Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11448 PROJECT COMPLETION REPORT MEXICO MEDIUM CITIES WATER SUPPLY AND SEWERAGE PROJECT (LOAN 1186-ME) SECOND MEDIUM-SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT (LOAN 1913-ME) AND THIRD MEDIUM-SIZE CITIES AND SINALOA STATE WATER PROJECT (LOAN 2281-ME) DECEMBER 21, 1992 Infrastructure Division Country Department II Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EOUIVALENTS Currency unit = Peso (Mex$) US$1.00 = $12.50 (1972) " = $25.60 (1980) " = $18.00 (1973-80) = $2,267.50 (1990) = $507.00 (1982-90) WEIGHTS AND MEASURES meter (m) = 3.28 feet kilometer (km) = 0.62 miles PRINCIPLE ACRONYMS USED BC - Beneficiary Cities Water Supply and Sewerage Companies BANOBRAS - National Bank of Public Works and Service. (Banco Nacional de Obras y Servicios Publicos, S.A.) CAVM - Valley of Mexico Water Commission (Comi.ifn de Agua del Valle de Mexico) CEAPAS - Sinaloa State Water Board (Comisi6n Estatal de Aqua Potable y Alcantarillado de Sinaloa) CNA - National Water Commission (Comisi6n Nacional de Agua) DIGESAPA - General Directorate of Water Supply and Sewerage Systems (Direcci6n General de Sistemas de Agua Potable y Alcantarillado) FIFAPA - Investment Fund for Water Supply and Sewerage Works (Fondo Fiduciario para Agua Potable y Alcantarillado) MCMA - Mexico City Metropolitan Area PIU - Project Implementation Unit RCs - Regional Companies to be integrated into CEAPAS SAHOP - Secretariat of Human Settlements and Public Works (Secretaria de Asentamientos Humanos y Obras Publicas) SARH - Secretariat of Agriculture and Hydraulic Resources (Secretaria de Agricultura y Recursos Hidr&ulicos) SEDUE - Secretariat of Urban Development and Ecology (Secretaria de Desarrollo Urbano y Ecologia) SRH - Secretariat for Hydraulic Resources (Secretaria de Recursos Hidraulicos) UNDP - United Nations Development Programme WSS - Water Supply and Sewerage FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation December 21, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Mexico Medium Cities Water Supply and Sewerage Project (Loan 1186-ME) Second Medium Cities Water Supply and Sewerage Project (Loan 1913-ME) Third Medium Cities Water Supply and Sewerage Proiect (Loan 2281-ME) Attached is a copy of the report entitled "Project Completion Report on Mexico - Medium Cities Water Supply and Sewerage Project (Loan 1186-ME), Second Medium Cities Water Supply and Sewerage Project (Loan 1913-ME) and Third Medium Cities Water Supply and Sewerage Project (Loan 2281-ME)" prepared by the Latin America and the Caribbean Regional Office with Part II contributed by the Borrower. The physical elements of the projects were successfully implemented, albeit with significant delays. Public health and environmental conditions improved in all project cities. On the other hand, the creation of an appropriate institutional context (including coherent sectoral norms) was undermined by frequent organizational changes and inadequate inter-agency coordination. Furthermore, the important objective of replacing government grant financing for urban water and sewerage projects by loan financing, coupled by systematic cost recovery, was not achieved. A number of cities withdrew from the projects given the availability of alternative (grant) funding. The first two projects are rated unsatisfactory. The third project, in an improved policy environment, is rated as marginally successful. Sustainability of all those projects is rated as uncertain. While much delayed, the Project Completion Report is of good quality. Part II, the borrower's comments, is refreshingly frank on the institutional problems of the sector. The three projects are being audited as a cluster. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their officiaL dutles. Its contents my not otherwise be disclosed without WorLd Bank authorization. FOR OFFICIAL USE ONLY MEXICO PROJECT COMPLETION REPORT lPCR) MEDIUM CITIES WATZR SUPPLY AND SEWERAGE PROJECT (LOAN 1186-MEI SECOND MEDIUM-SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT (LOAN 1913-ME} THIRD MEDIUM-SIZE CITIES AND SINALOA STATE WATER PROJECT (LOAN 2281-MEl Table of Contents Paae No. Preface ........................................................ 1 Evaluation Summary ............................................. iii PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE ............... 1 Identity ............................................. 1 Background ........................................... 1 Preparation .......................................... 5 Implementation ....................................... 18 Financial Performance ................................ 31 Project Results ...................................... 32 Sustainability ....................................... 35 Performance .......................................... 35 Project Relationships ................................ 38 Consulting Services .................................. 38 Documentation and Data ............................... 38 Lessons Learned ...................................... 39 PART II. BORROWER REVIEW OF THE PROJECT ....................... 41 Section I. BANOBRAS Comments on Draft PCR (6/22/92) ....... 41 Section II. Summary of Final Project Report Prepared by BANOBRAS and SEDUE ........................ 43 Background ........................................... 43 Analysis of the Project .............................. 44 Execution, Operation, and Project Costs .............. 45 Institutional Performance ............................ 47 PART III. STATISTICAL INFORMATION .............................. 49 1. Related Bank Loans ................................ 49 2. Project Timetable ................................. 50 3. Actual Cost & Source of Financing ................. 51 4. Actual & Forecast Disbursement Timetable .......... 54 5. Allocation of Proceeds: Appraisal, Revised, Actual 55 6. Project Implementation ..8........... S 7. Use of Bank Resources ............................. 65 8. Status of Covenants ............................... 70 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. PROJECT COMPLETION REPORT MEXICO MEDIUM CITIES WATER SUPPLY AND SEWERAGE PROJECT (LOAN 1186-MEI SECOND MEDIUM-SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT (LOAN 1913-MEl THIRD MEDIUM-SIZE CITIES AND SINALOA STATE WATER PROJECT (LOAN 2281-Nil PREFACE This is the Project Completion Report (PCR) for three related projects aimed at Improving and extending water supply and sewerage services in medium-size cities in Mexico: - MEDIUM CITIES WATER SUPPLY AND SEWERAGE PROJECT for which Loan 1186-ME in the amount of US$40 million was approved on December 18, 1975. The Borrower was the National Bank of Public Works and Services (BANOBRAS)t the executing agency was the Secretariat of Hydraulic Resources (SRH), which was reorganized in 1976 as the Secretariat of Human Settlements and Public Works (SAHOP). Almost all of the loan (99.5%) was disbursed. The loan was closed on January 14, 1984, four years beyond the date estimated at appraisal, and the undisbursed balance of US$0.21 million was canceled. The last disbursement was on May 23, 1984. - SECOND MEDIUM-SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT for which Loan 1913-ME in the amount of US$125 million was approved on October 4, 1980. The Borrower was BANOBRAS; the executing agency was SAHOP, which was reorganized in 1982 as the Secrtarilat of Urban Development (SEDUE). About 60.6% of the proceeds of the Loan were disbursed. The loan was closed on November 30, 1986, about two years after the date estimated at appraisal, and the undisbursed balance of US$49.27 million was canceled. The last disbursement was on August 31, 1987. - THIRD MEDIUM-SIZE CITIES AND SINALOA STATE WATER PROJECT for which Loan 2281-ME in the amount of US$100.3 million was approved on May 17, 1983. The Borrower was BANOBRAS; the executing agency was SEDUE. About 95% of the Loan was disbursed. The loan was closed on April 30, 1991, four months beyond the date estimated at appraisal, and the undisburs-d balance of US$5.03 million was canceled. The last disbursement was on March 13, 1991. With respect to costs, implementation periods, etc., this PCR treats the three projects separately, not as a single project, as they were presented to the Board as individual projects. However, Bank and Mexican officials came to think of the separate projects as parts of a single OFIFAPA* operation -- "FIFAPA" being the acronym for a funding device comon to all three projects, the Investment Fund for Water Supply and Sewerage Works. Bank and Mexican officials referred to the projects as FIFAPA I, 1I, and III, and had no trouble distinguishing between the projects and the financing 'mechanism. I - ii - PROJECT COMPLETION REPORT MEXICO MEDIUM CITIES WATER SUPPLY AND SEWERAGE PROJECT (LOAN 1186-MEt SECOND MEDIUM-SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT (LOAN 1913-ME) THIRD MEDIUM-SIZE CITIES AND SINALOA STATE WATER PROJECT (LOAN 2281-MEl EVALUATION SUMMARY 1. Description. Between December 1975 and May-1983, the Bank approved three loans, amounting to US$265.3 million (1186-ME, 1913-ME, and 2281-ME), to help finance three water/sewerage projects, consisting of a heterogeneous collection of water supply and sewerage (WSS) works for medium size cities. The projects consisted of: water, construction, installation, rehabilitation, or improvement, as appropriate, of wells, storage tanks, treatment facilities, transmission and distribution pipe, house connections, and water metersl and sawerace, construction, rehabilitation, or improvement, as appropriate, of pumping stations, treatment facilities, lines, interceptors, and house connections. Also included in the projects were miscellaneous equipment, leak detection programs, and accounting programs (paras. 3.11, 3.27, and 3.40). 2. Because these three projects relied on the same financing facility, the Investment Fund for Water Supply and Sewerage Works (FIFAPA) established at the National Bank for Public Works (BANOBRAS), and because they closely followed (1975, 1980, 1983) and resembled each other, Bank and Mexican officials adopted the practice of referring to them as FIFAPA I, II, and III rather than using their longer, official titles. 3. Borrower. Imolementina Aaencyv and Beneficiaries. Not only did the projects resemble one another with respect to works, but also with respect to: (i) borrower, executing agency, and beneficiaries (paras. 3.07, 3.24, and 3.36); and (Li) objectives, issues, and financing arrangements (paraz. 3.04-3.06; 3.16- 3.17; and 3.34-3.35). The loan for the first FIFAPA project (FIFAPA I) established the pattern followed by subsequent loans as to parties to the project ("institutional arrangements"). The borrower was BANOBRAS; the executing agency was the Secretariat for Hydraulic Resources (SRH)v the Federal water planning/ construction agency at the time when the loan was prepared; the beneficiaries were a shifting group of medium-size cities. The executing agency was restructured and renamed several times during project execution. In 1976, SRH was succeeded by the Secretariat of Human Settlements and Public Works (SAHOP); and in 1982, SAHOP was succeeded by the Secretariat of Urban Development and Ecology (SEDUE) (paraz. 2.07; and 2.10-2.13). 4. ibictives. Izszaes and Financina Arrancoments. FIFAPA I established the physical and other objectives followed by FIFAPA II and III (paras. 3.04- 3.06; 3.16-3.17; and 3.34-3.35). The physical objective of the FIFAPA projects was to extend and improve WSS services in medium-size cities. The other objectives of FIFAPA I -- financial, economic, and institutional -- includaed (a) introducing the concept of loan financing, as opposed to grant funds, to finance WSS works; (b) substituting "realistic tariffs" based on the concept of cost recovery for tariffs based on the concept of water as a "social" good; (c) establishing a suitable financial mechanism to channel and recuperate funds for works; (d) introducing the use of technical, economic and financial criteria in - iii - the selection of WSS project.; and (e) improving the operational, adminiotrative and technical capacity of sector institutions at both the national and municipal levels. FIFAPA II, building on FIFAPA I, aimed at the organizational objective of decentralizing the sector by traneferring Federal responsibilitieo to state and municipalities. The objectives of FIFAPA III largely paralleled those of FIFAPA II. 5. FIFAPA I addressed very contentious issues for the state and municipal governments in a country used to "free" water that tariffs should cover costs and that interest-bearing loans should replace grants. For the Bank and the Government, the projects provided a unique opportunity for innovation. As such, the first project was responsible for creating the FIFAPA trust fund, a revolving fund that provided loan funds on the basis of cost-recovery and municipal commitment to the concept of financial self-reliance (para. 3.08). It also provided a basis for subsequent operations in the second and third projects. The third project included a pilot health education component which was intended to serve as a model for replication throughout the country. 6. Implementation Experience. FIFAPA I began in 1976 and ended in 1984, almost four and a half years behind schedule (para. 4.02). FIFAPA II began in 1981 and ended in 1986, two years late (para. 4.16). FIFAPA III began in 1984 and ended in 1990, about a year late (para. 4.24). To complete FIFAPA I without further extension of the closing date, the Bank agreed to shift remaining civil works under construction to FIFAPA II and procurement of materials (amounting to US$8.3 million) from FIFAPA II to FIAPAP I (para. 4.14). There was also a shift of works under FIFAPA II to FIFAPA III prior to the closing of Loan 1913-ME (para. 4.23). 7. The difficulties of FIFAPA I were somewhat redue d in the two subsequent projects, but not eliminated. Prior to 1979,the progress of FIFAPA I was hampered because of the considerable time required by the executing agency (SRH/SAHOP -- para. 3) to complete the evaluation of subprojects and because of the reluctance by locai authorities to adjust tariffs, and to accept least-cost alternatives (paras. 4.04). Implementation was also regularly hampered by jurisdictional disputes between the implementing agency and BANOBRAS and by staffing problems at the agencies. From 1979 to mid 1982, project progress was satisfactory due to personnel changes at SAHOP suggeoted by the Bank and due to the contracting of consultants by SAHOP to prepare appraisal reports based on least-cost principles. Due to sharp reductions in budgetary allocations for FIFAPA in 1982 and non-payments of contractors, the execution of FIFAPA I and II was effectively paralyzed for several months in 1982-3. After implementation was resumed in the second half of 1983, there were difficult discussions betw n BANOBRAS and the boneficiaries in connection with the renegotiation of subloan agreements. Renegotiation was required because of high inflation and frequent devaluations of the peso (para-. 4.18-4.19)1 hence, the subloans, which had been negotiated in a fixed amount of pesos, did not cover tho total subproject costs. Moreover, because the executing agency had carried out the contracting function without the participation of the beneficiaries, the beneficiaries were reluctant to increase their indebtedness, as they regarded the cost increases as overruns to a fixed-cost contracts rather than as legitimate price adjustments for inflation. 8. Inadequate information also hampered project implementation. Information to assome the financial performance of the sub-borrowers was - iv - unreliable and incomplete, mainly due to three recurrent problems among the beneficiaries: (a) poor institutional capabilities which the project aimed at improving; (b) a lack of experience in reporting to federal agencies and; (c) lack of a sense of ownership of the project, which itself stood in the way of reporting to a central agency, either state or federal (paras. 3.24 and 3.36). 9. The timing of the loans also led to implementation difficulties. The first and third loans were declared effective shortly before new administrations took office in Mexico. While the Bank had explicitly noted the risks involved with proceeding with these operations at a time of change in government, it was decided that establishing the concept of cost-recovery and strengthening the institutional capacity of the beneficiaries were sufficiently important to sector development to justify the assumption of these risks. Moreover, the Bank also concluded that, instead of interrupting or postponing lending operations to accommodate administrative modifications and delays, these issues could adequately be tackled during project implementation. 10. In 1982, SEDUE succeeded SAHOP as the executing agency, and as a result of this development, there were major organizational and personnel changes in the executing agency. In 1983 and 1984, there was some project progress, but in 1985, the Project Implementation Unit (PIU) was abolished and its responsibilities were transferred to other units in SEDUE, causing serious problems of coordination between SEDUE and BANOBRAS. Meaningful supervision of beneficiaries and satisfactory reporting offectively were non-existent for about a year after the abolition of the PIU. (Because of the economic difficulties and natural disasters experienced by Mexico, the Bank deferred taking remedial action in the expectation that project implementation would improve. When this did not materialize, the Bank closed Loan 1913-ME in November 1986 and canceled the undisbursed balance of US$49.28 million. This action stimulated improved implementation of FIFAPA III.) To help overcome this recurring spat- of difficulties, the Bank worked out a "Plan of Action" with SEDUE and BANOBRAS, but compliance with its timetable was unsatisfactory and it was not sufficient to correct the difficulties, mainly due to lack of coordination and communication between the SEDUE and BANOBRAS (paras. 4.23 and 4.29). 11. During implementation of all three projects, Mexico continued to employ grant financing as well as loans at different rates and conditions through BANOBRAS and other lending institutions to finance investments in the sector. During appraisal of FIFAPA II and III, it had been expected that the budgetary problems of the Government would lead to reduced grant funding; but these expectations did not take into account municipal and state resistance to much reductions. These different financing windows resulted in an arbitrary structure of fund schemes and hidden subsidies through subsidized credits, which tended to mask system inefficiencies. Furthermore, these hidden subsidies stood in the way of efforts to implement least-cost solutions in the sector (para. 4.30). RUulta 12. Many physical targets were surpassed. The projects helped to finance 226,590 water and 130,300 sewerage connections, respectively, and served an incremental population of 1,870,300. Despite these achievements, the target p.rcentages for population served could not be met due to rapid population growth. 13. Concerning financial, economic, sectoral and institutional objective., results were mixed. The first objective, substituting at the national lovel loan financing for grants for the development of the sector, was accomplished only for FIFAPA operations, which only funded 8% of total sector investment (para. 6.08a). The second objective, the establishment of a sustainable financial mechanism to fund works for the sector was also only partially achieved. That in, the FIFAPA revolving fund was established in BANOBRAS, but, because relending rates were too low compared to domestic inflation, it became doecapitalized (6.08b). The third and fourth objectives were decentralizing the sector and substituting the concept of tariffs based on cost recovery for tariffs based on traditional concepts, i.e., water as a social good. Results have been mixed. The Government established the legal framework for transferring responsibilities to states and municipalities, but the local operators remained, for the most part, weak in terms of management, operations, and finances, *specially tariff levels (paras. 6.08c). The objectives of improving BANOBRAS and the executing agencies have not been met. (para 6.08d). Least-cost planning was established for all the works financed under FIFAPA, but not for all works carried out by the executing agency (para. 6.08e). 14. Sustainabilitv. The lingering problms besetting the FIFAPA operation clearly cast doubt on the *ustainability of the non-physical objectives of the projects. FIFAPA funded about 8% of sector investments. Yet, their influence extended beyond that small share by promoting cost-recovery and the uae of least- cost alternatives which were replicated in a numbor of cases throughout the country. The FIFAPA operation also served to establish a good dialogue with sector authorities and the three projects under review laid the foundation for the Water Supply and Sanitation Project, which was supported by Bank loan 3271-ME (1990; US$300 million). This project built upon sector work that focused on the institutional and financial problems of the sector and addresses the most important issues not covered by FIFAPA. It has both national and local components, and aims at: (i) furthering the institutional development of BANOBRAS, the National Water Commission (CNA), and the Mexican Institute of Water Technology (IMTA); and (ii) the rehabilitation and expansion of WSS systems in the poorer areas of subproject cities on a sound technical and financial basis. While it is till too early to assess fully the success of this ongoing project, it is valid to state that significant progress has been achieved. performance. 15. Bank performance was mixed. It was strong in reinforcing Bank credibility in Mexico by demonstrating support for Mexico at crucial moments (1983) and by combining the right combination of incentive and censure to correct institutional weakness at BANOBRAS and executing agency (1986); but poor in failing to address some important issues. At appraisal of all throe projects, the Bank did not recognize the potential for poor coordination between BANOBRAS and the executing agency or the need to provide for beneficiary participation in the project-preparation process. Thfse shortcomings in project design becam obvious during execution, especially with respect to the inadequate attention paid to the beneficiaries (paraa. 8.01-8.12). 16. SRH/SAHOP/SEDUE, the executing agency, which had a more important role ,to play than the borrower, performed in disappointing fashion while the efficient operation of FIFAPA by BANOBRAS counterbalanced its weak financial supervision of the beneficiaries. Both SRH/SAHOP/SEDUE and BANOBRAS failed to cooperate -vi- effectively or carry out their respective functions promptly, but the executing agency, especially in the years 1985-1986, was particularly remiss with respect to preparing suitable subproject feasibility studies and supervising the projects (para. 8.12). Most important in assessing their performance was the availability of grant financing (85% of total sector financing) between 1981 and 1986, which undermined the central objectives of the FIFAPA operation. Findings and Lessons Learned 17. As experience .with this project demonstrates, the generation of support and understanding of project objectives at the local level are pre-, requisites for smooth and effective implementation. The Bank should have sought to develop such an understanding, through more intensive sector work and a more thorough analysis of institutional issues (para. 12.01 a). 18. In instances where the lead role for implementation can shift between the executing agency and the Borrower, the Bank must insist on a very clear definition of institutional arrangements and responsibilities. While some conflict was inevitable between the two Mexican institutions sharing responsibility for project execution, clearer delineation of roles and obligations during preparation would have likely mitigated some of these problems. The same judgment applies to the PIU (para. 12.01 b). 19. Projects that include a large number of subprojects also require more intensive supervision and field visits on the part of the Bank to assure smoother operation and implementation of procedures that are perceived as politically unpopular or too costly in the short run and to ensure a sense of ownership by beneficiaries by providing them a more significant role in project design. Had the Bank devoted more resources to supervision and local field visits, the spate of problems arising from a perception of lack of ownership by the beneficiaries would have been more adequately taken into account in the design of FIFAPA II and III (para 12.01 c). 20. A firm Bank stance can result in long-term gains. An example in point was the suspension of disbursements under Loan 1983-ME until the PIU's new staff stood in compliance with Bank Procurement Guidelines and Procedures. Another lesson is the utility of having agreed, country-wide bidding documents (para 12.01 d). 