Mexico - Mexico City Water Supply Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4623 PROJECT PERFORMANCE AUDIT REPORT MEXICO: MEXICO CITY WATER SUPPLY PROJECT (LOAN 909-ME) June 30, 1983 Operations Evaluation Department 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.  FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT MEXICO: MEXICO CITY WATER SUPPLY PROJECT (LOAN 909-ME) TABLE OF CONTENTS Page No. Preface ............................................................ i Basic Data Sheet ...................................................... ii Highlights ......................................................... iv PROJECT PERFORMANCE AUDIT MEMORANDUM I. PROJECT SUMMARY ............................. ....1...... 1 The Project ................................ .....1...... Project Execution .......................................... 2 Project Costs ............................................... 3 Time Overruns .............................. .......... 4 Institutional Performance ............................ 5 Sales and Financial Performance ........................ 6 Economic Evaluation .................................... 8 Bank Performance ....8............................... 8 II. SUPPLEMENTARY COMMENTS ................................. 9 Prematurity of Project ............................... 9 Institutional Conflicts ................... .......... 11 Optimum Use of Water Resources ...................... 12 III. CONCLUSIONS ............................................. 13 Appendix I: Comments from Financing and Public Credit Secretariat.. 15 PROJECT COMPLETION REPORT I. Introduction ............................................ 19 II. Preparation and Appraisal ....................... ...... 21 III. Project Implementation ................................... 24 IV. Project Completion and Operation ......................... 30 V. Financial Performance ....................... .....*...... 32 VI. Economic Evaluation ...................................... 35 VII. Institutional Performance ................................ 35 VIII. Bank Performance ....................................... 36 IX. Conclusions and Lessons to be Learned .................... 37 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. TABLE OF CONTENTS (continued) Page No. Annexes 1. CAVM Organization Chart .............................. 39 2. Additional Water Yields .............................. 40 3. Project Costs ........................................ 41 4. Agreements Reached and Principal Covenants ... 42 5. Cumulative Schedule of Disbursements ................. 44 6. Comparison of Appraisal Estimates and Actual Works ... 45 7. Income Statements - CAVM ............................. 46 8. Balance Sheets - CAVM ................................ 47 - 1 - PROJECT PERFORMANCE AUDIT REPORT MEXICO: MEXICO CITY WATER SUPPLY PROJECT (LOAN 909-ME) PREFACE This is a performance audit of the Mexico City Water Supply Project for which Loan 909-ME in the amount of US$90 million was approved in June 1973. The borrower was Nacional Financiera SA (NAFINSA), a national develop- ment bank, which would channel the funds to CAVI1/, the beneficiary. Orig- inally planned to close in December 1977, the Loan actually closed in June 1981, with US$11.8 million undisbursed. The Project Performance Audit Report (PPAR) consists of a Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and a Project Completion Report (PCR) dated July 29, 1982 prepared by the Latin America and Caribbean Regional Office. The PPAM is based on a review of the PCR, the Appraisal Report (99a-ME) of May 24, 1973, the President's Report (P-1207a-ME) of May 30, 1973 and the Loan and Guarantee Agreements dated June 18, 1973 (together with an Amending Loan Agreement dated April 29, 1974). Correspondence and internal memoranda relating to the project in Bank files have also been consulted, and Bank staff associated with the project have been interviewed. The audit finds the PCR to be comprehensive, accurate and objective, and agrees with its conclusions. The PPAL provides some supplementary com- ments on: the justification for proceeding with the project, particularly in view of the inadequacy of feasibility studies and the eventual virtual exclu- sion from the project of water distribution and retail aspects, the problems arising from a lack of inter-agency coordination in obtaining some critical project objectives, and the desirability of making better use of existing water resources as a means of deferring some new construction. Following standard OED procedures, copies of the draft PPAR were sent on March 17, 1983 to NAFINSA, CAVM and the Government for comments. Joint comments were received from the Government (Secretariat of the Treasury and Public Credit). These have been taken into account in completing the PPAR and are reproduced as Appendix I to the PPAM. 1/ Comision de Aguas del Valle de Mexico.  - ii - PROJECT PERFORMANCE AUDIT BASIC DATA SHEET MEXICO: MEXICO CITY WATER SUPPLY PROJECT (LOAN 909-ME) KEY PROJECT DATA Appraisal Item Estimate Actual Total Project Cost (US$ million) 155.0 138.1/a Underrun (%) - 10.9/a Loan Amount (US$ million) 90.0 90.0 Disbursed 90.0 78.2 Cancelled - 11.8 Date for Completion of Physical Components 12/31/76 06/81 Physical Components Completed by Appraisal Target Date (%) 35 -/c Time Overrun (%)- 129/d Economic Rate of Return (%) 4/b Uncertain Financial Performance Uncertain Poor at first, satisfactory later Institutional Performance Uncertain Fair Cumulative Estimated and Actual Disbursements (US$ millions) FY 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 (i) Appraisal Estimate 1.7 26.3 51.2 77.0 90.0 90.0 90.0 90.0 90.0 90.0 (ii) Actual - 0.6 1.3 15.3 35.7 48.2 55.2 68.5 73.9 78.2 (ii) as % of (i) 0 2.3 2.5 19.9 39.7 53.6 61.3 76.1 82.1 86.9 OTHER PROJECT DATA Actual or Item Original Revisions Est. Actual First Mention in Files or Timetable 04/23/71 Government Application - 09/06/71 Negotiations 12/72 2/73 04/09/73 3/73 4/73 Board Approval 01/73 3/73 06/12/73 5/73 6/73 Loan Agreement Date 06/18/73 06/18/73 Effectiveness Date 10/18/73 11/20/73 04/30/74 12/20/73 03/15/7 4 04/30/74 Closing Date 12/31/77 12/31/78 06/30/81 02/28/7 9 06/ 30/8 0 06/30/81 Borrower Nacional Financiera, S.A. Executing Agency Comision de Aguas del Valle de Mexico Fiscal Year = calendar year  - 111 - MISSION DATA Month/ No. of No. of Date of Item Year Weeks Persons Manweeks Report Identification 08/71 1 1 1 08/10/71 Preparation 01/72 1 4 4 01/28/72 Preappraisal 03/72 1 4 4 04/04/72 Preappraisal 05/72 0.6 4 2.4 05/24/72 Preappraisal 07/72 3 3 9 07/24/72 Preappraisal 08/72 1 2 2 09/13/72 Appraisal 09/72 2 5 10 10/20/72 Postappraisal 11/72 0.6 2 1.2 11/24/72 Postappraisal 12/72 0.4 1 0.4 12/21/72 Postappraisal 03/73 0.4 2 0.8 03/29/73 Supervision I 07/73 1 3 3 08/02/73 Supervision II 12/73 0.8 1 0.8 01/16/74 Supervision III C5/74 1 1 1 05/30/74 Supervision IV 08/74 2 3 6 08/27/74 Supervision V 12/74 0.4 2 0.8 01/03/75 Supervision VI 06/75 n.a. 1 n.a. 06/24/75 Supervision VII 12/75 2 2 4 01/09/76 Supervision VIII 03/76 2 2 4 03/31/76 Supervision IX 06/76 2 2 4 08/12/76 Supervision X 09/76 0.6 1 0.6 10/06/76 Supervision XI 02/77 1.6 2 3.2 03/22/77 Supervision XII 05/77 1 1 1 06/07/77 Limited Supervision 09/77 0.5 3 1.5 10/28/77 Supervision 05/78 1 1 1 06/07/77 Supervision 10/78 2 2 4 11/22/78 Supervision 03/79 1 2 2 04/25/79 Limited Supervision 10/79 2 2 4 11/06/79 Limited Supervision 06/80 1 1 1 06/30/80 Limited Supervision 04/81 1 1 1 n.a. Supervision/Completion 03/81 1 1 1 n.a. Total Staffweeks: 78.7 COUNTRY EXCHANGE RATE Name of Currency (Abbreviation) Peso (Mex $) Appraisal Year Average (1972) US$1 = Mex$ 12.500 Intervening Years Average (1973-80) US$1 = Mex$ 18.003 Completion Year Average (1980) US$1 = Mex$ 25.684 /a Excluding studies, engineering, administration. Without these, appraisal estimate was US$ 134 million, giving a cost overrun of 3%. /b Excluding certain non-water components. /c Project as executed differed considerably from that appraised. /d From date of Loan Agreement.  - iv - PROJECT PERFORMANCE AUDIT REPORT MEXICO: MEXICO CITY WATER SLPPLY PROJECT (LOAN 909-ME) HIGHLIGHTS This was originally intended as a conventional water supply project, covering all elements -- production, distribution, tariffs, an autonomous and financially viable institution and studies (including feasibility studies for the next stage of works); it was admittedly based on preparatory studies of less than optimal quality, but deemed sufficient for a "first project" of urgently needed works, technically simple and with potential flexibility. It promised the beginning of a productive Bank presence in the sector. Gradually, as project processing advanced, its scope and aspirations progressively diminished, leaving the Bank-s input at little more than financ- ing water production facilities and monitoring the institutional development of the bulk water authority, the Comision de Aguas del Valle de Mexico (CAVI), the beneficiary. Other features of the project, in particular the essential distribution works, were eliminated from the components to be financed by the Bank (and over which the Bank might have had some influence) and covered by undertakings of a varying degree of commitment by the Government, to an extent where making the Loan at all was only marginally justifiable (PPAM, paras. 29-33). The project was successful in'eventually increasing water production capacity by an amount almost equal to that projected at appraisal and the completed works were well constructed. This was accomplished despite many changes in the physical components (partly attributable to the sketchy nature of the feasibility studies and partly to additional works financed from surplus loan funds, arising from devaluation of the peso). However, implemen- tation took eight years instead of about 3-1/2 years, and the works needed to distribute the water lagged even more. As a result of the delays, partic- ularly on distribution, the potential benefits of the increased supply to Mexico City were not realized fully, and water sales fell below estimates. Final costs were about as estimated in US$ terms, though some 40% higher in local currency equivalent; but because some expenditures were not financed from the Loans only US$78.2 million was disbursed and the balance (US$11.8 million) was cancelled. The project also achieved some of its institutional objectives. CAVM was newly established to fuction as the project executing agency and to be developed as a regional bulk water authority. After initial administrative problems, CAVM developed the necessary competence for project execution and operation, and to this extent fears of institutional inadequacy were unfounded. However. CAVM appears overstaffed and its performance in reporting - v - and accounting has been disappointing. Also, financial performance was poor at first, although it improved later in the period under review. Part of the problem was inflated administration and other indirect costs. But the major reasons were. (i) the shortfall in bulk sales due to delays in con- struction, particularly distribution works, which are the responsibility of other agenciesl/; and (ii) lack of satisfactory action on bulk purchase agreements and payments to CAVN by the bulk purchasers, FD and SM. Success with other institutional objectives ranged from fair to poor. There was some success in improving water supply planning for the region. To a lesser degree, and with great difficulty, more realistic tariff policies were introduced. There was no evidence of improvement in the effi- ciency of water distribution in the FD and SM areas. And finally, the sector organization in the Mexico City Metropolitan Area was as complex, responsibil- ities were as fragmented and activities as uncoordinated when the project was completed as they were at the beginning.2/ In spite of the disappointments, the Government has concluded that, on balance, the experience obtained from this project is positive both for the Government of Mexico and the Bank and will help future projects to be executed more efficiently. The following topics raised in the audit may be of particular interest: - delays caused by refusal of distribution authorities to agree to bulk water purchase contracts (PPAh, paras. 12, 19 and 37); - inconsistency in formulating the rate covenant (PPAM para. 21); and - importance of making better use of existing water resources before embarking on new construction (PPAM, paras. 40-41). 1/ The Federal District of Mexico City (FD) and the State of Mexico (SM) together with SM's subsidiary municipalities. 2/ In its comments the Government stated, "It is not possible to speak of a fragmentation of the sector when both the authorities involved and the water distribution agencies are autonomous sovereign entities with their own powers of decision, which means that institutionally they could not operate as a single organization". (Appendix I, item B-1). - 1 - PROJECT PERFORMANCE AUDIT MEMORANDUM MEXICO: MEXICO CITY WATER SUPPLY PROJECT (LOAN 909-ME) I. PROJECT SUMMARY The Project 1. The Mexico City Water Supply Project (Loan 909-ME signed on June 18, 1973) represented the first direct involvement of the Bank in this sector in Mexico. Uncontrolled development and excessive concentration of population and industry in the capital had strained available water resources, resulting in low pressures and service interruptions. Because of the city's location -- in a valley on a high plateau -- water resources were limited, comprising mainly groundwater derived from rain falling directly on the valley. These resources had been depleted by pumping out quantities much greater than their natural recharge ("mining the aquifer"), giving rise to land subsidence and consequent damage to buildings and utility services. Supply shortages were compounded by low tariffs which encouraged waste of water and provided insuf- ficient revenues for sound utility management. 2. The project, appraised in 1972, was a package of urgent works required to produce an additional 15.5 m3/sec of water, estimated to meet needs to 1977. The works included five wellfields in areas where "mining" was relatively harmless; a surface-water intake and treatment plant, with related transmission and storage facilities; and the multi-purpose Texcoco sub-project (PCR, para. 2.03). Since only preliminary studies were available, the exact content and sequence of the project construction program were left flexible, with alternative works as possible substitutes. In general, works would be carried out in ascending order of unit production cost during 1972-76 (with the possibility foreseen of a year's slippage). 3. Total cost was estimated at US$155 million equivalent, excluding capitalized interest during construction. Foreign exchange requirements represented 34% of this total (US$52 million), but for the reason indicated below (para. 5), the Bank agreed to finance 49% (US$76 million) plus US$14 million for interest during construction, i.e., US$90 million in total. The balance of project cost would be financed by the beneficiary, CAVM,1/ with the aid of counterpart Government equity funds. CAVM, a bulk water supply board attached to the Government's Secretariat of Water Resources, had been created in 1972, just before appraisal, to execute the project;2/ Bank 1/ Comision de Aguas del Valle de Mexico. 