Document of The World Bank FOR OFFICIAL USE ONLY Report No: 16847-ME MEMORANDUM AND RECOMMENDATION OF THE DIRECTOR OF THE MEXICO COUNTY DEPARTMENT TO THE REGIONAL VICE PRESIDENT, LATIN AMERICA AND THE CARIBBEAN REGION ON A PROPOSED OZONE PROJECTS TRUST FUND GRANT IN AN AMOUNT EQUIVALENT TO US$13.0 MILLION TO NACIONAL FINANCIERA, S.N.C FOR THE PHASE OUT OF OZONE DEPLETING SUBSTANCES (ODS PHASE OUT III PROJECT) October 8, 1997 Environment, Rural and Socially Sustainable Development Mexico Country Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit = Mexican Peso (N$) US$1.00 = N$ 3.12 (1992 end of year) US$1.00 = N$ 3.12 (1993 end of year) US$1.00 = N$ 5.08 (1994 end of year) US$1.00 = N$ 5.67 (1995 end of year) US$1.00 = N$ 7.89 (1996 end of year) UNITS AND MEASURES metric ton - Ton (MT) = 1,000 kg ACRONYMS CFC Chlorofluorocarbon FI : Financial Intermediary GOM : Government of Mexico INE Instituto Nacional de Ecologia (National Institute of Ecology) MACS : Mobile Air Conditioning Systems MFEC Multilateral Fund Exec. Comm. MP Montreal Protocol MPEC : Montreal Protocol Executive Committee MPOTF Montreal Protocol Ozone Trust Fund NAFIN : Nacional Financiera, S.N.C. (Government Development Bank) ODS : Ozone Depleting Substances OPU Ozone Protection Unit OTF Ozone Trust Fund SEMARNAP Secretaria de Medio Ambiente, Recursos Naturales y Pesca (Ministry of Environment) UCCI Unidad de Cooperacion y Convenios Internacionales (Cooperation and Inernational Agreements Unit) UNDP United Nations Development Program VAT Value Added Tax FISCAL YEAR January 1 - December 1 Vice President Shavid Javed Burki Director Oliver Lafourcade Sector Leader Adolfo Brizzi Task Manager Enrique Vanegas FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page Grant Summary Ozone Depleting Substances Phaseout Project 1 Schedule A. Project Costs and Financing Plan 12 Schedule B. Proposed Procurement and Disbursements Arrangements 13 Schedule C. Timetable of Key Processing Events 17 Annex 1. Subproject Pipeline 18 Annex 2. Subproject Preparation and Implementation Guidelines 20 Annex 3. Guidelines for Preparation of Project Documents, 23 Appraisal Reports and Completion Reports Annex 4. Eligibility Criteria, Incremental Costs, and 27 Sectoral Cost Effectiveness Thresholds Annex 5. Environmental Data Sheet 30 Annex 6. Performance Indicators 32 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. MEXICO MONTREAL PROTOCOL OZONE DEPLETING SUBSTANCES PHASEOUT III PROJECT Project and Grant Summary Project Description The project would assist Mexico in implementing an Ozone Depleting Substance (ODS) Phase out Program by providing for financing for subprojects through an Umbrella Grant Agreement. The Project would finance the incremental costs of conversion to non-ODS technology for a group of priority, cost effective, subprojects to reduce ODS consumption in Mexico. This project is a follow up to OTF 21920, which provided US$4 million in OTF grants for 13 subprojects which eliminated 250 MT/yr ODP consumption. Executing Agenciy: Nacional Financiera, S.N.C. (NAFIN) Recipient: NAFIN Beneficiaries: Mexican enterprises which are introducing ODS reducing technologies which have been approved by the Bank's Ozone Operations Resource Group (OORG) and the Multilateral Fund Executive Committee (MFEC). Umbrella Grant Amount: US$13 million equivalent Terms: Grant Relending Terms: Grant Financing Plan: Component US$ (000's) OTF Subproject Financing 12,570 Financial Inter. Fee (2.0%) 250 NAFIN Direct Expenses 130 Technical Assistance for Subproject Preparation 50 TOTAL OTF Grant 13,000 Estimated Enterprise Financing 2,000 Total Project Cost US$ 15,000 Economic Rate of Return: Not applicable Staff Appraisal Report: Not Applicable MEMORANDUM AND RECOMMENDATION OF THE DIRECTOR OF THE MEXICO COUNTRY DEPARTMENT TO THE REGIONAL VICE PRESIDENT, LAC REGION IN AN AMOUNT EQUIVALENT TO US$13 MILLION ON A PROPOSED OZONE PROJECTS TRUST FUND GRANT TO NACIONAL FINANCIERA, S.N.C. (NAFIN) FOR THE PHASE OUT OF OZONE DEPLETING SUBSTANCES (ODS III) PROJECT 1. I submit for your approval the following memorandum on a proposed Ozone Projects Trust Fund (OTF) grant to Nacional Financiera, S.N.C. (NAFIN) for the equivalent of US$13 million to help finance the Ozone Depleting Substance (ODS) III Phase Out Project. The proposed project would be the third Bank implemented operation for Mexico financed by the Montreal Protocol Multilateral Fund (MPMF), for which the United Nations Development Program (UNDP), the United Nations Industrial Development Organization (UNIDO), and the United Nations Environment Program (UNEP) are also implementing agencies. Nacional Financiera S.N.C. (NAFIN) will be the executing agency and financial agent for the Project. 2. Country ODS Sector Background. In 1995, Mexico's total recorded ODP consumption was 5,000 MT, down from 10,298 MT in 1992 (see Table A). Consumption by category was approximately 4,750 MT of Group I substances (CFC- 11, CFC-12, CFC-113, and CFC-114), down from a reported 8,130 MT in 1989. Corresponding figures for Group II substances (Halons) were 260 MT in 1989, 250 in 1995; and for Group III (1,1,1 TCA or MCF), 9,000 MT in 1989; 1,360 in 1995. CFC- 11, CFC-12, and HCFC-22 are now produced in Mexico only by Quimobasicos S.A. de C.V. of Monterrey, DuPont having ceased production in its two plants at the end of 1995. Combined production of CFC-1 1/12 for all plants in 1995 was 15,737 MT, of which 70% was exported. Quimobasicos (ownership 51% national; 49% Allied Signal) has a combined production capacity of CFC-11/12 of 12,000 MT. HCFC-22 is produced in a separate production unit. Plans are to continue production for currently viable export and domestic markets, while at the same time considering application to the MPMF for compensation for a premature shutdown. Consumption of carbon tetrachloride in 1995 was 20,000 MT, almost all as feedstock for CFC production. PEMEX produced 11,000 MT; the remainder was imported. All CFC-1 13, -114, - 115 (120 MT total in 1995) is imported. 3. Of the total of 5,000 MT ODP consumption in 1995, estimated figures by application sector were as follows: aerosols 150 MT or 3%; foaming agent 750 MT or 15%; Halons 250 MT or 5%; solvents 500 MT or 10%, miscellaneous 100 MT or 2%; and refrigeration and air conditioning 3247 MT or 65%. These figures demonstrate the progress which has been made via factory conversions; and which now leave air conditioning and commercial refrigeration use and servicing as the predominant remaining consumers by sectors of application. 2 4. Mexico signed the Montreal Protocol in 1987 and in March 1988 became the first country to ratify it. Mexico is strongly committed to phase out the use of ODS and, although the Montreal Protocol allows developing countries a 10-year grace period, has publicly announced its intention to go as fast as developed countries and achieve a complete phase out of controlled substances by year 2000. The Country Program (CP) was prepared in 1991, and approved by the MFEC in 1992. It has never been updated, due principally to the fact that the swift developments of recent years in ODS phase out technologies and recorded phase out progress, both MF and non-MF funded, and the collective world wide learning curve have rendered original projections and phase out strategies moot in Mexico and elsewhere. GOM, also, implemented measures to achieve significant near-term reductions in the consumption of ODS. INE negotiated and signed nine agreements with industry to control the consumption and emissions of CFC and halons. The CFC producers (now only one producer), halon distributors and representatives of industries that use CFCs in Mexico voluntarily agreed to the reduction measures. 