21. The FIFAPA operation illustrates the value of taking the long view. The projects were only one part of a larger effort to overhaul policy at the macro and sector levels. Notwithstanding the mixed results of these projects, the dialogue between the Government and the Bank continues and in connection with Loan 3227-ME there has been success in resolving issues posed by grant financing and settling jurisdictional conflicts. These achievements draw on the dialogue and experience under the FIFAPA projects; and hence appropriate credit should be given (12.01 e). I PROJECT COMPLETION REPORT MEXICO MEDIUM CITIES WATER SUPPLY AND SEWERAGE PROJECT (LOAN 1186-ME) SECOND MEDIUM-SIZE CrTIES WATER SUPPLY AND SEWERAGE PROJECT (LOAN 1913-MEl THIRD MEDIUM-SIZE CITIES AND SINALOA STATE WATER PROJECT (LOAN 2281-ME PART I. PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Identity Project Names: MEDIUM CITIES WATER SUPPLY AND SEWERAGE PROJECT, SECOND MEDIUM-SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT THIRD MEDIUM-SIZE CITIES AND SINALOA STATE WATER PROJECT Loan Numbers: 1186-MB (US$40 million; Approved, 12/75; Closed, 01/84), 1913-ME (US$125 million; Approved, 11/80; Closed, 11/86) 2281-ME (US$100.3 million; Approved, 05/83; Closed, 12/90) Borrower: National Bank of Public Works and Service. (BANOBRAS) RVP Unit: Latin America and the Caribbean Country: Mexico Sector: Water Supply and Sewerage (WSS) 2. ackaround. 2.01 Context Between 1974 and 1990, Bank and Mexican officials collaborated to prepare and execute the three water/sewerage projects covered by this project completion report (PCR). The Bank supported these project. with Loans 1186-ME, 1913-ME, and 2281-ME, amounting to US$265.3 million. 2.02 To evaluate the results of these projects, it is important to understand the context in which they were planned and executed. During this period, there were four Administrations -- those of Presidents Luis Echeverria (1970-1976), Lopez Portillo (1976-1982), Miguel de la Madrid (1982-1988), and Carlos Salinas (1988 to the present) -- during which there were extensive changes with respect to policy, personnel, and Government commitment to the objectives of the projects. Also during this period, there were major economic developments, especially in 1982, when the oil-related boom collapsed, thereby requiring a fundamental re-thinking of the national development strategy and the subsequent implementation of stringent measures to stabilize and restructure the economy. Besides changing Administrations and economic developments, the context included elements ranging from other water sector Bank loans to the evolution of water resource poliey and sector organization. Set forth below is the first of these elements; the other elements arm discussed in later chapters. 2.03 Bank Landina. Since 1973, the Bank has made six loans (US$675.3 million) to support water supply and sewerage (WSS) projects in Mexico (Part III, Table 1). Supported by Loan 909-MB (US$90 million; 1973), the first project was completed in 1981, five years late. The project .accomplished its objective of inereased water production capacity, but with -2- respect to institutional objectives for the beneficiary, Comision de Aguas del Valle de Mexico, accomplishments ranged from poor to fair.'' 2.04 Supported by Loans 1186-ME, 1913-ME, and 2281-ME (para. 2.01), the projects covered by this PCR achieved their physical objectives of extending and improving water and sewerage systems (referred to hereafter as "local operators") and increasing service levels, but they fell short of their objectives of establishing an appropriate institutional framework and sound cost-recovery policies. 2.05 The remaining two loans are 3101-ME (US$20 million, 1989) and 3271-ME (US$300 million, 1990). In 1991, at Government request, the Bank canceled Loan 3101-ME (from which no proceeds were disbursed). Underlying this request was a change in the Government approach to alleviating poverty which made loan funds unattractive for the beneficiary states.r The project supported by Loan 3271-ME is proceeding on schedule and is expected to be completed in 1995. 2.06 Physical Characteristics. About three-fourths of Mexico is arid or semi-arid and its water resources are unevenly distributed. Areas of heavy rainfall are thinly populated, while dry areas contain the bulk of the urban population. Because the mismatch of water resources and population is particularly severe in the Mexico City Metropolitan Area (MCMA), the Government is encouraging the relocation of people and industry to other locations. About 80% of the surface water resources are found below 500 meters of elevation, while 75% of the population and 80% of industrial output are located above that level. Consequently, water in many areas is scarce and costly, accentuating competing demands on agricultural users, domestic users and hydroelectricity generation. 2.07 Current Sector Organization. Because of the competition among users, Federal agencies establish water resource policy and standards to assure allocation of this scarce resource in line with national development priorities. Federal agencies are also responsible for the planning and construction of major new works. For example, the Secretariat of Agriculture and Hydraulic Resources (SAHR) sets water policy; it also constructs and operates bulk-water supply systems to municipalities. The National Water Commission (CNA), established in 1990 as an autarkic agency under SAHR, provides technical support in water supply and irrigation to local operators. The National Bank of Public Works and Services (BANOBRAS) is a main source of financing outside the Federal budget. The Secretariat of Urban Development and Ecology (SEDUE) sets standards for water pollution control and protection of the environment. 2.08 Local operators provide WSS services under a spectrum of organizational arrangements -- departments of municipal governments such as public works; semi-autonomous municipal companies; or state companies operat- ing municipal systems. Some local systems are operated by a Federal agency, but since 1975, the number of such systems has been slowly declining. With 1. World Bank: Proiect Performance Audit Report: Mexico City Water Supply Proiect (Loan 909-ME), 'Highlighta", pp. iv-v, Report No. 4623, dated June 30, 1993. Z Idem., Proiect Completion Memorandum, dated June 21, 1991, pp. 3-6. respect to management, operations, efficiency, information systems, and financial records, the level of performance by local operators varies widely. Thin organizational pattern for Federal agencies and local operators has prevailed throughout the period covered by this report (1974-75 to 1990). 2.09 Since 1983, Federal water policy and legislation have aimed at maintaining the policy-making and normative functions of Federal agencies, reducing their financing and operating roles, and expanding and developing the roles of local operators with the objective of reinforcing their autonomy and financial viability. These objectives represent a substantial change from the situation prevailing when Mexican and Bank officials began preparing (1974-75) the first project, known as FIFAPA I.F However, progress has been slow for a variety of financial, technical, and institutional reasons. 2.10 Former Sector Organization. In 1972, the Water Law assigned wide policy-making and operational powers to a Federal agency, the Secretariat of Hydraulic Resources (SRH), including responsibility for: (1) planning, constructing, and operating urban WSS works which relied on Federal funding; and (2) approving the schemes of other entities, even if no Federal funding was involved. SRH controlled about 200 systems directly and another 600 systems through Federal Water Board (Juntas Federals. de Agua).4 Federally- managed systems served about 20% of the total population. State and municipal entities managed the remaining systems. State governments set tariffs. As a consequence of its fractured structure, the activities of the sector were not coordinated. 2.11 The 1976 Administration Reform Act assigned the duties of SRH (para. 2.10) to SARH, its successor (para. 2.07); however, the same law also assigned to the Secretariat of Human Settlements and Public Works (SAHOP) the task of constructing and operating WSS systems outside Mexico City. Accordingly, SARH delegated actual construction and operation of specific schemes to SAHOP. 2.12 To operate at the local level, SAHOP established "Centroo SAHOP", or state offices; and operated some 1,200 systems. The operational performance of these systems was poor -- inefficient management, unclear financial policies, insufficient cash generation, lengthy delays due to centralized decision making at the national headquarters. This experience underlaid the decision (1980) of the Federal Government to begin transferring to the states the systems operated by SAHOP. Reinforcing this decision were amendments (1983) to Article 115 of the Constitution, assigning to cities and municipalities the responsibility for providing WSS services. In practice the local operators often required the help of the state and Federal governments (para. 2.07). _/ In connection with the fint project, BANOBRAS created a funding device with the acronym FIFAPA - Investment Fund for Water Supply and Sewerage Workh. Bank and Mexican officials adopted the pracice of referring to the various projects as FIFAPA 1, FIFAPA U, and FIFAPA m. The roman numerals permitted them to distinguish between the different projects (FIFAPA 1, n, and II) and the funding device (FIFAPA). Because the projecs tended to resemble each other and because the financing of subprojects was trnsferred between the Loans 1 186ME and 1913-ME and between 1913-ME and 2I81-ME as needed, Bank and Mexican officials came to think of the separate projects u part of single 'FIFAPA opeation. Part n makes plain the Mexican point of view. The approach of this PCR is to treat the project parately. I/ World Bank: 'Issues Paper", datod January 27, 1975, p. 2, footnote 2. 2.13 The 1982 Public Administrative Law created SEDUE (para. 2.07), which had powers and responsibilities similar to those of SAHOP, which was abolished. SEDUE was responsible for: (i) WSS policy and planning outside Mexico City; (ii) coordinating all state and municipal actions affecting the sector; (iii) providing technical assistance to the states; and (iv) supervising the construction of all subprojects. In 1990, CNA took over the technical assistance responsibilities of SEDUE. In 1992, SEDUE became SEDESOL (Secretaria de Desarrollo Social) and, as regards the water sector, its future role will be limited to setting environmental norms. Hence CNA's role has been further strengthened. 2.14 Current Obiectives. Unlike the situation prevailing during preparation of FIFAPA I (1974-75), the Government has established clear technical, organizational and institutional objectives for the sector. By the year 2,000, the Government is aiming at supplying piped water and sewerage services to 94% and 82% of the population, respe ctively. As for organiza- tional objectives, the Government is committed to: (i) retaining its policy- making and normative roles; (ii) reducing its financing role; and (iii) delegating the provision of WSS services to states and municipalities. The institutional challenge to the Government is to help the local operators to upgrade their performance. The Government is also committed to seeking private-sector participation through concessional schemes. Concerning finance, the Government aims at increasing the internal cash generation of the local operators and reducing reliance on Federal contributions. The Government is also seeking to develop the institutional capability of local operators -- state, municipal and Federal -- to address water pollution and environmental issues. Through the ongoing Water Supply and Sanitation Sector Project which is partially financed with Loan 3271-ME (para. 2.05), the Bank supports the objectives of the Government, especially the development of local operators that are technically efficient, financially independent, and institutionally strong. The Bank also supports: (i) reforms which deal with water supply in an integral manner, from its source to its disposal; (ii) unification of Federal and state financial assistance to the operating agencies under standardized criteria and conditions; and (iii) protection of the environment and improvement of water quality. 2.15 Macroeconomic Developments. During the Administrations of Presidents Echeverria (1970-1976) and Portillo (1976-1982), the Government continued to adhere to the inward-looking, state-contered national development strategy which had prevailed since about 1940. Consisting of massive Government investment in infrastructure, subsidies to favored sectors, protection for industry, etc., this development model had helped transform Mexico from an agricultural to an industrial/service economy. However, by the end of the Administration of President Echeverria, the limitations of this strategy were beginning to appear, especially as increased Government spending had not been accompanied by corresponding and appropriate increases in fiscal resources. These limitations took the form of a stagnating economy, high levels of inflation, and serious public-sector deficits and balance-of-pay- ments shortfalls. To stabilize the economy, the Portillo Administration initially had to undertake a macroeconomic program based largely on devaluation and fiscal restraint. However, following the discovery of major oil reserves in 1977 and the prospect of large oil-related revenues and fQreign borrowings to finance Government programs, the Portillo Administration abandoned its stabilization program and resumed a high level of public sector -5- expenditures. Over the next three years, the strong growth of the economy masked serious structural flaws, including the stagnation of non-oil exports. 2.16 In 1981, supply conditions and prices in world oil markets began to ease. This development implied reduced oil revenues for Mexico and threatened to undermine the foundation of the national development strategy. By the end of the year, the financial and economic conditions of the country had begun to resemble those prevailing in 1976 with the added complication of massive capital flight. In 1982, the Portillo Administration, facing a full- blown financial crisiu, nationalized the banking system, which led to further loss of public confidence in the capacity of the Government to address the problems of the country. 2.17 The Administration of President de la Madrid (1982-1988), which took office in December 1982, introduced a stringent stabilization program. Further, based on a major re-thinking of the national development strategy, it began to introduce over the next six years important structural reforms to integrate Mexico into the world economy: dismantling trade barriers, joining GATT, reforming taxes to stimulate investment and non-oil exports, liberalizing financial markets, and privatizing public enterprises. As a result of these comprehensive policy measures, which have been continued and extended by the Salinas Administration (1988 to the present), Mexico has become one of the most open economies in the world and has started on the hard road to recovery. Growth rates again have turned positive. 3. Prepartion 3.01 FIFAPA I: Issues. In addition to the evolution of development policy, changes in Administrations, and changes in sector organization, the context surrounding these projects also included numerous other issues -- water-resource/population policy, finances, economic, institutional, etc. As shown later, some issues first identified in connection with FIFAPA I reappeared with some change or refinement in connection with FIFAPA II and FIFAPA III. 3.02 Bank and Mexican officials planned FIFAPA I in 1974-1975, during the last years of the Echevarria Administration (para. 2.15). The Staff Appraisal Report (SAR) for FIFAPA I states that except for setting target service levels for 1980 and except for the organizational responsibilities of SRH mandated by the Water Law (para. 2.10), there was no "overall sector policy" F At that time (1975), the Government was considering the recomendations of a draft sector study and a draft National Hydraulic Plan (PNH), both of which the Bank had helped to prepare. The PNH "...was designed to formulate a water development program consisting of specific projects ...and facilitate adoption of policy decisions concerning water use and development"J The sector study identified sector .I Ld., Araisal of the Medium Cities Water SupolV and Saweraae Proicet. Mexico, Report No. 8SSa-ME, dated November 26, 1975, p. 3. Hereafier referd to aSAR, LfIEPA 1. Also, the Staff Appraisal Reports for FIFAPA n and FIFAPA ml will be refcrred to in like manner - that is, SFIAPA n, and SAR. PIFAPA In. §f LM., Report of the Preident to the Executive Directors on a Proposed Loan to Banco Nacional de Obru v Servicios with the Guarntce of the United Mexican States for a Medium Size Cities Water SuDolV and Sewerage Proiect, Report No. (continued...) -6- organization, coordination, and finances an major issues. Both studieos recommended important departure. from the then current situation. The identification, preparation and appraisal missions (January 1974, July 1974, and June 1975) confirmed the importance of those issues (Part III, Table 2). (As stated in 1971, the target service levels for 1980 were: (a) water: urban population, 80%, and rural population, 50%; and (b) sewerage: urban, 50%, and rural, 30%.) 3.03 More specifically, the lack of an overall sector policy meant that the Government had not fully stated its priorities and strategies with respect to: (i) water-resource/population policy; (ii) health and water-borne diseases; (iii) sector organization, including transfer of reoponsibilities from Federal agencies to states and municipalities; (iv) the operational and project-preparation capabilities of SRH; (v) a financing mechanism to encourage the substitution of loans for Federal grants and to establish the principle of cost recovery through more realistic pricing policies; and (vi) the shortcomings of local operators -- management, operational, and financial. 3.04 Another issue was the absence of economic (least-cost) project selection criteria on the part of SRH. There were links between this issue and the isoues of weak sector finances and poor efficiency on the part of the operators. Local attitudes towards water was the origin of these issues. Since water was considered a social good, tariffs normally just covered cash operating expenses.e Hence, it followed that the financing of major new works depended on Federal grants. In these circumstances, there was a history of project selection and preparation on grounds other than economic; indeed, the fact of Federal grant financing provided no incentive for economic behavior on the part of local managers. Further, inadequacies of operations and maintenance by local operators were deemed partly responsible for a relatively high incidence of water-related diseases. 3.05 The sector study (para. 3.02) recowmmndod: transfer from the Federal Government to the states and municipalities the responsibility for preparing, constructing, and operating WSS facilitios; promotion of project financing based on the principle of cost recovery; promotion of tariffs reflecting as closely as possible the marginal cost of supply; and reorganiz- ing SRH to eliminate overlapping functions. These recommendations formed the basis for a dialogue on Bank support for FIFAPA I, which, besides funding investment in WSS systems, aimed at beginning reforms in major areas of sector policy: (i) changing the pattern of financing new works by substituting loan. for grant.; (ii) changing a policy of low, "social" tariffs for water services to one based on the principle of cost recovery, i.e., tariff levels providing revenue sufficient to cover operating costs and debt servie-; and (iii) upgrading the project-preparation capacity at SRH (substituting least-cost !k( ..continued) P-1727-ME, dated Decenber 4, 1975, p. 9, pam. 27. Hereater refirrd to as Pnridet's Reort. FIPAPA I. lhe Presidet' Report for FIFAPA nI w be rfcrred to in hle mnun - tht u, Pemidnt'. Rort FMAPA nI. 2/ World Health Organizaon and World Bank: Sector Study: Water SuDDlV Lad Sewern, Report No. 1278-ME, daed August 16, 1976; and United Nations Development Program and World Bank: Mexioo: Nationl Water Plan, Report No. 14Q6-ME, dated Novenber 1976. I/ World Bank: SARE FIFAPA L p. 3, par. 2.05. - 7 - principles for non-economic principles).P Aware of discussions within the Government concerning excessive centralization and other institutional shortcomings at SRH, Bank staff decided that it was inappropriate to link the project to any particular remedial scheme -- except to support a training program (paras. 3.10 and 3.11) -- while the Government was still considering its options.L' Staff also deferred seeking measures to promote the transfer of Federal responsibilities to the states and municipalities. 3.06 Concerning the mode of Bank lending, the Government initially proposed a loan based on a "program approach", i.e., agreement on selection criteria with identification of subprojects to follow loan approval. As SRH was not accustomed to assessing and preparing projects on an economic basis, the Bank would not agree to this proposal. During project preparation, it wan necessary for Bank staff to contribute extensively to the preparation of suitable feasibility studies for uubprojects. 3.07 At appraisal, the project definition and the responsibilities of the various parties to the project ("institutional arrangements") appeared to be clear. The project would consist of WSS subprojects chosen on least- cost criteria with supporting documentation to benefit a specific group of cities which had indicated a willingness to participate in the project.i1' BANOBRAS, as the borrower, would relend Bank and Federal resources through FIFAPA to local operators (state, Federal, and municipal), who would be the beneficiaries (Loan 1186-ME, Loan Agreement -- LA -- Secs. 3.01 & 4.01). BANOBRAS would act as financial agent for the Government: presenting disburse- ment requests to the Bank, paying contractors, collecting debt-service pay- ments from sub-borrowers, etc. BANOBRAS would not evaluate and supervise the execution of projects. This was the role of SRH which, as the executing agency, would carry out the project (LA, Schedule 2, Parts A & B) through a properly-staffed special unit (Project Implementation Unit -- PIU) in charge of appraising and supervising the subprojects (Loan 1186-ME, Guarantee Agreement -- GA -- Secs. 3.01 & 3.05). Besides carrying out the project, the PIU would also issue project preparation guidelines based on least-cost criteria (Loan 1186-MN, GA, Sacs. 3.04 & 3.06). It was hoped that this unit would constitute a core planning group around which the sector could be reorganized. Except for complying with their respective sub-loan agreements, the beneficiaries had no active role with respect to the project. 3.08 To assure an adequate financial mechanism, BANOBRAS estab- lished, in addition to its other lending facilities ("windows"), FIFAPA -- a revolving fund which would derive its resources from Government equity contributions and the proceeds of the Bank loan and would relend those resources to local operators on the basis of cost-recovery and municipal commitment to the concept of financial self-reliance. Through the FIFAPA mechanism, the project contemplated the substitution of loan financing for grant financing. 2/ Ibid., pp. 1-2, pam. 1.04. 12/ &Wi, p. 7. pan. 4.03. A/ lm., President's Reort. FIFAPA . p. 13. 'In view of the limited number of project that could meet the agreed technical, financial and economic election criteria, the eight cities ... chowen for the project have been slckted on the basis of availability of suitable proposals.' 3.09 At appraisal, the Bank staff judged BANOBRAS to be well-run and recommended no remedial actions. Concerning the executing agent, Bank staff observed certain deficiencies in the organization of SRH and the project preparation capacity of PIU/SRH.U' As already reported (para. 3.05), the Bank did not seek to link the project to any particular scheme for reorganizing SRH, but it secured agreement to the establishment of the PIU with adequate staffing and authority "to monitor project preparation, appraisal,.design, execution and administration of subprojects financed with the proposed Bank loan".2 In theory, the PIU/SRH had the authority to coordinate the activities of other SRH departments -- construction, engineering, finance, etc. 3.10 Concerning the beneficiaries, Bank staff observed that they were not well managed. There was a poor standard of maintenance, excessive water losses, inadequately qualified personnel, and deficient systems for accounting, billing, and collections. To remedy these shortcomings and to strengthen sector organization, the Bank and Mexican officials agreed on a training program in operational, administrative, and financial matters to benefit the beneficiaries and the project-connected personnel at SRH. The PIU/SRH would administer this program. 