A Study On Financing Issues To Implement An IWRM Project in The Aguascalientes Valley

Manejo Sostenible del Agua Subterránea COMISION NACIONAL
Subdirección General Técnica

Gerencia del Programa de
DEL AGUA Modernización del Manejo del Agua
A Study on Financing Issues

to Implement an IWRM Project in the
Aguascalientes Valley
Informe No.
Informe No. 163
163
México, diciembre
México, diciembre de
de 2003
2003
Organización Meteorológica
Mundial
SUBDIRECCIÓN GENERAL TÉCNICA
COMISIÓN NACIONAL
Coordinación del Programa de
DEL AGUA Modernización del Manejo del Agua
A Study on Financing Issues to Implement an

IWRM Project in the Aguascalientes Valley
INFORME OMM/PROMMA No. 163
Organización Meteorológica Mundial

Consultores: Jeffrey Delmon (Reino Unido)
Pierre Teniere-Buchot (Francia)
Trac Nguyen (Francia)
Mundial
Diciembre 2003
COMISIÓN NACIONAL DEL AGUA COMISIÓN NACIONAL
DEL AGUA
LIC. CRISTÓBAL JAIME JÁQUEZ

Director General
ING. JOSÉ ANTONIO RODRÍGUEZ TIRADO

Coordinador de Asesores
ING. JOSÉ LUIS ADAME DE LEÓN

Subdirector General de Gerencias Regionales
ING. CÉSAR L. COLL CARABIAS

Subdirector General de Administración
DR. ALFONSO SALINAS RUÍZ

Subdirector General de Administración del Agua
ING. JESÚS CAMPOS LÓPEZ

Subdirector General de Infraestructura Hidráulica Urbana
ING. CÉSAR O. RAMOS VÁLDES

Subdirector General de Infraestructura Hidroagrícola
LIC. BLANCA ALICIA MENDOZA VERA

Subdirectora General Jurídica
ING. CÉSAR HERRERA TOLEDO

Subdirector General de Programación
DR. FELIPE I. ARREGUÍN CORTÉS

Subdirector General Técnico
LIC. RENÉ ESCÁRCEGA LEOS

Titular del Órgano Interno de Control
DR. VENANCIO TRUEBA LÓPEZ

Gerente del PROMMA
Subdirección General Técnica
ORGANIZACIÓN METEOROLÓGICA MUNDIAL
Mundial
Departamento de Cooperación Técnica (TCO)
Harouna Diallo, Director TCO
Cooperación Técnica para América del Norte, Centroamérica y el Caribe (NCAC)

Francisco Villalpando, Gerente de Programas NCAC
Unidad de Consultores OMM/PROMMA

José Alfredo Garza Ledesma
Preparación del Informe Final:

Jeffrey Delmon (Reino Unido)
Nguyen Quang Trac (Francia, Líder del equipo)
Pierre Ténière-Buchot (Francia)
Edición y Revisión Final:

Venancio Trueba (México)
José Alfredo Garza (México)
Acuerdo de Cooperación Técnica SEMARNAP / CNA – OMM

Programa de Trabajo PROMMA 2003 OMM – CNA
Préstamo BIRF No. 4050-ME
Banco Internacional de Reconstrucción y Fomento
NOTA
Las opiniones, conceptos y recomendaciones expresadas en el presente informe deberán ser consideradas como
aquellas del consultor o consultores y no necesariamente como las de la Organización Meteorológica Mundial.
Cualquier mención o referencia de productos en el presente informe no deberá ser considerada como un aval de los
mismos por parte de la Organización Meteorológica Mundial.
NOTE
The opinions, concepts and recommendations expressed in the present report should be considered as those of the
consultant(s) and are not necessarily those of the World Meteorological Organization.
Any mention or reference of products contained in the present report should not be construed as their indorsement by
the World Meteorological Organization.
Contents
1. Introduction...................................................................................................1
2. Main issues and proposals..........................................................................1
Annexes.................................................................................................................7
Annex 1 – Agenda and list of participants ..................................................................................... 9
Annex 2 – Summary of key meetings.......................................................................................... 11
Annex 3 – Documentation ........................................................................................................... 13
Annex 4 – Camdessus Panel Report recommendations which might apply to Aguascalientes
water financing project ................................................................................................................ 17
Annex 5 – Possible future appointments..................................................................................... 19
Annex 6 – Survey of the public-private partnership in the Mexican water market...................... 21
Annex 7 – On the future of an IWRM project in the Aguascalientes Valley ................................ 23
Annex 8 – Financing the IWRM project in Aguascalientes Valley............................................... 33
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1. Introduction
This mission has been organized in two parts :
- from 1 to 6 December 2003 in Aguascalientes, where all the shareholders of the

aquifer could be met ;
- from 6 to 14 December, with a partial time extension from 15 to 19 December, in
Mexico D.F. with appointments with the central administration of water policy-making
and financing, and with some representatives of private interests.
The precise agenda and the names and positions of the personalities who have been met are
given in Annex 1, and the summary of key meeting in Annex 2.
The documentation which has been used is indicated in Annex 3 with some summary and
comments for each of the documents.
The Study was carried out by three WMO consultants: Dr. Nguyen Quang Trac, Dr. Delmon and
Dr. Pierre Frédéric Ténière-Buchot, under the coordination and with the participation of Dr.
Venancio Trueba, as the PROMMA Project Manager.
The case of the Aguascalientes aquifer is exemplar because:
i) its depletion is tremendous (everybody agrees on this standpoint),

ii) the water management is shared by a municipal service (CCAPAMA) and a private
delegation (CAASA), with a obvious blockage to undertake a joined development in the
field of new infrastructure for water supply and sanitation.
The analysis of this situation has been already done in 2002 (see Annex 3) and an important
and comprehensive report (proyecto de manejo integrado y sostenible del agua en valle de
Aguascalientes) has been published by CNA in June 2002 (see Annex 3).
The purpose of the present report is not to repeat or update this analysis, which is
considered as well known, but to suggest tentative actions to merge with the world of real
achievements.
These proposals are supported by a legal approach which has been written down
simultaneously by Jeff DELMON (see this report in Annex 7).
2. Main issues and proposals
The State of Aguascalientes has a very good knowledge of its water problems thanks to three
water bodies: INAGUA, the State organisation, which also chairs the aquifer COTAS, CCAPAMA
for the City of Aguascalientes and CAASA, its private delegate.
The about 1 million people of the State are shared for less than 90% by the City of
Aguascalientes and for 10 to 12% by the rural areas.
OMM/PROMMA A Study on Financing Issues to Implement J. Delmon, T. Nguyen &

an IWRM Project in the Aguascalientes Valley P. Teniere-Buchot
2
From a financial point of view, no one can imagine that the relatively poor and limited rural population
could afford the cost to watering the urbanised area of Aguascalientes and would take part to the
rehabilitation of the potable water network and to the completion of the municipal sewers.
There are consequently two problems to be solved :
- the first one is mainly technical and sociological. It consists to reduce the importance of
the present agriculture, which is the most important cause of the aquifer depletion ; to
select the kind of cultures, which are less water-intensive (more crop per drop) ; to develop
innovations like the plasticulture (new techniques, new professionals, new products, new
markets… a lot of changes); to organise a social financial support to taking in charge the
farmers who want to stop their rather unproductive job (about 3/4 of the total consumption
of water by the actual agriculture produces less than 5% of the Global Local Revenue).
This program is politically delicate and touchy but financially low with a relative comparison
with the cost of the urban program to be undertaken.
- The second problem to be solved is to water the City of Aguascalientes (thanks to a

transfer from the water, which is presently used by the agriculture to the urban domestic
and industrial needs); to treat and recycle the used waters (for agricultural uses and
reinjection in the aquifer) ; to rehabilitate and reorganise the potable water network
(moving and concentration of the actual wells, building of a peripherical water feeder) and
to completing the sewerage network. All these projects are from a socio-political
standpoint relatively easy to achieve (with comparison with the rural part of the whole
program) but very costly.
In view to give a synthetic and caricature expression of the above considerations, 80% of the
financial needs directly concern the urban part, whilst 80% of the political difficulties are
addressed to the rural part of the water problem to be solved.
The global financing can be obtained directly by a priority given by the State and the municipality
of Aguascalientes to their respective budgets dedicated to new water infrastructures.
It can be complemented by an increase of the price paid for the water supply and the service of
sanitation, when CCAPAMA will decide to authorise it.
If this perquisite is not observed, no private financial input may be contractually demanded. This
very point seems to be a source of controversy, with the usual lack of transparency which, most
of the time, accompanies this kind of situation. Obviously, it is easier to discuss during a long
period from a fuzzy basis, than to evaluate precisely and immediately the rights and obligations
of each party from a clear and simple document…
The analysis of the present contract (1993, revised 1996) between the City of Aguascalientes
and CAASA, when it will be possible to examine it, will show that its content can quickly be
understood: a private input in new investments should be negotiated through an increase of the
water tariffs. If no increase, no further investment.
The reluctance of the municipality to adopt higher water tariffs, can however be understood
because Aguascalientes water rate is one of the highest of the Federal Republic. Nevertheless,
another consideration should be added: the average Mexican price of water is not observing the
urgent situation of the present scarcity of water on one hand and the extremely important
pollution of the water bodies, on the other had. The supposed high price of the water in