5. ODS Phase Out Institutional Structure and Project Background. INE is a semi-autonomous regulatory agency within SEMARNAP which, among other functions, coordinates activities to promote MP mandated ODS phase out. Within INE, the Ozone Protection Unit (OPU) was created in 1991 with a three year grant from the USEPA which financed two professionals (biologist, chemical engineer) and three support staff. INE, through the OPU, was given broad policy, regulation, and monitoring mandates, and later subproject identification, preparation, implementation and supervision roles for the first two Bank ODS phase out operations in Mexico (OTF 21920, OTF 21924). INE is also responsible for coordination with other ministries and institutions involved in ODS phase out, and as such, monitors MPMF activities for which the UNDP, UNIDO, and UNEP are MF implementing agencies. Under INE's supervision, the OPU is responsible for establishing and monitoring the ODS phase out program. The OPU in the past has also assisted industry to prepare ODS phase out projects for submission to the implementing agencies. 6. Due to the fact that the MPMF channels funds through four multilateral implementing agencies, subproject preparation, processing, and disbursement procedures differ according to implementing agency, as does the manner in which INE interacts with each implementing agency. In the case of UNDP and UNIDO implemented projects, project technical specification, preparation, and procurement is managed directly by the agencies through their technical consultants, and equipment delivered to beneficiaries without recourse to in-country funds disbursement. INE's role tends to be primarily that of relatively hands-off oversight, and there are no financial agents involved. 7. The Bank supports enterprise beneficiaries to develop their own engineering solutions, which are then presented to counterpart executing agencies and the OORG for endorsement before transmittal to the MFEC for funding approval. 3 Procurement for Bank implemented subprojects is the responsibility of the enterprises themselves, and grants are disbursed to the enterprises through NAFIN. For the second ODS phase out project (OTF 21920), NAFIN was responsible for forwarding subprojects to the Bank for review and approval, for reviewing compliance with procurement procedures, and for disbursing funds to beneficiaries and maintaining project accounts, but only after clearance at each step by INE. This process led to much duplication of effort, and unnecessarily long lead times for final approvals and disbursement. 8. In order to streamline subproject processing for the ODS III Project, it has been agreed that NAFIN will be the sole counterpart executing agency. INE's role through UPO will be as it has been for UNDP and UNIDO implemented grants, i.e., that of oversight and official endorsement without active participation in the preparation process. INE may review subprojects for funding eligibility, technical soundness, and compliance with the objectives of the MPMF, but will not be involved in clearance of procurement and disbursement documentation, nor with selection and contracting of technical consultants, nor will it be a signatory to subgrant agreements. All of the latter will be the responsibility of NAFIN. 9. Previous Bank OTF Funded Activities. This will be the third Bank implemented ODS phase out operation (ODS III) in Mexico. The first was the Ozone Protection Pilot Recycling and Training Project (OTF 21924) - ODS I. This latter, a US$180,000 grant for a demonstration MAC service recycling, and aerosol sector safety training subprojects. The OTF Grant was signed on April 16, 1992 and closed on December 31, 1995, without the aerosol safety subproject having been carried out due to contractual difficulties. The second operation (ODS II) was the Ozone Policy and Institutional Strengthening Project (OTF 21920), a US$4 million OTF Grant. It was approved on December 7, 1992, made effective on June 17, 1993, and closed on December 31, 1996. Thirteen (13) investment sub-projects were approved, received grants totaling US$3.98 million, and have already been, or are now being, successfully implemented. Projected ODP phase out was approximately 250 metric tons. Realized phase out will be approximately 210 MT/yr ODP, with a cumulative grant effectiveness of US$18.95/kg/yr (see Table A). 10. Other MPMF Assistance. The UNDP has been very active in implementing investment project funding in Mexico, including a total of US$8 million to the Mabe and Vitro Groups to convert all domestic refrigerator production lines to HFC-134a/HCFC-141b, and a series of rigid polyurethane producer foaming agent conversions from CFC- 11 to HCFC-14 1b. UNDP executed grants for 11 investment projects totals over US$9 million. The USEPA has also been very active using bilateral OTF funds for training and workshops, particularly prior to 1995. As of October 1995, 41 projects with a total committed amount of US$17.5 million and projected phase out of 3,000 MT had been approved by the MFEC for Mexico for investment projects and other activities. For all but one of these activities, either the Bank, UNDP, or USEPA 4 was the designated implementation agency. UNIDO has recently become more active and has developed a pipeline of about 14 enterprises, mainly, in the commercial refrigeration sector. Regarding UNDP's strategies and project preparation activities, the UN agency has traditionally worked on the foam sector and continues to do so in Mexico. As noted later on (para. 13) they will be conducting a market survey of ODS use in SMEs and approaches to their elimination. UNEP is not an agency that does actual project financing, but rather it focuses on institutional arrangements. The Bank expects strong demand in sectors such as MACs, commercial refrigeration users and halon areas where the other agencies are not as experienced. Table A Past Implementation Year Consumption ODP Phaseout (ODS I & II) ODP Phaseout ODP (mt) Projected Actual In percentages ODS III (Planned) 1992 10,298 % 1995 5,000 250 210 5 4 2000 2,500 620 25 (Est.) Project Objectives 11. The objective of the project is to continue to assist Mexico's transition into non-CFC technology. The project will help Mexico reach its objective by: (i) providing grant financing for implementation of already identified and to be identified cost effective ODS reduction or elimination subprojects, and (ii) financing local technical consultants to assist NAFIN and beneficiaries to identify, develop, implement and supervise ODS phaseout subprojects. Bank implemented project financing activities will be complementary to those of the other MP multilateral implementation agencies active in Mexico. Project Description 12. The project has two components: (i) an investment component under which approximately 20-40 subprojects are expected to be fully committed in 48 months after signing of the Umbrella Grant Agreement between the Bank and NAFIN; and (ii) a technical assistance component to supplement NAFIN's technical capabilities in ODS-related subproject technical review and supervision. Project preparation resources will be requested and channeled to NAFIN (see paras. 17 and 22). International technical consultants for subproject preparation will be contracted directly 5 by the Bank, in consultation with NAFIN, and financed through the MP Mexico project preparation budget. 13. Due to the small number of actual projects done on a case by case basis in Mexico MP operations to date, a significant number of projects exist to justify the use of the traditional approach for MP financing. Studies are contemplated to determine how best to target smaller consumers via sectoral approaches. UNDP has been given the mandate to undertake this work A list of potential subprojects has been identified with the assistance of industry associations and in conjunction with NAFIN, and Bank preparation missions (See Annex I). Subprojects, from all ODS use sectors for which sectoral guidelines have been approved by the MFEC, will be eligible for financing up to the amounts permitted by sectoral cost effectiveness threshold limits. Pending approval by the MFEC of policy guidelines, prepared by the Bank, for financing of conversion of commercial refrigeration users from CFC to non-ODS technologies, a strong pipeline of supermarket and other chain store conversions similar to those financed under OTF 21920 has already been identified. Full commissioning of the proposed US$12.57 million grant line at an assumed average cost effectiveness of US$20/kg/yr would result in annual phase out or reduction of approximately 620 MT ODP. The draft policy guidelines - based on case studies of demonstration