3.11 As defined in the Loan Agreement (Sch. 2), FIFAPA I consisted of: Part A -- the extension, in eight cities (Cd. Victoria, Jalapa, Mexicali, Morelia, Reynosa, Salamanca, Tampico-Cd. Madero, and Tuxtla Gutierrez), of water supply services to new users and improvements to existing customerq, the installation of sewerage services, the installation of meters on unmetered sources, repair of meters, and leak detection programs; and Part B -- a train- ing program to upgrade project-connected personnel. BANOBRAS agreed that the sub-loan agreements would include tariff and audit covenants -- namely, that three years after sub-loan signing, tariff levels would have been increased in three annual steps sufficiently to provide revenues covering operating expenses, increases in working capital, and the larger of annual debt service or depreciation on revalued fixed assets, and that each beneficiary should have its accounts audited by a qualified, independent auditor in accordance with sound auditing principles (Loan 1183-ME, LA, Sch. 5). The sub-loans would be repaid in local currency by the local WSS authority over a term of 18 to 19 years, including a grace period of about 3 years, and would carry a fixed interest rate of 9%, which was below the rate of inflation in 1975, 10% (between January and December 1975) and below the interest rate on medium-term savings accounts, 12%. The underlying objectives of such covenants were to assure the repayment of FIFAPA, to promote the concept of cost-recovery in the financing of WSS projects, and to develop beneficiaries which were both financially and institutionally strong. 3.12 While the Bank understood that these measures (the project unit, FIFAPA, etc.) did not constitute a sector-wide change with respect to policies and practices, it did expect that their future extension to an ever- IV Idm., 'Note to Pi", dad April 2, 1975, pan. 4; Back4to-flcc and Fuil Report', dad April 8,1975, pans. 3, Suad 6; luues Paper'", dad July 10, 1975, pam. 3. U/ Lbm.. SAR .IFAPA 1, p. 7, pan. 4.05. widening group of local operators would point the way toward such change.- The underlying assumption for this expectation was that Government commitment to this project implied an eventual reduction of grant financing, although Bank records provide no estimate am to the amount of such reduction. Bank records also do not indicate consideration given to issues which would later plague the project -- namely, lack of a clear definition of the respective roles of BANOBRAS and SRH and lack of a mechanism to bring the beneficiaries into the decision-making process related to project preparation and implementation. The decision-making process was centered in the offices of SRH in Mexico City. 3.13 The SAR identified the risks to the project as: (i) the limited capacity of PIU/SRH to prepare projects and to act as an agent of change for remedying the organizational deficiencies of SRH; and (ii) the possible lack of political commitment at the state and national levels to, respectively, raise water tariffs and extend the financial and organizational reforms of the project on a nationwide basis. It was expected that intensive supervision would overcome the first risk and help develop sufficient commitment at all levels of government to mitigate the other risks.W Bank records do not indicate any explicit consideration given to the possibility of a negative response at the local level, i.e., that the states and municipalities might prefer the status gau and would exercise pressure to continue the flow of grants and subsidies which had financed past expansion and operation. The absence of such commentary probably reflects the nature of the Bank dialogue which tended to be mostly with the national entities, Jto the exclusion of states and municipalities. 3.14 The project cost was estimated at US$90 milliont US$89.17 million for the WSS subprojects (Part A); and US$0.83 million for the training program (Part B) (after pro-rata distribution of physical and price contingencies). The foreign-currency cost of US$36 million would be covered by Loan 1186-ME (1975: US$40 million, including US$4.0 million for interest during construction). The implementation period was expected to extend from early 1976 to June 30, 1980. The expected loan closing date was December 31, 1980. 3.15 FIFAPA II: Issues. Bank and Mexican officials prepared FIFAPA II in 1979-1980 (Part III, Table 2). In the optimistic years following the discovery of major new oil reserves, the Administration of President Portillo (1976-1982) adopted a growth strategy based on ample availability of financing from oil revenues and foreign borrowings (para. 2.15). By 1980, the Government had set new target service levels and made up its mind about the future direction of water-resource/population policy and sector organization. 3.16 For the year 2000, the Government wanted to provide 95% of the urban population and 80% of the rural population with piped water and to provide 80% of the urban population and 42% of the rural population with sewerage or sanitation services. (Actual service levels in 1979-80 had fallen short of the targets announced in 1971s urban water: actual, 54% vs. target, 80%; and urban sewerage, actual 42% vs. target 50%.) Given that about 20% of IV IaM., Lcaer to Govenment, dad August 1, 1975. JII / mM, SAR, PFAPA I, p. 19, pam. 7.08. - 10 - the total population was concentrated in the MCMA, it was imperative that the Government continue its efforts to redistribute people and industry to medium- size cities. Adopted in 1978, the "Plan Nacional de De-arrollo Urbano" (PNDU) aimed at improving the water-resource/ population mismatch, and addressed regional priorities by controlling growth in the three main urban centers (Mexico City, Guadalajara, and Monterrey) and by promoting development in a number of intermediate cities. The PNDU was later supplemented by a National Incentive Program which established the order of priorities within the sector through various monetary incentives (variable interest rates, utility costs, and taxes). Both plans aimed at a more rational distribution of population and industry. 3.17 Besides having set target service levels and having adopted policies and plans to improve the water-resource/population mismatch, the Government articulated the elements of a coherent policy on sector organization and finances: (i) Federal agencies would continue to: (a) set policy and establish standards with respect to water use, treatment, etc.; (b) support the concept of water/sewerage tariffs based on marginal cost principles; and (c) substitute loan financing for grant financing, utilizing FIFAPA and linked to the concept of cost recovery; (ii) water policy explicitly recognized disease prevention as an objective; and (iii) management of local operators would increasingly assume the tasks of operations and expansion on a self-financing basis. (This policy closely paralleled the recommendations of a sector memorandum prepared in late 1978 by the Bank and the Pan American Health Organization,W which the Government commended ".,.as a good report, but lacking a description of intermediate and politically viable actions in order to achieve the stated objectives".f) The Government was in the final stages of preparing a decree to inaugurate a policy of transferring Federally-operated WSS facilities to states or municipalities ("decentralization policy"). 3.18 The purpose. of FIFAPA II were to support the objectives of PNDU, further the "decentralization policy" by assisting in the transformation of Federal and other local operators into autonomous water companies (AWSs), strengthen the management capabilities and financial performance of the AWSs, and improve the environmental/health conditions of medium-size cities. & 3.19 The context in which FIFAPA II was prepared reflected the recently successful efforts of the Bank and SAHOP to overcome the factors slowing the implementation of FIFAPA I. Between 1976 and 1978, these factors included inadequate leadership and staffing at the PIU, project-preparation and organizational problems at SRH/SAHOP, poor interagency coordination between BANOBRAS and SRH/SAHOP, and a hostile to lukewarm attitude on the part of beneficiaries toward the concepts of least-cost projects and tariffs based on cost-recovery principles (paras. 4.04 and 4.10). To remedy these problems, the Bank, in the first half of 1978, suggested major personnel changes which SAHOP accepted and implemented; and later in the year, SAHOP began to contract 16 World Bank and Pan American World Heath Organization: "Mexico: Water Supply and Snitation Sector Mcmorandum" (White Cover), p. ii, pars. viii, ix, x, and xii, dated October 1978. II/ World Bank: "Sector Memomndum: Back-to-Ofrice Report", p. 1, pa. 4, dated March 16, 1979. I8/ Idem., SAR. FIPAPA n, Report No. 3026d-ME, dated October 7, 1980, p. 21, pan. 6.03. - 11 - consultants to prepare appraisal reports based on least-cost principles (para. 3.21). By the beginning of 1979, there was a definite improvement in project progress. Five sub-loan agreements were signed, two were about to be signed; subproject construction was underway; the PIU and SAHOP were performing more efficiently; and the problems of interagency cooperation were reduced. While project progress was behind schedule at the beginning of 1979 (about two years), the rate of implementation was moving at a satisfactory rate. Project completion was expected at the end of 1981 or early 1982. By June 30, 1979, US$5.4 million (13.5%) of Loan 1183-ME had been disbursed vs. the appraisal estimate of US$39.0 million (97.5%); and by August 1980, just three months before the loan for FIFAPA II was approved -- November 1980 -- US$16.8 million (42%) of Loan 1196-ME had been disbursed and all of the loan and project funds had been committed. 3.20 The improvement in the operations of SAHOP and BANOBRAS in 1979 and the evidence of strong Government commitment to the objectives of the FIFAPA operation made a very positive impression on Bank staff. The Project Brief for FIFAPA II made no reference to the earlier shortcomings of BANOBRAS and did not identify interagency cooperation as an issue. Hence, Bank staff proposed no corresponding corrective measures. Evidently, Bank staff were counting on continuing strong Government commitment to the objectives of the FIFAPA operation to ensure continuation of the recent improvements. 3.21 Despite the problems and delays with respect to the timely preparation of satisfactory feasibility studies in 1976-1978, the Project Brief did not identify the organization and performance of SAHOP as issues to be addressed through loan conditionality.0 Such absence of commentary reflected Bank acquiescence to the use of consultants, whose performance had been in general satisfactory, for the preparation of feasibility studies for subprojects to be included in FIFAPA II. It also meant that the Bank was abandoning, at least temporarily, the effort to develop a full "in-house" project-preparation capacity at SAHOP. The financing for the consultants had materialized in late 1978 in the form of an additional budgetary allocation (US$6.7 million). To avoid delays due to the weak project-preparation capacity of SAHOP, the Bank relied on the completion of such studies by consultants, representing all but 30% of the projects before loan approval,11 and on an expected intensive supervision effort. The appraisal mission, according to the SAR for FIFAPA II, focused on strengthening SAHOP1 -- that is, obtaining the assurances of SAHOP to strengthen the PIU with adequate levels of qualified stafft.W To address the problem of municipal resistance to FIFAPA loans and to the concept of cost recovery, Bank staff relied on the persuasive powers of SAHOP to explain to local officials the virtues of least- 12/1 Id=., Projea Bnef, p. 4, pan. 3.02 and 3.03, dad Marh 30, 1979. WIM, 'Superdiion Report', dad July 26, 1979, Anm 7, pan. 1. 21 dIM., SALR FIFAPA n, p. 22, pru. 6.07 ad 6.08. 22 ikd., p. 1, par. 2.03. 2/ Ek., p. 12, par. 3.14. - 12 - cost planning and cost-recovery financing V and the anticipated enhanced lending power and financial importance of FIFAPA. While at the time this may well have been the most that could be achieved, the Bank should have been more critical in its assessment of the potential shortcomings and risks of the approach followed, and should have provided in the SAR a more comprehensive statement of the rationale for acting as it did. 3.22 To address the operational, managerial, and financial deficiencies of the local operators, Bank staff proposed training and other measures for their improvement. But staff seem not to have understood that the non-participation of the local operators in project preparation (which was centered in Mexico City) generated no sense of autonomy or of responsibility for project design (para. 3.12). 3.23 Bank staff were aware that the continuing availability of grant financing to states and municipalities might undermine the effectiveness of FIFAPA as a financing mechanism and delay signing sub-loan agreements and project execution, but they believed that this risk had been "minimized by the Government's decision to gradually reduce grant financing".2y The SAR and Bank files related to the appraisal provided no information on the timing and amounts related to reduced grant financing; it may have been that the Government was unwilling to go beyond a statement of intention on such a delicate domestic matter. The unspoken expectation on the part of the Bank was that the Administration would find sufficient support in the Congress to override the objections, if any, of the municipalities and that such reduction would be sufficient to enhance the role of FIFAPA during the implementation period of the project (1981-1984). (The Bank made no subsequent effort to monitor regularly the annual amounts of grant and non-grant financing used by the sector.) Given the delays experienced under FIFAPA I, the Bank again did not agree to the initial Government proposal for a program-type operation (para. 3.06). 3.24 Under FIFAPA II, the roles and responsibilities of the borrower, executing agency, and beneficiaries paralleled those under FIFAPA I. BANOBRAS, as the borrower, would relend Bank and Federal resources through FIFAPA to beneficiary local operators (Loan 1913-ME, LA, Secc. 3.01 & 3.02). BANOBRAS would be the financial agent of the Government and would perform the same duties as it did under FIFAPA I: paying contractors, collecting debt service, etc. SAHOP, as the executing agency, would: (i) carry out the projects through a properly staffed special unit (PIU) in charge of appraisals and supervision; and (ii) provide training to the beneficiaries to meet the specific needs their project-connected personnel (Loan 1913-ME, GA, Seca. 3.01, 4.02, & 4.03). As under FIFAPA I, the role of the beneficiaries was confined to complying with their respective sub-loan agreements (para. 3.07). 3.25 Unlike FIFAPA I, when beneficiaries were chosen simply on the basis of their willingness to participate, the beneficiaries under FIFAPA II would be selected in conformity with the priorities set forth in PNDU and with ZA/ IemsPident's Reort. FIFAPA nI, Report No. P-2983-ME, dd Octobr 15, 1980, p. 12, pas. 46. 2I 1-m., SAR FIPAPA n, p. 11, pam. 3.07 _W [bd. p. 44 pamn S.19. - 13 - other agreed criteria (coverage levels below the national average; and the availability of idle water production capacity); and *ubprojects would be selected on the basis of least-cost criteria (Loan 1913-MB, LA, Sec. 5.02). Only state or municipal companies could be beneficiaries (Loan 1913-MZ, LA, Sec. 5.03). State governments were obliged to guarantee the sub-loans; sub- loan disbursements were conditioned to the establishment of a municipal or state company if it did not exist. Sub-loans would bear an interest rate of at least 9% with a term not to exceed 18.5 years (Loan 1913-NE, LA, Sec. 5). BANOBRAS agreed to include in its sub-loan agreements the prior covenants on revenue levels and audits and to include new covenants relating to subproject timetables, monitoring indicators, institutional improvements, reduced accounts receivables, tariff studies, asset revaluation, accrual accounting systems, etc. (Loan 1913-M, LA, Sch. 5). The purposes of the sub-loan covenants were the same as under FIFAPA I (para. 3.11). SAHOP agreed to prepare not later than June 30, 1981 a framework tariff study, which would establish the basic guidelines and criteria for the tariff levels and structures of the local operators (Loan 1913-ME, GA, Sec. 3.04). 3.26 It was recognized that the 9% interest rate on sub-loane was lower than the then current (July 1979-June 1980) rate of interest paid on short-term commercial paper (26.9%) and highly negative at the rate of inflation (24.8%) in Mexico. However, the Bank "accepted the judgement of the Mexican authorities that it would be premature to raise the onlending terms, including the 9% interest rate charged to local water authorities, before the concept of loan financing of water supply projects has been firmly estabjished through the second FIFAPA operation".2' This was an important concession on the part of the Bank, as it meant accepting relending terms which would eventually decapitalize FIFAPA; however, it was worthwhile to the Bank to establish: (a) least-cost selection criteria; and (b) financing arrangements incorporating, even if imperfectly, the concept of cost recovery (as compared with grants). It was also expected that FIFAPA would become the primary source of funding as grant monies became less available (para. 3.23). 3.27 FIFAPA II was designed to extend water supply services to about 1.2 million people and sewerage services to nearly 1.3 million in several medium size cities. The project included construction of sewage treatment plants, where necessary, to keep the pollution level of effluents within acceptable standards; and promoted the metering of house connections. A small technical assistance program (para. 3.24) was designed to help local operators to improve their operational and service capabilities, i.e., the implementation of accrual accounting systems and the acquisition of equipment for accounting, leak detection, and water quality control. The urban poor were expected to conetitute about 35% of the new customers served by the project. The medium-size cities to benefit from the project included Tepic, Toluca, Nogales, Monclova, Matamoros, Queretaro, Cd. Juarez and any other city meeting agreed selection criteria (Loan 1913-ME, LA, Sec. 5.02 & Sch. 2). 3.28 The SAR identified as risks to the project the: (i) lengthy approval process at the state and municipal levels for sub-loan agreements; and (ii) limited management capacity of the beneficiaries. The Bank expected that the Government decision to reduce gradually grant financing would overcome the reluctance of local authorities to finance WSS subprojects 2/id, p. 11, pam. 3.09. - 14 - through FIFAPA loans. The Bank also expected management deficiencies of local operators would be overcome by actions of SAHOP, including the operation of its national training program.& Underlying the Bank's confidence was the expectation of strong Government support for the organizational, institutional and financial objectives of the project. The pressure of subsequent economic events (paras. 2.16 and 2.17) and municipal political resistance substantially undermined the support of the Government for these objectives. 3.29 Excluding the Value Added Tax of USS21.0 million, the project cost was estimated at US$297 million: US$0.61 million for the technical assistance program and US$296.39 million for WSS subprojocts (after pro-rata distribution of physical and price contingencies). The foreign-currency cost of US$125 million would be covered by the proceeds of Loan 1913-ME (US$125 million, 1980). Because BANOBRAS, the borrower, was financially strong, the loan included no financing for interest during construction. The implementation period was expected to extend from about November 1980 to June 30, 1984. The expected loan closing date was December 31, 1984. 3.30 FIFAPA III: Issues. Even before effectiveness of Loan 1913-ME, Bank and Mexican officials began planning for FIFAPA III. Identifi- cation, preparation, and appraisal were completed between April 1981 and March 1982, but thereafter, in the circumstances of the financial crisis of 1982 (para. 2.17), the Bank deferred approving the Loan until May 17, 1983 (Part III, Table 2). 3.31 The context in which FIFAPA III was prepared initially resembled that of FIFAPA II (para. 3.20). Rates of implem ntation for both FIFAPA I and II were satisfactory. Reliance on consultants to prepare final studies, financial projections, and designs had proved to be satisfactory. Government commitment to the objectives of the FIFAPA operation appeared to be strong. 3.32 This positive context changed drastically in the second half of 1982: Mexico's economic and financial crisis led to a drastic budgetary reduction for FIFAPA, non-payment to contractors, and work stoppage for both FIFAPA I and II. It also led to the substitution of grant monies to pay for subproject components previously earmarked for FIFAPA financing. Despite this substitution (para. 4.13), which contradicted the self-financing objectives of the FIFAPA operation, Bank staff believed (wrongly, as it turned out) that the economic crisis would only reinforce the Government policy of reduced grant financing (para. 3.23). "Under the present financial difficulties the Government's policy is to reduce net public outlays. FIFAPA will be used to introduce on a large scale the concept of cost recovery in water supply and sewerage projects. Therefore, it is expected that FIFAPA share of sector financing will be increased to about 80% during the forthcoming year".W 3.33 In most circumstances, the financial crisis, the funding constraints on FIFAPA, and the work stoppages of FIFAPA I and II would have constituted grounds for the Bank to defer loan processing until there was an 2&1 Iki,p. 44p ,puan. 8.19-8.21. 22/ M., SR FlIAPA I (Repoit No. 4007-ME), dated April 19, 1983, p. 4, pan. 2.14. - 15 - improvement in the policy environment. However, in the case of this loan, besides believing that the crisis provided an opportunity to extend FIFAPA financing on a large scale, the Bank, it seems, decided that the timing of approval should be part of a larger demonstration of Bank confidence in the future of Mexico and the ability and commitment of the Government to address its problems. While this may well have been justified when assessed against the macroeconomic context of the times, the strategy war not clearly spelled out in the Appraisal Report. 3.34 The basic sector policy context of FIFAPA II continued under FIFAPA III. Remaining unchanged were the: (i) target service levels for the year 2000; (ii) policy and plans for improving the water/population mismatch; (iii) health and disease-prevention objectives of water policy; and (iv) the "decentralization policy" -- that is, transferring the ownership and operation of Federal WSS systems to states and municipalities, strengthening the management, efficiency, and finances of local operators and limiting the roles of Federal agencies, especially their financing and operating roles (paras. 3.17-3.18). 3.35 The objectives of FIFAPA III supported the above sector policy context and closely paralleled those of FIFAPA II: furthering the "decentrali- zation policy" (with emphasis on a state water company--SWC); improving the infrastructure and health and onvironmental conditions of medium size cities; improvingj' the health conditions in Sinaloa statel and improving the efficiency of FIFAPA and PIU/SEDUE. The last objective would be achieved by purchasing support equipment, carrying out studies to establish best solutions to sector problems (metering and water quality), and reviewing SEDUE's guidelines for project preparation (para. 3.40). In design, FIFAPA III differed from FIFAPA II by: (i) including an SWC, the Sinaloa Water Board (CEAPAS), among the beneficiaries: (ii) eliminating the beneficiary selection criteria; (iii) refining the subproject-selection criteria; (iv) and increasing in nominal terms the relending rate. It also differed from FIFAPA II by including a health education program in the State of Sinaloa. 3.36 Under FIFAPA III, arrangements with respect to borrower, executing agency, beneficiaries, and subproject selection criteria paralleled those under FIFAPA I and II. BANOBRAS, as the borrower, would relend Bank and Federal budgetary resources through FIFAPA to beneficiaries which included: (i) a group of local operators serving medium-size cities (Celaya, Colima, Cd. Guzman, and Tapachula); and (ii) CEAPAS (para. 3.35), an autonomous agency for the State of Sinaloa regulating five semi-autonomous regional companies (RCs - - Culiacan, Los Mochis, Mazatlan, and Topolobampo) (Loan 2281-ME, LA, Secs. 3.01 & 3.02). BANOBRAS would again be the financial agent of the Government and wold perform the same duties as previously under FIFAPA I and FIFAPA II (paras. 