3
Aguascalientes is in fact at a very low price when comparing with the costs of international water
required quantity and quality patterns.
What would be an accepted affordable increase of the price of water during the next two decades
(+5% every year? +7% or +10%?) is a key point to be studied and decided. It summarises the
future of Aguascalientes. No increase for the tariff means no future for the City. Future has a cost.
An evaluation of the financial needs for a full water program, including the rural and the urban
parts is given in annex 5 and reported by the local press in annex 4.
The global amount of the program is 2 billion pesos (about 200 Million US $) with a share of 82%
of the urban part and 18% for the rural other one.
The theoretical duration of he program achievement should be ten years, in two phases of five
years each. The first phase (43% of the total) is mainly oriented to urban operations with the
recycling of urban treated used waters for agriculture uses and reinjection in the aquifer. An
interconnected water supply network should be built during this phase (peripheral feeder)
The second phase (57%) would complete the rehabilitation of the potable water and sewerage
municipal networks of Aguascalientes. It also would transfer the water of the Elias Calles
reservoir from an irrigation use to a municipal use.
The Aguascalientes project matches with the actual rules of the financing fund of
PROMAGUA/BANOBRAS (see Annex 4), which is dedicated to the modernisation of the water
management bodies with the preliminary there is a public-private partnership (which is rarely met
in Mexico:see an approximate record of examples in Annex 6).
PROMAGUA, which is a recent financial initiative, has not used its helping capacity for important
water infrastructures still yet.
Its scope of action is exclusively committed to urban/industrial operations. A specific solution

would have to be developed of the rural part of the Aguascalientes water program because
Banobras will not involve itself to develop it.
One suggestion should be that a simultaneous fideocomiso for the rural and agriculture
modernisation would be created with the participation of the partners of the urban operation
(Federal, State and municipal stakeholders, private operators, local commercial banks).As many
projects concern the transfer of water from the agriculture to urban uses or from treated
municipal used waters to the agriculture, the limit between the urban and the rural parts of the
Aguascalientes water program is rather artificial.
International water management rules for financing recommend the “integrated water resources
management “ approach (see Annex 7), which mixes surface and ground water resources ;
potable water and sanitation projects; urban, industrial and agro-rural operations. The present
Mexican water financing organisation is actually in full contradiction with this recommendations.
It is still project-oriented, with an old-fashioned clear separation between the type of project and
its usefulness for a specific isolated need. The Aguascalientes program offers a good transition
opportunity to completely reverse the present organisation and match with the new international
financial directions in favour of a sustainable development.

4
An isolated fideicomiso for rural and agriculture projects has about no chance to be developed. It
is too risky at a too low financial level (360 million pesos). Refunding is improbable and no
guarantee would be easily found. Within a 2 billion pesos global program, with the presence of
90% of urban/industrial water users, the stakes seem to be more attractive and feasible.
It however requires an important change in the financial management of the project, which is not
a consequence of a technical analysis but of a political will of good achievement. A suggestion
should be that an institutional thinking would be developed with the purpose of a coordination of
the various partners to be brought together (would he Secretariat for Finance of the State of
Aguascalientes assume this role, for example?) Financing a water project demands financial
skills, not only a water expertise or excellence.
Globally, as Annex 8 evokes it, the Aguascalientes 2 billion project for a water recovery should
be spread into three approximate equal parts :
- one should consist in the Promagua Banobras input, with a major share in subsidies,
complemented by some low rate loans from Banobras;
- a second part is the private business involvement, which is limited and conditioned by the
political capacity to increase the water tariffs an by the water users affordability to pay the
water bills. This remark is mitigated by the financial long range plan of the private partners.
Facilities should be offered to them so that they might borrow on 25 years what they have
to disburse during 10 years, for example.
- the third part is the support given by Federal, State and municipal Authorities. For example,
Promma 2-CNA should use an important part of its budget to facilitate, as a priority, the
Aguascalientes project, which could be considered as a pilot example of IWRM (integrated
water resources management) and as a support for the water sustainable development (a
water security plan for a depleted aquifer, which will be dried off in fifteen years).
What is spent today by the State and the municipality of Aguascalientes to balancing the actual
water operational expenses would need to be reconsidered because the new infrastructures
impact on their water budget. A transfer from excessive present operation cost (due to leakages
and low efficiency) to an investment support should be recommended.
The previous suggestions can be developed through various studies on financing, water
economy, tariffs etc…
That is not urgent and could be easily completed during the Aguascalientes achievement program.
What is urgent (the first semester of 2004?) is to bring together the eventual partners of such an
operation, which could be considered as a launching opportunity for Promagua (which is not used,
despite its name, for exclusive water project because an insufficient demand). Annex 5 gives a very
partial idea of what a kind of program of visits and meeting should look like to complement the
present mission and give to everyone a good knowledge on the Mexican water market perspectives.
Management by project, which is presently consistent with the observed Mexican approach, is
inadequate because it does not apply a long range (10 to 20 years long) water policy.
What kind of water policy is financially sustainable, with respect to the political will, the private
national partners capacity (including industrial operators, financiers and commercial banks) and
the water users affordability is the keystone of a water plan.

5
Projects are comparatively less important. They can be managed in the classical way when the
financing aspects are solved . They cannot when it is not.
The collective benefit of a shared information about the Federal, State and Municipal financial
possibilities of the current year should be tremendous. It will indicate the real priority ranking
given to water and sanitation. This information does not exist today.
Such an information would be not in contradiction with a strong competition between the private
industries and operators for each of the bids which are proposed for the project achievement.
A good water policy consists in investing the most possible useful money in he shortest possible
period. Not the contrary.
In conclusion, some cycle of permanent meetings between the water financing partners should
be organised for Aguascalientes as a first pilot project and extended to the other projects of the
Federal Republic.
What it is actually done :

6.examine the 1.bringing together the Aguascalientes
modifications to be 6 1 partners
decided and (public, private, COTAS etc…)
implement them
;repeat the process
2 2.examine the financial possibilities
for 2004
for 2005-2009
5 for 2009-2010
5.check the results of
the underway im-
plementations. Listen 3 3.debate and decide
to the opinion of the a plan to increase
COTAS-Inagua 4 the water tariff Implement
members in the short range
4.debate and decide financial
measures to reduce and
modernize the irrigation
What should be done :

6.change rules and 1.bringing together the water financial
staffs when necessary 6 1 partners
and repeat the (public, private, national, international, etc…)
process.
2
2.examine the financial possibilities
in the short and long range
5
3 3.decide the possible increase of tariffs for

water supply and sanitation
4
5.check the results
4.decide general financial
measures to reduce and
modernize the various waters, in
particular the irrigation use

Annexes
Annex 1 – Agenda and list of participants

Annex 2 – Summary of key meetings
Annex 3 – Documentation
Annex 4 – Camdessus Panel Report recommendations which might apply to
Aguascalientes water financing project
Annex 5 – Possible future appointments
Annex 6 – Survey of the public-private partnership in the Mexican water
market
Annex 7 – On the future of an IWRM project in the Aguascalientes Valley
Annex 8 – Financing the IWRM project in Aguascalientes Valley
9
Annex 1 – Agenda and list of participants
Monday 1, December 2003

13:00 Gerencia Estatal de la CNA
Ing. Martin MOLINA OCHOA
Revisión de la agenda de la misión del PROMMA-OMM
17 :00 Ing. Jorge Alberto CASTAŇEDA ALVARADO, INAGUA,
Presidente del COTAS
Presentación del propósito y resultados esperados de la misión
Tuesday 2, December
11 :00 Lic. Francisco SANCHEZ DE LIRA
Financiamiento de la Banca de Desarollo (BANOBRAS)
13 :00 SEDEC (Secretario of Economic Development)
Ing. Pedro González VILLALBAZO
Financiamiento del Sector Industrial
17:00 CCAPAMA
Ing. Roberto AMADOR MARTINEZ
Ing. Humberto BLANCARTE ALBARADO (CAASA)
Financiamiento al Subsector Publico-Urbano
Wednesday 3, December
10:00 INAGUA
6a Reunion ordinaria del Consejo Directivo
under the presidency of Mr. Felipe GONZALEZ GONZALEZ, Governador del Estado de Aguascalientes
12:30 CAASA
Ing. Humberto BLANCARTE ALVARADO
Ing. Marco PONZE
17:00 Secretaria de Obras Publicas
Comité de grietas, Grupo equilibrio del acuifero
Ing. Carlos LLAMAS HERNANDEZ
Dr. Mario ZERMENO DE LEON
Dra. Pauline SMEDLEY (British Geological Survey)
Investigación en flúor
Tuesday 4, December
10:00 Secretaria de Finanzas
C.P. Rodolfo MACIAS
Lic. Jose Alfredo MERCADO GARNICA
Lic. Alfredo GARDIA CARRANZA
Financiamiento del Gobernio del Estado
17:00 Universitad Autonoma de Aguascalientes
9a Reunion Ordinaria de COTAS
Ing. Jorge CASTANEDA ALVARADO
Dr. Guy FIPPS (Texas)
Friday 5, December
10:00 Secretaria de Agricultura
Ing. Roberto BONBENTRAN
Financiamiento de la Agricultura
12 :30 BANOBRAS
Lic. Francisco SANCHEZ DE LIRA
20 :00 Secretaria de Agricultura
Meeting with a group of plasticulture users
Financiamiento de la plasticultura
Saturday 6, Sunday 7, December :
Documentation and preparation of report
Mexico, D.F

10
Monday 8 et Tuesday 9, December

15:00 M. en I. Arturo JIMENEZ RAMON, Planeacion sistemas y control, S.A. de C.V.
Thursday 11, December
Synthesis with Venancio Trueba, Head of PROMMA
Friday 12, December
11:00 CNA, Subdireccion General de Infraestructura
Hidraulica Urbana – Unitad de Agua Potable y Saneamiento
Ing. Juan Luis CALDERON HINOJOSA (Banobras)
Lic. Eduardo GARCIA-LOPEZ LOAEZA
Subdirector de Desarollo de Proyectos
Financing water infrastructures
Saturday 13and Sunday 14, December
Report writing
Others appointments in relation with the mission
Monday 15, December
Ing. Nicolas MARISCAL.T.
Presidente de Consejo Grupo Marnhos
Wednesday 17,December
Dr. Juan Pedro ESCOBAR LATAPI
Director General ProAgua San Luis Potosi
List of CNA-PROMMA participants:
Dr Venancio TRUEBA LOPEZ, PROMMA coordinator
Quang-Trac NGUYEN (France), WMO consultant - Head of the mission

Pierre-Frédéric TENIERE-BUCHOT (France), WMO consultant
Jeffrey DELMON (United Kingdom), WMO consultant.

