BECC BOARD MOVES FORWARD WITH TECHNICAL ASSISTANCE PROGRAM DURING PUBLIC MEETING

EPISO RECEIVES GRANT FROM GENERAL ELECTRIC TO FUND PROJECT

CITIZENS COMMITTEE ESTABLISHED FOR THE BOT WASTEWATER PROJECT IN CD. ACUÑA

PROPOSED POLICY FOR BOT PROJECTS

COMMENTS ON BECC'S FINANCIAL CRITERIA

FINANCIAL FEASIBILITY AND PROJECT MANAGEMENT CRITERIA

NEW STEP I FORMAT RECEIVED

DRAFT TECHNICAL ASSISTANCE MANUAL READY FOR PUBLIC REVIEW

BECC BOARD MOVES FORWARD WITH TECHNICAL ASSISTANCE PROGRAM DURING PUBLIC MEETING

The BECC Board of Directors, in their 11^th regular public meeting held in El Paso, Texas, on February 11^th, presented an overview of its proposed technical assistance program for public consideration. The Board presented the major policy considerations that will form the Technical Assistance User's Manual, which communities will use to request funding assistance from the BECC. The technical assistance program will be supported by a $10 million grant from the U.S. Environmental Protection Agency (EPA), as well as $500,000 from BECC's own budget, and resources from other agencies as available.

The technical assistance program will provide needed resources to help communities through the BECC process and access financing from the NADBank or other funding sources. Dr. Jorge Aguirre, BECC's Technical Director, reported that presently the BECC has 69 projects in the project pipeline, of which as many as 30 are in the development stage during 1997 for future certification consideration. Projects certified by the BECC qualify for financing consideration by the North American Development Bank (NADBank) and other sources. The Board has certified twelve environmental infrastructure projects to date.

The meeting was also highlighted by a presentation by NADBank's Deputy Managing Director Victor Miramontes, who shared one of the Bank's first financing successes - a $25 million water treatment plant in Brawley, California. Mr. Miramontes explained that financing the Brawley project was a "team effort" including the BECC, NADBank, State of California (CAL/BEC) and City of Brawley. The project is Brawley's largest capital improvement project and will serve its 30,000 residents and an adjacent colonia. Mr. Miramontes explained that NADBank served as Brawley's financial advisor and helped Brawley become financially self-sufficient.

During the meeting, the Board also approved the release of the draft Policy for Build, Operate, and Transfer (BOT) projects for public consideration. The policy will ultimately guide the Board's certification of BOT projects in the future.

The Board also received numerous public comments from meeting participants including border residents, project sponsors, and non-governmental organizations. An official from SEMARNAP presented information on EPA/SEMARNAP's Border XXI program, a binational planning effort to address the border's serious environmental problems and existing cooperative programs.

The BECC Board encourages public input on the proposed BOT Policy, which is included in this edition of the BECCNEWS or can be found on BECC's Home Page: http://cocef.interjuarez.com.

The Self-Help Project for On-Site Wastewater Treatment Systems for Colonias of El Paso County, Texas, certified by the BECC Board of Directors in July 1996, received a $5,000 grant from General Electric earlier this month. The grant was awarded in a response to a request from the BECC to U.S. corporations that have operations in El Paso to help EPISO fund its $213,000 project. The grant is a small but important step in increasing the involvement of private businesses in environmental improvements in the region. The BECC is continuing to coordinate with NADBank in locating private and public funding sources for the project.

The self-help project will provide low-interest loans to help 180 colonia families properly install septic tanks to treat household sewage. The innovative project is a cooperative effort among the El Paso Interreligious Sponsoring Organization (EPISO), the University of Texas at El Paso (UTEP), and the colonias families themselves.

Contact: Angeles Villarreal, BECC's Project Evaluation Coordinator, at tel: (011-52-16) 29-23-95; or e-mail: avillarreal@cocef.interjuarez.com.

On February 24^th, the Citizens Committee for Information and Follow-up was created to fulfill the community participation requirements for the proposed BOT Wastewater Treatment Project for Cd. Acuña, Coahuila.

