PID THE WORLD BANK GROUP AWorld Froc of Poverty InfoShop Report No AB36 Initial Project Information Document (PID) Project Name MEXICO-MX-Decentralized Infrastructure Development Programmatic Loan Region Latin America and Caribbean Region Sector Roads and highways (40%); Water supply (30%); Sewerage (10%); Housing construction (10%); Housing finance and real estate markets (10%) Project ID P080149 Supplemental Project Borrower(s) BABOBRAS Implementing Agency BANOBRAS Address Address Javier Barros Sierra # 515, Col Santa Fe, Mexico D F 01219 Contact Person. Veronica Baranda Tel. 5 270 16 17 Fax Email. Environment Category F Date PID Prepared April 15, 2003 Auth Appr/Negs Date November 4, 2002 Bank Approval Date June 10, 2003 1. Country and Sector Background 2. Objectives This project represents the first stage of a Program to improve the performance and further development of infrastructure services throughout the territory of Mexico with eligible states participating in the Program on a demand driven basis subject to meeting pre-specified entry conditions and eligibility criteria. . The Project would accomplish this by supporting comprehensive infrastructure sector strategies and programs (including investment programs) to be implemented over the medium term (typically 3-4 years) by participating states in a decentralized mode with local and stakeholder involvement. Areas covered in this first stage of the Program would include transport, water, sewerage, urban development, and services to households. Program entry conditions would ensure that the fiscal, financial and debt management of the participating state (or municipality) is satisfactory. Eligibility criteria for inclusion of specific sectoral programs proposed by the states will require them to provide comprehensive coverage of the proposed sector reforms, plans and activities, paying specific attention to: (i) economically efficient pricing and management of infrastructure services to ensure resource conservation and supply of adequate amounts of the required services; (ii) financial self sufficiency or sustainability of the sector via appropriate cost recovery mechanisms; (iii) existence of appropriate sector structure and competition and regulatory framework to enable 2 PID competitive and/or efficient operation of markets; (iv) maintenance of adequate financial management, technical, environmental and service quality standards (v) enhancing participation of the private sector in investment, service provision and operation of the respective sectors; (vi) the degree to which the specific sectoral program and policies support improvements in the quality and access to a basic level of service for the poorest and least privileged population segments; (vii) a fiduciary and safeguards framework consistent with Bank policies and social consultation/ participation mechanisms that ensure transparency and social accountability in project management; and (viii) building of the adequate institutional capacity and appropriate institutional structure to enable the development and operation of the sector along the above lines, or in case of entities which do not yet have the institutional capacity to manage such transition, building the capacity to do so in the medium term. More detailed sector-by-sector eligibility criteria customized to reflect the specific characteristics of the sector would be agreed between the Bank and the Borrower during project appraisal, and will be included as annexes to the Program operating regulations. 3. Rationale for Bank's Involvement 1. The proposed programmatic loan is aimed at improving the performance and medium term development of infrastructure services throughout the territory of Mexico while respecting the decentralized mode of action adopted by Mexico for most of its economic activities. To enable sustained growth, total investment levels required for infrastructure development at the State and Municipal levels are estimated to be very large, of the order of 5-7 % of GDP (i.e., as much as $25 billion or more per year). The efficiency, effectiveness and financial responsibility with which these investments are undertaken could be a major determinant of the pace of which Mexico can make economic and social progress in the coming decade. Rational management of infrastructure services (including pension systems) can yield substantial fiscal and efficiency benefits, help improve services to the poor and help put the state or local government on a sustainable growth path. 2. Once fully developed, the Program could cover the full range of infrastructure sectors, including transport (roads, ports and airport services), water supply and sanitation, solid waste disposal, integrated urban and/or rural infrastructure, electricity and natural gas, telecommunications and other services directly serving households in Mexican states and municipalities. If found desirable, initiatives to foster private sector development, trade facilitation or financial sector infrastructure reform could also be addressed under the program umbrella in later stages. However, in order to facilitate learning and establishing good practice before expanding the coverage to all potentially eligible jurisdictions and sectors in the later stages, the focus of the first stage of the Program (estimated to span 2-3 years) will be on assistance to a limited number of states in three main sectors: transport; water supply and sanitation; and urban infrastructure improvement. 