DOCUMENT OF FOR OFFICIAL USE ONLY PROGRAM APPRAISAL ... Appraisal... · for official use only...

0

REPORT NO:

DOCUMENT OF

THE WORLD BANK

FOR OFFICIAL USE ONLY

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

April 10, 2014

For PADs disclosed AFTER the Board: “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.”

If the client has agreed to simultaneous disclosure: “This document is being made publicly available prior

to Board consideration. This does not imply a presumed outcome. This document may be updated

following Board consideration and the updated document will be made publicly available in accordance

with the Bank’s policy on Access to Information.”

1

CURRENCY EQUIVALENTS

(Exchange Rate Effective XX, 2014)

Currency Unit = Mexican Pesos

MX$1.00 = US$XX

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ACGs Anti-Corruption Guidelines

ADOSAPACO

Oaxaca Metropolitan Area Water Utility (until the creation of the SAPAO)

Administración Directa de Obras y Servicios de Agua Potable y Alcantarillado de la Ciudad

de Oaxaca

APAZU Program for Water Supply and Sanitation in Urban Areas (CONAGUA)

Programa de Agua Potable, Alcantarillado, y Saneamiento en las Zonas Urbanas

ATI Access To Information

BANOBRAS National Bank of Public Works and Services

Banco Nacional de Obras y Servicios Públicos

BP Bank Procedures

CDI National Commission for the Development of Indigenous People

Comisión Nacional para el Desarrollo de los Pueblos Indígenas

CEA State Water Commission

Comisión Estatal del Agua

CONAGUA National Water Commission

Comisión Nacional del Agua

CSO Civil Society Organization

DA Designated Account

DLIs Disbursement Linked Indicators

ESSA Environmental and Social Systems Assessment

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 Oaxaca Water and Sanitation Sector Modernization Program

Programa de Modernización del sector Agua potable y Saneamiento

OECD Organization for Economic Co-operation and Development

OP Operational Procedures

PAP Program Action Plan

PDO Program Development Objective

2

PforR Program for Results

PIBAI Program of Basic Infrastructure for Indigenous People (CDI)

Programa de Infraestructura Básica para la Atención de los Pueblos Indígenas

PROTAR Program for the Treatment of Wastewater (CONAGUA)

Programa de Tratamiento de Aguas Residuales

PROSSAPYS

Program for the Construction and Rehabilitation of Water Supply and Sanitation Systems in

Rural Areas (CONAGUA)

Programa para la Construcción y Rehabilitación de Sistemas de Agua Potable y Saneamiento

en las Zonas Rurales

SAI State Secretariat of Indigenous Affairs

Secretaría de Asuntos Indígenas

SAPAO Oaxaca Metropolitan Area Water Utility

Servicios de Agua Potable y Alcantarillado de Oaxaca

SCTG State Comptroller General and Transparency’s Office

Secretaría de la Contraloría y Transparencia Gubernamental

SEFIN State Finance Ministry

Secretaria de Finanzas de Oaxaca

SFP Federal Secretariat of Public Administration

Secretaría de la Función Publica

SHCP Federal Finance Ministry

Secretaria de Hacienda y de Crédito Publico

SIASAR Rural Water and Sanitation Information System

Sistema de Información de Agua y Saneamiento Rural

SINPRES Integrated budgeting and accounting system

Sistema Integral de Presupuesto

SOE Statement Of Expenditures

TA Technical Assistance

WSS Water Supply and Sanitation

Vice President: Hasan A. Tuluy

Country Director: Gloria M. Grandolini

Sector Director:

Sector Manager:

Ede Jorge Ijjasz-Vasquez

Wambui G. Gichuri

Task Team Leader: Charles Delfieux

3

MEXICO

Oaxaca Water and Sanitation Sector Modernization Operation

Table of Contents

I. STRATEGIC CONTEXT ................................................................................................................................... 10

A. Country and State Context .............................................................................................................................. 10

B. Sectoral and Institutional Context .................................................................................................................. 11

C. Relationship to the CPS ................................................................................................................................... 12

D. Structure of the Operation and Rationale for Use of Instrument ................................................................... 13

II. PROGRAM DESCRIPTION ............................................................................................................................. 14

A. The State’s WSS sector program..................................................................................................................... 14

B. Scope of the Program ..................................................................................................................................... 16

C. Program Activities .......................................................................................................................................... 18

D. TA Component Activities ................................................................................................................................. 20

E. Costs, Financing and Beneficiaries .................................................................................................................. 20

F. Program Development Objective .................................................................................................................... 21

G. Program Key Results and Disbursement Linked Indicators ............................................................................. 21

III. PROGRAM IMPLEMENTATION ..................................................................................................................... 22

