Mexico - Ozone Protection Policy and Institutional Strengthening Project

Document of THE WORLD BANK For Official Use Only Report No. 11407-ME INTERIM MULTILATERAL FUND FOR THE IMPLEMENTATION OF THE MONTREAL PROTOCOL MEMORANDUM AND RECOMMENDATION OF THE DIRECTOR OF THE COUNTRY DEPARTMENT II TO THE REGIONAL VICE PRESIDENT, LAC REGION ON A PROPOSED OZONE TRUST FUND GRANT IN THE AMOUNT EQUIVALENT TO US$4.0 MILLION TO NACIONAL FINANCIERA, S.N.C. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR THE OZONE PROTECTION POLICY AND INSTITUTIONAL STRENGTHENING PROJECT November 11, 1992 Country Operations Division I Country Department I Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Curr-ncy unit - Mexican Peso (Mex$) US$1.00 - Mex$ 3,110.00 (Exchange rate as of November 11, 1992). UNITS AND MEASURES metric ton - Ton (T) - 1000 kg ACRONYMS AC: Average Cost of Funds ARI Air Conditioning and Refrigeration Institute ASHRAE American Society for Heating# Refrigeration and Air Conditioning Engineering CFCs Chlorofluorocarbons FROR Financial Rate of Return ICOLP Industry Cooperative for Ozone Layer Protection INE Instituto Nacional de Ecologia (National Institute of Ecology) HACS Mobile Air Conditioning Systems MC. Methyl Chloroform MPMF Montreal Protocol Multilateral Fund NAFIN : Nacional Financiera, S.N.C. (Government's Development Bank) ODS Ozone Depleting Substances OPTF Ozone Projects Trust Fund OPU Ozone Protection Unit SEDESOL Secretaria de Dosarrollo Social (Ministry of Social Development) UNDP United Nations Dovelopment Programme UNEP United Nations Environment Programme USEPA United States Environment Protection Agency FISCAL YEAR (January 1 - December 31)  FOR OFFICIAL USE ONLY MEXICO OZONE PROTECTION POLICY AND INSTITUTIONAL STRENGTHENING PROJECT Project and Grant Summary Financial Agent Nacional Financiera, S.N.C. (NAFIN) Guarantor United Mexican States Executing Agency Instituto Nacional de Ecologia (INE) Beneficiaries Producers and Users of Ozone Depleting Substances (ODS) Amount US$4.0 million Terms Grant Re-lending Terms Grants Project Cost Summary Component US$ Thousand Policy and Institutional Strengthening 400 Subproject Financing 3,600 TOTAL 4,000 Economic Rate of Return N/A Staff Appraisal Report N/A This document has a restricted distribution and may be used by recipients only in the performance of their ofMicial duties. Its contents may not otherwise be disclosed without World Bank authorization.   MEMORANDUM AND RECOMMENDATION OF THE DIRECTOR OF THE COUNTRY DEPARTMENT II TO THE REGIONAL VICE PRESIDENT, LAC REGION ON A PROPOSED OZONE TRUST FUND GRANT TO NACIONAL FINANCIERA, S.N.C. (NAFIN) WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR THE OZONE PROTECTION POLICY AND INSTITUTIONAL STRENGTHENING PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed Ozone Projects Trust Fund (OPTF) grant to Nacional Financiera, S.N.C. (NAFIN) with the guarantee of the United Mexican States for the equivalent of US$4.0 million to help finance the Ozone Protection Policy and Institutional Strengthening Project. The proposed project would be the second one for Mexico under the Montreal Protocol Multilateral Fund (MPMF), which is administered by the Bank and jointly implemented with the United Nations Development Programme (UNDP and the United Nations Environment Programme (UNEP). The Instituto Nacional de Ecologia (INE) will be implementing the project. 2. Background on Ozone Depletin2 Substances (ODS). In 1989, Mexico consumed approximately 8,130 metric tons of Group I substances (CFC-ll, CFC-12, CFC-113, and CFC-114), 260 tons of Group II substances (Halon 1211 andHalon 1301), and 9,000 tons of Group III substances (1,1,1-Trichloroethane, also known as methyl chloroform - MCF). CFC-11 and CFC-12 are produced locally by Dupont (2 plants with a total capacity of 15,000 tons) and Quimobasicos (one plant with a capacity of 5,000 tons). Over the last few years, capacity utilization has hovered between 35 % and 40%. Most of the CFC-11 and CFC-12 is consumed locally. In recent years, small amounts of these substances have been exported. Carbon tetrachloride (a Group II substance) is also produced in Mexico (PEMEX), but is entirely used as a feedstock for CFC production. Mexico meets its demand for CFC-113, CFC-114, and MCF through imports. In the absence of controls, Mexican industry forecasts that CFC and MCF use would grow at an annual rate of 2.2% and between 3.0 to 5.0%, respectively. 3. Mexico signed the Montreal Protocol in September 1987 and was the first country to ratify it in March 1988. The Montreal Protocol limits the production and consumption of Groups I, II, and III ozone depleting substances (ODS), effective in 1989, as shown in annex Table 1. Mexico is strongly committed to phase out the use of ODS and, although the Montreal Protocol allows developing countries a 10-year grace period, has publicly announced its intention to go as fast as industrialized countries and achieve a complete phase out of controlled substances by the year 2000. The Mexican Government has prepared with industry a yearly phase out schedule which would stabilize the use of ODS at their 1989 level by 1993, thereafter decreasing by 20% per year during 1994-96, then by 10% per year during 1997 and 1998, and finally by 5% per year during 1999 and 2000, leaving 10% for indispensable uses as allowed by the Montreal Protocol (Annex IV). 