Mexico - Medium Size Cities Urban Transport Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11030-ME STAFF APPRAISAL REPORT MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT JANUARY 15, 1993 Country Department II Infrastructure and Energy Operations Division Latin America and the Caribbean Regional Office This document has a restricted distribution mnd may be used by recipients only in the perfonnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Peso (Mex$) US$1.00 = Mex$ 3,115 (November 30, 1992)* * The exchange rate against the US dollar is currently sliding at a rate of Mx$0.4 per day. FISCAL YEAR January 1 - December 31 UNITS OF WEIGHTS AND MEASURES Metric British/US Equivalent 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 (lb) 1 liter (1) = 0.26 gallons (gal) 1 cubic meter (mi3) = 1,000 liters (1) ABBREVIATIONS AND ACRONYMS BANOBRAS National Bank of Public Works and Services Banco Nacional de Obras y Servkios Pdblicos CETES Treasury Bill CUD Regional Development Agreement Conveno Unco de Desarrollo DGIE Department of Infrastructure and Equipment Direcci6n General de Infraestruct y Equipamniento GOM Government of Mexico ICB International Competitive Bidding IVA Value Added Tax ITP Integral Transport Plan LCB Local Competitive Bidding MCMA Mexico City Metropolitan Area PCR Project Completion Report PVT Plan for Roads and Urban Transport Programa de Vialidad Transporte Urbane SCT Ministry of Communications and Transport Secretarfi de Coenunkacio y Transporte SEDUE Ministry of Urban Development and Ecology Secretarfi de Desarrofll Urbano y Ecologfa SEDESOL Ministry of Social Development Secretarfa de Desarrello Social SHCP Ministry of Finance and Public Credit Secretaria de Hadenda y Crddito Pdblico SOM State of Mexico Estado de M4xico SOE Statement of Expenses TAQM Transport Air Quality Management Project  FOR OFFICIAL USE ONLY =x1X MEDIUM-SXSZ CITIES URBAN TRINUPORT PROJCCT STAFF APPRAISAL REPORT Table of Contents Page No. PROJECT SUMMARY ............................ . i-v I. THE URBAN TRANSPORT SECTOR ......... .... ... ... ... 1 A. Urban Transport and the Economy . . . . . . . . . . . . . 1 B. Institutional Framework . . . . . . . . . . . . . . . . . . 2 C. Sectoral Issues ... . . . . . . ... . . . . . . . . . 3 Institutions . . . . . . . . . . . . . . . . . . . . . . . 3 Federal Resource Allocation and Financing . . . . . . . . 4 Transport Policy and Planning . . . . . . . . . . . . . . 5 Public Transport and Regulation . . . . . . . . . . . . . 6 Maintenance . . . . . . . . . . . . . . . . . . . . . . . 7 Environment . . . . . . . . . . . . . . . . . . . . . . . 7 Low Cost Solutions . . . . . . . . . . . . . . . . . . . . 9 Cost recovery . . . . . . . . . . . . . . . . . . . . . . 10 D. Lessons Learned from Past Projects. .10 II. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 A. Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 B. Sector Strategy and the Rationale for and Objectives of Bank Involvement . . . . . . . . . . . . . . . . . . . . . . 13 C. Description . . . . . . 15 D. ITPs and the Operating Manual of the PVT .23 B. Costs .27 F. Financing .30 G. On-Lending .31 H. Implementation Schedule . . . . . . . . . . . . . . . . . . 32 I. Institutional Responsibilities . . . . . . . . . . 32 J. Procurement .35 K. Disbursements . . . . . . . . . . . . . . . . . . . . . . . 35 L. Reporting and Project Supervision . . . . . . . . . . . . . 37 M. Auditing .39 N. Project Benefits . . . . . . . . . . . . . . . . . . . . . 40 0. Environmental Aspects . . . . . . . . . . . . . . . . . . . 41 P. Project Risks . . . . . . . . . . . . . . . . . . . . . . . . 42 III. AGREEMENTS REACHED AND RECOMMENDATIONS . . . . . . . . . . . . . . 44 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.  ANNEXS . .. . . . . . . . . . . . . . 46 1. Sub-project and City Eligibility Criteria . .. .46 2. SXDSOL Strengthening Program ..53 3. BANORRAS Strongthnning Progr ....61 4. National Training Program . . . . . . . . . . .67 5. 3conamic gvaluation - Method and Resultr . .73 6. Sub-project Preparation and Execution . . . . .86 7. Monitoring and Evaluation . . . . . . . . . . .96 B. Financing of the Program . . . . . . . . . . . . . . . ...... . 101 9. Zstimated Schedule of Bank Loan Disbursoent . . .... . 103 10. Documnt in Projoct File ............. .. . .... 104 MAP IBRD 23662 TABLES Table 1 Project Cout Sumary . . .. .. .. .. .... . .29 Tablo 2 Financing Plan .............. ..... ..... . . 30 Tablo 3 Procurement Method ......... ........... ... . 36 Tablo 4 Disbursement Profile by Category . . . . . .38 Table 5 Sensitivity of BRR to change. in costs and benefits .41 This report in based on the finding of an appraiwal mission which visited Mexico in January/February 1992. Mission members included Messrs. Gideon Hashimshony (then Task Xanager, Sr. Transport Planner), John Flora (LATIE), Robin Carruthors (LA21E, Transport Economist and current Task Manager), John Cracknell (Consultant, Transport Specialist). Messrs. R. Scurfield (INUTD) and M. Dick (LATIE) providod the Peer Review, Mr. Ricardo Halperin is the Managing Division Chief, Mr. Paul Knotter is the Project Advisor and Mr. Zdilberto 8 gura is the Department Director. Mra. Sylvia Driscoll and Mrs. Angola Chioariu (LA2IZ) assisted in producing this report.  - s - amxzco nurnuM-XXU CXSXBS URBAN TRANSPORT PROJECT XAMX AND PROJECT SUNARY borrowers Banco Macional de Obras y Servicios P6blicom, 8.N.C. - (BA)OBRA.) guarantors United Mexican States. Executin Agenciae and BANOBRAS, Scretaria do D-zarrollo Social - (SBDBSOL), geneficiarh.ssand state and municipal urban transport agencies. Loan amount: U8$200 million equivalent. Tormss Repayment in 15 years, including 5 years of grace, with interest at the Bank's standard variable rate. os-lending terms BANOBRAS will on-lend loan proceeds in peso denominated sub-loans to states or municipalities agencies with repayment in up to 15 years including a grace period of up to 3 years, at a rate at least equal to the CZTES (Treasury Bill) rate plus 2%, which reflects the marginal cost of funds to and operating costs of BANOBRAS. Pro. ct objectivess The main objectives are to: (a) improve the quality and efflciency of urban transport systems in medium-size cLties; (b) assist the Federal Government ln decentralizing responsibility for urban transport manag em nt; (c) finance infrastructure improv eme nts that are economically justified, andt (d) control the environmental impacts of urban transport operations. Specifically, the proposed project will help to: (i) strengthen the local and national institutions responsible for planning and managing urban transport systems in medium- size cities; (ii) assist in the development/implementation of appropriate financial mechanisms which devolve responsibility for planning and financing of urban transport from the Federal and State governments to municipalities; (iii) improve the operational efficiency of the existing urban transport networks; (iv) improve sector planning, which should result in improved resource allocation within the sector, better transport to the poor and enhanced consideration of environmental factors; (v) preserve, through better maintenance, the urban transport infrastructure, deferring the need for now investments and reducing user costs; (vi) encourage public transport development and increase private sector participation; (vii) improve access to low income areas  - ii - through infrastructure improvement; (viii) improve environmental conditions, by strengthening the implementing agencies for environmental controls and enforcing environmental standards, and reducing traffic congostion, particularly in inner city areas; and (ix) encourage the development of facilities for non-motorized transport. Project Description: The proposed project includes two parts: Part A - National (US$7.8 million) comprises: (a) an institutional strengthening program for SEDESOL (US$4.3 million); (b) an institutional strengthening program for BANOBRAS (US$0.5 million); (c) a training program for urban transport professionals (US$2.2 million); and (d) grants towards the cost of studies to prepare Integral Transport Plans (ITPs) (US$ 0.8 million); Part B - Local (US$463.3) comprises credit (sub- loans) to medium-size cities that meet eligibility criteria to finance: (a) the remaining cost of the studies for ITPs (US$4 million); (b) urgent infrastructure improvements (US$45.3 million); (c) other urban transport improvements (sub- projects), which include planning and traffic management measures, public transport improvements, road maintenance and rehabilitation, paving of access routes to low income areas and corridor improvements (US$363.1 million); (d) the final design of sub-projects, technical assistance, studies and training for professional staff in the cities (US$41.6 million); and (d) equipment for traffic management and control (US$9.3 million). The total project cost is estimated at US$471.1 million equivalent, including land, taxes and duties, with a foreign exchange component of US$138.9 million. The above figures are inclusive of land costs, physical and price contingencies and taxes. Project Benefitst Medium-size cities have the highest population growth rate of all geographical sectors of Mexico and provide an important potential for increasing industrial productivity. Many responsibilities for urban transport management have been devolved to the cities, but they have neither the institutional framework nor professional expertise to carry out these responsibilities satisfactorily. The project will provide for institutional strengthening and professional training for technical staff. Benefits from infrastructure investment will result from reduced vehicle operating costs, travel time savings, more cost effective investments and improved environmental conditions. The ERR for all proposed sub- projects will be greater than 12%, as will the ERR of all subproject components. The poor will benefit through improved transport infrastructure and better public transport services resulting from the whole range of proposed measures, but particularly from the paving of access routes to low income areas, which will account for about 18% of total project costs.  - lii - Project Risks The main project risks involve weak institutions both at the national and local levels and uncertainty as to the commitment of future local administrations. BANOBRAS and SEDESOL have already undertaken reorganizations, in areas relevant to the project, to strengthen their capacities, and technical assistance and training programs are included in the project. The commitment risk will be mitigated by: (a) the up- front subproject eligibility criteria which will apply to all federally provided resources for urban transport in medium-size cities, and (b) the incentive provided by the grant element of the federal program for transport investment in medium-size cities. Also, the credit approach has built-in flexibility which will allow resources to be reallocated from an approved subproject which is not performing to another eligible subproject.  -iv - Project Cost Su marys Local Foreign Total -------US$ million------ PART A NATIONAL Al SEDESOL Strengthening 1.0 2.5 3.5 A2 BANOBRAS Strengthening 0.3 0.1 0.4 A3 National Training Program 0.9 0.9 1.8 A4 Integral Studies 0.4 0.2 0.6 SUB TOTAL PART A 2.6 3.7 6.3 PART B LOCAL B1 Integral Transport Plans 2.1 1.1 3.2 B2 Immediate Civil Works 25.7 12.4 38.1 B3(a) Implementation of ITPU (Civil works) 145.8 79.0 224.8 B3(b) Implementation of ITPu (Services) 17.6 5.8 23.4 B3(c) Implementation of ITPc (Zquipment) 2.5 5.0 7.5 Land and property acquisition 25.2 0.0 25.2 SUB TOTAL PART B 218.9 i9103 322.2 TOTAL BASE COST 221.5 107.0 328.5 Physical contingencies 37.8 18.2 56.0 Price contingencies 28.1 13.7 41.8 TOTAL (excluding taxes) 287.4 138.9 426.3 Taxes 44.8 0.0 44.8 Total (including taxes) 332.2 1389 41.1 Financing Plan: Local Foreign Total -----------Us$ million------- Government of Mexico 174.7 0.0 174.7 Municipalities and States 96.4 0.0 96.4 IBRD 61.1 138.9 200.0 TOTAL: 332.2 l3f.9 71.1  v Usti.ated Dank Didbursemet Bank Fiscal Years ----------- Us million ----------- 1993 1994 1995 1996 1997 1998 1999 2000 Annual 22AL 35 41 38 25 15 15 9 Cumulativ 22 57 98 136 161 176 191 200 a/ Includes initial deposit of US$12 million to Special Account and retroactivo financing of US$2 million for expenditures incurred after June 30, 1992. Rate of Return: Between 34% and 72% for different types of sub-projoet component, with an average of almost 50%, based on a samplo of three sub-projects that account for about 30% of total project costs. A minimum average economic rate of return of 12% will be required for all eligible proposed sub-projects, and no individual component should have an economic rate of return of less then 12%. maps IBRD 23662   MEXICO MEDIUM-SIZED CITIES URBAN TRANSPORT PROJECT I. THE URBAN TRANSPORT SECTOR A. Urban Transport and the Economy 1.1 Over the past 30 years, urbanization in Mexico has been expanding at a fast rate, which seems to be accelerating. In 1960, about 46% of the total population lived in urban areas (i.e., areas with more than 15,000 inhabitants). This had increased to about 50% by 1970 and to more than 53% by 1980, and in 1990 the provisional census figure was almost 61%. Urban growth is expected to continue to be fueled by relatively high birth rates coupled with falling mortality rates, the limited carrying capacity of the rural areas and the expansion of urban-based productive sectors. As a result, about 70% of the Mexican population are expected to be living in urban centers by the end of the century. 1.2 The provisional results of the 1990 census suggest that the geographical distribution of population is undergoing significant changes. Contrary to earlier expectations, the expansion of the Mexico City Metropolitan Area (MCMA) has slowed down significantly. At the same time, a number of intermediate and secondary cities have grown at rates much higher than expected at the start of the decade, partly as a response to a market- driven relocation of economic activities, particularly in the case of a number of cities along the Mexico-United States border. The proposed North American Free Trade Agreement (NAFTA) would accelerate the growth of the medium-size cities. However, even if the lesser growth rate were to be confirmed for the MCMA, it would continue to be confronted with a vast array of development, environmental and management problems rooted in the very massiveneos of its population, the complexity of its urban fabric, the constraints of its geographical environment, and the intricacy of its institutional and administrative framework. The transport-related environmental issues of the MCMA are being addressed in a the Transport Air Quality Management (TAQM) project for the MCMA, recently approved by the Board of Executive Directors. 1.3 Urban transport affects the productivity of cities in many ways. First, the costs of production of goods and services are influenced, both directly and indirectly, through the time required to move people and freight. Production costs are higher when distribution takes place in congested conditions and employee welfare costs are higher when employees have to undertake long and slow journeys to work. Second, the construction and maintenance of the urban transport system is capital intensive, and to the extent that there is less than full cost recovery, can require a significant proportion of government resources. Third, the form of city development itself is dependent on the way in which urban transport is provided; lack of recognition of the impact of urban transport on city land use development can result in an inefficient use of land and in unnecessarily high production and distribution costs. Fourth, it is increasingly recognized that urban transport can have a major negative impact on the quality of urban life,  particularly by creating air pollution and noise. If these impacts are not limited, they can affect the health, working capacity and lifestyles of urban populations. B. Institutional Framework 1.4 In 1983, the Mexican Constitution was amended. Its Article 115 now assigns to municipalities the responsibility for the provision of a number of services, including urban transport. However, in practice, because of the lack of financial resources and administrative and professional capacities at the local level, these services are often provided with assistance from the state and/or federal governments. While the states and municipalities are free to make their own arrangements, most municipalities are only responsible for street cleaning and maintenance of the local road and street network. Construction and financing of new roads in municipalities are often the responsibility of the states, usually through a Secretariat of Public Works. Traffic management and regulation of bus services and concessions are also often the responsibility of the states. The larger the city or municipality, the greater the tendency for it to have more responsibility for road construction and traffic management. The government's National Development Plan, published in June 1989 seeks to decentralize responsibilities and to strengthen local organizations, particularly st the municipal level, as it is felt that this leads to improved responsiveness to local needs and better accountability. 1.5 A number of agencies are involved in urban transport. At the federal level, the Secretariat of Social Development (SEDESOL) is responsible for formulating the federal policy on urban development, including transport and protection of the environment (para. 1.10). The Secretariat of Communications and Transport (SCT) is responsible for the development and maintenance of the federal highway network, sections of which often enter and traverse the urban areas. SCT's responsibilities extend into regulation of road transport, although in the past few years substantial deregulation has taken place, and in setting standards for highway design. Additionally, SCT exercises administrative oversight over aviation and railways. 1.6 In addition to SEDESOL and SCT, the other federal agencies involved with urban transport are the Secretariat of Finance and Public Credit (SHCP) and the National Development Bank for Public Works and Services (BANOBRAS). SHCP makes the budget recommendations to Congress, based on recommendations made by and negotiations with the operating Secretariats. It is then concerned with controlling the distribution of federal funds in line with the approved budget. BANOBRAS is an important channel of federal funds to the urban transport sector, through credits and loans to the states, municipalities and operators of public transport. 1.7 For many large cities, the responsibility for transport and traffic regulation, traffic engineering, traffic law enforcement, and short and medium range land use/transport planning is divided among agencies at state and municipal level, or between different departments within individual agencies or even between different municipalities within the same metropolitan area.  -3- This diversity sometimes results in agencies with shared responsibilities having conflicting policies for a particular activity (para. 1.9). C. Sectoral Issues 1.8 Urban transport conditions vary between cities, but most are affected by common problems. These include: (a) institutional weaknesses at the federal, state and local levels; (b) limited availability of professional staff with adequate technical skills; (c) lack of framework for transport policy and planning; (d) outmoded and ineffective public transport regulatory framework; (e) inadequate maintenance organizations and budgets; (f) inadequate consideration of environmental issues; (g) lack of recognition of the effectiveness of low-cost techniques in alleviating urban transport problems; and (h) inadequate cost recovery, especially by public transport. All these issues will be addressed in the Project. In the longer term, the lack of planning and increased dependency on the private automobile could result in the development of inefficient transport systems, and the eventual need for costly remedial environmental actions. 1.9 Institutions. At the federal level, no agency has to date been assigned effective responsibility for urban transport policy and support. While SEDESOL has been the normative authority for urban development, until mid 1991 it had not focused on or maintained staff in the area of urban transport. SCT has overall responsibilities in the transport sector, but it does not have jurisdiction over matters concerning urban transport, except for the location of railroad lines, airports and some federal highways, city bypass and approach roads. As a result, few policy guidelines for federal government assistance to the states and municipalities for urban transport projects have been developed. Currently, most federal assistance is provided on an ad hoc basis through direct negotiations between the SHCP and the individual states and municipalities and is not subject to any systematic evaluation (para. 1.14). 1.10 SEDESOL was formed at the end of May 1992 by the transformation of SEDUE, the former Secretariat of Urban Development and Ecology, which itself was reorganized in 1991 to better execute its functions in relation to urban transport policy formulation and to improve its efficiency in providing technical assistance to the states and municipalities. SEDESOL is organized in three sub-secretariats, one of which is for Urban Development and Infrastructure, another for Regional Development and the third for Land and Housing. The staff of the Subsecretariat for Urban Development and Infrastructure comprises those of the previous Division of Urban Infrastructure, most of whom have little experience of urban transport. The project will provide both short and medium term technical assistance to the new subsecretariat by financing consultants who will provide on-the-job training to its staff (para. 2.11) as well as assistance in the preparation of working manuals and technical guides. 1.11 In the past, BANOBRAS funded urban transport development mainly by financing the purchase of buses, minibuses, combis and trucks rather than by financing the provision of transport infrastructure. This role continues, but  - 4 - in 1987, BANOBRAS was given responsibility for the execution of the First Urban Transport Project (Loan 2824-ME) which provides assistance to the metropolitan areas of the States of Mexico and Nuevo Leon, and for the preparation of this project. Through the First Urban Transport Project, BANOBRAS gained experience in the supervision of an urban transport loan, with a main emphasis on infrastructure works. The participation of BANOBRAS in the preparation of the present project was limited, mainly due to lack of adequately trained staff. The increased role of SEDESOL in urban transport development has confined BANOBRAS activities in the urban transport sector to financing, procurement and contract administration. The project will provide for institutional strengthening for BANOBRAS in respect of the management of the financial aspects of transportation projects (para. 2.12). 1.12 At the state and city levels, urban transport matters are handled through organizational arrangements that are often inadequate. Lack of suitably trained professionals aggravates budgetary constraints in hiring staff. In many cases the level of staffing, in terms of quantity and quality, is inadequate. The formation of new, or the strengthening of existing, planning and traffic engineering units in fast growing medium-size cities will allow better planning for the future and as a consequence, result in better use of the transport system. Where this approach is feasible, the agency entrusted with urban transport responsibilities should preferably answer directly to the municipality and not to the state or federal authorities, in order to allow maximum participation and feedback from the population concerned. This is in line with the decentralization policy of the federal government (para. 2.2), as supported by the Bank (para. 2.3) and by this project (para. 2.6). 1.13 The availability and skill level of traffic engineers and urban transport economists is limited throughout the sector. The lack of professionals is evident not only in the public sector (SEDESOL, BANOBRAS, States and Municipalities) but also in the private sector and universities. If this situation persists, the devolution of responsibilities to state and municipal levels may be accompanied by declining professional standards, and the current tendency to depend on costly, but conceptually simple, solutions rather than on more imaginative, but less costly alternatives, will continue. To address this problem, the Government has decided to give priority to the development of professional and technical skills levels within the sector. An extensive national training program, which will support the institutional development programs in SEDESOL, BANOBRAS and the municipalities, has been included in the project (para. 2.13). 1.14 Federal Resource Allocation and Financing. Until this year there have been no guidelines for the allocation of federal resources to the states and cities to help finance urban transport projects, though substantial amounts of assistance have been provided. After a particular urban transport project has been identified, the municipality or state often lobbies the federal government for direct financial assistance. These requests are handled on an ad hoc basis. The issue is complicated further since there are various sources of federal funding. Federal government financing of development projects is provided through grants included in the annual development agreements with the states and municipalities, other special  allocations and through loans given by BANOBRAS. Since federal grants have not been allocated exclusively on the basis of the economic merits of the projects, there has been little incentive to the municipalities to develop comprehensive transport policies or to evaluate projects using sound methodologies. The Program for Urban Transport in Medium-Size Cities ("Programa de Vialidad y Transporte Urbano para Ciudades Medias", PVT), announced this year will be supported by the Project and will be an important first step in addressing policies and proposals for the future development of urban transport. Its main objectives are to: (a) improve the efficiency of urban transport services, within the context of rational overall urban development and within a logical administrative structure; (b) improve the financial viability of urban transport services; (c) reduce or mitigate the negative external effects of inefficient urban transport, particularly the environmental impacts; and (d) improve the level of transport service to the poor. 1.15 Transport Policy and Planning. The preparation and implementation of policies and programs for urban development is a complex process and beyond the means and ability of most municipalities. Through the implementation of the PVT, the Federal Government will now take a lead in developing methodologies and tools to enable municipalities to prepare sound programs and policies, and to assist in the evaluation of investment options. It also intends to enforce financial discipline in the sector by conditioning federal assistance to the preparation of sound urban transport development programs. Until the implementation of the PVT, no federal agency was actively involved in urban transport and the Federal Government provided little policy guidance to the states or municipalities. To begin resolving this situation, the PVT assigns clearly defined roles to SEDESOL and BANOBRAS and provides a suitable policy framework in which to exercise those roles. The PVT is designed to provide financial assistance, in the form of Federal grants and access to federal loans, to cities meeting the city and project eligibility criteria. Although the PVT and the Project are aimed at the medium-size cities, the PVT also has provisions for financing a more modest level of transport development in the economically important smaller medium cities which are just below the lower threshold of the eligibility size criterion and will not be supported by the Project. 1.16 The municipality eligibility criteria are listed in paras. 2.30 and 2.31 and described in more detail in Annex 1, together with the project eligibility criteria. Initial criteria for determining eligibility for participation in the project are that the municipality should: (a) have a target population as defined in para. 2.30; (b) agree to prepare a comprehensive Integral Transport Plan (ITP), which will indicate future policies and investments; and (c) agree to a program of institutional improvements as needed (see Annex 1). Eligibility for finance of the  - 6 - principal investment plan will require completion of the ITP and implementation of the institutional changes. 1.17 Under the PVT, finance for urban transport investment vill only be provided to those municipalities which meet the criteria for Darticipation ln the Program and only for proiects which meet the criteria for grant and loan allocation. Since the Federal Government has agreed that federal investment funds for urban transport projects in medium-size cities in future will not be made available through other means, there is a strong incentive for municipalities to comply with the criteria. The PVT and the Project apply the same criteria for city and component eligibility and identify the same responsibilities for project implementation. 1.18 Since urban transport responsibilities are often divided between federal, state and municipal agencies, urban transport problems are rarely considered from a comprehensive or integrated approach. As a result, immediate problems may be resolved, but insufficient consideration is given to alternative solutions, to the interaction of the solutions with other actual or potential problems, or to the longer term implications of the recommended solution. This broader consideration of urban transport issues will take time to implement but the ITPs (paras. 2.14 through 2.18) that the Government will require the municipalities to carry out, together with the conditions for participation in the PVT (Annex 1), will be significant steps in improving the quality of urban transport planning and investment. 1.19 Public Transport and Regulation. The operation of bus systems is also a pressing issue. Some of the most common problems include: (a) regulatory agencies do not operate effectively, are under-funded and the staff are insufficiently trained. This can result in changes in bus routes being slow to adapt to changing patterns and levels of demand and the growth of the city; (b) fare policies are guided by social objectives, which result in fare revenues insufficient to finance bus renewal. No provision is made for higher quality services operated at higher than minimum fares; (c) while most bus services are provided by the private sector, entrance to markets is restricted and route concessions are awarded in a non-transparent manner. Local monopolies prevent the award of concessions to new operators. Lack of effective competition leads to inefficient bus operation; (d) bus fleets are often in poor condition and provide little customer comfort and convenience (see (b) above); and (e) buses have an adverse impact on the environment (noise and exhaust/smoke emissions); these problems are worat in central areas of cities, where traffic congestion occurs. The replacement of existing vehicles with new environmentally  - 7 - friendlier ones is made difficult by the fare constraints (see (b) above). 1.20 The standard response of most city officials to these problems is to promote the replacement of existing buses and expansion of the fleet, with subsidized loans to operators. While this resolves some of the problems in the short term, change to the regulatory and organizational regime becomes crucial if effective long term improvements are to be made in the bus system. It is not easy for a municipal authority to break the pattern of issuing permits only to current operators or to introduce other forms of competition for or within markets. Instead of improving the regulatory system and providing market incentives, easier solutions are sometimes sought by subsidizing new vehicle purchases, introducing the public ownership of buses or developing expensive mass transit systems and/or high capacity highways. This leads to an inefficient allocation of resources. The Project will encourage regulatory and tariff reform by: (a) identifying deficiencies in the current systems and recommending and implementing changes; and (b) requiring acceptable economic and financial evaluations of all investment proposals, including loans for vehicle purchase, made during the period of the implementation of the ITPs (para. 2.20 (c)). 1.21 Maintenance. The condition of urban streets varies between municipalities, but is generally poor through a lack of maintenance. Maintenance has less political visibility than new construction, and is among the first activities to be reduced in times of financial austerity. Most municipalities are not well organized to deal with road or traffic signals maintenance. Improvement of the maintenance of urban transport infrastructure will be an essential component of the ITP for each municipality (para. 2.20 (e)). 