Document of The WorldBank FOR OFFICIAL USEONLY ReportNo: 32795-MX PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDLOAN INTHE AMOUNT OFUS$25MILLION TO THE UNITED MEXICAN STATES FOR THE MODERNIZATIONOF THE WATER AND SANITATIONSECTOR -TECHNICAL ASSISTANCE PROJECT July 7,2005 Finance,Private Sector and Infrastructure Mexico and Colombia Country Unit Latin America and CaribbeanRegion 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 Bankauthorization. CURRENCY EQUIVALENTS (Exchange Rate Effective April 22,2005) Currency Unit = Mexican Peso MX$11.06 = US$1 US$0.09 = MX 1 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities APAZU Water Supply, Sewerage, and Sanitation inUrban Areas -Agua Potable, Alcantarillado y Saneamientoen Zonas Urbanas BANSEFI Financial Bank of National Savings and Services - Banco del Ahorro Nacional y Sewicios Financieros CEA State Water Comission - Comisidn Estatal del Agua CNA National Water Comission - Comisidn Nacional del Agua cso Civil Society Organizations DIMP Decentralized InfrastructureManagement Project DIRD Decentralized InfrastructureReform and Development Program DIP Integral Diagnosis of Planning - Diagndstico Integral de Planeacidn GICA IntegratedManagement of Ground Water Reservoir and River Basins - Gestidn Integrada de Cuencasy AculjCeros G O M Government of Mexico PER Infrastructure Public Expenditure Review NRW Non-Revenue Water PMIR Irrigation Modernization Program - Programa de Modernizacidn Zntegral del Riego PMU Project Management Unit PROMAGUA Programfor the Modernization of Water Utilities - Programa para la Modernizacidn de Organismos Operadores deAgua PROMMA Water Management Modernization Program - Programa de Modernizacidn del Manejo del Agua RED1 Recent Economic Developments inInfrastructure SFA Water Financial System - SistemaFinancier0 del Agua SHCP Ministry of Finance and Public Credit - Secretaria de Hacienda y Crkdito Pu'blico S I L Sector Investment Loan TAL Technical Assistance Loan UAPS Water Supply and Sanitation Unit - Unidad de Agua Potable y Saneamiento wss Water Supply and Sanitation Vice President: Pamela Cox Country Managermirector: Isabel Guerrero Sector Director: MakhtarDiop Task Team Leader: Gustavo Saltiel FOR OFFICIALUSEONLY MEXICO MODERNIZATION OF THE WATER AND SANITATION SECTOR TECHNICAL ASSISTANCE PROJECT PROJECT APPRAISAL DOCUMENT Latin America and Caribbean LCSFW Date: July 7,2005 Team Leader: Gustavo Saltiel Country Director: Isabel Guerrero Sectors: Water Supply (50%); Sewerage (50%) Sector Managermirector: Makhtar Diop Themes: Regulation and Competition Policy (P); Corporate Governance (S); Infrastructure Service for Private Sector Develop (S) Project ID: PO91695 Environmental screening category: C Lending Instrument: Specific Investment Loan Safeguard screening category: N/A [XI Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing: USD$25m Pronosedterms: FSL I FinancingPlan (US$m) Source Local Foreign Total BORROWER 30.2 0.00 30.2 INTERNATIONALBANKFOR 25.O 25.0 RECONSTRUCTION AND DEVELOPMENT Total: 30.2 25.O 55.2 Borrower: Government of Mexico ResponsibleAgency: Comision Nacional de Agua (CNA)- Unidad de Agua Potable y Saneamiento (UAPS) Av. Insurgentes Sur #2416 Col. Copilco El Bajo Delegacion Coyoacan 04340, Mexico, D.F. Tel: 5174-4503 5174-4504 This document has a restricted distribution and may be usedby recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without World Bank authorization. Annual 5.O 8.0 8.0 4.0 Cumulative 5.0 13.0 21.0 25.0 Expectedeffectiveness date: 10/31/2005 Expectedclosing date: 06/30/2009 Does the project depart from the CAS incontent or other significant respects? Ref. PAD A.3 [ ]Yes [XINO Does the project require any exceptions from Bank policies? Ref. PAD 0.7 [ ]Yes [XINO Have these been approved by Bank management? E ]Yes [ IN0 I s approval for any policy exception sought from the Board? [ ]Yes [ IN0 Does the project include any critical risksrated "substantial" or "high"? Ref. PAD C.5 [ ]Yes [XINO Does the project meet the Regional criteria for readiness for implementation? Ref. PAD 0.7 [XIYes [ ] N o Project development objective Ref. PAD B.2, TechnicalAnnex 3 The proposed project objectives are: (i)to assist with the modernization of Mexico's water supply and sanitation sector through strengthening the sector policies at the federal and state level; and (ii) to develop and demonstrate replicable models of successful and sustainable provision of water and sanitation services, by supporting selected service providers and the municipalities of which they are a part in improving operational and financial performance. Project description: Ref. PAD B.3., TechnicalAnnex 4 The proposed Project consists of two major components, as follows: A. Modernization of the Water Supply and Sanitation Sector Institutions (14%) This component includes the following main subcomponents: (i) NationalInformationSystem (ii) Evaluation of existing programs inthe water and sanitation sector (iii) Strengthening of the State Water Commissions (CEAs) (iv) Training Component (v) Dissemination B. Modernization of Water Utilities (86%) This component will support the development of replicable modelsfor an efficient and sustainable provision of water supply and sanitation services ("success cases"). The component will fund efficiency improvement programs in selected municipalities to strengthen and bring utilities to reasonable levels of management, operational efficiency and financial viability Which safeguard policies are triggered, if any? Ref. PAD 0.6, TechnicalAnnex 10 .. 11 Significant, non-standard conditions, if any, for: Ref. PAD C.5 Board presentation: August 2005 Loadcredit effectiveness: October 2005 The Contruto de Munduto between the Borrower and BANSEFIhas been duly executed b y the parties. ... 111 MEXICO MODERNIZATIONOF THE WATER AND SANITATIONSECTOR. TECHNICAL ASSISTANCEPROJECT CONTENTS Page A. STRATEGICCONTEXTAND RATIONALE .................................................................. 1 1. Country and sector issues .................................................................................................... 1 2. Rationale for Bank involvement.......................................................................................... 2 3. Higher level objectives to which the project contributes..................................................... 3 B. PROJECTDESCRIPTION .................................................................................................. 3 1. Lending instrument.............................................................................................................. 3 2. Project development objectives and key indicators............................................................. 4 3. Project components.............................................................................................................. 4 4. Lessons learned and reflected in the project design ............................................................ 5 5. Alternatives considered and reasons for rejection............................................................... 6 C. IMPLEMENTATION ........................................................................................................... 7 1. Institutional and implementation arrangements................................................................... 7 2. Monitoring and evaluation of outcomeshesults .................................................................. 8 3. Sustainability ....................................................................................................................... 8 4. Critical risks and possible controversial aspects ................................................................. 8 5. Loan conditions and covenants............................................................................................ . . 9 D APPRAISAL SUMMARY . .................................................................................................... 9 1. Economic and financial analyses......................................................................................... 9 2. Technical............................................................................................................................ 10 3. Fiduciary ............................................................................................................................ 11 4. Social ................................................................................................................................. 11 5. Environment ...................................................................................................................... 12 6. Safeguard policies.............................................................................................................. 12 7. Policy Exceptions and Readiness ...................................................................................... 12 Annex 1:Country and Sector or Program Background .......................................................... 13 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies ..................24 Annex 3: Results Framework and Monitoring ......................................................................... 27 Annex 4: Detailed Project Description ...................................................................................... 30 Annex 5: Project Costs................................................................................................................ 39 Annex 6: Implementation Arrangements .................................................................................. 40 Annex 7: FinancialManagementandDisbursement Arrangements ...................................... 42 Annex 8: Procurement Arrangements ....................................................................................... 46 Annex 9: Economicand FinancialAnalysis .............................................................................. 50 Annex 10: SafeguardPolicy Issues ............................................................................................. 55 Annex 11:Project Preparation and Supervision ...................................................................... 56 Annex 12: Documentsinthe Project File .................................................................................. 57 Annex 13: Statementof Loans and Credits ............................................................................... 61 Annex 14: Country at a Glance .................................................................................................. 64 Annex 15: MapIBRD# 34141 ..................................................................................................... 66 A. STRATEGICCONTEXTAND RATIONALE 1. Countryandsector issues 1. In recent years, the attention of the Government of Mexico (GOM) has shifted from macroeconomic reforms - concentrated in the search for economic stability - to institutional reforms, particularly those aimed at satisfying basic needs. The Government of Mexico regards the water sector as a matter of national security, and the provision o f adequate water supply and sanitation i s considered an important element inthe quest to reduce poverty inMexico. 2. Between 1990 and 2001, important progress has been made as regards to service coverage, with water supply and sewerage coverage levels reaching 90% and 77% respectively. However, as the studies conducted under the Infrastructure Public Expenditure Review (IPER) show, this undeniable achievement masks several important weaknesses in the sector's performance: Poor service quality, as measured - among others - by a high incidence of intermittent supply affecting 55% of connected households according to the 2000 census. Low operating efficiency, as measured b y high levels o f non-revenue water (NRW) averaging 44% compared to less than 23% for well-run utilities and for the best utilities inMexico. Low collection efficiency estimated at 69%, meaningthat on average 31% of the amounts billed are never paid, compared to 98% for well-run utilities inMexico and abroad. The causes for this weak performance are multiple and include: Politicization and lack of autonomy of municipal service providers, coupled with short electoral cycles at the municipal level (3 years), resulting in absence of long-term planning, haphazard execution of investment programs, insufficient maintenance, frequent turnover of senior staff and degraded technical capacity, in particular in smaller service providers. Absence of a coherent policy formation framework. The Federal Government has undertaken important steps to strengthen the sector through the provision of matching grants, technical assistance for Master Plans and the promotion of private sector participation. However, progress has been uneven and existing programs are fragmented and of varying quality. The performance of states i s equally uneven, while most municipalities are unprepared for the task. As highlighted by the Infrastructure Expenditure Review (IPER), there i s a need for better vertical coordination inthe sector. Absence of incentives for improved performance in the management of federal and state financing programs. Limitedincentives for improved cost recovery and creditworthiness. Sector fragmentation into often very small municipal service providers, while inter- municipal utilities are quasi inexistent, resulting in a loss o f economies of scale. While the first issue - politicization of service providers - i s widely acknowledged in Mexico as a root problem of the sector, the other issues still remain to be widely recognized as 1 key problems in the sector by the major stakeholders. Moreover, even when these problems are recognized, the solutions do not seem to be clear. Recent modifications to the National Water Law constitute a step in the right direction. These changes affect both water resources management as well as water supply and sanitation. The Law now mandates the decentralization of Comisidn Nacional del Agua (CNA) through the creation of Basin Agencies, a change that i s expected to primarily affect the water resources management function of CNA. The law also mandates the development of a national Water Financial System (Sistema Financiero del Agua, SFA),covering water resources management, irrigation as well as water supply and sanitation. In water supply and sanitation, the SFA provides an opportunity to analyze and possibly reform existing federal sector programs in order to strengthen their incentives for better performance. 5. For a more detailed description of institutions, performance, recent legal amendments and existing programs in the water and sanitation sector inMexico please see Annex 1. 2. Rationalefor Bank involvement 6. Although the sector financing needs are large, at this moment it would seem premature to develop a large investment or adjustment operation. This was indicated by the senior management of CNA and Secretaria de Hacienda y Cridito Pu'blico' (SHCP), by requesting a modest modernization loan with an important element of technical assistance at this point, with the expectation that it would set the stage for a substantial financing operation tentatively envisaged inthe Country Partnership Strategy for FY08. 7. The Bank i s well positioned to assist G O M in improving the institutional framework in the sector and in strengthening selected utilities based on: (i)ts global experience in water and i sanitation sector reform, public expenditure management, private financing mechanisms, water resources management, environmental issues, poverty targeting and its ability to integrate across these diverse and related topics; (ii)its comprehensive analytical work in Mexico, including the recently concluded Infrastructure Public Expenditure Review - (PER), diagnostic studies for the SFA, an assessment of the legal, regulatory and institutional framework of the water sector, a study on poverty and water, and Master Plans carried out for 12 towns; and (iii) previousits engagement through lending for the water and sanitation sector in Mexico. In recognition of these assets, G O M has requested Bank support inthe form of a technical assistance loan (TAL). 8. The Secretary of Finance (SHCP) has indicated concerns about the new legal framework related mainly to water resources management and the envisaged financial autonomy of the planned Basin Agencies. These concerns could, however, be addressed in the law's implementing regulations (Reglamentos). The activities and studies to be financed under component 1 are expected to assist in the elaboration of the Reglamentos concerning water supply and sanitation. SHCP considers that the proposed technical assistance from the Bank would be essential to support a long-term vision for the sector along the following lines: 0 More sustainable, efficient and autonomous service providers; 0 Reduced politicization o f the sector; IMinistry of Finance 2 0 Federal and state sector institutions providing adequate support to service providers, linkingassistance to performance; 0 Improved monitoring and evaluation. 9. Lastly, it i s important to note that at present, key federal programs (e.g. Agua Potable, Alcantarillado y Saneamiento en Zonas Urbanas (APAZU) and Programa para la Modemizacidn de Organismos Operadores de Agua (PROMAGUA) are ostensibly targeted to support new infrastructure works. At the same time, significant investments are directed to non- reforming municipalities in response to political pressures, which has diluted incentives for states and municipalities to participate in such programs. Hence, the value added of this operation stems from the fact that it will make assistance available to water utilities on the basis o f multi- annual commitments for efficiency and sustainability improvements and it will foster a broad sector debate about the nature and scope of the reform program. 3. Higher level objectives to which the project contributes 10. The project will support one of the pillars stated in the CAS (April 15, 2004): "to strengthen institutions" by assisting the Government of Mexico to develop tools and instruments needed to induce local authorities to improve financial sustainability and efficiency of water supply and sanitation services. 11. The project will also test a range of approaches and assistance to improve water supply and sanitationservices, the lessons of which will be applied inthe redesignof existing programs and of the development of new programs which will promote efficiency and more directly target poor households/communities. Moreover, monitoring and targeting will be essential elements in the design of the Information System and the evaluation of existingprograms will feed the future design of the SFA. B. PROJECTDESCRIPTION 1. Lendinginstrument 12. The instrument proposed for this operation i s a Technical Assistance Loan (TAL) in response to the evident need to build capacity in the federal and state entities directly concerned with implementing water sector policies, financing, and reforms. The municipal utilities in charge of delivering water and sanitation services ("Organismos Operadores") also require technical assistance in order to provide the services in a sustainable manner, through the improvement of their technical, commercial and financial performance. 