Document of The World Bank FOR OFFICIALUSEONLY ReportNo: 28599-ME PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDLOAN INTHEAMOUNT OFUS$108.0MILLION TO THE NATIONAL BANK OF PUBLICWORKS AND SERVICES (BANOBRAS) WITH THE GUARANTEEOFTHE UNITEDMEXICAN STATES FORA DECENTRALIZEDINFRASTRUCTUREREFORMAND DEVELOPMENTLOAN PROJECT April 23,2004 Financial,Private Sector and Infrastructure ColombiaandMexicoCountryManagementUnit LatinAmerica andCaribbeanRegion This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosedwithout World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective December 31,2003) Currency Unit = MEXICAN PESO M X $ l l . 2 5= US$1 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS BANOBRAS NationalBank of Public Works and Services BOT Build, Operate and Transfer CAPUFE Federal Roads and Bridges CAS Country Assistance Strategy CEAG Guanajuato State Water Commission CETES Treasury Bonds CNA NationalWater Commission CONACAL NationalFeedingRoads and Airways Commission CONAFOVI NationalHousingCommission DIRD Decentralized Infrastructure Reform and Development Program EA EnvironmentalAssessment ESM Environmentaland Social Manual ESMF Environmentaland Social Management Framework FIG FieldImplementationGroups FM FinancialManagement FMRs FinancialMonitoring Reports FOVI HousingFund FOVISSTE Institutefor the Social Security of State Workers HousingFund GDP Gross Domestic Product GoM Government of Mexico GoSG Government of the State of Guanajuato GPN General Procurement Notice HDM Highway Developmentand Management Model BRD International Bank for Reconstruction and Development ICB International Competitive Bidding ICR Implementation Completion Report IEG Ecology Institute of the State of Guanajuato INFONAVIT National Institute for Workers Housing IP Inspection Panel IRR Internal Rate of Return IVEG Housing Instituteof the State of Guanajuato LCR Latin American and the Caribbean Region LCS Least Cost Selection M o U Memorandumof Understanding NAFTA North American Free Trade Agreement NCB National Competitive Bidding NPV Net Present Value OREVIS State HousingOrganisms PMS Pavement Management System PMT ProgramManagement Team PND National Development Plan PNH National Hydraulic Plan PNMA National Environmental and Natural Resources Plan PPB Planning and ProgrammingBudget PREM Poverty Reduction and Economic Management PROSAPIS Water and Sanitation Services inRural Areas Sustainability Program PROSAVI Housing Credits and Subsidies Special Program QCBS Quality and Cost Based Selection SA Special Account SBD Standard BiddingDocuments SCT Secretariat of Communications and Transport SDSH Secretariat of Social and Human Developmentof the State of Guanajuato SEA Strategic Environmental Assessment SEDESOL Secretariat of Social Development SEMARNAT Secretariat of Environment and NationalResources SFA Secretariat of Finance and Administration of the State of Guanajuato SHCP Secretariat of Finance SHF FederalMortgage Department SOFOLES Financial Limited Liability Corporation SoG State of Guanajuato SOP Secretariat of Public Works of the State of Guanajuato SWAP Sector Wide Approach TA Technical Assistance USA United States of America USD United States Dollar WB World Bank Vice President: David De Ferranti Country ManagerDirector: Isabel Guerrero Sector Manager: John Henry Stein Task Team Leader: Krishna Challa MEXICO MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan CONTENTS Page A. STRATEGICCONTEXT AND RATIONALE .................................................................. 1 1. Country and sector issues .................................................................................................... 1 2. Rationale for Bank involvement.......................................................................................... 3 3. Higherlevel objectives to which the project contributes..................................................... 4 B. PROJECTDESCRIPTION .................................................................................................. 4 1. Lending instrument.............................................................................................................. 4 2. Program objective and Phases ............................................................................................. 5 3. Project development objective and key indicators .............................................................. 7 4 . Project components.............................................................................................................. 7 5 . Lessons learned and reflected in the project design .......................................................... 10 6. Alternatives considered and reasonsfor rejection............................................................. 11 7. Partnershiparrangements................................................................................................... 11 8. Institutional and implementation arrangements................................................................. 11 9. Monitoring andevaluation of outcomeshesults ................................................................ 13 10. Sustainability ..................................................................................................................... 14 11. Critical risks and possible controversial aspects ............................................................... 14 12. Loadcredit conditions and covenants ............................................................................... 15 C APPRAISAL SUMMARY . .................................................................................................. 15 1. Economic and financial analyses....................................................................................... 15 2. Technical............................................................................................................................ 15 3. Fiduciary............................................................................................................................ 16 4. Social................................................................................................................................. 17 5. Environment ...................................................................................................................... 18 6. Safeguard policies.............................................................................................................. 19 7. Safeguard Policy Aspects and Readiness.......................................................................... 19 Annex 1:Country and Sector or ProgramBackground .......................................................... 21 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies ..................31 Annex 3: Results Framework and Monitoring ......................................................................... 32 Annex 4: Detailed Project Description ...................................................................................... 41 Annex 5: Project Costs................................................................................................................ 50 Annex 6: ImplementationArrangements .................................................................................. 51 Annex 7: Financial Managementand DisbursementArrangements ...................................... 52 Annex 8: Procurement ................................................................................................................ 53 Annex 9: Economic and Financial Analysis .............................................................................. 57 Annex 10: SafeguardPolicy Issues ............................................................................................. 61 Annex 11:Project Preparation and Supervision ...................................................................... 93 Annex 12: Documentsinthe Project File .................................................................................. 95 Annex 13: Statement of Loans and Credits ............................................................................... 98 Annex 14: Country at a Glance ................................................................................................ 101 Annex 15: Detailed Project Costs ............................................................................................. 103 Annex 16: DisbursementsIndicators ....................................................................................... 106 Annex 17: Operating Regulations ............................................................................................ 107 A. STRATEGIC CONTEXT AND RATIONALE This document presents a proposed US$lOS.O million Bank loan to the Banco Nacional de Obras y Servicios Ptiblicos (BANOBRAS) to finance the programs in the State of Guanajuato (SoG) under a multisector infrastructure reform and development strategy program implemented by BANOBRAS to support the execution of comprehensive infrastructure reform and development strategiesin Mexican states. 1. Countryandsector issues Economic activity in Mexico i s slowly recovering from the recession it went through and which resulted in a 0.3 percent contraction of Gross Domestic Product (GDP) in 2001, and modest growth rates of 0.9 percent in 2002, and 1.3 percent in 2003. This reflectedcontinuedweakness of the U.S. economy and weak private investment due in part to limited progress on the administration's legislative reform agenda and declining private consumption '. The country's economic policy remains successfully focused on maintaininginvestor confidence, market access, and progressing towards financial and price stability. Monetary policy i s geared toward achieving an inflation target of 3 percent in 2004. The government has not pursued a counter cyclical policy in order to avoid a deterioration of the public sector's solvency or the perception thereof, but largely maintained a neutral fiscal stance as public deficit targets are gradually reduced and lower-than-budgeted revenuescompensatedby expenditure cuts. Reflecting the expenditures cuts, national investment shrunk in the last two decades as austerity programs reduced infrastructure investments from over 10 percent of GDP in the early 1980s to an estimated 3.3 percent in 2003. A turnaround in this trend will be essential to sustaining economic growth in the mediumto long term. Closing the country's widening infrastructure gap will also require major investments, with preliminary estimates of US$20 billion per year over the next decade. Given the strong move to decentralized economic management mandated by the Mexican Constitution and legislation adopted in the 1990's, policy makers and managers at sub-national levels will need to play an increasingly major role inclosing this gap. This implies consolidating macroeconomic gains and accelerating growth through enhanced competitiveness. Although sound legal, regulatory, and institutional frameworks have been set in place in a number of infrastructure sectors at the federal level, it i s clear that bringing Mexico's infrastructure to an adequate level will require further reinforcing them and changing the way the strategies and priorities of these sectors are conceived, managed, owned and regulated at federal and sub-national levels. Slow growth, pent-up demand and institutional issues. Decentralization has been identified by the Government of Mexico (GoM) as a key element of the National Development Plan (Plan Nacional de Desarrollo, PND).The Six-year development plan issued in2001, although it is still ,very much a work-in-progress as the combination of fiscal constraints, increasing political plurality and a cautious policy outlook have left several components of the reforms incomplete. Closely coordinated efforts between the federal, state and local government levels are key in the ' On the basis of seasonally adjusted, quarter-on-quartereconomic growth rates, it can be statedthat the recessionlasted for 6 quarters beginning the last quarter of 2000. The economic recoverystarted inthe secondquarter of 2002, though it lost speed duringthe next two quarters. 1 infrastructure sectors. For example, to avoid a major water crisis inMexico, measures are needed to gradually move to bulk and retail water tariffs that reflect scarcity, improve their collection and allocation of bulk water rights, and find the appropriate institutional arrangements responsive to the needs of decentralized development within a federalism framework. Inthe road transport sector, where efforts to enhance private participation were stymied by the failure of a road concessions program in the 1990s due to as poor financial design, new arrangements are to be structured to guide the processes of rationalization of the toll roads program, better design concessions and private sector participations, establishment of a Road Maintenance Fund, institutional arrangements and the decentralization of the road network. In low-income housing, there have been advances in strengthening an integrated institutional structure at federal level to set the principles and parameters of the low-income housing strategy. State governments and their housinginstitutes must adapt them to match the local conditions and regulations. Annex 1 presents a more detailed examination of the main issues to be addressed in the infrastructure sectors considered at the national and state levels. Heterogeneity among states and need to customize. Historically, infrastructure development in Mexico has been very uneven among states and among sectors. Several (but not all) of the northern and central states have tended to be more proactive in reviewing the strategic issues surrounding the financially sustainable development of these sectors and attracting private sector participationto enable such development, whereas the southern states tended to pay less attention to these, given the rudimentary state of sector development and performance. Poverty, access to necessary basic services, attention to maintenance and local priorities also vary considerably among states and local communities. Insome sectors such as telecommunications and electricity, more attention has been focused on putting in place economically and financially sustainable tariffs and appropriate cost recovery mechanisms, whereas actions are at a much more initial stage with respect to the water and sewerage sectors in most states. Institutional capacity at the state and local levels varies widely amongst states, partly reflecting the different income levels and stages of development, but also the political environment and the consequent differences in the economic and sector policies. Private sector Participation and sub-contracting. Mexico has rightly sought over the past two decades to substitutepublic with private infrastructure investment. However, the private sector's response has not materialized as fully as had been expected, leading to a depreciation of Mexico's capital stock. In order to correct this trend, a continued search for innovative methods of promoting public-private partnerships and other modes of private sector participation i s needed, together with appropriate long term funding instruments and continued regulatory reforms at the three levels of government. Responsibilities of federal, state and local iurisdictions. The division of responsibilities varies significantly amongst infrastructure services - for example; water and sanitation services and local roads are primarily the responsibility of local government whereas key elements of telecommunications, major highways and electricity infrastructure are federally controlled and urban development and low income housing tend to be shared. Responsibilities for strategy making and priority setting amongst the three levels are often not well defined. Clarifying the strategies at the sub-national levels i s a key ingredient for providing better access, quality and sustainability of infrastructure services. 2 2. Rationale for Bank involvement The Bank can play an important role in helping Mexican states define coherent sector strategies and priorities and improving their institutional capacity and sustainability. Lack of access to basic infrastructure and public services i s both a key dimension of poverty and of quality of life of the poor and underprivileged inMexico. Both urban and rural poor neighborhoods experience strikingdeficiencies in access to potable water, sanitation, electricity and telephones. Poor water and sanitation services have been demonstrated to have direct effects on the health and productivity of population. Lack of access to roads i s typically also a major impediment, hindering effective participation of poorer population segments in economic and commercial activity, and limiting their access to basic health care and education - in turn perpetuating poverty and low quality of life. If pursuedas part of an effective and well thought out strategy which appropriately reflects the state's circumstances, priorities and capacities, decentralized infrastructure development can bring major improvements in and the quality and access to basic infrastructure, especially to the poorest segments. B y bringing policymakers and final beneficiaries closer together, it can promote the design and implementation of strategies that are much more responsive to the local needs, priorities and characteristics. It would redefine the role of the federal government entities into one that guides and catalyzes appropriate actions at the sub-national levels, limiting direct federal action to only where needed. Worldwide experience suggests that decentralization should best be carried out within a coherent overall national strategy and with adequate institutional infrastructure at lower levels of government. The proposed Program and Project aims to achieve this. The overall challenge i s to make the decentralization process fully sustainable. To this end, the previous Mexican Administration sought to ensure sustainability by promoting legislation to impose hard budget constraints on states andmunicipalities. This was achieved by the Government by severely limiting its direct powers to hand out discretionary transfers, and linking capitalization requirements for bank loans to sub-nationals to their market determined credit ratings. These reforms have started inthis decade to show their impact by makingstates and municipalities pay more attention to the fiscal sustainability of their programs. To get their full beneficial impact, however, sub-national governments will need to formulate and implement medium and long term comprehensive sector strategies comprising an array of actions that go from infrastvcture investment to regulatory reformimprovements andinstitutionalcapacities at state and locallevels. Sub-national sector strategies will undoubtedly be smaller in scale than traditional investment operations at federal level, but larger in the scope of the activities involved. Moreover, infrastructure investments at sub-national level are usually financed by pooling funds from federal and sub-national levels along with commercial and development bank financing. The combination of these factors would favor Bank financing through a Sector Wide Approach (SWAP), whereby comprehensive sector strategies including a variety of actions are prepared and put forward by sub-national governments to receive Bank financing under the proposed Program. I t i s anticipated that this mechanism will provide sufficient degrees of freedom for participating states to include within a multi-year sector strategy an optimal mix of investment and reform-orientated actions that would then be financed as a single unit. 3 3. Higher levelobjectives to which the project contributes The unmistakable mandate provided by Mexico's Constitutional amendments and corresponding legislation adopted in the 1990's was to link firmly the country's future economic and social development to a much more decentralized mode of economic management in most economic and service sectors. However, the majority of the states and local authorities do not yet have the institutional or technical capacities to undertake effectively the responsibilities implied in the strong move to decentralization or to formulate comprehensive economic and sectoral strategies to guide such a process. Institutional and strategic capacities of some of the national entities responsible for guiding the decentralization process in the respective sectors are also not yet well developed. Combined with the prospects for Mexico graduating from Bank lending in the coming decade or two, this makes it crucial for the Bank to engage firmly in this process at this time, and leave behind in Mexico adequate capacities to manage the decentralized development process. The Country Assistance Strategy (CAS) discussed by the Board in April 15, 2004 identifies decentralizeddevelopment andworking at sub-nationallevels of Government as a priority. The CAS envisages that the Bank program would help strengthen sub-national economic management and performancebuildingon Mexico's Constitutional reforms of the 1990's. The Bankhas beeninvolved in analytical work to help establishclearer fiscal decentralization rules, andto facilitate the ongoing discussions of the Convencidn Nucionul Hucenduriu. The hard budget constraints within which states manage their fiscal programs reduce the moral hazard in sub-national borrowing and enhance transparency of state fiscal and financial management. The CAS specifically suggests the importance of capacity buildingandinstitutional strengthening as well as communityparticipation to improve the effectiveness of the decentralization process and the efficiency of subnational expenditures, and use of country systems in financial management, procurement and other systems. The proposed Program/project i s a key part of these efforts and i s designed to promote structural reforms, effective strategies and priority setting, institutional strengthening and capacity building at subnationallevels, takinginto accountthe specific state priorities andcommunity needs. B. PROJECTDESCRIPTION 1. Lendinginstrument The proposed US$108.0 million (18-year FSL) loan to BANOBRAS to support SoG would help address the issues discussed above, inthe specific case of the State of Guanajuato (SoG) through partial financing of a program being mounted by BANOBRAS to support comprehensive infrastructure sector strategies undertaken by states. Bank financing would promote efficient and fiscally and financially viable infrastructure development in priority sectors, with poverty responsiveness and access of public services to the poorest segments of the population. Although BANOBRAS' program i s described in the following paragraphs to set the context, the Bank would be involved only in the financing related to SoG. To avoid any confusion the BANOBRAS programinthis section i s further described as the BANOBRAS approach. 4 2. Objective of BANOBRAS approachandphasing BANOBRAS' approach i s designed to improve the performance of infrastructure services throughout the territory of Mexico while operationalizing the decentralization objectives of the national government, and enabling and catalyzing the efficient and sustainable development of selectedinfrastructure sectors at the sub-national level. Inthe longrun,this should provide aneffective andsustainablemodelto channelfinancing to support development of different sectors at sub-national levels, and help create the requisite institutional capacities. However, in order to avoid undue complexity in its initial stage and to facilitate learning which could be incorporated infurther stages of the approach, support inthe first stage wouldfocus on three key infrastructure sectors, namely: (a) roads (including highways andruralroads); (b) water and sanitation (including wastewater treatment); and (c) urban and low-income housing. Based on the initial experience, and applying any lessons learned from the first stage, the approach could be extendedto additional priority sectors. Duringthe first stage, the financing would be available only to states. However, municipal and local administrations could benefit even in the first stage because an important part of the state strategy could involve catalytic support to municipalities and utility operators to inducereforms andsustainabledevelopment of servicesat locallevel consistent with state priorities (e.g., technical assistance to municipalities andutility operators). MainFeatures. The overall modality would be to provide long term finance to participatingstates to finance one or more sector strategiesfor infrastructure reform and development. States would be invited to articulate and submit a comprehensive sector strategy for the sector(s) for which they seek support under the approach, outlining investments in infrastructure, policies, structural or institutional reform actions and other sector development initiatives which they intend to implement over the next 2-4 year period. These would be accompanied by a specific investment program, calendar of actions and monitorable indicators to be achieved during that period which would be enabled by the sector strategies. As sector strategies are prepared by the states, it i s expected that they would be custom-tailored to reflect the stage of development of the sector, priorities and neededreformactions, andhence could vary significantly from one state to another. BANOBRAS' (and where involved the Bank's) loan amount to support sector strategies would be assessed individually, and would take into account the size of the financial gap that results from deducting all available funding sources from the total investment needs over the period covered by the medium term sector program, the quality of the sector strategies and the efforts toward achieving sustainable strategiesby each state. In screening candidate states BANOBRAS would verify that the fiscal affairs of the state in question are beingmanaged ina responsible way and that the finances of the state are sustainable in the medium term. These may be based on assessments to be made by BANOBRAS of the current and projected net fiscal balances of the state, the structural consistency and efficiency of expenditures, sustainability of the debt levels, and the quality of the internal financial management practices. As part of its assessment, BANOBRAS will take into account the credit ratings obtained by the state from an independent credit rating agency. BANOBRAS would also verify that candidate states have prepared a satisfactory, coherent and well integrated strategy for each sector for which they seek financing. 5 In the specific case of SoG, the Bank, in collaboration with BANOBRAS and state entities, assessed the sector strategies proposed and the existing safeguards-related legal and institutional frameworks and capacities in the sectors. To promote adequate long-term investment levels in the sectors, the sector strategies specifically: (i) promote access to services to the poorest segments of the population; (ii) incorporate market-based solutions that support the maximum level of private sector participation -whenever feasible- through an appropriate overall sector structure, regulatory and competition frameworks, suitable tariff and cost recovery policies; (iii) include the requisite attention to maintenance of infrastructure facilities and operational efficiency; and (iv) promote the strengthening of state environmental and social management capacity within key sectors. Proposed sector strategies would also have to be consistent with the national sector development strategy, as articulated by the respective national sector entities.2 As part of the vetting process, BANOBRAS and SoG would agree on any refinements and/or institutional strengthening measures that may need to be incorporated in the proposed sector strategy. The program makes use of a sector encompassing approach, so that the rules governing participation and execution would be applicable to all expenditures incurred under the corresponding medium term sector strategy supported, regardless of the funding source. Thus SoG agrees to apply the same rules and guidelines to the entire sector investment strategy, regardless of financing source. Financing sources may include other domestic or external sources, federal government transfers and their own budget resources. Advances under the loan are based on accomplishments of agreedoutput benchmarks that reflect key elements of the strategy and corresponding unit costs. The specific outputs on which loan advances would be based, would be aimed at ensuring adequate additional progress or "value added" vis-&vis the current situation and stage of development of the sector. Overall, these loan withdrawal triggers would reflect the state's priorities, needs and performance and output objectives. Their achievement would be closely monitored during execution by the BANOBRAS. The Operating Regulations of BANOBRAS' program, which are also applied to the state of Guanajuato in addition to the Bank loan requirements, would govern the operational aspects. This includes sector eligibility criteria, procurement arrangements, disbursements and financial management arrangements (to provide full transparency of outputs and expenditure accounting and auditing), and overall financial management. A copy of the OperatingRegulations to be used i s included in Annex 17. The Bank's formal loan documentation requires the DIRD execution to comply with these Operating Regulations. The treatment of Bank safeguard requirements is outlined in the Environmental and Social Management Framework (ESMF, Annex lo), which i s incorporated in the Operating Regulations. Consistent with the sector wide approach, the ESMFallows for use of country/state systems and describes the process by which participating states will assess, minimize and mitigate the environmental or social risks of each sub-component of their sector strategies. The Comisih Nucionul del Aguu (CNA) inthe case of the water and sanitation, Secrefudu de Comunicuciones y Trunsportes (SCT) inthe case of a state roadsprogramand the Secrefurfude Desurrollo Social (SEDESOL)in case of urban development and low-incomehousing, 6 Bank loan to BANOBRAS to support its approach, would serve as a "safeguard pilot" for the state of Guanajuato, with the Bank using GoM and SoG systems to materially meet the objectives of the Bank's environmental and social safeguard policies. As outlined in Annex 10, this pilot approach is based on: (i) comparison of the Bank's safeguards and GoM and SoG a laws, regulations, procedures, and practices; (ii)an assessment of SoG regulatory and institutional capacity to implement and enforce GoM and SoG safeguard-related laws and regulations; (iii)identification of SoG institutional arrangements, procedures for Bank prior review of subprojects, capacity strengthening measures, and monitoring and reporting requirements; (iv) identification of those GoM and SoG laws and policies that would apply to the project, and (v) specification of actions to address identified differences between the GoM and SoG systems and the Bank's policies and procedures necessary to materially satisfy the objectives of the Bank's policy framework. 3. Project development objective and key indicators The Bank loan to SOG (also referred to as the DIRD loan) would be a US$ 108.0 million specific investment loan to BANOBRAS to support programs in SoG to achieve sustainable investment levels and an efficient operation of the sector strategies for the following sectors: road transport, water supply and sanitation, and low-income housing, with enhanced basic services for the poorest population segments and financial sustainability. SoG has expressed strong interest in participating in the BANOBRAS program. Based on a full assessment by the Bank and BANOBRAS, SoG and the three sector strategies submitted have been determinedto be eligible for financing under this approach. The proposed loan would follow the Operating Regulations and would be output based in its major investment components. The sector strategies include investment, reform-oriented and institution building sub-components for each sector. Annex 3 presents the development indicators to monitor the performance. 4. Project components The three sector strategies, together with cross-sector TA program to improve state government processes are, hereinafter referred to as `Project Components', derive from SoG's "Plan Estatal de Desarrollo" - a long-term plan prepared on the basis of a systematic consultation process. A description of the main sector issues faced by SoG i s included in Annex 1, along with the strategies designed by the state agencies to address them. A brief summary of each sector strategy to be supported by the Bank i s presented here. Further details on the sub-components and costs estimates are in Annexes 4,5 and 15. Component I:Implementingthe Road Transport Sector Strategy The three-year sector strategy proposed by SoG to improve overall performance of the road transport sector includes actions with an estimated cost of around US$ 117 million, of which US$59million will be covered by the Bank loan. The mainsub-components are: 7 (i) Institutional strengthening. Improving the investment planning and the Planning Programming Budget (PPB) cycle, introducing performance maintenance contracts, designing a program for the transfer of the federal roads, development of pavement management systems and development of an improved framework for private sector financing of road projects (ii) Expansionof the state managed network. This includes building600 new kmof roads (iii) Improvement of bridges and elimination of bottlenecks. Road grade separation overpasses and improvement of unsafe or restricted spots along the state roads (iv) Pre-investment studies for construction of toll roads; and (v) Improvement and construction of rural roads. The following table indicates the output-oriented disbursement parameters for the road transport sector strategy. Component DisbursementIndicators Unitcost(USD) RoadConservationand Maintenance Kmrehabilitated inpoor conditions USD75,000 per kmrehab Kmmaintained in "fair" and USD 40,000 per km "good" conditions maintained RuralRoadsProgram KMofruralroadsbuilt or improved USD 15,000 per kmof rural roads built or imDroved Component11: Implementingthe Water Supply and SanitationSector Strategy This component addresses the problems faced by the State of Guanajuato (GoSG) in water and sanitation service provision. The estimated cost for this component i s US$94 million, of which US$38 will be covered by the Bank loan: (i) Improve water resources management: Establishing a Hydraulic Planning System, efficient measurement of hydrological cycle and introduction of participatory mechanisms for water management systems (ii) Increase coverage of water supply and sanitation in rural and urban areas, increase wastewater treatment in large communities3 (iii) InstitutionalStrengthening of Comisidn Estutul del Agua de Guunujuuto (CEAG) and Support Mechanism to Operators. Improve the regulatory framework, process certification, staff training, promote technological transfers. A substantial element of this item i s the Programto Improve Efficiency and financial sustainability of service providers, e.g. TA to service providers and municipalities to achieve cost effectiveness and a satisfactory level of tariff recovery; further development of benchmarking models for service providers. The wastewater treatment element of the strategy is part of a national program directed by CNA, however several deficiencies have been identified by CEAG and the Bank regarding the financial and operational sustainability of these investments.As part of the proposed loan, CEAG is developing additional screening criteria to bolster their effectivenessand promote sustainability, which could eventually be used by other states of the Program. 8 The following table indicates the output-oriented disbursement parameters for the water supply and sanitation sector strategy. Component Disbursement Indicators Unitcost (USD) Increase coverage in urban& ruralwater I supply Increase water and INumber o f additional inhabitants 100USD per new sewerage coverage in rural with access to water infrastructure inhabitants with access to areas water infrastructure Number o f additional inhabitants 100USD per new with access to individual sanitation inhabitants with access to solutions sewerage infrastructure Increase water and Number o f new connections to 780 USD per new water sewerage coverage in water infrastructure infrastructure connection urban areas Number of new connections to 780 USD per new sanitation sanitation infrastructure infrastructure connection Component111: Implementingthe Low-IncomeHousingStrategy (i) InstitutionalStrengthening (a) Establish adequate prudential financial criteria suitable for decentralized or autonomous non-bank financial intermediaries engaged in housing finance, efficient loanrecovery mechanisms and provisionspolicy thereof (b) Formally approve the legal framework applicable to the sector to incorporate item (a) above and to make Znstituto de Viviendu del Estudo de Guunujuuto (IVEG) financially sustainable in the medium term and able to preserve its capital inreal terms (c) Implement item (b) above and improve the information and supervision systems to enable it. (ii) Increasesupplyoflow-incomehousingfor thepoorestsegmentsofthepopulation through financing of materials for self-construction, additional housing for the poorest segments of the population, gradual improvement and rehabilitation of housing, and of urbanized lots ready for housing construction. Completion of the institutional strengthening sub-component satisfactory to the Bank would be a disbursement condition to begin withdrawals under item (ii). The following table indicates the output-oriented disbursement parameters for the low income housing sector strategy Component Disbursement Indicators Unitcost (USD) Increase supply of low- income housing Programa de Vivienda Number of loans granted in excess 2,500 USD per additional Popular Tu Casa of 2003 loan Programa de Lotes con Number o f loans granted in excess 1,000 USD per loan Sewicios of 2003 9 Component IV: Technical Assistance to Cross-Sector Areas Inresponse to the State's request and in order to implementthe necessary reforms as suggestedby the Bank's assessments for the state, a TA component of US$1.5 million has been designed to strengthen existing capabilities within the state in order to achieve full compliance with the Program's Operating Regulations. The subjects covered are cross-sectoral and would have a positive impact beyondthe sector strategiesproposedfor Bankfinancing. Specifically theseinclude: (i) Strengthening of the mechanisms to screen, prioritize and monitor public investments (ii) Strengthening of the existing consultation, participation and disclosure mechanisms (iii) Enhancing the capacity of relevant state agencies and practices inthe safeguard areas (iv) Strengthening of procurement policies and practices; and (v) Optimization of the existing financial management and audit systems and processes. 5. Lessons learned and reflected inthe project design Importance of capacity building at sub-national agencies. Decentralization of investment responsibility to lower levels increases accountability and typically improves service quality. However, this requires commensurate increases in the capacity of local agencies to strategize, plan, monitor and implement the programs under their new responsibilities. Previous projects that began with a decentralized or demand driven model without an adequate capacity building element have had poor operational results characterized by slow disbursements and low quality investments. Moreover, the impact of decentralization upon public sector efficiency depends on the country's ability to prevent lower-level governments from mismanaging their debt4. The basic criteria under the proposed Program are designed to ensure that participating states have a track record of prudential fiscal, financial and environmental and social management, and that capacity buildingi s tackled as an integralpart of the state sector programs. Establishing clear criteria for sub-proiect selection. Experience with previous decentralization projects in Mexico highlight the importance of establishing clear criteria for choosing sector priorities and sub-projects selection, in order to eliminate uneconomical pro ects, especially given the limited sub national experience inprioritization and project evaluation I. Sustainability and impact are increased through the establishment of clear rules of the game in relation to subsidies, cost recovery policies, minimizing market distortions and clarity on expected results. Previous projects have demonstrated that developing a cost recovery strategy, combined with clear targeted subsidies where needed, i s critical to the sustainability of investments. The proposed project applies these rules and a results-based disbursement approach. Importance of community participation in planning and implementation and Program ownership. Previous projects show that the benefits from decentralizing service provision help to develop strong local ownership of the projects and allow smooth projects transitions during political successions. Community participation in project design and implementation facilitates cost recovery tariffs, ensures accountability of government agents and is a way to ensure that priorities reflect the population needs. Experience highlightsthe importance of using the existing planning and participation mechanisms for consultation, strengthening them wherever necessary. 'Evaluation Decentralization and the challenge of hardbudget constraints, Poverty Reduction & Economic Management (PREM) Notes 21597. Report: Decentralization and Regional Development (US$SOOm), August 19941, Report No. 13032-ME 10 The proposed Program incorporates local stakeholders into the investment identification and prioritization process and will provide support to buildcapacities at state and municipal levels. 6. Alternatives considered and reasons for rejection The project was originally designed as an adjustment or hybrid operation, but taking into account Bank interest in a results oriented approach with close links with investment, it has since been changed into a results oriented investment project. An alternative of designing the project as a wholesale operation, which could potentially include several Mexican states receiving funding from BANOBRAS without a state-by-state appraisal by the Bank was also considered, but rejected because it would put too much burden on BANOBRAS as an executing agency on a strategically oriented project on which it does not have much experience. In addition, BANOBRAS would have to cover the commitment fees for undisbursed funds across non- disbursingstates, whereas a specific investment loanto a single state avoids such fees. 7. Partnership arrangements BANOBRAS, Mexico's principal national development bank charged with the responsibility for federally sponsored development lending to states and municipalities, especially ininfrastructure areas, i s the agency designated by GoM to implement the Program. In the initial stages of Program implementation, the Bank expects to work closely with BANOBRAS in discharging its functions of assessing the proposed sector strategies, checking compliance with the Program's sector eligibility criteria and rules governing its execution per the Program Operating Regulations. The expectation for possible future loans under the Program i s that BANOBRAS will increasingly assume responsibility for these functions, accompanied by a gradual transition of Bank involvement, from direct participation in assessments to provision of technical and advisory assistanceto BANOBRAS and the states. 