Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 11030-ME

STAFF APPRAISAL REPORT

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

JANUARY 15, 1993

Country Department IIInfrastructure and Energy Operations DivisionLatin America and the Caribbean Regional Office

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

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CURRENCY EQUIVALENTS

Currency Unit = Peso (Mex$)US$1.00 = Mex$ 3,115 (November 30, 1992)*

* The exchange rate against the US dollar is currently sliding at a rate of

Mx$0.4 per day.

FISCAL YEAR

January 1 - December 31

UNITS OF WEIGHTS AND MEASURES

Metric British/US Equivalent

1 meter (m) = 3.28 feet (ft)

1 kilometer (km) = 0.62 mile (mi)

1 kilogram (kg) = 2.20 pounds (lb)

1 metric ton (m ton) = 2,250 pounds (lb)

1 liter (1) = 0.26 gallons (gal)

1 cubic meter (mi3 ) = 1,000 liters (1)

ABBREVIATIONS AND ACRONYMS

BANOBRAS National Bank of Public Works and ServicesBanco Nacional de Obras y Servkios Pdblicos

CETES Treasury Bill

CUD Regional Development AgreementConveno Unco de Desarrollo

DGIE Department of Infrastructure and EquipmentDirecci6n General de Infraestruct y Equipamniento

GOM Government of MexicoICB International Competitive Bidding

IVA Value Added Tax

ITP Integral Transport PlanLCB Local Competitive Bidding

MCMA Mexico City Metropolitan Area

PCR Project Completion Report

PVT Plan for Roads and Urban TransportPrograma de Vialidad Transporte Urbane

SCT Ministry of Communications and TransportSecretarfi de Coenunkacio y Transporte

SEDUE Ministry of Urban Development and Ecology

Secretarfi de Desarrofll Urbano y Ecologfa

SEDESOL Ministry of Social DevelopmentSecretarfa de Desarrello Social

SHCP Ministry of Finance and Public CreditSecretaria de Hadenda y Crddito Pdblico

SOM State of MexicoEstado de M4xico

SOE Statement of Expenses

TAQM Transport Air Quality Management Project

FOR OFFICIAL USE ONLY

=x1X

MEDIUM-SXSZ CITIES URBAN TRINUPORT PROJCCT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

PROJECT SUMMARY ............................ . i-v

I. THE URBAN TRANSPORT SECTOR ......... .... ... ... ... 1

A. Urban Transport and the Economy . . . . . . . . . . . . . 1B. Institutional Framework . . . . . . . . . . . . . . . . . . 2

C. Sectoral Issues ... . . . . . . ... . . . . . . . . . 3Institutions . .. . . . . . . . . . . . . . . . . . . . . 3Federal Resource Allocation and Financing . . . . . . . . 4Transport Policy and Planning . .. . . . . . . . . . . . 5Public Transport and Regulation . .. . . . . . . . . . . 6Maintenance . . .. . . . . . . . . . . . . . . . . . . . 7Environment . .. . . . . . . . . . . . . . . . . . . . . 7Low Cost Solutions . .. . . . . . . . . . . . . . . . . . 9Cost recovery . . . . . . . . . . . . . . . . . . . . . . 10

D. Lessons Learned from Past Projects. .10

II. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13A. Origin . . . . . . . . . . . . . . . . . . . . . . . . . . . 13B. Sector Strategy and the Rationale for and Objectives of

Bank Involvement . . . . . . . . . . . . . . . . . . . . . . 13

C. Description . . . . . . 15D. ITPs and the Operating Manual of the PVT .23B. Costs .27F. Financing .30G. On-Lending .31

H. Implementation Schedule . . . . . . . . . . . . . . . . . . 32I. Institutional Responsibilities . . . . . . . . . . 32J. Procurement .35

K. Disbursements . . . . . . . . . . . . . . . . . . . . . . . 35

L. Reporting and Project Supervision . . . . . . . . . . . . . 37M. Auditing .39N. Project Benefits . . . . . . . . . . . . . . . . . . . . . 400. Environmental Aspects . . . . . . . . . . . . . . . . . . . 41P. Project Risks . . . . . . . . . . . . . . . . . . . . . . . . 42

III. AGREEMENTS REACHED AND RECOMMENDATIONS . . . . . . . . . . . . . . 44

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

ANNEXS . .. . . . . . . . . . . . . . 46

1. Sub-project and City Eligibility Criteria . .. .46

2. SXDSOL Strengthening Program .. 533. BANORRAS Strongthnning Progr .... 614. National Training Program . . . . . . . . . . .67

5. 3conamic gvaluation - Method and Resultr . .73

6. Sub-project Preparation and Execution . . . . .86

7. Monitoring and Evaluation . . . . . . . . . . .96

B. Financing of the Program . . . . . . . . . .. . . . . ...... . 1019. Zstimated Schedule of Bank Loan Disbursoent . . .... . 10310. Documnt in Projoct File ............. .. . .... 104

MAP IBRD 23662

TABLES

Table 1 Project Cout Sumary . . .. .. .. .. .... . .29

Tablo 2 Financing Plan .............. ..... ..... . . 30Tablo 3 Procurement Method ......... ........... ... . 36Tablo 4 Disbursement Profile by Category . . . . . .38

Table 5 Sensitivity of BRR to change. in costs and benefits .41

This report in based on the finding of an appraiwal mission which visitedMexico in January/February 1992. Mission members included Messrs. GideonHashimshony (then Task Xanager, Sr. Transport Planner), John Flora (LATIE),Robin Carruthors (LA21E, Transport Economist and current Task Manager), JohnCracknell (Consultant, Transport Specialist). Messrs. R. Scurfield (INUTD)and M. Dick (LATIE) providod the Peer Review, Mr. Ricardo Halperin is theManaging Division Chief, Mr. Paul Knotter is the Project Advisor and Mr.Zdilberto 8 gura is the Department Director. Mra. Sylvia Driscoll and Mrs.Angola Chioariu (LA2IZ) assisted in producing this report.

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amxzco

nurnuM-XXU CXSXBS URBAN TRANSPORT PROJECT

XAMX AND PROJECT SUNARY

borrowers Banco Macional de Obras y Servicios P6blicom, 8.N.C.- (BA)OBRA.)

guarantors United Mexican States.

ExecutinAgenciae and BANOBRAS, Scretaria do D-zarrollo Social - (SBDBSOL),geneficiarh.ssand state and municipal urban transport agencies.

Loan amount: U8$200 million equivalent.

Tormss Repayment in 15 years, including 5 years of grace, withinterest at the Bank's standard variable rate.

os-lending

terms BANOBRAS will on-lend loan proceeds in peso denominatedsub-loans to states or municipalities agencies withrepayment in up to 15 years including a grace period ofup to 3 years, at a rate at least equal to the CZTES (TreasuryBill) rate plus 2%, which reflects the marginal cost of fundsto and operating costs of BANOBRAS.

Pro. ctobjectivess The main objectives are to: (a) improve the quality

and efflciency of urban transport systems in medium-sizecLties; (b) assist the Federal Government ln decentralizingresponsibility for urban transport manag em nt; (c) financeinfrastructure improv eme nts that are economically justified,andt (d) control the environmental impacts of urban transportoperations. Specifically, the proposed project will help to:(i) strengthen the local and national institutions responsiblefor planning and managing urban transport systems in medium-size cities; (ii) assist in the development/implementation ofappropriate financial mechanisms which devolve responsibilityfor planning and financing of urban transport from the Federaland State governments to municipalities; (iii) improve theoperational efficiency of the existing urban transportnetworks; (iv) improve sector planning, which should result inimproved resource allocation within the sector, bettertransport to the poor and enhanced consideration ofenvironmental factors; (v) preserve, through bettermaintenance, the urban transport infrastructure, deferring theneed for now investments and reducing user costs; (vi)encourage public transport development and increase privatesector participation; (vii) improve access to low income areas

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through infrastructure improvement; (viii) improveenvironmental conditions, by strengthening the implementingagencies for environmental controls and enforcing environmentalstandards, and reducing traffic congostion, particularly ininner city areas; and (ix) encourage the development offacilities for non-motorized transport.

ProjectDescription: The proposed project includes two parts: Part A -

National (US$7.8 million) comprises: (a) an institutionalstrengthening program for SEDESOL (US$4.3 million); (b) aninstitutional strengthening program for BANOBRAS (US$0.5million); (c) a training program for urban transportprofessionals (US$2.2 million); and (d) grants towards the costof studies to prepare Integral Transport Plans (ITPs) (US$ 0.8million); Part B - Local (US$463.3) comprises credit (sub-loans) to medium-size cities that meet eligibility criteria tofinance: (a) the remaining cost of the studies for ITPs (US$4million); (b) urgent infrastructure improvements (US$45.3million); (c) other urban transport improvements (sub-projects), which include planning and traffic managementmeasures, public transport improvements, road maintenance andrehabilitation, paving of access routes to low income areas andcorridor improvements (US$363.1 million); (d) the final designof sub-projects, technical assistance, studies and training forprofessional staff in the cities (US$41.6 million); and (d)equipment for traffic management and control (US$9.3 million).The total project cost is estimated at US$471.1 millionequivalent, including land, taxes and duties, with a foreignexchange component of US$138.9 million. The above figures areinclusive of land costs, physical and price contingencies andtaxes.

ProjectBenefitst Medium-size cities have the highest population growth

rate of all geographical sectors of Mexico and provide animportant potential for increasing industrial productivity.Many responsibilities for urban transport management have beendevolved to the cities, but they have neither the institutionalframework nor professional expertise to carry out theseresponsibilities satisfactorily. The project will provide forinstitutional strengthening and professional training fortechnical staff. Benefits from infrastructure investment willresult from reduced vehicle operating costs, travel timesavings, more cost effective investments and improvedenvironmental conditions. The ERR for all proposed sub-projects will be greater than 12%, as will the ERR of allsubproject components. The poor will benefit through improvedtransport infrastructure and better public transport servicesresulting from the whole range of proposed measures, butparticularly from the paving of access routes to low incomeareas, which will account for about 18% of total project costs.

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ProjectRisks The main project risks involve weak institutions both at

the national and local levels and uncertainty as to thecommitment of future local administrations. BANOBRAS andSEDESOL have already undertaken reorganizations, in areasrelevant to the project, to strengthen their capacities, andtechnical assistance and training programs are included in theproject. The commitment risk will be mitigated by: (a) the up-front subproject eligibility criteria which will apply to allfederally provided resources for urban transport in medium-sizecities, and (b) the incentive provided by the grant element ofthe federal program for transport investment in medium-sizecities. Also, the credit approach has built-in flexibilitywhich will allow resources to be reallocated from an approvedsubproject which is not performing to another eligiblesubproject.

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Project Cost Su marys

Local Foreign Total

------- US$ million------

PART A NATIONAL

Al SEDESOL Strengthening 1.0 2.5 3.5A2 BANOBRAS Strengthening 0.3 0.1 0.4

A3 National Training Program 0.9 0.9 1.8

A4 Integral Studies 0.4 0.2 0.6

SUB TOTAL PART A 2.6 3.7 6.3

PART B LOCAL

B1 Integral Transport Plans 2.1 1.1 3.2B2 Immediate Civil Works 25.7 12.4 38.1B3(a) Implementation of ITPU (Civil works) 145.8 79.0 224.8

B3(b) Implementation of ITPu (Services) 17.6 5.8 23.4

B3(c) Implementation of ITPc (Zquipment) 2.5 5.0 7.5

Land and property acquisition 25.2 0.0 25.2

SUB TOTAL PART B 2 1 8.9 i9103 322.2

TOTAL BASE COST 221.5 107.0 328.5

Physical contingencies 37.8 18.2 56.0

Price contingencies 28.1 13.7 41.8

TOTAL (excluding taxes) 287.4 138.9 426.3

Taxes 44.8 0.0 44.8

Total (including taxes) 332.2 1389 41.1

Financing Plan:

Local Foreign Total----------- Us$ million-------

Government of Mexico 174.7 0.0 174.7

Municipalities and States 96.4 0.0 96.4IBRD 61.1 138.9 200.0

TOTAL: 332.2 l3f.9 71.1

v

Usti.ated Dank Didbursemet

Bank Fiscal Years----------- Us million -----------

1993 1994 1995 1996 1997 1998 1999 2000

Annual 22AL 35 41 38 25 15 15 9

Cumulativ 22 57 98 136 161 176 191 200

a/ Includes initial deposit of US$12 million to Special Account andretroactivo financing of US$2 million for expenditures incurred afterJune 30, 1992.

Rate ofReturn: Between 34% and 72% for different types of sub-projoet

component, with an average of almost 50%, based on a samplo of threesub-projects that account for about 30% of total project costs. Aminimum average economic rate of return of 12% will be required forall eligible proposed sub-projects, and no individual componentshould have an economic rate of return of less then 12%.

maps IBRD 23662

MEXICO

MEDIUM-SIZED CITIES URBAN TRANSPORT PROJECT

I. THE URBAN TRANSPORT SECTOR

A. Urban Transport and the Economy

1.1 Over the past 30 years, urbanization in Mexico has been expanding ata fast rate, which seems to be accelerating. In 1960, about 46% of the totalpopulation lived in urban areas (i.e., areas with more than 15,000inhabitants). This had increased to about 50% by 1970 and to more than 53% by1980, and in 1990 the provisional census figure was almost 61%. Urban growthis expected to continue to be fueled by relatively high birth rates coupledwith falling mortality rates, the limited carrying capacity of the rural areasand the expansion of urban-based productive sectors. As a result, about 70%of the Mexican population are expected to be living in urban centers by theend of the century.

1.2 The provisional results of the 1990 census suggest that thegeographical distribution of population is undergoing significant changes.Contrary to earlier expectations, the expansion of the Mexico CityMetropolitan Area (MCMA) has slowed down significantly. At the same time, anumber of intermediate and secondary cities have grown at rates much higherthan expected at the start of the decade, partly as a response to a market-driven relocation of economic activities, particularly in the case of a numberof cities along the Mexico-United States border. The proposed North AmericanFree Trade Agreement (NAFTA) would accelerate the growth of the medium-sizecities. However, even if the lesser growth rate were to be confirmed for theMCMA, it would continue to be confronted with a vast array of development,environmental and management problems rooted in the very massiveneos of itspopulation, the complexity of its urban fabric, the constraints of itsgeographical environment, and the intricacy of its institutional andadministrative framework. The transport-related environmental issues of theMCMA are being addressed in a the Transport Air Quality Management (TAQM)project for the MCMA, recently approved by the Board of Executive Directors.

1.3 Urban transport affects the productivity of cities in many ways.First, the costs of production of goods and services are influenced, bothdirectly and indirectly, through the time required to move people and freight.Production costs are higher when distribution takes place in congestedconditions and employee welfare costs are higher when employees have toundertake long and slow journeys to work. Second, the construction andmaintenance of the urban transport system is capital intensive, and to theextent that there is less than full cost recovery, can require a significantproportion of government resources. Third, the form of city developmentitself is dependent on the way in which urban transport is provided; lack ofrecognition of the impact of urban transport on city land use development canresult in an inefficient use of land and in unnecessarily high production anddistribution costs. Fourth, it is increasingly recognized that urbantransport can have a major negative impact on the quality of urban life,

particularly by creating air pollution and noise. If these impacts are notlimited, they can affect the health, working capacity and lifestyles of urbanpopulations.

B. Institutional Framework

1.4 In 1983, the Mexican Constitution was amended. Its Article 115 nowassigns to municipalities the responsibility for the provision of a number ofservices, including urban transport. However, in practice, because of thelack of financial resources and administrative and professional capacities atthe local level, these services are often provided with assistance from thestate and/or federal governments. While the states and municipalities arefree to make their own arrangements, most municipalities are only responsiblefor street cleaning and maintenance of the local road and street network.Construction and financing of new roads in municipalities are often theresponsibility of the states, usually through a Secretariat of Public Works.Traffic management and regulation of bus services and concessions are alsooften the responsibility of the states. The larger the city or municipality,the greater the tendency for it to have more responsibility for roadconstruction and traffic management. The government's National DevelopmentPlan, published in June 1989 seeks to decentralize responsibilities and tostrengthen local organizations, particularly st the municipal level, as it isfelt that this leads to improved responsiveness to local needs and betteraccountability.

1.5 A number of agencies are involved in urban transport. At thefederal level, the Secretariat of Social Development (SEDESOL) is responsiblefor formulating the federal policy on urban development, including transportand protection of the environment (para. 1.10). The Secretariat ofCommunications and Transport (SCT) is responsible for the development andmaintenance of the federal highway network, sections of which often enter andtraverse the urban areas. SCT's responsibilities extend into regulation ofroad transport, although in the past few years substantial deregulation hastaken place, and in setting standards for highway design. Additionally, SCTexercises administrative oversight over aviation and railways.

1.6 In addition to SEDESOL and SCT, the other federal agencies involvedwith urban transport are the Secretariat of Finance and Public Credit (SHCP)and the National Development Bank for Public Works and Services (BANOBRAS).SHCP makes the budget recommendations to Congress, based on recommendationsmade by and negotiations with the operating Secretariats. It is thenconcerned with controlling the distribution of federal funds in line with theapproved budget. BANOBRAS is an important channel of federal funds to theurban transport sector, through credits and loans to the states,municipalities and operators of public transport.

1.7 For many large cities, the responsibility for transport and trafficregulation, traffic engineering, traffic law enforcement, and short and mediumrange land use/transport planning is divided among agencies at state andmunicipal level, or between different departments within individual agenciesor even between different municipalities within the same metropolitan area.

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This diversity sometimes results in agencies with shared responsibilitieshaving conflicting policies for a particular activity (para. 1.9).

C. Sectoral Issues

1.8 Urban transport conditions vary between cities, but most areaffected by common problems. These include: (a) institutional weaknesses atthe federal, state and local levels; (b) limited availability of professionalstaff with adequate technical skills; (c) lack of framework for transportpolicy and planning; (d) outmoded and ineffective public transport regulatoryframework; (e) inadequate maintenance organizations and budgets; (f)inadequate consideration of environmental issues; (g) lack of recognition ofthe effectiveness of low-cost techniques in alleviating urban transportproblems; and (h) inadequate cost recovery, especially by public transport.All these issues will be addressed in the Project. In the longer term, thelack of planning and increased dependency on the private automobile couldresult in the development of inefficient transport systems, and the eventualneed for costly remedial environmental actions.

1.9 Institutions. At the federal level, no agency has to date beenassigned effective responsibility for urban transport policy and support.While SEDESOL has been the normative authority for urban development, untilmid 1991 it had not focused on or maintained staff in the area of urbantransport. SCT has overall responsibilities in the transport sector, but itdoes not have jurisdiction over matters concerning urban transport, except forthe location of railroad lines, airports and some federal highways, citybypass and approach roads. As a result, few policy guidelines for federalgovernment assistance to the states and municipalities for urban transportprojects have been developed. Currently, most federal assistance is providedon an ad hoc basis through direct negotiations between the SHCP and theindividual states and municipalities and is not subject to any systematicevaluation (para. 1.14).

1.10 SEDESOL was formed at the end of May 1992 by the transformation ofSEDUE, the former Secretariat of Urban Development and Ecology, which itselfwas reorganized in 1991 to better execute its functions in relation to urbantransport policy formulation and to improve its efficiency in providingtechnical assistance to the states and municipalities. SEDESOL is organizedin three sub-secretariats, one of which is for Urban Development andInfrastructure, another for Regional Development and the third for Land andHousing. The staff of the Subsecretariat for Urban Development andInfrastructure comprises those of the previous Division of UrbanInfrastructure, most of whom have little experience of urban transport. Theproject will provide both short and medium term technical assistance to thenew subsecretariat by financing consultants who will provide on-the-jobtraining to its staff (para. 2.11) as well as assistance in the preparation ofworking manuals and technical guides.

1.11 In the past, BANOBRAS funded urban transport development mainly byfinancing the purchase of buses, minibuses, combis and trucks rather than byfinancing the provision of transport infrastructure. This role continues, but

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in 1987, BANOBRAS was given responsibility for the execution of the FirstUrban Transport Project (Loan 2824-ME) which provides assistance to themetropolitan areas of the States of Mexico and Nuevo Leon, and for thepreparation of this project. Through the First Urban Transport Project,BANOBRAS gained experience in the supervision of an urban transport loan, witha main emphasis on infrastructure works. The participation of BANOBRAS in thepreparation of the present project was limited, mainly due to lack ofadequately trained staff. The increased role of SEDESOL in urban transportdevelopment has confined BANOBRAS activities in the urban transport sector tofinancing, procurement and contract administration. The project will providefor institutional strengthening for BANOBRAS in respect of the management ofthe financial aspects of transportation projects (para. 2.12).

1.12 At the state and city levels, urban transport matters are handledthrough organizational arrangements that are often inadequate. Lack ofsuitably trained professionals aggravates budgetary constraints in hiringstaff. In many cases the level of staffing, in terms of quantity and quality,is inadequate. The formation of new, or the strengthening of existing,planning and traffic engineering units in fast growing medium-size cities willallow better planning for the future and as a consequence, result in betteruse of the transport system. Where this approach is feasible, the agencyentrusted with urban transport responsibilities should preferably answerdirectly to the municipality and not to the state or federal authorities, inorder to allow maximum participation and feedback from the populationconcerned. This is in line with the decentralization policy of the federalgovernment (para. 2.2), as supported by the Bank (para. 2.3) and by thisproject (para. 2.6).

1.13 The availability and skill level of traffic engineers and urbantransport economists is limited throughout the sector. The lack ofprofessionals is evident not only in the public sector (SEDESOL, BANOBRAS,States and Municipalities) but also in the private sector and universities.If this situation persists, the devolution of responsibilities to state andmunicipal levels may be accompanied by declining professional standards, andthe current tendency to depend on costly, but conceptually simple, solutionsrather than on more imaginative, but less costly alternatives, will continue.To address this problem, the Government has decided to give priority to thedevelopment of professional and technical skills levels within the sector. Anextensive national training program, which will support the institutionaldevelopment programs in SEDESOL, BANOBRAS and the municipalities, has beenincluded in the project (para. 2.13).

1.14 Federal Resource Allocation and Financing. Until this year therehave been no guidelines for the allocation of federal resources to the statesand cities to help finance urban transport projects, though substantialamounts of assistance have been provided. After a particular urban transportproject has been identified, the municipality or state often lobbies thefederal government for direct financial assistance. These requests arehandled on an ad hoc basis. The issue is complicated further since there arevarious sources of federal funding. Federal government financing ofdevelopment projects is provided through grants included in the annualdevelopment agreements with the states and municipalities, other special

allocations and through loans given by BANOBRAS. Since federal grants havenot been allocated exclusively on the basis of the economic merits of theprojects, there has been little incentive to the municipalities to developcomprehensive transport policies or to evaluate projects using soundmethodologies. The Program for Urban Transport in Medium-Size Cities("Programa de Vialidad y Transporte Urbano para Ciudades Medias", PVT),announced this year will be supported by the Project and will be an importantfirst step in addressing policies and proposals for the future development ofurban transport. Its main objectives are to:

(a) improve the efficiency of urban transport services, within thecontext of rational overall urban development and within alogical administrative structure;

(b) improve the financial viability of urban transport services;

(c) reduce or mitigate the negative external effects ofinefficient urban transport, particularly the environmentalimpacts; and

(d) improve the level of transport service to the poor.

1.15 Transport Policy and Planning. The preparation and implementationof policies and programs for urban development is a complex process and beyondthe means and ability of most municipalities. Through the implementation ofthe PVT, the Federal Government will now take a lead in developingmethodologies and tools to enable municipalities to prepare sound programs andpolicies, and to assist in the evaluation of investment options. It alsointends to enforce financial discipline in the sector by conditioning federalassistance to the preparation of sound urban transport development programs.Until the implementation of the PVT, no federal agency was actively involvedin urban transport and the Federal Government provided little policy guidanceto the states or municipalities. To begin resolving this situation, the PVTassigns clearly defined roles to SEDESOL and BANOBRAS and provides a suitablepolicy framework in which to exercise those roles. The PVT is designed toprovide financial assistance, in the form of Federal grants and access tofederal loans, to cities meeting the city and project eligibility criteria.Although the PVT and the Project are aimed at the medium-size cities, the PVTalso has provisions for financing a more modest level of transport developmentin the economically important smaller medium cities which are just below thelower threshold of the eligibility size criterion and will not be supportedby the Project.

1.16 The municipality eligibility criteria are listed in paras. 2.30 and2.31 and described in more detail in Annex 1, together with the projecteligibility criteria. Initial criteria for determining eligibility forparticipation in the project are that the municipality should: (a) have atarget population as defined in para. 2.30; (b) agree to prepare acomprehensive Integral Transport Plan (ITP), which will indicate futurepolicies and investments; and (c) agree to a program of institutionalimprovements as needed (see Annex 1). Eligibility for finance of the

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principal investment plan will require completion of the ITP andimplementation of the institutional changes.

1.17 Under the PVT, finance for urban transport investment vill only beprovided to those municipalities which meet the criteria for Darticipation lnthe Program and only for proiects which meet the criteria for grant and loanallocation. Since the Federal Government has agreed that federal investmentfunds for urban transport projects in medium-size cities in future will not bemade available through other means, there is a strong incentive formunicipalities to comply with the criteria. The PVT and the Project apply thesame criteria for city and component eligibility and identify the sameresponsibilities for project implementation.

1.18 Since urban transport responsibilities are often divided betweenfederal, state and municipal agencies, urban transport problems are rarelyconsidered from a comprehensive or integrated approach. As a result,immediate problems may be resolved, but insufficient consideration is given toalternative solutions, to the interaction of the solutions with other actualor potential problems, or to the longer term implications of the recommendedsolution. This broader consideration of urban transport issues will take timeto implement but the ITPs (paras. 2.14 through 2.18) that the Government willrequire the municipalities to carry out, together with the conditions forparticipation in the PVT (Annex 1), will be significant steps in improving thequality of urban transport planning and investment.

1.19 Public Transport and Regulation. The operation of bus systems isalso a pressing issue. Some of the most common problems include:

(a) regulatory agencies do not operate effectively, are under-fundedand the staff are insufficiently trained. This can result inchanges in bus routes being slow to adapt to changing patternsand levels of demand and the growth of the city;

(b) fare policies are guided by social objectives, which result infare revenues insufficient to finance bus renewal. No provisionis made for higher quality services operated at higher thanminimum fares;

(c) while most bus services are provided by the private sector,entrance to markets is restricted and route concessions areawarded in a non-transparent manner. Local monopolies preventthe award of concessions to new operators. Lack of effectivecompetition leads to inefficient bus operation;

(d) bus fleets are often in poor condition and provide littlecustomer comfort and convenience (see (b) above); and

(e) buses have an adverse impact on the environment (noise andexhaust/smoke emissions); these problems are worat in centralareas of cities, where traffic congestion occurs. Thereplacement of existing vehicles with new environmentally

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friendlier ones is made difficult by the fare constraints (see(b) above).

1.20 The standard response of most city officials to these problems is topromote the replacement of existing buses and expansion of the fleet, withsubsidized loans to operators. While this resolves some of the problems inthe short term, change to the regulatory and organizational regime becomescrucial if effective long term improvements are to be made in the bus system.It is not easy for a municipal authority to break the pattern of issuingpermits only to current operators or to introduce other forms of competitionfor or within markets. Instead of improving the regulatory system andproviding market incentives, easier solutions are sometimes sought bysubsidizing new vehicle purchases, introducing the public ownership of busesor developing expensive mass transit systems and/or high capacity highways.This leads to an inefficient allocation of resources. The Project willencourage regulatory and tariff reform by: (a) identifying deficiencies inthe current systems and recommending and implementing changes; and (b)requiring acceptable economic and financial evaluations of all investmentproposals, including loans for vehicle purchase, made during the period of theimplementation of the ITPs (para. 2.20 (c)).