13. The Project will finance technical assistance needed to perform studies and activities related to the implementation of the reforms fostered by the new Water Law. In parallel, it will provide funds to finance a series of demonstrative projects at the utilities level, including urgently needed activities over the next 3 years that will enhance the performance of the utilities and hence serve as pilots for a broader reformprogram at the utilities level. 14. Through this approach, that will entail working with the Federal, State and Municipal levels, the project will further promote the improvement of the overall performance of the water sector and will foster the application of innovative approaches to service provision. The experience gained and the development of "success cases" will lay the foundation to prepare a large investment operation (scheduled for FY 08). 2. Project developmentobjectives and key indicators 15. The proposed project objectives are: (i) improve the efficiency o f Mexico's water to supply and sanitation sector through strengthening the sector policies at the federal and state level; and (ii) develop and demonstrate replicable models of successful and sustainable to provision of water and sanitation services, by supporting selected service providers and the municipalities of which they are a part in improving operational andfinancial performance. 16. Achievement of Project Development Objectives will be confirmed through the following key indicators: (i) improved Water and Sanitation Sector Information System to include funds received from CNA and with the possibility of registering funds from other sources and their impact; (ii) consensus reached with a majority of the State Water Commissions on their new roles and the establishment of an accreditation program for key water utilities personnel; and (iii) improved performance of pilot water utilities measured as net revenues per volume of water produced. 3. Project components 17. The proposed Project will provide funding for specific studies and activities covering different areas where technical assistance i s needed. The total project cost i s estimated at US$ 55.2 million (Bank's contribution, US$25.0 million). The project's components and amounts are as follows: Component 1.Modernization of the WSS Sector Institutions (US$2.9 million) 18. This component will provide assistance to the Federal and State Governments for developing a series of studies and activities associated to the strengthening o f the sector policy makingand planning institutions through: Support to the implementation of recent changes to the Water Law, b y providing an assessment of the current water supply and sanitation programs, an essential input for the design of the overarching financing framework for the sector (Le. Sistema Financier0 del Agua); Strengthening of the existing national water and sanitation information system; support of the State Water Commissions (CEAs) in the strengthening of planning, technical assistance and overseeing capacities through a series o f activities to be implemented under an agreement between CNA and Asociacidn Nacional de EmpresasdeAgua y Saneamiento (ANEAS); development of an accreditation program; and dissemination of the lessons learnedinthe project 4 A more detailed description of the activities to be financed under this component can be found in Annex 4. Component 2. Modernization of Water Utilities (US$47.7 million) 19. This component will support the development of replicable models for an efficient and sustainable provision o f water supply and sanitation services ("success cases") through institutional reforms and improvement of utility performance (technical, commercial and financial). This component will fund efficiency improvement programs in selected utilities to strengthen and bring utilities to reasonable levels of management, operational efficiency and financial viability. In some cases, and given the necessary social, political and financial conditions, this program would pave the way for some form o f private sector participation in service delivery and financing. 4. Lessons learned and reflected in the project design 20. Bank experience in the Region shows that for sectoral reforms to happen there needs to be broad debate and consensus over the type, scope and direction of the reforms, avoiding to be over-ambitious and rather setting realistic objectives and time-frames. The recent reforms to the water law in Mexico constitute a first step that now requires further development, acceptance, and ownership by the relevant stakeholders and policy makers. Whilst we acknowledge that major changes and the full implementation of the mandate contained in the law will take time to materialize, we hope that this operation will help to create momentum by producing the analytical information, involving the relevant institutions and establishing an appropriate forum for the debate to take place. This will inturn allow us to remain engaged in the dialogue with the government in a critical period o f sector development in Mexico. These lessons are reflected in the type of loan recommended (TAL) and the staging of assistance. 21. The Infrastructure Public Expenditure Review (PER), recently completed, presents a series of recommendations, some of which are relevant for the proposedoperation: . Better outcomes can be obtained by improving the manner in which investment programs are designed, projects selected, and funded. Across sectors, federal budgetary resources tend to be allocated annually by formulae, and for large projects based on ex-ante benefit-cost calculations undertaken by the project proponents. Even with limited competition, regulation, and financial-market involvement, however, the government could still discipline operators' performance b y making the size and type o f transfers depend on the progress in realizing genuine improvements to efficiency and service. Such performance-based allocation could be applied in setting up the Sistema Financiero del Agua, which was stipulated in the recent modifications to the national water law but i s yet to be established. The proposed project will support specific studies to review the main sector programs. 5 . Greater accountability and better information on performance outcomes are required. There i s little systematic information on whether projects have had good or bad results, and such information rarely has any budgetary consequences. While sectoral agencies and sub-national governments are demanding greater autonomy in investment planning, execution and financing, there i s not the effective accountability that should accompany autonomy. Indeed, without reliable, verifiable information on actual performance, it i s risky to respond positively to demands for more autonomy. Rather, increments to autonomy should depend on improvements in accountability. The measures needed for performance tracking and information disclosure include standardized reporting on performance of water companies through an expansion of CNA's Sistema de Znformacidn Nacional. The TAL will finance a series of activities aimed at streamlining the existing information system. 5. Alternatives considered and reasons for rejection 22. Different Bank assistanceoptions considered were the following: Limiting Assistance to AAA. The breadth of issues which demand urgent attention and sustained support required to work with key actors to put in place sound policies and programs exceed what several pieces of AAA can hope to provide. The Mexican authorities have expressed a willingness and desire to borrow for this purpose, despite the budget ceilings and lack of "additionality" that characterize Bank lending to Mexico. Sectoral Adjustment Lending. In the current context that is characterized by poorly focused programs and the recent modifications to the National Water Law, there i s a high degree of uncertainty concerning the implementation of the reforms mandated by the law. Thus, an adjustment operation would not be opportune at this juncture, given that an important period of time could elapse before the Federal Government implements the reforms mandated under new legal framework. Sectoral Investment Lending to States.Buildingon the experience with direct lending to the State of Guanajuato for multiple infrastructure sectors under the Decentralized Infrastructure Reform and Development Program (DIRD), WSS loans to states that are committed to reforming their WSS sector were considered, since municipalities and states are key players in the WSS sector. However, such lending would be premature pending the results o f reforms at the federal level (see above), the further experience with the DIRD and willingness of SHCP to agree to further state-level lending. Technical Assistance Loan (TAL). After considering the formal request of the Mexican Government to prepare a Technical Assistance Loan and reviewing the different options, the team recommendation i s to proceed with the appraisal of the TAL as a first step in a more comprehensive assistance strategy. Once the implementation of the decentralization process i s underway, the preparation of an investment lending or any other operation could be considered, in accordance with progress on improved policy formulation and program design and the recommendations of the studies and activities to be executed under the TAL. 6 C. IMPLEMENTATION 1. Institutionalandimplementationarrangements 23. The implementing agency will be CNA, more specifically the "Unidad de Agua Potable y Saneamiento" (UAPS), which i s part of the "Subdireccidn General de Infraestructura Hidra`ulica Urbana" (SGMU) of CNA. The UAPS will be supported by "Subdireccidn General de Programacidn " and "Subdireccidn General de Administracidn " in administration and disbursement matters, respectively All of them have extensive experience working with Bank and IDB projects. As i s the case of other Bank-financed projects in Mexico, Banco del Ahorro Nacional y Sewicios Financieros - BANSEFI will act as a financial agent. BANSEFI's responsibilities will include: (i)management of the special account; (ii)processing the disbursement requests; (iii) consolidating the progress reports and submitting them to the Bank; and (iv) organizing and carrying out of project audits. 24. For implementation of the "Strengthening of the State Water Commissions (CEAs)" Sub- component, CNA will sign an agreement with the National Association of Water Utilities (ANEAS)2through which ANEAS will organize a series of workshops and seminars that will bring together federal, state and municipal water sector decision makers in order to build consensus about reforms at the state level. CNA has estimated that the agreement with ANEAS will total circa U$400,000. 25. A Task Force will be established including representatives of CNA, BANSEFI, ANEAS, SHCP as well as participating service providers. The role of this Task Force will be to assure coordination among the institutions participating inthe operation. 26. For component 2, the envisaged process for selected utilities to participate in the program i s the following: Once compliance with eligibility criteria has been assessed, CNA will formalize the participation of the relevant municipalityhtility through the signature of a Memorandumof Understanding. Based on existing planning documents, the relevant municipalityhtility will submit a proposal to CNA and the Bank for an efficiency improvementprogram outlining priority actions to be funded under the project. Should a planning document not be available, the elaboration of the latter could be funded out of Project proceeds. DuringProject preparation, it was agreed with CNA that the proposal to be submitted by the relevant municipality or utility will include a financial analysis of the proposed efficiency improvement program as well as a procurement plan for the execution of the investments in compliance with Bank guidelines. Once the proposed efficiency improvement program has been assessed by CNA - and the Bank - and agreed upon with the relevant municipalityhtility, the Federal and State Governments will subscribe the annexes3 of a Coordination Agreement (Financial SupportAgreement),which will establish on a multi-annual basis, amongst other things, the 'ANEAS:"Asociucidn Nucional de Empresas de Agua y Suneamiento" (in Spanish) is a non-governmental organization that represents the water utilities throughout Mexico. "Anexos Tkcnico y de Ejecucidn" 7 agreed-upon actions and requirements for utility modernization and the technical and financial support to be provided by the Federal Government to achieve it. The corresponding municipalityhtility would also subscribe the agreement. 0 The executing agent as indicated in the Agreement (Utility, Municipality) will be responsible for the execution of the Project and fulfillment of the Agreement. Appropriate control and incentive mechanisms will be put into place - for example utilities which meet their obligations for efficiency improvement would be eligible for further investment support by the Federal Government. 2. Monitoringand evaluation of outcomes/results 27. Monitoring will be undertaken based on bi-annual progress reports b y the PCU and Bank supervision missions. The progress reports will summarize progress in procurement, physical execution as well as inthe achievement of impact indicators as listedunder Annex 3. 28. The indicators will be chosen among the same indicators that CNA will use to monitor progress in the sector at large, through its existing information system that will be strengthened through Component 1of this operation. 3. Sustainability 29. The sustainability of the first component will be ensured by integrating activities closely with already existing initiatives and by ensuring full client ownership. The financial sustainability of these activities at the federal level i s not expected to be an issue, given their limited size compared to the overall functions and budget of CNA. At the state level, careful consideration will be given to the size of activities and the financial capacity of the CEAs that are expected to continue activities beyond the duration of the project. 30. The activities under the second component are designed to strengthen the financial, technical and commercial capacity o f the participating utilities and are thus designed with sustainability criteria in mind. The overall level of investments foreseen in each utility i s fairly small compared to their past investment and future investment programs, thus reducing the likelihood that operation and maintenance o f the relatively small works would exceed the capacity of the utilities. However, the risk of poor sustainability o f the investments at the local level i s real and i s further discussed below. 4. Critical risksand possiblecontroversialaspects anges in municipa anges in government. govemment Promotion of institutional reforms that increaseutility autonomy. Activities under ComDonent 1(water 8 sector information system and accreditation program) to provide incentives for improved management. Limitedcapacity of the current Capacity buildingactivities included Moderate managementand staff of selected in the project design utilities and CEAs Reluctance to engage in or discuss Project design focuses on capacity Moderate reforms at the national level in building at the utilities level and anticipationof the 2006 Presidential efficiency improvements. At the elections federal level, the project will finance a series of studies relatedto the modifications of the Water Law. Additionally, working with SHCP as a partner, in addition to CNA, would help further the impact of the TAL, particularly inthe area of the program design and implementation. Delays in approvals for or insufficient Assurance that budgetary funds at the Low counterpart funding federal level would be included inthe 2006 budget For state and municipal counterpart funds, useof the mechanisms established under an existing program (APAZU),under which sub- sovereigns have shown to be able and willing.to contribute CP funds 31. Based on the results of the Financial Management Assessment (FMA), Financial Management (FM) did not identify any major risks; consequently FM does not request the inclusion of any FM-related risk. 5. Loanconditionsand covenants 32. There i s one condition of effectiveness: "the Contrato de Mandato between the Borrower and BANSEFIhas been duly executed by the parties". 33. Based on the results o f the FMA, FMdoes not request the inclusion o f any FM-related effectiveness condition. D. APPRAISAL SUMMARY 1. Economicand financial analyses 34. A financial analysis and a simplified economic analysis was carried out for a sample subproject from the first group of participating utilities. As shown in Annex 9, the base case of the analysis shows important net economic benefits above US$ 14 million, a financial internal rate of return o f 52% and an economic rate of return of 60%.The sensitivity analysis performed confirmed the robustness of the results, given that in the pessimistic scenario, positive economic 9 benefits of around US$7.3 million and still very high financial - 32% - and economic - 37% - returns would be reached. The project will generate additional economic benefits, including intangible and more difficult to measure ones such as: 0 Long-term environmental benefits and increased customer satisfaction 0 Improved reliability and leakage management will reduce the level of illegal tampering and so reduce the cost of distribution maintenance. 0 The Project will also have an impact on increasing the flexibility in the operational handling of the systems and improved pressure management, which will increase the economic life of the distribution network and therefore reduce the cost of maintenance 35. A complete discussion on the methodology and detailed results of the financial and economic analysis can be found inAnnex 9. 