Mexico - Water, Women and Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7726-ME STAFF APPRAISAL REPO?r MEXICO WATER, WOMEN AND DEVELOPMENT PROJECT MAY 24, 1989 Country Department II Latin America and the Caribbean Regional Office This document has a restricted distribuion and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authrkaIon.  CURRENCY EQUIVALENTS Currency Unit r ?eso (Mex$) US$1.00 - 2382 Mex$ (as of 411/89)* *The exchange rate against the US dollar is currently sliding at a rate of Mex$1 per day. FISCAL YEAR January 1 - December 31 UNITS OF WEIGHTS AND MEASURES Metric BritishlUS Equivalenit 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) - 0.62 mile (mi) 1 kilogram (kg) - 2.20 pounds (lb) 1 metric ton (m ton) - 2,250 pounds 1 liter CI) - 0.26 gallons (gal) 1 cubic meter (m) - 1,000 liters (1) ABBREVIATIONS BANOBRAS National Development Bank for Public Works CPP - Average Cost of Loanable Funds FI - Financial Intermediaries GIRA - General Interest Rate Agreement IDB Inter-American Development Bank IH Impulsora Hidalguense LRAC Long-run Average Cost M&E - Monitoring and Evaluation NWC - National Water Commission OEF - Overseas Education Fund PAHO - Panamerican Health Organization PIDER - Integrated Rural Development Program PRONASOL = National Program of Solidarity SEDUE = Secretariat of Urban Development and Ecology SPS = State Planning Secretariat SSA = Secretariat of Health SWA - State Water Agency  MEXICO FOR OMCIAL USE ONLY WATER, WOMEN AND DEVELOPMENT PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. PROJECT SUMMARY i-iii II. BACKGROUND .................., 1 A. Socio Economic Sector . . . 1 B. Condition of Women ... 1 C. The Water Sector ... 2 D. Policy Framework ... 4 E. Past Bank Experience ... 5 III. THE PROJECT... ..................................... 5 A. Project Origin ..................... . 5 B. Project Concept . . 6 C. Project Objectives. . . 6 D. Project Description. .. 7 E. Selection of Participating Counmities. . 7 F. Technological Alternatives and Service Standards 8 G. Project Area... 9 H. Implementation Arrangements and Distribution of Responsibilities .. .10 I. Project Cost and Financing ...12 J. Procurement ...14 K. Disbursement ...16 L. Auditing ...17 M. Monitoring and Evaluation ...17 IV. PROJECT JUSTIFICATION, EVALUATION AND RISKS .......... 18 A. Project Justification ........................... 18 B. Economic Evaluation ............................. 18 C. Project Risks ................................... 19 V. AGREEMENTS REACHED AND RECOMMENDATIONS . . 20 A. During Negotiations............................. 20 B. Effectiveness................................... 22 C. Disbursement in Each State...................... 22 This report is based on the findings of an appraisal mission which visited Mexico in Jantuary and March 1989. The mission was composed of Mesdames Lea Donaldson, Task Manager, Mirtha Pokorny, Economist, and Ingrid Buxell and Paquita Bath, Consultants. Mrs. Martha Leal (LA2IE) assisted in the production of this report. 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.  Page No. TABLES Table 2.1 Mexico - Water and Sewerage Services (1980).. 23 Table 3.1 Michoacan - Population and Characteristics in Selected Municipalities .......... 25 Table 3.2 Michoacan - Economically Active Population (EAP) by Sex and Economic Sectors in Selected Municipalities ....... 26 Table 3.3 Queretaro - Living Conditions - 1980 ......... 27 Table 3.4 Queretaro - Economically Active Popu'Zatior. by Sex per Municipality - 1980 ...... 28 To.ble 3.5 Queretaro - Economically Active Population (EAP) by Type of Activity - 1980. 29 Table 3.6 Hidalgo - Comparison with National Standard of Living Indicators - 1980 ...... 30 Table 3.7 Deta'led Cost Table .......................... 31 Table 3.8 Procurement Schedule for Major Contracts ..... 34 Table 3.9 Loan Disbursement Scheme . .. . 35 ANNEXES Annex 1 - Pre-selection Criteria for Participating Communities and Eligibility Criteria for Water and Income Generating Projects ........ 36 Annex 2 - Household Survey of Forty-Two Low-Income Communities in the State of Queretaro ....... 38 Annex 3 - Project Monitoring and Evaluation ........... 40 Annex 4 - Community Project Profile and Economic Evaluation . ... ............. ... 45 Annex 5 - Project Justification - Economic Analysis ... 57 Annex 6 - Institutional Assessment .............. 59 Annex 7 - Contents of Project File ................... . 60 MAP IBRD 21504  MEXICO WATER, WOMEN AND DEVELOPMENT PROJECT I. PROJECT SUMMARY Borrowers National Development Bank for Public Vo:ks (Banco Nacional de Obras y Servicios Publicos, S.N.C. - BANOBRAS). Guarantors United Mexican States. Beneficiaries: State Water Companies and financial intermediaries in the States of Michoacan, Queretaro and Hidalgo. Amount: US$20 million equivalent. Terms: Repayment in 17 years, including 5 years of grace at the standard variable interest rate. On-lending Terms: BANOBRAS would on-lend US$17 million equivalent in Mexican pesos of the loan funds to the State Water Companies (SWA) for water and sanitation services and to the local financial intermediaries (FI) which would provide credit for investments in fixed assets and working capital for productive activities to