Border Environment Cooperation
Commission and North American
Development Bank :
Background and Issues
J.F . Hornbeck
Specialist in Industry Analysis and Finance
Specialist in Environmental Policy
Environment and Natural Resources Policy Division
January 20, 1995
Border Environment Cooperation Commission and
North American Development Bank :
Background and Issues
In October 1993, the United States and Mexico adopted the Agreement
between the Government of the United States of America and the Government of
the United Mexican States Concerning the Establishment of a Border
Environment Cooperation Commission (BECC) and a North American
Development Bank (NADBank) . Both governments anticipated that the North
American Free Trade Agreement (NAFTA) would generate increased economic
activity in the border region, and that existing environmental conditions would
worsen without a targeted, binational effort to address infrastructure needs .
For many in Congress, support for NAFTA was partially contingent on the
identification of a mechanism for financing border environmental projects .
The Agreement approved the establishment of the BECC and the NADBank
to assist border-area communities in meeting environmental infrastructure needs
and to provide community adjustment and investment assistance . The BECC
is directed to help border States and communities coordinate projects and
assemble financing packages . The NADBank's key function is to evaluate the
financial feasibility of projects certified by the BECC and to facilitate their
financing. The BECC and the NADBank are scheduled to begin operating in FY
The NADBank is modeled after the multilateral development banks and will
be capitalized equally by both the United States and Mexico . Paid-in and
callable capital subscriptions will be leveraged to borrow funds from the
international bond markets, which will be used to make infrastructure loans .
Project financing, mostly loans, will be arranged by the NADBank and include
a mixture of government and perhaps private funds . Some concessionary
financing (grants) may also be needed .
At least two financial issues may need to be addressed. First, it may be
necessary to reconcile sometimes conflicting environmental and financial criteria
that will be used to select projects . Second, because the NADBank is in the
business of arranging financing for projects, not paying for them outright,
project finance options may have to be carefully assessed, with particular
attention paid to the amount of concessionary financing (grants) that will likely
continue to be needed to support border environmental infrastructure .
Additionally, the BECC and the NADBank are perhaps best viewed as parts
of a broader equation for solving border and transboundary environmental
problems that are largely associated with trade-related economic growth .
Existing conditions in the region derive in varying degrees from policies, actions,
and/or inactions involving all levels of government and the private sector .
Similarly, effective solutions to these and future problems would likely nvolve
the participation of each of these parties .
BORDER REGION ECONOMIC AND POPULATION GROWTH 2
Border Environmental and Health Conditions 6
ECONOMIC DEVELOPMENT AND BORDER
An Economic Rationale for a Binational Solution 11
Balancing Costs and Benefits
BORDER INFRASTRUCTURE NEEDS ASSESSMENTS 15
BORDER ENVIRONMENT COOPERATION COMMISSION 20
Certification for Project Financing 22
Organization and Management
Relationship to Bilateral Agreements
The International Boundary and Water Commission 24
The 1983 La Paz Agreement
THE NORTH AMERICAN DEVELOPMENT BANK 25
Source of Funds
Use of Funds
Environmental Infrastructure Projects 28
Community Development and Investment 30
Miscellaneous Powers and Provisions
IMPLEMENTATION AND POLICY ISSUES 31
Mitigating Future Environmental Problems 31
Project Finance and Risk Management
Capitalization and Expectations
LIST OF TABLES
Table 1 .
Table 2 .
Populations Projections for Mexican Border Cities in 1990,
2000, and 2010
Border Environmental Infrastructure Needs Estimates
(1993-2003) by Category and Country 17
NADBank Financial Commitments from the United States
Populations of the Metropolitan Areas and/or Counties of
U.S . and Mexican Sister Cities in 1980 and 1990 35
LIST OF FIGURES
Figure 1 . Population of U .S. and Mexican Sister Cities in 1980 and 1990 . . 3
Figure 2 . Map of U.S.-Mexico Border Region 4
Figure 3 . Border Environmental Infrastructure Needs (1993-2003)
Estimated by the Sierra Club and the U .S . Council of
Mexico-U .S. Business Committee
Border Environment Cooperation Commission and
North American Development Bank :
Background and Issues
In October 1993, the United States and Mexico adopted the
between the Government of the United States of America and the Government of
the United Mexican States Concerning the Establishment of a Border
Environment Cooperation Commission and a North American Development
Bank . (Hereafter referred to as the Border Environment Cooperation
Agreement) . This Agreement was prompted by the negotiation of the North
American Free Trade Agreement (NAFTA) and was the result of efforts by the
United States and Mexico to develop a strategy for planning, coordinating, and
financing environmental infrastructure projects in the border region .'
Both governments anticipated that NAFTA would generate increased
commercial and industrial activity in that region, and that existing
environmental and public health conditions would worsen without a targeted,
binational effort to address infrastructure needs . Although separate from
NAFTA, the Border Environment Cooperation Agreement was made contingent
on the entry into force of the trade agreement . The two key objectives of this
bilateral strategy are : 1) to facilitate control of transboundary pollution ; and 2)
to capture economies of scale for environmental infrastructure projects that can
jointly serve neighboring border communities .
The Border Environment Cooperation Agreement approved the
establishment of the Border Environment Cooperation Commission (BECC) and
the North American Development Bank (NADBank) primarily to assist borderarea communities in meeting environmental infrastructure needs . Additionally,
up to ten percent of the NTADBank's capital will be reserved for NAFTA-related
community adjustment and investment . The BECC is directed to help border
States and communities coordinate, design, and mobilize financing for projects
and to certify projects for financing . The NADBank's key function is to evaluate
the financial feasibility of projects certified by the BECC and to facilitate their
financing . Congress authorized U .S. participation in the BECC and NADBank
in NAFTA implementing legislation (P.L. 103-182) . The BECC and the
NADBank begin operating in FY 1995 .
1 The border region is the area 100 kilometers (62 miles) on each side of the
international boundary as defined in Article 4 of the 1983 Agreement between the United
States of America and the United Mexican States on Cooperation for the Protection and
Improvement of the Environment in the Border Area (the La Paz Agreement) . The
Border Environment Cooperation Agreement reaffirms the goals and objectives of the La
In May 1994, President Clinton issued an executive order on the Border
Agreement which states that it is to be implemented :
consistent with United States policy for the protection of human,
animal or plant life or health, and the environment . The Agreement
shall also be implemented to advance sustainable development,
pollution prevention, environmental justice, ecosystem protection, and
biodiversity preservation and in a manner that promotes transparency
and public participation in accordance with the North American Free
Trade Agreement and the Agreement .
The executive order designates the Secretary of the Treasury, the Secretary
of State, and the Administrator of the Environmental Protection Agency (EPA)
as the U.S . Government representatives to the Board of Directors of the
NADBank. The U.S . Government members of the BECC Board of Directors are
the EPA Administrator and the U.S. Commissioner for the International
Boundary and Water Commission (IBWC) .
This report explores environmental, economic, and financial issues relating
to the BECC and NADBank . Analysis focuses on environmental and health
problems associated with economic growth of the border area, economic issues
related to these environmental problems, infrastructure needs, preliminary
operating characteristics of the BECC and NADBank, and policy issues that may
still need to be addressed .
BORDER REGION ECONOMIC AND POPULATION GROWTH
The U .S.-Mexico border runs approximately 2,000 miles from the Gulf of
Mexico to the Pacific Ocean (see figure 2 on page 4 .) Although much of the
region is arid and has limited water supplies, economic development and
population growth have proceeded at a rapid pace in recent decades . Between
1980 and 1990 alone, the border-area population increased by more than 60
percent and now exceeds 9 .5 million people . More than 80 percent of this
population lives in seven of fourteen pairs of rapidly growing "sister" cities :
Tijuana, Baja California/San Diego, California ; Mexicali, Baja
California/Calexico, California ; Nogales, Sonora/Nogales, Arizona ; Cuidad
Juarez, Chihuahua/El Paso, Texas ; Nuevo Laredo, Tamaulipas/Laredo, Texas ;
Reynosa, Tamaulipas/McAllen, Texas ; and Matamoros, Tamaulipas/Brownsville,
Texas. The U.S.-Mexico border is now the busiest border in the world,
averaging 300 million border crossings annually . Population growth in U.S .Mexican sister cities from 1980 to 1990 is shown in figure 1 on the following
page . Populations for the major sister cities are shown in table 4 on page 35 .
Past and ongoing trade, economic development, and immigration policies
have attracted people and industry to the border area . On the Mexican side,
families were drawn to the region in significant numbers during the Bracero
program (1942-1960), which permitted Mexican workers to enter the United
States for seasonal agricultural work .' In 1965, the Mexican Government
initiated the Border Industrialization Program establishing a quasi free-trade
zone in the border region . This program, commonly known as the maquiladora
program, was created to promote foreign investment in Northern Mexico to
foster economic development and provide employment for area residents,
including Mexican farm workers who became unemployed with the end of the
Bracero program . 3
Population of U .S. and Mexican Sister Cities in 1980 and 1990
2 Hufbauer, Gary C . and Jeffrey J. Schott . North American Free Trade: Issues and
Recommendations. Institute for International Economics. 1992 . p . 91 .