projects - established a cost effectiveness ratio of US$22/kg which is within the parameters of the proposed grant effectiveness. Project Costs. Incremental Costs and Financing 14. The proposed OTF Grant Umbrella Line will be US$13 million, which includes US$12.57 million for OTF grants for investment projects (goods, works, and services, price and physical contingencies); NAFIN financial agent fee at 2.0% percent of disbursed OTF Grants for investment subprojects (US$250,000); NAFIN's travel and other administrative project expenses (US$130,000) at 1.0% of disbursed grant amount for investments; and technical assistance (US$50,000). The total project cost (Schedule A) of US$15 million includes in addition to the US$13 million OTF Grant, an estimated US$2 million of non-eligible incremental costs financed by beneficiaries, themselves, from equity or other financing sources. A pipeline consisting of eight subprojects in the commercial refrigeration equipment sector with a total of approximately US$6 million in incremental costs was identified during project preparation (See Annex 1). A large pipeline of commercial refrigeration user conversions awaits approval by the MFEC of eligibility guidelines for this sector. Eligible incremental costs (Annex 3) and OTF Grant amounts for individual subprojects will be determined during individual subproject preparation. Project Implementation 15. The Project will be disbursed through an OTF Umbrella Grant Agreement between the Bank and NAFIN, acting as Recipient for the United Mexican 6 States (UMS). Subgrant agreements will be entered into between NAFIN and subproject beneficiaries, based upon a model subgrant agreement to be approved by the Bank following approval of subproject grant amounts by the MFEC and subproject appraisal reports by the Bank. OTF Grants will be disbursed directly to suppliers by NAFIN on behalf of beneficiaries. Retroactive reimbursement of eligible expenditures incurred after 1993, up to a cumulative value of 40% of the OTF Grant (US$5 million), will be permitted, in accordance with MFEC's applicable policies 16. Executing Agency. NAFIN, as the designated executing agency will: (i) assist with promotion of subproject identification; (ii) administer funds allocated by the Bank through the OTF to the subprojects endorsed by NAFIN, and approved by the MFEC and Bank; (iii) evaluate financial viability of enterprises based on the eligibility criteria agreed with the Bank; (iv) disburse grants on behalf of subproject beneficiaries; (v) maintain project accounts and arrange project account audits; and (vi) supervise subproject implementation. NAFIN will receive a fee equivalent to 3.0% percent of disbursed grants for its services which includes a separate allowance for NAFIN's hiring of local consultant, travel and other direct expenses related to subproject preparation and supervision. A mid-term Review will be conducted within 24 months after effectiveness to assess project performance and, if necessary, adjust implementation arrangements. 17. Subproject Identification. Preparation and Implementation Procedures. For subproject identification, preparation, and implementation, NAFIN and beneficiary enterprises will be guided by the Subproject Preparation and Implementation Guidelines (Annex 2), by the Guidelines for Preparation of Project Documents, Appraisal Reports, and Completion Reports (Annex 3), and by the Eligibility Criteria, Incremental Cost, and Cost Effectiveness Thresholds (Annex 4) specified by the MFEC, all as contained in the Project Operations Manual to be prepared by NAFIN and to be condition of OTF Grant Agreement Effectiveness. During the second half of each calendar year, NAFIN- INE will develop a work program for the following year, including specific sectors and potential beneficiaries, for which project preparation funds will be requested. 18. Subproject identification will be a cooperative effort among enterprises, NAFIN, industry associations, and technical consultants. When a potentially eligible subproject has been identified, NAFIN will transmit a concise project summary to the Bank. Through mutual consultation, the Bank, NAFIN and INE will decide if the proposed project meets MP eligibility standards. INE will also assess its environmental impact. If positive, NAFIN and a technical consultant will meet with the beneficiary enterprise to decide on a project preparation schedule, and level of external preparation assistance, if any, required by the enterprise. The enterprise will also be instructed on the measures to take to prepare the project for approval by NAFIN and transmittal to the Bank for OORG review. 7 19. The Montreal Protocol list of eligible activities, indicative list of categories of incremental costs, and MFEC decisions, all-'of which are consolidated in the MF "Policies, Procedures, Guidelines and Criteria" of February 1997, will guide the eligibility selection process. The principal criteria for subproject approval will be: i) suitability of the replacement technology proposed; ii) cost effectiveness and compliance with sectoral cost effectiveness thresholds (Annex 4); iii) enterprise financial health; iv) implementability; and v) consistency with national ODP phase out strategy. 20. Once identified, a three step process (Annex 2) will be employed to prepare subprojects for submission to the Bank and the MFEC, and eventual disbursement: i) screening for OTF eligibility; ii) GOM endorsement, OORG review, and MFEC approval, based upon an enterprise prepared Project Document (Annex 3); and iii) execution of a subgrant agreement between NAFIN and the enterprise, based upon the Subproject Appraisal Report (Annex 3). INE, through UCCI, will provide the official endorsement of the GOM on a no objection basis for subprojects that are to be presented to the Bank for OORG review and subsequently to the MFEC for funding consideration. UCCI, in its role as lead agency for implementing the country ODS phase out program, will be consulted by NAFIN to verify that subprojects are consistent with MPEC eligibility and cost effectiveness criteria as well as environmental legislation. 21. Beneficiary enterprises will be responsible for preparation and implementation of their subprojects, including engineering and procurement, for compliance with all relevant environmental regulations, and for acquisition of necessary permits. 22. Under the project preparation advances, technical consultants may be contracted by NAFIN, subject to Bank no objection, to advise and assist potential beneficiaries with project preparation and supervision. International consultants for sub-project preparation, if required, will be contracted by the Bank, in consultation with NAFIN, outside the scope of the Grant Agreement, and funded through the Bank's MP project preparation budget for Mexico. Procurement and Disbursement 23. Procurement of goods, works, and services will be in accordance with Bank Procurement Guidelines (January 1995, as revised in January and August 1996), as further specified in Schedule B. Consultants will be selected in accordance with the Bank's Guidelines for the Use of Consultants (January 1997). Selection of individual consultants contracted by NAFIN under the technical assistance component will be by "Selection Based on Consultants Qualifications." Consultants used by project beneficiaries will be selected through competitive commercial practices. 8 24. Disbursement Procedures will be as specified in Schedule B. A Special Account (SA) of US$1.0 million (equivalent to about four months of estimated expenditures) will be established in NAFIN's name at the Banco Central de Mexico. Supervision and Reporting 25. NAFIN will be responsible for overall project and individual subprojects' supervision. INE will monitor enterprise compliance with environmental and safety standards. NAFIN will: (i) prepare semi-annual progress reports for the Bank beginning June 1998, with information copy to INE; (ii) submit an annual project audit report prepared by an independent auditor acceptable to the Bank; (iii) monitor enterprise compliance with equipment disposal agreements, as per subgrant agreement; (iv) prepare subproject completion reports in collaboration with the enterprises upon final implementation of each subproject; and (v) notify the Bank of any significant delays and problems with subproject implementation. Enterprises will agree not to transfer old ODS-using equipment to another location nor to another enterprise, nor to revert to ODS consuming technologies. 