Cd. Acuña Mayor, Lic. Francisco Saracho, presided over the committee's first meeting and highlighted the importance of the proposed infrastructure project for the community. He stated that the project will resolve public health and environmental problems in the region, improve the quality of water discharged into the Rio Grande River and elevate the quality of life for the residents of both countries.

According to C.P Javier Dávila Arizpe, Director of the State Water and Wastewater Authority, the proposed project includes the construction of an activated sludge facility, with a capacity of 5.7 mgd and expansion and rehabilitation of 65 miles of wastewater collection system.

The Committee, established according to the BECC's Community Participation Criteria, includes leaders from the Cd. Acuña community. Mario Rivera Ramírez was elected President of the Committee, José Muñoz Quintero, Secretary, and Noé Ramírez García, Treasurer. The Committee is charged with designing and overseeing the public process for the project, guaranteeing broad community participation and ensuring transparency, so that the residents of Cd. Acuña receive complete project information and are responsibly engaged in the project.

The BECC requests comments on the following draft Policy for Build, Operate, Transfer (BOT) Projects no later than Friday, March 28, 1997. Send comments to Dr. Jorge Aguirre, BECC's Technical Director. Tel: (011-52-16) 29-23-95; or e-mail: jaguirre@cocef.interjuarez.com.

The traditional method followed for the construction and operation of water, wastewater treatment and municipal solid waste facilities is generally a complex process that requires several phases by different consultants and contractors to complete:

a) Water and Wastewater Master Plan

b) Facilities Planning & Preliminary Design

c) Environmental Assessment of Proposed Projects

d) Detailed Design of Facilities

e) Construction of Facilities

f) Operation & Maintenance

Many communities on both sides of the border, and especially in Mexico, are opting for the "BOT" process, whereby they combine several of the activities mentioned above into one competitive bid package, thereby not only simplifying the procedure, but also reducing the amount of oversight required when there are several contracts for different phases of the process. Another advantage of the BOT process is the inherent incentive for the concessionaire to design and build efficient, low life-cycle cost facilities, since the same company has the contractual obligation to operate the facility for a specified number of years. It is generally accepted that a private firm can design and build, also operate and maintain these treatment facilities as efficiently as the public utility organizations.

The "conventional" scheme normally involves the development of facilities planning, preliminary design, detailed design and construction by different contractors under the direct supervision of the public utilities, with the subsequent operation and maintenance by the same public entity. This becomes a problem if something does not work properly due to the fact that it is often difficult to establish who is directly responsible for what part of the project (the design engineer, equipment manufacturer, or construction contractor). The "turn-key" scheme helped solve some of these problems by concentrating in one contractor the responsibilities for design, equipment acquisition and construction; however, operation and maintenance still remained a concern for the utility.

Although there are several schemes that simplify the process of putting into place an environmental facility, perhaps the most complete is the one known as BOT (Build, Operate, Transfer). In this scheme, a privately-owned company is awarded a contract in response to a Request for Proposals (RFP) process which outlines the goals and standards of the facility without defining the actual design or process of the project to design, build, finance and operate the treatment facilities for a defined period of time (ten-twenty years) and then transfer the facility to the public utility, as an option, or renew the contract for another specified time period.

This scheme works quite well for the communities along the Mexico-U.S. border and the BECC has received several projects that will utilize the BOT process. However, since projects must comply with all six of the BECC fundamental criteria before they may be considered for certification, a project must be well along the BOT project development process for it to be ready for certification by the Board of Directors. Thus, a project must have a substantial amount of development work already done to be able to comply with the BECC fundamental criteria. Specifically, the preliminary design and cost analysis for the proposed project must be complete; which means the sponsor must have selected a concessionaire and the technical aspects must have been established before submitting the project to the BECC.