4. INE (Instituto Nacional de Ecologia)}', as the lead environmental agency in Mexico, is currently engaged in a number of activities to encourage protection of the ozone layer. It has negotiated and signed voluntary agreements with the two CFC producers and a dozen users of ODS to encourage reductions of unnecessary emissions. These agreements form the thrust of Mexico's strategy to implement the Montreal Protocol and have been instrumental in creating an environment of trust and cooperation between the authorities and industry on this matter. INE is also devoting much of its efforts to help industry identify ozone protection projects. With the assistance from the United States Environmental Agency (USEPA), it has prepared a project consisting of two 1/ INE is the new environmental entity created following the reorganization of Mexico environmental subsecretariat. It is a specialized agency of SEDESOL (Secretaria de Desarrollo Social) in charge of environmental norms and regulations. The reorganization did not affect Montreal Protocol activities as that work continues to be carried out by the same officials as before. In fact, the new organizational set-up with the establishment of a coordination unit at the Minister level should help improve INE's effectiveness.  -2- components (CFC-12 recycling from MACS and an Aerosol Propellants Safety Program), which has betn approved by the Bank and is being implemented with a US$180,000 grant from the Ozone Projects Trust Fund (OPTF). 5. To meet the growing demands of its ozone protection program, INE has created an Ozone Protection Unit (OPU). The Unit has started to operate with bilateral financing from USEPA as part of the US contribution to the Montreal Protocol Multilateral Fund (MPMF). It has a staff of two professionals to help industry prepare ODS phase out projects. OPU is also responsible for preparing and managing public awareness programs and for representing Mexico in international conferences. 6. Finally, INE has prepared a Country Program (CP) which spells out Mexico's strategy to meet its commitment under the Montreal Protocol and gives an indication of the type of ozone protection projects it is preparing for funding from OPTF over the next four years. The program will be updated periodically to incorporate new developments, particularly with regard to progress in the preparation of ODS phase out subprojects. The Project described in this Memorandum of the Director (MOD) has been designed to support the implementation of the Country Program during 1993-95. In many ways, it is the translation of that program into concrete action. The project and the Mexico Country Program were approved by the MPMF Executive Committee in its February 1992 meeting in Montreal. 7. Proiect Obiectives. The overall objective of the proposed project is to help Mexico establish an adequate institutional framework and to introduce incentive measures to ensure an efficient implementation of the Montreal Protocol at the least possible cost to both the Mexican industry and consumers. Specifically, the Project aims at: (i) introducing market-based incentives to induce economically rational reductions of ODS production and consumption by industry; and (ii) establishing in Mexico the necessary capacity to process and finance ozone protection subprojects. This would involve strengthening INE in the preparation and monitoring of ODS phase out subprojects, and setting up in Mexico the financing mechanism through which OPTF funds would be channeled. This approach appears to be best suited as ozone protection subprojects tend to be small (less than US$ 1.0 million), and it would not be cost-effective for the Bank, as administrator of OPTF, to appraise and approve for financing each of them directly. 8. Proiect Description. The Project has two components: (a) introduction of adequate incentives and establishment of the institutional framework under which the Montreal Protocol would be implemented in Mexico; and (b) financing of specific ODS phase out subprojects. (a) The Institutional and Economic Incentives Component would consist of the following elements: (i) preparation and implementation of a program to phase out ODS use as mandated by the Montreal Protocols by the year 2000. This has involved INE's agreeing with industry on a phase out timetable and on the monitoring devises as well as on industry reporting requirements, INE will formally announce the schedule to industry before the end of 1992; (ii) establishment of a marketable permits system to introduce greater flexibility in the phase out program by allowing trading and selling of ODS permits. The practical experience gained would be very useful in deciding whether and how this policy instrument could be applied to help solve other pollution problems in Mexico. A description of the system, its functioning, as well as the trading rules and procedures appears in Annex II. During negotiations, it was agreed that the Mexican authorities would carry out a study to evaluate the options for, followed by possible implementation of, a marketable system in Mexico. The study would include, inter alia, allocation mechanisms (auction or administrative allocation based on existing market shares, or a combination of both), choice of the system design, base year, trading rules and procedures, and date for the introduction of the system (para. 13 (ii)). The terms of reference have been agreed with the Bank. The study should be completed by January 30, 1993 (Section 3.07(a) of the Grant Agreement); and (iii) strengthening OPU in ODS subproject preparation and supervision through provision of short-term consulting services to help deal with specific, short- term technical issues and financing of public awareness programs.  -3- (b) The Subproiect Financing Component would consist of a line of grants to finance ozone protection subprojects prepared by industry and/or OPU. NAFIN would administer the line of grants, disburse the funds to industry beneficiaries and keep the project accounts. Consistent with MPMF's guidelines, funds for non-profitable subprojects and for those of a pilot nature such as training of industry staff in non-ODS technologies, recycling, workshops, and demonstration subprojects would be given to industry beneficiaries as grants. These subprojects form the bulk of subprojects in the pipeline (Annex I). With regard to commercially-oriented subprojects and those supporting industry conversion to non-ODS technologies, a financial analysis would be made, including calculation of the financial rate of return (FROR) from the investing company point of view (after taxes) to determine their financial profitability. Those with FRORs above NAFIN's interest rate on loans for environmental projects (i.e., ACFY + 4%) would be deemed profitable and would not be eligible for grant financing under the proposed project as regular loan resources are available in Mexico to fund them. Those with FRORs below NAFIN's interest rate would be given grants as necessary to increase their profitability to the interest rate level where they could be financed with loan resources from NAFIN or other financial intermediaries in Mexico. NAFIN would submit subprojects prepared by OPU and/or the Mexican industry to the Bank for review to ensure full compliance with MPMF's eligibility criteria and technical soundness prior to approval and disbursement. There would not be any delegation of subproject approval authority as this would run contrary to the Bank's fiduciary duties as trustee of the OPTF. In addition, in line with MPMF policy, subprojects above US$500,000 would also need to be approved by the MPMF Executive Committee. NAFIN may charge industry beneficiaries an administrative fee not to exceed 3 % of the sub-grant for assistance on procurement and disbursement, and maintaining records. A detailed description of the financing arrangements can be found in Annex III. 9. Funds of the project would mainly finance ozone protection subprojects (Annex I). However, a small amount (up to 10% of the total) would be used to fund the cost associated with the design, establishment, and functioning of the marketable permit system, prefeasibility studies and outreach programs. The proceeds of the grant would be allocated as follows: (i) establishment of the marketable permit system and the cost of monitoring the ODS phase out program ($70,000); (ii) short-term consulting services ($250,000); (iii) public awareness programs ($80,000); and (iv) ozone protection subprojects ($3,600,000). Retroactive financing for expenditures incurred before signing of the Grant Agreement but after June 1, 1992 up to the equivalent of US$200,000 would be allowed. Estimated project costs are provided in Schedule A. 10. Proiect Implementation. INE would have the responsibility for Project implementation and for coordination with other ministries and institutions involved in the project. Under INE's supervision, OPU would be responsible for establishing and monitoring the ODS phase out program, including the functioning of the marketable permit system in coordination with SEDESOL (Secretaria de Desarrollo Social). OPU would also be responsible for helping industry prepare ODS phase out subprojects and for submitting them to NAFIN. As stated in para. 7 (b), NAFIN would be responsible for forwarding the subprojects to the Bank for review and approval, as appropriate. NAFIN would also be entrusted with disbursing the funds to the beneficiaries and keeping the Project accounts (including arranging for their auditing by independent auditors and sending the audits to the Bank). A Special Account in which the Bank would deposit an amount equivalent to US$400,000 (about four months of estimated expenditures) after effectiveness would be opened at NAFIN to facilitate disbursements. Withdrawals from the Special Account would be supported by usual documentation required under Bank-financed projects. Goods would be procured through intemational shopping by requesting at least two quotations from eligible suppliers. These arrangements are judged satisfactory, given the small size of the procurement packages and the specialized technologies and equipment required. Consultants would be selected following the August 1981 Bank Guidelines for the Use of Consultants by World Bank Borrowers and by the Bank as Executing ARency. The 2/ The Average Cost of Funds (ACF) is a weighted average of interest rates paid on all term funds and deposits by the Mexican banking system. It is calculated and published by the Banco de Mexico on a monthly basis.  4- deadline for submission to the Bank of subproject applications for grant approval is June 30, 1995. The project is expected to be closed at the end of June 1996 (Schedule B). NAFIN and INE would prepare detailed operating guidelines by March 30, 1993, i.e., three months after project's expected effectiveness. The guidelines would include, inter alia, clear criteria for grant financing, arrangements for a mid-term review of project implementation, and understanding that INE would ensure that companies requesting Montreal Protocol funds would be in compliance with environmental regulations in Mexico before the subproject requests could be approved. Agreement was reached at negotiations for a mid-term review of project implementation to be carried out by INE and NAFIN by May 31, 1994 (Section 3.09 of the Grant Agreement). 11. Project Sustainability. The Project has been designed to help set the policy and institutional framework for ozone protection activities in Mexico. The policy component would induce economically rational ODS phase out decisions by industry, while the financing mechanism tested under this project should establish a mechanism through which Montreal Protocol funding of ozone protection subprojects would be channeled until the phase out is completed. 