Mexico - Transport Air Quality Management Project For the Mexico City Metropolitan Area

A.) --2 A/ Document of The World Bank FOR OFFICIAL USE ONLY MICROFICHE COPY Repot-t No. :10673-ME Type: (SAR) Title: TRANSPORT A IR QUALITY MANAGEME Report No. 10673-ME Anuthor: MUMME C Ext. :38077 Room:10100 Dept. :L(A2IE STAFF APPRAISAL REPORT MEXICO TRANSPORT AIR QUALITY MANAGEMENT PROJECT FOR THE MEXICO CITY METROPOLITAN AREA NOVEMBER 20, 1992 Country Operations Division I Country Department II Latin America and the Caribbean Regional Office l Tbis 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.  CURRENCY EOU1VALENTS Currency Unit = Peso (Mex$) US$1.00 = 3,114 Pesos (October 13, 1992) FISCAL YEAR January 1 to December 31 UNITS OF WEIGHTS AND MEASURES Metric British/US Equivalent 1 kilometer (kIm) = 0.62 mile (mi) 1 meter (m) = 3.28 feet (ft) 1 gram (g) 0.0022 pound (lb) 1 kilogram (kg) = 2.20 pounds (lb) 1 ton 2,205 pounds 1 cubic meter (M3) = 6.29 barrel (bbl) 1 cubic meter (M3) = 35.32 cubic feet (ft3 or SCF) 1 cubic met.zr (M3) = 264 U.S. gallons (gal.) ACRONYMS BANOBRAS National Bank of Public Works and Services (Banco Nacional de Obras y Servicios Piblicos) CETES Treasury Bill CFC Chlorofluorocarbon CFE Federal Power Commission (Comisi6n Federal de Electricidad) CGT General Transport Coordinating Office (Coordinaci6n General de Transporte) CMPCCA Commission for the Prevention and Control of Environmental Pollution in the Metropolitan Area of the Valley of Mexico (Comisi6n para la Prevenci6n y Contrz de la Contaminaci6n Ambiental en la Zona Metropolitana del Valle de Mexico) CNB National Banking Commission (Comisi6n Nacional Bancaria) CNG Compressed natural gas CO Carbon monoxide CO2 Carbon dioxide COCODER Coordinating Commission for Rural Development (Comisi6n Coordinadora para el Desarrollo Rural) COTAM Metropolitan Transport Council (Consejo de Transporte del Area Metropolitana) COTREM State of Mexico Transport Commission (Comisi6n de Transporte del Estado de Mexico) CPP Index of Average Cost of Funds DDF Federal District Department (Departamento del Distrito Federal) DF Federal District (Distrito Federal)  FOR OFFCIAL USE ONLY DGAU General Directorate of Urban Automobile Transport (Direccion Ge. -ral de Auto-Transporte Urbano). DGE General Directorate of Ecology (Direcci6n General de Ecologfa) DGPA General Directorate for Environmental Projects (Direccidn General para Projecte3 del Medio Ambiente) DGVT/SoM General Directorate of Highway Administration and Transport of State of Mexico (Direcidn General de Vialidad y Transporte, Estado de Mexico) EPA U.S.A. Environmental Protection Agency GEF Global Environment Facility GIRA General Interest Rate Agreement GTZ Getli,an Technical Assistance Agency HC Hydrocarbons ICIC Training Institute of the Construction Industry (Instituto de Capacitacidn de Industria de Construcci6n) IDB Inter-American Development Bank ItM Inspection and maintenance system IMP Mexican Petroleum Institute (Instituto Mexicano del Petroleo) INE National Institute of Ecology (Instituto Nacional de Ecologfa) LPG Liquified petroleum gas MCMA Mexico City Metropolitan Area MTBE Methyl Tertiary Butyl Ether NAFIN National Finance Institution (Nacional Financiera, SNC) NO. Nitrogen oxides OECF Overseas Economic Cooperation Fund of Japan PM1o Particulate matter less than 10 microns in diameter PFIs Participating Financial Intermediaries PEMEX Mexican Petroleum Company (Petrdleos Mexicanos) PFPA Office of the Federal General Counsel for Environmental Protection (Procuradurfa Federal de Protecci6n al Ambiente) ppm Part per million PRETAM MCMA Transport Policy and Plan SARH Ministry of Agriculture and Water Resources (Secretarfa de Agricultura y Recursos Hidraulicos) SCT Ministry of Communications and Transport (Secretarfa de Comunicaciones y Transporte) SECOGEF General Secretariat of the Comptroller of the Federation (Secretarfa de la Contralorfa General de la Federaci6n) SEDESOL Ministry of Social Development (Secretarfa de Desarrollo Soc;a:) SEDUE Ministry of Urban Development and Ecology (Secretarfa de Desarrollc Urbano y Ecologfa) SEDUEWSE Subsecretariat of Ecology of SEDUE (Subsecretarfa de Ecologfa de SEDUE) SHCP Ministry of Finance and Public Credit (Secretarfa de Hacienda y Credito Pilblico) SMI Small and medium size industrial company SoM State of Mexico (Estado de Mdxico) SoM/SE Secretariat of Ecology of State of Mexico (Secretarfa de Ecologfa, Estado le Mexico) UNAM National Autonomous University of Mexico VOC Volatile organic compounds WHO World Iealth Organization 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.  MEXICO TRANSPORT AIR OUALITY MANAGEMENT IN THE MEXICO CITY METROPOLIT REA AFF APPRAISAL REPORT Table of Contents Page No. L.OAN AND PROJECT SU MARY ............................................. i L TRANSPORT AIR QUALITY MANAGEMENT IN THIE MCMA ........................ 1 A. The Air Pollution Problem ...... ............... ...1............. B. Transport and Air Pollution ..................... 3 C. Legal and Institutional Framework ...... ................... . 7 D. Human Resources ........................................... 12 E. The Government's Air Quality Strategy for the MCMA ....... .. ........... 14 F. Relevant World Bank Experience .............. .................... 16 G. Applying the Lessons of Experience ............. ................... 17 H. Rationale for Bankl Involvement ................................ ... 18 ! TBE PROJECT ...................................................... 19 A. Origin of the Project .................... ...................... 19 B. Project Rationale ..................... ....................... 19 C. Project Objectives .................... ....................... 20 D. Project Description .................... ....................... 21 E. Project Costs and Financing ................. .................... 30 F. Implementation Schedule ....................................... 33 G. Project Organization and Management ............ ................... 33 H. Flow of Funds ..................... ........................ 40 I. The Lines of Credit .................... ...................... 40 J. Procurement ............................................... 46 K. Disbursements .............................................. 48 L. Accounts and Audits ........ ............ ...................... 48 M. Project Supervision, Monitoring and Evaluation ....................... .. 50 N. Benefits and Risks ......................................... .. 51 IIL AGREEMENTS REACHED AND RECOMMNDATIONS .......................... 53 A. Agreements Reached During Negotiations ........................... 53 B. Condition for Loan Effectivenass .................................. 55 C. Events of Defaut ............................................ 55 D. Recommendations ........................................... 55 The report is based on the findings of a World Bank appraisal mission which visited Mexico from February 10 to March 9. 1992. Tbe mission was composed of Carl-Heinz Mumme (Task Manager); Gunnar Eskeland (CECPE); Ferne Molnar (LEGLA); and Philip Cornwell, Philip Glaasner, Howard Jones, Ivan Rizo, Christopher Weaver and Taizo Yamada (Consultants). Mmes. Alba M. Renero and Sandra Vallimont assisted in the production of the report. Country Department Director, Rainer B. Steckhan. Division Chief, David de Ferranti. The assistance prmvided by the German, Japanese and U.S. Authorities, which helped to finance consultant services used in the preparation and apprisal of the proposed project, is mtefulfy acknowledged.  PageNo. TABLES Table 2.1: Project Cost Summary .................................. 31 Table 2.2: Financing Plan ............. .......................... 32 Table 2.3: Project Cost by Procurement Method ............ . ............ 49 CHART Chart 2.1: Flow of Funds ......................... 41 ANNEXES Annex 1: Updated Summary of Sector Report .56 Annex 2: Review of Relevant World Bank Experience in Pollution Control .86 Annex 3: Timetable for Initiation, Completion and Discussion with the Bank of Technical Assistance and Studies ..... ......... 92 Annex 4: Credit Lines . ......................................... 94 Annex 5: Implementation Schedule ................................. 100 Annex 6: Responsibilities of Executing Agencies ........................ 102 Annex 7: Allocation of Loan Proceeds ............................... 106 Annex 8: Estimated Schedule of Bank Loan Disbursements .................. 107 Annex 9: Implementation Indicators ............................... 108 Annex 10: Impact Indicators-Emissions Reductions from the Proposed Project and Additional Government Measures ................ 113 Annex 11: Documents Available in the Project File ........ .. ............ 116 MAP IBRD 24056  MEXICO TRANSPORT AIR OMWJTY MAGEMENT ZROJECT FOR MEXICO CiTY MTROPOLffAN AREA LOAN AND PROJECT SUMMARY Borrower: Nacional Financiera, S.N.C. (NAFIN) Giuarantor: United Mexican States Executing Commission for the Prevention and Control of Environment Pollution Agencies Mand in the Metropolitan Area of the Valley of Mexico (CMPCCA), Environ- lenerfidaries: mental Trust Fund, Ministry of Health, Ministry of Social Developn.ent (SEDESOL), National Bank of Public Works and Services (BANOBRAS), National Finance Institution (NAFIN), Participating Financial Intermediaries (PFIs); Federal District Department (DDF), Secretariat of Ecology of the State of Mexico (SoM/SE), Mexican Petroleum Company (PEMEX), Mexican Petroleum Institute (IMP), Metropolitan Transport Council (COTAM) and private owners of high-use vehicles, inspection and maintenance (I/M) stations and gas stations. Amnount: US$220 million equivalent. Trmsa: Repayment in 15 years, including 5 years of grace, with interest at the Bank's standard variable rate. Re'ending terms: The Guarantor would onlend US$172.9 million equivalent at the 28-day CETES (Treasury Bill) rate as follows: US$89.1 million equivalent to NAFIN, and US$80.3 million equivalent to BANOBRAS. The Guarantor would onlend US$3.5 million equivalent to IMP on the same terms and conditions as the Bank loan. BANOBRAS would relend these funds to Participating Financial Intermediaries (PFIs) ensuring that the cost to sub- borrowers would be no more than CETES plus seven and one-half points for the purchase of taxis and no more than CETES plus six and one-half points for other vehicle sub-components and no less than the GIRA (General Interest Rate Agreement) rate. NAFIN would relend the funds to PFIs ensuring that the cost to sub-borrowers would be no more than CPP (the average cost of funds to commercial banks) plus six percentage points for the purchase of trucks, emission testing and diagnostic equipment and other vehicle sub-omponents and no less than the GIRA rate. The Guarantor would make available: (i) US$11.5 million equivalent through budgetary allocations to SEDESOL for emission standard related work and air quality monitoring and forecasting equipment; and (ii) on a grant basis US$0.4 million equivalent to NAFIN as executing agency to carry out the annual environmental audits and US$35.2 million equivalent through the Environmental Trust Fund to the DDF to carry out the remaining sub- components.  .. Emroect Q?jbJziy: The objectives of the proposed project would be to support a comprehensive program to reduce air pollution in the Mexico City Metropolitan Area (MCMA) through measures to: (a) reduce the growth of emissions of nitrogen oxides (NOx), volatile organic compounds (VOC), carbon monoxide (CO), lead, and of particulate matter from transport sources; (b) develop a policy framework to support both transport av.4 air quality objectives; (c) improve the scientific base underlying the air quality program development and management; and (d) strengthen institutional capabilities to effectively plan and implement air- quality programs over the long-term. Project Description: The proposed project would comprise five inter-related components: (a) Vehicles Component (USSI.030.6 million in total prolect cost) including: (i) support to develop, promulgate and enforce emission standards for new vehicles, (ii) progressive improvemDents to in-use emission standards, and inspection and maintenance programs for high-use vehicles and private cars, (iii) lines of credit to finance the replacement of old, high-use vehicles (taxis, trucks and minibuses) with new, emission-controlled vehicles, conversions of high-use vehicles to liquified petroleum gas (LPG) or compressed natural gas (CNG), and re-engining and retrofit of emissions controls, and (iv) improvements to the vehicle registration system; (b) Fuel Component (US$34.4 million) to help fund: (i) the installation of vapor recovery systems at service stations, and (ii) an alternative fuel pilot program to speed the conversion of high-use vehicles to LPG or CNG; (c) Transoort Policy and Management Component (US$2.7 million) to help prepare an integrated Transport and Air Quality Management Strategy for the MCMA to meet both transport and air quality objectives. The Strategy would set the context for policies related to travel demand management, urban freight management, public transport, and transport investment planning, which also would be supported under this component; (d) Scientific Base Component (US$13.4 million) to help fund consultant services to strengthen air-quality planning in the MCMA through an integrated research plan and equipment for extending the air-quality monitoring system, short-term pollution forecasting and the IMP mobile- source emissions laboratory; and (e) Institutional Strengthening Component (US$5.5 million) to support: (i) institutional strengthening of the CMPCCA Technical Support Team, and of other agencies, particularly those in the SoM related to air pollution, and (ii) independent annual environmental audits. 1B_Lim: Air pollution in Mexico City is a major and increasing threat to public health. Benefits due to its abatement include: decreased incidence of illness and premature death due to respiratory and cardiovascular illness, and improvements  iii in the overall well-being and quality of life of the population. Data on blood lead concentrations in children, and the effects of these concentrations on intellectual development and learning indicate that, viewed as an investment in human capital, the project could have very high returns. Increased worker productivity and scb ol performance due to a lessened incidence of respiraiory disease and respihatory discomfort are also likely, and the need to shut down industrial activity and extend the sJhool holidays would be reduced. Non-health related benefits are expected to include .ncreased crop yields, reduced damage to building matetials and increased tourism. Although it is not possible to make precise estimates of likely air pollution reductions as a result of the proposed projeet and the additional Government measures, some tentative estimates have been made for 1995, by which tim ;iost of the project sub-components are planned to be iniplemented. If no actions were taken, by 1995 motor-vehicle related emissions are est-aiated to increase by 0.52 million toxicity-weighted tons, over the 1989 level, to 1.84 million tons per year. The project would reduce emissions growth by 0.44 million tons, resulting in motor-vehicle related emissions of 1.40 million tons for 1995, offsetting to a large extent the estimated emissions growth. Additional Government measures having quartifiable emissions impacts are estimated to result in a further reduction of 0.75 million toxicity-weighted tons, resulting in a measurable net improvement in environmental conditiuns by 1995, despise population and economic growth. However, considering the technical, operational and institutional risks involved in the program, the estimated emissions reductions may well represent a "high case" estimation and the emissions reductions achieved may be actually lower. On the other hand, significant unquantifiable benefits from other project and Government measures have been omitted from the estimates. Risks: The proposed project provides a unique opportunity to help the Government of Mexico to address the very serious environmental problems in the MCMA. The Bank's country strategy attaches priority to environmental projects. The Government has provided strong evidence of its political commitment by raising the price of gasoline, curbing vehicle use and establishing mandatory reductions in productive activities when pollution reaches unacceptable levels. However, the project also poses technical, operational, and institutional risks. Transport air pollution is a relatively new area for the Bank, and involves many difficult technical issues. There is thus some possibility that the program may not fully achieve its objectives, or thac driorities may be found, in retrospect, to have been misplaced. To minimize this risk, the Bank has conducted extensive sector work. The Bank also established both internal and external advisory panels, and has retained expert consultants to provide advice and guidance. The technical basis underlying the proposed project has been endorsed by the external advisory panel and by participants in an international air quality management seminar held recently in Mexico City, which included senior representatives from both the German and U.S. environmental agencies, and Mexican and international experts. The decision to rely on measures which have already been proven in industrialized countries would also help to minimize the risk of making a serious error, as would the heavy emphasis on studies to develop the underlying scientific base and evaluation methodology for air quality program planning. Institutional issues will be addressed through well focussed technical assistance and intensive Bank supervision.  