3.07 and 3.24). SEDUE, which took the place of SAHOP as executing agency (para. 2.13), would: (i) carry out the project through a properly staffed special unit (PIU) in charge of appraisals and supervision; and (ii) provide training to the beneficiaries to meet the spe cific needs of their project-connected personnel (Loan 2281-ME, GA, Secs. 3.01, 4.02 & 4.03). There was provision for the assignment of the implementation responsibility to the beneficiaries (Loan 2281-ME, GA, 3.01). As under FIFAPA II, there was no provision for beneficiary participation in the project-preparation process and 30/ Ibid., p. 11, par. 5.03. - 16 - because of the initially positive implementation experience of FIFAPA II in 1981 (para. 4.11), Bank staff proposed no measures to strengthen coordination between PIU/SAHOP (later PIU/SEDUE) and FIFAPA (paras. 3.12 and 3.20). 3.37 Project selection criteria replaced beneficiary selection criteria. Under FIFAPA II, all beneficiaries had to be located in the regions selected in the PNDU (para. 3.16). Reference to the PNDU as selection criteria for either beneficiary or subproject does not appear in the Loan Agreement, although the SAR says: "Subprojects in all beneficiary cities have been selected in accordance with the priorities set forth in the National Urban Development Plan".W In addition to repeating the requirements for least-cost solutions and conformity with the SEDUE guidelines, the project selection criteria required that subprojects have: (i) internal rates of return ranging from at leaot 11% for cities with populations above 50,000 and to at least 6% for cities with populations below 50,000 (but above 10,000); (ii) a per-capita expenditure limit of US$200 for cities with a population below 10,000; and (iii) in the event that none of the above criteria applied, a demonstrable health benefit for a population suffering from lack of adequate WSS facilities. Also included among the selection criteria was the requirement that the subproject be carried out by a municipal or state operator (Loan 2281-ME, LA, Sch. 2, Annex). BANOBRAS agreed to include in the sub-loan agreements the same covenants on revenues, audits, subproject timetables, etc., as were agreed under FIFAPA II (para. 3.25). CEAPAS would relend its funds to the RCs under the same terms and conditions received from FIFAPA (Loan 2281-ME, LA, Sch. 4). Sub-loans would bear an interest rate of 25% and would be repaid in 15 years plus a grace period of up to four years (Loan 2281-MB, LA, Sch. 4). 3.38 As anticipated during the preparation of FIFAPA II, the Government issued (1980) a decree inaugurating a policy of transferring Federal WSS facilities, many of which lacked effective managements, to an SWC. Including as a beneficiary a suitable SWC, through which FIFAPA funding might pass to benefit small operators, would reinforce the decentralization of the sector and broaden the impact of FIFAPA on sector financing. Grouping the WSS facilities of small, scattered cities into an SWC offered many advantages for establishing a uniform financing system, economies of scale, proper project supervision, etc. Further, it was the only way to provide these small systems with the management and project-implementation capabilities without which FIFAPA funding would be an impossibility. It was expected that this pilot operation would provide useful lessons which could be applied to future projects. 3.39 A major issue was the relending rate, which, even at 25%, was far below the 1982 rate of inflation (98.9%) and below the rate of interest on short-term commercial paper (56.2%). The Bank position was: ...the only feasible way to reduce Government subsidies to the water sector was to progressively establish the concepts of cost- recovery and to substitute grant funds by interest-bearing loans ....While we support the idea of positive interest rates, we feel that at this time such rates would result in formidable pressures by the municipalities for reversion to grant funds. FIFAPA has aJj &W., p. 14, pam. 5.10. - 17 - agreed to increase its lending rate from 9 percent to 25 percent .Also, the Government, which was financing 93 percent of the sector investments through grants or interest free loans until recently, has shifted 70 percent of funds for the sector to inter- est bearing loans through FIFAPA. Thus, while under the Bank loan FIFAPA would be lending at subsidized rates, the subsidies to the sector would be reduced substantially".f By- not insisting on a positive or at least adjustable relending interest rate, the Bank was making an important, short-term concession to Mexican authorities (para. 3.26) because it expected that FIFAPA financing would constitute 80% of sector investments in the forthcoming year (para. 3.32). 3.40 , As defined in the Loan Agreement (2281-ME, Sch. 2), FIFAPA III would consist of: Part A -- a pilot program for CEAPAS consisting of the construction of WSS sub-projects benefiting RCs in the state of Sinaloa (paras. 3.35 and 3.36), an institutional development program for CEAPAS, and a health education program in Sinaloa that could be replicated in other states throughout the country; Part B -- provision of new and improved water supply facilities, laboratory equipment, transmission pipelines, domestic and production metering facilities, sewer interceptors and outfalls, sewage pumping stations and sewage treatment plants in medium-size cities (paras. 3.35 and 3.36); and Part C -- institutional support, including efficiency studies of the sector and operational equipment, to Direccion General de Sistemas de Agua Potable y Alcantarillado (DIGESAPA) of SEDUE and FIFAPA.. 3.41 According to the SAR, the highest risk to the project pertained to the implementation of the institutional development program at CEAPAS and the RCs. In the past, the choice of consultants had been subject to difficulties and the success of the programs depended on the willingness of the beneficiaries to implement the recommendations. It was expected that Improvement in the organization of SEDUE would diminish this risk. Another risk derived from the slow preparation of new subprojects by SEDUE due to repeated changes within its administration and reorganization of the sector by the new Administration. The more expensive terms of the FIFAPA loans might lead some beneficiaries to withdraw from the project, thereby requiring their replacement with new subprojects. "This risk is limited as grants would be lower than in previous administration due to the new government policy in the sector... In addition, SEDUE has a long list of potential beneficiaries". V If the FIFAPA operation was to achieve its economic and financial objectives, it was important for the Bank to monitor annually grant financing as a percent of total sector financing; however, in the subsequent supervision of the project, the Bank did not address this subject. 3.42 The project cost was estimated at US$192.80 million: US$67.85 million for the CEAPAS component (Part A); US$120.53 million for the medium size cities component (Part B); and US$4.42 million for the support component (Part C) (after a pro-rate distribution of price contingencies). Loan 2281-ME (US$100.3 million) would cover the foreign exchange cost plus US$0.3 million for the Bank front-end fee. Because BANOBRAS, the borrower, was strong 2Vk;dmu lterm Mmo, dated May 12,1983, pam. 5. S/ JSm. SAR FIFAPA m, p. 29, pam. 7.14. - 18 - financially, the loan, as for FIFAPA II, included no financing for interest during construction. The implementation period was expected to extend from early 1984 to December 1989. The expected closing date for the Loan was June 30, 1990. 4. Implementation 4.01 The FIFAPA Operation: As one FIFAPA loan followed another, Bank and Mexican officials came to think of the three projects as a single project, consisting of a succession of water and sewerage works executed in various cities supported and financed by three loans (see Part II). Works identified under the first loan were financed and executed under the second loan; supplies identified under the second loan were financed by the first loan. Works identified under the second loan were completed with financing under the third loan. Procedurally, the succession of loans effectively required the identification and negotiation of new activities at mid-stream. In other words, there was a continuing process of subproject identification and financing. Notwithstanding such thinking, each project was presented to the Board based on its individual merits and for the purposes of this report, the actual timetable, cost, and beneficiaries of each project will be compared with the corresponding appraisal data. 4.02 FIFAPA I: Timetable and Cost. The Bank declared the first loan (1186-ME; US$40.0 million) effective on April 26, 1976, slightly more than three months after signing, January 13, 1976. FIFAPA, the funding mechanism, was initially capitalized at US$100 million, including the Bank loan. The first sub-loan agreement was signed in early 1977 and construction began in late 1977. However, as shown below, project progress, i.e., the preparation of additional subprojects, the signing of corresponding sub-loan agreements, and the implementation of subprojects, moved at a very slow rate prior to 1979. Project completion coincided with loan closing (January 14, 1984), about four years later than expected (Part III, Table 2), by which time FIFAPA II was under way and the loan for FIFAPA III was about to be declared effective. 4.03 Schedule I on the next page shows the appraisal, revised, and actual cost of the projects, as well as individual subproject cost estimates and completion dates expected at appraisal. All project costs reflect then current prices and exchange rates. Column 1 shows that at appraisal the total project cost was expected to amount to US$90.0 million; the last three subprojects were expected to be completed by December 1979. Column 2 shows revised estimates of costs and completion dates as per the sub-loan contracts. In 1978, after deletions and additions of subprojects, the total project cost was estimated at US$95.7 million; completion for the last three projects was expected by December 1980. In 1981, reflecting then current prices and exchange rates, the total project cost was estimated US$78.2 million. Column 3 shows the actual project cost as of loan closing in January 1984 at US$76.5 million (See Part III, Table 3.1). The appraisal, revised and forecast costs are not comparable as a result of additions and deletions which reduced the scope of the project. Two beneficiaries withdrew from the project and only one joined the project; subprojects not completed (Tampico, Reynosa, Cd. Victoria, and Morelia) at the closing of Loan 1186-ME were transferred to FIFAPA II; the financing of materials procured for FIFAPA II was transferred from Loan 1913-ME to Loan 1186-ME. Another factor making comparability difficult was the appreciation (48.2%) of the Mexican peso relative to the US - 19 - dollar between 1977 and January 1984 am measured by the diverging trends of domestic inflation and of exchange rates.N There is insufficient data to restate current prices at the price level of January 1975. Schedule I FIFAPA I: Cost (without taxes or interest) -- Aooraisal. Contract. and Actual (in millions of US dollars, stated in current prices) C1) C2) (3) Appralsal Contract Actual Coop. Coup. Comp. Cost Date Cost Date Cost Date (1978 (1981 A. Sub-project prfcas) prices) Cd. Victoria 4.62 12/79 9.28 7.75 12/80 8.27 06/82 1/ Nexicali 21.63 12/78 10.48 9.26 03/80 9.64 01/81 lorelia 6.94 10/78 4.62 4.07 06/79 3.81 01/81 1/ Reynosa 14.37 12/77 21.37 17.49 12/80 14.15 12/82 1/ Tuxtla-Gutierrez 8.59 12/79 4.46 3.95 12/7a 3.96 12/80 Tampico 21.63 12/77 29.9 22.63 12/80 12.92 12/83 1/ Sub-totaL 77.78 80.20 65.15 52.75 Additions Culfacan 15.02 12.55 06/81 13.01 12/83 SuppLy Program 10.81 01/84 2/ Deetions Jalapa 7.43 09/77 Salmanca 3.96 12/79 Sub-total 11.39 Total, Sub-projects 89.17 95.22 77.70 76.57 S. Training Program 0.83 06/80 0.50 0.50 N.A. 0.00 3/ Total, Project 90.00 f 7 78020 765 * Source: "Supervision Report", dated October 7, 1981, Arrex 7. 1/ AefLects expenditures excluding works transferred to FIFAPA It. 2/ Reflects expenditures for materfals transferred from FIFAPA II to FIFAPA I. 3/ Reflects no disbursaments from Loan 1186-HE for training. 4.04 Proiect Implementation. In 1976 and 1977, project progress fell well behind schedule due to the inadequacy of institutional arrangements (para. 3.07) for implementing the project and the lukewarm response of the beneficiaries to the concepts of cost recovery and least-cost planning principles By year-end 1977, two beneficiaries (Jalapa, Salamanca) had withdrawn from the project due to reluctance to adjust tariffs as required under the tariff/revenue covenant of the proposed sub-loan agreement; and only three beneficiaries had signed sub-loan agreem-nts. Construction of only one subproject (Mexicali) was just beginning at the end of 1977. 4.05 The inadequacies of the institutional arrangements, which had many aspects, were both short term and long term. During most of 1976, there 34/ Between 1977 and January 1984, the appreciaion of the peso has been mueasured by rlating the percentage increae of domtic prices to the percentage change in the rte of exchange. The values for the consumer pnce index for 1977 (averge) and January 1984 are, respectively, 8S.1 and 814.8; the index is: 814.818S.1 - 9.S75. The values for the rate of eaxange for 1977 (avenge) and January 1984 are, repectively, USS1.00:MEXS22.6 and USS1.00:MEXS146.01; the index is: 146.01/22.6 - 6.461. Hence, during this period, the appreciation of the peso wu: (9.575/6.461) - 1 - 48.2%. - 20 - was uncertainty about the role and authority of SRH plus frequent management changes. The short-term uncertainty was resolved in December 1976 when the Government replaced SRH with SAHOP (para. 2.11). 4.06 The longer-term problems at SRH/SAHOP included: (i) poor internal organization at SRH/SAHOP; (ii) deficient leadership and staffing at the PIUS (iii) poor coordination between SRH/SAHOP and BANOBRAS; and (iv) the failure of BANOBRAS to discuss loan conditions with local authorities at an early stage of the project cycle. The appraisal work of SRH/SAHOP reflected poor internal organization -- that is, the various departments (engineering, market, etc.) tended to carry out their functions without proper coordination. Because the engineering group often ignored least-cost principles and failed to consult the intended beneficiaries, the Bank found that, again and again, projects were designed without regard to cost, the capacity of the community to pay, or the ability of the local technicians to operate the project. 4.07 Concerning the PIU, in theory, the unit was independent within SRH/SAHOP, possessing the authority and staff to monitor and coordinate project preparation and implementation by other departments. The reality was different: the various units within SRH/SAHOP feuded to gain control of the PIU, and they cooperated poorly with the PIU in carrying out duties important to timely subproject preparation (poor appraisal work and late completion of detailed engineering designs). Despite assurances from the Government gained during appraisal and confirmed at negotiations (para. 3.07), the PIU lacked adequate leadership and properly qualified staff to complete project preparation.M' The shortcomings of the PIU were made more complex by frequent personnel and management changes. In these circumstances, staff of the PIU usually required considerable time to complete the satisfactory evaluation of subprojects. 4.08 In October 1976, the Bank informed SRH of its concern about the departmental feuding and the shortcomings at the PIU, and SRH assured the Bank that adequate corrective action would be taken.& Nothing came of these assurances before the Government replaced SRH with SAHOP in December 1976. In early 1977, the Bank considered the idea of BANOBRAS's assuming the role of executing agent.37 The Bank did not press this idea while SAHOP was organizing. At the end of 1977, still concerned about the poor organization of SAHOP and the,shortcomings at the PIU, the Bank considered but did not adopt the options of: (a) merging the PIU into the SAHOP Projects Department and (b) amending the Loan and Guarantee Agreements for Loan 1186-ME to permit the beneficiaries to employ engineering consultants to design water and sewerage systems and to supervise construction. In early 1978, the Bank suggested that the top management of SAHOP should: (i) appoint a senior engineer to the PIU to act as an adviser; (Ui) introduce a procedure at an early stage of project processing to examine the capacity of a community to pay for a proposed project; and (iii) form of a special group to complete the 21 World Bank: Internal Bank Memo, dated October 19, 1976. pam. 2. 6 1M., Leter to SRH, dated October 21, 1976. D1/ dM., Memo to Filea, Atachment A, dat Februaiy 24, 1977. - 21 - task of preparing project preparation guidelines. SAHOP made personnel changes corresponding to these suggestions (para. 4.10). 4.09 Also delaying the project were poor cooperation, even rivalries, between SRH/SAHOP and BANOBRAS and the late timing of sub-loan negotiations on the part of BANOBRAS. In 1976, the rivalries became so intense that Bank staff thought that BANOBRAS might be attempting to replace SRH as the executing agency. Later, BANOBRAS informed the Bank (1978) that it would form a technical committee to correct the poor coordination with SAHOP, which would continue as the executing agency.-& After two of the potential beneficiaries withdrew from the project, BANOBRAS did very little to recruit new beneficiaries. The poor cooperation of 1977 and 1978 took the form of the strict sequencing of the various stages of the project rather than carrying them out on a phased or simultaneous basis. For example, BANOBRAS would not start negotiations until after SAHOP had completed the subproject feasibility study to the satisfaction or the Bank; and SAHOP would not issue bidding documents until after BANOBRAS had completed its sub-loan negotiations. 4.10 By the end of 1978, project progress had improved. Five beneficiaries had signed loan agreements and construction was underway. Two more contracts were expected to be signed in the near term. Personnel changes suggested by the Bank (para. 4.08) resulted in improved work at the PIU and the cessation of departmental feuding. Further, SAHOP issued acceptable project preparation guidelines based on least-cost principles and contracted consultants to prepare timely feasibility studies based on its guidelines (para. 3 21). SAHOP promised to improve its non-project supervision of beneficiaries, as they needed assistance in solving pending problems in administration, finance, and operations. A Bank supervision mission advised BANOBRAS and SAHOP to improve their coordination and the programming of their activities -- starting loan negotiations with state/municipal at an earlier stage in the project cycle, calling for bids before the completion of negotiations, etc. 4.11 In 1979-1981, having overcome the project-preparation and interagency coordination problems which had delayed the project,5 SAHOP and BANOBRAS were successfully implementing FIFAPA I; project completion was expected by August 1982.a/ Also during this period, the Bank, together with SAHOP and BANOBRAS, successfully prepared FIFAPA II (paras. 3.15 to 3.29). Following the withdrawal of Jalpa and Salamanca, the municipality of Culiacan was added as a beneficiary, resulting in seven cities participating instead of the eight expected at appraisal. The final two sub-loan agreements (Tampico, Reynosa) were signed in early 1979. Construction of the subprojects at Cd. Victoria and Culiacan began between February and November 1979, about three years late; and ended by late 1981, about eighteen months late. Construction for the subprojects at Tampico and Reynosa also started in 1979 and completion was expected by the end of 1982 and then extended to 1983 because of technical 31/ Lm, Bank Letter to SAHOP, dated January 17, 1978. S2/ 4m., Intena Bank Meno, pam. 3, dat January 18, 1978. 4 M., 'Supervsion Report, Annex S, p. 1, pmr. 2, dae Mach 3, 1980. A1/ L&m., "Supeviuion Report', Annex 7, p. 1, pam. 1, dad June 2, 1981. - 22 - and contract problems in connection with the water treatment plants at Tampico and slow progress by the local water authority at Reynosa in constructing house connections.9' In order to make allowance for these delays, the Bank agreed to extend the closing date for the loan to January 14, 1984.9' 4.12 The first two supervision missions of 1982 (March and August) reported satisfactory project progress: disbursements of Loan 1183-ME amounted to US$27.7 million (69%) as of January 1982 and US$28.8 million (72%) as of June 1982; SAHOP selected a consultant to implement a satisfactory technical assistance program to strengthen the beneficiaries; five of the seven subpro- jects were completed; completion of the subprojects at Reynosa and Tampico was expected by June 1983. When it was found that solving the problems of the water treatment plants at Tampico would extend completion beyond the new loan closing date, the Bank and BANOBRAS agreed in principle to transfer the financing of the treatment plants to Loan 1913-ME. To assure full disbursement of Loan 1186-ME, they agreed to expand the scope of the subprojects at Culiacan and Cd. Victoria with completion expected by June 1983."' 4.13 In the third calendar quarter of 1982, just prior to a change of Administrations, an economic and financial crisis engulfed Mexico, which in due course led to a fundamental re-thinking of the national development strategy (paras. 2.16 and 2.17). The third supervision mission of 1982 (October) reported that: (i) project progress for FIFAPA I and II had completely stopped in June/July 1982 due to non-payment of contractors; fnd (ii) sharp reductions of the budget allocation to FIFAPA had led BANOBRAS to make payments to contractors with available Federal grant money (about Mex$700 million) for components scheduled to be financed with FIFAPA loans. (The Bank would not agree to the application of the proceeds of its loans to these components unless the grants were transformed into loans.) Also due to budget reductions, SAHOP top management, which had been deferring decisions pending the inauguration of President de La Madrid (December 1, 1992), had substantially reduced supervision activities. By December 1982, the organiza- tional setting of the project was made more complex by the replacement of SAHOP with SEDUE. This resulted in changes in personnel charged with responsibility for the project. Staffing problems at SEDUE emerged similar to those experienced by SAHOP prior to 1979. 4.14 As part of a larger Bank-wide "Special Action Program" to help revitalize the economies of borrowing countries and to ensure full disbursement of Loan 1193-ME without further extension of the closing date, the Bank (January 1983): (i) reallocated the proceeds of category 3 (unallocated) to category 1 (equipment, materials, civil works, etc.); (ii) increased the disbursement percentage from 40% to 100% to cover equipment costs (foreign currency) and from 40% to 70% to cover the cost of civil works, engineering and subproject administration (local currency); and (iii) shifted the: (a) financing (US$8.7 million) of civil works construction at Tampico, house connections at Reynosa, and subproject expansion at Culiacan and Cd. 1 dM., "Supervision Report", Annex 7, p. 2, dated March 10, 1982. _4/ 1£m., Bank telex to BANOBRAS, dated January 6, 1982. 4U Ibm., Bank Ltcer to BANOBRAS, p. 2, dated Augu 13, 1982. - 23 - Victoria under FIFAPA I (Loan 1186-ME) to FIFAPA II (Loan 1913-ME) and (b) financing of materials (US$8.3 million) under FIFAPA II to FIFAPA I. Items (ii) and (iii) were part of a "Special Action Program", which was also applied to Loan 1913-ME. 4.15 As a result of the unavailability of counterpart funds, implementation of FIFAPA I and II remained paralyzed for several months during 1983. The major accomplishment of that year was the completion of the technical assistance program, except for training related to unaccounted-for water losses. Coordination problems between BANOBRAS and SEDUE re-emerged. After extending the closing date from December 31, 1980 to January 14, 1982 and then to January 14, 1984, the Bank closed the loan which was almost fully disbursed (US$39.79 million). The undisbursed balanced of US$0.21 million was canceled. The last disbursement was on May 23, 1984. Part III, Tables 4 and 5.1 compare actual and forecast schedules for the timing of disbursements and the allocation of loan proceeds. 