Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No. 3026d-ME

Public Disclosure Authorized STAFF APPRAISAL REPORT

MEXICO

SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT Public Disclosure Authorized

October 7, 1980 Public Disclosure Authorized

Water Supply and Sewerage Division Latin America and Caribbean Regional Office

This document has a restricted distribution and may be used by recipients only in the performance or their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS

Currency Unit = Peso

US$1 = Mex$22.8 (June 1980)

MEASURES

1 mm = millimiter = 0.04 inches

1 cm = centimeter = 0.39 inches

1 m = meter = 3.28 feet

1 km = kilometer = 0.62 miles

1 1 = liter = 0.26 US gallons 3 1 m = cubic meter = 264 US gallons

1 m /sec = cubic meter = 22.82 MGD = per second million US gallons per day

ABBREVIATIONS AND ACRONYMS

AWS companies = Autonomous Municipal or State Water Supply and Sewerage companies

BANOBRAS = National Bank for Public Works (Banco Nacional de Obras y Servicios Publicos S.A.)

COPLAMAR = Committee for Coordination for Depressed Areas (Comite de Coordinacion y Planeacion para Zonas Marginadas)

CUC = CoordinationAgreementsbetweenFederal and State Governments (Convenios Unicos de Coordinacion)

DGC = Directorate for Construction of Water Supply and Sewerage Systems (Direccion General de Construccion-SAHOP)

FIFAPA = Investment Fund for Water Supply and Sewerage Works (Fondo de Inversiones Financieras para Agua Potable y Alcantarillado) FOR OFFICIALUSE ONLY ICB = International Competitive Bidding

IRR = Incremental Rate of Return

JFMM = Federal Boards of Public Works (Juntas Federales de Mejoras Materiales)

PNDU = National Plan for Urban Development (Plan Nacional de Desarrollo Urbano)

PNH = National Hydraulic Plan (Plan Nacional Hidraulico)

SAHOP = Secretariat of Human Settlements and Public Works (Secretaria de Asentamientos Humanos y Obras Publicas)

SARH = Secretariat of Agriculture and Hydraulic Resources (Secretaria de Agricultura y Recursos Hidraulicos)

SCF = Financial Coordinating Unit-Directorate of Construction of Water and Sewerage Systems (SAHOP)

SFC = Financial Coordinating Unit (Subdireccion de Coordinacion Financiera-DGC)

SHCP = Secretariat of Finances (Secretaria de Hacienda y Credito Publico)

SPP = Secretariat of Programming and Budgeting (Secretaria de Programacion y Presupuesto)

UNDP United Nations Development Programme

VAT = Value Added Tax

FISCAL YEAR

January 1 - December 31

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

MEXICO

STAFF APPRAISAL REPORT

SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

TABLE OF CONTENTS Page No.

I. INTRODUCTION ...... 1

II. THE SECTOR ...... 2

Population ...... 2 Water Resources ...... 2 Health Situation ...... 3 National Planning ...... 3 Sector Organization ...... 3 Service Levels and Quality ...... 5 Past Sector Investments ...... 7 Sector Objectives and Programs ...... 7 Manpower Aspects ...... 8 Review of Previous Bank Loans ...... 8

III. THE BORROWER AND EXECUTING AGENCY ...... 10

Introduction ...... 10 The Borrower (BANOBRAS) ...... 10 FIFAPA Trust Fund ...... 10 The Executing Agency (SAHOP)...... 11

IV. THE BENEFICIARIES .12

Organization .12 Accounting .13 Audit .13 Tariffs .14

V. POPULATION, SERVICE AND DEMAND IN THE PROJECT CITIES *- 14

General ...... 14 Water Resources ...... 16 Existing Water Supply and Sewerage Systems ...... 16 Population Served and Service Levels ...... 16 Water Production and Consumption ...... 17 Population and Demand Projections ...... 20

This report is based on the findings of an appraisal mission which visited Mexico from March 10 to 28, 1980. The mission was comprised by Messrs. G. Yepes, Engineer; J. Culagovski, Economist; and L. Pereira, Financial Analyst. TABLE OF CONTENTS (Continued)

Page No,

VI. THE PROJECT ...... 20

Introduction ,... 21 Project Objectives .... 21 Priority Criteria ...... 21 Service Standards ,...,.,...... 22 Status of Design ...... 22 Project Description .. 22 Cost Estimates ...... ,. .. 23 Project Financing ...... 24 Implementation ...... '26 Procurement ...... ,,., . 26 Disbursement ...... ,., 28 Environmental Aspects ...... ,.,.,.,. 28

VII. FINANCIAL ASPECTS ...... 29

BANOBRAS Financial Performance . . .29 Subborrowers Financial Performance . .29 Financing Plan ...... 31 Subloan Agreements . . .35 Tariff Structures ...... ,. . 37 Future Finances of Beneficiary Cities . . .38 Reporting Requirements . . .38

VIII. ECONOMIC AND SOCIAL ANALYSIS .38

Introduction .38 Incremental Rates of Return and Marginal Costs .39 Project Sensitivity .40 Least-Cost Solution .40 Population Benefitted and Urban Poverty Impact .41 Affordability of Project Services by the Urban Poor... 41 Project Risks ...... 44

IX. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS . 44

LIST OF ANNEXES

1. Description of Existing Facilities 2. Proposed Works and Project Costs 3. Organization Chart of SAHOP 4. Organization Chart of D.G.C. 5. Project Costs 6. Consolidated Financial Statements of BANOBRAS 7. Financial Statements of FIFAPA 8. Summary of Assumptions Used in Financial Projections TABLE OF CONTENTS (Continued)

9. Financial Projections of Appraisal Cities 10. Projected Average Water and Sewerage Tariffs and Revenue Covenant Calculations 11. Monitoring Indicators 12. Outline Terms of Reference for Tariff Study 13. Incremental Rate of Return (IRR) and Long Run Average Incremental Cost (AIC) Calculations 14. Selected Documents and Data Available in Project Files

LIST OF TABLES

2.1 Water and Sewerage Service Levels in Mexico

5.1 Main Characteristics of Water and Sewerage Services in Appraised Cities

5.2 Water Consumption Distribution (metered use)

5.3 Population and Demand Projections

6.1 Summary of Project Costs

6.2 Estimated Schedule of Loan Disbursements

7.1 FIFAPA-Cash Flow Statement (1980-1984)

7.2 Appraised Companies Balance Sheet as of December 31, 1979 and Income Statement for 1979

7.3 Appraised Companies Financing Plan (1980-1984)

7.4 Project Financing Plan 1980-1984

8.1 Incremental Rates of Return

8.2 Incremental Population Served 1979-1984

8.3 Affordability of Minimum Consumption

LIST OF MAPS

No.15092Location of appraised Cities included in the Project.

MEXICO

SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

STAFF APPRAISAL REPORT

I. INTRODUCTION

1.01 The Government of Mexico has requested the continuation of Bank finan- cial assistance for the expansion and improvement of water supply and sewerage systems in medium-size cities. The project was prepared by the Secretariat of Human Settlements and Public Works (SAHOP) with Bank assistance. The total cost of the project is estimated at US$297 million equivalent, and a Bank loan of US$125 million is recommended to finance the foreign exchange component. The Borrower will be the National Bank for Public Works (BANOBRAS), and the Executing Agency, will be SAHOP. The Beneficiaries will be state or municipality-owned water supply and sewerage companies. The works to be financed are scheduled for construction and completion during the four year period 1980-84.

1.02 The following medium-size cities are expected to benefit from the project (see map No. 15092):

City State 1979 Proposed Works Population

1. Monclova Coahuila 254,300 Sewerage 2. Nogales Sonora 115,100 Water 3. Tepic Nayarit 121,400 Water & Sewerage 4. Toluca Mexico 240,000 Water & Sewerage 5. Cd.Juarez Chihuahua 671,500 Water & Sewerage 6. Matamoros Tamaulipas 214,500 Water & Sewerage 7. Queretaro Queretaro 315,000 Water & Sewerage

SAHOP had prepared feasibility studies for the first four cities by the time of appraisal; this report summarizes the conclusion of these studies. Subsequently SAHOP liubmitted satisfactory feasibility studies covering the last three cities- . SAHOP is preparing additional feasibility studies for two or three more cities accounting for the balance of the project and would be submitted to the Bank not later than June 30, 1981.

1.03 In addition to reviewing the four subprojects mentioned above, the appraisal mission focused on strengthening the capacity of BANOBRAS and SAHOP. Particular attention was given to SAHOP's project preparation, supervision, and technical assistance responsibilities (para. 2.23, 3.13 and 6.15).

1! Feasibility studies for subprojects comprising 71% of project costs available in Project Files; general information and project description are given in Annexes 1, 2 and 5. -2-

II. THE SECTOR-/

Population

2.01 The mid-1979 population of Mexico was estimated at 67.9 million inhabitants, of which about 63% were urban and 37% rural (communities with less than 2,500 inhabitants). The total population is growing at an estimated rate of 2.9% annually. This growth rate has been declining from 3.5% p.a. which prevailed in the 1960s in part as a result of the family planning program started in 1972. The present administration is further strengthening this program with the ambitious goal of reducing population growth to 1% p.a. by the year 2000.

2.02 With regard to the provision of public services, the problem of rapid population growth is compounded by an uneven geographic dis- tribution. Twenty percent of the total population lives in the congested Mexico City metropolitan area, while rural population is scattered among almost 100,000 localities. A serious effort is being made to influence population distritTtion patterns through the National Plan for Urban Development (PNDU)-

Water Resources

2.03 Mexico has particular water resource limitations. Rainfall ranges from 100mm per year in dry areas to 5,000mm in the tropical low lands. Heavy rainfall areas are thinly populated, while dry areas are heavily populated. About 85% of the surface water resources are found below 500 meters of elevation, while 75% of the population and 80% of the industrial output are located above that level. As a result, water in many areas is scarce and costly, and competing demands from agriculture, domes- tic consumers, and hydroelectricity are accentuated. Aware of the needs for orderly use of their scarce water resources, the Mexican Government requested assistance from United Nations Development Programme (UNDP) to prepare a national water study. The resulting National Water Plan (PNH), for which the Bank was the executing agency, was prepared from 1972-75. Its objectives, which were at least partially achieved, were to formulate and institutionalize systematic water resource planning to aid in the rational selection of water programs, projects and policies. To this end, a permanent PNH commission was established in 1976 under the Secretariat of Agriculture and Hydraulic Resources (SARH).

2.04 The total mulWi-use water consumption in 1970 was estimated at around 31,000 million m , representing §% of the total annual renewable water resources (over 400,000 million m ). Of the water withdrawn, 95% was used for irrigation, 3% for domestic use, and 1% each for energy and indus- try. A PNH groundwater survey identified 32 aquifers as being overpumped, mostly for irrigation purposes. The maldistribution between population and water resources is escalating the cost of urban water as sources located at more remote sites have to be exploited.

1/ A sector memorandum prepared under the IBRD/PAHO Cooperative Programme was published in August 1979. It is available in Project Files.

2/ Copy available in project files. -3-

Health Situation

2.05 The reporting of health statistics has somewhat improved in re- cent years. It is estimated that about 95% of all deaths are registered and 80% are certified by the medical authorities. While these figures pertain to the nation as a whole, reporting in rural areas is less accurate than in urban zones because of dispersion of the population, difficult communications, and lack of health services. The mortality rate for enteritj7 and other diarrheal diseases in 1975 was 85 per 100,000 inhab- itants,- showing a reduction from 119 in 1963. Mortality rates from these diseases, however, still occupied second place in the all-age group in 1975. Of all diseases, waterborne and sanitation-associated enteric infection and diseases account for the highest mortality rate in Mexico. In contrast to declining mortality rates, morbidity rates for diarrhea, dysentery and salmonellosis all rose between 1963 and 1977 indicating poor water supplies and unsanitary living conditions. More health statistics are available in project files.

National Planning

2.06 While PNH represented a serious analysis of the water resources and their present and future uses, the recently elaborated PNDU should become the blueprint for a more rational distribution of economic activi- ties and population. The plan aims at improving the population/resource mismatch by controlling growth in the three main centers (Mexico City, Guadalajara and Monterrey), and promoting development in a number of in- termediate cities. In an effort to decentralize the economy, these inter- mediate cities are to serve as growth poles in a number of regions. These regions form priority zones and are to be particularly favored with public investments. Analogous centers with a full range of public services are planned to serve surrounding rural populations.

2.07 The general policies outlined in PNDU are now being translated into specific programs at regional, state and municipal levels, For the purposes of required water supply and sewerage investments, SAHlOP has worked in close contact with the local authorities, and has prepared a 1980-82 investment program for urban areas. Details of this program are given in paragraphs 2.20 and 2.21.

Sector Organization

2.08 At the national level, the 1972 Water Law assigned the main responsibility for planning, constructing and operating water supply and sewerage works to the Secretariat of Hydraulic Resources (SRH) Twhenever such works were partially financed or required loan guarantees by the Federal Government. Even in cases where no federal financing was involved, the entities which were to exploit water resources had to obtain SRHVs approval, especially whenever there were competing demands for scarce water. The 1976 Administrative Reform assigned the authority previously exercised by SRH to its successor, SARH. Responsibility for the con- struction of water distribution and sewerage systems in urban and rural areas, however, was assigned to SAHOP. SARH and SAHOP have set up a committee to coordinate the functions of these agencies in each geogra- phical region.

1/ For selected countries in Latin America these rates were: Perut 7C in 1972; Colombia: 53 in 1975; Argentina: 21 in 1970. - 4 -

2.09 SARH's organization includes a Direccion General de Captaciones y Conducciones de Agua which plans, constructs, and operates bulk-water schemes that deliver water to municipal borders where SAHOP's jurisdiction begins. SARH is generally responsible for water supply schemes only where the projects are multi-purpose or where there is drought or where there are competing demands for water resources. SARH is in charge of overall planning of water resources administration, but delegates the actual cons- truction and operation of specific water supply schemes to SAHOP.

2.10 When SAHOP was formed in 1976 it absorbed the former Secretariat of Public Works and several Directorates from the old SRH (organization charts are presented in Annexes 3 and 4). Among these Directorates were the General Directorate for Construction of Water Supply and Sewerage Systems (DGC) and the General Directorate for Operations (DGO). SAHOP includes two other Directorates responsible for water supply and sanita- tion: one for systems in border towns (Juntas Federales de Mejoras Mate- riales-JFMM) and the other for desalinization schemes (Direccion General de Aguas Salinas).

2.11 SAHOP initially experienced difficulties in discharging its responsibilities, but this situation has improved considerably. Recent developments include the implementation of guidelines for preparing feasi- bility studies and engineering designs. A planning division has been created to coordinate sector activities at all levels and develop strate- gies to meet sector goals. To operate at the state level, SAHOP has formed the Centros SAHOP, or state offices, that take on a large share of the sector tasks. Their duties are not restricted to the water supply and sanitation fields. The operation of some 1,200 systems is arranged through a variety of operational entities, among which the Juntas Federales de Agua Potable (JFAP) under DGO are the most important ones. The management of both JFMM and JFAP has been inefficient. Their operations have been hampered by a lengthy, centralized decision-making process, and their fi- nances have suffered from insufficient cash generation and lack of clear financial policies. As part of SAHOP's decentralization plan, JFMM and JFAP are being transformed into local water and sewerage companies.

2.12 At the state level, the regional offices of the federal agencies, and SARH and SAHOP are responsible for carrying out federal investment programs in their respective states. The organization of the Federal Government is mirrored by state governments which have specific duties in the sector, including the definition of investment programs in agreement with SAHOP. In addition, they are responsible for approving water and sewerage tariffs. SAHOP is assessing a program for the creation of state-wide water companies which would be in charge of operations and, eventually, construction of rural and urban water supply systems. This program is in agreement with PNDU and would aim to develop, in addition to the local water companies, strong state-owned companies. Provided that appropriate financial arrangements are made, such state companies could resolve the problem of supplying rural and small cities which could not have viable companies at the local level. SAHOP has requested Bank assist- ance in the creation and definition of scope of these companies which SAHOP expects to be operative by late 1981. - 5 -

2.13 Finally, at the local and municipal levels, the entities have varying degrees of autonomy in the operation of their water supply and sanitation systems: (a) Federal Juntas (JFMM and JFAP - para. 2.10 and 2.11) which are owned and controlled by SAHOP; (b) the so called Juntas Estatales de Agua Potable y Alcantarillado (State CompanIes), which are in practice municipal entities operating water supply and sewerage systems only at the local level; the operation of these companies is controlled by state authorities but their jurisdiction is restricted to their respective municipalities and their revenues cannot be transferred to any other state or municipal entity; (c) autonomous municipal water supply and sewerage companies, which are managed by local authorities; and (d) departments of the municipalities in charge of these services. The authority of local companies is greater in larger urban communities and their autonomy (including construction) is almost complete in the cases of Guadalajara and Monterrey.

Service Levels and Quality

2.14 Service levels have been estimated on the basis of partial data provided by SAHOP since the entities in charge of operating the systems at the local level do not monitor or report this information regularly. It is estimated that by mid-1979, about 54% of the urban population (excluding the Federal District) had access to potable water through house connec- tions and about 42% (excluding the Federal District) was connected to sew- erage systems. Service levels in the Federal District are reported to be 83% for water supply and 80% for sewerage services. Service levels in ru- ral areas are lower; about 38% of the population has access to water sup- plies through house connections, while access to waterborne disposal sys- tems is almost non-existent. No information is available on coverage through septic tanks or latrines in rural areas. Service levels are summarized in Table 2.1.

2.15 The percentage of total po?ylation served with water connections rose from 49% in 1970 to 53% in 1979,- a substantial increase (21% to 38%) in the percentage of rural population served being offset by a significant decrease (65% to 54%) in the urban population served (excluding the Federal District). Heavy migrations of low-income rural population to urban areas have not been accompanied by the necessary investments in the sector. As a result, about 17 million people living in urban areas, mostly lower-income population, do not have access to safe water.

2.16 I/ The percentage of total population with sewerage in 1979 was 32%, - as opposed to 35% in 1970 (Table 2.1). It is estimated that about 21 million urban dwellers did not have access to waste water disposal systems in 1979.

1/ In 1978 service levels by house connections in selected Latin American countries were: Colombia: 61% water and 42% sewerage; Peru: 34% water and 34% sewerage. -6-

TABLE 2.1 Water and Sewerage Service Levels in Mexico

Water Supply Sewerage

1970 1979 1970 1979

1. Total Country

Population (million) 48.1 67.9 48.1 67.9

Population served (million) 23.8 35.7 16.8 21.8

Service level (%) 49 53 35 32

2. Urban Areas (Total)

Population (million) 28.4 42.8 28.4 42.8

Population served (million) 19.6 26.1 16.8 21.8

Service level (%) 69 61 59 51

2.1 Mexico City Federal District

Population (million) 6.7 9.9 6.7 9.9

Population served (million) 5.6 8.2 5.0 7.9

Service level (%) 83 83 74 80

2.2 Other Urban Areas

Population (million) 21.7 32.9 21.7 32.9

Population served (million) 14.0 17.9 11.8 13.9

Service level (%) 65 54 55 42

3. Rural Areas

Population (million) 19.7 25.0 19.7 25.0

Population served (million) 4.2 9.6 (NA) (NA)

Service level (%) 21 38 (NA) (NA)

NA: Not available -7-

2.17 Water supply in Mexico is provided mostly through house con- nections.. Public standpipes are used only as an interim solution or to serve dispersed urban and rural populations and are not considered by the governn nt and the urban population as an acceptable permanent solution. The extent of water pollution is not known in detail, and desinfection (chlorination) of water supplies and water quality control are limited. Many water supply systems reportedly provide intermittent services. This presents a pollution risk when contaminated groundwaters infiltrate the water lines. To overcome these problems, the Secretariat of Public Health and SAHOP had initiated by mid-1979 a program to control and improve the quality of water for domestic use.

Past Sector Investments

2.18 Over the 1971-78 period, executed annual investments in water supply and sewerage projects, expressed in 1978 prices, were about Mex$8 bil- lion. On average, the share of total sector investments in the Mexico City Metropolitan Area was close to 50%, while the remaining 50% was distributed among other urban and rural areas where 80% of the Mexican population lives.

2.19 Both SARH and SAHOP have been financing their projects with funds from the Federal Government, in most cases interest free, with the intention of recovering investments in 10 to 20 years. In effect most of these works become grant financed. There are other channels and mechanisms at the national level that intervene in water supply and sanitation works. The Convenios Unicos de Coordinacion (CUCs), for example, seem to be grow- ing in importance. These are direct agreements between the Federal Govern- ment and each of the 31 State Governments. The CUCs are instruments for distributing federal revenues as grants and are intended for a wide range of investments in rural areas. SAHOP often acts as the executing agency for CUC projects. One exception to the pattern of grant financing is BANOBRAS, which has been financing water and sewerage works through dif- ferent lending windows at varying interest rates (para. 3.02). One of these is the Investment Fund for Water Supply and Sewerage Works (FIFAPA), which was supported by Loan 1186-ME. Bank support would be continued under the proposed project.

Sector Objectives and Programs

2.20 Mexico's long term goals aim at providing by the year 2000, 95% of the urban and 70% of the rural population with piped water, and 80% of the urban and 42% of the rural population with sewerage or sanitation ser- vices. SAHOP has developed intermediate targets for the year 1982 for ur- ban areas, excluding the Federal District. These targets are to provide water to an additional population of 8 million and sewerage to 5 million, reaching a coverage of about 70% in water supply and 50% in sewerage. For the rural areas, a recently approved SAHOP-COPLAMARprogram will provide piped water to 8.2 million additional inhabitants and will rehabilitate existing systems benefitting 6.8 million inhabitants. The coverage of water supply in rural areas would thus reach 66%. - 8 -

2.21 The investment programs for the period 1980-82 are Mex$18 bil- lion (US$800 million) and Mex$20.7 billion (US$920 million) for urban and rural areas, respectively. More than 90% of the investments will be fi- nanced by the Federal Government. This will more than double the annual financing of the past decade for the sector outside the Metropolitan Area (para. 2.18).

Manpower Aspects

2.22 In 1979, there were about 60,000 persons working on urban and rural water supply and sewerage systems. The capability and experience of engineers is adequate. At the local levels, however, integrated financial and economic analysis in project preparation is still inadequate partly because of the lack of qualified personnel in these areas. Local con- sulting firms and contractors are adequately qualified to undertake most design, construction, and supervision of water and sewerage works. Oper- ation and maintenance of these services suffer most from lack of funds and inadequacy, both in number and quality, of skilled labor.