26. The Bank's supervision will include field visits to current and prospective beneficiaries, discussion with NAFIN of project implementation; and review of progress and audit, and subproject appraisal reports.. The Bank will also review with INE Mexico's overall progress in implementing national ODS phase out, and the activities of other MF implementing agencies (UNDP, UNIDO, UNEP) in order to avoid duplication of effort in relation to the Bank MP project in Mexico. Supervision mission factory visits will monitor subproject implementation, compliance with environmental and safety standards and training, and evaluation of project performance according to ENVGC project monitoring criteria. Bank supervision mission teams will consist of the Project Task Manager, and technical consultants as required. Environmental Considerations 27. The overall project objective is protection of the stratospheric ozone layer through financing of measures which will eliminate or reduce emissions of ODS. The transition to non-ODS technologies or substitution of ODS with other chemicals may involve other environmental risks and safety risks such as use of flammable substitutes or, in the case of solvent subprojects, increased waste water discharges. Sponsoring enterprises will be responsible for meeting emissions standards, preparing impact statements, and obtaining environmental clearances from INE as required by Mexican law, and consistent with World Bank environmental guidelines. INE will ensure that subprojects have complied with the above environmental requirements before officially submitting subprojects to the Bank for OORG approval. The overall ODS Phase Out III Project is classified as a Category B (OD 4.01). The environmental data sheet is shown in Annex 5. 9 Project Sustainability 28. If a subproject has resulted in a substitution of a zero or low ODP application fbr an ODS, the subproject can be considered sustainable, as it is unlikely, given the momentum of industry transition and future CFC availability, that a reconversion back towards an ODS would take place. By this standard, all of the subprojects which will be financed under this proposed follow up operation, as were those of OTF 21920, will be sustainable. Institutional sustainability for NAFIN's project management team will be assured by the disbursement based financial fee, and earmarked budget for expenses. Lessons from Previous Bank Experience 29. The most applicable lessons which are being incorporated in this proposed operation are those which were learned during implementation of OTF 21920. These are: i) devising a flexible mechanism for contracting appropriate external consultants - US$50,000 of the OTF Grant Request will be earmarked specifically for this purpose, and NAFIN will finance VAT obligations for domestic consultants from non-MF sources; international consultants for project preparation and supervision will be contracted by the Bank outside the scope of the Grant Agreement, and financed through the Bank's project preparation budget; ii) modifying project implementation arrangements to focus all subprojects processing responsibility in an experienced financial agent for multilateral loans, NAFIN; while requiring of INE only its institutionally mandated policy oversight role; iii) subgrant agreements will be entered into by NAFIN and the subproject beneficiary, without requiring the signature of INE; and iv) securing support at the appropriate level of government to ensure that executing agencies, through a combination of MPMF and counterpart support, will have the human and financial means to implement the operation successfully. Rationale for Funding from the MF 30. Mexico is a nation with a large number of ODS consuming domestic and export industries; and with many commercial and industrial refrigeration, and central air conditioning installations. Its accelerated phase out schedule is being driven to a certain extent by the phase out schedule for export industries in non-Article 5 countries, and by impending CFC scarcities both in Mexico and elsewhere. The rationale for funding will continue to be that which it has been -a means of providing a financial incentive to those users who will phase out sooner than mandated by the 10 year grace period granted to Article 5 nations, or sooner than warranted by current domestic market conditions, or financial compensation to those who face threat of loss of export markets in the absence of conversion to zero or low ODP technology. Project Benefits and Risks 10 31. Benefits: , The project will assist Mexican industry and commercial refrigeration users to implement an accelerated ODS phaseout program by providing grant financing for cost effective subprojects. The target objective, assuming an overall cost effectiveness ratio of US$20/kg/yr, will be to phase out 625 MT of ODS, or approximately 14 percent of Mexico's 1995 ODP consumption. 32. Risks: The greatest risk follows from the substantial phase out activity which has already taken place in Mexico, i.e. difficulty in developing a sufficient pipeline of cost effective eligible projects to fully commit the proposed US$12.5 million grant line. All large domestic and some commercial refrigerator manufacturing factory conversions have already been financed, as have a substantial number of rigid polyurethane producers. Yet, annual ODP consumption is still close to 5,000 MT, of which an estimated 65% is in refrigeration and air conditioning user applications. The three commercial refrigeration user conversions financed by OTF 21920 have demonstrated that commercial refrigeration user conversion strategies incorporating a combination of near drop in retrofits, replacements, and recycling are both technically feasible and cost effective. Recent consumption patterns in Mexico and elsewhere indicate that this is the last user application of substantial consumption for which MFEC sector eligibility guidelines have not been promulgated. It has already been confirmed that a strong demand exists among other large chain store, restaurant and cold storage commercial user operations, and among numerous smaller users who will be able to develop cost effective conversion subprojects. Project preparation field work has also revealed significant quality control problems among smaller producers of bottle coolers who converted from R-11/12 to HFC-134a/HCFC-141b with inadequate technical assistance. 33. Risk Mitigation: The possibility of not being able to develop a sufficient pipeline will be mitigated through an aggressive campaign of project promotion and subproject identification by NAFIN. Such a possibility will be completely eliminated if the MFEC will approve policy guidelines for financing of commercial refrigeration user conversion subprojects which are now being developed by the Bank for the consideration of the MFEC. Agreements Reached During Negotiations 34. During negotiations the following agreements were reached. i) The Bank will be able to work in any ODS consuming sector and beneficiary enterprises will be free to choose the implementing agency they wish, provided no previous commitment with a particular MP agency exists. ii) INE will review subprojects' environmental impact and risk assessment as established under Mexican law. 11 It was also agreed at negotiations on the following condition of effectiveness: i) an Operating Manual and a model subgrant agreement will be prepared by NAFIN. The manual will describe operating procedures and administrative requirements to be observed by Grant participants, including NAFIN-INE relationship. Staff Review Arrangements 35. This MOD was prepared based on the results of preparation missions of April 1997 and June 1997, respectively and other preparatory activities funded by the administrative budget for the Mexico MP ODS Phase Out III Project. The report was prepared by E.Vanegas (LCSFP) Task Manager and D. Rhatigan, (Consultant). F. Batista and M. Gonzalez (Consultants) assisted in identification and development of subproject pipeline. Peer reviewers are J. Von-Amsberg (LCC5C) and K. Kitamori (ASTEN). A. Brizzi is the LCSES Sector Leader for Mexico and 0. Lafourcade (LCC1C) is the Country Department Director. 