2/ In the event, the Texcoco sub-project was executed by a separate agency with the collaboration of CAVM on water matters. - 2 - funds would be channelled through a national development bank, Nacional Financiera, S.A. This agency also acted to some extent as a channel for communications, particularly disbursement applications, however, most of the day-to-day correspondence concerning the project was carried out by direct communication between the Bank and CAVIi. 4. Besides increasing the quantity of water available, the project's objectives were to encourage systematic regional water planning, foster CAVM's institutional development as a regional bulk water authority and encourage sensible pricing policies (PCR, para. 2.03). 5. Some elements essential in a comprehensive water supply develop- ment program were missing from the project as finally negotiated, namely, the distribution mains and storage required to effectively utilize the additional water, and measures to improve consumer metering and leak detection. The Bank estimated US$88 million of distribution works were neededl/ and had included these in the project originally. however, CAVM was not responsible for distribution of water to, or metering of, the ultimate consumer in the project area, those activities were the responsibility of the Federal District of Mexico City (FD) and the adjoining State of Mexico (SM) together with the latter-s subsidiary municipalities. These authorities also would have been executing agencies under the project, but the Federal Government decided it did not wish the Bank to finance the works in question. Accordingly, the Bank concentrated its funds on CAVM's share of the total investments, by increasing the percentage of costs financed therein, and thus freeing the equivalent in Government funds for SM and FD. As a safeguard, the Bank obtained commitments that: (i) the distribution works would be carried out (except that in SM, the Government only promised its "best efforts" to coordinate them with CAVM's project), with Government funding if necessary (PCR, para. 2.07); (ii) that SM and FD would sign bulk purchase contracts with CAVM, to ensure a buyer for the additional water (PCR, paras. 3.02-3.03); and (iii) that the efficiency of FD's water supply operation, as measured by its "revenue effectiveness index"2/ would be improved (PCR, para. 2.08(e)). The Bank also secured agreement to execute a number of studies (PCR, paras. 2.06, 3.01, 4.04 and 4.05) intended to further the wider objectives of the project. However, the Government did not accept either Bank financing or Bank participation in these, except for consultation on terms of reference for a tariff study and the right to make subsequent comments on all studies (PCR, para. 2.06). Project Execution 6. The project, as executed, differed considerably from that appraised. By the time the loan was effective, one component had been completed and was replaced by an alternative sub-project; the surface-water component was 1/ The Bank further estimated that sewerage/drainage works costing US$320 million equivalent would also be needed. 2/ Broadly, the relationship of actual revenue collected to the maximum collectible if every m3 produced were paid for by the consumers. - 3 - abandoned by reason of problems with water quality and water rights, and when the preliminary designs were reinforced by detailed grounduater studies, it was found that other components neeae6 to be developed on a larger scale, or could be relocated more economically. The Texcoco scheme was drastically scaled down for technical and other reasons (PCR, paras. 3.C4 - 3.06). 7. By 1977, anticipated cost savings because of these modifications, coupled with peso devaluation,1/ were expected to produce US$24 million in unused loan proceeds; accordingly, a package of additional works -- two sewage treatment plants, a water treatment plant, and further wells, cost- ing in all some US$31 million -- were added to the project (PCR, para. 3.05). However, one plant costing US$11 million was later dropped when its priority was reassessed. Eventually, US$ 11.8 million of loan funds remained unspent and were cancelled. 8. The project is reported to have been competently executed and operated; it produced some 13 m3/sec of extra water (compared with the fore- cast of 15.5 m3/sec)(PCR para. 4.02). All the studies were executed, though generally later than planned. Although procurement had been a thorny question at negotiations (para. 11), it gave rise to few disputes in the event; some contracts were excluded from Bank financing for various reasons, and the Mexicans made little attempt to group contracts so as to attract more than local interest. On the whole CAVM's procurement went smoothly, though not always speedily (PCR, para. 3.20). Project Costs 9. Since the project was modified so considerably, cost comparisons are not very meaningful. The PCR (para. 3.14 and Annex 3) shows that the works actually executed cost Mex.$ 2374 million against Mex.$1684 million estimated at appraisal for the original package.2! In US$ terms, however, there was not much difference (US$138 million, as against US$134 million appraised) -- on the face of it not surprising, since the intention was to match the additional project works to the residual loan funds available. (It is worth noting that senior Bank management was not particularly eager to finance the additional works, feeling that if loan funds in the "Unallo- cated" category were not required, they should be cancelled; but Regional staff were able to demonstrate that the underspending arose from genuine savings, and not merely from an overestimate of price contingencies.) 1/ The exchange rate used for appraisal was Mex.$12.5 to the US$. Over the project period, the average rate was about Mex. $18. 2/ Excluding studies, administration, engineering and interest during construction, for which no final cost data could be obtained. 10. The underdisbursement of the loan, when final costs were so close to the appraisal estimates, is explained by the lower proportion of civil works expenditures financed by the Bank -- 45% as against 57% estimated at appraisall/ (PCR, para. 3.14). This reduction appears to have arisen because reported total project expenditures include some which were incurred before loan signature or after closing; some contracts were also ineligible for Bank financing. Detailed information on the allocation of Bank disburse- ments over project elements was not available for the PCR. Time Overruns 11. Project slippage began with negotiations and accumulated progres- sively. Loan negotiations were protracted, the points at issue being the exclusion of the Bank participation in studies (para. 5), bid limits for ICE and the Bank's right to review bid evaluations prior to award (PCR paras. 2.05 and 3.17-3.18). On the latter point, the Bank accepted that prior review was not essential, provided the Borrower understood and accepted the risk that contracts might not be accepted for financing. 12. Loan effectiveness was repeatedly deferred, until 10 months after Loan signature. To ensure a buyer for the water produced by the project works, the Bank had made it one of the conditions of effectiveness that the two distribution agencies, SM and FD, should execute bulk purchase contracts with CAVM (para. 5), but SM refused to sign for over two years (Sept. 1975). SM wanted to operate the facilities itself, to limit future water resources allotted to CAVM and to have a preferential tariff for any water extracted within state boundaries. Since most sales would initially be to FD (which had signed the contract in October 1973) the Bank declared the loan effective in April 1974, but limited disbursements to US$40 million until SM-s agree- ment was finally secured. 13. Execution also lagged, at first from the need to finalize designs, sometimes entailing major restructuring of components, and subsequently from technical problems and shortage of counterpart funds (Texcoco sub-project). There were occasional material shortages, and contractors stopped work when inflation necessitated a re-negotiation of prices. The works included in the original project were on the whole completed in 1978, about two years late; the additional works went on until the loan was finally closed in June 1981, 3-1/2 years later than the original estimate.2/ These delays were not crucial from the water availability standpoint, since other sources could be over- exploited for short periods of time and sales to bulk water purchasers were below estimates. 1/ The Bank in fact disbursed at 57% of civil works expenditures -- 49% representing the Bank's share of project costs, plus 8% to cover adminis- trative and engineering costs. 2/ Disbursement applications were accepted up to October 31, 1981. - 5 - 14. Slow disbursements were a constant cause of concern to the Bank. By the originally planned closing date (December 1977), less than half the Loan had been disbursed, and even at closing US$1.3 million still remained unspent (US$10.5 million had been cancelled by the Borrower a few months earlier after review of expenditure forecasts). Delays due to construction slippage were compounded by: (i) slow processing of disbursement applications in Mexico (the Bank tried unsuccessfully to pinpoint the bottlenecks); (ii) the expansion of the project, which the Bank refused to finance until a second bulk purchase contract was signed by SM and FD in 1979 and (iii) devaluation of the Mexican currency, in which nearly all project costs were incurred. The PCR claims that the main cause of slow disbursements was the US$40 million limit imposed for a time by the Bank (para. 12); but this seems unlikely, since even after the limitation was lifted, disbursements still did not reach US$40 million for about another two years (PCR, paras. 3.15-3.16). Institutional Performance 15. The main project risks perceived by the appraisal mission concerned the institutional capacity of CAVM -- the quality of its personnel and its ability to execute the project competently. Accordingly, Loan covenants prescribed hiring of management and technical consultants, appointment of a qualified financial manager (a condition of effectiveness), and introduction of accounting and internal audit systems acceptable to the Bank (PCR, para. 7.01). Close supervision was also promised. 16. After some initial problems, CAVM appears to have functioned effi- ciently, on the technical side at least; but its administrative overhead was felt to be excessive and the Bank several times made representations about the growth in staff numbers.1 CAVM's accounting systems were never developed to the Bank's satisfaction, being inappropriate to a quasi-commercial under- taking (PCR, para. 5.01). Progress reports were seldom forthcoming (PCR, para. 3.22), and in general the Bank found information difficult to obtain and not always reliable (PCR, para. 7.02)../ The PCR notes (para. 7.03) that some of the institutional deficiencies of CAVM can be traced to the duplica- tion of sector responsibilities and the lack of co-ordination between authori- ties. CAVM nevertheless built the systems competently and operates them efficiently (PCR, para. 4.02). 1/ In 1978 a supervision mission estimated that CAVM had two to three times as many staff per 1,000 consumer connections as US water utilities, which not only produce water but also distribute it. 2/ The Government has stated that initial difficulties with CAVM's account- ing system were overcome in the course of project implementation (Appendix I, item B-2). However, the audit finds that accounting and financial reporting problems still existed at the end of the implementa- tion period. - 6 - 17. The Bank's relations with the other authorities affected by the project -- FD, SN and SM's municipalities -- were tenuous, direct contacts were discouraged, and information about their institutional structure and performance was patchy during most of the project period. The effects of their exclusion from the project, of their hostility to CAVM, and of their failure to complete distribution improvements are discussed elsewhere in this PPAI (paras. 29-30).l/ Sales and Financial Performance 18. The appraisal report forecast bulk sales of water by CAVM of 136 million m3 in 1974, rising to 690 million m3 in 1980. Actual sales never rose above two-thirds of the forecast, and in fact for the first three years only reached half (PCR, para. 5.02). Part of the shortfall was due to delays in construction, but a major reason was the failure of FD and Sh to construct the necessary transmission, storage and distribution facilities to receive the water, despite Government commitments in this respect. In 1977, these authorities were only able to take 50% of CAVIs production capacity (PCR, para. 4.07). 19. The effect of lower sales on CAVM-s revenues was magnified by operating costs 50% above the appraisal estimate as early as 1974, rising to more than double that estimated for 1977-80, mainly in respect of administra- tive and other indirect costs. CAVM's finances were also affected by the need to fix tariffs for three years at a time in a climate of inflation, the long-drawn-out negotiations which ensued, and the resultant substantial backlog of revenue. / Rates were eventually tripled at the second revision (in 1978), but again SM only accepted the tariff after promises of Government subsidies to cover about two-thirds of the increase. The Bank had no contrac- tual relationship with SM and FD and no leverage over their tariffs though these were a matter of serious concern to the Bank (paras. 30-31). Little information was ever forthcoming from these authorities, for this reason, and because of deficient metering of total incoming water, it was never possible to monitor the "revenue effectiveness" covenant (para. 5). Retail tariffs were modified from time to time, and their structure improved in FD at least, but it was difficult to assess their adequacy, e.g., by reference to CAVM-s bulk tariff, since other cheaper sources of water were also in operation. 20. The financial performance of CAVM itself was, however, monitored by an internal cash generation (ICG) covenant -- presumably preferred to a rate of return covenant on fixed assets in service, because CAVM was a new 1/ See Appendix I, item A-6, for Government statement regarding direct participation of FD and SM in the project. 2/ The PCR notes (para. 5.07) that CAVM-s accumulated earned surplus in the 1980 balance sheet was almost entirely locked up in unpaid bills due from the other authorities. - 7 - entity with no assets to start with, but with substantial needs for capital funds. The ICG targets agreed were to finance at least 24% of annual capital expenditure from internal sources in 1974, rising to 35% in subsequent years;1/ these targets if achieved would simultaneously produce an uneven, but ample, rate of return on revalued assets of 30%, 19% and 25% in the first three years (Appraisal Report Annex 9). 