World Bank Document - Centro Nacional de Estudios Municipales (National Center for Municipal Studies) FORTAMUN - Programa de Fortalecimiento Municipal (Program for the Strengthening

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 5974-ME

STAFF APPRAI'SL REPORT

MEXICO

KUNICIPAL STRENGTHENING PROJECT

March 5, 1986

Urban Projects DivisionLatin America and the Caribbean Regional Office

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

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CURRENCY EOUIVALENTSCurrency Unit - Mexican Peso (Mex.$)

Calendar 1984 (Appraisal)Currency Unit Average August 03, 1985 December 30, 1985

US$1.00 = Mex S 167.8 Hex S246 Mex S 367Nex $1.00 - US $ 0.006 Us S0.004 US $ 0.003Hex $1,000 3 US $ 5.96 Us $4.07 US S 2.73

WEIGHTS AND MEASURESMetric system

FISCAL YEARJanuary 1 - December 31

PRINCIPAL ABBREVIATIONS AND ACRONYHS

BANOBRAS - Banco Nacional de Obras y Servicios Publicos(National Rank of Puhlic Works and Services)

CECADE - Centro de Capacitacion para el Desarrollo(Center for Development Training)

CEDADEM - Centro de Estudios, Documentacion v Asistencia para elDesarrollo Municipal(Center for Studies, Documentation and Assistance forMunicipal Development)

CNEM - Centro Nacional de Estudios Municipales(National Center for Municipal Studies)

FORTAMUN - Programa de Fortalecimiento Municipal(Program for the Strengthening of Municipalities)

FRR - Financial Rate of ReturnGIRA - General Interest Rate AgreementINAP - Instituto Nacional de Administracion Publica

(National Institute of Public Administration)INCAFI - Instituto Nacional de Capacitacion Fiscal (de la

Secretaria de Facienda y Credito Puhlico)(National Institute for Fiscal Training - belongs tothe Secretariat of the Treasury and Public Credit)

INDETFC - Instituto para el Desarrollo Tecnico de las Raciendas(Institute for Technical Development of Public Assets)

IPADE - Instituto Panamericano de Alta Direccion de Empresa(Pan American Institute for Higher Management Training)

MDF - Municipal Development FundSEDUE - Secretaria de Desarrollo Urbano v Ecologia

(Secretariat for Urban Development and Ecology)SC - Secretaria de Gobernacion

(Secretariat of the Government)SHCP - Secretaria de Hacienda y Credito Publico

(Secretariat of the Treasury and Public Credit)SPP - Secretaria de Programacion y Presupuesto

(Secretariat of Programming and Budget)TS - Secretariado Tecnico

(Technical Secretariat)TSTU - Unidad de Apoyo de Entrenamiento

(Training Support Unit)

FOR OFFILIL USE ONLYMEXECO

MUNICIPAL STRENGTHENING PROJECT

Staff Appraisal Report

Table of Contents

Page No.

I. LOAN AND PROJECT SUMMARY I................ 1

II. SECTOR AND PROJECT BACKGROUND .................. 4...... 4

Government Objectives and Strategy ................... 4Sector Organization .... *5

Municipal Finance ........ 7Bank Sector Strategy, Past Experience and Rational forBank Involvement ....... ............... 7

III. THE PROJECT 9...........* 9

Project Objectives and Description ...... 9........-.. 9Program Structure *.......9

Project Cost and Financing 12Procurement and Disbursement 12Accounts and Auditing .......... 13Project Organization and Management 14Implementation Schedule ..... 15Monitoring and Reporting Requirements ............. 15Local Finance and Cost Recovery 15On-lending Terms and Procedures 16Appraisal of Sub-borrowers ........... s.. 16Subproject Appraisal . ............... 16Subloan Agreements .. ....... ... *c 16Matching Grants ...................................... 17Justification and Benefits 17Project Risks ....................... 18

IV. AGREEMENTS REACHED AND RECOMMENDATIONS ................... 18

This report is based on the findings of an appraisal missionwhich visited Mexico in August 1985. The mission comprised Messrs./Mmes.Braz Menezes, (Mission Leader), G. Yabrudy, LCPUR; K. Mera, WUD; R. Johnsonand G. Howell, (Consultants). Mrs. Miriam Torres assisted in the produc-tion of fEe report.

Thi document ha a tricd distfibutin and may be ud by rcpient only in therpfoanceofther officad duteL it contents my not otherwisbe dicied without Wodd Dank authoution.

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ANNXS

ANNEX 1: Detailed Component Features

101 Human Resource Development and OrganizationalStrengthening at Municipal, State and Federal Levels

1.2 Decentralization of Federal Public Administration

ANNEX 2: Distribution Data

2.1 Eligible Subprojects, Distribution of Investments, andRecommendations on Cost Recovery Mechanisms

2.2 Distribution of Municipality by Group type andDistribution of Subloans by Subsector

2.3 Flow of Funds Chart

ANNEX 3: Implementation Aspects

3.1 Organizational Chart for Implementation3.2 Selection of States for 7ear I, Numbers of

Municipalities, and Administrative Calendar3.3 Selection Criteria for Participation in Program3.4 Allocation Criteria for Matching Grants

ANNEX 4: Information System and Performance Monitoring

4.1 Monitoring and Evaluation System4.2 Chart - Organization of Information Flows4.3 Key Performance Indicators

ANNEX 5: Excerpts from the Operational Manual

5.1 Implementation Procedure of the FORTAMUN program ineach State

5.2 Proforma for Financial Appraisal of each Municipality5.3 Proforms A - Pre-appraisal of Sub-borrower5.4 Proforms B - Appraisal Request for Subprojects5.5 Contents of the Operational Manual

ANNEX 6: Financial Aspects

6.1 An Overview of Municipal Finance in Mexico6.2 BANOBRAS Finances, Activities and Future Orientation6.3 Matching Grants and Impact on the Fund (FORTAIMUN)

ANNEX 7: Cost Tables and Disbursements Schedules

7.1 Detailed Cost Table (9 years)7.2 Summry of Project Cost (5 years)7.3 Detailed Table (5 years)7.4 Disbursement Schedule (9 years)7.5 Disbursement Schedule (5 years)

ANNEX 8: Selected Documents on Project File

MAP IBID No. 15553

mHXICO

MATrICIPAL STRENGTi ENING PROJECT

PART I: LOAN AND PROJECT SUMMARY

Borrower : Banco Nacional de Obras y Servicios Publicos, S.N.C.(BANORRAS)

Guarantor : United Mexican States

Beneficiaries : Municipalities, and various federal and state agencies(Staff Development and Organizational Strengthening).

Amount USS40.0 million equivalent

Terms Fifteen years, including three years of grace at thestandard variahle interest rate.

Relending Terms: The Peso equivalent of about US$61 million would herelent. Subloans vould he made to cover at most 80% ofsubproject costs, at interest rates specified in theGeneral Interest Rate Axreement (GIRA), and according tothe following terms: (a) roads, sidewalks, drainage,parks and recreation areas - 5 years, including one yearof grace or completion of construction, whichever isshorter; (b) water supply, solid waste infrastructure,municipal vehicle and equipment maintenance workshops -15 years, including four years of grace or completion ofconstruction; (c) municipal markets, slaughterhouses,public transport terminals and equipment - 10 years,including three years of grace or completion of cons-truction; and (d) solid waste equipment and vehicles andmicro-computers and equipment - 5 years without a graceperiod. For the Staff Development and OrganizationalStrengthenipg components, and for Project Administra-tion, proceeds of the loan would be made available tothe relevant implementing agencies on a grant basis.

Project The Government's program objectives are to improve theObjectives and utilization of human and financial resources and streng-Description: then institutions, partic'ilarly at the municipal level,

to increase the delivery of affordable and efficienturban services. Within these overall program object-ives, the proposed project would: (a) strengthen andcoordinate federal and state agencies to become proinot-era for municipal development, through provision offinancial resources and effective training programs; (b)strengthen the municipalities' organizational, adminis-trative and financial management systems and performance; and (c) assist municipalities in expanding andupgrading urban infrastructure.

The project objectives would be achieved through theimplementation of the following components: (i) Munic-ipal Staff Development and Management Strengthening;(ii) Federal and State Staff Development and Institu-tional Strengthening; (iii) Infrastructure and RelatedInvestment Fund for Municipal Development; and (iv)Project Administration.

Project Benefits: The principal benefit of the proposed project would bethe improved policy and financial environment for munic-ipal development which would he necessary for the imple-mentation of the Government's decentralization program.Rationalization of BANORRAS' policies, practices andprocedures for provision of municipal credit, reinforce-ment of federal and state agencies' capacity to providetechnical assistance to municipalities, and trainingprograms would introduce a more rational planning andinvestment process, stimulate local resource generationand cost control measures and provide a reliable sourceof long-term financing for municipal development. Theimprovement of operational and financial managementpolicies and rationalization of grant financing formunicipal services would lead to reduced demands on thenational budget through greater local resource mobiliza-tion. In addition to significant health and socialbenefits, the project would have a positive environment-al impact in subproject municipalities.

Project Risks: The major profect risks are: (a) the inherent difficult-ies in coordination; (b) the capacity and willingness ofBANOBRAS to make appropriate changes; and (c) thepossible loss of political momentum. The estahlishmentof an independent Technical Secretariat and TrainingSupport Unit, and the definition of clear roles, respon-sibilities and procedures in the Operating Guidelines,are expected to reduce difficulties in coordination.Previous urban and water supply lending operations havebeen partially constrained by problems within BANOBRAS.However, the project addresses these issues. BANOBRAS'coordination of the project preparation effort and thedegree and rapidity with which changes in policy havebeen processed have been exemplary and indicate themanagement's and SRCP's commitment to change. Finally;the Government will be encouraged to accelerate imple-mentation within the first five years to obtain a quickfeedback, and also benefit from the momentum set inplace by the present Administration.

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Table 1: Pro,tect Costs

USS '000Local Forelic Total

A. Municipal Staff Development

1. Staff Training 5,123 103 5,2262. Technical Assistance & Promotional

Activities - 1,016 0 1,0163. Equipment and Materials 296 1,183 1,479

SUB-TOTAL A 6,435 1,286 7,721

B. Federal and State Staff Development

1. Staff Training 1,051 0 1,0512. Training of Trainers 21 0 213. Technical Assistance and Training 3,565 832 4,3974. Information System and Studies 87 350 4375. Equipment and Materials 40 162 202

SUB-TOTAL B 4,764 1,344 6,108

C. Infrastructure and Related Investments 45,750 15,250 61,000

D. Project Administration 2,097 0 2,097

TOTAL BASELINE COSTS 59,0 17,879 76,926

Physical Contingencies 65 134 200Price Contingencies 2,569 306 2,874

TOTAL PROJECT COSTS 1/ 61,681 18,319 80,000

Financing Plan: Local Foreign Total,uS ' 000)

Government of M4exico 27,800 0 27,800Municipalities 12,200 0 12,200Bank 21,681 1R,319 40,000

Estimatec Disbursements:

FY 1987 1988 1989 1990 1991 1992 1993 1994 1995CUSS million)

Annual 4.44 5.43 5.72 5.73 5.R5 5.03 3.59 2.53 1.68Cumulative 4.44 9.87 15.59 21.32 27.17 32.20 35.79 38.32 40.00

Economic Rate of Return: N/A

Staff Appraisal Report: Report No. 5974-ME, dated March 5, 1986

1/ Figures do not add due to rounding. The Droiect costs are net ofduties and taxes.

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PART II - SECTOR BACKGROUND

Government Objectives and Strategy

2.01 Mexico's outstanding spatial problems are the heavy concentrationof economic activity, wealth and population in Mexico City, the lack ofintegration between urban and rural areas, and unbalanced inter-regionaldevelopment. Population growth has declined from 3.2% p.a. in the early1970s to 2.6Z p.a. at present. Approximately 68% of the country's 75million people live in urban centers of more than 2,500 inhabitants, whileabout 26% of the population live in the three main metropolitan areas:Mexico City, Guadalajara and Monterrey.

2.02 Providing basic municipal services and improving the socialwell-being of all Mexicans has preoccupied successive Administrations.During the decade of the 70's and early 80's, the percentage of the popul-ation with access to piped water increased from 49 to 66Z and the percent-age connections to sewers or sanitation increased from 29 to 43%. However,the recent economic climate has led to a significant rise in servicesdeficits nationwide and a deterioration in existing infrastructure throughpoor maintenance and lack of training.

2.03 Successive administrations have attempted to address the overconcentration of people and economic activity in Mexico City (and to alesser extent in Guadalajara and Monterrey) through major decentralizationefforts. During the previous administration (1976-82) physical decentrali-zation was given priority through, inter alia: the enactment of the Law ofHuman Settlements, the creation of a new Ministry of Human Settlements andPublic Works, the issuance of new federal-state institutional proceduresand the creation of large federal programs and special incentive schemes toattract investments in pre-defined priority regions.

2.04 President Miguel de la Madrid's administration has again assignedhigh priority to decentralization efforts. The Government, as the firstinitiative towards establishing a base for its decentralization policies,in February 1983, modified Article 115 of the Constitution which governsmunicipal functions. This modification defined the legal responsibilitiesof municipalities to include the plAnning, financing, implementing, operat-ing and maintaining of basic municipal services. Through subsequentrelated decrees, the role of federal agencies were modified to conform tothe municipalities' increased responsibilities.

2.05 The Government's decentralization strategy, is outlined in theProgram for the Decentralization of the Federal Public Administration,published in January 1985. Unlike previous approaches which mostly concen-trated on physical decentralization (deconcentration), the present strategyemphasizes the delegation of responsibilities which were previously cen-tralized in federal government secretariats in Mexico City, to eitherfederal agencies operating at the state level or to state and municipal

governments. This strategy will imply and require more state and localparticipation in programming and implementing investment decisions, greatercoordination among central agencies and between federal, state andmunicipal governments, more state and local inputs into policy planningwith federal agencies providing overall policy guidance, technical outreachsupport and overall evaluation of programs.

2.06 On September 19, 1985, Mexico was hit by one of the worst earth-quakes in its history, measuring 8.1 on the Richter scale. The earthquakeand subsequent aftershocks caused severe damage in Mexico City and in thestates of Jalisco, Michoacan, Colima, Guerrero and Mexico. In Mexico Cityalone, an estimated 60% of federal government buildings were destroyed orheavily damaged and need to be demolished. Instead of reconstructingoffice space in Mexico City, the Government has decided to accelerate theongoing decentralization program. Staff and operations of various Secreta-riats are to be relocated to 20 cities which have been selected on thebasis of, inter alia, their physical location, existing population and rateof growth, land availability, and capacity for expanding use of existinginfrastructure. The Government's objective is to address the decentraliza-tion program in these 20 cities in an integrated manner in which, policy,financing and investments are coordinated at the federal level, with stateand municipal plans and programs. The proposed project would financestudies for the development of detailed plans for decentralization in 20priority cities as well as pilot municipal investments in two selectedcities (Annex 1.2).

Sector Organization

2.07 The Government structure in Mexico is highly centralized with thefederal government selectively delegating power tc the 31 states and 2379municipalities. Municipalities are the primary political and administrat-ive units of government. Municipal governments are headed by mayors which,together with approximately 10% of senior municipal officials, are electedfor three-year terms and are not eligible for reelection. In accordancewith the recent modifications to Article 115 of the Constitution, munici-palities are responsibile for the planning and delivery of various urbanservices including: water supply and sewerage, drainage, solid wastemanagement, roads and streetlighting, retail and wholesale markets, slaugh-terhouses, parks and gardens, graveyards, traffic management and publicsecurity. Municipal governments have full authority to set and collectuser charges and property taxes, to plan, finance and implement invest-ments, and to operate and maintain basic municipal services. However, theadministrative, financial and managerial capabilities of municipalitiesvary substantially; only about 100 of the larger municipalities are capableof undertaking their legal responsibilities. The absence of both qualifiedtechnical staff and adequate access to technical assistance and trainingresult in reduced mobilization of financial resources at the municipallevel, slow implementation of projects and overall inefficiency in the pro-vision, operation and maintenance of basic municipal services. Whilemunicipalities have recently been given increased responsibilities, no

clear municipal training policy has been adopted by Federal and Stategovernments; heretofore training of municipal staff has taken place infor-mally on the job or on an ad-hoc basis. Strengthening municipal managementthrough intensive training programs in order to improve the provision ofbasic municipal services is, therefore, essential for the success of theGovernment's decentralization program.

2.08 At the federal level, various Government agencies are involved inoverseeing policy in and providing technical assistance to municipalities.The Secretaria de Gobernacion (SG) is concerned with the jurisdiction,status and administration of local governments and their politicalrelations with the Federal Government. The Secretaria de Hacienda yCredito Publico (SHCP) is responsible for revenue collection, foroverseeing the financial management and revenue operations of local govern-ments, for determining sources of financing at the federal level, and forthe operation and management (including credit operations) of the Govern-ment's financial agents. The Secretaria de Programacion y Presupuesto(SPP) reviews and subsequently evaluates state and local budgets to ensuretheir priorities are consistent with national and regional plans, programsand statutory requirements. SPP is also responsible for the allocation offederal budgetary al'locations to municipalities. The Secretaria deDesarrollo Urbana y Ecologia (SEDUE) is the principal normative authorityresponsible for water supply, sewerage, solid waste and other basic munici-pal services. SEDUE is responsible for advising on and reviewing of landuse plans prepared by state and local governments and for providing techn-ical assistance and support for all municipal and urban services. All ofthe Secretariats have regional offices in each state.

2.09 BANOBRAS is a financial agent of the Government responsible forfinancing infrastructure (urban development, water supply, highway, etc.)investments (Annex 6.2). The federal goverament, through SHCP, controlsBANOBRAS' policies and directs its borrowings and lending activities.BANOBRAS onlends funds to states and municipalities through variouswindows- on varying terms and conditions. However, in view of the intern-al organization requiring coordination among four divisions (ExternalCredit, Planning, Operations and Training), as well as complex bureaucraticprocedures for loan application and processing, and lack of promotion,BANOBRAS has not been a major source of funding to municipalities. AGovernment decree issued in July 1985, modifies the status of BANOBRAS tothat of a National Credit Institution and Development Bank. In itsexpanded capacity, BANOBRAS is to become more actively involved in initiat-ing, preparing, appraising and supervising investment projects. Inaddition to headquarters in Mexico City, BANOBRAS has six regionalbranches. BANOBRAS has also under discussion a program for establishingbranches at each state level, pari passu with project implementation,adequately staffed to carry out appraisals, loan processing and monitoringoperations. In the meantime, BANOBRAS has undertaken to implement adminis-trative and operational measures at the regional and state levels asrequired for the efficient and timely implementation of the project,including mechanisms for the promotion of the Government 's Program for theStrengthening of Municipalities and for the provision of financial servicesrequired by eligible municipalities in connection with the execution ofsub-projects.

2.10 In support of the Government's decentralization efforts, federal,state and municipal agencies have been instructed to create special intern-al units which would provide technical and financial assistance and train-ing to municipalities. There is, however, at present, no proper frameworkfor coordinating the activities of these units and there is considerableambiguity on the roles and responsibilities of the various agencies. Theproposed project would assist the Government in addressing this issue on apilot basis by developing the framework, direction and necessary technicaland financial assistance so as to strengthen all municipalities over thenext 10-15 years.

Municipal Finance

2.11 An overview of Municipal Finance in Mexico is given in Annex 6.1and summarized below. Althougt municipalities are now expected to providea wide range of urban services, their finances and accounting records aregenerally weak and inadequat . Over the 1977-1982 period municipalrevenues grew at an average annual rate of 18% in real terms, while expen-ditures grew at an average annual rate of 12% in real terms. Municipalborrowing remained at a constant 4% of revenues throughout this period.The revenues and borrowing capacity of municipalities are sufficient tosupport increased capital investment to improve the quality of municipalservices and expand their coverage. The most striking trend, over thatperiod, was the 33% average annual increase (in real terms) in transfers tomunicipalities through federal revenue sharing. These transfers increasedfrom 25% of total revenues in 1977 to 42% in 1982. In addition to federalrevenue sharing, federal and state subsidies to municipalities (excludingcredit subsidies) increased at an average annual rate of 15% in real termsduring this period. Total transfers (revenue sharing plus directsubsidies) grew as a proportion of total municipal revenues from 45% in1977 to 59% in 1982. Municipally generated revenues, includingborrowings,decreased from 55% of total revenues in 1977 to 41% in 1982.

2.12 Given domestic resource constraints, it is unlikely that munici-palities will, in the future, receive this increasing amount of federalgovernment support. Municipal governments will need to generate consider-ably more resources to meet the needs of their growing population. Modifi-cation of Article 115 of the Constitution provides the legal instrumentsfor substantial increases in municipal own-source revenues. Municipali-ties, which previously received 15Z of property taxes collected by states,are now responsible for collecting property taxes and retaining 80% ofcollections. Furthermore, municipalities now collect and retain all usercharges for water, sewerage and drainage systems, solid waste services,markets and slaughterhouses, among other basic services. Finally, asmunicipalities have adopted conservative fiscal policies they haveconsiderable potential for borrowing.

Bank Sector Strategy, Past Experience and Rationale for Bank Involvement

2.13 Mexico's urbanization pattern and the inordinate growth of theMexico City Region has been a recurrent subject of dialogue between the

Bank and Mexican authorities. Since 1978, the Bank has assisted theGovernment in projects aimed at addressing spatial decentralization throughthe development of alternative growth poles and deconcentration of theMexico City Region.

2.14 The first urban project supported by the Bank in Mexico was theLazaro Cardenas Conurbation Development Project (Loan No. 1554-ME ofSeptember 27, 1978). This project was an attempt to deal with a variety ofurban and regional development issues in a priority region which had btenthe subject of other Bank-supported projects. The Second Urban and Region-al Development Project (Loan No. 1990-ME of May 12, 1981), addressedsimilar issues in the oil-producing areas of Tabasco, Veracruz andChiapas. Both projects were aimed at providing infrastructure, communityfacilities, low-cost housing and credits for productive enterprises to comr-plement expanding economic activity in growing peripheral regions. Imple-mentation of these projects was adversely affected by difficulties ininstitutional coordination, inadequate technical and financial capacity atthe state and municipal level, and complex bureaucratic procedures. Theseissues would be addressed under the proposed project. The latter projecthas, in addition, been affected by reduced absorptive capacity in theproject area, as well as, by recently revised administrative arrangementsnecessitated by the Government's decentralization program. The Deconcen-tration Program for the Mexico City Region (Loan No. 2194-iME of August 3.1982) supports the preparation of a pre-investment stage of a deconcentra-tion program for the Mexico City region. A Low Income Housing Project(Loan No. 2612-ME of August 6, 1985), concentrating investments outside theMexico City region, and addressing macro issues on housing finance, is ininitial stages of implementation.

2.15 After an initial water supply project for the Mexico City region(Loan No. 909-ME of June 1973), three subsequent water supply projects havesupported deconcentration efforts and more equitable regional distributionof benefits through assistance in medium-size cities. Through these pro-jects, the Bank has assisted the Government in significantly improvingfinancial policies, planning and institutional capacities. The institu-tional arrangements under which these projects operate has been affected bymodifications to Article 115 of the Constitution and some adjustments toaccount for the municipalities' increased responsibilities have been made.