1.22 In most cities, two particular agencies with maintenance responsibilities are likely to require strengthening - the local highway agency (Junta Local de Caminos) for road maintenance and the traffic engineering agency or traffic police for traffic signals. As far as possible, maintenance operations should be contracted to the private sector, as the evidence from many countries is that this is a more efficient solution than public provision, and there is ample capacity in the country to provide such services. Evidence of the higher efficiency of private contractors in providing maintenance services comes from cities in which the municipal agency was required to compete with private operators for maintenance contracts. In many cases, the municipal agency was only able to compete effectively when special contractual conditions were allowed. The Project will attempt to develop the abilities of the city maintenance organizations to plan, manage and supervise the maintenance works, by requiring the establishment of adequate maintenance organizations, the provision of sufficient budgets and the preparation and implementation of maintenance plans (para. 2.20 (a) and 2.20 (e)). 1.23 Environment. The transport induced air quality problems in the medium-size cities are presently less severe than in Mexico City, which confronts unique topographical conditions and an inordinate concentration of population. Nevertheless, the problems are of concern in many medium-size  - 8 - cities and will become more pressing as the cities grow. There is evidence that national air quality standards are already being exceeded in the central areas of some medium-size cities. Three types of measure to reduce traffic induced pollution will be included in the ITPs: (a) those to better implement the regulation of vehicle emissions; (b) those to reduce traffic congestion, and; (c) those to encourage non-motorized transport. With the benefit of experience from the implementation of tougher vehicle emission controls in Mexico City, supported by the TAQM project, it will be possible to determine how best to control such emissions in the medium-size cities. Lower polluting emissions from vehicles should also result from the expected reduction in traffic congestion and increased vehicle speeds anticipated as a result of the implementation of the civil engineering components of the project. Encouraging the use of non-motorized transport is the third way to reduce vehicle induced pollution. The proposed sub-project for Leon, a city with an already high cycle use, includes the development of a network of cycle ways. The usefulness of measures which will give priority to non-motorized transport will be reviewed in the studies for preparing the ITPs, and where appropriate, proposals for their implementation will be included in the sub-projects for each municipality. 1.24 While urban bus transport is promoted because of its high efficiency in transporting passengers, this policy is often offset by policies to reduce or eliminate buses from the city centers, because of their dilapidated physical conditions, loud noise, and smoke emissions. At present, SEDESOL has issued emission standards for passenger cars and light-duty trucks (up to about 4.0 tons gross vehicle weight). The emission standards for minibuses, medium-duty vehicles and heavy-duty diesel engines are under preparation, with technical support to be provided under the TAQM project, and are scheduled to be issued early in 1993. The studies to produce the ITPs will review options for the enforcement of these standards (para. 2.20 (f)). 1.25 Urban transport has at least three other environmental impacts, noise, community segregation and visual intrusion. Until the basic research has been completed, the scale of these problems in particular medium-size cities is unknown. The lack of consistent and comprehensive design standards for road construction in urban areas makes it improbable that environmental considerations have featured prominently in the design of urban highways and streets. The Terms of Reference for the studies to prepare the ITPs include a review of the existing conditions in each of the three aspects of environmental concern and a requirement to recommend amelioratory measures where they are causing, or are projected to cause, significant problems (para. 2.20 (f)). 1.26 In the longer term, the improved transport planning and traffic engineering capabilities of the cities, combined with the application of new, more stringent vehicle emission regulations, should provide for a more permanent improvement in air quality. Starting next model year, new automobiles will be required to have a catalytic converter and meet US emission standards, and standards for heavier vehicles, also compatible with US standards, are under preparation by SEDESOL. These improvements will come about in the context of the Bank's overall program of support to the GOM to address air pollution issues. This includes an extended co-financing  arrangement with EXIMBANK of Japan, which is financing refinery conversions to produce unleaded gasoline (OECF-Japan is financing a program for desulfurization of diesel), an on-going Bank loan to strengthen SEDESOL in its role as environmental agency (Loan ME-3461), and the proposed TAQM project in support of a comprehensive program to address the pollution problems of the MCMA. 1.27 While the net benefits of the above program will be substantially positive, it may bring about some negative consequences for urban areas outside the MCMA. The positive consequences will derive from new federal vehicle emission standards, revised automotive fuel specifications, increased experience in the control of air quality and in the inspection and maintenance of vehicles to control emissions. The possible negative consequences will derive from the part of the program which requires the progressive replacement of all older public service and freight vehicles in the MCMA and the encouragement in the use of lead-free gasoline. The first part of the program will create a pool of older high-use vehicles which could only be used commercially outside the MCMA. The program is expected to lead to the replacement of 25,000 taxis, 10,000 trucks and 3,000 minibuses in the period 1993 to 1996. While some of these will be scrapped, others are likely to find their way into other urban areas. If these vehicles are transferred to the medium-size cities, they could lead to a potential worsening of the air quality in those cities. Careful monitoring of vehicle registrations and air quality levels will be required to assess the impact of this program in the medium-size cities. Such monitoring is envisaged as part of the studies for the preparation of the ITPs. Where negative results of the policy are observed, the ITPs will propose remedial measures. 1.28 The encouragement of the use of unleaded gasoline (magna sin) in vehicles in the MCMA, through emissions regulations and a more appropriate pricing policy than that at present, should result in beneficial results for all of the country, not only in the MCMA. The expansion of PEMEX's production capabilities (para. 1.26) should resolve remaining supply constraints, identified in a study undertaken in preparation for the TAQM project. 1.29 Low Cost Solutions. The lack of a proper organizational structure for urban transport planning and operation, and a lack of sufficient professional staff at municipal, state and Federal levels results in little consideration being given to low cost solutions to urban transport problems. These solutions include traffic management measures, parking policies, bus- ways, bus route rationalization, pedestrian streets, and intersection improvements by cost-effective designs. In many cities, the first solution sought to relieve city center traffic congestion is often the construction of additional road capacity and the banning of buses from the center. In other cases, the construction of a metro or light rail system is seen as a suitable solution (as in Guadalajara and Monterrey). In the whole of Mexico only one small section of segregated busways exists, and most other non-segregated busways are not strictly implemented, even though over 80Z of all urban motorized trips in Mexico are made by bus and the creation of well planned and implemented busways is one of the most cost effective measures available to improve urban public transport. The project has already made progress in bringing this type of cost effective solution to the notice of municipal  - 10 - authorities. The ITPe so far completed have placed emphasis on management measures rather than construction of new works to resolve problems of road congestion. The sub-project component eligibility criteria (Annex 1) require that all schemes should be economically viable. This condition not only requires that the schemes have an acceptable economic rate of return (greater than 12x), but that all reasonable other solutions, and particularly those with lower investment costs, have been considered and found to have lower rates of return. 1.30 Cost recovery. Transport taxes and fees are levied both at the federal level (for example, fuel taxes), and at the state level (for example, bus concession fees). It is standard practice in Mexico for municipalities and states to have the power to levy betterment charges to beneficiaries of access road and other paving components. However, in many cases the potential charges are not imposed and in others, the valuations of properties, on which the charge is based, are unrealistic. Under the project, cost-recovery for new major road construction, road maintenance and traffic management, will take place indirectly through the imposition of betterment charges and other local taxes and fees. As part of the Project, the revenue generation effect of financial mechanisms currently being used in each city to recover the cost of infrastructure improvements will be evaluated and recommendations made for ensuring an acceptable level of cost recovery in the future (para. 2.17). 1.31 Although few municipalities, if any, provide subsidies to bus operators, bus fares are usually controlled by state governments. Present fare levels do not usually allow for an adequate operating profit, and as a result, many bus operators are not undertaking fleet renewal and the level of service is generally poor. The terms of reference for the studies to prepare the ITPs will include reviews of public transport regulations and projections of the financial viability of bus operations following the implementation of any proposed regulatory changes and the completion of proposed infrastructure investments (para. 2.20 (c)). D. Lessons Learned from Past Projects 1.32 No Bank-financed urban transport projects have yet been completed in Mexico, but the First Urban Transport Project (Loan 2824-ME) has been under implementation since 1987. Although implementation has been improving, and the project is expected to meet most of its objectives in the State of Mexico, it has experienced a number of difficulties, including the cancellation of the part of the project related to the State of Nuevo Leon, due to lack of counterpart funds, which resulted from a decision by the municipality of Monterrey to invest in a light rail system, contrary to the Bank's advice. For the State of Mexico, a recently agreed Action Plan is expected to accelerate the preparation of final engineering design and bid documents. Until recently, this has been slow, partially as a result of lack of in-house professional capacity and partially as a result of insufficient familiarity with the Bank's procurement procedures. As regards to the other components, the long-term planning studies and technical assistance have not proven to be particularly successful and institutional strengthening has been slower than expected, partly attributable to the lack of trained and experienced staff in  - 11 - the relevant agencies. The Federal component, under the responsibility of BANOBRAS, experienced the following difficulties; insufficient level of technical assistance consultants and lack of programmed, on-the-job training for BANOBRAS staff, insufficient professional personnel, and, until recently, conflicts within BANOBRAS regarding distribution of responsibilities between different divisions. Although these problems are now largely resolved, they have provided a valuable experience in the design of the project. On the other hand, the Federal District component has been quite successful in that low-polluting motors have been provided for more than 1,300 buses, but the bus operator has decided not to implement the sub-component to improve maintenance facilities. 1.33 To build also upon the experience of urban transport projects in other countries, an analysis of relevant "Lessons Learned" was undertaken. The review was based on fifteen Project Completion Reports and/or Project Audit Reports (PCR/PPAR) in the urban transport and development sectors worldwide. Recognition was made of trends and changes in Bank policy and project design since the PCR/PPAR's were completed. The main lessons identified both during the implementation of the on-going Urban Transport Project and the analysis of the fifteen PCRs, and the consequent actions in the Project, are: (a) Institutional strengthening: Weak organizations not only limit the implementation of transport policies, but also inhibit efforts at their own reform. Under the project it is proposed to reorganize and strengthen the organizations dealing with urban transport, at the federal, state and municipal levels (paras. 2.11 and 2.12); (b) Lack of counterpart funding has greatly influenced the pace of project implementation and in extreme cases has led to cancellation of components. A balance must be obtained between the promotion of sound financial practices in participating cities and the lack, at least in the short term, of municipal financial resources. The financial mix of up to 35% federal grant, at least 18% municipal participation and up to 50% (Annex 8) will reduce the scale of municipal counterpart funding to a feasible level and provide incentives for participation; (c) Slower than expected implementation occurred for a variety of reasons, including lack of familiarity with Bank procedures, optimistic scheduling at appraisal, lack of final engineering designs at appraisal and changes in political commitment and lack of counterpart funds. These problems will be mitigated in the Project by such measures as: (a) the strengthening of BANOBRAS' capacity for financial management (para. 2.12); (b) including the finance for final engineering design of civil works in the ITPs; and (c) including a grant element in the financing plan, which will encourage municipalities to continue their participation in the Program, regardless of political changes (Annex 8); (d) Weak institutions in the planning, design and implementation of traffic and highway projects has been a common feature of many  - 12 - projects. In this project, each municipality will have to demonstrate that their organizational structure is capable of managing the tasks assigned to it, and that it has the capacity to fulfill these functions on a permanent basis, before becoming eligible for the principal sub-loan (para. 2.31 (i)). In addition, the ITPs will include analyses of institutional arrangements and make proposals for their improvement (para. 2.20 (a)); (e) Lack of enforcement of traffic regulations, coupled with poor maintenance, are additional reasons why some schemes failed to achieve their full potential. In this project, schemes will be designed to be, as far as practical "self enforcing" and physical rather than regulatory methods of traffic control will be encouraged. Participating municipalities will need to ensure that components involving traffic regulation include operational specifications which are acceptable to the traffic police and that the police are prepared to undertake enforcement. If necessary, sub-projects could finance additional equipment for enforcement (para. 2.23 (c)); (f) Public transport operations have been found to be inefficient particularly when operated by public enterprises. Improving their efficiency has received increasing emphasis in Bank projects and it will be an important aim of this project to improve public transport operations. Efforts will concentrate on improving the regulatory framework to encourage efficient and competitive bus operations and improving the infrastructure to enable buses to operate at an acceptable level of service. The system of route licensing as operated in most cities is very inflexible and slow to react to changing patterns of demand. The ITPs will include reviews of the licensing system and of the finances of public transport operations and include recommendations to increase their flexibility of operation (para. 2.20 (c)). (g) Lack of consideration of environmental impacts was found to be a feature of most previous projects. The inclusion of assessments of current transport related environmental conditions in the ITPs, and for an environmental impact assessment of all proposed investments (para. 2.31 (f)) will ensure that these issues were given appropriate significance in the Project. (h) Lack of maintenance was a serious shortcoming of early urban transport projects. The Project will require a commitment and plan of action from the municipalities to develop a road and signals maintenance capability as a condition of on-lending (para. 2.31 (e)) and the ITPs will include the establishment of a road pavement management system and the financing of road rehabilitation works and deferred road maintenance actions (para. 2.20 (e)).  - 13 - II. THE PROJECT A. Origin 2.1 The Project was identified during the preparation of the First Urban Transport Project in 1986, aimed at the larger metropolitan areas of Monterrey and the State of Mexico. It will focus on the fast-growing medium-size cities and the small-medium size cities of particular economic importance including those on the USA/Mexico border. Project preparation work was carried out by consultants and has been reviewed by preparation missions since 1989. Appraisal took place in January/February 1992. Negotiations were completed on November 13, 1992. B. Sector Strategy and the Rationale for and Objectives of Bank Involvement 2.2 Sector Strategy: Mexico's urban population growth, the rapid increase in urban motorization and a heritage of deferred maintenance and inadequate investment expenditures, have all contributed to a pressing need to improve the condition of urban services and infrastructure. The situation is most acute in the MCMA, but is also rapidly becoming a problem in the medium size cities, where both human and capital resources are more limited. The government's strategy to address these problems was outlined in the National Development and Urban Development Plan for 1990-1994, and comprises the following priority actions: (a) Decentralization: to promote the orderly transfer of operational and financial responsibilities for urban services and infrastructure provision and maintenance from federal and state governments to municipal governments, and assist the latter to administer these functions. This will increase the responsibility and accountability of local officials and so improve the cost effectiveness and delivery of essential services; (b) Unification of federal assistance: to provide federal assistance to states and municipal governments under standardized criteria and conditions; (c) Public Transport: to stimulate public transport, particularly through private sector participation; (d) Improve operational efficiency: to improve the operational efficiency of existing infrastructure, with an emphasis on short-term, low-cost management programs and policies, and (e) Maintenance: to adequately maintain the existing urban infrastructure and traffic control facilities. 2.3 The Bank's urban development strategy, as outlined in the Decentralization and Urban Management Urban Sector Study (Report 8924-ME, July  - 14 - 1991), supports this policy of progressive and functional devolution of responsibilities to municipal governments. Ongoing projects supporting the policy are the Water Supply and Sanitation project (Loan 3271-ME) and the Housing Finance project (Loan 2947-ME) projects, as well as the First Urban Transport project (Loan 2824-HE). The Municipal Strengthening Project (Loan 2666-ME) was aimed specifically at strengthening the federal and state agencies active in the area of municipal development, by building up the municipalities' organizational, administrative and financial management systems, and assisting them to expand and upgrade their urban infrastructure. In July 1992, a reformulation of the project, to provide urgent help in the reconstruction of Guadalajara, was approved by the Board. During FY93, the Bank will undertake reviews of the government strategies for urban development and the transport sector and develop further measures in their support. These measures will provide both a policy framework for the longer term implementation of the ITPs and useful inputs to the annual implementation reviews of the Project. 2.4 Rationale for Bank involvement: The government has recently launched the "Programa de Cien Ciudades," (PCC) - the "Program of 100 Cities" - its program to strengthen the administration to and improve the infrastructure of the medium and small-medium cities. This program has five components of which the PVT is one, the others relating to land use, city center rehabilitation, federal land and environmental considerations. Through the PVT (para. 1.14), the federal government has committed itself to become more active in providing policy guidance and to rationalize its financial assistance to urban transport. The PVT and the broader development objective of the PCC are in line with Bank sector policy and the GOM is seeking Bank support for it. 2.5 Bank participation will help to ensure that the PVT builds upon the experience gained and the lessons learned from urban transport projects in other countries (para. 1.33). In this respect, the Project addresses, inter alia, the need for: (a) improved maintenance organizations through institutional strengthening; (b) availability of counterpart funds through an improved federal and local financing mix; (c) speed of addressing implementation concerns through clear city participation eligibility criteria; (d) improving public transport through infrastructure and regulatory measures; and (e) recognizing environmental impacts through their inclusion in city participation eligibility criteria. As Mexico successfully consolidates its stabilization programs and expands its modernization efforts to new areas, the Bank's lending strategy is to support such efforts by focusing its operations on poverty alleviation, environmental improvement and infrastructure rehabilitation and development to support economic growth. The Project fits these priorities well and the Bank's experience in institutional development, and its ability to consider a broad range of issues in an integrated framework provide a further rationale for the Bank's involvement in the project. 2.6 Objectives of Bank involvement: Urban transport in Mexico is underdeveloped and in need of restructuring if the rapidly growing medium-size cities are not to become choked with an unmanaged explosion in the volume of road traffic. The main objectives of the Project are to improve the quality and efficiency of urban transport systems in medium-size cities, to assist the Federal Government in decentralizing responsibility, to finance improvements  - 15 _ that are economically justified and to control the environmental impacts of urban transport operations. Specifically, the Project will help to: (a) strengthen the local and national institutions responsible for planning and managing urban transport systems in medium-size cities; (b) improve the operational efficiency of the existing urban transport networks; and (c) improve sector planning; this should result in improved resource allocation within the sector, better infrastructure maintenance, better public transport particularly for low-income users, and enhanced consideration of environmental factors in sector investments, as well the development of facilities for non- motorized transport. 2.7 These are ambitious objectives and may be difficult to achieve fully within the period of execution of the Project. It is expected that the Project will lay a sound basis for the development of the sector by providing institutional strengthening, training and encouraging a more rigorous analysis of urban transport. This should provide for project sustainability. Hence the project risks (para. 2.68) are felt to be significantly outweighed by the expected development impact. C. Description 2.8 The Project includes two parts: Part A - national programs and Part B - local level programs. Part A of the project will only account for some 2% of the costs (US$7.8 million, including contingencies and taxes), but will be critical to the achievement of the policy and institutional objectives, as it is designed to address the role of the Federal Government in providing policy and technical guidance to the municipalities, as well as training for professional staff. It will consist of four components: (a) an institutional strengthening program in SEDESOL 1/; (b) an institutional strengthening program in BANOBRAS; (c) a national urban transport sector training program; and (d) assistance towards the preparation of ITPs in the participating municipalities. 2.9 Part B of the project will account for about 98% of the cost (US$463.3 million, including contingencies and taxes), providing a line of credit (for sub-lending) to individual medium-size municipalities/ states for city sub-projects. The participation of each municipality or state will constitute a sub-project under which they will be eligible for up to three sub-loans, each of which will finance one of the following interrelated activities: (a) the studies needed to prepare the ITPs (Part B1); (b) immediate actions, whose delay in waiting for the completion of the ITP will result in higher costs and/or losses of significant benefits (Part B2), and (c) the implementation of the physical and institutional recommendations of the ITPs (Part B3), including changes in the institutional responsibilities for urban transport activities, regulatory changes, civil works, traffic management and environmental control measures, further studies, training, and final design of civil works and equipment specification. All participating municipalities will be required to undertake an ITP (Part Bl). Sub-loans for 1/ Ibe Bank is also auistin SEDESOL to develop it capabilities in the Environmental Project (Loan 346 I-ME), approved in April 1992.  - 16 - Part B2 will only be provided as needed and sub-loans for Part B3 will be conditional on the compliance with the project specific on-lending conditions (para. 2.31). 2.10 The four components of Part A and three components of Part B of the Project are described in the following paragraphs. 2.11 PART A.1 - SEDESOL Strengthening (US$4.3 million): SEDESOL has the dual roles of a normative agency, which formulates federal policy in urban transportation and provides technical assistance to the states and municipalities to achieve policy goals, and a project executing agency, with responsibility for overall project supervision, co-ordination, evaluation and monitoring. The Direccion General de Infraestructura y Equipamiento (DGIE - the Department of Infrastructure and Equipment) will be responsible for management of the Project. To help it fulfill both of its roles, an institutional strengthening program has been designed that will include the following components, which are described in more detail in Annex 2. SEDESOL's commitment to implementing the strengthening program was confirmed at negotiations (para. 3.1 (a)). (a) Restructuring and staffing of the DGIE: Although the permanent staff of DGIE includes some experienced professionals, many of them lack sufficient experience to manage a program such as the PVT. The work load of DGIE will be unusually high during the first two years of the Project. Provision is included within the project for 125 man months of local, temporary professional staff to help meet this requirement during this period. Agreement to the contracting of the full complement of 20 counterpart staff, and a commitment to keep all positions filled as necessary, at least until the end of the project, was confirmed at negotiations (para. 3.1 (a)). The initial placement of all these staff will be a condition of effectiveness (para. 3.2 (a)). (b) Technical assistance to DGIE: The Project will provide 75 man months of technical assistance to strengthen the DGIE in the critical first 15 months of operation of the PVT, and up to a further 70 man months during the remainder of the project. The first annual implementation review will assess the needs for this further assistance. The first 40 months have already been initiated and adequate counterpart staff are already in place. During the execution of this technical assistance the following will be prepared: (a) a data base of current and planned urban transport projects; (b) a plan of action to ensure that all projects seeking federal financing are subjected to adequate evaluation procedures; (c) updated design manuals for urban transport infrastructure and for the economic, financial and environmental evaluation of sub-projects and sub-project components, and (d) a full financing plan for urban transport in the medium and medium- small size cities. Guidelines have already been prepared for  - 17 - assessing, monitoring and treating environmental conditions resulting from transport activities in the participating cities-overall air quality and vehicle emissions, traffic noise, visual intrusion. (c) Equipment and software: The equipment which will be provided to SEDESOL will comprise office equipment--micro-computers, printers, plotters, communications equipment, and software-- so that it could fulfill its function of advising and supervising the production of ITPs by the municipalities and states. When the PVT is fully developed, with up to twelve cities undertaking and implementing their ITPs at the same time, the supervision task will demand a high level of technology if it is to function efficiently. Project management software will be provided by adapting already available software to the specific needs of SEDESOL. (d) External consultant services: During the preparation and implementation of the ITPs it is inevitable that additional needs will arise for specialized technical assistance. This assistance will be provided directly to SEDESOL, and through them, indirectly to the states and municipalities that might require it. The tasks could include advice on the design of traffic surveys, road safety systems and on the establishment of data bases and information and management control systems, the implementation of vehicle emission control standards, and the implementation of public transport regulations. The particular requirements for specialized technical assistance will be defined in each ITP, taking account of the specific needs of the municipality. The Project will provide for up to 105 man months of specialized technical assistance services. 2.12 PART A2 - BANOBRAS Strengthening (US$0.5 million): BANOBRAS will have responsibility for loan administration, procurement supervision and financial monitoring of the project and the sub-projects. An institutional strengthening program for BANOBRAS, which will finance consultant technical assistance (up to 80 man months), equipment and software, was agreed at appraisal (Annex 3). Satisfactory terms of reference for the technical assistance to BANOBRAS have been received and BANOBRAS has started the placement of additional counterpart staff for the management of this Project. Commitments to carry out BANOBRAS's strengthening program and keep the places filled until the end of the Project were obtained at negotiations (para. 3.1 (a)). A condition of effectiveness is that BANOBRAS contract all counterpart staff as shown in the schedule in Annex 3 (para. 3.2 (a)). 2.13 PART A3 - National Training Program (US$2.2 million): A national training program is included in the Project. Its objective is to increase the capabilities of staff now working in the urban transport sector in activities such as traffic and transport planning, project evaluation, project execution, traffic operations and maintenance. The program will benefit staff from the municipalities and states, from national agencies (SEDESOL, SHCP and  - 18 - BANOBRAS), and from local consulting firms on a fee paying basis. The training program will consist of three main stages: (a) an intensive four- month course at post-graduate level for traffic/transport engineers, economists and urban planners; (b) a series of updating courses and regional seminars given periodically for professionals, technicians and managers; and (c) overseas post-graduate studies for a selected group of participants in the initial intensive course. The general content, organizational and implementation arrangements were confirmed at negotiations (para. 3.1 (b)). The bidding of the Intensive Course is already under way in accordance with Bank guidelines. An acceptable draft contract for provision of the Intensive Course has already been presented to the Bank and signing of the contract would be a condition of effectiveness (para. 3.2 (b)). 