2.23 SAHOP initiated a national training program in late 1976 and its first stage concluded in 1979. There were 1,675 participants who received training through 66 courses given in different regions of the country. These activities covered only a small percentage of the original ambitious training plan. Loan 1186-ME included US$200 thousand to finance 40% of the cost of this program. This allocation has not yet been used and is expected to be applied to a second stage of the training program. SAHOP is presently evaluating the results of this first stage training program and is preparing a second stage for 1980-84. The second stage would address the most important deficiencies, and its goals are being set at a more realistic and practical level. It places special emphasis on the training of administrative and technical personnel at local levels, so that sector decentralization policies can be implemented in a more efficient manner. The programs are being coordinated and tailored to the needs of the muni- cipal companies receiving financing under the proposed project in accord- ance with the needs identified in the corresponding feasibility studies (para. 4.03). SAHOP has agreed to carry out this program, paying due attention to the needs of the AWS companies.

Review of Previous Bank Loans

2.24 Since 1974 the Bank has been assisting Mexico with the imple- mentation of sector plans. It helped to finance a US$155 million project for bulk water supply for the Mexico City Metropolitan Area under Loan 909- ME for US$90 million (signed on June 18, 1973), and a US$100 million water supply and sewerage project for medium-size cities under Loan 1186-ME for US$40 million (signed on January 13, 1976).

2.25 In addition, the Bank has participated in the financing of water supply and sewerage components of the:

(a) Papaloapan Integrated Rural Development Project (Loan 1053- ME) signed in November 1974, financing US$5.5 million for water supply and US$1.6 million for sewerage; (b) PIDER I Integrated Rural Development Project (Loan 1110-ME) signed in November 1974, financing US$7.1 million of the sector components;

(c) PIDER II Integrated Rural Development Project (Loan 1462- ME) signed in July 1977, financing US$6.6 million of the water supply component;

(d) Zihuatanejo Tourism Project (Loan 793-ME), already com- pleted;

(e) Baja California Tourism Project (Loan 1420-ME), signed in May 1977; and

(f) Lazaro Cardenas Urban Development Project (Loan 1554-ME), signed in April 1978.

The sector components were an integral part of the infrastructure com- ponents of the latter three projects.

2.26 The first medium-size cities water supply and sewerage project financed through FIFAPA, under arrangements similar to those of the pro- posed project, is currently being implemented (para. 3.06). As of June 30, 1980, US$13.35 million (33% of the total loan) had been disbursed, and the total loan and project funds are already committed (US$40 million and US$100 million respectively).

2.27 Progress under this project has been slower than anticipated mainly because of delays in signing the subloan agreements. Construction started in late 1977, almost two years behind schedule, and completion of the works is expected by December 31, 1981. Municipal and state autho- rities were initially reluctant to borrow for investments in the sector since they had previously been obtaining federal funds as grants. As a direct consequence of this, two cities originally included in the project (Salamanca and Jalapa) withdrew and were replaced by the city of Culiacan. The main project objectives, however, should not be significantly affected since FIFAPA and SAHOP are taking actions to accelerat Vproject execution. The financial performance of the seven beneficiaries- is satisfactory, and all of them are complying with the subloan financial covenants. Federal funds have been provided in a timely manner and project execution is now proceeding satisfactorily.

2.28 Project preparation and final designs under Loan 1186-ME took significantly longer than originally planned. As explained in paras. 6.07 and 6.08, particular attention was given to this problem in the course of the project preparation and preparation of final designs is well advanced. All subprojects will conform to guidelines prepared by SAHOP with Bank assistance under Loan 1186-ME.

1/ Cities of Mexicali, Morelia, Culiacan, Ciudad Victoria, Reynosa, Tam- pico-Ciudad Madero and Tuxtla Gutierrez. - 10 -

III. THE BORROWER AND THE EXECUTING AGENCY

Introduction

3.01 The Borrower will be BANOBRAS, which is also the Borrower in the first Bank-financed water and sewerage project for medium-size cities (Loan 1186-ME). BANOBRAS is a public corporation with the Mexican Federal Government, holding 98% of the outstanding capital stock. BANOBRAS is a financial agent of the Federal Government and operates several trust funds.

3.02 BANOBRAS is one exception to the pattern of federal grant finan- cing (para. 2.19) and finances urban infrastructure works through three different lending windows at different interest rates. While its normal credits carry interest rates of 18% p.a., BANOBRAS' soft-loan window, the Municipal Development Fund (Fondo Fiduciario Federal de Fomento Municipal- FFFFM) lends at 4% to 6% p.a. and FIFAPA lends at 9% p.a. FIFAPA is partially funded by the Bank through Loan 1186-ME and would serve as the channel for the proposed loan (para. 3.08).

3.03 SAHOP will be the executing agency (para. 3.11). SAHOP, through DGC's Financial Coordinating Unit (SCF) will be in charge of project pre- paration, supervision of construction, and provision of technical assist- ance in all areas of administration. In addition, SCF, on behalf of FIFAPA, will monitor compliance with subloan covenants in each project city.

The Borrower (BANOBRAS)

3.04 BANOBRAS, founded in 1933, is a national development bank spe- cializing in public and social works lending (sanitation, urban deve- lopment, marketplaces, housing and transportation). It provides loans to federal, state and municipal governments and their agencies, and obtains its funds from the Mexican Government and international markets (bond issues and bank lines of credit).

3.05 According to BANOBRAS' Organizational Law, the Federal Govern- ment controls its policies and, in practice, substantially directs its borrowings and lending activities. The Secretariat of Finances (SHCP) has veto power over the resolutions of BANOBRAS' Board of Directors and approves BANOBRAS' yearly budget. BANOBRAS is authorized to carry out such other functions related to its credit activities as may be approved by SHCP. BANOBRAS is legally empowered to act as a Bank Borrower.

FIFAPA Trust Fund

3.06 At the end of 1975, the Mexican Government established a revolv- ing investment fund, FIFAPA, as a trust fund under BANOBRAS to finance water and sewerage investments in medium-size cities. The Government aims at progressively replacing direct Federal contributions to investment in cities with population over 50,000 with loans through FIFAPA. For its first operation, FIFAPA was authorized an equity capital of US$100 million (to be financed by the proceeds of the Bank loan plus US$60 million equiv- alent from the Government's budget), the capital to be paid in as the sub- loans are disbursed. By the end of 1979, all of the US$100 million had been committed. - 11 -

3.07 In September 1979, the Secretariat of Programming and Budgeting (SPP) authorized by decree the increase of the Government's equity contri- bution to FIFAPA to up to Mex$11,500 million (US$500 million equiva- lent).This capital increase would allow FIFAPA to substantially increase the scope of its operations and would guarantee the availability of Federal funds to execute the proposed project. After SAHOP certification, FIFAPA will pay contractors and suppliers. FIFAPA will also be responsible for the timely collection of debt service payments from the beneficiary cities.

3.08 FIFAPA will relend the proceeds of the Bank loan and Government contributions to the AWS companies in each subproject city (paras. 7.09 and 7.10). Onlending terms are in accordance with the Government's investment policies in the sector and replicate those of the first FIFAPA operation: an interest rate of not less than 9% p.a. and a 15 years term after a grace period equal to the construction period (2-3½ years) (para. 7.09).

3.09 Although the 9% interest rate is lower than th 1 cost of capital in Mexico, and negative at current rates of inflation, - a higher rate would result in an increased pressure from local authorities to obtain interest-free funds from the Federal Government. The Bank has accepted the judgement of the Mexican authorities that it would be premature to raise the onlending terms including the 9% interest rate charged to local water authorities, before the concept of loan financing of water supply projects has been firmly established through the second FIFAPA operation. In ad- dition, distortion in investment decisions or in financial management of local institutions would be avoided by insuring: (a) that the least cost alternative is selected; and (b) that while consumers in the lower income brackets receive the benefit of the subsidies implied in the onlending rate and water changes for basic volume consumption are kept at levels afford- able to the poor, all consumption above this basic volume is charged at above the long range average incremental cost of the services.

3.10 BANOBRAS agreed under Loan 1186-ME to have FIFAPA's accounts audited each year by independent and qualified auditors, and to submit copies of the annual audit report to the Bank not later than three months after the end of each calendar year. Compliance with this obligation, which will also be included in the proposed loan, has been satisfactory. A satisfactory audit of the 1979 statements of FIFAPA was performed by the representatives in Mexico of the international firm of Ernst and Whinney- Despacho Freyssinier Morin S.C. Assurances were obtained during nego- tiations that FIFAPA's financial statements will continue to be audited by competent external auditors and that copies of the annual audit report will be submitted to the Bank not later than three months after the end of each calendar year.

The Executing Agency (SAHOP)

3.11 SAHOP will be the executing agency for the proposed loan (para. 3.03). SAHOP is in charge of the planning, design and construction of

1/ The annual average inflation rate in Mexico was 28.9% in 1977, 17.5% in 1978 and 18.2% in 1979, and 24.8% in July 1979-June 1980. Inflation is forecast at 15% in 1981, 13% in 1982 and 10% in 1983 and thereafter. -12- water and sewerage works in urban and rural areas wherever such works are partially financed or require loan guarantees by the Federal Government. In cases where no federal financing is involved, the cities have to obtain SAHOP's approval for their water and sewerage projects. In practice, however, state and local governments have been able to circumvent SAHOP in certain cases.

3.12 SAHOP is organized into five major departments: three Underse- cretariats (Human Settlements, Public Works, and Urban Works), the Admin- istrative Office, and the Centros SAHOP with offices in each one of the 31 states (Annex 3). The heads of these departments report directly to the Secretary.

3.13 The Undersecretariat of Urban Works is responsible for, among other things, construction and operation of water supply and sewerage systems in urban and rural areas. DGC under the Undersecretariat of Urban Works (Annex 4) is responsible for project construction and supervision and of all projects financed by FIFAPA through SCF. In addition, SCF provides technical assistance to the beneficiaries in all areas of admin- istration (para. 6.15)

3.14 SCF has made considerable progress since its creation in 1976, but still faces the problems associated with the rapid expansion of its responsibilities. SCF personnel is qualified, although relatively inex- perienced. To cope with the tasks ahead, SAHOP is strengthening SCF and hiring additional professional staff. The Bank discussed the organization with the Director of SCF. Assurances were obtained during negotiations that SAHOP will continue to exchange views with the Bank on its plans to strengthen SCF and assign suitable qualified staff in adequate numbers including engineers, economists and accountants, as required for the dis- charge of its responsibilities.

IV. THE BENEFICIARIES

Organization

4.01 The beneficiaries of the proposed loan will be autonomous muni- cipal or state water and sewerage companies (AWS companies) in charge of the operation of water and sewerage services at the local level. The creation of these autonomous companies is one of the major goals of SAHOP's decentralization policy. Consequently it is one of FIFAPA's onlending requirements that such companies be formed where none exist.

4.02 The bylaws of AWS companies follow a standard pattern set by SAHOP. All the companies manage their own assets and funds, and have an independent Board of Directors and legal representatives. Generally, the Boards of Direc- tors have five members. One is appointed by SAHOP, one by the State Governor, one by the Municipal Council and two by representative groups from industrial, commercial or consumer organizations. Of the four cities appraised by the mission (paras. 1.02 and 5.02), Monclova and Nogales, have AWS companies (para. 2.13). Tepic has a Federal Junta (JFMM -para. 2.10) and a municipal depart- ment in charge of water supply and sewerage works respectively. As a result of the proposed project, an AWS company has been created in Toluca, taking over all assets and liabilities of the municipal department. In Tepic a new AWS company is being created to take over the responsibilities of the old federal junta and the municipal department. -13-

4.03 Most of the AWS companies still lack experience and, in general, are not well managed. All share similar problems:

(a) lack of competent senior staff;

(b) poorly trained intermediate level staff, carried over from the original organizations;

(c) inadequate operational and maintenance practices as reflected mainly by the high percentage of water losses and deficient metering;

(d) lack of clear financial objectives and tariff policies; and

(e) inadequate management information systems.

SAHOP is well aware of these shortcomings and is taking the necessary steps to improve management efficiency of the AWS companies through: intensive train- ing courses in all areas of management (para. 2.23); specific technical assis- tance programs for each company to improve accounting practices and main- tenance program; and close monitoring of their financial performance and com- pliance with subloan covenants. SCF is responsible for identifying the specific areas for improvement in the AWS companies and for coordinating the provision of the technical assistance in a timely manner. The areas for technical assistance will be specifically identified in each subloan, includ- ing a time frame for implementation of required remedial actions to be taken by the AWS companies (para. 7.11 (d)).

Accounting

4.04 The majority of the AWS companies have cash accounting systems which do not satisfy present needs. Of the appraised cities (para. 1.02), only the Tepic and Monclova companies have accrual accounting systems. Their account- ing methods, procedures and policies, however, are not satisfactory. Records of fixed assets are not properly kept, moreover, they are not depreciated nor revalued. In addition, the AWS companies do not have separate accounts for the water and sewerage services and their cost accounting methods do not allow the origin and application of funds by type of service to be determined. Accounts receivable are not analyzed and a large percentage of such accounts are uncol- lectables that have been kept on the books for many years. The project aims to correct these deficiencies in accounting through the provision of consultants to develop and implement an adequate accounting system in each beneficiary AWS company (para. 7.05).

Audit

4.05 In all the appraised cities, an external audit has been performed by SAHOP or by state or municipal authorities every two to four years. Audit procedures, however, are far from satisfactory. Under each subloan agreement the AWS company concerned would be required to have its accounts audited every year by independent auditors satisfactory to BANOBRAS/SAHOP (para. 7.11(h)). Such audit reports will be available to the Bank for review. A similar requirement was included in subloan made under Loan 1186-ME and performance has been satisfactory. -14-

TariLffs

4.06 The AWS companies do not have the power to set tariffs, as this right rests with the elected congresses of the states. On the premise that water is a social good, tariffs are often left unchanged for many years. In addition, tariffs and other charges are set without a clear understanding of their objectives and do not reflect the real cost of services to the companies. To correct this situation, SAHOP has agreed to undertake a study to define ob- jectives and criteria for tariff structure and levels. Specific tariff studies within this framework will be carried out in each one of the project cities. Assurances were obtained during negotiations that this framework study will be developed by SAHOP with Bank assistance not later than June 30, 1981. SAHOP intends to have these objectives applied by other cities financed through FIFAPA. Draft terms of reference for this study are presented in Annex 12. Once this study is completed by SAHOP, each AWS company will develop to the satisfaction of BANOBRAS and the Bank, not later than September 30, 1981, or six months after subloan signature, whichever comes last, a specific tariff structure, including a schedule for its implementation (para. 7.11 (c)).

V. POPULATION, SERVICE AND DEMAND IN THE PROJECT CITIES

General

5.01 PNDU, approved by Presidential Decree in May 1978, assigns top prio- rity to the more even distribution of the urban population and orderly urban growth through creation of job opportunities by new industries and adequate provision of infrastructure services, including water and sewerage in medium- size cities. The proposed project would support the PNDU strategy by helping to proy1 de adequate water supply and sewerage services in medium-size cities.-

5.02 The estimated population of Mexico's medium size cities in 1979 was about 12 million.(18% of the total population), as contrasted to the Mexico City Metropolitan Area which harbors 20% of the country's total population. These medium size cities are growing at an average rate of 4.2% p.a. as compared with 2.9% p.a. for the country and 5.6% for Mexico City. The four cities appraised (Toluca, Tepic, Monclova-Frontera and Nogales) are taken as a representative sample of the medium-size cities to be financed under the project. These cities had a total population of 0.73 million in 1979 and are growing at a rate of 4.9% p.a. Economic activity is increasing significantly in these cities. Toluca, for example, is the main center of the automotive industry and Monclova-Frontera has one of the largest steel factories in the country. Nogales, due to its proximity to the US, has a strong commercial activity. Toluca and Tepic, capitals of the States of Mexico and Nayarit respectively, are important trading and Government centers.

1/ Cities with population greater than 50,000 inhabitants and excluding Mexico City, Monterrey and Guadalajara. -715-

TABLE 5.1

Main Characteristics of Water and Sewerage Services in Appraised Cities 1979

CITY

Units TOLUCA TEPIC MONCLOVA NOGALES

Estimated 1979 population Thousands 240.0 121.4 254.3 115.1 Population Served Water % 78 73 77 40 Sewerage % 75 61 26 23 Number of Connections Water Thousands 26.6 14.8 27.9 7.6 Metered % 45 89 90 16 House Discharges Thousands 25.6 12.4 9.5 4.4 Water Supply Pipes Km 280.0 181.0 377.0 115.0 Water Pipes/Connection Mts/c. 10.5 12.2 13.5 14.7 Storage Volume M3 7,820 2,700 10,250 7,800 Storage Volume/1000 CQnnections M3/t.c. 294 182 367 1,026 Sewerage Pipes Km 238.0 132.0 178.0 N.A. Sewerage Pipes/Connection Mts/c. 9.3 10.6 18.7 N.A. Sewerage Treatment NO NO YES YES Production M3/month/c. 79.0 61.0 51.0 70.0 Consumption (metered) M3/month/c. 45.0 35.4 27.0 40.0 Unaccounted-for Water % 36 46 46 43 Staff/1000 Connections #/t.c. 6.4 4.0 5.1 11.6 -16-

Water Resources

5.03 Water resources, albeit scarce, are not a limiting factor in the provision of water supply services in these four cities. All four cities draw their water from groundwater sources, through deep wells or infiltration galleries, within close range of the consumption areas and additional supplies can be tapped without special difficulty to meet the expected demand for the next 15 to 20 years. These groundwater sources, if protected from domestic and industrial pollution, have the additional advantage of offering water of good physico-chemical and bacteriological quality that requires only chlorination to make it safe for human consumption.

Existing Water Supply and Sewerage Systems

5.04 Production capacity in the four cities is now limited and needs expansion and/or improvement to cover present and future demands. The adequacy of existing water supply and sewerage services for present and future demand varies from one city to another. However, common needs are: (a) additional water production and chlorination facilities; (b) water distribution network improvements to reduce extreme pressure variation to within acceptable limits (10 to 50 m.); (c) extension of water supply and sewerage networks to provide services to low-income areas; (d) increase in metering coverage; and (e) improvements in the administrative practices of the local water and sewerage companies. The municipalities are responsible for providing solid waste col- lection and disposal services. Information on existing water supply and sewer- age facilities is given in Annex 1 and in the project file and is summarized in Table 5.1.

Population Served and Service Levels

5.05 The average water service level in these four cities (70%) is above the national average for urban areas (61%), while the average sewerage coverage (47%) is lower than the national average for urban areas (51%). Water service levels vary from 40% in Nogales to 78% in Toluca. Sewerage service levels vary from 23% in Nogales to 75% in Toluca.

5.06 Even though coverage in three of the appraised cities is above the national average, water supply services in all four cities are far from satis- factory. Services in many areas of the cities, especially in low income neighborhoods, are provided on a restricted basis due to the inadequacy of water production and low pressure in the distribution mains. Even Toluca and Tepic, where water service levels are relatively high, the water supply cannot be considered bacteriologically safe, as 40% is not chlorinated. In the four cities, as a result of inadequate water services, some 223,000 people presently lack house connections and must rely on such hazardous alternatives as public standpipes or water vendors for temporary relief.

5.07 Metered connections vary from a low of 16% in Nogales to a high of 90% in Monclova, with an average of 67%. These figures are somewhat mis- leading, however, as many connections have faulty meters. Toluca, following recommendations made by the Bank, has completed a service census to detect faulty meters and register illegal connections. Other cities, where appro- priate, will carry out similar surveys. Water production is not regularly - 17 -

metered. Volumes have been estimated on the basis of short-term metering of production sources and on the number of hours that deep well pumps operate. Consequently, and given the high percentage of unmetered connections, unac- counted-for water figures should be considered only rough estimates.

5.08 All four appraised cities have sewerage systems, often of the com- bined type (storm and sanitary) which have been gradually converted into se- parate systems as the need for sewage treatment becomes more pressing. Present sewerage services are inadequate and some 384,000 people are not covered. Sewerage systems do not function properly due to insufficient capacity of trunk sewers, and sewage often spills into the streets during heavy rains. In Toluca, interceptors are inadequate and sewage is discharged into open courses within the city, thus fouling the environment and creating health hazards. People lacking sewerage facilities rely on latrines or septic tanks which frequently overflow because they are not properly maintained. In addition, as all of these four cities rely on groundwater for their water supply, infil- tration from latrines or septic tanks may constitute a health hazard.

5.09 Monclova and Nogales have sewage treatment facilities. In Monclova the sewerage effluent is delivered to the local steel mill where it is treated (activated sludge process) and reused for industrial purposes. Water reuse will continue and increase in the future as the steel mill is expanding its production. In Nogales, under international agreement between the United States and the Mexican Government, the sewerage effluent is treated at Nogales- Arizona's sewage treatment plant (oxidation ponds) built with funds provided by both Governments. Under the agreement, ogales-Arizona will treat Nogales- Mexico's sewage up to a volume of 18,750 m /day. Given present water consump- tion and projected service levels, this sewage volume will be reached by 1986. SAHOP is working on a sewerage master plan to provide for the treatment of excess waste flow in Nogales-Mexico. Sewerage works, financed by Federal and State funds, are already under construction in this city to increase coverage to about 65% by 1983. In Toluca, because of heavy industrial wastes, SAHOP is developing a plan for the treatment of both domestic and industrial wastes. The proposed project will finance the construction of a sewage treatment plant in Tepic to reduce pollution in the Mololoa River. As a general rule, sewage treatment facilities will be part of the proposed subproject in each city, in accordance with Government objectives of improving the environment and ecology of receiving waters.

5.10 Subproject designs for the four cities follow SAHOP's design standards for the provision of water and sewerage services. These standards, which the Bank reviewed and found acceptable, make planning provisions for 20 to 25 years and works are staged to cover future demands for 10 to 15 years. The proposed works correspond to the minimum cost alternatives at a discount rate of 11% p.a.

