Mexico - Mexico City Drainage Project

RTUFT RN, TO RESTRICTED REPORTS DESK Report No. TO-571a WITHIN R'LE Copy ONE WEEK This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as. representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE MEXICO CITY DRAINAGE PROJECT MEXICO January 18, 1967 Projects Department  CURRENCY EQUIVALENTS U.S.$1. 00 = Mex$12. 50 Mex$1. 00 = U. S. $0. 08 Mex$1, 000, 000 = U.S.$80,000 ABBREVIATIONS cm = centimeter (0. 394 inches) km = kilometer (0. 621 miles) km = square kilometer (0. 386 sq. miles) m = meter (3. 28 feet) m /sec = cubic meter per second (22. 8 million U. S. gallons per day) FISCAL YEAR January 1 through December 31  APPRAISAL OF THE MEXICO CITY DRAINAGE PROJECT TABLE OF CONTENTS Paragraphs SUMMARY AND CONCLUSIONS .... ....... ... ...... * .* i - x I. INTRODUCTION ................................. 1.01 - 1.04 II. THE PROPOSED BORROWERS *......... ......... 0 2.01 - 2.0h A. Nacional Financiera .................... 2.01 B. Department of the Federal District ............ 2.02 - 2.O4 III. DEPARTMENT OF THE FEDERAL DISTRICT ............... 3.01 - 3.23 A. Description of the Mexico City Area .......... 3.01 - 3.06 B. Organization and Management of the Department. 3.07 - 3.18 Co Finances .,..... ,* ...... ,,...... 0*.. *0 3.19 - 3.23 IV. PRESENT DRAINAGE SITUATION ........................ 4.01 - 4.11 V. THE PROPOSED PROJECT ............................. 5.01 - 5.31 A. Description 5 ............. 5,01 - 5.03 B. Design Criteria .... 5.0h - 5.10 C. An Alternative Solution .......... 5.11 - 5.12 D. Project Costs ....,...........eo.......... 5.13 - 5.16 E. Foreign Currency Costs . . . 5.17 - 5.19 F. Design and Supervision 5.20- 5.25 G. Bidding and Construction ..................... 5.26 - 5.31 VI. FINANCING PLAN AND PROJECTIONS .................. 6.01 - 612 A. Total Financial Requirements and Sources of Funds .............**......... 6.01 - 6*02 B. Additional Revenue Measures for the Project .. 6.03 - 6.06 C. Financial Projections ........................ 6.07 - 6.12 VII. JUSTIFICATION ..... .......... . 7.01 - 7.05 VIII. CONCLUSIONS AND RECOMMENDATIONS .................. 8.01 - 8.03 This report is based on an appraisal mission in August 1966 to Mexico, composed of Messrs. Charles A. Morse and Paul Geli of the Bank, and Mr. Thomas F. Thompson, consultant to the Bank.  ANNEXES 1. Organization Chart of the Department of the Federal District 2. Current Revenues and Expenditures, 1961-1965 3. Sources and Applications of Funds, 1961-1965 4. Changing Drainage Conditions 5. Estimated Construction Cost 6. Construction Schedule 7. Forecast of Current Revenues and Expenditures, 1966-1970 8. Forecast of Sources and Applications of Funds, 1966-1970 MAPS 1. General Drain.,v- 2. Interceptor c.d OutL-all Tunnels  APPRAISAL OF THE MEXICO CITY DRAINAGE PROJECT SUI4eRY AND CONCLUSIONS i. The United Mexican States have requested a loan from the Bank to help finance a drainage project for the Mexico City metropolitan area. (Paras. 1.01 - 1.0h) ii. One of two co-borrowers would be Nacional Financiera, a develop- ment bank and the authorized channel for foreign loans guaranteed by the Federal Government. The other co-borrower would be the Department of the Federal District, the entity responsible for carrying out the project. The Department is a major government unit which administers the Federal District, the capital of Mexico. (Paras. 2.01 - 2.04) iii. The Federal District has almost 15% of the nation's population and is the principal center for finance, commerce, and industry. Because of the ground settlement caused by overpumping the ground water and the lack of natural drainage from the basin in which Mexico City is located, the down- town area is threatened by floods. (Paras. 3.01 - 3.o6) iv. The Department of the Federal District has several administrative divisions, of which the Water Supply and Sewerage Division is responsible for the operation of water supply, sewerage, and drainage facilities, and the Hydraulic Works Division is responsible for the planning and construction of these facilitieso The financial position of the Department is sound. (Paras. 3.07 - 3.23) v. The drainage situation has always been a problem because the Valley of Mexico is a closed basin. Drainage and flood control projects began under the Aztecs and have continued to the present. Most of the surface waters are pumped to the Gran Canal, constructed at the turn of the century. The Canal is severely overloaded and this and the settlement of adjacent ground puts the Canal's walls in danger of collapse. (Paras. 4.01 - 4.11) vi. The proposed project includes two gravity interceptor tunnels and an outfall tunnel, totalling about 100 kmi, which would drain the metropolitan area and, in effect, replace the Gran Canal. The tunnels would have a design capacity of 200 m3/sec., the maximum flow likely in the foreseeable future. Estimated project costs are US$128.5 million, including contingencies but excluding interest during construction. Foreign currency requirements to be financed by the proposed Bank loan are estimated at $37 million equivalent, 29% of the total project costs. (Paras. 5.01 - 5.19.) vii. The geological exploratory work, design, and cost estimates were well done by local private and government consultants and Department staff. There is considerable Mexican experience in hard rock tunnelling but little  - ii - in soft ground tunnelling; part-time foreign consultants in soft ground tunnelling would be employed as well as a consulting firm for the super- vision of construction. Construction would be divided into a number of contracts, which would be bid on an international competitive basis. Con- struction should be completed in three years. (Paras. 5.20 - 5.31) viii. The financial projections are made on the basis that the Depart- ment of the Federal District will take revenue action to recover substantially all the costs of the project within ten years. (Paras. 6.01 - 6.12) ix. The project is essential to avoid the risk of flooding the down- town portion of the city; damages of a flood are estimated at US$430 million equivalent. The probability of a flood is perhaps 1 in 50 now, but would approach close to certainty in the next decade or two in the absence of the project. The proposed project represents the least expensive means of re- moving the risk of flooding and providing an adequate drainage system. (Paras. 7.01 - 7.05) x. With the assurances noted in paragraph 8,02, the project provides a suitable basis for a loan from the Bank of US$37 million to the Depart- ment of the Federal District and Nacional Financiera for a period of 20 years, including a four-year grace period. (Paras. 8.01 - 8.03)  APPRAISAL OF THE MEXICO CITY DRAINAGE PROJECT I. INTRODUCTION 1.01 The United Mexican States have requested a loan from the Inter- national Bank for Reconstruction and Development to help finance a drainage project for the Mexico City metropolitan area. The request was made through Nacional Financiera and the project would be constructed and operated by the Department of the Federal District, both of which would be co-borrowers. 