2.14 PART A4 - Integral Transport Plans (US$ 0.8 million): The first activity of any municipality intending to participate in the Project will be the preparation of an ITP, described in more detail below. Part A4 of the Project will allow SEDESOL to finance up to 25Z of the cost of these studies through grants, the remainder being financed through sub-loans to the municipalities. Satisfactory generic terms of reference for the studies to prepare the ITPs have been received by the Bank. These will be modified to meet the particular requirements of each participating city. An average of 100 man months has been allowed for the preparation of each ITP, with 80% being provided by national consultants. 2.15 Part BI - Integral Transport Plans (US$4.0 million): The preparation of ITPs will be probably the most important component of the whole project, since they will result in a significant change in the approach to urban transport decision making, and their successful implementation will signify achievement of some of the fundamental changes sought in the supply of urban transport services. The objective of the ITPs will be to produce coherent sets of proposals for short and medium term actions and investments to ensure, so far as is possible, that the development of urban transport will provide for the needs of the population. This will be achieved by institutional reform and training, as well by implementing coordinated infrastructure investment plans. Urban transportation involves interaction between roads and streets, private and public vehicles, parking, traffic management and control, pedestrians and mass transit, including buaways and in some cases, light-rail and metros as well as relationships between transport and land use. The ITPs will take account of these interactions and provide an integrated framework for their implementation. 2.16 All transport planning activities have consequences for the physical environment, either positive or negative, from the impact of vehicle emissions on air quality, through traffic noise, the visual intrusion and physical segregation of communities by new roads, to the re-establishment of the atmosphere of historic city centers by the exclusion of vehicular traffic. The interactions of the various activities, together with their environmental impacts will be taken into account in the development of the ITPs. In the course of preparation of the ITPs, the institutional framework under which urban transport activities are planned, directed, regulated and controlled will be reviewed. Recommendations will be made for improvements in these respects, which will be implemented in Part B3 (a) of the project (para. 2.20  - 19 - (f)). In addition to the planning and institutional aspects of the studies, the ITPs will provide an analysis of the current and projected financial status of public transport operators, and provide for the final engineering and/or technical specification for components of the investment plans. 2.17 Although most municipalities have some mechanism, such as a betterment tax, for recovering a proportion of project costs from direct beneficiaries, these rarely recover more than a small fraction of their potential revenue. There are various explanations for this lack, ranging from political reluctance to impose the relevant charges to inadequate and outdated property valuation data. The ITPs will include a financing scheme for the proposed investments, which will show a reliable funding source for each component of the sub-project. The agreed generic Terms of Reference of the ITPa include a requirement to review current cost recovery programs, and if they are found to generate revenue equivalent to less than 40% of the average annual transport investment cost, the ITPs will include proposalst including implementation procedures and time schedules, which will achieve this recovery rate, which will usually be within three years of the implementation of the proposals. 2.18 The city eligibility criteria require BANOBRAS to demonstrate that the municipality or state which will receive any loan will have the financial capacity to cover any counterpart expenditure and to service loan charges. The review of financial capacity will be made by BANOBRAS, and will take account of all projected financial commitments of the municipality or state during the period of amortization of the sub-loans to be contracted as part of each sub-project. 2.19 Part B2 - Urgent civil works (US$45.3 million): Many of the municipalities have been waiting for years for funds to finance what are now urgently needed projects. Further delay in their implementation will result in a significant loss of social welfare, so it would be unreasonable to wait for the formulation of an ITP before starting them. This project category will provide for the financing of the preparation of final designs or product specifications acceptable to the Bank, and the implementation of such designs or the purchase of such equipment. To be acceptable to the Bank, the designs or specifications should meet Mexican standards, or where these do not exist, a standard previously agreed with the Bank. The projects will need to satisfy the same investment criteria as investment projects to be included in the ITPF, including provision of a positive environmental assessment, other than necessarily being part of an ITP. Finance will be provided through specific sub-loans to the municipalities. The maximum cost of the immediate action plan for any municipality will be US$5.0 million. 2.20 Part B3 (a) - Implementation of the recommendations of the ITPs (US$363.1 million): The ITPa will incorporate plans for policy and institutional changes in addition to those required as conditionality for on- lending, and for investments in the following six interrelated areas of urban transport activity as well as further studies. Failure to implement the policy and institutional plans of the ITP will be an event of default under the sub-loan. The related ITP proposals for training and further studies, as  - 20 - well as the final design of the civil works, will be financed under Part B3 (b) and equipment purchases under Part B3 (c): (a) Institutional Reform: will be aimed at rationalizing and increasing the efficiency of the arrangements for transport planning, public transport operations, and the implementation of transport regulations. The reforms will include: (a) the establishment of an organizational structure with clearly defined responsibilities for transport planning, traffic management, formulation and implementation of transport regulations and maintenance of transport infrastructure; (b) restructuring of the regulatory authorities for public transport services and vehicle and driver licensing; (c) proposals to improve the enforcement of traffic and traffic management regulations; and (d) reforms to create and/or improve road maintenance capabilities of the municipalities and other agencies responsible for road maintenance within the municipal boundaries. In addition, this section of the ITP will include proposals for further training, based on the needs identified in the analyses in the other sections of the ITP. The training will be in addition to that included under Parts A4 and Bl of the project and be aimed at the specific needs of each municipality. The training program could include courses on traffic management, road safety, public transport regulation, urban highway design, environmental control and municipal finance and administration; (b) Traffic Management Measures: will focus on making the best use of the existing transport infrastructure through traffic management methods. These will include the application of traffic systems management techniques to key routes and areas, particularly to city and district centers, and include traffic circulation schemes, parking policies, junction improvements, traffic signal control systems, pedestrian schemes and accident countermeasures. Priority measures and investment proposals for the benefit of cycle users will be included in this component. Physical measures will be supported by the necessary policy and enforcement actions essential for their success. The terms of reference for the ITPs will require that the policy and enforcement actions, including strengthening of the enforcement agencies, be spelled out and implemented. Most of the improvements are expected to yield immediate results at relatively low costs. Any proposals for further studies of traffic management will be included in this section and will include the terms of reference for such studies; (c) Public Transport measures: will seek to improve the quality, supply, and economic and financial viability of bus services through: (a) route reorganization, concession and revisions of tariff structures and levels. The tariff revisions will be designed to give operators the possibility of operating  - 21 - different qualities of service at different tariffs and to earn revenue sufficient to adequately to maintain their vehicles, replace them at appropriate intervals and show an adequate return on invested capital; (b) paving of bus access roads in low income areas poorly served by public transport; and (c) development of bus priority measures and facilities which will be integrated with the components of Traffic Management described in (b) above. Proposals including terms of reference, for further studies of issues relating to public transport will be included in this section of the ITP. Any proposals to use municipal funds or guarantees to assist in financing public transport vehicle purchases will need to be supported by acceptable economic and financial assessments, showing that the investments will be economically justifiable and profitable for the operator under the subsidized conditions but not under available commercial loan rates, even though the implementation of such proposals will not be financed by the Project. Investment plans which included uses of municipal funds for loans or guarantees which did not satisfy these conditions will not be acceptable for financing through the sub-loan for this part of the Project; (d) Corridor Improvements: will be aimed at increasing the capacity of major corridors to meet existing and future travel demands. Corridor improvements involving the paving of access roads to low income areas will form a specific sub- component, as the majority of their benefits will be to public transport users and operators. Other components under this category will include: (a) the elimination of "bottlenecks" through junction improvements; (b) the development of selected new roads to correct structural weaknesses in the network which may involve "missing links" or completion of ring roads; and (c) the strengthening of contract management and supervision administration; (e) Haintenance system improvements: will aim at preserving transport infrastructure and facilities such as roads, traffic signals and traffic control devices. Adequate maintenance will avoid the need for more expensive reconstruction at a later date, and reduce vehicle operating costs as its principal benefit. Depending on the particular needs of each municipality, elements will include: (a) the establishment of a road pavement management system; and (b) the financing of road rehabilitation works and deferred road maintenance actions. The establishment of necessary institutional arrangements will be included in component (a) described above; and (f) Environmental assessment and control: will be aimed at implementing adequate systems for the continual assessment of air quality standards and control of vehicle emissions, as  - 22 - well as establishing and implementing norms related to vehicle noise, the visual intrusion of transport infrastructure and traffic and the community segregation resulting from highway construction and expansion. The air quality assessment and control measures and procedures vill be based on those developed in the preparation of the TAQM project, as modified in the experience of their implementation. The SEDESOL vehilel emission standards for minibuses and trucks will be added to those already in existence for cars before the end of 1992, so they will be available by the time the second group of ITP. are completed. The ITPs will include proposals for the purchase of necessary equipment and facilities for ensuring that vehicles meet these standards, for the purchase of equipment, and for the training of personnel to assess air quality standards. The proposed norms for the control of traffic noise, visual intrusion and community severance will be based on a review of existing conditions in the municipality and the interpretation of norms successfully implemented elsewhere. The norms will include a requirement for an environmental assessment of all civil works and for the application of amelioratory measures where any adverse effects might otherwise result. The norms will be applied to all projects recommended in the ITP. 2.21 Part B3 (b) - Final design, technical assistance and training (US$41.6 million): This sub-component will finance: (a) the final design of the sub-project components included in the ITPs; (b) further studies and technical assistance to the municipalities, as recommended in the ITPs, up to a total of 120 man months (para. 2.20 (b) and 2.20 (c)); and (c) training (para. 2.20(a) and 2.20(f)). Normal practice in the municipalities has not been to produce final designs as required for Bank financed civil works, but rather to leave these designs to the selected contractor. This process often results in inferior results and large and unpredictable cost increases. To reduce the probability of such occurrences under this Project, and to start to change the way that municipalities go about implementing their transport infrastructure works, this sub-component will finance the provision of final designs according to Bank principles. Based on the experience of the first three sub-projects, this will be a lengthy and costly process, although it is expected to result in overall cost savings. An allowance of 6.3Z of the estimated cost of civil works has been made for final design and its supervision. 2.22 All additional environmental studies and training to implement environmental regulations and controls will also be included in this sub-part of the Project, as will additional technical assistance to the municipality in a form analogous to that provided to SEDESOL under Part Al. The sub-component also aims at improving the level of competence of the local staff involved in transport planning and maintenance, by financing special training courses in addition to those included in Part A3 of the project and additional technical assistance and studies to be recommended in the ITPs and approved by the Bank. This sub-component will also include as necessary, the training of police in  - 23 - the implementation of traffic regulations or in traffic management to reduce road accidents. The total amount allocated for technical assistance and training (US$17.4 million) reflects the extent of the need and current lack of qualified and experienced personnel, particularly in the areas of urban traffic engineering and public transport administration. 2.23 Part 3 B (c) - Equipment (US$9.3 million): This sub-component will provide: (a) technical equipment for the management and control of urban transport. Many cities lack adequate traffic signals systems, and very few of them have computerized, linked systems which are needed to provide maximum capacity from existing infrastructure. The installation of such systems is often a more efficient and lower cost alternative to undertaking civil works to provide additional traffic capacity; (b) the upgrading of existing traffic signals systems and the installation of new systems where they were demonstrated to contribute to an efficient solution to urban traffic congestion; (c) where necessary, the purchase of equipment such as parking meters, wheel clamps, and tow trucks for removing illegally parked vehicles, in support of strategies and plans under Part B3(a) of the project (para. 2.20 (b)); and (d) equipment for monitoring traffic related air quality indices and for controlling vehicle emissions. D. ITPe and the Operating Manual of the PVT 2.24 During project preparation, ITPs were prepared in three cities-- Ciudad Juarez, Leon and Toluca--under the guidance and supervision of BANOBRAS and utilizing agreed terms of reference. Based on the experience gained in the preparation of these studies, revised terms of reference have now been prepared by SEDESOL, the agency now responsible for the execution of the ITPs. Satisfactory final appraisals of these three ITPs have been received by the Bank, as has a model sub-project agreement to be used for these and other participating cities. 2.25 There are 46 cities (Annex 1, Table 1) which are potential participants in the PVT. The number of cities to be financed by project funds will depend on the investment needs of the first participating cities and the calls which they will make on these funds. However, to avoid the risk that the funds would be distributed between too many cities for efficient supervision, agreement was reached at negotiations that no more than twelve cities will be allowed to participate in Part B3, although no restrictions were placed on the number of cities to participate in Parts BI and B2 (para. 3.1 (e)). Present indications are that the actual number of Part B3 participants may be only ten, based on the size of the investment proposals of the first three participating cities. These three cities have completed their ITPs and are ready to apply for implementation sub-loans. Draft sub-loan agreements are being prepared for the municipalities of Ciudad Juarez and Leon and for the State of Mexico (SOM) in the case of Toluca. The SOM is responsible for the Plan for Toluca because the metropolitan area of the city is governed by five different municipalities. The Toluca ITP recommendations for the integration of the planning processes in the metropolitan area will be implemented as part of the project.  - 24 - 2.26 The Operating Manual of the PVT will guide the operations of all agencies involved in the Program, of which the Project will be an integral part. The Manual covers such matters as agency responsibilities for the project cycle, guidelines on financing arrangements and municipality and component eligibility criteria. The Bank has received a satisfactory final version of the Operating Manual. Any deviation from the policies and practices established in the Manual, without prior Bank agreement, will be an event of default. All municipalities and states participating in the Project will be required to comply with the guidance of the Manual. Final designs for first year sub-project civil works and equipment specifications for two participating cities have been completed satisfactorily to the Bank and final designs conform to recognized Mexican and international standards for urban roads. The bidding documents conform to the standard documents agreed between the Bank and the Mexican Government. 2.27 The Project will be an integral part of the PVT (para. 1.14). Funding of particular sub-projects which satisfy the criteria of the program (Annex 1), will be through a mixture of resources, as shown in Annex 8. Overall Bank financing of any sub-project will not exceed 50% of its total cost. Commitment to the elimination of federal funding under all alternative arrangements, and to adequate federal budget finance for counterpart expenditure (para. 2.39) is included in the PVT, as is the financing mix described above. This financing scheme will be complementary to the method of distributing regional development budgets through the Convenios Unicos de Desarrollo (CUD). These are agreements by which State governments contribute a fixed proportion of the investment costs of federal projects (mostly infrastructure maintenance) and are responsible for their execution. The CUD system will no longer apply to the maintenance and development of transport infrastructure and will be replaced by the mechanism of the PVT, which is similar but gives a more important role to the municipalities. All these arrangements were confirmed during negotiations (para. 3.1 (c)). 2.28 The ITPs will demonstrate that the modified economic rate of return (MERR)2' of the sub-project as a whole was greater than 12% and that all sub- project components had MERRs of at least 12%, and the economic evaluation will have to show that each proposed component is an efficient solution to the identified problem (Annex 1). BANOBRAS, under the First Urban Transport Project, has developed standardized urban vehicle operating costs and an economic evaluation manual (to be revised under the technical assistance to SEDESOL (para. 2.11 (c)), both of which will be used in the studies for preparation of the ITPs and be periodically revised as necessary during the execution of the Project. 2.29 The Operating Manual includes provision for three types of sub-loan, one pertaining to each of the three components of Part B of the Project. The first sub-loan will be made available for financing the preparation of an ITP (Part Bi) and the second sub-loan for urgent infrastructure works (Part B2), with the cities needing to have met only the city size and/or importance eligibility criterion and agreed to implement the other conditions (para. 2/ MERR is the Modified Econornic Rate of Retum. Its use is described in Annex 4, para. S.  - 25 - 2.31). The types of work and equipment which will be eligible for consideration as immediate actions are defined in Annex 1, were confirmed during negotiations (para. 3.1 (c)). The third and final sub-loan will be available for the implementation of the ITP (Part B3). During appraisal, the procedures and agency responsibilities in the preparation of the three components of municipal sub-projects were agreed (paras. 2.45 et seq. and Annex 6), and are included in the final version of the Operating Manual. The operational procedures and responsibilities for the PVT are identical to those of the Project and were confirmed during negotiations, together with the requirement that all participating municipalities and states abide by the norms of the Operating Manual (para. 3.1 (d)). 2.30 It was agreed at appraisal and confirmed at negotiations that the final decision as to which municipalities and sub-projects should receive Bank financing will lie with the Bank (para. 3.1 (e)). This will also apply to each individual component of Part B of the Project. A condition of on-lending and eligibility of any municipality or metropolitan area for a sub-loan under Parts B1 and B2 of the Project will be that it has a population of at least 400,000 and less than 1,200,000, as shown in the national population census of 1990, or that it is a regional center or otherwise of special significance to Mexico's economic development. 2.31 Agreement to the preparation and implementation of the ITPs will require a significant long-term political commitment from the relevant state and municipal authorities. Such commitment will be demonstrated in two stages. In the sub-loan agreement for Parts B1 or B2, responsible authorities will agree to implement all the requirements listed below, and all these obligations will be complied with before a sub-loan agreement under Part B3 could be made. All sub-loan agreements will include monitoring indicators. The municipality or state will report periodically to SEDESOL and BANOBRAS on the progress in meeting these indicators. The specific monitoring indicators for each sub-loan will be included in the sub-loan agreements. Failure to achieve them will require the implementation of a remedial plan to be agreed with the Bank, to avoid a condition of default under the sub-loan. The requirements and eligibility criteria for municipalities and sub-project components were confirmed during negotiations (para. 3.1 (f)): (a) The completion of the ITP, to ensure that the sub-projects financed under the loan, respond to a broad urban transport strategy. Terms of Reference for studies to prepare the ITPs, which will include reviews of public transport regulations and tariffs and of the financial viability of private bus operators, will be prepared specifically for each municipality, based on the generic terms of reference already prepared by SEDESOL. The municipalities will also be required to make a commitment to use their transport planning and traffic engineering units to update and review programs and policies recommended in the ITPs. Subsequent failure to implement fully the agreed policy recommendations of the ITP will be an event of default under the sub-loan;  - 26 - (b) The creation or strengthening, as warranted, of transport planning, traffic engineering unit and traffic management units. In those cases where these activities are the responsibility of the state, the requirement will be that the functions be transferred to the municipalities before completion of the sub-project; alternatively, where there are valid reasons for not following this course, a state delegation will be established in the municipality (Annex 1). Establishment of a local delegation could facilitate the transfer of functions to the municipality at a later date; (c) Agreement by the participating municipalities and states to make adequate budget provision for their share of sub-project funding and not to initiate any urban transport investment with a total cost over US$3.0 million outside of the agreed program, while the sub-project is being implemented, without the prior agreement of SEDESOL and the Bank. Remedies of the Bank may apply if such budget provisions are not made or if such transport investments are made without prior agreement. However at the Bank's discretion these remedies may be limited to the amount of Bank financing corresponding to the particular sub-project; (d) A formal commitment to the participation of the municipality in the project to be agreed with the State. Regulation of public transport operations is frequently divided between agencies at different levels of government (para. 1.18). The policy of the federal government is to decentralize responsibility for urban transport affairs to the lowest appropriate tier of government. This condition will include a requirement that the municipalities have in place or agree to strengthen or create, as appropriate, a competent public transport regulatory agency; (e) A commitment and plan of action from the municipalities to develop a road and signals maintenance capability. Compliance with the plan will be monitored during project implementation and will be a condition of access to further lending (Annex 1). The municipalities will be required to make a sufficient budget allocation for maintenance activities during implementation of the project, based on a calculation of minimum needs as identified in the ITP; (f) The completion of economic and environmental assessments of sub-project components, as part of the ITPs, to ensure that: (a) all projects have an HERR of at least 12S and that no alternative proposal has a higher HERR; and (b) any significant negative environmental impacts are identified and necessary mitigating measures proposed in a form acceptable to SEDESOL and the Bank. SEDESOL has already prepared a methodology acceptable to the Bank for assessing current environmental conditions which are influenced by urban roads  - 27 - and traffic, and for reviewing and implementing remedial actions for those environmental factors which would be adversely influenced by proposed actions. Where the sub- project may affect in a negative manner a specific community, the city should agree to provide to the affected community the environmental assessment and the proposed mitigatory and/or compensation measures with reasonable anticipation and to discuss them with the affected community. Bank approval of such sub-projects will be contingent inter alia upon full compliance with these requirements; (g) The completion of final engineering and bid documentation for components comprising a minimum of 20Z of the sub-project, to reduce the risk of slow implementation of sub-projects. The supervision of the preparation of these final designs will be included in the terms of reference of the ITPs (Part Bl), although their execution will be contracted separately under Part B3 (b); (h) All reasonable alternatives to any sub-project component which involved the displacement of population should have been reviewed and found to be inferior to that proposed, and that the affected community should have been given an adequate opportunity to comment on the proposal. In addition, the evaluation of all sub-project components will include an assessment of their environmental impact and the proposed components will include mitigatory and/or compensatory actions; and (i) That the municipality or state demonstrate to the satisfaction of SEDESOL that they have the administrative capacity and ability to undertake the sub-project, preferably by the creation of a fully staffed sub-project management unit, and to meet all the on-going conditions of participation, and demonstrate that a sub-loan agreement with BANOBRAS has been executed in line with the standard requirements of the Bank for such agreements (para. 2.51). E. Costs 2.32 The total level of transport investment required in the cities which could qualify for participation in the Program can not yet be quantified precisely. Few cities have yet undertaken systematic evaluations of their transport needs and past records of transport investments are not well documented. Sub-project preparation for the first three cities to prepare ITPs (Ciudad Juarez, Leon and Toluca) indicates that short term (about 3 years) investments of the order of US$40 million to US$50 million per city (including taxes and land costs) are required. If all of the 46 municipalities were to participate in the Program at this level of investment, the total cost could exceed US$2 billion. SHCP has determined that the Program should be initiated with a total investment budget of about of US$470  - 28 - million, which will be sufficient for the participation of some ten municipalities at the average level of investment. This estimate, based on prices prevailing in April 1992, provides the basis of the financial projections used in this report. 2.33 As the proposed level of funding will not meet the transport needs of all candidate cities for participation in the Program, the Federal Government needs to determine the financing arrangements for the remainder of the cities. To assist in this process, during the course of the first year of the Project, SEDESOL, assisted by consultants, will furnish proposals to: (a) develop a data base on the investments conducted and planned in the urban areas by all levels of government and a plan of action to ensure that the proposals from all cities are submitted to an adequate evaluation; and (b) in collaboration with SHCP, prepare a financing plan for the rest of the medium size cities, based on a realistic assessment of the needs and financial ability (para. 2.11 (b)). The above tasks have been incorporated in the SEDESOL work program and will be evaluated during the Mid-Term Review of the Project (para. 2.58). During the annual reviews of the Project (para. 2.57), account will be taken of the number of currently participating municipalities and the number then expected to participate in the coming two years. If the Program is successful and there is a reasonable expectation that the demand for Program funds will significantly exceed available funds, the Bank may consider a follow up operation. 2.34 Based on the proposed financing scheme (para. 2.27) and on the cost estimates for the three cities for which appraisals have been completed, the total Project cost will be about US$471 million equivalent, including duties and taxes of about US$45 million. The foreign exchange cost will be US$139 million, about 33Z of the total project cost (Table 1).  - 29 - Table 1: PROJECT COST SUMHARY (In million of US Dollars) Local Foreign Total -----------US$ million------ PART A NATIONAL Al SEDESOL Strengthening 1.0 2.5 3.5 A2 BANOBRAS Strengthening 0.3 0.1 0.4 A3 National Training Program 0.9 0.9 1.8 A4 Integral Studies 0.4 0.2 0.6 SUB TOTAL PART A 2.6 3.7 6.3 PART B LOCAL BI Integral Transport Plans 2.1 1.1 3.2 B2 Immediate Civil Works 25.7 12.4 38.1 B3(a) Implementation of ITPs (Civil works) 145.8 79.0 224.8 B3(b) Implementation of ITPs (Services) 17.6 5.8 23.4 B3(c) Implementation of ITPs (Equipment) 2.5 5.0 7.5 Land and property acquisition 25.2 0.0 25.2 SUB TOTAL PART B 218.9 103.3 322.2 TOTAL BASE COST 221.5 107.0 328.5 Physical contingencies 37.8 18.2 56.0 Price contingencies 28.1 13.7 41.8 TOTAL (excluding taxes) 287.4 138.9 426.3 Taxes 44.8 0.0 44.8 Total (including taxes) 332.2 138.9 471.1 2.35 About US$7.8 million (2% of the total cost) or US$6.3 million excluding contingencies and taxes, will be for the Part A - national component. About 220 man months of consulting services for technical assistance for SEDESOL (detailed in Annex 2) and BANOBRAS (detailed in Annex 3) are included, before taking account of the studies to prepare the ITPs, as are a further 15 months under the proposed National Training Program (detailed in Annex 4). 