Document ofThe World Bank

Report No: 20441-ME

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$404.05 MILLION

TO

BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS, S.N.C.WITH THE GUARANTEE

OFTHE UNITED MEXICAN STATES

FORA

NATURAL DISASTER MANAGEMENT PROJECT

NOVEMBER 7, 2000

Mexico, Venezuela, Colombia Country Management UnitEnvironmentally and Socially Sustainable Sector Management UnitLatin America and Caribbean Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective 10/17/2000)

Currency Unit = New peso (N$)N$1.00 = US$0.1055

US$1.00 = 9.4775

FISCAL YEARJanuary 1 December 31

ABBREVIATIONS AND ACRONYMSAPL Adjustable Program LoanBANOBRAS Banco Nacional de Obras y Servicios Puiblicos (National Bank of Public Works and Services)CAS Country Assistance StrategyCEPEP Centro de Estudios de Planeaci6n y Evaluaci6n de Proyectos (Project Planning and Evaluation

Training Center)CENAPRED Centro Nacional de Prevenci6n de Desastres (National Center for Disaster Prevention)CFE Comisi6n Federal de Electricidad (Federal Electricity Commission)CNA Comisi6n Nacional de Agua (National Water Commission)FME Fideicomiso Mixto Estatal (Mixed State Trust)FONDEN Fondo para Desastres Naturales (Fund for Natural Disasters)INE Instituto Nacional Ecologia (National Ecology Institute)INI Instituto Nacional Indigenista (National Indigenous Institute)LACI Loan Administration Change InitiativePCC Project Coordination ComnitteePROFEPA Procuraduria Federal de Protecci6n al Ambiente, (Federal Attomey General for Environmental

Protection)SAGAR Secretaria de Agricultura, Ganaderia y Desarrollo Rural (Secretariat of Agriculture, Livestock

and Rural Development)SCT Secretaria de Comunicaciones y Transportes (Secretariat of Communications and

Transportation)SECODAM Secretaria de Contraloria y Desarrollo Administrativo (Secretariat for Administrative Control

and Development)SEDESOL Secretaria de Desarrollo Social (Secretariat for Social Development)SEGOB Secretaria de Gobemaci6n (Secretariat of the Interior)SEMARNAP Secretaria de Medio Ambiente, Recursos Naturales y Pesca (Secretariat of Environment,

Natural Resources and Fisheries)SEP Secretaria de Educaci6n Publica (Secretariat of Public Education)SHCP Secretaria de Hacienda y Credito Piiblico (Secretariat for Finance and Public Credit)SINAPROC Sistema Nacional de Protecci6n Civil (National System of Civil Protection)SSA Secretaria de Salud (Secretariat of Health)UNAM Universidad Nacional Aut6noma de Mexico (National Autonomous University of

Mexico)

Vice President: David de FerrantiCountry Manager/Director: Olivier Lafourcade

Sector Manager/Director: John RedwoodCountry Sector Leader: Adolfo Brizzi

Task Team Leader/Task Manager: Christopher J. Barham

MEXICONATURAL DISASTER MANAGEMENT PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 22. Main sector issues and Government strategy 23. Sector issues to be addressed by the project and strategic choices 5

C. Project Description Summary

1. Project components 52. Key policy and institutional reforms supported by the project 73. Benefits and target population 84. Institutional and implementation arrangements 8

D. Project Rationale

1. Project altematives considered and reasons for rejection 112. Major related projects financed by the Bank and other development agencies 123. Lessons learned and reflected in proposed project design 134. Indications of borrower commitment and ownership 145. Value added of Bank support in this project 14

E. Summary Project Analysis

1. Economic 152. Financial 153. Technical 164. Institutional 165. Social 176. Environmental 197. Participatory Approach 22

F. Sustainability and Risks

1. Sustainability 232. Critical risks 233. Possible controversial aspects 24

G. Main Loan Conditions

1. Effectiveness Condition 242. Other 24

H. Readiness for Implementation 25

I. Compliance with Bank Policies 25

Annexes

Annex 1: Project Design Summary 26Annex 2: Detailed Project Description 29Annex 3: Estimated Project Costs 30Annex 4: Cost Benefit Analysis Summary, or Cost-Effectiveness Analysis Summary 31Annex 5: Financial Summary for Revenue-Earning Project Entities, or Financial Summary 35Annex 6: Procurement and Disbursement Arrangements 36Annex 7: Project Processing Schedule 45Annex 8: Documents in the Project File 46Annex 9: Statement of Loans and Credits 47Annex 10: Country at a Glance 50Annex 11: Environmental Management Plan 52Annex 12: Criteria for Selecting Prevention and Capacity-Building Investments 67

MAP(S)IBRD 29701

MEXICO

Natural Disaster Management Project

Project Appraisal Document

Latin America and Caribbean RegionLCSEN

Date: November 7, 2000 Team Leader: Christopher J. BarhamCountry Manager/Director: Olivier Lafourcade Sector Director: John RedwoodProject ID: P064887 Sector(s): VY - Other EnvironmentLending Instrument: Emergency Recovery Loan (ERL) Theme(s):

Poverty Targeted Intervention: N

Project Financing DataZ Loan [2 Credit C Grant Z Guarantee D Other (Specif-y)

For LoanslCredits/Others:Amount (US$m): US$404.05

Proposed Terms: Fixed-Spread Loan (FSL)Grace period (years): 5 Years to maturity: 15Commitment fee: .85% for the firstfour years and .75% thereafterFront end fee on Bank loan: 1.00%PianingP lan $ourc. ; - : - - -T. i

GOVERNMENT 254.30 0.00 254.30IBRD 77.50 326.55 404.05

Total: 331.80 326.55 658.35

Borrower: BANOBRASResponsible agency: MINISTRY OF FINANCESecretaria de Hacienda y Credito Publico (SHCP)Address:Subsecretaria de EgresosConstituyentes No. 1001Edificio C-3, Sexto NivelCol. Belen de Las FloresContact Person: Lic. Antonio Alvarado Ramirez, Jefe de La UnidadTel: 228-49-15 Fax: 228-49-62 Email: jalvarad@sse.gob.mx

Estimated disbursements ( Bank FY/US$M):FY 2 2-0X -0 204 0-

Annual 80.0 50.0 100.0 100.0 74.0Cumulative 80.0 130.0 230.0 330.0 404.0

Project implementation period: Fiscal 2001 - 2005Expected effectiveness date: 02/01/2001 Expected closing date: 12/31/2004

OC5 PADF-n R.- n:. 2-D

A. Project Development Objective

1. Project development objective: (see Annex 1)

The project will help reduce human, economic and financial costs of natural disasters in Mexico by (a)providing resources for rapid recovery following natural disasters within a framework of sound budgetmanagement; and (b) reducing the likelihood that natural forces will result in loss of life and infrastructuredamage by supporting policy and instituional reformns aimed at reducing vulnerability and risk andimproving government capacity for analyzing natural disaster risk.

2. Key performance indicators: (see Annex I)

It will not be possible to measure quantitativly the impacts of many of the projects' activities during theperiod the project is under implementation. For example, becausenatural disasters of similar types andintensities occur infrequently in areas with similar population, human settlement and infrastructurecharacteristics, it will not be possible to generate reliable time-series data to observdhe reduced economicimpacts from natural disasters which the project is intended to engender. Therefore, subjective assessmentswill be made of the project's outcomes. It will, however, be possible to measure indicators of improvedsector management, such as speed of response to natural disasters measured by the number of daysbetween the date when disasters are declared, the date federal, state and municipal reconstruction funds areallocated, and the date works are completed. They also include indicators of improved sector policies, suchas development and implementation of improved building codes or standards for design, construction, andmaintenance of public infrastructure. Finally, performance indicators include measures of institutionalstrengthening and capacity building, such as adoption of improved procedures by government agencies.

B. Strategic Context1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: R99-92[IFC/R99-82] Date of latest CAS discussion: 06/08/99

Poverty reduction is the ultimate objective of the Bank's Country Assistance Strategy (CAS) for Mexicodiscussed by the Board on June 8, 1999. Because of domestic and extemal circumstances, the povertyreduction objective will translate into three imperatives. First, assistance is needed to foster socialsustainability through programs that target the poor. Second, policy advice and projects that caneffectively foster sustainable growth are needed. Third, help is needed to strengthen public administration.The sectoral support strategies in the CAS include environmental protection by improving disastermanagement capacity to prevent and mitigate the heavy recurrent losses Mexico suffers (forest fires,earthquakes, floods, hurricanes, and the like), among other measures. The proposed project will improveMexico's ability to cope with natural disasters within a framework of sound budgetary management andfiscal discipline, and in the medium term, help reduce the heavy recurrent financial, economic, human andsocial losses that the country has frequently suffered in the past. And because natural disastersdisproportionately hurt the poor, the project supports Mexico's integrated poverty alleviation strategy.

2. Main sector issues and Government strategy:

In terns of geography and climate, Mexico is one of the most diverse countries in the world. It issusceptible to a wide range of natural disasters such as floods, droughts, volcanic eruptions, earthquakes,fires and tropical cyclones. These natural events can cause widespread loss of life and damage to economicinfrastructure because of the country's settlement patterns, construction practices and a lack of disasterresponse capacity.

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Since 1980 direct damage from natural disasters in Mexico totaled some US$11.1 billion, and some 8,000people have lost their lives. Apart from the direct losses, disasters disrupt the development process becausethe need for emergency and reconstruction financing diverts budgetary resources from their originallyintended uses, disrupting priority investment programs. For example, in recent years, an estimated 30percent of government funding for World Bank infrastructure projects in Mexico was diverted to respond toemergencies.

Moreover, in Mexico as in other developing countries, the poor are disproportionately affected by naturaldisasters. According to assessments of the National Center for Disaster Prevention (CENAPRED), 68percent of people affected by natural disasters in Mexico are poor and extremely poor. Many lower incomepeople live in substandard housing that is less able to withstand natural forces than housing of the betteroff. Some live in high density settlements near cities, built on steep slopes vulnerable to landslides. Otherslive in low lying areas and are at risk of flooding.

The poor also have less access to resources to help them recover from physical losses than others, andtherefore can suffer permanent setbacks from natural disasters. They are less likely to have savings,insurance or access to credit which could help them finance reconstruction costs. They are also more likelyto lose their source of livelihood because they eam their living from small agricultural plots which arethemselves damaged by the natural disasters. During crises poor children are also more likely to suffermalnutrition and health problems, and frequently drop out of school. These can lead to chronic poverty.

The Mexican government is well aware of the country's vulnerability to risks from natural hazards, and hastaken important steps to reduce their impacts on lives and property. These include:

3 The development of disaster preparedness and civil defense programs led by the Secretariat ofGovernment (SEGOB) and the Secretariat of Environment, Natural Resources and Fisheries(SEMARNAP), and implemented through the Civil Defense System (SINAPROC)

• The establishment in 1996 of the Fund for Natural Disasters (FONDEN) at the federal level, as a lastresort source of financing for reconstruction of public infrastructure, restoration of protected areas,purchase of emergency response equipment, and disaster relief.

3 The establishment of CENAPRED as a center for research and diffusion of mitigation technologies;and

3 The provision of support for university-based research on risk assessment and modeling (for example,at the National Autonomous University of Mexico (UNAM))

Federal agencies, (including SEGOB, Secretariat of Communications and Transportation (SCT),Secretariat of Agriculture, Livestock and Rural Development (SAGAR), Secretariat for SocialDevelopment (SEDESOL), SEMARNAP, Secretariat of Public Education (SEP), Secretariat of Health(SSA), and the National Water Commission (CNA)) and state or municipal governments execute theemergency activities and reconstruction works. Ongoing disaster management activities have helpedestablish an important knowledge and institutional base for disaster preparedness, mitigation andreconstruction, especially for seismic and hydrometeorological events affecting major cities. However, thisknowledge and institutional base needs to be expanded to cover other hazards (such as forest fires) andvulnerable regions of the country. Financing of reconstruction following natural disasters also needs to bemore efficient and effective, for example through better use of risk transfer instruments by both the privateand public sectors. Moreover, while government agenciesdo include actions to prevent damage fromnatural forces, these need to be made more systematic.

Following experience with the first two years of FONDEN's operations, the Mexican government reviewedFONDEN's operational practices, with a view to making them more effective. As part of these efforts, in

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mid- 1998 the govemment requested Bank assistance to improve its management of natural disasters. Inresponse, the Bank undertook a study examining how the govenmment was managing natural disasters, bothin terms of preparedness and mitigation, as well as risk financing and transfer. This study was discussed ina February 1999 workshop attended by stakeholders from government, academia and the private sector.The study found that:

* In Mexico, only about 10 percent of private property was insured. Moreover, there was need todevelop better mechanisms (for example, insurance pools) to make non-earthquake catastrophicinsurance more widely available. It is likely that privately-purchased catastrophic risk coverage willincrease only slowly, in concert with the growth of per capita income and a "culture of safety" in thesociety, and the introduction of new insurance products. Thus, government will continue to bear alarge share of risks from natural hazards in the near and medium-tenns.

* Insurance companies could provide incentives for insured parties to adopt measures to reduce lossesthrough their underwriting and monitoring practices Accordingly, adoption of a policy requiringgovemment entities to insure public properties could be a powerful means for encouraging adoption ofprevention measures, thereby reducing public sector losses in the event of natural disasters.

As a result of the review of FONDEN's operations, the Government decided to take several steps toimprove FONDEN's operating policies and practices to clarifv its responsibilities, improve its decisionprocesses and make them more transparent, define the risks assumed by FONDEN,and find ways to help itmeet disasters whose costs exceed FONDEN's resources. Following consultations with a broad range ofstakeholders and the Bank, in March 1999 the govemment modified FONDEN's operating guidelines to (a)make FONDEN's decision rules for access to resources and the loss assessment process clearer and moretransparent; (b) limit the moral hazard faced by FONDEN, by encouraging greater use of private insuranceby FONDEN's beneficiaries, and establishing clear cost-sharing formiulas for FONDEN's financing ofdisaster losses falling under the responsibility of state and municipal governments,and (c) encourageadoption of prevention measures, both within the reconstruction programs financed by FONDEN and in theregular investment programs of FONDEN's beneficiaries. These policies and practices are beingformalized through voluntary agreements between the federal and state governments (and the FederalDistrict), setting out the rights and responsibilities of the parties, including their acceptance of FONDEN'srules. Each agreement will lead to the establishment of a trust(ideicomiso mixto estatal or FME) betweenthe federal government and the respective state (or the Federal District) within which the agreed shares offinancing to be paid by the various parties will be blended to achieve the agreed cost-sharing targets fordisaster relief and reconstruction activities. Under the terms of each trust, which are administered byBANOBRAS as trustee, spending decisions and the contracting of eligible emergency activities will bemade by a technical committee comprising state and municipal representatives, acting with advice fromfederal entities. These measures are expected to increase transparency, accountability and efficiency in theuse of FONDEN's resources, and redistribute the costs of natural disasters between the various levels ofgovernment and the private sector, and over time reduce the share of such costs bome by the public sector.

By the end of January 2000, 27 states (of 32 states plus the Federal District) had signed trust agreementswith FONDEN. In addition, SEGOB and FONDEN were providing intensive training to state andmunicipal officials on FONDEN's objectives and procedures. Both SEGOB and FONDEN have learnedimportant lessons during the first year applying the 1999 guidelines, including lessons from the operationsof different technical committees. These lessons include the importance ofproviding financing for earlywarning systems and reconstruction of damaged national cultural property, the need to further decentralizedecision-making authority, the need to apply good resettlement practices, and the need to develop uniformstandards for insuring public property. Revised FONDEN guidelines were issued in February 2000reflecting the emerging lessons.

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The government is continuing to explore best use of FONDEN resources and is seeking Bank participationin the leaming process. Areas of particular interest are whether and how to employ reinsurance and capitalmarket instruments to finance FONDEN expenditures more efficiently, and analytical methods to setpriorities for public investment in prevention activities. It is therefore likely that during the project periodthe Government will continue to seek ways to improve the policy and institutional framework for disastermanagement in Mexico.

3. Sector issues to be addressed by the project and strategic choices:

Sector issues to be addressed by the project

The project will assist the govermnent to reduce human, economic and financial losses from naturaldisasters. It will support development and implementation of national policies and measures aimed atreducing damage from natural disasters and development of capacity to better assess and manage risks.Currently, federal agencies implement actions for prevention, but not systematically. It will also promotedevelopment of the insurance industry by generating better information which insurance companies need toassess risks and price their products.

Strategic choices

Providing post-disaster financing through FONDEN rather than other mechanisms. Traditionally,Mexico financed reconstruction costs by reallocating funds from sectoral development programs, includingthose financed extemally. This disrupted the development process because the need for emergency andreconstruction financing diverted budgetary resources from their originally-intended uses. FONDEN wasestablished as a dedicated source of financing for post-disaster needs, helping to protect ongoingdevelopment programs from disruption while maintaining fiscal discipline.

Reducing losses through prevention versus reacting to them through reconstruction. Government hasadopted several measures to encourage federal entities to reduce losses from natural events. FONDEN'srules require state and municipal governments to share costs arising from natural disasters. This providesthem with an incentive to implement prevention measures. It is also requiring federal entities to purchaseinsurance; insurance companies in turn offer incentives to customers to take prevention actions.

Encouraging federal entities to purchase private insurance rather than self-insuring. Traditionally, thegovernment has self-insured against natural disaster losses. This has sometimes led to lack of liquiditywhen these costs have been high. The government is now requiring federal entities to purchase insuranceagainst losses, which improves access to capital, speeds the reconstruction process and reduces shocks tothe economy.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

The project will finance subprojects acceptable to the Bank. It is expected to be committed in threecalendar years (years 2001-03) and disbursed in about four years. It willsupport three components: (1)prevention activities, (2) emergency recovery and reconstructionactivities, and (3) capacity buildingactivities.