2. Technical 36. The investment needs of the utilities in Mexico are very large. The specific needs and investment requirements in a number of municipalities and utilities Organismos Operadores (00)have been recently assessedin detailed diagnostic studies prepared under PROMAGUA anda PHRDgrant. The first one finances the elaborationof a comprehensive planning document with a view of incorporating the private sector in service delivery (Diagnostic0 Integral de Planeacidn, DIP), which outlines investment needs in all areas of service provision under a business-plan approach - and the PHRD grant has financed the preparation of thorough and in- depth Master Plans which outline the broad investment requirements for both water and sanitation services in 12 selected municipalities. This Project, however, will focus on financing those activities that will produce an immediate impact on the performance of the utilities in the next 3 years. These will include - though not limited to-: organizational reforms, training for managerial and operational staff, community participation programs; updates of the technical cadastral systems, equipment, macro and micro meters, rehabilitation of water and sewer networks, leak detection and control programs, efficiency improvement plans, updates of the commercial cadastral systems, modernization o f accounting and financial systems, procedures for meter reading, billing and collection, modifications to the tariff structure and levels, and information systems. 37. The Project i s envisaged to finance programs for efficiency improvement and modernization in different municipalities. Five utilities have already been pre-selected to participate inthe Project and 2 utilities have produced detailed efficiency improvement programs as part of project preparation. The criteria used for the selection of these utilities include the following: 0 Geographic representation of the different regions o f the country 0 Small and medium-sized municipalities (between 25,000 and 600,000 inhabitants) 0 Strong likelihood of stability and continuity inthe municipal authorities and/or management team of the utility Commitment of the utility and/or municipality to participate inthe program 10 0 Compliance with legal requirements, such as payment of exploitation rights (Derechos de Uso) and any other necessary legal conditions. 38. As stated above, the activities to be financed are focused around programs for improvement o f operational and financial performance. Each of the participating utilities i s currently defining - in collaboration with CNA, an efficiency-improvement investment program with priority actions to be financed under the Project. Inthe majority of the cases, the needs have already been identified in the corresponding Diagndstico Integral de Planeacio'n (DIP)s and Master Plans and the utilities are now working on prioritizing the different actions. It is envisaged that the implementation of the Project in each municipality will require three phases: (i)identification of priority actions to be financed under the project; (ii)preparation of detailed studies and project design; and (iii) execution or implementation of the actions. The first phase has been completed before appraisal for 2 of the participating utilities. Phases I1and I11will be funded out of the proceeds of the loan duringproject implementation. 3. Fiduciary 39. As part of project preparation an assessment of the financial management capacity of CNA to implement the Water Sector Modernization Technical Assistance Loan has been conducted and can be found inthe Project Files. 40. The Bank carried out a Financial Management Assessment (FMA), which involved ensuring that project design allows for an appropriate level of transparency, facilitating oversight and control while also supporting smooth implementation. The FM team concludes the following: (i) although some project-specific mechanisms will need to be implemented for the new project, existing financial management arrangements for the Integrated Irrigation Modernization Project, which i s currently under implementation, are operational and considered to form a sound basis for FM in this project; and (ii) although FM risk i s Moderate, project implementation should be accompanied b y a close supervision that allows early detection of financial management issues and ensures the proper use of the project funds. The risk i s moderate based on the FMA of the proposed project and, on record of the project which i s under implementation e.g. timely submission of information, external auditors had issued "unqualified" opinions, adequate disbursements' processing, Bank recommendations related to FMsupervision missions had been properly implemented by CNA. The main risk i s associated to the flow of funds for decentralized operations involving the Organismos Operadores at the Municipal level. Additional information on FMis provided in annex 7. 41. Annex 8 includes an explanation o f the Procurement capacity assessment and related issues. 4. Social 42. The project i s expected to have a positive social impact since it will provide the basis for developing sustainable utilities that will be in a position to provide better quality services to existing and new customers. 11 43. Also, on a demonstrative basis, the project will promote the inclusion of civil society in decision making processes in at least one of the participating utilities, as a means to generate a sense of ownership among the users of the services, thus facilitating implementation of reforms, and as an instrumentto foster a more transparentrelationship betweenthe utility and the public. 5. Environment 44. The project has been rated as Category C by the Regional SafeguardsAdvisor. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No ~ Environmental Assessment (OPBP/GP 4.01) [I [XI Natural Habitats (OPBP 4.04) [ I [XI Pest Management (OP 4.09) [ I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [I [XI Involuntary Resettlement (OPBP 4.12) [ I [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I [XI Forests (OPBP 4.36) [ I [XI Safety of Dams(OPBP 4.37) [I [XI ProjectsinDisputed Areas (OPBP/GP 7.60)* [I [XI Projectson International Waterways (OP/BP/GP 7.50) ' [ I [XI 7. Policy Exceptions andReadiness 45. The operation complies with all applicable Bank policies. * By supporting the proposed project, the Bank does not intend to prejudice thefinal determination of theparties' claims on the disputed areas 12 Annex 1:Country and Sector or ProgramBackground MEXICO: Modernization of the Water and Sanitation Sector -Technical Assistance 1.Institutional Structure ofthe MexicanWater andSanitationSector 1. The last section describes recent changes to the water law, including decentralization and the Sistema Financier0 del Agua. 2. According to the Mexican constitution, since the decentralization of 1983 the primary responsibility for delivery of water supply and sanitation services rests with local government, constituted by 2,446 municipalities and almost 200,000 villages and hamlets. Concurrently, other important sector responsibilities remain vested at the state and federal levels. Through a recent amendment of the National Water Law, the basin agencies (Organismos de Cuenca) are deemed to play an important role in the sector . Functions o f institutions at various levels of government overlap. Inpractice each level has different responsibilities in each state and in each municipality or village. 3. Institutions and their responsibilities at the three levels of government and at the basin level are described in more detail below, beginning at the local level. 1.1LocalLevel 4. At the local level, as a result of different policies and programs, a variety of institutional arrangements for service provision can be found. Broadly they can be classified in four different categories as shown inTable 1below: 0 Reformed service providers (organismos operadores), including both public and private utilities; 0 unreformed, but successful service providers; 0 unreformed and largely unsuccessful arrangements, including service providers and direct provision by municipalities; 0 other arrangements, including cooperatives and private small-scale providers. 5. The most frequently occurring category i s the third one of unreformed and largely unsuccessful arrangements with limited commercial orientation and limited autonomy from the municipality. It i s estimated that up to 90% of Mexicans with access to water and sewer services are served by operators inthis category. 13 Table 1:Institutional Arrangements for Water and Sanitation Service Provision Commercial Autono Autonomy Occurrence Examples Size Ownership orientation my from from the the state local governm government ent Reformed Sen :e Providers A1 Fully Yes Yes Yes Infrequent Public autonomous (Sonora), Municipal Le6n Provider (Guanajuat A2 Mixed Yes Yes Yes One case Mixed Municipal- (Coahuila) Private Provider A3 Yes Yes Yes Two cases Canch, Large Private Concession Aguascalie ntes B1 Local Yes No Yes Infrequent Baja Large Public Provider California, dominated by State B2 State To some No Yes Infrequent QuerCtaro, Vario Public Water extent Nuevo us Commission Le6n T Largely Unsuc :ssful Arrangements c1 Partly TO some Usually Very Frequent Public autonomous extent IIYes limited (about 360) Municipal Provider c 2 Limited I Usually No Frequent Public Nominally Yes (about 620) sized autonomous Municipal Provider C3 Provision No Frequent Public by (thousands) Municipality D Limited Yes Yes Infrequent Small Cooperative Cooperatives Source:WorldBankcompilation 14 6. Most larger cities and some smaller towns have created decentralized municipal service providers (Organismos Operadores) with varying degrees of independence (categories C1 and C2). While service providers have their own legal personality and Board, in practice most are closely linked to the municipality which typically appoints most Board members and the service provider's Director (Category C2). According to CNA estimates, general managers of service providers hold their positions for an average of 1.5 years: and most commonly do not survive political changes, resulting in frequent reorganizations and changes in strategy, which immediately undo the potential effectiveness of the previous strategy. There often are close financial links between service providers and municipalities, such as the contracting of debt and the payment o f bills by the municipality on behalf of the service provider. Accounts are usually held on a cash basis, not on an accrual basis, and are seldom audited. There are usually no performance targets for the service providers. 7. Nevertheless, there are a few notable exceptions of service providers that are efficiently operated on a commercial basis. The best of these service providers self-finance a substantial proportion of their investments, have been rated by credit rating agencies (Categories A and B) and at least one - the service provider of Tlanepantla - has even issued a local currency bond. 8. In most smaller municipalities, however, water and sanitation services are performed directly by a municipal department (Category C3). The quality and efficiency of services in smaller municipalities tends to be lower than in larger municipalities. Inter-municipal service providers, which are a common institutional arrangement in some other countries to benefit from economies of scale in service provision among small towns or in large metropolitan areas, are quasi inexistent inMexico. 9. Inrural areas, water services are provided directly by local government (Category C3) or by user groups, which sometimes take the form of cooperatives (Category D). Insome cases, the state water commission provides services in rural areas at the request of villages or municipalities (Category B2). 10. Most larger service providers are members of Asociacidn Nacional de Empresas de Agua y Saneamiento de Mbxico (ANEAS). Founded in 1992, ANEAS represents the interests of service providers in the national political arena, promotes the exchange o f experiences among service providers, strives to strengthen the autonomy of service providers and promotes environmental awareness (culturadel agua). 11. The degree of private sector participation in water supply and sanitation in Mexico has been limited so far, and the results have been mixed. A large number of contracts awarded have been ended prematurely for a number of reasons. In the case of Built-Operate-Transfer (BOT)contracts, which account for both the highest share of PSP contracts and the highest cancellation rate, according to a study conducted in 1999, the main reasons for cancellation include: financial problems (38% o f cases), tariff issues (18%), political problems (14%), issues 4 Kemper,KarinE.and Oscar Alvarado, "Water," inMexico: a comprehensive development agendafor the new era, ed. Giugale, Lafourcade,andNguyen(WashingtonDC, World Bank, 2001), p. 629. 15 concerning a lack of transparency in the bidding process (12%), legal guarantees (10%) and technical problems(8%).5 1.2 State Level 12. At the state level, institutional arrangements and the legal framework vary substantially among the 31 states. In 20 states the State Water Commission (Comisio'n Estatal del Agua - CEA), an autonomous entity that i s usually under the authority of the State Ministry of Public Works, has an explicit mandate to support municipalities in the provision of services through technical assistance. In some states the CEA also monitors data on the performance of service providers, but seldom are these data aggregated into a comprehensive information system. The CEAs also have a role in channeling federal and state subsidies to service providers, although their level of discretion in administering federal funds i s limitedby the detailed operational rules of these funds. 13. However, the CEAs are not the regulators of service providers, since they do not approve tariffs. In a few states with important bulk water supply systems, the CEA also operates these systems. In 13 states, CEAs actually operate water distribution systems (Category B2). However, the number of municipalities i s limited and the localities are usually small, with a few exceptions such as in the state of Queritaro. Almost all CEAs also have attributions in terms of water resources management. Three states have not created CEAs and the relevant State Ministries directly fulfill some of the functions otherwise attributed to CEAS.~ Table 2: Comparison of Functionsof State Water Commissions inMexico and Functions of Water Regulators in Other Countries omisiones o Commissions or Servicios Publicos Source:World Bank Compilation Morales (1999),quoted in Solis et al. (2003), p. 223. It should be noted that "political" is defined narrowly as political problems arising because of a change in local or state government. Baja California, Tamaulipas and Yucath. 16 1.3 NationalLevel 14. At the national level, the Comisidn Nacional del Agua (CNA) is the apex institution of the sector. Its mission i s to "manage the nation's water resources with participation by the society, aiming at the sustainable use of resources". It also has major attributions in terms o f water supply and sanitation, such as the channeling of federal funds to the sector and the provision of technical assistance. CNA i s formally under the authority of the Ministry of Environment (SEMARNAT), but enjoys a considerable degree of de facto autonomy. Its President i s nominated by the President of the Republic. Created in 1989 with a staff of 38,000 at the time, it now has 17,000 employees, most o f whom work in the agency's 13 regional offices and 20 state offices. 15. CNA plays a key role in administering the financial flows of the overall sector, including water resources management, irrigation as well as water supply and sanitation. 16. The Mexican Water Technology Institute (IMTA), which i s also under the authority of the Ministry of Environment (SEMARNAT) and was created in 1986, i s in charge o f research, development and transfer of water technologies. 17. A national training center for the staff of water and sanitation service providers, the Centro Mexicano de Capacitacidn en Agua y Saneamiento (CEMCAS), has been set up in 2000 with French assistance. The Center i s governed by a Board presided by CNA. 1.4 Basin Level 18. In addition to the local, state and national level, Basin Agencies and Basin Councils are expected to play an increasingrole in the Mexican water sector. The recently amended water law mandates a restructuring of key functions o f CNA at the basin level through the creation o f Basin Agencies (Organismos de Cuenca), which are administratively part o f CNA. So far, only three Basin Agencies have been functionally created and others are in the process of being created. It i s not clear if or to what extent the Basin Agencies will integrate the functions and the personnel of CNAs regional and state offices, thus introducing a considerable degree o f uncertainty into the restructuring process of CNA. 19. Inaddition to the BasinAgencies, the Basin Councils (Consejos de Cuenca) are supposed to play a key role in the administration of the Water Financial System (SFA) introduced through the recent amendment of the Water Law.7 Currently there are 25 Basin Councils covering almost the entire national territory. The Basin Councils' function i s to formulate and execute activities to improve water resources management and to develop water infrastructure in their respective basin.8 Most basin councils are of recent creation, the first one having been created in 1993 in the Lerma Basin and most others after 1999. More than half the members of the basin councils represent various levels of government, while up to half represent users and "society". The Basin 'The exact role of the basin level institutions in the SFA remains to be defined through the operating rules of the new system. The territory covered by some basin agencies (such as the Lerma Basin) covers up to five states, while on the other hand some states (such as Sonora) include territory covered by up to five basin agencies. 17 Councils are expected to guide, together with CNA, the work of the aforementioned Basin Agencies. 2. Featuresand Relevanceof Key FederalPrograms 20. Water supply and sanitation investment i s characterized by a multitude of federal grant programs - each created at different times, having different objectives, using different funding sources and different operating rules. All of them require matching funding by lower levels of government. Table 4 summarizes these programs. 