1.02 The project would include construction of two large interceptor tunnels and a central outfall tunnel, totalling some 100 km in length, to remove the sewage and storm water from the metropolitan area. The estimated project cost is US$128.5 million equivalent (Mex$l,606 million) and the pro- posed Bank loan of US$37 million equivalent (Mex$462 million) would cover the estimated direct foreign exchange expenditures for the project, amount- ing to 29% of the total project cost. 1.03 The appraisal is based on documentation prepared by the Department of the Federal District, with the assistance of staff of the Secretary of Hydraulic Resources and the Federal Electricity Commission and local con- sultants. An appraisal visit was made to Mexico in August 1966 by Messrs. C. A. Morse and P. Geli of the Bank. Mr. T. F. Thompson, an engineering geologist consultant, assisted the field appraisal and reported on the project. 1.04 The concept of the project was developed in 1954 and the project has been in preparation for the past few years. Although the project had been discussed tentatively three years ago, presentation of the project was made to the Bank only in October 1965. A preliminary visit was made to Mexico City in December 1965. Final presentation and appraisal had to await the completion of studies of alternative means of removing the waste waters from the metropolitan area and a decision by the Secretary of Hydraulic Re- sources.  - 2 - II. THE PROPOSED BORROWERS A. Nacional Financiera 2.01 Nacional Financiera, S.A., is a development bank established in 193h to further the industrial development of Mexico and in which the capital is provided by state and private sources. The institution has financed public utilities, public works, and heavy and light industries. Nacional Financiera is the only channel legally authorized for foreign loans guaranteed by the Federal Government, and has been either the borrower or co-borrower in all Bank loans to Mexico but one (103-ME). B. Department of the Federal District 2.02 The Federal District is the capital of Mexico. It is a territory, under the direct supervision of the President. It includes a metropolitan area, where most of the 6 million population resides, and 12 rural subordin- ate jurisdictions (delegations). 2.03 The functions, organization, etc., of the administering Depart- ment of the Federal District are fixed by the congressionally-approved Organic Statute of December 31, 1941, as amended from time to time. The legislative functions are exercised by the Congress. The annual budget of the Department must be approved by the Congress, and accounts are audited by the Secretary of Finance and Public Credit. The President of the Re- public exercises his executive power through the Governor of the District, appointed by him and assisted by a consultative council of municipal coun- cilors and rural delegates. 2.04 The Department has the combined functions of a municipality and a state. Within the limits of the Federal District, the Department is re- sponsible for all public services, including police, traffic, water supply, sewerage, street paving, street cleaning, public lighting, slaughterhouses, markets, parks and gardens, planning and zoning, and regulation and control of construction of private buildings. It has annual revenues of more than Mex$2.0 billion (US$160 million equivalent) and employs about 60,000 people. The Department is the largest single unit of the Federal Government.  - 3 - III. DEPARTMENT OF THE FEDERAL DISTRICT A. Description of the Mexico City Area 3.01 The Valley of Mexico is located in the southernmost part of the Great Central Plateau. It includes portions of the states of Mexico, Hidalgo, Tlaxcala, and Puebla as well as the entire Federal District. It affords a good central location for the economic, political, and cultural life of the nation. 3.02 The Federal District occupies the southeastern corner of the Valley of Mexico and is bounded on three sides by the State of Mexico, and the State of Morelos on the south. It has the shape of an irregular polygon, about 50 km north to south and about 40 km broad, with an average altitude of 2,200 to 2,300 m and an area of about 1,400 km2, of which some 300 km2 are urbanized. 3.03 Almost 15% of the nation's population is in the Federal District. According to the 1960 census, the District had a population of 4.9 million, almost three times the 1940 population, and the present population is esti- mated at about 6 million. Population growth is expected to continue at a somewhat lower rate; projections are for a little less than 8 million by 1970 and almost 10 million by 1990. 3ao4 The Federal District is the principal center in finance, commerce, and industry. Much industrial expansion took place after World War II, and the Mexico City area represents the single largest industrial aggregate in the Republic. According to the 1960 census, more than 80,000 private com- mercial establishments (30% of the nation's total) with investments of Mex$13.6 billion pesos and annual sales of Mex$21.0 billion pesos were lo- cated in the Federal District. About 100,000 industrial enterprises (50% of the country's total) with investments of Mex$15.4 billion and an annual production of Mex$20.0 billion were also established in the Federal District and provided employment to some 350,000 people and salaries and wages of Mex$3.5 billion. 3.05 Two interrelated phenomena give the Federal District a peculiar feature. Among the major cities in the world, Mexico City is unique in that it obtains most of its water from wells. This removal of ground water in the metropolitan area has caused a lowering of the water table and sub- sidence of the ground surface, damaging building foundations, streets, side- walks, and drains. The present rate of sinking, while variable according to the specific ground characteristics, is something like 10 cm per year. 3.06 In addition, because the valley is closed, there is no natural surface drainage from it. A number of defensive works have been built over the centuries, most recently a canal and two tunnels to carry waste water out of the valley. As a result of the sinking, all storm water and sewerage must be punped into the canal and a real danger of flooding downtown Mexico City exists.  B. Organization and Management of the Department 3.07 The Organic Statute lists the principal officers of the Department of the Federal District under the Governor as the General Secretary, the Chief Administrative Officer, and the General Managers in charge of the various divisions. These officers and the Chief of Police are appointed by the Governor with the approval of the President of the Republic. Other members of the staff may be appointed directly by the Governor, but those engaged in technical activities must have the required technical qualifica- tions and diplomas. All personnel are considered Federal employees. Recruit- ment of qualified personnel has not been a major problem and labor relations have been good. 3.08 The organization chart of the Department of the Federal District in Annex 1 shows the various divisions of the Department. All divisions are on the same level and are headed by managers who may delegate some of their functions to the section chiefs of their divisions in accordance with the rules and regulations of the Department. 3,09 The Treasury is, in fact, an office of the Secretary of Finance and Public Credit. This Secretary is responsible for the finances of the Department. The Treasurer is nominated by the Secretary with the approval of the Governor of the District. 