I i iv Cost Summary: LEAL OREIGN TOIAL (in Milion of U.S. Dollars) I. Vehicle Component 40Q84 S22.8 2312 (a) Emission standards 2.0 4.6 6.6 (b) I/M systemn 10.8 19.6 30.4 (c) High-use vehicle fleet modernization 395.1 498.4 893.5 (d) Vehicle registration system 0.5 0.2 0-7 11. Fuel Component 15.Q 14. (a) Gasoline vapor recovery system kStage 0 & I PEMEX) 4.9 6.3 11.1 (b) Gasoline vapor recovery system (Stage I & II, DDF & SoM) 9.6 8.2 17.7 (c) Alternative fuel pilot program 0.6 0.3 0.9 III. Transport Policy and Management Component 1.3 1.3 __5 IV. Scientific Base Component 4.7 7.0 11.6 (a) Technical assistance for CMPCCA 2.5 1.8 4.2 (b) Equipment for SEDESOL/INE '.8 3.0 .8 (c) IMP mobile-source emissions laboratory 1.4 2.3 3.7 V. Institutional Strengthening Component 4A Q l.15.1 (a) CMPCCA technical support team 3.9 0.8 4.7 (b) Annual environmental audit 0.0 0.4 0.4 Total Base Cost Estimates 433.4 546.8 980.2 Physical Contingencies 11 1.5 4.2 5.7 Price Contingencies 44.6 56.2 100.8 Total Project Costs 479.5 607.2 1.086.7 Of which: (a) taxes, duties, 145.0 and (b) land 3.3 I/ The high-use vehiele fleet modernization sub-component, by its nature, does not require physical contingencies.  v Fnancing Plan: LAL FOREIGN TOTAL (In Milion of U.S. Dollars) Government of Mexico 44.6 - 44.6 Private Sector 335.3 387.2 722.5 IBRD 220.0 220.0 Subloan Reflows 99.6 - 99.6 Total 479.5 607.2 1.086.7 Estimated Bank Disbursement: Bank FY 1993 1994 1995 1996 1997 (in Million of U.S. Doilars) Annual 43 70 74 22 11 Cumulative 43 113 187 209 220 a/ Includes US$20 million for the special account and US$7 million for retroactive financing incurred after May 1, 1992. Economic Rate o o Return: Not app!.cable  MEXICo I. TRANSPORT AIR OUAL MANAGEMENT !N THE MCMA .1 'The Mexico City I'etropolitan Area (MCMA) is one of the most populous urban areas in the world and has a very serious air pollution problem. The MCMA population has grown from less than 1 million at the beginning of the century to 15 million in 1990, and is projected to reach 20 million by 2010. With about one sixth of the nat.on's people, the MCMA cortributes some 36-7 of Mexico's gross national product. 1.2 The air pollution problem in the MCMA is complex, and the Bank has carried out extensive sector work to define better both the scope of the problem and the potential solutions. A report, Tr[a port Air Quality Management in the Me. ..o City Metropolitan Area (World Bank Sector Report No. 10045-ME dated March 9, 1992) includes a de,ailed analysis of the present stuation and trends, extensive cost-effectiveness analysis of potential air pollution control measures, and art outline strategy for transport and air quality management in the MCMA. An updated summary of the Sector Report is provided in Annex 1. A. The Air Pollution Problem 1.3 The critical air pollutants in the MCMA are ozone (03), fine particulate matter, carbon monoxide (CO) and lead. Ambient levels of the first two far exceed health-based norms, and their concentrations are increasing or holding constant, despite significant pollution control efforts. Ambient lead levels have been reduced greatly in the last few years to levels near or below international norms, but further reductions are desirable. Toxic and carcinogenic air contaminants such as benzene and formaldehyde are also of concern, but quantitative data are unavailable. 1.4 (zone. Exposure to high ozone levels causes irritation of the respiratory tract, and reduces lung function. Long-term ozone exposure is suspected of causing irreversible deterioration in lung structure, similar to emphysema. Ozone also retards plant growth and damages materials exposed to it. Ozone concentrations in the MCMA are the highest currently being measured in any city in the world, reaching more than three times the accepted national and international norms. During 1991, the Mexican ozone standard of 0.11 parts per million (ppm) was exceeded in the MCMA on more than 88% of days in the year. Ozone is a "secondary" pollutant, formed by the reaction of oxides of nitrogen (NOx) with sunlight and volatile organic compounds (VOC) in the atmosphere. Both NOx and VOC are necessary to produce ozone: either NOx or VOC availability may be the limiting factor in ozone production, depending upon their relative concentrations. The available evidence suggests that NOx is usually the limiting factor in the MCMA, but reductions in both pollutants are desirable. 1.5 &sVended Particulate Matter. A*ine particulate matter less than 10 microns in diameter (PM1O) result: from direct emissions of smoke and fumes, dust stirred up by vehicles, windblown dust from devt getated areas, and secondary particulate matter formed in the atmosphere from primary pollutants. Exposure to high PM1O levels .esults in increased rates of illness and death from respira- tory causeu. Bosb peak and annual-average particulate levels in the northeastern part of the MCMA far exceed the Mt xican health advisory level. The Mexican 24-hour particulate standard of 275 guglm was exceeded in the northeastern area on more than 80% of the days in 1991. The standard was also frequently exceeded in the soutieast, central, and northwestern portions of the MCMA. The  2 limited data on particulate composition suggest that the sources are primarily combus0on and secondary particulate in the central MCMA, while dtLst is also a major factor in outlying areas. 1.6 Carbon Monoxide. Carbon :lonoxide (CO) is formed by the incomplete combustion of carbon-containing fuals. WIen inhaied, CO binds to hemoglobin in the blood, deactivating it. This prevents +he transport of oxygen through the body, and reduces the oxygen supply to sensitive tissues such as the brain, heart, and linings of blood vessels. The results of moderate CO toxicity include shortness of breath, increased blood pressure, headaches, and difficulty in concentration. CO effects are aggravated by high altitude and are most significant in pregnant women, young children and those suffering from heart or respiratory disease - groups making up a large percentage of population in the MCMA. In the MCMA, nearly all CO emissions are produced by gasoline vehicles. In 1991, CO concentrations exceeded the Mexican 8 hour average standard of 13 ppm 63 times in the northwest portion of the MCMA, and less frequently in other areas. The number of CO violations experienced has been increasing in recent years. Human exposure studies have shown that pedestrians, roadside vendors and vehicle drivers and passengers are exposed to CO concentrations at street level well in excess of the standards. 1.7 Lead. The major source of atmospheric lead in the MCMA is combustion of lead antiknock compounds in gasoline. Lead is a cumulative, systemic toxin with effects on blood preesure regulation and on the nervous system. At sufficiently high levels ir. the blood, lead acts as an acute toxin, damaging kidneys, the nervous system, and the brain. However, changes in enzyme chemistry, and statistically significant effects on intelligence in children and blood pressure levels in adult males, have been demonstrated at blood lead levels well below those alat produce acute toxicity. Since idult blood pressure levels are strongly related to death rates from stroke and heart dl,ease, chronic exposure to 'ead would be expected to increase deaths from these causes. Petroleos Mexicanos (PEMEX) has already taken action to reduce the lead content of gasoline sold in the MCMA (para. 1.25), and new emission standards requiring the use of catalytic converters in new vehicles require these vehicles to use unleaded gasoline. Although current levels of atmospheric lead in the MCMA are near or below international norms, the current consensus among scientists is that no amount of lead in the environment can be considered safe. 1.8 Health and Economic Impacts. Quantitative data on the health and other economic impacts of air pollution in the MCMA are only beginning to be developed. A rough preliminary analysis by the Bank puts the economic damage from the health impacts of air pollution in the MCMA conservatively at US$ 1.1 billion per year. Substantial disruptions to the economy and to citizens' daily lives occur due both to the direct consequences of pollution and the effects of remedial measures. Examples include the closure of the city center to vehicle traffic, the closure of schools, and the temporary shutdown of industrial establishments representing a large fraction of total industrial production in Mexico when ozone concentrations are expected to reach aritical levels. In March 1991, a major oil refinery in the Federal District (DF) was permanently closed in order to reduce emissions. Users of private automobiles have been affected predominantly by a measure called "Hoy no Circula" (para. 1.57), which prohibits the circulation of motor vehicles on one work- day per week; this ban is extended to two days per week during critical episodes. 1.9 Relative Weighing of Pollutants. Not all pollutant emissions are equally toxic. Using health.-based environmental norms as a starting point, a set of weights has been developed in the Sector Report which roughly reflects the relative noxiousness of different pollutants under MCMA conditions. These weights assign the highest value (per kilogram of emissions) to lead, followed by  3 NOx, PM1O, VOC, SOx, and CO (Annex 1, Table 1). Refe,ences to "toxicity-weighted emissions" throughout this report refer to emissions combined using this set of weights. B. T'ransport and Air Pollution 1.10 Major snurces of pollutant emissions are road transport, industry, commercial and service sector activities, waste disposal, and natural sources such as vegetation and windblown dust. Road transport is by far the most important single source, accounting for 84% of the total mass of pollutant emissions (55% on a toxicity-weighted basis), based on available emissions data. 1.11 The high level of transport emissions is attributable to the large number of road vehicles in use; poor vehicle maintenance; past lack of stringent emission standards; unfavorable fuel properties; rapid urbanization (resulting in increased demand for road transport); unpaved roads in the peripheral areas (generating dust); and localized traffic congestion (resulting in pollution-producing "stop-go" driving conditions). The highest-polluting modes (on a per passenger-km basis) are taxis and private cars, followed by public transport vehicles with internal combustion engines (combis, minibuses and buses). Electric tranisport modes, such as the metro, produce no direct pollution; although the production of electricity does result in emissions, these are much less than would be produced by internal combustion engines. 1.12 Private Cars. There are an estimated 2.6 million cars in the MCMA (approximately 173 cars per 1,000 inhabitants). The fleet has been increasing rapidly in recent years, due to the improving economic climate, and Government policies promoting motor vehicle ownership. Cars carry some 24% of total daily passenger trips (34% of total daily passenger-km), and produce 38% of toxicity-weighted mobile-source emissions in the MCMA. 1.13 Taxis. A fleet of around 67,000 taxis carries over 1 million passenger trips per day in the MCMA, accounting for 8% of toxicity-weighted mobiie-source emissions. Taxi emissions per passenger-khi are extremely high, due to the high level of emissions per vehicle-km and to the low average occupancy rate. The Government has begun a program to replace all taxis older than 6 years with new vehicles incorporating emissions controls. Before this program was initiated, the taxi fleet was old and in poor condition, with over 60% of the fleet more than 10 years old, and 93% more than 6 years old. Because of the high annual emissions per high-use vehicle, the Government program to replace existing taxis with new, emission-controlled vehicles is highly cost-effective (Annex 1, Table 4). This program would be supported by the proposed project (para. 2.15). 1.14 Public Transport. Collective transport accounts for an estimated 72% of passenger trips (63% of passenger-km), but only 15% of the vehicle-kilometers travelled and 17% of toxicity- weighted mobile-source emissions. The operational combi fleet (typical capacity 11 seated passengers/vehicle), estimated at about 38,000 units, carries some 8.8 million passenger trips per day - more than any other single mode. Due to their small capacity, combis contribute disproportionately to congestion and the Mexican Authorities are encouraging their replacement by minibuses (typical capacity 23 seated passengers). 7,000 minibuses carry about 8% of daily passenger trips (7% of daily passenger-km). Buses carry over 6 million passengers per day and, in terms of daily passengers and passenger-km, are the second most important public transport mode. Because of their heavy usage and high annual emissions per vehicle, replacement or retrofitting of buses and minibuses with  4 emissions controls would be highly cost-effective, and would be supported under the proposed project (para. 2.15). 1.15 The DF has a modern metro, extending over 141 route-km and comprising eight lines. The metro system carries an average of 4.8 million passenger trips per day, about 17% of total MCMA person trips. A trolleybus network extends for about 522 km, with 27 routes, but fulfills only a minor role in providing passenger transport (0.5 million passenger trips per day); a single 12.5 km light rail line in the DF carries only about 10,000 passengers per day. The past lack of coordination between the Federal District Department (DDF) and the State of Mexico (SoM) has created a metropolitan transport system with major discontinuities at the boundary between the two jurisdictions. Vast numbers of passengers are forced to interchange between metro and bus at large terminals located close to the boundary; few bus services operate between the SoM and the DF. The recently formed Metropolitan Transport Council (COTAM) is addressing this issue and is expected to propose measures to introduce cross-boundary services and to harmonize regulations in the two jurisdictions. 1.16 Trucks. The MCMA is the largest source, destination, and transhipment point for freight traffic in Mexico. About 200,000 gasoline trucks and 60,000 diesel trucks are estimated to be operational in the MCMA at any one time. In addition, thousands of long-haul trucks from throughout the nation enter or pass through the metropolitan area every day. Together, long-haul and local trucks are estimated to contribute about 37% of toxicity-weighted pollutant emissions from the transport sector. The proposed project would support vehicle modernization, conversion to liquified petroleum gas (LPG) or compressed natural gas (CNG), re-engining and retrofitting with emission control equipment, in order to reduce pollutant emissions (para. 2.15). 