21. The methods used for calculating ICG appear to have been somewhat contradictory. Such a covenant reflects: Revenues available for investment x 100 = % ICG Capital expenditure In this fraction, the numerator broadly represents operating revenues less operational cash outflows or retentions (including debt service). Where, however, interest during construction is capitalized (i.e. deferred and auded to the Loan debt), no cash outflow is considered to arise, instead, the inter- est is often treated as capital expenditure, increasing the denominator. For this project, the appraisal report projections, from which the 24%/35%* targets were derived, ignored capitalized interest altogether, whereas the formula actually inserted in the Guarantee Agreement not only added it to the denominator but also deducted it from the numerator, which could affect the percentage markedly.2/ Either basis would be acceptable, if the re- sultant target is meaningful, but inconsistency makes for confusion. To this extent, therefore, the target percentages were misleading and inap- propriate. It is not clear on what basis actual performance was calculated, since supervision reports quote different achievements for the same year - for 1974, the rate achieved was given as 29% by a 1977 mission, 19% by a 1978 mission, and 9% in the PCR. The target rate was lowered to 24% for 1975-76-77 because the backlog of investments would create temporary "lumpi- ness", but, according to the PCR, CAVM never achieved more than 10% ICG in the first four years.3Y The low percentages achieved concealed (as forecast at appraisal) some high rates of return on net fixed assets4, and apart from some cash flow problems, CAVM's financial situation does not appear 1/ There was also a requirement for a minimum rate in 1973, based on aver- age future investments. 2/ For 1981, for instance, the 66% ICG forecast in appraisal projections would be only 24%. Moreover, the formula also took into account notional debt service on Government equity contributions, reducing the percentage still further. 3/ The authors of the PCR worked out these figures from financial reports (not always internally consistent) submitted by CAVh, they used a sim- plified formula, comparable to that used in the appraisal projections. 4/ E.g. 52% in 1975 according to PCR (Annex 7), though CAVM's fixed assets are believed understated in the accounts. ever to have adversely affected construction or operations. CAVN in fact began to achieve high rates of ICG when the tariff was tripled (PCR, para. 5.06), but the covenant was increasingly felt to be inappropriate in the Bank, and it was planned to substitute one based on the medium-range marginal cost of water in the abortive proposed second project. Economic Evaluation 22. At appraisal, the water supply works in the project were estimated to have an internal rate of return of 4%-9% depending on assumptions about consumer willingness to pay, since actual tariffs were so low and reliable data lacking these assumptions were necessarily conjectural. For this reason, and because the calculation could not quantify external benefits (e.g. health), the appraisal report stressed that the low percentage return was not meaningful and certainly no indication of an uneconomic investment. For the Texcoco irrigation and environmental works, a possible economic rate of return of 7%-16% was calculated, depending on assumptions about increased land values and alternative uses of wastewater. 23. Because of lack of reliable information about distribution system investments, operating costs and retail tariffs of SM and FD, and because the Texcoco component had not been completed on anything like the scale envisaged, actual rates of return for the project could not be calculated. It is probable, however, that they may be lower than those estimated at appraisal because of lower sales, higher costs and continuing high unaccounted-for waterl/ (PCR paras 6.01-6.03). Bank Performance 24. In view of CAVM's inexperience, the Bank foresaw that close super- vision would be required, and indeed this project received intensive Bank attention at all stages; there were five preparation/preappraisal missions, three post-appraisal missions and supervision missions on average three times a year during 1973-77. The appraisal seems to have been comprehensive and painstaking apart from the discrepancy in the rate covenant. however though the appraisal report recognized the critical importance of completing the complementary distribution works on time, it under-emphasized the need for adequate retail tariffs and for reduction of leakage and waste at the receiving end -- possibly because the Bank had been excluded from these aspects at negotiations and no firm commitments had been obtainable. The best it had been able to achieve was to secure promises of studies (though the Government refused to commit itself on implementing tariff recommendations), improvement of "revenue effectiveness," and that FD's distribution works at least would be completed (para. 5). Nevertheless the concern of the Bank at all levels, with these matters is evident from the internal memos in the 1/ The difference between water produced and water paid for by the consumer, arising from leakage, free public consumption, illegal connections, defective metering, or otherwise files, before and during negotiations, retail tariffs in particular were repeatedly mentioned as a crucial factor. Eventually the Bank accepted that the commitments obtained were a reasonable compromise for a first project in the sector (paras. 3U-32).1/ 25. Throughout the execution period, the bank continually pressed for more satisfactory action on these matters and other concerns which arose (poor reporting and accounting, high administrative overhead, aisbursement delays). Twice it used the leverage of withholding disbursements until satis- factory bulk purchase arrangements were concluded (paras. 12 and 14). Never- theless, the results were unccrtain at best; the effects of failing to secure firmer commitments at negotiations and positive action during execution are discussed under "Supplementary Comments." 26. One problem of supervision was the failure to group contracts into packages for ICB, with the result that practically all procurement was local (PCR, para. 3.26). This gave rise to a large number of contracts, and voluminous correspondence (one exchange of letters referred to a contract adjustment of under US$50). 27. Despite the apparently disappointing results from all the Bank-s efforts, they must in the long run have been helpful to the Mexican authori- ties. The studies aided technical and financial planning (PCR, para. 4.05), and, besides the inputs of frequent supervision missions, the Bank sent experts to help in financial projections and to recommend safety measures for a dam, as well as helped to organize a seminar on feasibility study preparation. 28. Whether the Bank should have gone ahead with the project at the time it did, or at all, is discussed under "Supplementary Comments." OED review of available information suggests that, once the Bank was committed by the Loan Agreement, it did everything possible (short of suspension) to ensure satisfactory completion and the resolution of its concerns. As experience repeatedly shows, this is rarely achievable without whole-hearted cooperation from the project authorities and their government. II. SUPPLEMENTARY COMMENTS Prematurity of Project 29. In the light of hindsight, the question inevitably arises, whether the project was appraised prematurely, or indeed whether the Bank should have financed it at all. It presented, in retrospect, a dismaying catalogue of unknowns and uncertainties: (a) CAVM was a new and almost unstaffed agency; 1/ Though CPS, at least, appears to have felt they were inadequate (see para. 32). - 10 - (b) there existed no master development plan, the feasibility studies had been done in a hurry, and the appraisal report admitted that lack of data prevented designing the project to reflect optimum price/demand relationship, demand projections were crude, based on an overall estimate of per-capita consumption, and financial pro- jections were inadequate especially for the retail agencies; (c) sector responsibilities were fragmented; distribution authorities were not parties to the loan, and contact with them was officially discouraged, the essential distribution portions of the project investments were removed from the Bank's scrutiny, (d) retail tariffs were still too low, even after increases about the time of appraisal, and the Government refused to commit itself to increasing them. 30. The Bank was well aware of, and somewhat apprehensive about, these problems. The Decision Memorandum reported a consensus that project objec- tives required a firm agreement on retail tariffs and might require financing of distribution systems, and Regional management wanted either the retail authorities to be parties to the Loan Agreement; or a tariff guarantee by the Government; or retail tariffs to be a function of the bulk rates. None of these materialized, due to the Government's insistence that it had no legal authority to commit itself on retail tariff levels or on execution of works in SM. 31. On some of these concerns, the Bank concluded that perhaps the risks were not too great. Despite the inadequate project preparation, there had been a number of previous groundwater studies; the project was flexible and technically uncomplicated; the appraisal team had helped improve the fi- nancial projections; and studies could be prescribed to improve preparation of the next stage project. On the question of retail tariffs, the bulk tariff would eventually be a powerful lever and meanwhile low tariffs could be partly explained by subsidies from other tax revenues. When submitting green cover loan documents, Regional management observed that retail tariffs were admittedly unsatisfactory, but a great improvement over previous levels, and the Bank looked to a second loan to complete the improvement. 32. In addition, the Bank incorporated a number of safeguards in the loan documents: management consultants for CAVM; undertakings about the necessary distribution works; contracts of sale to ensure buyers for the extra water; a tariff study (but without any commitment to raise tariffs), improvement of FD's "revenue effectiveness;" and undertakings to ensure CAVM-s solvency. Nevertheless, CPS observed somewhat prophetically (March 27, 1973) that. "If things involving the distribution and sewerage aspects... go wrong, we have a relatively inadequate basis of mutual agreement on objec- tives, and legal 'tools' with which to work to set them right". Herein seems to lie the prime problem -- it is not clear that the Government ever - 11 - really acquiesced in the Bank-s wider objectives, especially in the long- term objective of concentrating all water resources under one regional water authority. The most careful safeguards iii loan agreements are unavailing without mutual understanding on basic principles.1/ 33. In retrospect, the Bank took a calculated risk, evidently accepting that it might have to be content with half a loaf. The project was urgently needed and water shortages would fall most heavily on the poorest sections of the community. It was a "first project," enabling the Bank to become involved in the sector, encourage some improvements and commence a productive dialogue paving the way to further improvements as part of a larger project. Some of the problems were never solved, but the project broadly achieved its physical objectives and some of its institutional ones; delay would have achieved little change in the project "climate," and could have adversely affected living conditions. This audit concludes that, on balance, the project was justified, though it is a matter for speculation whether the Bank might have successfully stood out for more satisfactory commitments at negotiations. One must doubt this, a second project foundered on the same problems of sector institutions and organization, and was not proceeded with. Risks which might be acceptable in a "pilot project" cannot be justified a second time. Institutional Conflicts 34. This project illustrates the risks of building a project around an inexperienced agency while being unable first to reconcile the interests and concerns of its major partners. Basically, CAVM had only two customers -- SM and FD -- each politically powerful and in SM's case with a considerable degree of independence, even from the Federal Government. These factors were apparently underestimated by the Bank. Ideally, both authorities should have been parties to the loan, but the Government did not accept this and in fact appears to have discouraged direct Bank contact with them. 35. There were indications that CAVM was resented from the outset by politically influential interests, and the autonomy which the Bank had initially anticipated for it was whittled down. It was not given control of existing (cheaper) water sources it could only propose (not prescribe) bulk tariffs, and it had no means of enforcing payment of its charbes. SM in fact had its own bulk water supply agency, with its own plans to develop some of the sources proposed for CAVM. Even after CAVM's creation, there were pressures to reduce its authority or to subordinate it to existing authorities. 36. To sell the water CAVM produced required much coordination with distribution services, if not outright control, the Government while under- taking to ensure FD's distribution works were executed, could only promise its best efforts to ensure timely construction by SM and to ensure funding (since the Bank had been excluded from financing these components). 1/ In fairness, it must be mentioned that the Government's ability to intervene may have been limited by legal and constitutional constraints. - 1Z - 37. The conflicts of interest between CAVM and its customers bedevilled the project continuously.1/ Effectiveness was held up because SM refused to sign bulk water purchase agreements for two years after loan signature; and when the tariff was revised in 1977, the retail authorities again refused to sign the new agreement for a year (and then only on the promise of sub- sidies to SM). Despite the guarantees, the Government was unable to coor- dinate the distribution works of FD, SM and SM-s municipalities with CAVM's investments, so that by 1977 CAVM was left with unsold water of half its potential production-/ -- water which was needed by the eventual consumer. Little attempt appears to have been made to remedy waste and leakage so as to permit deferment of further investments in production capacity (see paras. 40-41). 38. Because of these delays, CAVM's revenues fell below the level anti- cipated, and cash flow problems arose; CAVN had to obtain increased Government grants to finance its program (US$100 million, according to the PCR, para. 5.68). The rate covenant in the Guarantee Agreement became a dead letter, and substantial book debts clogged CAVM's balance sheet. 