2.36 Part B will account for US$463.3 million (98Z of the total cost) or US$322.2 million excluding taxes and contingencies. This estimate, based on an extrapolation of the sub-project component costs of three cities which have already completed their ITPs is only indicative, as additional cities may have  - 30 - a different mixture of components in their sub-projects. In addition to the civil works, 100 man months have been included for each of the cities undertaking the preparation the ITPs (para. 2.14) and up to 120 months of technical assistance and consultant services have been included for implementing institutional strengthening and regulatory reform (para. 2.21). For the preparation of the ITPs, 25% of the finance will be provided under Part A4 of the Project. Physical contingencies were extrapolated from the already completed sub-projects and the experience of the large cost increases between appraisal and final execution of works in the First Urban Transport Project (Loan 2824-ME). Price contingencies were calculated with anticipated international inflation rates of 3.7Z per year for the seven years project implementation period. It is assumed that the peso exchange rate will be adjusted as may be necessary to reflect any difference between domestic and international inflation levels. F. Financing 2.37 The Bank loan of US$200 million will finance 42.5S of the total project cost, including land acquisition, taxes and duties. Of the net project cost, 29.5% is estimated as foreign exchange; funding of a modest proportion of local costs (18% of the total, including land and taxes) is justified in view of the beneficial institutional, social and environmental impacts of the project. The project does not include any provision for recurrent cost financing other than for salaries of temporary SEDESOL and BANOBRAS staff under Parts A.1 and A.2 of the Project for the first two years of Project implementation only. Table 2: FINANCING PLAN (In millions of US Dollars) Source of Funds Local Foreign TOTAL Z of Total IBRD 61.1 138.9 200.0 42.5% Federal Government 174.6 0.0 174.6 37.1S State and Local 96.5 0.0 96.5 20.5% Government TOTAL 332.2 138.9 471.1 100.0S % of Total 70.5% 29.5% 100.0% 2.38 The proposed loan will finance 100% of the expenditures related to the national part of the Program (Part A), with the exception of taxes and duties, which will be financed by the federal government, and almost 42Z of the expenditures under Part B. Annex 8 shows the full details of the  - 31 - financing scheme and an example of the financing of the Part B expenditures for a typical municipality. 2.39 The proceeds of the Bank loan will be transferred by BANOBRAS to the Guarantor in accordance with the norms applicable in Mexico to Bank loans, and subsequently the Guarantor will lend a portion of the proceeds back to BANOBRAS in pesos for on-lending by BANOBRAS to the states and cities. To ensure the availability of sufficient federal counterpart funds to meet the financial obligations for the coming year, it was agreed at appraisal and confirmed at negotiations that the Guarantor will submit to the Bank for its review and comment, at least sixty days before the end of each fiscal year, the proposed budget allocations by the Federal Government to the PVT for the succeeding fiscal year (para. 3.1 (g)). These proposals will be discussed during the annual implementation review (para. 2.57) and a budget submission, which will be adequate to meet the federal government counterpart funding obligations under both the national and local components of the project, will be agreed with the Bank. The following annual review will verify that the funding requirements had been met. Any failure by the federal government to provide adequately for the Project will constitute an action of default. The Guarantor has provided to the Bank the 1993 Federal budget proposal indicating the provision of adequate funds to cover the counterpart obligations for 1993. As a condition of effectiveness, the Guarantor and BANOBRAS shall provide to the Bank an executed sub-loan agreement under Part B3(a) of the Project, satisfactory to the Bank, defining the Guarantor/BANOBRAS transfer and on- lending procedures (para. 3.2 (c)). G. On-lending 2.40 BANOBRAS will on-lend the proceeds of the proposed loan to the municipalities and states, in Mexican pesos, at a variable interest rate, no lower than the marginal cost of funds to the Guarantor (CETES) plus 22, with repayment up to 15 years, including grace periods of up to three years. This is in line with the General Interest Rate Agreement (GIRA) between Mexico and the Bank. The Guarantor will bear the foreign exchange and interest rate risk on the Bank loan, which should be manageable since the CETES rate is market- determined and reflects expectations about inflation and devaluation. A sub- project for a particular city will include up to three separate sub-loans, one each to finance the ITP, the immediate actions and the implementation of the ITP. In all cases the states will be party to the sub-loan agreements, acting as guarantors for the municipalities. To help ensure that the municipalities and states participating in the program make sufficient budget allocations to meet the counterpart funding requirements and to meet their on-lending requirements including provision of adequate road maintenance funding, it was agreed at appraisal and confirmed at negotiations, that in conjunction with each sub-borrower, BANOBRAS will furnish to the Bank for its review and comment, the proposed Annual Transport Investment Plan (based on the investment plan of the ITP) of each sub-borrower at least sixty days before the beginning of each fiscal year (para. 3.1 (h)). The sub-loan agreement will give the Bank the right to suspend or terminate a sub-loan if the municipality or state failed to make sufficient budget provision for the investment plan in the approved ITP (para. 2.31 (c)).  - 32 - H. Implementation Schedule 2.41 The Project is expected to be implemented and the loan disbursed over a seven-year period, in accordance with experience under urban projects in the region. The project will be completed by December 31, 1999 and the closing date will be June 30, 2000. The final date for submission of city sub- projects by BANOBRAS to the Bank will be December 31, 1996. 2.42 The three cities that have completed their ITPs have indicated their willingness to comply with the other conditions of participation. The borrowing agency for the first two of these cities will be the municipality, while in the case of Toluca it will be the State Government (of Mexico) as the city of Toluca is administered by five separate municipalities. The sub- projects for these three cities will be ready for implementation as soon as the Bank is satisfied that the on-lending conditions (para. 2.31) have been met. 2.43 There are at least five other cities that are ready to start preparing their ITPs and to comply with the other conditions for participation in the Program. The studies to prepare the ITPs in these cities will start as soon as the administrative procedures can be completed, expected to be within two months of Board approval of the Project. These ITPs are expected to be completed by the end of 1993 and compliance with the on-lending conditions (para. 2.31) will be confirmed at the same time. Meanwhile, implementation of the urgent actions will start early in 1993. Implementation of the proposed investment and actions of the ITP will start after acceptance by the Bank of the ITP recommendations and after confirmation that all the on-lending conditions had been met (Annex 6). 2.44 With three cities now ready to implement their ITP action and investment plans, and a further five cities ready to start preparation of their ITPs, there is a reasonable probability of accelerating the planned disbursement schedule, which is based on an expectation of three ITPs being completed towards the end of 1993 and a further three before the end of 1994. With the investment plans included in the ITPs being for three year periods, the disbursement periods for loans under Parts B2 and B3 of any sub-project are not expected to be more than five years, with expenditure peaking in the third and fourth year. I. Institutional Responsibilities 2.45 BANOBRAS will be the borrower for the Project. For Part A, BANOBRAS and SEDESOL will be the implementing agencies, while for Part B SEDESOL will be the implementing agency, although BANOBRAS will retain responsibility for the financial aspects of procurement and responsibility for processing of sub- loan agreements. A project coordinating group has already been formed and held its first meetings. The purpose of the group is to coordinate the actions of the two implementing agencies and to resolve any inter institutional problems before they have a chance to prejudice the progress of the Project. In most cases the sub-loans will be made to the appropriate  - 33 - municipality, with the financial support and guarantee of the state of which it forms part. In those cases where the state still retains responsibility for most urban transport matters, the sub-loan will be made to the state, but with the municipality being a party to the agreement. Where a city region for which a sub-project is being prepared includes more than one municipality or municipalities in more than one state, all of the relevant states will be severally and jointly responsible as sub-borrowers for the execution of the sub-project. In these cases it may be necessary to constitute a sub-project coordinating group, comprising members of all interested government agencies to ensure timely resolution of potential difficulties in management of the sub-project. 2.46 BANOBRAS. Established in 1933, BANOBRAS is the principal source of funding for the Government's public works and housing sector projects. The institution provides credit to state and municipal Governments to finance public works (mainly water and sewage systems), low income housing and public transportation. In addition, as a second-tier bank, BANOBRAS provides credit to commercial banks to finance Government established programs such as for the purchase of taxis and minibuses; it also provides guarantees to private contractors engaged in public sector works. BANOBRAS recently established a separate unit to manage its second-tier operations. BANOBRAS is the Borrower for 10 Bank loans currently in execution. In August 1989, BANOBRAS closed its retail deposit-taking operations and converted its branches throughout Mexico into regional offices in each of the 31 Mexican states. 2.47 Loans to Mexican public sector entities are made by BANOBRAS both in its capacity as financial agent of the Government and from its own funds. As of December 31, 1991, 77.2% of BANOBRAS' loans were made as financial agent of the Government. In these operations BANOBRAS passes the funds to the different Government entities and charges a commission. BANOBRAS carries little credit risk on its portfolio because 97.3% of its loans are made to the public sector and have the guarantee of the Federal Government. BANOBRAS has never suffered losses on loans to the public sector and does not establish reserves for bad debts on these type of loans. BANOBRAS experienced some losses in loans to the private sector; however, these loans are now being channelled through the commercial banking system as second-tier operations where the commercial banks assume the credit risk. These loans are made at variable interest rates based on the CETES rate and are adjusted monthly. On the liabilities side, its financial agent operations are protected against foreign currency exchange risk as the Government assumes the risk. In the case of direct foreign currency borrowing by BANOBRAS, these funds are either on-lent in foreign currency or on-lent in local currency, but with principal and interest payments adjusted for exchange rate fluctuations. 2.48 The procedures for preparation and execution of sub-projects are described in detail in Annex 6. To assist in strengthening its operations and carrying out its obligations, SEDESOL has contracted additional staff and has in place consultants to provide the first 40 months of technical assistance for its strengthening program. SEDESOL will be the implementing agency responsible for:  - 34 - (a) Part Al - developing and implementing its own institutional strengthening program; (b) Part A3 - the national training program; (c) Parts A4 and BI - studies to prepare the ITPs, including the preparation and approval of a Diagnostic Report, an Immediate Actions Plan, and Investment and Action Plans, and the establishment and promotion of the national urban transport policy including monitoring sector performance and needs, both in coordination with other Federal agencies, particularly BANOBRAS; (d) Part B2 - implementation of the Immediate Actions Plan; and (e) Part B3 - reviewing the compliance with on-lending conditions, including the operational, economic and environmental evaluation of all proposed actions and investments, before starting to negotiate the third sub-loan agreements. Implementation of the ITPs, including the investment and institutional action plans and all technical assistance and training. 2.49 BANOBRAS has also contracted temporary staff and consultants to help in carrying out its following obligations under the project: (a) Part A2 - implementation of its own strengthening program; (b) Part B3 - assessment of the creditworthiness and debt service capacity of municipalities and states wishing to participate in this part of the project; .c) Parts B1, B2 and B3 - administration of sub-loans, including the preparation of all sub-loan agreements, which will be subject to Bank approval, leading the sub-loan negotiations with municipalities and states participating in Part B of the Project, and monitoring compliance with sub-loan conditions. A model sub-project on-lending agreement for implementing the civil works proposals of an ITP has been provided to the Bank; (d) Parts B2 and B3 - delivery of procurement seminars and supervision of procurement under all sub-loans; and (a) Coordination and transmission to the Bank of quarterly and other reports and preparation of information for the Annual and Mid Term Reviews of the project. 2.50 The preparation and implementation of each sub-project will be divided into two stages: Stage I, preparation, and Stage II, implementation. Stage I will be divided into two phases, the preparation of the diagnostic part of the ITP and an immediate action investment plan. Stage II will  - 35 - comprise the preparation of the final ITP, which will include an institutional and regulatory Action Plan, a short to medium range Investment plan, for which the final designs of all approved projects will be included, and the implementation of the immediate actions. The major tasks which will be carried out in each of the Phase., together with an indication of the agency responsibilities, are described in Annex 6. J. Procurement 2.51 BANOBRAS will be responsible for procurement for its institutional component, SEDESOL for its institutional component and for the national training program, and the municipalities for their respective sub-projects. BANOBRAS will install a project management system to help in the control and supervision of the procurement processes in the municipalities. Each participating municipality will send their procurement staff to BANOBRAS for training. Both agencies have recruited, or will have recruited as a condition of effectiveness (para. 3.2 (a)), specialized staff to manage the procurement process. Standard bidding documents, which are currently being revised and will be agreed with the Mexican authorities, will be used during project execution. All procurement documents will be subject to prior review by BANOBRAS. All International Competitive Bidding (ICB) and the first Local Competitive Bidding (LCB) contract per municipality, both for acquisition of goods and for civil works, will be subject to prior review by the Bank. Other procurement documentation will be subject to selective ex-post review. BANOBRAS will retain documentation for these contracts for periodic supervision by Bank staff. 2.52 To the extent practicable, contracts shall be grouped in bid packages estimated to cost the equivalent of US$250,000 or more for goods and US$5.0 million or more for works, and will be procured on the basis of ICB in accordance with the World Bank's Guidelines for Procurement under IBRD Loans and IDA Credit, May 1985. LCB will be used to award contracts estimated to cost the equivalent of less than US$250,000 per bid package for goods and US$5.0 million per bid package for works. In the case of procurement of goods through ICB, Mexican firms will be provided a preference margin equal to 15% or the prevailing duty, whichever is lower. The maximum total value of contracts awarded under LCB for any sub-project will be 60% of the total amount for these items in the sub-project. For contracts with an estimated cost below US$250,000 for goods and works, shopping based on price quotations from a least three bidders will be used. Total procurement under shopping will not exceed US$400,000 for goods and US$3.0 million for works. The selection and appointment of consultants for studies, works supervision, and technical assistance will follow the August 1981 Bank Guidelines for the Use of Consultants by the World Bank Borrowers and by World Bank as Executina Atency Procurement arrangements were agreed at appraisal and confirmed during negotiations (para. 3.1 (i)). 2.53 The estimated project cost breakdown by procurement method (Table 3) is presented below and is based on the three sub-projects already appraised. These figures are tentative as the components of each sub-project will depend  - 36 - on the nature of the recommendations of the ITP and on the components submitted for project financing: Table 3: PROCUREMENT METHOD (In millions of US Dollars) Project ICB LCB Other Total Component Parts Al and Institutional - - 4.6 4.6 A2 Strengthening - - (4. l)-l (4.1) Part A3 National Training - - 2.2 2.2 Program - - (2.0)1' (2.0) Parts A4 and Studies for ITPs - - 4.8 4.8 Bl - - (4.4)1/ (4.4) Part B2 Civil Works 21.2 24.9 1.0 47.1 (Immediate) (6.6) (11.1) (0.5)1' (18.2) Part B3.a Civil Works 153.1 185.2 2.0 340.3 (Other) (57.4) (67.5) (0.9)1' (130.4) Part B3.b Other Studies, - - 37.2 37.2 tech. assist & - - (33.5)1/ (33.5) training Parts Al, A2 Equipment 6.9 2.4 0.4 9.7 and B3.c (5.2) (1.8) (0.4)1/ (7.4) Land - - 25.2 25.2 - - (0.0)'1 (0.0) Total: 181.2 212.5 77.4 471.1 (73.8) (80.4) (45.8) (200.0) 1101 Vigures in pereutbesis are anounts to be financed by the proposed lank Loan. 11 Consultin services to be provided in accordance with Bank guidelines. TI *hopPI procedur aacceptable to the Bank. K. Disbursements 2.54 Proceeds of the proposed Bank loan will finance: (a) 100% of foreign expenditures and 85% of local expenditures for goods; (b) 100% of the cost of consultants, and (c) 42% of the cost of civil works. The remaining cost of civil works will be financed by a mixture of federal and municipal funds, as shown in Annex 8. To expedite project execution, a Special Account  - 37 - will be opened in the Central Bank, with an initial deposit of US$12 million equivalent, representing the estimated loan disbursements in the average four month peak period of disbursements in 1994. All contracts up to US$5,000,000 equivalent for works and US$250,000 equivalent for goods and services will be made on the basis of certified statements of expenditures (SOEs) prepared by BANOBRAS. Supporting documentation for the SOEs will be retained by BANOBRAS and made available for examination by Bank staff during supervision missions. Retroactive financing of up to US$4.0 million equivalent (2% of loan funds), will be provided for eligible expenditures incurred after June 30, 1992. It will be used to finance the first stage of implementation of the ITPs already completed and the initial costs of the first studies in the next round of ITPs. The disbursement arrangements, including those for retroactive financing, were agreed at appraisal and confirmed during negotiations (para. 3.1 (i)). Table 4: DISBURSEHENT BY CATEGORY (In US Dollars) Amount of the 2 of Loan Allocated Expenditures To be financed 1. Equipment, and materials 200,000 100% of foreign for National Component expenditures and 85Z of local expenditures 2. Services (consultants, 6,900,000 100% temporary staff salaries and Training courses) for National Component 3. Services (consultants) for 19,400,000 100% 21 local component, including final design and supervision 4. Civil works for Immediate 17,500,000 42% Actions 5. Civil works for the 128,800,000 42% implementation of ITPs 6. Equipment and materials 7,200,000 100% of foreign for the Local component expenditures and 85% of local expenditures 6. Unallocated 20,000,000 Total: 200.000.000 1/ Including consultant services, technical assistance, provalson of training courses, and the 25% grant element for the Integral Transport Plans. 2/ Including local component of cost of Integral Transport Plans.  - 38 - L. Reporting and Project Supervision 2.55 Reporting. It was agreed during Appraisal, and confirmed at negotiations, that BANOBRAS, with the assistance of SEDESOL and the city agencies, will prepare quarterly progress reports for the quarters ending on March 31, June 30, September 30 and December 31 (par-. 3.1 (j)). The reports will be furnished to the Bank within sixty days of the end of the quarter. The progress reports will cover institutional development and project execution achievements and compare them with appraisal projections and goals and present a critical assessment of problems and issues arising during relevant period of project execution. The reports will also evaluate compliance with sub-loan conditionality by each city, and actions taken to enforce compliance. In cases of unsatisfactory progress, the reports will also detail proposals for adjustments and remedial actions. 2.56 Project Supervision. The responsibilities for supervising project implementation are presented in Annex 6. It is expected that at least three supervision missions per year (four in the first year), staffed by an urban transport engineer/planner and a transport economist will be required to supervise the Project during the first three year. of execution. In addition, financial analysts and specialists in traffic engineering, training, environment, and mass transit systems should accompany the supervision missions as required. Supervision requirements are expected to be intensive, particularly in the initial years, as Bank missions should plan to visit every participating city at least once a year. There are now at least five municipalities or states waiting to participate in the Project, in addition to the three ready to start on the implementation of their ITP. For each of the first two years, the supervision requirements are estimated at about 40 and 35 headquarters staff weeks respectively. Supervision requirements will fall to 25-30 staff weeks per year thereafter. Arrangements will also be made for an additional 20-25 weeks per year of local supervision of works in the participating cities. 2.57 Asnual and Hid Term Reviews. In September of each year the Bank and the Government will conduct a formal joint review of the progress made in reaching the objectives, in the implementation of the project and in achieving the monitoring indicators of the sub-projects. The agenda for the annual review will include the following items: (a) a review of the number of cities currently participating in the project and expected to enter the project in the coming year, and of the needs for sub-project financing; (b) a review of the progress on implementing the technical assistance to SEDESOL and BANOBRAS, together with the specification of remedial measures to remedy any delays in implementation; (c) an agreement on the federal budget submission that will provide adequate federal financing for the project in the coming year (para. 2.39); (d) an assessment of progress of the national training program and its revision to meet any new needs which may have arisen during the previous year; (e) a review of the financial performance of both the national and local components of the project in the previous year and of the requirements for the coming year and of the compliance of federal, state and municipal agencies with sub-loan covenants. Information for the financial reviews will be provided by the sub-project monitoring program to be introduced by BANOBRAS;  - 39 - (f) a review of the proposed urban transport investment plan for each participating municipality for the coming year, particularly in respect of the availability of finance for each of the projects; (g) an assessment of adequacy of the municipal and state budget allocations for urban transport in the participating cities for the following year, to meet the assessed needs for road and equipment maintenance. The assessment will include an analysis of the recovery of investment costs from the immediate beneficiaries and of the implementation of bus and taxi tariff scales to enable operators to earn sufficient revenues to implement adequate fleet replacement policies; (h) progress on the implementation of institutional changes in the participating cities, particularly in respect to the allocation of responsibilities between state and municipal agencies for the design and implementation of traffic and transport regulations and taking account of performance against agreed timed objectives; (i) an evaluation of progress in improving air quality indices and vehicle emission controls in participating cities and of the proposed measures to further improve these indices in the coming year, and (j) a review of progress on the preparation of new ITPs and of the proposed participation of further cities in the program. The discussion and analysis of these issues will lead to the formulation of adjustments to the project and, if necessary, the implementation of remedial actions satisfactory to the Bank to correct any deficiencies or delays. Satisfactory in this case implies that the proposed actions would, in the opinion of the Bank, have a high probability of resolving significant problems. 2.58 The third annual review will constitute a Mid Term Review, and provide an opportunity for a more comprehensive review of the achievements of the project to date, and of the prospects for its successful completion. For this Mid Term Review the agenda will include, in addition to the agenda items for the annual reviews: (a) a review of compliance with the on-lending conditions; (b) an evaluation of the funding proposals for the remainder of the PVT; (c) assessment of a specific report to be prepared by SEDESOL on the status of transport related environmental issues in the medium-size cities (the terms of reference for the study to produce this report to be agreed at the previous annual review); and (d) proposals for restructuring or reorientation of the project in light of the reviews and assessments of the issues discussed during the Review. The timing and agendas of the annual and Mid Term reviews were confirmed during negotiations (para. 3.1 (k)). M. Auditing 2.59 Auditing. BANOBRAS will have its financial statements, Special Account and SOEs audited by an independent auditor satisfactory to the Bank and according to generally accepted auditing standards. The Bank will review the external auditors' terms of reference. BANOBRAS, in turn, will require each city and state implementing agency to engage external auditors satisfactory to BANOBRAS to audit their sub-project accounts according to generally accepted auditing standards. The accounts for each sub-project will be maintained separately. BANOBRAS will review the audits of the sub- project accounts and report to the Bank on the status and the remedial actions taken. The reports of the sub-projects will be furnished to BANOBRAS within  - 40 - five months of the close of the fiscal year. BANOBRAS' audit report and its report of the sub-project audits will be presented to the Bank annually no later that June 30. SEDESOL will keep project accounts that will be audited by Contraloria General de la Federaci6n (the auditor of the federal government) and their report will be furnished to the Bank not later than June 30 of the following year. The project auditing arrangements were confirmed during negotiations (para. 3.1 (i)). N. Project Benefits 2.60 The main benefits of Part A of the Project will be in the improved organizational structure of responsibilities for urban transport and improvements in the technical abilities of the manpower available. In addition, federal officials will be better equipped for allocating federal financial resources for urban transport development as a result of the proposed technical assistance to SEDESOL and BANOBRAS. Part B of the Project will provide, by way of the ITPs, a coherent framework for the development of urban transport infrastructure and services and, by way of the sub-project investment components, improvements to urban transport operations. In addition, the changes to transport policies brought about through the new approach to transport planning will result in a more responsive and user oriented urban transport system. 2.61 The quantifiable benefits used to justify the physical investments are in terms of reduced vehicle operating costs, but just as important in terms of their impact will be time-saving benefits through reduced traffic congestion. This reduction in congestion, together with reduced dust generated from vehicles operating on earth roads will make a significant contribution to improving the environment and hence to the quality of urban life. The poor in particular will benefit from road paving and consequent improved public transport access to low income areas, one of the specific investment categories of the project and accounting for almost 18Z of the proposed investments in the three investment plans approved to date. Sub- project categories dealing with non motorized road users, pedestrians and cyclists, will also principally be of benefit to poorer users of the urban transport system. 2.62 Based on the evaluations of three city sub-projects, the project categories are expected to have modified economic rates of return (MERR), weighted by the investment costs, of between 34Z and 72%, with an average of about 50Z (Table 5). Annex 5 provides a discussion of the methodology used, including an explanation of why MERR's reduce the otherwise exaggerated rates of return for sub-projects which have very high ERR's, and more details of the results for each of the three cities for which sub-projects have so far been evaluated. The project MERR's exclude the benefits of time savings and environmental improvements, which are very important but which are difficult to quantify. The average HERR excludes the costs and benefits of the institutional strengthening program of SEDESOL and BANOBRAS and of the national training program. The average rates of return, and sensitivity  - 41 - analyses reflecting the impact of higher costs and/or lower benefits, for the four evaluated components in the three sub-projects which have been already appraised are summarized below. Table 5 - SENSITIVITY OF HERR TO CHANGES IN COSTS AND BENEFITS Basic Costs Benefits Costs -25Z Sub-project component MERR +25% -25Z Benefits +25% Traffic management 65% 60% 532 47% Corridor improvements 34% 30% 27% 19% Access to low income areas 36% 32% 28% 20% Road maintenance 72% 65% 53% 37Z Average 49% 45% 39% 30% 0. Environmental Aspects 2.63 The project will have a beneficial impact on the environment, which is one of the principal objectives of the ITPs. The Project will benefit from several of the measures proposed in TAQM project, particularly those components dealing with national standards and issues. Equipment to be purchased by SEDESOL's emissions laboratory will be available to the municipalities to undertake their initial analyses of levels of vehicle emissions. Much of the expertise gained in the operation of the laboratory and in the commercial vehicle testing stations will become available to municipalities participating in the project. Changes in the composition of vehicle fuels and in the comparative pricing of normal and low lead gasoline to be introduced as a result of the TAQM project will also be of benefit in other urban areas. 2.64 Traffic management investments will help relieve congestion in major transport corridors and central areas, resulting in lower emission of pollutants per vehicle kilometer. Junction improvements and pedestrian schemes will improve safety. The paving or resurfacing of access roads and city streets will reduce the volumes of airborne dust. Public transport system improvements will contribute to promote a more efficient form of urban development resulting in a further reduction of travel and emissions. Redesign of urban roads produces opportunities for tree planting, an activity which will be encouraged in the ITPs. The approved ITP for Ciudad Juarez includes proposals for the planting and maintenance of more than 2,500 trees. Similar proposals will be expected in other ITPs. 2.65 Some road works may have localized adverse impacts, mainly related to excavation for construction materials and disposal of work site wastes. Measures to mitigate such impacts will be specified in the bidding documents for works. The problems of excavated material are likely to be less than in  - 42 - an inter-urban transport project as the road developments in the project will mostly be to existing roads for which no further earthworks will be required. 