World Bank Documentdocuments.worldbank.org/curated/pt/717101468048904178/pdf/mul… · IMTA - Mexican Institute of Water Technology - Instituto Mexicano de Tecnologia del Agua NAFTA

Document of

The World Bank

FOR OFFICIAL USE ONLY

R^eport No. 14611

PROJECT COMPLETION REPORT

MEICO

WATER SUPPLY AND SANITATION SECTOR PROJECT(LOAN 3271-ME)

JUNE 22, 1995

Environment and Urban Development DivisionCountry Department IILatin America and the Caribbean Region

This document has a restricted distTibution and mav be used bv recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Banl; authorization.

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MEXICO


WATER SUPPLY AND SANITATION SECTOR PROJECT

(Loan 3271-ME)

Currency Equivalent

Currency Units= Nuevos Pesos= 100 cents

Average Exchange Rate

1990 US$1 NPMex2 57

1991 US$1 NPMex2.85

1992 US$1 NPMex3.00

1993 US$1 NPMex3 05

FISCAL YEAR

January 1 - December 31


MEXICO



(Loan 3271-ME)

WEIGHTS AND MEASURES

One Hectare (ha) =10,000 square metersMetric Ton (mt) =2,200 poundsMetric Ton (mt) =1,000 kgKilometer (km) =0.6215 milesKilometer (km) =1,000 metersCubic Meter (m3 ) =1,000 liters

Liter =1,000 milliliters

ABBREVIATIONS AND ACRONYMS USED

ANOAPA - National Association for Water Supply Operation AgenciesAsociaci6n Nacional de Organismos Operadores de Agua Potable

APAZU - Program of Water Supply and Sanitation for Urban Areas- Programa de Agua Potable y Alcantarillado de Zonas Urbanas

BANOBRAS - National Bank of Public Works and Services- Banco Nacional de Obras y Servicios Publicos

CETES - Government of Mexico Treasury Bills- Certificados de la Tesoreria de la Naci6n

CNA - National Water Commission- Comisi6n Nacional del Agua

CONAPO - National Population Commnittee- Comite Nacional de Poblaci6n

COPLADES - State Development Planning Committee- Comite de Planeaci6n de Desarrollo Estatal

EAS - Water Utilities Association- Asociacion de Empresas de Agua

IDB - Inter-American Development Bank- Banco Interamericano de Desarrollo

IMTA - Mexican Institute of Water Technology- Instituto Mexicano de Tecnologia del Agua

NAFTA - North American Free Trade Agreement- Tratado de Libre Comercio de Norte America

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

OAs - Operating Agencies- Agencias Operadoras

SARH - Ministry of Agnrculture and Water Resources- Secretaria de Agricultura y Recursos Hidraulicos

SAHOP - Ministry of Human Settlementsand Public Works- Secretaria de Asentamientos Humanos y Obras Publicas

SEAPA - State Water Supply and Sanitation Subcommittee- Subcomite Especial de Agua y Alcantarillado

SEDESOL - Ministry of Social Development- Secretaria de Desarrollo Social

SHCP - Ministry of Finance and Public Credit- Secretaria de Hacienda y Credito Publico

SICREF - Development Credit System- Sistemas de Credito de Fomento

SIAPA - General Information System for the Water and Sanitation Sector- Sistema General de Informaci6n para Agua Potable y Alcantarillado

SPP - Ministry of Planning and Budgeting- Secretaria de Programaci6n y Presupuesto

SWA - State Water Agency- Agencia Estatal de Agua

SWSS - State Water Supply and Sanitation Subcommnittee- Subcomite de Agua Potable y Saneamiento

TA - Technical Assistance- Asistencia Tecnica

WUs Autonomous Water Utilities and Operating AgenciesAgencias Operadoras Aut6nomas de Agua Potable


THE WORLD BANKWashington, D.C. 20433

U.S.A.

Office of Director-GeneralOperations Evaluation

June 22, 1995

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on MexicoWater Supply and Sanitation Sector Project(Loan 3271-ME)

Attached is the Project Completion Report (PCR) for the Mexico - Water Supply and SanitationSector project (Loan 3271-ME, approved in FY91) prepared by the Latin America and the CaribbeanRegional Office (Parts I and 111). Part 11, prepared by the National Bank of Public Works and Services(BANOBRAS) on behalf of the Borrower, presents a divergent, overly positive view of project experience.The loan was closed on December 31, 1993, and the full amount of US$300 million was disbursed.

The project supported by the sixth loan in the sector, focused on assisting the Government of Mexico(GOM) with a major Sector Reorganization Program to be carried out during the 1990-1994 period. Theproject was designed to reduce the subsidies to the sector, strengthen the institutional framework at thenational level, promote the autonomy of companies which operate water and sanitation systems at sub-national levels, serve 3.2 million additional people by the end of 1994 with water supply and sanitationservices, and improve the environment through a pilot water-pollution control program.

Total project costs reached US$1,340 million equivalent, twice the appraisal estimates. The project'sphysical achievements were substantial, as 96 percent of the project resources were used for worksconstruction in some 2,150 sub-projects. Because disbursement was faster than scheduled the project closed18 months ahead of target; disbursement was 98 percent completed before Bank staff discovered that manysub-projects did not meet the agreed selection criteria on rate of return. Progress towards policy andinstitutional objectives was achieved at the national level and many states changed their law to grant moreautonomy to local Operating Agencies. Yet little evidence was presented on the quality of their works andtheir financial and operational capabilities thus leaving project sustainability in question.

With hindsight, a program of this size and type could have benefitted from disbursement in tranches,so that implementation in subsequent tranches would proceed only after compliance with subprojectconditionalities had been demonstrated.

The project outcome is rated as marginally unsatisfactory based on the PCR and the stated detailedobjectives. Its institutional development impact is rated as modest. The sustainability of project benefits israted as uncertain.

The PCR is of satisfactory quality, and provides an adequate discussion of implementation experienceand project achievements.

The project may be audited.

Attachment

This document has a restricted distribution and may be used by recipients only in the performance oftheir officiaL duties. Its contents may not otherwise be discLosed without World Bank authorization.

MEXICO



(Loan 3271-ME)

Table of Contents

Page No.Preface .......................................................... ivEvaluation Summary .......................................................... v

PART I PROJECT REVIEW FROM BANK'S PERSPEC'rwVE

. Project Identity .12. Background .1

Economic Overview .1Sector Overview .2Sector Organization and Legal Aspects .3Sector Strategy .4Bank lending to the Sector .4

3. Project Objectives and Descrption .54. Project Preparation, Design and Appraisal .75. Project Cost and Financing .116. Project Implementation .12

Contracting Staff and Consultants .12Preparation Guidelines for Feasibility Studies .12Government Counterpart Funding .12Project Cost .13Procurement .14Disbursement .14

7. Project Results .14Physical Results .15Sub-projects .15Studies .16Training .16Institutional Results .17Audit Compliance .18

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8. Project Sustainability ...................................... 189. Bank Performance ...................................... 1810. Borrower Performance ...................................... 2111. Project Relationship ...................................... 2312. Consultant Services ...................................... 2313. Project Documentation and Data ...................................... 2314. Lessons Learned ...................................... 24

PART II PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE .. 27-51

PART IH STATISTICAL INFORMATION

ANNEXES

1. Related Bank Loans ...................................... 552. Project Timetable ...................................... 563. Cumulative Estimated and Actual Disbursements ...................................... 574. Project Cost and Financing ....................................... 58

(a) Project Cost and Financing ...................................... 58(b) Project Financing ...................................... 59(c) Loan Allocation by Category ...................................... 60

5. Procurement ...................................... 61(a) Procurement of the Project ....................................... 61(b) Procurement of the Loan ....................................... 62

6. Status of Covenants ...................................... 637. Use of Bank Resources ...................................... 64

(a) Staff Inputs ...................................... 64(b Mission Data ...................................... 64

8. Project Results ...................................... 65(a) Total of Sub-Projects ...................................... 65(b) Studies ...................................... 66(c) Training Activities ...................................... 67(d) Cost of Training Activities ...................................... 68(e) Total Sector Investment ....................................... 69(f) Total Sector Investment by Source of Funds ....................................... 70

i.i

(g) Water Supply and Sanitation Coverage .................................... 71(h) Water Supply and Sanitation Connections .............. ...................... 72

9. Performance Indexes .................................... 7310. Poverty Index .................................... 7411. CNATotal Staff 1989-1993 .................................... 7512. Total Operating Agencies (QAs) .................................... 76

CHARTS

1. BANOBRAS .772. CNA . 78

iv

MEXICO



(Loan 3271-ME)

PREFACE

This is the Project Completion Report (PCR) for the Water Supply and Sanitation Project,financed under Loan 3271-ME for the amount of US$300 million to the National Bank for PublicWorks and Services (Banco Nacional de Obras y Servicios Publicos, BANOBRAS) with the guaranteeof the United Mexican States. The loan was approved on November 29, 1990 and signed on January18, 1991. The Bank declared its effectiveness on June 18, 1991. The loan was closed on December31, 1993, approximately two years ahead of the appraisal estimate. The last disbursement was onMarch 1, 1994.

The PCR was jointly prepared by the World Bank and the Government of Mexico betweenNovember, 1993 and November, 1994. The Environment and Urban Development Division, CountryDepartment II, of the Latin America and Caribbean Regional Office prepared the Preface, theEvaluation Summary, and Parts I and Im. The Borrower prepared Part 11 of the report after reviewingParts I and II.

The report is based principally on the following sources: data obtained during a mission toMexico in November 1993; the Staff Appraisal Report; the Loan and Guarantee Agreements; ProjectSupervision Reports; correspondence between the Bank and the Borrower; interviews with Bank staffand Mexican Govermment officials; and internal Bank memoranda.

v

MEXICO


WATER SUPPLY AND SANITATION PROJECT

(Loan 3271-ME)

EVALUATION SUMMARY

Objectives

1. Loan 3271-ME was the sixth loan to support the development of the water supply andsanitation sector in Mexico and to finance a high priority part of the Mexico's National Water Supplyand Sanitation Investment Plan 1990-1993. The project was designed to improve the quality andquantity of water supply and sanitation services, promote sound pricing policy and improveenvironmental conditions in the country. Specific objectives were to: (a) reduce the amount ofsubsidies to the sector; (b) strengthen the institutional framework at the national level; (c) promote atstate, regional and/or municipal levels the development of companies of sufficient scale to operateeconomically and maintain their water and sanitation systems efficiently and with financial autonomy;(d) provide by the end of 1994 water supply and sanitation services in Mexico to about 24 millionadditional people, most of whom belong to the poorer segment of the population; and (e) improve theenvironment by implementing a pilot water-pollution control program and requiring a comprehensiveenvironmental assessment of each financed sub-project (para. 3. 01).

Implementation Experience

2. The project was approved by the Board on November 29, 1990. The Loan was signed onJanuary 18, 1991, but legal opinions on behalf of the Borrower were provided to the Bank with somedelay, and thus the loan finally became effective on June 18, 1991. Although the project was originallyscheduled to be completed by December 31, 1995, it was actually implemented in only three years, twoyears ahead of the appraisal estimate, and was closed on December 31, 1993 (paras. 6 01-6 02). Thespeed of implementation was due to higher demand for investments than had been expected, with afinal total of 2,122 sub-projects financed (more than had been anticipated in the SAR).

3. The project began with some minor delays during the first year of implementation, becausecontracting staff in the executing agencies and CNA was slower than expected. BANOBRAS andCNA also experienced some similar lags in beginning their institutional development programs.

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Additional delays occurred in updating the guidelines for the preparation of the feasibility studies and inacquiring the required hardware for the implementation of the General Information System for theWater and Sanitation Sector (SIAPA). The Government was slow in providing counterpart funding forthe project in a timely manner, which made BANOBRAS the sole source of financing for the operatingagencies (OAs) and caused delays. This situation improved over the course of the project, ascounterpart funds became available (paa 6. 03).

4. By early 1993, project implementation had progressed faster than forecast in the originalimplementation schedule. The speed of disbursements, however, masked some serious problems.BANOBRAS could not supply the Bank with information necessary to monitor compliance withcovenants in the Loan Agreement relating to specific sub-projects. The Bank could thereforedetermine neither whether each sub-project was following the agreed implementation plan, norwhether it had earned the agreed minimum rate of return (Section 4.02 (c) (iii) of the LoanAgreement). It became apparent that many sub-projects were out of compliance. By the time itdiscovered this situation 98% of the funds had been disbursed, and the Bank could not realisticallystop project implementation. The Bank did, however, call the situation to the attention of theMexican officials, at which point matters began to improve (pacra. 6.05). Inadequate coordinationand rivalries between BANOBRAS and CNA in the earlier stages of the project also affected theproject's implementation (paras. 6.01-6.03).

5. Procurement caused some delays, especially in the preparation of bid documentation. Bothsuppliers and contractors were concemed about lack of confidentiality in the bidding process. Both theGovemment of Mexico and the Bank agreed that this is an area where the agencies need muchimprovement. BANOBRAS prepared and sent a circular with precise instructions to all executingagencies handling procurement, which improved confidentiality conditions. Mexican staff consideredthe Bank's documentation requirements to be excessively burdensome (para. 6.06).

Results

6. The project was very successful in expanding and improNing the quantity and quality of watersupply and sanitation services. A total of about 4.5 million people received water and/or sanitationservices compared to 3.2 million estimated at appraisal. A total cif 2,171 sub-projects (para 7.03) ledto the construction of 43,342 water supply and 32,077 sewerage connections and supportinginfrastructure. Final designs were completed for 147 cities under the PoLution Control Program andsimultaneously the operating water treatment capacity was increased from 15m3/sec to 23m3/sec., andthe inventory of 478 water treatment plants was completed (pa-a. 7.02). Total project cost reachedUS$1,340.0 million, more than twice the original appraisal estimale. Ninety six percent of this financedinvestments (para 7.03). Of the total, US$319.0 million (23.8%) was financed by the Bank (including

vii

US$19.0 million from loan 2666-ME); US$544.7 million by the Federal Government; US$316.0million by the State Governments; US$33.4 million by the Operating Agencies' cash generation; andUS$126.9 million byBANOBRAS.

7. The project only partially achieved its objectives of supporting decentralization in the watersupply and sanitation sector. Although the Government fundamentally changed its policy from one ofcentralized decision-making to one of promoting local ownership and operation, the project onlypartially achieved its objective of creating technically strong beneficiaries. Water losses (average 45%)are still high, despite several studies on ways to improve operations. Some of the works inanced werenot the best solutions to local problems. This was largely because beneficiaries participated to a verylimited degree in sub-project design and decision-making, and therefore did not develop a real sense ofsub-project ownership. Powerful institutions such CNA and SEDESOL hindered full beneficiaryparticipation by promoting certain types of sub-projects and even authorizing sub-projects that werenot in compliance with the eligibility criteria and on-lending conditions. Insufficient Bank supervisionand absence of field visits caused this lack of consultation to go undiscovered and allowedinappropriate projects to go ahead.

8. The project training results were satisfactory both in terms of quality and quantity. A total of5,041 of the operating personnel received training during the three years of project implementation.The original target for the training of about 10,000 operating personnel of 300 state and local operatingagencies had been estimated based on a six-year period of project implementation (Annex 8.C). Thetraining component has been satisfactorily implemented by the water training institute, IMMA, underthe guidance of CNA and in cooperation with the Association of Water Utilities (EAS). IMTA andCNA have designed a National Training Program, which will be implemented in 1994-1997. Sectortraining workshops were organized and materials were designed (pwa 7.06). 1MTA has periodicallyrevised and evaluated all of the materials. More than 200 courses and seminars were conducted in theareas of (i) administration; (ii) commercial activities; (iii) pollution control; and (iv) unaccounted-forwater. Additionally, there were several technical exchanges among water utilities (WUs) and foreignwater utilities. Project experience shows that training is most successful when continuity is assured. Inorder to be consistent with the government's decentralization objectives, training should focus on staffof the WUs, and on CNA staff at the state and regional levels, wvho provide technical support to theWUs. Annex 8C shows the distnbution by agency and by type of seminars and workshop ofparticipation in training courses (Dora 7.06).

9. Institutional achievements ranged from modest to disappointing aras. 7.08 ad 7.09).Achievements of the studies, seminars and workshops were also modest. The objectives ofstrengthening the institutional framework at the national level (developing CNA's capacity to providetechnical support, strengthening BANOBRAS and reinforcing its project preparation capacity) wereonly partially achieved. The project also had very limited success strengthening CNA's capacity to

vii

prepare projects based on least-cost principles. The situation improved toward the end of projectimplementation, based on Bank recommendations. However, inuch remains to be done to extendleast-cost principles throughout the sector.

10. Certain project initiatives were successful. The project instituted unified financing mechanismsfor all sub-borrowers, which improved efficiency of all investments financed by BANOBRAS.Integrated water and sanitation projects, supported by the project, were instrumental in the sector,particularly as a means of combating surface and ground water pollution from domestic waste water.During the course of the project a large number of states improved their laws, which will help theperformance and management of Operating Agencies (OAs) in the future. The principal changes arerelated to: (a) easier tariff approval methods--tariffs will now be approved by the Municipal Councils,thus avoiding delays and political interference from State Congresses; (b) legal rights of the OAs to cutservice due to lack of payment; and (c) more autonomy in setting investment priorities.

Sustainability

11. Physical facilities and equipment that have been incorporated under the project are stillfunctioning properly, and there is no evidence that they will not be sustainable during their full usefullife. The agencies gained experience over the course of the project that helped to rationalizeinvestments, promote water conservation and improve water quality. The limited institutionalorganizational changes and the reduction of the sector's dependence on the Government are bothsustainable, but have not tackled the roots of the problems. The Government has taken a moreeffective role in the management of the water resources and accumulated much more information. Theproject increased awareness on the part of all sector officials of the need for institutional improvements,least cost solutions, and better information management systems, and so formed a strong basis for thefollow-on Second Water Supply and Sanitation Sector Project. In the long run, the situation isexected to improve further, once the sector decentralization process that is currently underwayachieves its fUlll effect.

Lessons Learned

12. The following lessons emerge from the implementation of the project:

(a) The project could have benefited from increased beneficiary participation andownership. Sub-projects would have been better adapted to local needs hadbeneficiaries been involved in their design. Financing and revenue collection wouldhave been more efficient had the beneficiawy been the primary organizer and investor inthe project. The lack of beneficiary involvement in the project reflects the situation atthe time of project design, when decision-making was almost exclusively concentratedat the Federal level. During the course of project implementation, however, the Bank

Lx

did not make sufficient efforts to insist on the participation of beneficiaries in projectdevelopment. This lesson fits with the Bank's worldwide experience, and shouldincorporated in the design of all future projects (paras. 4.05, 4.07. 6.02404 and7.01).

(b) BANOBRAS did not monitor or supervise the project adequately. It did not have aproperly-designed Management Information System nor did it devote adequateresources to supervision. It therefore approved ineligible sub-projects, agreed tophysically and financially unfeasible implementation plans, and continued to fund sub-projects that were not meeting agreed physical targets and not complying with financialand other sub-loan covenants. BANOBRAS's progress reports were inadequate bothin terms of quality and regularity, and contained no data on the financial analysis of theoperating agencies. BANOBRAS was not able to tell when projects were runningseriously over-budget and therefore had to re-finance several sub-projects after theyhad been completed (paras. 6.02-6. 04, 6. 08, 9.05, 10.02 and 10.03).

(c) Inadequate Bank supervision exacerbated both ol these problems. It should not haveaccepted fast disbursements as sufficient indication that the project was moving well.The Bank should have realized the inadequacy of BANOBRAS's supervision effortsand stepped up its own supervision. It would then have discovered that sub-projectswere not in compliance with covenants at a stage when it could have taken action, by,for instance, suspending disbursements. The total lack of financial infornation tendedto force Bank supervision missions into a role of basic fact-finding rather than ofanalysis of results.' Had these issues come to light earlier, the Bank could have insistedon remedial action. Bank supervision did not put sufficient emphasis on beneficiaryparticipation. Increasing supervision focus on visits to the local level would havehelped involve sub-borrowers, fostered a sense of ownership and forced BANOBRASand CNA to address the issue in more detail. Projects with a large number of sub-projects typically require more intensive supervision and greater emphasis on fieldvisits, especially when they involve politically sensitive changes, as in this case. TheBank should have acted upon this knowledge.

(d) The Bank needs to track performance much more closely during projectimplementation to ensure that the Borrower complies with all project covenants. Inthis case, the Bank did not discover lack of compliance until 98% of project funds hadbeen disbursed. The Bank should enforce compliance with covenants and must be ableand willing to suspend disbursements in the case of major institutional problems.(paWas. 10.03 and 9.02).

'.Bank Experience in Project Supervision. Repon No. 10606, Apil 30, 1992. OED.

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(e) The objectives of the institutional reforms designed to increase financial autonomy atthe municipal and regional levels were too broad and insufficiently defined.Municipalities, OAs, and WUs usually require a well-defined and carefully phased setof objectives, so that they can properly organize their activities, monitor projectperformance and make the necessary changes in the case of shortfalls. Continuedreform of sector policies and institutions is a complex undertaking, subject to changesin the political climate, and one that the Bank should not expect to complete in theduration of just one project.

(f) The inability of the Bank to finance the private sector directly in this project without aGovemment guarantee precluded private sector investment in sub-projects, despitestrong interest. Given the potential efficiency and financial gains that the private sectorcan bring about, its participation should be encouraged to the maximum extent.Service contracts or management concessions are most suitable for current conditionsin Mexico and the project should have done more to encourage arrangements of thistype (paras. 7. 03 and 9.01).

(g) Project design should pay particular consideration to the definition of specificinstitutional arrangements. One agency should have primary responsibility, and thisshould be clear to all agencies involved, in order to avoid rivalries (para.. 6. 05). In thisproject, institutional rivalries and lack of coordination between BANOBRAS and CNAduring project implementation resulted in frequent discussions to determine theirrespective responsibilities for implementing the project, and caused delays and neglectof many important activities (para. JO.05).

