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

MICROFICHE COPY Report No. :P- 5814 ME Type: (PM) Title: TRANSPORT AIR QUALITY MANAGEMEI Author: MUMME, C.H. Ext.:38077 Room:I8 100 Dept. :LA2IA tI. Ii~~~~~~~~~~~~~~~~~~~~~~~Z z~~ t1~~~~~ 0 Ii[ I CZ~~~~~~~~X PZ  Currency Unit = Mexican Peso (Mex$) US$1.00 = Mex$3,114 (October 13, 1992) January 1 to Deember 31 UNS OF WEIGHTS AND MEASURES Mietri BritishllJS EwdQi 1 kilometer (km) = 0.62 mile (mi) 1 meter (m) = 3.28feet (ft) 1 gram (g) = 0.0022 pound (1b) 1 kilogram () = 2.20 pounds (1b) I ton o 2,205 pounds 1 cubic meter (M') = 6.29 barrel (bbl) 1 cubic meter (M`) = 35.32 cubic feet (fe or SC) 1 cubic meter (N) = 264 U.S. gallons (gal.) ACRONYLS BANOBRAS National Bank of Public Works and Services tanco Nacional de Obras y Servicios P4blicos) CETIE Treasury Bill CMPCCA Commission for the Prevention and Control of Environmental Pollution in the Metropolitan Area of the Valley of Mexico (Comisidn para la Prevencidn y Control de la Contaminacifn Ambiental en la Zona Metropolitana del Valle de Mexico) CNG Compressed natural gas Co Carbon monoxide COTAM Metropolitan Transport Council (Consejo de Transporte del Area Metropolitana) CPP Index of Average Cost of Funds DDF Federal District Department (Depatamento del Distrito Federal) DF Federal District (Distrito Federal) DGE General Directorate of Ecology (Direcci6n General de Ecologta) DGPA General Directorate for Environmental Projects (Direccidn General para Projectos del Medio Ambiente) ETF Environmental Trust Fund GIRA General Ineest Rate Agreement IMP Mexican Petroleum Instute (Institu Mexicano del Petrtleo) INE National Institute of Ecology (lstituto Nacional de Ecologfa) LPG Liquified petroleum gas MCMA Mexico City Metropolitan Area NAFIN National Finance Institution (Naciona; Financiera, SNC) NOx Nitrogen oxides PFls Participating Financial Intermediaries PEMEX Mexican Petroleum Company (Petr6leos Mexicanos) PFPA Office of the Federal General Counsel for Environmental Protection (Procuradurfa Federal de Proteccion al Ambiente) SEDESOL Ministry of Social Development (Secreaa de Desarrollo Social) SEDUE Ministry of Urban Development and Ecolo-y (Secretarka de Desarrollo Urbano y Ecologfa) SoM State of Mexico Estado de Mxico) SoM/SE Secretariat of Ecology-of the State of Mexico (Secretarfa de Ecologfa del Estado de Mexico) VOC Volatile organic compounds  FOR OMCLAL USE ONLY MEXICO TRANSPORT A1R OUALITY MANAGEME.NT PROJECT FOMR TE MEXICO CITY MEI OPOILHAN AREA LOAN AND PRO.ECT A Itowerr : Nacional Financiera, S.N.C. (NAFIN) Gtuarmnto: United Mexican States EeMtinU Commission for the Prevention and Control of Enviromental Pollution Agendes ad in the Metropolitan Area of the Valley of Mexico (CMPCCA), Environ- Beneficiaries: mental Trust Fund, Ministry of Health, Ministry of Social Development (SEDESOL), National Bank of Public Works and Services (BANOBRAS), National Finance Institution (NAFIN), Participaing Financial Intermediaries (PFIs), Federal District Department (DDF), Secretariat of Ecology of the State of Mexico (SoM/SE), Mexican Petroleum Corpany (PEMEX), Mexican Petroleum Institute (IMP), Metropolitan Transport Council (COTAM) and private owners of high-use vehicles, inspection and maintenance (IIM) stations and gas stations. Amount: US$220 million equivalent. Term: Repayment in 15 years, including 5 years of grace, with interest at the Bank's standard variable rate. .relening Tenm: The Guarantor would onlend US$172.9 million equivalent at the 28-day CETES (Treasury Bill) rate as follows: US$89.1 million equivalent to NAFIN, and US$80.3 million equivalent to BANOBRAS. The Guarantor would onlend US$3.5 million equivalent to IMP on the same terms and conditions as the Bank Loan. BANOBRAS would relend these funds to Participating Financial Intermediaries (PFIs) ensuring that the cost to sub- borrowers would be no more than CETES plus seven and one-half points for the purchase of taxis and no more than CETES plus six and one-haf points for other vehicle sub-components and no less than the GIRA (General Interest Rate Agreement) rate. NAFIN would relend the funds to PFIs ensuring that the cost to sub-borrowers would be no more than CPP (the average cost of funds to commercial banks) plus six percentage points for the purchase of trucks, emission testing and diagnostic equipment and other vehicle sub-components and no less