Document of The World Bank FOROFFICIALUSEONLY ReportNo: 27657-MX PROJECTAPPRAISAL DOCUMENT ON A PROPOSEDLOAN INTHE AMOUNT OFUS$7.77 MILLION TO THE UNITED MEXICANSTATES FOR HOUSINGAND URBANTECHNICAL ASSISTANCE OCTOBER 12,2004 FINANCE,PRIVATESECTORAND INFRASTRUCTURE MEXICO COLOMBIACOUNTRYMANAGEMENT AND UNIT LATINAMERICA ANDTHECARIBBEANREGION This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Exchange Rate Effective December 31,2003) Currency Unit = MEXICANPESO MX $11.25 = US$1 FISCAL YEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS BANSEFI Bank of National Savings and Financial Services CAS Country Assistance Strategy CENAPRED National Center for Disaster Prevention C M U Country Management Unit CODEVISU Coordination Agreement for Housing and Land Development CONAFOVI National Commission for HousingDevelopment CONAVI National Council of Housing EA Environmental Assessment EMP Environmental Management Plan FM Financial Management FMR Financial Monitoring Reports FONAEVI National Fundof Economical Housing Support FONDEN National Fundfor Natural Disasters FONHAPO Low-Income Housing Fund FOVI Financial HousingAid Fund FOVISSSTE Housing Fundfor the Social Security Services Institute of the Public Workers G O M Government of Mexico HUSAL Affordable Housing and Urban Poverty Sector Adjustment Loan HUTAL Housing and Urban Technical Assistance Loan IDB Inter American Development Bank INDESOL National Institute for Social Development INFONAVIT Institute for National HousingFundfor Public Workers MW MinimumWage (IMW =US$109) NGO Non-Governmental Organization PSR Project Status Report SEDESOL Social Development Department SHCP Ministry of Finance SHF Federal Mortgage Department Vice President: David de Ferranti Country Director: Isabel Guerrero Sector Director: Danny Leipziger Sector Manager: John Henry Stein Team Leaders: Bruce Ferguson / Anna Wellenstein FOROFFICIAL USEONLY SOFOLES Financing Societies with Limited Purposes TA Technical Assistance TAL Technical Assistance Loan TOR Terms of Reference WBI World Bank Institute This document has a restricted distribution andmay be used by recipients only in the performance of their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization. MEXICO HOUSING AND URBANTECHNICAL ASSISTANCE LOAN CONTENTS Page A. PROJECT RATIONALE AND DEVELOPMENT OBJECTIVE ....................... 1 1. Project development objective................................................................................. 1 B . STRATEGIC CONTEXT ......................................................................................... 1 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project .1 2. Main sector issues and Government strategy .......................................................... 2 C. PROJECT DESCRIPTION SUMMARY ................................................................ 6 Project components.......................................................................................................... 6 1. Key policy and institutional reforms supported b y the project................................ 8 2. Benefits and target population............................................................................... 10 3. Institutional and implementation arrangements..................................................... 10 D PROJECT RATIONALE . ....................................................................................... 12 1. Project alternatives considered andreasons for rejection:..................................... 12 2. Major related projects by the Bank and/or other development agencies...............13 3. Lessons learned and reflected inthe project design: ............................................. 14 4. Indications of borrower commitment and ownership............................................ 15 5. Value added of the Bank support inthis project.................................................... 15 E SUMMARY PROJECT ANALYSIS . ..................................................................... 15 1. Economic ............................................................................................................... 15 2. Financial ................................................................................................................ 16 3. Technical ................................................................................................................ 16 4. Institutional............................................................................................................ 16 5. Environmental........................................................................................................ 18 6. Social ..................................................................................................................... 19 7. Safeguard Policies ................................................................................................. 19 F. SUSTAINABILITY AND RISKS .......................................................................... 20 1. Sustainability ......................................................................................................... 20 2. Critical Risks......................................................................................................... 20 3. Possible Controversial Aspects.............................................................................. 21 G. MAINLOANCONDITIONS ............................................................................. 21 H. READINESS FOR IMPLEMENTATION ........................................................ 22 I COMPLIANCEWITHBANKPOLICIES . ........................................................... 22 Annex 1: Sector Background .......................................................................................... 23 Annex 2: Major RelatedProjectsFinancedby the Bank and/or other Agencies ......35 Annex 3: Results Framework and Monitoring ............................................................. 36 Annex 4: Description of Property Registry and Rights Component .......................... 41 Annex 5: Project Costs .................................................................................................... 45 Annex 6: Implementation Arrangements ...................................................................... 46 Annex 7: Financial Managementand DisbursementArrangements .......................... 48 Annex 8: Procurement .................................................................................................... 56 Annex 9: Project Preparation and Supervision ............................................................ 70 Annex 10: Documentsinthe Project File ...................................................................... 71 Annex 11:Statementof Loansand Credits ................................................................... 72 Annex 12: Country at a Glance ...................................................................................... 75 Annex 13: Map ................................................................................................................. 