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Annex 2 – Summary of key meetings
1. Meetings with CNA, Aguascalientes with Martin Molina Ochoa
CNA in Aguascalientes was extremely helpful is arranging meetings and providing an

understanding of the political lay of the land. In particular they noted the number of different
entities that would be involved in the financing of this project and the importance of a single,
coordinated vision. Without this differing political interests could defeat anything we achieve.
They made it clear that, from their point of view, the project in Aguascalientes could be a pilot
project for PROMAGUA and the whole of the water sector in Mexico, and that the CNA is very
supportive. The dramatic physical evidence of the subsidence following the drop in the water
table will provide added incentive for the State and Federal Governments to support the
proposed investments.
2. Meetings with INAGUA with Mr. Jorge Alberto Castaneda Alvarado – President of
COTAS
Mr. Castaneda noted the difficult political situation given the upcoming elections (June 2004) and
the political difficulties that any suggestion of increased water tariffs or reduction in water rights
to farmers might raise. Any decisions are likely to require the agreement of the Presidente del
Municipale and the Congreso del Estado.
He raised the option of PROMAGUA and the possibility of obtaining 40% of the capital costs as
a grant. He warns however of the perception that any aid provided to the water sector in the city
of Aguascalientes might be perceived as aid to the private concessionaire, CAASA.
3. Meetings with BANOBRAS in Aguascalientes with Mr. Francisco Sanchez de Lira
We discussed the possibility of grant funding from PROMAGUA. He was of the opinion that
PROMAGUA had never financed anything and therefore PROMAGUA and BANOBRAS would
see Aguascalientes as a good opportunity to fulfill their mandate. BANOBRAS can also provide
other funding to the Municipality, the State and CAASA.
4. Meeting with SEDEC (State Ministry of Economic Development) with Pedro

Gonzalez Villalbazo
SEDEC helps industrial companies wanting to settle in Aguascalientes. The industrial users
have their own water and sanitation system, so SEDEC is not very interested in what we are
doing. We discussed the possibility of the industrials providing support or funding out of a social
responsibility obligation. He was not very convinced.
5. Meeting with CCAPAMA with Roberto Amador Martinez (and Humberto Blancarte
Alvarado of CAASA)
He sees CAASA having an obligation to build any new infrastructure, and sees no reason why
CCAPAMA should do anything to help the situation. He seems to think that the operating costs
that would be saved from the implementation of the capital expenditure would cover the cost of
servicing any debt. This seems extremely unlikely. He does not see any need for a tariff
increase. He indicated that there was no written concession agreement and so he could not give
us a copy. We have now found out that this is not true.

12
6. Meeting with CAASA with Humberto Blancarte Alvarado
After some discussion of the scope of the project, and the need to invest some 1.5 to 2 billion
Pesos, he became very interested in the project and indicated that CAASA may be able to cover
1/3 of the costs (subject to consent from Paris). He ducked the issue of giving us a copy of the
concession agreement and indicated that he would send over anything he had. We have not
seen anything yet.
7. Meeting with State Ministry of Finance with Rodolfo Macias, Jose Alfredo Mercado
Garnica and Alfredo Garcia Carranza
Our meeting was extremely positive. The Ministry is interested in helping. We discussed the
limitations on the Municipality and their credit risk, as well as the possibility of using a bond issue
to finance a part of the cost. We also discussed the possibility of the State providing funding and
what conditions would need to be satisfied before PROMAGUA could help. He noted that
BANOBRAS funding may be from the World Bank, which would be expensive. We also
discussed the possibility of increasing property taxes to help fund, though this will be politically
sensitive. He suggested that if we needed any further information or wanted to run ideas by
them, his team would be happy to help. We should contact M. Carranza in the first instance (he
has experience with infrastructure and speaks good English).
8. Meeting with the Ministry of Agriculture with Roberto Bonbentran
Is aware of the water problem, but intend to resolve it not with water management or reduced
use or improved technology, but rather by seeding clouds to increase rainfall. They have been
sold an idea by a Russian company. Trac made it very clear that this was not a technically viable
solution and they would look ridiculous if they actually tried it.
9. Meeting with BANOBRAS, Mexico with Edouardo Garcia Lopez Leaeza and the
CNA, Mexico with M. Juan Luis Calderon
PROMAGUA cannot lend to rural/agricultural projects. It is limited to water system to be

managed by the private sector. With the right guarantees, BANOBRAS would be willing to lend
to such a project.
Similarly, PROMAGUA does not support industrial projects. Industrial users will be expected to
obtain their own financing.
After discussing the basis for which PROMAGUA was created and its recent exploits, we
discussed the current lack of funding in PROMAGUA, but that Aguascalientes, in particular as
an example of a concession that does not work, would provide an ideal opportunity for
PROMAGUA and BANOBRAS to develop a concession that works and will act as an example
for projects throughout Mexico. This funding could be combined with funding from private
commercial banks and international financial organizations.
BANOBRAS indicated that they were interested in financing the project and would be willing to
manage the financing process.

13
Annex 3 – Documentation
• Proyecto de Manejo Integrado y Sostenible del Agua en el Valle de Aguascalientes,

CNA-PROMMA, junio de 2002.
This important and comprehensive report presents the actual water situation in the State of
Aguascalientes : very affected surface water bodies due to an intensive urban, industrial and
farming pollution, depleting groundwater, general concern about water scarcity in the near
future. This overexploitation should be stopped thanks to a reorientation of the water uses :
modernization of the agriculture (plasticulture instead of classic irrigation) interconnexions
between water supply networks, recycling of treated used waters. A financing evaluation is
given.
• Manejo sostenible del Agua Subterranea. Informe Final de misión. CPROMMA-2/202.

Pierre Ténière-Buchot, CNA-PROMMA-WMO, May 2002
This short study recommends a more integrated water policy (mixing together rural, industrial
and urban users of the water surface and groundwater simultaneous management, quantity and
quality objectives monitoring) It stresses the necessity to observe the Plan-Do-Check-Act
process to better manage the water resources. It underlines the importance of legal,
administrative and economic adapted tools with the purpose to modify the structure of water
uses (in particular : urban and rural water withdrawals). It recommends a higher level of public
participation in view to developing a sustainable water policy.
• Evaluation Socioeconomica del Progama de Inversiones en Agua Potable y

Alcantarillado 2001-2006 para la Ciudad de Aguascalientes (Perfil), Banobras CEPEP,
Diciembre 2001.
A very detailed report has been achieved by Banobras-CEPEP to calculate the needed
investment to reduce the water leakages, improve the water supply service an rehabilitate the
sanitation network. A concept of “social usefulness” has been used to select the priorities and
match with the financial possibilities. Four districts have been distinguished in the City of
Aguascalientes. The evaluated global investment would reach 506 million pesos (140 for the
wells, 11 for the reservoirs, 273 for the potable water network, 82 for the sewers). In view to
limiting the total investment to 339 million pesos, some projects, in particular the rehabilitation of
the sewers, have been pointed out as “socially inefficient”. Proposed investments are displayed
as follows : 80 for wells, 10 for reservoirs, 249 for the potable water network.
Although this program cut off is argued, the global needed investment (506 million) has been
taken into consideration in the integrated water plan.
• Programa para la Modernizacion de Organismos Operadores de Aguas, SEMARNAT,

CNA, BANOBRAS, diciembre 2002 –
• Terminos para la elaboración del Estudio de Diagnóstico y Planeación Integral de

Organismos Operadores de Agua Potable, Alcantarillado y Saneamiento, CNA Finfra 2,
Agosto 2001
This paper precises the methodological way to be observed to evaluate the water supply and
sanitation investment needs of a municipal project. It indicates the various technical, economical
(tariff oriented) indicators, which must be used to assess a water diagnosis about potable water

14
supply and sanitation. Financial criterias are omitted and supposed to be later developed by
Banobras (see previous comment about the Aguascalientes CEPEP study). Nevertheless, a
proposed model addressed to tariffs is developed, which constitutes a surprising approach: most
of the time tariffs result from financing decisions, not the contrary. General guidelines for
strategic planning, social appraisal, risk analysis and private participation are indicated.
• Estudio para la optimizacion de la Explotacion del acuifero del valle de Aguascalientes,