21. Compared to 2002, investments in 2003 increased by 12 %, excluding investments funded by Ram0 33's Fund to Support Social Infrastructure- (FAIS for which no 2003 figures are available. Federal investment subsidies increased by a stunning 85% to P4.2bn, and total subsidies from all sources increased at the even higher rate of 103%. The increases are primarily accounted by two programs, APAZU and PRODDER. There has been, however, a decline in investment by housing developers and in Bunco Nucionul de Obras y Sewicios Pziblicos (BANOBRAS) lending to the sector, partially compensating for the substantial increase in federal programs. Table 4: Major National Federal FundingProgramsinWater and Sanitation - Acronym Name Objective Volume Terms Beneficiaries Creati Funding Imple on mentat - ion PRODD Program Providean M$ 1,924min Grants with 1,190 public 2002 mrough CNA ER ade incentiveto 2002-03 (2 co- andprivate :evenues Devoluci operating years) financing operating From 6n de entities to pay requiremen entities water Derechos water ts. Single abstractio abstraction sector. n charges fees - PROMA Fondo Fundthe So far only Grants with Operatorsin 19991 Fondode BAN GUA para la WSS sector usedfor co- cities with 2000 Inversi6n OBRA modemiz on the Integrated financing more than en SICN aci6nde conditionof Planning requiremen 50,000 Infraestru A Organis structural studies ts. Single- inhabitants. ctura mos reformsincl. sector. (FINFRA Operador PSP 1and es de CNA Agua - grants APAZU Agua "designed to M$508min Grants with WB project 1994 Usedto CNA Potabley provideWUs 2002 co- 1994-2001 be co- Saneami with a mix of financing funded 70% funded by ento en loans and requiremen of APAZU in the WB Zonas grants to ts. Single- that period. Water Urbanas encourage sector. The program Supply increased continues and intemal cash without Bank Sanitation generation" support. - I1project Ram033 Chapter earmarkedto FAIS P26.8bn Grants. All Mexican Form Federal SHCP I FAIS 33 of the pay for in 2002; share Multi- municipalities erly Tax federal (formerly) of FAIS spent sector. throughthe know Revenue budget federal on water and sub-program nas includes commitments sanitation FISM, and all -Ram0 18 a sub- and unknown; states through 26 program transferredto couldbe 10% the sub- called the states and programFISE Fondode municipalities APOYO together with parala those Infraestr commitments uctura Social + (FAIS) SEDESO Secretari 11targeted Various Vario Federal SEDE L a de poverty Multi- us Tax SOL Desarroll alleviation sector. Revenue? o Social programs, part of which i s spent on water and sanitation PROSSA Pr. para Rural water P761bnin Grants. Rural Areas 1996 IDBand CNA PYS l a supply and Single-sector. Federal Sostenibi sanitation Budget lidad de 10s Serv. de AP y de San. en Comm. Rurales irce: WB compilatio Jased on data 3m CNA and other sources Table 5: Investments inWater Supply and Sanitation by Sources (2003, mPesos) CONCEPT0 FEDERAL ESTATAL MUNICIPAL Inversiones CNA 3,302 2,076 1,829 7,360 SGIHU 2,767 1,608 1,746 6,273 Agua Potable y Saneamiento en Zonas Urbanas 970 670 670 2310 Frontera Norte y B.C. 337 402 145 152 1036 Devolucion de Derechos 1,432 501 931 2,864 Agua Limpia I , 27 36 63 SGPRPS PROSSAPYS 536 467 83 1 1087 OtrasFuentes 935 72 98 3,970 5075 SEDESOL 459 69 72 600 CONAFOVI 3,600 3600 CONADEPI 160 3 26 1 190 Otros (CEAS/Otros Programas) 171 171 BANOBRAS 316 198 514 TOTAL 4,237 2,148 1,927 4,123 12,435 source: CNA 22. Based on a preliminary assessment, the various programs are characterized by the following common characteristics: 19 a Most - perhaps even all - projects in the sector require co-funding by municipalities and state governments. This has provided a powerful incentive to raise the level of investment contributions from these sources, especially recently as major programs such as PRODDER have been initiated. On the other hand, the absence of differentiation of co- financing requirements according to the level of marginality makes it hard for service providers in poorer municipalities to fully tap those federal funds. A few programs - in particular PROSSAPYS and FAIS - specifically target poorer communities and states. This partly compensates for the above-noted drawbacks of other programs. All programs have detailed operating rules, specifying numerous pre-conditions, layers of approvals and reporting requirements. In practice, these are sometimes not being followed. This introduces an undesirable amount of political discretion, which probably favors states with better political connections. a The complexity of programs may make access by states and service providers with limited administrative capacity more difficult. A simplification of operating rules may reduce that bias. However, the solution to that problem ultimately lies in the strengthening of local capacity through continuity of managerial staff and better insulation of service providers from undue political interference at the municipal level. a There i s limited flexibility in setting priorities among and within programs, although the degree of flexibility varies among programs. For example, the total amount and regional distribution of the largest program, PRODDER, are defined exclusively by payments of water abstraction rights by service providers. The program that allows the greatest flexibility in terms of setting rules i s APAZU, a program that has been expanded significantly. However, it includes no incentives for improved performance and i s not poverty-targeted. There are no regional or geographic priorities, except for the Frontera Norte program (a US-funded program for states bordering the US) and FAIS (targeted at poorer states, though not a water program by nature).None of the programs i s conditional on changes in the governance structure of utilities or on policy/regulatory changes at the state level. None of the programs i s performance-based, privileging service providers that have improved their performance and discriminating against those with stagnating or deteriorating performance. Instead, all service providers that fulfill certain formal criteria (size of city, co-financing, etc.) can participate. The only program that i s conditional on a commitment for structural change i s PROMAGUA. It requires a commitment to private sector participation and the elaboration o f a long-term planning study before funds for works can be disbursed. However, the program has been very slow to be implemented and has been criticized for being ineffective. In particular, some cities that engaged into major reforms - such as Saltillo and Hermosillo - did so without participating in PROMAGUA, while in none of the participating cities a private sector contract has been signed so far. However, now that the planning studies for a number of cities have been completed, it remains to be seen if the program still can bear fruits. a Some programs - such as FAIS - include no reporting requirements, making it difficult to assess their impact. 20 0 There is only limited quality assurance. Cost-Benefit Analyses are pro forma exercises and are not used as a screening tool. Ex-post evaluations are rare and, if done, lack independence and critical assessment. 0 There are attempts at monitoring outcomes, both at the federal level and in some states (e.g. Guanajuato). But these are hampered by several factors: (i) poor quality of financial and technical data (lack of metering) as collected by service providers; (ii) lack of incentives to improve the quality of data and to pass them on to state and federal entities; (iii)aggregated nature of data, without links to investments in specific programs. 23. The recent modifications to the water law foresee the introduction of the Sistema Financiero del Agua (SFA).According to those modifications, the instruments for the SFA are to be created by the CNA under the supervision of SHCP, through regulations that remain to be published. The law introduces a series of concepts that promote the principles of financial sustainability; cost recovery; spending monitoring, evaluation and accountability; efficiency; and others which are expected to contribute to rationalize the existing sector programs. 3. Sector Performance inInternational Perspective 24. Water service quality inMexico - measured, among others, by continuity of supply - and operating efficiency - and by non-revenue water and billing efficiency - clearly fall short o f the levels achieved inother OECD countries and upper middle-income countries. 25. According to the 2000 census only 45% of households connected to the water distribution network received a continuous supply o f water, the remaining 55% suffer to various degrees from intermittent sup~ly.~ The incidence of intermittent supply i s higher in smaller municipalities and for the poor." While there are very limited data on drinking water quality at the tap, the intermittency of supply i s likely to have a negative impact on drinking water quality, mitigating progress made in the disinfection of water at the source, which has now reached 95%. Intermittent supply also imposes costs for storage at the householdlevel. 26. Water-related health indicators have shown a marked improvement, but still remain worse than those of other upper middle-income countries in Latin America (see Annex). The share of treated wastewater has increased to 30% in 2003," significantly above the L A C average of 14% for 2000.'* However, there are no data showing which share o f the wastewater treatment plants complies with the norms for wastewater discharge. 27. Using non-revenue water (NRW) as an indicator, operating efficiency levels in Mexico are far below the average level attained in developed countries and below the level attained in the best-performing quartile of utilities indeveloping countries, as shown be10w.l~For example, Own calculation, basedon census data quoted in Avila (2004), spreadsheet named AnnexoI.CC-Agua loAvila (2004) based on census data, as detailed in the Annex on water. 11CNA (2004), Situacion del Sub-sector, p. A-76. PAHO/WHO (2001), Regional Report on the Evaluation 2000 in the Region of the Americas. Water Supply and Sanitation - Current Status Projects, p. 24 and p. 81 l3Among the internationally most commonly used indicators to measure technical and commercial efficiency are: (a) non-revenue water (water produced-water billed)/water produced); (b) staff per 1000 connections; (c) working 21 the average level of non-revenue water (NRW) in Mexico i s estimated at 44%,14 while the best- performing quartile of 123 utilities in 44 developing countries achieve less than 23% of NRW. The average level in developed countries i s about 15%. The level of NRW in Mexico varies between 22% in the best utilities and 65% in those with the poorest performance, proving that low levels of NRW are achievable in Mexico. However, it should be noted that characteristics such as extension of network relative to consumption levels, topography, continuity of supply and pressure all influence the attainable level of NRW, so that levels of NRW are not always comparable between cities and countries. Table 6. Non-revenue water Sources: CNA, Situacion del subsector agua potable, alcantarillado y saneamiento a diciembre 2003; CNA: Ciudades Estrategicas (2000), Barocio (2004); for Brazil SNIS Diagnostic0 2000; Malaysia and Asian cities from ADB Water in Asian Cities, 2004; UK and US from IB-Net (Intemational BenchmarkingNetwork); Latin American average from WHOKJNICEF (2000),p. 25. 28. Average collection efficiency in Mexico i s far below the levels achieved in developed countries and even in many developing countries. The level of collection efficiency in Mexico has been estimated by various sources at about 72%. In some small towns the collection efficiency i s as low as 20%, while in the best-managed utilities it reaches 98%, again showing that highlevels of performance are definitely achievable inMexico. ratio (total annual operating expenses, excluding depreciation and debt servicehotal annual pretax collections from billing and subsidies); and (d) collection or billing efficiency (accounts received/accounts billed). All these indicators are fraught with some limitations, including the lack of a universally accepted detailed specification of the definitions. For example, the current ratio can be calculated based on billed or collected revenues; and staff levels can fully or partially account for part-time staff and contractual workers. l4 CNA (2004), Situaci6ndel sub-sector,p. 42. Calculatedbasedon a sample of 157 service providerswith reliabledata. 22 Table 7. Collection efficiency Country Year I Billing/Collection (%) Mexico (average. 2 sources) I v 72 Mexico (Monterrey) 2004 98 MCxico (Hermosillo) IIII2002 I 1999 I 85 _ _ Mtxico (Matamoros) 1999 45 IMalaysia(Kuala Lumpur) 2001 95 Asian cities (average of 18) 12001 I 88 Brazil (average) I 2000 87 ~ OECD average I 1996 II 95 Sources: CNA, Situacion del subsector agua potable, alcantarillado y saneamiento a diciembre 2001, SMAPA (Tuxtla Gtz. 0.0.)2004 presentation, 1999 Capitol Advisors Ltd. Hermosillo Case Study, ADB, SNIS and OECD, Ciudades Estrategicas (2000). 23 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies MEXICO: Modernizationof the Water and SanitationSector Technical Assistance - 1.DecentralizedInfrastructure ReformandDevelopmentProgram(DIRD) 1. This Project is designed to improve the performance of infrastructure services throughout the territory of Mexico while operationalizing the decentralization objectives of the national government, thereby enabling and catalyzing the efficient and sustainable development of selected infrastructure sectors at the sub-national level. The project supports comprehensive infrastructure sector strategies undertaken by states. The candidate states are those that are taking reform and development measures to catalyze and promote efficient and fiscally and financially viable infrastructure development in priority sectors, with poverty responsiveness and access of public services to the poorest segments o f the population. The first loan i s for US$ 108.0 million to BANOBRAS to support the State of Guanajuato. 2. Inthe first stage, the Program will focus on three key infrastructure sectors, namely: (a) roads (including highways and rural roads); (b) water and sanitation (including wastewater treatment); and (c) urban and low-income housing. Based on the initial experience, and applying any lessons learned from the first stage, the Program could be extended to additional priority sectors and states and eventually, to municipalities. 3. The Program i s a Sector Wide Approach (SWAP) that specially emphasizes sector strategies that: (i) promote access to services to the poorest segments of the population; (ii) incorporate market-based solutions that support private sector participation - whenever feasible - through an appropriate overall sector structure, regulatory and competition frameworks, suitable tariff and cost recovery policies; (iii)include the requisite attention to maintenance of infrastructure facilities and operational efficiency; and (iv) promote the strengthening o f state ' environmental and social management capacity within key sectors. The sector strategies have to be consistent with the national sector development strategy, as articulated by the respective national sector entities. In the case of water and sanitation, the project will address the issues of absence of incentives for improved performance in the design of federal and state programs and limitedincentives for improvedcost recovery. 2. Irrigation & Drainage Modernization Project (PMIR) 4. This Project supports: (i)the modernization of existing irrigation infrastructure to promote a more efficient use of irrigation water within the framework of integrated irrigation investment plans; (ii) increased productivity of irrigated agriculture and diversification into high- value crops; (iii) consolidation o f the transfer of irrigation infrastructure to water users; (iv) institutional strengthening of water users' organizations to enhance their participation in the O&M of irrigation infrastructure as well as in investment decisions; (v) consolidating the current cost recovery system for both operating and capital costs; and (vi) establishment of a comprehensive monitoring and evaluation system. Even when this i s not a water supply and 24 sanitation project, it should be noted that these components address similar issues to those underlying the proposedTA operation. 3. EnvironmentalDevelopmentPolicyLoanENVDPLI1(underpreparation) 5. This project, which builds upon the Programmatic Environment SAL I,aims to mainstream environmental concerns in key sectoral development agendas, and improve the effectiveness and efficiency of local environmental management processes. With respect to the water sector, the programmatic S A L inter alia supports the fiscal framework of the water sector, determining the economic value o f water and implementing a tariff structure that reflects the marginal costs o f supply as well as incorporates the marginal cost o f the resource; supports the development of water availability data and an improved water rights registry as foundational steps in the implementation of a functioning water rights market; promotes the functioning of Water Basin Councils with self-management, as well as an increase number of functioning Aquifer Committees with independent administrative systems; and supports verification that concessions for public urban water use and discharges in municipalities are enforced and comply with environmental regulations. The project tackles the issues of efficiency, cost recovery and institutional strengthening. 4. SecondWater ResourcesManagementProject(GICA) (under preparation) 6. This project aims to: (a) improve conditions for sustainable integrated water resources management and use; and (b) detain the accelerated deterioration o f water resources in selected areas. The project will support: preparation of comprehensive water resources sustainability plans in collaboration with water users, states, municipalities, Comisio'n Nacional de Agua - (CNA), Secretaria de Agricultura, Ganaderia, Desarrollo Rural, Pesca y Alimentacidn (SAGARPA), private sector, etc. The plans will include reaching agreement on aquifer regulations, entailing the reduction o f water rights to sustainable levels and enforcement mechanisms. The plans will also include financing schemes that will involve financing from different state, federal and private sources and will include activities financed through other Bank-supportedprojects. The project addresses the financing issue, same as the proposedTAL. 5. Pilot Programfor InstitutionalDevelopmentinthe Water Supply and SanitationSector (InteramericanDevelopmentBank,PR 1540/OC-ME) 7. The program's objective i s to implement pilot projects to promote autonomy, efficiency, equitable access, citizen participation and financial sustainability at the providers of these water supply and sanitation services in small and mid-sized cities. The program seeks to: (i) demonstrate the real potential for improving service in the near term and with limited resources; (ii) consensusandsupportfortheneededmeasureswithinthecommunityconcerned; (iii) build gain experience and share the lessons learned that will be useful in similar communities; and (iv) lay the groundwork for a larger-scale investment and institutional development program. 