The BECC has been approached by communities wishing to pursue the BOT option with a private concessionaire to consider a process that provides a high level of confidence to any potential concessionaire prior to engaging in the lengthy, time and resource intensive process of responding to a BOT RFP. To facilitate, and encourage, the BOT facility process to bring the capital and resources of the private sector into the BECC process to help address the enormous health and environmental needs of the border communities, BECC proposes a policy that (l) meets all of our criteria prior to certification; and (2) provides assistance to communities and some level of assurance to potential concessionaires who would be participating in this process that the project, after development, is a good candidate for BECC certification.

1. All BOT projects must comply with BECC criteria prior to certification.

1. BECC may provide technical assistance for qualifying municipal BOT projects in development of the Request for Proposal (RFP) to potential concessionaires that incorporates the BECC criteria in all phases of that process, thereby enhancing the ability of the project to receive BECC certification. Upon completion of the RFP, incorporating BECC criteria prior to solicitation of bids, BECC will prepare a resolution for Board adoption stating the RFP has incorporated the BECC criteria and, as a result, the project is a good prospect for certification.

1. After the concessionaire has been selected by the municipal project sponsor, the project sponsors and the selected concessionaire will then move through the certification as all other projects are required to do.

1. If the municipal project sponsor intends to seek NADBank financing, the RFP must incorporate the procurement criteria and procedures of NADBank.

We know that environmental infrastructure projects are, above all, long-term investments. Infrastructure projects typically involve a large initial cash outlay, generate recurring cash inflows, and involve important income tax considerations.

It is important to recognize that all expenditures for the development and construction of environmental infrastructure, including those on capital items, will ultimately need to be paid from revenues in somebody's budget, either today or in the future. Therefore, project sponsors must determine how to finance their projects: either from current revenues or future revenues for debt service or lease payments.

Determining the sources from which infrastructure investments will be funded is very important not only in determining its relative economic merit, but also in the practical affairs of designing a financing plan. For example, project financing for water and wastewater projects is a relatively complex undertaking, particularly if an entire water network is involved.

There are many risks associated with project financing in addition to the financial feasibility of a project, creditworthiness and integrity of the sponsor, and specific risks associated with NADBank or other financing. Additional risks include: construction, management, contract compliance, contingency and cost escalation, as well as adverse regulatory changes and technology risks.

In the certification process, BECC reviews the project's financial feasibility. Applicants must submit the project's main financial information including:

• Financial statements - Historical and Proforma;
• Financial Structure of the Project;
• Capital Improvement Plan/Budget;
• Operations & Maintenance Budget - Historical and Proforma;
• Sensitivity Analysis;
• Financial Break-Even Analysis; and
• Demographic and Economic Information of the Proposed Service Area.

The BECC also assesses the fee/rate model. As such, project sponsors must provide the BECC with:

• Fee/Rate schedules - Historical and Current; and
• Proposed User Fee Structure.

Finally, the BECC evaluates information related to project management and requires the project sponsor's:

• Organization Structure; and
• Institutional Capacity and Legal Framework.

The projection of financial requirements is an important part of the project planning process as a project sponsor determines future activities relative to the expected economic, competitive, technical, and social environments. Detailed cash budgets and cash flow statements must also be reviewed to provide greater insight into the implications of projected activities.

The main techniques of financial projections fall into three categories: proforma financial statements, cash budgets and operating budgets. Proforma statements are projected financial statements embodying a set of assumptions about a project's future performance and funding requirements. Cash budgets are detailed projections of the specific incidence of cash moving in and out. Operating budgets are detailed projections of departmental revenue and/or expense patterns which are subsidiary to both proforma statements and cash flow statements.

All three categories involve an organized arrangement of financial and economic data for the purpose of assessing future performance and funds requirements. The three methodologies are also closely interrelated. The process is difficult in that judgments about future conditions are fraught with uncertainty, as planning of any sort may be. Here the use of sensitivity analysis, or the calculation of the impact of alternative assumptions, can narrow the range of uncertainty.

For the BECC, a fundamental criteria states that revenues from project operations or from other sources must be sufficient to cover debt amortization, as well as operation and maintenance costs, with an appropriate safety margin.