BURGEAP, Secretaria de Economica y de Finanzas, FASEP (Fondos de estudios y
ayuda al sector privado), febrero de 1998.
This technical comprehensive study out the groundwater policy of the State of Aguascalientes
has been commended by the French Ambassy. The State and Municipal Authorities of
Aguascalientes, CNA and the private delegate company, CAASA.
A general analysis about the surface and groundwater resources is given . Several scenarios on
the aquifer possible use are indicated thanks to the mathematical model MOSAIC.
Recommendations are suggested: technical changes oft the irrigation with a better water use
efficiency, modified culture choices in view to select less water consuming crops, and finally a
general reduction of the irrigated areas. Institutional changes are proposed to implement theses
objectives. Their achievement and the resulting impact on the aquifer should be followed up by a
specific aquifer observatory. The more than hundred wells within the City of Aguascalientes,
which are used to supply water should be moved and brought together in a more rational way
with the elimination of the less productive wells and when protection measures are difficult to be
completed.
• Al mercao bursátil, opción para financiar infraestructura hidráulica, José Guadalupe

TRUJILLO, CNA Vertientes, n° 90, 2003
Tlalnepantla, Edomex, primer municipio en colocar certificados en la Bolsa Mexicana de Valores
• 6a réunion ordinaria del Consejo Directivo de INAGUA, 3 de Diciembre 2003
This meting to the board of the Instituto del Agua del Estado de Aguascalientes gives the
opportunity to present a general information about the past year activities of the Institute. 67
works have been undertaken during 2003 for a total investment of 93,5 million pesos (31,3
coming from Federal programs and 62,2 from the State of Aguascalientes). Display of the public
works is the following : 33 for potable water, 20 for sewers and 3 for sanitation treatments, 11 for
studies and other achievements.
30% of the investment was dedicated to the municipality of Calvillo, 18% for Rincon de Romos
and 10% have a State-large impact ; the other 42% are spread , on the other municipalities,
including the City of Aguascalientes.
One third of the water works has been achieved during the 2003 period. Two thirds are
underway.
A lot of punctual actions for potable water (more than 3000) have been completed. A
communication program allows that more than 5000 people have visited treatment plants of the
State of Aguascalientes. Training courses have been organised for 42 professionals. Several
COTAS meetings have been held.

15
Projects for 2004 reach 125 million pesos (40% from Federal sources, 60% from the State).
They included 48 millions for the protection of the environnemnet, 49 million for sanitation
purposes and 28 million for potable water.
1. Las herramientas de participacion del sector privado en agua potable y alcantarillado

2. La importancia del marco regularorio en la prestacion de los servicios de agua potable,
alcantarillado y seneamiento
3. Sistemas tarifarios en servicios de agua potable, alcantarillado y seneamiento ; CNA
Banco Mundial, Monterrey, 26-28 de octubre de 1999, CNA et al, 2000.
These three published reports are the proceeding of a CNA-World Bank Seminar, which has
been held during three days in March 1999, in Monterrey. It is mainly addressed to the
participation of the private sector for water management. Mexican (Aguascalientes (Mexico D.F,
Cancun, eventually Hermosillo, Sonora) and Latin american examples (Lima, Perú; Buenos
Aires and Corrientes, Argentina; Santiago, Chile; Cuyaquil, Ecuador; Cartagena, Columbia)
have been presented from the legal and financial points of view. Industrial water groups of
Veolia (Vivendi, Generale des Eaux), Suez-Lyonnaise des Eaux, Degrémont, Aguas de
Barcelona, Azurix and Biwater have participed to this seminar. Various kinds of contracts :
B.O.T. (Build, Operate and Transfer), B.O.O.T. (Build, Own, Operate and Transfer), D.B.O.
(Design, Build, Operate) have been evaluated by World Bank, IDB, NADBANK, Lehman
Brothers officials with a special attention given to the risk analysis and the corresponding
guarantees.
A special volume is dedicated to tariffs considerations which are limited to municipal water
management with no mention about sanitation costs and the importance of the rural areas
burden, despites the role of subsidies would be strongly underlined.
• Apuntes para la Historia de la Infrastructura en mexico, Ignacio BERNAL, 65 aniversario de

Banobras, 1998.
This historic survey shows the role of Banobras for the water investments. About 700 water
reservoirs have been built for irrigation purposes between 1940 and 1970 (75% of the total
number of dams) A special effort (25% of the total aided investment) has been developed after
1970 to supply municipalities and urban areas with water, simultaneously with a tremendous
expansion of the housing programs. Sewerage, drainage and treatment of used waters has been
added more recently. Banobras has granted about 40% of the water municipal investment during
the 90s. Last years have been addressed to a partial privatisation of the water services, with a
relative limited success.
• Estado de Aguascalientes www.aguascalientes.gob.mx/sedec
General economic datas
• Water Projects. A commercial and contractual guide. Jeffrey DELMON, International Water
Law and Policies series, Kluwer Law International, 2001
B.O.T. (Build, Operate and Transfer) and other contracts. A legal survey
• Financing Water for All, World Panel on Financing Water Infrastructures, M.CAMDESSUS, J.
WINPENNY et al. GWP, WWC, WWF4, 2003 www.gwpforum.org ; www.worldwatercouncil.org

16
Other documents
• Projecto de Manejo Integrado y Sostenible del Agua en el Valle de Aguascaliantes,

CAN-PROMMA, Junio de 2002.
• Manejo Sostenible del Agua Subterránea – CPROMMA-2/202. Pierre Terriere-Burchot,

CNA-PROMMA-WRO, May 2002.
• Evaluacion Socioeconómica del Programa de Inversiones en Agua Potable y

Alcantarillado 2001-2006 para la Ciudad de Aguascaliantes (Perfil), Banobras CEPEP,
Diciembre 2001.
• Programa para la Modernizacion de Organismos Operadores de Agua, SEMARNAT,

CNA, BANOBRAS, Diciembre 2002. [Lineamientos PROMAGUA]
• Términos para la elaboración del Estúdio de Diagnóstico y Planeacióu Integral de

Organismos Operadores de Agua Potable, Alcantarillado y Saneamiento, CNA Finfra 2.
• Estúdio para la Optimizacion de la Explotacion del Acuisero del Valle de Aguascaliantes,

BURGEAP, Secretaria de Econimia y de Finanzas, FASEP (Fondes de Estúdios y ayuda
al sector privado), Febrero 1998.
• El mercado bursatil, apcióu para financier infraestructura hidráulica, José Guadalupe

TRUJILLO, CNA Vertientes, No. 90, 2003.
• 6a. Reunion Ordinária del Consejo Directivo de INAGUA, 3 de Diciembre 2003.
• Sistemas taritarios en servicios de agua potable, alcantarillado y seneamiento; CNA,

Banco Mundial, 26-28 de Octubre de 1999.
• Apuntes para la Historia de la Infraestructura en México, Ignacio BERNAL, 65 aniversaria

de Banobras, 1998.
• Estado de Aguascalientes: www.aguascalientes,gob.mx/sedec.
• Water Projects. A commercial and contractual guide, Jeffrey Delmon, International Water
Law and Policies Series, Kluwer Law International, 2001.
• Financing Water for All, World Panel on Financing Water Infrastructures, M. Camdessus,
J. Winpenny et al. GWP, WWC, WWF3, 2003. www.gwpforum.org;
www.worldwatercouncil.org.

17
Annex 4 – Camdessus Panel Report recommendations which might apply to

Aguascalientes water financing project
This report which has been endorsed by the World Band and the various other International
Financial Institutions in Washington DC, September 2003, is based on the two Water
Millennium Development Goals (reduction by the half of the World population who has not
access to potable water and who is not equipped with sanitation means still yet. These
objectives must be reached before 2015). A lot of recommendations are suggested. Some of
them apply directly to the Aguascalientes integrated water program:
- doubling the financial flows from any source in favour of water infrastructures (potable
water, sanitation, control irrigation, water resources protection)
- a decentralised sub-sovereign level must be encouraged to managing water, instead of

the present centralised level
- contracts for Private Sector Participation must be developed within the Integrated
Water Resources Managed projects
- promote a central agency1 to collect, publish and compare sub-sovereign’s financial and
management information (including benchmarking or key operating parameters). The
agency should encourage civil society2 to monitor whether the services received by the
community are consistent with the published reports. The panel recommends that a small
group of donors supports such an agency, using public and private sector expertise in
administrative, legal and financial areas.
- the Federal Government should encourage the prudent development of domestic

borrowing markets (fideocomiso) for sub-sovereigns in view to promoting local capital
markets and savings for water.
- local development banks should develop partial credit guarantees that effectively
lengthen the term of loans. A partial risk guarantee should complement it by covering
other repayment risks. Local pension funds and other institutional investors are invited
to participate to these initiatives with the support of the Multilateral Financing Institutions.
- the concept of "full cost recovery" for water tariffs must be replaced by the reasonable and
more effective notion of sustainable cost recovery. A tariff based on such a notion includes
the solidarity aspects (farmers, poverty alleviation) with a balanced system of subsidies
- funding for capacity development in water-related institutions at government, municipal

and community levels should be a high priority for the use of Official Development
Assistance and Multilateral Financial Institutions funds.
- the panel recommends the creation of a revolving Fund or funds consisting of grant money
to finance the preparation and structuring costs of complex projects (including private
sector participation and other innovative structures). The Fund would be used to cover the
legal, financial and technical advisory costs of the preparation and structuring of projects
up to and including the tendering and negotiation phases.
1
Banobras
2
COTAS
19
Annex 5 – Possible future appointments
GAFI (Grupo de Asesores para el Fomento de Infrastructuras)
BANOBRAS
LIC. ARTURO OLVERA VEGA
Director de desarrollo de proyectos
Banobras
Javier Barro Sierra # 515
Col. Santa fe
Tel. Conmutador 52 70 12 00
CAASA
Remy USQUIN
Tomas Alva Edison 176
Col. San Rafael; Mexico DF
(01 55) 57 22 77 00
VEOLIA - Générale des Eaux