6. Sustainability of Water Supply and Sanitation Services in Rural Communities (InteramericanDevelopmentBank,PR 116UOC-ME) 25 8. The project aims at developing the water supply and sanitation sector in rural communities through activities that include: (a) institutional development; (b) community development and participation; and (c) water supply and sanitation infrastructure. The first subprogram supports decentralization by separating and strengthening sector functions and improving institutional mechanisms in approximately 20 states and 200 municipalities. The second subprogram strengthens or creates organizations in approximately 1,500 rural communities to operate and maintain water supply and sanitation services, with active participation of all groups in receiving instruction on water use and resource protection. The third subprogram supports the processes of institutional development, community development, and community participation by the building of new works and the rehabilitation and expansion of existing water supply and sanitation systems to benefit marginalized rural communities of up to 2,500 inhabitants. 26 Annex 3: Results Framework and Monitoring MEXICO: Modernization of the Water and Sanitation Sector Technical Assistance - PDO Outcome Indicators Use of Outcome Information To improve the :i> ImprovedWater and Outcome information will be efficiency of Mexico's Sanitation Sector disseminatedto service providers water supply and Information System to throughout Mexico, stimulating sanitation sector through strengthen quality and themto use similar approachesto strengthening of sector quantity of selected improve water and sanitation policies at the federal performance indicators; services with the assistanceof and state level; CNA, ANEAS and CEAs. To develop and :ii) Consensusreachedwith demonstrate replicable a majority of the State models of successful and Water Commissions on sustainable provision of their new roles and water and sanitation policies and the services, by supporting establishment of an selectedservice accreditation programfor providers in improving key water utilities technical and financial personnel; and performance and efficiency of service (iii) Improvedperformance provision. of pilot water utilities measured as net operational revenues oier operational costs Intermediate Results One ResultsIndicators for Each Use of ResultsMonitoring per Component Component ComponentOne: ComponentOne: Component One: Evaluation of existing Information of 5 CNA Programs Measure and compare the impact programs inthe water and on the sector of CNA channeled Sanitation Sector managed federal funds by CNA in urban areas Component Two: Component Two: ComponentTwo: Improvement of operational 5% improvement inthe Disseminate improvement results and financial efficiency of performance of pilot water to other Organismos Operadores service provision utilities measured as net (00s) operational revenues over operational costs 27 2U 4 6 d 6 4 6 3m 3 4C d d u z W 2 I Annex 4: Detailed Project Description MEXICO: Modernizationof the Water and Sanitation Sector -Technical Assistance 1. The project will fund the following components and activities: Project Component 1: Modernization of the Sector at the Federal and State level (Bank financed: $2.9 m). This component will includethe following subcomponents: National Information System (US$ 0.8 m) - The proposed project will fund an evaluation of the existing systems (both at a state and federal level), comparing them with the national information system for the water and sanitation sector (SNSS) in Brazil and other systems in other countries. This activity will cover both a diagnosis on the existing system and a proposed action plan. The action will include a detailed proposal with the relevant recommendations and needs assessment in terms of technology, manuals and training. Evaluation of Existing Programs in the Water and Sanitation Sector (US$ 0.4 m) - This activity will fund a comprehensive study to review and asses the effectiveness and impact of existing financing programs at a federal level and propose the necessary changes to reflect the principles included inthe new National Water Law. Strengthening of the State Water Commissions (CEAs) (US$0.4 m) - To strengthen the capacity of the CEAs (Comisiones Estatales del Agua) through targeted technical assistance and the organization o f seminars on specific areas relevant to their mission (tariffs, regulation, best industry practices, benchmarking, etc.) and conduct activities towards the dissemination of the lessons learned inthe project. Training Component (US$ 0.7 m) - To fund: (i)comprehensive assessment study of a the existing human resources and training needs in the water and sanitation sector; and (ii)the development of adetailed proposalfor the establishment of an accreditation system in the sector. This component will also fund training requests from the relevant participating institutions (CEAs, ANEAS, CNA) to build up the needed specialized skills inthe sector. Project Dissemination (US$ 0.2 m) - This activity will finance documentation of the lessons learnt through the project as well as a series of workshops and seminars for dissemination of the project. Project Management (US$ 0.4 m) To finance staff, consultant services and other - expenses in order to execute, supervise and monitor the results of the Project. Activities to be financed under this component include staff to work as Project coordinators, CNA project supervision costs, information technology equipment, and other operating expenses for the project implementationunit within CNA. Subcomponents (i) through (v) will be financed by the Loan, whereas subcomponent (vi) will be financed from CNA's budget. 30 Project Component 2: Pilot cases of Modernization of Water Utilities (U$47.7 m). 3. This component will support the development of replicable models for an efficient and sustainable provision of water supply and sanitation services ("success cases"). The component will fund efficiency improvement programs in selected municipalities to strengthen and bring utilities to reasonable levels of management, operational efficiency and financial viability. 4. The Bank will finance 100% of the federal contribution to the activities at the utilities level, which will be implemented in accordance with the prevailing operation rules of APAZU. 5. A first group of five utilities (table 1)has been proposed by CNA based on the following criteria: e Geographic representation: the group represents different regions of the country. e Small and medium-sized municipalities (between 25,000 and 600,000 inhabitants) to maximize the impact of the program inthe overall level of service delivered to the population. e Managerial stability: the participating utilities belong to municipalities where changes in the political cycle should not affect the permanence of managerial staff of the utility. a Commitment to participate in the project: the utility and the municipality have expressed their willingness to participate in the technical assistance project and accept its conditions. e Payment of water fees: participating utilities must be current on the water fees due to the Federal government as well as in compliance with any other legal requirement. e Potential for dissemination of results: selected utilities must commit to participating in analysis and evaluation of the results achieved after implementation o f the improvement programs, as well as to share the results of the activities undertaken under the project. Table 1 MunicipalitiesProposed(first phase) - Service Provider PlanningDocument Population (Inhabitants) Colima-Villa de Alvarez, Col. Yes (DIP) 196,3 18 Puerto Vallarta, Jal. Yes (DIP) 151,432 Guaymas, Son. No 97,593 Hermosillo, Son. DIP Under preparation 545,928 Cd. del Carmen, Camp. No 126,024 6. Existing diagnostic studies and detailed planning documents for each o f the above utilities are available inthe Project files. Additional utilities (inprinciple three other utilities) are expected to participate inthe project based on the same criteria. 31 Ciudad del Colima-Villa Heroica Carmen de Alvarez Guaymas Vatlarta Hermosillo Number of Employees 206 210 212 389 816 Water Supply Coverage (%) 80 98 97 93 97 Sewerage Coverage (%) 6 97 72 83 92 Micro Metering (%) 60 7 48 88 94 Physical Efficiency (%) 44 58 1 30.6 I 61 I 56 Commercial Efficiency (%) 67 84 44 94 80 Annual Collection (US$millions) 1.9 5.1 2.2 15 16 7. The component will fund efficiency improvement programs to strengthen and bring utilities to reasonable levels of management, operational efficiency and financial viability. The activities to be financed under this component are centered around programs for improvement of technical, commercial and financial efficiency, and each of the participating i s defining - in collaboration with CNA and based on the existing planning documents where available- an investment program with priority actions to be financed under the project. 8. Though the investments envisaged under this component are not explicitly intended to be pro-poor, the investments assessed will benefit poor populations. Poverty classification in Mexico takes into consideration the access to and quality of public services received, so investments to improve basic water and sanitation services will benefit those with deficient levels of service. Also, and though investments will have system-wide benefits (including improved continuity, system pressure, reduced physical losses, etc.) and the operational and financial performance improvements which are expected to result from improved water service providers are not targeted directly at the poor, per se, experience in Mexico and throughout the region indicates that improved performance and financial situation, which will enable the utility to invest in the expansion of the services, will benefit the poor - the served and underserved. Small and medium sized municipalities included under component 2 comprise marginal and peri- urban areas where poverty i s more acute. The project will permit testing and adapting a range of approaches and assistance to improving services in poorer areas, the lessons of which will be fed into the redesign of existing programs and or the development o f new programs which more directly target poor householdskommunities. Table 3 Key Actions to be financed under the Project - -- Hydraulic - Cadastre and customer databases - Business organization Physical - Micro-metering - HumanResources development 32 - Control of supplies and stock - External and internal communication management - Accounting systems -- Transport Social communication and customer service Implementation Arrangements 9. The implementation of the project in each municipality will require three phases, the length of each depending on the level of progress that the utility has done against each of them already: (i) identification o f priority actions to be financed under the project (will be done during project preparation under the responsibility of CNA); (ii) preparation of studies (including Business Plans for those utilities who do not have one), project design and biddingdocuments; and (iii) execution or implementation of the improvement activities. 10. Under phase (ii),Consultant will prepare the detailed studies and documents necessary a to execute the priority activities identified inphase (i). Incase a planning document would not be available, the Consultant would prepare a Business Plan identifying the activities that must receive priority attention in order to improve the performance o f the utility. 11. In phase (iii), utility will implement the activities previously identified, which will the include some of the following: organizational reforms, training for managerial and operational staff, community participation programs; updates o f the technical cadastral systems, equipment, macro and micro meters, rehabilitation of water and sewer networks, leak detection and control programs, efficiency improvement plans, updates of the commercial cadastral systems, modernization of accounting and financial systems, procedures for meter reading, billing and collection, modifications to the tariff structure and levels, and information systems. 12. The envisaged process for selected utilities to participate inthe program i s the following: 1 Once compliance with eligibility criteria has been assessed, CNA will formalize the participation of the relevant municipalityhtility through the signature o f a Memorandum of Understanding. a Based on existing planning documents, the relevant municipalityhtility will submit a proposal to C N A and the Bank for an efficiency improvement program outlining priority actions to be funded under the project. Should a planning document not be available, the elaboration of the latter could be funded out o f Project proceeds. 1 Once the proposed efficiency improvement program has been assessedby CNA - and the Bank-and agreed upon with the relevant municipalityhtility, the Federal and State Governments will subscribe a Coordination Agreement (Financial Support Agreement) which would establish on a multi-annual basis, amongst other things, the agreed-upon actions and requirements for utility modernization and the technical and financial support to be provided by the Federal Government to achieve it. The correspondent municipalityhtility would also subscribe the agreement. 33 1 The executing agent as indicatedinthe Agreement (Utility, Municipality or State) will be responsible for the execution of the Project and fulfillment of the Agreement. Appropriate controlling and incentive mechanisms will be put into place - for example utilities which meet their obligations for institutional improvement would be eligible for further investment support by the Federal Government. SummaryProjectDetails 13. We attach here-in a description of two of the proposed programs for 2 of the participating utilities: CIAPACOV Colima Villa de Alvarez - - 14. The utility serving the Municipalities of Colima and Villa de Alvarez (CIAPACOV) has a planning document (DIP) prepared in 2003 under the program PROMAGUA. Estimated population in year 2003 i s 220,000 inhabitants. Water coverage i s 98% for water and 97% for sewerage. In 2002 the utility had efficiency levels of 56% (physical efficiency) and 84% (commercial). The quality of service i s reasonable and production capacity i s estimated to be sufficient to supply the population for the next 20 years. However, micro metering i s low (25%) and continuity o f service substandard given that a large proportion o f the network i s old and in need of rehabilitation or replacement. The following priority investments have been identified: (i) rehabilitation and replacement of water mains; (ii) rehabilitation of distribution network and accessories; (iii) and micro metering; and (iv) replacement of household connections. macro 15. The main operating and efficiency indicators in Colima are as follows: ~ Colima-Villa de Alvarez Number of Employees hater SUPPIV Coverage (%) 98 I +I Isewerage Coverage (%) h i c r o Meterina (%) ~ Physical Efficiency (%) Commercial Area Efficiency (%) lAnnuaI Collection (US$ millions) 5.1 16. The investment plan discussed by Colima for financing under the TAL contemplates the following actions: 34 Managementof PhysicalLosses Action Target Rational Tentative Tentative cost cost WXP) (mill US$) Identification and fixing of 15,000 new Unaccounted -for water due to 12 1.2 leakages in household connections leakage is estimated to be connections 38%. Currently, a large proportion of the leakage and wastage occurs either along the service mains (19" poly tube), or defective plumbing within the customers' premises. I t s expected that by reducing leakage in the household connections, the figure of non-revenue water will also be reduced. Zoning and sectioning of 56 "cruceros" ~~ The objective is to set up 1 0.1 secondary networks zoned and distinct sections of (including valves) the distribution system with clearly identified entry points from the transmission system. The volume, flow and pressure of water entering a section will be monitored at each of these entry points. This will enable the utility to identify plan, schedule and perform effective leakage reduction works Zoning and sectioning o f 225 "cruceros" See above 4 0.4 secondary networks (including valves) Leakage detection in valve 80 boxes Identification and fixing of 1.5 0.15 boxes in the urban area rehabilitated existing leakages in valve boxes that are in need of rehabilitation. Replacement of secondary 40,000 m Pipe repair and replacement o f 20 2.0 network pipe in 5 locations defective lengths within the distribution system i s needed for an effective implementation of the leakage strategy. The pipe is 50 years old and i s suspected to present many unidentified leakage points. Replacement of water 14 flow meters To effectively manage 0.6 0.06 source flow meters production and ensure information on 100% of production points. Installation of flow meters 20 flow meters To control the volume and 1 0.1 at exit Doints of tanks balances of water, the flow 35 Action Target Rational Tentative Tentative (MJw cost cost (mill US$) will be monitored at each of these exit points. Capacity building to 5 people Training of technical staff in 0.1 0.01 increase physical efficiency leakage detection Updating of infrastructure 600 km The update is needed so that 10.5 1.05 inventories and details of the essential nature of the distribution network. effectively managing leakage Total 1 50.7 I 5.07 Commercial Efficiency Action Target Rational l'entative Tentative cost Cost (MXW (mill US$) Update of customer Updating of This action will enable: 3.5 0.35 cadastre 92,000 To identify illegal tampering connections in and begin to bill unknown the urban and customers rural areas of To bill properly the 2 The cost of operating the municipalities system will effectively be distributed amongst all the real users Support financial sustainability Installation of MIS in: Support the A reliable flow of information 10 1 General Direction improvement i s needed so it can be fed in Operations of the utility's the decision making process Commercial global and also serve as the basis for Finance efficiency by the planning function, staff introducing performance, monitoring of modern activities and adoption of information corrective measures. systems that will allow for the establishment and monitoring of targets in an efficient manner. Total 13.5 1.35 Puerto Vallarta SEAPAL - Existing Situation 36 17. The utility SEAPAL provides service to the municipality of Puerto Vallarta with over 200,000 inhabitants and a large seasonal population. SEAPAL has a DIPfinanced in 2004 under PROMAGUA. Both water and sewerage coverage are currently close to 100%. The utility i s showing very healthy indicators of efficiency (in 2002, physical efficiency was 96% and commercial efficiency was 90%). - SEAPAL i s aware that a top utility needs to continue investing in maintaining and improving the efficiency indicators and has put together a plan (discussed with CNA and the Bank) to build on the existing achievements and further improve the physical and commercial efficiency by the introduction of innovative systems in the technological and commercial areas. The main operating and efficiency indicators in SEAPAL are as follows: humber of Emulovees I 389 I Water Supply Coverage (%) 93 Sewerage Coverage (%) 83 Micro Metering (%) 88 Physical Efficiency (%) 61 ICommercial Efficiency (%) 94 [Annual Collection (US$ millions) II 15 II InvestmentPlan 18. The heart of SEAPAL's strategy i s the setting up of distribution sectors in the current 18 pressure zones. These are zoned and distinct sections of the distribution system, with clearly identified entry points (one, or two at the most) from the transmission system. The volume, flow and pressure of water entering a sector will be monitored at each of these entry points. In addition, demand within the sector will be monitored by ensuring each household i s metered. A comparison o f supply and demand, as well an analysis of night-time flows and operating pressures will allow management to plan, schedule and perform effective reduction of non- revenue water (via identification and fixing of leaks) within each sector. In addition, measurements of daily consumption figures and flow profiles will be used to improve the accuracy of planning and design assumptions for future projects and demand management. This program will provide top notch implementation of an efficiency improvement strategy and constitute a consistent model for replication in other utilities. 