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Component 1: Prevention activities

This component will finance analytical, design and policy-related studies and equipment aimed at reducingeconomic and human losses in the event of a natural disaster. Prevention activities will be executedthrough federal agencies as part of their annual investment programs. Participating federal agencies will beSHCP, SEGOB/CENAPRED, SEMARNAP/CNA, SCT, SAGAR, SEDESOL, SEP and SSA. At thestart of each (Mexican) fiscal year SHCPwill agree with the Bank and the executing agencies upon theprevention activitiesthat the project will finance. Such activities, which will not include major civil works,will be selected and implemented in accordance with the Bank's procurement guidelines and procedures,and technical criteria acceptable to the Bank. These criteria will be included in the projects operatingmanual. Technical criteria for prevention programs are detailed in annex 12.

Component 2: Emergency recovery and emergency reconstruction activities

This component will support emergency recovery and reconstruction activities financed through FONDENand executed either through federal agencies orstate and municipal agencies financed throughfideicomisosmixtos estatales (FMEs). Only FONDEN-financed activities initiated within 15 days before and 180 daysfollowing the declaration of an emergency by SEGOB will be eligible for Bank financing. Emergencyrecovery activities are defined for purposes of the project as those activitiesnitiated within 15 days beforeand 45 days after the declaration of an emergency by SEGOB. These activities are subject to expeditedprocurement procedures. Reconstruction activities are defined for purposes of the project as thosdnitiatedbetween 45 days and 180 days following the declaration of an emergency. On an exceptional basis, boththe 45 day limit and the 180 day limit mentioned above may be extended by the Bank for a particularsub-project if justifiable delays occur in the cornmencement of on-site work following the declaration of adisaster, for example, owing to non-receding flood waters. Reconstruction investments will be selected andimplemented in accordance with the Bank's procurement guidelines and procedures, and environmental,social and technical criteria acceptable to the Bank. Eligible emergency recovery and reconstructionexpenditures include net-of-tax FONDEN expenditures for activities that satisfy the environmental criteriaincluded in Annex 11, except for cash compensation paid to producers, purchases of equipment for disasterpreparedness, relief assistance, land, and activities not constituting investments.

Component 3: Capacity building activities

This component will finance activities to strengthen capacity of SHCP, SEGOB/CENAPRED,SEMARNAP/CNA, SCT, SAGAR, SEDESOL, SEP and SSA to respond to natural disasters, managesocial, cultural and environmental issues arising from natural disasters, and use insurance and other risktransfer instruments. It is envisaged that this component will help develop a framework to help sectoralimplementing agencies identify priority prevention investments for inclusion in their annual programs. Atthe start of each (Mexican) fiscal year SHCP will agree with the Bank and the executing agencies uponcapacity building activities that the project will finance. Such investnents will be selected and implementedin accordance with the Bank's procurement guidelines and procedures and technical criteria acceptable tothe Bank. These criteria will be included in the project's operating manual. Typical activities thiscomponent will support are shown in annex 12.

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_____________--_--- _: _-- ___ : : : ( U S$M )-iot {U $M } : financingPrevention activities 15.90 2.4 15.00 3.7Emergency recovery and reconstruction 633.30 96.2 380.00 94.0investmentsCapacity building activities 5.00 0.8 5.00 1.2

Total Project Costs 654.20 99.4 400.00 99.0Front-end fee 4.05 0.6 4.05 1.0

Total Financing Required 658.25 100.0 404.05 100.0

2. Key policy and institutional reforms supported by the project:

Through studies and policy dialogue, the project will support continuing exploration of more efficient waysto finance reconstruction from natural disasters, for example by using risk transfer instruments to financeappropriate components of FONDEN's costs.

The project will support development and adoption of measures to incorporate prevention measures into thepublic investment program. These could involve changes in policies (such as building and constructioncodes, land use planning, incentives to purchase insurance and the like) and analytical techniques (such asuse of risk analysis to screen public investment proposals).

The project will support diffusion of the resettlement practices presently implemented by SEDESOL for"disaster refugees" under FONDEN's operations. These resettlementpractices represent good practice inMexico and are consistent with the Bank's resettlement policy, but are still not widely applied outside ofSEDESOL's own programs. The practices have been codified in the project's Resettlement Frameworkwhich will govern any involuntary resettlement activities which may occur under the project.

Under FONDEN's operating rules,technical committees of the FMEs have been given substantialresponsibilities for disaster managementdecisions. The project will support the decentralization process inMexico through its support for FMEs.

The project will also support adoption of more competitive practices for procuring goods and works in theimnmediate aftermath of disasters by requiring implementing agencies using shopping procedures to obtainquotations from suppliers in at least two states. In other countries similar procedures have resulted inreduced reconstruction costs.

Finally, through application of the environmental management plan (Annex 11), the project will supportimprovements in the management of environmental issues and "chance find" cultural property duringreconstruction from natural disasters.

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3. Benefits and target population:

The project will assist in reducing the human, economic and financial costs of natural disasters bysupporting the development of prevention measures to reduce the vulnerability of infrastructure to naturalforces, and by facilitating quicker access to reconstruction financing by FONDEN's beneficiaries. It willreduce diversion of funds from ongoing development programs--and their consequent disruption--byproviding a dedicated source of financing for reconstruction. It will also help reduce fiscal shocks to theeconomy from natural disasters by providing liquidity for reconstruction.

While the project will benefit the entire population by reducing the losses to the overall economy fromnatural disasters, it will particularly benefit impoverished victims of natural disasters. In Mexico some 65percent of victims of natural disasters are the poor or very poor. Ninety percent of the 400 people who diedin Acapulco due to hurricane Pauline lived inbarrios leveled by mudslides. Most people living insubstandard housing in high density settlements built in risky areas where land is cheap or unoccupied byothers are poor with no other options. Further, the poor have little or no access to formal insurancemarkets, so must bear the full costs of natural disasters themselves. FONDEN as financier of last resorthas special provisions to assist poor and low-income households rebuild their communities and reestablishtheir incomes in the event of a natural disaster.

In the medium term, the project will benefit private sector insurance finns through generation of riskinformation, including risk maps prepared through the project's prevention and capacity building activities.

4. Institutional and implementation arrangements:

Project implementation period. The project will be implemented over four calendar years, 2001-2004. Itis expected that the loan will be fully committed in three years and will be fully disbursed by December 31,2004.

Project coordination and oversight. SHCP will establish a project coordinating committee (PCC), andassume the role of overall project coordination. This PCC will comprise representatives from SHCP,SEGOB/CENAPRED, and BANOBRAS. SHCP will chair the PCC. Representatives from the FMEs andother implementing agencies will be invited when warranted. The PCC will monitor progress of projectimplementation based on technical and financial information received from BANOBRAS and theimplementing and auditing agencies. A staff member of SHCP has been designated to be projectcoordinator. He will serve as the principal point of contact with the Bank and will provide progress reportsto the government and the Bank through BANOBRAS.

Executing agencies. SHCP, SEGOB/CENAPRED, SEMARNAP/CNA, SCT, SAGAR, SEDESOL, SEPand SSA will execute prevention and capacity-building activities as part of their normal work programs.These same federal agencies and those state and municipal agencies which are FONDEN's beneficiaries(financed through FMEs) will execute emergency recovery and reconstruction activities. The FMEs andthe federal implementing agencies will provide technical and monitoring data to the project coordinatorthrough BANOBRAS.

Project administration. BANOBRAS as the government'sfmancial agent (and building on itsresponsibilities as trustee for the FMEs) will exercise key administrative and quality control functions. Itwill oversee financial management, procurement, disbursement and audit arrangements for the project, andinform federal and state environmental authorities of FONDEN-financed activities. BANOBRAS willcollect technical and financial data from the FMEs and the federal implementing agencies, and providethem to the project coordinator. BANOBRAS will screen expenditures which are not subject to Bank prior

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review (such as those for emergency recovery activities) ex-post for eligibility for Bank financing.

Procurement arrangements. Based on experience with procuring contracts under emergency conditions inMexico, and the fact that monitoring of contracts not requiring prior review by the Bank will be donethrough sampling, there is a risk that contracts not satisfying the definition of emergency activities asdefined above will be included in the emergency component and procured through direct contracting. Thismay be especially true in the case of contracts financed through the FMEs, which may be procured throughstate and local agencies with little familiarity with Bank procurement requirements. The procurement riskfor this project is therefore rated as high.

In order to mitigate this procurement risk, the following arrangements have been agreed with the Borrower:(a) BANOBRAS will ensure quality control of all procurement processes, liaise with the Bank and theexecuting agencies, organize and maintain procurement records, draft quarterly reports, and be responsiblefor project accounting, financial reporting, and compliance with audit and environmental requirementsagreed under the project. BANOBRAS will also review and confirm the eligibility of all procurementcontracts not subject to Bank prior review before signature by the contracting agency. The LoanAgreement will assign these responsibilities to BANOBRAS, which will retain adequate staff for thispurpose; (b) A justification for the use of direct contracting in emergency activities will be required andwill be maintained on file. Such justification will clearly establish a causal relationship between thespecific emergency and the need for the direct contract Every quarter a copy of the justifications will besent to the Bank by BANOBRAS. The project will include annual procurement audits of selectedcontracts, particularly those awarded on a sole source basis as a result of any specific emergency; and (c)During the first year of the project, BANOBRAS will implement a training program through whichappropriate staff will receive training in Bank procurement procedures.

Accounting, financial reporting and auditing arrangements. Disaster recovery and reconstructionprojects cofinanced with resources from FONDEN, states, and municipalities are financed through FMEsestablished in each of the affected states. The FMEs will maintain separate accounts for each disaster andwill prepare statements of their respective sources and uses of funds (disaggregated by budget category)and balance sheets showing their financial condition. BANOBRAS, as their trustee, will maintain budgetand financial accounts for each of these FMEs, which will be subject to annual audits acceptable to theBank. For disaster reconstruction of purely federal assets, and prevention and capacity building activitiesimplemented by federal agencies, the respective federal agencies will maintain budget accounts andsupporting documentation in accordance with federal budget and accounting procedures. BANOBRAS, inits role as financial agent and trustee for the FMEs, will establish a consolidated project account whichreflects budget allocations and expenditures for all project activities, and will arrange to receive copies ofdocuments (for procurement review, preparation of SOEs, and the like) to support disbursement requests tothe Bank. The project accounts maintained by BANOBRAS will also be subject to annual auditsacceptable to the Bank.

For purposes of carrying out the project, a Special Account will be opened and maintained byBANOBRAS on terms and conditions satisfactory to the Bank. Deposits into the Special Account andcorresponding replenishments, up to the authorized allocations set out in the Disbursement Letter, will bebased initially on Withdrawal Applications accompanied by supporting documentation as specified in theDisbursement Handbook (traditional procedure based on SOEs).

A financial management assessment was carried out during project preparation. The classification of theproject for FM] purposes is based upon the judgment that while the project's financial management systemis basically sound, reporting systems cannot immediately generate PMRs. Accordingly, a time-bound

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action plan for improving reporting systems has been agreed with the Borrower. By October 31, 2001 the

Borrower and the Guarantor will complete the action plan aimed at preparing quarterly PMRs. The

possible migration to PMR-based disbursements will be analyzed by the Bank, the Borrower, and the

Guarantor during the second year of project imnplementation. Once the accounting and financialmanagement systems of the federal executing agencies and BANOBRAS as trustee are deemed compliant

with the Bank's Financial Management Initiative (FMI) requirements, and are certified as such by theBank, migration to a project management report-based (PMR) disbursement system may be implemented.

Accounting systems in the implementing agencies will operate in accordance with the "Financial,Accounting, Reporting, and Auditing Handbook," dated January 1995 and published by the World Bank.

The annual audit of the project will be carried out in line with both (a) the "Guidelines and Terms ofReference for Audits of Projects with financing by the World Bank in the Latin America and Caribbean

Region" dated May 1999, and (b) the Technical Memorandum of Understanding agreed between the Bankand SECODAM in 2000. Terms of reference for annual audits of project accounts and specificarrangements related to auditors have been agreed. Audits will be carried out by independent auditorsacceptable to the Bank, in accordance with international audit standards. The report of such auditors willbe submitted to the Bank no later than six months after the end of the Borrower's fiscal year.

Reporting. Different entities are responsible for reporting on various aspects of the project. All reportswill be submitted to the Bank through BANOBRAS.

* The PCC will prepare progress reports every six months. No later than six months after the project

closing date, the Guarantor will prepare and provide to the Bank a report on the execution of theproject, its costs, and current and future benefits to be derived from it.

* SEMARNAP (with input from INE and PROFEPA) will produce an annual report on theenvironmental aspects of the project.

- SEDESOL will report on resettlement every six months* the Guarantor and BANOBRAS will provide quarterly project management reports acceptable to the

Bank, in agreement with the financial management action plan.

Project operating manual. The project operating manual will contain technical and legal documentspertaining to the project, management and implementation arrangements, FONDEN's guidelines, criteriafor selecting prevention and capacity building activities, disbursement and procurement procedures andsamples of standard procurement documents, audit requirements and terms of reference for externalauditors, the environmental management plan and resettlement framework, monitoring indicators and

reporting requirements.

Supervision. The Bank will devote an estimated 100 staff weeks to supervise progress under the Bank loanthrough fiscal 2005. Two routine supervision missions will be planned each year, in the spring and fall.Each mission will focus on (a) FONDEN performance; (b) progress with prevention and capacity building

activities; (c) procurement and financial management issues; and (d) environmental and social impacts ofsubprojects, on an individual and a cumulative basis, the extent to which various emergencies were

precipitated or exacerbated by inappropriate environmental practices, and the adequacy of safeguardprocedures agreed for the project. Mission members will be drawn from Mexican or Washington-basedBank staff or consultants with appropriate skills. Since the Mexico field office has procurement andfinancial management specialists on its staff, these issues will be dealt with on an ongoing basis, leavingonly special issues to be addressed during supervision missions.

Climatological disasters normally occur seasonally, with floods and hurricanes occurring during July-

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December, and droughts and forest fires occurring during January-June. Therefore, the skill mix ofenvironmental field staff will vary depending on the season. The fall supervision mission will focus onresponse to fires and droughts, and general institutional performance in applying this EMP under theproject. The spring mission will focus on response to floods and hurricanes, and budgetary issues for theforthcoming Mexican fiscal year. Effects of episodic geological events (major earthquak.e or volcaniceruption) will be reviewed in the field as needed.

The midterm review will include (a) an analysis of the progress made towards achieving the project'sobjectives and the degree to which they remain valid; (b) an assessment of the adequacy of treatment ofenvironmental, cultural, and social issues under the project, including those arising from resettlement; (c)identification of any changes which should be introduced into the project's EMNP or resettlement frameworkin order to better mitigate emergencies arising from inappropriate environmental practices and apply theBank's safeguard policies during project execution; (d) consideration of ways to modify the EMP's triggersfor prior review by the Bank to reflect the magnitude of the anticipated environmental and social impactsfrom the proposed interventions, and not size alone, and (e) the adequacy of the eligibility period used todefine expenditures to be included under the project.

The implementation completion report mission will evaluate the overall success of the project relative to itsobjectives, the effectiveness of executing agencies in addressing environmental and social issues, and drawlessons for improvements in design and implementation of similar projects. The implementation completionreport will include an analysis of the adequacy of the instruments used to apply Bank safeguard policiesduring project execution.

Monitoring. Overall project monitoring will be based on indicators that the Bank and its Borrowingcountry counterparts have together selected to enable FONDEN and other participating agencies tomeasure the success of their programs, including the activities supported by the project. The indicators willbe included in the project's operating manual.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

Supporting FONDEN's operations versus supporting emergency recovery needs through existingprojects and programs. The Bank typically assisted Mexico to respond to natural disasters by divertingresources from existing project, disrupting its ongoing investment programs. By supporting FONDEN, theBank can avoid diverting its resources from investment projects to emergency works, and thereby maintainthe integrity of its sectoral operations.

Supporting reconstruction through FONDEN's operations rather than through an emergencyrecovery loan. During a typical year, Mexico experiences numerous droughts, floods, forest fires,hurricanes, and earthquakes. FONDEN has been established to finance up to about US$450 million ofemergency recovery and reconstruction assistance per year. By financing FONI)EN the Bank canefficiently help Mexico meet its post-disaster financing needs for most years. However, periodicallyMexico experiences a major disaster requiring reconstruction resources beyond what FONDEN can supply.For these cases, extraordinary public funding will be needed, and FONDEN will provide financing for themost urgent and immediate needs until emergency recovery loans are in place.

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2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

S ctor Issue Peolect (PSRj atings

Implementation Development

Bank-financed Progress (IP) Objective (DO)

Natural Disaster Recovery Mexico Earthquake S SRehabilitation andReconstruction Project(Loan 2665) (Closed December1990)Bolivia El Nino Emergency S S(Loan 3050) (ClosingDecember 2000)Ecuador El Nifio Emergency S SRecovery (Loan 44200)(Closing December 2000)Peru El Nifio Emergency S SProject (Loan 42500)(Closing December 2000)Guyana El Nifno Emergency S SRecovery (Loan 31390)(Closing November 2001)Organization of Eastem S SCaribbean States EmergencyRecovery and DisasterManagement (effective June1999, closing January 2002)(Loan 31500)Dominican Republic Hurricane S SGeorges Emergency Recovery(Loan 44200)(effective June 1999, closingJanuary 2002)Turkey Mamara EarthquakeRecovery Project (Boardapproval November 16, 1999)(Loan 45170)Colombia Earthquake Recovery S SProject (Board approval March21, 2000)

Other development agenciesUSAID, implemented by OAS Caribbean Disaster Mitigation

Project (Model Building CodeProject)

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Inter-American Development Bank Dominican RepublicReconstruction in the Wake ofHurricane Georges (approved1998)Guatemala Emergency Programin Response to NaturalDisasters (approved 1998)Ecuador Supplementary el NifioEmergency Program(approved 1998)Paraguay El Nifio EmergencyProgram (approved 1998)Colombia Reconstructionfollowing the Earthquake in theCoffee Belt (approved 1999)Honduras Emergency Road andWater Supply InfrastructureProject (approved 1999)

1PID0 Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

Previous Bankwide experience with disaster reconstruction projects shows that for authorities to actquickly, flexible procurement procedures must be in place, and implementing agencies should have a cleardefinition of their roles and responsibilities. It also shows that victims of disasters must be involved indecisions which affect them, such as where to locate new housing and community infrastructure.Otherwise affected people may not use the new facilities, and the resources used to build them will bewasted.

