Mexico - Pollution Control Project

Document of The World Banik FOR OFFICIAL USE ONLY Report No. 9495 PROJECT COMPLETION REPORT MEXICO POLLUTION CONTROL PROJECT (LOAN 2154-ME) APRIL 12, 1991 Infrastructure and Energy Operations Division Country Department II Latin America and the Caribbean Regional Office 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.  POLLUTION CONTROL PROJECT (Loan 2154-ME) PROJECT COMPLETION REPORT CUR.RENCY EQUIVALENT Currency Unit - Mexican Pesos (Values as of June 30th) 1982 US$1 PM 47.75 1983 119.96 1984 176.41 1985 227.49 1986 571.40 1987 1,348.50 Average Exchance Rate for the Project 1982 - 1987 US$1 - PM 413.75 Exchange Rate for the Project 1982 - 1987 US$1 - PM 721.1 ABBREVIATIONS FONEI Fondo de Equipamento Industrial GMCA Greater Mexico City Metropolitan Area NAFIN Nacional Financiera, S.N.C. PEMEX Petroleos Mexicanos PED Project Execution Document SARE Secretaria de Agricultura y Recursos Hidraulicos SSA Secretaria de Salubridud y Asistencia SEDUE Secretaria de Desarrollo Urbano y Ecologia  THE WOILO BANK FrOR OFFICIAL USE ONLY Washingion. DC. 20433 U.S A. Oke i Ovgcgv.CgqwwaI 0*Wat lVatwi"o April 12. 1991 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Mexico Pollution Control Project (Loan 2154-ME) Attached, for information. is a copy of a report entitled "Project Completion Report on Mexico - Pollution Control Project (Loan 2143-ME)" prepared by the Latin America and the Caribbean Regional Office with Part II of the report contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a restricted distribution and may be used by rmcipients only in the perfomnance of their oficial duties. Its contents may not otherwise be disclosed without World Bank authoriation.  FOR OFFICIAL USE ONLY MEXICO PROJECT COMPLETION REPORT POLLUTION CONTROL PROJECT (LOAN 2154-ME Table of Contents Page No. PREFACE .............................................................. i EVALUATION SUMKARY ................................................... ii PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE . . 1 1.1 Project Identity .. 1 1.2 Project Background ............................................. 1 1.3 Project Objectives and Description .. 3 1.4 Project Preparation and Design .. 5 1.5 Project Implementation .. 6 1.6 Results and Lessons Learned for Future Environmental Projects ....................................................... 10 PART II: PROJECT REVIEW FROM THE BORROW4ERS' PERSPECTIVE ............. iS 2.1 Introduction ..... 13 2.2 Project Execution ............................................ . . 15 2.3 Performance of the Borrower . . .................................. 16 2.4 Performance of the Bank ..... 17 2.5 Lessons Learned ..... 17 2.6 Economic-Financial Analysis .......................... .......... 19 PART III: STATISTICAL DATA ........................................... 21 Annex 1, Table 1 - Distribution of Loans by Size of Loan ............. 24 Annex 1, Table 2 - Industrial Sector, Distribution of Projects ....... 25 Annex 1, Table 3 - Location of Pollution Control Projects ............ 26 Annex 1, Table 4 - Financial Impact of Projects on Participants ...... 27 Annex 1, Table 5 - Cost of Total Project as a Percentage of Operating Profits ......... ...... .......... 28 Annex 2, Table 1 - Estimated and Actual Project Financing Plan ....... 29 Annex 3, Table 1-6 - Summary of Project Outcome ...................... 30 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.  PROJECT COMPLETION REPORT MEXICO POLLUTION CONTROL PROJECT (Loan 2154-ME) PREFACE This report presents a review of the Pollution Control Project (Loan 2154-ME), the Bank's first loan fully dedicated to supporting environmental improvement in Mexico. The US$60 million loan was approved in July 1982, became effective in February 1983, was substantially amended in February 1984 and was closed in December 1988. Total disbursements were US$8.7 million, and US$51.3 million was cancelled. The Project Completion Report (PCR) was prepared by the Latin American and Caribbean Country Department II, with the assistance of the Environment Department and in coordination with NAFIN, who prepared Part II of this document. The PCR is based upon a review of the Staff Appraisal and President's Reports, loan documents, supervision reports, project files and on recent Bank reports on environmental sector policy and strategy in Mexico. A PCR mission visited Mexico in November 1989 and conducted field investigations of a sample of industries that had subprojects financed under each subloan. It also conducted a detailed review of the project files for each one of the subprojects financed, including records of the administrative actions taken by environmental authorities, of the pollution control problems that were addressed under the loan, and of the motivations for the investments made, the environmental standards applied for each investment program and the financial costs involved.  - li - MEXICO POLLUTION CONTROIL PROJECT (Loan 2154-ME) PROJECT COMPLETION REPORT Evaluation Summary Introduction 1. The Bank's first experience with pollution control financing in Mexico was under the Fourth Industrial Equipment Fund (FONEI) Project (Loan 1712-ME) approved in June 1979. This loan included an experimental pollution control component of US$10 million of which about US$7 million was disbursed mainly for water treatment equipment. 2. The Government and the Bank initiated the preparation of a comprehensive pollution control project in 1980 and by July 1982 the Bank approved a US$60 million loan aimed at helping Mexico finance its efforts to deal with mounting pollution problems. The Project was expected to mobilize US$131 million in local resources to help finance 80 to 100 industrial pollution control subprojects, 300 to 400 private emission t'-lng facilities and the purchase of air pollution monitoring equipment. Proiect Obiectives 3. The principal obiective3 of the proiect were to support: (1) The development anid introduction of more effective pollution control strategies; (2) More effective enforcement procedures; (3) The formulation and implementation of long term strategies to address priority environmental problems on a national scale; (4) Industrial investments aimed at reducing atmospheric and water pollution and dealing with solid wa3te pollution; and (5) Financial system funding of pollution control investments. To achieve these objectives the loan would help finance: (i) investment in industrial pollution control equipment and civil works in the greater Mexico City Metropolitan Area (GMCA) and improved solid waste management; (ii) equipment to measure and control automotive exhaust emissions; and (iii) the establishment of a network of automatic air quality monitoring stations in the GMCA.  - iii - Implemantation Experience 4. A Maior Change in Institutional Arrangements. During appraisal, responsibility for the technical and enforcement aspects of pollution control was vested with the line ministries (paras 1.26 to 1.28). A detailed Project Execution Document (PED) entitled, Program For Polluticn Control in Mexico was furnished by the Government on July 3, 1982 and the loan was signed on July 16, 1982. Shortly after loan signature, to demonstrate progress in the face of mounting criticism about environmental deterioration, the new Government created a new ministry, the Secretariate of Urban Development and Ecology (SEDUE), that absorbed the coordinating and policy functions of the Secretariate of Health and Welfare (SAM), and the personnel and environmental tesponsibilities from the line secretariates. Thus, the institutional framework that was carefully prepared for the project had ceased to exist in early 1983 before the Loan became effective. 5. The New Policy for Environmental Control and Enforcement. The original strategy for environmental control called for the adoption of acceptable standards and their vigorous enforcement. This policy was abandoned when SEDUE was created and a new model for the management of environmental issues was put in place. The new policy called for the resolution cf industrial environmental problems by the negotiation of 'social contracts" between industrial associations and SEDUE which would define the environmental standards for the industry and set the time frame for their adoption (para 1.5.5). The negotiation process did not affectively begin until 1985 and in the absence of environmental standards and firm pressures for legal compliance, the project came to a standstill. The standards that emerged from the negotiations process (mainly during 1987-1990) were never discussed with or reviewed by the Bank, and the limited number of standards to which the PCR mission had access appeared to fall short of Bank recommended standards. 6. The Pollution Control Project was prepared and appraised during a period of mounting economic difficulties. Mexico's industrial sector and Bank assisted projects in various sub-sectors had been affected, by a change of Government and government priorities, rising inflation, successive devaluations and the financial crisis that erupted in 1982. The peso cost in real terms of imported machinery and equipment underwent major increases of some 450 percent under successsive devaluations in an 18 month period starting in January 1982, and enterprises cash flow deteriorated because of higher inventory and debt service costs. Investment in industry contracted in 1982 as GDP declined sharply (i.e. 5Z in real terms) from its high in 1981. The Government's economic stabilization program of December 1982 sharply trimmed budgets and parastatal investment capability. 