than the GIRA rate. The * Guarantor would make available: (i) US$11.5 million equivalent through budgetary allocations to SEDESOL for emission standard related work and air quality monitoring and forecasting equipment; and (ii) on a grant basis US$0.4 million equivalent to NAFIN as executing agency to carry out the annual environmental audits and US$35.2 million equivalent through the Environmental Trust Fund to the DDF to carry out the remaning sub- components. This document has a restricted distribution and may be used by recipients only in the perforn.ance of their offiial duties. Its contents rnay not otherwise be disclosed without World Bank author tation.  InZ ingaPal: LOCAL EQfiJA 2TOT SIo Mmom ot B.S. oa Government 44.6 - 44.6 Private Sector 335.3 387.2 722.5 IBRD - 220.0 220.0 Subloan Reflows - AM TOTAL 479.5 607.2 1,086.7 Rate of Return: Not applicable. Staff Appraissl Reporl: Report No. 10673-ME, dated November 20, 1992 Mw: IBRD 24056  MEMORANDUM AND RECOMMENDATION OF THE PRESlDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.N.C. (NAFIN) WITH THE GUARANTEE OF THE UNITED MEXICAN STATES "IU A TRANSPORT AIR QUALITY MANAGEMENT a XCT FOR THE MEXICO CITY METROPOLITAN AL.A 1. I submit for your approval the following memorandw!m and recendaton on a proposed loan to Nacional Financiera S.N.C. (NAFIN) with the guarantee or the United Mexican States for an equivalent of US$220 million to help finance the Govermnent of Mexico's Integrated Progran Against Air Pollution for the Mexico City Metropolitan Area (MCMA). 2. Backgcound. The MCMA comprises the Federal I)strict Departent (DDF) and 17 municipalities in the neighboring State of Mexico (SoM). The MCMA population has grown from less than 1 million at * the beginning of the century to 15 million in 1990, and is projected to reach 20 million by 2010. Thirty thousand industril establishments and about three million vehicles are based in the area. This concentration of population and economic activity, together with the unfavorable topographic and weather conditions, are the main causes of one of the most severe air pollution problems in the Western Hemisphere. Health-based national and internatonal norms for ozone and particuate matter concentrations are exceeded virtually every day, poWng particularly significant health threats. The highest ozone concentrations on record ws rldwide were measured in the MICMA in March 1992. Carbon monoxide and lead are also of concern. By far the largest source of air pollution is the transport sector. Causes of high emissions include: the scale of transport activities; rapid growth in the vehicle fleet; lack of strngent vehicle emission stndards and of reliable inspection procedures; a high proportion of old and poorly maintaned vehicles; and traffic congestion, which results in stop-and-go travel conditions. Limited access to credit is an important reason for the age of the high-use vehicle fleet. 3. Attainment of air quality improvements in the MCMA has been hampered by an inadequate policy framework, by poor coordinadon of the various agencies (federal, state and municipal) involved in policy implementaton, by the weaknmess of the former Ministry of Urban Development and Ecology (SEDUE) which bad been charged with setting vehicle emission standards, and of the enviromeal agencies of the Federal District (DF) and SoM in charge of enforcing them. In the past few years air quality has deteriorated to the point that it has become not only an important health but also an important political issue; as a result air quality programs have been expanded rapidly and given much greater emphasis. An Emergency Air Polludon Control Program was put into effect in 1989; and in September 1990, the Government announced the Integrated Program Against Air Pollution, which is one of the most comprehensive and ambitious ever attempted anywhere. 