1.17 Future Emissions. Given the present and expected future growth in the vehicle fleet of around 8% per year, pollutant emissions from vehicles - already far too high - are likely to continue to increase rapidly in the future. Although measures to manage travel demand are being undertaken (para. 1.21), near-term improvements in vehicle emissions must come primarily from reducing pollutant emissions per kilometer travelled. Prompt and effective action is needed: (a) to reduce growth in vehicle emissions by imposing strict emission standards for new vehicles; and (b) to "roll back" the emission levels of vehicles of the existing fleet through measures such as inspection and maintenance (I/M), retrofitting emissions controls, reformulation of fuels, conversion to alternative fuels, accelerated retirement, and replacement with new, emission-controlled vehicles. 1.18 Vehicle Emission Standards. Responsibility for issuing and enforcing new-vehicle emission standards lies with the recently created Ministry of Social Development (SEDESOL) which has assumed the functions and powers of the Ministry of Urban Development and Ecology (SEDUE) which has ceased to exist (para. 1.32). New passenger cars and light-duty trucks sold in Mexico have been subject to emission standards since 1975, but only in 1991 did these standards become stringent enough to require catalytic converters. Model years 1991 and 1992 represent a transition period, with an intermediate standard; compliance with Mexican 1993 model year standards will require vehicles to be equipped with three-way catalytic converters and computerized engine control systems. Emission standards for new medium- and heavy-duty gasoline vehicles have not yet been issued, so that emissions from new vehicles in these groups are effectively uncontrolled (except for minibuses in the OF, which are being equipped voluntarily with catalytic converters under a 1991 agreement with the DDF). The diesel engines used in buses and heavy trucks are subject only to a smoke opacity standard. Unit emissions from these heavy-duty vehicles are relatively high.  5 1.19 The declared policy of the Mexican Government is to move toward full compatibility with U.S. emission standards for both light- and heavy-duty vehicles. The Mexican 1993 exhaust emission standards for light-duty vehices are numerically equal to those presently in force in the U.S., but are not identical, as the U.S. standards include many provisions such as evaporative emissions, compliance over the useful life of the vehicle, emissions warranties, recall of non-complying vehicles etc., which have not yet been incorporated In the Mexican regulations. The Mexican Authorities intend to adopt these other elements of the U.S. regulatiori, as well as regulations covering medium- and heavy-duty vehicles, during 1992 and 1993. The proposed project would support these efforts (para. 2.11). 1.20 Inspetion lMMal 7The Mexican Authorities enacted vehicle inspection and maintenance (a/M) requirements in 1988. However, until recently the system design left the pass-fail decisions to individual mechanics. TLis approach has been found to result in a very high percentage of improper inspections in the U.S.. The Mexican Authorities, as a temporary measure, have recently begun requiring taxis and minibuses to be inspected in one of the 13 public stations operated by the DDF, using new computerized emissions analyzers to make the pass/fall determination. Concessions have also been issued for 24 high-volume, inspection-only facilities known as "Macrocentros' which will also incorporate computerized emission analyzers. All high-use commercial vehicles in the MCMA and Government vehicles in the DF will be required to be inspected in these facilities when they begin operation in January 1993. Private cars could also use these facilities. Private garages inspecting private cars only will be required to use computerized analyzers beginning in January 1993, and will also be subject to stepped-up surveillance and enforcement activities. Steps to improve mechanic training and quality of repairs, especially for new high-technology vehicles, are also being developed. Financing for improved inspection equipment, oversight facilities, and mechanic training would be provided under the proposed project (para. 2.12). 1.21 GasolineiPdng. Gasoline pricing is determined by the Government. Until November 1991, retail prices of leaded (Nova) and unleaded (Magna Sin) gasoline were set at 710 and 1,000 Mexican pesos pc. liter, respectively (equivalent to US$0.87 and US$1.22 per gallon respectively). The large price differential encouraged misfueling of catalyst-equipped vehicles with leaded gasoline - a practice which destroys the effectiveness of the catalyst. In November 1991, the Government raised the prices of leaded and unleaded gasolines by 55% and 25%, respectively - bringing them to 1,100 and 1,250 Mexican pesos per liter (equivalent to US$1.34 and US$1.52 ptr gallon). In April 1992 the price of Magna Sin was adjusted downward slightly to 1,220 Mexican pesos per liter, equivalent to US$1.49 per gallon. The price differential has thus been reduced from 290 (40%) to 120 Mexican pesos (11%). 1.22 Results from a recent survey carried out in the MCMA by independent consultants show detectable levels of lead in the tailpipes of 12% of the catalyst-equipped private vehicles sampled, and 13% of the public transport vehicles. In the same survey, 28% of the owners of non-catalyst vehicles reported reverse misfueling, use of Magna Sin in vehicles that do not require unleaded gasoline. Shortages of Magna Sin have been a problem, 37% of private car drivers and public transport operators stated that they had problems finding Magna Sin. The reported supply shortfall may have been a significant factor for the present misfueling rates. 1.23 Both misfueling and reverse misfueling are undesirable. Misfueling damages the catalyst and oxygen sensor in modern emission-controlled vehicles, permanently increasing emissions. Reverse misfueling is wasteful, since non-catalyst vehicles do not require it, and Magna Sin is more  6 expensive than Nova to refine. It is also undesirable from an environmental standpoint, as Magna Sin (in order to achieve the higher octane specification) contains a higher fraction of aromatic hydrocarbons than Nova. These compounds contribute to ozone xormation, and some (e.g. benzene) are also carcinogens. Reverse misfueling on a large scale would also reduce the effectiveness of gasoline reformulation strategies aimed specifically at older vehicles, which would otherwise be an attractive option for emissions control. Finally, since Magna Sin supply is limited in the short-term, large-scale reverse misfueling may lead to shortages, and therefore cause catalyst-equipped vehicles to be misfueled. 1.24 Based on the above findings, it will therefore be necessary to adopt gasoline pricing and other policies which strike a balance between misfueling, reverse misfueling, and Magna Sin availability. First priority in this balance should be given to ensuring Magna Sin availability. This may require the maintenance of a small price differential between Nova and Magna Sin, while measures are taken to minimize the resultant misfueling through public information campaigns and increased enforcement via the I/M program. Magna Sin availability should be monitored closely, and periodic surveys be conducted of misfueling and reverse misfueling rates in order to guide these policies. Agreement was reached during negotiations that the Government would: (i) provide unleaded gasoline sufficient to meet demand in the MCMA throughout project implementation; (ii) ensure that the rates of misfueling of catalyst-equipped private and public transport vehicles in the MCMA do not increase from the present level; (iii) make its best efforts to reduce such misfueling rates and to resolve any problems of reverse inisfueling; (iv) cause the CMPCCA to carry out, through independent consultants and under terms of reference satisfactory to the Bank, an annual survey of the availability of unleaded gasoline and the extent of misfueling and reverse misfueling in the MCMA; and (v) make the results of the surveys available to the Bank for the annual reviews (paras. 2.90 and 3.1(a)). 1.25 Fuel Standards and Formulation. Change,s in fuel formulation can affect vehicle emissions. Responsibility for setting and enforcing fuel standards lies with SEDESOL. SEDESOL and PEMEX are reviewing possible changes in gasoline specifications, including changes in volatility and distillation characteristics. PEMEX has already taken an active role in reformulating fuels to reduce emissions by reducing the lead content of leaded gasoline and the sulfur content of diesel sold in the MCMA, and by blending 5% methyl tertiary butyl ether (MITBE) into gasoline to reduce HC and CO emissions and to supply additional octane in place of some of the lead. Major investments in gasoline refining facilities to allow gasoline reformulation and increased production of unleaded gasoline are under way, with financing provided by the Export-Import Bank of Japan under a "broadened" cofinancing agreement with the Bank. As part of the environmental assessment for this project, PEMEX is sponsoring a study to evaluate the effects of changes in gasoline formulation, including the reduction in vapor pressure, on emissions in order to identify the best and most cost- effective ways to reformulate gasoline to reduce emissions in the MCMA. PEMEX has agreed to implement the study recommendations. Under the cefinancing agreement, the Bank is supervising the PEMEX study, as well as monitoring the consistency of the entire program (para. 1.69). In addition, the Overseas Economic Cooperation Fund of Japan (OECF) is funding investments which would enable the sulfur content of diesel and fuel oil to be reduced. 1.26 Gasoline Vapor Recovery. The storage, transportation and marketing of gasoline result in substantial hydrocarbon emissions in the form of gasoline vapors. These can be prevented through the addition of floating lids to storage tanks, and the use of vapor recovery systems. The installation  7 of gasoline vapor recovery systems in the MCMA would be supported under the proposed project (para. 2.18). 1.27 Electrid The MCMA passenger transport system already makes considerable use of electric traction for metro, trolleybuses and light rail. The electricity is generated both inside and outside the Valley of Mexico, primarily by power stations using either natural gas or residual oil as fuel; and is a source of NOx and SOx emissions in the MCMA. 1.28 Alternative Fuels. Potential "clean" alternative fuels for the MCMA include LPG and CNG. Both are available in quantities sufficient to support large numbers of vehicles. Some 125,000 vehicles already use LPG in Mexico, of which about 8,000 are in the MCMA. The CMPCCA has estimated that available LPG supplies could fuel another 100,000 high-use vehicles by 1995, while available CNG could fuel 44,000 vehicles. Conversions of high-use vehicles to LPG or CNG would be supported under the proposed project (para. 2.15). C. Legal and Institutional Framework leal Framework 1.29 The General Law of Ecological Balance and Protection of the Environment, enacted in March 1988, constitutes the present legal framework to deal with transport air pollution in the MCMA. The law assigns a lead role to SEDESOL (in collaboration with other Federal Secretariats) in formulating environmental policy and in setting national standards and norms, and makes the States and the DDF responsible for implementation, except for the control of industrial air pollution in the DDF, which remains a responsibility of SEDESOL. Mexico's enviromnental legislation is essentially "command-and-control" in nature, with limited market-based incentives. However, the recent increase in gasoline prices indicrtes a willingness to place greater reliance on market-based incentives. On this basis, the legal framework can be considered to constitute a reasonably adequate framework to deal with transport air pollution and other environmental problems. Institutional Framework 1.30 The planning and implementation of a program to control transport air pollution in the MCMA is greatly complicated by the fact that the problem has national, regional and local aspects. As a result, a multitude of Federal, State and Municipal agencies are involved in policy making and effective implementation and coordination is difficult to achieve. Since the MCMA includes both the DF and 17 municipalities in the State of Mexico, and air pollution originates in, and affects the entire Valley of Mexico, the problem is regional in scope, requiring common action across jurisdictional boundaries. Such areas as vehicle inspection, traffic management and public transport, for example, are the responsibility of individual agencies of the DDF and SoM, and in some cases of Municipal Authorities. 1.31 National Level Institutions. At the national level, the National Institute of Ecology (INE), which is a dependency of SEDESOL sets fuel and vehicle emission standards in coordination with the Ministries of Transport and Communicatins, Industry and Commerce, Health, and with PEMEX, the Federal Power Commission (CFE) and the Federal District Department (DDF). The  8 Ministry of Finance and Public Credit (SHCP) plays a key role in decisions on investment and the use of external credit. 1.32 At the end of May 1992, Mexico's Congress approved a series of changes of the Law of Federal Public Administration, proposed by the President. As a result SEDUE was transformed into a powerful Ministry of Social Development (SEDESOL), which will be responsible for the execution of the Government's poverty alleviation program "Solidarity," and other social and regional programs in addition to assuming SEDUE's responsibilities in the areas of urban development, housing and environmental policies, standards and norms. The formulation of environmental policies and the setting of standards and norms, for which the Sub-Secretariat for Ecology (SE) of SEDUE had been responsible, are to be carried out by INE, a dependency of the new Ministry, which is to be technically and administratively autonomous. The enforcement of measures to control industrial pollution in the DF is to be the responsibility of a newly created Office of the Federal General Counsel for Environmental Protection (PFPA), which will also be an autonomous dependency of the new Ministry. While responsibility for the administration of the national parks and the execution of programs to reduce water pollution has been transferred to the Ministry of Agriculture and Water Resources (SARH), and the preservation of maritime species to the Ministry of Fishing, SEDESOL will continue to be responsible, through INE for setting fuel quality and vehicle emission standards and assisting the DDF and SoM in enforcing them as well as for the operation of the air quality monitoring system in the MCMA. Under the new law, the staff and budgetary allocation of SEDUE have been transferred to SEDESOL, except for those functions transferred to other Ministries. It also specifically provides that SEDESOL is to assuvme the functions of SEDUE on various Commissions, such as the recently created Commission for the Prevention and Control of Environmental Pollution in the Metropolitan Area of the Valley of Mexico (CMPCCA). 