A. Institutional and Implementation Arrangements ........................................................................................... 22

B. Results Monitoring and Evaluation ................................................................................................................ 23

C. Disbursement Arrangements and Verification Protocols ............................................................................... 24

IV. ASSESSMENT SUMMARY ......................................................................................................................... 25

A. Technical ......................................................................................................................................................... 25

B. Fiduciary ......................................................................................................................................................... 26

C. Environmental and Social ............................................................................................................................... 28

D. Fraud & Anti-Corruption Institutional Capacity Assessment .......................................................................... 30

E. Integrated Risk Assessment Summary ............................................................................................................ 31

F. Program Action Plan ....................................................................................................................................... 32

Annex 1: Detailed Program Description .................................................................................................................. 33

Annex 2: Results Framework and Monitoring ......................................................................................................... 44

4

Annex 3: Disbursement-Linked Indicators, Disbursement Arrangements and Verification Protocols ..................... 47

Annex 4: Summary Technical Assessment .............................................................................................................. 56

Annex 5: Summary Fiduciary Systems Assessment ................................................................................................. 71

Annex 6: Summary Environmental and Social Systems Assessment ...................................................................... 82

Annex 7: Integrated Risk Assessment ...................................................................................................................... 89

Annex 8: Program Action Plan ................................................................................................................................. 93

Annex 9: Technical Assistance Component Implementation Arrangements ........................................................... 97

Annex 10: Implementation Support Plan .............................................................................................................. 103

Annex 11: Map ...................................................................................................................................................... 105

5

PAD DATA SHEET

Mexico

Oaxaca Water and Sanitation Sector Modernization Operation


Latin America and the Caribbean Region

Water Supply and Sanitation Unit

.

Basic Information

Date: XXX 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:

Q2 CY14

12/31/19

Q2 CY14 End Date: 06/30/19

.

Operation Financing Data

[ X ]

[ ]

[ ]

Loan

Credit

Grant

Term:

IBRD Flexible Loan in the amount of USD 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 February 15 and August 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.

6

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

US$ 35

Financing Gap :

.

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: [email protected]

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

Oaxaca

Telephone No.: Email: [email protected]

Contact: Ricardo Canavati Title: Subdirector de Planeación de BANOBRAS

Telephone No.: (+52) 55 5270 1200 Email: [email protected]

.

Expected Disbursements (in USD 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

.

7

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 the improvement of 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 State of Oaxaca


Operational Manual of the MAS Oaxaca

Operation No Effectiveness N/A


Prepare and publish the Operational Manual of the MAS Oaxaca Operation satisfactory to the Bank.


Implementation Agreements No Effectiveness N/A


Sign the Implementation Agreements between SEFIN and the two executing agencies CEA and SAPAO.

8


Independent Verification Agent of the Program’s

results No 31/12/2014 N/A


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 UPI

Abel Lopez Infrastructure Specialist

LCSTR

Alexandra Ortiz Sector Leader

LCSSD

Blanca Lopez-Alascio Junior Professional Associate

LCSWS

Charles Delfieux Water and Sanitation Specialist Task Team Leader LCSWS

David Michaud Sr Water and Sanitation

Specialist

ECSUW

Diomedes Berroa Lead Specialist

OPSOR

Dmitri Gourfinkel Financial Management

Specialist

LCSFM

Elizabeth Sanchez Program Assistant

LCSWS

Fabiola Altimari Sr Counsel

LEGLE

Gabriel Penaloza Procurement Specialist

LCSPT

Harold Bedoya Country Operations Adviser

LCC1C

Irina Luca Lead Procurement Specialist

LCSPT

Jozef Draaisma Sr Country Economist

LCSPE

Jorge Luis Alva-Luperdi Sr Counsel

LEGES

Lisa Bhansali Regional Adviser for

Governance/Anti-corruption

LCSOS

Luis de la Plaza Lead Financial Officer

FABBK

Maria Elena Garcia Mora Social Development Specialist

LCSDE

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Martin Gambrill Lead Water and Sanitation

Specialist

LCSWS

Martin Lenihan Sr Social Development

Specialist

LCSSO

Robert Montgomery Lead Environmental Specialist

LCSEN

Samantha Fien-Helfman Junior Professional Associate

LCSOS

Ventura Bengoechea Lead Water and Sanitation

Specialist Peer reviewer AFTU2

Victor Ordonez Sr Finance Officer

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

LCSFM

Non Bank Staff

Name Title Office Phone 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

10

MEXICO

OAXACA WATER AND SANITATION SECTOR MODERNIZATION OPERATION


I. STRATEGIC CONTEXT

A. Country and State Context

1. Mexico is experiencing solid economic growth but inequality remains a challenge. Although Mexico has made significant economic and social progress over the last two decades,

poverty levels have increased 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 such as Oaxaca, Chiapas and Guerrero

remain as poor as they were in the early 1990s. The poverty and economic gap between the top

and the worst performing States has widened notably over the past two decades. Poverty rates

also reflect regional inequalities. In 2012, extreme poverty ranged from 2.4 percent in Nuevo

Leon and 2.5 percent in the Federal District, to 32.2 percent in Chiapas, 31.7 percent in Guerrero

and 23.3 percent in Oaxaca.