MEXICO



(Loan 3271-ME)

PART I: PROJECT REVIEW FROM THUE BANK PERSPECTIVE

1. Project Identity

Project Name: Water Supply and Sanitation Sector ProjectLoanNo.: 3271-MEAmount: US$300 million equivalentYear of Approval: 1990Borrower: BANOBRASRVP Unit: LA2IECountry: MexicoSector: InfrastructureSubsector: Water Supply and Sanitation

2. Background.

2.01 Economic Overview. Mexico's economy has been characterized by unusualturbulence over the past two decades. Until 1970, the economy grew rather rapidly on a sustainedbasis, but then it began to slow, with major recessions in 1976 and 1982. After the economic crisis of1982, the Government gradually instituted an ambitious economic stabilization and restructuringprogram, which has brought inflation under control and laid a sound foundation for future growth.Economic growth resumed in the late 1980s, albeit of at a slow rate. In 1983, the constitution wasamended to make municipalities responsible for infrastructure services, and thus rieduced their previousalmost complete dependence on Federal Government funding. Implementation of this policy has beenslow, and subsidies remain high, although they are now based on more rational and transparenteligibility criteria.

2.02 The Government's direct role in the economy has been reduced through sweepingpublic sector restructuring and a privatization program, which have generated proceeds in excess of

2

US$21 billion and led to a major streamlining of government institutions. Inflation has dropped sharplyto 6.5% in 1993, down from an average of 90% per annum during 1982-88. Inflation for 1994 isexpected to be around 9%. Through a combination of expenditure cuts and increases in revenues, theoverall fiscal balance went from a deficit of 15.6% of GDP in 1982, to a surplus of about 1% of GDPin 1992, excluding proceeds from privatization. Finally, the implementation of the North AmericanFree Trade Agreement (NAFTA) will further strengthen the foundations of the transformation of theMexican economy.

2.03 Sector Overview. Provision of adequate water supply in Mexico is difficult andexpensive. The country's water resources are very unevenly distributed. It has an area of 762,605square miles and a population of 82.5 million (1990 data), which is growing at 2.6% per year (althoughthe Government intends to reduce this rate to 1% by the year 2000). Some 75% of the totalpopulation lives in the urban areas, concentrated in just four cities: Mexico, Guadalajara, Monterreyand Puebla. Some 25% of the total population lives in the Mexico City Metropolitan Area. Averagerainfall ranges from 100mn/year in the dry zones of the North to 5,000mm/year in the tropicallowlands of the South. About 85% of surface water resources are at an elevation of 500 meters orbelow, while fully 75% of the population and 80% of the industrial production are located above thatelevation. These conditions have forced Mexico to develop a sophisticated and costly system of waterresource management, which requires accumulation of increasing knowledge and information. Tointegrate this information and knowledge, a National Program for Water and Sewerage (APAZU) wasformulated, taking into account water problems and demand-oriented solutions. Eighty eight percentof water is used by agriculture, whereas municipal water supply accounts for about 5% of totaldemand, and industry only about 6%. Estimated coverage (the percentage of people with access towater supply or wastewater disposal services) is known only approximately and is rather low comparedwith countries at a similar stage of development in LAC.2 Coverage increased annually by more thanthe population growth until about 1980. From that point until the end of 1992, coverage more or lessmatched population growth, because of budgetary constraints and insufficient attention to the sector.By the end of 1992, progress has been restored. The government expects water and sanitationcoverage to reach a significantly larger percentages of the population by the mid- 1990s (Annex 8G).

2.04 Not only is coverage low, but water is also of poor quality. The systems currentlyprovides water at a quality that is inconsistent with Mexico's level of economic development.Inadequate water and sanitation systems have created unhealthy environmental conditions.Disinfection is generally inadequate, especially for small systems. Deterioration of ground waterquality is an increasingly important problem due to arsenic poisoriing in the northern area and leachingfrom dumps in the valley of Mexico and other urban areas. Pollution from agrochemicals is a problemin the agricultural areas. Unsafe water and the lack of sanitation are among the principal causes of

2 Other LAC countries have the following coverage for 1990: Argentina (67%), Brazil(96%), Colombia (89%) andCosta Rica (92%). Sewerage coverage including septic tank connections are: Argentina (89%), Brazil (79%),Colombia (97%) and Costa Rica (96Y%). PAHO "Health Conditions in the Americas".

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morbidity and infant mortality3. The use of untreated water for irrigation also causes a health problemin the country4.

2.05 Sector Organization and Legal Aspects. In an effort to improve its effectiveness, thesector has undergone many reorganizations during the past two decades. Overall, the results have beenmoderate, due to inherent institutional inefficiencies, or to lack of a adequately trained staff In 1980, ina first attempt at decentralization, more responsibility for the sector was given to state agencies, underthe overall direction of the Ministry of Human Settlements and Public Works (SAHOP). In 1982,sector responsibilities were transferred to the Ministry of Urban Development and Ecology (SEDUE),which became the executing agency for external loans to the sector. In 1990, the National WaterCommission (CNA) was created as an autonomous organization within the Ministry of Agriculture andWater Resources (SARI). In 1992, SEDUE's functions regarding water supply and sanitation andenvironmental protection were assumed by the Ministry of Social Development (SEDESOL).Amendments to the Mexican Constitution, made in 1983, have assigned to municipalities theresponsibility for the provision of water supply and sanitation services. In practice, these services havebeen provided with heavy assistance from the state and federal governments.

2.06 Functions of the state-level water agencies vary widely from state to state. Some stateagencies concentrate on assisting municipalities in the design and construction of water and seweragesystems, while making the municipalities responsible for the operation and maintenance of theirsystems. Other state agencies provide all water and sewerage services to urban and rural communities,from planning and construction to operation, billing and collection. At the Federal level, someinstitutional arrangements have changed, particularly those of SARH. There are five major players inthe urban water supply and sanitation services, as described below.

2.07 The SARH is responsible for water administration through its agency the NationalWater Comrnmission (CNA). CNA is the technical sector support agency both in water supply andsanitation, as well as irrigation. For water supply, it has sector-wide responsibilities for planning,setting and enforcing technical standards, assisting operating agencies to develop their institutionaldevelopment programs, monitoring the perfornance of the operating agencies, and helping them toprepare annual action plans to improve their performance. CNA is responsible for the definition ofpriorities of the sector, planning of development, and protection and administration of water resources.In addition, CNA is responsible for technical support, and in coordination with the National Bank for

Public Works (BANOBRAS) and the Ministry of Finance and Public Credit (SHCP), reviews thesector annual investment plan, and coordinates design and implementation of the National TrainingProgram with the Mexican Institute of Water Technology (IMTA) and the National Association of

3 .In 1990, intestinal diseases was the number one cause of death in Mexico, with a rate of 32.8 per 100,000 people.SAR Second Water and Sanitation Sector Project, February 8, 1994.

4 .It is estimated that about 240,000 hectares are being irrigated with untreated wastewater. As part of the choleraprevention campaign, the use of wastewater for irrigating vegetables has been banned.

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Water Supply Operating Agencies (AMOAPA). SEDESOL is responsible for funding sectorinvestments and issuing official water standards and environmental impact assessments, and togetherwith the Ministry of Planning and Budgeting (SPP) within the Ministry of Finance and Public Credit(SHCP) participates in preparing and approving the annual investment program for the sector. To helpcoordinate and standardize state needs with the Federal and State plans, State Water Supply andSanitation Subcommittees (SWSS) were created in all states. The main responsibilities of SWSSs areto: (a) coordinate sector activities; (b) set sector priorities for water use; (c) select communities wherewater and sanitation services will be implemented; (d) propose annual sector investment plans; (e)assign state financial resources with credit resources coming from BANOBRAS; (f) propose to theState Congress the tariff level and structure; and (g) promote private sector participation. CNA acts asthe technical secretariat of each SWSS. In rural areas, the Programa Nacional de Solidaridad(SOLIDARIDAD) works with communities to promote economic development, including theprovision of potable water and sanitation services facilities, and acts as a channel for government funds.The Federal Government is aware of the organizational problems at both the State and Municipal leveland the Government continues implementing organizational changes to improve the provision ofservices nationwide (Charts 1-2).

2.08 Sector Strategy. In line with its overall strategy of decentralization, the Governmentis committed to support the delegation of water supply and sewerage services to municipalities and topromote sustainable development of water resources with emphasis on rational and efficient resourceuse. In addition, the Government is encouraging the preservation of water quality and the environmentby taking the river basin as the basic unit for water management. The challenge to the Government isto help the municipalities carry out this responsibility efficiently.

2.09 To meet this challenge and as part of the APAZU, the Government (through CNA)prepared the National Program for Water Quality Improvement in 1991, which aims at: (a) monitoringwater quality and its assessment; (b) developing effluent standards and discharge permits; (c)strengthening the finance system; (d) developing sanitation and treatment infrastructure; (e) improvingmanagement of river basin pollution; and (f) reinforcing the sector's institutional capacity.

2.10 Bank Lending to the Sector. The Bank has been active in the water supply andsanitation sector in Mexico for about twenty years. Throughout this period, the Bank has supportedthe Government's priorities to make progress in proposing, planning, executing and financing keyactivities in the sector. Altogether, there have been five loans to Mexico for a total to US$ 375.3million, as follows: loans 909-ME (US$90 million in 1973), 1186-ME (US$40 rmillion in 1975); 1913-ME (US$125 million in 1980); 2281-ME (US$100.3 million in 1983); and 3101-ME (US$20 million in1989). Bank involvement began in 1973 with the first water supply loan, which was to build bulkwater supply facilities for Mexico City (Annex 1). The next three financed physical improvements invarious medium-sized cities. The fifth loan, to support water and sanitation facilities and productiveopportunities for women, was allowed to lapse and never became effective. This was because the

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Government created the SOLIDARIDAD program5 that provided grants rather than loans for the sameactivities. While the above projects successfully achieved their physical objectives (extending andimproving water and sewerage systems and increasing service levels), they did not meet theirinstitutional objectives (establishing an appropriate institutional framework and sound cost-recoverypolicies)6. This was due mainly to the limited ability of the national agency to provide technicalassistance to local institutions and to the lack of adequate commitment to the objective of cost-recovery. The main lessons learned from these projects were the importance of developing self-sufficient water agencies, community support, and designs that reflect local needs and willingness topay.

3. Project Objectives and Description.

3.01 The main objectives of the project were to support the implementation of the SectorReorganization Program, which was designed to increase coverage of water supply and sanitationservices, improve their quality, promote sound pricing policies, progressively reduce the need forgovernment funding, and improve environmental conditions in Mexico. Specific project objectiveswere to: (a) reduce the amount of subsidies to the sector; (b) strengthen the institutional framework atthe national level; (c) promote at state, regional andlor municipal levels the development of companiesof sufficient scale to operate economically and maintain their water and sanitation systems efficientlyand with financial autonomy; (d) provide by the end of 1994, water supply and sanitation services inMexico to about 24 million additional people, most of whom belong to the poorer segment of thepopulation; and (e) improve the environment by implementing a pilot water-pollution control programand requiring a comprehensive environmental assessment of each financed sub-project.

3.02 The loan consisted of the following two components that the Bank felt were equallyimportant:

A. The National Level.

3.03 This US$61.4 million component was to be executed by CNA and included:

(a) assistance to CNA and training for its staff in: (i) sub-project preparation andevaluation under the new national policies; (ii) review and updating of existing technicalnorms and parameters for the design, construction, and maintenance of the watersupply and sanitation systems; (iii) design and implementation of a sector monitoring

5.This program is designed to improve standard of living of the poor, and finance, on a grant basis, water andsanitation works in rural and in some urban areas.

. World Bank: Project Performance Audit Report: Mexico City Water Supply Project (Loan 909-ME); Medium CitiesWater Supply and Sewerage Project (Loan 1185-ME); Second Medium-Size Cities Water Supply and SewerageProject (Loan 1913-ME); and Third Medium-Size Cities Water Supply and Sewerage Project (Loan 2281-ME). OEDReport No. M93-779, July 23, 1993.

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system; (iv) assistance to operating agencies for their institutional developmentprograms; (v) strengthening environmental assessment capability; (vi) specializedstudies to provide or update the basic information needed to define medium and long-term water pollution control policies; (vii) a pilot environmental project in the Lerma-Chapala Basin, which would also provide the opportunity to test the institutional, legal,technical, and financial schemes that were under consideration; (viii) financing for thephysical infrastructure needed for the National Water Quality Monitoiing Program andthe implementation and operation of the Water Quality Information System, whichincluded equipment for five regional and 22 state laboratories and for field samplingand analysis; (ix) review of existing legislation and carry out the private sectorparticipation study; (x) financing for the preparation of a follow-up project;

(b) strengthening of IMTA's National Training Center through: (i) upgrading trainingfacilities in Cuemavaca; (ii) purchasing training materials and equipment; (iii)development and organization of a management and technical training program forsector personnel, including the execution of a training program for sector managers andstaff,

(c) strengthening BANOBRAS in the following areas: (i) project preparation andevaluation; (ii) procurement; and (iii) monitoring and evaluation systems; and

(d) technical assistance to undertake a study, prepare model contracting documents,and implement promotion programs and develop a strategy to encourage private sectorparticipation in provision of water supply and sanitation services.

B. The State and Local Levels.

3.04 This was to be the main project component, with a total estimated cost of US$589.5million. It would provide a line of credit to municipal and/or state water and sanitation agencies and toprivate providers of water supply and sanitation services to be administered by BANOBRAS in fullcompliance with agreed sector policies. It would also fund investments to be made under the 1990-1994 Investment Plan. Sub-projects would become eligible for Bank financing by complying withagreed-upon criteria--BANOBRAS would only sign sub-loans with established independent water andsanitation agencies after August 31, 1991. Eligible sub-projects would involve the rehabilitation andexpansion of water supply and sanitation systems, including sewage treatment plants, worksupervision, and institutional strengthening of sub-project executing agencies.

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4. Project Preparation, Design and Appraisal.

4.01 A Bank mission identified the project in November 1988 and its main componentswere prepared by BANOBRAS through the middle of 1990. The Bank helped project preparationwith several missions. At the same time, IDB prepared a companion project (US$350 million), withidentical conditionality. The project was appraised in June 1990. The loan was approved by the Boardin November 1990 and signed in January 1991. The Borrower provided the Bank with legal opinionswith some delay, and thus the loan became effective only in June 199 1.

4.02 Project Design. The project was fairly well prepared. Project design was in generalsatisfactory and in line with the Government of Mexico's main objective of supporting decentralizationand delegation of water supply and sewerage services to the municipalities. It was also in line with theBank's strategy aimed at providing water and sanitation services to low-income populations,promoting more efficient sector management and supporting Government efforts to strengthen thesector. The project was also timely as it played an important role in shaping Mexico's investmentprogram in the first stage of the Government's water supply and sanitation development plan. Thepreparation of the project grew out of an intensive dialogue between the Government and the Bankduring preparation of the underpinning sector report7 , which lead to the formulation of a Water andSanitation Sector Reorganization Program, in CNA document called Lineamientos.

4.03 Sector Reorganization. The Government of Mexico has for the last three decadesbeen closely investigating means of meeting demand for water and sanitation services. Severalorganizational changes have been made during the past two decades to improve sector performance(para. 2.06). Mexico made rapid progress in improving its citizens' access to water and sewerageservices during the 1970s, but progress had subsequently slowed. The Government has been workinghard to establish a coordinated legal policy and institutional framework for managing the country'sscarce water resources. The Bank analyzed the need to improve water supply and sanitation coverageand standards during project preparation, with particular emphasis on improving services to neglectedlower-income groups.

4.04 Sector Strengthening. The project was designed to strengthen the planning capacityof the sector, particularly at the State and Municipal levels. As is standard in Bank water and sanitationprojects, the project used least-cost analysis for design of the investment prograrn. The absence ofleast-cost analysis in the sector had led to poor investment decisions in previous Bank loans8 . Theabsence of such analysis in sector investments was traced to the system of grant financing and theabsence of cost recovery, where little incentive existed to plan effectively and conserve resources. Theproject was to provide access to water and sewerage connections to about 3.2 million people (of 24million benefiting from the National Water Supply and Sanitation Investment Plan), and mostly to low-

7. Urban Water Supply and Sewerage Sector Study --Institutional and Financial Constraints--7109-ME, June 1988.

SAR Water Supply and Sanitation Sector Project. Report No. 8973-ME. November 8, 1990.

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income groups. In the case of rural communities, improvements would have an important impact onthe welfare of women, as local customs often call for women to walk long distances to fetch water inbuckets. The project investment would also contribute significantly to improve both public health andthe standard of living among the population receiving the services under the project. To qualify for asub-loan, water supply sub-projects should yield a minimum Rate of Return (RR) of 12%, higher thanthe opportunity cost of capital in Mexico. The acceptable RR for water-pollution control sub-projectswould be only 10%, since reducing pollution generates positive extemalities that are not easy toquantify. To help sub-project implementation, sub-project evaluation guidelines were prepared, whichwere consistent with the policies and priorities established by the Government to strengthen the sector.

4.05 Financial Measures. During appraisal, the Bank was concerned that water tariffswere not sufficiently high to cover operating and investment costs. Before appraisal, rates averagedabout US$0.07 per cubic meter, which was considered very low, compared to an average incrementalcost of services of US$0.30 to US$0.50 per cubic meter. Furthermore, many cities did not chargeexplicitly for sewerage services. Most water and sewerage agencies did not meter water services orestablish sound accounting and internal control systems. To enhance cost recovery, the design of theproject required: (a) that as condition for sub-lending for a sub-project, every sub-borrower shouldhave tariffs in place to at least cover its operating and maintenance expenses (excluding depreciation);(b) a commitment, under the conditions of the sub-loan, from every sub-borrower to increase waterand sewerage rates in accordance with a satisfactory initial timetable; and (c) a commitment from eachsub-borrower to implement conmmercial accounting and internal auditing, and to carry an institutionaldevelopment program.

4.06 The Bank was also concerned about the potential for conflict between projectfinancing criteria and those of the newly created SOLIDARIDAD9 program. The Government agreedin August 1990 to avoid this by limniting SOLIDARIDAD's target group to the poorest populations,and confirmed during negotiations that SOLIDARIDAD funding for the water and sanitation sector inthe poorest municipalities would have the same criteria and norms as the Bank project'.

4.07 Environmental Assessment. Lack of control of municipal and industrial waterdischarges was another major concern for the Bank at appraisal. Most industries connected tomunicipal sewers discharge their effluent without any pre-treatment. The project design thereforeemphasized strengthening the institutional capacity of Operating Agencies (OAs), to operate, maintain,control and monitor waste-treatment facilities. It was agreed that all sub-projects would require anenvironmental impact assessment, to be carried out by CNA, as an eligibility condition. Failure to

9 .This program was designed to improve the standard of living of the poor, and to finance on a grant basis, water andsanitation works in rural and in some urban areas. SAR Report No. 8973-ME, November 8,1990.

°. Indice de Marginalidad as indicated in the Manual Unico de Operaciones para el Programa de Agua Potable yAlcantarillado.

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implement this measure would be a condition of default under the sub-loan. During negotiations,agreements were reached with the Government on the water-quality monitoring programs to beimplemented during project execution.

4.08 Borrower and Executing Agency. The Loan Agreement provided that the Borrowerand executing agency for the project would be BANOBRAS. Its responsibilities included: (a)approving sub-loans to the OAs ; (b) supervising project execution by each OA and monitoringcompliance with sub-loan conditions; (c) participating in each SWS and preparing and sending semi-annual report to the Bank on the execution of the project. CNA would be the technical agenciesresponsible for: (a) applying, modifying and monitoring sector development policies; (b) preparingtechnical standards; (c) assisting implementing agencies in project preparation, construction, and worksupervision; (d) providing technical assistance to operating agencies; (e) developing and implementing,in coordination with IMTA, and AMOAPA, the National Training Program; (f) preparing annual actionplans to improve the performance of the operating agencies; and (g) implementing the Water PollutionControl Program.

4.09 During appraisal and negotiations, several important issues arose concerning: (a) on-lending rates; (b) conditions of effectiveness; and (c) sub-loans.

4.10 On-lending Rates. During appraisal, it was agreed that the minimum on-lending rateto be used in the project was CETES, the Government's marginal cost of peso funding, which wassufficient to cover the cost of funds to BANOBRAS. This rate was different from that specified in theGeneral Interest Rate Agreement (GIRA) between the Bank and Mexico for the water and sanitationsector, and at negotiations both the Bank and the Mexican authorities agreed to amend the GIRA.This also created the need to amend the current Normatividad (budgeting and subsidy transferagreement for the Mexican development banks), so that the Borrower's financial intermediation costs(paid by the Government) would be borne by the sub-loan recipients through the higher interest ratesto be set in the GRA. Once the GIRA was amended and Normatividad was in force, the Bank and theBorrower could modify interest rates for the project accordingly.

4.11 Condition of Effectiveness. At the request of the Mexican delegation it was agreedduring negotiations to remove one condition of loan effectiveness--execution of a contract betweenIMTA and its consultants-- and make it instead a dated covenant to be met by March 1, 1991. Thereason was to avoid that a possible delay in securing this contract could affect loan effectiveness, sincethe IMTA contract was not critical for project success.

4.12 Sub-loans. To make the mix of funds to be applied in different types of sub-projectcomponents transparent, and to facilitate monitoring, it was agreed during negotiations thatcomponents dealing with institutional development, emergency infrastructure works, and sanitation or

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pollution control works for each sub-project would each be covered by a separate sub-loan and sub-loan agreement. Also, it was agreed that the obligations of the Borrower, Operating Agency,Guarantor and State shall be combined in the Sub-loan Agreement.

4.13 Procurement. The Bank's procurement requirements were discussed during appraisalwith BANOBRAS and CNA. Standard Bidding Documents for Mexico, already agreed with theMexican authorities and the Bank in Cuemavaca in April 1990, would be used during projectimplementation. OAs would carry out procurement under CNA supervision, and CNA would beresponsible for the procurement of the national component. All ICB and the first LCB contracts perstate, both for acquisition of goods and for civil works, would be subject to prior review by the Bank.All other procurement documentation would be subject to selective ex-post review, and CNA wouldretain documentation for these contracts for periodic supervision by the Bank.

4.14 All contracts that could be packed to exceed the equivalent of US$5.0 million for civilworks, and US$250,000 for equipment or materials would be procured on the basis of ICB followingthe Bank's procurement guidelines. In the case of procurement of goods through ICB, Mexican firmswould be provided a preference margin equal to 15% of total cost or an amount equivalent to theprevailing import duty, whichever was lower. The Bank reviewed and found acceptable localprocurement procedures. At negotiations, it was agreed, based on previous experience under Bankfinanced projects, to increase the limit for shopping from US$50,000 to US$250,000 for civil worksand from US$25,000 to US$50,000 for goods. These LCB procedures would be used to awardcontracts with estimated cost below US$5.0 million for civil works and US$250,000 for goods, up toUS$310.0 million in the aggregate for civil works and US$50.0 million for goods. Selection andappointment of consultants would follow Bank's guidelines for the use of consultants.