Another important lesson emerging from disaster management projects is that prevention is key to reducinglosses from disasters. There are many policy, institutional and physical measures that governments canadopt to improve land-use planning; encourage better engineering, construction, and maintenance practices;and reduce environmental degradation that contributes to natural disaster losses. Further, government cantake steps to encourage the development of insurance markets and create incentives for public sectorentities to insure their properties against loss--thereby reducing the fiscal shocks to the economy fromnatural disasters and speeding reconstruction by making it easier to mobilize resources to finance its costs.Finally, experience from some countries shows that construction costs can fall when the post-disasterprocurement process requires more competitive procedures.

The proposed project design reflects these lessons. FONDEN's present operating guidelines have beendeveloped following widespread consultation with diverse stakeholders and the Bank. These rules nowprovide for speedy access to financial resources for emergency recovery and reconstruction, and specifyclearly the roles of states, municipalities, federal agencies and others in responding to natural disasters.FONDEN's rules, which provide for cost-sharing among different levels of government, also encouragepublic entities to insure their properties against natural disaster risk. Indeed during 1999, following acatastrophic earthquake and floods, the state of Puebla placed insurance to limit its future financial

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exposure to natural disaster losses. Through SEDESOL, mechanisms are in place to ensure thatdisaster-affected people are involved in decisions about how to best rebuild their lives.

Moreover, the project will provide support to develop an analytical framework for assessing and reducingdisaster risk in development projects and reconstruction investments. And it will support analytical studiesand technical assistance to underpin development of Mexico's first explicit program of prevention activities.

4. Indications of borrower commitment and ownership:

The government has invested substantially to develop disaster preparedness and civil defense programs ledby SEGOB and SEMARNAP, among others. It has provided support to establish CENAPRED as a centerfor research and diffusion of prevention measures, and provided funding for university research on riskassessment and modeling. Importantly, it established FONDEN in 1996. In mid-1998 following a periodof heavy losses from natural disasters, the government requested Bank assistance to improve itsmanagement of natural disaster risks. In October 1998 the Bank undertook a study of how the govemmentwas managing natural disasters, both in terms of preparedness and mitigation, and risk financing andtransfer. The study was well received by the government and stakeholders from academia and the privatesector when it was presented at a workshop in February 1999. In March 1999 the government amendedFONDEN's operating guidelines to reflect several of the suggestions raised at the workshop, and inFebruary 2000 it again refined the guidelines to reflect lessons gained through experience. The governmenthas now requested Bank support for development of prevention programs and for FONDEN's operations.

5. Value added of Bank support in this project:

In Mexico Bank resources accrue to the Treasury and government agencies have access only to resourcesdistributed to them through the annual public budget. Currently, federal agencies that agree to implementBank-supported projects may have to undertake them with no additional budgets. Under these conditionsknowledge transfer is a major contribution of the Bank. Thus, it makes sense for the Bank to concentrateits efforts in areas where the Borrower can benefit from Bank knowledge and expertise.

One such area is natural disaster management. In 1998 the Bank established the Disaster ManagementFacility (DMF) to ensure that its knowledge, expertise and ability to attract world class partners is used toassist developing countries--where 95 percent of deaths from natural disasters occur. The DMF andcollaborating Bank Group units are well equipped to help Mexico find ways to increase protection, reduceenvironmental degradation contributing to disasters, identify and implement prevention measures, anddevise ways to share natural disaster risks with the private sector. The DMF's expertise has already beendrawn upon for the design of the project. During project implementation the Bank will be able to provideMexican counterparts with expert advice through the DMF and the newly-established ProVentionConsortium, comprising government and business leaders, international agencies, non-governmentalorganizations, academic institutions, and others.

Recognizing the Bank's capacity to mobilize expertise in natural disaster management, the governmentrequested assistance in refining FONDEN operations. It also requested help in developing methodologiesfor defining prevention programs and assistance in understanding its options to use risk transferinstruments more widely.

A Japanese PHRD grant has financed studies and technical assistance to begin developing the frameworkfor identifying priority prevention programs, so that investments generate the greatest return for theresources spent. The grant is also supporting research on options for financing post-disaster reconstructioncosts including FONDEN's role as part of the financing system, work to develop risk maps for forest fires,

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a review of the municipal operations of the National System for Civil Protection (SINAPROC), anddevelopment of a methodology for hazard mapping at the municipal level to support preparation ofprevention programs. It is expected that further studies will be carried out through the prevention andcapacity building components of the project and that in the medium term these will lead to formulation ofpublic investment programs for prevention works.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):C Cost benefit NPV=US$ million; ERR = % (see Annex 4)O Cost effectiveness* Other (specify)

In Mexico federal sectoral agencies are responsible for carrying out economic analysis of their investmentproposals. They use methodologies developed by SHCP through its Unit for Investment and Divestment ofParastatal Entities in SHCP. These are disseminated through theCentro de Estudios de Planeacion yEvaluacion de Proyectos, which provides training for public sector staff in project analysis throughregional universities. The project will rely on Mexico's existing practices of economic analysis.

Component 1: Prevention activities

Prevention studies and equipment are not subject to economic analysis.

Component 2: Emergency recovery and reconstruction investments

Emergency recovery investments are not subject to economic analysis.

Reconstruction investments are selected in accordance with methodologies acceptable to SHCP.

Component 3: Capacity building activities

Capacity building activities are not subject to economic analysis.

2. Financial (see Annex 4 and Annex 5):NPV=US$ million; FRR = % (see Annex 4)

FONDEN was created in 1996 to provide a dedicated source of federal budgetary resources to financedisaster relief and reconstruction. Funds for FONDEN come from the general expenditure budget ofMexico based on historic experience and information provided from several agencies, such as CENAPREDand CNA. The FONDEN trust fund ffideicomiso FONDEN) established in 1999 is responsible foraccumulating and administering resources remaining in FONDEN's budget at the end of each fiscal year.FMEs transfer FONDEN resources on a cost-shared basis to state and municipal governments.

Cost sharing between levels of government. FONDEN's rules provide for cost sharing between federal,state and municipal governments. FONDEN finances 100 percent of the costs of repairing andreconstructing federal infrastructure, 60-70 percent of the costs for state infrastructure and 20-50 percentof costs for municipal infrastructure. Similarly, FONDEN shares costs of responding to forest fires andrehabilitating damaged forests; restoring protected areas and other natural capital; programs for disaster

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victims, including income support, compensation for lost assets, and assistance to rebuild housing and

community infrastructure.

In 1996 FONDEN's budget was about US$100 million, in 1997 US$250 million, in 1998 US$450 million,

and in 1999 US$1 billion. The disasters varied over this time, with drought dominant in 1996, hurricanes

in 1997, floods in 1998, and earthquakes and floods in 1999. Because of the large rise in public

expenditures for post-disaster costs, the government is eager to find ways to reduce losses from natural

disasters through adoption of prevention measures. It is encouraging states and municipalities to adopt and

enforce higher engineering and building standards, inform people of natural disaster risks and risky areas,

prevent settlement in risky zones, and promote less risky behaviors.

Fiscal Impact:

In the short term the fiscal impact of expenditures on reconstruction activities is negative. However, once

reconstruction is complete, these expenditures lead to higher economic activity, which will generate tax

revenues resulting in positive fiscal impacts. Investments in prevention studies and capacity building will

have negative short term fiscal impacts. However, over the medium term they will save fiscal resources ifthey lead to investments which reduce public sector losses from natural disasters.

3. Technical:The project will finance a broad range of prevention studies, technical assistance activities, and emergencyrecovery and reconstruction investments in major sectors, including for repair, reconstruction andimprovement of roads and bridges, other publicly owned structures,water supply and sanitation

infrastructure and restoration of environmentally sensitive areas and damaged cultural property.Technical

agencies executing the project will propose designs and operational arrangements for these investments,

reflecting generally accepted technical standards and operating practices appropriate to the respectivesectors. In general, the federal agencies which will carry out prevention activities and larger-scalereconstruction projects have qualified and experienced technical staffs who either carry out the work

in-house or through consultants. Moreover,under the executing arrangements employed by the FMEs,

state and municipal agencies work under the technical guidance of the generally more experienced federal

agencies. Thus, the implementing agencies have adequatetechnical capacity, especially for the design of

routine infrastructure improvements. In the case of prevention studies, the project will help the federal

sectoral implementing agencies identify and use appropriate expertise to design programs to reduce the risk

of loss from natural disasters. It is anticipated that experts associated with the Bank's DisasterManagement Facility and sectoral specialists will provide guidance in this area.

4. Institutional:

a. Executing agencies:

SHCP will provide resources to federal agencies (SEGOB/CENAPRED, SEMARNAP, CNA, SCT,SAGAR, SEDESOL, SEP and SSA) to undertake eligible prevention and capacity building activities as

part of their annual work programs. These federal agencies generally have well-trained and competent

staff, and long experience with executing Bank projects and applying the Bank's procurement procedures.

In its Mexico City office, BANOBRAS (the Borrower's financial agent under the project) also has

expertise applying Bank procedures. Such expertise is now being developed in its state offices.

State and municipal agencies financed through FMEs are responsible for implementing FONDEN-financed

activities at the state and municipal levels. Technical committees comprising state and federalrepresentatives make key decisions regarding activities financed through the FMEs. Although FMEs are

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new institutions and inexperienced with Bank projects, they will have access to advice from federalagencies and BANOBRAS (their trustee), which have considerable experience with Bank projects. Duringproject implementation, BANOBRAS will implement a training program in Bank procedures for its staff.

b. Project management:

The PCC will oversee project implementation. It will comprise representatives from BANOBRAS and theexecuting agencies, as warranted. As described above, both BANOBRAS and the executing agencies haveconsiderable experience executing Bank projects. They also have experience with disaster managementissues. In the medium term the capacity building component will support programs to improve the abilityof implementing agencies to carry out project activities.

5. Social:

FONDEN provides resources in the immediate aftermath of natural disasters to enable victims to meet theirneeds for food, clothing, medicines and shelter, and thus helps to save lives and speed recovery fromnatural disasters. Aside from addressing immediate needs, FONDEN's resources are targeted to coverlosses of uninsurable property and to assist low-income people who are unable to obtain insurance.Specifically, FONDEN assists low-income people (defined as those whose family incomes do not exceed2.5 times minimum monthly wages of the region) repair or rebuild houses and restore water supply andother services in communities. It also compensates low-income people for loss of productive assets (suchas fishing vessels and aquaculture ponds), and for lost sources of income (like crops, cattle, and trees).And it helps people who lose their sources of income by funding temporary employment programs, whichhire people to repair or reconstruct damaged houses or infrastructure.

Resettlement

Natural disaster-displaced people. Natural disasters disproportionately affect impoverished people, wholive in substandard housing in vulnerable areas. FONDEN does not support the rebuilding of housing andinfrastructure in high-risk locations exposed to recurrent natural disasters, such as in floodplains. Instead itprovides affected communities with new land in low-risk zones and aid to rebuild housing and communityinfrastructure to similar or better standards as previously existed. As a funding agency, FONDEN does notdirectly manage the relocation process. Rather, this responsibility rests with SEDESOL through its urbandevelopment, housing and social organization units, which coordinate closely with local agencies.

During the past two years of FONDEN operations, SEDESOL has refined resettlement practices throughits experiences dealing with victims of natural disasters, from involvement with Acapulco flood victims,people displaced by Puebla's earthquake and floods, families left homeless by the Chiapas hurricane, andrefugees of flooding in Veracruz in October 1999. While the Bank's OD 4.30 on Involuntary Resettlementdoes not cover these cases of "natural disaster refugees," SEDESOL follows practices that are broadlyconsistent with the Bank's OD 4.30. Under the project, SEDESOL will retain responsibility for assistingdisaster-displaced people in accordance with established practice in Mexico.

People relocated to allow construction of more resilient infrastructure. Reconstruction activities couldtheoretically involve resettlement (for example construction of a washed-out road in a new alignment).These cases are likely to be extremely rare. No disasters of the past few years have involved resettlement.The 1999 floods in Veracruz significantly damaged 900 kilometers of roads and 18 bridges, but the oneroad segment that was realigned between Veracruz and Coatzacoalcos did not involve resettlement. Theearthquake in September 1999 in Oaxaca damaged 4,600 kilometers of roads (including 3,600 kilometersof rural roads) and 28 bridges, but again rehabilitation did not involve resettlement. Rebuilding of other

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types of infrastructure, such as water and electricity infrastructure, schools and the like does not involveresettlement.

Resettlement framework. Although resettlement of people other than natural disaster refugees is expectedto be rare under the project, a resettlement framework has been agreed under the project to govern theprocess if the need for resettlement does arise. This framework is based on FONDEN rules regardingresettlement, good practices followed during recent resettlement experiences in Mexico and on the Bank'srecommendations. Specifically, the framework reflects the following principles:

* Beneficiaries. All affected people are covered by the resettlement framework.

* Improvement or restoration offormer living standards. Government provides new land, housing andtitles in areas certified as safe by public authorities, basic services and community infrastructure,compensation for losses of productive assets, and temporary employment for people who lose theirsources of income.

* Economic recovery activities. Government will take measures to help resettled people restore theirlivelihoods.

* Participation mechanisms. Comites de vivienda (housing committees), comprised of representativeselected by community members, participate in decisions regarding resettlement and other issuesaffecting the community.

Conclusion. The Bank team visited resettlement sites for disaster-displaced people in Puebla and Chiapasand found the process to be working well. Infrastructure and housing in the new sites were built rapidlyand are in good condition. In Chiapas for example more than 12,000 new basic houses for poor householdswere built in less than one year. All resettlement sites have basic infrastructure, a public garden and civicplaza, and all have schools (completed or under construction) and other amenities. The housingcommittees, which were organized after the disaster, still exist and oversee implementation of projects andnegotiate for further improvements.

The resettlement framework agreed under this project builds on these practices. Ongoing policy dialoguewill help to further improve the process and diffuse the application of good resettlement practices inMexico.

Indigenous people

In the event a natural disaster affects indigenous people, SEDESOL will continue to arrange for specialissues to be addressed in a manner consistent with the Bank's OD 4.20 through itsfnstituto NacionalIndigenista (National Indigenous Institute) or other sources. This is accepted practice for FONDEN, andhas helped to address specific cultural needs and priorities of indigenous peoples during past disasters.

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6. Environmental assessment: Enviromnent Category: B (Partial Assessment)

For purposes of environmental assessment (EA) the project is classified as category B because nosubprojects are expected to have significant adverse environmental impacts. The vast majority of workssubprojects will involve repair or reconstruction of infrastructure works at their original sites. Subprojectsmay occasionally involve capacity expansion (for example, water treatment), relocation' of infrastructure(either to improve its resilience or to provide community services such as houses, schools and clinics), orwork in protected areas (mainly to restore ecosystems damaged in natural disasters). Both a negative andpositive list of eligible subprojects has been developed to provide clear guidance on eligible activities andexclude activities with potentially significant environment impacts (Bank environmental category A) fromBank financing. In addition, all nonemergency subprojects will be EA category C.

Mexican Environmental Law and regulations. Mexican Environmental Law (Ley General delEquilibrio Ecol6gico y la Proteccion al Ambiente or LGEEPA) was enacted in 1988 and last modified in1996. It requires an executing agency or responsible party (federal entity, state or municipal government,or contractor) to obtain an environmental permit. This permit may require the responsible party to submitan environmental impact assessment report to the National Ecology Institute (INE) for works and activitiesthat fall under federal jurisdiction and that may have negative environmental impacts. The law provides forenvironmental assessment procedures which vary by type of works and their environmental impacts. A"manifestaci6n de impacto ambiental" (MIA) is required for activities with the most significantenvironmental impacts. An 'Ynforme preventivo " is required for activities carried out within urbandevelopment or ecological zoning plans, or as part of an approved development program, and for activitieslocated in approved industrial parks, or for which environmental standards exist. The federalenvironmental law sets minimum standards that state or municipal governments must adhere to. Moreover,when regulated activities do not fall explicitly under federal jurisdiction, SEMARNAP may issue arecommendation for environmental management to the relevant state or municipal authority. Thus, alllevels of government must apply minimum standards of environmental management. In emergencies, whenresponse speed is critical, Mexican law permits executing agencies to initiate works without priorconsultation with environmental authorities. However, within three days of initiating works, executingagencies must inform SEMARNAP that works have started, and within twenty days of initiating worksthey must provide SEMARNAP with a report on the types of works and associated mitigation andcompensation measures that will be undertaken. Mexico issued new environmental regulations in May2000 reflecting experiences gained through environmental impact assessments. These regulations givegreater emphasis to sound natural resource management; refine the scope and content of EA proceduresand reports; provide more mechanisms for public consultation, citizen participation and complaint; andinclude specific guidance on environmental permitting requirements in emergency situations. Elevensectoral guidelines for environmental assessment are expected to be enacted soon, and should help improvethe quality of environmental impact assessments.

Environmental management capacity of implementing agencies. A capacity assessment of the federalimplementing agencies participating in the project found that their capacity to manage environmental issuesin their investment programs is adequate.

Public consultation. The environmental law provides for public participation in the EA process. The newregulations for environmental assessment emphasize the law's provisions related to public participation andthe right to information. They require that a list of all permit requests be published and that INE's analysisof MIAs be made publicly available. The law also gives rights to any member of the public to requestpublic consultations on projects submitted to SEMARNAP via MIAs. However, public consultation is atINE's discretion, and therefore not mandatory for all investments.

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Cultural property. Mexico has a rich cultural heritage and archeological, artistic and historic sites aredistributed widely throughout the country. Therefore, natural disasters and subsequent reconstruction workmay uncover cultural property, requiring the use of "chance find" procedures to ensure that that qualifiedpersonnel make decisions on management of the sites and materials. Natural disasters may also damagecultural property (separate earthquakes striking Oaxaca and Puebla in 1999 damaged importantarcheological sites and colonial buildings), which requires properly planned and supervised stabilization orrestoration measures.