3 U .S . Library of Congress . Congressional Research Service . Mexico's Maquiladora
Industry, by M . Angeles Villarreal . CRS Report for Congress 93-1050, December 14,
1993. p . 1 .
U .S . - Mexico Border Region
Source : U .S . Environmental Protection Agency, SEDUE, 1991
The term "maquiladora" refers to the labor-intensive, export-oriented
processing and assembly plants located in the Mexico border area that use
imported materials and inputs and that export intermediate and final products .
The program permits 100 percent foreign investment and allows temporary
importation of equipment, components, and inputs into Mexico on a duty-free
basis . Finished products using U .S . materials typically pay duty when exported
to the United States only on the value added to the product in Mexico' This
program has not only provided employment to residents of Northern Mexico, it
also has attracted tens of thousands of families to the border area in search of
jobs .' These workers and their families account for a large percentage of the
population along the border .
Maquiladora industries have proliferated as predominantly U .S . companies
located plants in Mexico near the border to take advantage of low labor costs,
preferential tariff treatment, and proximity to U .S . suppliers and markets . The
number of maquiladoras increased from 12 plants employing roughly 3,000
people in 1965 to more than 1,900 plants employing more than 470,000 people
in 1991 .
From 1983 to 1991, the average annual growth rate for the
maquiladoras in terms of plants and employment was 16 percents Although
the Mexican government has allowed maquiladoras to locate throughout Mexico
since 1972, nearly 80 percent of the plants are concentrated in six Mexican
border cities .' By 1991, nearly 380,000 people were employed in the border
region by maquiladoras, while other industries employed more than 500,000
additional people . 8
Although industrial growth has not been as vigorous on the U .S . side of the
border, many of the same types of industries found on the Mexican side of the
border are also present on the U .S . side . In addition, continued economic
growth experienced throughout the U .S . sunbelt generally has contributed to
the population growth along the U .S . side of the border.
Proliferation of unimproved settlements around the maquiladoras in
Mexico and, to a lesser but significant degree, in the United States has been an
unanticipated result of this rapid, unplanned economic growth . In addition,
' Under NAFTA, the maquiladora program eventually is likely to end as the duty
advantages of the program cease to exist with the elimination of North American tariffs,
and as the Mexican market becomes open to maquiladora products .
' U .S . Environmental Protection Agency and the Secretaria de Desarrollo Urbano y
Ecologia . Integrated Environmental Plan for the Mexican-U.S. Border Area (First Stage,
1992-1994). 1992 . Summary, p . 11 .
6 Integrated Environmental Plan for the Mexican-U .S. Border Area, p . II-9.
' Office of the U .S . Trade Representative . Review of U.S . Mexico Environmental
Issues. Feb . 1992 . p . 75 .
8 Integrated Environmental Plan for the Mexican-U.S. Border Area, p . 11-9 .
established urban areas along the border have experienced overwhelming growth
and have become heavily congested .
One projected benefit of NAFTA was that opening Mexico's markets to U .S.
goods would reduce the incentive for businesses to concentrate in the border
region, and thus reduce border congestion . Even under this scenario, most
NAFTA analyses projected that the border area would experience significant
additional growth under NAFTA .9 In a 1994 study of border sanitation issues,
the U .S. Army Corps of Engineers projected extensive population growth in
Mexico's border cities, estimating that all of these cities would at least double
their populations by 2010 . (See table 1, below .)
Table 1. Population Projections for Mexican Border Cities
in 1990, 2000, and 2010
from 1990 to 2010
Source : U.S . Army Corps of Engineers, Fort Worth District, International Boundary and Water Commission .
Prepared for U .S . Section, IBWC .
September 1992 . p . 4 .
Sanitation Issues, United States and Mexico. Design and Cost Estimate Report .
Border Environmental and Health Conditions
Population growth associated with rapid economic development has far
outpaced the efforts of Federal, State and local governments on both sides of the
border to meet the demand for public environmental services, to ensure
industries are meeting pollution control requirements, and to achieve and
maintain applicable environmental protection goals and requirements .
Largely because of the lack of environmental services and infrastructure,
the United States and Mexico now face a number of environmental and health
issues that are to a significant degree transboundary in nature . The U .S.
Department of Commerce identified Mexico's past trade liberalization and the
9 See, for example,
Review of U.S.-Mexico Environmental Issues.
Supra at 6 .
establishment of nearly 2,000 manufacturing and assembly facilities primarily
in the last 15 years as a key factor contributing to current strain on border
region environmental infrastructure . lo
The Environmental Protection Agency and SEDUE (Mexico's former
environment ministry, now SEDESOL) have identified two general problem
the absence of municipal pollution control facilities for a majority of
the border population; and
inadequate industrial pollution control facilities to properly manage
the wastewater, air pollution, and hazardous wastes being
Implementing legislation for the Border Environment Cooperation
Agreement states that the Border Environment Cooperation Commission will
give initial priority to the need for municipal pollution control facilities for
wastewater, drinking water, and municipal solid waste ." Problems in these
areas are thought to pose the greatest threats to public health and involve
services that are traditionally in the public domain . Needs pertaining to
industrial pollution control are predominantly related to regulatory compliance
and typically are private sector costs, hence, industrial needs generally are not
likely to be addressed by the activities of the BECC and NADBank . (To the
extent that industries are included in municipal service areas, they would
benefit from public environmental infrastructure projects .)
Currently, many urban and rural areas in the border region lack basic
public health and sanitation facilities, including sewage collection and treatment
systems, drinking water supply systems, and municipal solid waste collection
services . These conditions are most severe on the Mexican side of the border .
A joint 1992 report by the environmental agencies of Mexico and the United
States concluded that :
the increased population along the border, particularly in Mexico, has
brought about serious problems due to the uncontrolled urban growth
and unplanned land use . Although significant investments have been
made to resolve existing problems, they have been insufficient thus far
to U .S
. Department of Commerce, International Trade Administration . Proceedings
of the U.S. Mexico Border Infrastructure Conference . San Antonio, Texas . July 15-16,
Integrated Environmental Plan for the Mexican-U .S. Border Area . Summary, p . 11 .
North American Free Trade Agreement, Texts of Agreement, Implementing Bill
Statement of Administrative Action, and Required Supporting Statements . Message from
the President of the United States . 103rd Congress, 1st Session . H . Doc. 103-159, v . 1,
Nov . 4 . 1993. p . 230.
to compensate for the current deficits in infrastructure and urban
services . . . . In addition, the lack of preparation of land suitable for
housing has resulted in unplanned settlements lacking in basic
services, including wastewater treatment, public transportation
facilities, and adequate means to manage and dispose of municipal
solid waste . 13
A major concern for the United States is the daily flow of untreated
industrial wastewater and domestic sewage into the United States from Mexico
in the areas of Tijuana, Mexicali, and Nogales and into the Rio Grande River all
along the Mexico-Texas border . Tijuana's wastewater collection and treatment
system is inadequate, and each day, approximately 14 million gallons of raw
sewage flow into the Tijuana River and across the border into San Diego .
Ciudad Juarez has a population of roughly 1 million people, but no sewage
treatment plant, and approximately 45 million gallons per day of wastewater
and irrigation water are discharged untreated into an open ditch and used to
irrigate field crops . Nuevo Laredo has a limited sewage collection system and
no wastewater treatment facilities, and each day 27 million gallons of untreated
wastewater flow into the Rio Bravo/Rio Grande . 16 Other communities along
the border face similar situations .
Wastewater treatment capacity has been exceeded in many border
Untreated sewage and industrial
communities for more than a decade .
wastewaters have contaminated drinking water supplies in numerous locations
in the region . Transboundary aquifers (the primary source of water supply for
a significant portion of border residents and industries) are threatened both
with contamination and depletion .
The absence of environmental infrastructure for sewage treatment and
drinking water supplies poses serious health risks for residents . Incidents of
hepatitis, intestinal infections, stomach disorders, skin rashes, and tuberculosis
are increasing along the border . In 1990, the Council on Scientific Affairs of the
American Medical Association reviewed border environmental health conditions
and concluded that "the border area is a virtual cesspool and breeding ground
Integrated Environmental Plan for the U .S .-Mexico Border Area, p . II-6.
14 Through the International Boundary and Water Commission and with the
participation of Federal, State, and local governments, the United States and Mexico are
jointly constructing an international wastewater treatment plant in the United States to
treat Tijuana sewage . Groundbreaking ceremonies were held in July 1994 . Congress
authorized appropriations for this project under section 510 of the Water Quality Act of
1987 . Through FY 1995, Congress has appropriated $234 .7 million for the Tijuana
project, approaching the $239 .4 million cap imposed in FY 1993 appropriations (P .L . 102389) . The current total cost estimate for the project is $383 million .