7. In the absence of the political priorities t, pursue pollution control aggressively (in line with the PED) SEDUE was reorganized in 1983 and again in 1985, and its management, professional and inspection staffs were reduced and its capacity to plan, establish technical standards and enforce regulations, was annually eroded. By the close of the Project in 1988, SEDUE had been reduced to about half the manpower that it had ir 1983 with only 10 GMCA inspectors to cover all inspection and enforcement acivity and only about 80 inspectors to cover the balance of the country. In the end, despite agreements reached with the Bank the standards, regulations and enforcement  - iv - capacity required for the success of the Project were never established (para 1.5.5 - 1.5.7). 8. Bank Response to ChanRinR Prolect Conditions and Policy Direction. A Bank mis8ion reviewed the new institutional structure in early 1983 and optimistically reported that the institutional changes wero fortuitous. It predicted an initial delay of several months for SEDUE to sort things out and prepare the required environmental standards and regulations that would become the basis for a firm 'command and controln form of regulations, which are recognized as the precondition for successful pollution control efforts and ultimate disbursement of Loan funds (para 1.6.5). The Bank made special efforts to get the project back on track by establishing a special project account, expanding the basis for loan disbursements and retaining an expert on air pollution control to undertake two major project supervision efforts designed to help SEDUE. 9. These efforts did not succeed. By 1985, it had become clear that the Loan was in substantial difficulty primarily due to the inability of SEDUE to take the measures required. v The project was rated as a problem project and the Bank agreed, in July 1985, to cancel US$35 million of the Loan. In effect, policy toward the reduction of air and water pollution had been altered and priorities on environmental enforcement had changed, resulting from a political decision to switch from a 'command and control' basis of enforcement of objectively determined standards to an environmental program based upon negotiated agreements with industry (para 1.5.5). In fact, the administrative, technical, and professional basis for environmental planning and enforcement was not created in SEDUE during the implementation period of the Loan. These major issues were gen-.rally not fully reflected in Bank supervision reports or fully addressed with the Borrower by management. Achievement of Objectives 10. Investment. Total investment in pollution control, originally estimated at US$190.9 million, was only US$18.2 million equivalent. This amount helped to finance 20 subprojects, which was less than 10 percent of the number of investment cubprojects originally expected. 11. Environmental Impact. The project did not have any measurable impact on Government policy, strategy or institutional development nor in the final analysis did it impact the environment of the GMCA, whose air and water pollution continued to worsen significantly over the life of the project. The project also had no impact on seriously deteriarating conditions of the Middle Lerma River Basin and it did not advance any solid waste management programs. 12. Attainment of Project Objectives. The project did not succeed in fostering the introduction of effective pollution control strategies or effective enforcement procedures in the GMAC, nor did it advance the implementation of comprehensive longer term national strategies or significant industrial pollution control investment related to air water or waste 1/ Note: From Borrowers' perspective main constraints to project performance were related to the unfavorable economic climate and the Bank's high fixed interest rate (Part II Paras 4.01 and 4.02).  - v - management. The project did succeed in financing a well functioning automatic air pollution measurement system in the GMCA. 13. Institutional ImDact. Except in the area of establishing systems for measuring air pollution, the Bank has had no measurable impact on strengthening SEDUE or improving its capability to administrate air, water and solid waste pollution control programs.  MEXICO POLLUTION CONTROL PROJECT (Loan 2154-ME) PROJECT COMPLETION REPORT PART Is PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1.1 Project Identity Project Names Pollution Control Project Loan No: Loan 2154-ME Loan Amount: US$60 million (equivalent) Project Cost at Appraisals US$190.9 million (equivalent) Actual: US$18.2 million (equivalent) RVP Unit: Latin America and Caribbean Country: MEXICO 1.2 Project Background 1.2.1 The Environmental Problem. By 1980, the Greater Mexico City Area (GMCA) has become the third most populous urban center in the world. With an estimated population of nearly 15 million, the area was projected to reach a population of at least 25 million in the 19909. / The GMCA accounted for almost twenty percent of the country's total population, and about thirty five percent of its industrial production and motor vehicles. While rapid and essentially environmentally uncontrolled industrial, urban and vehicular growth had created high levels of air, water and land pollution in the GMCA, similar forces were at work and similar degraded environmental conditions prevailed in Mexico's other major urban centers such as Guadalajara, Monterrey and Coatzacoalcos - Minatitlan. 1.2.2 Air Pollution. According to the air quality measurements available in 1979/80, the daily concentration levels of the four major contaminants associated with air pollution in the GMCA substantially exceeded World Health Organization (WHO) standards. The contamination level was 600 percent of the WHO standard for ozone, 230 percent for carbon monoxide, 130 percent for sulphur dioxide and 490 percent for total suspended solids. Industrial activities and high sulphur content fuel oil combustion wa said to account for almost all of the particulates, and about two-thirds of nitrogen 2/ In fact, with the new 1990 census which indicated that the GMCA had a population of 16 million, the population projections have been reduced.  2- oxides. Motor vehicles accounted for most carbon monoxide and about seventy five percent of hydrocarbon emissions, with inzastry accounting for the balance. Adverse air quality conditions albc prevailed in the other major industrial areas of the coantry. The Government had initiated a program to control emissions from new motor vehicles, and these were to be strengthened and augmented by a program of mandatory annual inspections. 1.2.3 The adverse effects of uncontrolled emission of pollutants into the air are intensified in the GMCA by its location in a high (over 2,200 meters), sheltered valley with high solar radiation, poor combustion conditions and poor ventilation. The impact of air pollution upon the general health of the population is observable and measurable and threaten to become worse in the years to come unless vigorous corrective actions are taken. Respiratory illness, especially among children, increased cardiovascular diseases, and adverse effects on the human nervous system are among the serj.ous consequences of long term exposure. On a daily level, irritation of throat, nose and eyes, and increased asthmatic problems all make for reduced health standards. Because cf the danger to children, foreign embassies curtailed family living within the GMCA and wealthy families leave the GMCA during weekends and the winter months. 1.2.4 Water Pollution. Municipal wastes and industrial effluents were judged to be a major source of the Mexico's water pollution. In addition much of the domestic sewage was discharged into streams without any treatment. The water bodies connected to the GMCA, the Toluca-Lerma urban industrial area, Guadalajara and Monterrey metropolitan areas, the Cuernavaca valley and Coatzacoalcos-Minatitlan were given highest priorities for industrial pollution control. The harmful effects of polluted waters, i.e. spread of water-borne diseases and adverse impacts on aquatic life in these areas, had a negative impact on about half of Mexico's population. The Lerma River Basin was cited for a rigorous program of enforcement across different source categories based upon setting of individual standards for discharge. 1.2.5 Solid Waste Disposal. Rapid urbanization and industrial growth had led to vast increases in the amounts of solid waste generated. Of these, the industrial component included large quantities of toxic and hazardous waste materials which were discarded as part of municipal refuse or in several hundred unauthorized wayside landfill sites. Such wastes percolated into the groundwater or formed the basis for airborne, bacterial laden dust. The net effect on numan health was known to be highly negative. 1.2.6 The Legal and Institutional Platform for Urban Environment Control. The first comprehensive legislation for environmental protection was embodied in the 1971 Federal Law for Prevention and Control of Environmenta) Pollution. The Law covered all types and sources of environmental pollution (including air, water, land, solid wastes and noise pollution), provided the framewoLk for control measures, and vested enforcement authority in the concerned ministries. In general, the legislation provided a basis to plan and implement an effective environmental protection program. The Law became partially operational during 1972-73 when detailed regulations were issued for control of dust and smoke particulates into the air (1972) and for control of water pollution (1973). Major gaps were the lack of prescribed standards for gaseous emissions from stationary sources and specific discharge standards for industry. The 1971 Law was superseded by a Federal Law for Environmental  -:3- Protection in February lS82. The new law provided for some needed streamlining in the diviston of responsibilities among ministries and for higher non-compliance penalties to facilitate effective enforcement, but otherwise preserved the basic concepts and approach of the 1971 Law. The regulations issued in 1971 and 1973 continued to remain in effect under the new Law. Complementary legislation was provided under the Sanitary Code of Mexico, specifying the responsibiliti6s of individuals, industrial and other establishments and federal and local agencies in maintenance of health and sanitation conditions. 