4. The complexity and magnitude of the sector issues faced has led the Bank to conduct very comprehensive sector work, which provides a solid underpinning to the proposed project. Internal and external advisory panels guided the sector and project preparatory work. Two importnt policy issues addressed under the proposed project are the availability of unleaded gasoline and the extent of misfueling and reverse misfueling and institutional arrangements. Until November 1991, retail prices of leaded (Nova) and unleaded gasoline (Magna Sin) were set at 710 and 1,000 Mexican pesos per liter equivalent to US$0.87 and US$1.22 per gallon respectively. The large price differental encouraged misfueling of catalyst equipped vehicles with leaded gasoline - a practice which destroys the effefciveness of the catalyst. Recentdy, the Government has tak important actions to addr these issues: (a) in November 1991, the Government raised the prices of leaded and unleaded gasolines by 55% and 25%, respeivey, brin&g them to 1,100 and 1,250 Mexican pesos per liter (equivalent to US$1.34 and US$1.52 per gallon). InApril 1992 the price of unleaded gasoline was adjusted downward slightly to 1,220 Mexican pesos per liter, equivalent to US$1.49 per gallon. The price differential has thus been reduced from 290 (40%) to 120 Mexican pesos (11%). Results from a recent survey carried out in the MCMA by independent consultans show detectable levels of lead in the tailpipes of 12% of the catalyst-equipped private vehicles sampled, and  2 13% of the public transport vehicles. In the same survey, 28% of the owners of non-catalyst vehicles reported reverse misfueling, use of Magna Sin in vehicles that do not require unleaded gasoline. Shortages of Magna Sin have been a problem, 37% of private car drivers and of public transport operators stated that they had problems finding Mapa Sin; and (b) in January 1992, the President issued a Decree creating a new, permanent Commission for the Prevention and Control of Environmental Pollution in the MCMA (CMPCCA). The Decree contains seeral features sought by the Bank; in pardcular, CMPCCA is a permanent insitution with clearly defined objectives and functions and it has a permanent Technical Secretary and an Advisory Council, where leading scientists and non-governmental organizations (NGOs) are represented. In line with fte terms of the Decree, the DDF has created a new Department, the Generl Directorate for Environmental Projects (DGPA), which constitutes the Technical Support Team for the CMPCCA and its Technical Secretary. The Government has also created an Environmenta Trust Fund (ETF), as the financial arm of CMPCCA with the National Bank of Public Works and Services (BANOBRAS) as Trustee and with a Techtncal Committee, chaired by the Ministry of Finance and Public Credit, on which the key members of the CMPCCA and its Technical Secretary are represented. The ETE is to finance the projects recommended by the CMPCCA. At the end of May 1992, the Mexican Congress approved a law which merged SEDUE into a newly-created Ministy of Social Development (SEDESOL). ITe actviies of SEDUE's former Sub-Secetaiat for th Environmnt th are essential for the proposed project, i.e. the settng and enforcing of vehicle emission standards and the extension of the air quaity monitoring sysem in the MCMA, are now the responsibility of the National Instiute of Ecology (IN>, a dependency of SEDESOL, which is technically and admistratively auuwaomous. 5. ecti^ . The objectives of the proposed project would be to: (a) reduce the growth of emissiom of nitrogen oxides (NOx), volatile organic compounds (VOC), carbon monoxide (CO), lead, and of pardculate matter from transport sources; (b) develop a policy framework to support both transport and air quality objectives; (c) improve the scientific base underlying the air quality program development and management; and (d) strengthen insttutional capabilities to effctively plan and implement air-quality progams over the long-term. 6. Pit lpt . The proposed project would comprise five inter-related componnts: (a) Vehile Copnent (USSI -030.6 mllion in total project cost) including: (i) support to develop, promulgate and enforce emission standards for new vehicles, (ii) progreive improvements to in-use emission standar, and npecion and mainte programs for high-use vehicles and private cars, (iis) lines of credit to finance the replacement of old, high-use vehicles (taxis, trucks and minibuses) with new, emissio- controlled vehicles, conversions of high-use vehicles to liquified petroleum gas (LPG) or compressed natura gas (CNG), re-engining and retrofit of emissions controls, and (iv) impovements to the vehicle registration system; (b) Fuel Component IU$$34.4 million) to help fund: (i) the installation of vapor tecovery systems at service stations, and (ii) an alternative fuel pilot program to speed the convesion