1.21 Maintenance. The condition of urban streets varies betweenmunicipalities, but is generally poor through a lack of maintenance.Maintenance has less political visibility than new construction, and is amongthe first activities to be reduced in times of financial austerity. Mostmunicipalities are not well organized to deal with road or traffic signalsmaintenance. Improvement of the maintenance of urban transport infrastructurewill be an essential component of the ITP for each municipality (para. 2.20(e)).

1.22 In most cities, two particular agencies with maintenanceresponsibilities are likely to require strengthening - the local highwayagency (Junta Local de Caminos) for road maintenance and the trafficengineering agency or traffic police for traffic signals. As far aspossible, maintenance operations should be contracted to the private sector,as the evidence from many countries is that this is a more efficient solutionthan public provision, and there is ample capacity in the country to providesuch services. Evidence of the higher efficiency of private contractors inproviding maintenance services comes from cities in which the municipal agencywas required to compete with private operators for maintenance contracts. Inmany cases, the municipal agency was only able to compete effectively whenspecial contractual conditions were allowed. The Project will attempt todevelop the abilities of the city maintenance organizations to plan, manageand supervise the maintenance works, by requiring the establishment ofadequate maintenance organizations, the provision of sufficient budgets andthe preparation and implementation of maintenance plans (para. 2.20 (a) and2.20 (e)).

1.23 Environment. The transport induced air quality problems in themedium-size cities are presently less severe than in Mexico City, whichconfronts unique topographical conditions and an inordinate concentration ofpopulation. Nevertheless, the problems are of concern in many medium-size

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cities and will become more pressing as the cities grow. There is evidencethat national air quality standards are already being exceeded in the centralareas of some medium-size cities. Three types of measure to reduce trafficinduced pollution will be included in the ITPs: (a) those to better implementthe regulation of vehicle emissions; (b) those to reduce traffic congestion,and; (c) those to encourage non-motorized transport. With the benefit ofexperience from the implementation of tougher vehicle emission controls inMexico City, supported by the TAQM project, it will be possible to determinehow best to control such emissions in the medium-size cities. Lower pollutingemissions from vehicles should also result from the expected reduction intraffic congestion and increased vehicle speeds anticipated as a result of theimplementation of the civil engineering components of the project.Encouraging the use of non-motorized transport is the third way to reducevehicle induced pollution. The proposed sub-project for Leon, a city with analready high cycle use, includes the development of a network of cycle ways.The usefulness of measures which will give priority to non-motorized transportwill be reviewed in the studies for preparing the ITPs, and where appropriate,proposals for their implementation will be included in the sub-projects foreach municipality.

1.24 While urban bus transport is promoted because of its high efficiencyin transporting passengers, this policy is often offset by policies to reduceor eliminate buses from the city centers, because of their dilapidatedphysical conditions, loud noise, and smoke emissions. At present, SEDESOL hasissued emission standards for passenger cars and light-duty trucks (up toabout 4.0 tons gross vehicle weight). The emission standards for minibuses,medium-duty vehicles and heavy-duty diesel engines are under preparation, withtechnical support to be provided under the TAQM project, and are scheduled tobe issued early in 1993. The studies to produce the ITPs will review optionsfor the enforcement of these standards (para. 2.20 (f)).

1.25 Urban transport has at least three other environmental impacts,noise, community segregation and visual intrusion. Until the basic researchhas been completed, the scale of these problems in particular medium-sizecities is unknown. The lack of consistent and comprehensive design standardsfor road construction in urban areas makes it improbable that environmentalconsiderations have featured prominently in the design of urban highways andstreets. The Terms of Reference for the studies to prepare the ITPs include areview of the existing conditions in each of the three aspects ofenvironmental concern and a requirement to recommend amelioratory measureswhere they are causing, or are projected to cause, significant problems (para.2.20 (f)).

1.26 In the longer term, the improved transport planning and trafficengineering capabilities of the cities, combined with the application of new,more stringent vehicle emission regulations, should provide for a morepermanent improvement in air quality. Starting next model year, newautomobiles will be required to have a catalytic converter and meet USemission standards, and standards for heavier vehicles, also compatible withUS standards, are under preparation by SEDESOL. These improvements will comeabout in the context of the Bank's overall program of support to the GOM toaddress air pollution issues. This includes an extended co-financing

arrangement with EXIMBANK of Japan, which is financing refinery conversions toproduce unleaded gasoline (OECF-Japan is financing a program fordesulfurization of diesel), an on-going Bank loan to strengthen SEDESOL in itsrole as environmental agency (Loan ME-3461), and the proposed TAQM project insupport of a comprehensive program to address the pollution problems of theMCMA.

1.27 While the net benefits of the above program will be substantiallypositive, it may bring about some negative consequences for urban areasoutside the MCMA. The positive consequences will derive from new federalvehicle emission standards, revised automotive fuel specifications, increasedexperience in the control of air quality and in the inspection and maintenanceof vehicles to control emissions. The possible negative consequences willderive from the part of the program which requires the progressive replacementof all older public service and freight vehicles in the MCMA and theencouragement in the use of lead-free gasoline. The first part of the programwill create a pool of older high-use vehicles which could only be usedcommercially outside the MCMA. The program is expected to lead to thereplacement of 25,000 taxis, 10,000 trucks and 3,000 minibuses in the period1993 to 1996. While some of these will be scrapped, others are likely to findtheir way into other urban areas. If these vehicles are transferred to themedium-size cities, they could lead to a potential worsening of the airquality in those cities. Careful monitoring of vehicle registrations and airquality levels will be required to assess the impact of this program in themedium-size cities. Such monitoring is envisaged as part of the studies forthe preparation of the ITPs. Where negative results of the policy areobserved, the ITPs will propose remedial measures.

1.28 The encouragement of the use of unleaded gasoline (magna sin) invehicles in the MCMA, through emissions regulations and a more appropriatepricing policy than that at present, should result in beneficial results forall of the country, not only in the MCMA. The expansion of PEMEX's productioncapabilities (para. 1.26) should resolve remaining supply constraints,identified in a study undertaken in preparation for the TAQM project.

1.29 Low Cost Solutions. The lack of a proper organizational structurefor urban transport planning and operation, and a lack of sufficientprofessional staff at municipal, state and Federal levels results in littleconsideration being given to low cost solutions to urban transport problems.These solutions include traffic management measures, parking policies, bus-ways, bus route rationalization, pedestrian streets, and intersectionimprovements by cost-effective designs. In many cities, the first solutionsought to relieve city center traffic congestion is often the construction ofadditional road capacity and the banning of buses from the center. In othercases, the construction of a metro or light rail system is seen as a suitablesolution (as in Guadalajara and Monterrey). In the whole of Mexico only onesmall section of segregated busways exists, and most other non-segregatedbusways are not strictly implemented, even though over 80Z of all urbanmotorized trips in Mexico are made by bus and the creation of well planned andimplemented busways is one of the most cost effective measures available toimprove urban public transport. The project has already made progress inbringing this type of cost effective solution to the notice of municipal

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authorities. The ITPe so far completed have placed emphasis on managementmeasures rather than construction of new works to resolve problems of roadcongestion. The sub-project component eligibility criteria (Annex 1) requirethat all schemes should be economically viable. This condition not onlyrequires that the schemes have an acceptable economic rate of return (greaterthan 12x), but that all reasonable other solutions, and particularly thosewith lower investment costs, have been considered and found to have lowerrates of return.

1.30 Cost recovery. Transport taxes and fees are levied both at thefederal level (for example, fuel taxes), and at the state level (for example,bus concession fees). It is standard practice in Mexico for municipalitiesand states to have the power to levy betterment charges to beneficiaries ofaccess road and other paving components. However, in many cases the potentialcharges are not imposed and in others, the valuations of properties, on whichthe charge is based, are unrealistic. Under the project, cost-recovery fornew major road construction, road maintenance and traffic management, willtake place indirectly through the imposition of betterment charges and otherlocal taxes and fees. As part of the Project, the revenue generation effectof financial mechanisms currently being used in each city to recover the costof infrastructure improvements will be evaluated and recommendations made forensuring an acceptable level of cost recovery in the future (para. 2.17).

1.31 Although few municipalities, if any, provide subsidies to busoperators, bus fares are usually controlled by state governments. Presentfare levels do not usually allow for an adequate operating profit, and as aresult, many bus operators are not undertaking fleet renewal and the level ofservice is generally poor. The terms of reference for the studies to preparethe ITPs will include reviews of public transport regulations and projectionsof the financial viability of bus operations following the implementation ofany proposed regulatory changes and the completion of proposed infrastructureinvestments (para. 2.20 (c)).

D. Lessons Learned from Past Projects

1.32 No Bank-financed urban transport projects have yet been completed inMexico, but the First Urban Transport Project (Loan 2824-ME) has been underimplementation since 1987. Although implementation has been improving, andthe project is expected to meet most of its objectives in the State of Mexico,it has experienced a number of difficulties, including the cancellation of thepart of the project related to the State of Nuevo Leon, due to lack ofcounterpart funds, which resulted from a decision by the municipality ofMonterrey to invest in a light rail system, contrary to the Bank's advice.For the State of Mexico, a recently agreed Action Plan is expected toaccelerate the preparation of final engineering design and bid documents.Until recently, this has been slow, partially as a result of lack of in-houseprofessional capacity and partially as a result of insufficient familiaritywith the Bank's procurement procedures. As regards to the other components,the long-term planning studies and technical assistance have not proven to beparticularly successful and institutional strengthening has been slower thanexpected, partly attributable to the lack of trained and experienced staff in

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the relevant agencies. The Federal component, under the responsibility ofBANOBRAS, experienced the following difficulties; insufficient level oftechnical assistance consultants and lack of programmed, on-the-job trainingfor BANOBRAS staff, insufficient professional personnel, and, until recently,conflicts within BANOBRAS regarding distribution of responsibilities betweendifferent divisions. Although these problems are now largely resolved, theyhave provided a valuable experience in the design of the project. On theother hand, the Federal District component has been quite successful in thatlow-polluting motors have been provided for more than 1,300 buses, but the busoperator has decided not to implement the sub-component to improve maintenancefacilities.

1.33 To build also upon the experience of urban transport projects inother countries, an analysis of relevant "Lessons Learned" was undertaken.The review was based on fifteen Project Completion Reports and/or ProjectAudit Reports (PCR/PPAR) in the urban transport and development sectorsworldwide. Recognition was made of trends and changes in Bank policy andproject design since the PCR/PPAR's were completed. The main lessonsidentified both during the implementation of the on-going Urban TransportProject and the analysis of the fifteen PCRs, and the consequent actions inthe Project, are:

(a) Institutional strengthening: Weak organizations not only limit theimplementation of transport policies, but also inhibit efforts attheir own reform. Under the project it is proposed to reorganizeand strengthen the organizations dealing with urban transport, atthe federal, state and municipal levels (paras. 2.11 and 2.12);

(b) Lack of counterpart funding has greatly influenced the pace ofproject implementation and in extreme cases has led to cancellationof components. A balance must be obtained between the promotion ofsound financial practices in participating cities and the lack, atleast in the short term, of municipal financial resources. Thefinancial mix of up to 35% federal grant, at least 18% municipalparticipation and up to 50% (Annex 8) will reduce the scale ofmunicipal counterpart funding to a feasible level and provideincentives for participation;

(c) Slower than expected implementation occurred for a variety ofreasons, including lack of familiarity with Bank procedures,optimistic scheduling at appraisal, lack of final engineeringdesigns at appraisal and changes in political commitment and lackof counterpart funds. These problems will be mitigated in theProject by such measures as: (a) the strengthening of BANOBRAS'capacity for financial management (para. 2.12); (b) including thefinance for final engineering design of civil works in the ITPs;and (c) including a grant element in the financing plan, which willencourage municipalities to continue their participation in theProgram, regardless of political changes (Annex 8);

(d) Weak institutions in the planning, design and implementation oftraffic and highway projects has been a common feature of many

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projects. In this project, each municipality will have todemonstrate that their organizational structure is capable ofmanaging the tasks assigned to it, and that it has the capacity tofulfill these functions on a permanent basis, before becomingeligible for the principal sub-loan (para. 2.31 (i)). In addition,the ITPs will include analyses of institutional arrangements andmake proposals for their improvement (para. 2.20 (a));

(e) Lack of enforcement of traffic regulations, coupled with poormaintenance, are additional reasons why some schemes failed toachieve their full potential. In this project, schemes will bedesigned to be, as far as practical "self enforcing" and physicalrather than regulatory methods of traffic control will beencouraged. Participating municipalities will need to ensure thatcomponents involving traffic regulation include operationalspecifications which are acceptable to the traffic police and thatthe police are prepared to undertake enforcement. If necessary,sub-projects could finance additional equipment for enforcement(para. 2.23 (c));

(f) Public transport operations have been found to be inefficientparticularly when operated by public enterprises. Improving theirefficiency has received increasing emphasis in Bank projects and itwill be an important aim of this project to improve publictransport operations. Efforts will concentrate on improving theregulatory framework to encourage efficient and competitive busoperations and improving the infrastructure to enable buses tooperate at an acceptable level of service. The system of routelicensing as operated in most cities is very inflexible and slow toreact to changing patterns of demand. The ITPs will includereviews of the licensing system and of the finances of publictransport operations and include recommendations to increase theirflexibility of operation (para. 2.20 (c)).

(g) Lack of consideration of environmental impacts was found to be afeature of most previous projects. The inclusion of assessments ofcurrent transport related environmental conditions in the ITPs, andfor an environmental impact assessment of all proposed investments(para. 2.31 (f)) will ensure that these issues were givenappropriate significance in the Project.

(h) Lack of maintenance was a serious shortcoming of early urbantransport projects. The Project will require a commitment and planof action from the municipalities to develop a road and signalsmaintenance capability as a condition of on-lending (para. 2.31(e)) and the ITPs will include the establishment of a road pavementmanagement system and the financing of road rehabilitation worksand deferred road maintenance actions (para. 2.20 (e)).

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II. THE PROJECT

A. Origin

2.1 The Project was identified during the preparation of the First UrbanTransport Project in 1986, aimed at the larger metropolitan areas of Monterreyand the State of Mexico. It will focus on the fast-growing medium-size citiesand the small-medium size cities of particular economic importance includingthose on the USA/Mexico border. Project preparation work was carried out byconsultants and has been reviewed by preparation missions since 1989.Appraisal took place in January/February 1992. Negotiations were completed onNovember 13, 1992.

B. Sector Strategy and the Rationale for and Objectives of Bank Involvement

2.2 Sector Strategy: Mexico's urban population growth, the rapidincrease in urban motorization and a heritage of deferred maintenance andinadequate investment expenditures, have all contributed to a pressing need toimprove the condition of urban services and infrastructure. The situation ismost acute in the MCMA, but is also rapidly becoming a problem in the mediumsize cities, where both human and capital resources are more limited. Thegovernment's strategy to address these problems was outlined in the NationalDevelopment and Urban Development Plan for 1990-1994, and comprises thefollowing priority actions:

(a) Decentralization: to promote the orderly transfer ofoperational and financial responsibilities for urban servicesand infrastructure provision and maintenance from federal andstate governments to municipal governments, and assist thelatter to administer these functions. This will increase theresponsibility and accountability of local officials and soimprove the cost effectiveness and delivery of essentialservices;

(b) Unification of federal assistance: to provide federalassistance to states and municipal governments understandardized criteria and conditions;

(c) Public Transport: to stimulate public transport,particularly through private sector participation;

(d) Improve operational efficiency: to improve the operationalefficiency of existing infrastructure, with an emphasis onshort-term, low-cost management programs and policies, and

(e) Maintenance: to adequately maintain the existing urbaninfrastructure and traffic control facilities.

2.3 The Bank's urban development strategy, as outlined in theDecentralization and Urban Management Urban Sector Study (Report 8924-ME, July

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1991), supports this policy of progressive and functional devolution ofresponsibilities to municipal governments. Ongoing projects supporting thepolicy are the Water Supply and Sanitation project (Loan 3271-ME) and theHousing Finance project (Loan 2947-ME) projects, as well as the First UrbanTransport project (Loan 2824-HE). The Municipal Strengthening Project (Loan2666-ME) was aimed specifically at strengthening the federal and stateagencies active in the area of municipal development, by building up themunicipalities' organizational, administrative and financial managementsystems, and assisting them to expand and upgrade their urban infrastructure.In July 1992, a reformulation of the project, to provide urgent help in thereconstruction of Guadalajara, was approved by the Board. During FY93, theBank will undertake reviews of the government strategies for urban developmentand the transport sector and develop further measures in their support. Thesemeasures will provide both a policy framework for the longer termimplementation of the ITPs and useful inputs to the annual implementationreviews of the Project.

2.4 Rationale for Bank involvement: The government has recently launchedthe "Programa de Cien Ciudades," (PCC) - the "Program of 100 Cities" - itsprogram to strengthen the administration to and improve the infrastructure ofthe medium and small-medium cities. This program has five components of whichthe PVT is one, the others relating to land use, city center rehabilitation,federal land and environmental considerations. Through the PVT (para. 1.14),the federal government has committed itself to become more active in providingpolicy guidance and to rationalize its financial assistance to urbantransport. The PVT and the broader development objective of the PCC are inline with Bank sector policy and the GOM is seeking Bank support for it.

2.5 Bank participation will help to ensure that the PVT builds upon theexperience gained and the lessons learned from urban transport projects inother countries (para. 1.33). In this respect, the Project addresses, interalia, the need for: (a) improved maintenance organizations throughinstitutional strengthening; (b) availability of counterpart funds through animproved federal and local financing mix; (c) speed of addressingimplementation concerns through clear city participation eligibility criteria;(d) improving public transport through infrastructure and regulatory measures;and (e) recognizing environmental impacts through their inclusion in cityparticipation eligibility criteria. As Mexico successfully consolidates itsstabilization programs and expands its modernization efforts to new areas, theBank's lending strategy is to support such efforts by focusing its operationson poverty alleviation, environmental improvement and infrastructurerehabilitation and development to support economic growth. The Project fitsthese priorities well and the Bank's experience in institutional development,and its ability to consider a broad range of issues in an integrated frameworkprovide a further rationale for the Bank's involvement in the project.

2.6 Objectives of Bank involvement: Urban transport in Mexico isunderdeveloped and in need of restructuring if the rapidly growing medium-sizecities are not to become choked with an unmanaged explosion in the volume ofroad traffic. The main objectives of the Project are to improve the qualityand efficiency of urban transport systems in medium-size cities, to assist theFederal Government in decentralizing responsibility, to finance improvements

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that are economically justified and to control the environmental impacts ofurban transport operations. Specifically, the Project will help to: (a)strengthen the local and national institutions responsible for planning andmanaging urban transport systems in medium-size cities; (b) improve theoperational efficiency of the existing urban transport networks; and (c)improve sector planning; this should result in improved resource allocationwithin the sector, better infrastructure maintenance, better public transportparticularly for low-income users, and enhanced consideration of environmentalfactors in sector investments, as well the development of facilities for non-motorized transport.

2.7 These are ambitious objectives and may be difficult to achieve fullywithin the period of execution of the Project. It is expected that theProject will lay a sound basis for the development of the sector by providinginstitutional strengthening, training and encouraging a more rigorous analysisof urban transport. This should provide for project sustainability. Hencethe project risks (para. 2.68) are felt to be significantly outweighed by theexpected development impact.

C. Description

2.8 The Project includes two parts: Part A - national programs and PartB - local level programs. Part A of the project will only account for some 2%of the costs (US$7.8 million, including contingencies and taxes), but will becritical to the achievement of the policy and institutional objectives, as itis designed to address the role of the Federal Government in providing policyand technical guidance to the municipalities, as well as training forprofessional staff. It will consist of four components: (a) an institutionalstrengthening program in SEDESOL 1/; (b) an institutional strengtheningprogram in BANOBRAS; (c) a national urban transport sector training program;and (d) assistance towards the preparation of ITPs in the participatingmunicipalities.

2.9 Part B of the project will account for about 98% of the cost(US$463.3 million, including contingencies and taxes), providing a line ofcredit (for sub-lending) to individual medium-size municipalities/states for city sub-projects. The participation of each municipality or statewill constitute a sub-project under which they will be eligible for up tothree sub-loans, each of which will finance one of the following interrelatedactivities: (a) the studies needed to prepare the ITPs (Part B1); (b)immediate actions, whose delay in waiting for the completion of the ITP willresult in higher costs and/or losses of significant benefits (Part B2), and(c) the implementation of the physical and institutional recommendations ofthe ITPs (Part B3), including changes in the institutional responsibilitiesfor urban transport activities, regulatory changes, civil works, trafficmanagement and environmental control measures, further studies, training, andfinal design of civil works and equipment specification. All participatingmunicipalities will be required to undertake an ITP (Part Bl). Sub-loans for

1/ Ibe Bank is also auistin SEDESOL to develop it capabilities in the Environmental Project (Loan 346 I-ME), approved in April 1992.

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Part B2 will only be provided as needed and sub-loans for Part B3 will beconditional on the compliance with the project specific on-lending conditions(para. 2.31).

2.10 The four components of Part A and three components of Part B of theProject are described in the following paragraphs.

2.11 PART A.1 - SEDESOL Strengthening (US$4.3 million): SEDESOL has thedual roles of a normative agency, which formulates federal policy in urbantransportation and provides technical assistance to the states andmunicipalities to achieve policy goals, and a project executing agency, withresponsibility for overall project supervision, co-ordination, evaluation andmonitoring. The Direccion General de Infraestructura y Equipamiento (DGIE -the Department of Infrastructure and Equipment) will be responsible formanagement of the Project. To help it fulfill both of its roles, aninstitutional strengthening program has been designed that will include thefollowing components, which are described in more detail in Annex 2.SEDESOL's commitment to implementing the strengthening program was confirmedat negotiations (para. 3.1 (a)).

(a) Restructuring and staffing of the DGIE: Although thepermanent staff of DGIE includes some experiencedprofessionals, many of them lack sufficient experience tomanage a program such as the PVT. The work load of DGIE willbe unusually high during the first two years of the Project.Provision is included within the project for 125 man monthsof local, temporary professional staff to help meet thisrequirement during this period. Agreement to the contractingof the full complement of 20 counterpart staff, and acommitment to keep all positions filled as necessary, atleast until the end of the project, was confirmed atnegotiations (para. 3.1 (a)). The initial placement of allthese staff will be a condition of effectiveness (para. 3.2(a)).

(b) Technical assistance to DGIE: The Project will provide 75man months of technical assistance to strengthen the DGIE inthe critical first 15 months of operation of the PVT, and upto a further 70 man months during the remainder of theproject. The first annual implementation review will assessthe needs for this further assistance. The first 40 monthshave already been initiated and adequate counterpart staffare already in place. During the execution of this technicalassistance the following will be prepared: (a) a data baseof current and planned urban transport projects; (b) a planof action to ensure that all projects seeking federalfinancing are subjected to adequate evaluation procedures;(c) updated design manuals for urban transport infrastructureand for the economic, financial and environmental evaluationof sub-projects and sub-project components, and (d) a fullfinancing plan for urban transport in the medium and medium-small size cities. Guidelines have already been prepared for

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assessing, monitoring and treating environmental conditionsresulting from transport activities in the participatingcities-overall air quality and vehicle emissions, trafficnoise, visual intrusion.

(c) Equipment and software: The equipment which will be providedto SEDESOL will comprise office equipment--micro-computers,printers, plotters, communications equipment, and software--so that it could fulfill its function of advising andsupervising the production of ITPs by the municipalities andstates. When the PVT is fully developed, with up to twelvecities undertaking and implementing their ITPs at the sametime, the supervision task will demand a high level oftechnology if it is to function efficiently. Projectmanagement software will be provided by adapting alreadyavailable software to the specific needs of SEDESOL.

(d) External consultant services: During the preparation andimplementation of the ITPs it is inevitable that additionalneeds will arise for specialized technical assistance. Thisassistance will be provided directly to SEDESOL, and throughthem, indirectly to the states and municipalities that mightrequire it. The tasks could include advice on the design oftraffic surveys, road safety systems and on the establishmentof data bases and information and management control systems,the implementation of vehicle emission control standards, andthe implementation of public transport regulations. Theparticular requirements for specialized technical assistancewill be defined in each ITP, taking account of the specificneeds of the municipality. The Project will provide for upto 105 man months of specialized technical assistanceservices.

2.12 PART A2 - BANOBRAS Strengthening (US$0.5 million): BANOBRAS willhave responsibility for loan administration, procurement supervision andfinancial monitoring of the project and the sub-projects. An institutionalstrengthening program for BANOBRAS, which will finance consultant technicalassistance (up to 80 man months), equipment and software, was agreed atappraisal (Annex 3). Satisfactory terms of reference for the technicalassistance to BANOBRAS have been received and BANOBRAS has started theplacement of additional counterpart staff for the management of this Project.Commitments to carry out BANOBRAS's strengthening program and keep the placesfilled until the end of the Project were obtained at negotiations (para. 3.1(a)). A condition of effectiveness is that BANOBRAS contract all counterpartstaff as shown in the schedule in Annex 3 (para. 3.2 (a)).

2.13 PART A3 - National Training Program (US$2.2 million): A nationaltraining program is included in the Project. Its objective is to increase thecapabilities of staff now working in the urban transport sector in activitiessuch as traffic and transport planning, project evaluation, project execution,traffic operations and maintenance. The program will benefit staff from themunicipalities and states, from national agencies (SEDESOL, SHCP and

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BANOBRAS), and from local consulting firms on a fee paying basis. Thetraining program will consist of three main stages: (a) an intensive four-month course at post-graduate level for traffic/transport engineers,economists and urban planners; (b) a series of updating courses and regionalseminars given periodically for professionals, technicians and managers; and(c) overseas post-graduate studies for a selected group of participants in theinitial intensive course. The general content, organizational andimplementation arrangements were confirmed at negotiations (para. 3.1 (b)).The bidding of the Intensive Course is already under way in accordance withBank guidelines. An acceptable draft contract for provision of the IntensiveCourse has already been presented to the Bank and signing of the contractwould be a condition of effectiveness (para. 3.2 (b)).

2.14 PART A4 - Integral Transport Plans (US$ 0.8 million): The firstactivity of any municipality intending to participate in the Project will bethe preparation of an ITP, described in more detail below. Part A4 of theProject will allow SEDESOL to finance up to 25Z of the cost of these studiesthrough grants, the remainder being financed through sub-loans to themunicipalities. Satisfactory generic terms of reference for the studies toprepare the ITPs have been received by the Bank. These will be modified tomeet the particular requirements of each participating city. An average of100 man months has been allowed for the preparation of each ITP, with 80%being provided by national consultants.

2.15 Part BI - Integral Transport Plans (US$4.0 million): The preparationof ITPs will be probably the most important component of the whole project,since they will result in a significant change in the approach to urbantransport decision making, and their successful implementation will signifyachievement of some of the fundamental changes sought in the supply of urbantransport services. The objective of the ITPs will be to produce coherentsets of proposals for short and medium term actions and investments to ensure,so far as is possible, that the development of urban transport will providefor the needs of the population. This will be achieved by institutionalreform and training, as well by implementing coordinated infrastructureinvestment plans. Urban transportation involves interaction between roads andstreets, private and public vehicles, parking, traffic management and control,pedestrians and mass transit, including buaways and in some cases, light-railand metros as well as relationships between transport and land use. The ITPswill take account of these interactions and provide an integrated frameworkfor their implementation.

