Mexico - Solid Waste Management Pilot Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 5952-ME STAFF APPRAISAL REPORT MEXICO SOLID WASTE MANAGEMENT PILOT PROJECT March 5, 1986 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by mcipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MEXICO SOLID WASTE MANAGEMENT PILOT PROJECT STAFF APPRAISAL REPORT Currency Equivalents Currency Unit = Mexican Peso (Mex$) Calendar 1984 (Appraisal) Currency Unit Average August 03, 1985 December 30, 1985 US$1.00 Mex $167.8 Mex $246 Hex $ 367 Mex $1.00 = US S 0.006 US $0.004 US $ 0.003 Mex S1,000 = US $ 5.96 US $4.07 US $ 2.73 WEIGHTS AND MEASURES Metric System FISCAL YEAR January 1 to December 31 PRINCIPAL ABBREVIATIONS AND ACRONYMS AZOMAR - Programa para Atencion a las Zonas Marginadas (Program for At- tention to Marginated Zones) BANOBRAS - Banco Nacional de Obras y Servicios Publicos (National Bank for Public Works and Services) BM - Beneficiary Municipality/Metropolitan Area CUD - Convenio Unico de Desarrollo (Special Development Agreement) DGPCCA - Direccion G,eneral de Prevencion y Control de Contaminacion Ambiental (General Directorate for Prevention and Control of Environmental Contamination) FIFAPA - Fondo de Inversiones Financieras para Agua Potable y Alcanta- rillado (Investments Fund for Water Supply and Sewerage Works) FM - Fondo Fiduciario Federal de Fomento Municipal (Small Municipal- ities' Development Fund) FORTAMUN - Programa de Fortalecimiento Municipal (Municipal Strengthening Program) COM - Government of Mexico MSP - Municipal Strengthening Project SAHOP - Secretaria de Asentamientos Humanos y Obras Publicas (Secre- tariat of Human Settlements and Public Works) SEDUE - Secretaria de Desarrollo Urhano y Ecologia (Secretariat of Urban Development and Ecology) SC, - Secretaria de Gobernacion (Secretariat of the Interior) SHCP - Secretaria de Hacienda y Credito Publico (Secretariat of Fi- nance and Public Credit) SPP - Recretaria de Programacion y Presupuesto (Secretariat of Pro- gramming and Budgeting) UC - Urldad Coordinadora del Proyecto (Project Coordinating Unit)  - i - FOR OFFICAL USE ONLY MEXICO SOLID WASTE MANAGEMENT PILOT PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. LOAN AND PROJECT SUMHARY . . . . . . . . . . . . . . . . . . . . ili-vi I. THE SECTOR/SUBSECTOR . . . . . . . . . . . . . . . . . . . 1 The Setting . . . . . . . . . . . . . . . 1 Subsector Organozation . a o . . . . . . . . . . . . . . 2 Subsector Operational Performance. . . . . . . . . . . . . 3 Subsector Investments and Financing. . . . . . . . . . . . 3 Subsector Objectives and Constraints . . . . . . . . . 4 Bank Sector/Subsector Strategy and Rationale for Bank Involvement. . . . . . . . . . . . . . . . . . . . . 5 TI. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . . 6 Project Background, Origin and Concept . . . . . . . . . . 6 Project Objectives . . . . . . . . . . . . . . . . . . . . 6 Project Description . . . . . . . . . . . . . . . . . . . 7 Project Cost . . . . . . . . . . . . . . . . . . . . . . . 8 Project Financing Plan . . . . . . . . . . . . . . . . . . 9 Project Implementation . . . . . . . . . . . . . . . . . . 11 Key Executing Agencies . . . . . . . . . . . . . . . . . . 12 Project Monitoring and Progress Reporting. . . . . . . . . 12 Procurement, Disbursement and Special Account. . . . . . . 13 Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Status of Project Preparation. . . . . . . . . . . . . . . 14 Benefits and Riskcs . . . . . . . . . . . . . . . . . . . . 14 III. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS . . . . . . . 15 LIST OF TABLES 2.1 Project Financing Plan . . . . . . . . . . . . . . . . . . 9 This report is based on the findings of an appraisal mission whicb visited Mexico from July 15 to August 5, 1985. The mission was composed of Messrs./Mme. Emmanuel Mbi, Economist (Mission Leader); Luis Pereira, Financial Analyst; Eric Willianms, Consultant; and Sandra Cointreau, Consultant. Ms. Madeline DeVan (LCPWS) assisted in the preparation of the report. I This docunmnt has a rsiteddiribution and may be used by recients only in the prformannc of thi ofclW duti Its contents may not otherwie be dicksed wihout Wodd Bnk authorniatoL  - ii - Page No. LIST OF ANNEXES 1. Bank Loans to Mexico for Water Supply and Sewerage . . . . 18 2. Project Description . . . . . . . . . . . . . . . . . . . 19 3. Terms of Reference for Solid Waste Subsector Development Studies. . . . . . . . . . . . . . . . . . . 24 4. Terms of Reference for Technical Assistance to SEDUE and Municipalities . . . . . . . . . . . . . . . .... 46 5. Human Resources and Level of Effort of SEDUE and . . Consultants by Component . o . . . . . . 49 6. Overview of Some Subsector Tssues . ... . . . . . 50 7. Overview of Solid Waste Management In Beneficiary Cities . 53 8. Project Cost Estimates . . . . . . . . . . . . . . . . . . 61 9. Allocation of Loan Proceeds. . . . . . . . . . . . . . . . 67 10. Projected Annual Investments . . . . . . . . . . . . . . . 68 11. Project Implementation Schedules . . . . . . . . . . . . . 74 12. Project Financing Plan and Implerentation Procedures . . . 76 13. Funds Flow Chart . . . . . . . . . . . . . . . . . . . . . 79 14. Operating Principles and Governing Conditions of Project Line of Credit . . . . . . . . . . . . . . . . . . . . . 80 15. Provisions for Onlending Agreement between BAJOBRAS and Municipalities . . . . . . . . . . . . . . . . . . . . . 84 16. Selection and Design Criteria. . . . . . . . . . . . . . . 87 17. Loan Disbursement Schedule . . . ......... . . 88 18. Project Cost by Procurement Metbod . . . . . . . . . . . . 90 19. Organization Charts . . .... . . . . . .. 91 20. Terms of Reference for SEDUE Project Coordinating Unit . . 93 21. Metbodology for Financial Appraisal of Beneficiary Municipalities . . . . . . . . . . . . . . . . . . . . . 96 22. BANOBRAS Finances, Future Plans and Orientation. . . . . . 99 23. Monitoring Indicators. . . . . . . . . . . . . . . . . . . 106 24. Selected Documents and Data Available in Project File. . . 107 MAPS IBRD Map No. 19423 - Citles in Pilot Component IBRD Map No. 19424 - Monterrey Metropolitan Area  - iii - MEXICO SOLID WASTE MANAUUEMENT PILOT PROJECT STAFF APPRAISAL REPORT Loan and Project Summary Borrower: Banco Nacional de Obras y Servicios Publicos, S.N.C. (BANOBRAS). Guarantor: United Mexican States Beneficiaries: The Monterrey Metropolitan Area, eight medium-sized munici- palities, Secretariat of Urban Development and Ecology (SEDUE) and BANOBRAS. Amount: US$25.0 million equivalent. Terms: Repayment in 15 years, including tbree years of grace, witb interest at the Bank's standard variable rate. Relending Terms: For the implementation of subprojects under the pilot component, the peso equivalent of the Loan would be made available to the Beneficiaries (BMs) with a 15-year repayment period including a grace period equal to the shorter of the construction period or four years, at interest rates specified in the General Interest Rate Agreement (GIRA). Each subloan would he secured by contractual agreements among BANOBRAS, the BNs and the State Governments, with SEDUE as a party. Funds for technical assistance and training would be provided as grants. For the national component, the proceeds of the Loan would he made available to SEDUE and BANOBRAS on a grant basis. The Covernment of Mexico would bear the foreign exchange and interest risks. Project ObJectives and Description: The objectives of the proposed project are to: (a) assist C-On to more clearly define solid waste subsector ohjectives and policies and to develop national and local institution- al capability to improve subsector management; (b) to im- prove subsector services through pilot suhprojects, reduce public bealth risks and improve environmental conditions in selected cities; (c) test and evaluate alternatives for promoting cost savings, providing training and channelling funds in the solid waste subsector; and (d) to provide a basis for preparing full-scale solid waste management im- provement projects.  - iv - The project designed to meet these objectives comprises two components. The pilot component will finance the development, testing and evaluation of replicable techniques for the delivery of services in about eight medium-sized municipalities and one metropolitan area. These will include among others, improved repair and maintenance facilities, a metropolitan waste management enterprise in Monterrey, transfer stations and materials recovery facilities, sanitary landfills and industrial waste cemeteries, and development of public education campaigns and materials and training materials. The national component, wbich would be fxecuted at the federal level, would finance technical assistance, consulting services, studies, and equipment to: (i) define subsector policies and options for effective and efficient delivery of serviceq and to reduce dependence on the Government's budget; (ii) strengtben institutions; (iii) develop plans to address subsector constraints; (iv) undertake plan preparation and prefeasibility studies in 26 selected cities; and (v) prepare follow-on solid waste management, projects. Benefits: The project would generate cost savings by: introducing better equipment maintenance and repair systems; reducing vebicle mileage through the establishment of intermediate transfer stations; promoting shared facilities; and using more economical techniques for collection from market and slum areas. The public education campaigns are expected to generate cost savings by reducing the need to clean clan- destine dumps and streets. Alternative sources of financ- ing investments and operations and maintenance will be identified to reduce dependence on the Government budget. The markets for compost and recycled materials will also be investigated with a view to their more active development. Benefits accruing from the tecbnical assistance and studies will include: on-the-job training and experience which will develop SEDUE's ability to assist and advise munici- palities as provided for in GOM's decentralization program, as well as the municipalities' abilities to absorb and implement that advice; dissemination of knowledge gained througb the project to other municipalities; and definition of options to permit increased private sector involvement in waste management and a consequent reduction in Govern- ment outlays. In addition, the expertise of local consult- ants will be developed by the project's research and imple- mentation activities.  Risks: The main project risks are related to the need for close cooperation among several entities and the possible unwillingness or inability of the Beneficiary Municipalities to borrow from the project's line of credit. The first risqk will be minimized by the agreed institutional arrangements for project implementation. In addition, technical assistance and consulting services are widely available. Long-term consultants would help SEDUE to closely supervise the project, supplemented by pr')ject reporting and monitoring provisions whicb would allow the Bank to detect problems early. The second risk will be minimized by requesting prior written commitments from the Beneficiaries showing their willingness to accept the subloan terms and conditions. Second, similar projects being prepared in a number of medium-sized cities could replace the cities appraised. Project Costs: Local Foreign Total US$ thousan A. Pilot Component TA/Studies 3,841.2 805.9 4,647.1 Equipment and Spare Parts 4,201.5 3,788.1 7,989.6 Civil Works 13,063.5 2,739.2 15,802.7 Operations. and Maintenance 2,697.8 - 2,697.8 Engineering/Administration 391.9 82.2 474.1 Subtotal 24,195.9 7,415.4 31,611.3 B. National Component Coordinating Unit (T.A., etc.) 1,766.3 1,305.6 3,071.9 Equipment 24.1 9.8 33.9 Generic Studies/Training 710.0 128.1 838.1 Plan Preparation/Prefeasibility Studies (26 cities) 1,967.5 668.0 2,635.5 Preparation of Future Follow-on Project(s) 826.0 159.0 985.0 Subtotal 5,293.9 2,270.5 7,564.4  Local Foreign Total USS tboussnd Base Cost (12/85 prices): 29,489.8 9,685.9 39,175.7 Physical Contingencies 988.1 410.9 1,399.0 Price Contingencies (1/86-12/93) 7,069.0 2,356.3 9,425.3 Total Project Cost 37,546.9 12,453.1 50,000.0 Local costs include about US$0.8 million equivalent of indirect taxes on industrial products. Financing Plan: Local Foreign Total US$ thousand Bank 12,546.9 12,453.1 25,000.0 GlOM (SPP) 12,000.0 - 12,000.0 SEDUE 3,250.0 - 3,250.0 Beneficiary Municipalities 9,750.0 - 9,750.0 TOTAAL 37,546.9 12,453.1 50,000.0 Estimated Disbursements: / 1987 1988 1989 1990 1991 1992 1993 1994 Bank Fiscal Year = $ million Annual 6.00 6.00 4.00 2.30 2.62 1.78 1.29 1.01 Cumulative 6.00 12.00 16.00 18.30 20.92 22.70 23.99 25.00 Rate of Return: N.A. 1/ Includes retroactive financing valued at US$2.5 million equivalent.  PART I - THE SECTOR/SUBSECTOR The Setting 1.01 Mexico's outstanding spatial problems are the beavy concentration of economic activity, wealth and population in Mexico City, the lack of integration between urban and rural areas, and unbalanced inter-regional development. Population growth bas declined from 3.2% p.a. in the early 1970s to 2.6% p.a. at present. Approximately 68Z of the country's 75 million people live in urban centers of more than 2,500 inhabitants, wbile about 262 of the population live in the tbree main metropolitan areas: Mexico City, Guadalajara and Monterrey. 1.02 Between 1970 and 1983, Mexico made significant progress in expanding and improving its water supply and wastes services. During this period, the percentage of the population with access to piped water grew from 49 to 66. The percentage which was connected to sewerage systems or had adequate exereta disposal facilities grew from 29 to 43. Although con- struction of new facilities increased, the capacity of many of the institu- tions responsible for operating and maintaining them did not grow. It is estimated that 50% of all systems need some degree of rehabilitation. The Impressive improvements in water and sewerage coverage bave also been off- set to a considerable degree by worsening, and unfortunately heretofore neglected, water pollution and solid waste problems. 1.03 Collection, transfer and final disposal of solid waste are inade- quate in virtually every city. Collection service, often erratic and inconsistent, is available only to 702 of the urban population, and is ge- nerally provided with limited and/or aging facilities, deteriorating equipment and untrained personnel. Adequate final disposal te.hniques are applled to only 5% of the total volume of -wastes collected, and open air dumps are used for final disposal in 90X of all Mexican cities. Solid waste services in the municipalities that will benefit from the pilot component of the proposed project are representative of the rest of the country (Annexes 6 and 7). l 1.04 Inadequate and erratic solid waste collection and disposal and lack of public education programs on proper waste management are resulting in the spread of debilitating diseases by insects and animals, and by di- rect human contact. Typically, the downtown business districts and higher- income neighborhoods benefit from solid waste collection services. Some middle- and lower-income neighborhoods receive occasional, sporadic serv- ice; others do not. The residents thus store refuse in their bomes for days and then dump it in clandestine areas of their neighborhoods, or leave it in the streets, illegally in nearby open dumps or in drainage canals. 1.05 C.wrowing quantities of industrial and toxic wastes present yet another major problem. Large quantities of toxic substances sucb as PCBs are generated by the electro-mecbanical industry in Mexico. Other indus- trial and toxic wastes are produced in unknown, but presumably large, quan- tities and are stored, dumped or discarded in unknown locations.  -2- 1.06 Most of the official refuse disposal sites are open dumps that receive refuse from homes, commercial establishments, industries and institutions. Scavengers sort through the refuse at most, if not all, of the sites. As the dumps lack on-site washing facilities for scavengers, the scavengers are exposed to intestinal parasites, skin infections and respiratory diseases. The contamination may well spread as the scavengers travel (often via public transport) from work to home. Very few disposal sites are designed to receive industrial wastes. Instead, there are many clandestine industrial open dumps which are contaminating scarce groundwa- ter and degrading the environment. The proposed project would support studies on the quantities and characteristics of industrial and toxic wastes (para. 2.06). Subsector Organization 1.07 The Secretariat of Urban Development and Ecology (SEDUE) is res- ponsible for establishing regulations and norms for the solid waste subsec- tor, and for enforcing and promoting proper planning and operation of services by providing technical and financial advice. Because of the increased awareness of the magnitude of the solid waste problem, SEDUE has been given the mandate to organize and develop the solid waste subsector. But it has yet to be provided the necessary resources. SEDUE provides funds from its regular hudget to municipalities as seed capital to design and construct sanitary landfills (para. 1.13). SEDUE undertakes its activities in solid waste management through the Directorate General for the Prevention and Control of Environmental Pollution (DGPCCA). Until eight months ago a department of solid waste management and soil control (DRS) under DGPCCA was the unit directly responsible for subsector activities. An informal unit reporting directly to DRS' director was set up in August 1984, with staff from each of DRS' divisions, to prepare the proposed project. DGPCCA has recently heen reorganized; its activities in solid waste management are now shared by its three departments (standards and vigilance, studies, and technical support-Annex 19). The unit which prepared the proposed project (Project Coordinating Unit-UC) has been formalized and will he responsible for overall project management and execution of some subcomponents (paras. 2.11 and 2.14). UC reports directly to the Director General of DGPCCA. 1.08 BANOBRAS is a financial agent of the Government responsihle for financing infrastructure investments (urban development, water supply, highways, etc.). The federal government, through SHCP, controls BANOBRAS' policies and directs its borrowings and lending activities. BANOBRAS onlends funds to states and municipalities through various windows" on varying terms and conditions. However, in view of the internal organization requiring coordination among four divisions (External Credit, Planning, Operations and Training), as well as complex bureaucratic procedures for loan application and processing, and lack of promotion, BANOBRAS has not been a major source of funding for solid waste services (para 1.13). 1.09 The Covernment, as part of its decentralization efforts in Febru- ary 1983, modified Article 115 of the Constitution which governs municipal functions. This modification defined the legal responsibilities of munici- palities to include the planning, financing, implementing, operating and maintaining basic municipal services. Municipalities are, therefore, res- ponsible for the collection and disposal of municipal solid wastes.  -3- Responsibility for collectlon, transport, storage, treatment and final disposal of toxic and industrial wastes rests with the generating industries, SEDUE and, in some cases, with the municipalities. 1.10 Various arrangements are employed to bandle waste management at the municipal level. In many municipalities, one department is responsible for collection, transport, disposal and fleet maintenance and repair. Others have a separate department of transport to handle management, main- tenance and repair of all municipal vehicles. In others, a municipal 'em- presa- handles all aspects of waste management, including fleet mainte- nance. Contract and/or private collection is employed in a few municipali- ties, usually to cover specific zones and institutions (botels, hospitals, restaurants, etc.). Lack of information precludes a clear-cut assessment of the potential efficiency and effectiveness of private and/or contract service. This would be studied and defined under the proposed project (para. 2.04). Industrial and toxic waste management is unorganized, except in the handful of areas where municipalities have assumed responsibility for it. There are virtually no lnter-municipal cooperative arrangements or organizations to promote and manage shared facilities and equipment. Subsector Operational Performance 1.11 Solid waste services thrcughout Mexico are characterized by poor operational performance. Because of lack of planning and funds to regular- ly restock spare parts, on average, about 25% of the most organized munici- palities' operative fleets are out of service at any given moment. It is estimated that more than half of the inoperative vehicles could be repaired at a cost of 10% to 152 of their replacement cost. The problem is worse if parts need to be imported (Annexes 6 and 7). Although solid waste manage- ment is estimated to consume up to one-third of municipal budgets, there are no systems to record and compile the costs of solid waste operations. There are no data on employees per ton of waste collectcd or disposed of. When maintenance and repairs are performed by a general municipal workshop, costs for labor, parts, supplies, and administration are not disaggregated by service. Without proper cost data, cost-efficiency is not even an issue of concern, much less a goal to he achieved. 1.12 Few, if any, cleaning agencies attempt to minimize exposed raw refuse or provide separate areas for hazardous wastes. Route planning for such activities as waste collection, disposal and proper vehicle operation, are particularly weak. Public education campaigns focussing on the social and health aspects of wastes have begun only recently. Disincentives for littering, illegal dumping and hurning have yet to be developed in any city. Finally, operational performance has been adversely affected by dearth of trained professional and supervisory staff at the municipal level and by the resistance of strong labor and scavenger unions to change. Subsector Investments and Financing 1.13 Municipal budgets have generally financed most investments in waste management. However, as in the past, most municipal revenues were provided as Federal and State transfers, the majority of subsector invest- ments as well as operation and maintenance costs were financed on a grant basis. BANOBRAS has lent some funds to the subsector, mainly for truck  -4- purcbases, as part of larger urban development scbemes. Between 1983-85, SEDUE provided about US$6 million (1985 prices) to support the design, construction or operation of sanitary landfills in selected cities. Be- cause of the rudimentary nature of the municipalities' accounting systems (para. 1.11), however, the level of subsector investments is unknown. Evi- dence gathered from a representative sample of citles indicates that in- vestments made and planned are far below the estimated minimum required to upgrade services and provide facilities for a minium acceptable level cf solid waste collection and disposal (para. 1.14). The modification to Ar- ticle 115 of the Constitution (para. '.09) provides the legal instruments for substantial Increases in municipal own-source revenues. Municipalities, which previously received 152 of property taxes collected by states, are now responsible for collecting property taxes and retaining 80% of collections. Furthermore, municipalities now collect and retain all user charges for water, sewerage and draining syqtems, solid waste services, markets and slaughterhouses, among other basic services. Municipalities have adopted conservative fiscal policies and have, therefore, considerable potential for borrowing. Subsector Objectives and Constraints 1.14 At the end of 1983, the Government established hroad, medium-term (1984-88) objectives for improvement of municipal and industrial solid waste management. The objective in municipal solid ws"te is to increase collection service coverage from 70% to 90% of the population in all cities with more than 100,000 inhabitants, and to increase appropriate final dis- posal from 5X to 90Z of collected wastes through a program of sanitary landfill construction. The initial objectives in industrial and toxic wastes are to: (a) identify the characteristIcs of the wastes in 20 indus- trial zones; (b) draw up regulationq for industrial waste management; (c) promote financing for the waste-generating industries to develop adequate collection systems and construct suitable dumps; and (d) construct indus- trial waste disposal sites (cemeteries) in the municipalities that have undertaken the management of industrial wastes. Total financial require- ments to meet the above objectives are estimated at a minimum of US$500 million (US$125 million per year) in 1985 prices. 