2. Oaxaca ranks among the poorest States in Mexico and faces a complex social

environment. Out of Mexico’s 32 States, Oaxaca is the third most economically marginalized in

the country. In 2012, the State's GDP per capita2 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. 62 percent of its 3.8 million inhabitants live below the

national poverty line and 23 percent below the extreme poverty line. While Oaxaca has been

moving in the last 20 years from the poorest State to the third poorest ahead of Chiapas and

Guerrero, its development gap with the most advanced States has been constantly increasing over

the same period as reflected by the Shared Prosperity Convergence Index3. Oaxaca is also known

for tense social dynamics, including recurrent protests that obstruct the Government’s normal

functioning.

3. The Bank has been supporting the reform agenda for inclusive growth in Oaxaca

through a strategic programmatic partnership since 2011. The Bank and the Government of

Oaxaca (GoO) 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, structured around four areas: (i) public sector modernization; (ii) human

development; (iii) finance and private sector; and (iv) sustainable development. After two years

of implementation, the MoU has proven to be a successful tool for supporting a reform agenda

for inclusive growth in Oaxaca and for modernizing the State’s public institutions and policies.

1 National Council for Evaluation of Social Development Policy (CONEVAL), 2012 2 Mexican Institute for Competitiveness (IMCO), State Competitiveness Index, 2012 3 Developed by the World Bank

11

B. Sectoral and Institutional Context

4. 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 sector4, 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 of some of the State’s

water supply systems, 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 (ADOSAPACO5) whose legal status recently changed to become

an autonomous State utility (SAPAO6

) and which serves 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 areas7,

municipal agencies or user committees operate the water systems in 10,000 highly scattered

localities8 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. Access to WSS services is among the lowest of Mexico. The State of Oaxaca has the

third lowest drinking water coverage (79 percent)9 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 operational10

.

There is no strategic planning for the development of access to sanitation services, in terms of

institutional organization, selection of technologies, and financing policy.

6. 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.

4 Team analysis of the sector financing (2009-2012)

5 Administración Directa de Obras y Servicios de Agua Potable y Alcantarillado de la Ciudad de Oaxaca 6 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 State department 7 Defined as localities of 2,500 people or less

8 Oaxaca has 570 municipalities representing 23% of the total number of municipalities in the country

9 CONAGUA, 2013 10 State Water Commission, 2013

12

7. Financing of WSS service operations is largely subsidized, leading to political

interference and further affecting the performance of the service providers. The combination

of unprofessional management, lack of efficiency, low tariffs11

, and collection rates, leads 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 federal and state

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, through its WSS sector program, 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 prepared 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. Alignment of the Operation with the federal Government’s priorities and the Mexico

CPS. The Operation is aligned with the Government of Mexico’s priorities, as laid out in the

2013-18 National Development Plan, of achieving greater inclusiveness by reducing 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

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)

presented in December 2013 that prominently features water and subnational engagement. The

Operation would support two of the four proposed 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. Poverty and shared prosperity. The Operation is aligned with the Bank’s twin goals of

ending extreme poverty by 2030 and promoting shared prosperity of the poorest 40 percent of

Mexicans. The Operation is implemented in the third most economically marginalized State in

Mexico, where in 2012, the GDP per capita was estimated to represent 44 percent of the national

average and 62 percent of its population lived below the national poverty line. In the 18

secondary municipalities that will benefit from direct interventions under the Program, 58

percent of the population lives below the national poverty line13

and are part of the 46 percent

bottom segment of the country’s population in terms of poverty level14

. 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. The impacts of improved water services on welfare are multi-faceted and

may be indirect; however, by providing better access to improved water services to poor

households, benefits – from the easily identifiable and quantifiable (coping costs avoided, time

saved) to the more intangible and difficult to measure (living standards, health, well-being) – can

be substantially increased.

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

Supply and Sanitation Sector Modernization Operation (MAS Oaxaca15

), 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. This PAD presents the activities of the Operation to be financed

through the PforR and IPF instruments, as well as the distinct implementation arrangements and

Anti-Corruption Guidelines (ACGs) applying to each financial instrument, as discussed and

agreed with the GoO. The use of both instruments complies with the requirements of OP/BP

9.00 and OP/BP 10.00 respectively.