2.16 All transport planning activities have consequences for the physicalenvironment, either positive or negative, from the impact of vehicle emissionson air quality, through traffic noise, the visual intrusion and physicalsegregation of communities by new roads, to the re-establishment of theatmosphere of historic city centers by the exclusion of vehicular traffic.The interactions of the various activities, together with their environmentalimpacts will be taken into account in the development of the ITPs. In thecourse of preparation of the ITPs, the institutional framework under whichurban transport activities are planned, directed, regulated and controlledwill be reviewed. Recommendations will be made for improvements in theserespects, which will be implemented in Part B3 (a) of the project (para. 2.20

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(f)). In addition to the planning and institutional aspects of the studies,the ITPs will provide an analysis of the current and projected financialstatus of public transport operators, and provide for the final engineeringand/or technical specification for components of the investment plans.

2.17 Although most municipalities have some mechanism, such as abetterment tax, for recovering a proportion of project costs from directbeneficiaries, these rarely recover more than a small fraction of theirpotential revenue. There are various explanations for this lack, ranging frompolitical reluctance to impose the relevant charges to inadequate and outdatedproperty valuation data. The ITPs will include a financing scheme for theproposed investments, which will show a reliable funding source for eachcomponent of the sub-project. The agreed generic Terms of Reference of theITPa include a requirement to review current cost recovery programs, and ifthey are found to generate revenue equivalent to less than 40% of the averageannual transport investment cost, the ITPs will include proposalst includingimplementation procedures and time schedules, which will achieve this recoveryrate, which will usually be within three years of the implementation of theproposals.

2.18 The city eligibility criteria require BANOBRAS to demonstrate thatthe municipality or state which will receive any loan will have the financialcapacity to cover any counterpart expenditure and to service loan charges.The review of financial capacity will be made by BANOBRAS, and will takeaccount of all projected financial commitments of the municipality or stateduring the period of amortization of the sub-loans to be contracted as part ofeach sub-project.

2.19 Part B2 - Urgent civil works (US$45.3 million): Many of themunicipalities have been waiting for years for funds to finance what are nowurgently needed projects. Further delay in their implementation will resultin a significant loss of social welfare, so it would be unreasonable to waitfor the formulation of an ITP before starting them. This project categorywill provide for the financing of the preparation of final designs or productspecifications acceptable to the Bank, and the implementation of such designsor the purchase of such equipment. To be acceptable to the Bank, the designsor specifications should meet Mexican standards, or where these do not exist,a standard previously agreed with the Bank. The projects will need to satisfythe same investment criteria as investment projects to be included in theITPF, including provision of a positive environmental assessment, other thannecessarily being part of an ITP. Finance will be provided through specificsub-loans to the municipalities. The maximum cost of the immediate actionplan for any municipality will be US$5.0 million.

2.20 Part B3 (a) - Implementation of the recommendations of the ITPs(US$363.1 million): The ITPa will incorporate plans for policy andinstitutional changes in addition to those required as conditionality for on-lending, and for investments in the following six interrelated areas of urbantransport activity as well as further studies. Failure to implement thepolicy and institutional plans of the ITP will be an event of default underthe sub-loan. The related ITP proposals for training and further studies, as

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well as the final design of the civil works, will be financed under Part B3(b) and equipment purchases under Part B3 (c):

(a) Institutional Reform: will be aimed at rationalizing andincreasing the efficiency of the arrangements for transportplanning, public transport operations, and the implementationof transport regulations. The reforms will include: (a) theestablishment of an organizational structure with clearlydefined responsibilities for transport planning, trafficmanagement, formulation and implementation of transportregulations and maintenance of transport infrastructure; (b)restructuring of the regulatory authorities for publictransport services and vehicle and driver licensing; (c)proposals to improve the enforcement of traffic and trafficmanagement regulations; and (d) reforms to create and/orimprove road maintenance capabilities of the municipalitiesand other agencies responsible for road maintenance withinthe municipal boundaries. In addition, this section of theITP will include proposals for further training, based on theneeds identified in the analyses in the other sections of theITP. The training will be in addition to that included underParts A4 and Bl of the project and be aimed at the specificneeds of each municipality. The training program couldinclude courses on traffic management, road safety, publictransport regulation, urban highway design, environmentalcontrol and municipal finance and administration;

(b) Traffic Management Measures: will focus on making the bestuse of the existing transport infrastructure through trafficmanagement methods. These will include the application oftraffic systems management techniques to key routes andareas, particularly to city and district centers, and includetraffic circulation schemes, parking policies, junctionimprovements, traffic signal control systems, pedestrianschemes and accident countermeasures. Priority measures andinvestment proposals for the benefit of cycle users will beincluded in this component. Physical measures will besupported by the necessary policy and enforcement actionsessential for their success. The terms of reference for theITPs will require that the policy and enforcement actions,including strengthening of the enforcement agencies, bespelled out and implemented. Most of the improvements areexpected to yield immediate results at relatively low costs.Any proposals for further studies of traffic management willbe included in this section and will include the terms ofreference for such studies;

(c) Public Transport measures: will seek to improve the quality,supply, and economic and financial viability of bus servicesthrough: (a) route reorganization, concession and revisionsof tariff structures and levels. The tariff revisions willbe designed to give operators the possibility of operating

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different qualities of service at different tariffs and toearn revenue sufficient to adequately to maintain theirvehicles, replace them at appropriate intervals and show anadequate return on invested capital; (b) paving of bus accessroads in low income areas poorly served by public transport;and (c) development of bus priority measures and facilitieswhich will be integrated with the components of TrafficManagement described in (b) above. Proposals including termsof reference, for further studies of issues relating topublic transport will be included in this section of the ITP.Any proposals to use municipal funds or guarantees to assistin financing public transport vehicle purchases will need tobe supported by acceptable economic and financialassessments, showing that the investments will beeconomically justifiable and profitable for the operatorunder the subsidized conditions but not under availablecommercial loan rates, even though the implementation of suchproposals will not be financed by the Project. Investmentplans which included uses of municipal funds for loans orguarantees which did not satisfy these conditions will not beacceptable for financing through the sub-loan for this partof the Project;

(d) Corridor Improvements: will be aimed at increasing thecapacity of major corridors to meet existing and futuretravel demands. Corridor improvements involving the pavingof access roads to low income areas will form a specific sub-component, as the majority of their benefits will be topublic transport users and operators. Other components underthis category will include: (a) the elimination of"bottlenecks" through junction improvements; (b) thedevelopment of selected new roads to correct structuralweaknesses in the network which may involve "missing links"or completion of ring roads; and (c) the strengthening ofcontract management and supervision administration;

(e) Haintenance system improvements: will aim at preservingtransport infrastructure and facilities such as roads,traffic signals and traffic control devices. Adequatemaintenance will avoid the need for more expensivereconstruction at a later date, and reduce vehicle operatingcosts as its principal benefit. Depending on the particularneeds of each municipality, elements will include: (a) theestablishment of a road pavement management system; and (b)the financing of road rehabilitation works and deferred roadmaintenance actions. The establishment of necessaryinstitutional arrangements will be included in component (a)described above; and

(f) Environmental assessment and control: will be aimed atimplementing adequate systems for the continual assessment ofair quality standards and control of vehicle emissions, as

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well as establishing and implementing norms related tovehicle noise, the visual intrusion of transportinfrastructure and traffic and the community segregationresulting from highway construction and expansion. The airquality assessment and control measures and procedures villbe based on those developed in the preparation of the TAQMproject, as modified in the experience of theirimplementation. The SEDESOL vehilel emission standards forminibuses and trucks will be added to those already inexistence for cars before the end of 1992, so they will beavailable by the time the second group of ITP. are completed.The ITPs will include proposals for the purchase of necessaryequipment and facilities for ensuring that vehicles meetthese standards, for the purchase of equipment, and for thetraining of personnel to assess air quality standards. Theproposed norms for the control of traffic noise, visualintrusion and community severance will be based on a reviewof existing conditions in the municipality and theinterpretation of norms successfully implemented elsewhere.The norms will include a requirement for an environmentalassessment of all civil works and for the application ofamelioratory measures where any adverse effects mightotherwise result. The norms will be applied to all projectsrecommended in the ITP.

2.21 Part B3 (b) - Final design, technical assistance and training(US$41.6 million): This sub-component will finance: (a) the final design ofthe sub-project components included in the ITPs; (b) further studies andtechnical assistance to the municipalities, as recommended in the ITPs, up toa total of 120 man months (para. 2.20 (b) and 2.20 (c)); and (c) training(para. 2.20(a) and 2.20(f)). Normal practice in the municipalities has notbeen to produce final designs as required for Bank financed civil works, butrather to leave these designs to the selected contractor. This process oftenresults in inferior results and large and unpredictable cost increases. Toreduce the probability of such occurrences under this Project, and to start tochange the way that municipalities go about implementing their transportinfrastructure works, this sub-component will finance the provision of finaldesigns according to Bank principles. Based on the experience of the firstthree sub-projects, this will be a lengthy and costly process, although it isexpected to result in overall cost savings. An allowance of 6.3Z of theestimated cost of civil works has been made for final design and itssupervision.

2.22 All additional environmental studies and training to implementenvironmental regulations and controls will also be included in this sub-partof the Project, as will additional technical assistance to the municipality ina form analogous to that provided to SEDESOL under Part Al. The sub-componentalso aims at improving the level of competence of the local staff involved intransport planning and maintenance, by financing special training courses inaddition to those included in Part A3 of the project and additional technicalassistance and studies to be recommended in the ITPs and approved by the Bank.This sub-component will also include as necessary, the training of police in

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the implementation of traffic regulations or in traffic management to reduceroad accidents. The total amount allocated for technical assistance andtraining (US$17.4 million) reflects the extent of the need and current lack ofqualified and experienced personnel, particularly in the areas of urbantraffic engineering and public transport administration.

2.23 Part 3 B (c) - Equipment (US$9.3 million): This sub-component willprovide: (a) technical equipment for the management and control of urbantransport. Many cities lack adequate traffic signals systems, and very few ofthem have computerized, linked systems which are needed to provide maximumcapacity from existing infrastructure. The installation of such systems isoften a more efficient and lower cost alternative to undertaking civil worksto provide additional traffic capacity; (b) the upgrading of existing trafficsignals systems and the installation of new systems where they weredemonstrated to contribute to an efficient solution to urban trafficcongestion; (c) where necessary, the purchase of equipment such as parkingmeters, wheel clamps, and tow trucks for removing illegally parked vehicles,in support of strategies and plans under Part B3(a) of the project (para. 2.20(b)); and (d) equipment for monitoring traffic related air quality indices andfor controlling vehicle emissions.

D. ITPe and the Operating Manual of the PVT

2.24 During project preparation, ITPs were prepared in three cities--Ciudad Juarez, Leon and Toluca--under the guidance and supervision of BANOBRASand utilizing agreed terms of reference. Based on the experience gained inthe preparation of these studies, revised terms of reference have now beenprepared by SEDESOL, the agency now responsible for the execution of the ITPs.Satisfactory final appraisals of these three ITPs have been received by theBank, as has a model sub-project agreement to be used for these and otherparticipating cities.

2.25 There are 46 cities (Annex 1, Table 1) which are potentialparticipants in the PVT. The number of cities to be financed by project fundswill depend on the investment needs of the first participating cities and thecalls which they will make on these funds. However, to avoid the risk thatthe funds would be distributed between too many cities for efficientsupervision, agreement was reached at negotiations that no more than twelvecities will be allowed to participate in Part B3, although no restrictionswere placed on the number of cities to participate in Parts BI and B2 (para.3.1 (e)). Present indications are that the actual number of Part B3participants may be only ten, based on the size of the investment proposals ofthe first three participating cities. These three cities have completed theirITPs and are ready to apply for implementation sub-loans. Draft sub-loanagreements are being prepared for the municipalities of Ciudad Juarez and Leonand for the State of Mexico (SOM) in the case of Toluca. The SOM isresponsible for the Plan for Toluca because the metropolitan area of the cityis governed by five different municipalities. The Toluca ITP recommendationsfor the integration of the planning processes in the metropolitan area will beimplemented as part of the project.

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2.26 The Operating Manual of the PVT will guide the operations of allagencies involved in the Program, of which the Project will be an integralpart. The Manual covers such matters as agency responsibilities for theproject cycle, guidelines on financing arrangements and municipality andcomponent eligibility criteria. The Bank has received a satisfactory finalversion of the Operating Manual. Any deviation from the policies andpractices established in the Manual, without prior Bank agreement, will be anevent of default. All municipalities and states participating in the Projectwill be required to comply with the guidance of the Manual. Final designs forfirst year sub-project civil works and equipment specifications for twoparticipating cities have been completed satisfactorily to the Bank and finaldesigns conform to recognized Mexican and international standards for urbanroads. The bidding documents conform to the standard documents agreed betweenthe Bank and the Mexican Government.

2.27 The Project will be an integral part of the PVT (para. 1.14).Funding of particular sub-projects which satisfy the criteria of the program(Annex 1), will be through a mixture of resources, as shown in Annex 8.Overall Bank financing of any sub-project will not exceed 50% of its totalcost. Commitment to the elimination of federal funding under all alternativearrangements, and to adequate federal budget finance for counterpartexpenditure (para. 2.39) is included in the PVT, as is the financing mixdescribed above. This financing scheme will be complementary to the method ofdistributing regional development budgets through the Convenios Unicos deDesarrollo (CUD). These are agreements by which State governments contributea fixed proportion of the investment costs of federal projects (mostlyinfrastructure maintenance) and are responsible for their execution. The CUDsystem will no longer apply to the maintenance and development of transportinfrastructure and will be replaced by the mechanism of the PVT, which issimilar but gives a more important role to the municipalities. All thesearrangements were confirmed during negotiations (para. 3.1 (c)).

2.28 The ITPs will demonstrate that the modified economic rate of return(MERR)2' of the sub-project as a whole was greater than 12% and that all sub-project components had MERRs of at least 12%, and the economic evaluation willhave to show that each proposed component is an efficient solution to theidentified problem (Annex 1). BANOBRAS, under the First Urban TransportProject, has developed standardized urban vehicle operating costs and aneconomic evaluation manual (to be revised under the technical assistance toSEDESOL (para. 2.11 (c)), both of which will be used in the studies forpreparation of the ITPs and be periodically revised as necessary during theexecution of the Project.

2.29 The Operating Manual includes provision for three types of sub-loan,one pertaining to each of the three components of Part B of the Project. Thefirst sub-loan will be made available for financing the preparation of an ITP(Part Bi) and the second sub-loan for urgent infrastructure works (Part B2),with the cities needing to have met only the city size and/or importanceeligibility criterion and agreed to implement the other conditions (para.

2/ MERR is the Modified Econornic Rate of Retum. Its use is described in Annex 4, para. S.

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2.31). The types of work and equipment which will be eligible forconsideration as immediate actions are defined in Annex 1, were confirmedduring negotiations (para. 3.1 (c)). The third and final sub-loan will beavailable for the implementation of the ITP (Part B3). During appraisal, theprocedures and agency responsibilities in the preparation of the threecomponents of municipal sub-projects were agreed (paras. 2.45 et seq. andAnnex 6), and are included in the final version of the Operating Manual. Theoperational procedures and responsibilities for the PVT are identical to thoseof the Project and were confirmed during negotiations, together with therequirement that all participating municipalities and states abide by thenorms of the Operating Manual (para. 3.1 (d)).

2.30 It was agreed at appraisal and confirmed at negotiations that thefinal decision as to which municipalities and sub-projects should receive Bankfinancing will lie with the Bank (para. 3.1 (e)). This will also apply toeach individual component of Part B of the Project. A condition of on-lendingand eligibility of any municipality or metropolitan area for a sub-loan underParts B1 and B2 of the Project will be that it has a population of at least400,000 and less than 1,200,000, as shown in the national population census of1990, or that it is a regional center or otherwise of special significance toMexico's economic development.

2.31 Agreement to the preparation and implementation of the ITPs willrequire a significant long-term political commitment from the relevant stateand municipal authorities. Such commitment will be demonstrated in twostages. In the sub-loan agreement for Parts B1 or B2, responsible authoritieswill agree to implement all the requirements listed below, and all theseobligations will be complied with before a sub-loan agreement under Part B3could be made. All sub-loan agreements will include monitoring indicators.The municipality or state will report periodically to SEDESOL and BANOBRAS onthe progress in meeting these indicators. The specific monitoring indicatorsfor each sub-loan will be included in the sub-loan agreements. Failure toachieve them will require the implementation of a remedial plan to be agreedwith the Bank, to avoid a condition of default under the sub-loan. Therequirements and eligibility criteria for municipalities and sub-projectcomponents were confirmed during negotiations (para. 3.1 (f)):

(a) The completion of the ITP, to ensure that the sub-projectsfinanced under the loan, respond to a broad urban transportstrategy. Terms of Reference for studies to prepare theITPs, which will include reviews of public transportregulations and tariffs and of the financial viability ofprivate bus operators, will be prepared specifically for eachmunicipality, based on the generic terms of reference alreadyprepared by SEDESOL. The municipalities will also berequired to make a commitment to use their transport planningand traffic engineering units to update and review programsand policies recommended in the ITPs. Subsequent failure toimplement fully the agreed policy recommendations of the ITPwill be an event of default under the sub-loan;

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(b) The creation or strengthening, as warranted, of transportplanning, traffic engineering unit and traffic managementunits. In those cases where these activities are theresponsibility of the state, the requirement will be that thefunctions be transferred to the municipalities beforecompletion of the sub-project; alternatively, where there arevalid reasons for not following this course, a statedelegation will be established in the municipality (Annex 1).Establishment of a local delegation could facilitate thetransfer of functions to the municipality at a later date;

(c) Agreement by the participating municipalities and states tomake adequate budget provision for their share of sub-projectfunding and not to initiate any urban transport investmentwith a total cost over US$3.0 million outside of the agreedprogram, while the sub-project is being implemented, withoutthe prior agreement of SEDESOL and the Bank. Remedies of theBank may apply if such budget provisions are not made or ifsuch transport investments are made without prior agreement.However at the Bank's discretion these remedies may belimited to the amount of Bank financing corresponding to theparticular sub-project;

(d) A formal commitment to the participation of the municipalityin the project to be agreed with the State. Regulation ofpublic transport operations is frequently divided betweenagencies at different levels of government (para. 1.18). Thepolicy of the federal government is to decentralizeresponsibility for urban transport affairs to the lowestappropriate tier of government. This condition will includea requirement that the municipalities have in place or agreeto strengthen or create, as appropriate, a competent publictransport regulatory agency;

(e) A commitment and plan of action from the municipalities todevelop a road and signals maintenance capability.Compliance with the plan will be monitored during projectimplementation and will be a condition of access to furtherlending (Annex 1). The municipalities will be required tomake a sufficient budget allocation for maintenanceactivities during implementation of the project, based on acalculation of minimum needs as identified in the ITP;

(f) The completion of economic and environmental assessments ofsub-project components, as part of the ITPs, to ensure that:(a) all projects have an HERR of at least 12S and that noalternative proposal has a higher HERR; and (b) anysignificant negative environmental impacts are identified andnecessary mitigating measures proposed in a form acceptableto SEDESOL and the Bank. SEDESOL has already prepared amethodology acceptable to the Bank for assessing currentenvironmental conditions which are influenced by urban roads

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and traffic, and for reviewing and implementing remedialactions for those environmental factors which would beadversely influenced by proposed actions. Where the sub-project may affect in a negative manner a specific community,the city should agree to provide to the affected communitythe environmental assessment and the proposed mitigatoryand/or compensation measures with reasonable anticipation andto discuss them with the affected community. Bank approvalof such sub-projects will be contingent inter alia upon fullcompliance with these requirements;

(g) The completion of final engineering and bid documentation forcomponents comprising a minimum of 20Z of the sub-project, toreduce the risk of slow implementation of sub-projects. Thesupervision of the preparation of these final designs will beincluded in the terms of reference of the ITPs (Part Bl),although their execution will be contracted separately underPart B3 (b);

(h) All reasonable alternatives to any sub-project componentwhich involved the displacement of population should havebeen reviewed and found to be inferior to that proposed, andthat the affected community should have been given anadequate opportunity to comment on the proposal. Inaddition, the evaluation of all sub-project components willinclude an assessment of their environmental impact and theproposed components will include mitigatory and/orcompensatory actions; and

(i) That the municipality or state demonstrate to thesatisfaction of SEDESOL that they have the administrativecapacity and ability to undertake the sub-project, preferablyby the creation of a fully staffed sub-project managementunit, and to meet all the on-going conditions ofparticipation, and demonstrate that a sub-loan agreement withBANOBRAS has been executed in line with the standardrequirements of the Bank for such agreements (para. 2.51).

E. Costs

2.32 The total level of transport investment required in the cities whichcould qualify for participation in the Program can not yet be quantifiedprecisely. Few cities have yet undertaken systematic evaluations of theirtransport needs and past records of transport investments are not welldocumented. Sub-project preparation for the first three cities to prepareITPs (Ciudad Juarez, Leon and Toluca) indicates that short term (about 3years) investments of the order of US$40 million to US$50 million per city(including taxes and land costs) are required. If all of the 46municipalities were to participate in the Program at this level of investment,the total cost could exceed US$2 billion. SHCP has determined that theProgram should be initiated with a total investment budget of about of US$470

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million, which will be sufficient for the participation of some tenmunicipalities at the average level of investment. This estimate, based onprices prevailing in April 1992, provides the basis of the financialprojections used in this report.

2.33 As the proposed level of funding will not meet the transport needs ofall candidate cities for participation in the Program, the Federal Governmentneeds to determine the financing arrangements for the remainder of the cities.To assist in this process, during the course of the first year of the Project,SEDESOL, assisted by consultants, will furnish proposals to: (a) develop adata base on the investments conducted and planned in the urban areas by alllevels of government and a plan of action to ensure that the proposals fromall cities are submitted to an adequate evaluation; and (b) in collaborationwith SHCP, prepare a financing plan for the rest of the medium size cities,based on a realistic assessment of the needs and financial ability (para. 2.11(b)). The above tasks have been incorporated in the SEDESOL work program andwill be evaluated during the Mid-Term Review of the Project (para. 2.58).During the annual reviews of the Project (para. 2.57), account will be takenof the number of currently participating municipalities and the number thenexpected to participate in the coming two years. If the Program is successfuland there is a reasonable expectation that the demand for Program funds willsignificantly exceed available funds, the Bank may consider a follow upoperation.

2.34 Based on the proposed financing scheme (para. 2.27) and on the costestimates for the three cities for which appraisals have been completed, thetotal Project cost will be about US$471 million equivalent, including dutiesand taxes of about US$45 million. The foreign exchange cost will be US$139million, about 33Z of the total project cost (Table 1).

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Table 1: PROJECT COST SUMHARY(In million of US Dollars)

Local Foreign Total-----------US$ million------

PART A NATIONAL

Al SEDESOL Strengthening 1.0 2.5 3.5A2 BANOBRAS Strengthening 0.3 0.1 0.4A3 National Training Program 0.9 0.9 1.8A4 Integral Studies 0.4 0.2 0.6

SUB TOTAL PART A 2.6 3.7 6.3

PART B LOCAL

BI Integral Transport Plans 2.1 1.1 3.2B2 Immediate Civil Works 25.7 12.4 38.1B3(a) Implementation of ITPs (Civil works) 145.8 79.0 224.8B3(b) Implementation of ITPs (Services) 17.6 5.8 23.4B3(c) Implementation of ITPs (Equipment) 2.5 5.0 7.5

Land and property acquisition 25.2 0.0 25.2

SUB TOTAL PART B 218.9 103.3 322.2

TOTAL BASE COST 221.5 107.0 328.5

Physical contingencies 37.8 18.2 56.0Price contingencies 28.1 13.7 41.8

TOTAL (excluding taxes) 287.4 138.9 426.3

Taxes 44.8 0.0 44.8

Total (including taxes) 332.2 138.9 471.1

2.35 About US$7.8 million (2% of the total cost) or US$6.3 millionexcluding contingencies and taxes, will be for the Part A - nationalcomponent. About 220 man months of consulting services for technicalassistance for SEDESOL (detailed in Annex 2) and BANOBRAS (detailed in Annex3) are included, before taking account of the studies to prepare the ITPs, asare a further 15 months under the proposed National Training Program (detailedin Annex 4).

2.36 Part B will account for US$463.3 million (98Z of the total cost) orUS$322.2 million excluding taxes and contingencies. This estimate, based onan extrapolation of the sub-project component costs of three cities which havealready completed their ITPs is only indicative, as additional cities may have

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a different mixture of components in their sub-projects. In addition to thecivil works, 100 man months have been included for each of the citiesundertaking the preparation the ITPs (para. 2.14) and up to 120 months oftechnical assistance and consultant services have been included forimplementing institutional strengthening and regulatory reform (para. 2.21).For the preparation of the ITPs, 25% of the finance will be provided underPart A4 of the Project. Physical contingencies were extrapolated from thealready completed sub-projects and the experience of the large cost increasesbetween appraisal and final execution of works in the First Urban TransportProject (Loan 2824-ME). Price contingencies were calculated with anticipatedinternational inflation rates of 3.7Z per year for the seven years projectimplementation period. It is assumed that the peso exchange rate will beadjusted as may be necessary to reflect any difference between domestic andinternational inflation levels.

F. Financing

2.37 The Bank loan of US$200 million will finance 42.5S of the totalproject cost, including land acquisition, taxes and duties. Of the netproject cost, 29.5% is estimated as foreign exchange; funding of a modestproportion of local costs (18% of the total, including land and taxes) isjustified in view of the beneficial institutional, social and environmentalimpacts of the project. The project does not include any provision forrecurrent cost financing other than for salaries of temporary SEDESOL andBANOBRAS staff under Parts A.1 and A.2 of the Project for the first two yearsof Project implementation only.

Table 2: FINANCING PLAN(In millions of US Dollars)

Source of Funds Local Foreign TOTAL Z ofTotal

IBRD 61.1 138.9 200.0 42.5%

Federal Government 174.6 0.0 174.6 37.1S

State and Local 96.5 0.0 96.5 20.5%Government

TOTAL 332.2 138.9 471.1 100.0S

% of Total 70.5% 29.5% 100.0%

2.38 The proposed loan will finance 100% of the expenditures related tothe national part of the Program (Part A), with the exception of taxes andduties, which will be financed by the federal government, and almost 42Z ofthe expenditures under Part B. Annex 8 shows the full details of the

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financing scheme and an example of the financing of the Part B expendituresfor a typical municipality.

2.39 The proceeds of the Bank loan will be transferred by BANOBRAS to theGuarantor in accordance with the norms applicable in Mexico to Bank loans, andsubsequently the Guarantor will lend a portion of the proceeds back toBANOBRAS in pesos for on-lending by BANOBRAS to the states and cities. Toensure the availability of sufficient federal counterpart funds to meet thefinancial obligations for the coming year, it was agreed at appraisal andconfirmed at negotiations that the Guarantor will submit to the Bank for itsreview and comment, at least sixty days before the end of each fiscal year,the proposed budget allocations by the Federal Government to the PVT for thesucceeding fiscal year (para. 3.1 (g)). These proposals will be discussedduring the annual implementation review (para. 2.57) and a budget submission,which will be adequate to meet the federal government counterpart fundingobligations under both the national and local components of the project, willbe agreed with the Bank. The following annual review will verify that thefunding requirements had been met. Any failure by the federal government toprovide adequately for the Project will constitute an action of default. TheGuarantor has provided to the Bank the 1993 Federal budget proposal indicatingthe provision of adequate funds to cover the counterpart obligations for 1993.As a condition of effectiveness, the Guarantor and BANOBRAS shall provide tothe Bank an executed sub-loan agreement under Part B3(a) of the Project,satisfactory to the Bank, defining the Guarantor/BANOBRAS transfer and on-lending procedures (para. 3.2 (c)).