Integrated Environmental Plann for the U .S .-Mexico Border Area, p. 111-8 .
for infectious disease ." 16 In 1993, in certain areas within El Paso County,
Texas, 90 percent of the population was infected with hepatitis ." Health
officials in both countries are concerned about the approach of cholera in the
region and are monitoring the occurrence of this disease .
The absence of municipal solid waste collection and disposal systems in
Mexico also creates transboundary health problems . Although the figures are
imprecise, EPA and SEDUE estimated that on the Mexican side of the border,
roughly 2,980 tons of municipal solid waste are generated each day, but only one
half of that amount is collected ." Consequently, almost 1,500 tons of solid
waste are left uncollected each day . Of the amount collected, approximately 65
percent is disposed of in open air dumps . Most communities lack sanitary
landfills, incineration facilities, and recycling programs . Although the daily
waste generation rate is higher for U .S . border communities (approximately
5,800 tons per day), municipal waste collection and management systems are
generally well established .
On the U .S . side of the border, municipal environmental services and
facilities are generally in place in the major cities . There is, however, a pressing
need for environmental infrastructure among the hundreds of unincorporated
communities, or colonias, that have sprung up around established urban areas .
Colonies have been described as substandard, typically rural unincorporated
communities or housing developments that lack some or all basic infrastructure
including plumbing, public water and sewer, garbage collection, paved streets,
and sometimes electricity ."
Texas and New Mexico officials estimate that nearly 300,000 people live in
colonias in those two States . The prevalence of houses lacking sewer and water
facilities is particularly serious in Texas, which has an estimated 1,200 colonias .
State officials estimate that roughly 25 percent of residents in these colonias
have no indoor plumbing; more than 20 percent lack an adequate drinking water
source, and nearly all lack sewage treatment 20
Committee on Scientific Affairs . A Permanent U .S .-Mexican Border Environmental
Health Commission . Journal of the American Medical Association, June 27, 1990, p .
U .S . Congress . Senate . Committee on Energy and Natural Resources . Water
Supply Needs of the Colonia in Texas . Hearings, 103rd Cong., 2d Sess . May 10, 1994 .
U .S . Govt . Print . Off., 1994 . p . 46 .
Integrated Environmental Plan for the U .S .-Mexico Border Area . p . III-23 .
19 Hearings on Water Supply Needs of the Colonia in Texas, p .
Ibid, p . 21 .
At a 1994 hearing before the Senate Committee on Energy and Natural
Resources, a representative of the Office of the Governor of Texas explained the
causes of the problem as follows :
[in Texas] came into existence due to a combination of
circumstances : a lack of affordable housing, unscrupulous developers,
and weak subdivision rules in Texas . Developers sold families small,
unimproved lots with the promise that water, sewer, and other
services would soon follow . . . . [T]he situation continued for decades,
leaving Texas with the reality of over 1,200 colonias and nearly
280,000 residents 21
Since 1989, Texas has enacted legislation and taken other actions to
improve conditions in colonias and to prevent future illegal subdivisions . Voters
approved $250 million in State-issued bonds for colonia water and wastewater
projects, and legislation created model subdivision rules that counties must
adopt to receive colonia funding. In addition, the State Attorney General has
filed a series of lawsuits against colonia developers to hold them accountable for
basic infrastructure improvements that were promised to colonia residents 22
A substantial portion of environmental infrastructure needs identified for
the U.S side of the border are for colonias . Overall, EPA estimates that U .S.
colonia needs (primarily for wastewater treatment) total approximately $721
million . This includes $696 million in needs reported by Texas, and roughly $25
reported by New Mexico . (A broader discussion of border infrastructure
needs and funding is provided below.)
ECONOMIC DEVELOPMENT AND BORDER
Historically, economic development has frequently been at odds with
environmental concerns, often causing unintentional environmental side
effects 2 3 Current thinking, however, has made room for an expanded concept
of economic development, which the World Bank defines as "a sustainable
increase in living standards that encompass material consumption, education,
Testimony for the Office of the Governor, State of Texas,
Hearings on Water
Supply Needs of the Colonia in Texas, p . 35 .
p. 35-36 .
For a discussion of environmental problems and development programs see :
Schwartzman, Stephan . Bankrolling Disasters : International Development Banks and
the Global Environment . Washington, D.C., Sierra Club, 1986 and U.S. Library of
Congress. Congressional Research Service . International Financial Institutions and
Environment: Multilateral Development Banks and the Global Environment Facility .
Report No . 943-173 ENR, by Susan R . Fletcher and Betsy A . Cody . February 25, 1994 .
24 This relatively new emphasis on
health, and environmental protection ."
environmental protection surfaced again as a point of vigorous debate in the
passage of NAFTA, leading to, among other measures, creation of the BECC and
the NADBank .
In the U .S .-Mexico border region, unplanned economic growth stems from
the largely unfettered workings of industrial development and cross-border trade
and, as discussed above, has led to at least two environmental concerns . First,
Mexico's lax regulatory requirements and enforcement allowed high levels of
Transboundary effects of pollution compound the
industrial pollution ."
problem when, for example, Mexican emissions and discharges can keep U .S .
communities from meeting Federal environmental standards . In addition to the
environmental effects of pollution, differences in environmental law and
enforcement between Mexico and the United States become trade issues when
economic benefits may be reaped by businesses having a choice to operate in two
unequal regulatory environments ." To a degree, these particular problems are
addressed in the NAFTA environmental side agreement dealing with legal,
regulatory, and enforcement issues .
Second, and more closely related to potential BECCINADBank solutions,
public health concerns have arisen over inadequate infrastructure investment
in drinking water, solid waste disposal, and wastewater treatment facilities .
These public capital deficiencies have both industrial and residential
implications in the border communities, including the colonias in the United
States . Together, these two environmental and economic concerns define the
additional policy parameters that many groups felt had to be addressed for
NAFTA to be a success .
An Economic Rationale for a Binational Solution
An economic analysis of these environmental problems would suggest that
they are linked to at least two significant market failures : the existence of
negative externalities in the form of excessive pollution, and inadequate
attention to public goods investment . Each can be addressed by government
action, but because local, State, and national governing bodies have so far failed
to meet these environmental challenges, proponents of a NAFTA-related
World Development Report 1991 : The Challenge of Development .
Oxford University Press, June 1991 . p . 31 .
25 U .S . Library of Congress . Congressional Research Service . North American Free
Trade Agreement: Environmental Issues, by Mary Tiemann . Issue brief 93049, archived .
p . 10 .
To the extent that firms operating in Mexico do not pay the costs of pollution
abatement that they would in the United States, they enjoy a production cost subsidy .
Conversely, Mexico has argued that heavier environmental regulations in the United
States are tantamount to a nontariff barrier if they inhibit the movement of Mexican
goods across the border .
solution argued that a binational approach was required to ensure that greater
economic activity associated with NAFTA would not worsen already serious
environmental problems ."
Inherent in recognizing that environmental problems are a direct result of
economic activity is the idea that undeterred polluting is the sign of a market
economy not fully incorporating the "social costs" of conducting business .
Economists refer to such social costs as externalities precisely because they are
"external" to the market place and hence are not reflected in the price of goods
produced . In theory, externalities are market failures that can be remedied by
government intervention, which is appropriate when it appears unlikely that the
private sector will "internalize" external costs, as with pollution in this case ."
Without government intervention, society as a whole must bear the cost of
pollution and the social cost of production remains higher than the private cost
incurred by business, leading to relatively higher levels of output and pollution,
as readily observed in the border region ."
Pollution is often cited as a textbook case of a negative externality and may
be addressed by two fundamental public policy solutions that, until the passage
of NAFTA, have failed to materialize in any meaningful way on the Mexican side
of border area . Governments may : (1) regulate pollution, health, and safety
standards or, (2) tax businesses to reflect the cost of pollution . Theoretically,
each provides a way to ensure that firms account for both the marginal social
and private costs of production, thereby leading to a more efficient level of
output as well as an abatement of environmental problems ."
Governments may also entice firms to adopt pollution controls by
subsidizing their cost . Although this approach results in a reduction in
pollution, it shifts the burden of cost away from those who purchase goods from
the polluting firm to the general taxpayer . It also fails to promote the socially
optimal level of production because the firm has not absorbed the entire
27 Hinojosa-Ojeda, Raul . The North American Development Bank : Forging New
Directions in Regional Integration Policy . Journal of the American Planning Association .
Summer 1994, p . 302 .
28 See . Stiglitz, Joseph E . Economics of the Public Sector. New York, W . W. Norton
& Company, 1986. p. 179-81 .
29 A related argument holds that in two otherwise identical countries, trade between
one with "ill-defined" environmental "property rights" and another with well-defined
environmental "property rights" results in the overuse and misallocation of environmental
resources in the production process of the first country . This outcome leads to inefficient
trade patterns of "environmentally intense goods" and compounds the social cost problem
experienced by developing economies that are induced to specialize in so-called "dirty
Chichilnisky, Graciela .
North-South Trade and the Global
Environment . American Economic Review, September 1994 . p . 851-52 .