Charles-Louis de MAUD'HUI
Guy VIDAL
52, rue d'Anjou, 75008 PARIS
01.49.24.32.77 (visited on 6 January 2004)
SUEZ
Charles CHAUMIN
16, rue de la Ville l'Evèque, 75008 PARIS
01.40.06.64.00 (visited on 9 January 2004)
DEXIA
Daniel CAILLE – PARIS (visited on 13 February 2004)
Alejandro VALENZUELA
David SUAREZ
WB – World Bank
IBDR – International Bank for Development and Reconstruction
IFC – International Finance Corporation

21
Annex 6 – Survey of the public-private partnership

in the Mexican water market
Mexico Veolia-Vivendi Suez Degrémont Water Works & Sewage Biwater Autres
Gen. des Eaux Lyon. Des CAR Ltd, Toronto, Can. & abandonnés
Eaux Wallingford software,UK
Azurix
D.F. Contrato de Lehman Bros.
servicio 97,98
Aguascalientes, Ags "concession"
integral 93,96
Cancùn, Qro Contrato de
servicio ?
Saltillo, Coa AGBAR
Barcelona
Monterrey, N.L. Studies
Puerto Vallarta, Jal. BOOT
PTAR
San Luis Potosi, SLP BOT Marhnos
PTAR
Puebla, Pue. ?
Leon, Gua. PTAR ?
Ttalnepantla, Mex Fideocomiso
industrials
Ciudad Juarez, Chih. Contrato de
servicio PTAR
Navojoa, Son. Hermosillo, ?
Sonora Ciudad Obregon, Son. PROTEXA
PTAR ?

23
Annex 7 – On the future of an IWRM project in the Aguascalientes Valley
The following note covers the information gathered and ideas generated by this consultant
during the mission to Aguascalientes and Mexico City from 30 November to 14 December 2003
of the members of the field study missions: Venancio Trueba (CNA), Jeff Delmon (United
Kingdom), Trac Nguyen Quang (France) and Pierre-Fréderic Ténière-Buchot (France).
The investments and capital works specific to the City of Aguascalientes and identified in the
Report can be divided into two main packages: (1) the implementation of mechanisms to
encourage more efficient water use and (2) capital expenditure to improve the current
infrastructure and provide new infrastructure for the delivery of water and sanitation services to
end-users in a manner intended to help manage the current ground water crisis.
This note is intended to apply to the numerous Mexican aquifers that are in crisis. For ease of
reference, it will use the situation in the city of Aguascalientes as a test case and will therefore
make reference to the facts and terminology specific to Aguascalientes. This focus on
Aguascalientes should not distract from some of the key issues that need to be addressed in the
Mexican water and sanitation sector generally, such as regulation, transparency, efficiency and
resources. These issues will be addressed briefly in section 3 of this note.
Throughout this note, proposals for further research by PROMMA II are included in bold.
1. Encouraging more efficient water use
The aquifers in and around Aguascalientes are in a critical state of deficit. The current situation
is well documented in the Report, which identifies the critical need for mechanisms to be
implemented to encourage recharge of the aquifers and reduce abstraction of water from these
aquifers. The following is a discussion of the key mechanisms available to assist in this process.
a. Increase of water tariffs for treated water in Aguascalientes to tie them firmly to the value
of water, thereby reducing use.
The overuse of ground water and the wasteful use and management of potable water arises
partly from the very low tariffs charged for water and sanitation services in Aguascalientes. This
results in a diminished value associated with water. An increase in the tariffs charged for water
and sanitation would create an added incentive for a decrease in water use and an increased
awareness of the economic value of water.
This issue is discussed further below, as it would also provide needed funding for the water and
sanitation infrastructure investments so badly needed in Aguascalientes. The increase of tariffs
is, however, a politically sensitive issue.
As discussed below, PROMMA II may need to do further research into the political viability of
such increases in tariffs and the levels of increase that would be needed to achieve the incentive
and funding goals indicated.
b. Increase the fees paid for abstraction of raw water by those holding concessions.
Concessions for the abstraction of water are obtained from the Comision Nacional del Agua
(“CNA”). The fees paid by those holding concessions are set by the Federal Government
through the tax authority who sets the fees paid for water abstraction licenses. An increase in
such fees could reduce the use of ground water and encourage the efficient management of the
aquifer.
However, the current fee system for use of ground water is only nominally based on actual use,
since metering is rare and controls of volumes used uncommon. Therefore an increase in fees
may have little if any effect on usage. Also, the complex structure of subsidies paid to the

24
agricultural community to counterbalance any such cost of water may defeat the very purpose of
increasing water abstraction fees, since the agricultural community will not see a real increase in
costs associated with the abstraction of water and will not therefore be encouraged to reduce
abstraction.
PROMMA II may need to do further research into the political viability of this mechanism and the
extent to which fees would need to be increased to cause the desired reduction in abstraction.
c. Buy-back water rights from certain agricultural uses in order to reduce total abstraction.
Removal of water rights can be achieved by buying-back abstraction rights. This process may
involve buying the water rights attached to a given plot of land, or purchasing the land outright,
with all associated water rights. There may be legal complications limiting the government’s right
to forcibly procure such rights or such land.
Mexican law will mandate the level of compensation that will need to be paid in the event of the
compulsory acquisition by or through the Federal or State Government of rights or land. In
relation to water rights it could be argued that due to the drop in the water table and the damage
caused to the aquifer, the value of those rights has diminished. Purchase of land can be
performed on the open market, but will be subject to the risk of farmers banding together to
artificially raise market prices.
There may also be political difficulties associated with encouraging farmers to adopt alternative
career paths. The Federal and/or State Government may wish to provide training and possibly
some financing for the creation of new small industry or commercial enterprises by those
farmers who have agreed to sell their land or their water rights.
To the extent that existing abstraction rights are harmful to the aquifer, removing these
abstraction rights from use should reduce the stress on the aquifer. This approach will only work
if the removal of the rights results in the reduction of abstraction, and will not work if the removal
of the rights results in a migration of abstraction to other abstraction points.
The success of this effort will depend on the ability to set this water aside, rather than issuing
concessions for this same water to other users. A separate legal vehicle may need to be created
to hold these water rights.
PROMMA II may need to do further research into the legal ramification of such buy-back
schemes and develop a model that will allow the buy-back in the most efficient, long-term
manner available under Mexican law. The total compensation that will need to be paid will also
need further consideration.
d. New water efficient technology for agriculture.
The implementation of drip irrigation and plasticulture to reduce water use and improve
production is being addressed by PROMMA, providing the farming community in Aguascalientes
with information and funding for testing to prove the significant efficiencies and production gains
available from these technologies. This is probably one of the most efficient and effective of the
solutions identified to date. In addition, it does not carry with it the political consequences that
burden some of the other initiatives.
This program should continue to attract support from PROMMA.
e. Publicity campaign for water conservation.
INTERAGUA has been implementing publicity campaigns to encourage people, in particular
children, to conserve water. This will create the perception of the social value of water that
should work hand-in-hand with the perception of the economic value of water created by the
proposed increase in water tariffs discussed above.

25
f. Focused treatment and recharge of waste water and use of new sources of raw water.
This issue forms part of the capital expenditure works discussed below. It involves (1) the
transportation of raw water from two different reservoirs (one in the North and one in the West)
to Aguascalientes and (2) the transportation of treated waste water from the city of
Aguascalientes to the water table of the reservoir to the West of the city. These new sources of
raw water and recharge mechanisms have been addressed in the Report.
PROMMA II may need to perform more detailed research on the actual benefits to be obtained
from these mechanisms.
2. Capital expenditure for water and sanitation infrastructure
The water and sanitation system for Aguascalientes is in desperate need of refurbishment and
further capital investment. These investments will encourage the efficient management of
ground water and recharge of the aquifers. The investments needed are described in more detail
in Annex E of the Report. A diagram showing the different infrastructure projects and their
respective costs is set out.
When developing the legal and commercial structure for the financing and carrying out of the
capital works, it will be important to keep in mind the experiences of Mexico City where a
practical and apparently rational structure was developed in an effort to slowly involve the private
sector into the water sector through clearly identifiable tasks which would allow politicians and
consumers to assess whether private sector involvement provides the benefits sought. This
structure was undermined by political exigencies and failed to advance beyond the first phase.
This section is split in two sub-sections: (2.1) the source of funding and financing for such capital
works and (2.2) the methods of increasing revenues or reducing costs in order to enable the
Comision Ciudadana de Agua Potable y Alcantarillado de la Ciudad de Aguascalientes
(“CCAPAMA”), which is an arm of the Municipality of Aguascalientes, and/or the Concessionaria
de Aguas de Aguascalientes, S.A. de C.V. (“CAASA”), the private sector holder of the
concession to provide water services in Aguascalientes, to repay any debt that is incurred in the
development of the infrastructure.
2.1 Funding and financing for infrastructure development
The capital costs identified in the Report amount to between Pesos 1.5 and 2 billion, over seven
to ten years. Sources of funding and finance for this amount will need to be identified. The key
characteristics of this funding should be its flexibility, long maturity and low cost.
a. PROMAGUA
Programa para la Modernizacion de Organismos Operadores de Agua (“PROMAGUA”) is a fund
managed by the CNA and the Banca Nationale de Obras y Servicios Publicos, S.N.C.
(“BANOBRAS”) which makes grant funding available for water projects to support private sector
participation and keep water tariffs low. This is the evolution of the fund to support local water
utilities using private sector participation called Fondo de Inversion en Infraestructura
(“FINFRA”). In order to benefit from PROMAGUA, a State must sign up to an agreement with
BANOBRAS that allows for legislative changes to enable the financing and administrative
structure that underlies PROMAGUA and to encourage private sector participation. The levels of
grant funding available are limited depending on the nature of the project, the level of private
sector involvement and the efficiency of the system before the works commence. The more
private sector involvement and the less efficient the system, the more funding can be provided. It
is also meant for urban water reform, not for agricultural or industrial, which have funds of their
own. It is not clear that this is a strict rule, but PROMAGUA funding may not be available for
these parts of the project.