Cultural property is highly valued in Mexico, and protected by national law, institutions and practices. Thefederal law on archeological, artistic and historic monuments and sites defines archeological, artistic andhistoric property and specifies the authority and responsibilities of cultural heritage agencies when sites ormaterials of cultural significance are discovered. The law grants responsibility to the National Institute ofAnthropology and History (INAH) for archeological and historic property, and to the National Council ofFine Arts and Culture and the National Institute of Fine Arts and Literature for artistic property. The lawrequires any party finding cultural property to report the discovery to a local civil authority, which mustreport the find to INAH within twenty four hours. The law further establishes INAH as the sole entityauthorized to excavate and research discoveries of cultural property, and empowers INAH to suspend anyworks or activities carried out by unauthorized persons. To ensure adequate resources are available torepair cultural property and sites damaged during natural disasters, FONDEN has recently incorporatedinto its rules provisions for financing costs of rehabilitating national heritage buildings and sites. Mexico'slegal and regulatory framework is therefore consistent with the Bank's guidance on cultural heritage.Through application of the environmental management plan (EMP) for the project (Annex 11), the projectwill encourage integration of cultural and environmental protection in the reconstruction process.

Summary capacity assessment. Mexican laws and regulations dealing with environmental assessment andmanagement of "chance find" cultural property are broadly consistent with Bank environmental andcultural property safeguards as defined in the Bank's operational policies on environmental assessments(OP 4.01) and natural habitats (OP 4.04), and its guidance on treatment of cultural property.SEMARNAP (including INE and PROFEPA) has adequate capacity to ensure that executing agenciescomply with Mexico's federal environmental laws and regulations, which establish minimum standards forother jurisdictions. SEMARNAP has many years of experience and a large professional staff working indiverse aspects of environmental management. Reinforcing this view, an ongoing Bank OED study findsthat SEMARNAP's environmental review and enforcement process is generally operating satisfactorily (itsagencies have benefited from considerable Bank technical assistance through the Mexico EnvironmentalManagement Project, Northem Border Environment Project, and Water Resources Management Project).The study points out that the Bank's annual reviews of Mexican environmental assessment have found asteady increase in their quality and effectiveness. Moreover, principal federal implementing agencies haveadequate capacity to manage environmental issues faced in the emergency investments for which they areresponsible. Therefore, the project can rely on Mexico's established procedures as the basis forenvironmental assessment for most emergency recovery and reconstruction works.

Environmental screening and review procedures. Activities financed by Bank loans are typicallysubject to ex ante environmental screening, assessment and public consultation requirements pursuant tothe Bank's OP 4.01. However, in the case of emergency recovery loans, OP 4.01, para. 13 states that"when compliance with any requirement of this policy would prevent the effective and timely achievementof the objectives of an emergency recovery project, the Bank may exempt the project from such arequirement."

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Emergency recovery loans are govemed by the Bank's OP 8.50 and are made in response to an emergencywhich has already occurred. The loan for this project is not made in response to an emergency which hasoccurred prior to the processing of the project, and in this sense does not fit exactly within the bounds ofOP 8.50. Nevertheless, the emergency subprojects envisioned under the project will be made in response toemergencies occurring before such subprojects are prepared, and thus will be subject to the same urgentresponse imperative -- to protect affected lives and property -- as may justify exemptions (pursuant to OP4.01, para. 13) from potentially time-consuming environmental requirements.

The only difference between a classic OP 8.50 emergency recovery project and the emergency subprojectsenvisioned here is that the Bank cannot today, when the loan is being processed for approval, judge on theground, in the face of an actual emergency, the extent to which OP 4.01 environmental requirementexemptions may be justified. Potentially, the Bank could perfonn such anex ante analysis for everyemergency subproject that arises post-loan approval by the Bank's Board, but this would imply Bank priorreview of each case, with the delays, impracticalities and Bank micro-scrutinv such prior review can signify(all in the face, again, of an emergency requiring the quickest response). Given that the projectcontemplates responses to potentially hundreds of "routine" natural disasters expected to occur throughoutall of Mexico's varied and extensive geography, such Bank micro-scrutiny could jeopardize the neededspeed of response implicit in any emergency, and hamper Mexico's sophisticated processes for dealingswiftly with such cases through FONDEN.

Hence, the project, through a proposed application of OP 4.01 exemption policy as allowed in emergencysettings, provides for reliance on notification (by subproject implementing agencies to Mexican federalenvironmental authorities deemed competent as indicated in the project's Environmental Management Plan)of the emergency subproject activities falling under federal jurisdictionafter those activities have beeninitiated. Nothing prevents such notification from being madeprior to such initiation, triggering full exante environmental assessment under Mexican law if the local parties involved feel that the circumstancesso allow, despite the emergency nature of the situation. However, by applying the cited OP 4.01 exemptionpossibility, any such ex ante environmental review, by the Bank or local environmental authorities, as wellas any ex ante public consultation on potential environmental impacts and mitigation, would not bemandatory.

There may therefore be some risk that, in any given future subproject, an unwanted environmental impactmay occur because of said exemptions necessitated by the emergency nature of the response.Consequently, the project legal documents specify a series of protective measures designed to minimize thisrisk. Such measures include the following:

(a) Specification of a "positive list" of activities that may be carried out under subprojects;

(b) Specification of a "negative list" of activities that may not be carried out under subprojects (suchactivities include what would typically be considered risky "category A" activities for environmentalpurposes under Bank policy),

(c) Mandatory ex ante Bank prior review of subprojects considered potentially risky because theyaffect some protected areas, or are particularly large, involve relocation of infrastructure, or involveexpansion of infrastructure (see the project's Environmental Management Plan for details); and

(d) Limitation of subprojects to those that involve initiation of on-site work within no later than 180days after the official declaration of a disaster, the assumption being that work initiated afterwards isindicative of the lack of a true emergency. The 180 day cut-off was established in consultation with Bank

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environmental staff, and reflects their opinion that a soundex ante environmental assessment of asubproject -- together with meaningful public consultation -- would take at least 180 days to perform.Consequently, a subproject begun more than 180 days after a disaster declaration could have benefitedfrom such an assessment and consultation and would thus not require the exemptions proposed under OP4.01, para. 13.

Procedures and schedules for Bank review. As part of its routine supervision process and midtermreview, the Bank will review performance of 1NE and PROFEPA in applying the environmental assessmentprocedures, evaluate performance of executing agencies in addressing environmental issues in design andimplementation of subprojects, and agree on actions to be taken to improve performance. This will involvevisits by specialists to selected sites of subprojects for first-hand assessment of implementing agencies'performance. They will assess the environmental and social impacts of subprojects, both individually andcumulatively, and the adequacy of safeguard procedures agreed for the project. They will also evaluate theextent to which the emergency was precipitated or exacerbated by inappropriate environmental practicesand propose remediation measures to be included in the project. The midterm review will considerespecially (a) any changes which should be introduced into the project's EMP or resettlement framework tobetter mitigate emergencies arising from inappropriate environmental practices and apply the Bank'ssafeguard policies during project execution, and (b) ways to modify the EMP's prior review triggers toreflect the magnitude of the anticipated environmental and social impacts from the proposed interventions,rather than reflect size alone. The implementation completion report will, among other aspects, evaluatethe effectiveness of executing agencies in addressing environmental and social issues, and draw lessons forimprovements in design and implementation of similar projects. It will also include an analysis of theadequacy of the instruments used to apply Bank safeguard policies during project execution. Subprojectsimplemented in violation of Mexico's laws for environment, EA procedures, or treatment of culturalproperty will not be eligible for Bank financing. Details of the environmental assessment and reviewprocedures to be followed under the project appear in annex 11.

7. Participatory Approach (key stakeholders, how involved, and what they have influenced or mayinfluence; if participatory approach not used, describe why not applicable):

a. Primary beneficiaries and other affected groups:

FONDEN's direct beneficiaries are federal agencies and state and municipal govemments. FONDEN's1999 guidelines were issued following previous experience in 1996-98, and extensive consultations withstakeholders at the federal and state levels and the Bank. The 1999 guidelines were updated in February2000, reflecting lessons learned from stakeholders during the first year of their application. The presentguidelines and any associated agreements supporting FMEs therefore represent a consensus amongstakeholders about the operations of FONDEN.

Disaster-affected people will participate in decisions affecting them, especially when the disaster requiresthem to resettle. These processes are described in greater detail under the section on resettlement above.

b. Other key stakeholders:

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F. Sustainability and Risks

1. Sustainability:

The sustainability of project benefits will depend on government establishing an ongoing process ofidentifying and implementing annual prevention investments, providing incentives to public entities toinsure properties against natural disaster risks and setfing up a system of post-disaster financing which isefficient and effective.

2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk Rating Risk Mitigation MeasureFrom Outputs to ObjectiveGovemment agencies may not have the M The Bank is supporting development of acapacity to accurately assess risks and framework for identifying high priorityvulnerabilities, and to identify prevention investments and reducing riskscorresponding prevention programs. through policy, institutional and physical

measures through the PHRD grant and capacitybuilding component. The prevention componentwould support analytical and design studies tosupport development of prevention investmentprograms.

Government may not provide adequate M The govemment is very committed to usingincentives to encourage public entities to insurance more widely. The Bank is supportinginsure properties. research into options for doing this.

Political factors could affect N Government publishes FONDEN guidelines soimplementation of FONDEN rules. that they are fully transparent. In the event of a

natural disaster government announces the termsof FONDEN's assistance.

From Components to OutputsGovernment does not allocate sufficient S The Bank is assisting the govemment tofunds for prevention programs. understand the importance of prevention and

helping it develop methodologies to select highpriority investments.

Government entities may not respect the M The Bank has recently completed an assessmentBank's procurement rules. of the performance of government entities with

regard to procurement. BANOBRAS will assistimplementing agencies with the procurementprocess.

- 23 -

The project is complex and information M A Project Coordinator will be appointed inintensive. SHCP, and BANOBRAS will assist the PCC

with project administration.

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

Resettlement and environment are potentially controversial aspects in any project.

In the case of resettlement, while it is not expected that the project will finance activities involvinginvoluntary resettlement, there is a small chance that as part of reconstruction works the government willwish to move people living in risky areas to safer areas. It is also possible that reconstruction investmentswill involve resettlement to allow, for example, for re-siting of damaged infrastructure to safer areas. Forcases involving involuntary resettlement, the Bank and the government have agreed upon a resettlementframework consistent with the Bank's OD 4.30 on Involuntary Resettlement, which will govern resettlementactivities carried out under the project.

In the case of environment, the environmental management plan (EMP) provides for a negative list and apositive list designed to ensure that only Bank category B and C activities are financed by the project, andprior review procedures have been included to ensure that subprojects with greatest environmental risk aresubject to prior scrutiny by the Bank (see Part E.6 above, "Environmental screening and reviewprocedures"). During project preparation a process of consultation on the EMP was started withstakeholders in Mexico, including non-governmental organizations.

G. Main Loan Conditions

1. Effectiveness Condition

* The Government and BANOBRAS have entered into a contractual arrangement, satisfactory to theBank, to transfer the proceeds of the loan to the Government, and to transfer interest payments andother debt service charges from the Government to BANOBRAS.

* The Government has established a project coordinating committee (PCC) and appointed a projectcoordinator.

* SHCP has prepared and adopted an operating manual satisfactory to the Bank.

2. Other [classify according to covenant types used in the Legal Agreements.]

3. Disbursement Condition

* None.

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H. Readiness for Implementation

0 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

1 1. b) Not applicable.

a 2. The procurement documents for the first year's activities are complete and ready for the star ofproject implementation.

C: 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryqualitv.

a 4. The following items are lacking and are discussed under loan conditions (Section G):

The project will finance subprojects that have not yet been identified. Thus (2) and (3) are not appiicable.

1. Compliance with Bank Policies

1 1. This project complies with all applicable Bank policies.[ 2. The following exceptions to Bank poiicies are recommended for approval. TIe project compiies with

all other applicable Bank policies.

.,. l\oow , \,: ,< ,--.

Christopher J. Barham John Redwood Olivier LafouruadeTeam Leader Sector Oirector Country Manager

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Annex 1: Project Design SummaryMEXICO: Natural Disaster Management Project

4000000USi:000 0 i40 0Key00 g $Mion00torin aluationti4 crliticallg;0 Asump -tions0i0Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Improve ability to manage Outcome cannot be measured Agency assessments Stakeholders understand andnatural disaster risks and quantitatively during the (personal communication) respond to incentives forreduce recurrent losses. project life. prevention.

Government consistentlyfollows policies to encouragepublic sector entities to insurepublic properties.

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:Reduce the human, economic Outcome cannot be measured Agency assessments Public entities invest inand financial costs of natural quantitatively during the (personal communication) prevention. FONDEN'sdisasters. project life. budget is sufficient to cover

disaster costs, avoiding needto reallocate governmentbudget.

Reduce vulnerability of Outcome cannot be measured Agency assessments Government is committed toinfrastructure to natural quantitatively during the (personal communication) developing and implementingforces. project life. prevention programs.

Build institutional capacity to Federal entities adopt new Agency assessments (personal Government is committed tosupport prior objectives. procedures to improve natural communication). improving procedures.

disaster management.

- 26 -

-Hie Obives Ini tor= MoiorOutput from each Output Indicators: Project reports: (from Outputs to Objective)Component:Component 1: At least SCT Studies completed (for Agency infonnation. Government has the capacityand CNA implement example, for works to reduce to identify key risks andanalytical and/or design flood damage or strengthen vulnerabilities for study.studies explicitly intended to bridges).reduce losses to infrastructure Adequate federal budgetin the event of a natural resources are available.disaster.

Policy and institutionl .Policy or institutional Agency information. Government has political willPolicy and institutionaltoirdueefmsreforms intended to reduce measures adopted. to mtroduce refoms.vulnerability of infrastructure

Component 2: Goverunent is Number of days between the FONDEN data. Beneficiaries understandable to respond quickly to date a disaster is declared and FONDEN's rules so they cannatural disasters. the date federal, state and easily comply.

local funds are allocated tofederal agencies or to stateFMEs.

Reconstruction proceeds Trend in average number of FONDEN data. Beneficiaries understandquickly. days between date funds are FONDEN's rules so they can

allocated and reconstruction easily comply.is completed.

Resources are used as Number of units built versus FONDEN data. Initial estimates are accurate.authorized. number initially programmed.

Final unit costs versus FONDEN data.estimated unit costs.

Costs are redistributed from Trends in distribution of costs FONDEN data. FONDEN's cost-sharingthe federal to state and among levels of government. formulas are respected.municipal governments. FONDEN beneficiaries

respond to incentives to insureproperties.

Component 3: Government Federal entities adopt new Agency assessments (personal Goverrnent is committed tocapacity to manage natural procedures to improve natural conununication). improving procedures anddisasters is strengthened. disaster management. provides resources for capacity

building.Govenunent adopts guidelines SHCP assessments.and procedures to encourageuse of insurance.

Municipal-level disaster Number of days between SINAPROC assessments.response is improved. issuance of a warning and

evacuation completed.

Share of population removedfrom danger versus shareremaining at risk.

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HS.':rchy,'t 3:eeive lnixao Maitorin. .gEvaluatong C g000 ritical supinProject Components / Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)1. Prevention studies and US$15.9 million Periodic project progress There is demand for Bankequipment reports. resources.

2. Emergency recovery and US$633.3 million Bank supervision reports. Government is committed toreconstruction capacity building and allocates

adequate resources for it.3. Capacity building. US$5.1 million Disbursement reports.

Implementation completionreport.

-28-

Annex 2: Detailed Project DescriptionMEXICO: Natural Disaster Management Project

By Component:

Project Component 1 - US$15.90 millionPrevention activities

This component will finance analytical, design and policy-related studies and equipment aimed at reducingeconomic and human losses in the event of a natural disaster. Prevention activities will be executedthrough federal agencies as part of their annual investment programs. Participating federal agencies will beSHCP, SEGOB/CENAPRED, SEMARNAP/CNA, SCT, SAGAR, SEDESOL, SEP and SSA. At thestart of each (Mexican) fiscal year SHCP will agree with the Bank and the executing agencies upon theprevention activities that the project will finance. Such activities, which will not include major civil works,will be selected and implemented in accordance with the Bank's procurement guidelines and procedures,and technical criteria acceptable to the Bank. These criteria will be included in the project's operatingmanual. Technical criteria for prevention programs are detailed in annex 12.

Project Component 2 - US$633.30 millionEmergency recovery and emergency reconstruction investments

This component will support emergency recovery and reconstruction activities financed through FONDENand executed either through federal agencies or state and municipal agencies financed througlfideicomisosmixtos estatales (FMEs). Emergency recovery activities are defined for purposes of the project as thoseactivities initiated within a time window extending 15 days before and 45 days after the declaration of anemergency by SEGOB. These activities are subject to expedited procurement procedures. Reconstructionactivities are defined for purposes of the project as thoseinitiated between 45 and 180 days following thedeclaration of an emergency by SEGOB. Reconstruction investments will be selected and implemented inaccordance with the Bank's procurement guidelines and procedures, and environmental, social and technicalcriteria acceptable to the Bank. Eligible emergency recovery and reconstruction expenditures includenet-of-tax FONDEN expenditures for activities that satisfy the environmental management plan included inAnnex 11, except for cash compensation paid to producers, purchases of equipment for disasterpreparedness, relief assistance, land, and activities not constituting investments

Project Component 3 - USS 5.10 millionCapacity building activities

This component will assist SHCP, SEGOB/CENAPRED, SEMARNAP/CNA, SCT, SAGAR, SEDESOL,SEP and SSA to carry outdiagnostic studies, technical assistance programs, and training aimed atstrengthening their capacity to respond to natural disasters, manage social, cultural, or environmentalissues arising from natural disasters, and use insurance or other risk transfer instruments. It is envisagedthat this component will help develop a framework to enable sectoral implementing agencies to identifypriority prevention investments for inclusion in their annual programs.At the start of each (Mexican) fiscalyear SHCP will agree with the Bank and the executing agencies upon the capacity building activities thatthe project will finance. Such investments will be selected and implemented in accordance with the Bank'sprocurement guidelines and procedures and technical criteria acceptable to the Bank. These criteria will beincluded in the project's operating manual. Typical activities this component will support are shown inannex 12.