Stiglitz, Joseph E . Economics of the Public Sector, p . 184-92 .
marginal social cost of production . Because of the inefficiencies this option
introduces, economists tend to advise against it .
In a separate but related issue, the public health problems associated with
population increases in the colonias and Mexican border towns point to the need
for environmental infrastructure to support essential services such as drinking
water, wastewater treatment, and solid waste disposal . Such infrastructure may
be thought of in economic terms as a public good because the benefits are widely
shared and the infrastructure will not be provided in sufficient quantity if left
to the private sector . Unlike the provision of private goods, the allocation of
which is generally left to the market, the appropriate level of public good
production requires government action, which has been inadequate in the border
From an economic perspective, the NAFTA environmental side agreement
and the Border Environment Cooperation Agreement may be viewed as the
culmination of negotiated solutions designed to account for the external costs
of border development as well as to meet the immediate and emerging need for
public goods in border communities . With respect to the external costs of
pollution, the two corrective policy options mentioned above have been adopted,
although they do not directly relate to BECC and NADBank operations . First,
in the NAFTA side agreement, countries commit to enforcing their domestic
industrial environmental regulations that require producers to meet health,
safety, and environmental standards . Second, the dispute settlement process
includes provisions for use of fines and sanctions in trade-related cases of
unresolved nonenforcement 3' Because governments are obliged and compelled
by these provisions to enforce environmental laws, business is likely to be under
greater pressure to comply, and thus, to absorb the added costs of production .
Albeit indirectly, these solutions are commensurate with the "polluter-pay"
principle advocated by most public policy analysts, including economists .
As to the issue of public goods, the BECC and the NADBank provide the
third solution of helping finance infrastructure by providing low-cost funds to
environmental projects . The agreement emphasizes assistance for municipal
services infrastructure that provides clean drinking water, wastewater
treatment, and solid waste disposal . Much like industrial pollution control costs,
however, beneficiaries of these environmental services, both commercial and
residential, are ultimately expected to pay for most of them through a user-fee
The NADBank will also play a small role in helping communities adjust to
problems that arise from a more liberalized trade relationship between the two
countries . This assistance amounts to a subsidy to those communities that may
have businesses that are unable to adjust quickly, or at all, to increased
competition. Although the benefits of free trade, such as reducing costs of many
goods, may be national in scope, the costs, such as business movements or
closures, may be localized in cases where communities in one country are heavily
31 Tiemann, North American Free Trade Agreement: Environmental Issues, p . 6-7.
dependent on businesses that have direct competitive counterparts in the other .
NADBank adjustment assistance is expected to ameliorate specific potential
short-term economic disruptions .
Balancing Costs and Benefits
These new institutions can only be undertaken at some cost to the Federal
Governments of Mexico and the United States . Direct costs include the
administrative expenses of operating the two organizations and $450 million in
paid-in capital needed to fund the NADBank . Cost was a pivotal issue for some
Members of the House Appropriations Committee who appeared before the
House Banking Committee . They recognized that given existing budget
constraints, including arrearages in U .S . commitments to other international
financial institutions, NADBank funding could only be done at the expense of
other programs ."
The Federal Government, however, has already committed funding for
assisting the colonias and other border communities with their environmental
problems, as well as for helping Mexico directly and through the International
Boundary and Water Commission (IBWC) . In this light, the BECC/NADBank
alternative may be viewed as a possible option for reducing future Federal
outlays by facilitating the use of alternative financial resources . Nonetheless,
the question raised repeatedly in congressional hearings was whether the costs
resulted in sufficient benefits .
In addition to direct costs, from an economic perspective, it is important to
recognize that there are opportunity costs to governments from influencing
credit market decisions . To the extent that the NADBank directs or subsidizes
capital flows to border infrastructure projects, other uses, which may have
higher private returns to capital, are being forgone . This approach suggests
that the Federal governments of the United States and Mexico implicitly assume
that the social rate of return for the NADBank project equals or exceeds the
difference in private rates of return between the NADBank project and the
project forgone .
The benefits associated with NAFTA and BECC/NADBank costs are, on one
level, diffuse . That is, the resulting improved trade should benefit many sectors
and regions of the U.S . economy. Benefits of correcting regional market failures
may also show up as national economic efficiency gains . In addition, because
pollution can affect communities across international borders, investments in
Mexico may have positive spillover effects in the United States . To the extent
that these benefits and costs are both national in scope and that a public policy
U .S . Congress . House . Committee on Banking, Finance, and Urban Affairs .
Subcommittee on International Development, Finance, Trade, and Monetary Policy .
United States-Mexican Border Environment Agreement . Hearings, 103d Cong., 2d Sess .
Oct . 27, 1993 . Washington, U .S . Govt . Print . Off., 1993 . p . 2 and 3 . (Hereafter cited
as Border Environment Hearings,)
response is warranted, it is appropriate for the Federal Government to be
On another level, however, direct infrastructure investment may benefit the
border region most . The national costs, in this case, represent a subsidy to the
State and local governments, businesses, and communities of the border area .
The Border Agreement recognizes that special government assistance and
subsidies are required to meet these goals on the border, at least on a selective
basis, because the region has not been compelled to meet environmental
guidelines and is apparently unable to generate sufficient funds from local
resources to finance the social capital spending necessary to improve working
and living conditions .
The BECCINADBank, then, have three specific goals of financing
construction of environmental infrastructure, accelerating the process of putting
this infrastructure in place, and providing limited community adjustment
assistance . It is hoped that these policy directives will help solve immediate
environmental and public health problems and perhaps allow the border area to
proceed along a more progressive course of "sustainable" economic and social
BORDER INFRASTRUCTURE NEEDS ASSESSMENTS
Two issues dominated the debate on the BECCINADBank : specific
environmental needs of the border area and the reasons for their not having
been met by private capital markets and local governments .
By design, the BECCINADBank will give priority to infrastructure that, in
the United States, is typically provided at the municipal level and usually
involves some type of user fee as the financing mechanism . NAFTA left the
regulatory process to deal with other environmental concerns, such as industrial
pollution and hazardous waste, which do not readily lend themselves to user-fee
solutions . Figure 3 displays two series of infrastructure estimates. The first is
provided by the U .S. Council of Mexico-U.S. Business Committee, a subgroup of
the Council of the Americas sponsored by business interests in both countries .
The second estimate comes from the Sierra Club, an environmental group . The
data were developed for a ten-year time period with total needs estimated to be
between $5 .8 and $8 .7 billion . In addition, the U .S. Department of the Treasury
is on record as citing an $8 billion figure in congressional testimony . 33
As figure 3 indicates, the Sierra Club estimate for the three infrastructure
categories is over 50 percent higher than that of the U .S . Council of Mexico-U .S .
Ibid, p . 8 and 141 .
Business Committee ." Most of the discrepancy can be explained in terms of
the different scope of needs defined rather than methodological inconsistencies .
Under these circumstances, the estimates are closer than might appear at first
Border Environmental Infrastructure Needs (1993-2003) Estimated by the
Sierra Club and the U.S . Council of Mexico-U .S . Business Committee
U .S.-Mexico Business
Sierra Club 0U.S .-Mexico Business
Hs. Bank Corn., 10/27(93, pp. 105 and 141 .
To explain these differences, the Sierra Club argues that for water supply
infrastructure, it relied more heavily on Texas State data than on data provided
by Mexico and included a larger sample of needs in Texas than only those of the
colonias. With wastewater, both estimates borrowed heavily from studies done
by the U .S . Army Corps of Engineers, but the Sierra Club added operations,
maintenance, and new service costs associated with sewer hookups in Mexico .
For solid waste, the Sierra Club included estimates for collection and clean-up
costs in addition to future landfill needs, which were part of both estimates . 35
34 Needs estimates developed by the U .S . Council of U .S .-Mexico Business Committee
and the Sierra Club rely heavily on a number of estimates made by the following
organizations : the Texas Water Development Board ; U .S . Environmental Protection
Agency; San Diego Clean Water Program ; Southwest Border Infrastructure Initiative ;
U .S . Army Corps of Engineers ; and the Mexican Secretariat of Social Development .
35 House Committee on Banking, Finance, and Urban Affairs,
Hearings, Oct, 27, 1993 . p . 121 .
As may be seen from table 2 below, there is a difference in the estimated
needs between the two countries because, in some respects, Mexico lags behind
the United States in developing infrastructure . Many water supply and
distribution facilities in Mexican border cities are not up to the same standards
as those in U .S . border cities and many Mexican households remain unserved .
Wastewater treatment, which in Mexico is by far the need category with the
greatest dollar discrepancy compared to the U .S ., is required for both residential
and commercial use .
These services are currently provided by municipal
authorities and cover much of the residential needs, but commercial needs,
especially those of the maquiladoras, have not been well documented, but are
expected to be costly . Finally, Mexico needs to upgrade its facilities for solid
waste disposal and also institute charges for residential users who have been
given free access to landfills (including garbage collection) ."