G. On-lending

2.40 BANOBRAS will on-lend the proceeds of the proposed loan to themunicipalities and states, in Mexican pesos, at a variable interest rate, nolower than the marginal cost of funds to the Guarantor (CETES) plus 22, withrepayment up to 15 years, including grace periods of up to three years. Thisis in line with the General Interest Rate Agreement (GIRA) between Mexico andthe Bank. The Guarantor will bear the foreign exchange and interest rate riskon the Bank loan, which should be manageable since the CETES rate is market-determined and reflects expectations about inflation and devaluation. A sub-project for a particular city will include up to three separate sub-loans, oneeach to finance the ITP, the immediate actions and the implementation of theITP. In all cases the states will be party to the sub-loan agreements, actingas guarantors for the municipalities. To help ensure that the municipalitiesand states participating in the program make sufficient budget allocations tomeet the counterpart funding requirements and to meet their on-lendingrequirements including provision of adequate road maintenance funding, it wasagreed at appraisal and confirmed at negotiations, that in conjunction witheach sub-borrower, BANOBRAS will furnish to the Bank for its review andcomment, the proposed Annual Transport Investment Plan (based on theinvestment plan of the ITP) of each sub-borrower at least sixty days beforethe beginning of each fiscal year (para. 3.1 (h)). The sub-loan agreementwill give the Bank the right to suspend or terminate a sub-loan if themunicipality or state failed to make sufficient budget provision for theinvestment plan in the approved ITP (para. 2.31 (c)).

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H. Implementation Schedule

2.41 The Project is expected to be implemented and the loan disbursed overa seven-year period, in accordance with experience under urban projects in theregion. The project will be completed by December 31, 1999 and the closingdate will be June 30, 2000. The final date for submission of city sub-projects by BANOBRAS to the Bank will be December 31, 1996.

2.42 The three cities that have completed their ITPs have indicated theirwillingness to comply with the other conditions of participation. Theborrowing agency for the first two of these cities will be the municipality,while in the case of Toluca it will be the State Government (of Mexico) as thecity of Toluca is administered by five separate municipalities. The sub-projects for these three cities will be ready for implementation as soon asthe Bank is satisfied that the on-lending conditions (para. 2.31) have beenmet.

2.43 There are at least five other cities that are ready to startpreparing their ITPs and to comply with the other conditions for participationin the Program. The studies to prepare the ITPs in these cities will start assoon as the administrative procedures can be completed, expected to be withintwo months of Board approval of the Project. These ITPs are expected to becompleted by the end of 1993 and compliance with the on-lending conditions(para. 2.31) will be confirmed at the same time. Meanwhile, implementation ofthe urgent actions will start early in 1993. Implementation of the proposedinvestment and actions of the ITP will start after acceptance by the Bank ofthe ITP recommendations and after confirmation that all the on-lendingconditions had been met (Annex 6).

2.44 With three cities now ready to implement their ITP action andinvestment plans, and a further five cities ready to start preparation oftheir ITPs, there is a reasonable probability of accelerating the planneddisbursement schedule, which is based on an expectation of three ITPs beingcompleted towards the end of 1993 and a further three before the end of 1994.With the investment plans included in the ITPs being for three year periods,the disbursement periods for loans under Parts B2 and B3 of any sub-projectare not expected to be more than five years, with expenditure peaking in thethird and fourth year.

I. Institutional Responsibilities

2.45 BANOBRAS will be the borrower for the Project. For Part A, BANOBRASand SEDESOL will be the implementing agencies, while for Part B SEDESOL willbe the implementing agency, although BANOBRAS will retain responsibility forthe financial aspects of procurement and responsibility for processing of sub-loan agreements. A project coordinating group has already been formed andheld its first meetings. The purpose of the group is to coordinate theactions of the two implementing agencies and to resolve any interinstitutional problems before they have a chance to prejudice the progress ofthe Project. In most cases the sub-loans will be made to the appropriate

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municipality, with the financial support and guarantee of the state of whichit forms part. In those cases where the state still retains responsibilityfor most urban transport matters, the sub-loan will be made to the state, butwith the municipality being a party to the agreement. Where a city region forwhich a sub-project is being prepared includes more than one municipality ormunicipalities in more than one state, all of the relevant states will beseverally and jointly responsible as sub-borrowers for the execution of thesub-project. In these cases it may be necessary to constitute a sub-projectcoordinating group, comprising members of all interested government agenciesto ensure timely resolution of potential difficulties in management of thesub-project.

2.46 BANOBRAS. Established in 1933, BANOBRAS is the principal source offunding for the Government's public works and housing sector projects. Theinstitution provides credit to state and municipal Governments to financepublic works (mainly water and sewage systems), low income housing and publictransportation. In addition, as a second-tier bank, BANOBRAS provides creditto commercial banks to finance Government established programs such as for thepurchase of taxis and minibuses; it also provides guarantees to privatecontractors engaged in public sector works. BANOBRAS recently established aseparate unit to manage its second-tier operations. BANOBRAS is the Borrowerfor 10 Bank loans currently in execution. In August 1989, BANOBRAS closed itsretail deposit-taking operations and converted its branches throughout Mexicointo regional offices in each of the 31 Mexican states.

2.47 Loans to Mexican public sector entities are made by BANOBRAS both inits capacity as financial agent of the Government and from its own funds. Asof December 31, 1991, 77.2% of BANOBRAS' loans were made as financial agent ofthe Government. In these operations BANOBRAS passes the funds to thedifferent Government entities and charges a commission. BANOBRAS carrieslittle credit risk on its portfolio because 97.3% of its loans are made to thepublic sector and have the guarantee of the Federal Government. BANOBRAS hasnever suffered losses on loans to the public sector and does not establishreserves for bad debts on these type of loans. BANOBRAS experienced somelosses in loans to the private sector; however, these loans are now beingchannelled through the commercial banking system as second-tier operationswhere the commercial banks assume the credit risk. These loans are made atvariable interest rates based on the CETES rate and are adjusted monthly. Onthe liabilities side, its financial agent operations are protected againstforeign currency exchange risk as the Government assumes the risk. In thecase of direct foreign currency borrowing by BANOBRAS, these funds are eitheron-lent in foreign currency or on-lent in local currency, but with principaland interest payments adjusted for exchange rate fluctuations.

2.48 The procedures for preparation and execution of sub-projects aredescribed in detail in Annex 6. To assist in strengthening its operations andcarrying out its obligations, SEDESOL has contracted additional staff and hasin place consultants to provide the first 40 months of technical assistancefor its strengthening program. SEDESOL will be the implementing agencyresponsible for:

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(a) Part Al - developing and implementing its own institutionalstrengthening program;

(b) Part A3 - the national training program;

(c) Parts A4 and BI - studies to prepare the ITPs, including thepreparation and approval of a Diagnostic Report, an ImmediateActions Plan, and Investment and Action Plans, and theestablishment and promotion of the national urban transportpolicy including monitoring sector performance and needs,both in coordination with other Federal agencies,particularly BANOBRAS;

(d) Part B2 - implementation of the Immediate Actions Plan; and

(e) Part B3 - reviewing the compliance with on-lending conditions,including the operational, economic and environmentalevaluation of all proposed actions and investments, beforestarting to negotiate the third sub-loan agreements.Implementation of the ITPs, including the investment andinstitutional action plans and all technical assistance andtraining.

2.49 BANOBRAS has also contracted temporary staff and consultants to helpin carrying out its following obligations under the project:

(a) Part A2 - implementation of its own strengthening program;

(b) Part B3 - assessment of the creditworthiness and debtservice capacity of municipalities and states wishing toparticipate in this part of the project;

.c) Parts B1, B2 and B3 - administration of sub-loans, includingthe preparation of all sub-loan agreements, which will besubject to Bank approval, leading the sub-loan negotiationswith municipalities and states participating in Part B ofthe Project, and monitoring compliance with sub-loanconditions. A model sub-project on-lending agreement forimplementing the civil works proposals of an ITP has beenprovided to the Bank;

(d) Parts B2 and B3 - delivery of procurement seminars andsupervision of procurement under all sub-loans; and

(a) Coordination and transmission to the Bank of quarterly andother reports and preparation of information for the Annualand Mid Term Reviews of the project.

2.50 The preparation and implementation of each sub-project will bedivided into two stages: Stage I, preparation, and Stage II, implementation.Stage I will be divided into two phases, the preparation of the diagnosticpart of the ITP and an immediate action investment plan. Stage II will

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comprise the preparation of the final ITP, which will include an institutionaland regulatory Action Plan, a short to medium range Investment plan, for whichthe final designs of all approved projects will be included, and theimplementation of the immediate actions. The major tasks which will becarried out in each of the Phase., together with an indication of the agencyresponsibilities, are described in Annex 6.

J. Procurement

2.51 BANOBRAS will be responsible for procurement for its institutionalcomponent, SEDESOL for its institutional component and for the nationaltraining program, and the municipalities for their respective sub-projects.BANOBRAS will install a project management system to help in the control andsupervision of the procurement processes in the municipalities. Eachparticipating municipality will send their procurement staff to BANOBRAS fortraining. Both agencies have recruited, or will have recruited as a conditionof effectiveness (para. 3.2 (a)), specialized staff to manage the procurementprocess. Standard bidding documents, which are currently being revised andwill be agreed with the Mexican authorities, will be used during projectexecution. All procurement documents will be subject to prior review byBANOBRAS. All International Competitive Bidding (ICB) and the first LocalCompetitive Bidding (LCB) contract per municipality, both for acquisition ofgoods and for civil works, will be subject to prior review by the Bank. Otherprocurement documentation will be subject to selective ex-post review.BANOBRAS will retain documentation for these contracts for periodicsupervision by Bank staff.

2.52 To the extent practicable, contracts shall be grouped in bidpackages estimated to cost the equivalent of US$250,000 or more for goods andUS$5.0 million or more for works, and will be procured on the basis of ICB inaccordance with the World Bank's Guidelines for Procurement under IBRD Loansand IDA Credit, May 1985. LCB will be used to award contracts estimated tocost the equivalent of less than US$250,000 per bid package for goods andUS$5.0 million per bid package for works. In the case of procurement of goodsthrough ICB, Mexican firms will be provided a preference margin equal to 15%or the prevailing duty, whichever is lower. The maximum total value ofcontracts awarded under LCB for any sub-project will be 60% of the totalamount for these items in the sub-project. For contracts with an estimatedcost below US$250,000 for goods and works, shopping based on price quotationsfrom a least three bidders will be used. Total procurement under shoppingwill not exceed US$400,000 for goods and US$3.0 million for works. Theselection and appointment of consultants for studies, works supervision, andtechnical assistance will follow the August 1981 Bank Guidelines for the Useof Consultants by the World Bank Borrowers and by World Bank as ExecutinaAtency Procurement arrangements were agreed at appraisal and confirmedduring negotiations (para. 3.1 (i)).

2.53 The estimated project cost breakdown by procurement method (Table 3)is presented below and is based on the three sub-projects already appraised.These figures are tentative as the components of each sub-project will depend

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on the nature of the recommendations of the ITP and on the componentssubmitted for project financing:

Table 3: PROCUREMENT METHOD

(In millions of US Dollars)

Project ICB LCB Other TotalComponent

Parts Al and Institutional - - 4.6 4.6A2 Strengthening - - (4. l)-l (4.1)

Part A3 National Training - - 2.2 2.2Program - - (2.0)1' (2.0)

Parts A4 and Studies for ITPs - - 4.8 4.8Bl - - (4.4)1/ (4.4)

Part B2 Civil Works 21.2 24.9 1.0 47.1(Immediate) (6.6) (11.1) (0.5)1' (18.2)

Part B3.a Civil Works 153.1 185.2 2.0 340.3(Other) (57.4) (67.5) (0.9)1' (130.4)

Part B3.b Other Studies, - - 37.2 37.2tech. assist & - - (33.5)1/ (33.5)training

Parts Al, A2 Equipment 6.9 2.4 0.4 9.7and B3.c (5.2) (1.8) (0.4)1/ (7.4)

Land - - 25.2 25.2- - (0.0)'1 (0.0)

Total: 181.2 212.5 77.4 471.1(73.8) (80.4) (45.8) (200.0)

1101 Vigures in pereutbesis are anounts to be financed by the proposed lank Loan.

11 Consultin services to be provided in accordance with Bank guidelines.TI *hopPI procedur aacceptable to the Bank.

K. Disbursements

2.54 Proceeds of the proposed Bank loan will finance: (a) 100% offoreign expenditures and 85% of local expenditures for goods; (b) 100% of thecost of consultants, and (c) 42% of the cost of civil works. The remainingcost of civil works will be financed by a mixture of federal and municipalfunds, as shown in Annex 8. To expedite project execution, a Special Account

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will be opened in the Central Bank, with an initial deposit of US$12 millionequivalent, representing the estimated loan disbursements in the average fourmonth peak period of disbursements in 1994. All contracts up to US$5,000,000equivalent for works and US$250,000 equivalent for goods and services will bemade on the basis of certified statements of expenditures (SOEs) prepared byBANOBRAS. Supporting documentation for the SOEs will be retained by BANOBRASand made available for examination by Bank staff during supervision missions.Retroactive financing of up to US$4.0 million equivalent (2% of loan funds),will be provided for eligible expenditures incurred after June 30, 1992. Itwill be used to finance the first stage of implementation of the ITPs alreadycompleted and the initial costs of the first studies in the next round ofITPs. The disbursement arrangements, including those for retroactivefinancing, were agreed at appraisal and confirmed during negotiations (para.3.1 (i)).

Table 4: DISBURSEHENT BY CATEGORY(In US Dollars)

Amount of the 2 ofLoan Allocated Expenditures

To be financed

1. Equipment, and materials 200,000 100% of foreignfor National Component expenditures and 85Z

of local expenditures

2. Services (consultants, 6,900,000 100%temporary staff salariesand Training courses) forNational Component

3. Services (consultants) for 19,400,000 100% 21

local component, includingfinal design and supervision

4. Civil works for Immediate 17,500,000 42%Actions

5. Civil works for the 128,800,000 42%implementation of ITPs

6. Equipment and materials 7,200,000 100% of foreignfor the Local component expenditures and 85%

of local expenditures6. Unallocated 20,000,000

Total: 200.000.000

1/ Including consultant services, technical assistance, provalson of training courses, and the25% grant element for the Integral Transport Plans.

2/ Including local component of cost of Integral Transport Plans.

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L. Reporting and Project Supervision

2.55 Reporting. It was agreed during Appraisal, and confirmed atnegotiations, that BANOBRAS, with the assistance of SEDESOL and the cityagencies, will prepare quarterly progress reports for the quarters ending onMarch 31, June 30, September 30 and December 31 (par-. 3.1 (j)). The reportswill be furnished to the Bank within sixty days of the end of the quarter.The progress reports will cover institutional development and projectexecution achievements and compare them with appraisal projections and goalsand present a critical assessment of problems and issues arising duringrelevant period of project execution. The reports will also evaluatecompliance with sub-loan conditionality by each city, and actions taken toenforce compliance. In cases of unsatisfactory progress, the reports willalso detail proposals for adjustments and remedial actions.

2.56 Project Supervision. The responsibilities for supervising projectimplementation are presented in Annex 6. It is expected that at least threesupervision missions per year (four in the first year), staffed by an urbantransport engineer/planner and a transport economist will be required tosupervise the Project during the first three year. of execution. In addition,financial analysts and specialists in traffic engineering, training,environment, and mass transit systems should accompany the supervisionmissions as required. Supervision requirements are expected to be intensive,particularly in the initial years, as Bank missions should plan to visit everyparticipating city at least once a year. There are now at least fivemunicipalities or states waiting to participate in the Project, in addition tothe three ready to start on the implementation of their ITP. For each of thefirst two years, the supervision requirements are estimated at about 40 and 35headquarters staff weeks respectively. Supervision requirements will fall to25-30 staff weeks per year thereafter. Arrangements will also be made for anadditional 20-25 weeks per year of local supervision of works in theparticipating cities.

2.57 Asnual and Hid Term Reviews. In September of each year the Bank andthe Government will conduct a formal joint review of the progress made inreaching the objectives, in the implementation of the project and in achievingthe monitoring indicators of the sub-projects. The agenda for the annualreview will include the following items: (a) a review of the number of citiescurrently participating in the project and expected to enter the project inthe coming year, and of the needs for sub-project financing; (b) a review ofthe progress on implementing the technical assistance to SEDESOL and BANOBRAS,together with the specification of remedial measures to remedy any delays inimplementation; (c) an agreement on the federal budget submission that willprovide adequate federal financing for the project in the coming year (para.2.39); (d) an assessment of progress of the national training program and itsrevision to meet any new needs which may have arisen during the previous year;(e) a review of the financial performance of both the national and localcomponents of the project in the previous year and of the requirements for thecoming year and of the compliance of federal, state and municipal agencieswith sub-loan covenants. Information for the financial reviews will beprovided by the sub-project monitoring program to be introduced by BANOBRAS;

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(f) a review of the proposed urban transport investment plan for eachparticipating municipality for the coming year, particularly in respect of theavailability of finance for each of the projects; (g) an assessment ofadequacy of the municipal and state budget allocations for urban transport inthe participating cities for the following year, to meet the assessed needsfor road and equipment maintenance. The assessment will include an analysisof the recovery of investment costs from the immediate beneficiaries and ofthe implementation of bus and taxi tariff scales to enable operators to earnsufficient revenues to implement adequate fleet replacement policies; (h)progress on the implementation of institutional changes in the participatingcities, particularly in respect to the allocation of responsibilities betweenstate and municipal agencies for the design and implementation of traffic andtransport regulations and taking account of performance against agreed timedobjectives; (i) an evaluation of progress in improving air quality indices andvehicle emission controls in participating cities and of the proposed measuresto further improve these indices in the coming year, and (j) a review ofprogress on the preparation of new ITPs and of the proposed participation offurther cities in the program. The discussion and analysis of these issueswill lead to the formulation of adjustments to the project and, if necessary,the implementation of remedial actions satisfactory to the Bank to correct anydeficiencies or delays. Satisfactory in this case implies that the proposedactions would, in the opinion of the Bank, have a high probability ofresolving significant problems.

2.58 The third annual review will constitute a Mid Term Review, andprovide an opportunity for a more comprehensive review of the achievements ofthe project to date, and of the prospects for its successful completion. Forthis Mid Term Review the agenda will include, in addition to the agenda itemsfor the annual reviews: (a) a review of compliance with the on-lendingconditions; (b) an evaluation of the funding proposals for the remainder ofthe PVT; (c) assessment of a specific report to be prepared by SEDESOL on thestatus of transport related environmental issues in the medium-size cities(the terms of reference for the study to produce this report to be agreed atthe previous annual review); and (d) proposals for restructuring orreorientation of the project in light of the reviews and assessments of theissues discussed during the Review. The timing and agendas of the annual andMid Term reviews were confirmed during negotiations (para. 3.1 (k)).

M. Auditing

2.59 Auditing. BANOBRAS will have its financial statements, SpecialAccount and SOEs audited by an independent auditor satisfactory to the Bankand according to generally accepted auditing standards. The Bank will reviewthe external auditors' terms of reference. BANOBRAS, in turn, will requireeach city and state implementing agency to engage external auditorssatisfactory to BANOBRAS to audit their sub-project accounts according togenerally accepted auditing standards. The accounts for each sub-projectwill be maintained separately. BANOBRAS will review the audits of the sub-project accounts and report to the Bank on the status and the remedial actionstaken. The reports of the sub-projects will be furnished to BANOBRAS within

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five months of the close of the fiscal year. BANOBRAS' audit report and itsreport of the sub-project audits will be presented to the Bank annually nolater that June 30. SEDESOL will keep project accounts that will be auditedby Contraloria General de la Federaci6n (the auditor of the federalgovernment) and their report will be furnished to the Bank not later than June30 of the following year. The project auditing arrangements were confirmedduring negotiations (para. 3.1 (i)).

N. Project Benefits

2.60 The main benefits of Part A of the Project will be in the improvedorganizational structure of responsibilities for urban transport andimprovements in the technical abilities of the manpower available. Inaddition, federal officials will be better equipped for allocating federalfinancial resources for urban transport development as a result of theproposed technical assistance to SEDESOL and BANOBRAS. Part B of the Projectwill provide, by way of the ITPs, a coherent framework for the development ofurban transport infrastructure and services and, by way of the sub-projectinvestment components, improvements to urban transport operations. Inaddition, the changes to transport policies brought about through the newapproach to transport planning will result in a more responsive and useroriented urban transport system.

2.61 The quantifiable benefits used to justify the physical investmentsare in terms of reduced vehicle operating costs, but just as important interms of their impact will be time-saving benefits through reduced trafficcongestion. This reduction in congestion, together with reduced dustgenerated from vehicles operating on earth roads will make a significantcontribution to improving the environment and hence to the quality of urbanlife. The poor in particular will benefit from road paving and consequentimproved public transport access to low income areas, one of the specificinvestment categories of the project and accounting for almost 18Z of theproposed investments in the three investment plans approved to date. Sub-project categories dealing with non motorized road users, pedestrians andcyclists, will also principally be of benefit to poorer users of the urbantransport system.

2.62 Based on the evaluations of three city sub-projects, the projectcategories are expected to have modified economic rates of return (MERR),weighted by the investment costs, of between 34Z and 72%, with an average ofabout 50Z (Table 5). Annex 5 provides a discussion of the methodology used,including an explanation of why MERR's reduce the otherwise exaggerated ratesof return for sub-projects which have very high ERR's, and more details of theresults for each of the three cities for which sub-projects have so far beenevaluated. The project MERR's exclude the benefits of time savings andenvironmental improvements, which are very important but which are difficultto quantify. The average HERR excludes the costs and benefits of theinstitutional strengthening program of SEDESOL and BANOBRAS and of thenational training program. The average rates of return, and sensitivity

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analyses reflecting the impact of higher costs and/or lower benefits, for thefour evaluated components in the three sub-projects which have been alreadyappraised are summarized below.

Table 5 - SENSITIVITY OF HERR TO CHANGES IN COSTS AND BENEFITS

Basic Costs Benefits Costs -25ZSub-project component MERR +25% -25Z Benefits +25%

Traffic management 65% 60% 532 47%Corridor improvements 34% 30% 27% 19%Access to low income areas 36% 32% 28% 20%Road maintenance 72% 65% 53% 37Z

Average 49% 45% 39% 30%

0. Environmental Aspects

2.63 The project will have a beneficial impact on the environment, whichis one of the principal objectives of the ITPs. The Project will benefit fromseveral of the measures proposed in TAQM project, particularly thosecomponents dealing with national standards and issues. Equipment to bepurchased by SEDESOL's emissions laboratory will be available to themunicipalities to undertake their initial analyses of levels of vehicleemissions. Much of the expertise gained in the operation of the laboratoryand in the commercial vehicle testing stations will become available tomunicipalities participating in the project. Changes in the composition ofvehicle fuels and in the comparative pricing of normal and low lead gasolineto be introduced as a result of the TAQM project will also be of benefit inother urban areas.

2.64 Traffic management investments will help relieve congestion in majortransport corridors and central areas, resulting in lower emission ofpollutants per vehicle kilometer. Junction improvements and pedestrianschemes will improve safety. The paving or resurfacing of access roads andcity streets will reduce the volumes of airborne dust. Public transportsystem improvements will contribute to promote a more efficient form of urbandevelopment resulting in a further reduction of travel and emissions.Redesign of urban roads produces opportunities for tree planting, an activitywhich will be encouraged in the ITPs. The approved ITP for Ciudad Juarezincludes proposals for the planting and maintenance of more than 2,500 trees.Similar proposals will be expected in other ITPs.

2.65 Some road works may have localized adverse impacts, mainly relatedto excavation for construction materials and disposal of work site wastes.Measures to mitigate such impacts will be specified in the bidding documentsfor works. The problems of excavated material are likely to be less than in

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an inter-urban transport project as the road developments in the project willmostly be to existing roads for which no further earthworks will be required.

2.66 In general, land acquisition should be limited, as the Project'smain thrust will consist of improvements within existing rights of way,traffic management measures, paving of streets, and road maintenance.However, in some cities, the proposed sub-project may include construction ofnew road links or major intersections, and in such cases, a need forrelocation of existing residents may occur. In the case of relocation theBank guidelines will be strictly followed. A special condition for on-lendinawill apply to any sub-project involving displacement of population (para. 2.31(h)).

2.67 The TORs for preparing the ITPs will require that existingenvironmental road conditions be reviewed and that the Plan include specificmeasures for alleviating conditions where they fail to meet existing orproposed standards. In addition, an environmental assessment will be requiredof all proposals for new works, indicating any adverse environmentalconsequences and proposing measures to eliminate them or at least reduce theirimpact to internationally accepted levels. These assessments and proposalswill relate principally to vehicle emissions, vehicle noise, visual intrusionand community severance.

P. Project Risks

2.68 The main project risks will arise from the ambitious objectives itpursues and the weak institutional capacity to deal with sector issues, bothat the Federal and local levels. Although improvements have been made,implementation of the First Urban Transport Project has been delayed by theinstitutional weaknesses within the State of Mexico (SOM) and BANOBRAS. Toaddress this problem, BANOBRAS has now consolidated its transport groups intoone division but is having difficulty in contracting new professional levelstaff. SOM has initiated an agreed Action Plan to improve the institutionalcapacity and capability of its Transport Planning Division. SEDESOL, inpreparation for the implementation of this Project, has reorganized its UrbanProject Transport Division and has contracted counterpart staff and technicalassistance to further strengthen the division. Part A2 of the Projectincludes additional funds for institutional strengthening for SEDESOL, the useof which will depend on the assessed needs. The reinforcement of both SEDESOLand BANOBRAS and the implementation of the National Training Program, shouldincrease the implementation abilities of both Federal and local agencies. Inaddition, technical assistance and consultant services for state or municipalagencies are provided for in Part B3 (c) of the Project.

2.69 It is not expected that all the objectives will necessarily be fullyachieved within the period of project execution. The objectives are ambitiousrelative to the low base from which the project will atart and even theirpartial achievement will be of significant benefit to the population of themedium-size cities. However, it is expected that the Project will lay a soundbasis for the development of the sector by providing institutional

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strengthening, training and encouraging a more rigorous analysis of urbantransport.

2.70 The risk of a change in commitment to the Project, resulting in alack of counterpart funding, could occur as a result of changes inadministrations after elections at the federal, state and municipal levels.The risk of delay due to changes in administration will be mitigated by: (a)application of the up-front sub-project eligibility criteria which will applyto all federal resources for urban transport in medium-size cities; and (b)the incentive provided by the grant element of the federal program fortransport investment in medium-size cities. Also, the flexibility of the lineof credit approach will allow resources to be transferred from a sub-projectwhich is not performing well (with actual disbursements le than 401 of thoseplanned by the end of the second year of implementation) to new sub-projectsin other cities. The Federal grant system is attractive to the cities andshould motivate good performance.

2.71 In view of the considerations outlined in the preceding paragraph,the risks are expected to be manageable and the conditionality has beendesigned to contain them within acceptable limits. Offsetting these risks arethe significant benefits expected from the project, particularly from itsinstitutional strengthening components. If these components are successfullyimplemented, the benefits in term of improved resource allocation would gowell beyond the direct benefits estimated in Table 5, even if performance inrespect to some other objectives falls short of expectations.