13

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. 14

National poverty rate in 2010. 15 Modernización del sector Agua potable y Saneamiento de Oaxaca (MAS Oaxaca)

14

14. Rationale for use of a Program for Results. The PforR is seen as 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. In addition, the use of a

PforR instrument will provide the opportunity to develop a model of results-based financing for

the WSS sector, that CONAGUA is interested in introducing on a larger scale. The use of a

PforR will allow the Bank team to focus its implementation support on the enhancement of the

performance and efficiency of the State WSS program and on strategic assistance to GoO.

15. Rationale for use of a Technical Assistance Component following IPF policies. The

executing agencies of the Program have the procurement systems in place to contract TA and

have some experience in doing so. However, two key factors limit their ability to undertake the

identified TA activities through their own systems: (i) the Program’s procurement systems do

not allow multi-annual TA, which would prevent the necessary continuity in the strategic support

needed to accompany the modernization process throughout the duration of the Program; and (ii)

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. These

two reasons have led GoO to include a TA Component which follows IPF policies within the

Operation, as this will allow them to: (i) address the systemic constraints that prevent multi-

annual TA contracts; and (ii) 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 prepared a Strategic Plan16

for the

WSS sector as part of its State Development Plan17 covering 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; 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,

16 Plan Estrategico Sectorial 17 Plan Estatal de Desarrollo

15

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

CONAGUA federal programs (APAZU, PROSSAPYS, PROTAR), CDI federal program

(PIBAI), SHCP’s federal programs, and GoO’s own financing program.

Table 1: Main Financing Streams of GoO’s Strategic Plan

Financing of the

expenditure program

for GoO’s Strategic Plan

(US$ million)

Respective contribution of the main financing streams18

State

financing

program

SHCP

program

CONAGUA

Programs

CDI

program

APAZU PROTAR PROSSAPYS PIBAI

Federal financing 360.8

4% 50% 16% 4% 14% 7% State financing 246.4

Municipal financing 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,

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

18

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

16

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 GoO would not otherwise necessarily address without Bank 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 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 proposed scope has been delineated in such a way that it complements the

features of other federal programs currently under implementation in Oaxaca. Given the limited

funds available under the Bank Operation, it was judged most strategic to use them 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 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

area. In the secondary towns outside the Oaxaca Metropolitan Area, activities will focus on the

water utilities of (i) the largest State’s secondary towns, whose population is above 15,000

habitants 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 Oaxaca19

).

19

Modernización del sector Agua y Saneamiento

17

Table 2: Program Scope

Oaxaca WSS sector program

Main financing streams of the Oaxaca WSS sector program

State

financing

program

SHCP

program

CONAGUA

Programs

CDI

program


Modernization of the sector institutional

framework

Str

ateg

ic P

lan

fo

r th

e W

SS

Sec

tor

Expanding access to WSS services in

urban areas

Improving water service quality and

financial sustainability of utilities20

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. Contribution of the Program to access to water supply services. While a high percentage

of urban households in the selected municipalities are nominally connected to a water supply

network, this does not necessarily translate into receiving reliable drinking water: a large

majority of users 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 affects disproportionately the poorest 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 utilities21

. Given the above, although the Program interventions will nominally focus

on the quality of the urban water services provided, given the grave state of existing services, the

Program will improve de facto access to reliable urban water supply for the beneficiary

population that currently have the infrastructure but do not have the associated service.

24. 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

20 Includes utilities of the Oaxaca Metropolitan Area and of secondary towns. 21 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)

18

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 PROSSAPYS22

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

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

25. Program activities23

. Through 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.

a. 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 law24

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 possible approval of the law by the State

Congress are however not a pre-requisite for the achievement of objectives under the other

Results Areas.

22

Financed by the Inter-American Development Bank 23

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. 24

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

19

b. 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 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.

c. 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 towns25

, located outside of the Oaxaca Metropolitan Area. The selected

secondary towns are made up of those with a population above 15,000 habitants 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.

d. 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.

25

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

20

D. TA Component Activities

26. 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 through the contracting of a

professional operator/consultancy firm to improve the planning of activities, to review the

quality of bidding documents, 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 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

27. 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 TA

component will follow IPF policies. The table hereafter summarizes the financing of the MAS

Oaxaca Operation.

28. 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.

21

Table 3: Financing of the MAS Oaxaca Operation

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 M - 4.5 M

2. Improvement of water services in Oaxaca

Metropolitan Area 8.5 M 8.5 M 17 M

3. Improvement of water services in secondary

towns 30 M 30 M 60 M

4. Improvement of WSS information in rural

areas 2 M - 2 M

TA Component 10 M - 10 M

Total (US$) 55 M 38.5 M 93.5 M

F. Program Development Objective

29. 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 the improvement of the quality and sustainability of

water supply service in selected urban areas.