1.2.7 Under the 1982 law, SSA was assigned the overall responsibility for cuordinating the efforts of various government agencies in implementing the environmental protection and control regulations for all environmentai media. In addition, SSA had the direct responsibility for monitoring air and land pollution, and formulating and implementing protection and control measures for these media. The direct responsibility for monitoring and implementing water pollution control lay mostly with SARH, whicli was expected to consult and closely coordinate with SSA on all issues involving public health, formulation of standards and sanctions against violation of the standards. The Secretariat of Public Works assisted states and local agencies in public works execution, including the construction of local water supply and sewerage systems. The above actions were to be closely coordinated with the respective state and local government authorities to take account of particular regional considerations and to obtain their assistance in implementation. 1.2.8 The Regulations to the 1982 Law did not establish specific emission standards, and :equirements for control of liquid discharges awaited comprehensive studies of ...e carrying capacity of each major stream or water body to set final standards, which would be a major research program. The responsibilities of the different .ainistries remained largely unchar%ed, but clarifications were provided to assign the overall responsibility for environmental protection to SSA and to remove some of the earlier ambiguities and duplications in responsibilities, particularly with respect to water pollution control in which both SSA and SARH are involved. The SSA was also to serve as the coordinating body that would ensure that all agencies implemented environmental programs. Because SAA's role was essentially one of coordination, what was missing was an efficient, forceful, central Secretariat with the professional capability to perform the normative, monitoring, policy setting, coordinating and enforcement roles. It was within this legal and organizational framework that the Loan was approved. 1.3 Project Obiectives and Description 1.3.1 Project Objectives and Scope. Loan 2154-ME was envisaged as the first phase of a multi-phased, long range, pollution control program that would address the health and other consequences of the high levels of environmental pollution in several areas of Mexico. The loan was an expression of the high priority that the Government placed upon dealing with mounting pollution control issues.  - 4 - 1.3.2 The Principal Oblectives of the Project: (1) Help in the development and introductton of more effective pollution control strategies. (2) Support the introduction of more effective enforcement procedures. (3) Formulation and implementation of appropriate longer term strategies for the resolution of pollution problems on a national scale. (4) Encouragement of industrial investment aimed at reducing atmospheric and water pollution, and initiation of steps to deal with solid waste pollution. (5) Provision of resources to help industry finance pollution control investment. 1.3.3 Major Project Activities. To achieve the above stated pollution related objectives the project intended to: (i) address the most serious industrial and vehicular air pollution problems; (ii) reduce water pollution in high priority river basins; (iii) begin to deal with land fill pollution; (iv) improve monitoring and enforcement in these areas; (v) train technical staff; and (vi) advance studies and modeling work to determine long- term strategies for air pollution control. Under the air pollution component, the project expected to finance industrial and vehicular control; programs and a monitoring system in the GMCA and other industrial centers based upon improved monitoring of new standards and enforcement by better trained and expanded staff. To achieve the water pollution abatement related objectives, the project intended to focus on enforcement initiatives to reduce contaminant discharges into selected high priority water basins, in particular the Middle Lerma River basin where it intended to address simultaneously the problem of muniLipal and industrial water pollution. The project would also focus on high priority industrial polluters. The Loan was intended to support increased staff training, improvements in methodology, and studies of water basin characteristics. It was also expected that the Loan would support studies to identify the industrial solid waste disposal problem and propose possible solutions. Altogether this constituted a very comprehensive and ambitious program, all the more so because the successful outcome of the project depended upon the existence of a large amo-nt of technical and planning work that had to be rapidly completed. 1.3.4 Project Financing Plan. To help achieve the major objectives and implement specific functional project activities, a Bank loan of US$60 million was expected to finance 28Z of a total prog.-am with a total project cost of US$190.9 million (equivalent). US$171 million would fi..ance industrial pollution investments (of which the Bank would finance 31.4Z) by 80 to 100 major industrial polluters. About US$13 million was to be lent to 300 to 400 private automobile garages for the purchase of automobile emission testing and diagnostic equipment, and about US$6 million was to be provided for technical assistance and the purchase of laboratory and measurement equipment.  - 5 1.4 Proiect Preparation and DesiE 1.4.1 Proiect Identification and Preparation. In the autumn of 1978, the Bank conducted an exploratory mission to discuss with the Mexican Government the possibilities of the Bank financing a pollution control project. In September 1980, a mission visited Mexico to gather information necessary for the preparation of a pollution control project. A detailed technical report with respect to the air pollution control component was prepared in October, 1980. In June 1981, an appraisal mission further defined the project and a post appraisal mission in December 1981 completed appraisal of the Pollution Control Project (Loan 2154-ME). The mission estimated that the regulatory basis for the project would be rapidly established. The actions that the environmental authorities were expected to take in about 18 months included, inter alia; making appropriate detailed measurements of pollution levels and sources, preparing a strategy for the implementation of the project including the setting of appropriate, detailed standards for permissible levels of discharges of industrial pollutants into the air and water from alternative industrial sources, setting standards and a strategy for the management of solid waste disposal and establishing and training an expanded inspection and enforcement capabilities. In hindsight it would seem obvious that these judgements would have been optimistic even in a highly developed country with ample technical, administrative and financial resources available. However, they were not challenged during the preparation and appraisal cycle. 1.4.2 In May 1982 the Bank's Board approved a US$60 milli3n Bank loan with the following componer4ts: (i) US$39.3 million for air pollution control. Of thi. amount, US$35.2 million was allocated to industrial pollution control and the balance for automobile testing equipment, a new air monitoring system, studies and training; (ii) US$18.0 million for water pollution control facilities; (iii) US$1.9 for studiej relating to industrial solid waste and (iv) US$0.9 to cover the Bank's front end fee. A major condition of effectiveness was that the Borrower submit a satisfactory PED which would detail Mexico's program for control of pollution. The PED was furnished to the Bank in July 1982 and upon review was found to be satisfactory. 1.4.3 Project Design. Overall the air pollution control loan component was designed to address the most serious sources of industrial and vehicular pollution. It included proposa's for improvements in pollution monitoring and enforcement, the training and expansion of technical staff, developing approaches to control new sources of pollution and the completion of several studies and modeling tasks to aid in determining opti.lm long term strategies. It was expected that financial support under the loan would be provided to 80-100 major industrial sources of air pollution in the Mexico City and other major cities in their efforts to control pollution and that the auto inspection/maintenance program in the Mexico City area would be substantially strengthened. In December 1982, a new Government assumed power and shortly thereafter changed dramatically the basic framework for environmental policy formulation and enforcement by creating a new ministry, SEDUE, which was staffed by professional and administrative staffs taken from the environmental departments of the line ministries that had been responsible for such activity (e.g. SEDUE assumed the responsibility for water pollution  - 6 - abatement programs that had been the responsibility of SARH, except in rural areas where SARH retained control). 