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Document of

The World Bank

for Official Use only

Report no: 87104-MX

PROGRAM APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT US$55 MILLION

TO THE

NATIONAL BANK OF PUBLIC WORKS AND SERVICES (BANOBRAS)

WITH THE GUARANTEE OF THE UNITED MEXICAN STATES

FOR A

OAXACA WATER AND SANITATION SECTOR MODERNIZATION OPERATION

May 5, 2014

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

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CURRENCY EQUIVALENTS

(Exchange Rate Effective March 27, 2014)

Currency Unit = Mexican Pesos

US$1.00 = MX$13.13

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ACGs Anti-Corruption Guidelines

ADOSAPACO Administración Directa de Obras y Servicios de Agua Potable y Alcantarillado de la Ciudad de Oaxaca - Oaxaca Metropolitan Area Water Utility (until the creation of the SAPAO)

APAZU Programa de Agua Potable, Alcantarillado, y Saneamiento en las Zonas Urbanas - Program for Water Supply and Sanitation in Urban Areas (CONAGUA)

ATI Access To Information BANOBRAS Banco Nacional de Obras y Servicios Públicos - National Bank of Public Works and Services BP Bank Procedures

CDI Comisión Nacional para el Desarrollo de los Pueblos Indígenas - National Commission for the Development of Indigenous People

CEA Comisión Estatal del Agua - State Water Commission CONAGUA Comisión Nacional del Agua - National Water Commission CSO Civil Society Organization DA Designated Account DLIs Disbursement Linked Indicators ESSA Environmental and Social Systems Assessment ESSM Environmental and Social Management Manual F/C Fraud and Corruption FM Financial Management GoO Government of Oaxaca IBRD International Bank for Reconstruction and Development IDA International Development Association IFR Interim Financial unaudited Report IPF Investment Project Financing IPOs Indigenous People Organizations IR Intermediate Results IVA Independent Verification Agent

MAS Oaxaca Programa de Modernización del sector Agua potable y Saneamiento - Oaxaca Water and Sanitation Sector Modernization Program

M&E Monitoring & Evaluation OECD Organization for Economic Co-operation and Development OP Operational Procedures PAP Program Action Plan PDO Program Development Objective PforR Program for Results PIBAI Programa de Infraestructura Básica para la Atención de los Pueblos Indígenas - Program of

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Basic Infrastructure for Indigenous People (CDI)

PROTAR Programa de Tratamiento de Aguas Residuales - Program for the Treatment of Wastewater (CONAGUA)

PROSSAPYS Programa para la Construcción y Rehabilitación de Sistemas de Agua Potable y Saneamiento en las Zonas Rurales - Program for the Construction and Rehabilitation of Water Supply and Sanitation Systems in Rural Areas (CONAGUA)

SAI Secretaría de Asuntos Indígenas - State Secretariat of Indigenous Affairs

SAPAO Servicios de Agua Potable y Alcantarillado de Oaxaca - Oaxaca Metropolitan Area Water Utility

SCTG Secretaría de la Contraloría y Transparencia Gubernamental - State Comptroller General and Transparency’s Office

SEFIN Secretaria de Finanzas de Oaxaca - State Finance Ministry SEPA Sistema de Ejecución del Plan de Adquisiciones – Procurement Plan Execution System SFP Secretaría de la Función Pública - Federal Secretariat of Public Administration SHCP Secretaria de Hacienda y de Crédito Publico - Federal Finance Ministry

SIASAR Sistema de Información de Agua y Saneamiento Rural - Rural Water and Sanitation Information System

SINPRES Sistema Integral de Presupuesto - Integrated budgeting and accounting system SOE Statement Of Expenditures TA Technical Assistance WSS Water Supply and Sanitation

Vice President: Jorge Familiar Country Director: Gloria M. Grandolini

Sector Director: Sector Manager:

Ede Jorge Ijjasz-Vasquez Wambui G. Gichuri

Task Team Leader: Charles Delfieux

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MEXICO

Oaxaca Water and Sanitation Sector Modernization Operation

Table of Contents

I.  STRATEGIC CONTEXT .................................................................................................................................. 1 

A.  Country and State Context ............................................................................................................................... 1 

B.  Sectoral and Institutional Context .................................................................................................................... 2 

C.  Relationship to the CPS .................................................................................................................................... 3 

D.  Structure of the Operation and Rationale for Use of Instrument .................................................................... 4 

II.  PROGRAM DESCRIPTION ............................................................................................................................ 5 

A.  The State’s WSS sector program ...................................................................................................................... 5 

B.  Scope of the Program ....................................................................................................................................... 7 

C.  Program Activities ............................................................................................................................................ 9 

D.  TA Component Activities ................................................................................................................................ 10 

E.  Costs, Financing and Beneficiaries ................................................................................................................. 11 

F.  Program Development Objective ................................................................................................................... 12 

G.  Program Key Results and Disbursement Linked Indicators ............................................................................ 12 

III.  PROGRAM IMPLEMENTATION .................................................................................................................. 12 

A.  Institutional and Implementation Arrangements ........................................................................................... 12 

B.  Results Monitoring and Evaluation ................................................................................................................ 14 

C.  Disbursement Arrangements and Verification Protocols ............................................................................... 14 

IV.  ASSESSMENT SUMMARY ....................................................................................................................... 15 

A.  Technical ......................................................................................................................................................... 15 

B.  Fiduciary ......................................................................................................................................................... 17 

C.  Environmental and Social ............................................................................................................................... 18 

D.  Fraud & Anti‐Corruption Institutional Capacity Assessment .......................................................................... 21 

E.  Integrated Risk Assessment Summary ........................................................................................................... 22 

F.  Program Action Plan ....................................................................................................................................... 23 

Annex 1: Detailed Program Description .................................................................................................................. 24 

Annex 2: Results Framework and Monitoring ......................................................................................................... 35 

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Annex 3: Disbursement‐Linked Indicators, Disbursement Arrangements and Verification Protocols ................... 38 

Annex 4:  Summary Technical Assessment ............................................................................................................. 47 

Annex 5: Summary Fiduciary Systems Assessment ................................................................................................. 63 

Annex 6:  Summary Environmental and Social Systems Assessment ...................................................................... 74 

Annex 7: Integrated Risk Assessment ..................................................................................................................... 81 

Annex 8: Program Action Plan ................................................................................................................................. 85 

Annex 9: Technical Assistance Component Implementation Arrangements .......................................................... 89 

Annex 10: Implementation Support Plan ................................................................................................................ 95 

Annex 11: Map ........................................................................................................................................................ 97 

 

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PAD DATA SHEET

Mexico

Oaxaca Water and Sanitation Sector Modernization Operation

PROGRAM APPRAISAL DOCUMENT

Latin America and the Caribbean Region Water Supply and Sanitation Unit 

.

Basic Information

Date: 05/05/2014 Sectors: Water Supply (65%) Sanitation (10%) Public administration-Water, Sanitation and Flood Protection (25%)

Country Director

Sector Manager/Director:

Gloria M. Grandolini

Wambui G. Gichuri / Ede Jorge Ijjasz-Vasquez

Themes: City-wide Infrastructure and Service Delivery (60%) Rural Services and Infrastructure (10%) Managing for development results (30%)

Program ID: P145578 Environmental Category (IPF Component): C

Team Leader: Charles Delfieux

Program Implementation Period:

Expected Financing Effectiveness Date:

Expected Financing Closing Date:

Start Date:

Q3 CY14

12/31/19

06/04/14 End Date: 06/30/19

.

Operation Financing Data

[ X ] [ ] [ ]

Loan Credit Grant

Term:

IBRD Flexible Loan in the amount of US$55,000,000 to BANOBRAS with a sovereign guarantee from the United Mexican States. Fixed spread, commitment linked with level repayment, 18 years of repayment term (including 5 years of grace period), payment dates on June 15 and December 15, all conversion options (Currency, Interest Rate and Caps and Collars), and Front-end fee and Cap/collar premium to be paid by the Borrower from own resources.

   

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For Loans/Credits/Others: IBRD CONAGUA (APAZU) Total

PforR (Program): US$45 million US$38.5 million US$83.5 million IPF (Technical Assistance Component): US$10 million - US$10 million

Total MAS Oaxaca Operation: US$55 million US$38.5 million US$93.5 million

Total Cofinancing : US$38.5 million Total Financing Gap : 0

.

Financing Source Amount

IBRD

-PforR (Program)

-IPF (Technical Assistance Component)

US$55 million

US$45 million

US$10 million

CONAGUA (APAZU) US$38.5 million

Total US$93.5 million

.

Borrower: National Bank of Public Works and Services (BANOBRAS)

Responsible Agency: Ministry of Finance of the State of Oaxaca

Contact: Francisco Madrazo Title: Asesor, Secretaria de Finanzas del Estado de Oaxaca 

Telephone No.: Email: ozardam76@hotmail.com

Contact: Iliana Sotomayor Title: Consultora, Secretaria de Finanzas del Estado de Oaxaca 

Telephone No.: Email: ilianasotomayor@gmail.com

Contact: Ricardo Canavati Title: Subdirector de Planeación de BANOBRAS

Telephone No.: (+52) 55 5270 1200 Email: ricardo.canavati@banobras.gob.mx

.

Expected Disbursements (in US$ Million)

Fiscal Year FY15 FY16 FY17 FY18 FY19

Annual 5.00 16.50 12.00 12.00 9.50

Cumulative 5.00 21.50 33.50 45.50 55.00

.

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Program Development Objective

The Program Development Objective is to support the improvement of the institutional framework of the water supply and sanitation sector of the State of Oaxaca, and to improve the quality and sustainability of water supply service in selected urban areas

Compliance

Policy

Does the operation depart from the CPS in content or in other significant respects? Yes [ ] No [ X ]

.

Does the operation require any waivers of Bank policies applicable to Program-for-Results and Investment Project Financing instruments?

Yes [ ] No [ X ]

Have these been approved by Bank management? (N/A) Yes [ ] No [ ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]

Does the program meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ]

Does the IPF component trigger any Safeguard Policy? Yes [ X ] No [ ]

If so, which one (s)? -Environmental Assessment OP/BP 4.01 -Indigenous Peoples OP/BP 4.10

Overall Risk Rating: High

Legal Covenants

Name Recurrent Due Date Frequency

Subsidiary Agreement between BANOBRAS and the State of Oaxaca

No Effectiveness N/A

Description of Covenant The Subsidiary Agreement has been executed on behalf of the Borrower and the Operation Implementing Entity.

Name Recurrent Due Date Frequency

Operational Manual of the MAS Oaxaca Operation

No Effectiveness N/A

Description of Covenant The Operational Manual has been duly approved and adopted by the Operation Implementing Entity, through SEFIN.

Name Recurrent Due Date Frequency

Implementation Agreements No Effectiveness N/A

Description of Covenant The Participating Agency Agreements have been executed on behalf of each respective Participating Agency and the Operation Implementing Entity.

   

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Name Recurrent Due Date Frequency

Independent Verification Agent of the Program’s results

No 31/12/2014 N/A

Description of Covenant Contract the Independent Verification Agent of the Program’s results in accordance to Terms of Reference acceptable to the Bank.

.

Team Composition

Bank Staff

Name Title Specialization Unit

Abel Lopez Infrastructure Specialist Institutional Coordination LCSTR

Alexandra Ortiz Sector Leader Sector Coordination LCSSD

Blanca Lopez-Alascio Junior Professional Associate Team Coordination LCSWS

Charles Delfieux Water and Sanitation Specialist Task Team Leader LCSWS

David Michaud Sr Water and Sanitation Specialist Water and Sanitation ECSUW

Diomedes Berroa Lead Specialist Procurement OPSOR

Dmitri Gourfinkel Financial Management Specialist Financial Management LCSFM

Elizabeth Sanchez Program Assistant Administration and Client Services LCSWS

Fabiola Altimari Sr Counsel Legal LEGLE

Gabriel Penaloza Procurement Specialist Procurement LCSPT

Harold Bedoya Country Operations Adviser Country Coordination LCC1C

Irina Luca Lead Procurement Specialist Procurement LCSPT

Jozef Draaisma Sr Country Economist Macro economy LCSPE

Jorge Luis Alva-Luperdi Sr Counsel Legal LEGES

Lisa Bhansali Regional Adviser for Governance/Anti-corruption

Governance and Anti-corruption LCSOS

Luis de la Plaza Lead Financial Officer Finance FABBK

Maria Elena Garcia Mora Social Development Specialist Social Management LCSDE

Martin Gambrill Lead Water and Sanitation Specialist Water and Sanitation LCSWS

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Martin Lenihan Sr Social Development Specialist Social Management LCSSO

Robert Montgomery Lead Environmental Specialist Environmental Management LCSEN

Samantha Fien-Helfman Junior Professional Associate Governance and Anti-corruption LCSOS

Ventura Bengoechea Lead Water and Sanitation Specialist Peer reviewer AFTU2

Victor Ordonez Sr Finance Officer Disbursement CTRLN

Victor Vazquez Alvarez Water and Sanitation Specialist Peer reviewer EASWE

William Kingdom Lead Water and Sanitation Specialist Peer reviewer SASDU

Xiomara Morel Sr Financial Management Specialist Financial Management LCSFM

Non Bank Staff

Name Title City

Alvaro Campy Sr Rural Water and Sanitation Specialist Bogota, Colombia

Dora Garcia Kobeh Sr Procurement Specialist Mexico City, Mexico

Fabio Garzon Sr Water Utility Specialist Cali, Colombia

Guillermo Mingolla Sr Water Utility Specialist Rosario, Argentina

Jose Luis Calderon Sr Environmental Specialist Mexico City, Mexico

Ledda Macera Governance Specialist Washington DC, USA

Lucia Fandino Water Engineer Mexico City, Mexico

Luz Maria Gonzalez Sr Economist and Financial Specialist Ohio, USA

Oswaldo Patino Sr Institutional Specialist Lima, Peru

Ricardo Miranda Sr Water Engineer Puebla, Mexico

Ricardo Sandoval Sr Institutional Specialist Guanajuato, Mexico

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MEXICO

OAXACA WATER AND SANITATION SECTOR MODERNIZATION OPERATION

PROGRAM APPRAISAL DOCUMENT

I. STRATEGIC CONTEXT

A. Country and State Context

1. In spite of economic and social improvements, inequality, poverty and regional disparities remain a challenge in Mexico. Mexico is an upper middle-income country with one of the highest per capita incomes among Latin American countries. A rebound of economic growth during 2010-12 boosted shared prosperity as income growth of the bottom 40 percent of the population increased higher than the average income. However poverty levels have not decreased significantly in recent years and currently 53 million Mexicans (45 percent of the total population) still live under the national poverty line1, with persistent and substantial differences across regions and ethnic groups. Mexico has experienced regional convergence towards the levels of its richest regions, however States as Oaxaca, Chiapas and Guerrero remain as poor as they were in the early 1990s. The poverty and economic gap between the top and worst performing States has widened notably over the past two decades, as the former have been growing faster. In 2012, extreme poverty ranged from 2 percent in Nuevo Leon and in the Federal District, to 32 percent in Chiapas and Guerrero and 23 percent in Oaxaca2. 2. Oaxaca ranks among the poorest States in Mexico and faces a complex social environment. Out of Mexico’s 32 States, Oaxaca has the second lowest GDP per capita in the country3, approximately US$2,750, representing 44 percent of the national average. It also ranks third in the country in terms of its poverty and extreme poverty levels. Sixty two percent of its 3.8 million inhabitants live below the national poverty line. The development gap between Oaxaca and the most advanced States has been increasing over the same period as reflected by the Shared Prosperity Convergence Index4. Oaxaca is also known for tense social dynamics, including recurrent protests that obstruct the Government’s normal functioning. 3. Since 2011 the Bank has been supporting the reform agenda for inclusive growth of the Government of Oaxaca through a strategic programmatic partnership. The Government of Oaxaca (GoO) and the Bank signed a Memorandum of Understanding (MoU) in June 2011 which includes multi-year, multi-sectoral support to the State, combining a package of knowledge, convening and financial services, to support a reform agenda for inclusive growth in Oaxaca and for modernizing the State’s public institutions and policies. The MoU was structured around four areas: (i) public sector modernization; (ii) human development; (iii) finance and private sector; and (iv) sustainable development. In 2013, the MoU has been renewed for another two years.

                                                            1 National Council for Evaluation of Social Development Policy (CONEVAL), 2012 2 National average of extreme poverty: 9.8 percent 3 Mexican Institute for Competitiveness (IMCO), State Competitiveness Index, 2012 4 Developed by the World Bank

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B. Sectoral and Institutional Context 4. Access to Water Supply and Sanitation (WSS) services is among the lowest of Mexico. The State of Oaxaca has the third lowest drinking water coverage (79 percent)5 after Chiapas and Guerrero, and the lowest sanitation coverage (71 percent) in the country. This low service coverage contrasts with a relatively high availability of water resources, as Oaxaca is the State with the fifth largest underground water reserves of the country. Treatment of collected wastewater is another concern, as only 15 of the 139 treatment plants in the State are considered fully operational6. There is no strategic planning for the development of access to sanitation services, in terms of institutional organization, selection of technologies, and financing policy. 5. Quality of the WSS services is generally poor. Intermittent water supply is widespread. Generally, water service through a piped distribution system varies from a few hours of supply a day to once every couple of weeks. To compensate irregular water supply, users resort to buying costly water from trucks. As a consequence of a lack of systematic disinfection and of intermittent supply, the systems do not generally distribute safe potable water. The absence of a culture of professional management, including commercial management, is prevalent among the State’s water service providers, contributing to a downward spiral in the quality of their services. 6. The institutional framework of the WSS sector in Oaxaca is characterized by the incomplete separation of sector functions, the lack of autonomy of urban service providers, and the lack of a strategic vision for sector stewardship. The State Water Commission (CEA), the leading institution for sector planning and financing in Oaxaca, contracts and supervises around 80 percent of the investments made in the sector7, directly operates 15 urban water supply systems across the State, and provides some remunerated operational assistance to other service providers, mostly in urban areas. Its actions are therefore dispersed in various areas rather than focusing on policy direction and sector stewardship. In addition, the incomplete separation of functions between CEA’s role of sector planning/financing and operations prevents a fair allocation of financial resources across all the State’s urban service providers. Other urban service providers in Oaxaca include: (i) the water utility of the Metropolitan Area of Oaxaca (SAPAO 8 ), an autonomous State utility serving close to 280,000 people; (ii) autonomous municipal utilities with boards chaired by the respective mayors; and (iii) municipal department operated WSS systems for the rest of the State’s urban localities. Their governance structure, which is generally associated with a lack of autonomy, generates a high politicization of the tariffs, of revenue collection from services and of staff appointments. In rural areas9, municipal agencies or user committees operate the water systems in 10,000 highly scattered localities10 for which there is, inter alia, no mechanism for technical assistance in place to provide support to system management or to facilitate access to federal funding programs.

                                                            5 CONAGUA, 2013 6 State Water Commission, 2013 7 Team analysis of the sector financing (2009-2012) 8 Servicios de Agua Potable y Alcantarillado de Oaxaca. On October 31, 2013 the State congress approved the law creating SAPAO, an autonomous State water utility, replacing ADOSAPACO, a former State department 9 Defined as localities of 2,500 people or less 10 Oaxaca has 570 municipalities

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7. WSS service operations are largely subsidized, leading to political interference and further affecting the performance of the service providers. The combination of limited capacity, lack of efficiency, low tariffs11 and low collection rates has led to highly subsidized service providers. Tariffs cover only 25 percent of operating costs in SAPAO and 75 percent in the systems operated in secondary towns12

. The general reliance on subsidies increases the political dependence of the service providers, and affects their performance as sufficient subsidies are not always available when needed. There is no tariff regulation, nor any other form of regulation of the providers and existing subsidies in the sector are not targeted to the poorest municipalities or to the poorest inhabitants within a municipality. 8. Financing of WSS sector investments is unpredictable and depends on federal programs that do not incentivize service improvement. While all resources for investments in the sector are channeled through the State Secretariat of Finance (SEFIN), 96 percent of the sector investments are financed through federal programs (40 percent from programs of the Federal Water Commission, CONAGUA, 52 percent from programs of the Federal Ministry of Finance, SHCP, and 8 percent from programs of the National Commission for the Development of Indigenous People, CDI, respectively). Over the period 2007-2012 it is estimated that the sector benefited from an average of US$55 million of investments per year, having increased from US$32 million to US$78 million during this period. CEA and other State stakeholders plan for the use of funds, procure and execute on a yearly basis depending on the annual availability of the State counterpart financing required to leverage the federal programs, rather than based on a strategic vision of service improvement. The unpredictability of the available resources prevents rational medium-term investment planning both at the State and service provider levels. 9. There is a general lack of data on service levels and on provider performance. In urban areas only a few utilities have the tools and systems to measure key performance indicators, while in rural areas there is no mechanism to monitor service access and sustainability. 10. Modernizing the WSS sector is a priority of the Government of Oaxaca (GoO). The current State administration, which started its 6-year term in January 2011, has made the institutional strengthening and modernization of its WSS sector a priority, as embodied in the State Development Plan (2011-2016). GoO is committed to address the institutional, technical and financial challenges hindering the expansion of access to quality and sustainable WSS services in the State. In 2012 GoO adopted and published13 a Strategic Plan for the WSS sector that sets out an investment plan and objectives for the development of the sector. The preparation of the Strategic Plan has been coordinated by SEFIN which is championing the modernization of the State’s WSS sector.

C. Relationship to the CPS

11. The Operation is aligned with the Federal Government’s priorities and the World Bank Group’s 2014-19 Country Partnership Strategy (CPS). The Operation is aligned with the

                                                            11 ADOSAPACO had the lowest residential tariff among the 32 main cities of the country, CONAGUA 2012 12 Team analysis of the sector financing (2009-2012) 13 https://www.finanzasoaxaca.gob.mx/pestrategicosec.html

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Government of Mexico’s priorities, as laid out in the 2013-18 National Development Plan, of achieving greater inclusiveness by reducing the inequalities dividing the country (the “Inclusive Mexico” objective) and promoting prosperity across the country through productivity improvements (the “Prosperous Mexico” objective). It is also fully consistent with the World Bank Group’s 2014-19 Country Partnership Strategy (CPS) discussed by the Executive Directors in December 2013 that prominently features water and subnational engagement as one way to address the World Bank Group twin goals of ending extreme poverty and promoting share prosperity. The Operation would support two of the four CPS themes for alleviating poverty and promoting shared prosperity: (i) Promoting Green and Inclusive Growth, by enabling an environment that strengthens the efficiency, quality and sustainability of water service provision in one of the poorest States of Mexico; and (ii) Strengthening Public Finances and Government Efficiency, by encouraging a results-based approach in public budgeting and service management, and by strengthening the State’s own systems for WSS service delivery. 12. The Operation supports poverty reduction and shared prosperity. The Operation is aligned with the Bank’s twin goals of ending extreme poverty by 2030 and promoting shared prosperity among the poorest 40 percent of Mexicans. The Operation is implemented in the State with the second lowest GDP per capita in the country. In the 18 secondary municipalities that will benefit from direct interventions under the Program, 58 percent of the population lives below the national poverty line14. Among people who speak an indigenous language in the State, the share of the population living below the national poverty line rises to 84 percent. A large majority of users benefiting from the Operation have intermittent services, with households receiving water through piped distribution systems for a few hours a day to only once every couple of weeks. Households consequently resort to purchasing water at great expense from private tankers and/or by adopting other coping mechanisms. The lack of quality in the supply of water from the public networks of the utilities disproportionately affects their poorest users given the large difference between their currently high coping costs and the tariff that would be needed to fully cover the operating costs of the water utilities15. In addition, the improvement of the quality and sustainability of water services under the Operation are expected to have multiple benefits including prevention of water-related diseases and can have a strong impact on productivity and income, health, cognitive development, mortality rates, educational attainment, as well as time and opportunity costs, particularly for women, children and vulnerable populations.

D. Structure of the Operation and Rationale for Use of Instrument

13. The Operation encompasses a Program financed through a PforR instrument and a Technical Assistance Component following IPF policies. The Bank Operation, the Water

                                                            14 Based on most recent data on poverty rate available at municipality level (CONEVAL, 2010). No disaggregated data on poverty level available in the selected sector benefiting from direct interventions in SAPAO’s service area. 15 For example, in the Metropolitan Area of Oaxaca, the average cost of water delivered by the formal service provider is evaluated to be between 20 and 40 times cheaper than the cost of delivering an equivalent volume purchased from the water trucks. If the tariffs from the water utility were increased to cover its operating expenses (without considering efficiency gains), the costs of getting potable supplies from the tankers would still be much higher than the adjusted tariffs. (Team information and Diagnóstico y Evaluación sobre la Estructura Tarifaria del Sistema de Agua de Oaxaca, Alef consultores, Agosto 2011)

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Supply and Sanitation Sector Modernization Operation (MAS Oaxaca16), proposes the use of a hybrid Program for Results (PforR)/Investment Project Financing (IPF) financial instrument, the latter funding a Technical Assistance (TA) Component supporting the achievement of the objectives of the Program. The use of both instruments complies with the requirements of OP/BP 9.00 and OP/BP 10.00 respectively. 14. Rationale for use of a Program for Results. The PforR is considered an appropriate financial instrument to support the State’s WSS sector program and to achieve the objectives of the Operation, as GoO is strongly interested in : (i) improving the efficiency of its WSS program from the technical, fiduciary, environmental and social perspective in a sector that has traditionally been one of the poorest-performing in the country; (ii) creating financial incentives for results achievement, thus shifting the focus from resources execution to output/outcome achievement; and (iii) leveraging CONAGUA financing, using part of the proceeds of the loan as the State counterpart funds required to access CONAGUA financing. 15. Rationale for use of a Technical Assistance Component following IPF policies. The executing agencies of the Program have the procurement systems in place and some experience to contract technical assistance. However, contracting of multi-annual TA under the Program’s systems could not be considered due to the operational rules applicable to federal resources as they limit contract execution within one fiscal year. A similar limitation applies to contracts funded with state resources as Oaxaca´s state procurement legislation regarding consultant services sets multiple requirements for authorization of contracts beyond one fiscal year including a limitation to the commitment of payments. This drastically limits the necessary continuity in the strategic support needed to accompany the modernization process throughout the duration of the Program. The financing of the TA Component following IPF policies will address this constraint. In addition, the Program executing agencies traditionally limit TA contracting to consulting services that support design and supervision of investments, and do not dedicate financial resources to strategic support for service improvement and sector studies, which are regarded as critical to improve the Program performance and increase the likelihood of achieving its objectives. The TA Component will allow them to ring-fence resources for strategic service improvement TA and sector studies - thus also creating a demonstrative effect of the relevance of such TA activities. Though some activities financed by the TA Component have been designed to increase the likelihood to achieve the Disbursement Linked Indicators (DLIs) targets, none of them is a pre-requisite for the achievement of the DLIs.

II. PROGRAM DESCRIPTION

A. The State’s WSS sector program 16. This section presents the Strategic Plan for the WSS sector of the GoO and the Vision for the modernization of the institutional framework integrating the State’s WSS sector program. 17. Strategic Plan for the WSS sector. In 2012, GoO adopted a Strategic Plan17 for the WSS sector as part of its State Development Plan18 covering the six years of its administration. The                                                             16 Modernización del sector Agua potable y Saneamiento de Oaxaca (MAS Oaxaca) 17 Plan Estrategico Sectorial

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objectives of the Strategic Plan for the WSS sector can be grouped under four pillars: (i) Expanding access to WSS services in urban areas; (ii) Improving water service quality and financial sustainability of water utilities; (iii) Increasing wastewater treatment coverage; and (iv) Expanding access to WSS services rural areas. To achieve its objectives, GoO will finance investments in WSS infrastructure across the State, service efficiency improvement activities, and studies. GoO’s Strategic Plan for the WSS sector has a total program of expenditures of approximately US$800 million. Details about the expenditure program for GoO’s Strategic Plan are provided in Annex 1. The program of expenditures will be funded by a mix of federal, state and municipal financing through existing sector financing streams, the main ones being SHCP’s federal programs, CONAGUA federal programs (APAZU, PROSSAPYS, PROTAR), CDI federal program (PIBAI), and GoO’s own financing program.