G. Program Key Results and Disbursement Linked Indicators

30. 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.

31. 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 all amounts 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.

22

III. PROGRAM IMPLEMENTATION

A. Institutional and Implementation Arrangements

32. 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 loan26

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

be implemented in various Mexican cities27

. Finally, BANOBRAS is also the fiduciary agent of

two Bank-financed operations28

.

33. 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 can 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.

34. 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.

26“ Decentralized Infrastructure Reform and Development Loan Project” (P080149), 2004 27 “Urban Transport Transformation Project” (P107159), 2010 28 “Sustainable Transport and Air Quality” (P114012) and “Tertiary Education Student Assistance II” (P127557)

23

35. 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.

36. 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.

37. 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.

38. 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

39. Monitoring and Evaluation arrangements. The Monitoring and Evaluation (M&E)

system of Oaxaca’s WSS sector is regarded as weak due to a lack of measurement tools and of

institutional culture for undertaking M&E. The Operation recognizes the issue and strengthening

M&E is embedded into its design: (i) The installation of measurement tools needed to monitor

the improvement of service quality and sustainability expected under Result Areas 2 and 3, as

well as capacity-building to use them are part of the Program’s activities; (ii) Institutional

capacity to monitor the results achieved under Result Areas 2, 3 and 4, and to consolidate the

information, will be further strengthened 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

24

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

40. 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

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 PforR financing, which is US$ 45 million). 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 the closing date stated in the Loan

Agreement.

41. 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 review missions, and

for disbursement purposes, the Bank will make the final decision on whether DLIs have been

achieved, as per BP 9.00.

42. Disbursement arrangements of the Technical Assistance 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.

25

IV. ASSESSMENT SUMMARY

A. Technical

43. 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 certain capacity constraints in Oaxaca but embraces the

opportunity to have a significant development impact under a high risk / high reward Operation.

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.

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 intervention of the Program will be concentrated in selected geographic areas

of the urban population segments, 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.

44. The Program’s approach and design are also aligned with the following strategic

orientation that the incoming CONAGUA administration is now 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.

45. 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.

26

46. Program preparedness. The risk of delay in the implementation of the MAS Oaxaca

Operation during the first year is deemed moderate. A first set of activities proposed to be

financed by the APAZU in 2014 supporting the objectives of Results Areas 2 and 3 of the

Program will be executed this year. In the case of the Results Area 2, the above set of activities

include the preparation of the majority of the bidding documents corresponding to the activities

to be executed in the selected sector during the subsequent years of the Program. In the case of

the Results Area 3, the preparation of the programs of interventions of immediate impacts in

2014 will include the preparation of the bidding documents for 2015. The preparation of the

bidding documents for the subsequent years will be supported by the TA Component. 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. 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 risk that the

effectiveness conditions corresponding to legal conditions and to the publication of the final

version of the Operational Manual delay the implementation of the Program is deemed low.

47. 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.

48. 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. Sensitivity and risk analyses show a robust Operation with high

probability of yielding positive economic returns. From a financial point of view, results show

that only when tariff structure is changed and tariff levels are increased the Program is

financially viable.

B. Fiduciary

49. 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

27

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 SAPAO29

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.

50. 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 identified as the default method. The agencies in charge of procurement

under the Program, CEA and SAPAO have reasonable capacity built on their historic experience

of conducting similar programs consisting mostly 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, and (c) contract implementation issues that increase the transactions 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.

51. 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

29

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

28

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

52. Environmental and Social Systems Assessment. An Environmental and Social Systems

Assessment (ESSA) was prepared according to OP 9.00. 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 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 environmental and social management system –

through changes in the Program design, the Program Action Plan (PAP) and activities under the

TA Component – were presented during the consultation. The ESSA has been updated to reflect

recommendations from the consultations and the final version will be re-disclosed in the GoO’s

website and in the World Bank’s Infoshop. See Annex 6 for details on the ESSA and the

consultations, and Annex 8 for environmental and social aspects of the Program Action Plan.

53. Environmental aspects under the Program. The potential negative environmental

impacts associated with the Program are low or moderate and will be limited to the civil works

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, as defined in OP 9.00, and the

CEA and SAPAO environmental and social management systems will screen Program sub-

projects 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 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) 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 risks; and (ii) improving

the institutional coordination between CEA and SAPAO with the responsible environmental

regulatory institutions, especially with regard to environmental permitting. The CEA and

29

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 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.

54. 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. However, because social benefits outweigh these risks,

and appropriate mitigation measures have been agreed upon with the GoO, this Program

provides a great 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.

