SAN ANTONIO - The sprawling, 2,000-mile U.S.-Mexico border illustrates economic contrasts and financing dilemmas of historic proportions.

With U.S.-Mexico trade more than tripling since 1986 and the region's manufacturing workforce almost quadrupling within a decade, the border is a symbol of the global economy and of the North American free trade zone, the world's largest.

Yet in the midst of economic growth, a sad irony surfaces. Hundreds of thousands of poor people on both sides of the border live in colonias - shantytowns that don't have water or sewer services - and are exposed to hepatitis and other diseases that are near to Third World levels. On the U.S. side, border poverty rates are among the nation's highest and personal income among the nation's lowest.

The contrasts underscore the difficulties in financing border environmental projects, which some say could cost $5 billion or more: The services are desperately needed, but municipalities and their residents would be strapped to repay traditional loans until more economic development occurs.

To help solve the dilemma, Mexican and U.S. officials are working on a viable structure for a new North American Development Bank that is scheduled to open this fall and could issue $3 billion of bonds in coming years.

The bank would use the bond proceeds to provide environmental project loans with lower costs and longer maturities than standard vehicles - particularly on the Mexican side, where interest costs are higher.

In addition, credit enhancements and loans guarantees would be offered in an attempt to bring in other public funds and private investment to the border region.

"This isn't an institution of subsidized finance - NADBank environmental loans and guarantees must be serviced fully and on time," said U.S. Treasury Secretary Lloyd Bentsen, whose department is spearheading the U.S. effort.

"Separate U.S. and Mexican grant programs are an essential complement to the success of our border environmental efforts ... A well-run NADBank also will help catalyze private sector support for these projects, on both sides of the border," Bentsen said in a prepared statement.

James Gomez, a vice president of the municipal finance department of Goldman, Sachs & Co., agreed. "The NADBank will primarily serve to marshal financial resources," he said.

Incorporating Resources

However, coming up with plans to coalesce dozens of public and private resources and defining the role of the embryonic NADBank are difficult tasks that have been the subject of several meetings, including a NADBank workshop held earlier this month in San Antonio.

More than 35 U.S. and Mexican government and business leaders attended, giving recommendations on the financial structure of the bank as well as other issues.

"This information will be use to define our position of the details of the North American Development Bank," said Antonio Gonzales, president of the Southwest Voter Registration Institute, which organized the workshop. "It will go to the U.S. Treasury, which is writing the regulations now."

The institute has long been involved in the creation of the bank. It was spearheaded by a group of Latino organizations and 12 Congressmen, led by U.S. Rep. Esteban Torres, D-Los Angeles who offered to deliver the winning votes for NAFTA in exchange for the NADBank.

However, in Congress' flurry to get the North American Free Trade Agreement approved last fall, only the general concept and funding of the bank were outlined as part of the legislation, leaving many unanswered questions.

Under the agreement, the bank would be operated jointly by Mexico and the United States, which would each contribute $225 million in paid-in capital over a four-year period.

The United States would initially put in $56 million, starting Oct. 1, the beginning of the federal fiscal year, and Mexico would contribute the same amount on Jan. 1, the beginning of its fiscal year.

In addition, the two countries will provide a total of $2.55 billion of capital on demand or callable capital during the same time period. It is envisioned that the bank would be able to make about $3 billion in loans or loan guarantees, and eventually those funds could be leveraged to attract billions more in private capital.

Ninety percent of the loans or loan guarantees would be for water, waste-water, and other environmental clean-up projects. They would be certified through a separate binational Border Environmental Cooperation Commission, also created through NAFTA. Another 10% would be used for community adjustment programs to offset worker displacement and economic losses resulting from NAFTA. The bank would be jointly operated by Mexican and U.S. officials.

"The architecture of the institution is very unique. It's a binational organization, not just a U.S. government institution," said Edward Knight, senior adviser to Treasury Secretary Bentsen.

The NADBank is expected to complement existing efforts by other multilateral financial institutions, such as the World Bank and the InterAmerican Development Bank by providing a greater range of financial services from equity participation to credit enhancements to direct project loans.

"The World Bank and the InterAmerican Development Bank don't have this broad latitude of types of financing - most are direct loans," said Raul Hinojosa-Ojeda, originator of the NADBank idea and professor at the University of California at Los Angeles. "We needed to create a new type of institution that can mobilize resources."

The best way to mobilize the resources is now under discussion. Key issues involve the types and volumes of the projects that would affect credit ratings, availability of funding, and development of a user fee system and public finance infrastructure in Mexico.