26
To date PROMAGUA has not provided much in the way of funding for water projects, only
reports. It has funding obligations for five different projects. For this reason there is not currently
funding available in PROMAGUA, though there is some hope to obtain further funding from the
Federal Government this next year.
One of the goals of PROMAGUA is to develop a properly functioning private sector concession
in the water and sanitation sector. BOT projects have worked well in the past, but concessions
have a bad reputation in Mexico. Aguascalientes should therefore be a welcome opportunity for
those responsible for PROMAGUA, in particular given its long-standing private sector
participation concession that could be revised into a healthy and sensible example of a working
concession. BANOBRAS also indicated that if the concession agreement for Aguascalientes is
restructured, it would provide further funding to support this process and the opportunity to
develop a successful concession.
It is hoped that PROMAGUA will be able to provide grant funding for 35-40% of the costs of the
capital works. It should be noted that PROMAGUA funding requires a lengthy study and
application process that Aguascalientes has failed to commence, despite notice of the same.
This may delay the implementation of PROMAGUA funding unless PROMAGUA can be
convinced to soften its administrative requirements. The preliminary indications are that the CNA
and BANOBRAS will be flexible in applying the administrative requirements so long as their spirit
is respected. Thus it must represent a reasonable long-term development with significant private
sector investment.
PROMMA II will need to explore further with the CNA and BANOBRAS the mechanisms required
and the conditions that must be satisfied to release this funding and the optimal structure that
will need to be implemented to benefit from the maximum amount of funding from PROMAGUA.
b. BANOBRAS
BANOBRAS is a Federal Government bank that focuses on infrastructure projects in Mexico. It
has available to it resources from a variety of sources and for a number of different uses. In
particular it is partially responsible for managing PROMAGUA. It provides financing to pubic
sector entities, such as the Municipality and the State. It can also lend to private entities, under
certain conditions, and may therefore be able to provide funding to CAASA.
BANOBRAS has provided more creative funding mechanisms to support infrastructure
development in Mexico. An example would be its contingent revolving loan facility that it uses to
guarantee lenders the repayment of their debt. If the borrower does not pay, the lender can draw
down on the BANOBRAS revolver for repayment. BANOBRAS is itself guaranteed by the full
faith and credit of the Federal Government and is therefore a reasonable credit risk.
BANOBRAS is at heart a bank, and therefore needs appropriate guarantees from State or
Municipal entities. It will not take security against crop yields, and therefore is concerned about
the rural aspects of the current proposals.
BANOBRAS is interested in being involved with restructuring the Aguascalientes concession
agreement. They are keen to demonstrate to the Mexican market that concession agreements
can provide a reasonable and practical solution for the Mexican water and sanitation sector.
They have indicated that they are interested in Aguascalientes and would be willing to manage
the financing for this project.
PROMMA II will need to explore further with BANOBRAS the different sources of funding that
BANOBRAS could provide to the project, the mechanisms required and the conditions that must
be satisfied to release this funding and the optimal structure that would need to be implemented
to benefit from the maximum amount of funding available at the lowest cost.

27
c. Other Federal Government sources

In addition to the funding available from PROMAGUA, the Federal Government may be able to
provide other sources of funding, for example through the Nacional Financiera (“NAFIN”), at
competitive rates. In particular we are aware of a fund of some USD350 million that is currently
under negotiation with the World Bank, specific to the water sector. Some of this funding may be
allocated to this type of practical and essential infrastructure investment.
The Mexican and US Governments have entered into a “Partnership for Prosperity” which
foresees assistance for environmental and development purposes. In particular the assistance of
the Overseas Private Investment Corporation (“OPIC”) of the USA has been committed to
private sector participation and investment in infrastructure projects in Mexico. The US has also
agreed to provide some USD 1.4 million for feasibility studies.
PROMMA II will need to explore further with the Federal Government the mechanisms required
and the conditions that must be satisfied to release Federal Government funding and to benefit
from the maximum amount of funding available at the lowest cost.
d. Other State sources
The State of Aguascalientes may have other forms of finance available to support this project.
From our visit with the Ministry of Finance, there is considerable good will from the State´s
perspective which we hope to convert into funding undertakings. Aguascalientes has a very
good credit rating, something along the lines of AA, far better than that of the City of
Aguascalientes. This should be very useful when looking at accessing the capital markets and
obtaining private sector commercial financing.
The State of Aguascalientes may provide partial or full guarantees, provide subsidies or act as
asset owner, leasing those assets to the Municipality.
PROMMA II will need to explore further with the State of Aguascalientes the mechanisms
required and the conditions that must be satisfied to release this funding and to benefit from the
maximum amount of funding at the lowest cost.
e. Commercial lending
Mexican banks may be able to provide a certain level of financing. This avenue has not been
explored to date, and should only be explored once PROMMA II has obtained a better
understanding of the grant and concessionary funding available from public sources. The project
finance market in Mexico is not particularly strong and is primarily focused on the oil and gas
and electricity sectors, with significant support from international banks who have experience in
this type of complex, structured lending.
PROMMA II will need to explore capacity in the Mexican commercial market for funding of this
project and the technical and managerial know-how necessary to bring such complex, structured
financing to fruition.
f. Foreign lenders
IFIs, such as the IFC, and other concessionary lenders, such as DEXIA, may provide useful
sources of funding. The structure developed for Tlalnepatla provides a useful precedent.
However, it should be noted that this funding can be expensive. It is also generally denominated
in foreign currencies (e.g. in USD or EUROs), which involves exchange rate risk. Given the
current state of the Peso on the international currency market, currency exchange risk may add
an appreciable cost to such funding. Further, we understand that Mexican States and
Municipalities are not entitled to borrow in foreign currencies.

28
Despite these difficulties, many of the past successes in the financing of water and sanitation
projects in Mexico have involved assistance from these international lenders and donors. This
may therefore represent an important element of any solution found for the current infrastructure
deficits faced by the Mexican water and sanitation sector.
Where an international lender is involved PROMMA will need to be careful that overlapping
layers of authority from the international lender and BANOBRAS do not create inefficiencies.
Once the domestic Mexican market (both public and private) has been explored, PROMMA II
may need to explore capacity in the international financial markets for funding of this project.
This will involve visits to the relevant actors in London, Paris and Washington D.C., first to obtain
information on the interests and requirements of the decision-makers and then to obtain the
approval and support of those decision-makers.
g. CAASA
CAASA (owned partially by Veolia Environnement) has a contractual obligation to fund new or
reconditioned infrastructure, and may be willing to provide or arrange a certain amount of the
capital cost. The current discussions assume that CAASA will provide 33% of the funding
needed. However, it should be noted that this funding tends to be expensive (at least 8-15%). It
may be more efficient to obtain funding from other sources.
BANOBRAS has indicated that if the concession agreement is restructured, it would be willing to
lend to CAASA with no guarantee from Veolia. It expects CAASA to put in around 25% of the
project cost (at least that part of the project that pertains to CAASA´s mandate. It is not clear in
what form this funding should be provided.
PROMMA II may need to have further discussions with representatives from CAASA to establish
their appetite to invest in these capital works and whether they would be willing to manage the
process of obtaining finance and ensuring the completion of these capital works.
h. The need to amend the concession agreement
CCAPAMA and CAASA signed a concession agreement in 1993 which was then amended in
1996. This agreement sets out the relationship between CCAPAMA and CAASA and the basis
on which CAASA is entitled to operate and maintain the water and sanitation system in
Aguascalientes. We have not been provided a copy of this contract by either CCAPAMA or
CAASA. CCAPAMA insisted that no copy of the concession agreement exists (which we do not
believe). CAASA has simply avoided the question.
It may be necessary to agree an amendment of this concession agreement in order to manage
the capital works with the greatest efficiency possible. For example, for financial reasons it may
be necessary to establish a new corporate vehicle to manage the funding and ownership of the
new assets and create a lease relationship between CAASA and this new vehicle. This may
require amendment of the concession agreement. The payment mechanism in the concession
agreement may also need to be adjusted to funnel increased revenues to the appropriate asset
vehicle in order to repay any associated debt.
There is also some sensitivity related to the concession agreement. Some people blame the
concession and its subsequent amendment for the removal of the reigning Municipal and State
Governments of the day. Further, funding for the project may be perceived as an inappropriate
support paid to CAASA (a subsidy paid to a foreign private sector company). In light of this, it
may be possible to agree an amendment to the concession agreement, for example removing
CAASA from control of assets, but retaining its operation and maintenance functions. This may
resolve some of the issues surrounding the lack of comfort of the populace with private sector
supplied public services and encourage CAASA to provide support and investment for the