Indigenous people count as an important group of beneficiaries of the Program as they are being

present in all of the zones of direct intervention - with 5 of the beneficiary municipalities having

a population that is over 40% indigenous, and an additional 8 whose population is over 12%

indigenous - albeit in urban areas where indigenous languages and community structures do not

persist, cultural adaptations to service delivery are not necessary. Otherwise, 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 ESMM30

mandated under the PAP; (c) a pilot initiative to providing

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 communities in urban areas; (ii) Poverty and inequality. The Operation

is providing support to the water sector in a state where GDP per capita is estimated to represent

44 percent of the national average. Furthermore, in the 18 secondary municipalities that will

benefit from direct interventions under the Program, 58 percent of the population lives below the

national poverty line31

and are part of the 46 percent bottom segment of the country’s population

in terms of poverty level32

. 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 an 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

30

Environmental and Social Management Manual (ESMM) 31

Based on most recent data on poverty rate available at municipality level (CONEVAL, 2010). 32

National poverty rate in 2010.

30

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 normally acquired through voluntary donations. However, there are legacy issues

surrounding the inadequate documentation of these transfers in the past. 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.

55. Environmental and Social Aspects under the Technical Assistance Component. The

Environmental Assessment OP/BP 4.01 and Indigenous Peoples OP/BP 4.10 policies are

triggered related to the TA Component following IPF policies. 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 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

56. 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 faculty to refer cases

to the Office of the Attorney General’s Delegate in the State of Oaxaca. The Technical,

Fiduciary, and Environmental and Social Assessments include a F/C analysis which provide

greater details.

57. 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 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 PAP.

31

58. 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.

E. Integrated Risk Assessment Summary

59. Integrated Risk Assessment Summary. The overall risk rating of the Operation is

deemed as “High”. The detailed risk assessment and proposed mitigation measures are provided

in Annex 7. Table 4: Risk ratings

Risk Rating

Country * Moderate

Stakeholder * High

Technical High

Fiduciary Substantial

Environmental and Social Substantial

Disbursement Linked Indicator High

Other Substantial

Overall Risk High

60. 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

32

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.

61. 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

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

62. 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.

33

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 2007-201233

) 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:

33

Bank team analysis of the water sector financing

34

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)

35

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

financing

Program

SHCP

program

CONAGUA

programs

CDI

program


Expand access to WSS services in

urban areas

Improve water service quality and

financial sustainability of utilities

Increase wastewater treatment

coverage

Expand 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. A complete note presenting the vision is

presented in the Technical Annex.

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 Oaxaca34

). 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.

34

Modernización del sector Agua y Saneamiento

36

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

Congress35

; (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; (f) 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 USD 35,000 and USD 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.

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%

35

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

37

Volume

produced36

Volume

billed37

Physical

efficiency

Amount

billed38

Amount

collected39

Commercial

efficiency

Overall

efficiency

(m3) (m

3) (%) ($) ($) (%) (%)

2,008,383 925,058 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

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

36

Produced volume by wells and/or other interconnections with other aqueducts that enter the system 37

Billed volume of residential and non-residential users, including measured consumption and non-measured and

billed consumption (fixed rate) 38

Amount billed for water and sanitation services 39

Amount of revenue from water and sanitation services registered without considering transfers, fines, recharges,

connection rights or other income

38

operating in 18 selected secondary towns40

, located outside of the Oaxaca Metropolitan Area.

The selected secondary towns are made up of those with a population above 15,000 habitants

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


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

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

40

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

39

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)41

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.

41 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

coverage

Drainage

coverage

Institutional

model

Services

providedConnections

Estimated

population

served

Number of

employees

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

municipal utility

water +

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 Zaragoza74,825 17,646 94% 98% CEA water 20,526 71,841

62

4Heroica Ciudad de

Huajuapan de León53,043 12,841 88% 97%

autonomous

municipal utility

water +


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 utility

water +


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 +


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 +


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 utility

water +


19

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


1

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


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

40

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 USD 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, 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 activities will also finance activities pertaining

41

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 loan42

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 loan43

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,

preparing technical specifications and terms of reference, bidding, signing and managing

42

“ Decentralized Infrastructure Reform and Development Loan Project” (P080149), 2004 43

“Urban Transport Transformation Project” (P107159), 2010

42

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 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


will be signed with CEA during the first year of the Program in order to create incentives for

information improvement, legal autonomy and cost-recovery. The two standard Results

43

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

Sta

te

SEFIN

channels and allocates Program funds44 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