12. Rationale for Montreal Protocol Financing. As per the Implementation Guidelines and Criteria for Project Selection established by the MPMF's Executive Committee during its third meeting in April 1991, all technical assistance, pre-investment and investment activities, which lead to reduction in ODS emissions are eligible for financing. The proposed Project aims at establishing the framework under which the ODS phase out program would be carried out. Without the Project, the implementation of the Montreal Protocol would most likely be slower, disorderly, and more costly to Mexican industry and consumers, and ultimately to the MPMF. 13. Actions Agreed. The following main actions have been agreed during negotiations: (i) phase out schedule on a yearly basis (para. 15); (ii) carrying out of a study to evaluate the options for, followed by possible implementation of, a marketable permit system before January 30, 1993 (Section 3.07 (a) of the Grant Agreement and para. 8 (a) (ii)); (iii) eligibility criteria for grant financing of ozone protection subprojects (para. 8 (b); (iv) source and level of NAFIN's renumeration (para. 8 (b); (v) preparation of detailed operating guidelines to help project execution by March 30, 1993 (Section 3.08 of the Grant Agreement and para. 10); (vi) auditing arrangements (para. 9); and (vii) reporting requirements by NAFIN and INE, the main implementing agencies (para. 9). A condition of effectiveness of the Grant Agreement would be the execution of a satisfactory agreement between NAFIN and the Government for transfer to the Government of grant proceeds other than funds allocated for subproject financing. 14. Environmental Aspects. While, given their objectives, all the ozone protection subprojects are clearly environmentally sound, the operations of the beneficiary companies may not. INE, which is responsible for environmental regulations in Mexico, would ensure that: (i) companies requesting Montreal Protocol funds are in compliance with environmental regulations in Mexico before approving the requested grant or loan; and (ii) thereafter such compliance is maintained (paras. 10 and 13 (v)). 15. Proiect Benefits. The Project's major benefit is to help Mexico achieve its objective of phasing out the use of controlled substances as mandated by the Montreal Protocol by the year 2000 (i.e., 10 years before the deadline given by the Montreal Protocol for developing countries) in the most efficient way. Based on the annual phase out schedule presented in Annex IV, it is estimated that, by the end of the project disbursement period (June 30, 1996), the consumption of ODS in Mexico would have decreased by 50% from its 1989 level of 8,130 tons of Group I substances, 260 tons of Group II substances, and 9,000 tons of Group III substances. The Project would also help build up INE's expertise in ozone protection activities as required for successful project implementation. Finally, the project is expected to demonstrate the applicability of the line of credit/grant approach for ozone protection financing and it is hoped that its design and special features, particularly its emphasis on policy and institutional strengthening, would be replicated elsewhere. 16. Project Risks. The proposed project faces two major risks. The first concerns the impossibility for INE and NAFIN to prepare and finance sound ozone protection subprojects. This risk is mnitigated by the short-term  -5- consulting services provided under the Project, USEPA's continued assistance to OPU (both in project identification and preparation and in financing of OPU's personnel and equipment), the Bank's close monitoring of project implementation, and the requirement for INE and NAFIN to submit all subprojects for review and approval to the Bank. This risk is also worth taking, in view of the expected benefits in terms of capacity building. The second risk relates to the possible reluctance of industry to use alternative chemicals and/or adopt non-ODS technologies. This risk is considered very small given the grant nature of the Montreal Protocol resources provided to industry beneficiaries, the close and cooperative relationships between INE and industry in this matter, and the expected introduction of the marketable permit system, which would introduce some flexibility for industry in their adaptation to non-ODS technologies. 17. Recommendation. I am satisfied that the proposed Ozone Projects Trust Fund grant would comply with the Executive Directors' Resolution No. 91/5, establishing the Global Environment Facility, and I recommend that the Regional Vice President, LAC, approve the proposed grant. Rainer B. Steckhan Director Country Department II Latin America and the Caribbean Region Attachments Washington, D.C. November 11, 1992  -6- MEXICO OZONE PROTECTION POLICY AND INSTITUTIONAL STRENGTHENING PROJECT Table 1 SUBSTANCES CONTROLLED BY THE MONTREAL PROTOCOL AND PHASE OUT TIMETABLE FOR INDUSTRIALIZED COUNTRIES Group Substance Control Measures Group I CFCI3 CFC-11 20 % reduction by 1993; 50% CF2C12 CFC-12 reduction by 1995; CF3C13 CFC-1 13 85% reduction by 1997; C2F4C12 CFC-114 100 %o reduction by 2000 C2F,CI CFC-115 Group I CF2BrCl Halon-1211 50% reduction by 1995; 100% CF3Br Halon-1301 reduction by 2000 (with C2F,BR2 Halon-2402 exemption for essential uses) CCl4 Carbon Tetra- 85 % reduction by 1995; 100 % chloride reduction by 2000 Group III C,H3C13 Methyl Chloforo- Freeze by 1993; 30% reduction form (1,1,1-Tri- by 1995; 70% reduction by chloroethane) 2000; 1005% reduction by 2005 * Ten additional fully halogenated chlorofluorocarbons were included in Group I as part of the June 1990 Amendments to the Protocol. These substances have limited applications in industrialized countries and are not currently used in Mexico. Source: UNEP. London, 27-29 June 1990. Draft Amendments to the Montreal Protocol on Substances that Deplete the Ozone Layer.  -7- Schedule A MEXICO Ozone Protection Policy and Institutional Strengthening Proiect Estimated Project Cost Local Forei2n Total -------------------(US$ thousand)-------- Marketable Permit System 60 10 70 Feasibility Studies 50 200 250 Public Awareness Programs 80 -- 80 Ozone Protection Subprojects 1,450 2,150 3,600 TOTAL 1.640 2.360 4.000  -8- Schedule B MEXICO Ozone Protection Policy and Institutional Strengthenine Proiect Procurement Methods and Disbursement Schedules Procurement Methods: Categorv ICB LCB Other Total Goods 3,600 3,600 Consultants 400 400 TOTAL 4.000 4.000 Note: Goods would be procured through international shopping by requesting at least two quotations from eligible suppliers. these arrangements are judged adequate given the small size of the procurement packages and the specialized technologies and equipment requires. Consultants would be selected following the August 1981 Bank Guidelines for the Use of Consultants by World Bank Borrowers and by the Bank as Executing A2encv. Allocation of OPTF Grant Proceeds: Cate2ory Amount Allocated Financiny (US$ thousand) (%) Marketable Permit System 70 100 Feasibility Studies 250 100 Public Awareness Programs 80 100 Ozone Protection Subprojects 3,600 100 TOTAL 4.000 Estimated Disburements: EJJ3 FY94 FY95 FY96 -----(US$ thousand)- Annual 700 1,500 1,000 800 Cummnulative 700 2,200 3,200 4,000  -9- Schedule C MEXICO Ozone Protection Policy and Institutional Strengthening Project Timetable of Key Project Processing Events (a) Time taken to prepare: 6 months (b) Prepared by: World Bank/Mexican Govt (c) First Bank mission: January 1990 (d) MPMF approval: February 28, 1992 (e) Appraisal: June 1992 (f) Negotiations: October 15-16, 1992 (g) Bank approval: November 1992 (h) Planned Signing: December 1992 (i) Planned Effectiveness: December 1992 (k) Planned Completion: December 1995  -10- ANNEX I MEXICO Ozone Protection Policy and Institutional Strengthening Project Ozone Protection Subproiect Pipeline 1. The table below shows the ozone protection subprojects likely to be financed by the project, together with their estimated ODP-weighted tons phased out. A detailed description of these subprojects follows. All the information comes from the 'Mexico Country Program for Eliminating Substances Controlled by the Montreal Protocol' approved by MPMP Executive Committee in February 1992. 2. While extreme care has been taken to estimate what subprojects would most likely be financed over 1993-94, the list can only be indicative. During implementation, new developments could alter the composition of the list, with new subproject proposals added on, while others under preparation are dropped. Furthermore, it should be noted that: (i) the total cost of the projects included in the list exceeds the $4 million envelope. It was thought prudent to include more subprojects than the $4 million could cover as some may not materialize or take more time to mature than foreseen; and (ii) while most of the funds will finance investment projects, a small amount (less than 10% of the total) would be used to fund prefeasibility studies and outreach programs within the subprojects. LIST OF SUBPROJECTS LIKELY TO BE FINANCED UNDER THE LINE OF CREDIT COMPONENT Subproject Name ODP Phased Out Cost (Ton/year) ($m) A. Centralized CFC Recycling and Material Handling System 550 1.1 B. Expanded Use of Recycling in MACs 120 0.5 C. Chiller Purge Device and Conversion 39 1.3 D. Low-CFC Foam Insulation 150 0.5 E. Training and Plant Conversion in the Electronic Industry 400 1.8 TOTAL 1.259 5.2 Source: Mexico Country Program for Eliminating Substances Controlled under the Montreal Protocol.  -11- A. Centralized CFC Recycling and Material Handling System and Training Program 3. High volumes of CFC-11 and CFC-12 are emitted from various refrigeration equipment due to improper maintenance practices. Typically, a large portion of the refrigerant charge is vented to conduct repair work in particular components of the system (e.g., compressor, condenser). However, both recovery and disposal are established and commercially available technologies for reducing the demand and emissions of CFCs. 4. Recycling can be accomplished either on-site or off-site. For example, portable recycling units can process up to four pounds per minute and can be used for refrigeration systems with charges ranging from a few ounces to several pounds. Altematively, stationary receiver tanks can be used to temporally store refrigerant while the system is being repaired. Such receiver tanks help avoid the venting of refrigerant to the atmosphere and collect refrigerant for reclamation. Several countries already have centralized reclamation facilities. In the US, for example, the Air Conditioning and Refrigeration Institute (ARI) has established ARI standard 700 which provides the specifications that reclaimed refrigerants must meet. Moreover, the American Society for Heating, Refrigeration and Air Conditioning Engineering (ASHRAE) has developed service practice manuals that provide the necessary guidance for refrigeration service technicians. 5. The development of a recycling network in Mexico will be an effective means of increasing participation in refrigerant recycling. Such a network could serve refrigerant distributors, service shops for industrial and household air conditioners, MACs, hotels, supermarkets, restaurants, and refineries. CYDSA, a holding company that owns Quimobasicos, is interested in pursuing this project and has the necessary qualified service technicians, technical expertise, and a suitable network of distributors. As currently proposed, the project will involve recycling CFCs sold by Quimobasicos and will provide the necessary impetus for a comprehensive refrigerant recycling program throughout Mexico. Terms of reference for this project are being developed by CYDSA. B. Expanded Use of Recvcline in Mobile Air Conditioners (MACs) 6. The MACs recycling demonstration project is expected to produce several results such as successful demonstration of recycling technology, a small cadre of MAC service technicians skilled in recycling procedures, and educational materials both for MAC service technicians and consumers. As described in the MACs recycling demonstration project, however, the ultimate goal of the demonstration program is to facilitate replication of MACs recycling throughout Mexico. The purpose of this project is to fulfill this objective by implementing the widespread use of MACs recycling technology at all major service sites in Mexico. 