1.33 Metroolitan AirQ uality Instituffons. Prior to January 1992, no permanent metropolitan agency existed, capable of taking an overall view of MCMA air quality, and of planning and guiding implementation of a long-term program. Having regard to past difficulties in making metropolitan or regional commissions effective, the present administration concluded that coordination between the DDF, SoM, SEDUE and other Federal agencies could best be promoted through an informal institutional arrangement. Under this arrangement, the DDF took the lead in planning the program, the creation of new bureaucratic structures was avoided, and private sector expertise was used extensively. In response to a specific mandate from the President, the Mayor of the DF initiated preparation of an air pollution control program for the entire Metropolitan Area, and appointed a senior official as General Coordinator to lead the task. Two inter-governmental groups were formed in 1989 to help develop the program: a Steering Committee, consisting of senior officials of the DDF, SoM, SEDUE, appropriate Federal Ministries, PEMEX, IP and CFE; and a Technical Secretariat, consisting of staff members of these same agencies, working on a part-time or temporary basis. Preparation of the program was a collaborative effort of the Technical Secretariat and teams of local and foreign experts, directed by prominent Mexican consultants. These arrangements worked relatively well for program preparation but, to ensure effective implementation and sustainability of the program, institutional arrangements needed to be strengthened and made permanent. 1.34 Taking these considerations into account, on January 6, 1992, the President issued a Decree creating a new, permanent CMPCCA. Under a subsequent agreement between the CMPCCA and the SoM, the Governor of the SoM has become a permanent, voting member of the CMPCCA. The objectives of the CMPCCA are to definte and coordinate the policies, programs and projects which the various public agencies are to carry out to control environmental pollution in the MCMA,  9 and to mo3nitor their implementation. The CMIPCCA has responsibilities for the prevention and control of all aspects of environmental degradation, although its initial focus Is primarily on air pollution. 1.35 The CMPCCA comprises the SoM Governor and seven representatives of Federal Government agencies - the Secretaries of Finance and Public Credit, Energy, Transport, Social Development, Health, the Mayor of the DF and the Director General of PEMEX. When matters for which they are responsible are to be discussed, representatives of other agencies may participate in the Commission's work: e.g. the Comptroller General; the Secretaries of Commerce and Industrial Development, and of Public Education; the Directors General of the Mexican Petroleum Institute (IMP), the National Water Commission and the National Power Commission; the heads of other Federal agencies; and SoM municipalities. 1.36 The CMPCCA's key functions are to: (a) define anti-pollution policies, programs, projects and actions to be carried out by Federal Government dependencies and entities in the MCMA, including those dealing with environmental emergencies. The Commission Is to establish mechanisms to ensure effective coordination in these matters between entities of the Federal Government, the DDF, the Government of the SoM and its municipalities; (b) establish criteria and guidelines to prevent and control pollution in the MCMA, spelling out the actions the public sector is to take and coordination arrangements between the Federal Government, the DDF, the SoM and its municipalities, representatives of the "social" and private sectors, and affected interest groups and individuals; (c) give its views concerning programs, projects and budgetary allocations of Federal Govermnent entities and dependencies which involve pollution control measures in the MCMA; (d) propose to the relevant authorities actions to prevent and control environmental emergencies in the MCMA; (e) support environmental research, technological development and training programs; (fl define mechanisms to secure resources to form a "Fund" to finance the programs, projects and actions approved by the Commission; (g) evaluate periodically the implementation of the agreed actions and findings of the Commission; and (h) carry out other actions related to the Commission's objectives, as directed by the President of the Republic . 1.37 The CMPCCA's Presidency will rotate every two years: the Mayor of the DF will preside over the Commission's activities initially; followed by the Governor of the SoM; and the head of SEDESOL.  10 1.38 The CMPCCA has an Advisory Council, consisting of representatives of the scientific community, industrial associations, transport operators, environmental interest groups, the Presidents of the Ecological and Environmental Commission and the Commission for Governmental Affairs of the Chamber of Deputies, and the Ecological Commission of the Representative Assembly of the DF, and other agencies. 1.39 The CMPCCA may constitute both permanent and temporary Working Groups on specific environmental problems. Each Working Group will be led by a group-chief who will prepare its plan of work, schedule the group's working sessions and follow up to see to it that the agreed-upon actions are taken. 1.40 The CMPCCA has a Technical Secretary, appointed for a two year term by the President of the Republic. The Technical Secretary, appointed by the President in January 1992, is an official who is also the General Coordinator for Prevention and Control of Environmental Pollution in the DF. Besides preparing and submitting to the Commission the Annual Work Program, calling Commission meetings, following up on the Commission's agreed actions and reporting periodically on their implementation, the Technical Secretary is to: (a) prepare programs and projects, and obtain and administer grant, loan and budget funds to support anti-pollution strategies and actions; (b) ensure that the resources of the Commission's "Fund' are used in an effective and timely manner to support the programs, projects and actions which the Commission decides to support; (c) coordinate the activities of Commission's Working Groups; and (d) train technical personnel, specialized in the administration of environmental matters in order to ensure the quality and continuity of actions to deal with pollution problems. 1.41 The CMPCCA does not have its own permanent staff. The administrative and technical support for the CMPCCA and its Technical Secretary are provided by the DDF, in line with the Presidential Decree. To meet CMPCCA's requirements, the DDF has been reorganizing and expanding its environmental management capability. Three entities now report to the DDF's General Coordinator for Prevention and Control of Environmental Pollution: (a) the General Directorate of Ecology, which continues to be the DDF implementing agency for pollution-control measures; (b) the Coordinating Commission for Rural Development (COCODER), which coordinates rural development (including reforestation and soil conservation); and (c) a new General Directorate for Environmental Projects (DGPA). The latter General Directorate constitutes the de facto Technical Support Team for the CMPCCA and its Technical Secretary. 1.42 The DGPA has been assigned the budget resources needed to build up a technical staff of about 25 in the course of 1992 (15 were in-place as of June 1992). Disciplines to be covered include: environmental, automotive and industrial engineering; biology and chemistry; meteorology; legal affairs; economics and finance; sociology; and public relations. DDF budget resources also are available to finance short-term consultants to assist the DGPA technical staff with specific activities.  11 The DGPA is to be strengthened under the proposed project through financing of long- and short-term consultants (para. 2.28). 1.43 Metropolitan Transport Institutions. Until recently, there was very little coordination between the DDF and the SoM in the planning, coordination and supply of transport services. A Metropolitan Transport Council, COTAM, was formed in February 1991 by the Mayor of the DF, the Governor of the SoM and the Secretary of the Federal Ministry of Transport and Communications (SCT). The Council provides a framework for coordinated policy development and implementation. Ten working groups have been formed to address the most serious short-term jurisdictional conflicts affecting primarily passenger transport throughout the metropolitan area, and to lay the basis for achieving, in the longer run, greater uniformity in the formulation and application of the normative, operational, technical and functional aspects of the public transport system. The working groups are: (1) legal aspects, (2) technical standards and safety, (3) operations, (4) fleet renewal and finance, (5) supervision and enforcement, (6) infrastructure, (7) energy and environmental protection, (8) freight, (9) short-term program, and (10) Transport Plan for the MCMA (PRETAM). Under the regulations in effect until now, the presidency of COTAM, and of each working group has rotated every six months between the three participating entities - DvF, SoM and SCT. In order to provide COTAM with greater continuity, th- DDF, SoM and SCT have agreed on two important modifications: first, the presidency of COTAM is from now on to rotate every two years rather than every six months, with the DDF representative to become the first President of the Council with a twc year term; second, a full time, permanent Technical Secretariat is being established. This Secretariat would be supported under the proposed project (paras. 2.20 and 2.21). 1.44 DF Institutions. The key agencies in the DF involved .n transport air quality control are: the General Directorate of Ecology (DGE), in charge of the public and private vehicle testing programs, the "Hoy no Circula" ("Day without a Car") program and the vapor recovery systems; the new DGPA, which constitutes the de facto Technical Support Team for the CMPCCA; the General Directorate of Urban Automobile Transport (DGAU), which is in charge of vehicle registration and grants driver, bus and taxi licenses; the General Directorate of Operations (DGO), which is responsible for traffic management and traffic signaling systems; and the General Transport Coordinating Office (CGT) which regulates public transport and parking lots, and coordinates the operation of the metro, bus and trolley bus systems. 1.45 SoM Institutions. The legal and institutional framework in the SoM dealing with environmental protection, and with the planning and implementation of public transport policies, has undergone significant changes recently. Under the terms of a new State Law for Environmental Protection, approved by the legislature of the SoM in November 1991, the powers and responsibilities of the Ecological Commission have been substantially expanded and more clearly defined. The Commission, which was a dependency of the Public Works Ministry, has been transformed into a separate State Secretariat (Ministry of Ecology (SE)), reporting directly to the Governor of the State - thus increasing its influence and coordinating power. The new SE has a 1992 operating budget of US$5 million, more than double the amount authorized for the Ecological Commission in 1991. The SE, which has a staff of 66 (of which 30 have technical qualifications), has been authorized to expand its staff to 250 positions by the end of CY92. Of these, 45 will be administrators (including 25 division chiefs), 146 technical staff (including 46 inspectors), and the rest support staff. The new SE and his assistants clearly face a formidable challenge in contracting and training 44 new inspectors to supervise the State's industrial and mobile source pollution prevention and control efforts, and over  12 70 additional technicians to work on expanded programs of air, water and soil pollution prevention and control (para. 2.50). 1.46 The new SE is in charge of suDervising vehicle emission inspection and the "Hoy no circula" program. While the Ecological Commission contracted a private firm to supervise stations inspecting private vehicles and delegated to COTREM (the SoM Transport Commission) responsibility for the inspection of public service vehicles, the new SE is planning to supervise the network of private inspection stations with its own expanded inspection staff, beginning in 1993. Once fully staffed, the iew SE's organization chart calls for some 20 qualified technicians tc work in ta area of air pollution, in addition to 10-15 inspectors who are to supervise the operation of the I/M program, In close co-operation with the DDF General Directorate of Ecology. In case of need, the new SE would have access to the consultancy resources being provided to the CMPCCA Technical Support Team under the proposed project (para. 2.29). The timely recruitment of the I/M inspsetors which forms part of the implementation indicators (Annex 9), as well as t'eir performance, would be reviewed annually (para. 2.90). 1.47 As part of a recent reorganization of the State Secretariat for Urban Development and Public Works, all aspects of public transport policy and the planning of transport investments are now the responsibility of the General Directorate of Highway Administration and Transport (DGVT/SoM), which is in charge of bus, minibus and taxi licenses, and the granting of bus route concessions. Security and Transport, part of the State Police, is in charge of private vehicle registration and, together with the municipalities controls traffic. Drivers' licenses are issued by the municipalities. 1.48 An assessment of the capacity of the above institutions to implement the Transport Air Quality Management program effectively is presented in paras. 2.40 - 2.57. D. Human Resources 1.49 The Sub-Secretariat for the Environment of SEDUE (now INE and PFPA, which are dependencies of SEDESOL), the General Directorate of Ecology (DGE) in the DF and the Ecological Commission in the SoM (now transformed into a State Ministry), which together are responsible for settiDng and enforcing air pollution standards in the MfCMA, have until recently had very limited staff and operating budgets. At the end of 1990, only about 300 staff worked on air pollution in these three institutions, of whom about 80 had college degrees. The SoM had only 8 managers or techni- cians working on all aspects of pollution. 1.50 While recent actions to strengthen the technical capacity of public sector agencies are helpful, private demand for qualified technicians is growing; public agencies will continue to have grave difficulties in attracting and retaining such staff because of low salaries and hiring freezes. The effectiveness of both public entities and the private sector dealing with transport air pollution is limited by a general shortage of well trained, specialized staff. University and technical training in environmental science started only a few years ago and study programs are still weak, particularly in the area of air pollution. Training of Mexican technicians abroad has partly compensated for the shortage of domestic training opportunities. 1.51 There is an urgent need to: (a) increase the supply of university trained scientists, specialized in environmental science, and (b) provide continuing, mid-career training to keep the staff  13 of public and private institutions abreast of new developments. In both areas, effective programs are underway and a number of promising new initiatives are under active consideration. 1.52 University-levol Training. In the area of university-level training, the most significant initiA&ves are: (a) a plan to reinforce and expand the existing training and research program in Environmental Chemical Engineering and Chemistry at the School of Chemistry and Institute of Geography of the National University of Mexico, with the technical and financial support of O1Z, the German Technical Assistance Agency. The program, which has had the support of SEDUE and the DDF, has until now focused on water and soil pollution as well as the treatment of industrial wastes. A plan to expand the program to cover air pollution, to be included as a sub-component of the proposed project, was prepared with GTZ technical assistance. While the Government was in accord with its technical aspects, it preferred that it be considered as part of a more general approach to environmental training being developed by the CMPCCA and financed, if at all possible, from bilateral grant resources; (b) a proposal for the creation of an environmental researca and training center, which SEDUE had been discussing with the Japanese International Cooperation Agency; and (c) the creation of an International Center for Environmental Training at the University of Veracruz, under the leadership of an outstanding Mexican environmental scientist. 