Table 1: Main Financing Streams of GoO’s Strategic Plan (US$ million)

Financing of the expenditure program

for GoO’s Strategic Plan

Respective contribution of the financing streams19

State program

SHCP Federal program

CONAGUA Federal programs

CDI Federal program

Other Federal

programs APAZU PROTAR PROSSAPYS PIBAI

Federal financing 524.6

4% 50% 16% 4% 14% 7% 5% State financing20 246.4

Municipal financing21 26.8

Total financing 797.8

18. GoO seeks to increase the financing to the WSS sector to meet the Strategic Plan’s objectives since implementing it will require an ambitious increase in annual sector investment financing from the current annual average of US$55 million to US$160 million per year. The financing of the Strategic Plan is consequently deemed to be very challenging in a context of limited counterpart financing and limited capacity to absorb such an increased amount of investments. In addition, GoO aims at improving the performance and efficiency of its WSS program to more effectively turn investments into results, as well as to strengthen the capacity of the State to execute the anticipated increase in resources that will be directed to its WSS sector. More details on GoO’s Strategic Plan for the WSS sector are provided in Annex 1. 19. Vision for the Modernization of the WSS Sector Institutional Framework. GoO has developed a Vision to modernize the institutional framework of its WSS sector in order to create a conducive institutional environment through which to improve the access, quality and sustainability of the State’s WSS services. Key principles framing the modernization of the WSS institutional framework include: (i) the separation of key sector functions – namely, policy direction and sector stewardship (planning, financial resources allocation, technical assistance,

                                                                                                                                                                                                18 Plan Estatal de Desarrollo 19 The respective contribution of the main financing stream to the program of expenditures of the State’s Strategic Plan for the WSS sector presented in the table are expectations based on the 2007-2012 data 20 Including the State counterpart for the Federal programs 21 Including the Municipal counterpart for the Federal programs

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monitoring of norm compliance), service provision and regulation; (ii) the allocation of sector financial resources based on efficiency and equity criteria with the aim of reducing regional disparities and social inequalities, and of setting incentives to promote service quality and sustainability; and (iii) the promotion of the legal autonomy and financial sustainability of the State’s service providers. To concretize this vision, GoO is committed to: (a) progressively transferring the operations of the water systems that CEA currently manages to autonomous municipal service providers; (b) introducing mechanisms of results-based financial allocation to enhance the efficiency of sector expenditures and to promote the legal autonomy and cost-recovery of service providers; (c) improving the quality and availability of information in the WSS sector to strengthen sector monitoring, planning and fund allocation based on equity criteria, and to act as a first step towards sector regulation; and (d) revising the key legal and regulatory tools, as well as the strategic vision and planning tools, of the State’s urban and rural WSS sector in order to align them with this modernization agenda. More details regarding GoO’s modernization agenda for the WSS sector are provided in Annex 1.

B. Scope of the Program

20. Program scope and rationale. The areas of the Bank-supported portion of GoO’s WSS program have been strategically identified in order to use the Bank financing to incentivize and tackle key sector issues that the Bank has a comparative advantage to support, and will focus on the following: (i) Modernization of the sector institutional framework that is not traditionally supported by federal sector financing programs and that includes the consolidation of a strategic vision for the sector, and the related planning tools in order to provide a platform from which GoO can scale-up quality and sustainability of water supply and sanitation services for all; and (ii) Improving the service quality and financial sustainability of water utilities in selected urban areas receiving funding through federal financing programs (the main one being CONAGUA’s APAZU program), which generally focus on infrastructure delivery in a piecemeal fashion with no holistic vision for the service provider, rather than incentivizing service improvements. 21. The Program’s scope has been delineated in such a way that it complements the features of other federal programs currently under implementation in Oaxaca. It was judged most strategic to use the funds of the Bank-financed Operation to support the two aforementioned areas. The other pillars of the State WSS program continue to be addressed through complementary federal financing streams, mainly the APAZU, PROTAR, PROSSAPYS, PIBAI designed to support infrastructure outcomes, and focused on expanding access to WSS services in rural and urban areas and on increasing wastewater treatment coverage. 22. The Bank-financed Operation’s support to the modernization of GoO’s WSS program is designed to have beneficial impacts on all sector activities throughout the State and across the rural and urban water and sanitation subsectors. Through the Bank’s support to the improvement of the service quality and financial sustainability of water utilities, activities will be concentrated in selected urban areas across the State, with the objective of creating a demonstrative effect of sustainable urban water provision such that GoO could subsequently scale up the approach and the results. In Oaxaca Metropolitan Area, activities will focus on the San Juan Chapultepec Sector identified by SAPAO as having an adequate size and hydraulic characteristics to achieve the expected results and to be the basis to replicate the approach to the rest of SAPAO’s service

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area. In the secondary towns outside the Oaxaca Metropolitan Area, activities will focus on the water utilities of (i) the State’s largest secondary towns, whose population is above 15,000 inhabitants and/or (ii) where CEA currently operates the systems in order to support the transfer of those systems to municipalities as per the vision for the modernization of the institutional framework. The Bank-supported portion of GoO’s WSS program is called the Oaxaca Water Supply and Sanitation Sector Modernization Program (MAS Oaxaca22).

Table 2: Program Scope

Oaxaca WSS sector program

Main financing streams of the Oaxaca WSS sector program

State program

SHCP Federal program

CONAGUA Federal

programs

CDI Federal

program APAZU PROTAR PROSSAPYS PIBAI

Modernization of the sector institutional framework

Str

ateg

ic P

lan

for

the

WS

S

Sec

tor

Expanding access to WSS services in urban areas

Improving water service quality and financial sustainability of utilities23

Increasing wastewater treatment coverage

Expanding access to WSS services in rural areas

Financing stream funding the activities of the Oaxaca WSS sector program

Bank-supported portion of GoO’s WSS program

23. The Program will provide a platform for further development of the WSS sector of the State. The consolidation of a strategic vision for the sector and the development of related planning tools, as part of the implementation of a modernized sector institutional framework, will provide a platform for the long-term development of the WSS sector of Oaxaca going beyond the improvements in the service quality and financial sustainability of water utilities in urban areas: (i) Rural water supply and sanitation. While the rural water and sanitation subsector remains a challenge in the State, two large federal programs, CONAGUA’s PROSSAPYS24 and CDI’s PIBAI, are in place to increase access to rural water supply and sanitation services in Oaxaca. The Rural Water Supply and Sanitation Strategy and the Public Expenditure Review to be prepared under the TA Component will include a diagnosis of the rural WSS sector in Oaxaca, including of the effectiveness of its financing, in order to define optimal institutional arrangements for promoting sustainable rural WSS provision in the State. The rural WSS

                                                            22 Modernización del sector Agua y Saneamiento 23 Includes utilities of the Oaxaca Metropolitan Area and of secondary towns. 24 Financed by the Inter-American Development Bank

 

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diagnostic work and the design of the pilot approaches, combined with the Rural Water and Sanitation Information System to be supported by the Program, will provide a platform for the development of the rural WSS sub-sector in Oaxaca; and (ii) Urban sanitation. Similarly, the Urban Water Supply and Sanitation Strategy and the Public Expenditure Review supported under the TA Component, will include a review of current approaches to urban sanitation and wastewater management in the State, including of its financing, in order to define optimal institutional, technological and financial arrangements for sustainable urban sanitation. This diagnostic and planning work will provide a platform for the development of urban sanitation sub-sector of Oaxaca.

C. Program Activities

24. Program activities25. Through the use of the PforR instrument, and complemented by the TA Component, the Bank will support an integrated set of institutional reforms, institutional strengthening activities and investments in participating institutions to achieve the Program’s objectives. Program’s activities have been structured in four Results Areas. Details of the Program activities are provided in Annex 1. 25. Results Area 1: Modernization of the legal and regulatory framework of the WSS sector in the State. The Program activities will consist of preparing revised versions of key legal and regulatory tools of the WSS sector’s legal and regulatory framework in order to align them with GoO’s vision to modernize the sector, including the development of: (a) a WSS sector law26 and related regulations; (b) standard regulations for municipal or inter-municipal WSS service provision; (c) the SAPAO law; and (d) the CEA and SAPAO organizational manuals and internal regulations. The revision of the State WSS sector law and its subsequent legal and regulatory tools aims at embodying the modernization of the institutional framework into the State’s legal framework. The activities under this Result Area 1 as well as the approval of the law by the State Congress are however not a pre-requisite for the achievement of objectives under the other Results Areas. 26. Results Area 2: Improvement of water services in Oaxaca Metropolitan Area. The Program activities financed through CONAGUA’s APAZU program will aim at improving the quality and efficiency of water supply services in a selected service area of the Oaxaca Metropolitan Area’s water utility (SAPAO) – namely the San Juan Chapultepec Sector which represents 20 percent of SAPAO’s total number of connections, serving 50,000 people, through: (a) the rehabilitation of the boreholes supplying the sector; (b) the construction of interconnection between the boreholes and water treatment facility; (c) the construction of interconnection with main distribution lines; (d) the construction of water treatment facility; (e) the construction of a pumping station; (f) the construction of transmission line from the pumping station to storage tanks; (g) the rehabilitation and construction of storage tanks; (h) the rehabilitation, hydraulic optimization and sectorization of the water distribution network; (i) the                                                             25 The Program will not finance any activities considered likely to have a significant adverse impact on the environment or on affected people, as defined in OP 9.00, or that may require the procurement of goods, works or consultancy contracts above OPRC thresholds. 26 During the Program implementation, the current State WSS Sector Law that was published in 2005 will be reviewed in accordance with the guidelines annexed to the Operational Manual and submitted to the State Congress

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rehabilitation of water connections and the installation of micro-metering; (j) the installation of macro-metering and pressure gauges; (k) the update of the network mapping and commercial system; and (l) the carrying out of WSS studies, preparation of bidding documents and works supervision. 27. Results Area 3: Improvement of water services in secondary towns. The Program activities financed through CONAGUA’s APAZU program will aim at improving the quality of water services and the financial sustainability of the water utilities operating in 18 selected secondary towns27, located outside the Oaxaca Metropolitan Area. The selected secondary towns are made up of those with a population above 15,000 inhabitants and/or where CEA currently operates the systems. The participating water utilities account for about 50 percent of the total State urban population outside of the Oaxaca Metropolitan Area, and total some 600,000 beneficiaries. Planning of the activities financed in each town will be based on available diagnostics/ master plans and will be strengthened through the TA Component. Activities will be geared to the local conditions and needs, and could include the following: (a) the rehabilitation and extension of production, storage and pumping systems; (b) the rehabilitation, hydraulic optimization and sectorization of the water network; (c) the rehabilitation of water connections; (d) the installation of macro and micro metering and pressure gauges; (e) the update of the network mapping and commercial systems; (f) the improvement of accounting systems; and (h) the carrying out of WSS studies, preparation of bidding documents and works supervision. CEA will grant access to financial support to the selected water utilities subject to them meeting certain conditions and results, as specified in a Results Agreement signed with CEA. 28. Results Area 4: Improvement of WSS information in rural areas. The Program activities will consist of establishing an information system designed to capture the status and sustainability of rural WSS services in the 1,130 localities with populations of between 500 and 2,500 inhabitants throughout the State, through: (a) the provision of information technology infrastructure and equipment and carrying out of training in the use of said information technology’s systems; and (b) the carrying out of data survey activities.

D. TA Component Activities

29. TA Component activities. The TA Component will finance activities complementing the Program activities and supporting the achievement of its objectives. These activities consist of strategic support for services improvement and sector studies critical to improve Program performance and to increase the likelihood of achieving its objectives: (i) Multi-annual strategic TA to CEA, SAPAO and selected water utilities in secondary towns to improve the planning of activities, review the quality of bidding documents, strengthen the supervision of the works and improve the operational, commercial, social and environmental management of the operation of the water systems; and (ii) WSS sector studies designed to underpin the modernization of the sector institutional framework, including: (a) the preparation of a Rural and an Urban Water

                                                            27 Heroica Ciudad de Huajuapan de León, Loma Bonita, Miahuatlán de Porfirio Díaz, Ocotlán de Morelos, San Juan Bautista Tuxtepec, Heroica Ciudad de Tlaxiaco, Zimatlán de Álvarez, Asunción Ixtaltepec, Ciudad Ixtepec, El Espinal, Heroica Ciudad de Juchitán de Zaragoza, Matías Romero Avendaño, Salina Cruz, San Francisco Telixtlahuaca, Puerto Escondido, Santiago Pinotepa Nacional, Santo Domingo Tehuantepec, Santo Domingo Zanatepec

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Supply and Sanitation Strategy for the long-term development and organization of the sector, including a diagnosis of the rural WSS sector in Oaxaca, the definition of optimal institutional arrangements for promoting sustainable rural WSS provision in the State, the review of current approaches to urban sanitation and wastewater management in the State, the definition of optimal institutional, technological and financial arrangements for sustainable urban sanitation; (b) the undertaking of a Public Expenditure Review of the Oaxaca WSS Sector to inform the aforementioned strategies; and (c) the design of pilot approaches to provide sustainable rural WSS implementation and support services. (iii) The TA Component activities will also finance activities pertaining specifically to the management of the Operation, including the financing of: (a) the Independent Verification Agent of the Program’s Results; (b) the Operation’s financial audit; (c) the hiring of MAS Oaxaca Operation Coordinators; and (d) the carrying out of training and TA to strengthen fiduciary systems.

E. Costs, Financing and Beneficiaries 30. Costs and financing. The total cost of the MAS Oaxaca Operation is US$93.5 million. Results Areas 1 and 4 of the Program are financed through the State’s own financing program, while Results Areas 2 and 3 are financed through the APAZU program of CONAGUA. The table hereafter summarizes the financing of the MAS Oaxaca Operation. 31. Beneficiaries. While the MAS Oaxaca Operation supports the State-wide modernization of the WSS sector institutional framework, 50,000 people in the selected sector of SAPAO and 600,000 people served by the participating water utilities in the 18 selected secondary towns will benefit from water supply services improvements under the Operation.

Table 3: Financing of the MAS Oaxaca Operation (US$ million)

MAS Oaxaca Operation IBRD

CONAGUA (APAZU federal

counterpart)

TOTAL

Program

1. Modernization of the legal and regulatory framework of the WSS sector in the State

4.5 - 4.5

2. Improvement of water services in Oaxaca Metropolitan Area

8.5 8.5 17

3. Improvement of water services in secondary towns

30 30 60

4. Improvement of WSS information in rural areas

2 - 2

TA Component 10 - 10

Total (US$) 55 38.5 93.5

 

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F. Program Development Objective

32. Program Development Objective. The MAS Oaxaca Program Development Objective (PDO) is to support the improvement of the institutional framework of the water supply and sanitation sector of the State of Oaxaca, and to improve the quality and sustainability of water supply service in selected urban areas.

G. Program Key Results and Disbursement Linked Indicators

33. PDO and Intermediate Results Indicators. The GoO and the Bank have agreed on Results Indicators to measure the progress made under the Results Areas of the Program and under the Technical Assistance Component as well as to measure the achievement of the PDO. The Results Indicators, including baseline, yearly targets and verification protocol, as well as the Results Chain of the Operation are presented in Annexes 2 and 4 in further details. 34. Disbursement-Linked Indicators. The GoO and the Bank have also agreed on the Disbursement-Linked Indicators (DLIs) that will trigger the Bank disbursements under the Program. The DLIs are embedded in the Results Chain of the Operation. The DLIs and their associated amounts have been selected to signal and create financial incentives to achieve critical but measurable results during the implementation of the Program under the four Results Areas. All DLIs trigger disbursement against performance, however the nature of the results achieved under the various DLIs varies: DLI 1 triggers disbursement upon outputs reflecting legal and institutional reforms, DLIs 2-1 (partially), 3-1, 4-1 are linked to the delivery of outputs and systems, while DLIs 2-1 (partially), 2-2, 3-2, 3-3 trigger disbursements against water service improvement outcomes. In order to disburse the full amount allocated under DLI 1, approval of the revised State WSS Law by the State Congress is required. This step stands out of the control of the implementing agencies of the Program. While the GoO recognizes that this clearly generates a risk of non-achievement of the DLI 1, it seeks to create financial incentives through this DLI to follow-up on the Law submission to the State Congress, thus increasing the likelihood of obtaining its approval. The completed DLIs Matrix is provided in Annex 3.

III. PROGRAM IMPLEMENTATION

A. Institutional and Implementation Arrangements

35. Sub-national on-lending arrangements. According to the Mexican Constitution, International Financial Institutions cannot lend directly to subnational entities. Therefore, BANOBRAS, as Mexico’s national development bank responsible for promoting and granting financing to States and municipal governments for infrastructure projects, will be the Borrower of the loan and will, in turn, on-lend the proceeds of the loan to GoO through SEFIN. The Bank has prior experience working with BANOBRAS at subnational level. In 2004, the Bank provided a US$108 million loan28 to the State of Guanajuato through BANOBRAS to support the water supply and sanitation, transport and low-income housing sub-sectors of the State. More recently, in 2010, the Bank lent US$150 million to BANOBRAS to finance an urban transport project to

                                                            28“ Decentralized Infrastructure Reform and Development Loan Project” (P080149), 2004

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be implemented in various Mexican cities29. Finally, BANOBRAS is also the fiduciary agent of a Bank-financed operation in the transport sector30.

36. Institutional arrangements for the Program implementation. Institutional arrangements are embedded within the existing institutional framework of GoO’s WSS sector. Limited adjustments have been made to the existing structure to strengthen inter-institutional coordination, results reporting, and verification. Implementation of the Program involves three government entities: SEFIN, through the MAS Oaxaca Unit, CEA, and SAPAO, as well as water utilities and municipalities in the selected secondary towns. The institutional arrangements under the Results Area 3 of the Program vary depending on the institutional models of the water utilities: (i) CEA-operated utilities (11 out of 18); (ii) Municipal autonomous utilities (4 out of 18); and (iii) Municipal Department utilities (3 out 18). The key role and responsibilities of each institution are summarized in the Annex 1. 37. Results-based allocation of financial resources under the Program. An important feature of the implementation of the Program is the scheme of financial incentives embedded into its design that the GoO intends to introduce at two levels: (i) SEFIN will annually assign the financial resources of the Program to its executing agencies CEA and SAPAO, as part of its annual budget allocation exercise, based on an annual Results Agreement, thus replicating the disbursement approach of the PforR financial instrument and transferring financial incentives to perform to CEA and SAPAO; and (ii) Under the Results Area 3, CEA will also sign Results Agreement with the selected municipal water utilities to grant financial support subject to them meeting certain conditions and results in order to create incentives for information improvement, legal autonomy and cost-recovery, and to reflect the selected municipal water utilities’ obligations to maintain and operate the investments that CEA will make in their respective systems. The two standard Results Agreements between respectively SEFIN/CEA and SAPAO, and CEA/selected municipal water utilities will be incorporated in the Operational Manual of the MAS Oaxaca Operation. The results-based allocation of financial resources by SEFIN and CEA in the WSS sector will be introduced under the MAS Oaxaca Operation as part of the modernization of the WSS sector institutional framework. 38. Federal Water Commission (CONAGUA). Results Areas 2 and 3 will be financed through CONAGUA’s APAZU program. As is the case for CONAGUA’s other financing programs, APAZU consists of federal grants supplementing State counterpart financing. In the case of the Program, the State counterpart funding to leverage the federal funds of the APAZU program will come from the proceeds of the Bank loan and from GoO’s own resources. 39. Institutional arrangements for the TA Component implementation. SEFIN, through the MAS Oaxaca Unit, will be responsible for the general implementation of the Technical Assistance Component following the IPF policies, in coordination with CEA and SAPAO.

                                                            29 “Urban Transport Transformation Project” (P107159) 30 “Sustainable Transport and Air Quality” (P114012)

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40. Strengthening the institutional arrangements of the MAS Oaxaca Operation. SEFIN, CEA and SAPAO will draw on their existing structures to implement the Program. However, in order to respond to the need to address the institutional coordination between the GoO and BANOBRAS pertaining to the implementation of the Bank loan, to strengthen the results monitoring and reporting as well as the inter-institutional coordination of the Program activities, and to address the specificities of the implementation of the TA Component, the following Program Coordinators will be appointed: a Program General Coordinator within the MAS Oaxaca Unit of SEFIN, and two Program Technical Coordinators within CEA and SAPAO. In addition, a Program administrative focal point in both CEA and SAPAO will be designated for administrative and financial reporting to SEFIN of Program execution. 41. Legal structure of the MAS Oaxaca Operation. Since the Borrower of the loan is BANOBRAS and not the State of Oaxaca, several agreements will be in place, in addition to the Loan Agreement between the Bank and BANOBRAS and to the Guarantee Agreement between the Bank and the Government of Mexico in order to ensure that the responsibilities of the implementation of the Operation are transferred adequately, as follows: (i) Subsidiary Agreement between the GoO and BANOBRAS, to provide for the on-lending of the loan from BANOBRAS to the GoO; (ii) Operation Agreement to be signed between the GoO and the Bank, to regulate the responsibilities of the GoO to implement the Program and the TA Component in accordance to the Loan Agreement, the Program Assessments and the Bank ACGs; and (iii) Implementation Agreements to be signed between SEFIN and CEA / SAPAO detailing their obligation under the Program and under the TA Component.

B. Results Monitoring and Evaluation

42. Monitoring and Evaluation arrangements. The Monitoring and Evaluation (M&E) system of Oaxaca’s WSS sector is weak due to a lack of measurement tools and of institutional culture for undertaking M&E. The Operation recognizes the issue and will strengthen it through: (i) the installation of measurement tools needed to monitor the improvement of service quality and sustainability under Result Areas 2 and 3 as part of the Program’s activities; (ii) the strengthening of institutional capacity to monitor the results achieved under Result Areas 2, 3 and 4, and to consolidate the related information through the appointment of the Program Coordinators; and (iii) the nature of the financial instrument used for the Program, under which disbursements require the proper reporting of the results achieved, is also expected to create additional incentives to improve M&E of the Program’s results. SEFIN will be responsible for consolidating the results reported by CEA (Results Areas 1, 3, 4) and SAPAO (Results Areas 1, 2), and for submitting them to BANOBRAS, after verification by the Independent Verification Agent (IVA), in order to request disbursements. The Program will also contribute to improving the M&E of the sector as a whole since, for the first time in Oaxaca, as it sets as an objective and will finance, under the Result Areas 2, 3 and 4, the improvement of the quality and availability of service performance and sustainability data in both the urban and rural areas.

C. Disbursement Arrangements and Verification Protocols

43. Disbursement arrangements of the Program. Disbursements will be made on the basis of verified results, as measured by DLIs. For each DLI, allocated amounts, baselines, yearly

15  

targets, conditions of achievement, advance payments, deadlines for achievement, and determination of the amount to be disbursed have been defined. Details on the disbursement modalities are provided in Annex 3. The GoO will have to demonstrate through its regularly prepared financial statements that the total of the Program’s net expenditures are equal to or in excess of the amount of the Bank’s Program financing by the end of the Operation. The Program Financial Statements will be audited annually. Prior Results Financing is not considered necessary for this Operation, but it is expected to provide advances following effectiveness to ensure that the activities are implemented in a timely manner, and for up to US$11.25 million (25 percent of the US$45 million PforR financing). The amount of the advances and the specific DLIs to which the advance relates, will be indicated in each Withdrawal Application. The Disbursement Deadline Date will be six months after closing date stated in the Loan Agreement. 44. Verification protocols of the Program. An independent third party will be contracted by GoO as an Independent Verification Agent (IVA) to verify Program results on a yearly basis, under Terms of Reference acceptable by the Bank. No state or federal government agency has been identified as a particularly suitable IVA. The draft verification reports will be submitted for review by the IVA simultaneously to the GoO and the Bank, and neither party can modify such reports except for factual errors. The Program’s results will be consolidated and submitted by SEFIN to BANOBRAS, based on the results reported by CEA (for the DLIs under Results Areas 1, 3 and 4) and by SAPAO (for the DLIs under Results Areas 1 and 2) through the strengthened M&E system. The verification protocols for each DLI are presented in the Annex 3. The Bank will also review compliance with the DLI targets during implementation support missions, and for disbursement purposes, the Bank will make the final decision on whether DLIs have been achieved, as per BP 9.00. 45. Disbursement arrangements of the TA Component. Disbursements under the TA Component will be made either as Advances or Reimbursements. Applications for withdrawal, except in the case of the initial Advance, must be accompanied by Statements of Expenditure and Summary Sheets with Records. Advances will be made to the Designated Account established at the BANOBRAS’s treasury under terms acceptable to the Bank, denominated in US$, with a ceiling agreed in the Disbursement Letter. Details are provided in Annex 9.

IV. ASSESSMENT SUMMARY

A. Technical 46. Strategic relevance. The Bank’s financial support to the State WSS program through the MAS Oaxaca Operation has emerged from a strategic dialogue started in 2011 as a high priority of the GoO. The proposed Operation will be the first State-level intervention in Mexico since the Guanajuato Decentralized Infrastructure Project approved in 2004 and closed in 2010. The Program design explicitly recognizes capacity constraints in Oaxaca but represents the opportunity to have a significant development impact under a high risk / high reward Operation. The Program also offers an opportunity to work in partnership with CONAGUA at the State level, as two of the Result Areas are financed through one of its programs. The boundaries of the portion of the State WSS program supported by the Program are highly relevant. Its two areas of focus have been strategically identified to use the Bank financing to incentivize and tackle key sector issues the GoO would not have necessarily addressed without Bank support. The

16  

intervention of the Program will be concentrated in selected geographic areas of the urban population segments, with the objective of creating a demonstration effect such that the GoO could scale up the approach and the results achieved at a later stage. 47. The Program’s approach and design are aligned with the following strategic orientation that the incoming CONAGUA administration is giving to the WSS sector: (i) a focus on strengthening service providers with regard to service quality improvement, especially continuity of supply and financial sustainability, through comprehensive support comprising investment and institutional strengthening; (ii) the promotion of legally autonomous WSS service providers; (iii) a thrust to improve the quality and the availability of data on the performance and sustainability of WSS service providers in urban and rural areas in order to strengthen planning and allow regulation; (iv) the introduction of results-based financing for utilities and for institutional reforms; and (v) a move towards multi-annual planning and financing. 48. Technical soundness. The technical soundness of the Program was evaluated with regards to the: (i) appropriateness of the activities and the incentives to achieve the objectives of each of the Results Areas; (ii) adequacy between the schedule of implementation of the activities and the targets of the DLIs and other results indicators; and (iii) the cost efficiency of each of the Results Areas. The Program was evaluated as technically sound providing that GoO strategically strengthens the technical aspects of its program systems and builds capacity in the following areas: (i) Institutional capacity for (a) coordination of Program activities, (b) results monitoring and reporting, and (c) inter-institutional coordination within SEFIN, CEA and SAPAO; (ii) The implementation of those activities to be financed by APAZU (under Results Areas 2 and 3) is subject to an annual budget cycle and is characterized by major delays which impact the performance and efficiency of this financing program; (iii) The planning and executing capacity of CEA and SAPAO to improve the identification and prioritization of the activities required to achieve the Program objectives, as well as to control the quality of the bidding documents in a timely manner and to enhance the quality of the supervision of the corresponding investments; and (iv) The operational and commercial management of SAPAO and of the participating water utilities to achieve the service quality and sustainability improvement objectives of the Program.

49. Program preparedness. The design of the two activities under Results Areas 1 and 4 contributing to the modernization of the sector institutional framework are expected to be initiated during the first year of the Program, as scheduled, and will directly benefit from the policy dialogue and technical support provided by the Bank during the preparation of the Operation. Under the Results Area 2, SAPAO is executing in 2014 a first set of activities and will prepare the bidding documents corresponding to the majority of the activities to be executed in the selected sector during the subsequent years of the Program. Under the Results Area 3, CEA will prepare in 2014 the programs of interventions of immediate impacts that include the preparation of the bidding documents for 2015. For both Results Areas 2 and 3, the preparation of the bidding documents for the subsequent years will be supported by the TA Component. The preparation of the Requests for Proposal of three strategic contracts financed by the TA Component is being finalized and the corresponding contracts are expected to be awarded by January 2015 as planned. The GoO is benefiting from the specific technical support of the Bank for the development of the Terms of Reference and is hiring a procurement consultant with extensive experience in Bank procurement norms. Further details on the chronogram of execution are provided in Annex 4. The Operational Manual will be adopted by effectiveness.

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50. Expenditure framework. During the period 2008-2012, the investments made in the WSS sector have represented 2 percent of the total State budget. On an average yearly basis, the total cost of the Program represents close to half of the investments made in the WSS sector during the same period and 15 percent of the investments considered under the GoO’s program. The financial advance mobilized by the Bank loan and subsequent result-based disbursements of the Program will be supplemented by GoO’s own resources to fund the Program activities, should cash flow constraints occur. 51. Economic evaluation. The Program was evaluated for a representative sample of sub-projects similar to those to be implemented under this Operation. Cost benefit analysis was used to measure net benefits generated from the sub-projects in the sample. From an economic point of view, results show that expected economic benefits for the sub-projects of the sample are 70 percent higher than the associated costs, with net economic benefit as high as US$31 million and 17 percent expected return.