1.15 Achievement of the above objectives is constrained by the following: (a) the country's public investment programs are being sharply curtailed, and financing from private sources is not available; (b) a national solid waste plan, including site-specific programs, has not been prepared; Cc) SEDUE's capacity to provide technical assistance to cities and private companies on a wide scale is limited; (d) the municipalities' capacity to effectively absorb the investments leaves mauch to he desired; (e) options involving the private sector have not been explored; (f) methods of promoting financing for waste generating industries have not been defined; (g) measures to increase efficiency and reduce costs are not being taken or planned; and (h) constraints on sanitary landfill operating capacity bave not been considered, despite ongoing construction. In addition, such key constraints as lack of technical and administrative knowledge, weak planning, limited and/or aging equipment and facilities, untrained personnel, poor operation and maintenance of equipment and facilities, unclear and sometimes inadequate pricing policies and cost recovery levels, and lack of experience in dealing with various types of wastes are not being addressed. As discussed more fully in P-rt II, the proposed project has been designed to assist the government in establishing an appropriate framework and a basis to achieve subsector objectives by addressing the above constraints.  -5- Bank Sector/Subsector Strategy and Rationale for Bank Involvement 1.16 The Bank's strategy in the water supply and wastes sector com- prises two elements: (a) to assist the water supply and sewerage subsector with continued emphasis on medium-sized cities and increased attention to the problems of small cities; and (b) to act as a catalyst in hringing about a rational development of the solid waste management and pollution control subsectors. In water supply and sewerage, in addition to stimulat- ing improved management, developing appropriate financial policies and pro- moting training, the Bank is paying particular attention to the development of regional entities to manage the cost-effective provision of services. 1.17 The proposed project, the Bank's first direct Loan to the solid waste subsector, will help the federal, state and municipal governments initiate the process of rational development of the solid waste management subsector through nationwide studies, technical assistance and pilot works. These &.ctivities will provide a sound basis for establishing a cohesive policy with an appropriate framework, and develop techniques with nation- wide relevance. They will provide the grounding for future investments un- der a larger scale follow-up operation. Complementing the Municipal Strengthening Project (MSP) for which a parallel Bank loan is being pro- cessed, the project would: (i) help improve overall public sector mana- gement at the federal, state and municipal levels, and consolidate the Government's decentalization program; (ii) through actions at the subsec- toral and technical level, improve the institutional and financial manage- ment of municipalities by gradually rationalizing the system of grant transfers, and strengthening municipal finances through application of a systematic methodology which would lead to appropriate pricing and cost re- covery policies; and (iii) reduce federal subsidies to states and munici- palities by improving access to credit for a key municipal service and im- proving local finance mobilization. The proposed project would help meet the basic needs of the population and establish a sound basis for develop- ing a critical subsector. 1.18 Coordination with the Municipal Strengthening Project. Future Bank lending in both the urban and water supply sectors will necessarily incorporate the revised institutional framework required as a result of the Government's decentralization policy. The MSP would support the Covern- ment's objectives of improving the utilization of human and financial re- sources and strengthening institutions, particularly at the municipal level, to increase the delivery of affordable and efficient urban servi- ces. The proposed project would, to the extent feasible, operate within the framework being established under the MSP. At the same time, the pro- ject would develop at the federal level the expertise and relevant institu- tional coordination required to provide municipalities with financial and technical assistance and training to adequately discharge their responsi- bilities in the solid waste subsector. Because of the pressing need to ex- pand knowledge of the subsector and develop expertise at the federal level, SEDUE would assume a major role in implementation of the proposed project, in order to be able to adequately discharge its assigned functions (para. 1.07).  -6- 1.19 Both the proposed project and the MSP would he within the Govern- ment's Program for the Strengthening of Municipalities (FORTAMUN). FORTAMUN would he formally estahleshed under a mandate from SHCP to BANOBRAS as a condition of effectiveness of the loans for the MSP and the proposed project. The mandate authorizes BANOBRAS to control funding and establishes the basic structure of the program, including: (a) a high-level interministerial Steering Committee (Comite Directivo); (h) a Technical Secretariat to coordinate various agencies involved in municipal strength- ening and the program as a whole; Cc) a Training Support Ulnit; and (d) the formalization of Operating Guidelines which detail the rules and procedures of FORTAMUN. All Beneficiaries under the project would be suhject to the financial appraisal criteria established under FORTAMUN and adjusted to accommodate the particular requirements of the solid waste subsector (Annex 21); each subloan would he reviewed and approved by the Comite Directivo. BANOBRAS would follow the policies and procedures outlined in the Operating Guidelines which were reviewed during negotiations and would he formally approved by the Government and BANOBRAS as a conditiorn of effectiveness. The Guidelines would he amended from time to time, as necessary, by agree- ment between the Government, BANUBRAS and the Bank. PART II - THE PROJECT Project Origin, Background and Concept 2.01 A joint Bank-Mexican sector study, undertaken in late 1983, con- cluded that the solid waste subsector posed serious problems and recommen- ded assistance for its development. In February 1984, the Government re- quested Bank assistance to develop the subsector and to help prepare a first project. An April 1984 mission concluded that a modest operation which would provide substantial technical assistance and a pilot program to test applications would he advisable. Such a project would review options and define policies, strengthen institutions, demonstrate the efficient de- livery of subsector services and gain experience before undertaking a larg- er lending operation. The resulting project was appraised in July-August, 1985. Negotiations were held in Washington in February 1986. The Mexican delegation was led by Lic. German Sandoval Faz of BANOBRAS. Project Objectives 2.02 The objectives of the project are to: (a) assist G1OM to more clearly define subsector objectives and policies and to develop national and local institutional capability to improve subsector management; (b) im- prove subsector services through pilot/demonstration subprojects, reduce public healtb risks and improve environmental conditions in selected cit- ies; (c) test and evaluate alternatives for promoting cost savings, provid- ing training and channeling funds in the subsector; (d) help national and local governments to fully understand solid management costs and to develop a basis for cost recovery of solid waste services; and (e) provide an ade- quate hasis for preparing full-scale solid waste management improvement projects.  -7- Project Description 2.03 The project is described in detail in Annexes 2-4 and is summar- ized in the following paragraphs. Selection and design criteria are des- cribed in Annex 16. A pilot component (US$40.09 million, or about 80% of the total project cost) will consist of nine types of subprojects, each designed to improve operations and environmental protection, reduce costs, and increase efficiency. Each subproject will he documented by audio- vlual and written materials to he used for sector-wide training and to fa- cilitaLe replication. Various combinations of subproject types will be un- dertaken in following 8 urban areas tentatively included in the project: the Monterrey Metropolitan Area, Puebla, Merida, Tlalnepantla, Acapulco, Ecatepec, Cuernavaca, and the Orizaha/Cordoha twin cities. The component will include financing for civil works, equipment and materials, training and technical assistance for: (a) improved repair and maintenance facili- ties and systems (Puebla, Orizaha); (b) low-cost collection systems for markets (Puehla, Orizaba); (c) low-cost collection syStems for marginal zones (Tlanepantla, Acapulco, Monterrey); (d) materials recovery and com- posting facilities designed to operate in direct response to market demand for their products (Merida); (e) a regional sanitary landfill (Orizaba/ Cordoba); (f) industrial waste disposal sites/cemeteries (Puebla, Cuernavaca, Ecatepec); (g) improvement of institutional, financial and organizational arrangements, including office improvements and provision of office and transport equipment (Puebla, Merida, Orizaba); (h) development of public education programs and related materials (Puebla, Orizaba); and (i) three regional transfer stations (including materials recovery) and a sanitary landfill; establishment of a metropolitan waste management enter- prise and studies on the economic and technical viability of employing com- posting, mass burning and/or refuse-derived fuel systems of resource recov- ery (Monterrey Metropolitan Area). 2.04 The national component (US$9.91 million, or about 20Z of the total project cost) will finance: (a) technical assistance and equipment to strengthen SEDUE; (b) generic studies to define solutions/options to solve the fundamental problems, issues and needs of the solid waste management subsector; (c) development of plans and preparation of prefeasibility studies in 26 cities; and (d) project preparation of future follow-on projects. Terms of reference for technical assistance, studies and preparation of the follow-on projects are presented in Annexes 3 and 4 and were agreed with the Government during negotiations. In addition to the technical assistance (26% of national component cost, or 5X of total project cost), the tasks to he carried out under the national component will include the following areas: A. Generic Studies (11% of national component cost, or 2X of total pro- ject cost): (a) an examination of institutional aspects of solid waste management including legal, regulatory, enforcement, and defi- nition of institutional/organizatif nal options for effective deliv- ery of services (e.g. contract, concession, lease options, etc.) and assistance, where necessary, to the Beneficiaries to implement applicable recommendations; (b) an examination of financial and accounting aspects of solid waste management comprising options for financing municipal solid waste service from municipal and other resources, financing industrial waste management, and accounting,  -8- including cost control; (c) development and implementation of an industrial waste data base management system and provision of training on its use; Cd) design of a sampling and analysis program to fill gaps in the data base on municipal solid waste cha- racteristics; (e) development of a data base and a technical framework for the evaluation of the environmental impact of open dumping of non-industrial and industrial solid wastes in order to provide a basis for assessing the costs and benefits of other disposal options; (f) development of a data base of costing factors and a simplified computer system to enable ready comparison and analysis of collection, transport and transfer options; (g) assessment of the existing and potential markets for recycled materials and recovered resources; (h) assessment of constraints and incentives to recycling and resource recovery and definition of policy options and plans of action which could enhance recycling and resource recovery. B. Plan Preparation and Prefeasibility Studies (315 of national compo- nent cost, or 7% of total project cost) will include the development of comprehensive plans of action for improving solid waste manage- ment in 26 citiesl/ including, in each case, recommended options for improvements. C. Development and Preparation of Future Follow-On Projects (13S of national component cost, or 3% of total project cost) will comprise: (a) comparison of issues and proposed approaches among cities; (b) selection of cities based on sound selection criteria; (c) prepara- tion of full feasibility studies, taking into consideration informa- tion contained in the generic studies and experience with implemen- tation of pilot subprojects. 2.05 An important feature of the project is the special technical assistance to he provided to a number of the Beneficiaries to implement recommendations developed above. This effort will concentrate on Institutional and organizational options for effective and efficient service provision, accounting and cost control, administrative procedures and systems for analyzing collection, transport and transfer options. As specified in the Operating Guidelines (para 1.19), the Beneficiaries would be required, under subloan agreements (para. 2.08), to undertake to implement recomendations relating to cost recovery. Project Cost 2.06 The total cost of the project, excluding interest during cons- truction, is estimated at US$50.0 million equivalent with US$40.09 million allocated to the pilot component and US$9.91 million, to the national com- ponent with an estimated foreign exchange cost of US$12.45 mdllion or 25% of the project costs. Costs are based on December 1985 prices and include physical contingencies of 42. Price contingencies of US$9.43 million or 1/ Puebla, Isla Mujeres, Cozumel, Mazatlan, Saltillo, Oaxaca, Salina Cruz, Guaymas, Tlanepantla, Ecatepec, Tlaxcala, Ciudad Carmen, Cancun, Veracruz, Toluca, Queretaro, San Luis Potosi, Ciudad Valles, Ciudad Juarez, Durango, Tepic, Ciudad Victoria, Hermosillo, Poza Rica, Jalapa, and Monterrey.  -9- 23Z of 1985 project costs are based on estimated international inflation of 7.5Z in 1986 and 8% thereafter. The local component includes ahout USS0.8 million equivalent of indirect taxes on industrial products. Technical assistance and consultant costs, ranging from US$2,500-US$8,500 per month, are based on those of similar internationally and locally recruited experts in Mexico and other countries in the Region. The costs include about 321 man-months of foreign consultants, 1,292 man-months of local consultants, and 598 man-months of counterpart staff at the national level (Annex 5). Construction costs are based on hills of quantities from those subprojects with advanced engineering designs, and(on unit prices developed by SEDUE or found in recent bids for similar civil works, materials and equipment. Detailed project costs are in Annex 8, and projected annual investments are in Annex 10. Project Financing Plan 2.07 The Bank Loan of US$25.0 million (50% of total project cost) will finance total foreign costs and US$12.55 million equivalent of local costs. This is in line with recent Bank participation in social sector projects in Mexico, and is justified by the extensive expenditure in local currency (mainly for consulting services), the technical assistance and the pilot nature of the project. The financing plan is summarized below and discussed in detail in Annex 12. Table 2.1: Project Financing Plan (US$ Million) Counterpart Component Bank MOM SEDUE Beneficiaries Total Pilot 16.94 11.55 1.85 9.75 40.09 National P.06 0.45 1.40 0 9.91 25.00 12.00 3.25 9.75 50.00 = _ = == _ == _= ______=== _ _ _ _ Z of Total 50 24 6.5 19.5 100 BANOBRAS would, as a condition of effectiveness, enter into contractual arrangements, satisfactory to the Bank, with the Government providing for the transfer of funds to the project's line of credit (project account) under FORTAMUN and repayment of the loan by the Government. In addition, BANOBRAS would open and maintain a Mandate Account (Municipal Development Fund--iDF) for the purposes of carrying out FORTAMUN. The amount allocated to the pilot component would, as in the case of the MSP, provide initial capital to the MDF to provide subloans and grants for the implementation of the pilot subprojects (para. 2.08). Principal and interest payments on the subloans would be deposited in the MDF and onlent to municipalities to expand FORTAMUN. Funds for technical assistance, studies and training under the pilot subprojects would be provided as grants (para. 2.09 and Annex 13). Funds for the national component would also be provided on a grant basis. Assurances were obtained during Loan negotiations that coun- terpart funds would be made available in a timely manner and that the rOM counterpart funds would be channeled through the Project's account under FORTAMUN. The Beneficiaries' contributions would be in the form of pro- ject-related services, assets and land. SEDUE would allocate its share from future budgets.  -10- 2.08 The project account to be established under FORTAMUN will be re- served for the exclusive use of the project. FORTAMUN's Steering Committee would be responsible for approving the account's operations. The line of credit's operating principles and governing conditions have been defined and include the provisions set forth in Annex 14. These will he incorpora- ted in the Operating Guidelines of FORTAMUN. A subsidiary onlending agree- ment (Contrato de Apertura de Credito) will be executed for eacb subproject between BANOBRAS, the State Government and the Beneficiary. Bank approval of each subloan agreement will he a condition of disbursement for eacb Ben- eficiary's subproject(s). The agreements will include tle provisions list- ed in Annex 15. In addition, eacb subloan would carry a starting interest rate in 1986 of 68% of the Average Cost of Funds (CPP; para. 2.10) and in 1987, of 80x. The repayment period would he 15 years including a grace period equal to the shorter of the construction period or four years. Dur- ing negotiations a draft model onlending agreement and a draft Mandate from SHCP to BANOBRAS setting up FORTAMUN were reviewed and found satisfactory. The Mandate would he formalized by the effective date of the proposed loan and that of the MSP (para. 1.19). The draft model onlending agreement would also be incorporated in the Operating CGuidelines (para. 1.19). 2.09 The project will be included under the General Interest Rate Agreement (GIRA) between the Bank and Mexico. A category for municipal in- frastructure lending (including solid waste) will he opened in GIRA to ac- commodate the proposed project and the MSP. The interest rate (para. 2.08) would be applied to equipment acquisitions, materials and civil works for the pilot component. Technical assistance and studies would be provided on a grant hasis because of the pilot nature of the project and the nationwide relevance and demonstrative nature of the activities under project. This would be spelled out in an annex to the subloan agreements. 2 .10 At present, most funds for solid waste investments are passed to the municipalities entirely as grants (para. 1.13). In some instances grants may be justified for reasons of affordability, but there are no es- tablished criteria for sucb funding. The small amount that BANOBRAS lends to the subsector under its FM window is provided at 9-23% of the CPP with no apparent requirements other than that the funds be used to purchase equipment or construct landfilj.s, and that the municipality have a popula- tion of less tban 100,000 inhabitants. The above issues are in part the result of the absence of a cohesive policy and mechanism for financing so- lid waste investments. The establishment of FORTAMUN and the project's line of credit would begin to establish a policy framework. The relatively high interest rate (68% of CPP) to be applied to the project would mark a sharp departure from present policy. CGOM counterpart funds to he onlent through the project would otherwise have been transferred to municipalities entirely as grants.  Project Implementation 2.11 Project implementation procedures are discussed in detail in Annex 12. The Borrower would he BANOBRAS; SEDUE's UC, assisted by long- term consultants, will act as technical agent for the project. UC will be responsible for overall project monitoring and coordination. UC will also carry out the national component, with the exception of the financial and accounting studies which will be carried out by BANOBRAS, unless BANOBRAS agrees otherwise. The Be ieficiaries will execute the pilot subprojects with support from consultants and UC, as necessary. UC will assist in the supervision of the pilot subprojects, in collaboration with the Beneficiar- ies and BANOBRAS, thus providing BANOBRAS and the Beneficiaries additional training. In consultation and mutual agreement with the Beneficiaries, UC will prepare an institutional development program for each Beneficiary not included in the pilot subproject dealing with institutional and financial arrangements, using the findings and recommendations of the national com- ponent's institutional issues study. UC will provide the Beneficiaries witb special technical assistance to implement the recommendations of the national component studies, if such assistance is not already included within the scope of a study. Each Beneficiary of the pilot component has appointed two coordinators for its subproject(s). The project would he im- plemented in 1986-93 (para. 2.13), in accordance with the schedules pre- sented in Annex 11. Terms of reference for the long-term consultants to assist and strengthen UC and the Beneficiaries are in Annex 4. Agreement was reached during negotiations on the terms of reference. 2.12 The contractual documents under the project would he: (a) a Loan Agreement between the Bank and BANOBRAS; (h) a Loan Guarantee Agreement be- tween the Bank and the Government; (c) a subsidiary onlending agreement (Contrato de Apertura de Credito), satisfactory to the Bank, for each sub- project between BANOBRAS and the Beneficiary, guaranteed by the state gov- ernment or, in the case of the Monterrey Metropolitan area, between BANOBRAS and the State Government. An annex to the subloan agreements would detail the scope of SED-JE's assistance to each Beneficiary in the ex- ecution of each subproject. 2.13 The project was initially designed to be implemented in four years. The implementation period has been increased to eigbt years based on experience with water supply projects in the region as reflected in the standard disbursement profiles, given thar the Bank has no experience with freestanding solid waste management projects. It is possible that if the project is implemented efficiently and with few delays, the implementation period could be reduced to four years. This would result in a reduction of project costs from US$50.0 million to US$48.4 million' The annual share of funds provided by the Government and the Beneficiaries, bowever, would be higher under the four-year plan-US$0.42 million equivalent in 1986, US$0.20 million in 1987, US$0.06 million in 1988 and US$0.15 million in 1989. The alternative cost and investment estimates of the eight and four- year schedules are shown in Annexes 8 and 10.  -12- Key Executing Agencies 2.14 SEDUE's General Directorate for the Prevention and Control of En- vironmental Pollution (DGPCCA) (para. 1.07) has 71 employees involved in solid waste management and soil pollution control, lncludiug 28 profession- als and 14 technicians. The UC will undertake the responsibilities des- cribed iu para. 2.11. The unit will initially have a staff of 13. If nec- essary, DGPCCA would make other staff available to the unit. During nego- tiations agreement was reacbed that until the project is completed, the unit will be maintained and fully staffed with qualified and experienced personnel. The unit will be supported by the five long-term consultants to be engaged under the technical assistance provided in the national compon- ent. UC will also be supported at the municipal level by SEDUE's resident state delegations which will provide a day-to-day liuk with the Beneficiar- ies. By mutual agreement among the eight municipalities of the Monterrey Metropolitan area, Monterrey's pilot subcomponent (about 722 of the total cost of the pilot component) would he executed by a unit that has been set up under the State of Nuevo Leon's Secretary of Urban Development. Organi- zation Charts are in Annex 19. Terms of Reference and staff composition for SEDUE's Coordinatiug Unit are iu Anuex 20. 2.15 BANOBRAS' finances, activities and future orientation are dis- cussed iu Annex 22. Established in 1933 as an urban mortgage and public works bauk, its constitution and activities have been modified from time to time in the intervening yea.rs. It obtains funds from the Mexican Govern- ment and the international market. Under its 1980 Organic Law, BANOBRAS is also empowered to act as technical adviser to the Federal Government, the Federal District and local governments in planniug, financing and executing works and services of a public or social nature. BANOBRAS is legally em- powered to act as a Bank Borrower and has acted as financial intermediary for ten Bank loans, amounting to US$1,225 ndlliou. Project Mouitoriug and Progress Reporting 2.16 Monitoring indicators are shown in Annex 23 and are hased on a critical path study completed prior to appraisal. Each onlending agreement will be subject to approval by the Bank. The long-term consultants will assist SEDUE with the preparation of semi-annual reports focussing on tech- nical and managerial aspects and project executiou progress (including ex- penditures on all subprojects), to which BANOBRAS will add reports on fi- nancial aspects. The combined document will be forwarded to the Covernment and the Bank. Reports by the short-term consultants undertaking the stud- ies and preparation of follow-on projects will be available to the Bank. Agreement was reacbed and assurances obtained during negotiations on the monitoriug indicators as well as the plan for progress reportiug. Agree- ment was also reacbed and assurances obtained during negotiations that per- iodic project implementation reviews, whicb sbould include discussions with the Bank of the findings and recowmeadations of the studies and technical assistance, will provide anotber basis for determining any corrective ac- tions which might need to be taken.  -13- Procurement, Disbursement and Special Account 2.17 Procurement (Annex 18) would be carried out following Bank guide- lines. All contracts for equipment, spare parts and materials exceeding a total of US$300,000 and for civil works in excess of US$3 million would be awarded on the basis of international competitive bidding (ICB). Equip- ment, spare parts and materials for eacb subproject will, to the extent practicable, be grouped into packages in excess of US$300,000. Subject to an aggregate limit of US$12 million, contracts for civil works of less than US$3 million but over US$300,000, or less than US$300,000 but over US$100,000 for equipment, spare parts and materials could be procured on the basis of local competitive bidding (LCB) procedures satisfactory to the Bank. Contracts of less than US$300,000 for civil works and less than US$100,000 for equipment, subject to a maximum aggregate of US$6 million, could be procured directly on the basis of a minimum of three quotations or executed by force account (Beneficiaries). Coods manufactured locally and procured under ICB would be allowed a preference over foreign goods of 152 of the CIF price or the level of import duty, whichever is lower. 2.18 Technical assistance end consultants' services will be procured In accordance with Bank Guidelines for Use of Consultants. Prior Bank review of feasibility studies, final designs, specifications and prequali- fications, bidding documents, awards, and contracts procured under ICB would be required. BANOBRAS/SEDUE will retain all relevant documentation for local procurement of goods and services. Bank missions will carry out an ex-post review by sampling. The Beneficiaries would undertake to maintain adequate documentation to support expenditures made for force account works. SEDUE will, if necessary, prepare master contracts for consulting services for the national component, and help the Beneficiaries to prepare those that may be deemed necessary for the pilot component; all contracts and consultants' qualifications will he satisfactory to the Bank. 2.19 The Bank would disburse as follows: (a) for the pilot component: (i) 67% for consulting services and training; (ii) 1002 of foreign expendi- tures for direct imports of equipment and materials and 372 of the costs of locally procured goods; and (iii) 372 of total expenditures for civil works; and (b) for the national component, 372 for equipment and materials and 902 for consulting services and training. The allocation of loan pro- ceeds by component is shown in Annex 9. Disbursements for eligible expen- ditures and contracts valued at under US$250,000 equivalent would be made against Statements of Expenditures (SOEs). Supporting documentation would he retained by BANOBRAS and made available for review during project super- vision missions. Retroactive financing in an amount equivalent to US$2.5 million would be provided for expenditures on project preparation and rela- ted project activities undertaken after August 3, 1985. Disbursements would he completed by June 30, 1994 (Annex 17). A Special Account for the project in the amount of US$2.0 million (estimated four months' peak dis- bursements) will be established in the Central Bank. The Borrower would submit to the Bank a monthly statement of the activities of the Special Account.  -14- Audit 2.20 BANOBRAS and Solid Waste Line of Credit (Project Account). BANOBRAS' accounts are audited annually by an independent audit firm, whose reports are made available to the Bank. Agreement was reacbed during Loan negotiations that the project's account under FORTAMUN will be speclfically audited annually hy independent and qualified auditors and that the auditors' report will he submitted to the Bank not later than six months after the end of the accounting year. BANOBRAS also agreed that the project's Special Account will he audited hy independent and qualified auditors. The audit report would be submitted to the Bank not later than six months after tne end of the fiscal year. 2.21 Beneficiaries. Audit of the accounts of Mexican municipalities is not mandatory and depends on the volition of each individual municipal- ity. Each subloan agreement entered into under the project will therefore rpquire each Beneficiary and state government to have project expenditures verified annually by an independent auditor acceptable to BANOBRAS. Assurances were obtained to this end. The audit reports would he made available to the Bank for review. Status of Project Preparation 2.22 Project preparation conforms to the proposed implementation schedule. Under the pilot component, all subprojects have been fully costed and preliminary designs for all landfills bave been prepared. SEDUE staff and consultants have developed preliminary specifications for major equipment items. The lands needed for the workshops, landfills and trans- fer facilities have been identified and are being acquired. There are no legal issues impeding acquisition of the land and, wbere applicable, a con- dition for approving each subloan would be that clear evidence of title is furnished. Preliminary designs and specifications for the largest items (Monterrey regional transfer stations and Merida materials recovery and compositing facility) have been prepared. Preparation of final designs (covering about 302 of the total) has already begun. Terms of reference for the tecbuical assistance to UC, all studies, preparation of follow-on projects as well as for the pilot subprojects have been prepared. Benefits and Risks 2.23 The principal benefits are expected to be the positive health, institutional and social impact and an improved policy and financial envi- ronment for solid waste management. In the field of environmental improve- ment, the project aims at reducing bealth bazards to the public by creating well designed and appropriately located landfills and industrial cemeteries to eliminate or reduce unauthorized dumps and unsanitary open landfills and by introducing more sanitary disposal of market wastes. Improved indus- trial waste management and disposal should diminish liability risks for in- dustry and help encourage industrial expansion in project areas. As a se- condary benefit, the combination of reduced health risks and more aestheti- cally pleasing environments may enhance Beneficiaries' tourist image. Substantial technical assistance, on-the-job training and experience will  -15- develop the ability both of SEDUE to assist and advise municipalities, and of the municipalities to absorb and implement that advice. The audio- visual documentation produced will enable the lessons of the project to be disseminated among other municipalities. In addition, the expertise of local consultants in this heretofore neglected subsector will be developed by the research and implementation activities under the project. The pro- ject should help reduce dependence on the federal budget by improving access to credit, and by stimulating local resource generation through de- velopment of appropriate cost recovery measures while introducing cost sa- vings through more efficient operations of solid waste management systems. None of the above benefits is readily quantifiable. Therefore a rate of return has not been estimated. Nevertheless, some idea of the scope for generating benefits by more efficient operations can be gauged by observing the number of solid waste vehicles and equipment out of service or ineffec- tively used, in project areas. 2.24 Four of the eight medium-sized municipalities included in the project are among the economically weaker ones in Mexico. Five of the eight municipalities comprizsng the Monterrey Metropolitan area are among the poorest in the country as measured by deficiencies in basic services and by income levels. The project will substantially benefit the poor hut its direct ,mpact on that group can be measured with any reasonable degree of accuracy only in the Beneficiary cities in which marginal zone waste collections will be improved under the project. These cities (Tlalnepan- tla, Acapulco and Monterrey) have a combined total population of over 3.5 million of which marginal zone population is estimated at about 1.4 million inhabitants of which about 0'.9 million would be covered by the project. 2.25 The main project risks are: (a) possible implementation delays due to the need for close cooperation among several entities, the difficul- ty of coordinating the many project activities combined with UC's and the Beneficiaries' lack of familiarity witb Bank procedures; and (b) the po- ssible unwillingness or inability of the Beneficiaries to borrow on the proposed terms and conditions. The first risk will he minimized by the arrangements for project implementation. The responsibilities of all participants have been clearly defined and continuous technical assistance will be widely available. These measures will be complemented by the reporting and monitoring provisions, designed to detect problems at an early stage. The second risk will be reduced by requesting written commitments from Beneficiaries showing their willingness to accept the terms of the subloans. If, however, a Beneficiary should drop out of the project, similar projects being prepared in other municipalities could replace them. In addition, the project's technical assistance grant provisions will ease some of the burden. III. AGREEMENTS REACHED AND RECOMMENDATIONS 3.01 During negotiations, assurances were obtained that: (a) that USS12.0 million in GOM counterpart funds would be channeled through the project's line of credit under the FORTAMUN Mandate Account at BANOBRAS (para. 2.07);  -16- (b) that SEDUE's counterpart funds from Its budget would be made iu a timely manner (para. 2.07); (c) that the Beneficiaries' contributions would be provided on time (para. 2.07); (d) that repayments by the Beneficiaries of CGOM counterpart funds aud the Bank Loan would be deposited in the MDF and further onlent to municipalities for the purposes of expand- ing FORTAMUV (para. 2.07); (e) that the proposed project monitoring indicators and the plan for progress reporting would be used to monitor project pro- gress (para. 2.16); (f) that periodic project implemeutation reviews would be held to provide another basis for determintug any corrective ac- tions which may ueed to be taken (para. 2.16); (g) that BANOBRAS would have the project's line of credit (pro- ject account) audited annually by independent auditors and that the audit report would be submitted to the Bank not later than six months after the end of the accounting year (para. 2.20); (b) that BANOBRAS would have the Special Account audited by in- dependent auditors and that the audit report would be sub- mitted to the Bank not later than six months after the end of the fiscal year (para. 2.20); (I) that each subloan agreement would require each Beneficiary and state government to have project expenditures verified annually by an independent auditor acceptable to BANOBRAS and that the audit reports would be made available to the Bank for review if and wheu requested (para. 2.21); and (j) that one conditiou for approving each subloan would he that, where applicable, clear evidence of land title would be fur- nished by the Beneficiary (para. 2.22). 3.02 As a condition of Loau effectiveness: (a) rhe C.overament Program for the Strengthening of )Fmici- palities (FORTAMUN) would be formally establiLshed under a mandate from SHCP to BANOBRAS (paras. 1.19 and 2.08); (b) The C(overnment and BANOBRAS shall have approved the Operat- ing (-uidelines on terms acceptable to the Bank (para. 1.19);  -17- (c) BANOBRAS would enter into contractual arrangements, sat's- factory to the Bank, with the Government providing for the transfer of funds to the project account under PORTAMUN's Mandate Account (para. 3.01(a) and repayment of the loan by the CGovernment (para. 2.07); and (d) The GCovernment would agree to an amendment to the General Interest Rate Agreement (GIRA) providing for the inclusion of a category for municipal infrastructure lending (includ- ing solid waste) with the following target rates: 68X of the ACF as of January 1, 1986, and 80Z as of January 1, 1987 (paras. 2.08 and 2.09). 3.03 As a condition of disbursement on eacb Beneficiary's subproj- ect(s), the Bank shall have approved the corresponding subloan agreement between BANOBRAS and the Beneficiary (para. 2.08). 3.04 With the above assurances, agreements and conditions, the propo- sed project would be suitable for a Bank loan of US$25.0 million to be re- paid over 15 years, including three years of grace.  -18--. ANEN I