1.53 Nd-career Training. In the area of continuing training, SEDUE/SE had since 1987 carried out a nation-wide training program, consisting of: (a) regional training courses for the staff of State and Municipal governments, and SEDUE's State delegations; (b) seminars with the participation of foreign experts to acquaint public sector staff members with technical advances and developments in Mexico and abroad, and (c) training of SEDUE/SE staff both in Mexico and abroad, financed by international and bilateral donors. The program is to be strengthened and complemented through the recently approved Bank-supported Envirommental Project, which will finance: (i) the training of the staff of SEDESOL (former SEDUE/SE) State delegations and of State agencies which are to assume increasingly the responsibility to evaluate and approve environmental risk assessments; (ii) in-service training of new staff for six regional centers, which are to implement programs in 36 critical urban areas, other than the MCMA, and (iii) training of consultants who are to be increasingly responsible for implementing SEDESOL's monitoring and auditing functions. DDF's General Directorate of Ecology has developed an original program with the National University to train students who fulfill their national service obligations by supervising the operation of the private T/M stations in the DF. 1.54 As noted previously, one of the key functions of the CMPCCA is to support environmental research, technological development and training programs. Moreover, the Decree creating the Commission lists as one of the key tasks of CMPCCA's Technical Secretary the training of technical personnel, specialized in the administration of environmental matters 'in order to ensure the quality and continuity of actions to deal with pollution problems." Accordingly, the Commission's Advisory Council has been requested to give high priority to helping the Technical Secretary and the Technical Support Team prepare an education and training program for the staff of the Technical Support Staff and the Staff of executing agencies in the DDF and SoM. Such a training program would encompass both university level and mid-career training, focusing especially on various aspects of air pollution caused by mobile sources (para. 2.43). 1.55 Vocatonal Trainir. ,. General Motors and Volkswagen have started training programs, through the Mexican Manufacturing Association, for their local mechanics, so they will be able to maintain and repair vehicles equipped with direct fuel injection and sophisticated emission control equipment, with which they are not familiar. GIZ is developing a similar program for the inspectors  14 and mechanics of the public and private inspection/maintenance a/M) stations in the MCMA, which are to be modernized under the proposed project (para. 2.12). E. The Government's Air Quality Strategy for the MCMA 1.56 Since 1988, air pollution control programs have been greatly expanded and given much greater political emphasis. An Emergency Air Pollution Control Program was put into effect in 1989 and, in September 1990, the Mexican Authorities announced an expanded program, the 'Integrated Program Against Air Pollution in the Mexico City Metropolitan Area" (a revised version of this program was issued in September 1991). The Emergency Program 1.57 Measures instituted in 1989 under the Emergency Program included: (a) adoption of tighter vehicle emission standards, effective in model year 1991, with further tightening to equal current U.S. standards in 1993; (b) "Hoy no Circula", a rotating one day/week driving ban, covering one-fifth of the vehicles each weekday; (c) addition of 5% MTBE to gasoline to reduce HC and CO emissions, and compensate for a reduction in gasoline lead content; (d) implementation of a vehicle inspection and maintenance program; (e) temporarily switching of oil-fired thermoelectric plants to natural gas; (f) replacement of some 3500 bus engines with engines meeting California 1990 emission standards, and rehabilitation of these buses to improve their comfort, appearance, and mechanical condition; and (g) expansion and reinforcement of the air quality monitoring network. 1.58 The Government estimates that these measures (excluding the vehicle emission standards, which have only just begun to take effect) reduced total pollutant emissions in 1989 by about 22% of what they would otherwise have been. No quantitative monitoring or evaluation of the effects of these measures has been carried out, however, and there is some reason to assume that the actual emission reductions achieved may be significantly smaller, since ozone and CO levels have continued to increase despite the program. The Integrated Program 1.59 The "Integrated Program Against Air Pollution in the MCMA", announced in 1990, comprises 41 specific measures (including continuation of measures taken under the Emergency Program), grouped into the following categories: (a) oil iindistry and fuels; (b) Tansport sector; (c) private industry and services; (d) thermoelectric plants; (e) reforestation and sanitary measures; and (f) research, education, and communication. Of these, the elements dealing with fuels, the transport sector, and research and training are most relevant to the proposed project. However, the other measures are also very important and the integrated nature of the program is a valuable characteristic. Progress in implementing the measures related to the transport sector has been satisfactory. Other agencies and financial institutions are providing financial support for the non-transport-related measures. These include the Inter-American Development Bank (IDB) and the OECF. The total direct cost of the Integrated Program is estimated by the Government at US$4.7 billion. 1.60 Oil Industry and Fuels. The Integrated Program includes two types of measures: (a) changes in fuel composition to reduce pollutant emissions from other sources; and (b) changes in the refining and distribution infrastructure to reduce emissions from those sources. Measures of the first type include: supplying unleaded gasoline for catalyst-equipped vehicles, with funding being provided  1S by the Export-Import Bank of Japan (para. 1.69); reformulating leaded gasoline to reduce pollutant emissions; desulfurization of diesel fuel and desulfurization of fuel oil, with financing provided by OECF (Japan). Measuros of the second type to reduce pollutant emissions directly include shutting down the refinery located in the MCMA, and the addition of floating roofs to fuel storage tanks and vapor recovery systems to filling stations to reduce emissions of hydrocarbon vapors. 1.61 Trn S . Transport-related emissions control measures include both steps to reduce pollutant emissions per kilometer travelled and steps to encourage use of public transport while limiting private car use. The measures in the Integrated Program include: new, catalyst-forcing emission standards for gasoline vehicles; replacement of high-use vehicles with new vehicles meeting emission standards; conversion of gasoline-powered cargo trucks to liquified petroleum gas (LPG) or compressed natural gas (CNG), Incorporating catalytic converters; expansion and improvement of the inspection/maintenance program; continuation of "hoy no circula', and its extension to include taxi. and some public transport vehicles; improvements in parking and traffic management systems; expansion of the metro and electric surface transportation systems; and authorizatiorn of new private bus routes. 1.62 Research and Training. The Integrated Program includes the follGwing measures intended to develop data and analytical techniques needed for more effective air quality management, and to increase the supply of trained personnel to plan and execute air quality programs: establishment of a test program for vehicle emission controls and fuels; installation of laboratories to check fuel quality in the field; extension and reinforcement of the air quality monitoring system; development of the "Global Air Quality Study" by IMP, in cooperation with the U.S. Department of Energy's Los Alamos laboratory; implementation of an epidemiological study to evaluate the health impacts of air pollution in the MCMA; establishment of long-term relationships with universities and research centers; and environmental training and education for children, teachers, and professionals. Assessment of the Government's Progm 1.63 The Integrated Program constitutes an important step forward in air pollution control in the MCMA. The proposed measures cover most of the significant air pollution sources and, If carried through, should result in a substantial reduction in overall pollutant emissions. There remains significant room for further improvement, however, including: improvements to the scientific base (emissions inventory and air-quality models) to support detailed air quality planning; more complete coverage of emissions sources; better definition of air quality targets; explicit consideration of cost- effectiveness and the establishment of priorities; greater reliance on economic incentives; development of a policy framework to support the individual measures; improved planning for implementation and enforcement; monitoring and evaluation of effectiveness; and direct linkages with transport sector investment and policy programs. Further development of the transport demand management strategy and assessment of the "Hoy no circula" program are especially urgent. Technical and financial support for addressing these issues would be provided through the proposed project (paras. 2.20 - 2.24 and para. 2.30). Twrd an Interted Transnort and Air Ouality Strategy 1.64 Because of its significance as the dominant contributor to air pollution, the transport sector deserves major attention in any air quality str.ategy. In addition, the transport sector in the MCMA by itself has major problems which also must be addressed. Until now air quality and transport issues  16 have largely been dealt with in isolation and an integrated strategy for both transport and air pollution control is needed - one which would address both air quality and transport objectives, while recon- ciling the potential conflicts between them (e.g. the effect of major road construction on traffic generation and emissions). Tle Government's transport strategy for the MCMA focuses primarily on traditional transport concerns, with little explicit consideration of air quality. With the development of the Integrated Air Quality Program, the creation of COTAM, and the new CMPCCA, the Mexican Authorities have laid the foundation for a more integrated strategy, but much work remains to be done. A Strategy Outline, consistent with the Integrated Program and the proposed project, is presented in the updated summary of the Sector Report referred to above (Annex 1, Table 5). Due to the ongoing policy dialogue during the sector work and project preparation, the Bank's and the Government's views of this strategy are now closely aligned. The Government's and the External Advisory Panel's comments on the Sector Report (see para. 1.2) have been taken into account In the updated summary of the Sector Report. The proposed project would include financing and technical assistance to prepare an integrated Transport and Air Quality Strategy, which is not Intended to replace the individual sub-sector strategies being adopted or considered by the Government, but to refine, extend and unify them (paras. 2.20 and 2.21). F. Relevant World Bank Experience 1.65 Transport air pollution control is a relatively new area for the Bank. While a number of projects have contained components dealing with transport air pollution issues, the proposed project will be one of the first Bank projects supporting a comprehensive approach to the problem. Relevant Bank experiences in the pollution control and related sectors include: (a) the Project Completion Report (No. 9495-ME) on the first 2Pollution Conto ftect' in Mexico, for which Bank Loan 2154-ME was approved in July 1982; (b) the Project Completion Report (No. 8685-ME) on the "Decentralization Progm f,r the Mexico City Region", a preinvestment project, for which Bank Loan 2194-ME was approved in August 1Q82; (c) experience to date of the Bank-financed transport components of the MCMA Emergency Air Pollution Control Program, which was made possible by amending in December 1989 the "First Urban Transport Project", for which Bank Loan 2824-ME was approved in May 1987; and (d) the Project Completion and Performance Audit Report (No. 7720-BRA) on the :ao Paulo Industrial Pollutio,l Control ProJect" in Brazil, for which Bank Loan 1822-BR was approved in March 1980. 1.66 Ihe main lessons from these projects, presented in more detail in Annex 2, are that: (a) among the key preconditions for a successful vehicular pollution abatement program is the existence of an adequate legal and regulatory basis and adequate institutions to plan, coordinate and implement the prograiu; such institutions must be able to secure and retain the services of well trained professionals and have secure sources of financing; (b) a regional planning institut.on, which lacks assured sources of financing, the authority to allocate investment resources, and the active support of its members, is likely to be ineffectual and become irrelevant; (c) the success of an air pollution control program or project depends to a significant extent on the work of a well qualified Technical  17 Team, which coordinates implementation of all components on a full-time basis; and (d) the Bank should be flexible in financing projects in this new field, which is subject to frequent technological changes and to improvements in the underlying scientific base. G. Applying the Lessons of Experience 1.67 The lessons derived from the review of relevant Bank experience have been taken into account in helping to pi pare the proposed MCMA Transport Air Quality Management Project. The Bank's approach is based on: (a) Strong emphasis on institutional strengthening. As noted in para 1.28 the Authorities have transformed the former Air Quality Steering Committee and Technical Secretariat into a permanent CMPCCA under a full-time Technical Director. The project would include strengthening of the DGPA of the DDF, which provides technical support to the new CMPCCA, as well as to COTAM, which has begun efforts to develop an integrated transport and air quality strategy for the MCMA; (b) Assured sources of funding. It is important that the activities of the new CMPCCA should be sustained by assured sources of funding based, as far as possible, on the "polluter pays" principle. The Presidential Decree establishing the CMPCCA refers to the establishment of an Environmental Trust Fund. Such a Fund is being created (para 2.44) and would help to avoid some of the difficulties experienced during the Decentralization Program for the Mexico City Region, referred to in Annex 2; (c) Linkage of regulations and Incentives. Under past projects difficulties were experienced because lines of credit established to finance vehicles and equiprment were not drawn down, largely because of inadequate linkage with environmental regulations and policies. The proposed project would link the "carrot" of access to credit with the "stick" of increasingly stringent regulations relating to vehicle emissions (para. 2.11); (d) Making full use of the private sector. Taking into account the Government's policy to reduce the size of the public sector, and the limited technical capacity of public sector institutions, key project components are to be constructed and/or operated by private firms on a concession basis or through turn-key contracts. The high-use vehicle modernization program would be financed in large part by the private sector. The proposed lines of credit (paras 2.60 - 2.64) would meet financing needs of private-sector taxi, minibus, bus and truck owners for the replacement of vehicles, and of private garage owners for the purchase of inspection equipment; (e) Minimizing design risks. Risks are being minimized by: (i) basing the program and project on preparation work by a team of international experts and on sector work carried out by Bank staff and international consultants, (ii) supporting proven