2.66 In general, land acquisition should be limited, as the Project's main thrust will consist of improvements within existing rights of way, traffic management measures, paving of streets, and road maintenance. However, in some cities, the proposed sub-project may include construction of new road links or major intersections, and in such cases, a need for relocation of existing residents may occur. In the case of relocation the Bank guidelines will be strictly followed. A special condition for on-lendina will apply to any sub-project involving displacement of population (para. 2.31 (h)). 2.67 The TORs for preparing the ITPs will require that existing environmental road conditions be reviewed and that the Plan include specific measures for alleviating conditions where they fail to meet existing or proposed standards. In addition, an environmental assessment will be required of all proposals for new works, indicating any adverse environmental consequences and proposing measures to eliminate them or at least reduce their impact to internationally accepted levels. These assessments and proposals will relate principally to vehicle emissions, vehicle noise, visual intrusion and community severance. P. Project Risks 2.68 The main project risks will arise from the ambitious objectives it pursues and the weak institutional capacity to deal with sector issues, both at the Federal and local levels. Although improvements have been made, implementation of the First Urban Transport Project has been delayed by the institutional weaknesses within the State of Mexico (SOM) and BANOBRAS. To address this problem, BANOBRAS has now consolidated its transport groups into one division but is having difficulty in contracting new professional level staff. SOM has initiated an agreed Action Plan to improve the institutional capacity and capability of its Transport Planning Division. SEDESOL, in preparation for the implementation of this Project, has reorganized its Urban Project Transport Division and has contracted counterpart staff and technical assistance to further strengthen the division. Part A2 of the Project includes additional funds for institutional strengthening for SEDESOL, the use of which will depend on the assessed needs. The reinforcement of both SEDESOL and BANOBRAS and the implementation of the National Training Program, should increase the implementation abilities of both Federal and local agencies. In addition, technical assistance and consultant services for state or municipal agencies are provided for in Part B3 (c) of the Project. 2.69 It is not expected that all the objectives will necessarily be fully achieved within the period of project execution. The objectives are ambitious relative to the low base from which the project will atart and even their partial achievement will be of significant benefit to the population of the medium-size cities. However, it is expected that the Project will lay a sound basis for the development of the sector by providing institutional  - 43 - strengthening, training and encouraging a more rigorous analysis of urban transport. 2.70 The risk of a change in commitment to the Project, resulting in a lack of counterpart funding, could occur as a result of changes in administrations after elections at the federal, state and municipal levels. The risk of delay due to changes in administration will be mitigated by: (a) application of the up-front sub-project eligibility criteria which will apply to all federal resources for urban transport in medium-size cities; and (b) the incentive provided by the grant element of the federal program for transport investment in medium-size cities. Also, the flexibility of the line of credit approach will allow resources to be transferred from a sub-project which is not performing well (with actual disbursements le than 401 of those planned by the end of the second year of implementation) to new sub-projects in other cities. The Federal grant system is attractive to the cities and should motivate good performance. 2.71 In view of the considerations outlined in the preceding paragraph, the risks are expected to be manageable and the conditionality has been designed to contain them within acceptable limits. Offsetting these risks are the significant benefits expected from the project, particularly from its institutional strengthening components. If these components are successfully implemented, the benefits in term of improved resource allocation would go well beyond the direct benefits estimated in Table 5, even if performance in respect to some other objectives falls short of expectations.  - 44 - III. AGREEMENTS REACHED AND RECOMMENDATIONS 3.1 During negotiations agreement was reached on the following: (a) SEDESOL's and BANOBRAS' commitment to carry-out their respective strengthening programs, including the contracting of remaining counterpart staff and commitment to keep all positions filled at least until the end of the project (paras. 2.11 and 2.12); (b) the general content, organizational and implementation arrangements of the National Training Program as defined in Annex 4 (para. 2.13); (c) the content of the PVT, including the mix of Federal, local, and sub-project funds, municipality and component eligibility criteria, the types of project for consideration as immediate actions and the commitment to provide adequate federal budget finance throughout the project (paras. 2.27 and 2.29); (d) sub-project agreements would require participating municipalities and states to comply with the PVT Operating Manual (para. 2.29); (e) that the final decision as to which municipalities and sub- projects should receive Bank financing would lie with the Bank (para. 2.30) and that not more than 12 municipalities would participate in Part B3 (para. 2.25); (f) the requirements and eligibility criteria for on-lending (para. 2.31); (g) the Guarantor shall submit to the Bank for its review and comment, at least sixty days before the end of each fiscal year, the proposed budget allocations by the Federal Government to the PVT for the succeeding fiscal year. Failure to provide sufficient federal counterpart funding would constitute an action of default (para. 2.39); (h) BANOBRAS shall, in conjunction with each sub-borrower, furnish to the Bank for its review and comment, the proposed Annual Transport Investment Plan of each sub-borrower at least sixty days before the end of each fiscal year (para. 2.40); (i) the procurement, disbursement and auditing arrangements (paras. 2.52, 2.54 and 2.59); (j) BANOBRAS shall submit a progress report to the Bank for its review and comment, within 60 days of the end of each quarter. The reports would cover institutional development and project execution achievements (progress on disbursement of loan funds would be reported only in June and December, for each  - 45 - semester) and compare them with appraisal projections and goals and present a critical assessment of problems and issues arising during relevant period of project execution. They would also evaluate compliance with sub-loan conditionality by each city, and actions taken to enforce compliance. In cases of unsatisfactory progress, the reports would also detail proposals for adjustments and remedial actions (para. 2.55); (k) the timing and agendas of the annual and Mid Term Review of Project progress and issues (para. 2.58). 3.2 The following would be conditions of effectiveness: (a) all counterpart staff for SEDESOL and BANOBRAS, as described in their Strengthening Programs shown in Annex 2 and 3, respectively, will be in place including specialists in procurement (paras. 2.11, 2.12 and 2.51); (b) the contract for the provision of the Intensive Course of the National Training Program as defined in Annex 4 will have been signed (para. 2.13); (c) the Guarantor and BANOBRAS shall provide to the Bank a satisfactory executed sub-loan agreement under Part B3 (a) of the Project, defining the Guarantor/BANOBRAS transfer and on- lending procedures (para. 2.39). 3.3 Retroactive financing of up to US$4 million for expenditures made after June 30, 1992 is recommended (para. 2.54). 3.4 With the above agreements, the project would be suitable for a Bank loan of US$200 million equivalent for a period of 15 years including 5 years of grace at the Bank's standard variable interest rate.   - 46 - ANNEX 1 Page 1 of 6 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT City and Investment Eligibility Criteria Introduction 1. Urban transportation involves an integrated system of roads, private and public vehicles for the movement of goods and passengers, pedestrians, parking, traffic signaling and, in some cases, railroads and metros as well as land use planning. A change in one component of the urban transport system affects the other components. It is therefore necessary that urban transportation be analyzed in an integrated manner so that improvements in one area does not cause problems in another one. In order to improve the technical quality and development impacts of urban transport planning and development, SHCP, SEDESOL and BANOBRAS will take an integrated approach to the analysis of urban transport issues in medium size cities. Urban transport investment appraisals, recommendations for regulatory reform and for technical assistance and training, will be grouped together to form a coherent sub- project in each eligible city. 2. This approach will be implemented through the Program for Urban Transport in Medium-size Cities ("Programa de Vialidad y Transporte Urbano para Ciudades Medias", PVT), described in paras. 1.14 through 1.17, which provides a suitable policy framework for the Project. The PVT is designed to provide financial assistance, in the form of a federal grant and access to federal loans, to cities meeting the city and project eligibility criteria. Cities meeting the criteria will be eligible for up to three sub-loans, one each for financing: (a) the studies to prepare an Integral Transport Plan (ITP); (b) immediate actions to resolve specific urban transport problems, and; (c) implementation of the recommendations of the ITP. City Eligibility Criteria 3. Participation in the PVT by any city will be dependent on the fulfillment of eligibility criteria. The first criterion will need to be satisfied before the municipality and\or state could enter into a sub-loan under Parts Bl and B2 of the proposed project, as will a commitment to satisfy the other criteria (para. 2.30). Confirmation that the other conditions had been met will be required before a sub-loan under Part B3 of the proposed project could be made (para. 2.31). The financing of any sub-loan with Bank funds will require the prior consent of the Bank. The following are the criteria for city eligibility for the proposed project: (a) a population between 400,000 and 1,200,000 in the 1990 national census. Consideration will also be given to other cities if they are of significant economic importance to the country, such as some of those on the US-Mexico border and some regional capitals. A  - 47 - ANNEX 1 Page 2 of 6 proposal for inclusion of a city under this exception will require the agreement of the Bank; (b) completion of an Integral Transport Plan (ITP). Specific terms of reference for each city, acceptable to the Bank, will be prepared by SEDESOL, with the assistance of the municipality (Annex 6, para. 9). These Terms of Reference will include requirements to analyze and make recommendations in respect to: (a) institutional reform; (b) traffic management; (c) public transport; (d) improvements to corridors to low income areas; (e) infrastructure maintenance; and (f) environmental issues related to road transport. The municipalities will be required to make a commitment to use their transport planning and traffic engineering units to update and review programs and policies recommended in the ITPs. Subsequent failure to implement fully the agreed policy recommendations of the ITP will be an event of default under the sub-loan; (c) The creation or strengthening, as warranted, of transport planning, traffic engineering unit and traffic management units. In cases where these activities are the responsibility of the state, the requirement will be that the functions be transferred to the municipalities before completion of the sub-project; alternatively, where there are valid reasons for not following this course, that a state delegation be established in the municipality. Establishment of a local delegation could facilitate the transfer of functions to the municipality at a later date. The municipalities will also be required to make a commitment to use their transport planning and traffic engineering units to update and review programs and policies recommended in the ITPs; (d) Agreement by the participating municipalities and states to make adequate budget provision for their share of sub-project funding and not to initiate any urban transport investment outside of the agreed program with a total cost over US$3.0 million, while the sub-project is being implemented, without the prior agreement of SEDESOL and the Bank. Remedies of the Bank may apply if such provisions are not made or if such investments are made without prior agreement, although at the Bank's discretion these remedies may only apply to the amount of the proposed Loan corresponding to the sub-project where the particular investment is being made; (e) A formal commitment to the participation of the municipality in the project to be agreed with the State. Regulation of public transport operations is frequently divided between agencies at different levels of government (para. 1.18). The policy of the federal government is to decentralize responsibility for urban transport affairs to the lowest appropriate tier of government. This condition will include a requirement that the municipalities have in place, agree to strengthen or create, as appropriate, a competent public transport regulatory agency;  - 48 - ANNEX 1 Page 3 of 6 (f) A commitment and plan of action from the municipalities to develop a road and signals maintenance capability. Compliance with the plan will be monitored during implementation and will be a condition of access to further lending. The municipalities will be required to make sufficient budget allocation for maintenance activities during implementation of the project, based on a calculation of minimum needs as identified in the integrated urban transport studies; (g) The completion of economic and environmental assessments of sub- project components, as part of the ITPs, to ensure: (a) that all projects are economically viable (that is, that they have an MERR of at least 12% and that no alternative proposal has a higher MERR (the difference between ERR and MERR is explained in Annex 4, par. 8); and (b) that any significant negative environmental impacts are identified and necessary mitigating measures proposed in a form acceptable to SEDESOL and to the Bank. SEDESOL has already prepared a methodology acceptable to the Bank for assessing current environmental conditions which are influenced by urban roads and traffic, and for reviewing and implementing remedial actions for those environmental factors which will be adversely influenced by proposed actions. Where the sub-project may affect in a negative manner a specific community, the city should agree to provide to the affected community the environmental assessment and the proposed mitigatory and/or compensation measures with reasonable anticipation and to discuss it with the affected community. In the case of relocation, the Bank guidelines will be strictly followed. Bank approval of such sub-projects will be contingent inter alia upon compliance with these requirements; (h) The completion of final engineering and bid documentation for components comprising a minimum of 20% of the sub-project, to reduce the risk of slow implementation of sub-projects. The supervision of the preparation of these final designs will be included in the terms of reference of the ITPs, financed under Part B2 of the proposed project, although their execution will be contracted separately under Part B3.b; (i) All reasonable alternatives to any sub-project component which involved the displacement of population should have been reviewed and found to be inferior to the that proposed, and that the affected community should have been given an adequate opportunity to comment on the proposal. In addition, the evaluation of all sub- project components will include an assessment of their environmental impact and the proposed components will include mitigatory and/or compensatory actions; and (j) That the municipality or state demonstrate to the satisfaction of SEDESOL that they have the administrative capacity and ability to undertake the sub-project, preferably by the creation of a fully staffed sub-project management unit, and to meet all the on-going conditions of participation, and demonstrate that a sub-loan  - 49 - ANNEX 1 Page 4 of 6 agreement with BANOBRAS has been executed in line with the standard requirements of the Bank for such agreements. Number of participating cities 4. The 1990 national census results showed that there were 21 cities with a population between 400,000 and 1,200,000 with a total population of about 12.8 million or about 16Z of the national total. There are a further 25 cities with a population greater than 200,000, with a total population of 7.2 million and representing a further 8Z of the national population (Table 1). The maximum number of participating municipalities in Part B3 of the proposed project been established at twelve. This reflects resource constraints and an estimate of the manageable limit for adequate supervision while maximizing the institutional improvements to be gained under the proposed project. No limit has been established for participation in Part Bl of the project. Participation in Part B2 will be conditional on adequate progress on the development of the ITP under Part BE and particularly the completion of final designs for the components to be included in the immediate action plan. Participation in Part B3 will be conditional on compliance with the on-lending conditions. It is anticipated that some participants in Part Bl will be unable to satisfy the on-lending criteria. 5. No rigid criteria have been determined for participation by cities of less than 400,000 population in the proposed project and each proposal will be considered on the basis of the case made for the city's importance to the development of the national economy and the gravity of its urban transport problems. Only a few of the cities in the group are expected to satisfy the importance component of criterion (a). Additional city requirements 6. In addition to satisfying the eligibility criteria, the municipality or state carrying out the sub-project will also undertake to: (a) submit annually its urban transport investment and maintenance budgets to demonstrate compliance with the on-lending conditions (b) follow procurement guidelines established under the project; (c) have all subproject accounts audited annually by independent auditors, approved by BANOBRAS, and submit reports no later then the end of June of each year; (d) implement the monitoring program agreed as part of the sub-loan agreements and submit quarterly progress reports; and (e) during sub-project preparation, appoint a sub-project coordinator to coordinate activities between the various city and state departments with responsibilities in respect to the sub-project.  - 50 - ANNEX I Page 5 of 6 Investment Zligibility Criteria 7. An urban transport investment shall be considered eligible for financing under Part B3 of the proposed project provided it meets the following criteria: (a) complies with the objectives of the PVT and forms part of the Integrated Transport Plan (ITP) of the city; (b) an economic evaluation is provided showing that the investment is an efficient solution to the identified problem. This will require that the investment be shown to have an MERR greater than 12Z and that this is greater than that for any alternative with similar benefits (a definition of MERR is provided in Annex 5); (c) it has been subject to an environmental assessment which provides a positive outcome in respect to air quality, noise, visual and community cohesion criteria (para 2.20 (f)). In the case of negative impacts, appropriate mitigating measures should be devised and included; (d) includes any necessary complementary institutional and policy action plans for successful implementation and operation; and (e) have a planned implementation period greater than two years, unless otherwise agreed by the Bank. Candidate measures for Immediate Action 8. As part of the development of the ITPs a plan of immediate actions, if any, will be prepared, and sub-loans will be available for their implementation under Part B2 (para. 2.19). All eligible measures will be subject to planning and evaluation (technical, economic, financial, and environmental) according to standard Bank requirements but, identification and implementation will not be dependent on the completion of the ITP. 9. The objective of the plan will be to improve traffic and transport conditions in a city in the immediate future and at low cost. In most instances the qualifying actions will have been prepared in advance of the municipality or state entering the PVT and will have been subjected to the normal criteria for qualifying for Bank funding. The proposed Immediate Action Plans will require Bank approval before their implementation and their procurement will follow standard Bank guidelines. 10. Immediate action measures are to be sought which will be justified under any traffic and transport strategy developed under the Integral Study. The total implementation cost of the urgent actions will not normally exceed US$5 million, equivalent to 10% of the cost of the average investment plan to be approved under the ITP. The following list shows the types of action envisaged.  - 51 - ANNEX 1 Page 6 of 6 i) Measures to improve the efficiency of traffic operations including: (a) traffic management; (b) exclusive bus lanes; (c) reversible lanes; (d) traffic signals schemes; (e) intersection improvements by low cost means such as channelization, access control and changes in signal phasing; (f) signing and marking of roads to improve capacity and safety; and (g) parking controls. ii) Civil works to eliminate bottlenecks by limited construction such as minor road widening. iii) Policy measures to reduce vehicle flows in congested areas including access controls, parking and loading/unloading controls, traffic circulation schemes etc and all associated traffic management measures. iv) Actions to improve the short term maintenance of roads and traffic control devices, particularly the purchase of equipment and spare parts. v) Technical assistance to strengthen institutions such as municipal traffic agencies and highway planning departments, to improve traffic and road planning, operations, maintenance etc and to public transport companies to improve operational practices. vi) Implementation of environmental monitoring systems and of actions to bring about environmental improvements, such as the construction of noise barriers and the introduction of vehicle emissions testing. Financing limits 11. Although there are no formal limits to the total funding available to any municipality or state under the operating rules of the PVT, the funds available, in comparison to the number of potentially eligible cities and their indicative investment needs, indicate that some restriction will have to be imposed. It is unlikely that any municipality will receive grants and loans totalling more than US$30 million equivalent. The maximum amount available from the Project to finance immediate actions is US$5 million equivalent per city.  - 52 - Annox 1 Table I MEXICO MEDIUM -SIZE CMES URBAN TRANSPORT PROJECT Candidate aities for Participation in the Program Cumulative Cumnulaive 9-ty ~~~~State Populationt Population percentage I Puebla PUB 1. 054,9. 1,5,211 2 LeonG'Q724.1,774.4 3 aiudad luarz CHt, 826,127" 7,753,01 3.4% 4 Torreon. (6 COAHf. 686.CRI:. 3.43%O.4 S I1~~~~~~~~ma B.C ~~~~~~~~~746,:465 4807:52 6 appnJAL=OO .7117648793,0 7 San Luis Potosi (3) &LP.. 658,740: ,5,556,66 8. . Mezicai BC .% 9 Qrlwaan. SIN 602 HAU4 '6,7j16 ......3.%. IO- Meida I)YU 595,16. ,5, 11 Acapulco GRO 528: .4,5098 12 :Chihuahua. CHIHI53.47 8.478,987104 13 Tampico (4 AP 53808,928 14: AguascAilentcsAO 56,8 9,49921 1.7 15: MorelHa MCI49769,8,6 2 16 Toluca. () MEX 4760*047,9 29 17 Veracruz 17 E 7~661,4,6 3..9 18 a salttillo ()COAH 46,93. 1.1,3 41 19 ueeroORO 454,059 11.870,95146 20 Hermosijlo SON' 449,472 12.321,47 15.296 21 DurangD DGO 41,1 274482 57 Sub total meditm Cities 12,734.482: 1.1 22 Vafla HermosaTA 390,161] 13,124,643 16,2% 23 Reynosa TAMPS 375,549 13,5(13,19 16.6 24 Irapuato G'M: 367,471: 13,862,63 11 25 TIaquepaque. JAL.37,. 14.W6375% 26 Matamro T'Ahm 323,39 14,524N0 ....% 27: Celaya GTIO 3571,3,8 83 28 Mazai.ln :SIN.3114,249 1S,1.3,8 1187 .29 CiudadObrego SON31,71,490 . 19% 30) LAs Mochils SIN 30M7,71.706194 31 Xalapa VER 298,331.. 16,068,747:1' 49.8% 32 Tuxtla Gtcz CHIS 295.615: 16-164X62 20.1% 33 CuraaaMOR 281,752'1.4,1 05 34. Cordoba VB1 47A8451,995 21.29% 35. EF.nsaada B.C. 26,0 7,414,64:. 2,% 36 GuassveSI 25..2 17,12.85:. 37 moaclova ..O..2.,891,9. ,74 :.22.1* 38 Tepic NAY. 23kd103 1510=7 24% 39 Coaizacoalos ~~~V]ER 4451862Z,4Z9. 40, Tk'pachula CHI 22,2SM I8,82441 41. Nuv Laed AMPS'27921,6,2 35 42~ Uruapan:: y mtiCRt7121,7,6 43 Qazaca OAX 21,4I9,492,76240 44 Ciudad Victoria TAMPS: . 0780 97...8242 45 SuIrnaw TO 062tS1990481 46 ..Minatilia EL 9,4 20,16624.7% Sub total . sub totalmedlumSma Ciiate7,271 :: . 'TOAL 'TOTAL MEDIUM sad MEDIUM-SMALL C7S2,0.5 47 TOTAL MEXICO . ~~~~~~~~1,24,64$ x0o 1 Includes Progreso (37,86) 5 Only Toluca 2 Includes Ramos Aripe (28,128) 6 Includes G.Palacio 3 Includes Soledad de Graciano Sanchez (132,921) & Cd. Lerdo (330,210) 4 Includes Cd. Madero & Altamnira (242,2D4) 7 Includes Boca del Rio Source: Population Census, 1990 08-Oct-92 05:11 PM  - 53 - Annex 2 Page 1 of 5 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT SEDESOL Strenathenina Program Background 1. Until recently, the transfer of central government funds to states and municipalities for urban transport improvements has boen primarily a subject for negotiation between the central government and the local agencies involved. Only limited evaluation of projects was carried out. Increasod emphasis by the Federal Government on decentralization, and the creation of the Programa de Vialidad y Transporte para Ciudades Medias (paras. 1.14 through 1.17), means that urban transport improvements will now be funded by a mix of local, borrowed and federal funds. To qualify for federal funds, projects will have to be subject to evaluation and only those which meet acceptable technical, economic, financial, environmental and social evaluation standards will qualify for Federal Government transfers. Projects must also form part of an acceptable urban transport strategy developed from an integrated urban transport study of the municipality concerned. Role of SEDESOL 2. The Secretariat of Social Development has been charged with development of urban transport policy, among other urban development matters. However, for various reasons, particularly the financial distribution mechanisms between the Federal Government and the states/municipalities for urban transport improvements, SEDUE, the predecessor of SEDESOL, was not formerly active in developing transport policy or in assisting municipalities in the development of cost-effective urban transport systems. 3. SEDESOL has now been assigned a key role in the PVT, of which the Project is an integral part. The role involves the technical evaluation of the Integral Transport Plans (ITPs) and the economic and technical assessment of the sub-project components to be financed by the Program. In carrying out this role SEDESOL will establish, publish and promote standards, norms and criteria; provide advice and assistance to municipalities on transport policy and for planning, design, implementation, supervision and monitoring of studies and projects; give guidance on public transport organization and regulation and other sectoral institutional issues; and, investigate and develop appropriate technology. 4. To meet the challenge of its new role, SEDUE reorganized in late 1991 and created the "Direccion General de Infrastructure Urbana" (DGIU). DGIU was divided into sectoral units, one of which is responsible for urban transport, and is further supported by technical units (for financial analysis, statistics, training, etc.) to enable DGIU to meet its responsibilities. The new structure of SEDESOL includes a "Direcci6n General de Infrastructure y Equipamiento" (DGIE) with similar functions to DGIU.  - 54 - Annex 2 Page 2 of 5 5. The transport sector directorate of DGIE, the "Direccion de Infraestructura, Vialidad y Transporte" (DIVT), will be responsible for planning, evaluation and implementation of the urban transport components of the and of the Project. DIVT has been adequately staffed with professionals, technicians, and support staff and the number will reach the full complement before effectiveness. Additionally, the environmental directorate of SEDESOL will also be actively involved in the evaluation of, and recommendations regarding, environmental issues in the development of urban transport programs. The system of sub-secretariate of SEDESOL and the organizational structure of DIVT are shown in Attachment 1 to this Annex. 6. Initially, DIVT activities under the PVT will be based in SEDESOL offices in Mexico City and will be carried-out by DIVT staff assisted by consultants. As the Project progresses and the benefits of training (see Annex 6) begin to be realized, much of the supervision and day-to-day liaison with municipalities can be achieved with personnel and consultants in regional offices. Technical Assistance 7. The PVT is a new initiative and will be implemented by the new DIVT, within SEDESOL. While SEDESOL has selected with care the qualified professionals to staff DIVT, urban transport methodologies and processes are untried and the staff have little practical experience in implementing this type of program. Consequently, SEDESOL proposes to strengthen the management and technical capabilities of DIVT through training and technical assistance. The training will be provided through the National Training Program (Annex 6), and through day-to-day contact with specialist technical assistance hired to assist DIVT in implementation of the PVT and the Project. 8. The technical assistance will assist DIVT to establish the PVT and the Project and to cope with the workload generated by the initial stages of the program. This will be achieved by providing specialized advice in traffic engineering and management, transport planning, public transport operations, infrastructure maintenance management and transport economics. The technical assistance program is designed to supplement and transfer specialized experience to the DIVT staff already hired by SEDESOL. The high technical level and experience of urban transport planning required makes it unlikely that this technical assistance could be provided by local consultants. The first 40 months of technical assistance have been contracted in accordance with the August 1981 "Bank Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agencv." 9. The total of staff-months of technical assistance will vary with the sector specialty, reception and interest in the PVT by the municipalities and the ability of SEDESOL to maintain qualified technical staffing levels continuously. Over the life of the Project, the following levels of technical assistance per sector specialty will be needed: (i) Traffic Engineering/Traffic Management - 36 staff-months, (ii) Transport Planning - 36 staff-months, (iii) Public Transport Operations - 24 staff-months, (iv) Maintenance Management - 24 staff-months, and (v) Transport Economics - 24 staff-months.  - 55 - Annex 2 Page 3 of 5 10. Thus, technical assistance totalling approximately 144 staff-months will be provided for the Project period. During the first 6 months of the Project, five sector specialists will work together, with two continuing for a further six months. At the end of the first six month period, the need for further technical assistance will be reviewed. The technical assistance will assist SEDESOL to develop methodologies (including technical manuals), processes, work programs and appropriate methodologies to be used in future Integral Studies and to evaluate proposed municipality transport investments under the PVT and the Project. The technical assistance will also assist municipalities to develop and supervise their respective sub-projects. 11. During the first Annual Review Meeting of the Project, with participation of SEDESOL, BANOBRAS, SHCP and the Bank, progress will be evaluated and it will be decided if, which and for what period, technical assistance should be extended beyond the first 75 staff months. The remaining technical assistance allocation will be utilized on an as-needed basis to address specific issues that arise during Project/sub-project implementation. Facilities and Equipment 12. DIVT has adequate office space in SEDESOL headquarters and in regional field offices. It has desk top computers, portable computers, printers, vehicles, and a modest library. Additional computers are needed, as well as software, audio visual equipment and reference material. Procurement of equipment to be acquired to adequately support the Project will be carried out in accordance with the Bank's 1985 "Guidelines for Procurement under IBRD Loans and IDA Credits." Consultants 13. The specifications of the three categories of consultants needed during the Project in addition to technical assistance are defined in the following paragraphs. 