of high-use vehicles to LPG or CNG; (c) Transport Policy and Maagement Component (US$2.7 mEillion to help prepare an integrated Transport and Air Quality Management Strategy for the MCMA to meet both tansport and air quality objecives. The Strategy would set the context for policies related to travel demand manement, uban freight management, public transport and transport investment (d) Scint BaSe Cmponent ( 1S$13.4 million' to help fund consultant services to strengthen air-qualit planning in the MCMA through an integrated research plan and equipment for extending the air-quality monitoring system, short-term pollution feasting and the IMP mobile-source emiso laboratory; and (e) Inslitudonal Strengheng Component (US$5.5 million) to support (i) insdtudonal strengthening of the CMPCCA Technical Support Team, and of other agencies, particuarly those in the SoM related to air pollution, and (ii) independent annual enviromnental audits. Ihe total project cost is estimated at US$1,086.7 million equivalent, including taxes and duties (estimated at US$145.0 million) with a foreign exchae compont of US$607.2 million (56 percent). A breakdown of costs and the financing plan are shown in Schedule A. Retroactive financing of up to US$7 million would be granted for eligible project expenditures incred after May 1, 1992.  3 7. Proed Ftnncn . The Bank loan of US$220 million would finance about 20% of total projct cost. Investments supported by the credit lines represent some 92% of total project cost. About two-thirds of these investments will be financed by the private sector. An important part of the high-use vehicle fleet modernizadon program would be expected to be financed by individual vehicle or fleet owners, commercial banks and fnancial leasing. In order to accelerate the program, 77% of the proposed Banc loan proceeds would be used to support lines of credit through BANOBRAS and NAFIN to finance, through participatig financial intermediaries (PFIs), new taxis, minibuses, third party trucks ant own-account trucks, conversion to LPG or CNG, and re-engining and retrofitltng. Erission testing and diagnostic equipment for private garages would also be financed through the credit lines. In order to maintain maximum flexibility in the use of funds, there would be no speciflc allocation within the credit lines to sub-components. 8. The credit lines to be financed by the Bank are aimed pdmarily at individual vehicle owners or small enterprises having limited access to credit. The forced high-use vehicle replacement program, which will generate large positive environmental benefits, is unlikely to be implemented on a timely basis and on the massive scale intended, unless the credit is provided to these beneficiaries on terms which encourage them to replace their old vehicles with new vehicles rather than with newer but used vehicles. This would have a positive impact on pollution reduction and justifies below market final lending rates ranging at present from 27% to 29%, compared with a market rate of about 33%. All these rates are highly positive in real terms. 9. NAFIN, as financial agent of the Government, would transfer the proceeds of the proposed loan to the Government, which would in turn, be responsible for onending the proceeds of the proposed loan tD BANOBRAS and NAFIN (as executing agencies for the lines of credit) and to the Mexican Petroleum Institute (IMP), making fimds available through budgetary allocations to SEDESOLAINE, and for transferring funds to the ETF. The ETF would enter into a contract, satsfctory to the Bank, with the Government and SoM, whereby the Government (through the DDF) comnits to carry out its project execution obligations m exchange for reimbursement from the ETF of its relevant project execution expenditwu. The ETP would be empowered to cease disbursements to an executing agenqy that defauts on the terms of its contract. Amounts and methods of procurement and of disbursement of the proposed Bank loan, and the disbursement schedule for the Bank loan are shown in Schedue B. A dmetable of key project processing events and the status of Bank Group operations in Mexico are given in Scheduls C and D, respecdively. A Map (IBRD 24056) is attached. The Staff Appraisal Report No. 10673-ME, dated November 20, 1992, is being distributed separately. 