77 MEXICO HOUSINGAND URBANTECHNICAL COOPERATION PROJECTAPPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN LCSFU Date: October 12,2004 Team Leaders: Bruce Ferguson / Anna Wellenstein Country Director: Isabel Guerrero Sectors: Housingfinance and real estate markets Sector Manager: John Henry Stein (70%); Sub-national government administration (15%); General water, sanitation and flood protection sector (15%) Themes: Access to urban services for the poor Project ID: PO88080 Environmental screening category: Not Required Lending Instrument: Technical Assistance Loan Safeguard screening category: No impact For Loans/Credits/Others: Total Bank financing (US$m.): 7.8 RECONSTRUCTIONAND DEVELOPMENT Total: 11.oo 4.38 15.38 Does the project depart from the CAS in content or other significant respects? [ ]Yes [XINO Does the project require any exceptions from Bank policies? [ ]Yes [XINO Does the project include any critical risks rated "substantial" or "high"? [ ]Yes [XINO Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ]No Project Development Objective The proposed loan will support the Government'sefforts in seven key areas of affordable housing and urban poverty alleviation: i)developing sound national housing and urban policies and institutional frameworks; ii)designing and puttingin place a unified housing subsidy policy that facilitates access of low/moderate income families to housing and leverages household savings and private credit finance; iii) strengthening the housingcredit and household savings systems, and moving these systems down market; iv) strengthening urban real property registries and rights; v) increasing the supply o f urban land and access by the poor and improving this market's function; vi) coordinating and supporting physical and social investments to systematically upgrade poor neighborhoods; and vii) better preventing and managing the impacts o f natural disasters. Project Description Component 1 - National Housing Policy and Institutional Framework: supports G o M to continue its advances in housing strategy, institutional development, and a strategic environmental assessment. Component 2 - Housing Subsidies: supports housing subsidy reform through evaluating and quantifying existing housing subsidy programs to design a unified housing subsidy system. Component 3 -Housing Credit and Household Savings: provides an array of support to reforms in home credit and household savings. In particular, this assistance will help drive primary lending downmarket to reach the low/moderate-income majority and develop secondary mortgage markets. Component 4 - Urban Real Property Registries and Rights: assists G o M in taking the next step in property registries and rights reform. This component supports finishing a pilot project for property rights modernization in three states and expanding this project to five additional states. Component 5 - National Urban Policy, Slum Upgrading and Institutional Strengthening: helps the Government to improve the operation o f Habitat, the Government's new slum upgrading program, by strengthening community participation and training local government officials. Component 6 - Low and Moderate Income Land Development: supports the analysis of low/moderate- income land development costs and methods in order to formulate a program that attacks this key bottleneck. Component 7 - Disaster Prevention and Management: helps the Government shift from reactivelq cleaning up after natural disasters to prevention by improving methodologies for city level risk atlases and training of local authorities in risk prevention and disaster management. Which safeguard policies are triggered, if any? NONE Significant, non-standard conditions, if any, for: NONE A. PROJECTRATIONALE AND DEVELOPMENT OBJECTIVE 1. Projectdevelopmentobjective This three-year Technical Assistance Loan (TAL) supports the policy reforms of the Affordable Housing and Urban Poverty Programmatic Sectoral Adjustment Loan (HUSAL) as its main objective. HUSAL program consists of three sequential adjustment operations over a three-year period to reform this sector. The Housing and UrbanTechnical Assistance Loan (HUTAL)supports HUSALreforms in seven key areas of affordable housing and urban poverty alleviation: 0 Developing sound national housing and urban policies and institutional frameworks. 0 Designing and putting in place a unified housing subsidy policy that facilitates access of low/moderate income families to housing and leverages household savings and private credit finance. 0 Strengthening the housing credit and household savings systems, and moving these systems down market. 0 Strengtheningurban real property registries and rights. 0 Increasing the supply of urban land and access by the poor and improving this market's function. 0 Coordinate and support physical and social investments to systematically upgrade poor neighborhoods; 0 Better prevent and manage the impacts of natural disasters The proposedTAL contributes to providing the analysis and technical support necessaryfor the Government to achieve these goals. B. STRATEGIC CONTEXT 1. Sector-relatedCountryAssistanceStrategy (CAS)goalsupportedbytheproject The HUTAL will provide the technical assistance (TA) for the HUSAL to enable Mexico's efforts to achieve three objectives of the new CAS (presented to the Board on April 15, 2004): poverty reduction, competitiveness, and environmental sustainability. Most fundamentally, the project will result in improved housing, basic services, and access to real assets by low-income households. The project addresses this key aspect of poverty through support of a national slum upgrading program and new housing and land development for low-income families. The programinvolves local implementationand includes measures to buildcapacity. The project also targets competitiveness through increasing the efficiency of housing and urban development, housing finance, and property registries and rights systems. Many low-income homes contain microenterprises as well as provide' shelter, while owners often build accessory units to rent or house family members. Their home also constitutes the main asset of most low income families. Thus, housing often serves as a key source of capital accumulation critical to building a strong middle class. By supporting measures to reduce the housing system's reliance on inefficient public housing finance and to bolster a stable financial system, the loan will help reduce risks to the federal government of bailouts. Finally, the project will have a strongly positive environmental impact through improving conditions in existing slums and by promoting formal- sector development on appropriate sites with rational layout. 1 2. Mainsector issuesand Government strategy Mexico is at a critical point in its demographic history where affordable housing and related urban development represent crucial challenges for the country's socio-economic development. Population growth rates have slowed from 3% per annum in the 1960s to around 1% per year currently. However, the formation of new families by the "baby boom" of the 1970s and 1980s will double the number of total households and the resulting demand for housing and basic services by the year 2030 as this group comes of age. This demand will increase at even higher rates in cities as the country continues to urbanize. Although the institutions and financial architecture necessary to serve the roughly 60 '3% of families are largely in place, low/moderate- income households generally lack formal-sector support. The maturation of Mexico's "baby boom" of the 1970s and 1980s has increased the urgency and importance of these tasks. If this problem goes unaddressed, the resulting informal settlement, lack of housing, and attendant social, economic, environmental, and health problems will generate enormous private and public costs. The Government is committed to address this critical challenge by doubling housing production to 750,000 housing solutions per year by 2006. To attain this goal, the administration is taking measures to reform institutions and policies and to address the key bottlenecks in the sector. These actions include: (i)putting in place a national housing development policy and institutional framework; (ii)strengthening primary and second mortgage markets and moving home credit finance downmarket; (iii)increasing the efficiency and equity of housing subsidy programs, harmonizing these efforts so that they provide comparable levels of subvention, and coordinating their administration; (iv) modernize urban real property registries and rights; (v) putting in place a national urban policy, including slum upgrading, land development, and disaster mitigation. The HUTAL project is designed strategically as a TAL to strengthen low/moderate-income housing and urban poverty programs, in general, and the HUSAL program, in particular. This objective involves attacking bottlenecks inthe following seven key areas: National housing policy and institutional framework. Until the last three years, the federal government had lacked an effective vision for reform of the housing sector. Similarly, the federal agencies involved in housing had operated with neither an overall strategy nor coordination. No agency existed with responsibility for sector policy. The Government has responded by establishing a new organization, National Council of Housing (CONAFOVI), to lead and coordinate other agencies in the sector. In turn, CONAFOVI has developed an official housing policy based on widespread participation of public and private-sector leaders and analysis. Government of Mexico (GoM) has also taken measures to decentralize operation of housing programs to municipalities, although further efforts are need to build the localities technical capacity and funds to carry out their role inhousing and urban development. While many aspects of decentralization and local capacity building extend beyond the scope of this program, the HUSAL contains various milestones for strengthening key actors involved in decentralization of housing and urban development. 