Mexico - Water Supply and Sanitation Sector Project

Document of The World Bank 'OR OFFICIAL USE ONLY Rqet No. P-5370-4E 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$300 MILLION TO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS, S.N.C. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR A WATER SUPPLY AND SANITATION SECTOR PROJECT NOVEMBER 8, 1990 I This document has a restticted dhisiotion nd ma be used by recipients oy in the peonrme of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Peso (Mex$) US$1.00 W 2887 Mex$ (as of 9/19/90) */ */ The exchange rate against the US dollar is currently sliding at a rate of Hex$0.80 per day. FISCAL YEAR January 1 - December 31 UNITS OF WEIGHTS AND MEASURES Metric British/US Equivalent 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) 0.62 mile (mi) 1 kilogram (kg) = 2.20 pounds (lb) 1 metric ton (m ton) = 2,250 pounds 1 liter (1) = 0.26 gallons (gal) ACRONYMS ANOAPA - National Association for Water Supply Operating Agencies - Asociaci6n Nacional de Organi'smos Operadores de Agua Potable BANOBRAS = National Development Bank for Pulblic Works and Services - Banco Nacional de Obras y Servicios Pdblicos CETES Mexican Government's Treasury Bills Certificados de la Tesoreria de- la Naci6n. CNA = National Water Commission - Comision Nacional de Agua CONAPO - National Population Committee - Comite Nacional de Poblaci6n IMTA = Mexican Institute of Water Technology - Instituto Mexicano de Tecnologia del Agua OAs = Operating Agencies SARH = Secretariat of Agriculture and Hydraulic Resources - Secretaria de Agricultura y Recursos Hidraulicos SEDUE Secretariat of Urban Development and Ecology - Secretaria de Desarrollo Urbano y Ecologia SHCP = Secretariat of Finance and Public Credit - Secretaria de Hacienda y Credito P6blico SPP = Secretariat of Planning and Budgeting - Secretaria de Programaci6n y Presupuesto SWA = State Water Agency SWS State Water Supply and Sanitation Subcommittees - Subcomit4s de Agua Potable y Saneamiento.  FOR OFFICIAL USE ONLY MEXICO WATER SUPPLY AND SANITATION SECTOR PROJECT Loan and Project Summary Borrower: National Development Bank for Public Works and Services (Banco Nacional de Obras y Servicios Ptblicos, S.N.C. - BANOBRAS). Guarantor: United Mexican States. Executing Agencies and Beneficiaries: State, municipal, and private water and sanitation operating agencies. Amountt US$300 million equivalent. Terms: Repayment in 17 years, including 5 years of grace, with interest at the Bank's standard variable rate. On-lending Terms: BANOBRAS would onlend proceeds in peso denominated subloans to operating agencies, at variable interest rates sufficient to cover the cost of funds to BANOBRAS which is CETES (Treasury Bill rate). Financing Plan: Operating agencies US$ 98.0 million State Governments US$130.5 million Federal Government US$122.4 million Bank Loan US$300.0 million Total US$650.9 million Rate of Return: Minimum of 122 for eligible subprojects (102 for environmental subprojects), with revenues as proxy for benefits. Staff Appraisal Report No. 8973-ME, November 8, 1990 Map IBRD 22594 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.  HMEIRANDU AND RECOMMENDATION OF THE PRESIDENT O0 THE INTERNATIONAL BANK FOR RWCONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSZD LOAN TO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS S.N.C. WITH THE GUARANTEE OF THE UITED MEXICAN STATES The following memorandum and recommendation on a proposed loan to Banco Nacional de Obras y Servicios Publicos, S.N.C. (BANOBRAS) for US$300.0 million equivalent, with the guarantee of the United Mexican States, is submitted for approval. The proposed loan would be on standard IBRD terms with 17 years maturity, including 5 years of grace, and would help to finance a Water Supply and Sanitation Sector Project. 1. Background. In general, health conditions are improving in Mexico, as measured by increases in life expectancy (from 62 years in 1970 to 69 in 1989). However, diarrhea is still a major cause of death among children, because of poor environmental conditions (these include inadequate operation of water and seweragelsanitation systems and poor sanitation habits). Water supply and sewerage coverage increased notably among the urban population during 1970-1980 to reach 82? and 49?, respectively. In rural areas coverage is lower, standing at 45S for water and 282 for sewerage. Due to Mexico's economic difficulties and the implementation of stabilization measures that curbed public sector expenditures, since the early 1980s there has been little, if any, progress in improving service coverage. People not served generally belong to the poorer segment of the population. Much remains to be done to expand service coverage and to improve both water quality and service reliability, since many systems are in need of repairs or obsolete. The main cause of the poor operation of the systems has been the lack of appropriate sector policies which was mirrored in weak sector institutions at all levels (municipal, state, and federal). Especially, the Secretariat of Urban Development and Ecology (SEDUE), the sector technical lead agency until January 1990, had not been able to provide consistent and efficient guidance to sector development. 