technology, particularly benefltting from relevant experience in the U.S., and (iii) having the program and project reviewed within the Bank by an Advisory Panel as  18 well as by a special External Advisory Panel, comprising world class specialists in transport air pollution control; and (f) Need for flexibility. Having regard to previous sector experience, and in view of the fact that some project sub-components are more fully defined than others, a flexible line of credit approach would facilitate allocations of funds in line with actual requirements. H. Rationale for :3ank Involvement 1.68 As the Government's economic stabilization program successfully consolidates and prospects for sustained economic growth have increased, the Bank's lending str. tegy towards Mexico attaches priority to poverty alleviation programs, rebuilding and expanding the country's infrastructure to permit private sector led growth and addressing environmental problems. Within the environmental sector, the Bank's support strategy is to assist the Government in strengthening the institutional and policy framework for the sector through free-standing projects and environmental components of other projects and to help assure that environmental factors are addressed in investment and policy decisions. A free-standing Environmental Project was approved in April 1992 which principally addresses institutional issues b-, providing support to SEDESOL (INE and PFPA). The second free-standing project would be the proposed project to help alleviate the MCMA's serious air pollution problem by addressing its principal cause, pollution from transport, and which would lay the basis for further Bank support in the area of air pollution control (para. 1.71). Assistance will also be given to help Mexico meet its commitments under global environmental programs. The Bank as executing agency of the Global Environment Facility (GEF) has approved a pilot project under the Montreal Protocol and is about to netgotiate a second operation. These projects are designed to establish an adequate policy framework and to provide the necessary resources to finance the phasing out of chlorofluorocarbons (CFCs) production in Mexico. In addition, the Bank is helping Mexico develop programs for addressing gases contributing to the greenhouse problem, the preservation of biodiversity, and the promotion of the use of energy- efficient lighting, with funds from the GEF. 1.69 The Bank is already contributing to the Emergency Air Pollution Control Program through reallocation of resources from Loan 2824-ME (President's Memorandum, December 22, 1989), and has participated in the development of the Integrated Program from its beginning. Moreover, the Bank has signed a "broadened" cofinancing agreement with the Export-Import Bank of Japan, under which it is providing technical assistance concerning the environmental aspects of PEMEX's projects to produce unleaded gasoline, (which are being financed by the Export-lmport Bank of Japan), and will review the consistency of the overall Program. The loan agreement between the Export-Import Bank of Japan and NAFIN to finance PEMEX's projects to produce unleaded gasoline, contains a cross default clause. Under its terms the Export-Import Bank of Japan may suspend disbursements or cancel Its loan in case the proposed Bank loan for the Transport Air Quality Management Project has not become effective before June 30, 1993 or if the loan is cancelled or disbursements are suspended. The proposed Bank loan would contain a cross-reference clause to the effect "that, if the Gasoline Project is not implemented, the World Bank may suspend disbursements under its loan." The cross- reference clause may be applied "upon suspension of any disbursement under, or cancellation of all or a portion of the loan made pursuant to the loan agreement between the Export-Import Bank of Japan and NAFIN, if the suspension or cancellation is based at least partially on Gasoline Project execution grounds rather than solely on grounds not related to Gasoline Project execution." Agreement on the cross-reference clause was confirmed during negotiations (para. 3. l(b)).  19 1.70 The urgent need for action to improve air quality in the MCMA, the evident commitment of the Government to addressing the issue, and its demonstrated willingness and ability to take bold actions when necessary to improve air quali.y justify Bank support for the air quality program, despite significant risks. The Bank is well placed to assist the Government to take such a systematic planning approach which, by its scale and complexity, the air quality problem in the MCMA requires. It can help develop a sustainable institutional arrangement for air quality ptanning and coordination with a metropolitan focus as well as the policy framework required for program development and implementation. It can also lend assistance to help strengthen existing institutions charged with implementing air quality programs. 1.71 Ideally, a Bank loan of the proposed nature should await the establishment of an adequate scientific base and environmental data and of a well developed policy framework, and support a prioritized implementation program based upon economic principles. However, having regard to the urgency and seriousness of the MCMA air pollution problems in terms of public health, social disruption and economic loss, a staged approach is proposed. The first stage - the proposed MCMA Transport Air Quality Management Project - would include high-priority measures to reduce emissions levels compared to what they would otherwise be. The proposed project would also include the preparation of policies to support more comprehensive measures (para. 2.21), to be implemented during a second stage (e.g. a comprehensive public transport policy and related investments), together with measures to improve the scientific base, in order to provide the foundation for any subsequent operation in both areas of mobile and stationary source, of air pollution. The justification for the credit lines under the proposed project is provided in para. 2.63. It. THE PROJECT A. Origin of the Project 2.1 In early 1989, the Government of Mexico requested the Bank to support an urban transport project for the MCMA. Subsequently, the Government further requested that the Bank's support should be targeted toward addressing the increasingly serious problems of transport air pollution in the city. In order to provide an immnediate response, and in view of the gravity of the problems, funds were reallocated from the First Urben Transport Project in support of the Government's Emergency Program (para. 1.69). At the same time, the Mexican Authorities initiated the preparation of a free-standing project, under the leadership of the DDF. The proposed project is based on the preparation work carried out by the DDF and its team of Mexican and international consultants and the Bank's extensive sector work. B. Project Rationale 2.2 The top priority of the proposed project is to help contain air pollution in the near term. Technical studies during project preparation and sector work have indicated that this objective could be achieved best through investment in vehicle- and fuel-related measures, in conjunction with the application of appropriate policies relating to: (a) vehicle emission standa;ds; (b) vehicle inspection/maintenance (a/M); (c) vehicle fleet renovation; and (d) travel demand management. 2.3 The definition of increasingly stringent vehicle emission standards (para. 2.11), suitable for all vehicle categories in ;JICMA conditions (for both new and in-use vehicles), and the existence of an  20 effective vehicle I/M system, are necessary conditions to achieve substantial vehicle emissions reductions. These elements are therefore central to the proposed project and would "force" the progressive modernization of the MCMA vehicle fleet to meet air quality targets. In parallel, the modernization of high-use vehicles would be encouraged through the provision of lines of credit (paras. 2.13 - 2.16) for: (a) vehicle fleet replacement, (b) conversion to LPG or CNG, and (c) re- engining and retrofitting with emission-control equipment. These credit lines are designed to meet the needs of individuals and small enterprises with limited access to credit. 2.4 Parallel investments in fuel processing facilities are being undertaken by PEMEX, under a broadened co-financing agreement between the Export-Import Bank of Japan and the Bank (para. 1.69). The proposed project would include a vapor recovery program and assistance to speed up the conversion of minibuses, buses and trucks to LPG or CNG. No investments in transport infrastructure are included in the proposed project in view of continuing uncertainty over the air pollution impacts of major road construction when the traffic generation effects are taken into account, and pending assessments of major public transport investments which would take into account air quality and developmental benefits, in addition to traditional transport benefits. 2.5 Among the important policy issues to be addressed under the proposed project are: (a) the availability of unleaded gasoline and the extent of misfueling and reverse misfueling; (b) reduction of emissions from the existing vehicle fleet (e.g. through incentives to remove or scrap old, highly- polluting vehicles); (c) the need to develop more effective demand management procedures, in order to adapt and eventually to supersede "Hoy no Circula"; and (d) the develorment of a coherent Transport and Air Quality Strategy, and full incorporation of air quality criteria into transport sector investment planning and management. 2.6 Given the lack of knowledge about many aspects of air quality in the MCMA, an improved scientific base is necessary for improving air quality planning and management, and the proposed project would therefore incorporate an important research component. 2.7 Finally, sustainable improvements are unlikely to be possible without devoting substantial attention to institutional strengthening and to human resource development. The CMPCCA Technical Support Team would be strengthened through the provision of technical assistance, and would support executing agencies in the DF and SoM. CMPCCA with the assistance of its Advisory Council will develop a training program for the staff of its Technical Support Team and of the executing agencies. The Bank would review progress in preparing and implementing the program, as part of the annual reviews (paras. 1.54 and 2.43). C. Project Objectives 2.8 The objectives of the proposed project would b to support a comprehensive program to reduce air pollution in the MCMA through measures to: (a) reduce the growth of emissions of nitrogen oxides (NOx), volatile organic compounds (VOC), carbon monoxide (CO), lead, and of particulate matter from transport sources; (b) develop a policy framework to support both transport and air quality objectives; (c) improve the scientific base underlying the air quality program development and management; and  21 (d) strengthen institutional capabilities to effectifely plan and implement air-quality progrm over the long-term. D. Project Description 2.9 The proposed project would include five inter-related components for: (a) Vehicles (paras. 2.10 - 2.17); (b) Fuels (paras. 2.18 and 2.19); (c) Transport policy and management (paras. 2.20 and 2.21); (d) Scientific base (paras. 2.22 - 2.26); and (e) Institutional strengthening (paras. 2.27 - 2.30). Vehicle Component (USS1.030.6 million in total pro3ect cost) 2.10 lhis component would include: (a) support to develop, promulgate and enforce emission stan- dards for new vehicles; (b) progressive improvements to in-use emission standards, and inspection programs for high-use vehicles and private cars; and (c) replacement of old, high-use vehicles (taxis, trucks and minibuses) with new, emission-controlled vehicles, conversion of high-use vehicles to LPG or CNG, and re-engining and retrofitting with emission controls (e.g. catalytic converters). 2. 11 Emission Standards Sub-component (US$7.7 million). Ihis sub-component would include the development, promulgation and enforcement of vehicle emission standards, and specification of a laboratory for SEDESOL: Emission Standards Development (USS3.0 million). Various new emission standards are urgently needed for the vehicle fleet modernization program to be effective. This sub- component would support SEDESOL through INE in developing and promulgating vehicle emission standards during 1992-1994 by financing consultant assistance, contract laboratory studies, and related needs. Regulations to be developed would include: (a) heavy-duty diesel engine emission standards (to be issued by the end of 1992, with revised standards to be issued by the end of 1994); (b) standards for minibuses and medium-duty vehicles, including CNG and LPG vehicles (to be issued by the end of 1993); (c) regulations for manufacturers' liability for emissions durability, warranty, and in-service compliance (to be issued by the end of 1993); and (d) evaporative emission standards (to be issued by the end of 1993). Fuel standards would be reviewed and, if appropriate, revised regulations issued. The terms of reference for the proposed technical assistance and laboratory testing were reviewed by the Bank and found satisfactory. Progress in the emission standards development would be reviewed during the annual reviews with the Bank and agreements would be reached on follow-up actions as necessary (Annex 3). Emission Standards Enforcement llSS4.7 million) . By the end of 1993. SEDESOL thdrough INE is scheduled to adopt regulations requiring that vehicles meet emission standards in- service over their full useful lives. Vehicle models which consistenty fal to meet emission standards when tested in the field may be subject to recall, and their manufacturers may be subject to sanctions. In order to enforce this requirement, SEDESOL through INE would need to carry out a program of surveillance testing of vehicles in-service. This surveillance  22 program would also provide valuable data on vehicle emission factors. SEDESOL's present emissions laboratory is limited to testing only exhaust emissions from light-duty vehicles. Although the Government has indicated its intention to develop a more complete laboratory capability, this new laboratory will not be available for some time. To enable enforcement activities to proceed in the meantime, financing would be provided for: (a) emissions testing beyond SEDESOL's present capacity by outside laboratories; and (b) preparation of the technical specifications, bid documents and cost estimates for a fully-equipped emissions testing laboratory for SEDESOL to enforce emission standards and carry out research on vehicle emissions and fuels. The terms of reference for the proposed technical assistance and laboratory testing were reviewed by the Bank and found satisfactory. Progress in the emission standards enforcement would be reviewed during the annual reviews with the Bank and agreements would be reached on follow-up actions as necessary (Annex 3). 