2 3ox 1 Summary Lexiconof Affordable Housing and UrbanDevelopment inMexico - SANSEFI. This federal institution was createdin2001in order to promotehouseholdsavings, help popularfinance institutions adjust and prosperunder the new Law for 'opuiar Savings and Credit that phases in requirements between 2001 and 2004, and coordinate government support to financial institutions that focus on serving owlmoderate-incomehouseholds ("popular financial institutions"). 30NAFOVI. Formed in 2001, this federal institution - a dependency of SEDESOLthat also reports to the President - develops housing policy and coordinates national lousing institutions, particularly the federal housinginstitutions (SHF and FONHAPO), but also INFONAVIT andFOVISSSTE. JONAVI. Createdunderthe samedecree as that of CONAFOVI, this organizationservesas aforum for public andprivate-sectorinput into housingpolicyand programs, md is managedby andreportsto CONAFOVI. 30RETT. A dependency of SEDESOL, this entity hasleadresponsibility for regularizing informally-urbanized ejidos, and has operatedon a massive scale. The process nvolves purchase of ejido landby the federal government (expropriation), regularizing title, and sale to the existingoccupants. Zjido land. Created by Article 27 of the Mexican Constitution, this form of communal property (often termed "social land") was intended to protect rural farming :ommunities and is regulatedby a complex set of federal laws and institutions. With urbanization,two-thirds of the land on the fringe of Mexico's cities now consists of :jidos and constitutes the main sourceof developableparcelsfor new housing. 'ONHAPO. Historically, this institution has served as the federal government's main support to low-income housing. Poor repayment on below market-rateloans made )y FONHAPO to state and local housing institutes that on-lent these funds to low-income households led to this organization's near bankruptcy, from which it has now .ecovered. A presidentialdecree has given the organization- alongwith FONAEVI- the mandate to develop a unified housing subsidy system. Currently, FONHAPO's nainprogram is Tu Casa. FONAEVI. A division of FONHAPO, this entity will receive, account for, and disburse funds under the unified housing subsidy system, and currently performs this :unction for Tu Casa. FOVI. FOVIhadthe mandateto develop market-ratemortgagefinance as a second-tierinstitution untilthe creation of SHF in 2002, which has assumedthis role. FOVI :ontinues as atrust within SHF with anumberof specific functions mainly relatedto covering liabilities createdduring its former lending operation. FOVISSSTE. This institution gets funding from a compulsory contribution of 5% of the salary of federal public-sector workers. It then uses these resources to extend mortgagefinance for housing at below-market interestrates graduatedto favor lower-income households. FOVISSSTE accounts for around 10% of all mortgage finance. [nadditionto home lending, FOVISSSTE forms part of thepensionfund for its contributing workers. INFONAVIT. By representativesof formally-employed workers, employers,and government, this institution gets funding from a governed compulsory contribution of 5% of the salary of private-sectorworkers andapplies these monies to extendmortgage finance for housing at below-market interestrates graduatedto favor lower-income households. INFONAVIT accounts for around two-thirds of all mortgage finance. In addition to home lending, INFONAVIT forms part of the pension system for its contributing workers. Low-incomehousehold. A householdearning3 minimum wages (currently US$ 327 per month) and below MinimumWage (MW). A measureusedfor socialprogramsincludinghousingprograms. Currently, one minimumwage is approximatelyUS$ 109per month. Moderate-income household. A householdearningabove 3 minimumwages to 6 minimumwages (currently US$327 to US$655per month) Prosavi. A subsidy program started by FOVI and now operated by SHF that provides an upfront grant (currently, US$ 5,000 for householdsearning 3 to 5 M W and US $8,000 for householdsearning4 to 6MW dependingon the program). Householdsjoin this grant with a mortgage loan (currently from SOFOLES that receivetheir fundin from SHF and that channelthe Prosavi grant to specific projects) and a downpaymentin order to purchasean expandable unit (around40 m2; price: US$ 14,000) built b) developers. SEDESOL. The SocialDevelopmentMinistry holds overall responsibility for governmentaction inurbandevelopment SHF. Createdin 2002 as the successor to FOVI, the FederalMortgage Societyenjoysbackingof the faith and credit of federal governmentfor 12 years inorder to lead thc development of primary and secondary market-rate home lending. SHF operates as a second tier-finance institution that provides liquidity and guarantees to first-tie lenders (currently, mainly the SOFOLES). SHF accountsfor around 15% of total mortgagefinance. SOFOLES. Startingin 1995, these mortgagebanks - now totaling 16 - havebecomethe Mexico's main source of home lending. These institutions can make loans an( raisedebt on capital markets,but cannot accept deposits from the public. Tu Casa (formerly "Vivah). A subsidyprogram operatedby FONHAPOthat deliversa federalgrant (currently US$3,000) that stateand local governments must match- typically with a serviced lot. The local government contracts the construction of a basic unit (up to 30 m2) that households eaming 2.5 minimum wages and beloc purchase by making adownpayment and, sometimes, their self-help labor inthe construction. Housing subsidies. Over the last five years, Mexico has launched two small-scale (total funding of US$ 300 million in 2003 in a federal budget of over US$ 135 billion) housing subsidy programs - Prosavi now operated by SHF (previously by FOVI), and Tu Casa (formerly called "Vivah") now operated by FONHAPO. These initial on-budget federal housing-subsidy programs have proved useful trials, but can be substantially improved - a pre-requisite for expansion of funding to a level necessary to have an important impact in reaching the government's goal of producing 750,000 housing solutions per year as intended. However, no plan or policy agency has existed for building on these subsidy programs to develop a unified national subsidy program- the mechanism that has proved most effective in Latin America (e.g. Chile and Costa Rica). Meanwhile, the bulk of Mexico's housing subsidies come in the form of below-market interest rates- off-budget subsidies mainly provided by INFONAVIT. The HUSAL supports GoM to (i) standardize federal housing subsidies and centralize the design of subsidy programs in one institution, and (ii)establish a unified housing subsidy system that improves their efficiency and equity in order to lay the basis for expanding this subvention to a scale relevant to need. Housing credit and household savings. Despite some advances in recent years, the credit finance system remains weak relative to other countries at a similar level of socio-economic development. Outstanding mortgage loans represented 5.2% of GDP in 2000, compared to over 10% in Colombia and Chile, and 35% to 40% on average for OECD countries. The funding method of INFONAVIT and FOVISSSTE - 5% of formal-sector payroll - has provided the cash flow for considerable housing production, even during times of economic stagnation or/and instability. However, the heavy subvention embedded in the below-market interest rates and other aspects of these loans (three-quarters of all mortgage credit) has crowded out the private sector, hinderedthe mobilization of private