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III. AGREEMENTS REACHED AND RECOMMENDATIONS

3.1 During negotiations agreement was reached on the following:

(a) SEDESOL's and BANOBRAS' commitment to carry-out theirrespective strengthening programs, including the contractingof remaining counterpart staff and commitment to keep allpositions filled at least until the end of the project (paras.2.11 and 2.12);

(b) the general content, organizational and implementationarrangements of the National Training Program as defined inAnnex 4 (para. 2.13);

(c) the content of the PVT, including the mix of Federal, local,and sub-project funds, municipality and component eligibilitycriteria, the types of project for consideration as immediateactions and the commitment to provide adequate federal budgetfinance throughout the project (paras. 2.27 and 2.29);

(d) sub-project agreements would require participatingmunicipalities and states to comply with the PVT OperatingManual (para. 2.29);

(e) that the final decision as to which municipalities and sub-projects should receive Bank financing would lie with the Bank(para. 2.30) and that not more than 12 municipalities wouldparticipate in Part B3 (para. 2.25);

(f) the requirements and eligibility criteria for on-lending(para. 2.31);

(g) the Guarantor shall submit to the Bank for its review andcomment, at least sixty days before the end of each fiscalyear, the proposed budget allocations by the FederalGovernment to the PVT for the succeeding fiscal year. Failureto provide sufficient federal counterpart funding wouldconstitute an action of default (para. 2.39);

(h) BANOBRAS shall, in conjunction with each sub-borrower, furnishto the Bank for its review and comment, the proposed AnnualTransport Investment Plan of each sub-borrower at least sixtydays before the end of each fiscal year (para. 2.40);

(i) the procurement, disbursement and auditing arrangements(paras. 2.52, 2.54 and 2.59);

(j) BANOBRAS shall submit a progress report to the Bank for itsreview and comment, within 60 days of the end of each quarter.The reports would cover institutional development and projectexecution achievements (progress on disbursement of loan fundswould be reported only in June and December, for each

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semester) and compare them with appraisal projections andgoals and present a critical assessment of problems and issuesarising during relevant period of project execution. Theywould also evaluate compliance with sub-loan conditionality byeach city, and actions taken to enforce compliance. In casesof unsatisfactory progress, the reports would also detailproposals for adjustments and remedial actions (para. 2.55);

(k) the timing and agendas of the annual and Mid Term Review ofProject progress and issues (para. 2.58).

3.2 The following would be conditions of effectiveness:

(a) all counterpart staff for SEDESOL and BANOBRAS, as describedin their Strengthening Programs shown in Annex 2 and 3,respectively, will be in place including specialists inprocurement (paras. 2.11, 2.12 and 2.51);

(b) the contract for the provision of the Intensive Course of theNational Training Program as defined in Annex 4 will have beensigned (para. 2.13);

(c) the Guarantor and BANOBRAS shall provide to the Bank asatisfactory executed sub-loan agreement under Part B3 (a) ofthe Project, defining the Guarantor/BANOBRAS transfer and on-lending procedures (para. 2.39).

3.3 Retroactive financing of up to US$4 million for expenditures madeafter June 30, 1992 is recommended (para. 2.54).

3.4 With the above agreements, the project would be suitable for a Bankloan of US$200 million equivalent for a period of 15 years including 5 yearsof grace at the Bank's standard variable interest rate.

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Page 1 of 6

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

City and Investment Eligibility Criteria

Introduction

1. Urban transportation involves an integrated system of roads,private and public vehicles for the movement of goods and passengers,pedestrians, parking, traffic signaling and, in some cases, railroads andmetros as well as land use planning. A change in one component of the urbantransport system affects the other components. It is therefore necessary thaturban transportation be analyzed in an integrated manner so that improvementsin one area does not cause problems in another one. In order to improve thetechnical quality and development impacts of urban transport planning anddevelopment, SHCP, SEDESOL and BANOBRAS will take an integrated approach tothe analysis of urban transport issues in medium size cities. Urban transportinvestment appraisals, recommendations for regulatory reform and for technicalassistance and training, will be grouped together to form a coherent sub-project in each eligible city.

2. This approach will be implemented through the Program for UrbanTransport in Medium-size Cities ("Programa de Vialidad y Transporte Urbanopara Ciudades Medias", PVT), described in paras. 1.14 through 1.17, whichprovides a suitable policy framework for the Project. The PVT is designed toprovide financial assistance, in the form of a federal grant and access tofederal loans, to cities meeting the city and project eligibility criteria.Cities meeting the criteria will be eligible for up to three sub-loans, oneeach for financing: (a) the studies to prepare an Integral Transport Plan(ITP); (b) immediate actions to resolve specific urban transport problems,and; (c) implementation of the recommendations of the ITP.

City Eligibility Criteria

3. Participation in the PVT by any city will be dependent on thefulfillment of eligibility criteria. The first criterion will need to besatisfied before the municipality and\or state could enter into a sub-loanunder Parts Bl and B2 of the proposed project, as will a commitment to satisfythe other criteria (para. 2.30). Confirmation that the other conditions hadbeen met will be required before a sub-loan under Part B3 of the proposedproject could be made (para. 2.31). The financing of any sub-loan with Bankfunds will require the prior consent of the Bank. The following are thecriteria for city eligibility for the proposed project:

(a) a population between 400,000 and 1,200,000 in the 1990 nationalcensus. Consideration will also be given to other cities if theyare of significant economic importance to the country, such as someof those on the US-Mexico border and some regional capitals. A

- 47 -ANNEX 1

Page 2 of 6

proposal for inclusion of a city under this exception will requirethe agreement of the Bank;

(b) completion of an Integral Transport Plan (ITP). Specific terms ofreference for each city, acceptable to the Bank, will be preparedby SEDESOL, with the assistance of the municipality (Annex 6, para.9). These Terms of Reference will include requirements to analyzeand make recommendations in respect to: (a) institutional reform;(b) traffic management; (c) public transport; (d) improvements tocorridors to low income areas; (e) infrastructure maintenance; and(f) environmental issues related to road transport. Themunicipalities will be required to make a commitment to use theirtransport planning and traffic engineering units to update andreview programs and policies recommended in the ITPs. Subsequentfailure to implement fully the agreed policy recommendations of theITP will be an event of default under the sub-loan;

(c) The creation or strengthening, as warranted, of transport planning,traffic engineering unit and traffic management units. In caseswhere these activities are the responsibility of the state, therequirement will be that the functions be transferred to themunicipalities before completion of the sub-project; alternatively,where there are valid reasons for not following this course, that astate delegation be established in the municipality. Establishmentof a local delegation could facilitate the transfer of functions tothe municipality at a later date. The municipalities will also berequired to make a commitment to use their transport planning andtraffic engineering units to update and review programs andpolicies recommended in the ITPs;

(d) Agreement by the participating municipalities and states to makeadequate budget provision for their share of sub-project fundingand not to initiate any urban transport investment outside of theagreed program with a total cost over US$3.0 million, while thesub-project is being implemented, without the prior agreement ofSEDESOL and the Bank. Remedies of the Bank may apply if suchprovisions are not made or if such investments are made withoutprior agreement, although at the Bank's discretion these remediesmay only apply to the amount of the proposed Loan corresponding tothe sub-project where the particular investment is being made;

(e) A formal commitment to the participation of the municipality in theproject to be agreed with the State. Regulation of publictransport operations is frequently divided between agencies atdifferent levels of government (para. 1.18). The policy of thefederal government is to decentralize responsibility for urbantransport affairs to the lowest appropriate tier of government.This condition will include a requirement that the municipalitieshave in place, agree to strengthen or create, as appropriate, acompetent public transport regulatory agency;

- 48 - ANNEX 1

Page 3 of 6

(f) A commitment and plan of action from the municipalities to developa road and signals maintenance capability. Compliance with theplan will be monitored during implementation and will be acondition of access to further lending. The municipalities will berequired to make sufficient budget allocation for maintenanceactivities during implementation of the project, based on acalculation of minimum needs as identified in the integrated urbantransport studies;

(g) The completion of economic and environmental assessments of sub-project components, as part of the ITPs, to ensure: (a) that allprojects are economically viable (that is, that they have an MERRof at least 12% and that no alternative proposal has a higher MERR(the difference between ERR and MERR is explained in Annex 4, par.8); and (b) that any significant negative environmental impacts areidentified and necessary mitigating measures proposed in a formacceptable to SEDESOL and to the Bank. SEDESOL has alreadyprepared a methodology acceptable to the Bank for assessing currentenvironmental conditions which are influenced by urban roads andtraffic, and for reviewing and implementing remedial actions forthose environmental factors which will be adversely influenced byproposed actions. Where the sub-project may affect in a negativemanner a specific community, the city should agree to provide tothe affected community the environmental assessment and theproposed mitigatory and/or compensation measures with reasonableanticipation and to discuss it with the affected community. In thecase of relocation, the Bank guidelines will be strictly followed.Bank approval of such sub-projects will be contingent inter aliaupon compliance with these requirements;

(h) The completion of final engineering and bid documentation forcomponents comprising a minimum of 20% of the sub-project, toreduce the risk of slow implementation of sub-projects. Thesupervision of the preparation of these final designs will beincluded in the terms of reference of the ITPs, financed under PartB2 of the proposed project, although their execution will becontracted separately under Part B3.b;

(i) All reasonable alternatives to any sub-project component whichinvolved the displacement of population should have been reviewedand found to be inferior to the that proposed, and that theaffected community should have been given an adequate opportunityto comment on the proposal. In addition, the evaluation of all sub-project components will include an assessment of theirenvironmental impact and the proposed components will includemitigatory and/or compensatory actions; and

(j) That the municipality or state demonstrate to the satisfaction ofSEDESOL that they have the administrative capacity and ability toundertake the sub-project, preferably by the creation of a fullystaffed sub-project management unit, and to meet all the on-goingconditions of participation, and demonstrate that a sub-loan

- 49 - ANNEX 1Page 4 of 6

agreement with BANOBRAS has been executed in line with the standardrequirements of the Bank for such agreements.

Number of participating cities

4. The 1990 national census results showed that there were 21 citieswith a population between 400,000 and 1,200,000 with a total population ofabout 12.8 million or about 16Z of the national total. There are a further 25cities with a population greater than 200,000, with a total population of 7.2million and representing a further 8Z of the national population (Table 1).The maximum number of participating municipalities in Part B3 of the proposedproject been established at twelve. This reflects resource constraints and anestimate of the manageable limit for adequate supervision while maximizing theinstitutional improvements to be gained under the proposed project. No limithas been established for participation in Part Bl of the project.Participation in Part B2 will be conditional on adequate progress on thedevelopment of the ITP under Part BE and particularly the completion of finaldesigns for the components to be included in the immediate action plan.Participation in Part B3 will be conditional on compliance with the on-lendingconditions. It is anticipated that some participants in Part Bl will beunable to satisfy the on-lending criteria.

5. No rigid criteria have been determined for participation by citiesof less than 400,000 population in the proposed project and each proposal willbe considered on the basis of the case made for the city's importance to thedevelopment of the national economy and the gravity of its urban transportproblems. Only a few of the cities in the group are expected to satisfy theimportance component of criterion (a).

Additional city requirements

6. In addition to satisfying the eligibility criteria, themunicipality or state carrying out the sub-project will also undertake to:

(a) submit annually its urban transport investment and maintenancebudgets to demonstrate compliance with the on-lending conditions

(b) follow procurement guidelines established under the project;

(c) have all subproject accounts audited annually by independentauditors, approved by BANOBRAS, and submit reports no later thenthe end of June of each year;

(d) implement the monitoring program agreed as part of the sub-loanagreements and submit quarterly progress reports; and

(e) during sub-project preparation, appoint a sub-project coordinatorto coordinate activities between the various city and statedepartments with responsibilities in respect to the sub-project.

- 50 - ANNEX IPage 5 of 6

Investment Zligibility Criteria

7. An urban transport investment shall be considered eligible forfinancing under Part B3 of the proposed project provided it meets thefollowing criteria:

(a) complies with the objectives of the PVT and forms part of theIntegrated Transport Plan (ITP) of the city;

(b) an economic evaluation is provided showing that the investment isan efficient solution to the identified problem. This will requirethat the investment be shown to have an MERR greater than 12Z andthat this is greater than that for any alternative with similarbenefits (a definition of MERR is provided in Annex 5);

(c) it has been subject to an environmental assessment which provides apositive outcome in respect to air quality, noise, visual andcommunity cohesion criteria (para 2.20 (f)). In the case ofnegative impacts, appropriate mitigating measures should be devisedand included;

(d) includes any necessary complementary institutional and policyaction plans for successful implementation and operation; and

(e) have a planned implementation period greater than two years, unlessotherwise agreed by the Bank.

Candidate measures for Immediate Action

8. As part of the development of the ITPs a plan of immediate actions,if any, will be prepared, and sub-loans will be available for theirimplementation under Part B2 (para. 2.19). All eligible measures will besubject to planning and evaluation (technical, economic, financial, andenvironmental) according to standard Bank requirements but, identification andimplementation will not be dependent on the completion of the ITP.

9. The objective of the plan will be to improve traffic and transportconditions in a city in the immediate future and at low cost. In mostinstances the qualifying actions will have been prepared in advance of themunicipality or state entering the PVT and will have been subjected to thenormal criteria for qualifying for Bank funding. The proposed ImmediateAction Plans will require Bank approval before their implementation and theirprocurement will follow standard Bank guidelines.

10. Immediate action measures are to be sought which will be justifiedunder any traffic and transport strategy developed under the Integral Study.The total implementation cost of the urgent actions will not normally exceedUS$5 million, equivalent to 10% of the cost of the average investment plan tobe approved under the ITP. The following list shows the types of actionenvisaged.

- 51 - ANNEX 1Page 6 of 6

i) Measures to improve the efficiency of traffic operations including:(a) traffic management; (b) exclusive bus lanes; (c) reversiblelanes; (d) traffic signals schemes; (e) intersection improvementsby low cost means such as channelization, access control andchanges in signal phasing; (f) signing and marking of roads toimprove capacity and safety; and (g) parking controls.

ii) Civil works to eliminate bottlenecks by limited construction suchas minor road widening.

iii) Policy measures to reduce vehicle flows in congested areasincluding access controls, parking and loading/unloading controls,traffic circulation schemes etc and all associated trafficmanagement measures.

iv) Actions to improve the short term maintenance of roads and trafficcontrol devices, particularly the purchase of equipment and spareparts.

v) Technical assistance to strengthen institutions such as municipaltraffic agencies and highway planning departments, to improvetraffic and road planning, operations, maintenance etc and topublic transport companies to improve operational practices.

vi) Implementation of environmental monitoring systems and of actionsto bring about environmental improvements, such as the constructionof noise barriers and the introduction of vehicle emissionstesting.

Financing limits

11. Although there are no formal limits to the total funding availableto any municipality or state under the operating rules of the PVT, the fundsavailable, in comparison to the number of potentially eligible cities andtheir indicative investment needs, indicate that some restriction will have tobe imposed. It is unlikely that any municipality will receive grants andloans totalling more than US$30 million equivalent. The maximum amountavailable from the Project to finance immediate actions is US$5 millionequivalent per city.

- 52 - Annox 1Table IMEXICO

MEDIUM -SIZE CMES URBAN TRANSPORT PROJECT

Candidate aities for Participation in the Program

Cumulative Cumnulaive9-ty ~~~~State Populationt Population percentage

I Puebla PUB 1. 054,9. 1,5,2112 LeonG'Q724.1,774.43 aiudad luarz CHt, 826,127" 7,753,01 3.4%4 Torreon. (6 COAHf. 686.CRI:. 3.43%O.4

S I1~~~~~~~~ma B.C ~~~~~~~~~746,:465 4807:526 appnJAL=OO .7117648793,07 San Luis Potosi (3) &LP.. 658,740: ,5,556,668. . Mezicai BC .%9 Qrlwaan. SIN 602 HAU4 '6,7j16 ......3.%.

IO- Meida I)YU 595,16. ,5,11 Acapulco GRO 528: .4,509812 :Chihuahua. CHIHI53.47 8.478,98710413 Tampico (4 AP 53808,92814: AguascAilentcsAO 56,8 9,49921 1.715: MorelHa MCI49769,8,6 216 Toluca. () MEX 4760*047,9 2917 Veracruz 17 E 7~661,4,6 3..918 a salttillo ()COAH 46,93. 1.1,3 4119 ueeroORO 454,059 11.870,9514620 Hermosijlo SON' 449,472 12.321,47 15.29621 DurangD DGO 41,1 274482 57

Sub total meditm Cities 12,734.482: 1.1

22 Vafla HermosaTA 390,161] 13,124,643 16,2%23 Reynosa TAMPS 375,549 13,5(13,19 16.624 Irapuato G'M: 367,471: 13,862,63 1125 TIaquepaque. JAL.37,. 14.W6375%26 Matamro T'Ahm 323,39 14,524N0 .... %27: Celaya GTIO 3571,3,8 8328 Mazai.ln :SIN.3114,249 1S,1.3,8 1187.29 CiudadObrego SON31,71,490 . 19%30) LAs Mochils SIN 30M7,71.70619431 Xalapa VER 298,331.. 16,068,747:1' 49.8%32 Tuxtla Gtcz CHIS 295.615: 16-164X62 20.1%33 CuraaaMOR 281,752'1.4,1 0534. Cordoba VB1 47A8451,995 21.29%35. EF.nsaada B.C. 26,0 7,414,64:. 2,%36 GuassveSI 25..2 17,12.85:.

37 moaclova ..O..2.,891,9. ,74 :.22.1*

38 Tepic NAY. 23kd103 1510=7 24%39 Coaizacoalos ~~~V]ER 4451862Z,4Z9.

40, Tk'pachula CHI 22,2SM I8,8244141. Nuv Laed AMPS'27921,6,2 3542~ Uruapan:: y mtiCRt7121,7,6

43 Qazaca OAX 21,4I9,492,7624044 Ciudad Victoria TAMPS: . 0780 97...8242

45 SuIrnaw TO 062tS199048146 .. Minatilia EL 9,4 20,16624.7%

Sub total . sub totalmedlumSma Ciiate7,271 :: .

'TOAL 'TOTAL MEDIUM sad MEDIUM-SMALL C7S2,0.5 47TOTAL MEXICO . ~~~~~~~~1,24,64$ x0o

1 Includes Progreso (37,86) 5 Only Toluca2 Includes Ramos Aripe (28,128) 6 Includes G.Palacio3 Includes Soledad de Graciano Sanchez (132,921) & Cd. Lerdo (330,210)4 Includes Cd. Madero & Altamnira (242,2D4) 7 Includes Boca del Rio

Source: Population Census, 1990 08-Oct-9205:11 PM

- 53 - Annex 2Page 1 of 5

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

SEDESOL Strenathenina Program

Background

1. Until recently, the transfer of central government funds to states andmunicipalities for urban transport improvements has boen primarily a subjectfor negotiation between the central government and the local agenciesinvolved. Only limited evaluation of projects was carried out. Increasodemphasis by the Federal Government on decentralization, and the creation ofthe Programa de Vialidad y Transporte para Ciudades Medias (paras. 1.14through 1.17), means that urban transport improvements will now be funded by amix of local, borrowed and federal funds. To qualify for federal funds,projects will have to be subject to evaluation and only those which meetacceptable technical, economic, financial, environmental and social evaluationstandards will qualify for Federal Government transfers. Projects must alsoform part of an acceptable urban transport strategy developed from anintegrated urban transport study of the municipality concerned.

Role of SEDESOL

2. The Secretariat of Social Development has been charged with developmentof urban transport policy, among other urban development matters. However,for various reasons, particularly the financial distribution mechanismsbetween the Federal Government and the states/municipalities for urbantransport improvements, SEDUE, the predecessor of SEDESOL, was not formerlyactive in developing transport policy or in assisting municipalities in thedevelopment of cost-effective urban transport systems.

3. SEDESOL has now been assigned a key role in the PVT, of which theProject is an integral part. The role involves the technical evaluation ofthe Integral Transport Plans (ITPs) and the economic and technical assessmentof the sub-project components to be financed by the Program. In carrying outthis role SEDESOL will establish, publish and promote standards, norms andcriteria; provide advice and assistance to municipalities on transport policyand for planning, design, implementation, supervision and monitoring ofstudies and projects; give guidance on public transport organization andregulation and other sectoral institutional issues; and, investigate anddevelop appropriate technology.

4. To meet the challenge of its new role, SEDUE reorganized in late 1991and created the "Direccion General de Infrastructure Urbana" (DGIU). DGIU wasdivided into sectoral units, one of which is responsible for urban transport,and is further supported by technical units (for financial analysis,statistics, training, etc.) to enable DGIU to meet its responsibilities. Thenew structure of SEDESOL includes a "Direcci6n General de Infrastructure yEquipamiento" (DGIE) with similar functions to DGIU.

- 54 -Annex 2

Page 2 of 5

5. The transport sector directorate of DGIE, the "Direccion deInfraestructura, Vialidad y Transporte" (DIVT), will be responsible forplanning, evaluation and implementation of the urban transport components ofthe and of the Project. DIVT has been adequately staffed with professionals,technicians, and support staff and the number will reach the full complementbefore effectiveness. Additionally, the environmental directorate of SEDESOLwill also be actively involved in the evaluation of, and recommendationsregarding, environmental issues in the development of urban transportprograms. The system of sub-secretariate of SEDESOL and the organizationalstructure of DIVT are shown in Attachment 1 to this Annex.

6. Initially, DIVT activities under the PVT will be based in SEDESOLoffices in Mexico City and will be carried-out by DIVT staff assisted byconsultants. As the Project progresses and the benefits of training (seeAnnex 6) begin to be realized, much of the supervision and day-to-day liaisonwith municipalities can be achieved with personnel and consultants in regionaloffices.

Technical Assistance

7. The PVT is a new initiative and will be implemented by the new DIVT,within SEDESOL. While SEDESOL has selected with care the qualifiedprofessionals to staff DIVT, urban transport methodologies and processes areuntried and the staff have little practical experience in implementing thistype of program. Consequently, SEDESOL proposes to strengthen the managementand technical capabilities of DIVT through training and technical assistance.The training will be provided through the National Training Program (Annex 6),and through day-to-day contact with specialist technical assistance hired toassist DIVT in implementation of the PVT and the Project.

8. The technical assistance will assist DIVT to establish the PVT and theProject and to cope with the workload generated by the initial stages of theprogram. This will be achieved by providing specialized advice in trafficengineering and management, transport planning, public transport operations,infrastructure maintenance management and transport economics. The technicalassistance program is designed to supplement and transfer specializedexperience to the DIVT staff already hired by SEDESOL. The high technicallevel and experience of urban transport planning required makes it unlikelythat this technical assistance could be provided by local consultants. Thefirst 40 months of technical assistance have been contracted in accordancewith the August 1981 "Bank Guidelines for the Use of Consultants by WorldBank Borrowers and by the World Bank as Executing Agencv."

9. The total of staff-months of technical assistance will vary with thesector specialty, reception and interest in the PVT by the municipalities andthe ability of SEDESOL to maintain qualified technical staffing levelscontinuously. Over the life of the Project, the following levels of technicalassistance per sector specialty will be needed: (i) TrafficEngineering/Traffic Management - 36 staff-months, (ii) Transport Planning - 36staff-months, (iii) Public Transport Operations - 24 staff-months, (iv)Maintenance Management - 24 staff-months, and (v) Transport Economics - 24staff-months.

- 55 - Annex 2

Page 3 of 5

10. Thus, technical assistance totalling approximately 144 staff-months willbe provided for the Project period. During the first 6 months of the Project,five sector specialists will work together, with two continuing for a furthersix months. At the end of the first six month period, the need for furthertechnical assistance will be reviewed. The technical assistance will assistSEDESOL to develop methodologies (including technical manuals), processes,work programs and appropriate methodologies to be used in future IntegralStudies and to evaluate proposed municipality transport investments under thePVT and the Project. The technical assistance will also assist municipalitiesto develop and supervise their respective sub-projects.

11. During the first Annual Review Meeting of the Project, withparticipation of SEDESOL, BANOBRAS, SHCP and the Bank, progress will beevaluated and it will be decided if, which and for what period, technicalassistance should be extended beyond the first 75 staff months. The remainingtechnical assistance allocation will be utilized on an as-needed basis toaddress specific issues that arise during Project/sub-project implementation.

Facilities and Equipment

12. DIVT has adequate office space in SEDESOL headquarters and in regionalfield offices. It has desk top computers, portable computers, printers,vehicles, and a modest library. Additional computers are needed, as well assoftware, audio visual equipment and reference material. Procurement ofequipment to be acquired to adequately support the Project will be carriedout in accordance with the Bank's 1985 "Guidelines for Procurement under IBRDLoans and IDA Credits."

Consultants

13. The specifications of the three categories of consultants needed duringthe Project in addition to technical assistance are defined in the followingparagraphs.

14. Supervision of works in the participating municipalities will becarried out by consultants contracted directly by the participatingmunicipalities and states. SEDESOL will maintain an oversight, by centraloffice and the regional delegation staff, as part of its normal operationalactivities. The cost of supervision will be included in SEDESOL's operatingbudget and recovered in the lending arrangements between BANOBRAS and theparticipating municipalities.

15. During the initiation of the Project, however, when greater control isadvisable, and until greater responsibility can be assumed by the regionaldelegations, there is justification to include financing of SEDESOLsupervision within the Project. This will be only for the first two years.Thereafter the supervision requirements will be reduced and the full-timeSEDESOL staff will have become more experienced in supervision, so furtherBank participation will be needed. Estimated costs are based on twoconsultants visiting each city for two days each quarter, and spending one dayin the office following the visit for reporting.

- 56 -Annex 2

Page 4 of 5

16. During the early stages of the Project, all potentially eligiblemunicipalities must be visited and at least five are expected to apply forProject funds before effectiveness. This will create a higher workload thanwould be normal for DIVT. It is proposed to meet these unusual staff demandswith temporary staff, rather than through the hiring of permanent staff whomay later be made redundant. The temporary staff will be financed under theProject for a period up to 2 years. If they are still needed after that time,they will be considered essential to the normal working environment andfinanced by SEDESOL. Approximately 115 staff-months of consultant technicalassistance, together with 36 man-months of temporary staff have been includedin the project design.

17. In addition there will be the need throughout the Project life forshort-term consultants to carry-out special assignments, including, interalia. adaptation of software packages, computerization of work-flow process,staff supplementation during periods of concentrated activity, or specialassistance to municipalities. The consultants will be contracted on an as-needed basis with prior approval of the Bank. Approximately 30 staff-monthsover the life of the Project are anticipated.

Study Tour

18. Much has been done within Latin American in the context of urbantransport including public transport operations and planning, infrastructuremaintenance and traffic management particularly, for example, in Brazil,Argentina, and Chile. It is proposed to arrange a study tour to: SaoPaulo/Curitiba for operation of busways and traffic management; Buenos Airesfor organization and regulation of public transport; and Santiago for trafficmanagement, transport planning and maintenance. The study tour will lastapproximately three weeks, and involve six staff from DIVT (the two trafficengineers, transport planner, public transport operations specialist,maintenance management specialist) and six specialists from municipalitieswith Sub projects. The program will be managed in each country by a localconsultant. The tour will take place during the last quarter of the firstyear of the proposed project to provide ample opportunity for experiencegained to be used during the remainder of the implementation period.

Promotion and Distribution

19. As in many countries, the benefits of integrated urban transportmanagement, public transport organization and regulation, and cost-effectivemaintenance, are not fully appreciated by most municipal officials andtechnicians. In addition, the impact on the municipalities of the changes inFederal Government approach to financial assistance for urban transportprojects and the attendant requirements, need to be publicized in light of thepotential benefits. SEDESOL staff will work in cooperation with the Promotionconsultant contracted by BANOBRAS (Annex 4, para 8) to develop and distributeinformation and literature and to advise and assist states and municipalitiesto fully understand the Project.