individuals or associations (i.e. cooperatives) from low-income communities. BANOBRAS' on- lending rate to SWAs and the FI's on-lending rate to their borrowers would be not lower than the levels agreed under GIRA. The FI's would charge u? to 4.5 points for their services. The subloans to the SWAs would have the same grace and repayment periods as the Bank loan; the loans to FIs and the subloans by the FIs would carry grace periods of up to three years and repayment periods of up to 12 years. The Federal Government will bear the interest and foreign exchange risks. Proiect Obiectives and Description: The main objective of the proposed project is to improve the living standard of low-income population groups by: (i) providing water, sanitation and health education; and (ii) developing income-generating activities, primarily for women, and providing them with the necessary training and credit to carry them out. To that end, the project would include three major components related to: (a) water supply and sanitation; (b) income-generating activities; and (c) project preparation in other states. Water and Sanitation Services (71.8Z of total cost) would comprise a line of credit for: (i) installation of water supply and sanitation cervices in about 200 low-income communities in rural and peri-urban areas in the States of Michoacan, Queretaro and Hidalgo; (ii) maintenance of water systems (including the procurement of equipment); and (iii)  - ii - technical assistance to strengthen the SWAs, to train staff in community mobilization techniques, and to implement a health education program. Income-Generating Activities (l8.9S of total cost) would include: (i) a line of credit through BANOBRAS to FIs in the participating states to support the investment and working capital needed by beneficiaries to st&rt productive activities; and (ii) technical assistance to the agency in each state in charge of project promotion at the community level. Proiect Preparation in Other States (9.MZ of total cost) would operate as a project preparation facility. It would finance technical assistance to other states for: (i) identifying water-cum-productive activities projects; and (ii) preparing subprojects that would be eligible for future financing. It would also finance priority works in other states. Proiect Benefits: The proposed project is justified on the basis of the benefits accruing to low-income target groups in the form of: improved water and sanitation services and the expected increase in household income derived from the productive activities supported by the project. In addition. the strengthening of SWAs included under the water and sanitation component of the project, is expected to result in improved selection of water sector investments, adoption of low-cost technologies and improvements in the operational efficiency of the SWAs. Also, the pilot nature of the proje%.- should result in a learning experience that will help to replicate in other communities a scheme based on linking water and income-generating activities, and to mobilize resources for the provision of services to the lowest income groups. The direct benefits of the project are expected to reach about 200,000 people through the water supply component, while the households expected to benefit from the income generating component have been roughly estimated at 5,000. Proiect Riskss By its nature, the income-generating component of the project faces risks related to the identification, implementation and sustainability of viable productive activities. To contain these risks, the project includes a substantial element of technical assistance to develop project evaluation capabilities and the ability of promoters to mobilize the communities and ensure their commitment to the successful implementation of the selected activities. In addition, low subloan limits and prior evaluationlapproval processes have been designed to reduce these risks. An assessment of these risks confirms that the project would remain economically viable even in the case of 502 of the activities failing after two years of their implementation. Financial risks, related to the creditworthiness of low-income beneficiaries and their ability to pay for water services, will be addressed through high frequency collection schemes. Another uncertainty relates to the coordination of the agencies involved in project implementation. This risk has been  addreused by involving and ensuring strong commitment of the agencies' personnel since the early stages of project preparation. Estimated Proiect Costs 1 Local Foreizn Total ----------US$ million- Water and Sanitation 7.8 7.8 15.6 Income-Generating Activities 2.3 1.6 4.0 Monitoring and Evaluation 0.3 0.2 0.5 Project Replication 1.4 0.6 2.0 Base Cost (April 1989 prices) 11.9 10.2 22.1 Physical Contingencies 1.2 1.0 2.2 Price Contingencies 2.4 1.8 4.2 Total Project Cost 15.5 13.0 28.5 Financing Plan: Local Foreign Total Bank 7.0 13.0 20.0 Federal-State Contribution 6.5 - 6.5 Beneficiaries 2.0 _ 2.0 Total 15.5 13.0 28.5 Estimated Disbursementss Bank Fiscal Year 1990 2 1991 1992 1993 1994 1995 ------------------------USS million-------------------- Annual 1.8 2.6 3.8 4.3 4.4 3.1 Cumulative 1.8 4.4 8.2 12.5 16.9 20.0 Rate of Return: Overall economic rate of return for the project has been estimated at about 262. The rates of return for the individual water subprojects in a sample of four representative communities range from 92 to 15Z. Financial returns for possible income-generating activities range from 292 to 712. 