14. Supervision of works in the participating municipalities will be carried out by consultants contracted directly by the participating municipalities and states. SEDESOL will maintain an oversight, by central office and the regional delegation staff, as part of its normal operational activities. The cost of supervision will be included in SEDESOL's operating budget and recovered in the lending arrangements between BANOBRAS and the participating municipalities. 15. During the initiation of the Project, however, when greater control is advisable, and until greater responsibility can be assumed by the regional delegations, there is justification to include financing of SEDESOL supervision within the Project. This will be only for the first two years. Thereafter the supervision requirements will be reduced and the full-time SEDESOL staff will have become more experienced in supervision, so further Bank participation will be needed. Estimated costs are based on two consultants visiting each city for two days each quarter, and spending one day in the office following the visit for reporting.  - 56 - Annex 2 Page 4 of 5 16. During the early stages of the Project, all potentially eligible municipalities must be visited and at least five are expected to apply for Project funds before effectiveness. This will create a higher workload than would be normal for DIVT. It is proposed to meet these unusual staff demands with temporary staff, rather than through the hiring of permanent staff who may later be made redundant. The temporary staff will be financed under the Project for a period up to 2 years. If they are still needed after that time, they will be considered essential to the normal working environment and financed by SEDESOL. Approximately 115 staff-months of consultant technical assistance, together with 36 man-months of temporary staff have been included in the project design. 17. In addition there will be the need throughout the Project life for short-term consultants to carry-out special assignments, including, inter alia. adaptation of software packages, computerization of work-flow process, staff supplementation during periods of concentrated activity, or special assistance to municipalities. The consultants will be contracted on an as- needed basis with prior approval of the Bank. Approximately 30 staff-months over the life of the Project are anticipated. Study Tour 18. Much has been done within Latin American in the context of urban transport including public transport operations and planning, infrastructure maintenance and traffic management particularly, for example, in Brazil, Argentina, and Chile. It is proposed to arrange a study tour to: Sao Paulo/Curitiba for operation of busways and traffic management; Buenos Aires for organization and regulation of public transport; and Santiago for traffic management, transport planning and maintenance. The study tour will last approximately three weeks, and involve six staff from DIVT (the two traffic engineers, transport planner, public transport operations specialist, maintenance management specialist) and six specialists from municipalities with Sub projects. The program will be managed in each country by a local consultant. The tour will take place during the last quarter of the first year of the proposed project to provide ample opportunity for experience gained to be used during the remainder of the implementation period. Promotion and Distribution 19. As in many countries, the benefits of integrated urban transport management, public transport organization and regulation, and cost-effective maintenance, are not fully appreciated by most municipal officials and technicians. In addition, the impact on the municipalities of the changes in Federal Government approach to financial assistance for urban transport projects and the attendant requirements, need to be publicized in light of the potential benefits. SEDESOL staff will work in cooperation with the Promotion consultant contracted by BANOBRAS (Annex 4, para 8) to develop and distribute information and literature and to advise and assist states and municipalities to fully understand the Project.  - 57 - Annex 2 Page 5 of 5 Summary 20. The SEDESOL Strengthening Program will be a combination of efforts involving training, technical assistance, equipment, consultants, study tours, and development and distribution of information. Training will be included in the National Training Program, described in Annex 4. The total cost of the proposed institutional strengthening of SEDESOL will be US$ 3.5 million, made up as follows: Activity __US$ Technical Assistance 2,640,000 Equipment 106,000 Consultants 625,000 Study tour 79,000 Promotion and distribution 50,000 [ Total 3,500,000 21. The schedule of contracts and activities will be as in the following Table, but subject to review at the annual Review Meetings. I Activity |Start Completion First Technical Assistance Contract Highway Design Manual September 1992 January 1993 Economic Evaluation Manual December 1992 March 1993 Public Transport Operations Manual September 1992 February 1993 Environmental Assessment Manual December 1992 March 1993 Preparation of ITPs January 1993 September 1993 Supervision of ITPs March 1993 September 1993 Assessment of ITPs June 1993 September 1993 Second Technical Assistance Contract Preparation of ITPs May 1993 November 1993 Supervision of ITPe May 1993 November 1993 Assessment of ITPs May 1993 November 1993 Further Technical Assistance To be determined during First Annual Review Supervision (Temporary Staff) Supervision of ITPs by SEDESOL March 1993 March 1995 Study Tour September 1993 September 1993  - 58 - ANNZ 2 Attachment I Page I of 3 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT ORGANIZATION CRART OF SEDESOL SUBSECRETARIAT OF URBAN DEVELOPMeNT AND INFRASTRUCTVRC DEPARTMENT OF INFRASTRUCTURE AND EQUIPMENT DEPARTMENT OF INTERACTION AND PROCRESS OF PROJECTS DEPARTMENT OF INFRASTRUCTURE HIGHWAYS AND TRANSPORT IDIVISION OF PROGRAMS AND PROJECTS FOR SOLID WASTE L ENVIRONMENTAL PROTECTION DIVISION OF EQUIPMENS FOR URBAN DEVELOPMENT DIVISION FOR PUBLIC BUILDINGS ADMINISTRATIVE COORDINATION  - 59 - ANNEX 2 Attachment I Page 2 of 3 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT ORGANIZATION CHART OF SEDESOL DEPARTKENT OF INFRASTRUCTURE AND EQUIPMENT DEPARTMENT OF INFRASTRUCTURE HIGHWAYS AND TRANSPORT I I SUBDEPARTMENT FOR 1 [SUBDEPARTHENT OF HIGHWAY | SUBDEPARTMENT FOR SPECIAL INFRASTRUCTURE I INFRASTRUCTURE TRANSPORT PROGRAKS SUBDEPARTHEN FOR I DIVISION OF PLANNING DIVISION SPECIAL INFRASTRUCTURE I FIELD STUDIES PROJECTS ] DIVISION FOR OPERATION SUBDEPARTMENT FOR DIVISION FOR HIGHWAY AND MONITORING MAINTENANCE MAINTENANCE INFRASTRUCTURE PROGRAMS DIVISION OF ECONOMIC DIVISION FOR TRAFFIC AND ADMINISTRATION FINANCIAL STUDIES DIVISION FOR HIGHWAY DIVISION OF TRANSPORT SAFETY SYSTEM  - 60 - ANNEX 2 ATTACHMENT 1 Page 3 of 3 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT ORGANIZATION AND LEVEL OF STAFFING DIVT Staff level Total In place by DIVT effectiveness Professional 11 11 Technical 11 4 Support 9 5 Total-----------------------------3----------------20--------- Total 31 20 --------------------------------------------------------------  - 61 - ANX 3 Page 1 of 4 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT BANOBRAS Strengthening Program Role of BANOBRAS 1. BANOBRAS responsibilities under the Project are set out in Annex 6, which describes the sub-project preparation and execution. The same terminology for the Project process has been employed in the present description of the BANOBRAS strengthening program which relates to the following parts of the Project: (a) Part A2 - National component, BANOBRAS strengthening (b) Part B1 - preparation, including Diagnostic Studies, Action Plans and Investment Plans of the Integral Transport Plans (ITPs), and the identification, evaluation, design and of the plans for immediate actions; (c) Part B2 - implementation of the plans for immediate actions; and (d) Part B3 - implementation of the ITPs. Strengthening Program 2. The responsibilities of BANOBRAS under the Project will be exercised by the "Gerencia de Proyectos, Vialidad y Transporte" (GPVT), under the "Direccion de Financiamiento del Desarrollo" (DFD). The structures of DFD and GPVT are shown in Attachment 1, Tables 1 and 2. BANOBRAS has determined that Project work should be allocated to two main sub directorates of GPVT - "Financiamiento Integral" and "Promocion". 3. BANOBRAS' strengthening program, Part A2 of the Project, will have two components: (a) internal actions, mainly increases in BANOBRAS staff in the two sub directorates to facilitate the development of the units involved in sub-project preparation and execution; and (b) strengthening, through the provision of technical assistance, consultant services and essential equipment. 4. Part A2 - Internal Strengthening: The management of the sub directorate of "Financiamiento Integral" will comprise a unit head and two division chiefs - one for financial analyses and one for bidding. The duties of the sub directorate will be carried out by 4 professional staff with financial and contract experience. It is proposed to contract 2 of the staff for 2 years; BANOBRAS will provide counterpart staff such that they can receive on-job  - 62 - ANNEX 3 Page 2 of 4 training and BANOBRAS will take over all duties of these two contracted staff after two years. 5. Part Bl - Promotion: To assist BANOBRAS identify which of the potential 46 cities listed in Table 1 of Annex I would participate in the Project, it is proposed to fund: (a) a consultant for the preparation of a "promotional package". Outline Terms of Reference are set out in Attachment A. In general, the consultant will prepare explanatory and standard documents which will make clear to the cities the scope and objectives of the program, the terms and conditions under which BANOBRAS (Project) loans will be granted, the procedures necessary for cities to qualify for loans and the bidding procedures for consultants, works and goods which will must be followed; and (b) the preparation of a video detailing the role of urban transport in city development, describing cost effective and good practice in urban transport and traffic techniques and demonstration of successful traffic and transport systems both in Mexico and overseas. 6. Once the cities have been identified, it will be necessary to explain the relationship between transport planning and investment and financial responsibility to the states and municipalities. Since this area is concerned with traffic and transport policy, and BANOBRAS is relatively weak in this area, it is proposed to contract 3 staff for 1 year. BANOBRAS will provide counterpart staff such that they can receive on-job training and BANOBRAS will take over all duties of these two contracted staff after two years. 7. Parts Bl, B2, and B3 - Financial analyses of municipalities: BANOBRAS will be responsible for: (a) determining the financial impact of any sub- project loans on city finances, and; (b) assessing the financial status of candidate municipalities and states, and verifying that the proposed sub- project financing arrangements satisfy the financing conditions for on- lending, particularly those involving direct cost recovery (eg betterment taxes for roads, toll roads, parking facilities etc). While BANOBRAS has much experience in these areas, it is considered that technical assistance is needed to assist in defining procedures to be followed, in preparing guidelines for the financial analysis to be included as part of the ITPs. The program provides for a financial analyst with experience in transport to prepare the guidelines. 8. Parts B2 and B3 (c) - Immediate Actions Implementation of ITPs: BANOBRAS will be responsible for ensuring that procurement guidelines, acceptable to the Bank, are followed for all sub-project components in all cities. BANOBRAS has considerable experience in this area and performance under the First Project has improved steadily, although the number of staff involved are insufficient. To capitalise on this experience and to ensure a greater depth of experience in BANOBRAS, it is proposed to employ consultants to: (i) prepare a manual of standard bidding procedures, and (ii) give courses on procurement.  -63 - ANNEX 3 Page 3 of 4 9. Parts B1, B2 and B3 - Monitoring: The First Project has demonstrated weaknesses in monitoring and ex-post evaluation of projects. BANOBRAS will be responsible only for the financial monitoring, supervising compliance with loan covenants and the preparation of Quarterly Reports in a timely manner. To assist in setting up an effective internal reporting procedure in BANOBRAS, a management consultant will be employed to establish working practices and to train BANOBRAS staff. 10. Parts A2, and B1, B2, and B3: GPVT lacks basic equipment, largely computers, to enable it to fulfill its role in an efficient manner. It is proposed to fund a number of microcomputers, ancillary hardware and software under the Project to enable GPVT to set up efficient working practices. 11. Total Cost: The total cost of the actions to strengthen BANOBRAS for the Project are shown in the Table below: Activity US$m Supplementary Staff Financial Analyses 49,000 Procurement 48,000 Promotion 24,000 Monitoring 24,000 Sub-total 145,000 Consultants Financial Analysis 40,000 Procurement 40,000 Promotion 40,000 Monitoring 20,000 140,000 Sub-total Other Viaticos (consultants and supp.staff) 30,000 Promotional video 60,000 Computers 20,000 Software 5,000 Sub-total 115,000 Total 400,000  - 64 - ANNEX 3 Page 4 of 4 12. The schedule of principal activities is shown in the following Table. The implementation of this schedule will be reviewed during the course of the Annual Review Meeting. Activity Start Completion Supplementary Staff Financial analysis January 1993 December 1994 Procurement March 1993 December 1994 Promotion August 1992 July 1993 Monitoring March 1992 February 1993 Consultants Promotion August 1992 July 1993 Financial analysis November 1992 October 1993 Procurement manual January 1993 December 1993 Monitoring model January 1993 May 1993 Equipment Computers January 1993 December 1994 Software March 1993 March 1993  EXZICO MEDIURH-SIZE CITIES URBAN TRANSPORT PROJECT ORGANIZATION CHART OF BANOBRAS - DEPARTMENT OF DEVELOPMENT FINANCE DEPARTMENT OF DEVELPHNTf FINUCE SUBDEPARTHENT OFl URBAN INFRASTRUCTU;RE SUBDEPARTHENT OF FINANCE SERVICE FINANCE DIVISION OF URBAN iDIVISION OF URBAN LAND DIISION OF HIGHWAY INFRASTRUCTURE AND DIVISION OF WATER SUPPLi AND AND DIVISION OF PL^AMING N EQUIPHENT AND DRAINACE HOUSImC rINANCz TRANSPORT PROJECTS CREDIT a'1 oLu  MHDIUI-SIZE CITIES URANS TRAUSPORT PROJECT ORGANIZATION CHART OF BANOBAAS .DIVISIOB & POJE1CTS. HIGHWAYS AND TANOSPORT COORDIENTIOH AND CREDIT CONTROL OUTSIDE COUSULTAHIS PROMOTION FINANCIAL ANALYSTS NOUITORING COORDINATION AND CREDIT COFT; O ..............'...........R BIDDING [SUBDIVISION OF CREDIT SUDIVISION OF TECHNICAL SUBDIVISION OF BIDDING SUBDIVISION OF AND AND ErVALUATION or ch PRHONCTION FIRAJIAL ANALYSIS CONTRACTING CURRENT PROJECTS c DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION CHIEF CHIEF CHIEF CHIEF CHIEF CHIEF CHIEF ,1 I, ,1 1, , i i . I I 1, |SUtERVISOR ||SUWPERVISOR SUPW ERVISOR S UPERVISOR ANXSTY |AALYST(s) AN AALYST(s) |A| "LYST(s)  - 67 - ANNEX 4 Page 1 of 6 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT The National TraininR Program National Training Program Objectives 1. The objectives of the National Training Program (NTP) are: (a) to train, in a short time, a nucleus of professionals such that they have understanding of urban transport issues, urban transport planning concepts, methodologies for analyses of alternative transport proposals, and prioritization methods for evaluating transport investments; (b) to develop the staff capabilities required to improve urban traffic engineering and management practice, and; (c) to assist in the build up of staff capabilities in the longer term in the traffic and transport sector, by a continuous training and updating program for professionals and decision makers. The Courses 2. To accomplish the objectives, an integrated training program is envisaged. The NTP has commenced with a one year traffic management course offered by the Universidad Nacional Autonomo de Mexico (UNAM) and supported by SEDESOL. The course is already in progress and will not be financed by the Project. The part of the NTP that will be financed by the Project will comprise; (a) PART A - An Intensive Course - an intensive course of about 4 months duration, aimed at engineers, economists and urban planers in the middle sized cities, with the objective of providing basic training in urban transport and traffic planning. Preparation and delivery of the course is currently being contracted. Depending on the recommendations of a post course evaluation, it is expected that the course will be repeated several times; (b) PART B - Updating Courses - a series of updating and special topic courses and lectures provided periodically to the professionals and managers in the cities, SEDESOL and BANOBRAS on various issues and subjects in urban transport related issues; (c) PART C - Regional Seminars - seminars aimed at particular regional urban transport issues;  - 68 - ANNEX 4 Page 2 of 6 (d) PART D - Overseas Training - overseas training for a selected group of successful participants from the Intensive Course and professionals from the SEDESOL's DIE; and (e) PART E - An Evaluation Program - an evaluation program will be undertaken to assess the impact and value of the NTP and to assist in future planning of training. PART A - The Intensive Course 3. The objective of the Intensive Course is to provide, in a concentrated period a total of 4 months full-time training, a well prepared course, delivered by qualified professionals with extensive practical knowledge. 4. The course is designed for engineers, economists, urban planners and others with a sufficient technical background, but not necessarily with previous traffic and transport experience. Participants will be assigned to the course by their state or municipal government. It is expected that the course will be given on an annual basis until such time as it is assessed that sufficient trained professionals are available. In the first instance, one course is being contracted, with an option for a second course at a later date. 5. The Intensive Course comprises four modules, viz: (a) Traffic Engineering; (b) Transport Planning; (c) Transport Economics; (d) Public transportation. Each module is divided into a series of lectures on specific subjects. Details of the modules are as follows: (a) Transport Planning - The module covers: development of urban transport objectives; definition of the aims of regional and urban planning and assessment their interaction; methodologies of urban transport planning; the modeling of urban transport demand characteristics and traffic flow; the criteria to be used in the selection of particular mathematical models; data needs and geographic considerations; surveys and sampling methods; the preparation of alternative scenarios and characteristics of urban transport systems; methods of evaluation of available software ; the preparation and evaluation of investment programs; (b) Traffic Engineering - The module includes: the design of urban streets and roads systems; traffic surveys and methods of the application of their results; traffic flow characteristics; road and signalized intersection capacity and intersection design (round-about, priority, split levels, signalized); the use of state of the art software for calculation of levels of service; demonstrations and exercises in use of software packages; road safety and road safety data considerations; road signs and markings; the planning and provision of parking facilities; special provision for public transport vehicles - bus ways and bus priority systems; design considerations for  - 69 - A_MX 4 Page 3 of 6 pedestrianization scheme.; providing for bicycle wvays planning for goods vehicles traffic; software and its application for evaluation of short range solutions. (c) Public Transport - The module covers: the characteristics of different public transport system, (taxis, para-transit, buses, light rail, metro systems); the definition and measurement of level of service; public transport network and route planning; public transport operations; regulation and privatization issues; public transport company operations - operations, maintenance, vehicle choice and replacement, tariff structures and profitability. (d) Transportation Economics - The module includes: project evaluation criteria and methods; vehicle operating costs and time related benefits; environmental assessments - vehicle emissions, noise, visual intrusion and social severance; sensitivity analysis; how to allow for economic growth and inflation; priorities and the preparation of investment programs; infrastructure and public transport finance. 6. In addition to the four modules, a pre-requisite course is being offered by SEDESOL to the Intensive Course participants. This includes an introduction to personal computers, the use of basic software packages, and introductory courses in statistics and economics. 7. The course will be spread over a period of up to one year, vith participants having 40 hours of weekly contact with the lectures (lectures, exercises and laboratory hours) in each monthly module, each module being planned for about 160 hours training. The final details of course and module duration are now being negotiated with the selected course provider. 8. Course Procuremont The Intensive Course is being procured according to the Bank's Guidelines for the Selection of Consultants. 9. Estimte of Intensive Course Costs: Course cost estimates are divided into two parts: (a) the cost of preparation and delivery of the by the selected organization and (b) other costs to be met by SEDESOL locally (the pre-requisite course and course administration noted in para 11). The cost estimate is based on two courses but will be contracted once with the option to provide all or part of the modules a second time. SZDESOL will finance the local component of the course including offices/lecturer rooms, office equipment, photocopier, course secretary, and food and accomodation for the students. The Project will finance the contract for course preparation and execution. (i) Th. Intensive Course contract - the estimated amount of the contract for providing the two courses, each of four modules is US$ 700,000. This includes about 150 days of lectures for each course, transport to/from the course location, subsistence of lecturers, all preparation, course materials, equipment, audio-visual aids and  - 70 - ANNEX 4 Page 4 of 6 other equipment necessary for the preparation and delivery of the courses; and (ii) Other costs - the cost for providing the four week "pre-requisite module" and for the local costs for the Intensive Course is estimated at US$ 600,000. More than 70% of this cost is for the accommodation and living costs of the course students. PART B - Updating Courses 10. The objective of these Courses is to update urban transport professionals and administrators with recent developments in their respective fields of expertise, to provide refresher courses and to conduct regional seminars on specific local, topics of interest. The updating program will start after the completion of the first Intensive Course and comprise eight two week cou es over a period of four years. 11. For the first two years, the courses will be administered and housed by the same local organization that administers.the intensive course program. Some of the lecturers will be selected from the SEDESOL Technical Assistance Team, others will be contracted from local universities, institutions and consulting firms. The subjects covered will be similar to those of the Intensive Course, but with an emphasis on recent developments. PART C - Regional Courses/Seminars and Workshops 12. This component of the Project will concentrate on providing to the city and state professionals and administrators, basic explanations of the relevance of the PVT to local problems, and of the application of traffic and transport planning methods in the resolution of specific local and state transport issues. It will comprise various elements, ranging from one-to-two day regional seminars to one week courses and/or workshops. The courses/seminars will be given in most of the candidate cities during the first two years of the program. It is planned that each course will be for a maximum of 25 students. The courses/seminars will be open to a wide range of participants, including those from participating cities and state governments, other city and state governments, professionals from Federal Government agencies and from the private sector. It is expected that the courses will be given twice a year for the first two years of the project (a total of four to six weeks during the first two years). 13. As for the Updating Courses, the Regional Courses/Seminars will be given by lecturers selected from the SEDESOL Technical Assistance Team contracted from local universities, institutions and consulting firms. It is expected that with the increased decentralization of responsibilities for urban transport and the development of the profession, the need will arise for additional courses at centers located all over the country.  - 71 - ANNEX 4 Page 5 of 6 14. Cost Estimates for the Updating Courses and Regional Seminars. The Project will fund: (a) the cost of preparing the course materials and presenting the Courses, (b) the administration costs, and (c) the subsistence costs for the public sector participants. The participants salaries will be paid by their respective employing agencies. The estimated cost for these parts of the program, are US$ 100,000 for the Updating Courses and US$300,000 for the Regional Courses and Seminars. About 25% of the cost will comprise course accommodation and participant subsistence costs. PART D - Training Abroad 15. The objectives of training abroad is to increase the specialist skills in urban transport planning and traffic engineering skills in Mexico. The areas of specialization and the location of overseas training will be determined by SEDESOL, advised by their technical assistants, during the Project implementation period. Three professionals will be selected for the program by a committee established by SEDESOL for this purpose. SEDESOL will enter into an agreement by under which the professionals will agree to work for three years (or other agreed period) in an assigned office with the option of leaving and being charged for the course on a Dro-rata basis. 16. Selected successful participants from the Intensive Course, or other professionals with comparable background from SEDESOL, will be eligible for overseas study specializing in a specific subject, such as transport economics, urban rail, public transport operations or transportation modeling. Participants will attend a specific university or institute to study/work for up to a year, preferably working toward a higher degree, although working overseas in a private sector company or public sector agency would not be ruled out. 17. The Project will support the tuition, international travel and subsistence of selected participants but not participant salaries. The estimated cost for the overseas training, including travel, tuition and subsistence, is US$ 90,000 for three students. PART E - Post Evaluation Study 18. The Project will also finance a post NTP evaluation study, aimed at evaluating the course achievements. The study design will form an integral part of the course proposal and will assist in the preparation of future training programs in Mexico. The first evaluation will be made soon after the termination of the first intensive course and will assist in the preparation of further courses as well as providing information for the following annual review. A special evaluation report will be made for consideration in the Mid Term Review, and a final report will be made for inclusion in the PCR. The cost of the evaluations is estimated at US$10,000.  - 72 - ANNEX 4 Page 6 of 6 The Total Cost of The Training Program 19. The following Table shows the expected cost of each of the components of the NTP to be financed by the Project, which will finance 100% of the cost. More than 70% of the cost is represented by the two intensive courses and of this amount, 602 (42% of the total cost) represents the accommodation and living costs of the students. This expenditure is considered justified given the importance of the Intensive Courses in the NTP and the need of the NTP to train a sufficient number of students for the decentralization of urban transport planning to be feasible. Without the incentive of financing of the students, there is a high risk that the municipalities and states would not nominate students for the courses. Part Course US$ Part A SEDESOL cost for the pre-requisite Course and two Intensive Courses 600,000 Contract for two Intensive Courses 700,000 Part B Updating Course 100,000 Part C Regional Course 300,000 Part D Study courses abroad 90,000 l Part E Post Evaluation Study 10,000 Total 1,800,000  - 73 - Annex 5 Page 1 of 8 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT Economic Evaluation A. Methodology 1. An evolution has been carried out in the method used for the economic evaluation for the first three cities. A standard method is now expected to be used in future evaluations, but it will not be rigidly applied as the circumstances of each city and each individual sub-project component might require a variation on the standard method. 2. The method of economic evaluation which can be used depends to a large extent on the data which is available. There is no advantage in deciding on a very sophisticated method of evaluation which requires extensive amounts of data if there is no chance of that data being produced, or if it could be produced, the cost is likely to be prohibitive. 3. In the three cities whose projects have so far been evaluated, there has been an attempt to evaluate individual sub-project components and the sub- project as a whole. Some use was also made of economic evaluation to optimize some of the proposed sub-project components. 4. There are two fundamentally different ways of evaluating multiple road improvement projects in an urban area. The simplest is to consider all the improvements to be implemented simultaneously, and then to compare the evaluation variables in the situation with and without the improvements. In the application of this method it is common to find that the evaluation of each individual project is made by estimating the change in vehicle operating costs (and possibly vehicle occupants' time savings) on the road which is the subject of the improvement. But the changes in travel speed on this road, which are the determinant of the changes in operating costs and travel times, can arise as much from changes else where on the network as on that link which is the subject of a specific improvement. In these cases there will be a misallocation of benefits, and possibly a wrong determination of which particular components of an overall sub-project are economically justifiable, even though the estimation of overall estimation of benefits might well be correct. This method should therefore not be used to assess the economic viability of components of a sub-project. It was used in the original evaluation of the Ciudad Juarez sub-project. 5. The alternative method starts in the same way, by assuming that all the components of a sub-project are implemented simultaneously. This will allow a determination to be made as to whether the overall sub-project is economically viable. There is then a vital second stage, in which each individual component of the overall subject is taken out, and the economic evaluation repeated with  - 74 - Annex 5 Page 2 of 8 the remaining components only. The difference in total costs and benefits provides a measure of the impact of the eliminated component, and its economic viability can be assessed. This method is also not without problems, as the evaluation of any particular component can change according to what other components are still included in the overall sub-project. But this problem is capable of resolution by repeating the elimination of components, and using as starting point for the evaluation of particular components that combination of components which gives the highest aggregate rate of return. These problems of evaluation are particularly relevant in urban transport projects, where the usual assumption made in an economic evaluation, that there is independence of components, is not valid. 