10. Prjec Implementatio. Under the leadership of CMPCCA's Technical Secretary, the Technical Support Team for the CMPCCA, including a project coordinator, would be responsible for program and project coordination and overall supervsion, including the preparation of periodic reports to the Bank. BANOBRAS and NAFIN would be executng agencies for the credit lines for the high-use vehicle fleet modernization program and emission testing and diagnostic equipment for private garages. SEDESOL through INE would be the execudng agency for vehicle emission standards; the DDF General Directorate of Ecology (DGE) would execute the insecion and maintenance (1M) system, and woud be responsible, in coordination with the Mexican Petroleum Company (PEMEX) and the SoM, for the gasoline vapor recovery systems to be instlled at service station tanks and retail gasoline pumps; PEMEX would be responsible, in coordination with DGE and SoM, for vapor recovery systems insalled at petroleum terninals and tank trucks; the DDP General Directorate for Environmental Projects (DGPA) would be the executing agency for the alternative fuel pilot program and the transport policy and management component (through the Metropolitan Transport Councl (COTAM)), which has no juridical personality, and with the paticipadon of SoM); the DGPA, in coordination with INE and the Ministry of Health, would be responsible for work on the scientific base; and the Mexican Petroleum Instute (IMP) woud be responsible for its own laboratory. The DGPA would be the execuing agency for the institutional sengthening component. NAFIN would contract a group of independent experts to car out the auml enviromnental audits.  4 11. Lessons from evious BAnk Inxlvement. The main lessons from three relevant projects (two in Mexico and one in Brazil), and one ongoing proJect in Mexico, are: (i) that the preconditin for a successful vehicular pollution abatement program is the existence of a proper legal basis and adequate institutions to plan, coordinate and implement the program; such institutions must be able to rely upon the services of well trained professionals and have assured sources of financing; and (ii) that there is the need for flexibility on the part of the Bank in financing projects in this relatively new field, which Is subject to frequent technological changes and to improvements in the underlying scientific base. 12. Proiect Sustainability. During recent months the Mexican authorides have taken a number of important steps towards ensuring the sustainability of the air pollution control effort. Tey have relied increasingly on market incentives to control air pollution, as evidenced by the increase in the price of gasoline. As noted in para. 4, the ad hoc institutions which hand:ad preparation of the and-pollution program, have been transformed by Presidendal Decree into a permanent Metropolitan Commission, the CMPCCA with the ETF as its financial arm. A representative of the Ministry of Finance and Public Credit is a permanent member of the CMPCCA and will assume the presidency of the Technical Comiittee, which will allocate the ETF's resources. This should help ensure the allocation of adequate resources for the over-all program and the proposed project. The Decree to create the ETF leaves open the option that resources raised by applying the "polluter pays" principle, (such as the tax on old, heavily polluting vehicles, recently imposed by the DDF, increased I/M fees and/or possible fuel surcharges in the MCMA) could be channelled directly to the ETF. At the same time, as noted, the environmental agencies of the DF have been reorganized and the staff and budget of the new DGPA, which serves as the Technicai Support Team for the CMPCCA, substantially increased. Under the terms of a new State law, the powers and responsibilidties of the SoM Ecological Commission have been greatly increased and it has been transformed into a Secretariat with a much enlarged staff and increased budget resources. 