2. In February, 1990 the National Water Commission (CNA) was formed as an autarchic agency under the Secretariat of Agriculture (SARH). Seasoned staff, who had previously worked in SARH, were transferred to CNA. CNA is now the primary technical support agency both in water supply and irrigation. The formation of CNA is a major advance in unifying and coordinating federal assistance to the sector. However, within the state and municipal agencies, serious organizational issues remain to be addressed. The Government, through CNA and with Bank assistance, designed a Sector Reorganization Program to correct the shortcomings which have hampered sector development. This Program is aiming to: (a) rationalize sector investments by adopting and implementing a medium-term (1990-1994) sector investment plan; (b) provide guidelines to reduce reliarnce on central government contributions for sector investments by increasing the resource mobilization required of Water and Sanitation Operating Agencies (OAs) through greater internal cash generation, and encouraging private sector participation; (c) establish a new sector lending policy which links the  provision of credit to a commitment by the OAs to strengthen their management, administration, operations and finance; (d) reduce the per- capita costs of investments through the formulation and implementation of more cost-efficient design standards; (e) upgrade the skills of sector personnel through the creation of a sector training center and execution of appropriate training programs; and (f) halt the environmental degradation brought about by the discharge of untreated sewerage. 3. Rationale for Bank Involvement. With the assistance of the Bank, the Government has embarked on a reform program of sector policies and institutions to accelerate sector development. Continued Bank support, both through the provision of financial resources and advice, would help to guide and carry out efficiently the reform process. In addition, the objectives of the project fully coincide with the Bank's country and sector strategies, which aim to provide water and sanitation services to low-income population, rationalize public expenditures and investments, stimulate domestic resource mobilization and cost- recovery, promote more efficient public sector management, promote private sector participation, and improve environmental conditions in Mexico. The Bank's institution building goals are shared and supported by the Interamerican Development Bank that is also processing a sector loan which will carry similar conditionality. 4. Project Objectives. The main objectives of the proposed project are to sutiport the implementation of the Sector Reorganization Program, which is designed to improve the quality and quantity of water supply and sanitation services, promote sound pricing policies, progressively reduce the need for Government funding, and improve environmental conditions in Mexico. Specific objectives are to assist Mexico to: (a) reduce the amount of subsidies to the sector; (b) strengthen the institutional framework at national level; (c) promote at state, regional and/or municipal levels the development of companies of sufficient scale to operate economically and maintain their water and sanitation systems efficiently and with financial autonomy; (d) provide, by the end of 1994, water supply and sanitation services in Mexico to about 24 million additional people, most of whom belong to the poorer segment of the population: and te) improve the environment by implementing a pilot water-pollution control program and requiring a comprehensive environmental assessment of each subproject financed. Works financed under the proposed project would directly benefit about 3.2 million people. 