savings, reduced liquidity in the private housing market, and provided few housing options for low-income households. In addition to serving as below-market home lenders, INFONAVIT and FOVISSSTE function as provident funds that are supposed to maximize the return on their contributors' savings. This conflict in roles contributes to undermining the housing finance system. However, the dominant role of these institutions in the mortgage market requires a careful plan for resolving this dilemma in order to avoid disastrous disruption inhousing supply. Inaddition, themortgage-financeindustryfocuses onlendingfor the purchaseofnew developer- built unitsaffordable to moderate-income people accompanied by a substantial subsidy and to the middle class and above at market rates. These mortgage institutions provide virtually no credit for the lower-cost housing solutions suited to the low/moderate-incomemajority, including home improvement, expansion, a serviced site, and purchase of low-cost existing unit. Similarly, savings for housing is quite low. As a result of low savings, the family contribution necessary to leverage credit and subsidies i s small or missing. Housing microcredit and other forms of housing finance that can fund the progressive buildingprocess used by the low/moderate-income majority are emerging slowly. The HUSAL contains an array of milestones to support GOM reforms in home credit, including: (i)approval of new foreclosure and home-credit transparency laws; (ii)mortgage-risk data base a necessaryfor development of a secondary mortgage market; (iii) development and mainstreaming of products to finance low-cost housing solutions for low/moderate-income households including home improvement, expansion, purchase of existing low-cost homes, and serviced sites; and (iv) a strategy that resolves the conflicting roles of INFONAVIT. 4 Property registries and rights. The lack of agreement on basic legal and administrative principles, operational inefficiency, and the antiquated and insecure information systems of the great bulk of Mexico's 32 state property rights registries has helped make real private property ownership difficult and expensive. Widespread insecurity of tenure and informal ownership has followed as lowlmoderate-income households opt out of this costly, cumbersome system. Well aware of this problem and its negative impact on many markets (real estate, home lending, local taxation, etc.), GoM has launched a property registry modernization pilot project in three states. The HUSAL has milestones for expansion and strengthening of this project to five additional states. National urban policy, slum upgrading and institutional strengthening. Until recently, GoM has lacked an urban policy with regard to slum upgrading, which has occurred - if at all - in piecemeal fashion, without planning, neighborhood participation, sequencing of investments, or integration of physical and social improvements. SEDESOL has recently created an official urban development strategy, and integrated the physical and social aspects of slumupgradingin a new program, Habitat, that has now made investments (approximately U S $90 million in 2003 and around US $180 million in 2004) in 60 cities. HUSK supports capacity building among local governments, and incorporation of neighborhood participation and planning methods - now in Habitat's operating rules - into the execution of Habitat, as well as expansion of the Oportunidades social support programfrom rural to urban areas and wider use of poverty maps in program targeting. Low/Moderate Income Land development. The supply of urban land in Mexico represents a major problem for low/moderate-income households. Myriad complex and costly building and subdivision regulations have contributed to making low and moderate-income land development an uneconomic venture for the private sector. The difficulties of developing ejido land - a form of communal land ownership that accounts for two-thirds of developable land on the fringe of Mexican cities - have exacerbated this problem. These bottlenecks contribute to pushing the great bulk of lowlmoderate-income land development into the informal sector. However, if unguided, informal settlement creates enormous public and private costs that are two to three times those of formal-sector development in other Latin American countries and, the evidence suggests, in Mexico. Meanwhile, government purchases land to amass land reserves in order to provide the parcels used in social housing projects and in order to subsequently regularize and transfer title of these informally-urbanized ejidos to their de-facto occupants. Insum, this modus operandi for low/moderate-income residential development createsenormous costs. Although some preliminary analysis has occurred in Mexico, the costs of informal development and their impact on diverse participants in the process - households, landowners, local government, federal government - have yet to be quantified and publicized. The HUSAL contains milestones for quantifying the costs and benefits of the current approach (government land reserves) and alternative methods - from deregulation to land readjustment - for low/moderate-income land development as a basis for formulating a program. Disaster Prevention and Management. Earthquakes, hurricanes, and other natural disasters extract a heavy toll on the urban poor. Although the Mexican government has a model system in place to finance disaster recovery and reconstruction (through FONDEN), risk mitigation measures and community vulnerability reduction through preventive planning, have recently become priority activities for SEDESOL under its Habitat program. 5 The HUSAL supports this initiative for risk reduction through the development of a methodfor riskmappingand analysis, and.training for local authorities andcommunity members indisaster prevention and risk management. C. PROJECTDESCRIPTIONSUMMARY Projectcomponents Theproject components, andtheir cost and financing, are summarized inthe table below. The seven HUTAL project components are mutually supportive, and correspond to the reform agenda of the HUSAL in these crucial areas: national housing policy and institutional framework; housing subsidies; home credit and household savings; urban real property registries and rights; national urban policy, slum upgrading and institutional strengthening; low and moderate income land development; and disaster prevention and management. Component 1 - National Housing Policy and Institutional Framework (US$ 0.43 million): supports GoM to continue its advances in housing strategy, institutional development, and a strategic environmental assessment (SEA). In particular, this TA will strengthen the capacity of the federal government to design and operate a unified housing subsidy program, and that of state and local governments to operate housing and urban development programs. This component also supports the development of a national housing information system, including design, data collection and hardware. Finally, this component includes institutional support for CONAFOVI as the coordinating agency for the development of a National Housing Policy and its institutional framework. Component 2 - Housing Subsidies (US$ 0.22 million): supports housing subsidy reform. It assists GoM to evaluate and quantify existing housing subsidy programs (including the subvention in INFONAVIT lending) in order to design a unified housing subsidy system. Component 3 -Housing Credit and Household Savings (US$ 2.31 million): provides an array of support to reforms in home credit and household savings that are already in motion. Inparticular, this assistance will help drive primary lending downmarket to reach the low/moderate-income majority and develop secondary mortgage markets. Component 4 - Urban Real Property Registries and Rights (US$ 7.80 million): assists GoM in taking the next step in property registries and rights reform - a key area that underlies many markets and functions, including real estate, financial sector development, local taxation and urban services, and municipal finance. In essence, this component supports finishing a pilot project for property rights modernizationinthree existing states and expanding this project to five additional states. A series of related studies, technical assistance and equipment will build modem registries capable of processing much larger numbers of transactions with fewer administration steps, at reduced time and cost to users. These reforms are a pre-requisite for improving the efficiency of massive titling and regularization programs planned by GOM. In tandem, this component supports systemic reform of the property rights system, including conversion of the nature of the property registry from a record of filed documents to a record of legal rights in real estate, development of "principles of modern property rights" that incorporate these and other basic reforms, and dissemination of these principles and key practices (information systems) to state property registries. The new CAS contains a specific operation on Property Rights for FY 05 that will extend the reforms begun under the HUTAL. 