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Annex 3: Estimated Project CostsMEXICO: Natural Disaster Management Project

.... ............ n T ota'.... ... .. ... o , C . n U , , 9S''mWin4 US $mZIIonf

Component 1: Prevention activities 6.80 9.10 15.90Component 2: Emergency recovery and reconstruction 322.70 310.60 633.30Component 3: Capacity building activities 2.30 2.80 5.10

Total Baseline Cost 331.80 322.50 654.30Physical Contingencies O.00 0.00 0.00Price Contingencies 0.00 0.00 0.00

Total Project Costs 331.80 322.50 654.30Front-end fee 4.05 4.05

Total Financing Required 331.80 326.55 658.35

0~~~~~~ Cat. o US $mWio US- $mw ;aifaNion U- $mWi 0n Goods 83.10 194.00 277.10Works 210.20 90.00 300.20Services 38.50 38.50 77.00Training 0.00 0.00 0.00

Total Project Costs 331.80 322.50 654.30Front-end fee 4.05 4.05

Total Financing Required 331.80 326.55 658.35Nwmbers may not concur with those in other tables due to rounding.

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Annex 4

MEXICO: Natural Disaster Management Project

In Mexico federal sectoral agencies are responsible for carrying out economic analysis of their investmentproposals. They use methodologies developed by SHCP through its Unit for Investment and Divestment ofParastatal Entities in SHCP. These are disseminated through the Centro de Estudios de Planeacion yEvaluacion de Proyectos, which provides training for public sector staff in project analysis throughregional universities. The project will rely on Mexico's existing practices of economic analysis.

Component 1: Prevention activities

Prevention studies and equipment financed by the project are not subject to economic analysis.

Component 2: Emergency recovery and reconstruction investments

Emergency recovery activities (defined for purposes of the project as those activities initiated within a timewindow extending 15 days before and 45 days after the declaration of an emergency by SEGOB) are notsubject to economic analysis.

Reconstruction activities. The project will finance investments selected in accordance with methodologiesacceptable to SHCP.

Component 3: Capacity building activities

Capacity building activities are not subject to economic analysis.

Costs of natural disasters in Mexico, 1980-1999

Natural disasters cause substantial economic, financial and human losses each year in Mexico. Thefollowing table presents deaths and property damage caused by natural disasters during 1980-98. Since thetable is based on estimates of verified financial costs, the related economic costs are most likely higher.

- 31 -

Year Event Deaths Total property damage US$millions

1980 Floods 3 87Droughts 222.6

1982 Volcanic eruption 42 117.0Hurricane Paul 0 82.4Floods 8 114.6

1985 Earthquake Mexico City 6,000 4,104.0Floods 43 39.46Rains 0 16.4

1986 Forest fires 1.51987 Snowstorms 6 0.31988 Forest fires 1,250

Droughts 168.4Hurricane Gilberto 225 76.0

Other hurricanes 417 597.6Freezes 30 0.6

1989 Forest fire 684.01990 Freezes 52 1.3

Hurricane Diana 139 90.7Floods 200 2.5

1991 Flood 5 0.7Winter storms 16.8

1992 Rain and snow 0.2Thunderstorms 11.8Hurricane Winifred 8.0Winter storms 64 78.0Hail-storms 2.5Freezes 27.0

1993 Volcanic eruptions Popocatepetl 1993-1998 5 12.0Hurricane Gert 18.1Winter storms 23 95.4Freezes 0.1

1994 Droughts 3.5Hailstorns 0.3

1995 Hurricane Ismael 56 26.0Hurricane Opal 14 124.7Earthquakes . 21.1

Forest fires 1.0Droughts 92.9

1996 Freezes 224 5.31997 Hurricane Pauline 228 447.81998 Forest fires 1,862.4

Hailstorms 1.7Torrential rains 199 602.7

Total 7,983 11,116.36Source: Bitran Bitrni 1999.

- 32-

The events and their costs can be grouped into the following categories, presented in the table below.

Category Total damages Share of total1981-98 (US$ millions)

Hydrometeorological disasters (floods, 3,063.4 27.6droughts, storms, hurricanes)

Geological (volcano eruptions, 4,254.1 38.3earthquakes)

Forest fires 3,798.9 34.2

Total 11,116.4 100.0

Thus, disasters related to hydrometeorological events account for almost 30 percent of damage, geologicalevents for almost 40 percent and forest fires for about 35 percent. Eliminating the earthquake that hitMexico City in 1985 (which accounts for nearly all damage from seismic events), then the most frequentevents are due to hydrometeorological disasters and forest fires (even though the impact of one seismicevent may be much larger than many hydrometeorological events).

The proposed project will support programs designed to reduce damage from natural events. With lossesdue to natural disasters totaling about 11 billion dollars over the past twenty years, many of which couldhave been avoided by adequate prevention (it is estimated for example that construction costs increases ofonly 1-4 percent would prevent most damage from earthquakes) the benefits of the proposed project areclear.

Benefits from different types of disaster prevention investments

The following table shows the benefits that can be expected from different types of disaster preventioninvestnents.

Investments Potential benefit categories

Flood (and flood Structural: Protection of floodprone Avoidance of damage to housing andimpact) prevention areas, improved housing, relocation of other infrastructure, avoidance of loss

high risk shanty settlements, improved of lives, crops, production assets;road and bridge construction. avoidance of incidence of disease.

Non-structural: civil defense, earlywarning systems, safety training, land useand watershed management, flood andenviromnental education.

- 33 -

Interventions in Structural: construction of reservoirs, Increase in water production (measureddrought prone areas wells, desalinization plants, water through tariffs or willingness-to-pay),

distribution systems, water treatment improved health due to reduction inplants. irrigation schemes. waterbome diseases, time saved if

access to water sources is improvedNon-structural: community based early through the project, reduced risk towaming systems, improved soil health or crop production in case ofmanagement and cropping patterns. drought, mitigation of social impacts in

case of drought.

Prevention of forest Construction of fire breaks, early Avoidance of damage to housing andfires warning systems. other infrastructure, avoidance of losses

of lives, crops, productive assets,avoidance of health damage toindividuals, avoidance of loss of forestproductivity.

Prevention of Early warning systems, functioning Avoidance of damage to housing andhurricane and storm meteorological services, improved other infrastructure, avoidance of healthimpacts building construction, changed cropping damage to individuals, crops,

patterns. productive assets.

Decrease damage Reinforce construction in buildings, Avoidance of damage to infrastructure,from seismic events houses and other infrastructure, early avoidance of loss of lives and capital,

waming systems. avoidance of health damage toindividuals.

Further guidance for economic analysis of prevention activities

It is envisaged that the PHRD grant-financed studies carried out as part of project preparation will generateinformation and develop methodologies which will support development of an intersectoral investmentprogram of prevention projects that will provide high economic rates of return. The methodology to bedeveloped for this purpose will be based on cost-benefit analysis with benefits defined as damages avoided.The framework will involve:

* Probability that a natural event occurs of particular intensities in the country.* Probability that a certain type of disaster occurs in certain locations in the country (construction of a

risk map).* Estimates of expected losses from the principal natural hazards affecting Mexico. This involves

classifying exposure of assets to different hazard events, classifying structural vulnerability andresistance, and estimating expected currency/dollar loss exposure (including likely maximum losses)derived from these.

* Expected minimum rates of return for prevention subprojects.

This methodology would provide a basis for the government to design future intersectoral investmnentprograms to reduce human and economic costs of natural disasters.

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Annex 5: Financial Summary

MEXICO: Natural Disaster Management Project

Years Ending

Year 1 I Year 2 | Year 3 | Year 4 Year 5 I Year 6 Year 7Total Financing RequiredProject CostsInvestment Costs 126.0 164.0 164.0 200.0 0.0 0.0 0.0Recurrent Costs 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Costs 126.0 164.0 164.0 200.0 0.0 0.0 0.0

Front-end fee 4.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Financing 130.0 164.0 164.0 200.0 0.0 0.0 0.0

FinancingIBRD/IDA 80.0 100.0 100.0 124.0 0.0 0.0 0.0

Government 50.0 64.0 64.0 76.0 0.0 0.0 0.0Central 25.0 32.0 32.0 38.0 0.0 0.0 0.0Provincial 25.0 32.0 32.0 38.0 0.0 0.0 0.0

Co-financiers 0.0 0.0 0.0 0.0 0.0 0.0 0.0User Fees/Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0Others 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total Project Financing 130.0 164.0 164.0 200.0 0.0 0.0 0.0

Main assumptions:State and municipal governments contribute about 20 percent to the cost of reconstruction programs.

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Annex 6: Procurement and Disbursement ArrangementsMEXICO: Natural Disaster Management Project

Procurement

General

Procurement of works and goods financed by the Bank under the project shall be carried out in accordancewith Bank's Guidelines for Procurement under IBRD Loans and IDA Credits (January 1995, revised inJanuary and August 1996, September 1997 and January 1999).

Emergency recovery and emergency reconstruction activities

Emergency recovery activities are defined for purposes of the projects those activities for which workunder contracts for goods, works and consulting services is initiated within a time window extending 15days before and 45 days after the declaration of an emergency by SEGOB. All other activities will beconsidered as emergency reconstruction activities if they are initiated no later than 180 days after suchdeclaration.

Procurement responsibilities, capacity, and risk management

Based on the findings of a procurement assessment of executing agencies, experience witlprocuringcontracts under emergency conditions in Mexico, and the fact that monitoring of contracts not requiringprior review by the Bank will be done through sampling, there is a risk that contracts not satisfyiing thedefinition of emergency recovery activities as defined above will be included in the emergency recoverycomponent and procured through direct contracting. This may be especially true in the case of contractsfinanced through the FMEs, which may be procured through state and local agencies with little familiaritywith Bank procurement requirements. The procurement risk for this project is therefore rated as high.

In order to mitigate this procurement risk, the following arrangements have been agreed with the Borrower:

(a) BANOBRAS will ensure quality control of all procurement processes, liaise with the Bank and theexecuting agencies, organize and maintain procurement records, draft quarterly reports, and be responsiblefor project accounting, financial reporting, and compliance with audit and environmental requirementsagreed under the project. BANOBRAS will also review and confirm the eligibility of all procurementcontracts not subject to Bank prior review before signature by the contracting agency. The LoanAgreement will assign these responsibilities to BANOBRAS, which will retain adequate staff for thispurpose.

(b) A justification for the use of direct contracting in emergency activitieswill be required and will bemaintained on file. Such justification will clearly establish a causal relationship between the specificemergency and the need for the direct contract Every quarter a copy of the justifications will be sent to theBank by BANOBRAS. The project will include annual procurement audits of selected contracts,particularly those awarded on a sole source basis as a result of any specific emergency; and

(c) During the first year of the project, BANOBRAS will implement a training program through whichappropriate staff will receive training in Bank procurement procedures.

- 36 -

Procurement methods (Table A)

Grouping of contracts. To the extent practicable, contracts for goods and works shall be grouped in bid

packages estimated to cost US$500,000 equivalent or more each.

Notification and advertising. The invitation to bid for each contract to be awarded following"International Competitive Bidding" (ICB) procedures estimated to cost $10,000,000 equivalent or more

shall be advertised in accordance with the procedures applicable to large contracts under paragraph 2.8 of

the Guidelines.

Emergency reconstruction Works

Works estimated to cost more than US$10,000,000 equivalent per contract would be procured on the basis

of ICB procedures in accordance with the provisions of Section II of the Guidelines and paragraph 5 ofAppendix 1 thereto. Works estimated to cost less than US$10,000,000 per contract up to an aggregatedamount of US$60,000,000 may be procured under contracts awarded following "National CompetitiveBidding" (NCB) procedures in accordance with the provisions of paragraphs 3.3 and 3.4 of the Guidelines

using Standard Bidding Documents satisfactory to the Bank. Works estimated to cost less thanUS$500,000 per contract up to an aggregated amount of US$25,000,000 may be procured through pricecomparison, from a list of at least three contractors from at least two different states.

Emergency reconstruction goods

Contracts for goods estimated to cost more than US$500,000 equivalent per contract would be procuredfollowing ICB procedures in accordance with the provisions of Section II of the Guidelines and paragraph5 of Appendix I thereto. Goods estimated to cost less than US$500,000 per contract up to an aggregatedamount of US$20,000,000 may be procured under contracts awarded on the basis of NCB procedures in

accordance with the provisions of paragraphs 3.3 and 3.4 of the Guidelines using Standard BiddingDocuments satisfactory to the Bank. Goods estimated to cost less than US$100,000 per contract up to an

aggregated amount of US$560,000 may be procured through National Shopping in accordance with theprovisions of paragraphs 3.5 and 3.6 of the Guidelines from a list of at least three suppliers from at leasttwo different states.

Emergency reconstruction consultant services

Consultant services shall be procured in accordance with Guidelines for the use of Consultants by theWorld Bank Borrowers and the Bank as Executing Agency (January 1997, revised in September 1997 and

January 1999). Except as otherwise provided below, consultants' services shall be procured under contractsawarded on the basis of Quality and Cost Based Selection procedures (QCBS) in accordance with theprovisions of Section II of the Consultant Guidelines, paragraph 3 of Appendix 1 thereto, Appendix 2thereto, and the provisions of paragraphs 3.13 through 3.18 thereof applicable to QCBS. The short list ofconsultants, estimated to cost less than $200,000 equivalent per contract, may consist entirely of national

consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. To obtainexpressions of interest, each contract estimated to cost US$200,000 equivalent or more shall be advertisedin accordance with the procedures applicable to large contracts under paragraph 2.5 of the Guidelines.

Services of a straightforward nature that can be precisely defined and that are estimated to cost less thanUS$200,000 equivalent per contract may be procured under contracts awarded followingLeast Cost

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Selection procedures in accordance with the provisions of paragraphs 3.1 and 3.5 of the ConsultantGuidelines, up to a maximum aggregate amount ofUS$7,500,000 equivalent. The short list of consultantsmay consist entirely of national consultants in accordance with the provisions of paragraph 2.7 of theConsultant Guidelines.

Services for tasks that meet the requirements set forth in paragraph 5.1 of the Consultant Guidelines shallbe procured under contracts awarded to individual consultants in accordance with the provisions ofparagraphs 5.1 through 5.3 of the Consultant Guidelines up to a maximum aggregate amount ofUS$18,000,000 equivalent.

Emergency recovery activities

Procurement of goods and works for emergency recovery activitiesmay be carried out through directcontracting of a supplier that has aprevious contract in force which had been awarded in accordance withprocedures acceptable to the Bank and extended forthe additional goods and works of similar naturerequired by the emergency in question In the cases where this possibility is not feasible, contracts forgoods costing more than US$500,000 equivalent; and works costing more than US$1,000, 000 shall beprocured by local shopping based on comparing prices obtained from at least three suppliers located in atleast two states. Contracts below these thresholds may be procured by direct contacting.

Consultant Services for design and supervision of emergency recovery works may be selected on a solesource basis.

The aggregate amount of the loan available for emergency recovery goods, works and consulting serviceswill be US$200,000,000

Tables A and B, respectively present project cost by procurement arrangements and the threshold contractvalue for the use of each procurement method .

Prior review

Emergency reconstruction activities

All civil works contracts estimated to cost US$3.0 million equivalent or more, ontracts for goodsestimated to cost US$500,000 equivalent or moreshall be subject to prior review by the Bank inaccordance with the procedures set forth in paragraph 2 and 3 of the Appendix to the Guidelines. Inaddition, the first two contracts in each state let by shopping procedures shall be subject to prior review bythe Bank.

Contracts for individual consultants estimated to cost US$50,000 equivalent or more, and consultantservices provided by a firm with an estimated to cost of US$100,000 equivalents or more shall be subjectto prior review by the Bank following the provisions set forth in paragraphs 1 and 2 of the Appendix 1 ofthe Consultant Guidelines. In addition, all terms of reference for prevention studies and capacity buildingactivities shall be subject to prior review by the Bank.

Emergency recovery activities

For emergency recovery activities, prior review by the Bank will be required for all ICB contracts forgoods and civil works, and for consultants contracts over US$200,000 procured through LCS.

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Post review and procurement audits

With respect to each contract not subject to prior review, complete records shall be maintained byBANOBRAS for purposes of post-review and/or audit. Post-reviews of contracts may be carried out at anytime during project supervision. In the present case, it is recommended that post review be carried outfollowing each major disaster .

A justification for the use of direct contracting in emergency activities, clearly establishing a causalrelationship between the specific emergency and the contract would be required and would be maintainedon file. By the end of every quarter a copy of those justifications should be sent to the Bank. The projectwill include annual procurement audits of selected contracts, particularly those awarded on a sole sourcebasis as a result of any specific emergency.

Procurement methods (Table A)

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

ProcummnentMt.pnditur Cateory ic Totat Cost

1. Works 100.00 50.20 150.00 0.00 300.20(50.00) (25.00) (75.00) (0.00) (150.00)

2. Goods 150.10 27.00 100.00 0.00 277.10(94.00) (17.00) (63.00) (0.00) (174.00)

3. Services 0.00 0.00 77.00 0.00 77.00(0.00) (0.00) (77.00) (0.00) (77.00)

4. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

5. Front-end fee 0.00 0.00 4.05 0.00 4.05(0.00) (0.00) (4.05) (0.00) (4.05)

Total 250.10 77.20 331.05 0.00 658.35(144.00) (42.00) (219.05) (0.00) (405.05)

Figures in parenthesis are the amounts to be financed by the Bank Loan. All costs include contingencies

vIncludes civil works and goods to be procured through national shopping, consudting services, services ofcontracted staff of the project management office, training, technical assistance services.

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Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

A. Firms 14.00 0.00 0.00 20.00 0.00 25.00 0.00 59.00

(14.00) (0.00) (0.00) (20.00) (0.00) (25.00) (0. 00) (59.00)

B. Individuals 0.00 0.00 0.00 0.00 15.00 3.00 0.00 18.00

(0.00) (0.00) (0.00) (0.00) (15.00) (3.00) (0.00) (18.00)Total 14.00 0.00 0.00 20.00 15.00 28.00 0.00 77.00

_ (14.00) (0.00) (0.00) (20.00) (15.00) (28.00) (0.00) (77.00)

1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of Consultants Guidelines),Commercial Practices, etc., and Sole Source

N.B.F. = Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank Loan.