5. Project Description. The proposed project would include two major components: (a) National component (9? of total project cost). This component would seek to asslst in: (i) the strengthening of sector institutions (CNA. BANOBRAS and the Mexican Institute of Water Technology, IMTA); (ii) supporting the implementation of the new sector policies; (iiI) financing technical assistance to undertake a study to encourage private sector participation in the provision of water supply and sanitation services; and (iv) financing the preparation of studies for a follow-up pollution-control project; (b) State and Local component (912 of total project cost). This component would help finance sector  investments through BANOBRAS and involve rehabilitation and expansion of water and satitation systems, engineering, and institutional strengthening of the operating companies. Investments would focus on the poorer areas of the subproject cities, and would have to meet technical, institutional, environmental and economic criteria, and will need to be approved by CNA. 6. Of the total estimated project cost of US$650.9 million equivalent, the foreign exchange component would amount to US$300 million (462). A breakdown of costs and the financing plan are shown in Schedule A. Amount.s and methods of procurement and of disbursement and the disbursement schedules are shown in Schedule B. Retroactive financing of US$30 million would be granted for expenditures incurred after May 1, 1990. A timetable of key project processing events and the status of Bank Group operations in Mexico are given in Schedule C and D, respectively. The Staff Appraisal Report No. 8973-ME dated November 8, 1990, is also attached. 7. Implementation Arrangements. The borrower and implementing agency would be BANOBRAS, which would be responsible for the overall project coordination. CNA would be the technical agency, and OAs would be responsible for the implementation of construction and technical assistance. To ensure the efficient execution of the project, while taking into account the major sector reforms needed, the following programs have been agreed upon with the Mexican authorities: (a) Monitoring of OAs; (b) Monitoring the executions of the National Training Program: (c) Plan of Action to improve performance of OAs; (d) Subproject Preparation and Pipeline; and (e) Annual review of the Sector Plan of Action. 8. Actions Agreed. During negotiations assurances were obtained on the followings (a) implementation of the rules to allocate the mix of grant and loan funds to the OAs as well as establishing consistent criteria for all federal assistance; (b) terms of reference for technical assistance to CNA, description of its staff requirements and a plan to fill relevant positions; (c) the Government, through SHCP, SPP, CNA, IMTA and BANOBRAS shall participate in the Annual Review of the Sector Plan of Actions and implement its recommendations; (d) the Government to cause the consolidated net sector contribution to total investment to be at a level that would be satisfac tory to the Bank, as determined during the Annual Sector reviews, and which should be in the following ranges no lower than 1S for 1991, 202 for 1992 and 1993 and 25% for 1994 and thereafter; (e) the Government to confirm the proposed investment and financing plans and to update them and to present to the Bank for review and comments the proposed annual sector investment plans by November of the preceding year; (f) the Government to allocate funds for CNA and IMTA to implement the national component of the proposed project and to budget and disburse, in a timely fashion, its contributions required for project execution; (g) the Government to cause CNA to complete a Private Sector Participation Study by September 30, 1991 and exchange views with the Bank regarding the study's recommendations by January 31, 1992; (h) the Government to cause CNA to engage consultants under terms of reference satisfactory to the Bank for its technical assistance program by March 31, 1991; (i) CNA. IMTA and BANOBRAS to carry out their institutional development programs in a  manner satisfactory to the Bank; (j) CNA to establish a sector- monitoring system and publish its results annually; (k) the Government to carry out jointly with the Bank an annual review of project execution; and (1) BANOBRAS tot (i) only finance subprojects that cuit'ply with the agreed upon sector policies, including a satisfactory fe.ibility study and environmental assessment; (ii) maintain present and, if necessary, add additional staff having the necessary skills and experience to carry out its obligations under the project execution; (iii) not change subloan conditionalities without previous approval from the Bank; (iv) sulmit all subloans to private companies to Bank for prior approval: (v) submit all subloans proposals before