6 Component 5 - National Urban Policy, Slum Upgrading and Institutional Strengthening (US$ 2.27 million): helps the Government to improve the operation of Habitat by strengthening community participation, and by training local government officials to advance in the implementation of this new slum upgradingprogram. It will also assess how poverty maps have been usedby local governments, and will provide TA and training in poverty mappingand related data management. Finally, this component includes institutional support for SEDESOL as the coordinating agency of these slumupgradingand poverty targeting efforts. Component 6 - Low and Moderate Income Land Development (US$1.91million): supports the analysis of low/moderate-income land development costs and methods in order to formulate a program that attacks this key bottleneck. As such, it will make recommendations on policies, programs and instruments to be developed in order to expand low-moderate income land development that deal both with supply (including streamlining the development approval process) and demand (such as subsidy programs to increase access to low income households). It will support development agencies in fast growing urban areas to develop programs for local economic development. The component will also review the management and use of land inventories at city level to improve their usefulness and support further integration of urban and land information systems to better support policy malung and programming. Component 7-Disaster Prevention and Management (US$0.40 million): helps the Government shift from reactively cleaning up after natural disasters to prevention by; (i)assessing SEDESOL's methodological guide for the elaboration of risk atlases at city level, and (ii) conducting regional workshops to train local authorities in risk prevention and disaster management. Component 1, National housingpolicy and 0.43 2.8% 1.9% institutional framework 2. Housing subsidies 0.22 1.4% 0.13 1.7% 3. Housing credit and household 2.3 1 15.1 % 1.14 14.7% savings 4. Urban realproperty registries and 7.80 50.7% 3.56 45.8% rights I 5. National urban policy, slum 2.27 14.8% 1.36 17.5% upgradingand institutional strengthening 6. Low/moderate income land 1.91 12.4% 1.15 14.7% development 7. Disaster mevention and management 0.40 2.6% 0.24 3.1% TotalProject Cost 15.34 99.7 % 7.73 99.5 % Front EndFee (0.5%) 0.04 0.3% 0.04 0.5% TotalFinancingRequired 15.38 100.0% 7.77 I 100.0% 7 1. Keypolicy and institutionalreformssupportedbythe project The HUTAL's work program aligns closely with the reforms of the Affordable Housing and Urban Poverty Programmatic Sectoral Adjustment Loan (HUSAL) and those necessary to reach the government's fundamental goal: increasing production of housing solutions (and corresponding serviced land) to 750,000 solutions per year by 2006. The following shows how selectedTA supported by the HUTAL corresponds to the categories of reform of the HUSAL: Component 1:National housing policy and institutional framework: 1.1) Strengthen the capacity of Government's subsidy agencies, such as FONHAPO, to manage housing subsidy programs, particularly its systems for registering beneficiary information and for design, evaluation, and monitoringof programs. 1.2) Develop a strategy and model for the operation of state and municipal government housing agencies. 1.3) Develop and manage a housing data system to systematize information on price, title, construction, liens, permits, environmental licenses, zoning, and other related topics, including support for studies, data collection, hardware and training. 1.4) Support a strategic environmental assessment of the housing sector. 1.5) Institutional strengthening for CONAFOVI. Component 2: Housing subsidies 2.1) Evaluate federal housing subsidy programs in a comprehensive and coordinated manner, including studies and dissemination of findings. 2.2) Analyze and calculate the present value of interest-rate subsidies embedded in the loans of INFONAVIT, as a step to making this organization's function more transparent and to aligning INFONAVIT's subsidy levels and program with those of on-budget federal housing agencies. Component 3: Housingcredit and household savings 3.1) Design and implement a strategy for an awareness campaign for state and local authorities on mortgage foreclosure enforcement. 3.2) Develop a strategy for reconcilingINFONAVIT's roles as housinglender, social housing agency, and pension fund. 3.3) Analyze the Cajas de Ahorro y PrCstamo (Saving and Loan Fund), microfinance institutions, home building materials retailers, land developers and other low-cost housing lenders in order to lay the basis for expanding low/moderate-income home credit. 3.4) Assist SHF in developing norms for SOFOLES. 3.5) Develop a strategy to improve the efficiency of migrant remittances for housingfinance. 3.6) Design and implement a database to support the development of national, regional and local houseprice indexes. 3.7) Assess the economic benefits of housing microfinance. 3.8) Develop a new legal and regulatory framework for issuance and investment in mortgage related securities. 8 Component 4: Urbanreal property registries and rights 4.1) Promotion and dissemination of property rights reform.: by influencing and trying to change the incentives under which RPPs and the property registry industry operate. These changes involve shifts in the national policy. Most fundamental, this sub- component will support a conversion in the nature of the property registry from a record of filed documents to a record of legal rights in real estate. This and other principles will be developed and codified in a statement of "principles of modem property rights." This statement of principles will be widely discussed and agreed upon in a series of forums, and seminars. 4.2) Strengthening of property rights management.This subcomponent involves developing a system of indicators for performance of state property rights registries, further definition of the principles of modem property registries, evaluations of the economic impact of property rights initiatives and an assessment of property rights in the civil codes of various Mexican states. 4.3) Modemization of the public registry in selected states . This subcomponent diagnosing the operational characteristics of property registries and making recommendations in each selected state in order to reach an agreement between CONAFOVI and the state on modem performance standards (e.g. for digitizing and conversion from paper to electronic files, reception of documents, remote consultation via the Internet, and electronic signature). The subcomponent will also support the investments necessary to meet the performance standards agreed, along with an evaluationof the results. 4.4)Technical support to CONAFOVI. This subcomponent will provide resources for local supervisors of each state's work plan and training needs, for coordinating CONAFOVI's activities, and for strengthening its auditing, contracting, accounting, and evaluation capacities. Component 5: National urban policy, slumupgradingand institutional strengthening 5.1) Train state and municipal governments and community representatives in the Habitat program methodologies. 5.2) Analyze the experience of the Habitat program and make recommendations on effective community participation suited to slumupgrading. 