11 Net of taxes (estimated at US$3.4 million). 21 Retroactive financing of US$1.5 c.illion to be provided for all project expenditures incurred after January 15, 1989.  MEXICO WATER, WOMEN AND DEVELOPMENT PROJECT II. BACKGROUND A. Socio-Economic Setting 2.01 Even though during the 1960s and 1970s, Mexico made important gains in the areas of social sector development and poverty alleviation, by 1977, still around 362 of Mexican households were earning less than the minimum wage and their share in total income was about 10x; significant progress was achieved between 1977 and 1982, when households earning less than the minimum wage declined to about 21Z of total households. Hence, as a result of economic growth and the welfare programs, absolute poverty was on the decline and social sector services were on the increase. Between 1960 and 1985, life expectancy at birth increased from 58 to 64 years and infant mortality declined from 74 to around 50 deaths per 1000 live births. The illiteracy rate fell from 44? in 1950 to 172 in 1980 due to improvements in primary education which involved a three-fAld increase in the number of schools, a five-fold increase in teachers and a seven-fold increase in school enrollment. 2.02 The economic crisis that started in 1982 slowed down progress in the areas of poverty alleviation and social sector development. During 1983-87, cumulative real output declined by 2Z, real per capita consumption by 142 and real investment by 202 (40Z since 1980). These reductions appear to have been unevenly distributed among the population, as indicated by data on wages and income, employment, consumption of food, subsidies, and social spending. Wage-earners, among which some of the urban poor and the vast majority of middle-income people are included, have lost about 20? of their share in GDP, though this has been partially offset by a shift towards self-employment. Unskilled workers have suffered a larger drop in employment than skilled workers. In rural areas, where income levels are the lowest, there is evidence that substantial deterioration in absolute terms occurred. 2.03 To alleviate the rising cost of adjustment and to help eradicate poverty, the Administration that took office in December 1988 is committed to redesign and expand ongoing social investments in the public sector. Emphasis is placed on new delivery mechanisms to reach the truly needy, on cost effectiveness and improved cost recovery to stretch the scarce resources under the prevailing austerity conditions, and on institutional streamlining where added benefits can be obtained from better organization, technical training and improved skills. B. Condition of Women 2.04 In focussing its strategy on alleviating conditions of extreme poverty and increasing the well-being and productivity of the poorest segments of the population, the Mexican Government is showing a growing awareness of the role of women in development. Several reasons exist for this new emphasis on women. First, there is a greater world awareness of  -2- the equity issues relating to the role of women. Second, there is evidence that women make up a larger number of the poor. 1/ This is caused primarily by a lack of employment opportunities which has been more significant among women, forcing them off the labor market or into activities with very low pay. Also, rapid population growth has prompted increased interest in the relationship between birth rates and such inter- related factors as women's education, contribution to family income, and participation in the decision-making process at hcsme. 2.05 As a result of male emigration to more attractive employment areas in Mexico City or the United States, an increasing number of households within the lowest income groups are headed by women. These women, limited by their education and their household and maternal responsibilities. often lack training, mobility and flexibility to compete with men for new jobs. They tend to be concentrated in low productivity jobs that require relatively little training. Low skills, low productivity, and low wages reinforce each other to keep women at the bottom of the economic scale. 2.06 Many efforts to improve women's status have been hampered by a failure to recognize that they place competing demands on women's time and energy. In particular, these efforts disregard the reality that women must continue to perform domestic tasks. Such is the case of programs designed to generate female employment without considering the limited amount of time and energy women can devote to the labor market after completing their domestic chores, which in many areas of rural Mexico include a substantial amount of time fetching water. A family's daily water supply is determined by the distance, and the carrying capacity of the women and children who are usually in charge of this task. In addition to the health implications of inadequate water supplies, the depletion of women's energy