12 Schedule A Page 1 of 1 MEXICO MONTREAL PROTOCOL ODS PHASEOUT III PROJECT Indicative Project Costs and Financing Project Costs (US$ 000) Component A. Subprojects Already approved 0 To be appraised and approved 12,570 Financed by Beneficiaries 2,000 Total Component A 14,570 Component B. Agent fees, Administration and TA To be approved 430 Total Component B 430 Total Incremental Costs (Components A and B) 13,000 Total Project Costs (Components A and B) 15,000 Financing Plan (US$ 000) Total Percentage Ozone Trust Fund (OTF) 13,000 87 Beneficiaries 2,000 13 Total (OTF and Beneficiaries) 15,000 100 13 Schedule B Page I of 4 MEXICO MONTREAL PROTOCOL ODS PHASEOUT PROJECT Proposed Procurement Arrangements 1. Procurement of goods and works will be in accordance with World Bank Procurement Guidelines (January 1995, as revised in January and August 1996), and hiring of consultants will be in accordance with the guidelines of January 1997 and as specified herein. Beneficiaries will be responsible for procurement of all goods, works and services for their subprojects. NAFIN will review compliance with agreed procedures and consult with the Bank, if interpretation is required. 2. The following procurement procedures will apply for this Project: Goods and Works (i) Contracts of US$2 million or more equivalent (excluding proprietary packages) will be procured under International Competitive Bidding (ICB) procedures. (ii) Contracts for procurement of goods and works (consisting of installation and commissioning of equipment) costing less than US$2 million may be procured by grant beneficiaries in accordance with commercial practices acceptable to the Bank; (i.e., shopping) consisting of competitive selection based on at least three quotations from eligible and qualified contractors and suppliers. Direct contracting may be used for procurement of proprietary items in accordance with Clause 3.7 of the procurement Guidelines. Consultants (i) Consultants selected by NAFIN in an amount not to exceed US$50,000 will be hired on the basis of the consultants qualification, in accordance with the guidelines published by the World Bank in January 1997. (ii) Consultants selected by prospective beneficiaries will follow competitive commercial practices acceptable to the Bank. 14 Schedule B Page 2 of 4 Prior Review Prior review of proposed awards and final contracts of good and works will be as follows: (i) All contracts for investment projects will be reviewed by NAFIN, on a prior review basis. Procurement procedures and documentation for all contracts costing over US$ 2 million, the first two contracts procured through shopping and all direct contracting for proprietary equipment will be subject to prior review. (ii) Terms of Reference for all consultants contracted by NAFIN, or by prospective project beneficiaries will be subject to the Bank's prior review. In addition, full Bank prior review shall apply in the case of contracts costing US$100,000 or more equivalent (in the case of consulting firms) and US$50,000 equivalent or more (in the case of individual consultants). All contracts of any type financed through this grant will be subject to ex-post review by the Bank. 15 MEXICO MONTREAL PROTOCOL ODS PHASEOUT PROJECT Proposed Disbursement Arrangements 1. Disbursement will follow the procedures given in the Disbursement Handbook published by the Bank in 1992, and in the Disbursement Letter which will be issued after the Grant Agreement is signed. Once the Grant agreement has been approved and is effective, and after receipt of a withdrawal application from NAFIN, the Bank will make an initial deposit of up to US$1 million into the Special Account (SA) opened by NAFIN at an institution acceptable to the Bank. NAFIN will be responsible for submitting the applications for withdrawal and replenishment to the Bank 2. Replenishment of the SA and all other disbursements would be made against full documentation, except for expenditures under contracts valued below US$2,000,000 equivalent for goods or works- the procurement of which is not subject to prior review - or for consulting contracts valued below US$100,000 for a consulting firm, or below US$50,000 for individuals for which the Bank will accept Statement of Expenditures (SOEs). Supporting documents for SOEs including contracts, procurement documentation, and evidence of payment should be kept in a central location for examination by independent auditors and Bank staff during supervision missions. 3. The expected disbursement schedule is 4 percent in FY 98, 23 percent in FY 99, 62 percent in FY 2000, 85 percent in FY 2001, and 100 percent in FY 2002 (Estimated Disbursement Schedule). The project is expected to be completed by December 31, 2001, and the closing date shall be June 30, 2002. Between NAFIN and the Subproject Enterprises 4. Fully documented disbursement requests will be sent by the beneficiary to NAFIN who, after approving the contract, or after receiving the Bank's no objection, when required, will issue payment directly to the supplier on behalf of the beneficiary. Disbursement for Operational Costs 5. For projects with grant funding of incremental operating costs as well as investment costs, NAFIN will indicate in the subproject appraisal report, the phased disbursement plan for operating cost grants. 16 Schedule B Page 4 of 4 6. After one year of operation following disbursement of investment costs, an enterprise awarded funding of incremental operating costs will provide NAFIN with documentation verifying the realized level of annual incremental operating costs, which will then be compared with the estimate upon the subgrant approval was based. If the documentation is satisfactory to NAFIN, it will approve disbursement of the lesser of the realized level, or the subgrant amount originally allocated for incremental operating costs. Disbursement Table 7. Withdrawal of the Proceeds of the OTF Grant: The table below sets forth the categories of items to be financed out of the proceeds of the OTF Grant, the allocation of the amounts of the OTF Grant to each category and the percentage of expenditures for the items to be financed in each category. Allocation of OTF Grant Proceeds Category Amount Allocated Financing (excl. local taxes, tariffs and duties) (US$ million) (percent) Subgrants 12.57 100 NAFIN Fee 0.250 100 NAFIN Travel .13 100 Technical .05 100 Consultants Total 13.000 100 Estimated Disbursement Schedule (US$ million) Bank FY 1998 1999 2000 2001 2002 Annual .5 2.5 5.0 3.0 2.0 Cumulative .5 3.0 8.0 11.0 13.0 Cumulative 4 23 62 85 100 (% of Total) 17 Schedule C Page 1 of 1 MEXICO MONTREAL PROTOCOL ODS PHASEOUT PROJECT Timetable of Key Project Processing Events Preparation (time taken): 10 months Prepared by: Bank, NAFIN, enterprises First Bank Mission: Feb. 1997 Departure of Bank Pre-appraisal Mission: June 1997 Departure of Bank Appraisal Mission: September 1997 Negotiations: October 1997 Bank Approval: October 1997 Planned Date of Signing: November 1997 Planned Date for Effectiveness: November 1997 Planned Completion Date: December 31, 2001 Planned Closing Date: June 30, 2002 18 Annex 1 Page 1 of 2 SUBPROJECT PIPELINE 1. Active pipeline development for the proposed operation commenced during the June 1997 pre-appraisal mission and will be ongoing during subsequent preparation of the umbrella grant. The priority sectors selected for subproject identification were commercial refrigeration equipment fabricators, and mobil (auto, truck) air conditioner (MAC) fabricators, sectors in which few projects have been approved to date in Mexico. Targeted visit programs were organized with the assistance of CANACINTRA (Mexico City), CAINTRA (Monterrey), and CAREINTRA (Guadalajara), regional private sector industry organizations. For coordinating purposes among international implementing agencies and INE , any Mexican enterprise which has been identified previously by one of the agencies will be dropped from the others' pipeline. 