Water Production and Consumption

5.11 Estimated waterfTroduction to meet the urbanneeds of thi four cities appraised varies from 51 m /month/connection in Mosclova to 79 m /month/con- nection in Toluca (Table 5.1) with an average of65 m /month/connection. These wide variations are accounted for by, among other things, differences in clima- tic conditions, extent of metered house connections and industrial con- sumption. Water consumption varies seasonally from a low of 0.70-0.80 of TABLE 5.2

Water Consumption Distribution (Metered use) 1979

TOLUCA TEPIC MONCLOVA

Connections Volume Average Connections Volume Average Average Range C Consump. Consump. Connections Volime Consump. M3/Month/Con. '000 % '000 M3/m % M3/M/C '000 % '000 M3/m % M3/M/C '000 % '000 M3/m % M3/M/C

0-20 3.11 22.7 35.4 5.7 11.4 10.40 60.0 148.9 24.2 14.3 15.78 65.4 210.1 32.3 13.3

21-50 '7.95 58.5 276.8 44.8 34.8 5.30 30.5 234.7 38.2 44.3 6.41 26.6 201.9 31.0 31.5

51-100 2.02 14.7 154.7 25.1 75.6 1.09 6.3 103.0 16.8 94.5 1.43 5.9 96.4 14.8 67.4 m

100-250 0.48 3.5 80.4 13.0 167.5 0.39 2.2 66.7 10.8 171.0 0.39 1.6 55.2 8.5 141.5

> 250 0.16 1.2 70.2 11.3 438.8 0.17 1.0 60.9 10.0 358.2 0.13 0.5 87.1 13.4 670.0

TO' Al 13.72 100.0 617.5 100.0 45.0 17.35 100.0 614.2 100.0 35.4 24.14 100.0 650.7 100.0 27.0 TABLE 5.3 Population and Demand Projections

Urban Unaccounted-for Water Demand Per Capita Per Capita Population Service Level-%- Water Million M3/Year Production Consumption Thousands Water Sewerage % Production Consumption l.c.d. l.c.d.

CITY

TOLUCA 1979 240.0 78 75 36 25.2 16.1 374 234 1980 255.3 78 73 36 25.6 16.4 357 225 1984 316.3 92 83 25 26.3 19.8 251 185 1995 570.0 93 83 25 46.4 34.8 243 185 TEPIC

1979 121.4 73 61 46 11.1 6.0 348 181 1980 126.5 73 63 46 11.3 6.1 340 181 1984 150.0 90 78 30 11.6 8.1 239 165 1995 231.7 90 80 25 16.9 12.7 225 165 MONCLOVA-FRONTERA-/ 1979 254.3 76 26 46 17.6 9.5 253 130 1980 269.7 76 29 46 17.7 9.6 240 127 1984 322.3 87 65 35 21.4 13.9 212 131 1995 446.5 90 80 25 26.4 19.8 182 135 NOGALES 2/

1979 115.1 40 23 43 6.4 3.7 386 215 1980 119.1 42 36 40 6.2 3.7 344 203 1984 136.7 84 70 30 10.9 7.6 264 185 1995 200.0 90 80 25 16.2 12.2 250 185

I/ Water supply not part of the proposed project. 2/ Sewerage works (in construction) not part of the proposed project. - 20 - annual average during the winter and rainy seasons to a high of 1.20-1.30 of average during summer. Domestic consumption accounts for 70% to 80% of total consumption. Distribution of consumption varies widely among consumers, as typified by the information on metered consumption in Toluca, Tepic and Monclova (Table 5.2).

Population and Demand Projections

5.12 In 1979, the total urban population of Toluca, Tepic, Nogales and Monclova was estimated at about 730,000. The average growth rate for these cities of 4.9% p.a. is expected to decline gradually to 4.0% in 1990-95. By 1995, the population will almost double to 1.44 million. Population, service levels and demand projections from 1979-95 are available in the project file and summarized in Table 5.3.

5.13 The lack of adequate distribution systemmaintenance programs in the past, very old pipes and malfunctioning meters account for the estimated high percentage of unaccounted-for water (Table 5.1). The proposed project in- cludes the purchase and installation of water meters at production sources. In those cities where unaccounted-for water is higher than 30%, which is con- sidered a practical attainable limit, the subproject loan agreement will pro- vide funds to carry out a leak detection survey and leak repair program (para. 7.11 (e)).

5.14 In 1979, the average per capita production in these four cities was 330 liters/day, the per capita consumption 190 liters/day, and unaccounted-for water 140 liters/day. Water demand projections for each city (Table 5.3) take into consideration: (a) the lower per capita consumption of the low-income population to be served; (b) improvements in the quality of service; (c) extended metering in house connections; and (d) tariff increases in real terms during project construction (Annex 13).

5.15 Water service coverage by house connections is expected to increase from an average of 70% in 1979 to not less than 80% by the end of the construc- tion period (1984) and to 90% by 1995. Unaccounted-for water is expected tobe reduced from an average of 41% to about 30% by the end of the construction period. This reduction takes into account the leak detection and metering programs to be included in the subprojects. Sewerage service levels are expected to increase from an average of 47% in 1979 to not less than 70% by 1984 and 80% by 1995.

VI. THE PROJECT

Introduction

6.01 Since early 1979, four Bank missions have visited Mexico to assist FIFAPA/SAHOP in the identification and preparation of the project. These efforts follow a Government request for further Bank participation in the financing of the sector. This project would be the Bank's second direct opera- tion through BANOBRAS/FIFAPA to develop water and sewerage services in medium- size cities throughout Mexico. - 21 -

6.02 The proposed project will consist of improvements and extension of water supply and sewerage systems in medium-size cities. It is expected that the project will be completed by June 30, 1984.

Project Objectives

6.03 The proposed project aims to:

(a) support the objectives of PNDU (paras. 2.06 and 5.01) through adequate provision of water supply and sewerage services in medium-size cities;

(b) assist SAHOP in its decentralization policy through the trans- formation of local water supply and sewerage services operated by the Federal Government or directly by the municipalities into autonomous and financially viable AWS companies;

(c) strengthen the management capabilities of existing and newly created AWS companies and improve their financial and oper- ating performance;

(d) improve the environmental and health conditions in medium-size cities through:

(i) expansion of water and sewerage services, especially to low income areas;

(ii) implementation of chlorination programs to provide bac- teriologically safe water to all of their urban population by 1983; and

(iii) provision of sewage treatment in cities where pollution problems are more pressing or where downstream water use requires it.

Priority Criteria

6.04 Subproject cities have been selected by FIFAPA/SAHOP in accordance with the priorities set forth in the PNDU (para. 2.06). Service coverage levels lower than the national average for urban areas and the existence of idle production capacity allowing increase in coverages by complementary in- vestments are additional factors taken into account in the selection. In addition, in all cities to be included in the project:

(a) a feasibility study will be prepared for the proposed subpro- ject ifn/accordance with SAHOP's guidelines for project prepara- tion - and the proposed works will represent the least-cost solution; and

(b) an autonomous municipal or state company will be in charge of operation of water and sewerage services (para. 4.01) and will have to agree with FIFAPA/SAHOP goals on financial viability as set forth in FIFAPA onlending conditions (para. 7.11).

1/ Available in project files. - 22 -

6.05 There is a risk that some of the selected cities might not agree to the onlending conditions, and consequently would not be eligible for FIFAPA financing and would be excluded from the proposed project. It has been agreed with the Mexican authorities and confirmed during negotiations that in the event that an investment program for any project city is cancelled, other high priority subprojects could be included, conforming to the above mentioned criteria.

Service Standards

6.06 Water and sewerage services in the project cities will be provided through house connections. In particular, the standards are in accordance with the population's habits, expectations and ability to pay. These standards conform to the Government's sector objectives and to proper management practice of water and sewerage companies. Existing facilities in all project cities will be upgraded to extend their useful lives, and expanded to reach higher service levels and to meet the needs of a growing population (para. 5.15). The project includes the construction or extension of waterborne sewer- age systems where population density is too high to continue using alternative disposal systems or where infiltration from alternative systems would endanger the quality of city groundwater sources (para. 5.08). It is not considered economically feasible to extend service by house connections or waterborne sewerage connections to serve all the population as many people live in scat- tered areas on the outskirts of the cities. It is estimated that by 1995, about 10% of the population will continue to be served by public standpipes and about 20% by latrines or septic tanks. In the four appraised cities (21% of project cost) a population of 303,000 and 337,000 would benefit, from water and sewerage services respectively by 1984 (Table 8.2). By 1995, the project benefits would reach an incremental population of about 625,000 (water) and 717,000. (sewerage).

Status of Design

6.07 SAHOP qrepared feasibility studies for seven cities, four of which were appraised. - These seven studies were prepared with the aid of local consultants and found satisfactory to the Bank. These feasibility studies include subprojects comprising 71% of total project cost.

6.08 The degree of project preparation parallels the proposed implementa- tion schedule. SAHOP's consultants are working on the final designs, and those for the four appraised cities are 90% complete. Final designs for the addi- tional three subprojects are 80% complete. Therefore, final designs are ready for work which represents about 60% of total project cost. It is expected that bids could be called during the first year of project execution for at least 40% of project costs.

Project Description

6.09 Detailed project scope for each one of the cities appraised is pre- sented in Annex 2. Works in these cities are representative of the project and comprise the following:

1/ Available in project files. -23-

(a) provision of new production facilities and improvement of existing ones to increase production capacity to meet demand needs up to 1995;

(b) chlorination of all water supplies to provide bacteriolo- gically safe water by 1984;

(c) construction of transmission pipelines to connect the new pro- duction facilities to the distribution systems and provision of additional storage capacity;

(d) extension of the water system to areas without service and improvements of the water distribution system to increase its delivery capacity;

(e) construction of new metered house connections and provision of meters for currently unmetered connections to cover about 95% of all connections;

(f) purchase and installation of production meters and meter re- pair shops, and implementation of leak detection surveys and leak detection and control programs to reduce unaccounted for water to about 30% by 1984 and 25% by 1995;

(g) construction of sewer interceptors and outfalls to eliminate discharge of sewage in populated areas;

(h) extension of sewer pipes to areas without sewerage service including the construction of house discharges;

(i) construction of sewage pumping stations where topographic con- ditions preclude the use of gravity systems;

(j) construction of sewage treatment plants where downstream use (domestic or agricultural) requires improvement in water qua- lity; and

(k) provision of technical assistance programs to the local water and sewerage companies to improve the operational capabil- ities, including the implementation of an accrual accounting- system and the acquisition of accounting, water quality con- trol laboratory and leak detection equipment.

Cost Estimates

6.10 The estimated cost of the project is US$297 million equivalent of which US$125 million represent the foreign exchange component. Total project -24-

cost is exclusive of taxes -/ and of interest during constructionfinanced by FIFAPA. Cost estimates in June 1980 price le?ls have been based on bills of quantitiesand unit prices prepared by SAHOP - and its consultants for those project componentswith final or advanced engineeringdesigns. Estimates for subprojectsunder preparationwere preparedby SAHOP, and based on averageunit costs, engineering and administrationexpenses related to the project have been estimatedat about 7% of base cost on the basis of the experienceobtained during the executionof the first FIFAPA project. Physical contingencyallow- ances vary from 5% to 18% (averaging15%) accordingto the type and locationof works and degree of advancementof engineering. Price contingencieswere based on a constructionprofile of four years starting in 1980. Price contingencies for the local componentwere based on estimatesof the Mexican price escalation index of 15% in 1981, 13% in 1982 and 10% in 1983 and 1984. Price contin- gencies for the foreign componentwere estimatedat 9% in 1981, 8% in 1982 and 7% in 1983 and 1984. Table 6.1 gives a summary of investmentcosts for each subproject. More detailed costs for the four appraised cities and the three additional subprojectssubmitted by SAHOP are presented in Annex 2.

6.11 Final engineeringdesigns, supervisionof constructionand manage- ment consultants for the AWS companies (mostly for the implementationof ac- crual accounting systems) will require about 4,450 man-months of consultant services at an estimatedtotal cost of US$13.8million (Annex 5, Attachment2). The average man-month cost, including salary, costs, fees, travel and sub- sistence is expected to be about US$4,650 for professionalstaff and US$1,220 for support staff. Most consultantservices for final engineeringdesigns and constructionsupervision will be charged by FIFAPA to each subproject in the subsidiaryloan agreementas a SAHOP administrativecost (para. 6.08). Due to the technicalcapability of local consultingfirms, no expatriateconsultants' input is expected.

Project Financing

6.12 The Bank loan would finance the US$125.0 million foreign exchange component of the project. The Mexican Governmenthas agreed to make available to FIFAPA, as needed, the balance of its requirements.

6.13 The Bank loan would be made to BANOBRAS with the guarantee of the Government of Mexico, BANOBRAS would bear the foreign exchange risk. In turn, BANOBRAS through its FIFAPA Trust Fund, would relend the proceeds of the loan and Governmentcontributions to the local water and sewerage companies (para. 3.08). Relending of Bank proceeds and Governmentbudget funds will be carried out pursusant to subsidiary loan agreementsbetween FIFAPA and each AWS com- pany, state or municipality. Signatureof each of the agreementsand Bank

1/ Effective January 1, 1980 a value added tax (VAT) was introduced. This tax, in the sector, applies only to constructionworks and materials. VAT is 10% except in border areas where it is 6%.

2/ Unit prices catalogue- 1980 - prepared yearly by SAHOP's Subsecretariat for Construction. (Bank reviewed this catalogue and found it sound). TABLE 6.1

Summary of Project Costs -

…------Mex$ Million ------US$ Million------

Local Foreign Total Local Foreign Total

Water Works

Toluca 152.70 124.93 277.63 6.70 5.48 12.18 Tepic 17.08 13.98 31.06 0.75 0.61 1.36 Nogales 103.65 84.81 188.46 4.55 3.72 8.27 Monclova - - Matamoros 152.33 124.64 276.97 6.68 5.47 12.15 Queretaro 152.81 125.03 277.84 6.70 5.48 12.18 Cd. Juarez 315.64 258.25 573.89 13.84 11.33 25.17 Other subprojects 2/ 375.24 307.02 682.26 16.46 13.46 29.92 1269.45 1038.66 2308.11 55.68 45.55 101.23

Sewerage Works

Toluca 157.55 128.90 286.45 6.91 5.65 12.56 Tepic 32.08 26.24 58.32 1.41 1.15 2.56 Nogales - - Monclova 100.42 82.16 182.58 4.40 3.60 8.00 Matamoros 119.30 96.61 216.91 5.23 4.28 9.51 Queretaro 119.72 97.95 217.67 5.25 4.30 9.55 Cd. Juarez 2 347.47 284.29 631.76 15.24 12.47 27.71 Other subprojects -/ 368.14 301.20 669.34 16.15 13.21 29.36 1244.68 1018.35 2263.03 54.59 44.66 99.25

Development of accounting systems 5.54 4.53 10.07 0.24 0.20 0.44

Engineering and Administration 167.15 136.77 303.92 7.33 6.01 13.34 Base Cost 2686.82 2198.31 4885.13 117.84 96.42 214.26

Physical contingencies 382.84 313.24 696.08 16.79 13.74 30.53 Price escalation 852.04 338.35 1190.24 37.37 14.84 52.21 Total Project Cost 3921.70 2849.90 6771.60 172.00 125.00 297.00 Value added tax (VAT) 478.80 - 478.80 21.00 _ 21.00 Total Cost 4400.50 2849.90 7250.40 193.00 125.00 318.00

1/ Does not include interest during construction charged by FIFAPA

2/ Subprojects to he prepared by June 30, 1981 - 26 - approval of the agreements would be a condition of disbursement of loan pro- ceeds for project expenditures incurred in each city. When a subloan is signed between FIFAPA and a state or municipality, the subloan will include the obligation of the state or municipality, as the case may be. to establish within six months an autonomous company to operate the water and sewerage services in the municipality. The establishment of such companies would be a condition of disbursement from the proposed loan for each subproject.

6.14 If costs are greater than estimated, the Federal Government will provide FIFAPA with the required funds to cover overruns. In those subprojects where the works are completed at a lower cost than estimated, the Bank will consider, at BANOBRAS' request, applying any resulting subloan surplus to financing the cost of properly justified additional works. These surplus funds could also be transferred to new subprojects as agreed upon between FIFAPA and the Bank in accordance with the criteria listed in para. 6.04.

Implementation

6.15 SAHOP will be the executing agency for the proposed project, through SCF under DGC (para. 3.13). SCF will be in charge of (a) supervising the work done by engineering consultants hired by SAHOP to undertake final designs or leak detection surveys; (b) preparing bidding documents, tender analysis and the supervision of construction; (c) providing technical assistance in all areas of management to the AWS companies, including preparation of terms of reference, hiring and supervision of the work of consultants providing manage- ment assistance to the companies; and (d) construction supervision and moni- toring project execution and compliance with subloan agreements by the local water authorities. The proposed investment program and construction schedule (Annex 5), was confirmed during negotiations and will form the basis for reporting on progress. The proposed investment program has been discussed with FIFAPA/SAHOP and is compatible with the execution capability of SCF, demons- trated in Loan 1186-ME. SCF intends to delegate some of the supervision of construction work to qualified engineering consultants working under its close supervision. Bank supervision of the project should concentrate on assisting SCF and the local water and sewerage companies to improve their management practices.

Procurement

6.16 All goods and services will be procured in accordance with Bank's guidelines as in the first FIFAPA operation (Loan 1186-ME). To the extent practicable, civil works and materials and equipment would be grouped as to make them attractive for international competitive bidding (ICB). Assurances were obtained during negotiations that before bids are invited and as a condition of disbursement for each individual subproject, FIFAPA/SAHOP will furnish to the Bank, for comment, the list of all major contracts it intends to award for each subproject, and will make such modification as the Bank may suggest. Contracts in excess of US$2.5 million for civil works and US$500,000 for the purchase of equipment and materials will be awarded on the basis of ICB. Contracts for less than US$2.5 million but over US$250,000 for civil works or less than US$500,000 but over US$150,000 for the purchase of equipment will be awarded on the basis of local competitive bidding, the procedure for which is satisfactory. Contracts of less than US$250,000 for civil works and less than US$150,000 for materials subject to a maximum aggregate of US$12.5 million (4% of total project cost) can be procured directly on the basis of a minimum of three quotations. No force account works are envisaged. -27-.

TABLE 6.2

Estimated Schedule of Loan Disbursements

US$ Million

DISBURSEMENTS

IBRD Fiscal Year Quarterly Cumulative Cumulative

1981

March 31, 1981 2.0 2.0 1.6

June 30, 1981 3.0 5.0 4.0

1982

September 31, 1981 3.0 8.0 6.4

December 31, 1981 4.0 12.0 9.6

March 31, 1982 10.0 22.0 17.6

June 30, 1982 10.0 32.0 25.6 1983

September 31, 1982 12.0 44.0 35.2

December 31, 1982 13.0 57.0 45.6

March 31, 1983 12.0 69.0 55.2

June 30, 1983 10.0 79.0 63.2

1984

September 31, 1983 10.0 89.0 71.2

December 31, 1983 10.0 99.0 79.2

March 31, 1984 9.0 108.0 86.4

June 30, 1984 7.0 115.0 92.0

1985

September 31, 1984 5.0 120.0 96.0

December 31, 1984 5.0 125.0 100.0 - 28 -

6.17 Given the advanced degree of development of the civil works con- struction industry in Mexico, all civil works contracts are expected to be won by local contractors. For all contracts under ICB, FIFAPA/SAHOP will make copies of bidding documents, bid analysis reports and recommendations for award available to the Bank for prior review and approval. General conditions for tender documents to be used for ICB and local procurement were prepared under the first FIFAPA operation and are acceptable to the Bank. Contracts awarded under local competitive bidding procedures will be submitted to the Bank for ex-post review and disbursements will only be made after the Bank is satisfied with said review. Goods manufactured locally and procured under ICB would be allowed a preference of 15% of the CIF price or the level of import duty, whichever is lower, over foreign goods.

Disbursement

6.18 The project would be completed by June 30, 1984, and the closing date would be December 31, 1984. Bank financing of the foreign component (42%, para. 6.12) will be achieved by disbursing 45% of all payments to contractors (net of VAT) except the repayment of the 5% retention withheld from civil works contractors during the guarantee period following the completion of works or SAHOP's direct cost for supervision of construction charged to the AWS com- panies (para. 6.11). BANOBRAS will also be reimbursed 45% of the sum paid to consultants for engineering designs, construction supervision and management assistance to AWS companies. Table 6.2 shows the estimated schedule of dis- bursements. Proceeds of the proposed Bank loan would be disbursed under the following category upon presentation of normal documentation:

Amount US$ % of Expenditures Category Thousands To be Financed

Equipment, materials, civil works, 45% and consulting services for engineering and management assistance 125,000

TOTAL: 125,000

6.19 Retroactive financing from April 1, 1980, for up to US$5.0 mil- lion would reimburse FIFAPA for expenses incurred on subprojects approved by the Bank.

Environmental Aspects

6.20 The expansion of water supply and sewerage systems in medium- size cities would lead to an increase in the volume of sewage discharged into water courses. In many instances, the proposed works would help to reduce health hazards from sewage spillovers caused by insufficient delivery - 29 -

capacity of existing sewer system (para. 5.08). The project includes the construction of adequate sewage treatment facilities (para. 6.09 (j)) in those cities where domestic and industrial pollutant loads could cause adverse effects on downstream domestic and agricultural water uses. In some cases, sewage treatment will not be part of the proposed works ia a given city as sewage pollution loads (both current and caused by the project) are low com- pared with the self-purification capacity of the receiving waters and do not interfere with downstream uses.

VII. FINANCIAL ASPECTS

BANOBRAS-Financial Performance

7.01 BANOBRAS' financial performance has been satisfactory. Its oper- ations are large and have been growing at a very high rate since 1976. Its assets and liabilities as of December 31, 1979, were US$4.6 billion equivalent. BANOBRAS' net worth increased 80% from US$107.1 million in December 31, 1976, to US$192.5 million as of December 31, 1979. Its net profit after taxes increased 60% from US$11.4 million equivalent in 1976 to US$18.3 million equivalent in 1979. Consolidated financial statements are presented in Annex 6.

7.02 The FIFAPA Trust Fund has been an important factor in helping the Federal Government to reduce its grant financing through the present lending policy. FIFAPA has contracted financing with seven entities for an aggregate amount of Mex$ 2.17 billion (US$95.2 million) of which Mex$761 million has been disbursed. FIFAPA will continue to grow and it is expected that by the end of 1983 the amount contracted to be financed will reach Mex$9.0 billion. FIFAPA's assets and liabilities have increased from US$12.7 million equiv- alent at December 31, 1978, to US$28.1 million equivalent as of December 31, 1979 and its net worth has grown from US$12.4 million equivalent at December 31, 1978, to US$27.6 million equivalent at December 31, 1979. In 1979 FIFAPA had a net income of US$1.96 million equivalent compared with US$0.67 million in 1978. As a means of capitalizing FIFAPA, the Federal Government will provide counterpart funds on an equity basis. BANOBRAS will service the principal of the debt of the Bank loan, assuming the foreign exchange risk. Cash flow statements for 1980-84 are shown in Table 7.1. Financial statements are presented in Annex 7.