39. Since FD and SM were not involved in the project, the Bank's know- ledge of the important retail distribution activities was fragmentary and inadequate; it has proved impossible to evaluate the project properly in terms of its economic rate of return or even of FD's "revenue effectiveness," which is believed to have actually deteriorated. The duplication of author- ity and the lack of co-ordination still persisted at the end of the project, with no prospect of rationalization so that a second project was dropped from the Bank-s lending program. Optimum Use of Water Resources 40. It is not uncommon in the water supply sector in developing coun- tries that the authorities responsible seem to concentrate upon constructing new works to meet demand, rather than making best use of the existing supplies to defer some new works. In the area covered by this project, unaccounted-for water is estimated still to be at a high 40% of production (PCR para. 4.07); with sound operating practices, this could be reduced by half, thus either reducing loss of water or increasing revenues (depending on why the water is found to have been unaccounted-for). 1/ The Government states that initial administrative problems between CAVM ana its clients caused delays (Appendix I, item B-5). However, the continued lack of coordination among these authorities was one of the main reasons that bank financing of a proposed second project did not take place (PCR, para. 7.03). 2/ The PCR states that the surplus capacity was eventually absorbed in 1978, (para. 4.07); but a supervision report dated November 1978 mentions that SM and FD were still only utilizing 60% of CAVM's production capacity at that date. The same mission reported considerable water deficits existing at consumer level. - 13 - 41. Total water availability, net of transmission losses, was about 40 m3/sec in 1973 and the project to increase this by 15 m3/sec was to cost US$155 million. Reduction of unaccounted-for water to 20% of production (assisted by a retail tariff which discouraged excessive consumption of a scarce commodity) might have gone some way toward making available the addi- tional water needed, at a much lower cost. (Measures were included in the proposed second project to reduce losses and waste at an estimated cost of about US$20 million.) It would have been most desirable if the project under review had included similar remedial measures which might have permitted deferment of some of the new works. It might have taken some time to effect results, but then so did the project.1Y III. CONCLUSIONS 42. The project, though hastily prepared and in some respects premature from the Bank's standpoint, broadly achieved its main objectives of increasing the water available to the Mexico City Metropolitan area by about one-third (though this took much longer than expectd), and of developing a centralized bulk water supply agency for the region, however, the latter did not achieve the degree of autonomy and authority which the Bank would have liked to see. CAVM-s partners in water supply, FD and SM, saw its creation as contrary to their interests and were sufficiently powerful politically for the Federal Government to be unable to implement its promises to upgrade the water dis- tribution in their areas in step with the project. The project also helped improve water supply planning for the region and, to a limited extent, the introduction of more realistic tariff policies, though not without a conti- nuous confrontation between CAVM and its customers. Little progress was made in reducing leakage or in improving metering efficiency at the retail end, and at project completion the sector organization in the region was still as complex and as fragmented as it was at the outset. 43. Lessons learned from the project are, first, that the most careful safeguards built into loan documents and the most intensive inputs by Bank staff cannot ensure timely and successful project implementation where the 1/ The Government has a conflicting view. It denies that this suggestion has any direct relationship to project development, and, furthermore, that there are no reliable studies to justify the figures given above (Appendix I, item B-6). The audit maintains, however, that provisions for reduction of unaccounted-for water as part of a first project could have been beneficial, at least for later development, as in almost all cases where water losses are high. On the other hand, the audit recog- nizes that since the project excluded distribution works, which were to be carried out independently by SM and FD, it may have been impractical for the project to include loss reduction measures which usually occur mostly in distribution networks. - 14 - institutions in the sector do not all concur in the goals to be attained or the means of attaining them, and where the government is not able or willing to implement the measures necessary to achieve the project-s wider objectives; and second, that where the success of a project is dependent on comple- mentary actions or investments by other agencies, it is essential for the Bank to be able to review and monitor those activities.1/ 44. From experience gained in this project, the Bank became much more demanding in its preparation of a follow-up project, and was justified in not proceeding further with that project when no solution to the sector problems seemed to be politically feasible. At the same time, the Government has expressed the opinion (Appendix I, item A-5) that the experience obtained from this project is positive, both for the Government and for the Bank and will help future projects to be executed more efficiently. 1/ An almost identical conclusion was drawn in respect of Loans 757/758-BR (Sao Paulo Water Supply & Pollution Control Project), PPAR No. 2929 dated April 4, 1980 refers. - 15 - APPENDIX I Page 1 of 3 E-1109/83 June 7, 1983 Spanish (Mexico) OED JDVS:cc Incoming Telex from Mexico to Mr. Shiv S. Kapur, Director, OED June 2, 1983 With reference to your request for comments on the PPAR regard- ing Loan 909-ME, we consider that on the whole the document covers all aspects of the project. However, in order to improve the report, we take this opportunity to make certain comments, both general and particular, for inclusion in the final version of the audit report submitted to the Executive Directors. A. General Comments 1. We regard the PPAR as rather critical, since it discusses the main problems faced by the project during implementation and to some extent plays down the benefits that flowed from it. We also believe that the audit report should analyze in more detail the technical problems encountered during project executiqn. 2. In our opinion the PPAR is unbalanced, since although it does contain matters relating to project implementation, it largely consists of criticism of institutional arrangements and performance, while neglecting the positive achievements of the project, such as the social benefits of a better supply of potable water to Mexico City. 3. We find that there are some apparent contradictions in chapters one and two of the report as regards the objectives attained by the project, which we feel may be due to the fact that it was not possible entirely to grasp the progress made in the institutional structure of the project and in the administrative organization of the executing agency (CAVM). 4. Likewise, we note special criticisms regarding the insti- OED Note: PPAR tutional coordination undertaken under the project. Consideration Highlights has should have been given to the innate problems of establishing a been revised new coordinating organization, such as the CAVM, in order to to give a more implement properly the institutional arrangements required with balanced account the sovereign and autonomous agencies involved in the project. of performance. - 16 - APPENDIX I Page 2 of 3 5. The report indicates that from the point of view of the World Bank's evaluation missions, the project was prepared hastily and to a certain extent begun prematurely, while the OED Note: project as executed differed considerably from the original Additions made plan. Nonetheless, despite these apparent irregularities, to PPAR High- both the initial design and the subsequent modifications were lights and to approved for disbursement purposes. We, therefore, feel that PPAM, para. 44. the experience obtained from this project is positive both for the Government of Mexico and for the Bank and will help future projects to be executed more efficiently. 6. The report mentions that the Federal District and the State of Mexico did not participate directly in the loan as the Bank would have desired, although they were the water dis- tributing agencies. It is nonetheless stated that there were information and coordination problems between these entities OED Note: and the Bank. In the light of this, it is necessary to point Footnote added out that the Government of Mexico does not consider the direct to PPAM, para. participation of the above-mentioned entities appropriate, in 17. order to avoid costly duplication and to be able to work through a project coordinating agency. The report should therefore give consideration to the Mexican Government's desire to use an adequate institutional framework, such as is provided by CAVM, for better project administration and execu- tion. B. Particular Comments 1. On page vi of the PPAR, it is suggested that the parag- raph that begins "A principle obstacle to success" and ends "little contact and no leverage" be eliminated and that the following line "Other points of interest are:" be replaced by OED Note: "Some of the problems faced during project execution were:." Highlights has We propose this because the project was successfully imple- been revised mented despite execution delays, given that an additional water to give a more supply of 13m3 per second was achieved, very close to the 15.5m3 balanced originally estimated. Furthermore, it is not possible to speak account of of a fragmentation of the sector when both the authorities performance. involved and the water distribution agencies are autonomous sovereign entities with their own powers of decision, which means that institutionally they could not operate as a single organization. - 17 - APPENDIX I Page 3 of 3 2. As regards paragraph 16, line 1, we would consider it appropriate to eliminate "over-centralization" and substitute "its administrative organization," since CAVM was set up to function as the project executing agency and, like any newly- OED Note: established organization, experienced administrative problems Revisions made which were gradually overcome. In the same paragraph, we and footnote suggest deleting the statement that "CAVM's accounting systems added to were never... and not always reliable" and replacing it with PPAM, para. 16. "there were initial difficulties with CAVM's accounting systems which were overcome in the course of project imple- mentation." 3. Paragraph 33 states that "some of the problems were never solved, but at least the project broadly achieved its physical objectives and some of its institutional ones." This supports our statement in paragraph 1 of these specific comments, which means that there are certain contradictions in the PPAR, given that it is stated that certain factors hindered the success of the project, while here it is affirmed that the project met its physical objectives and some of the institutional ones. 4. The beginning of paragraph 34 states "this project illustrates the pitfalls of building a project around a new and untried agency without being able to reconcile the OED Note: interests and concerns of its major partners." It is PPAM, para. 34 suggested that this be replaced by "this project presented revised in understandable problems arising both from the inexperience of part. CAVM and from institutional difficulties with the agencies involved in the project." 5. Paragraph 37 states that "the conflicts of interest between CAVM and its customers bedeviled the project con- OED Note: tinuously." We suggest that this be replaced by "the initial Footnote added problems of administrative organization between CAVM and its to PPAM, para. clients caused certain delays to the project." 37. 6. It is suggested that paragraph 41 be entirely deleted OED Note: since it has no direct relationship with project development, Footnote added and furthermore there are no reliable studies to justify the to PPAM, para. figures included in this paragraph. 41. We would be grateful if our comments and views were reflected in the Project Performance Audit Report to be distributed to the Executive Directors. Regards, Jose Luis Flores H. Secretariat of the Treasury and Public Credit Copy to Patricio Ayala, Executive Director  - 19 - MEXICO Loan 909-ME Mexico City Water Supply Project Project Completion Report I. INTRODUCTION The Project Area and the Sector 1.01 The Mexico City Metropolitan area, Mexico's cultural, political and economic center, is located in the Valley of Mexico, a basin of vol- canic origin at the southern end of t'e Central Mexican Plateau. The Valley covers an area of about 10,J00 km2 at an elevation of about 2,000 m. Rainfall averages 700 mm p.a. The Valley includes the entire Federal District (DF), the seat of the Federal Government, and parts of the states of Mexico, Hidalgo, Tlaxcala and Puebla. The main government entities in the area are DF and the State of Mexico (SM). At the time of appraisal. the metropolitan area contained about nine million inhabitants (20% of the country's total population), 7.5 million in DF and 1.5 million in the surrounding states. The metropolitan area's population growth rate of almost 6% p.a. was 60% higher than the national average. There was little control over urban growth at the time, and lack of planning in many areas resulted in rapid development without appropriate infrastructure. 1.02 Water is a scarce resource in Mexico: 70% of the country's population and 80% of its industry are located in areas which contain only 15% of available water resources. The Valley's topographical situation limits available resources and complicates access to water in surrounding areas. At the time of appraisal, about 70% of the Metropolitan Area's water was supplied by rainfed groundwater sources via wells. All but one of the sources were in the Valley itself. The Metropolitan Area's rapid growth had severely strained water resources. Indeed, depletion of the aquifer had caused land subsidence, resulting in damage to buildings and infrastructure. In recognition of the problem of scarce water resources, the Government prepared, with the assistance of UNDP and the Bank, a national water plan (completed in July 1975). 1.03 The Secretariat of Water Resources (SRH) was responsible for water resources at the national level.]