Comments on BECC/NADBANK Reform

October 8, 2001

Comments on Reforming the North American Development Bank (NADBank) and the Border Environment Cooperation Commission (BECC)

The Texas Center for Policy Studies appreciates the opportunity to comment on the U.S. Government's background paper entitled Reforming the North American Development Bank (NADBank) and the Border Environment Cooperation Commission (BECC). TCPS, a 501-C-3 public interest organization headquartered in Austin, has worked on policy and project issues related to these two unique institutions since 1995. As such, we have seen the progress that has occurred in both institutions. Our understanding of the background paper provided for comment, and the Joint Statement of the Mexican and U.S. Presidents, is that the comments at this time should be directed at "immediate measures... to identify and fund environmental infrastructure project on the border." Therefore, we are limiting our comments to discussion of how to improve the identification, coordination and funding of border environmental infrastructure projects, rather than discuss other options such as geographic or mandate expansion, including the possibility of NADBank's involvement in migrant-remittance projects in areas within Mexico that lack economic opportunities, as has been previously suggested (see TCPS, NAID and William Velasquez Institute, Finding Common Ground: A Public Interest Proposal for BECC/NADBANK Reform, August 9, 2001).

Summary and General Comments

While there are some needs for increased efficiency, better BECC/NADBank cooperation, and more affordable NADBank loans, TCPS is strongly opposed to merging BECC and NADBank into a single institution. Such an unwarranted change, which we believe would require congressional authorization in the U.S., would be enormously and unnecessarily disruptive to the current progress being made in certifying and funding border environmental infrastructure projects. As far as we can determine, there is absolutely no groundswell of support for this option from the border.

We believe greater BECC/NADBank cooperation can be achieved through political will for cooperation and, possibly, a "Joint Executive Committee" of key BECC and NADB Board members to resolve disputes that cannot be resolved between the General Managers. Similarly, we believe that technical assistance, project development and review, and certification for border environmental infrastructure projects should remain at the Border Environment Cooperation Commission and the financing of those projects at NADBank. Thus, we oppose transferring any functions related to border environmental infrastructure projects from BECC to NADBank. Instead, we support ensuring early NADBank involvement in project development as the financial analyst in a "team" approach and other steps to make the project development process more efficient.

Finally, we continue to believe that the most important thing that federal agencies can do for the border is to ensure that grant funding is available for both technical assistance and construction of border environmental infrastructure projects over the next several years, particularly as budget pressures increase with the current economic downturn. A recent NADBank study identified over $2.0 billion in needed border environmental infrastructure project investment for the 1999-2009 period, with the need for nearly a half a billion dollars in U.S. grant money (such as the BEIF monies) for the 2002 to 2005 period. In the end, the availability of sufficient grant money to help finance border environmental infrastructure projects will do much more to really help the border than wasting time and resources on an unwarranted institutional reorganization. In addition, while the lack of loans made by NADBank is a unique challenge, we believe a series of steps already underway will make loans more affordable. The NADBank only recently adopted a new "value lending" program intended to allow monies to be lent at below-market interest rates. This program should be implemented as soon as possible, and the NADBank Board should consider expanding the program. In addition, a recent NADBank progress report identified over $67 million in new loan agreements that NADBank is currently negotiating with borrowers. Also, some of the projects which the recent mandate expansion make eligible for BECC certification and NADBank financing may allow a larger loan component than the three priority areas identified in the charter. These factors, along with continued grant monies, should allow NADBank to lend considerably more for border environmental infrastructure than it has been able to lend to date.

Guiding principles

Our comments reflect several key principles that were at the heart of the BECC/NADBank's creation during the NAFTA debate. These principles, which remain of critical importance, include:

maintaining the promise of NAFTA to improve the public health, environment and living conditions along the U.S./Mexico border;
guaranteeing accountability, transparency, and wise use of public funds available to the BECC and NADBank;
ensuring that effective mechanisms for informed public participation exist, so that the public and communities that benefit from or are affected by proposed projects have full access to information and an opportunity to comment on the project and help develop the project before certification and financing decisions are made;
using the limited available resources for projects that benefit the public, improve the quality of life in the border region and promote sustainable development; and ensuring that the institutions have a fully binational character;
having a system of checks and balances between project development and financing, so that financing decisions alone do not drive project development and selection, but instead are one of many factors to be considered.

Specific Issues

We do not believe that the BECC/NADBank "experiment" is fundamentally flawed or broken, or needs a major overhaul. Rather, we see a need to: (1) increase NADBank lending for border environmental infrastructure projects; (2) make the project development process more efficient; and (3) increase cooperation between BECC and NADBank.

1. Changes in the lending practices and financing of projects (NADBANK's Financial Structure)

We support the idea of giving NADBank flexibility to lend at concessional (subsidized) interest rates. The easiest way to accomplish this is to give sufficient time to implement the present $50 million value lending program, and consider increasing the amount of paid-in capital dedicated to the value lending program. The value lending program provides a significant opportunity to increase NADBank lending for border environmental infrastructure projects. TCPS has previously advocated, and we continue to believe, that more of the paid-in capital should be dedicated to the value-lending.

While we are certainly not opposed to allowing NADBank flexibility in also providing grants, we believe it is more important to ensure significant grant money through the BEIF to make projects financially viable. As previously mentioned, we believe the best thing that federal agencies could do for the border is to ensure that grant money is available over the next few years, especially given the budget pressures resulting from the present economic crisis.

We do not support federal government guarantees at this time, at least until more details are available. We simply do not believe that given the budget crisis in both countries, there will be sufficient monies to guarantee NADBank loans, in addition to providing grant monies for the BEIF.