Subborrowers Financial Performance

7.03 Past financial performance of the water and sewerage companies to be benefitted by the project is exemplified by the four cities appraised. All these operations share similar problems: (a) most maintain only cash account- ing records (Toluca, Nogales and Tepic); (b) accounts of municipal water and sewerage services (water and sewerage in Toluca; sewerage in Tepic) are com- bined with those of such other services as markets and solid waste collection; and (c) accounts for water and sewerage services are consolidated when a company is in charge of both services (Monclova and Nogales). -30-

TABLE 7.1

FIFAPA

Cash Flow Statement (1980-1984)

US$ Million

Year Ending December 31 1980 1981 1982 1983 1984

SOURCES

Internal Cash Generation 2.7 3.3 3.9 4.4 4.9

Loan Repayment 0 1.0 3.1 5.4 6.2

Bank Loans 12.0 31.0 45.0 42.0 26.0

Government Budgetary Funds for Investments. BANOBRAS Fund for Principal on Debt Service 20.6 40.3 66.4 69.6 45.0

Total Sources 35.3 75.6 118.4 121.4 82.1

APPLICATIONS

Loans 32.0 70.0 111.3 111.4 71.0

Interest and Other Charges on Bank Loan .2 1.5 7.6 8.2 13.7

Increase in Working Capital (+) 3.1 4.1 -.5 1.8 -2.6

Total Applications 35.3 75.6 118.4 121.4 82.1 - 31 -

7.04 In 1979, the financial performapye of the four appraised cities varied widely (Table 7.2). Working ratios- were 0.74 in Monclova, 0.57 in Tepic, 0.95 in Nogales and 1.16 in Toluca. Revenues have been low compared with operational expenses. Contribution to investment has been marginal or nonexiste t. Accounts receivable are generally high and recorded inaccurately as a large portion is made up of very old and uncollectable accounts. Long term debt is very low or nonexistent since most of the works have been grant- financed by the Federal or State Governments. Fixed assets are not properly recorded, leading to an unrealistically low base rate. Moreover, the accumu- lated depreciation and depreciation charges are only best estimates since these entities do not depreciate nor revalue their assets. Because of these problems, the financial information and projections for these four companies for 1980-84, presented in Annex 9, can only be regarded as pre- liminary and subject to revision upon installation of an adequate accounting system (para. 4.04).

7.05 The proposed project aims at improving the managerial capacity and financial performance of the beneficiary companies through the following actions:

(a) providing training programs in specific areas of administration as identified in each feasibility study (para. 2.23);

(b) using consultants to implement an accrual accounting system, based on a manual prepared by the University of Monterrey which has been reviewed by the Bank and found acceptable (para. 7.11

(c) inventorying and revaluating fixed assets. The methodology to be used was reviewed by the Bank and found acceptable (para. 7.11 (g));

(d) adjusting tariffs and other charges to meet the required finan- cial covenants (para. 7.11 (b)); and

(e) reducing accounts receivable to a maximum of three months of billings not later than two years after subloan signature (para. 7.11 (j)).

Financing Plan

7.06 The financing plan for each one of the four appraised cities is shown in Annex 9 and in Table 7.3.

1/ Operating expenses before depreciation/operating income. - 32 -

TABLE 7.2

Appraised Companies Balance Sheet as of December 31, 1979 and Income Statement for 1979

(Million Mex Pesos)

Balance Sheet

Assets Toluca Monclova Tepic Nogales

Fixed assets 325.5 176.1 191.5 76.9 Accumulated Depreciation 132.0 54.5 162.8 34.2 Net assets 193.5 121.6 28.7 42.7 Work in Progress 0 0 0 .8 Cash 0.04 0.05 .35 2.82 Accounts Receivables 14.0 7.6 4.90 8.97 Inventory .3 1.0 .70 .54 Other Current Assets 12.6 19.8 .60 0

Total Current Assets 26.9 28.4 6.5 12.3 Other Assets 0 .9 0 0

Total Assets 220.4 150.9 35.3 55.8

Liabilities

Accounts Payable 1.8 12.8 .5 1.7 Other Current Liabilities 0.1 .9 0. 0 Other Liabilities 1.6 0 0 0

Total Current Liabilities 3.5 13.7 .5 1.7

Long Term Debt 0 0 6.4 0 Other Long Term Liabilities 23.0 16.5 0 0

Total Liabilities 26.5 30.2 6.9 1.7

Equity 193.9 120.7 28.4 54.1

Total Equity and Liabilities 220.4 150.9 35.3 55.8

Water Connections (000 26.60 27.89 17.42 7.64 Volume Sold (Million M3) 16.13 9.24 6.90 3.63 3 Average Tariff (Pesos M ) 0.95 2.95 2.14 4.25 % of Unaccounted-for Water 36 46 46 40 Income Statement Water Sales 15.44 27.27 14.76 15.44 Connections Fees and other Operation Revenues 2.63 1.21 1.56 .23 Sewerage Charges 3.19 1.58 0 0

Total Revenues 21.25 30.05 16.32 15.67

Operating and Maintenance Costs 24.62 22.21 9.38 14.91

Depreciation 9.25 7.88 5.75 2.02

Operating Income -12.62 - .03 1.19 -1.26 Non-Operational Revenues 10.60 7.70 1.04 .54

Net Income - 2.02 7.66 2.23 - .72

Working Ratio 1/ 115.9 73.9 57.48 95.14 Average Rate Base 161.9 115.2 18.85 36.11 Rate of Return (%) - 1.3 6.6 11.8 - .20

1/ Operating expenses before depreciation/operating income. - 33 -

TABLE 7.3

Appraised CompaniesFinancing Plan (1980-1984)

Million Mex Pesos

TEPIC TOLUCA NOGALES MONCLOVA

Income Before Depreciation 72.11 375.88 184.96 235.69 Net Non-OperatingRevenue 32.91 129.70 17.04 102.88

Gross Internal Cash Generation 105.02 505.58 202.00 338.57 Total Debt Service (-) 35.42 261.24 70.62 86.57 Working Capital (-) 49.59 129.19 72.06 134.86 Other Liabilities (+) or Assets 0.00 8.00 0.00 (.84) Total Contributionto Investment 20.01 107.15 59.32 117.98

Project InvestmentIncluding VAT 148.13 920.51 310.68 303.49 Interest During Construction 16.00 100.17 36.42 38.28 Other Works 20.06 107.15 59.32 117.97 Total Investments 184.19 1127.83 406.42 459.74

Total to be Financed by FIFAPA Loan 164.18 1020.68 347.10 341.76 - 34 -

7.07 The total cost of the project is US$297 million equivalent excluding a value added tax (VAT) of US$21.0 million, US$35.0 million of interest during construction period charged by FIFAPA to the beneficiary cities, and US$18 million for minor extensions and replacements financed by the AWS companies through internal cash generation. The consolidated financing plan for the project is presented in Table 7.4.

TABLE 7.4

Project Financing Plan 1980-1984

Applications (US$ mill.) (%)

Project Cost 297.0 80.0 VAT 21.0 5.5 Interest during const.(FIFAPA) 35.0 9.5 Other works and replacements 18.0 5.0

Total Financing Requirements 371.0 100.0

Sources

IBRD 125.0 33.6 Federal Government 193.0 52.0 Interest during const.(FIFAPA) 35.0 9.5 Internal cash generation by AWS companies 18.0 5.0

Total 371.0 100.0

7.08 The total financing requirements for the project of US$371.0 million equivalent would be financed as follows:

(a) the Bank will contribute to FIFAPA trust fund with 42% of the cost of each subproject, (33.6% of total financial require- ments), up to a total amount of US$125 million to finance the foreign exchange component of the project;

(b) the Federal Government of Mexico will provide counterpart funds to FIFAPA, on an equity basis of US$193.0 million (52% of total financial requirements) (para. 7.02);

(c) FIFAPA will finance interest during the construction period (9.5% of total financial requirements) to the beneficiary cities; and

(d) the AWS companies will finance other works for minor exten- sions and replacements (5% of total financial require- ments) out of internal cash generation. - 35 -

Subloan Agreements

7.09 FIFAPA will relend the proceeds of the Bank loan and Government contribution to the AWS companies either directly or through the respective municipality or state government for an amount equivalent to the cost of construction and consulting services, the corresponding VAT, and interest dur- ing construction. Subloans eligible for inclusion in the project should be signed before June 30, 1982. Each subloan will carry an interest of at least 9% p.a. and a 15-year term after a grace period equal to the construction period but not greater than 3½ years. The amount of each subloan cannot be modified without prior Bank approval.

7.10 Each subloan will be secured by contractual agreements between FIFAPA/SAHOP, the AWS company, and the government of the state. As required by BANOBRAS, the State Government will guarantee every loan to an AWS company in its state by giving FIFAPA a lien on the state's share of federal taxes. Should a beneficiary fall behind with debt payments, FIFAPA would request the National Treasury to deduct the amount overdue from its monthly distribution of Federal taxes to that state. This procedure follows standard practices in all BANOBRAS loans to municipalities.

7.11 Each subloan agreement would require Bank's approval as a condition of disbursement for the corresponding subproject (para. 6.13). Assurances were obtained from BANOBRAS during negotiations that subloan agreements will include the following specific conditions:

(a) AWS Companies: When a subloan is signed with a municipality or state, it should include the obligation to establish, within 180 days from the date of the respective agreement, an auto- nomous company to operate the water and sewerage services of the beneficiary city and to relend to such autonomous company, as soon as it is established, the proceeds of the,subloan under the terms and conditions listed in items (b) to (j) below:

(b) Revenue Covenant: Tariffs, other charges and non operating revenues for water and sewerage shall be set at such levels as shall be required by each AWS company to obtain in each calendar year, starting in the third calendar year after the date of the corresponding agreement, revenues sufficient to cover the sum of (i) all its operating expenses; (ii) increase of working capital and the financing of working capital and minor works (about 3% of net revalued fixed assets plus work in progress); and (iii) the higher of either the annual interest and debt repayment on the subloans or the annual depreciation charges on revalued fixed assets. The agreement shall also provide that in the first two calendar years after the date of each agreement, charges for the water supply and sewerage services shall be set as follows:

(i) in the first calendar year after the date of the corres- ponding agreement at a level at least equal to the level of the present charges plus one-third of the difference between the level of such present charges and that re- quired to cover the sum of the item specified in (i), (ii) and (iii) hereof, as estimated for such calendar year; - 36-

(ii) in the second calendar year thereafter, at a level at least equal to the level of the present charges plus two-thirds of such differences; and

(iii) in the first and second calendar years mentioned in items (i) and (ii) above revenues for water and sewerage serv- ices should be sufficient to avoid cash deficits.

(c) Tariffs: Each AWS company shall review at least once a year its tariff levels and other charges and timely submit, when- ever necessary, a request to the state government and state congress for tariff increases to meet the financial covenant (Annex 10). In addition, each AWS company should develop to the satisfaction of BANOBRAS and the Bank a specific tariff structure and schedule for its implementation (para. 4.06).

(d) Institutional Arrangement: The institutional changes and im- provements, including training needs and time frame for their implementation, recommended in the feasibility study prepared by SAHOP, will be spelled out as obligation by the AWS com- panies (para. 4.03).

(e) Leak Detection and Control Program: In those cities where unaccounted for water is higher than 30% a leak detection and control program will be carried out within the subproject con- struction period.

(f) Accounting: Proper accrual accounting system will be esta- blished in each AWS company within a year of subloan signature (para. 7.05).

(g) Revalued Fixed Assets: Within a year of subloan signature, the fixed assets will be inventoried and revalued (para. 7.05). As agreed under Loan 1186-ME, fixed isrsetswill be revalued annually in a proportion equal to 85%- of the cor- responding variation of the Mexican Price Index (Indice Nacio- nal de Precios al Consumidor -Banco de Mexico S.A.).

(h) Auditing: The accounts of the AWS company will be audited each calendar year, by qualified independent auditors acceptable to FIFAPA and SAHOP. Such reports will be available for Bank review.

(i) Monitoring Indicators: Based on the project objectives and financial projections included in the feasibility studies a list of Indicators (Annex 11) will be used to monitor project execution. These monitoring indicators specify for each year the following targets: percentage of population served by water and by sewerage services; number of water and sewerage connections; volume sold; percentage of unaccounted-for waters number of employees per 1,000 water connections; cost per m sold; average water tariff Mex$ per m ; and working ratio. These indicators should be updated semi-annually by the AWS companies to FIFAPA/SAHOP's satisfaction.

1/ This percentage has been found to reflect the average increase in the value of fixed assets within the sector. - 37 -

(j) Within six months of subloan signature, each AWS company will submit a plan satisfactory to FIFAPA to reduce accounts re- ceivable to a maximum of three months of billings not later than two years after subloan signature.

7.12 SAHOP through SCF would be responsible for (a) monitoring the com- pliance of the AWS companies with the subloan covenants; (b) procurement and supervision of construction; and (c) coordinating and supervising technical assistance to the AWS companies (para. 6.15).

Tariff Structures

7.13 In most cities water and sewerage tariffs levels and structures are inadequate. The main deficiencies are: (a) there is no differentiation between types of csonsumers; (b) the minimum consumption allowance is often too large (up to 20m per month) and as a consequence low income users, using an amount well below that minimum, pay a higher tariff per actual volume consumed; (c) progressiveness of charges for consumption is insufficient to discourage water waste and to allow cross subsidies; and (d) fixed sewerage charges are widely used and in many instances are levied on consumers lacking this service.

7.14 Connection fees charged to new consumers for either water or sewer- age services include: (a) a fee (derecho de conexion) for the right of access to the service, and (b) a charge for materials and labor costs that the utility incurs in connecting the consumer to the service. The rationale for these fees and charges varies from one city to another and the amount assessed does not follow a uniform or consistent pattern. Because the AWS companies have the right to vary these charges without approval from the State Legis- lature, the charges are adjusted frequently to meet their financial needs. This situation has caused these charges to be at such high levels that low income consumers are often deprived from connecting to the water and sewerage systems.

7.15 A special charge (cuota de cooperacion) has been instituted in some instances, to partially recuperate the costs of water and sewerage works that are considered to benefit specific areas, such as water distribution network, small diameter sewerage pipes, and individual connections. This special charge is based on the lot area, assessed to property owners and paid in annual installments under terms and conditions set by each individual AWS company.

7.16 SAHOP has agreed to prepare not later than June 30, 1981, a framework tariff study, which will establish the basic guidelines and criteria for tariff levels and structures that would: (a) provide enough revenues to meet financial requirements and promote an efficient resource allocation; (b) differentiate between consumers in basic categories (i.e. domestic, commercial, industrial, etc.); (c) set tariffs and charges for basic consumption affordable by the low income groups; (d) set progressive tariffs to discourage water waste and to provide cross subsidies to low income users; (e) establish sewerage tariffs as a proportion of water usage; (f) establish other fixed charges according to a consistent policy of cost recovery (para. 4.06). - 38 -

Future Finances of Beneficiary Cities

7.17 Financial projections have been prepared for each of the appraised AWS companies for the period 1980-198./, Basic assumptions for the financial projections are presented in Annex 8. - Given the poor accounting systems of these entities (para. 7.03) projections shown are only indicative of expected financial performance. During the construction period all AWS companies will be able to cover at least operating expenses and in later years they will cover debt service and will be able to make contribution to investments. The finan- cial position of the AWS companies as measured by the financial rate of return on revalued fixed assets will be satisfactory. The rates of return, after the construction period, range between 2-8% (Annex 9).

Reporting Requirements

7.18 BANOBRAS will send to the Bank semi-annual consolidated reports on project execution and costs and information on the performance of the AWS companies based on audited reports (para. 4.05) and measured by the monitoring indicators (para. 7.11 (i) and Annex 11) and their compliance with subloan covenants. Financial projections will be updated annually and will include revision of tariffs and other changes if necessary to meet the objectives of the financial covenant. BANOBRAS/SAHOP will take prompt remedial actions as the Bank may request from the review of these reports. This requirement is also included in Loan 1186-ME and compliance has been satisfactory.

7.19 During negotiations, assurances were obtained from BANOBRAS that not later than twelve months after the closing date they would prepare a completion report, satisfactory to the Bank, describing project execution and its finan- cial and physical achievements and benefits.

VIII. ECONOMIC AND SOCIAL ANALYSIS

Introduction

8.01 The proposed project will meet the needs for water supply and sewer- age services in selected medium-size cities, thereby enhancing the living and health conditions of their inhabitants. At the same time, the project, by providing these services, supports the Government's efforts to achieve a more balanced urban development. The proposed project will also help improve the management and technical operations of the newly created water companies in the selected cities in order to permit more accelerated sector development.

8.02 The project, while raising the living standards of the low-income population, puts special emphasis on the application of sound financial poli- cies as a means to increase efficiency in the allocation of water resources and alleviate the burden on Government finances.

1/ Projections made by SAHOP available in Project Files. - 39 -

Incremental Rates of Return and Marginal Costs

8.03 Incremental rates of return (IRR) were estimated by city fcr project investments and complementary works in water supply and water supply and sewer- age comb_.ed. These IRR calculations are shown in Annex 13. No return was estimated for sewerage alone since sewerage tariffs are charged as a percentage of the water charge and do not reflect benefits that the users assign to the sewerage service separately.

8.04 The estimated aggregate IRR for the four appraised subprojects and three additional subprojects submitted by SAHOP (Queretaro, Cd. Juarez and Matamoros - para. 1.02) is 13%. The combined cost of these subprojects is US$173.0 million (at June 1980 prices) or 71% of the total project cost. All costs are exclusive of taxes or price escalation. This IRR compares favorably with the estimated shadow discount rate for the country (11%). Benefits were estimated according to the tariff to be charged for the services, and as such, they do not reflect economic and social benefits in full. Benefits such as improvements in public health, increases in labor productivity, and environ- mental improvements are either not reflected or only partially reflected in the tariff paid for these services. The use of revenues as a proxy for benefits under a progressive tariff structure also understates the benefits of supply- ing water to the low income population where the initial volume of low-price water ensures most of the health benefits of providing safe water.

8.05 The IRR calculations do not include the consumers' surplus because the absence of reliable historical data on quantities demanded and of volumet- ric tariffs and restrictions on supply preclude to estimate the demand func- tion. Evidence indicates, however, that users assign a value to the initial volumes consumed much higher than the value of water tariffs.

8.06 Information gathered in the cities of Cd. Juarez, Tepic and Nogales indicates that people lacking access to public supplies obtain their water mostly from priNate vendors in recepta5les of 200 lts. at a price varying from Mex$6 (Mex$30/m ) to Mex$2g (Mex$100/m ). These prices are more than 10 times the estimated tariff per m in the project cities. Moreover, families earning less than one monthly minimum salary (about Mex$3,600 presumably below the critical consumption level), whp are presently paying from Mex$120 to Mex$400 for a monthly consumption of 4m of unsafe water, will now hive access to safe water, paying about Mex$30 for a monthly consumption of lom .

8.07 The former considerations indicate that the project's economic and social rates of return, if quantifiable, would be significantly higher than the estimated IRR. As an illustration of this, the consumer surplus was roughly estimated for the subproject in the city of Tepic resulting in an increase in the respective IRR from 12% to 34%. Results of similar magnitude are likely for all subprojects. Details of the estimate are available in project files.

8.08 Table 8.1 presents IRRs for the individual appraised subprojects. These rates indicate that water and sewerage tariffs on average will be close to long-run average incremental costs estimated on the basis of the same investment programs (discounted at 11%). Higher tariffs per unit volume for water consumption in excess of minimum consumption will be set to reflect the policies of cross-subsidization to low income consumers and of avoiding waste in the use of water resources. Tariff studies for each city will include - 40 - detailed calculations for long-run average incremental costs and a comparison with tariff levels and structures (paras. 4.06, 7.16 and Annex 12). In order to improve resource allocation, tariffs on excess consumption will be set as closely as possible to long-run average incremental costs, within the con- straints of the need for financial feasibility and the low-income population's ability to pay.

TABLE 8.1

Incremental Rates of Return

Description Tepic Toluca Nogales Monclova

Water Supply 17% 13% 10% NA

Water Supply and Sewerage 12% 9% NA 13%

NA: Not applicable.

Project Sensitivity

8.09 Sensitivity of the IRRs to changes in investment costs and benefits was estimated by city (available in project files). If investment costs were 20% higher than projected, the aggregate return would decrease to 10%. If this were the case, tariffs would have to be increased to meet the associated higher financial requirements.

8.10 The estimated IRRs are highly sensitive to changes in revenues since they were used as the only measure of benefits. Demands have been estimated on the basis of past evidence and present patterns shown in similar cities in the country (para. 5.14). Actual demands are not expected to deviate significantly from those projected. Projected tariff levels are considered achievable since they will not represent an excessive burden on family expenditures; in those cases where substantial increases are deemed necessary, a gradual path has been established. Revenues from "cuotas de cooperacion" (para. 7.15) are con- sidered the least certain revenues. However, they have been kept as a moderate percentage of total revenues, up to 30%, and failure to collect them in a timely manner would cause the water companies to resort to additional tariff revenues.

Least-Cost Solution

8.11 The appraised subprojects are the least-cost alternatives for meeting water and sewerage demand for the selected cities (paras. 5.10 and 6.04 (a)). Where more than one alternative was found technically satisfactory, the present value of costs was compared at a discount rate of 11%.

8.12 For subprojects not yet identified, the selection of least-cost alternatives constitutes a condition for a subproject to receive FIFAPA finan- cing (para. 6.04 (a)). - 41 -

Population Benefitted and Urban Poverty Impact

8.13 The project would provide water supply through house connections to about 1.2 million additional inhabitants by 1984 and sewerage to about 1.3 million additional inhabitants by 1984. About 36% of the additional population to be served with water supply and 34% of the additional population to be served with sewerage are estimated to belong to the urban poverty target group, defined as people earning less than one-third of the annual national per capita income (estimated at Mex$9,420 or US$413 in 1979). Table 8.2 shows the incre- mental population served and the percentage of urban poor for the appraised subprojects by city. Maps showing their locations are available in project files.

8.14 Water supply coverage for the urban poor will increase from 58% in 1979 to 81% in 1984, while the sewerage coverage will increase from 35% to 63% during the same period. Coverages will continue to increase in subsequent years. For this purpose, water intake works, major networks and sewage collec- tors have been designed for a period ranging from 10 to 15 years.