B. Fiduciary

52. Financial management of the Program. Public Financial Management (FM) of the Mexican federal administration relies on open and orderly FM systems based on a strong legal framework, policies, and procedures for execution of public expenditures. These FM country systems are partially replicated in the State of Oaxaca and, in particular, in SEFIN, which will be coordinating the overall implementation of the Program, and in the executing entities, CEA and SAPAO, which will be responsible for carrying out technical activities under the Program. Although SEFIN has limited experience in managing Bank-financed operations, and CEA and SAPAO have no such experience, the overall conclusion of the FM assessment is that SEFIN, CEA and SAPAO31 have suitable financial management arrangements which include the key elements for the adequate implementation of the Program, such as: (i) a formal process of budget planning and execution based on comprehensive legal and normative frameworks; (ii) the approval of the State Expenditures Budget on an annual basis by the State Legislature; (iii) an integrated budgeting and accounting system (SINPRES), which allows for the management and control of financial resources; (iv) organizational structures with adequate segregation of duties, documented in the appropriate Functions and Organizational Manuals, and (v) experienced staff. Moreover, BANOBRAS has already been a borrower for several lending operations financed by the Bank and will provide implementation support and oversight to SEFIN, drawing on its many years of experience with the implementation of Bank-financed projects. Given the proposed implementation arrangements for the Program, and to ensure adequate planning, managing, control and generation of relevant and reliable financial information under it, the assessment has identified areas for strengthening of the systems and institutional capacity of SEFIN, CEA and SAPAO. The identified areas for improving the FM systems, capacity of the implementing entity and participating executing agencies are presented in the Program Action Plan in Annex 8.

                                                            31 When SAPAO is referred, consider that the assessment was carried out for the entity formerly named ADOSAPACO.

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53. Procurement under the Program. The procurement system provides reasonable assurance that the fiduciary principles of transparency, economy efficiency and integrity will be met under the Program. It also provides an adequate mechanism to ensure the right of appeal in individual bidding processes. The applicable procurement procedures, both federal and state, are enshrined in the Article 134 of the Constitution of the United Mexican States that defines the principles governing procurement at national level, mandating that resources for procurement of goods, works and services be administered with efficiency, effectiveness, and probity. Competitive bidding is the default method. The agencies in charge of procurement under the Program, CEA and SAPAO have sufficient capacity and experience of conducting similar programs consisting of small works contracts and related services. The assessment has however, identified some risks that, if addressed, can increase the ability of the Program to deliver timely and quality services to the Program beneficiaries: (a) delays in budget allocation of federal and state programs, especially for the APAZU, (b) challenges to competition as a result of contract fragmentation and the use of less competitive methods, and (c) contract implementation issues such as frequent delays and contract amendments that increase the transaction cost of procurement and result in less optimal outcomes. The proposed actions to mitigate these risks and performance indicators to monitor their implementation are included in the Program Action Plan in Annex 8 and are fully consistent with the federal and state procurement systems contributing to their further strengthening. 54. Fiduciary arrangements under the Technical Assistance Component. Implementation of the TA Component will apply Bank procurement procedures and guidelines. SEFIN, CEA and SAPAO will be responsible for the bidding processes (including the preparation of the bidding documents and the signature of the contracts) for all the activities financed by the TA Component pertaining to the respective institution. The institutions will be supported throughout the bidding processes by an experienced consultant in Bank procurement. The MAS Oaxaca Unit will be responsible for the necessary coordination, publishing and updating of the Procurement Plan in SEPA and as a channel for any required information. The payments for all the activities financed by the TA Component will be processed by the Treasury, in case of those expenditures procured/incurred by CEA and SAPAO, and Administrative Unit of SEFIN in case of expenditures procured/incurred directly by SEFIN. Details on the fiduciary arrangements under the TA Component are provided in Annex 9.

C. Environmental and Social  

55. Environmental and Social Systems Assessment. An Environmental and Social Systems Assessment (ESSA) was prepared according to OP 9.00. The ESSA was developed based upon information review, field visits, consultations, and discussions with various Program entities and relevant stakeholders. The draft ESSA was disclosed to the public in December 2013 in the website of the GoO32 and a public consultation was held on January 9, 2014 which included the participation of members of different government agencies and civil society. The Program, the main findings of the ESSA, and the recommendations to enhance the existing environmental and social management system were presented during the consultation. The ESSA has been updated

                                                            32 http://www.finanzasoaxaca.gob.mx/p_mas.html

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to reflect recommendations from the consultations and the final version has been disclosed in the GoO’s website and in the World Bank’s website. See Annex 6 for details on the ESSA and the consultations, and Annex 8 for environmental and social aspects of the Program Action Plan (PAP). The PAP aims to enhance the existing environmental and social management systems of the executing agencies through: (i) preparing an Environmental and Social Management Manual (ESMM) for CEA and SAPAO, and institutionalizing the use of the Manual through a training program and through the inclusion of the main provisions of the ESMM in their internal regulations and organizational manuals, (ii) ensuring adequate and sufficient environmental and social personnel within both institutions, (iii) improving the institutional coordination between CEA and SAPAO with the responsible environmental regulatory institutions. 56. Environmental aspects under the Program. The potential negative environmental impacts associated with the Program are ranging between low and moderate, and will be limited to the civil works sites and will be mitigated with standard measures. The Program does not include activities that could involve significant adverse impacts considered to be permanent, cumulative or without precedent for the environment or that could affect the population, as defined in OP 9.00, and the Program sub-projects will be screened by CEA and SAPAO environmental and social management systems to ensure compliance. The Mexican environmental laws, and health and safety laws that apply to the Program are comprehensive and complete, and the relevant institutional capacity of the applicable environmental regulatory authorities is good. In relation to the environmental permits required for the Program sub-projects, in the past there has been some lack of clarity on the procedure to follow on the part of CEA and SAPAO in terms of obtaining all the necessary permits from the applicable entity (federal, state or municipal) based upon the type of works intervention and the assigned regulatory authority. While both CEA and SAPAO have implemented some environmental management procedures, there is some need for improvement which, if developed and implemented with relatively limited effort and resources, could lead to a positive and wider impact within each entity and on the WSS sector in the State of Oaxaca. Based on ESSA systems and risk evaluation, a PAP was developed as part of the ESSA (see Annex 8) and has been agreed with the relevant Program entities. In terms of the environmental and health and safety aspects, the PAP consists of two main components: (i) enhancement of the existing environmental management system within both CEA and SAPAO in relation to the Program-related activities and their inherent potential impacts and risks (actions 3 and 4); and (ii) improving the institutional coordination between CEA and SAPAO with the responsible environmental regulatory institutions, especially with regard to environmental permitting (action 8). 57. Social aspects under the Program. The overall social risk to the Program is considered Substantial due to the complex social context, risks of demonstrations and protests, and the unwillingness to pay for water services from water utilities. However, these risks are outweighed by the social benefits of the Program, i.e. improving the quality and sustainability of water services ultimately leading to improved household health and nutrition along with time and financial savings. Appropriate mitigation measures have been agreed upon with the GoO, this Program provides an opportunity to strengthen the social management practices in the WSS sector in the State. Given the social context and potential impacts under the Program, key social management issues addressed in the ESSA include: (i) The presence of Indigenous People.

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Indigenous people count as an important group of beneficiaries of the Program as they are present in all of the zones of direct intervention - with 5 of the beneficiary municipalities having a population that is over 40 percent indigenous, and an additional 8 municipalities whose population is over 12 percent indigenous - albeit in urban areas where indigenous languages and community structures do not persist. The Operation includes (a) requirements to strengthen rural (indigenous) water committees and culturally appropriate grievance redress mechanisms as part of the modernization of the institutional framework under Results Area 1; (b) a requirement to include procedures for free, prior and informed consultations and to quantify the value of traditional methods of voluntary labor contributions as part of the ESMM33 mandated under the PAP; (c) a pilot initiative to provide sustainable rural WSS implementation and support services under the TA Component; and also (d) a Poverty and Social Impact Assessment focusing on analyzing the WSS needs of marginalized indigenous people in urban areas; (ii) Poverty. In the 18 secondary municipalities that will benefit from direct interventions under the Program, 58 percent of the population lives below the national poverty line34. The Program includes measures to strengthen the targeting of WSS investments to the poorest municipalities in Oaxaca; (iii) Gender. Women take primary responsibility for sourcing and managing water in urban households. However, women have only a limited role in water management decision making at a community, municipal and state level. The Program supports the inclusion, in the legal and institutional framework, of incentives for increased women’s participation in decision making; (iv) Social conflict. During the Program there may be community objections to disruption to traffic or infrastructure caused by civil works, or unwillingness to pay for the sustainability of the WSS services provided. Measures have been included in the program to strengthen communication, consultation and grievance redress at the community level; and (v) Potential impacts related to civil work sites. Aside from temporary disruption to traffic and community infrastructure, the Program may require land and the temporary displacement of informal vendors. Land required for WSS infrastructure in Oaxaca is generally acquired through voluntary donations. However, there are legacy issues surrounding the inadequate documentation of past transfers of very small parcels of private land to be used by the State for the purpose of installing wells or other small scale infrastructure. Measures for dealing with these legacy issues, future land acquisition and the displacement of informal vendors have been included in the Program, as presented in the Annex 6.

58. Environmental and Social Aspects under the TA Component. The Environmental Category of the TA Component following IPF policies is C. The Environmental Assessment OP/BP 4.01 and Indigenous Peoples OP/BP 4.10 policies are triggered to ensure the activities under this Component takes into account social and environmental dimensions. The Terms of Reference of these various activities will embed the necessary environmental / social criteria and considerations. With regard to the realization of the Rural and Urban Water Strategy this will be assessed against appropriate environmental and social objectives and will be adequately consulted with the relevant stakeholders. With regard to the design of pilot approaches to providing sustainable rural WSS implementation and support services, given that the overwhelming majority of beneficiaries are Indigenous Peoples, this pilot will not require a

                                                            33 Environmental and Social Management Manual (ESMM) 34 Based on most recent data on poverty rate available at municipality level (CONEVAL, 2010).

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separate Indigenous Peoples Plan. Instead, the elements of an Indigenous Peoples Plan will be included in the activity design.

D. Fraud & Anti-Corruption Institutional Capacity Assessment 59. Capacity assessment. Overall, the legal and regulatory framework in Oaxaca establishes strong capacities for both prevention and investigation actions to address Fraud and Corruption (F/C) risks. The State of Oaxaca has a grievance system in place which allows citizens and businesses to report allegations of F/C through a variety of means. Although complaints may be submitted to state agencies and departments directly managing bidding processes, they are generally submitted to the Comptroller General’s Office (SCTG - Secretaría de la Contraloría y Transparencia Gubernamental del Estado de Oaxaca), which also has the authority to refer cases to the Office of the Attorney General’s Delegate in the State of Oaxaca. The Technical, Fiduciary, Environmental and Social Assessments include a F/C analysis with greater details. 60. Risk Assessment. One of the risk management measures that support greater social accountability for this Program is the existence of an Access to Information (ATI) Law and institutional capacity for its implementation, both at the state and federal level. Public access to key fiscal information is strong in Mexico as a general matter and most budgetary and financial information is available through the Internet, in accordance with both state and federal Transparency and Access to Information (ATI) legislation. By law, each public entity is required to publish information about their regulatory framework, budget, and financial reports on-line. Furthermore, CompraNet, a national web-based, on-line procurement system using a variety of hardware and software, is used as a platform to disclose information about procurement requirements and government suppliers. Any information regarding the disqualification of suppliers or contractors by the Federal Secretariat of Public Administration (SFP - Secretaría de la Función Publica) is also made available on this site. It should be noted, however, that many of the entities' websites include outdated information and are not regularly maintained. This issue will be addressed through the action 9 of the PAP. 61. Application of the PforR and IPF Anti-Corruption Guidelines. ACGs for both the PforR instrument as well as the IPF have been discussed with federal and state representatives, based on a review of their respective systems, and these will be applied where relevant in the implementation of the Operation. Discussions included BANOBRAS, SHCP, SFP, and the State of Oaxaca agencies (SEFIN, CEA, SAPAO), which have agreed to execute the Program and the TA Component in accordance with the applicable ACGs. Investigations related to the application of the PforR ACGs will be carried out by the SCTG, including the use of the Bank’s suspension and debarment lists. SEFIN will inform the Bank and coordinate as needed. The Bank reserves its right to potentially conduct investigations in coordination with the SCTG and any other institution responsible for investigating fraud and corruption allegations in accordance with the legal and regulatory framework of the United Mexican States.  

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E. Integrated Risk Assessment Summary

62. Integrated Risk Assessment Summary. The overall risk rating of the Operation is deemed as High. The detailed risk assessment is provided in Annex 7.

Table 4: Risk ratings

Risk  Rating

Technical High

Fiduciary Substantial

Environmental and Social  Substantial

Disbursement Linked Indicator High

Other Substantial

Overall Risk High

63. Operation’s Risks. The main risks of the Operation include: (i) The existing political economy and incentive framework under which the executing agencies currently function and their resistance to changing this, especially with regard to (a) reforming CEA so that it becomes a modern planning, monitoring and evaluating, funds directing sector entity, and moves away from direct service provision, (b) moving from an infrastructure-based ‘build and rebuild’ approach to a customer focused approach to management of sustainable services, (c) resistance to the raising of water tariffs (from municipalities, from the utilities, from customers, and from other stakeholders), and resistance to charging for services and to discontinuing services for non-payment, and (d) inertia regarding making the service providers more autonomous; (ii) SEFIN is currently the main champion for WSS sector reform in Oaxaca. The momentum for change and modernization could diminish, or could be lost, should there be significant changes in SEFIN’s leadership of the change agenda. Other stakeholders with a peripheral but potentially significant role regarding investment decisions in the sector could potentially interfere with the efficient implementation of the Program; (iii) Potential delays in: (a) the annual mobilization and implementation of CONAGUA’s APAZU financing program, (b) the mobilization of the TA to assist the different stakeholders, especially the service providers, in changing the way they currently undertake their responsibilities, and (c) the funding availability of the Program by the GoO; (iv) BANOBRAS lack of experience in undertaking a PforR operation, and GoO’s lack of experience in undertaking a Bank-funded operation; (v) Under Results Area 1, the responsibility of the passing of the new State sector law by the State Legislative Assembly and the subsequent drafting and approval of the different regulations lie outside of the mandate of GoO’s executive counterparts with whom the Bank is working directly. The approval of the law will depend upon the political alignments within the State Legislative Assembly and, therefore, cannot be guaranteed by the Bank’s GoO counterparts; and (vi) Not being able to accurately measure the Program results and DLIs. The detailed mitigation measures are provided in Annex 7. 64. Operation’s Rewards. The Bank will develop strong implementation support plan to enhance the quality of implementation and minimize risks. The MAS Oaxaca Operation is seen as high risk/high reward, since successful execution of the Program will allow the Bank to: (i) Demonstrate the provision of continuous water supply in a select number of secondary cities for some 650,000 beneficiaries, with formal tariffs to cover operational costs which are less than the

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coping costs that households are currently paying for informal water supply; (ii) Use the Bank financing to incentivize and tackle key sector issues in the modernization of the State’s WSS sector that GoO would not otherwise necessarily address without Bank support: (a) To provide a platform from which GoO can scale-up quality and sustainable urban and rural water supply and sanitation services for all, and which we can serve as a model to other States in Mexico, (b) To demonstrate a paradigm shift in the sector by moving the focus from infrastructure delivery to water services improvement in a results-based framework, through the improvement of the performance and the efficiency of an existing federal program – which could subsequently serve as an example nationally and could positively influence CONAGUA more widely across the country, and (c) Implement the first Bank Operation with a sub-national entity in Mexico since 2004, and enhance the relationship between the Bank and BANOBRAS.

F. Program Action Plan

65. Definition and implementation of the Program Action Plan. The technical, fiduciary, environmental and social assessments have identified areas to improve the performance and efficiency of the program and in turn increase the likelihood of achieving the Program results. The GoO has agreed to implement an integrated set of critical actions, through the Program Action Plan (PAP) presented in details in Annex 8, including implementation responsibility, timing and measurement of the actions. The implementation of the PAP along the agreed dates and completion measures will be systematically supervised by the Bank during the execution of the Program. The GoO agreed on the financing of each action of the PAP through GoO’s own resources or through the Technical Assistance Component of the Operation.

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Annex 1: Detailed Program Description  

A. The Water Supply and Sanitation program of the State of Oaxaca

1. Strategic Plan for the Water Supply and Sanitation sector

1. In 2012 the Government of Oaxaca (GoO) prepared a Strategic Plan (Plan Estrategico Sectorial) for the Water Supply and Sanitation sector as part of its State Development Plan (Plan Estatal de Desarrollo) covering the period 2011-2016 corresponding to the six years of its administration. The objectives of the Strategic Plan for the WSS sector can be grouped under four pillars: (i) Expanding access to WSS services in urban areas; (ii) Improving water service quality and financial sustainability of water utilities; (iii) Increasing wastewater treatment coverage; (iv) Expanding access to WSS services rural areas. The table below presents the baseline and targets of the Strategic Plan.

Table 5: Targets of the Strategic Plan for the WSS sector

WSS Strategic Plan indicators Baseline Targets

2011 2012 2013 2014 2015 2016 Percentage of households with access to water services

70% 71% 73% 75% 78% 80%

Number of households receiving services from ADOSAPACO and CEA utilities

177,721 181,275 184,901 188,599 190,485 192,390

Percentage of urban localities served by water utilities

20% 23% 27% 33% 38% 45%

Commercial efficiency of CEA utilities 77% 80% 82% 84% 84% 85%

Physical efficiency of water utilities 53% 53% 55% 58% 63% 64%

Percentage of operating subsidies to CEA utilities

10% 10% 8% 6% 4% 0%

Percentage of households with access to sanitation services

71% 72% 74% 76% 78% 80%

Ratio volume of wastewater treated / wastewater treatment capacity

40% 42% 44% 45% 48% 80%

 

2. Implementing the Strategic Plan is requiring a significant increase of the annual sector investment financing from US$55 million (actual average annual sector investment financing over the period 2007-201235) to US$160 million. Financing of the Strategic Plan is deemed as very challenging as it would require tripling the funding and execution of the State sector resources in a context of limited counterpart financing and limited capacity to absorb such an increased amount of investments. To address financing and capacity constraints, the GoO has been directing an increase amount of its resources to the sector, in turn leveraging federal resources and is looking to modernize and strengthen its sector institutions. To achieve the above objectives the Plan sets an ambitious framework for investments:

                                                            35 Bank team analysis of the water sector financing

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Table 6: Investment framework of the Strategic Plan for the WSS sector

(US$ millions) 2012 2013 2014 2015 2016 Total Water Supply

Production and distribution infrastructure 40.0 68.4 85.0 77.3 90.2 360.8 Treatment infrastructure 2.2 4.1 3.5 4.9 4.5 19.3 Efficiency improvement 0.3 0.6 0.7 0.6 0.7 2.8 Studies 3.5 11.1 15.7 14.9 11.3 56.5

Total Water Supply 45.9 84.1 104.9 97.6 106.7 439.4

Sanitation Collection infrastructure 23.2 42.2 49.8 52.3 47.2 214.6 Treatment infrastructure 20.1 20.7 25.5 22.8 34.0 123.1 Studies 2.7 3.6 5.1 3.9 5.4 20.7

Total Sanitation 45.9 66.5 80.4 79.0 86.6 358.4 Total investments 91.8 150.6 185.3 176.6 193.4 797.8

Federal financing 58.8 98.6 122.7 116.4 128.1 524.6 State financing 27.3 46.9 57.4 54.8 59.9 246.4 Municipal financing 5.7 5.1 5.2 5.4 5.4 26.8

Total financing 91.8 150.6 185.3 176.6 193.4 797.8

Figure 1: Comparison past actual sector financing vs required financing by the WSS Sector Strategic Plan

3. Funding of the Strategic Plan is expected to be made of a mix of federal, state and municipal financing through existing sector financing programs, the main ones being SHCP programs, CONAGUA programs (APAZU, PROSSAPYS, PROTAR), CDI program (PIBAI) in addition to the State’s own financing program as illustrated in the table below. In 2012, the GoO has substantially increased the resources directed to the WSS sector to US$78 million representing 150 percent of the average sector financing during the period 2007-2011. The GoO seeks to further increase the financing to the WSS sector in order to meet with the Strategic Plan’s objectives in a context of competitive access to state and to federal resources.

0.0

50.0

100.0

150.0

200.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Actual average annual sector investment financing (2007‐2012)

Strategic Plan required average annual sector investment financing (2012‐2016)

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Table 7: Main financing streams of the Oaxaca WSS Strategic Plan

Pillars of the Strategic Plan for the WSS Sector

Main financing streams of the Oaxaca WSS Strategic Plan

State program

SHCP Federal program

CONAGUA Federal

programs

CDI Federal program

APAZU PROTAR PROSSAPYS PIBAI

Expanding access to WSS services in urban areas

Improving water service quality and financial sustainability of utilities

Increasing wastewater treatment coverage

Expanding access to WSS services in rural areas

Financing program funding the activities of the Oaxaca WSS sector program

2. Vision to modernize the institutional framework of the Water Supply and Sanitation sector

4. The GoO, with the support of the Bank, has also developed a Vision to modernize the institutional framework of its WSS sector in order to create a conducive institutional environment to improve the access, quality and sustainability of its WSS services. Key principles framing the modernization of the WSS institutional framework are the following: (i) Separate the key functions of the sector: (a) sectorial policy direction and stewardship (planning, financial resources allocation, technical assistance, monitoring of norm compliance), (b) service provision, (c) regulation; (ii) Allocate the financial resources based on efficiency and equity criteria to reduce regional disparities and social inequalities, and set the right incentives to promote service quality and sustainability improvement; (iii) Promote the legal autonomy and financial sustainability of the service providers.

B. The WSS Sector Modernization Program 5. The Bank will support a portion of GoO’s WSS program focusing on the following: (i) Modernization of the sector institutional framework, financed through the State’s own financing program, and (ii) Improving the service quality and financial sustainability of water utilities, financed through the federal APAZU program of CONAGUA. The Bank-supported portion of GoO’s WSS program is called the WSS Sector Modernization Program (MAS Oaxaca36). The Program activities have been structured in four Result Areas, as presented below. The Bank Operation will also finance a Technical Assistance component whose main objective will be to support the achievement of the Program’s objectives.

                                                            36 Modernización del sector Agua y Saneamiento

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1. Results Area 1: Modernization of the legal and regulatory framework of the WSS sector in the State Program activities

6. The Program activities will consist of preparing revised versions of key legal and regulatory tools of the WSS sector legal and regulatory framework in order to align them with GoO’s vision to modernize the sector’s institutional framework, including: (a) Revision of the current State WSS Sector Law, preparation of a new State WSS Sector Law and its submission to the State Congress37; (b) Preparation and publication of the regulations of the State WSS Sector Law; (c) Preparation of standard regulations for municipal or inter-municipal WSS service provision; (d) Revision of the SAPAO law and its submission to the State Congress; (d) Revision and publication of the CEA organizational manual and internal regulations; (e) Revision and publication of the SAPAO organizational manual and internal regulations. The activities under this Result Area 1 as well as the possible approval of the law by the State Congress are not a pre-requisite for the achievement of objectives under the other Results Areas. 7. Under this Results Area, the Program will finance only consulting contracts (up to 6 contracts whose value could range between US$35,000 and US$350,000 depending on the contractual packaging of the activities - as per team’s assessment).

2. Results Area 2: Improvement of water services in Oaxaca Metropolitan Area

8. The Program activities financed through CONAGUA’s APAZU program will aim at improving the quality and efficiency of water supply service in a selected service area of the Oaxaca Metropolitan Area’s water utility (SAPAO) – namely the San Juan Chapultepec Sector which represents 20 percent of SAPAO’s total number of connections, serving 50,000 people, through: (a) the rehabilitation of the boreholes supplying the sector; (b) the construction of interconnection between the boreholes and water treatment facility; (c) the construction of interconnection with main distribution lines; (d) the construction of water treatment facility; (e) the construction of a pumping station; (f) the construction of transmission line from the pumping station to storage tanks; (g) the rehabilitation and construction of storage tanks; (h) the rehabilitation, hydraulic optimization and sectorization of the water distribution network; (i) the rehabilitation of water connections and the installation of micro-metering; (j) the installation of macro-metering and pressure gauges; (k) the update of the network mapping and commercial system; and (l) the carrying out of WSS studies, preparation of bidding documents and works supervision.

 

                                                            37 During the Program implementation, the current State WSS Sector Law that was published in 2005 will be reviewed in accordance with the guidelines annexed to the Operational Manual and submitted to the State Congress

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Table 8: Main performance indicators of the San Juan Chapultepec sector

Connections with meters

Connections without meter

Total number of

connections

Micro-metering coverage

8.115 5.076 13.191 62%

Volume produced38

Volume billed39

Physical efficiency

Amount billed40

Amount collected41

Commercial efficiency

Overall efficiency

2,008,383m3 925,058m3 46% $6,290,051 $2,682,025 43%

(49%, 2013) 20%

Source: ADOSAPACO (January – December 2012 data)

Figure 2: Hydraulic distribution of the San Juan Chapultepec Sector

                                                            38 Produced volume by wells and/or other interconnections with other aqueducts that enter the system 39 Billed volume of residential and non-residential users, including measured consumption and non-measured and billed consumption (fixed rate) 40 Amount billed for water and sanitation services 41 Amount of revenue from water and sanitation services registered without considering transfers, fines, recharges, connection rights or other income

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9. Under this Results Area, the Program will finance works, goods and consulting contracts. The procurement profile of the Program’s activities will be consistent with the procurement currently carried out by SAPAO under the federal programs as described in the Annex 5 of the PAD.

3. Results Area 3: Improvement of water services in secondary towns

10. The Program activities financed through CONAGUA’s APAZU program will aim at improving the quality of water services and the financial sustainability of the water utilities operating in 18 selected secondary towns42, located outside of the Oaxaca Metropolitan Area. The selected secondary towns are made up of those with a population above 15,000 inhabitants and/or where CEA currently operates the systems. The participating water utilities account for about 50 percent of the total State urban population outside of the Oaxaca Metropolitan Area, and total some 600,000 beneficiaries. Planning of the activities financed in each town will be based on available diagnostics and master plans and will be strengthened through the TA Component. Activities will be geared to the local conditions and needs, and could include the following: (a) the rehabilitation and extension of production, storage and pumping systems; (b) the rehabilitation, hydraulic optimization and sectorization of the water network; (c) the rehabilitation of water connections; (d) the installation of macro and micro metering and pressure gauges; (e) the update of the network mapping and commercial systems; (f) the improvement of accounting systems; and (h) the carrying out of WSS studies, preparation of bidding documents and works supervision. CEA will grant access to financial support to the selected water utilities subject to them meeting certain conditions and results, as specified in a Results Agreement that will be signed with CEA. The selected water utilities are located in seven of the eight regions in which the State is divided: Valles Centrales, Sierra Norte, Papaloapan, Istmo, Sierra Sur, Costa and Mixteca.

Figure 3: Selected Water Utilities under the Program

                                                            42 Heroica Ciudad de Huajuapan de León, Loma Bonita, Miahuatlán de Porfirio Díaz, Ocotlán de Morelos, San Juan Bautista Tuxtepec, Heroica Ciudad de Tlaxiaco, Zimatlán de Álvarez, Asunción Ixtaltepec, Ciudad Ixtepec, El Espinal, Heroica Ciudad de Juchitán de Zaragoza, Matías Romero Avendaño, Salina Cruz, San Francisco Telixtlahuaca, Puerto Escondido, Santiago Pinotepa Nacional, Santo Domingo Tehuantepec, Santo Domingo Zanatepec

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Table 9: Basic data of the selected 18 secondary towns under the Program

Source: INEGI, 2010 Population and Housing Census, and CEA information (year 2012)43

11. Under this Results Area, the Program will finance works, goods and consulting contracts. The procurement profile of the Program’s activities will be consistent with the procurement currently carried out by CEA under the federal programs as described in the annex 5 of the PAD.

4. Results Area 4: Improvement of WSS information in rural areas

12. The Program activities will consist of establishing an information system on the sustainability of rural WSS service providers in the 1130 localities with populations of between 500 and 2,500 inhabitants, through: (a) the provision of information technology infrastructure and equipment and carrying out of training in the use of said information technology’s systems; and (b) the carrying out of data survey activities.                                                             43 The working ratio is calculated as the ratio between the revenues from water and sanitation services registered, not including transfers, fines, recharges, connection rights or other income, and the operating expenses, i.e. all those directly associated with necessary costs for granting and maintaining water, sewerage and sanitation services (when they exist).