5.3) Develop training modules in poverty mapping and related data management, and disseminate this capacity to municipal governments and other organizations, including related software and hardware. 5.4) Evaluate the use and usefulness of poverty maps to local governments. 5.5) Institutionalstrengtheningfor SEDESOL. Component 6: Low/ Moderate Income Landdevelopment 6.1) Quantify the costs, benefits, and incidence (who gains, who loses) of informal versus formal-sector land development. 6.2) Analyze options to promote low/moderate-income land development, and incorporate these analysesinto recommendations for policies and programs for a national program. 6.3) Create a local economic developmentkompetitivitymodule (software and hardware) for Local Development Agencies to train local authorities in regional, strategic, local and participatory planning. 6.4) Design a geographic information system that includes both urban development and land information. 6.5) Evaluationof land data base. 9 6.6) Evaluation of the economic developmentlcompetitivity program. Component 7: Disaster prevention and management 7.1) Assess SEDESOL's methodological guide for the elaboration of risk atlases at city level, make recommendations for its improvement, and assess the use and implementation of risk atlases in selectedcities. 7.2) Conduct regional workshops and develop or update materials for courses to train local authorities in risk prevention and disaster management. 2. Benefitsandtarget population. Low/moderate-income families - which comprise two-thirds of Mexico's population - will benefit from greater access and affordability of housing, basic services, and residential land. Governments at all levels will benefit from reduced costs for provision of basic infrastructure - the result of increasing the share of formal-sector development, and of formalizing and guidinga greater share of low/moderate-income settlement. The program will help key federal government agencies (CONAFOVI, CONAVI, FONHAPO/FONAEVI, SEDESOL, SHF, INFONAVIT) design and implement more effective programs in the sector. The country as a whole will profit from the boost to economic growth generated by greater investment in housing and urban development, and from an improvedurban environment createdby these reforms. 3. Institutionalandimplementationarrangements BorrowerandFinancialAgent A loan of US$ 7.77 million will be made to the United Mexican States. The SHF will be the financial agent, as well as serve as one of the implementing agencies. ProjectImplementation CONAFOVI will serve as the implementing agency for the components of this TA loan relatedto housingpolicies and subsidies and property registries and rights as follows: 0 Component 1- Nationalhousingpolicy and institutional framework 0 Component 2 - Housing subsidies 0 Component 3 - Housing credit and household savings - ("Strategy for an awareness campaign on mortgage foreclosure enforcement" and "INFONAVIT strategy", subcomponents 3.1 and 3.2 respectively) 0 Component 4 - Urban real property registries and rights - All project's subcomponents will be executed by CONAFOVI directly, with the exception of subcomponent 4.3, "Modernization of thepublic registry in selected states" where each state will implement the activities under CONAFOVI's supervision. SHF will execute the studies in Component 3 on housing credit, with the exception of the "Strategy for an awareness campaign on mortgage foreclosure enforcement" (subcomponent 3.1) andthe "INFONAVIT strategy" (subcomponent 3.2). These last two activities will be conducted by CONAFOVI. 10 SEDESOL will be the implementing agency for the components of this TA loan that deal with urban development as follows. 0 Component 5 - National urban policy, slumupgrading and institutional strengthening 0 Component 6 - Low/moderateincome landdevelopment 0 Component 7 - Disaster prevention and management Each implementing agency (CONAFOVI for housing and via the state RPPs for part of the property rights activities, SHF for housing credit, SEDESOL for urban development) will have the responsibility for definingan action plan, and will approve, evaluate, monitor and control the implementation of their corresponding project components. Each of these implementing agencies will have in place a full-time team to manage the project, and hire consultants to dedicate to this project if required. For further details on the implementationarrangements, see Annex 6. Supervision Supervision missions will be undertaken at least three times a year and Project Status Reports (PSRs) will be updated after each mission. Project supervision will be front-loaded and focus initially on ensuring the preparation of terms of reference for key studies and consultants. In addition to regular supervision, the Bank will periodically review the progress of this project (the HUTAL) and sector reformunder the HUSK with the Government. The implementingagencies will submit quarterly progress report during project implementation, including financial monitoring. A midterm review will be carried out inJanuary 2005. ImplementationPeriod The loan will be implemented over a period of three years. The project effectiveness date is February 28,2005, completion date is December 30, 2007 and closing date is June 30, 2008. Procurement CONAFOVI, SEDESOL, SHF and the States (participating in component 4 via CONAFOVI) as implementingagencies, will be responsible, in their respective parts of the project, for bidding contracting and paying consultants, for producing adequate procurement reports, and for preparingand submitting annual procurement plans and periodic reports as required by the Bank. A global procurement plan has been prepared and a specific procurement plan for the first 18 months will be in place no later than the date for Board presentation. See Annex 8 for further details on procurement arrangements. Financial Management,Flow of FundsandAccounting Financial Management Assessment. A financial management (FM) assessment was conducted to evaluate the FM arrangements for the proposed project and the capacity of CONAFOVI, SEDESOL, and SHF to effectively manage and implement the project and provide the Bank with accurate and timely information. The existing FM arrangements in SEDESOL, CONFOVI, and SHF are operational and were found acceptable. The FM risk i s Moderate to Substantial, depending on the FM systems and capacity of the state RPPs that may be involved and the relative inexperience that the financial agent and the implementing agencies may have with Bank- financed projects. 11 Flow ofFunds. Bank loan funds will flow from the loan account, to a Special Account managed by SHF as financial agent and established in US dollars at the Mexican central bank (Banco de Mexico). CONAFOVI (and the state RPPS via CONAFOVI), SEDESOL, and SHF (as implementing agency) will receive funds in Mexican pesos via its standard budget from the Federal Treasury (Tesoreria de la Federacidn), which will be reimbursed at the end of the cycle from the Special Account. Disbursements to the Special Account will be on the basis of SOEs, following transaction-based disbursement procedures. Accounting Procedures and Audits. SEDESOL, CONAFOVI, and SHF will maintain records and accounts adequate to reflect, in accordance with accounting practices compatible International Accounting Standards and in compliance with local requirements. These records will cover its operations and financial condition, including the proposed special account. SEDESOL's internal auditor office i s responsible for permanent internal audit reviews to both SEDESOL and CONAFOVI. SHF's internal control reviews are beingcarried out by the internal audit department of SHF. The external audit process and audit report will follow the Bank's audit guidelines, reflecting the new audit policy as of July 2003. The annual audits will be carried out in accordance with auditing standards, by independent auditors (a private firm) in the case of CONAFOVI (and the participating state RPPs) and SHF, and by the internal audit office - Organo Intemo de Control de la SEDESOL- in the case of SEDESOL. All of the annual audits will be under Terms of Reference (TOR) acceptable