Table 2 . Border Environmental Infrastructure Needs Estimates
(1993-2003) by Category and Country ($ millions)
Solid Waste Disposal
U .S . (Bus)
U .S. (SC)
Source : Congressional Hearings, Oct . p . 105 & 141 .
Bus = Council of Mexico-U.S . Business Committee estimate .
S C = Sierra Club estimate.
To date, Mexican border infrastructure projects have been financed
primarily by the national government and the IBWC . Additional loans have
been made by various multilateral development banks . Demand, however,
outstrips supply of financing resources for the projects needed to address
longstanding environmental problems .
Further, until 1992, Mexico did not have a legal structure in place that
allowed for local governments or independent agencies to provide environmental
services that could leverage user fees into borrowings for public capital projects .
Changes, however, are underway in the regulatory and financial market
environments . The National Water Law, passed in December 1992, put in place
a legal framework that allows for the creation of local autonomous agencies with
the authority to promote self-financing infrastructure projects based on user fees
Ibid, p . 151-58 .
being collected commensurate with service costs . The law also expresses the
desire to access, where feasible, the private sector infrastructure financing
market in Mexico, which has also grown dramatically (although not without
problems) in recent years ." The NADBank eventually is also expected to
utilize this fledgling private capital market to further its goal of leveraging bank
funds for environmental infrastructure projects .
In the United States, border cities will need to expand many of their
environmental facilities to handle new growth and meet backlogged needs . In
general, the primary concern in border cities is not over a lack of aggregate
funds to meet infrastructure needs ; most needs are being met because of the
more highly developed regulatory environment and capital markets . The
colonias are the exception in all cases . Environmental capital spending is
needed most in these areas where per capita incomes are insufficient to cover
debt service necessary to support municipal bonds or to meet financial matching
requirements of Federal assistance programs .38
Responsibility for U .S . environmental infrastructure financing usually falls
to State and local governments, which have the authority to issue tax-exempt
bonds. The Federal Government assists through the State Revolving Fund
(SRF) program operated out of the Environmental Protection Agency (EPA), the
U.S. Department of Agriculture's (USDA) Water and Waste Disposal Grant
Program, and the Department of Housing and Urban Development's Community
Development Block Grant (CDBG) program . The SRFs, because they usually
support projects that are 100 percent debt financed, are not well suited to meet
the needs of the colonias, where low income levels cannot support user fees
sufficiently to guarantee regular servicing of debt payments .39
The Administration has recognized this problem and, for a number of years,
has requested appropriations for grants for border infrastructure projects . For
each of FY 1994 and FY 1995, the Administration requested $150 million for
border-area sewage treatment projects, including continued funding for the
Tijuana-South Bay (San Diego) international wastewater treatment plant, a
joint U .S .-Mexico project supported by the United States and California because
of cross-boundary pollution problems . Additional funding was requested
specifically for colonias .
Congress too has responded to this problem by authorizing EPA to issue
direct grants for border infrastructure projects from the "hardship communities"
funds . In FY 1994, $50 million and $10 million were appropriated to assist
Texas and New Mexico colonias, respectively . In addition, $58 million was
appropriated for the Tijuana-South Bay international treatment plant near San
Diego for treating Tijuana sewage .
Ibid, p. 152 .
Ibid, p. 144 .
Ibid, p. 154-55 .
FY1995 EPA appropriations provided an additional $52 .5 million for the
Tijuana-South Bay international treatment plant and $47 .5 million for
wastewater facilities in Nogales, AZ and Mexicali, Mexico, part of which will be
used for planning and design of other higher priority facilities in the border
areas to control municipal wastewater from Mexico . Also in FY1995, Congress
appropriated another $50 million for improving wastewater treatment in the
Texas colonias, $8 .2 million for expansion of water and sewer infrastructure in
Laredo, TX, $3 .5 million for wastewater treatment in Dona Ana County, NM,
and $5 million for a regional water quality research project in Pima County, AZ .
In addition to EPA grants, for fiscal years 1993, 1994, and 1995 the USDA
program targeted $25 million of its loan and grant funds specifically to meet the
needs of the colonias, which are being used for construction of water supply and
wastewater plants and to subsidize plumbing installation in individual houses .
A portion of border States' CDBG funds have also been targeted for colonias .
Notwithstanding recent appropriations, the overall financing picture is
complicated by the tentative nature of Federal spending to subsidize the needs
of colonias and the unlikely prospect that alternative financing resources can be
Although needs estimates may be challenged, the primary argument for a
BECC/NADBank rests on the assumption that Mexico is unable to generate
sufficient public resources to meet environmental standards in the border area
and that low per capita incomes in the colonias are insufficient to support a fullcost, user-fee financing system necessary to access the tax-exempt or private
bond markets . The combined "financing gap" between expected needs and
resources was estimated by the U .S . Council of the U .S .-Mexico Business
Committee to be $1 .9 billion for both Mexico and the United States ." The role
of the NADBank is to finance BECC-approved projects directly or provide the
assurances necessary to reduce risk so that financing packages can be created
to address unmet needs . The NADBank, in short, is expected to act as a catalyst
to bring other financing sources to the border area and thereby perhaps reduce
the amount of Federal grants that would otherwise be needed .
To reach the Administration's estimated $8 billion "needs" level assumes
that NADBank resources can be combined with current financing resources
discussed above and private capital .
Specifically, the U .S . Treasury has
identified the following funding sources for meeting estimated border
infrastructure needs over the next decade :
U .S . General Accounting Office . Water and Waste Disposal Grant Program ; Letter
of June 6, 1994 . RCED-94-229R . Washington, 1994 . p . 4 .
House Committee on Banking, Finance, and Urban Affairs, Border Environment
Hearings, Oct, 27, 1993 . p. 143 .
private financing; and as needed,
up to $2 billion from existing State and local program
State revolving funds, municipal revenue bonds, and t e colonies
program for projects on the U .S. side of the border ;
$2 billion in new funding from the World Bank and Inter-American
Development Bank, offered as loans to Mexico ;
approximately $1 .4 billion in U .S . and Mexican grants (half from the
United States) ; and
some $2 billion in loans or guarantees
infrastructure projects from the NADBank .42
Although State and Federal governments have already assumed much of the
financing burden, it is easy to overstate the likely participation of private
financing, particularly given that user-fee based infrastructure financing has
only recently been developed in Mexico .
Under the best of circumstances, privatizing infrastructure projects requires
the participation of many parties to diversify risk. Privatization efforts in
Mexico, however, have met with only limited success . Privatization projects for
road building and water supply have been scaled back because returns to capital
have not met with expectations . The World Bank has criticized Mexican
privatization efforts for lacking organization and management, which may
further slow the process of developing a viable private capital market for
environmental infrastructure projects ." Part of the NADBank's mission is to
help arrange financing during an admittedly long transition period where
regional growth should lead to greater economic self-sufficiency and rising
incomes that eventually will be able to support more traditional user-fee based
financing schemes .
BORDER ENVIRONMENT COOPERATION COMMISSION
The NAFTA debate focused an unprecedented amount of attention on the
worsening environmental conditions in the border region . Although in recent
years the United States and Mexico had increased their cooperation on border
environmental matters, NAFTA proponents and opponents agreed that a
commitment to cooperate was insufficient to address already major border
environmental problems . As the debate progressed, consensus emerged that
existing efforts needed to be supplemented by a bilateral mechanism for
Ibid, p. 32 .
Public Works Financing. Salinas' Infrastructure Goals Undone By Lack of New
Capital . September 1993, p . 26 and World Bank Blasts Mexican Concessions . Feb. 1994,
p. 26 .
financing border environmental infrastructure . Of the various funding options
considered, the NADBank proposal prevailed .
A second issue concerned the view that previous efforts to address border
problems had not adequately involved State and local officials or the public, and
had not been sufficiently coordinated with interested parties . Out of this debate
emerged the proposal for the Border Environment Cooperation Commission, an
organization separate from the NADBank that would work with State and local
governments, the private sector, and public interest groups to identify, develop,
and coordinate environmental projects . A key feature of the BECC is that it is
structured to be open, accessible, and responsive to local concerns .
The stated purpose of the BECC is "to help preserve, protect and enhance
the environment of the border region in order to advance the well-being of the
people of the United States and Mexico ." In carrying out its purpose, the BECC
is directed to cooperate with the NADBank, other national and international
institutions, and private sources supplying investment capital for environmental
infrastructure projects in the border region .
The BECC is primarily a coordinating agency that will help border States
and communities design and arrange financing for environmental infrastructure
projects, and oversee the use of project funds . Specifically, the BECC may assist
border States and communities, other public entities and private investors by
performing any or all of the following functions :
coordinating environmental i
preparing, developing, implementing, and overseeing projects,
including the design, siting and other technical aspects of projects ;
analyzing the financial feasibility and/or environmental aspects of the
evaluating social and economic benefits of the projects ;
organizing, developing and arranging public and private financing for
projects ; and
certifying applications for project financing for submission to the
NADBank or other financing sources . 4
rojects in the border
Article I, Section 2 . The Border Environment Cooperation
the BECC to set fees or other charges for its assistance, including the processing of
applications for certification (Article II, Section 5) .