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Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior Review'

-Contract Value Contwc upt $.biec toThrestold Procuremen-t pr-or-- e w

Expe-ndire Categoy (Us$ A Method1. WorksEmergency recovery Existing contract Extension in scope None

<1,000,000 Direct Contracting None

>1,000,000 Shopping at least 3 Nonecontractors in at least 2 Only post review

states>10,000,000 ICB All

Emergency reconstruction >10,000,000 ICB All

<10,000,000 NCB Above 3,000,000

<500,000 Shopping at least 3 First two contracts per statecontractors in at least 2

states

2. GoodsEmergency recovery Existing contract Extension in scope None

<500,000 Direct contracting None

>500,000 Shopping at least 3 Nonecontractors in at least 2

states

>1,000,000 ICB All

Emergency reconstruction>500,000 ICB All

<500,000 NCB None

<100,000 Shopping at least 3 First 2 contracts per statecontractors in at least 2

states

- 41 -

3. ServicesEmergency recovery Anv amount SSS None

Firms and individuals <200,000 LCS Nonel

Emergencyreconstruction

Firms >100,000 QCBS All<100,000 QCBS-LCS TORs

Individuals >50,000 All<50,000 _ TORs

4. Miscellaneous5. Miscellaneous6. Miscellaneous

Total value of contracts subject to prior review: Approximately

US$187 million.

Overall Procurement Risk Assessment

High

Frequency of procurement supervision missions proposed: One every 6 months (includes specialprocurement supervision for post-review/audits)or following a disaster.

Thresholds generally differ by country and project. Consult OD 11.04 "Review of ProcurementDocumentation" and contact the Regional Procurement Adviser for guidance.

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Disbursement

Allocation of loan proceeds (Table C)

Table C: Allocation of Loan Proceeds

Expen-itureCategoy Amount in h--. Financing Prct Fg =Emergency recovery goods 78.00 85Emergency recovery works 83.00 60Emergency recovery services 15.00 100Emergency reconstructon goods 67.00 85Emergency reconstruction works 73.00 60Emergency reconstruction services 15.00 100Prevention and capacity building goods 60.00 85Prevention and capacity building 9.00 100services

Total Project Costs 400.00

Front-end fee 4.05

Total 404.05

Numbers in table are rounded

Use of statements of expenditures (SOEs):

During the project's initial stage traditional disbursement procedures (predominantly SOEs) will be used asthe basis for Bank loan disbursements. Withdrawal applications wuld be prepared by BANOBRAS basedupon information furnished by the federal implementing agencies and theFMEs. The SOE threshold willbe consistent with the prior review limits for procurement, and the federal implementing agencies andFMEs will retain supporting documentation (on procurement, contracts, invoices, payments, and the like),which will be subject to audit by independent external auditors acceptable to the Bank. The annual audit ofthe project accounts maintained by BANOBRAS will include a review of SOEs in accordance with Bankprocedures and guidelines, and the Technical Memorandum of Understanding (MET) agreed between theBank and SECODAM in 2000. When the procedures for the flow of information from the implementingagencies and the FMEs, and the budgeting and accounting systems are functioning effectively, theBorrower may choose to switch to project management report-based (PMR) disbursements, consistent withthe Bank's Financial Management Initiative (FMI). Disbursements will then be based on quarterly projectreports (PMRs), which will consist of financial statements (sources and uses of funds by project categoryand activity, expenditure forecasts for the following period, estimates of disbursements for the currentperiod, and a reconciliation of the Special Account), a report on physical project implementation, and areport on bidding, contract award, and acquisitions under the project. The FMI system will operate inaccordance with the "Project Financial Management Manual," dated February 1999 and the "LACIImplementation Handbook," dated September 1998, both published by the World Bank.

Special account:Payments from the loan proceeds will be administered by BANOBRAS from a Special Account, which willbe maintained in US dollars in the Central Bank (Banco de Mexico). BANOBRAS will use data submittedby executing agencies to prepare statements of expenditures (SOEs) and related loan withdrawal requestsfor submission to the Bank. It will authorize disbursements from the Special Account to reimburse eligibleexpenditures incurred or to make direct payments to suppliers for such expenditures.

- 43 -

The authorized allocation, sufficient for financing four months of eligible expenditures will be US$27.0million.

Retroactive Financing. The Bank will provide retroactive financing for 20 percent of the loan amount(US$80 million) for eligible expenditures for goods, works and services incurred within one year prior tothe date of loan signing. The justification for this amount of retroactive financing is thatlespiteextraordinary expenditures by FONDEN for disasters which occurred in the second semester of 1999, theGovemment of Mexico did not request restructuring of ongoing Bank operations, since it assumed thatfinancing for disasters would have become available by end-1999 under this project. However, this wasnot the case, owing to delays in loan processing. Approval of this retroactive financing amount wasobtained from the LAC RVP and OPR pursuant to Para. 3 of OP 12. 10.

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Annex 7: Project Processing ScheduleMEXICO: Natural Disaster Management Project

Pro7ct SchedulE anned A t aTime taken to prepare the project (months) 4 9First Bank mission (identification) 07/07/99 07/07/99Appraisal mission departure 11/15/99 05/01/2000Negotiations 11/15/99 11/03/2000Planned Date of Effectiveness 09/29/2000 02/01/2001

Prepared by:

Secretaria de Hacienda y Credito Piiblico SHCP)

Preparation assistance:

Japanese Population and Human Resources Development(PHRD) Grant

Bank staff who worked on the project included:

Name SpecialityChristopher J. Barham Senior Operations OfficerHoward Jones Financial Management SpecialistMaria Elena Castro Social ScientistVictor Manuel Ordonez Financial Management SpecialistLea D. Braslavsky Senior Procurement SpecialistMichael Fowler Disbursement OfficerWendy Ayres EconomistKarin Erika Kemper EconomistKen Green Environmental SpecialistFerenc Molnar Senior CounselGustavo Unda EngineerMichael Fowler Disbursement OfficerJeannette Ramirez Operations AnalystSantiago V. Sandoval Language Team AssistantAdrian Demayo Environmental SpecialistRicardo Hernandez Environmental SpecialistEdmundo de Alba Environmental SpecialistAlberto Galan Environmental Specialist

- 45 -

Annex 8: Documents in the Project File*MEXICO: Natural Disaster Management Project

A. Project Implementation Plan

Not applicable

B. Bank Staff Assessments

Project Concept Document and Minutes of the Concept Review Meeting (9/28/99)

Draft Project Appraisal Document and Minutes of the Appraisal Decision Meeting (4/19/00)

Sector work to prepare project: Alcira Kreimer, et.al, 1999, Managing Disaster Risk in Mexico: MarketIncentivesfor Mitigation Investment. Working paperssupporting this study.

PHRD financed studies:* Options for Financing Catastrophic Losses* Methodologies for Risk Mapping* Prevention Policy at the Municipal Level* Economic Analysis of Prevention Projects

C. Other

Identification mission BTOPreparation missions BTOsAppraisal mission BTOProject Information DocumentEnvironmental Data Sheet*Including electronic files

- 46 -

Annex 9: Statement of Loans and CreditsMEXICO: Natural Disaster Management Project

Difference between expectedand actual

Original Amount in US$ Millions disbursementsProject ID FY Borrower Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'd

P048505 1999 Mexico AGRICULTURAL PRODUCT 444.45 0.00 0 00 266 35 -15.70 0 00

P067491 2000 Mexico Bank Restructuring Facility 50506 000 000 150.00 -5.06 0.00P007700 1997 Mexico COMMUNITY FORESTRY 15.00 0.00 0 00 7.81 1.91 0.00

P007610 1999 Mexico FOVI RESTRUCTURING 505.05 0.00 0 00 462 00 242 00 0.00

P007723 1993 Mexico HWY RHB&SAFErY 480.00 0.00 000 10.50 1050 0.00

P007667 1992 Mexico IRRIG SCTR 400.00 0 00 50.00 2.85 5285 2.85P044531 1998 Mexico KNOWLEDGE&INNOV. 300.00 0.00 0.00 253.77 1177 0.00

P007648 1993 Mexico MEDIUMCITIESTRANSP 200.00 0.00 2300 109.01 126.91 9101P066867 2000 Mexico MX DECENTRALIZATION SAL 606.07 0.00 0 00 300 00 300.00 0 00P066938 2000 Mexico MX GENDER (LIL) 3.07 0.00 0.00 307 0.00 000

P007720 1998 Mexico MX HEALTH SYSTEM REFORM - SAL 700.00 0.00 0 00 350 00 350 00 0 00P040199 1998 Mexico MX: BASCEDUC.DEVELOPMENTPHASEl 115.00 000 000 84.00 2918 0.00P007689 1996 Mexico MX BASIC HEALTH II 310 00 0 00 0.00 99.78 61 78 31 78P055061 1998 Mexico MX HEALTH SYSTEM REFORM TA 25 00 0.00 0 00 21.39 15 59 0.00P049895 1998 MexcorV MX HIGHER ED. FINANCING 180.20 0.00 000 165.94 26.00 0.00P007725 1994 Mexico MX PRIMARY EDUC.II 412.00 0.00 40.00 8625 12625 8625

P034490 1995 Mexico MX TECHNICAL EDUCITRAINING 265.00 0.00 30.00 132.13 16213 710P007710 1994 Mexico N. BORDER I ENYiRONM 368.00 000 30099 36.22 31751 43.61P007701 1994 Mexico ON-FARM & MINOR IRRI 200.00 0.00 30 00 53.71 83.71 0 01P007711 1998 Mexico RURAL DEV. MARG AREA 47.00 0.00 000 3594 12.94 000P057530 2000 Mexico RURAL DEV.MARG.ARII 55.00 0.00 0.00 55.00 0 00 0 00P007702 1995 Mexico SECOND DECENTRALZTN 500.00 0.00 0.00 58.28 58 28 58.28P007612 1994 Mexico SOLID WASTEII 200.00 0.00 19306 1.48 -4.46 1.47P007713 1996 Mexico WATER RESOURCES MANA 186.50 0.00 0 00 138.41 59.09 10.62P007707 1994 Mexico WATER/SANIT II 350.00 0.00 84.30 71 42 155.72 000

Total: 7372.40 0.00 751.35 2955 31 2178 90 332.98

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MEXICOSTATEMENT OF IFC's

Held and Disbursed Portfolio3 1-Jul-1999

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic

1988/91/92/93/95 Apasco 14.40 0.00 0.00 57.60 14.40 0.00 0.00 57.601998 Ayvi 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.001990/92/96 BANAMEX 96.21 0.00 0.00 50.83 96.21 0.00 0.00 50.831997 Banco Bilbao MXC 75.52 0.00 30.00 0.00 75.52 0.00 30.00 0.001992 Banorte-SABROZA 3.00 0.00 0.00 0.00 3.00 0.00 0.00 0.001995/96 Baring Mex. FMC 0.00 0.03 0.00 0.00 0.00 0.02 0.00 0.001995/99 Baring Venture 0.00 2.73 0.00 0.00 0.00 0.00 0.00 0.001998 CIMA Mexico 0.00 4.80 0.00 0.00 0.00 4.80 0.00 0.001998 CIMA Puebla 7.00 0.00 0.00 0.00 3.50 0.00 0.00 0.001994 CTAPV 4.01 0.00 2.53 0.00 4.01 0.00 2.53 0.00

0 Chiapas-Propalma 0.00 0.80 0.00 0.00 0.00 0.31 0.00 0.001997 Comercializadora 3.28 0.00 2.34 6.88 3.28 0.00 2.34 6.881990/91 Condumex 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001999 Corsa 13.00 3.00 0.00 0.00 13.00 3.00 0.00 0.001993 Derivados 2.20 0.00 0.00 0.00 2.20 0.00 0.00 0.001997 Fondo Chiapas 0.00 4.20 0.00 0.00 0.00 0.31 0.00 0.001998 Forja Monterrey 13.00 3.00 0.00 13.00 13.00 3.00 0.00 13.001991/96 GIBSA 21.64 0.00 10.00 72.76 21.64 0.00 10.00 72.761993 GIDESA 7.50 8.00 0.00 8.50 7.50 8.00 0.00 8.501996/00 GIRSA 45.00 0.00 0.00 60.00 22.71 0.00 0.00 30.291993 GOTM 0.98 0.00 0.00 0.44 0.98 0.00 0.00 0.441997198 Gen. Hipotecaria 0.00 1.20 0.00 0.00 0.00 0.00 0.00 0.001998 Grupo Calidra 12.00 6.00 0.00 10.00 12.00 6.00 0.00 10.00

Grupo FEMSA 0.00 9.43 0.00 0.00 0.00 9.43 0.00 0.001989 Grupo Minsa 18.00 10.00 0.00 27.00 18.00 10.00 0.00 27.001997 Grupo Posadas 25.00 0.00 10.00 10.00 25.00 0.00 10.00 10.001992/93/95/96/99 Grupo Probursa 0.00 1.32 0.00 0.00 0.00 1.32 0.00 0.001992/96/97/98 Grupo Sanfandila 9.58 0.00 0.00 4.70 6.25 0.00 0.00 3.031998 Heller Financial 0.00 0.32 0.00 0.00 0.00 0.32 0.00 0.001994/96/98/00 Interceramic 8.00 0.00 6.00 3.50 8.00 0.00 6.00 3.501994 InverCap 0.00 1.00 0.00 0.00 0.00 1.00 0.00 0.002000 Masterpak 2.40 0.00 0.00 0.00 2.40 0.00 0.00 0.001993 Merida III 30.00 0.00 0.00 73.95 27.36 0.00 0.00 67.441998 Mexplus Puertos 0.00 1.41 0.00 0.00 0.00 1.41 0.00 0.001995/99 NEMAK 0.00 0.00 0.83 0.00 0.00 0.00 0.83 0.001996/99/00 Petrocel 1.30 0.00 0.60 0.70 1.30 0.00 0.60 0.701990 Punta Langosta 2.63 1.00 0.00 4.55 2.63 1.00 0.00 4.551998 Rio Bravo 50.00 0.00 0.00 59.50 0.00 0.00 0.00 0.002000 Saltillo SA. 35.00 0.00 0.00 43.00 0.00 0.00 0.00 0.002000 Sigma 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001988/94/95 Sudamerica 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.001999 TMA 2.77 0.00 2.10 9.60 2.77 0.00 2.10 9.601997 Toluca Toll Road 7.23 0.00 0.00 0.00 7.23 0.00 0.00 0.001992 Vitro 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001991/92

Total Portfolio: 525.61 98.54 64.40 518.58 408.85 67.85 64.40 378.19

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Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic

1997 Altamira 17800.00 1000.00 0.00 38000.001999 BANAMEX LRF II 50000.00 0.00 0.00 0.001999 Baring BMPEF FMC 0.00 0.00 60.00 0.001998 Cima Hermosillo 7000.00 0.00 0.00 0.002000 Educacion 9700.00 0.00 0.00 0.002000 FCCM 10500.00 0.00 2000.00 17700.002000 Hospital ABC 30000.00 0.00 0.00 14000.002000 ITR 14000.00 0.00 0.00 4000.002000 Innopack 15000.00 0.00 15000.00 0.002000 Teksid Aluminio 25000.00 0.00 0.00 0.002000 Teksid Hierro 15000.00 0.00 0.00 30000.00

Total Pending Commitment: 194000.00 1000.00 17060.00 103700.00

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Annex 10: Country at a GlanceMEXICO: Natural Disaster Management Project

Latin Upper-POVERTY and SOCIAL America middle-

Mexico & Carib. income Development diamond*1998Population, mid-vear (millions) 95.9 502 588 Life expectancyGNP per capita (Atlas method, US$) 3,970 3,940 4,860GNP (Atlas method, USS billions) 380.9 1,978 2,862

Average annual growth, 1992-98 l

Population (%) 1.8 1.6 1.4Labor force I%) 2.6 2.3 2.0 GNP Gross

Most recent estimate (latest year available, 1992-98) per - primarycapita enrollment

Poverty (% of population below national poverty line)Urban Dopulation (% of total poPulation) 74 75 77Life expectancy at birth (years) 72 70 70Infant mortality (per 1,000 live births) 31 32 27Child malnutrition (% of children under 5) 14 8 Access to safe waterAccess to safe water (% of population) 95 75 79Illiteracy (% of population age 15+) 10 13 11Grossprimaryenrollment (%ofschool-agepopulation) 115 113 108 Mexico

Male 116 Upper-middle-income groupFemale 113

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1977 1987 1997 1998Economic ratios*

GDP (US$ billions) 87.4 140.2 401.7 410.3Gross domestic investment/GDP 21.6 19.2 26.0 24.4Exports of goods and services/GDP 8.6 19.5 30 3 312 TradeGross domestic savinqs/GDP 20.6 25.3 26.0 22.4Gross national savings/GDP 18.2 218 24.1 20.6

Current account balance/GDP -2.2 3.0 -1.9 -3.8 DomesticInterest pavments/GDP 1.8 5.5 2.1 2.0 Somesti InvestmentTotal debt/GDP 35.7 78.1 37.3 39.0 SavingsTotal debt service/exports 57.4 40.1 32.4 18.8Present value of debt/GDP . .. 36.0 36.2Present value of debt/exports . .. 110.3 106.0

Indebtedness1977-87 1988-98 1997 1998 1999-03

(average annual growth)GDP 2.2 2.9 6.8 4.8 4.8 -MexicoGNP per capita 0.1 0.5 6.0 2,9 2.9 Upper-middle-income groupExports of qoods and services 9.4 12,3 10.8 9.7 69

STRUCTURE of the ECONOMY1977 1987 1997 1998 Growth rates of output and investment I%)

(% of GDP) 40Aoriculture 10.2 8.6 5.7 5.4Industrv 30.7 35.9 28.5 291 20

Manufacturinq 22.4 25.7 21.4 21.9Services 59.1 55.5 65.8 65.5 .20 99 97 98

Private consumPtion 69.6 65.9 64.1 68.2 -40General aovernment consumption 9.8 8.8 9.9 9.4 GDI * 0 GDPImports of goods and services 9.6 13.4 30.4 33.2

1977-87 1988-98 1997 1998 Growth rates of exports and imports (%)(average annual growth)Aoriculture 2.2 1.6 0.2 0.5 40Industrv 2.7 3.5 9.3 6.6

Manufacturing 2.3 3.9 10.0 7.4 20Services 2.1 2.7 6.4 4.4

Private consumption 2.2 2.5 6.4 6.4 S's 9'7 9aGeneral aovernment consumption 5.2 1.8 2.9 -1.3Gross domestic investment -4.6 4.1 25.0 8.4 20Imports of qoods and services -1.3 12.1 22.8 14.2 Exports a-Imports

Gross national Product 2.6 2.4 7.9 4.7

Note: 1998 data are preliminary estimates.