4.15 Disbursements. The loan was to be disbursed over a five year period -- December 31,1990 to December, 1995 -- which was consistent with the standard disbursement profile for sectorprojects in Mexico. The Mexican Government mentioned to the Bank that it was consideringaccelerating project execution and was making considerable efforts to complete the project in threeyears, in which case the disbursement profile, the Government's contribution, and cash generationwould all be accelerated. It was agreed that the final date for submission to the Bank ofBANOBRAS's proposals for sub-loans would be December 31, 1993. To expedite project execution,a Special Account would be opened in the Central Bank, with a deposit of up to US$30.0 millionequivalent. In view of the desirability of starting the project without delays, retroactive financing up toUS$30.0 million (10% of loan funds) was approved for expenditures incurred after May 1, 1990.

4.16 Extemal Auditing. BANOBRAS would continue to have its financial statementsaudited by external auditors acceptable to the Bank. It was agreed that the Bank would review theexternal auditors' terms of reference to ensure that they would include the audit of the Special Accountand of the Statement of Expenditures (SOEs). BANOBRAS, in turn, would require each OA toengage external auditors satisfactory to BANOBRAS to audit their financial statements and project

11

accounts. BANOBRAS's audit report would be presented to the Bank annually, no later than June 30.CNA and IMTA would keep project accounts that would be audited by the Contraloria General de la

Federaci6n and their report would be furnished to the Bank, no later than June 30 of the followingyear.

5. Project Cost and Financing.

5.01 The total project cost was estimnated at US$650.9 million equivalent, of whichUS$512.9 million (78.8% of total) would be directed towards financing investment sub-projects(US$282.7 million to water supply and US$230.2 million to sanitation); US$19.9 million (3.1% oftotal) would fund technical assistance; US$28.5 million (4.4% of total) would be used to preparefeasibility studies and final designs; and US$4.7 million (0.7% of total) would finance equipmentneeded to upgrade CNA's laboratories. The foreign exchange cost of the project was estimated atUS$300.0 million, about 46% ofthe total project cost. Project cost included US$84.9 million (13.1%of the total) as provision for taxes. Individual project components included physical and pricescontingencies of 10% and 14% respectively.

5.02 The Bank loan, amounting to US$300 million would finance about 46% of totalproject costs (US$38.1 million and US$261.9 million for the National and State and Local componentsrespectively). The project financing plan included also equity contributions from the Federal and Stategovernments to OAs, as well as, OA's internal cash generation (Annex 4.B). The cost sharingarrangements between Federal and State governments were defined and agreed upon on the basis ofeach state income. Local participation was defined on a case-by-case, taking into account the financialsoundness of each OA, which would be assessed in each feasibility study. BANOBRAS would bearthe foreign exchange and interest rate risk on the Bank loan, but since the CETES rate was marketdetermined, it reflected expectations about inflation and devaluation. The proceeds of the Bank loanwould be transferred by BANOBRAS to the Guarantor in accordance with the Nonnatividadapplicable in Mexico to Bank loans, and subsequently the Guarantor would lend a portion of theproceeds back to BANOBRAS in pesos for on-lending by BANOBRAS to the OAs. BANOBRASwould on-lend to the OAs through sub-loans, in Mexican pesos, at the minimum variable interest rate,sufficient to cover the cost of fund to BANOBRAS, with repayment up to 15 years, including up tothree years-grace period, and the guarantee of the state on behalf of the public companies. The Bankloan was made on Bank's standard variable interest rate, with 17 years maturity, including five yearsgrace.

5.03 The US$300.0 million loan would be used to finance the following:

> Equipment, materials and civil works for National (80%), State and LocalComponents (50%);

> Consulting services for implementing the National, State and LocalComponents (100%);

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> Unallocated funds.

6. Project Implementation.

6.01 The project was originally scheduled to be completed by December 31, 1995.However, after some initial delays explained below, it was actually implemented in only three years,two years ahead of the appraisal estimate. More rapid implementation reflected mainly the evidence ofa higher demand for sector investment and a large number of 2,122 sub-projects to be financed (para.7.03). The last disbursement was made in March 1, 1994.

6.02 Contracting Staff and Consultants. Some minor delays during the first year ofimplementation occurred, due to slowness in contracting staff in the executing agencies and CNA.However, this situation started to improve by the end of the first year. Implementation continued at afaster pace during the following years and the project was completed way ahead of the originalschedule (Annex 2). BANOBRAS experienced some delays in the presentation of its institutionaldevelopment program, as a result of delays in hiring personnel for the program during the first stage.CNA experienced a similar situation in implementing its institutional development program, mainly dueto difficulties in contracting, both the personnel and consultants for the implementation of the GeneralInformation System for the Water and Sanitation Sector (SIAPA) at the regional and state levels, andfor acquiring the required hardware. Some additional delays occurred in contracting support personnelfor the strategic program at the regional level, and in the design and approval of model subcontracts forConsolidaci6n and sanitation components.

6.03 Preparation Guidelines for Feasibility Studies. CNA was slow in updating theguidelines for the preparation of feasibility studies, to accommodate the agreements reached duringloan negotiations and also additional time was lost in the selection of consultants to implement theNational Training Program, which resulted in IMTA's slow inauguration of this program, whichoccurred by the end of 1991. The Pollution Control Program was implemented satisfactorily Tospeed up implementation of SIAPA, the Bank approved the purchasing of computer equipment,without waiting for the institutional development programs to be ready. This action was taken toassure timely availability of sector data for CNA to assist in the establishment of priorities in the TA toOAs.

6.04 Government Counterpart Funding. The Government was slow in providingcounterpart funding for the project at the beginning of implementation. This made BANOBRAS thesole source of financing for the OAs and caused delays. After the first year, the Government fundswere available in larger quantities than estimated at appraisal, allowing an acceleration of projectcompletion. Sector lending had been consolidated de-jure into one window. It was agreed duringappraisal that lending through this window was to be based on a poverty index, and would target citieswith relatively large low-income populations. Nevertheless project sub-loans still had to compete withgrant funding to some municipalities.

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6.05 By early 1993, project implementation had progressed faster than forecast in theoriginal implementation schedule. The speed of disbursements, however, masked some seriousproblems. BANOBRAS could not supply the Bank with information necessary to monitorcompliance with covenants relating to sub-projects in the Loan Agreement such as: (i) entering tocontractual agreements with OAs; (ii) providing financing to OAs, which did not contribute from theirown intemal resources (Schedule 5.C), and (iii) atomization of large projects into several small loansthat led to a large number of small contracts. The Bank could therefore determine neither whethereach sub-project was following the agreed implementation plan, nor whether it had earned theagreed minimum rate of return (Section 4.02 (c) (iii) of the Loan Agreement). It became apparentthat many sub-projects were out of compliance. By the time it discovered this situation 98 % of thefunds had been disbursed, and the Bank could not realistically stop project implementation. TheBank did, however, call the situation to the attention of the Mexican officials, at which point mattersbegan to improve. A similar situation existed in CNA, and in addition there was a lack of coordinationamong Sub-Direcciones and Gerencias, and limited support to the area of Consolidaci6n (TA).Therefore, a lack of implementation capacity and supervision of the TA is reflected by its minimalimpact on improving efficiency and management in the OAs. Inadequate coordination and rivalriesbetween BANOBRAS and CNA in the earlier stages of the project also affected projectimplementation.

6.06 Project Cost and Financing. Total project cost reached US$1,340.0 million(Annexes 4A-4B). This is US$689.1 million higher than the appraisal estimate of US$650.9 million).Of the total, US$319.0 million (23.8 %) was financed by the Bank, including US$19.0 milliondisbursed from Loan 2666-ME to support additional financing of equipment, materials, civil works andconsulting services in the preparation of studies and designs. The Federal Government providedUS$544.7 (US$422.3 million more than the original estimate); State Governments provided US$316.0million (compared to US$130.5 million estimated in the SAR); US$33.4 million carne from by the'As' internal cash generation (less than the SAR estimate); and the remaining US$126.9 million carnefrom BANOBRAS. A greater number of sub-projects financed caused the rise in total costs. TheFederal Government's contribution to the project was exceptional, compared to the financing availablefor other Bank's projects.

6.07 Procurement. In general, the procurement process was satisfactory, although somedelays occurred in the beginning of implementation for the preparation of bid documentation.Originally the SAR estimated US$109.0 million of total loan financing for the project were to beprocured under ICB. However, because the sub-projects were smaller than original envisioned, onlyUS$27.6 million were procured under ICB (Annex 5B). Procurement missions reviewed the unit costsduring bid evaluation to ensure that contracts proposed for awards were technically sound.Confidentiality of the bidding process was a concern by suppliers and contractors, and there wasconsensus that this was an area where the agencies needed much improvement. BANOBRASprepared and sent a circular letter with precise instructions to improve confidentiality to all executingagencies handling procurement. Mexican staff considered the Bank's documentation requirements to

14

be excessively burdensome. There is need for procurement training particularly because BANOBRASand CNA are relatively new executing agencies, and because of decentralization efforts. Mexicanofficials from both institutions confirmed to the Bank their interest in this type of trainig (Annev 5A-SB).

6.08 Disbursements. Annex 3 indicates the estimated and actual schedules for the tiningof disbursements and allocation of loan proceeds. The proceeds of the loan were disbursed two yearsin advance of the period estimated at appraisal which was considered somewhat faster than thedisbursement profile for water sector projects in other countries of Latin America. As of December 31,1991, a total of US$252.1 million was already committed, and US$105.2 million already disbursed.The loan was fully committed by January 1993. The main reason for this fast disbursement was theadvanced degree of preparation of several sub-projects, which allowed the Bank to approve largeamounts during the first years of implementation. In fact, many inappropriate or inadequately preparedprojects were approved. BANOBRAS informed the Bank that several sub-projects required additionalfinancing. This was a result of inadequate supervision and management information that allowed theborrower to continue to approve new sub-projects, without realizing that the project did not havesufficient funds to complete sub-projects already approved (Tra 6.05). Disbursements of up toUS$5.0 million equivalent for works, and up to US$0.3 million equivalent for goods, were made on thebasis of certified SOEs prepared by BANOBRAS. To expedite disbursements, a Special Account wasopened at the Central Bank with a the deposit of up to US$30.0 nillion equivalent. The originalClosing Date was June 1996, but the Loan was actually closed on December 31, 1993. The originalloan allocations were revised in September and December 1993, to reflect the actual projectimplementation needs. The final disbursement was made on Ma-ch 1, 1994. The original and actualdisbursements by categories are shown in Annex 3.

7. Project Results

7.01 Project results were mixed. The project was very successful in expanding andimproving the quantity and quality of water supply and sanitation services ( Annexes 8A-8E).However, it was only reasonably successful in strengthening the sector institutions. Achievementsthrough studies, seminars and workshops were also modest. Institutional achievements ranged frommodest to disappointing (Daras. 7.06 and 7.07). The project aimed correctly to fornulate andimplement policies of decentralization in the water supply and sanitation sector by reducingGovernment funding to the sector. However, such objectives were partially achieved, becausebeneficiaries only participated in a limited degree in sub-projects design and decision rnaking . Thisfailure to give beneficiaries a real sense of project ownership was due to pressure from powerfulpolitical institutions such CNA and SEDESOL, who promoted certain types of sub-project and evenauthorized sub-projects that were not in compliance with the eligibility criteria and on-lendingconditions. Excessive focus on speedy disbursements appears to have diverted the Bank attention fromenforcement of loan compliance (para.. 9.05). Nevertheless, the dialogue between the Governmentand the Bank on sector and institutional matters has continued and a follow-up project has beenapproved. Sector responsibility has been vested in CNA, and the Bank is planning to continue assisting CNA to

15

strengthen its technical and planning capacities. Despite the initially inadequate counterpart fundingdue to Government delays in distributing its revenue sharing contribution to the states andmunicipalities and the cumbersome procedures for approval of sub-loans, project disbursements wereabout two years faster than estimated at appraisal. This was the result of almost total lack of Banksupervision that allowed approval of new sub-projects without assurance that the project had sufficientfinancing to complete sub-projects already initiated.

7.02 Physical Results. The physical targets of the project in terms of water supply andsewerage facilities were surpassed to a large extent. A total of about 4.5 million people were providedwith water supply and sanitation services, compared to 3.2 million estimated at appraisal"1. A total of43,342 water supply and 32,077 sewerage connections, and the necessary supporting infrastructure,were constructed as a result of the project. Rehabilitation and operational improvements to existingfacilities has provided more reliable and safer services to a number of people. It is estimated that about75% and % of the total population now receive water supply services and 61 % receive sanitationservices. Final designs were completed for 147 cities under the Pollution Control Program, operatingwater treatment capacity was increased from 15m3 /sec. to 23m3 /sec., and the inventory of 478 watertreatment plants was completed. The project expauded badly-needed services and thuc in.1rovedhealth and environmental conditions. The project has contributed to a reduction of infant mortality, byaddressing the principal cause of diarrhea: poor quality of water supply and inadequate sanitationservices to low-income groups (Annex 8G-8H).

7.03 Sub-projects and Their Financing. The loan financed a total of 2,171 sub-projectsin Mexico, with a total investment cost of US$1,285 million equivalent (NPMex$3,853.9 rnillion),which is 96% of total project cost. The Bank financed US$233.0 rnillion (18%) and the remainingUS$1,037.8 million was financed by Federal and States governments and intemal cash generation. Ofthe total, 237 sub-projects (US$161.1 million equivalent) were located in the State of Mexico; 214sub-projects (US$86.7 million equivalent) in the State of Guanajuato; 131 sub-projects (US$80.5million equivalent) in the State of Sonora; 124 sub-projects (US$34.4 nillion equivalent) in the State ofPuebla; and the rest or about 1,465 sub-projects (IJS$980.1 million equivalent) among the remaining28 states of the country. Eighty three percent of sub-projects were for infrastructure operations (1,154water supply, 497 sewerage and 143 water supply-sewerage) and 377 sub-projects for sanitationoperations (Annex 8A).

7.04 The Government for its Water Supply and Sanitation Sector Investment Plan 1990-1994, had estirnated that about US$4.5 billion equivalent, will be required to expand and improve theexisting OAs, as well as to improve the environmental conditions of the country. As of December1993, the updated annual water supply and sanitation investment had reached a total US$4.1 billionequivalent. Additional funding sources will be needed to ensure financial feasibility of the proposedinvestment, and it is expected that investment in 1994 will exceed the Investment Plan. The follow-up

.The information has been provided by BANOBRAS, therefore the conclusion regarding the service levels has to betaken with caution.

16

operation would finance part of the proposed Water Supply and Sanitation Sector Investment Plan1990-1994 and 1994-1998 (Annex 8D)

7.05 Studies. CNA carried out a Private Participation Sector Study under the project. Itincluded the developing procedures and model contracts for various types of private sectorparticipation in the water supply and sanitation sector. After a complete review of public contracting inthe sector, the study provides recommendations for changes in public contracting and water laws inMexico. Additionally, the study has developed a strategy for implementing a program to promoteprivate sector participation, especially in municipalities, where private sector participation might beadvantageous. As a result, the private sector is already participating in the financing, construction andoperation of waste water treatment plants and it is expected that will play a very important role ininfrastructure development. CNA also prepared Strategy for Prevention and Control of WaterPollution in Mexico. This incorporates the results of a workshop involving Mexican public and privatesector agencies and it will be used as a basis for the technical assistance program in any follow-uplending operation by the Bank. A Pilot Environmental Study in the Lerma-Chapala Basin was carriedout by CNA, which analyzed the preservation of water quality, pollution control and management ofthe use of both surface and ground water, including promotion of efficient use of water. A consultativegroup has been set to oversee the study and to evaluate its achievements. By July 1993, 36 of themunicipal wastewater treatment plants have been built and are in operation. Improvements in waterquality have been observed both in the Lerma River and in Lake Chapala, and CNA is developing awater quality model to help asses the overall impact and plan future actions. As of today, the Lerma-Chapala basin study has served to demonstrate in Mexico the importance of an integrated approach toriver basin management including water quality. CNA designed a guideline entitled El Procedmientode Impacto Ambiental, which includes a methodology for considering environmental variables in theplanning and implementing of water projects. IMTA prepared a Comparative Study of the Design andOperation of Water Treatment Plants, which evaluates both the engineering, operational andinstitutional aspects of a sample group of treatment plants. Both studies have been distributed by CNAto all the OAs in the country (Annex 8B).

7.06 Training.-The project results were satisfactory in terms of quality and quantity. A totalof 5,041 of the operating personnel received training during the three years of project implementation.The original target for the training of about 10,000 operating personnel of 300 state and local operatingagencies had been estimated based on a six-year period of project implementation (Annex 8.C). Thetraining component has been satisfactorily implemented by IMTA under CNA's guidance and incooperation with the Association of Water Utilities (EAS). [MTA and CNA have designed a NationalTraining Program, which will be implemented in 1994-1997. Sector training workshops wereorganized and materials were designed. The latter have been revised and evaluated periodically byIMTA. The training component was carried out through workshops, which identified WUs weaknessand training needs, and designed curricula and several manuals. The training component was providedthrough several training centers owned by IMTA located in Nuevo Leon, Veracruz, Yucatan, Sonora,and Cuernavaca. Most of the training centers were associated with existing water systems or treatmentfacilities available in the regions. More than 200 courses and seminars were conducted in the areas of:

17

(i) administration; (ii) commercial; (iii) pollution control; and (iv) unaccounted for water. Staff thatcompleted workshops and training received certification as competent in their position for contractingwith WUs. Additionally, there were several technical exchanges among WUs and foreign waterutilities . Project experience shows that priority should be given to the continuation of training, whichshould focus on WUs' personnel, as well as and state and regional personnel of CNA, so as to beconsistent with the decentralization process and with the strengthening of CNA, which actually servesas technical agent to WUs. Additional training should be focused to strengthen the sector capability ofall personnel directly involved in the day to day supervision and administration of OAs. A technicalexchange program with participants from several OAs was initiated, which included discussions of theirproblems and share of their solutions. Some of the more advanced OAs have started to participate inexchanges with less developed countries to share their experiences and hence provide technicalassistance to those countries. Annexes 8C shows the distribution of participants by agencies and bytype of semninars aiid workshop.

7.07 The total cost associated with the National Training Program was US$7.4 millioncompared to US$9.6 million at appraisal, but it covered a shorter period than estimated. A total ofUS$0.2 million financed the construction and rehabilitation of three regional centers and an additionalUS$1.7 million was used for the financing of equipment and teaching materials (Annex 8D).

7.08 Institutional Results.- Achievements of the institutional objectives range from mixedto disappointing. Results were particularly disappointing regarding objectives of expanding the role ofthe beneficiaries and the decentralization process. While the government fundamentally changed itspolicy, towards one of promoting local ownership and operalion of water supply and sanitationfacilities, the objective of establishing technically strong beneficiaries was only partially achieved.Water losses (average 45%) are still high, despite several studies carried out to improve operations.Several studies were carried out to improve the operations of local operators, but their impact was lessthan satisfactory (see Annex 8D). The executing agency did not systematically consult with localoperators concerning design solutions; and the Bank did not recognize non-participation of the localoperators as constituting a problem, mainly because Bank stff supervision was inadequate andinvolved virtually no visits to OAs. The objectives of strengthening the institutional framework at thenational level, through developing strong technical support of CNA, as well as strengtheningBANOBRAS, the executing agency, and reinforcing its project preparation capacity, were onlypartially achieved. The project also had only partial success achieving the objective of helping CNAapply least-cost principles to project preparation. Least cost solutions were applied to water andsewerage facilities for a very small number of sub-projects. The situation improved toward the end ofproject implementation, based on Bank recommendations. However, much remains to be done toextend least-cost principles throughout the sector. The executing agency's performance andcommitment to the project and continuity of sector policies varied through the years. BANOBRASwas reorganized in April 1993, and its new organization is aimedl at converting BANOBRAS into aneffective and efficient development bank. The decentralization process is planned to continue.

18

7.09 The project had some successful institutional results in three areas. First, unifiedfinancing mechanisms with the same norms and conditions for all sub-borrowers, implemented underthe project, helped BANOBRAS establish procedures improve the efficiency of its investments.Second, the project was instrumental in promoting the idea of financing integrated water and sanitationprojects, particularly as a means to combat surface and ground water pollution by domestic wastewater. Third, important improvements were made in eleven state laws. These new laws will helpimprove the performance and management of OAs. The most important changes are related to: (a)easier tariff approval methods--tariffs will be approved by the Municipal Councils--which will avoiddelays and political interference by the participation of the State Congress in tariff setting; (b) legalrights of the OAs to cut service due to lack of payment; and (c) more autonomy in dealing with priorityof investments.

7.10 Audit Compliance. Submission to the Bank of audited reports was frequentlydelayed by several months at the beginning of implementation. The Bank expressed its concern onseveral occasions and recommnended also to incorporate some observations made by extemal auditors(lack of cross references for some of IMTA's expenses, and timing of disbursements fromBANOBRAS to beneficiaries, errors in the SOEs, etc.). BANOBRAS gave assurances that timing ofdisbursements would be improved, but the situation persisted after beneficiaries complained to theBank during the last supervision mission. BANOBRAS's financial statements were audited by externalauditors, and CNA and IMTA were audited by the Contralo fia General de la Federaci6n.

8. Project Sustainability

8.01 Physical facilitie:s olxd c qipiiient thnat have been incorporated under the project are stillfunctioning properly, and there is no evidence that they will not be sustainable during their full usefullife. Increasing knowledge and important experience was gained in both the rationalization ofinvestments, promotion of water conservation and improvement of water quality. Institutional changesin organization and in the reduction of the sector's dependence on the government are sustainable, buthave not eliminated the main causes of inefficiency in the water supply and sanitation sector. TheGovernment has taken a more effective role in the management of the water resources and much moreinformation has been accumulated. The project has laid the basis for the follow up Second WaterSupply and Sanitation Sector Project, and has increased awareness on the part of all sector officials onthe need for institutional improvements, least cost solutions, and better information managementsystems. In the long run this situation is expected to improve further, once the decentralization of thesector, currently underway, achieves its intended effect.