December 31, 1993; (vi) cause the OAs to execute their subprojects in a manner satisfactory to the Bank, support the National Training Program, maintain a tariff level that will allow them to cover at least their operating and maintenance costs plus debt service and to generate net internal funds to contribute to fund their investment programs in accordance with the results of the Annual Review of the Sector Plan of Action to be conducted jointly with the Bank, carry out an institutional development program in a timely manner, implement a commercial accounting and internal auditing system, annually revalue their assets and report to CNA their monitoring indicators; vii) suspend disbursements to sub-borrowers not complying with provisions of a subloan agreement. A condition of Effectiveness would be that the Government furnish to the Bank an executed contract, satisfactory to the Bank, describing the GuarantorIBANOBRAS transfer and relending procedures. 9. Project Benefits. The proposed project would directly benefit some 3.2 million (of the 24 million benefiting from the investment plan) people who will receive water and/or sewerage connections. The majority of these beneficiaries would belong to the poorer segment of the country's population and, in the case of rural communities, improvements would have an important impact on the welfare of women as local customs often call for women to walk long distances to bring water hume in buckets. In addition, the rehabilitation and operational improvements to existing facilities would provide better and safer services to an unknown but appreciable number of people. The project investments would also contribute significantly to improve both public health and the standard of living among the population receiving services under the project. The implementation of the Sector Reorganization Program supported under the proposed loan would bring significant benefits to the country's economy through savings brought about by: rationalization of sector investments; execution of more cost-efficienit projects with lower per-capita investment costs; improvements in the operational and administrative efficiency of operating agencies; application of more adequate cost-recovery policies; and increased human-resources development. 10. Project Risks and Safeguards. The reforms of sectoral institutions and policies being undertaken by the Government is an ambitious and complex task, and its successful implementation will require a sustained effort by the Government in the years ahead.  Although major steps are already being implemented (i.e. the creation of CNA, the approval of sound sector policies, agreement on training among CNA, IMTA and ANOAPA), the follTwing risks remaint (a) inadequate levels of counterpart funds caused by Government delays in distributing its contributions or inability of CNA/BANOBRAS/OAs to raise sufficient funds from domestic resources; (b) lack of coordination between federal programs (i.e. the proposed project and SOLIDARIDAD), thus creating the possibility of softer funding for sector investments that would delay the achievement of efficiency improvement goals; (c) delays in subproject preparatiPn, evaluation, and execution because of insufficient operating capability of the OAs; and (d) BANOBRAS being forced to relax on subproject conditionalities, particularly in the tariff area, because of political pressure from central or local governments. Although the conditionality contains remedies and plans of action to address these risks (annual review of investment and of overall program performance, agreement on financing and lending policies, technical assistance to strengthen CNA, IMTA and BANOBRAS), the Government's firm determination to provide sector services in a more efficient manner is the most important safeguard in this area. Nevertheless. intensive Bank supervision of the project and decisive actions by the Bank In case of unsatisfactory performance are essential. The Annual Review of the Sector Plan of Action would play a key role in detecting shortcomings and making adjustments leading to performance improvements. To strengthen the importance attached to it, a condition of default under the proposed project would be the failure to implement the Agreed Annual Sector Plan of Action or any part thereof. 11. Recommendation. 