13. Ratonl for Bank Involvement. As the Govermnent's economic stabilizaton program successfiuly consolidates and prospects for sustained economic growth have increased, the Bank's lending strategy towards Mexico attaches priority to poverty alleviation programs, rebuiding and expanding the country's infrastructure to permit private sector led growth and addressing environmenta problems. The proposed project fits into the latter category. The Bank is already contributing to the Emergency Program through reallocation of resources from Loan 2824-ME (Memorandum of the President, December 22, 1989), and has participated in the development of the Integrated Program from its beginning. Moreover, the Bank has signed a "broadened" cofinancing agreement with the Export-Import Bank of Japan, under which it is providing technical assistance concerning the environmental aspects of PEMEX's projects to produce unleaded gasoline, (which are being financed by the Export-Import Bank of Japan), and will continue to assess the conistency of the overall Program. The urgent need for action to improve air quality in the MCMA, the evident commitment of the Government to addresig the issue, and its demonstrated willingness and ability to take bold actions when necessary to improve air quality jusify Bank support for the air quality program, despite significant risks (para. 4). The Bank is well placed to assist the Government to take such a systematic planning approach which, by its scale and complexity, the air quality problem in the MCMA requires. It can help develop a sustainable institutional arrangement for air quality planning and coordinadon with a metropolitan focus as wett as the policy framework required for program development and implementation. It can also lend assistance to help strengthen existing institutions charged with implemendng air quality programs. 14. Actions Agrd. During neotdations, agreement was reached or confirmed on the following main issues: (a) that the Government would: (i) provide unleaded gasoline sufficient to meet demand in the MCMA throughout project implementation; (ii) ensure that the rates of misfueling of catalyst-equipped private and public transport vehicles in the MCMA do not increase from the present level; (iii) make its best efforts to reduce such misfiueling rates; (iv) make its best efforts to resolve any problems of reverse misfueling; (v) cause the CMPCCA to carry out, through independent consultants and under terms of reference satisfactory to the Bank, an annual survey of the availability of unleaded gasoline and the extent of misfueling and reverse misfteling in the MCMA; and (vi) make the results of the surveys avai "ble to  5 the Bank for the annual reviews; (b) if the Gasoline Project of PEMEX, financed by the Export-Import Bank of Japan is not implemented, the Bank may suspend disbursements under its loan; (c) that: (i) by January 1, 1993, aicenes to operate taxis in the MCMA would not be provided or renewed for taxis that are more than six years old; (ii) new taxis financed under the program would meet Mexican emissi.on standards for model-year 1993 and onwards; and (iii) the Bank would need to be satisfied as to the following items for minibuses and trucks: (1) policies for vehicle replacement, conversion to LPG or CNG, re-engining, and retrofitting; and (2) measures to avoid the continued use of *replaced vehicles" as high-use vehicles in the MCMA beyond the age limits set in the Government's high-use vehicle replacement program; (d) that the CMPCCA Technical Supp>.t Team would form a Working Group between PEMEX, the DDF and SoM, no later than December 1, 1992 to coordinate the gasoline vapor recovery program; (e) the Government would provide adequate counterpart funding for the project; (t) that: (i) the DDF would provide through the implementation period of the project budgetary allocations sufficient to cover, at least, the cost of 25 professionals of the Technical Support Team and its operational cost; and (ii) the CMPCCA would develop a training program for the staff of the Technical Support Team, and of executing agencies; (g): (i) BANOBRAS' and NAFIN's operating rules for the credit lines; (ii) eligibility criteria for PFIs; (iii) general terms of relending contracts between NAFIN, BANOBRAS and PFls; (iv) infbrmation to be provided to the Bank fo; authorizing sub-loans; (v) lending rates and terms to PFIs and final beneficiaries; (vi) that BANOBRAS and NAFIN carry out their promotional campaigns; and (vli) that sub-loan reflows would be used during the grace period of the Bank loan to finance additional vehicles (including buses) conversions, re-engining and retrofitfting; (h) procurement arrangements (Schedule B, page 1); (i) retroactive financing of up to US$7 million equivalent for project expenditures incurred in accordance