2. Monterey Area Identified Sub Projects. Three subprojects were identified; Climas de Mexico S.A., a MAC factory conversion project (US$ 4 million cost estimate); and TORREY/FERSA and CRIOTEC, fabricators of commercial refrigeration cabinets, which will request US$ 350,000 and US$ 500,000 respectively. 3. Production Sector. QUIMOBASICOS, the sole remaining Mexican producer of CFC- 11/12, indicated that it now will actively consider premature shut down in return for MF production sector closure compensation grants, a reversal of its previous position. Subsequent missions will continue dialogue with QUIMOBASICOS concerning this issue. 4. Mexico City/Central Mexico. Six firms were visited. All fabricate bottle coolers for Coca Cola distributors, in addition to other clients. Due to pressure from Coca Cola, which set a world wide 1994 deadline for ODS phase out in all coolers bearing the Coca Cola logo, all have either converted or attempted to convert without MF support. Unfortunately, among the smaller producers, technical assistance has been deficient to the level where quality control has become a generalized problem, particularly with regard to rigid polyurethane foam insulation. According to some firms, one principal domestic polyol supplier simply switched from R- 11 to HCFC-141 with little or no technical support to users. There is clearly a need for investment in quality control upgrading on both insulation and refrigeration sides in almost all installations visited, even though they have already reduced or eliminated CFC consumption. 19 Annex 1 Page 2 of 2 5. Firms visited and estimated cost of quality control improvements are as follows: EPECSA - US$ 200,000; VICTER US$ 200,000; Reno Refrig.(Guadalajara) - US$ 200,000; Refrig. Rodriguez (Guadalajara) - US$ 110,000; Ref. Guty (Guadalajara) - US$30,000. Outline profiles of these potential subprojects (in Spanish) are located in Annex 1 of the Aide Memoire of June 1997. 6. Vendo de Mexico (Mexico D.F.) and its subsidiaries in San Juan del Rio (PTM) and Celaya (Ref. Nieto) are together the largest producers of bottle coolers in Mexico. All produce 50-60,000 units/yr each, using up to date technology and quality control. Vendo has been completely converted since 1994 and Ref. Nieto since 1996, whereas PTM still requires a foam side conversion, the estimated capital cost of which is approximately US$ 500,000. Nieto is currently discussing a retroactive grant with UNIDO. PTM informs that UNIDO has also approached them and preparation work is underway. 7. Commercial Refrigeration User Sector. Pending approval by the MPEC of eligibility guidelines for this sector, a substantial pipeline of supermarket and other chain store operations will be available, beginning with GIGANTE and Commercial Mexicana, two large supermarket chains. 8. Competition with Other Implementing Agencies. The UNDP has been implementing agency for over US$ 10 million of projects in the rigid polyurethane foam and domestic refrigeration sectors. UNIDO had been previously inactive in Mexico until its recent activity in the commercial refrigeration sector. For remaining phase out projects, NAFIN/INE have agreed not to designate implementing agencies by sector, and that beneficiary enterprises will be free to choose the implementing agency they wish. 20 Annex 2 Page 1 of 3 SUBPROJECT PREPARATION AND IMPLEMENTATION GUIDELINES 1. Subprojects will be identified, prepared and implemented in accordance with the following subproject guidelines, and consistent with the MPMF's Report of February 1997, which consolidates all policies, procedures, guidelines and criteria for financing of ODS phase out activities. These indicative guidelines, which will be the basis for NAFIN's Project Operations Manual, may be modified by mutual agreement between the Bank and NAFIN. Subproject Identification 2. Subproject identification will be a cooperative effort among enterprises, NAFIN, industry associations, technical consultants and INE. When a potentially eligible subproject has been identified, the enterprise and NAFIN will prepare a brief project summary for transmittal to the Bank. NAFIN will review the subproject summary to evaluate the proposed subproject's conformity with eligibility and cost-effective threshold guidelines (Annex 4). 3. Through mutual consultation, the Bank and NAFIN will decide if the proposed project meets MP eligibility standards. If positive, NAFIN and a technical consultant will meet with the enterprise to establish a project preparation schedule, identify external preparation assistance requirements, if any, and to inform the enterprise concerning project preparation requirements. NAFIN will also carry out a preliminary assessment of the enterprises financial viability, and ability to use an OTF Grant productively. Subproject Preparation 4. Project Document. The subproject beneficiary (enterprise) will be responsible for preparing the pre-investment studies, a draft Project Document per Annex 3 of the guidelines, and an executive project summary (EPS). Technical consultants will assist by informing enterprises about: (i) alternative technologies; (ii) Montreal Protocol (MP) Fund eligibility and financing criteria; and (iii) the MP Fund application process. Technical consultants, also, will assist enterprises to prepare subproject proposals, if required. 5. OORG Technical Review. Subprojects under preparation should be reviewed on an informal basis by the appropriate technical expert in the World Bank's Ozone Operations Resource Group (OORG). OORG comments will be provided to NAFIN and to the concerned enterprises, and project design and/or cost estimates revised accordingly. A 21 Annex 2 Page 2 of 3 formal OORG approval will be required for all subprojects before being submitted by the Bank to the MFEC. 6. GOM and World Bank Endorsement. Once approved by NAFIN, subprojects will be transmitted to INE, through UCCI, for official GOM endorsement. INE will submit its comments to NAFIN within ten working days or official approval. After final OORG technical review and verification of eligible incremental costs, and agreement by the Bank and NAFIN as to the requested OTF Grant amount, subprojects will be submitted by the Bank to the MFEC for funding approval. MFEC Approval 7. Review and approval of funding for subprojects will be based upon the Project Document, to which will be appended the final OORG Review and any other relevant technical reports. Subproject Appraisal/Subgrant Agreement/Approval for Disbursement 8. Funding approval by the MFEC signifies only that an OTF Grant in the amount approved will be made available to the Bank to finance project implementation, based upon the subproject's technical design and compliance with MFEC eligibility and cost effectiveness criteria. Disbursement of funds for implementation will require: i) approval by the Bank of the subproject's detailed implementation arrangements; ii) demonstration by the enterprise that it possesses the requisite financial ability to use the grant productively; and iii) execution of a subgrant agreement between NAFIN and the beneficiary enterprise. The basis for the Bank's final approval will be a review and approval of the Subproject Appraisal Report, and the draft Subgrant Agreement. 9. Subproject Appraisal. The World Bank and NAFIN will appraise subprojects to ensure that all technical, cost and implementation issues raised before, during, or after OORG review and MFEC approval have been addressed. Subproject beneficiaries will be responsible for preparing a draft Appraisal Report consistent with the content and format outlined in Annex 3, and submitting to NAFIN for its review and transmittal to the Bank. 10. Subgrant Agreement. After the Subproject Appraisal Report has been approved by the World Bank, NAFIN will finalize the Subgrant Agreement. The final draft Subgrant Agreement between NAFIN and the beneficiary enterprise will follow a standard 22 Annex 2 Page 3 of 3 model approved by the Trustee and will be submitted by NAFIN to the World Bank for its no objection. Disbursement may proceed after Subgrant Agreement signature. 