- 57 - Annex 2Page 5 of 5

Summary

20. The SEDESOL Strengthening Program will be a combination of effortsinvolving training, technical assistance, equipment, consultants, study tours,and development and distribution of information. Training will be included inthe National Training Program, described in Annex 4. The total cost of theproposed institutional strengthening of SEDESOL will be US$ 3.5 million, madeup as follows:

Activity __US$Technical Assistance 2,640,000Equipment 106,000Consultants 625,000Study tour 79,000Promotion and distribution 50,000

[ Total 3,500,000

21. The schedule of contracts and activities will be as in the followingTable, but subject to review at the annual Review Meetings.

I Activity |Start Completion

First Technical Assistance Contract

Highway Design Manual September 1992 January 1993Economic Evaluation Manual December 1992 March 1993Public Transport Operations Manual September 1992 February 1993Environmental Assessment Manual December 1992 March 1993

Preparation of ITPs January 1993 September 1993Supervision of ITPs March 1993 September 1993Assessment of ITPs June 1993 September 1993

Second Technical Assistance Contract

Preparation of ITPs May 1993 November 1993Supervision of ITPe May 1993 November 1993Assessment of ITPs May 1993 November 1993

Further Technical Assistance

To be determined during First AnnualReview

Supervision (Temporary Staff)

Supervision of ITPs by SEDESOL March 1993 March 1995

Study Tour September 1993 September 1993

- 58 -

ANNZ 2Attachment I

Page I of 3

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

ORGANIZATION CRART OF SEDESOL

SUBSECRETARIAT OF URBAN DEVELOPMeNT AND INFRASTRUCTVRC

DEPARTMENT OFINFRASTRUCTURE AND

EQUIPMENT

DEPARTMENT OF INTERACTIONAND PROCRESS OF

PROJECTS

DEPARTMENT OF INFRASTRUCTUREHIGHWAYS AND

TRANSPORT

IDIVISION OF PROGRAMS ANDPROJECTS FOR SOLID WASTE LENVIRONMENTAL PROTECTION

DIVISION OF EQUIPMENS FORURBAN DEVELOPMENT

DIVISION FORPUBLIC BUILDINGS

ADMINISTRATIVE COORDINATION

- 59 -ANNEX 2

Attachment IPage 2 of 3

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

ORGANIZATION CHART OF SEDESOL

DEPARTKENT OF INFRASTRUCTURE AND EQUIPMENT

DEPARTMENT OF INFRASTRUCTUREHIGHWAYS AND TRANSPORT

I I SUBDEPARTMENT FOR 1[SUBDEPARTHENT OF HIGHWAY | SUBDEPARTMENT FOR SPECIAL INFRASTRUCTUREI INFRASTRUCTURE TRANSPORT PROGRAKS

SUBDEPARTHEN FOR IDIVISION OF PLANNING DIVISION SPECIAL INFRASTRUCTURE IFIELD STUDIES PROJECTS ]

DIVISION FOR OPERATION SUBDEPARTMENT FORDIVISION FOR HIGHWAY AND MONITORING

MAINTENANCE MAINTENANCE INFRASTRUCTURE PROGRAMS

DIVISION OF ECONOMICDIVISION FOR TRAFFIC AND

ADMINISTRATION FINANCIAL STUDIES

DIVISION FOR HIGHWAY DIVISION OF TRANSPORTSAFETY SYSTEM

- 60 -ANNEX 2

ATTACHMENT 1Page 3 of 3

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

ORGANIZATION AND LEVEL OF STAFFING DIVT

Staff level Total In place byDIVT effectiveness

Professional 11 11Technical 11 4Support 9 5Total-----------------------------3----------------20---------

Total 31 20--------------------------------------------------------------

- 61 - ANX 3

Page 1 of 4

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

BANOBRAS Strengthening Program

Role of BANOBRAS

1. BANOBRAS responsibilities under the Project are set out in Annex 6,which describes the sub-project preparation and execution. The sameterminology for the Project process has been employed in the presentdescription of the BANOBRAS strengthening program which relates to thefollowing parts of the Project:

(a) Part A2 - National component, BANOBRAS strengthening

(b) Part B1 - preparation, including Diagnostic Studies, Action Plansand Investment Plans of the Integral Transport Plans (ITPs), andthe identification, evaluation, design and of the plans forimmediate actions;

(c) Part B2 - implementation of the plans for immediate actions; and

(d) Part B3 - implementation of the ITPs.

Strengthening Program

2. The responsibilities of BANOBRAS under the Project will be exercised bythe "Gerencia de Proyectos, Vialidad y Transporte" (GPVT), under the"Direccion de Financiamiento del Desarrollo" (DFD). The structures of DFD andGPVT are shown in Attachment 1, Tables 1 and 2. BANOBRAS has determined thatProject work should be allocated to two main sub directorates of GPVT -"Financiamiento Integral" and "Promocion".

3. BANOBRAS' strengthening program, Part A2 of the Project, will have twocomponents:

(a) internal actions, mainly increases in BANOBRAS staff in the twosub directorates to facilitate the development of the unitsinvolved in sub-project preparation and execution; and

(b) strengthening, through the provision of technical assistance,consultant services and essential equipment.

4. Part A2 - Internal Strengthening: The management of the sub directorateof "Financiamiento Integral" will comprise a unit head and two division chiefs- one for financial analyses and one for bidding. The duties of the subdirectorate will be carried out by 4 professional staff with financial andcontract experience. It is proposed to contract 2 of the staff for 2 years;BANOBRAS will provide counterpart staff such that they can receive on-job

- 62 - ANNEX 3

Page 2 of 4

training and BANOBRAS will take over all duties of these two contracted staffafter two years.

5. Part Bl - Promotion: To assist BANOBRAS identify which of thepotential 46 cities listed in Table 1 of Annex I would participate in theProject, it is proposed to fund:

(a) a consultant for the preparation of a "promotional package".Outline Terms of Reference are set out in Attachment A. Ingeneral, the consultant will prepare explanatory and standarddocuments which will make clear to the cities the scope andobjectives of the program, the terms and conditions under whichBANOBRAS (Project) loans will be granted, the procedures necessaryfor cities to qualify for loans and the bidding procedures forconsultants, works and goods which will must be followed; and

(b) the preparation of a video detailing the role of urban transportin city development, describing cost effective and good practicein urban transport and traffic techniques and demonstration ofsuccessful traffic and transport systems both in Mexico andoverseas.

6. Once the cities have been identified, it will be necessary to explainthe relationship between transport planning and investment and financialresponsibility to the states and municipalities. Since this area is concernedwith traffic and transport policy, and BANOBRAS is relatively weak in thisarea, it is proposed to contract 3 staff for 1 year. BANOBRAS will providecounterpart staff such that they can receive on-job training and BANOBRAS willtake over all duties of these two contracted staff after two years.

7. Parts Bl, B2, and B3 - Financial analyses of municipalities: BANOBRASwill be responsible for: (a) determining the financial impact of any sub-project loans on city finances, and; (b) assessing the financial status ofcandidate municipalities and states, and verifying that the proposed sub-project financing arrangements satisfy the financing conditions for on-lending, particularly those involving direct cost recovery (eg bettermenttaxes for roads, toll roads, parking facilities etc). While BANOBRAS has muchexperience in these areas, it is considered that technical assistance isneeded to assist in defining procedures to be followed, in preparingguidelines for the financial analysis to be included as part of the ITPs. Theprogram provides for a financial analyst with experience in transport toprepare the guidelines.

8. Parts B2 and B3 (c) - Immediate Actions Implementation of ITPs:BANOBRAS will be responsible for ensuring that procurement guidelines,acceptable to the Bank, are followed for all sub-project components in allcities. BANOBRAS has considerable experience in this area and performanceunder the First Project has improved steadily, although the number of staffinvolved are insufficient. To capitalise on this experience and to ensure agreater depth of experience in BANOBRAS, it is proposed to employ consultantsto: (i) prepare a manual of standard bidding procedures, and (ii) give courseson procurement.

-63 - ANNEX 3

Page 3 of 4

9. Parts B1, B2 and B3 - Monitoring: The First Project has demonstratedweaknesses in monitoring and ex-post evaluation of projects. BANOBRAS will beresponsible only for the financial monitoring, supervising compliance withloan covenants and the preparation of Quarterly Reports in a timely manner.To assist in setting up an effective internal reporting procedure in BANOBRAS,a management consultant will be employed to establish working practices and totrain BANOBRAS staff.

10. Parts A2, and B1, B2, and B3: GPVT lacks basic equipment, largelycomputers, to enable it to fulfill its role in an efficient manner. It isproposed to fund a number of microcomputers, ancillary hardware and softwareunder the Project to enable GPVT to set up efficient working practices.

11. Total Cost: The total cost of the actions to strengthen BANOBRAS forthe Project are shown in the Table below:

Activity US$m

Supplementary Staff

Financial Analyses 49,000Procurement 48,000Promotion 24,000Monitoring 24,000

Sub-total 145,000

Consultants

Financial Analysis 40,000Procurement 40,000Promotion 40,000Monitoring 20,000

140,000Sub-total

Other

Viaticos (consultants and supp.staff) 30,000Promotional video 60,000Computers 20,000Software 5,000

Sub-total 115,000

Total 400,000

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Page 4 of 4

12. The schedule of principal activities is shown in the following Table.The implementation of this schedule will be reviewed during the course of theAnnual Review Meeting.

Activity Start Completion

Supplementary Staff

Financial analysis January 1993 December 1994Procurement March 1993 December 1994Promotion August 1992 July 1993Monitoring March 1992 February 1993

Consultants

Promotion August 1992 July 1993Financial analysis November 1992 October 1993Procurement manual January 1993 December 1993Monitoring model January 1993 May 1993

Equipment

Computers January 1993 December 1994Software March 1993 March 1993

EXZICO

MEDIURH-SIZE CITIES URBAN TRANSPORT PROJECT

ORGANIZATION CHART OF BANOBRAS - DEPARTMENT OF DEVELOPMENT FINANCE

DEPARTMENT OF DEVELPHNTfFINUCE

SUBDEPARTHENT OFlURBAN INFRASTRUCTU;RE SUBDEPARTHENT OF

FINANCE SERVICE FINANCE

DIVISION OF URBAN iDIVISION OF URBAN LAND DIISION OF HIGHWAY

INFRASTRUCTURE AND DIVISION OF WATER SUPPLi AND AND DIVISION OF PL^AMING N

EQUIPHENT AND DRAINACE HOUSImC rINANCz TRANSPORT PROJECTS CREDIT

a'1oLu

MHDIUI-SIZE CITIES URANS TRAUSPORT PROJECT

ORGANIZATION CHART OF BANOBAAS.DIVISIOB & POJE1CTS. HIGHWAYS AND TANOSPORT

COORDIENTIOH AND CREDIT CONTROL

OUTSIDE COUSULTAHISPROMOTIONFINANCIAL ANALYSTSNOUITORING

COORDINATION AND CREDIT COFT; O ..............'...........R BIDDING

[SUBDIVISION OF CREDIT SUDIVISION OF TECHNICAL SUBDIVISION OF BIDDING SUBDIVISION OFAND AND ErVALUATION or ch

PRHONCTION FIRAJIAL ANALYSIS CONTRACTING CURRENT PROJECTS c

DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION

CHIEF CHIEF CHIEF CHIEF CHIEF CHIEF CHIEF

,1 I, ,1 1, , i i .I I 1,|SUtERVISOR ||SUWPERVISOR SUPW ERVISOR S UPERVISOR

ANXSTY |AALYST(s) AN AALYST(s) |A| "LYST(s)

- 67 - ANNEX 4

Page 1 of 6

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

The National TraininR Program

National Training Program Objectives

1. The objectives of the National Training Program (NTP) are:

(a) to train, in a short time, a nucleus of professionals suchthat they have understanding of urban transport issues, urbantransport planning concepts, methodologies for analyses ofalternative transport proposals, and prioritization methodsfor evaluating transport investments;

(b) to develop the staff capabilities required to improve urbantraffic engineering and management practice, and;

(c) to assist in the build up of staff capabilities in the longerterm in the traffic and transport sector, by a continuoustraining and updating program for professionals and decisionmakers.

The Courses

2. To accomplish the objectives, an integrated training program isenvisaged. The NTP has commenced with a one year traffic management courseoffered by the Universidad Nacional Autonomo de Mexico (UNAM) and supported bySEDESOL. The course is already in progress and will not be financed by theProject. The part of the NTP that will be financed by the Project willcomprise;

(a) PART A - An Intensive Course - an intensive course of about 4months duration, aimed at engineers, economists and urbanplaners in the middle sized cities, with the objective ofproviding basic training in urban transport and trafficplanning. Preparation and delivery of the course is currentlybeing contracted. Depending on the recommendations of a postcourse evaluation, it is expected that the course will berepeated several times;

(b) PART B - Updating Courses - a series of updating and specialtopic courses and lectures provided periodically to theprofessionals and managers in the cities, SEDESOL and BANOBRASon various issues and subjects in urban transport relatedissues;

(c) PART C - Regional Seminars - seminars aimed at particularregional urban transport issues;

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Page 2 of 6

(d) PART D - Overseas Training - overseas training for a selectedgroup of successful participants from the Intensive Course andprofessionals from the SEDESOL's DIE; and

(e) PART E - An Evaluation Program - an evaluation program will beundertaken to assess the impact and value of the NTP and toassist in future planning of training.

PART A - The Intensive Course

3. The objective of the Intensive Course is to provide, in a concentratedperiod a total of 4 months full-time training, a well prepared course,delivered by qualified professionals with extensive practical knowledge.

4. The course is designed for engineers, economists, urban planners andothers with a sufficient technical background, but not necessarily withprevious traffic and transport experience. Participants will be assigned tothe course by their state or municipal government. It is expected that thecourse will be given on an annual basis until such time as it is assessed thatsufficient trained professionals are available. In the first instance, onecourse is being contracted, with an option for a second course at a laterdate.

5. The Intensive Course comprises four modules, viz: (a) TrafficEngineering; (b) Transport Planning; (c) Transport Economics; (d) Publictransportation. Each module is divided into a series of lectures on specificsubjects. Details of the modules are as follows:

(a) Transport Planning - The module covers: development of urbantransport objectives; definition of the aims of regional andurban planning and assessment their interaction; methodologiesof urban transport planning; the modeling of urban transportdemand characteristics and traffic flow; the criteria to beused in the selection of particular mathematical models; dataneeds and geographic considerations; surveys and samplingmethods; the preparation of alternative scenarios andcharacteristics of urban transport systems; methods ofevaluation of available software ; the preparation andevaluation of investment programs;

(b) Traffic Engineering - The module includes: the design of urbanstreets and roads systems; traffic surveys and methods of theapplication of their results; traffic flow characteristics;road and signalized intersection capacity and intersectiondesign (round-about, priority, split levels, signalized); theuse of state of the art software for calculation of levels ofservice; demonstrations and exercises in use of softwarepackages; road safety and road safety data considerations;road signs and markings; the planning and provision of parkingfacilities; special provision for public transport vehicles -bus ways and bus priority systems; design considerations for

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pedestrianization scheme.; providing for bicycle wvaysplanning for goods vehicles traffic; software and itsapplication for evaluation of short range solutions.

(c) Public Transport - The module covers: the characteristics ofdifferent public transport system, (taxis, para-transit,buses, light rail, metro systems); the definition andmeasurement of level of service; public transport network androute planning; public transport operations; regulation andprivatization issues; public transport company operations -operations, maintenance, vehicle choice and replacement,tariff structures and profitability.

(d) Transportation Economics - The module includes: projectevaluation criteria and methods; vehicle operating costs andtime related benefits; environmental assessments - vehicleemissions, noise, visual intrusion and social severance;sensitivity analysis; how to allow for economic growth andinflation; priorities and the preparation of investmentprograms; infrastructure and public transport finance.

6. In addition to the four modules, a pre-requisite course is being offeredby SEDESOL to the Intensive Course participants. This includes an introductionto personal computers, the use of basic software packages, and introductorycourses in statistics and economics.

7. The course will be spread over a period of up to one year, vithparticipants having 40 hours of weekly contact with the lectures (lectures,exercises and laboratory hours) in each monthly module, each module beingplanned for about 160 hours training. The final details of course and moduleduration are now being negotiated with the selected course provider.

8. Course Procuremont The Intensive Course is being procured according tothe Bank's Guidelines for the Selection of Consultants.

9. Estimte of Intensive Course Costs: Course cost estimates are dividedinto two parts: (a) the cost of preparation and delivery of the by theselected organization and (b) other costs to be met by SEDESOL locally (thepre-requisite course and course administration noted in para 11). The costestimate is based on two courses but will be contracted once with the optionto provide all or part of the modules a second time. SZDESOL will finance thelocal component of the course including offices/lecturer rooms, officeequipment, photocopier, course secretary, and food and accomodation for thestudents. The Project will finance the contract for course preparation andexecution.

(i) Th. Intensive Course contract - the estimated amount of thecontract for providing the two courses, each of four modules is US$700,000. This includes about 150 days of lectures for each course,transport to/from the course location, subsistence of lecturers,all preparation, course materials, equipment, audio-visual aids and

- 70 - ANNEX 4Page 4 of 6

other equipment necessary for the preparation and delivery of thecourses; and

(ii) Other costs - the cost for providing the four week "pre-requisitemodule" and for the local costs for the Intensive Course isestimated at US$ 600,000. More than 70% of this cost is for theaccommodation and living costs of the course students.

PART B - Updating Courses

10. The objective of these Courses is to update urban transportprofessionals and administrators with recent developments in their respectivefields of expertise, to provide refresher courses and to conduct regionalseminars on specific local, topics of interest. The updating program willstart after the completion of the first Intensive Course and comprise eighttwo week cou es over a period of four years.

11. For the first two years, the courses will be administered and housed bythe same local organization that administers.the intensive course program.Some of the lecturers will be selected from the SEDESOL Technical AssistanceTeam, others will be contracted from local universities, institutions andconsulting firms. The subjects covered will be similar to those of theIntensive Course, but with an emphasis on recent developments.

PART C - Regional Courses/Seminars and Workshops

12. This component of the Project will concentrate on providing to the cityand state professionals and administrators, basic explanations of therelevance of the PVT to local problems, and of the application of traffic andtransport planning methods in the resolution of specific local and statetransport issues. It will comprise various elements, ranging from one-to-twoday regional seminars to one week courses and/or workshops. Thecourses/seminars will be given in most of the candidate cities during thefirst two years of the program. It is planned that each course will be for amaximum of 25 students. The courses/seminars will be open to a wide range ofparticipants, including those from participating cities and state governments,other city and state governments, professionals from Federal Governmentagencies and from the private sector. It is expected that the courses will begiven twice a year for the first two years of the project (a total of four tosix weeks during the first two years).

13. As for the Updating Courses, the Regional Courses/Seminars will be givenby lecturers selected from the SEDESOL Technical Assistance Team contractedfrom local universities, institutions and consulting firms. It is expectedthat with the increased decentralization of responsibilities for urbantransport and the development of the profession, the need will arise foradditional courses at centers located all over the country.

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Page 5 of 6

14. Cost Estimates for the Updating Courses and Regional Seminars. TheProject will fund: (a) the cost of preparing the course materials andpresenting the Courses, (b) the administration costs, and (c) the subsistencecosts for the public sector participants. The participants salaries will bepaid by their respective employing agencies. The estimated cost for theseparts of the program, are US$ 100,000 for the Updating Courses and US$300,000for the Regional Courses and Seminars. About 25% of the cost will comprisecourse accommodation and participant subsistence costs.

PART D - Training Abroad

15. The objectives of training abroad is to increase the specialist skillsin urban transport planning and traffic engineering skills in Mexico. Theareas of specialization and the location of overseas training will bedetermined by SEDESOL, advised by their technical assistants, during theProject implementation period. Three professionals will be selected for theprogram by a committee established by SEDESOL for this purpose. SEDESOL willenter into an agreement by under which the professionals will agree to workfor three years (or other agreed period) in an assigned office with the optionof leaving and being charged for the course on a Dro-rata basis.

16. Selected successful participants from the Intensive Course, or otherprofessionals with comparable background from SEDESOL, will be eligible foroverseas study specializing in a specific subject, such as transporteconomics, urban rail, public transport operations or transportation modeling.Participants will attend a specific university or institute to study/work forup to a year, preferably working toward a higher degree, although workingoverseas in a private sector company or public sector agency would not beruled out.

17. The Project will support the tuition, international travel andsubsistence of selected participants but not participant salaries. Theestimated cost for the overseas training, including travel, tuition andsubsistence, is US$ 90,000 for three students.

PART E - Post Evaluation Study

18. The Project will also finance a post NTP evaluation study, aimed atevaluating the course achievements. The study design will form an integralpart of the course proposal and will assist in the preparation of futuretraining programs in Mexico. The first evaluation will be made soon after thetermination of the first intensive course and will assist in the preparationof further courses as well as providing information for the following annualreview. A special evaluation report will be made for consideration in the MidTerm Review, and a final report will be made for inclusion in the PCR. Thecost of the evaluations is estimated at US$10,000.

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Page 6 of 6

The Total Cost of The Training Program

19. The following Table shows the expected cost of each of the components ofthe NTP to be financed by the Project, which will finance 100% of the cost.More than 70% of the cost is represented by the two intensive courses and ofthis amount, 602 (42% of the total cost) represents the accommodation andliving costs of the students. This expenditure is considered justified giventhe importance of the Intensive Courses in the NTP and the need of the NTP totrain a sufficient number of students for the decentralization of urbantransport planning to be feasible. Without the incentive of financing of thestudents, there is a high risk that the municipalities and states would notnominate students for the courses.

Part Course US$

Part A SEDESOL cost for the pre-requisiteCourse and two Intensive Courses 600,000

Contract for two Intensive Courses 700,000

Part B Updating Course 100,000

Part C Regional Course 300,000

Part D Study courses abroad 90,000 l

Part E Post Evaluation Study 10,000

Total 1,800,000

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Annex 5Page 1 of 8

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

Economic Evaluation

A. Methodology

1. An evolution has been carried out in the method used for the economicevaluation for the first three cities. A standard method is now expected to beused in future evaluations, but it will not be rigidly applied as thecircumstances of each city and each individual sub-project component mightrequire a variation on the standard method.

2. The method of economic evaluation which can be used depends to a largeextent on the data which is available. There is no advantage in deciding on avery sophisticated method of evaluation which requires extensive amounts ofdata if there is no chance of that data being produced, or if it could beproduced, the cost is likely to be prohibitive.

3. In the three cities whose projects have so far been evaluated, there hasbeen an attempt to evaluate individual sub-project components and the sub-project as a whole. Some use was also made of economic evaluation to optimizesome of the proposed sub-project components.

4. There are two fundamentally different ways of evaluating multiple roadimprovement projects in an urban area. The simplest is to consider all theimprovements to be implemented simultaneously, and then to compare theevaluation variables in the situation with and without the improvements. Inthe application of this method it is common to find that the evaluation ofeach individual project is made by estimating the change in vehicle operatingcosts (and possibly vehicle occupants' time savings) on the road which is thesubject of the improvement. But the changes in travel speed on this road,which are the determinant of the changes in operating costs and travel times,can arise as much from changes else where on the network as on that link whichis the subject of a specific improvement. In these cases there will be amisallocation of benefits, and possibly a wrong determination of whichparticular components of an overall sub-project are economically justifiable,even though the estimation of overall estimation of benefits might well becorrect. This method should therefore not be used to assess the economicviability of components of a sub-project. It was used in the originalevaluation of the Ciudad Juarez sub-project.

5. The alternative method starts in the same way, by assuming that all thecomponents of a sub-project are implemented simultaneously. This will allow adetermination to be made as to whether the overall sub-project is economicallyviable. There is then a vital second stage, in which each individual componentof the overall subject is taken out, and the economic evaluation repeated with

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Annex 5Page 2 of 8

the remaining components only. The difference in total costs and benefitsprovides a measure of the impact of the eliminated component, and its economicviability can be assessed. This method is also not without problems, as theevaluation of any particular component can change according to what othercomponents are still included in the overall sub-project. But this problem iscapable of resolution by repeating the elimination of components, and using asstarting point for the evaluation of particular components that combination ofcomponents which gives the highest aggregate rate of return. These problems ofevaluation are particularly relevant in urban transport projects, where theusual assumption made in an economic evaluation, that there is independence ofcomponents, is not valid.

6. All evaluations used a similar sequence of activities and used the sameindicators of net benefit of the projects. The sequence was:

i) define the project and estimate the investment costii) project future traffic volumesiii) estimate vehicle speeds and operating costs with and without the

projectiv) determine the flow of net project costs for the evaluation periodv) calculate the values of the economic indicators

7. The economic indicators calculated were Benefit/Cost ratio (B/C Ratio),Net Present Value (NPV) and Economic Rate of Return (ERR). In all theevaluations, economic costs rather than market prices were used. The costswere derived by eliminating the taxation component, principally fuel taxes andvalue added tax, from market prices. Although there are other differencesbetween the two concepts, such as in labor costs and the prices of importedgoods, where market prices do not necessarily represent economic costs, thederivation of the appropriate shadow prices is controversial and makes littledifference to the results of the economic evaluation. In the following reviewof the results, only the MERR results are analyzed. The other indicatorsinvariably indicated the same results and conclusions.

8. Many of the sub-project components analyzed for the three first citiesshowed high values for the ERR, many in excess of 75% and some in excess of500%. The standard method of calculating ERR values involves an assumptionthat all benefits can be reinvested to obtain a rate of return equal to theERR value. This assumption is reasonable at normal levels of ERR but isunrealistic for very high values, where the probability of being able toreinvest at the ERR rate is very low. A modified method of determining thevalue (MERR) requires the more reasonable assumption that benefits arereinvested at the standard discount rate, in Bank evaluations 12%. All thevalues presented in this Annex are based on this modified HERR method. For usein those cases where the standard method was used, a conversion to themodified method has been made, making use of knowledge of the project costsand rate of growth of benefits to simulate the future stream of net revenues.

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Annex 5Page 3 of 8

Sub-prolect component costs

9. Project costs were estimated using very preliminary designs, andestimates of quantities of materials and labor, to which standard unit costswere applied to obtain total costs. Experience has shown that cost estimatesmade in this way grossly underestimate the final project costs, even whenallowance is made for inflation. For this reason, sensitivity tests withassumed large assumed investment cost increases were made.

Traffic volumes

10. The next stage is to make an estimate of future volumes of traffic. Thesimplest predictions assume that traffic will continue to grow at somepredetermined rate, usually independent of any changes in the road network orin vehicle travel speeds or operating cost. Other projection methods takeimplicit or explicit account of these variables. Many of these methods resultin either different projections of total traffic, or assignments of a fixedvolume of traffic to different routes from their origin to their destination,depending on whether or not a project is implemented.

11. If different total volumes of traffic are projected in the twosituations being compared in the economic evaluation, that evaluation musttake explicit account of the benefits of the generated traffic. If theprojections involve different assignments of a given volume of traffic toroutes through the network, the economic evaluation must take explicit accountof the change in total vehicle operating costs.

12. Although these might seem elementary principles to be applied in theeconomic evaluation of a road project, they were overlooked in various of thepreliminary evaluations made in the three sub-projects. In at least one case,they were deliberately overlooked in an attempt at simplification of themethodology, but when the results of the simplified evaluations were comparedwith those in which both principles were applied, significantly differentresults, leading to different conclusions, were obtained.