The BECC is directed to mobilize sources of financing for projects from a
variety of sources including the NADBank, the private sector, and Federal, State
and local governments .
Certification for Project Financing
A primary activity of the BECC is to certify projects as eligible for funding
by the NADBank. The Commission may accept project applications from States,
localities, other public investors and private investors4 5 To be eligible for
certification, a project must meet or agree to meet the technical, financial,
environmental, or other criteria established by the BECC . A project also must
be able to meet any environmental laws in effect in the area in which the project
is to be located. For projects having significant environmental effects, an
environmental assessment must be presented with the application, and the
BECC Board of Directors must examine potential environmental benefits, risks,
and costs, available alternatives, and environmental standards and objectives of
the area . The Board, in consultation with States and localities, must also
determine that the project will provide a high level of environmental protection
for the affected area .
The BECC's guidance for selecting among qualified projects is provided in
more general terms . The Statement of Administrative Action accompanying
NAFTA and BECC/NADBank implementing legislation states that "the BECC
will initially give preference to waste water, water treatment, and solid waste
projects . . , . Such facilities will be important to improve environmental
conditions in the border area and to ensure that increased trade generated by
the NAFTA does not adversely affect environmental quality in that region ." 46
Organization and Management
The BECC, located in Ciudad Juarez, has a binational Board of Directors
comprised of five members from each country . The members for each country
include : 1) the senior environmental official ; 2) the commissioner of the
International Boundary and Water Commission ; 3) a representative from a
border State ; 4) a representative from a locality in the border region ; and 5) a
member of the public from the border region .
In July 1994, President Clinton named the State, local, and public members
of the BECC Board of Directors for the United States . The members are the
Chair of the Texas State Parks and Wildlife Commission, the Deputy Director
of the City of San Diego Division of Water Utilities, and the Director of the
45 Article II, Section 3 .
North American Free Trade Agreement, Texts of Agreement, Implementing Bill
Statement of Administrative Action, and Required Supporting Statements . Message from
the President of the United States . 103rd Congress, 1st Session . H . Doc 103-159, v . 1,
Nov. 4 .1993. p . 679 .
Radiation, Toxics, and Health Project, Southwest Research and Information
Center in Albuquerque .
The BECC Board is required to hold regular quarterly sessions and may
hold other special sessions as well . During each regular session, the Board must
hold at least one public meeting.' The first public meeting was held on
November 17, 1994, in Ciudad Juarez, Mexico, with more than 60 organizations
The Border Environment Cooperation Commission is designed to be
transparent in its operations and open to interested parties . The Border
Environment Cooperation Agreement provides opportunities for public
involvement in the BECC through public representation on the Board of
Directors that governs the BECC (the majority of members are from the border
area), and on the 18-member advisory council which is composed entirely of
border State and public representatives . Also, the public is to be notified of, and
permitted to comment on, proposed projects . The Agreement directs the BECC
to establish procedures that will :
ensure, to the extent possible, project documents are available to the
provide that notice is given and comments taken on guidelines
established by the BECC for environmental infrastructure projects and
on applications for certification received by the BECC ; and
enable the Board of Directors to receive complaints from groups
affected by projects . 8
The transparent structure of the BECC may present an administrative
challenge for members . The unusually high level of public representation and
anticipated public participation is not customary for Mexican governmental
organizations . Consequently, it may take some time for the BECC to become
proficient in communicating and coordinating its activities with interested
members of the public .
Relationship to Bilateral Agreements
The BECC joins two existing bilateral arrangements aimed at addressing
U .S : Mexico border resource and environmental issues : the International
Boundary and Water Commission (IBWC) and the 1983 Agreement to Cooperate
in the Solution of Environmental Problems in the Border Area (the La Paz
Agreement) . Despite the potential for overlap in missions, BECC advocates
Article III, Section 3 .
48 Article II, Section 4 .
during deliberations on the Border Environment Cooperation Agreement argued
that a separate bilateral entity was needed to focus specifically on the extensive
environmental protection and cleanup needs in the border region .
The International Boundary and Water Commission
The IBWC was established by the 1944 Treaty between the United States
and Mexico Relating to Utilization of Waters of the Colorado and Tijuana Rivers
and of the Rio Grande ." The IBWC is headed by a U .S. and a Mexican
Commissioner and is entrusted by treaties and laws with a range of
responsibilities for solving water and boundary problems along the U .S.-Mexico
border. The IBWC has responsibility for the distribution of the waters of the
Rio Grande and Colorado River between the two countries, the joint operation
of international dams on the Rio Grande, the joint flood control works along the
boundary rivers, the solution of transboundary water quality problems, and the
solution of problems relating to changes in the river boundaries . Although, the
IBWC's treaty mandate primarily involves water utilization and flood control
matters, the Commission has been increasingly involved in developing
wastewater treatment projects . (For example, the IBWC will build, own, and
operate the Tijuana wastewater treatment plant .)
The Border Environment Cooperation Agreement recognizes the partial
overlap in mission between the BECC and the IBWC, and includes language
aimed at clarifying the relationship between the two organizations . The
Agreement reaffirms the role of the IBWC in preserving "the health and vitality
of the river waters of the border region" and provides the United States and
Mexico can direct the BECC and the IBWC to cooperate in planning, developing,
and carrying out border sanitation and other environmental activities ." The
Agreement authorizes the IBWC to provide assistance for projects outside the
border region if a project would remedy a transboundary environmental or
health problem 51
The 1983 La Paz Agreement
This Agreement, with its five annexes, provides a framework for
cooperation between Mexico and the United States on addressing pollution in
the border region and for coordinating activities of the U .S. and Mexican
environmental agencies . Under the aegis of the Agreement, the two agencies
jointly issued the Integrated Environmental Plan for the Mexican- U.S. Border
Area (First Stage, 1992-1994) . The plan identified ways to improve bilateral
coordination and cooperation, with the goal of solving the problems of air, soil,
and water quality and hazardous wastes in the border region . The U.S . EPA
49 With the Water Treaty of 1944, the United States and Mexico replaced the
International Boundary Commission, established in 1889, with the IBWC .
50 Chapter I, Article M .
51 Border Envi n ent Cooperation Agreement . Chapter I, Article I.
and Mexico's Secretaria de Desarrollo Urbano Y Ecologia (SEDESOL) have
established six work groups to address specific border environmental issues
(water, air, hazardous waste, enforcement, joint emergency response, and
pollution prevention) and are currently developing an expanded program, the
Border 2000 Plan, that will extend bilateral cooperative efforts in the region .
Notwithstanding these initiatives, the EPA and SEDESOL are generally viewed
as over-taxed to address existing mandates and environmental issues within each
country. Moreover, their authority and resources for bilateral efforts are
limited . The Border Environment Cooperation Agreement reaffirms the goals
and objectives of the La Paz Agreement while noting the specialized functions
of the BECC .'2
THE NORTH AMERICAN DEVELOPMENT BANK
As the sister agency to the Border Environment Cooperation Commission
(BECC), the North American Development Bank (NADBank) was established to
meet critical public capital needs by facilitating financing of BECC-approved
environmental infrastructure projects . It will also devote approximately 10
percent of its resources to community adjustment and investment assistance in
areas, not necessarily on the border, that are adversely affected by NAFTA.
The NADBank, headquartered in San Antonio, Texas, is scheduled to begin
operations in fiscal year 1995, pending appointment of management staff . The
community adjustment office for the United States is located in Los Angeles,
California ." The Board of the NADBank comprises three members from both
the United States and Mexico . For the United States, they are the Secretary of
the Treasury, the Secretary of State, and the Administrator of the EPA . For
Mexico, they are the Secretary of Finance, the Secretary of Trade and Industry,
and the Secretary of Social Development . The board is charged with defining
bank policies .
The NADBank is modeled after the multilateral development banks (e.g.
World Bank or Inter-American Development Bank) and shares some features
with the State Revolving Funds used to finance environmental infrastructure
in the United States . Both the United States and Mexico commit a given
amount of financial resources to capitalize the bank . These commitments in
turn are used as a reserve against which bonds are sold in the international
markets. The bond proceeds become the bank's primary source of capital and
are used to make loans in support of individual projects . When a project is
finished and begins to generate revenue, loaned or guaranteed funds are repaid
a2 Upon opening EPA border offices in El Paso and San Diego, EPA Administrator
Carol Browner (a BECC board member) noted that the border offices will interact with
the BECC and the NADBank regarding EPA funding of BECC-certified projects .
53 North American Free Trade Agreement Implementation Act, P .L . 103-182 .
or freed up, at which point they are added to capital and used to repay
international borrowing or reloaned to other infrastructure projects .