29
project (with the understanding that CAASA would prefer to amend the nature of its obligations
in the manner set out above).
The restructuring of the concession agreement is also of interest to BANOBRAS and
PROMAGUA. Both have indicated that they would provide more financing for the project if the
concession agreement were revised to provide a rational investment plan, establish a non-
political tariff (one which moves, at least with inflation, without the need to refer to the State or
City Congress), establishes an independent regulator, creates a sensible structure for tariff
management and identifies a practical solution for dispute resolution, possibly with arbitration
before reference to administrative tribunals.
i. Structural issues
Once sources of funds have been identified, the requirements of each of the prospective funders
and lenders will need to be considered and satisfied. This may include security rights provided to
particular lenders over aspects of the project, the way the funds are managed once they have
been drawn from the relevant facility and where funds have been identified for repayment of debt
and how those funds are set aside to satisfy the relevant lenders´conditions.
There are likely to be issues specific to the financial arrangements between the Federal and
relevant State and Municipal Governments. These entities will have arrangements as between
themselves in relation to flows of funding, who controls that funding and whether and how that
funding can be isolated and committed to the project, preferably in advance.
The structure for asset ownership may also require some creative thinking, given the number of
different potential funders and lenders for the project and the need to provide security to the
lenders without obstructing the provision of services and the flexibility of the relevant water
company to provide services, address emergency and crisis situations, and provide for the
continued growth and improvement of the relevant water and sanitation system, including future
injections of debt.
There is in Mexico a developed concept of the fideocomiso, which may serve as a useful
mechanism for receiving funds or managing assets, where necessary. In particular this may be
useful for the different rural and urban aspects of the system.
It may be preferable for certain parts of the project to be set up in mini-BOT projects. This would
allow the State to take responsibility for certain of the assets that are meant for the benefit of the
aquifer as compared to the municipal water system.
PROMMA II will need to consider these structural issues with experts in Mexican law, accounting
and government procedure. This process may require sophisticated and experienced advice,
and will need to be handled carefully and sensitively.
2.2 Increasing revenues available to service debt
Once the capital works have been funded, any investment or financing must be repaid. This will
require CCAPAMA and CAASA to find additional revenues that can be committed to this
purpose. These revenues will need to be identified and isolated with a significant level of
certainty before some financing will be made available to the project. Some of the potential
sources of revenues are identified below.
Some lenders will want a pledge over part or all of the revenue streams specific to the
repayment of debt. Our understanding is that it may not be possible, under Mexican law, to
provide a pledge over tax revenues or tariff revenues collected by a Municipal entity.
PROMMA II may wish to consider the security package that can be offered to lenders to this
project, in particular as concerns pledges over revenues and assets.

30
a. Reduction in costs
The capital works will reduce water losses significantly and therefore reduce the cost of water
treatment. They will also reduce the cost of maintenance, since the new system works will be
easier and cheaper to maintain than the current system.
PROMMA II will need to calculate the cost reduction available through the capital works.
b. Suppressed demand
Where consumers have not had 24 hour service, the new works will improve the services
provided (in particular in relation to sanitation) and will therefore allow consumers to use the
level of service that they would otherwise demand. This increase in demand by releasing
suppressed demand will increase total receipts from water and sanitation services. This increase
in receipts will depend on the relevant consumers having the financial wherewithal to afford
increased services and the desire to spend their resources on such services. This may also
have the perverse effect of creating an increase in water usage.
PROMMA II will need to calculate the potential revenues from suppressed demand from the
completion of the capital works.
c. Identifying and converting illegal connections
During the implementation of the capital works, CAASA will have the opportunity to identify
illegal connections and convert these to legal connections, increasing its water tariff receipts.
PROMMA II will need to calculate the potential receipts from converting illegal connections
during the capital works.
d. Increase of water tariffs for treated water in Aguascalientes to tie them more closely to
cost recovery.
Current tariffs are below the cost of operation and would not support the necessary capital
works. Increases would permit repayment of any investment of equity and debt needed to
perform these works. This issue is discussed further above, as it would help to create a
perception of the economic value of water thereby reducing consumption and abstraction. The
increase of tariffs is, however, a politically sensitive issue. The upcoming elections in
Aguascalientes raise further issues associated with the timing of PROMMA´s indication to the
market of the potential for tariff increases. If this issue is raised too early, it may become part of
campaign platforms, where candidates promise no increases in tariffs in order to win votes,
thereby defeating the viability of the project before it commences.
PROMMA II will need to calculate the need for an increase in water tariffs, the affordability and
political viability of such increases and how those increased receipts can be committed to the
capital works and repayment of debt and not disappear into some other budget.
e. Increases in taxation.
There may be some margin for increases in taxation to help pay the costs associated with the
capital works. Property taxes, in particular, would appear to provide an opportunity to place the
burden of the cost of capital expenditure on some of the key beneficiaries of an improved water
and sanitation system and the protection of the aquifer.
PROMMA II will need to quantify any proposed increase in taxation, the affordability and political
viability of such increases and how those increased tax receipts can be committed to the capital
works and repayment of debt and not disappear into some other budget.

31
3. Other issues
This note focuses primarily on the test case of Aguascalientes, and the need to improve
management of the aquifers in Aguascalientes as well as the asset renewal and investment
needed to support the delivery of water and sanitation services. This should not distract from the
different key issues that will need to be considered in any revision of the mechanism for
managing water and sanitation in Mexico. In particular, though we are concentrating on
Aguascalientes, a program of reform needs to be rolled-out across Mexico.
The following section identifies and discusses some of these key issues.
a. Regulation
Any effort at reforming the regulation of the water sector in Mexico must encourage transparency.
The key principles behind transparency include the provision of information to all stakeholders,
obtaining feedback and information from these stakeholders and discouraging corruption. The flow
of information must be clear, well defined and readily available to all stakeholders. Whether this
information sharing has been successful will usually be apparent through the consultation
mechanisms, whereby information is shared as between all stakeholders.
The regulating bodies must then be accountable to those stakeholders for the information
provided and decisions made. This requires procedures for raising issues and complaints with a
regulating body and sanctions that can be imposed on the regulator if the decision is found to
have been erroneous or invalid.
The nature of an independent, transparent regulatory function will require a significant amount of
resources available to the regulator to manage this function. Separate bodies may also be
required to manage claims and dispute functions.
The current regulatory mechanisms in Mexico is split between the Federal, State and Municipal
Governments.
PROMMA II may wish to review the regulatory structure in Mexico to propose mechanisms to
rationalize this structure and coordinate the different functions.
b. Efficiency
The water and sanitation sector must endeavor to provide an excellent, cost-effective service and
to extend those services to anyone who needs them. This means constantly improving services
while endeavoring to reduce costs and increase revenues. Therefore incentives must be placed on
the organizations and individuals involved in service provision to achieve these goals.
Certain people believe that the best or the only method of creating these incentives is applying
market forces to the water sector, by involving the private sector in the provision of services and
creating competition between private sector participants in order to obtain the best possible
service at the least cost. Other mechanisms are however available to place similar incentives on
public sector entities and achieve similar levels of efficiency (see for example the corporatization
of the water company for Washington DC).
PROMMA II may wish to explore methods of creating incentives to increase efficiency in
Mexican Water utilities, through public and/or private sector structures.
c. Future funding of capital expenditure
The current situation of crisis should motivate the Federal, State and Municipal Governments to
put in place funding mechanisms for future major capital expenditure. This may involve retention
funds from tariffs or tax revenues set aside for such purposes. It may also require on-going

32
review of the condition of existing assets and the development of comprehensive programs for
major maintenance and asset replacement.
PROMMA II may want to review the political and financial feasibility of establishing such funds or
a more formal rolling program of major maintenance expenditure.
d. Training
Municipal and State representatives are often not trained in the methods of improving
management of water utilities or implementing the complex financing structures that could be
used to improve water infrastructure. Where such new methods and structures are to be
proposed or adopted, training should be made available to those people in a position of
responsibility for management of such projects.
It should be noted that trained public sector employees often become targets for recruitment by
private sector companies, or may be promoted within the company and removed from positions
of direct management control. Therefore, any training facility will need to be a continuing service
providing existing managers with updates on the latest information, and providing training for
new managers.
PROMMA II may wish to explore the training facilities available in Mexico and the funds
available to provide such training to the right people.
e. Roll-out
The intention of PROMMA is to review the situation in the water sector in Mexico and propose
solutions that will work not only for isolated Municipalities, but across Mexico. This is an
extremely difficult thing to achieve. The focus on Aguascalientes, though practical and
necessary, should not distract from the intention to ensure that the solution developed can be of
use in other parts of Mexico. This means that any solution will need to be developed with an eye
to establishing general principles and a basic format that can be modified to meet the needs of
different Municipalities and States.
It should be noted that any structure will need to be sensitive to the political exigencies in
Mexico. The States do not want to be forced to manage their water sectors in a certain way by
the Federal Government, nor will one State consider its situation entirely consistent with the
situation in another State. The solution proposed will need to be sufficiently flexible to enable
and encourage modification of its form within the context of its principles to meet the needs of
each individual Municipality and State.
Therefore, there may need to be buy-in from the Federal and State Governments for any
proposed solution.
PROMMA II may wish to consider whether a basic solution to be implemented across Mexico is
a reasonable or desirable goal. If this is the ultimate goal, it may need to consider the political
steps to be taken once a structure is ready to be proposed to the relevant decision makers in the
Federal and State Governments. Some mechanism for consultation may be useful to get buy-in
from the various relevant parties.