2.12 Insaection and Maintenance (I/M) Sub-component fUss34.2 million). The existing vehicle l/M systems in the DF and the SoM would be upgraded with more effective test procedures, increased stringency of oversight, and measures to increase the precision and reliability of testing. High-volume Inspection Stalions (USS13.4 million). High-volume vehicle inspection-only stations, comprising a minimum of 54 test lanes in total, would be constructed, financed and operated by the private sector under licenses to be issued on a competitive basis by the DDF/DGE and the SoM/SE. The licenses would specify inspection requirements, and would also provide for the DDF and the SoM to implement improved procedures in the future. During negotiations agreement has beeb confirmed that, beginning in January 1993, all high- use vehicles registered in the MCMA, and Government vehicles registered in the DF, would be required to be inspected either at one of these stations or at one of 13 DDF-run inspection stations; private cars could also use these stations (para. 3.1 (c)). The stations would be equipped to inspect gasoline, diesel, LPG and CNG powered vehicles. The technical specifications and test procedures of the stations were reviewed by the Bank and round satisfactory. Inspection performance would be reviewed during the annual reviews with the Bank (para. 2.90). Computerized Emission Testng and Diagnostic Eupment for Private Garage (US_16_ nillion). Existing private-garage inspection stations in the MCMA would be required to upgrade to advanced, fraud - resistant computerized emissions analyzer systems by January 1993, and would be subject to rigorous training and licensing requirements, and improved oversight. During negotiations agreement has been confirmed on the upgrade of the existing private-garage inspection stations in the MCMA by January 1993 (para 3. I(d)). A line of credit would be available to private garage owners to finance the purchase of up to 300 computerized emissions analyzers and other emissions measurement and diagnostic equipment (para. 2.60). IM Monitoring and Enforcement (USSO.5 million}. A computer center to support monitoring and enforcement of the I/M program will be set up and operated by the DGE. Through an agreement with the SE, this center will process data from both the DF and the SoM. Tbe center will read the data disks containing IIM test records from the private garages and high-volume inspection centers, and will carry out statistical and other analyses to support: (a) monitoring and reporting on the program; and (b) identification of test centers showing suspicious activity patterns (e.g. very low failure rates). These latter reports will be used to  23 target undercover and overt enforcement activities by the DOE and SE. The proposed project would finance equipment, including computer hardware and software for the DGE. MIM Program Assessment and Development (US$2.6 milllon). In order to assess the effectiveness of the I/M program in reducing vehicle emissions, a continuing program of laboratory emissions testing would be carried out by contractors on behalf of the CMPCCA Technical Support Team. Work would include: (a) reviewing the effectiveness of I/M tests and inspection procedures in identifying high-emitting vehicles; (b) analyzing the extent to which the repairs required under the I/M program actually reduce emissions; and (c) extension and updating of in-use vehicle emission standards (including heavy-and medium-duty gasoline and diesel vehicles). The test program would also evaluate the relative effectiveness of alternative I/M procedures, such as steady-state loaded mode testing, and the U.S. EPA's I/M 240 test (as it becomes available). The results of the test program would be used to update I/M test procedures and standards, having regard to the distributions of actual vehicle emissions for each category, and to the likely public acceptability of anticipated failure rates. The proposed project would finance contractor operations over two and one-half years, commencing in 1994. The terms of reference for technical assistance and laboratory testing were reViewed by the Bank and found satisfactory. Progress in the I/M program assessment and development would be discussed during the annual reviews with the Bank and agreements would be reached on follow-up actions as necessary (Annex 3). Supervisory Consultant (US$0.4 million). A consultant experienced in the design and implementation of I/M systems would be retained by the DGE tc supervise program implementation and operations over a two and one-half year period. The terms of reference for the consultancy services were reviewed by the Bank and found satisfactory, and a contract has been signed with the consultant. The I/M systems performance would be reviewed during the annual reviews with the Bank (Annex 3). Inspector/Mechanic Training Program (US$0.8 million). A training program for VM inspectors and mechanics would be set up by the Association of Inspection Stations, in conjunction with the Training Institute of the Construction Industry (ICIC), with technical support from the GTZ. The cost of setting up the program would be advanced from a trust fued maintained by the Association of Inspecting Stations, and would be repaid through tuition charges. The training would cover the inspectors and mechanics of both the public and private inspection stations in the whole MCMA. The training would be carried out over a two year period by a series of courses at two levels: (a) a basic course in inspection (40 hours); and (b) a more advanced course in inspection and maintenance (40 hours). Approximately 1,500 inspectors and mechanics are expected to attend both courses. A university would administer the final course tests, and every inspector would be tested annually. Each test station would be required to employ at least one inspector who had completed the two courses and subsequent annual tests successfully; otherwise the station would lose its operating license. The proposed project would support staff, equipment, technical assistance and teaching staff. The curriculum and program performance would be reviewed annually with the Bank, GTZ, and the Mexican Authorities (para. 2.90). 2.13 MIg-use Vehicle Fleet Modernization Sub-component (USS988.0 million). This sub- component, which would be largely financed by the private sector, aims to strengthen the CMPCCA program outlined below. Bank financing would be provided to speed the modernization of the high-  24 use vehicle fleet through provision of lines of credit to finance: (a) replacement of old high-use vehicles with new, emission controlled vehicles; (b) conversion of gasoline and diesel-powered vehicles to LPG or CNG; (c) re-engining existing vehicles with modem technology gasoline or diesel which meet new emission standards; and (d) retrofitting vehicles with catalytic converters. The CMPCCA high-use vehicle fleet modernization program for the MCMA is based on the following policies to be fully implemented by January 1, 1993 (para 2.16): (a) no taxi operating in the MCMA should be more than six years old; (b) no public passenger transport vehicles (combis; minibuses; buses) should be more than nine years old for fixed-route services and no more than seven years old for non-fixed- route operations; (c) no own-account passenger vehicles should be more than 15 years old; (d) no own-account trucks (servicio mercantil de carga) should be more than 15 years old; and (e) no trucks used for common carrier operations (servicio pdblico de carga) should be more than 15 years old. 'kill 2.14 Provided a high-use vehicle meets the relevant age criterion, it would be for itadwner to decide which technical measure (replacement, conversion, re-engining or retrofitting) to adopt in order to meet the prevailing emission standards (para. 2.11). Individual decisions will depend on the state of the vehicle, its operating pattern, profitability in its business sector, availability of funds, and other factors. Under this sub-component lines of credit would be provided which would be available to private owners of high-use vehicles, subject to meeting emission and safety standards. 2.15 Below .is a description of the fleet modernization sub-component of the project which would support the CMPCCA program. A more detailed description of the sub-component is given in Annex 4. x A taxi fleet modernizatio.r,,.,un for the MCMA was launched by the Mexican Authorities in 1991. In the DF, the objtimive is to replace all taxis more than 6 years old with newer vehicles. In the SoM, the ctirt ac policy is to replace all taxis more than 10 years old with newer vehicles. When the program was introduced, some 93% of the fleet in the DF was 1985 vehicles or older, indicating that some 55,000 vehicles would have to be replaced. Between April, 1991 when the replacement program was announced and mid- Fabruary, 1992, the number of taxis 1985 and older had been reduced from about 55,000 to 38,400 and the number of taxis 1986 and newer had been increased from a little over 4,000 to some 20,700 vehicles, of which 7,919 were new vehicles. The aim of the Govermnent is to facilitate on- going fleet renewal so that no MCMA taxi would be more than 6 years old, and the SoM would be required to amend its policy in this regard by January 1, 1993 (para. 2.16). As a result, an additional 8,000 taxis would need to be replaced with newer vehicles. It is anticipated that, consistent with the six-year replacement policy, about 25,000 taxis would be replaced over the project period (1993 to mid-1996), of which an estimated 8,000 would be financed under the project line of credit, 2,800 from subloans financed from loan disbursements and an additional 4,700 from subloan repayments (reflows) (para. 2.73). Taxis financed under the project line of credit would be new vehicles meeting Mexican emission standards for model year 1993 and onwards (i.e. equipped with catalytic converters and computerized engine management) (para. 2.16). Replaced taxis more than six-years old could  25 not be used as taxis elsewhere in the MCMA, but could be used as private vehicles, which are less intensively used and are thus less polluting. Trucks. There are an estimated 200,000 gasoline trucks operating in the MCMA, making them the second laigest mobile source of air pollution, after passenger cars. There are soms 18,400 common carrier (third party) trucks of which about 9,700 are models 1976 and older and will need to be replaced under the CMPCCA program. An estimated 6,000 are expected to be replaced during the project period of which some 2,350 are expected to he financed by a BANOBRAS credit line (including reflows). There are an estimated 127,000 own account trucks of which some 18,700 will need to be replaced. An estimated 10,000 of these would be replaced during the project period. A NAFIN line of credit (para. 2.60) would finance an estimated 4,500 new units (including reflows). Trucks older than 15 years could not continue to be operated in the MCMA, but could be used outside the area. Trucks - Emission Control Conversion. The Government formulated a program in February 1992, which has as its objective the conversion of some 129,000 freight vehicles which are 1977 or newer to LPG or CNG between 1992 and 1997. About 72,000 of these conversions are expected to be carried out during the project period. A NAFIN line of credit (para. 2.60) would finance about 11,400 conversions (re-engining and retrofitting could also be financed once respective credit sub-components have been prepared by NAFIN, but these investments are expected to be financed by sub-loan reflows). Minibuses and Buses. There is a rising trend towards the purchase and use of minibuses in both the DF and the SoM because of their cost and operating characteristics. In view of uncertainties concerning both the economic implications of this tendency and its impacts on air quality, the proposed project would support a study by COTAM (Annex 3) to define the future roles of different bus types (e.g. size, motive power), taking into account their respective emission factors, the cost-effectiveness of emission reductions, impact on traffic congestion, and the likely socio-economic and financial viability in their intended markets (included in the terms of reference for the transport and policy and management in study) (para. 2.20). In view of the urgent need to reduce emissions, and the continuing need for fleet renewal, the proposed project would initially finance the replacement of existing vehicles by new, emission- controlled vehicles, on a one-for-one basis, in those cases in which emissions would be reduced, and future policy options would not be unduly prejudiced, namely: (a) one new minibus for one old combi (current DDF policy); and (b) one new minibus for one old minibus. DDF policy is to increase the minibus fleet from 18,000 to 25,000 units, of which about 3,000 would be acquired during the period project. It is anticipated that a project line of credit would finance 850 minibuses in the DF under the CMPCCA program. It is impossible to estimate the demand for buses until an appropriate public transport policy framework has been developed; upon completion of the transport policy and management study (paras. 2.20 - 2.21) and discussion of the Goverment's proposal for the use of reflows during the annual reviews (para 2.73), buses could be financed with the sub-loan reflows. Replaced combis, minibuses and buses, operating on fixed routes, which are more than eight- years old, could not continue to be operated in the MCMA. Such vehicles, operating without fixed routes, older than six years, could only operate for two further years on fixed routes in the MCMA. In both cases, the vehicles could be in continued use outside the area.  26 2.16 Agreement has been confirmed during negotiations on the following matters: (a) for taxis that: (i) by January 1, 1993 licenses to operate taxis in the MCMA would not be provided or renewed for vehicles that are more than six years old; and (ii) new taxis under the program would meet Mexican emission standards for model year 1993 and onwards; and (b) for minibuses and trucks on: (i) policies for the vehicle replacement program, conversions to LPG or CNG, re-engining, and retrofitting with emission-control equipment (e.g. regulations specifying vehicle replacement criteria, emission and safety standards); and (ii) measures to avoid the continued use of "replaced vehicles" as high-use vehicles in the MCMA beyond the age limits stipulated in rhe Government's vehicle replacement program (e.g. through an MCMA vehicle registration system) (para. 3.1(e)). In the case of taxis, these technical requirements have already been met. For the minibus and truck replacement, conversion, re-engining and retrofitting programs, further work is needed to meet the technical requirements. The needed emission standards would be developed as part of the emission standard sub-component (para. 2.11); safety and other critical features of the conversion program would be developed through the alternative fuel pilot program sub-component (para. 2.19); and vehicle replacement polices and their enforcement would be reviewed and refined with the help of consultants hired under the CMPCCA Technical Support Team component (para. 2.28). Appropriate public transport policies would have to be prepared for buses as part of the transport policy anl` management component (paras. 2.20 and 2.21) before they could be financed from sub-loan reflows. 2.17 Vehicle Registration System Sub-component (US$0.8 million). Improved co-ordination and linkages between the DDF and the SoM registration and database systems would be supported, in order to improve the management of the vehicle fleet. The goals would be to ensure that: (a) every vehicle registered in the MCMA submits to I/M inspections at appropriate intervals; (b) a vehicle could not be registered annually without presenting an I/M inspection certificate corresponding to the J/M database records; and (c) high-use vehicles replaced under the Government's vehicle replacement program, or failing an I/M inspection, could not be re-registered for continued use elsewhere in the MCMA. The system would be developed in stages: vehicle registration and I/M initially, with possible future extensions to include linkage with contraventions (to ensure payment of all outstanding fines, prior to annual registration), and incorporation of vehicle safety testing information. The proposed project would support: (a) consultancy services to design ap ^ppropriate system, prepare an implementation plan, prepare bid documents, and supervise system implementation; and Co) acquisition of computer equipment. The terms of reference were reviewed by the Bank and found satisfactory. Upon completion of the consultant services, the results would be discussed with the Bank and agreements would be reached on follow-up actions as necessary (Annex 3). Fuel Comronent (US$34.4 million) 2.18 Gasoline Vapor Recovery Sub-component lUS$33.4 million). Gasoline vapor recovery systems installed at petroleum terminals (Stage 0), tank trucks and service station tanks (Stage 1), and retail gasoline pumps (Stage 11) could reduce refueling emissions by an estimated 90%. Bank funding would be provided for the installation of Stage II and the service-station portion of Stage I vapor recovery systems at all 360 service stations in the MCMA, and for consultants to coordinate and supervise the work. PEMEX would provide funding for installing Stage 0 controls at all petroleum products terminals in the Valley of Mexico, and equipping all 300 tank trucks used in the MCMA for Stage 1. Agreement has been confirmed during negotiations that the CMPCCA Technical Support Team would form Working Groups between PEMEX, the DDF and the SoM by no later than December 1992 to coordinate final design and implementation (para. 3.1(f)). The terms of reference for consultants to prepare detailed designs, bid documents (including technical specifications), and  27 supervise this sub-component were reviewed by the Bank and found satisfactory. The performance of the vapor recovery system would be reviewed annually with the Bank (Annex 3). 