2.16 The proposed project would provide timely support to the Govern-ment's decentralization policies on a pilot basis by establishing theinstitutional, organizational and financial management framework for thefuture. The proposed project is expected to: (i) help improve the overallmunicipal public sector management policy and consolidate the Government'sdecentralization program; (ii) improve the institutional and financialmanagement of municipalities by gradually rationalizing the system of granttransfers, and strengthening municipal finances through application of asystematic methodology which would lead to appropriate pricing and costrecovery policies; (iii) reduce federal subsidies to states andmunicipalities by improving access to credit and improving local financemobilization; and (iv) establish, at the federal and state levels, acoordinated and streamlined mechanism to provide financial and technicalassistance and training to enable municipalities to discharge theirassigned responsibilities.

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2.17 Future Bank lending in both the Urban and Water Supply sectorswill necessarily incorporate the revised institutional framework requiredas a result of the Government's decentralization policy. A series of pro-jects in Solid Waste Management (processed in parallel), Small Cities WaterSupply, and Medium Cities Urban Transport are envisaged, to establish, atthe federal level, the technical subsector expertise and relevant institu-tional coordination, required to provide municipalities with financial andtechnical assistance and training, within the framework established underthe proposed project, to adequately discharge their responsibilities inthese subsectors.

PART III - THE PROJECT

3.01 The proposed project was identified in August, 1984 and appraisedin August, 1985. Negotiations were held in Washington in February, 1986.The Mexican delegation was led by Mr. German Sandoval of BANOBRAS.

Project Objectives and Description

3.02 The proposed project would support the Government's objectives toimprove the utilization of human and financial resources and strengtheninstitutions, particularly at the municipal level, to increase the deliveryof affordable and efficient urban services. Within these overall programobjectives, the proposed project would: (a) strengthen the municipalities'organizational, administrative and financial management systems andperformance; (b) strengthen federal and state agencies in the area ofmunicipal development promotion, through provision of financial resourcesand effective training programs; and (c) assist municipalities in expandingand upgrading urban infrastructure. The project ob4ectives would beachieved through the implementation of the following components: (a)Municipal Staff Development and Organizational Strengthening; (b) Federaland State Staff Development and Organizational Strengthening; (c) Infras-tructure and Related Investment Fund for Municipal Development; and (d)Project Administration.

3.03 Program Structure. The project would emphasize a 'process'orientation that would represent a shift away from traditional singleproject analysis to an institutional appraisal focused on the municipalityas an important agent of national economic development. The project isdesigned around an 'ntegrated set of mutually supportive activities. Aftercarrying out a detailed institutional and financial appraisal, municipal-ities would have access to credit for municipal infrastructure subject topresenting subproject appraisals, participating in relevant trainingprograms and implementing required financial measures. Because of thepilot nature of the project, emphasis has been placed on monitoring andevaluation for project management and subsequently for project performanceevaluation. Specific indicators have been established for measuring the

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performance of institutions and of beneficiary municipalities, as well asthe impact of the program as a whole.

3.04 The Government's Program for the Strengthening of Municipalities(FORTAMUN) would be formally established under a mandate from SHCP toBANOBRAS, as a condition of effectiveness. The mandate agreementauthorizes BANOBRAS to control funding and establishes the basic structureof the program, including: (a) the establishment of a high-level ministe-rial Steering Committee; (b) the establishment of a Technical Secretariatfor coordinating the various agencies and the program as a whole (paras.3.14 and 3.15); (c) the establishment of a Training Support Unit responsi-ble for providing detailed technical support to training agencies; and (d)the formalization of the Operating Guidelines which detail the basis forthe operation of FORTAMUN. The Operating Guidelines include: (a) projectobjectives; (b) participation criteria; (c) operating procedures; (d)procedures for inst4tutiocal and financial appraisal of municipalities; (e)procedures for financial, technical, and economic appraisal of subprojects;(f) model subloan agreements; (g) procurement guidelines; (h) recommenda-tion on cost recovery mechanisms; (i) accounting, auditing and reportingrequirements; and (j) monitoring and evaluation procedures. The OperatingGuidelines include a definition of concepts and data requirements relatingto municipal finance, methodology for analysis of historic data and otherindicators, as well as financial projection and impact techniques.BANOBRAS has agreed to follow policies and procedures as outlined in theOperating Guidelines, reviewed during negotiations, and to be acceptable tothe Bank as a condition of effectiveness, and would not make any changes inthe guidelines which would adversely affect the carrying out of theProject.

3.05 Municipal Staff Development and Organizational Strengthening.The Municipal Staff Development component would support a coordinatedprogram to upgrade the administrative and financial capacity of selectedmunicipalities through the training of: (a) about 14,350 senior municipalofficials requiring structured orientation of Government priorities formunicipal reform; (b) about 5,000 mid-level municipal officials responsiblefor the continued operation of services and programs across municipaladministrations; and (c) about 260 trainers. The project would finance thecost of courses, travel and subsistence and required equipment and mate-rials. To the extent possible, existing facilities, courses and curriculawould be utilized. The following six training themes would be provided toinitiate the program: Program Priorities, Financial Management, CreditManagement, Municipal Administration, Legal Aspects, and Technical Serv-ices. Training for mid-level officials would focus on specific skilltraining such as improving cadastres, accounting, inventory control,pricing of services, programming, project formulation, economic evaluationand project appraisal, and operation and maintenance. Additional trainingmaterials would be developed under the project. In addition, this compo-nent would include a program of technical assistance and fellowships to:(a) assist municipalities in implementing improved financial and adminis-trative management systems; (b) strengthen training agencies by contractingwith national or foreign institutions for specialist staff; (c) provide forprogram planning and evaluation; and (d) provide study visits to assist in

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technical and pedagogical aspects of curriculum development, implementationof training courses and operational systems. A detailed description of theTraining and Technical Assistance components for municipal, federal andstate level staff is given in Annex 1.1.

3.06 Federal and State Staff Development and OrganizationalStrengthening. The Federal and State Staff Development component wouldprovide for: training of staff of federal and state agencies providingoutreach support to municipalities, including, SG, SHCP, SPP, SEDUE,BANOBRAS, their regio.lal branches, relevant state-level agencies and train-ing subsidiaries, as well as training the trainers. The project wouldfinance the cost of courses, travel and subsistence, required equipment andmaterials, and related technical assistance and fellowships. This compo-nent would include technical assistance, training and studies to carry outpreinvestment training and detailed feasibility studies for the 20 citiesselected for the Government's decentralization (Annex 1.2), and a minicipalmanpower training study. The SG, assisted by the Training Support Unit,would establish an itformation and data system to examine the characteris-tics of municipal manpower and prepare an assessment of training needs as aprerequisite to formulating a National Municipal Training Policy. OutlineTerms of Reference for the studies have been agreed and would be submittedto the Bank in detail for review as a condition of disbursement againstthat sub-component.

3.07 Infrastructure and Related Investment Fund for Municipal Develop-ment. This component would support the establishment of a municipaldevelopment fund (MDF) within BANOBRAS to provide subloans to municipal-ities in respect of subproject investments in water supply, sewerage,roads, drainage, streetlighting, markets, slaughterhouses, etc. (Annex2.1). Municipalities, depending on their financial needs, would receivepartial subproject funding through matching grants (para. 3.25). Inaddition to channelling government budgetary support for municipal subpro-jects in conjunction with credit funds, the MDF would serve to demonstratethe simplification of subloan application procedures, reduction in subloanreview period and improvements in BANOBRAS' appraisal process, including a-pre-appraisal- process through which a municipality would be prequalifiedfor a line-of-credit based on its financial situation and debt-carryingcapacity (para. 3.21). Two pilot subprojects would finance municipalinfrastructure in cities targetted under the Government's decentralizationprogram. With the exception of the pilot subprojects which would notindividually exceed US$12.0 million, subprojects financed under the MDFwould not exceed US$2.0 million.

3.08 Project Administration. The project would finance the salary ofkey full-time staff of the TS and TSU (paras. 3.14 and 3.15) as well astravel and subsistence costs, materials and equipment required for projectadministration.

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Project Cost and Financing

3.09 The total project cost, excluding taxes, but including physicaland price contingencies, is estimated at US$80.0 million equivalent, with aforeign exchange cost of US$18.3 million. Costs for the training and tech-nical assistance components have been based on an analysis of similarrecent expenditures by each of the executing agencies (para. 3.15).Approximately 1,475 staff months of consultants' services have beenestimated to carry out training, technical assistance, studies and supportactivities. Physical contingencies of 10% have been allowed on the train-ing and technical assistance components. Similarly, price contingencies onthe training and technical assistance components only, have been estimatedaccording to a nine-year disbursement profile, on US dollar based values at7% for 1986 and 1987, 7.5% for 1988, 7.7Z for 1989, 7.6% for 1990 and 4.5%for 1991 onwards. Base costs are expressed in December 1985 prices. Adetailed cost table for a 9-year implementation period is shown in Table7.1 (Annex 7). The Government intends however to complete the project in 5years, in part to minimize risks over the possible loss of politicalmomentum (para 3.27). This would result in the overall project costs beingreduced by about 2%, or from US$80.0 million to US$78.3 million (Tables 7.2and 7.3), and would increase the total number of possible subprojects.However, the annual provision of funds by the Government would be higher(Table 7.5).

3.10 The proposed Bank loan of US$40 million equivalent would finance50% of project cost or the estimated foreign exchange component pls 35% oflocal cos ts. This is in line with recent Bank participation in socialsector projects in Mexico, and is justified by the extensive expenditure inlocal currency, the training and technical assistance and pilot nature ofthe project. BANOBRAS would as a condition of effectiveness, enter intocontractual arrangements, satisfactory to the Bank, with the Governmentproviding for the transfer of funds to FORTAMUN and repayment of the loanby the Government. The Government would provide the required counterpartfunds through annual budgetary allocations to FORTAMUN. For sub-projectinvestments, municipalities would contribute the equivalent of US$12.2million from their revenues. Part of the loan proceeds (US$9.5 million)would be channelled by the Government through the project account (para.3.13), to the agencies implementing the training and technical assistancecomponents and for project administration (Chart 2.3 of Annex 2). Theremaining balance (US$30.5 million) would provide initial capital to theMDF to provide subloans and grants for subprojects to be implemented bymunicipalities on terms and conditions satisfactory to the Bank (para.3.23). Principal and interest payments on subloans would be deposited iuthe MD? and further onlent to municipalities under the same terms andconditions.

Procurement and Disbursement

3.11 Mexico's construction industry is highly developed and capable ofexecuting works at costs competitive with international bidders and none ofthe individual contracts would be large enough to attract foreign bidders.Therefore, most construction contracts would be awarded through localcompetitive bidding (LCB) procedures acceptable to the Bank, which would

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allow participation by foreign contractors. Civil works contracts estim-ated to cost less than US$100,000 and up to an aggregate of US$8.0 millionwould be contracted directly on the basis of at least three quotations.Works not exceeding in the aggregate US$5.0 million would be executed onthe basis of force account procedures. This large amount of force accountis required because of the large number of small works to be executed bymunicipalities, many of which have established work forces capable ofcarrying out works in the most economic and efficient manner. Most ecidip-ment and materials for subprojects, as well as for the training and insti-tutional strengthening components would be procured under LCB procedures.ICB procedures would be followed when the estimated cost of a singlepackage exceeds US$250,000. Equipment and materials estimated to cost lessthan US$75,000 equivalent and up to an aggregate limit of US$7.0 millionwould be contracted directly through prudent local shopping on the basis ofat least three quotations. Consultants' services for studies, training andtechnical assistance would be obtained in accordance with Bank guidelines.Because of the large number of small individual contracts, the Bank wouldreview all awards on an ex-post basis. Prior Bank review would be requiredfor contracts procured under ICB.

3.12 Disbursements would be made to cover: 50% of expenditures fortraining, (including fellowships and travel and subsistence cost oftrainers), equipment and material for training, consultants' services andproject administration and 100Z of amounts disbursed for civil works,materials and equipment under approved subloans and grants up to 50% of thesubproject cost. All disbursements in respect of expenditures under sub-loans, training and project administration would be made against certifiedStatements of Expenditures. Supporting documentation for these expendi-tures would be retained in BANOBRAS, and made available for periodic reviewby Bank supervision missions. Retroactive financing in an amount notexceeding US$0.6 million equivalent would be provided for expenditures forpreparation of promotional and training materials, and technical assistanceincurred on or after September 1, 1985. To accelerate disbursements,BANOBRAS would establish and maintain under its control, a Special Account,with an initial deposit of US$2.0 million, which would be operated inaccordance with terms and conditions satisfactory to the Bank. A 9-yeardisbursement schedule is shown in table 7.4 of Annex 7.

Accounts and Auditing

3.13 Beneficiary municipalities would be required to maintain detailedsubproject accounts which would be audited annually by auditors acceptableto BANOBRAS. The audit reports would be made available to the Bank forreview upon request. BANOBRAS would when necessary, provide technicalassistance to municipalities to assist in establishing an information baseand accounting system as a condition of granting subloans. Otherimplementing agencies would be responsible for maintaining separate projectaccounts which would be forwarded to the TS for consolidation into a singleproject account. BANOBRAS would open and maintain a separate projectaccount to reflect all project expenditures, including a separatesub-account to reflect all transactions under the MDF. The consolidatedproject account including the MDF would be audited annually by independent

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auditors acceptable to the Bank and the auditors' reports would beforwarded to the Bank no later than six months after the end of each fiscalyear. The Special Account would be audited by BANOBRAS' independentauditors and their report would be submitted to the Bank not later than sixmonths after the end of each fiscal year.

Project Execution

3.14 Project Organization and Management. A Steering Committee(Comite Directivo), headed by the the Undersecretary of SHCP, and consist-ing of senior officials of SG, SPP, SEDUE and BANOBRAS would be appointed,to deal with overall policy matters. The TS, would centralize overallproject management and would be responsible for coordinating, programming,managing and performance monitoring functions, including administeringproject finances. The TS, headed by an experienced administrator, would besupported Ly a number of staff trained in finance, programming, andadministrative skills. The TS Director would function as ex-officioSecretary to the Steering Committee.

3.15 The TSU would be established, under the coordination of the TS,to coordinate, plan, program and promote the training and technical assist-ance components (paras. 3.05 and 3.06). The TSU would form the nucleus ofa central national coordination centre for municipal training programs andwould be staffed by representatives of SHCP, SPP, SG, SEDUE and BANOBRAS,assisted by training experts, as required. The Government has providedassurances that the TS and the TSU would be staffed at all times withqualified and experienced technical and administrative personnel. Thetraining components would be implemented by SHCP, SPP, SG, SEDUE andBANOBRAS and their subsidiary Training Units (INDETEC, INCAFI, CNEM, andCEDADEM) assisted, as necessary, by external training institutions.

3.16 The State Development and Planning Committees (COPLADES) wouldparticipate actively in the promotion of the program. Subproject invest-ments would be implemented by municipalities who would plan and executetheir program with the assistance of SEDUE and consultants, when neces-sary. BANOBRAS would be responsible for the appraisal of municipal subpro-jects, for all credit operations and monitoring and evaluation.

3.17 Selection criteria have been agreed and are incorporated in theOperating Guidelines. Priority for states selected take into account datesof changes in administration and the recent earthquake (Annex 3.2).Because of its pilot nature, priority will be given to those municipalitiesin each state that are likely to benefit quickly from the project andtherefore serve as in-state demonstrative examples. Participation in theMDF or the training component would be on a self-selection basis. For theMDF specific criteria will include: (a) willingness to follow proceduresset out in the Operating Guidelines (para. 3.04); (b) willingness to acceptterms and conditions specified in subloan agreements (para. 3.23); and (c)compulsory participation in the training component (Annex 3.3). Forparticipation in the training component, the municipality must comply withthe procedures set out in the Operatirg Guidelines.

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3.18 Implementation Schedule. The proposed project, which representsa first pilot phase of the Government's program, would be implemented overa nine-year period in accordance with the sector profile. All trainingunder the project would be fully implemented by December 1990. The imple-mentation period of subprojects is estimated to average 11 months for themost complex subprojects. Loan funds under FORTAMUN would be committed byOctober 31, 1993. After allowing for the completion of final subprojects,the project would be completed by June 30, 1994 and the closing date wouldbe December 31, 1994.

3.19 Monitoring and Reporting Requirements. Because of the pilotnature of the project, emphasis has been placed upon strengthening thecapacity for monitoring and evaluation at the municipal, state and federallevels. The monitoring system for FORTAMUN would be detailed in theOperating Guidelines. The reporting system would have separate moduleswhich would monitor: (a) activities relating to subloan requests,authorization, formalization, actual investment and cost recovery; (b) aninventory of municipal needs in the areas of financial management,institutional strengthening, and training; and {c) a register of trainingand funding programs to be implemented after the technical evaluation ofeach municipality (Annex 4). The TS would be responsible for monitoringand evaluation on the basis of quarterly progress reports prepared bymunicipalities and implementing agencies. Quarterly ImplementationSummaries would be forwarded to the Steering Committee and to the Bank.The TS would forward an annual evaluation of progress in meeting financial,economic, technical and institutional objectives to the Bank not later thanMarch 31 of each year.

Local Finances and Cost Recovery

3.20 Through the institutional strengthening and training components,the project would significantly increase the capacity for resource mobiliz-ation at the municipal level, both by increasing local revenues throughproperty taxes or general revenues and user charges, as well as by reducingexpenditures through improved administration and maintenance. Capital andrecurrent costs for improvements in roads, sidewalks, drainage, parks andrecreation areas, and residential solid waste connections would be recov-ered through general surcharges levied on beneficiaries. User chargeswould be applied to recover debt service and operation and maintenancecosts for revenue earning services such as water supply and sewerage,commercial solid waste infrastructure, utility network expansion, mnicipalvehicle and equipment maintenance workshops and cemeteries. Rents and feeswould cover capital and recurrent costs of revenue earning investments suchas markets, slaughterhouses, public transport terminals and equipment andvehicles. No change in existing laws or policies is required to implementcost recovery. Implementation of satisfactory cost recovery measures underproposed subprojects would be reviewed by BANOBRAS in the context ofoverall municipal finances during appraisal of individual subprojects.Subloan agreements would require full cost recovery of subproject invest-ments, with state and municipal governments determining specific mixes ofuser charges and general tax revenues.

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Onlending Terms and Procedures

3.21 Appraisal of Sub-borrower. Appraisal of individual subprojectswould follow a two-step procedure - appraisal of the municipalities andthen of specific subprojects. BANOBRAS would, on the basis of standardinformation supplied by municipalities and compiled in the monitoring sys-tem, appraise the overall financial, technical and institutional capacityof individual municipalities. On the basis of this general assessment,training and technical assistance requirements, as well as financial per-formance targets, cost recovery measures and borrowing ceilings would beagreed with the municipality as a precondition for borrowing from the MDF(Annex 5.2).

3.22 Subproject Appraisal. BANOBRAS would, as necessary, assistmunicipalities in preparing the technical, financial, economic and legalsubproject information (Annex 5.3). Model technical design criteria andstandards have been prepared by SEDUE and are incorporated in the OperatingGuidelines. Economic rates of return would be prepared for all subprojectscosting more than US$200,000 equivalent. Once a subproject has beenapproved by the Division of FOMENTO (Operations) in BMNOBRAS, a subloanagreement would be signed between the municipality and BANOBRAS. Individ-ual subprojects with an estimated total cost exceeding the equivalent ofUS$500,000 would be forwarded to the Bank for approval. Subproject docu-mentation for works in the two pilot cities (Annex 1.2) would include: (a)an institutional and financial appraisal of the Sub-borrower carried out inaccordance with Pro Forma A of the Operating Guidelines; (b) the detailedcapital investment plan in respect of the Decentralization Program for themunicipality; (c) a financing plan; (d) a study of the impact of investmenton the municipality's revenues; (e) institutional responsibilities forLmplementation of complementary investments by federal and state agencies,and (f) details of subprojects for financing, in accordance with format asin Pro Forma B of the Operating Guidelines.

3.23 Subloan Ageents. Subloans would be approved by the SteeringCommittee (para. 3.14). A traf t model subloan agreement has been reviewedby the Bank and is incorporated in the Operating Guidelines (Annex 5.5).Subloans would be made to cover at mDst 80% of subproject costs, atinterest rates specified in the General Interest Rate Agreement (GIRA), andaccording to the following terms: (a) roads, sidewalks, drainage, parksand recreation areas - 5 years, including one year of grace; (b) watersupply and sewerage, solid waste infrastructure, municipal vehicle andequipment maintenance workshops - 15 years, including four years of graceor the end of construction, whichever is shorter; (c) municipal markets,slaughterhouses, public transport terminals and equipment - 10 years,including three years of grace or end of construction, if shorter; and (d)solid waste equipment and vehicles, and microcomputers and equipment - 5years without a grace period.

3.24 GIRA is a master agreement, signed between Mexico and the Bank onAugust 7, 1984, which covers Interest rates in individual loans for creditprogras. It provides for the linking of interest rates to a centralreference rate (an index of average cost of funds to multi-purpose banks -ACF), a systematic accounting of subsidies, a gradual phasing out of

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remaining subsidies for most beneficiary categories, periodic adjustment ofrates and a reduction in the dispersion of interest rates. As GIRA doesnot at present include a category for interest rates in respect of munici-pal infrastructure lending, the Government has agreed to an amendment tothe GIRA providing for the inclusion of such category with the followingtarget rates: 68Z of ACF as of January 1, 1986, and 80% of ACF for January1, 1987 onwards. The effectiveness of this amendment to the GIRA would bea condition of effectiveness of the proposed loan.

3.25 Matching Grants. In order to induce municipalities (which hadpreviously been accustomed to receive straight grants) to rely on creditfor financing infrastructure investments, and to rechannel some currentGove-nment budgetary support to municipalities into a coordinated effortwith credit funds, a formula of matching grants is proposed. For thepurposes of establishing the proportion of matching grants, municipalitieshave been classified into five categories according to the followingcriteria: (i) size; (ii) deficiencies in provision of basic services;(iii) priority in the National Development Plan; and (iv) current reve-nues. Municipalities in categories one (most developed) through five(least developed) -would be eligible for 0%, 5%, 10%, 25% and 30Z grant (asa percentage of total financing), respectively. BANOBRAS has providedassurances that, in any given calendar year, the amount of grant funds dis-bursed from the MDF shall cot exceed 16% of total funds disbursed from theMDF in respect of subproject investments. BANOBRAS has further agreed toreview the matching grant formula not later than March 31, 1988 and toexchange views with the Bank on the results of such review. A review ofmunicipal finance in Mexico, a review of BANOBRAS' finances, activities andfuture operations, and a discussion on FORTAMJN, and the impact on the MDFof the proposed matching grants is attached in Annexes 6.1 to 6.3.

Justification and Benefits

3.26 The principal benefit of the proposed project would be theimproved policy and financial environment for municipal development whichwould be necessary for the implementation of the Government's decentraliza-tion program. Rationalization of BANOBRAS' policies, practices and proce-dures for provision of municipal credit, reinforcement of federal and stateagencies' capacity to provide technical assistance to mnicipalities, andtraining programs would introduce a more rational planning and investmentprocess, stimulate local resource generation and cost control measures andprovide a reliable source of long-term financing for municipal develop-ment. The improvement of operational and financial management policies andrationalization of grant financing for municipal services would lead toreduced demands on the national budget through greater local resourcemobilization. In addition to significant health and social benefits, theproject would have a positive environmental impact in subproject municipal-ities. Economic rates of return (ERR) for similar investments financed byBANOBRAS have ranged from 11% to 30%, with an average of 16%. It isexpected that subproject investments under the proposed project would yieldat least comparable returns, particularly in light of lover cost technicalsolutions which will be incorporated in subloan agreements. ERRs would be

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calculated for all subprojects exceeding the equivalent of US$200,000. Onthe basis of a sample of municipalities selected by the Government forimplementation in the first phase of the program, it is anticipated thatabout 90% of project costs under municipal strengthening components wouldfinance investments in about 340 municipalities with a population of about7 million of which 1.7 million or 25% are estimated to be within thepoverty group.