3.10 The Administrative Services Division is in charge of personnel, procurement, and stores. Accounts are kept by the Accounting and Internal Audit Division. Billings and collections are performed by the Treasury Division, which is also in charge of meter readings for water services. 3.11 The two divisions directly involved in the planning, design, con-, struction, and operation of the project are the Hydraulic Works Division and the lWater Supply and Sewerage Division. 3.12 According to the Organic Statute, the Water Supply and Sewerage Division is the division responsible for the reconstruction, improvement, expansion, operation, and maintenance of the existing water supply and sewerage facilities of the Federal District. It employs about 6,650 people. 3.13 The Hydraulic Works Division, with 1,100 employees, was estab- lished in 1953, with the sole object to study and resolve the serious water supply and drainage problems of the District. It is responsible for the planning and construction of new water supply, sewerage and drainage facil- ities. 3.14 The two principal divisions and the several sections in the Treasury dealing with aspects of the water supply and sewerage/drainage are each adequately managed as a unit. There is, nevertheless, an obvious lack of coordination among the units so that there is little knowledge of what the others are doing and instances of duplication exist.  3.15 The administration of the physical facilities has weaknesses. Many of the water meters are broken, the water losses are not known, cost account- ing is absent, and record plans and data are poor. The records on the sewer- age and drainage facilities are scant and obsolete, in effect, they are com- posed largely of construction plans without "as built" amendments. These records will be brought up-to-date and made complete by June 30, 1968. 3.16 The metropolitan area has expanded beyond the district boundaries into the state of Mexico, and the new sources of water and the outlet for drainage are also outside the district boundaries. Nevertheless, the Fed- eral District has approached its water supply and sewerage problems from a District standpoint, rather than from a regional one. 3.17 The Ministry of Hydraulic Resources, which has jurisdiction over the ground water and surface water resources of Mexico, has set up an Hydro- logical Commission of the Mexican Valley Basin to plan regionally for the valley and to review and approve plans of such units within the valley as the Federal District. The policy of the Commission is established by an advisory group composed of representatives of the Secretary of Hydraulic Resources, the Department of the Federal District, the State of Mexico, the State of Hidalgo, and engineering societies. Unfortunately, the Commission has no executive powers and, in fact, the Federal District has paid little attention to the recommendations of the Commission and gone its own way. The Federal District plans have been prepared in good time and have been practical, contrary to some of the Commission's findings. 3.18 There is an obvious need for a coordinated, realistic study of the use of water resources and the disposal of waste waters in the Valley of Mexico, as well as for better coordination between the various imple- menting agencies involved. A recent change in the management of the Commission and the members of its advisory group is expected to achieve this. The present project does cater to the metropolitan area's drainage needs, not the District's alone. C. Finances 3.19 With very minor exceptions, the Department keeps its accounts on a cash basis, and the system and classification used does not allow for a precise determin,4t:on of curr-ent expenditures versus investments. The Bank tried, howe-ier, to distribute total expenditures between these two concepts. The Current Revenues and Expenditures of the Department of the Federal Dis- trict for the last five years are shown and discussed in Annex 2. A state- ment of Sources and Applications of Funds for the same period is presented in Annex 3. 3.20 The financial position of the Department is sound. It has no debt, but has, on the contrary, a substantial cash surplus. At the end of 1965 it held Mex$1.2 billion (US$96 million equivalent), which it has accumulated over the years, since its current revenues have averaged more than its current expenditures and investments. For the last five years, total revenues collected and total expenditures have been as follows (in Mex$ million):  -6- Surplus Revenues Expenditures or (Deficit) 1961 1,562 1,235 327 1962 1,708 1,608 100 1963 1,851 1,943 (92) 19614 2,127 2,663 (536) 1965 2,247 1,617 630 Total 9,495 9,066 429 3.21 From 1961 to 1965, total revenues collected increased by 44%, whereas the population of the Federal District increased by only 20%. During the same period, the wholesale price index and the cost of living index for workers increased by about 8%. 3.22 A detailed breakdown of investments made is included in Annex 3. Expenditures for water supply, sewerage, and drainage accounted for 28% of the total. Next in importance are street paving (16%), purchase of real property (9%), and housing (7%). Most of the expenditures for sewerage and drainage consisted of repairs, modification, and replacement of sewer lines and pumping stations as a consequence of the ground settlement in the city. One of the benefits of the proposed project would be to eliminate that type of expenditure in the future. 3.23 Over the 1961-65 period, total investments of the Department have averaged Mex$933 million (US$75 million equivalent) a year, with marked peal:s in 1963 and 1964 and a sharp drop in 1965. This is substantially less than the amount of cash surplus generated by the Department from current operations, which explains the increase over the period in the cash reserves deposited with the Banco de Mexico, S.A.  - 7 - IV. PRESENT DRAINAGE SITUATION 4.01 The Valley of Mexico (Map 1) is an alluvial basin, at an average elevation of 2,240 m above sea level, in the south of the Mexican plateau. Three of the five mountain systems of Mexico combine to enclose the valley on two sides, thus isolating it from the Gulf and Pacific coasts and the south. The valley is a naturally closed basin, the only drainage from it being man-made canals. The Federal District occupies about 15% of the valley's total area of approximately 10,000 km2. 4.02 The average rainfall is 700 mm and the surface run-off has been estimated to be about 460 million m3. The abundance of water in the many lakes, rivers, and springs in the valley has attracted settlement from pre- historic times, but this abundance, combined with the closed nature of the valley, also has occasioned natural disasters by flooding. 4.03 The problem of drainage of the Valley of Mexico was first tackled by the Aztecs. In 1449, under the direction of the Aztec king and first hydraulic engineer, Netzahualcoyotl, the first large work of flood control was constructed, a 16 km dike against the waters coming from the north; these waters were the most plentiful and filled Lake Texcoco, at that time in the lowest part of the valley. The dikes of Tlahuac and Mexicaltzingo were constructed later to regulate the waters coming from the south. 