19. The main actions contemplated in the investment plan discussed with Puerto Vallarta are the following: 37 SEAPAL's Efficiency Improvement Program Action Rational Tentative Cost Tentative (MXP) cost (millUS$) Teleprocessing This will enable the instrumentation 6 0.6 of 100%of the network in the existing 18 pressure zones to enable its remote control and management. Network sectorization The objective is to set up zoned and 20 2 distinct sections of the distribution system with clearly identified entry points from the transmission system. The volume, flow and pressure of water entering a section will be monitored at each of these entry points. This will enable the utility to identify plan, schedule and perform effective leakage reduction works Leakage Strategy Identification and fixing of leaks in 20 2 the network and household connections through pipe repairs and replacement of household connections. Update of Customer This action will enable: 4 0.4 Cadastre To identify illegal tampering and begin to bill unknown customers To bill properly The cost of operating the system will effectively be distributed amongst all the real users - Support financial sustainability Total 50 38 Annex 5: Project Costs MEXICO: Modernizationof the Water and Sanitation Sector Technical Assistance - ProjectCost By Component and/or Activity Counterpart Financed Total US$th. US$th. US$ th. Modernizationof the Sector at the Federaland State 1 Level 364 2,499 2,863 1.1 NationalWSS InformationSystem 0 762 762 Evaluationof existingprograms inthe water and 1.2 sanitation sector 0 400 400 1.3 Strengtheningof the State Water Commissions (CEAs) 0 455 455 1.4 TrainingComponent 0 682 682 1.5 Disseminationactivities 0 200 200 1.6 Project Management 364 0 364 2 Pilot Cases of Modernization of Water Utilities 27,688 20,050 47,738 Subtotal: Components 1and 2 28,052 22,549 50,601 Contingency 2.20 1 2,201 4,402 Total Project cost 30,253 24,750 55,003 Front End Fee (1%) 250 250 Total Project cost 30,253 25,000 55,253 39 Annex 6: ImplementationArrangements MEXICO: Modernization of the Water andSanitation Sector Technical Assistance - 1. The implementing agency will be CNA, more specifically the "Unidad de Agua Potable y Saneamiento" (UAPS), which i s part of the "Subdireccidn General de lnfraestructura Hidra`ulica" (SGM) of CNA. The UAPS will be supported by "Subdireccidn General de Programacidn " and "Subdireccidn General de Administracidn " in administration and disbursement matters, respectively. 2. All of them have extensive experience working with Bank and IDB projects. As is the case o f other Bank-financed projects in Mexico, BANSEFI will act as a financial agent. BANSEFI's responsibilities will include: (i) management of the special account; (ii) processing the disbursement requests; (iii) consolidating the progress reports and submitting them to the Bank; and (iv) organizing and carrying out of project audits. 3. A Task force will be established including representatives of CNA, BANSEFI, ANEAS, SHCP as well as participating service providers. The role of this task force will be to assure coordination among the institutions participating inthe operation. 4. For component 2, the envisaged process for selected utilities to participate inthe program i s the following: Once compliance with eligibility criteria has been assessed, CNA will formalize the participation of the relevant municipalityhtility through the signature of a Memorandum of Understanding. Based on existing planning documents, the relevant municipalityhtility will submit a proposal to CNA and the Bank for an efficiency improvement program outlining priority actions to be funded under the project. Should a planning document not be available, the elaboration of the latter could be funded out of Project proceeds. DuringProject preparation, it was agreed with CNA that the proposal to be submittedby the relevant municipality or utility will include a financial analysis of the proposed efficiency improvement program as well as a procurement plan for the execution of the investments in compliance with Bank guidelines. Once the proposed efficiency improvement program has been assessed by CNA - and the Bank - and agreed upon with the relevant municipalityhtility, the Federal and State Governments will subscribe the annexesI5 of a Coordination Agreement (Financial Support Agreement) which will establish on a multi-annual basis, amongst other things, the agreed-upon actions and requirements for utility modernization and the technical and financial support to be provided by the Federal Government to achieve it. The correspondent municipalityhtility would also subscribe the agreement. The executing agent as indicated in the Agreement (Utility, Municipality or State) will be responsible for the execution of the Project and fulfillment of the Agreement. Appropriate l5 "Anexos Te`cnicoy de Ejecucidn" 40 controlling and incentive mechanisms will be put into place - for example utilities which meet their obligations for efficiency improvement would be eligible for further investment support by the Federal Government. 41 Annex 7: FinancialManagementandDisbursementArrangements MEXICO: Modernizationof the Water andSanitationSector -TechnicalAssistance 1. Background. ProjectFinancialManagement (FM) arrangements will be consistent with Bank's principles and practices on the subject, and the proposed project will allow for the use of existing government FMarrangements (country systems that are satisfactory to the Bank), thus minimizing any additional program specific requirements. The FMsection of the project Manual (OM) will include detailedinformation on the following evaluated areas (excluding the Financial Management Assessment section). 2. Financial Management Assessment (FMA). The Bank carried out a FMA of the institutional capacity of CNA. The main conclusions of the FMA are the following: (i) although some project-specific mechanisms will need to be implementedfor the proposedproject, existing FMarrangements for the Bank-financed project currently under implementation are operational and considered to form a sound basis for financial management in the proposed project; (ii) the Gerencia de Recursos Financieros under the Subdireccidn General de Administracidn has the capacity to manage the project financial matters; and (iii) risk i s moderate based on the the results of the FMA, on record o f the project under implementation, and on the design of the proposed project e.g. risk associated to the flow of funds involving the Organismos Operadores at the Municipal level. 3. Implementingentity. The national water commission CNA, which will implement the proposed project, has demonstrated high capacity for project implementation, including smooth interfaces with NAFIN and BANOBRAS (two governmental development banks appointed as financial agencies for previous Bank-financed projects implemented by CNA) and the Ministry of Finance (SHCP). The latter has appointed Banco del Ahorro Nacional y Sewicios Financieros (BANSEFI) as the financial agency for the proposed project. 4. Flow of funds and information. Bank loan funds will flow from the Loan Account to a Special Account managed by BANSEFI and established in U S dollars at a commercial bank (section on Disbursement Arrangements and Retroactive Financing provides information to complement this section). The Government of Mexico (GOM) will pre-finance project spending, thus the National Treasury TESOFE (via the Secretaria de Medio Ambiente, Recursos Naturales y Pesca - SEMARNAT) will transfer funds to CNA in local currency (Mexican Pesos) via the standard budget under the APAZU program. CNA and participating Organismos Operadores will pay to their corresponding suppliers of goods and services. At the end of the cycle, TESOFE will be reimbursed. See the following flowchart for additional information. 5. Counterpart funds are part of CNA's standard budget, are used to complement Bank funds and will include funds provided by subnational level entities. Bank funds and counterpart funds will be registered in the standard budget in two separated budgetary lines earmarked for the project. 42 FLOW OF FUNDSAND INFORMATION -71 SUPPORTINGDOCUMENTATION(SOEs) f CMERClALBANK on US dollar) + WORLD BANK REPLENISHMENT I REIMBURSEMENT SHCP - ,___________ INFOMATION _ _ _ _ _ _ _ _ _ _ _ (NationalTreasury) STANDARD BUDGET m 1 2 Commission - 3b TRANSFER j (Goods and Sewices) ADDITIONALSOURCES OF FUNDS e.g. StatesI Municipalnies Note Mx$ Flow offunds FIOW of Information ll 6. The Bank will recognize expenditures as soon as payments to suppliers are made. 7. Accounting Policiesand Procedures. CNA maintains records and accounts adequate to reflect, in accordance with accounting practices compatible with International Accounting Standards and in compliance with local requirements, its operations and financial condition, including records and separate accounts for the Integrated Irrigation Modernization Project (IIMP), a Bank-financed project which is currently under implementation by CNA. The same arrangements will apply to the proposed TA project. 8. Information Systems. CNA's existing systems (mainly the SIF version 5 and its modules), which are being utilized for the Bank-financed IIMP, which i s currently under implementation, are considered acceptable to the Bank. These systems will track every project transaction and produce required information, including an important portion of the Financial Monitoring Reports (FMRs). The SIF will be operated at the subnational level as well. CNA, in coordination with the Bank and BANSEFI, will carry out training activities for the participating statedmunicipalities. 9. Staffing (key FM staff). A project team in the Gerencia de Recursos Financieros, housed within the Subdireccio'n General de Administracio'n, is acceptable to the Bank, and this project team has qualifications and public sector experience adequate to undertake all FM tasks related to the proposed TA project. These arrangements are currently applied to the Bank- 43 financed project under implementation and are considered satisfactory to the Bank, so the same arrangements will be utilized by the proposed TAL project. 10. Financial Reporting. CNA will report to the Bank inthe format of the above mentioned Financial Monitoring Reports (FMRs), which will be semiannually submitted through BANSEFI. The FMRs will sufficiently describe all project operations in a format which will include two sections: (a) narrative information; and (b) financial statements. 11. The FMRs will be complemented with the annual Financial Statements of both the entity and the project. These Financial Statements will be audited on annual basis. The project audit will be carried out in line with the Bank policy and requirements (see next subsection on Internal and External Audit). The FMRs will not form the basis o f disbursement, as it i s agreed that Statements o f Expenditures (SOEs) will provide information for disbursement purposes (see corresponding section inthis Annex). 12. Internal and External Audit. The Internal Audit Department of CNAA will include in its work program the review of the Bank-financed program APAZU. 13. The framework for all project audits in MCxico i s the M O U agreed between the G O M (through the Secretaria de la Funcidn Pu'blica) and the Bank. An external private auditor will carry out, in line with Bank policy and procedures, annual financial audits of the project. These audits will include operations at subnational level. As it i s done for the Bank-financed project under implementation, the external private auditor will audit the entity's Financial Statements. CNA through BANSEFI will furnish the audit report to the Bank before June 30 of the year following the audited calendar year. Audit Report Duedates Entity Financial Statements Within the six months following the end of the audited year. Starting by 06/30/2007 (which will cover full calendar year 2006 and the corresponding portion of calendar year 2005) until 06/30/2009 (which will cover calendar year 2008). The standard covered period is the calendar year, that is, from January the lst to December 3lst. Project Financial Statements Same due dates as the above audit. ~ Special Account Same due dates as the above audit; one Special Account report is submitted for all BANSEFI-administrated projects. 14. Disbursement Arrangements and Retroactive Financing. Disbursements (Loan withdrawal applications - WA) will be prepared in accordance with guidelines set out in the Bank's Disbursement Handbook. 15. Method and supporting documentation. The G O M will pre-finance project execution as the National Treasury (TESOFE) will provide funding for all project operations via CNA's 44 standard budget. The Bank will reimburse upon request and against Statements of Expenditures (SOEs). 16. Thresholds and supporting documentation. L O A will determine the threshold for submitting supporting documentation, which will be reviewed as part of the project audit. Documents in support of disbursements will be maintained by BANSEFI, CNA and all participating states / municipalities for at least until one year after the Bank has received the audit report for the fiscal year in which the last loan withdrawal was made. Such documents mustbe available for review by the auditors and Bank staff at all times. 17. Special Account (SA). BANSEFI, the financial agency, will establish a Special Account in a commercial bank for the project. The SA will be in US dollars to be used to receive Bank funds to reimburse TESOFE. It may be possible to eventually disburse directly to TESOFE without utilizing the SA. While BANSEFI will be responsible for the management of the SA (thereby carrying out monthly account reconciliations, submitting Bank-Form 1903 and preparing monthly reconciliations), TESOFE will fund all project operations via CNA's standard budget. CNA will provide all needed information on project operations to both BANSEFI and TESOFE to ensure proper flow of funds. 18. Retroactive Financing. The project will be eligible to submit for retroactive reimbursement, documentation on expenditures totaling up to US$ 2,500,000 o f the loan amount for eligible expenditures incurred during the period between the date o f the official Project Appraisal and the signing of the Loan Agreement. 19. Disbursement percentages.A table which will indicate the componentlcategory, amount of the loan allocated in US$ and the percentage of expenditures to be financed by the Bank, will be included before project negotiations. This table will be prepared based on final project costing and agreements on financing percentages (CNA requested a 100%Bank financing of the entire project, which includes subnational level contributions). 20. Operational Manual (OM) and Written Procedures. Project FM-related procedures will be documented in the OM, which will define the roles and responsibilities of CNA, BANSEFIand the subantional level entities e.g. Organismos Operadores. A draft of this manual should be submitted to the Bank for its approval before Negotiations to avoid it having to be included as an Effectiveness Condition inthe Loan Agreement o f the proposed project. 21. Supervision Plan. At least one FMsupervision mission will be conducted each FY, and a Bank Financial Management Specialist will review the annual audit reports and the semi- annual FMRs. 45 Annex 8: Procurement Arrangements MEXICO: Modernization of the Water and SanitationSector Technical Assistance - A. The Project 1. The project consists of two components. The first component will support CNA's programs to assist with the modernization of Mexico's water supply and sanitation sector through strengthening the sector policies at the federal and state level. Through the first component, technical assistance and studies will be financed to support recent changes to the Water Law, including assistance in reviewing existing sector programs, strengthen and expand the national water and sanitation information system, support State Water Commissions (CEA's) in the strengthening of planning and regulatory capacities, develop training and accreditation programs and disseminate the lessons learned in the project. The second component will support pilot cases of modernization o f water utilities, technical assistance for institutional reforms, performance improvement (technical, commercial and financial), design of business plans, and development of community participation mechanisms. B. General 2. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004, and the provisions stipulated in the Procurement Plan and the Legal Agreement. The Procurement Plan will be based under both components and will be updated at least annually or as required to reflect the actual project implementation needs and improvement in the institutional capacity. C. Procurement Methods 3. Procurement of Works and Supply & Install: There will be small works under the Project to be carried out by the water utilities. In order to prepare the procurement plans the following threshold will be generally used: the procurement of works will be carried out through NCB procedures acceptable to the Bank up in individual contracts estimated to cost less than US$5 million. Contracts for smaller works in individual contracts estimated to cost less than US$300,000 will be carried through shopping. Contracts for Supply & Install will be carried through NCB procedures in individual contracts estimated to cost less than U S $ 3 million. 