8. Institutional and implementationarrangements Borrower, ImplementingAgencies and Channeling Arrangements. BANOBRAS would be the Borrower of the proposed Bank loan, with guarantee provided by the UnitedMexican States. The Borrower has stated its preference for a USD fixed spread loan with an automatic currency conversion into Mexican pesos. Funds from BANOBRAS to SoG would be initially channeled through the state's Finance Secretariat and would be passed on by it to the concerned state executing agency, including SOP (for road transport), CEAG (for water and sanitation), IVEG (for low income housing) and other government entities for the cross-secto? TA. Funds from BANOBRAS are expected to be made available to SoG at terms comparable to the Bank's own maturities, bearing interest rates in pesos, covering the funding cost for BANOBRAS and administrative and other spread. The responsible entities in the state will keep track of the details of the costs, financing and outputs, and make them available to Secretaria de Finanzas y Administracio'n (SFA) and through them to BANOBRAS who will act as the liaison with the Bank on financial and procurement matters. Procurement. Inorder to ensure that the Bank fiduciary obligations are met, BANOBRAS will have to sign a formal loan contract with SoG, covering most of the conditions described above, including the channeling arrangements, procurement and disbursement conditions, and the rules under the Operating Regulations. It will define the thresholds for prior reviews and allow for bidders from all countries to participate in local biding, and an obligation for a rolling 18-month Procurement Plan. Inorder to review all procurement activities below the prior review threshold BANOBRAS should have adequate procurement and financial management (FM) staff. Financial Management. WB loan funds will flow from the loan account to a Special Account (SA) in Mexican pesos managed by BANOBRAS6, with expenditure also reported in Mexican pesos. States will be allowed to receive an initial advance on the loan based on an expenditure forecast, after which further advances must be triggered by output achievements. Under the report-based disbursement method, the application for loan withdrawal will be supported by a Financial Monitoring Report (FMR) prepared by the state. The FMR will include (i)the financial statement for the sector investment program; (ii) a report on project outputs including the benchmarked unit costs for these outputs and the resulting amount of additional advances the state i s currently eligible for; (iii) a narrative status report; and (iv) any required procurement information. It will also include any additional information that may be required to allow the Bank's Disbursement Division to record the documented expenditures (Le. expenditure information consistent with the format of Schedule 1of the loan agreement). Once states provide the required information demonstrating the financial activity and outputs achieved during the period and cumulatively, BANOBRAS will review this information, add additional documents such as the withdrawal application form and Special Account reconciliation, and submit this package to the World Bank. Within the World Bank, the application will be received by the Loan Department (LOA), but review of the FMR and approval of the disbursement amount will be the primary responsibility of the task team leader (with input from relevant members of the team). Upon receiving the pesos from the World Bank, BANOBRAS will disburse the appropriate amount of funds to the states7. Inthis way the FMR will serve as a monitoring tool, while supporting the amount advanced and additionally documenting the expenditures made. Counterpart funds will be represented, in the Sources and Uses of Funds statement of the FMR, by the funds provided by financing sources other than the BankBANOBRAS loan. On an annual basis, Guanajuato will prepare a program financial statement, which will be audited by the state's international audit firm. The financial activity to be audited will be the same as what i s included in the quarterly FMRs, which will be based on the activities covered in the agreed investment program (see Annex 15). The FMRs and audit report will need to demonstrate that the level of aggregate investment program spending exceeded the aggregate amount of loan funds received duringthe programperiod. Safemards. The Environmental and Social Manual in Annex 10 provides the methodology for determining each state's arrangements for materially satisfying the objectives of the Bank's applicable safeguard requirements. In general, the manual emphasizes substantial reliance on existing state environmental and social agencies to address the safeguards. Under the safeguard 'The only accountingindollarswould be that maintainedby the World Bank's DisbursementsDivision. States are responsible for transferringfunds to other subnational entities and for monitoringexpenditures intheseentities, in accordancewith their legalagreementwith BANOBRAS) 12 pilot approach for the first loan to SoG, the institutional and implementation arrangements for achieving the objectives of the safeguards will be based on use of SoG's environmental and social capacity to implement and enforce GoM and SoG safeguard-related laws and regulations. In particular, the Instituto de Ecologia del Estado de Guanajuato (IEG) and Secretaria de Desarrollo Social y Humano (SDSH) will be responsible for overseeing management of environmental and social safeguard-related issues, respectively. As part of the due diligence arrangements for this pilot approach, each agency will also closely monitor (using indicators acceptable to the Bank) and report to the Bank on the environmental and social management and outcomes of the state's sectoral programs. In addition, the Bank will conduct prior review of highrisk subprojects and intensivelysupervise the program. 9. Monitoringand evaluation of outcomes/results Procurement. The Borrower will prepare a Procurement Plan, that will be updated annually and that it will include the next 18 months of project implementation, satisfactory to the Bank and will establish procedures for monitoring project execution and impact, procurement implementation, including monitoring of contracts. Each state and BANOBRAS will maintain detailed records of procurement activities, and will include summary schedules in the quarterly FMRs (see below). Based on the overall risk assessment of each state, aperiodic post-review missionfor the state shall be completed at least once a year, covering not less than 1in20 contracts signed. Financial and Output Monitoring. Each state will require to prepare a FMR which will include: (i) financialstatementsforthesectorstrategydetailingsourcesoffundsandexpenditures basic by component, (ii) output monitoring reports detailing program achievements, (iii) current the procurement lan and implementation status; and (iv) any additional reports as required for loan disbursement . Counterpart funding will be monitored via the review by BANOBRAS of B financial statements of the state, including the annual audit reports. The information reported in the FMRs would be verified by the joint supervision efforts of BANOBRAS and the Bank, as well as by the project's financial auditors and reviews by technical experts. Safemmrds. Participating states will closely monitor, using policy specific outcome indicators acceptable to the Bank, the safeguard aspects of their sectoral programs based on the procedures determinedthrough application of the ESMF. In the case of SoG, IEG and SDSH will oversee monitoring of environmental and social safeguard-related issues, respectively (see Annex 10for details) and report their findings to the Bank on a biannual basis. In addition, the Bank will conduct biannual supervision missions, focused on outcome-oriented reviews of high risk subprojects. On an annual basis the Bank, IEG, SDSH and BANOBRAS will evaluate the effectiveness of the pilot approach and make appropriate enhancements. IEG or SDSH will alert the Bank in a timely manner of any changes in policy or implementation capacity that could significantly affect the state's treatment of safeguard-related issues. See the Institutionaland ImplementationArrangements (Financial Managementsection) and Part 10of Annex 17 (ProgramOperating Regulations)for further details onproject financial managementandmonitoring. 13 10. Sustainability The main challenge is the need to address structural, performance or economic efficiency problems experienced in a number of individual sectors. The Program and the project directly address this issue. Guanajuato's proposed sector strategies are the product of an extensive consultation process, describing the expected goals to be achieved during the 2004-2006 period and are consistent with the sector strategies at federal level. The proposed strategies are the second-phase of the six-year plan that GoSG launched in 2001. Support to investment needs, structural reforms and sustainable development of key infrastructure sectors in SoG can be expected to yield substantial benefits in terms of economic growth, productivity and competitiveness as well as improvement of basic services to the poor, their standard of living and ability to participate more effectively in economic activities. Ownership i s ensured as sector strategies respond to the local needs and priorities, with high priority to achieving sustainability ineach sector (e.g.maintenance of infrastructure, financial sustainability, etc.). 11.Criticalrisksandpossiblecontroversialaspects Three main areas of risks, which could hinder the success of the Program in this phase, have been identified. First, the Program i s rather ambitious in attempting to cover the varying needs of decentralized constituencies while achieving some important breakthroughs in the design of an appropriate instrument to do so. The design incorporates: coherent and well integrated state development strategies to meet the specific needs and priorities of individual states, communities and sectors; promoting full ownership of such programs; use of broad sector-wide approaches which imply application of agreed financial management, procurement and environmental and social safeguard policies and procedures to entire sector investment programs regardless of the financing sources; a synergistic combination of policy and institutional reforms with effective implementation of investment programs via an output and results oriented disbursement modality; and flexibility to smooth out the financing program patterns over the medium term depending on the state's overall resource position, by explaining fully all these principles. Including the applicable fiduciary and safeguard principles and their expected long term positive impact, the Bank has minimized these risks. The second risk is that political developments inMexico may prevent effective implementation of the reform and development strategies envisaged under the Program. Mexico is in the midst of an evolving democratization process within the context of an increasingly well-balanced multi-party system. One result of this i s that political developments and expediencies that may be demanded by the needto forge a political coalition amongst different parties are difficult to forecast. This risk is mitigated to some extent by the fact that the Bank would be working at the state level. The governing administrations inthe participatingstate would be the principal authors of the proposals for individual state sector reform and development programs, and therefore are likely to incorporate their assessment for what i s politically feasible duringtheir administration. The third risk is that the legal and institutional frameworks and capacities deemed adequate at project approval could fail to demonstrate continued capacity or could be impaired through law or policy changes. This risk would be mitigated through the condition that in the case of any substantive change in state or national law, regulation or standard dealing with environmental, social safeguards or other issues, SoG will, for all subprojects implemented as part of the Bank 14 supported sectoral programs, continue following the norms of the previous laws, regulations or standards unless the change i s discussed with the Bank and the loan agreement and/or Operating Regulations are amended accordingly. 12. Loadcredit conditionsand covenants Itwould be an effectiveness condition for the loanthat the Agreement between BANOBRAS and SoG replicate the arrangements requiring SoG collaborating in meeting the Borrower's obligations with the Bank. Submission of the Borrower's ESM, Operating Regulations and procurement plan to SoG would be additional effectiveness conditions. In addition, for the Low Income Housingcomponent, completion of IVEG's institutional reform (See Annex 4), would be a disbursement condition for the remaining resources. C. APPRAISAL SUMMARY 1. Economicandfinancial analyses Being a broad-based swap covering a wide range of priority investments in each sector, a framework-type approach i s appropriate. Since the sector strategies will comply with the sector eligibility criteria, which in itself focuses on those elements considered to offer high economic rates or return, it i s expected that the majority of the expenditures in each strategy would offer substantive economic benefits. For example in the case of roads, preventive and routine maintenance and rehabilitation investments are known to yield economic rate of returns higher than expansion: using the HDM-4 model will allow project screening to prioritize investments for high Net Present Values (NPVs). Inthe water and sanitation sector, concentrating investment in increasing access to water supply and sanitation services in rural and peri-urban areas, and improving operational efficiency of service providers, reducing water losses, improving billing and collection systems and improving financial sustainability of operators could generate high economic and financial returns, including major health benefits. All institutional strengthening measures and TA from the state to the service providers and municipalities haves been identified to yield high economic returns. Further use of the existing benchmarking system by CEAG will also help prioritize investments, and provide incentives for water utilities to improve operational and financial efficiency and service quality. Specific investments have been identified, such as wastewater treatment plants and highway capacity expansion, for which appropriate cost- benefit or least cost analysis would be perform to ensure at least a 12% rate of economic return. Approximately 68% of the State's population earns three minimum salaries or less, putting them out of range for most of the traditional housingassistanceprograms and accentuating the need of efficient subsidy channeling. 2. Technical Road Transport. SoG has about 11,280 km of roads, of which about 2,600 km (or just under 24%) currently fall completely under the state's jurisdiction and that are managed by SOP. About 2,071 km of the latter roads are paved and of these a total of 60% i s in good condition, 10%fair to poor, and the remaining 30% need to be rehabilitated. Most of the remainder of the non federal roads in the state are in fair to poor condition. The state roads network i s distributed 15 unevenly across the state, with coverage that i s somewhat limited overall and extremely so in rural areas. On balance, currently it cannot provide the efficient, least cost surface transport linkages needed to improve the state's relative competitiveness and to serve the needs of poor rural communities adequately. Water Supply and Sanitation. Guanajuato is among the Mexican states with the worst conditions of water scarcity, with aquifer over-exploitationresultingfrom higher water demand than supply. There i s a 16% deficit between extraction and replenishment of aquifers mainly due to the fact that 99% of water for human consumption and 83% of water for irrigation originates from subterranean sources. With about 92% water supply and 75% sewerage coverage Guanajuato i s slightly above the national average. Small town and rural areas, however, have 77% and 60% water and sewerage coverage respectively. More than half of the water utilities cover the inefficient operational costs, which have had a direct impact on the financial capacity of providers and their inability to expand the network. Low-Income Housing. Housing i s a pressing issue for SoG, which has an estimated lag of 180,000 units. Urban housing for low-income populations i s particularly important since it has the third highest urban population in the country with relatively well dispersed amongst 11 medium and large size cities. In addition, it i s estimated that about 1520% of the state's urban populationlive ininformal settlements. 3. Fiduciary Procurement. Mexican federal procurement law mandates that any procurement that includes federal funds or federal guarantee must be carried out under federal law. The Bank and GoM have agreed to procurement arrangements more efficient and progressive than those prevailing at state levels. It i s expected that by adhering to the agreed federal arrangements, the overall standard of procurement practices at state level would improve. Consequently it was agreed that everything at the National Competitive Bidding (NCB) will be according with the Mexican Federal Procurement Laws; ICB, and consultant services will follow Bank guidelines. Consistent with the procurement arrangements for the Program as described in Annex 8, the Bank has prepared a State Procurement Assessment for SoG concluding that the risk is average and consequently the thresholds for prior review are as follows: Prior Review Threshold (US$) Works 5,000,000 Goods 500,000 ConsultingFirms 350,000 ConsultingIndividuals 100,000 Financial Management and Disbursements. Consistent with the principles of SWAps, the DIRD will allow for the use of existing government financial management arrangements, thus minimizing any additional program-specific requirements. The existing arrangements for SoG have been assessed and the necessary capacity buildingmeasures incorporated as part of the TA Program Additional information regardinggeneral program, FMand disbursement arrangements i s included in Annex 7. 16 For SoG, an assessment was carried out of the state-level financial management institutions and systems, as well as FM arrangements in the three entities that will participate in the Program. The main conclusion was that the state has established sound mechanisms for maintaining control over state funds while also ensuring agility in its processes. Information systems and external audit arrangements (a private, international auditor audits state finances annually) stood out as particularly impressive. The state follows local accounting standards which are generally compatible with the federal accounting standards for the sector. The assessment's key recommendations for capacity building were in the areas of financial and program planning and infurther improvingthe state financial informationsystems. With regard to the three entities, the financial management of CEAG and SOP is considered to be satisfactory, especially because of their strong linkage to the state-wide systems. IVEG, however, was considered to have some significant capacity gaps, including in terms of adequate numbersof personnel, who is beingaddressedas part of the specific housingcomponent. 4. Social. The social risks associated with state programs will vary according to the sectoral strategies, management capacity, and social characteristics (e.g., nature of indigenous population) of each state. In most cases, state programs are expected to include some subprojects that may require involuntary resettlement. Correspondingly, the Environmental and Social Manual (ESM) in Annex 10 provides a methodology to be applied to each state for determining appropriate institutional and implementationarrangements for addressing safeguard-related social risks. For the first loan to SoG, social safeguard-related issues will be addressedthrough a "safeguard pilot" approach with the Bank using GoM and SoG legal frameworks' to materially satisfy the objectives of certain of the Bank's environmental and social safeguard policies. As outlined in Annex 10, this pilot approach is based on: (i)comparison of the Bank's safeguards and GoM a and SoG legal frameworks; (ii) assessment of SoG regulatory and institutional capacity to an implement and enforce GoM and SoG safeguard-related laws and regulations; and (iii) identification of SoG institutional arrangements, procedures for Bank prior review of subprojects, capacity strengtheningmeasures, and monitoring and reporting requirements. As describedinAnnex 10,socialsafeguardsissuesinthe firstloanwill begenerallyaddressedas follows: Involuntary Resettlement: Several types of subprojects included in SoG's sectoral strategies could require resettlement. As explained in Annex 10, SoG will develop and follow good practice procedures for all resettlement plans based on one of the state's good practice examples, which the Bank's review i s fully consistent with the requirements and materially meets the objectives of OP 4.12, including consultation and participation of affected population, assets and land compensation at market prices to legal occupants with and without titles, and restoration of livelihoods. SDSH will be responsible for ensuring the application of these procedures. For due diligence purposes, SoG will also develop procedures to identify any subproject that could For the purpose of the ESM, "legal framework" includes all laws, regulations, decrees, standards, and practices identified during appraisal as related to the safeguard policies. 17 require resettlement, by sector. Subprojects that are so identified will be forwarded by the sectoral agency to SDSH for further screening. If SDSH finds that the subproject has the potential for resettlement of more than 200 persons it will forward the subproject to the World Bank for review. Indigenous Peoples. There are no significant discrepancies between GoM's and SoG's legal frameworks and the Bank's Indigenous Peoples Policy (OD 4.20). SoG's DlRD program is not expected to trigger OD 4.20 because Guanajuato does not have a large indigenous population, and the state's DIRD program, which i s focused on enhancing competitiveness, does not include any subprojects, which have beendetermined to have potential effects on indigenous people. The state does address indigenous peoples issues through the state Indigenous Peoples Committee, and current practices assessed during preparation are acceptable. Nevertheless, for due diligence purposes, SoG will develop procedures for screening by sectoral agencies to identify any subproject that could affect indigenous people. Subprojects that are so identified will be forwarded by the sectoral agency to SDSH for further screening. If SDSH finds that the subproject has potential impacts on indigenous people it will forward it to the World Bank for review. 5. Environment As with social risks, environmental risks associated with state programs will vary according to the sectoral strategies pursued, management capacity, and social characteristics (e.g., nature of indigenous population) of each state. Most environmental risks are most likely to be related to the construction or operation of civil works subprojects. As described in Annex 10, environmental safeguard-related issues will be generally addressedin Guanajuato as follows: Environmental Assessment (EA). All types of subprojects included in the sectoral strategies to be supported through the project have been pre-screened for risk, and specific institutional arrangements and procedures have been set forth for those subproject types. These due diligence procedures are designed to ensure that existing GoM and SoG environmental laws and regulations, deemed to be an adequate surrogate for achieving the objectives of the Bank's Environmental Assessment Policy (OP 4.01) are systematically applied to all subprojects in the selected sectors. The procedures call for the state environmental agency, IEG, to oversee application of EA laws and regulations. In addition to ensuring that applicable EA laws are complied with, IEG will be responsible for flagging high risk projects to the Bank (i.e., Type I11 projects as described in Annexes lo), and guaranteeing that additional EA procedures (site screening) are implemented in those high-risk projects. IEG will also be responsible for providing updatesto the Bank. Natural Habitats. IEG i s responsible for ensuring that subprojects do not adversely impact any critical natural habitat areas (as per OP 4.04, these include existing and officially proposed protected areas, as well as other sites of high conservation value). This i s done within the context of a very strong state protected areas system; including 16 such areas legally established (including a RAMSAR site) with an additional six under development. This protected areas system i s considered adequate to mitigate any long-term cumulative impacts associated with the state's infrastructure development program on other non-protected natural habitats areas. Harm to non-protected natural habitat areas i s also addressed by the SoG environmental assessment process, which requires that potential adverse impacts to natural habitats be identified and 18 avoided or mitigated. Additionally, all subprojects with significant potential environmental risk (Type I11projects) will be screened to ensure that the Bank has an opportunity to recommend measures to minimize and/or mitigate any adverse impacts to non-critical natural habitats. Safety of Dams. CNA and CEAG are responsible for overseeing the development of all dams within the state of Guanajuato. Given their capability to ensure adequate oversight of dam safety- related issues, the Bank will oversee only dam projects greater than 15m in height. The existing state procedures are considered adequate for smaller dams (c15m). Cultural Property. Cultural property-related issues will be addressed using existing state systems, as they are consideredhighly adequate. InGuanajuato, cultural property is addressedthrough the SOP'S restorationunit (Direccidn de Restauracidn de Monumentos), which i s responsiblefor identifying and mitigatingany potential infrastructure-relatedimpact on cultural property. Incase of chance findings SOP will ensure that INAHis promptlynotified andinvolved inthe protection processes. 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No ~ Environmental Assessment (OP/BP/GP 4.01) [XI [ I Natural Habitats (OP/BP 4.04) [XI [ I Pest Management (OP 4.09) [ I [XI Cultural Property (OPN 11.03, beingrevised as OP 4.11) [XI [I Involuntary Resettlement (OP/BP 4.12) [XI [ I Indigenous Peoples (OD 4.20, beingrevised as OP 4.10) [XI [ I Forests (OP/BP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [XI [I Projects inDisputedAreas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OP/BP/GP 7.50) [ I [XI 7. Safeguard Policy Aspects and Readiness As one of the first pilot projects proposed by Bank management to rely on country systems for addressing project safeguard issues, the project raises a number of novel issues with respect the application of Bank safeguard policies. With these factors in mind, the Bank undertook a thorough evaluation of the safeguard rules, procedures and institutional capacities of the State of Guanajuato as part of project appraisal. It then assessed to what extent the use of the local framework would materially meet the objectives underlying the relevant Bank policies and thus be used for purposes of project safeguard compliance. Where discrepancies were detected between the local framework and the objectives of Bank policies, commitments were obtained from the Mexican authorities to supplement their framework with steps that would serve to meet materially those objectives. Those steps are contained in an environmental and social manual for the project, compliance with which (together with compliance with the local framework in general) i s a covenanted condition of the legal agreement between the Bank and the Borrower. The assessment of the local framework in * By supporting theproposed project, the Bank does not intend to prejudice thejkal determination of the parties' claims on the disputed ureas 19 terms of materially meeting the objectives of Bank policies i s set out below Also detailed in Annex 10 are the supplemental steps agreed with the local authorities to cover those instances where the local framework was deemed not to meet Bank policy objectives in a material way. Environmental Assessment. While OP 4.01 requires analysis of alternatives during the process of carrying out an environmental assessmentfor Category A projects, Mexican law does not specify this requirement. InSoG these alternatives are instead evaluated inthe feasibility stage analyses. Additionally, the World Bank requires consultation during the preparation of the EA. SoG follows the GoM approach of conducting public hearings at the request of interested parties, rather than as a mandatory step in the EA process. The significance of these policy differences will be evaluated through intense monitoring and supervision. Natural Habitats. The Bank's OP 4.04 requires compensation for projects that result in significant impact to non-critical natural habitats, while Mexican law does not. However, the strength of SoG's approach to natural habitats minimizes the significance of this discrepancy. First, the state has a robust and vibrant protected areas system (managed by IEG) that continues to make significant advances toward long-term preservation and management of sensitive ecosystems. SoG's EA process also requires potential adverse impacts to natural habitat areas to be identified and avoided or mitigated. Safety of Dams. OP 4.37 requires a panel of experts and other related assessments prior to construction of large dams (defined as those greater than 15minheight). For smalldams, generic dam safety measures are designedby qualified engineers. Current Mexican practice uses highly qualified dam specialists through CNA and CEAG. Additional measures are required for projects that rely on existing dams. However, in Guanajuato, none of the proposed sectoral projects involve existing dams or construction of large dams. If a subproject i s proposed for a large dam it will not be included in the pilot approach, and instead will be flagged by IEGto the Bank for prior review and clearance to ensure compliance with OP 4.37. Involuntary Resettlement. The key economic objective of the Bank's OP 4.12 i s to improve or restore the incomes or standards of living of all affected people, regardless of the legality oftheir land tenure. There i s no single Mexican or SoG law specifically addressing resettlement, and some aspects of the Bank's OP 4.12 are not fully reflectedinthe existing Mexican laws. Neither has SoG issued specific state laws or regulations that more precisely define how resettlement will be addressed. However, as a matter of non-codifiedgood practice, SoG has demonstrated a capacity to undertake resettlement activities in a manner consistent with the requirements of OP 4.12, including consultation and participation of affected population, assets and land compensation at market prices to legal occupants with and without titles, and restoration of livelihoods. As explained inAnnex 10, SoG will develop and follow good practice procedures for all resettlement plans basedon one of the state's good practice examples, which fully complies with the requirements of OP4.12. SDSH will be responsible for ensuring the application of these procedures. For due diligence purposes, SoG will also develop procedures for screening by sectoral agencies to identify any subproject that could require resettlement. Subprojects that are so identified will be forwarded by the sectoral agency to SDSH for further screening. If SDSH finds that the subproject has the potentialfor resettlement of more than 200 persons it will forward the subproject to the World Bank for review. 20 Annex 1:CountryandSector or ProgramBackground MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoanReform andDevelopmentLoan The macroeconomic gains that Mexico has achieved in the recent past need to be protected and consolidated through continued expenditure discipline, strengthening of the fiscal accounts, decreasing reliance on oil-based revenues and sound management of public debt, both federal and sub-national. At the same time, the country needs to increase investment that can bring some near term gains while building the foundation for long term competitiveness. There i s a large array of factors that can contribute to a country's competitiveness. Chief among them are improvements in infrastructure, logistics, innovation, financing mechanisms, labor market and human capital. The GoM has rightly sought to foster the needed improvements through a decentralized mode in order to promote regional development. The various infrastructure sectors have experienced decentralization in an uneven way. Below i s a summary of the situation prevailing in Mexico, and in particular in SoG in each of the sectors includedin the proposed loan. RoadTransport Mexico's highway system consists of about 302,000 km of roads, of which about 49,000 km are classified as federal roads and for which SCT has primary responsibility. The states have full jurisdictional responsibility for some 83,000 km of roads; though this figure i s scheduled to increase as federal decentralization of the road network proceeds. Control and responsibility for the approximately 170,000 km remainder, classified as rural roads, i s shared by the municipalities, the states, Comisio'n Nacional de Caminos Alimentadores y Aeropistas (CONACAL), the National Feeder Road and Airstrip Commission Trust -- really an SCT dependent parastatal -- and the federal Government. However, the federal Government intends to transfer responsibility for about 22,000 km of the secondary links in its trunk network and all of its share of the rural road network fully to the states and municipalities. Hence at the end of the decentralization process the federal SCT will be responsible for only about 27,000 km of trunk national roads and the vast majority of the network, comprising a mixture of today's federal secondary, state, and rural roads, and totaling about 275,000 kmwill be managedby the state and municipal governments. This responsibility will represent a major challenge, as these are institutionally weaker levels of government. The breadth and depth of that challenge will to some extent be mapped out in the near term by Bank experiences with the proposed first state level roadprograminMexico. The GoM has formulated a strategy to improve the country's road transport system in line with the need to maintain country competitiveness. In brief, the strategy seeks to: (a) encourage greater decentralization of responsibilities to state and lower levels of government; (b) support institutional reforms required at all levels of government for the development of better road management practices - especially with regard to maintenance; and (c) focus investments on the rehabilitation and maintenance of the existing network, as well as on connecting poorly served localities to the roadnetwork. 21 Inthe case of Guanajuato, there are about 11,280 kmof roads inthe state of which about 2,600 km (or just under 24%) currently fall completely under the state's jurisdiction and are managed by SOP. About 2,071 km of the latter roads are paved and of these a total of 60% are in good condition, 10% fair to poor, and the remaining 30% needto be rehabilitated. Most of the remainder of the non federal roads in the state are in fair to poor condition. The state roads network i s distributedunevenly across the state, with coveragethat is somewhat limitedoverall andextremely so in ruralareas. On balance, currently it cannot provide the efficient, least cost surface transport linkages neededto improve the state's relative competitiveness andto serve the needs of poor rural communities adequately. As summarized below, this results from the many roadtransport issues at the state and municipal levels that have been left un-addressedduringrecent years as the emphasis has been on completing the federal decentralization program. The mainissues to be considered are described below. Planning/ programming/ budgeting (PPB) cycle. Planning i s undertaken largely in relation to preparing annual investments for items included inthe state's Six-year plan. No formal economic analysis methodology i s used although, given the traffic levels and relatively short travel distances, many of the projects in Guanajuato state could probably pass minimumeconomic rate of return hurdles. However the state does not really prepare multi-year road transport improvement programs that can be considered as balanced as the plans lack adequate provisions for maintenance, both in terms of its institutionalorganization and its financing arrangements. To remedy this situation, the state needs to develop further its capacity to plan and rank investments interms of their economic priority and the Government's strategic goals, while paying adequate attention to their environmental and social aspects. This will require strengthening of the planning divisions, training of staff in the use of the Highway Development and Management Model (HDM) and other planning models, and the development of true annual and multi-annual road improvement programs. Some of the groundwork i s already underway as the state has contracted with the University of Guanajuato to use the Bank's HDM3 model inthe development of the initial phases of a Pavement Management System (PMS) for the 2,071 km of core state roads. This assistance involves primarily analyzing and determining roughness indices and the condition of paved roads, as well as the completion of user surveys and ranking of roads interms their level of service. Lacking are provisions for the training of SOP staff, the developing of a consistent framework for maximizing private sector participation, and the establishment of a rational planning capability in SOP. Also needed i s sustainable further expansion to prepare economically prioritized investment programs and develop budgeting models that can optimize the tradeoffs between expenditures for rehabilitation versus maintenance. A more efficient annual PPB cycle would enable SoG to promote least cost approaches and well-functioning transportation networks. The state would thus be in a position to promote balanced road improvement and maintenance plans that have sound economic underpinnings. Need to optimize institutional arrangements: The roads in the state are being managed by three very dissimilar levels of government (federal, state and municipal government) which ostensibly are pursuing the same objectives but with an inappropriate division of resources and responsibilities and also a lack of an effective forum for designing indicators, measuring results, and addressing deficiencies. To too large an extent, the institutional framework instead features an unclear division of labor between the national government and the state government and a 22 diminished role for policy coordination. For example, most revenues collected from the transport sector (taxes on fuels, spares, etc.) accrue to the Federal level and there i s even mention of an additional surcharge to be levied for a Road Fund, but there i s no transparent mechanism for the reallocationof resources to state and local levels. This i s among the reasons why decentralization of the road network i s proceeding slowly as Guanajuato and other states decline to accept additional responsibilities without the commensurate resources needed to carry them out. There i s a need to develop a comprehensive strategy for road network transfers, including decentralizing and deconcentrating functions. A major task here will be for SOP to develop the criteria, jointly with the Federal and Municipal governments, for the completion of the transfer of SCT secondary road network in Guanajuato state. Attempts in the past to decentralize these roads, which total about 631 km and are dispersed widely in the state, have been incomplete, leaving maintenance to an agency that does not fully own the roads. Strengthening plans for management of existing. roads in the state. Road transport i s by far the dominant mode of transportation for both passengers and freight in Guanajuato. However, the combination of the limited extent of the state managed portion of the network (2,071 km) and the poor condition of the other roads in rural areas (managed largely by very weak municipal governments) results in higher costs to the state's economy and serves as an impediment to sustained growth. The poor condition of rural roads in the network resulted from the slow and discontinuous decentralization process, undeveloped planning and budgeting cycles, lack of understanding of the roles that periodic and routine maintenance could play in a road's life cycle costs, as well as earlier years of neglect which continues today for rural roads. There is clearly room to improve the road network's ability to support efficient economic growth. This i s particularly true as more states that are distant from the United States of America (USA) border like Guanajuato are trying to compete with their more northern neighbors to attract maquiladora type industries or to export their fruits and vegetables. In response to this situation, the state will need to take steps to formulate and implement comprehensive road improvement programs. The SOP is actually doing a goodjob now for the officially managed portionof the network (2,071 km) with its program of routine maintenance by contract. The next step should be to introduce periodic maintenance programs and to carry out major rehabilitation works on the 30% of the state- managed network that has exceeded its useful life and has deteriorated. This requires developing the state's SOP'Scapacity to carry out condition inventories of the roads, design and implement annual and multi-annual routine and periodic maintenance programs, as well as to seek least cost solutions to technical and engineering problems associated with road and bridge maintenance. These steps should be accorded priority in the state's plans to increase its managed network by buildingnew roads during the Sexenio. Doing so would help to address some of the high priority needs of the state andremove some of the impediments to sustainingthe ongoing economic growth of the state. Addressing these issues should be accompanied by TA to develop SOP'S capacity to promote the development of the local construction industry. Water and Sanitation Mexico has an integrated water management scheme: GoM owns all water sources, with main functions including the assignment of water rights, charging for water extraction, controlling water contamination, irrigation management and water pollution abatement control. These functions are housed at CNA, a de-concentrated institution under Secretaria de Medio Ambiente 23 y Recursos Naturales (SEMARNAT), the environment Ministry. Recently Congress passed a Decree adjusting the Water Law, geared at further de-concentrating and decentralizing CNA's function to the state level. Since, constitutionally the water supply, sewerage and wastewater treatment services are entirely a municipal responsibility, the role played by the federal level in the sector i s discrete, mainly regarding overall planning, programming and follow-up, funding via credit lines, disaster management and direct interventions in critical cases, and facilitating and promotingreforms. The Federal Government's objectives for the management of water resources are clearly defined in the Plan Nacional Hidrdulico (PNH) and the Plan Nacional del Medio Ambiente y Recursos Naturales (PNMA), that are part of PND for the period 2001-2006. For the medium term, the government established a specific water and sanitation sector program - Programa Sectorial