Source of Funds
The NADBank is tasked with providing between $2 and $3 billion in
financial resources, over four years, to government agencies and other entities
of the United States and Mexico . The key to supplying development finance of
this magnitude is the concept of leveraging . To accomplish this, the United
States and Mexico will each take out a $1 .5 billion subscription of capital
stock." Only 15 percent of the total capital ($450 million), however, will
actually be appropriated funds or paid-in capital . The remaining shares ($2 .55
billion), referred to as callable capital, will be backed by the financial resources
of the two countries and provide a guarantee against which the bank may
borrow in the international capital markets at relatively low interest rates .
As shown in table 3 on the following page, the United States and Mexico
will make four equal installments in fiscal years 1995-1998 totaling $450 million
in paid-in capital and $2 .55 billion of callable capital, pending future
appropriations . Because of the guarantee implied by the callable capital
provisions, the $450 million of paid-in capital can be leveraged to generate over
6 .5 times its value in infrastructure investment, or $3 billion . Callable capital
represents a commitment by the two countries to provide additional capital in
the future should the bank require it to meet losses from project defaults, or
other obligations to creditors that might otherwise exceed bank resources .
Callable capital is a contingent liability on the Federal budget, scored as zero
appropriations, unless used . All multilateral and regional development banks
are supported by callable capital and to date the United States has not been
required to appropriate funds to meet any contingent requirements for such
The NADBank will secure funds in two ways . First, and foremost, it will
sell bonds in the international capital markets that are backed by the subscribed
capital of the bank ." The ratio at which funds are borrowed will be 1 :1 . That
is, the bank may borrow one dollar for every dollar of subscribed capital it has
on its books . The bank may eventually finance at least $3 billion worth or
projects based on paid-in and callable capital accounts . The bank's working
Each country will subscribe to 150,000 shares of stock with each share having a
par value of $10,000, for a total capitalization of $3 billion .
55 Unlike government loan guarantee programs, which require an appropriation to
cover estimated losses for credit reform purposes, callable capital is treated in the Federal
budget as zero appropriations because the implied guarantee covering any project defaults
is covered by paid-in-capital .
56 Current plans call for the NADBank to enter into agreement with the Inter-
American Development Bank to handle its borrowing and investment responsibilities .
capital will consist of paid-in subscriptions, borrowed funds, and any revenue
the bank may generate .
Table 3 . NADBank Financial Commitments
from the United States and Mexico
(in $ millions)
Source : North American Free Trade Agreement Implementation Act, P .L . 103-182, sec.
In this way, projects can be financed from loaned funds that are indirectly
backed by the United States and Mexico .' The bank reserves and implicit
backing of the national governments act as a credit enhancement, which reduces
.'' All bond issues are required to have
the cost of borrowing for the
the highest (AAA) safety rating and therefore will carry the lowest possible
Because these projects would be considered high-risk
interest rate 59
propositions by the investment community, without NADBank participation,
they would have to provide significantly, if not prohibitively, higher rates of
return to prospective investors so
The second option for securing project financing is to use the bank's
subscribed capital to leverage local government and private sector funds .
Although the two countries financially support the NADBank, the securities it
issues are not obligations of either government .
56 The low-cost financing may be particularly useful in Mexico because it does not
have a tax-exempt municipal bond market to support local infrastructure . Mexican real
interest rates have been as high as 10 percent for capital projects, precluding many of
them from being built . See : U .S . Congress . House . Committee on Banking, Finance,
and Urban Affairs . Subcommittee on International development, Finance, Trade, and
Monetary Policy . Hearings, 103d Cong ., 2d Sess ., July 22, 1 993 . Washington . U .S .
Govt . Print . Off., 1993 . p . 29 . (Hereafter cited as NADBank Hearings .)
59 U .S . Department of the Treasury . Office of Public Affairs . Treasury News .
Treasury Secretary Lloyd Bentsen Statement on NADBank . May 16, 1994 .
NADBank Hearings, p . 22 .
Because NADBank resources can serve as a guarantee, they will reduce the
project finance risk to other investors . The extent to which a public-private
venture is possible again depends on the riskiness of the project and how much
of the risk is taken on by the NADBank .s i
Bond rating agencies, local governments, and private partic will look
to the project's ability to repay the loans when determining whether and how
much to invest . Most environmental public works operated in the United States
are financed on a user-fee basis . Privatization projects in Mexico also rely
heavily on tolls and user fees . Should the expected revenue streams of the
proposed projects be sufficient to cover all or part of the debt payments, it is
possible that investors may be interested in border projects, given NADBank
participation . State and local governments may also wish to participate more
fully, even if the plants may not cover the full cost of debt, for the purpose of
subsidizing the infrastructure costs of poor or developing communities under
their jurisdiction . It is anticipated that, in many cases, NADBank financing will
also include some Federal grant funds .
Once NADBank operations are underway, theoretically cash flow will be
generated from three sources : interest and fees earned on loans and services
provided ; interest earned on invested capital ; and repaid borrowings . This flow
of funds, some of which will add to the bank's working capital, will presumably
allow the bank to operate at a profit over the long run . As working capital
grows, the bank should be able to increase its reserves (retained capital and loan
loss reserves), which in turn will allow for increased project lending . The
NADBank would, therefore, ideally establish itself as a financially self-sufficient
organization able to absorb periodic losses with income generated from
operations . Operating goals assume that the bank succeeds at minimizing
defaults on projects and that income exceeds operating and borrowing costs .
Use o f Funds
The agreement between the United States and Mexico clearly sets out the
two express purposes of NADBank funds : to facilitate financing of
environmental infrastructure projects and to provide community adjustment
assistance to trade-impacted communities (up to ten percent of capital) .
Environmental Infrastructure Projects . The NADBank will assist in the
development of infrastructure projects by coordinating financing commitments
from private lenders, governments, and capital from the NADBank . Only
projects that have been certified as eligible by the BECC will be considered for
assistance . The bank is, however, encouraged to provide financial technical
assistance to projects that pass the environmental assessment stage . In this
way, the bank should serve as an institution that can pull together diverse
61 For more on the problems of private financing of infrastructure see : U .S . Library
of Congress . Congressional Research Service . Highway Privatization and ISTEA
Economic Policy and Financing Issues . Report No . 92-883 E, by J . F . Hornbeck .
December 1, 1992 . p . 21-23 .
financial resources and provide sufficient assurance against losses to help move
projects forward that otherwise would probably be infeasible from a financing
The NADBank can theoretically take a number of roles
financing package together . First, it may lend funds directly . In this capacity,
the bank may act as the long-term, high-risk project lender (take on a
subordinated debt position) to attract private sector and local government
financing . Second, it may guarantee loans made by other parties to reduce
project financial risk. Third, the bank may take on the entire financial risk
alone, should a project prove unable to attract other financial commitments .
Equity participation and grants are not available for infrastructure projects .
The mechanisms actually used will be a matter of bank policy .
Loans and guarantees will only be made for BECC-approved projects
provided they have been evaluated for :
their ability to secure loans from private sources on "reasonable
the ability of the borrower and other guarantors involved to meet their
obligations under the loan agreement ;
appropriateness of proposed interest rate and payment schedules ;
appropriateness of risk compensation for guaranteeing a third party
loan (a guarantee fee) and ;
financial feasibility or the likelihood that the project will provide an
adequate revenue stream from user fees or other sources to repay
outstanding obligations .
Despite the attention paid to the user-pay concept, it is not reasonable to
assume that these projects will be able to produce the revenue necessary to
repay fully the total project cost . Some type of concessionary financing, such as
Federal or State grants, will be necessary in many cases . In the United States,
EPA and USDA are already providing Federal assistance that could be used to
support NADBank projects . In Mexico, all levels of government are becoming
involved in supporting border projects through a process know as backstop
financing. In this arrangement, municipal, state, and federal governments agree
to pay an agreed upon amount for environmental services supplied by a given
project . These funding commitments are called upon in a predetermined order
to the extent that user fees fall short of the revenue stream needed to repay
project debt . The critical financing aspect of the arrangements made in both the
United States and Mexico is that direct government assistance will still be
needed to diversify the project risk sufficiently to attract other financial
resources to NADBank projects ." The U .S . Treasury estimates that $1 .4
billion would be required in grants from the U .S . and Mexican governments over
ten years .
Community Development and Investment . The NADBank is also charged
with helping communities that are adversely affected by the liberalized trade
agreement between Mexico and the United States through the Community
Adjustment and Investment Program (CAIP) .
These "trade impacted"
communities, which need not be located within the border region, presumably
can show that they have in some way been economically hurt by changing trade
This might include the closing or movement of plants,
redirecting of trade travel patterns, or some other effect that can be related to
If a community qualifies for adjustment assistance and investment funds
and the proposed project is endorsed by the country in which it would reside,
the NADBank may approach a proposed project in the same way it does
environmental infrastructure and provide direct loans or guarantees .
addition, separate provisions allow for grants to be made for community
assistance . In the United States, the community adjustment and investment
program will use these grants to cover the additional subsidy costs of existing
Federal credit or guarantee programs . These might include programs operated
by the Small Business Administration (SBA), the Rural Development
Administration, and the Economic Development Administration .