4.16 FIFAPA II: Timetable and Cost. The Bank approved the second FIFAPA loan (1913-ME; US$125.0 million) on November 4, 1980, but effectiveness was delayed until June 23, 1981 -- about eight months -- because of slow action on the part of the Government in fulfilling a routine requirement -- namely, providing legal opinion. on the loan documents. At appraisal, project completion was expected as of June 30, 1984 and loan closing was scheduled for December 31, 1984. The actual project completion date coincided with the loan closing date, which was almost two years late: November 30, 1986. 4.17 Schedule 2 on the next page shows how the number of subprojects, their cost estimates and completion dates varied between October 1980 and November 1986, when the loan was closed. The cost values are stated in US dollars and reflect then current prices and rates of exchange. Column 1 of Schedule 2 shows that as of October 1980 the project cost estimate was US$296 million (excluding value added tax of US$21 million): US$208.9 million for subprojects with approved feasibility reports and US$87.1 million for subprojects, the feasibility reports of which were pending. All subprojects were expected to be completed by December 1983. Column 2 shown that in April 1981 the cost estimate on subprojects with approved feasibility studies amounted to US$175.4 million. The subproject at Tepic was expected to be withdrawn; feasibility studies for other subprojects were still pending. The completion of the last subproject was expected by December 1984. Columns 3 through 6 show additional adjustments in the cost estimates and completion dates for the subprojects a. the project scope was expanded and reduced. The actual project cost (Column 7) was US$115.9 million (Part III, Table 3.2) and is not comparable with the forecast cost due to reduction in the scope of the project (1983), elimination of some subprojects (1986), and transfer of uncompleted subprojects from Loan 1913-ME to 2281-ME (1986). Also contributing to the reduced project scope was the construction of subprojects with Federal grants. Another factor accounting for lower project cost in US dollars was the depreciation by 29% of the Mexican peso relative to the US _q/ 1km., Intenal Bank Memo, dated December 7, 1982. 24 - Sch duLe 2 FIFAPA II: Cost (excluding taxes and interest) -- Appraisal, Revisd, and ActuaL (in millions of US doltars, stated in current prices) (4) 7/ (1) (2) 3/ (3) 5/ Reduced Project Scope as Per Appraisal (10/80) Revised (04/81) Revised (10/ 82) Rank Letter of 07/15/83 Adjusted Per- Per- Cost, Per- Cost cent Ori- cent Con- Exchange- cent as per Cost Ori- X) ginat Con- CX) tract Rate MX) Revised Original as per ginat Comple. Comp. tract Comple. Coup. Adj- Cople. Coop. Sub-loan Reduced Cost T 1/A 2/ Date Cost T A Date usted T A Date 6/ Contract 30/4/83 Scope Sub-projects Totuca 36.14 MA MA 12/82 35.44 15 6 06/83 19.90 80 45 12/83 21.28 14.32 21.30 Tepic 5.3 09/82 4/ 9.40 0 0 09/85 6.80 0.00 6.80 Nogales 12.00 12/82 10.24 1 1 12/83 5.90 65 60 06/83 6.55 5.31 6.60 Monclova 11.71 12/82 9.92 1 1 12/83 7.90 35 32 06/84 12.18 2.98 8.50 Matamoros 32.50 12/83 26.16 1 2 12/83 15.30 60 45 12/84 28.43 5.77 28.40 Ouertero 32.30 12/83 28.32 2 3 09/83 16.60 65 45 12/83 31.18 11.98 23.80 Cd. Juarez 78.52 12/83 64.96 5 0 12/84 28.90 35 40 12/84 81.99 13.39 41.40 .. .... a a ... ..... ...... .... Sub-total 208.90 175.04 103.90 188.41 53.75 136.80 Additions/Other 87.10 12/82-3 No information 194.10 95.20 0.00 63.00 *..X.SSSan ...... . . . .. ... ...... Zacatecas 10.00 0 0 06/85 7.60 0.00 7.60 Cozumel 12.10 0 0 09/84 10.60 0.00 10.30 Tapi co 38.60 0 0 12/85 53.00 0.00 25.00 Reynosa 10.00 0 0 12/84 12.00 0.00 8.10 Culaican 5.80 0 0 12/84 3.00 0.00 3.00 Cd. Victoria 5.80 0 0 --- 2.90 0.00 2.90 ChiLpancingo 10.80 0 0 09/85 6.10 0.00 6.10 Merida 11o.U0 --- --- --- sss=ssa ~~~~amouan=ssasss. asan .a..... TotaL 296.00 175.04 298.00 283.61 53.75 199.80 (5) 8/ (6) 10/ (7) 11/ Revised (04//84) Revised (01/85) Actual (04/92) Footnotes: 1/ T: Target percent completed. Cost, Per- Cost, Per- 2/ A: Actual percent coapleted. Exchange cent Revi- Exchange cent 3/ Source: "Supervision Report" (SR), Rate CX) sed Rate CX) Revise dated 06/02/81, Annex 7, pps. 10-11. Adj- Coop. Comp. adj- Cop. Coop. Cop. 4/ Due to lack of interest on part of usted T A Date usted T A Date Cost Date state officials, it appeared as if _ _ _ - - - - - - - Tepfc would be dropped from project. Sub-projects 5/ Source: SR, 12/03/82, Annex 7, Attachments 1 * 2 Toluca 20.18 100 60 12/85 21.31 100 90 03/86 15. 99 03/86 6/ Revised to reflect iupct of delay. Tepic 5.65 32 8 12/85 2.94 75 55 12/85 2.22 09/85 7/ To reduce project cost to upper limit ldogales 5.76 100 75 12/4 7.55 100 91 06/85 5.60 06/85 of US#200 million, as requested by Monclova 9.54 100 27 12/85 12.65 100 50 12/85 6.89 12/85 Government, Bank and SANOBRAS agreed Matamoros 21.17 8 8 09/87 9/ 29.90 21 32 12/86 10.98 09/87 to reduce scope of sub-projects at Quertero 28.55 100 63 12/84 28.70 100 88 09/85 20.98 09/85 Monclav, Quertero, Tmpico, nd Cd. Juarez 33.57 29 29 09/87 9/ 33.14 41 58 12/86 22.12 09/87 Reynosa. Due to severe macroeconomic _ ...... *-a- - problems, Governrmnt was unable to sub-total 124.42 136.19 84.78 fund FIFAPA with the result that con- - * -s -sa... =~-u tractors were not being paid and work Additions/Other 53.20 65.07 31.12 was not continuing. 8/ Source: SR, 06/25/54, Annex 7, Zacatecas 7.89 38 3 09/86 9.88 90 37 09/86 3.93 Attachments 1 & 2 CozumeL 8.58 37 3 09/86 15.05 91 15 09/86 7.86 9/ Implementation schedules revised to Tampico 19.42 31 0 09/87 23.36 63 49 12/86 12.32 reflect reduced project scope. Reynosa 7.01 80 0 03/86 6.65 100 45 03/86 4.87 10/ Source: SR, 05/16/85, Annex 7, Attach- Culiacan 2.83 100 0 12/85 3.49 100 0 03/86 0.69 ments 2 & 3. Cd. Victoria 2.73 100 0 06/85 3.02 100 44 09/85 1.47 11/ Source: BANOIRAS. Chilpancingo 4.74 30 0 06/86 3.62 70 0 12/86 --- Merida ... -- -- _ ...... . ........ . . 5. --.- Total 177.62 201.26 115.90 - 25 - dollar as measured by the trends of domestic inflation and exchange rates over the period June 1980 to November 1986.!' Data is not available for restating the actual project cost on a constant-price basis. 4.18 Proiect Implementation. The supervision missions of 1981 (April and September) reported the project to be progressing normally, if slightly behind schedule -- that is, designs were being finalized, subprojects approved (Toluca, Nogales, Monclova, Matamoros, Queretaro, and Cd. Juarez), respective sub-loans signed, and construction initiated (see Schedule 2 on following page). The supervision mission of June 1982 reviewed and approved the feasibility studies for Zacatecas, Cozumel, Tepic, and Chilpancingo, extension of the scope of the subprojects in Tampico, Reynosa, and extension of the scope of the subprojects of Ciudad Victoria and Culiacan (part of FIFAPA I but later transferred to FIFAPA II with financing under Loan 1913- ME). The supervision mission of October 1982 reported subproject work stoppages beginning in June/July 1982 due to non-payment of contractors, the substitution of Federal grants to pay for FIFAPA loans, and the reorganization and personnel turnover at SAHOP (para. 4.13). 4.19 The mission of November 1982 also revised the cost and completion dates of the subprojects to take account of prior delays (Schedule 2). Because of the rapid change in the rate of exchange of the peso against the US dollar since 1980 (June 1980: US$l.00:Mex$22.8; November 1982: US$1.00: Mex$70.0), the costs of the individual subprojects stated in US dollars were decreasing as compared with what had been expected. For example, at appraisal the cost of the sub-project at Toluca was expected to be US$36.14 milli6n; the revised cost was US$19.90 million. 4.20 As stated in pesos, because of very rapid inflation, the costs of the individual subprojects were rapidly increasing, requiring time- consuming renegotiation to amend the original sub-loan agreements. Even though all construction contracts included a price adjustment formula, updated monthly, BANOBRAS sub-loans were in set amounts, not adjusted for inflation and thus needed to be renegotiated. The process of renegotiation itself generated discord among all participants, most notably over three contentious issues: (a) increased interest rate, which almost trebled from 9% to 25% (even though it continued to be highly negative in real terms); (b) discrepancies in total subproject cost as defined in the feasibility studies prepared by the implementing agency which drastically underestimated inflation; and (c) compliance with previous sub-loan covenants, particularly tariff increases, perceived by the beneficiaries as excessively high and thus even more unpopular than normal. 4 'The depreciation of the peso relative to US dollar during the period June 1980 to November 1986 has becn measured by comparing the domestic price index to the rate of exchange index. Th valucs for the consumer price index for June 1980 and November 1986 are, respectively, 147.3 and 3807.5; the index is: 3807.5/147.3 = 25.849. The values for the rte of exchange for June 1980 and November 1986 are, respetivcly, USS1.00:MexS22.8 and USS1.00:MexS830.6; the index is: 830.6/22.8 = 36.430. During this period, the appreciaion of the peso was: (25.849J36.430) - 1 =- 29.0%. - 26 - 4.21 During 1983, besides the "Special Action Program"E' and the transfer of subprojects from FIFAPA I to FIFAPA II (para. 4.14),!W the Bank, at the request of or in agreement with BANOBRAS and SEDUE: (i) reduced the scope and cost of the project to US$200 million primarily, but not solely, through the deletion of the Merida subproject (see Schedule 2) (July);1' and (ii) amended the Loan and Guarantee Agreements to create a Special Account for the purpose of facilitating disbursements (November) . Based on: (i), the Bank, BANOBRAS, and SEDUE also formulated a comprehensive "Plan of Action" which set dates for: (a) renegotiation of all sub-loan contracts to reflect reduced project scope (September 1983); (b) receipt of information on counterpart financing to be provided by the Government and resolution of the coordination problems between BANOBRAS, SEDUE, and the Government (July 1983); and (c) compliance'with respect to the various financial covenants (levels of tariffs and accounts receivable, etc. by December 1984). Nevertheless, work did not resume at any of the subprojects for the first several months of 1983 for lack of counterpart funds. A supervision mission (September 1983) noted that work had resumed at a slow pace for ten of the fourteen subprojects, and that FIFAPA had made some progress toward renegotiating the sub-loans. (In April 1983, the Bank approved Loan 2281-ME.) 4.22 Procurement: Procurement activities in general were carried out satisfactorily although delays were experienced in the preparation of documents and their submission to the Bank. These documents often needed to be modified upon review to bring them in line with Bank procurement policies. In 1985, during one of the personnel changes of the PIU, new staff, unfamiliar with Bank procurement procedures, changed procurement procedures with a bias favoring local suppliers, despite Bank comments and assistance in the review of tender documents and bid proposals. Accordingly, the Bank threatened to stop disbursements .I' A general dialogue with Mexican authorities on the subject finally led to agreement and implementation of satisfactory bidding procedures for all Bank operations in the country. 4.23 Proiect Progress. The supervision missions of 1984 reported good rates of subproject execution and reasonable compliance with the "Plan of Action", but thereafter progress slowed. In 1985, a major earthquake devastated Mexico City with adverse impact on the premises and operations of SEDUE and BANOBRAS. Also, in 1985 and 1986, major organizational and personnel changes in SEDUE adversely affected implementation. The PIU was 47/ World Bank: Letter to BANOBRAS, dat January 20, 1983. _4/Idc., Lttr to BANOBRAS, dat Janury 21, 1983. 2/ SM, Lete of BANOBRAS, dated July 15, 1983. IQ/ I&m., Leter to BANOBRAS, dated November 7, 1983. 1./ 1Idm., Telex to BANOBRAS, dated May 1, 1986. - 27 - abolished (1985) and its duties were transferred to existing units within SEDUE. Since their responsibilities included work outuide the projects, this organizational change caused serious problems of coordination with BANOBRAS. Meaningful supervision of beneficiaries and satisfactory reporting effectively were non-existent. Based on spot checks, it was found that none of the beneficiaries was in full compliance with sub-loan covenants. SEDUE and BANOBRAS were not fulfilling the updated "Plan of Action." In addition, project implementation was further delayed since adequate counterpart funds had not been allocated to FIFAPA, but Federal grants and contributions were available. Disbursements from Loan 1913-ME slowed. In such circumstances, the Bank was unwilling to extend further the closing date as requested by local officials. Works not concluded under Loan 1913-ME loan were transferred for financing to Loan 2281-ME. The second medium size cities loan was closed on November 30, 1986, about two years after the appraisal estimate. Disbursements amounted to US$75.52 million; the undisbursed balance of US$49.28 million was canceled. The last disbursement was on August 31, 1987. Tables 4 and 5.2 compare actual and forecast schedules for the timing of disbursements and allocation of loan proceeds. 4.24 FIFAPA III: Timetable. Cost. Chanaes. and Interest Rates. The Bank approved the third FIFAPA loan (2281-ME; US$100.3 million) on May 17, 1983, but effectiveness was delayed until February 27, 1984 -- about nine months -- because the Government was slow to fulfill effectiveness conditions: (i) providing legal opinions on the loan documents; (ii) authorizing an increase of the capital of FIFAPA by US$100 million; and (iii) publishing the by-laws of CEAPAS (para. 3.31) in the official state gazette. At appraisal, the expected dates for project completion and loan closing were, respectively, December 31, 1989 and June 30, 1990. The actual project completion date coincided with the loan closing date: December 31, 1990. The last disbursement was on March 13, 1991. 4.25 Schedule 3 on the next page shows the appraisal, revised, and actual costs of the project, reflecting current prices and exchange rates, and the corresponding subproject completion dates. Schedule 3 also shows details for subproject costs. Column 1 of Schedule 3 shows the appraisal cost esti- mate at US$192.8 million; completion of the last subproject was expected by December 1987. Columns 2 and 3 show revisions of that cost as new information became available. Column 4 shows that the actual project cost was US$128.6 million (see also Part III, Table 3.3) and is not comparable with the appraisal value due to changes and reductions in the scope of the project and transfers of subprojects initially financed under Loan 1913-ME to Loan 2281- ME. Another factor making difficult the comparison of the actual and forecast costs was appreciation (127%) of the peso relative to the US dollar. 2' The increasing availability of Federal grants to finance subprojects contributed to the reduced scope of the project as municipalities chose to avoid high-cost FIFAPA loans. I The appreciation of the peso relative to the US dollar for the period December 1982 to Decmber 1990 has been measured by comparing the domestic price index to the rate of exchange index. The values for the consumer price index for December 1982 and Decenber 1990 are, respectively, 423.8 and 29832.5; the index is 29832.5/423.8 = 70.393. The correponding values for the rate of exchange are, respectively, USS1.00:Mcx$9S.0 and US$1 .00:Mex$2940.90. The appreciation of the peso i: (70.393/30.957)- 1 - 127.0%. - 28 - Schedule 3 FIFAPA III: Cost (excluding taxes and interest) -- Appraisal. Revised, nd Actual (in miLlions of US dollars, stated in current prices) (1) (2) 1/ (3) 4 / (4) 5/ Appraisal (04/83) Revised (09/83) Revised (05/84) Revised (08/84) Final Ori- Cost, Cost, Cost, Ori- ginat Exchange- Exchange- Exchange- ginal Comp. Rate Comp. Rate Coup. Rate Comp. Actual Cost Date Adj. T 2/ A 3/ Date AdJ. T A Date AdJ. T A Date Cost A. State Water Canpany IDP* 0.00 NA mA 03/87 0 0 Supply 3.34 12/8S HEP** 0.11 12/87 0.30 Sinaloa State 12/86 10 0 12/87 Culiacan 30.73 12/86 2.20 Los Mochis 8.72 12/85 6.55 5 0 03/87 6.87 Topolobampo 3.05 06/85 0.00 Mazatlan 21.90 09/86 15.79 10 0 12/87 6.36 3333333 3333x3 an 33 3ms33 ma333 Z3 an 333 3ama3 an 3E 33 33a Sub-total for A 67.85 68.50 NA NA 59.40 22.64 15.43 B. Medium-Size Cities Cetaya 9.13 09/86 9.10 NA NA 12/86 --- -- -- --- --- -- -- --- ... Colima 10.57 09/86 10.80 NA NA 12/86 --- -- -- --- --- Cd. Guzman 10.82 12/86 11.60 NA NA 03/87 9.60 5 0 03/87 7.36 5 0 03/87 --- Tapachula 10.55 12/85 10.10 NA NA 12/85 --- -- -- ... --- Sub-total 41.07 41.60 NA NA 9.60 7.36 0.00 Other 79.46 12/86 --- 12/90 97.50 93.91 111.50 La Paz MA NA 6.00 1 0 09/86 5.82 1 0 12/86 Not Cd. Obregon NA NA 29.70 1 0 09/86 19.82 1 0 03/88 Appli- Pachuca NA NA 24.80 5 0 03/87 12.34 5 2 09/87 capbte AcapuLco NA NA 31.20 10 0 12/87 31.80 10 1 12/87 Manzanillo NA NA 5.80 0 0 03/88 16.79 0 0 12/87 Pt. Vallarta NA NA --- .. .. --- 7.34 3 3 03/87 Sub-total for S 120.52 41.6 107.1 101.27 111.50 C. Institutional Support 4.42 12/87 4.60 NA NA 03/87 3.40 0 0 12/86 1.00 NA 1.64 3333=33 33*=3 33333 Na um 3a333 w3333 3. 3 333 ..3 so n3 33333 3333... Total 192.80 114.70 169.90 124.91 128.57 1/ "Supervision Report", dated 10/21/83, Attachments 3 & 6. 2/ T: Target. 3/ A: Actual. 4/ "Supervision Report", dated 06/25/84, Attachments 3 £ 4. 5/ "Supervision Reportu, dated 11/20/84, Attachments 2 & 4. - 29 - 4.26 In 1985 and 1986, respectively, the project description was changed (amended) to: (i) substitute the RCc (para. 3.31) in Sinaloa for CEAPAS as beneficiaries of the institution building component (para. 4.18); and (ii) provide financing for the reconstruction of Mexico City.& By agreement between the Bank and BANOBRAS, there were extensions of the deadline for disbursements at 70% from 1985 to 1986 to 1988. In 1987, subprojects not completed with financing under Loan 1913-ME were transferred to Loan 2281-ME: Culiacan, Matamoros, Monclava, Nogales, Reynosa, Queretero, and Tampico. Only three of the original eight cities benefitted from the loan (see Schedule 3); and most of the other beneficiaries (22) borrowed only small sums (Part III, Table 3.3). 4.27 The substitution of the Sinaloa RCn for CEAPAS as benefici- aries of the institution building component resulted when a new decree reor- ganized (February 1984) CEAPAS to conform to Article 115 of the Constitution, which delegated to municipalities full responsibility for operation and maintenance of WSS systems. Because this decree deprived CEAPAS of its prior authority to regulate and coordinate the management and operation of WSS systems in the state, CEAPAS was no longer a proper vehicle for the pilot institutional development component of the project. BANOBRAS proposed that the RCB -- now called "Intermunicipal Companies" -- benefit from this component. The Bank agreed and made (May 17, 1985) a corresponding amendment to the Loan Agreement. 4.28 The growing interest expense of FIFAPA loans had its origins in the effort of the Government, an a result of Bank prompting, to reduce its interest rate subsidies to various sectors, including the WSS sector, with a view toward their phased elimination. In 1984, when Loan 2281-ME became effective, the interest rate on FIFAPA loans (25%) was highly negative in real terms because of the high rate of inflation. To address interest-rate problems under the FIFAPA and other loans, in August 1984, the Bank and the Government entered into a General Interest Rate Agreement (GIRA) under which the Government undertook to set the interest rate for sub-loans under Loan 2281-ME (and other loans) at an increasing percentage of a market reference rate. Under GIRA, between October 1984 and January 1987, the interest rate on new FIFAPA loans would rise from 45% of the reference rate to 80% of the reference rate. Schedule 4 below compares the interest rates on FIFAPA loans and on commercial paper. Schedule 4: Interest on FIFAPA Loans Interest Type Interest Rate (X)* Interest Type Interest Rate (X)* Years: Rate CX) of Lon Commercial P22rE Years Rate (X) of Lon Commerciat PaDer 1976-81 9 FIFAPA I 29.1 ** 1985 25 FIFAPA II 94.6 1982 9 FIFAPA I & II 56.2 37.5 FIFAPA III 1983 15 FIFAPA 11 58.2 1986 25 FIFAPA II 110.9 25 FIFAPA III 42.5 FIFAPA III 1984 15 FIFAPA 1 49.4 1987 80X RR FIFAPA III 128.2 25 FIFAPA 11 1988-90 100X RR FIFAPA III 52 - 29 * As of year end. **As of December 1980 onLy. 5I See Pat H, p. 41, para. 4. - 30 - In 1990, after discussion and agreement with the Government, the Bank amended GIRA to provide for 100% of the reference rate. IV An FIFAPA loans became increasingly expensive, municipalities avoided them as sources of finance; and such avoidance was made easy by the continuing availability of Government grants (see para. 4.30). 4.29 Proiect Proaress. The rate of execution was slower than what had been expected. From 1984 to 1986, the project was delayed by the slow production of suitable subproject feasibility studies, the earthquake which leveled parts of Mexico City, funding shortages at FIFAPA, major personnel changes at BANOBRAS, and organizational problems at SEDUE consequent to abolition of the PIU and the amendment to Article 115 of the Constitution, which required the decentralization of operations. SEDUE did not bring the beneficiaries into the project-preparation/implementation process. During this period, SEDUE and BANOBRAS did not coordinate effectively, and SEDUE did not carry out meaningful supervision of the beneficiaries (Part II, para. 15). In these circumstances, the Bank did not extend the closing date of Loan 1913- ME as requested by SEDUE and BANOBRAS with the result that works not completed with financing from Loan 1913-ME were transferred to Loan 2281-ME. 4.30 Drawing the correct lesson from the closing of Loan 1913-ME and cancellation of its undisbursed balance, Mexican officials improved the pace of implementation of FIFAPA III in 1987; and in 1988, an a result of renewed effectiveness on the part of SEDUE, they improved it even more. By this time, Bank personnel had concluded that the cause of slow implementation went beyond organizational problems of SEDUE and BANOBRAS: due to the availability of grant financing, municipalities were increasingly avoiding expensive FIFAPA loans. A draft sector study made a number of critical points about the unfortunate link between free Federal financing (grants), the absence of least-cost analysis in sector planning, and low tariffs: "The absence of least-cost analysis in sector investments and ... the absence of cost recovery..., persist because resources allocated to the sector are provided free to the municipalities... and little economic or financial analysis is required to justify these investments... Municipal authorities.. .elicit . political influence-.. to have access to the most concessional window... It has been argued.. that ... the most important (reason] why FIFAPA funds are not in high demand is becauso of the 'high' costs of these funds.. This is true only because substantially larger funds are available from federal sources at no cost... Grant financing has also allowed sector agencies to maintain low tariffs that do not even cover operating costs, let alone depreciation of fixed assets or debt service." LF The study found that between 1981 and 1986 85% of the Federal resources allocated to sector were provided as grants. Obviously, the expectation of introducing the concept of cost recovery on a large scale through FIFAPA (para. 3.27) had been contradicted by the political pressure of states and t 41M., Lcttcr to Government, datd November 16, 1990. SS/ dem., Mcxico: Urban Watcr SuDDIv and Sewermen Sector Study - Instutional nd Funancial Constmints, Report No. 7109-ME, dated June 30, 1988, pp. 11-12. - 31 - municipalities on the Government. In circumstances of high inflation and negative real interest rates, FIFAPA was being decapitalized. 4.31 The dissolution of CEAPAS precluded implementation of the health education program. In spite of the recurrsnt Bank requests to encourage the Ministry of Health to use the funds designated for this program, Mexican authorities never agreed on a mechanism to transfer loan funds. In retrospect, Bank efforts seem to have been lax in recognizing and in providing for politi- cal circumstances that made it difficult to involve still another agency in the area where jurisdictional problems were a constant source of difficulties. 4.32 The Bank closed the loan on December 31, 1990, six months later than originally expected, and canceled the undisbursed balance of US$5.0 million. The last disbursement was on March 13, 1991. Part III, Tables 4 and 5.3 compare actual and forecast schedules for the timing of disbursements and allocation of loan proceeds. 