with Bank procurement guidelines afer May 1, 1992; (j): (i) timetable for the initiation, completion and discussion with the Bank of technical assistance and studies, and (ii) implementaton and impact indicators; (k) that anal reviews would be held each year in September and conclude with an agreed action plan; and (1) a mid-term review would be held with the participation of the external advisory panel in September 1994, and agree on changes in project implementadon and schedule, if required. A onition for loan efecd w ould be presentation to the Bank of satsfactory signed and legally binding contractual arrangements between NAFIN, the Guarantor, the ETF, and executing agencies. 15. Environmental Imgat. The proposed operation has an environmental ruting of "C" and is expected to result in major environmental benefits through reduced air pollution (see para. 16); no potential adverse environmental impact has been identified. 16. Proec enefit. Air pollution in Mexico City is a major and increasing threat to public health. Benefits due to its abatement include: decreased incidence of illness and premature death due to respiratory and cardiovascular illness, and improvements in the overall well-being and quality of life of the population. Data on blood lead concentrations in children, and the effects of these concentrations on intellectual development and learning indicate that, viewed as an investment in human capital, the project woud have very high reurns. Increased worker productivity and school performance due to a lessened incidence of respiratory disease and respiratory discomfort are also likely, and the need to shut down industrial activity and extend the school holidays would be reduced. Non-health related benefits are expected to include increased crop yields, reduced damage to building materials and increased tourism. Although it is not possible to make precise estimates of likely air pollution reductions as a result of the proposed project and the additiona' Government me es, some tentative esdmates have been made for 1995, by which time most of the project sub-componnts are planned to be implemented. If no actions were taken, by 1995 motor-vehicle related emissions are estimated to increase by 0.52 miliion toxicity-weighted tons, over the 1989 level, to 1.84 .nillion tos per year. The project would reduce emissions growth by 0.44 million tons, resulting in motor-vehicle related emissions of 1.40 million tons for 1995, offsetting to a large extent the esimated emissions growth. Additional Government measures having quantifiable emissions impacts are esdmated to result in a firther reduction of 0.75 million toxicity-weighted tons, resuting in a measurable net improvement in environmental conditions by 1995, despite population and economic growth. However, considering the technical, operational and institutional risks involved in the program, the estinated emissions reducdons may well -oresent a 'high case' estiation and the emissions reductions achieved  6 may be actually lower. On the other hand, significant uuluantifiable benefits from other project and Government measures have been omitted from the esdmates. 17. rlect Rkiks. The project poses technical, operadonal, and institutional risks. Transport air pollution is a relatively new area for the Bank, and involves many difficult technical issues. There is thus some possibility that the program may not fully achieve its objectives, or that priorities may be found, In retrospect, to have been misplaced. To minimize this risk, the Bank has zonducted extensive sector work. The Bank has also established both internal and external advisory panels, and has retained expert consultants to provide advice and guidance. The technical basis underlying the proposed project has been endorsed by the external advisory panel and by participants In an international air quality management seminar held recently in Mexico City, which included senior representatives from both the German and U.S. environmental protection agencies, and Mexican and international experts. The decision to rely on measures which have already been proven in industiaized countries would also help to minimize the riak of making a serious error, as would the heavy emphasis on studies to develop the underlying scientific base and evaluation methodology for air quality program planning. Institutional issues will be addressed through well focussed technical assistance and intensive Bank supervision. 