1.5 Project Im}lementation 1.5.1 Background. Project preparation through appraisal was expeditiously managed, a detailed Project Execution Document (PED), entitled 'Programa para el Control de la Contamination en Mexico" (Program for Pollution Control in Mexico), wee curnished by the Government on July 3, 1982 and the loan was signed on Jul"' 1982. Under the PED, it was expected that the environmental agencies hotusr ai the line ministries and operating with the assistance of an environn-,-'' roordinating group would rapidly produce effective standards for indu.. ard vehicular pollution control and plans and strategies for enforcement a propriate standards for air and water quality and solid waste management, It was expected that the menu of technical, legal and administrative tasks defined in the PED would be promptly completed and that the first US$15 million in loan fund would be disbursed in 18 months (para 1.4.1). 1.5.2 Institutional Performance. The institutional framework for environmental management and protection that Mexico had in place when Loan 2154-ME was approved by the Board in May 1982 had been dramatically altered by the time the loan became effective in February 1983. However, the Bank did not undertake a formal reappraisal of the project, the new environmental agency or its new mandate. It relied instead upon a detailed review of the new institutional set-up for the project. 1.5.3 A Bank supervision mission visited the field in early 1983 to assess SEDUE and the new administrative arrangements for environmental policy setting, development of regulations and implementation of enforcement strategies. It reported that the creation of SEDUE would substantially simplify and strengthen operations in the environmental field and that the project would be delayed in its start-up by only several months. It was further expected that once SEDUE had assumed the legal obligations previously held by SSA under the project, it would initiate the specific actions that were to be taken under the PED including the development of specific standards, strengthening of the regulatory framework, and increasing the number of inspections and technical capability of its staff; all of which were preconditions to successful loan implementation. Concurrently, it was expected that SEDUE would: (a) take m3asures to increase availability and consumption of less polluting natural gas in urban areas; (b) reach agreement with major public enterprises on the pollution control measures to be achieved by them; (c) strengthen collection capability and methodology for standard setting; (d) rigorously apply a unified water quality control strategy in high priority basins; and (e) rapidly implement mandatory inspection of motor vehicles operating in the GMCA. These constituted an ambitious menu of essential actions, and were included under the PED. 1.5.4 In September 198,, a Bank supervision mission evaluated the prospects for the full implementation of Loan 2154-ME. A mission report dated November 18, 1983 noted that progress had been slow in implementation of the project due to the country's serious economic problems and substantial reorganization of environmental programs into a new Ministry. Investment credit demand for air pollution control component of the project was reduced  to an estimated US$14.8 million with US$7.1 million projected for industrial pollution control and the remaining US$7.7 million projected for air monitoring and vehicle testing equipment. Water pollution control investments estimates were similarly revised and the groundwork laid for the ultimate reduction in loan size to US$25 million in mid-1985, when US$35 million of the loan was canceled. 1.5.5 The expected project implementation actions spelled out in the PED were never undertaken,. and SEDUE's professional, technical and supervisory capabilities were sharply reduced by budget cuts and three major changes in senior management and related organizational restructuring. Underlying the dramatic changes in SEDUE's institutional capability to perform under the PED were two major factors: First, the new Government adopted a new industrial pollution control strategy for the nation and abandoned the then existing strategy of enforcing compliance with national emission standards through firm and consistent on-site inspection and enforcement programs. It replaced this "command and control" system with a new policy of negotiating subsectoral standards for emissions with each of the industrial associations along with a corresponding plan for compliance with the negotiated standards. The agreements negotiated by SEDUE would form the basis for "social contracts" between the government and industry which when ratified would assume the force of law. Second, the new Government was striving to reduce budgetary (para. 6) expenditures and made SEDUE's activities a m&jor reduction target. While there were subsequently many coordinating meetings to get Loan 2154-ME back on track, little progress was made. The Pollution Control Project was never linked to SEDUE's new operational objectives and it had little impact on its institutional performance, except that the air pollution measurement equipment financed under the project did provide SEDUE with an improved data base for setting monitoring strategies and measuring outcomes of pollution control programs. 1.5.6 Compliance with Loan Conditions. During the almost six years of project operations, SEDUE essentially failed to comply with the PED agreement requiring them to establish and begin to implement the strategic, informational or operptional basis for dealing with the nation's broad ranging pollution control problems. In some cases SEDUE failed to establish standards for control of air pollutants when technically adequate standards, developed in 1981 by their predecessor agencies, already existed in draft form. It was the impression of the Bank's expert consultants during two reviews, in 1984 and again in 1986, that SEDUE's performance and its failure to adhere to the PED, was not a lack of professional capability and that, with some assistance that was offered by the Bank, SEDUE had an adequate background of studies and of professional skills to complete the tasks of preparing acceptable standards for emissions and to undertake strategic plarning tasks. What appeared to be lacking was the willingness to sustain the prior Government's aggressive approach toward environmental clean up that was embodied in the PED agreement. It is clear that SEDUE was slow to establish firm pollution control programs because the policy in force after 1983 was to move slowly and because SEDUE's enforcement capability was substantially reduced during the next half decade. 1.5.7 SEDUE's capacity to undertake the expected environmental control actions continued to deteriorate as its staffing declined from about 5,000 to 2,500 employees by the end of 1988. Also, SEDUE's low salary structure did not allow it to easily attract or retain qualified staff. SEDUE  -8- had about 100 inspectors available on a country-wide basis of which about 10 to 15 were available to handle the 4,000 priority industrial installaticris that required inspection, supervision and technical assistance. Clearly, on that basis a pollution control program of national scope, which was the objective of Loan 2154-ME, could not advance. 1.5.8 Enforcement Strategies. It was assumed that a strategy for pollution control enforcement would be rapidly developed under the PED, and that the strategy would be based upon some simple form of roll-back model, with improved inventory information and enforcement activity wherein highest pollution sources would be addressed first. Neither the models nor the strategies were ever developed. The Bank was never officially advised that the Government's policy regarding pollution control reduction had been changed and that the PED was no longer relevant. Supervision reports continued to correctly point to slow economic growth and lack of enforcement activity as reasons why the Loan had no_. been disbursed, but the main reason for non- enforcement of existing regulations, the change in policy away from enforcement of pollution control laws at national levels and toward negotiated agreements as a subsectoral level was not adequately addressed. 1.5.9 Enforcement Results. Based upon a review of the files of each of the 20 subproject financed under the loan and field visits to a sample of firms, the following information was obtained on the reasons why projects were advanceds Nature of Intervention Number of Projects Percent 1. ComRany Initiative 8 40 Cost Reduction (4) (20) Same Cost Recovery (4) (20) 2. Social Contract Signed 2 10 3. Other Aaency Enforcement 3 15 4. SEDUE Enforcement 6 30 5. Other Reasons 1 5 TOTAL 20 100 Forty percent of the subprojects resulted from voluntary actions taken by industry. These voluntary initietives were taken in cases where the projects applied technologies that reduced costs and/or provided some cost recovery in the form of reusable production materials or water. Two companies undertook investments in line with signed industrial pollution control agreements, three projects with water pollution problems had been inspects by SARH. In the six year period of project implementation only six investments, of the 20 financed, resulted directly from SEDUE enforcement of existing standards and regulations. 1.5.10 Investment for Control of Pollution. The appraisal estimated that about 622 of total resources would be directed toward the resolution of air pollution problems and 282 to water pollution problems, created by industry. It was expected that some 80 to 100 industrial pollution control investments would be generated. Ultimately, only 20 subloans were financed, of which about one-half were for water and one-half for air pollution. (Annex  - 9 - 1 Page 1). Most subloans were for less than US$100,000 equivalent, and four large subprojects accounted for 20? of subproject financing. In terms of industrial sectors in which investment occurred, 252 were petroleum based, 25? in non-metallic minerals, 15? in paper products, 152 in textiles and leather, 5? each for four other inc Astries (Annex 1 Table 2). There were 10 air pollution, 11 water pollution and 2 solid waste problems treated under the 20 projects financed. Three projects treated multiple environmental issues. 