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

Oa

xaca

Met

ropo

lita

n

Are

a

SAPAO

executes some

Program activities

reports Program



SEFIN

executes Program

activities

reports Program



SEFIN

- -

Sec

on

da

ry T

ow

ns

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

-

44

Made up of State own resources, loan funds received from BANOBRAS (advances and result-based

disbursements), and APAZU funds received from CONAGUA

44

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 the improvement of the quality and sustainability of water supply service in selected urban areas

PDO Level Results Indicators

Co

re

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

prepared45

- - -

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-

ized46

-

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

sector47 in

place and

being used

-

PDO Indicator 2:

People in urban areas provided with

sustainable and improved water service

quality under the Program48

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

45 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 SAPAO law submitted to Congress. 46 Number of water utilities becoming legally autonomous (municipal, inter-municipal, State or privately-run) during the Program’s implementation. 47 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. 48 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.

45

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


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


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


Commercial efficiency in the selected

sector

% 49 49 55 70 90 90 Annual IVA report on

DLI 2-2 SAPAO


Percentage of samples tested complying

with bacteriological, residual chlorine,

iron, manganese, color parameters of the

drinking water norm in the selected

sector49

% 0 0 40 70 100 100 Annual

Report on water

quality testing SAPAO

Intermediate Results 3: Improvement of water services in provincial towns


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


Number of selected water utilities with

improved service continuity


IVA report on

DLI 3-2 CEA


Number of selected water utilities whose

service revenue is greater than their

operating costs


IVA report on

DLI 3-3 CEA

49 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.

46

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


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


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

47

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


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 - - - -


48

- Construction of the selected sector’s macro

distribution No -

Component 1:Yes

Component 2:Yes

Component 3:Yes

- - -


- 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


Percentage of localities in selected segment with

information integrated in SIASAR

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

49

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


State of Oaxaca

- SAPAO’s internal

regulation and

organizational manual

adopted and published in


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.

50

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.

51


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


calculation of commercial

efficiency prepared by SAPAO.

Evaluation of billing and revenue

records in the selected sector.


of water services in secondary

towns


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.

52


service quality


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;









equal to or exceeds the target.

Yes CEA AVI


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.


service sustainability


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


calculation of revenue from

services and of the operating

expenses of selected utilities,

prepared by CEA. Annual


to verify the proper operation of

commercial and accounting

systems.

53


of WSS information in rural

areas


information

Percentage of localities in

selected segment with

information integrated in

SIASAR

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


to verify the reliability of data in

at least 10% of localities surveyed

each year.

54

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


- 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.


compliance with each of the five

measures

Results Area 2. Improvement of water services

in Oaxaca Metropolitan Area


- 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.


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

55

- 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


Number of water utilities with an approved

program of interventions of immediate impact


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


Number of selected water utilities with improved

service continuity


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


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


Percentage of localities in selected segment with

information integrated in SIASAR


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

56

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

under a high risk / high reward Operation. 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 the: (i) 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 habitants 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.

57

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 with: (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

ow

led

ge

serv

ices

F

ina

nci

al

Ser

vic

es

Co

nv

en

ing

Ser

vic

e

s

58

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

amendments envisaged to the current WSS Sector law that was enacted in 1993 and whose last

amendment was approved in 2005, as well as some points not considered in the current 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

59

by the Bank and SAPAO given the appropriateness of the activities supported by the Program

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

realize 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 expenses50

. It is

anticipated the progress throughout the Program’s period of implementation will be non-linear

50

As per the definition given in the DLIs matrix

60

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, Huajuapan


Tlaxiaco, Tehuantepec, Salina Cruz, Huajuapan, Espinal, Ixtaltepec, Ocotlan,

Miahuatlan, Zanatepec, Tuxtepec


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 habitants will start in 2015. The Result Framework of the

Program reflects this timeframe.

http://www.siasar.org/

61

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

62

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

63

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 transfers51

.

51

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

64

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%

65

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.

66

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. 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

EJECUTOR

TOTAL FEDERAL

CEA TOTAL MUNICIPAL TOTAL

ADOSAPACO 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%

SINFRA

ESTATAL INVERSION SEGUN

EJECUTOR

67

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.

68

Figure 8: Results Chain of the MAS Oaxaca Operation

69

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 towns52

. The cost of these works was increased by 10.7percent53

to account

for the TA activities, which are crucial to attain the expected benefits of the whole Operation.

32. Cost benefit analysis54

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

100 percent subsidy granted by the Government of the State on the investment cost. Only

52

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. 53

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). 54

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.

70

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 USD )

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

recipient countries to take ownership of the reform process. All of these Bank’s strengths are

crucial for implementing this specific Program in Oaxaca.

71

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.

72

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 (SAPAO55

, 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 USD 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 SAPAO’s that has not been

involved in all the stages of the procurement process in particular under the Federal Law;

therefore 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.