18. RMLu=dafiW. I am satisfied that the proposed loan would comply with the Ardcles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Lewis T. Preston President Attachments By Ernest Stern Washington, D.C. November 20, 1992  cbSem 7 Page 1 of 1 MEXICO TI>NSPOIIT AIR QBUTlR MANAGEMENT PROJECT FORTH MUECOCI CTY bMEROPlIJTAN AREA Estimated Prolect Cost anq F n Plan (In Milin of U.S. Dollars) PROJECTCOMrlPONENTS LOCAL FOREIGN TOTAL L Vehile Component _2L4 (a) Emission standards 2.0 4.6 6.6 (b) UM system (emission testing and diagnostic equipment) 10.8 19.6 30.4 (c) High-uso vehicle fleet modernization 395.1 498.4 893.5 (d) Vehicle registration system 0.5 0.2 0.7 11. Fue Componrut 15.0 14:7 22W2 (a) Gasoline vapor recovery system (Stage 0 & I PEMEX) 4.9 6.3 11.1 (b) Gasoline vapor recovery system (Stage I & II DDF & SoM) 9.6 8.2 17.7 (c) Alternativ - fbe lpilot program 0.6 0.3 0.9 | IDL Tramport Policy and Management Compont 1.3 1.3 2.5 IV. Scentic Base Compont 4.7 7.0 11.6 (a) Technical assistance for CMPCCA 2.5 1.8 4.2 (b) Equipment for SEDESOIJINE 0.8 3.0 3.8 (c) IMP mobile-source emissions laboratory 1.4 2.3 3.7 V. Intitia Strengtheing Component 4U0 5.1 (a) CMPCCA technical support team 3.9 0.8 4.7 QD) Annual environmental audit 0.0 0.4 0.4 Total Base Cost 433.4546.8 2 Physical Contingencies L/ 1.5 4.2 5.7 Price Contingencies 44.6 56.2 100.8 Total Project Costs 479.5 602 1.086.7 Of which: (a) taxes, duties 145.0 and (b) land 3.3 Government 44.6 44.6 Private Sector 335.3 387.2 722.5 IBRD - 220.0 220.0 Subloan Reflows 99.6 - 99.6 TOTAL 479.5 16086.7 I/ The high-use vehicle fleet modernization sub-component, by its nature, does not require physical contingencies. Note: Retroactive financing: Project expenditures of no more than US$7 million incurred after May 1, 1992 would be eligible.  Scdedule B 8 Pap 1 of 2 MEaCO TI>NSI AM OUALff-Y rANAGENMEIf .]nlIE FOR THE MliXlgCo Clllf .MEIROOITAN AREA (In Millioa of U.S. D oa se) Procurement Method Project Element ICB LCB Otber N.B.F. Total Cost 1. Vehicles 165.4 I 600.1 765.S (132.3) (132.3) 2. Vehicle Conversion and 35.3 1 187.2 222.S Retrofit Parts (30.0) (30.0) 3. Civil Woks 0.6 0.6 (0.5) (0S) 4. Equipment 8.9 8.3 A/ 8.4 25.6 (7.7) (7.1) (14.8) 5. Consuing Services 25.0h1/ 0.6 25.6 (inchiding Labortory Testig) (25-0) (2s.0) 6. Equipment for /apor Recovety 20.5 1?.9 33.4 System (Stages 0, 1 & ED (17.4) (17.4) 7. I/M High Vohme Inspecfion 10.2 10.2 Staions (0.0) 8. Laad 3.3 3.3 (0.0) TOTAL 29.4 0.6 234.0 822.7 1,086.7 (25.1) (0.5) (194.4) (220.0) Note: Figures in parentsis are me respective amounts financed by the Bank loin. N.B.F.: Not Bank-financed. g/ Established commercial practices for private owners of high-e vehicles and private garages. The Mefican authorWies would present, wihin three months from the date of efctiveness, a melhodology satisfactory to the Bank to assess and confirm that the use of commercial practices for taxis. minibuse, and trucks is consistent with ecoonomy and efficiency (in terms of pries), and with project objecdves (by ensuring sufficient and timely vehicl availability). Tne Mexican aorities would, with the help of an independentprocuremtconsultant, satisfactory to the Bank, complee and submit such an asasmet within nine months from effectiveness. Should the results be satisfactory to the Bank, established comm ial practices would continue in use subject to review at six months intervals. Should the first or any subsequentrview not be satisfacory (because in the opinion of tbe Bank economy and efficiency are not beig achieved or because vehicb supply constraints impede achieving project objectives) with rspect to any type of veiebs to be procured under the project, the Bank could cease to disbursc ibr such type of vehicles until agreement has been reached on revised procurementarrangementS consistent with o libealized vehicl imports, satisfactory to the Bank. If no agreemen on an acopble etvise prmntarrangement for any type of vehicles to be procured underthe proposedprojectcan be reahedwithin six months, the Bank would reservet right to reallocateiuds to other types of vehicles or projet sub-componentsor to caned the respective loan amount. hi Seleced on the basis of proposals from a shott-ist of consuklants.  9 Page 2 of 2 MEXICO TRANSPORT OUR ouALY MANAGEMENT P1P