4. Procurement of Goods: Goods include computer and networking equipment, peripherals, software, IT accessories and micro-metering devices. In order to prepare the procurement plan, the following thresholds will be generally used: contracts for goods in individual contracts estimated to cost more than US$500,000 will be carried out through ICB; packages for goods estimated to cost less than US$500,000 but more than US$lOO,OOO will be procured through NCB procedures acceptable to the Bank; smaller packages for goods estimated to cost less than US$lOO,OOO will be procuredthrough shopping. 5. Procurement of Services (other than consultant services). All contracts for services not related to consultant services (logistics, organization of seminars, workshops, travel, printing 46 services) may be procured under same methodologies and thresholds specified for goods above, except for the ICB threshold that shall be US$250,000 in this category. 6. Hiring of Consulting Services: Firms. It i s expected that the project will finance several studies, design of information systems, data collection and analysis, development of a monitoring and evaluation system and technical assistance. All contracts for firms would be procured using QCBS procedures except for small contracts for assignments of standard or routing nature and estimated to cost less than US$lOO,OOO equivalent that would be procure using LCS. Single-source selection (SSS) procedures may be used, with prior agreement of the Bank, for hiring services that meet the requirements o f paragraphs 3.10 of the Consultants' Guidelines, for assignments when only one firm i s qualified or has experience of exceptional worth. The short list of consultants in contracts estimated to cost less than $500,000 equivalent, per contract, may be comprised entirely of national consultants, in accordance with the provisions of paragraph 2.7 o f the Consultant Guidelines. 7. Hiring of Consulting Services: Individuals. Specialized advisory services would be provided by individual consultants selected by comparison of qualifications of at least three candidates and hired in accordance with the provisions of paragraph 5.1 to 5.3 of the Consultant Guidelines. Sole-source selection of individual consultants may be contracted, with Bank's prior agreement, in accordance with provisions of paragraphs 5.4 o f the Consultants Guidelines. 8. Operating Costs: Project implementation unit staff, office utilities, and sundry items, will be financed b y the project and procured using CNA's administrative procedures which were reviewed andfound acceptable to the Bank. Procurement Methods/ Thresholds (US$) NCB for CNA and beneficiaries Institutional regulations/ Shopping D. Assessment of the agency's capacity to implement procurement 9. The Bank carried out a procurement capacity assessment o f central CNA for the proposed project. The overall procurement risk i s average due to the participation of entities that are not familiar with the Bank's procurement rules. The assessment indicates that central CNA's headquarters inMexico has well trained staff with experience in Bank procurement. If during the project implementation, there i s any state or municipal utility which i s expected to have 47 procurement actions in aggregate above US$2'000,000, CNA will carry out specific capacity assessment and risk assessment of the sub-national agency and would agree on an action plan to improve their performance in consultation with the Bank). The assessment conveys the fact that the institutional organization and staffing in the executing agency i s satisfactory and will remain intact during execution of the Project. An Action Planwas agreed at Negotiations to improve the procurement planning tools and other key actions, including the availability o f an Operational Manual. BANSEFI, as the financial agent for the project, will supervise procedures and contracts, including issuance of no objection to documentation and awards under the delegation the Bank makes o f its fiduciary responsibilities (ex-post review) not included in the prior review arrangements. E. ProcurementPlan 10. For the Institutional Development component, CNA would maintain a procurement plan for project implementation which provides the basis for the selection of the procurement methods. This plan has been agreed between the Borrower and the Project Team on April 2005 and i s available at Unidad de Agua Potable, CNA. It will also be available in the project's database and in the Bank's external website. The Procurement Plan will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements ininstitutional capacity. F. Frequencyof ProcurementSupervision 11. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of CNA has recommended two supervision missions annually, one at CNA and other to visit the field to carry out post review of procurement actions. G. Detailsof the ProcurementArrangementsand GlobalProcurementPlan 1. Works,GoodsandNonConsultingServices 12. The following items were identified as procurement of goods and services for the central CNA and two identified municipal utilities: 1 1 2 3 4 1 5 1 6 7 8 Ref. Contract Estimated No. (Description) Cost 1 Printing 30,000 services 2 Sundry items 10,000 3 Study Tour 91,000 4 Equipment 10,000 Rental I 5 Communicati 550.000 LPI No Yes Yes 42 ons services 6 Civil works 4,000,000 NCB INo I No Yes 42 2. Consulting Services 13. Seemingly, the following consultant services were identified during appraisal for central CNA and two participant municipal utilities: 14. The above identified contracts represent about 30% of the total cost of the Project. It i s expected that the other participant municipal utilities will model their procurement arrangements following the same types of contracts. H. Priorreview 15. The prior review will be identified in the annual Procurement Plan and generally will follow these rules: consultancy services estimated to cost above US$250,000 per contract and single source selection of consultants (firms) as well as individual assignments estimated to cost above US$lOO,OOO will be subject to prior review by the Bank. All ICB will be subject to prior review as well as the civil works contracts above US$ 3,000,000. 49 Annex 9: Economic and Financial Analysis MEXICO: Modernization of the Water and Sanitation Sector -TechnicalAssistance 1. Objectives 1. The objectives of the Water Sector Modernization Project are: (i) assist with the to modernization o f Mexico's water supply and sanitation sector through strengthening the sector policies at the federal and state level; and (ii)to develop and demonstrate replicable models of successful and sustainable provision of water and sanitation services, by supporting selected service providers and the municipalities of which they are a part in improving operational and financial performance. 2. Methodology 2. A cost benefit analysis was conducted on a sample subproject from the first group of participating municipalities and utilities, Puerto Vallarta, which was subjected to financial and economic analyses, which i s deemed representative of the type of interventions that would be financed by the project. To determine the net incrementalfinancial costs and benefits, "with" and "without" project scenarios were constructed. The "with" project situation assumed that all targets expected with the investment subproject would be met. The "without" project situation assumed that the performance and indicators of the utility would remain unchanged. On the basis of these scenarios, the incremental financial benefits and costs of the proposed investment programs were assessed. The stream of financial flows was then adjusted for the impact of taxes, subsidies, and externalities to arrive at the economic flows of costs and benefits. The study consisted of financial and economic analyses. 3. A similar methodology will be applied to municipalities and utilities interested in participating in the Project to establish subproject eligibility in terms of its financial feasibility. With this criteria, although the overall project was not analyzed, the project will guarantee at least a positive net present value of the interventions financed under this project. 3. Sample Selection Sample selection 4. The analysis included the following utility with its corresponding investment program (described indetail in annex IV): 50 4. Scenarios 5. To identify the incremental costs and benefits resulting from each subproject, "with" and "without" project scenarios were built for each of them. The "with" project scenario considered the proposed investment plan (described in detail in annex IV) and its associated targets and incremental benefits. The "without" project scenario considered the service would continue unchanged, that is, current performance, coverage, UFW levels and other operational indicators. 5. Assumptions 6. Investment Costs. The "with" project scenario also included all project costs including labor and the necessary equipment. 7. Incremental Benefits. The "with project scenario" considers the following: 0 Increased revenues resulting from higher volume o f water billed 0 Increased revenues resulting from the reclassification of the customers database and cadastre updates 0 Reduced operating costs resulting from the reduction of system operational losses 8. The project will generate additional economic benefits, including intangible and more difficult to measure environmental benefits and increased customer satisfaction. Improved reliability and leakage management will reduce the level o f illegal tampering and so reduce the cost of distribution maintenance. The Project will also have an impact on increasing the flexibility in the operational handling o f the systems and improved pressure management. This will reduce the level o f current pipe burst-out - and therefore leakage - while increasing the economic life of pipeline and therefore reducing the cost of distribution maintenance. These additional benefits have not been considered in the analysis, thus the results presented in this Annex are a conservative estimate of the economic impacts of the financed investments. 9. Operation and maintenance (O&M). Includes the cost of labor, chemicals, power, and all administrative costs. Incremental O&M costs resulting from the project are considered to be compensated by the incremental benefits described above which have not been considered in the analysis. 10. Collection EfSiciency. Collection efficiency was assumed to remain constant. 11. Unaccountedfor water. It i s defined as volume of water not billed over volume of water supplied. Its value has been projected according to targets on the project. 12. Theopportunity costs of raw water were assumed equal to zero. 13. The implementation schedule of each project varies from 1 to 3 years depending on the type of project. 51 6. Incremental Costs and Benefits 14. Costs and benefits associated with the "with" and "without" project scenarios are projected for 25 years, that is, during the implementation period and until the full impact of the projects i s obtained. The cash flows were discounted using a discount rate o f 9% percent for the financial analysis which i s estimated to be a proxy of Mexico's opportunity cost of capital. 7. Evaluation 15. The project i s evaluated from two different perspectives. The financial viability of each of the projects i s appraised measuring its flows of costs and benefits in market prices. Under a financial perspective, benefits are assumed equal to the estimated flow o f financial revenues. The economic viability i s appraised measuring the flows of costs and benefits in economic prices, which corresponded to stream of financial flows adjusted for the impact of taxes and subsidies. 8. FinancialAnalysis 16. The financial analysis of each subproject i s based on the flow of costs and benefits for each subproject in market prices. Financial benefits were calculated as the increase in revenues generated in higher volume of water billed (resulting from a reduction of commercial losses and customer database cleansing and cadastre updates), and (ii) the reduction on operating costs due to decrease on UFW. Results of the Financial Analvsis 9. Economic Analysis 17. The economic viability of each project i s appraised converting financial cash flows into economic cash flows by using conversion factors, and then discounting these cash flows using a discount rate of 12 %, that was assumed as a proxy of Mexico's opportunity cost of capital. Estimation of Economic Costs 18. For the estimation of economic costs, shadow prices were used to capture the effects to the economy of the use of goods and resources by the project. To convert market prices into shadow prices, conversion factors were used for the main inputs of the project: skilled and unskilled labor, domestic and imported inputs (pipes, equipment, and pumps) which are subject to different duties. 52 Table 2: Shadow Price Conversion Factors Item 1 ConversionFactor Labor Unskilled Skilled Domestic Inputs 19. Once all financial costs were converted into economic costs, incremental costs were calculated based on the comparison o f the "with" and "without" project scenarios. Estimation of Economic Benefits 20. The project will have the following benefits: (i) reduction of operating costs, the operating cost will decrease due to lower volume of water produced due to decrease on UFW; and (iv) continuity, pressure and customer attention improvement. Conservatively, the economic benefits of the project are assumed equal to the savings the utility will have once the project i s implemented. Results of the economic analysis Present Valueof Flows (Thousand Economic Area Utility US$) Rate of Benefits Costs Net Benefits Return (%) Puerto Vallarta SEAPAL 18,413 3,933 14,480 60% 21. The results of the economic analysis show that the subproject is economically feasible and so i t will have a positive impact on the economy. 10. SensitivityAnalysis 22. The leakage control program, was identified as the component conveying major risks to the expected outcome of the subproject, given that it accounts for 76% of the net benefits expected from the project. The analysis of this component assumes a reduction in UFW of 10% by year 4 of the project - reducing the current UFW from 35% to 25% and maintaining in that level thereafter. 23. The sensitivity analysis considered that only a 5% reduction of UFW i s achieved - equivalent to 1.25 million m3 of water per year - ,and that its achievement i s postponedto year 5 of the Project. This has a significant impact on the results generated by the subproject, although they are still very positive results: 0 internal rate of return for the project goes down from 52% to 32% 0 economic rate of return for the project goes down from 60% to 37% 0 net economic benefits go down from US$14.4 million to US$7.3 million 53 24. Cost overruns may also affect the results, and will be monitoredclosely by the project implementation unit to ensure that it remains as a moderate risk to the project. This analysis confirms the robustness of the results presented inthis Annex for the financial andeconomic analysis of the subproject. 54 Annex 10: Safeguard Policy Issues MEXICO: Modernizationof the Water and Sanitation Sector Technical Assistance - 1. The project has been ratedas Category "C" by the Regional Safeguards Advisor 55 Annex 11:ProjectPreparationand Supervision MEXICO: Modernizationof the Water andSanitationSector -TechnicalAssistance Planned Actual PCN review 07/01/2004 Initial P D to PIC 12/20/2004 Initial ISDS to PIC 01/16/2005 Appraisal 05/09/2005 Negotiations 06/23/2005 Board/RVP approval 08/02/2005 Planned date of effectiveness 10/31/2005 Planned date of mid-termreview 05/30/2007 Planned closing date 06/30/2009 Keyinstitutionsresponsiblefor preparationof the project: Comisidn Nacional del Agua (CNA) Bank staff andconsultants who worked on the project included: Name Unit Gustavo Saltiel Task team leader LCSFW JonathanHalpern Lead Economist EWDWS Ventura Bengoechea LeadWater Supply Specialist LCSFW Manuel Schiffler Senior Economist LCSFW PatriciaLopez FinancialAnalyst LCSFW PhilippeMarin Water & Sanitation Specialist WBLEN Martin Naranjo Senior Financial Analyst LCSFF EfraimJimenez Lead Procurement Specialist LCOPR Juan Carlos Alvarez Legal Counsel LEGLA Victor Ordonez Financial Management Specialist LCOAA Gabriel Peiialoza Procurement Analyst LCOPR Maria Angelica Sotomayor Economist LCSFW PatriciaAcevedo ProgramAssistant LCSFW Bankfunds expendedto date onprojectpreparation: 1. Bankresources: 110,000 2. Trust funds: 3. Total: 110,000 EstimatedApproval and Supervisioncosts: Bankresources: 300,000 56 Annex 12: Documents in the Project File MEXICO: Modernization of the Water and SanitationSector -Technical Assistance National Level 1. Avila, JosC Luis (abril 2004), Estudio de Focalizaci6n de las Zonas Urbanas Marginales en MCxico (Documento de circulaci6n restringida. N o citar), CNA-Banco Mundial, MCxico. 2. Barocio, R. (2005): Reporte Final - Apoyo para la Elaboraci6n de Estrategia para el Sector de Agua Potable y Saneamiento, Proyecto de Modernizaci6n del Sector Agua y Saneamiento en MCxico, Introduccibn del Reporte Final. 3. Capital Advisors, Ltd. (1999), Executive Summary - Public and Private Participation in the Water Sector in Mexico: The Technical Memoranda. "For a World BanW"Comisi6n Nacional del Agua", Mexico Study "Strengthening the Strategy for Public and Private Sector Participation in Water and Sewer Services in Mexican State and Local Governments". 4. Comisi6n Nacional del Agua, 2003, MCxico - Situaci6n del Sub-sector Agua Potable, Alcantarillado y Saneamiento - a diciembre de 2002. 5. Comisi6n Nacional del Agua, 2001, MCxico - Informe sobre Agua Potable y Saneamiento en Zonas Rurales 2001. 6. Comisi6n Nacional del Agua-CNA (2001), ProgramaNacional Hidriulico, 2001-2006. 7. Comision Nacional del Agua-CNA (2004), Estadisticas del Agua en MCxico - 2004. 8. Comisi6n Nacional del Agua-CNA (2002), Manual de Operaci6n del Programa de Agua Potable, Alcantarillado y Saneamiento en Zonas Urbanas. 9. Comisi6n Nacional del agua-CNA-Subdirecci6n General de Infraestructura Hidriulica Urbana (2004), Informe Final - Evaluaci6n de Resultados del Programa de Agua Potable, Alcantarillado y Saneamiento en Zonas Urbanas - APAZU, MCxico, marzo 2004. 