EFAi
Chair
       a


Bxnostif® Dkirt or

          E      A







                                                   THE
                           This report has not been reviewed for approval b\B the
                           U.S. Environmental Protection Agency; and hence, the views
                               opinions expressed In the      do not necessarily
                           represent those of the Agency or     other        In the
                                   Government,



-------
                                  R
 Honorable Carol M.
 Administrator
 US.
                 20460

 Dear             Browner:

       On       of the Environmental                  Board (EFAB), we are very
        to         to you the EFAB Report,              the              Finance
        of the North          Free Trade             This      serves as a
 up to a 1993 Board       on environmental               the HS./Mexican
 that we          to        the           and                    of NAFTA,

       la. this      the Board                 finance         to         the
               of the NAFTA side          for border
 We        that       purpose                    or        should be       in
 Mexico to                    infrastructure        and that the         of such
        be based on         to the greatest               The        will
        and sound              to evaluate the         of projects.  The
       should be           to participate in       for              the borders
         leveraging                            for              Furthermore, we
        in the                        billing       be           as a viable
 to                  for the water and wastewater services.

       The      recommendations are           timely in         the
 binational       ie. the Border                          Commission         and
 the North                      Bank (NADBank)f to       and maintain a
                 the        The Board offers its         to the             in
              as a         of the  BECC and  of the                    the
 of               for               and the        of                 funding .
             We are         at                 to discuss this       and to provide
 any               you may
 Sincere!1
       U-Wiessmann
       Environmental                 Executive Director,
'                 Board                       Advisory Board

-------
                           Report of the
           Environmental  Financial  Advisory Board
                               of the
        United         Environmental Protection
          Implementing the  Environmental Finance
                               of the
               North American  Free Trade Agreement
      In 1992, the Board approved a report ("the 1992 Report8') of the
International Committee ("the Committee") to the Administrator regarding the
financing of environmental infrastructure along the Mexican Border. The
1992 Report was intended to assist the Administrator in her efforts in support
of the           and approval of the North American Free Trade Agreement
("the NAFTA" or "the Agreement").

      Subsequently, the NAFTA was, in fact, approved by the governments of
the United      and Mexico.' In its final form, the NAFTA contains a
side          which addresses-the financing of environmental
infrastructure      the border.  The side agreement        a
                is to be funded at a level of 8450,000,000     an
S2,550tOOO,000 of call       If these funds can be         at only a 2:1
rarior iiiejgjHji||J^^                         for environmental
infrastructure        along the border. At a 3:1
be ov^r, S9.00Q.OOO.OOO available. Since official estimates of
are in the S3 - 7 billion range, this means jhat the prpjegted fimdfflg_sjgojiid_be

            by the NAFTA..  This is an event of truly historic           in

-------
the                   to                   a                    on a
       basis.

     .          the NAFTA has                   the Committee resolved to
issue a follow-up -report dealing with the environmental               in the
            \

      TMs       has              The                   the
concerning the NAFTA         the two reports.  The second section contains
six                 to the              in       of the     she will     in
the               of the NAFTA.

      The six

      * That                                    or        be        in
Mexico to deliver environmental infrastructure services.

      * That the financing of such districts be based, to the greatest extent
        on     fees.            '                 "

      * That the user fees         for water and wastewater        be
              the                                           the end
non-payment of any of the       user         would be grounds for the
           of                 to the

      * That,  to the                      the          of the
sector be used to pay for environmental infrastructure projects along the
border.

      * That,  in determining the role  of the              in the      to
                                      the        the utmost
consideration be given to private sector means of leveraging the  funds, of the
            of the              and                    for

-------
      *  That the first order of         In financing environmental
infrastructure      the border should be to create realistic     sound credit
criteria for the financing of projects on behalf of special purpose districts.
      In addition to the six recommendations, the Committee
sgryige^..tp,..thg_Administrator to assist.,her h
environmental infrastructure projects alongthe Mexican border.
SKTIONONE
       The 1992 Report, after            referred t© the Admtnisnator,
        one of      resource           for an                  group
formed by Dr. Alice M Rivlin, Deputy Director of the Office of Management
and Budget, under the leadership of Jeffrey R. Schafer,          Secretary of
the Treasury for International Affairs, to advise the Administration on the
environmental finance aspects of its negotiations with the Government of
'Mexico on the NAFTA.

      The NAFTA             were            concluded and the
was signed by the Presidents of the United       and Mexico.  The President of
the United      then submitted the Agreement to the         for
ratification.  On November 17, 1993, the U.S. House of Representatives voted to
approve the Agreement. Anticipating a favorable vote, as weM, in the United
      Senate (which, in fact, occurred on November 20, 1993), the Committee
convened in Washington, D.C., on November 19, 1993, to formulate advice to the
Administrator on the implementation of the environmental                of
the Agreement.

      At its meeting, the Committee heard presentations from Jonathan Z.
Cannon, Assistant Administrator for Administration and Resource
Management of the U.S. Environmental Protection Agency (USEPA); DT, John E
Petersen, President of the  Government Finance Group, Inc.; Congressman Jim
Kolbe of Arizona; Jeffrey R. Schafer,          Secretary of the Treasury for

-------
 International Affairs;             E. (Kika) DeLaGarza of Texas, Chairman of
 the House Agriculture Committee;.Mario Aguilar, General               of
 the           for       Development (SEDESOL) of the Government of
 Lynn Fischer,'Policy Analyst, Natural Resources  Defense Council;
 Lawrence I. Sperling, Senior Attorney-Advisor,  International
 Program,       of Enforcement, USEPA.
             .
      The Committee has reviewed the Agreement and makes a      of
observations and recommendations to the Administrator concerning the
implementation of the environmental finance aspects of the accords.