9. Bank Performance

9.01 Taking into consideration that this was the fifth Bank project to the Mexican watersupply and sanitation sector, the overall performance of the Bank was mixed, strong on some issuesand weak on others. At the time of project preparation, the Bank correctly highlighted the sector

19

policy issues and there appears to have existed a considerable unanimity of views between the Bank,the Government and the sector institutions on all aspects of sector development: (objectives, strategy,institutional needs and financial principles) resulting in a productive dialogue. The Bank addressed thepoor organization and weak execution capacity of BANOBRAS, and the need to increase water supplytariffs to improve the financial situation of the water agencies and to foster more efficient andfinancially independent operating agencies. The former projects in the sector required little explicitjustification, in view of the sector's obvious backlogs and its institutional and financial deficiencies, andmost of the feasibility studies carried out by WUs were not satisfactory. To avoid these problems, theBank will review a larger number of sub-projects under the proposed follow-up project. The Bankaddressed special attention to the social and environmental aspects of the sub-projects, as well as theneed to provide basic services for the low-income population. The Bank paid inadequate attention tothe issues of relationships between executing agencies, the borrower, and the beneficiaries, and the lackof understanding of project objectives at the local level, which are pre-requisites for smooth andeffective implementation (para.. 6.04). During supervision, the Bank initially did not allow sufficienttime for adequate supervision in situ of the beneficiaries and the need for closer contact with theimplementation issues which they faced (para6.04). The supervision reports are notable for theabsence of comment on the inadequate performance of the respective beneficiaries.

9.02 Due to lack of adequate supervision, the Bank was unsuccessful in ensuring the qualityof sub-projects, despite its long experience with the previous projects in the sector'2. Although, bothproject scope and design were appropriate, the project failed to provide adequately for beneficiaryparticipation in the decision-making process. Failure to include community participation as afundamental requirement of the project, especially at a time when the Government itself was attemptingto decentralize the sector, was clearly a weakness (pwras. 7.01 and 7.06). Despite the deficienciesaddressed in the previous projeCst3, the Bank during project preparation failed to define in sufficientdetail the roles and responsibilities of the implementing agency, BANOBRAS, even though experiencewith SARH, BANOBRAS, and CNA during project preparation had already indicated seriousdeficiencies. The Bank should have taken appropriate actions, such as to stop disbursements to certainsub-projects that were not in compliance with the eligibility criteria and on-lending conditions,especially in areas of financial and operational targets (Para 10. 03). This lack of compliance came tothe attention of the management of the Bank only during the last year of implementation, at whichpoint the Bank launched aggressive supervision efforts (para 9.05). Because the loan was alreadyfully committed, and since most sub-projects were already well advanced into their execution, the Bankdecided not to stop disbursements at that point.

12. Findings of the Audit for previous projects confirmed the project's performance rating as unsatisfactory anduncertain. OED Report SecM93-779, July 23, 1993.

13. The Bank's experience worldwide has clearly shown that this sector is usually unable to achieve permanentimprovements without the active participation of beneficiaries. PAR Mexico: Medium Cities Water Supply andSewerage Project (Loan 1186-ME); Second Medium-Size Cities Water Supply and Sewerage Project (Loan 1913-ME); and Third Medium-Size Citiea and Sinaloa State Water Project (Loan 22111-ME). Document SecM93-1601.

20

9.03 The Bank was strongly committed to assisting Mexico develop the water supply andsanitation sector, improve the environment and strengthen the management and organizaion of its keysector institutions. One of the main supporting features of its lending strategy has been to encouragethe Mexican authorities in timely and well-coordinated preparation of projects, with emphasis ontechnical assistance, and the unification of Federal and State financial assistance to the OAs, understandardized criteria and conditions. Bank performance during implementation demonstrated supportto the project and a desire to sustain project momentum During 1991-1992, a significant number ofcontracts for consultant services were prepared and reviewed for financing under the loan. In order toreduce administrative work load and to expedite project implementation, as an exception of normalprocedures, the Bank simplified procedures by reviewing only those consultant contracts with a valueequal to or exceeding US$100,000 equivalent per contract.

9.04 The Bank, BANOBRAS, CNA, IMTA, and Federal and Local Government institutionsmaintained a good working relationship and understanding concerning some of the constraints affectingthe project. The Bank was also helpful in coordinating the activities of the Mexican's own internalagencies. SWAs, SWSS and WUs sometimes tended to deal with each other at arm's length and amiddleman was needed. Thus the Bank attached great impqrtance to cooperation among the sectoragencies. By the time the loan closed, Federal, State and Municipal agencies were marginally strongerthan they had been. Indeed, the Bank intervention provided a continuity that would otherwise havebeen absent; given the weakness of federal agencies and the organizational changes in the sector.

9.05 Despite the recommendations of the Project Completion Reports of the three main andearlier water supply operations, the number of Bank staff supervision missions and their required skillscomposition appear to have been inadequate for the size and complexity of the project (Annex 7).Supervision efforts were sustained through full or partial missions from Project Effectiveness toClosing Date, but excluding supervision combined with other projects, there was an average of only2.2 supervision missions per year, although it was expected that at least three supervision missions peryear would be required by this project, especially during the first three years of execution. During thefirst two years of implementation, supervision was done only by the Task Manager with emphasis ondiscussing issues only with CNA without due consideration to the opinion provided by BANOBRAS.Time spent on supervision was insufficient (average mission of one staff-week and some of them aboutthree days only). Furthermore, there were no visits to the local beneficiaries to assess their problems,mainly their lack of operational and managerial experience. Ihe Task Manager did not properlyidentify or address emerging and existing problems in the project. The Bank did not supervise theproject for almost a year (March 1992-Januazy 1993). Staff resources devoted to the projectsupervision would have been sufficient to work with just the borrower and executing agency, but theywere inadequate to supervise individual projects with the intensity customary in other Bank projects.The Bank mainly tried to speed up the project implementation by accelerating disbursement proceduresand viewed the accelerated disbursements as a sufficient sign of adequate project implementation.Bank supervision improved during the last year of project implementation, when the new Task

21

Manager and additional Bank staff started visiting several beneficiaries and devoted additional time tofield visits to assess local problems. Bank supervision of the project started even before the loanbecame effective, which was possible because the Bank was still supervising other operations. It isworth highlighting the absence of both a training and environmental specialist, as well as a financialanalyst during the missions, contrary to what had been agreed at appraisal. There were few visits toOAs to monitor the technical assistance being given, and assess its effects on OAs' operational andmanagement efficiency. There is a total absence of financial analysis in the Bank supervision reports.

9.06 Supervision reports provided a comprehensive picture of the technical matters of theproject, but rarely of the institutional-financial aspects of the Borrower and other implementingagencies. The analysis of such aspects improved in later supervision reports.

10. Borrower Performance

10.01 The project was properly identified and prepared. Project preparation and design weresatisfactorily carried out by BANOBRAS staff, with adequate assistance from the Bank. However,BANOBRAS's performance ranged from generally unsatisfactory to modest throughout projectimplementation even though the physical components of the projects were completed, in general, aboutthree years ahead of schedule.

10.02 BANOBRAS lacked capacity to supervise sub-projects and paid little attention to theirfinancial viability and sustainability. The design problems of some sub-projects was the result of poor-quality feasibility studies or master plans. They were compounded by inadequate supervision fromBANOBRAS, partly resulting from a lack of coordination with CNA, and rivalries between the twoinstitutions (para. 6.05). The problems also stemmed from the absence of a monitoring andinformation system to assess the progress of the project components and the degree of compliance withsub-loan covenants. BANOBRAS, with the help of consultants, initiated the organization of anadequate information system to start monitoring sub-project implementation only in 1993. Once theinformation system was in place, it assured the flow of information from WUs to CNXs NationalInformation System and its verification.

10.03 During the last year of implementation when the Bank started very active supervision,the Task Manager found that BANOBRAS had approved several sub-loans to beneficiaries who didnot meet the eligibility criteria, and had failed to ensure that OAs had contributed the agreed-uponamount from their internal cash generation. In addition, BANOBRAS granted some sub-loans tostates and municipalities that were not autonomous, and in some cases approved sub-projects withoutthe assurances that the sub-projects already initiated would be completed. By this time, the Bank wasnot able to take appropriate actions because of the advanced stage of execution of sub-projects (para.9.02). An adequate management information system would have enabled BANOBRAS and the Bankto monitor compliance with the loan conditions for each sub-loan. To avoid this problem,BANOBRAS agreed with the Bank to set-up a high-level group to monitor and to coordinate the

22

following project and to prepare a flow chart describing the different steps that have to be taken toprocess and to approve a sub-project, as well as to increase the number of staff in charge of theimplementation of the project.

10.04 Most of the CNA's activities were carried out by its central office, although aprogressive involvement of the regional state offices occurred later in project implementation. CNAhas committed to a decentralization process and prepared a plan for training OA's staff to strengthen itsregional offices.

10.05 The Bank was concerned about the lack of coordination between BANOBRAS andCNA. Several discussions were held during project implementation to alleviate the coordinationproblems between BANOBRAS and CNA and to assess their responsibilities for projectimplementation C,ara. 6. 05). BANOBRAS had limited resources for supervision, which made itdifficult to maintain satisfactory project leadership and to provide its presence in the field. Neither theborrower nor the executing agency devoted adequate resources to supervise beneficiaries. As a result,institutional improvements will have to be addressed in the following operation. Bank recommendedthe establishment of a high level working group in BANOBRAS to coordinate and manage the project.BANOBRAS has created an Executive Coordinating Unit and the Bank's recommendation will be

implemented in the follow-up operation. Coordination aspects improved later, during projectimplementation, when BANOBRAS assigned additional staff to supervise sub-projects.

10.06 BANOBRAS and CNA have improved their procurement procedures and knowledgeof the Bank's Guidelines, after their initial delays in procurement, because of the unfamiliarity of theirstaff with the Bank's procurement procedures. Sufficient progress occurred during the last two yearsof project implementation. BANOBRAS and CNA staff have improved their professional capacity withtheir participation in seminars and conferences in areas of management and sub-project economic-financial evaluation and supervision. The purchasing of laboratory equipment has improved theIMTAs facilities to detect water leaks and reduce water losses in the design of water supply network.Additionally, the rehabilitation of JMTA's training centers expanded its training capacity to carryseminars and workshops.

10.07 IMfTA had serious delays in the preparing the National Training Program, compoundedby IMTA firing the foreign consultants in charge of supporting and advising them on preparation of thetraining program and materials. CNA and IMTA did not coordinate sufficiently, which led to someproblems in the training program, but matters improved over the course of project implementation.

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11. Project Relationship

11.01 Over the full period of project implementation, the Bank's relationship with theBorrower, CNA, IMTA, Federal and local agencies has been very good. The relationship wascharacterized by continuity of staff and managers working on the project, both in Mexico and in theBank. Minor changes in the Bank staff took place after the first year of implementation andsupervision was done by a new team, which seems to have given fresh vigor to project relationshipsand better understanding of the main project constraints. In the management of CNA and IMTA, therewere few changes during the project implementation period and a good understanding seems to havedeveloped between the Bank missions and the managers in Mexico.

11.02 The relationship between the Bank and the Government was generally a meaningfuiland productive one. The Bank's relationship with other national agencies was also very cordial. TheBank had no problem gaining access to the highest level of Government for sector policy dialogue andfor rendering professional advice.

12 Consultant Services

12.01 Consultants, contractors, and suppliers, both local and foreign, generally performedwell. Their perfonnance, both in terms of technical quality and compliance with schedules was verysatisfactory. The Bank reviewed some studies prepared by consultants under CNA and found themless satisfactory in the areas of financial and sensibility analysis, and in handling alternatives with a least-cost solution. Such deficiencies improved during project implementation. The consultants wereselected in accordance with procedures approved by the Bank and worked generally in compliancewith their Terms of References which were reviewed by the Bank. Consultants hired by CNA wereuseful in providing technical support to OAs in their institutional development programs. CNA, withthe help of consultants, designed and started to implement a monitoring system that reviews theperformance of all agencies that provide water supply and sanitation services in Mexico. Consultantshired by IMTA were useful in designing the monitoring indicators to evaluate effects of subsequenttraining and institutional strengthening, and the designing of operation-maintenance working levelmanuals.

13. Project Documentation and Data

13.01 Project documentation and data included legal documents, the staff appraisal report(SAR), the mission back-to-office reports, supervision reports, and progress reports provided by theBorrower. The legal agreements and the SAR were adequately prepared and generally of acomprehensive nature.

13.02 The SAR was comprehensive, and had a considerable amount of data, which wasuseful in monitoring the project and in its assessment at completion. The legal documents comprisingthe Loan and Project Agreement and the SAR were detailed, and specified clearly the project

24

components and the action to be taken, which reflected the Bank's interest for the satisfactoryexecution of the project. The Borrower's progress reports were submitted with some delays and didnot reflect a complete or timely picture of technical and institutional aspects of the project.BANOBRAS is in the process of strengthening its management information system, in which the datafor project costs and accounting matters will be integrated to serve as a useful tool for projectmanagement and monitoring in the future. Data required for the preparation of the PCR wasinadequate (incomplete correspondence fles, missing back-to-office and supervision reports, and otherproject data) reflecting poor filing practices at the Bank.

14. Lessons Learned

14.01 The following lessons emerge from the implementation of the project:

(a) The project could have benefited from increased beneficiary participation andownership. Sub-projects would have been better adapted to local needs hadbeneficiaries been involved in their design. Financing and revenue collection wouldhave been more efficient had the beneficiary been the primary organizer and investor inthe project. The lack of beneficiary involvement in the project reflects the situation atthe time of project design, when decision-making was alnost exclusively concentratedat the Federal level. During the course of project implementation, however,government policy changed towards increased decentralization in the sector. The Bankdid not make sufficient efforts to insist on the participation of beneficiaries in projectdevelopment. This lesson fits with the Bank's worldwide experience, and shouldincorporated in the design of all future projects (paras. 4.05, 4.07. 602-6.04 and7.01).

(b) BANOBRAS did not monitor or supervise the project adequately. It did not have aproperly-designed Management Information System nor did it devote adequateresources to supervision. It therefore approved ineligible sub-projects, agreed tophysically and financially unfeasible implementation plans, and continued to fund sub-projects that were not meeting agreed physical targets and not complying with financialand other sub-loan covenants. BANOBRAS' progress reports were inadequate both interms of quality and regularity, and contained no data on the financial analysis of theoperating agencies. BANOBRAS was not able to tell when projects were runningseriously over-budget and therefore had to re-finance several sub-projects after theyhad been completed (paras. 6 02-6. 04, 6. 08, 9.05, 10.02 and 10. 03).

(c) Inadequate Bank supervision exacerbated both of these problems. It should not haveaccepted fast disbursements as sufficient indication that the project was moving well.The Bank should have realized the inadequacy of BANOBRAS' supervision effortsand stepped up its own supervision. It would then have discovered that sub-projectswere not in compliance with covenants at a stage when it could have taken action, by,

25

for instance, suspending disbursements. The total lack of financial information tendedto force Bank supervision missions into a role of basic fact-finding rather than ofanalysis of results.14 Had these issues come to light earlier, the Bank could haveinsisted on remedial action. Bank supervision did not put sufficient emphasis onbeneficiary participation. Increasing supervision focus on visits to the local level wouldhave helped involve sub-borrowers, fostered a sense of ownership and forcedBANOBRAS and CNA to address the issue in more detail. Projects with a largenumber of sub-projects typically require more intensive supervision and greateremphasis on field visits, especially when they involve politically sensitive changes, as inthis case. The Bank should have acted upon this knowledge.

(d) The Bank needs to track performance much more closely during projectimplementation to ensure that the Borrower complies with all project covenants. Inthis case, the Bank did not discover lack of compliance until 98% of project funds hadbeen disbursed. The Bank should enforce compliance with covenants and must be ableand willing to suspend disbursements in the case of major institutional problems.(paras. 9.02 and 10. 03).

(e) The objectives of the institutional reforms designed to increase financial autonomy atthe municipal and regional level were too broad and insufficiently defined.Municipalities, OAs, and WUs usually require a well-defined and carefully phased setof objectives, so that they can properly organize their activities, monitor projectperformance and make the necessary changes in the case of shortfalls. Continuedreform of sector policies and institutions is a complex undertaking, subject to changesin the political climate, and one that the Bank should not expect to complete in theduration ofjust one project.

(f) The inability of the Bank to finance the private sector directly in this project without aGovernment guarantee precluded private sector investment in sub-projects, despitestrong interest. Given the potential efficiency and financial gains that the private sectorcan bring about, its participation should be encouraged to the maximum extent.Service contracts or management concessions are most suitable for current conditionsin Mexico and the project should have done more to encourage arrangements of thistype (paras. 7.03 and 9. 01).

(g) Project design should pay particular consideration to the definition of specificinstitutional arrangements. One agency should have primary responsibility, and thisshould be clear to all agencies involved, in order to avoid rivalries (para.. 6.05). In thisproject, institutional rivalries and lack of coordination between BANOBRAS and CNA

'. Bank Experience in Project Supervision. Report No. 10606, April 30, 1992. OED.

26

during project implementation resulted in frequent discussions to determine theirrespective responsibilities for implementing the project, and caused delays and neglectof many important activities (pwa 10. 05).

27

MEXICO



(Loan 3271-ME)

PART I PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

The Borrower's contribution to the PCR was prepared by BANOBRAS. The text below is as receivedfrom the Borrower and its content are not attributable to the Bank. The original report was in Spanishand has been translated to English and edited to achieve stylistic consistency with Part I.

28

MEXICO



(Loan 3271-ME)

Table of Contents

I - General Framework of the Water Supply and Sanitation Program ...................................... 29

II - Comments to the PCR .............................................. 32

III - Executive Summary ................................................ 33

IV - Project Review from the Borrowers' Perspective ............................................... 40

29

L General Framework of the Water Supply and Sanitation Program

This docunent presents an evaluation of the progress made in the water supply and sanitationsubsector during the period from 1989-1994, along with the perspective of the Government of Mexicoon the development and implementation of the Water Supply and Sanitation Sector Program carriedo 't during that period and on the Project Completion Report (PCR) from the perspective of theBorrower.

The actions caried out were part of the Water Supply and Sanitation Sector Program, whichsought an expansion of services at a rate faster than population growth, institutional building in thesubsector and its financial recovery.

The development of the subsector is reflected in the increase in coverage, as well as in the legal,administrative and financial improvements at the operating agencies, the development of a new waterculture based on rational use and the protection of resources, and heightened social sector participationin improving the quality of service.

Implementation of the program required the participation and coordination of the NationalWater Commission (CNA), the Ministry of Social Development (SEDESOL) and the NationalDevelopment Bank for Public Works and Services (BANOBRAS), which are responsible for theregulatory, programming, financial and managerial aspe-tes of the Soibsector, as well as joint efforts tostrengthen policies and strategies. During this process, measures were taken to improve and streamlineprocedures and to increase decentralization with a view to more inimble and autonomous action andoperation within the subsector.

At present, the Water Supply and Sanitation Sector Program is one of the most decentralizedwith regard to services and infrastructure and it is highly open to participation of the private sector inthe administration and expansion of services. The water supply and sanitation subsector is developinga market based on the supply of and demand for better products, technology and services that respondto the needs for investment and development of the agencies with oversight for the services.

Evaluation of Progress in the Subsector.

One of the most pressing needs perceived by Mexico's population at the beginning of the currentadministration (1988-1994) was potable water supply. At the time, 21.8% of the population did nothave a formal supply of potable water and 38.4% did not have sanitation services.

The Federal Governnent took various administrative and budgetary measures on an urgentbasis at the national level to address the issue of water supply and sanitation services. In particular:

30

* In January 1989 the CNA was established as the arm of the Federal Government responsiblefor overall water management, which meant changes in the responsibilities and powers of theentities providing support to the subsector;

* May 1990 saw the start-up of the Water Supply and Sanitation Sector Prograrn, through whichpolicies, strategies and instruments to support development of the subsector were identified;

* The adaptation and modernization of water legislation, through amendments to the FederalWater Rights Law. In December 1992 the new National Water Law was published and oneyear later its regulations issued;

* International finance agencies were invited to support the program and supplement investmentsin the subsector. In 1991 the Bank agreed to participate in the program through a loan forUS$300 million targeted towards the urban areas, while credits were concluded with the Inter-American Development Bank (IDB) for projects in the metropolitan region of Monterrey andGuadalajara and a sectoral undertaking for medium-size cities, for a total of US$694 million.Financing was secured with the OECF of Japan to support sanitation operations in the city ofMonterrey for US$100 million.

The policies implemented under the program placed special emphasis on institutional andstructural consolidation of the sector, decentralized management of the program and in particular theoperational and financial improvement of the agencies providing the services.

Federal (SEDUE-SEDESOL, SARH-CNA) and State eiltities alike underwent administrativeand organizational restructuring through the decentralization and deconcentration of services to theOperating Agencies (OAs). BANOBRAS, the financial institution serving the sector, was alsorestructured. The reforms were introduced at all levels of representation and action, and institutionbuilding programs addressed the development of the new tasks and responsibilities.

With a view to improving and strengthening the coordination and cooperation of the variousentities involved in the subsector, State Water Supply and Sanitation Subcommnittees were established;criteria and procedures governing the utilization of funds were standardized through the start-up of theResource Mix Scheme and the opening of a single financing window for urban water supply andsanitation programs in BANOBRAS.

In the metropolitan and rural areas, federal efforts in support of the subsector were consistentwith specific programs in the former case and funding from the Solidarity Program in the latter.

From 1989 to 1994 investments in the subsector were some NPMexl4.5 billion (US$4,150million), or double the amount invested during the previous period. Most program funds came fromfederal and state tax revenue (75%); loans, the equity of the operating agencies and private financingprovided the remaining 25%. International finance organizations provided 17.6% of the total investedunder the program.

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At the end of 1994, coverage in potable water service will have risen from 78.2% to 87%,sanitation from 61.6% to 70%, disinfection of water supply from 55% to 95%; the capacity forwastewater treatment should be four times greater. A total of 16.3 million and 13.7 mnillion inhabitantswill benefit from expanded water supply and sanitation services, respectively.

Progress in institutional building and modernization of the legal framework of the subsector isreflected in the following results:

* At the local level, 231 decentralized water operating agencies were established, of which 133operate in cities of more than 50,000 inhabitants; 90 of those cover their operating andmaintenance costs; 50 are financially self-sufficient and 40 generate resources for the expansionand improvement of services. At the state level, 31 agencies have been established to coverareas not served by the municipal systems;

* Programs focusing on improving the operations of the systems and lowering operating costshave meant general improvements, as reflected in the reduction of system water losses, lowerconsumption of energy and [increase in] service standards.