4.04 The early Spaniards constructed a dike around the Laguna de San Cristobal. In spite of all these works, the city had severe floods in 1604 and 1607, caused principally by the Cuautitlan River filling the ponds to the north and overflowing into Lake Texcoco. It was then that a German engineer, Enrico Martinez, drew up a plan to carry some of the surface waters outside the valley. He built a tunnel, Nochistongo de Cuautitlan, which. partially collapsed a year later - it is said because the local authorities refused to give him the money to put in tunnel supports, which did not prevent them from putting him in prison for the collapse of his tunnel. In 1629, a flood caused some 30,000 deaths and the emigration of most of the Spanish families to Puebla. The tunnel also suffered serious collapses in 1629 and 1634, but only by 1789 was it laboriously replaced by an open trench (tajo), which is still in use. 4.05 In 1856, the Gran Canal del Desague and its outfall tunnel of Tequisquiac were begun. These works were interrupted several times and were completed only in 1900. A second Tequisquiac tunnel was constructed in 1940-46. 4.o6 The Gran Canal was originally constructed for a flow of 5 m3/sec in its first 20 km and 17.5 m3/sec in the remainder, with Lake Texcoco acting as temporary storage during peak floods. Now with increasing flows and a reduced lake, flows have been as high as 130 m3/sec. Both tunnels have a combined capacity of 50 m3/sec, so that the Canal has to act as temporary storage along its 47 km length.  - 8 - 4.07 A tunnel, the Western Interceptor (Interceptor del Poniente), was built in 1959-60 along the western side of the metropolitan area to inter- cept the surface run-off from the mountains to the west. It was extended in 1963-64 to discharge into the Laguna de Zumpango and the tunnels of Tequisquiac or into the Tajo de Nochistongo. 4.o8 The system of collectors for the waste water was designed as a series of "combs", with the major collectors going west to east to discharge into the Gran Canal. With the settlement of the ground, the collectors settled and changed slope so that the present network is highly irregular with pumping stations interspersed as necessary to ccrrect for the settle- ment. Several severe local floods obliged the authorities to reconstruct part of the drainage system and change it from a gravity system to a pump- ing system with 29 pumping plants. 4.og A major problem which has resulted from the sinking, and the one which causes the greatest immediate danger to the city itself, is the risk of flooding due to the city now being below the Gran Canal and Lake Texcoco, as illustrated schematically in Annex 4. Although the subsidence was noticed as early as 1850, most of the settling has taken place in the last twenty years. 4.10 Because of the sinking of the ground on both sides of the Gran Canal within the metropolitan area and the increased flows in the Canal, the banks of the canal have had to be continuously built up. The resulting loads on the none-too-stable soil foundationsare approaching the safe limit; the longer the present situation continues and the walls are raised, the more likely is a failure. It has been calculated that, should the Canal fail, the city would be flooded in an area of 2,400 hectares (see the cross- hatched area in Flap 1) up to contour 2,234 m. 4.11 Sinking has been at a rate of some 10 cm a year, although the rate is decreasing. It is estimated that as much as 2 m more of settlement will occur before conditions are stabilized, unless measures are taken to end the water removal from the ground water system (see para. 6.12). The proposed drainage project would have no effect on the ground settlement, nor be affected by it.  - 9 - V. THE PROPOSED PROJECT A. Description 5.01 The project is to provide drainage facilities to remove the sewage and rainwater runoff from the Mexico City metropolitan area by gravity flow through tunnels. The facilities would consist of an eastern and a central interceptor tunnel joining to discharge into a central outfall tunnel. The layout of these tunnels can be seen in Map 1. 5.02 The interceptor and outfall tunnels are shown in more detail in plan and profile in Map 2. The eastern interceptor would begin with a diain- eter of 4 m, increasing to 5 m, and is 26,600 m long. The central inter- ceptor also would have a diameter of 4 m, increasing to 5 m, and is 24,800 m long. Both of the interceptors would lie between 20 and 40 m below the ground surface, depths unaffected by future settlement. 5.03 The central outfall tunnel would have a diameter of 6.5 and a length of 47,000 m. In certain areas it would be as much as 100 m below the ground surface and would be largely in rock. The outfall tunnel would discharge by gravity into the Salto River and the nearby Requena Reservoir (see Map 1). B. Design Criteria 5.04 The design capacity of this drainage system is based on the sum of projected sewage and rainfall. The sewage flows were calculated by the De- partment staff by estimating the area tributary to each interceptor, the future population growth and density, and the portion of the per capita water supply which would enter the sewers. These calculations resulted in a maximum day sewage discharge of about 50 m3/sec. 5.05 The probable rainfall runoff was estimated in two ways. One was to assess the tributary areas to each sub-collector and calculate the time to reach peak flow for each section fbr a rainfall of one hour's duration with an intensity of 4.1 cm per hour (a frequency experienced once in five years) and the amount of the rainwater which would enter the sewers. The quantities and time of concentration were added graphically for the 31,000 hectares to be served in the near future. This resulted in a storm water runoff of 107 m3/sec which was subsequently adjusted to 150 m3/sec to allow for a larger area, 48,000 hectares, in the more distant future. 5.06 The second method was to compare the measured flow in the Gran Canal with the area and the storms contributing to that flow, after dis- counting the base flow due to sewage. Ground water infiltration would be insignificant. Studies indicated that the unfavorable but likely (once in ten years) storm conditions would be two separate storms of 1 and 4 hours duration, 9 hours apart. The maximum runoff was calculated at 153 m3/sec.  - 10 - 5.07 The sum of the two flows, about 50 m3/sec for sewage and 150 m3/sac for rainfall runoff, combined to give a design total of 200 m3/sec. These design flows are generous and would be experienced some decades hence, when the metropolitan area would have expanded to cover all of the area which has been projected as draining into the tunnels. The data used in the design were convincing and conventional analytical procedures were followed. The major uncertainty in the calculations arose from the total area which would eventually be drained. 5.08 In a project of this nature, a modest amount of over-design is acceptable as subsequent expansion is well nigh impossible; the tunnels would have to be built now for their ultimate capacity. Should the flows actually exceed the design figures there would be some localized flooding, which could be tolerated given its probable limited extent and frequency (about 1 in 100). 