Name of locality Population HouseholdWater

coverageDrainage coverage

Institutional model

Services provided

Connections Estimated

population served

Number of employees

1 San Juan Bautista Tuxtepec 101,810 27,310 93% 96%autonomous

municipal utilitywater +

sanitation32,807 114,825

146

2 Salina Cruz 76,596 21,636 91% 98% CEA water 23,699 82,94778

3Heroica Ciudad de Juchitán de Zaragoza

74,825 17,646 94% 98% CEA water 20,526 71,84162

4Heroica Ciudad de Huajuapan de León

53,043 12,841 88% 97%autonomous

municipal utilitywater +

sanitation14,552 50,932

18

5 Santo Domingo Tehuantepec 42,082 10,758 95% 98% CEA water 12,451 43,57941

6 Loma Bonita 31,485 8,781 95% 97%autonomous

municipal utilitywater +

sanitation10,828 37,898

22

7 Santiago Pinotepa Nacional 29,604 7,306 31% 91% CEA water 4,593 16,07615

8 Puerto Escondido 25,902 6,752 69% 97% CEAwater +

sanitation13,800 48,300

49

9 Ciudad Ixtepec 25,381 6,743 94% 97% CEA water 8,540 29,89035

10 Miahuatlán de Porfirio Díaz 23,940 5,578 56% 92% municipal dptwater +

sanitation4,072 14,252

11 Matías Romero Avendaño 18,944 5,373 76% 98% CEA water 6,730 23,55525

12 Heroica Ciudad de Tlaxiaco 17,543 4,412 81% 83%autonomous

municipal utilitywater +

sanitation4,648 16,268

19

13 Ocotlán de Morelos 15,016 3,570 55% 77% municipal dptwater +

sanitation2,560 8,960

1

14 Zimatlán de Álvarez 10,986 2,696 64% 88% municipal dptwater +

sanitation2,238 7,833

5

15 San Francisco Telixtlahuaca 10,618 2,420 79% 76% CEA water 1,619 5,6674

16 El Espinal 7,823 2,145 89% 99% CEA water 2,934 10,26910

17 Santo Domingo Zanatepec 7,249 2,061 93% 94% CEA water 2,081 7,2845

18 Asunción Ixtaltepec 7,203 2,098 98% 99% CEA water 2,518 8,8139

Total 580,050 150,126 85% 96% 171,196 599,186 544

Municipality Water utilities

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Figure 4: Localities with populations between 500 and 2,500 inhabitants

Source: Prepared with information from INEGI, 2010 Population and Housing Census.

13. Under this Results Area, the Program will finance small goods and non-consulting services (for IT infrastructure and related training) and one non-consulting service contract for the data survey and collection whose estimated value is US$1,000,000.

5. Technical Assistance Component activities

14. The TA Component will finance activities complementing the Program activities and supporting the achievement of its objectives. These activities consist of strategic support for services improvement and sector studies which the Program’s procurement systems do not allow or are not traditionally financed under the existing sector program, but which are regarded as critical to improve Program performance and to increase the likelihood of achieving its objectives: (i) Multi-annual strategic TA to CEA, SAPAO and selected water utilities in secondary towns through the contracting of a professional operator/consultancy firm to improve the planning of activities, to review the quality of bidding documents, to strengthen the supervision of the works and to improve the operational, commercial, social and environmental management of the operation of the water systems; and (ii) WSS sector studies designed to underpin the modernization of the sector institutional framework, including: (a) the preparation of a Rural and an Urban Water Supply and Sanitation Strategy for the long-term development and organization of the sector, including a diagnosis of the rural WSS sector in Oaxaca, the definition of optimal institutional arrangements for promoting sustainable rural WSS provision in the State, the review of current approaches to urban sanitation and wastewater management in the State, the definition of optimal institutional, technological and financial arrangements for sustainable urban sanitation; (b) the undertaking of a Public Expenditure Review of the Oaxaca WSS Sector to inform the aforementioned strategies; and (c) the design of pilot approaches to provide sustainable rural WSS implementation and support services. (iii) The TA Component

32  

activities will also finance activities pertaining specifically to the management of the Operation, including the financing of: (a) the Independent Verification Agent of the Program’s Results; (b) the Operation’s financial audit; (c) the hiring of MAS Oaxaca Operation Coordinators; and (d) the carrying out of training and TA to strengthen fiduciary systems.

C. Institutional and implementation arrangements

1. Sub-national on-lending arrangements

15. According to the Mexican Constitution, International Financial Institutions cannot lend directly to subnational entities. Therefore, BANOBRAS, as Mexico’s national development bank responsible for promoting and granting financing to States and municipal governments for infrastructure projects, will be the Borrower of the loan and will, in turn, on-lend the proceeds of the loan to GoO through SEFIN. The Bank has prior experience working with BANOBRAS at subnational level. In 2004, the Bank provided a US$108 million loan44 to the State of Guanajuato through BANOBRAS to achieve sustainable investments levels and efficient operations in various sectors, including water supply and sanitation, transport and low-income housing. Most recently, in 2010, BANOBRAS and the Bank agreed on a US$150 million loan45 for an urban transport project to be implemented in various Mexican cities.

2. Institutional and implementation arrangements of the Program

16. Institutional arrangements for Program implementation are embedded within the existing institutional framework of the WSS sector of Oaxaca. Limited adjustments have been made to the existing structure to strengthen inter-institutional coordination, results reporting, and verification.

a) Implementation arrangements at the State level

17. Overall Implementation. SEFIN, through the MAS Oaxaca Unit, will be responsible for the overall implementation of the Program and for ensuring the coordination between the State institutions and BANOBRAS: (i) Allocating the loan funds received from BANOBRAS (advances and result-based disbursements) and APAZU funds received from CONAGUA to the executing agencies along existing budget mechanisms; (ii) Monitoring physical / financial execution and progress of Program activities and Program results achieved by CEA and SAPAO, and consolidating information; (iii) Coordinating with the Independent Verification Agent for results validation, and with BANOBRAS for disbursement requests. SEFIN will draw on their existing structures to implement the Program. However, in order to respond to the need to address the institutional coordination between the GoO and BANOBRAS pertaining to the implementation of the Bank loan, and to strengthen the results monitoring and reporting as well as the inter-institutional coordination of the Program activities, a Program General Coordinator leading the MAS Oaxaca Unit will be appointed within SEFIN. 18. Executing agencies. The implementation of Program activities will be the responsibility of CEA and SAPAO. As executing agencies, both entities will be responsible for: (i) Planning,

                                                            44“ Decentralized Infrastructure Reform and Development Loan Project” (P080149), 2004 45 “Urban Transport Transformation Project” (P107159), 2010

33  

preparing technical specifications and terms of reference, bidding, signing and managing contract, and implementing Program activities under their respective Results Areas; (ii) Implementing the activities of the Program Action Plan; (iii) Reporting to SEFIN physical and financial execution of the Program activities and results achieved under the Program. In carrying out its functions related to the Program, CEA and SAPAO will draw on its current structure, processes and procedures. Additionally, coordination and reporting functions will be strengthened in each of the two institutions through the appointment of: (i) A Program Technical Coordinator - In charge of overall coordination and monitoring of their respective activities, as well as of reporting to SEFIN on progress in the execution of said activities and results achieved. The Technical Coordinator will provide a full-time support to Program implementation. The Coordinator of CEA will work in close collaboration with the municipalities and/or municipal water utilities of the 18 secondary towns; (ii) Administrative focal point - Responsible for the financial reporting of activities executed by the respective institutions to SEFIN. The Administrative focal point of CEA will be designated within the Área Administrativa, while the the focal point of SAPAO will be designated within the Dirección de Planeación. 19. Municipal governments and water utilities. The implementation of the activities to improve water services in secondary towns (Result Area 3) will require a close collaboration between CEA, the municipalities and the water utilities. The institutional arrangements under the Results Area 3 of the Program and the respective role of water utilities and municipalities will however vary depending on the institutional models of the participating water utilities: (i) CEA-operated utilities (11 out of 18), (ii) Municipal autonomous utilities (4 out of 18), (iii) Municipal Department utilities (3 out 18).

b) Role of CONAGUA

20. At the federal level, CONAGUA is the government entity in charge of water resource management in the country. Its main function is to manage and preserve national water resources, including the development of the national water policy, the administration of rights for water use and wastewater discharge, the sector planning, and the management of investment in the Mexican water sector by allocating resources through a variety of programs. While CONAGUA will not be involved directly in the implementation of the Program, Results Areas 2 and 3 will be financed through CONAGUA’s APAZU Program. As this is the case for CONAGUA’s other financing programs, APAZU consists of federal grants supplementing State counterpart financing – in the case of the Program, the State counterpart funding to leverage the APAZU program will come from the proceeds of the Bank loan and from GoO’s own resources.

c) Results-based allocation of financial resources under the Program

21. An important feature of the implementation of the Program is the scheme of financial incentives embedded into its design that the GoO intends to introduce at two levels: (i) SEFIN will annually assign the financial resources of the Program to its executing agencies CEA and SAPAO, as part of its annual budget allocation exercise, based on an annual Results Agreement, thus replicating the disbursement approach of the PforR financial instrument and transferring financial incentives to perform to CEA and SAPAO; (ii) Under the Results Area 3, CEA will also sign Results Agreement with the selected municipal water utilities to grant financial support subject to them meeting certain conditions and results, as specified in a Results Agreement that will be signed with CEA during the first year of the Program in order to create incentives for

34  

information improvement, legal autonomy and cost-recovery. The two standard Results Agreements between respectively SEFIN/CEA and SAPAO, and CEA/ selected municipal water utilities will be incorporated in the Operational Manual of the MAS Oaxaca Operation. The results-based allocation of financial resources by SEFIN and CEA in the WSS sector will be introduced under the MAS Oaxaca Operation as part of the modernization of the WSS sector institutional framework. .

Table 10: Key role and responsibilities of the Program’s implementing agencies

Level Sector institutions Results Area 1 Results Area 2 Results Area 3 Results Area 4

Stat

e

SEFIN

channels and allocates Program funds46 to the executing agencies, CEA and SAPAO, following existing budget mechanisms and as defined in the Results Agreement

consolidates information on Program results and on physical and financial execution of Program activities coordinates with the Independent Verification Agent (IVA) for results verification and with BANOBRAS

for disbursement requests, financial reporting and audits under the Program

CEA

executes some Program activities

reports Program results, physical and financial execution to SEFIN

-

executes Program activities

reports Program results, physical and financial execution to SEFIN

approves tariff revision in CEA-operated utilities

transfers CEA-operated utilities to municipalities

signs Results Agreement with non CEA-operated utilities

executes Program activities

reports Program results and financial execution to SEFIN

Oax

aca

Met

ropo

lita

n A

rea

SAPAO

executes some Program activities

reports Program results, physical and financial execution to SEFIN

executes Program activities

reports Program results, physical and financial execution to SEFIN

- -

Seco

ndar

y T

owns

CEA operated utilities

- -

benefits from the investments and institutional strengthening if they meet certain conditions specified in a signed Results Agreement with CEA

- Municipal autonomous utilities

Municipal Dpt utilities

Municipalities - -

creates legally autonomous utilities where they do not exist

approves tariff revision in municipal utilities

-

                                                            46 Made up of State own resources, loan funds received from BANOBRAS (advances and result-based disbursements), and APAZU funds received from CONAGUA

  35

Annex 2: Results Framework and Monitoring  

Program Development Objective (PDO): To support the improvement of the institutional framework of the water supply and sanitation sector of the State of Oaxaca, and to improve the quality and sustainability of water supply service in selected urban areas

PDO Level Results Indicators

Cor

e

DL

I Unit of Measure

Baseline

Target Values

Frequency Data Source/ Methodology

Responsi-bility for

Data Collection

Year 1 Year 2 Year 3 Year 4 Year 5

PDO Indicator 1: Modernized institutional framework of the WSS sector

-

n.a. -

Key legal and

regulatory tools

prepared47

- - -

Annual

IVA reports on DLIs 1, 2-1, 3-1 and 4-1, completion of IR 1-2, and legal status of the water utilities supported by the Program

CEA 0 water utilities

decentral-ized48

- 2 water utilities

decentral-ized

5 water utilities

decentral-ized

6 water utilities

decentral-ized

7 water utilities

decentral-ized

n.a. - - -

Tools for the WSS

sector49 in place and

being used

-

PDO Indicator 2: People in urban areas provided with sustainable and improved water service quality under the Program50

Number 0 0 100,000 300,000 550,000 650,000 Annual IVA reports on DLIs 2-1, 2-2, 3-2 and 3-3

CEA/ SAPAO

Beneficiaries

Direct Program beneficiaries Number 0 0 100,000 300,000 550,000 650,000 Annual IVA reports on DLIs 2-1, 2-2, 3-2 and 3-3

CEA/ SAPAO

Of whom are female % - 52 52 52 52 52 Annual CEA/

SAPAO Water utilities that the Program is supporting

Number 0 19 19 19 19 19 Annual CEA/

SAPAO

                                                            47 Key legal and regulatory tools are considered prepared if the following conditions are met: Regulation of State Water and Sanitation Law prepared and published in the Official Gazette of the State of Oaxaca, standard regulation for provision of municipal water supply and sanitation services prepared, CEA and SAPAO internal regulation and organizational manual adopted and published in the State Official Gazette, and amendment of law creating SAPAO submitted to Congress. 48 Number of water utilities becoming legally autonomous (municipal, inter-municipal, State or privately-run) during the Program’s implementation. 49 Tools for WSS sector monitoring and planning, including the tools to measure performance indicators in the selected sector of SAPAO, the tools to measure performance indicators in the selected water utilities, the Rural Water and Sanitation Information System, and the Rural and Urban Strategy and Public Expenditure Review for the WSS sector. 50 People in urban areas will be considered as provided with a sustainable and improved water service quality under the Program, if (i) they receive from SAPAO in the San Juan Chapultepec sector a continuous water service as defined under DLI 2-1 and if the commercial efficiency in the selected sector is equal to or above 90%, or (ii) they receive services from the selected utilities in provincial towns with improved continuity and whose revenues from services are greater than their operating expenses, as defined under the Intermediate Results Indicators and DLIs 2-1, 2-2, 3-2 and 3-3.

  36

Intermediate Results 1: Modernization of the legal and regulatory framework of the WSS sector in the State

Intermediate result indicator 1-1: New State Water and Sanitation Law submitted to Congress

- No Yes Yes Yes Yes Yes Annual IVA report on DLI 1

CEA

Intermediate result indicator 1-2: Rural and Urban Strategy and Public Expenditure Review for the WSS sector successfully completed

- No No No Yes Yes Yes Annual

Successful completion of the Strategy and of the Public Expenditure Review

CEA

Intermediate Results 2: Improvement of water services in Oaxaca Metropolitan Area

Intermediate result indicator 2-1: Percentage of active users with continuous service in the selected sector

% 0 0 0 30 100 100 Annual IVA report on DLI 2-1

SAPAO

Intermediate result indicator 2-2: Commercial efficiency in the selected sector

% 49 49 55 70 90 90 Annual IVA report on DLI 2-2

SAPAO

Intermediate result indicator 2-3: Percentage of samples tested complying with bacteriological, residual chlorine, iron, manganese, color parameters of the drinking water norm in the selected sector51

% 0 0 40 70 100 100 Annual

Report on water quality testing

SAPAO

Intermediate Results 3: Improvement of water services in secondary towns

Intermediate result indicator 3-1: Number of selected water utilities with an approved program of interventions of immediate impact

Number 0 9 18 18 18 18 Annual

IVA report on DLI 3-1

CEA

Intermediate result indicator 3-2: Number of selected water utilities with improved service continuity

Number 0 0 3 8 13 18 Annual

IVA report on DLI 3-2

CEA

Intermediate result indicator 3-3: Number of selected water utilities whose service revenue is greater than their operating expenses

Number 0 0 3 8 13 18 Annual

IVA report on DLI 3-3

CEA

   

                                                            51 The regulation applied to verify compliance with wáter quality standards is NOM-127-SSAI-1994. Sampling will be done in accordance with NOM-179-SSA1-1998 at pressure gauging points.

  37

Intermediate Results 4: Improvement of WSS information in rural areas and development of pilot approaches for rural WSS

Intermediate result indicator 4-1: Percentage of localities in priority segment with information integrated in Rural Water and Sanitation Information System

% 0 0 25 75 100 100 Annual

IVA report on DLI 4-1

CEA

Intermediate result indicator 4-2: Pilot approaches to providing sustainable rural WSS implementation and support services designed

- No No No Yes Yes Yes Annual

Report on design of pilot approaches

CEA

 

  38

Annex 3: Disbursement-Linked Indicators, Disbursement Arrangements and Verification Protocols

Matrix of Disbursement Indicators

DLI Total amount

allocated to DLI % of total financing

Baseline Time frame for achievement of DLI

Year 1 (2014)

Year 2 (2015)

Year 3 (2016)

Year 4 (2017)

Year 5 (2018)

Results Area 1. Modernization of the legal and regulatory framework of the WSS sector in the State

DLI 1: Reform of legal and regulatory framework

Amount allocated to DLI 1: US$4.5 million 100%

- New State Water and Sanitation Law submitted to Congress

No Yes - - - -

Amount allocated: US$2 million

- Regulation of State Water and Sanitation Law prepared and published in the Official Gazette of the State - Standard regulation for provision of municipal water and sanitation services prepared - Amendment of law creating SAPAO submitted to Congress - CEA’s internal regulation and organizational manual adopted and published in the Official Gazette of the State - SAPAO’s internal regulation and organizational manual adopted and published in the Official Gazette of the State

No - Yes - - -

Amount allocated: US$2.5 million

Results Area 2. Improvement of water services in Oaxaca Metropolitan Area

DLI 2-1: Improvement of service quality

Amount allocated to DLI 2-1: US$7 million 50%

- Preparation of the Expendientes Tecnicos for the rehabilitation and/or construction of the selected sector’s macro and micro distribution systems

No Yes - - - -

Amount allocated: US$1 million

  39

- Construction of the selected sector’s macro distribution

No -

Component 1:Yes Component 2:Yes Component 3:Yes

- - -

Amount allocated: US$3 million

- Percentage of active users with continuous service in the selected sector

0% 0% 0% 30% 100% -

Amount allocated: US$1.5 million US$1.5 million

DLI 2-2: Improvement of service sustainability Commercial efficiency in the selected sector

49% 49% 55% 70% 90% -

Amount allocated to DLI 2-2: US$1.5 million 50% US$0.5 million US$0.5 million US$0.5 million

Results Area 3. Improvement of water services in secondary towns

DLI 3-1: Improvement of information Number of selected water utilities with an approved program of interventions of immediate impact

0 9 18 - - -

Amount allocated to DLI 3-1: US$2 million 50% US$1 million US$1 million

DLI 3-2: Improvement of service quality Number of selected water utilities with improved service continuity

0 0 3 8 13 18

Amount allocated to DLI 3-2: US$14 million 50% US$3.5 million US$3.5 million US$3.5 million US$3.5 million

DLI 3-3: Improvement of service sustainability Number of selected water utilities whose service revenue is greater than their operating expenses

0 0 3 8 13 18

Amount allocated to DLI 3-3: US$14 million 50% US$3.5 million US$3.5 million US$3.5 million US$3.5 million

Results Area 4. Improvement of WSS information in rural areas

DLI 4-1: Improvement of information Percentage of localities in selected segment with information integrated in Rural Water and Sanitation Information System

0% 0% 25% 75% 100% -

Amount allocated to DLI 4-1: US$2 million 100% US$0.5 million US$1 million US$0.5 million

Total amount allocated to DLI: US$45 million US$4 million US$14.5 million US$10 million US$9.5 million US$7 million

  40

Table for Protocol to Verify Disbursement Indicators

DLI Definition/description of achievement of DLI

Scalability of disbursement

(Yes/no)

Protocol to verify achievement of DLI

Source of data Verification

agent Procedure

Results Area 1. Modernization of the legal and regulatory framework of the WSS sector in the State

DLI 1: Reform of legal and regulatory framework

-New State Water and Sanitation Law submitted to Congress

This target will be considered achieved if a proposal for a new Oaxaca State Water and Sanitation Law has been submitted to the State Congress, meeting the guidelines included in Operational Manual.

No CEA AVI

Verification by IVA of the submission of the proposed new Law to the State Congress, prepared in accordance with guidelines in Operational Manual.

- Regulation of State Water and Sanitation Law prepared and published in the Official Gazette of the State of Oaxaca - Standard regulation for provision of municipal water and sanitation services prepared - Amendment of law creating SAPAO submitted to Congress - CEA’s internal regulation and organizational manual adopted and published in the Official Gazette of the State of Oaxaca - SAPAO’s internal regulation and organizational manual adopted and published in the Official Gazette of the State of Oaxaca

As a prerequisite, the Oaxaca State Water and Sanitation Law will have to be previously submitted to the State Congress, meeting the guidelines included in Operational Manual. This target will be considered achieved if the regulation of the State Water and Sanitation Law has been prepared and published in the Official Gazette of the State, the standard regulation for provision of municipal water and sanitation services has been prepared, and CEA and SAPAO’s internal regulations and organizational manuals have been prepared, adopted and published in the Official Gazette of the State, and a proposed amendment of the Law creating SAPAO has been submitted to the State Congress, meeting the guidelines included in Operational Manual.

Yes CEA/SAPAO AVI

Verification by IVA of the publication in the State Official Gazette of the regulation of the State Water and Sanitation Law, of the preparation of the standard regulation for provision of municipal services, of the adoption and publication in the Official Gazette of the State of CEA and SAPAO’s internal regulations and organization manuals, and of the submission of the proposed amendment of the law creating SAPAO to the State Congress in accordance with guidelines in Operational Manual.

  41

Results Area 2. Improvement of water services in Oaxaca Metropolitan Area

DLI 2-1: Improvement of service quality

- Preparation of the Expendientes Tecnicos for the rehabilitation and/or construction of the selected sector’s macro- and micro-distribution systems

The target will be considered achieved if all Expendientes Tecnicos are available for the following works and actions: - components of the macro-distribution system: redesign of electro-mechanical equipment in the 6 wells, interconnection lines from the wells to the Trujano water purification plant, the Trujano water purification plant, the Trujano pumping station, macro-metering in the Trujano pumping station, conveyance lines from the Trujano pumping station to storage tanks, storage tanks (new and reconditioned), macro-metering in storage tanks; - components of the micro-distribution system: feeder lines, reinforcement of distribution networks, section valves, pressure regulators, metering stations for the formation of hydrometric districts.

No SAPAO AVI

Review by IVA of the Expedientes Tecnicos, depending on the contractual scope of the service and engineering good practices. The Expendientes Tecnicos should at least contain terms of reference, basic designs and bidding specifications in accordance with CONAGUA guidelines.

- Construction of the selected sector’s macro-distribution system

The target will be considered achieved if the components of the macro-distribution system were constructed according to the Expendientes Tecnicos and are fully operational. -Component 1: redesign of the electro-mechanical equipment in the 6 wells, interconnection lines from the wells to the Trujano water purification plant; -Component 2: Trujano water purification plant -Component 3: Trujano pumping station, macro-metering in the Trujano pumping station, conveyance lines from the Trujano pumping station to storage tanks, storage tanks (new and reconditioned), macro-metering in storage tanks.

Yes SAPAO AVI

Verification by IVA of the works described in each component, in operation and complying with applicable regulations.

- Percentage of active users with continuous service in the selected sector

IVA will define the location of 12 fixed pressure gauging points, which will be representative of pressure conditions in the selected sector, and will allocate all active users to each of these 12 points. All active users associated with a pressure gauging point will be considered to have continuous service if the pressure is ≥10 mca during 95% of the evaluation period. This target will be considered achieved if the percentage of active users with continuous service during the evaluation period is equal to or exceeds the target for each year.

Yes SAPAO AVI

Review by IVA of the report on pressure records by gauging point and on the calculation of the percentage of users with continuous service, prepared by SAPAO. Annual random field inspections by IVA to verify the proper operation of all pressure gauges and data loggers.

  42

DLI 2-3: Improvement of service sustainability Commercial efficiency in the selected sector

Commercial efficiency will be defined as:

Where: - Revenue from services: all revenue from water, sewerage and sanitation services inputted in SAPAO’s commercial information system, not including transfers, fines, recharges, connection rights or other revenue during the evaluation period - Amount billed: all those amounts billed for water, sewerage and sanitation, inputted in SAPAO’s commercial information system, but not including fines, recharges, connection rights or other revenue during the evaluation period. The DLI 2-3 will be considered achieved if commercial efficiency during the evaluation period is equal to or exceeds the target for each year.

Yes SAPAO AVI

Review by IVA of the report on calculation of commercial efficiency prepared by SAPAO. Evaluation of billing and revenue records in the selected sector.

Results Area 3. Improvement of water services in secondary towns

DLI 3-1: Improvement of information Number of selected water utilities with an approved program of interventions of immediate impact

The program of interventions with immediate impact should at least contain: - diagnostic of the water supply system and identification of priority measures to improve the continuity of water service and ensure the coverage of expenditures by service revenue; - Expendientes Tecnicos on identified priority measures; - Expendientes Tecnicos to ensure the operation of tools necessary for measuring performance indicators: (i) macro-meters in all supply sources, in accordance with NOM-012-SCFI-1994, (ii) a computerized commercial system that makes it possible to input and generate reports at least on users classified according to the fee structure, volumes and amounts billed, collected and overdue, (iii) a computerized accounting system that makes it possible to input and provide information on revenue and expenditure operations, by cost center and activity, in accordance with generally accepted accounting principles; - definition of the location of pressure gauging points needed for the calculation of performance indicators; - calculation procedures and tools of the system of basic performance indicators, with the respective training of relevant staff. The DLI 3-1 will be considered achieved if the number of selected water utilities with an immediate-impact action plan is equal to the year’s target.

Yes CEA AVI

Review by IVA of technical documents on identified interventions and their correspondence with the diagnostic and prioritization. IVA will also verify the functionality of the indicator tool and the preliminary results.

  43

DLI 3-2: Improvement of service quality Number of selected water utilities with improved service continuity

IVA will define the location of fixed pressure-gauging points that will be representative of pressure conditions in the supply system of each of the selected water utilities. The DLI 3-2 will be considered achieved if: -Year 2, the number of selected water utilities supply service with a service pressure ≥3 mca at all gauging points during 50% of the evaluation period is equal to or exceeds the target; -Year 3, the number of selected water utilities supply service with a service pressure ≥3 mca at all gauging points during 60% of the evaluation period is equal to or exceeds the target; -Year 4, the number of selected water utilities supply service with a service pressure ≥3 mca at all gauging points during 70% of the evaluation period is equal to or exceeds the target; -Year 5, the number of selected water utilities supply service with a service pressure ≥3 mca at all gauging points during 80% of the evaluation period is equal to or exceeds the target.

Yes CEA AVI

Review by IVA of the report on pressure records by gauging point, prepared by CEA. Annual random field inspections by IVA to verify the proper operation of all pressure sensors and data loggers.

DLI 3-3: Improvement of service sustainability Number of selected water utilities whose service revenue is greater than their operating expenses

The following are defined: - Revenue from services: all revenue from water, sewerage and sanitation services, inputted in the water utility’s commercial information system, not including transfers, fines, recharges, connection rights or other revenue during the evaluation period. - Operating expenses: all expenses recorded in the water utility’s accounting system that are directly related to the provision of water, sewerage and sanitation services (when the latter exists). The following are considered: salaries and services of staff in charge of the operation and maintenance of the system’s entire hydraulic infrastructure; electricity costs of pumping equipment in wells and pumping stations; chemical reagents for water purification and treatment; materials, equipment and tools for the operation and maintenance of hydraulic infrastructure, and any type of expenditure directly related to activities for system operation, such as gasoline and repairs. Depreciations, interests or debt amortizations are not included. The DLI 3-3 will be considered achieved if the number of selected water utilities, whose revenue from services is greater than their operating expenses during the evaluation period, is equal to or exceeds the target for each year.

Yes CEA AVI

Review by IVA of the report on calculation of revenue from services and of the operating expenses of selected utilities, prepared by CEA. Annual random field inspections by IVA to verify the proper operation of commercial and accounting systems.

  44

Results Area 4. Improvement of WSS information in rural areas

DLI 4-1: Improvement of information Percentage of localities in selected segment with information integrated in Rural Water and Sanitation Information System

The selected segment is defined as the set of localities with a population of 500 to 2,500.

Information from a selected locality integrated in the Rural Water and Sanitation Information System (SIASAR) will be considered when it has data in all fields of said system’s data collection form. DLI 4-1 will be considered achieved if the percentage of localities in the selected segment whose information is integrated in the SIASAR is equal to or exceeds the target for each year.

Yes CEA AVI

Review by IVA of the report generated by SIASAR. Annual random field inspections by IVA to verify the reliability of data in at least 10% of localities surveyed each year.

  45

Table for Bank Disbursements

DLI Total amount

allocated to DLI

Percentage of which is available for:

Deadline for achievement of

DLI

Minimum value of DLI to be achieved in order to allow disbursement

Maximum value of DLI above

which no additional

disbursement is allowed

Determination of amount to be disbursed in terms of the value

of the achieved and verified DLI

Prior results

Advance payments

Results Area 1. Modernization of the legal and regulatory framework of the WSS sector in the State

DLI 1: Reform of legal and regulatory framework

- New State Water and Sanitation Law submitted to Congress

US$2 million - 25% Last day of

Year 4 n.a. n.a.