8.15 Expansion of water production and main distribution facilities and provision of sewage collectors and interceptors will permit a coverage of 90% of the 1990 population for water supply and 80% for sewerage through the expansion of secondary networks. On the basis of the appraised cities and the additional feasibility studies prepared by SAHOP, it is estimated that as a result of the project about 2.4 million and 2.5 million additional inhabitants will be connected to the water supply and sewerage systems respectively by 1990.

Affordability of Project Services by the Urban Poor

8.16 Present water and sewerage charges for minimum consumption (10-20 m3/month) do not constitute an excessive burden on the low-income population. Tariff studies in every city will ensure that increases in tariffs to meet financial requirements will be structured so as not to significantly affect minimum charges. Table 8.3 shows the percentages of one monthly minimum salary that a family would pay for water supply and sewerage when consuming up to 10-20 m3 of water per month. These charges are expressed in 1979 prices. Tariff increases for minimum consumption from 1979 to 1984 are assumed pro- portional to increases in the projected average tariff levels.

8.17 It is estimated that by 1984, families will have to spend from 1% to 3% of one monthly minimum salary for minimum consumption. These charges are considered to be well within the reach of even the poorest families, since studies on distribution of expenditure in Latin America show that poor families spend up to 5% to 7% of their monthly income (about one minimum salary per month) on these services. New consumers connected to the water and sewerage systems would also have to pay connection fees and other fixed charges. The tariff studies to be undertaken in every city (para. 4.06) will devise a system of monthly payments or fee reductions for the low-income population to facil- itate the connection of the whole population to the system. TABLE 8.2

Incremental Population Served 1979-1984

(thousand inhabitants and %)

Tepic Toluca Monclova Nogales

Total Population 1984 150.0 316.3 322.3 136.7 Urban Poor 59.5 (40%) 124.4 (39%) 136.0 (42%) 56.0 (41%)

WATER SUPPLY Total Population Served 1984 135.0 (90%) 292.6 (92%) 279.4 (87%) 112.1 (81%) Urban Poor Served 1984 53.5 (90%) 104.8 (84%) 115.8 (85%) 37.1 (66%) Incremental Total Population Served 1979-1984 46.2 106.4 84.2 66.2 Incremental Urban Poor1''1'' Served 1979-1984 20.3 (44%)' 47.9 (45%)- 37.0 (44%)-/ 28.1 (42%)'/

SEWERAGE Total Population Served 1984 117.0 (78%) 261.8 (83%) 209.4 (65%) 95.7 (70%) Urban Poor Served 1984 41.0 (69%) 85.2 (69%) 67.4 (50%) 33.0 (59%) Incremental Population Served 1979-1984 42.6 82.6 142.6 69.2 Incremental Urban Poor1//1// Served 1979-1984 18.1 (43%)-/ 33.8 (41%)-/ 47.1 (33%)-/ 25.5 (37%)'/

1/ % = percent of urban poor within the incremental population served. TABLE 8.3

Affordability of Minimum Consumption

Charge for Minimum Consumption Monthly Charges as Percentage (1984 at 1979 prices) of Minimum Salary (M$/month) % Minimum Water and Water and City Consumption Water Sewerage Water Sewerage (m3/month)

Tepic 15 29 48 0.8 1.3

.1

Toluca 20 76 114 2.1 3.2

Monclova 15 23 35 0.6 0.8

Nogales 10 26 34 0.7 0.9

1/ The increase in tariffs for basic consumption between 1979 and 1984. was assumed to be the same percentage as that for the average tariff level. - 44 -

Project Risks

8.18 Given SAHOP's implementation capability, the availability of ex- perienced local construction firms and the advanced stage of project design, no major problems are envisaged in the construction of the relatively simple works.

8.19 There is a moderate risk on the timely execution of subprojects because of lengthy approval processes for subloan agreements at the state and municipal levels. Since the water sector is used to receiving most federal funds as grants, there has been an initial reluctance to accept the terms of FIFAPA loans. This risk has been minimized by the Government's decision to gradually reduce sector grant financing and by FIFAPA/SAHOP continuous promo- tion efforts from a very early stage of project preparation.

8.20 Most of the AWS companies still lack experience but SAHOP is taking the necessary steps to improve management efficiency thus reducing the risks of inefficiencies in the operation of the systems. Required tariff increases have been staged during the construction period so as to avoid sharp increases within a short time span. The risk of noncompliance with revenue requirements is thus considered moderate.

8.21 Overall, the project presents a moderate risk of not achieving its objectives; the risk is more than compensated for by the benefits accruing to the beneficiaries and the expected sectoral improvements.

IX. AGREEMENTS REACHED AND RECOMMENDATIONS

9.01 During loan negotiations assurances were obtained as follows:

1. From the Federal Government that it will:

(a) provide the funds required to carry out the project (para. 6.12);

(b) cause SAHOP to:

(i) prepare not later than June 30, 1981 a framework tariff study, which will provide the basis for individual tariff studies to be undertaken by each AWS company in accordance with the provisions of the subsidiary loan agreements (para. 4.06);

(ii) maintain its financial Coordinating Unit in charge of project preparation and implementation and that it will adequate its staff to the increasing responsibilities with qualified professionals in sufficient number at all times (para. 3.14);

(iii) continue carrying out its national training program, paying due attention to the needs of the AWS companies (paras. 2.23 and 4.03); - 45 -

(iv) provide technical assistance through its Financial Coordinating Unit as required by the AWS companies (paras. 4.03 and 6.15); and

(v) carry out all procurement in accordance with the Bank's guidelines and under the conditions set forth (Daras. 6.16 and 6.17).

2. From BANOBRAS:

(a) subprojects which would be incorporated in the project after loan negotiations or which would replace other previously se- lected subprojects will be selected according to the priority criteria agreed upon with the Bank (paras. 6.04 and 6.05);

(b) feasibility studies for subprojects to be financed under the proposed loan will be prepared following SAHOP guidelines and in a manner satisfactory to the Bank and appropriate insti- tutional and financial arrangements will be made (para. 6.04);

(c) FIFAPA's financial statements will be audited by competent independent auditors and copies of such reports submitted to the Bank (para. 3.10);

(d) it will cause the AWS companies to produce semi-annual reports to monitor their operations and finances (para. 7.11 (i));

(e) it will furnish to the Bank semi-annual consolidated reports on project execution and costs and information on the perform- ance of the AWS companies as measured by the agreed upon moni- toring indicators, and on their compliance with subloan cove- nants (para. 7.18);

(f) it will prepare a completion report, satisfactory to the Bank, not later than one year after the closing date (para. 7.19).

9.02 The following conditions of disbursement will be included for each subproject:

(a) FIFAPA should enter into subsidiary loan agreements, under terms and conditions specified in paras 7.09 and 7.11 and to be signed before June 30, 1982 (para. 7.09).

(b) Each subsidiary loan agreement should be secured by the State Government (para. 7.10), include the conditions listed in para 7.11 and should have been approved by the Bank before dis- bursements are made on account of such subproject (para. 6.13) and;

(c) A list of all major contracts intended to be awarded should have been approved by the Bank (para. 6.16).

9.03 Retroactive financing from April 1, 1980 for up to US$ 5 million is recommended (para. 6.19).

9.04 Provided the foregoing conditions are met, the proposed project will be suitable for a Bank loan of US$125 million. The loan would be repayable over 15 years, including three years grace. - 46 -

ANNEX 1 Page_ 1of 4

MEXICO

SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

Description of Existing Facilities

This annex briefly describes the existing water and sewerage faci- lities in each one of the appraised cities.

1. TOLUCA

Toluca, capital of the State of Mexico, has a population of 240,000 (1979) inhabitants, growing at a rate of 5.5% p.a., of which 78% are served with water (house connection) and 73% have access to the sewerage system.

Toluca's main water supply sources are some 24 deep we 6ls 3 located within the city, with a production capacity of 850 1/sec (26.8 x 10 m /year); only about 60% of the water delivered is chlorinated. The disiribution network includes five storage tanks with combined capacity of 7,820 m , 280 km of pipes and 26,600 house connections of which 45% are metered. Quality of service is deficient in many areas of the city due to extreme pressure variations for lack of adequate pressure zones in the distribution system. Unaccounted-for water averages 36% of production.

The sewerage system is combined (storm and sanitary) and comprises 238 km of pipes and 25,600 house discharges. During the rainy season, sewage overflows into the streets. Sewage is discharged into open courses within city limits and receives no treatment when it is finally discharged into the Verdiguel River.

Water and sewerage services were operated by the municipality until March 1980 when a new autonomous state company was created to be in charge of these services. The number of staff is 170 persons (ratio of 6.4 persons per thousand connections) which is considered acceptable.

2. TEPIC

Tepic, capital of the State of Nayarit, has a population of 121,400 (1979) inhabitants, (growing at a rate of 4.2% p.a.), of which 73% are served with water (house connections) and 61% have access to the sewerage system.

3 Eight deep wells with a combined capacity of 570 lps (18.0 x 106 m /year) provide water to the city and about 64% of the water delivered is chlorinated. The distribution network includes three storage tanks with a combined capacity of 2,700 m , 181 km of pipes and 14,800 house connections of which 89% are metered. - 47 -

ANNEX 1 Page 2 of 4

The sewerage system comprises 132 km of pipes and 12,400 house dis- charges. Sewage is dischargedwithout treatmentinto the Mololoa River.

Water services are operated by a Federal Commission (Junta Federal de Agua-Tepic),and sewerage services by the municipality. Steps are being taken to create an automonousmunicipal company in charge of water and sewerage services. This new company would be operatingby end of 1980 (para. 6.04).

3. MONCLOVA-FRONTERA

These two cities have a population of 254,100 (1979) inhabitants growing at a rate of 6.0% p.a. Service levels are 77% for water (house connections)and 26% for sewerage.

Water supply comes from groundwatersources 6 located some 18 km fron the city. Productioncapacity is 644 lps (20.3 x 10 m /year) and all water delivered is chlorinated. The distributionnetwork includes six storage tanks with a combined capacity of 10,250 m , 377 km of pipes and 27,900 house connectionsof which 90% are metered.

The sewerage system comprises 178 km of pipes and 9,500 house dis- charges. Sewage is treated in an activatedsewage plant and reused for indus- trial applicationby a large steel mill (AltosHornos de Mexico) locatedwithin city limits.

Water and sewerage services are operated by an autonomousmunicipal company (Junta Administradorade Agua Potable y Alcantarilladode Monclova- Frontera). The number of staff is 142 persons (ratio of 5.1 persons per thousand connections)which is considered acceptable.

4. NOGALES

It has a population of 115,100 (1979) inhabitantsgrowing at a rate of 3.5% p.a. of which 40% have water (house connections) and 23% sewerage services. Nogales' water is supplied from groundwatersources (infiltration galleriesand A-ep3wells) some 30 km from the city. Productioncapacity is 250 lps (7.9 x 10 m /year) and all waters are chlorinated. The distribution network includesseven storagetanks with a combinedcapacity of 7,800 m , five booster pump stations,115 km of pipes and 7,600 house connectionsof which 16% are metered.

The sewerage system, under construction with Federal and State funds, provides service through 4,400 house discharges. Under international agreement between Mexico and the United States, the sewerage effluent is treated at Nogales-Aurora'ssewerage treatment plant (oxidation lagoons - para. 5.09)

Water and sewage services are operated by a Federal Commission (Junta Federal de Mejoras Materiales de Nogales). This commission is being transformed into an autonomous state company which is expected to be opera- tional by end of 1980 (para. 6.04). - 48 -

ANNEX 1 Page 3 of 4

5. MATAMOROS

Matamoros has a population of 214,500 (1979) inhabitants growing at a rate of 4.9% p.a., of which 72% are served with water (house connections) and 55% have access to the sewerage system.

The Rio Bravo is the source of water supply. Water is drawn from the multi-purpose Solideno Channel into three pre-sedimentation lagoons, and then at the water treatment plant it receives 3conventional tregtmint including chlori- nation. Production capacity is 0.70 m /sec. (22.1 x 10 m /year). The distri- bution network includes a main pumping stati3on, 255 km of pipes, four storaie tanks with a combined capacity of 14,500 m (two not in service, 8,000 m due to deficiencies in the distribution system) and 22,150 house connections of which 40% are metered. Unaccounted for water averages 39% of production.

The sewerage system includes 240 km of pipes, six pumping stations and 16,900 house discharges. Sewage is discharged without treatment and used by SAHR for irrigation.

Water and sewerage services are operated by the Junta de Agua y Drenaje de Matamoros. It has a staff of 224 persons (ratio 10.1 person per thousand connections) which is considered high.

6. QUERETARO

Queretaro has a population of 315,000 (1979) inhabitants growing at a rate of 6.5% p.a., of which 60% are served with water (house connections) and 44% have access to the sewerage system.

3 Twenty seven wells with a combined capacity of 1170 lps (36.9 x 106 m /year) provide water to the city. All water delivered is chlorinated. The distribution network includes 221 km of distribution pipes, four Toosterpump stations, 17 storage tanks with a combined capacity of 24,720 m and 32,200 house connections of which 98% are metered.

The sewerage system includes 202 km of sewerage pipe and 23,300 house discharges. About 80% of the sewerage is treated at a primary sewage treatment plant, before its discharge into the Queretaro River.

Water and sewerage services are operated by 8 different companies (two federal government and six privately owned). All these companies are being merged into an autonomous municipal company to be operative by the end of 1980. - 49 -

ANNEX 1 Page 4 of 4

7. CD. JUAREZ

Cd. Juarez, has a population of 671,500 (1979) inhabitants, growing at a rate of 5.7% p.a., of which 72% are served with water (house connections) and 49% have access to the sewerage system.

3 Fifty five wells with a combined capacity of 2.1 m /sec (66.2 x 10 m /year) provide water to the city. About 70% of the water delivered is chlorinated. The distribution network includes 801 km of pipes, 9 booster pump stations, 20 storage tanks with a combined capacity of 55,560 m and 74,900 house connections of which 23% are metered. Unaccounted-for water averages 39% of production.

The sewerage system includes 609 km of pipes and 50,980 house discharges. Sewerage is discharged without treatment and used by SAHR for irrigation.

Water and sewerage services are operated by the Junta Municipal de Agua y Saneamiento. The number of staff is 346 persons (ratio of 4.6 persons per thousand connections) which is considered acceptable. - 50 -

ANNEX 2 Page 1 of 6

MEXICO

SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

Proposed Works and Project Costs

This Annex briefly describes the proposed works in each of the cities appraised. Costs and annual investments during the construction period are presented in Annex 3.

1. TOLUCA

1.1 Water Supply

a. improvements to existing wells including replacement of obs- olete pumping equipment, provision of master meters and cons- truction of net6we Yls3 to increase production capacity to 1,097 lps (34.6 x 10 m /year);

b. provision of five chlorination equipments;

c. construction or expansioz of five storage tanks with a com- bined capacity of 5,400 m ;

d. improvements in the distribution system and construction of 59 km of pipes;

e. construction of 9,000 metered house connections and provision of 10,000 house meters;

f. provision of a meter repair shop and leak detection equipment.

1.2 Sewerage

a. construction of 60 km of trunk sewers and interceptors;

b. construction of 38 km of sewerage pipes and of 6,000 house discharges. - 51 -

ANNEX 2 Page 2 of 6

2. TEPIC

2.1 Water Supply

a. construction of two deep3 wells to increase production capacity of 455 lps (14.3 x 10 m /year) and provision of master meters in all production sources;

b. provision of chlorination facilities for the new wells;

c. construction of 12 km of transmission pipes;

d. construction of two storage tanks fnd expansion of one to increase storage capacity by 3,000 m ;

e. improvements and expansion in the distribution system includ- ing the construction of 45 km of pipes;

f. installation of 3,500 metered house connections and purchase and installation of 6,900 house meters;

g. construction of a meter repair shop and leak detection and correction program.

2.2 Sewerage

a. construction of 45 km of trunk sewers and sewerage pipes;

b. construction of 5,500 house discharges;

c. construction of the first stage of an activated sludge sewage treatment plant including a complete laboratory for physico- chemical and bacteriological analysis of water and sewage.

2.3 Institutional

Development and implementation of an accrual accounting system.

3. MONCLOVA-FRONTERA

3.1 Sewerage

a. construction of 25 km of trunk sewers and interceptors;

b. construction of 163 km of sewerage pipes;

c. construction of about 11,500 house discharges in Frontera and Monclova. - 52 -

ANNEX 2 Page 3 of 6

3.2 Institutional

Development and implementation of an accrual accounting system.

3.3 Water Supply

Expansion of the water supply system will be carried out by the local water supply and sewerage company with internally generated funds. Total project cost of this component is estimated at US$1.3 million (Mex$30 million).

4. NOGALES

4.1 Water Supply

a. construction of infiltration gqlle3ries to increase production capacity to 500 lps (15.6 x 10 m /year);

b. rehabilitation of existing transmission pipes and construction of some 37.5 km of new transmission pipes;

c. provision of chlorination facilities and purchase of equipment for a water quality control laboratory;

d. construction of 77 km of interconnecting pipes between storage tanks; and

e. improvements and expansions in the distribution system includ- ing construction of:

i. seven storage tanks with a combined capacity of 8,100 m 3

ii. three pressure-reducing stations;

iii. 59 km of pipes - 3" to 14" in diameter;

iv. 7,200 metered house connections;

v. a meter repair shop.

4.2 Institutional

Development and implementation of an accrual accounting system.

4.3 Sewerage

Expansion of the sewerage system is being carried out with Federal funds. Works are expected to be completed by the end of 1981. - 53 -

ANNEX 2 Page 4 of 6

5. MATAMOROS

5.1 Water Supply

a. rehabilitation of the existing water treatment plant and con- struction of a new later treatment p1ant, to increase production capacity by 1.05 m /sec. (33.1 x 10 m /year).

b improvements and extension in the distribution system in- cluding construction of:

i. 185 km of water mains 4" to 30" in diameter;

ii. a booster pump station;

iii. 8,000 m storage tank;

iv. 8,900 additional house connections;

v. 13,000 additional house connection meters.

c. construction of a meter repair shop;

d. leak detection program;

e. purchase of maintenance equipment.

5.2 Sewerage

a. construction of 1.4 km of trunk sewers;

b. construction of 140 km of sewer pipes;

c. construction of six pumping stations and 1.3 km of pressure discharge pipes;

d. construction of 9,900 house discharges.

5.3 Institutional

Development and implementation of an accrual accounting system and purchase of accounting equipment.

6. QUERETARO

6.1 Water Supply

a. construction of three wills to increase production capacity by 550 lps (17.3 x 10 m /year) and provision of chlorination facilities. - 54 - ANNEX 2 Page 5 of 6

b. construciionof six storage tanks with a combined capacity of 11,400 m .

c. constructionof 28 km of transmissionpipes.

d. improvementsand extensionsin the distributionsystem includ- ing:

i. 252 km of distributionpipes 3" to 30" in diameter;

ii. 19,600 metered house connections;

iii. 4,000 additionalhouse meters.

6.2 Sewerage

a. constructionof 51 km of trunk sewers and interceptors;

b. constructionof 183 km of sewer pipes;

c. constructionof 20,000 house discharges.

6.3 Institutional

Developmentand implementationof an accrual accountingsystem.

7. CD. JUAREZ

7.1 Water Supply

a. construct3onof 15 deep wePls3to increase production capacity by 0.83 m /sec. (26.0 x 10 m Iyear);

b. construction of 34.1 km of transmissionpipes between wells and distributiontanks;

c. provision of chlorinationfacilities for all wells;

d. improvements and expansion in the distribution system in- cluding constructionof:

i. three storage tanks with a combined capacity of 11,500 m 3

ii. 325 km of pipes 2 1/2" to 36" in diameter;

iii. 34,780 metered house connections;

iv. 57,300 additionalhouse connectionmeters.

e. constructionof a meter repair shop. - 55 -

ANNEX 2 Page 6 of 6

7.2 Sewerage

a. construction of 99 km of trunk sewers and interceptors;

b. construction of 510 km of sewerage pipes;

c. construction of about 44,200 house discharges.

7.3 Institutional

Development and implementation of an accrual accounting system. SECONDMEDIUM SIZE CITIESWATER SUPPLYAND SEWERAGEPROJECT SAHOP SECRETARIADE ASENTAMIENTOSHUMANOS Y OBRASPUBLICAS ORGANIZATION CHART

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-58-

ANNEX 5 Page 1 of 7

MEXICO

MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE II

Project Costs 1/

1. TOLUCA

Cost-Millions Mex$ US$

Water Works

Rehabilitationof wells and new wells 32.70 1.44 Chlorination 1.53 0.07 Distributionnetwork and transmissionpipes 186.28 8.17 Storage tanks 24.20 1.06 House connectionsand meters 31.28 1.37 Meter repair shop and leak detection equipment 1.64 0.07 Sub-total 277.63 12.18

Sewerage Trunk sewers and interceptors 213.20 9.35 Sewerage pipes 28.45 1.25 House discharges 44.80 1.96 Sub-total 286.45 12.56 Engineeringand administration 39.90 1.75 Base Cost 603.98 26.49 Physical contingencies 91.40 4.01 Price escalation 128.62 5.64 Project Cost 824.00 36.14 Value added tax (VAT) 78.40 3.44

Total Cost 902.40 39.58

1/ In June 1980 prices.