/ About 80% of its investments were devoted to multipurpose river basin schemes and irrigation, and 20% were in urban water supply and sewerage. In 1972, SRH established the semi- autonomous Mexico Valley Water Commission (CAVM, para. 1.07) to take 1/ In 1976, SRH became part of the Secretariat of Agriculture and Water Resources (SARH). - 20 - responsibility for provision of additional water for the Metropolitan Area. DF and SM were responsible for their existing water sources. DF was responsible for its own water distribution system and retail water sales. Various State and municipal agencies were responsible for distribution systems and water sales in SM. In addition, many industrial and agri- cultural cunsumers in DF and SM developed and operated their own sources of water supply.l/ It was estimated that DF would purchase 76% of CAVM's bulk water in 1977. The remainder was expected to be sold to SM, individual municipalities and industry. 1.04 It was estimated at appraisal (1972) that 80% of the population of the Metropolitan area had access to water through house connections. The remainder received water from public hydrants or private carriers. Retail tariffs were set in DF by the Federal Congress and in SM by the State Government on the basis of recommendations from DF and from SM's municipalities. Retail pricing policies and Government subsidies had en- couraged waste and produced insufficient revenues. Tariffs were increased in SM May 1972. At the Bank's urging, DF's tariffs were raised by 100% in January 1973. The Borrower 1.05 The Borrower for the Loan was Nacional Financiera S.A. (NAFINSA). NAFINSA, established in December 1933, is an administratively and financially autonomous national development bank. It acts as finan- cial agent for external funds obtained with the guarantee of the Federal Government. NAFINSA is managed by seven directors; three are elected by the Federal Government and four are elected by the private sector. The Secretary of Finance and Public Credit is the ex-officio Chairman of the Board of Directors. The Director General, appointed by the Board, is responsible for NAFINSA's operation. The Borrower's role was that of providing a channel of communication between the Bank and the executing agencies (CAVM and the Lake Texcoco Commission) and approving documents relating to transfer of Loan proceeds. The Executing Agencies 1.06 The original executing agency was CAVM. The Guarantee Agree- ment (Section 3.02) required that all works carried out under the project, except for some supplementary public works in the project areas, be trans- ferred to and administered by CAVM. An exception was made for the multi- purpose Lake Texcoco component, however. A specialized team was estab- lished to carry out the Lake Texcoco scheme and became an autonomous commission under SRH in late 1974. The Lake Texcoco Commission (CLT) then acted as an executing agency. In order to ensure procedural uniformity, CLT documents related to water works were prepared with the concurrence of CAVM. The Bank agreed to this arrangement by letter in September 1974. 1/ DF policy was to charge owners of private wells for water at standard retail rates, but the policy was not strictly enforced. SM did not levy a charge on privately produced water. - 21 - 1.07 CAVM was established as a semi-autonomous agency of SRH on August 17, 1972, one month before the project was appraised. It was given responsibility for developing, operating and maintaining new bulk water sources to meet the Metropolitan Area's growing demand. SM and DF re- tained control of their existing water sources. The President, who ap- proves all policy and financial matters, is the Secretary of SRH. CAVM's chief executive officer is the General Manager, who is appointed by the President of Mexico. The Deputy General Manager is appointed by the President of CAVM. CAVM has five staff and six line departments (Organiz- ation Chart, Annex 1). The department heads are appointed by the General Manager. 1.08 CAVM receives its funds from the Federal budget and from its own revenues. During the project, the Federal budget allocation included government counterpart funds (through SRH) and the proceeds of the Bank Loan (through NAFINSA) for capital investments. Revenues were expected to cover operating expenses and a percentage of capital investments (para. 2.08, iten c). Tariffs for bulk water are set by SRH after negotiations between CAVM, SM and DF. II. PREPARATION AND APPRAISAL Preappraisal and Appraisal 2.01 Loan 909-ME was the first direct Bank operation for water supply in Mexico. In July 1970, representatives of DF's Department of Water Works indicated their organization's interest in obtaining Bank financing for a large sewerage and drainage scheme. The Bank did not participate in that scheme, but began to consider a water supply operation in April 1971. Discussions on a multi-purpose development scheme for the Lake Texcoco area were held at the Bank in June 1971, and an identification mission visited Mexico City in August 1971. 2.02 The identification mission concluded that it would not be possible to include the entire Texcoco scheme in the project, but that some of the Texcoco components combined with other water supply schemes would comprise a project suitable for Bank financing. The Mexican Government agreed with the above conclusion and preparation proceeded accordingly. Major areas of concern during preparation and appraisal were the organiz- ation and autonomy of CAVM, preparation of feasibility studies for the project, and bulk and retail tariffs. Project Description and Objectives 2.03 The project's objectives were to increase water supply by an aggregate of about 15 m3/sec/ (Annex 2), encourage systematic regional water planning, foster the development of a centralized regional bulk- water authority and encourage change in pricing policies. The project as appraised was viewed as a first-stage water source development program to meet the needs of the Mexico City Metropolitan Area through 1977. It consisted of: - 22 - (a) Pozos Sur - construction of a wellfield and transmission facilities to link it to the distribution networks; (b) Guadalupe - construction of facilities to draw water from the Cuautitlan River and facilities to treat the water and transmit it to two service reservoirs: (c) Cuautitlan - expansion of an existing wellfield and trans- mission facilities to link it to the distribution network: (d) Los Reyes - construction of a wellfield and transmission facilities; (e) Apan - construction of a wellfield and transmission facili- ties to link it to the distribution system; (f) Texcoco Multipurpose Scheme - construction of a wellfield, sewage treatment plant and sprinkling irrigation system; creation of three artificial lakes; construction of facili- ties to extract salt from the water pumped out to create the lakes; construction of river regulation facilities; and afforestation of land in the Lake Texcoco area; and (g) Public Works - Construction of roads, schools, health care centers and similar facilities in the project areas. It was decided during negotiations to 41low the following component to be substituted for any one of items (a) - (e) above (para. 3.04): Southeastern Wellfield - construction of a wellfield and transmission facilities to link it to the distribution sys- tem. 2.04 The cost of the project, excluding interest during construction, was estimated at US$155 million equivalent (Annex 3). The Bank's partici- pation was expected to be US$76 million equivalent (49% of project costs), plus US$14 million equivalent to finance interest during construction. Negotiations 2.05 Negotiations were protracted and difficult: they began on April 9, 1972, were adjourned on April 20, resumed on May 21 and concluded on May 24. The major issues raised during negotiations were related to the project description (paras. 2.03 and 3.04), procurement (para. 3.17). studies and construction of distribution works. - 23 - 2.06 Because of the less than optimal quality of the studies carried out during preparation, the Bank had suggested that studies to ensure proper planning of future investments and project control be financed under the project. CAVM recognized the importance of the studies, but insisted that they be excluded from Bank financing because it regarded Bank involvement as an infringement on Mexico's national sovereignty. CAVM agreed to carry out the studies, but was initially unwilling to consult with the Bank on anything pertaining to the retail tariff study. The compromise worked out and formalized in the Guarantee Agreement (Section 4.02) required that terms of reference for the retail water tariff study be set with Bank concurrence and that the Bank be given the opportunity to comment on the results of all studies. There was no commitment from the Mexican authorities to revise retail tariffs after completion of the study. 2.07 The Mexican authorities had expressed interest in obtaining Bank financing for construction of distribution works in DF and SM, but later asked that they be dropped from consideration. The Bank pressed the Government for a firm commitment that it would provide funds for and ensure the timely completion of the distribution works. The language adopted in the Guarantee Agreement covenant called for the Government to exert its "best efforts" to see that the works were completed and to reduce CAVM's bulk water investments if the distribution works were not carried out (Sections 4.03 and 4.04, and Schedules 4 and 5). 2.08 Other principal covenants were that: (a) the Government would provide funds, on terms satisfactory to the Government and the Bank, to CAVM to carry out the project; (b) CAVM would engage construction consultants as necessary and would employ consultants for management, organization and personnel matters within 90 days of Loan signature; (c) average bulk water tariffs would be set, according to an agreed formula, at levels that would allow CAVM to generate net internal resources sufficient to cover at least 24% of its capital investments in 1974 and 35% in following years; (d) CAVM would have functioning no later than September 30, 1973 accounting and internal auditing systems acceptable to the Bank, would employ independent commercial auditors, and would have annual audit reports prepared and submitted to the Bank within five months of the end of each financial year; - 24 - (e) DF would improve its revenue effectiveness index (REI) 1/to not less than 60% by 1976 and 707 by 1980: and (f) CANM would continue to require private producers of non- agricultural water to connect to public systems where pos- sible and, if not possible, charge the producers an amount at least equal to CAVM's bulk water tariff. III. PROJECT IMPLEMENTATION 3.01 The project was presented to the Board on June 12, 1973, and the Loan was signed on June 18, 1973. The original effectiveness deadline was October 18, 1973. Construction works were to have been completed as follows: (a) Pozos Sur and Cuautitlan - December 31, 1973; (b) Guadalupe and Los Reyes - December 31, 1974: (c) Apan - September 30, 1976; (d) Texcoco - water, September 30, 1976; other works, December 31, 1976: (e) General Public Works - December 31, 1976. Studies on the economics of groundwater extraction, saline intrusion into the Texcoco wellfield and investment strategy were to have been carried out continuously throughout the project. The study on sewage and drainage water reuse was to have been completed by the end of 1974. and the study of facilities to meet future needs was to have been completed by the end of 1975. The retail tariff study was to have started by January 31, 1974 and to have been completed according to a schedule agreed upon by the Bank and the Government. Effectiveness 3.02 There were two special conditions of effectiveness: (a) CAVM was to have appointed a qualified financial manager; and (b) CAVM was to have entered into contractual arrangements with DF and SM for the sale of bulk water in amounts which, in the opinion of the Federal Government, justified the car- rying out of the project. 1/ REI = Revenues collected/Volume produced Average tariff/m3 on metered connections - 25 - The first condition had been met by August 1973, but fulfillment of the second condition caused the effectiveness date to be delayed four times. 3.03 The purpose of the bulk water tariff agreement was to ensure that there would be a buyer for the water to be produced under the project. The agreement between CAVM and DF was signed on October 10, 1973, but negotia- tions with SM bogged down because SM wanted to operate some of the project systems. The Federal Government was reluctant to force the issue because it feared that doing so might adversely affect SM's willingness to collab- orate on this and other Bank projects. As about 80% of the water to be produced during 1975-77 was destined for DF and because it was felt that SM would eventually agree to purchase the water, the Bank declared the Loan effective on April 30, 1974. The Loan Agreement was amended to delete the SM bulk water agreement from the conditions of effectiveness. In order to maintain Bank leverage, the amendment stipulated that only US$40 million of the Loan proceeds, an amount considered sufficient to cover critical works, could be withdrawn prior to signature of the SM bulk water tariff agreement. The agreement between CAVM and SM was not signed until September 1975. After extensive Bank review, the contract was approved on January 22, 1976 and the full amount of the Loan was released for disbursement. Project Revisions 3.04 Because only preliminary designs were available for some proj- ects, the project description (para. 2.03) and timing of investments were left flexible. The project was modified during execution to take into consideration the following technical and legal matters. The Southeastern Wellfield was substituted for the Pozos Sur component (completed in January 1974 with CAVM financing) because the delays in effectiveness would have postponed operation. The Guadalupe component was dropped be- cause of a dispute over water rights. The wellfield capacity at Los Reyes was expanded, as were the Cuautitlan transmission facilities. The cost increases resulting from the Los Reyes and Cautilan changes were more than offset, however, by the rerouting of a transmission main at Apan. None of the above modifications necessitated a change in the Loan documents. 3.05 By the summer of 1977 it had become evident that project works would not be completed before the end of December 1978, one year after the original closing date. 