100% of disbursement for compliance

- Regulation of State Water and Sanitation Law prepared and published in the Official Gazette of the State - Standard regulation for provision of municipal water and sanitation services prepared - Amendment of law creating SAPAO submitted to Congress - CEA’s internal regulation and organizational manual adopted and published in the Official Gazette of the State - SAPAO’s internal regulation and organizational manual adopted and published in the Official Gazette of the State

US$2.5 million - 25% Last day of

Year 5 n.a. n.a.

20% of disbursement for compliance with each of the five measures

Results Area 2. Improvement of water services in Oaxaca Metropolitan Area

DLI 2-1: Improvement of service quality

- Preparation of the Expendientes Tecnicos for the rehabilitation and/or construction of the selected sector’s macro- and micro-distribution systems

US$1 million - 25% Last day of

Year 4 n.a. n.a.

100% of disbursement for compliance with DLI

- Construction of the selected sector’s macro-distribution system

US$3 million - 25% Last day of

Year 5 n.a. n.a.

US$1 million for each component of macro-distribution system

  46

- Percentage of active users with continuous service in the selected sector

US$3 million - 25% Last day of

Year 5 n.a. 100%

(i) $1.5 million/30 for each percentage point between 0 and 30%, (ii) $1.5 million/70 for each percentage point between 31% and 100%

DLI 2-2: Improvement of service sustainability Commercial efficiency in the selected sector

US$1.5 million - 25% Last day of

Year 5 n.a. 90%

(i) $0.5 million/6 for each percentage point between 49% and 55%, (ii) $0.5 million/15 for each percentage point between55% and 70%, (iii) $0.5 million/20 for each percentage point between 70% and 90%

Results Area 3. Improvement of water services in secondary towns

DLI 3-1: Improvement of information Number of water utilities with an approved program of interventions of immediate impact

US$2 million - 25% Last day of

Year 4 n.a. 18 US$2 million/18 per each utility

DLI 3-2: Improvement of service quality Number of selected water utilities with improved service continuity

US$14 million - 25% Last day of

Year 5 n.a. 18

(i) $3.5 million/3 for each water utility between 0 and 3, (ii) $3.5 million/5 for each water utility between 4 and 18

DLI 3-3: Improvement of service sustainability Number of selected water utilities whose service revenue is greater than their operating expenses

US$14 million - 25% Last day of

Year 5 n.a. 18

(i) $3.5 million/3 for each water utility between 0 and 3, (ii) $3.5 million/5 for each water utility between 4 and 18

Results Area 4. Improvement of WSS information in rural areas

DLI 4-1: Improvement of information Percentage of localities in selected segment with information integrated in Rural Water and Sanitation Information System

US$2 million - 25% Last day of

Year 5 n.a. 100% $20,000 each percentage point

47  

Annex 4: Summary Technical Assessment

I. PROGRAM’S STRATEGIC RELEVANCE AND TECHNICAL SOUNDNESS

A. Strategic Relevance

1. The Bank’s financial support to the State WSS program through the MAS Oaxaca Operation has emerged from a strategic dialogue started in 2011 as a high priority of the GoO. The Operation has adopted a parallel track of supporting institutional reforms, institutional strengthening while simultaneously improving infrastructure. The proposed Operation will be the first State-level intervention in Mexico since the Guanajuato Decentralized Infrastructure Project approved in 2004 and closed in 2010. The Program design explicitly recognizes certain capacity constraints in Oaxaca but embraces the opportunity to have a significant development impact. The Program also offers an opportunity to develop a new model to work in partnership with CONAGUA at the State level and enhance the relationship between the Bank and BANOBRAS. 2. The boundaries of the portion of the State WSS program supported by the Program are highly relevant. Its two areas of focus have been strategically identified to use the Bank financing to incentivize and tackle key sector issues the GoO would not have necessarily addressed without Bank support: (i) the implementation of a modernized sector institutional framework that is not traditionally supported by federal sector financing programs, and that will include the consolidation of a strategic vision for the sector and the development of related planning tools will provide a platform from which GoO can scale-up quality and sustainable urban and rural water supply and sanitation services for all; and (ii) improvement of quality and financial sustainability of water services in urban areas that is funded through federal financing programs generally focusing on infrastructure delivery rather than incentivizing service improvement. The improvement of quality and financial sustainability of water services in urban areas through the Program will be concentrated in selected geographic areas of the urban population segments (Oaxaca Metropolitan Area and secondary towns), with the objective of creating a demonstrative effect such that the GoO could scale up the approach and the results achieved at a later stage. In Oaxaca Metropolitan Area, activities will focus on the San Juan Chapultepec Sector identified by SAPAO as having an adequate size and hydraulic characteristics to achieve the expected results and to be the basis to replicate the approach to the rest of SAPAO’s service area. In the secondary towns, activities will focus on the water utilities operating in the secondary towns, whose population is above 15,000 inhabitants and/or where CEA currently operates the systems, thus encompassing the largest secondary urban centers of the State as well as those affected by the reform of the mandate of CEA that will transfer progressively its operations to autonomous municipal service providers. 3. The MAS Oaxaca Operation is fully embedded in the long-term engagement of the Bank in the WSS sector of Mexico through knowledge, financial and convening services.

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Figure 5: Stages of Engagement in Mexico on WSS

 

2005-2008

2008-2013

2014-2019

Rural Water Rights Economic Assessment of Policy Interv Water I Economic Assessment of Policy Interv Water II Water PER

Water Sector Financing Strategy (P104740) Water Sector Flagship (P111969)

Results-based sectorial strategic plans: agriculture, water, roads, economics, forestry, tourism, livestock, fishing and housing (October 2011 to June 2013) TA WSS Acapulco (P146961)

Lending Decentralized Infrastructure Reform and Development Loan (P080149) Lending: Integrated Irrigation Modernization Project (P035752) FY06: Water Supply and Sanitation TAL (P091695)

Tlalnepantla Municipal Water Conservation Project - PPP (IFC 530171) Grant Enhancing Capacity of Water Utilities for Integrated Water Resources Management (TF096725) Water Capital- Lease of water treatment and efficient water equipment (IFC 29509) Grant PPIAF: Market Based Infrastructure Financing for Campeche (P122401) DPL: Framework for Adaptation to Climate Change in the Water Sector (P120134) CD: 31-Dec-12 Water Utilities Efficiency Improvement Program PROME (P121195) GPOBA Grant: PROME/ support to the OBD pilot component (P125716) SFLAC Grant: Tackling Water Scarcity in Mexico (P119943)

Oaxaca Water and Sanitation Sector Modernization Program (P145578)

WBI capacity building support to national association of municipal water utilities (ANEAS

Sharing Int'l Experiences in WSS (P112539) Policy and sector dialogue in Oaxaca

Regional workshop on the Rural Water and Sanitation Sector Information System (i.e. SIASAR in Spanish).

B. Technical soundness  

4. This section evaluates the technical soundness of each Results Area of the Program with regard to: (i) the appropriateness of the activities and incentives to achieve the objectives of each Results Area, including the activities required to build capacity and strengthen the Program systems, (ii) the adequacy between the schedule of implementation of the activities and the targets of the DLIs and other results indicators, and (iii) the cost efficiency of each Results Area.

Stages of Engagement in Mexico on WSS

Kn

owle

dge

serv

ices 

Fin

anci

al S

ervi

ces 

Con

ven

ing

Ser

vice

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1. Results Area 1: Modernization of the legal and regulatory framework of the WSS sector in the State

5. Under this Result Area, the Program is revising or preparing the legal and regulatory tools of the WSS sector legal framework regarded as key to materialize the modernization of the institutional framework of the WSS sector envisioned by the GoO: (i) At WSS sector level - (a) Revision of the State WSS sector law and its submission to the State Congress, (b) Preparation and publication of the regulations of the State WSS Sector law; (ii) At CEA level - Revision, adoption and publication of the CEA organizational manual and internal regulations; (iii) At service providers level – (a) Preparation and publication of standard regulations for municipal or inter-municipal WSS service provision; (b) Revision, adoption and publication of the SAPAO organizational manual and internal regulations; (c) Revision of the SAPAO law and its submission to the State Congress. 6. The activities under the Results Area 1 are expected to be realized in two phases: during the first year of the Operation, the CEA will lead the revision of the WSS Sector law in accordance with the sector vision and submit it to the State Congress; the law will bring the overarching framework for the modernization of the Sector legal and regulatory framework. Once the law has been approved by the State of the Congress, the rest of the activities of this Result Area will be undertaken aligned with the approved law, ideally during the second year of the Program. The Result Framework of the Program reflects this timeframe. The Technical Assessment presents some points not considered in the current Sector law that are proposed to be considered under the revision of the law. 7. To achieve the modernization of the State’s institutional framework and the objectives of the MAS Oaxaca Operation, the reform of CEA’s mandate and organization will be crucial. The Operation will accompany CEA’s modernization through: (i) revision of its organizational manual and internal regulation to ensure consistency with the new WSS sector law – under Results Area 1; (ii) improvement of the quality and availability of information in the WSS sector to strengthen its sector monitoring and planning – under Results Area 2, 3, 4 and TA Component; (iii) improvement of the financial sustainability of the WSS systems it currently operates, thus facilitating the progressive transfer of its operations to autonomous municipal service providers – under Results Area 3 and TA Component; and (iv) introduction of results-based allocations of financial resources in the WSS sector through the Results Agreements signed with the participating municipal utilities – as per the Program design.

2. Results Area 2: Improvement of water services in Oaxaca Metropolitan Area

8. The Program will appropriately finance a comprehensive set of activities that will improve the water service continuity and the efficiency in the targeted sector through investments that have been appraised by the Bank and through TA to enhance the quality of the bidding documents, to improve the operational, commercial, social and environmental management of the operations in the service area and to strengthen the supervision of the works. 9. The target to provide a continuous supply in the whole sector and increase the commercial efficiency to 90 percent within the timeframe of the Operation is appraised as being achievable by the Bank and SAPAO given the appropriateness of the activities supported by the Program

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and taking into account that the intervention is focused on a sector that is clearly delimited and hydraulically isolated from the rest of SAPAO’s distribution system. The actions aimed at achieving this target have been designed taking into account the current operating conditions and the results of hydraulic modeling undertaken by SAPAO technical personnel. It is anticipated the progress throughout the Program’s period of implementation will be non-linear considering the scheduling of necessary works to achieve the objectives. Scheduling of the Program’s activities has been designed as follows: (i) During the Year 1 of the Program, SAPAO will prepare the bidding documents for the majority of the activities to be executed in the selected sector during the subsequent years of the Program, as already identified. In parallel SAPAO will implement a first set of rehabilitation activities and contract the Technical Assistance to support the improvement of its operational and commercial management; (ii) During the Year 2 of the Program, SAPAO will construct the macro-distribution system of the sector. In parallel it will initiate the improvement of its operational and commercial processes with the support of the TA contract to optimize its production and distribution schemes, as well as to improve its commercial practices; (iii) During the Years 3 and 4, it is estimated that the percentage of users benefiting from a continuous service will increase to 30 percent and 100 percent respectively (as per the methodology presented in the DLIs matrix), while the commercial efficiency will keep improving up to 90 percent, corresponding to good utilities practices. The following results projections have been considered to estimate commercial efficiency improvement targets:

Table 11: Commercial efficiency improvement projections under the Program in the San Juan Chapultepec

Sector

Baseline (2013 data)

Year 1 2014

Year 2 2015

Year 3 2016

Year 4 2017

Commercial efficiency 49% 49% 55% 70% 90%

10. Estimated total cost associated with the activities to be executed under this Result Area has been prepared by SAPAO, appraised by the Bank team and presented in the Technical Assessment. The activities of the Program will be executed during the four years of the Program following APAZU cycles. The TA will be in place throughout the duration of the Program.

3. Results Area 3: Improvement of water services in secondary towns

11. Likewise the Results Area 2, the Program will finance a comprehensive set of investments and technical assistance to improve the continuity of water supply and the working ratio of the selected water utilities. The Technical Assistance will consist of supporting the operational, commercial, social and environmental management of the operations of the water systems in the selected towns, improve investment planning and the quality of the bidding documents and strengthen supervision of the works. 12. The target is that, in all selected water utilities, users get water supply with an improved continuity and that the revenues from services are greater than their operating expenses52. It is anticipated the progress throughout the Program’s period of implementation will be non-linear

                                                            52 As per the definition given in the DLIs matrix

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considering the scheduling of necessary works to achieve the objectives. The schedule of disbursement reflects this non-linearity. It is estimated the targets of service improvements will be achieved in the following cities:

Year 2: Puerto Escondido, Juchitán, Ixtepec

Year 3: Puerto Escondido, Juchitán, Ixtepec, Matias Romero, Pinotepa Nacional, Tlaxiaco, Tehuantepec, Salina Cruz

Year 4: Puerto Escondido, Juchitán, Ixtepec, Matias Romero, Pinotepa Nacional, Tlaxiaco, Tehuantepec, Salina Cruz, Huajuapan, Espinal, Ixtaltepec, Ocotlan, Miahuatlan

Year 5: Puerto Escondido, Juchitán, Ixtepec, Matias Romero, Pinotepa Nacional, Tlaxiaco, Tehuantepec, Salina Cruz, Huajuapan, Espinal, Ixtaltepec, Ocotlan, Miahuatlan, Zanatepec, Tuxtepec, Telixtlahuaca, Loma Bonita, Zimatlan

13. In addition, during the Year 1 of the Program, CEA will realize program of interventions of rapid impact in order to strengthen the planning and preparation of the bidding documents of the activities to be executed in 2015 contributing to the achievement of the objectives of the Program. Meanwhile it will contract the Technical Assistance that will support CEA and the participating water utilities to prepare the portfolio of activities to be financed during the subsequent years 2016, 2017, 2018. 14. The total costs of the Program activities of the Results Area 3 have been estimated using two different methodologies, as presented in details in the Technical Assessment. Firstly, the CEA has formulated an investment plan for the 18 systems, on the basis of the existing master plans carried out in the targeted cities and on a planning exercise conducted in coordination with the staff operating the 18 systems. As a result of this assessment, an investment of US$56.2 million (without contingency) was estimated. Secondly, the cost of the Results Area was estimated following the methodology published by CONAGUA, “Planning of actions to increase and control efficiency in drinking water systems”. Annex A of this methodology provides a catalogue of sample projects for increasing and controlling efficiency and their unit costs per connection. Based on this assessment, a total investment of US$50.7 million without contingency was estimated.

4. Results Area 4: Improvement of WSS information in rural areas

15. The Program will finance all activities required to set-up the RWSS information system, including the provision of IT infrastructure and equipment, as well as the data survey to feed the information system with all data required from the RWSS systems of the targeted segment. The system to be installed is the Sistema de Información de Agua y Saneamiento Rural, SIASAR, a platform already promoted by the World Bank in several countries of the region www.siasar.org. Four staff of CEA participated to a regional workshop on SIASAR organized in July 2013 where they learned from the implementation by other agencies. Oaxaca will benefit from the experience learned in other countries. It is expected the procurement of the IT infrastructure and equipment will be carried out in 2014 and 2015, while the data survey in 1130 rural localities with a population between 500 and 2,500 inhabitants will start in 2015. The Result Framework of the Program reflects this timeframe.

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5. Chronogram of Program execution, results verification and disbursement

 

 

FY 20

Revision of the SAPAO law and its submission to the State Congress

Rural and Urban Water Supply and Sanitation Strategy 

Contracting plan de accion impacto inmediato

Preparation plan de accion impacto inmediato

Preparation plan de acciones de mediano plazo

Estimated disbursements

PforR Program activities

TA component activities

USS$2.50 M

Preparation bidding documents for works

USS$1.00 M USS$2.00 M USS$2.00 M USS$2.50 MEstimated disbursements under the TA Component

USS$4.00 M USS$14.50 M USS$10.00 M USS$9.50 M

Bidding process Independent Verification Agent

Design of pilot approaches to providing sustainable rural WSS implementation and support 

Data survey SIASAR

Results verification by the independent agent

Execution activities financed under APAZU

Public Expenditure Review of the Oaxaca WSS Sector

Bidding process strategic TA to CEA and participating water utilities

Strategic TA to CEA and participating water utilities in place

FY15

Intermediate Results 1 : Modernization of the State’s sector institutional framework

Bidding process strategic TA to SAPAO

Strategic TA to SAPAO in place

Revision of the State WSS sector law and its submission to the State CongressPreparation and publication of the regulations of the State WSS Sector law

Preparation and publication of standard regulations for municipal or inter‐municipal WSS 

Disbursement to BANOBRAS (advance and results‐based disbursement)

Maximum disbursements under PforR Program (excluding advances)

Results reporting by CEA and SAPAO

Provision of IT infrastructure and equipment SIASAR

Execution activities financed under APAZU

Intermediate Results 4 : Improvement of information in rural areas and development of a pilot of technical assistance mechanism to rural WSS service providers

Program management

USS$7.00 M

FY 19

Intermediate Results 2 : Improvement of water services in the Oaxaca Metropolitan Area

Intermediate Results 3 : Improvement of water services in secondary towns

FY 16 FY 17 FY 18

Year 1: CY 2014 Year 2: CY 2015 Year 3: CY 2016 Year 4: CY 2017

FY14

Year 5: CY 2018 CY 2019

Revision, adoption and publication of the CEA organizational manual and internal 

Revision, adoption and publication of the SAPAO organizational manual and internal 

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II. PROGRAM EXPENDITURE FRAMEWORK

A. Oaxaca WSS sector financing 16. The Oaxaca WSS sector’s financial scheme is complex and fragmented. Various entities participate in the sector’s financing while others execute the resources. The federal government plays a leading role in the sector’s financing, while the State government plays an important role in channeling and executing resources. Information is not centralized and each agency handles partial figures in terms of the program it manages or the resources it channels. The methodology for inputting information is not unified and each entity inputs it differently. During the analysis of the sector financing, there were serious difficulties in obtaining information and in its consistency. The figures presented herein are those provided by SEFIN’s Budget Planning and Integration Department.

1. Sector’s financial scheme

17. The resources allocated for financing the WSS sector undergo various stages from beginning to end. In each stage, the federal, state and municipal governments play different roles and the scale of their participation changes significantly. Moreover, the financing scheme and the governments’ participation are different, depending on whether the resources are allocated for investment or for operation and maintenance. The stages that the resources undergo are grouped in four categories: (a) financing, corresponding to the source of the resources; (b) transfer, corresponding to financial intermediation; (c) execution, corresponding to the use of the resource; and (d) end-use, corresponding to the purpose of the resources. The diagram below presents the path followed by the financial resources in each stage, as well as the entities and programs that participate in these stages.

Figure 6: Stages followed by financial resources allocated to the sector

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2. WSS sector investment financing 2007-2012

18. In 2007–2012, an annual average of MX$725 million was allocated to WSS sector investments. The diagram below shows the gradual growth in amounts allocated for investment. From 2007 to 2012, investment increased by an annual average of 19 percent. By 2012, the level was nearly 2.4 times the 2007 value.

Figure 7: Amounts allocated for investment, 2007–2013

19. Federal, state and municipal government participation in the financing, transfer and execution of resources varies significantly, as presented in the table below. The federal resources have contributed 52 percent to financing, and the state government or the municipalities execute the resources. In turn, the state resources have contributed 32 percent to financing, while SEFIN has transferred 100 percent of resources, and has used 93 percent of available funds for investments. Municipalities have contributed 16 percent to financing and 7 percent to execution.

Table 12: Annual Investment (2007–2012 Average), MX$ Millions

FINANCING (financial resources)

TRANSFER EXECUTION

FEDERAL 377 3 - STATE 230 722 670 MUNICIPAL 118 - 54

TOTAL 725 725 725

FEDERAL 52% 0% 0% STATE 32% 100% 93% MUNICIPAL 16% 0% 7%

TOTAL 100% 100% 100%

3. Financing of the WSS sector investment

20. The WSS sector investment is financed through federal, state and municipal programs that are themselves made up of federal, state and municipal resources, knowing that state and municipal resources stem from their own funds and from federal transfers53.

                                                            53 Such as FISE, FAIS, FEIS, FAFEB, Metropolitan Fund (Fondo Metropolitano) and Regional Program (Programa Regional)

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21. Each federal program has operating rules defining the counterpart funds to be required by the state and municipal governments. In 2007-2012, federal government programs contributed 96 percent of investment financing; the remaining 4 percent came from state government programs. The programs that contributed most to the financing of sectorial investments were those administered by SHCP (52 percent of total resources of federal programs), followed by CONAGUA (40 percent), and CDI with PBAI (8 percent). Adding the counterpart contributions from federal, state and municipal entities that participated in each program provides the total amount contributed by these entities to finance investments in 2007–2012: 52 percent financed by federal resources, 32 percent by the state resources, and the remaining 16 percent by municipal resources. The table below presents detailed figures.

Table 13: Average WSS sector investments financing by programs 2007-2012

MX$ ‘000 % %

FEDERAL PROGRAMS

CONAGUA 278,102 40%

SHCP 365,541 52%

CDI 53,470 8%

SERMANAT - 0%

TOTAL FEDERAL PROGRAMS 697,114 100% 96%

STATE PROGRAMS 27,595 4%

MUNICIPAL PROGRAMS - 0%

TOTAL SECTOR 724,708 100%

Table 14: Average WSS sector investments financing by programs and resources 2007-2012 (%)

Federal Resources

State Resources

Municipal Resources

Total Resources

FEDERAL PROGRAM CONAGUA

APAZU 57% 17% 26% 100%

PROSSAPYS 69% 8% 23% 100%

CLEAN WATER 57% 43% 0% 100%

PROTAR 77% 10% 13% 100%

PRODDER 100% 0% 0% 100% PASO ANCHO AND WATER

SUSTAINABILIITY 100% 0% 0% 100%

TOTAL CONAGUA 68% 12% 20% 100%

SHCP

FAFEB, PAFEF, AFEF 0% 83% 16% 100%

FEIS, FAIS, FIEF, FISE 4% 70% 26% 100%

FEIEF 0% 94% 6% 100% RG23: METROPOLITAN FUND,

REGIONAL FUND, MODERNIZATION FUND, REGIONAL PROGRAM 60% 2% 1% 64%

MICROREGIONS 66% 0% 34% 100%

VARIOUS 13% 70% 17% 100%

TOTAL SHCP 40% 46% 14% 100%

CDI 76% 6% 18% 100%

SERMANAT 0% 0% 0% 0%

TOTAL: FEDERAL PROGRAMS 54% 29% 17% 100%

STATE PROGRAMS 0% 94% 6% 100%

TOTAL 52% 32% 16% 100%

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Table 15: Evolution of WSS sector investments by programs 2007-2012 (MX$’000)

2007 2008 2009 2010 2011 2012 AVERAGE

FEDERAL PROGRAMS

CONAGUA

APAZU 114,358 196,197 163,681 100,534 66,962 62,231 117,327

PROSSAPYS 150,412 133,265 92,786 77,045 69,140 78,969 100,269

CLEAN WATER 7,714 5,143 3,453 3,669 4,960 4,716 4,942

PROTAR - - 95,117 38,394 19,423 19,249 28,697

WATER CULTURE -

PRODDER 7,299 1,951 1,801 2,280 1,183 1,556 2,678 PASO ANCHO AND WATER

SUSTAINABILIITY - - - - - 145,126 24,188

VARIOUS -

TOTAL CONAGUA 279,783 336,555 356,838 221,923 161,667 311,845 278,102

SHCP -

FAEB, PAFEF, AFEF 1,904 54,635 67,909 115,618 176,669 170,298 97,839

FEIS, FAIS, FIEF, FISE 38,683 64,522 117,283 95,411 227,510 132,063 112,579

FEIEF 8,584 3,885 - - - - 2,078 RG23: METROPOLITAN FUND,

REGIONAL FUND, MODERNIZATION FUND, REGIONAL PROGRAM - 7,639 139,082 236,915 249,595 233,747 144,496

MICROREGIONS 31,665 - - - - - 5,278

REGIONAL FUND -

VARIOUS 7,374 - 8,625 3,631 - - 3,272

TOTAL SHCP 88,210 130,682 332,899 451,575 653,774 536,108 365,541

CDI 31,939 11,388 49,422 41,658 75,260 111,155 53,470

SEDESOL -

SERMANAT - - - - - - -

TOTAL FEDERAL PROGRAMS 399,932 478,624 739,160 715,156 890,702 959,108 697,114

STATE PROGRAMS 23,320 11,205 3,581 29,478 42,569 55,415 27,595

MUNICIPAL PROGRAMS - - - - - - -

TOTAL 423,252 489,829 742,741 744,633 933,271

1,014,523 724,708

4. Transfer of the WSS sector investment

22. SEFIN is in charge of channeling and transferring the funds that finance federal and state programs and then transfers them to the entities that execute investments. The only funds not channeled through SEFIN are those corresponding to two CONAGUA programs (PRODDER and PROSANEAR), which are financed and transferred directly by CONAGUA. Of total investments, the amount administered by CONAGUA is less than 1 percent.

5. Execution of the WSS sector investment

23. In 2007-2012, the state government executed 92 percent of the resources, and the municipal government 8 percent respectively. During this period, CEA executed 78 percent of the resources and SINFRA 14 percent.

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Table 16: Evolution of execution of WSS sector investments by entities 2007-2012 (MX$’000 and %)

B. Participation of WSS sector investments in State finances 24. This section presents the importance of WSS sector investments within the state’s total finances. The state’s total average revenue was MX$ 44.5 billion in 2008–2012, of which 96 percent were from the federal government and 4 percent from the state’s own revenue. 82 percent of expenditures were allocated to current expenditures and the remaining 18 percent to investments. The WSS sector’s investments correspond on average to 2 percent of the total budget and 9.5 percent of total state investments.

Table 17: WSS sector investments compared to State budget

% Sectoral investments in budget and investments

2008 2009 2010 2011 2012 Average

2008–2012

WSS investments 490 743 745 933 1,015 785

% of State budget 1.2% 1.8% 1.7% 2.0% 2.1% 1.8%

% of State investments 7.5% 9.3% 8.8% 11.5% 10.0% 9.5%

III. PROGRAM RESULT FRAMEWORK AND MONITORING & EVALUATION

25. The Bank has assisted GoO in developing indicators and targets to monitor the results achieved under the Operation. The following indicators were defined: (i) Program Development Objective Indicators, (ii) Intermediate Results Indicators, (iii) Disbursement-Linked Indicators. Some of the Disbursement-Linked Indicators are also Intermediate Results Indicators. The completed tables including baseline, yearly targets and verification protocol for all the indicators are provided in Annexes 2 and 3. The section below presents how the Intermediate Results link with the PDO Indicators, as well as the Results Chain of the Operation. Intermediate Results associated with PDO Indicator 1 26. The modernization of the institutional framework of the WSS sector under PDO Indicator 1 will be measured against three results: (i) Key legal and regulatory tools are prepared, i.e. the regulation of State Water and Sanitation Law prepared and published, the standard regulation for provision of municipal water supply and sanitation services prepared, the CEA and SAPAO internal regulation and organizational manual adopted and published, the SAPAO law submitted to Congress, (ii) The number of water utilities supported by the Program that are becoming legally autonomous (municipal, inter-municipal, State or privately-run utilities) during Program’s implementation, (iii) The tools for the WSS sector monitoring and planning are in place and being in use, including the tools to measure performance indicators in the selected

EJECUTORTOTAL FEDERAL

CEA TOTAL MUNICIPAL TOTALADOSAPACO RESTO TOTAL ESTATAL

2,007 423,252 0% 87% 0% 0% 6% 93% 7% 100%2,008 489,829 0% 90% 0% 0% 6% 97% 3% 100%2,009 742,741 0% 94% 0% 0% 1% 95% 5% 100%2,010 744,633 0% 77% 9% 11% 20% 96% 4% 100%2,011 933,271 0% 60% 27% 0% 27% 87% 13% 100%2,012 1,014,523 0% 76% 7% 8% 15% 91% 9% 100%

AVERAGE 724,708 0% 78% 0% 0% 14% 93% 7% 100%

SINFRAESTATAL INVERSION SEGUN

EJECUTOR

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sector of SAPAO and in the selected water utilities of the secondary towns, the Rural Water and Sanitation Information System, the Rural and Urban Strategy and Public Expenditure Review for the WSS sector. 27. To achieve the targets of the PDO Indicator 1, the following intermediate results will need to be achieved: (i) The submission of the revised State Water and Sanitation Law to Congress, a Program activity under Results Area 1, and a pre-requisite for the revision of the key legal and regulatory tools that will be developed based on the approved law (progress measured by Intermediate Result 1-1); (ii) The operation of the tools to measure performance indicators in the selected sector of SAPAO and in the selected utilities of secondary towns, Program activities under Results Areas 2 and 3 (progress measured by Intermediate Results 2-1 and 3-1); (iii) The setting-up of a Rural Water and Sanitation Information System, a Program activity under Result Area 4 (progress measured by Intermediate Result 4-1); (iv) The successful completion of a Rural and Urban Strategy and Public Expenditure Review for the WSS sector, an activity of the TA Component (progress measured by Intermediate Result 1-2). Intermediate Results associated with PDO Indicator 2 28. Under PDO Indicator 2, people in urban areas will be considered as provided with a sustainable improved water service quality under the Program if either (i) they receive from SAPAO in the selected sector a continuous water service and if the commercial efficiency in the selected sector is equal or above 90 percent, (ii) they receive services from the selected utilities in provincial towns with improved continuity and whose revenues from services are greater than their operating expenses. To achieve the targets of the PDO Indicator, the following intermediate results will need to be achieved: (i) In the selected sector of the Oaxaca Metropolitan Area: improvement of the continuity of the water supply and improvement of the efficiency through investments and routine TA financed under the Results Area 2 of the Program, and through strategic TA to strengthen the capacity and service management of SAPAO financed under the TA Component (progress measured by Intermediate Results 2-1 and 2-2); (ii) In the selected sector secondary towns: improvement of the continuity of the water supply and improvement of the cost-recovery through investments and routine TA financed under the Results Area 3 of the Program and through strategic TA to strengthen the capacity and service management of CEA and participating utilities financed under the TA Component (progress measured by Intermediate Results 3-2 and 3-3). 29. The Results achieved under the Intermediate Indicator 4-2, Pilot approaches to providing sustainable rural WSS implementation and support services designed are not directly linked to the PDO Indicators. This strategic activity that has emerged from the dialogue with the GoO during the preparation of the Operation and that will be addressed through the TA Component, aims at capitalizing best international practices to explore options to improve the sustainability of the WSS services in rural areas of the State. This pilot will set the basis for a potential scalable approach in the rural WSS sector the GoO may consider to implement in the future.