7. An expanded network of MACs recycling will depend on at least two key factors: (i) the availability of more recycling machines; and (ii) the availability of adequately trained MACs service technicians. Once the MACs recycling demonstration program is fully implemented, a pool of service technicians trained in MACs will be created. These service technicians will assist in transferring MACs recycling expertise to other MACs service establishments in Mexico. INE will select up to 100 service shops from around the country to receive on-site training and a recycling machine. Only sites with a large volume of MACs servicing will be chosen so as to ensure the cost effectiveness of the project. The project includes public outreach activities to inform consumers about the environmental benefits of CFC-12 recycling and about companies in Mexico that are using recycling equipment.  -12- C. Chiller Pur2e Device and Conversion 8. This project will demonstrate technology for reducing emissions of CFC-1 1 from the purge devices in centrifugal chillers. 7. Centrifugal CFC-1 1 chillers are normally equipped with purge units. By removing water and non- condensible gases (e.g., air) from refrigeration systems, these units improve refrigeration efficiency by ensuring that the presence of non-condensible gases does not artificially inflate the condenser pressure. Because they remove moisture, purge units can also successfully prevent the occurrence of corrosion caused by moisture build-up and acids that are formed when small amounts of moisture mix with the refrigerant. 9. In removing the unwanted non-condensibles and water, however, the purge units also remove some CFC-1 1 and vent it into the atmosphere. In order to minimize the amount of CFC-1 1 vented, high efficiency purge units have been developed and are now manufactured by several companies. 10. Most of these high efficiency purge units are one of two basic designs: mechanical or thermal. Mechanical units employ a compressor in removing a mixture of refrigerant, air, and other non-condensibles from the refrigeration condenser. The mixture is compressed to a higher pressure which condenses the refrigerant and water vapor. In comparison, thermal purge units use the pressure differential between the operating refrigeration system condenser and evaporator to remove a vapor mixture of refrigerant, air, and other non-condensibles. A second stream of high-pressure refrigerant passes through purge unit coils at a lower temperature to condense the refrigerant out of the mixture that has been drawn off. For both types of systems the cost of a high efficiency purge device is approximately US$2,500-7,000. 11. This project will involve the installation of purge units in several selected chiller units and will include the establishment of a training program for certifying chiller service technicians. In addition, the project will implement conversion of several chiller units. While INE is in the process of identifying Government agencies that have large numbers of chillers to undertake chiller conversions, several firms have expressed interest in participating in this project. D. Low CFC Foam Insulation 12. Technology that reduces the amount of CFC-11 foam used in refrigerator manufacturing is now available. Such technology uses standard equipment and would only require slight modifications to Mexico's factory specifications. Reduced CFC-1 1 foam insulation is capable of meeting necessary performance criteria of traditional CFC-1 1 foam. Reductions of up to 50 % of the CFC-1 1 normally used can be achieved by substituting water for CFC-1 1 and adjusting the polyol mix. In addition to reducing the amount of CFC-1 1, other desirable properties of low CFC-11 foam include completeness of cabinet filling, foam friability, dimensional stability of the foam, structural stability of the cabinet, removal of exothermal heat, and improved viscosity of the process chemicals. Increasing the amount of water used in foam insulation would not require any capital cost, but would result in a 5 % increase in operating costs due to changes in the chemicals used. 13. The objective of this project is to reduce CFC foam insulation, while maintaining refrigerators's performance and consumer satisfaction. The latter would be addressed through consumer awareness activities. This project is expected to introduce low-CFC foam in three refrigerator manufacturing facilities using standard equipment only requiring modification to individual factory specifications. The project would involve several steps: (i) meetings between interested refrigerator manufacturers and foam suppliers; (ii) initial factory screening to verify compliance with performance needs; (iii) a short production trial; (iv) review of results from the short production  -13- trial; (v) process and product modifications to reflect production trial results; (vi) a full production trial; (vii) quality control and assurance verification tests; and (viii) full production. E. Training and Plant Conversion in the Electronic Industry 14. The largest users of CFC-1 13 and methyl Chloroform in the Mexican electronics and metal cleaning industry are firms located near the Mexico-US border. This project involves assisting these industries in reducing and eventually eliminating their use of CFC-1 13 and methyl chloroform solvents. Several commercially available alternatives for these solvent applications exist such as low-solid/no-clean fluxes, and aqueous and semi-aqueous cleaning. Each has been proven to meet rigorous performance standards in both civilian and military electronics cleaning applications. Low-solids/no-clean fluxes, for example, can be used to eliminate cleaning in some instances. Both aqueous and semi-aqueous cleaning are currently being used in many diverse cleaning applications. 