de Agua Potable, Alcantarillado y Saneamiento 2002-2006 - which is the main guiding instrument for policy reform and federal investment programs. A number of targets have been defined by the Federal Government to be reached by the end of 2006. Inparticular, the strategy aims to raise national coverage levels to 89% for water, 78% for sanitation, and 65% for collected wastewater which i s treated. In 2000 national coverage levels were 87.8% for water and 76.2% for sanitation, but rural coverage levels were significantly lower (68.9% for water and 37.5% for sanitation). Although states have a less clearly defined formal role regarding water provision and sanitation, varying according to their respective State Water Law, they can, and in several cases do play a very important role through significant investment and TA programs, influencing sector development and reform in medium and small cities and, in particular assisting municipalities to achieve tariff adjustments, since the State Congress has the last say in this matter. Potentially the role of the states can be crucial inmoving any modernizationand structural reform agenda. As a result of the country decentralization agenda in the mid 90s, municipalities have been formally responsible for the provision of water and sanitation services. Most large and medium size municipalities provide these services via water utilities, which are semi-decentralized for operations but their management and key decisions (tariff setting for instance) are heavily dependent on the municipal administration. Ina few cases, municipalities have delegated to Sate agencies the service administration. Most small towns have water "juntas" which fall within the municipal organizational chart. Two key issues that are hampering the development of the sector at the local level are worth noting and explained below: incomplete decentralization and low cost recovery Incompletedecentralization. Decentralization of the water and sanitation service, a constitutional mandate, was a big step in the right direction. However, the process did not provide sufficient guidance and support to municipalities many of which were just not ready to assume this new responsibility. Decentralizationmeant "municipalization" and the notion that direct involvement rather than a commercially oriented and autonomous enterprise prevailed. Inmost cases, this has meant that the service has been captured by local politics, with administrations lasting at most three years and often times much less. Despite the move in recent years towards autonomous 24 water utilities, most of them depend heavily on the municipalities that continue to own the assets and influence tariff-setting. This has resulted in utilities depending largely on subsidies, in many cases even for operation, therefore incapable of self sustainable development. Since the decentralization model did not include a federal economic regulatory framework for service provision, the federal level can norm quality standards (such as wastewater disposal) but cannot interfere in service provisionper se. Low financial equilibrium. Tariffs for water and sanitation inMexico generally don't recover full costs and in many cases not even the operational costs. The main reason i s that traditionally, tariffs adjustments have been captured by politics. Tariffs are usually proposed by the utility, filtered through the municipal administration, and the city council and formally approved by the State Congress. In many cases, the main final criteria relates to the maximum percentage increase that i s politically viable, instead of the degree of cost recovery needed to provide efficient services for all. In most cases operational cash flows of utilities make up only a small fraction of the total investment requirements, probably explaining the timid private sector involvement in the sector so far. The federal level PNH proposes achieving greater efficiency andhigher levels of cost recovery. Guanajuato faces among the worst conditions of water scarcity within Mexico. Not withstanding this, the state has been playing an increasingly important role as facilitator for sector development where CEAGhas ledthe water sector development inthe state, providingTA to the municipalities covering operational issues such as reductionof unaccounted for water and design of appropriate technical solutions. Overall, CEAG i s one of the most innovative and dynamic state water commissions in Mexico. Yet, important issues prevented it from movingthe sector at a faster development pace. Key issues: Low Service Coverage in rural areas. Although, water and sanitation coverage in most urban areas of the State i s adequate, rural areas show major gaps especially in sanitation. Lately, attention has greatly increased with government and state programs directed at the rural areas, which include the right set of policies: demand driven approach, community participation including cash contributions, operations cost recovery and use of appropriate technologies. However, increased efforts along these lines are needed to cover the gap and get close to the planned targets. Wastewater treatment. Given that most of the state lies in the ecological sensitive Lema- Chapala water basin, Federal penalties for lack of wastewater treatment are high.Previous plants developed under Build, Operate and Transfer (BOT) contracts have gone through financial difficulties and some of them have been abandoned. In order to avoid a repetition of this problem, certain deficiencies inthe design and use of this plants, e.g., better collection of sewage and more effective use of recycled water for productive purposes and more effective sludge removal, should be undertaken to make these plants financially more sustainable. Adequate operation and maintenance (O&M) of the plants impose a major financial burden in the utilities, and given the low tariffs and cost-recovery levels, the design requires appropriate least-cost solutions that take into account not only investment but O&M, to make them sustainable investments inthe long-run. 25 Sub-optimal allocation of funds. The State has made important advances in allocation of funds, mainly by improving project identification and design, and by developing a formula based allocation mechanism, geared at favoring poorer municipalities with larger per capita grant funds. However there are still efficiency problems. On one side funds are allocated mainly within the principle of equality -everybody gets something- and allocation i s not linked to integrated projects. This allows for fund dispersion and pulverization. CEAG has begun to issue master plans and already has collected a few from main cities. However, since budget has not been allocated in a multi-year basis but rather just for the year, the tendency i s to contribute to small projects that can be accommodated within the same year. Moreover, a big portion of project cost . can be currently applied to municipal projects different than those sponsored by the State, dispersing investments even further and making it difficult to follow-up on actual counterpart investments. CEAG can make use of its financial leverage inthe allocationof funds to utilities or municipalities by insistingon filtering out low yielding projects and selecting sound ones. Pricing; of water and sanitation services. Water service has suffered from traditional low tariffs in Mexico which often barely operational costs. This leads to the lack of maintenance and poor service quality. Tariffs are proposed by the municipalities, with the state Congress final approval, are usually captured by political agenda and tariff increases are pegged to the maximum politically viable percentage increase for the current year rather than to reflect actual service cost. CEAG has recently begun efforts to improve tariff setting in the water sector by preparing tariff studies for the different service providers based on benchmarking performance across service providers, providing training and dissemination of good tariff policies and practices, and appropriate briefing session to the State Congress regarding liability of tariffs. Potential role of the State as a promoter of reform. The State has played an important role in supporting institutional strengthening of municipalities and water utilities, especially in project planning, design and construction, as well as in operations including leak detection, and more recently assistance in tariff calculation. CEAG needs to extend this TA to promote structural reform and financial sustainability of the water utilities. UrbanDevelopment andLow-Income Housing The first steps in decentralization of urban development projects were taken with the Solidarity Program managed by SEDESOL during the 1990s. However, for the majority of the program's funds had been exclusively federal, and states and municipalities mainly execute federal programs with funds earmarked for the different purposes. With the fiscal decentralization implemented in the 1990's, sub-national governments have substantially more freedom over these funds. The speed at which Mexico transformed itself into an urban country surpassed the planning and administrative capabilities of GoM. The cities are today, where as much as 85% of the country's GDP is produced, and coincidentally, cities are where two thirds of the country's poor live. Urban development represents an important challenge to Mexico's economic development: how to take advantage of the economies of scale derived from agglomeration while at the same time minimizing the social costs resulting from crowding and lack of urbanplanning. 26 At its peak in the 1980s, a third of Mexico's urban populationwas concentrated around Mexico City. This trend has since been reversed following the country's economic and political liberalization and the government's decentralization strategy. Today, Mexico City's metropolitan area accounts for less than 25%, as population growth has shifted to a second tier of cities, mainly in the central and northern states. Intermediate cities (between 0.5 and 4 million inhabitants) grew at more than 3% per annum i s the last decade, and now account for close to 40% of the country's urban population. The number of medium-size cities with 100,000 to 1 million inhabitants increased from 10 to 55, and i s likely to increase further as decentralization continues. This more balanced urban picture represents a positive trend since medium size cities are more easily managed and the benefits of economies of scale can trigger regional development and help to improve income distribution. Unfortunately, urbanization has also meant an increase in the urban poor. Thirty five million poor people live in Mexico's urban centers, or 64% of Mexico's poor. The three levels of government have to respond to the urban development challenge this represents in infrastructure services. SEDESOL estimates show that today two out of three urban centers in Mexico have levels of basic infrastructure coverage either low or very 1 0 ~ ' In.addition, 84% of Mexican ~ cities have less than 50% of pavement coverage and 58% of the solid waste generated by cities with 50,000 inhabitants or more remains untreated. Although overall access to services in urban areas throughout Mexico i s relatively high, there are wide variations amongst states and even within cities; inparticular, wide differences exist between city centers and their periphery. As local authorities are unable to cope with the increasing demands for adequate land, infrastructure and security services, the population resorts to irregular settlements and slums in the outskirts of the cities, mostly in areas not well suited for human settlement or that represent an adverse environmental impact. Today 40% of the informal settlements are in mostly on "ejido" - communal - land. Despite constitutionalreforms during the 1990s to incorporate ejidos into the real estate market, the procedure remains unpractical and allows for a single-type of urbanization solution, effectively creating a rigid constraint to the legal expansion of cities. Around 95 thousand hectares would be needed to satisfy urban development demands by 2006. A strategy that responds to this challenge would need to include schemes to identify adequate land, provide the necessary urban services and incorporating it into the market wherever its needed, while at the same time managingthe existing urban infrastructure (regular and irregular) inamoreefficient manner. At the federal level, SEDESOL assumes the responsibility of urban planning, preparing six-year urban development and housing sector plans". Most urban development activities have been delegated to the municipal level, although in practice, states continue to dominate urban development activities mainly due to a lack of institutional and economic resources at the municipal level and also because often urban areas expand beyond the borders of a single municipality. Most states typically retain powers to promulgate laws that regulate human lo SEDESOL ranks cities on the basis of the ratio of the number of private houses covered by three basic services: piped water, access to electricity and sewerage relative to the total number or private houses: Between 1.00 - 43.9% Very low; 44.0 - 63.9% Low; 64.0 - 75.4% Medium; 75.5 - 82.9% High; 83.0- 95% Very high " ProgramaNacionaldeDesanolloUrbanoyOrdenaci6ndelTemtorio2001-2006,ProgramaSectorialdeVivienda2001-2006 27 settlement and require.municipal and local authorities to prepare land use, zoning and urban development plans. However, in the absence of requisite capacities and funding, municipalities have been slow inpreparing such plans. The National Urban Development Plan 2001-2006 has three strategic objectives, to be implemented within a decentralized framework: (i)implement a national strategy of "ordenamiento territoriar' to maximize the economic efficiency of the Mexican territory; (ii) integrate a new National Urban System coherent with the regional development pattern observed andpromotinglivable andcompetitive cities; and (iii) the speed at which available landis increase incorporated to the territorial reservesinorder to satisfy housingand urbandevelopment needs. Perhaps the major challenge faced by Mexican cities i s the provision of low-income housing. Around 4.3 million Mexican families are under-housed, (of which 1.8 million correspond to new-housing needs and 2.5 million that have repairing and improvement needs). The current demographic trend suggests that by 2010 Mexico will have 30 million households, demanding an annual 730,000 new housing units per annum. Taking this into account, President Fox has set as a national target annual production of 750,000 housingunits per year by the end of this Sexenio. Inhousing, likeinmost infrastructure services, there are important variations between states. The state of Zacatecas, for example, may need only around 500 new units each year until 2010, whereas the figure for the State of Mexico for the same period i s around 150,000. Analysis of housing demand relative to household income statistics suggests that as much as 40.9% of housing demand corresponds to "basic" housing (households earning up to three minimum salaries who demand units of around 30m2). The cumulative housing demand for households earningup to five minimumsalaries or "social" housing (up to 45m2) i s almost 64%. A comprehensive strategy to tackle the most pressingissues should include: (a) Focus the government's role on regulation, planning and facilitating private investment, through an integrated strategy. The Mexican government has traditionally dominated almost all aspects of the housing sector. Today, regulation supports a single high standard of urban land -which municipalities are unable to finance and poor families are unable to purchase. The government's strategy since 2001 has strived to reverse this trend, limiting the role of the public sector within the housing markets, clarifying the institutional environment for land markets and urban development, reducing norms and standards that today make the market very rigid and allowing for legal low-cost options12. These reforms require greater decentralization and a more active role by state and local authorities over the transformation of rural to urban lands and should be coupled with efforts of the federal government to address tenure issues. For decentralization to increase efficiency, there needs to be good coordination amongst the different parties involved in the housing market. The sectoral nature of most of the traditional public housing funds and the low profile played by state housing institutes and other non-public institutions resulted in a lack of adequate coordination. To tackle this Transactioncostsrelatedto landacquisition, urbanization,constructionandtitling (Le. taxes, buildingpermitsandlegalcosts) havedecreased since 1992from a nationalaverageof 12.4% to 3.9% 28 problem the federal government created in 2001 the Comisidn Nacional de Fomento a la Vivienda (CONAFOVI) as a decentralized organization from SEDESOL to design, promote and coordinate the federal housing strategy. (b) Increasing the flow of private financial resources to the housing sector through the development of secondary mortgage markets and the return of commercial banks. The mainpublic housing funds (INFONAVIT, FOVISSTE), together control three quarters of the mortgage market and subsidize housing through lower-than-market interest rates mostly targeted to the formal sector working class, crowding out private investment, increasing the government's contingent liabilities and leaving a large portion of the population ~nattended'~.To increase liquidity in the housing market, FOVI - and its successor, National Mortgage Corporation (SociedadHipotecaria Federal -- SHF), have strived to develop and deepen primary and secondary mortgage markets in Mexico, granting credits to specialized housing finance entities called Sociedades Financieras de Objeto Limitado (SOFOLES), who in turn lend to individuals at market rates. However, since the best mix of housing solutions varies substantially by region, states and municipalities should be allowedto develop their own programs within the parameters set by the federal housing strategy. (c) Shift from implicit subsidies towards up-front subsidies and facilitate the diversification of housing products for the lower income segments. Without direct government support, households earning less than three minimum wages do not have access to credit. The government has designed a program to address this unattended sector through a demand- side, rather than an implicit subsidy. PROSAVI an up-front subsidy program, where the federal government contributes with a third of the value of the unit, while the State Housing Institutes (OREVIS) contributed with an urbanized lot (roughly equal to one third of the total value) and the remaining balance as a loan at the market interest rate to the final user through SOFOLES. In order to partici ate, the federal government requires states to allow for mortgage portfolio securitization . To this day 27 states are eligible to ,P receive federal funds for the program. Until August 2001 the total number of credits granted under this scheme was about 45,000, indicating that these program has been small relative the country's housing needs. Also, issues have been raised regarding the sustainability of funding. Given the bias of housing institutes towards new, developer-built units for the middle class, 40% of housing demand i s met through informal settlements, where units are gradually constructed and regularized over a period of 5 to 15 years. The government had tried to tackle this problem through VivAh - A subsidy program launched in 1998 targeted for households earningaround 2.5 minimumsalaries. The household provides an up-front payment roughly equivalent to 10% of the total unit value, the federal government channels through OREVIS as much as 45% of the value of the unit (of a maximum value of MXP$80,000) and OREVIS through their own resources provide a loan for the remaining balance. During 2000, the program provided grants to about l3This problem was aggravatedby the 1995 financial crisis; on average, commercial bankscontributed with lessthan 1% to the total numberof mortgage loans granted between 1995-2000 l4Most stateshadto modify their existing civil codes to allow for this provision. 29 26,000 households. One of the main concerns is a very low recovery ratio, since OREVIS are allowed to charge up to 15% of 2.5 minimum salaries per month for a term of no more than six years. The success of the decentralization strategy inrelation to urbandevelopment projects will largely depend on the extent to which state and local level priorities are taken into account in the design and execution of federal programs and assignments of specific expenditures (an item on which there are complaints from the states), efficiency of executing urban planning are urban development programs, and adequate community participationmechanisms. 30 Annex 2: Major Related Projects Financed by the Bank and/or other Agencies MEXICO: MX-Decentralized InfrastructureDevelopment ProgrammaticLoan The Bank i s also preparing national projects for Mexico in the sectors that are being covered in the proposed DIRD. In many ways the national strategies and institutional framework being discussed in each of he areas will have an important effect on the state level strategies being implemented by Guanajuato and possible future participating states and municipalities. In fact, the state level strategies for which support i s included under the DIRD are required to be consistent with the overall sectoral strategies proposed and approved at the national level. Among the major tenets of the national sectoral strategies are included a positive impact on poverty alleviation and enhancement of access and quality of infrastructure services to the poorer segments of the state population, good cost recovery and financial sustainability policies, economic viability, positive ecological impact, and reasonable private sector participation. In addition, the national strategies would typically include important areas of institutional and policy support and TA services from the national sectoral entities that could enhance the effectiveness of the states and municipalities in implementing their strategies effectively. The mainfeatures of the national sector initiatives are summarized below. A proposed National Highway Finance and Toll Roads Restructuring Loan is being discussed with the SCT and the Secretaria de Hacienda y Crkdito Pziblico (SHCP), to help improve the synergies between the key sector entities involved in the management of the toll roads programs (including private concessions that got into financial problems), federal roads maintenance and planned gradual decentralization of some of the state highways to state governments, and rationalize the efficiency, financial sustainability and division of labor among the entities. The proposals outlined therein would help articulate better the national strategies for highways development and ways to enhance private participation and highways development, which will provide guidance to state and municipal roads programs. A National Water and Sanitation Program and/or an associated TA operation are being considered to help catalyze water and sanitation services in priority urban and rural areas, organize necessary TA services to states and municipalities, rationalize the regulatory framework in the water and sanitation sector, corresponding cost recovery and tariff policies, and the need for associated subsidies to provide basic water and sanitation services to the least privileged segments of the population, and enhance community and private sector participation. A previous Federal Highways Maintenance loan had been helping states and municipalities strengthen the routine and preventive maintenance and rehabilitation of decentralized roads. The Bank i s also working on a National Urban and Housing sector land and associated TA loan, to help improve urban zoning and development programs, low income housing subsidies and urban slum upgrading and improve urban land markets, property rights and titling, and related institutional development. As a complement to the above the Bank has an ongoing national housing finance loan which helps promote housingfinance systems for low and middle income families, and create robust primary and secondary markets for mortgage finance, risk management and related securitization initiatives along the lines of Fannie Mae inthe U.S. 31 Annex 3: ResultsFrameworkandMonitoring Mexico: MX-DecentralizedInfrastructure Development Programmatic Loan ResultsFramework Use of OutcomeInformation Improve the overall performance As described in each component The Program has an output-based and poverty responsiveness of the approach to disbursements. Refer to infrastructure sectors under Project Components or Annex 16 for consideration through sector Disbursement indicators. strategies that promote sustainable investments. IntermediateResults ResultsIndicatorsfor Each UseofResultsMonitoring Oneper Component Component ComponentOne: ComponentOne: Component One: Transport Sector a) Institutional Strengthening Develop and implement the Planning instrument in place with (SOP) planning instruments, including annual updates. budgetingand evaluation for projects: preparation o f the multi- annual programs adjusted to budget limits, introducing economic evaluation tools (e.g. HDM), investment prioritization, data bases and staff training Rehabilitation o f 500 kmo f state b) Roadsrehabilitation and roads which are considered to be in Decrease the Road Roughness Index maintenance "poor" condition (IRI) to 2 Routine and periodic maintenance of the state roads considered to be in Decrease the Road Roughness Index "fair" and "good" condition (IRI) to 1.5 Increase the state's road network by 300km, including city bypass roads c) Expansion of the paved and new city accesses Construction o f new city accesses road network and city bypasses Road grade separation overpasses and improvement of unsafe or restricted spots along nine roads. d) Improvement of bridges, Improvement o f main critical and bottlenecks and critical conflict points points e) Pre investment studies for Complete two pre-investment Completion o f studies construction of toll roads ?roject studies 32 Improvement of lOOOkm o f rural Kmof rural roads improved f) Rural roadsprogram roads in the state in coordination with municipal governments ComponentTwo: ComponentTwo : ComponentTwo: Water andSanitation(WSrS) a) Improve water resource Develop and implement the planning Annual updated Integrated Water management instruments and annual updating Management Plan in place mechanisms with participation of the main stakeholders to guarantee Integrated Water Resource Management (IWRM) Practices b) Increase Water and Sanitation Coverage Increase water supply coverage from 1 Develop new W&S 78 to 85% and sanitation coverage Increase access to water supply to connections in rural from 35 a 42% 40,000 inhabitants and access to areas sanitation to 60,000 inhabitants Maintain the current coverage o f 5500 new W&S connections 1 Develop new W&S 95% in all cabeceras municipales connections in urban areas Number o f WW treatment plants built or rehabilitated 850,000 additional inhabitants 1 Increase wastewater connected to adequately operated (WW) treatment WW treatment plants capacity and quality c) Institutional Strengthening and Support Mechanisms c l ) Institutional Strengthening o f Staff training CEAG Number o f courses given 1 HR Development Development and implementation of certification Programs Certification program inplace Promotion o f a sustainable water culture through information dissemination and education Water conservation campaigns I Water Culture programs undertaken Develop regulatory proposals, and practical options to improve CEAG's ability to influence Proposal prepared for regulatory 1 Regulatory framework appropriate tariff levels and improvements performance of operators Develop operational rules and lptions to ensure that co-financing 1 Co-financing 2greements with municipalities are Number of co-financed investments arrangements net which meet expected results 33 . Improve the State's information system on water resources and W&S Information systems services Improve the technical efficiency of C2) Support Mechanisms to operators Execution of workshops/ seminars to Operators (Programade disseminate best practice experience Eficiencia te`cnicay comercial de amongst operators Organismos Operadores "operators") Improve commercial efficiency o f Professional development training operators courses and workshops amongst operators undertaken Preparation o f tariff studies Improve financial sustainability o f Training courses on methodology operators for financial sustainability and available financing operators Operators' revenues and collection improved ComponentThree: ComponentThree: ComponentThree: Low Income Housing a) Institutional Strengthening Establish adequate prudential Implementation o f prudential criteria (IVEG) financial criteria suitable for as part of 1VEG;s internal policy . decentralized or autonomous non- bank financial intermediaries engaged in housing finance, efficient loan recovery mechanisms and provisions policy thereof Improve information systems Implementationo f an information supervision policy to improve system that will allow to screen collection. candidates, adequately measure risk and increase the billing-to-collection ratio. Training Program in place Staff training Acquisition o f 400 hectares Increase IVEG's land reserve by 400 b) Land Reserve Acquisition hectares to satisfy demand Increase by 2,000 the number o f c) Increase access o f low- Increase low-income housing families with access to new or income housing to the poor provision by 10% rehabilitated housing d) Housing Developers (land Promote sustainable programs with Number o f new housing units use) jevelopers to increase housing developed in partnership between access to the Door IVEG and developers 34 sia sia a si 8 CL: a si I B da Y 3 EB B xY EB B xm Y 3 E B s:a s:a a g CL 5? n t tn 2 n2 2 5?Q s:a 5?a 5n a B a m 3 + 5a -8 %.m Y --. J h0t 5 0 . am8 0 c3 0 2 8 4u 4u 8Z t Y 8 Y 8 c I - U 4U 0 8 8 r3 0 8 U 3U U u4 m 00 YL YL 0 d w u Y2 Y2 Y2 E t: P 2 g YL YL 2 - m 3m m 5 2 22 5 2 8 0 d Annex 4: DetailedProjectDescription MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan Component 1: RoadTransport Sector Strategy for the State of Guanajuato The strategy of GoSG i s consistent with the federal framework and given the competitive situation facing the state, it i s pursuing the goal of developing adequate transport systems to enable it to meet the challenges of North America Free Trade Agreement (NAFTA) and to support economic growth. The project needs therefore to focus on certain key areas that would be consistent with national and state government plans and can be justified economically. The strategy previously summarized consists of six major items of which the key segments for which Bank assistance now could prove to be helpful are described below. Sub-component 1:Institutional Strengthening of SOP, including consultants services, TA, Training,Studies This component includes TA, training, and studies needed to help SOP implement the project and to manage the road sector development better. Under this component, the Bank will also assist SOP to further broaden and deepen its ongoing technical assistance program with the University of Guanajuato for the development of an HDM4-based Pavement Management System (PMS). For all of these purposes, if needed SOP could employ foreign and local consultants under (i) a Program Management Team (PMT) that will focus primarily on planning, training and institutional strengthening for the whole program, and (ii) Field ImplementationGroups (FIG) of local consultants responsible primarily for the day-to-day supervision and monitoring of the specific portions or items in the annual programs. The PMT services could include up to about 50 staff months of foreign and about 100 staff months of local consultants. The terms of reference for these services will be finalized by SOP and reviewed by the Bank. Some of the salient features of this component are outlined inthe following paragraphs. a) TA for Institutional and Technical Development: GoSGcentral agencies, mainly SOP, need support to continue improving the institutional and technical framework for preparationand implementation of state road improvement programs as well as to guide and monitor program execution. Support can be provided to establish and operate a PMT that will help to manage the proposed road program. The PMT will assist in tasks such as performance monitoring, design and implementation of a training program, technical audits, preparation of reports and organizing an Annual Transport Sector review. A few vehicles and planning and mapping software may also be provided also underthis component. The services to be provided by the PMT will include: (i) Assistance for improving road network planning and programming of investments in SOP; (ii) Design and supervision of the overall contract maintenance program, including the establishment of micro-enterprises; (iii) General assistancein planning, including development of planning methodologies; (iv) Provide training and equipment to help carry out annual road condition inventories and eventually the designand installation of a PMS; 41 (v) Assistance in the monitoring and coordination of project activities, including the coordination of the separate teams of staff and consultants supervising both the rehabilitation and maintenance works ineach SOP; (vi) Support for the preparation of annual roadimprovement programs; (vii) Designing and implementing sectoral environmental assessment techniques for roads that are consistent with the Safeguardsframework in Annex 10; (viii) Assistance to SOP in designing and implementing a strategy for completing the decentralization program in collaboration with the federal agencies (SCT and SHCP) and the municipalities; (ix) Analyzing and recommending long term options for mobilizing resources and for increasing private sector participation; and (x) Promote technology adaptation and dissemination. b) Works Supervision: Assuring the technical quality of work implementation is important. The project will provide full support to the SOP for the implementation of the annual programs of maintenance and rehabilitation, including engineering preparation, contractor pre-qualification and tender evaluation, quality control and monitoring, and on the job training of staff inthese fields. To facilitate administration and coordination, these services could be provided by consultants empowered to supervise contracts and certify the works. The schedule of consultants services will be based on (i) detailed estimates of annual workload (on average 10contracts per year based on a length of 30 km per periodic maintenance contract, plus about 5 rehabilitation contracts), and staffing requirements by type of works including site inspection, travel time and office work. By category, field supervision engineers would constitute about 25% of the staff months, 45% would be for experienced works supervisory inspectors and foremen, with lab technicians and general inspectors makingup the rest. About 80 staff months of local consultants may be required for these services. c) Training program: The SOP needs in terms of qualified and experienced staff required to manage the road program may increase as decentralization proceeds and the SOP becomes responsible for managing a larger share of the road network in the state. A comprehensive training needs assessment could be carried out and a training program could be designed. The program could support (i)preparation of training programs including course design and materials development; (ii) provision of equipment and supplies for training programs preparation and delivery; and (iii) strengthening of training needs analysis, monitoring and evaluation. About 10 staff months of local and foreign consultancy services may be neededto support this component. Studies and assistance for Road Safety improvement. The study will focus on identifying and analyzing accident black-spots, development of a database, and subsequently designing a strategy to improve road safety. The strategy will include assistance for the enforcement of road safety and traffic regulations. Sub-component2: Road Conservationand Maintenance This component is for the design and implementationof aprogramof routine and periodic maintenance for core roads in the state network. It includes provisions for the implementation of both routine and periodic maintenance by contract. It represents specific Bank assistance to SOP in meeting overall maintenance targets for which additional TA will be provided. Some changes are required in several 42 aspects of the road program, especially in planning, if the road maintenance situation i s to be improved. Therefore the civil works component of the Bank-assisted program will give priority to maintenance in order to (i) the development and use of better assisted procedures and guidelines for road ensure network maintenance on a larger, state-wide scale; (ii) encourage the state to increase its allocations for maintenance in the SOP budget; and (iii)focus more of the attention and support of staff on maintenance. Targets in terms of roads maintained and modalities used will be set by the SOP by road type. The routine and periodic maintenance component will comprise the entire annual maintenance program of SOP for 2004-2006. It will be carried out in accordance with a strategy that assigns the highest priority to interventions on the "good" and "fair" portion of the network, termed as the maintainable segment of the network. The segments that are in poor condition will be targeted first for rehabilitation to restore them to good condition and then be maintained subsequently. The target to be reached by 2006 i s that 80% of the maintainable network, i.e. about 2100 km should be maintained adequately. Emergency and seasonal maintenance will be carried out on selected parts of the rest of the network. The target will be met gradually, starting at 60% inthe first year and increasing gradually untilthe 80% level i s attained. The maintenance programwill introduce newer and more cost effective approaches for Guanajuato for: a) Routine Maintenance by Micro enterprises: Its introduction will represent an important source of employment for the rural poor as well as provide a sustainable basis for the introduction of a program for systematic routine maintenance of rural and other road link classes. Its establishment will require institutional strengthening and consensus building at the state and local levels through several workshops, training, community consultation and the provision of goods and materials. It i s expected that by year 2007 about 25 micro enterprises will be formed and approximately 1100km of roads will be maintained. b) Periodic maintenance: This component will focus on the introduction of periodic maintenance for the core network and at the same time provide growth opportunities for the local construction industry. The latter will be done mainly through the introduction of major periodic maintenance programs together with the hiring of private contractors to carry them out through contracts to be managed by SOP. This component will also finance the rehabilitation and improvement of a total of about 500 km of secondary (non-federal) roads, which are in poor or bad condition and represent the largest rehabilitationbacklog in Guanajuato, would be accorded high priority. Though the state's overall plans may be somewhat larger, the 500km arises from the 30% of the core network that currently need to be rehabilitated and does not include the roads that are scheduled for transfer from the federal government. The roads will be brought up to minimum standards based on projected traffic volumes and topography. The proposed works will be designed for a 15 year life, and consist primarily of rehabilitatingthe road along the existing alignment, widening the shoulders (especially inlocations with SIOW moving traffic), provision of adequate drainage, strengthening of bridges, and the provision of road signs and other safety measures. Road recyclingtechnologies may be tested for the longer sections to be rehabilitated. 43 Consultancy services could be provided to SOP to help supervise these works. The first segment of the rehabilitation programfor the state, covering about 50km of roads, will be selected and prepared on the basis of approved economic criteria and reviewed subsequently by the Bank. Sub-component3:Expansion of the road network Expansion of the state managed network by 600 new kmof roads. Sub-component4:Improvement of bridgesand critical points Improvement of bridges and elimination of bottlenecks: This itemconsists on road grade separation overpasses and the improvement of unsafe or restricted spots along the state roads ineight identified points. Sub-component5: Constructionof toll highways Construction of toll roads: Two construction projects and two pre-investment studies have been included inthe program. The largest item in this sub-component i s the Silao-San Felipe toll road project already inan advanced stage, partially financedby FORTEM (IDB). Sub-component6: Rural RoadsProgram Construction and Improvement of rural roads: An indicative plan for construction and improvement of about 1000km of rural roads has been identified. This item would be implemented in collaboration with the municipal governments and inclose coordination with the activities described in Component2: Water Supply and Sanitation Sector Strategy for the State of Guanajuato The problems faced by GoSG concerning water and sanitation service provision described in Annex 1 are addressed by the proposed investment program and action plan as described in the Guanajuato Hydraulic Program for 2002-2006 (Progrumu Hidrddico). Overall, it places emphasis on efficiency improvements and financial sustainability of service providers via appropriate tariff structures, with increasing reliance on private sector participation where possible. To this end, the investment and technical assistancecomponents to support the sector strategy include: 0 Improve Water Resource Management. Improve the water balance between supply and demand through better water resource management, better planning and improvement of information systems 0 IncreaseWater and Sanitation Coverage . Expand service coverage of water and sanitation, with a focus of increasing the percentage of people covered inrural and underserved areas; 0 Institutional Strengthening and Support Mechanisms. Strengthen the institutional framework and support mechanisms, including financial sustainability of W&S operators, staff training, water culture and tariff and other benchmarkingmodels to help local governments. 44 Sub-component 1: Improve Water Resource Management Deficient meteorological, hydrometric and piezometric stations, improper water quality measurement, and incomplete aquifer information, along with inadequate planninghas resulted in an inefficient water management, project development and water use. Bank support would include T A to: 0 Improvemeasurement of hydrological cycles, via expansion of the state's monitoringnetwork 0 Appropriate planning and optimal use of the state's available hydrological resources taking account of productive and socioeconomic needs by geographical area 0 Reduce aquifer depletion and promote aquifer stabilizationwith community participation Sub-component 2: Increase Water and Sanitation Coverage The provisionof services inrural areas is be coming increasingly expensive and problematic due to the low density and disperse population that characterizes these areas, where costs are higher and population poorer. Intensive community participation will be needed in all stages of project cycle to ensure sustainability, promoting demand driven approaches and providing adequate levels of service that correspond to the users' ability and willingness to pay, providing training to water users associations and water use and hygiene education to beneficiaries, so that water and sanitation services yield the expected benefits in rural areas; and providing technical assistance to the water users associations inthe post-construction phase. The investment program would seek to support GoSG in increasing urban and rural water and sanitation service coverage and wastewater treatment and improving the sustainability and quality of service provision. Rural water and sanitation. Extend water and sanitation (individual solutions) services to communities with less than 2500 inhabitants with efficient operation of the systems. 