10. Diario Oficial (2003), Reglas de Operaci6n para 10s Programas de Infraestructura hidro- agricola, y de agua potable, alcantarillado y saneamiento a cargo de la Comisidn Nacional del Agua, y sus modificaciones aplicables a partir del aiio 2003 - Secretaria de Medio Ambiente y Recursos Naturales. 11. Encuesta Nacional de Ingresos y Gastos de 10s Hogares (ENIGH) (2000), Cuadro 5. Hogares y promedio de gastos por condici6n de pobreza de patrimonio y tamaiio de la localidad, segdn indicador de gasto, 2000. 57 12. Environmental Resources Management Limited (Diciembre 2003), Estudio Legal, Regulatorio e Institucional- Informe de Avance - Proyecto de Modernizaci6n del Sector de Agua y Saneamiento. 13. "Environmental Resources Management Limited" (Febrero 2004), Estudio Legal, Regulatorio e Institucional- Informe de Avance - Proyecto de Modernizaci6n del Sector de Agua y Saneamiento. 14. ProcuraduriaFederal de Protecci6n a1Ambiente (1997), Normal Oficial Mexicana NOM- 001-1996, que establece 10s limites maximos permisibles de contaminantes en las descargas residuales en aguas y bienes nacionales. 15. Poggi, Luis (Diciembre 28, 2003), MCxico - AnBlisis de la Situaci6n del Sector de Agua Potable y Saneamiento, Versi6n Preliminar. 16. PRODDER, Lineamientos para el Otorgamiento de 10s Ingresos Federales obtenidos por el Uso, Explotaci6n o Aprovechamiento de Aguas Nacionales, en la Realizaci6n de Acciones de Mejoramiento de Eficiencia y de Infraestructura de Agua Potable, Alcantarillado y Tratamiento de Aguas Residuales. 17. Secretaria de Medio Ambiente y Recursos Naturales (SEMRNAT), Banco Nacional de Obras y Servicios Pdblicos, S.N.C. (BANOBRAS), Comisi6n Nacional del Agua (CNA) (2002), Programa para la Modernizacih de Organismos Operadores de Agua (PROMAGUA), Diciembre 2002. 18. Unidad Politica de Ingresos, Direcci6n General Adjunta de Derechos, Productos y Aprovechamientos (2002), Ley Federalde Derechos. Baia California 19. XVII Legislatura - Peri6dico Oficial No. 14 del 30 de abril de 1969, Tom0 LXXVIdel Servicio de Agua Potable (1969), Ley que Reglamenta el Servicio de Agua Potable en el Estado de Baja California. 20. XVII Legislatura (1979) - Peri6dico Oficial No. 4, Secci6n I, fecha 10 de febrero de de 1979, Tom0 LXXXVI, Ley de las Comisiones Estatales de Servicios Pdblicos del Estado de Baja California. 21. Comisi6n Estatal del Agua de Baja California, Comisi6n Nacional del Agua (CNA), CESPM, CESPE (2003), Informe 2003 - Proyecto de Infraestructura Hidriiulica para el Saneamiento Ambiental y Suministro de Agua Potable en el Estado de Baja California, y el Programa de Fortalecimiento Institucional (PROFI) de las Comisiones Estatales de Servicios Pdblicos de Mexicali, Tijuana y Ensenada. 22. Comisi6n Estatal del Agua, Secretaria de Infraestructura y Desarrollo Urbano (octubre 2003), Resumen Ejecutivo - ProgramaEstatal Hidrhlico 2003-2007. 58 23. Ley de Ingresos 2003, Baja California, Titulo Cuarto, Derechos por la Prestaci6n de 10s Siguientes Servicios Pdblicos. 24. Ley de Hacienda del EstadoBaja California, Articulos 157, 158, 159 y 160. 25. Martinez Carrillo, Sadl, C.P., Direcci6nde Planeaci6n y Finanzas-Direccibn de Inversi6n Pdblica (2003), Informe Ejecutivo - Inversi6n Autorizada-aprobada-ejercida a1 30 de noviembre de 2003. 26. Secretaria de Planeaci6n y Finanzas-Direcci6n de Inversi6n Pdblica, Informe Comparativo de Inversi6n Pdblica. Chiapas 27. Comisi6n Estatal de Agua y Saneamiento (CEAS) - Gobierno del Estado de Chiapas. Cuadro de Regiones, Tarifas y Us0 Domestico. 28. Water Supply and Sanitation inChiapas (internal memo). 29. Water System of the San Crist6bal de Las Casas, third largest municipality in Chiapas (internal memo). Estadode MCxico 30. Comisidn Nacional del Agua, Programa Hidriulico Integral del Estado de Mexico, ResumenEjecutivo - Introducci6n. 31. Comisidn Nacional del Agua, Programa Hidriulico Integral del Estado de Mexico, ResumenEjecutivo -2. Marco de Planeacidn. 32. Comisi6n Nacional del Agua, Programa Hidriulico Integral del Estado de Mexico, ResumenEjecutivo - 3. Diagn6stico de 10s Recursosy Servicios Hidriulicos. 33. Comisi6n Nacional del Agua, Programa Hidriulico Integral del Estado de Mexico, ResumenEjecutivo -4. Objetivos, Estrategiasy Metas. 34. Comisi6n Nacional del Agua, Programa Hidriiulico Integral del Estado de Mexico, ResumenEjecutivo -5. Proyecci6n de la Demanda delAgua. 35. Comisi6n Nacional del Agua, Programa Hidriulico Integral del Estado de Mexico, ResumenEjecutivo - 6. Planteamiento y Evaluaci6n de Programas y Acciones. 36. Comisi6n Nacional del Agua, Programa Hidriiulico Integral del Estado de Mexico, ResumenEjecutivo -7. Identificaci6ny Evaluacidn de Fuentes de Financiamiento. 59 37. Comisidn Nacional del Agua, Programa Hidrhulico Integral del Estado de Mtxico, Resumen Ejecutivo - 8. Desarrollo Institucional. 38. Comisi6n Nacional del Agua, Programa Hidr6ulico Integral del Estado de MCxico, Resumen Ejecutivo - 9. Conclusiones y Recomendaciones. 39. Comisi6n Nacional del Agua, Programa Hidrhlico Integral del Estado de MCxico, Resumen Ejecutivo - 10. Acciones a Realizar en el Corto Plazo. 40. Gobierno del Estado de MCxico, Secretaria de Agua, Obra Pdblica e Infraestructura para el Desarrollo, Comisi6n del Agua del Estado de MCxico (CAEM); Microcircuito de Distribuci6n de Agua Potable. 41. Water Supply and Sanitation inEstado de MCxico (internal memo). Guanajuato 42. Comisi6n Nacional del Agua, Diagn6stico Sectorial de Agua Potable y Saneamiento 2000-2002. 43. Ley de Aguas para el Estado de Guanajuato, Texto Original-Ley Publicada en el Peri6dico Oficial, 26 de mayo de 2000. 60 Annex 13: Statementof Loansand Credits MEXICO:Modernizationof the Water andSanitationSector -TechnicalAssistance ~ ~~ Differencebetween expectedand actual Original Amount in US$Millions disbursements Project ID FY - Purpose IBRD IDA SF GEF Cancel. Undisb Orig. Frm.Rev'd PO74755 2005 MX State JudicialModernizationProject 30.00 0.00 0.00 0.00 0.00 30.00 0.00 0.00 PO85851 2005 M X Basic EducationDev PhaseI11 300.00 0.00 0.00 0.00 0.00 300.00 0.00 0.00 PO70371 2004 M X Afford.Housing & Urb.Pov.Prog. 100.00 0.00 0.00 0.00 0.00 100.00 0.00 0.00 SECAL PO80149 2004 M X Decentralized Infrastructure 108.00 0.00 0.00 0.00 0.00 108.00 0.00 0.00 Developm PO87152 2004 M X Savings & Rurl Finance(BANSEFI 75.50 0.00 0.00 0.00 0.00 75.50 0.00 0.00 PO35751 2004 M X Community Forestry I1 21.30 0.00 0.00 0.00 0.00 21.09 1.59 0.00 (PROCYMAF11) PO35752 2004 M X Irrigation& DrainageModemization 303.03 0.00 0.00 0.00 0.00 300.00 38.47 0.00 PO70108 2003 M X Savings & Credit Sector 64.60 0.00 0.00 0.00 0.00 34.50 8.40 0.00 Strengthening PO74655 2003 M X RuralFinanceDevelop Struct Adj 505.06 0.00 0.00 0.00 0.00 300.01 0.01 0.00 Loan PO60686 2003 M X Municipal Dev in RuralAreas 400.00 0.00 0.00 0.00 0.00 396.00 216.00 0.00 PO59161 2003 GEFMX-Climate Measures in Transport 0.00 0.00 0.00 5.80 0.00 4.81 4.53 0.00 PO65988 2002 GEFM X Consolidat.Prot Areas (SINAP 0.00 0.00 0.00 16.10 0.00 4.48 12.83 0.00 11) PO77602 2002 M X Tax Admin Institutional Development 52.00 0.00 0.00 0.00 0.00 45.28 24.13 0.00 P066674 2001 GEFMX-Indigenous&Community 0.00 0.00 0.00 7.50 0.00 5.83 5.34 0.00 Biodiversity PO66321 2001 MX: I11BASIC HEALTH CARE 350.00 0.00 0.00 0.00 0.00 319.22 127.72 0.00 PROJECT PO65779 2001 M X FEDERAL HIGHWAY 218.00 0.00 0.00 0.00 0.00 44.93 44.93 0.00 MAINTENANCE PROJ. PO64887 2001 M X DISASTER MANAGEMENT (ERL) 404.05 0.00 0.00 0.00 200.00 181.27 288.22 0.00 PO60908 2001 GEFMX-MESO AMERICAN 0.00 0.00 0.00 14.84 0.00 15.23 7.97 0.00 CORRIDOR PO63463 2001 METHANE CAPTURE & USEAT A 0.00 0.00 0.00 6.27 0.00 0.93 5.86 5.27 LANDFILL PO60718 2000 GEFM X ALTERNATIVE ENERGY 0.00 0.00 0.00 8.90 0.00 3.61 8.90 0.00 PO66938 2000 MX GENDER (LIL) 3.07 0.00 0.00 0.00 0.00 1.13 1.13 0.17 PO07610 1999 M X FOVIRESTRUCTURING 505.50 0.00 0.00 0.00 0.00 180.63 180.63 0.00 PO44531 1998 M X KNOWLEDGE& INNOV. 300.00 0.00 0.00 0.00 0.00 51.52 5152 -33.97 PO49895 1998 M X HIGHER ED.FINANCING 180.20 0.00 0.00 0.00 0.00 61.52 61.52 0.00 PO07713 1996 M X WATER RESOURCES MANA 186.50 0.00 0.00 0.00 54.00 27.00 81.OO 18.99 Total: 4,106.81 0.00 0.00 59.41 254.00 2,612.49 1,170.70 - 9.54 61 MEXICO STATEMENT OF IFC's Heldand DisbursedPortfolio InMillions of US Dollars Committed Disbursed IFC IFC ~~ FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. ~ 1998 Ayvi 5.00 0.00 0.00 0.00 5.00 0.00 0.00 0.00 BBVA-Bancomer 27.50 0.00 0.00 0.00 27.50 0.00 0.00 0.00 1995199 BaringMexFnd 0.00 1.88 0.00 0.00 0.00 1.88 0.00 0.00 1998 CIMA Mexico 0.00 4.80 0.00 0.00 0.00 4.80 0.00 0.00 1998 CJMA Puebla 6.15 0.00 0.00 0.00 3.25 0.00 0.00 0.00 Chiapas-Propalma 0.00 1.oo 0.00 0.00 0.00 1.oo 0.00 0.00 2001/04 Compartamos 24.25 0.00 0.00 0.00 5.69 0.00 0.00 0.00 2003 Copamex 0.00 0.00 25.00 0.00 0.00 0.00 25.00 0.00 2003 CopamexCPG 57.00 0.00 0.00 46.00 53.57 0.00 0.00 46.00 2002 Coppel 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 1999 Corsa 6.50 3.00 0.00 0.00 6.50 3.00 0.00 0.00 2004 DTM 37.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2001 Ecomex 4.75 0.00 1S O 0.00 2.75 0.00 1S O 0.00 2000 Educacion 6.23 0.00 0.00 0.00 4.63 0.00 0.00 0.00 1997 FondoChiapas 0.00 3.35 0.00 0.00 0.00 0.11 0.00 0.00 1998 Foja Monterrey 7.43 3.00 0.00 7.43 7.43 3.00 0.00 7.43 2001 GFNorte 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996 GIBSA 10.82 0.00 0.00 36.38 10.82 0.00 0.00 36.38 1996100 GIRSA 35.36 0.00 0.00 47.14 35.36 0.00 0.00 47.14 1998104 Grupo Calidra 22.00 0.00 0.00 0.00 11.26 0.00 0.00 0.00 1989 Grupo FEMSA 0.00 2.73 0.00 0.00 0.00 2.73 0.00 0.00 1997 Grupo Minsa 12.60 0.00 0.00 17.97 12.60 0.00 0.00 17.97 1996199 Grupo Posadas 21.05 0.00 10.00 0.00 21.05 0.00 10.00 0.00 1998 Grupo Sanfandila 5.24 0.00 0.00 1.90 5.24 0.00 0.00 1.90 2004 HipNal 100.66 0.00 0.00 0.00 100.66 0.00 0.00 0.00 2000 HospitalABC 30.00 0.00 0.00 14.00 10.29 0.00 0.00 7.21 2000 ITR 10.00 0.00 0.00 2.67 10.00 0.00 0.00 2.67 2000 Innopack 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 Interoyal 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 2003 Lomas de Real 51.61 0.00 20.00 105.10 50.33 0.00 20.00 105.10 1998 Merida 111 27.08 0.00 0.00 61.75 27.08 0.00 0.00 61.75 2003 Mexmal 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.00 1995199 MexplusPuertos 0.00 1.41 0.00 0.00 0.00 1.41 0.00 0.00 1996/99100101 NEMAK 0.00 0.00 1.51 0.00 0.00 0.00 1.51 0.00 2003 OccidentalMex 30.00 0.00 0.00 40.00 30.00 0.00 0.00 40.00 Occihol 0.00 9.99 0.00 0.00 0.00 9.99 0.00 0.00 2003 POLOMEX S.A. 6.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00 2000 Pan American 0.00 6.39 0.00 0.00 0.00 6.39 0.00 0.00 2002 PuertasFinas 12.19 0.00 0.00 0.00 12.19 0.00 0.00 0.00 62 2002 Qualita 0.00 2.50 3.50 0.00 0.00 2.50 3.50 0.00 2000 Rio Bravo 46.62 0.00 0.00 53.22 46.62 0.00 0.00 53.22 2004 SSA Mexico 45.00 0.00 0.00 0.00 45.00 0.00 0.00 0.00 2000 Saltillo S.A. 33.00 0.00 0.00 38.77 33.00 0.00 0.00 38.77 2000 Servicios 8.25 1.90 0.00 7.50 8.25 1.90 0.00 7.50 2001/04 Su Casita 15.85 0.00 0.00 0.00 15.85 0.00 0.00 0.00 1997 TMA 1.53 0.00 2.89 5.30 1.53 0.00 2.89 5.30 2003 TMWC 3.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2003 Valle Hermoso 52.00 0.00 20.00 107.09 39.90 0.00 15.40 82.44 ZN Mexico I1 0.00 10.00 0.00 0.00 0.00 6.30 0.00 0.00 1998 ZN Mxc Eqty Fund 0.00 13.87 0.00 0.00 0.00 13.87 0.00 0.00 Total portfolio: 842.27 80.83 94.40 592.22 679.35 73.89 89.80 560.78 ~~ Approvals PendingCommitment FY Approval Company Loan Equity Quasi Panic 2004 Calidra I1 0.00 0.00 0.00 0.01 1998 Cima Hermosillo 0.01 0.00 0.00 0.00 2003 Copamex 0.00 0.00 0.00 0.00 2001 Ecomex 0.00 0.00 0.00 0.00 2000 Educacion 0.00 0.00 0.00 0.00 2001 GFNorte-CL 0.05 0.00 0.00 0.10 2003 Mexmal 0.00 0.00 0.01 0.00 2003 Polomex 0.00 0.00 0.00 0.00 Total pending commitment: 0.06 0.00 0.01 0.11 63 Annex 14: Country at a Glance MEXICO: Modernizationof the Water and Sanitation Sector -Technical Assistance Latin Upper- POVERTY and SOCIAL America middle- Mexico &Carib. income Development diamond' 2003 Population, mid-year(miiiions) 1)2 3 534 335 Lifeexpectancy GNIpercapita (Atlas method, US$) 6230 3260 5,340 GNi (Atlas method, US$ bilons) 6373 1,741 1,788 T Average annual growth, 1997-03 Population (%) 14 15 12 Laborforce (77) 24 21 18 GNi Gross M o s t recent estimate (latest year available, 1997-03) per primary capita enrollment Poverty (%of population belownationalpovenyline) Urbanpopulation(%of totalpopulatfon) 75 77 76 Lffeexpectancyat birth (years) 74 71 73 1. Infant mortality (per 1,OOOlive births) 24 28 19 Childmalnutntion (%ofchildren under5) 8 Access to improvedmtersource Access to an improvedmtersource(%ofpopulation) 88 86 89 Illiteracy(%ofpopulationage 54 9 11 9 Gross pnmaryenrollment (%of school-age population) 11) e 9 D4 -Mexico Male 111 131 1)4 Upper-middle-incomegroup Female 11) P6 1)4 ~ KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1983 1993 2002 2003 GDP (US$ billions) Economic ratios' 1489 4032 648 5 626.1 Gross domestic investmentlGDP 208 210 20 7 198 Exports of goods and serviceslGDP 190 152 26 8 28.4 Trade Gross domestic savingslGDP 303 i71 188 182 Gross national savings/GDP 250 151 185 18.1 T Current account balancelGDP 39 -58 -22 -I8Domestic interestpaymentslGDP 5 5 14 16 16 savings investment Total debtlGDP 625 324 216 22 6 Total debt serviceleworts 453 357 232 1 Presentvalue of debtiGDP 238 Presentvalue of debtlexports 82 5 I indebtedness " 1983-93 1993-03 2002 2003 2003-07 (averageannualgrowth) GDP 24 32 07 13 3 6 -Memo GDP Dercapita 04 17 -07 -0.2 19 - Upper-middle-incomegroup STRUCTURE of the ECONOMY 1983 1993 1 Growth of investment and GDP ( O h )I (%of GDP) Agriculture 8.5 6.3 4.0 4.O lndustfy 352 26.8 26.5 26.4 Manufacturing 21.3 19.0 18.5 18.1 Services 56.3 66.9 69.5 69.6 Private consumption 60.9 71.9 69.1 692 Generalgovernmentconsumption 8.8 110 e.1 e.7 Imports of goods and services 9.4 19.2 28.7 30.1 1983-93 1993-03 2002 2003 (averageannualgrowih) Growth of exports and imports ( O h ) Agriculture 0.8 2.1 0.3 3.9 N T Industry 32 3.5 -0.3 -0.7 20 Manufacturing 3.5 4.0 -0.7 -2.0 Services 2.4 3.1 1.2 1.9 io Private consumption 3.3 3.3 1.3 3.0 0 Generalgovernmentconsumption 2.1 1.5 0.1 2.5 Gross domestic investment 4.7 4.6 0.7 -8.4 Imports of goods and Sewices 142 112 1.4 -1.0 64 Mexico ' PRICES and GOVERNMENT FINANCE 1983 1993 2002 2003 Domestic prices Inflation ( O h ) I (%change) 25 T Consumer prices 01.9 9.8 5.0 2.9 Implicit GDP deflator 90.5 9.5 6.9 6.5 Government finance (%of GDP.includes current grants) Current revenue 31.8 23.1 22.2 22.7 98 99 00 01 02 0 Current budgetbalance -1.6 3.6 2.0 2.6 Overall surpiusideficit -7.3 0.7 -1.2 -0.5 TRADE I 1983 1993 2002 2003 (US5 millions) Export and import levels (USS mill.) Total exports (fob) 25,953 51,886 160,80 164,240 200.000T Oil 16,OD 7,418 14,475 18,083 Agriculture 1,189 2,504 3,998 4,67 150000 Manufactures 8,224 41,685 141,951 141,049 Total imports (cif) 11,848 65,367 168,949 169,634 100 000 Food Fuel and energy 50 000 I Capital goods 2,197 11,056 20,992 20,023 0 Export price index(W95=WO) 18 88 0 6 d 9 97 98 99 00 01 02 Import price index(W95=X)0) 76 92 0 2 0 4 5 Exports Imports Terms of trade (895=WO) 156 95 TI3 0 4 ~ 03 BALANCE of PAYMENTS 1983 1993 2002 2003 (US$ millions) Current account balance to GDP ( O h ) Exports of goods andsewices 30,027 61,305 w 4 5 4 77,597 Imports of goods andsewices 16216 7698 185,419 186,618 Resource balance U,80 -5,611 -11,964 -9,021 Net income -9,P3 -11,429 -t2,308 -14,732 Net current transfers 1,73 3,640 0,268 P,724 Current account balance 5.860 -23,399 -14,004 -11,030 Financingitems (net) -3,826 30,631 21,379 P,928 Changes in net reselves -2,033 -7,232 -7,375 -1,898 Memo: Reselves includinggold (US5 millions) 3,997 25,x33 50,607 52,705 Conversion rate (DEC,local/US$j 0.1 3.1 9.7 0.8 EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) Composition of 2003 debt (USS mill.) Total debt outstanding and disbursed 92,974 x30,520 140,164 141,290 iBRD 2,870 P,322 0,797 0 , 7 7 IDA 0 0 0 0 G 9,900 A 'Ot717D 7,174 Total debt selvice 14,825 24,081 43,536 38,524 I IBRD 399 1,895 2,071 1,951 IDA 0 0 0 0 Composition of net resource flows Officialgrants 47 53 42 Officialcreditors -283 1 246 -363 Privatecreditors 2,639 2,546 -4257 7,036 Foreigndirect investment 2,192 4,389 14,622 Portfolio equity 0 0,716 -04 World Bank program F: 110,828 Commitments 740 680 1,6P 628 Disbursements 360 1,098 1,247 E - Bilateral 1,258 A IBRD B IDA -- D Other multilatwal . F. Private Principal repayments 183 991 1,334 1,338 C-IMF G - Short-teri 65 Annex 15: Map MEXICO: Modernization of the Water and Sanitation Sector Technical Assistance - 66 IBRD 34141 110° 100° 90° This map was produced by the Map Design Unit of The World Bank. Tijuana Mexicali The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any Colorado endorsement or acceptance of such boundaries. Ensanada Sonoita Ciudad Juárez San Felipe U N I T E D S T A T E S O F A M E R I C A Nogales Bravo Agua Prieta B A J A Grande 30° 30° G u S O N O R A C H I H U A H U A C A L I F O R N I A l f Ojinaga Hermosillo Cd. Acuña M E X I C O Sonora o Conchos Chihuahua Piedras Negras MODERNIZATION OF THE WATER AND La Perla f Yaqui Nava Bravo SANITATION SECTOR Guaymas Nueva Rosita Santa Rosalia Ciudad Obregón El Sauz TECHNICAL ASSISTANCE PROJECT C C O A H U I L A Nuevo Laredo Est. Hermanas Salado BAJA a Navojoa Frontera DIVIDED HIGHWAYS l Parral i Montclova SELECTED MAIN ROADS Castanos CALIFORNIA f te N U E V O Grande RAILROADS Loreto o Fuer L E O N PRINCIPAL AIRPORTS SUR r Los Mochis Reynosa n Monterrey Matamoros RIVERS i Guasave Torreón a Saltíllo SELECTED CITIES AND TOWNS Fernando STATE CAPITALS Culiacán San DURANGO Linares Puerto Mexico SINALOA Cuencame TAMAULIPAS NATIONAL CAPITAL La Paz San Roberto HIdalgo Barretal STATE BOUNDARIES Durango ZACATECAS Ciudad INTERNATIONAL BOUNDARIES Victória Matehuala El Huisache Rio Grande Gonzalez Mazatlán Llera 0 100 200 300 400 500 Kilometers Cabo San Lucas Fresnillo Cd. Mante Est. Manuel Zacatecas SAN LUIS POTOSI Altamira Cd. Madero 0 100 200 300 Miles AGUASCALIENTES Ventura Tampico N AYA R I T Pánuco Aguascalientes San Luis Potosí Cd. Valles G u l f o f M e x i c o Pto. Juárez Progreso Tizimin Tepic GUANAJUATO VERACRUZ Merida Cancun Leon ARO Valladolid Cozumel Zapopan Guanajuato Tuxpan Y U C ATA N Irapuato QUERET Querétaro 20° Poza Rica PuertoVallerta Guadalajara Tlaquepaque Tulum Salamanca HIDALGO 20° Celaya Peto J A L I S C O Lerma Palmillas Pachuca PUEBLA Campeche Tulancingo Piramides Q U I N TA N A Morelia Jalapa Tlaxcala B a y o f C a m p e c h e P A C I F I C Colima Uruapan MEXICO TLAXCALA R O O Manzanillo Veracruz Apatzingan Toluca D.F. Puebla Cd. del MEXICO Córdoba Carmen Chetumal COLIMA Tecomán MICHOACAN Cuernavaca MORELOS Orizaba CAMPECHE San Andrés Tuxtla Taxco Coatzacoalcos TABASCO Balsas Villahermosa Lazero Cardenas Minatitlan O C E A N G U E R R E R O Zihuatenejo Chilpancingo Grijalva BELIZE Oaxaca C H I A PA S Usumacinta Acapulco O A X A C A Tuxtla Gutierrez Pinotepa Juchitan Nacional Tehuantepec Puerto Escondido G U A T E M A L A HONDURAS Tapachula 110° 100° 90° JULY 2005