Project Risks

3.27 The major project risks are: (a) the inherent difficulties incoordination; (b) the capacity and willingness of BANOBRAS to make appro-priate changes; and (c) the possible loss of political momentum. The esta-blishment of an independent Technical Secretariat and Training SupportUnit, and the definition of clear roles, responsibilities and procedures inthe Operating Guidelines, would reduce difficulties in coordination.Previous urban and water supply lending operations have been partiallyconstrained by problems within BANOBRAS. However, the project addressesthese issues. BANOBRAS' coordination of the project preparation effort andthe degree and rapidity with which changes in policy have been processedhave been exemplary and indicate the management's and SHCP's commitment tochange. Finally, the Government would be encouraged to accelerate imple-mentation within the first five years to obtain a quick feedback, and alsobenefit from the mDmentum set in place by the present Administration.

PART IV. AGREEMENTS REACHED AND RECOMMENDATIONS

4.01 During Negotiations: Assurances were obtained from GOM that:

(a) BANOBRAS would undertake to implement administrative andoperational measures at the regional and state levels as requiredfor the efficient and timely implementation of the project,including mechanisms for the promotion of FORTAMUN and for theprovision of financial services required by eligiblemunicipalities in connection with the execution of thesubprojects (para. 2.09);

(b) BANOBRAS will follow policies and procedures as outlined in theOperating Guidelines, and would not make any changes in theGuidelines which would materially or adversely affect thecarrying out of the project (para. 3.04);

(c) A Municipal Development Fund (MDF) would be established toprovide subloans and grants for subprojects to be implemented bymunicipalities on terms and conditions satisfactory to the Bank.Principal and interest payments on subloans would be deposited inthe MDF and further onlent to municipalities for the purposes ofexpanding FORTAMUN (para. 3.10).

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(d) In any given calendar year, the amount of grant funds disbursedfrom the MDF would not exceed 16Z of total funds disbursed fromthe MDF in respect of subproject investments. BANOBRAS hasfurther agreed to review the matching grant formula not laterthan March 31, 1988 and to exchange views with the Bank on theresults of such review (para. 3.25).

4.02 As a Condition of Effectiveness:

(a) The Government and BANOBRAS shall have entered into the MandateAgreement on terms acceptable to the Bank (para. 3.04);

(b) The Operating Guidelines shall have been approved by theGovernment (Guarantor) and BANOBRAS (Borrower) on termsacceptable to the Bank (para. 3.04);

(c) BANOBRAS would enter into contractual arrangements, satisfactoryto the Bank, with the Government providing for the transfer offunds to FORTAMUN and repayment of the loan by the Government(para. 3.10).

(d) The General Interest Rate Agreement (GIRA) shall have beenamended so as to cover interest rates applicable to subloans asdefined in the Project Agreement for the proposed project, andthat such amendment is in full force and effect (para. 3.24).

4.03 Based on the agreements reached on the above, the project issuitable for a Bank loan of US$40.0 million.

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MEXICO

NUNICIPAL STRENGTHENING PROJECT

Detailed Component FeaturesMunlcipal Staff Developrent and Management Strengthening

Federal and State Staff Development and Instituticnal Strengthening

Table of Contents

Paragraph

1. Background and Selected Issues .................... . . 1-3

2. Training Objectives .4.............................

3. Training Strategy 5............................. 5

4. Municipal Staff Development and ManagementStrengthening ................ e................. 8-10

5. Federal and State Staff Development andInstitutional Strengthening ...................... 11-12

6. Project Target Groups ............................ 13-15

7. Estimate of Costs ........ ........................ 16-17

8. Implementation of Training Programs ..... ......... 18-20

9. Special Ongoing and Recurrent Activities ......... 21

List of Tahles and Attachments:

Attachments: Page No.

1.1 Principal Training Theues ....................... 31

1.2 Municipal Officials - Estimated Totals .. e ....... 34

1.3 Projected Training Events and Participants(municipalities) gee ............................. 36

1.4 Projected Training Events and Partipants(Federal and State Level Staff) ................. 37

1.5 Aggregated Cost/Participant/Day for RecurrentCosts .ce...............e..... 38

1.6 Institutional Responsibilities for Training byThemes e.ee..ee..eee....e.cgegeeeeee..e......e.... 39

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ARMUE 1.1Page 1 of 10

MEXICO

MUNICIPAL STRENGTPENING PROJECT

Human Resources Development and Organizational Strengthening.at Municipal, State and Federal Levels

Background

1. Under the Government's decentralization program, themunicipalities have been given increased responsibilities (paras.2.04-2.07). The administrative, financial and managerial capabilities ofthe municipalities, however, vary substantially with only about 100 of thelarge municipalities capable of undertaking their legal responsibilities.The absence of both qualified technical staff, and adequate access totechnical assistance and training, result in slow Implementation ofprojects and overall inefficiency in the provislon, operation, andmaintenance of basic urban services.

2. At the federal and state level, various government agencies willbe involved in overseeing policy, and providing technical assistance to themunicipalities, (paras. 2.08-2.10). They have been instructed to createspecial internal units which will provide technical and financialassistance and training to the municipalities. Developing a framework forcoordinating the activities of these units, training their staff to providethe necessary outreach and support, and strengthening municipal managementthrough intensive training programs, in order to improve the provision ofbasic municipal services is essential for the success of the government'sdecentralization program.

3. A number of issues in the development of human resources in thesector have been identified:

a) Poliy Issues. No clear policy or objectives have been adoptedby federal, state or municipal authorities for the training oftheir respective staff. Thus no coordination exists at anappropriately high level, of the objectives and efforts of thevarious agencies involved in training, resulting in an informalwon the Job' or ad-hoc approach to training.

b) Institutional and Financial. Responsibility for improving theperformance of municipal officials has not previously beeninstitutionally defined, leading to ambiguity on the roles andresponsibilities, and often unnecessary duplication of effort andresources. Training needs at the municipal staff level have notbeen generally identified in a manner that relates training tostaff's operational requirements or the staff's trainability.There is also at this time, inadequate knowledge of personneladministration and training. In the absence of a centralizedcoordination mechanism, there is a mismatch between trainingprograms available and training required, and no formalizedmeansof bringing this information to the attention of appropriateofficials or potential trainees. No agency of the federal orstate government is equipped to assess overall staff developmentrequirements, to evaluate the usefulness of any training

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undertaken, to carry out appropriate "tracer' studies, or tosuggest modifications to course curricula. In addition to theseproblems, all agencies have suffered financial cutbacks,consequently there is little attempt to aggresively promotetraining or to disseminate available information on trainingopportunities, etc. The municipalities do not have separatetraining budgets.

c) Technical. There is the need to consolidate the number anddiversity of available courses and make them more relevant to thedemands of the municipalities. This implies a qualitative andquantitative improvement. The level of pedagogic skills andtechniques differ considerably within agencies, as do the modesof delivery; there is a need to develop and upgrade trainingagencies with -state of the art' techniques and facilities. Mostof all there is a need to concentrate on a structured program forthe training of trainers, as adequate assistance and propersupervision is lacking, as is the availability of equipment andteaching materials.

Training Objectives

4. Inspite of the problems listed, the existing programs in Mexico,do provide an adequate basis of experience and facilities, for developingan accelerated national training program to meet municipal needs under theproposed project. The GOM's long-term objective, is to build a permanenttraining capability in the sector. Specific objectives under the projectinclude:

a) Introduction of planning and integration, of existing andproposed training activities of federal and state agencies.

b) Development of a more accurate and systematic definition ofmunicipal training requirements as locally perceived, anddetermined in the light of operational needs.

c) Implementation of appropriately designed training programs forselected mwnicipal officials.

d) Development of a mechanism for coordinated inter-secretarial andstate follow-up and evaluation leading to improvements intraining design and delivery.

e) Equipping municipal officials with the skills required to assignfinancial resources for municipal development including projectidentification and preparation; credit management; and improvedfinancial management and administration.

f) Equipping federal and state officials with the skills to plan andimpart training under the municipal staff development program,and to provide appropriate supporting services.

5. Training StrategX. These objectives will be acnieved through a)for municifpalstarf: setting up a central coordinating institutional

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mechanism for the development, financing, administration, delivery, andevaluation of training; and b) for federal and state staff: provision ofsubstantial technical assistance and training, to enable their coordinatedand appropriate responses to the needs of the municipalities.

6. The need for some institutional coordination is critical tofacilitate a technical and operational exchange of experiences, such as:the training of instructors, development of programs, preparation ofteaching and learning materials (including audio-visual aids) etc.. Atthis time no single institution can automatically assume this coordinatingrole. Hence the evolution of the proposal for a Training Support Unit(TSU) to the Technical Secretariat (TS), as described in paras. 14 to 16.It is envisaged that the TSU will form the nucleus of a central nationalcoordination centre for municipal training programs. Its eventual possiblerelocation from BANOBRAS, within the organization of training agencies,will be decided through experience under this project.

7. The central training coordinating agency's role would be:

a) to compile an inventory of training facilities in each state;

b) to identify and evaluate existing programs capable of improvementand extension;

c) to promote integration of the various municipal trainingactivities of Secretariats, Agencies and Institutions;

d) to establish a sound and permanent form of finance for training;

e) to allocate necessary resources and support for training ofinstructors, and for staff development; and,

f) to insure the active commitment of all agencies (especially ofmunicipalities through their cooperation), in the assessment oftraining needs, program design, selection of participants andevaluation of results;

Detailed Description of Training Components.

8. Municipal Staff Development and Management Strengthening: Thiscomponent will consist of: Training of Municipel Staff, Training ofTrainers, Technical Assistance, Equipment and Teaching Materials, in acoordinated program to ;pgrade the administrative and financial capacity ofmunicipalities. Training under the proposed project will utilize existingfacilities and courses and curricula to the extent possible. This will befocussed at three levels of staff in particular: (i) senior officials ofincoming municipal administrations (14,320 persons), who require require aquick, but structured orientation, or reorientation of the government'sprogram priorities for municipal reform, to enable them to becomeimmediately effective, instead of the current 'learning-on-the-job-approach; (ii) mid-level officials (4,940 persons) who are not subject tothe same degree of mobility, and are thus responsible for the continuity ofoperation of services and programs; and (iii) Training of Trainers (about270 persons), these are municipal staff who already are involved or willbe, in training.


9. Following two separatel/ surveys, and discussions withexperienced municipal officials, and training specialists of existingagencies, the project preparation team have listed material covered inabout 60 courses (nearly 20% of available number) into 6 training themes:Program Priorities, Financial Management, Credit Management, MunicipalAdministration, Legal Aspects, and Technical Services. These areconsidered adequate to initiate the program. Training for mid-levelofficials will focus on specific skill training such as improvingcadastres, accounting, inventory control, pricing of services, programming,project formulation, economic evaluation and project appraisal, and,operation and maintenance. Additional appropriate training materials wouldbe developed under the project.

10. This project component will finance: (i) the training ofmunicipal staff (cost e- courses and attendance expenses including traveland subsistence); (ii) the training of trainers (costs of courses, traveland subsistence); (iii) equipment and teaching materials (upgrading throughreplacement and additior. of existing printing and video production/replayfacilities, audio visual and other training materials and equipment); and(iv) technical assistance and fellowships (a) to assist municipalitiesimplement improved financial and administrative management systems; (b) forstrengthening training agencies by contracting with national or foreigninstitutions for specialist staff; (c) program planning and evaluation, and(d) fellowships for study visits to assist in technical and pedagogicaspects of curriculum development, implementation of training courses andoperational systems.

II. Federal and State Staff Development, and InatitutionalStrengthening: This component will consist of: (i) training of staff ofederal and state agencies providing outreach support to the

municipalities. (SG, SHCP, SPP, SEDUE, and BANOBRAS, their regionalbranches, relevant state-level agencies and training subsidiaries) (ii)Training of Trainers; (iii) Studies for formulating future policy andstrengthening of relevant information systems in SHCP, SPP and SEDUE: ((a)the SG assisted by the Training Support Unit (para. 20) is to set up aninformation and data system, to study the characteristics of municipalmanpower and complete an assessment of training needs, as a prerequisite toformulating a National Training Policy in the future); and (iv) TechnicalAssistance and Fellowships, Equipment and Materials.

12. This project component will finance (i) Training of Federal andState Officials (cost of courses and attendance expenses, including traveland subsistence); (ii) Training of Trainers (cost of courses, travel andsubsistence); (iii) Cost of undertaking the above mentioned studies andstrengthening of relevant information systems in SHCP, SPP and SEDUE; (iv)related technical assistance, fellowships, equipF2ent and materials.

1/ A questionnaire re-oriented survey of 81 municipallties by SPP, inSeptember 1984; and an interview-oriented one in 14 municipalities (May1985) by the project preparation team.


Project Target Groups

13. Of the estimated total of about 660,000 municipal staff andofficials in Mexico2/, the project target group consists of 64,000 seniorand middle level offncials. Of these, only 3% or nearly 19,520 (includinginstructors) will receive training under the project. Of the most seniorelected officials, 14,320 or about 54% of the national total will take partin two-day seminars of 80 participants, focused cn program priorities(issues to be addressed under the municipal reform program, improvingpublic participation, and strengthening of municipal management anddevelopment). About 5,200 middle-level officials will take part in 5-daylong (average) training courses in groups of 20. Table 1.2 shows a) theestimated total of municipal officials in Mexico; b) the estimated numberin the first group of 8 selected states, and c) the planned trainingcoverage in 1986 by theme and category. Table 1.3 shows the total ofmunicipal staff training events proposed under the project, and estimatedtotal participants (1986-90) by training theme.

14. To keep the initial project manageable, training of policeofficials, technical and clerical staff, supervisors and operativepersonnel of technical services programs, will take place under specialprograms (SP) outside the scope of the project, and through existingfacilities already catering for such groups.

15. Training will be given to 2,680 federal and state officialsincluding instructors, from 1986 to 1990. They will participate in groupsof 20 each in 134 training events focused on aforementioned themes.Programs will be organized within each participating agencies, andadditional opportunities will be provided to study Mexican and foreigntraining institutions, and to undertake short study trips overseas. (Table1.4 shows the total of training events and participants (1986-90)).

Estimates of Costs

16. Costs for the Trainir.g and Technical Assistance components formunicipal, federal and state staff, are based on an analysis of actualrecent expenditures by eiach of the relevant agencies, and on estimatesprovided by the agencies during appraisal. A detailed cost estimate isshown on Table 7.1. Physical contingencies of 10% have been allowed forcourse materials and equipment. Price contingencies are included at 7% for1986 and 87, 7.5% for 88, 7.7% for 89, 7.6 for 1990 and thereafter at4.5%. Base costs are expressed in December 85 prices.

17. Estimates are based on the following:

a) Municipal Training and Technical Assistance

(i) Recurrent expenditure: 19,520 participants (includingtraining of trainers) US$80 per day. (Table 1.5). Thisincludes up to 14,320 participants on 2-day programs; andabout 5,200 participants on 5-day programs; for a total costof US$4,371,000.

2/ Mission estimate based on national total of 2,379 municipalities andsurveys of selected municipalities during project preparation.


(ii) Technical and Promotional ActivitiesInitially, the equivalent of 25 full time professional staffof the 5 participating agencies will be assigned to theproject. Duties3/ attributable to the project will declinecommencing 1988:

US$ 000's1986 25 man/yrs at US$ 7,360 1841987 25 - - 1841988 20 - 1481989 15 " 1111990 10 74

TOTAL US$70

(iii) The cost of preparing and publishing basic material for about66 courses is estimated at US$1,008 per course or a totalequivalent of US$71,000. Recurrent material for 439 courseofferings during the project will cost US$556 per course or atotal equivalent of US$244,000.

(iv) Equipment: The sum of US$1,479,000 covers audio-visualequipment, video film making equipment, monitors, andmiscellaneous training equipment and materials. Detailedrequirements will be submitted for Bank review prior toprocurement. Estimated total costs are as follows:

Estimated cost of Equipment Required a/

US$ 000-1986 1987 1988 1989 1990 TOTAL

BANOBRAS/CEDADEM 57 - - - - 57

SEDUE 108 95 92 - - 295

SG 130 93 168 - - 391

SPP 72 72 - - - 144

SHCP (INCAFI) 592 - - - - 592959 260 260 - - 1,479

a/ Estimates supplied by each Secretariat/Agency

3/ Staff duties will include collaboration with the TSU in the:identification of training needs; preparation of training materials;promotion of the municipal reform program among municipal, state andfederal officials, follow-up and evaluation of training activities andtechnical assistance to the municipal development program; updatingtraining programs following evaluation. Staff would also participatein the formulation of future municipal training programs.


b) Federal and State level Training(i) Recurrent Expenditure: About 2,680 participants (includiLng -

5% of trainers) @ US$80 per day, based on 5-day programs.(Table 1.5), for a total of US$1,051,000.

(ii) Technical Assistance and Training: Services of locally basedconsultants have been estimated within a range or US$1,500 toUS$7,0004/ per staff month, or approximately 200 staffmonths ror a budget of US$444,000. 26 foreign consultantstaff months @ US$8,500 will be available to assist ineducational planning and program evaluation at a totalestimated cost of US$221,000.

(iii) Fellowships for study tours for federal and state officialswill be financed. These will include studie_ at universitiesand institutes in Mexico and visits to training institutionsand municipal development programs in other countries on thefollowing basis:

Work/Months

NATIONAL INTERNATIONAL1986 48 121987 60 121988 60 8

168 32at US$1 000 at US$4,500USS168,000 US.51449000

(iv) Studies and Information Systems: A budget figure ofUS$312,000 has been included for specific studies and forstrengthening information systems in SG, SHCP, SPP andSEDUE.

(v) Equipment and Teaching Materials. The sum of US$202,000covers miscellaneous audio-visual and other trainingequipment including up to 10 micro-computers for use byBANOBRAS in analyzing municipal finances and demonstratinguse thereof to municipal staff. Micro-computers will befinanced for use exclusively with programming and relatedproject use by each of the key agencies, and for use of theTS and TSU. Detailed requirements will be submitted for Bankreview prior to initiating procurement.

18. Implementation of Training Programs. Overall projectorganization, management and implementation is described in paragraphs 3.17to 3.22. At the policy level the Comite Directivo (Steering Committee)will be headed by the Under Secretary, SHCP. The Director of anindependent Technical Secretariat (TS) will be ex-officio Secretary to theSteering Committee and be responsible for overall project coordination,assisted specifically by a Training Support Unit (TSU) for the planning andcoordination of the training program (para. 20).

4/ To eliminate discrimination between local and foreign consultants doingthe same job.

- 28 -

ANNEX 1.1Page 8 of 10

19. The Training component would be implemented by SG, SHCP, SPP,SEDUE and BANOBRAS and their subsidiary training units (INDETEC, INCAFI,CEF, CECADE, CNEM, SEDUE and CEDADEM (see Attachment 1.6). Each of thesealready have developed subject specialization that reflect broadly therespective roles and responsibilities of their parent Secretariats. Someas in the case of SEDUE are currently fragmented and would benefit from aconsolidation of the various training sub-units specializing Insub-sectors. During negotiations SEDUE submitted a satisfactory plan andtimetable for consolidating its various training sub-unlts. Other privateand seai-government training Institutions (INAP, IPADE, UNAM, and others)will, on the recomnendation of the Steering Comittee, assist governmentagencies in the delivery of training.

20. A Training Support Unit (TSU) has been formally established. Itis coordinated by, and reports to the Steering Committee through theTechnical Secretariat (TS). The TSU will coordinate, plan, program andpromote the Training and Technical Assistance components. The TSU will bestaffed by a core of key full-tlme staff, who would collaborate witb therepresentatives assigned from the key participating Secretariat. andBANOBRAS. Staff of the TSU and the TS would he selected and appointed by aconsensus of participating agencies. The TSU will also be assisted byspecialist professionals capable of providing a complete range of technlcaland operational support (training instructors, programming, learningmaterial production, etc.). The modus-operandi for implementing theTraining and Technical Assistance components in parallel with theInvestment component has been outlined in the Activity List in Annex 5.1.Promotion and launching of the project in each state will be undertaken bya number of especially constituted and trained teams. The StateDevelopment and Planning Committee (COPLADES) will participate actively inthe promotion of the program.

Special On-going and Recurrent Activities

21. The TSU will coordinate the following:

a) Development of each state's training program. Startingimmediately, the TSU will formulate a draft course program forthe first year for each of the eight states selected toparticipate during the first year of project implementation. Thedraft program for each state will result from discussions betweenthe governor, state and municipal officials and members of theTSU. It will be formally approved by the Governor and theSteering Committee. In 1986 it will mainly consist of existingcourses adapted to project requirements. Program content insubsequent years will reflect municipal requirements indicated bythe response to particular courses during previous years.

b) Development of Each Agency's Outline 3-Year Plan. The SteeringCommittee will assign responsibility for agreed training themesand course titles between participating agencies. The TSU willassist each agency to prepare an outline draft 3-year TrainingPlan to reflect anticipated project needs, against which eachstate's specific requirements will be matched. The plan will beadjusted every six months accordingly. Each agency will ident.fydetailed staff, equipment and other requirements (e.g. assistanceby non-governmental agencies) to implement its program, and will

- 29 -


submit its proposals for discussion at the TSU prior to formalsubmission (thru the TS), to the Steering Committee.

c) Development and Initiation of Federal and State Staff TrainingProgram Each agency will prepare witb assistance from the TSUas necessary, its Staff Training Plan for Year 1, and every yearthereafter, and related proposals for consideration by theSteering Committee for financing under the project. Proposalswill reflect the agreed projlect responsibilities of each agency.

d) Preparation of Job Descriptions and Assignment of Staff. Eachagency will submit to the Steering Committee a list of thefunctions of existing staff to he assigned full time under theproject and to he paid from project funds. On approval of theproposals, participating staff will be formally designated andwill work in collaboration with the TSU.

e) Preparation of Equipment Lists. Each agency should preparedetailed equipment lists to match their draft Training Plan forsubmission by the TSU to the Steering Committee and Bank priorreview.

f) Consultant Terms of Reference. Each agency should prepare theTerms of Reference (TORs) for national and for internationalconsultants required for its agency during 1986 and subsequentlyfor later years. These TORs will be reviewed and coordinated bythe TSU who will assist In ensuring their consistency with theobjectives of the program, specific identification of tasks,and measurable indicators for each TOR. The TORs will heapproved by the Steering Committee.

g) Study Programs. Each agency will prepare a 3-year draft trainingplan and program for its training staff and other key staffwho will undertake study trips. The operating rules andregulations for staff undertaking study programs should beapproved by the Steering Committee, based on recommendations ofthe TSU.

b) Development of Key Indicators of Project Effectiveness. The TSUwill, as part of prolect evaluation, develop a series ofmeasurable indicators to evaluate the numerical and qualitativeimpact of the program. Indicators will Include:- Number of institutions participating In prolect;- No. of participants in training programs;- Unit Cost (USS cost/participant/day of training)- Rate of disbursement of project funds;- No. of consultants or experts participating in program;- No. of fellowships;- No. of instructors trained;- Operational improvements resulting from training programs;- No. of applications for successful applications from the

Infrastructure Investment Fund.

i) Design of a Tracer StudEach agency will design appropriate tracer studies to track

- 30 -

ANNEX 1. 1Page 10 of 10

individual performance improvement and subsequent careerdevelopment of participants on training programs assisted underthe project. The TSU will prepare a generic study to follow upperformance and impact of the project, on a consistent basis.