1.5.11 Location of Proiects. In terms of subproject location, it was expected that the GMCA would be the focus of efforts and investments, in fact only 35? of the subprojects were located in the GMCA with 65Z broadly distributed around the country (Annex I, Table 3). This finding is consistent with SEDUE's lack of inspection/enforcement capability in the GMCA. It is interesting to note that most subprojects were approved in 1986 (40Z of total), the year in which Mexico City suffered a major air pollution event that generated substantial efforts by PEMEX and others to improve the quality of fuels burned and transport equipment in the GMCA. However, all but one of the projects approved in 1986 were outside of the GMCA, indicating that there was no build-up of enforcement of industrial pollution in the GMCA even in 1986. 1.5.12 Financial aspects. The financial costs of pollution control investment were high for many firms. The cost exceeded annual profits in the year of investment for 502 of the investing companies, and it was a relatively small percentage of annual profits (less than 25Z) for only 35Z of companies. The smaller companies tended to have higher costs relative to profitability. Although the financial consequences of such investments were understood to be high, little attention was paid to the issue of fiscal or other incentives as a feature of the project. In other projects financed by the Bank, incentives have been an element in stimulating demand for pollution control investment (para. 1.5.14-16). 1.5.13 Other Proiects. For the balance of the program, no requests were received from automobile garages to finance equipment for emissions testing and diagnostics, to reduce vehicular air pollution in the GMCA. While two of the subprojects financed under the loan had funding components for solid waste facilities, these investments did not result from regulatory action. Essentially nothing happened in the field of solid waste management as SEDUE never came to grips with the policy and regulatory issues involved. The Government did procure an automatic air monitoring network and did undertake a variety of priority studies. No technical assistance was financed. 1.5.14 Commitment and Disbursement Performance. The reason why demand for investment under Loan 2154-ME was low (i.e., US$5.9 million actual versus UTS$57.2 million estimated), has been variously attributed to two main factors: (1) Mexico's economic recession, starting in 1982, which reduced demand for productive credit and non-productive investments like pollution control were postponed even further; and (2) in the absence of vigorous enforcement of pollution control standards, investment was low. Both were true, although it has been found in other projects that with vigorous policing of environmental regulations, investment rises even in the midst of a recession. A third element was that there was nio incentives to promote participation in the program. These had played an important role in stimulating environmental investment in other parts of the world.  - 10 - 1.5.15 The Impact of Incentives. When this pioneering project was appraised, there was only limited experience with the effects of incentive mechanisms on investment decisions by industry. Since then, a large body of experience and literature has emerged (paras 1.6.7 - 1.6.8). Mexico experimented with incentives for environmental investment for one year (August 1987 to August 1988) when SEDUE was authorized to administer a program of investment in pollution control equipment. The fiscal incentives in the form of a tax credit was equal to 20Z of the cost of pollution control equipment. The program was reported to be an immediate success, as about 100 firms applied for pollution control investments under the incentive program, more that five times the number of projects that Loan 2154-ME was able to attract in six years. While the fiscal impact of this incentive program wp never determined, a rough approximation can be made. If the average coL of a project financed under the SEDUE incentive program was equal to US$700,000 (i.e. the average cost of a project financed under Loan 2154-ME) then the cost to the Government of tax revenues forgone under the incentive program would be about US$14 million for the 100 pollution control projects. In terms of potential benefits, if this program had focussed on the worst case polluters, it could have eliminated something close to one-half of industrial based environmental problems and associated health and welfare issues. a 1.5.16 Experience with environmental incentive programs in Europe has shown that incentives of about 52 to 62, granted for limited periods of time to advance clean-up, can be very effective, if supported by well functioning "command and control" operations. Based on this experience, it is possible that a smaller, limited term incentive program (costing as little as US$3.5 to US$5 million per 100 projects) could have generated a large volume of projects for Loan 2154-ME. If, as a result of such incentives, the Loan had been fast disbursing, then, the real cost of incentives, net of commitment fees paid for the slow disbursing loan, could be as low as US$1.5 to US$3 million and less, netting out some of SEDUE's costs of operations. Moreover, the direct and indirect benefits achieved as a result of a more rapid clean up of air or water in the GMCA can be substantial given negative impacts of Mexico's high levels of environmental pollution on public health. 1.6 Results and Lessons Learned for Future Environmental Proiects 1.6.1 Project Results. The Bank had made its impact during Loan preparation in 1979-1982 as it worked with the Government to structure an approach to overall pollution control. Thereafter, the Bank's impact on the environmental policy was small as the institutional development purposes and strategy underlying the Loan did not correspond with the new Government's concept of supporting slower change through negotiated agreements (i.e., "social contracts") with industrial associations over the peried from 1984 through 1990. In 1989 the new Government determined that environmental planning and enforcement be decentralized and that communities play a larger role in determining the quality of their environment. Tin human and institutional infrastructure for this line of action has not been prepared which will both complicate and offer opportunities for any future programs that the Bank may consider. 1.6.2 There is no clear evidence that the small number of 20 projects financed under Loan 2154-ME made a positive measurable contribution 3/ SEDUE had estimated that some 225 industrial plants accounted for about 85% of the sector's pollution problems in the GMCA.  - 11 - to the improvement of air, water or land fill site quality in Mexico. The amounts involved in investment by industry (US$5.9 million) was far too small over the five year disbursement to have a measurable impact. Indeed, in the Mexican context such small amounts could have been available from other credit sources. 1.6.3 Precondition for Project Success. Projects designed to support industrial and vehicular pollution abatement programs are hard to implement under the best circumstances. For such projects to have a reasonable prospect for achieving these objectives and rapid disbursement, the following conditions would have to be in place at project start-up; (a) Adequate institutional structure, including trained professional staffs, operating under a policy mandate to plan and to establish program priorities and plans of action; (b) Laws and operating regulations that clearly set appropriate national environmental standards and provision of regulatory oversight, adequate manpower and budget allocations to support firm monitoring and enforcement of standards; (c) Adequate scientific and laboratory capability to: (i) prepare base line data including measures of environmental quality, and types, volumes and sources of pollution; (ii) prescribe the measures that would need to be taken to achieve needed improvements and (iii) assess the results of enforcement activity on environmental quality; (d) The administrative mechanisms and/or economic incentives for encouraging society to clean up its pollution mess should be fully confirmed and the system operationally in place; (e) The potential benefits vs. costs of time-dated "incentive approach" to stimulate firms to take early, voluntary measures for pollution abatement should be calculated and the program, established and in place; (f) The availability of loan funds at appropriate close to market terms; and (g) A sound economic environment, and a profitable and growing industrial sector. 1.6.4 At the start-up of Loan 2154-ME in 1983, only Condition (f) was in place. The situation did not improve as the new government sharply reduced SEDUE staff and enforcement activities in 1983-85 and SEDUE moved away from a policy of 'command and control" enforcement toward a series of negotiated agreements with each industrial association, which were not completed until 1989. Evidence available in Bank supervision reports indicated that the loan was in fact ready for cancellation in late 1984. At that time, it had become clear that SEDUE was not implementing the PED, and prospects for project success had virtually disappeared. Meanwhile, commitment fee costs were mounting on a large uncommitted balance.  - 12 - Performance ratings in supervision reports did not fully reflect the deteriorating situation and the continued non-compliance with major loan conditions until 1985. The increasing seriousness of the situation underlying the loan appeared not to be recognized. ComEpliar.ce and Incentives, Alternative Approaches 1.6.5 Compliance. Loan 2154-ME was advanced on the assumption that centralized command and control regulations would enforce a uniform rollback from all sources of Fpllution to ensure that required pollution reduction was achieved and ambient standards would be reached. The Bank's environmental experts considered the command and control approach to be administratively and technologically the simplest form to administer with highest prospects for public acceptance, as it appears to be fair. It was then and continues to be the most commonly used system worldwide. 