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Figure 8: Results Chain of the MAS Oaxaca Operation

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IV. PROGRAM ECONOMIC EVALUATION

A. Rationale for Public Provision and Financing

30. This Operation aims at modernizing the WSS sector and improving the quality and sustainability of the water services in selected urban areas of the State of Oaxaca, where services are generally poorly provided and where high poverty levels are present. Public financing is the most appropriate source of financing, as it will be supporting the development of an innovative model of result-based financing for the WSS sector and water utilities, that CONAGUA is interested in introducing at large scale.

B. Program’s Economic Impact

31. The Program was evaluated for a representative sample of sub-projects similar to those to be implemented under this Operation. The evaluation was carried out for Results Areas 2 and 3, which correspond to 82 percent of the total MAS Oaxaca Operation cost. Results Area 2 was evaluated for all works to be implemented in Oaxaca Metropolitan Area; while Results Area 3 was evaluated for a sample of municipalities, whose water services were representative of the 18 selected secondary towns54. The cost of these works was increased by 10.7 percent55 to account for the TA activities, which are crucial to attain the expected benefits of the whole Operation. 32. Cost benefit analysis56 was used to measure net benefits generated from the Program sub-projects in the sample. The Program will impact positively socio-economic development, as it will generate more economic benefits than expected costs. The economic results show that all sub-projects in the sample are economically viable, with net benefit of US$31 million and return of 17 percent. To estimate the benefits, coping costs approach was employed to derive the costs of inadequate water. Coping costs were estimated as those incurred by the government (corresponding to those associated with the distribution of water in water-trucks to the areas with no coverage or with very poor service) and by the affected population, including: a) costs of storing water; b) cost of buying bottle water for drinking purposes; and c) implicit costs related to the opportunity cost of time associated with water collection. Economic benefits correspond to savings obtained when water service improves. From the selected sub-projects in the sample it is expected that: a) coverage increases from an average of 90 percent today to 100 percent benefitting about 35,000 people; and b) those currently served, about 300,000 in the municipalities of the sample, will benefit from a better service. There are additional benefits when efficiency improvement is obtained by reducing water losses. 33. From a financial point of view, the Program will be financially sustainable only when tariff system is adjusted to pay at minimum for operating costs. The financial analysis includes the

                                                            54 The sample consisted of six municipalities in different regions and variable water coverage, including Loma Bonita, Huajuapan de León, Ocotlán de Morelos, Salina Cruz, Puerto Escondido and Juchitán de Zaragoza. 55 The cost of the TA activities corresponds to US$10 million, which equals to 10.7 percent of the total cost of the Program (US$93.5 million). 56 Costs and Benefits are expressed at 2013 prices, and estimated over a 30 year-period. The discount rate used is 10 percent as a proxy of the opportunity cost in Mexico.

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100 percent subsidy granted by the Government of the State on the investment cost. Only operating costs are included in the evaluation. Results of the financial analysis show that when there is no increase on tariffs, the losses are as high as US$8 million. However, when tariffs increase to cover at least operating costs, and all efficiency gains are attained, the Program is viable and financial sustainability is possible to attain.

Table 18: Result of the Economic Analysis of the Program

Present Value of Flows (000 US$ )

Costs Benefits Net Benefits IRR

Financial (including tariff increase) 13,043 23,708 10,665

Economic 44,094 75,313 31,218 17%

34. The distributive analysis, which estimates gains and losses for stakeholders shows that net expected benefits for the whole society are US$20 million. This result is obtained from the difference between economic and financial benefits, and takes into account economic benefits, and subtracts financial cost that customers will have when paying more to the water utilities due to service expansion and collection efficiency improvement. The Government will have net losses of US$33 million corresponding to the transfer that is passing on to the municipalities to pay for the investment cost. Sensitivity and risk analyses show a robust Program with a probability higher than 90 percent of yielding positive economic returns. 35. Regarding the TA Component, benefits were not quantified by itself but their cost was included in the cost of the works, as the success of implementation depends on the institutional strengthening and TA. The Technical Assessment of the Program contains a more detailed description of the economic analysis, including the methodology used and main results and conclusions.

C. World Bank Added Value 36. The Bank’s support to the reform agenda for inclusive growth in Oaxaca since 2011 has shown positive results in the modernization of the State’s public institutions and policies. The partnership between GoO and the Bank has been in line with the priorities set by GoO to modernize the WSS sector that currently has a very weak institutional framework, and low coverage and quality of services, among the lowest of Mexico. The Program is expected to improve performance, as it will finance works using the PforR approach to promote efficiency and create financial incentives for results achievement. The Program will be complemented with TA activities to support Program management activities as well as sector policies dialogue and studies to support long term WSS development. The Bank is very well positioned to help the State given its experience for achieving efficiency gains, and for supporting technical assistance in the needed areas. Specifically the Bank has shown to be effective in taking a long-term approach when working with the countries across the range of programs in a particular country, as well as measuring success by actual results rather than the amount of inputs, and encouraging

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recipient countries to take ownership of the reform process. All of these Bank’s strengths are crucial for implementing this specific Program in Oaxaca.

V. TECHNICAL RISKS AND MITIGATION MEASURES

37. The overall technical risk after mitigating measures is High. The main technical risks are: (i) The implementation of the Program’s activities to be financed by APAZU (under Results Areas 2 and 3) is subject to an annual budget cycle which initiates in January and requires all funds to be executed by December 31 of each year, and is characterized by major delays which impact the performance and efficiency of this financing program; (ii) The planning and executing capacity of CEA and SAPAO to improve the identification and prioritization of the activities required to achieve the Program objectives, as well as to prepare the bidding documents in a timely manner and to properly supervise the corresponding investments; and (iii) The operational and commercial management of SAPAO and of the participating service providers to achieve the service quality and sustainability improvement objectives of the Program. The identified risks have been addressed with mitigating measures through the actions 1 and 6 of the PAP (See Annex 8 of the PAD).

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Annex 5: Summary Fiduciary Systems Assessment

I. EXECUTIVE SUMMARY 1. The fiduciary systems supporting the MAS Oaxaca Program provide reasonable assurance that the Program funds will be used for the purposes intended with due attention to the principles of economy, efficiency, effectiveness, transparency, and accountability, given the fiduciary arrangements among the implementing and executing entities of the Program. These arrangements include key elements for an adequate implementation of the Program and are addressing risks, including of fraud and corruption, and define how the risks would be mitigated during implementation of the Program. Based on the fiduciary systems assessment, the overall fiduciary risk after mitigating measures is Substantial, and the salient aspects of the fiduciary systems assessment are described in the sections following this Executive Summary.

II. PROGRAM LEGAL AND INSTITUTIONAL ARRANGEMENTS

A. Legal Framework  

2. The MAS Oaxaca Operation will be subject to an ample set of legal and regulatory financial management and procurement arrangements. With respect to the former, the following Laws and regulations are relevant: (a) the annual Expenditure Budget Act and Public Revenue Law, (b) the State Budget and Fiscal Responsibility Law, (c) the Fiscal Coordination Law, and (d) the General Law on Government Accounting. Each of these legal considerations have been taken into account in the Program financial management arrangements, and their impact on the Program are described within each of the dimensions (budget, accounting, internal controls, transparency, external oversight) discussed in the performance section of this assessment.

3. With respect to public procurement, article 134 of the Constitution of the United Mexican States establishes the applicable principles that rule procurement at national level (Federal or State), stating that resources for procurement of goods, works and services must be administered with efficiency, effectiveness, and probity. This article determines that, as a rule, procurement shall be carried out through open competitive bidding procedures. Both federal and state legislation apply for the Program. In the case of those contracts financed with federal proceeds (such is the case of APAZU- Result Areas 2 and 3 of the Program), the applicable law for civil works and related services is the Law of Public Works and Related Services (LOPSRM); and for goods and services, the Law of Acquisitions, Leases and Services of the Public Sector (LAASSP), complemented with their respective Regulations and General Application Administrative Manuals. For contracts financed with Oaxaca’s State resources (Result Areas 1 and 4), the regulatory framework is set out in the Law on Public Works and Related Services of the State of Oaxaca and Law for Acquisitions, Leases and Services of the State of Oaxaca . Both the Federal and State legislation distinguish between consulting services related to civil works and other types of consulting services. While noting that the same general Constitutional principles apply to Oaxaca’s procurement legal framework, there are certain differences between the Federal and the State procurement systems (e.g. procurement methods, thresholds, use of CompraNet), which are further addressed in the performance section in terms of their impact on the Program.

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B. Institutional Arrangements

4. Given that the borrower of this Operation is Banco Nacional de Obras y Servicios Públicos (BANOBRAS), as per the legal framework for international indebtness, the Federal Ministry of Finance (SHCP) will not designate a financial agent, and BANOBRAS would be responsible for managing and transferring loan proceeds to SEFIN, while providing overall implementation support and oversight, including the fiduciary aspects of the Program.

5. Implementation of the Program involves three government entities SEFIN, CEA, and the Oaxaca Metropolitan Area Water Utility (SAPAO57, formerly ADOSAPACO), as described in Section III.A of the main text of the PAD and Annex 1.

Procurement profile under the Program

6. The procurement profile of the program consists, in its majority of civil works and related supervision services, generally small and medium size contracts that are unlikely to attract international bidders and some goods contracts, such as vehicles, computers, and topographic equipment. The dominant methods anticipated are national bidding and shopping. The procurement actions financed under the Results Areas 2 and 3 of the Program are governed by the Federal law and amount to the largest share of the Program, 90 percent, i.e. US$77 million equivalent. In addition to the above, the Program finances consulting services and some goods for improving legal framework and information in the rural areas under Result Areas 1 and 4 (whose associated amount is US$6.5 million) that are governed by the State laws and regulations

7. All three implementing agencies have experience in these types of procurement activities as the Program builds on the existing institutional experience and practice in procurement under the ongoing national program which consists of small and standardized contracts, on average less than US$300,000. Even with stepping up the contract aggregation and the use of “slice and package” as recommended, given the level of complexity and the size of the contracts it is unlikely that they will attract international competition.

8. Among the implementing agencies the weakest capacity is that of SAPAO as it has not been involved in all the stages of the procurement process, and in particular under the Federal Law. The PAP provides for specific actions regarding SAPAO’s alignment with the Federal systems and capacity building. The staff, the roles and the collaboration among the three entities has been discussed and agreed during Operation preparation.

III. PROGRAM FIDUCIARY PERFORMANCE

9. This section summarizes the adequacy of the key elements of the State Fiduciary (Public Financial Management (PFM) and Procurement) systems taking into account the institutional arrangements to carry out the financial management (FM) and procurement responsibilities for the Program. The section is organized to describe the strengths and areas in need of improvements to support the Program in the different fiduciary dimensions being evaluated.                                                             57 On October 31, 2013 the State congress approved the law creating SAPAO, an autonomous State water utility, replacing ADOSAPACO, a State department. When SAPAO is referred, consider that the assessment was carried out for the entity formerly named ADOSAPACO.

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A. Planning and budgeting  

10. The Program Results Areas 2 and 3 will finance the state contribution for the APAZU. According to the Operations Rules of the program, once the technical implementation Annexes of the Coordination Agreements between CONAGUA and participating States are signed (expected by March 31 of each year), and the State contribution is transferred to a designated banking account, administered by the State Secretariat of Finance, CONAGUA transfers a certain percentage, which could vary between 40 and 80 percent, depending on the type of activity to be financed, of the program’s federal contribution to the same designated account. However, the major obstacles for the program implementation in various States including in the case of Oaxaca historically have been delays in signing of the Expendientes Tecnicos as well as transfers of the local State contribution. This could have negative impact on the timing and quality of the program outputs and outcomes, as all program funds should be dully incurred by the State by December 31 of each year. It is worth mentioning that due to the systematic delay in the implementation of APAZU by several States the Operation Rules could eventually include a grace period for Program’s execution of three month for certain FYs (but it was not a case for the FY13).

11. The MAS Oaxaca Operation’s budget for all activities, including Program and TA component, will be embedded in the standard budgetary procedures of the State executive branch, including planning, formulation, execution, monitoring and control. Hence the MAS Oaxaca Operation will be subject to the annual Expenditure Budget Act and Public Revenue Law, the State Budget and Fiscal Responsibility Law, the Fiscal Coordination Law, as well as the General Law on Government Accounting

12. The budget formulation and execution for all implementing entities will be carried out: (i) based on the budget classifications (e.g. administrative, functional, and economic), which were already harmonized with those used at the federal level in compliance with the General Law on Government Accounting; (ii) through the Budgetary Integral System (Sistema Integral de Presupuesto, SINPRES), which is an integrated Financial Management Information System (FMIS), developed internally by SEFIN and used by the entire State executive branch, including SEFIN, CEA, and SAPAO. This system includes several modules, such as budget formulation and execution, accounting, and public debt, among others. Moreover, the MAS Oaxaca Program funds would be earmarked with a specific code (clave de financiamiento) at both federal and state levels in order to allow its prompt identification.

13. However, it should be noted that one area for improvement identified in the process of budget formulation and execution is that the revenues and treasury management are not included in SINPRES. While State public revenues are monitored and control through SAP Governmental Resource Planning (GRP) system; the payments made by the public entities are processed internally by each governmental entity without reporting these transactions in the budget module of SINPRES. Nevertheless, a suitable control and filing systems for all supporting documentation are in place, which is also subject to internal and external audits by the Secretariat of the Comptroller and Governmental Transparency of the State of Oaxaca (Secretaría de la Contraloría y Transparencia Gubernamental -SCTG) and the State Supreme Audit Institution (Auditoría Superior del Estado de Oaxaca - ASEO). Hence, it was agreed with SEFIN to ensure

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that SINPRES would produce Program consolidated financial reports, including the information on payment to the Program’s consultants, providers, and final beneficiaries.

14. Procurement planning is based on an approved Annual Operating Plan (Plan Operativo Annual, POA) which consists of a list of contracts considered in each program with their corresponding estimated budget. Both the federal and the state procurement laws establish that public entities must prepare annual procurement plans (one for works and related services and another for goods and services in general) and their corresponding budget. The actions considered in these procurement plans may be subsequently modified, suspended or cancelled without responsibility for the entity, as long as valid reasons support these modifications. At the state level procurement plans are reviewed by procurement committees and approved by the head of the respective public entity and submitted to SEFIN that approves the actions to be financed.

15. Since most of procurement under the Program is subject to the Federal laws, the State of Oaxaca will have to align the procurement planning under Result Areas 2 and 3, consisting of works, related services and goods and accounting for about 90 percent of the Program, with the regulations defined by the Federal procurement laws (LOPRSM and LAASSP). These procurement plans have to be published in CompraNet before January the 31st and follow Federal regulations regarding their periodical updates. To ensure this alignment the PAP includes relevant actions that the State of Oaxaca will need to undertake.

16. Unlike CEA, SAPAO is relatively new to the federal programs therefore the action plan includes steps to ensure that SAPAO will be able to publicize its contracts in CompraNet and will have the capacity to conduct procurement under federal rules.

17. During the assessment an important gap was noted between the budget assigned and budget executed (e.g. for two of the CEA programs, 30 percent and 57 percent). One of the reasons is the fact that the budget is made available late during the calendar year due to the late signing of the Expendientes Tecnicos for the execution of the CONAGUA federal program causing the majority of the procurement to be carried out during the second part of the year resulting in short time windows for procurement, less competitive procedures and return of unused federal resources to the Federation. The PAP provides for actions to address this challenge by the early finalization of the Expendientes Tecnicos and advance preparation of the bidding documents.

B. Transparency and competition 18. SEFIN posts an ample set of information on its web site (www.finanzasoaxaca.gob.mx) on a regular basis, including the documentation classified according to the following structure: (i) legal framework, which include a complete set of legal and normative documents, including Laws, By laws, and other relevant guidelines on public finances, procurement and financial management; (ii) budget and accounting manuals, including annual budget classifications. (iii) financial reports, which includes, the annual State Public accounts (Cuenta Pública del Estado de Oaxaca), quarterly reports on public debt, and quarterly financial reports (starting in 2013); (iv) accounting harmonization information, including disclosure of financial information required by the General Law on Governmental Accounting, as well as the relevant normative documents issued by the National Council of Accounting Harmonization (Consejo Nacional de

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Armonización Contable, CONAC), which, in turn, were ratified by SEFIN at the State level; (v) annual credit ratings reports of all big three agencies; and (vi) relevant information on the State annual budget. Therefore, taking into account that the Program will mainly finance the APAZU, which is an existing federal program, its financial information will be regularly reported in the financial reports mentioned above. Despite the information published by SEFIN, it should be noted that the information published by CEA, and SAPAO on their web pages is not as comprehensive and updated as that published in SEFIN’s web page. 19. Transparency in procurement at the Federal level (federal entity procurement or state entity procurement with federal resources) is enhanced by the mandatory use of CompraNet (www.compranet.gob.mx) in all procedures, which is an electronic public procurement information system that, among other applications, publishes free public information regarding all stages of all the procurement procedures carried out by public entities when estimated contract amount is over MX$20,000 (approximately US$1,500). These include procedures by open competitive bidding, invitation to at least three suppliers or contractors and direct awards. Information in CompraNet is updated on a daily basis. At the State level, the GoO site includes a transparency webpage “Ventanilla única de acceso a la información” (www.infopublica.oaxaca.gob.mx) posting information regarding contracts of the State Government entities. This information refers to procedures completed during a period of time (generally on a six month or yearly basis) and includes data on: object of contract, contract amount, awarded supplier, contractor or consultant, and contract time frames. As the Program will mainly finance procurement to be carried out under federal legislation, as APAZU is a federal program, the use of CompraNet will be mandatory, thus information of procurement procedures within APAZU must be published and will be publicly available. Under the Federal law and as restated in the PAP, the annual program of works and work related services and all the contracting steps will be published in CompraNet. Furthermore, in order to increase transparency for simple works contracts (usually up to US$1.5 million) the PAP identifies the pass fail method as the most appropriate. 20. As far as competition is concerned, the sample of contracts assessed show that there is room for increased competition with improved results on prices and quality and delivery of services under the program. The sample assessed showed that open/public bidding accounts for 69 percent for CEA and 44 percent for SAPAO. The PAP identifies steps to further consolidate contracts and use “slice and package” to increase competition and reduce the transaction cost and establishes as a target, minimum 70 percent public bidding, which is the requirement under the Federal law. It is also expected that by the publication in CompraNet of the procurement plans and invitations to quote the number of potential bidders, at the state level, will expand beyond those that are currently in the state registries.

C. Accounting and financial reporting 21. The accounting records of the MAS Oaxaca Program are subject to compliance with the General Law on Governmental Accounting based on the harmonized chart of accounts and financial reporting standards issued by CONAC. Moreover, MAS Oaxaca Program’s accounting will be also recorded and monitored through the same system (SINPRES). This system allowed recording of all transactions for budgeting and accounting effects, as well as preparation of

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financial and budget reports in real time. All MAS Oaxaca Program’s supporting documentation will be appropriately maintained to facilitate the annual external audits. The Program consolidated financial reports will be generated by the SINPRES, and will include information according to the budget economic classification by implementing entity, and Results Areas under the Program.

D. Treasury management and funds flow 22. The treasury management system is decentralized and it is not integrated into SINPRES. As a result, SEFIN has limited control and information on payments to final Program’s beneficiaries processed by each implementing entity. Moreover, the Program flow of funds is also affected by the delays in: (i) process of signing of the Expendientes Tecnicos between CONAGUA and SEFIN; and (ii) availability and transferring of the State contributions to the Program designated banking account, administrated by SEFIN. While the timely signing of the Expendientes Tecnicos and the transfers of local funds would be addressed by the fact that part of the operation will finance the State contribution to the APAZU program, strengthening of the treasury management system has been included in the Advisory Services for Strengthening Public Sector Management RAS (P129050). This initiative includes, among others, the development of the conceptual model and functional design of a new integrated FMIS. Nevertheless, this initiative does not include implementation of the new FMIS. Hence, in order to ensure the Program’s flow of funds is properly controlled and monitored, including the records of payments to the final beneficiaries of the expenditures to be financed by the MAS Oaxaca Program it was agreed that all Program’s payments would be centrally processed by the SEFIN’s Treasury unit. 23. The primary disbursement method for the Program will be advances to a Program account in US$ to be administered by BANOBRAS, which, in turn, will be channeling the funds through SEFIN. The description of the funds flow is presented in the following diagram:

Figure 9: Flow of funds

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The Bank advances the authorized amount into Program account, administered by BANOBRAS, which, in turn transfers the advanced amount to SEFIN.

CEA, SAPAO, and SEFIN execute the Program activities, and request SEFIN’s Treasury unit to process payments to Program’s consultants and providers.

CEA and SAPAO report result to SEFIN, which submits these results to Independent Verification Agent (IVA).

IVA verifies and valid the results, and submits its report back to SEFIN. SEFIN formally submits the report to BANOBRAS, and requests documentation of the

advances and refund of the remaining funds after achievement of the DLIs. BANOBRAS requests documentation of the advance and remaining funds based on the

achieved and validated results. The Bank disburses the remaining funds to the Program account.

E. Internal controls and internal audit  

24. The Government of Oaxaca issued on September 25, 2010 an internal control regulation applicable to all the public sector entities across the State. Although this regulation is somewhat basic, it is aligned with the norm issued by the Federal Government on internal controls, and to some extent to best international practices, namely, the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Committee (COSO). Among other aspects, the Oaxaca internal control regulation establishes that the head of each public entity is responsible for maintaining an adequate internal control environment, along with a suitable risk management system. In other words, the responsibility relies within each entity, justifying why it is quite relevant to make sure that the entities that will implement the MAS Oaxaca Program have established adequate measures on this regard, specially, because on risk management, which is a concept quite new for all levels of the Mexican Public Sector. 25. In this regards, it is worth mentioning that based on the recently approved reform (November 2013) to the Organic Law of Executive Branch, which establish the creation and operation of the internal control units within each governmental agency, internal control units within SEFIN, CEA and SAPAO were already created,. The main objective of the Internal Control Units would be the design, implementation, and evaluation of the internal control systems within each implementing agency. 26. On the other hand, all implementing entities have a solid operational set of guidelines, which includes Internal Bylaws, Function and Organizational Manuals, including clear segregation of main FM-related functions. Nevertheless, some of these manuals have been in the process of updating for the past few years. Thus, some of the entities have parallel organizational structures that were not formally approved as yet. Moreover, due to the recent legal transformation of ADOSAPACO into SAPAO, its administrative structure and manuals are being revised and updated, with the objective to ensure that the entity would have sufficient institutional capacity to implement the Program, and take on the administrative functions which used to be supported by SINFRA in the case of ADOSAPACO. 27. In terms of internal audit, the SCTG, which, similar to the Secretariat of the Public Function (Secretaría de la Función Pública - SFP) at the federal level, is in charge of the internal audit

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function of the State of Oaxaca, has also issued a set of guidelines and manuals of procedures that are mainly focused in the administrative parts of the audit process. However, it appears that the Government is pursuing the performance of audits under Risk Based Approach (RBA), which, from the methodological perspective, is at a very early and basic stage. Moreover, as result of the assessment it was noted that no system for control and timely follow-up on internal audit findings and implementation of recommendations is currently in place.

F. Control systems in procurement  

28. Federal level. Definition and division of roles and responsibilities for procurement - both for the contracting procedures and the administration of contracts--is set in the General Application Administrative Manuals for procurement (one for works and related services and another one for goods and services in general) issued by SFP. Additionally, in particular, each entity must establish responsible areas and hierarchical levels according to their own policies and guidelines.

29. These Manuals establish for each particular stage of the procurement process the responsibilities within each procuring entity. For example the approval of exceptions to public competitive bidding (that should not exceed 30 percent of the entity’s annual budget) for contract amounts above the established thresholds must pass through a legally established procurement committee (its structure, functions and responsibilities are established in the law) and be supported by justification in accordance with the legal requirements. For amendments to contracts above 25 percent the authorization must be issued by SFP. SFP is also authorized by law to verify, at any moment during the procurement process or during contract execution that actions have been carried out by the contracting entities according to all legal provisions.

30. State level. The legal framework of the SoO includes specific provisions for control mechanisms by the SCTG (Secretaría de la Contraloría y Transparencia Gubernamental) on procurement performed by State entities (regardless of whether procurement is with State or Federal resources). They identify the areas to be examined and approved by SCTG during the pre-bidding, bidding and post bidding period. At this level, exceptions to public competitive bidding for contract amounts above the established thresholds are authorized by the head of the entity who must issue an agreement that supports and justifies the circumstance of exception specifically provided for in the law.

31. As regards the bidding documents, both Federal and Oaxaca procurement legislation provide the minimum content of the bidding documents and contracts, and each public entity may draft its own according to these legal provisions, which require that bidding documents furnish all information necessary for a prospective bidder to prepare a bid.

32. In the case of procurement of works or works-related services both CEA and SAPAO currently use model bidding documents (templates) provided by SINFRA for procedures subject to either Federal law or State law. These documents also include a model contract.

G. Program audit 33. APAZU, as a federal government program implemented at sub-national level, is subject to multiple levels of external audit. Hence, in case of the SoO, the program is audited on periodic

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basis by the Federal Supreme Audit Institution (Auditoria Superior de la Federación, ASF), SFP, ASEO, and SCTG.

34. The external audit function at the State level, based on the Constitution of the SoO and the Supreme Audit Law (Ley de Fiscalización Superior, LFS), is a responsibility of the ASEO, which, in turn, is mapped to the State legislative branch. According to the articles 3 and 4 of the LFS, ASEO has budget, technical and management independence from the state Congress and its main mandate is to audit the use of public funds at the state and municipal levels, including all public entities of the three branches of the Governments and Municipalities, as well as any person or firm that has spent public funds during the audited period. Even though, the ASEO has a solid legal and normative background, as well as a strong coordination with the Supreme Audit Institution at the Federal level (Auditoria Superior de la Federación), it is also characterized by (i) limited annual budget (approximately US$5 million for the CY12); (ii) large audit universe (more than 680 public entities); (iii) high staff turnover; and (iv) non-competitive salaries. All these factors eventually have impacted the institutional capacity, quality and scope of audits conducted by ASEO.

35. Therefore, the Program financial audit would be performed by a private firm and based on ToRs acceptable to the Bank. The financial audit of the Program will cover one fiscal year of the borrower, except that the first audit may cover from the effectiveness of the Program and up to the end of the second fiscal year of the borrower. In accordance with the Bank’s Access to Information Policy, the audited financial statements of the Program will be subject to public disclosures.