J) Information System for Development of National Training Policy.The TSU will assist the CNEM in the SG to develop a detailed3-year program of dat.# collection for the purposes of developinga National Training Policy. The study will set out theparameters and objectives for the information system tofacilitate design of a follow-on project from 1989. It will alsoinclude preparatory studies for the development of a formalizedmunicipal civil service career structure.

- 31 -ANNEX 1.1Table 1.1Page 1 of 3

MEXICO


Principal Training Themes

PP: PROGRAm PRIORITIES

PP.1 Overview of urban managementPP.2 The municipality and communityPP.3 The community role in public services and public works

FM: FINANCIAL MANAGEMENT

FM.1 Federal 'Participations" for states and municipalitiesFM.2 Costs and Tariffs of public works and servicesFM.3 Municipal AccountingFM.4 Municipal programming and BudgetingFM.5 Organization and introduction to 'cadastre-FM.6 Pricing of Municipal ServicesFM.7 Practical Municipal FinanceFM.8 Mechanisms for Cost RecoveryFM.9 Federal 'Participations' in financing municipal public works

and servicesFM.10 Leasing principles and proceduresFM.11 Municipal Financial Analysis and ForecastingFM.12 Improving Revenue CollectionFM.13 Financial Appraisal of Projects

CM: CREDIT MANAGEMENT

CM.1 Municipal financial analysisCM.2 Use of credit fundsCM.3 Financial appraisalCM.4 Economic evaluationCM.5 Credit proceduresCM.6 ProcurementCM.7 Loan processingCM.8 Pricing policies for municipal servicesCM.9 Project evaluation

MA: MUNICIPAL ADMINISTRATION

MA.1 National, State and Municipal planning systemMA.2 Municipal AdministrationMA.3 Municipal Financial AdministrationMA.4 Administration of human resourcesMA.5 Administrative methods and techniques of Government systemsMA.6 Municipal Records.4A.7 Administration of municipal services

- 32- ANNEX1.1

Table 1.1Page 2 of 3

NA.8 Project FormulationMA.9 Administrative SimplificationNA.IO Planning and Administration of urban developmentNA.11 Hanagement controlNA.12 Organizatlonal, human, physical and financial requirementsNA.13 Municipal auditMA.14 Inventory controlNA.15 Organization and Administratlon of paramunicipal enterprises

LA: LEGAL ASPECTS

LA.1 Practical municipal lawLA.2 Practical labor lawLA.3 Practical fiscal lawLA.4 Administrative organization of the iunicipalityLA.5 Internal organization of the municipal councilLA.6 Administrative organizationLA.7 Organization of public servicesLA.8 Organization of commanity lifeLA.9 Municipal financial legislation

TS: TECHNICAL SERVICES

TS.1 Potable water servicesTS.2 Drainage and sewerage servicesTS.3 Markets and distribution centersTS.4 Slaughterhouse facilitiesTS.5 Public lighting servicesTS.6 Solid waste managementTS.7 Municipal cleansing servicesTS.8 Cemeteries, Parks and GardensTS.9 Waste water treatmentTS.1O Control of uanicipal and lndustrial solid wasteTS.11 Streets, sidewalk designs and maIntenanceTS.12 Highway system MaintenanceTS.13 Rural roads and pathsTS.14 Maintenance of municipal public worksTS.15 Architectural projects for mmicipal public worksTS.16 Promotion and financing of housingTS.17 Land managementTS.18 Operation and Maintenance of Equipment and VehiclesTS.19 Heavy transport centresTS.20 Municipal transport services

SP: SPECIAL PROGRAMS (not included under this Project)

Required for: Directors of Public SecurityChiefs of PoliceLlectral registration officersNass literacy officialsLibrary staffSocial workersPrison staffForestry officials

- 33 -AMX 1.1Table 1.1Page 3 of 3

Maintenance officialsSecretariesTypistsAdministratlve assistantsPolice officersMechanicsCaretakersDriversWater supply plant operetivesGardenersSolid waste removal operativesSecurity guardsPensioners

- 34 -ANN 1.1Table 1.2Pme 1 of 2

MM=D

IJCIPAL STRE1WnqNI 1mn=

Ctmt A

Mmicpal Officials: FstandE Totals 1/ aM P1mwd nainin Coverae I Yea 1by Prcipal TrahrLif Thu

Tot Staff Total to PrinciplFirst Grop be TraIted TraifTd

No. Titles of posts in the 1Muidpalities HexiC0 of 8 states 2 / in Year I mms/

1 HNLmcipal President 2,300 302 302 PP2 Mayor 2,3D0 302 258 PP3 Cirdiiun 16,000 2,718 1,840 PP4 Secetaxy of the mirnc. go,wrnt 1,800 302 240 IA5 Ciief clerkshp 2,000 302 240 MA

6 Tremrer ai/or Deputy Treagurer 2,300 302 240 FM7 cqptroUler 350 60 40 (cm8 mcmmtmit 950 100 40 FM9 hAlitor 400 70 20 FM10 Prograoidng and Budget Officer 2,500 320 40 FM

11 Officer Civil Pezstrar 2,500 350 20 TA12 dijef Urban Dev. mad/or Odief and/or Dep.

Chief Public Services ad Works 2,500 350 40 TS13 Dixrector Niblic Security ad/or C2ief

of Police 4,000 450 - (SP)14 Market Mmamr 2,0000 250 40 cm15 Sla*terhcuse Naner 2,000 250 20 ITS

16 Drainae and Seerage Mmer 1,ROO 2D0 20 t417 Qiltaral, Recreation and T auria

activities Ma1ager F0D 100 20 IS18 Director of Regdations 300 40 20 IA19 Director of Ometeries 2,300 300 2) 152D Chief of Madeipal Cleanirt 1,800 250 2D TS

21 Permal and/or Private Secetary 1,500 200 - (SP)22 Mandcipal Delegate 12,000 2,000 - (SP)23 legal dvlsor 1,700 250 40 IA24 Electoral RePistration Officer 2,500 350 - (SP)25 CoordlrAtor ClEAMJN 1,500 2M0 2D MA

26 Tremrer' Aide 5,000 900 8D FM27 Colector md/or Fiscal Ament 6,500 1,100 100 FM28 Preident -of mmircipal settlements 1,800 200 40 PP29 Preiddit ef Civil Czmcil 900 150 20 PP30 m litera' officials 11,000 1,800 - (SP)

~btotal 84,300 12,668 3,780

- 35 -

AN 1.1Table 1.2Pwe 2 of 2

Total Staff Total to PrincipalPFirst Grup be Trained TraiLurg

No. Titles af posts In the Mncipalities Memo of 8 st"e2/ in Yewr I 3m/

31 Libray Staff 2,000 300 - (SP)32 Social Worker 4,500 800 - (SP)33 Prison Staff 4,500 800 - (SP)34 Forestry official 1,000 150 - (SP)35 Public LI;AiLg official 8.50D 1,500 - (SP)

36 Maintenance and/or Aid official 14,500 2,500 - (SP)37 Secretary 10,000 1,300 - (SP)38 Datlogrpher 8,000 1,100 - (SP)39 1!ypist 12,500 2,200 - (SP)40 Adnirdstrative Assistant 8,500 1,500 - (SP)

41 Polic officers 350,000 45,000 - (SP)42 mecaadc and/or asistat 20,000 3,500 - (SP)43 Caretaker 6,000 900 - (SP)44 Caretd.er of spor failities and/or

mmicipal aLiitoritun official 4,00D 700 - (SP)45 Driver 6,500 1,000 - (SP)

46 Water supply operativ 3,500 700 - (SP)47 Gardener 17,500 3,000 - (SP)48 Solid wste rwsval q,ratiws and adoers 65,000 12,000 - (SP)49 Semrity g2ard 8,000 1,400 - (SP)50 Plesioners 10,500 - - (SP)

Subtotal 576,0OD 82,150 - (SP)IUrAL 660,300 94,818 5,248 -

1/ Estimted baied on national ttal of 2,379 m icipalities aId axvey of selected muixcpaUltiesconduted by gDem tt Officials daring prepration of the project.

2/ EstLted totals for 8 priority states ected by govmient to comence the progrm in 1986:Qieretaro, Sonora, Collus, Qianjuato, San aiis Pbtosi, Tlaxcala, Nuevo Ieon, Catqeahe; withtotal of 302 cipaities.

3 Corresp to c ifiation:PP Progran Priorities (Prioridaiw del Progranm)FM Finnncial (agedenstron Finmiciera)a4 Credit M!gnmez inistrscin de Credito)MA Mimicipal AdnIstraticn (Adninistracion de Hbdcipios)IA legal Aspects (Aslctos Legales)TS Tecluical Services (Servicios Tecoieco)

(SP) Special Programs Rquired (Program Especiales Requeridos)

4/ Posts ezwlndd fros trainipg covert under the project ramire special progra nirdicated a,V.

- 36 -A31 1.1~1 .3

g g

Total ~ ~ ~ 3, oanvet rifg ut d Pwlpmt. 196690 byPnpl2zifgwlin

1966 1987 1988 1989 L990 oa

- - AN ~1IA EaW

a. Senior Offas iIF 1/30 45 65 140

PYno M_t3 4 6 13p.^l AiI8CD . ~3 4 6 13

L bgal AofPet3 3 4 6 13S o986 57 983 19T 179

b. Sldarl Officals 2/Progr PrlorIties 3 5 7 3 3 21Finazi al _ 11 22 28 Mt 12 93I Yudct 6 8 12 10 4 40

Prcg l dmilniemi 3 5 7 3 2 21)Legal Aspects 4 7 10 5 4 30Tedbnical Services 6 10 20 15 5 56

Sub-Total 3i 57 84 56 30 260TOtal 72 114 167 56 31 439

-r~CIPAtDS (lncln tranerst)

a. Se-ior Officia 1/Progr Priodties 2,400 3,600 5,2D0 11,20DPl dM _m2t 240 320 48D 1,040

!b ial stratici 240 32D 480 1,040Legal Aspet 240 32D 480 1,040

Sub9Tot.1 3.1 4,560 6,640 14,32Db. Qid-Iwl Officials 2/

Prog fPtiritie 60 100 140 60 60 42DFinmeis Kwai_eut 22D 440 560 400 240 1,860Credit Nrnvmt 1m 160 240 20D 80 800

mf cipal Adzstraim 60 100 140 60 40 400lAspets SD 140 200 100 80 60D

Services 12D 200 400 300 100 1,120SubilotaL 60 1,40 1,6D 1.1 600 5,200Total 3,780 5,700 5,3X) I,Im mm 9,w

I/ 1e-dqe os oD1/Fieda e of 2)E pticipui3/ sts "rW a fin 0.5 dqs to 10 dsp c uw% ad NW tdce the fdm of a uMdia, p nabp, cs,

an-site tralzdrg, etc. lbe tim for P--cdxmi bu bur umod far buIpttkg axd jp3 hzb wpjapu rly.

- 37 -

MNX1.1Table 1.4

NEXW

MUCIPAL TR -!UC PR0J CT

Federal and State Staff DaveloymnatTotal of Progect T i ents 37 and PartIcivant. (1986-90

YEAR1986 1987 1968 1089 1990 TOTAL

TIE I

1. TRAINING EVENTS I1

Program Priorities 10 8 6 2 - 26Financial Management 9 7 5 2 - 23Credit Management a 4 3 1 - 16Municipal Administration i1 6 7 2 - 25Legal Aspects 12 6 5 2 - 25Technical Services 8 6 4 1 - 19

TOTAL 57 37 30 1n - 134

2. PARTICIPANTS 2/(incl. 5Z Trainers)

Program Priorities 200 160 120 40 _ 520Financial Managerent 1an 140 100 40 460Credit Management 160 80 60 20 - 320Municipal Administration 200 120 140 40 - 500Legal Aspects 240 120 100 40 - 500Technical Services 160 120 g0 20 - 3Rn

TOTAL 1,140 740 600 200 - 2,6Rn

1/ Estimated at 5 days average duration for 20 particivants.

2/ Mission estimates equivalent to 242 of total axency return.

3/ "Events' may range from 0.5 days to 10 days or wore, and may take the form of a seminar,Workshop, course, 0n -site training, ete. The tlme for events shown has been used forbudgetting and planning purposes only.

- 38 -

ANNEX 1.1Table 1.5

MEXICO


AGGREGATED COST/DAY

5-day course of 20 participants US$RE rA

- training rooms at Mex.Ps. 300,000 92.- course equipment at Mex.Ps. 200,000 615INSTRUCTORS- honoraria at Mex.Ps. 250,000 770

- travel at Mex.Ps. 68,000 210- accommodation/subsistence at Mex.Ps. 140,000 430PARTICIPANTS- travel at Mex.Ps. 13,000 x 20 800- accommodation/subsistence at Mex.Ps. 70,000per participant/week x 20 participants 4,310

8 060Divided by 5 days and 20 participants: US$ Wp~fer day

2-day seminar of 80 participants USSRENTAL- training rooms at Mex.Ps. 300,000 925- course equipment at Mex.Ps. 200,000 615INSTRUCTORS

- honoraria at Mex.Ps. 250,000 770- travel at Mex.Ps. 68,000 210- accommodation/subsistence at Mex.Ps. 56,000 180PARTICIPANTS- travel at Mex.Ps. 13,000 x 80 3,200- accommodation/subsistence at Mex.Ps. 28,000per participant/seminar x 80 participants 6,900

12,800Divided by 2 days and 80 participants: US$ 80 per day

ANNEX 1.1Attachment 1.6Page 1 of 4

MEXICO


Institutional Responsibilities by Training Themes

1. The grouping of main training themes has been carried out throughan iterative process reflecting priorities expressed in surveys andinterviews with municipal officials, other experts, the availability ofexisting course material, and the capacity of existing organizations.There will in practice be a number of overlapping and complementary coursesoffered by different institutions. Demand expressed in response from themunicipalities is expected over time to reinforce specialization.

A. Theme: PROGRAMME PRIORITIES (PP)

2. This series forms part of an overall orientation to the problemsof municipal reform and financial management. All key agencies willtherefore participate to a greater or lesser degree, assuming leading rolesas appropriate.

B. Theme: FINANCIAL MANAGEMENT (FM)

3. The Secretariat of Finance (SHCP) and its subsidiaries, INDETEC(para. 4), CEF (para. 5), INCAFI (para. 6) will be primarily responsiblefor this group, issisted by SPP and the successor to CECADE (para. 11).

Secretariat of Finance (Hacienda y Credito Publico (SHCP)

4. The SHCP's participation in technical assistance and training formunicipal development is directed to institutional and financialstrengthening of municipal resources as a basis for economic and socialimprovement. The program provides an introduction to the Mexican financialsystem and the functions, organization and procedures of municipalfinance. Training and technical assistance is given in fiscalcoordination, financial programming, including municipal budgeting andmanagement of public debt, identification and mobilization of creditresources, and price and tariff setting for mauncipal services.

5. The Institute for Technical Development of Public Finance(INDETEC) was established in 1973 as a 'government association' under ageneral assembly ccmposed of federal and state representatives. TheInstitute's program is wholly financed from government sources (40%federal, 60% states) and is staffed by a full time faculty of 35 whoundertake studies into legislative and administrative aspects of state andmunicipal financial management. Study findings are used in the design oftraining programs, and are disseminated with other national andInternational material through 3 periodicals which the Institutepublishes. In 1984, the Institute trained about 2,000 officials in 150decentralized courses/seminars of an average 3-day duration. Courses arerin in the officials' own localities although this has been restricted byinadequate resources for travel. Some 2/3 month courses are runce:zrlly. Course themes include municipal financial administration,incone budgetting, property taxation, municipal accounting, procedures,administration of municipal services and the role of the municipality in

- 40 -ANNEX 1.1Attachment 1.6Page 2 of 4

national fiscal coordination. The Institute provides advisory services tomunicipalities and state governments on request, currently about 10assignments per year. INDETEC has developed a practical approach totraining which uses case study material and role playing. Faculty membersare aware of pedagogic as well as technical issues and this is reflected inimaginative training design.

6. The Centre for Financial Studies (CEF Eduardo Suarez-) wasestablished within SHCP's Direccion General de Credito Publico, to providespecific on-the-job training and interchange of experience betweenpracticing financial career employers at various levels of federal, stateand municipal service, with the specific objective of building a specificcadre of financial career civil servants. The focus of training will be onfinancial planning and management within the constraints of the currenteconomic and financial parameters facing Mexico. The Centre will beassisted by outside (government) Institutions (INAP, IPADE, [NAM, etc.) todevelop a full time program of training.

7. The National Institute for Fiscal Training (INCAFI) wasestablished in 1980 to initiate and support training programmes in internalrevenue procedures. The Institute has 55 full time staff engaged ininstruction, production of training materials (modules, videos), andpublication of magazines and training aids. Modular materials have beendeveloped for use in 12 courses. The Institute provides training forinstructors in the use of video as an integral part of trainingprogrammes. The video library which has already been developed is animportant resource for training of municipal staff. The video productionteam of 8 people has lost no staff in 5 years, and good material has beenproduced in restricted accommodation with very basic facilities. Lack ofresources to obtain spares and replacement equipment has recently led to areduction in studio output despite growing demand for training materials.

C. Theme: CREDIT MANAGEMENT (CM)

8. In 1984, BANOBRAS established a Center for Studies, Documentationand Assistance for Municipal Development (CEDADEM). The Centre has beenenergetic during the preparation of the project, but it is inadequatelystaffed to deal with the broad program of assistance it originally intendedto provide to municipalities. It is currently being reorganized, and itwill in future focus on Credit Management and Operations (financialappraisal; Economic and Project Evaluations; Credit Procedures ad LoanProcessing; Procurement, etc). Technical experienced staff would berecruited from within BANOBRAS' existing operating divisions andsupplemented with specialist technical assistance as required. Final plansfor CEDADEM's reorganization will be brought to negotiations.

D. Theme: MUNICIPAL ADMINISTRATION (MA) and LEGAL ASPECTS (LA)

9. Strengthening municipal administration including legislation willbe primarily the task of the SG, the SPP and their subsidiaries at thefederal and state levels. In May 1984, the Secretariat of Government (SG)established a National Center for Municipal Studies (CNEM) to helpaccelerate the national municipal reform program. The Centre sponsors andundertakes studies in municipal organization, disseminates study findings


and other information, and is a focal point in municipal administrationimprovements. Centres for municipal studies (CEED) have been establishedin each state, and legislation for a model municipal constitution has beendrafted. The Centre's present professional staff of 20 will be increasedto assist municipalities to adapt the model to specific requirements, andto develop corresponding operating procedures. The Centre will set up aninformation system at each state level, and will coordinate a studyincluding data collection (with the assistance of the Training SupportUnit) towards preparation of a national training policy for municipaldevelopment.

10. The Secretariat of Programming and Budget's (SPP) DirectorateGeneral for Regional Development works through a Directorate of UrbanPlanning which undertakes study programs on administrative decentralizationand advisory services to states and municipalities in staff training andplanning support. Training activities are currently being extended incooperation with University faculties and include the development ofmodular training materials. There are plans for experienced formermunicipal presidents to participate in training programs under contract tothe University or the SPP.

I1. The SPP operates a Center of Training for Development (CECADE).In 1984, for example 354 officials from 24 states participated in trainingprograms in budgeting, programming, state planning, project development andbasic economics. Over 70% of participants were drawn from otherSecretariats and para-statal and non-governmental organizations. Decliningresources for training have led to the increasing concentration of programsin Mexico City. In August 1985, CECADE formally disappeared in a broaderinstitutional cut-back of various Secretariats. It has since beenre-established in SPP's Directorate of Regional Planning. Key Staff havebeen re-distributed to selected State level positions.

E. Theme: TECHNICAL SERVICES (TS)

12. In 1982 the Secretariat of Urban Development and Ecology (SEDUE)assumed the former functions of the Secretariat of Human Settlements andPublic Works (SAHOP), which between 1976 and 1982, trained 7,000officials. SEDUE has responsibility for Housing, Urban Development,Potable Water and Sanitation, Pollution and Environment Protection.Training programs in these areas are supported by a full range of modulartraining packages and are regarded as central to the Secretariat's role.Available materials are not being fully utilized because of lack ofadequate funds for training. Programs are offered for federal,state andmunicipal officials. Special emphasis is given to training of instructorswhich has a multiplier effect when they run training courses in their ownSecretariats and Departments. Although SEDUE has adequate trainingmaterials and staff available, its training units are too fragmented tobenefit from the technical assistance to be given to institutional stafffor improving the quality (content and delivery) of training programs.SEDUE has undertaken to prepare a plan for consolidating their trainingunits to this end, and to implement this consolidation during the -rlystages of the projects.


Other Institutions

13. Mexico is not short of training institutions (including privateor officially sponsored institutes specializing in public managementtraining) that can be brought into active participation in the Government'sdecentralization program. In addition to academic institutions (higherlevel teaching institutions), many semi-autonomous organizations providelocal training and bring together international expertise to Mexico forseminars, etc. Typical among these are INAP, IPADE and UNAM (paras.14-16).

14. The National Institute of Technical Administration (INAP) is asemi autonomous organization financed from affiliation fees, charges fortraining and consultancy services, sale of publications, and a budgetaryallocation from the Government. In 1983, the Institute established aCentre of Studies for Municipal Administration (CEDAM) to support theGovernment's municipal strengthening program. The Centre publishes aninformative bi-monthly bulletin for distribution to states andmunicipalities. Special studies and a series of Technical Guides have beenpublished, with further regular publications planned. The Centre's programincludes intensive training for municipal officials. In 1984, for example807 officials attended 2-day seminars and 35 representatives from 9countries took part in a 3-week Latin American Seminar for Training ofInstructors in Municipal Administration organized by CEDAM in Mexico City.The Centre is equipped and prepared to undertake sub-contracted trainingand research activities in municipal development as required by lineministries.

15. The Universidad Iberoamericana's Instituto Panamericano de AltaDireccion de Empresa (IPADE), specializes in executive training. It is oneof the most advanced centres of management training in Latin American withtop rated facilities in Mexico City; offers a diversified program and hasan excellent faculty. It will be amongst other institutions which will beinvited to improve the management of training institutions.

16. The Universidad Nacional Autonoma de Mexico's (UNAM's) Facultadde Contaduria y Administracion is also active in management training in thearea of financial management and has offered a program on "FinancialInformation and Control Systems for Municipalities.

17. These and others, in addition to some outside mexico, will bebrought in to assist with specific technical assistance during theimplementation of the project.

- 43 -


MEXICO

PHYSICAL DECENTRALIZATION OF FEDERAL PUBLIC ADMINISTRATION

(PILOT COMPONENT)

Note: This component was included after the Appraisal (August 1985) of theproposed Municipal Strengthening Project (FORTAMUN). It reflects the find-ings of an appraisal mission in November 1985 in connection with the Earth-quake Reconstruction Project, and is based on data brought to Washington(December 19-20, 1985) by a Mexican Government delegation with a specificrequest for assistance (see memc to files dated December 30, 1985).