1.6.6 Recent advances in the administration of environmental policy need to be considered in the future. These include administrative mechanisms that (i) maximize the degree of influence of market forces in giving enterprise the choice to pollute or pay and (ii) minimize the aggregate cost to industry of achieving a predetermined level of environmental quality. There is also a new body of economic literature and some experience with a variety of penalties, incentives, certificate and taxing schemes which is relevant to structuring future programs. 1.6.7 In line with the above incentive based approaches to inducing a rapid pace of industrial investment for environmental clean-up should be adequately explored during loan preparation. Systematic efforts should be made to approximate the economic and social costs of the high levels of pollution including: medical costs of pollution related illness, shortened lives and reduced quality of health of the human population, high costs of inspection, enforcement, negotiation and adjudication of environmental enforcement efforts and finally, in the case of a Bank loan, the excess costs of commitment fees on a slow disbursing loan. The economic and social costs of slow action would need to be offset against the budgetary cost of an incentive scheme that would reduce the industrial sector's objections to the adoption of appropriate standards and speed up the pace of investment in environmental clean up.  13 - PROJECT COMPLETION REPORT ENVIRONMENTAL POLLUTION CONTROL PROJECT LOAN_2154-ME PART IO. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE 2*1 INTRODUCTION 2.1.1 In July 1982, the loan agreements for Loan 2154-ME were signed by the World Bank and Nacional Financiera, the latter the financial agent for the Federal Government, and Fondo Nacional de Equipamiento Industrial (FONEI), the executing agency of the Project. It should be noted that in view of the progress in modernization made by the Mexican Financial System, FONEI was integrated into the organizational structure of Nacional Financiera (NAFIN) in 1989, enabling NAFIN to take advantage of and to complement the experience of FONEI. From then on, regional financial coverage has come from the Mexican Banking System, promoted by state agencies. Moreover, the fusion of various development funds in the institutional structure has made global financing for economic activity possible. 2.1.2 Loan 2154-ME comprised three components: Part (A) was the installation of pollution control equipment, the change in production processes or in the technology to reduce air and water pollution, the relocation of industrial plants, the conversion of facilities to use natural gas as energy, and the investigation of ways to contribute to environmental pollution control; Part (B) was to finance the purchase of mechanical automotive workshop equipment and diagnostic equipment for automotive revision workshops designed to reduce the level of gaseous pollutants thrown into the atmosphere by the combustion of automotors; and Part (C) financed staff training from the Secretariat of Health and Welfare, private companies, and intermediary banking institutions in matters of emissions control of air, and water pollutants, studies and programs related to pollution control, and laboratory and monitoring equipment for large urban environments. Since 1982 actions related to pollution control in all its aspects were to be carried out by the Secretariat of Urban Development and ecology; it is important to note that with Part (C) the pollution control measures applied in 1987 by this Secretariat were to be identified. 2.1.3 The objective of the project was to support the activities oriented toward reducing the environmental pollution indices through financing the purchase and installation of air and water pollution control equipment, so as to prevent the increase of pollutants brought about by industrial plants I This is a translation of the Borrower's Report which is available in Spanish in the project files.  - 14 - and to reduce the levels of environmental poisoning observed at the end of the 1970s and the beginning of the 19809. 2.1.4 The loan was identified in a favorable economic environment but was formalized at the beginning of a serious economic crisis affecting the country. Between 1982 and 1987 we can locate the serious point of the crisis and the rupture of the development model followed up to then. The national and international financial and economic happenings of tlLs decade led to the stoppage of productive investment, capital flight, constant increases in domestic and foreign interest rates, the depression of real salaries, high unemployment, and a critical shortage of capital. Formation of capital decreased as a result of the sudden economic upset. 2.1.5 The project was ident :'ed in 1978, when the domestic economy was in full upsurge, with annual growth rates measured in terms of gross domestic product very close to those of developed countries. However, the economic environment, marked by an apparent economic strength whose availability of resources was based on projections of income derived from exports of hydrocarbons and foreign credits, suddenly changed. The economic imbalances that have taken place since 1982 in the world economy, have had a negative impact on the Mexican economy and Loan 2154-ME was affected by it. It should be enough to remember that the loan was contracted at a fixed rate of 11%, which was financially negative to the situation the country was living in. Similar to this example, a great number of external conditions influenced the taking of drastic adjustment measures to the economy by the national authorities. 2.1.6 One of the first measures, and probably one of greater impact on the project, was the reduction in the country's expense and investment budget, which, due to the development model, marked the tendency of the economic activity in general. Faced with the reduction of investment demands by public entities, companies doing business with them, directly or indirectly, put the brakes on their productive processes: this had a negative impact on the investment demand for equipment or activities related to the Pollution Control Project. On the other hand, the reduction of structures in gover.ment agencies prevented the Secretariat of Urban Development and Ecology, created in 1982, from obtaining the expected results from its supervision, monitoring, control, and sanction activities as well as those oriented toward the regulation of pollution emissions from industry and automotor vehicles. 2.1.7 At the same time, alternatives for placing the funds for feasible projects identified with the objectives of the Project were sought, such as: Waste water Treatment Systems in the cities of Quer6taro, Qro. and MinatitlAn and Coatzacoalcos, Ver., in the amount of Mex$16.1 million; equipment for 2/ Note: See Part I, Evaluation Summary Paras 1, 2 and 5 for details on timing of the project cycle. The Project identified in 1978 was the Fourth industrial Equipment Fund Project (Loan 1712-ME) approved in June 1979 which included a small pollution equipment component. Preparation for this project was begun in 1981. F"  - 15 - environmental quality laboratories in the cities of Altamira, Tamps., and Ldzaro CArdenas, Mich., and atmospheric monitoring networks in Guadalajara, Jal., and Monterrey, N.L., for a total investment of US$3.8 million. For others of lesser importance, the unfavorable economic situation for the recuperation of this type of investments was hampered, and formalization was not carried out within this project. 2.2 PROJECT EXECUTION 2.2.1 Within this recessive environment and great economic disadjustments, project objectives were truncated. The lack of resources made it impossible for a large number of companies to meet their credit commitments. At the same time, the public sector faced budget cuts for current expenses and investment like never before, such that PONEI and SEDUE were unable to take actions that would meet, at a minimum, the proposed objectives, especially because of the elimination of public sector structures. This had a negative impact on the project as it could not hire enough staff for project evaluation, promotion, and control activities (para. 4.02). 2.2.2 The situation described above forced companies to earmark their resources for productive processes in view of the inability to invest in assets for pollution control, the development of technology, or training for the same purpose. In spite of this, efforts by SEDUE to carry out the Project efficiently continued, even if results were to be seen only in the medium term, as in the case of the Mandatory Vehicle Revision Program, the installation of the Environmental Monitoring Network, and the legal framework structured in accordance with the reality of the country with respect to environmental pollution control -- the creation of SEDUE itself is proof of the effortr made and of the priority given to the environmental pollution problem, not only in cities of greater urban and industrial concentration, but also in areas as those already mentioned (para. 4.03). 