11. Sbproject Implementation. Enterprises will: i) be responsible for executing the subproject in accordance with the agreed subproject implementation plan; ii) prepare and submit periodic progress reports, consistent with Bank Project Monitoring Guidelines to NAFIN. NAFIN will: i) ensure that the beneficiary enterprises follow specified procurement procedures prior to authorizing disbursements; ii) "monitor enterprise compliance with environmental and safety standards including any equipment disposal agreements"; iii) notify the Bank of any significant delays and problems with subproject implementation. As required, NAFIN will receive technical support for subproject supervision from the Bank and consultants. 12. Sibproject Completion. In conjunction with enterprises, NAFIN will prepare a Subproject Completion Report (Annex 4) after implementation and start up of each subproject. A technical audit will be conducted by an independent consultant to verify that the enterprise has successfully implemented the subproject, and achieved the desired ODP phase out objective. 23 Annex 3 Page 1 of 4 GUIDELINES FOR PREPARATION OF PROJECT DOCUMENTS, APPRAISAL REPORTS AND COMPLETION REPORTS A. Project Documents The Project Document, which will be the basis for review for funding approval of subprojects by NAFIN, the World Bank, including OORG, and the MFEC, will be prepared according to the following guidelines for Project Document content and format: 1. Standard Cover Sheet. Brief project summary per standard cover sheet format. The summary must specify aim of project, ODS phased out, substitute technology, and implementation time frame. 2. Project Objectives. Brief description of project ODS/ODP phase out objectives. Specify if the project is new or has already been implemented. Indicate quantity of ODS (expressed as ODS and ODP) phased out, directly attributable to the subproject, on an annual and total basis. 3. Sector Background. i) Consumption of ODS in the sector: Include recent growth trends and latest available official information on the sector - ensure that the ODS used in the Sector reflects latest information endorsed by the government, as the ODS use in the Country Program might not be up to date; ii) Description of all major manufacturers/users in the sector; iii) Impact of project on ODS consumption for achieving 1999 freeze - Table on ODS consumption and impact of approved projects to be provided by the country; and iv) Current status of regulatory action, policy changes, etc. Include restrictions on ODS use, or tariff or revenue measures recently announced. 4. Enterprise Background. i) Brief history of the enterprise including financial performance; ii) Percentage of domestic ownership; iii) Production profile and brief process or production description; iv) Include table of last three years annual production; v) export profile, if any. 5. Project Description. Existing equipment briefly described. Full description of project scope, technology, and source of supply, divided into: (i) components relating to ODS phaseout and (ii) other components, such as expansion of output or product upgrading. Baseline information per PD Annex 5. 24 Annex 3 Page 2 of 4 6. Justification for Selection of Alternative Technology. Review of technical feasibility of subproject should describe the before implementation and projected post implementation situations. A complete equipment list including one line specifications and cost quotations/estimates will be shown in PD Annex 5. If relevant, the issue of conversion to transitional substitutes such as HCFCs should be addressed here; wording could be as follows: " the enterprise has been informed of the interim nature of technology, and will not seek additional funding from MPMF at a later date to convert to zero-ODP technologies." 7. Project Costs. Total estimated subproject costs, including non incremental costs, disaggregated into: (i) one-time capital and training costs; (ii) annual estimates of net operating costs or savings, if any, for the first four years of operation; (iii) retroactive expenditures eligible for reimbursement, if any. A 10% price contingency will be added to arrive at the total cost estimate. 8. Calculation of Incremental Operating Costs (ioc). Results here; calculation in PD Annex 2. Production level must be based on the most recent full year or the average of the last three years of production, and using current and projected production costs. Incremental costs should be calculated for the full period of eligibility allowed by the ExComm for the given sector, even if the resulting total exceeds the sectoral threshold value. 9. Cost Effectiveness (ce). Calculated CE in terms of US$/kg ODP/yr to be presented here and on cover page and compared with sectoral CE threshold (calculation shown in PD Annex 3). 10. Proposed Multilateral Fund Grant. Grant amount will be based on eligible incremental costs, adjusted for non-national ownership and exports to non-Article 5 countries. Neither capacity expansion nor technological upgrades can be financed by the MPMF. If either or both is incidental to conversion to non-ODS technologies, deductions from total cost to arrive at eligible incremental cost will be made on a case by case basis. The baseline information in PD Annex 5 should be sufficient to evaluate and justify the proposed grant amount. The Financial Agent's Fee is not to be included in calculating the proposed grant. 11. Project Implementation. The implementation schedule should include realistic lead times for MPEC approval, appraisal and Sub Grant Agreement signing before date of first disbursement. Indicate any non-conventional procurement arrangements (e.g. sole source procurement) if already known. 25 Annex 3 Page 3 of 4 12. Environmental Assessment. Indicate nature of environmental impact, required mitigation, and type of clearances likely to be required. 13. OORG Technical Review. Attach final OORG approval. Project Document (PD) Annexes Annex 1 Summary of Capital Investment Costs Annex 2 Calculation of Incremental Operating Costs Annex 3 Calculation of Cost Effectiveness (a) ODS Savings (b) Cost Effectiveness Calculation Annex 4 Environmental Assessment Annex 5 Baseline Information: (a) List of equipment addressed in the proposal; (b) Equipment specification, e.g. capacity performance, etc.; (c) Age of equipment; (d) Future use of the equipment; disposal plan, if replaced. Other Annexes as may be necessary, e.g. Annex 6 Technology Transfer Agreement Annex 7 Engineering Supplement: Quotations from suppliers, etc. B. Appraisal Reports After approval for funding by the MFEC based on the Project Document, the beneficiary enterprise, with the assistance of NAFIN shall prepare a Subproject Appraisal Report which will be the basis for drafting of the Subproject Grant Agreement between NAFIN and the enterprise. Appraisal Reports follow the same general format and content as Project Documents, but are supplemented to provide more detail in the following areas: (a) Financial analysis of the enterprise. Limited to the essential necessary in NAFIN's judgement to determine that the enterprise is sufficiently viable to use the grant productively. i.e., that it is likely to remain in operation for five years after start up of the non-ODS process. Rate of return calculations only if necessary to determine above, or to estimate incremental operating costs. (b) Procurement arrangements. List major contracts, and those requiring Bank prior review. 