The diamonds show four key indicators in the countrv (in bold) compared with its income-oroup averaoe. If data are missino, the diamond willbe incomplete.

- 50 -

Mexico

PRICES and GOVERNMENT FINANCE

Domestic prices 1977 1987 1997 1998 Inflation (%)

(X change) 40 -Consumer prices .. 131.8 20.6 15.9 30

Implicit GDP deflator 25.6 137.3 17.7 13.8 20

Govemment finance 10(% of GDP, includes cunrent grants) o Current revenue .. 29.5 23.0 20.6 93 94 95 98 97 95

Current budget balance .. -10.3 3.1 2.3 GDP deflator - e CPIOverall surplus/deficit .. -15.0 -0.7 -1.3

TRADE

(US$ millions) 1977 1987 1997 1998 Export and import levels (USS millions)Total exports (fob) .. 22,093 110,431 117,500 150000

Oil .. 8,630 11,323 7,147Agriculture .. 1,543 3,828 3,954 0 -iManufactures .. 11,344 94,802 105,933 100,0

Total imports (cif) .. 13,305 109,808 125,242Consumer goods .. 768 9,326 11,108 50,0o8

Intermediate goods 9,907 85,366 96,805Capital goods .. 2,631 15,116 17,329

92 93 94 95 98 97 98Export price index (1995=100) ,. 93 101 99Import prce index (1995=100) .. 80 101 103 C Exports * ImportsTerms of trade (1995=100) .. 115 100 96

BALANCE of PAYMENTS

(US$ mriions) 1977 1987 1997 1998 Current account balance to GDP ratio (%)

Exports of goods and services 7,792 27,509 121,701 129,427 0Imports of goods and services 7,665 18,387 121,608 137,729Resource balance 127 9,121 94 -8,302 -2

Net income -2,151 -6,801 -12,790 -13,497Net currenttransfers 88 1,919 5,247 6,012 -4

Current account balance -1,936 4,239 -7,448 -15,786 -

Financing items (net) 2,558 1,861 17,942 17,923Changes in net reserves -622 -6,100 -10,494 -2,137 -8

Memo:Reserves including gold (US$ milions) .. 12,590 28,815 29,032Conversion rate (DEC, locaVUS$) 2.26E-2 1.4 8.8 9 6

EXTERNAL DEBT and RESOURCE FLOWS1977 1987 1997 1998

(US$ mnuilons) Composition of total debt, 1998 (USS millions]Total debt outstanding and disbursed 31,179 109,459 149,690 159,962

IBRD 1,374 7,347 11,356 11,514 G: 28,507 A: 11,514IDA 0 0 0 0

Total debt service 4,715 12,083 42,453 26,294 D 12,863IBRD -152 1,072 2,102 2.027IDA 0 0 0 0

Es 5.475Composition of net resou rce flows

Official grants 9 75 29Official creditors 299 888 -4,563 129Private creditors 4,407 2,891 6,003 3,943Foreign direct investment 556 3,246 12,478 10,238Portfolio equity 0 0 3,215 -666

World Bank program FS 93,573Commitments 162 1,695 530 2,212 A - IBRD E - BilateralDisbursements 202 983 995 1,986 B - IDA D - Other muiilateral F - PrivatePrincipal repayments 50 567 1,311 1,257 C - IMF G - Short-termNet flows 152 416 -316 729Interest payments 102 505 791 769Net transfers 50 -89 -1,107 41

Development Economics 9/3/99

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AdditionalAnnex No.: 11

MEXICO: NATURAL DISASTER MANAGEMENT PROJECT

Environmental Management Plan

Introduction

1. The Mexico Natural Disaster Management Project will provide resources for post-disasteremergency recovery and reconstruction financed by FONDEN and executed either through SCT, CNA,SEMARNAP, SEDESOL, SAGAR, SEP and SS orfideicomisos mixtos estatales (FMEs). To be eligiblefor Bank-financing, works must be initiated within 15 days prior to and 180 days following the declarationof emergency by the Secretary of Interior (SEGOB). Exceptions to this 180 day limit may be agreed by theBank on a case-by-case basis when the nature of the disaster prevents initiation of on-site works after thedisaster is declared, such as in the case of non-receding flood waters. The project will also finance policyand institutional reforms and equipment aimed at reducing vulnerability of infrastructure and communitiesto natural events, and capacity building activities to strengthen the capacities of environmental and sectoralimplementing agencies to manage environmental issues.

2. Because the emergency recovery and reconstruction subprojects that the project will finance will bedefined and carried out after an emergency has occurred, such subprojects are deemed analogous toemergency recovery projects under Bank OP 8.50 for environmental purposes (see OP 4.01. para. 13).

3. For purposes of environmental assessment (EA), the project is classified as category B because noeligible subprojects are expected to have significant adverse environmental impacts. All studies andcapacity building activities will be environmental assessment category C.

4. This environmental management plan (EMP) was prepared on the basis of a review of Mexicanenvironmental laws and regulations and extensive consultations with federal environmental authorities andthe executing agencies, including initial consultations with local NGOs and executing agencies on proposedenvironmental assessment procedures, public consultation measures, and actions to protect culturalproperty under the project. It describes Mexico's environmental regulations and institutional arrangementsfor EA, especially as they apply to emergency recovery and reconstruction subprojects not normally subjectto prior review by the Bank; assesses institutional capacity to carry out EA; and provides a negative list ofsubprojects that the project will not finance and a positive list of subprojects that it can. This EMP alsooutlines proposed EA arrangements for each type of subproject financed by the project, describes howcultural property will be treated and how public consultation will occur, sets out the procedures forreporting and Bank supervision and monitoring, and outlines contemplated capacity development activities.

Mexican environmental law

5. The Mexican Environmental Law (hey General del Equilibrio Ecologico y la Protecci6n alAmbiente or LGEEPA) was enacted in 1988 and last modified in 1996. It requires an executing agency orresponsible party (federal entity, state or municipal government, or contractor) to obtain an environmentalpermit. This permit may require the responsible party to submit an environmental imnpact assessmentreport to the National Ecology Institute (INE) for works and activities that fall under federal jurisdiction

- 52 -

and that may have negative environmental impacts. The law provides for environmental assessmentprocedures which vary by type of works and their environmental impacts. A full environmental impactassessment "rmanifestaci6n de impacto ambiental" (MIA) is required for activities with the mostsignificant environmental impacts. A preventive report (nforme preventivo) is required for activitiescarried out within an urban development or ecological zoning plan or as part of an approved developmentprogram, and for activities located in approved industrial parks or for which environmental standards exist.For other activities, such as those implemented following natural disasters, notification to SEMARNAP isrequired (article 8 of the regulations).

6. The federal environmental law sets minimum standards that state or municipal governments mustadhere to. The federal law therefore establishes minimum standards for environmental compliance inMexico. Moreover, even when regulated activities do not fall explicitly under federal jurisdiction,SEMARNAP may issue a recommendation for environmental management to the relevant state ormunicipal authority (federal law article 5, paragraph XVIII). Thus, all levels of govemment in Mexicomust apply minimum standards of environmental management.

7. In emergencies, when speed of response is critical, Mexican law permits executing agencies toinitiate works without prior consultation with environmental authorities. However, within three days ofinitiating works, executing agencies are required to inform SEMARNAP that works have started, andwithin twenty days of initiating works they must provide SEMARNAP with a descriptive report on thetypes of works and associated mitigation and compensation measures that will be undertaken (article 7 and8 of regulations).

Mexican environmental regulations and sectoral guidelines

8. Mexico issued new environmental regulations in May 2000 reflecting experiences gained throughenvironmental impact assessments. The new regulations give greater emphasis to the sound management ofnatural resources (for example, forests, wild lands and arid zones), refine the types of environmentalimpacts to be taken into account (for example, significant, synergetic, cumulative and residual risks),provide for the issuance of sectoral guidelines, provide more mechanisms for public consultation, citizenparticipation and complaint, introduce new measures to ensure compliance with environmental regulations(for example, liability insurance), simplify environmental assessment procedures, and include specificguidance on environmental permitting requirements in emergency situations.

9. In accordance with the new environmental regulations, eleven sectoral guidelines for environmentalassessment have been released for public comment and are expccted to be enacted soor(referencewww.ine.gob.mxldgoeia/impacto/guias.html). They provide details on information required forinformepreventivos and MIAs, including data requirements, applicable regulations, types of impacts to beconsidered and the like. Once they are^enacted, the guidelines should help improve the quality ofenvironmental impact assessments. The eleven guidelines cover the following sectors:

* Energy (electricity generation, transmission and transportation):Hydro, thermo and geoelectricWind and nuclear energySubstations and transmission lines

* Fishing and aquaculture:Seeding and repopulation of water bodiesProduction units at water bodies

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Farms, labs and seed production centers

* Water works:Treatment, potable water, and desalting plantsWater infrastructure

* Tourism:Hotels, condominiums, marinas, decksBeach restoration, ecotourismMaritime and river worksRestaurants and the likeWildlife exhibition centers, golf courses

* Agriculture and cattle raising:All crops and cattle raising activities that will result in land use change of forest soilCattle raising infrastructure

* Industry:Production infrastructureRisk activities and installationsAccess infrastructure

* Petroleum:Marine infrastructure and activitiesLand infrastructure and seismological activitiesDucts, warehouses, refining, petrochemical and other related industrial plants

* Forestry:Access roadsProduction, warehouses, sanitawy installations and carnpsWater treatment plants

* Mining:Infrastructure, residue deposits, complementary works, leaching areasExplosive storageSurface mining

* Roads and other communication infrastructure:Roads and motorwaysRail and ports infrastructureAirports and heliports

* Hazardous waste:Infrastructure constructionReception and transfer centersStorage of explosives

Provision for protected areas under Mexican law

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10. Works carried out in federal protected areas require SEMARNAP's prior review regardingenvironmental impacts and authorization to proceed. Management plans are one of the principalinstruments for managing works in these areas. Presently 21 out of 127 federal protected areas havemanagement plans. In protected areas where management plans exist, federal environmental proceduresrequire preparation of informes preventvos before works can be undertaken. Activities-that are exemptfrom environmental assessment requirements include production for one's own consumption and domesticuse by settled communities, and activities necessary for conservation, maintenance and enforcement.(article 5 S, regulations).

Provisions for cultural property

11. Mexico has a rich cultural heritage and archeological, artistic and historic sites are distributedwidely throughout the country. Natural disasters and subsequent reconstruction work may thereforeuncover buried cultural property, requiring the use of "chance find" procedures to ensure thatlualifiedpersonnel make decisions on the management of sites and materials. Natural disasters may also damagecultural property (separate earthquakes striking Oaxaca and Puebla in 1999 damaged importantarcheological sites and colonial buildings), which requires properly planned and supervised stabilization orrestoration measures.

12. Cultural property is highly valued in Mexico, and protected by national law, institutions andpractices. The federal law on archeological, artistic and historic monuments and sites definesarcheological, artistic and historic property (articles 27 and 28) and specifies the authority andresponsibilities of cultural heritage agencies when sites or materials of cultural significance are discoveredduring construction.

13 The law grants responsibility to the National Institute of Anthropology and History (INAH) forarcheological and historic property, and to the National Council of Fine Arts and Culture and the NationalInstitute of Fine Arts and Literature for artistic property. INAH and the National Institute of Fine Arts andLiterature both fall under the Ministry of Public Education. INAH has offices in every state, and has over400 researchers devoted to rescue activities.

14. The law requires any party finding cultural property to report the discovery to a local civilauthority, which in tum must report the find to INAH within 24 hours. The law further establishes INAHas the sole entity authorized to excavate and research discoveries of cultural property (article 30), andempowers INAH to suspend any works or activities carried out by unnauthorized persons (article 32).INAH may also impose fines and even cause violators to be placed in preventive detention. Mexico'sexisting legal and regulatory framework is therefore consistent with the Bank's guidance on culturalheritage.

15. The project will support FONDEN's programs to restore cultural property damaged by naturaldisasters. Moreover, SEMARNAP would be encouraged to help strengthen the synergies betweenmeasures to protect the environment and those to protect cultural heritage by incorporating Mexican lawand regulations covering cultural property in the guidelines that it will develop for handling environmentalissues during emergencies (paragraph 48).

Public consultation

16. The environmental law is based on the assumption that the federal government will shareresponsibility with civil society in the planning, execution, evaluation and enforcement of environmental

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and natural resource policies. The new regulations for environmental assessment emphasize the law'sprovisions related to public participation and the right to information. They require that a list of all permitrequests be published and that INE's analysis of MIAs be made publicly available. The law also givesrights to any member of the public to request public consultations on projects for which aMIA is submittedto SEMARNAP.

17. Once a project's sponsor submits an environmental impact assessment (nforme preventivo ormanifestaci6n de impacto ambiental) and all the required information to INE, a notification of the action ispublished in the official ecological newsletter (kaceta Ecol6gica, article 31 of the environmental law andarticle 37 of the regulations).

18. The project's sponsor submits a copy of the MIA to INE for public consultation, containing all theinformation originally included in the report, plus any additional information requested by INE. Theproject's sponsor must disclose all information that is not protected by intellectual or commercial rights.

19. Any member of the public may obtain a copy of the MIA. If INE or another interested partyregards information excluded from the report as relevant for public consultation, INE will ask the sponsorto justify its claim regarding intellectual or commercial rights or else to include the information in the copyof the report. INE has established an information center where people can obtain information on theenvironmental aspects of projects, in accordance with article 5, paragraph XVII of the environmental law.Any person or entity who believes that the works or activities underway, covered by a MIA, exceed thelimits or conditions allowed for under the law or the environmental technical norms (ormas t&nicasecol6gicas) is entitled to ask for a public consultation,

20. INE will evaluate the environmental impact assessment and will respond in no more than 30working days. In the meantime, INE can demand the suspension or closure of the activities or works whenthere is a risk of environmental damage or risk to public health. However, public consultation is at INE'sdiscretion, and therefore is not mandatory for all investments.

Institutional arrangements and capacity to implement environmental protection procedures

21. SEMARNAP consists of a series of subministries (such as Planning, Natural Resources andFisheries) and a series of autonomous agencies (such as INE, PROFEPA, CNA, the National FisheriesInstitute and the Mexican Institute of Water Technology). For environmental impact assessments,SEMARNAP evaluates environmental impacts of proposed activities; issues authorizations; formulates,publishes and disseminates guidelines for the presentation of the diverse environmental assessmentdocuments required by the regulations; conducts public consultations and hearings as required; andsupervises and enforces the regulations and corresponding resolutions. SEMARNAP has over 30,000staff, sixty percent of whom are based-in state delegations.

22. INE is responsible for reviewing environmental impact assessments and issuing permits foractivities falling under federal jurisdiction. INE is an autonomous agency attached to SEMARNAP. It hasabout 1,500 staff, of which about 200 are assigned to state delegations. Many of these staff areuniversity-trained professionals. INE formulates, publishes and disseminates guidelines for thepresentation of various environmental assessment documents. INE has analyzedinformes preventivos andmanifestaciones for 6,978 projects between 1990 and April 2000. About 96 percent of them werepreventive reports and environmental impact assessments of the then "general" type. About 73 percentwere approved, but only I percent without conditions. All the "specific" MIA's were conditioned by thepermit process, and 83 percent were rejected in the first instance. During 1999, INE subjected about 1,050

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projects to enviromnental assessment. By June 2000 INE had subjected 700 new projects to environmentalassessment. Many of the projects were in forestry, roads, communications and water works, sectors oftenaffected by natural disasters.

23. PROFEPA is responsible for overseeing and enforcing Mexican environmental law and itsregulations. PROFEPA has about 3,100 staff, of which about 1,500 are based in its state delegations.Through its state offices it carries out site inspections and penalizes the project sponsors in accordance withthe law. The percentage of serious violations that were sanctioned declined from 26 percent in 1992 (whenPROFEPA was established), to 2.1 percent in 1995 and to 1.6 percent in 1998. This may be interpreted asevidence of increasing compliance with environmental regulations in Mexico.

24. SEMARNAP, [NE and PROFEPA have central offices in Mexico City as well as state leveloffices. During the past few years, as part of the decentralization process, government has been delegatingincreasing responsibilities to state offices, which are developing capacity to carry them out. Recently, itwas decided to decentralize all activities related to environmental impact assessments to regional offices,while retaining regulatory functions in the central office. Many professional staff will move from thecentral to regional offices in correspondence with the shift in responsibilities. A training workshop todisseminate the new environmental regulations and sectoral guidelines was recently held for regional stafffrom SEMARNAP and state and local government officials from 20 states. Funding for five additionaltraining programs (with 100 participants each) has been included in the 2001 budget.

25. SEMARNAP has adequate capacity to ensure that executing agencies comply with Mexico'sfederal environmental laws and regulations. It has many years of experience and a large professional staffworking in diverse aspects of environmental management. Reinforcing this view, an ongoing Bank OEDstudy finds that SEMARNAP's environmental review and enforcement process is generally operatingsatisfactorily (its agencies have benefited from considerable Bank technical assistance through the MexicoEnvironmental Management Project, Northern Border Environment Project, and Water ResourcesManagement Project). The study points out that the Bank's annual reviews of Mexican environmentalassessment have found a steady increase in their quality and effectiveness.

Capacity assessment of implementing agencies for environmental management

26. The types of works most likely to be damaged in natural disasters include roads and bridges, waterworks, community infrastructure, and farm infrastructure. During project preparation, the Task Teamassessed the capacity and historical record of the various federal implementing agencies likely to beinvolved with reconstructing works (directly or subcontracted) damaged through a natural disaster.