0 Urban water and sanitation. Extend water and sanitation services to all municipalities with more than 2500 inhabitants with efficient operation, consistent with preserving the 95% water and sanitation coverage ratio incabeceras municipales. 0 Wastewater treatment. Extend wastewater treatment facilities to all municipalities with more than 20,000 inhabitants, consistent with federal policies (CNA), strengthened by gradual introduction of additional financial sustainability, health safeguard and productive water reuse criteria being developed by CEAG. This element would seek to improve sustainability of the investments by improving technical designs, introducing least cost analysis of alternatives and cost-benefit analysis of the selected least cost solution. Special attention to optimization of operation and maintenance costs will be included in project designs to reduce the financial burden to the utilities, and considering mechanisms to improve cost recovery (selling treated water), and minimize fiscal subsidies. Sub-component3: InstitutionalStrengtheningand SupportMechanisms Lack of trained staff with a genuine commitment for more efficient water management, insufficient financial resources and poor cost recovery mechanisms, rigidity of the current legal and regulatory framework, and absence of socially responsible water use by consumers, result in a weak institutional capacity for comprehensive water management. For these reasons, the objective of achieving a strengthened institutionalframework i s paramount for the success of the sector strategy for 2004-2006. This would be achieved through coordinated efforts with the federal and municipal governments and with the associations of users and utilities. CEAG would be strengthened to buildfurther its technical assistanceto municipalities and service providers. CEAG's institutional strengtheningincludes: Staff training 0 Certifying skilled technicians and processes 0 Developing a sustainable culture of rational use of water resources through information dissemination and education Develop regulatory proposals and practical options to improve CEAG's ability to influence appropriate tariff levels 0 Develop operational rules practical options to ensure that municipal investments, partially financed by CEAG, receive the agreed municipal co-financing and meet the agreed performance standards 0 Improve the information system on the hydrological and water and sanitation services of the state Support Mechanisms to Operators (Progrumu de Eficiencia Tkcnicay Comerciul de Operudores) aims to strengthen operators' capacity to increase efficiency, adequately design the tariff structure, promote a water culture, and increase the technical capacity of their staff and assets. Ultimately CEAG seeks to apply a benchmarking model to all operators in order to link financing to efficiencies achieved. It includes training and professional development related to: 0 Improvingtechnical efficiency, including: Diagnosis and improvement of the technical efficiency of pumpingequipment, Geophysical studies for well perforation and exploitation, Leak control, Civil works supervision, Analysis of alternatives on sanitation technologies Technology transfers, including workshops for the dissemination of best-practice solutions between operators Certification of technical staff 0 Improvingfinancial efficiency and quality, including: Systematic billing Collection improvement Accounting standards 46 0 Improving financial sustainability, covering : Tariff modeling Analysis of financing options Cash management Technology transfer ' 0 Improving Information systems to allow comparison and benchmarking across operators Component 3: Low Income HousingSector Strategy for the State of Guanajuato InSoG, housing is under the direction of the Instituto de Vivienda del Estado de Guanajuato (IVEG), an "organism0 descentralizado" ascribed to the Secretaria de Desarrollo Social y Humano (SDSH). Despite its formal independence, until last year, IVEG exercised virtually no independence and fully depended on the State budgettransfers. Some important reforms have been taken. The state reformed the civil code proceedings on mortgage liens and foreclosure which now allow the state to participate in additional federal program, such as PROSAVI, and will introduce important reforms in the sector, particularly in the promotion of the housingmarket. Inaddition, the state i s in a process of weaning IVEG away from state transfers for the state funded programs. This will force IVEG to search for capital from financial sources, such as BANOBRAS, or use its own capital (total capital as of August 31, 2002 was MX$526,988,920). It will also force IVEGto bringtighter controls to its credit operations forcing reform of the institution. Sub-component 1: Institutional Strengthening Measures Although IVEGhas substantially increased the annual number of loans granted, in order to achieve the 2000-2006 target as specified in the State's Development Plan, its institutional capacity to cope with the challenges this represents is lagging and would need to be substantially increased in order to adequately manage its recently acquire independence. Thus the strategy proposed for Bank financing includes a number of institutional strengthening measures to develop IVEG into a sustainable and efficient housingfinance institution. These include: (i) Establishing adequate prudential financial criteria suitable for decentralized or autonomous non-bank financial intermediaries engaged inhousing finance (ii) Implementingefficientloan-recoverymechanisms,provisionspolicyandpreservation of its capital inreal terms (iii) Implementingappropriateinformationsystemsinorderto allow IVEGto adequately link its low income housing programs to the state's housing development objectives, decide on the future composition and growth of its products, and enable systematic supervision and financial management. Sub-component 2: Increase loans for low-income housing The state has beenboth a laggard and an innovator inthe housing sector. Inrecent years, the IVEGhas demonstrated innovation that i s worth supporting, this includes some innovative programs that have great potential to provide housing services to the poor earning three or less minimum salaries. These programs include: 47 Autoconstrucci6n. which provides credits (about 80% of borrowers earn less than 3 minimum wages) for housing improvements usinga voucher type system that allows the borrowers to purchase materials for construction and then make repairs for constructions themselves. Credits have periods of between 24-48 months and loan amounts vary from MX$22,000-28,000, with fixed interest rates of 8% (rural) or 11% (urban), supported by federal or state subsidy programs. Approximately 25,000 credits have been made in the past seven years. Despite a poor performance with about 25% of the portfolio in arrears, since 2000 measures have been taken to improve collection processes and newer loans are said to have a better overall performance. In 2003 the state i s expecting to invest MX$36,000,000 in this program. Lotes Con Servicios. i s a state financed program that provides credit to households to purchase urbanized lots (which are often usedby families to take an additional autoconstruccidn credit for their housing). Terms are similar to the autoconstruccidn program. Since the program began in 1996 approximately 2,000 Zotes per year have been financed in 20 municipalities (about MX$40,000,000 invested annually). The state also takes advantage of other programs such as the federal program VIVA, under which if finances about 1,000 progressive housing units per year (about MX$20,000,000 annual of investment under this program). Vivienda Progresiva. Provides housing loans for housing upgrading and self-improvement. The average loan i s around MX 15,000. Although it intendsto target the low-income population in need of housing improvements, the net impact of this i s difficult to assess, in the absence of reliable information systems mentioned above. Promama Vivienda Popular TU CASA. This program i s partially funded by the federal government, and partially by IVEG. It provides up-front subsidy (PROSAVI) to households for the acquisition of a basic unit. IVEGcontributes with the urban lot, and the final user pays market rates to a developer that has previously agreed to participate inthe program. Component4: TA Componentfor State GovernmentApparatus (9 Strengthening of the mechanisms to screen, prioritize and monitor public investments. Today, SoG prepares six-year development plans. Under this component, methodologies to incorporate into evaluation of state investment plans systematic economic, financial and social analysis and criteria would be strengthened and implemented, introducing interalia multi-sector and multi-annual evaluation to all infrastructuresectors. (ii) Technical assistance to strengthen of the existing consultation and participation mechanisms at state and municipal level. The state could enhance its catalytic effect to strengthen the consultation process across the 46 municipalities through training and TA to the municipalities, incorporating into these special mechanisms applied to infrastructure investments that could have a significant impact over the community and the environment. (iii)Methodologies to improve the safeguard policies and practices applicable to public investments. Although the State already has adequate environmental and social due diligence and management capacities, the state intends to further strengthen its capacities in 48 the environmental and safeguard areas - among other things to assure full compliance with the Program's safeguardrequirementsunder infrastructure programs. (iv) Strengthening of procurement policies and practices. The State would pursue specific measures to strengthen its existing public procurement practices, including standardization of contracts, offer and ex post valuation mechanisms and conflict resolution, broaden access to information and transparency via the electronic system Compranet, and correcting remaining process deficiencies. (v) Optimization of the existing financial management systems and processes. Evaluation of the existing SAP R/3 platform and processes to determine system requirements and methodologies to assure transparency, good auditing and accountability. 49 Annex 5: ProjectCosts MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan A. Roads Sector Strategy 44,661,213 44,590,476 28,390,476 117,642,165 B. Water and Sanitation Sector Strategy 37,917,200 30,272,381 26,542,857 -C. Low Income Housing Sector Strategy 21,815,743 26,433,622 28,646,568 D. Technical Assistance 1,000,000 500,000 0 Ithe Bank Loan I 22,317,0871 58,284,1331 24,898,78111 105,500,0001 11. Improve water balance I 1,243,1781 2,666,6671 2,380,95211 6,290,7971 IDIRD /Total (% rounded) I 15% *Figures are indicative and based on the best available items 50 Annex 6: ImplementationArrangements MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan Once a sector strategy i s approved by BANOBRAS and the Bank this will be reflected in the form of a formal agreement entered into between the State and BANOBRAS for making available specified amounts and terms of financing, WB loanfunds will flow from the loan account, to apeso-denominated Special Account (SA)managed by BANOBRAS. States will be allowed to receive an initial advance on the loan based on an expenditure forecast, after which further advances must be triggered by output achievements. Under the report-based disbursement method, the application for loan withdrawal will be supported by a Financial Monitoring Report (FMR), prepared by the state. The FMR will include (i) the financial statement for the sector investment program; (ii) a report on project outputs including the benchmarked unit costs for these outputs and the resulting amount of additional advances the state is currently eligible for; (iii) a narrative status report; and (iv) any required procurement information. It will also include any additional information that may be required to allow the Bank's Disbursement Division to record the documented expenditures (Le. expenditure information consistent with the format of Schedule 1 of the loan agreement). Once states provide the required information demonstrating the financial activity and outputs achieved during the period and cumulatively, BANOBRAS will review this information, add additional documents such as the withdrawal application form and Special Account reconciliation, and submit this package to the World Bank. Within the World Bank, the application will be received by the Loan Department (LOA), but review of the FMR and approval of the disbursement amount will be the primary responsibility of the task team leader (with input from relevant members of the team). Disbursement requests will be made in Mexican pesos, and upon receiving the esos from the World Bank, BANOBRAS will disburse the appropriate amount of funds to the states," In this way the FMR will serve as a monitoring tool, while supporting the amount advanced and additionally documenting the expenditures made. Counterpart funds will be represented, in the Sources and Uses of Funds statement of the FMR, by the funds provided by financing sources other than the BankBANOBRAS loan. On an annual basis, Guanajuato will prepare a program financial statement, which will be audited by the state's international audit firm. The financial activity to be audited will be the same as what i s included in the quarterly FMRs, which will be based on the activities covered inthe agreed investment program (see Annex 15). The FMRs and audit report will need to demonstrate that the level of aggregate investment program spending exceeded the aggregate amount of loan funds received during the programperiod.16 In each state operation, agreement will be reached between BANOBRAS, the Bank, and the state regarding the appropriate level of Program-specific reporting as well as what entity-level reports should be submitted to BANOBRAS. l5States areresponsiblefor transfemngfundsto othersubnationalentitiesandmunicipalitiesandfor monitoringexpendituresintheseentities, in accordancewith their legalagreement with BANOBRAS) l6 Thepreciseamountby which total expenditureswould needto exceedthe loan funds provided, shouldbe determinedby loannegotiations. 51 Annex 7: FinancialManagementandDisbursementArrangements MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan For each state entering the program, a FM assessment will be carried out, covering the main entities involved in managing state funds, and the specific agencies expected to be involved in the program. This assessment will have two main functions: (i) determine the extent to which existing borrower to systems can be relied upon, and thus the extent that alternative arrangements may be required for the DIRD; and (ii) determine capacity building needs - especially, those that can be addressed as a to subcomponent of the program. The Operating Regulations (Annex 17) provide further details on the assessment process and describe the minimumFMrequirements for entry into the program. Following appropriate accounting standards, financial accounts of the full sectoral expenditure program will be maintained. For ease of monitoring, these financial-orientedreports will have separate parts detailing achievements against targets, and expenditures under each major state sector program, subdivided by main program components and subcomponents. These periodic reports and financial statements of eligible Program expenditures will provide the basis for disbursement of Bank loan proceeds. The financial statements for each approved state sector strategy will be audited annually by an independent auditor following acceptable auditing principles. BANOBRAS will establish a Special Account in Mexican Pesos for each state loan, and then onlend these funds in pesos to the states. States would be eligible to receive an initial advance loan disbursement, the amount of which would depend on a forecast of expenditures. Subsequently, using the Bank's report-based disbursement modality, states would report expenditures and outputs. The output reporting would determine the amount of additional advances that could be made, while the expenditure reporting would serve to document the outstanding ad~ance.,'~ FMrisk in the program is considered to be moderate to substantial, depending on the FM systems and capacity of the states or municipalities that may be involved. FM risk i s increased by the inexperience that subnational governments may have with international programs, and with the changing roles that the program (including its results focus) implies for BANOBRAS as well as the Bank. The programwill rely heavily on existing systems, which may increase FMrisk relative to other Bank-financed programs but i s more likely to have a greater development impact on the FM institutions involved. Risks are mitigated by the thorough FM assessment and (planned) supervision effort of the Bank, as well as the mechanism within the program to withhold disbursements should verified outputs and performance be unsatisfactory. The ability to incorporate FM-related capacity improvements as an activity of the Program serves to mitigate the most important risks at the state level. In addition, the relatively small amount of Bank-specific requirements will serve to decrease the riskrelatedto any lack of familiarity with Bankprocedures. See the main text of the PAD, and Section 10 of the Operating Regulations (Annex 17), for further details on financial management, disbursements, and funds flow. l7To minimizeits own cost, it will be inBANOBRAS' interest to only request loandisbursementsat the time when funds are neededfor subloan disbursementsto a given state. Requestsfor disbursementsto the SA may be made separate from the submissionof the FMRs. 52 Annex 8: Procurement MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan A. PROCUREMENTARRANGEMENTS Procurement for the proposed project will be carried out in accordance with World Bank "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 (the Procurement Guidelines); "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 (the Consultants' Guidelines), and the provisions stipulated in the Legal Agreement. For all contracts to be financed by the Loan to BANOBRAS, the procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame are given in the Procurement Plan for 18 months to be delivered to the Bank before effectiveness. The Procurement Plan will be a rolling Plan updated at least annually or as required to reflect actual project implementation needs and improvements in institutional capacity of the state institutions that are beneficiaries of the BANOBRAS loan. PROCUREMENTOF GOODS AND WORKS Major contracts for goods and works will be procured following International Competitive Bidding procedures (ICB), in accordance with May 2004 Guidelines, usingBank StandardBiddingDocuments (SBDs). Procurement of Works. Contracts with estimated values below the agreed threshold for ICB (US$lO.O million equivalent), may be procured using Mexico's federal law (Articles 27, Section 1 (Licitacio'n Pu'blica) for national competitive bidding (NCB) using the Standard Bidding Documents (SBDs) agreed by the Secretaria de la Funcidn Pu'blica (SFP) and the Bank. Works estimated to cost less than US$500,000 equivalent per contract may be procured through price comparison of quotations of at least three contractors, received in response to a written invitation. The invitation will include a detailed description of the small works, including basic specifications, requiredcompletion dates, and a basic contract form acceptable to the Bank. When needed and if the requirements of paragraphs 3.1, 3.6, and 3.7 of the Procurement Guidelines are met, direct contracting of small works may be undertaken, with prior agreement of the Bank or in accordance with procedures referred to under Art. 26, section I11(Adjudicacio'n Directa) of Mexico's federal law. The proposed Loan will not finance works carried out by force account. Procurement of Goods. Contracts with estimated values below the agreed threshold for ICB (US$500,000) may beprocuredusingMexico's federal law (Article 26, Section 1(Licitacidn Pu'blica)) procedures, using the Standard Bidding Documents (SBDs) agreed by the Secretaria de la Funcidn Pu'blica (SFP) and the Bank. For contracts valued less than $100,000 shopping procedures may be followed. When needed and if the requirements of paragraphs 3.1, 3.6, and 3.7 of the Procurement Guidelines are met, direct contracting of goods may be undertaken with prior agreement of the Bank or in accordance with procedures referred to under Art. 26, section I11 (Adjudicacidn Directa) of Mexico's federal law. 53 Procurement of services (other than consultants services): All contracts for services not related to consultant services (under goods, works and training activities (logistics, organization of seminars, workshops or similar training events) may be procured under same methodologies and thresholds specified for goods, using the non-Consulting services bid document (trial version) dated December 2002, or other biddocument agreed with the Bank. GROUPINGOF CONTRACTS. To the extend practicable contracts for goods and works shall be grouped in bid packages estimated to cost US$500,000 equivalent or more each for goods, or US$10,000,000 equivalent or more each for works. NOTIFICATION ADVERTISING. The General Procurement Notice (GPN)for all large contracts for AND works, goods and services (other than consulting services) to be procured under ICB procedures by the states under BANOBRAS loans shall be published in the Development Business, and shall be updated annually to include any outstanding procurement. All invitations to bid shall be published in the "Diario Ofcial de la Federacio'n" and in COMPRANET. In addition, invitations to bid for each contract for works estimated to cost US$10,000,000 equivalent or more and each contract for goods and services (other than consulting services) estimated to cost US$500,000 equivalent shall be advertised inthe DevelopmentBusiness in accordance with the procedures applicable to large contracts under paragraph 2.7 of the Guidelines. BANOBRAS will solicit expressions of interest for large consultant assignments when contracts are expected to cost more than US$200,000 equivalent, a specific procurement notice shall be published in Development Business. The name of the consultant selected shall also be publishedinthe Development Business. SELECTION OF CONSULTANTS Consultants services will be contracted in a number of skill areas as they are applicable to the activities to be financed by BANOBRAS' loans and may include technical assistance and capacity building activities required under the modernization subprojects approved by BANOBRAS, under the loans to the States. All contracts would be procured usingBank's SBD for consultants services. Description of consulting services and methodology to be provided by consulting firms and individuals will be included in the Specific Procurement Plans (SPP's) submitted and updated by the executing agencies participating in the activities financed by BANOBRAS' loans. Firms, All contracts for firms would be procured using QCBS procedures except for small contracts for assignments of standard or routing nature and estimated to cost less than US$lOO,OOO equivalent that would be procure using LCS. Single-source selection (SSS) procedures may be used, with prior agreement of the Bank, for procuring tasks that meet the requirements of paragraphs 3.10 of the Consultants' Guidelines, for assignments when only one firm i s qualified or has experience of exceptional worth. Contracts may also be used to hire universities, training Institutions, and NGOs, as required. Consultants services to provide training will be selected usingLCS. Consultant's contracts may also be used to hire universities, training Institutions, and NGOs, as required. The short list of consultants in contracts estimated to cost less than $500,000 equivalent, per contract, may be comprised entirely of national consultants, in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. 54 Individuals. Specialized advisory services would be provided by individual consultants selected by comparison of qualifications of at least three candidates and hired in accordance with the provisions of paragraph 5.1 to 5.3 of the Consultant Guidelines. Sole-source selection of individual consultants may be contracted, with Bank's prior agreement, in accordance with provisions of paragraphs 5.4 of the Consultants Guidelines. B. PROCUREMENTMETHODS The methods to be used for the procurement describe below, and the maximum estimated amounts in (US$) for each method, are summarized inTable A. Annex 8, TableA. Procurement Methods/Thresholds (US$) Category Contract Value (thresholds) Procurement method Works 2 10,000,000 ICB < 10,000,000 NCB c 500,000 Shopping at least 3 contractors Goods 2 500,000 ICB 500,000 NCB c 100,000 Shopping Non-consultant services 2 500,000 ICB c 500,000 NCB c 100,000 Shopping Consultants Services 2 100,000 QCBS (firms) c 100,000 QCBSLCS Consultants Services NIA Paras. 5.1 to 5.4 Guidelines (individua1s) Annex 8. Table B. Prior Review Thresholds (inUS$) 1 LowlAverage Risk State I HighRisk State WORKS 5,000,000 500,000 GOODS 500,000 250,000 CONSULTANT (Firms) 350,000 100,000 CONSULTANTS (Individua1s) 100,000 50,000 55 C. PROCUREMENTPLAN In view of the special design of the project, a condition of effectiveness will ensure that BANOBRAS delivers to the Bank Specific Procurement Plans (SPPs)for each participating executing agency of the beneficiary State. The SPPs will include all contracts to be financed by BANOBRAS' loans, which will include the procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame inrolling SPPs prepared for 18 months of project activity. D. PROCUREMENT MONITORING BANOBRAS will be directly responsible for staff training at state level, assisted by the Bank from time to time, and for ensuring that on-time updates are submitted to the Bank for no objection, before a modification to any of the SPP's i s made. In addition to BANOBRAS' responsibility to maintain procurement information at the center, participating state's executing agencies will maintain detailed records of all their procurement activities. E. FREQUENCYOF PROCUREMENTSUPERVISION Based on the overall risk assessment of each state, the post-review supervision mission, to be carried out by BANOBRAS and the Bank in each participating executing agency in each state shall be completed every 4,6, or 12 months, and shall cover not less than 1in20 contracts signed. Table C: Project Costs for the State of Guanajuato by Procurement Arrangements (inUS$millionequiv.) Expenditure Category Total Cost 1.Goods, works, services (other than consulting services), 64.5 training and consultants services Component A. (59.0) 2. Goods, works, services (other than consulting services), 52.1 training and consultants services Component B. (38.0) 3. Goods, works, services (other than consulting services), 34.3 training and consultants services Component C. (7.0) 4. Goods, works, services (other than consulting services), 1.7 training and consultants services Component D. (1.5) 5. Front-end fee 1.08 (0) Total 153.68 105.5) Note: Figures inparenthesis are the respective amounts financed by the World Bank 56 Annex 9: Economicand FinancialAnalysis MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan GuanajuatoRoadTransport ImprovementProgram:EconomicEvaluation Summary ofBenefitsand Costs: The project's main benefits are the savings to be made by road users on vehicle operating costs and passenger time costs. An economic analysis will be done to assess: (i)the rehabilitation and maintenance needs o f the overall paved network (2,071 km) managed by SOP; and (ii) the economic justification of the rehabilitation program to be financed under the project (500 km). A preliminary economic evaluation indicates that the Net Present Value (NPV) of the rehabilitation program i s in the order of US$99.4 million with an overall internal rate of return(RR) of 61%. MainAssumptions: Net benefits were analyzed using the most recent version of the HDM-4,which simulates highway life cycle and vehicle operation conditions and costs for multiple road design and maintenance alternatives. The discount rate was set to 12%, the evaluation period to 20 years, and the annual traffic growth to 3 percent. The maintenance and rehabilitation costs were estimated in financial and economic terms (net of taxes), economic costs being on average 87% of financial costs. The table below presents current roadworks unit costs in Mexico. Road Works Costs Unit Costs 1 FinancialEconomic Financial Economic I cost cost cost cost RoadWorks (US$/m2) (US$/m2) (US$/km) (US$/km) Reseal 25 mm 3.2 2.8 23,000 20,010 Overlay 50 mm 5.0 4.4 36,000 31,320 Overlay 65 mm 7.6 6.6 55,000 47,850 Reconstruction 20.8 18.1 150,OOO 130,500 Routine Maintenance ($/km/year) 3,000 2,610 The following table'presents typical roaduser costs inMexico, at different roughness levels, inUS$ per vehicle-km, and the traffic composition adopted inthe preliminary analysis. 57 IUser Costs (US$/vehicle-km) Medium Heavy Articulated (RI) Car Bus Truck Truck Truck 2 0.13 1.11 0.53 0.72 1.09 4 0.14 1.22 0.56 0.75 1.16 6 0.15 1.45 0.62 0.83 1.31 8 0.16 1.75 0.71 0.93 1.52 10 0.18 2.09 0.80 1.07 1.74 e 12 0.21 2.44 0.91 1.21 1.97 14 0.23 2.79 1.02 1.35 2.21 0.26 3.14 1.13 1.50 2.45 Com osition (%) 79 6 7 4 4 NetworkRehabilitationand MaintenanceNeeds: A network strategic analysis will be done during appraisal, usingHDM-4 model and network condition and traffic to be provided by SOP, with the objective of assessing the overall rehabilitation and maintenance needs of the paved network managed by SOP (2,071). A preliminary analysis of the paved network condition indicates that 60% of the network i s ingood condition, 10% in fair condition (requiring seals or thin overlays), and 30% in poor condition (requiring thick overlays or reconstruction). The tables below present a preliminary estimate of the current condition and traffic distribution of the network. I Paved Roads Managed bv SOP I Condition Length (km)Percent (%) Good 1,243 60 ITotal I 2.071 I 100 I e 1000AADT 1000-2500AADT 2500-4000AADT 414 >4000 AADT 331 16 Total 2,07 1 100 RoadRehabilitationProgram: The proposed sections, to be financed by the Bank, to be rehabilitated during the duration of the project (500 km) will be evaluated, during appraisal, using HDM-4 model with project level data for road, vehicle fleet and road works characteristics and costs. Each road section to be rehabilitated will 58 be submitted to an economic evaluation with proper cost and traffic estimates, and should yield an IRR higher than 12percent. A preliminary evaluation of the rehabilitationprogramwas done analyzing representative road classes, which are in poor condition (average roughness of 5.5 IRI)and vary by traffic level. The table below presents the 4 road classes evaluated with HDM-4, considering the same traffic distribution of the network. I RoadRehabilitationPreliminarv EstimateI Traffic Length(km)Percent (%) < 1000AADT 120 24 1000-2500AADT 200 40 2500-4000AADT 100 20 >4000 AADT 80 16 Total 500 100 The economic evaluation considered a 'without project' alternative that includes routine maintenance, patching and reconstruction of the road when the roughness reaches 8.0 IRI, and a 'with project' alternative that includes the rehabilitationwork done at the beginning of the evaluation periodfollowed by a maintenance policy that includes routine maintenance, patching and overlays when the roughness reaches 3.5 IRI.The NPV of the proposed rehabilitation program i s US$ 99.4 million with an overall IRR of 61%. The table below presentsthe distribution of the resulting rates of return. PreliminaryEconomic Evaluation ILengthl Investment 1 NPV IIRR Traffic (km) (US$ million) (US$ million) (%) I 1 < 1000AADT I 1 120 18.0 1.1 18 1000-2500AADT 200 30.0 17.1 37 2500-4000AADT 100 15.0 26.1 I 8 1 >4000 AADT 80 12.0 55.1 162 Total 500 75.0 99.4 61 Other elements of the roads sector strategy on subprojects involving improvement of bottlenecks and critical points, where the overall benefits are clearly established, economic analysis would be used to arrive at the least cost solution. Water Supply and Sanitation In the water and sanitation sector, concentrating investment in increasing access to water supply and sanitation services in rural and peri-urban areas, and improving operational efficiency of service providers, reducing water losses, improving billing and collection systems and improving financial sustainability of operators could generate high economic and financial returns, including major health benefits. In general institutional strengthening measures and TA from the state to the service providers and municipalities has been identified to yield high economic returns. Further use of the existing 59 benchmarking system by CEAG will also help prioritize investments, and provide incentives for water utilities to improve operational and financial efficiency and service quality. On wastewater treatment plants, CEAGwill improve the methodologies requiredby inorder to increase the health benefits through effective sludge removal, improve commensurate development of sewerage collection and wherever possible, recycling of water for productivepurposes. Moreover least cost analysis would be usedin selecting the technologies. 60 Annex 10: Safeguard Policy Issues MEXICO: MX-Decentralized Infrastructure Development ProgrammaticLoan Introduction BANOBRAS i s initiating a World Bank-supported program to further development of selected infrastructure sectors at the sub-national level to improve the performance of infrastructure services in Mexico while also helping achieve the Government's decentralization objectives. A key feature of the program i s that its procedures for execution would be applicable both for the portion of the investment financed by the World Bank, and to all expenditures incurred under the corresponding medium-term sector strategy, regardless of the funding source. Thus, eligible participating states or municipalities would agree to apply the same approach to investments and other expenditures financed by other domestic or external sources, federal government transfers, as well as their own budget resources. The first step in the implementation of the program i s this project, through which BANOBRAS will on- lend funds to the State of Guanajuato (SoG). The inclusion of additional states inthe future would be completed through separately approved and financed Bank projects. Part Iof this Environmental and Social Manual (ESM) provides a generic Environment and Social Management Framework (ESMF)to be applied by any participating states to determine the procedures for ensuring compliance with the World Bank's safeguard policies." For SoG, this framework was applied in the context of a "Safeguards Pilot" approach in which the World Bank will test the use of national and sub-national systems to materially meet the objectives of the World Bank's safeguard policies. The resulting safeguard-related procedures for execution of the project in SoG are outlined in Part 11. Part I.Environmentaland Social Management Framework 1.1. Framework Overview This ESMF is the program's mechanism for ensuring that environmental and social aspects of state programs are adequately managed, particularly with respect to the requirements of selected World Bank's safeguard policies and the Government of Mexico's (GoM) laws and reg~1ations.l~While the current project funds only activities in Guanajuato, the framework describes how environmental and social management could be approached in any other state with adequate capacity. The ESMFlays out the procedures for assessingthe environmental and social risks of state programs, as well as evaluating the policy and institutional capacity in each state, and identifying appropriate management and oversight procedures. The ESMF also includes procedures for strengthening state agencies and l8The Bank has ten key policies that are critical to ensuring that potentially adverse environmental and social consequences are identified, minimized, and mitigated. These "safeguard policies" receive particular attention during the project preparation and approval process. Additionally, the Bank's policy on disclosure (BP 17.50) promotes public access to many safeguard-related documents. See: www.worldbank.org/safeguards. l9For the purpose of this framework, the term ``social" generally reflects the scope o f the Bank's social safeguard policies, which address indigenous peoples and involuntary resettlement issues. The ESMF does not address other social development issues, such as gender, disability, or retrenchment. institutions involved in enforcing safeguards-related laws and standards. In general, the ESMF i s designed to ensure that participating states' environmental and social management capacity develops on a broad scale and not only inthe limited context of a given set of subprojects. Correspondingly, the ESMF favors, and provides incentives for, utilization of existing or enhanced state mechanisms rather than the creation of separate frameworks or procedures that are specific to World Bank-assisted subprojects. The first phase of this ESMF, outlined in Section 1.2, corresponds to the state's preparation and submission of a proposed sector strategy. Inthis phase, the state works with BANOBRAS to evaluate the potential environmental and social risks of each type of subproject proposed, based on an analysis of typological risk factors, and to conduct an assessment of its existing institutional capacity for environmental and social management of the subprojects included inthe sector strategy. Inthe second phase, outlined in Section 1.3, the World Bank reviews the submitted strategy and corresponding assessment and: (i) assigns an institutional capacity rating to the state for each sector of its program; (ii)identifies the procedures for World Bank oversight of subprojects; (iii)where necessary, recommends additional strengthening measures; (iv) identifies a program of institutional capacity enhancements that could result in a higher level of reliance on existing systems; and (v) provides guidance on any additional up-front sectoral environmental assessment (EA) work required. BANOBRAS, as the borrower institution will oversee compliance with this process. The ESMF also includes procedures, outlined in Section 1.4, for project implementation and supervision, including procedures for conducting site sensitivity screening of higher risk projects, and for encouraging and facilitating state institutional capacity improvements at any time duringparticipationinthe program. 1.2. Preparationand Submissionof State Proposalto Participateinthe Program As noted above, a state that wishes to participate in BANOBRAS' program may submit a proposed medium-term sector strategy (3-4 years) for funding. As part of the proposal, the state works with BANOBRAS to develop, and submit to the World Bank assessments o f (i) environmental and the social risks associated with the subprojects included in the strategy; and (ii) their institutional management capacity. While not currently planned in the case that World Bank financing were to be used, the World Bank reviews to the appropriate degree the assessments, and recommends oversight and management procedures as described in Section 1.3 below. The purpose of this approach i s to facilitate the application of oversight and management procedures commensurate with each state's subproject risks and institutional capacity. 1.2.1 Assessmentof Sub-ProjectRisks As part of its proposal, the state works with BANOBRAS to assess the potential environmental and social risks of each type of subproject in its proposed program. In practice, the environmental and social risks of a particular subproject are a function of the type and scale of the subproject's activities and the ecological and sociocultural sensitivity of the subproject site. Recognizing, however, that specific subproject sites will usually not yet have been identified at the time the proposal i s submitted, this framework provides for a typological risk rating of each subproject as Type I, or 111, according I1 to the intrinsic risks associated with the type of intervention to be carried out. 62 The risk level for each type of sectoral activity i s based on the intrinsic environmental and social risk associated with: (i)the type of intervention (e.g., maintenance, expansion, upgrading, new infrastructure) to be carried out; and (ii) the specific type of infrastructure or sub-sector in which the intervention i s being executed. I t does not require any knowledge of the site's ecological and sociocultural sensitivity, which is instead examined, following the guidance in Section 1.4.1, through subproject site screening once the site has been identified to further differentiate between relatively higher and lower risk subprojects?' Where a single subproject includes multiple types of interventions or sub-sectors, the risk rating i s assigned based on the highest level of risk applicable for any component of the subproject.2' Ingeneral, the riskratinglevels aredefined as follows: Type I: Subprojects likely to have minimal or no adverse environmental or social impacts. Type 11: Subprojects with moderate environmental, indigenous peoples, cultural property, or resettlement risks. The project presents certain risks given the civil works planned, but its potential adverse impacts are less adverse than those of Type I11projects. These impacts are site-specific22; few if any of them are irreversible; and in most cases mitigation measures can be designed more readily than for Type I11projects. Type 111: Subprojects with high environmental, indigenous peoples, culturalproperty, or resettlement risks. These impacts may affect an area broader than the sites or facilities subject to physical works. This methodology includes the following Bank-approved typological guidelines for the Roads, Water and Sanitation, Urban Housing, and Solid Waste sectors. If a state program includes investments in different sectors, it should work with BANOBRAS to prepare a similar typology for subprojects inthat sector that i s satisfactory to the World Bank. 2o Normally, site screening will only be required for Type I11 subprojects to ensure that particularly high risk projects receive closer Bank oversight and that specific risk areas are identifiedprior to the initiation of subproject EA work. 21 In cases where the typological definitions for a sector conflict with existing state classifications, the state may include in its proposal a description of a rating system based on the alternative classifications, along with an explanation of why it i s necessary to use the alternative system. 