33
Annex 8 – Financing the IWRM project in the Aguascalientes Valley
De acuerdo con el Banco Mundial y la Comisión Nacional del Agua, se ha realizado un estudio
técnico entre 1999 y 2002 en el Estado y la Ciudad de Aguascalientes. Un reporte completo fue
publicado por la CNA en junio de 2002. Éste trata sobre:
1. el suministro de agua potable y la recolección y tratamiento de las aguas residuales en

la Ciudad de Aguascalientes (usos doméstico – urbano e industrial).
2. la protección del acuífero interestatal de Ojocaliente-Aguascalientes-Encarnación, en
relación con una transformación e industrialización de las prácticas agrícolas
(agroplasticultura)
En 2003, se retomaron los contactos para visualizar y analizar el financiamiento de las nuevas
obras de infraestructura, las operaciones de rehabilitación y de las innovaciones tecnológicas en
el negocio de la agricultura, tal como se recomiendan en el reporte ya mencionado.
Dichos contactos han implicado a los siguientes organismos :
¾ el Sr. Gobernador del Estado de Aguascalientes

¾ el Secretario de Finanzas y Administración
¾ el Secretario de Desarrollo Económico
¾ el Director de la Comisión de Desarrollo Agropecuario (CODAGEA)
¾ el Director del Instituto del Agua (INAGUA)
¾ el Director del Comité Ciudadano de Agua Potable del Mpio. Ags. (CCAPAMA)
¾ la Empresa CAASA (concesionario privado con contrato para el suministro y
administración del sistema de agua potable y de alcantarillado de la Ciudad de
Aguascalientes)
¾ las Asociaciones de Productores Agrícolas de Riego

¾ el Grupo “Equilibrio del Acuífero”, Comité de grietas
¾ el Comité Técnico de Aguas Subterráneas (COTAS)
¾ BANOBRAS, Delegación Aguascalientes

¾ Comisión Nacional del Agua, CNA
El monto total de las obras asciende a 1998 millones de pesos
- la parte urbana e industrial : 1639

- la parte rural 359
Estas obras podrían ser realizadas en dos fases de cinco años cada una:
- fase 1 (2005-2009) : 863

- fase 2 (2010-2014) : 1135
La fase 1 (2005-2009) se reparte de la manera siguiente:

34
Nuevas Obras de Infraestructura
N1 transporte y tratamiento de aguas residuales

de la planta de tratamiento (PTAR) 82 M$
N2 intercambio de agua (limpia) subterránea / agua tratada 206 M$
N3 acuaférico de suministro / distribución de agua potable
de la Ciudad de Aguascalientes (Poniente) 80 M$
N4 acuaférico de suministro / distribución de agua potable
de la Ciudad de Aguascalientes (Oriente) 90 M$
Protección del Acuífero
P1 operaciones rurales 200 M$
Rehabilitación de las redes de Aguascalientes
R1 red de agua potable 120 M$

red de alcantarillado 85 M$
Total 1 863 M$
La fase 2 (2010-2014) se forma de:
Nuevas Obras de Infraestructura
N5 intercambio de agua de la presa

Presa Calles rural/urbano 676 M$
Protección del Acuífero
P2 operaciones rurales 159 M$
Rehabilitación de las redes de Aguascalientes
R2 red de agua potable 220 M$

red de alcantarillado 80 M$
Total 2 1135 M$

35
Presa Plutarco
M$ = millones de pesos
Elías Calles
P = Protección = 359 M$
N = Obras nuevas
= 1,134 M$
N5 = 676 M$
Presa Abelardo
N4 = 90 M$
Rodríguez
N2 = 206 M$ R = Rehabilitación
P Agua potable 340
N3 = 80 M$ +
Saneamiento 165
505 M$
PTAR
N1 = 82 M$ N1+N2+N3+N4+N5+P+R = 1,998 M$
El financiamiento se inspira del esquema global siguiente:
PROMAGUA : 1/3 (fondos perdidos + préstamos)
aportación privados : 1/3 (incremento del precio del agua y

del saneamiento de la ciudad)
aportaciones públicas : 1/3 (fondos perdidos, fideicomiso, préstamos

con repercusión fiscal)

36
Figura M.2. Trazo esquemático y resumen de proyectos básicos
Proyecto Presa Calles N5 = 676 M$

manejo conjunto agua superficial reordenación
y subterránea: 60 hm3/año urbana/rural
N5
Zona de
reubicaci
P = 359 M$ ón pozos
protección P
del acuífero
N1+N2 = 288 M$
reordenación
urbana/rural Acuaféric
N2 Zona de N3+N4 = 170 M$
reubicació o
seguridad
n pozos
P Acuaférico agua urbana
N3 N4
R
Proyecto 1: Intercambio
Agua tratada: 23 hm3/año N1
Agua superficial: 6 hm3/año R = 505 M$
Agua subterránea: 14 hm3/año PTAR rehabilitación
urbana
N1+N2+N3+N4+N5+P+R = 1,998 M$
PROMMA/OMM Proyecto Manejo Integrado y Sostenible del Agua en Aguascalientes

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Manejo Sostenible del Agua Subterránea COMISION NACIONAL

Subdirección General Técnica

A Study on Financing Issues

A Study on Financing Issues to Implement an

INFORME OMM/PROMMA No. 163

Organización Meteorológica Mundial

LIC. CRISTÓBAL JAIME JÁQUEZ

ING. JOSÉ ANTONIO RODRÍGUEZ TIRADO

ING. JOSÉ LUIS ADAME DE LEÓN

ING. CÉSAR L. COLL CARABIAS

DR. ALFONSO SALINAS RUÍZ

ING. JESÚS CAMPOS LÓPEZ

ING. CÉSAR O. RAMOS VÁLDES

LIC. BLANCA ALICIA MENDOZA VERA

ING. CÉSAR HERRERA TOLEDO

DR. FELIPE I. ARREGUÍN CORTÉS

LIC. RENÉ ESCÁRCEGA LEOS

DR. VENANCIO TRUEBA LÓPEZ

Cooperación Técnica para América del Norte, Centroamérica y el Caribe (NCAC)

Unidad de Consultores OMM/PROMMA

Preparación del Informe Final:

Edición y Revisión Final:

Acuerdo de Cooperación Técnica SEMARNAP / CNA – OMM

2. Main issues and proposals..........................................................................1

This mission has been organized in two parts :

- from 1 to 6 December 2003 in Aguascalientes, where all the shareholders of the

The case of the Aguascalientes aquifer is exemplar because:

i) its depletion is tremendous (everybody agrees on this standpoint),

2. Main issues and proposals

OMM/PROMMA A Study on Financing Issues to Implement J. Delmon, T. Nguyen &

There are consequently two problems to be solved :

- The second problem to be solved is to water the City of Aguascalientes (thanks to a

OMM/PROMMA A Study on Financing Issues to Implement J. Delmon, T. Nguyen &

Its scope of action is exclusively committed to urban/industrial operations. A specific solution

OMM/PROMMA A Study on Financing Issues to Implement J. Delmon, T. Nguyen &

OMM/PROMMA A Study on Financing Issues to Implement J. Delmon, T. Nguyen &

What it is actually done :

What should be done :

3 3.decide the possible increase of tariffs for

OMM/PROMMA A Study on Financing Issues to Implement J. Delmon, T. Nguyen &

Annex 1 – Agenda and list of participants

Annex 1 – Agenda and list of participants

Monday 1, December 2003

OMM/PROMMA A Study on Financing Issues to Implement J. Delmon, T. Nguyen &

Monday 8 et Tuesday 9, December

List of CNA-PROMMA participants:

Dr Venancio TRUEBA LOPEZ, PROMMA coordinator

Quang-Trac NGUYEN (France), WMO consultant - Head of the mission

OMM/PROMMA A Study on Financing Issues to Implement J. Delmon, T. Nguyen &

Annex 2 – Summary of key meetings

1. Meetings with CNA, Aguascalientes with Martin Molina Ochoa

CNA in Aguascalientes was extremely helpful is arranging meetings and providing an

3. Meetings with BANOBRAS in Aguascalientes with Mr. Francisco Sanchez de Lira

4. Meeting with SEDEC (State Ministry of Economic Development) with Pedro

OMM/PROMMA A Study on Financing Issues to Implement J. Delmon, T. Nguyen &

6. Meeting with CAASA with Humberto Blancarte Alvarado

8. Meeting with the Ministry of Agriculture with Roberto Bonbentran

PROMAGUA cannot lend to rural/agricultural projects. It is limited to water system to be

OMM/PROMMA A Study on Financing Issues to Implement J. Delmon, T. Nguyen &

• Proyecto de Manejo Integrado y Sostenible del Agua en el Valle de Aguascalientes,

• Manejo sostenible del Agua Subterranea. Informe Final de misión. CPROMMA-2/202.

• Evaluation Socioeconomica del Progama de Inversiones en Agua Potable y

• Programa para la Modernizacion de Organismos Operadores de Aguas, SEMARNAT,