Vehicle speeds and operating cost savings

13. The principal benefits which could be evaluated for each of the sub-projects were the reduction in vehicle operating costs and reductions in thelong term cost of road maintenance and reconstruction. Other benefits whichwere not evaluated (although some of them were measured) include the value oftime savings to vehicle occupants other than paid drivers, environmentalbenefits in terms of reduced vehicle gas emissions, the benefits in terms ofimproved environment for pedestrians at road crossings and in town centers,and the contribution to economic growth through lower transport costs and aworkforce with a more regular arrival time at their place of employment.

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Annex 5Page 4 of 8

14. Vehicle operating cost savings formed more than 90% of the evaluatedbenefits of the sub-project components in each of the cities. The estimationof vehicle operating costs was made by the application of equations or tablesof unit operating costs for different vehicle types at different averagespeeds (see Table A7.1 and Fig A7.1). The vehicle speeds were estimated, forthe situations with and without the sub-project components, using standardequations which relate vehicle speeds to the ratio of traffic volume to roadcapacity. Estimates of future road traffic volumes were usually obtained byapplication of standard growth rates to estimates of current traffic volumesderived from various types of survey and road capacities were estimated usingstandard values such as those from the Highway Capacity Manual.

15. The estimates of current road traffic volume were generally made for theaverage daily peak hour, a notoriously difficult concept to define. In thelater evaluations made for the components of the sub-project in Toluca andLeon, estimates were made of the frequency of occurrence (in terms of hours pryear) of various values of this ratio expressed as proportions of the trafficin the exceeded on the busiest 7.5% of hours of the year. Estimates of theshape of the frequency distribution were based on all day vehicle counts forperiods of at least three months at key sites in each city.

16. The estimates of unit operating costs were originally based on the formsof equation used in the HDM, urban traffic version, but in the latestevaluations for all three cities, use was made of a Mexican version of a moreprecise method, which takes into account the number of times a vehicle mustaccelerate from stop and of the operating costs of stationary vehicles,particularly important for buses. This national version of vehicle operatingcosts provides data for five vehicle types - private cars, combis, micros,buses and medium trucks, at operating speeds from 5 km/hr to 50 km/hr, forthree types of road surface and three types of terrain. A summary of the costsfor each vehicle type at different speeds on level paved roads in goodcondition is shown in Table 5.1.

17. A disadvantage of all currently available vehicle operating costequations is in their treatment of the depreciation costs of private cars.Only a small part of this depreciation is related to vehicle use, and eventhat part is related to distance travelled rather than to time in use. Only ifit is to be argued that increased speeds will result in higher use per vehiclecould it be reasonably argued that this part of depreciation could beinfluenced by a typical road improvement project. In most cases, there is nochange in the annual depreciation of private cars as a result of theimplementation of such projects. When included in economic evaluations, as inthose undertaken for this project, benefits of reduced depreciation forprivate cars typically account for about 15% of the benefits of this vehicletype, so inclusion of full depreciation benefits results in an overestimate ofbenefits of less than this percentage.

18. Depreciation allowances for commercial vehicles are a different matter.It is quite possible that increased average speeds will result in higherutilization and increased depreciation, and so an apparent disbenefit of the

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Annex 5Page 5 of 8

project - unless the increased utilization results in fewer vehicles beingpurchased. In this case, there will be two opposing effects - moredepreciation per vehicle but fewer vehicles to depreciate. Whether or notthere would be a depreciation benefit attributable to the project will dependvery much on operators response to the road improvement. Depreciation benefitsfor commercial vehicles can account for 30% of the benefits of roadimprovement schemes attributable to commercial vehicles. Including these costsavings at their full value is less likely to result in an overestimate ofbenefits than inclusion of the equivalent benefits for private cars.

19. For use in the final evaluations described in this Annex, the costequations were updated to end January 1992 prices, to take account of a fuelprice increase of 30% at the end of 1991.

Volume capacit, ratios and vehicle speeds

20. The use of this method to estimate vehicle speeds requires a number ofassumptions to be made about road capacity and the way in which average speedreduces as traffic volume increases. The starting point for the application ofthe ratio is the estimated free flow speed, that speed at which the firstvehicle on the road would travel in the absence of any others. Mostmathematical relationships between these variables indicate free flow speedsof the order of those shown in the following Table, with very little if anyspeed change for a volume to capacity ratio of less than 0.5, then an almostproportional reduction of speed as the ratio approaches a value of 1.0, atwhich point the speed usually reduces to less than 10 km/hr. Although speedslower this limit are observed, the vehicle operating cost equations becomeunreliable at lower speeds, so it is usually assumed that the costs areunchanged at lower speeds.

21. Not all project benefits derive from increasing the travelling speed ofvehicles. Particularly in urban areas, much of the benefit comes fromreduction in junction delays. The cost of vehicles waiting at junctions can beassessed in two ways. The time involved in waiting can be added to the timetaken in travelling on the next link of the network, and this combined timeused to estimate the average speed which is then used in the estimate ofvehicle operating costs. The more direct way is to make a separate estimate ofthe cost of operating a vehicle which is stationary. The first method was usedin most of the evaluations, but the second more accurate method was used in afew of the later estimates of component benefits.

22. Table 5.1 shows the assumed average vehicle speed for various volumecapacity levels on different types of road. These are the values which wereapplied in the revised evaluations of the sub-components of Leon and Toluca.They are derived from the use of a mathematical formula relating speed to thevolume/capacity ratio at the given level of traffic and the assumed free flowvehicle speed. The evaluation of components in the Ciudad Juarez sub-projectdid not use this method of speed estimation. Instead a current average networkspeed was derived from moving vehicle surveys. Future vehicle speeds were

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Annex 5Page 6 of 8

assumed to be equal to these speeds if no improvement was projected, or thefree flow speed if some measure was included in the sub-project to increaseroad capacity. This method was clearly unsatisfactory and will not be usedagain.

B. Evaluation results

23. The components of the sub-projects for each of the three cities whosesub-project has so far been evaluated have been categorized into six groups.These are:

a. Traffic managementb. Corridor improvementsc. Access to residential zonesd. Public transporte. Road maintenance, andf. Institutional development.

24. Only components in the first three and in one case, the fifth category,have been subjected to economic evaluation. The average MERR's for each typeof project in each of the three cities are shown in Table 5.2 (iv). Theaverage MERR for all projects was 50%, with a range from 14% (access toresidential zones in Ciudad Juarez) to 78% (road maintenance in Toledo).Tables 5.2 (i) through 5.2 (iii) show the results of the sensitivity tests foreach category of sub-project component for Leon, Ciudad Juarez and Tolucarespectively. The lowest MERR values were obtained for the access toresidential zone components for Ciudad Juarez, with an MERR value of 9% on themost pessimistic set of assumptions. However, the method used in theevaluation for Ciudad Juarez to assign sub-project benefits to components andcategories of component was unreliable (see para 4 of this Annex). The overallaverage MERR for the whole proposed Project on the most pessimisticassumptions was 30%.

Results by category of component

25. The highest MERR's, with an average of more than 78%, were obtained forthe road maintenance category in Toluca, closely followed by the trafficmanagement category in the same city. One reason for the high benefits forthese categories is that the traffic volumes in Toluca are very high all daylong and on all days of the week. The highest average daily traffic occurs onSunday as does the busiest hour of the week. The combination of high trafficlevels during the working week combined with high volumes at the weekendprovides a large source of potential benefits

26. The categories of sub-project component with the highest average MERR'sare road maintenance and traffic management, with values of 78% and 76%respectively. Even on the most pessimistic assumptions tested, both categorieshad MERR values in excess of 60%. These categories typically have relatively

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Annex 5Page 7 of 8

low capital costs and high immediate benefits to existing traffic. The nexthighest average MERR value is attributable to those projects which improve theroad access to residential zones, having a value of 65%. The MERR value forthe most pessimistic assumptions only falls to 57Z. These projects mostlyinvolve the paving and realignment of roads to suburbs with low incomepopulations and which are distant from the city centers. Characteristics whichlead toward lower MERR values are the higher cost per km of road and the lowertraffic volumes than for the previous categories. These are partly compensatedby the higher benefits per vehicle resulting from an improved road servicerather than for reduced congestion. The per vehicle benefits are initiallyvery high and increase only slowly over time, whereas congestion benefitsstart off low but increase more than proportionally with the increase intraffic over time. The principal measured benefit of these projects is thereduced operating cost of buses, which without the project will have tocontinue to use earth or gravel roads.

27. The category of sub-project component with the lowest average MERR valueis that of corridor improvements, with an average of 23%, reducing to 16% onthe most pessimistic assumptions. The relatively low MERR values areattributable to the high capital cost of these projects and the need to investin new capacity in larger discrete units than for traffic management projects.The benefits of these projects are similar to those of traffic managementprojects, in that they are related to the level of road congestion andtherefore start low in the early years of the project and increase faster thanthe traffic growth rate.

Results by City - Leon

28. The economic evaluation for Leon covered sub-project components whichaccounted for 96% of the total sub-project cost and showed an average MERR of52% (see Table 5.2 (i). The highest average MERR was for the road maintenancecomponents (66%), followed by traffic management (56%), access to residentialzones (41%) and corridor improvements (35%). The corridor components had awide range of HERR values, with a highest value of 85% and a lowest of 15%.With the exception of this last project, all the HERR's remained above thecritical value of 12% even on the most pessimistic sensitivity test. This onecomponent had an MERR value of 10% on this test.

Results by City - Ciudad Juarez

29. The economic evaluation of sub-project components for Ciudad Juarez mustbe treated with some caution because of the problem described in paragraph 4above. The economic evaluation included sub-project components representingover 70% of the total sub-project cost and indicated an average MERR of 33%(see Table 5.2 (ii). The method of projecting traffic volumes and measuringtraffic benefits meant that only two categories of sub-project component couldbe evaluated, corridor improvements and paving of access roads to residentialzones. The former type of project had an average MERR of 41% while the latter

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Annex 5Page 8 of 8

had an average MERR of 14%. A separate evaluation of the individual corridorimprovements was made, but the results are unreliable because of a potentialmisallocation of benefits between projects (see paragraph 4 above). Noseparate evaluation was made of the paving of access routes. The sensitivitytests indicated that in the worst situation considered the average MERR of thecorridor projects reduced to 31% while that of the paving the access routesreduced to 9%.

Results by City - Toluca

30. The economic evaluation of sub-project components for Toluca showed thehighest overall MERR with an average of more than 59% (see Table 5.2 (iii)).This result was derived from evaluations of sub-project components whichaccounted for 73Z of total sub-project costs. The results obtained for theroad maintenance and traffic management components of the sub-project were thehighest of any category for the three cities, each at more than 75%. Even thecategory of access to residential zones had a high MERR value of more than65%, while that for corridor improvements was 24%, with a variation from 17%to more than 35%.

- 81 -

Annex 5Table 5.1

MEXICO

HEDIUM-SIZE CITIES URBAN TRANSPORT PROGRAM

VARrATION OF VEHICLE OPERATINC COST WITH VEHICLE SPEED

Spood Car Cosbi Micro Bus Trucktm/hr Max$/ M4x$I 16ex$/ MaSX/ MHxS/

vohk im vah km vah it voh ka veh km

10 909 961 1139 1959 210920 533 572 680 1187 124530 409 444 529 936 96640 347 382 456 819 82850 311 344 413 751 75760 289 320 387 714 71670 272 307 372 694 698

Speed Ratio Cost ratio Cost ratio Cost Ratio Cost Ratio Cost ratio

20110 km ir 58.6S 59.5S 59.72 60.6S 59.0230110 to hr 45.0S 46.22 46.41 47.8 45.840/10 km hr 38.2K 39.82 40.0S 41.8S 39.3250/10 km hr 34.2Z 35.8S 36.32 3S.3S 35.9S60/10 km hr 31.8S 33.3S 34.0S 36.4Z 33.9270/10 km hr 29.91 31.9S 32.7 35.4Z 33.12

Table 5.1VARIATION OF VOC WtTH SPEED

90

80

70-

50 .

40 -S

30

20

10I

10 0 I50 7I020 40 60

Speed in km/hrC Car 4 Cormbi

0 Mtcro A Cuw x Truck

- 82 -

Annex 5Table 5.2 U.)

MEDIUM-SIZE CITIES URAN T SPORT PROGRAM

ECONGC EVALU&TION OF THE CMPOETS OF T SUBPROJECT FOR LAON

ModifLed econoclc Rate of Return (MMl)

Total

Category Coust Baic +2SS Coot -252 Cost +251 C

Traffic monag m_ t 12.96 86S 69S 55 57ZCorridor tproave_nts 6.00 421 341 271 271Access to residential soans 4.27 48S 391 29S 321Public Transport 0.74 not evaluated not evaluated not evaluated not evaluatedRoad Malateac 6.99 1211 9S1 732 801Inatitutional strcngthbning 0 45 not evaluated not evaluated not evaluated not evaluated

Sub total 31.41 771 611 482 511

L-ad nt Property purchaeb 4.12

Ptysical continency 4.11Price contingency 3.63

TOTAL 43.27

- 83 -

Table 5.2 (i4)

MEDIUM-SIZE CITIES URBAN TRANSPORT PR

ECONOMIC zVm UATIOw OF THE ComONENTS OF THE SUBPROJECT FOR CIUA JUAREZ

Modified conomic lat of Return (MMll)

Total

Category Coust asic +252 Cost -252 Coat +252 C

Traffic management 5 41 not *valuatod not evaluated not evaluated not evaluatedCorridor Improv nts 15.72 512 432 401 34SAcces to residential zoneD 6.00 142 122 IIS 92Public Transport 0 30 not evaluated not evaluated not evaluated not evaluatedRoad Mainton nea 3.61 not evaluated not evaluated not evaluated O0Inn titutionaLl strengthening 0.*93 not evaluated not evaluated not evaluated not evaluated

Sub total 31.97 402 342 322 272

Land and Property purchase 2.17

Physical contingency 6.42Price contingency 4.31

TOTAL 44.87

- 84 -

Annexc STable 5.2 (iii)

MEDIUM-SIZE CITIES URBAN TRANSPORT PROGRA

ECONOMIC EVALUATION OF THE COMPONENTS OF TE SUBPROJECT FOR TOLUC

Modified Economic Rate of Return (MEMl)

Total

Category Coust Basic +252 Cost -252 Cost +25Z C

Traffic manag ement 9.58 761 671 641 602Corridor improv emts 8.89 242 202 191 16SAccess to residentiAl zones 4.00 652 641 622 561Public Transport 0.38 not evaluated not evaluatod not evaluated not evaluatedRoad Maintenanco 7.27 781 732 66S 611Institutional strengthening 0.*68 not evaluated not evaluated not evaluated not evaluated

Sub total 30.80 591 541 51S 471

Land and Property purchase 6.54

Physical contingency 4.17Price contingency 3.42

TOTAL 44.93

- 85 -

Table 5.2 (iv)

MZICO

MEDIUM-SIZE CITIES URBAN TRANSPORT RO

ECONOMIC EVALUATION OF THE COONENTS OF THREE CITIES

Modified Zcoo-4c Rate of Return (MM)

Total

Category CUst Leon Cludad Juares Toluca Average

Traffic .anag _m t 27.95 561 not evaluated 762 635Corridor Liprow_ments 30.61 35S 411 242 35SAccess to resldential zones 14.27 412 142 65S 362Public Transport 1.42 not evaluated not evaluated not evaluated not evaluateodRoad Maintes nce 17.87 66S not evaluated 78 . 723Institutional strengthening 2.06 not evaluated not evaluated not evaluated not eawluated

Sub total 94.18 521 332 592 502

Land and Property purchase 12.83

Physical contingeucy 14.70Price contingancy 11.36

TOTAL 133.07

- 86 - ANNEX 6Page 1 of 10

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

Sub-Project Preparation and Execution

1. This Annex provides a description of the agreed Sub-project preparationand implementation process and the division of responsibilities betweenSEDESOL, BANOBRAS and SHCP.

Overall Organization and Scope

2. The "Programa De Vialidad y Transporte Urbano Para Ciudades Medias"(PVT) and the proposed Bank Project will be jointly managed by SEDESOL(Direccion General de Infrastructure y Equipamiento) and BANOBRAS (GerenteProyectos, Vialidad y Transporte). SEDESOL's primary responsibilities will betechnical (transport planning, urban transport policy issues, public transportregulatory systems, traffic management and maintenance) and economic(evaluation of the investment programs). The role of BANOBRAS will be tomanage the Bank loan and municipal and state sub-loans (determination offinancial viability of the municipalities and states, obtain the necessaryguarantees, supervise the assessment of compliance with loan conditions andcovenants and negotiate with the Bank and with the municipalities and states).In addition, while the participating municipalities and states will beresponsible for their own procurement activities. SEDESOL will be responsiblefor supervising the technical aspects and BANOBRAS for the supervising thefinancial aspects of procurement. BANOBRAS will verify the use of the Bank'sprocurement guidelines and ensure that the standard bidding documents agreedbetween the Mexican authorities and the Bank were followed. A projectcoordinating group has already been formed and held its first meetings; theobjective of the group is to coordinate the actions of the two implementingagencies and to resolve any inter-institutional problems before they have achance to prejudice the progress of the proposed project.

Project and Sub-project Processes

3. The preparation and implementation of the municipal and state sub-projects will be related to following parts of the proposed project: Parts A2and A3 - Promotion of the PVT by BANOBRAS and SEDESOL, Part B1 - preparationof Integral Transport Plans (ITPs), Part B2 - Implementation of immediateactions, and Part B3 - Implementation of the ITPs. These are outlined inTable 1 and described in the following paragraphs.

- 87 - ANNEX 6

Page 2 of 10

TABLE 1 - OUTLINE OF THE PROJECT PROCESS

Part A2

Promotion BANOBRAS, with help Describe to cities thefrom SEDESOL program, objectives, and

eligibility criteria

Part Bl

Confirmation BANOBRAS Participating municipalityand/or state will confirminterest in participation andagreement to the generalconditions

Prequalification SEDESOL Prequalification ofconsultants for ITP.

Part BI sub-loan BANOBRAS/SEDESOL A sub-loan to finance the ITPfor the ITP will be prepared, negotiated

and signed with municipalityand/or state

Selection of Preparation of bid Municipality or state selectsConsultants documents by consultants for ITP

municipality orstate; SEDESOL fortechnical review andBANOBRAS forprocedural review

ITP Consultants to carry 1. Diagnosis Reportout for Municipality 2. Immediate Actions Planor state. SEDESOL and 3. Action PlanBANOBRAS to supervise 4. Investment Planand appraise

Part B2

Second sub-loan - Municipality and/or A sub-loan to finance theImmediate Actions state with BANOBRAS immediate actions will be

supervision prepared, negotiated andsigned with municipalityand/or state

- 88 - ANNEX 6Page 3 of 10

Execution of Municipality or state 1. Bid document preparationimmediate actions to execute; SEDESOL 2. Bidding and evaluation

and BANOBRAS to 3. Contracting and executionsupervise. 4. Supervision

Part B3

Preparation of SEDESOL and BANOBRAS Verification of compliancethird sub-loan with on-lending conditions

Third sub-loan Municipality or state Finalization of sub-loannegotiations and with BANOBRAS conditions and legalapproval supervision documents

Third sub- loan Municipality with Confirmation that all sub-effectiveness supervision by loan conditions have been

SEDESOL for technical complied with by municipalityaspects and BANOBRAS and statefor financial aspects

Bidding for works Municipality or Confirmation that alland goods state; SEDESOL for components are prepared in

technical review and accordance with sub projectBANOBRAS for loan agreement conditionsprocedural review

Implementation of Municipality or state Confirmation that all sub-works and for on-site super- loan components areprocurement of vision; SEDESOL for implemented in accordancegoods technical supervision with legal agreements

and BANOBRAS forprocedural super-vision

Monitoring and Ex- Municipality and Confirmation that sub projectpost Evaluation state for actions; schedule and covenants are

SEDESOL for being met, and thatperformance components meet objectivesmonitoring (ex post);BANOBRAS forfinancial monitoring

Part A2 -Promotion

4. The program will be initiated by a BANOBRAS with support from SEDESOLand SHCP and include identification and promotion missions to the potentialparticipating municipalities and states (those listed in Annex 1, Table 1).The aim will be to describe the program and its objectives. Targets of thepromotion process, who will include consultants and contractors as well asmunicipal and state representatives, will be notified of the phased approach,the financial terms of sub-loans, the conditions for participation and the

- 89 - ANNEX 6Page 4 of 10

"first come first served" approach for participation in the Bank loan.Municipalities and states will receive the following documentation:

(a) the program manual of the PVT ("Programa De Vialidad y TransporteUrbano Para Ciudades Medias");

(b) sample sub-loan agreements, conditions and other legalrequirements;

(c) procurement guidelines for works, goods and hiring of consultants,and an explanation of the required "no-objection" procedure(submission of TOR, reports, documents, the level of engineeringdetail required for works to be considered eligible for financing,bid documents, technical specifications etc);

(d) a description of the types of, and conditions applying to,immediate actions eligible for sub-loan financing;

(e) the terms of reference for studies to produce an ITP (Including anoutline of an appraisal report); and

(f) model final designs and bidding documents.

5. During the identification/promotion phase SEDESOL will form a view onthe main transport problems in the medium cities, and collect data andinformation to enable the final TOR for the Integral Studies in eachparticipating city to be prepared to reflect particular city conditions.BANOBRAS will verify the municipal and state financial eligibility and themaximum value of sub-loans they will be capable of absorbing.

Part Bi - Confirmation of participation

6. Each candidate municipality and state, after analyzing the documentsreceived, the on-lending conditions and taking account of its own transportneeds, will confirm its interest in participating in the program and itsunderstanding and acceptance of the conditions of participation as describedin the PVT.

Part Bl Sub-loan negotiation:

7. A sub-loan will be made from BANOBRAS to the participating municipalityor state to finance the preparation of the ITP. The participatingmunicipality will have to satisfy only the first type of eligibility criteria(relating to size and economic importance) and agree to satisfy the othersbefore implementation of the recommendations of the ITP. BANOBRAS willprepare the legal documents, negotiate the sub-loan with the municipality andstate and then present the sub-loan to its Board.

Part B1 - Selection of consultants

8. It is expected that the several national and international consultantswill be included on the short list for selection for most of the ITPs. Thecompilation of the short lists will be the responsibility of the respective

-90- ANNEX 6Page 5 of 10

municipalities or states, with guidance from SEDESOL. To avoid long andcostly repetitions of the prequalification process, it is planned that SEDESOLwill prepare a list of prequalified consultants, based on proposals inresponse to the issuing of generic terms of reference. The municipalitieswill be encouraged to compile their short list from these prequalifiedconsultants. Although they will be free to include any others in their shortlist, these additional consultants will have to satisfy the sameprequalification criteria as those already prequalified, with a consequentdelay in the selection process.

9. Consultants will be selected by the participating municipality orstate, with the supervision of SEDESOL in respect of:

(a) the preparation of specific terms of reference by themunicipality or state, based on the generic terms ofreference already available

(b) approval of short lists of consultants, preferably fromthose already prequalified by SEDESOL.

SEDESOL, together with BANOBRAS will be responsible for supervising:

(c) the evaluation of proposals and selection of consultants, toensure that procurement guide-lines, established for theProject are followed, with SEDESOL covering the technicaland BANOBRAS the procedural aspects.

Part BI - ITP: Diagnostic Study and Immediate Action Plan

10. The consultants will prepare a Diagnostic Report, identifying the majorissues to be addressed in the Action and Investment Plans and identifyimmediate actions, if any, which will be in risk of significant cost increasesor benefit losses if subjected to further delay in implementation. Theimmediate actions could comprise limited infrastructure improvements, shortterm improvements to assist bus operations and traffic circulation schemes. Acomplete list of the types of investment acceptable as immediate actions aregiven in Annex 1. The proposals will be reviewed by the municipality andSEDESOL and comments (to ensure actions comply with the conditions anddirection for immediate action proposals) given to the consultants prior topreparation of the final designs and bidding documents, the environmentalassessment and the economic evaluation and presentation of their final reporton the immediate actions. Completion of this report for immediate actions,including approval by the municipality or state, will be within two months ofinitiating the ITP studies.

11. SEDESOL will evaluate the report on immediate actions from technical,economic, environmental and financial feasibility points of view, and ifappropriate, authorize the municipality or state to proceed with theirimplementation.

- 91 - ANNEX 6Page 6 of 10

Part B2 Implementation of Immediate Action Plan

12. Final designs and bid documents for the immediate investments will beprepared by the consultants appointed to undertake the Integral Study. Thebid package should be approved by SEDESOL and BANOBRAS. Bidding for theexecution of the immediate actions will take place in accordance with SEDESOLnorms and bid evaluations and awards of contracts will be approved by BANOBRASand SEDESOL. Municipalities or states will be responsible for supervision ofthe civil works included in the immediate actions, but SEDESOL will overseethe implementation by using its own supervising consultants.

13. Once the bid documents for investments in civil works and/or equipmentpurchases were agreed, the municipality or state will be eligible for a secondsub-loan. The procedures for negotiating this sub-loan will be similar to (b)and (c) and (d) for the first sub-loan (para 7), but will relate to theimmediate actions instead of the studies to produce the ITP. The amount ofthe second sub-loan will not exceed US$ 5 million equivalent.

Part Bl ITP: Action Plan and Investment Plan

14. The consultants will complete studies for the ITP, reviewing theadministrative structure of the municipalities and states responsible forregulating urban transport, current and projected environmental conditionsrelated to transport (as specified in the terms of reference), the operationalregulations controlling urban transport (including tariff policy), theenvironmental regulations controlling vehicle emissions, the financialviability of public transport operators, and defining a short term investmentprogram proposed for sub project loan financing and including detailed designof the works proposed for first year of implementation. They will prepare anInvestment Plan which will be based on a systematic analysis of the city'stransport needs and an Action Plan which will be based on an assessment of theneed to strengthen institutions, planning procedures and the regulation oftransport operations. The consultants will support the investment proposalswith a Financing Plan, which will include an assessment of the impact of theInvestment and Action Plans on the municipality's and state's finances,demonstrating that sufficient funding will be available for the counterpartfunding and to service any loans which will be proposed.

15. The consultants will be responsible for the completion of the studiesand for preparing the ITP in accordance with the agreed TOR's. It will be afunction of SEDESOL to ensure that the Study was conducted in accordance withthe objectives of the program. This will involve SEDESOL in the followingactions:

(a) assisting in clarifying issues, definition of problems, andproposing alternative solutions;

(b) advising on appropriate methodologies for all study aspects butparticularly evaluation (technical, economic, financial, andenvironmental) of alternative solutions;

- 92 - ANNEX 6Page 7 of 10

(c) assisting the municipalities in the supervision of theirconsultants; and

(d) coordinating the different federal, state and municipal agenciesinvolved in the sub-project;

16. SEDESOL will review the draft ITP, to verify that the proposals were inaccordance with the objectives of the Program and that the economic, financialand environmental justifications were adequate to justify proceeding to thestage of preparing preliminary designs and the final design of componentsincluded in the proposed actions for the first year of implementation.Following the SEDESOL review of the Draft ITP, preliminary engineering designswill be completed for each component and costs and economic and environmentalevaluations will be updated by the consultants.