-59-

ANNEX 5 Page 2 of 7

2. TEPIC

Cost-Millions Mex$ US$

Water Wells and master meters 4.03 0.18 Transmissionpipelines 10.36 0.45 Chlorinationfacilities 2.29 0.10 Storage tanks 3.49 0.15 Meter repair shop 1.09 0.05 Leak detectionprogram 2.07 0.09 Distributionnetwork 2.62 0.11 House connectionsand meters 5.11 0.22 Sub-total 31.06 1.36

Sewerage Sewerage treatmentplant 39.13 1.72 Trunk sewers and interceptors 10.68 0.47 Sewer pipes 3.92 0.17 House discharges 4.59 0.20 Sub-total 58.32 2.56

Institutional

Accountingsystem 0.98 0.04 Engineeringand administration 6.40 0.28 Base Cost 96.72 4.24 Physical contingencies 14.60 0.64 Price escalation 19.34 0.85 Project Cost 130.70 5.73 Value added tax (VAT) 12.44 0.55 Total Cost 143.14 6.28 -60-

ANNEX 5 Page 3 of 7

3. NOGALES

Cost-Millions Mex$ US$

Intake works 26.70 1.17 Chlorination and laboratory equipment 3.05 0.13 Trasmission and interconnecting pipes 86.98 3.82 Storage tanks 10.03 0.44 Distribution network 38.70 1.70 House connections and meters 21.36 0.94 Meter repair shop 1.64 0.07 Development of accounting system 0.98 0.04 Engineering and administration 13.40 0.59 Base Cost 202.84 8.90

Physical contingencies 30.70 1.35 Price escalation 39.90 1.75 Project Cost 273.44 12.00 Value added tax (VAT) 18.74 0.82 Total Cost 292.18 12.82 -61-

ANNEX 5 Page 4 of 7

4. MOF,LOVA-FRONTERA

Cost-Millions Mex$ US$

SewerageWorks

Monclova West Interceptorservice area 105.62 4.63 Central service area 14.82 0.65 East Interceptorservice area 39.79 1.75 Frontera Sewerage System 22.38 0.98 182.58 8.01

Institutional

Developmentaccounting system 0.98 0.04 Engineering 13.00 0.57 Base Cost 196.56 8.62 Physical contingencies 29.70 1.30 Price escalation 40.71 1.79 Project Cost 266.97 11.71 Value added tax (VAT) 15.23 0.67 Total Cost 282.20 12.38 -62-

ANNEX 5 Page 5 of 7

5. MATAMOROS Cost-Millions Mex$ US$

Water Works New water treatmentplant 160.00 7.02 Optimizationwater treatment plant 1.09 0.05 Distributionnetwork 83.72 3.67 Storage tanks 1.20 0.05 House connectionsand meters 25.51 1.12 Leak detection program 1.09 0.05 Meter repair shop 1.09 0.05 Maintenanceequipment 3.27 0.14 Sub-total 276.97 12.15

Sewerage Trunk sewers and interceptors 97.56 4.28 Sewer pipes 63.87 2.80 Pumping stations and pressure pipes 24.31 1.07 House discharges 31.17 1.36 Sub-total 216.91 9.51

Institutional Development accountingsystem and purchase of accountingequipment 1.63 0.07 Engineeringand administration 31.80 1.40 Base Cost 527.31 23.13 Physical contingencies 72.90 3.20 Price contingencies 140.83 6.17 Project Cost 741.04 32.50 Value added tax (VAT) 42.55 1.87 Total Cost 783.59 34.37 -63-

ANNEX 5 Page 6 of 7

6. QUERETARO Cost-Millions Mex$ US$ Water Works Wells and meters 17.55 0.77 Chlorination 1.74 0.08 Transmissionpipes 50.15 2.20 Storage tanks 11.77 0.52 Distributionnetwork 154.45 6.77 House connectionsand meters 42.18 1.85 Sub-total 277.84 12.19

Sewerage Trunk sewers and interceptors 109.98 4.82 Sewer pipes 77.17 3.38 House discharges 30.52 1.34 Sub-total 217.67 9.54

Institutional Developmentand implementationof an 1.09 0.05 accrual accountingsystem Engineering 31.90 1.40 Base Cost 528.50 23.18 Physical contingencies 73.20 3.21 Price contingencies 134.78 5.91 Project Cost 136.48 32.30 Value added tax (VAT) 70.46 3.09 Total Cost 806.94 35.39 -64-

ANTNEX5 Pag,e .7 of 7

7. CD. JUAREZ

Cost-Millions Mex$ US$ Water Works

Wells and transmission pipes 120.12 5.26 Chlorination 5.78 0.25 Pumping stations and transmission pipes 60.17 2.64 Distribution pipes and storage tanks 270.76 11.88 House connections and meters 115.98 5.09 Meter repair shop 1.09 0.05 Sub-total 573.89 25.17

Sewerage

Trunk sewers and interceptors 169.60 7.44 Sewer pipes 259.75 11.39 House discharges 202.41 8.88 Sub-total 631.76 27.71

Institutional

Development of accounting system 0.98 0.04 Engineering 77.50 3.40 Base Cost 1284.13 56.32 Physical contingencies 177.60 7.79 Price contingencies 328.47 14.41 Project Cost 1790.20 78.52 Value added tax (VAT) 102.76 4.50 Total Cost 1892.96 83.02 CONSTRUCTIONSCHEDULE

Proj ect- / YEI/QUARTER Cost 1980 1981 1982 1983 1984 UsS CITY WORKS Million I II III IV I II III IV I II III IV I II III IV I II III IV

1 TOLUCA W_S2/ 36.14 __ XX X _- - _

2 TEPIC W-S 5.73 ------XXX ----

3 NOGALES w 12.00 ……------_ X X- ---

4 MONCLOVA S 11.71 … __- _ …--_-XXX --

5 MATAMOROS W-S 32.50 ---- - XX--- _ - _

6 QUERETARO W-S 32.30 ------X XX-- - _

7 CD. JUAREZ W-S 78.52 ------X XX-----

8 OTHER SUBPROJECTS W-S 87.10…- __ ___ --- _ XXX _ - 297.00 4.0 101.0 115.0 67.0 10.0

1/ Including engineering and contingencies. Does not include value added tax or interest during construction charged by FIFAPA. 2/ W = water works; S - sewerage works. ------= final designs; XXXX = bidding; = construction. -66-

ATTACHMENT2

MEXICO

MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE II Consulting Services

.-Appraised Cities Other Total Toluca Tepic Nogales Monclova Cities-

1. Personnel - Man-months Professional Staff Project Director 40 15 25 25 Engineers & Professionals 180 10 60 60 Sub-total 1,825 220 25 85 85 1,410

Supporting Staff Surveyors 100 20 30 20 Supervisors 210 25 40 40 Other 60 10 20 20 Subtotal 2,625 370 55 90 80 2,030

Total 4,450 590 80 175 165 3,440

2. Cost - US$ Thousands Professional staff 8,480 960 190 390 390 6,550 Supporting staff 3,200 440 70 110 100 2,480 Miscellaneous expenses 2,920 350 60 130 120 1,440 Total 13,780 1,750 320 630 610 10,470

3. Average Cost Professional staff 8,480 $4,650 man-month 1,825 Supporting staff 3,200 $1,220 man-month 2,625

1/ Estimate based on personnel input and costs prorrated to total man-months and costs in appraised cities. - 67 - ANNEX6 Page 1 of 2

MEXICO

SECOND MEDIUMSIZE CITIES WATER SUPPLY AND SEWERAGEPROJECT

BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS S.A. (BANOBRAS)

Consolidated Balance Sheet as of December 31, 1979

Million Mex Pesos

A) Assets

Fixed Assets

Building and equipment (net) 26.7 Of wholly owned subsidiaries 65.1

Total fixed assets 91.8

Long Term Investments

Government bonds and securities 632.S Bonds and certificates of deposit 475.5 Stock in affiliated companies 452.7 Less reserve for contingencies (32.5) Other investments Land and others 772.3 Total long term investments 2,300.8

Long Term Loans (net)

Loans guaranteed by lieu or mortgage 67,558.1 Loans for equipment purchases 36.6 Other loans (refaccionarias) 1,555.8 Mortgage loans 30,387.4

Total long term loans 99,537.9

Current Assets

Cash and Banks 1,034.2 Receivables (net) 1,749.6 Other current assets 84.2 Total current assets 2,868.0 TOTAL ASSETS: 104,798.5

B) Capital and Liabilities

Capital 2,500.0 Capital reserves and accumulated earnings 1,470.8 jaru.nis 417.0

Total Equity 4,387.8

Long Term Debt Certificate of deposits: From the public 5,199.4 From banks 1,301.6 Mortgage bonds 6,235.3 Bonds and CD payablT to foreign creditors 12,183.8 Long term loans from banks 62,355.6 Other long term debt 7,481.6

Total long term debt 94,757.3

Current liabilities Deposits on demand 4,058.6 Other deposits and liabilities 7.5 Reserves for current liabilities 1,543.2 Deferred credit 44.1

Total current liabilities 5,653.4 TOTAL CAPITAL AND LIABILITIES IO47==.5 -68- ANNEX 6 Page 2 of 2

MEXICO

SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS (BANOBRAS)

Consolidated Income Statement as of December 31, 1979

(Million Mex Pesos)

REVENUES Interest collected on Loans 11,729.1 Dividends from Affiliated Companies 45.6 Commission and other Charges on Loan 662.8 Other Revenues 187.3 Total Income 12,624.8

EXPENSES General Administrative Expenses 811.3 Interest Paid on Outstanding Debt 10,515.5 Commissions Paid on Outstanding Debt 266.6 Rent and Maintenance 16.2 Depreciation and Amortizations 46.2 Reserves for Bad Debt and Other Contingencies 44.9 Bonuses and Other Expenses of Personnel 84.1 Total Expenses 11,784.8

Profit Before Taxes 840.0 Taxes 423.0 Net Profit 417.0 -69-

ANNEX 7 Page 1 of 3

MEXICO

SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

FIFAPA Balance Sheet (Audited)

(Mex Million Pesos)

Assets Liabilities Dec. 31 Dec. 31 Dec. 31 Dec. 31 1979 1978 1979 1978

Current Assets Bonds and Securities 83.2 65.9 Total Current Assets 83.2 65.9 Long Term Loans under FIFAPA InvestmentPlan 558.8 224.4 Total Assets 642.0 290.3

Current Liabilities Accounts Payable 13.0 7.6 Other Current Liabilities .7 .1 Total Current Liabilities 13.7 7.7 Equity 628.3 282.5 Total Equity and Liabilities 642.0 290.3 -70-

ANNEX 7

MEXICO Paxe 2 of 3

SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

FIFAPA

Statement of Income and Expenses

Million Mex Pesos

1979 1978 Revenues

Interest from bonds and securities 14.8 2.4

Interest and other charges on loans 32.5 14.0

Total Income 47.3 16.4

Expenses

Administration-/ 2.2 .8

Fees to the "Comite Tecnico" .4 .2

Other expenses .1 .2

2.7 1.2

Net income 44.6 15.2

1/ Administrative expenses include wages, general office expenses, rent and indirect administrative expenses charged by BANOBRASto FIFAPA. *-71-

ANNEX 7 Page 3 of 3

MEXICO

SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

FIFAPA

Statement of Flow of Funds (Mex Pesos Million)

Year Ending Year Ending December 31, December 31, 1979 1978

SOURCES OF FUNDS Net Income 44.6 15.2 Government Contributions 301.1 179.4 Total Sources 345.7 194.6

APPLICATION OF FUNDS Working Capital Needs 11.3 13.0 Loans under FIFAPA 334.4 181.6 Total Application of Funds 345.7 194.6 - 72 -

ANNEX 8 Page 1 of 2

MEXICO

SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

Summary of Assumptions used in Financial Projections

l. Financial projections prepared by SAHOP showing production, demand, financial data, and cost data are available in the project files for the four cities appraised. These projections were the base used to arrive to the financial information prepared by the mission. A summary of the main assump- tions used in the financial projections are described below.

Revenues

2. Water sales are based on projections for production, consumption per con/month, and reduction of unaccounted-for water as shown in Annex 9. Oper- ating revenues are from billings which include charges for water consumption, sewerage services, connection rights for both services. Required tariffs for water and sewerage revenue assumptions and rate increases are shown in Annex 13.

3. Average tariffs are assumed to be sufficient to allow the AWS com- panies to comply with the financial covenants and to at least maintain tariffs in real terms after the construction period. Required rate increases are showi in Annex 10 and expected combined (water plus sewerage) average tariffs per m sold are given in Annex 9. Nonoperating revenues are made up of costs on materials and labor, which are paid by the user when a water or sewerage connection is made. This category also includes the Cuota de Cooperacion (para. 7.15).

4. Annual inflation was assumed to be 15% in 1981, 13% in 1982 and 10% in 1983 and 1984. Wages are based on present payroll and assumed to grow parallel to inflation plus an average of 2% per year in real terms to account for promotions, increases in personnel, bonuses and special subsidies. The cost of energy was calculated taking into account the water production and adjusted on the basis of projected electricity tariffs provided by the "Comision Federal de Electricidad". Use of chemicals are assumed to increase in proportion to water production, except when special increases were made to compensate for historical unrrealistically low consumption. Cost of materials and other expenses are assumed to increase in proportion to the number of connections. Experience in the previous project (1186-ME) has shown that the indirect foreign component varies according to domestic rather than intern- ational inflation. This assumption has been made to calculate total project costs for financial purposes. - 73 -

ANNEX 8 Page 2 of 2

Depreciation

5. A straight-line amortization method is used, and an annual average rate of 3% was estimated on the basis of the average useful life of fixed assets.

Balance Sheets Accounts

6. Fixed assets-/ and accumulated depreciation are revalued accordirig to the Mexican Construction Price Index which is approximately 85% of the Consumer Price Index. Accounts receivable are based on uncollected billing and are assumed to be reduced from present levels to a maximum of three month of billing by 1981 and thereafter. Inventories are estimated at a level sufficient to cover an average of three months of material and chemicals required for operations. Accounts payable are assumed to reflect unpaid bills for operating costs (material and services) from two to three months. Other assets and liabilities, when historical records show no significant amounts, are reduced to zero and when amounts are large these are kept constant or reduced slowly to avoid sharp increases or decreases in the flow of funds.

1/ Initial balance (1979) represents the best information obtained by SAHOP or the best estimate made by the appraisal mission. T E P I C I N C O M E S T A T E M E N T Million Mex$

1980 1981 1982 1983 1984 Connections-000 15.390 16.380 20.360 21.490 22.500 Consumption/m3/connec/month 33.000 31.000 31.000 30.000 30.000 Volume sold-million/m3 6.094 6.093 7.574 7.786 8.100

% Unaccounted-forwater 46.000 46.000 40.000 35.000 30.000 Water production-million/m3 11.286 11.284 12.623 11.902 11.571 Average tariff/m3 2.600 3.05 3.550 3.95 4.400

Water sales 15.846 18.584 26.887 30.754 35.640 H Other (connectioncharges) 1.600 5.820 5.290 3.380 3.400 Other (seweragerevenues) 9.100 8.861 14.310 15.963 16.872

TOTAL REVENUES 26.546 33.265 46.487 50.097 55.912 o H (D m rtI Wages 2.600 3.080 3.584 4.061 4.601 Chemicals 0.300 0.345 0.436 0.452 0.484 Energy 12.810 14.930 16.950 19.230 21.780 X H Materials 1.060 1.282 1.780 1.987 2.268 o CA Other (general) 1.270 1.460 1.790 2.470 2.820 Other (administrative) 2.520 2.900 3.260 3.670 4.130 1 TOTAL COSTS 20.560 23.996 27.750 31.871 36.083

Income before depreciation 5.986 9.269 18.737 18.226 19.829 Depreciation 6.720 9.300 12.060 14.030 15.760 INCOME BEFORE INTEREST -0.734 -0.031 6.677 4.196 4.069 H. Operationalinterest 0.000 0.000 0.000 12.410 11.930 O o Non-operatingrevenues 1.330 2.940 9.200 9.880 9.560 NET SURPLUS (+) 0.596 2.971 15.877 1.666 1.699 100 Average Cost/Volumesold 3.374 3.938 3.664 4.120 4.455 Operatingratio 0.775 0.693 0.597 0.582 0.573 o Average rate base 40.180 85.805 148.180 183.500 197.210 Rate of Return (M) -1.828 -0.361 4.506 2.290 2.100 T E P I C SOURCES AND APPLICATION OF FUNDS Million Mex$

1980 1981 1982 1983 1984 Income before depreciation 5.986 9.269 18.787 18.226 19.829 Non-operatingrevenues 1.330 2.940 9.200 9.880 9.560

GROSS INTERNAL GENERATION 7.316 12.209 27.987 28.106 29.389 Working Capital Needs (+) 2.460 0.150 2.050 0.670 1.070 Other Assets (+) or Liabilities 0.000 0.000 0.000 0.000 0.000

Amortization 0.000 0.000 0.000 5.300 5.780 Operational Interest 0.000 0.000 0.000 12.410 11.930 TOTAL DEBT SERVICE 0.000 0.000 0.000 17.710 17.710 CONTRIBUTIONTO INVESTMENT (+) 4.856 12.059 25.887 9.726 10.690

Project Investment 0.000 88.300 59.830 0.000 0.000 I CapitalizedInterest 0.000 6.300 9.700 0.000 0.000 Q Other Works (systems rehabilita- tion and expansion) 0.800 1.700 3.690h6.550 7.320 TOTAL INVESTMENT 0.800 96.300 73.220 6.550 7.320

NET TO BE FINANCED (+) -4.056 84.241 47.383 -3.176 -3.289

FINANCED BY: FIFAPA Loan 0.000 94.600 69.580 0.000 0.000 Other 0.000 0.000 0.000 0.000 0.000 Other 0.000 0.000 0.000 0.000 0.000 TOTAL LOANS 0.000 94.600 69.580 0.000 0.000

Contributions or Grants 0.000 0.000 0.000 0.000 0.000 Debt Service Ratio 0.000 0.000 0.000 1.587 2.057 o

Increase (+) or Decrease in Cash 4.056 10.359 22.197 3.176 3.289 T E P I C B ALAN C E ST ATE MEN T Million Mex$

1980 1981 1982 1983 1984 Fixed Assets 226.000 330.000 440.190 495.420 555.410 Accumulated Depreciation 174.390 210.000 263.830 304.780 351.630

NET FIXED ASSETS 51.610 120.000 176.360 190.640 203.780 Work in Progress 0.000 21.115 20.610 14.270 3.710

Cash 4.406 14.765 36.962 40.138 43.427 Accounts Receivable 8.500 8.500 10.900 12.220 13.710 Inventories 0.810 0.810 0.760 0.660 0.640 Other Current Assets 0.600 0.800 1.000 1.100 1.150 Other Assets 0.000 0.000 0.000 0.000 0.000 TOTAL ASSETS 65.926 165.990 246.592 259.028 266.417

Accounts Payable 1.250 1.500 1.900 2.450 2.800 Other Current Liabilities 0.500 0.600 0.700 0.800 0.900 a Other Liabilities 6.370 6.370 6.370 6.370 6.370 i Long-Term Debt 0.000 100.970 170.500 165.200 159.430 Equity 57.806 56.550 67.122 84.208 96.917

TOTAL EQUITY AND LIABILITIES 65.926 165.990 246.592 259.028 266.417

% Debt/(Debt Equity) 9.926 64.010 71.752 66.237 62.193 Working Capital 8.160 8.010 10.060 10.730 11.800 Current Ratio 8.180 12.632 19.721 18.585 19.526

0> (D M TO0 L U C A I N CO0 M E S T A T E M E N T S Million Mex$

1980 1981 1982 1983 1984 Connections- 000 28.450 30.020 34.600 38.600 41.800 Consumption/mr/Connec/msnth 48.000 45.000 42.000 39.000 39.000 Volume sold - million/m 16.387 16.211 17.438 18.065 19.562

% Unaccounted-forwater 36.000 30.000 28.000 26.000 25.000 Water production- million/m3 25.605 23.158 24.220 24.412 26.083 Average tariff/m3 1.900 3.100 4.200 5.650 6.200

Water sales 31.136 50.253 73.241 102.066 121.287 Other (connectioncharges) 6.540 10.470 23.150 20.540 17.360 Other (seweragerevenues) 7.300 15.740 20.830 56.820 67.900

TOTAL REVENUES 44.976 76.463 117.221 179.426 206.547

Wages 11.990 14.202 16.530 18.728 21.219 Chemicals 0.260 0.600 0.678 0.746 0.820 Energy 9.080 10.620 12.710 14.560 16.810 Materials 7.860 9.438 11.967 14.381 16.868 Other (general) 1.420 1.870 2.380 3.900 4.590 1 Other (administrative) 2.360 3.290 4.770 6.570 7.540

TOTAL COSTS 32.970 40.020 49.035 58.885 67.847

Income before depreciation 12.006 36.443 68.187 120.541 138.700 Depreciation 10.710 15.790 28.600 44.730 55.500 INCOME BEFORE INTEREST 1.296 20.653 39.587 75.811 83.200 Operationalinterest 0.000 0.000 0.000 91.860 88.730 Non-operatingrevenues 6.220 5.400 9.930 55.010 53.140 NET SURPLUS (+)7.516 26.053 49.517 38.961 47.610

Average Cost/Volumesold 2.012 2.469 2.812 3.260 3.468 4 Operatingratio 0.733 0.523 0.418 0.328 0.328 h Average rate base 209.535 345.045 729.450 1166.748 1397.861 Rate of Return (%) 0.618 5.986 5.427 6.500 5.952 T O L U C A SOURCES AND APPLICATION OF FUNDS Million Mex$

1980 1981 1982 1983 1984 Income Before Depreciation 12.006 36.443 68.187 120.541 138.700 Non-operatingRevenues 6.220 5.400 9.930 55.010 53.140

GROSS INTERNAL GENERATION 18.226 41.843 78.117 175.551 191.840 Working CapitalNeeds (+) 9.630 0.450 -2.200 24.700 8.380 Other Assets (+) or Liabilities 1.600 1.600 1.600 0.000 3.200

Amortization 1.600 1.600 1.600 36.360 39.490 Operational Interest 0.000 0.000 0.000 91.860 88.730 TOTAL DEBT SERVICE 1.600 1.600 1.600 128.220 128.220

CONTRIBUTIONTO INVESTMENT (+) 5.396 38.193 77.117 22.631 52.040

Project Investment 85.570 445.760 389.180 0.000 0.000 CapitalizedInterest 3.850 28.110 68.210 0.000 0.000 X Other Works (system rehabilitation)4.080 15.970 15.100 22.000 22.000 Other Works (system expansion) 0.000 0.000 10.000 0.000 18.000 TOTAL INVESTMENT 93.500 489.840 482.490 22.000 40.000 NET TO BE FINANCED (+) 88.104 451.647 405.373 -0.631 -12.040

FINANCED BY: FIFAPA Loan 89.420 473.870 457.390 0.000 0.000 Other 0.000 0.000 0.000 0.000 0.000 X TOTAL LOANS 89.420 473.870 457.390 0.000 0.000 '0 Contributions or Grants 0.000 0.000 0.000 0.000 0.000 Debt Service Ratio 11.391 26.152 48.823 1.369 1.496 H

Increase (+) or Decrease in Cash 1.316 22.223 52.017 0.631 12.040 T O L U C A B A L A N C E S H E E T S Million Mex$

As of December 31 1980 1981 1982 1983 1984

Fixed Assets 390.150 662.380 1244.480 1656.006 1864.766 AccumulatedDepreciation 162.940 199.500 248.460 318.530 406.520

NET FIXED ASSETS 227.210 462.880 996.020 1337.476 1458.246 Work in Progress 76.810 344.164 317.746 34.000 6.000