5. Financial Performance 5.01 As explained in paragraph 6.09, this PCR does not compare actual and forecast financial results of the beneficiaries. Although the SARM for FIFAPA II and III provided partial financial forecasts for the beneficiaries, the supervision reports made no attempt to compare actual and forecast results for the beneficiaries, either individually or collectively, probably because it wam never expected that the internal cash generation of the beneficiaries would constitute a significant part of project financing and becauue the turnover of beneficiaries rendered meaningless such comparison (paras. 4.09, 4.14 and 4.16). Financial supervision consisted of monitoring compliance by the beneficiaries with the financial covenants of their respective sub-loan agreements. In any event, the Bank had no direct power to discipline a beneficiary for non-compliance with a sub-loan financial covenant, although BANOBRAS, as borrower, could be considered to be in default to the extent that it did not enforce the covenants. 5.02 Prior to 1982, the compliance by beneficiaries with the financial covenants of the sub-loans was reasonably good, but in subsequent years, there was a general lack of compliance due, above all, to the unwillingness of BANOBRAS to take measures against those sub-borrowers that did not comply with the sub-loan agreements, followed by the lack of coordination between BANOBRAS and the executing agency. Further aggravating the problem, the required tariff increases to comply with the financial covenant appeared disproportionately high in Mexican pesos due to inflation. In the then current socio-political environment, the State Congresses were reluctant to approve the required tariff increases. In the difficult economic circumstances of Mexico, especially in the years after earthquake which devastated Mexico City (1985) when the Government was trying to contain inflation by negotiating global priea-control agreements with labor and industry, the Bank took an understanding view toward low water tariffs. 5.03 To resolve this problem, in 1990 BANOBRAS added a new condition to the agreements negotiated for the extension of sub-loans that automatically required the beneficiaries to increase the tariffs to the required level without authorization by the State Congress. Since then, 13 states have adopted a law which allows a much higher level of autonomy to the beneficiaries. - 32 - 5.04 Repayments to FIFAPA were satisfactory but only because the state governments covered the defaults of the sub-borrowers. This pattern of repayment had a detrimental effect on the cost recovery policies of FIFAPA. State guarantee. effectively replaced Federal grant money, undermining the project's fundamental aims of promoting municipal self-sufficiency through tariffs based on cost-recovery. 6. Proiect Results 6.01 ImDact of Proiects: Project results were mixed. The projects were reasonably successful in expanding WSS services (Part III, Tables 4.0 to 4.3), but less so in shaping sector policies and organizational arrangements. Achievements through technical assistance and studies were also modest (paras. 6.05 and 6.06; Part III, Table 4.4). As of the closing of Loan 2281-ME, institutional achievements ranged from mixed to disappointing (paras. 6.07 and 6.08). 6.02 Recognizing that the immediate results of these projects were mixed is not all that can be said. One should take the longer view -- namely that these projects constituted only one part of a larger effort of assisting the Government in carrying out a major policy overhaul at the macro and sectoral levels. In the context of the macroeconomic dialogue between the Bank and Mexico, these projects aimed at the right sector and project goals: creating an appropriate institutional context at the Federal level with strong technical, planning (least-cost), and supervision capacities; establishing a sector financing mechanism (FIFAPA) based on the concepts of cost recovery and improved financial discipline; reducing Federal subsidies; assisting in the decentralization of the sector through the development of strong local operators; and expanding WSS services. Notwithstanding some disappointments, the dialogue continues between the Bank and the Government on institutional matters; and in connection with Loan 3227-ME, there has been success in resolving the issues posed by grant financing and settling jurisdictional conflicts. Sectoral responsibilities have now been vested in CNA, and the Bank is assisting CNA to strengthen its technical and planning capacities. These achievements draw on the dialogue and experience under the FIFAPA projects; and hence appropriate credit should be given. 6.03 Physical Results: The actual and forecast physical targets and results of the project are compared in Part III, Tables 6 to 6.3. Many of the targets for water and sewerage connections were surpassed. They totalled 226,600 and 130,300, respectively, and served an incremental population of 1,870,300. Despite these achievements, rapid population growth, exceeding appraisal estimates, did not permit achievement of the service coverage targets. The projects expanded badly needed services and improved health and environmental conditions which would have been poorer in their absence. Regrettably, benefits of these infrastructure investments could have been considerably enhanced, had the Ministry of Health been able to use loan funds for the Health Education Program in Sinaloa State. 6.04 In addition to these specific objectives, the projects improved environmental quality in the participating cities. They have also contributed to the reduction of infant mortality, principally due to diarrhea, by addressing its main cause: deficiencies in water supply and sanitation services for low-income groups. - 33 - 6.05 Technical Assistance and Studies: In connection with FIFAPA I, SAHOP completed the installation of a technical assistance program to train sector staff in finances, administration, and operations, and carried out a national inventory/survey of WSS systems for municipalities with a population over 2,500 and studies for water pollution control and metering, but used none of the proceeds of Loan 1186-ME allocated for the training program (US$200,000). The inventory of municipal systems permitted a better planning of investments; the water pollution control study defined priority areas for investment in pollution control equipment; the metering study, which was only partially completed, helped develop a program for efficient water use (Part III, Table 6.4). 6.06 In connection with FIFAPA II and FIFAPA III, technical assistance was provided certain beneficiaries, consisting of various studies to improve their accounting and financial information systeme, commercial departments, office procedures, etc. The impact of these studies was modest. 6.07 Institutional Results: As a first step leading toward major sector-wide changes with respect to organization and financing, FIFAPA I aimed at: (i) changing the pattern of financing new works by: (a) substituting loan. for grants; and replacing "social tariffs" with "realistic tariffs" based on the principle of cost recovery; and (b) upgrading the project preparation capacity of SRH by substituting least-cost principles for relatively loose engineering criteria (para. 3.04). The objectives of FIFAPA II built on and expanded the objectives of FIFAPA II. Besides supporting the objectives of the PNDU and improving the environmental/health conditions of medium-size cities, FIFAPA II aimed at supporting the "decentralization policy" for s*ctor organization -- transferring Federal sector responsibilities to the states and municipalities and transforming Federal and other local operators into AWSe, institutionally strong, operationally efficient, and financially viable. There were great hopes for the large scale substitution of FIFAPA loans for Federal grants, if the Government reduced the availability of grant financing (parau. 3.23, 3.32, and 3.39). The objectives of FIFAPA III closely paralleled those of FIFAPA II, with emphasis on reinforcing the SWC of Sinaloa plue some technical assistance to BANOBRAS and SEDUE (para. 3.40). The emphasis on reinforcing an SWC became moot due to a change in the law making municipalities, not states, primarily responsible for providing WSS services. 6.08 Regarding financial, economic, sectoral and institutional objectives, achievements ranged from mixed to disappointing: (a) The objective of substituting loan financing for grant financing did not materialize except for the subprojects financed by FIFAPA. Between 1981 and 1986, 85% of Federal resources allocated to the sector were provided as grants (para. 4.30); (b) The objective of establishing a suitable financial mechanism to channel and recover funds was only partially achieved. A revolving fund, FIFAPA, was created in BANOBRAS. However, because relending rates were too low compared to inflation, the fund became decapitalized (para. 4.30). Competition with grant funds, lack of counterpart funding, and cumbersome procedures for the approval of subloans contributed to slow disbursements. At the center of the competition of grant funds was the continuing political strength of - 34 - municipalities which wished to avoid high-cost FIFAPA loans as compared with "free" grant monies. (c) As far the beneficiaries are concerned, results with respect to the allied concepts of "decentralization" and "realistic tariff." have been disappointing. After 1982, the objective of establishing "realistic tariffs" was not achieved, as indicated by the poor financial performance of the beneficiaries (para. 5.02). However, developments under Loan 3271-ME have been positive and there is hope for the future. While the Government fundamentally changed the direction of sector organization policy toward the ownership and operation of local operators, the objective of establishing technically strong beneficiary local operators was only partially achieved, as indicated by the continuing high level of losses (Part III, Tables 6.1-6.3). Various studies were carried out to improve the operations of local operators but their impact was limited (Part III, Table 6.4). (d) The objective of creating an appropriate organizational context at the Federal level, i.e., strengthening the executing agency (SRH, SAHOP, SEDUE) and reinforcing its project-preparation capacity based on least-cost principles, was only partially achieved. Least- cost principles were applied to water and sewerage facilities for selected cities; however, much remains to be done to extend least- cost principles throughout the sector. The objective of improving SRH/SAHOP/SEDUE was not accomplished. Frequent reorganizations of the executing agency (paras. 2.11 and 2.13) undermined the Bank's substantial efforts to enhance their project-preparation capacity and to establish guidelines, norms, and procedures to monitor WSS operations at the local level. The executing agency's performance and commitment to FIFAPA and the continuity of sector policies varied through the years. Commitment suffered as ten general directors were appointed during the twelve years of project execution. The technical assistance to the local operators was weak and received only little attention. As a result, local operators often rejected the advice of the executing agency. It is worth noting that the executing agency did not systematically consult with local operators concerning design solutions; and that the Bank did not recognize non-participation of the local operators as constituting a problem (paras. 3.24 and 3.36). (e) The other half of creating an appropriate organizational context at the Federal level was improving the operations of BANOBRAS. Because of the availability of grant financing, the beneficiaries were not obliged to seek financial advice; hence BANOBRAS was not able to assume the role of financial adviser to the sub-borrowers as envisaged and was reluctant to enforce covenants. Cooperation with the executing agency was poor; and Bank staff did not recognize this as a problem during appraisal of FIFAPA II and III (paras. 3.24 and 3.36). (f) The objective of establishing adequate norms and procedures to ensure the efficiency of investments was met for all the works financed under FIFAPA (paras. 3.08, 3.19, 3.25 and 3.37). However, some projects rejected for financing by the Bank were financed by - 35 - other sources and FIFAPA selection criteria were not adopted as a general rule for the sector. 6.09 Internal Rate of Return. Given the mainly institutional focus of the three loans and the difficulties of obtaining meaningful investment and operating data, no attempt has been made to calculate a representative rate of return. 7. Sustainabilitv 7.01 The lingering institutional and managerial deficiencies which beaet the projects, in spite of the successes in increasing water and sewerage services, raise questions about project sustainability; but, on the other hand, these projects laid the basis for the on-going Water Supply and Sanita- tion Sector Project (para. 2.05). This project, which aims at overcoming prior shortcomings by building upon lessons discussed in this report, has already led to resolution of the financing issues raised in paragraphs 6.08(a) and 6.08(b) and to a promising start toward the solution of the institutional issues raised in paragraph 6.06(d). Other issues are also being addressed. From this perspective, the achievements from Bank involvement do seem more sustainable. 7.02 During the years of their implementation (1976-1990), the projects represented only about an 8% share of sector investment. Yet, it increased awareness on the part of all sector personnel of the need for institutional improvements, cost-recovery pricing policies, least-cost solutions, and operational maintenance. If Federal spending is reduced as part of a fiscal stabilization effort, grant financing for investment in the sector will not be available in significant amounts. Prospects are for continued austerity. Hence, the FIFAPA reforms which facilitate municipal self-reliance are indispensable to a continuing program of inventment in keeping with forecasts for urban population growth, provided, of course, that the states and municipalities do not resist reduction of Federal grant financing. 8. Performance 8.01 Bank Bank performance was mixed. At appraisal, the Bank addressed some important issues with the right measures, but paid inadequate attention to the issue of relationships between the executing agency, the borrower, and the beneficiaries. During implementation, it appears that the Bank did not allow sufficient time for adequate supervision of the beneficiaries (Part III, Table 7). To resolve the institutional problems delaying the projects during the middle 1980s -- dissolution of PIU/SEDUE, poor interagency cooperation, ineffective supervision of beneficiaries (para. 4.20) -- the Bank combined the right mix of incentive and censure by refusing to extend the closing date for Loan 1913-ME. The fact that the projects did not achieve all of their institutional objectives, especially substituting loans for grants and establishing the principle of cost recovery, was largely a reflection of the difficult financial circumstances of the 1980s and the political strength of municipalities in Mexico. The Bank, on the other hand, could have facilitated a better understanding of sector issues, promoting 'their fuller discussion and attaching higher priority to their resolution. In 1983, when Mexico needed a visible sign of support, the Bank provided that sign by, inter Al", approving Loan 2281-ME. In 1986, when the Government - 36 - needed to improve the operations of BANOBRAS and SEDUE, the Bank provided the right impetus to such improvement by closing Loan 1913-ME and canceling the undisbursed balance. If reinforcing the credibility of the Bank is an implicit objective of Bank lending, these loans helped to achieve that objective. 8.02 Project design, scope and scale were appropriate, albeit too ambitious in some regards, and failing to recognize other problems. The designs of all three projects failed to provide for the participation of the beneficiaries in the decision-making process, which was centralized in Mexico City (paras. 3.19 and 3.31). They also failed to define in sufficient detail the roles and responsibilities of the implementing agency and of BANOBRAS, even though experience with SRH during project preparation had already indicated serious deficiencies (paras. 3.07 and 3.10). In the first project, the design also failed to take into account the unfamiliarity of BANOBRAS, as a first time borrower, with Bank policies and procedures on procurement and disbursement. During appraisal, especially with respect to FIFAPA II and III, the Bank overestimated the prospects for FIFAPA as a vehicle for introducing the concept of cost recovery on a large scale (para. 3.20 and 3.27), the Government's resolve to reduce the extent of grant financing and the willingness and ability of BANOBRAS to enforce compliance by the beneficiaries with their respective sub-loan financial covenants (para. 5.02). 8.03 Supervision of the projects involved Bank missions at a rate of at least one every six months, to assist SRH/SAHOP/SEDUE, including preparing the criteria for subproject selection and the necessary feasibility studies (Part III, Table 7). Although the time spent on supervision appeared commensurate with the tasks at hand, in retrospect it now seems insufficient, as it did not allow enough time to visit the beneficiaries and be in closer contact with the implementation issues which they faced. The supervision reports are notable in the absence of commentary on the performances of the respective beneficiaries. 8.04 Institutional development at the local level was also given insufficient attention, with the exception of some technical support which took place at the time of project completion. This occurred despite a situation where local beneficiaries lacked operational and managerial experience, had little interest in taking on large debts to finance works previously provided on a fully subsidized basis by the Federal government, had little say in defining their respective needs and solutions (reflecting mainly their lack of perception of ownership of the project), and had minimal participation in the engineering solution chosen by SRH. This deficiency and confusion of responsibilities within the implementing agency and BANOBRAS contributed to delays in implementation. 8.05 The timing of loan approvals may have contributed to some difficulties. The first and third loans were declared effective shortly before new Administrations took office. While the Bank explicitly noted the risks involved with proceeding with these operations at the time of change, it decided that it would be more beneficial for sector development to maintain a presence and promote policy changes. The Bank felt that instead of interrupting or postponing lending operations to accommodate changes and delays, these issues could be adequately tackled in follow-up operations. In retrospect, it would seem that meeting lending targets may have also contributed to theme decisions. -37- 8.06 In addition, the projects also confronted unforeseeable difficulties unrelated to those management issues noted above. Thus, for example, it was impossible to anticipate the disruptive effects on the entire country, especially to the infrastructure sectors, of the 1985 earthquake. The Bank responded quickly to the earthquake by defining two new disbursement categories to support urgent rehabilitation works, totalling US$21 million. 8.07 Bank performance during implementation demonstrated flexibility in approach and in adjusting to deteriorating economic conditions and to numerous organizational changes within institutions. In particular, the Bank response to the economic crisis in 1982, the 1985 earthquake and the shortage of counterpart funds was timely and appropriate as it agreed to raise disbursements (from 45% to 70%) to maintain the pace of project execution. It also made sensible arrangements for shifting the financing of items between FIFAPA I and II to accelerate disbursements and close the first loan promptly. Indeed, the Bank showed considerable flexibility throughout, since the projects funded a succession of several subprojects, except when disbursements were stopped because of non-compliance with Bank procurement procedures. 8.08 Many of the problems which hindered implementation were identified at appraisal as risks but were deemed acceptable in light of the impetus for change in the sector and the expected benefits ensuing from these changes. They were to be minimized by establishment of a strengthened PIU prior to loan approval and intensive Bank supervision. The ambitious nature of the first loan, deeply rooted patterns of behavior regarding investment activities and changing levels of commitment to the project by three different Administrations were the main factors which made the delays in implementation mostly unavoidable. 8.09 Interest rates were maintained too low, ranging from 9-25% when inflation rose to more than 100%, leading to large subsidies which pre- cluded genuine efforts for reforms to implement least-cost solutions in the sector. However, given the very difficult macroeconomic environment of the 1980s, it is hard to fault Mexico for its approach to this sensitive domestic issue or the Bank for failing to take a stronger stance on this issue before reaching agreement on interest rate increases for FIFAPA in the context of GIRA (para. 4.28). As of project completion (1990), these hidden subsidies have been eliminated. Since 1988, all subloans have been signed using an interest rate accounting for 100% of the average cost of funds in the market. 8.10 A four year disbursement profile was optimistic, given the sharp shift in sector policies to be supported by the project and the intro- duction of BANOBRAS as a new Bank borrower. In light of this experience, the preparation of FIFAPA III allotted seven years for disbursement. 8.11 In spite of repeated Bank prompting, neither BANOBRAS nor the executing agency opted to use resources for consultants or staff training to strengthen weak areas in their respective organizations. This had a material and adverse effect on institutional development and improvement. The Bank should have been more insistent on the use of resources for consultants and training (para. 10.01). - 38 - Performances of the Executina Aa-ncv and the Borrower 8.12 As between the executing agency and the borrower, the executing agency had the more important role in carrying out the projects. SRH/SAHOP/SEDUE played its role in disappointing fashion while the strong points of the performance of BANOBRAS, on balance, outweighed its weak points. As noted previously, the inexperience of PIU/SRD under FIFAPA I hampered initial project preparation and implementation. Partly due to the shortcomings of project design, interagency coordination was also deficient, exacerbated by institutional rivalries (para. 4.06). During the years 1984- 86, after the dissolution of the PIU/8ZDU, the performance of the SDUV was marginalt in addition to poor interagency cooperation, meaningful supervision of the beneficiaries did not occur (para. 4.23). Also during this period, BANOBRAS did not enforce the financial covenants of the sub-loan agreements (para. 5.02) or generally assume the role of financial adviser to the local operators. Further, it had a stronger tendency to identify problems than to take active steps to remedy them. Offsetting these weak points was its operation of FIFAPA, which was efficient. In assessing the performance of BANOBRAS and the executing agency, the most important fact to consider is that 85% of sector financing was provided by grants. In other words, the Government, under the pressure of economic events and municipal political resistance to FIFAPA, abandoned the goal of sector reform in favor of other strategic goals. The compliance of BANOBRAS and SRH/8AHOP/ SEDUN with selected covenants is summarized in Table 8, Part III and in Part II from the Borrower's perspective. 9. Proiect Relationships 9.01 The Bank's relationship with the borrower, implem nting agency and Federal and local government institutions has been very good. By the closing of Loan 2281-ME (1990), Federal, state and municipal agencies were marginally stronger than they had been. Indeed, Bank intervention provided a continuity that would otherwise have been absent given the weakness of the federal agencies, and the recurrent changes in the implementing agency. 10. Consultina Services 10.01. By and large, the use of consultants for toechnical assistance to strengthen Federal institutions and the beneficiaries has been a point of contention throughout the projects between the Bank and the Mexican officials. Only in FIFAPA III were loan funds used for this activity. A stronger Bank stance on this issue, given the evident need for such assistance, would probably have been warranted. 