6. All evaluations used a similar sequence of activities and used the same indicators of net benefit of the projects. The sequence was: i) define the project and estimate the investment cost ii) project future traffic volumes iii) estimate vehicle speeds and operating costs with and without the project iv) determine the flow of net project costs for the evaluation period v) calculate the values of the economic indicators 7. The economic indicators calculated were Benefit/Cost ratio (B/C Ratio), Net Present Value (NPV) and Economic Rate of Return (ERR). In all the evaluations, economic costs rather than market prices were used. The costs were derived by eliminating the taxation component, principally fuel taxes and value added tax, from market prices. Although there are other differences between the two concepts, such as in labor costs and the prices of imported goods, where market prices do not necessarily represent economic costs, the derivation of the appropriate shadow prices is controversial and makes little difference to the results of the economic evaluation. In the following review of the results, only the MERR results are analyzed. The other indicators invariably indicated the same results and conclusions. 8. Many of the sub-project components analyzed for the three first cities showed high values for the ERR, many in excess of 75% and some in excess of 500%. The standard method of calculating ERR values involves an assumption that all benefits can be reinvested to obtain a rate of return equal to the ERR value. This assumption is reasonable at normal levels of ERR but is unrealistic for very high values, where the probability of being able to reinvest at the ERR rate is very low. A modified method of determining the value (MERR) requires the more reasonable assumption that benefits are reinvested at the standard discount rate, in Bank evaluations 12%. All the values presented in this Annex are based on this modified HERR method. For use in those cases where the standard method was used, a conversion to the modified method has been made, making use of knowledge of the project costs and rate of growth of benefits to simulate the future stream of net revenues.  - 75 - Annex 5 Page 3 of 8 Sub-prolect component costs 9. Project costs were estimated using very preliminary designs, and estimates of quantities of materials and labor, to which standard unit costs were applied to obtain total costs. Experience has shown that cost estimates made in this way grossly underestimate the final project costs, even when allowance is made for inflation. For this reason, sensitivity tests with assumed large assumed investment cost increases were made. Traffic volumes 10. The next stage is to make an estimate of future volumes of traffic. The simplest predictions assume that traffic will continue to grow at some predetermined rate, usually independent of any changes in the road network or in vehicle travel speeds or operating cost. Other projection methods take implicit or explicit account of these variables. Many of these methods result in either different projections of total traffic, or assignments of a fixed volume of traffic to different routes from their origin to their destination, depending on whether or not a project is implemented. 11. If different total volumes of traffic are projected in the two situations being compared in the economic evaluation, that evaluation must take explicit account of the benefits of the generated traffic. If the projections involve different assignments of a given volume of traffic to routes through the network, the economic evaluation must take explicit account of the change in total vehicle operating costs. 12. Although these might seem elementary principles to be applied in the economic evaluation of a road project, they were overlooked in various of the preliminary evaluations made in the three sub-projects. In at least one case, they were deliberately overlooked in an attempt at simplification of the methodology, but when the results of the simplified evaluations were compared with those in which both principles were applied, significantly different results, leading to different conclusions, were obtained. Vehicle speeds and operating cost savings 13. The principal benefits which could be evaluated for each of the sub- projects were the reduction in vehicle operating costs and reductions in the long term cost of road maintenance and reconstruction. Other benefits which were not evaluated (although some of them were measured) include the value of time savings to vehicle occupants other than paid drivers, environmental benefits in terms of reduced vehicle gas emissions, the benefits in terms of improved environment for pedestrians at road crossings and in town centers, and the contribution to economic growth through lower transport costs and a workforce with a more regular arrival time at their place of employment.  - 76 - Annex 5 Page 4 of 8 14. Vehicle operating cost savings formed more than 90% of the evaluated benefits of the sub-project components in each of the cities. The estimation of vehicle operating costs was made by the application of equations or tables of unit operating costs for different vehicle types at different average speeds (see Table A7.1 and Fig A7.1). The vehicle speeds were estimated, for the situations with and without the sub-project components, using standard equations which relate vehicle speeds to the ratio of traffic volume to road capacity. Estimates of future road traffic volumes were usually obtained by application of standard growth rates to estimates of current traffic volumes derived from various types of survey and road capacities were estimated using standard values such as those from the Highway Capacity Manual. 15. The estimates of current road traffic volume were generally made for the average daily peak hour, a notoriously difficult concept to define. In the later evaluations made for the components of the sub-project in Toluca and Leon, estimates were made of the frequency of occurrence (in terms of hours pr year) of various values of this ratio expressed as proportions of the traffic in the exceeded on the busiest 7.5% of hours of the year. Estimates of the shape of the frequency distribution were based on all day vehicle counts for periods of at least three months at key sites in each city. 16. The estimates of unit operating costs were originally based on the forms of equation used in the HDM, urban traffic version, but in the latest evaluations for all three cities, use was made of a Mexican version of a more precise method, which takes into account the number of times a vehicle must accelerate from stop and of the operating costs of stationary vehicles, particularly important for buses. This national version of vehicle operating costs provides data for five vehicle types - private cars, combis, micros, buses and medium trucks, at operating speeds from 5 km/hr to 50 km/hr, for three types of road surface and three types of terrain. A summary of the costs for each vehicle type at different speeds on level paved roads in good condition is shown in Table 5.1. 17. A disadvantage of all currently available vehicle operating cost equations is in their treatment of the depreciation costs of private cars. Only a small part of this depreciation is related to vehicle use, and even that part is related to distance travelled rather than to time in use. Only if it is to be argued that increased speeds will result in higher use per vehicle could it be reasonably argued that this part of depreciation could be influenced by a typical road improvement project. In most cases, there is no change in the annual depreciation of private cars as a result of the implementation of such projects. When included in economic evaluations, as in those undertaken for this project, benefits of reduced depreciation for private cars typically account for about 15% of the benefits of this vehicle type, so inclusion of full depreciation benefits results in an overestimate of benefits of less than this percentage. 18. Depreciation allowances for commercial vehicles are a different matter. It is quite possible that increased average speeds will result in higher utilization and increased depreciation, and so an apparent disbenefit of the  - 77 - Annex 5 Page 5 of 8 project - unless the increased utilization results in fewer vehicles being purchased. In this case, there will be two opposing effects - more depreciation per vehicle but fewer vehicles to depreciate. Whether or not there would be a depreciation benefit attributable to the project will depend very much on operators response to the road improvement. Depreciation benefits for commercial vehicles can account for 30% of the benefits of road improvement schemes attributable to commercial vehicles. Including these cost savings at their full value is less likely to result in an overestimate of benefits than inclusion of the equivalent benefits for private cars. 19. For use in the final evaluations described in this Annex, the cost equations were updated to end January 1992 prices, to take account of a fuel price increase of 30% at the end of 1991. Volume capacit, ratios and vehicle speeds 20. The use of this method to estimate vehicle speeds requires a number of assumptions to be made about road capacity and the way in which average speed reduces as traffic volume increases. The starting point for the application of the ratio is the estimated free flow speed, that speed at which the first vehicle on the road would travel in the absence of any others. Most mathematical relationships between these variables indicate free flow speeds of the order of those shown in the following Table, with very little if any speed change for a volume to capacity ratio of less than 0.5, then an almost proportional reduction of speed as the ratio approaches a value of 1.0, at which point the speed usually reduces to less than 10 km/hr. Although speeds lower this limit are observed, the vehicle operating cost equations become unreliable at lower speeds, so it is usually assumed that the costs are unchanged at lower speeds. 21. Not all project benefits derive from increasing the travelling speed of vehicles. Particularly in urban areas, much of the benefit comes from reduction in junction delays. The cost of vehicles waiting at junctions can be assessed in two ways. The time involved in waiting can be added to the time taken in travelling on the next link of the network, and this combined time used to estimate the average speed which is then used in the estimate of vehicle operating costs. The more direct way is to make a separate estimate of the cost of operating a vehicle which is stationary. The first method was used in most of the evaluations, but the second more accurate method was used in a few of the later estimates of component benefits. 22. Table 5.1 shows the assumed average vehicle speed for various volume capacity levels on different types of road. These are the values which were applied in the revised evaluations of the sub-components of Leon and Toluca. They are derived from the use of a mathematical formula relating speed to the volume/capacity ratio at the given level of traffic and the assumed free flow vehicle speed. The evaluation of components in the Ciudad Juarez sub-project did not use this method of speed estimation. Instead a current average network speed was derived from moving vehicle surveys. Future vehicle speeds were  - 78 - Annex 5 Page 6 of 8 assumed to be equal to these speeds if no improvement was projected, or the free flow speed if some measure was included in the sub-project to increase road capacity. This method was clearly unsatisfactory and will not be used again. B. Evaluation results 23. The components of the sub-projects for each of the three cities whose sub-project has so far been evaluated have been categorized into six groups. These are: a. Traffic management b. Corridor improvements c. Access to residential zones d. Public transport e. Road maintenance, and f. Institutional development. 24. Only components in the first three and in one case, the fifth category, have been subjected to economic evaluation. The average MERR's for each type of project in each of the three cities are shown in Table 5.2 (iv). The average MERR for all projects was 50%, with a range from 14% (access to residential zones in Ciudad Juarez) to 78% (road maintenance in Toledo). Tables 5.2 (i) through 5.2 (iii) show the results of the sensitivity tests for each category of sub-project component for Leon, Ciudad Juarez and Toluca respectively. The lowest MERR values were obtained for the access to residential zone components for Ciudad Juarez, with an MERR value of 9% on the most pessimistic set of assumptions. However, the method used in the evaluation for Ciudad Juarez to assign sub-project benefits to components and categories of component was unreliable (see para 4 of this Annex). The overall average MERR for the whole proposed Project on the most pessimistic assumptions was 30%. Results by category of component 25. The highest MERR's, with an average of more than 78%, were obtained for the road maintenance category in Toluca, closely followed by the traffic management category in the same city. One reason for the high benefits for these categories is that the traffic volumes in Toluca are very high all day long and on all days of the week. The highest average daily traffic occurs on Sunday as does the busiest hour of the week. The combination of high traffic levels during the working week combined with high volumes at the weekend provides a large source of potential benefits 26. The categories of sub-project component with the highest average MERR's are road maintenance and traffic management, with values of 78% and 76% respectively. Even on the most pessimistic assumptions tested, both categories had MERR values in excess of 60%. These categories typically have relatively  - 79 - Annex 5 Page 7 of 8 low capital costs and high immediate benefits to existing traffic. The next highest average MERR value is attributable to those projects which improve the road access to residential zones, having a value of 65%. The MERR value for the most pessimistic assumptions only falls to 57Z. These projects mostly involve the paving and realignment of roads to suburbs with low income populations and which are distant from the city centers. Characteristics which lead toward lower MERR values are the higher cost per km of road and the lower traffic volumes than for the previous categories. These are partly compensated by the higher benefits per vehicle resulting from an improved road service rather than for reduced congestion. The per vehicle benefits are initially very high and increase only slowly over time, whereas congestion benefits start off low but increase more than proportionally with the increase in traffic over time. The principal measured benefit of these projects is the reduced operating cost of buses, which without the project will have to continue to use earth or gravel roads. 27. The category of sub-project component with the lowest average MERR value is that of corridor improvements, with an average of 23%, reducing to 16% on the most pessimistic assumptions. The relatively low MERR values are attributable to the high capital cost of these projects and the need to invest in new capacity in larger discrete units than for traffic management projects. The benefits of these projects are similar to those of traffic management projects, in that they are related to the level of road congestion and therefore start low in the early years of the project and increase faster than the traffic growth rate. Results by City - Leon 28. The economic evaluation for Leon covered sub-project components which accounted for 96% of the total sub-project cost and showed an average MERR of 52% (see Table 5.2 (i). The highest average MERR was for the road maintenance components (66%), followed by traffic management (56%), access to residential zones (41%) and corridor improvements (35%). The corridor components had a wide range of HERR values, with a highest value of 85% and a lowest of 15%. With the exception of this last project, all the HERR's remained above the critical value of 12% even on the most pessimistic sensitivity test. This one component had an MERR value of 10% on this test. Results by City - Ciudad Juarez 29. The economic evaluation of sub-project components for Ciudad Juarez must be treated with some caution because of the problem described in paragraph 4 above. The economic evaluation included sub-project components representing over 70% of the total sub-project cost and indicated an average MERR of 33% (see Table 5.2 (ii). The method of projecting traffic volumes and measuring traffic benefits meant that only two categories of sub-project component could be evaluated, corridor improvements and paving of access roads to residential zones. The former type of project had an average MERR of 41% while the latter  - 80 - Annex 5 Page 8 of 8 had an average MERR of 14%. A separate evaluation of the individual corridor improvements was made, but the results are unreliable because of a potential misallocation of benefits between projects (see paragraph 4 above). No separate evaluation was made of the paving of access routes. The sensitivity tests indicated that in the worst situation considered the average MERR of the corridor projects reduced to 31% while that of the paving the access routes reduced to 9%. Results by City - Toluca 30. The economic evaluation of sub-project components for Toluca showed the highest overall MERR with an average of more than 59% (see Table 5.2 (iii)). This result was derived from evaluations of sub-project components which accounted for 73Z of total sub-project costs. The results obtained for the road maintenance and traffic management components of the sub-project were the highest of any category for the three cities, each at more than 75%. Even the category of access to residential zones had a high MERR value of more than 65%, while that for corridor improvements was 24%, with a variation from 17% to more than 35%.  - 81 - Annex 5 Table 5.1 MEXICO HEDIUM-SIZE CITIES URBAN TRANSPORT PROGRAM VARrATION OF VEHICLE OPERATINC COST WITH VEHICLE SPEED Spood Car Cosbi Micro Bus Truck tm/hr Max$/ M4x$I 16ex$/ MaSX/ MHxS/ vohk im vah km vah it voh ka veh km 10 909 961 1139 1959 2109 20 533 572 680 1187 1245 30 409 444 529 936 966 40 347 382 456 819 828 50 311 344 413 751 757 60 289 320 387 714 716 70 272 307 372 694 698 Speed Ratio Cost ratio Cost ratio Cost Ratio Cost Ratio Cost ratio 20110 km ir 58.6S 59.5S 59.72 60.6S 59.02 30110 to hr 45.0S 46.22 46.41 47.8 45.8 40/10 km hr 38.2K 39.82 40.0S 41.8S 39.32 50/10 km hr 34.2Z 35.8S 36.32 3S.3S 35.9S 60/10 km hr 31.8S 33.3S 34.0S 36.4Z 33.92 70/10 km hr 29.91 31.9S 32.7 35.4Z 33.12 Table 5.1 VARIATION OF VOC WtTH SPEED 90 80 70- 50 . 40 - S 30 20 10I 10 0 I50 7I0 20 40 60 Speed in km/hr C Car 4 Cormbi 0 Mtcro A Cuw x Truck  - 82 - Annex 5 Table 5.2 U.) MEDIUM-SIZE CITIES URAN T SPORT PROGRAM ECONGC EVALU&TION OF THE CMPOETS OF T SUBPROJECT FOR LAON ModifLed econoclc Rate of Return (MMl) Total Category Coust Baic +2SS Coot -252 Cost +251 C Traffic monag m_ t 12.96 86S 69S 55 57Z Corridor tproave_nts 6.00 421 341 271 271 Access to residential soans 4.27 48S 391 29S 321 Public Transport 0.74 not evaluated not evaluated not evaluated not evaluated Road Malateac 6.99 1211 9S1 732 801 Inatitutional strcngthbning 0 45 not evaluated not evaluated not evaluated not evaluated Sub total 31.41 771 611 482 511 L-ad nt Property purchaeb 4.12 Ptysical continency 4.11 Price contingency 3.63 TOTAL 43.27  - 83 - Table 5.2 (i4) MEDIUM-SIZE CITIES URBAN TRANSPORT PR ECONOMIC zVm UATIOw OF THE ComONENTS OF THE SUBPROJECT FOR CIUA JUAREZ Modified conomic lat of Return (MMll) Total Category Coust asic +252 Cost -252 Coat +252 C Traffic management 5 41 not *valuatod not evaluated not evaluated not evaluated Corridor Improv nts 15.72 512 432 401 34S Acces to residential zoneD 6.00 142 122 IIS 92 Public Transport 0 30 not evaluated not evaluated not evaluated not evaluated Road Mainton nea 3.61 not evaluated not evaluated not evaluated O0 Inn titutionaLl strengthening 0.*93 not evaluated not evaluated not evaluated not evaluated Sub total 31.97 402 342 322 272 Land and Property purchase 2.17 Physical contingency 6.42 Price contingency 4.31 TOTAL 44.87  - 84 - Annexc S Table 5.2 (iii) MEDIUM-SIZE CITIES URBAN TRANSPORT PROGRA ECONOMIC EVALUATION OF THE COMPONENTS OF TE SUBPROJECT FOR TOLUC Modified Economic Rate of Return (MEMl) Total Category Coust Basic +252 Cost -252 Cost +25Z C Traffic manag ement 9.58 761 671 641 602 Corridor improv emts 8.89 242 202 191 16S Access to residentiAl zones 4.00 652 641 622 561 Public Transport 0.38 not evaluated not evaluatod not evaluated not evaluated Road Maintenanco 7.27 781 732 66S 611 Institutional strengthening 0.*68 not evaluated not evaluated not evaluated not evaluated Sub total 30.80 591 541 51S 471 Land and Property purchase 6.54 Physical contingency 4.17 Price contingency 3.42 TOTAL 44.93  - 85 - Table 5.2 (iv) MZICO MEDIUM-SIZE CITIES URBAN TRANSPORT RO ECONOMIC EVALUATION OF THE COONENTS OF THREE CITIES Modified Zcoo-4c Rate of Return (MM) Total Category CUst Leon Cludad Juares Toluca Average Traffic .anag _m t 27.95 561 not evaluated 762 635 Corridor Liprow_ments 30.61 35S 411 242 35S Access to resldential zones 14.27 412 142 65S 362 Public Transport 1.42 not evaluated not evaluated not evaluated not evaluateod Road Maintes nce 17.87 66S not evaluated 78 . 723 Institutional strengthening 2.06 not evaluated not evaluated not evaluated not eawluated Sub total 94.18 521 332 592 502 Land and Property purchase 12.83 Physical contingeucy 14.70 Price contingancy 11.36 TOTAL 133.07  - 86 - ANNEX 6 Page 1 of 10 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT Sub-Project Preparation and Execution 1. This Annex provides a description of the agreed Sub-project preparation and implementation process and the division of responsibilities between SEDESOL, BANOBRAS and SHCP. Overall Organization and Scope 2. The "Programa De Vialidad y Transporte Urbano Para Ciudades Medias" (PVT) and the proposed Bank Project will be jointly managed by SEDESOL (Direccion General de Infrastructure y Equipamiento) and BANOBRAS (Gerente Proyectos, Vialidad y Transporte). SEDESOL's primary responsibilities will be technical (transport planning, urban transport policy issues, public transport regulatory systems, traffic management and maintenance) and economic (evaluation of the investment programs). The role of BANOBRAS will be to manage the Bank loan and municipal and state sub-loans (determination of financial viability of the municipalities and states, obtain the necessary guarantees, supervise the assessment of compliance with loan conditions and covenants and negotiate with the Bank and with the municipalities and states). In addition, while the participating municipalities and states will be responsible for their own procurement activities. SEDESOL will be responsible for supervising the technical aspects and BANOBRAS for the supervising the financial aspects of procurement. BANOBRAS will verify the use of the Bank's procurement guidelines and ensure that the standard bidding documents agreed between the Mexican authorities and the Bank were followed. A project coordinating group has already been formed and held its first meetings; the objective of the group is to coordinate the actions of the two implementing agencies and to resolve any inter-institutional problems before they have a chance to prejudice the progress of the proposed project. Project and Sub-project Processes 3. The preparation and implementation of the municipal and state sub- projects will be related to following parts of the proposed project: Parts A2 and A3 - Promotion of the PVT by BANOBRAS and SEDESOL, Part B1 - preparation of Integral Transport Plans (ITPs), Part B2 - Implementation of immediate actions, and Part B3 - Implementation of the ITPs. These are outlined in Table 1 and described in the following paragraphs.  - 87 - ANNEX 6 Page 2 of 10 TABLE 1 - OUTLINE OF THE PROJECT PROCESS Part A2 Promotion BANOBRAS, with help Describe to cities the from SEDESOL program, objectives, and eligibility criteria Part Bl Confirmation BANOBRAS Participating municipality and/or state will confirm interest in participation and agreement to the general conditions Prequalification SEDESOL Prequalification of consultants for ITP. Part BI sub-loan BANOBRAS/SEDESOL A sub-loan to finance the ITP for the ITP will be prepared, negotiated and signed with municipality and/or state Selection of Preparation of bid Municipality or state selects Consultants documents by consultants for ITP municipality or state; SEDESOL for technical review and BANOBRAS for procedural review ITP Consultants to carry 1. Diagnosis Report out for Municipality 2. Immediate Actions Plan or state. SEDESOL and 3. Action Plan BANOBRAS to supervise 4. Investment Plan and appraise Part B2 Second sub-loan - Municipality and/or A sub-loan to finance the Immediate Actions state with BANOBRAS immediate actions will be supervision prepared, negotiated and signed with municipality and/or state  - 88 - ANNEX 6 Page 3 of 10 Execution of Municipality or state 1. Bid document preparation immediate actions to execute; SEDESOL 2. Bidding and evaluation and BANOBRAS to 3. Contracting and execution supervise. 4. Supervision Part B3 Preparation of SEDESOL and BANOBRAS Verification of compliance third sub-loan with on-lending conditions Third sub-loan Municipality or state Finalization of sub-loan negotiations and with BANOBRAS conditions and legal approval supervision documents Third sub- loan Municipality with Confirmation that all sub- effectiveness supervision by loan conditions have been SEDESOL for technical complied with by municipality aspects and BANOBRAS and state for financial aspects Bidding for works Municipality or Confirmation that all and goods state; SEDESOL for components are prepared in technical review and accordance with sub project BANOBRAS for loan agreement conditions procedural review Implementation of Municipality or state Confirmation that all sub- works and for on-site super- loan components are procurement of vision; SEDESOL for implemented in accordance goods technical supervision with legal agreements and BANOBRAS for procedural super- vision Monitoring and Ex- Municipality and Confirmation that sub project post Evaluation state for actions; schedule and covenants are SEDESOL for being met, and that performance components meet objectives monitoring (ex post); BANOBRAS for financial monitoring Part A2 -Promotion 4. The program will be initiated by a BANOBRAS with support from SEDESOL and SHCP and include identification and promotion missions to the potential participating municipalities and states (those listed in Annex 1, Table 1). The aim will be to describe the program and its objectives. Targets of the promotion process, who will include consultants and contractors as well as municipal and state representatives, will be notified of the phased approach, the financial terms of sub-loans, the conditions for participation and the  - 89 - ANNEX 6 Page 4 of 10 "first come first served" approach for participation in the Bank loan. Municipalities and states will receive the following documentation: (a) the program manual of the PVT ("Programa De Vialidad y Transporte Urbano Para Ciudades Medias"); (b) sample sub-loan agreements, conditions and other legal requirements; (c) procurement guidelines for works, goods and hiring of consultants, and an explanation of the required "no-objection" procedure (submission of TOR, reports, documents, the level of engineering detail required for works to be considered eligible for financing, bid documents, technical specifications etc); (d) a description of the types of, and conditions applying to, immediate actions eligible for sub-loan financing; (e) the terms of reference for studies to produce an ITP (Including an outline of an appraisal report); and (f) model final designs and bidding documents. 5. During the identification/promotion phase SEDESOL will form a view on the main transport problems in the medium cities, and collect data and information to enable the final TOR for the Integral Studies in each participating city to be prepared to reflect particular city conditions. BANOBRAS will verify the municipal and state financial eligibility and the maximum value of sub-loans they will be capable of absorbing. Part Bi - Confirmation of participation 6. Each candidate municipality and state, after analyzing the documents received, the on-lending conditions and taking account of its own transport needs, will confirm its interest in participating in the program and its understanding and acceptance of the conditions of participation as described in the PVT. Part Bl Sub-loan negotiation: 7. A sub-loan will be made from BANOBRAS to the participating municipality or state to finance the preparation of the ITP. The participating municipality will have to satisfy only the first type of eligibility criteria (relating to size and economic importance) and agree to satisfy the others before implementation of the recommendations of the ITP. BANOBRAS will prepare the legal documents, negotiate the sub-loan with the municipality and state and then present the sub-loan to its Board. Part B1 - Selection of consultants 8. It is expected that the several national and international consultants will be included on the short list for selection for most of the ITPs. The compilation of the short lists will be the responsibility of the respective  -90- ANNEX 6 Page 5 of 10 municipalities or states, with guidance from SEDESOL. To avoid long and costly repetitions of the prequalification process, it is planned that SEDESOL will prepare a list of prequalified consultants, based on proposals in response to the issuing of generic terms of reference. The municipalities will be encouraged to compile their short list from these prequalified consultants. Although they will be free to include any others in their short list, these additional consultants will have to satisfy the same prequalification criteria as those already prequalified, with a consequent delay in the selection process. 9. Consultants will be selected by the participating municipality or state, with the supervision of SEDESOL in respect of: (a) the preparation of specific terms of reference by the municipality or state, based on the generic terms of reference already available (b) approval of short lists of consultants, preferably from those already prequalified by SEDESOL. SEDESOL, together with BANOBRAS will be responsible for supervising: (c) the evaluation of proposals and selection of consultants, to ensure that procurement guide-lines, established for the Project are followed, with SEDESOL covering the technical and BANOBRAS the procedural aspects. Part BI - ITP: Diagnostic Study and Immediate Action Plan 10. The consultants will prepare a Diagnostic Report, identifying the major issues to be addressed in the Action and Investment Plans and identify immediate actions, if any, which will be in risk of significant cost increases or benefit losses if subjected to further delay in implementation. The immediate actions could comprise limited infrastructure improvements, short term improvements to assist bus operations and traffic circulation schemes. A complete list of the types of investment acceptable as immediate actions are given in Annex 1. The proposals will be reviewed by the municipality and SEDESOL and comments (to ensure actions comply with the conditions and direction for immediate action proposals) given to the consultants prior to preparation of the final designs and bidding documents, the environmental assessment and the economic evaluation and presentation of their final report on the immediate actions. Completion of this report for immediate actions, including approval by the municipality or state, will be within two months of initiating the ITP studies. 11. SEDESOL will evaluate the report on immediate actions from technical, economic, environmental and financial feasibility points of view, and if appropriate, authorize the municipality or state to proceed with their implementation.  - 91 - ANNEX 6 Page 6 of 10 Part B2 Implementation of Immediate Action Plan 12. Final designs and bid documents for the immediate investments will be prepared by the consultants appointed to undertake the Integral Study. The bid package should be approved by SEDESOL and BANOBRAS. Bidding for the execution of the immediate actions will take place in accordance with SEDESOL norms and bid evaluations and awards of contracts will be approved by BANOBRAS and SEDESOL. Municipalities or states will be responsible for supervision of the civil works included in the immediate actions, but SEDESOL will oversee the implementation by using its own supervising consultants. 13. Once the bid documents for investments in civil works and/or equipment purchases were agreed, the municipality or state will be eligible for a second sub-loan. The procedures for negotiating this sub-loan will be similar to (b) and (c) and (d) for the first sub-loan (para 7), but will relate to the immediate actions instead of the studies to produce the ITP. The amount of the second sub-loan will not exceed US$ 5 million equivalent. Part Bl ITP: Action Plan and Investment Plan 14. The consultants will complete studies for the ITP, reviewing the administrative structure of the municipalities and states responsible for regulating urban transport, current and projected environmental conditions related to transport (as specified in the terms of reference), the operational regulations controlling urban transport (including tariff policy), the environmental regulations controlling vehicle emissions, the financial viability of public transport operators, and defining a short term investment program proposed for sub project loan financing and including detailed design of the works proposed for first year of implementation. They will prepare an Investment Plan which will be based on a systematic analysis of the city's transport needs and an Action Plan which will be based on an assessment of the need to strengthen institutions, planning procedures and the regulation of transport operations. The consultants will support the investment proposals with a Financing Plan, which will include an assessment of the impact of the Investment and Action Plans on the municipality's and state's finances, demonstrating that sufficient funding will be available for the counterpart funding and to service any loans which will be proposed. 