1. Background. On September 19, 1985, Mexico was hit by one of theworst earthquakes in its history, measuring 8.1 in the Richter scale. Theearthquake and subsequent aftershocks caused severe damage in Mexico Cityand in the States of Jalisco, Michoacan, Colima, Guerrero and Mexico.Financing for earthquake damages outside Mexico City will be addressedthrough amendments to existing loans and through proposed future opera-tions. These states have now been included in the list of priority statesto be selected under the Municipal Strengthening Project (FORTAMUN) throughwhicb reconstruction of damaged municipal infrastructure will be financed(Annex 3.2). Additional funding, primarily for housing will be financedthrough the normal program of FONHAPO.

2. The proposed Reconstruction Project focuses on damage withinMexico City, and will finance primarily the reconstruction of shelter andselected amenities. In Mexico City alone, an estimated 60Z of federalGovernment buildings were destroyed or heavily damaged and need to bedemolished. Instead of reconstructing office space in Mexico City, theGovernment has decided to accelerate the ongoing program for the physicalDecentralization of Federal Public Administration (DPA). For practical andpsychological reasons it is important that significant implementation ofthe decentralization program, move in parallel with the reconstructioneffort in Mexico City. Various Secretariats have been instructed torelocate staff and operations to selected municipalities and states. TheGOM proposed utilizing this opportunity to initiate a discreet pilot compo-nent under FORTAMUN to explore related issues, as a prerequisite toexpanding the program.

3. Key Issues: In order to sustain the decentralization programbeyond the initial stage a number of issues must be addressed:

a) First, there is a need to strengthen the institutional coordina-tion at the federal and state le els to permit a coordinated andcomprehensive capital budgeting and programming mechanism forcomplementary investments from different sources. Besidesinvestment-, made directly by municipalities, there are a numberof federal and state projects and subsector programs that normal-ly also finance related infrastructure and public services, forexample, roads, telephone, trunk water supply, schools, housingfor various income groups, etc. (Annex 6). Agencies and programs

- 44 -


include among others the SCT, the SSA, the SEP, FONHAPO, FOVI,INFONAVIT. A systematic institutional process in which policy,financing and investments are coordinated at the federal leveland integrated with technical (physica'l and economic) developmentplans prepared by the municipality or state is critical.

b) A more accurate assessment of likely resource requirements is adesirable prerequisite to expansion of the program. In documentsprepared by SEDUE1/, it is estimated that earthquake-relatedreconstruction and decentralization will require about US$3billion (Attachment 1). The immediate decentralization programalone for about 20 cities is estimated at approximately US$1.5billion for the period 1986-88. This scale of public investmentin 20 cities requires more careful evaluation of i) the utiliza-tion of existing resources through subsector budgetary alloca-tions; ii) its impact on the public investment program previouslyprepared, iII) its implications on the GOM's external borrowing;and iv) the programming of complementary sub-projects in anenvironment subject to fluctuating capital availability;

c) there is the need to explore alternative financing, mobilizingadditional local resources, particularly from the private sectorto substitute or complement public expenditure. For example,could private sector finance companies, corporations or indivi-duals finance construction of public administration buildings inreturn for long-term land leases and/or in consideration oflong-term rental agreements? Should the private sector beencouraged to construct more of the revenue-generating projectssuch as markets, abatoirs and other similar municipal services?Such policy shifts could, for example, reduce the demands on thepublic sector and increase revenues through property taxes andother fees, which in turn could be directed towards improvedoperation and maintenance;

d) an accelerated investment program to support decentralizationwill include extensions to trunk infrastructure to accomodatefuture growth. The capital costs cannot always be fullyrecovered in the early phases of the subproject. The policy fordeferring full capital cost recovery will have to be elaborated;

e) a fundamental objective under the FORTANMUN addresses the issue ofinstitutional and financial responsibility for operation andmaintenance. Not all municipalities will have the managerial orfinancial capacity to assume immediate responsibility for theoperation and maintenance of all infrastructure. Investmentplans for specific cities should include strengthening theirinstitutional and financial capacity under FORTAMUN. Such planswill also have to clearly define the institutional responsibi-lities for planning, implementing and maintaining (by agencies)respective services during this period, especially in cases wheremore than a single municipal jurisdiction may be involved; and

1/ Copy in Pioject File.

- 45 -


f) Finally, there is a need to strengthen the information and datarecording systems in both the SPP and in SEDUE, to enable a quan-tification of the real costs and benefits of decentralization.

A pilot component under FORTAMUN would provide an opportunity to immediate-ly explore these issues.

4. Objectives: The Government's objective through this component isto address the decentralization program in selected cities in an integratedmanner, instead of through hitherto separate, and sometimes uncoordinatedsubsectoral investments.

5. Specific objectives under this subcomponent will be (a) todevelop a -process' for implementing decentralization objectives (whiledeconcentrating Mexico City) in priority cities; (b) to identify typicalminimum and realistic resource requirements from SPP for expanding theprogram, (c) to identify the implications and overall externa'l creditrequirements of the program and its impact on the Public InvestmentProgram; (d) to identify and implement policies in respect of responsibil-ities for operation and maintenance of completed infrastructure; (e) todevelop efficient institutional coordination at the federal and statelevels for capital budgeting and programming from a number of sources (forexample: SCT, SSA, SEP, FIFAPA, FONHAPO, FOVI, INFONAVIT) and for expansionof such a program; (f) to identify potential investments by, and increaseincentives for participation by the private sector; and (g) strengtheningthe information systems in SPP and SEDUE towards improved evaluation of thedecentralization program.

6. Description: The project would additionally finance the fourcomponents under FORTAMUN as follows: a) the investment fund will beincreased by US$25 millIon (US$12.5 million loan) which will be targettedspecifically in at least two selected cities (para. 9), for municipalinfrastructure investments necessitated under the decentralization effort,and for which no other resources (from the SPP or through sub-sectorbudgetary allocations) are available; b) the Municipal Staff Developmentand Management Strengthening component, the Federal and State Staff Devel-opment and Institutional Strengthening component, and the project adminis-tration component will be increased by a total of US$5.0 million (US$2.5million loan) - This will provide for TA and Training and Studies to carryout pre-investment and municipal management training, detailed feasibilitystudies, for preparing a detailed follow-up project addressing the needs ofthe 20 priority cities (para. 9) and for project administration. Eligiblesubprojects for financing would include all municipal infrastructure (watersupply, sewerage, roads, bridges, etc.) and special urban investments aslisted in Annex 2.1. In addition under the DPA component trunk infrastruc-ture or shared inter-municipal infrastructure would also be eligible forfinancing subject to compliance with the specific conditions for disburse-ment as noted in para. 11, and satisfactory detailed subproject evaluationin accordance with the Operating Guidelines prepared for FORTAMUN.

- 46 -


Component Cost and Financing

7. General cost estimates have been prepared by SEDUE (Annex 1.2,Attachment 1). The amount allocated for the investment fund (US$25 miullionand TA and Training (US$5.0 million) subcomponents have been based on theseestimates. The foreign exchange characteristics will be similar to typicalinvestments already appraised under the FORTAMUN. Approximately 1200staff-months of local consultants' services (US$ 3.6 million) and 50 staffmonths of foreign consultants' services (US$0.4 million) have been added tothe FORTAMUN project as appraised. About US$1.0 million has been estimatedfor expansion of the municipal and institutional training components toaccelerate training of "host" municipalities in the 20 cities, and federaland state institutions. Cost sharing,the flow of funds, cost recovery andother principles governing financial policy would be identical to thoseagreed under the FORTAMUN.

Execution of the Component

Organization, Management and Implementation

8. Four principal Government Secretariats (SG, SPP, SHCP and SEDUE)and BANOBRAS would be involved in the FORTAMUN. To initiate the project,the institutional structure (Steering Committee, Technical Secretariat,Training Support Unit, etc.) as designed for the 'core" participants in theFORTAMUN would be adopted. (see paras. 3.14 to 3.15 of main report). Forthe purposes of overall coordination of city-wide programming of capitalinvestments however, a number of additional agencies would be also involved(for example: SCT, SEP, FONHAPO, etc.). Developing the framework for suchcoordination is the primary objective of this pilot component. Because ofthe importance the government attach to the decentralization program, theSteering Committee will assume overall responsibility for coordination ofthe pilot component delegating specific responsibilities as required to oneor more (jointly) participating agencies.

Selection of Pilot Cities for the Emergency Relocation Program

9. Approximately 60 medium-size cities have been identified by theGOM as being suitable. 20 of these (with an estimated absorptive capacityof up to 600,000 persons) have been designated for the emergency relocationprogram (starting 1986) and are thus given the highest priority. Selectioncriteria are pragmatic and focus on immediate absorptive capacity at theleast cost. These criteria include inter-alia, physical location and thecities' priority in the national spatial strategy; existing populationsize, annual rate and potential of population growth; availability andsuitability of land for expansion; relative deficits in service provisionand constraints to expansion (water supply, sewerage, drainage, roads,postal and telecommunications, etc.); the expandable capacity of existinginfrastructure; the availability of housing; and finally, exposure risk tonatural disasters, (earthquake, flooding, etc.). A copy of the list ofselected 20 cities, detailed analyses and final ranking is available in theProject File. The Steering Committee will select at least two cities forthe pilot sub-component.

- 47 -


Compliance with Operating Guidelines under the FORTAMUN

10. All operating and implementing procedures for the component suchas Procurement and Disbursements, Accounts and Auditing; Monitoring andReporting Requirements, On-lending Terms and Procedures; Appraisal ofSub-borrowers; Appraisal of Sub-projects; Sub-loans Agreements; andapplication of matching grants, would be in accordance with the OperatingGuidelines (Annex 5) for FORTAMUN.

Status of Preparation

11. SEDUE in collaboration with other Secretariats and the selectedmunicipalities has been preparing technical documents for the program.During negotiations, SEDUE through the Technical Secretariat (TS) submittedevidence of the advanced state of preparation for selected cities (AguasCalientes, Ags.; Morelia, Mich.; Queretaro, Qro.; and the conurbations ofTampicofAltamira/Murillo/Pueblo Viejo/Tamos. At least two among these willbe selected. Some further work on the documents is required. Assuranceswere received that under this sub-component, a request to the Bank forapproval of a subloan, would be accompanied by a) an institutional andfinancial appraisal of the Sub-borrower carried out in accordance with Pro-Forma A of the Operating Guidelines; b) the detailed capital investmentplan in respect of the Decentralization Program for the eligible municipal-ity, including the appropriate technical, financial and administrativeinformation on the implementation of such plan, and a description of theinvestments to be made by the federal or state government outside the scopeof the subproject; and c) such other information as the Bank shallreasonably request.

Terms of Reference for Main Studies

12. The outline scope of the Terms of Reference for two groups ofstudies under this subcomponent was also discussed. These are as follows:

a) Overall Strategy for implementing the Physical DecentralizationProgram. The Consultants' Terms of Reference will include:(i) completing an up-dated assessment of the number of personsand functions (by agency), to be relocated out of Mexico City tothe selected cities; ii) making an assessment of the program'scapital cost requirements by subsector; iii) estimating incollaboration with SPP and SHCP the resource availability, theimplications of the program on overall credit requirements, andits impact on the normal public investment program over the shortand medium term; iv) making recommendations on financial policiesrelating to: a) the operation and maintenance of completed infra-structure; and b) the alternatives for financing urban services(private sector/vs. the public sector or both); v) makingrecommendations on institutional strengthening, policies at thefederal and state levels, for example coordination, budgeting andprogramm.ng, physical planning, etc.) and finally vi) proposing arealistic timeframe for implementation of the program.

- 48 -

ANNEX 1. 2Page 6 of 7

b) City Specific Studies. In order to develop the overall strategynoted in para. 12 (a) above, it will be necessary for a number ofcity-related specific studies to be carried out In parallel withthe main study. These studies would focus on i) an institutionaland financial appraisal of the selected city (municipality orgroups of adjacent uwnicipalities) in accordance with Pro Forma Aof FORTAWNN as set out in the Operating Guidelines; ii) a reviewof a triannual capital investment plan assuaing a 'low'availability or a 'high' availability of funds; iii) anexamuination of a financing plan which would incorporate publicand private sector financed program and a review of the impactof the investment program on nunicipal revenues. (This sub-studywould be a requisite for the development of appropriaterecommendations for cost recovery of capital, operating andmaintenance expenses); and finally vi) the institutional strategybased on the findings under related studies above, forinplementation, operation and maintenance responsibilities, andfor strengthening the selected municipality 's mmageuentcapacity.

Draft Terms of Reference for the studies would be prepared and submitted tothe Bank for reviw as a condition of disbursement against thissubcomponent.

KNtCIAL sR .IM , cr

Firezia1 Eathutes hAsaiiiw 20 Ifost Cities for Deostralization

Resaorce Dastrlhtian tyr Fund Application of Resrosa O f wtdldi-_ EatInAtt for

Cuaponents Total limdpul PabMlIty Civil fbod A Recontuc- Dt ontea- pilotRescurm ITetltui;oml Studie snd Ftup.(Paaon. ton lizattin Cities (2)

USt miolla Stueot1udng ealesin leoentmlt.) IUq$ mdllion U villian U."$ miUlln I$ adllion US$ idUion 11$ dilion

Total8 2,946 IR 47 2,881 1,479 1,467 146.2

1. Plamnirg and StreilthenliW Urlsn ?kiweunt 18 18 Is 2

2. FeasiblIty Studles, PrJect Deulgi an TA 47 47 15 2 3

3. Road Vorks ad related Tnfratimctue 319 319 319 32

a Paint 145 145 145 15, (autn.ctton 174 174

4. IbHiu 1,877 1,877 1,246 631* 63*

* Reaxutnittion 198 198 198. Retternant 277 277 141 13 14. Prpaliw 229 229 24 205 20

Fintied 1,125 1,125 835 29n. 29* mltiau 48 48 48

5. Ilrbm i 1mrat 354 354 4 350 35

. Hlntiivl Infrutwture 316 316 316 32

. fulpment for Public Savio 34 34 34 3

. Rehabl.ltation of Historic 1ounents 4 4

6. Urtn Tra_port I .2 _ _ _ _ _.._ _ _ _ _ _ ._ _ ._ _ _ .. _ . _ _ _ _ _ ,_ _ _ .__ _ _ _ _ r

7. Ilildiip for Publie Ahndstratimn 330 330 116 11

. amstructlin 315 315 116 X ". Dolition 15 15 . .

*~lyinlaluas zusoumwi from MEIAP uid &Me~Sawze: MM 12/85.

- 50 -

2.1

KU.bi* &hro1uM. 0-1dz Two, 1Vstr1h of Tzmtu. ad Ct bSr . &MwU

DisrEutm owanm Team CmL-tbmy bdad~lagpowe aabwJamet facr RWAWM of ___ _ _ _

_. NOWWWM= EmMft o t 1. .

Nw b, 'mtm. fat tu, Ullks 1t of eP 5 1 T Aurur .n .PoweztyD_dAI Prqt ax .GwnxNatu.d mdr9>LI, *Umrt RePmmEwP~cu, qu fnd2ld ad Camt1M "

Levmi

U-

2. ft~EME

1 aILy aid _ai 65Z Z of @P 15 4 Y .Um d umr ISolid P iciztnvj aid fm ad fm

_ aS ad f_Wtiu omo _ai (ddtrck, gm) .2

3. L endiSw wdth POtfl S&n&z

)zddum =does (Chlimul ad mtil.) 30 S of QP 10 3 Ym .PRnt .11tSl aft .. ur dua_

Sa1 ti aa md Sue PDUI1/,-ku Sf -(oins TW

P.ddre ]am ad .Cnul 1mqr Ig 1_ I 11

A! Imurd3 mcmst. udd~l4tim il a I lo l z mtrdmofaltmS dspm bilhrntrv ei

s. !p

C:vil 1- admt a soUdut at V ad I 02 S of QPP S N~ -fotztm lmVddl Irsalot

wil thm b P-m wai wid d afriti malm oF dwabml laid, or eiao' am pe xfaq 1. U_mummt come ,n ami

Mm s out #a=g In criaI at far Sold Wmtn. _th. Swvlam,6 E! a m Vddelm il ble iw3n in (ADty 2. f2 ron =wy I 0 w Sf

- 51 -ANNEX 2Chart 2.3

MEMXCOMUNCIPAL STRENGTHENING PROJECT

Row of Funds

X . ~~~FORTWUN l

L mMn-eI

L~~~~~ GOM(SPPJ ~ ~ ~ ~ ~ ~ ~ ~~AMrsofo

o ~~~~(T5J IJ)

C-

E

E A _

tOE7E CEM

4 SEDLE-

pLct r~f1 uSS million .w _^WVIc Bffk40.0 US$m. 12. 2 souacE2O

G>OM-sub4oWowt5 40.0 .0rATo?d 80.0 . *#AMMEW

CFaOwtrgWfc0 n.dn TWUl & ConEOn Cost lR.caaV '

,sbottmdow9i5wit SAflh1U 6.3 VI3t-3U@t

- 52 -ANE 3Chart 3.1

ifg __ __ __

X,~~~~lin~~~~

- 53 -

3,2

)tICIPALPRW

Selection of States for Year 1: N1hT of adldltle. co] A tiactoral B)

No. of with Siecticm of Det of dwsStates ?zdciplitLe. mm tha 25,000 PrIority Sttm In az!nstrtton

Pqnuatw1 for Yew I Naddp State

Dlstrito Fedleral 16 -.kwm Calentes 9 4BaJa Calfofna 4 4 Reja Cd] :fonia 01-11-6 01-11-69Bala Caiifomla Sur 4 3Cupede 8 4 Comiedie 01-12-R5 16-0985CombUIa 38 13collm 10 3 C0i1w* 01-12-65 01-12-65

111 24QiChlua 67 16DurW 38 11Qunajuato 46 30Guerrro 76 23 QmerrerdHidalgp 84 15Jaltsa 124 27 Jais 01M-1-85 01-03-9maxim21 49 1Ba1IMdiboea 113 26 MldamaMorlos 32 10Nayrit 19 8 Nayit 01-11-84 19-09-67Nuv lem 52 13 Wivo I 01-12-85 01-08-85

'ca 570 10Puebla 217 23Oiezetaro 18 9 OQeretuzo 01-09-5 01-10-65Otdntna too 7 3 Qo otam Io 6O7."87 05-08-7San Luis Potci 56 16 San his Potoui 01-12-6 26-09-85Simlm 17 13Sonora 69 14 Soor 1349-65 13-09-65Taleo 17 14 1b_w 01-12-65 01-0949Mllie 43 13Tlaxcal 44 6 Tlaxcala 15-1265 15-01-87Veracruz 203 4Yucatan 106 62 YUCin 01-12644 0102-8Zacatecas 56 11

umL 2,379

Same: IARSGezencla de Plseam9eb1mmsda de Plazeacim Reomi

Suffen in the Sepmber 195 e.rtludw.

54 - ANNEX 3.3

MEXICO


ALLOCATION AND SELECTION CRITERIA

GENERAL

1. The project will tentatively cover about 340 municipalities(Annex 2.2) in all 31 states on a self-selection basis. Priority willtherefore be given to those municipalities in each state, likely to benefitquickly from the project and thus serve as demonstrative examples withineach state. As demand initially may be high, each state government willprepare a short-list from which, only those municipalities which meet withthe specific criteria as set out in the Operating Guidelines (Annex 5), forparticipation in the Sub-Loan and Training components will be selected.During the first year states which (i) suffered earthquake damage; (ii) orare on the GOM's decentralization 'host" list, and (iii) will have newadministrations, are given priority (see Annex 3.2).

2. Selection Criteria for Sub-loans through FORTAMUN. The proceedsfrom FORTAMUN, wolild be on-lent to municipalities which:

(a) pass the minimum affordability test, in accordance with anassessment of their finances, as set out in Volume 2 of theOperating Guidelines (the Municipal Financial Handbook) preparedby BANOBRAS (Annex 5.2; and Pro Forma A, Annex 5.3);

(b) submit subprojects presented in accordance with guidelines fortheir technical, financial, economic and social evaluation asspecified in the Operating Guidelines (Pro Forma B, Annex 5.4);

(c) are willing to accept the financial terms and conditions asspecified in the Sub-loan Agreements betweeen BANOBRAS and theBorrower; and are willing to comply with Guidelines andProcedures including procurement, accounting, monitoring, etc. asset out in the Operating Guidelines (Annex 5.5);

(d) participate in the Municipal Staff Trainirg and TechnicalAssistance component.

3. Municipal Staff Training and Technical Assistance Components.Participation only in the training and technical assistance program will beopen to all municipalities which: (a) comply with procedures set out inthe Operating Guidelines.

-55 - ANNEX 3.4

MEXICO

MUNICIPAl. STRENGTHENING PROJECT

Allocation of Matching Grants

(a) For the purposes of allocating matching grants, all 2,379municipalities outside Mexico City (Distrito Federal) were eachranked on the following criteria based on the 1980 census data:

(i) size of population;

(ii) deficiency in basic services; and

(iii) priority in National Development Plan.

(b) five groups (I-V) were identified, with Group I eligible for theminimum proportional grant and Group V, for the maximum. A copyof the document is in the Project File (Annex 8);

(c) for every amount of sub-loan taken, an incentive matching grantwill be apportioned in accordance with the specific category intowhich that municipality is classified. Nothing precludes amunicipality from participating with their own additionalresources, which would increase the volume of investments; suchcontributions would be considered as counterpart funds for thepurposes of disbursement out of the Project Loan;

(d) Three alternative scenarios for the matching grants, have beenexamined. These are illustrated in Table 3.4 below and discussedfurther in Annex 6.3.

Table 3.4

No. ofGroup Municipalities X Z of Loans as Grants

I 18 0.7 15 5 0II 67 2.8 25 25 5III 177 7.5 35 20 10IV 597 25 50 25 15V 1,520 64 75 65 30

Total 2,379 100 50 33 16

- 56 -ANNEX 4.1

MEXICO


MONITORING AND EVALUATION SYSTEMS

1. The project would strengthen the capacity for both monitoring andevaluation at the municipal state and federal levels. The monitoringsystem for the proposed project would provide regular information aboutproject activities to all implementing units as well as a variety ofreports on progress of implementation essential to adequate management bythe Technical Secretariat and for fulfillment of Bank project monitoringrequirements (Chart 4.2).

2* The monitoring system for FORTAMUN will be a separate moduleunder the Information System for Credit and Development (SICREF) inBANOBRAS (see Project File for detailed description). In addition to theexisting components which monitor all activities relating to loanrequest, authorization, formalization, actual investment and cost recovery,the system for FORTANUN wv1 ' have two other components to be implemented inthe initial phase of the project: a) inventory of needs in the areas offinancial managevient, institutional strengthening and training (data willbe extracted from the Regional Information System on Municipalities (SIREG)in RANOBRAS which contains information on economic, socio-demographic,financial, access to services, political and administrative indicators, andwill be supplemented by the survey of training needs conducted byimplempnting agencies during the promotion phase of the project); and b) aregister of training and funding programs to be implemented after thetechnical evaluation of each municipality vis-a-vis their needa, recordedin the component previously mentioned.