2. Improving Project Development (Operational Process)

The statement that "many project sponsors, particularly within the private sector, have found the BECC-NADBANK process to be onerous" has thus far not been substantiated. While it is admittedly not perfect, the number and size of the many projects already certified and finished or under construction demonstrate the essential viability of the BECC certification process. In fact, if we consider projects that have gone through the BECC process the last 24 months, recent surveys as well as interviews with BECC project sponsors have shown high praise for the process. It is true that private industry has not participated to a full extent in the BECC/NADBank process, but that may be related more to the types of eligible project themselves, and the fact that other more attractive financing options available to private industry, rather than to an "onerous" process. If there are some specific examples of where the process has been somewhat difficult or could be improved, the focus should be on the improvements necessary to address those problems, not on wholesale institutional restructuring.

Moreover, merely transferring functions from one institution to another is no guarantee the process will be better. Instead, it is likely to create new uncertainties and generally disrupt and slow down the process of cleaning up the border. For example, the charter provisions and BECC rules that guarantee transparency, public notice, accountability and meaningful public participation are not by their terms applicable to NADBank, nor has the Bank adopted them. Transferring basic functions from the BECC to the NADBank could lead to erosion of the transparency, notice, accountability and public participation guarantees provided by the current structure.

Therefore, we believe in maintaining the current structure and division of responsibilities for border environmental infrastructure projects, as defined under recently expanded mandate. Project development, technical assistance and certification for border environmental infrastructure projects should remain in the BECC, as set out in the existing charter.

There are some inefficiencies in the current certification process, however, including some duplication of effort, particularly with respect to some of the first projects to be certified. We maintain that this problem can be resolved by refocusing and prioritizing projects for review, setting timelines and guidelines in the project development process, including more involvement by NADBank at the front-end of the process. For example, we believe that each Step I project application received should be quickly assessed for its status, feasibility, impact and priority. If it looks potentially viable and meets the basic eligibility criteria, a project workplan should be developed between the BECC and the sponsor and partner agencies. Once the workplan is agreed to, and the initial steps taken, the project could be assigned to a project development "team" rather than a single regional project manager, as is presently the case. This team would see the process through the development of the Step II application, final design and certification. The "team" would include active participation by the BECC's public participation, sustainability, engineering and design specialists and the financial experts at the NADBank. The NADBank would then have a chance to flag any problems or issues early in the process. The regional project managers, on the other hand, would oversee the process, and help prioritize which projects were ready for possible certification and financing.

Other changes in the BECC process could include:

Use the BECC's already-initiated review of the project development process to lay the groundwork for possible simplification and improvement of the certification criteria, with an opportunity for all interested parties to participate. Part of this discussion could include certification simplification for smaller projects, especially if they involve adding on to an existing project, such as wastewater treatment or water supply hook-ups. For example, such a project may not need a full-scale operation and maintenance program.
Use the BECC's already-initiated review of the procurement process to improve the quality and efficiency of project development and lower the costs of technical assistance.
BECC and NADBank board, in consultation with interested parties could explore options for better project follow-up once certification occurs.
3. Cooperation between the two institutions

One of the fundamental challenges in the BECC/NADBANK process has been the lack of cooperation between the two institutions. Some have suggested that we could simply merge the two institutions. As we have made clear, we do not believe there is a need for merger -- in fact we believe it would create new problems and be enormously disruptive to the progress that is being made. Another option that has been advanced is the idea of merging the boards of directors. Our view is that such a change - a merged board of directors -- would necessitate some kind of consultation and even approval by Congress in both countries, because it is a fundamental change in the charter.

We believe a better approach is for the governments to specifically charge the BECC and NADBank general managers with resolving conflicts between the agencies. If the conflict cannot be resolved, it could be taken to a special "joint executive" committee composed of selected representatives from both the BECC and NADBank boards for resolution. We believe such a mechanism could be created without consultation with Congress in either country. This mechanism could be accomplished through an addendum to the Memorandum of Understanding between the BECC and NADBank.

If, on the other hand, the Mexican and U.S. Governments did decide to merge the boards - with consultation with Congress - such a merged BECC and NADBANK Board would need to be large enough to represent federal, state, and local governments as well as have public representation, yet not be too unwieldy to be able to meet on a quarterly basis. We cannot emphasize enough how important it would be to maintain a public member on the Board from both countries.

4. Other Issues

Private Sector Projects

We support the idea that, in appropriate cases, the private sector should and could make use of NADBANK loans for projects that reduce pollution, conserve energy and water, finance renewable energy and recycle and reuse wastewater. However, we believe that there has already been substantial involvement of the private sector. For example, the wastewater plants in Ciudad Juarez, Piedras Negras and Ciudad Acuna - all BECC certified and NADB financed projects - are run by private companies on a BOT basis. The success of these projects should be evaluated to see to what extent these models can be expanded and promoted. In addition, in terms of prioritization, BECC and NADBank staff and resources should continue to be focused on public-private projects that have a clear public benefit and substantially improve public health and the environment. We are supportive of private projects that "fit into" a public project, such as the BOTs already mentioned, loans to private companies to install wastewater pretreatment programs or to create recycling centers as alternative sites to municipal dumps. But BECC and NADBank were never intended to be and should not be the central financing institution for pollution control projects at private facilities.

Regulatory Reforms

TCPS does not support the idea of using technical assistance monies for broader, sector-level legal and regulatory reforms, through either BECC or NADBank. While we believe that TA monies can and should be used to assist local planning efforts, regulatory reform is a national issue that is better suited for national discussions.

Contact Information:

Mary E. Kelly, Executive Director (mek@texascenter.org)
Cyrus Reed, Project Director (cr@texascenter.org)
Texas Center for Policy Studies
44 East Ave., Suite 306
Austin, TX 78701
(512) 474-0811
(512) 474-7846 Fax