5.09 The project lies in a zone of high earthquake frequency and the design has taken this into account. Worldwide experience has proven that underground construction results in greater security to structures than surface construction. The possibility of an off-set disruption to the tunnels is so small as to be discounted as a hazard. 5.10 Two changes were made in the project as submitted. One was to reduce the outfall tunnel diameter from 7.0 to 6.5 m; office and model studies, as well as the experience with the western interceptor, show that the wall smoothness which could be attained would perrnit the smaller diameter to pass the design flow. A minor change in the alignment of the outfall tunnel was made to avoid passing below some small lakes; the danger was small but the cost of avoiding it nil. Department staff readily agreed to both changes. C. An Alternative Solution 5.11 An alternative project proposed by the Commission of the Valley and studied by a local consulting firm and the Secretary of Hydraulic Re- sources, called for a large new pumping station pumping into a 7.5 m tunnel, 16 km long, which would discharge at km 24 of the 47 km long Gran Canal. This would have eliminated the Gran Canal up to km 19.5, the section now liable to rupture and consequent flooding of the city and the section which, as an open sewer passing through a built-up area, creates a sanitary nuisance. Km 19.5 to km 24 of the Gran Canal would remain for local drainage. 5.12 The construction and operational costs of this pumping solution, including extensive renovation and maintenace to the Gran Canal, would be more expensive than the gravity solution by 10%, discounting the future streams of expenditures for both alternatives to present value at 12%. The gravity system also has benefits which are difficult to quantify but do have appreciable value, such as simplicity of operations and independence from power failures.  -11- D. Project Costs 5.13 The estimated project costs are summarized below, a more detailed breakdown is shown in Annex 5. Mex$ US$ Equiv. Eastern Interceptor 3453900,000 27,700,000 Central Interceptor 320,800,000 25,700,000 Outfall 671,400,000 53,700,000 Contingencies 267,900,000 21,400,000 Total 1,606,000,000 128,500,000 5.14 The unit costs of the project have been built up from an analysis of items of work, the expected speed of work, the equipment and the equip- ment hours necessary, and the labor required. The costs of hard rock tunnel- ling are based on recent Mexican experience; such unit costs have proven to be about half U.S. costs. Recent Chicago experience in sewer tunnelling in similar clays has been used in the design and cost estimating of this pro- ject for tunnelling in the soft ground; because of lower Mexican labor costs these estimated costs are conservative. The Bank has reviewed the costs anc concluded that cost estimates are valid and that the work can be accomplished within the amount of funds estimated with the expected underground conditions. 5.15 The unit costs include 38% for indirect costs. This item includes various administrative expenses, including supervision and engineering by the Federal District staff. This amount is considered adequate for works of this nature. 5.16 In spite of the uncertainties in estimating for tunnelling work, a physical contingency of 15% and a price contingency of 5% are appropriate because of the thorough preparation of the project and the conservative assumptions used. E. Foreign Currency Costs 5.17 Direct foreign exchange costs for imported equipment and tools for this project are estimated to be approximately 21% of the total project cost, or Mex$335 million (US$26.8 million equivalent). This figure applies only to the life of the imported equipment, including related accessories and spares, which would be used up in the work; it does not include the re- maining life of the equipment which would, theoretically, be used up on other projects in Mexico or abroad. The list of imported goods is based on preliminary indications by the Secretary of Industry and Commerce of the items it would grant import licenses for. The direct foreign exchange esti- mate does not include the foreign component of machinery produced in Mexico, such as compressors and vehicles. No distinction was made between imported equipment which would be imported especially for that project and imported equipment already in the country.  - 12 - 5.18 Approximately 8% of the project costs, Mex$131 million, represents the estimated cost of imported tunnel supports. Tunnel supports are princi- pally 8-inch cold-formed structural steel members, which are not made in Mexico. US$10.5 million would be included in the proposed loan to finance the importation of these tunnel supports. 5.19 Investigation of the cement capacity around Mexico City by the appraisal mission indicated that there should be ample capacity to provide the necessary kind of cement during the three-year construction period. There is no apparent reason to fear that reinforcing steel cannot also be supplied. F. Design and Supervision 5.20 The geological ifivestigation work was divided into two parts. With- in the city proper the underlying clay soils have been extensively studied be- cause of the phenomenon ofthe ground settlement and the importance of good building foundations. Solum, S.A., a well qualified consulting firm, made the studies. 5.21 The exploratory work outside the metropolitan area along the route of the outfall was done under the direction of the Federal Electricity Com- mission's Chief Geologist, who acted as consultant to the Federal District. Several test holes were drilled and substantially all the investigatory work had been completed at the time of the appraisal. Additional work requested by the Bank is being done to remove any remaining doubts about the nature of underground conditions and to establish the final alignment at the end of the outfall. 5.22 The Mexicans have considerable experience in hard rock tunnelling, although very limited experience in tunnelling in soft ground. The experi- ences of the Federal Electricity Commission and the Secretary of Hydraulic Resources were called upon, and their senior staff advised the Federal Dis- trict in all phases of design of the project. More exploration was done than usually the case for comparable projects. Extensive use was also made of local Mexican individual consultants and consulting firms. The manner in which the national experience and know-how in tunnelling were brought into the project preparation was outstanding. 5.23 Foreign experience was also used to a remarkable degree, including visits and personal correspondence. Technical and sales representatives of specialized manufacturing firms were also consulted. 5.24 The Department will employ a part-time consultant on soft ground tunnelling and the problems of squeezing ground (the action of bentonitic clays which tend to expand into the tunnel section when the water in them is drained by the tunnel). The estimate of direct foreign exchange costs include provision for foreign consulting costs.  - 13 - 5.25 The Department has a well established procedure for the super- vision of construction. It is administratively and technically able to super- vise the construction of this project with the limitation that middle echelon technicians capable of supervising the work are few. Therefore, the Depart- ment will use the services of a foreign consulting firm specializing in con- struction supervision. It is anticipated that such a firm would supply four to six superintendents of work and perhaps twenty to thirty experienced in- spectors. This staff would have the responsibility of the day-to-day super- vision of the construction. G. Bidding and Construction 5.26 Present plans are to divide the tunnel construction work into 18 separate contracts for soft ground, medium ground, hard rock, and squeezing ground, so that any one contract would contain only one type of earth and require only one type of tunnelling equipment. Each contract would be large enough to interest foreign firms and the contracts cculd proceed simultaneous- ly and finish at the same time. All the contracts would be bid on an inter- national competitive basis. A firm could bid on one or several of the con- tracts. 5.27 The Department would buy the imported tunnel supports on an inter- national competitive basis and supply them to the civil works contractors. 5.28 The Bank believes that there will be no difficulties encountered except for the squeezing ground found along the last 16 km of the outfall. Hard rock tunnelling is within the proven capability of local contractors and tunnels have been driven in the soft ground, although in smaller sizes and at lesser depths. Infiltration water is expected to be less than esti- mated in the design. Probably "mole" boring machines can be used, and could lower costs and speed completion. 5.29 Land acquisition is not a problem as the state holds the subsoi'l rights. Surface possession for shafts will be located on government lands to a large extent and/or will be in rural areas where no trouble is expected. In M4exico, the government is able to solve any difficulty in this regard which may arise. 5.30 A construction schedule chart is shown in Annex 6. It programs the construction time as 33 months after bids are sought. It is estimated that construction would be in calendar 1967, 1968, and 1969, although ex- penditures would lag perhaps six months, and such a lag is provided for in the financial projections. 5.31 The network is based on one prepared by a local consultant to the District. It is made up on critical path analyses of elements of the tunnel.- such as shafts, excavation, lining, etc. Contractors will be required to use critical path techniques and submit an outline program with their bids.  VI. FINANCING PLAN AND PROJECTIONS A. Total Financial Requirements and Sources of Funds 6.01 Over the four-year period 1967-1970, the financial requirements of the Department of the Federal District would be as follows: In Million In Million Mex$ US$ % The proposed drainage project 1,606 128.5 21.1 Interest during construction on proposed Bank loan 54 4.3 0.7 Investments in water supply and sewerage 1,778 142.2 23.4 Other investments 4,160 332.8 54.8 Total 7,598 607.8 100.0 To meet these requirements, the following sources would be available: In Million In Million Mex$ US$ % Current surplus before interest 6,560 524.8 86.3 Proceeds of the proposed Bank loan 462 37.0 6.1 Decrease in reserves 576 46.0 -7.6 Total 7,598 607.8 100.0 6.02 The proceeds of the proposed Bank loan would cover 29% of the project investment and correspond to 6% of the total financial requirements of the Department. The balance of the requirements would be met from the excess of revenues over current expenditures and from a drawdown of reserves. B. Additional Revenue Measures for the Project 6.03 There is no special charge for drainage and sewerage services. Property owners in the Federal District, however, pay a real property tax, which purpose is, among others, to cover the costs of the drainage and sewerage services. Since property owners will be the major beneficiaries of the project and the value of the benefits received can be related to the value of the property protected and served, an increase in the real property tax is an appropriate way to recover the cost of the project.  - 15 - 6.04 Out of the 450,000 properties in existence in the Federal District, it is estimated that 270,000 are taxed on the basis of cadastral value ard 180,000 on the basis of rents. The Federal District may, according to existing laws, revalue properties every five years, or when a building is constructed, reconstructed, or additions made, or when the property is transferred. In recent years, however, the Federal District has followed the policy of not making the periodic reassessments every five years, with the result that property is substantially underassessed. 6.o5 As an additional revenue measure for the project, the Federal Dis- trict started in the beginning of January 1967 the cadastral reassessment of the 180,000 properties (out of a total of 270,000 taxed on the basis of the cadastral value) which were assessed five years ago or earlier. The reassess- ment will be carried out in 18 months at the rate of 10,000 lots monthly. An additional yearly income of Mex$150 million to Mex$180 million (over and above the normal increase brought about by the increase in the number of properties and in rental values) is expected for the Federal District from this source. The 15% surcharge tax, which applies mostly to the real property tax, will also increase proportionately. With these additional revenue measures, the Department will recover the costs of the project within ten years. 6.06 In addition, the Federal District increased the rates of fees for connections of new residential and industrial developments built by developers to the public water supply and sewerage systems and the rates of contributions by land developers for other public services. The new rates came into force January 1, 1967, and it is conservatively estimated that additional revenues of Mex$50 million will be obtained each year from these sources. In the justification for the bill submitted to Congress in December 1966, mention was made of the heavy investments required for water and drainage and of the fairness of increasing the contributions for the installation of facilities which will increase the value of the property. C. Financial Projections 6.07 A statement of Current Revenues and Expenditures of the Federal District and a schedule of Sources and Applications of Funds are shown in Annexes 7 and 8. These financial projections cover the period 1966 to 1970, up to the end of the current presidential sexennial. 6.08 It is the first time that the Federal District has made financial forecasts for more than one year ahead. Estimates of expenditures will have to be approved, of course, every year by the Congress of the United Mexican States within the framework of the normal budget procedures for the District. 6.09 The projections are based on the assumption that the proposed Bank loan would be for a twenty-year period (including four years of grace) at 6% interest, with a commitment charge of 3/8% on undisbursed amounts. Repayments of the loan by the Federal District would start in 1971, with an annual debt  - 16 - service of Mex$4h.5 million. Although financial projections have not been carried beyond 1970 because of the too great uncertainties in estimating expenditures beyond the current presidential term, total revenues and cur- rent surplus estimated at Mex$3.6 billion and Mex$1.7 billion respectively for 1970 indicate a very high debt service coverage. 