3. A proposed design of monitoring system and its expected outputhas been reviewed by tl-e Bank and an implementation schedule agreed to.The Technical Secretariat will be responsible for the monitoring andevaluation of the project. Ouarterly progress reports would be prepared bymunicipalities and implementing units and sent to the TechnicalSecretariat. They, in turn, would aggregate these and prepare thequarterly Implementation Summary to be sent to the Comite Directivo(Steering Committee) and the Bank. In addition, the Technical Secretariatwill be responsible for preparing an annual evaluation to assess progressin all project areas towards meeting major project objectives and, ifnecessary, investigate any question or problems that would arise fromanalyses of both monitoring and evaluation data.

- 57 -

AkMEX 4Chart 4.2

ME)GCOMUNICIPAL STRENGTHENING PROJECT

Row od Infonatlon

,iNB5JORY OF PROGRA REGEIER

TRAINI&NG aAIWNG & EKIECHNrASST. REr.

0UONAL VWRJONALSXGHNWG STENGTHG

lErOGRAM EPROGRAM

INFORMATION TOlECH SECRET.

S UtiAARY I PROJECrFILE

_ KEY VINDICATORS &PERFORM. MONITOQING

QUARIERLY PROGRESS

REPOR1SANNUAL & PROJECr

UPLEMEEW. Sj9AARY

LOAN REOUCiT l l TO IBRD

LOAN I REb Z LOAN CODONAUHRCTON &LOA RGSE

e I~~~~~~~~~~~~RJC GKENERAL LOA REPAVMNT

VVd Bar*-302WA

- 58 -AR 4.3Table 1

KNICIPAL P EnumvU Paw=

1986 1987 19...A. TrairAig -xUpeors

1. Partidpatiia in and acuirdstratimn of trxning pzogzq 1:

a) No. of par ng tisb) No. of eents offeredc) No. of mmicipal aind federl staff trned per eventd) Averq cost per pari pat per cmmsee) No. of Izstrctor trainedf) No. of Fel1ashIps

B. IA}rItrctur Investment in!

1. P tundr MoxitorLtg Indicators for hunicipalities:

a) Debt service/total reimzesb) Capital erpsitures/total revesmc) Total e,eru/total revwuesO De-bt service/arent eqpenditLure) C nqxoitim of Revem (i.e. beneficnary bw,

bettermnt levies, and gerel)

co tnm indicators

a) Paosirg tizm for loan applicain and disbrsemnt(bre*-down oE thme tdcen for e step Wby iespcaible

pny involved)b) No. of lom applcatfons received and 2 approvedc) Averasze of Sub-loam by GRP ao micpalities

D. Cavera of Pro1ec..

a) No. of states, promtion comletedb) No. of dm plitks particit in tranigimc) No. of umidpalitias receiving FORIWIJN sub-louSd) No. af Regimal Offic of BaEASe) No. of State Offices of EASf) No. of " tt offaE of BA!I8AtAS

- 59 '

Aw 5.1

mmac% inmgcFo R

_nm ati Pm pmhi, of tw MEW Pr in In web lE

mm~WO STMZ

Actlvtim Sdwhle I/

A PrCmoi. ColmuIctee is SoizAf (mat-I-UMMICY)

Visit to di' tae Gomz,,ror

Iduiatimi to H civ Pe wuida

MutelpelIMMtt LgWrnu.gr W! Egiiet,p. iwMIbit-ttoUAdrtu4 tmrciv L o tthiulte, _tate(Qddei Rodl Prt P ) (Qlldm,lmwt .os Mid Prefrm)

Nwd4wUlm raquer to 1 S %mlipallty pII j . ntet ot ROWS

dtw seate oIUS n" idth capm ddrm to 1S dwos ete R4SI'

to tie SectaaLt of G b wI to a(LMA1S z=p atiw sdth ow to (XLAs

The TS tet sii= to the n;n foc rnd]t iuca pddliM cn tedmiml dat.Wb12 an eaiIntia the T finI roqturzmunts fo mud l n f e and iittitr-Support unit (TDo timul ualy.s (%=*xI ax sifrilp. Amiwlls.

| asp~~~Chter 3)

T.W acpoizm. I a Widonel Inf6rustion 1d mm?tdpsaity rledoiCc-3mmLth die Ttd3 t IR aidinz_ta im idmtim to'S W5 cmu te ft e fn. ete Ord

flzunca anelyses (Profom A) ' anI cnT'S jzmte qpUfaxtIcu id _ Cmmhtia to the hwrvai W lialts ai oidistee Ott (S:) reI

ltivIt piwe. aid &hid± Teduical i_uetAplfmtion Wv1. IS - IL ffie. idue el vich Subprnjedw imus (P.OfoN B) aawItSI br

xneWs of SCs SE". o cousutants 'tf

I'S relds fin& to WnM 1 recive su!xlxoe m> t d=7amo lUIASI tfstateoietatif aid A umits for eumiziata to

sm1 atorl tpc w e tmittw am oot ten hirW m Onerstialso Fid nce)

TS freedtb Mm see, moultors overaU If puiti'ie, S t, s f

uxdzlt~ tf qztm, with alime to 1'S.Etmb af pCOa lm ICt (1S. IJ.emaitlig _des. mdepmitii) 7oeiLnZmtiw oE cmdit AS. )mdpm]±v

and is)

F-metion of W*lw i

S9pervbelm aid ff ddp.lity, nUAS,se)

pmuwLp.JIty o er in fb r w Mtnmd edoxeeI

TGUivAmta p.dMc rae Nxdcivsllty stsUloTtbnln of If gV" T. AOW M

I/ | aiviti lm an .tiu.ad ts gale f o d Pe rfb. n lttdW WM ' Yiwus - to idwt*f CrtAM- qsm=UaW bottlmisd m d iitrwhae furdW ur eiildzw er- a _ D1stme m b,m anx rmau or micei wumiZtS


MEXICO


Pro Fornma for Financial Appraisal of Each Municipality

1. A standard municipal financial appraisal methodology has beendeveloped during project preparation. The methodology has been tested withpositive results on two municipal projects, one a large municipality(Tijuana) and one small (Tuxpan). It is intended to be a standard tool forBANOBRAS' appraisal of a municipality's financial status. It is undergoingsome refinement and is thereafter intended to be applied to all loanrequests to RANOBRAS.

2. Basic inputs to the methodology are historical data on municipalrevenues, expenditures, municipal general characteristics (includingpopulation, municipal employees, service production levels, pricedeflators, etc.) and proposed project data, including infrastructure andtechnical assistance components. The revenue, expenditure and generalcharacteristics data provide the basis for a municipal situationassessment. Municipal financial status trends are identified, includingthe relative growth (total and per capita) of different revenue andexpenditure categories, and critical financial ratios (e.g., currentrevenues/current expenditures, current revenues/total revenues, debtservice/total revenues, etc.) may be examined.

3. The situation assessment alone may identify municipal financialproblems that should be the target of training and technical assistance, aswell as performance targets, including cost recovery measures, that shouldbe agreed to as a condition for participat!on in the BANOBRAS loanprogram. It also provides the basis for making revenue and expenditureprojections expected in the municipality without the BANOBRAS financedproject under examination. Initially, BANOBRAS' own staff will employthe financial assessment methodology. Ultimately, state level staff willbe trained in its use. For consistency in all municipalities, a projectedannual growth rate based on expected rates of inflation will always beused. Trained analysis will judge when other methods should be used assupplements. For example, for some revenues and expenditures, past trendsmay provide the basis for projections. For others, deterministic methodsbased on interviews with municipal staff (e.g., Investment programs,personnel policy changes expected, etc) and on expected changes in stateand national policies may be appropriate.

4. Finally, the proposed sub-project characteristics are introduced,including investment costs, financing conditionts, cost recovery measures,operation and maintenance costs, etc. These data provide a "with project"scenario. Comparison of "with- and 'without' project scenarios provide thebasis for evaluation of the proposed project's financial impact on themunicipality. In addition to the standard financial internal rate ofreturn, the appraisal methodology includes examination of key performanceratios, seeking to insure that the proposed project is moving themunicipality in the right direction in terms of financial status.

5. Implementation of the appraisal methodology will be at twolevels. For large, more complex loan applications (including support forthree or more sub-projects in the same loan), BANOBRAS staff will utilizethe methodology to assess municipal financial capacity and the impact of


the proposed loan on that capacity. Otherwise, a simpler approach tostimulating municipal credit operations with BANOBRAS will be employed. Atthe state level, the general methodology will be utilized to establish forall municipalities a general line of credit. This would take into accountonly the municipality's general capacity to borrow, without consideringpossible direct cost recovery from individual projects. Thus,municipalities would know in general how much they might be able to borrow,with the possibility for still larger amounts dependent on specific costrecovery features of individual project applications. Particularly forappropriate subsectors, municipalities will be encouraged to increase theuse of user charges to recover service delivery costs.

6. For municipalities' potential use, and for states with limitedstaff resources, the appraisal methodology includes simple methods offorecasting future revenues and expenditures based on annual growth rateassumptions. Guidance will have to be provided to municipalities by theFederal government on such assumptions as expected rates of inflation andFederal policy with respect to public employee salary increases.

7. Tables 1 and 2 (attached) illustrate the application of theproforma appraisal methodology to two different municipalities. Tijuana,B.C., is a large, relatively wealthy municipality (Group I); Tuxpan,Nayarit is a small, relatively poorer municipality (Group IV). The Tijuanaexample illustrates an analysis based on a solid historical base(1979-1984) and with good information about actual future debt servicerequirements based on current commitments and the capital expenditureimplications of completing current commitments. The projected overallsurplus deficit indicates an increasing amount available for capitalinvestment. The overall surplus is especially high in years 1988-1990because it reflects the completion of current capital projects with nolarge, new start-ups. From the analysis, BANOBRAS would establish a creditline. Considering 1985 and 1986 (assuming the vantage point of the lastcompleted year -- 1984), the credit, line would suggest Tijuana's limits atonly 50 to 60 million pesos (about US$200,000). However, beginning in1987, Tijuana has a much larger capacity to borrow. BANOBRAS might suggestthen some kind of bridge financing for 1985-86 in order to permit Tijuanato leverage a much higher credit limit. This credit limit takes intoaccount the use of only existing revenues. A larger project well beyondthe credit limit could be financed if the project itself generated revenuethrough some form of beneficiary charges.

8. The second example, Tuxpan, illustrates projections based only on1984 data, using an estimated annual growth rate sufficient to keep Tuxpanoperations at the same level in constant pesos (assumed inflation rateswere used for the projections). The example first illustrates the need forBANOBRAS to require the implementation of a financial and serviceinformation base in Tuxpan to generate in the future the type ofinformation available in Tijuana. Second, it is clear that Tuxpan hasnever (or not in recent years) borrowed aa there are no debt serviceobligations. However, Tuxpan generates an annual surplus of revenues overexpenditures of approximately 15%. In addition to establishing a creditlimit of about 36 million pesos, BANOBRAS would need to provide training insound financial management practices, emphasizing the amount of capitalinfrastructure that could be financed if Tuxpan would undertake credit

- 62 -


operations. The project scenario at the bottom of the table illustratesthe fact that Tuxpan could increase capital expenditures more thanfour-fold in 1985-86 (from 3 and 4 million to 18 and 18 million) byinitiating a 36 million pesos project with a loan from BANOBRAS.

9. The two examples illustrate the process that is being put inplace by BANOBRAS under this project. Based on its existing financialcondition, a municipality is appraised through the methodology as eligiblefor a specific credit line. With this information, the municipality candesign a sub-project based on that line of credit, certain of loanapproval. If a more ambitious project is desired, the municipality alsoknows in advance that additional revenues beyond current patterns wouldhave to be generated, perhaps through user charges, in order to obtain alarger loan.

-63 - AZN 5.2

Table 1: TLIUANA

Profu Finacial Apprusal: Tijuana,I.C.Histurical Projectd

Iiillen de #pen) 197 1990 1991 1992 1993 1994 1995 1996 1919 19B9 1999 IM0

Curret Rnue 247 461 676 1019 1730 3395 3244 3912 4331 496 5517 6096Current Expenditurn 311 419 756 71 1550 290 2770 3239 3707 4176 4645 5114Current SArplas/deficit (64) 42 (B0) 14 10 55 474 S73 674 773 972 972

Caital Revnus 186 97 273 161 308 154 233 243 253 264 276 290brrouing 66 50 217 93 69 55 79 76 73 67 66 62Other 120 47 56 69 239 99 154 167 190 197 210 229

Capital Expediture 124 137 302 314 445 62 670 769 745 700 65 623Dbt Srvice 94 77 124 193 245 208 271 303 270 225 90 175Oter 30 60 17 121 200 19 399 466 475 475 464 448

Cpital Srpls/deficit 62 140) (29) (1531 11371 (4731 (437) (526) 14923 (436) (379) (3)

Overall hrplusJdeficit 2 2 (109) (53 43 62 37 47 182 337 4 639

Dbt Serwvice as 2 of Total Reenues 21.711 13.600 13.07! 16.362 12.021 5.962 7.79Y 7.47! 5.932 4.32! 3.29! 2.U74Capital Expeditur as I of Total Revenues 29.64! 24.55 31. 2! 26.61! 21.041 17.67! 19.27! 19.96! 16.089 13.43! 11.2! 9.77Total Expenditur as I of Total Rerem s 100.461 99.64 111.49! 100.42! 97. 99 99.25! 99.94! 99.40 96.7 On 93.54! 91.4n 99.992

Table 2: TUXPAN ANfl 5.2

Proifrua Financial Appraisal: Tuzpan,Nay.Projected uithaut ProjKct

(cillones de puossl 195 1986 1997 1998 1999 1990

Current Rvenues 109 126 142 159 176 193Current Expenditures 94 109 124 140 155 170Current Surplusldeficit 15 17 19 19 21 23

Capital Revenues 7 0 9 10 11 12Borrowing 0 0 0 0 0 0Other 7 9 e 10 11 12

Capital Expenditures 3 4 4 5 5 tDebt Service 0 0 0 0 0 0Other 3 4 4 5 5 6

Capitai SurplusIdef:cit 4 4 5 5 6 6

Overall Surplus/deficit 19 21 23 24 27 29

hebt Service as 2 of Total Revenues 0.O0 0.00! 0.00! 0.00! 0.0! 0.00%Capital Expeditures as 2 of Total Revenues 2.59! 2.99! 2.65! 2.96! 2.67! 2.9Y3Total Expnditures as I of Total Revans 83.62! 94.33= 94.7 95.90! 95.S6 95.95S

Project Impact (36 sillones de pesosexpnditurel

Capital lavestment 19 19Dbt Service 9.5 7.9 4.3 3.9 3.2 2.7Principal 3.6 3.6 3.6 3.6 3.6Total Project Impact 26.5 29.4 7.9 7.4 6.0 6.3

Financed by:anobras Lon 19 19

Dispouble Income (acuelated surplus/deficit) 19 21 23 24 27 29

With Project Overall Surplus/Deficit 10.5 9.6 15.1 16.6 20.2 22.7

-64 -

(RaEct fr gpat -deu)

MA - YI3hJSL O

llUmlal ad rA.AtIUMIa Bvabzatgm

Iluddpulity ___________________ Doe oi Final Evahugicu

A. Bnc ludB.-u Be. Pd- Rik Year

w~azpp1siy C ) ___

()_Total pqulmi (1970) SDI-la C ) Total P W 11 (19(0)Projeete papul*iai(U _ _

Projectedl puli(1)

p--Ls__r Mes (rail or *bol )le^uidpaipy ain (1980) _h2 SIai&. ___)

Net daeity of _albo p (ntm) () )(190) __Cil vml si t ( )Palmdi mr WbY Imi Z oi Totl Otbr/-plme efy ( )Primy ecnide .tacdfin in __t_3

C. 1 Raff to be zemdted ftgr&2lw _ 331

For ez daF Epmt for_ 1914depdal *zuw r . 19

C.2 Tmica Atistuvm R.diw for Pb1es PnSm

5~~~~~~~~I- I-[_lePbut Nmbw ~IsdOzw ~OrJdM caftrct

1. _z 2 10/85 06/862. Plnmdlf 1 prt 1 09/85 09/86 /PP/BmgwS3.4.

- 65 -A 5.3Pep 2 of 3

a MA

D. ZdaLk Arei for frt PrMq 'E ft&Lmft _mmt ls to be de by 1ualm 1Ten.

Prkgru P Orit)FPmLal M _sg t (C)Credit mawt ()tmicip.l Adenitratl(n.

Thdmicnl Serviee - Operationale ( ~)

Pro,ject: Desig axM Preparation

E. FRnmxdat Imforauticn (Rood m' z aw 5 Mm tX 'o MM).

Yer (Speif)

(l) (2) (3) (4) (5)

-'TiB $__S $ $ $ $

• Toes (Iiquestos)_ _ _ _ _ _ _ _ _ _ _ _ _ _ _

J Tariff user, d6a etc.

C-. Lixs , Pes, etc. (D era ii) __ _ _ _ _ _ __ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

i Inweet _

. Sburfrg transfer(pera !B

-Elqxture $S $ $ $

. MnratI E_ ___

* ctal Woz d um t ____t

Tafers. ebt sw i__

ute Enelue

- 66 -AN= 5.3PaOe 3 of 3

P F(I A

F. Fizuidal Akmiwis af the tbidil A aimts is attacbed. The foladzg Is a auury:

1. Do the umiclpality hbw a Fizmcal InfomaUon SstM?

Yes ( ) N ( )

2. Does gthe micipality hbw an updated cadter?

Yes ( ) No( )

3. oeg the mmicipality habw an updated fees and tariffs systm?

4. Other obmmatns (secify)

2.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~G. PaRtlm a n g l es of Fd erailmd/or Sttey Pardp the imfolAta£Io this doziut

Ne o£ tIh cme thi are_ prvde

1. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

4 .X ,_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _

?&l Enls doomt prvddl the uzrdplity Aidt th ifomtin in this docni(ony in ~etee are prvded).

f~~i i : i Xt---

'Ia I tij!j,j1

- 68 -

Pae 2 of 4

Otbers (Speify)

________________._ ( )_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ( )

2. Tica Project

* Ted ud.c nl P 1mm _____ _________ ____- . ( )

. Tedmica ____ __

u Unit Prices ( )

C. Theal bst of PrJect

1. Ewselr an i $_Crnf1 AsLt1 for V ec ds

2. Invett (2.1 + 2.2 + 2.3) $

2.1. Lax $2.2. MaddI ry and Equipent $

2.3. Other (Specify) $

3. Direct costa (3.1+3.2+3.3) $

3.1. C astnx:tim and Materials3.2. Labor (uber fore acomt utiizd)3.3. Others (specify)

4. Nstfor WosO ( + 2 + 3) (Bae aost) $

5$ Price ConIzV nie $-

6. Ptysdsa1 $ __I____

7. Sultot (4 + 5 + 6) $

8. -A (tm) $

9. MTA1 Cot (7 + 8) $

10. 12 for qzpervisr $-

11. Subto9 (9+ 10)

12. Int3ests wk dai cz $ _t_et

13. Cat to aztid (11 + 12) $-

- 69 -

-5.4Pp 3 of 4

D. 1ng P1

1. pEdcpal fiuxh $2. EA?RAS low $3. State ad federal t fe $4. Other loans (speify) $5. T1tal(1+2+3+4) S

E. Sdm&1fu of eit iaois

Papumits WAdiel____________Estlmtsl Nbesfuxd of ~wo _ __ __Estlueted euplet1im oE ____ __

Estheted date begqrg aperatitm of dC_

F. Ofor the exmtLei of uolc

1 .R dM the prject be axiutcted?

Torl bddibg ( )Fore rakm t()

Otber

2. Oor agmn E diare of project supervIsan

3. mediam to be ued fo st reovry

Fean ad tariffs RentsALi paymt ( ) Ot

4. Ozgentzation or Agency In diarg of qmerat1mz ad mmintsmmi am dxc iwim bowam oipetedk_____

C. FJnauial Awlnals (In cm oE rum wdes 1 )

1. Sesivity ad rldk aalysi (Ccose E_ )aw1ai.)2. Vinod-l rae dE return (ewle g cali*ti)3. Other 0- quaitfiable proJect rIPI (encie ad dmibe tl)

R. (Ei . ) Justtficatim (ew3m for i,rlects of o WZJD)

I. Requmatal Fimud2z Stmm

RR__-__- m PS,

- 70 -

AM 5.4P_ 4 of 4

J. Pziiu for ftymmft urolect

a) WJAS' TeLclmi aLtam __Other a cy_

b) cAtanc(l)

c) Name__________________

K. Other ainrated fmfonim an! additiaml nu the project (1close)

Na. of pesmm in durp of prepaing dds do_ ___

ht_oizatc of Hzdc1pl Presidet CN )_)

L. Thfozitian to be auplte ewIuive,.ly by EANC

Date ofret___Date of pprol of credit __GO&d of mappaml_________Avx of authorized credit ____________

Interest rate __ _Te__ _ Year_ _Period of g--Eaqet. date of cu±m3ct_ ______

I I!l wLthRd prevoly c d if M InPro Form "A'pat fi a tpreas with preialy axpa infrntams in Pro FoP "A"

- 71 - ANNEX 5.5

MEXICO


CONTENTS OF THE OPERATING GUIDELINES FOR THE FORTAMUN PROGRAM

1. The OPERATING GUIDELINES for the FORTAMUN Program consists of 2 parts:Volume I which deals with concepts, procedures, etc. as detailed below,and Volume II, which is an operational guidebook on MUNICIPAL FINANCIALANALYSES prepared under the project for future use in Mexico on allWorld Bank assisted projects in Urban Development (including WaterSupply and Solid Waste Management), in which municipalities ore thebeneficiaries of Sub-Loans.

2. MAIN CONTENTS OF VOLUME I

a) Program Objectives and Contents

b) Procedures to be followed and Chronology

c) Model Pro Forma for Sub-Borrower Pre-Appraisal (A)

d) Model Pro Forma for Sub-Project Appraisal (B)

e) Model Sub-loan Agreements

f) Procurement Guidelines

g) Recommendations on Cost Recovery Mechanisms

I) Accounting, Auditing and Reporting Requirements

i) Monitoring and Evaluation Indicators

j) Index and Directory of participating Agencies

3. MAIN CONTENTS OF VOLUME II

a) Definition of Concepts and Data Requirements

b) Analysis of Historic Data and Other Indicators

c) Financial Projections

d) Financial Impact of Projects (Internal Rate of Return: Net PresentValue; Cash Flows)

e) Conclusions, Observations, and Recommendations to Users ofHandbook.

- 72 -ANNEX 6.1

MEXICO


An Overview of Municipal Finance in Mexico

1. Municipal governments in Mexico have two basic sources ofrevenues, each equaling approximately 50% of total revenues in 1982. Thefirst is made up of municipal direct collections, over which municipalitieshave full discretion, within legal limits, in their use. Local directrevenues are:

- impuestos local taxes (mainly property taxes in the medium tolarger cities);

- derechos, including licenses, certificates and use permits;

- productos, (primarily service user charges including markets,slaughterhouses, and water, sewer and drainage systems); and

- aprove_hanientos (which basically include all other localrevenues - not to be confused with direct Federal and statesubsidies which in larger aggregate tables are mixed with localaprovechamientos); these mainly include rents, sale of mnicipalproperty, interest, and miscellaneous income.

Together, these four categories accounted for 45% of total municipalrevenues channeled through municipal budgets in 1982.