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 By Ibrahim F.I. Shihata Attachments Washington, D.C. November 8, 1990  -6- Schedule A MEXICO WATER SUPPLY AND SMITATION SECTOR PROJECT Estimated Costs and Financing Plan Project Costs 1I Local Foreign Total -----------US$ millions------- 1. National C.omvonent 15.0 38.1 53.1 CNA 0.3 3.0 3.3 BANOBRAS 0.8 0.6 1.4 Ik4TA 2.0 2.9 4.9 Studies and Designs 7.1 21.4 28.5 Pilot Pollution-Control 0.3 0.2 0.5 Training 3.9 5.7 9.6 Laboratories 0.5 4.2 4.7 Prep. Follow-up Project 0.1 0.1 0.2 2. States and Local Component 251.0 261.9 512.9 Water Supply 141.4 141.3 282.7 Sanitation 87.5 87.5 175.0 Sewerage Treat. Plants 22.1 33.1 55.2 Subtotal Proiect Cost 266.0 300.0 566.0 Value added taxes 84.9 - 84.9 Total Project Cost 350.9 300.0 650.9 Financing Plan Local Foreign Total -----------US$ millions-- Operating Agencies 98.0 - 98.0 State Governments 130.5 - 130.5 Federal Government 122.4 - 122.4 Bank Loan _ 300.0 300.0 Total 350.9 300.0 650.9 1/ Individual project cost component includes physical and price contingencies of 102 and 142, respectively.  -7- Schedule B Page 1 of 2 MEXICO WATER SUPPLY AND CANITATION SECTOR PROJECT Procurement Method and Disbursements Project Element Procurement Method ICB LCB Other Total -.________USS million------------ 1. Civil works 136.0 310.7 17.0 a/ 463.0 (62.0) (139.5) (7.5) (209.0) 2. Equipment/Materials 90.9 50.0 17.0 a/ 157.9 (47.0) (20.5) (7.5) (75.0) 3. Training and Technical Assistance - - 30.0 30.0 (16.0) b/ (16.0) Total 226.9 360.0 64.0 650.9 (109.0) (160.0) (31.0) (300.0) Notet Figures in parenthesis are the respective amounts financed by the Bank. a/ Shopping from at least three suppliers. b/ Proposals from short-list of consultants according with Bank Guidelines for the Use of Consultants.  schedule B Page 2 of 2 M6XICO WATER SUPPLY AND SANITATION SECTOR PROJECT Disbursements Category Amount I of Expenditures (USS million) to be Financed 1. Equipment, materials, civil works, for implementing National Component 24.0 80 2. Equipment, materials, civil works, for implementing State and Local Component 208.0 50 3. Consultants' services for implementing National Component 15.0 100 4. Consultants' services for implementing State and Local Component 23.0 100 5. Unallocated 30.0 Total 300.0 Estimated Bank Disbursements: Bank FY 91iA 92 93 94 95 96 ------ ----_US$ millions------------ Annual 45 53 95 70 34 3 Cumulative 45 98 193 263 297 300 1/ Retroactive financing of US$30.0 million for expendltures incurred after May 1, 1990. A Special Account will be opened with a deposit of up to US$30.0 million equivalent.  Schedule C a~~~~~~~~~~~mxc WATER SUPPLY AND SANITATION SZCTOR PROJECT Timetable of Key Proiect Processing Events (a) Time taken to Prepares 20 months (b) Prepared bys Government and BANOBRAS/CNA with Bank assistance (c) First Bank missions November 1988 (d) Appraisal mission departures June 1990 (e) Negotiations October 1990 (f) Planned Boa.J Presentstions November 29, 1990 (g) Planned Date of Effectiveness December 1990  - 10 - SCHEDULE D M E X I C O Page 1 of 2 WATER SUPPLY AND SANITATION SECTOR PROJECT A. STATEMENT OF BANK LOANS As of August 31, 1990 Amount in USS3 *illion (leescancel lotlon) Creditt Flocal Loan No. Yoea Borrower Purpee Sank IDA Undisbursed 84 loans fully disbursrd 7,9a9.5s Of which SECALo, SALa, Program Loans, and Interest Support *> Ln. 1929-ME 1991 BANOSRAS Railway IV 149.38 Ln. 28S2-ME 1986 9AHX0WfT Trade Policy Lo II 500.00 La. 29MS-ME 1088 HAFIN Agrie Sector Loan J00.00 Ln. 1159-ME 1990 ANCOMIEXT Interest Support Loan 1,260.00 Subtotal 2,209.33 Ln. 1706-5-ME 1979 NAFIN Irrigation 31.80 12.11 Ln. 18S8-S-ME 1960 HAFIN Irrigttion 64.40 10.71 Ln. 2261-ME 1903 SANtIORAS Third Water Supply 100.80 19.02 a Ln. 2381-ME 1 J ANCOMEXT Export Developm ne a0.00 0.67 Ln. 2428-ME 1984 SANtORAS Highways 200.00 55.89 Ln. 2450-ME 1984 SANPESCA Ports 38.25 18.76 Ln. 2S26-ME 1936 NAFIN Chtopam Ag9rc. Dev. 58.00 86.78 Ln. 2546-ME 1986 NAFIN Sm/Mad Mining II 105.00 12.13 Ln. 259-ME 198t NAFIN Vocational Educ 81.00 8.68 Ln. 2575-VE 193 SMA4MRAS Railways V 100.00 123.2S La. 2688-ME 1936 NAFIN Prodertth II' 66.80 86.62 Ln. 2666-ME 1986 SANO8RAS Earthquake Rehab 400.00 10.63 Ln. 2666-ME 166 BANOS iSMunicipal Strength 40.00 86.18 Ln. 2669-ME 19M6 SANOSRAS Solid w t^ Pilot 25.00 17.93 * Ln. 2745-ME 1917 SAiCOMEXT Trade Poliey Loon I 500.00 7.08 Ln. 2748-ME 1987 KAMN Industrial R covery 150.00 15.21 Ln. 2747-ME 1967 NAFIN Technology Dev 48.00 20.88 * Ln. 2777-ME 1987 BANCOMEXT Export Oov II 250.00 7.61 Ln. 2624-ME 1987 8ANOSRAS Urban Transport 125.00 90.66 Ln. 2017-ME 1997 NAFIN Agricultural Credit 400.00 9.57 Ln. 2866-ME 19S7 NAFIN Sm/Mad Industry NV 100.00 71.61 Ln. 2859-ME 1937 NAFIN Agric Extension 20.00 12.09 LA. 287645E 1917 9AN0SRAS Highway Maint 138.00 126.00 La. 207-ME 1M NAFIN Uanpowr Training 60.00 41.8S Ln. 2916-ME 1988 NAFN Steel Setr Rastruct 400.00 256.28