Mexico plans to move towards a lower carbon growth path by overhauling its urban transport system, a project requiring US$2.7 billion. The project’s overall viability was not only dependent on securing additional long-term financing, but also on cost. Blending two resources enlarged the pool of low-cost financing available, enabling the project’s implementation. transport system by developing operational strategies, infrastructure, and low carbon technology Mexico, ranked fourth in the world behind Sweden, that reduce GHGs. Germany, and Iceland in the Climate Performance Index, has emerged as a global leader in the climate change arena. Despite fuel technology The transformation of Mexico’s urban transport improvements and the enactment of a national system requires more than US$2.7 billion of strategy for climate change mitigation and financing, US$2.4 billion of which was sourced from adaptation, Mexico is still among the more carbon- the national infrastructure fund (FONADIN), local intensive economies in Latin America. The transport governments, and the private sector. The project’s sector, characterized by the highest motorization overall viability was not only dependent on securing rate in the continent, poorly maintained old buses, additional long-term financing, but also on cost. inefficiently allocated road space for public Mexico was, therefore, seeking to meet the shortfall transport, and inadequate fuel specifications, with loans at highly concessional rates. accounts for 18% of Mexico’s total Green House Gas (GHG) emissions. An integrated mass transit program has the potential The Clean Technology Fund (CTF), managed by the of reducing 20% of the sector’s carbon footprint, International Bank for Reconstruction and thereby contributing to the transformation of Development (IBRD) with participation from other Mexican cities to a lower carbon growth path. To that multilateral development banks, provides financing at end, Mexico has committed to overhauling its urban concessional terms to scale-up demonstration, dollars or Mexican pesos, at fixed or floating rate to deployment, and transfer of low carbon facilitate asset-liability management. technologies. IBRD’s financial solution to Mexico’s financing challenge for the Urban Transport Transformation Project was to blend US$200 million The blending of these two resources enlarges the in concessional financing from CTF with a US$150 pool of low-cost financing available, and reduces the million loan from IBRD. The blending of the two financial barriers associated with this type of sources of financing provides a very competitive investment, facilitating countries’ decisions to adopt funding cost for the project, enabling its low-carbon systems. By blending CTF and IBRD implementation. The state-owned bank, loans, Mexico was able to mobilize the necessary BANOBRAS, is the designated borrower of both volume of funds at financial terms that met its loans. The IBRD loan was customized to suit requirements to enable the project’s implementation. BANOBRAS’ requirements. The repayment This co-financing scheme also allows the Bank and schedule was linked to disbursements, and set up to CTF to jointly support Mexico’s efforts to take its be “annuity-type,” which will allow BANOBRAS to climate change agenda forward. Moreover, the pay the principal in increasing installments as flexible terms of the IBRD loan and embedded risk project revenues materialize. This means management options will allow Mexico to manage BANOBRAS will be making lower repayments at the interest rate, currency, and repayment risk. onset of the project. Moreover, the loan’s flexible terms give the borrower the option to request disbursements in either US IBRD Loan CTF Loan Amount US$150 million Amount US$ 200 million Maturity/Grace Period 13 years/3 years Maturity/Grace Period 20 years/10 years Repayment Schedule Annuity type Repayment Schedule Level repayment Interest Rate 6-month LIBOR +80 bps1 Service Charge 0.75% per annum Front-End Fee 0.25% Front-End Fee 0.25% Currency USD, with the option to convert to MXN Currency USD Indicative Blended Rates as of March 26, 20102 Loan Type Equivalent Fixed Rate (%)3 Equivalent to: US$150 million IBRD Loan 4.67% 6M LIBOR +84 bps US$200 million CTF Loan 0.77% 6M LIBOR -350 bps IBRD/CTF Blended Rate 2.12% 6M LIBOR -201 bps Miguel Navarro-Martin, Head of Banking Products, mnavarromartin@worldbank.org, +1 (202) 458 4722 1 Fixed spread of 80 basis points (bps) applies to the loan (average maturity between 10 and 14 years). 2 Pricing is subject to market conditions. 3 Equivalent fixed rate includes annualized front-end fee. Photo Credits Front: Curt Carnemark / World Bank