22Ifprojects impacts are site-specific, but result insignificant social impact (i.e., involvinglandacquisition that affects more than 200 persons, or significantly affects indigenous peoples either positively or negatively), projects are considered to be Type I11A. 63 ROADS SECTOR Step 1: Type of Intervention Maintenance Routine or periodic works to maintain a road in good serviceable condition. All works are performedon existing structures. - - Routine work (pothole repair, cleaning of drainage). Periodic work (resurfacing, signaling, bridge maintenance). Rehabilitation Restoring an existing deteriorated roadto its original condition. All the work i s performedon existing structures or in the right-of-way (ROW).N o land acquisition i s required. - Improvementof drainage, slopes, retaining walls, and other structures. - Reinforcement of the roadway. - Complete resurfacing. - Restoration of civil works. Improvement Improving the existing road's specifications. The majority of the work i s carried out on the existing road surface or inthe ROW. Some land acquisition may be required in specific areas. - Widening of emergency lanes, shoulders or sidewalks. -- Widening of intersections. Addition of new lanes in limited areas (e.g. slopes). - Upgrading of curves. - Reinforcement of bridges. Upgrading Expansion of road carrying capacity within existing ROW, through upgradingof roadcategory, for example, basedon its hierarchy, from a secondary road to a primary road or basedon the type of road surface, from gravel to a paved road. - Adding of new lanes (from 2 to 4 or from 4 to 6, etc.). - Change in the road surface. New New projects or new trajectories. Land acquisition i s required for the entire span of Construction roadway. - New roadprojects, including new bridges. - - Construction of bypasses. New trajectories (changes of route). Step 2: Type of Infrastructure/Sub-sector For roads, classification of the type of infrastructure or sub-sector i s complex as several categorizations have been established for Mexico's roads in accordance with a variety of criteria, such as jurisdiction (federal, state, or municipal), "level of traffic'' (heavy, moderate, or light), and geometric or engineering criteria. For the purpose of this ESMF, roads subprojects were classified according to the gridhierarchy below.23 23This approachmay needto be adjustedfor other states. 64 Principal Grid Generally, the principal gridi s administered by the state road agency. Insome countries this i s called the "central artery system" or "priority grid." It includes major transportation corridors. These are high-speed, multiple-lane, paved roads, with intersections and complex works. The ROWs can range from 50 to 100meters on each side of the roadway. Secondary Grid Sometimes called regionalgrids or feeder grids, administration varies. Generally, these are paved roads with moderate traffic, and ROWs from 20 to 50 meters on each side of the roadway. Tertiary Grid Generally, these roads are administered by municipal or local authorities. These are and Rural generally dirt roads, some are gravel; works are of limited technological level, the Roads volume of traffic i s low; there are no sidewalks or emergency lanes, and the ROWs are very narrow. Step 3: EnvironmentalRisk Rating Tertiary ' Roads SecondaryRoads MainRoads Maintenance I I I Rehabilitation I I I Improvement I I1 I1 Upgrading I1 I11 I11 New Road I11 I11 111 WATER AND SANITATIONSECTOR Step 1: Type of Intervention Rehabilitation This includes restoration of an existing water supply system, seweragesystem, wastewater treatment system, or potable water treatment system. Also falling into this category are works for optimization of potable water treatment plants or changes in diameter size for aqueducts and sewer systems. N o land acquisition i s required. Expansion This includes anincrease inthe coverage of water supply aqueducts and sewerage systems, potable water storage tanks, or the construction of related booster and mmting.stations. New systems This includes the construction of new aqueducts, dams and sewerage systems, including connected residential systems, construction of potable water and wastewater treatment plants. 65 Step 2: Type of Infrastructure/Sub-sector The principal systems or grids, mainlines, tertiary systems, and Sewer Networks residential connections. PotableWater Supply Capture systems (excluding dams and reservoirs), untreated water Systems transport lines, treatment plants, water wells, pumpingstations and storage tanks. Wastewater Treatment Major Interceptors. This includes treatment plants, transport, and final Systems disposal. Stormwater Drainage Includes drainage canals, flood buffer zones, and pumping stations Systems ~~~ Includes all dams and reservoirs for water supply, flood control, etc. Distribution Water PotableWater Wastewater Stormwater Damsand and Sewer Supply Treatment Drainage Reservoirs Networks Systems Systems Systems Rehabilitation I I I I I1 Expansion I I1 I1 I1 I11 New Systems I1 I11 I11 I11 ILT URBANHOUSING SECTOR Step 1: Type of I n t e r ~ e n t i o n ~ ~ Technical Involves consultation and direction for low-impact urban subprojects that seek to Assistance improve the livingconditions of the inhabitants of a given sector or sectors, but that do not involve major works or major adjustments. These projects do not involve land acquisition or resettlement. Neighborhood Involves subprojects that seek to consolidate marginalurban sectors and improve Improvements the quality of life, public services, or urban outdoor structures. These subprojects may involve minor levels of local resettlement. New Urban Involves subprojects aimedat constructing new urbandevelopments, with the Developments development of new infrastructure, urban outdoor structure, new roads, and the extension of public services. This usually requires land acquisition and resettlement. 24Housingprogramsare expectedto vary significantlyby state. 66 Step 2: Type of Infrastructure/Sub-sector Rehabilitation Involves restoration or remodeling works that do not have a major impact and do no alter the urban landscape. Expansion Involves moderate scope works that require local modifications of the urban landscape inthe area of the constructions involved. New Construction Involves major works requiringsignificant modification to the urban landscape and/or the local dynamics of the area of influence by the new development. Requires land acquisition and resettlement in some cases. Step 3: EnvironmentalRiskRating TechnicalAssistance Upgradingof New Urban Neighborhoods Developments Rehabilitation I I NIA ExDansion I I1 NIA New Construction I I1 I11 SOLIDWASTE MANAGEMENTSECTOR Step 1: Type of Intervention Upgradingof This involves major planninginthe collection, transportation, and disposal Collectionand processes. It could include programs for reducing the source of and recycling DisposalSystems waste. It may include upgradingof disposal systems, such as leachate re- injection and the burningof gases. No land acquisition i s required. Expansionof Includes increased coverage of collection services, expansion of sanitary Collectionand landfills, and expansion of areas for recycling. It may require new land. DisDosalSvstems New Systems Includes the planning of new collectionroutes, recycling systems at the source, and construction of new transfer stations and sanitary landfills. In some cases it may require the construction of leachate treatment plants or leachate re-circulation within the landfill cells, as well as systems for the usage or burningof gases. Often, new lands are requiredalong with detailed environmental studies. 67 Step 2: Type of Infrastructure/Sub-sector System Design and Includes the upgradingof the mobile collection equipment, collection Equipment Purchases stations and other equipment that could be required. ResidentialSolid Waste Involves the optimization of collection systems, includingthe service Collection area expansions and campaigns to reduce waste at the source and recycle waste. Final DisposalinSanitary Involves the upgrading of existing systems or construction of new sanitary Landfills landfds. Appropriate lands wdlbe required for this activity, along with a detaded environmental study. Step 3: Project Type Definition System Design and Collection Of Equipment ResidentialSolid FinalDisposalin Purchases Waste Sanitary Landfills Upgrading of Collection and I I1 I Disposal Systems Expansionof Collection and I I1 I1 Disposal Systems New Systems I I1 I11 1.2.2 Analysis of State Legal Framework, Mexican Legal Framework, and Bank Safeguard Policies Inthe second step of the ESMF, BANOBRAS and the state conduct a systematic analysis to identify areas of consistency and discrepancy between the state's legal framework, the GoM legal framework and applicable Bank safeguard p~licies.~'For the purpose of this evaluation, "legal framework" includes all laws, regulations, decrees, standards, and practices related to safeguards. This analysis should draw on Table 1.2.2.1, which presents a comparison of World Bank safeguard policies likely to be applicable to subprojects and GoM's related laws, regulations, and standards germane to all states, and, as an example, the work done to apply the ESMF to SoG, described in section II.4. The information in Table 1.2.2.1 is for methodological purposes-application of this framework to each state will involve a state-specific analysis of the state and/or GoM legal frameworks as they are applicable to achieving the objectives the Bank's safeguard policies within the sectors proposed for funding under the program. This analysis i s submitted to the Bank during the appraisal mission and i s used to define the specific oversight arrangements for the environmental and social assessment and management of subprojects. 25The existing Mexican legal framework for safeguard-related issues is based on its federal system. Under this system, states are mandated to perform certain functions, which are, in turn, undertaken by state and/or municipal institutions through arrangements specified by law, administrative decree, or agreement. 68 Table 1.2.2.1 World Bank SafeguardPoliciesand MexicanLaws, Regulations,and Standardsz6 RELATEDMEXICANLAWS,REGULATIONS, PRINCIPAL POINTS STANDARDS, AND INSTITUTIONALFRAMEWORK OFDISCREPANCY OP4.01 - ENVIRONMENTALASSESSMENT Act for Ecological Equilibriumandthe Screening: In .Mexico is basedon inclusive or exclusive lists of projects. EnvironmentalProtectionandthe regulationsto that Act At the World Bank the project is cross-referencedwith the sensitivity of with regardto: EnvironmentalImpact the project area. Scope: In Mexico, there are generic Terms of Reference for various sectors. The World Bank adjusts the Terms of Reference to the characteristicsof the project andto the "screening" results. Analysis ofalreniarives: For high risk projects, the World Bank requires an analysis of alternatives. In Mexico, there is no such specific requirementwithin EA, per se. Alternatives would be examinedmost likely as part of feasibility studies Consulfarion: The World Bank requiresconsultationduring the preparationof the EA. This requirement is not included in Mexican legislation, althoughpublic hearings can be held at the requestof interestedparties. I General Act for EcologicalEquilibrium& Environmental Overall, the protectionof naturalhabitatsis very similar and these practices Protection, and the regulationsto that Act with regardto: are well known in Mexico, including in the DIRD sectors. The principal protectednaturalareas, environmentalimpacts, and natural discrepancy is seen in: areas protectedthroughfederaland state decrees The World Bank requirescompensationin the event of an adverse effect on Mexican Official StandardNOM-022-SEMARNAT-2003for natural habitats(generally the measures employedare new protectedareas the Preservationof Coastal Wetlands or the strengtheningof existing areas). However, certain laws that require National Commissionon ProtectedNaturalAreas (agency establishment of protectedareas can be assessedand reviewedto determine of SEMARNAT) whether the net impact is adequately achieved. National Commissionfor the Understandingand Use of Biodiversity (COYABIO) OP437 SAFETY OFDAMS - Administration of Operation, Conservationand Industrial Bank requiresall projectsthat rely on existing dams to be evaluated by one Engineeringof Dams, Pumping Stations and Aqueducts or more independent dam specialists to inspect the safety status, review the (agency of the National Water Commission,CNA) operationaland maintenanceprocedures, and provide a written report of The GoM does not have a specific resettlementpolicy per se, [ngeneral,becausethe GoMdoes nothaveaspecificresettlementpolicy per nor a single institution responsible for implementing se, nor a single institution responsiblefor implementingresettlement-related , resettlement-relatedplanningor activities. Mexican law does planningor activities,it is importantto establish the principlesto follow on the not recognize the term "Involuntary Resettlement." basisof those lawsandpractices that correspondclosely with the spirit of OP 4.12 anddeterminewhich agency takes the leadinoverseeingresettlementin Nonetheless,extensivelegislationexists regardingrights to :ach state. Inaccordancewith Mexicanlaw andpractice, resettlement propertyand to land, agrarian laws for protectionof agricultural ?roceduresshouldincludecensus of affectedhouseholds, valuationof lands landholdings (with or without title). Laws on Expropriation of mdimprovements,provision of new replacementhousesandtitled property property exist. Paymentinkind is accepted, provided that it i s :includingthose lackinglegally recognizedtitle to occupiedaffectedlands,but done without detrimentto the affectedparties. with legally recognizedclaims to those lands), anddevelopment of :omplementary social assistance anddevelopment projects. To define these procedures for inclusion inthe ESMF, states participating in 3ANOBRAS' shoulddefine procedures for conductingresettlement, lenoting one agency or institution to oversee the process, and describingthe nstitutional arrangementsfor ensuringcompliancewith relatedMexican aw. These procedures may needto ensure that all projectsinvolving land icquisition that affects more than 200 people are categorizedas Type IIIA xojects and flaggedto the World Bank early on to allow prior review and :omment on TORSand RAPSby Bank staff, as needed. 26 This table summarizes national legal instruments. Individual states may have related laws and policies that are more stringent or detailed. This table is not intended as an exhaustive list of all GoM safeguard-related laws and regulations. 69 RELATEDMEXICANLAWS, REGULATIONS, PRINCIPAL POINTS STANDARDS, AND INSTITUTIONALFRAMEWORR OFDISCREPANCY OP4.20 INDIGENOUSPEOPLES - Constitutionof the United Mexican States A preliminary analysisof the World Bank's policies andof Mexican Constitutional Reform Decree of August 14,2001 legislation (See Attachments 1) in indigenousaffairs makes it possible to ILO Convention 169Conventionconcerning concludethat there is a substantialconsistencyandcompatibility inthe basic IndigenousandTribal Peoples inIndependent principles of protection, participation, and consultation. To maintain a Countries consistent approachtoward IndigenousPeoples,each state shouldadhere to ConstitutiveAgreementof the Fundfor the the following principles contemplatedinMexicanlaws and programs: (i) Developmentof IndigenousPopulationsof Latin identification, socioeconomicand cultural analysis of the indigenousgroups America and the Caribbean involved inthe sector strategy, to identify subprojectsthat could potentially Draft AmericanDeclaration on the Rights of affect indigenouspeoples or to ensure that they benefit from the subprojects; IndigenousPeoples, Organizationof American States (ii)participation and consultationmechanisms so as to ensure subprojects Draft UnitedNations Declarationon the Rightsof are socially and culturally compatible; (iii)identification or implementation IndigenousPeoples of conflict resolution mechanisms; (iv) definition of actions targeting IndigenousRights Containedin StateConstitutionsof indigenousgroups to mitigate impact and/or to ensurebenefits; and (v) Mexico designationof the state entitiesresponsiblefor implementationof pertinent FederalLegislation Applicable to IndigenousCases institutional arrangements. Law on IndigenousRights andCulture OPN11.03 CULTURALPROPERTY - FederalLaw on Monumentsand Archeological, The requirementsare similar and no significant deviationsare seen. The Artistic, and Historical Areas, and regulationsto that practicefor protection of archeologicalheritageinMexico i s quite advanced law and the regulationsfor unexpectedfinds are well detailed. OrganicLaw of the National Institute of Anthropology and History (INAH), and Directorate of Archeological Restoration 0 National Coordinationof INAH Centers 1.2.3 InstitutionalManagement Capacity Self-Assessment In the next step, the state, also as part of its proposal, works with BANOBRAS to conduct an assessment of its existing institutional environmental and social management capacity-within the program's sectoral implementation entities, at the level of the state environmental agency, and in any agencies with applicable authority for indigenous peoples, cultural property protection, or resettlement issues-as it applies to the subproject program. To conduct the assessment, the state completes a Bank-provided survey (see example in Attachment 2), which evaluates environmental assessment capacity in general, and environmental and social management capacity within each sector included in the state's proposed sector ~trategy.'~The survey i s designed to address key policy, budgetary, staffing and technical capacity, and monitoring and evaluation aspects of institutional management capacity. The assessment should draw on available existing compilations and analyses of the state's environmental regulatory framework prepared by the Department of the Environment and Natural Resources (SEMARNAT) and other agencies. It may also draw upon institutional analysis and methodological proposals for environmental and social management already implemented for other projects in Mexico financed by the World Bank (or other donors), if relevant. *'States may also provide the information obtained through the assessmentthrough meetings or other methods satisfactory to the World Bank. 70 1.3. Bank Review of the Proposal Upon receipt of the state's proposal, the Bank reviews the subproject risk and institutional capacity assessments, consulting further with the state as needed. The purpose of the Bank's review i s to: (i) assign an institutional capacity rating to the state for each sector of its proposed strategies; (ii) identify the procedures for Bank oversight of subprojects; (iii)recommend any necessary additional strengthening measures; (iv) identify aprogram of institutionalcapacity enhancementsthat could result in a higher institutional capacity rating; and (v) provide guidance on any additional up-front sectoral EA work required. 1.3.1 InstitutionalCapacityRating As part of the review process, the Bank assigns an institutional capacity rating for each sector to be funded by the Bank. The institutional capacity ratings, summarized below, correspond to a baseline level of management capacity for the sector. For each rating, the state must demonstrate that all of the requirements of the rating below have been achieved.28.The purpose of this approach i s to provide a strong incentive for states to improve their institutionalcapacity. High e The sectoral agency and/or the state environmental agency have clear environmental policies and procedures, strong management capacity, and adequate instruments (e.g., environmental manuals, regulations). This includes environmental aspects for bidding specifications and contracts, and environmental follow-up on projects. e The state environmental agency has the capacity to control the projects and review environmental impact studies; the system of environmental licensing i s strong; environmental monitoring i s conducted; and remedial action i s taken. e The state has indigenous peoples and resettlement policies, as well as specialized agencies or units with sufficient capacity to manage these issues e There have been positive experiences in the state in management of environmental, indigenous peoples, cultural property, and resettlement programs, projects and issues. Medium e The sectoral agency and/or the state environmental agency need to be strengthened with regard to environmental policies, procedures, and management capacity, and/or specific instruments (e.g., environmental manuals, regulations) need to be prepared. This strengthening canbe achieved inthe short- to medium-term. The state environmental agency has the capacity to oversee all relevant subprojects and review environmental impact studies; the system of environmental licensing i s strong; environmental monitoring i s conducted; and remedial action i s taken. The state has indigenous peoples policies and agencies specialized in the management of those policies, but it lacks sufficient institutional capacity to elaborate and implement plans for indigenous development, which may be required. The state has resettlement policies, agencies specialized in the management of those policies, and an application framework, but does not have sufficient experience in the management of resettlement. With technical assistance, it i s possible to overcome the deficiencies. '*Theinstitutional capacity rating may be changed (higher or lower) at a later time based on performance. 71 Low 0 The institutional capacity in the sectoral agencies or inthe state environmental agency i s quite weak, and strengthening programs are necessary in the long-term. 0 The state does not have adequate indigenous peoples or resettlement policies and/or management capacity (i.e., insufficient human resources, weak organizational structure). It has a history of inadequate management of social impacts. The strengthening programs needed are long-terminnature. 1.3.2 World Bank OversightProcedures The state's institutional capacity rating broadly determines how the Bank will oversee the environmental and social assessment and management of subprojects (see Table 1.3.2.1). This approach i s intended to provide a level of oversight commensurate with expected risk, while also encouraging states to enhance their institutional environmental and social capacity. For all capacity levels, the Bank would normally require prior review and approval of any necessary environmental, indigenous peoples, or resettlement assessmentsor plans (EA, RAP, IPDPs and TORS)for highest risk subproiects (i.e., all Type 111-A proiects). The Bank may also require more comprehensive oversight procedures for initial subprojects to provide additional assurance of quality and to identify capacity building needs. In addition to ex-post review procedures, all state programs are subject to general supervision reviews, as outlined in Section 1.4.4. 72 *'Thefirst several Type I1subprojects may be subject to prior Bank review to ensure typology and proceduresare adequate. 30The first several Type 111-Bsubprojects may be subject to prior Bank review to ensure typology and proceduresare adequate. 31Type I11A & B subprojects are described in Section 1.4.1. 32See footnote # 30 33See footnote # 31 34See footnote ## 30 73 1.3.3 Institutional Capacity EnhancemenustrengtheningMeasures In addition to the general oversight procedures outlined above, in all cases the World Bank may recommend more specific strengthening measures based on the identified needs. These measures can be implemented in the short- or mid-term and are specific to the preparation or implementation of one or more of the state's subprojects. In making the recommendations, the World Bank defines each capacity need and recommends procedures or instruments that can fulfill that need. The state, in implementing its sector strategies (Section 1.4), confirms the procedures or instruments it will utilize. A wide variety of procedures or instruments may be identified as capacity strengthening measures, such as: e Environmental assessmentprocedures, including specialized procedures for Type 111-A projects;35 e Environmental manuals, regulations, etc.; e Environmental Management Plans; e Compensation plans for natural habitat loss; e Environmental guidelines for the design and construction of specific projects ineach sector; e Strategic EnvironmentalAssessment (SEA); e Procedures for unexpected cultural property findings (e.g., archeological remains); e Procedures for including environmental requirements inbiddingspecifications and contracts; e Resettlement policy framework (see Attachment 3 for a sample framework) and subproject resettlement plans; e Indigenous peoples framework and subproject plans; (see Attachment 4 for a sample IPDP) e Training, equipping, or infrastructure enhancements; e Consultationand/or disclosure procedures; and e Monitoring procedures 1.3.4 Additional SectoralEnvironmentaland/or Social Assessment Work As part of its review of the state proposal, the World Bank also specifies whether additional sectoral environmental or social assessment (SEA) work i s required for the overall sector strategy. Normally, limited additional work will be requiredfor high capacity states beyond a confirmation and elaboration of the oversight procedures described in Table 1.3.2.1 above. For most low-and some medium- capacity states, the state will need to complete, through an independent consultant, an abbreviated SEA. Based on the state's proposed programs and capacity self-assessment, the World Bank will provide guidance, including draft TORs, on what issues should be covered by the SEA. In general, SEASmay include one or more of the following elements: An upstreamanalysis of sectoral policies and investment strategies; An assessment of the potential cumulative environmental and social impacts of the proposed program; Further institutional capacity analysis of the applicable policy, legal, and administrativeframework for environmental and social management; 35Procedures for Type 111-A subprojects are likely to include: examination of the project's baseline data and potential negative and positive environmental impacts; comparison of those impacts with those of feasible alternatives; recommendation of any measures needed to prevent, minimize, mitigate, or compensate for adverse impacts and improve environmental performance; and consultation and disclosure o f TORs and draft EA. 74 0 A description of the environmental and social management procedures the state will follow to help ensure that use of its systems will help achieve the objectives of the World Bank's safeguard policies; 0 A determination of the functions of each entity participating inBANOBRAS' program, in regards to the fulfillment of environmental management responsibilities including: authorizations, mitigation programs, provision of information, verification of compliance with requirements, and project supervision; and 0 A proposal for abroadinstitutionalcapacity enhancementprogram. The state's completion and submission of this work to the World Bank will function as the state's revised proposal. Because the state provides additional detail inits revised proposal and has latitude in identifying alternative measures to meet World Bank requirements, further consultation between the World Bank and the state may be required to finalize the proposal as the state's environmental management plan. This additional consultation should, however, be limited to resolving or clarifying responses to already identifiedneeds, and should be completed in as timely a manner as possible. If resolution of particular issues cannot be reached in a timely manner, the World Bank may approve implementation of selected elements of the state's subproject program, for which oversight and management procedures have been finalized. 1.4 Implementation Specific implementation procedures will be developed for each state. However, the following section sets forth general guidance for implementation designed to ensure that subprojects with potential significant environmental and social risk are flagged to the Bank. 1.4.1 Site Screening Again, for Type I11subprojects, states must conduct site screening once potential subproject sites are known and prior to implementation of the subproject to better determine subproject risk areas and to flag to the World Bank those subprojects with potential significant environmental or social impacts. This flagging will ensure that particularly highriskprojects receive closer World Bank oversight (such as prior review of TORSand final drafts of EAs, resettlement plans, etc.). Results of site screening are used to determine, whether subprojects are designated as either Type 111-A or 111-B. Type 111-A: Subprojects with particularly high environmental, indigenous peoples, cultural property, or resettlement risks, as determined by an analysis of the nature and scope of civil works plannedand the ecological and sociocultural sensitivity of the project site. Type 111-B: Subprojects with moderately high environmental or social risk. The subproject does present certain risks due to the sensitivity of the setting and the nature and scope of civil works planned. However, mitigatory measures are readily available and the subproject will not have a major impact that places the natural environment, its biodiversity, society, or its culturalproperty at risk. Site screening may be carried out by the sectoral agency, state environmental agency, and/or relevant social agency. A system designating three possible degrees of sensitivity for a setting (Le., low, medium or high) i s presented in Table 1.4.1.1, using the World Bank policies most likely to be activated by subprojects. Other factors of importance may be added for sectoral projects, as 75 applicable. In addition, more detailed work charts can be prepared for each sector. In screening subprojects, states should review each row of the table to determine the highest sensitivity level applicable to the site or sites under consideration. SENSITIVITY LEVEL POLICY Low MODERATE HIGH Natural Habitats No critical natural No critical natural Presenceof critical (OP 4.04) habitats; absence of habitats; presence of natural habitats and naturalhabitats. other naturalhabitats. natural forests.36 Moderatepopulation Highpopulation ~ Involuntary ~~~ ~ Low population Resettlement density; disperse density; some density; cities and (OD 4.12) populations, little or no activities along the major towns; intense activity or well- trajectory; mixed activities inthe established enterprises property and project's area of inthe project's areaof landholdings along the influence; low-income influence. trajectory . population and squatters; communal properties. Landholdingsthat are not very well defined. Indigenous Absence of indigenous Dispersed, mixed Populations, reserves Peoples populations. indigenous and indigenous (OD 4.20) populations; territories; vulnerable populations with a indigenous populations highdegree of acculturation. Cultural Property N o sites of importance The presence of sites Sites of cultural (OPN 11.03) are known or of cultural interest are importance inthe area suspected. suspected; there are of influence. significant sites inthe area of influence. Based on the highest level of sensitivity identifiedfor any aspect of the subproject or policy/parameter, the subproject i s designated as either Type 111-A or 111-B, in accordance with the matrix below. IProject TvDe Sensitivity of the Setting 1.4.2 Bank Reviews and Supervision Procedures for World Bank reviews and supervision will be based on the Bank's assessment of the state's proposal and may be adjusted during project implementation. As noted in Table 1.3.2.1, the ~ 36Critical natural habitats are defined as existing and proposed protected areas, along with unprotected natural habitats of known high importance for biodiversity conservation. For details see Natural Habitats OP 4.04. 76 World Bank will conduct ex post reviews of subproject EA and social work of, at a minimum, all Type I11subprojects and select Type I1subprojects. This selection will be basedby the Bank on subproject risk and institutional capacity to ensure the adequacy of the environmental and social management work implemented. The specific procedures for conducting these reviews will be determined in consultation with the state. Ingeneral, Bank subproject reviews, both prior and ex post, will take place after the responsible state agency has completed its review, to allow an assessment of that agency's performance indoing the review, as well as an examination of the overall quality of the environmental and social work. Inaddition, World Bank supervision will be supplemented with a broader auditing system carried out over a certain period of time agreed upon with the state. In general, World Bank supervision will include re-examination of project risk levels, institutional capacity, and delegation and oversight procedures, as well as supervision of environmental and social outcomes. All supervision activities will be designed to correspond to the broader supervision procedures of BANOBRAS' program. 1.4.3 CapacityBuildingDuringImplementation Duringimplementation, the World Bank will be available to provide support to states in strengthening their environmental and social management and procedures, as well as its environmental and social criteria, consistent with the World Bank's policies. At any point in its participation in the program, a state may submit a request for reclassification of its institutional capacity rating. To submit the request, the state should submit a revised self-assessment to the World Bank for review to determine whether the state's capacity ratingshould be adjusted, and, correspondingly, whether management and oversight procedures can be adjusted. 1.4.4 Evaluationof the ESMF The World Bank will conduct a mid-term evaluation of the ESMF to determine whether it i s effectively meeting its objectives and to identify any opportunities for enhancing the framework. The evaluation will look at the effectiveness of the ESMF, in general, and inregard to each state and sector. Prior to making any changes to the ESMF the World Bank will share its findings and any proposed reforms with the states. States are encouraged to provide feedback on the ESMFto the World Bank at any time duringtheir involvement inthe program. Part11. Applicationof the ESMFto Guanajuato 11.1.Introduction In accordance with program eligibility criteria, the first loan under BANOBRAS' program will be made to the State of Guanajuato (SoG, or the State) for the DIRD Project. For the purpose of this document, infrastructure services are deemed to include road transport, water and sewerage services, and low-income housing. The following sections describe the specific arrangements for ensuring that environmental and social aspects of subprojects implemented in SoG are adequately managed, particularly in respect to the requirements of the Bank's safeguard policies and the GoM's laws, standards, and regulations. These arrangements were determined through application of the generic ESMFdescribedinPart I. 77 For the loan to SoG, the ESMF was applied inthe context of a "Safeguard Pilot" approach, which tests use of existing country and state systems to address environmental and social safeguard-related issues and to materially meet the objectives of the World Bank's safeguard policies. 11.2. Framework Methodology Inaccordancewith the procedure set forth inPartI, first prepared and submitted aproposed sector SoG strategy. Building on this strategy, SoG evaluated the potential environmental and social risks of each type of subproject proposed, drawing upon an analysis of typological risk factors, and conducted a self-assessment of its existing institutional capacity for environmental and social management of the subprojects included in the sector strategy. In the second phase, the World Bank reviewed the submitted strategy and corresponding self-assessment7appraised the situation, and: (i) identified the procedures for Bank oversight of subprojects; (ii) recommended additional strengthening measures; (iii)identified a program of institutionalcapacity enhancements; and (iv) providedguidance on additional up-front sectoral EA and social impact assessment required. The results of this assessment are presented inthe following sections. 11.3. Assessment of Sub-project Risk In accordance with the ESMF methodology, SoG prepared a proposed sector strategy for each of the three select sectors (roads, water and sanitation and low-income housing) and analyzed the potential environmental and social risks of each type of subproject proposed. This risk analysis was based on an analysis of inherent typological risk factors for each subproject type, recognizing that the risks of a particular subproject are a function of the type and scale of the subproject's activities and the ecological and socio-cultural sensitivity of the subproject site. The following tables present the risk classifications associated with the different types of activities listed in SoG sector strategies. The tables also list specific environmental and social work and institutional arrangements likely to be associated with each type of activity. These considerations are explained in more detail in section 11.4, and the precise arrangements will be further clarified prior to the implementationof the Bank-supported program. Roads Sector Project Activity Class- Environmental and Social Institutional Arrangements ification Work Institutional Define strengthening programs SOP and IEGwill define mechanismsfor Strengthening NIA for SOP and IEG information exchange on all roads sector projects Establish environmental capacity SOP and IEG will coordinate efforts to within SOP strengthen environmental and social managementcapacity Develop environmental and IEGwill support SOP development of social manualsfor road manuals rehabilitation, construction and maintenance works 78 Project Activity Class- Environmentaland Social Institutional Arrangements ification Work Maintenance1 I Application of environmental SOP environmental staff will ensure Rehabilitation and social manuals application of manuals Expansion of State Network (Secondary Roads)37 e Bypasses I11 Site sensitivity analysis, EIA IEGand SOP will concur on site TORs modifiedbasedon results sensitivity analysis and resulting TORs. e Access I11 of sensitivity analysis, EIA, SOP will contract consultant to undertake Change of TORs for resettlementplan and EIA. Resultsof EIA will be approved by category (e.g. I11 resettlementplan (if necessary) SOP and IEG. TORs and final from 2 to 4 ResettlementPlan will be approved by lanes) Secretaria de Desarrollo Social (SDS) and SOP. Improvement of Bridges/ Overpasses and Critical Points 0 Reconstruction I Application of Environmental SOP environmental staff will ensure 0 New I1 and Social Manuals application of manuals construction 0 Critical points 11 Application of manuals and SOP environmental staff will ensure standardcodes of practice application of manuals; SOP and IEG apply standard codes of practice Construction of Toll [I1 Site sensitivity analysis, EIA IEGand SOP will concur on site Roads TORs modified basedon results sensitivity analysis and resulting TORs. of sensitivity analysis, EIA, SOP will contract consultant to undertake TORs for resettlement plan and EIA. Results of EIA will be approved by resettlementplan (ifnecessary) SOP and IEG. TORs and final ResettlementPlan will be approved by Secretariade Desarrollo Social (SDS) and SOP. Rural Roads D New roads Site sensitivity analysis, EIA IEGand SOP will concur on site TORS modified basedon results sensitivity analysis and resulting TORs. D f sensitivity analysis, EIA, SOP will contract consultant to undertake TORS for resettlementplan and EIA. Results of EIA will be approved by resettlementplan (ifnecessary) SOP and IEG. TORs and final ResettlementPlan will be approved by Secretariade Desarrollo Social (SDS) 2ndSOP. 4pplication of Environmental SOP environmental staff will ensure 1 Maintenance1 rehabilitation md Social Manuals ipplication of manuals 37Expansion and change of category may include new bridges and overpasses on existing ROWS.This is different from new bridges and overpasses that are part of new road construction (and require substantial land acquisition). 79 Water and Sanitation Sector Risk Rating '2 Project Activity Class- Environmental and Social Institutional Arrangements ification Work Institutional Define strengthening programs SOP and IEGwill define mechanisms for Strengthening N/A for CEA and IEG information exchange on all water and sanitation sector projects Strengthenenvironmental and social capacity within CEA CEA and IEGwill coordinate efforts to strengthenenvironmental and social Develop environmental and management capacity social manuals for community watershed management, water IEG will support CEA development of supply, sewerage collection and manuals treatment Watershed Management Studies 0 Hydrologic I EA to define critical issues TORSfor SEA will be reviewed by IEG Monitoring affecting long-term and CEA 0 Socio-economic I sustainability of water at the use of water state and watershed levels and 0 Natural disasterI develop recommendations to prevention address those issues 0 Aquatic ecosystem I studies ~ Rural Water Supply and Sanitation Site sensitivity analysis, TORS IEGand CEA will concur on site 0 Water Supply I11 modified based on results of sensitivity analysis and resultingTORs. Dams sensitivity analysis, EIA, CEA will contract consultant to undertake application of Environmental EIA. Results of EIA will be approved by and Social Manuals and standard CEA and IEG.TORSand final codes of practice, TORSfor Resettlement Plan will be approved by resettlementplan and Secretaria de Desarrollo Social (SDS) resettlementplan (if necessary) and SOP. Water Supply Application of Environmental CEA environmental staff will ensure Distribution [I andSocialmanualsandstandard application of manuals; CEA and IEG :odes of practice apply standardcodes of practice. TORs 0 DrinkingWater Treatment [I UrbanWater Supply and Sanitation Site sensitivity analysis, TORS IEGand CEA will concur on site D Water Supply nodified based on results of sensitivity analysis and resultingTORs. Dams [I1 sensitivity analysis, EM, CEA will contract consultant to undertake ipplication of Environmental EIA. Results of EIA will be approved by indSocial Manuals and standard CEA and IEG. TORSand final :odes of practice, TORSfor Resettlement Plan will be approved by 'esettlement plan and Secretariade Desarrollo Social (SDS) 'esettlementplan (if necessary) and SOP. CEA environmental staff will ensure I1 Application of Environmental application of manuals; CEA and IEG 0 Water Supply Distribution and Social manuals and standard apply standard codes of practice. TORS [I codes of practice 0 Sewerage collection 80 Project Activity Class- Environmental and Social Institutional Arrangements ification Work Wastewater Treatment Site sensitivity analysis, EIA IEGand CEA will concur on site and Reuse TORs modified based on results sensitivity analysis and resulting TORs. o f sensitivity analysis, EIA, CEA will contract consultant to undertake TORSfor resettlement plan and EIA.Results of EIA will be approved by resettlement plan (if necessary) CEA and IEG. TORs and final Resettlement Plan will be approved by Secretariade Desarrollo Social (SDS) and SOP. Include within SEA and identify TORs for SEA will be reviewed by IEG critical factors affecting water and CEA use efficiency, and recommended solutions ng Class- Environmental and Social Institutional Arrangements ification Wnrk Define strengthening programs IVEGand IEG will define mechanisms Strengthening NIA for IVEG and IEG and Direcci6n for information exchange on all housing de Ordenamiento Territorial sector projects (part of SDS responsible for + Land Use Plans) . IVEGand IEG will coordinate efforts to strengthen environmental and social Create environmental and social management capacity capacity within IVEG IEGwill support IVEGdevelopment of Develop environmental and manuals social manuals and public information materials for housing construction, lot development and maintenance Land Acquisition I1 SEA to define critical issues TORs for SEA will bereviewed by IEG affecting sustainable long-term and IVEG development at the state and municipality levels and develop recommendations to address those issues Application o f codes o f practice IVEGand IEG including screening o f land to be acquired against municipal land use Dlans Housing Financing 0 Home 4pplication o f codes o f practice, [VEGand IEGensure screening. improvement including screening o f land to be loans (auto- icquired against municipal land construction) lse plans, dissemination o f 0 Materials for mblic environmental self- nformation construction ("vivienda progresiva") 4pplication o f Environmental [VEGand IEGensure screening. IVEG md Social Manuals and standard and SOP environmental staff will ensure :odes of practice for application o f manuals and IVEG, SOP 0 Development of :onstruction and infrastructure, and loans for and IEG apply standard codes of practice. ncluding screening o f land to be serviced lots levelODedagainst municiDa1 81 Project Activity Class- Environmentaland Social InstitutionalArrangements ification Work e Housing for I1 land use plans. poor ("vivienda popular") Commercialization of Housing and Lots e Maintenance I Application o f environmental IVEGensures application of manuals. e Marketing I maintenance manuals e Service rights Application o f Environmental IVEGand IEGensure screening. IVEG e Executive I1 and Social Manuals and standard and SOP environmental staff will ensure projects codes o f practice including application o f manuals and IVEG, SOP I1 screening o f land to be and IEGapply standard codes of practice. developed against municipal land use plans 11.4 Legal and Institutional Management Capacity and Arrangements SoG completed and submitted assessments of its institutional environmental and social management capacity in each of the program's sectors and institutions in charge of social programs. The assessments addressed key budgetary, staffing, and technical capacity aspects of institutional management capacity. The findings of the assessments were further clarified through Bank discussions with key staff from the participating SoG agencies. Under the ESMFguidelines, SoG i s considered to have a high institutional capacity for environmental and social management in each of the sectors included in its DIRD program. In general, SoG has clear procedures for implementing GoM laws related to the Bank's safeguard policies. In addition, SoGhas adequate technical management capacity, including sufficient instruments (e.g., environmental manuals, regulations, specialized social units), qualified staff, and sufficient experience, which will be further improved through a Bank-supported capacity enhancement program. Finally, SoG will also follow due diligence procedures, including monitoring and tracking of key aspects of the process, to provide assurance to the Bank that the application of the ESMF i s achieving its objectives. 