17. The final version of the ITP will be prepared by consultants in aformat acceptable to SEDESOL, BANOBRAS, and the Bank. The proposed InvestmentPlan and Action Plan components will be defined, together with their economic,financial and environmental and operational justification, and theinstitutional, administrative, and financial arrangements for theirimplementation. SEDESOL will review and coordinate a review of the componentsof the ITP. BANOBRAS will assist in all financial issues and loan relatedissues. SEDESOL will prepare an Appraisal Report, with full explanatoryannexes, in a format acceptable to the Bank, and arrange for the presentationof the ITP to all agencies which will be involved in its approval andimplementation. Acceptable to the Bank will be interpreted as complying withthe Terms of Reference, providing an implementable Investment Plan which waswithin the financial capability of the municipality and/or state to manage,and including an Action Plan which provided feasible solutions to theinstitutional problems identified in the Diagnostic Report of the ITP.

18. It will be a condition of the first sub-loan that the final design ofproposed civil works, the technical specification of equipment to be purchasedand the TOR's of all proposed further studies, be included in the terms ofreference for the studies to produce the ITP, and a condition of negotiating athird sub-loan that at least 20% of the final designs, specifications and biddocuments had received Bank approval. In those cases where the consultantsselected for the ITP studies will be different to those undertaking the finaldesigns and product specifications, SEDESOL will assist the process by:

(a) assisting cities to prepare terms of reference for the finalengineering consultants;

(b) assisting to prepare short lists of consultants; and

(c) ensuring, through supervision, that all SEDESOL norms and designguidelines for urban works and technical specifications arefollowed (including bid documents for works and goods);

- 93 - ANNEX 6Page 8 of 10

Part B3 - Implementation of the ITP

19. Following successful completion of the ITP and approval of theSEDESOL/BANOBRAS appraisal by the Bank, each participating municipality orstate will then be reviewed for its eligibility for a third sub-loan, financedin part by federal grants and loans in accordance with program guidelines toimplement the recommendations of the approved ITP. The review will be made bySEDESOL in respect to the technical conditions (para 2.31 (a), (b), (e), (f),(g) and (h) and by BANOBRAS in respect to the financial conditions (para 2.28(c) and (d) and (i)) for on-lending. Once compliance with these conditionshade been verified, the implementation Stage of the sub-project will start.This will include negotiation of the third sub-loan and then undertaking theinvestments include in the Investment Plan and enacting all the institutionalchanges included in the Action Plan.

20. The preparation of the third sub-loan will include the followingactivities:

(a) SEDESOL will arrange for a formal meeting of all involved partiesand agree on the contents of the sub-project;

(b) BANOBRAS will negotiate and finalize the sub-loan conditions andwill prepare a draft sub-loan agreement, a final municipal andstate appraisal report, specify lending terms and conditions andprepare all other legal documents as necessary including stateguarantees (and proceed to secure approval of the state congress,when required);

(c) subsequent to finalization and agreement of all legal documents,BANOBRAS will submit the documents to the Bank for comments and,following receipt of these comments, will present the sub-loan toBANOBRAS Board of Directors for approval. Following thisprocedure, the sub-loan will be formally submitted to the Bank forapproval.

Part B3: Bidding of works and goods

21. Once the sub-loan arrangements had been completed and the relevantdocuments approved and signed, SEDESOL and BANOBRAS will review the biddocuments and evaluations for the first year projects, and issue a "noobjection" notification as appropriate to the municipality or state. Thethird sub-loan will include finance for the preparation of final designs andbidding documents for the components of the Investment Plan not covered byfunding under the first sub-loan. Preparation of these designs and documentswill precede the bidding of these works and of equipment for which thetechnical specifications had been prepared with finance from the first sub-loan. All further studies, planning and training activities included in theAction Plan will also be bid in this Phase of the sub-project.

94- ANNEX 6Page 9 of 10

Part B3: Supervision

22. Supervision of all physical works will be carried out throughout theimplementation phase and will include:

(a) periodic re-evaluation of Project components, including theinstitutional strengthening and training components, to determineimpact on component viability of changes in unit costs and/orprojected traffic volumes or user costs from those established atProject Evaluation (SEDESOL, with BANOBRAS for financial aspects);

(b) review and approval of changes in Project components requested bythe municipality or state(SEDESOL);

(c) review and approval of consultant terms of reference, finaldesigns, and proposals (SEDESOL);

(d) review and approval of procurement arrangements, biddingdocuments, procurement awards, and contracts; SEDESOL (technical)and BANOBRAS (financial);

(e) review of implementation progress (SEDESOL);

(f) monitoring compliance with the sub-Loan Agreement; SEDESOL(physical) and BANOBRAS (financial);

(g) preparation of quarterly reports and other documentation relativeto sub-project progress (SEDESOL, and BANOBRAS for financialreports); and

(h) coordination among and liaison with all agencies involved in theprogram (SEDESOL).

Part B3: Ex-Post evaluation

23. An ex-post evaluation of each sub-project will be prepared by SEDESOL.making use of the information gained during Parts Bl, B2 and B3 of the sub-project as well as its own and BANOBRAS' monitoring reports (Annex 7). Theevaluation reports will be submitted to the Bank as part of the ProjectCompletion Report, but before then SEDESOL should disseminate the lessonslearned and make use of them in the preparation and development of subsequentsub-projects.

The Role of the Bank in the Process

24. The Bank will review relevant stages of: (a) all short lists ofconsultants and contractors; (b) all terms of reference and consultantselections; and (c) selective bid documents, and bid evaluations. Theselection will include all International Competitive Bidding contracts and thefirst Local Competitive Bidding Contract of each sub-loan. All otherprocurement documentation will be subject to selective ex-post review by the

- 95 - ANNEX 6Page 10 of 10

Bank. BANOBRAS will retain documentation for these contracts for periodicsupervision by Bank staff. A "no-objection" letter from the Bank will berequired before the award of contracts to consultants, contractors andsuppliers of goods. This applies to all stages and phases of the Project.The Bank will review and comment on all sub-loan agreements.

25. The Bank will review the immediate action proposals and will appraiseeach new sub-project based on the SEDESOL appraisal report. Thus, the Bankwill receive the appraisal of the Diagnostic Report and the final ITP beforethe approval of the third and principal sub-loan by BANOBRAS.

26. During the course of Part B3 of the proposed project, the Bank willsupervise on a sample basis the work and development of the institutionalcomponents. The Bank, together with SEDESOL and BANOBRAS will be responsiblefor reviewing the reports prepared for the annual and mid-term reviews, theagendas for which are detailed in para 2.57.

- 96 - Annex 7Page 1 of 5

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

Monitoring and Evaluation

1. Although monitoring and evaluation are considered as linked activities,they have rather different objectives. Monitoring is designed to reviewprogress on a project as it is being executed, in an attempt to avoid delaysor cost overruns, and to determine whether existing standards and norms ofperformance are being achieved. Evaluation is designed to assess whether, oncethe project is completed, it achieved its declared objectives.

2. Monitoring involves three separate actions, related to: (a) Standardsmonitoring: current operational performance and its comparison with nationaland international standards and norms; (b) Progress monitoring: progress onthe achievement of institutional, physical and operational targets; and, (c)Financial monitoring: measurement of progress on disbursements. For the PartA activities of the Project, each agency will be responsible for monitoringand evaluation its own activities. For Part B activities, responsibility willbe shared between SEDESOL and BANOBRAS.

3. Standards monitoring is only relevant to Part B activities. Standardsand Progress monitoring in respect of Part B sub-project activities will bethe responsibility of SEDESOL, while financial monitoring, for each sub-project and of Part B as a whole, it will be that of BANOBRAS. Similarly,Standards evaluation will be the responsibility of SEDESOL, while financialevaluation will be the responsibility of BANOBRAS.

Progress Monitoring and Evaluation of the National component (Part A)

4. In respect to its own strengthening program (Part Al), SEDESOL will beresponsible for monitoring progress of its own technical consultants.Although the terms of reference for this TA were detailed in respect to thequalities required of the consultants, they were open in respect to thespecific activities they will undertake. The first action of the consultantsonce appointed will be to develop, together with SEDESOL, a detailed workprogram, with specific dates for the production of specific manuals, analysesand reports. Compliance with this program will account for about half of theconsultants time. The remainder will be spent helping SEDESOL with thepreparation of ITPs for the participating municipalities. SEDESOL will developa monitoring schedule of reports and manuals for its consultants and will usethis as its basic monitoring document.

5. Monitoring of BANOBRAS' technical assistance (Part A2) will be moresubjective, as there are even fewer specific outputs required. For the firstsix months of the project, most of the time of the consultants will be used inreviewing the financial status of potential participating municipalities andstates. Once the activities related to Part B2 (Immediate Action Plans) and B3(c) (Implementation of the ITPs) are under way, the responsibilities will

- 97 - Annex 7Page 2 of 5

change and a detailed monitoring exercise will be implemented to keep track ofthe progress of each contract in each sub-loan.

6. The National Training Program will be monitored by SEDESOL. There is atpresent no detailed schedule of training activities other than that for thefirst Intensive Course. A number of regional courses are currently beingplanned, in response to an identified specific need from the municipalities.The other training courses will similarly be initiated in response to specificneeds as well as to a general overall program.

7. The studies to implement the ITPs will be financed under Parts A4 and Biof the Project. Since the majority of the funding will come from the latter,ITP monitoring is considered as an activity under that part of the project.

8. The three Part A activities are such that it will be inappropriate toevaluate their performance during their execution, other than at the mid pointof their progress. In the case of technical assistance to SEDESOL, there isprovision for a review of the need for further assistance after the firsttwelve months of the project. For the training program, a planned. reviewafter the first of the Intensive Courses will help to inform a decision as towhether it should be repeated, and if so, what changes should be made. Thereis no provision for an interim review of the BANOBRAS strengthening program.A provisional ex post evaluation should be made as soon as each of theactivities is completed. These evaluations will be the responsibility of theexecuting agency. The evaluation criteria will be different for each activityand depend on its specific objectives, but by their nature they will bequalitative rather than quantitative

9. For the SEDESOL strengthening, the evaluation will take account of:

(a) the time needed to implement each sub-project and the extent towhich SEDESOL's own staff were able to assist this work;

(b) the extent to which the consultants were able to undertake atechnology transfer to SEDESOL's staff;

(c) the number of SEDESOL technically qualified staff;

(d) the use made of the equipment purchased with Project funds;

(e) Reports provided by the SEDESOL participants in the Study Tours,indicating the experience they had gained and how it is expected tobe useful in their future work for SEDESOL;

(f) the usefulness of the promotion campaign in encouragingmunicipalities to participate in the Program. This can be measuredto some extent by the rate at which municipalities request toparticipate, compared with an expected participation rate of aboutfour or five municipalities each year and by the proportion ofparticipants in Part B3 (a) of the project which progressed to PartB3 (c);

- 98 - Annex 7Page 3 of 5

10. For the BANOBRAS strengthening component, the evaluation will takeaccount of:

i) the average time it takes BANOBRAS to process the various stages ofeach sub loan to a municipality, including the contracting of civilworks construction,

ii) the utilization of equipment purchased vith Project funds, and

iii) the content and timeliness of submission of quarterly reports tothe Bank

Standards Monitoring and Zvaluation of the local component (Part B)

11. Each participating city will undertake a monitoring and evaluationprogram as part of its ITP. The monitoring will be in respect of activities(a), (b) and (c) described in para.2. In addition, BANOBRAS and SEDESOL willcarry out an overall monitoring and evaluation of all of Part B of theProject. All sub-loan agreements will include between six and ten of thefollowing indices, preferably with at least one for each major area ofactivity, for use in monitoring the sub-loan. The particular indices for eachagreement will be determined by SEDESOL based on their existing knowledge ofthe more important urban transport issues in each city. The values selectedfor the particular indices will be based on national and internationalstandards and vill take account of the particular characteristics of eachcity. The monitoring process will comprise a comparison between the achievedand target values, explanations for any significant deviation and proposalsfor how the original target values could be achieved

(a) Public transport operation

Infrastructure - number and route km of bus priority systems,observed level of observance (number of privatevehicles observed in public transport lanes, numberof bus priority intersections and traffic signals,proportion of services terminating in a recognizedpassenger terminal, number and proportion of busstops in pull-offs from the main highway;

Passenger satisfaction - bus occupancy factors, proportion of trips whichcan be completed without a change of vehicle,availability of interchange and period fares, on-time performance of services, availability of routeinformation, average walking distance to a bus stop,average age of buses, availability of alternativequalities of service;

Operators efficiency - vehicle km per day, proportion of vehicles inservice on an average day, proportion of "dead km",number of breakdowns in service;

- 99 - Annex 7Page 4 of 5

Financial results - total revenue and average revenue per vehicle,total cost and average cost per vehicle, structureand level of operating and capital costs, fixed andvariable costs per vehicle; and

Regulatory control - ease of issuing of licenses or permits - number ofpermits granted to new operators in each of the lastthree years, number of requests for permits grantedand refused in each of the last three years, averagetime between request for a license and a response;

(b) Traffic management

Parking - number of on and off street parking places in cityand other centers, occupancy level of parkingplaces, number of infractions observed and ticketed;

Intersections - number of signalized intersections, proportion oflinked traffic signals;

Vehicle operation - average speeds on various parts of the network,typical average journey times; and

Highways - demand/capacity ratios at different times of dayand days of week, numbers of and severity of roadaccidents and identification of especially dangerouslocations;

(c) Corridor improvements

Infrastructure - total reservation width, road width, number oflanes, number of bus-only lanes, number and type ofintersections, surface type and condition; and

Traffic - hourly and daily traffic level, AADT,volume/capacity ratios, junction turning movements,vehicle speeds at different times of time, averagecorridor transit times, average junction queues andwaiting times;

(d) Infrastructure maintenance

Roads - road surface roughness measures, frequency ofresurfacing of different parts of the road network;and

Traffic signals - number and proportion of traffic lights inservice, average time to repair failed trafficlights;

(e) Enviroment

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Page 5 of 5

Air quality - concentrations of NOx, CO, PMIO, atmospheric lead,SOx at the assessed worst six city locations;

Vehicle emissions - number of and proportion of vehicle fleet testedeach year, proportion of failures; and

Noise - average noise level, measured in Leq over theperiod 8am to 8pm, at specified minimum of twentyworst locations. Monitored noise emission measuredin dB(A) of a sample of at least 100 vehicles ofeach type (passenger car, urban bus and large truck)

Progress and Financial Monitoring of the local component Part B

12. Each sub-project component will have an implementation schedule whichwill be monitored. Each proposal for an institutional change will include anAction Plan, indicating which decisions and actions needed to be taken, bywhom and when. A similar Action Plan for civil works will include thefollowing activities for each component: (a) final engineering design andequipment specification; (b) preparation and issue of bid documents; (c)contract signature; and (d) the start and finish dates for works (or supply ofequipment) as well as quarterly targets. These Action Plans will provide thebasis for the Progress Monitoring. SEDESOL will be responsible for Progressmonitoring and reporting to the Bank on a quarterly basis.

13. BANOBRAS will be responsible for Financial Monitoring for each componentof each sub-project and has included in its own institutional strengtheningprogram the resources to do this. Since civil works and the supply ofequipment are likely to extend over a number of quarters, the disbursementschedule for each component of each sub-project will include target"percentage completed" by quarter or by semester as appropriate. Thus targetexpenditures will be used to monitor financial (disbursement) performance on aquarterly basis;

Ex-post Evaluation

14. The ex-post evaluation activities will be aimed at determining theeffectiveness and efficiency of measures in meeting the standards used in theStandards Monitoring comparisons. In the event that objectives are not metand previously anticipated improvements in performance are not achieved, thedata will be used (a) to identify why sub-project components had not beenfully successful; and (b) to improve the specification of future sub-projects.Furthermore, the ex-post evaluation will be used as a major input to theProject Completion Report.

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Annex 8Page 1 of 1

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

Financing Sourcoe

1. The attached Tablo shows the financing sourcoe for each Part of thoproposed project and an example of how a typical sub-project vould befinanced. The allocation of financial responsibility among the three sources -federal grants, sub-project loans and municipalities own sources- is thatincluded in the Operating Manual of the PVT. During negotiations the federalgovernment would confirm these arrangements and that they would comitsufficient federal resources to cover their obligations throughout theproject. Each sub-project agreement would require the participating state andmunicipality to commit sufficient funds to cover their share of the sub-project cost.

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- 103 -

Annex 9Page 1 of 1

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

Estimated Schedule of Bank Loan Disbursements(In millions of US Dollars)

IBRD Fiscal Year and Quarter Quartely Cumulative(Ending date) Disbursements Disbursements

1993March 31 14.01 14.0June 30 2.0 16.0September 30 3.9 19.0December 31 3.0 22.0

1994March 31 5.0 27.0June 30 10.0 37.0September 30 10.0 47.0December 31 10.0 57.0

1995March 31 10.0 67.0June 30 10.0 77.0September 30 10.0 87.0December 31 11.0 98.0

1996March 31 10.0 108.0June 30 10.0 118.0September 30 9.0 127.0December 31 9.0 136.0

1997March 31 8.0 144.0June 30 6.0 150.0September 30 6.0 156.0December 31 5.0 161.0

1998March 31 5.0 166.0June 30 4.0 170.0September 30 3.0 173.0December 31 3.0 176.0

1999March 31 4.0 180.0June 30 4.0 184.0September 30 4.0 188.0December 31 3.0 191.0

2000March 31 3.0 194.0June 30 6.0 200.0

1/ Includes US$12 million for the Special Account and US$4 million for retroactive financingincurred after June 30, 1992.

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Annex 10Page 1 of 5

MEXICO

MEDIUM-SIZE CITIES URBAN TRANSPORT PROJECT

DOCUMENTS IN PROJECT FILE

A. Documents supporting the Staff Appraisal Report

1. Summary of Sub-project Appraisals

2. Lessons learned from Other Urban Transport ProjctsPreviously an Annex to the White Cover SAR

B. Selected Sector Papers

3. Transporte Urbano en Ciudades Medias de Mexico, Propuesta Lineas deCredito Sectorial. BANOBRAS, Direcci6n de Financiamiento delDesarrollo, September 1989.

4. Diagn6stico Global del Transporte Urbano en Ciudades Medias - FelipeOchoca y Asociados, S.C. Louis Berger Int, Inc. September 1989.

5. Estimaci6n de Costos de Operaci6n de vehiculos Modelo HDM. BANOBRAS,Direcci6n de Financiamiento del Desarrollo, March 1989.

6. Politica Nacional de Transporte Urbano. Lineamientos Relativos alInforme. July 1989.

7. Methodology for Evaluation Medium City Urban Transport Proiects - FelipeOchoa y Asociados, S.C., and Louis Berger International, Inc., 1989.

8. Manual de Operacion para el Programa Nacional del Sistema de TransporteUrbano. BANOBRAS .October 1992.

C. Selected Project Related Studies-First Stage Cities.

9. Reporte de Evaluacion - Subproyecto Toluca. BANOBRAS. March 1992

10. Reporte de Evaluacion - Subproyecto Leon. BANOBRAS. March 1992

11. Reporte de Evaluacion - Subprovecto Ciudad Juarez. BANOBRAS. March 1992

12. Cd. Juarez - Estudio de Factibilidad de Transporte Urbano de Pasaieros,Direcci6n General de Vialidad Municipal, Diciembre 1990.

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Annex 10Page 2 of 5

13. Cd. Juarez - Estudio Integral de Transporte Urbano, Informe dePreevaluaci6n. Versi6n Resumida, Gobierno del Estado de Chihuahua,Felipe Ochoa y Asociados, S.C., Louis Berger Int. Inc., July 1989.

14. Metodologia para el Diagn6stico Pron6stico v Asignaci6n del Transito deCiudad Juarez, Chihuahua. Informe - Anexo 1. September 1989.

15. Evaluaciones Econ6micas de Nuevas Vialidades Primarias v Pavimentaci6nde Rutas de Transporte,Informe sobre el supbroyecto Ciudad Juarez -Anexo 2, September 1989.

16. Estudio Integral de Transporte Urbano para la Cd. de Chihuahua, Informede Preevaluaci6n Resumen Ejecutivo - Felipe Ochoa y Asociados S.C.,Louis Berger International Inc., August 1989.

17. Metodologia para el Diagn6stico Pron6stico v Asignaci6n del Transito dela Ciudad de Chihuahua. Informe Anexo 1. August 1989.

18. Segundo ProVecto de Transporte Urbano - Subprovecto Chihuahua - FelipeOchoa y Asociados, S.C., and Louis Berger International, Inc., August1989.

19. Estudio Integral del Transporte Urbano de la Ciudad de Le6n. Informe deDiagn6stico - Anexos A, B, C, D, E y F. 1990.

20. Programa Integral de Transporte Urbano de Le6n, Guanajuato.

D. Selected Project Related Studies-Second Stage Cities.

21. Diagn6stico del Transporte Urbano en la Zona Metropolitana deCoatzacoalcos - Veracruz. Informe (versi6n preliminar). March 1989.

22. Plan de Desarrollo del Municipio de Puebla. 1990.

23. Diagn6stico del Transporte Urbano, Zona Metropolitana de Coatzacoalcos.Ver. Felipe Ochoa y Asociados, S.C., and Louis Berger International,Inc. Diciembre, 1989.

24. Diagn6stico del Transporte Urbano, Area Metropolitana Tampico-Madero-Altamira, Felipe Ochoa y Asociados, S.C., and Louis BergerInternational, Inc. Diciembre, 1989.

25. Diagn6stico de Transporte Urbano de la ReAi6n Metropolitana de laLaguna, Felipe Ochoa y Asociados, S.C., and Louis Berger International,Inc. Septiembre, 1989.

26. Diagn6stico del Transporte Urbano, Zona Metropolitana de San LuisPotosi, SLP, Felipe Ochoa y Asociados, S.C., and Louis BergerInternational, Inc. Diciembre, 1989.

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Annex 10Page 3 of 5

27. Diagn6stico del Transporte Urbano en la Ciudad de Merida. Yuc., FelipeOchoa y Asociados, S.C., and Louis Berger International, Inc. Diciembre,1989.

E. Documents held by BANOBRAS

28. Manual de Operaci6n para el Programa de Nacional de Transporte Urbano.SHCP, Marzo, 1992

29. Diagn6stico; Zona Metropolitana de Coatzacoalcos, Ver. FOA, FelipeOchoa y Associados S.C. Consultores, March 1989

30. Diagn6stico; Zona Metropolitana de La Laguna. FOA, Felipe Ochoa yAssociados S.C. Consultores, March 1989

31. Diagn6stico; Merida, Yuo. FOA, Felipe Ochoa y Associados S.C.Consultores, March 1989

32. Dia_n6stico; Zona Metropolitana de San Luis Potosi, S.L.P. FOA, FelipeOchoa y Associados S.C. Consultores, March 1989

33. Diagn6stico; Zona Metropitana de Tampico. Tams. FOA, Felipe Ochoa yAssociados S.C. Consultores, January 1989

34. Diagn6stico Global del Transporte Urbano en Ciudades Medias. FOA, FelipeOchoa y Associados S.C. Consultores, September, 1989

35. Politica Nacional de Transporte Urbano. FOA, Felipe Ochoa y AssociadosS.C. Consultores, July 1989

36. Procedimientos de Licitaci6n de Obras Viales Urbanas. FOA, Felipe Ochoay Associados S.C. Consultores, March 1989

37. Lineamientos Metodol6gicos para la Evaluaci6n Econ6mica y Financiera deProvectos de Vialidad y Transporte Urbano. FOA, Felipe Ochoa yAssociados S.C. Consultores, September 1990

38. Adquisici6n de Autobuses Urbanos. FOA, Felipe Ochoa y Associados S.C.Consultores, March 1989

39. Subproyecto Chihuahua, Reporte Central. FOA, Felipe Ochoa y AssociadosS.C. Consultores, August 1989

40. Subprovecto Chihuahua, Informe de Prevaluaci6n. FOA, Felipe Ochoa yAssociados S.C. Consultores, February 1990

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Annex 10Page 4 of 5

41. Subprovecto Chihuahua, ANEXO I. Metodologia Para el Diagn6stico,Pron6stico y Asignaci6n del Transito. FOA, Felipe Ochoa y AssociadosS.C. Consultores, October 1989

42. Subprovecto Chihuahua, ANEXO II. Evaluaciones Econ6micas de NuevasVialidades Primarias, Cruces, Desnivel y Pavimentaci6n de Rutas deTransporte Urbano. FOA, Felipe Ochoa y Associados S.C. Consultores,October 1989

43. Subproyecto Chihuahua, ANEXO III. Los Semaforos en DiversasIntersecciones. FOA, Felipe Ochoa y Associados S.C. Consultores, October1989

44. SubproVecto Chihuahua, ANEXO IV. Mantenimiento de Vialidades. FOA,Felipe Ochoa y Associados S.C. Consultores, October 1989

45. Subproyecto Ciudad Juares, Reporte Central. FOA, Felipe Ochoa yAssociados S.C. Consultores, September 1989

46. Subproyecto Ciudad Juares, Informe de Prevaluaci6n. FOA, Felipe Ochoa yAssociados S.C. Consultores, February 1990

47. Subprovecto Ciudad Juares, ANEXO I.. FOA, Felipe Ochoa y AssociadosS.C. Consultores, October 1989

48. Subprovecto Ciudad Juares. ANEXO II. Evaluaciones Econ6micas de NuevasVialidades Primarias, Cruces, Desnivel v Pavimentaci6n de Rutas deTransorte Urbano. FOA, Felipe Ochoa y Associados S.C. Consultores,October 1989

49. Subprovecto Ciudad Juares. ANEXO III. Analisis de Capacidad y Nivelesde Servicio en Intersecciones. FOA, Felipe Ochoa y Associados S.C.Consultores, October 1989

50. SubproVecto Ciudad Juares, Reporte de Evaluaci6n (Borrador) FOA, FelipeOchoa y Associados S.C. Consultores, September 1991

51. Provecto de Vialidades Zonas Oriente. FOA, Felipe Ochoa y AssociadosS.C. Consultores, April 1990

52. Estimaci6n de Costos de Operaci6n de Vehiculos para Condiciones Urbanas.Adaptaci6n de Modelo VOC del BIRF a las Condiciones Nacionales(Borrador). FOA, Felipe Ochoa y Associados S.C. Consultores, September1991

53. Subproyecto Morelia, Prediagn6stico del Estudio Integral. Ustran,Urbanismo y Sistemas de Transporte, December 1988

54. Subprovecto Morelia, Sintesis Elecutiva. Ustran, Urbanismo y Sistemas deTransporte, April 1989

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Annex 10Page 5 of 5

55. Subprovecto Morelia. Ingenieria de Transito. Ustran, Urbanismo ySistemas de Transporte, March 1989

56. Subprovecto Morelia. Transporte Plablico. Ustran, Urbanismo y Sistemas deTransporte, March 1989

57. Subprovecto Morelia. Analisis Financiero. Ustran, Urbanismo y Sistemasde Transporte, March 1989

58. Subproyecto Morelia, Metodoligias. Ustran, Urbanismo y Sistemas deTransporte, March 1989

59. Subproyecto Le6n, Antecedentes. Cal y Mayor y Asoc, April 1989

60. Subproyecto Le6n, Reporte Central. Cal y Mayor y Asoc, April 1989

61. Subproyecto Le6n, Informes de Diagn6stico. Cal y Mayor y Asoc, April1989

62. Subproyecto Le6n, Informes de Estrategias. Cal y Mayor y Asoc, April1989

63. Subproyecto Le6n, Reporte de Evaluaci6n. Cal y Mayor y Asoc, October1991

64. Subproyecto Toluca, Reporte Central. Cal y Mayor y Asoc, April 1989

65. Subprovecto Toluca, Informe Diagn6stico. Cal y Mayor y Asoc, April 1989

66. Subprovecto Toluca, Informes Estrategias. Cal y Mayor y Asoc, April 1989

67. Subprovecto Toluca. Reporte de Evaluaci6n. Cal y Mayor y Asoc, October1991

IBRD 23

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