2.2.3 Since the rest.ictions imposed on public expenditures prevented strengthening the organizational and financial structures of the agencies involved in the Project, thus, in the absence of fiscal credit mechanisms during the execution of the same, greater emphasis was placed on the formalization and strengthening of the legal and institutional framework in the medium term -- the strategy was identified more in terms of agreement with industrial chambers than in coercive aspects and direct fiscal support. The idea was to induce investment in pollution emission control equipment without losing sight of public and private finances in the middle of a serious economic crisis. In this regard, it is important to note that during the identification and appraisal of the project fiscal expenses that could have been generated with this type of support were not clearly quantified. However, when the loan was approved, the economic conditions were already very different from when the project was identified. It should be mentioned that the process of identification, appraisal, approval, and effectiveness of the loan took five years.  - 16 - 2.3 PERFORMANCE OF THE BORROWER 2.3.1 The project was developed at the end of a stage in which it was estimated that (a) economic growth during the 19809 would be sustained, and (b) industrial modernization would follow the stage of growth consolidation. This process would allow for the necessary resources to fight the harmful effects of industrial growth. 2.3.2 With respect to the environment, the levels of air and water pollution that affected almost 30% of the population directly, were beginning to reach alarming levels, especially in the large urban concentrations, even higher than those registered a decade earlier in the industrial cities of developed countries. 2.3.3 Because of the above, Mexico requested the financial assistance of the World Bank for the Industrial Pollution Control Project, designating FONEI as the executing agency (para. 1). FONEI, historically a promoter of industrial development in the country, had a small structure compared to the size the pollution problem had reached and with the level it would reach by the mid 1980s. Howevor, FONEI, with its characteristic efficiency and with the use of its vast experience in second-level operations, was able to promote the Project before the Industrial Chambers, but because the economic recession undermined the financial situation of the domestic companies, credit to control polluting emissions fell into second place. 2.3.4 In 1982, the new Administration, upgraded to State Secretariat level the measures developed to make up and strengthen the legal and institutional framework to control the emission of solid, liquid, and gaseous pollutants into the environment, as well as atmospheric pollution produced by noise or by new or existing sources as well as that generated by motor vehicles. However, the scarcity of human resources in SEDUE for surveillance activities (paras. 4.02 and 6) prevented the success of the strategy formulated for such end. The idea was that with the surveillance activity to check compliance with the pollution emissions norms, the Secretariat's coercive power would be supported by the promotion and coordination activities of FONEI and SEDUE, respectively. 2.3.5 Notwithstanding the above, direct promotion with the industrial associations in the areas identified by SEDUE as highly polluting continued, as did correspondence with those companies catalogued by SEDUE as polluters. In view of the impact of the economic crisis of the 1980s, these measures found little support from the companies (para. 4.03). 2.3.6 In view of the facts, in July 1985, it was requested that US$35 million be cancelled from tha originally approved US$60 million loan. This was as a result of the vertical fall in the demand for investments. One year later an additional US$11.4 million was cancelled for the same reason.  - 17 - 2.4 PERFORMANCE OF THE BANK 2.4.1 During project implementation the Bank maintained a close relationship and dialogue with the Borrower and the executing agency, which allowed a better understanding of the graveness of the crisis that began in 1982. This relationship contributed to the understanding of the efforts undertaken to execute the Project within the environment described in the previous paragraphs, so much so that the Bank proposed the design and development of alternative projects to invest the resources in activities related to the Project. 2.4.2 It should be noted that from project identification in 1978 to its loan approval in 1982, four important years passed by -- in the year the project was identified economic activity registered a high growth rate and toward the year of loan effectiveness, in 1983, economic conditions had radically changed. 2.4.3 On the other hand, the interest rate agreed to with the Bank became a negative factor for the performance of the project, too, fixed at 11%. The economic environment in which it was immersed prevented the executing agency from having a sufficient enough intermediation margin to offer available resources to investors. 2.5 LESSONS LEARNED 2.5.1. Implementation of this type of project within distorted economic scenarios requires a more profound analysis and the adoption of immediate measures to avoid assigning resources under conditions unfavorable to the country; a profound evaluation of these situations might have suggested a review of the Bank's systems since within recessive frameworks it would have more economic and financial merit for the subprojects to offer the same resources of the loan in execution to attend to contingent programs, which should be included in loan agreements in order to give continuity to these projects. 2.5.2 In preparation of this project, the lack of an adequate legal and institutional framework was underestimated. Therefore, similar projects should emphasize, condition, or financially support maintenance and strengthening of the same, ensuring, in all cases, that a positive impact on public health could be obtained in the long term with projects to control the levels of environmental pollution. 2.5.3 With respect to the lapse of time from when the loan was ident!.fied and approved, the lack of opportunity and the imbalance presented by such in the implementation of the project is undeniable. It would be convenient to review the priorities of projects that would benefit directly, and in the shortest possible time, public health and which at the same time would oe less profitable to investors; in such cases fiscal credit could complement support of the global scheme to this type of project. In this regard it is important to quantify the weight on public finances that a tax  - 18 - exemption program or fiscal credit for investment in assets to control environmental pollution would havo. 2.5.4 The establishment and revision of interest rates for this type of loan :;iould be updated in accordance with the internal and external economic conditions. Likewise, the resources of these projects should be offered at more attractive rates with respect to other projects, in view of the benefit to public health and the low profitability of this type of investment. 2.5.5 Projects related to pollution control should emphaoize aspects of intangible benefits and complex quantifirition (public health, environmental cleanup, cleanup of aquiferous layers, reduction of expenses and specialized medical care, improvement in life quality, increase in productivity levels by employment factors, etc.), whereas the financial merits could take secondary or reference positions, based, above all, on the magnitude of the problem and the long-term effects it would have on the population. 2.5.6 Promotion of this type of project and its acceptance will be achieved in the measure that the resources are offered at preferential costs attractive to the manufacturers. The present economic conditions of the country, as well as the existence of a greate'r ecological awareness and a strengthened legal and institutional framework, favor the implementation of this type of investment. Within this context, the manufacturer would be in a position to alternate these actions with thone carried out to solve his problems in the production process, which are .f greater priority to him. 2.5.7 Training, as a tool without which the implementation of projects becomes difficult, should be given greater importance and priority by the Bank within its training and information systemz, an well as in the loan agreements themselves. 2.5.8 On the other hand, the present scheme of credit offering contemplates the financing of projects, through t.'s Environmental Improvement Program, that have as their objectives controllirn; .he generation and emission of atmospheric pollutants. In this respect, it i: interesting to note that there are no restrictions for awarding financial supoyirt in the industrial zone denominated as III-A (controlled growth), which joins the greater number of industries in the country. Indeed, the present legal framework (and the economic upsurge registered in 1989) foretells an increase in the demand of these resources.  - 19 - 2.6 ECONOMIC-FINANCIAL ANALYSIS 2.6.1 The achievements of the Environmental Pollution Control Project were analyzed by a group of companies that received assistance from the executing agency, FONEI. The study encompassed 18 of 20 companies that received financing, and these are as follows: NAtMEOTE COMPANY AMOUNT OF FINANCING (Mex$ million) Papeles Ponderosa, S.A. 294.0 Sociedad Cooperativa Industrial Cementos Hidalgo, S.C.L. 286.3 Negro de Humo Negromex, S.A. de C.V. 1,248.0 Triturados El Roble, S.A. 44.8 Fundidora M6xico. S.A. de C.V. 25.0 Unicab Industrial, S.A. de C.V. 34.8 Fundiciones Altzairu, S.A. de C.V. 7.1 San Ildefonso. FAbrica de Tejidos de Lana, S.A. de C.V. 13.7 Cementos Anahuac, S.A. de C.V. 881.0 Ingenio La Margarita. S.A. de C.V. 14.5 Quimica Potosi, S.A. de C.V. 79.9 Productos Lince> S.A. 37.0 Celulosa de Fibras Mexicanas, S.A. de C.V. 55.0 Cementos Portland Moctezuma, S.A. de C.V. 380.0 Pitsa San Juan, S.A. de C.V. 700.0 Esquim, S.A. de C.V. 32.0 Vidriera M6xico, S.A. 44.1 Protexa, S.A. de C.V. 31.1 Note: The detailed case history of each of the companies in the sample is available in the project file. The case studies include technical details on the equipment procured, standards set by SEDUE and company compliance with environmental regulations. 