27. For SCT, works typically include repair of roads and repair and replacement of bridges followingoriginal alignments. Generally, SCT incorporated improved design standards in the new works to improvetheir safety (for example, for road drainage and bridges). For CNA, works typically involved restoringpotable water services, repairing sewage disposal facilities, and repairing and improving flood controlinfrastructure and canals. In general, SEDESOL coordinates and finances housing reconstruction, ratherthan constructing housing itself. Typically, it finances self-construction housing kits, or arranges forconstruction of housing estates in collaboration with state and municipal authorities. SEDESOL's primaryrole is to identify beneficiaries and ensure their participation in all pertinent decisions, and to assure thatnew housing sites are suitable and safe. SAGAR, working through FIRCO and local authorities, focuseson developing small watering points and other nonfarm infrastructure to combat effects of drought, frostand floods. SAGAR also informs farmers and promotes the use of species that are resistant to adverseweather conditions. SEMARNAP focuses on sustainable natural resource management. In collaboration

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with other federal, state and local entities, it acts to prevent and fight forest fires. It also helps restoreforests and protected areas that have been damaged by natural disasters, removing debris, planting treesand taking other restorative measures. SEP oversees and finances the repair and reconstruction of publiceducational institutions by local authorities, with the intention of restoring the quality of educationalservices. Through the National Institute of Anthropology and History (INAH) and the National Institute ofFine Arts and Literature (INBA), it also finances repair and reconstruction of cultural monuments. Finally,SSA, which does not execute works itself, contracts and oversees reconstruction of health infrastructure,including clinics and public hospitals. It also monitors the state of public health in stricken areas.

28. Clearly, the complexity of the environmental issues to be addressed varies greatly. Thus, CNA andSCT generally deal with more complex environmental issues than the other implementing agencies becausethey deal with larger and more complex structures. In fact, the environmental management capacity of thevarious agencies corresponds closely with their direct environmental responsibilities,and the agencies haveadequate capacity to ensure environmental compliance Both CNA and SCT have dedicated environmentalunits (dealing with environmental impacts both under normal and disaster conditions), while other agenciesrely upon more general technical staff or outsourcing for environmental expertise. In all cases, theexecuting agency staff are aware of the requirements of the environmental law and their obligations tocomply with environmental regulations, and have adequate capacity to ensure environmental compliance.They are also keen to receive additional training and information conceming environmental issues related todisaster episodes. Local authorities responsible for disaster management express similar views.

29. The vast majority of reconstruction activities following natural disasters involves restoration ofsmall infrastructure at its original site, which cause minor environmental impacts and are not controversial(similar to environmental category C). Occasionally, it is decided to expand capacity (for example, watertreatment), relocate infrastructure (either to improve its resilience or to provide community services such ashouses, schools and clinics), or undertake work in protected areas. These activities may affect theenvironment (similar to category B). The negative list below excludes category A activities for financingunder the project.

Environmental assessment procedures for subprojects financed by the Bank

Negative list

30. The project will not finance any subproject which will be classified as category A under the Bank'sEA policy, or subprojects which are implemented in violation of Mexico's environmental laws andenvironmental impact assessment procedures, or Mexico's laws on treatment of cultural heritage.Specifically, subprojects involving the following activities will be excluded from financing:

* Dam construction, reconstruction, rehabilitation or strengthening.

* Activities affecting natural protected areas recognized by federal, state or municipal governnents (orbuffer zones thereof), other than as required to mitigate damage caused by a natural disaster.

* Land reclamation (such as drainage of wetlands or filling of water bodies to create land).

* Land clearance and leveling (when affecting critical natural habitats and natural land contours, naturalhabitats for this purpose being those water or land areas where most of the original plant and animalspecies are still present), except for clearing of debris resulting from an emergency. (For more detailson critical natural habitats, Bank Operating Policy (OP) 4.04 can be consulted a-Mi-viv.worldbank.org

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* Hazardous waste management and disposal as well as manufacture, transport and use of pesticides andother hazardous and/or toxic materials (except small amounts of solvents, degreasing materials, paints,fuels, and the like used during construction).

* River training (such as realignment, contraction or deepening of an existing river channel, orexcavation of a new river channel).

* Activities involving industrial plants (large-scale) and industrial estates.

* New road construction or major upgrading or realignment of roads ("major" means changing the roadcategory, such as from seasonal to all-weather or secondary to primary; adding new lanes; or changingroad surface).

* New irrigation, drainage and flood control works.

* (a) Activities which, when being carried out, will affect, or involve the use of, water of rivers or ofother bodies of water (or their tributaries) which flow through or are bordered by countries other thanMexico, in such a manner as to in any way adversely change the quality or quantity of water flowing toor bordering said countries; and (b) activities involving the installation or construction of facilitieswhich, when operated after their construction or installation, will affect, or involve the use of, water ofrivers or of other bodies of water (or their tributaries) which flow through or are bordered by countriesother than Mexico, in such a manner as to in any way adversely change the quality or quantity of waterflowing to or bordering said countries (unless such bordering countries have formally expressed inwriting to the Bank and to the Guarantor their no-objection to the activities referred to in (a) or (b)herein).

* Activities relating to forestry production.

* Development of new, or expansion of existing, ports and harbors.

= Aquaculture and mariculture activities.

* River basin development activities.

* Development of new, or expansion of existing, thermal power and hydropower facilities.

Positive list

31. Subprojects for the following activities will be eligible for financing under the project:

* Repair or reconstruction of streets, roads, bridges, ports or harbors damaged by the natural disaster inquestion.

* Re-establishment of telecommunications infrastructure damaged by the natural disaster in question.

* Re-establishment of urban or rural solid waste, water supply and sanitation (including urban drainage)infrastructure damaged by the natural disaster in question.

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* Repair, re-equipment, reconstruction or construction of homes, schools, clinics, hospitals or othercommunity structures following a natural disaster.

* Repair of works of cultural significance damaged by the natural disaster.

* Removal and disposal of debris resulting from the natural disaster in question (but only if such removaland disposal is not an end in itself but constitutes an integral part of an infrastructure repair.reconstruction or re-establishment activity included in the project).

* Restoration of the productive assets, damaged by the natural disaster, of uninsured low-incomeproducers.

* Replacement, with similar species, of vegetation destroyed by the natural disaster.

* Restoration and mitigation activities in response to damage caused by a natural disaster to federal,state, or municipal natural protected areas or their buffer zones.

* Policy and institutional development activities related to reduction of risks arising from natural forcesand institutional capacity development.

Environmental review procedures

32. Because of the need for rapid response following a natural disaster, FONDEN-financedsubprojects initiated within a period extending from 15 days prior to and 180 days following(see para. above) the declaration of an emergency by SEGOB are exempt from the requirements of the Bank's OP4.01 regarding (a) ex-ante environmental screening and Bank prior review, and (b)ex-ante publicconsultation. They are subject to the normal environmental review and public consultation proceduresprescribed by the competent authorities (at federal, state or local levels) under Mexican law.

33. The exemption from Bank prior review cited in paragraph 32 does not apply to subprojects thattake place in protected areas which lack official management plans, or where major works, major re-siting,or significant capacity expansion is contemplated (paragraph 36).

34. All prevention studies and capacity building will be Bank environmental assessment category Cactivities. They are not subject to any special environmental review or reporting requirements.

35. Evidence for the adequate application of these procedures will be required by the Bank throughselected prior review (paragraph 36) andex-post monitoring and supervision (paragraphs 40-44).

Prior review requirements

36. All subprojects meeting the following criteria will be subject to prior review by the Bank:

* Works subprojects costing more than US$3.0 million (US$5.0 million in the case of SCT and CNA,which have dedicated environmental units).

* Activities to mitigate natural disaster damage in a protected area (and buffer zones) included in thefederal, state or municipal system of protected areas for which an official management plan has not

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been issued, unless the activity is specifically exempted from permitting requirements under federalenvironmental regulations.

* Costing more than US$2.0 million, and involving reestablishment or reconstruction of infrastructure ata site different from the site originally occupied by the infrastructure before it was damaged by thenatural disaster in question.

* Costing more than US$ 1.0 million, and involving repair, reestablishment or reconstruction ofinfrastructure in such a way that the resulting infrastructure will have a production output capacitygreater than 10 percent (such as in the case of a water treatment plant, using a measurement of treatedwater volume per unit of time), and/or a service capacity greater than 10) percent (such as in the case ofa school or clinic, using as measurement the number of classrooms or beds) than the originalinfrastructure.

Reporting

37. On a monthly basis BANOBRAS will inform SEMARNAP and competent state environmentalauthorities of all FONDEN-financed activities supported by the loan for which contracts have beenawarded.

38. SEMARNAP will disclose through its electronic media the environmental information forFONDEN-financed activities drawn from the "under 20 day after work initiation" reports and such otherrelevant environmental reports filed by executing agencies in compliance with environmental regulations.

39. SEMARNAP will produce and give the Bank through BANOBRAS an annual report while theproject is under implementation, showing as a minimum on a state and national basis: (a) number ofreconstruction subprojects that were reported under Article 8 of the regulations; with sectoral breakdown,(b) number of subprojects for which aninforme preventivo was prepared or aMAA was carried out, with abreakdown by sector and by the type of study (nforme preventivo, specific or regionalA4A); (c)percentage rejected or withdrawn on environmental grounds with sectoral breakdown; (d) results ofPROFEPA's supervision and control activities, including the number by sector of subprojects visited, andthe degree of compliance (fines, closures, etc.) under existing environmental regulations and standards,including Article 8 of the Reglamento; (e) results from public disclosure, including number and sectoralbreakdown, those with public comments, those subject to public hearings, resulting additionalenvironmental measures, etc. The report will also include information on positive environmental impacts ofthe project, including use of improved construction and other risk avoidance practices, better land use,reforestation and revegetation and similar measures following a disaster to reduce vulnerability to naturalevents. Finally, the report will evaluate the extent to which emergencies in Mexico are precipitated orexacerbated by inappropriate environmental practices and propose remediation measures to be undertaken.

Monitoring and supervision'

40. As a continuation to pre-Board consultations with interested and affected parties, a workshop willreview this EMP with executing agencies and other stakeholders. These will include representatives fromthe executing agencies, the various statefideicomrisos, and local NGOs. This EMP will also be placed inSpanish on the Bank's Mexico Website.

41. Two routine supervision missions will be planned each year, in the spring and fall. Each missionwill focus on (a) FONDEN performance, (b) INE and PROFEPA performance in applying the

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environmental assessment procedures, (c) executing agencies' performance in addressing environmentalissues in design and implementation of subprojects, (d) progress with prevention and capacity buildingactivities; (e) procurement and financial management issues; and (f) environmental and social impacts ofsubprojects, both individually and cumulatively, and the adequacy of safeguard procedures agreed for theproject. Mission members will be drawn from Mexican or Washington-based Bank staff or consultantswith appropriate skills. Since the Mexico field office has procurement and financial managementspecialists on its staff, these issues will be dealt with on an ongoing basis, leaving only special issues to beaddressed during supervision missions. Specialists will visitselected sites of subprojects to assess theenvironmental and social impacts of subprojects and the adequacy of safeguard procedures agreed for theproject. They will also evaluate the extent to which the emergency was precipitated or exacerbated byinappropriate environmental practices and propose remediation measures to be included in the project.

42. Climatological disasters normally occur seasonally, with floods and hurricanes occurring duringJuly-December. and droughts and forest fires occurring during January-June. Therefore, the skill mix ofenvironmental field staff will vary depending on the season. The fall supervision mission will focus onresponse to fires and droughts, and general institutional performance in applying this EMP under theproject. The spring mission will focus on response to floods and hurricanes, and budgetary issues for theforthcoming Mexican fiscal year. Effects of episodic geological events (major earthquake or volcaniceruption) will be reviewed in the field as needed.

43. The midterm review will consider especially (a) any changes which should be introduced into theproject's EMP or resettlement framework to better mitigate emergencies arising from inappropriateenvironmental practices and apply the Bank's safeguard policies during project execution, (b) ways tomodify the EMP's prior review triggers to reflect the magnitude of the anticipated environmental and socialimpacts from the proposed interventions, rather than to reflect size alone; and (c) the adequacy of theeligibility period used to define expenditures to be in included under the project (paragraph 1).

44. The implementation completion report will, among other aspects, evaluate the effectiveness ofexecuting agencies in addressing environmental and social issues, and draw lessons for improvements indesign and implementation of similar projects. It will also include an analysis of the adequacy of theinstruments used to apply Bank safeguard policies during project execution.

Capacity development

45. While SEMARNAP and its agencies have adequate staff and capacity, continuing efforts will beneeded to build the environmental assessment review and enforcement capacity of the state offices of INEand PROFEPA, to ensure they can carry out their new responsibilities. SEMARNAP's senior managementhas named natural disaster prevention and mitigation a high priority for the Ministry, and has committed toprovide up to US$1.5 million per year of additional resources to meet this objective and ensure thatBank-financed subprojects are implemented in compliance with Mexican environmental law and itsregulations. It will obtain these resources either by reallocating SEMARNAP resources or from SHCP aspart of its budgets for 2001 and subsequent years. Moreover, SEMARNAP has expressed interest inbenefiting from the capacity building component of the project. It has already requested assistance todevelop risk maps showing areas of forest fire risk. It has also indicated a need for additional computerequipment for use by its environmental assessment staff in state offices, and field equipment for use by itsforestry and fisheries inspectorates. It is expected that SEMARNAP will define other needs to deal withthe special environmental issues associated with disaster management, especially with risk mapping.Mapping initiatives will be facilitated by ongoing actions to conform SEDESOL's land use zoning programwith SEMARNAP's ecological zoning program, thereby providing a better basis for environmental

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assessment and siting decisions for structures.

46. The possibility of developing a special guide outlining procedures for handling environmental andsocial issues arising from natural disasters and defining works to be subject to hazard and impactassessment and related procedures is under consideration. This guide will also specify procedures to befollowed for "chance find" cultural property. Training courses associated with this guide will include theagencies that participate at the technical committees of the variou§fideicomisos that manage FONDENresources in all states of the country.

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APPENDIX I

Table 1: Environmental screening: Objectives and actions

p Design phase review Implementation phase monitoring

Objective: Objective:Ensure that the project will not have negative Ensure that the conditions of environmentalenvironmental impacts permit are met by the executing agency

What will be done? What will be done?- Review environmental impacts submissions - Monitor implementation of permit conditions,- Identify mitigation measures, if any, to be including mitigation measures, duringundertaken during construction subproject execution- Issue environmental permit with or withoutconditions, or reject submission

Who is responsible?INE staff in state and central offices Who is responsible?

PROFEPA

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APPENDIX 2

Table 1. Public complaints processed by PROFEPA during 1999.-

Affected resource Total complaints Percent

Forest 1559 29

Air 948 17

Flora 758 14

Fauna 717 13

Water 332 6

Fishing 169 3

Maritime-terrestrial federal Zone 128 2

Ecological ordering 90 2

Enviromnental Impact 87 2

TOTAL 5,425 100

Source: PROFEPA. wNvw.profena.gob.mx/dentncia4.htm

Table 2. PROFEPA's activities for supervision and enforcement of environmental regulations

1995 1996 1997 1998 1999 2000

Environmental impact

Impact verification 389 538 367 687 1.061 628

Projects lacking authorization 180 293 103 18 279 84

Projects with authorization, but 198 250 39 164 201 112

out of standards

Closure due to irregularities 23 21 47 45 32 33

Contingencies

On natural resources 38 50 46 38 55 27

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Anthropogenic 17 23 23 14 15 6

Natural 15 21 10 18 24 15

Undetermined origin 6 6 9 6 16 6

Public Complaints

Received 5,206 6,429 5,565 5,173 5,420 3,234

Attended 3,641 3,203 4,449 3,892 3,280 2,168

In process 1,565 3,226 1,116 1,281 2,140 1,066

1. Estimate to August 31Source: PROFEPA, Presidential Report, September 2000

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AdditionalAnnex No.: 12

MEXICO: NATURAL DISASTER MANAGEMENT PROJECT

Technical Criteria for Selecting Prevention Studies and Capacity-Building Activities

Prevention studies

Prevention studies should contribute to risk identification, risk avoidance or vulnerability reduction for

natural hazard risks addressed by FONDEN.

Risk identification

Risk identification involves:

* Hazard assessment or hazard mapping to estimate the probability that a natural event of an intensity

capable of damaging structures, infrastructure, or productive activities occurs in a given area

* Vulnerability assessment (through technical audits) to estimate the probability of damage when a

natural event of a given intensity occurs* Loss estimation.

Risk reduction

Risk reduction measures aim to reduce the likelihood of physical damage by (a) discouraging or preventingsettlements, infrastructure, and economic activities in areas where natural events of high intensity are

known to occur, (b) requiring structures and infrastructure to be built to standards to withstand natural

forces of particular intensities, and (c) developing improved cultivation or husbandry techniques to reduce

vulnerability. Specifically, they may include:

* Design of early waming systems* Land-use management plans and regulations, and related enforcement mechanisms* Appropriate building standards, and the institutional mechanisms to apply them* Incentive schemes to change individual and institutional behaviors to implement loss reduction

measures* Public education campaigns to inform people of risks, and measures they can take to reduce them

* Sector policies and regulations goveming design, construction, and maintenance of publicinfrastructure to reduce vulnerability

* Better design or siting standards in- new or retrofitted structures* Promotion of improved natural resources management practices to reduce likelihood of erosion and

landslides during a natural event

Capacity-building activities

Capacity-building activities may consist of diagnostic studies, technical assistance programs, and training

aimed at strengthening the capacity of implementing agencies to respond to natural disasters, manage

social, cultural, or environmental issues arising from natural disasters, and use insurance or other risk

transfer instruments. These may cover areas such as the following:

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* Requirements of the Mexican laws on management of environment and treatment of cultural property,and their regulations

* Development of guidelines for environmental screening* Best environmental or social practices in design and implementation of projects* Hazard and vulnerability assessment* Priority setting* Design and programming of prevention investments* Appropriate prevention technical standards* Monitoring and evaluation* Development of insurance or other risk transfer programs

- 68 -

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