'US$53.1 million of the Loan proceeds remained undisbursed on September 30, 1977. In addition, the substantial devalua- tion of the peso in 1976 and the cost savings resulting from the modif- ications discussed above were expected to result in US$24 million in unused funds. In August 1977, the Government requested that the closing date be extended and the project be revised. NAFINSA and CAVM, in consultation with Bank staff, had identified five items similar to those originally appraised that would expand the supply of bulk water to the Mexico City Metropolitan Area by 4.6 m3/sec. In December 1977 it was recommended that the following items be added to the project: - 26 - (a) construction of the Ecatepec sewage treatment plant; (b) execution of minor works in the Lake Texcoco area; (c) drilling of wells in areas not served by the distribution networks; (d) construction of the Lecheria sewage treatment plant; and (e) construction of a water treatment plant at the Madin Dam. 3.06 The Texcoco Component had been seriously delayed because of lack of counterpart funds, difficulties in obtaining water rights and tech- nical problems. It was recommended that the wellfield be reduced and that the irrigation and salt extraction items be deleted from the project. With the proposed changes, it was estimated that the entire Loan amount would be disbursed. 3.07 The closing date was extended to December 31, 1978 to allow works on components included in the original project to be completed. The bulk water tariff agreements signed with DF in October 1973 and SM in September 1975 (para. 3.03) were due to run out at the end of December 1977, and negotiations on new agreements had begun in late April 1977. Because of the importance of the agreements to CAVM's financial viability, it was decided that the Bank would not reallocate project funds until the new bulk water tariffs agreements had been signed. 1/ 3.08 Although the Federal Government had approved a Mex$3.00/m3 bulk water tariff increase effective February 1, 1978, negotiations again proved difficult, mainly because SM felt the precarious financial position of its Municipalities would not permit them to pay the resulting higher retail rates. CAVM billed DF and SM at the new rate (Mex$4.44/m3), but both entities continued to pay at the old rate (Mex$1.44/m3). By the extended closing date negotiations still had not been completed, and a one- month interim extension was granted. On February 6, 1979, agreement on the new tariff was reached, including a Government subsidy for SM's purchases, and the closing date was extended to June 30, 1980. 1/ Signature of the agreements was also made a condition of appraisal of the then proposed Second Mexico City Water Supply Project. The project was dropped from the Bank's Lending Program in July 1979. The Inter-American Development Bank appraised this project in October 1979 and approved a loan of US$170 million to the Mexican Government in May 1981. - 27 - 3.09 Approval of the change in project description was further de- layed, however, because groundwater studies submitted in October 1978 in- dicated that there was reason to doubt the safety of the Madin Dam if it were filled to its full capacity. The Bank believed that inability to fill the Dam would have made it difficult to operate the water treatment plant to be built under the revised project at its full design flow. After evaluation of the Dam's safety by a Bank consultant in September 1979, it was recommended that the Madin component be included in the revised project description, but that no funds be disbursed for works on the treatment plant until certain safety measures had been taken. SRH agreed to the terms of the recommendation. 3.10 The Board approved the revised project description and realloca- tion of funds on January 16, 1980. The cost of the new items, net of the reduction in scope of the Texcoco project, was as follows: US$ Million 1/ (a) Ecatepec sewage treatment plant 11.0 (b) Lake Texcoco 3.2 (c) Local wells 7.8 (d) Lecheria sewage treatment plant 4.8 (e) Madin Dam 4.0 30.8 1/ Including contingencies. US$73.3 million of the Loan proceeds were expected to be disbursed for civil works and construction. Remaining funds (US$16.7 million) were to be used to finance interest during construction. Cancellations and Closing 3.11 In March 1980, NAFINSA requested the Bank to extend the closing date a fourth time to June 30, 1981 to allow CAVM to complete the newly added works and utilize as much as possible of the Loan proceeds. The Bank agreed to the postponement. In June 1980, CAVM informed the Bank that counterpart funds for the Ecatepec sewage treatment plant were not forth- coming because the Government was no longer considering the plant to be of high priority. CAVM had decided not to construct the plant. A supervision mission also found that SRH officials wanted confirmation by their own advisers of the safety measures that had been made a condition of disburse- ment for the Madin Dam treatment plant (para. 3.09). The mission estimated that because of procurement problems Bank participation in the Texcoco component would be further reduced. Post-mission requests for updated project costs, revised disbursement schedules and financial statements - 28 - remained unanswered until February 1981. At that time it was estimated that US$22 million would remain in the Loan account as of the closing date, but it was felt that the closing date should not be postponed again. NAFINSA was informed of the Bank's position in late February 1981. 3.12 CAVM and NAFINSA considered the financial and technical aspects of the project and requested that US$10.5 million be cancelled. The Bank complied with their request. In June 1981, NAFINSA requested a three-month extension because processing of disbursement requests was taking longer than expected. The Bank informed NAFINSA that the closing date would not be extended, but that disbursements would be continued if the disbursement applications were received before August 31. 3.13 In early September 1981, the Bank received evidence that the conditions for disbursement for the Madin Dam Sewage Treatment Plant had been substantially met. The Bank informed NAFINSA that it would disburse for expenses incurred prior to June 30 if the disbursement applications were received by September 30, 1981. After final disbursement, about US$1.3 million remained in the Loan account. The undisbursed balance was cancelled. Project Costs and Disbursements 3.14 A comparative table of cost estimates at appraisal and actual costs is presented in Annex 3 and summarized below: ----Appraisal Estimate---- ----------Actual----------- Project Bank Project Bank Cost Participation Cost Participation US$ million US$ million % US$ million US$ million % Civil Works 134 76 57 138.1 61.5 45 Interest During Construction 14 14 100 16.7 16.7 100 148 90 61 154.8 78.2 51 NAFINSA excluded the cost of the studies and administrative costs (esti- mated at a total of US$21 million equivalent during appraisal) from its calculation of total project cost. In the interest of comparability, these items have been deleted from the appraisal estimate. - 29 - 3.15 A comparison of appraisal estimates and actual disbursements is presented in Annex 5. Disbursements were slow over most of the con- struction period. The only disbursements made through the end of June 1Q75 were for interest during construction. In 1976 and 1977, the rate of disbursement increased markedly, but by the end of June 1978 (six months after the original closing date), only about 54% of the Loan amount had been disbursed. Disbursements slowed before the Loan was restructured, increased in 1980, then slowed again. Although the Loan was closed on June 30, 1981, final disbursement was not made until December 1981. 3.16 One of the main reasons for the slowness in disbursements was the delay in releasing the full Loan amount (para. 3.03). Although the Loan was signed in mid-June 1973, the entire Loan amount was not released for disbursement until late January 1976. Similarly, delays in submitting evidence of safety of the Madin Dam caused delays in disbursement at the end of the project (para. 3.13). The other major cause of slow disburse- ments were administrative delays in CAVM and NAFINSA and lack of counter- part funds for the Lake Texoco component. Slow processing of applications was given as the reasons for one request for extension of the closing date. Bank supervision missions estimated that the processing time for disburse- ment applications was six months. Procurement 3.17 The question of procurement procedures was the main reason nego- tiations were adjourned in April 1972. The Mexican authorities had wanted to exempt all civil works of less than Mex$20 million (US$1.6 million equivalent in 1972 prices) from ICB and reserve them for local contractors. The compromise reached provided that contracts for works of less than Mex$20 million and equipment of less than Mex$l million (USS80,000 equiv- alent in 1972 prices) would be locally advertised, that the Bank would be consulted and that local embassies of Bank member countries would be given information on works in advance. Contracts below these limits for the public works component and for seasonal works under the Lake Texcoco com- ponent were to be awarded on the basis of price quotations from at least three contractors, according to Federal Government procedures. Contracts for works in excess of Mex$20 million and for equipment of more than Mex$1 million were awarded on the basis of TCB and in accordance with the Bank's Procurement Guidelines. Procurement procedures were changed when the project was restructured to allow CLT to award contracts for works of less than Mex$200,000 (US$9,000 equivalent) to community groups on the basis of price quotations. 3.18 The other major procurement related problem at negotiations was that the Mexican authorities felt that prior Bank review of bid evaluation and comparison analyses prior to contract award would be regarded as inter- ference and would cause unnecessary delays. The requirement for prior review was dropped. - 30 - 3.19 The Bank had recommended providing US$2 million of retroactive financing for construction financed by local funds prior to Board presen- tation. The retroactive financing was dropped before negotiations because existing procurement procedures were not in accordance with Bank Guide- lines. This led to minor changes in the works financed under the project and consequently to delays in execution. 3.20 The Guarantee Agreement called for CAVM to group as many civil works, equipment and materials items as possible in lots large enough to attract ICB. Despite Bank efforts to encourage international competition, only three of the about 200 contracts awarded were won by foreign firms. Evidence in the files indicates that CAVM followed the agreed procedures, although there were serious delays in the approval of procurement doc- uments by the Mexican authorities. 3.21 CLT experienced problems with procurement. CLT was allowed to directly award contracts of up to Mex$200,000 (US$9,000 in 1980 prices) to community groups on the basis of price quotations. Twenty-nine such con- tracts were awarded for an amount of US$1.8 million. Most of these ex- ceeded the limit, and only US$21,000 worth of contracts were eligible for Bank financing. Reporting 3.22 In early 1974, the Bank officially informed CAVM that it was to provide progress reports within one month of the end of each quarter. The Bank also provided guidelines for report preparation and sample formats. Although the Bank repeatedly stressed the need to prepare the reports, CAVM seldom complied. Only three annual progress reports were prepared. 3.23 The Guarantee Agreement stipulated that CAVM was to have pro- vided audited financial statements to the Bank within five months of the end of CAVM's financial year. Auditors' reports were prepared but they were generally received at least three months late. IV. PROJECT COMPLETION AND OPERATIONS Construction 4.01 A comparison of project components as appraised and actual works is presented in Annex 6. Construction began in 1972 with Government funds. Only the Pozos Sur component, which was deleted from the project, was completed as appraised and on schedule. The various items which made up the Cuautitlan, Los Reyes, Apan and public works components were completed after substantial delays. Supervision missions estimated that delays - 31 - averaged about two years. The delays were the result of lack of final engineering designs at time of appraisal, procurement problems and changes in works. The public works component was completed by June 1979. The Lecheria sewage treatment plant has not been completed but is expected to be operational by the end of 1982. All other CAVM works were completed by June 1981. 4.02 In general, the works were constructed in accordance with ac- ceptable engineering standards. The works completed under the project increased average annual output by 13.0 m3/sec, 16% less than the ap- praisal estimate of 15.5 m3/sec. CAVM has sufficient personnel and mater- ial resources to efficiently operate the system. CAVM has mainly carried out maintenance on an emergency basis, but is beginning to use preventive maintenance. 4.03 The Lake Texcoco component faced serious delays. The major causes were the failure of the Government to provide sufficient counter- part funds and the change in the component's scope (para. 3.06). The sewage treatment plant has not yet been completed. One of the three artificial lakes has been completed and the other two should be finished by the end of 1982. The river regulation program was completed by June 1981. By March 1982, abut 2,900 ha. had benefitted from the afforestation pro- gram, as compared with the 6,200 ha. foreseen at appraisal. It is esti- mated that 70% of the Lake Texcoco component has been completed. Studies 4.04 The studies on the economics of groundwater extraction and saline intrusion of Lake Texcoco were made through the use of a computer model of the Mexico Valley aquifer. The studies were completed in late 1976, but there is evidence that they were not updated as frequently as necessary. The computer model was also used in the investment strategy study carried out by the Technical Coordinating Committee set up in June 1974. The Committee is composed of representatives of CAVM, DF and SM. The completion date is not available, but the files indicate that the study was not being updated. The sewage and drainage water reuse study, which was to have been completed by the end of 1974, was finished in June 1976. The study of facilities required to meet demand in 1980 was to have been completed by the end of 1975. It was carried out through the preparation of reports on the various schemes considered for inclusion in the then proposed Second Mexico City Water Supply Project (dropped from consider- ation for Bank financing in July 1979). The retail tariff study began in June 1974, six months later than covenanted. It was prepared by the Technical Coordinating Committee and completed by the end of June 1976. 