6.10 Taking 1965 as a base year, total revenues (excluding the additional revenue measures for the project) are projected to increase at an annual average rate of 8-1/2% to 1970. This is a somewhat lower rate than for the past five years. Projections have been made separately for the most impor- tant items of revenue (representing in aggregate 80% or more of total revenues) on the basis of the trends for the period 1956 to 1965. They appear reason- able and should be on the conservative side. A similar process was followed for forecasting current expenditures, which (excluding interest) are pro- jected to increase at an annual average rate of 13-1/2% during the 1965-1970 period. 6.11 The District will not only have heavy expenditures for the project, but also for other major investments, which would amount to Mex$7.3 billion for 1966-1970, compared to Mex$4.7 billion for the preceding five years. Apart from investments in water supply, particularly noteworthy are the planned increases in expenditures for schools, housing, and public works in the suburbs. 6.12 Investments for water supply include the completion of the first stage Alto Lerma project in 1967 (to supply an additional 5 m3/sec), a second stage in 1969 (4 m3/sec), the Chalco project (2.5 m3/sec), and the first stage of the Amacuzac project (3 m3/sec). Present supply of water, including that from the private wells, is of the order of 22 mi./sec. The above-mentioned projects will take care of the increased requirements of the city due to projected growth in population and demand for this decade and permit cessation of the overpumping in 1969.  - 17 - VII. JUSTIFICATION 7.01 In the situation in which Mexico City finds itself, in a depres- sion with no natural outlet, a system for removal of the city's waste waters is essential. The issue is which solution is the more acceptable, taking into account costs and risks. 7.02 The cost of flooding the lowest downtown portion of the city, shown in Map 1, has been estimated by the Hydrological Commission follow- ing a method used by the Miami Conservancy District, Ohio, U.S.A. Under the assumed situation, the lower part of the city would be flooded up to elevation 2,234, an area of about 2,400 hectares. Based on the type of construction and the depths of flooding, a direct loss of Mex$3,400 million, representing about 8% of the total value of the flooded area, would be realized. Indirect damages, such as the interruption of commercial activi- ties, services, and transportation, were taken to be 60% of the direct damages. Thus, the total cost would be Mex$5,400 million (US$430 million equivalent). 7.03 The probability of a flood of this nature is high (perhaps 1 in 50) even now with the present drainage system, and would approach intoler- ably close to a certainty in the next decade or two were the present system not to be replaced. 7.04 Two alternatives were possible, although a number of variations of each have been considered. The first would be the construction of gravity drainage tunnels as planned in the present project. A second would be the pumping alternative discussed in paragraphs 5.11 and 5.12 above. A present value comparison of capital and operating costs of the two alternatives shows that the proposed project is more economical than the pumping alternative. 7.05 The economies which favor the present gravity drainage project are supplemented by a number of inherent advantages not reflected in the cost figures. A gravity system is simpler to operate, would be less affected by earthquakes, could accept overloads more readily and, of course, would not be susceptible to power failures.  VIII. CONCLUSIONS AND RECOMMENDATIONS 8.01 The proposed project is necessary to remove the danger of flood- ing portions of downtown Mexico City and provide an economical and ade- quate method of waste water removal. The project is well designed and the cost estimates are reasonable. With the anticipated revenue action, the financial situation of the Department of the Federal District should remain sound. 8.02 During negotiations, it was agreed that the Department of the Federal District would: (a) Take revenue action to recover from the beneficiaries the costs of the project within ten years (paras. 6.03- 6.06); (b) Employ consultants on soft ground tunnelling and the problems of squeezing ground and for the supervision of construction (paras. 5.24 and 5.25); (c) Make up-to-date and detailed record plans of sewerage and drainage facilities (para. 3.15); (d) Proceed with all due haste to carry out the develop- ment of additional water supply to the metropolitan area so as to permit cessation of the overpumping in the metropolitan area (para. 6.12). 8.03 On the basis of the foregoing arrangements, the project is suit- able for a Bank loan of $37 million to the Department of the Federal Dis- trict and Nacional Financiera for a period of twenty years, including a four-year grace period. January 18, 1967  MEXICO CITY DRAINAGE PROJECT DEPARTMENT OF THE FEDERAL DISTRICT ORGANIZATION CHART GOVERNOR HIGH COURT OF JUSTICE ATTORNEY GENERALS OFFICE OF THE FEDERAL DISTRICT OF THE FEDERAL DISTRICT AND FEDERAL TERRITORIES GENERAL SECRETARY AND FEDERAL TERRITORIES CHIEF ADMINISTRATIVE OFFICER |DECENTRALIZED DIVISIONS COSLAIV|ONI | AND ENTERPRISES sCNUTTV ONI ACCOUNTING AND FADMINISTRATIVE LEGAL LABOR AND- INTERNAL AUDIT TREASURY SERVICES INTERIOR SERVICES SOCIAL SECURITY| HYDRAULI WATER SUPYGNRLMEDICAL WORKS AND SEWERAGE SERVICES SERVICES AND WELFARE I I I [X [1 DELEGATIONS l z z (R)IBRD--3202 X  ANNEX 2 Page 1 MEXICO CITY DRAINAGE PROJECT DEPARTMENT OF THE FEDERAL DISTRICT Current Revenues and Expenditures (ln million Mex$) Year Ended December 31 1961 1962 1963 1964 1965 REVENUES Taxes (Impuestos) Business Receipts Tax 402.2 435.9 478.0 576.3 628.3 Real Property Tax 312.8 349.9 398.1 441.7 486.4 15% Surcharge Tax 73.8 82.2 91.9 102.0 111.9 Amusement Tax 4o.9 41.1 43.0 44.9 44.8 Other 170.1 165.6 168.4 175.3 187.6 99M.6 1,074.7 1797.4 1,340.2 1,4I59.0 Rates, Charges and Fees (Derec,hos) Water Rates 98.6 97.7 109.6 116.9 121.8 Fees for Public Works 24.0 25.6 21.7 20.2 27.2 Feeo for Public Register of Property & Business 16.3 13.6 15.5 18.2 20.9 Other 40.1 73.6 45.o 92.6 63.6 17r9.0 10.5 191.8 247.9 233.5 Financial and Other Income (Productos) Income from Deposits and Securities 31.2 52.7 62.0 61.0 42.1 Income from Property 17.4 13.6 12.0 17.4 37.0 Other 1.1 1.3 6.9 1.2 1.3 Special Revenues (Aprovechamientos) Share in Federal Taxes 98.3 106.3 117.4 132.1 130.7 Dues from Previous Years 122.3 152.4 173.8 199.3 204.1 Fines 32.9 35.2 34.5 37.8 36.9 Other 41.9 50.8 53.1 74.6 78.5 2957.4 3447 378. T 4U50.2Y Rectifications 38.2 10.6 19.7 15.6 24.2 TOTAL REVENUES 1,562.1 1,708.1 1,850.6 2,127.1 2,247.3 EXPENDITURES Salaries and Wages 352.5 399.4 481.7 547.2 602.8 Social Security Contributions and Subsidies 19.5 30.4 46.7 57.1 59.7 General Services 42.8 56.4 67.0 86.8 89.1 Overhead and Administrative Expenditures 65.6 88.1 114.2 133.5 115.5 Special Expenditures 140.0 124.5 108.8 140.8 120.1 Sub-Total 620.4 698.8 818.4 965.4 987.2 Interest 2.0 1.4 0.9 0.4 - TOTAL EXPENDITURES 622.4 700.2 819.3 965.8 987.2 CURRENT SURPLUS 939.7 1,007.9 1,031.3 1,161.3 1,260.1 January 18, 1967  ANNEX 2 Page 2 MEXICO CITY DRAINAGE PROJECT Discussion of Current Revenues and Expenditures for 1961-1965 1o The figures in Current Revenues and Expenditures in this Annex represent revenues collected and payments made during each year. On the other hand, the figures shown in Sources and Applications of Funds (Annex 3) for the investments of the Hydraulic Works Division and the Public Works Division represent the value of the investments made each year, as reported by these divisions, although they may not have been entirely paid for during the same year. Differences between investments made and actual payments are included (with other minor changes) in the items, increase or decrease in current liabilities. A. Revenues 2. Total revenues collected amounted to Mex$2,2h7 million (U.S.