For example, if $1 million of SBA loan guarantees is provided to tradeimpacted areas with a budget cost estimate scored at $25,000 (in line with SBA's
2 .5 percent default rate), the funds can be provided by the NADBank and
transferred directly to an SBA account . In this way, no existing Federal
program funds are diverted from other uses to support NAFTA trade adjustment
The total amount of loans, guarantees, and grants used for community
adjustment and investment in either country is limited to 10 percent of the sum
of the country's actual paid-in capital and unqualified or budgeted subscription
of callable shares ." In addition, the total grants plus 15 percent of loans and
guarantees made for community adjustment for each country must not exceed
10 percent of the country's paid-in capital . The U .S . Treasury estimates that
NADbank funds can be leveraged to create at least $200 million in community
Discussion with William A . Schall, U .S . Department of the Treasury, November 22,
Unqualified callable capital is formally recognized in the Federal budget . Border
Environment Cooperation Agreement, Chapter II, Article III, section 4 .
adjustment assistance in the United States, if used to support projects through
existing Federal programs ."
Miscellaneous Powers and Provisions
There are a number of miscellaneous powers and provisions that govern the
NADBank's operations including: prohibiting restrictions on use of currencies
for bank transactions or repayments of loans from borrowed funds ; allowing for
the investment of funds not needed for bank operations ; guaranteeing securities
in its portfolio to facilitate their sale ; and distributing or transferring net profits
as deemed appropriate 66
In addition, the NADBank may terminate its liability for interest payments
for guarantee contracts if, upon default, the bank offers to purchase the bonds
at a price equal to their par value plus interest accrued to date . The bank may
also require a third party guarantee from a public institution if a loan is to be
made to a nongovernment entity .
The bank is also subject to various limitations on how much of its resources
can be committed . The total amount of outstanding loans and guarantees is
restricted to the amount of "unimpaired" subscribed capital, reserves, surpluses,
and other income the bank may assign to its reserves . The bank must also
maintain adequate loan loss reserves . Although the bank charter does not
stipulate which projects, if any, may be exempt from assistance, it does require
that funds be used for the express purposes outlined in the project proposal .
IMPLEMENTATION AND POLICY ISSUES
Although many facets of the BECC and the NADBank were defined in the
supplemental NAFTA trade negotiations, as new institutions, they may
encounter some problems that might be anticipated and further debated as
detailed regulations are being considered .
Mitigating Future Environmental Proble ms
Existing environment and health problems in the border region derive in
varying degrees from policies and actions, or lack thereof, involving all levels of
government and the private sector. Similarly, effective solutions to these and
future problems will depend on the involvement of each of these parties .
The Border Environment Cooperation Agreement, in establishing the
NADBank and the BECC, has created a mechanism for facilitating the
development of environmental infrastructure in the border region . Federal and
fi4 House Committee on Banking, Finance, and Urban Affairs,
Oct, 27, 1993. p. 34.
Border Environment Cooperation Agreement,
Chapter II, Article V .
State appropriations also contribute to solving border health and environmental
problems . Arguably, an element of equal or greater importance in any strategy
to address border environmental issues involves the existence of legal authority
and institutional capacity to prevent or mitigate the continued growth of such
Currently, efforts to mitigate future problems are being taken at the
Federal, State, and local government levels in the United States and Mexico,
both independently and cooperatively . Examples of preventive measures include
the ongoing efforts of the Mexican Government to adopt and enforce new
pollution control regulations, and actions by the State of Texas to stem the
growth of colonias . In addition, the private sector, including the maquiladora
industries, has begun to increase investments in pollution control technologies .
A second element of a successful strategy for sustainable economic
development in the border region would appear to involve the enhancement of
local government authority and capacity in Mexico for enforcing environmental
laws, financing public infrastructure, and planning industrial and urban
A regional study prepared by Baylor University for the Joint Economic
Committee concluded that,
[e]xplosive growth on both sides of the border, propelled by a U .S .Mexican free trade agreement, will severely tax the water systems and
add to air and soil pollution problems . Growth must be planned along
with the installation of environmental projects to reduce pollution, and
to prevent transborder negative environmental impacts . 66
Under Mexico's General Law for Ecological Balance and Protection of the
Environment (effective 1988), Mexico has begun to decentralize environmental
regulation and enforcement and to give more responsibility and authority to
State and local government . The 1992 National Water Law also increases local
government authority for water planning and management . The water law also
provides for the creation of local autonomous agencies with the authority to
promote self-financing infrastructure projects based on user fees . Although it
remains early in the implementation phase, these innovations represent
important elements of Mexico's effort to improve the ability of local
governments to provide environmental infrastructure and services .
Each proposed environmental project will go through at least a two-stage
evaluation process .
First, all projects must be assessed by the Border
Environment Cooperation Commission for their ability to address the identified
U.S . Congress . Joint Economic Committee . Subcommittee on Economic Growth,
Trade and Taxes . Free Trade and the United States-Mexico Borderlands . A Regional
Report by Baylor University . 102d Cong ., 1st Sess . July 1, 1991 . p . 78.
environmental problem and to meet technical criteria and environmental laws
and regulations . Project proposals that do not pass this test will not be
forwarded to the NADBank for financial consideration. The BECC, however, is
also tasked with providing technical assistance to communities to help them
develop cost-effective and technologically sound proposals to mitigate perceived
Assuming that the BECC approves a proposal to support a particular
project, it must then be evaluated at the NADBank for financial feasibility ."
In some cases, the NADBank may not be able to support projects that are
incapable of generating sufficient revenue to repay long-term debt incurred . The
NADBank is in the business of arranging financing for the projects, not paying
for them outright. Although there may be numerous creative ways to construct
a financing package, if the NADBank views the project as too risky or unlikely
to meet its future financial obligations, it may not be approved .
This possibility raises the fundamental question of what happens to
projects where high social rates of return may be in conflict with low economic
rates of return? Will financial criteria overrule environmental criteria, or will
there be alternatives for pushing forward on needed projects that may have
trouble generating sufficient revenue?
Project Finance and Risk Management
As mentioned above, all financing arrangements hinge on the development
of projects that will be driven by a user-fee system . In practice, charges should
be sufficient to cover the operating costs of the plant as well as any repayment
of long-term debt . Because of low per capita income in targeted areas on both
sides of the border, user fees may be a limited revenue source from which to
finance long-term capital investment . NADBank documents, however, advocate
the almost paradoxical conclusion that such user fees are expected to be the
primary source of revenue backing most projects .
Border infrastructure projects are inherentlyrisky investments for potential
lenders and investors . The fact that many of these projects have not yet been
built suggests that the financial risk may be exceedingly high, thereby requiring
NADBank to take on much of the risk or subsidize others for doing so . In
particular, given Mexico's struggle with private market financing of
infrastructure projects, reducing project finance risk to a point where public and
private partnerships can be created may prove to be a difficult goal to achieve,
perhaps requiring more concessionary financing arrangements . Although this
point is recognized by many officials, it is not well developed in the NADBank
documents . It should be understood that government financial assistance
probably will be needed to consummate most project deals and this assistance
could be more extensive and costly than initially anticipated .
fi 7 The BECC charter states that it will also have some role in overseeing the financial
feasibility of projects . This duplication of effort is an issue that will have to be resolved
as the BECC and NADBank develop operating procedures .
Capit alization and Expectations
Finally, it may be easy to oversell the capabilities of the NADBank, which
are currently defined very narrowly . Without changes to its charter and
additional funding, the NADBank should not be viewed as a broadly focused
regional development bank with resources available to develop businesses or
address more costly environmental problems such as toxic waste cleanup .
Nonetheless, many NADBank proponents may wish to expand the scope of the
bank and should future legislative proposals be considered, they may wish to
revisit the cost-benefit structure of these institutions.
Table 4. Populations of the Metropolitan Areas and/or Counties of
U.S . and Mexican Sister Cities in 1980 and 1990
Mexicali, Baja California
Ensenada, B .C . d
San Luis Rio Colora
Agua Prieta, Sonora
Ciudad Acuna, Coahuila
Del Rio, Texas
Piedras Negras, Coahuila
Eagle Pass, Texas
Nuevo Laredo, Tamaulipas a
McAllen, Texas b
Brownsville, Texas `
Tijuana, Baja California
San Diego, California
Tecate, B .C . d
Las Palomas, Chihuahua
Columbus, New Mexico
Ciudad Juarez, Chihuahua
El Paso, Texas
U.S . County Non-Sister City Total
U .S . Total
Total U.S . and Mexican
Increase or Decrease
from 1980 to 1990
a Total includes population data for the City of Rio Bravo
b Includes Edinburg and Mission, Texas
` Includes Harlingen, Texas
d Not included among fourteen sister city pairs
e 1990 population data are for Cochise County, Arizona, which includes the cities of Naco and Douglas .
f Percentage increases in population are not comparable because 1980 data reflected only the population of each metropolitan
area and not of the entire county .
N/A = not available, N/C = not comparable