4.05 The groundwater study and the review of investment strategy have allowed CAVM to locate new wellfields in a manner that minimizes land subsidence in the metropolitan area. CAVM states that it collects data for the model every six months. The study on saline intrusion has resulted in - 32 - the revision of the estimated safe yield of Lake Texcoco from 1.0 m3/sec to 0.6 m3/sec. CAVM continues to monitor water quality. The sewage and drainage reuse study allowed DF to prepare a master plan for treatment and reuse of sewage water. The retail tariff study was of use to DF and SM in setting their charges. Distribution Works 4.06 The Guarantee Agreement set specific amounts to be invested in distribution works in DF and SM in 1972-76 (para. 2.08 and Annex 4). It was also stipulated that the Federal Government would ensure that DF and SM would be provided sufficient funds to carry out the investment programs. Information prepared by the Mexican authorities indicates that DF met or exceeded the covenanted amount in each year, investing Mex$1,583 million (Mex$826 million covenanted) by the end of 1976 and Mex$8,015 million by the end of 1980. The data show that SM, however, consistently invested less than the amount called for and did not complete its total covenanted investment (Mex$427 million) until 1979. 4.07 Supervision missions found information on DF and SM investments difficult to obtain. Metering and leak detection programs were delayed in both jurisdictions, and unaccounted-for water is estimated to have re- mained at a high 40%. The Federal Government found it difficult to coordinate DF and SM investments with those of CAVM. Transmission mains and pipelines were not completed on schedule, which left CAVM with substantial amounts of unsold water (50% of production as of June 1977). DF and SM distribution networks were not able to absorb all CAVM production until 1978. V. FINANCIAL PERFORMANCE Financial Data 5.01 The audited financial statements provided by CAVM have some important problems in presentation. In particular, they reflect CAVM's financial data in accordance with SRH's accounting principles, which con- sider all funds received by CAVM to be capital contributions. At the Bank's request, CAVM's financial department prepared additional pro-forma statements. While they separate long-term debt from equity, they do not present revalued fixed assets and depreciation. In addition, total assets in service are undervalued and works in progress are overvalued, since part of the works for some project components (for instance, wells) were put into service before the entire component had been completed and trans- ferred to the assets in operation category. Because of these problems, the following conclusions on CAVM's financial performance have been limited to its operating results. - 33 - Operating Results 5.02 During 1974-77, revenues from water billings were much lower than estimated at appraisal because sales to DF and SM were lower than expected. This was because the complementary distribution works were not constructed on schedule (para. 4.07). The following table shows that volumes sold reached an average of 55% of appraisal estimates during 1974-77, and re- mained below the appraisal estimates through 1980: Volume Sold (m3 Million/Year) 1974 1975 1976 1977 1978 1979 1980 Appraisal 138 227 324 416 512 605 690 Actual 59 100 172 281 330 402 436 Actual/ Appraisal% 43 44 53 68 64 66 63 5.03 Revenues were also adversely affected by delays in signing bulk water tariff agreements. The original agreements were signed in October 1973 with DF and September 1975 with SM (para. 3.03). The agreements expired in December 1977 and the Federal Government approved new tariff levels in February 1978 (para. 3.08). CAVM began to bill for water sold at the new rate in 1978, but DF and SM continued to pay at the old rate until after the agreements were signed (February 1979). 5.04 During 1974-80, total revenues increased at an annual rate of 70% compared with the 37% expected at appraisal. Operating expenses also grew at a higher annual rate than expected at appraisal (50% versus 43%). Personnel, power and administrative costs were among the operating costs presenting major discrepancies with appraisal figures. While personnel and power expenses (twice the expected amounts in 1980) are the consequence of high national and international inflation rates, administrative expenses reflect CAVM's high overhead. 5.05 During the period under review, the operating ratio (before de- preciation) grew from 57% (18% estimated at appraisal) in 1974 to 82% (18% estimated at appraisal) in 1977. The operating ratio dropped again in 1978 as a result of the tar4ff increase and stabilized at about 28% (23% estimated at appraisal) in 1980. - 34 - 5.06 The Guarantee Agreement established that the Government should maintain rates for the sale of bulk water that would provide CAVM with revenues sufficient to finance from net internal resources not less than 24% of its capital expenditures during 1974 and 35% during each year thereafter. The following table shows that during the first four years. CAVM did not generate enough funds to meet the required percentages. Starting in 1978, CAVM appears to have complied with the covenant, except for a small shortfall in 1980. Net Internal Cash Generation as % of Capital Expenditures 1974 1075 1976 1977 1978 1979 1980 Appraisal 24 35 42 37 43 28 34 Actual 9 8 8 (9) 42 38 33 Although the bulk water tariff tripled in 1978, DF and SM continued to pay CAVM at the old rates. Thus this apparently satisfactory performance does not reflect CAVM's actual cash generation, as it is based on billings, rather than collections (see below). 5.07 CAVM showed in its balance sheets for 1978 and thereafter a sizable accumulation of retained earnings. In 1980, retained earnings amounted to Mex$2,688 million (US$122 million). or 24% of total assets (Mex$11.354 million or US$516 million); however, because DF and SM did not pay the increased tariffs in 1978, accounts receivable also increased substantially. They were estimated at two months of billings in 1974, and by 1980, they represented 16 months of billing or Mex$2,530 million (US$115 million), an amount equivalent to CAVM's retained earnings. Since there was no allowance for doubtful accounts, the financial statements are not really representative of CAVM's financial performance. 5.08 CAVM's total investments during the period 1974-80 were 20% hi- gher than appraisal estimates (Mex$8,114 milion vs. MexS6,787 million). As it was unable to collect its bills in full, CAVM could not contribute to investments as scheduled. This lack of internally generated funds and additional capital expenditures was offset by Government contributions (about Mex$2,200 million or US$100 million). Revenue Effectiveness Index (RED 5.09 As DF did not supply the information required to calculate the REI (Section 4.03 of the Guarantee Agreement), it is not possible to establish whether this covenant was met. - 35 - VI. ECONOMIC EVALUATION 6.01 The internal financial Rate of Peturn of the project (IRR) was used as a proxy for the economic rate of return at appraisal. It has not been recalculated because of the lack of full and reliable information on investment and operating costs for water distribution in the DF and SM. Furthermore, no information is available on yearly retail water tariffs in DF and SM. 6.02 On the basis of the available information, it can be concluded that the actual IRR is likely to have been lower than estimated at ap- praisal (4%) for the following reasons: (a) although actual proiect investments were similar to those projected at appraisal, additional water produced as a re- sult of the project was lower than estimated at appraisal; (b) although no reliable estimate on actual unaccounted-for water is available, partial information suggests that it has been considerably higher than projected at appraisal; and (c) actual operating costs per m3 of water sold appear to have been three to four times higher than projected at appraisal. These higher operating costs are due in part to CAVM being charged with responsibility for construction and operation of sewage treatment plants. No data are available to estimate the percentage of operating costs attrib- utable to the project. 6.03 The Appraisal Report included the calculation of IRR for the Texcoco irrigation and Texcoco non-water component. As investments for the Texcoco scheme have not been completed, most of its projected benefits have not yet been realized. VII. INSTITUTIONAL PERFORMANCE CAVM 7.01 CAVM was formed in August 1972, one month before the appraisal mission. By negotiations, only the General Manager and his Deputy had been appointed. Because of the recentness of its formation and lack of staff, the appraisal team was reluctant to predict CAVM's probable performance. To help ensure effective project execution and CATM management, the Guarantee Agreement required that management consultants be hired within 90 days of Loan signature. The consultants were not hired until January 1975, about 18 months after Loan signature. A change in NAFINSA management was given as the reason for delay. - 36 - 7.02 During the first half of 1976, CAITM took measures to strengthen its organization. In March, the organizational structure was revised, but the authority for decision making remained with the General Manager. The supervision mission that reviewed the changes found CAVM's management and organization to be generally satisfactory. By 1q79, CAVM's staff had grown to 2,388 employees. Of this number, 13% were managerial and professional staff, 18% were technical and secretarial, and 69% were skilled and unskil- led workers. Although CAVM's technical performance appears to have been satisfactory throughout project execution, the Bank found CAVM's inform- ation difficult to obtain and unreliable. CAVM's lengthy procurement procedures were a factor in overall project delays. 7.03 CAVM's performance was adversely affected by the complex sector organization. The division of responsibility among CAVM, DF and SM re- sulted in duplication of responsibilities and complicated the collection of information. Lack of coordination among these authorities and lack of reliable information were two of the main reasons the proposed Second Mexico City Water Supply Project was dropped. The need to negotiate bulk water tariffs with DF and SM twice caused substantial delays in project execution. Poor coordination of the construction of distribution works resulted in reduced CAVM revenues. The Bank's concern during preparation, appraisal and supervision over the division of responsibility for sector activities and CAVM's lack of autonomy was thus well warranted. CLT 7.04 Apart from its difficulties with contracting (para. 3.21), there is little mention in the files of CLT's internal performance. The major factors affecting its performance were those over which it had little control. The most important factor was the failure of the Government to provide adequate funds. The second factor was the reduction in scope of the Texcoco component for technical reasons. NYTII. BANK PERFORMANCE Preparation and Appraisal 8.01 During preparation and appraisal, the Bank attempted to make the best it could of a less-than-optimal situation. The Bank recognized that the studies upon which the project was based were not of the highest quality. To compensate for this, studies were included in the project. Because the detailed designs of some components had not been completed, timing and sequencing of works were left flexible. As the critical distri- bution works were dropped from project financing, the Bank attempted to ensure their completion through Guarantee Agreement covenants. The Bank also attempted to deal with the uncertainty of CAVM's performance through Guarantee and Loan Agreement covenants. The difficulties at negotiations related to procurement, studies and distribution works were resolved through compromise on all sides. - 37 - Supervision 8.02 The first supervision mission visited the country in July 1973, one month after Loan signature. The project was supervised intensively (14 missions) during the first five years of the project. Missions worked closely with CAVM to resolve technical, procurement and financial pro- blems. In 1977, the Bank helped CAVM to identify new components. The missions were followed by reports and letters to NAFINSA and CAVM on the Bank's findings and recommendations. Supervision slowed in 1978 and 1979 when the second round of bulk water tariff negotiations was taking place and the Second Mexico City Water Supply Project was in the final stages of preparation. There were only three limited supervision missions between July 1979 (when the Second Mexico City Water Supply Project was dropped) and project completion in June 1981. During this period, Bank efforts concentrated on speeding up disbursements to ensure that remaining funds were as fully used as possible by closing. This was accomplished mainly by cable and letter. 8.03 The appraisal report foresaw the possibility of a one-year delay in execution of works. It did not foresee such long delays in effective- ness. Repeated expressions of concern over the protracted bulk water tariff negotiations did nothing to speed up the process. Although the possibility of modifying the project had been anticipated, the Bank over- estimated the adequacy of the groundwater studies prepared prior to appraisal and, consequently, the extent of the changes that had to be made. The need to restructure the project and reallocate funds could not have been expected at appraisal. IX. CONCLUSIONS AND LESSONS TO BE LEARNED 9.01 The project's objectives were to increase water supply by an aggregate of about 15 m3/sec., encourage systematic regional water plan- ning, foster the development of a centralized regional bulk-water autho- rity and encourage change in pricing policies. The project was more successful in achieving the first two objectives than it was in meeting the last two. The project provided an additional 13.0 m3/sec of water to the metropolitan area. The covenanted studies were carried out and helped CAVM to improve its planning process. 9.02 The project was far less successful in developing a centralized regional planning authority. During project preparation, the Bank pressed for the creation of a financially autonomous agency to take responsibility for bulk water production and distribution. SRH proposed such an arrange- ment, but it did not materialize. CAVM was established without the power to unilaterally set bulk water tariffs and particularly without the power to enforce the collection of its bills. CAVM had no control over existing sources of production or distribution systems. - 38 - 9.03 Essentially, the Bank underestimated the powerful political forces at play in the Mexico City Metropolitan Area. The Federal Govern- ment was unable to coordinate the construction of distribution works. The Bank recognized that direct involvement of DF and SM in the lezal documents might have reduced the problem. Delays in effectiveness did not speed up tariff negotiations. The safeguards the Bank built into the legal documents failed to ensure timely project execution. At the end of the project, sector organization in the Mexico City Metropolitan Area was as complex as it had been to begin with. 9.04 The difficulties faced by the Bank and CAVM during project im- plementation led the Bank to be more demanding with regard to institutional and financial arrangements during preparation of the proposed Second Mexico City Water Supply Project. Although the Bank recognized that the consolidation of all bulk water production under one agency would be politically difficult, it continued to recommend this solution as the most effective one. The Bank also continued to express its concern over the need to provide adequate distribution systems and to reduce unaccounted- for water. A solution to these problems was not found. The lack of adequate sector arrangements and provision of distribution works weighed heavily in the Bank's decision to not participate in the Second Mexico City Water Supply Project. 