Earlier this year, Mexico's Secretary of Finance and Public Credit initiated discussions with the U.S. Department of Treasury concerning dissolution of the North American Development Bank (NADB). Much of the impetus behind the discussion appears to have stemmed from Mexico's frustration with the NADB's inability to effectively utilize its paid-in capital for border infrastructure loans.

The NADB and its partner institution—the Border Environmental Cooperation Commission (BECC)—were created in 1994 under a side agreement to the North American Free Trade Agreement (NAFTA) with a mandate to finance environmental infrastructure projects in the border region. However, since its inception, the NADB has had difficulties making environmental infrastructure loans in the border region.1 Despite this uncharacteristic weakness for a development bank, the NADB and BECC have had and can continue to have a positive impact on improving the border environment.

Not a Traditional Development Bank

Quantifying the success or failure of BECC-NADB depends on the parameters used and the desired outcomes for the region. Without question, the original structure of the NADB is flawed as a development bank. The U.S. and Mexican governments have provided $151.9 million of their $225 million paid-in capital commitment.2 Of this capital, the NADB has disbursed $71.8 million through its Loan and Guaranty Program.3 The NADB also has disbursed $321.7 million through grant programs funded from their paid-in capital's interest earnings and the Environmental Protection Agency's Border Environment Infrastructure Fund (EPA BEIF).4

The NADB is the only development bank where grant funding exceeds loan financing. The composition of the NADB's total funding is 70% grants versus 30% loans.5 It is also the only development bank where the majority of its financial transactions, BEIF grants, are dependent upon funds that are not its own. These are not palatable facts for bankers; however, these facts are not new. The NADB's loan portfolio always has been an area of discontent for the U.S. and Mexican governments. Ironically, the NADB's loan portfolio is hindered by the policies and procedures established for the bank by the same governments that now criticize it.

Commercial lending rates are generally out of reach for the border region considering the limited financial capabilities of the majority of the border communities. With the exception of a limited program created in 2002 to offer lower interest lending rates, the NADB generally charges the market rate. Many U.S. border communities have alternatives to the NADB that offer lower loan rates, including the U.S. Department of Agriculture's Rural Development program and EPA's State Revolving Funds. The U.S. Department of Housing and Urban Development administers the Community Development Block Grant program, which can provide grants of up to $500,000 for environmental infrastructure and other improvements. In Texas, the Texas Water Development Board's Economically Distressed Areas Program offers financial packages of 90% grant to 10% loan as an aggregate of all projects, with the grant to loan ratio determined by an affordability rate.6

The BECC and NADB were created to be an innovative, binational approach to environmental infrastructure development and financing for the U.S.-Mexico border region—a region that both governments agreed had unique needs and therefore required a unique set of approaches and solutions. In the past 20 years, the population in the border region has grown to more than 11.8 million people and is expected to reach 19.4 million by 2020.7 Rapid population growth in the border has resulted in unplanned development, greater demand for land and energy, increased traffic congestion, increased waste generation, overburdened or unavailable waste treatment and disposal facilities, and more frequent chemical emergencies. Residents in rural areas suffer from exposure to airborne dust, pesticide use, and inadequate water supply and waste treatment facilities. Border residents also suffer disproportionately from many environmental health problems, including water-borne diseases and respiratory problems.8

Although the region shares many of these challenges, there are also important differences. The U.S. southern border region comprises some of its poorest communities. Mexico's northern border region has generally better environmental infrastructure than other parts of the country. For example, the latest census from Mexico's National Institute of Statistics and Geography shows that in the year 2000, 94.2% and 83.5% of houses in Chihuahua had water and wastewater, respectively.9 Statistics for the other five border states were similar, while in poorer, non-border states like Guerrero, water and wastewater were at 60.9% and 40.6%, respectively, and 69.3% and 57.5%, respectively, in Chiapas. When considering these statistics, it is not surprising to find political pressure within Mexico to withdraw its unused capital from the NADB and put it directly into infrastructure development in other parts of the country.

A Changing Political Context

Initially, Mexico had a lot of incentive to capitalize the NADB, both for practical and political purposes. To garner key votes in the U.S. Congress, both countries needed to prove their commitment to improving existing environmental and public health conditions in the border region and to guard against future degradation due to predicted population growth in the region.

However, many of these political incentives have long since disappeared. Once NAFTA passed and public scrutiny abated after the first few years, the governments tossed responsibility for border environmental infrastructure largely to the BECC and NADB's Boards of Directors. Ultimately, the NADB's fiscal health trumped environmental health and the sense of urgency to improve border public health after the NAFTA negotiations waned.

The BECC and NADB would have failed completely by now if they had relied on the policies and procedures as written by the governments. However in 1997, the BECC established the Project Development Assistance Program (PDAP) and NADB established the BEIF as a mechanism to utilize EPA resources for border water and wastewater grants. The BECC and NADB also were able to establish similar agreements with Mexico's Comisión Nacional de Agua (CNA) so that every BEIF-funded project in Mexico would be matched with Mexican grant funds. The EPA and CNA's grant funds have proven to be critical for border infrastructure construction. Unfortunately, BEIF's annual appropriations have been reduced from $100 million in 1995 to $25 million today. Ironically, Mexico now has more funds available for border infrastructure grants than the United States .