and time derived from carrying out water related household activities reduces their capacity for other responsibilities. Thuas, increased level of services, for instance through yard-taps, would not only improve well being but would also set the stage for improving productivity. C. The Water Sector 2.07 Mexico has set ambitious goals for extending the coverage of water supply and sanitation services to its inhatitants. Considerable progress was made in the sixties and seventies. In 1980, about 702 of the population had access to a piped system and 492 had access to a sewerage system (Table 2.1). This ranks Mexico's water sector as the sixth most developed in Latin America. However, the level of coverage has not increased since 1980, and investment requirements to expand it must compete with other infrastructure and social investment needs, at a time when fiscal resources are scarce and availability of external financing is limited. 2.08 One factor that will influence the future of the sector is population growth. Population is expected to increase from about 80 million today to between 100 and 110 million by the year 2000. The trend towards concentration in urban centers is expected to continue, while the rural population will remain scattered in more than 100,000 communities. 1/ Of the total population of women, 7.6Z belongs to the lowest income group as opposed to 6.9Z for men (Source: INEGI, Encuesta de Hogares, 1983).  - 3 - This spatial distribution pattern in rural areas results in high unit costs of basic water and sanitation services, endangering their affordability to the rural poor. The need thus exists to concentrate on low-cost technologies and staged approaches to the provision of water and sanitation services in order to permit the implementation of affordable cost-recovery schemes. 2.09 Water supply and sanitation investments have seldom been complemented with health education programs to promote better sanitation habits among the population. As a result, in spite of increases in water and sewerage coverage during the last two decades, gastrointestinal diseases continue to be one nf the main causes of morbidity in Mexico. Health education programs would increase the acceptance, utilization and continuous maintenance of new, perhaps unfamiliar, technologies by the community. Collective behavioral changes is required to achieve measurable impact on both individual and community health status. 2.10 On the institutional front, in January 1989 the Government created the National Water Commission (NWC) to address the over-decentralization of responsibilities in the sector. A 1984 constitutional amendment had decentralized responsibility for the provision of water and sanitation services, previously under the Secretariat of Urban Development and Ecology (SEDUE), to the municipal level. It is now generally agreed that, as implemented, this approach was not successful. The present scale of operations is generally uneconomic and precludes the possibility of establishing sound pricing policies. In addition, the municipalities lack planning and operational capabilities, since SEDUE was unable to provide technical assistance to local sector agencies as had at first been expected. 2.11 In summary, the two most pressing issues affecting sector development are: a) Increasing population coverage, especially to low income areas, which requires: (i) increasing sector investments, funded by improved cost-recovery schemes and expanded resource mobilization efforts (internal and external); and (ii) reducing per capita investment costs by ernsuring efficient operation and using low-cost technologies; b) Fostering imDrovements in efficiency, which requires strengthening water companies at the state level. This implies: (i) encouraging small municipalities to delegate the operation and maintenance of their systems to the state water companies (SWAs); (ii) developing planning, design and maintenance capabilities in the SWAs; and (iii) implementing health education program in conjunction with water and sanitation projects. 2.12 The new administration is considering far reaching institutional changes which, if implemented, would go a long way towards addressing the Bank's concerns in the sector. Particularly noteworthy are initiatives to expand the role of the private sector in the provision of water and sewerage services. In this respect, a pilot test is already under way in the city of Aguas Calientes to operate the system by a private firm.  -4- D. Policy Framework 2.13 Government Stratemy. To address the most pressing issues affecting the well being of the poorest members of the society, the Government launched the Programa Nacional de Solidaridad (PRONASOL). PRONASOL, which is under the responsibility of a Committee headed by the President and integrated by Secretaries dealing with poverty alleviation issues, has the objective of ensuring that thoso projects effectively targeted to the poor will have first priority in the allocation of budgetary resources. For 1989, PRONASOLI's budget amounts to Mex$l.6 billion and this amount is expected to be tripled by 1990. In addition to implementing projects and programs. PRONASOL coordinates and provides guidelines to other agencies with poverty alleviation objectives. Priority is given to community participation projects aiming at providing water and sanitation as well as increasing income and improving health conditions. In the water sector, more specifically, Government's efforts in expanding water and sanitation services to the poor will be based on a policy that would reduce reliance on budgetary appropriations by promoting an increase in the se"I-9nancing of the SWAs. Subsidies would be progressively reduced Q. aiminated except for the very poor. 2.14 Rationale for Bank Involvement. The thrust of the Bank's lending strategy for Mexico is to assist the Government in stabilizing and restructuring the economy to obtain sustained growth, and to alleviate the cost posed by the adjustment process on the poorest segments of the population. To implement this strategy, the Bank would participate in two new projects in the water sector during the next two years: (a) the proposed project, and (b) a water and sanitation sector loan, which would address the broader institutional and policy issues. The proposed project, which would enhance women's productivity and well being by freeing them from the chore of fetching water and creating income-generating activities, will allow the Bank to target its benefits to groups that have hitherto not been directly assisted by Bank lending, but which have high priority needs. The project also provides an efficient instrument for strengthening the capabilities of the SWAs involved to adequately operate and maintain the systems. As a pilot scheme the project would provide a model which, if successful, can be replicated in other areas of the country and make an important contribution towards improving the living conditions of the low- income population in Mexico. The Bank is the development institution best equipped to provide the needed multisectoral approach essential for this project and it can draw on the experience from working on four previous water and several rural development loans, as well as several sector studies since 1974. The main lessons learned from these projects point to the importance of self-sufficient water agencies, community support, adequate designs that reflect local needs and willingness to pay, recognizing the value of infrastructure in relieving constraints to productive activities and ensuring the early establishment of an effective monitoring and evaluation system to focus project management on project impact. These lessons have been incorporated in the design of the proposed project.  Past Bank Experience 2.15 The Bank was involved in four water supply projects in Mexicos Loans 909-ME (US$90 million; 1973), 1186-HE (US$40 million; 1975), 1913-ME (US$125 million% 1980), and 2281-ME (US$100.3 million; 1983). While these projects were successful in increasing service levels in medium-sized cities, the establishment of an appropriate institutional set-up was not accomplished. This was mainly due to weaknesses in SEDUE's technical assistance to local institutions as vell as lack of adequate promotional schemes needed to increase population acceptance of effective cost- recovery. The problem of insufficient revenues was compounded by the high investment costs resulting from inadequate norms and procedures. Projects rejected under Bank-financed programs because they were not least-cost solutions, were financed by other sources. The main lessons learned from these projects point to the importance of self-sufficient water agencies, community support and adequate designs that reflect local needs and willingness to pay. 2.16 The most relevant past Bank experience in which project design included, albeit marginally, some focus on technical training and employment opportunities for women, has been through the Integrated Rural Development Project - PIDER III (Loan 2043-ME; US$175.0 million; 1981). PIDER III, the third of a series of projects supporting the Mexican Investment Program for Rural Development, financed irrigation works, soil and water conservation, crop and livestock development and rural road investments. At the time of the appraisal, it was envisaged that 1? of the project expenditures would be on studies, technical assistance and training to support women's participation in productive activities. As it turned out, implementation problems with the major project components coupled with insufficient Government commitment, resulted in the women's component not being undertaken. 2.17 Nevertheless, the PIDER experience provides some valuable lessons which have been taken into consideration in the design of the proposed project. These include: (a) ensuring beneficiary participation by structuring sub-project technical and productive options to be the prerogative and responsibility of the community; (b) recognizing the value of infrastructure in relieving constraints to productive activities; and (c) ensuring the early establishment of an effective monitoring and evaluation system in order to focus project management on project impact as well as to measure regular project progress. III. THE PROJECT A. Proiect Origin 3.01 The idea for the proposed project was developed at the community level as a result of informal grass-root meetings held by women to discuss their water supply problems. This led to the request for assistance from the State Government which in turn sought the support of the National Government. The Government, in turn, recognizing the priority needs of these commmnities, requested Bank assistance to prepare a pilot project to raise the standard of living of low-income communities, focusing particularly on bettering the condition of women, through the provision of  water and sewerage services. Following a first Bank mission to Mexico in April, 1988, the Pan American Health Organization (PAHO) assisted the Mexican Government in project preparation. The project was appraised in January and March. 