11.4.1 SoG PoliciesAnd InstitutionalArrangements for Implementingand Enforcing GoM Laws As a first step in applying ESMF guidelines for determining the institutional arrangements for its DIRD program, SoG evaluated its legal framework for implementing and enforcing SoG and GoM environmental and social laws, particularly those that address issues covered by Bank safeguards policies that were determined to be applicable to the SoG DIRDproject. This evaluation was based on a review of what SoG identified as being applicable SoG laws and regulations and was conducted as part of the Strategic Environmental Assessment (SEA) completed for S O Gas well as the assessment ~ ~ of federal and state laws and regulations related to resettlement and indigenous peoples (see Attachment l)39. The list of the applicable federal and state legislation evaluated by the Bank and applicable to this Project i s included inthe loan agreement of the project. 38Evaluacidn Ambiental Estratkgica del Estado de Guanajuato. 2003 39Attachment 1i s not intended as an exhaustive list o f all G o M and SoG safeguard-related laws and regulations. 82 The adequacy of SoG' s procedures was further assessed through a series of discussions between Bank and SoG staff and gaps between Bank policies and SoG laws and regulations were identified and a mechanism to address these gaps was agreed. 40 A summary of the state's policies and institutional arrangements in the areas covered by the Bank's applicable safeguard policies follows. In each of these areas, SoG has a strong record of positive experiences in terms of demonstrating adequate implementation and enforcement of GoM laws; in many cases demonstrating beyond-compliance performance. This section highlights areas where there are discrepancies between the GoM legal framework and World Bank safeguard policy requirements (as described inTable 1.2.2.1). Environmental Assessment: SoG has a well-developed policy, regulatory, and institutional framework for environmental assessment. The key policies and regulations are the Law for Protection and Preservation of the Environment of SoG (LPPAEG) and the associated Regulation of the LPPAEG in Matters of Environmental Impact Assessment. Through these policies, the State, in 1996, created a strong regulatory basis for a new administrative structure for environmental assessment; the Directorate of Ecology was removed from the Secretariat of Urban Development and Works, and two new independent entities were created: (i) the Instituto de Ecologi'a Guanajuato (IEG) [Institute of Ecology of the State of Guanajuato] as the state's lead regulatory agency, responsible for overseeing and issuing standards for the application of environmental laws and regulations; and (ii)the Procuraduri'a de Proteccio'n al Ambiente del Estado (PROPAE) [Judge Advocate General for Environmental Protection of the State of Guanajuato], the state's lead juridical agency on environmental matters and charged with monitoring and inspection. In regard to the specific areas of discrepancy between GoM's legal framework and the Bank's safeguards, SoG has the following . arrangements: Screening: IEG's existing practice involves limited site screening. As part of the application of the ESMF, IEG will conduct site screening of all high risk (Type 111) projects, following guidance providedby the Bank. Screening of Type Iand I1projects will be at the discretion of IEG. Scope of EA: IEG has traditionally used generic TORs. Under the application of the ESMF, IEG will customize the scope of TORs for highrisk (Type 111)projects based on the findings of the site . screening. The TORs for Category IIIA projects will be disclosed. The Bank will also provide assistanceto IEG inpreparinga more flexible TOR template for Type Iand I1projects. Analysis of alternatives: SoG does not require analysis of alternatives within EAs. Alternatives are evaluated in the feasibility stage analyses, with the practice being that the most feasible design being that with the fewest impacts. This practice provides partial overlap with the requirements of OP 4.01, but a discrepancy remains because of the unique value of an analysis of alternatives within the context of an EA. . Consultation: SoG follows the GoM approach of conducting public hearings at the request of interested parties, rather than as a mandatory step inthe EA process. Exceptions: IEGhas instituted a practice of waiving EIAs for certain low risk activities (e.g., water distribution, sewerage networks, small housing developments). IEG still requires application of construction guidelines and conformance with applicable environmental standards for these projects, but, nevertheless, this practice represents an additional discrepancy with the Bank's safeguard policies. 40The World Bank's Operational Policies on International Waterways, Forests, Disputed Areas, and Pest Management are not applicable to SoG's DIRDproject. 83 Natural Habitats: SoG has a very well-developed policy, regulatory, and institutional framework for protecting natural habitats. This framework i s based on the Regulation of the LPPAEG in Matters of Protected Natural Areas, and several associated ordinances and technical norms. Through this framework, SoG ensures that critical natural habitat areas are protected through the Sistema de Areas Naturales Protegidas del Estado de Guanajuato (SIANPEG) [System of Protected Areas of SoG]. This is a very strong and dynamic state protected areas (PA) system. As indicated in Figure 1, SIANPEG includes 16 legally established PAS with an additional six (6) officially proposed as protected areas. N o development i s allowed in existing or officially proposed PAS. In addition to the SIANPEG, SoG requires through its EA system mitigations to avoid or minimize impacts to non- protected natural habitats. The State also requires over-compensation for any necessarytree loss. Safety of Dams: The National Water Commission (CNA) i s responsible for the design, construction and overseeing of all dams within the state of Guanajuato; however, CNA can delegate some of these activities to be carried out on its behalf by the State Water Commission (CEA). Given the capability of both institutions to ensure adequate oversight of dam safety-related issues, the Bank will oversee only dam projects greater than 15m in height. The existing state procedures are considered adequate for smaller dams (c15m). Cultural Property: N o discrepancies are seen between the GoM's cultural property laws and the Bank's Cultural Property Policy (OPN 11:03). SoG's existing systems are considered highly adequate for enforcing GoM laws inthis area. The state's lead entity i s the Secretaria de Obras Pdblicas' (SOP) [Secretariat of Public Works] restoration unit (Direccidn de Restauracidn de Monumentos), which i s responsible for identifying and mitigating any potential infrastructure-related impact on cultural property. Involuntary Resettlement: The key economic objective of the Bank's OP 4.12 i s to improve or restore the incomes or standards of living of all affected people, regardless of the legality of their land tenure. There i s no Mexican or SoG law specifically addressing resettlement and some aspects of the Bank's OP 4.12 are not fully reflectedin the existing Mexican laws. SoG has not issued specific state laws or regulations that more precisely define how resettlement will be addressed. However, as a matter of non-codified good practice, SoG has demonstrated a capacity to undertake resettlement activities in a manner consistent with the requirements of OP 4.12, including consultation and participation of affected population, assets and land compensation at market prices to legal occupants with and without titles, and restoration of livelihoods. As part of the application of the ESMF, SoG will develop and follow good practice procedures for all resettlement plans (Attachment 6 summarizes necessary elements of the procedures) based on one of the state's good practice examples, which fully complies with the requirements of OP 4.12. The Social and Human Development Ministry (Secretaria de Desarrollo Social y Humano; SDSH) will be responsible for ensuring the application of these procedures. For due diligence purposes, SoG will also develop procedures for screening by sectoral agencies to identify any subproject that could require resettlement. Subprojects that are so identified will be forwarded by the sectoral agency to SDSH for further screening. If SDSH finds that the subproject has the potential for resettlement of more than 200 persons it will classify the project as Type 111-A and forward it to the World Bank for review. 84 Figure 1. SoG Protected Area System 85 Indigenous Peoples: There are no significant discrepancies between GoM laws and the Bank's Indigenous Peoples Policy (OD 4.20). The SoG's DIRD program i s not expected to trigger OD 4.20 because Guanajuato does not have a large indigenous population, and the State's DIRD program, which i s focused on enhancing competitiveness, does not include any subprojects, which have been determined to have potential effects on indigenous people. The State does address indigenous peoples issues through the state Indigenous Peoples Committee, and current practices assessed during preparation are acceptable. Nevertheless, for due diligence purposes, SoG will develop procedures for screening by sectoral agencies to identify any subproject that could affect indigenous people. Subprojects that are so identified will be forwarded by the sectoral agency to SDSH for further screening. If SDSH finds that the subproject has potential impacts on indigenous people it will classify the project as Type 111-A and forward it to the World Bank for review. Inaddition to SoG's specific provisions ineach of the above areas, it has a strong overall strategy for sustainable development and environmental protection. Inparticular, the Plan de Gobierno 2000-2006 establishes a strategy for all sectors of government, including strong objectives, goals, strategies, and actions related to improving environmental quality, and promoting social development. 11.4.2 InstitutionalArrangements for ESMFImplementation Table 11.4.2.1 summarizes the institutional arrangements for SoG's implementation of the ESMF. As indicated in the table, IEG will serve as the lead agency for overseeing and reporting on the environmental management of the program, while SDSH will oversee issues related to resettlement and indigenous peoples, including preparation of resettlement plans, mitigation programs (as necessary) and progress reports. The table also lists potential strengthening measures (the actual measures will be identified by the participating agencies as described in section 11.5) and due diligence responsibilities (in regard to reporting to the Bank) associated with each step. In addition to the specific strengthening measures listed here, the Bank and SoG will implement other strengthening measures as explained in Section 1.5. Based on the application of the ESMF, the following overall oversight arrangements will apply to ... SoG's program: Type I:Noprior WorldBank review of subproject EA work. Sample ex-post World Bank reviews Type 11: No prior World Bank review of subproject EA work. Sample ex-post World Bank reviews. Type 111: State follows site-screening procedures. Prior World Bank review of all Type 111-A subprojects. Ex-post World Bank review of all type IIIA and sample Type 111-Bsubprojects. In addition, the World Bank will conduct limited prior review of the first few Type I1and 111-B subprojects to provide additional assurance of quality and to identify capacity building needs. In general, Bank subproject reviews, both prior and ex post, will take place after the responsible state agency has completed its review, to allow an assessment of that agency's performance in doing the review, as well as an examination of the overall quality of the environmental and social work. 86 Tab11 1.4.2.1 General Institutional Arr lgementsfor ESMFImp1 nentation - Step Action Anticipated Strengthening Due Diligence Responsibilities - Measures 1 Site Screening: For Type 111subprojects The Bank will provide IEG will maintain records of IEG will, prior to preparation of the EA, guidance and resources site screenings for purposes o f screen the project site to better determine (Le., a screening checklist) reporting to the Bank. the project's environmental and social to IEG, the sectoral SDSH will maintain records o f risk. Based on the results of the agencies, and SDSH for all flagged subprojects received screening, IEG will determine whether conducting environmental from sectoral agencies or IEG Type I11projects are classified as Type and social screening. and it's follow-up actions. 111-Aor 111-B(followingthe guidance in section I.4.1). If the subproject could affect indigenous people or require resettlement, IEG forwards the subproject to SDSH for treatment as described below for Type Iand I1subprojects. For Type Iand I1subprojects, SoG will develop procedures for screening by sectoral agencies to identify early on any subproject that could affect indigenous people or require resettlement. Subprojects that are so identified will be forwarded by the sectoral agency to SDSH for further screening. IfSDSH finds that the subproject has potential negative impacts on indigenous people or the potential for resettlement o f more than 200 persons it will classify the project as Type 111-Aand forward it to the World Bank for review. 2 rORs:For Type I11projects, IEG will The Bank will provide IEGwill maintain records of ~~ ?rovide and disclose TORSfor guidance to IEG in TORS. :ompleting the EA. customizing TORSbased SDSH will track and report on Type I11project site (through IEG) on its experience ?or projects with resettlement or screenings, and in providing guidance on ndigenous peoples issues, SDSH, will developing a more flexible resettlement and indigenous :oordinate preparation o f indigenous TOR template for Type I peoples issues. Jlans, and, on the basis o f agreed good and I1projects. xactice guidelines, resettlement plans. D The Bank will provide assistance to SDSH in developing good practice guidance for resettlement plans. .___ 3 ieview: IEG will review the EA to 1 The Bank will provide IEG will forward EAs and/or ipprove or deny it, and/or recommend guidance on reviewing EAs resettlement plans for all Type :hanges. SDSH will review resettlement and resettlement plans. 111-Aand initial few Type I1 md indigenous plan preparation and 1The Bank will help SDSH and Type I11B projects to the :xecution. to develop an institutional Bank for review and clearance strengthening program for IEG will maintain records of all municipalities on EAs and their associated resettlement plans and comments and decisions for indigenous peoples plans. purposes o f reporting to the - Bank 87 Step Action I Anticipated Strengthening Due Diligence Responsibilities Measures 4 Monitoring & Evaluation: The relevant 0 Each agency will send its 0 IEGwill maintains records of sectoral agencies, IEG, PROPAE, and findings to IEG on findings and report any other involved agencies will conduct environment and to SDSH outstanding problems to the monitoring, inspections, and evaluations on social impacts. Bank through BANOBRAS. of the environmental and social aspects of The Bank will supervise 0 SDSH will prepare reports on projects following existing SoG selectedprojects and resettlement and indigenous procedures. SDSHwill monitor the conduct ex-post reviews of plans. execution and outcomesof resettlement sample Type I1and 111-B and indigenous plans. projects, and all Type 111-A projects. 5 Reporting: IEG will report through 0 IEGincoordinationwith BANOBRAS on its due diligence SDSH will provide data to the responsibilities to the Bank every six Bank on all of the areas listed months. above, and input on the effectiveness of the ESMF. In addition, these institutions will report on any significant changesto the state's policies or implementation arrangements(i.e., changes resulting from a change in state government administration). 11.5 AdditionalImplementationAgreements 11.5.1 CapacityBuildingProgram Specific measures to strengthen capacity within participating SoG agencies will be included within the annual work program. Upon receipt of SoG annual work program, BANOBRAS will review it and forward it to the World Bank for review and approval. 11.5.2 World Bank Reviewand Supervision Given the pilot nature of this project,World Bank supervision of safeguards issues will require more intensive oversight than in routine Bank projects. In addition to the monitoring and evaluation conducted by SoG, the Bank will conduct limited project supervision, particularly of high- risk projects. Supervision activities will include: (i) reviews of subproject safeguards-related ex-post documentation (i.e., EAs and resettlement plans) of select Type I1and 111-B projects; (ii) prior review of subproject documentation for all Type 111-A and the first few Type 111-B and Type I1projects; and (iii) supervisionofselectType111-Band111-AprojectsandthefirstfewType11projects.Bank field subproject reviews, both prior and ex-post, will take place after the responsible state agency has completed its review, to allow an assessment of that agency's performance indoing the review, as well as an examination of the overall quality of the environmental and social work. Field supervision will be conducted for the first few sub-projects and then through annual project supervision missions and a separate annual environmental and social supervision mission. 88 The World Bank and SoG will agree on specific monitoring indicators prior to the implementation of the World Bank-supported program and these indicators may be revised duringthe program. Potential .. monitoring indicators are likely to include measureso f The quality and timeliness of EAs; .. The number and quality of EA disclosures and consultations; The extent to which EMPmitigatory measureswere adequately implemented; The quality and extent of site screening; and For resettlement, the quality and extent of consultation with and participation of affected persons and evaluation and compensation of affected properties and income earningcapacity. 11.5.3 Evaluationof the ESMF The World Bank will conduct a mid-term evaluation of the ESMF to determine whether it i s effectively meetingits objectives and to identify any opportunities for enhancing the framework. This evaluation will be based on: (i) review of the data provided by SoG through the due diligence Bank activities listed in Table 11.4.2.1; (ii)the findings of the Bank's supervision activities; and (iii) additional input from participating SoG agencies. Inevaluating the ESMF, the Bank will focus on: (i) the framework's effectiveness in identifying and addressing safeguard-related issues; (ii)the effectiveness of SoG in implementingand enforcing the agreed ESMFlaws related to the safeguards; and (iii)the effectiveness of the agreedcapacity strengtheningmeasures. Attachments With the exception of Attachment 1, Attachments referenced inAnnex 10are includedinproject files and in the ESM(the project's EA report), which i s available inthe Bank's Infoshop. 89 Attachment 1. Summaryof GoMand SoGSafeguard-RelatedLaws41 State of Guanajuato Environmental Protection and Preservation Law Primary state environmental (LPPAEG). protection and preservation Ley para Proteccio'ny Presewacio'na1Ambiente del Estado de law Guanajuato (LPPAEG). PublishedFeburary8,2000 http://www.guanajuato.gob.mx/ieeg/nOlD_Ley_Proteccion_Prevenc ion.htm Regulations for State of Guanajuato Environmental Protection and Requirements for Preservation Law as related to EnvironmentalImpact Assessment conducting EAs Reglamentode la Ley para la Proteccio'ny Presewacidn del Ambiente del Estado de Guanajuato en materia de Evaluacidn de Impacto Ambienta1. PublishedSeptember 22,2000 http://www .guanajuato.gob.mx/ieeg/n04Reglamento_Ley_MIA.htm DelistingProcedures for EnvironmentalImpact Assessment inPublic Minor works are exempted State and Municipal Works for Guanajuato from the normalEA process Proceso de Desregulacidn en Materia de la Evaluacio'n de Impacto Ambiental de la Obra Pdblica Estatal y Municipal del Estado de Guanajuato PublishedAugust 21,2001 http://www.guana.iuato.gob.dieeg./nllAcuerdo Desregulacion.ht m OP4.04 NaturalHabitats Regulations for State of Guanajuato EnvironmentalProtection and Regulations for Creating and Preservation Law as related to Protected Areas. Managing Protected Areas Reglamentode la Ley para la Proteccidn y Presewacio'n del Ambiente del Estado de Guanajuato en materia deAreas Naturales Protegidas. PublishedSeptember 19,2000 http://www.guanajuato.gob.mx/ieeg./n03Reglamento Lev MAN.ht m OD4.20 IndigenousPeoples National Constitution: Articles 2 and 4. Protectionof cultural Constitucio'nde la Repdblica: Articulos 2"y 4" diversity and indigenous rights PublishedFebruary5,1917, DiarioOficialde la Federacih http://www.cddhcu.gob.deyinfo/pdf/l.pdf National Commission for Indigenous Communities Development Law Details protection 41This Attachment is not intended as an exhaustive list of all GoM and SoG safeguard-relatedlaws and regulations. 90 Ley de la ComisidnNacional para el Desarrollo de 10s Pueblos mechanisms Zndi'genas PublishedMay 21,2003, Diario Oficial de laFederacidnDiario Oficial de la Federaci6n http://cdi.gob.mx/i~dex.php?option=displaypage&Ite~d=S6&op=page&SubMen Convention 169 of the E O ratified by Mexico Protection of indigenous Convenio 169de la OITfirmadopor M6xico peoples rights http://www.endepa.org.ar/Conveniol69.htm Frameworkfor Federal Public Administration Law, Article 32 Social protection programs (SEDESOL) for indigenous communities Ley Orgdnica de la Administracidn PLiblica Federal Art. 32 (SEDESOL) PublishedDecember29,1976, Diario Oficial de la Federacidn http://www.cdd hcu.gob.mx/leyinfo/pdf/l53.pdf OPN4.11 Cultural Property FederalMonument and Archaeology Law Protection of known cultural Ley Federal sobreMonumentos y ZonasArqueolo'gicas resources or "chance finds". Published May 6,1972, Diario Oficial de la Federacidn http://www.cddhcu.gob.mx/leyinfo/pdf/l3l.pdf Yramework Law for National Anthropology and History Institute Outlines responsibilities Ley Orgdnica del Znstituto Nacional deAntropologia e Historia Published February 3,1939, Diario Oficialde la Federacidn itt~://www.cddhcu.~ob.mxAevinfo/~df/l70.~df 3P4.12 InvoluntaryResettlement jgrarian Law Agricultural, ejido, and Ley Agraria communal lands and property. %blishedFebruary 26,1992, Diario Oficialde laFederacidn ittp://www.~ddh~u.gob.mxAeyinfo/pdf/13.pdf 3ivil Federal Code Private lands and property Xdigo Civil Federal 'ublished May 26,1928, Diario Oficial de la Federacidn ittp://www.cddhcu.gob.mxAeyinfo/pdf/2.pdf ixpropriation Law Compensation procedures ,ey deExpropiacidn andmechanisms 'ublishedNovember 25,1936, Diario Oficialde la Federacidn ittp://www .cddhcu.gob.mxAeyinfo/pdf/35.pdf L s a l 4ppraisal and compensation I 91 Ley Orga'nicade la Comisidn deAvalu'os y Bienes Nacionales (CABIN) for agrarian lands and property PublishedDecember6,1999, Diario Oficial de laFederaci6n http://www .cabin.gob.mx/indexl .html ' Federal HousingLaw Regulations to support Ley Federal de Vivienda appropriate human living conditions PublishedFebruary 8,1984, http://info4.juridicas.unam.mx/ijure/tcfed/l25.htm?s= General Human Settlement Law Regulations and conditions Ley General deAsentamientos Humanos for human settlements PublishedJuly 21,1993, Diario Oficial de la Federaci6n http://www.cddhcu.gob.mx/leyinfo/pdf/l33.pdf General Ecological Equilibriumand EnvironmentalProtection Law Conditions for new human Ley General de Equilibrio Ecoldgico y Proteccidn a1Ambiente settlements Ley de Transparenciay Acceso a la Informacidn public PublishedJune 11,2002, Diario Oficial de la Federaci6n http://www.cddhcu.gob.mx/leyinfo/pdf/244.pdf 92 Annex 11:ProjectPreparationandSupervision MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan Planned Actual PCN review 05/22/2002 05/22/2002 Initial PID to PIC 07/09/2003 Initial ISDS to PIC Appraisal 12110/2003 Negotiations 04119l2004 BoardIRVP approval 05/25/2004 Planned date of effectiveness Planned date of mid-termreview Planned closing date Key institutions responsible for preparation of the project: BANOBRAS -Banco Nacional de Obras y Servicios Pdblicos Bank staff and consultants who worked on the project included: Name Title Unit Krishna Challa Sector Leader LCSFP John Henry Stein Sector Manager LCSFW Jose Luis Irigoyen Sector Manager LCSFT Mariangeles Sabella Counsel LEGLA BernardBecq Manager LCOPR LeaD.Braslavsky LeadProcurement Spec. LCOPR Maria Angelica Sotomayor Economist LCSFW Gustavo Saltiel Senior Water Engineer LCSFW Oscar Alvarado Senior W & S Spec. SASE1 EmmanuelA. James Sr. Financial Analyst LCSFT Daniel Boyce Sr. Financial Management Spec. LCOAA Victor Ordonez FinancialManagement Spec. LCOAA Charles DiLeva Lead Counsel LEGEN Juan David Quintero LeadEnvironmentalSpec. LCSEN Maria Elena Castro Sr. Social Scientist LCSEO L.PanneerSelvam Sr. EnvironmentalSpec. ESDQC Jean Roger Mercier Lead Specialist ESDQC Ernest0 Sanchez-Triana Sr. EnvironmentalEngineer LCSEN Ann Jeannette Glauber Consultant LCSEN Justin Jacinto Junior Professional Associate LCSEN Paul Bermingham Director OPCFM Jeff Ruster LeadFinancial Analyst IEF Fernando Rojas Lead Public Sector Management LCSPS Spec. 93 Steven Benjam'n Webb Lead Economist LCSPE Karina M.Kashiwamoto Language ProgramAssistant LCSFP Fcitima Galbaga Language Team Assistant LCSFP Fabio Arjona Consultant LCSFU Javier Cobos Consultant LCSFU Angelica Ntifiez Consultant LCSFU Ignacio Palos Consultant LCSFU LuisE.Vega Chacon Consultant LCSFU Bank funds expended to date on project preparation: 1. Bank resources: US$ 343,648.82 2. Trust funds: US$ 0.00 3. Total: US$343,648.82 Estimated Approval and Supervision costs: 1. Remainingcosts to approval: US$ 35,000.00 2. Estimated annual supervision cost: US$230,000.00 94 Annex 12: Documentsinthe ProjectFile MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan A. Project ImplementationPlan Operating Regulations Environmental and Social Management Framework B. BankStaffAssessments Lea Braslavsky -Procurement Capacity Assessment, 2004 DanielBoyce - Financial Management Capacity Assessment, 2004 Juan David Quintero-EnvironmentalAssessment, 2004 C. Other Joint Statement, dated June 8,2004. Comisi6n Estatal de Agua de Guanajuato (CEAG) - Lineamientos para la Atencidn Social y Participacidn Comunitariaen 10s Sistemas de Agua Potable, Saneamiento y Alcantarillado para la Zona Rural. - Guanajuato, Gto.: CEAG, 2002. ---- Diagn6sticoSectorial de Agua Potable y Saneamiento: 1995-2000, Publicado 2001, ---- Diagn6sticoSectorial de Agua Potable y Saneamiento 2000-2001, ---- Diagn6sticoSectorial de Agua Potable y Saneamiento 2000-2002. ---- Diseiio de Subsistemas del Modelo de Desarrollo Institucional. 2002. ---- Material de Apoyo para la organizacibn de 10s sistemas rurales de agua potable, 2003. ---- Tercer Informe 2000-2003. Convenio de Coordinacidn para el Desarrollode la Vivienda y del Suelo ("CODEVISU"): Estado de Guanajuato. - Mexico: SEDESOL :CONAFOVI: Gobierno del Estado de Guanajuato: Presidenciade la Repdblica, Programa Contigo es Posible, 2002. Gobierno del Estado de Guanajuato - Cuenta Pdblica Cuarto Trimestre. -- Mexico: Gobierno del Estado de Guanajuato, 2000. ---- Periddico Oficial del Gobierno del Estado de Guanajuato. --- 20 de Febrero de 1996. ---- Peri6dico Oficial del Gobierno delEstado de Guanajuato. -- 22 de Diciembre de 2000. ---- Peri6dico Oficial del Gobierno del Estado de Guanajuato. -- No. 52-B. -- 30 de Junio de 2001. 95 ---- Peri6dico Oficial del Gobierno del Estado de Guanajuato, Afio LXXXIX, Tom0 CXL, 26 de Julio de 2002. ---- Peri6dico Oficial Gobierno del Estado de Guanajuato. -- No. 153. -- 24 de Diciembre de 2002. ---- Peri6dico Oficial Gobierno del Estado de Guanajuato. -- No. 52. -- 1de Abril de 2003. ---- PlanEstatal de Desarrollo, 2002. ---- PlanEstatal de Desarrollo2025. ---- Programa HidrAulico 2002-2006. Secretaria de Desarrollo Social (SEDESOL) - Programa Nacional de Desarrollo Urbano y Ordenaci6n del Territorio 2001 -2006 -ResumenEjecutivo :MCxico, D.F., Primera edici6n 2001. ---- ProgramaHabitat-Reglas de Operaci6n 2003 -- MCxico, D.F. :SEDESOL, 2003. ---- Programa Sectorial de Vivienda - CONAFOVI 2001 - 2006 -111.Qui5sequierelograr-MCxico, D.F. Secretaria de Medio Ambiente y Recursos Naturales (SEMARNAT) - Situaci6n del Subsector Agua Potable, Alcantarillado y Saneamiento a Diciembre de 2001- MCxico: Comisi6n Nacional del Agua, 2002. Secretaria de Obras Pdblicas (SOP) -Propuesta para la Aplicaci6n de Recursos de Conservaci6n de la RedCarretera Estatal, Ejercicio 2004 -MCxico :Gobierno del Estado de Guanajuato, 2004. Sector Vivienda Proyecto del Banco Mundial : Guanajuato. - Instituto de Vivienda del Estado de Guanajuato : Gobierno del Estado de Guanajuato, 2003. -- Contenido: Requerimiento de Informaci6n - Programa Institucional IVEG 2000-2003 - Transformacidn de IBGE (Autosuficiencia Financiera) - Modificaciones del C6digo Civil y C6digo de Procedimientos Civiles del Estado de Guanajuato - Hist6rico de CrCditos Otorgados para Mejoramiento de Vivienda y su proyecci6n a1 afio 2006 - Reglas de Operaci6n de 10s Programas de Trabajo IVEG -EstadosFinancierosrecientes- ProgramaInstitucionalIVEG. World Bank. -- Aide Memoire and Back to Office Report of Identification and Preparation Mission (February 2003, March 2003, September 2003). ---- Brazil : Impact Evaluation Report, Learning from Best Practice in Five Urban Projects. -- June 1997 -- Report No. 167736. ---- Decentralization Fiduciarias para Enfoques Sectoriales (SWAPS) : Guias Provisionales para Personal del Banco. - Emitidos por las Juntas Sectoriales de Gesti6n Financiera y Contrataci6n. - Noviembre 22, 2002. 96 ---- EvaluationReport: Decentralizationand RegionalDevelopment,August 1994, Report No. 13032- ME. ---- Mexico Low IncomeHousing: issuesand options, 2002-Vol. IMainissues & Vol. I1Background Studies, 2002. ---- Mexico : Project Appraisal Document on Brazil Family Health Extension Adaptable Lending Program.-February 14,2002. -- ReportNo. 233353 BR. ---- Mexico : Project Appraisal Document on Housing and Urban Technical Assistance, February 2004. ---- Mexico State Level Public ExpenditureReview, July 2002. ---- Minutesof InitiatingMemorandum,May 2002. ---- Program Document on Affordable Housing and Urban Poverty Structural Adjustment Loan, February2004. Literature: Achievements and Challenges of Fiscal Decentralization : lessons from Mexico / ed. by Marcelo Giugale, StevenB.Webb. -Washington, D.C. :The World Bank, 2000. Mexico : a ComprehensiveDevelopment Agenda for The New Era/ ed. by Marcelo Giugale, Olivier LafourcadeandVinh Nguyen.-Washington, D.C. :The World Bank, 2001. 97 Annex 13: Statementof Loansand Credits MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan Differencebetween expectedandactual OriginalAmount inUS$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm.Rev'd PO68290 2004 MX E-Businessfor SmallBus.Devpt.Pr. 58.40 0.00 0.00 0.00 0.00 58.40 1.30 0.00 PO35752 2004 MX Irrigation& Drainage Modernization 303.03 0.00 0.00 0.00 0.00 303.03 0.00 0.00 PO35751 2004 MX Community ForestryI1 21.30 0.00 0.00 0.00 0.00 21.30 0.00 0.00 (PROCYMAFIT) PO59161 2003 GEFMX-ClimateMeasuresinTransport 0.00 0.00 0.00 5.80 0.00 5.79 1.99 0.00 PO60686 2003 MX MunicipalDev inRuralAreas 400.00 0.00 0.00 0.00 0.00 396.00 162.67 0.00 PO70108 2003 MX Savings & Credit Sector 64.60 0.00 0.00 0.00 0.00 39.40 -1.14 0.00 Strengthening PO74655 2003 MX RuralFinanceDevelopStruct Adj 505.06 0.00 0.00 0.00 0.00 300.01 0.01 0.00 Loan PO65988 2002 GEFMX Consolidat.ProtAreas (SINAP 0.00 0.00 0.00 16.10 0.00 7.33 11.19 0.00 11) PO77602 2002 MX Tax Admin InstitutionalDevelopment 52.00 0.00 0.00 0.00 0.00 51.45 16.93 0.00 P060577 2002 MX SoutheastReg'lDevelopment LIL 5.OO 0.00 0.00 0.00 0.00 4.28 1.90 0.00 PO57531 2002 MX Basic Ed.APL I1 300.00 0.00 0.00 0.00 0.00 85.39 -9.61 0.00 PO66321 2001 MX: 111BASIC HEALTHCARE 350.00 0.00 0.00 0.00 0.00 327.73 56.33 0.00 PROJECT PO65779 2001 MX FEDERALHIGHWAY 218.00 0.00 0.00 0.00 0.00 83.20 61.53 0.00 MAINTENANCEPROJ. PO64887 2001 MX DISASTER MANAGEMENT(ERL) 404.05 0.00 0.00 0.00 200.00 181.27 215.56 0.00 PO63463 2001 METHANECAPTURE& USEAT A 0.00 0.00 0.00 6.27 0.00 1.18 5.42 4.56 LANDFILL PO60908 2001 GEFMX-MESO AMERICAN 0.00 0.00 0.00 14.84 0.00 15.71 6.57 0.00 CORRIDOR PO66674 2001 GEFMX-Indigenous&Community 0.00 0.00 0.00 7.50 0.00 6.52 4.76 0.00 Biodiversity PO66938 2000 MX GENDER (LIL) 3.07 0.00 0.00 0.00 0.00 2.02 2.02 1.72 PO60718 2000 GEFMX ALTERNATIVE ENERGY 0.00 0.00 0.00 8.90 0.00 5.23 8.90 0.00 PO07610 1999 MX FOVIRESTRUCTURING 505.50 0.00 0.00 0.00 0.00 182.40 182.40 0.00 PO44531 1998 MX KNOWLEDGE& INNOV. 300.00 0.00 0.00 0.00 0.00 108.45 108.45 -18.25 PO49895 1998 MX HIGHER ED. FINANCING 180.20 0.00 0.00 0.00 0.00 84.64 78.46 0.00 PO07713 1996 MX WATER RESOURCESMANA 186.50 0.00 0.00 0.00 54.00 39.71 93.71 13.38 Total: 3,856.71 0.00 0.00 59.41 254.00 2,310.44 1,009.35 1.41 98 MEXICO STATEMENT OF IFC's Held and DisbursedPortfolio InMillions of US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1988191192193195 Apasco 7.20 0.00 0.00 28.80 7.20 0.00 0.00 28.80 1998 Ayvi 6.43 0.00 0.00 0.00 6.43 0.00 0.00 0.00 0 BBVA-Bancomer 42.35 0.00 0.00 0.00 42.35 0.00 0.00 0.00 1995199 BaringMexFnd 0.00 1.89 0.00 0.00 0.00 1.78 0.00 0.00 1998 CIMA Mexico 0.00 4.80 0.00 0.00 0.00 4.80 0.00 0.00 1998 CIMA Puebla 6.75 0.00 0.00 0.00 3.25 0.00 0.00 0.00 0194 CTAPV 1.93 0.00 1.os 0.00 I.93 0.00 1.05 0.00 0 Chiapas-Propalma 0.00 1.02 0.00 0.00 0.00 0.89 0.00 0.00 1997 Comercializadora 1.75 0.00 1.25 2.50 1.75 0.00 1.25 2.50 2001 Compartamos 1.oo 0.66 0.00 0.00 1.oo 0.66 0.00 0.00 2003 Copamex 75.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Coppel 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 1999 Corsa 8.36 3.00 0.00 0.00 8.36 3.00 0.00 0.00 2001 Ecomex 5.00 1.50 0.00 0.00 3.OO 1.50 0.00 0.00 2000 Educacion 6.50 0.00 0.00 0.00 4.90 0.00 0.00 0.00 0197 FondoChiapas 0.00 3.53 0.00 0.00 0.00 0.11 0.00 0.00 1998 Foja Monterrey 9.29 3.00 0.00 9.29 9.29 3.00 0.00 9.29 2001 GFNorte 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1991/96 GIBSA 13.52 0.00 0.00 45.48 13.52 0.00 0.00 45.48 1993 GIDESA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996100 GIRSA 38.57 0.00 0.00 51.43 38.57 0.00 0.00 51.43 0 Grupo BBVA 0.00 2.67 0.00 0.00 0.00 2.67 0.00 0.00 1998 Grupo Calidra 8.00 6.00 0.00 5.00 8.00 6.00 0.00 5.00 1989 Grupo FEMSA 0.00 2.85 0.00 0.00 0.00 2.85 0.00 0.00 1997 GrupoMinsa 13.14 0.00 0.00 18.78 13.14 0.00 0.00 18.78 0192196199 Grupo Posadas 23.68 0.00 10.00 0.00 23.68 0.00 10.00 0.00 1998 Grupo Sanfandila 6.08 0.00 0.00 2.45 6.08 0.00 0.00 2.45 2000 HospitalABC 30.00 0.00 0.00 14.00 10.29 0.00 0.00 7.21 2000 ITR 12.00 0.00 0.00 3.33 12.00 0.00 0.00 3.33 2000 Innopack 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0 Interoyal 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 2000101 InverCap 0.00 0.07 0.00 0.00 0.00 0.06 0.00 . 0.00 1998 Merida111 27.78 0.00 0.00 64.34 27.78 0.00 0.00 64.34 2003 Mexmal 10.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00 0195199 MexplusPuertos 0.00 1.41 0.00 0.00 0.00 1.41 0.00 0.00 1996/99/00/01 NEMAK 0.00 0.00 1.51 0.00 0.00 0.00 1.51 0.00 2003 Occidental Ho ... 30.00 0.00 0.00 40.00 30.00 0.00 0.00 40.00 0 Occihol 0.00 9.99 0.00 0.00 0.00 9.99 0.00 0.00 2003 POLOMEX S.A. 8.00 0.00 0.00 0.00 8.00 0.00 0.00 0.00 2000 PanAmerican 0.00 9.00 0.00 0.00 0.00 9.00 0.00 0.00 99 2001 Plata 10.00 0.00 0.00 0.00 8.00 0.00 0.00 0.00 2002 Puertas Finas 13.00 0.00 0.00 0.00 13.00 0.00 0.00 0.00 2002 Qualita 0.00 2.50 3.50 0.00 0.00 2.50 3.50 0.00 2000 Rio Bravo 47.69 0.00 0.00 55.06 47.69 0.00 0.00 55.06 2000 Saltillo S.A. 33.31 0.00 0.00 39.46 33.31 0.00 0.00 39.46 2000 Servicios 9.00 1.90 0.00 8.33 9.OO 1.90 0.00 8.33 2001 Su Casita 1.76 10.62 0.00 0.00 1.76 10.62 0.00 0.00 1997 TMA 1.98 0.00 2.75 6.86 1.98 0.00 2.75 6.86 1992 Toluca Toll Road 1.25 0.00 0.00 0.00 1.25 0.00 0.00 0.00 0 ZNMexico I1 0.00 10.00 0.00 0.00 0.00 2.57 0.00 0.00 1998 ZNMxc Eqty Fund 0.00 15.30 0.00 0.00 0.00 15.30 0.00 0.00 Total portfilio: 590.32 106.72 20.06 395.11 432.51 95.62 20.06 388.32 ApprovalsPendingCommitment FY Approval Company Loan Equity Quasi Partic. 1999 BANAMEX LRF I1 0.05 0.00 0.00 0.00 2001 BBVA-Bancomer CL 0.10 0.00 0.00 0.00 1998 Cima Hermosillo 0.01 0.00 0.00 0.00 2003 Copamex 0.01 0.00 0.00 0.06 2001 Ecomex 0.00 0.00 0.00 0.00 2000 Educacih 0.00 0.00 0.00 0.00 2001 GFNorte-CL 0.05 0.00 0.00 0.10 2003 Mexmal 0.00 0.00 0.01 0.00 2003 Polomex 0.00 0.00 0.00 0.00 2003 Rio Bravo I11 0.05 0.00 0.02 0.17 2003 Rio Bravo IV 0.05 0.00 0.02 0.17 2003 Tizavuca 0.03 0.00 0.01 0.03 Total pendingcommittment: 0.35 0.00 0.06 0.53 100 Annex 14: Countryat a Glance MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan Mexico & Carib. income Development diamond' 2002 I Population, mid-year (milltons) no.9 527 Lifeexpectancy GNIpercaptta (Atlas method, US$) 5,920 3,280 I GNI (Atlas method, US$billlons) 5970 I727 1668 T Average annual growth, 19 1 t4 15 12 2A 22 18 Grass t estimate (latest year available, 1996.02) 75 76 75 74 71 73 25 27 S 8 9 88 86 90 8 11 7 10 a0 n 5 114 0 1 x)6 Female 10 128 x)5 IOS and LONG-TERM TRENDS 1992 2001 2002 Economic ratios* 3636 623.9 6372 22.9 233 209 203 P 274 272 Trade 186 183 l79 18.0 1 -29 -22 Domestic 4.5 l.6 19 17 savings Investment 496 309 25 4 242 523 338 263 188 1 Indebtedness 2002 2002-06 (average annualgrowth) GDP 19 32 -0.3 09 3 8 -Mexico -Uooer-middle-incomeor0UD 1982 1992 2001 -Growth of investment and GDP (%) (%of GDP) I Agriculture 8.1 6.7 4.1 Industry 33.4 28.1 27.1 Manufacturing 21.7 202 S.6 Services 58.4 652 68.7 Privateconsumption 616 71.8 69.6 Generalgovernment consumption n.5 9.9 11.8 Imports of goods andservices n.3 20.3 29.7 1982-92 1992-02 2001 (averageannualgrowth) Agriculture 0.7 1.7 3.3 -0.4 30 Industry 2.5 3.7 -3.5 0.0 20 Manufacturing 3.0 4.3 -3.7 -0.8 Services 2.0 3.1 0.7 1.4 lo Privateconsumption 2.7 2.9 12 O Generalgovernmentconsumption 2.1 1.5 -2.7 12 -1.3 -10 Gross domestic investment 2.5 4.7 -52 0.5 Imports of goods andservices 11.2 11.8 -1.5 1.6 -Exports -Imports 101 Mexico PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Inflation (%) Domestic prices c ("7 change) Consumer prices 58.9 a.5 6.4 5.0 ImplicitGDP deflator 60.9 14.4 6.5 4.6 Government finance (%of GDP,includes currentgrants) , - Current revenue 27.4 23.7 21.8 22.6 97 98 99 00 01 02 Current budget balance -6.0 5.0 1.9 0.2 Overall sulplusldeficit -14.1 1.4 -0.7 -1.2 -GDP deflator &CPI TRADE 1982 1992 2001 2002 (US$ millions) Export and import levels (US$ mill.) Totalexports (fob) 24,055 46,196 158,443 160,8U Oil 16,477 8,307 P,799 14,475 ~200,000 I Agriculture 1,233 2,lP 3,903 3,998 150,000 Manufactures 5,843 35,420 141,353 141,951 Total imports (cif) l 7 , O l l 62,P9 168,396 68,949 100,000 Consumergoods 1,5V 7,744 8,752 21,m Intermediategoods 10,991 42,830 P6,149 e6778 50,000 I Capital goods 4,502 11,556 22,496 20,992 0 Exportprice index(W95=WO) P7 91 103 106 96 97 98 99 00 01 02 Import price index(W95=W0) 74 91 103 104 s ~ x p o r t s oimports Terms of trade (W95=WO) l7l 100 101 102 BALANCE of PAYMENTS 1982 1992 2001 2002 (US$ millions) Current account balance to GDP ( O h ) Exports of goods andservices 28,169 55,387 l7llo3 R3,374 imports of goods andservices 22,841 73,6l7 184,614 185,419 Resourcebalance 5,328 -18230 -U,511 -P,045 Net income -e261 -9,595 -0,835 -e282 Net current transfers 1,043 3,386 9,338 lo268 Current account balance -5,890 -24,438 -18,008 -14,058 Financingitems (net) 2,316 26,184 25,347 8,851 Changes innet reserves 3,574 -1,745 -7,339 -5,793 Memo: Reserves includinggold (US$ millions) 914 18,975 44,014 50,607 Conversion rate (DEC,iocal/US$) 5.64E-2 3.1 9.3 9.7 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) Composition of 2002 debt (US$ mill.) Total debt outstandinganddisbursed 86,081 1P2,315 158,291 53,923 iBRD 2,692 11,966 lo883 10,596 IDA 0 0 0 0 Total debt service 15,684 20,751 48,729 35,254 IBRD 328 1,874 2 , m 2,093 IDA 0 0 0 0 Compositionof net resourceflows Official grants 76 14 Official creditors 1,577 615 -669 -432 Private creditors 6,391 -531 3,198 -3,932 Foreign direct investment 1,655 4,393 25,334 U,627 Portfolio equity 0 4,703 5 1 -104 F World Bank program 116,503 Commitments 540 1,30 860 1,322 A- IBRD E- Bilateral Disbursements 408 1,352 749 1,247 B .IDA D - Other multilateral F. Private Principal repayments x33 981 1,314 1,356 G. Short-term 102 Annex 15: DetailedProjectCosts MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan 1. Institutional strengthening Initiatives 638,095 523,810 523,810 1,685,714 Complecian of lhe decenlrahzalion program far the lrsniier. and SOP icceplian. of the secondary federal network I I R I <3 5. assumed condilion) and the development of a model to transfer pail oilhe mads 10 (he municipahlies 47.619 47.619 95,238 lmpravemenr of !he plannmg cycle. budgeling and evahalion for projecls: preparalion of rhe mulriannual programs adjusted lo budge1iimilr: inlroducing economic evaluation mob leg.. HDM). e n ~ ~ ~ n m r nand lsocial analyss: mverlemen! pnorairarion: t a 380.952 285.714 285,714 952.381 Development of a new road maintenance financing plan. indepcndenl from lhe budget iesourcei: eniabiishmenLof the Road Fund, new 1001s for privale p2imcipatmn: inlcr-instilutimalmechanisms 10 mobilize SOP resourse~,municipalilies. and other slates 47,619 47,619 95,238 Design and mplement a multiannud SOD~~PCI by ieiuII3 for the rehahilirarton and pdor program mamenance of state roads. and mlroduce new lrshniquen for their periodic mamtensnce 95,238 47,619 47,619 190,476 Propose new scheme for !he mainlenance plan for the non-paved rural roads with private community pamcipation (e g. Associaled Misroemprerar & others) and shared financing with the mumcipatiues, state and SCTI SEDESOL and others): Dengn: mplementauo 95.238 47.619 47.619 190.476 Transferring authority for assigning urban liansporlroule~ 47.619 47.619 95.238 Insialabn oilbe Slate ayrlem oi work casts 66.667 66,667 2.Road improvement and rehabilitation 8,571,429 14,285,714 11,428,571 34,285,714 Mainram the exirrmg state road network in "good"condi1ions Maintam the exirling stale road nelwoik in "fau"condi1ions TOTAL^I I I I , , , , " .' U&l313 44PW76 w 7 4 ¶1?,641,165 Financine Summar, 1I II II I Slate leso"1ces I 27,848,193 1.460.639 17.857.143 47.165.975 103 1. Improve water balance 1,243,118 2,666,661 2,380,952 6,290J9l K174 Improve !kms~rementof hydrologicalcyFles- Expansionof Slate monitoringnetworkof the hydrologic cycle 152,381 952.381 952.381 2,057,143 P4O9 Evualatepotencklty of water rewurcesand Ihe socm-economic aspecls lmked 10 !km. 329.042 285.714 285.714 9w.47a 104 1. InstitutionalStrengthening 457,143 276,190 361,905 1,095,238 A, Transformationof practicesandprocessesfor managementof informationwithin IVEG 266,661 66,667 190,476 523,810 Proposalpreparation 190,476 190,476 Acceptanceof the proposal by the DirectorsCouncil 76,190 28,571 104,762 Systemsimplementation 38,095 190,476 228,571 3. Transformationof IVEGs financial practices to asimilar scheme use by other non financial intermediaries Proposalpreparation 142,857 142,857 Acceptance of the proposal by the DirectorsCouncil 66.667 66,667 Programa "ViviendaPopular"(Tu Cam) 1 FederalFunds(indicative) 1,868,190 2.267,429 2,568,838 6,704,457 State Resources 18,752,057 19,189,993 21,059,139 59,001,189 of which FromSF 2,312,302 2,748.968 3,078,635 8,139,905 BANOBRASfinancing 1,785,073 1,785,073 IVEGown Income 14,654,683 16,441.025 17,980,504 48,710,930 MunicipalFunds(indicative) 1,167,619 1,417,143 1,605,524 4,190,286 105 Annex 17: OperatingRegulations MEXICO: MX-DecentralizedInfrastructureDevelopmentProgrammaticLoan 1. Objective The Operating Regulations hereby described have been designed by BANOBRAS to govern the operational aspects applicable to loans under the Financiamiento de Estrategias Sectoriales (FES), including, sector eligibility criteria, fiduciary and safeguard requirements, disbursement mechanisms and the overall management procedures. The objective of FES i s to improve the performance of infrastructure services throughout the territory of Mexico while operationalizing the decentralization objectives of the Federal government, thereby enabling and catalyzing the efficient and sustainable development of selected infrastructure sectors at the sub-national level. For the purpose of this document, infrastructure services are deemed to include transport (including roads, ports and airport services), water, sewerage and solid waste, urban development (including housing), telecommunications and other services directly serving households that fall within the jurisdiction of Mexican states and municipalities. 