15. The consultants will be responsible for the completion of the studies and for preparing the ITP in accordance with the agreed TOR's. It will be a function of SEDESOL to ensure that the Study was conducted in accordance with the objectives of the program. This will involve SEDESOL in the following actions: (a) assisting in clarifying issues, definition of problems, and proposing alternative solutions; (b) advising on appropriate methodologies for all study aspects but particularly evaluation (technical, economic, financial, and environmental) of alternative solutions;  - 92 - ANNEX 6 Page 7 of 10 (c) assisting the municipalities in the supervision of their consultants; and (d) coordinating the different federal, state and municipal agencies involved in the sub-project; 16. SEDESOL will review the draft ITP, to verify that the proposals were in accordance with the objectives of the Program and that the economic, financial and environmental justifications were adequate to justify proceeding to the stage of preparing preliminary designs and the final design of components included in the proposed actions for the first year of implementation. Following the SEDESOL review of the Draft ITP, preliminary engineering designs will be completed for each component and costs and economic and environmental evaluations will be updated by the consultants. 17. The final version of the ITP will be prepared by consultants in a format acceptable to SEDESOL, BANOBRAS, and the Bank. The proposed Investment Plan and Action Plan components will be defined, together with their economic, financial and environmental and operational justification, and the institutional, administrative, and financial arrangements for their implementation. SEDESOL will review and coordinate a review of the components of the ITP. BANOBRAS will assist in all financial issues and loan related issues. SEDESOL will prepare an Appraisal Report, with full explanatory annexes, in a format acceptable to the Bank, and arrange for the presentation of the ITP to all agencies which will be involved in its approval and implementation. Acceptable to the Bank will be interpreted as complying with the Terms of Reference, providing an implementable Investment Plan which was within the financial capability of the municipality and/or state to manage, and including an Action Plan which provided feasible solutions to the institutional problems identified in the Diagnostic Report of the ITP. 18. It will be a condition of the first sub-loan that the final design of proposed civil works, the technical specification of equipment to be purchased and the TOR's of all proposed further studies, be included in the terms of reference for the studies to produce the ITP, and a condition of negotiating a third sub-loan that at least 20% of the final designs, specifications and bid documents had received Bank approval. In those cases where the consultants selected for the ITP studies will be different to those undertaking the final designs and product specifications, SEDESOL will assist the process by: (a) assisting cities to prepare terms of reference for the final engineering consultants; (b) assisting to prepare short lists of consultants; and (c) ensuring, through supervision, that all SEDESOL norms and design guidelines for urban works and technical specifications are followed (including bid documents for works and goods);  - 93 - ANNEX 6 Page 8 of 10 Part B3 - Implementation of the ITP 19. Following successful completion of the ITP and approval of the SEDESOL/BANOBRAS appraisal by the Bank, each participating municipality or state will then be reviewed for its eligibility for a third sub-loan, financed in part by federal grants and loans in accordance with program guidelines to implement the recommendations of the approved ITP. The review will be made by SEDESOL in respect to the technical conditions (para 2.31 (a), (b), (e), (f), (g) and (h) and by BANOBRAS in respect to the financial conditions (para 2.28 (c) and (d) and (i)) for on-lending. Once compliance with these conditions hade been verified, the implementation Stage of the sub-project will start. This will include negotiation of the third sub-loan and then undertaking the investments include in the Investment Plan and enacting all the institutional changes included in the Action Plan. 20. The preparation of the third sub-loan will include the following activities: (a) SEDESOL will arrange for a formal meeting of all involved parties and agree on the contents of the sub-project; (b) BANOBRAS will negotiate and finalize the sub-loan conditions and will prepare a draft sub-loan agreement, a final municipal and state appraisal report, specify lending terms and conditions and prepare all other legal documents as necessary including state guarantees (and proceed to secure approval of the state congress, when required); (c) subsequent to finalization and agreement of all legal documents, BANOBRAS will submit the documents to the Bank for comments and, following receipt of these comments, will present the sub-loan to BANOBRAS Board of Directors for approval. Following this procedure, the sub-loan will be formally submitted to the Bank for approval. Part B3: Bidding of works and goods 21. Once the sub-loan arrangements had been completed and the relevant documents approved and signed, SEDESOL and BANOBRAS will review the bid documents and evaluations for the first year projects, and issue a "no objection" notification as appropriate to the municipality or state. The third sub-loan will include finance for the preparation of final designs and bidding documents for the components of the Investment Plan not covered by funding under the first sub-loan. Preparation of these designs and documents will precede the bidding of these works and of equipment for which the technical specifications had been prepared with finance from the first sub- loan. All further studies, planning and training activities included in the Action Plan will also be bid in this Phase of the sub-project.  94- ANNEX 6 Page 9 of 10 Part B3: Supervision 22. Supervision of all physical works will be carried out throughout the implementation phase and will include: (a) periodic re-evaluation of Project components, including the institutional strengthening and training components, to determine impact on component viability of changes in unit costs and/or projected traffic volumes or user costs from those established at Project Evaluation (SEDESOL, with BANOBRAS for financial aspects); (b) review and approval of changes in Project components requested by the municipality or state(SEDESOL); (c) review and approval of consultant terms of reference, final designs, and proposals (SEDESOL); (d) review and approval of procurement arrangements, bidding documents, procurement awards, and contracts; SEDESOL (technical) and BANOBRAS (financial); (e) review of implementation progress (SEDESOL); (f) monitoring compliance with the sub-Loan Agreement; SEDESOL (physical) and BANOBRAS (financial); (g) preparation of quarterly reports and other documentation relative to sub-project progress (SEDESOL, and BANOBRAS for financial reports); and (h) coordination among and liaison with all agencies involved in the program (SEDESOL). Part B3: Ex-Post evaluation 23. An ex-post evaluation of each sub-project will be prepared by SEDESOL. making use of the information gained during Parts Bl, B2 and B3 of the sub- project as well as its own and BANOBRAS' monitoring reports (Annex 7). The evaluation reports will be submitted to the Bank as part of the Project Completion Report, but before then SEDESOL should disseminate the lessons learned and make use of them in the preparation and development of subsequent sub-projects. The Role of the Bank in the Process 24. The Bank will review relevant stages of: (a) all short lists of consultants and contractors; (b) all terms of reference and consultant selections; and (c) selective bid documents, and bid evaluations. The selection will include all International Competitive Bidding contracts and the first Local Competitive Bidding Contract of each sub-loan. All other procurement documentation will be subject to selective ex-post review by the  - 95 - ANNEX 6 Page 10 of 10 Bank. BANOBRAS will retain documentation for these contracts for periodic supervision by Bank staff. A "no-objection" letter from the Bank will be required before the award of contracts to consultants, contractors and suppliers of goods. This applies to all stages and phases of the Project. The Bank will review and comment on all sub-loan agreements. 25. The Bank will review the immediate action proposals and will appraise each new sub-project based on the SEDESOL appraisal report. Thus, the Bank will receive the appraisal of the Diagnostic Report and the final ITP before the approval of the third and principal sub-loan by BANOBRAS. 26. During the course of Part B3 of the proposed project, the Bank will supervise on a sample basis the work and development of the institutional components. The Bank, together with SEDESOL and BANOBRAS will be responsible for reviewing the reports prepared for the annual and mid-term reviews, the agendas for which are detailed in para 2.57.  - 96 - Annex 7 Page 1 of 5 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT Monitoring and Evaluation 1. Although monitoring and evaluation are considered as linked activities, they have rather different objectives. Monitoring is designed to review progress on a project as it is being executed, in an attempt to avoid delays or cost overruns, and to determine whether existing standards and norms of performance are being achieved. Evaluation is designed to assess whether, once the project is completed, it achieved its declared objectives. 2. Monitoring involves three separate actions, related to: (a) Standards monitoring: current operational performance and its comparison with national and international standards and norms; (b) Progress monitoring: progress on the achievement of institutional, physical and operational targets; and, (c) Financial monitoring: measurement of progress on disbursements. For the Part A activities of the Project, each agency will be responsible for monitoring and evaluation its own activities. For Part B activities, responsibility will be shared between SEDESOL and BANOBRAS. 3. Standards monitoring is only relevant to Part B activities. Standards and Progress monitoring in respect of Part B sub-project activities will be the responsibility of SEDESOL, while financial monitoring, for each sub- project and of Part B as a whole, it will be that of BANOBRAS. Similarly, Standards evaluation will be the responsibility of SEDESOL, while financial evaluation will be the responsibility of BANOBRAS. Progress Monitoring and Evaluation of the National component (Part A) 4. In respect to its own strengthening program (Part Al), SEDESOL will be responsible for monitoring progress of its own technical consultants. Although the terms of reference for this TA were detailed in respect to the qualities required of the consultants, they were open in respect to the specific activities they will undertake. The first action of the consultants once appointed will be to develop, together with SEDESOL, a detailed work program, with specific dates for the production of specific manuals, analyses and reports. Compliance with this program will account for about half of the consultants time. The remainder will be spent helping SEDESOL with the preparation of ITPs for the participating municipalities. SEDESOL will develop a monitoring schedule of reports and manuals for its consultants and will use this as its basic monitoring document. 5. Monitoring of BANOBRAS' technical assistance (Part A2) will be more subjective, as there are even fewer specific outputs required. For the first six months of the project, most of the time of the consultants will be used in reviewing the financial status of potential participating municipalities and states. Once the activities related to Part B2 (Immediate Action Plans) and B3 (c) (Implementation of the ITPs) are under way, the responsibilities will  - 97 - Annex 7 Page 2 of 5 change and a detailed monitoring exercise will be implemented to keep track of the progress of each contract in each sub-loan. 6. The National Training Program will be monitored by SEDESOL. There is at present no detailed schedule of training activities other than that for the first Intensive Course. A number of regional courses are currently being planned, in response to an identified specific need from the municipalities. The other training courses will similarly be initiated in response to specific needs as well as to a general overall program. 7. The studies to implement the ITPs will be financed under Parts A4 and Bi of the Project. Since the majority of the funding will come from the latter, ITP monitoring is considered as an activity under that part of the project. 8. The three Part A activities are such that it will be inappropriate to evaluate their performance during their execution, other than at the mid point of their progress. In the case of technical assistance to SEDESOL, there is provision for a review of the need for further assistance after the first twelve months of the project. For the training program, a planned. review after the first of the Intensive Courses will help to inform a decision as to whether it should be repeated, and if so, what changes should be made. There is no provision for an interim review of the BANOBRAS strengthening program. A provisional ex post evaluation should be made as soon as each of the activities is completed. These evaluations will be the responsibility of the executing agency. The evaluation criteria will be different for each activity and depend on its specific objectives, but by their nature they will be qualitative rather than quantitative 9. For the SEDESOL strengthening, the evaluation will take account of: (a) the time needed to implement each sub-project and the extent to which SEDESOL's own staff were able to assist this work; (b) the extent to which the consultants were able to undertake a technology transfer to SEDESOL's staff; (c) the number of SEDESOL technically qualified staff; (d) the use made of the equipment purchased with Project funds; (e) Reports provided by the SEDESOL participants in the Study Tours, indicating the experience they had gained and how it is expected to be useful in their future work for SEDESOL; (f) the usefulness of the promotion campaign in encouraging municipalities to participate in the Program. This can be measured to some extent by the rate at which municipalities request to participate, compared with an expected participation rate of about four or five municipalities each year and by the proportion of participants in Part B3 (a) of the project which progressed to Part B3 (c);  - 98 - Annex 7 Page 3 of 5 10. For the BANOBRAS strengthening component, the evaluation will take account of: i) the average time it takes BANOBRAS to process the various stages of each sub loan to a municipality, including the contracting of civil works construction, ii) the utilization of equipment purchased vith Project funds, and iii) the content and timeliness of submission of quarterly reports to the Bank Standards Monitoring and Zvaluation of the local component (Part B) 11. Each participating city will undertake a monitoring and evaluation program as part of its ITP. The monitoring will be in respect of activities (a), (b) and (c) described in para.2. In addition, BANOBRAS and SEDESOL will carry out an overall monitoring and evaluation of all of Part B of the Project. All sub-loan agreements will include between six and ten of the following indices, preferably with at least one for each major area of activity, for use in monitoring the sub-loan. The particular indices for each agreement will be determined by SEDESOL based on their existing knowledge of the more important urban transport issues in each city. The values selected for the particular indices will be based on national and international standards and vill take account of the particular characteristics of each city. The monitoring process will comprise a comparison between the achieved and target values, explanations for any significant deviation and proposals for how the original target values could be achieved (a) Public transport operation Infrastructure - number and route km of bus priority systems, observed level of observance (number of private vehicles observed in public transport lanes, number of bus priority intersections and traffic signals, proportion of services terminating in a recognized passenger terminal, number and proportion of bus stops in pull-offs from the main highway; Passenger satisfaction - bus occupancy factors, proportion of trips which can be completed without a change of vehicle, availability of interchange and period fares, on- time performance of services, availability of route information, average walking distance to a bus stop, average age of buses, availability of alternative qualities of service; Operators efficiency - vehicle km per day, proportion of vehicles in service on an average day, proportion of "dead km", number of breakdowns in service;  - 99 - Annex 7 Page 4 of 5 Financial results - total revenue and average revenue per vehicle, total cost and average cost per vehicle, structure and level of operating and capital costs, fixed and variable costs per vehicle; and Regulatory control - ease of issuing of licenses or permits - number of permits granted to new operators in each of the last three years, number of requests for permits granted and refused in each of the last three years, average time between request for a license and a response; (b) Traffic management Parking - number of on and off street parking places in city and other centers, occupancy level of parking places, number of infractions observed and ticketed; Intersections - number of signalized intersections, proportion of linked traffic signals; Vehicle operation - average speeds on various parts of the network, typical average journey times; and Highways - demand/capacity ratios at different times of day and days of week, numbers of and severity of road accidents and identification of especially dangerous locations; (c) Corridor improvements Infrastructure - total reservation width, road width, number of lanes, number of bus-only lanes, number and type of intersections, surface type and condition; and Traffic - hourly and daily traffic level, AADT, volume/capacity ratios, junction turning movements, vehicle speeds at different times of time, average corridor transit times, average junction queues and waiting times; (d) Infrastructure maintenance Roads - road surface roughness measures, frequency of resurfacing of different parts of the road network; and Traffic signals - number and proportion of traffic lights in service, average time to repair failed traffic lights; (e) Enviroment  - 100 - Annex 7 Page 5 of 5 Air quality - concentrations of NOx, CO, PMIO, atmospheric lead, SOx at the assessed worst six city locations; Vehicle emissions - number of and proportion of vehicle fleet tested each year, proportion of failures; and Noise - average noise level, measured in Leq over the period 8am to 8pm, at specified minimum of twenty worst locations. Monitored noise emission measured in dB(A) of a sample of at least 100 vehicles of each type (passenger car, urban bus and large truck) Progress and Financial Monitoring of the local component Part B 12. Each sub-project component will have an implementation schedule which will be monitored. Each proposal for an institutional change will include an Action Plan, indicating which decisions and actions needed to be taken, by whom and when. A similar Action Plan for civil works will include the following activities for each component: (a) final engineering design and equipment specification; (b) preparation and issue of bid documents; (c) contract signature; and (d) the start and finish dates for works (or supply of equipment) as well as quarterly targets. These Action Plans will provide the basis for the Progress Monitoring. SEDESOL will be responsible for Progress monitoring and reporting to the Bank on a quarterly basis. 13. BANOBRAS will be responsible for Financial Monitoring for each component of each sub-project and has included in its own institutional strengthening program the resources to do this. Since civil works and the supply of equipment are likely to extend over a number of quarters, the disbursement schedule for each component of each sub-project will include target "percentage completed" by quarter or by semester as appropriate. Thus target expenditures will be used to monitor financial (disbursement) performance on a quarterly basis; Ex-post Evaluation 14. The ex-post evaluation activities will be aimed at determining the effectiveness and efficiency of measures in meeting the standards used in the Standards Monitoring comparisons. In the event that objectives are not met and previously anticipated improvements in performance are not achieved, the data will be used (a) to identify why sub-project components had not been fully successful; and (b) to improve the specification of future sub-projects. Furthermore, the ex-post evaluation will be used as a major input to the Project Completion Report.  - 101 - Annex 8 Page 1 of 1 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT Financing Sourcoe 1. The attached Tablo shows the financing sourcoe for each Part of tho proposed project and an example of how a typical sub-project vould be financed. The allocation of financial responsibility among the three sources - federal grants, sub-project loans and municipalities own sources- is that included in the Operating Manual of the PVT. During negotiations the federal government would confirm these arrangements and that they would comit sufficient federal resources to cover their obligations throughout the project. Each sub-project agreement would require the participating state and municipality to commit sufficient funds to cover their share of the sub- project cost.  wwwwwww0 wmwa,wIT0, 0 v--4 rn. --u a -4mmm - ( u0 ' -in-i-ir ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~L -e Itt A. 5.O~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~...... . x x x e r n ii w w ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.. . . $1 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~...... 0 C ~~~~~~~~~~~~~~~~~~~~~~~flt~~~~~~~~~~~~~~~~~~ n c vt~~~~~~~~~.. ......... 5'~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~S - co -4 ~~~~~~~ ~ ~ -....--~ ~ ~ ~ ~~~~~~~~~~~~0 C6sa 0 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ C~~~~~~~~~~~~~~ F~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~K CL 3 P- ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ to 0~~ * - - a~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 0 .10~~~~~~~~~~~ S R R tfl. m cs & cicitS'o a ~ ~ ~ R R R R R3~ S 0 *t*--k1.bcb ibobtbb~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~aIRE w tens yE~~~~~~~~~~~~~~~~~~~~~~~~' 1t~~~~~~~4 4 S~~~~~~~~~ C _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~i 4:b~6L ____ ntn *tn ne-t _ btRL  - 103 - Annex 9 Page 1 of 1 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT Estimated Schedule of Bank Loan Disbursements (In millions of US Dollars) IBRD Fiscal Year and Quarter Quartely Cumulative (Ending date) Disbursements Disbursements 1993 March 31 14.01 14.0 June 30 2.0 16.0 September 30 3.9 19.0 December 31 3.0 22.0 1994 March 31 5.0 27.0 June 30 10.0 37.0 September 30 10.0 47.0 December 31 10.0 57.0 1995 March 31 10.0 67.0 June 30 10.0 77.0 September 30 10.0 87.0 December 31 11.0 98.0 1996 March 31 10.0 108.0 June 30 10.0 118.0 September 30 9.0 127.0 December 31 9.0 136.0 1997 March 31 8.0 144.0 June 30 6.0 150.0 September 30 6.0 156.0 December 31 5.0 161.0 1998 March 31 5.0 166.0 June 30 4.0 170.0 September 30 3.0 173.0 December 31 3.0 176.0 1999 March 31 4.0 180.0 June 30 4.0 184.0 September 30 4.0 188.0 December 31 3.0 191.0 2000 March 31 3.0 194.0 June 30 6.0 200.0 1/ Includes US$12 million for the Special Account and US$4 million for retroactive financing incurred after June 30, 1992.  - 104 - Annex 10 Page 1 of 5 MEXICO MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT DOCUMENTS IN PROJECT FILE A. Documents supporting the Staff Appraisal Report 1. Summary of Sub-project Appraisals 2. Lessons learned from Other Urban Transport Projcts Previously an Annex to the White Cover SAR B. Selected Sector Papers 3. Transporte Urbano en Ciudades Medias de Mexico, Propuesta Lineas de Credito Sectorial. BANOBRAS, Direcci6n de Financiamiento del Desarrollo, September 1989. 4. Diagn6stico Global del Transporte Urbano en Ciudades Medias - Felipe Ochoca y Asociados, S.C. Louis Berger Int, Inc. September 1989. 5. Estimaci6n de Costos de Operaci6n de vehiculos Modelo HDM. BANOBRAS, Direcci6n de Financiamiento del Desarrollo, March 1989. 6. Politica Nacional de Transporte Urbano. Lineamientos Relativos al Informe. July 1989. 7. Methodology for Evaluation Medium City Urban Transport Proiects - Felipe Ochoa y Asociados, S.C., and Louis Berger International, Inc., 1989. 8. Manual de Operacion para el Programa Nacional del Sistema de Transporte Urbano. BANOBRAS .October 1992. C. Selected Project Related Studies-First Stage Cities. 9. Reporte de Evaluacion - Subproyecto Toluca. BANOBRAS. March 1992 10. Reporte de Evaluacion - Subproyecto Leon. BANOBRAS. March 1992 11. Reporte de Evaluacion - Subprovecto Ciudad Juarez. BANOBRAS. March 1992 12. Cd. Juarez - Estudio de Factibilidad de Transporte Urbano de Pasaieros, Direcci6n General de Vialidad Municipal, Diciembre 1990.  - 105 - Annex 10 Page 2 of 5 13. Cd. Juarez - Estudio Integral de Transporte Urbano, Informe de Preevaluaci6n. Versi6n Resumida, Gobierno del Estado de Chihuahua, Felipe Ochoa y Asociados, S.C., Louis Berger Int. Inc., July 1989. 14. Metodologia para el Diagn6stico Pron6stico v Asignaci6n del Transito de Ciudad Juarez, Chihuahua. Informe - Anexo 1. September 1989. 15. Evaluaciones Econ6micas de Nuevas Vialidades Primarias v Pavimentaci6n de Rutas de Transporte,Informe sobre el supbroyecto Ciudad Juarez - Anexo 2, September 1989. 16. Estudio Integral de Transporte Urbano para la Cd. de Chihuahua, Informe de Preevaluaci6n Resumen Ejecutivo - Felipe Ochoa y Asociados S.C., Louis Berger International Inc., August 1989. 17. Metodologia para el Diagn6stico Pron6stico v Asignaci6n del Transito de la Ciudad de Chihuahua. Informe Anexo 1. August 1989. 18. Segundo ProVecto de Transporte Urbano - Subprovecto Chihuahua - Felipe Ochoa y Asociados, S.C., and Louis Berger International, Inc., August 1989. 19. Estudio Integral del Transporte Urbano de la Ciudad de Le6n. Informe de Diagn6stico - Anexos A, B, C, D, E y F. 1990. 20. Programa Integral de Transporte Urbano de Le6n, Guanajuato. D. Selected Project Related Studies-Second Stage Cities. 21. Diagn6stico del Transporte Urbano en la Zona Metropolitana de Coatzacoalcos - Veracruz. Informe (versi6n preliminar). March 1989. 22. Plan de Desarrollo del Municipio de Puebla. 1990. 23. Diagn6stico del Transporte Urbano, Zona Metropolitana de Coatzacoalcos. Ver. Felipe Ochoa y Asociados, S.C., and Louis Berger International, Inc. Diciembre, 1989. 24. Diagn6stico del Transporte Urbano, Area Metropolitana Tampico-Madero- Altamira, Felipe Ochoa y Asociados, S.C., and Louis Berger International, Inc. Diciembre, 1989. 25. Diagn6stico de Transporte Urbano de la ReAi6n Metropolitana de la Laguna, Felipe Ochoa y Asociados, S.C., and Louis Berger International, Inc. Septiembre, 1989. 26. Diagn6stico del Transporte Urbano, Zona Metropolitana de San Luis Potosi, SLP, Felipe Ochoa y Asociados, S.C., and Louis Berger International, Inc. Diciembre, 1989.  - 106 - Annex 10 Page 3 of 5 27. Diagn6stico del Transporte Urbano en la Ciudad de Merida. Yuc., Felipe Ochoa y Asociados, S.C., and Louis Berger International, Inc. Diciembre, 1989. E. Documents held by BANOBRAS 28. Manual de Operaci6n para el Programa de Nacional de Transporte Urbano. SHCP, Marzo, 1992 29. Diagn6stico; Zona Metropolitana de Coatzacoalcos, Ver. FOA, Felipe Ochoa y Associados S.C. Consultores, March 1989 30. Diagn6stico; Zona Metropolitana de La Laguna. FOA, Felipe Ochoa y Associados S.C. Consultores, March 1989 31. Diagn6stico; Merida, Yuo. FOA, Felipe Ochoa y Associados S.C. Consultores, March 1989 32. Dia_n6stico; Zona Metropolitana de San Luis Potosi, S.L.P. FOA, Felipe Ochoa y Associados S.C. Consultores, March 1989 33. Diagn6stico; Zona Metropitana de Tampico. Tams. FOA, Felipe Ochoa y Associados S.C. Consultores, January 1989 34. Diagn6stico Global del Transporte Urbano en Ciudades Medias. FOA, Felipe Ochoa y Associados S.C. Consultores, September, 1989 35. Politica Nacional de Transporte Urbano. FOA, Felipe Ochoa y Associados S.C. Consultores, July 1989 36. Procedimientos de Licitaci6n de Obras Viales Urbanas. FOA, Felipe Ochoa y Associados S.C. Consultores, March 1989 37. Lineamientos Metodol6gicos para la Evaluaci6n Econ6mica y Financiera de Provectos de Vialidad y Transporte Urbano. FOA, Felipe Ochoa y Associados S.C. Consultores, September 1990 38. Adquisici6n de Autobuses Urbanos. FOA, Felipe Ochoa y Associados S.C. Consultores, March 1989 39. Subproyecto Chihuahua, Reporte Central. FOA, Felipe Ochoa y Associados S.C. Consultores, August 1989 40. Subprovecto Chihuahua, Informe de Prevaluaci6n. FOA, Felipe Ochoa y Associados S.C. Consultores, February 1990  - 107 - Annex 10 Page 4 of 5 41. Subprovecto Chihuahua, ANEXO I. Metodologia Para el Diagn6stico, Pron6stico y Asignaci6n del Transito. FOA, Felipe Ochoa y Associados S.C. Consultores, October 1989 42. Subprovecto Chihuahua, ANEXO II. Evaluaciones Econ6micas de Nuevas Vialidades Primarias, Cruces, Desnivel y Pavimentaci6n de Rutas de Transporte Urbano. FOA, Felipe Ochoa y Associados S.C. Consultores, October 1989 43. Subproyecto Chihuahua, ANEXO III. Los Semaforos en Diversas Intersecciones. FOA, Felipe Ochoa y Associados S.C. Consultores, October 1989 44. SubproVecto Chihuahua, ANEXO IV. Mantenimiento de Vialidades. FOA, Felipe Ochoa y Associados S.C. Consultores, October 1989 45. Subproyecto Ciudad Juares, Reporte Central. FOA, Felipe Ochoa y Associados S.C. Consultores, September 1989 46. Subproyecto Ciudad Juares, Informe de Prevaluaci6n. FOA, Felipe Ochoa y Associados S.C. Consultores, February 1990 47. Subprovecto Ciudad Juares, ANEXO I.. FOA, Felipe Ochoa y Associados S.C. Consultores, October 1989 48. Subprovecto Ciudad Juares. ANEXO II. Evaluaciones Econ6micas de Nuevas Vialidades Primarias, Cruces, Desnivel v Pavimentaci6n de Rutas de Transorte Urbano. FOA, Felipe Ochoa y Associados S.C. Consultores, October 1989 49. Subprovecto Ciudad Juares. ANEXO III. Analisis de Capacidad y Niveles de Servicio en Intersecciones. FOA, Felipe Ochoa y Associados S.C. Consultores, October 1989 50. SubproVecto Ciudad Juares, Reporte de Evaluaci6n (Borrador) FOA, Felipe Ochoa y Associados S.C. Consultores, September 1991 51. Provecto de Vialidades Zonas Oriente. FOA, Felipe Ochoa y Associados S.C. Consultores, April 1990 52. Estimaci6n de Costos de Operaci6n de Vehiculos para Condiciones Urbanas. Adaptaci6n de Modelo VOC del BIRF a las Condiciones Nacionales (Borrador). FOA, Felipe Ochoa y Associados S.C. Consultores, September 1991 53. Subproyecto Morelia, Prediagn6stico del Estudio Integral. Ustran, Urbanismo y Sistemas de Transporte, December 1988 54. Subprovecto Morelia, Sintesis Elecutiva. Ustran, Urbanismo y Sistemas de Transporte, April 1989  - 108 - Annex 10 Page 5 of 5 55. Subprovecto Morelia. Ingenieria de Transito. Ustran, Urbanismo y Sistemas de Transporte, March 1989 56. Subprovecto Morelia. Transporte Plablico. Ustran, Urbanismo y Sistemas de Transporte, March 1989 57. Subprovecto Morelia. Analisis Financiero. Ustran, Urbanismo y Sistemas de Transporte, March 1989 58. Subproyecto Morelia, Metodoligias. Ustran, Urbanismo y Sistemas de Transporte, March 1989 59. Subproyecto Le6n, Antecedentes. Cal y Mayor y Asoc, April 1989 60. Subproyecto Le6n, Reporte Central. Cal y Mayor y Asoc, April 1989 61. Subproyecto Le6n, Informes de Diagn6stico. Cal y Mayor y Asoc, April 1989 62. Subproyecto Le6n, Informes de Estrategias. Cal y Mayor y Asoc, April 1989 63. Subproyecto Le6n, Reporte de Evaluaci6n. Cal y Mayor y Asoc, October 1991 64. Subproyecto Toluca, Reporte Central. Cal y Mayor y Asoc, April 1989 65. Subprovecto Toluca, Informe Diagn6stico. Cal y Mayor y Asoc, April 1989 66. Subprovecto Toluca, Informes Estrategias. Cal y Mayor y Asoc, April 1989 67. Subprovecto Toluca. Reporte de Evaluaci6n. Cal y Mayor y Asoc, October 1991   IBRD 23 2 l\ >- UNITED STATES OF AMERICA MEXICO MEDIUM-SIZE CITIES . r t