1989. Negotiations took take place in Washington from May 15 through May 18, 1989. The Mexican delegation was led by Mr. German Sandoval Faz, Deputy Director, BANOBRAS. B. Proiect Concept 3.02 The Water, Women and Development Project will be the Bank's first operation that will combine funding for water supply and sanitation facilities, and support for productive activities with special focus on women. The link between the water and income-generating components is a crucial element of the project, as it increases the possibility of success, especially since the main beneficiaries are low-income women. A project focusing only on income-generating activities would have limited impact because the time and energy required by women to fetch water constrains them from taking advantage of credit and training opportunities. Likewise, a project focusing only on community water and sanitation needs might not be affordable to many households because the beneficiaries would be unable to pay for the services on a sustainable basis without a schem't for increasing their income through productive activities. 3.03 Integrated in the conceptual design of the proposed project is the recognition of the importance of community participation in defining and addressing their needs, as well as the adherence to the principle that the community itself is the primary decision maker, the primary organizer, and the primary investor in the project. This approach, by encouraging self- help and promting increased community responsibilities, supports the Government strategy to change the generalized perception that improvements in living standards will only be achieved through increased public sector involvement. 3.04 In this context, the project envisages an important contribution towards the implementation of cost-recovery policies. Until recently, the Government's strategy had been to consider investments in the water sector targeted to low-income groups as direct transfers. In the current policy framework of subsidy reductions, it was agreed during negotiations that 100Z of the operating cof_B and 70Z of the investments costs would be recovered through water rates (para. 3.23). C. Proiect Obiectives 3.05 The main objective of the proposed project is to improve the living standard of low-income population groups, especially women, by: (i) providing water and sanitation and improving the target population's health and sanitation knowledge and habits; (ii) promoting income-generating activities, primarily for women who will be freed from the chore of fetching water by improved water supply services and providing them with the necessary training and credit to carry out such activities; and (iii) assisting the state Governments of Michoacan, Queretaro and Hidalgo to strengthen the SWAs abilities to design, build, operate and maintain water systems in low-income areas.  -7- D. Proiect Description 3.06 Tbe proposed project would include three major components related tot (a) water supply and sanitation (71.8? of total cost); (b) income generating activities (18.92 of total cost); and (c) project replication to other states (9.3? of total cost). a) Water and Sanitation Services would comprise: (i) a line of credit of US$12.0 million through BANOBRAS to the SWAs to finance the installation of water supply and sanitation services in a total of about 200 low-income communities in rural and peri-urban areas; (ii) maintenance of water systems (including procurement of maintenance equipment); (iii) technical assistance to strengthen the SWAs in the areas of organizational and operating perfonmance, information systems, and design and construction using low-cost technologies and to train staff in community mobilization techniques; and (iv) developing a health education program to improve health and sanitation knowledge and habits (para. 3.17). Suggested Terms of reference for these programs are available in Project File; b) Income Generating Activities would include: (i) a line of credit of US$5.0 million through BANOBRAS to financial intermediaries to support the investment and working zapital needed by beneficiaries to start productive activities. These activities most likely will involve micro-enterprises under some form of cooperative ownership; financing of tools and raw materials to carry out piecemeal work for in-bond industries will also be included (Annex 2 shows four examples of these activities and financial analyses of other five activities are available in Project File); and (ii) technical assistance to the agency in charge of the promotion at the community level