2. LendingInstruments Support under FES would be made available by BANOBRAS to finance eligible states that are taking reform and development measures in a selected infrastructure sector(s) to catalyze and promote fiscal and financial viability, poverty responsiveness and access of public services to the poorest segments of the population, through the efficient functioning of the sector(s) under consideration. 3. SectorsIncluded Although the sector strategies supported by BANOBRAS could eventually cover different infrastructure sectors, support in a first stage would focus on three key infrastructure sectors, namely: (a) roads including highways, rural roads and urban transport; (b) water, sanitation, and wastewater treatment; and (c) urban and regional development and low-income housing. Based on the initial experience, and applying any lessons learnt in the first stage, additional priority sectors could be included. During a first stage, FES would be available only to states, although direct support could be extended to municipalities in later stages. Municipal and local administrations could also benefit because an important part of the state strategy might involve providing catalytic support to municipalities and utility operators to induce reforms and sustainable development of services at the local level inline with state priorities, for example, by usingloan proceeds to provide TA or institution building. 4. Modalityof Operation The overall modality would be to provide long-term finance to participating states to finance one or more sector strategies for infrastructure reform and development. States would be invited to articulate and submit a comprehensive sector strategy for the sector(s) for which they seek support under FES, 107 outlining investments in infrastructure, policies, structural or institutional reform actions and other sector development initiatives, which they intend to implement over the next 3-4 year period. These strategies would be accompanied by a specific investment plan, calendar of actions and monitorable indicators to be achieved during that period. As sector strategies would be prepared by the states it i s expected that they would be custom-tailored to reflect the stage of development of the sector, priorities and neededreform actions andhence could vary significantly from one state to another. The loan amount granted to each participating state by BANOBRAS to support sector strategy would be assessed individually by BANOBRAS, and the World Bank, where its financing i s involved, and would be based on the size of the total investment needs over the period covered by the medium term sector strategy (typically 3-4 years), the associated estimated financing gap after taking into account other sources, the quality of the sector strategies and the efforts toward achieving sustainable strategies by each state. In screening candidate states BANOBRAS would verify that the fiscal affairs of the state inquestion are being managed in a responsible way and that the public finances are sustainable in the medium term. These may be based on assessmentsto be made by BANOBRAS of the current and projected net fiscal balances of the state, the structural consistency and efficiency of expenditures, sustainability of the debt levels, and the quality of the internal financial management practices. As part of its assessment, BANOBRAS will take into account the credit ratings obtained by the state by an independent credit rating agency. BANOBRAS would also verify that candidate states have prepared a satisfactory, coherent and well-integrated strategy for each sector for which they seek financing. BANOBRAS, incollaboration with the World Bank when necessary, would assess the sector strategies proposed for financing. To promote adequate long-term investment levels in the sectors, FES will place special emphasis to support sector strategies that (i) promote access to services to the poorest segments of the population, (ii) incorporate market-based solutions that support the maximum level of private sector participation - whenever feasible - through an appropriate overall sector structure, regulatory and competition frameworks, suitable tariff and cost recovery policies, and (iii) include the requisite attention to maintenance of infrastructure facilities and operational efficiency. The proposed sector strategies would also have to be consistent with the national sector development strategy, as articulated by the respective national sector entities42.As part of the vetting process, BANOBRAS, the World Bank, and the participating state would agree on any refinements and/or institutional strengthening measures that may need to be incorporated in the proposed sector strategy. If agreement i s reached between the parties, financial support to sector strategies would be codified in the form of a loan from BANOBRAS to the candidate state. Loan withdrawals under the Program would be based on accomplishments of agreed output benchmarks and corresponding unit costs. The specific triggers would be aimed at ensuring adequate additional progress or "value added" vis-&vis the current situation and stage of development of the sector, and would vary depending on the characteristics of the agreed sector strategies. Overall, these loan draw-down triggers would reflect the priorities, needs and performance and output objectives articulated in the respective state sector strategies. Their achievement would be closely monitored duringimplementationby BANOBRAS incollaboration with the World Bank as needed. ~ ~~ 42 CNA inthe case of the water andsanitation, SCT inthe case of a state roadsprogram and SEDESOLincase of urban development and low-income housing. 108 5. Coverage of all investmentsinselected sectors The set of rules governing participation and execution under FES would be applicable to all expenditures incurred under the corresponding medium term sector strategy supported. Thus participating states would apply the same rules and guidelines to investments and other expenditures financed by other domestic or external sources, Federal government transfers as well as their own budget resources. To ensure that the various fiduciary and safeguard policies and arrangements are adequately addressed, explicit assessments related to the proposed state sector strategies would be undertaken before appraisal of each participating state. These assessments would typically cover: (i)the state's procurement capacity to implement the project ; (ii) the state's financial management practices and policies, including those related to financial reporting, accounts, auditing, and financial control as applicable; and (iii) the environmental and social safeguard policies and practices States that have . moderate weaknesses in these areas could still be eligible for financing under FES ,provided that the necessary arrangements and action plans to strengthen these areas are included in the institutional strengthening and technical assistanceplans. 6. Sector Eligibility Criteria Financing will be considered on the basis of comprehensive well integrated medium term sector strategies (typically covering a 3-4 years span) elaborated by the state clearly showing the vision and objectives for the sector, within the jurisdiction of the state, specific sector policy and reform actions proposed to ensure the healthy evolution and performance of the sector, the corresponding sector development activities and proposed investment together with the corresponding proposed financing plans to help implement them, and a concrete set of output indicators expected to be achieved over the period covered. Detailed sector-by-sector eligibility criteria customized to reflect the specific characteristics of each sector are described below. a. HIGHWAYS, SECONDARYROADSAND/OR URBANTRANSPORT 0 Comprehensive approach to addressing all aspects of the sector's performance covering: the state's highway and secondary road network and rural access to roads; main issues, priorities and how the state authorities plan to address them; master plans for the road network within which individual transport infrastructure or transport service improvement proposals would be considered; urban transport issues where relevant; strategies to enhance efficiency, private participationand systematic roadmaintenance; and access for the poorer population segments 0 Associated action plans, institutional strengthening measures, performance and output benchmarks expected to be achieved and the calendar thereof, together with an investment plan and schedule of investment which are required to enable reachingthe benchmarks 0 Adequate financial investment and physical planning, systematic maintenance and rehabilitationof roads to ensure financial and physical sustainability of the strategy. 109 b. WATER SUPPLYAND SANITATION 0 Comprehensive approach to addressing all aspects of the sector's performance; covering interalia: main issues, priorities and how the state authorities plan to address them; institutional framework and capacity building; tariffs, cost recovery and financial sustainability issues affecting water utilization, sewerage and sanitation issues; means to enhance efficiency; private participation; and access for the poorer population segments Associated action plans, institutional strengthening measures, performance and output benchmarks expected to be achieved and the calendar thereof, together with an investment plan and schedule of investments which are required to enable reachingthe benchmarks 0 Measures to minimize wastage and maximize physical and collection efficiency and systematic maintenance of facilities, improve cost recovery and financial sustainability of the water, sewerage and treatment operating entities as well as appropriate metering and better billing and collection systems. C. URBANDEVELOPMENT LOW-INCOME AND HOUSING Comprehensive approach to addressing key urban development issues and priorities, including: specific strategies to help municipal governments and local communities to address them at their levels (e.g. TA and financing). Activities covered could include preparation of city and local development strategies, urban and regional plans (including land use plans), urban transport, low-income housing, slum upgrading, waste management, measures to increase access to the poorer segments of the population 0 Associated action plans, institutional strengthening measures, performance and output benchmarks expected to be achieved and the calendar thereof, together with an investment plan and schedule of investmentswhich are requiredto enable reachingthe benchmarks 0 Adequate capacity for financial planning and resource management taking account of existing and potential income sources and expenditure needs, private participation in service provision, riskmanagement andcost and burden sharing betweenmunicipal, state andnationalauthorities 7. Sector Best-Practice Guidelines The best practice guidelines for inclusion of a sector strategy proposed by a state are designed to guide preparation and assess the quality of the sector strategies and action plans rather than to act as screens to deny or condition entry. Items included in the guidelines should be compared with the sector strategies articulated by states to verify that they had adequately taken into account a number of key dimensions such as appropriate institutionalframework, attention to the needs of the poorer population segments, cost recovery or subsidy policies, and that their strategy envisages reasonable steps to move in the right direction. These guidelines are indicators to reflect adequate efforts and reasonable benchmarks, in order to allow FES to adapt to the different degree to which sector strategies expected to be proposed by states reflect the status of each sector ineach state, since the strategies would need to be adapted and customized to take account of the stage of development of each candidate state. 110 HIGHWAYS, SECONDARY ROADSAND/OR URBANTRANSPORT Steps towards developing an adequate regulatory and competition framework for operations in the sector, with sufficient autonomy for the regulatory and supervisory agencies. As far as possible, separation of regulatory/supervisory roles from operating and promotional functions of the state and local governments; Appropriate institutional framework, clear definitions and delineation of responsibilities amongst the main sector entities and vis-8-vis Federal and municipal entities, identification of institutional needs and puttingin place required capacity strengthening measures for key sector entities; Measures to ensure regular and systematic maintenance of roads, including rehabilitation where necessary, and efficient operation of existing roads infrastructure. (e.g., using HDM or RED models); Adequate financial planning and resources to ensure financial and physical sustainability of the strategy, identification of sources of financing for maintenance and new investments (e.g. state or municipality budget allocations out of Rumo 33 or other sources, financing from BANOBRAS, private banks or capital markets, multilateral assistance, etc), risk management and cost and burden sharingbetween municipal, state and national authorities; Measures to improved roads access to the poor, isolatedor otherwise underprivileged segments of the population within the state or municipalities - for example, via improved roads and transport services in marginalized `barrios' along major road corridors or surrounding the main urban areas, or a proactive secondary or rural roads strategy to connect isolated or indigenous communities, ideally accompanied by specific targets regardingquality and kilometers of roads access (e.g., connecting all communities with more than 2,000 inhabitants within a 5-year time frame); Adequate environmental and social policies and action plans to ensure that environmental factors are taken into account inroad construction and operation; Measures to enhance private participation in roads building, operations and maintenance, via long term toll road or other concessions wherever feasible, integrated constructiodoperatiodmaintenance (CREMA) contracts where appropriate, other management and/or service contracts or outsourcing of specific services (e.g., toll collection); and Consistency and complementarity with the national strategy and development programs of Cuminosy Puentes Federules (CAPUFE) and the SCT. WATER SUPPLY AND SANITATION Steps towards developing an adequate regulatory, and where applicable, competition framework for operations in the sector, with sufficient autonomy for the regulatory and supervisory agencies. As far as possible, separation of regulatory functions from operating and promotionalroles of the state and local governments; Appropriate institutional framework, clear definitions and delineation of responsibilities amongst the main sector entities and vis-&-vis Federal and municipal entities, identification of institutional needs and putting in place required institutional and capacity strengthening measures for key sector entities (e.g. the state water commissions, municipal water departments and water utility operators); 111 e Measures towards achieving economically efficient pricing of water, and promotion of tariff structures that provide incentives to avoid wastage of water and promote conservation; e Measures to minimize wastage and maximize physical and collection efficiency via regular and systematic maintenance of facilities, appropriate metering, and good billing and collection systems; e Steps towards reasonable cost recovery and financial sustainability of the water, sewerage and treatment operating entities. Determination of appropriate level of subsidies, if any, required from the municipality, state or other sources, taking into account the state's social development priorities, externalities and affordability of the basic service to the poor; e Proactive programs to improve the quality and access of service to the poorest and least privileged segments of the population of the state or municipalities in terms of their current access, with specific programs and/or targets; e Adequate programs for sustainable rural water supply and sanitation, including demand driven approaches, use of appropriate technologies, and capacity building and training for service providers in rural areas and for water users including environmental sanitation and hygiene education; e Adequate environmental and social policies and action plans to ensure that environmental and health factors are taken into account; due attention to sewerage improvement, drainage and wastewater treatment facilities inorder to avoid damage to water bodies; e Measures to enhance private participation in service provision wherever appropriate - via different modalities of such participation in long term concessions, management and/or service contracts or outsourcing of specific services; and e Consistency with the national strategy, initiatives and development priorities as articulated by CNA. C.URBANDEVELOPMENT LOW-INCOME HOUSING AND e Adequate capacity for financial planning and resource management, identification of sources of financing the proposed urban development initiatives and strategies (e.g. state or municipality budget allocations out of Ramo 33 or other sources, financing from BANOBRAS, private financial institutions or capital markets, multilateral assistance, etc), risk management and cost and burdensharing between municipal, state and national authorities; e Measures to improve access of urban infrastructure for the poor, isolated or otherwise underprivilegedsegments of the population via better access roads and public transport services inmarginalized`barrios' along major roadcorridors or surrounding the mainurbanarea; a Land tenure regularization and registration; establishing appropriate building standards; more affordable urban housing, and improved availability of basic infrastructure and public services inthe low incomeurban settlements (barrios); e Adequate environmental and social policies and action plans to ensure that environmental and health factors are taken into account in urban development, urban land management and operation of urban transport systems; e Balanced urban transport strategies that expand travel choices, interconnectivity and efficiency of urban transport systems, covering interalia traffic management, urban and road safety, efficient parkingpolicies, and measures to promote private participation inurban service; and e Consistency and complementarity with the national strategy and development programs of SEDESOL and Comisidn Nacional para la Vivienda (CONAVI). 112 8. Availability and Channelingof Resources Once a sector strategy i s approved by BANOBRAS and the World Bank this will be reflected in the form of a formal loan agreement entered into between the State and BANOBRAS for making available specified amounts and terms of financing. Availability of FES resources to the recipient state will be subject to achievement of agreed specific performance or output indicators consistent with the sector's strategy provided by the state. The state will have the right to withdraw from its loan account the disbursements any time after the corresponding disbursement rights have been so "earned" within the agreed period for execution under the Program. It i s anticipated that states will adapt the actual timing of withdrawals to the situation of availability of other possible sources. In order to facilitate the timely launching of the different components of agreed sector strategies, states may receive an initial advance on the loan based on its first year expenditure program, subject to the provision that in case the corresponding disbursement conditions were not eventually complied, this advance would have to be promptly returned to BANOBRAS and where applicable to the World Bank. 9. ProcurementArrangements Procurement for the proposed project will be carried out in accordance with World Bank "Guidelines: Procurement under IBRD Loans and IDA Credits" dated May 2004 (the Procurement Guidelines); "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 (the Consultants' Guidelines), and the provisions stipulated in the Legal Agreement. For all contracts to be financed by the Loan to BANOBRAS, the procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame are given in the Procurement Plan for 18 months to be delivered to the Bank before effectiveness. The Procurement Plan will be a rolling Plan updated at least annually or as required to reflect actual project implementation needs and improvements in institutional capacity of the state institutions that are beneficiaries of the BANOBRAS loan. Procurementof GoodsandWorks Major contracts for goods and works will be procured following International Competitive Bidding procedures (ICB), in accordance with May 2004 Guidelines, usingBank Standard BiddingDocuments (SBDs). Procurement of Works. Contracts with estimated values below the agreed threshold for ICB (US$lO.O million equivalent), may be procured using Mexico's federal law (Articles 27, Section 1 (Licitacidn Pdblica) for national competitive bidding (NCB) using the Standard Bidding Documents (SBDs) agreed by the Secretaria de la Funcidn Pdblica (SFP) and the Bank. Works estimated to cost less than US$500,000 equivalent per contract may be procuredthrough price comparison of quotations of at least three contractors, received in response to a written invitation. The invitation will include a detailed description of the small works, including basic specifications, requiredcompletion dates, and a basic contract form acceptable to the Bank. When needed and if the requirements of paragraphs 3.1, 3.6, and 3.7 of the Procurement Guidelines are met, direct contracting of small works may be 113 undertaken, with prior agreement of the Bank or in accordance with procedures referred to under Art. 26, section I11(Adjudicacio'n Directa) of Mexico's federal law. The proposed Loan will not finance works carried out by force account. Procurement of Goods: Contracts with estimated values below the agreed threshold for ICB (US$500,000) may be procured usingMexico's federal law (Article 26, Section 1(Licitacidn Pdblica)) procedures, using the Standard Bidding Documents (SBDs) agreed by the Secretaria de la Funcio'n Pdblica (SFP) and the Bank. For contracts valued less than $100,000 shopping procedures may be followed. When needed and if the requirements of paragraphs 3.1, 3.6, and 3.7 of the Procurement Guidelines are met, direct contracting of goods may be undertaken with prior agreement of the Bank. or in accordance with procedures referred to under Art. 26, section 111 (Adjudicacidn Directa) of Mexico's federal law. Procurement of services (other than consultants services: All contracts for services not related to consultant services (under goods, works and training activities (logistics, organization of seminars, workshops or similar training events) may be procured under same methodologies and thresholds specified for goods, using the non-Consulting services bid document (trial version) dated December 2002, or other biddocument agreed with the Bank. Grouping of contracts. To the extend practicable contracts for goods and works shall be grouped in bid packages estimated to cost US$500,000 equivalent or more each for goods, or US$10,000,000 equivalent or more each for works. Notification and advertising. The General Procurement Notice (GPN) for all large contracts for works, goods and services (other than consulting services) to be procured under ICB procedures by the states under BANOBRAS loans shall be published in the Development Business, and shall be updated annually to include any outstanding procurement. All invitations to bid shall be published in the "Diario Oficial de la Federacidn" and in COMPRANET. In addition, invitations to bid for each contract for works estimated to cost US$10,000,000 equivalent or more and each contract for goods and services (other than consulting services) estimated to cost US$500,000 equivalent shall be advertised in the DevelopmentBusiness in accordance with the procedures applicable to large contracts under paragraph 2.7 of the Guidelines. BANOBRAS will solicit expressions of interest for large consultant assignments when contracts are expected to cost more than US$200,000 equivalent, a specific procurement notice shall be published in Development Business. The name of the consultant selected shall also be publishedinthe DevelopmentBusiness. Selection of Consultants Consultants services will be contracted in a number of skill areas as they are applicable to the activities to be financed by BANOBRAS' loans and may include technical assistance and capacity building activities required under the modernization subprojects approved by BANOBRAS, under the loans to the States. All contracts would be procured usingBank's SBD for consultants services. Description of consulting services and methodology to be provided by consulting firms and individuals will be included in the Specific Procurement Plans (SPP's) submitted and updated by the executing agencies participatinginthe activities financed by BANOBRAS' loans. 114 Firms. All contracts for firms would be procured using QCBS procedures except for small contracts for assignments of standard or routing nature and estimated to cost less than US$lOO,OOO equivalent that would be procure using LCS. Single-source selection (SSS) procedures may be used, with prior agreement of the Bank, for procuring tasks that meet the requirements of paragraphs 3.10 of the Consultants' Guidelines, for assignments when only one firm i s qualified or has experience of exceptional worth, Contracts may also be used to hire universities, training Institutions, and NGOs, as required. Consultant's services to provide training will be selected usingLCS. Consultant's contracts may also be used to hire universities, training Institutions, and NGOs, as required. The short list of consultants in contracts estimated to cost less than $500,000 equivalent, per contract, may be comprised entirely of national consultants, in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Individuals. Specialized advisory services would be provided by individual consultants selected by comparison of qualifications of at least three candidates and hired in accordance with the provisions of paragraph 5.1 to 5.3 of the Consultant Guidelines. Sole-source selection of individual consultants may be contracted, with Bank's prior agreement, in accordance with provisions of paragraphs 5.4 of the Consultants Guidelines. ProcurementMethods The methods to be used for the procurement describe below, and the maximum estimated amounts in (US$)for each method, are summarized inTable A. TableA. ProcurementMethods/Thresholds (US$) Category ContractValue (thresholds) Procurement method Works 2 10,000,000 ICB < 10,000,000 NCB <500,000 Shopping at least 3 contractors Goods 2 500,000 ICB <500,000 NCB < 100,000 Shopping Non-consultant services 2 500,000 ICB < 500,000 NCB < 100,000 Shopping Consultants Services 2 100,000 QCBS (firms) < 100,000 QCBSLCS Consultants Services NIA Paras. 5.1 to 5.4 Guidelines (individuals) 115 TableB. Prior Review Thresholds (inUS$) GOODS 500,000 250,000 CONSULTANT (Firms) 350,000 100,000 CONSULTANTS (Individuals) 100,000 50,000 ProcurementPlan Inview of the special design of the project, a condition of effectiveness will ensure that BANOBRAS delivers to the Bank Specific Procurement Plans (SPPs)for each participating executing agency of the beneficiary State. The SPPs will include all contracts to be financed by BANOBRAS' loans, which will include the procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame in rolling SPPs prepared for 18 months of project activity. ProcurementMonitoring BANOBRAS will be directly responsible for staff training at state level, assisted by the Bank from time to time, and for ensuring that on-time updates are submitted to the Bank for no objection, before a modification to any of the SPP's i s made. In addition to BANOBRAS' responsibility to maintain procurement information at the center, participating States' executing agencies will maintain detailed records of all their procurement activities. Frequencyof ProcurementSupervision Based on the overall risk assessment of each state, the post-review supervision mission, to be carried out by BANOBRAS and the Bank in each participating executing agency in each state shall be completed every 4, 6, or 12 months, and shall cover not less than 1in20 contracts signed. 10. FinancialManagementandDisbursementArrangements States must meet a minimum standard of FM readiness in order to enter FES. They must have the capacity to record, control, and manage all FES-related resources, and produce timely, understandable, relevant, and reliable financial information that would allow BANOBRAS and the World Bank to monitor compliance with agreed procedures and appraise progress toward the objectives. Moderate weaknesses in FM systems will not disqualify any subnational entity but will require either the installation of alternative arrangements for this particular aspect (e.g. audit, information systems, programmatic tracking of expenditures) or the strengthening of that aspect prior to, or during implementation. Substantial weaknesses in FM systems may render a state ineligible to participate in FES. State/agency FMcapacity will be determined based on reviews carried out by BANOBRAS and World Bank in sectors where its financing i s involved. The following are the most important elements of the agencies' FMarrangements: 116 e Budgeting. Especially, a system to identify the short-term activities necessary to achieve the strategy objective and express these activities in financial terms. e Accounting. A system in place that appropriately tracks, records, analyzes, and summarizes financial transactions. e Funds flow arrangements. Appropriate arrangements to receive funds from all sources and disburse the funds to the agencies involvedin FES implementation. e Internal control. Arrangements, including internal audit, to provide reasonable assurance that (a) operations are being conducted effectively and efficiently and in accordance with relevant financing agreements with respective donors; (b) financial and operational reporting are reliable; (c) applicable laws and regulations are beingcomplied with; and (d) assets and records are safeguarded. e Reporting. A system that would produce sufficient detailed information, and provide BANOBRAS with regular consolidated progress reports and annual financial statements. e External audit. Arrangements for conducting annual external audit of the state/entity financial statements on TOR acceptable to all the stakeholders. e Written procedures. State and sector entities should have in place written financial guidelines, policies and procedures for the guidance of all personnel charged with financial responsibilities, with the aim of ensuringthat resources are properly managed and safeguarded. e Financial management staffing. Relevantly qualified FM staff, including accounting and internal audit staff, with clearly defined roles and responsibilities to conduct FMactivities. 0 Information systems. Entity financial operations should be sufficiently automated to support the carrying out of the above activities ina timely and efficient way. e Programmatic adaptability. In each of the above areas, states and state-level entities should have the ability to adjust existing arrangements to meet the specific FES needs , such as the maintenance of information related to -specific financial activity in order to demonstrate the total expenditures within the sector strategy of a state or subnational entity. FundsChanneling. Stateswill be allowed to receive an initial advance from BANOBRAS basedon an expenditure forecast, after which further advances must be triggered by output achievements. States would report expenditures and outputs in Financial Monitoring Reports (FMRs). The expenditure information would serve to document (justify) the amounts previously advanced to the State, while the output information would be used to calculate the amount of the next advance. Therefore the sector strategy outputs will determine the amount of the loan funds to be advanced to the States, but these advances will not be considered to be documented until the program expenditures are reported in the FMRs (see below). FES will incorporate a results-focused approach to disbursements. First, as mentioned above, states will prepare FMRs on a quarterly basis. BANOBRAS, in collaboration with the World Bank will then conduct ex-post reviews to verify the reported performance and output achievements, and to check that the Program Operating Regulations have been complied with while implementing sector strategies. If it i s determined that a participating state receiving advance disbursements has failed to achieve outputs stated in the FMRs, or has failed to comply with the Operating Regulations ,the state would have to reimbursepart or all of their loan advances back to BANOBRAS.These procedures represent a results- oriented approach that i s consistent with the World Bank's report-based disbursementmodality. 117 States are responsible for transferring funds to other subnational entities, and for obtaining information about the FES-related expenditures at the municipal level. Counterpart funds will be represented by the funds that states have included in the sector strategies partially financed by the World Bank/BANOBRAS loan. Accounting, Reporting and Loan Disbursements. States must be able to produce data related to the financial activity within their sector strategies. Following appropriate accounting standards, financial accounts of the full sectoral expenditure plans will be maintained. In each state operation, agreement will be reached between BANOBRAS, and the state regarding the appropriate level of FES-specific reporting as well as what entity-level reports should be submitted to BANOBRAS. States and state- level entities that are able to maintain FES-level data within their existing budgeting or accounting systems will be expected to present information within their existing financial statements and reports. In states whose systems are less flexible, or which have less of a programmatic focus, a greater segregation of accounts may be required, in order to allow for tracking of the activities financed under FES. In this way a balance will have to be struck between the use of existing reporting systems and additional, FES-specific arrangements. BANOBRAS will provide the World Bank with a periodic progress report showing financial activity, physical progress, and projection^.^^ This report will be consistent with the World Bank's guidelines for FMRs. For ease of monitoring, these financial-oriented reports will have separate parts detailing achievements against targets, and expenditures under each major state sector strategy, subdivided by main components. These periodic reports and financial statements of eligible FES expenditures would provide the basis for disbursement of World Bank loan proceeds. All FES accounts, showing separate sections for each approved state sector strategy, would be audited annually by an external auditor following acceptable auditing principles. States will include the following information intheir progress reports FMRs submitted to BANOBRAS and then to the World Bank: e Sources and Uses of Funds statement. This would include the funds received from BANOBRAS and from all other sources, and expenditures for the period and cumulative; e Additional financial report. This would include a more detailed breakdown of FES-related financial activity, including a comparison with the originally budgeted figures; e State Program progress report. This would detail the actions/outputs achieved to date, and explanations of program status and expectations for the next six months. World Bank technical/sectoral experts will review the reports, use them as a basis for FES supervision, and provide input as to their reasonableness. These reports will be used to calculate the additional advance on the loan that the state i s eligible to receive; e Procurement Information. To the extent that procurement at the subnational level will be monitoredby BANOBRAS, this information should be included inthe progress report; e Forecast. The forecast should consist of an estimate of the amount that states are expected to spend, in the coming months and calculating what percentage of that amount would be financed with BANOBRAS' loan funds. It would be prepared for project monitoring purposes except for the first forecast, which would serve as the basis for the initialadvance of loan funds; e Additional information required for disbursement. This information, explained in Annex 2 of the World Bank's FMR guidelines, i s required to specifically document FES expenditures for 43 Dependingon how the program is ultimately designed, someprocurement informationmay also needto beprovided. 118 disbursement purposes, and to calculate the disbursement amount. It will in most cases be prepared by the states but BANOBRAS may also be involvedinits preparation; a BANOBRAS would add additional information about financial activity at its level, for example regardingSA and additional loan-financed costs, such as loan fees or audits; and 0 Disbursement Request. World Bankform 1903B is usedas the loan account withdrawal application form. This, along with the information on SA activity, is the only information provided by BANOBRAS. Attached to the disbursementrequest will bethe FMRsprovidedby the state. Annual Reporting and Auditing. A financial audit will be carried out annually for each state strategy, includingthe loan from BANOBRAS andthe funds provided by the state or other financing sources. The audit report will be provided by the state to BANOBRAS, which will then be required to provide the report to the World Bank within six months after the end of the year audited. The audit report should include a statement by the auditors regarding whether the eligible expenditures made under FES (equal to total expenditures minus items like taxes and land purchases), exceed the amount of loan funds provided. Where state audit arrangements are acceptable, it may be possible for the current state-level auditor to be the auditor for FES inthat State. Otherwise, altemative, FES-specific audit arrangementsmay benecessary. Any incremental costs that the specific audit may entail, will be eligible for financing by the loan. The financial activity to be audited inthe FES financial statement should be the same as that included in the FMR, as described above. It should include all expenditures, as well as all sources of funds, including the World Bank/BANOBRAS loan, state resources, and other loans or grants. The overall levels of counterpart funding will be monitored via the review of the FMRs, annual audit report, and in some cases, of the audit reports of the entities involved. These reports would have to demonstrate that the government contributions were inline with what hadbeenpreviously agreed. Additional aspects such as budgeting, accounting, internal control, written procedures, and staffing, should in most cases be heavily reliant on existing arrangements within the states and the financial agency. These will be reviewed as part of the capacity assessment described above, with appropriate institutional strengthening, or altemative arrangements for FES ,agreed as needed. Entity Responsibilities Prior to implementation: BANOBRAS and the participating statejointly: FES Level: Agree with each other on FMarrangements. 