15. This project involves training workshops and investments ia substitute technologies. The Industry Cooperative for Ozone Layer Protection (ICOLP) and Northem Telecom, a manufacturer of telecommunications equipment, have agreed to provide technical expertise for this project. The project will be implemented in four stages: project planning, training, demonstration, and plant conversion. The technical training and demonstration components are scheduled for 1992. Workshops will be organized in various maquiladora sectors (Tijuana, Juarez, Nogales, etc.). In addition, technical staff of Mexican firms will be invited to visit ICOLP facilities where altemative processes are in operation. 16. Following these workshops, participating firms will be asked to provide information on the amount of solvents, what technologies they are selecting to eliminate solvent use, and their proposed timetable for elimination of solvents. As a result of these activities, electronics manufacturers will develop plans to convert existing cleaning processes to altematives such as those listed above. November 11, 1992 Country Operations Division I Country Department II Latin America and the Caribbean Region  -14- ANNEX II Marketable Perrmit System Obiective 1. The marketable permit system would complement the phase out schedule (Annex IV) that INE has prepared with industry and will put into place by the end of 1992 to ensure the elimination of ODS use in Mexico as mandated by the Montreal Protocol by the year 2000. The system helps make the phase out less costly by introducing greater flexibility for industry in their conversion into non-ODS technologies. Description of the System 2. Under the system, permits (denominated in kilograms) would be auctioned or allocated to producers and importers of ODS based on their market share in 1989, the base year. Permits would authorize companies to produce or import ODS up to a specified quantity during a particular year; companies would be allowed to buy and sell permits as they wish in response to market conditions or their own business strategy. The quantity of permits would be decreased over time according to the phase out schedule, ensuring that Mexico would reduce its production and consumption of ODS to zero by the target year. 3. Permits would not be denominated like currency or stock certificates, but would function more like the balance of a checking account. Just as a bank allows the owner of a checking account to write checks up to the amount in the account, INE would allow the holder of the permit to produce or import controlled substances up to the stated value of the permit. 4. There would only be one type of permits. Trading would be allowed between substance groups and would be based on the ozone depleting potential (ODP) of the chemicals. This system is flexible and would create a larger market in which permit trading could take place. In addition, it would not force reduction of substances such as halons for which substitutes are still being developed. The system would be allowed by the Montreal Protocol as Mexico would be implementing a faster phase out than mandated by the Montreal Protocol for developing countries. Implementation of the system 5. INE, assisted by SEDESOL, would be the main agency responsible for establishing the system and for monitoring its functioning. 6. To record and control the import and export of controlled substances, the system would use an existing mechanism: 'La Guia Ecologica'. INE currently requires companies that import and export chemicals to submit to it a request or 'Manifiesto'. If INE approves the request, it issues a 'Guia Ecologica' that must be presented to customs officials before a shipment of chemicals enters or leave Mexico. When the marketable permit system is implemented, before issuing the Guia INE would check its record to make sure the importing company held a permit that allowed it to import the requested quantity of ODS. 7. Trade or sale of permits should have INE's prior authorization. This requirement is meant to protect buyers, but would also allow INE to monitor the functioning of the system. Companies wanting to trade permits would inform INE of the quantity and type of permits to be sold; INE would authorize the sale if the seller held permits in sufficient quantities. In this manner, INE would act much as a bank does in verifying that the funds in an account are sufficient to cover a check on the account.  -15- Budget for system implementation 8. It is estimated that about US$70,000 would be sufficient to introduce and monitor the marketable permit system in the first two years. The relatively low cost is due to the fact that some expenses (e.g., office equipment, computer, fax machine, etc.) will be funded by the U.S. EPA as part of their support to OPU. Maior actions a2reed 9. During negotiations, the following actions were agreed with the Mexican authorities: (i) the phase out timetable on a yearly basis, which would be announced to industry before the end of 1992; and (ii) carrying out of a study to evaluate the options for, and the implementation of, a marketable permit system. Such study would include, inter alia, allocation mechanisms (auction or administrative allocation based on existing market shares, or a combination of both), trading rules and procedures, and date for the introduction of the system. November 11, 1992 Country Operations Division I Country Department II Latin America and the Caribbean Region  -16- ANNEXm Financine Arrangements Role and Responsibilities of the Financial Agent. 