Mexico - Urban Transport Project

Document of The World Bank FOR OFFICIAL USE ONLY Rg. 2gY- A- Report No. P-4551-ME MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$125.0 MILLION TO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS, S.N.C. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR AN URBAN TRANSPORT PROJECT May 8, 1987 { This document bas a restricted distribution and may be used by recipients only in the performance of their official duties. Its ontents may not otherwise be disclosed without World flank authorization.  CURRENCY EQUIVALENTS July, 1986 Currency Unit: Peso (Mex$) US$1 = Mex$ 643 Mex$ 1 = US$0.016 GOVERNMENT OF MEXICO FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 kilometer (Km) - 0.62 miles (mi) 1 liter (1) - 0.26 gallons (gal.) 1 hectare (ha) = 2.47 acres (ac.) 1 metric ton (Mton) = 2205 pounds (lbs) GLOSSARY OF ACRONYMS AND ABBREVIATIONS ACF Average Cost of Funds (Federal Government Borrowings) (Costo Porcentual Promedio (CPP)) BANOBRAS National Bank of Public Works and Services (Banco Nacional de Obras y Servicios Publicos, S.N.C.) COTREM State of Mexico Transport Commission (Comision del Transporte del Estado de Mexico) GOM Government of Mexico (Federal) ICB International Competitive Bidding LCB Local Competitive Bidding  FoR OFFIAL UK ONLY MEXICO URBAN TRANSPORT PROJECT LOAN AND PROJECT SUMMARY Borrower: Banco Nacional de Obras y Servicios Publicos, S.N.C. (BANOBRAS) Guarantor: United Mexican States Bene'iciaries: The States of Mexico and Nuevo Leon, private bus operators and BANOBRAS Amount: US$i25.0 million equivalent Terms: Fifteen years, including three years of grace, at the standard variable interest rate Onlending Terms: The peso equivalent of US$53.5 million and US$39.8 million would be made available to the States of Mexico and Nuevo Leon, respectively, on the same terms as the Bank loan and at an interest rate of 80% of the Average Cost of Funds (ACF). The peso equivalent of US$28.8 million would be made available to private bus operators in the project areas, under subloans which would cover at most 80% of the cost (net of taxes) of equipment for a term of three years with no grace period. Subloans would be made at an interest rate of ACF through June 30, 1989 and ACF+2 thereafter. Financing Plan: US$ million Federal Government 0.5 State of Mexico 94.5 State of Nuevo Leon 62.4 Private Bus Operators 12.5 Bank 125.0 TOTAL 294.9 Economic Rate of Return: 39% Staff Appraisal Report: Report No. 6487-ME dated April 29, 1987 This document has a restricted distibution and may be used by rec -"ts only in the performance of their official duties. Its contents may not otherwise be disclosed World batnk authodration.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO NACIONAL DE OBRAS Y SERVICTOS PUBLICOS, S.N.C. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR AN URBAN TRANSPORT PROJECT 1. The following report on a proposed loan to Banco Nacional de Obras y Servicios Publicos, S.N.C. (BANOBRAS) for US$125 million equivalent is submitted for approval. The proposed loan would be repaid over 15 years, including 3 years of grace, at the standard variable interest rate and would help finance an Urban Transport Project. 2. Background. Approximately 68% of Mexico's 75 million people live in urban centers of more than 2,500 inhabitants, while about 26% of the population live in three metropolitan areas: Mexico City, Guadalajara and Monterrey. As a result of natural population increase and immigration, these areas have experienced population growth rates as high as 10% p.a. The burden on urban transport infrastructure has been aggravated even more by rapid motorization. This has led to congestion, excess fuel consumption, deterioration of the infrastructure system, high levels of pollution, and increased demand for federal subsidies. Responsibility for providing urban transport services is shared among the federal, state and municipal levels of government and the private sector with inadequate coordination. Planning and execution of investments have emphasized capital intensive construction with little attention to traffic system management concepts or evaluation of low-cost alternatives for meeting transport demand. State owned public transport companies, such as the Comision del Transporte del Estado de Mexico (COTREM), have required large subsidies to cover operating and investment costs for systems characterized by inefficient route structures, poor maintenance practices, ineffective management, and antiquated equipment. 3. Project Objectives. The objectives of the proposed project are to: (a) improve the accessibility, quality of service, operational efficiency, and costs of public transport; (b) rationalize tariff policies, improve the financial and economic viability and sustainability of transport investments, and encourage private sector participation; (c) preserve transport infrastructure investments and reduce vehicle operating costs through implementation of adequate cost-effective maintenance programs; and (d) strengthen institutional capability, at the local as well as national level, to provide effective policy development, planning, resource allocation, traffic system implementation and operation, and project replicability. 4. Project Description. The proposed project would finance civil works, materials and equipment, technical assistance and studies to initiate and support a transport systems management approach to urban transport in the Monterrey Metropdlitan Region (State of Nuevo Leon) and the urbanized area in the State of Mexico. The project would include four integrated components: (a) corridor improvements to improve traffic flow and reduce accidents and pollution in major corridors, such as road widening, addition of turn lanes,  - 2 - inter-section improvements, curbs, gutters and sidewalks, paving, and construction of missing links, pedestrian overpasses, medians, and exclusive bus ways; (b) public transport to increase the quality and efficiency thereof, including: (i) bus system management. route rationalization and tariff studies; (ii) construction of bus maintenance facilities, including purchase of maintenance equipment; (iii) development of a program to optimize bus maintenance procedures; (iv) development of integrated medium- and long-range public transport plans; and (v) provision of credit for financing bus purchases by private operators; (c) road maintenance to develop an integrated road maintenance management program and implement the program's recommendations; and (d) traffic system management to develop a program of low-cost physical and administrative measures such as signing, marking, signaling, minor geometric improvements, parking and turning regulations, training in accident investigation, one way systems, and location of bus stops to improve traffic flow and safety. The project would also provide technical assistance to the Transport Technical Directorate in BANOBRAS to assist with project coordination and supervision and to analyze transport problems in medium-sized cities in Mexico. The total cost of the project is estimated at US$294.9 million equivalent, with a foreign exchange component of US$110.5 million (37%). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group Operations in Mexico are given in Schedules C and D, respectively. Maps are also attached. The Staff Appraisal Report, No. 6487-ME dated April 29, 1987 is being distributed separately. $. The proposed project would demonstrate the cost-effectiveness of an integrated transport management approach, emphasizing increased efficiency in the utilization of existing infrastructure as well as minor infrastructure investments, in two major urban areas of Mexico. At the same time, the project would strengthen the institutional framework at the federal, as well as local, level to prepare and coordinate a similar approach to transport problems in other urban areas in Mexico. Emphasis on increasing operational efficiency of existing infrastructure as opposed to initiating new capital intensive works, and raising fares to cover the costs of operating and maintaining services thereby reducing subsidies are fully consistent with our overall country assistance strategy. The project would address transport problems in two major industrialized areas of Mexico, thereby complementing Bank assistance to non-oil export development by helping to eliminate transport bottlenecks which affect the efficient production of goods and services in these areas. 6. Agreed Actions. During negotiations, BANOBRAS agreed: (a) to submit to the Bank for review the annual urban transport investment program in the States of Mexico and Nuevo Leon, including proposed allocations to road rehabilitation and maintenance; (b) that any urban transport investment exceeding the equivalent of US$10.0 million which would adversely affect the project or the economic or financial viability of the states' urban transport investment programs would constitute grounds for suspension of loan disbursements; (c) that the State of Mexico would agree, under the Subsidiary Loan Agreement, to cause COTREM to make substantial prograss towards improving the financial condition of its bus operations within two years of the effective date of the Loan Agreement by decreasing the ratio of total  -3- working expenses to total operating revenues so as to achieve a ratio of not higher than 100 percent, and to carry out management, operations, maint- enance, tariff and financial studies, and implement appropriate action plans to achieve this objective; (d) that the project studies would be initiated and completed according to agreed implementation schedules within the first 18 months of the project, and relevant recommendations would be incorporated in corresponding physical works programs; (e) to present, as a condition of effectiveness, a formalized onlending agreement with either the State of Mexico or Nuevo Leon and, as a condition of disbursement, the formalized onlending agreement with the remaining state, and that non-compliance with the onlending agreements would constitute grounds for suspension of loan disbursements; (f) to onlend funds to the States of Mexico and Nuevo Leon at a rate of 80% of ACF and to private bus operators for the purchase of buses at a rate of ACF through June 30, 1989 and ACF+2 thereafter and to submit evidence that the July 1, 1989 interest rate adjustment shall have been made as a condition of disbursement against bus purchase subloans made after that date; (g) as a condition of disbursement for the privately operated pilot maintenance facility in Nuevo Leon, that both feasibility studies and the execution of agreements, satisfactory to the Bank, which would ensure that all costs of operation and debt service are borne by private bus operators, are completed; (h) as a condition of disbursement for the Nuevo Leon subproject, that maintenance operations facilities have been established and agreements between the State of Nuevo Leon and the municipalities of the Monterrey Metropolitan Region have been executed; and (i) as a condition of disbursement for the purchase of buses under either subproject, to: (1) complete and implement route reorganization studies; (2) complete tariff studies and implement recommendations; and (3) complete financial analysis, acceptable to the Bank, of each subborrower which would include substantiation of full cost recovery of the bus operation. 7. Justification. Economic benefits would result from reduced vehicle operating costs and reduction in the use of fuel, improved efficiency in bus operations which would impact user costs and provide incentives for private investment in system operation, and reduced depreciation of transport infrastructure. The economic rates of return (ERR) for the appraised components were calculated using projected user cost savings in total vehicle operating costs, excluding passenger time savings. The overall ERR for the project weighted by investment costs is 39%. About 428,000 urban poor households (about 2.5 million people) would receive direct benefits under the project, equivalent to an estimated 5.6% increase in household incomes. Approximately 15,700 man-years of direct employment and approximately 2,250 man-years of indirect employment would be generated by the project. Finally, the proposed project would have a positive impact on air quality by reducing vehicle emissions through improved traffic flows. 8. Risks. The major risk is institutional as previous projects have been adversely affected by institutional weaknesses within BANOBRAS. However, BANOBRAS has recently been reorganized and strengthened, and the project would provide technical assistance to the project coordinating unit in BANOBRAS' Transport Technical Directorate. An interministerial committee which would provide regular monitoring of the project, combined with intensified supervision during early implementation, are expected to mitigate the risks of delays in project execution, approvals, and disbursement which could result from institutional weaknesses in BANOBRAS.  -4- 9. Recommendations. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. May 8, 1987  SCHEDULE A Estimated Costs:1/ Local Foreign Total -