Hinojosa-Ojeda said he expects up to $3 billion of bonds could be sold during the first four years, or about $750 million a year, although some industry sources said that sounded overly optimistic.

If that amount of taxable bonds were sold, then the funds would leverage the paid-in and callable capital on a one-to-one basis. In addition, Hinojosa-Ojeda said, the funds could generate up to $20 billion in other types of capital in 10 years.

Government and business sources said the types of help for various projects, whether credit enhancement, loan guarantees, or direct loans, will depend on the needs of the particular municipality. "It will not be a cookie cutter operation. It will be driven by a hard analysis of the facts," Knight said.

How Will the Poor Pay?

Such an analysis has left many with concerns that poor areas will not be able to repay debt even with longer maturity schedules and credit enhancements to bring down costs and that too many projects will remain unfunded.

"It's difficult to see how the many users will pay for the projects," said Richard Kamp, director of the Border Ecology Project, based in Bisbee, Ariz. "The projects that will be funded will be mega-projects."

However, Carlos Melcer, director of international business development for Public Financial Management in San Francisco and a financial adviser to Mexico, disagreed.

"We are trying to create an institution that is very different from other multilateral organizations," Melcer said. "It will be a dynamic institution that can look at projects fro what they are, rather than on the sponsorship."

For instance, he said, many projects to be funded could be on the Mexican side because the U.S. tax-exempt, municipal securities market, which offers low interest rates, is hard to compete with. However, U.S. cities could benefit from credit enhancements.

Melcer and several other investment bankers said a key question is whether the bank should make fewer loans and aim for a triple-A credit rating, or finance more projects and retain a single-A rating.

The bankers tended to support a single-A rating because it would increase the flexibility of the NADBank to come up with creative financings tools, while Treasury officials talked about the triple-A rating.

In a recent statement, Treasury Secretary Bentsen said: "NADBank's job is to deliver financing at a lower cost with longer maturities than would other wise be available. To do this, it must maintain high credit standards to earn the AAA rating that will make this possible. That's essential to help hold down taxpayer costs."

Steve Levine, head of the Southwest region for Moody's Investors Service, said the financial framework and other details have to be determined before any evaluation of ratings can be made. "There are some real decisions that need to be made on the structure before we could do a rating," he said.

Meanwhile, investment bankers and others in the bond industry are watching for opportunities to consult with the Mexican government on establishing a public finance infrastructure and to advise municipalities on structuring their projects.

Don Gonzales, associate director with Rauscher Pierce Refsnes, and Jorge Rodriguez, first vice president with masterson Moreland Sauer Whisman, said regional and other investment banking firms would be working with small cities to bring deals to the NADBank.

Paul Martin, a bond attorney with McGinnis, Lochridge & Kilgore in San Antonio, agreed that the border would be a target for the municipal industry. "You look at where projects have to be done, and it is border and other growth areas," he said.

Few are predicting any shortage of projects on the border or applicants for the NADBank loans. Dozens of projects already have been identified, primarily along the Texas-Mexico border, which is the longest and has the most colonias, or secondarily, the California-Mexico border.

Those and other environmental and infrastructure project are estimated to cost billions of dollars, no matter which of the various figures one chooses.

The Sierra Club and other opponents of the North American Free Trade Agreement projected environmental and other border needs at more than $20 billion.

The Clinton Administration has indicated it can do the job with an $8 billion plan to clean up the border over a 10-year period, using many sources of funding, from the NADBank to the World Bank to state revolving funds.

Last summer, before the NADBank was included in the free trade agreement, a committee study for the Council of the Americas estimated that $6.5 billion is needed for water and sewer as well as solid and hazardous waste services along the border during the next decade.

It also found a $1.9 billion financing gap after available capital resources were tallied. Funding voids like that can be filled by the NADBank, said Melcer of Public Financial Management, which helped prepare the study. "We saw the NADBank as a vehicle to improve the financing environment on the border," said Melcer, a strong advocate of the bank.

In the past, "people said, 'It's a noble idea, but it is not going to fly politically,'" Melcer said. Now, at least, the NADBank is headed for takeoff later this year.

So far, several steps have been taken to prepare for opening. San Antonio, Tex., has been selected as the headquarters site for the NADBank while Los Angeles will be the location of the community adjustment branch office.

Earlier this month, a six-member binational board was selected, and a U.S. advisory committee is expected to be appointed this summer. A manager and key staff are expected to have been hired by Oct. 1, Knight said, when the first funding becomes available

However, industry sources said they don't expect the NADBank to start providing loans and loan guarantees until next year, although the lineup of potential projects already has started.

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