0 Ensure flow of funds and other financial management arrangements are sufficient to support the FES objectives, within an adequate control framework; Ensureroles and responsibilities of all parties are understood; 0 Ensure the FM assessment of FES, including appropriate recommendations for strengthening the FMassessment and supervision capabilities; 0 Document key FMprinciples and procedures for states to follow; Develop an agile but robust framework for analyzing the FMarrangements ineach state44 44consistentwith the assessment processexplained inthe FiduciaryFrameworkfor SWAP document, issuedin November 2002 by the World Bank. 119 StatelEntity Level: 0 Facilitateexternal reviews of existing FMsystems; 0 Agree with BANOBRAS on flow of funds, reporting, and audit arrangements; Ensurethat the FMenvironment into which funds will be disbursedis strong enough to provide assurancethat funds will be usedfor the agreed purposes, financial and progress reports can be prepared on a timely basis, and an acceptable auditor will audit the agreed subnational-level financial statements (which will preferably be comprised of entity financial statements that contain programmatic information); and Agree with each other, and with state/entity officials, the specific arrangements for FES in that particular state: flow of funds, reporting, audit, etc. ImplementingEntities at the State Level: 0 Facilitateexternal reviews of existing FMsystems; Agree with other implementing agencies with the state on the FES-specific information to be maintainedand reported; and Make amendments to existing audit arrangements, as required to meet FES fiduciary requirements,and work with auditors to implement these changes. Once FES begins: BANOBRAS and the state iointly: Ongoing reviews of FES financial (including audit) reports, visiting sites, meeting with relevant officials to ensure that the agreed procedures are complied with by the state andlocal agencies; Work jointly in the certification process with regard to supervision of completed actions and outputs that may impact disbursements from BANOBRAS to the states. BANOBRAS: Maintain overall FES records based on information provided by states; Process advance requests submissions from states. States: Provide financial and progress reports including the periodic FMRs and additional information for disbursements and implementing entity audit reports - to BANOBRAS; FacilitateFMoversight by BANOBRAS; 0 Submitrequestsfor advances. Implementing; Entities at the State Level: Provide information to state officials as required for consolidated reporting to BANOBRAS. This may include general entity financial reports or specific FES information; Cooperate with teams from BANOBRAS involved inFES supervision. 11. SAFEGUARDPRINCIPLESANDGUIDELINES Several of the investments included in the sector strategies financed under FES could have significant environmental and/or social impact. In order to ensure the World Bank's environmental and social safeguards are complied with, an Environmental and Social Management Framework has been designed. The framework describes the procedures to be followed by any participating state. 120 Environmentaland Social Management Framework 1.1. Framework Overview Part I.Environmental and Social Management Framework This ESMF is the program's (FES) mechanism for ensuring that environmental and social aspects of state strategies are adequately managed, particularly with respect to the requirements of selected World Bank's safeguard policies and the Government of Mexico's (GoM) laws and regulation^.^^ While the current project funds only activities in Guanajuato, the framework describes how environmental and social management could be approached in any other state with adequate capacity. The ESMFlays out the procedures for assessingthe environmental and social risks of state strategies, as well as evaluating the policy and institutional capacity in each state, and identifying appropriate management and oversight procedures. The ESMF also includes procedures for strengthening state agencies and institutions involved in enforcing safeguards-related laws and standards. In general, the ESMF i s designed to ensure that participating states' environmental and social management capacity develops on a broad scale and not only in the limited context of a given set of subprojects. Correspondingly, the ESMF favors, and provides incentives for, utilization of existing or enhanced state mechanisms rather than the creation of separate frameworks or procedures that are specific to World Bank-assisted subprojects. The first phase of this ESMF, outlined in Section 1.2, corresponds to the state's preparation and submission of a proposed sector strategy. Inthis phase, the state works with BANOBRAS to evaluate the potential environmental and social risks of each type of subproject proposed, based on an analysis of typological risk factors, and to conduct an assessment of its existing institutional capacity for environmental and social management of the subprojects included in the sector strategy. Inthe second phase, outlined in Section 1.3, the World Bank reviews the submitted strategy and corresponding assessment and: (i) assigns an institutional capacity rating to the state for each sector of its program; (ii)identifies the procedures for World Bank oversight of subprojects; (iii)where necessary, recommends additional strengthening measures; (iv) identifies a program of institutional capacity enhancements that could result in a higher level of reliance on existing systems; and (v) provides guidance on any additional up-front sectoral environmental assessment (EA) work required. BANOBRAS, as the borrower institution will oversee compliance with this process. The ESMF also includes procedures, outlined in Section 1.4, for project implementation and supervision, including procedures for conducting site sensitivity screening of higher risk projects, and for encouraging and facilitating state institutionalcapacity improvements at any time duringparticipationinthe program. 1.2. Preparation and Submission of State Proposal to Participate inthe Program As noted above, a state that wishes to participate in BANOBRAS' program may submit a proposed medium-term sector strategy (3-4 years) for funding. As part of the proposal, the state works with BANOBRAS to develop, and submit to the World Bank assessments o f (i) the environmental and social risks associated with the subprojects included in the strategy; and (ii)their institutional management capacity. While not currently planned in the case that World Bank financing was to be 45For the purpose of this framework, the term "social" generally reflects the scope of the Bank's social safeguard policies, which address indigenous peoples and involuntary resettlement issues. The ESMF does not address other social development issues, such as gender, disability, or retrenchment. 121 used, the World Bank reviews to the appropriate degree the assessments, and recommends oversight and management procedures as described in Section 1.3 below. The purpose of this approach i s to facilitate the application of oversight and management procedures commensurate with each state's subproject risks and institutionalcapacity. 1.2.1 Assessmentof Sub-project Risks As part of its proposal, the state works with BANOBRAS to assess the potential environmental and social risks of each type of subproject in its proposed program. In practice, the environmental and social risks of a particular subproject are a function of the type and scale of the subproject's activities and the ecological and sociocultural sensitivity of the subproject site. Recognizing, however, that specific subproject sites will usually not yet have been identified at the time the proposal i s submitted, this framework provides for a typological risk rating of each subproject as Type I, or 111, according I1 to the intrinsic risks associatedwith the type of intervention to be carried out. The risk level for each type of sectoral activity i s based on the intrinsic environmental and social risk associated with: (i)the type of intervention (e.g., maintenance, expansion, upgrading, new infrastructure) to be carried out; and (ii) the specific type of infrastructure or sub-sector in which the intervention i s being executed. It does not require any knowledge of the site's ecological and sociocultural sensitivity, which is instead examined, following the guidance in Section 1.4.1, through subproject site screening once the site has been identified to further differentiate between relatively higher and lower risk subprojects?6 Where a single subproject includes multiple types of interventions or sub-sectors, the risk rating i s assigned based on the highest level of risk applicable for any component of the s~bproject.~~ Ingeneral, the riskrating levels are defined as follows: Type I: Subprojects likely to have minimalor no adverse environmental or social impacts. Type 11: Subprojects with moderate environmental, indigenous peoples, cultural property, or resettlement risks. The project presents certain risks given the civil works planned, but its potential adverse impacts are less adverse than those of Type I11projects. These impacts are site-~pecific~~;few if any of them are irreversible; and in most cases mitigation measurescan be designed more readily than for Type I11projects. Type 111: Subprojects with highenvironmental, indigenous peoples, cultural property, or resettlement risks. These impacts may affect an area broader than the sites or facilities subject to physical works. 46 Normally, site screening will only be required for Type I11subprojects to ensure that particularly high-risk projects receive closer Bank oversight and that specific risk areas are identifiedprior to the initiation of subproject EA work. 47Incases where the typological definitions for a sector conflict with existing state classifications, the state may include in its proposal a description of a rating system based on the alternative classifications, along with an explanation of why it i s necessary to use the alternative system. 48Ifprojects impacts are site-specific, but result insignificant social impact (i.e., involvingland acquisition that affects more than 200 persons, or significantly affects indigenous peoples either positively or negatively), projects are considered to be Type I11A. 122 This methodology includes the following Bank-approved typological guidelines for the Roads, Water and Sanitation, Urban Housing, and Solid Waste sectors. If a state program includes investments in different sectors, it should work with BANOBRAS to prepare a similar typology for subprojects inthat sector that i s satisfactory to the World Bank. ROADSSECTOR Step 1: Type of Intervention Maintenance Routine or periodic works to maintain a road in good serviceable condition. All works are performedon existing structures. - Routine work (pothole repair, cleaning of drainage). - Periodic work (resurfacing, signaling, bridge maintenance). Rehabilitation Restoringan existing deteriorated road to its original condition. All the work i s performedon existing structures or inthe right-of-way (ROW). N o land acquisition i s required. - Improvementof drainage, slopes, retaining walls, and other structures. - Reinforcement of the roadway. - Complete resurfacing. - Restoration of civil works. [mprovement Improvingthe existing road's specifications. The majority of the work i s carried out on the existing road surface or inthe ROW. Some land acquisition may be requiredin specific areas. - Widening of emergency lanes, shoulders or sidewalks. - - Widening of intersections. Addition of new lanes in limited areas (e.g. slopes). - Upgradingof curves. - Reinforcement of bridges. Upgrading Expansion of road carrying capacity within existing ROW, through upgrading of road category, for example, based on its hierarchy, from a secondary road to a -primary road or based on the type of road surface, from gravel to a pavedroad. - Adding of new lanes (from 2 to 4 or from 4 to 6, etc.). Change in the road surface. Uew New projects or new trajectories. Land acquisition i s requiredfor the entire span of Zonstruction -roadway. New roadprojects, including new bridges. - - Construction of bypasses. New trajectories (changes of route). 123 Step 2: Typeof Infrastructure/Sub-sector For roads, classification of the type of infrastructure or sub-sector i s complex as several categorizations have been established for Mexico's roads in accordance with a variety of criteria, such as jurisdiction (federal, state, or municipal), "level of traffic" (heavy, moderate, or light), and geometric or engineering criteria. For the purpose of this ESMF, roads subprojects were classified according to the gridhierarchybelow.49 Principal Grid Generally, the principal grid i s administered by the state road agency. In some countries this i s called the "central artery system'' or "priority grid." It includes major transportation corridors. These are high-speed, multiple-lane, pavedroads, with intersections and complex works. The ROWs can range from 50 to 100meters on each side of the roadway. Secondary Grid Sometimes called regional grids or feeder grids, administrationvaries. Generally, these are paved roads with moderate traffic, and ROWs from 20 to 50 meters on each side of the roadway. Tertiary Grid Generally, these roads are administered by municipal or local authorities. These are and Rural generally dirt roads, some are gravel; works are of limited technological level, the Roads volume of traffic i s low; there are no sidewalks or emergency lanes, and the ROWs are very narrow. Step 3: Risk Rating Tertiary & Rural Roads SecondaryRoads MainRoads Maintenance I I I Rehabilitation I I I Improvement I I1 I1 Upgrading I1 I11 111 New Road I11 I11 I11 49This approach may need to be adjusted for other states. 124 WATER AND SANITATION SECTOR Step 1: Type of Intervention I RehabilitationThis includes restoration of an existing water supply system, sewerage system, wastewater treatment system, or potable water treatment system. Also falling into this category are works for optimization of potable water treatment plants or changes in diameter size for aaueducts and sewer svstems. No land acauisitioni s rewired. Expansion This includes an increase inthe coverage of water supply aqueducts and sewerage systems, potable water storage tanks, or the constructionof related booster and pumpingstations. This includes the construction of new aqueducts, dams and sewerage systems, including connected residential systems, construction of potable water and wastewater I treatment plants. Step 2: Type of InfrastructureBub-sector Water Distribution and The principal systems or grids, main lines, tertiary systems, and Sewer Networks residential connections. Potable Water Supply Capture systems (excluding dams and reservoirs), untreatedwater Systems transport lines, treatment plants, water wells, pumping stations and storage tanks. Wastewater Treatment Major Interceptors. This includes treatment plants, transport, and final Systems disposal. Stormwater Drainage Includes drainage canals, flood buffer zones, and pumpingstations Systems DamsandReservoirs Includes all dams and reservoirs for water supply, flood control, etc. Distribution Water Potable Water Wastewater Stormwater Damsand andSewer Supply Treatment Drainage Reservoirs Networks Systems Systems Systems Rehabilitation I I I I I1 Expansion I I1 I1 I1 I11 New Systems I1 I11 I11 I11 I11 125 URBANHOUSINGSECTOR Step 1: Typeof Interventionso Technical Involves consultation and direction for low-impact urban subprojects that seek to Assistance improve the living conditions of the inhabitants of a given sector or sectors, but that do not involve major works or major adjustments. These projects do not involve landacquisition or resettlement. Neighborhood Involves subprojects that seek to consolidate marginalurban sectors and improve Improvements the quality of life, public services, or urbanoutdoor structures. These subprojects may involve minor levels of local resettlement. New Urban Involves subprojects aimed at constructing new urban developments, with the Developments development of new infrastructure, urban outdoor structure, new roads, and the extension of public services. This usually requires land acquisition and I resettlement. Step 2: Type of Infrastructure/Sub-sector Rehabilitation Involves restoration or remodeling works that do not have a major impact and ~ do no alter the urban landscape. Expansion Involves moderate scope works that require local modifications of the urban landscapeinthe area of the constructions involved. New Construction Involves major works requiring significant modification to the urban landscape and/or the localdynamics of the area of influence by the new development. Reauires land acauisition and resettlement insome cases. Step 3: EnvironmentalRisk Rating TechnicalAssistance Upgradingof New Urban Neighborhoods Developments Rehabilitation I I NIA Expansion I I1 NJA New Construction I I1 I11 50Housing programs are expectedto vary significantly by state. 126 SOLID WASTE MANAGEMENT SECTOR Step 1: Type of Intervention Upgradingof This involves major planninginthe collection, transportation, anddisposal Collectionand processes. It could include programs for reducing the source of and recycling DisposalSystems waste. It may include upgrading of disposal systems, such as leachate re- injection and the burningof gases. No land acquisition i s required. Expansionof Includes increased coverage of collection services, expansion of sanitary Collectionand landfills, and expansion of areas for recycling. It may require new land. DisnosalSvstems New Systems Includes the planningof new collection routes, recycling systems at the source, and construction of new transfer stations and sanitary landfills. In some cases it may require the construction of leachate treatment plants or leachate re-circulation within the landfill cells, as well as systems for the usage or burningof gases. Often, new lands are required along with detailed environmental studies. Step 2: Type of Infrastructure/Sub-sector SystemDesignand Includes the upgradingof the mobile collection equipment, collection EquipmentPurchases stations and other equipmentthat could be required. ResidentialSolid Waste Involves the optimizationof collection systems, including the service Collection area expansions and campaigns to reduce waste at the source and recycle waste. Final Disposal in Sanitary Involves the upgradmg of existing systems or construction of new sanitary Landfills landfills. Appropriate lands will be required for this activity, alongwith a detailed environmental studv. Step 3: ProjectType Definition SystemDesignand Collection Of Equipment ResidentialSolid FinalDisposalin Purchases Waste Sanitary Landfills Upgradingof Collectionand I I1 I DisposalSystems Expansionof Collectionand I I1 I1 DisposalSystems New Systems I I1 I11 127 1.2.2 Analysis of State Legal Framework, Mexican Legal Framework, and Bank Safeguard Policies Inthe second step of the ESMF, BANOBRAS and the state conduct a systematic analysis to identify areas of consistency and discrepancy between the state's legal framework, the GoM legal framework and applicable Bank safeguard policies.'' For the purpose of this evaluation, "legal framework" includes all laws, regulations, decrees, standards, and practices related to safeguards. This analysis should draw on Table 1.2.2.1, which presents a comparison of World Bank safeguard policies likely to be applicable to subprojects and GoM's related laws, regulations, and standards germane to all states, and, as an example, the work done to apply the ESMF to SoG, described in section II.4. The information in Table 1.2.2.1 i s for methodological purposes-application of this framework to each state will involve a state-specific analysis of the state and/or GoM legal frameworks as they are applicable to achieving the objectives the Bank's safeguard policies within the sectors proposed for funding under the program. This analysis i s submitted to the Bank duringthe appraisal mission and i s used to define the specific oversight arrangements for the environmental and social assessment and management of subprojects. Table 1.2.2.1 World Bank SafeguardPolici 3 and Mexican Laws, Regulations,and Standards" RELATED MEXICANLAWS,REGULATIONS, PRINCIPAL POINTS STANDARDS, AND INSTITUTIONALFRAMEWORK OFDISCREPANCY OP4.01 - ENVIRONMENTALASSESSMENT GeneralAct for Ecological Equilibriumand the Screening: InMexico i s basedon inclusive or exclusivelists of projects. EnvironmentalProtectionandthe regulations to that Act At the World Bank the project i s cross-referencedwith the sensitivity of with regardto: EnvironmentalImpact the project area. Scope: InMexico, there are generic Terms of Referencefor various sectors. The World Bank adjusts the Terms of Referenceto the characteristicsof the project andto the "screening" results. Analysis of altematives: For high risk projects,the World Bank requires an analysisof alternatives. InMexico, there i s no such specific requirementwithin EA,per se. Altematives would be examinedmost likely as part of feasibility studies Consultation: The World Bank requiresconsultationduring the preparationof the EA. This requirementi s not includedinMexican legislation, althoughpublic hearingscanbe heldat the request of interestedparties. GeneralAct for Ecological Eauilibrium& Environmental Overall, the protection of natural habitatsis very similar and these practices Protection, and the reiulations to that Act with regardto: are well known inMexico, including inthe DIRD sectors. The principal protectednaturalareas, environmentalimpacts,andnatural discrepancyi s seen in: areas protectedthrough federal and state decrees Mexican Official StandardNOM-022- SEMARNAT-2003 for The World Bank requires compensationin the event of an adverse effect on the Preservationof CoastalWetlands naturalhabitats (generallythe measuresemployedare new protectedareas National Commissionon ProtectedNatural Areas (agency or the strengtheningof existing areas). However, certain lawsthat require of SEMARNAT) establishmentof protectedareas can be assessedand reviewedto determine National Commissionfor the Understandingand Use of whether the net impact i s adequately achieved. Biodiversity (CONABIO) ''The existing Mexican legal framework for safeguard-related issues is based on its federal system. Under this system, states are mandated to perform certain functions, which are, in turn, undertaken by state and/or municipal institutions through arrangements specified by law, administrative decree, or agreement. 52This table summarizes national legal instruments. Individual states may have related laws and policies that are more stringent or detailed, This table is not intended as an exhaustive list o f all G o M safeguard-related laws and regulations. 128 RELATEDMEXICANLAWS, REGULATIONS, PRINCIPAL POINTS STANDARDS, AND INSTITUTIONAL FRAMEWORK OFDISCREPANCY Administration of Operation, Conservationand Industrial Bank requiresall projectsthat rely on existing dams to be evaluatedby one Engineeringof Dams, PumpingStations andAqueducts or more independent dam specialists to inspect the safety status, review the (agency of the National Water Commission,CNA) operational and maintenanceprocedures,and provide a written report of` findings and recommendations. OP4.12 INVOLUNTARYRESETTLEMENT - The GoM does not have a specific resettlement -policy. per se, _ Ingeneral, becausethe GoM does nothave aspecific resettlementpolicy per nor a single institution responsiblefor implementing se, nor a single institution responsiblefor implementing resettlement-related resettlement-relatedplanning or activities. Mexican law does planning or activities, it i s important to establishthe principles to follow on not recognizethe term "Involuntary Resettlement." the basis of those laws and practices that correspondclosely with the spirit Nonetheless, extensivelegislation exists regardingrights to of OP 4.12 anddetermine which agencytakes the leadinoverseeing property and to land, agrarianlaws for protectionof agricultural resettlementineach state. Inaccordancewith Mexican law and practice, land holdings (with or without title). Laws on Expropriation of resettlementprocedures shouldinclude census of affectedhouseholds, property exist. Payment inkind is accepted,provided that it is valuation of lands andimprovements,provision of new replacementhouses done without detrimentto the affectedparties. and titled property (including those lacking legally recognizedtitle to occupiedaffectedlands, but with legally recognizedclaims to those lands), anddevelopmentof complementarysocial assistanceanddevelopment projects. To define these procedures for inclusion inthe ESMF,states participating in BANOBRAS' shoulddefine procedures for conductingresettlement, denoting one agency or institution to overseethe process, and describingthe institutional arrangements for ensuringcompliance with relatedMexican law. These procedures may needto ensurethat all projectsinvolving land acquisition that affects more than 200people are categorizedas Type IIIA projectsand flaggedto the World Bank early on to allow prior review and commenton TORSand RAPSby Bank staff, as needed. OP4.20 INDIGENOUSPEOPLES - Constitution of the United Mexican States Constitutional Reform Decree of August 14,2001 legislation (See Attachments 1) inindigenousaffairs makes it possibleto ILO Convention 169ConventionconcerningIndigenous concludethat there is a substantialconsistencyand compatibility inthe basic and Tribal Peoplesin IndependentCountries principles of protection,participation, and consultation. To maintain a Constitutive Agreement of the Fundfor the Development consistent approachtoward IndigenousPeoples, each state shouldadhere to of IndigenousPopulationsof Latin America and the the following principles contemplatedinMexican laws andprograms: (i) Caribbean identification, socioeconomicand cultural analysisof the indigenousgroups Draft American Declarationon the Rightsof Indigenous involved inthe sector strategy, to identify subprojectsthat could potentially Peoples, Organizationof American States affect indigenouspeoples or to ensurethat they benefit from the subprojects; DraftUnitedNationsDeclarationon the Rightsof [ii)participation and consultationmechanisms so as to ensure subprojects IndigenousPeoples ire socially and culturally compatible; (iii) identification or implementation IndigenousRights Containedin State Constitutionsof Jf conflict resolution mechanisms; (iv) definition of actions targeting Mexico ndigenousgroupsto mitigate impact and/or to ensure benefits; and (v) FederalLegislation Applicable to IndigenousCases iesignation of the stateentities responsiblefor implementationof pertinent Law on IndigenousRights andCulture nstitutional arrangements. D FederalLaw on MonumentsandArcheological, Artistic, and Historical Areas, andregulationsto that law xactice for protection of archeologicalheritageinMexico i s quite advanced D OrganicLaw of the NationalInstituteof Anthropology and md the regulationsfor unexpectedfinds are well detailed. History (INAH), and Directorateof Archeological Restoration D National Coordinationof INAHCenters 129 1.2.3 InstitutionalManagementCapacitySelf-Assessment In the next step, the state, also as part of its proposal, works with BANOBRAS to conduct an assessment of its existing institutional environmental and social management capacity-within the program's sectoral implementation entities, at the level of the state environmental agency, and in any agencies with applicable authority for indigenous peoples, cultural property protection, or resettlement issues-as it applies to the subproject program. To conduct the assessment, the state completes a Bank-provided survey (see example in Attachment 2), which evaluates environmental assessment capacity in general, and environmental and social management capacity within each sector included in the state's proposed sector ~trategy.'~The survey i s designed to address key policy, budgetary, staffing and technical capacity, and monitoring and evaluation aspects of institutional management capacity. The assessment should draw on available existing compilations and analyses of the state's environmental regulatory framework prepared by the Department of the Environment and Natural Resources (SEMARNAT) and other agencies. It may also draw upon institutional analysis and methodological proposals for environmental and social management already implemented for other projects inMexico financed by the World Bank (or other donors), if relevant. 1.3. Bank Reviewof the Proposal Upon receipt of the state's proposal, the Bank reviews the subproject risk and institutional capacity assessments, consulting further with the state as needed. The purpose of the Bank`s review i s to: (i) assign an institutional capacity rating to the state for each sector of its proposed strategies; (ii) identify the procedures for Bank oversight of subprojects; (iii)recommend any necessary additional strengthening measures; (iv) identify a programof institutionalcapacity enhancements that could result in a higher institutional capacity rating; and (v) provide guidance on any additional up-front sectoral EA work required. 1.3.1 InstitutionalCapacity Rating As part of the review process, the Bank assigns an institutional capacity rating for each sector to be funded by the Bank. The institutional capacity ratings, summarized below, correspond to a baseline level of management capacity for the sector. For each rating, the state must demonstrate that all of the requirements of the rating below have been achieved.54.The purpose of this approach i s to provide a strong incentive for states to improve their institutional capacity. High The sectoral agency and/or the state environmental agency have clear environmental policies and procedures, strong management capacity, and adequate instruments (e.g., environmental manuals, regulations). This includes environmental aspects for bidding specifications and contracts, and environmental follow-up on projects. The state environmental agency has the capacity to control the projects and review environmental impact studies; the system of environmental licensing i s strong; environmental monitoring i s conducted; and remedial action i s taken. 53States may also provide the information obtained through the assessmentthrough meetings or other methods satisfactory to the World Bank. 54The institutional capacity rating may be changed (higher or lower) at a later time based on performance. 130 e The state has indigenous peoples and resettlement policies, as well as specialized agencies or units with sufficient capacity to manage these issues e There have been positive experiences in the state in management of environmental, indigenous peoples, cultural property, and resettlement programs, projects and issues. Medium e The sectoral agency and/or the state environmental agency need to be strengthened with regard to environmental policies, procedures, and management capacity, and/or specific instruments (e.g., environmental manuals, regulations) need to be prepared. This strengthening canbe achieved inthe short- to medium-term. The state environmental agency has the capacity to oversee all relevant subprojects and review environmental impact studies; the system of environmental licensing i s strong; environmental monitoring i s conducted; and remedial action i s taken. The state has indigenous peoples policies and agencies specialized in the management of those policies, but it lacks sufficient institutional capacity to elaborate and implement plans for indigenous development, which may be required. The state has resettlement policies, agencies specialized in the management of those policies, and an application framework, but does not have sufficient experience in the management of resettlement. With technical assistance, it i s possible to overcome the deficiencies. Low e The institutional capacity in the sectoral agencies or in the state environmental agency i s quite weak, and strengthening programs are necessary in the long-term. e The state does not have adequate indigenous peoples or resettlement policies and/or management capacity (Le., insufficient human resources, weak organizational structure). It has a history of inadequate management of social impacts. The strengthening programs needed are long-term innature. 1.3.2 World Bank OversightProcedures The state's institutional capacity rating broadly determines how the Bank will oversee the environmental and social assessment and management of subprojects (see Table 1.3.2.1). This approach i s intended to provide a level of oversight commensurate with expected risk, while also encouraging states to enhance their institutional environmental and social capacity. For all capacity levels, the Bank would normally require prior review and approval of any necessary environmental, indigenous peoples, or resettlement assessments or plans (EA, RAP, IPDPs and TORS)for highest risk subproiects (ie., all Type 111-A proiects). The Bank may also require more comprehensive oversight procedures for initial subprojects to provide additional assurance of quality and to identify capacity building needs. In addition to ex-post review procedures, all state programs are subject to general supervision reviews, as outlined in Section 1.4.4. 131 55The first severalType I1subprojects may be subject to prior Bank review to ensure typology and procedures are adequate. 56The first severalType III-B subprojects may be subject to prior Bank review to ensure typology and procedures are adequate. 32Type I11A & B subprojects are describes in Section 1.4.1. See footnotes #10 & #11. 132 1.3.3 InstitutionalCapacityEnhancemenustrengtheningMeasures In addition to the general oversight procedures outlined above, in all cases the World Bank may recommend more specific strengthening measures based on the identified needs. These measures can be implemented in the short- or mid-term and are specific to the preparation or implementationof one or more of the state's subprojects. In making the recommendations, the World Bank defines each capacity need and recommends procedures or instruments that can fulfill that need. The state, in implementing its sector strategies (Section 1.4), confirms the procedures or instruments it will utilize. A wide variety of procedures or instruments may be identified as capacity strengthening measures, such as: e Environmental assessmentprocedures, including specialized procedures for Type 111-A projects;59 e Environmental manuals, regulations, etc.; e EnvironmentalManagement Plans; e Compensation plans for natural habitat loss; e Environmentalguidelines for the designand construction of specific projects ineach sector; e Strategic EnvironmentalAssessment (SEA); e Procedures for unexpected cultural property findings (e.g., archeological remains); e Procedures for including environmental requirements inbiddingspecifications and contracts; e Resettlement policy framework (see Attachment 3 for a sample framework) and subproject resettlement plans; e Indigenous peoples framework and subproject plans; (see Attachment 4 for a sample IPDP) a Training, equipping, or infrastructure enhancements; e Consultation andor disclosure procedures; and e Monitoringprocedures 1.3.4 AdditionalSectoralEnvironmentaland/or SocialAssessment Work As part of its review of the state proposal, the World Bank also specifies whether additional sectoral environmental or social assessment (SEA) work i s required for the overall sector strategy. Normally, limited additional work will be required for highcapacity states beyond a confirmation and elaboration of the oversight procedures described in Table 1.3.2.1 above. For most low-and some medium- capacity states, the state will need to complete, through an independent consultant, an abbreviated SEA. Based on the state's proposed programs and capacity self-assessment, the World Bank will provide guidance, including draft TORs, on what issues should be covered by the SEA. In general, SEASmay include one or more of the following elements: An upstreamanalysis of sectoral policies andinvestment strategies; An assessment of the potential cumulative environmental and social impacts of the proposed program; Further institutional capacity analysis of the applicable policy, legal, and administrative framework for environmental and social management; 59Procedures for Type 111-A subprojects are likely to include: examination o f the project's baseline data and potential negative and positive environmental impacts; comparison o f those impacts with those o f feasible alternatives; recommendation of any measures needed to prevent, minimize, mitigate, or compensate for adverse impacts and improve environmental performance; and consultation and disclosure o f TORs and draft EA. 133 0 A description of the environmental and social management procedures the state will follow to help ensure that use of its systems will help achieve the objectives of the World Bank's safeguard policies; 0 A determination of the functions of each entity participating in BANOBRAS' program, inregards to the fulfillment of environmental management responsibilities including: authorizations, mitigation programs, provision of information, verification of compliance with requirements, and project supervision; and 0 A proposal for abroadinstitutional capacity enhancement program. The state's completion and submission of this work to the World Bank will function as the state's revised proposal. Because the state provides additional detail in its revised proposal and has latitude in identifying alternative measures to meet World Bank requirements, further consultation between the World Bank and the state may be required to finalize the proposal as the state's environmental management plan. This additional consultation should, however, be limited to resolving or clarifying responses to already identified needs, and should be completed in as timely a manner as possible. If resolution of particular issues cannot be reached in a timely manner, the World Bank may approve implementation of selected elements of the state's subproject program, for which oversight and management procedures have beenfinalized. 1.4 Implementation Specific implementation procedures will be developed for each state. However, the following section sets forth general guidance for implementation designed to ensure that subprojects with potential significant environmental and social risk are flagged to the Bank. 1.4.1 Site Screening Again, for Type I11subprojects, states must conduct site screening once potential subproject sites are known and prior to implementation of the subproject to better determine subproject risk areas and to flag to the World Bank those subprojects with potential significant environmental or social impacts. This flagging will ensure that particularly high-riskprojects receive closer World Bank oversight (such as prior review of TORSand final drafts of EAs, resettlement plans, etc.). Results of site screening are used to determine, whether subprojects are designated as either Type 111-A or 111-B. Type 111-A: Subprojects with particularly high environmental, indigenous peoples, cultural property, or resettlement risks, as determined by an analysis of the nature and scope of civil works planned and the ecological and sociocultural sensitivity of the project site. Type 111-B: Subprojects with moderately high environmental or social risk. The subproject does present certain risks due to the sensitivity of the setting and the nature and scope of civil works planned. However, mitigatory measures are readily available and the subproject will not have a major impact that places the natural environment, its biodiversity, society, or its cultural property at risk. Site screening may be carried out by the sectoral agency, state environmental agency, andor relevant social agency. A system designating three possible degrees of sensitivity for a setting (i.e., low, medium or high) is presented in Table 1.4.1.1, using the World Bank policies most likely to be 134 activated by subprojects. Other factors of importance may be added for sectoral projects, as applicable. In addition, more detailed work charts can be prepared for each sector. In screening subprojects, states should review each row of the table to determine the highest sensitivity level applicable to the site or sites under consideration. POLICY Low MODERATE HIGH Natural Habitats N o critical natural No critical natural Presenceof critical (OP 4.04) habitats; absence of habitats; presence of naturalhabitats and natural habitats. other natural habitats. naturalforests.60 Involuntary Low population Moderate population Highpopulation Resettlement density; disperse density; some density; cities and (OD 4.12) populations, little or no activities along the major towns; intense activity or well- trajectory; mixed activities inthe established enterprises property and project's area of inthe project's areaof landholdings along the influence; low-income influence. trajectory. populationand squatters; communal properties. Landholdings that are not very well defined. Indigenous I Absence I of indigenous Dispersed,mixed Populations, reserves Peoples populations. indigenous and indigenous (OD 4.20) populations; territories; vulnerable populations with a indigenous populations highdegree of acculturation. The presence of sites Sites of cultural (OPN 11.03) are known or of cultural interest i s importance inthe area suspected. suspected; there are of influence. significant sites inthe area of influence. Based on the highest level of sensitivity identifiedfor any aspect of the subproject or policy/parameter, the subproject i s designated as either Type 111-A or 111-B,inaccordance with the matrix below. IProject Tvne I Sensitivity of the Setting MICritical natural habitats are defined as existing and proposed protected areas, along with unprotected natural habitats of known highimportance for biodiversity conservation. For details see Natural Habitats OP 4.04. 135 1.4.2 Bank Reviewsand Supervision Procedures for World Bank reviews and supervision will be based on the Bank's assessment of the state's proposal and may be adjusted during project implementation. As noted in Table 1.3.2.1, the World Bank will conduct ex post reviews of subproject EA and social work of, at a minimum, all Type I11subprojects and select Type I1subprojects. This selection will be based by the Bank on subproject risk and institutional capacity to ensure the adequacy of the environmental and social management work implemented. The specific procedures for conducting these reviews will be determined in consultation with the state. Ingeneral, Bank subproject reviews, both prior and ex post, will take place after the responsible state agency has completed its review, to allow an assessment of that agency's performance in doing the review, as well as an examination of the overall quality of the environmental and social work. In addition, World Bank supervision will be supplemented with a broader auditing system carried out over a certain period of time agreed upon with the state. In general, World Bank supervision will include re-examination of project risk levels, institutional capacity, and delegation and oversight procedures, as well as supervision of environmental and social outcomes. All supervision activities will be designed to correspond to the broader supervision procedures of BANOBRAS' program. 1.4.3 CapacityBuildingDuringImplementation During implementation, the World Bank will be available to provide support to states in strengthening their environmental and social management and procedures, as well as its environmental and social criteria, consistent with the World Bank's policies. At any point in its participation in the program, a state may submit a request for reclassification of its institutional capacity rating. To submit the request, the state should submit a revised self-assessment to the World Bank for review to determine whether the state's capacity rating should be adjusted, and, correspondingly, whether management and oversight procedures can be adjusted. 1.4.4 Evaluationof the ESMF The World Bank will conduct a mid-term evaluation of the ESMF to determine whether it i s effectively meeting its objectives and to identify any opportunities for enhancing the framework. The evaluation will look at the effectiveness of the ESMF,ingeneral, and inregard to each state and sector. Prior to making any changes to the ESMF the World Bank will share its findings and any proposed reforms with the states. States are encouraged to provide feedback on the ESMF to the World Bank at any time duringtheir involvement in the program. 136