      The Committee notes that under the NAFTA, the responsibility for
         environmental infrastructure pursuant to the           was
divided        two "new binational agencies, the Border, Environmental
           Commission (BECC) and the North American
(NADBank).

      The Agreement envisions the BECC as an agency whose respoesibiHty it
is to work with communities to generate needed environmental infrastructure
projects.  The BECC's role will then be to coordinate the planning and
financing of      projects-and then to "certify" them for 'funding to the
NADBank. The BECC will have a ten-member binational board of directors on
which the Administrator will serve. The BECC will be required to consult with
an 18-mem.ber Advisory Council, of which nine members will come from each
country.

      The NADBank will be capitalized with 5225,000,000 of.cash each from the
United      and        with an additional SI,275,000,000 of callable
from       Ninety        of the banks funds will be     to
environmental infrastructure projects.  The       purpose of .the NADBank is
to fund, "as appropriate",         "certified" by the BECC The NADBank is to
have a six-member board, three from each country.  It is        that the

-------
             will      as one of the U.S.         of the NADBank.  In
         for the         of     or                   by the      it is also
             the U.S.               to the          Witt be          in
               the           of the National Advisory           on
                          Financial         as established by
             11269 of         14,      and     for              the
                      be a         of

      The                        it     are two of the
                     to the                                   to the
                  environmental infrastructure         should be financed
by the       sector,...".  The               "that, to the
                                               in the
       be                                            by
      who       from the projects, and should be       to     or private
control".

      In the 1992        the           recommended that the          of
                           the border, to the         extent        be
      on           It
                 on             be       as the                to
            projects. The Committee notes     the          to the
               for          fee              the                     In
           the

      1)      the BECC           the         of                       (or
            in the     of                   as  the
            by which                                    are
        the NADBank!

      2)       to the                               be the
of such

      At the          19,         the                the            of
Dr.                            to  be an       and                    of
       and          for              in              the             Dr.

-------
        also                         law, the        for              of
              Is            of                It is not         to
                       for

      The                          in            the border with
      nor       service      was little or no         of paying for
and              for             were           to random         on a


                in       to       a                   for
              districts, the

      3) That the user            for water and wastewater         be
              the              biffing and          system, to the end



           the Committee      that both the             and the          to
the           eaU for the involvement of the        sector as far as Is
         The Committee,          reiterates its

      4)      to the                      the         of the
      be      to    for                                          the
border.

      In this        the           noted that the NADBank is           with
             of cash and               of               In       with the
1992           in      to        the                  of the
       and die                      the               will      in
     to be       the

      5) That the                    be      to                    of
Insurance or of supplemental Private capital,

-------
      The Committee noted most importantly that if the       of the NADBank
can be         at a 3:1 or even 2:1 ratio,
                     all of_the_estiinated-S  - 7
jnfgggtructure itgegjs_a|pjigjiie_bgi)rdert    TMs would be an event of truly
Mitoric            not only for the United      and Mexico, but     for the
entire international effort to improve environmental quality.
eac  ndiidua   an
      Finally s the Committee observes that although the BECC iss on the one
hand, required to "certify" projects to the NADBank, the NADBank is, on the
other hand,  only required to fund such projects "as appropriate".

      The Committee noted several instances where there, were organizations
where the loan origination function was  not well coordinated with the loan
approval function. When this happens there can be grave problems, to a
        context such problems can be readily ..dealt     and            But,
the NAFTA is a       political issue, as are the environmental          on the
border.  The BECC     the NADBank were       for one purpose only: to
provide  a         solution t©      problems.  The public will     high
expectations that the BECC/NADBank will, in fact, solve many of the problems.

      Therefore, if there is any conflict  between the credit criteria of -the
BECC and the credit criteria of the NADBank, men there could be very serious
political repercussions that will not be easy to resolve.  This is espedaljy
significant «toce the Administrator will serve as a director of both .the
and.the,,fc|[ARBank. and will be a member of the Natioqal Advisory Committee
wjjjcJiJnstiTicjg_diejJ.S. difgg|ois_of the N, ADBanfc wjth respect to their votes
                  Si as well.  The Committee  recommends, therefore, that
these matters be addressed before they become problems:  Therefore, in order
to assure a smooth working relationship between the two          the first
order of        should be the development of realistic    sound
       which the BECC, the NADBank and the MAC aE      on
criteria are

-------
                        it is In the         of all                 be
         in      a     as         the                    of the
       In this ways the          dollar      of                      will
be     to be financed and the maximum               amelioration will
            the               of the NADBank.

      To this     the

      6)      as Its          of         the
                       for the          of         on       of
        districts in order to     the greatest dollar        of environmental
             projects to be        by           the
         of the  NADBank.

      In        the                       to the
the                           the creation of            sound credit,
criteria for NADBmtk loans,
                               the

lQ£ll|^taffl.^^^^^^n,,^^^^L8^ffl^^^S.,^££^^^Q..^
                          »      for any further or           efforts she
            in this
      In           the                      the NAFTA is one of the
                    of                  for the
in the Twentieth Century.  It             that the
       of the           if         implemented, will            the
           will enjoy a       of       Improving
          the Committee      the                       as     its
                to      in the               of die               |o
     the         of                                   to the
                                   8

-------