2.19 Alternative Fuel Pilot Program Sub-component (US$1.0 million). This sub-component would aim to speed the conversion of minibuses, buses, delivery trucks, and Government vehicles to the use of alternative fuels, using appropriate technologies in a safe manner. Initially, the proposed project would support the provision of technical assistance to the CMPCCA Technical Support Team related to: design and monitoring of a pilot program, technical standards (including durability; installation; enforcement), vehicle engineering (for retrofitting), fuel quality, gas and electric distribution and marketing systems, and public safety. Based on the pilot program design, the proposed project would finance vehicle conversion and acquisition to demonstrate in-service performance of LPG, CNG and electric power driven vehicles in the MCMA. The in-service performance would be monitored over at least one year and the results would be used by the CMPCCA to refine the overall gas conversion program in order to optimize benefits, having due regard to public safety issues. The terms of reference for the consultant assistance and subsequent implementation were reviewed by the Bank and found satisfactory. Upon completion of the consultant assistance by December 1994, the results would be discussed with the Bank and agreements would be reached on follow-up actions as necessary (Annex 3). Transport Policy Pnd Management Component (US$2.7 million) 2.20 This component would help prepare an integrated Transport and Air Quality Management Strategy for the MCMA, to be agreed with and implemented by the relevant Mexican Authorities. The Strategy would set the context, having due regard to both transport and air quality objectives, for policies related to travel demand management, urban freight management, public transport, and transport sector investment planning. The Strategy would be developed by COTAM, under the auspices of the CMPCCA. The proposed project would support technical assistance to the COTAM Technical Secretariat to develop and implement a Transport and Air Quality Management Strategy in two phases. A first phase would develop the overall Strategy by the end of 1993, and a second phase would prepare specific investments and policy measures for implementation. 2.21 Having regard to the inevitable reed for increased travel demand management in the medium- term, and the likely erosion of the effectiveness of "Hoy no Circula", urgent attention should be devoted to developing and implementing an appropriate policy for travel demand managemenit. Such a policy could include pricing measures (e.g. parking fees, tolls, cordon pricing, area licensing), physical measures (e.g. pedestrianization and traffic calming), management measures (e.g. car- pooling), and regulatory measures (e.g. area or corridor bans on non-emission controlled vehicles during air quality emergencies). The travel demand strategy would set the framework for: (a) truck management within congested and polluted areas; (b) public transport measures (including fleet modernization, on-street priorities, pricing, and premium bus services); and (c) management of the existing private vehicle traffic (e.g. elimination of old, highly-polluting vehicles). The Bank has been furnished a satisfactory copy of the legal agreement establishing the COTAM Technical Secretariat; and a full-time technical team, with an initial staffing of no fewer than 5 appropriately qualified professionals is in place. The terms of reference for the proposed technical assistance to the COTAM Technical Secretariat were reviewed by the Bank and found satisfactory. The results of the studies for travel demand management, urban freight management, public transport, and transport sector investment planning, would be discussed during the annual reviews with the Bank and agreements would be reached on follow-up actions as necessary (Annex 3).  28 S&ientlfic Base ComRonent (USS13.4 Million) 2.22 This component is intended to improve the level of scientific knowledge regarding air pollution in the MCMA, as well as to improve planning, evaluation, and emergency response capabilities for air pollution control measures. Financing would be provided for technical assistance, additional air quality monitoring and sampling equipment, and computer systems. 2.23 Technicgl Assistance to the CMPCCA to Improve the Scentific Base (JSS4.7 million). An expert consultant team would be contracted by the DDF to work with the CMPCCA Technical Support Team and with the CMPCCA multi-agency Working Groups, which include SEDESOL (NE) and the Ministry of Health. The consultants would provide technical assistance totalling some 210 man months in various areas, including: (a) extended air-quality monitoring and sampling to characterize the air-quality problem better, and to provide data required for air-quality modeling; (b) extensions and improvements to the pollutant emissions inventory, in order to provide a better foundation for air-quality modeling and development of emissions control measures; <e (c) implementing a photochemical grid model of the MCMA, including associtd emissions data bases, transferring this to the CMPCCA Technical Support Team and INE and training their staff, and carrying out modeling to address specific policy issues (such as whether NOx or VOC are of greatest significance for ozone); (d) development of a human exposure model linked to the photochemical grid model to be provided in task (c); (e) contingency planning and prediction techniques for critical pollution episodes; (f) epidemiological study of the health effects of air pollution in the MCMA; and (g) refinements to the present cost-effectiveness methodology for ranking and evaluating of air-quality projects and development of a more rigorous evaluation methodology using cost-benefit analysis. 2.24 The consultants would also prepare the technical specifications and bid documents for the scientific base equipment to be financed under the proposed project (para. 2.25). The terms of reference for the technical assistance were reviewed by the Bank and found satisfactory. Progress in improving the various aspects of the scientific base would be discussed during the annual reviews with the Bank and agreements would be reached on follow-up actions as necessary (Annex 3). 2.25 Equlpment for SEDESOL MMNE) (USS4.5 million). This sub-component would support the upgrade and extension of the air-quality monitoring system and the short-term air pollution forecasting system. Extending Air-quality Monitoring System (USS3.2 million). Financing would be provided for permanent air-quality monitoring sites in the upwind regions of the Valley of Mexico, including Tula - an important industrial emissions source. Two semi-mobile monitoring stations would also be provided to extend the coverage of the network. Specifications and bid documents for these systems are to be prepared by the consultants under the technical assistance sub-component.  29 Eqipment and Softa for ShoreM Air Polludon For__ting (ISS1.3 mliflon). Equipment and software would be provided to improve the accuracy and reliability of short- term polluticn forecasts, and to link forecasting with response management. Final recommendations for this equipment would be developed as part of the consultant study for contingency planning and prediction techniques for critical pollution episodes (para. 2.23(e)), but it is envisioned that it would include a Tiros satellite link for improved access to meteorological data, an airtrack monitoring system, and the development of an expert system. 2.26 IMP Mobile-source Emissions Lab 1r.r (USS44 niillion). Adequate data on pollutant emissions from motor vehicles are essential in order to establish the emissions inventory, and to plan and evaluate the effects of transport emissions control measures such as inspection and maintenance, and fuel reformulation. The existing laboratory of the Instituto Mexicano del Petrdleo (IMP) would be expanded and upgraded to provide sufficient capacity and capability for emission factor develop- ment, testing in support of emission standards development, emissions testing associated with the conversion to LPG and CNG, and similar requirements. This equipment would also be available for studies by PEMEX, SEDESOL, the CMPCCA Technical Support Team, and commercial clients. The proposed project would finance a heavy-duty chassis test cell (including chassis dynamometer; dilution tunnel system; analyzers and sampling system); a light-duty cell (including constant volume sampler and bags, chassis dynamometer, and on-board exhaust emission sampler); and an evaporative emissions testing system for measurement of running losses and real-time diurnal emissions. nstltutional Strer.gthenn. Compgnent =IS.S mililon) 2.27 The proposed component would include institutional strengthening of the CMPCCA Technical Support Team and an independent annual environmental audit. 2.28 CMPCCA Technical Surnort Team (USSS.1 milHon. The CMPCCA and its Technical Secretary have a Technical Support Team provided by the DDF's DGPA. This component would strengthen this Technical Support Team by financing long- and short-term cons4tants, including a Project Coordinator for the proposed project. Consultant skills would cover the following technical disciplines: project implementation management; vehicle emissions; vehicle inspection/maintenance and enforcement; alternative fuels (e.g. CNG); atmospheric chemistry and photochemical modeling; environmental economics, policy and planning; transport policy, planning and management; and environmental impact assessment (Annex 3). The work of the consultants would include technical aspects of: (a) oversight of the implementation and effectiveness monitoring of the overall air quality program, including the following project sub-components: (i) upgrading and monitoring the DDF and SoM vehicle I/M systems, and the related vehicle registration systems, (ii) the gas conversion program for public transport vehicles and trucks, (iii) the high-use vehicle replacement programs, vehicle re-engining and retrofitting, and I/M equipment for private garages, and (iv) gasoline vapor recovery systems; (b) assistance to the CMPCCA to set institutional, emission and air quality targets, and to monitor performance;  30 (c) close liaison with COTAM to ensure coherence between transport sector management and air quali.y objectives by developing and updating an integrated Transport and Air Quality Strategy; (d) introduction and management of strengtheined Environmental Impa': Assessment procedures for major schemes within the MCMA; (e) preparation of proposed investments for funding and implementation; (f) direction of work on the scientific base; and (g) advice on education and training related to air pollution. 2.29 Additionally, the Technical Support Team and the consultants would provide technical assistance related to air pollution to other agencies, particularly those in the SoM. The terms of reference for long- and short-term consultants (including a Project Coordinator) to work within the Technical Support Team were reviewed by the Bank and found satisfactory. The Project Coordinator has been selected and is in-place. The effectiveness of the CMPCCA Technical Support Team and of the Bank-financed consultants would be discussed during the annual reviews with the Bank and agreements would be reached on follow-up actions as necessary (Annex 3). 2.30 Annual Environmental Audit IUSSO.4 million). The services of a group of independent technical experts would be contracted to conduct annual environmental audits in order o(determine to what extent the various DDF, SoM, Federal, Metropolitan and Municipal agencies, and private sector organizations, are meeting their respective air quality targets. The terms of reference for the enviremnental auditors were reviewed by the Bank and found satisfactory. The results of the audits would be discussed during the annual reviews w1th the Bank and agreements would be reached on follow-up actions as necessary (Annex 3). E. Project Costs and Finandng 2.31 Proect Costs. As shown in Table 2.1, the total cost of the proposed project is estimated at US$1,386.7 million equivalent, consisting of the base cost (US$980.2 million), physical contingencies (US$5.7 million), and price contingencies (US$100.8 million). Project costs include US$145.0 million in taxes and duties and US$3.3 million for land. Cost estimates are based on prices as of June 1992. A physical contingency of 10% has been added to civil works, equipment and laboratory testing cost estimates. Annual price contingencies of 3.7% were applied to both the foreign and the local cost component, on the assumption that any differences between domestic and world inflation would be reflected in periodic exchange rate adjustments. The foreign exchange component is estimated at US$607.2 million, which represents 56% of total project cost. 2.32 Loan Amount and Terms. The proposed loan would be for US$220 million. The loan would have a maturity of 15 years, including 5 years of grace, and would be made at the Bank's standard variable interest rate. 2.33 Financing Plan. The financing plan for the proposed project is set out in Table 2.2. Total investments supported by the credit line. represent some 92% of total project cost. It is estimated that about two-thirds of these investments will be financed by the private sector. For example, it is expected that an important part of the high-use vehicle fleet modernization program would be financed by individual vehicle or fleet owners, commercial banks, and financial leasing. However, in order to  31 Table 2.1: Project Cost Summary (in Miion of U.S. DoUll) PROJECT COMPONENTS LOCAL FOREIGN TOTAL 1. Vehicle Component .41 581.2 (a) Emission standards 2.0 4.6 6.6 (b) I/M system 10.8 19.6 30.4 (c) High-use vehicle fleet modernization 395.1 498.4 893.5 (d) Vehicle registration system 0.5 0.2 0.7 II. Fuel Component . 14.7 2 (a) Gasoline vapor recovery system , t (Stage 0 & I PEMEX) 4.9 6.3 11.1 (b} tGasoline vapor recovery system (Stage I & II DDF & SoM) 9.6 8.2 17.7 (c) Alternative fuel pilot program 0.6 0.3 0.9 1II. Transport Policy and Manragement Component 1 .23 . IV. Scientific Base Component 4.7 7.0 11. (a) Technical assistance for CMPCCA 2.5 1.8 4.2 (b) Equipment for SEDESOL(INE) 0.8 3.0 3.8 (c) IMP mobile-source emissions laboratory 1.4 2.3 3.7 V. Institutional Strengthening Component . 1.1 5.1 (a) CMPCCA technical support team 3.9 0.8 4.7 (b) Annual environmental audit 0.0 0.4 0.4 Total Base Cost Esitmates 433 546 2 Physical Contingencies I/ 1.5 4.2 5.7 Price Contingencies 44.6 56.2 100.8 Total Project Costs 179. 6072 L.086D 7 Of which: (a) taxes, duties 145.0 and (b) land 3.3 1/ The high-use vehicle fleet modernization sub-component, by its nature, does not require physical contingencies.  32 Tabe2l Financing Plan (In Milliou of U.S. Dollars) WORLD BANK Gosemmui PROJECT COMPONENTS PIvate CouAte Owners 1a SUfoDI Sector part DoUn Dhburegt q OTAL _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~ ~ ~~~~rum dqlo Payment_ _ _ _ _ inadag of Fleet Modernzation and IIM System (Supported by Lines of Credlt) 1. Velhle Component (a) High-use Vehicle Fled Modem n i7a.2 9 IOU 12 -. I) Taxis 224.9 14.4 31.0 51.4 321.7 2) Minibusca 68.7 4.4 23.3 0.0 96.4 3) Third Party Trucks 81.1 8.1 26.0 17.2 132.4 4) Own Account Trucks 111.3 20.7 52.0 31.0 215.0 5) Emision Control Retrofit 187.2 5.3 30.0 '3i