IV. FRAUD AND CORRUPTION RISKS

36. Overall, the fiduciary framework is deemed sound and strong enough to prevent, detect, investigate and sanction Fraud and Corruption (F/C) under the Program. Yet some issues or concerns exist such as the limited market reflecting a specific community of vendors in Oaxaca and the resulting reluctance by bidders to submit complaints about the procurement process for fear of retribution (e.g. that they will not be invited to participate in future bidding processes if one company complains against another). There is no whistleblower protection or incentive provided for bidders who come forward with a complaint. Despite limited experience in managing Bank-financed projects, both CEA and SAPAO were evaluated to be suitable for the implementation of this operation, but include areas for institutional strengthening which raises risks that are addressed through other mechanisms, including the TA component for institutional strengthening.

37. One of the preventive risk management measures for F/C risks that support greater social accountability for this Program is the existence of an Access to Information (ATI) Law and institutional capacity for its implementation, both at the state and federal level. Public access to key fiscal information is strong in Mexico as a general matter and most budgetary and financial information is available through the Internet, in accordance with both State and Federal Transparency and ATI legislation. By law, each public entity is required to publish information about their regulatory framework, budget, and financial reports on-line. Furthermore, CompraNet, is used as a platform to disclose information about procurement requirements and government suppliers. Any information regarding the disqualification of suppliers or contractors by the SFP is also made available on this site. It should be noted, however, that many of the

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entities' websites include outdated information and are not regularly maintained; this weakness could be strengthened by greater management attention to such issues under the Program.

38. Bidders may submit complaints regarding procurement processes to the SFP, either directly or through CompraNet within a period of six working days from the date of the alleged wrongdoing. Alternatively, because the SFP has established a coordination agreement with the Comptroller's Office (Contraloría), bidders can submit their claim to the Comptroller General’s Office as well. It typically takes the SFP 45 days to respond to a complaint, depending on whether it has been received directly or from the Comptroller's Office. Sanctions often involve a disqualification from future bidding processes for periods ranging from 3 months to 5 years and are dependent on the intentional nature of the offense; the gravity of infringement; and the conditions of the offender.

V. FIDUCIARY RISKS AND MITIGATION MEASURES

39. The overall fiduciary risk after mitigating measures is Substantial, and the identified risks have been addressed with mitigating measures which are included in the PAP (See Annex 8 of the PAD). The corresponding actions of the PAP (2, 5, 6, 7 and 9) address the specific FM and procurement risks described below.

40. The main FM risks for the Program and identified during the assessment are: (i) decentralized treasury management system, which is not currently integrated into the institutional FMIS; (ii) limited information on payments to final beneficiaries processed by each co-implementing entity (CEA and SAPAO) in SEFIN; (iii) major delays in the APAZU s annual flow of funds and overall implementation of program activities; (iv) lack of a well-established internal control function in each of the implementing entities; (v) limited institutional capacity of all implementing entities in terms of internal controls and risk management; (vi) lack of automated system to follow-up on findings raised from internal audits conducted by SCTG; (vii) limited institutional capacity of the State Supreme Audit Institution in terms of financial and human resources.

41. Some of the proposed mitigating actions to address these risks have been already addressed by the implementing entities, such as the case of the centralization of cash management and payments to Program beneficiaries by SEFIN, and the creation of the Internal Control Units in each of the implementing entities. Other actions will take a longer term and have been addressed in the PAP such as, the prompt updates in the Portals of the executing entities (i.e. CEA and SAPAO) of the Program financial execution, and the institutional strengthening of SAPAO.

42. The procurement system provides reasonable assurance that the fiduciary principles of transparency, economy efficiency and integrity will be met under the Program. It also provides an adequate mechanism to ensure the right of appeal in individual bidding processes. The executing agencies in charge of procurement under the Program have reasonable capacity built on their historic experience of conducting similar programs. It was established however that SAPAO needs to improve its capacity to manage Federal funds. SAPAO’s institutional capacity for procurement in Federal Programs will be strengthened with training in the use of the federal procurement framework and CompraNet, both provided, free of charge, by the SFP to entities that register as purchasing units in this procurement information system.

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43. The assessment has also identified some risks that if addressed can increase the ability of the Program to deliver timely and quality services to the program beneficiaries: delays in budget availability of federal and state programs, challenges to competition, contract implementation issues that increase the transactions cost of procurement and result in less optimal outcomes Such actions include: early preparation of the Expendientes Tecnicos to secure the timely budget release, advance procurement actions, consolidating contracts and use of “slice and package approach”, expanding the lists of potential suppliers in registries through CompraNet publicity.

VI. IMPLEMENTATION SUPPORT

44. The fiduciary team will monitor the implementation progress of the PAP fiduciary actions and will help the implementing entities to achieve the expected results of the Program through continued joint implementation support field missions, which are expected at least two staff weeks in the first year of implementation, and will adjust the implementation support plan accordingly for the remaining of the Program.

45. The team will also monitor the changes in the fiduciary risks to the Program and, as relevant, will monitor the compliance of the fiduciary legal provisions/covenants. There will also be a monitoring of the Program performance through desk review of Progress Reports and financial audits of the Program.

46. Other technical assistance activities to strengthen institutional capacity for internal controls and external oversight to the State external oversight institutions (i.e. SCTG and ASEO) may be undertaken in parallel through other Bank’s sources of financing and instruments during the implementation of the Program, however, this technical assistance will not be monitored as part of the Program.

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Annex 6: Summary Environmental and Social Systems Assessment

1. An Environmental and Social Systems Assessment (ESSA) of the Program was performed based upon the requirements of OP/BP9.00 and the Environmental and Social Systems Assessment Guidance Note. The ESSA covered both environmental and social considerations. 2. The methodology for the preparation of the ESSA consisted of: collection and analysis of relevant information; field visits to relevant sites related to the Program works and activities; meetings with various entities associated with the environmental and social aspects and management related to the Program and stakeholders58 associated with the Program; preparation and consultation of a draft of the ESSA; and account the comments and observations collected in the consultation. The ESSA provides more details on consultations and discussions with various Program entities and relevant stakeholders during the ESSA preparation. Neither OP7.50 International Waterways or OP7.60 Disputed Territories were identified as applicable to the Program. 3. Environmental aspects. Regarding environmental and health and safety management, the responsible entities for the Program are CEA and SAPAO. The potentially applicable environmental regulatory authorities to the Program are SEMARNAT/PROFEPA and the INAH at the federal level, the IEEDS at the state level, and individual municipalities at the municipal level. Given the type of Program works and the regulatory system, the responsibility for environmental permitting for the majority of Program works is either at the state or municipal level. The potential negative environmental impacts associated with the Program are of low or moderate intensity, will be limited to the work sites, and can be mitigated with relatively standard measures. The Program does not include activities that could involve significant adverse impacts to be permanent, cumulative or without precedent for the environment or that could affect the population. The Mexican environmental and health and safety laws that apply to the Program are comprehensive and complete, and the relevant institutional capacity of the applicable environmental regulatory authorities is good. In relation to the environmental permits required for the Program sub-projects, there has been in the past some lack of clarity on the part of CEA and SAPAO in terms of obtaining all the necessary permits from the applicable entity (federal, state or municipal) based upon the type of work and assigned regulatory authority. While both CEA and SAPAO have implemented some environmental management procedures, there is some need for improvement which, if developed and implemented with relatively limited

                                                            58 Meetings were held with Comisión Nacional del Agua (CONAGUA), Secretaría de Asuntos Indígenas (SAI), Comisión Nacional para el Desarrollo de los Pueblos Indígenas (CDI), Secretaría de Desarrollo Social y Humano (SEDESOH), Secretaría de la Contraloría y Transparencia Gubernamental, Secretaría de las Infraestructuras y el Ordenamiento Territorial Sustentable (SINFRA), Secretaría de Finanzas (SEFIN), Secretaría de Medio Ambiente y Recursos Naturales (SEMARNAT), Instituto Nacional de Antropología e Historia (INAH), Comisión para la Regularización de la Tenencia de la Tierra (CORETURO), Instituto Estatal de Ecología y Desarrollo Sustentable del Estado de Oaxaca (IEEDS) and at the municipal level with members of a sample of municipalities. In addition, the team consulted with members of civil society including Instituto de la Naturaleza y la Sociedad de Oaxaca (INSO), Grupo de Estudios sobre la Mujer Rosario Castellanos, Coordinadora de Pueblos Unidos por la Defensa del Agua, members of the Consejo Consultivo Indígena and members of Comités de Vida Vecinal (COMVIVES) and their recommendations helped inform the elaboration of the ESSA and PAP.

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effort and resources, could lead to a positive and wider impact with each entity and on the water and sanitation sector in the State of Oaxaca. 4. The principal potential environmental risks identified is the ESSA included: ineffective environmental impact evaluation or mitigation by CEA or SAPAO due to lack of adequate environmental management system related to the Program; construction works could cause negative environmental impacts due to the lack of clarity in the responsibilities of regulatory agencies related to environmental permitting and thus contractors not fully aware of their regulatory obligations; risks of impacts due to failure by contractors to implement necessary measures and requirements due to failure to include clear and complete requirements in contracts, inadequate supervision by executing entities, the contractor failure to fully account for the costs in their bids or due to contract cost overruns. 5. Based on ESSA systems and risk evaluation, a Program Action Plan (PAP) was developed as part of the ESSA and has been discussed with the relevant Program entities. The objective of the PAP is to improve the social and environmental management systems for the Program in the context of the guidelines established in OP 9.00. In terms of the environmental and health and safety aspects, the PAP consists of two main components: (i) development and implementation of an appropriate environmental management system within both CEA and SAPAO in relation to the Program related activities and their inherent potential impacts and risk; and (ii) improving the institutional coordination between CEA and SAPAO with the responsible environmental regulatory institutions especially related to environmental permitting. The CEA and SAPAO environmental management system would include: definition of responsibilities within the organization; contracting for adequate and sufficient personnel; mechanisms for coordination with environmental regulatory authorities; procedure to evaluate potential environmental impacts in proposed works and to ensure no high risk/impacts projects are included in the Program; procedure to obtain the applicable environmental permits; development and use of Good Practices Guidelines for the different type of works under the Program; improving bid and contracts related to environmental aspects, mechanisms for environmental supervision of works; and development and implementation of training programs for entity personnel and contractors. 7. Social aspects. Out of Mexico’s 32 States, Oaxaca is the third most economically marginalized in the country. In 2012, the State's GDP per capita59 was estimated to be close to US$2,750, representing 44 percent of the national average. It also ranks third in the country in terms of its poverty and extreme poverty levels. Currently, 62 percent of its 3.8 million inhabitants live below the national poverty line and 23 percent below the extreme poverty line (CONEVAL, 2012). In the last 20 years, there have been some improvements in Oaxaca from the poorest State to the third poorest ahead of Chiapas and Guerrero. Nonetheless, its development gap with the most advanced States has been constantly increasing over the last 20 years as reflected by the Shared Prosperity Convergence Index60 and progress has not been equitable with 65 percent of the State’s population living in localities with high and very high levels of marginalization (INEGI and CONAPO, 2010). Oaxaca is also known for tense social dynamics, including recurrent protests and demonstrations that obstruct the GoO functioning.                                                             59 Mexican Institute for Competitiveness (IMCO), State Competitiveness Index, 2012 60 Developed by the World Bank

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Table 19: Number of Municipalities by Levels of Marginalization and Social Lagging

Number of Municipalities by Levels of Marginalization and Social Lagging

Level of Marginalization Total

Mexico Only

Oaxaca % Levels of Social Lagging

Total Mexico

Only Oaxaca

%

Very high 441 216 49 Very high 113 63 56

High 408 144 35 High 495 255 53

Medium 944 171 18 Medium 490 129 26

Low 401 28 7 Low 575 85 15

Very low 262 11 4 Very low 783 38 5

Source: Data from CONAPO, 2010

8. In the 18 secondary municipalities that will benefit from direct interventions under the Program, 58 percent of the population lives below the national poverty line61 and are part of the 46 percent bottom segment of the country’s population in terms of poverty level62. 9. Oaxaca has a pluri-ethnic composition that includes the following indigenous peoples: Amuzgos, Cuicatecos, Chatinos, Chinantecos, Chocholtecos, Chontales, Huaves, Ixcatecos, Mazatecos, Mixes, Mixtecos, Nahuatls, Triquis, Zapotecos y Zoques, as well as Tacuates. In addition, there is presence of Afro-Mexican or Negro-Mexican communities in the State. Depending on the criteria utilized 32 percent (linguistic criteria) or 58 percent (self-selection) of the population is indigenous in the State (INEGI, 2010). Indigenous peoples, who are disproportionally over-represented amongst the poorest in Mexico, are also present in all municipalities benefiting from Results Areas 2 and 3, with a presence above the national average in 13 of the targeted localities (see details in ESSA) with 5 of the 18 cities of the study being considered indigenous localities as more than 40 percent of the locality is considered indigenous (Asunción Ixtaltepec, Ciudad Ixtepec, El Espinal, Juchitán de Zaragoza and Tlaxiaco). Nonetheless, the collective attachment and specific local organization structures have been lost in the urban areas and the number of population that is monolingual in these cities is limited (4 percent in Juchitán and 1 percent in Asunción Ixtaltepec). Cultural adaptations to WSS service delivery are therefore not necessary. 10. The overall social risk to the Program is considered substantial due to the complex social context in Oaxaca. However, given that the expected social benefits outweigh these risks and that appropriate mitigation measures have been agreed upon with the GoO, this Program provides a great opportunity to strengthen the social management practices in the water sector in the State. Four categories of risk were identified as part of the ESSA. 11. First, social conflict risks are considered substantial and include: (a) risk of demonstrations that might obstruct the execution of civil works; (b) unwillingness to pay service tariffs impeding the attainment of financial sustainability of the WSS operating systems; and (c) potential social conflict resulting of the revision of tariffs or suspension of services. Measures to strengthen the socialization of projects, consultation with communities and grievance redress mechanisms, as                                                             61 Based on most recent data on poverty rate available at municipality level (CONEVAL, 2010). 62 National poverty rate in 2010.

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well as the expected improvement in services will help mitigate these risks and will be specified in the Environmental and Social Management Manual to be prepared during the first year of implementation. 12. Second, risks related to civil works that include: (a) land acquisition; (b) temporary displacement and economic impacts to businesses and informal vendors; (c) potential impacts on community and public infrastructure; and (d) temporary impacts on traffic. These risks are expected to be minor given that the scope of land acquisition and size of civil works to be financed under the Program is small. The normal practice to acquire land for hydrological works in Oaxaca is through negotiating the voluntary donations of land. The ESSA recommends measures for strengthening systems for negotiating and documenting the voluntary donation of land, and where necessary, the payment of replacement costs, that will be further specified in the environmental and social manual for the project. 13. Third, includes risks related to legacy issues surrounding inadequate documentation of the transfer of land for water sources (mostly small wells) that will be used to achieve the objectives of the Program. This could represent a risk to rehabilitation of existing wells and other water sources, where land owners may threaten to restrict access to the infrastructure site. However, the risk is considered minimal given that there is no evidence of complaints to date related to land legacy issues; on average these works were constructed more than 21 years ago; and that the size of the land plots occupied by the infrastructure is relatively small (100 m2). The GoO is commencing work on the land regularization of these sites, and a grievance redress mechanism dedicated to addressing land legacy issues will be specified in the Environmental and Social Management Manual, in order to resolve any potential objections to rehabilitation works from owners. For new construction works essential for achieving program objectives, adequate measures will be specified in the Environmental and Social Management Manual to ensure the necessary land is acquired in accordance with PforR principles. 14. Fourth, there is a risk related to the cultural appropriateness of civil works given the potential conflict between modern water management practices and those of indigenous communities, and issues surrounding equity of access between urban and rural areas to WSS. Given that the focus of the Program is in urban areas, where indigenous languages and community structures do not persist, the risk related to cultural appropriateness is expected to be low. The focus in urban areas obeys to the complementarity of other government programs currently in place including PDZP, PIBAI (specifically targeted to indigenous peoples), Cruzada contra el Hambre (specifically targeting the most marginalized localities in the State) and PROSSAPYS. Furthermore, procedures for conducting free, prior and informed consultations, as well as guidance on the principles of ethno-engineering will be included in the Environmental and Social Management Manual. In addition, the TA Component includes the design and support to the implementation of a pilot to providing sustainable rural WSS implementation and support services. The addition of this activity responds to feedback during consultations were Civil Society Organizations (CSOs) and Indigenous leaders, members of the Consejo Consultivo Indígena, emphasized the need to have communities directly managing and maintaining WSS in rural areas.

15. Finally, there is a risk related to the exclusion of women from decision making on water resource management. During the preparation of the Operation, consultation with one of the

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statewide women’s organization’s confirmed that investments to improve water quality and availability could significantly benefit poor urban women. Women take primary responsibility for sourcing and managing water in urban households, and improved availability and quality of services could significantly reduce women’s workload by reducing the necessity to purchase water outside of the home. Furthermore, by systematizing and improving the disinfection of potable water, household incidences of water-related diseases are expected to decrease, freeing up time for women as they generally play the role of the primary care-takers in the case of household illness. The population structure of the state (52.2 percent women) reflects the incremental migration of male household heads, and young men. This has caused a change in the traditional family structure, resulting in an increase of female household heads, and in some regions greater participation of women in public and community decision-making bodies. However, in many cases, the role of women in decision making remains restricted, including in the state legislature, local decision-making bodies (i.e. only two percent of commune presidents are women) and, especially, in rural indigenous communities (only 0.5 percent of commune presidents are indigenous women). The Program design has acknowledged the need to address this challenge by requiring the inclusion of incentives in the legal and institutional framework as part of Results Area 1. In addition, all the data collected under the SIASAR will be gender disaggregated to better inform policy and WSS program design.

16. The recommendations to address these risks and strengthen the associated systems are included in: (a) changes in the design of the Program and particularly through legal and institutional reforms under DLI 1 and socio-economic data compilation in rural areas as part of DLI 4; (b) actions under the PAP to strengthen institutional capacity through recruitment of social specialists, preparation of an Environmental and Social Management Manual and implementation of a training program in environmental and social management; and (c) through activities under the TA Component. Activities for strengthening the existing social risk management systems included as part of the Program’s institutional modernization activities (DLI 1) include: (i) the institutionalization of complaints handling and conflict management mechanisms; (ii) mechanisms to increase public participation and civil society engagement in the oversight of WSS operations; (iii) incentives to improve women’s participation in water management committees; (iv) guaranteeing a minimal amount of water as a human right the vulnerable population; (v) establishing a state-wide information system that builds transparency in the water sector that includes information disaggregated by ethnicity and gender; (vi) ensuring replacement costs are paid for land and/or land affixed assets which are required for building/improving water infrastructure and that compensation is made prior to the start of the works; and (vii) recommending public campaigns on water usage to be communicated through culturally appropriate media such as through the use of indigenous radio stations.

17. In terms of social management, the PAP consists of three main components: (i) recruitment of social specialists; (ii) development and implementation of a Social and Environmental Management Manual; and (iii) implementation of a training program in environmental and social management to the technical personnel of the implementing agencies, the companies contracted prior to the start-up of works and the personnel of utilities in provincial towns. Key social risk management measures included in the Manual are: (a) criteria for targeting beneficiaries for the expansion of WSS based on their degree of social risk and marginalization; (b) strengthening the regulatory requirements and the guidance governing the donation of land to ensure its voluntary

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nature; (c) a system for ex-ante evaluation of the social risks of sub-projects and stakeholder mapping; (d) the development of good practice guidelines that incorporate principles of ethno-engineering for each type of sub-project; (e) guidelines for including good social management principles into construction contracts; (f) guidelines for coordinating with municipalities to assist street vendors temporally displaced by works in accessing project-related employment; (g) requirements for realizing free, prior and informed consultations with indigenous communities and rural communes affected by civil works; and (h) guidelines for quantifying voluntary labor (tequio) traditionally donated by communities. Finally, activities under the TA component include TA to strengthen supervision of works and improve social and environmental management of water systems’ operations and a pilot of technical assistance mechanism to rural WSS service providers. 18. As part of the preparation of the ESSA, the task team social specialists engaged in a range of field based and stakeholder consultations. This included meetings with representatives from Municipal Governments and WSS Providers, Rural Water Committees, Urban Neighborhood Councils, the State Wide Water Forum, Indigenous Peoples Groups as part of the Consejo Consultivo Indígena, the State Secretariat for Indigenous Affairs, the State Delegation for the Commission for the Development of Indigenous People, and the Oaxaca Women’s Study Center. The consultation and engagement process for the social inputs can be broken into three phases (i) field visits and stakeholder meetings to gather data and understand the context (April, June, and August 2013); (ii) pre-consultation meetings with Government and Civil Society Stakeholders to present and verify preliminary findings and recommendations (September 2013); and (iii) final disclosure and formal consultation with Government and Civil Society Stakeholders and additional discussions with indigenous leaders, members of the Consejo Consultivo Indígena, facilitated by the State Secretariat for Indigenous Affairs (January 2014). 19. Consultations. The draft ESSA was developed based upon information review, field visits, consultations, and discussions with various Program entities and relevant stakeholders. The draft ESSA was disclosed to the public in December 2013 in the website of the GoO (http://www.finanzasoaxaca.gob.mx/p_mas.html) and a public consultation was held on January 9, 2014 which counted with the participation of members of different government agencies and civil society. The main findings of the ESSA, as well as the recommendations to enhance the environmental and social management system – through changes in the Program design, the PAP and activities under the TA – were presented during the consultation. During the public consultation a number of questions were raised, by civil society and government stakeholders, regarding the overall impacts of the program. The table below presents the main recommendations made during the consultations and the response from the team.

Table 20: Main recommendations and responses made during the consultation

Recommendation Response (i) Ensuring that compensation paid for communal land is used for social purposes

Because it is necessary to respect the autonomy of communal authorities (including indigenous authorities) it will not be possible for the Program to designate the use of funds paid as compensation for land for specific purposes. However, the Program will include communication campaigns and consultation mechanisms that will serve to mitigate the risk that compensation payments might be used for purposes that are not for the benefit of the entire

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community. (ii) Establishing measures to ensure that the citizens observatory is not made up of political nominees

The legal framework will allow for such mechanisms to be established at the operator level, and guidance will be developed as part of the Environmental and Social Management Framework on how to ensure maximum transparency and accountability in the nomination and selection process. This guidance will draw on the recommendations of the Plan Para Bien Comun, developed by the Civil Society Forum for Water Resource Management in Oaxaca.

(iii) Taking an integrated view of the entire water cycle and the availability of surface water as a potential source by analyzing the potential of rain-fed systems

Although the development of systems for collecting rainwater is within the scope of this program, the World Bank will work with the Government of Oaxaca to explore lessons from other Civil Society initiatives within Mexico, and from other countries during implementation.

(iv) The importance of putting in place multi-stakeholder working groups and strengthening grievance redress-mechanisms to avoid potential cases of deviation of funds

Specific guidance will be provided on establishing such mechanisms within the Environmental and Social Management Framework during the early stages of implementation. Also, the modernization of the legal and institutional framework will include provisions for the establishment of such mechanisms at the level of the service provider.

(v) Mechanisms to ensure the quality of the works is adequately supervised and scrutinized

The contractors responsible for the execution of civil Works will be trained in the application of best practices in environmental and social management as will be detailed in the environmental and social management manual. Also the works contracts will include provisions for good environmental and social management. Finally the program will strengthen the human resources necessary on the part of the state and WSS service providers for supervising social and environmental aspects of civil works.

21. On January 10, 2014 a dedicated consultation workshop was held with representatives of the Consejo Consultivo Indigena, which includes representatives from Indigenous Communities, Civil Society Organizations, and Afro-Mexican Communities in Oaxaca. Feedback received during this meeting emphasized the need to have rural communities directly managing and maintaining WSS in rural areas. In response to this concern, the Technical Assistance Component of the Operation will include a pilot initiative to strengthen the capacity of rural water committees to implement and manage hydraulic systems. In addition, recommendations were made to include potential future works with indigenous groups to prepare a book compiling short stories on the importance and significance of water for Indigenous Peoples and Afro-Mexicans in the State. There was also a commitment to continue the dialogue with Indigenous Peoples organizations in the state on the topic of water resource management.        22. The ESSA has been updated to reflect recommendations from the consultations and the final version has been disclosed in the GoO’s website and in the World Bank’s Infoshop.

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Annex 7: Integrated Risk Assessment MEXICO: Oaxaca WSS Sector Modernization Program

Stage: Board

1. PROGRAM RISKS 1.1 Technical Risk Rating: High Description : Delay in APAZU execution. The implementation of the activities financed by the APAZU (Results Areas 2 and 3) whose budget cycle is annual and requiring to incur all funds by December 31 of each year, is characterized with major delays impacting the performance and efficiency of this program. Delay in mobilizing TA. Strategic TA has been identified as a critical action to achieve the results of Result Areas 2 and 3. Sustainability of the TA. The IPF instrument of the operation is financing strategic multi-annual TA, seen as critical to increase the likelihood to achieve the Program’s objectives, but which is traditionally not funded by the sector financing programs, hence raising sustainability issues.

Achieving the results under Results Area 1 includes a step outside of the control of the implementing agencies. The responsibility of the passing of the new State sector law by the State Legislative Assembly and the subsequent drafting and approval of the different regulations lie outside of the mandate of GoO’s executive counterparts with whom the Bank is working directly. The approval of the law will depend upon the political alignments within the State Legislative Assembly and, therefore, cannot be guaranteed by the Bank’s GoO counterparts.

Risk Management : Enhancing the planning mechanism to ensure that Expendientes Tecnicos of the APAZU are signed in March of each year to avoid delays in implementation, is part of the PAP. GoO is committed to mobilizing the TA seen as a decisive step to achieve the Program’s objectives. The preparation of the Requests for Proposals has started with a close support of the Task Team A procurement consultant is also being recruited by the GoO to help the client in this process. The two strategic TA contracts will be designed to foster capacity-building and knowledge transfer within the beneficiary institutions. In addition, it is anticipated that the mobilization of soundly-designed TA under this Program will raise the interest for such support mechanism and will encourage its funding in the future through the existing sector financing programs Risk is clearly identified and known by the State of Oaxaca and the Bank. Amounts associated to the corresponding DLI have been designed to generate a financial incentive for the State to accompany the presentation of the Law to the State Legislative Assembly and maximize the chance it gets approved.

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Quality of the bidding documents and of works supervision. As in most infrastructure projects, there is a risk of poor quality of the bidding documents for the investments that could affect the impacts of the infrastructure. This risk primarily applies to Result Areas 2 and 3. Timely funding of the Program. The Program will be partially financed by the proceeds of the loan supplementing GoO’s own resources. In the case of two of the Result Areas, this will be used as State counterpart financing to leverage APAZU funds. Untimely availability of the funds may prevent achieving the Program objectives. Sustainability of investments is always a potential issue in infrastructure as lack of cost-recovery or capacity to operate impacts the long-term maintenance of the assets built.

In both case of Result Areas 2 and 3, TA to revise the quality of the bidding documents and ensure proper supervision of the investments made is embedded within the Program design. The Program funding advance and subsequent disbursements will generate most of the flow of funds required to finance the Program activities. The GoO is committed to face a potential shortage of flows of funds by complementing with its own resources. Improving sustainability is precisely part of the Program Development Objective. In urban areas the Program aims at raising the cost-recovery ratio of the participating utilities. In rural TA will be directed to enhance the sustainability of the management of the RWSS systems.

Resp: GoO, Bank Stage: Preparation and implementation

Due Date : Status: On-going

   

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1.2 Fiduciary Risk Rating: Substantial Description : Implementation at sub-national level. The State of Oaxaca is not subject to compliance on rigorous fiduciary framework established at the federal level. Hence, weak institutional capacity at the State and sector levels, such as: (i) decentralized treasury management system; (ii) weak control and limited information on payments to final beneficiaries processed by each co-implementing entity; (iii) lack of Internal Control Offices within each implementing entity; and (iv) limited institutional capacity of all implementing entities in terms of internal control and risk management, may increase the possibility of governance challenges in the implementation of the Program.

Risk Management : Even though, the Program will be executed by CEA and SAPAO, through the existent staffing arrangements and current institutional capacity and systems, SEFIN will coordinate the overall implementation from fiduciary perspective. Hence, the Administrative Units of SEFIN, CEA, and SAPAO will be responsible for using the existent institutional planning, budgeting, and accounting processes and systems to implement the Program. The specific staffing arrangements have been agreed in the PAP. During the project preparation and appraisal stage, a formal integrated fiduciary risk assessment of the sector and implementing entities was carried out and a Program Action to strengthen the existing institutional capacity and systems, was prepared and agreed with the Client.

Resp: GoO, Bank Stage: Implementation Due Date : Status: On-going 1.3 Environmental and Social Risk Rating: Substantial Description : General environmental and social management of the Program. Although no major environmental and social impacts and risks are anticipated, the social context in Oaxaca is prone to protests, demonstrations and high levels of social conflict, which might impact the implementation of the Program.