to the Bank. A consolidated (non-audited) report covering the entire project will be prepared by CONAFOVI in coordination with SEDESOL. The Annual audit reports and the consolidated report will be sent to the Bank no later than six months after the end of each audited year. Details on financial managementand disbursement arrangementsare provided inAnnex 7 D. PROJECTRATIONALE 1. Project alternatives considered and reasons for rejection: As regards the overall program, the Government and the Bank considered an investment loan before deciding on the current design - a Programmatic sectoral adjustment loan (HUSAL) supported by the TAL dealt with in this document (HUTAL). An investment-loan format would have substantially limited the ability of the Program to deal with the multiple areas necessary for effective reform of housing and urban development. Theory and practice (e.g. Enabling Housing Markets to Work, World Bank, 1990) show "housing and urban development" to be a synthetic sector where effective programs and policy require action in institutional strengthening, credit, subsidies, property rights, basic services, and land development. Experience of the Bank and other development institutions with housing and urban investment loans demonstrates that they can effectively focus on one or, perhaps, two of these topics. For example, the Bank's FOVI operation (now, SHF) inMexico deals with one area -that of housing credit. Incontrast, Programmatic sectoral adjustment lending can target key reforms inmany more areas. Hence, it well suits the multi-sectoral nature of affordable housing and urban poverty alleviation. The programmatic sectoral adjustment loan also serves as an appropriate means of maintaining the momentum of the policy and program reforms already in process in both housing and urban development under this Administration. This TAL provides technical and policy support between adjustment loans, helping to maintain reform momentumand quality. 12 2. Major relatedprojectsby the Bank and/or other developmentagencies Various donor-financed projects have a significant relationto this TAL. Foremost, this TAL supports and serves as a companion loan to the HUSAL. These two operations are tightly aligned, and have beenprepared with the Government and processedwithin the Bank intandem. Ineffect, they join to form an overall Program. The Bank's FOVI operation (now SHF) provides liquidity for and targets reform of market-rate primary and secondary mortgage lending. However, SHF mainly serves middle-income and some moderate-income households principally in one area - credit. Incontrast, the HUSAL and the supporting HUTAL focus on the range of reforms necessary to reach the low-moderate- income majority - the two-thirds of the income distribution largely left out of formal-sector markets. The Inter-American Development Bank (IDB) also has a FOVI operation. This project has provided liquidity for credit and support for FOVI(now SHF) to change its method of subvention in the Prosavi program from a below-market interest rate to an upfront grant. The HUSAL and accompanying HUTAL, again, target a much broader reform agenda. Even as regards subsidies- a pillar of the IDB FOVI operation - the HUSAL and HUTAL promote the creation of a unified federal housing subsidy system rather than just improving the efficiency and equity of one particular subsidy program(Prosavi). CONAFOVI i s currently implementing its "Program for the Modernization of the Public Property Registries" inthree states with IDB'sfinancial support. The HUSALand accompanying HUTAL support the strengthening the pilots with experiences and best practices from similar World Bank projects and then completion of the current pilots and expansion to an additional five states. The HUSAL and HUTAL lay the foundation for Bank involvement in a broader property rights initiative and the new CAS contains a specific operation on Property Rights for FY 05. This TAL will pave the way for this broader program by: (a) strengthening and expanding the property registry modernization pilot projects; (b) designing and implementing new reforms in registries aimed to build institutional conditions and capacities to contribute to the reduction of informal property rights and facilitate the property rights transactions; and (c) establishing working relationships between Bank staff and relevant government agencies inthe area of property rights. The IFC has a number of operations in the housing finance area, and in the pipeline that total US $215 million. These projects offer different types of investments (equity, debt, and guarantees) and include primary and secondary mortgage finance and construction finance. Finally, the Bank has been closely involved with Mexico's efforts to reduce its vulnerability to natural disasters. Following its work on the reconstruction after the Mexico City earthquake of 1985, the Bank has collaborated and supported Mexico's program of preventive planning and emergency preparedness at a national level. This support has taken the form of financing for initiating CENAPRED, for studying insurance and risk transfer issues and, in particular, in the development and financing of a national insurance program "FONDEN' helping states to cover reconstruction and recovery expenses following natural disasters. The Bank project in support of FONDEN proved very difficult to disburse for bureaucratic reasons, but at this writing, i s being amended to finance the country's first parametric insurance program, a major step forward in retention of natural disasterrisk at the national level. 13 3. Lessonslearnedand reflectedinthe projectdesign: The experience of the World Bank and other donors in housing and urban development, and in TA. projects, generally, suggests a number of key lessons incorporated in program design of the HUSKandthe relatedTA provided by the HUTAL: a. First and foremost, the synthetic nature of the housing and urban sectors requires joining reform in a range of areas to be effective, including credit and household savings, subsidies, property rights, land development, institutional strengthening and policy, and basic services. In addition to program design (e.g. the programmatic sectoral adjustment approach supported by this operation), this lesson applies to the institutional structure of reform and this operation. For this reason, an organization such as CONAFOVI - established by the Fox Administration to coordinate diverse entities and public and private-sector input in housing - holds critical importance to effective programs and policy, and serves as the primary implementing agency of the housingcomponents of this TAL. In turn, SEDESOL joins responsibility for many aspects of urban development, and functions as the implementing agency for the urban development elements of this operation. b. Prevention costs muchless than fixing the problem after it has occurred. This conclusion applies, in particular, to disaster mitigation and to residential land development. Adopting strategies and spending modest sums to prevent and mitigate natural disasters in advance costs a small fraction of the amount (typically, 10% to 20%) necessary to aid victims afterwards. Similarly, providing basic services to formal-sector land development costs a fraction of the amount necessary to upgrade informal settlement once it has occurred. C. Housing subsidies function best in the form of grants made under a unified subsidy system that meets criteria for efficiency and equity. When markets function - the case for some moderate-income and most middle-income households - these grants best take the form of portable vouchers that households join with their own down payment and a market-rate loan to buy the home of their choice. When distortions disrupt markets - the case of low-income households, in general, and many moderate-income households - reforms that facilitate supply (e.g. organizing households into groups for projects, making available serviced lots, and strengthening property rights) arejust as important and a pre- requisite for the effective functioning of subsidy programs. d. Slum upgrading functions best when physical and social interventions are joined, programmed and supported by community participation, and investments sequenced, rather than ina piecemeal approach. e. InT.A. projects, it is important to have flexibility in the allocation of funds. To this end, this TA defines the project components somewhat broadly. f. T.A. projects work well when they provide not only short-term consultants, but also support longer-term institutional strengthening and policy reform. g. Implementation of policy reform requires strong overall coordination. For this reason, the key counterpart of the HUSAL that this HUTAL supports is the Ministry of Finance (SHCP). 