26 Annex 3 Page 4 of 4 (c) Financial Plan divided into: (i) incremental costs to be financed by the OTF Grant; (ii) equity/loan amounts provided by the enterprise. (d) Disbursement schedule and amounts, including retroactive. (e) Subproject implementation arrangements including a description of management, engineering and technology acquisition, installation, operation, marketing, disassembling of phased out/unused ODS equipment and an installation schedule. (f) Environmental assessment. Compliance with any environmental assessments or clearances required by Federal, State, or Municipal regulations will be verified. (g) Reporting requirements agreed to with enterprises. All enterprises must submit a Subproject Completion Report after full disbursement and start up of the funded project. (h) Subgrant Agreement. NAFIN will submit the draft Subproject Appraisal Report, and draft Subgrant Agreement between NAFIN and the enterprise to the Bank for its review and approval prior to executing the Subgrant Agreement. Disbursement of OTF Grant Funds for the subproject may commence after signature of the Subgrant Agreement. C. Subproject Completion Reports The Subproject Completion Report which will be completed for each subproject subsequent to implementation will report the realized (as compared with the originally amounts) for the following: i) ODS and ODP phase out impact; ii) capital costs; iii) incremental operating costs; iv) technology choice; v) equipment disposal; vi) project impact; and lessons learned. Particular attention will be given to any significant differences between projected and realized values and costs. 27 Annex 4 Page 1 of 3 ELIGIBILITY CRITERIA, INCREMENTAL COSTS, AND SECTORAL COST EFFECTIVENESS THRESHOLDS The following are the general eligibility and cost effectiveness criteria which subprojects must meet in order to be eligible for financing from the Ozone Projects Trust Fund (OTF). These guidelines are indicative in nature, and subject to interpretation depending upon the circumstances of individual subprojects, and specific decisions of the MFEC. A. General Subproject Eligibility Criteria Selection of subprojects will be consistent with eligibility criteria, and sectoral cost effectiveness thresholds established by the MFEC. To be eligible for funding consideration, projects must result in a direct and demonstrable reduction or elimination of ODS consumption in Mexico; should be cost effective; and based on environmentally sound, commercially available definitive zero ODP or transitional low ODP substitute technologies for the substances controlled by the Montreal Protocol. B. Definition of Eligible Incremental Costs OTF Grant amounts are based on the evaluated incremental capital and operating costs of an ODS reduction or elimination phase out proposal. Incremental capital costs are defined as the difference between the total costs of installing replacement non-ODS technology of similar capacity and sophistication as the existing ODS technology, less the normal replacement investment costs which would have been incurred to maintain the existing technology at its current operating level. Incremental operating costs are defined as the net operating costs for the non-ODS technology less the net operating costs of the ODS technology. In cases where there are no significant incremental operating costs, the OTF grant amount will be based on the incremental capital costs. The total incremental costs will equal the net present value of incremental capital costs plus the net discounted incremental operating costs. To determine OTF Grant 28 Annex 4 Page 2 of 3 amounts, incremental costs will be adjusted to reflect the local share of ownership, exports, and sectoral cost effectiveness thresholds. Duties and Taxes. Import duties and other direct taxes are not considered as incremental costs and are not eligible for OTF grant finding. The detailed indicative list of categories of eligible incremental costs is given in Annex I of the London Amendment to the Montreal Protocol, and is reproduced in Annex VIII.3 of "Policies, Procedures, Guidelines and Criteria of the MF for the Implementation of the Montreal Protocol" of February 1997. C. Cost Effectiveness The cost effectiveness (or efficiency) of the financial mechanism is a measure of how efficient it has been in utilizing funds put at its disposal to meet its objectives. The most simple method used to calculate cost-effectiveness of subprojects calculates total incremental costs of a subproject, excluding cost of safety where applicable, divided by the amount of its Ozone Depleting Potential (ODP) to be phased out. Cost effectiveness is defined by the following formula: C= IC + IO M [ODP] where: C = Cost-effectiveness IC = Incremental capital costs (covered by the Fund) 10 = Net incremental operating costs (covered by the Fund) M [ODP] = Amount of ODS to be phased out annually (weighted kg ODP) D. Cost Effectiveness Thresholds The following sector and subsector cost-effectiveness threshold values will be applied to determine maximum eligible OTF Grant amounts for subprojects submitted to the MFEC. No threshold amount for commercial refrigeration user conversion subprojects has as yet been defined. 29 Annex 4 Page 3 of 3 Sector US$/kg ODP Aerosol Hydrocarbon 4.40 Foam General 9.53 Flexible polyurethane 6.23 Integral skin 16.86 Polystyrene/polyethylene 8.22 Rigid polyurethane 7.83 Halon General 1.48 Refrigeration (factory conversions) Commercial 15.21 Domestic 13.76 Solvent CFC-113 19.73 TCA 38.50 30 Annex 5 Page 1 of 2 ENVIRONMENTAL DATA SHEET FOR PROJECTS IN THE IBRD/IDA LENDING PROGRAM Country:Mexico Project ID No.:MX-MT-50429 Project: Montreal Protocol Ozone Depleting Substances Phaseout III Project Appraisal Date: 9/23/97 Total Project Cost ($m): 15 VP Approval Date: 11/05/97 Managing Division:LCC I C Sector: Environment Lending Instrument: Grant from Ozone Trust Fund Status: FY98/Grant Date for receipt of EA by Bank: Not Applicable EA Category: B Date Assigned: 9/92 Date Data Sheet Prepared/Updated: October 7, 1997 Major Project Components: Under the project, grant funding will be extended to subprojects for the phaseout of ozone depleting substances (ODS) in all sectors for which sectoral guidelines have been approved by the MFEC. Major Environmental Issues: (Identified or suspected in project) The project deals with existing enterprises and relatively small quantities of ozone depleting substances. There are potential safety issues associated with substitute chemicals. Also, other environmental impacts may include the atmospheric release of substitute chemicals, in particular hydrocarbons. Other Environmental Issues: (of lesser scope associated with project) There may be some environmental issues depending on the alternative chosen to replace the ozone depleting substance. An example would be the use of aqueous-based substitutes in solvent subprojects, thereby increasing wastewater discharge. Proposed Actions: (to mitigate issues described above) Sponsoring enterprises will be responsible for meeting emissions standards, preparing impact statements and obtaining environmental clearances as required by Mexico law, and consistent with World Bank environmental guidelines. INE will assure that subprojects have complied with the above environmental requirements before subprojects are officially submitted to the Bank for OORG approval. Also, extensive safety reviews and training will be provided by international experts and incorporated in the subprojects, as the case may require. 31 Annex 5 Page 2 of 2 Justification/Rationale for Environmental Category: The overall project objective is protection of the stratospheric ozone layer through financing of measures which will eliminate or reduce emissions of ODS. No major environmental impacts are anticipated. No resettlement is anticipated. Reporting Schedule: Category A Environmental Assessment: Start-up date, date for first draft, and current status. Category B: Is there a separate environmental analysis? If yes, when is it due? Not applicable. Remarks: None Signed by: \ Maritta Koch-Weser Director, ESSD Signed by: \ Adolfo Brizzi Sector Leader, ESSD Signed by: \ Enrique Vanegas Task Manager's Initials 32 Annex 6 Page 1 of 1 PERFORMACE INDICATORS 1. One of the first activities of NAFIN will be to prepare an annual business plan, starting first year of execution, describing, inter alia, project targets which will be used by the Bank to monitor performance: i) ODP to be phased out; ii) disbursements; iii) time to signing subgrant agreement; iii) time to first disbursement; iv) cost effectiveness; v) time to physical completion; vi) time to financial completion. 2. This information will be part of the semi-annual progress reports to be submitted to the Bank and will outline results on the agreed performance indicators. INE will receive copies of these reports, since its role is to monitor the progress being made in ODS phase out in accordance with the Country Program.