Much of the future success or failure of the BECC and NADB lies in the political will of the U.S. and Mexican governments. It will depend on the executive branches, the federal agencies involved directly and indirectly,10 and the legislatures making the institutions a political priority and committing to strengthening their fiscal situation. The crucial difference will be between following the spirit or the letter of the law. The administrations of both countries, arguably, are following the letter of the law but are currently bereft of the spirit of active engagement and cooperation that was to give life to the institutions.

A Crisis of Leadership

The lack of spirit to make the BECC and NADB successful in fulfilling their missions can be seen in the leadership crisis in the Boards of Directors over the past years. Leading up to the current situation, the respective boards of the BECC and NADB began with contrasting visions on how to achieve their goals, which some even perceived as contradictory. The BECC Board of Directors, which was composed to balance government and civic interests, emphasized public participation, human health, environmental analysis, and sustainable development. The NADB Board of Directors, made up entirely of government agencies,11 emphasized financial risk reduction, process efficiencies, and higher loan-to-grant ratios.

One would have hoped that the two philosophies could have been intertwined. However, rivalries between the institutions and their Boards began to grow and NADB's Board of Directors always seemed to have the upper edge. To make matters worse, representation on the NADB Board was not always on an equal footing. The U.S. Department of Treasury and Mexico's Finance Ministry governed the NADB Board of Directors with a heavy hand even though there were four other directors as defined by the Charter.

At the same time, pressure from civil society groups previously active in the formation and development of the institutions began to diminish. Foundation funding for border policy-related projects, which had been considerable during the NAFTA debate and just after its passage, began to dwindle. This made it difficult for some non-profit groups to maintain watchdog programs that were important for monitoring BECC-NADB activities and ensuring transparency in decision-making.

In 2004, the BECC and NADB's Boards of Directors merged. The institutions are now governed by a single, ten-member board composed of equal representation of U.S. and Mexican cabinet members, border states, and civil society members from the region.12

The U.S. and Mexican governments touted the merger as a way to streamline the process and facilitate communication between the BECC and NADB. In reality, the new Board of Directors, which is charged with certifying all projects and approving funding, has shown a lack of attention to the institutions. Its indifference has held up several key decisions and contributed to a general level of frustration among the staff. Furthermore, the much-hyped business process review that concluded in December 2004 included 30 recommendations for improvement, and, to date, only two have been implemented.

Lack of progress is not surprising considering the Board of Directors has not met publicly in over two years. This is a direct violation of its charter. The revised BECC-NADB charter requires the merged Board of Directors to hold public meetings at least twice in each calendar year. The NADB Board of Directors last met in October 2003, and the BECC Board of Directors last met in June 2004. The governments announced in January 2006 the appointment of the public members of the new board—more than one year after the announced merger.

The Board of Directors has not certified any projects since the last meeting of the BECC Board. The NADB Board of Directors, comprised of the government representatives, continued to approve project funding through email and other communication.

The BECC-NADB Board of Directors recently announced it will meet June 21 in San Antonio, making it the first public meeting since their merger and publication of the Business Process Review. Ten projects are pending board approval for financing, with nine expected to be voted on by the board. Six projects are expected to be certified, making them eligible to begin the financing process. The Board of Directors anticipates meeting in a private session prior to the public meeting to approve pending projects and to vote on other matters.

The agenda for the public meeting includes time for public comments, limited to three minutes per speaker. This is a paltry amount given the lack of public interaction in recent years and a slap in the face to transparency of decision-making given the BECC Board's history of lively and open debate.

Indeed, public participation in the BECC and NADB appears to be the major casualty of the institutions' reforms . The NADB's original Board of Directors did not include civil society representatives and had one annual public meeting. The BECC's original Board of Directors had six civil society representatives and had four public meetings. By merging the BECC and NADB Boards of Directors, the governments greatly weakened the influence that civil society had on the BECC in key areas of the decision-making process, particularly in the early stages of project development.

The BECC has had a real impact on citizen involvement and grassroots organizing in the border region. It brought in non-traditional civil society players such as El Colegio de la Frontera Norte, and served as a catalyst for the formation of numerous citizen advisory organizations to develop projects for BECC certification. In Mexico before the BECC, infrastructure projects were designed and carried out by the CNA and the International Boundary and Water Commission (IBWC) without any transparency, accountability, or public input.

Unfortunately, the government representatives from the finance ministries do not recognize this type of public participation as a positive achievement of the BECC-NADB system, as evidenced by their discussions earlier this year to abandon the institutions. The governments have maintained an almost exclusive emphasis on the NADB's fiduciary performance. While important, this should not be the only focus. Furthermore, the BECC-NADB Board's actions have hampered its ability to certify and finance more projects.

BECC and NADB are much more than a traditional development bank. We assert that the model offers many positive benefits for the border region in four general areas: 1) providing needed environmental infrastructure; 2) promoting access to information, more accountable government and grassroots participation; 3) offering technical and financial capacity-building among local communities; and 4) increasing the perception that development in a border region heavily impacted by economic integration is by nature a binational responsibility.

BECC-NADB has changed the face of border environmental infrastructure in a number of key ways:

Not all of these achievements are financial. In evaluating BECC-NADB, the U.S. and Mexican governments must begin to calculate in the value of these activities if they are to understand the significance of the bilateral institutions in the border region.

We contend that without the binational structure and financial resources of BECC-NADB, environmental conditions in the border region would be much worse today. BECC-NADB is worthy of our support and deserves strong, diverse, and careful leadership to provide the necessary stewardship for the future public and environmental well-being of our shared border region.

For media inquiries, email americas@ciponline.org or call (202) 536-2649.