1. Under the proposed project, NAFIN will act as a financial agent for the Mexican Government. Under an agreement with the Government, the signing of which is a condition of effectiveness of the proposed Project, NAFIN will perform the following tasks: (i) channel all disbursements to the Government related to the establishment and functioning of the marketable permit system, short-term consulting services, and the preparation and implementation of public awareness programs; (ii) submit ozone protection subprojects prepared and appraised by OPU and/or the Mexican industry to the Bank for review and approval and ensure disbursement of the project funds to industry beneficiaries under the line of grants (the subproject financing component). NAFIN may charge industry beneficiaries an administrative fee not exceeding 3 % of the subproject amount; (iii) keep project accounts, arrange for their auditing by independent and reputable auditors, and send the audited accounts to the Bank (the Government will likewise keep and audit accounts relating to its use of non-subproject funds); and (iv) prepare periodic project progress reports (as will the Government) for monitoring of project implementation by the Bank. 2. A Special Account would be opened in NAFIN to facilitate disbursements. After effectiveness and upon NAFIN's request, the Bank will make an initial deposit up to an amount equivalent to four months of estimated expenditures (US$400,000) and will replenish the Account monthly or whenever one half of the amount has been withdrawn. Withdrawals from the Special Account would be supported by usual documentation required under Bank-financed projects. Subproiect A2Droval Procedures. 3. All requests for financing would need prior World Bank approval. For the policv component, the requests would be submitted to the Bank by INE (with copy to NAFIN) and would include the following documentation: (i) justification of the financing requested (e.g., description of a proposed public awareness program, or of a technical problem requiring expert advice, etc.); (ii) estimation of the cost; and (iii) employment contracts in the case of consultants for OPU. 4. For the line of yrants comRonent, the financing requests would be submitted by NAFIN on the basis of subproject documentation prepared by industry and/or the OPU. This documentation would include, as a minimum, the following information: (i) objectives of the subproject; (ii) estimated total cost; (iii) summary description of the ODS subsector; (iv) detailed technical description of the subproject components and procurement procedures to be followed, paying particular attention to the technologies proposed in the subproject; (v) expected results, including a quantitative estimation of the emissions reduction achieved; (vi) assessment of the beneficiary enterprise(s), including compliance to environmental regulations in Mexico; (vii) implementation arrangements; and (viii) justification for Montreal Protocol financing. In the case of profitable subprojects, a financial analysis would be made, including calculation of FROR from the investing company's point of view, to determine whether a loan would not be more appropriate.  -17- 5. Upon receipt of a subproject financing request, the Bank will organize the technical review and, in parallel, will assess its overall soundness and readiness for implementationbefore approving its financing. Subprojects above US$500,000, would be sent to the Executive Committee for review and approval. Following approval, NAFIN would enter into an agreement with the beneficiary(ies), which would spell out in detail the rights and obligations of all parties. Signing of this agreement would clear the way for disbursement to the subproject beneficiaries. Procurement Procedures. 6. The goods and services to be financed under the project, as summarized in Schedule B, would be procured in accordance with procedures satisfactory to the Bank. Goods will be procured through international shopping by requesting at least two quotations from eligible suppliers. These arrangements are judged satisfactory, given the small size of the procurement packages and the specialized technologies and equipment required. Consultants would be selected in accordance with the August 1981 Bank Guidelines for the Use of Consultants by World Bank Borrowers and by the Bank as Executing Aeencv. November 11, 1992 Country Operations Division I (Mexico) Country Department II Latin America and the Caribbean Region   ANNEX IV Pg. 1 of 3 Chart 1 CFC Consumption Phaseout Indicative Schedule 12,000 - ax 0 I 10,000 - - tD 6,000 + 0) 4,000 l 0. ~ ~ ~ ~ ~ ~ ~ 0 co~ o 2,000- 0 0 I I I I III 1989 1991 1993 1995 1997 1999 2001 2003 2005 Base Year Montreal Protocol No Controls  ANNEX IV Pg. 2 of 3 Chart 2 MCF and Halon Consumption Phaseout Indicative Schedule 2,500 No Controls Halon Demand - 22000 _ __ 1 _ _ E 1,500 ,' . No Controls MCF Demand --- 001,0 000 a 500 20%2 o % 20 10% _ 10% = 0 1989 1991 1993 1995 1997 1999 2001 2003 2005 Base Year MCF Demand Halon Demand (Montreal Protocol) (Montreal Protocol)  ANEX IV Pg. 3 of 3 Chart 3 CFC, MCF and Halon Phaseout Combined National Schedule 15,000 _ 1 10,000 1 0.20 0~~~~~~~~~~~~0 1989 1991 1993 1995 1997 1999 2001 2003 2005 Base Year Combined Schedule No Controls Demand (Montreal Protocol) (CFC,MCF,Halon)