4. Description The Project would support comprehensive infrastructure sector strategies and programs (including investment programs) to be implemented over the medium term (typically 3-4 years) by participating states in a decentralized mode with local and stakeholder involvement. Areas covered in this first stage of the Program would include transport, water, sewerage, urban development, and services to households. Program entry conditions would ensure that the fiscal, financial and debt management of the 3 PID participating state (or municipality) is satisfactory. Eligibility criteria for inclusion of specific sectoral programs proposed by the states will require them to provide comprehensive coverage of the proposed sector reforms, plans and activities, paying specific attention to: (i) economically efficient pricing and management of infrastructure services to ensure resource conservation and supply of adequate amounts of the required services; (ii) financial self sufficiency or sustainability of the sector via appropriate cost recovery mechanisms; (iii) existence of appropriate sector structure and competition and regulatory framework to enable competitive and/or efficient operation of markets; (iv) maintenance of adequate financial management, technical, environmental and service quality standards (v) enhancing participation of the private sector in investment, service provision and operation of the respective sectors; (vi) the degree to which the specific sectoral program and policies support improvements in the quality and access to a basic level of service for the poorest and least privileged population segments; (vii) a fiduciary and safeguards framework consistent with Bank policies and social consultation/ participation mechanisms that ensure transparency and social accountability in project management; and (viii) building of the adequate institutional capacity and appropriate institutional structure to enable the development and operation of the sector along the above lines, or in case of entities which do not yet have the institutional capacity to manage such transition, building the capacity to do so in the medium term. More detailed sector-by-sector eligibility criteria customized to reflect the specific characteristics of the sector would be agreed between the Bank and the Borrower during project appraisal, and will be included as annexes to the Program operating regulations. 5. Financing Total (US$m) BORROWER $0.00 IBRD $250.00 IDA Total Project Cost $500 00 6. Implementation A $250 million Bank Loan is contemplated to support the first stage of a Program along the above lines to be launched by BANOBRAS. In order to avoid undue complexity in its initial stage and to facilitate learning which could be incorporated in further stages of the Program, support under the proposed loan would be concentrated on three specific sectors, namely: (a) water, sanitation, and wastewater treatment; (b) roads including highways, rural roads and urban transport; and (c) urban and regional management. In addition, during the first stage, the Program will be directed primarily to states, leaving to later stages extension of direct Program support to municipalities. Municipalities and operators could, however, benefit indirectly in that states may make use of the resources to pass them on to local governments and operating entities under conditions to be agreed between the state and a municipality (or operator). This could be the case, for example, if states wish to sponsor or catalyze actions by the municipalities that would have a favorable sector impact in line with state 4 PID priorities, for example, by using loan proceeds to arrange technical assistance, institution building or even some grants to spur reforms. Al sub-loans to states approved by BANOBRAS for financing under the Program will require prior authorization of the Bank. A small part of the loan (say $5 million) will be allocated to support any requests by states for funding of technical assistance and institution building initiatives that cut across sectors and may impinge on the quality of the overall financial management of the state. Over the projected life of the first phase of the Program (2-3 years) which would be supported under the proposed Loan, we anticipate participation of 3-4 states for a total of, say, six sectoral programs. Based on initial expressions of interest, among the list of potential participants in the first stage of the Program are the states of: Coahuila, Guanajuato, Queretero, Puebla and Veracruz. As one concrete measure to ensure the Program takes off to a good start, Board presentation of the proposed Bank loan would be subject to completion of the review of eligibility of at least one sectoral assistance proposal by a state and agreement between BANOBRAS and the state on its participation in the Program. 7. Sustainability A key eligibility criteria for sector programs to be supported under the Program is the demonstration that the programs and investments be financially, environmentally and socially sustainable. State level assessments are performed to ensure that this principle is obeyed. 8. Lessons learned from past operations in the country/sector 9. Environment Aspects (including any public consultation) Issues: 10. List of factual technical documents: 11. Contact Point: Task Manager Krishna Challa The World Bank 1818 H Street, NW Washington D.C. 20433 Telephone 01 1 52 55 5480 42 57 Fax: 011 52 55 5480 42 22 12 For information on other project related documents contact The InfoShop The World Bank 1818 H Street, NW Washington, D C 20433 Telephone: (202) 458-5454 Fax (202) 522-1500 Web http ll www worldbank org/infoshop 5 PID Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. 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