55

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.

73

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

74

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

http://www.finanzasoaxaca.gob.mx/

75

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 as 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

http://www.compranet.gob.mx/

http://www.infopublica.oaxaca.gob.mx/

76

financial and budget reports in real time. All MAS Oaxaca Program’s supporting documentation

will be appropriately maintained to facilitate ex post reviews and 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

77

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, reason 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.

78

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

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.

79

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

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). here 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

80

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

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 specific FM and procurement risks are 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

81

procurement framework and CompraNet, both provided, free of charge, by the SFP to entities

that register as purchasing units in this procurement information system.

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.

44. The proposed actions to mitigate these risks are included in the Program’s PAP and are

consistent with the federal and state procurement systems contributing to their further

strengthening.

VI. IMPLEMENTATION SUPPORT

45. 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.

46. 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.

47. 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.

82

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 stakeholders56

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

56

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.

83

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 capita57

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 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 Index58

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.

57

Mexican Institute for Competitiveness (IMCO), State Competitiveness Index, 2012 58

Developed by the World Bank

84

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 line59

and are part of the

46 percent bottom segment of the country’s population in terms of poverty level60

.

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

well as the expected improvement in services will help mitigate these risks and will be specified

59

Based on most recent data on poverty rate available at municipality level (CONEVAL, 2010). 60

National poverty rate in 2010.

85

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

statewide women’s organization’s confirmed that investments to improve water quality and

86

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

nature; (c) a system for ex-ante evaluation of the social risks of sub-projects and stakeholder

87

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

community.

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

88

(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 Consultiva 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 will be re-disclosed in the GoO’s website and in the World Bank’s Infoshop.

89

Annex 7: Integrated Risk Assessment

MEXICO: Oaxaca WSS Sector Modernization Program

Stage: Appraisal

2. PROGRAM RISKS

2.1 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 that will

dedicate a large share of its implementation support to this task. 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 that currently tend to be directed to

infrastructure building rather than service improvement activities.

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.

90

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 complementing with its own resources

to face a potential shortage of flows.

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: Bank Stage: Preparation and

implementation Due Date : Status: On-going

91

2.2 Fiduciary Risk Rating: Substantial

Description :

Program implementation and coordination. Program

implementation could be jeopardized by the coordination

among several co-implementing entities.

Implementation at sub-national level. The State of Oaxaca is

not subject to compliance on rigorous fiduciary framework

established at the federal level, which includes, among others,

strong budgeting, accounting, treasury, internal controls, and

external audit arrangements. 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 would be also

agreed during appraisal as recommended 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, which should be addressed prior to Program’s effectiveness, was

prepared and agreed with the Client.

Resp: Bank Stage: Implementation Due Date : Status: On-going

2.3 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: Bank/SEFIN Stage: Implementation Due Date : Status: On-going

2.4 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

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

92

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

the baseline information for others.

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.

Resp: SEFIN / CEA/

SAPAO

Stage: Preparation /

Implementation Due Date : Status: On-going

2.5 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: Bank Stage: implementation Due Date : Status: On-going

3. OVERALL RISK RATING

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

93

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.

94

4

Prepare 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.

95

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/SAP

AO

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.

96

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.

97

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).

98

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

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

99

financial statements of the project will be subject to public disclosures. After loan effectiveness,

the following financial reports will be presented to the Bank:

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.

9. Supervision strategy. The supervision of the TA Component will review the implementation

of FM arrangements and FM performance, identify corrective actions if necessary, and monitor

fiduciary risks. It will take place on a semi-annual basis and include: (i) desk review of IFRs and

audit reports, following-up on any issues raised by auditors, as appropriate; (ii) participation in

TA Component supervision at least twice a year, which will look into the Operation of the TA

Component control systems and arrangements; (iii) updating the FM rating in the FM

Implementation Support and Status Report (FMISSR), as needed.

Disbursements

10. 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 arrangements61

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 The DA ceiling would be variable and based on a forecast of two

quarters of expenditure. The funds advanced to the DA would be

61

For details, see the Disbursement Letter and the “World Bank Disbursement Guidelines for Projects”.

100

documentation documented on quarterly basis.

Supporting documentation SOE62

.

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.

Table 23: Disbursement Table

Category

Amount of the TA

Allocated

(expressed in USD)

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

11. 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.

12. 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.

62 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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13. 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.

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.

14. 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).

15. Operating Costs. Small procurement may be undertaken for operational needs using

simplified methods acceptable to the Bank as detailed in the Operational Manual.

16. 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.

17. 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.

102

18. 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. 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


Public Expenditure Review of the Oaxaca

WSS Sector 100,000

Consulting


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

19. 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

20. 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

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Annex 11: Map

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