A sound analysis of debt coverage relates the net profit of the project, before interest and taxes, to the sum of current interest and principal repayments, in an attempt to indicate the project's ability to service the burden of its debt. Prospective debt holders often require covenants in the loan agreement spelling out the number of times the project is expected to cover its debt service obligations.

Project finance implies generally that the lender or lenders relies almost exclusively on the cash flows of a project to repay the loan. BECC requires that the applicant must demonstrate that the proposed fee/rate model will produce the cash flow to support debt service requirements. On the other hand, project financing offers the advantages of pooling resources of various organizations and spreading the risks among the various financial players involved. For BECC, the potential access to grants and the amount of equity must be a key assumption in the evaluation of any project.

In order to have cost-effective projects, and given the social and environmental issues addressed, fundraising activities including sources like foundations and grant programs, are highly encouraged by BECC. The Mexican federal government, along with many federal and state programs in the United States, can allocate this type of funding for any specific project. The economic results from an investment funded partially with grants can be sufficiently attractive to justify allocation of the various long-term funds available to the project. Given the long-term nature of capital expenditures for working capital, facilities, technology, and so on, these funding commitments are normally backed by the long-term capital structure of the project. This structure may include different degrees of leverage and a whole range of financial instruments. Thus the weighted cost of capital measure is an important criterion in the capital budgeting context. And, per BECC criteria, the applicant must demonstrate that it has the capacity to implement and operate capital improvement programs independently, and undertake necessary accounting and financial reporting.

We at the BECC have a strong commitment to minimize the risks involved with project financing by providing guidance and technical assistance to project sponsors. The Project Development Assistance Program (PDAP) will be dedicated to help potentially eligible projects qualify for BECC certification and access funding from the very beginning. Whether a project is going to be financed in a significant proportion by the NADBank or another funding source, the BECC criteria provide a valuable guideline in project financing.

For more information, contact Mr. Alberto Perez, at tel: (011-52-16) 29-23-95; or e-mail: aperez@cocef.interjuarez.com.

1. Financial Feasibility. Revenues from project operations or from other sources must be sufficient to cover debt amortization, as well as operation and maintenance costs, with an appropriate safety margin.

1. Fee/Rate Model. The applicant must demonstrate that the proposed fee/rate model will produce the cash-flow to support debt service requirements as well as operation and maintenance costs.

1. Project Management. The applicant must demonstrate that it has the capacity to provide service at a reasonable price, implement and operate capital improvement programs independently, and undertake necessary accounting and financial reporting.

In accordance with Article I of the Border Environment Cooperation Commission's (BECC) Procedures Regarding Public Notice and Comment on Project Applications, the BECC has received a Step I Form for the following project during the month of February. Please note that this listing does not represent any type of BECC staff recommendation concerning the potential for project certification.

Cummins Tire Recycling Facility, Cotulla, Texas. Process scrap tires through pyrolysis to recover oil, carbon black, steel and methane gas. Total Est. Cost: $8 million. Contact: Ray Freightner, Jr. CFO, Cummins Tire Recycling, P.O. Box 748, Enid Oklahoma 73702, Tel: (405) 233-6000; Fax: (405) 233-9858. Rec'd: 2/17/97.

For more information, contact: Edgardo Tovilla, Technical Coordinator, at tel: (011-52-16) 29-23-95; e-mail etovilla@cocef.interjuarez.com.

Kudos to Edgardo for his contributions behind the scenes!

The draft Technical Assistance User's Manual will be ready for public review by the middle of March 1997. The BECC is seeking comments on the proposed manual before it is approved by the Board of Directors. The manual will outline the procedures to apply for technical assistance from the BECC.

The draft manual will be available on BECC's Home Page: http://cocef.interjuarez.com, or by request. Contact: Mr. Hector Gonzalez, BECC's Program Manager for Strategic Planning, at tel: (011-52-16) 29-23-95; or e-mail: hgonzalez@cocef.interjuarez.com.

The next public meeting of the BECC Board is scheduled for June 18, 1997, in Mexicali, Baja, California. Projects to be considered during the meeting will be announced on the BECCNET and BECC Home Page at least 45 days prior to the meeting.