Risk Management : An assessment of the environmental and social management system has been carried out during the preparation through an ESSA. Key weakness in the system being identified will be addressed in the Program Action Plan, through the modernization of the institutional framework as part of DLI 1 and through select activities under the TA component.

Resp: GoO, Bank Stage: Implementation Due Date : Status: On-going 1.4 Disbursement linked indicator risks Rating: High Description : Definition of realistic and measurable targets. In most performance-based schemes, the design of the targets of the indicators could represent a risk as too low or too ambitious targets could not create the sought incentives. Also there is a risk if inadequacy between the schedule of implementation of the activities and the targets of the DLIs. Finally there is a risk of not being able to accurately measure Program results. The definition of the baseline may be affected by the lack of reliable information for some indicators and the need to collect

Risk Management : Targets have been carefully defined with the implementing agencies to ensure realistic and achievable goals, based on execution forecasts of the Program activities. Actions to install the measurement tools and to strengthen the institutional capacity needed to monitor the Program results are embedded within the Program design. Also the verification protocols to properly measure the results achieved under the Program by the Independent Verification Agent have been revised to ensure they are realistic. DLIs have been designed taking into account the need to rely on a reliable baseline available at the beginning of the Program.

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the baseline information for others.

Resp: GoO Stage: Preparation / Implementation

Due Date : Status: On-going

1.5 Other Risks Rating: Substantial Description : Coordination with CONAGUA. CONAGUA plays a key role in terms of sector financing and technical leadership. Part of the Program is being financed by the APAZU.

Risk Management : The design of the Program has been presented and discussed with CONAGUA in several occasions. In addition CONAGUA has expressed its interest for the design and approach pursued under this Program.

Resp: GoO, Bank Stage: implementation Due Date : Status: On-going 

2. OVERALL RISK RATING: High It is estimated the risk associated with the implementation of the Program will be “High”. The main risks include (i) potential delays in the implementation of the APAZU, in the mobilization of the TA, and funding availability of the Program, (ii) the institutional structure of sub-national lending, the lack of experience of PforR operation in BANOBRAS and the lack of experience of Bank-funded operation in Oaxaca, (iii) the political economy from implementing agencies of not wanting to change the way the sector works now, especially to move from a build infrastructure approach to a management approach to service delivery instead of, (iv) the risk of not being able to accurately measure the project results and DLIs. The Bank will develop a strong implementation support plan to enhance the quality of the implementation and minimize risks.

Legend: L – Low, M – Moderate, S – Substantial, H – High

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Annex 8: Program Action Plan

Description of Measure DLI

Legal Cov.

Date Respons. Compliance Measure

Building the capacity of the Program’s institutions

1

Contract technical advisers with suitable experience to support: a) CEA and SAPAO in planning, in reviewing the quality of technical

documents, and in supervising Program activities. b) SAPAO and participating water utilities in provincial towns in their

operational, commercial, environmental and social management of water services.

Six months after

Program’s effectiveness

date

CEA/ SAPAO Order to proceed with contracts issued.

2

Ensure that SAPAO has the necessary institutional capacity to implement the Program in accordance with its fiduciary arrangements:

a) It will obtain certification as a purchasing unit in CompraNet. b) It will have access to all SINPRES modules from its offices. c) Personnel will be trained, through the means stipulated by the Civil

Service Secretariat, in the use of CompraNet as a purchasing unit. d) Personnel will be trained in federal regulations for public contracting

(works, goods and services), through courses offered by the Civil Service Secretariat or by specialized third parties officially certified in this subject.

e) Personnel will be trained, through the means provided by SEFIN, in matters concerning government accounting, budget and use of SINPRES.

f) SEFIN will approve the internal regulations and organizational manual.

g) The Administrative Unit will be strengthened in terms of human resources.

Three months after

Program’s effectiveness

date

SAPAO

Inclusion of SAPAO in CompraNet’s registry of purchasing units.

Certification of SAPAO personnel as CompraNet users, and evidence of training in federal regulations for public contracting, government accounting, budget and use of SINPRES.

SAPAO has the institutional access code to SINPRES.

SAPAO has the necessary administrative structure to ensure the Program’s sustainability.

3

In SAPAO, maintain the social management unit and its personnel at the time of the public consultation on the evaluation of environmental and social systems; hire an environmental specialist, with suitable professional expertise, to work full time; and allocate resources to satisfactorily carry out social and environmental management. In CEA, ensure that there is a social and environmental management unit with at least four social specialists and two environmental specialists, with suitable professional expertise, to work full time, and allocate resources to satisfactorily carry out social and environmental management.

Three months after

Program’s effectiveness

date

CEA/ SAPAO

One-year contracts for personnel, renewable each year, with a market-competitive salary, in accordance with Terms of Reference.

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4

Prepare and adopt an Environmental and Social Management Manual (ESMM; Spanish acronym MGAS) for CEA and SAPAO. ESMMs should include at least the requirements stated in Table 1 of this Annex.

By

November 30, 2014

CEA/ SAPAO

ESMM prepared and published.

Ensure that CEA and SAPAO implement a training program on environmental and social management, using the ESMM’s guidelines for:

a) their related technical personnel; b) the companies contracted prior to the start-up of works; and c) personnel of water utilities in provincial towns.

Each calendar year

starting in 2015

Evidence of personnel training.

5

Ensure that the SCTG’s internal control Delegations in SEFIN, CEA and SAPAO, in accordance with the recent modification of the State of Oaxaca’s Executive Authority, are operating during the Program’s implementation.

During Program’s duration,

starting July 1, 2015

SEFIN/ CEA/

SAPAO

Existence of a work program in the Delegations of each entity.

Strengthening the Program’s systems

6

Ensure the efficient management of the initiation of contracting procedures under APAZU:

a) The APAZU Expendientes Tecnicos contained in the Coordination Agreement between CONAGUA and CEA are signed in March of each year, as stipulated in APAZU’s operating rules.

b) SEFIN issues the official letters regarding budget sufficiency in order to initiate bidding procedures in a timely manner, as scheduled.

c) CEA and SAPAO will have the necessary bidding documents and sample contracts to begin the procedures for contracting, scheduled to be conducted each month according to the annual program of works and related services.

d) Once the Expendientes Tecnicos have been signed with CONAGUA, CEA and SAPAO will initiate the corresponding bidding procedures in a maximum period of 30 business days.

Each year of

Program execution

SEFIN/ CEA/

SAPAO

APAZU Expendientes Tecnicos signed in March of each year.

Report on the monitoring of contracting procedures conducted under the Program, indicating the scheduled date of the initiation of the procedure and the actual date of the initiation of the procedure.

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7

Promote competition, efficiency, transparency and economy in the procurement procedures (contracting of goods, services, works and works-related services) of CEA and SAPAO:

a) The annual program of works and work-related services, and 100% of contracting procedures (public bidding, invitation to at least three suppliers, and direct award) conducted for the Program and financed by the federal budget are inputted in CompraNet, as required by the applicable regulation.

b) At least 70% of the Program’s total amount for contracting public works and related services is conducted by means of public bidding.

c) In all cases of smaller works costing less than $20 million pesos, the “binary” criteria will be used to evaluate bids; evaluations using points and percentages will be used only for more complex and/or larger works.

d) In cases where various small works of the same type, which may be executed by contractors with the same specialization and experience, are scheduled to be contracted, consolidated contracting will be conducted by means of batch bidding (these may be awarded to one or several contractors). When this modality is not used simultaneously for bids that include similar contracts, justification must be provided and recorded.

e) In at least 50% of procedures in which invitations are issued to at least three contractors, the invitation to participate is extended to more than three contractors meeting the requirements of timely response, skills, experience and specialization for the planned contracting, with the aim of including the larger number of those contained in the internal lists and those who have expressed interest in participating through CompraNet.

At end of each year of

Program execution

CEA/SAPAO

Official institutional report on the State Government’s transparency website, detailing the procedures conducted under the Program.

Information on CompraNet report regarding procedures that have been concluded and that are being supervised by the corresponding purchasing unit.

Results of audits conducted.

8

Formulate coordination agreements between CEA and SAPAO with SEMARNAT and IEEDS, with the objective of complying with applicable environmental legislation, as stipulated in the ESMM, to:

a) define applicable environmental requirements, and specifically environmental permits and the institutional agency responsible for issuing such permits;

b) define a standard request for environmental permits under the Program’s projects, and submit them to CEA and SAPAO for their information; and

c) if relevant, establish a mechanism to monitor resolutions (environmental permits).

Three months after

Program’s effectiveness

date

CEA/ SAPAO Agreements established.

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Ensure that CEA and SAPAO meet annually to present their project plan under the scope of the Program to (i) IEEDS, SEMARNAT and relevant municipalities in order to coordinate requests for environmental permits; and (ii) INAH in order to coordinate, if necessary, the necessary actions with regard to archeological and cultural heritage protection aspects.

In first three months of

each year of Program execution

Minutes of meetings held with each of the institutions mentioned.

9

Ensure that CEA and SAPAO keep their Internet portals updated (including financial information) on a quarterly basis, in accordance with the regulation of the National Council for the Harmonization of Accounting Standards (Consejo Nacional de Armonización Contable [CONAC]), in terms of transparency.

30 days after end of each four-month

period of the Program

CEA/ SAPAO

Notification to SEFIN about link in

Internet portal.

Table 1 of Annex 8

Minimum Requirements for the Environmental and Social Management Manual (ESMM; Spanish acronym MGAS)

(1) Criteria for the selection of beneficiaries for the expansion of WSS coverage, including criteria regarding social gaps and marginalization. (2) Mechanisms to promote inter-institutional coordination:

On environmental matters, with SEMARNAT (PROFEPA), IEEDS and INAH; and On social matters, with SAI, CDI and Oaxaca Transparente.

(3) The system for preliminary assessment of projects in terms of environmental and social impacts and risks. (4) Processes for requesting and obtaining environmental permits applicable to a project. (5) Mechanisms for project monitoring, including non-mitigated impacts or accidents, if they occur, and for compliance with contractual requirements

including Good Practice Guidelines. (6) Good Practice Guidelines for each type of project, including mitigation measures and, if relevant, including principles of ethno-engineering. (7) Formats for bids and work contracts that incorporate environmental and social obligations. (8) Formats for work estimates in which contractors include precise environmental and social (performance) categories that can be verified prior to payment

of contract estimates and for final liquidation of such contracts. (9) Guidelines for land purchase including the process for verifying the voluntary nature of land grants. (10) Guidelines and process for granting, in coordination with municipalities, an alternative temporary space for street vendors who could be affected by

work construction. (11) Requirements for a complaint and conflict resolution mechanism that is (i) simple and accessible; (ii) efficient; (iii) inclusive and culturally appropriate;

and (iv) contains mechanisms for monitoring and resolution by an independent appeals authority. (12) Requirements for the conduction of free, prior and informed consultations with communities and indigenous peoples who will be affected by works,

ensuring that they are aware of the operation and maintenance costs of any work performed in their communities, and in the case of SAPAO the process of obtaining easement records and acceptance in discussions with neighborhood life committees (Comités de Vida Vecinal, COMVIVEs).

(13) Guidelines for quantification of the tequio in the case of works conducted by direct administration, so that this community contribution is taken into consideration.

 

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Annex 9: Technical Assistance Component Implementation Arrangements

Institutional Arrangements 1. SEFIN through its Program General Coordinator of the Unit MAS Oaxaca will have the general responsibility for the implementation of the Technical Assistance Component following the IPF policies, in coordination with CEA and SAPAO. Financial Management 2. SEFIN will be responsible through the MAS Oaxaca Unit for the Financial Management (FM) arrangements (i.e. accounting, budgeting, and flow of funds, preparation of financial and disbursements reports) of the Technical Assistance Component following IPF policies. Although SEFIN has limited experience managing Bank-financed projects, the entity has a suitable FM system of internal and external controls, which allows for an adequate internal control environment, including, among others, the following elements: (i) formal process of budget planning and execution based on the comprehensive legal and normative frameworks; (ii) the State Expenditures Budget is approved on annual basis by the State Legislature; (iii) an integrated budgeting and accounting system (SINPRES), which allows for the management and control of the financial resources; (iv) organizational structures with adequate segregation of duties, documented in respective Functions and Organizational Manuals, and (v) experienced staff. Moreover, BANOBRAS, as the loan Borrower, will provide implementation support and guidance for the Technical Assistance Component based on its many years of experience with Bank-financed projects. Therefore, the FM risk, i.e. the inherent and control risks as mitigated by existing controls, is Moderate. 3. Staffing arrangements. As mentioned, SEFIN will be responsible for the overall implementation and coordination of the Technical Assistance Component. The MAS Oaxaca Unit of SEFIN will be in charge of the FM arrangements for the TA Component, including budgeting, accounting, internal control, financial reporting and audit. It should be also noted that BANOBRAS will be responsible for managing the loan disbursements with the Bank and as such will need to coordinate with SEFIN for the documentation supporting disbursements, while providing overall implementation support and guidance to SEFIN, including all fiduciary aspects related to the loan. 4. Budgeting and accounting arrangements. As explained in the Annex 5, the budget for the TA Component will be embedded in the standard budgetary procedures of the Executive Branch of the State, including planning, formulation, execution, monitoring and control. The accounting records of the TA Component will be subject to compliance with General Law on Governmental Accounting based on the harmonized chart of accounts and financial reporting standards issued by National Council of Accounting Harmonization (CONAC). All transactions under this Component will be recorded and monitored through the Sistema Integral de Presupuesto (SINPRES). 5. Internal control and internal auditing. As documented in the Annex 5 and in compliance with Operational Guidelines of the Internal Control Committees, issued by the SCTG, and the

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recently approved reform to the article 47.XXXII of the Organic Law of Executive Branch, during appraisal it was confirmed that, based on the appointments made by SCTG, SEFIN, CEA and SAPAO have already created the internal control units (DCI). Moreover, all the implementing entities of the TA Component have a solid operational set of guidelines, which includes Internal Bylaws, Function and Organizational Manuals, including clear segregation of main FM-related functions. 6. General flow of funds and information. The primary disbursement methods for this component would be Advance to the project Designated Account (DA) in US$ to be administered by BANOBRAS, which will be channeling the funds to SEFIN. The description of the funds flow is presented in the following diagram, where the solid lines represent the flow of funds and the dotted lines represent the flow of information:

Figure 10: Funds flow

(1) The Bank advances the authorized amount into project DA, administered by BANOBRAS, which, in turn, transfers the advanced amount to SEFIN. (2) SEFIN processes payments to the project consultants and providers, and submit the supporting documentation to BANOBRAS. (3) Those eligible expenditures will be aggregated and summarized by BANOBRAS in SOEs to be formally submitted, together with a loan withdrawal application, to the Bank in order to document the advance and/or to request DA’s replenishment, whatever the case may be. (4) The Bank will replenish the documented amount to the DA.

7. Financial reporting and external audit. BANOBRAS, based on the information provided by SEFIN, will prepare and submit to the Bank on semi-annually basis the unaudited Interim Financial Reports (IFRs) of the Technical Assistance Component for monitoring purposes. These reports will be prepared, in local currency, using the simplified standard formats agreed with the Bank. Reports will be submitted to the Bank no later than 45 days after the end of each calendar semester. The annual audits of financial statements corresponding to the Technical Assistance Component will be conducted by an independent audit firm and based on Terms of Reference acceptable to the Bank. In accordance with the Bank’s Access to Information Policy, the audited financial statements of the project will be subject to public disclosures. After loan effectiveness, the following financial reports will be presented to the Bank:

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Table 21: Financial reports

Report Periodicity Due dates

Interim Financial unaudited Reports (IFRs)

Semi-annual February 15 and August 15

Audited financial statements Annual June 30, or six month after the end of audit period

8. Written procedures. SEFIN, with support from BANOBRAS, will complete prior to effectiveness an Operational Manual for both the Program and TA Component, which will include the detailed description of the Operation, as well as institutional, FM, disbursement and procurement arrangements, among others relevant sections. Disbursements 9. Disbursements under the Technical Assistance Component will be made either as Advances, or Reimbursements. Applications for withdrawal, except in the case of the initial Advance, must be accompanied by Statements of Expenditure and Summary Sheets with Records. Advances will be made to the Segregated DA, established at the BANOBRAS’s treasury under terms acceptable to the Bank, denominated in US$, with a variable ceiling as per the Disbursement Letter. The frequency for reporting eligible expenditures paid from the DA is quarterly. The Minimum Application Size for Reimbursements will be US$200,000 equivalent. The Disbursement Deadline Date for the technical assistance component will be four (4) months after the closing date. The loan disbursement arrangements63 for the IPF component are summarized below.

Table 22: Loan disbursement arrangements for the TA Component following IPF Policies

Disbursement method 1. Advances to the Segregated Designated Account in US$, to be administered by BANOBRAS.

2. Reimbursements. DA and timing of documentation

The DA ceiling would be variable and based on a forecast of two quarters of expenditure. The funds advanced to the DA would be documented on quarterly basis.

Supporting documentation SOE64. Minimum value of applications

The recommended minimum value of applications is $200,000.

Retroactive expenditures No retroactive financing is expected to be required for this component.

                                                            63 For details, see the Disbursement Letter and the “World Bank Disbursement Guidelines for Projects”. 64 All SOE supporting documentation would be available for review by external auditors and Bank staff at all times during Project implementation, until at least the later of: (i) one year after the Bank has received the audited Financial Statements covering the period during which the last withdrawal from the Loan Account was made; and (ii) two years after the Closing Date. The Borrower and the Project Implementing Entity shall allow the Bank’s representatives to examine these records.

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Table 23: Disbursement Table

Category Amount of the TA

Allocated (expressed in US$)

Percentage of Expenditures to be

Financed (inclusive of taxes)

(1) Goods, Consultants’ Services, Non-consulting services, Training and Operating Cost for the Project

$10,000,000 100%

TOTAL AMOUNT $10,000,000

Procurement 10. SEFIN, CEA and SAPAO will be responsible for the bidding processes (including the preparation of the ToRs, Request for Proposals and the signature of the contracts) for all procurement financed by the TA Component pertaining to the respective institution. The institutions will be supported throughout the bidding processes by an experienced consultant in Bank procurement. The MAS Oaxaca Unit of SEFIN will be responsible for the necessary coordination, publishing and updating of the Procurement Plan in SEPA and as a channel for any required information. 11. Procurement General Provisions. Procurement for the TA component of the Program will be carried out in accordance with the World Bank’s “Guidelines: Procurement of Goods, Works and Non-consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers” dated January 2011; and “Guidelines: Selection and Employment of Consultants Under IBRD Loans and IDA Credits & Grants by World Bank Borrowers”, dated January 2011, and the provisions stipulated in the Loan Agreement. For each contract to be financed by the Technical Assistance Component, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. The Unit MAS Oaxaca will be in charge of updating the procurement plan in SEPA. 12. Selection of Consultants. The TA Component will mostly require the services of consultants to carry out a variety of consultant services. These will be procured following the Bank’s policies and using Standard Documents.

Short lists of consultants for services estimated to cost less than US$500,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines. Universities, government research institutions, public training institutions and NGOs in some specialized fields of expertise could participate in the provision of consulting services as per Bank procurement guidelines and polices.

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Firms. Most contracts for firms carried out by SEFIN are expected to be selected using Quality and Cost Based Selection Method (QCBS). Consultant assignments of specific types as agreed previously with the Bank in the Procurement Plan may be selected with the use of the following selection methods: (i) Quality Based Selection (QBS); (ii) Selection under a Fixed Budget (SFB), especially for works supervision contracts; (iii) Least Cost Selection (LCS); (iv) Selection Based on Consultants’ Qualifications (CQS), for contracts estimated to cost below $ 300,000 equivalent; and, exceptionally (v) Single Source Selection (SSS), under the circumstances explained in paragraph 3.9 of the Consultants’ Guidelines.

Individuals. Individual consultants will be hired to provide technical advisory and project support services and selected in accordance to Section V of the Consultant Guidelines. All sole source selection of consultants will be subject to prior review. Other specific procedures for the selection of these consultants will be described in the Operational Manual.

13. Goods and Non-consulting services. No ICB is expected under the Project. NCB will be using the Bank’s Standard Documents. Small contracts for sundry goods will be generally procured through shopping (including price quotations from local suppliers). 14. Operating Costs. Small procurement may be undertaken for operational needs using simplified methods acceptable to the Bank as detailed in the Operational Manual. 15. Assessment of the Implementing Entity’s Capacity to Implemented Procurement. CEA has previous experience implementing Bank procurement policies Bank’s policies and using Standard Documents.  SEFIN has developed certain but limited experience because of its participation in the implementation of Bank’s grants;  and SAPAO has not yet had experience in Bank project implementation. In order to guarantee proper implementation of the TA Component, SEFIN and SAPAO’s procurement team capacities will have to be strengthened. An experienced consultant on World Bank’s procurement policies and procedures will be employed to support implementing agencies in these procurement activities. 16. Overall Risk Assessment. Most of the procurement activities to be carried out in the TA Component are not complex, however, in view of SEFIN and SAPAO’s  limited experience in the application of the World Bank Procurement and Consultant’s Guidelines and procedures the overall procurement risk for this Operation is substantial during implementation. 17. Procurement Plan. A Procurement Plan, which is being prepared by SEFIN will provide the basis for the procurement methods. This plan will be available in the Operation’s database and on the Bank’s external website. It will also be available in SEPA that the Unit MAS Oaxaca will be responsible to update. The procurement plan will be updated in agreement with the Bank annually or as required to reflect actual implementation needs and improvements in institutional capacity.  

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Table 24: Initial Procurement Plan

Activity Cost (US$) Type Method Bank

revision Contracting

agency Strategic TA to support the achievement of the objectives of the Program

Secondary town water service improvement contract

6,500,000 Consulting

services QCBS Prior CEA

SAPAO water service improvement contract 500,000 Consulting

services QCBS Prior SAPAO

Sector policy dialogue activities and studies Rural and Urban Water Supply and Sanitation Strategy

200,000 Consulting

services QCBS Prior CEA

Public Expenditure Review of the Oaxaca WSS Sector

100,000 Consulting

services QCBS Prior CEA

Program management Program results Independent Verification Agent contract

500,000 Consulting

services QCBS Prior SEFIN

Program financing audit contract 600,000 Consulting

services QCBS Prior SEFIN

Program technical coordinator contract (CEA)

38,000 (annual)

Individual consultants

Individual consultants

Prior CEA

Program technical coordinator contract (SAPAO)

38,000 (annual)

Individual consultants

Individual consultants

Prior SAPAO

Environmental and Social Safeguards 18. The Environmental Assessment OP/BP 4.01 and Indigenous Peoples OP/BP 4.10 policies are triggered. The Terms of Reference of the various activities financed under the TA Component will embed the necessary environmental / social criteria and considerations. With regard to the realization of the Rural and Urban Water Strategy this will be assessed against appropriate environmental and social objectives and will be adequately consulted with the relevant stakeholders and representatives of Indigenous Peoples organizations. With regard to the design of pilot approaches to providing sustainable rural WSS implementation and support services, given that the overwhelming majority of beneficiaries are Indigenous Peoples this pilot will not require a separate indigenous peoples plan. Instead, the elements of an Indigenous Peoples Plan will be included in the overall activity design in conformity with OP 4.10. Anti-Corruption Guidelines 19. The ACGs of the IPF instrument will apply to the TA Component.

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Annex 10: Implementation Support Plan 1. The implementation of the MAS Oaxaca Operation will require a substantial support from the Task Team especially during its first year. There is a need for the Bank to work closely with SEFIN, CEA, SAPAO and BANOBRAS given the scope of the Operation, the use of a hybrid PforR/IPF for the first time in Mexico, the sub-national implementation arrangements of the Program and its general high risk rating. 2. Particular emphasis of the implementation support will be on reviewing implementation progress (including that of the Program Action Plan) and achievement of Program results and DLIs, providing proactive support on resolving emerging Program implementation issues, monitoring compliance with legal agreements, supporting the Government in monitoring changes in risks. In addition, the Task Team will also engage in a sector dialogue through the monitoring of the Results Framework, as well through some of the TA Component activities. Main focus of Implementation Support

Time Strategic Focus

Throughout the MAS Oaxaca Operation implementation

Provide comprehensive technical support to pro-actively identify implementation bottlenecks or support the GoO to solve existing implementation issues

Review the Program implementation progress with respect to the Results Framework and DLIs

Review the implementation of the recurrent actions of the Program Action Plan

Assist the GoO to develop a communication strategy around the implementation of the Program

Year 1

(including by effectiveness)

Review and support the finalization of the Program Operational Manual, including the preparation of the Results Agreement between SEFIN , CEA, SAPAO and participating utilities

Review and support the hiring of the Independent Verification Agent

Review and support the hiring of the strategic Technical Assistance for CEA y SAPAO

Review the implementation of the actions of the Program Action Plan that need to be executed during the early stage of the Program, and support specifically the preparation of the Environmental and Social Management Manual

Review the compliance with the legal covenants associated with the effectiveness of the operation

Train relevant staff involved in the fiduciary execution of the TA Component following IPF policies

Years 2-4 Assist the GoO in the preparation of mid-term evaluation of the Program and in the identification of possible restructuring actions

Assist the GoO in capturing lessons learned from the Program implementation

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Resources and Task Team Skills Mix Requirements for Implementation Support

3. The Task Team will closely work with the State institutions and BANOBRAS involved in the implementation undertaking joint and periodic supervision missions, including field visits in accordance with the planning below:

Year 1: four supervision missions, including one between approval and effectiveness Years 2-4: three supervision missions each year

The Task Team will provide a comprehensive package of technical support for the Government of Oaxaca throughout the implementation. Skills needed are listed below.

Core Skills Needed for Supervision Other Skills Needed based on specific Demand or

Issue

WSS institutional specialist

Water utilities specialist

Water engineer

Environmental specialist

Social specialist

Communication specialist

Procurement specialist

Financial management specialist

Anti-corruption and governance specialist

Lawyer

Disbursement specialist

Financial analyst and economist

   

Oaxaca

El Espinal

Salina Cruz

LomaBonita

Ciudad Ixtepec

Puerto Escondido

Ocatlan de Morelos

Asuncion Ixtaltepec

Zimatlanade Alvarez

Matias Romero Avendano

Santo DomingoZanatepec

Santo DomingoTehuantepec

Santiago PinotepaNacional

Heroica Ciudadde Tlaxiaco

San JuanBautista Tuxtepec

San FranciscoTelixtlahuaca

Miahuatlan dePorfirio Diaz

Heroica Ciudad deHuajuapan de Leon

Heroica Ciudad deJuchitan de Zaragoza

PUEBLA

GUERRERO

VERACRUZ

CHIAPAS

MIXTECA

CAÑADA PAPALOAPAN

SIERRA NORTE

ISTMO

COSTA SIERRA SUR

VALLESCENTRALES

94°W95°W

97°W

98°W99°W

19°N

18°N 18°N

17°N 17°N

16°N

Oaxaca

El Espinal

Salina Cruz

LomaBonita

Ciudad Ixtepec

Puerto Escondido

Ocatlan de Morelos

Asuncion Ixtaltepec

Zimatlanade Alvarez

Matias Romero Avendano

Santo DomingoZanatepec

Santo DomingoTehuantepec

Santiago PinotepaNacional

Heroica Ciudadde Tlaxiaco

San JuanBautista Tuxtepec

San FranciscoTelixtlahuaca

Miahuatlan dePorfirio Diaz

Heroica Ciudad deHuajuapan de Leon

Heroica Ciudad deJuchitan de Zaragoza

PUEBLA

GUERRERO

VERACRUZ

CHIAPAS

MIXTECA

CAÑADA PAPALOAPAN

SIERRA NORTE

ISTMO

COSTA SIERRA SUR

VALLESCENTRALES

PACIFIC OCEAN

94°W

94°W

95°W

95°W

96°W

96°W

97°W

97°W

98°W

98°W

99°W

99°W

19°N 19°N

18°N 18°N

17°N 17°N

16°N 16°N

MEXICO CITY

Oaxaca

U N I T E D S T A T E S O F A M E R I C A

MEXICO

GUATEMALA

BELIZE

HONDURASEL

SALVADOR

PACIFICOCEAN

Gulf of MexicoSELECTED SECONDARY TOWNS

REGIONAL OFFICES OF THESTATE WATER COMMISSION

RURAL LOCALITIES WITH A POPULATIONBETWEEN 500–2500 INHABITANTS

IBRD 40596

JANUARY 2014

MEXICOOAXACA WATER AND SANITATION SECTOR

MODERNIZATION PROGRAM (MAS OAXACA)

0 25 50 Miles

0 25 50 Kilometers

This map was produced by the Map Design Unit of The World Bank.The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

GSDPMMap Design Unit

MUNICIPAL BOUNDARIES

REGION BOUNDARIES

STATE BOUNDARIES