2. The second group consists of two distinct categories. The first,direct Federal or state subsidies (8% of total revenues in 1982) andmunicipal borrowing (4% in 1982) appear to represent a relatively smallamount of municipal financial activity. Not counted in the Federalsubsidies, however, are direct Federal and some state financing ofmunicipal infrastructure projects. SPP, for example, might finance a watersystem project directly for a municipality without the funds ever appearingin the municipality's budget. Estimates for the level of this type ofFederal financial assistance are difficult because 'municipal' projects arenot categorized distinctly from others, such as rural irrigation. However,if added to municipal revenues, SPP estimates that the figure is from 25%to 35% of total municipal revenues.

3. The second distinct category is municipal revenue sharing in theFederal participaciones' fund (42% in 1982). These were instituted in1979 with two objectives. The first, was to discourage municipalities fromlevying taxes on sales and produwtion, a Federal tax base also, in order to

- 73 -

ANNEX 6.1Page 2

minimize double taxation of a revenue source. The second wasredistributive - to transfer resources from areas of higher commercialactivity to areas with overall lower resources. These transfers are onformula basis, changed each year, with a hold-harmless provision - nomunicipality will get less than it received the previous year. Onceparticipaciones are transferred to the municipality, the local governmenthas complete discretion on how this revenue source will be used. Thus,participaciones are not truly a Federal subsidy, but are a formuladistribution of revenues managed by the Federal Government.

4. During the 1977-82 period, the most striking trend in municipalrevenues was the rapid increase in participaciones as a proportion of totalmunicipal revenues. This proportion increased from 25% of total revenuesin 1977 to 42% in 1982. This increase in relative proportion resulted froman average annual rate of growth of 33% (constant pesos) forparticipaciones, while total revenues were growing at only an 18% annualrate. Impuestos, derechos, productos, and aprovechamientos grew at therelatively lower rates of 9%, 12%, 3%. and 15% respectively, over the sametime period.

5. Caution must be exercised in interpreting these trends, however.The participaciones fund is made up of revenues that once were localown-source revenues, collected by all of the large municipalities and manyof the smaller ones. To prevent double taxation, the Federal governmenttook over these sources in 1979 and replaced them with a revenue sharingprogram that insures at least no relative losses to municipalities.Thus, while it no longer is a local own source revenue in the same sense asthe property tax, for example, participaciones should not be counted adirect Federal subsidy.

6. In summary, the 1977-82 period presented a significant shift fromstrictly local tax resources to a large role for a revenue sharingprogram. This occurred largely by the Federal government's consolidatingpreviously local taxes on production activities and establishing arevenue sharing program. This permitted some degree of redistribution andimproved the efficiency of overall public sector taxation.

7. More recent changes in Federal policy and legal requirements willimprove the revenue generating capacity of municipalities. Modification ofArticle 115 of the Federal Constitution provides the legal instruments forsubstantial increases in municipal own-source revenues. These include thetransfer of the property tax (impuestos) and water and sewer system(produc_.os) authority and administration from the states tomunicipalities. Municipalities also have considerable potential forborrowing. Since 1980, aggregate municipal borrowing has been less thanaggregate cash reserves. This conservative municipal fiscal policy hasresulted in a reduction in the amount of municipal services that could havebeen produced if municipalities had taken a higher financial leverageposition. On the other hand, the period under analysis was one of highInflation and extremely high nominal interest rates, so it may be judged

- 74 -

ANNEX 6.1Page 3

rational for municipalities to have adopted low leverage policies. Inaddition, most municipal personnel in smaller cities, and many in themedium sized cities, are not professionally trained in either municipalmanagement or finance and have culturally influenced biases againstborrowing. Their aversion to borrowing can be attributed at least in partto their lack of training and to a lack of awareness of the potentiallysound business reasons why borrowing to finance municipal capitalinfrastructure is a good practice for most municipalities.

8. On the expenditure side, there have been less significant shiftsin categories than observed on the revenue side. Total expendituresincreased at the rate of 12.4 percent in real terms from 1977-1982, a rateof growth consistent with State and Federal trends over the same timeperiod. Gastos administrativos (administrative expenses) and deuda publica(debt service) increased at rates slightly less than the average, whileobras publicas (public works) and transferencias (municipal transfers tobenevolent organizations) increased slightly more than the average.

9. Both revenue and expenditure accounts emphasize a line-itemapproach to budgeting, and little program budgeting takes place. Theseaccounts currently provide little insight into current versus capitalbudgets, or into the relative importance of maintaining the flow ofservices from the present capital stock versus expanding the capital stockto serve new beneficiaries.

10. Overall, municipal revenues have grown faster than expenditures(average annual rates of 18% and 12% in real terms, respectively) andmunicipal borrowing has maintained a constant proportion of totalrevenues. Thus, the resources and the borrowing capacity are sufficient tosupport increased capital investment to improve the quality of municipalservices and to expand their coverage. In addition, the very low growthrate in user charges (productos) of only 3% per year leaves a financingsource for capital services relatively untapped at the present time. Themain obstacles to additional capital investment have been inadequateounicipal management capacity and the correlated lack of understanding ofthe potential for utilizing credit of finance capital investment ratherthan strict lack of resources. For those municipalities who do considerborrowing, the broad array of programs, interest rates, and applicationsprocesses discourages participation in available municipal credit programs.

- 75 -ANNEX 6.2

MEXICO


BANOBRAS FINANCES, ACTIVITIES AND FUTURE ORIENTATION

Backcground aud Constitution

1. BANOBRAS is the acronym of Banco Nacional de Obras y ServiciosPublicos (National Bank for Public Works and Services). It was establishedin 1933 as a National Urban Mortgage and Public Works Bank, but in the in-tervening years, its constitution and activities have been modified fromtime to time. BANOBRAS' most recent Organic Law was enacted in 1980, but adecree of July 1985 specifies a number of changes in its constitution andfield of action (paras 17-18 below).

2. BANOBRAS' capital was fixed under the 1980 Organic Law at 5billion pesos (increased in 1984 to 10 billion), divided into four catego-ries; Series A, which must represent at leant 51% of capital, held by theFederal Government; Series B, bearer bonds for subscription by the public;and Series C and D (less than 1OZ of total capital), available respectivelyto Federal Government agencies and local authorities (States and munici-palities, together with the Federal District). The C and D series cannotbe transferred or pledged without BANOBRAS' approval. Under the 1985Decree, however, only two categories of shares are contemplated, Series A(66%) and Series B (34%).

3. Under the 1980 Law, BANOBRAS was managed by a board of eightdirectors, two from each group of stockholders, with the Secretary of theTreasury as president. The Federal Government, acting through the TreasurySecretary, has the right of veto over board decisions or stockholders' re-solutions if it considers these inconsistent with governuent financial andmonetary policy.

Activities

4. BANOBRAS operates under the general provisions of the RegulatoryLaw for Public Service Banking and Credit. Under its 1980 Organic Law, itsauthorized fields of activity comprise mainly the financing of services inthe public sector, especially urban infrastructure in areas of urban, tour-ist, port and housing development (including low income housing) and trans-portation by sea, river, air and land. It can act as a financial agent ortechnical adviser to the Federal Government, the Federal District, statesand municipalities in planning, financing and executing works and servicesof a public or social nature. BANOBRAS is authorized to guarantee securi-ties issued by other public authorities, and issue guarantees to Mexicancompanies carrying out public works projects abroad, in order to stimulatethe export of technology; and to carry out all the activities of acommercial bank.

- 76 -ANNIEX 6.2Page 2

5. BANOBRAS is empowered to contract directly for external loans andcredits, as well as for local credit lnstruzmnts, and the only securityrequired is a deposit with the Central Bank equal to 4% of the value offixed-term securities lssued. Loans advanced by BANOBRAS may be secured onreal estate, cash reserves and revenue resources of the public service con-cerned; but in the case of loans to state and unnicipal agencies, BMNOBRASis aloe required to carry out appraisals to satisfy itself that the obliga-tions under the credit can be met without prejudice to other services ofthe borrower. BANOBRAS may not make loans to non-residents, or forpurposes not authorized by its Organic Law, nor may it invest in companieswith unlimited liability.

6. The table belcw shows the sources of funds raised by BANOBRASduring 1982-84, a'l expressed in constant 1984 pesos, to eliminate theeffect of local inflation. The figures show clearly the down-turn after1982 as a result of the Federal Governuent 's austerity program, and an in-creased recourse to bond issues, to compensate in part for the reduction inloans and loan repaylnts. Part of BANOBRAS' external debt was restruc-tured in 1983. As part of this restructuring, the Federal Governmentassumed all exchange risk liabilities. A formal agreewunt was also reachedin late 1983 by which the Federal Government guarantees all loans fromBAMOBRAS to State-owed Institutions.

Table 1

BANOBRAS - Sources of Funds 1982-84 (billions of constant 1984 pesos)

1982 1983 1984

Loans 314.6 76.5 46.4

Loan Repayments 198.6 55.4 65.0

Bond Issues 15.6 24.2 40.7

Net Checking and Savings Deposits 3.2 3.3 14.9

Profits and Equity Increases 6.7 16.8 33.7538.7 176.2 200.7

7. BANOBRAS prepares annually a 5-year lending program, which issubmitted for approval by the Federal Government and if necessary adjustedin the light of the latter's investment policies and priorities under theNational Development Plan.

Financial Performance

8. The table below shows BANOBRAS' balance sheets and income state-ments, 1982-84, in current pesos. BANOBRAS made a modest surplus in eachof these years, rising to 4.7 billion pesos in 1984, out of which 1.0billion was paid as dividend (10C on the nominal value of stock).BANOBRAS' accounts are audited annually by recognined external auditors,whose reports are made available to the World Bank.

- 77 - ANNEX 6.2Page 3

Table 2

A - BANOBRAS - Sumary Balance Sheets 1982-84 (Audited)(Billions of Pesos)

ASSETS 1982 1983 1984

Central Bank deposits 5.0 7.6 17.1Other Bank & Cash Balances 2.0 1.7 4.9Securities and Term Deposits 11.8 22.2 39.7Loans 524.5 940.3 1,309.3Accounts Receivable, Real Estate& Other Balances 45.3 77.2 85.9

588.6 1,049.0 1,456.9

LIABILITIES AND EQUITY

Deposits, Short Term Liabilitiesand Accruals 68.0 137.6 127.6Debt-Federal Govt. & Agencies 126.6 125.5 220.4

-Mortgage Bonds and OtherTerm Liabilities 63.4 102.4 146.5-Banks 320.5 671.8 939.3

578.5 1,037.3 1,433.8

Equity - Capital 5.0 5.0 10.0- Reserves & Retained

Earnings 5.1 6.7 13.110.1 11.7 23.1

588.6 1,049.0 1,456.9

B -BANOBRAS - Summary Income Statements 1982-84 (Audited)(Billions of Pesos)

Interest, Dividends & Com,issions 84.1 150.1 173.5Other Income (net) 0.8 2.4 0.9

8__-9 152.5 17_4_.4

LESS: Interest and Comnissions Paid 76.5 139.5 154.9Operating Expenses 7.3 9.6 12.2Taxes and Employee ProfitSharing 0.5 2.0 2.6

Net Earn0151.1 4.7

. Net Earnings 0.6 1.4 4.7

- 78 -

ANNEX 6.2Page 4

Lending to Local Governments

9. BANOBRAS makes advances to states and municipalities and fortheir agencies through several 'windows or lines of credit, as follows:

FIFAPA (Fondo de Inversiones Financieras para Agua Potable yAlcantarillado - Water Supply and Sewerage InvestmentFurd). This fund, the resources of which can be lentonly to municipal or state water companies, operates as anational program, primarily directed at medium sizecities, but has hitherto lent to cities over 100,000population (excluding the three largest cities of MexicoCity, Guadalajara and Monterrey). It has been supportedby three Bank Loans (1186-ME, 1913-ME, and 2281-NE),totalling US$265.3 million. The latter two are activecurrently.

PACDU (Programa de Accion Concentrada para el Desarrollo Urbanode la Zona Costera del Golfo e Istmo de Tehuantepec -Concerted Action Program for Urban Development in fourGulf States), intended for a variety of urban infrastruc-ture investments, in support of which Bank Loan 1990-ME(US$164 million) was approved.

FOMUN (Fondo Fiduciario Federal de Fomento Municipal - FederalTrust Fund for Municipal Promotion) is another nationalprogram for general urban development, intended mainlyfor smaller municipalities and supported by two loansfrom tne Inter-American Development Bank, totalling US$80million.

BANOBRAS' ovn urban development program, available to any size ortype of municipality. However, the relatively highinterest rates applied have resulted in its loans havingbeen mainly concentrated in the largest cities.

10. The current cost of loan funds in Mexico is about 57% butBANOBRAS lends at lower Lates depending on the fund and purpose (thus,water supply loans may be at 10% under FOMUN, but 25% under FIFAPA; underBANOBRAS' own program, the average is also about 25%).

11. The table below shows the distribution of BANOBRAS lending 1982-84, all expressed in constant 1984 pesos. It again mirrors the downturnafter 1982, especially in loans to federal agencies. Loans to states andnunicipalities decreased in real terms but increased as a proportion of to-tal lending; loans for water supply and sewerage, however, show a sharp in-crease in 1984 and this trend may accelerate as a result of the decentrali-zation of responsibility for this service.

- 79 -

ANNEX 6.2Page 5

Table 3

BANOBRAS Credits 1982-84

(Billions of Constant 1984 Pesos)

A - Distribution of Credits

1982 1983 1984

Federal Government and Agencies 206.1 63.7 39.2es and Muaicipalities (excl. credits

under People's Housing Fund) 47.4 22.9 29.8Other 69.2 37.8 58.1

322.7 124.4 127.1

B - Purpose of Credits to States & Municipalities

Water & Sanitation 7.5 6.7 17.1Markets 1.4 0.5 2.3Slaughterhouses 0.5 0.1 0.2Electrification - 0.3 0.4Paving and Urbanization 6.4 3.7 3.3Transportation - - 2.8Housing 0.8 0.3 1.7Other Services 30.8 11.3 2.0

47.4 22.9 29.8

Financed from:

FIFAPA 4.5 3.3 7.5PACDU 0.5 3.7 3.5FOMUJN 1.9 0.7 1.3BANOBRAS' own program 40.5 15.2 17.5

47.4 22.9 29.8

12. The total of credits authorized in 1984 was 55.6 billion pesos ofwhich nearly two-thirds was for water supply and sanitation (33.2 billionpesos).

Other Activities in Collaboration with World Bank

13. BANOBRAS has been the channel for investment of World Bank loansin a nuuber of projects, other than those mentioned above. In all,BANOBRAS has acted as financial intermediary in ten Bank projects. Total

- 80 -

ANNEX 6.2Page 6

loans approved to date for MANOBRAS amount to some US$1,225 million, oflwhich about US$450 million has been disbursed. With the exception of theFIFAPA loans whose beneficiaries are water companies, most of which areselected and coamitted during project preparation, BANOBRAS has haddifficulty in municipal sector loans (for example, 1990) in generatingInterest in the programs. Although a variety of circumstances may accountfor this, two factors seem to dominate - the lack of promotion of theseloan programs and the complexity of the application process.

14. BANOBRAS historically has not been a major lender to municipalit-ies. It is unaccustomed to promoting municipal-related loan program;rather, it has adopted a rather passive role in the municipal sector, pro-viding information to municipalities about possible loan programs and theirterms and conditions.

15. BANOBRAS' major loan programs to municipalities to this pointhave presented a confusing array of interest rates and terms. As noted inparagraph 10, loans for the same purpose (water supply) may vary from 10Zannual interest to 25% annual interest for FOfUN and FIFAPA, respectively.Overall, the lowest interest rate is ln the PACDU program (3% to 5%) forproduction activities with the FIFAPA water loans at the highest. Wheremore than one program is available to support a particular municipal re-quest, there has been no policy for determining which program to select.

16. Finally, the processing time in BANOBRAS' various programsexcluding FIFAPA has been a decided deterrent to municipal borrowing. Theaverage time taken from the initial application to final approval has been10 months, and from up to 24 months before the first installment isreleased. Corrective actions in each of these areas are necessary to getBANOBRAS' municipal loans o. an effective track. These are discussed inparagraph 20 below.

Future Orientation of BANOBRAS' Operations

17. The government decree issued in July 1985 amends the status ofBANOBRAS from a 'Sociedad Anonima' (limited liability company) to a "Socie-dad Nacional de Credito, Institucion de Banca de Desarrollo" (NationalCredit Institution and Development Bank) as from August 1, 1985. A newOrganic Law is under preparation, to give effect to the change inorientation of BANOBRAS' activities implied in the new status.

18. The intentions behind the new legislation reflect the govern-ment's desire to reshape financial institutions for the more effective im-plementation of its National Program of Development Finance 1984-88; underthis program, the federal authorities intend Mexican financial institutionsto focus their activities on modernizing and reinforcing the basic infra-structure, in order to maxmize productivity.

19. In pursuance of this policy, BANOBRAS will become a multipurposeI'eelopment bank, initiating and preparing projects itself (including the

necessary studies). At present, BANOBRAS is only partially involved inappraisal and supervision of Investment projects. It will in future be

- 81 -

ANNEX 6.2Page 7

able to issue bonds specifically ear-marked to individual sectors or pur-poses, and generally increase the volume of credit available to states andmunicipalities. In this way, it is hoped to overcome the deficiencies ofthese authorities in infrastructure and urban equipment, housing and trans-port. As part of the change of direction, BANOBRAS is likely to graduallydivest itself of commercial banking activities.

20. Recognizing the limitations of its current programs for statesand municipalities, BANOBRAS has undertaken a complete review of itsvarious windows, their terms and conditions, and its program of stimulatingmunicipal development. A preliminary proposal has been prepared, in draftform (not yet reviewed), to revise the interest rate structure, the maximumamount of any particular project that can be financed, and the repaymentterms. Four categories of project types, five city types, and two to threeurban-rural classifications within each city type have been suggested asthe categories for determining interest rates. This unfortunately wouldlead to a complex administrative program since there would be as many as 52different interest rates. In addition, 25 different repayment periodswould apply, depending on type of loan and type of municipality.

21. "or BANOBRAS' state and municipal programs to be successful, con-siderable simplification of the structure (interest, terms) is necessary.In addition, a program for simplifying the processing time and for pro-moting municipal borrowing for capital investments is needed to get the en-tire program moving. Finally, BANOBRAS should be encouraged Lo renegotiatemost of its state and municipal portfolio financed by IBRD, IDB and otheragencies to develop a consistent structure and policy.

22. There is little doubt that BANOBRAS has the potential to carryout the mandate conferred on it, and equally little doubt that it hasoperated successfully in the past. The new responsibilities, however, willdemand an even more dynamic approach to preparing, evaluating and super-vising investment projects, without which there would be a risk thatBANOBRAS might relapse into a mere passive channel for funds. Its manage-ment, therefore, supported by the SHCP, intends to revise the staffstructure to permit increased activity in, and improved capacity to offer,technical assistance in support of the government's policies ofdecentralization and social development.

- 82 - ANNEX 6.3

MEXICO


Matching Grants and Impact on the Fund (FORTAMUM)

1. The project will establish an investment fund (FORTAMUN) inBANOBRAS capitalized by two sources. The Bank loan will provide US$18million and the Government of Mexico will furnish US$18 million for a totalinvestment fund of approximately US$36 million. The available capital willbe disbursed to municipalities through a combination of loans and grants.The grant portion of the fund will be used to take into account thefinancial capacity of different municipalities, with those financiallybetter off municipalities eligib'e for no or low matching grants and poorermunicipalities with serious service deficits eligible for a higher matchinggrant. The actual distribution of matching grants is still to benegotiated with the GOM; however, as a result of analyses conducted forappraisal, the mission strongly recommends that the overall investment fundbe operated at approximately 85% loan and 15% grant.

2. Three scenarios for the operation of the fund have been modelledto assess its characteristics. The scenarios vary in the overallproportion of the fund consisting of grants and the distribution of thosegrants among the five classes of municipality. Four types of loans areconsidered in the simulations: water and drainage, markets, urbanizationand other. For analysis purposes, the distribution of the fund among thesefour loans types and among the five classes of municipalities followed the1983-current history of the FO(UN (Annex 6.2, para. 9) program as the bestavailable estimate of the probable distribution of actual projects. Theaverage size of each of these loan categories was based on BANOBRAS'current lending for similar projects.

3. Initial simulations focused also on assessing the effects ofvarying interest rates. During the course of appraisal, however, agreenentwas reached to work with a uniform interest rate across all loan and citytypes, a change that will reduce the current confusion in BANOBRAS'numerous program options for municipalities (currently, there are iI excessof 50 different interest rates to municipalities under various BANOBRASfunds). Consistent with current policy options under review in BANOBRAS,the mission has also recomuended to BANOBRAS that the other loan programsbe modified to a single, uniform interest rate.

4. Consistent with the terms of the General Interest Rate Agreewint(GIRA), the one interest rate will be tied to the average market rate c'

- 83 -ANNEX 6.3Page 2

interest (CPP). At the time of appraisal (August 1985) that CPP rate was57%. With the percent of CPP established at 67%, as of that date, theactual interest rate would be 38%. Under the terms of the GIRA, thepercent of CPP will rise to 80% by 1987. At that time, the interest rateissue will be reexamined. If the rate of inflation has fallen as expected,the BANOBRAS will be encouraged to shift to a positive, m*rket rate ofinterest. For purposes of the appraisal, positive interest rates have beenassumed beginning in 1989.

5. For the three simulations, the sumary assumptions are asfollows:

% Matching Grant

City Type 1 2 3

I 152 5% 0%II 25% 15% 5%III 35% 20% 10%IV 50% 25% 25%V 75% 65% 30%

Weighted Average 50% 33% 16%

I/ Interest Rates: 67% CPP in 1985 increasing to 80% in 1987 and reachinga floor of 15% actual interest by 1989 for initial loans under theprogram.

1/ Inflation Rates: 64% in 1985 to 7% in 1989 and thereafter.

I/ Source: LCPMX.

6. The simulations were conducted twice, first with the initiallending to municipalities and subsequent repayments the onlyconsideration. This first simulation illustrates the decapitalization ofthe fund over a fifteen year period due to the combined effects ofinflation and the interest rate being held to 80% of market rates.

7. Table 1 illustrates this decreasing value of the fund and itsconseqaent decapitalization through the period to year 2,000, given thethree scenarios.

- 84 - MX 6.3

Page 3

8. Table 1 also illustrates the same fund operation with each year'smunicipal loan repayments reinvested at the assued 152 interest rate. Ascan be seen from the graph, the fund shows a steadily increasing growthrate through the year 2,000, with the Initial size and the overall totalvarying according to the matching grant formula variations.

Impact of Implementation Period

9. With reinvestment of the fund, at positive market rates, the fundincreases its capitalization over tine, as Table 1 illustrates. Forproject planning purposes, two different implementation periods wereconsidered -- a four year and a nine year period. The effects of thesedifferent implementation schedules are illustrated in two ways. Table 2takes Scenario III (from preceding tables and Table 1) and plots the twoimplementation periods through fifteen years (in constant pesos). There isa sizeable impact of stretching implematation from four to nine years asmeasured by the number of municipalities that might be able to borrow.Until 1992, roughly half as mny muicipalities will be able to participatein the fund under the nine year implementation as under the four year.After 1992, the number of mnicipalities participating begln to converge.