11. Proiect Documentation and Data 11.01 The legal documents were adequato for achieving the projects' objectives, but should have beon more flexible from the outset in permitting the inclusion of additional subproject cities, without requiring an amendment, as did indeed happen shortly after the effectiveness of loan 1186-ME. The iARs were appropriatoly comprehensive with the exception of interagency coordination arrangments and the arrangements for participation of the beneficiaries from an early stage. Data availability for preparation of the - 39 - PCR was inadequate au a suitable monitoring program was never in place in spite of consistent Bank recommendations in this regard. 12. Lessons Learned 12.01 The following lessons emerge from the implementation of the project: (a) Where the main sector issues arise from an inadequate policy framework and deficient organizational/institutional arrange- ments (parar. 4.04 to 4.10), Bank staff should seek to develop an understanding of the issues and a vision of how they ought to be addressed; and enure that local officials share this understanding and vision. Lack of this shared understanding and vision appears to have been the key missing element common to all three projects (para. 4.30) and explains the subsequent shortfalls with respect to the achievement of project objectives, physical and institutional. (b) Where the lead role for implementation can shift between the executing agency and the borrower, the Bank must give more careful consideration to the definition of specific institutional arrangements (paras. 3.21 & 3.36). Preferably one agency should take the leadership in the overall coordination of the involved institutions and in the monitoring and enforcement of sub-loan agreements. While some conflict is inevitable when two Federal institutions and various local agencies share responsibility for project execution, clearer delineation of roles and obligations at appraisal would likely have mitigated some of the problems experienced by the projects, such an the slow processing of documents, lack of monitoring information, and delays in subproject construction. The same judgement applies to the PIU. If the top management of SRH/SAHOP had moved to support the authority of the PIU and to upgrade its leadership and staff before 1978, the challenges to the PIU and the feuding within SRH/SAHOP would not have been such an obstacle to project progress; (c) Concentration of decision-making at the Federal level was responsible for the weak sense of ownership of the part of the beneficiaries. The design of the project should include recognition of the importance of the beneficiaries' participation in defining and addressing their own needs, as well as the adherence to the principle that the beneficiary itself is the primary decision-maker, the primary organizer and the primary investor in the project. As experience with these projects demonstrates, the generation of local support and understanding of the project objectives are prerequisites for smooth and effective implementation. The Bank should have focused on the issue with the SRH/SAHOP/SEDUS, identifying the time dimension, personnel requirements and amounta of financial resources required to integrate the sub-borrower in the design, construction and implementation of subprojects (parar. 3.21 and 3.36). In addition, promoting and implementing legal changes, as in the case of organizational changes or tariff increases, require closer supervision by the Bank. More of the Bank's supervision effort should have been focused at the local level; and - 40 - (d) A firm Bank stance can result in long-term gains. An example of this point was the threat to suspend disbursements under Loans 1913-ME and 2281-ME until the PIU's new staff stood in compliance with Bank Procurement Guidelines and Procedures (para. 4.22). Another lesson is the value of country-wide bidding documents as were agreed by Bank and Mexican official in about 1990. These have contributed to a much smoother procurement process. (e) A final lesson is the value of taking the long view -- namely that these projects constituted only one part of a much larger effort to assist the Government in a major policy overhaul at both the macro and sector levels. Notwithstanding some disappointments, the dialogue with the Government continues and in connection with Loan 3227-MZ, there has been some success in resolving issues posed by grant financing and settling jurisdictional conflicts. These achievements draw on the dialogue and experience under the FIFAPA projects and hence appropriate recognition should be given (para. 6.02). - 41 - PROJECT COMPLETION REPORT MEXICO PART II. BORROWER'S REVIEW OF THE PROJECT & Set forth below is a translation of the comments of BANOBRAS on a draft of Parts I and III of the PCR. Revised to achieve consistency of references with the current version of the PCR, these comments have been incorporated into or noted in the PCR where appropriate. Also set forth below is a translation of a summary of the final project report prepared by SEDUE and BANOBRAS. Section I. BANOBRAS Comments on Draft PCR (dated June 22. 19921 1. In general terms, the PCR uses the financial information appearing in the final project report prepared by BANOBRAS (dated May 1990). However, the data in Table 4, Part III of the PCR, which compares actual and forecast disbursements for all three loans, differs from the corresponding data prepared by BANOBRAS (see attachment). The PCR refers to this data in paragraphs 4.15, 4.23, and 4.32. 2. The interest-rate table on page 29 of the PCR shows an interest rate of 15% for FIFAPA loans in 1982; the actual rate was 9%. 3. The second to last paragraph of the "Preface" (p. i) indicates that the Bank wrote Parts I and III of the PCR and that BANOBRAS and SEDUE wrote Part II. But it is worth mentioning the PCR reflects information provided by all three entities. 4. The PCR does not clearly indicate that FIFAPA resources were diverted to assist the national reconstruction program for Mexico City following the earthquake of 1985.1W 5. In paragraph 10 of the "Evaluation Summary" (p. v), we think that the last part ought to say: "that due to the deficient cooperation and comnmunication between SEDUE and BANOBRAS, the "Action Plan" arranged by the Bank was not sufficient to correct the difficulties." 6. In paragraph 13 of the "Evaluation Summary" (p. vi), in the first objective mentioned, it would be useful to indicate that FIFAPA was the first program which introduced at the national level the concept of cost-recovery financing for the development of the sector. S6/ Summarized and translated from 'Fondo e Inversiones Financier,, para Agua Potable y AlcantariUlado: Informe de Terminaci6n de Programa", SEDUE and BANOBRAS; May, 1991, 50 pp. S7/ See Part 1, p. 29, pam. 4.26, - 42 - Attachment Comparlson of Annual Disbursements from Loans 1186-HE, 1913-ME and 2281-ME as per Accountina Data and Expenditures in Pesos Restated in US Dollars (in millions of US$) = G __ _ _ __n 91-" Loan 1186-ME Loan 1913-ME Loan 2281-ME jTotaL Loans Year A* B* 01ff. A* B* Offf. A* 5' Diff. Total A B Diff. 1978 4.09 3.38 0.71 _ 4.09 3.38 0.71 1979 5.65 3.90 1.75 _ 5.65 3.90 1.75 1980 8.38 8.45 (0.07) _ r _ 8.38 8.45 (0.07) 1981 9.38 7.95 1.43 3.02 4.24 (1.22) _ 12.40 12.19 0.21 1982 1.61 1.90 (0.29) 14.80 12.69 2.11 r 16.41 14.59 1.82 1983 2.32 2.78 (0.46) 4.82 3.99 0.83 7.14 6.77 0.37 1984 8.36 7.53 0.83 17.86 14.29 3.57 9.41 1.13 8.28 35.63 22.95 12.68 1985 32.64 24.57 8.07 13.57 11.64 1.93 4 .21 36.21 10.00 1986 7.43 6.85 0.58 11.86 11.11 0.75 19.29 17.96 1.33 1987 (4.84) 4.28 (9.12) 9.05 12.04 (2.99) 4.21 16.32 (12.11) 1988 11.21 9.82 1.39 11.21 9.82 1.39 1989 11.54 11.22 0.32 11.54 11.22 0.32 1990 = 16.02 20.70 (4.68) 16.02 20.70 (4.68) 1991 6.68 2.89 3.79 6.68 2.89 3.79 TOTAL 39.79 35.89 3.90 75.73 70.91 4.82 89.34 80.55 8.79 204.86 187.35 17.51 Special CanceLlstion (9.00) Exchange Rate Difference (0.09) Sibtotat 80.25 80.55 -0.3 195.77 187.35 8.42 Earthquate RealLocation 15.05 15.05 TOTAL 95.30 96.60 -0.3 210.82 202.4 8.42 Cancellation at Loan CLosing (5.00) 1 Original Loan Amount 100.3 Total Cancellation 14.09 | _ _._ _ - -_ . - __ 'A a Loan Accounting Data. *S a Expenditures In Pesos Restated in US Dollars. - 43 - Section II. Summarv of Final Proiect Report Prepared by BANOBRAS and SEDUE A. Background 2. In the mid-1970's, when the first medium-size cities project was designed, the organization of the Mexican federal government presented the following characteristics: (a) It did not have a unified legal framework nor national planning strategy for urban development; (b) In most cases, it assumed direct fiscal responsibility for construction and installation of water and sewerage systems throughout the country. There did not exist, however, an autonomous organization to operate these systems, nor did the government contemplate the possibility of lending (rather than grants) to finance projectsl (c) Public institutions in the sector possessed a very limited capacity to generate or evaluate new projects using least-cost criteria; (d) The revenues of the operating companies did not cover costs of operation, precluding resources for rehabilitation or expansion of infrastructurel (e) The secretariats responsible for finance and national planning tried to promote change from the traditional idea of subsidies for new works to an approach based on cost-recovery for new investments in those medium-size cities capable of paying. Likewise, they tried to change the policy of subsidizing the cost of services, to one where tariffs and revenues would cover the cost of operation and build up reserves for future investments; 3. By 1979, the situation described above had changed as noted below: (a) Instead of regarding water intake, transmission, treatment and distribution as different functions, FIFAPA now viewed the full range of functions as part of an integrated system of infrastructure, including institutional development, coordinated and decentralized in various regions and cities. This change of view led to a new stage of accelerated development calling for new projects and investments. (b) In spite of the overall plans to decentralize services and their administration from Mexico City to the States, the Federal Government continued to dispense grant money for water and sewerage, without rational criteria to differentiate between grant and loan funds. (c) SRH was dismantled and replaced by SANOP in order to centralize the planning, supervision and construction, and to decentralize operation and billing/collection to the operating companies. - 44 - 4. The international economic crisis of 1982, also affected FIFAPA in that the Federal Government war unable to provide the counterpart funds it had planned. B. Analysis of the Proiect 5. FIFAPA I, II and III, actually a continuation of a mingle project in three phases, had the common objective of improving the provision of water supply and sanitation services in medium-size cities throughout Mexico. Each stage, however, contained specific objectives, reflecting the different phase. of project development and implementation over the long-term. 6. FIFAPA I aimed at devising a mechanism to finance public investments at the municipal level, based on cost-recovery rather than Federal grants. It also aimed at strengthening the institutional capacity to evaluate projects, to use its resources more efficiently, and promote a policy of realistic tariffs. 7. FIFAPA II, by comparison, aimed to support the National Plan for Urban Development; assist SAHOP to decentralize water and sewerage services, promoting viable finance and operations to autonomous companies; strengthen the administrative capacity of existing management; improve environmental and health conditions in medium-size cities; extend water and sewerage services to low-income areas; facilitate a program of chlorination for all urban populations by 1983; prioritized and initiate waste water treatment in those cities with high levels of contamination. 8. FIFAPA III contained a pilot program in Sinaloa State aimed at developing a State water company that could be replicated in other states. It also contained a institutional development component to strengthen SEDUE and BANOBRAS. Its objectives changed markedly from those designated in the Staff Appraisal Report. These occurred for several reasons, but three were crucial: (a) First, lack of reliable information on specific cities made it difficult to conduct feasibility studies, which, in turn, impaired the preparation of individual subloan agreements with them. (b) Second, finance to the Sinaloa State Commission (CRAPAS) to on-lend to the particular cities was seriously impaired by the economic crisis, coupled with changes in administrative structure of SRH/SAHOP. (c) Third, the interest rate changed from 25% to 60% (which represented 100% of the CPP), and was viewed as too high by the participating cities. To add to these three impediments, the individual operating companies were weak in administration, and others had not received 100% of the works contracted under FIFAPA II. 9. In general, the repeated staff changes in the implementing agencies, already administratively weak, made it extremely difficult to incorporate the lessons learned from FIFAPA I and II, and thus, to overcome the impediments noted above. Moreover, the high inflation rate of the 80's was unforseen at the time that each of the FIFAPA stages was designed. Indeed, some beneficiaries, because of the high interest rate, partially - 45 - canceled their sub-loans, or transferred them to pay interest or amortize principal. 10. In keeping with the Bank's objectives, FIFAPA included resources to strengthen the implementing agencies. But in reality, neither technical nor financial resources were available to meet this objective. The inherent risk of poor management and technical assistance was counterbalanced by frequent supervision missions from the Bank. In fact, this public sector crisis lasted until 1986 until the Direcci6n General de Infra-structura Urbana within SEDUR was restructured and was able to combat the problem systematically. 11. In many cases, institutional development programs were limited only to purchase operation and maintenance equipment. In a few cases, however (e.g. Culiacan, Los Mochis e Irapuato), investment in such equipment plus consultant services to strengthen the company resulted in substantial improvement of operation and administration. 12. The US$2.4 million available for strengthening federal institutions was reallocated for seminars directed to the beneficiaries. 13. In the absence of adequate data from monitoring systems, the cities tended systematically to underestimate true costs over time, resulting in tariff increases that were perceived by the public to be excessive when they were eventually applied. In those cases where monitoring data existed, it was easier to implement the increases when supported by actual costs. c. Execution. Operation. and Proiect Costs 14. The principal impediment to efficient operation of the entire FIFAPA program was tied to the inability of financing viable projects, which, in turn, depended on prefeasibility studies to determine financial viability and potential for full cost-recovery. These studies, in turn, depended on reliable data which were unavailable for a variety of factors already mentioned. All aspects of the project were influenced by the high inflation rates of the mid-1980'". 15. The lack of coordination among the agencies, itself, was due to misunderstandings stemming from the difference between grant and loan financing. The participation of the beneficiaries during the execution of works financed with resources of the first two stages of the FIFAPA program was practically nil, because the planning, execution and supervision of the works was the responsibility of the federal agency, i.e. SRH, SAHOP, and SEDUE. Once the works were constructed, the federal agency handed over responsibility for operation, administration, as well as management of the debts acquired in the process. 16. Nonetheless, the program disbursed US$216 million and served 32 cities distributed in 20 states. In most cases, they met their prograummed targets, and in some cases surpassed them. In nine citioe, new water and sewerage systems were installed, two of which were completely financed by states resources. 17. In 1985, the relation between operational income and operational costs was 1.29, whereas in 1989, it was 1.98. That is to say, in 1985, income covered only 29% of costs; in 1989, they covered nearly 100%. - 46 - 18. The ratio between total income and fixed assets of the aggregate of the beneficiaries reached 15.3% in 1991. Allowing furthermore, that operating costs represented 50% total costs, it is reasonable to assum that the operating companies approached a point of economic equilibrlum. This is a promising sign that, with the assurance of FIFAPA funding, the campaign of the Urban Infrastructure Directorate (Direcci6n de Infra-structura Urbana) was leading to a more rational use of water and more efficient administration, and that the operating companies in the future can operate free of subsidies to provide their best services to their respective communities. 19. Twenty-one cities who received support from FIFAPA were surveyed. This group represents an overall population of 9.3 million people, with an estimated coverage of water of 77% of the population, of which the figure surpassed 90% in 7 cities. Only one city below 50%. For sewerage, the average coverage reached nearly 60%, and in two cities, 80%. In 3 cities, however, the coverage was only 50%. Average water consumption is approximately 225 l/c/d, without including physical losses. In six cities, the figure surpasses 300 l/c/d, but in two others it has not reached 100 l/c/d. Under the program, FIFAPA reduced the 300-350 l/c/d standards, which were unrealistically high in order to be able to provide minimum quantities of water to more people. The Mexican Government is now reviewing this change of standards. 20. In terms of finance, income generally covers expenses in the sample cities. In two cases (Cuernavaca and Leon), income is greater than expenses. It is important to note, that traditionally in Mexico, the revenues of water and sewerage utilities have never covered operation and maintenance costs before. 21. In terms of sound financial manag ement, water losses of the order of 35% remain a problem, with figures ranging from 5-60%. It is not clear, however, whether these figures represent a deficiency in management or inaccurate measurements. Overall efficiency appears to be of the order of 53%, ranging between 40-80%. Generally, tariffs cover 63% more than operating costs. For every 1000 connections, there are 5 employ-ee on average. 22. In commercial terms, it is possible to conclude that even when overall efficiency is low, the financial operation of the operating companies, reflects the low importance that has been assigned to institutional develop- ment as noted earlier. In terms of institutional development of the federal agencies, results in general were marginal. This occurred primarily because the federal agencies did not feel the necessity for a strong management capability of the sector, in spite of the efforts of SEDUN, and one of the recurring proposals of the supervision of the World Bank staff. Nonetheless, in those cities which were able to implem nt these principles, the results were very positive, notably in Queretaro, Mazatlan, Culiacan, Irapuato y Acapulco. 23. In spite of these deficiencies in support and funding, the financial and administrative management of the beneficiaries began to be more efficient, a fact that is reflected in the higher incomes with more equitable and rational tariffs, and a cash surplus which permitted some of them to confront the necessities of operations and maintenance as well as the expansion of services in water supply and sewerage. In this sense, FIFAPA - 47 - contributed to the gradual collective understanding of the necessity to pay for water and sewerage services according to actual costs. 24. The FIFAPA program also caused several secondary benefits outside the project itself. Even if all the specific objectives were not met literally, the program was instrumental in changing the mentality of government employees at the federal, state and municipal levels, as well as in the beneficiaries and the communities which benefitted from the financing. This change in mentality, in turn, promoted the acceptance of the concept the water and sewerage services necessarily should not be subsidized. 25. Similarly, the project confronted a series of legal, regulatory and financial problems which should be easier to resolve in the future. For example, municipalities were reluctant to sign subloan contracts to manage works whose final costs were higher than original estimates, due to inflation. Based partly on a lack of communication, and partly on the concept of a fixed- costs contract, the states felt it inappropriate to accept the higher costs without an understanding the reasons for cost increases. 26. The program was also instrumental in promoting the idea of integrated water and sanitation projects to be financed together, particularly as a means to combat pollution of surface and underground water contaminated by domestic waste water. 27. FIFAPA was also instrumental in identifying hidden subsidies tp be dealt with more rationally, or identified as a direct subsidy and handled accordingly. That is, where systems are so deteriorated that they require an inordinate amount of repair that might be difficult to justify on strict cost- benefit grounds, or where full cost recovery might not be possible for economically disadvantaged populations, these works are now viewed as needing subsidy, either through a reduced interest rate, or by the state paying the bill. In particular, this feature was incorporated into the Sector Loan, approved in November 1990, which provides for transparent subsidies and specific targets to the poor. D. Institutional Performance 28. Institutional problems were compounded by the fact that local institutions did not perceive the project as their own, and were therefore reluctant to participate in planning, monitoring or accepting their full share of costs. The latter added to delays in project execution, in particular in devising contractual arrangements for signing subloans. Moreover, supervision by SEDUE was not frequent or of high quality, partly because SEDUE lacked resources. 29. Training was not well executed at the federal, state or municipal levels. Indeed, the training funds were not used, partly because SEDUE felt that works were more important than training and did not request an adequate training budget, e.g. to buy equipment. This occurred also because of the variety of factors, particularly inflation, that drew attention to planning and completion of works. Now, training is designed in conjunction with CNA operating companies and ANOAPA. 30. The excessive centralization of information and of decision making within SEDUE and BANOBRAS generated problems. - 48 - 31. Personnel at all levels changed frequently during the course of the three project stages, and is still changing roughly every three years. In many cases this is a result of electoral changes. - 49 - PROJECT COMPLETION REPORT MEXICO PART II1 STATISTICAL INFORMATION Table 1: Related Sank Loans Nuaber Title Purpose Year of Aount ApprovaL US$ mitlion 0909-HE Mexuco City Water Supply Project lxprove water quaLity and quantity and treat 11/90 90 wastewater for reuse. 1186-ME Madius Cities Water Supply and Sector objectives: To establish and 12/73 40 ' Seorege Project implement policies for the national water supply and rsewrage (WSS) sector; ifprove sector institutional structure. Project objective: to expand service levels in eight (8) cities through construction of heterogeneous subprojects. 1913-ME Second Medium-Size Cities Water Sector objectives: to support 11/80 125 3 Supply and Seweroge Project decentralization of: (a) population and economy through Ixproved WSS services to wedium-size cities; and (b) sector organization through transformation of local WSS entities operated by Federal and m.nicipal goverrnants into autonomous financially viable copxnies. Project objectives: to expand service levels in five medium size cities through construction of heterogeneous subprojects. To strengthen mangemnt capabilities and lmprove financial performAnce of WSS coapanies (state and m.micipal). 2281-ME Third Medlus-Slze Cities and Sector objective: to support 06/83 100.3 Sinalos State Water Project decentralization of: (a) population and economy through Improved WSS services to mediu-size cities; Cb) sector organization at state lovel by developz nt of model USS company CSinaloa); and c) isprove Institutional capacity of Federal agencie. Project objective: to expand service levels in four cities through construction of heterogeneous subprojects. 3101-HE Water woen end developaent Improve living standards of lou-income 05/89 20 project groups. 3271-HE Water supply nd sanitotion Support sector Reorganization Progrom. 