Cash 1.356 23.579 75.596 76.227 88.266 Accounts Receivable 15.400 16.800 20.520 51.530 60.390 Inventories 0.610 1.080 1.420 1.640 1.890 Other Current Assets 20.790 21.000 15.500 10.800 10.000 Other Assets 0.000 0.000 0.000 0.000 0.000

TOTAL ASSETS 342.176 869.503 1426.802 1511.673 1624.792

Accounts Payable 2.000 3.500 4.200 5.960 5.780 0.440 0.550 1 Other Current Liabilities 0.180 0.310 0.370 Other Liabilities 21.400 19.800 18.200 18.200 15.000 - Long-Term Debt 91.020 563.290 1019.080 982.720 943.230 Equity 227.576 282.603 384.952 504.353 660.232

TOTAL EQUITY AND LIABILITIES 342.176 869.503 1426.802 1511.673 1624.792 O X 0 % Debt/(Debt+Equity) 28.569 66.592 72.582 66.084 58.825 o-h Working Capital 34.620 35.070 32.870 57.570 65.950 i Current Ratio 17.503 16.393 24.734 21.906 25.363 NOGALES I.NC MESTATEMENT Million Mex$

1980 J.j98 1982 19i3 19.4 Connections- 000 8.360 10.610 13.610 18.040 18.680 Consumption/m3/connec/month 37.000 36.000 35.000 34.000 34.000 Volume sold-million/m3 3.712 4.584 5.716 7.360 7.621

% Unaccounted-forwater 40.000 37.000 34.000 32.000 30.000 Water production-million/m3 6.186 7.275 8.661 10.824 10.888 Average tariff/m3 4.850 6.500 7.890 8.680 9.540

Water sales 18.002 29.793 45.101 63.888 72.709 Other (connectioncharges) 3.290 7.600 12.010 18.620 4.170 Other (seweragerevenues) 4.610 6.920 10.570 17.440 20.970

TOTAL REVENUES 25.902 44.313 67.681 99.948 97.849

Wages 8.410 9.962 11.594 13.009 14.453 Chemicals 0.030 0.041 0.055 0.075 0.083 Energy 3.490 4.590 5.970 7.820 9.670 Materials 3.870 5.409 7.494 10.391 11.754 Other (general) 1.920 2.420 3.050 3.630 5.120 Other (administrative) 0.940 1.100 1.260 1.450 1.670

TOTAL COSTS 18.660 23.521 29.423 36.374 42.750

Income before depreciation 7.242 20.792 38.257 63.573 55.099 Depreciation 2.530 5.780 11.770 15.700 17.780 INCOME BEFORE INTEREST 4.712 15.012 26.487 47.873 37.319 OperationalInterest 0.000 0.000 0.000 30.680 29.640 Non-operatingrevenues 1.750 3.220 5.070 4.420 2.580 NET SURPLUS (+) 6.462 18.232 31.557 21.613 10.259

Average Cost/Volumesold 5.027 5.132 5.147 4.942 5.609 Operating ratio 0.720 0.531 0.435 0.364 0.437 Average rate base 46.275 145.005 330.460 441.505 483.358 X Rate of return (%) 10.184 10.353 8.015 10.843 7.721 u

o N 0 G A L E S SOURCES OF APPLICATION OF FUNDS Million Mex$

1980 1981 1982 1983 1984

Income before depreciation 7.242 20.792 38.257 63.573 55.099 Non-operatingrevenues 1.750 3.220 5.070 4.420 2.580

GROSS INTERNAL GENERATION 8.992 24.012 43.327 67.993 57.679 Working Capital Needs (+) 0.170 4.716 5.238 4.580 2.232 Other Assets (+) or Liabilities 0.000 0.000 0.000 0.000 0.000

Amortization 0.000 0.000 0.000 4.640 5.660 Operational Interest 0.000 0.000 0.000 30.680 29.640

TOTAL DEBT SERVICE 0.000 0.000 0.000 35.320 35.300

CONTRIBUTIONTO INVESTMENT (+) 8.822 19.296 38.089 28.093 20.747

Project Investment 0.000 202.760 107.920 0.000 0.000 CapitalizedInterest 0.000 12.730 23.690 0.000 0.000 Other Works (systems rehabilita- tion and expansion) 6.500 7.000 13.400 15.470 16.950

TOTAL INVESTMENT 6.500 222.490 145.010 15.470 16.950

NET TO BE FINANCED (+) 6.500 203.190 106.921 -12.623 -3.797

FINANCED BY:

FIFAPA Loan 0.000 215.490 131.610 0.000 0.000 Other 0.000 0.000 0.000 0.000 0.000

TOTAL LOANS 0.000 215.490 131.610 0.000 0.000

Contributions or Grants 0.000 0.000 0.000 0.000 0.000° Debt Service Ratio 1.925 1.662 o

Increase (+) or Decrease in Cash 2.322 12.296 24.689 12.623 3.797 N O G A L E S B A L A N C E S H E E T S Million Mex$

As of December 31 1980 1981 1982 1983 1984

Fixed Assets 91.810 308.404 491.040 555.480 624.906 Accumulated Depreciation 42.000 59.100 70.320 93.190 120.480

NET FIXED ASSETS 49.810 249.304 420.720 462.290 504.426 Work in Progress 0.000 17.601 14.053 6.821 1.560

Cash 5.142 17.438 42.127 54.750 58.547 Accounts Receivable 6.250 11.080 16.920 21.710 24.250 Inventories 0.860 0.980 1.110 1.230 1.350 Other Current Assets 2.200 2.266 2.334 2.404 2.476 Other Assets 0.000 0.000 0.000 0.000 0.000

TOTAL ASSETS 64.262 298.669 497.264 549.205 592.609

Accounts Payable 1.100 1.400 1.600 1.900 2.300 Other Current Liabilities 0.500 0.500 1.100 1.200 1.300 Other Liabilities 0.000 0.000 0.000 0.000 0.000 Long-Term Debt 0.000 215.490 347.100 299.840 294.780 Equity 62.662 81.279 147.464 246.265 294.229

TOTAL EQUITY AND LIABILITIES 64.262 298.669 497.264 549.205 592.609 I-d~ % Debt/(Debt +Equity) 1.050 72.612 70.183 54.905 50.047 Working Capital 7.710 12.426 17.664 22.244 24.476 s Current Ratio 7.870 10.018 9.656 14.089 13.945 o F- M O N C L O V A I N C O M E S T A T E M E N T S Million Mex$

1980 1981 1982 1983 1984

Connections- 000 29.560 31.980 35.320 38.000 39.920 Consumption/m3/Connec/month 27.000 27.000 27.000 28.000 29.000 Volume sold - million/m3 9.577 10.362 11.444 12.768 13.892

% Unaccounted-forwater 46.000 45.000 43.000 40.000 35.000 Water production- million/m3 17.736 18.839 20.077 21.280 21.373 Average tariff/m3 3.900 4.600 5.300 5.850 6.380

Water sales 37.352 47.663 60.652 74.693 88.632 Other (connectioncharges) 8.160 11.810 20.330 17.920 16.310 Other (seweragerevenues) 2.100 10.510 16.880 23.950 33.210

TOTAL REVENUES 47.612 69.983 97.862 116.563 138.152

Wages 12.540 14.854 17.288 19.587 22.193 Chemicals 0.050 0.061 0.074 0.086 0.095 Energy 9.510 11.310 13.200 16.330 20.110 Materials 1.680 2.059 2.520 2.941 3.366 Other (general) 4.270 5.440 6.450 7.610 8.880 Other (administrative) 4.800 5.420 6.290 7.230 8.240

TOTAL COSTS 32.850 39.143 45.822 53.784 62.883

Income before depreciation 14.762 30.840 52.039 62.779 75.269 Depreciation 5.960 8.360 13.490 19.400 23.530 INCOME BEFORE INTEREST 8.802 22.480 38.549 43.379 51.739 OperationalInterest 0.000 0.000 0.000 29.590 28.580 Non-operating revenues 3.680 6.120 9.460 42.580 41.040 X § NET SURPLUS (+) 12.482 28.600 48.009 56.369 64.199 Hxo Average Cost/Volumesold 3.430 3.778 4.004 4.212 4.527 o Operatingratio 0.690 0.559 0.468 0.461 0.455 Average rate base 137.155 209.410 361.200 523.495 622.765 Rate of return (%) 6.418 11.206 10.632 8.286 8.308 M 0 N C L 0 V A SOURCES AND APPLICATION OF FUNDS Million Mex$

1980 1981 1982 1983 1984

Income before depreciation 14.762 30.840 52.039 62.779 75.269 Non-operating revenues 3.680 6.120 9.460 42.580 41.040

GROSS INTERNAL GENERATION 18.442 36.960 61.499 105.359 116.309 Working Capital Needs (+) 8.240 8.250 6.480 18.090 5.770 Other Assets (+) or Liabilities -0.840 0.000 0.000 0.000 0.000

Amortization 0.000 0.000 0.000 13.700 14.700 Operational Interest 0.000 0.000 0.000 29.590 28.580

TOTAL DEBT SERVICE 0.000 0.000 0.000 43.290 43.280

CONTRIBUTION TO INVESTMENT (+) 11.042 28.710 55.019 43.979 67.259

Project Investment 0.000 175.248 128.238 0.000 0.000 Capitablized Interest 0.000 12.800 25.475 0.000 0.000 Other Works (systems rehabilita- tion and expansion) 1.850 24.300 27.210 30.480 34.130

TOTAL INVESTMENT 1.850 212.348 180.923 30.480 34.130

NET TO BE FINANCED (+) 9.192 183.638 125.904 -13.499 -33.129

FINANCED BY:

FIFAPA Loan 0.000 188.048 153.713 0.000 0.000 Other 0.000 0.000 0.000 0.000 0.000°

TOTAL LOANS 0.000 188.048 153.713 0.000 0.000

Contributions or Grants 0.000 0.000 0.000 0.000 0.000 Debt Service Ratio 24.600 2.434 2.687

Increase (+) or Decrease in Cash 9.192 4.410 27.809 13.499 33.129

FtE M O N C L O v A B A L A N C E S H E E T S Million Mex$

As of December 31 1980 1981 1982 1983 1984

Fixed Assets 221.390 352.040 563.370 730.290 830.000 Accumulated Depreciation 68.740 85.870 108.120 138.550 176.210

NET FIXED ASSETS 152.650 266.170 455.250 591.740 653.790 Work in Progress 0.000 109.925 92.792 4.238 0.732

Cash 9.242 13.652 38.961 52.460 85.589 Accounts Receivable 11.300 18.410 23.820 40.110 45.120 Inventories 1.900 1.910 1.980 2.980 3.140 Other Current Assets 20.000 21.000 21.500 22.000 22.500 Other Assets 0.000 0.000 0.000 0.000 0.000

TOTAL ASSETS 195.092 431.067 634.303 713.528 810.871

Accounts Payable 10.330 10.200 9.700 9.400 9.300 1 Other Current Liabilities 0.000 0.000 0.000 0.000 0.000 X Other Liabilities 0.000 0.000 0.000 0.000 0.000 Long-Term Debt 0.000 188.048 341.761 312.560 297.860 Equity 184.762 232.819 282.842 391.568 503.711

TOTAL EQUITY AND LIABILITIES 195.092 431.067 634.303 713.528 810.871

% Debt/(Debt +Equity) 0.000 44.681 54.717 44.390 37.160 mw Working Capital 22.870 31.120 37.600 55.690 61.460 Current Ratio 4.109 5.389 8.893 12.505 16.812 o

I-h - 86 - ANNEX 10

MEXICO SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT Projected Average Water and Sewerage Tariffa and Revenue Covenant Calculations (million of Mexican Pesos)

Years_ 1980 1981 1982 1983 1984

TOLUCA

Sewerage Revenue Assumption-/ 2/ 50 50 50 50

Water Tariff Mex Peso/M3 1.90 3.10 4.20 5.65 6.20 % Annual Tariff Increase 121 63 35 35 10 Net Revalued Fixed Assets 227.2 462.8 996.0 1337.5 1458.2 Average Net Fixed Assets 209.5 345.0 729.4 1166.7 1397.9

Depreciation 10.7 15.8 28.6 44.7 55.5 Contribution to Investment-/ 13.7 16.5 25.1 46.7 48.4 Debt Service on Subloans 1.6 1.6 1.6 128.2 128.2 Operating Expenses 32.9 40.0 49.0 58.9 67.8 Revenue Requirement4/ N/A 58.1 75.7 233.8 244.4

MONCLOVA

Sewerage Revenue Assumptionl/ 2/ 50 50 50 50 Water Tariff Mex Peso/M3 3.90 4.60 5.30 5.85 6.38 % Annual Tariff Increase 18 15 15 10 10 Net Revalued Fixed Assets 152.6 266.0 455.3 591.74 662.0 Average Net Fixed Assets 137.1 209.3 361.2 523.5 626.9

Depreciation 5.9 8.4 13.5 19.4 23.5 Contribution to Investment-/ 10.1 24.3 33.7 48.6 39.9 Debt Service on Subloans 0 0 0 43.3 43.3 Operating Expenses 32.8 39.1 45.8 53.8 62.9 Revenue Requirement- N/A 63.4 79.5 145.7 146.1

TEPIC

Sewerage Revenue Assumption- 66 66 66 66 66 Water Tariff Mex Peso/M3 2.60 3.05 3.55 3.95 4.40 % Annual Tariff Increase 32 23 10 21 14 Net Revalued Fixed Assets 51.6 120.0 176.3 190.6 203.8 Average Net Fixed Assets 40.2 85.8 148.1 183.5 197.2 Depreciation 6.7 9.3 12.1 14.0 15.8 Contribution to Investment- 3.3 1.7 5.8 7.3 8.4 Debt Service on Subloans 0 0 0 17.7 17.7 Operating Expenses 20.6 24.0 27.8 31.9 36.1 Revenue Requirementi4 N/A 25.7 33.6 56.9 62.2

NOGALES

Sewerage Revenue Assumption-/ 30 30 30 30 30 Water Tariff Mex Peso/M3 4.85 6.50 7.89 6.68 9.54 % Annual Tariff Increase 34 21 21 10 10 Net Revalued Fixed Assets 49.8 249.3 420.7 462.3 509.5 Average Net Fixed Assets 46.0 145.0 330.5 441.50 483.4 Depreciation 2.5 5.8 11.8 15.7 17.8 Contribution to Investment-/ 6.7 11.7 18.6 20.1 19.2 Debt Service on Subloans 0 0 0 35.3 35.3 Operating Expenses 18.7 23.5 29.4 36.4 42.8 Revenue Requirement-/ N/A 35.2 48.0 91.8 97.3

I/ Sewerage revenue assumptions are expressed as a percentage to be charged on water consumption billed. 2/ A fixed charge per connection is billed. 3/ Increase in working capital and minor investments as projected. 4/ For the years 1981 and 1982, estimated as requirements to avoid cash deficits. It includes tariff levels in compliance with pata. 7.11(b). 8EXI GC SECOND MFDIUM S171 CITIES WATER 51PPLY AND SEWERAGE PROJEC1 kANgUS CSONAO SO OBRAS Y SERVICIOS PUBLICOS S.A. (BANOBRAS)

Monitoring I1odSoat.rS

t e. Working Popult-ion . . 'I,lt C,snnsp.ion S Vo' . old I Unacc.-for Cost3 MtxS Avg. Water Avg. Combined No. Staff C- Coon. no /o Ratio Citi Year T sh n d Served Wator Served Sewer. Conn. 3 /Conn l( /year Water m /sold Tariff 3 Tariff 3 per 1000 (thous (Iho-s; ____ /1 Mee$/n MexS/m Connections a TOLICA 1979 227 71 02 23 20 53 14.7 36 - - - 6.4 - 80 255 78 73 28 26 48 16.4 36 2.01 1.90 2.35 6.4 73 82 284 S5 76 35 31 42 17.4 28 2.81 4.20 5.39 5.0 42 84 31h 92 83 42 37 39 19.6 25 3.47 6.20 9.67 5.0 33 86 352 92 83 46 42 39 21.8 25 4.25 7.50 11.70 5.0 33

MONLLOVA 1978 240 76 26 26 Y 32 .1 45 - - - 5.1 - 80 279 76 29 30 11 27 9.6 46 3.43 3.90 4.12 5.1 69 82 306 81 455 35 20 27 11.4 43 4.04 5.30 6,80 5.O 47 8, 322 87 65 40 30 29 13.9 35 4.53 6.38 8.17 5.0 45 .6 342 90 70 43 34 29 15.1 30 5.44 7.78 10.12 5.0 40

TEPIC 1978 116 67 61 14 12 35 5.9 48 1.00 1.35 1.35 4.0 __ 94 126 73 63 15 13 33 6.1 46 3.37 2.60 4.10 4.0 78 82 138 88 72 20 56 31 7.6 40 3.66 3.55 5.39 4.0 60 84 1 5( 90 78 22 19 30 8.1 30 4.45 4.40 6.63 4.0 57 86 163 90 80 24 2( 30 8.8 30 5.38 5.12 7.68 4.0 57

NOCALES 1978 I1 - 3, 22 7 4 40 3.5 45 3.61 3.19 -. 19 11.6 98 80 119 42 36 8 8 37 3.7 40 5.02 4.85 6.09 11.6 72 82 128 64 50 14 14 35 5.7 34 5.15 7.89 9.74 7.0 43 84 137 84 70 19 16 34 7.8 30 5.61 9.54 12.29 6.0 43 86 146 88 80 22 19 34 9.0 30 6.70 11.54 14.90 S.0 40

'he figurns shown are the aggregated cost enclodin depr-ci.tio- of water -od seo:eroge nernree. - 88 -

ANNEX 12 Page 1 of 2

MEXICO

SECOND MEDIUM-SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

Outline Terms of Reference For Tariff Study

Introduction

1. The Mexican authorities and SAHOP agreed on the need to undertake a water supply and sewerage tariff study which will serve as a framework to design and implement individual tariff structures and levels in medium size cities. This study will provide specific policies and objectives to achieve a sound financial basis for the continuous expansion of the services, efficient resource allocation, and affordable services to the low-income population. For this purpose, SAHOP will undertake a framework tariff study in accordance with the outline set out below.

Objective

2. The purpose of the study is to devise a set of objectives and cri- teria which complies with financial requirements comprising self sufficiency and contribution to investments; reflects as closely as possible the costs to the economy of meeting increasing demands for water and sewerage services; and ensures that services will be affordable to the whole population (i.e. cross- subsidizing minimal needs for poorer users).

General Guidelines

3. The framework study will define the basic parameters to be applied in the determination of specific tariff structures and levels by the local autho- rities. These parameters should include among others, a definition of:

(a) financial requirements to meet preestablished targets such as: a viably cash position, contribution to investments, and terms and conditions of debt service coverage;

(b) which costs are to be recuperated through tariffs on water consumption and sewage collection, and which through other charges, such as betterment levies, connection fees and other fixed charges;

(c) resource allocation objectives, through the application of tariffs for excess consumption (over the basic consumption) that reflect as closely as possible long-run average incre- mental costs of each service separately (excluding costs to be recuperated through fixed charges); - 89 -

ANNEX 12 Page 2 of 2

(d) different tariff levels for different users (industrial,com- mercial, public and domestic), reflecting different costs of the services and different ability to pay;

(e) metering policies for differentusers; and

(f) social objectives through the application of affordable tariffs and charges for minimum consumptionwhich allow low- income population to be connected and served.

4. SAHOP will take fully into considerationthe followingdeficiencies of present tariff structures so that they will be eliminated in the revised tariff structures. These deficiencieshave been preliminarily identified; they are not present in the tariff structure of every city nor are they comprehensive(para. 7.13-7.16).

(a) no significant progressivity in tariff in relation to con- sumption;

(b) no differentiationbetween type of users (industrial, com- mercial, public, and domestic);

(c) sewerage charges unrelated to volumes discharged;

(d) loosely defined "cuotas de cooperacion"charges; and

(e) tariffs and charges do not fully reflect the cost of providing services. - 90 -

ANNEX 13 Page 1 of 12

MEXICO

SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

Incremental Rate of Return (IRR) and Long Run

Average Incremental Cost (AIC) Calculations

Basis for Calculations

1. Individual Incremental Rates of Return have been calculated for sub- projects comprising 27% of total project costs. These rates have been calcu- lated for the water supply and the water supply and sewerage components and complementary works. All investments have been stated in June 1980 prices and include physical contingencies and engineering, but exclude taxes and price contingencies. Since about 50% of water and sewerage secondary networks and connections are built by private urban developers and handled to the AWS companies, these would have to finance only part of the required networks beyond the project's construction period. A cost of Mex$2,500/connection has been assumed for each incremental water and sewerage connection.

2. Revenues generated by the project services have been used as a proxy for economic benefits. Revenues have been based on per capita consumption and tariffs which are forecasted to prevail in each year if each MWS Company complies with the revenue requirements for the period 1980-1984 which will be part of each subsidiary loan agreement. Tariffs for the year 1985 and there- after were assumed to remain at the 1984 levels in real terms.

3. Operating costs have been based on estimated per m (m equivalent for sewerage) costs. It was assumed that 70% and 30% of administrative and operating costs were attributable to water supply and sewerage respectively. It was also assumed that 20% of these costs were unrelated to levels of production and as such were not considered as part of incremental costs.

4. In cases where new investments were required within the project design period, these have been estimated and included in the calculations.

5. In the case of Toluca, water supply, investments for rehabilitation of the present system were excluded from the calculations because of the impossibility of a quantifying benefit in a meaningfully manner. The under- lying assumption in this case was that the net present value of benefits of rehabilitation works would at least equal their costs. - 91 -

ANNEX 12 Page 2 of 2

(d) different tariff levels for different users (industrial, com- mercial, public and domestic), reflecting different costs of the services and different ability to pay;

(e) metering policies for different users; and

(f) social objectives through the application of affordable tariffs and charges for minimum consumption which allow low- income population to be connected and served.