for project implementation. This technical assistance would consist of: (a) training of trainers within the promotion agencies in participatory education techniques targeted mainly to women and project evaluation; (b) developing the beneficiaries' entrepreneurial skills and their ability to make decisions, thereby gainirg the confidence and experience needed to adjust to different economic environments; and (c) training the participants in the skills to carry out the new activities. Suggested terms of reference for this program are available in Project File; and c) Project Preparation in Other States would operate as a project preparation facility and would include technical assistance to other states for: (i) identifying water-cum-productive activities projects; (ii) preparing subprojects in other states that would be eligible for future financing. It would also finance priority works in other states. E. Selection of Participating Communities 3.07 There would be two steps in the selection of communities to participate in the project. The first would consist of a review of secondary data sources to screen potential communities according to: (i) estimated cost of bringing the water, based on characteristics of the wat-r  source, (ii) degree of community marginality; and (iii) known participatory experiences of the community. The second step would involve the application of selection criteria based on: (i) the estimated cost of the respective water supply and sanitation subprojects (a maximum per-capita investment cost of US$150 for both the water and sanitation systems has been agreed); (ii) community commitment to the project; and (iii) the potential for implementing income-generating activities. A methodology for the selection of communities has been developed (Annex 1) and has been tested by the Bank in the selection of 14 communities to be benefitted during the first year of project implementation (Arcila, Tenaxda, Colonia Reforma Agraria and El Rodeo in Queretaro State; El Alberto, Santa Cruz - Las Alcantarillas, and Jiliapa in Hidalgo State; and Huetzanguio, San Juan Tumbio - Santa Isabel Nocut - Zepo and La Rueda in Michoacan State). The selection of the communities to be benefitted in subsequent years would be carried out by the Secretary of Planning in each state following the methodology outlined in Annex 1, in close collaboration with the respective SWA and promotion agency, which would be responsible for the necessary technical and socio-economic inputs. The selected communities will be included in the annual State Water Plan to be presented to the Bank for review by September 30 of each year (para. 5.01(b) vii(d)). F. Technological Alternatives and Service Standards 3.08 Under the proposed project, the water supply and sanitation service standards and technologies will be tailored to the population's low incomes. To select the level of service, the community itself will be the primary decision-maker, with the support of SWA's staff 21 who will conduct community workshops, with the assistance of the promotion agency, to analyze the advantages and disadvantages (i.e. cost, convenience and quality) of different technological options. The SWA would ensure that the selected technology is the least cost solution given the level of service chosen. In communities with very low ability to pay and little exposure to urban standards, a progressive approach is required. During project preparation, communities have shown interest in having water connections through a single yard-tap for every household. The level of services in these cases could involve open branches and above-ground pipes with lower pressures than in conventional designs. The solutions being explored for the sanitation systems are also non-conventional and are based on community septic tanks or latrines. These technological alternatives would allow progressive upgrading towards eventual in-house plumbing and conventional and sewerage networks, as the community becomes able to afford them. The technologies selected with the involvement of the communities to be benefitted in the first year of project execution include open branches, 30cm underground pipes and community septic tanks. Detailed description of these technologies is available in project files. To reinforce the expected health benefits from the project, the SWA's will also assist in constructing chimneys for house ventilation. 2/ Staff from SWA-Queretaro were trained by PAHO/North Carolina University on these technologies during project preparation, and are supporting SWAs in Hidalgo and Michoacan in the implementation of the technologies.  -9- G. ProAect Area 3.09 The project is to be implemented in three statest Michoacan, Queretaro and Bidalgo (Map IBRD 21504). These states were selected by the Federal Government on the basis of their timely interest in the project and the relatively poor status of their population. The Government is considering three other states for future Bank assistance to implement similar projects in their communities and a follow-up operation in the near future seems likely. 3.10 Michoacan has a population of about 2,900,000, of which 102 live in the capital cif,. The state is divided into 113 municipalities. Between 1970 and