$180 million equivalent) in 1965; collections have increased at an annual average rate of 9i4 (1961-65). The District collects a total of 21 different taxes (Impuestos), 21 different rates, charges, and fees (Derechas), receives seven different types of financial and other income (Productos) and more than ten different types of special revenues (Approvechamientos5. 3. Taxes alone account for 65% of total revenues.-/ Two taxes domi- nate, the business receipts tax and the real property tax, The business receipts tax (28% of total revenues in 1965) is the major source of tax revenue and represents the District's share of the Federal 3% turnover tax, The Federal District collects 40% of this tax and the Federal Govern- ment collects 60%. About half of all business receipts taxes collected by the Federal Government comes from transactions within the Districto The District cooperates closely with the Ministry of Finance in the collection and administration of this tax. Collections have increased at an average annual rate of 12% (1961.-1965). 2/ 4. The real property tax (22% of total revenues in 1965) is the second major source of tax revenuee It is levied either on the actual or imputed rent (when the property is rented in totality or in part, or in the case of apartment buildings in condominium), or on the cadastral value of the property (when it is not rented, or even if it is rented when it is (i) a rural property, (ii) an urban property without any permanent building5 1/ Actually, if other sources of income,such as, taxes due from previous years, automobile licenses, andthe District's share in Federal taxes (not treated as taxes in the District's concept) are taken into account, the percentage of revenue derived from taxes increases to 80%, 2/ The real property tax does not present a complete picture of the taxes on real property. In addition, there are taxes on the transfer of property, a charge for sub-dividing land, an additional 15% surcharge on the property tax, and accounts dud from previous years on the property tax. If these other taxes are taken into account, property taxes accounted for an average of 33% of total Ievenues in the period 1961-65.  ANNEX 2 Page 3 i.e. a vacant lot, or (iii) used for certain activities or businesses listed in the Finance Law of the Federal District). In practice, about 40% of the taxpayers are assessed on the basis of the actual or the im- puted rent, the rest on the catastral value. 5. When the tax is levied on the cadastral value, the rates that apply depend on whether or not the lot is classified as urban or rural. If it is classified as rural, the rate is 0,525% of 75% of the catastral value, or an actual rate of 0.394%; if the property is classified as urban, the rate is 1.26% of 75% of the catastral value, or an actual rate of 0945%. When the tax is levied on the actual or imputed rent, the rate is 12,6% of 87% of the rent, or an actual rate of 11.96%, Actually, al1 the above- mentioned percentages should be increased by 15% on account of the 15% sur- charge tax, The real property tax is assessed annually, but payments are made in six bi-monthly installments. 6. Collections of the real property tax have increased at an average annual rate of 12% (1961-65), reflecting both the increasing value of land within the Federal District and the improvements in assessment. It is graduaUly developing into an efficient and growing source of revenues. There is no special charge for drainage and sewerage services in the Dis- trict, and the real property tax covers the cost of these services. 7* The Federal District may revalue properties every five years, or when a building is constructed, reconstructed, or additions made, or when the property is transferred, Such revaluations are done cautiously, however, and property is said to be substantially underassessed. 8. Third in importance among taxes is the 15% surcharge tax (5% of total revenues in 1965)o This measure, introduced in 1949, establishes a 15% surcharge on all taxes paid to the Federal District, but the exemptions are such that it applies mostly to the real property tax. Collections have increased at an annual average rate of 11% (1961-65). 90 Other taxes (10l of total revenues in 1965) includes taxes on certain types of capital income, on private wells, alcohol, gasoline, lotteries, markets, animal slaughter, and public spectacles. The rate of growth of this group of taxes has been just over 2% (1961-65). 10 Over the 1961-65 period, Rates, Charges, and Fees represented about 13% of total revenues. They have been decreasing in importance, growing at an annual average rate of about 7%0 Water rates account for about half of the total. Fees for public works include contributions for extensions of water and sewer lines and for water and sewer connections to new urban developments, Other rates, charges, and fees include charges for individual water and sewer connections, automobile plates and inspection and supervision charges.  ANNEX 2 Page 4 11. Financial and Other Income, which accounted for less than 4% of total revenues over the 1961-65 period, represent income from property and income from deposits and investments. The latter consists almost exclusively of deposits with the Banco de Mexico, S.A., earning 6% interest. Fluctuation in this item follows closely the change in amounts deposited, according to the yearly cash surplus or deficit of the Federal District. 12. Special Revenues represented about 20% of total revenues. The Federal District receives a share in Federal taxes, such as, consumption taxes on gasoline, beer, tobacco, etc., collected by the Federal Government. Over the 1961-65 period, they amounted to about 6% of total revenues, and had an annual average rate of increase of 7i4. The main item is due from previous years, or amounts collected on previous years' billings for all revenue accounts. Collections of this item have increased at an annual average rate of 131g (1961-65). Receivables on all revenue accounts, how- ever, remain substantial, Mex$560.3 miIllion at the end of 1965. There is room- for improvement in collections. For late payments of taxes, rates, charges and fees, a penalty of 2% per month (with a maximum of 48% of the principal amount due) is applied. B. Expenditures 13. Current expenditures have been increasing as a percentage of total income, and absorb at present close to 50% of total revenues. The rate of increase in current account expenditures (from 1961 to 1965) was 12% per annum, despite a levelling off in 1965, or 2