9.05 Although responsibilities and functions of CAVM were defined by law, CAVM did not receive the necessary support from the Government during project execution to collect its water bills from the two principal users of bulk water. As a consequence of this lack of action, CAVM was not able to generate sufficient funds to cover the covenanted percentages of capital expenditures. The Government should also have caused CAVM to furnish to the Bank audited financial statements and other financial information for each fiscal year. The lack of this information and poor coordination among the various sector institutions prevented the Bank from making firm conclusions on the financial and economic performance. These problems could have been minimized if the Guarantor had played a more active role in sector coordination. MEXICO LOAN 909-ME MEXICO CITY WATER SUPPLY PROJECT Mexico Valley Water Commission Organization Chart PRESIDENT GENERAL MANAGER OFFICE OF INFORMATION AND TECHNICAL DATA PROCESSING ADVISOR CENTER Lo) DEPUTY GENERAL MANAGER OFFICE OF INTERNAL AUDIITING LEGAL OFFICE OFFICE OF LAND ACQUISITION DEPARTMENT OF DEPARIMENT DEPARTHENT OF PROJECTS CONSTRUCTION OPERATIONS PROGRAMMING, OF STUDIES AND DEPARTMENF DEPARTMENT DEPARTMENT ORGANIZATION AND ADMINISTHATION EVALATION SYSTEMS - 40 - ANNEX 2 MEXICO LOAN 909-ME MEXICO CITY WATER SUPPLY PROJECT PROJECT COMPLETION REPORT Additional Water Yields (m3/sec) Appraisal Revised Project Actual Average Annual Installed Component Estimate Estimate Production Capacity Pozos Sur 2.5 1/ 1/ 1/ Guadalupe 2.0 1/ 1/ 1/ Cuautitlan 3.3 2.8 1.8 2.1 Los Reyes 3.7 7.5 4.7 5.4 Apan 3.0 3.0 3.0 3.0 Texcoco 1.0 0.5 0.6 0.6 Southeastern Wellfield 2/ -2.0 1.3 1.4 Madin Dam - 0.6 0.6 6.0 Total 15.5 16.4 12.0 18.5 Local Wells3 - 3.0 1.0 1.6 Total 15.5 19.4 13.0 20.1 1/ Deleted from project. 2/ Considered as an alternate component at appraisal with an estimated yield of 4.0 m3/sec. 3/ Serving areas in the Valley of Mexico beyond the reach of the metro- politan area's distribution system. MEXICO LOAN 909-ME MEXICO CITY WATER SUPPLY PROJECT PROJECT COMPLETION REPORT Project Costs ---------------- Appraisal Estimate------------ -------------------Actual--------------------- Project Cost Bank Participation Project Cost Bank Participation Construction Mex$ Million US$Million US$ Millipn % Mex$Million US$ Million US$ Million % Pozos Sur 73 6 3 50 -- -- N.A. Cuautitlan 41 3 2 67 587.2 40.3 N.A. Guadalupe 94 8 4 50 -- -- N.A. Los Reyes 223 18 9 50 478.6 29.8 N.A. Apan 503 40 20 50 480.4 25.6 N.A. Texcoco 312 25 12 48 85.7 3.7 N.A. Southeastern Wellfield -- -- -- 243.4 15.4 N.A. Public Works 53 4 2 50 Local Wells -- -- -- -- 209.4 10.5 N.A. Lecheria Sewage Treatment Plant -- -- -- -- 163.6 7.3 N.A. Madin Dam -- -- -- -- 125.5 5.5 N.A. Studies 46 4 -- -- 1/ 1/ N.A. Subtotal 1,345 108 52 48 2,373.8 138.1 N.A. Contingencies Physical 196 15 8 53 1/ 1/ N.A. Price 189 15 8 53 1/ 1/ N.A. Total Construction 1,730 138 68 49 2,373.8 138.1 N.A. Engineering and Administration 210 17 8 47 1/ 1/ N.A. Total Project Cost 1,940 155 76 49 27373.8 138.1 61.5 45 Interest during construction 178 14 14 100 1/ 16.7 16.7 100 Total Bank Financing 90 78.2 1/ Information not available. M 2/ Disbursement data by component are not available. Page 2 contains figures on Bank participation based on data prepared by the Mexican authorities. - 42 - ANNEX 4 Page 1 of 2 LOAN 909-ME MEXICO CITY WATER SUPPLY PROJECT PROJECT COMPLETION REPORT Agreements Reached and Principal Covenants A. Agreements Reached 1. CAVM's investment program would not be revised without prior Bank approval; 2. CAVM's bylaws would not be modified in a way which would adversely and substantially affect project execution. B. Guarantee Agreement Covenants 1. CAVM would receive from the Federal Government the funds necessary to carry out the project on terms and conditions satisfactory to the Guarantor and the Bank (Section 3.01). 2. The Comision would engage construction consultants as necessary to assist in carrying out the proj,ect and would employ consultants for management, organization and personnel matters within 90 days of the signing of the loan (Section 3.04). 3. The average bulk water tariff would be set according to the formula which divides the Comision'srevenuesby the quantities of water sold, such revenues being sufficient to provide the CAVM with annual net internal resources at least equal to an annual percentage of capital expenditures of no less than 24% in 1974 and 35% in each year thereafter (Section 3.05). 4. The Comision would have functioning, not later than September 30, 1973, accountingand internal auditing systems acceptable to the Bank and would employ independent commercial auditors for annual audits to be submitted within five months of the end of each financial year (Section 3.06). 5. The Government would ensure that studies on the following subjects were prepared: (a) economics of groundwater extraction; (b) saline intrusion into the Texcoco well field; - 43 - ANNEX 4 Page 2 of 2 (c) investment strategy; (d) sewage and drainage water reuse; (e) facilities needed to satisfy demand after 1980; and (f) retail water tariff levels and structure, and water depart ment operations. Studies (a) through (c) were to have been continuous, study (d) was to have been completed by the end of 1974 and study (e) was to have been completed by the end of 1975. Study (f)was to have started by January 31, 1974 and been completed according to a schedule set by the Government and the Bank. The terms of reference for the retail tariff study were to be set with Bank concurrence, and the Bank was to be allowed the opportunity to comment on the conclusions of all studies (Section 4.02 and Schedule 3). 6. The Government was to have taken or cause to have taken by December 1973measures to: (a) haveDF improve its revenue effectiveness index to not less than 60% by 1976 and 70% by 1980; and (b) have DF invest Mex$718million(US$57.4millioninl972dollars)indistributionworks by the end of 1976 (Section 4.03 and Schedule 4). 1/ 7. The Government would use its best efforts to coordinate CAVM's bulk water investments with SM's distribution system investments. SM's investments were tohavereachedMex$426million (US$34.lmillion in 1972dollars)bytheendof 1976, 1/unless theBankand theGovernment otherwise agreed (Section 4.04 and Schedule 5). 8. The Federal Government would make available to DF and SM all funds required to complete the distribution works (Section 4.05). 9. CAVMwould continue its program to require private producers of non- agriculturalwater inthe ValleyofMexico toconnect topublic systems wherefeasibleand,wherenotfeasible,chargetheproducersatleastat the bulk water tariff of the Comision (Section 4.06). C. Loan Agreement Covenants (Conditions for Effectiveness) 1. The Comision would engage a competent financial manager (Section 8.01(b)). 2. CAVM would enter into contractual arrangements with the DF and SM for the sale of bulkwater in amounts whichwould justify the carrying out of the Project, to the satisfaction of the Guarantor and the Bank (Section 8.01 (c)). 1/ Total DF and SM distribution works were to have reached Mex$826 million by the end of 1976, thus leaving room for reallocation between the two entities. - 44 - ANNEX 5 LOAN 909- ME MEXICO CITY WATER SUPPLY PROJECT Project Completion Report Cumulative Schedule of Disbursements (US$ million) Bank Fiscal Appraisal Estimate Actual Year US$__ %_ US$ % 1973 1.72 20.0 -0- -0- 1974 26.32 29.0 0.6 2.3 1975 51.20 57.0 1.3 2.5 1976 76.97 85.0 15.3 19.9 1977 90.00 100.0 35.7 39.7 1978 -0- 100.0 48.2 53.5 1979 -0- 100.0 55.2 61.1 1980 -0- 100.0 68.5 76.0 1981 1/ -0- 100.0 73.9 82.0 1982 2/ -0- 100.0 78.2 87.0 Although the loan was closed on June 30, 1981, disbursements continued until December 1981. 1/ US$10.5 million cancelled in February 1981. 2/ US$1.3 million cancelled in December 1981. MEXICO LOAN 909-HE MEXICO CITY WATER SUPPLY PROJECT PROJECT COMPLETION REPORT Comparison of Appraisal Components and Actual Works --Completion Date-- ---------Composition of Component-------------- Appraisal Completed Estimate Actual As Appraised Revised Added Deleted Remarks Construction Pozos Sur 12/31/73 N.A. X Replaced by Southeastern Wellfield as provided In the Guarantee Agreement. Completed with local funds in 1/74. Cuautitlan 12/31/73 6/81 X Transmission facilities expanded. Except for Barrientos pumping station, works were completed by mid-1977. Guadalupe 12/31/74 N.A. X Dropped because of dispute over water sights. Los Reyes 12/31/74 6/81 X Wellfield capacity expanded. Original items completed by mid- JS 1977; one additional item completed by mid-1979, two other by LA June 1981. Apan 9/30/76 6/81 X Transmission main rerouted. Original component completed In mid- 1979. Lake Texcoco: Water 9/30/76 not yet X Wellfield and irrigation items dropped, afforestation program Non-water 12/31/76 completed reduced, other minor items added. Artificial lakes completed by end-1978, other items by June 1981 or still in proces. Southeastern Wellfield 6/81 Public Works 12/31/76 12/79 Local Wells 6/81 K Lecheria Sewage Treatment Plant not yet X completed Ecatepec Sewage Treatment Plant X X Added when project was restructured, dropped at end of project because of change in priority. Madin Dam Water Treatment Plant 6/81 X Studies 1. Groundwater Extraction continuous before 10/76 2. Texcoco Saline Intruston continuous before 10/76 3. Investment Strategy continuous N.A. 4. Sewage and Drainage Water Reuse end 1974 6/76 5. Facilities to Meet Demand after 1980 end 1975 before 12/76 MEXICO LOAN 909-ME MEXICO CITY WATER SUPPLY PROJEUT Project Comletion Reor Income Statements - CAVM (Mex$ Million) 1974 1975 1976 1977 1978 1979 1980 Appraisal Actual ApJraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual OPERATING REVENUES Water billingI 166 81 272 147 389 256 666 393 819 3968 l7 l9 Total Revenues 166 81 272 147 389 256 666 393 819 1,385 968 1,780 1,117 1,94) OPERATING EXPENSES Labor A 1) 17 0 23 0 29 22 36 43 44 67 49 99 Chemicals 1 0 7 0 10 0 12 36 14 4 27 3 37 4 Power 14 0 21 0 35 0 47 63 65 83 81 133 99 199 Materials 4 0 10 0 13 0 22 0 28 9 40 9 45 30 Administrative - General- 1 41 2 83 3 157 3 200 4 152 4 148 4 189 Other3Y 2 5 5 16 7 33 9 0 12 7 16 23 19 13 Total operating coqt, 30 46 62 99 91 190 122 322 159 298 212 383 253 534 INCOME BEFORE DEPRECIATION 136 35 210 48 298 66 544 71 660 1,087 756 1,397 864 1,411 DEPRECIATION 17 11 35 - 20 39 44 73 75 85 96 113 127 122 139 OPERATING INCOIF 119 24 175 28 259 22 471 (4) 575 991 643 1,270 742 1,272 OTIlER NET INCOME 6 0 5 0 4 0 3 0 2 0 1 0 0 0 NET INCOME BEFORE TNTEST 125 24 180 28 263 22 474 J4) 577 991 644 1.270 742 1,272 INTEREST NOT CAPITALIZFD4/ 0 (6) 0 0 43 30 116 53 104 75 177 232 149 533 NwT INCOME 125 30 180 28 220 8) 358 (57) 473 916 467 lO_38 593 739 OPERATING RATIO (7) / 18.07 56.79 22.79 73.88 23.39 78.84 18.32 P1.93 19.41 21.52 21.90 21.52 22.65 27.46 (Before Depreciation) OPERATING RATIO (%)/ 28.31 70.37 35,66 88.81 33.42 97.06 29.28 101.02 29.79 28.45 33.57 28.65 13.57 34.60 (After Depreciation) RATE BASF/ 398 N,A. 507 53.77 973 54.05 2,064 370.97 2,386 582.31 3,254 1,512.52 3,447 1,489.92 RETURN ON RATE BASE 7A/ 31 N.A. 20 52.07 28 40.70 23 (1) 24 170.17 20 83.97 22 85.37 CASH FLOW RErURt9/ 24 N.A. 18 54 23 43 22 13 23 119 20 75 21 69 1/ 1975 and 1976 Actual Income Statement include under "Water Billing", interests received, which have to be deducted when calculating ratios; $13 and $15 million each year. 2/ Indirect costs of Actual income Statements are stated under "Administrative - General" for a proper comparison with Appraisal. 3/ "Other" (Operating Expenses) includea "Vehicle, Administration - Cotmercial, Maintenance and others" in Actual Income Statements. 4/ "Interest Not Capitalized" in Actual Income Statements include interests paid and received (net). 5/ Total operat inr expenses divided I total revenues. / total operating expenses (inclding depreciation) divided by total revenues. 7/ Works In operation at end of previous year. 8/ Income Before Interest divided by Rate Base. 9/ Operating Income before depreciation divded ly eross fixed assets in operation. NEXICO LON 909-ME MEXICO CITY WATER SUPPLY PROJECT Project Completion Report Balance Sheets Statements - CAVM Mexican $ Million 1974 1975 1976 1977 1978 1979 1980 Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual ApZisal Actual Appraisal Actual ASSETS FIYED ASSETS s 1,156 89 1,298 155 2,441 556 2,827 910 3,771 1,869 4,088 2,042 6,287 2,214 Lass: Depreciation 11 52 31 91 75 164 150 249 246 362 373 484 507 Net 1,139 78 1,246 124 2,3 50 481 2,6-63 760 3,5S2 1,6 23 372b 1-!,669 5,803 1,77 Wortk in roress 95 292 590 774 0 1,022 533 1,271 732 1,678 1 3,258 984 6.407 SubtUtal 1,234 370 1,836 898 2,350 1,503 3,196 2,481 4,254 3,301 5,248 5,027 6,787 8,114 CURRE'T ASSETS L-nvencories 3 36 9 43 11 136 17 70 21 82 34 121 41 478 Accounts receivable 28 18 45 50 65 46 111 556 137 272 161 25 186 72 Consumners 1/ 81 82 142 1,206 2,897 2,530 Ca:h and Bank 215 31 236 237 254 271 313 75 429 103 3o8 903 453 160 Subtotal 246 166 2_9_0 412 330 595 441 701 587 1,663 563 398 680 3,2!40 TOTAL ASSETS 1,480 536 2,126 1,310 2,680 2,098 3,637 2,182 4,841 4,964 5,811 8,975 7,467 11,354 EQUITY + LIABILITIES rr I Capital 2/ 585 256 585 247 585 313 585 358 585 648 585 201 585 11 Accumu lated Surplus 132 31 312 59 532 51 890 (6) 1,363 911 1 830 11949 i Subtotal 717 287 897 306 1,117 364 1,475 352 1,948 1,559 2,150 3,008 2,79Q DEBT Long-term debt 689 233 1,083 823 1,995 1,527 1,925 2,497 2,460 3,144 3,048 4.569 4,027 4,815 OPK'-7 LTABILITIES 74 16 146 181 168 207 237 333 433 261 348 2LI6 432 3,710 TO IAL EQUITY + LIABILITIES 1,480 536 2,126 1,310 2,680 2,098 3,637 3,182 4,841 4,964 5,811 8,975 7,467 11,354 Debt as % of long-term capitalization 3/ 49 45 55 73 56 81 57 88 56 67 56 68 57 63 Current Ratio 4/ 3.32 10.4 1.99 2.28 1.96 2.87 1.86 2.11 1.36 6.37 1.62 1.75 1.57 .87 Receivable/Revenue 7, 17 100 17 61 17 59 17 134 17 87 17 163 17 130 Fixed Assets Growth 95.87 0.00 48.78 142.70 28.00 67.37 36.00 65.07 33.10 33.05 23.37 52.28 29.33 61.41 1/ Accounts Receivable of Appraisal should be compared with "consumerd" in Actual Balance Sheets Statements. In 1977, "Consumers" is supposed to be 526 according to Audited statcvnts of the same year. 2/ In Actual information Equity has been presented in the same way as in Appraisal, for adequste comparisons. Decrease in capital reflects the tranafer of social works to the comunities having benefited from the works. e 3/ Long-term debt divided by total capitalization. 4/ Current assets divided by current liabilities. try oX