Additional Capitalization of the Fund

10. Table 2 assumes only the initial capitalization of the fund.After tie initial lending to approximately 340 municipalities, relying onlyon the fund's earnings (repayments from the first 340) restricts theability Gf the fund severely. Additional capitalization within the firstfive years of the fund is essential in ordtr to have a significant impacton mnmicipal development. Based on the analysis of sample mmicipalities(see Appraisal Methodology in Annex 5.2), mny of those in category IV,like the Tuxpan example, are able to afford loans in the 35 million pesos(US$140,000) range. Thus, additional capitalization of the fund at a veryconservative estimate of $100 million within five years would seem to beneeded to meet basic mimicipal borrowing requirements at the presentlevels.

Financing Polics

11. In addition to its role in meeting municipal borrowing needs, thefund also has a major impact on policy. The fund noves BANOBRAS from acurrently unwieldy municipal lending program, rendered mainly ineffectiveby the administrative complexity of more than 50 interest rates, to onlyone Interest rate formulation. In addition, it moves BANOBRAS from fixedrates of interest substantially below the mrket rate toward positivemarket rates of interest. Finally, it establishes the fund as aself-sustaining, revolving fund.

Monitoring Performance

12. Fund performnce will be monitored in relation to Table 2. Oncea mtching grant formula has been negotiated, a recalculation of the

- 85 -ANNEX 6.3Page 4

financial flows varying the inflation rate assumptions will be used to seta perforuance range for the fund. The specific loan conditions vllrequire reexamination of interest rates in 1988-89 toward the policy ofpositive interest rates (in relation to the urket rate) after theinflation rate falls below 15Z. In addition, BANOBRAS vlll be required tocalculate seniannually the average, minimum and _ xiuzu times for loanprocessing from the initial application receipt to first dlsbursement toensure improveuent in the processing tie. Finally, as actual detand forthe loan program is ascertained on an annual basis, preparation could beginfor an additional input into the fund.

MEXICOMUNICIPAL STRENGTHENING PROJECT

Alwatt Loan ScenadosWffh and Wthout Relnesment

4.0

3.5-

3.0-

j2.5-z2o - ,,0,,, oh

12'5ie ... ,~~~~~~~~~~~~~~~~~~~ ....... gO . ::e*Oem*u ......

1.0

0 L1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

-m Im R eitmhd i -1 wm cut Resnt i 6be-o*eee Reuwedtnt2 - _- W R9hwut Reh ftwent2

sRlhehtment 3 -'thout Reknwsrent3 ww Bw*-3M09.2

MEXICOMUNICIPAL STRENGTHENING PROJECT

Value of Loan Fund(billions of constant pesos)

3.0

2.8 -

2.6 - --- Y oe Irr enf atiotn

24 _ 9 Yean Inv4nentation

2.2-lo 0

2.0 =

1.8 0 o

1.6 -

1.4-

1.2-

0.4

0.2

1986 1989 1992 1995 1998

YhrId Ba*-2:3 0209

- 88 -

ANNEX 6.3Yable-3

MEXICO


Stusio I i Nhtirq ms* total at ON of Fed

Distriutio of proJim is I. liter I utdz. 0 tehued co 1964 ditfribtion ou Iof FM projts by city tpI Spj 2 0 0 0 -

ad by tp of Projet. Siu(vg) 5' 5 40.7 40.7 3M.bts 96.6 0 0 0

Int-rt is a mifon 67% S ran I5 15% 1% 1isof W Jldy, I,l OP a 5%) S OP 67% 67% 67% 6n

p IIPcest mtdsiq4 rat (a'u,: * projs. 16 2 6 0

50.29 Siu(av) 5.5 40.7 40.7 3.LPt lut 678 61.O 16.l15 0

rh wi#td aerap intwrst S ran 25% 8% 2 2rat using thus assumuious S OP 67% 67% 675 67%peals: Group IiI

3.L195 *qjs. 26 4 10 0Sizu(a) 5.5 0W 07 35

Total project mont I(pesos) bt lst S8I 10l5I2 264.5 0L0170. grant 35% S S 3%

S OP 67% 67% 675 6Piotal projt _mount () Group I

-Sa * projs. 6E a 1i 2Sizs(aq) 5S. 40.7 40.7 35.1

Total mount lIt bt lent 1469 16528 36.3 3.8(uilliois of pesos) S rant 50% 50D% 3% Su

-617 SOP 67% 67% 67% 6P

Total oult I0 * proj* 3 6 12 2(million of SI) Siz(av) SL5 40.7 7 35.

91.07 bt lu 0 2 st6a1 GO 12.1 104% rant 73% 75% 75% 75%

TOtl repid S OP 6;t 67 67% PS(million of *)

95.22

Total repaid(millm Cs de peos)

15741.5

- 89 -

ANNEX 6.3Table 4

MIEXICO


Suuwio 23 Ntchirq Brat Total at 33% of Fwd

Dimtrihutia of pojctu is Mater Noltuet thtauiz. Otherbu cm 194 distribution or" Iof FpM ojtu by city ty * proj. 2 0 0 0

d typ of Proju-t. ' ti.a(v) 55 40.7 40.7 3.BAlS lst 107.35 0 0 0

tur d is a iqfwo67% % grat 5% 5 5% 5%of W (July, 19f C 8 57) % CPP 67% 67% 67% 67%

amp 11PEren-t .tdiiu ra* (we): projs. 16 2 6 0

33.29% Sin(avg) 5L5 40.7 47 36.8Ant lent 7654 69.19 207.57 0

Thu wiht wrap inteuest rant 15i 15% 15% 15Srate hiqA th us mptis % CPP 67% 67% 61% 67%equlss rop 111

35.19% * proiL 26 4 10 0Sizo(avg) 56.5 40.7 40.7 36.8

Total projuct muet (polos) lbS lut 1175.2 130.21 32L6 01017L4 5 grant 0% 20 20% 20%

S CPP 67% 67% 67% 67%Total project wEst (S) G.o.p IV

$3635 proju. 2 a 18 2Siz=(ag) 565 40.7 40.7 36.8

TOa t lust AS lu* 22035 244.2 5$. 42(million of puw * % grant 2S 25% 25% 2s

679042 % tP 67% 67% 67% 67%Group V

Total mountloot Ip ojin. 34 6 12 2(million of S) a Siu(avg) 565 40.7 40.7 3L6

94.25 abt lust 672.3 E.47 170.9 25.76S grant 65% 6S 6% 65%

Total mm! rpad S CPP 67% 67% 67% 67%(millions of O)

S76.54

Total must upidfuillo..s de pin 2U)

21430.57

- 9o -ANNEX 6.3

MEXICO Table 5


Sewrio 3m Nt l inq Dwit Total at 16.66% of Fw,

Ditrishti m of pqojit is Matr Nmks IhbmiL Other_uh an I9S distribution Goup I

of FMUt pts by city type Pro. 2 0 0 0ad J ty of Pojc. Si(v) 56.5 40.7 40.7 3.6

bdt lot 113 0 0 0Inturt is a ifo 67% % raVt 0% 0% 0% 0%of CPP (Jely, 19iE CP a 57%) % CP 67% 67% 67% 67%

p IIPen .tehiqgrut (an): O proji. 16 2 6 0

16.64% Siz(av,) 5.5 0 40 366eAd let a51. 77.33 231.99 0

l. wi*te vep intrst % grat 5% so 5% sorat (atul u_but rat) % WP 67% 67% 67% 67%Wausti .on"p III

3.19% projs. 26 4 10 0SiD(avu) 56.5 47 7 3

Ta projcd -_t (pesos Ant lnt. 13Z.1 14652 3563 01017L4 % grant 10% 10% 10% 10%

% CP w67% 67% 67% 67%Total projet I (6) Group IV

$3635 # proj. 52 a to 2Sie(av) 565 40.7 4 36l

Total mot lint st lent 2497.3 27676 6Z.71 62.56(million of po) % grant 15% 15% 15% 15

84.41 % CIP 67% 67 67% 67%6M v

TOSl lott S prjn. 34 6 12 2(million of *) Siz.(q) 5.5 40.7 7 36.6

S3.30 Pat lint 134.7 170.94 341.8 51.52% 9,,t 30% 30% 30% 30s

Total mwut mpid % WP 67% 67% 67% 67%(million of 6)

S61.67

Total mw_t rpid(millo. de psos)

27067.12

z 1N illICt aIUlpal l truzttk.asn Prajct,.Estlait I t, n,_5..t c, k.

(US $ 0001

Project e__poomm_t_ _ 19 1011 Itt7 19 1991 1992 1993 1994 S TOTAL I M.A.C

L lSlpl I f Oers o t

CCIII, ~~~~~~~~~~~~~~1,009 4'' t 'l''"h lets I, i's 6'@Q *u m §$

tI"e ttrit[fswer@ 9t31 5t 57 22 12 99Pregres ~~~III 214 257 120 6II

Wight Atll 934 144 I9 114 346 0 s,22u 212. 2Kt U Cil k ohdst tC I Pritlnl ktlvliti

-cum lal [tiff 114 ISO to III 14 701 it-emit lalgriats III 42 93 31 11 311 It

ti-trtai L2 291 241 242 142 it I 4 e 1,e6 e11n3. Eqipmt ad lktIwIl. 9f 240 2 1,479 I

li-Ittl a 11-3) 2,1n 1,907 2,42 7l 417 0 e 0 0 e 7,1n inflislca2 ti.. 107 32 35 3 2 0 I 0A 0 27t "IPrice catia. U 4 411 tot Ill 0 4 0 I I 1,121 In1

Total A 2,71 2,147 3,01 122 in 0 0 0 I I,e22 m71. r al ad ttatq Itiff k l t

' 1 TraI.iq 447 U 23 T is I,ff1 n3. CubIcalr k d lucs m Fo 1 5 2 21 is

X tetitirtl e sistuce S F llSi ~~II* 150 27 10 60 t45 444mrt-ta rSt.dy tript W . % 0 50 312 Su-kcscutnatlu Fraii4 f4I U 15,2m 511 342 3,920 In2

l-tatal S.3 S42 1,043 1,7 443 452 0 0 0 0 0 4,M7 I

4. Iofwatt, Syttm ad Stilt., 212 125 100 0 0 37 WAS. Eipialt ad ktIrlals t11 is 2l 0 0 22 9

lII-total a ll-St 1,42 1,149 1,14 123 452 0 0 0 0 0 4,2122ftrIcaclu tim. It 7 3 0 I 0 S 0 0 I o eiPrIce coatl. 52 17 S32 201 170 0 S 0 0 0 22 221Total 1,144 ,n1 2,097 924 422 0 0 0 a 7,0 U

C. IsfraItroctorm, d Rlatled Iitamto :,270 5,49 4,710 9,150 10,371 9,150 4,10 4,270 3,00 2,44U 11,6K 325

2 tl o I, at 1112 112 122 262 112 112 112 212 122 122 1,'24 nPravollef fipnuo ~ ~27 2 27 27 27 2 7 21 27 27 27 274 99

l-Ntotal I 112) 210 212 210 210 210 210 212 210 210 210 2,97 Prm- ."tI. 7 2S 39 i 19 110 124 3I IS5 Ul t

rdd I 217 232 249 2U 39 306 320 S3 149 s5 2,2 M

.nW hull" Citti 0,2n 9,155 11,174 0,61 2I,440 9,340 4,30 4,410 3,20 2,i50 74,9 npli4stcAl ostts. tit 19 a 3 2 0 0 I I S 216 9price autih. to9 S" Hi 460 40 94 II0 124 I39 IS 2,67 II

Tttal ProJKt C1ts S,f;' 9,s 12,051 11,2U4 11,15, 9,414 4,420 4,404 3,39 2,6M W,0 E ll

-92 - AMf 7

.TaWre 7. PTable 1: Sumeary of Project Costs

(5 Year Project mplementation .~~~~~~~~~~~~~~~~~s oo

Z FREIGN I TOTILProject Component LOCAL FOREIGN TOTAL ERCHAIIGE BSE C0STS

A. Municipal Staff Development I

1. Staff Training 5, 123. 103 5,226 22 6.9912. Tehnical ASIs. I Promotional Activ. 1,016 0 1,016 02 1.3413. Equipmnt and Naterials 296 1,183 1,479 g02 1.951

SUf-TOTAL A 6,435 1,296 7,721 171 10.191

3. Federal and State Stiff Development

1. Staff Training 1,051 0 1,051 0x 1.3912. Training of Trainers 21 0 21 0x 0.03B3. Technical Assistance and Training ,6 3 ,q 9 .i4. Information System. and Studies 3,56 320 4,397Bo055. Equipmnt and Materials 40 162 2 90Z 0.27?

SUB-TOTAL B 4,764 1,344 6,109 22Z 8.05S

C. Infrastructure and Related Investments 45,750 15,250 61,000 25Z 90.392

D. Project Administration 1,049 0 1,049 0Z 1.393

TOTAL BASELINE COSTS 57,999 17,B79 75,979 242 100. 00Z

Physical Contingencies 65 134 200 67? 0.261Price Contingencies 1,944 306 2,250 1t4 2.961

TOTAL PROJECT COSTS 60,008 19,319 79,327 232 103.232

FINANCING PLAN - US o000

Governaent of Mexico 39,164 0 39,164Bank 20,844 12,319 39,164

ESTIMATED DISBURSEMENTS

Bank Loan Bank Fiscal Year US$ '000)

1997 1989 1999 1990 1991

Annual 7,004 9,475 10,143 B,705 3,837Cumulative 7,004 16,479 26,623 35,328 39,164

ECONOMIC RATE OF RETURN: MIA

1Tthe prOJeCt costs are net of dutie~s and taxes.

- 93 MM-

IC17R MEXICO: uNicipal Strngthemn ProjKt T bl* .307-jan46 Estimated Instent Sd ule

[US5 s 000)

ProejKt C1ONuts 1996 1917 19 199 19% TD1IL I F.E.C

L llicidl Staf kNl,^vent1. Staf Training

Snior Officials 474 694 1,009 2,176 02-id-led Officials 251 433 638 426 228 1,976 01-Training of Trainwrs 38 59 97 22 12 219 Q2-Deconceitratimn Progr 171 214 257 129 96 955 121

Sub-total A.1 934 1,400 1,991 576 326 5,226 212. TKchnical ksistance I Proeational Activities

-Increyntal Staff 184 194 14B lit 74 701 o0-Course Materials 111 63 93 31 17 315 O0

Sub-total A.2 295 247 241 142 91 1,016 0a3. Equipmt and Materials 95f 260 260 1,479 90S

Sub-total A 11-3) 2,19 1,907 2,492 719 417 7,721 17SPhysical centin. 107 32 35 3 2 179 6f!Price cantin. 90 20e 475 201 157 1,121 1O0

Total A 2,375 2,147 3,001 922 575 9,022 tnS. Federal and State Staff Developmnt

1. Staff Training 447 290 235 79 1,051 022. Training of Trainers 9 6 5 2 21 OS3. Technical ssistance and Fellowships

-Consultants 1o0 150 275 9 60 665 40I-Shrt-tern Study Trips 59 59 96 50 50 312 502-Deconcentration Progra 684 B55 1,026 513 342 3,420 122

Sub-total B.3 B42 1.063 1,397 643 452 4,397 192

4. Inforation Systems and Studies 212 125 100 0 0 437 BOI5. Equipmet and Materials 111 A5 26 3 0 202 go9

Sub-total E (1-51 1,621 1,549 1,763 723 452 6,109 222Physical contin. 11 7 3 0 0 20 902Price contin. 52 167 332 201 170 922 212

Total B 1,60? 1,723 2,097 924 622 7,050 222

C. Infrastructure and Related Investaents 9,540 13,420 15,860 14,030 9,150 61,000 25Z

D. Project Aninistrat:inLSalaries 192 192 182 192 '92 912 022.Traveling Expenses 27 27 27 2? 27 137 02

Sub-total 3 11-23 210 210 210 210 210 1,049 02Price contin. 7 23 39 58 79 206 02

Total D 217 232 249 269 299 1,255 0N

Total Baseline Costs 12,559 17,085 20,324 :5,681 ID,5'6 75,978 24!Physical Cont:n. 119 39 3 2 200 672Price contin. 140 392 946 460 40, 2,250 141

Total Project Costs 12,917 17,522 21.20B 16,144 !0,63; 79,327 232

-94 - AME 7

Mexico: Municipal Strengthening Project

Disbursement Schedule (9 years)

Calendar Year Disbursement Bank FiscalSemester Ending Semester Cumulative Semester Year

June 1986 - 2,600 First FY87December 1986 1,837 4,437 Second FY87June 1987 3,036 7,472 First FY88December 1987 2,398 9,871 Second FY8eJune 1988 2,706 12,577 First FY89D)ecember 1988 3,014 15,591 Second FY89June 1989 2,915 !B.507 First FY90December 1989 - 816 21,323 Second FY90June 1990 2,890 24,213 First FY91December 1990 2,964 27,177 Second FY91June 1991 2,664 29,841 First FY92December 1991 2,364 32,204 Second FY92June 1992 1,984 34,189 First FY93December 1992 1,605 35,794 Second FY93June 1993 1,378 37,172 First FY94December lry93 1,151 38,323 Second FY94June 1994 1,000 39,323 First FY95December 1994 677 40,000 Second.FY95

a/ Includes US$0.60 M retro-active financing (since Sept.1, 1985) and US$ 2.0 M in Special Account establishedupon loan effectiveness.

b/ Rate of disbursement reduced to recover Special AccountJdvance. This reduction should not affect project completionsince a second project within the Municipal StrengtheningProgram will have already started.

- 95 - ANEX 7Table 7.5

Mexico: Municipal Strengthening Project

Disbursement Schedule (5 years)

Calendar Year Disbursement Bank FiscalSemester Ending Semester Cumulative Semester Year

June 1986 - 4,100 al First FY87December 1986 2,904 7,004 Second FY87June 1987 5,095 12,099 First FY88December 1987 4,381 16,479 Second FY88June 1988 4,841 21,321 First FY89December 1988 5,302 26,623 Second FY89June 1989 4,.69 31,292 First FY90December 19B9 4,036 35,328 Second FY90June 1990 3,348 38,675 First FY91December 1990 489 b/ 3,9,164 Second FY91

a/ Includes USSO.60 M retro-active financing (since Sept-1, 1985) and US1$ 35 M in Special Account establishedupon loan effectiveness.

b/ Rate of disbursement reduced to recover Special Accountadvance.

- 96 -ANNEX 8Page 1 of 2

MEXICO


Selected Documents and Data Available in the Project File

Programa de Fortalecimiento Municipal - Informe del Proyecto;BANOBRAS/CEDADER; Agosto 1985.

Numero de Ocupantes por Puesto en Municipio3 Seleccionados - Anexo No. 1;BANOBRAS/CEDADEM; Julio 22, 1985.

Cedulas de Requerimientos de Entrenamiento de los Puestos Tipo delAyuntamiento - Anexo No. 2; BANOBRAS/CEDADEM; Julio 22, 1985.

Relacion de Eventos de Entrenamiento por Puesto - Anexo No. 3;BAROBRAS/CEDADEN; Julio 22, 1985.

Relacion de Eventos de Entrenamiento Clasificados por NIimero Progresivc -Anexo No. 4; BANOBRAS/CEDADEK; Julio 22, 1985.

Clasificacion de Eventos y Entidades Capacitadoras que Participan - AnezoNo. 5; BANOBRAS/CEDADEI4; Julio 22, 1985.

Eventos de Entrenaziento Clasificados por Prioridad - Anexo No. 6;BAROBRASJCEDADEN; Julio 25, 1985.

Netodologta Utilizada para Costear el Componente de Entrenamiento delPrograma acional de Fortalecimiento Municipal - Anexo No. 7;BAROBRAS/CEDADEM; Julio 15, 1985.

Caracteristicas del Instructor Municipal - Anexo No. 8; BANCBRAS/CEDADEM;Mayo 21, 1985.

Instituciones Educativas y de Capacitaci6n Localizadas en MunicipiosSeleccionados de Cinco Estados de la Repfiblica Mexicana - Anexo No. 9;BANOBRAS/CEDADEM; Julio 22, 1985.

Identificaci6n de Necesidades de Entrenamiento en Municipios Seleccionadosy Resultados Obtenidos; BANOBRAS/CEDADEM; Julio 22, 1985.

Metodologia de Anilisis Financiero Municipal; Direccion General de CreditoPublico.

Reunion Nacional de Evaluaci6n de la Reforma Municipal; Presidencia de laRepugblica - Direccion General de Comunicacion Social; Julio 4, 1985.

Sistema de Informacion del FORTAMUN; Gerencia de Sistlemas de Informacion yEvaluacion; Agosto 19, 1985.

Participaci6n del Centro de Estudios Financieros en el Programa deFortalecimiento Municipal, 1986-1988; SHCP; Junio 1985.

Participaci6n de la Secretaria de Hacienda y Credito Puzblico en el Programade Capacitacion; SHCP; Agosto 1, T9857

- 97 -ANNEX 8Page 2 of 2

Cursos de Capacitacion Otorgados por Distintas Instituciones - Anexo C -Capacitaci6n SPP.

Curso Regional p ra la Elaboracion e Instrumentacion de Planes DirectoresUrbanos de Centros de Poblacion - Anexo C - Capacitacibn SEDUE; SEDUE;Abril 1985.

Metodologia para el Llenado de la Cedula 1 - Anexo C - Capacitaci6n SG;Secretaria de Gobernacion - Centro Nacional de Estudios Municipales.

Investigaci6n sobre la Problematica Municipal Estudio Caso: 8 Estados de laRep6iblica Nexicana.

Politica General de Capacitacion; Secretaria de Gobernaci5n; Agosto 1985.

Cedula 1 - Programa de Fortalecimiento Municipal, Cursos de CapacitacionOtorgados por Distirntas Instituciones; BAQOBRAS/CEDADEK; Julio 30, 1985.

Cursos del Componente de Fortalecimiento Institucional cuya Impartici6n sePropone de Manera Inmediata; Julio 30, 1985.

Prioridades Regionales (Nivel Municipal) - Creditos Autorizados; B-NOBRAS

Fortalecimiento de Delegaciones Regionales - Propuesta de EntidadesFederativas Prioritarias para Instalacibn de Representaciones EstatalesBANOBRAS - GSIE/1985; BANOBRAS.

Programa Trianual 86-88 - Acciones Prioritarias (Tampico, Madero, Altamira,Tampa, Pueblo Viejo, Morilillo, Tamos, Ver); SEDUE; 12/85.

Programa Financiero para Reconstracciin y Decentralizaci6n, SectorDesarrollo Urbano; SEDUE; 12/85.

Frograma Financiero para Reconstrucci6n y Decentralizaci6n, SectorDesarrollo Urbano - Anexos; SEDUE; 12/85-

Manual de Operaci6n (Municipal) Volumen I; Secretaria Tecnica - FORTAMUN.

Manual de Operacion Analisis Financiero) - Volumen II; Secretaria Tecnica -FORTAMUN.

Programa Trianual 86-88 - Aguas Calientes. Ags; SEDUE.

Programa Trisnual 86-88 - Morelia, Mich.; SEDUE.

Programa Trianual 86-88 - Queretaro, Qro.; SEDUE.

Programa Trianual 86-88 - Tampico, Cd. Madero, Tamps. Moralillo, PuebloViejo, Tamos, Veracruz; SEDUE

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