* Through an improvement in commercial aspects, the annual aggregate income of the operatingagencies increased by 335% in real terms from 1989-1994;

* Legal and admninstrative reforms were made in 17 states with a view to the decentralization ofservices and the financial self-sufficiency of the operating agencies, along with the promotion ofprivate and social investment in potable water, sewerage and sanitation systems;

* From 1989 to 1994, in order to stimulate program implementation and make up for the dearthof final designs, through CNA 954 studies and projects were carried out involving thediagnostic aspects, feasibility, design, consolidation, long-term planning for water supply,sewerage and sanitation projects that supported a large slhare of the investments made initiallyand served as a basis for ranking the priority of investments in a second phase. The cost ofthese studies represented only 2% of the funds invested, since a hallmark of the prograrn wasits decentralization;

* With regard to the feasibility studies and master plans, the financial and economic appraisals forthe investment program were based on traditional microeconomic parameters for assessingproject rate of retum, including least-cost analysis of altermatives. For the studies and designseligible for extemal financing, the methodology and procedures preferred by each fundingsource were used;

* With regard to training and technical assistance, CNA worked through the Mexican Institute ofWater Technolog (IMTA), providing courses and workshops that trained 5,000 technicians

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and administrators from more than 200 state and municipal operating agencies, the privatesector and universities;

With regard to private sector participation, through CNA and BANOBRAS, progress has beenmade in the formulation of promotion schemes and local authorities are receiving advisoryassistance in service concessioning.

Financing from international finance organizations has been an important tool in the efforts toeffect structural change in the subsector. In particular, Loan .3271-ME from the Bank assisted ininstitutional building and consolidation for the participating entities and the beneficiary operatingagencies under the program; competitive bidding procedures weie standardized country-wide and thestudies, feasibility projects and master plans were for the most part consistent with the Bank'smethodological guidelines.

For the Government of Mexico, the benefits achieved through the implementation of the WaterSupply and Sanitation Sector Program are highly positive; the structural change in the administrationand operation of services ensures the continuity, strengthening and improvement of water supply,sewerage and sanitation systems, on new bases of autonomy and self-sufficiency.

The following document provides a general overview of the operations and credit processesunder the Water Supply and Sanitation Sector Program from the standpoint of BANOBRAS andCNA, as borrower and technical agent, respectively, for Loan 3271-ME, and constitutes Part II,entitled "Project Review from the Borrower's Perspective," of the PCR for the Water Supply andSanitation Sector Project prepared jointly by the Bank, CNA and BANOBRAS.

II. Comments to the PCR.

A review of Parts I and III of the PCR for the Water Supply and Sanitation Sector Projectshows that the document makes a series of categorical assertions that play down the successful andsound experience of the Water Supply, Sewerage and Sanitation Program and Loan 3271-ME, in thatthey repeatedly criticize the operational aspects and implementation of the program, and only brieflymention the achievements of its first three years of operation.

Although the program was launched with some gaps in coordination primarily because it wasthe first joint program in which BANOBRAS, CNA and SEDESOL were involved, these deficiencieswere gradually cleared up and ultimately such a sound working relationship was established that thetargets set in the Staff Appraisal Report (SAR) were largely exceeded, to such an extent that the sub-loan program of Loan 3271-ME was totally committed by the first quarter of 1993, instead of thescheduled date of December 31, 1996.

With regard to the National Training Program, in a lapse of three years 200 courses andsemninars were given in administration, commercial aspects, pollution control and un-metered water and

33

more than half of the targeted personnel were trained within three years, instead of the six yearsscheduled.

Importantly, the broad-based participation of beneficiaries made it possible to conclude the sub-loan program in three years; the operating agencies were granted financing for NPMex46.9 million for248 studies and engineering designs, some of which will be financed under the Second Water Supplyand Sanitation Sector Loan (Loan 3751-ME).

Of all the programs mentioned in Part I of the PCR for the Water Supply and Sanitation SectorProject, without a doubt supervision of the performance of contractual commitments regarding sub-loans was the only program not properly completed, owing prinmarily to understaffing on the part ofBANOBRAS for carrying out the activity in full; nevertheless, most of the operating agencies satisfiedthe greater part of the contractual conditions, primarily with regard to the annual increase in rates,thereby consolidating their financial position to such an extent that, despite the current crisis in theoverdue portfolio faced by the other banks, the operating agencies have satisfactorily covered theiramounts due BANOBRAS.

Part I of the PCR does not mention that various Bank credit programs carried out byBANOBRAS were administered efficiently and responsibly, such that for the Water Supply andSanitation Sector Project the Bank demonstrated confidence in BANOBRAS by delegating to itdecisions on eligibility in connection with the competitive bidding, as well as review of thedocumentation supporting the reimbursement of external resources. Moreover, during the supervisionmissions carried out by Bank personnel under Loan 3271-ME, no anomalies whatsoever were foundwith the competitive bidding and disbursement programs that were worthy of any mention by theIBRD.

Given the foregoing, it would be appropriate for the Bank to rework Part I of the PCR for theWater Supply and Sanitation Sector Project, so that it reflects the real performance of that program andthe above-mentioned loan, recognizing that the project was a model of development whose successwould be difficult to equal.

Im. Executive Summary

1. Background

With a view to mitigating the severe shortfall in potable water and sewerage services faced bythe great majority of medium-sized cities in the country, as well a; to create the efficient administrativestructure needed for the sound operation of the services, in early 1989 the Federal Governmentformulated the Water Supply and Sanitation Program, which was based on three key strategic thrusts:

(a) Strengthening of the operating agencies of water supply and sanitation systems;

(b) At the state-level, consolidation of an oversight agency for the sector;

34

(c) Strengthening of management at the central level.

The program sought to strengthen coordination, consultation and technical assistance, establisha financial system and reform the legal framework.

In order to best serve the sector, the CNA was established in January 1989 as a deconcentratedadministrative body of the Ministry of Agriculture and Water Resources to address policy prioritieswith regard to water resources at the federal, state and municipal levels.

With a view to examining and expanding the financing of water supply, sewerage and sanitationprojects primarily in the metropolitan areas and medium-sized cities, in May 1990 the FederalGovernment launched the Urban Water Supply, Sewerage and Sanitation Program (Prograna de AguaPotable, Alcantarillado y Saneamiento en Zonas Urbanas - APAZU), which bases its operations onthe general principle of mixed sources of fands. As such, funds come from the federal and stategovernments, borrowing and the equity of the operating agencies of the water supply and sanitationsystems.

In support of the Water Supply and Sanitation Sector Prograrm, the Federal Government andthe Bank prepared the Water Supply and Sanitation Sector Project through Loan 3271-ME, which wasconcluded on February 18, 1991 between the BANOBRAS, as the financial agent of the FederalGovernment, and the Bank for the partial financing of that project. The CNA was to serve as thetechnical agent of the project and the Ministry of Social Develop)ment (SEDESOL) as the regulatoryentity with regard to budgetary matters.

2. Project Objectives

The general objectives of the project were to improve the quantity and quality of potable water,sewerage and sanitation services; support the institutional development of the sector; promote pricingpolicies; gradually reduce govermnent subsides; expand service coverage; and improve environmentalconditions in the sector.

3. Project Implementation

With a view to enhancing project implementation, BAN013RAS, CNA and the former Ministryof Progranmming and Budget (SPP) and now SEDESOL carried out a deconcentration process of theirregional and state fanctions. The COPLADEs were established within the State Water Supply andSanitation Subcommittees as mixed-representation bodies responsible for coordinating the fornulationof the State Water Supply and Sanitation Program and the corresponding annual operations program.

Through its regional and state offices, CNA provided technical assistance to state andmunicipal authorities in the formulation of sub-projects, con3truction, administration, operation,rehabilitation and conservation of water supply, sewerage and sanitation systems.

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Through its state branch offices, BANOBRAS oversaw the economic and financialaspects of the sub-projects and was responsible for the authori,ation, formalization, investment andrecovery of credits.

With a view to enhancing coordination in project implementation, SEDESOL, CNA andBANOBRAS formulated a Uniform Operations Manual for the implementation of the Water Supply,Sewerage and Sanitation Prograrm, which sets forth the program's objectives, the functions of eachparticipating entity and applicable regulations, as well as the procedures to be followed.

Given the differing levels of development and national integration, the program used themunicipal marginality indexes defined by the National Population Council in establishing creditpercentages, as well as those for the federal and, state governments and the internally generated cashinputs of the operating agencies, with a view to constituting the funding mixes for each sub-project.

From the start of the program in 1990, BANOBRAS was the single payment window, inaccordance with the agreement reached with the federal offices involved. This arrangement madepossible proper control of the investments, including their utilization of federal funds, as well ascompliance with the regulations.

With a view to a quantitative and qualitative improvement in water supply, sewerage andsanitation services, as well as to boost the decentralization of those services, priority was given toefforts involving the constitution and/or consolidation of municipad, inter-municipal and state operatingagencies, seeking their technical administrative, operational and financial autonomy.

4. Project Development

In order to promote the use of the resources budgeted for each fiscal year, as well as thedecentralization of actions, an important aspect was that the programming and budgeting functions forthe water supply, sewerage and sanitation sector were carried out within the COPLADEs, through theState Water Supply and Sanitation Subcommittees.

At December 31, 1993, 2,171 operations had been financed for a total of NPMex3,853.9million, consisting of 1,722 mixed resource operations totaling NPMex3,269.6 nillion; 201 operationsfinanced without a credit component totaled NPMex537.4 rnillion. Lastly, 248 studies and finaldesigns were carried out for NPMex46.9 million.

With regard to the distribution of financing by type of project, the total authorized breaks downinto 1,794 infrastructure operations, of which 1,154 were for water supply, for a total ofNPMexl,928.5 million; 497 projects were for sewerage works totaling NPMexl,033.2 million and 143for combined water supply and sewerage operations totaling NPMex434.9 million. With regard tosanitation, 41 projects for construction and/or rehabilitation for the same number of wastewatertreatment plans for a total of NPMex 153.5 rmillion were financed, whereas 336 operations for a total ofNPMex303.8 nillion were approved for consulting services under the consolidation component.

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From 1990 to December 31, 1993, 3,166 operations involved competitive bidding for civilworks, supplies and consulting services for an amount totaling NPMex2,682.9 million.

During that period, program funds were invested in 5319 localities of the 31 states of theRepublic in efforts to satisfy the needs of the inhabitants with regard to water supply, sewerage andsanitation.

With regard to the disbursement of the proceeds of Loan 3271-ME at December 31, 1993,BANOBRAS had received US$278.9 million, representing 93% of the total amount contracted. It isexpected that the loan will be fully disbursed by October 31, 1994

5. Operating Agencies

In 1990 the Water Supply, Sewerage and Sanitation Program began operation with 57operating agencies, of which 20 were state, 34 municipal and 3 inter-municipal; nevertheless, with aview to attaining the objectives of the program and complying with the eligibility criteria for financingunder the program, from 1990 to 1993 a total of 129 operating agencies were either deconcentrated orestablished, bringing the total at December 31, 1993 to 186, of which 155 were decentralizedmunicipal entities, 22 were established under the state governmenls and 9 were inter-municipal.

The operating agencies were established in accordance with the legal precepts, and the servicesof municipal employees with the necessary experience in the provision of water supply and sanitationservices were contracted to run them.

As a result of the institution building of the operating agencies as well as the restructuring ofthe water and sewerage rates by the local authorities, in 1993 the operating agencies saw operatingrevenue at the national level increase to more than NPMex5 billion, in relation to the NPMex800million revenue that was collected in 1989.

Moreover, the sound performance of the operating agencies was fundamental to the success ofthe program. The agencies did an excellent job in identifying the needs of the population with regard towater supply and sanitation, formulating engineering designs, presenting their requests to the StateDevelopment Planning Committees (COPLADEs) and managing credits vis-c-vis BANOBRAS.

6. Sector Coordination

Although the program exceeded the expected results in both quantitative as well as qualitativeterms, it is true that it was not without certain various operating problems, owing to its design within aframework of decentralization. These problems were overcome through sound coordination amongthe various participating entities.

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With a view to solving the problems that arose during project implementation, the key officesand institutions involved provided ongoing advisory assistance to their counterpart state agencies andfurnished the necessary training, so that the APAZU regulations wNere fully understood and respected inaccordance with the Uniforrm Operations Manual.

As the executing agency for the Bank loan, BANOBRAS maintained ongoing coordinationwith the SEDESOL, to ensure that the budget authorizations were issued on time. Coordination withthe CNA, as the federal regulatory office with regard to the technical aspects of the program, ensuredthat program activities were of the expected quality, and that they were consistent with timetables andwith the budget, resulting in optimal utilization of those resources and the provision of water supplyand sanitation services to the beneficiaries.

7. Institutional Building

With a view to strengthening CNA's and BANOBRAS' intemal operating structures, the twoentities were reorganized to allow for proper running of the prolgrarn, and the requisite personnel foradministering the Water Supply and Sanitation Program were recruited.

In order to ensure the greatest success in project implementation under the decentralizedapproach, courses, seminars and workshops were held periodically for both BANOBRAS and CNApersonnel at the central and state level. In some cases, state and municipal authorities and personnelfrom the operating agencies also attended, in order to introduce and strengthen the new water policy inall its aspects.

8. Coordination with the Bank

Coordination with Bank project officials was characterized by cordial working relationshipsthat in general were satisfactory; the project also enjoyed broad-based cooperation, as evidenced by theconfidence placed in BANOBRAS through the delegation of decisions on eligibility in the competitivebidding processes, as well as the review of the documentation supporting the reimbursement ofextemal resources.

9. Achievements

The achievements of the program implemented by the operating agencies of the water supplyand sanitation systems would include the following:

establishment of the mixed-resource approach which made possible the timely use ofcounterpart funds and the establishment of budgeting and programmning mechanismswith the assistance of the pertinent federal, state and municipal entities;

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establishment of a single financing and payment window for the sector, which improvedthe channeling of resources and resulted in the decentralized implementation ofinvestments, to the benefit of the borrowers and users;

expansion of coverage of water supply and sanitation services in various localities ofthe 31 states, resulting in coverage of 97.6% for water supply and 93.2% for sanitationservices cities with between 50,000 and 100,000 inhabitants. In cities with more than1,000 inhabitants, coverage [of water supply services] was approximately 97.9% andsanitation 92. 1%;

improvement in the administration of services, through their consolidation and greaterautonomy, as well as expansion of management and operating capabilities;

increase in national operating revenue, as a result of the rate review and adjustmentthrough the Boards of the operating agencies, as a result, among other factors, of thelegal changes introduced;

changes to the state legal frameworks, through the formulation of state water lawsproviding for the autonomy of the decentralized operating agencies in the provision ofthe services. A total of 19 state water laws were finalized and another 8 are in thepipeline;

gradual elimination of subsidies to water consumption, for domestic as well ascommercial and industrial use;

greater transparency and standardization in competitive bidding for works and/orservices, making resource utilization more efficient;

substantial increase in the number of project beneficiaries, from 3.2 million inhabitantsto 4.5 million, within a three-year period, in comparison with the six years estimated inthe SAR;

substantial headway in institution building of BANOBRAS, CNA, IMTA and theoperating agencies of the water supply, sewerage and sanitation systems, throughattendance by their staff at courses, seminars, workshops and similar events, as well asthrough the acquisition of the necessary equipment for carrying out their objectives andfunctions more efficiently;

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greater confidence on the part of the Bank in BANOBRAS in its capacity as financialand executing agency, through the delegation of iunctions with regard to decisions oneligibility for competitive bidding on works and services, as well as in the review ofdocumentation supporting the reimbursement process under Loan 3271-ME.

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IV. Project Review from the Borrowers' Perspective

1. Background

Between 1974 and 1990, the Bank and the Mexican authorities prepared and implementedthree water supply and sewerage sectoral projects, which were financed by the Bank under Loans1186-ME, 1913-ME and 2281-ME, for a total amount of US$265.3 million.

The projects financed the expansion and improvement of water supply and sewerage systems inthe medium-sized cities of the country (80,000 inhabitants or more), excluding the metropolitanregions of Mexico City, Guadalajara and Monterrey, in accordance with the notion of a morecomprehensive approach. Likewise, actions were financed to support the institution building of theoperating agencies of the systems, which had been recently established.

In the 1980s, owing to the econornic crisis that affected Mexico, the investments that thecountry needed in the sector were not made, which exacerbated the backlog and caused thedeterioration of existing infrastructure. In addition, the operating agencies had limited autonomy andtechnical capability for administering and operating most of the systems. In early 1990, some 22% ofthe population was not connected to a formal water supply system and nearly 38% lacked sewerageservices. 5

Given the above-mentioned circumstances, in early 1989 the Federal Government formulatedthe Water Supply and Sanitation Program, which was centered around three basic strategy thrusts:

(a) consolidation of the operating agencies of the water supply and sanitation systems;(b) consolidation within each state of an agency with oversight for the sector;(c) strengthening of oversight at the central level.

The Water Supply, Sewerage and Sanitation Program also seeks to strengthen coordination,cooperation and technical assistance, to establish a financial system and to reform the legal framework.

In order to improve services in the sector, in January 1989 the National Water Commission wasestablished as a deconcentrated administrative body of the Ministry of Agriculture and HydraulicResources (SARH). Its mission was to focus on the priorities of the water resources policy; streamlinethe administration of water resources; facilitate coordination between federal, state and municipalentities; expand deconcentration; and strengthen consultation.

With a view to examining and expanding financing for water supply, sewerage and sanitationprojects, primarily in the metropolitan areas and medium-sized cities, in May 1990 the Federal

National Water Commission, "Situaci6n del Subsector Agua Potable, Alcantarillado y Saneamiento 1993." ("Situation of theWater Supply, Sewerage and Sanitation Subsector in 1993"), Tables 9 and 10, p. 9.

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Government established the APAZU, which is based on the general mixed resource approach, whichbrings together government and state monies, borrowed funds and the internally-generated resourcesof the agencies that operate the water supply and sewerage systems.

In support of the National Water Supply and Sewerage Program, the Federal Government andthe Bank prepared the Water Supply and Sanitation Sector Project, under Loan 3271-ME, which wasconcluded on January 18, 1991 between BANOBRAS, in its capacity as financing agent of the FederalGovernment, and the Bank, for the partial financing of that project. CNA was to serve as technicalagent of the project and SEDESOL was to be the regulatory body for budgetary matters.

The APAZU Program is part of the National Solidarity Program and is governed by pertinentfederal legislation, as well as agreements with international finance agencies, with a view to ensuringmaximum efficiency in the use of the resources and the attainment of the objectives. To this end, aUniform Operating Manual was formulated jointly by the federal entities in question (SEDESOL,CNA, BANOBRAS) to standardize the program's development.

Program operation is totally decentralized, although programming and budgeting of works andactions are carried out at the state level under the pertinent COPLADE, while preparation of studiesand final designs, competitive bidding, contract award and the execution of works and actions arecarried out through the operating agencies. Likewise, the channeling of funds is handled by the statebranch of BANOBRAS in each state.

2. Project Objectives

The general objectives of the project were to improve the quantity and quality of water supply,sewerage and sanitation services, support institution building in the sector, promote pricing policies,gradually reduce government subsides, expand the coverage of services and improve environmentalconditions in the sector.

The specific objectives of the project were to:

(a) reduce subsidies to the sector;

(b) strengthen the national institutional structure, through (i) development of an agencyresponsible for monitoring with solid support (CNA); (ii) strengthening of the financial intermediary(BANOBRAS), with a view to improving its technical experience as financial and executing agency inorder to improve the performance of sub-loans; (iii) participation of the Mexican Institute of WaterTechnology (MTA) in the ongoing upgrading of human resources and the development andimplementation of a training program for sector personnel at all levels; and (iv) formulation of a studyon the legal structure and development of model contracts to promote the involvement of the privatesector in the provision of water supply and sanitation services;

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(c) promote at the state, regional and/or municipal level, the development of appropriatelysized agencies (public or private) with financial and operating autonomy that are capable of efficientoperation and maintenance of the water supply and sewerage systems;

(d) provide by the end of 1994 water supply and sanitation services for some 24 millionadditional people, most of whom would be among the poorest segment of the population (the worksfinanced by the project were expected to benefit some 3.2 million people);

(e) improve environmental conditions through the implementation of a water pollution controlprogram to: (i) develop, test and fine-tune national policies and regulations governing water pollutioncontrol; (ii) strengthen the capacity of the agencies responsible for the implementation of waterpollution control programs, with special emphasis on operating capacity and compliance withregulations; (iii) develop a sound program for monitoring water quality and a management informationsystem for the related activities; and (iv) help ensure that all projects and programs are supported bymeasures to lessen the environmental impact.

3. Project Implementation

With a view to improving project implementation, BANOBRAS, CNA and the formnerMinistry of Programming and Budget (SPP) -- now the Ministry of Social Development (SEDESOL)took steps to deconcentrate their functions to the regional and state level. Thus, the State WaterSupply and Sanitation Subcommittees were established within the COPLADEs, as the mixed-representation bodies responsible for coordinating the formulation of the State Water Supply andSewerage Program and the pertinent annual operating program. Likewise, the Subcommittee analyzesand, if appropriate, approves the investment proposals submitted to it, in accordance with theestablished priorities, and subsequently monitors the utilization of resources and evaluates the results.

Through its regional and state offices, CNA provides technical assistance to the state andmunicipal authorities in the formulation of sub-projects, construction, administration, operation,rehabilitation and conservation of the water supply, sewerage and sanitation systems. It also decides onthe eligibility of sub-projects.

Through its state branch offices, BANOBRAS makes an economic and financial appraisal ofsub-projects and is responsible for the authorization, formalization, investment and recovery of loans.It also monitors compliance with the contractual conditions in accordance with the regulationsestablished for the program.

In order to improve coordination in project implementation, SEDESOL, CNA andBANOBRAS formulated a Uniform Operating Manual for the Water Supply, Sewerage and SanitationProgram, which sets forth the program's objectives, the powers of each participating entity andapplicable regulations, and the procedures to be followed.

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Given the different levels of development and national integration, the program adopted themunicipal marginality indexes defined by the National Population Council for setting loan percentages,as well as those for the federal and state inputs and those internally generated by the operatingagencies, with a view to constituting the funding mixes for each sub-project. The idea was to provideequitable support to the various localities with needs in water supply, sewerage and sanitation servicesby recognizing the different socioeconomic conditions prevailing in each of them.