11/90 300 sector project Amsot canceled: USS 11.79 million. A ount canceled: US# 0.21 miLlion. Amount cancel d: USS 49.28 million. Amount canceled: US$ 5.00 Oillion. Auoumt canceled: USS 20.0 milLion. - 50 - Table 2: Proiect Timetable: Date Date Date Item Planned Revised Actual TABLE 2.1: LOAN 1186-ME Identification Jan 74 Preparation Jul 74 Appraisal Mission Nov 74 Jun 75 Post-Appraisal Mission Loan Negotiations 10 Nov 75 Board Approval 18 Dec 75 Loan Signature 13 Jan 76 Loan Effectiveness 15 Apr 76 26 Apr 76 Loan Closing 31 Dec 80 14 Jan 82 14 Jan 83 14 Jan 84 14 Jan 84 Peoject Completion 30 Jun 80 14 Jan 84 Last Disbursement 23 May 84 ----------------------------------------------------------------------__-----_ TABLE 2.2: LOAN 1913-ME Identification Mar 79 Preparation May 79 Appraisal Mission 10 Mar 80 Post-Appraisal Mission Jun 80 Loan Negotiations Aug 80 11 Sep 80 Board Approval Nov 80 4 Oct 80 Loan Signature 23 Jan 81 Loan Effectiveness 23 Jun 81 Loan Closing 31 Dec 84 30 Nov 86 30 Nov 86 Project Completion 30 Jun 84 30 Nov 86 Last Disbursement 31 Aug 87 …---------------------------------------------------------------------__-----_ TABLE 2.3: LOAN 2281-ME Identification Apr 81 Preparation Jul 81 Appraisal Mission Mar 82 Post-Appraisal Mission Fab 83 Loan Negotiations 7 Apr 83 Board Approval 17 May 83 Loan Signature 25 Sep 83 Loan Effectiveness 27 Feb 84 Loan Closing 30 Jun 90 31 Dec 90 31 Dec 90 Project Completion 31 Dec 89 31 Dec 90 Last Disbursement 13 Mar 91 … Table 3.1: FIFIPA I: Actual Cost and Sources of Financing (stated in thousands of current US$) Location Foreign Currency Local Currency Total Cost CD, JUARZZ, CHIN. 1,5S5.2 64.9 1,620.1 CD, VICTORIA, TAMPS 3,307.3 4,961.0 8,268.4 COZUJWL, QROO. 998.3 167.7 1,166.0 CULIACAN, SIN 5,202.3 7,805.1 13,007.4 MATAMOROS, TAMPS. 1,459.7. 309.0 1,768.7 MEXICALI, B.C. 3,856.8 5,785.3 9,642.1 )ONCLOVA-FRONTERA, COAR. 616.1 219.0 835.1 MORELIA, KICK. 1,523.2 2,204.9 3,808.1 NOGALES, SON. 343.3 78.5 421.8 QUERETARO, QRO. 1,322.0 300.3 1,703.2 REYNOSA, TAXWS, 5,777.3 8,375.0 14,152.3 TAMPICO-CD MADERO, TAWiS. 5,602.2 7,317.3 12,919.4 TEPIC, NAY. 496.7 64.5 561.3 TOLUCA, NZX. 927.5 316.5 1,244.1 TUXTLA GUTIZRRZX, CRIS. 1,505.4 2,378.1 3,963.5 SAGATECAS-OPI, ZAC. 1,325.7 167.4 1,493.1 TOU2L 35,099.91 40,674.6 76,574.5 Diffors fro amount shown in Table 4 (US$ 39.8 million) due to rate-of-exchange differences (US$ 4.82 million); also, see Part XI, Attachment (p. 42). - 52 - Table 3.2: FIFAPA Ils Actual Cost and Sources of Financing (stated in thousands of current US dollars) Location Foreign Currencr Local Currener Total Cost CD, JUARZN, CHIN. 12,922.4 9,191.1 22,113.6 CD, VICTORIA, TAMPS 1,026.0 439.7. 1,465.8 COZU3EL, QROO. 5,500.2 2,357.2 7,857.5 CULIACAN, SIN 490.8 195.1 685.9 MATAMOROS, TAWUS. 6,824.9 4,153.8 10,978.7 MONCLOVA-FRONTZRA, COaX. 4,407.2 2,480.3 6,887.5 NOGALES, S0N. 2,850.3 2,745.6 5,595.9 QUERETARO, QRO. 12,346.3 8,634.8 20,981.2 REYNOSA, TAMPS, 3,409.2 1,461.1 4,870.3 TAMPICO MADERO, TAMPS. 8,458.2 3,859.5 12,317.6 TEPIC, NAY. 1,553.2 665.6 2,218.8 TOLUCA, HEX. 8,380.3 7,613.1 15,993.3 ZAGATzEas-oPE, sac. 2,748.7 1,178.0 3,926.7 _OTAL 70,917.72 44,975.1 115,892.8 2 Differs from rate in Table 4 (US$ 75.7 aillion) due to rate-of-exchange differences (US$ 3.90 million); also, see Part II, Attachment (p. 42). - 53 - Table 3.3t FIFAPA III: Actual Cost and Sources of Financing (in thousands of current US dollars) Location Foreign Currency Local Currency Total Cost ACAPULCO, GRO. 9,403.9 12,966.3 22,460.0 CO. OBREGON, SON. 2,064.1 4,837.3 6,902.0 CO. NEZABUALCOYOTL, HEX. 2,376.1 2,904.1 5,280.1 CHICUAETUA CHIN. 3,253.2 3,976.1 7,229.3 CHILPANCINGO, GRO. 1,089.0 1,331.0 2,419.9 GUERNAVACA, NOR. 2,039.8 2,493.1 4,533.0 GOUACAN, SIN. 681.1 1,517.7 2,198.8 IRAPUATO, GRO. 1,036.4 2,877.7 4,714.1 LA PAZ, BCS. 977.9 2,281.7 3,259.5 LEON, GTO. 1,907.4 2,331.3 4,238.8 LOSMOCEIS, SIN. 2,854.1 4,020.5 6,874.6 MANZANILLO, COL. 4,723.3 10,128.1 14,851.4 MATAMOROS, TANPS. 338.0 727.8 1,065.8 MAZATLAN, SIN. 1,861.4 4,499.7 6,361.1 SONCLOVA-FRODTERA, COAB . 239.4 292.7 532.2 MORELIA, MICE. 3,430.1 6,497.8 9,927.9 NOGALES, SON. *11.1 991.3 1,802.4 PAGHUGA, EGO. 2,691.8 6,281.0 8,972.8 PTO. VALLARTA, JAL. 809.2 1,887.7 2,696.9 QUERETARO, QRO. 9.8 22.9 32.7 REYNOSA, TAMPS. 671.9 961.7 1,633.6 SALTILLO, COAN. 1,131.7 1,353.2 2,514.8 TAMPICO-CD. KADZRO, TAMPS. 336.6 772.9 1,109.5 TEPIC, NAY. 1,102.6 1,247.7 2,450.3 TORREON, COA8. 1,297.0 1,585.2 2,882.1 DZSARROLLO INSTITUCIONAL 0.0 1,638.0 1,638.0 TOMML 45,016.9 80,554.7' 128,571.6 3 Differs from amount shown in Table 4 (US$ 95.3 million) due to rate-of-exchange differences (US$ 9.09 million) and reallocation for reconstruction of Mexico City (Us$ 15.05 million); also, see Part II, Attachmont (p. 42). - 54 - Table 4: Actual and Forecast Disbursement Timetable (in US milton equvaLent) Loan 1186-ME Loan 1913-ME Loan 2283-ME - Anmiau cuiatTive Arnml CtuLmttve Anrnal CumuLative Disbursa_wnts 0U aburswments Olsbursum nts Disburs_ments Disbursements Di sbursements Act- Act- Act- ual as uat as uaL as Per- Per- Per- cent of cent of cent a Act- Fore- Act- Fore- Fore- Act- Fore- Act- Fore- Fore- Act- Fore- Act- Fore- Fore- FY uwl cast uat cast cat uaL cast utl cat cast uaL cast ual cast cat ... ....... ... .... -- -- .... .... .... .... .... .... .... ..... 1976 -- 0.5 -- 0.5 -- -- -- -- -- -- -- -- 1977 -- 13.5 -- 14.0 -- -- -- -- -- -- - -- 1978 -- 16.0 -- 30.0 -- -- -- - -- -- -- -- 1979 5.4 9.0 5.4 39.0 13.8 -- -- -- - -- -- -- - 1980 15.6 1.0 21.0 40.0 52.5 -- -- -- -- -- -- -- -- 1981 2.6 23.6 59.0 -- 5.0 -- -- -- -- 1982 5.2 286 72.0 12.6 22.0 12.6 32.0 39.3 -- -- -- -- 1983 0.8 29.6 74.0 7.4 47.0 19.9 79.0 25.2 -- -- -- -- 1984 10.2 39.8 99.5 13.7 46.0 33.6 125.0 26.9 9.3 6.9 9.3 6.9 134.5 1985 25.3 59.0 47.2 5.0 25.1 14.3 32.0 44.6 1986 8.2 67.1 53.7 9.9 39.0 24.2 71.0 34.1 1987 8.6 75.7 60.6 12.9 16.8 37.1 87.8 42.3 1988 27.0 7.9 64.1 95.7 67.0 1989 12.8 2.3 76.9 98.0 78.4 1990 4.4 2.3 81.3 100.3 81.0 1991 14.0 95.3 95.0 - 55 - Tab1i 5.11 Allocation of Proceeds, Loan 1186-MOJ Apraisal, K viasd & actual A2rALMI Revised Actual (As por Loan (As pow Loan Agreement, dated Agreement, dated, 01/13/76) 01/20/83) Category 1: Equipment, materials, 27,300,000 35,800,000 35,790,3901 and civil works Category 2: Training 200,000 200,000 --- Program Category 3: Interest 4,000,000 4,000,000 4,000,000 Category 4: 3,500,000 _ --- Unallocated 40,000,000 40,000,000 39,790,3901 Differs from foreign coat of FIFAPA I (US$35.9 million) due to foreign exchange fluctuations. 2 Asount cancelled: $209,610 - 56 - Table 5.2: Allocatton of Proceeds, Loan 1913-ME: Appraisal and Actual (in US$) Apinraisal Ata (As per Loan Agreement, dated 02/23/al) Category It Equipm*nt, materials, civil works, engineering, $125,000,000 75,724.795 .59 3 ' and technical assistance Amount cancelled: $49,275,204.41. 4 Differs from foreign cost of FIFAPA II (US$70.9 million, se- Part rrr, Table 3.2), due to rate-of-exchange difference (see Part II, Component A, Attachment). - 57 - TabLe 5.3: ALLocation of Proceeds, Loan 2281-ME: Appraisal, Revised & Actual (in Us doLtars) __________________________ ) AcoralsaL Revi s.d _ As per Loan As per 8ank As per lank As per Bank Aoreement. 02/25/81 Letter, 01/15/86 Letter, 02/26/88 Letter 01/11/90 Actual (1) Equipment, materials, 35,649,875 36,649,875 15,604,875 15,604,875 3,740,501.52 civiL works and consultants' services for Part A of the project. _ _ _I (2) Equipment, materials 62,000,000 44,000,000 61,000,000 61,000,000 74,599,628.44 civiL works and consultants' services for Part B (middle- size cities) (3) Equipment, materials, 2,400,000 2,400,000 2,400,000 2,400,000 1,634,638.44 end consultants' fees for Part C (4) Equipnent, materials, -- 15,000,000 15,045,000 15,045,000 15,044,864.87 and consultants, for Part 0.1 (earthquake reconstruction) (5) Equipment, materials, - 3,000,000 6,000,000 6,000,000 civil works and engineering consuttants' services for Part D.2 (6) Fee 250. 125 2503 125 250. 125 250. 125 250. 125 100,300,000 100,300,000 100,300,000 100,300,000 95,269,758.27 A ount canceled: US$5,030,241.73. 2 Differs from foreign cost of FIFAPA III (US$80.5 million, soo Part Ill, Table 4.2) by including disbursements for earthquake reconstruction (USS15.0 million) and also because of a rate-of-exchange differenct: US$0.029 million. Table 6: Pr2ject Imolementation Page 1 of 6 pages A. Beneficiaries Cities FIFAPA I JIFAPA II FIFAPA III ACAPULCO, GRO. CD. JUAREZ, CHSI. CD. OBREGON, SON. CD. VICTORIA, TAMP. CD. VICTORIA, TAMP. CULIACAN, SIN. ./ CULIACAN, SIN. CULIACAN, SIN. COZUMEL, Q.R. CUERNAVACA, MOR. CHIHUAHUA, CHIH. CHILPANCINGO, GRO. IRAPUATO, GTO. LA PAZ, B.C. LEON, GTO. LOS MOCHIS, SIN. MANZANILLO, COL. MATAMOROS, TAMP. MATAMOROS, TAMP. MAZATLAN, SIN. MEXICALI, B.C. MEXICO, D.F. MONCLOVA, COAH. MONCLOVA, COAH. MORELIA, MICH. MORELIA, MICH. NEZAHUALCOYOTL, MEX. NOGALES, SON. NOGALES, SON. PACHUCA, GOC. PTO. VALLARTA, JAL. QUERETARO, QRO. REYNOSA, TAXPS. REYNOSA, TAMPS. REYNOSA, TAMPS. SALTILLO, COAH. TAMPICO-MADERO, TAM. TAMP.-MADERO, TAM. TAMPICO, TAM. TEPIC, NAY. TEPIC, NAY. TOLUCA, MEX. TORREON, COAH. TUXTLA GTEZ., CHIS. ZACATECAS, ZAC. I] Added to project; Jalapa and Salmanca withdrew from project. - 59 - Table 6.1 Selected Monitorina Indicators FIfAPA I (1962) Total P o p u l a t I o n Number of Unheccmted Averae Wator Tariff Population S * r v a d Conrection For Water Dic.1962 Beneficiary Citieo ('000) X ('000) X CU/w (S/wi) Appr. PCI AWe. PCA Appr. PCd Appf. PCR Appe. PCI Water Supply 140 124 59 69 15 15 20 30 2.4 4.5 CO VICTORIA, TAN. Sewrag 70 66 17 15 Water Suppty 411 316 95 89 56 45 22 22 4.6 7.6 NEXICALI, S.C. Seweraog s0 51 47 25 Water Supply 271 241 90 93 41 37 21 35 2.8 1.5 NCELIA, NIC. Sewerog 78 64 35 26 Water Suppty 257 235 80 70 34 27 23 35 2.5 4.2 RETNSA, TAN. S*werag 60 56 26 22 Water Suppty 433 400 80 76 58 51 23 30 4.2 3.9 TAMPICO-CD. ADERO, TAM. Sewerage 70 67 50 45 Water Supply 116 106 95 90 17 13 20 34 4.4 1.5 TUTLA GUTIEREZ, CNI. Sewerag 75 75 14 U - 60 - 6. Project Imolementation (Cont'd) Table 6.2 Selected Monitorina Indicators FIFAPA I[ (1988) Total Population Number of Unaccounted Average Water Tariffs Population Served Connections For Water 1984 1988 Beneficiary Cities (000) X ('000) X (S/m3) (S/m3) Appr.1/ PCR Appr. PCR Appr. PCR Appr. PCR Appr. PCR Water Supply 443 203 92 84 - 42 25 27 6.4 55.2 MONCLOVA,FRONTERA,COA Sewerage 83 41 ... 21 Water Supply 170 81 84 60 --- 12 25 22 9.5 16.2 NOGALES, SON. Sewerage 70 29 ... 6 Water SuppLy 191 190 90 72 .. 37 25 61 4.4 25.1 TEPIC, NAY. Sewerage 80 52 - 20 Water Supply 443 547 93 68 ... 62 25 40 6.2 389.1 TOLUCA, MEX. Sewerage 83 61 --- 56 1/ Appraisal data for 1988, which does not appear in the SAR for FIFAPA II, was supplied by BANOBRAS. - 61 - 6. Proiect Implementation (Cont'd) Table 6.3 Selectod Monitorina Indicators FIFAPA llI (1991) Total P o p u l a t I a n Number of Unaccounted Avrege Water Tariffs Populatlon S * r v a d Conrnctions For Water July 1991 8eneficiary Cities ('000) X ('000) X (S/U3 (S/3) Appr. 1/ PCR Appr. PCR Appr. PCR Appr. PCR Appr. PCR Water Supply 613 566 90 96 86 90 25 36 70 708 CU.LIACAH, SIM. Sewerage sO 78 77 74 ater Supply 218 226 95 92 60 42 25 25 23 1434 LOS MOCHIS, SIN. Serage 85 87 54 40 Water Supply 423 272 95 95 34 84 25 25 68 515 KAZATLAN. SIM. Sewerage 85 55 30 49 1/ AppraisaL data, which does not appear in SAR for FIFAPA 111, was supplied by BANOBRAS. leneficiaries not Included In SAR Water Supply --- 528 80 -- 71 -- 36 2462 ACAPULCO, GRO. Sewerage .. 59 52 Water Supply --- 443 ... 86 -- 64 -- 25 466 CUERNAVACA, HOR. Sewerage -- 73 53 Water Supply --- 514 ... 95 122 30 695 CHIHUAHMA, CHI Sewerage --- 83 -- 107 Water Supply --- 112 --- 97 -- 17 25 600 CHILPAMCINGO, GRO. S*wrage - 89 16 Water Supply --- 290 --- 86 42 -- 25 583 IRAPUATO, GTO. Seweroge --- 77 -- 37 Water Supply - 131 --- 89 26 - 16 -- 2420 LA PAZ, BCS. Sewrage --- 65 19 Water Supply ... 837 --- 95 159 - 25 ... 583 LEON, GTO. Sewrage --- 84 141 Uater Supply --- 87 ... 88 -- 19 -- 33 --- 1710 NAIZANILLO, COL. Sewerage ... 66 -- 14 Water Supply ... 497 -. 95 -- 89 25 -- 1919 NORELIA, NIC. Sewerage --- 91 s5 Water Supply --- 140 .*- 85 -- 24 -- 61 --- 144 PACHUCA, HGO. SewrJge --- 85 -- 23 Water Supply --- 82 -- 63 -- 15 4- 737U PUERTO VALLARTA, JAL. Sewerage 4- 8 12 Uater Supply --- 429 --- U4 78 29 ... 1942 SALTILLO, COA. Seuwrag --- 80 -- 70 water Supply --- 711 --- 90 - 107 -- 30 --- 382 TORREON, COA. Sewerage -- 70 83 LF- 62 - Table 6.4: Project Results -- Studies 6. Project ReSUlts Page 1 of 3 A. Studies Carried Out In Connection with Loan 1186-ME Purpose as De-Jn eG studies At Aporaisal Status Impat of Study Inventory of all Survey results to Degan prior to Loan Permitted a better water supply and facilitate approval and planing of the sewerage systems for implementation of successfully investments. urban communities recommendations completed. with more than 2,500 contained In (L) the inhabitants. National Hydraulic Plan -- UNDP- financed project with Bank as executing agency and (i$) Bank sector study. Water pollution The Preparation of Completd. Defined priority control surveys, detailed feasibility areas for lnvestment studies of projects in pollution to be carried out in control. areas to be determined by government and Ln agreement with the Bank. National Water Creation of data Partially carried Helped the Program: metering Study. base on metering out. "Uco Eficiente del situation in all Aqua". (IffiCiont systems operated by use of Water). SRE to: (i) control leaks/losses and the quantity of unaccounted-for water, and (ii) estimate positive SRH metering efforts. - 63 - B & C: Studies Carried out Under Loans 1913dlS 6 2281-M Table 6.4 (Cont'd.) Page 2 of 3 pages Studies sthaun Imnact of Study Toluca, Institutional Completed. Implemented accounting, Development Program for finazcin gand commercial Beneficiary. programs, *.g., for stock/Lnventory fixed assets, personnel, leak detection and operating manuals. Culiacan, InstitutLonal Completed. Hlped to define accounting Development Program for for an efficient operating B-neficiary. company and Lt is used now as model in the new program OConsolidaci6n". Topic, Subdivision of Cmpleted. Itemization of updated plans Distribution Network and of water distribution operational Analysis of systems for more efficient Water Mains. operation. ManzanLllo, updating Completed. Strengthened beneficiary in user/connection distribution billing illegal connections maps, based on a physical and improved meter reading census of connections and and billing, both of which redesign of meter reading increased revenues. routes. Morelia, technical, Cospleted Develbp-d program for financial and administrative organization of office analysis, procedures, large scale metering, -- of connectLon and billlng collection Irapuato, study for Completed. Developed programs for institutional development of organization office b-neficiary. procedures of census, productLon, metering, connections, and billing and collection. -64 - Table 6.4 (Cont'd.) Page 3 of 3 Studies Stat ID=act of Study Saltillo, d-velopment of Complete. Acquisition of computer mechanized systems for software increased billing and bookeeping beneficiary operational ledgers of the b-neficiary. efficiency. Chihuahua, Management Complete. Now information equipment Information System. permitted integration of data with high level of advantages to beneficiary decision makers. Cuernavaca, updating of Complete Sufficient manuals were user/List, based on a printed for distribution to physical census of beneficiaries. connection and a redesign of meter reading routes. With study results, Complete Increase revenues for more increased income from more efficient bililng. efficient billLng. Manuals and Models permitted incorporation of technlcal and management principles promoted by FIFAPA which strengthened beneficiaries. With study results, - increased income from more efficient billing. - 65 - Table 7: Use of Sank Reeources: Staff Weeks in Feltd Page 1 of 5 1974 1975 1976 1977 1978 1979 1980 1961 1962 1963 1964 1985 1986 1987 1988 1989 1990 TotaL 1. Loan 1186-NE Preparatfon 17.5 7.5 . - -- - - - -. - 25.0 Appralsat 12.0 4.0 .... ... . .57.5 superv1slon 7.0 6.0 4.0 2.0 3.5 10.0 4.0 5.0 --.41.5 Totat 17.5 19.5 4.0 7.0 6.0 4.0 2.0 3.5 10.0 4.0 5.0 .-2.5 2. Loan 1913-NE Preratfon 18.5 3.0 -- -- -- -- 21.5 Apprsat - -a10.0 . . . . . . .10.0 Supervisfon ..3.0 1Z.0 24.0 4.0 3.0 6.0 1.0 - -53.0 Total 18.5 13.0 3.0 1Z.0 Z4.0 4.0 3.0 6.0 1.0 0.0 0.0 0.0 84.5 3. Loan 2282-ME Preration 6.0 -- -- -- 6.0 Approisat l12.0 5.0. -- 17.0 Supervisfon -- 1.0 3.5 2.0 14.0 9 3 2 -- 34.5 Total 6.0 12.0 6.0 3.5 2.0 14.0 9.0 3.0 2.0 0.0 57.5 Total, All Loan 17.5 19.5 4.0 7.0 6.0 22.5 15.0 12.5 34.0 34.0 12.5 5.0 20.0 10.0 3.0 2.0 0.0 224.5 - 66 - Table 7 (Cont'd) P.EG 2 of 5 Hissionm to Suo ruise Loan 1186-M7 Performance Stage of Month/ wo. of Weeks ln Specialization Rating Type of Project Cvcle Y-r efrsons R r-sntd stus Problem Identification 1/74 3 5 S I YCt; PA Not rated (NR) Preparation 2/74 1 3 0.5 ZUG; FC KR Preappraisal I 8/74 4 1 ZUG) FA; FC KR Preappraisal TI 9/74 4 9 1gm; PA NR Preappraisal III 12/74 3 2 1gm; PA NR Preappraisal IV 3/75 3 21. A; 1Na NR Sub-Total 25 Appraisal 6/75 3 ZUG; VrA NR Total, Project Processing }i Sup,ervision SupervisLon 5/76 2 1 ENO; PA 2 M Supervision 10/76 2 3 3XG; PA 2 M Supervision 5/77 2 4 1m; PA 2 M Supervision 12/77 2 3 1NG; PA 3 M, T, P Supervision 4/78 2 2 330; PA 3 M, T, P Supervision 10/78 2 4 XNMG FA 3. M Supervision 3/79 2 1 1NG 2 M Supervision 6/79 2 3 NMG; PA 2 M Supervision 2/80 2 1 ZG; IFA 2 M Supervision 10/80 2 1 ZUG; PA 2 M Supervision 3 4/81 3 2 1NG; PA; YP 2 M Supervision Y 9/81 2 1.5 ZNG; PA 2 M Supervision ' 2/82 S 2 ENO; PA; PS 2 M 1/ Two comsultents In the fietd for thre weeks, Joined by 9ank staff. Ceirned with mission for urban sector study. 21 Combined with Supervision muison fer Lem 909- J/ CambIned fssfion for Loa 1186-0I &d 1913-NE. - 67 - Tabte 7 (Cont'd) Page 3 of 5 Performance Stage of Month/ No. of Weeks in Specialization Rating Type of Proiect Cycle Ysak Persons Field ReDresented Status Proble Supdrvilion F 7/82 3 2 ENG; FA 2 M Supervision Y 10/82 5 6 ENG; FA 2 H, F Supervision ? 6/83 4 3 ENG; FA 3 M, F Supervision ' 9-10/83 2 1 ENG; FA 3 M, F Supervision F 3/84 2 1 ENG; FA 3 M, F Supervision ! 5-6/84 3 1 ENG; FA 2 M Total, Supervision 30 KEY: EC - Economist; ENG - Engineer; FA - Financial Analyst; YP - Young Professional; PS - Procurement Specialist; H - Managuriall T - Technical; P - Political; CONS - Consultant. 4/ Combined saslons for Loan 1186-ME, 1913-WE end 2281-NE. - 6R - Tabto 7 (Cont'd) pae 4 of 5 Missions to Supervise Loan 1913-ME Performance Stage of Month/ No. of Weeks in Specialization Rating Type of Proiect Cycle Yer Persons Field Represented Status Problem Identification 2/79 2 2 ENG; EC Not rated (NR) Preparation I 11/79 3 1.5 ENG; EC NR Preparation II 11-12/79 5 15 ENG; EC; FA NR Preparation III 2-3/80 3 31 ENG; EC; FA NR Sub-Total 21.5 Appraisal 3/80 S ENG; EC; FA NR Post Appraisal 6/80 4 2 ENG; EC; FA Sub-Total 10 Total, Project Processing 32.5 Supervision ' 4/81 3 1.5 FA; ENG; YP 1 1 Supervision 1' 9/81 2 1.5 FA; ENG 1 H Supervision l. 2/82 5 2.8 ENG; FA; PS; 1 I CONS. Supervision 1 7/82 3 2.5 ENG; FA 1 M Supervision ' 10/82 S 6.4 ENG; FA; CONS. 2 M, F Supervision 5/83 4 14.5 ENG; FA NR; Purpose of mission was to reduce project scope and cost. Supervision 6/83 4 7 ENG; FA 3 M, F Supervision 1 9-10/83 3 2 FA; ENG; CONS. 3 F Supervision 1 3/84 2 1 ENG; FA 3 M,F Supervision 1 5-6/84 3 1.5 ENG; FA; CONS. 3 M Supervision Y 10/84 2 1.5 ENG; FA 2- M Supervision 1 4/85 2 1.5 FA; CONS. 2 M Supervision 1 10-11/85 2 1.5 ENG; FA 3 M, F Supervision 1 2-3/86 2 3 ENG; FA 3 M, F Supervision Y 7/86 3 3 ENG; FA 3 M, F Supervision 1 2/87 1 1 ENG 3 M,F TOTAL 52 Misslons to Supervise Loan 2281-ME j/ CoSbined with missions for Loan 11-86-ME. 2/ Cowbined missions for Loans 1186-ME, nd 2281-ME. / Combined with missions for Loan 2281-ME. o9 - Table 7 CContsd) pace S off S Performance Stage of Month/ No. of Weeks in Specialization Rating Type of Proiect Cycle Year Persons Field Represented status problem Identification 3-4/81 3 3 ENG; FNA; YP Not rated (NR) Preparation 8/81 3 3 ENG; FNA; CONS. NR Preparation 2/82 4 2 ENG; FNA NR Sub-Total 8 Appraisal 4/82 4 12 rNA; ECN; ENG; NR CONS. Post Appraisal 2/83 2 5 FNA; ENG NR Sub-Total 17 Total, Project Processing 25 Supervision i' 9-10/83 3 1 ENG; FA; CONS. 1 Supervision 1' 3/84 2 1 ENG; FA 2 M Supervision 2 5-6/84 3 1 ENGI PA; CONS. 2 M Supervision P 9-10/84 2 1.5 ENG; FA 2 M Supervision ' 4/85 2 1.5 ENGI PA; 2 H Supervision 2 10-11/85 2 0.5 ENG; PA 3 M Supervision Y 2-3/86 1 2 FA NR Supervision Y 2-3/86 2 6 FA; CONS. 3 M, F Supervision Y 7/86 3 6 ENG 3 M,F Supervision 7 2/87 2 2 ENG; EC 3 M, F Supervision 7/87 3 2.5 ENG; EC; CONS. 3 M, F Supervision 12/87 3 4.5 ENG; FA; CONS. 2 M, F Supervision 7-8/88 3 4.5 ENG; PA; CONS. 2 M, P Supervision 12/89 2 __2 ENG; FA 2 M F Total, Supervision 36 j/ Conbined with 1186-ME and 1913-ME. j/ Combined mission with Loan 1913-ME. - 70 - TabLe 8: Status of Covennts Paoe 1 of 4 Pages LOAN 1186-ME Covenant Deadline for Loan Aareement Subect Compliance Status 4.01 Subloans to be made in accordance with leanding policies and procedures as indicatad in N.A. Complied Schedule 5 of the Loan Agreement. 5.01 Borrower to maintain adequate and separate accounts N.A. Complied for the Fund. 5.02 Audit of accounts No later than March Often delayed but and financial 30 of each year. complied. statements of Trust Fund by qualified independent auditors. Guarantee 3.01 Guarantor to provide Throughout project Counterpart fund sufficient funds and implementation. shortages were resources for experienced during carrying out the the economic crisis project. of 1982. 3.04 Preparation and Preparation within Both completed in implementation of six months of loan September 1978. guidelines for signing. Implemen- project preparation, tation within twelve design and appraisal months of loan of water supply and signing. sewerage systems in urban areas. - 71 - TabLe 8: Status of Covenants Page 2 of 4 Pages Covenant Subiect Deadline for Guarantee Aareement Compliance Status 3.05 (a) & (b) Maintain special Throughout project Not complied with unit adequately implementation. during early stages staffed in SRH to of project execution carry out due to frequent feasibility studies changes of management and appraisal of and staff. Complied projects, as well as since 1979. project supervision. 3.06 Furnish to Bank a Within three years Completed late. complete inventory of loan signing. of all water supply and sewerage systems in Mexico urban communities with more than 2,500 inhabitants. 3.07 Furnish to Bank a December 31, 1977 Complied in 1983. nation-wide training (or date mutually program. agreed). 3.10 Encourage industrial Through project Complied. and other entities implementation. that distribute water to transfer such distribution to corresponding municipal authorities, or their agencies, or concessionaires. 3.11 Carry out Water metering Complied. feasibility studies studies to be for the control of carried out within pollution in areas 42 months of loan to be agreed, carry signing. out studies on water metering in systems operated by SRH. - 72 - Table 8: Status of Covenants Pa* 3 of 4 Pages Loan 1913-ME Covenant Deadline for Loan Aareemontub1ect Compliance Status 3.02 (b) Full commitment of Loan. June 30, 1992. In compliance. 4.02 Annual audit of FIFIPA 1982 and ther-after. In compliance. trust fund. Schedule 5.B Financial and other Year after signing Partial compliance: covenants In subloan of subloan. Inadequate tariff agreements. levels on part of beneficiaries because major problems of the financial crisis of 1982. Guarantee Acroament 2.02 Provide counterpart 1981 and thereafter. Shortages experienced funds. in 1982-1983; there- after, availability of Federal grants caused beneficiaries to reduco their result to FIFIPA. 3.01 Insurances Immediate In compliance 3.04 Framework Tariff Study. June 30, 1983. In compliance 4.02 Maintain special project Immediate In compliance until unit. 1986, when unit was dissolved and its functions transferred to other departments in SEDUE. 4.03 Maintain National Immediate In compliance Training Program. - 73 - Table 8: Status of Coveants Pace 4 of 4 Pages Loan 2281-ME Covenant Deadline for Loan Agreement Subiect Compliance Status 3.02 (b) Full commitment of Loan. December 31, 1985. In compliance. 4.02 Annual audit of FIFIPA 1984 and thereafter. In compliance. trust fund. 5.01 Semiannual reports December 1984 In compliance. Schedule 5.B Financial and other Year after signing Partial compliance: covenants in subloan of subloan. Beneficiaries were agreements. slow to raise tariffs. Guarantee Agreement 2.02 Provide counterpart 1984 and thereafter. Partial compliance: funds. availability of grant funds during 1984-87. 3.01 Insurance Immediate In compliance 3.05 Furnish the Bank with December 31, 1985. Partial compliance the monitor indicators of each regional company. 4.02 Maintain special project Immediate In compliance until unit. 1986, when unit was dissolved and its functions transferred to other departments in SEDUE. 4.03 Maintain National Immediate In compliance Training Program.