4. SAHOP will take fully into consideration the following deficiencies of present tariff structures so that they will be eliminated in the revised tariff structures. These deficiencies have been preliminarily identified; they are not present in the tariff structure of every city nor are they comprehensive (para. 7.13-7.16):

(a) no significant progressiveness in tariff in relation to con- sumption;

(b) no differentiation between type of users (industrial, com- mercial, public, and domestic);

(c) sewerage charges unrelated to volumes discharged;

(d) loosely defined "cuotas de cooperacion" charges; and

(e) tariffs and charges do not fully reflect the cost of providing services. 1'nExICO SECOND MEDIUM SIZE CITIES WA7?MR SUPPLY ANID SEWERAGE PROJECT

Incremental Rate of Return (IRR) (M$ million of June 1980)

A) TOLUCA. WATER SUPPLY

Incremen- Unit Incremen- Total Total tal Con- Construc- Operating tal Opera- Incremen- Incremen- suption tion Costs ($1 ting tal Tariffs Tariff Other tal Year (millionm 3) Costs m3 sold) Costs Costs $/m3 Revenues Revenues R¢venues

1980 - 30.52 NA - 30.52 NA - -

1981 - 98.65" NA - 98.65 NA - - 1982 1.23 134.97 1.21 1.48 136.45 3.23 3.97 12.94 16.91 1983 1.86 - 1.28 2.38 2.38 3.95 7.35 26.00 33.35 1984 3.35 4.00 1.24 4.15 8.15 3.95 13.23 22.82 35.03 1985 4.43 2.88 1.24 5.49 8.37 3.95 17.50 18.64 36.14 1986 5.58 3.06 1.24 6.92 9.98 3.95 22.Q4 17.89 39.93 f '0 1987 6.77 3.19 1.24 8.40 11.59 3.95 26.74 17.10 43.84 1?S3 8.06 3.45 1.24 9.99 13.44 3.95 31.84 16.67 48.51 1989 9.40 89 + 3.56 1.24 11.66 104.22 3.95 37.13 16.03 53.16 1990 10.80 3.76 1.24 13.39 17.15 3.95 42.66 15.63 58.29 1991 12.29 3.98 1.24 15.24 19.22 3.95 48.55 15.38 63.93 1992 13.86 4.18 1.24 17.19 21.37 3.95 54.75 15.13 69.83 1993 15.51 4.43 1.24 19.23 23.66 3.95 61.26 15.07 76.33 1994 17.26 4.66 1.24 21.40 26.06 3.95 68.18 15.00 83.18 1995 19.10 4.91 1.24 23.68 28.59 3.95 75.45 6.31 8176 1996 21.04 5.18 1.24 26.09 31.27 * 3.95 83.11 10.68 93.79 1997-2009 21.04 - 1.24 26.09 26.09 3.95 83.11 \ - 8.11

IRR: 12.5% TEXICO SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEIWERAGE PROJECT

Incremental Rate of Return (IRR) (14$million of June 1980)

B) TOLUCA. WATER SUPPLY AND SEWERAGE Sewerage Sewerage WS & S WS & S IncremcntalSewerage Unit Incremen- Total Sewerage Total Volume mi- Construc- Operating tal Opera- Incremen- Tariffs Sewerage Other Incremen- 3 lion m3 tion Costs $/M3 ting tal $/m - Tariff Sewera2e tal Year ivalent Costs equival.emt COSts Costsa-t Revenues Revenues R_v_nueo

1980 - 40.24 NA - 70.76 NA - - -'

1981 - 193.13' NA - 291.78 NA - _ 1982 1.29 119.28., 0.58 0.75 256.48 1.62 2.09 8.67 27.67 1983 2.88 - 0.62 1.79 4.17 1.98 5.70 28.38 67.43 1984 4.26 3.54 0.60 2.55 14.24 1.98 8.44 24.68 68.17 1985 5.22 2.46 0.60 3.13 13.96 1.98 10.34 20.26 66.74 1 1986 6.22 ' 2.58 0.60 3.73 16.26 1.98 12.3,2 19.41 71.66 0 19S7 7.30 2.76 0.60 4.38 18.73 1.98 14.45 18.82 77.11 1)83 8.33 2.64 0.60 5.00 21.08 1.98 16.49 17.48 82.48 1989 9.51 3.04. 0.60 5.71 112.97 1.98 18.83 13.10 85.09 1990 10.77 3.22 0.60 6.46 26.83 1.98 21.33 12.53 92,15 1991 12.09 3.38 0.60 7.25 29.86 1.98 23.94 12.01 99.88 1992 13.48 3.56 0.60 8.09 33.02 1.98 26.69 11.58 108.15 1993 14.95 3.78 0.60 8.97 36.42 1.98 29.60 11.21 117.14 1994 16.50 3.97 0.60 9.90 39.93 1.98 32.67 13.52 129.37 i995 *18.14 4.20 0.60 10.88 43.67 .1.98 35.92 5.52 123.26 1996 19.87 4.42 0.60 11.92 47.61 1.98 39.34 5.88 139.01 1997-2009 19.87 - 0.60 11.92 38.02 1.98 + 39.34 _ 122.45z

R..3 IRR: 9.3% MEXICO SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

Incremental Rate of Return (IRR) (M$ million of June 1980)

C) TEPIC. WATER SUPPLY

Incremen- Unit Incremen- Total - Total tal Construc- Operating tal Opera- Incremen- Incremen- Volume(mi- tion Costs ting tal Tariffs Tariff Other tal Year ilon n.3) Costs ($/m3) Costs Costs $/L.3 Revenues Revenues Revenues

1930 - - NA - - NA - -

1981 - 32.86 NA - 32.86 NA - - - 1982 1.48 6.47 1.61 2.38 8.85 2.73 4.04 10.18 14.22 1983 1.65 - 1.59 2.62 2.62 2.80 4.55 3.70 8.25 1984 2.01 1.26 1.59 3.20 4.46 2.80 5.63 3.348.97 1935 2.33 1.13 1.59 3.70 4.83 2.80 6.52 3.00 9.52 19S6 2.67 1.16 1.59 4.25 5.41 2.80 7.48 2.95 10.43 1987 3.02 1.23 1.59 4.80 6.03 2.80 8.46 2.97 11.43 1933 3.39 1.29 1.59 5.39 6.68 2.80 9.49 2.98 12.47 1939 3.77 1.31 1.59 5.99 7.30 2.80 10.56 2.94 13.50 1990 4.17 1.39 1.59 6.63 8.02 2.80 11.68 2.29 13.97 1991 4.59 1.44 1.59 7.30 8.74 2.80 12.85 2.36 15.21 1992 5.02 1.51 1.59 7.98 9.49 2.80 14.06 2.48 16.54 1993 5.47 1.55 1.59 8.70 10.25 2.80 15.32 2.54 17.86 1994 5.93 1.63 1.59 9.43 11.06 2.80 16.60 2.66 ! 19.26 1995 6.42 1.68 1.59 10.21 11.89 2.80 17.98 2.76 20.74 , 1996-2009 6.42 - 1.59 10.21 10.21 2.80 17.98 _ 17.98

IRR: 17.6% MEXICO SECOND MEDIUM SIZE CITIES WAIER SUPPLY AND SEWERAGE PROJECT

Incremental Rate of Return (IRR) (M$ million of June 1980) D) TEPIC. WATER SUPPLY AND SEWERAGE Sewerage Sewerage WS & S WS & S Incmmerial Sewerage Unit Incremen- Total Se..erage Total Volume (mi- Construc- Operating tal Opera- Incremen- Tariffs Sewerage Other incremen- llion m3 tion Costs ($/m3 ting tal $/m3 Tariff Sewerage tal Year eouivalent Costs equivalent) Costs Costs equivaent Revenues Revenues Revenues

1980 - NA - - NA - -

1981 - 39.60 NA - 69.76 NA - - .1982 1.22 36.66 0.83 1.01 46.52 1.80 2.20 7.79 24.21

19S3 1.79 - 0.81 1.45 4.07 1.82 3.26 4.00 15.51 1984 2.24 1.58 0.79 1.77 7.81 1.85 4.14 5.79 18.90 1985 2.71 1.63 0.79 2.14 8.60 1.85 5.01 5.63 20.16 1986 3.01 1.09 0.79 2.38 8.88 1.85 5.57 4.29 20.29 1 19S7 3.32 1.14 0.79 2.62 9.79 1.85 6.14 4.17 21.29 \ 19S3 3.65 1.14 0.79 2.88 10.70 1.85 6.75 4.08 23.30 1939 3.99 1.18 0.79 3.15 11.63 1.85 7.38 3.97 24.85 1990 4.34 1.24 0.79 3.43 12.69 1.85 8.03 3.93 25.93

1991 4.69 1.27 0.79 3.71 13.72 1.85 8.68 2.30 26.19 1992 5.07 1.33 0.79 4.01 14.83 1.85 9.38 2.52 28.44 1993 5.49 1.46 0.79 4.34 16.05 1.85 10.16 2.78 30.80 1994 5.91 1.44 0.79 4.67 17.17 1.85 10.93 Z.73 32.92 1995 .6.34 1.50 0.79 5.01 18.40 1.85 11.73 2.85 35.32

1996-2009 6.34 - 0.79 5.01 15.22 1.85 11.73 - 29.71 0 1.2)

IRR: 12.22Z MEXICO SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGEPROJECT

Incremental Rate of Return (IRR) ('1$million of June 1980)

F) NOGALES. WATER SUPPLY

Incremen- Unit Incremen- Total Total tal Construc- Operating tal Opera- Incremen- Incremen- Volume tion Costs ting tal Tariffs Tariff Other tal Year (mi_ilio.n m3) Costs ($/m 3 ) Costs Costs ($/m 3 ) Revenues Revenues Revenues

1980 NA - NA , '

1981 - 158.82 NA - 158.82 NA - - .19S2 1,14 74.35 2.22 2'53 76.88 6.07 6.92 10.65 17.57 1933 2.15 - 2.08 4.47 4.47 6.08 13.05 10.27 23.32 1984 3.04 2.71 2.00 6.08 8.79 6.08 18.48 7.65 26.13 1935 3.70 4.51 2.00 7.40 11.91 6.08 22.49 5.67 28.16

1986 4.19 1.50 2.00 8.38 9.88 6.08 25.48 4.23 29.71 £ 1937 4.70 1.57 2.00 9.40 10.97 6.08 28.57 4.44 33.01 1 l^S3 5.03 1.00 2.00 10.06 11.06 6.08 30.58 2.82 33.40 1989 5.37 1.06 2.00 10.74 11.80 6.08 32.65 3.00 35.65 1990 5.72 1.05 2.00 11.44 12.49 6.08 34.78 2.96 37.74 1991 6.08 1.11 2.00 12.16 13.27 6.08 36.97 3.14 40.11 1992 6.45 6.15 2.00 12.90 19.05 6.08 39.22 3.24 42.46 1993 6.84 1.18 2.00 13.68 14.86 6.08 .41.59 3.35 44.94 1994 7.24 1.22 2.00 14.48 15.70 6.08 44.01 3.46 47.47 1995 7.68 1.31 2.00 15.36 16.67 6.08 46.69 3.70 50.39 1996 8.10 1.28 2.00 16.20 17.48 6.08 49.25 3.63 52.88

1997-2009 8.10 - 2.00 16.20 16.20 6.08 49.25 - 49.25

IRR: 9.9% MEXICO SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

IncrementalRate of Return (IRR) I (M1$million of June 1980)

F) NONCLOVA. WATER SUPPLY AND SEWERAGEI/ WS & S Ws & S WS & S Incremen- Sewerage WS & S Incremen- Total Water Total tal Water Volume Construc- tal Opera- Incremen- Supply Sevenge Other Incremen- Supply (irn m3/ tion ting tal Tariff Tariff WS & S tal Year (millionm 3) eaEnt)_ Costs Costs Costs wevenueS Revenues Revenues Rtvonucs

1980 ------_ _ 1981 - - 156.73 - 156.73 - - - 1982 1.08 1.79 108.07 4.25 112.32 4.40 3.66 24.43 32.49 1983 2.41 3.51 19.74 7.80 27.54 9.86 7.16 38.54 64.14 1984 3.53 5.51 23.21 10.75 33.96 14.44 11.22 34.33 59.99 1985 4.19 6.14 24.07 12.39 36.46 17.14 12.54 25.93 55.61 1986 4.72 6.99 24.38 14.03 38.41 19.30 14.27 24.19 57.76 1987 5.40 7.87 6.52 15.93 22.45 22.09 16.06 24.88 63.03 1033 5.87 8.79 5.96 17.54 23.50 24.01 17.95 21.70 63.66 1989 6.38 9.58 5.64 19.08 24.72 26.09 19.55 20.23 65.87 1990 6.90 10.44 4.89 20.72 26.61 28.22 21.22 19.60 69.04 1991 7.42 10.86 6.10 21.94 28.04 30.35 22.16 16.75 69.26 1992 7.95 11.34 16.31 23.23 39.54 32.52 23.13 16.22 71.87 1993 8.50 11.83 3.67 24.56 28.23 34.76 24.13 15.75 74.64 1994 9.07 12.33 3.77 25.95 29.72 37.10 25.15 15.36 77.61 mOQ 1995 9.65 12.84 3.89 227.35 31.24 39.47 26.21 9.21 74.89 0 1996-2009 9.65 12.84 3 27.35 7.351 39.47 26.21 9 65.68

IRR: 13.08%

1/ Water Supply componentnot financed under Bank loan. MEXICO SECOND EDIUM SIZE CITIES WATER SUPPLY AND SEWERAGEPROJECT LONG RU'N AVERAGE INCRi'iENTAL COST (AIC)

(million m3 and Mex$ of June 1980) A) TOLUCA W A T E R S U P P L Y S E-W E R A G E Incremental Incremental Other VolumeIncremental Incremental O:. Volume Costs Revenues (millionm 3 Costs Reavenues Year (million Mex$) (million Mex$) equivalent) (s,illion_(exS)( in

1980 30.52 - 40.24

1981 98.65 ' - 193.13 - 1982 1.23 .136.45 12.94 ',1.29 120.03 8.67 1983 1.86 2.38 26.00 2.88 1.79 28.38 1984 3.35 8.15 22.82 4.26 6.09 24.68 1985 4.43 . 8.37 18.64 5.22 5.59 20.26 1986 5.58 ' 9.98 17.89 ' 6.22 , , 6.31 19.41 1987 . 6.77 11.59 17.10 7.30 ' 7.14 18.82 1988 8.06 ' 13.44 16.67 *8.33 7.64 17.48 1989 9.40 104.22 16.03 9.51 8.75 13.10 1990 10.80 17.15 15.63 10.77 9.68 . 12.53 1991 12.29 19.22 15.38 12.09 10.63 12.01 1992 13.86 , 21.37 15.13- 13.48. 11.65 11.58 1993 15.51 23.66 15.07 14.95 12.75 11.21 1994 17.26 26.06 15.00 16.50 - 13.87 13.52 1995 19.10 -28.59 6.31 18.14 15.08 ' 5.58 1996 21.04 31.27 .10.68 19.87 16.34 5.88

1997-2Q09 21.04 - 26.09 - 19.87 11.92 - P.V. ,74.97 375.12 112.31: 75.18 V, 371.83 108.05.

375.12 -.112.31 371,83 - 108.05 ,AIC: _ $ 3.51/mi3 AIC: $ 3.50/m3equiv-ient 74.97 775.1, MFfXICO ND SIZE CITIES WWERAGE EEDIUMPROJECT LONG RUN AVERAGEINCREMENTAL COST (AIC)

(million m3 and Mex$ of June 1980) B) TEPIC W A T E.R S U P P L Y S E W E R A G E

Incremental Incremental Other Incrementaltal Other VolumeInrmna Ohe Volume Costs Revenues (millionm 3 Costs 3 Revenues Year (millionm ) (million Mex$) (millionMex$) equivalent)_ (millionMcx$) (millionXexS) 1980

1981 _ 32.86 - 39.60 - 1982 1.48 8.85 10.18 '1.22 37.67 7.79 1983 1.65.. ., ' 2.62 3'.70 1.79 1.45 4.00

1984 , 2;.01 4.46 3.34 2.24 3.35 . 5.79 1985 2.33 . . 4.83 3.00 2.71 3.77 5.63 1986 2.67 '.41 2.95 ' , 3.01 .3.47 ' 4.29 1987 .3;02 6.03 2.97 3.32 3.76 4.17 1988 3.39 ' . 6.68 2.98 , 3.65. 4.02 4.08 1989 3.'77 ,, 7.30 2.94 ' 3.99 . 4.33 3.97 1990 4.17 . 8.02 ' 2.29 '4.34. 3.95 3.93 1991 4.-59: 8.74 2.36 4.69 , 4.23 ' 2.30 1992 5.02 ' ,, 9.49 2.48 5.07 5.34 2.52 1993 5.47 10.25 2.54 5.49 5.80 .2.78 1994 5.93. 'r.06 , 2.66 . 5.91' , 6.11 2.73. 1995 6.42 '11.89'' 2.76 6.34 6.61 2.85

1996 6.93 ' 30.46 2.87 6.34, .5.01 . - 1997 7.45 13.68 2.99 6.34 5.01 - 1998 8.00 14.62 3.12 6.34 \ 5.01 -

1999 8.57 15.61 3.24 6.34 5.01 -

2000 9.16 16.62 3.38 6.34 5.01 -

2001 9.78 17.69 3.51 6.34 5.01 -

2002 10.25 18.31 3.30 6.34 5.01 -'

2003-2009 10.25 16.30 - 6.34 5.01 -0 P.V. 32.52 98.11 27.63 29.56 94.40 28.81 F

AIC: 98.11 - 27.63 $2.17 AIC: 94.40 - 28.81 $2.22/mr equivalerxt 32.52 29M56 . EXICO- SECOND NEDIUM SIZE CITIES WATER SUPPLY AND SEIE:RAGEPROJECT LONG RUN AVERAGE INCREMENTAL COSC (AIC)j

(million m3 and Mex$ of June 1980) C) MONCLOVA W A T E R S U P P L Y S E W E R A G E Incremental neena Ohr Incremental Incremental Other Volume Incremental Other Volume Costs Revenues (million m3 Costs Revet..es Year (million m3 ) (million Mlion (millionMexM) equivalent) (million }exS) (r.illicn.MexS

1980, - -

1981 19.56 137.17 - 1982 1.08 21.25 12.52 '1.79 91.07 11.91

1983 2.41 23;71 . 10.05 3.51 3.83 28.49

19S4 3.53 25.80 ' 7.20 5.51 8.16 27.13

1985. 4.19 . . 27.21 7.13 6.14 9.25 18.80

1986 4.72 28.46 5.63. 6.99 . 9.95 18.56

1987 . 5-40 11.26 7.739 7.87 . 11.19 17.49 6 1988 5.87 11.15 5.10. 8.79. 12.35 6.60

19S9 6.38 12.08 5.44 . 9.58 12.64 14.79

1990 6.90 12.97. . 5.59 10.44 13.64 14.01

1991 7.42 .13.81 5.59 10.86 14.23 . 11.16 1992 7.95 27.48 5.78 . 11.34 12.06 10.44

1993 8.50 . 15.66 5.92 11.83. 12.57 9.83

1994 9.07 ,. 16.64 6.11 . 12.33 . 13.08 9.25 1995 . 9.65 17.64 6.3Q 12.84 13.60 2.91

1996-2009 9.65 15.54 - - 12.84 _.. ,8. -.

P.v. 44.60 165.86 47.05. 64.09 \ 271.31 107.60 0

16586 475 271.31. 107.60 3 AIC: _ 2.66 $/m . AIC: ____2.55 $/-q uivalent it4 .r, . C14.ol MEXICO SECONDMElDIUM SIZE CITIES WATERSUPPLY AND SEWER~ACEPROJE.CT LONIGRUN AVERAGEINCREMENTAL C:OST_(AIC)

(million m3 and Mex$ of June 1980) D) NOGALES W A T E R S U P P L Y S E W E R A G E

Incremental Incremental Other - Volume Increment 1 Other 3 Volume Costs Revenues (million m Costs Revenues 3 (c-.i1ion. S Year _million m ) (million Mex$) (million Mex$) equivalent) (,illion ioexS)

1980 ,

. 48.71 - 1981 - 158.82 - 1982 1.14 76.88 10.65 0.91 14.55 2.64 1983 2.15 4.47 -l10.27 2.29 18.31 3.58 1984 3.04 8.79 7.65 2.95 20.45 1.56

1985 3.70 . 11.91 5.67 3.18 22.41 0.53 1986 4.19 9.88 4.23 3.42. 24.64 0.55 1987 4.70 10.97 4.44 3.92 27.29 1.17 H 0 1988 5.03 . 11.06 2.82 4,45 30.17. 1.25 H 1989 5.37 11.80 3.00 5.01 5.91 1.29 1990 5.72 i2.49 2.96 5.60 8.34 1.37 1991 6.08 .13.27 3.14 5.92 7.93 0.75 1992 6.45 19.05 3.24. 6.25 8.35 0.78 1993 6.84 14.86 3.35 6.60 8.81 0.81 1994 7.24 15.70 3.46 6.96 9.26 0.83 1995 7.68 16.67 3.70 7.33 9.74 0.87 1996 8.10 17.48 .3.63 7.62 .10.11 0.89 1997-2009 8.10 .16.20 - ' 7.62 8.99 P.V. 38.13 290.47 37.44: 35.45 \ 166.20 9.70 O

3 AIC: 3 AIC: 6. 9' 4.41 $/D equivalent 38.13 35.45 - 102 -

ANNEX 14 Page 1 of 1

MEXICO

SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT

Selected Documents and Data Available in Project Files

A. SECTOR REPORTS AND STUDIES

1. SAHOP Guidelines for Project Preparation.

2. National Plan for Urban Development.

3. MEXICO - Water Supply and Sanitation Sector Memorandum.

4. Evaluation of the National Training Program on Water Supply and Sewerage.

B. PROJECT RELATED REPORTS AND DOCUMENTATION

1. Feasibility Studies for subprojects in the cities of: Tepic, Toluca, Nogales, Monclova, Cd. Juarez, Matamoros and Queretaro.

2. SAHOP's financial projections for the period 1979-1986 for Water and Sewerage for the cities of Tepic, Toluca, Nogales, Monclova, Cd. Juarez, Matamoros and Queretaro.

3. Consolidated Balance Sheet and Statement of Profit and Loss as of December 31, 1979 of BANOBRAS.

4. Financial Report (Audited) as of December 31, 1979 of FIFAPA.

5. Progress Report dated December 31, 1979 of FIFAPA.

6. Copy of Decree authorizing FIFAPA's capital increase to Mex$ 11.5 billions.

7. Financial projections (FINPRO) for the period 1980-1984 for appraised estimates for the four subproject cities of Tepic, Toluca, Nogales and Monclova.

8. Project's urban poverty impact in the cities of Tepic, Toluca, Nogales and Monclova; and maps of income distribution (included in feasibility studies). iiO* 100* 00 tEE~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~BD15092

UNITED STATES OF AMERICA MEXICO MEDIUM SIZECITIES H

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