With a view to bringing a greater number of local communities into the program and expandingthe benefits to the population, it was agreed to include those where -- despite -- a high marginalityindex -- financing was possible owing to the creditworthiness of the population.

Given the degree to which needs were met with regard to water supply, sewerage andsanitation, as well as the strengthening of the operating agencies themselves, beginning in 1993 changeswere made to the policy for putting together finding mixes; in areas with more than 80,000 inhabitants,financing for water supply and primary treatment plans with 100% of borrowed funds and intemallygenerated resources was introduced, while sewerage/sanitation projects and actions to strengthen theoperating agencies were financed 100% by federal and state funds. Secondary treatment plans werefinanced through additional funding from the private sector.

From the start of the program in 1990, BANOBRAS was the single payment window, inaccordance with the agreement reached by the federal entities involved and described in the UniformOperating Manual so that the actions to be carried out under the program would comply with theestablished eligibility criteria and regulations. This has pernitted proper monitoring of the investments,including their utilization of federal funds, as well as compliance with regulations regarding publiccompetitive bidding and eligibility, for both projects and repayments of borrowed external resources.

With a view to optimizing the development of the program through the identification of priorityprojects, generation of studies and final designs and in general to resolution of any problems that rnightarise during project implementation, SEDESOL, CNA and BANOBRAS established an inter-institutional working group that meets weekly and attends the meetings of the State Water Supply andSanitation Subcommittees.

With a view to the quantitative and qualitative improvement of the water supply, sewerage andsanitation services provided by the operating agencies, as well as to further the decentralization ofthose services, emphasis was placed on actions involving the establishment and/or strengthening ofmunicipal, inter-municipal and state operating agencies with technical, administrative, operational andfinancial autonomy.

4. Project Development

Owing to its unique design, at the outset the program ran into various problems that directlyaffected its development. These would include:

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(a) Nonexistence or limited number of feasibility studies and final designs in some of the states thatwere able to lead ultimately to works, as well as the atomization of projects to the detriment ofbroad-based works and/or actions;

(b) Inadequate programming of works implementation by the operating agencies, resulting inincreased outflow of resources in the last weeks of each fi:cal year.

With a view to addressing those problems, a portfolio of final designs for comprehensiveprojects was established, through which credit and technical support was provided to the state andmunicipal governmnents and their decentralized operafing agencies in order to avoid atomization to thedetriment of the projects. Using funding from the Water Supply, Sewerage and Sanitation Program,from 1990 to 1993 BANOBRAS financed 248 operations for a total of NPMex46.9 million that wasused in the formulation of studies and final designs.

Likewise, with a view to promoting the use of budgeted finds in each fiscal year, as well as thedecentralization of actions, emphasis was placed on carrying out programming and budgeting for thewater supply, sewerage and sanitation sector within the COPLADEs, through the State Water Supplyand Sewerage Subcommittees.

Of the operations supported by the program, at December 31, 1993, a total of 2,171 sub-projects had been financed for a total of NPMex3,853.9, consisting of 1,722 operations with a fundingmix for a total of NPMex3,269.6 rnillion; 201 operations without a credit component for a total ofNPMex537.4 million; and 248 studies and projects for NPMex46.9 million (Table 1).

Funding for the financing of the authorized operations included NPMexl,403 million in federalcontributions, NPMex987.9 in state funds; NPMexl.359.6 millicn in credit operations andNPMex:O3.5 million in direct contributions from the operating agencies, through their internallygenerated cash flow (Table 1).

In terms of the breakdown of financing by type of project, the total authorized breaks downinto 1,794 infrastructure operations, of which 1,154 were for water supply, at a cost of NPMexl,928.5million; 497 sewerage projects for NPMexl,033.2 million and 143 combined water supply andsewerage operations for NPMex434.9 billion. For sanitation, there were 41 operations for theconstruction and/or rehabilitation of a like number of wastewater treatment plants, for a total ofNPMex153.5 million, while for the consolidation program 336 operations accounted for NPMex303.8million (Table 1).

With regard to competitive bidding, both BANOBRAS and CNA sponsored various regionaltraining courses at the national level, with a view to training the staff of the operating agencies as wellas the BANOBRAS state offices and CNA regional and state branch offices in the implementation andoperation of program procedures governing competitive bidding fbr works, supplies or the contractingof consulting services.

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Moreover, from the outset of the program the Bank demonstrated great confidence bydelegating to BANOBRAS decisions on eligibility regarding competitive bidding, which expeditedprogram operations, since in the past the procedure involved sending the briefs and bidding documentsto Bank headquarters in Washington, D.C. for review and approval, which took longer and delayedthe start-up of the works or actions financed, in addition to pushing up their cost.

Between 1990 and December 31, 1993, 3,166 invitations to tender were issued for works,supplies and consulting services, representing a total of NPMex2,6 82.9 million.

Competitive Bidding for Works, Supplies and Consulting Services 1990-1993(NPMex million)

Competitive bidding Water supply Sewerage Water supply Sanitation Consulting servicessewerage

Year No. Aant No. Amnt No. Amt No. Amnt No. Amt No. Amnt

1990 624 525.7 470 382.1 111 91.6 22 40.7 0 0.0 21 11.31991 725 713.7 430 490.8 110 136.8 14 23.3 10 25.6 161 37.21992 858 730.2 396 345.8 235 269.1 25 51.3 5 15.0 197 49.01993 959 713.3 307 258.1 261 302.2 44 61.3 8 19.1 339 72.6

Total 3166 2682.9 1603 1476.8 717 799.7 105 176.6 23 59.7 718 170.1

4.1 Water Supply Operations

With regard to water supply, from 1990 to December 31, 1993, BANOBRAS granted 1,154loans for a total of NPMexI,928.4 million for the construction, expansion and rehabilitation of watersupply systems, which expanded water supply coverage in towns with 50,000 to 100,000 inhabitants to97.5% and in towns with more than 100,000 inhabitants to some 98% (Table 1).

With regard to the competitive bidding for works and services in connection with water supplysub-projects, 1,603 invitations to tender were issued for a total of NPMexl,476.9 million, of which 470were in 1990, 430 in 1991, 396 in 1992 and 307 in 1993 (Table 2).

4.2 Sewerage Operations

During the period under review, 497 operations were financed for a total of NPMex 1,033.2million for the construction, expansion and rehabilitation of sewerage systems, following whichcoverage of this service was increased in localities with between 50,000 and 100,000 inhabitants to93.2% and in localities with more than 100,000 inhabitants to approximately 92.1% (Table 1).

Under this component, 717 invitations to tender were issued for works and services, for a totalof NPMex799.7 million, of which 111 were in 1990, 110 in 1991, 235 in 1992 and 261 in 1993 (Table2).

46

The increase in the number of invitations to tender in the last two years was due to the need toimprove and expand sewerage infrastructure and serve a greater number of inhabitants with a view toreducing current coverage shortfalls and the negative environmental impacts.

4.3 Combined Water Supply and Sewerage Operations

For combined water supply and sewerage operations, 14.3 loans were made for NPMex434.9million for system construction and expansion. The joint projects were undertaken in localities lackingboth services (Table 1).

With regard to competitive bidding for works and services, 105 invitations to tender wereissued for a total of NPMexl76.6 million, of which 22 were in 1990, 14 in 1H;)1, 25 in 1992 and 44 in1993 (Table 2).

4.4 Sanitation Operations

With regard to operations to reduce negative environmental impacts and protect theenvironment, BANOBRAS financed 41 operations for a total of NPMexl53.5 million for theconstruction, expansion and rehabilitation of wastewater treatment plants. This helped in the gradualcleaning up of the major watersheds in the country, as well as in the prevention of water pollution(Table 1).

The competitive bidding for works and services required by the sanitation component involved23 invitations to tender for NPMex59.7 million, of which 10 were in 1991, 5 in 1992 and 8 in 1993(Table 2).

4.5 Institution Building

With regard to institution building of the operating agencies of the water supply, sewerage andsanitation systems, during the period under review BANOBRAS financed 336 operations for a total ofNPMex303.7 million for the promotion of operating and financial self-sufficiency and development of atechnical and administrative structure aiming at maximum efficiency in the provision of services.Concurrently, assistance was to be provided in establishing a pricing policy that would make it possibleto attain the objectives of the component (Table 1).

For this component, 718 invitations to tender were issued for consulting services andacquisitions for a total of NPMexl70.1 million, of which 21 were in 1990, 161 in 1991, 197 in 1992and 339 in 1993 (Table 2).

The competitive bidding held for contracts to strengthen the operating agencies involved theacquisition of computer equipment and information systems, the preparation of organizational manualsand subscriber registry control studies (estudios de control de pad-ones), as well as the purchase,

47

among other items, of equipment for micrometering, leakage detection and laboratory equipment forrepair of the micrometering equipment.

The operations described above saw the use of program lbnds in 539 localities in the 31 statesof the Republic during the period in question, helping to satisfy needs in water supply, sewerage andsanitation. Moreover, program beneficiaries included 186 operating agencies, 123 municipalgovernments, 14 state governments and 3 state housing and community development entities.

With regard to disbursements of Loan 3271-ME, at December 31,1993 BANOBRAS hadreceived US$278.9 million, which represented 92.9% of the total contracted, and it was expected thatthe loan would be fully disbursed by October 1994.

5. Operating Agencies (OAs)

As of 1990, the Water Supply, Sewerage and Sanitation Program began its operations with 57OAs, of which 20 were state, 34 municipal and 3 inter-municipal. Nevertheless, with a view to meetingprogram objectives, in accordance with the eligibility criteria for financing through the program, from1900 to 1993 a total of 129 operating agencies were deconcentrated and/or established, bringing thetotal at December 31, 1993 to 186, of which 155 were decentralized municipal entities, 22 state and 9inter-municipal.

The OAs were established in accordance with legal guidelines, and municipal employees withthe necessary experience in water supply and sewerage services were engaged to run them. However,the administrative personnel recruited did not have the requisite experience. In order to resolve theadmninstration problems encountered by the operating agencies, CNA and IMTA formulated theNational Training Program, through which more than 200 courses and seminars were given in thefollowing areas: (i) administration; (ii) commnercial aspects; (iii) pollution contriu, (iv) un-meteredwater.

The operating agencies were consequently able to satisfy their needs and contractualcommitments with BANOBRAS, as reflected in a marked improvement in 1993 in both income as wellas administrative capability, as a result of the courses given by LMTA and supervised by CNA. Anotherpositive factor was the restructuring of water rates by the local authorities, which resulted in anincrease of more than 500% in their operating revenue at the national level and which, following therevision and adjustment in rates promoted through their Boards and the legal changes, meant that morethan NPMex5,000 million was collected, when in 1989 receipts had been some NPMex800 million.

The good performance of the operating agencies was also key to the sound development of theprogram, as they did an excellent job in identifying the needs of the population with regard to watersupply and sewerage, formulating the final designs, bringing their requests to the COPLADE andmanaging the financing with BANOBRAS.

48

Although the demand for water supply and sewerage services is very extensive at the nationallevel and even though many projects could not be financed under the program owing to the scarcity ofcounterpart resources, sector shortages were significantly reduced. The continuation and strengtheningof the program will ensure that the remaining deficiencies are addressed and that the increased demandgenerated by the natural growth of the cities and their population is satisfied.

6. Sectoral Coordination

Although the program achieved and exceeded the targeted results in both quantitative andqualitative terms, it certainly was not without problems in its implementation, owing to itsdecentralization-based design. The problems were resolved through appropriate coordination arnongthe participating entities, which with a view to resolving the problems encountered during projectimplementation, provided ongoing advisory assistance to their state branches and provided thenecessary training so that the regulations would be fully understood and implemented in accordancewith the Uniform Operating Manual.

As the executing agency for the Bank loan, BANOBRAS maintained ongoing coordinationwith the Ministry of Social Development to ensure that the budget authorizations were issued on time,sutch that the flow of federal, state, borrowed and internally-generated cash resources provided theoperating agencies with sufficient funds to implement the works and actions planned by the State WaterSupply and Sanitation Subcommittees.

The coordination between BANOBRAS and the CNA in its capacity as the regulatory federalentity for the technical aspects of the program, enabled the operations carried out with programresources to be implemented with the required quality, within schedule and budget, thereby pernittingoptimal use of those resources and the provision of water supply and sewerage services to thebeneficiaries.

7. Institutional Building

With a view to the strengthening of the internal operating structure of CNA and BANOBRASso that they could administer the Water Supply, Sewerage and Sanitation Program, the institutionswere reorganized to allow for proper running of the prograrn and the requisite personnel wererecruited.

In 1990 BANOBRAS established the Water Supply and Sanitation Sector FinancingDepartment with a staff of 28. Its primary function was to coordinate program operation andmonitoring at the national level.

With a view to maximum success in project implementation under the decentralized approach,courses, seminars and workshops were given periodically for BANOBRAS and CNA central and statepersonnel. In some cases, state and municipal authorities and personnel from the operating agenciesalso attended, with a view to introducing and strengthening the new water policy in all its concepts.

49

From the outset of the program, BANOBRAS linked its control and monitoring to theDevelopment Credit System (SICREF) with a view to managing the credit process for the financinginvolved, as well as the payments made with program funds to contractors, suppliers and consultants.The SICREF operates in a totally decentralized fashion, as recorcls are kept by the BANOBRAS stateoffice on the sub-loans concluded with the operating agencies, invitations to tender and the contractingof works, supplies and consulting services, as well as the payments, made to contractors.

During the preparation mission for the Second Water Supply, Sewerage and Sanitation SectorProject with the Bank in July 1993, Bank officials indicated the need to improve program monitoringand evaluation through the establishment of a management information system, the main advantage ofwhich would be to obtain more precise information on project progress and the management of theoperating agencies. As the system will begin to operate with the Second Water Supply, Sewerage andSanitation Sector Project, the necessary steps in the design and development of the computer programhave been taken. Moreover, progress has been made in giving the computer classes needed byBANOBRAS personnel with a view to optimizing their personnel tasks and standardizing the workmethodology.

8. Coordination with the Bank

Coordination with project officials from the Bank wa; maintained on a very cordial andprofessional basis which in general terms can be considered satisfactory, inasmuch as the projectbenefited from extensive cooperation, as reflected in the confidence placed in BANOBRAS by makingit responsible for deciding on eligibility under the competitive bidding processes as well as the review ofdocumentation in connection with the reimbursement of external resources.

Nevertheless, certain aspects had a negative impact on project development, such as the factthat at the start of the program only 10% of the proceeds of L)an 3271-ME (US$30 million) weremade available to cover retroactive expenditures. As a result, some US$20 million in expenditures incompliance with the regulations was excluded from disbursement, which shifted the burden of the loanto the detriment of the Federal Government.

Another aspect that had a negative impact on project development was that Bank missionsincluded personnel who were unfamiliar with the APAZU prograra and even the project, which causeddelays in implementation, and even more importantly, in the start-up of preparation, appraisal andnegotiation of the Second Water Supply, Sewerage and Sanitation Sector Project, since such personneldid not have the necessary background or knowledge of previous agreements. Among other effects,this was reflected in an inability to respond to the pace and rhythm of prograrn operation.

Another aspect is that Bank staff made agreements Aith the technical agent, without soinforming BANOBRAS as the executing agency and borrower of the Water Supply, Sewerage andSanitation Sector Project, which made it difficult to monitor and carry out the terms of thoseagreements.

50

9. Achievements

Below are the results obtained through the implementation and development of the program tothe benefit of the water supply and sewerage systems operating agencies:

* Establishment of the mixed-resource scheme, which made counterpart resources available in atimely fashion, estabEshment of budgeting and programming mechanisms with the assistance ofthe pertinent Federal, State and Municipal entities, whereby the investments had a multipliereffect and a greater impact and reach;

* Establishment in BANOBRAS of the single financing and payment window for the sector,facilitating the channeling of resources and decentralization of investments, to the benefit of theborrowers and users;

* Expansion in the coverage of water supply and sewerage services in various cities throughoutthe 31 states in the country; in cities with 5,000 to 100,000 inhabitants coverage reached97.6% for water supply and 93.2% for sewerage services, while in cities with a populationgreater than 100,000 inhabitants coverage was approximately 97.9% [for water supply] and92.1% for sewerage services;

Improvement in the administration of services, through tlhe consolidation and strengthening ofthe autonomy of the operating agencies, as well as an increase in their management andimplementation capabilities;

* Increase of more than 500%/o in operating revenue at the national level, following the reviewand adjustment of rates through the Boards of the operating agencies, as a result, among otheraspects, of the legal changes. This increase has meant a total of slightly more than NPMex5billion for 1993, in comparison with the NPMex800 million collected in 1989;

* Changes to the legal framework at the state level, through the formulation of state water lawsthat facilitate the autonomy of the decentralized operating agencies in the provision of services.A total of 17 state water laws were revised and another 8 are now in the process;

* Gradual elimination of subsidies for water supply consurnption, for both domestic as well ascommercial and industrial use;

* Establishment of 129 new operating agencies decentralized from the state and municipalgovemments that have been accredited by the program. At December 31, 1993, there were186 agencies, of which 155 were decentralized municipal entities, 22 decentralized state entitiesand 9 inter-municipal;

51

* Greater transparency and standardization of the competitive bidding processes for worksand/or supplies, making the utilization of resources more efficient, in addition to compliance bythe operating agencies with the competitive bidding guidelines for the program;

* Increase in the channeling of resources for both water purification and wastewater treatment,which lowered the risk of the development of infection centers and unhealthy public places invarious cities of the country, as well as pollution of the water tables;

* Substantial exceeding of the targeted number of users benefited by the project, which was 3.2million inhabitants as against the 4.5 million achieved within a three-year period, as comparedto the six years estimated in the Staff Appraisal Report (SAR);

* Incentives for private sector involvement in the provision of services, primarily with regard tothe sanitation component;

* Substantial progress in the institutional strengthening of BANOBRAS, CNA, IATA and theoperating agencies of the water supply, sewerage and sanitation systems, through attendanceby their staff at courses, seminars, workshops and sirrilar events, as well as through theacquisition of the necessary equipment for carrying out their objectives and functions moreefficiently,

* Greater confidence by the Bank in BANOBRAS in its capacity as financial agent and executingagency, through the delegation of functions with regard to decisions on eligibility forcompetitive bidding for works and supplies, as well as the review of documentation related toreimbursements under Loan 3271-ME, which meant efficient and more rapid implementationof the project, a finction that was carried out in a totally responsible manner and achievedadmirable results.

Table 1URBAN WATER SUPPLY, SEWERAGE AND SANITATION PROGRAM

Financing Authorized at December 31, 1993(in thousands of NPMex)

I__________ SOURCE OF FUNDS

NO. OF INTERNALLYSTATE OPERATIONS FEDERAL STATE CREDIT GENERATED TOTAL

TOTAL 2171 1,402,995.20 987,884.20 1,359,604.70 103,457.50 3,853,941.80

Aguascalientes 53 39,841.80 39,841.70 45,999.10 125,682.60Baja Califorria 118 71,765.10 68,337.40 145,896.60 285,999.10Baja Calif.Sur 123 19,373.60 12,950.00 21,793.40 2,839.30 56,956.30Campeche 27 28,369.40 21,842.50 27,413.60 77,625.50Coahuila 13 5,395.40 6,310.00 10,180.80 21,886.20Colima 30 25,642.30 17,805.50 16,582.50 162.4 60,192.70Chiapas 62 102,893.80 65,730.00 68,999.60 6,166.40 243,789.80Chihuahua 24 12,746.10 12,359.90 5,317.80 891 31,314.80Durango 29 21,814.70 15,081.20 15,792.90 52,688.80Guanajuato 214 100,027.10 66,888.50 77,014.20 16,338.70 260,268.50Guerrero 24 52,645.10 19,767.40 31,585.50 3,582.60 107,580.60Hidalgo 38 23,436.70 15,276.50 8,908.00 340.3 47,961.50aJlisco 88 91,344.20 91,344.40 146,231.30 24,440.50 353,360.40

Mexico 237 175,787.90 91,636.10 211,062.10 478,486.10Michoacan 112 55,129.50 27,788.10 44,870.30 127,787.90Morelos 55 16,994.70 11,726.20 17,405.30 3,198.30 49,324.50Nayarit 40 16,174.10 9,982.30 12,183.60 38,340.00Nuevo Leon 95 54,987.10 55,315.50 73,423.30 18,644.30 202,370.20Oaxaca 102 38,834.90 2,604.60 36,145.70 77,585.20Puebla 124 40,997.20 25,264.10 37,063.70 103,325.00Queretaro 32 10,256.20 5,966.10 6,913.80 314.5 23,450.60Q. Roo 35 29,348.00 11,648.70 3,020.40 1,472.00 45,489.10San Luis Potosi 30 19,812.90 11,273.60 17,253.90 48,340.40Sinaloa 29 26,034.30 16,357.50 38,487.10 4,321.90 85,200.80Sonora 131 72,249.80 71,247.30 97,437.60 681.1 241,615.80Tabasco 33 42,783.20 29,457.70 28,068.20 3,186.40 103,495.50Tamaulipas 82 53,147.10 35,120.20 37,599.40 4,426.20 130,292.90Tlaxcala 103 18,671.60 9,708.10 13,246.30 5,082.40 46,708.40Veracruz 46 100,401.80 97,860.50 37,164.50 6,123.80 241,550.60Yucatan 32 24,417.80 14,421.60 19,005.40 348.5 58,193.30Zacatecas 10 11,671.80 6,971.00 7,538.80 896.9 27,078.50

Includes financing in preparation, Implementation, recovery, and after closure.