2.6.2 Of the projects financed, 12 were to improve the environment (decrease dust and smoke) and 6 to rationalize water consumption. Financial support was mainly channelled to companies located in highly polluted areas because 11 of the companies studied are in Zone III; of the rest, 5 are located in Zone I and 2 in Zone II. 2.6.3 In the environment of economic crisis registered between 1982 and 1987, the majority of the companies analyzed were able to carry out their investment projects. Of the 18 cases studied, 16 concluded their projects in accordance with their Investment Programs. The two missing projects belonged to Unicab Industrial, S.A. de C.V. and Productos Lince, S.A., which did not carry out their projects because, in the case of Unicab Industrial, the cempany closed down in January 1990 due to lack of markets for its products. The financial assistance awarded to this company was cancelled. In the case of Productos Lince, the project was suspended due to problems with the manufacturer of anti-pollution equipment (TEISA, S.A. de C.V.) who did not comply with the specifications of the equipment to be manufactured; the project was suspended until the equipment adequately met specifications.  - 20 - 2.6.4 As a consequence of the same economic situation that brought about a reduction in the government's Expense and Investment Budget and prevented SEDUE from having the necessary resources to supervise and sanction the established norms to the polluting companies, it is noted that most of the cases studied did not have the certificates issued by this agency regarding compliance with the established norms for each case. The controls of the companies are of an internal nature and were developed by their own technical staff, and these controls are also used for submission to SEDUE to prove that they comply with the norms established by it. 2.6.5 According to the reports submitted, 16 of the companies studied are carrying out their projects and functioning under normal conditions. Results obtained with respect to reduction of pollution levels and cost savings are satisfactory as to the established goals and SEDUE's request. Of the credits awarded, seven have been paid off up to now. 2.6.6 Based on the above and considering the results obtained, it should be noted that even though the projects were carried out within an environment of economic crisis, the original objectives were reached 90S and 1OOZ of the time, which indicates that this type of project should be continued, with positive results foreseen, especially since there is more and more ecological awareness in the country.  - 21 - PART III STATISTICAL DATA  - 22 - IXI-CO POLLUTION CONTROL PROJECT (Loan 2154-ME) PROJECT COMPLETION REPORT PART- III 1. Proiect Cost and Outeome Item Actual Actual Actual as Z of Expectations Appraisal Estimate Total Project Costs 190.9 17.4 9.1% (US$ million) Loan Amount 60.0 8.7 13.7% (US$ million) Date Physical Components n/a n/a n/a Completed Proportion by that Date n/a n/a n/a Economic Rate of Return n/a n/a n/a Institutional Performance Satisfactory Unsatisfactory n/a 2. Proiect Timetable Item Date Planned Date Revised Date Actual - Identification 06/80 - 06/80 (Executive Project Summary) - Preparation 06/80 - 06/80 - Appraisal Mission 06/81 - 06/81 - Loan/Credit 04/82 - 04/82 Negotiations - Board Approval 05/82 - 05/82 - Loan/Signature 07/82 - 07/82 - Loan/Effectiveness 02/83 - 02/83 - Loan/Closing 12/88 - 12j88 - Loan/Completion 12/85 08/85 12/87  - 23 - 3. Disbursement Cummulative Estimate and Actual Disburgement (US$ million) FY83 PY84 PY85 PY86 FY87 FY88 FY89 Appraisal Estimate 2.4 12.9 28.4 43.5 53.7 58.5 60.0 (Cunmulative) Actual .89 3.89 6.23 .34 1.74 - (-4.4)b/ Disbursements / Actual .89 4.78 11.01 11.35 13.09 13.09 8.69 Disbursements (Cuizulative) Actual as S of 372 37Z 39Z 262 242 222 14.42 Estimate Al Front end fee, actual disbursement for project purpose was US$7.8 million. b/ Repayment of unutilized balance in Special Account. Date of Final Disbursement (final loan account adjustment) April 1989. 4. Use of Bank Resources A. Staff InDuts (Staff Weeksj State of Prolect Planned Revi6ed Final Ccnle Through Appraisal n.a. n.a. 30.5 Appraisal through n.a* n.a. 36.0 Board Approval Board Approval n.ea n.s. 14.7 Through Effectiveness Supervision n.a. n.a. 43.7 TOTAL - - 124.9  - 24 - 5. Sups mision Mission Month/Year Number of Dave in Field Saecial- Performance Persons ization Ratinei 06/82 1 .1 H n.a. 02/83 1 .2 H 3 09/83 2 9,0 H,C 2 06/84 3 20.0 H,C 2 03/85 n.a. n.a. H 2 09/85 1 5.0 H 2 01/86 2 11.0 C 3 11/86 Desk Update 0 H 4 12/86 1 10.0 H 3 TOTAL 11 55.3  6. Estimated and Actual Project Financing Plan Actual Project Industrial Polution Equipment for Lab Equipment & as a Percentage Prolect6 Auto Garages Technical Assistence Front Total Project of Estimated Estimated Actual Estimated Actual Estimated Actual End Estimated Actual Total Prolect (US million & 2) World Bank 53.2 5.9 4.4 -0- 1.5 1.9 .9 $60. 31.42 $8.7 47.82 14.52 Z FONEI 79.8 -0- -0- -0- 4.5 -0- - 84.3 44.22 -0- -0- -0- t Beneficiaries 38.0 7.3 -0- -0- -0- -0- - 38.0 19.92 7.3 40.1 19.2 Intermediary -0- .1 -0- -0- -0- -0- - -0- 02 .1 .5 nla Government -0- -0- 8.6 -0- -0- 1.2 - 8.6 4.52 1.2 6.6 13.9 Other -0- .9 -0- -0- -0- -0- - -0- 9 4.9 ;Ra Total 171.0 15.1 13.0 -0- 6.0 3.1 .9 190.9 100.0 18.2 100.0 9.5  26 -nnex 1 Table 1 MEXICO POLLUT1ON CONTROL PROJECT (Loan 2154-ME) PROJECT COMPLETION REPORT Distribution of Loans by Size of Loan (US$) Amount of Loan Number of Loans Percentage Less than 100,000 12 60 100,000 to 500,000 4 20 500,000 to 1,000,000 1 5 More than 1,000,000 3 15 Total 20 100 Distribution of Loans By Prolect Size (USS) Proiect Size Number of Loans Percentage Less than 100,000 11 55 100 000 to 500,000 4 20 500,000 to 1,000,000 1 5 1,000,000 to 2,000,000 1 .5 More than 2,000,000 3 1 Total 20 100 Type of Environmental Issues Treated 8Y Investament Projects Air Water Solid Waste 10 11 2 Notes Three projects treated multiple environmental issues.  -27 ex I Table 2 MExICo POLLUTION CONTROL PROJECT (Loan 2154-HE) PROJECT COMPLETION REPORT Industrial Sector, Distribution of Proiects Sector Percentage of Projects Machinery & Equipment, Metal Prod. 5 Basic Metals Industries 5 Non-Metalic Minerals (mainly cement) 25 Chemicals & Plastics (petro based) 25 Paper & Paper Products 1S Textile & Leather Products 15 Food Products S Mining and Petrol Extraction S 100  28 Annez 1 Table 3 POLLUTION CONTROL PROJECT (Loan 2154-ME) PROJECT COMPLETION REPORT Location of Pollution Control Proiects State (or Mexico City) Number of Proleqts Percentage of Projects Mex.co City (D.P.) 2 10 Mexico 5 25 Nuevo Leon 3 15 Queretaro 2 10 Guansquato 1 5 Oaxaca 1 5 San Luis Potosi 1 S Tamaulipas 1 S Puebla 2 10 Tlaxcala 1 5 Morelos 1 5 2o 100  - 29 - Table 4 POLLU-TioN CONTROL PROJECT (Loan 2154-2E) PROJECT COKPLETION REPORT Xinancial Impact of Proiects on Particiiants.-2/ 1. Cost of Total Proiect As a Percentage of Pre-Tax Proilts Number Percentage A. Cost of Project - Greater than annual profit S 10 50 3. Cost of Project - Equal to 502 or more of annual profits 1 5 C. Cost of Project - Equal to 252 to 492 of annual profits 2 10 D. Cost of Project - Equal to 1OX to 242 of annual profits 2 10 E. Cost of Project _ Eqtl to 92 or less of annual profits S 25 20 1002 Based upon the audit financial statements for the year in which loan application was approved.  - 30 - JAnnex 1 Table 5 HEXICO POLLUTION CONTROL PROJECT (Loan 2154-ME) PROJECT COMPLET12N BEPORT 1I. Cost of Total Project As a Percentage of Og'erating Profits-&/ 11.gber Percentage A. Cost or Project - Greater than annual profit 9 45? B. Cost of Project - Equal to 502 or more of annual prcfits 2 10 C. Cost of Project - Equal to 252 to 492 of annual profits 1 5 D. Cost of Project - Equal to 10? to 24? of annual profits 2 10 S. Cost of Project - Equal to 92 or less of annual profits 6 30 20 100t ai Used as an indicator of each flow from operations. Operating profits do not include profits (losses) from foreign exchange transactions which account for the profits or (losses) of a number of participating fims. V.  PROJECT COMPLETION REPORT MEXICO POLLUTION CONTROL PROJECT (LOAN 2154-HI) ESTIMHTED AND ACTUAL PROJECT FINANCING PLAN Actual Project Industrial Polution Equipment for Lab Equipment & as a Percentage Proiects Auto CaraRes Technical Assistance Front Total Project of Estimated w Estimated Actual Estimated Actual Estimated Actual End Estimated Actual Total Prolect ' (US iAlion & t) Vorld Bank 53.2 5.9 4.4 -0- 1.5 1.i .9 $60. 31.4? $8.7 47.8Z 14.5Z FONEI 79.8 -0- -0- -0- 4.5 -0- - 84.3 44.22 -0- -0- -0- Bcneficinries 38.0 7.3 -0- -0- -0- -0- - 38.0 19.92 7.3 40.1 19.2 Intermediary -0- .1 -0- -0- -0- -0- - -0- 0? .1 .5 nla Governmeat -0- -0- 8.6 -0- -0- 1.2 - 8.6 4.5? 1.2 6.6 13.9 Other -0- .9 -0- -0- -0- -0- - -0- .9 4.9 nla Total 171.0 15.1 13.0 -0- 6.0 1.1 .9 190.9 100.0 18.2 100.0 9.5  HEXICO ENVIROIMENTAL POLLUTION CO TROL PROJECT hit 3 (LOAN 2154-tEa Page 1 of 6 Sumary of Proiect Outcome cW0uAw C .A1 P o LL 1 * I 0 E W I I t SEM rDI vgziwzw em Acrnagvr (Wx.) WE. 0Me VAuAIT CE ami? m r m ut w"AP ZCArT ?uncm oncarmtn fra or OirECFIm SUAlEU s m mjw W I-W 1m . - waruf JAuis noss OrAw mr7AnZet 07t sorn ow PR DIOS so mtl 01 VIeS$ * m ZWAUAZW Of A M WtsES 13 n S.A. Cn#w na To St. Smjns to .$I ao .sip .n I sfL1FlAD A C INAR *eSu Pn2.J5 tl UArMAL orns aum ast #to ofn *jit 4 10 INtO ffl0 Zm1 co= TMQ ,usW syrmTV 3nnaiu o ilk t toa aEMw a aIu=swrA m PAM. 012 Joe W. 13 v. . is Cmamsm SON. s1u10 4 will 0.n1 aiil - to ham A flA 7 or. r a a Earn. am 02U103 10.000 c 1.1CC tv . St 1*8210207 s.en18 019381 amtO 113 IIALAEON OJA 07