Table 2

WATER SUPPLY AND SEWERAGE SECTOR FINANCING DEPARTMENTUrban Water Supply and Sanitation Program

Competive Bidding 1990-1993(in thousands of NPMex)

STATE INVITATIONS TO TENDER TYPE OF OPERATIONAMOUNT WS/S

___________ NO. % CONTRACTED WS AMOUNT SEW AMOUNT EW AMOUNT SANITATION AMOUNT CONSOLIDATION AMOUNT

Aguascalientes 87 2.75 89,248.49 41 23,080.32 14 52,903.25 1 306.60 2 4,274.89 29 8,683.4Baja Caliornia 125 3.95 217,215.01 74 152,284.02 38 54,089.00 2 1,311.95 2 7,215.13 9 2,314.91Baja Cal. Sur 84 2.65 54,671.78 41 20,360.59 24 22,065.72 1 154.14 1 8,454.60 17 3,636.73Campeche 47 1.48 54,227.80 23 25,183.63 4 21,103.31 1 648.65 0 0 19 7,292.21Chiapas 106 3.35 162.838.24 31 114,094.98 6 25,218.52 2 14,824.43 0 0 67 8,700.31Chihuahua 10 0.32 5,702.41 5 2,928.01 5 2,774.40 0 0 0 0 0 0Coahuila 47 1.48 23,010.17 28 12,517.65 14 6,063.70 2 2,811.22 0 0 3 1,617.60Colima 58 1.83 37,321.70 20 20,508.85 28 10,042.02 1 39.68 3 4,122.46 6 2,608.69Durango 111 3.51 49,096.48 55 24,963.84 30 9,600.59 7 1,637.83 1 8,5T7.25 18 4,316.9Guanajuato 435 13.74 203,664.77 222 112,115.37 108 65,102.45 14 9,338.00 0 0 91 17,108.95Guerrero 45 1.42 104,451.26 33 98,656.50 1 1,308.92 0 0 0 0 11 4,485.84Hidalgo 51 1.61 27,790.27 17 9,674.99 6 7,254.68 0 0 0 0 28 10,860. n

Jalisco 146 4.61 251,108.50 58 88,652.47 17 13,987.75 58 134,741.49 5 8,204.47 8 5,522.32Mexico 301 9.51 255,008.59 198 128,946.57 58 114,826.48 1 301.30 0 0 44 10,934.2Michoacan 75 2.37 111,603.90 56 94,313.62 13 15,737.72 0 0 0 0 6 1,552.5Morelos 50 1.58 24,462.22 35 14,176.25 6 8,996.21 0 0 0 0 9 1,289.7Nayarit 115 3.63 35,449.05 35 8,348.69 17 19,052.81 4 2,905.84 0 0 59 5,141.71Nuevo Leon 240 7.58 132,392.65 119 66,197.48 113 64,029.27 1 238.96 1 499.98 6 1,426.96Oaxaca 92 2.91 41,669.28 41 22,988.11 12 9,038.67 0 0 0 0 39 9,642.50Puebla 141 4.45 87,053.83 58 50,199.10 13 16,395.47 2 562.20 2 5,506.76 66 14,390.30Queretaro 65 2.05 22,385.50 48 16,908.26 9 3,016.39 0 0 0 0 8 2,460.85Quintana Roo 15 0.47 15,404.50 9 7,106.63 5 4,075.40 0 0 1 4,222.47 0San Luis Potosi 37 1.17 33,704.56 24 20,968.42 1 575.97 2 5,258.79 2 5,201.52 8 1,699.86Sinaloa 39 1.23 57,318.87 24 48,878.71 5 5,068.46 6 1,483.69 0 0 4 1,888.01

Sonora 213 6.73 179,730.62 99 113,000.24 55 45,525.24 0 0 1 2,418.00 58 18,787.1Tabasoo 84 2.65 61,721.07 23 9,117.24 49 49,443.16 0 0 0 0 12 3,160.67Tamaulipas 61 1.93 91,271.86 28 30,385.96 31 60,593.41 0 0 0 0 2 292.49

Tbxcab 109 3.44 35,978.28 100 33,337.46 3 1,273.06 0 0 1 697.11 5 670.65Veracruz 115 3.63 153,931.74 20 54,172.49 28 88,079.80 0 0 0 0 67 11,679.45Yucatn 29 0.92 43,255.51 21 40,433.62 0 0 0 0 1 338.73 7 2,483.1

33 1.04 20,235.73 17 12,284.54 4 2,486.05 0 0 0 0 12 5,485.14

TOTAL 3166 100 2,682,924.64 1603 1,476,784.61 717 799,727.88 105 176,564.77 23 59,733.37 718 170,114.01

Table 3URBAN WATER SUPPLY, SEWERAGE AND SANITATION PROGRAM

Financing Authorized at December 31, 1993-fin thousands of NPMex)

________________________ INFRASTRUCTURENO. OF OPERATIONS FINANCED AMOUNT OF FINANCING SANITATION CONSOLIDATION TOTAL

NO. OF NO. OF NO. OFWS/ OPERATIONS OPERATIONS OPERATIONS

STATE WS SEW SEW SUBTOTAL WS SEW WSI SEW SUBTOTAL FINANCED AMOUNT FINANCED AMOUNT FINANCEO AMOUNT

TOTAL 1154 497 143 1794 1.928,457.70 1,033,239.60 434,931.70 3,396,629.00 41 153,547.10 336 303,768.50 2171 3,053,941.60

Aguancaliente 25 15 1 41 27,468.40 17,662.70 278.70 45,409.80 5 69,453.20 7 10,819.60 53 125,682.60Baja Califomia 70 36 3 109 201,063.70 66,332.30 9,704.10 277,100.10 5 7,496.00 4 1,403.00 118 2865,999.10Baja Calif.Sur 68 30 98 27,186.20 23,633.00 50,819.20 1 991.9 24 5,145.20 123 56,956.30Campeche 19 3 22 61,643.90 6,799.30 68,443.20 5 9,182.30 27 77,626.50Coahuila 4 9 13 1,167.30 20,718.90 21,886.20 13 21,886.20Colima 9 17 2 28 36,254.10 17,727.60 3,349.50 57,331.20 2 2,861.50 30 60,192.70Chiapas 32 3 18 53 188,065.00 16,493.70 23,068.90 227,627.60 9 16,162.20 62 243,789.80Chihuahua 6 11 17 9,479.00 18,503.40 27,982.40 7 3,332.40 24 31,314.80Durango 13 3 5 21 27,833.20 8,650.40 6,058.70 42,542.30 2 2,624.10 6 7,522.40 29 52,688.80Guanajuato III 60 171 113,558.60 91,063.70 204,622.30 43 55,646.20 214 260,268.50Guerrero 17 1 18 99,117.70 4,282.70 103,400.40 6 4,180.20 24 107,580.60Hidalgo 18 7 2 27 18,892.20 10,486.70 4,434.20 33,813.10 11 14,148.40 38 47,961.50Jalisco 28 16 34 78 28,413.30 37,103.30 266,864.60 332,381.20 6 15,202.20 2 5,770.00 88 353.300.40Mexico 115 58 7 180 280,495.90 175,822.90 6,309.10 462,627.90 57 15,858.20 237 478,486.10Michoacan 74 12 86 93,229.40 15,469.10 108,698.50 26 19,089.40 112 127,787.90 UMorelos 24 12 1 37 20,044.10 16,958.70 1,500.00 38,502.80 2 4,168.40 16 6,653.30 55 49,324.50 .>

Nayarit 5 10 6 21 2,148.10 13,297.60 1,827.00 17,272.70 2 11,169.10 17 9,898.20 40 38,340.00Nuevo Leon 43 32 11 86 78,436.90 57,879.90 29,915.20 166,232.00 6 20,156.00 3 15,982.20 95 202,370.20Oaxaca 74 13 87 42,109.90 17,440.00 59,549.90 15 18,035.30 102 77,585.20Puebla 74 26 4 104 54,237.00 18,696.80 7,555.00 80,488.80 2 5,941.80 18 16,894.40 124 103,325.00Oueretaro 21 6 2 28 14,794.50 1,226.10 4,729.00 20,749.60 4 2,701.00 32 23,450.60Q. Roo 25 7 32 12,900.10 28,809.90 41,710.00 2 3,317.50 1 461.60 35 45,489.10San Luls Potosi 10 2 13 25 21,781.10 2,318.20 14,064.30 38,163.60 1 8.000.00 4 2,176.80 30 48,340.40Slnaloa 18 5 3 26 70,640.80 6,082.80 397.60 77,121.20 3 8,079.60 29 86,200.80Sonora 76 45 1 122 149,976.90 70,344.10 826.10 221,147.10 1 2,500.00 8 17,968.70 131 241,615.80Tabasco 16 12 1 29 19,034.70 77,972.90 3,210.00 100,217.60 4 3,277.90 33 103,496.50Tamaullpas 33 32 2 67 53,820.90 67,673.60 4,041.20 125,535.70 15 4,757.20 82 130,292.90Tlaxcala 80 4 13 97 37,281.70 2,303.30 1,166.30 40.751.30 2 1,125.60 4 4,831.50 103 46,708.40Veracruz 23 20 2 45 72,525.70 146,072.70 11,952.20 230,550.60 1 11,000.00 46 241,550.60Yucatan 21 21 52,927.60 52,927.60 1 401.3 10 4,864.40 32 68,193.30Zacatecas 2 1 2 6 11,929.80 414.9 8.678.40 21,023.10 1 1,000.00 4 5,055.40 10 27,078.50

* Includes financing in the different stages of fonmalization, Investment, recuperation and settlement

55 - Annex 1MEXICO



(Loan 3271-ME)

PART HI STATISTICAL INFORMATION

Related Bank Loans

Loan Year of Amount Description StatusApproval US$million

Mexico City Water Supply 1973 $90 Improve water quality and quantity Completed June 1981.Project (0909-ME) and treat wastewater for reuse Amount canceled US$11.8

million. PCR No. M83-0765, June 30, 1983

Medium Cities Water 1975 $40 Establish and implement policies for Completed January 1984.Supply and Sewerage the national water supply and Amount canceled US$0.2Project (1186-ME) sewerage sector (WSS) and improve million. PCR No. M92-

sector institutional structure. 1601, December 31, 1992

Second Medium-Size Cities 1980 $125 Support decentralization of Completed November 1986.Water Supply and Sewerage population and economy through Amount canceled US$49.3Project (1913-ME) improved WSS services to medium- million. PCR No. M92-

size cities and sector organization 1601, December 31, 1992through transformation of localWSS entities operated by Federaland Municipal Government intoautonomous financially viablecompanies. Expand services levelsin five medium-size cities throughconstruction of heterogeneoussubprojetcs.

Third Medium-Size Cities 1983 $100.3 Support decentralization of Completed December 1990.and Sinaloa State Water p. -,ulation and economy trough Amount canceled US$5.0Project (2281-ME) improved WSS services to medium- million. PCR No. M92-

size cities and improve institutional 1601, December 31, 1992capacity of federal agencies.Expand service levels in fourmedium-size cities throughconstruction of heterogeneoussubprojects.

Water, Women, and 1989 $20 Improve living standards of low- Total loan amount wasDevelopment Project (3101- income groups. canceled before effectivenessME) by request of Government.

PCM No. 4623 June 21,1991

- 56

Annex 2MEXICO



(Loan 3271-ME)

Project Timetable

Item.. ......... DaWtePanned:': Date iReivised: Date Actual

Identification November 4, 1988

Preparation February 24, 1989

Appraisal June 12, 1990 June 12, 1990

Negotiations October 15, 1990 October 15, 1990

Board Approval November 29, 1990 November 29, 1990

Loan Signature January 18, 1991 January 18, 1991

Effectiveness Date December 18, 1990 April 18, 1991 June 18, 1991

Completion Date December 31, 1995 December 31, 1993

Loan Closing June 30, 1996 December 31, 1996 December 31, 1994

- 57 -

Annex 3

MEXICO



(Loan 3271-ME)

Cumulative Estimated and Actual Loan Disbursements(US$ million)

FY91 FY92 FY93 FY94 FY95 FY96

Appraisal Estimate 45.0 98.6 193.5 263.3 296.7 300.0

Actual 146.5 243.4 300.0* - - -

Actual as % of Estimate 300.3 200.5 100.6 -

*An additional US$19.0 million were disbursed under Loan 2666-ME

Date of First Disbursement: June 30, 1991

Initial Loan Closing Date: June 30, 1996

Actual Loan Closing Date: December 31, 1993

Date of Last Disbursement: March 1, 1994

- 58 -

Annex 4A

MEXICOPROJECT COMPLETION REPORT

WATER SUPPLY AND SANITATION PROJECT(LOAN 3271-ME)

PROJECT COST(US $MILLION)

NATIONALCNA 0.3 3.0 3.3 0.5 0.3 25.3 25.6 1.9BANOBRAS 0.8 0.6 1.4 0.2 0.0 1.0 1.0 0.1IMTA 2.0 2.9 4.9 0.8 0.4 1.7 2.1 0.2Studies&Designs 7.1 21.4 28.5 4.3 11.6 35.5 47.1 3.5Pilot Pollution Control 0.3 0.2 0.5 0.1 0.0 0.0 0.0 0.0Training 3.9 5.7 9.6 1.5 0.0 1.8 1.8 0.1Laboratories 0.5 4.2 4.7 0.7 3.1 1.6 4.7 0.4Follow-up Project 0.1 0.1 0.2 0.1 0.1 0.1 0.2 0.0Sub-Total 15.0 38.1 53.1 8.1 15.5 67.0 82.5 6.2

STATE & LOCALWater Supply 141.4 141.3 282.7 43.4 558.5 163.3 .721.8 53.8Sanitation 87.5 87.5 175.0 26.9 268.6 78.6 347.2 25.9Sewerage Plant 22.1 33.1 55.2 8.5 34.8 10.1 44.9 3.4Sub-Total 251.0 261.9 512.9 78.8 861.9 252.0 (a) 1,113.9 83.1

Total Subproject 266.0 300.0 566.0 86.9 877.4 319.0 1,196.4 89.3VAT(b) 84.9 84.9 13.1 143.6 143.6 10.7

TOTAL COST 350.9 300.0 650.9 100.0 1,021.0 319.0 1,340.0 100.0Preliminar Data

- Individual project component includes physical and price contingencies of 100% and 14% , respectively.

(a) Includes US$19million from Loan No. 2666-ME

(b) VAT of 12% average was used

- 59 -

Annex 4B

MEXICO



(Loan 3271-ME)

Financing Plan(US$ million)

Estimate Actual*

.- Local Foreign TofTotal cal Foreip.. Total % of Total

Bank 300.0 300.0 46.1 319.0** 319.0 23.8

Federal Governrment 122.4 122.4 18.8 544.7 544.7 40.6

State Government 130.5 130.5 20.0 316.0 316.0 23.6

OA's Internal Cash 98.0 98.0 15.1 33.4 33.4 2.6Generation

Others(BANOBRAS) 126.9 126.9 9.5

TOTAL 350.9: 300.0 650.9 . 100.0 1,021.0 319.0 1,340.0 100.0

* Preliminary Data"*Includes US$19.0 million from Loan 2666-ME

- 60 -

Annex 4C

MEXICO



(Loan 3271-ME)

Allocation of Proceeds(US$ million)

[C0ategor-y: t - :: : : :Appraisal V:Revised Actual*]

1. Equipment, materials and civil 24.0 8.0 8.0works for National Component

2. Equipment, materials and civil 208.0 225.0 244.0works for State and Local Component

3. Consultant services for implementing 15.0 24.0 24.0the National Component

4. Consultant services for implementing 23.0 43.0 43.0the State and Local Component

5. Unallocated 30.0

TOTAL 300.0 300.0 319.0

* US$ 19.0 million were authorized from Loan 2666-ME

- 61 -

Annex 5A

MEXICO



(Loan 3271-ME)

Procurement Method of the Project(US$ million)

[Project Element ICB LCB Others Total*

Appraisal Actual Appraisal Actual Appraisal Actual Appraisal Actual** "

* Civil Works 136.0 36.0 310.0 814.7 17.0 228.6 463.0 1079.3

* Equipment/Materials 90.9 26.0 50.0 119.8 17.0 7.6 157.9 153.4

* Training/Technical Assistance - - 6.7 30.0 100.6 30.0 107.3

Total 226.9 62.0 360.0 941.2 64.0 336.8 650.9 1340.0

*Preliminary Data** Includes authorization of US$19.0 million from Loan 2666-ME

- 62 -

Annex 5B

MEXICO



(Loan 3271-ME)

Procurement Method of the Loan(US$ million)

Irjec ;-Elem ICl: LCB Other Total*

:. ........ . .... A ppraisalt A tu a App raisal, Actual Apprais Actual Appraisal Actual**

*Civil Works 62.0 16.1 139.0 167.4 7.5 44.5 209.0 223.0

*Equipment/Materials 47.0 11.5 20.5 10.3 7.5 2.2 75.0 24.0

*Training/Technical Assistance - 6.0 16.0 61.0 16.0 67.0

TOTAL 109.0 27.6 160.0 183.7 31.0 107.7 300.0 319.0

*Preliminary Data** Includes authorization of US$19.0 million from Loan 2666-ME

- 63 -

Annex 6

MEXICO



(Loan 3271-ME)

Status of Covenants

Agreement Description of Covenants ActualSection Compliance

3.01 Borrower (B-BANOBRAS) shall enter into satisfactory contractual arrangements with the Complied.Government (G) providing for transfer of the proceeds of the loan to G and for onlending theproceeds by G to B in peso denominated subloans (SLs) at variable interest rates sufficient tocover the cost of funds to, which is CETES.

4.02 BANOBRAS undertakes that, unless the Bank shall otherwise agree, to make SLs on agreed Complied.satisfactory terms and conditions.

4.03 Procurement of goods and services financed out of the proceeds of the Loan shall be governed by Complied.existing agreement between BANOBRAS and the Bank.

4.04 BANOBRAS shall not into SLs, except as the Bank shall otiierwise agree, unless: (a) the operating Complied.agency (OA) is directly responsible for operating a water supply or sanitary system; (b) in thecase of an OA receiving an aggregate equivalent to US$lm or more in SLs, the OA is collectingwater and sewerage charges sufficient to produce total operating revenues equivalent to not lessthan the sum of its total operating expenses; and (c) the OA presents a satisfactory feasibilitystudy.

4.05 Each subproject shall include a technical assistance (TA) or training component to strengthen the Complied.institutional capabilities of the OA.

4.06 BANOBRAS shall present a satisfactory time table and terms of reference for consultant services Complied.no later than March 31, 1991.

4.07 BANOBRAS shall participate in the reviews together with the Government in November of each Complied.year.

4.08 BANOBRAS shall present semi-annual project progress reports (September 30 and March 31). Complied, butnot timely.

5.02 BANOBRAS shall furnish copies of audited financial statements within six months after the end of Complied, butthe preceding year. not timely.

- 63 a -

MEXICO



(Loan 3271-ME)

Status of Covenants

Guarantee Agreement Description of Covenant Actual ComplianceSection

3.01 Government shall enter into contractual arrangements referred to Section 3.01 of Complied.Loan Agreement.

3.02 Through CNA, Government shall assist OAs in preparing satisfactory subproject Complied.feasibility studies.

3.03 Government shall enter into and comply with its obligations under subloan Complied.agreements for each subproject to be carried out by an OA.

3.04 Through CNA, Government shall: (a) assist the OAs in carrying out the institutional Complied.3.05 strengthening component and supervise the OAs' execution of the subprojetcs; (b)3.06 present guidelines for revaluating the assets of the OAs by December 31, 1991; and

(c) publish and furnish to the Bank by March 30 of each year a report on theperformance of OAs during the immediately prior calendar year.

3.07 Through CNA and IMTA, Government shall supervise strengthening of IMTA Complied.National Training Center and submit a project progress report with a plan forexecution during the immediately upcoming calendar year.

3.08 Through CNA, Government shall carry out the National Water Quality and Complied.Informnation System.

3.09 Through SHCP, SPP, CNA, and IMTA, Government shall participate in the annual Complied.reviews referred to in Section 4.08 of the Loan Agreement.

3.10 Through CNA and IMTA, Govemment shall furnish to the Bank an audited report Complied, but noton expenditures for the project. timely.

3.11 Through CNA, Government shall contract with consultants under satisfactory term Complied, but notof reference to provide CNA with TA for evaluating projects, reviewing technical timely.norms, etc., by March 312, 1991.

3.12 Through IMTA, Government shall, by March 1, 1991, enter into a contract with Due toqualified consultants to provide TA to IMTA. unsatisfactory

performance fromoriginal contractor,IMTA hired otherconsultants toprovide TA.

- 63 b -

MEXICO



(Loan 3271-ME)

Status of Covenants

Guarantee Agreement Description of Covenants Actual ComplianceSiection-:

3.13 Through CNA, Government shall, by September 30, 1991, complete Complied, but not timely.a study examining alternative machanisms to encourage privatesector participation in the provision of water supply and sanitationsystems; and exchange views with the Bank regarding therecommendations of the study.

4.07 BANOBRAS shall perticipate in the reviews with Government in Complied.November of each year.

4.08 BANOBRAS shall present semi-annual project progress reports Complied, but not timely.(September 30 and March 31).

5.02 BANOBRAS shall furnish copies of audited financial statements Complied, but not timely.within six months after the end of the preceding year.

- 64 -Annex 7

MEXICO



(Loan 3271-ME)

Use of Bank Resources

A. Staff Inputs

~Staff Weeks..

Stage of Poject Cyce Planned Actual

Trough Appraisal n.a. 51.9

Appraisal-,--*Board Approval n.a. 13.5

Board Approval-Effectiveness n.a. n.a.

Supervision n.a. 98.6

Total 174.0

B. Mission Data

1 Act'vitt ivi Monear : o.::.of N of Spciation : aff1 1:tlng: Dae eof:E :: p o:1 Weeks Persons W~~~~~~~~~~~~~~~~~~~~eeks ~Stats Reot Prbe

Identification November 1988 2 2 E,Ec 4.0 n/s 12/10/88 n/s

Preparation March-December 1989 2 2 E,F 4.0 n/s 7/25/90 n/s

Appraisal June 1990 2.5 3 E,Ec,F 7.5 n/s 11/8/90 n/s

Post Appraisal September 1990 1 1 E 1.0 n/s 10125/90 n/s

Supervision* January 1991 1 1 E 1.0 n/s 1/2/91 n/s

Supervision March 1991 1 1 E 1.0 2 3/28/91 M,F

Supervision* September 1991 1 1 E 1.0 n/s 9/19/91 M,F

Supervision October 1991 2 4 E,Ec, 8.0 2 10/22/91 My

Supervision January 1992 1 3 E,F,T 3.0 2 2/14/92 M,P

Supervision March 1992 1 2 E,Ec 2.0 3 4/22/92 M,P

Supervision January 1993 2 5 E,F,Ec 10.0 3 1/27/93 M,F

Supervision April 1993 2 4 E,F,Ec 8.0 3 5/13/93 M

Supervision September 1993 2 3 E,F,Ec 6.0 3 10/2/93 M

*Includes supervision for other projectsSpecialties: F=Financial Analyst; E=Engineer; Ec=Economist; Training:TType of problem: M=Managerial; F=Financial; P=Political; n/s= Not Specified

- 65 -Annex 8A

MEXICO



(Loan 3271-ME)

Total of Sub-Projects

States Number of Total Cost Percentage Bank Loan PercentageSubprojects (US$million) (US$mil lion)

Aguascalientes 53 41.9 3.26 14.6 5.27

Baja Califomia 118 95.3 7.42 19.6 8.41

Baja California Sur 123 19.0 1.48 3.6 1.55

Campeche 27 25.9 2.02 4.9 2.10

Coahuila 13 7.3 0.57 1.9 0.82

Colima 30 20.1 1.56 4.8 2.06

Chiapas 62 81.3 6.33 11.3 4.85

Chihuahua 24 10.4 0.81 0.6 0.26

Durango 29 17.5 1.36 4.6 1.97

Guanajuato 214 86.7 6.75 17.4 7.47

Guerrero 24 35.9 1.25 3.3 4.12

Hidalgo 38 16.0 1.25 3.3 1.42

Jalisco 88 117.8 9.17 24.1 10.34

Estado de Mexico 237 159.5 12.41 19.4 8.33

Michoacan 112 42.6 3.32 9.1 3.91

Morelos 55 16.4 1.28 2.5 1.07

Nayarit 40 12.8 1.00 3.4 1.46

Nuevo Le6n 95 67.5 5.25 8.6 3.69

Oacaxa 102 25.9 2.02 4.6 1.97

Puebla 124 34.4 2.68 7.1 3.05

Queretaro 32 7.8 0.61 1.3 0.56

Quintana Roo 35 15.2 1.18 0.9 0.39

Sn Luis Potosi 30 16.1 1.25 2.6 1.12

Sinaloa 29 28.4 2.21 6.3 2.70

Sonora 131 80.5 6.26 14.2 6.09

Tabasco 33 34.5 2.68 6.3 2.92

Tamaulipas 82 43.4 3.38 8.3 3.56

Tlaxcala 103 15.6 1.21 2.9 1.24

Veracruz 46 80.5 6.26 6.9 2.96

Yucatan 32 19.4 1.51 5.8 2.49

Zacatecas 10 9.4 0.73 2.0 0.86

TOTAL 2,171 1,285.0 100.00 233.0 100.00

Annex 8B

MEXICO


WATER SUPPLY AND SANITATION SECTOR PROJECT(Loan 3271-ME)

List of Studies and Activities during 1990-1993Year 1990

| esultan0 0 | t :; ; :; i tt iti 00 Activiq ty u0; :: ;:; 0: t; 0 00000 teetise Foaow-u

l IMTA Evaluation and research of lab devices and measurement The behavior of household meters, shower heads, getters, Test modules were reconditioned at IMTALAB and are usedsupport. toilets and fittings was evaluated and investigated. Likewise, for certification purposes.

thc provisional lab for the efficient use of water was equippedwith instruments and put in operation.

DATA Certification andt standardization. Th e main standards of the water sector were analyzed and the The Project was submitted to IMTA Coordination which hasIMTA certification lab was designed. responded to CNA requests.

EITA Efficient use of water techniques. Evaluation of diagram digitalization, pitorinetry and The different techniques are used in the country's main water a'macromeasurement in two developmedts in Morelos. companies. a'

ITA Rust prevention and control. Preparation of recommendations and suggestions oii The use of these recommendations was promotcd withinsupervision and sampling in aqueducts susceptible to corrosion. CNA.

IMTA Leakage detection and conrol and impact of meters in It was found, with 95% certainty, that household taps lose The evaluation method was generalized and applied in 15savings and collection, for Guayymas, Son. 23% of the water provided, 2% is lost through metering errors cities with the training provided by 5 consulting companies.

and 0% in the network.

IMTA Microbiological water quality control at the rural and Implementation of low cost tedmologies to remove micro Instrumental techniques are available and perforned in themunicipal levels. organisms from waters. lab.

WMTA Microbiological control of waste waters for agricultural Dynamic detennination of bacteria and pathogenic parasites in Technical criteria for maximum limits were generated.irrigation in Alfajayucatan, Hgo. agricultural waters and irrigated soils.

IMTA Sanitary and productive handling of waters in the area of Evaluation of technical and standardization criteria in draft Technical criteria for maximum limits were generated.Alfajayucatan, Hgo. Regulations.

MEXICO



List of Stidies and Activities during 1990-1993Year 1991

|-.---- Conultatttt Activity Ontcoaiic Folow-up

IMTA Evaluation of losses in drinking water systems. On average, 26% of the water provided to the cities is The method was transferred to 15 cities and 5 consultant companies werolost in household taps, 8% in networks and 2% by trained; water compaties carry out studies independently from CNA.deficient measuremenit.

IMTA Update of supplies in the country. Thoc averages were: for warm weather 495 Ilperson/day 'There are agreements with 8 national universities, and measuremrrrdnt dataand in seni-warm weather, 350 I/persontday anid in in 23 cities.nioderate weather, 310 L/lperson/day.

IMTA Drinking water networks with integrated leakage The model of the network for Tuxtla Gtz., Clhig. was hIle hydrometric district technique was iniproved and included in a Manualdetection syslems. gauged and 13 hydrometric systerns wore propo{scd to fur tile Design of Distributioni Networks.

detcct leakages.

IMTA Corrosion prevention and control. Throughout the country, 86% of steel and 50% of pre- Three proposals for anti-corrosive covering standards were developed as Pistressed concrete show high risk of failure due to well as several docurnents to support corrosion control.corrosion.

IMTA Saving devices. A total of 95 household water consumption savimg Device selection guides were prepared and four test brochures,devices were evaluated. Sixty-two per cent of whichweie found not to be effective.

IMTA Standardization and certification. The criteria for tie implementation of the It was submitted to IMTA Coordination and it has responded to CNAstindlFlrdizationi and certificationi system was developed. requests and Ihose from Oie domestic industrial sector.A list of reliable suppliers in tho waler sector was

IMTA Shear rates. It was found that in some 30-year-old Mexican The results were included in the new CNA basic data manual for drinkingaqueducts, the C shear rate decreases by 40%. Manning- water and sewerage design.n increases by 80% and Darcy-W f by 85%.

IThA international Seminar, It took place in Mexico City in October 1993 with the The seminar reports were distributed and a book on the efficiedt use ofpresentation of 146 technical reports. water was edited.

DlTfA Water unalysis through atomic absorption. HIeavy metal determination (As, Pb, Cr, Jig) in water Metal concentrations were determined in water samples from agriculturalsamples from problem areas. areas and supply sources.

IMTA Water quality and control in Tlaxcala. MOGOOD evaluation. Manufacturing was established at the industrial level.

MEXICO



(Loan 3271-ME)

List of Studies and Activities during 1990-1993

Year 1992

[ Consultit ; Activity Outcome Follow-uip

IMTA Drinking Water, Sewerage and Sanitation Design Manual. Guidelines as to presentation, structure and contents of The Manuals will be edited and distributed by CNAthe Manual were developed. Three issues were throughout the country.developed: Distribution Networks, Basic Data andLeakage Control.

The issues were divided into three sections: theory,procedures and metering programs.

IMTA Technological transfer and analytical support. Propose organizational alternatives in Operating Procedures Manual was developed.Agencies' labs.

IMTA Determination of pathogens in water supply. Improve low cost techniqLwUs to isolate pathogens. Water quality techniques are applied in laboratory.IMTA Slow filtration in sand for denitration of water destined for human Design models and improve treatment techniques. A model was built.consumption.

MEXICO



(Loan 3271-ME)

List of Studies and Activities during 1990-1993Year 1993

[ Con sultant Activity Outcome Follow-up

TMTA Operation and maintenance of drinking waler and sewerage From the analysis of lab tests, it was discovered that Specifications will be developed for sewers with airtightsystems. sewers constructed widt simple concrete tubing are not joints and for the installation, repair and replacement of

airtight due to poor quality control during manufacture. household taps.

Samples of household taps were identified and are being On the other hand, the field measurement program totested in the lab to define design specifications. determine the iniput of waste waters will be carried out

during 1994.Weirs were installed to measure household wastewaters; the weirs are being gauged in the lab.

IMTA Evaluation of the efficiency of water companies. A computer program was developed with a basic module The program will be validated with domestic indices and Othat allows to capture and handtlle data, validate thcin, training will be given to water companies for their use.and calculate efriciency rates of operating agencies. Itworks with a minimum of 25 pieces of data and 15indices, to be expanded to 61 pieces of data and 41indices.

IMTA Basic engineering and design of drinking water systems. A Drinking Water Design Manual for rural systems is The Manual and the program will be distributed by CNAbeing developed, where prototype projects of supply to water and consulting companies.sources, standardi2ation, distribution and potabilizationare being developed.

A computer program allowing to design distributionnetworks is also being developed, with graphic inputsand outputs (digitalization and executive planes) capableof solving networks of up to 3000 knots and the samenumber of sections.

IMTA Water quality evaluation in rtaiii Mexican cities. Improve analysis technigues in water related parameters Out of 120 techniques, 97 were implemented. Waterrequired by SSa and EPA. quality evaluation in 8 Mexican cities.

IMTA Toxicological evaluation of municipal effluents. Improve toxicity techniques through the MICROTOX It was transferred to Operating Agencies and it is beingsystem. applied in Ciudad Juirez.

- 67 -

Annex 8CMEXICO



(Loan 3271-ME)

Training Program 1990-1993(number of participants)

Training Participants by Occupation Category

category Appraisal Actual

Managers 1300 685

Supervisors 2340 715

Technical 2340 1425

Operators 1240 695

Clerks 2500 1521

TOTAL 9720 5041

Training Program by Types of Systems

Systems. Appraisal Actual::

Water Supply 2,160 1,327

Sewerage 2,160 1,198

Water-Treatment 1,620 428

Water Pollution Control 1,620 590

Commercial-Finance 2,160 1,498

TOTAL 9,720 5,041

Training Program by Size of Agency

Agency Appraisal Actual

A 4,600 2,722

B 3,700 1,613

C 1,420 706

TOTAL 9,720 5,041

- 68 -

Annex 8D

MEXICO



(Loan 3271-ME)

Cost of the Training Program(US$ million)

Category Appraisal Actual

Local Foreign Total Local Foreign Total

Civil Works

contruction-rehabilitation 1.0 0.9 1.9 0.2 - 0.2

three regional centers

Equipment & Materials

training equipment - 0.7 0.7 - 0.2 0.2

water quality laboratory - 1.7 1.7 - 1.5 1.5

Technical Assistance 2.4 2.4 - 2.3 2.3

Training

operating agencies 2.0 - 2.0 -

CNA 0.4 - 0.4 0.5 2.3 2.8

Administration-Operation 0.5 - 0.5 0.3 - 0.3

TOTAL 3.9 5.7 9.6 1.1 6.3 7.4

Source: CNA

_ 69 _

Annex 8E

MEXICO



(Loan 3271-ME)

Total Sector Investment

National Water Supply and Sanitation Sector Investment Plan 1990-1994(US$million)

Sub Sectors 1990 1991 1992 1993 1994:.

Estimate Actual Estinate Actual Estimate Actual Estimate Actual Estiimate Actual jWater Supply 206.1 737.6 674.1 789.9 695.6 681.8 690.8 726.5 728.1

Sewerage 63.7 181.1 232.6* 64.6* 252.1 188.4 247.0 364.8 238.0

Treatment 16.0 - 121.5 - 107.5 33.5 112.9 263.5 117.6

Total 285.8 918.7 1028.2 854.5 1055.2 903.7 1050.7 1354.8 1083.7

* Includes investments in water treatment.

Total Accumulated Investment in the Sector 1990-1993(US$ million)

Sub Sectors Amount Percentage

Water Supply 2,935.8 72.8

Sewerage 798.9 19.8

Treatment 297.0 7.4

Total 4,031.7 100.0

Source: CNA

- 70 -

Annex 8F

MEXICO



(Loan 3271-ME)

Total Sector Investment

National Water Supply and Sanitation Investment Plan 1990-1993(US$ million)

By Source of Funding

Year Federal State & Municipal Credits & Operating Agencies TotalInternal Cash: Generation

1990 452.0 198.6 268.1 918.7

1991 232.6 243.0 378.9 854.5

1992 478.0 242.0 183.7 903.7

1993 591.7 406.7 456.4 1,354.8

TOTAL 1,754.3 1,090.3 1,287.1 2,377.4

Source: CNA

-71 -

Annex 8G

MEXICO



(Loan 3271-ME)

Water Supply and Sanitation Service Coverage(population in million)

|WaterSupply Saiton. Services

YEAR:::: TOTAL. POPULATION*t;-; Population Percentage jou+ion Percentagemt;.

1990 82.5 66.1 80.1 51.8 62.8

1991 84.1 68.9 81.9 54.7 65.1

1992 85.7 71.9 83.9 57.2 66.7

1993 87.3 74.4 85.2 60.2 68.9

1994 88.9 76.9 86.4 63.2 71.01

1995 90.6 79.4 87.6 66.2 73.1

1996 92.2 81.9 88.7 69.2 75.0

1997 94.0 84.4 89.8 72.2 67.8

1998 95.7 86.9 90.7 75.2 78.5

1999 97.5 89.4 91.6 78.2 80.2

2000 99.3 91.9 92.5 81.2 81.7

*Population has been estimated at the end of each year.

Source: CNA

72 -

Annex 8H

MEXICO



(Loan 3271-ME)

Water Supply and Sanitation Coverage(thousands)

Water Supply Connections Sewerage Connections

Sector 1990 1991 1992 1993 1990 1991 1992 -1993

Domestic 9,797 10,166 10,645 11,029 7,174 7,448 7,814 8,164

Commercial 268 392 427 481 285 325 356 391

Industrial 25 32 38 42 25 28 32 35

TOTAL 10,090 10,590 11,110 11,552 7,484 7,801 8,202 8,590

Preliminary Data in 1993Source: CNA

MEXICO Annex 9PROJECT COMPLETION REPORT


Performance Indexes

Population Served Total Total Unaccounted Total Staff Total Billed Production Cost Energy/Total Cost(percentage) Production Billed for water c000)

City Water Sewerage connection/m 3 lyear % Water Sewerage m31

'ylr/Staff N$/m3 %Supply Connections Connections

Campeche 70.0 10.0 524.57 n.a. 40.80 2.60 n.a. 113,465 0.33 29.80

Ciudad Carmen 60.0 5.0 383.66 272.88 30.40 6.78 n.a. 47,931 0.46 42.00

Piedras Negras 81.9 58.0 897.00 407.40 54.60 5.50 n.a. 74,161 0.38 22.00

Monclova 87.4 69.9 772.00 332.00 57.00 5.50 8.13 60,764 0.24 31.50

Saltillo 87.5 78.7 569.00 260.00 45.80 4.30 7.37 60,535 0.48 46.00

Manzanillo 96.0 87.0 857.00 406.00 52.60 7.80 4.63 52,099 0.69 32.25

Tuxtla 92.0 82.0 552.60 233.93 48.00 8.50 n.a. 28,017 0.90 34.00

Celaya 73.0 70.0 695.50 n.a. n.a. 6.60 6.90 n.a. n.a. 41.00

Irapuato 90.0 77.0 450.20 286.80 36.20 4.90 7.75 58,792 0.36 22.00

Pachuca 97.0 87.0 573.34 281.75 51.00 6.43 6.50 43,824 0.79 10.00

Apatzingan 85.0 35.0 359.00 216.00 39.80 2.50 3.00 86,686 0.16 85.70

Cuernavaca 73.7 59.0 n.a. n.a. 54.34 5.60 n.a. n.a. n.a. 42.62

Oaxaca 84.7 55.2 415.42 199.42 52.00 10.90 n.a. 18,320 0.68 15.20

Tuxtepec 88.0 73.0 679.85 468.73 71.70 3.50 3.82 18,304 0.18 45.30

Sn Luis P. 95.0 85.0 331.17 245.57 26.00 2.80 3.17 86,420 n.a. 51.40

Soledad Graciano 86.5 81.0 516.47 320.21 38.00 3.04 3.24 105,229 n.a. n.a.

Matehuala 84.9 67.0 542.34 360.67 33.80 7.20 9.36 70,009 0.28 35.60

Culiacan 96.7 72.2 851.48 370.82 38.00 4.70 6.29 101,421 0.30 n.a.

Hermosillo 96.8 55.0 806.00 425.31 52.00 4.70 8.27 50,644 0.33 34.00

Guaymas 90.0 42.0 995.34 394.00 60.40 7.90 16.93 49,851 0.33 34.40

Empalme 90.0 74.0 537.83 497.63 n.a. 9.82 12.28 50,644 0.67 18.53

Reynosa 87.9 51.0 550.42 332.77 39.50 7.30 13.42 44,212 0.38 16.00

Matamoros 87.0 56.0 1445.22 541.96 52.00 7.70 10.00 70,391 0.37 25.10

Xalapa 76.0 61.0 108.00 56.40 52.00 9.80 11.89 66,194 0.61 27.00

Merida 87.5 3.9 697.40 211.90 n.a. 2.90 n.a. 52,982 0.49 35.50Source: CNA

MI%ICO Annex 10



(Loan 3271-ME)

Poverty Index of Each State of the Union

STATE. Poverty Index Degree*

Chiapas 2.36046 High

Oaxaca 2.05526 High

Guerrero 1.74666 High

Hidalgo 1.16952 High

Veracruz 1.13030 High

Puebla 0.83108 High

San Luis Potosi 0.74878 High

Zacatecas 0.56805 High

Tabasco 0.51677 High

Campeche 0.47741 High

Yucatan 0.39959 High

Michoacan 0.36274 High

Guanajuato 0.21157 High

Queretaro 0.16086 High

Durango 0.01175 High

Tlaxcala -0.03620 Medium

Nayarit -0.13366 Medium

Sinaloa -0.14100 Medium

Quintana Roo -0.19119 Medium

Morelos -0.45714 Low

Mexico -0.60422 Low

Tamaulipas -0.60855 Low

Colima -0.75783 Low

Jalisco -0.76764 Low

Sonora -0.85979 Low

Chihuahua -0.87224 Low

Aguascalientes -0.88969 Low

Baja California Sur -0.96851 Low

Coahuila -1.05344 Low

Baja California -1.34464 Low

Nuevo Leon -1.37660 Low

Distrito Federal -1.68846 Low

* The poverty index is divided in three categories: PI High> 0.01 175; PI Medium> -0.1919; PI Low>-1.6884. The index and data with respect to each municipality in Mexico is readily available through a Data Basefile in LAC files.

75 _

Annex 11

MEXICO



(Loan 3271-ME)

National Water Commission: Total Staff(staff by category)

Staff ~~~1.989 199 1991~ ... 199 1993..

Professional 5,301 6,615 6,926 6,676 6,357

Administrative 4,990 2,805 2,140 1,904 1,848

Support 22,224 22,756 21,411 20,738 15,805

Total 32,515 32,176 30,477 29,318 24,010

National Water Commission: Total Staff(staff by location)

. i i : E: r . 7 .f . - r 7 F ! 7 iRE r -r i - 7 i -f -7E hE: m !:E iN A r i: . . . -i P...... . .......

Location 1989:: 199001991 1992 193

Central 3,518 3,481 3,298 3,172 2,598

Regional 1,249 1,236 1,170 1,126 922

State 27,748 27,459 26,009 25,020 20,490

Total 32,515 32,176 30,477 29,318 24,010

Source: CNA

- 76 -MEXICO Annex 12



(Loan 3271-ME)

Total Operating Agencies in Mexico

State - . . Number of OAs

Aguascalientes I

Baja California 4

Baja California Sur I

Campeche 2

Coahuila 10

Colima 4

Chapas 4

Chihuahua 6

Distrito Federal I

Durango 3

Guanajuato 11

Guerrero 5

Hidalgo 2

Jalisco 8

Mexico 9

Michoacan 9

Morelos 2

Nayarit I

Nuevo Leon 5

Caxaca 4

Puebla 2

Queretaro 3

San Luis Potosi 5

Sinaloa 8

Sonora 7

Tabasco 2

Tamaulipas 9

Tlaxcala 2

Veracruz 8

YucatAn 2

Zacatecas 3

Total 147

NATIONAL BANK FOR PUBLIC WORKS AND SERVICES

(BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS - HBANOBRAS")

SCAR OF DItECToP

|m GENERAL D IRECTORATE

CO2IEATION Of PGN- .CVoorrINATION OF PROJECTSAND EVALUATION AND

INSTITUTIONAL EVLIARTIOW SPECIAL STUhDES

rnreDI"ATI0O -f Institutional Im_

SOCIAL CUICATIOV - International Conlication- Social Coomiunlction

Dlrector of Director ofPlwnring, Finenefl Director Director of Fiduciary Dfrector Comptroller statesPromotion and Engineering of of *n Legsl of of DetegatiorsTechnical Sectorial Financing Finonce Counselling Administration AccountingAssistence Projects

_ 77 a -

"BANOBRAS" DEPARTMENT OF FINANCE

FINANCEDIRECTORATE

FOR ll FOR lINTERNATIONAL FIOAXIAOPERATIONS OPERATI ONS

Manager's Manager'sOffice for Office forInternational InternationatFinance Operations

Assfstant Assistant Assistant AssfstantManager's Office Manager's Manager's Office Manager's offfcefor Transports Office for for Foreign for FlnanciatSector Assistant Urban Trade and Scheme and lIport

= Development International FinancingTreasury

- 78 -

ORGANIZATIONAL CHART OF THE NATIONAL WATER COUMISSION

(Comisifn Nacional de] Agua - -C.NA.-)

SECRETARIAT Of AGRICU"'T"E|

IIDRAIJLIC RESOURCES

AEXICAl 1ISTITUTE AUDITOFGEEA ltcoT

U&mU TECHNOLOGY

Sub~diructorst. of Sub~diractorate of subir.ctorast of Stbdir.ctorst. of asnatsKydrosgricu(ture Hydraulic Urban Watat Planning arnd Subdi rectorate ofInfrastructure infrastructure Amuinustrstion Financing Akiiinistration

and Inc4.stry

anaevor'. Officeof

SpeciaI ProjectI

Manager's officeof

Studies andProjects

MANAGER'S OFFICESOF REGIONAL

Manager's Office

Contruct Ior

MAAGER'S OFFICESOF STATES

Manager's Officeof

TechnicaL Norn

Manager's Officeof

Potabnlization andVoter Iretuient

I

I

PIXTEX IMAGING

Report No: 14611 Report No: 14611Type: PCR Type : PCP.