14 4. Indicationsof borrowercommitmentandownership The Government has taken bold steps to reform housing and urban development. Among the most important are the following: a. The Government has set and given priority to an ambitious goal: providing 750,000 housing solutions per year by 2006 - the same amount as new household formation - in comparison to current formal housing productionof over 500,000 units in 2003. b. Establishment of a new agency, CONAFOVI, to set policy and coordinate other federal institutions inhousing. C. Creation and launch of a nationwide slumupgradingprogram, now operating in 60 cities, with its budget expandedfrom approximately US $90 million in 2003 to $180in 2004. d. A property rights registry modernization pilot program in three states, now set to expand to other states. e. Substantial operational improvements inINFONAVIT and FOVISSSTE. f. Creation of SHF (successor to FOVI), a strong institution with the powers necessary to develop a secondary mortgage market, and expansion of this institution's guarantee and lending programs. g* Unification of responsibility for federal housing subsidy programs in FONHAPOFONAEVI. h. Critical laws that strengthen foreclosure and make the costs of housing credit transparent and comparable across lenders. 1. Creation of BANSEFI in order to lead the development of household savings, and expansion of savings networks and the number of households with formal savings. The HUTAL has been prepared not only in close cooperation with the implementing agencies involved - CONAFOVI, SEDESOL and SHF - but also with FONHAPO/FONAEVI, BANSEFI, and SHCP. These agencies have worked closely with the Project team to formulate, review and revise, and agree on the content of this operation. 5. Value addedof the Banksupportinthisproject The HUSAL loan disburses to the SHCP based on meeting prior actions. Hence, the HUSK supports the overall reform agenda and SHCP involvement in affordable housing and urban poverty, but does notwork directly with the key sectoral agencies. In contrast, this operation - the HUTAL- forms an essential complement to the HUSALand the Government's reform program by supporting the line agencies directly involved in reform of affordable housing and urban poverty programs and policy - CONAFOVI, SEDESOL, SHF, and the states. In effect, this HUTAL supplies the key pieces and analysis necessary to follow on the prior actions of the first HUSALand to meet many of the milestones for reform of the second and third HUSAL loans. As such, this technical-cooperation loan holds substantial added value in maintainingthe momentumand direction of positive change in these areas. E. SUMMARY PROJECTANALYSIS 1. Economic [XI Other: Not applicable 15 Note: quantitative economic and financial analyses are not applicable for TA operations such as this. However, if carried out successfully, the project will improve the efficiency of housing and urban development, which would have major economic benefits. 2. Financial The proposed loan will be for US$ 7.77 million, to be disbursed over a period of 3 years. The counterpart funding from the Government will be US$ 7.61 million. In this regard, SHCP has requested the implementingagencies of the TAL.-CONAFOVI, SEDESOL, and SHF - to budget the necessary counterpart for FY 2005, and has indicated that all of these agencies will have the budgetary space necessary for executing this project. Nonetheless, a continuing effort by the project team i s necessary to assure that the project receives the required allocation and priority in the formulation of the Government budget proposal for the next three years. 3. Technical The project addresses the complex inter-related issues that compose "housing and urban development" -credit andhouseholds savings, subsidies, property rights, land development, slum upgrading, disaster mitigation, and institutional strengthening. As such, this loan (HUTAL) provides assistance for reforms in these areas supported by the programmatic sectoral adjustment loan (HUSAL) that it accompanies. 4. Institutional 4.1 Implementingagencies: The HUTAL works with several implementing agencies, CONAFOVI and SHF for housing, and SEDESOL for urban development, and the states' RPPs and CONAFOVI on property registries and rights. CONAFOVI's central responsibility in. coordinating federal housing policy and programs, and its many institutional relationships well suit its role as the implementing agency for housing of the HUTAL. Formed in 2001 under the current Administration, CONAFOVI has responsibility for housing policy, and coordinating other federal agencies involved in the sector. In this regard, CONAFOVI oversees, provides technical support for, and receives guidance from CONAVI, a sectoral forum that operates through committees composed of public and private-sector leaders. CONAFOVI also coordinates FONHAPO/FONAEVI - the agency with the mandate to design and oversee a unified federal housing subsidy system - and with SHF - the entity in charge of developing primary and secondary market-rate mortgage markets. In addition, CONAFOVI oversees the relationship between these federal housing agencies and state government, and makes annual agreements with the housing institutes of Mexico's 23 states (called "CODEVISU"). As regards housing policy, CONAFOVI works with INFONAVIT, FOVISSSTE and BANSEFI(the entity incharge of developing household savings and the strengthening of financial institutions and financial cooperatives that provide services to low/moderate- income households). CONAFOVI also directly operates the federal government's flagship initiative in strengthening property registries and rights. Under this TAL, CONAFOVI will execute component 1 - National Housing Policy and Institutional 16 Framework, subcomponent 3.1 and 3.2 within Component 3-Household credit and household savings-, and all of the subcomponents within Component 4 - Urban Real Property Registries and Rights. The execution of activities under subcomponent 4.3 - modernization of the public property registry in pilot project states-- will be carried by the selectedstates, under close supervision from CONAFOVI. Pilot projects have already been initiated in three states (Baja California, Sonora and Colima) that have all shown substantial technical and administrative capacity. Subsequent states to enter the program will be analyzed and trained to assure sufficient implementation capacity to execute the subcomponent. Moreover, policy reform and technical and administrative capacity will be criteria for the selection of additional states to participate inthe project. SEDESOL is the federal agency in charge of urban development and provision of social services to the poor. This agency funds and operates federal government programs in slum upgrading, low/moderate-income land development, and regularization of informally-owned and occupied land. Hence, SEDESOL i s the indicated agency to execute the urban-development components of the HUTAL, SHF is the second-tier finance agency in charge of developing housing credit markets. SHF works closely with CONAFOVI, BANSEFI,FOVISSSTE, INFONAVIT, and other actors in the housing credit market. SHF is the main source of funding of Mexico's mortgage banks, the SOFOLES, and operates a World Bank and IDB-financed programs to support the development of this market. 4.2 Project management: CONAFOVI, SEDESOL, SHF and the state RPPs (via CONAFOVI) will manage and account for their respective components of the HUTAL loan. Thus, CONAFOVI will have responsibility for components 1, 2, subcomponents 3.1 and 3.2, and 4 (with the state RPPs) - national housing policy and institutional framework, housing subsidies, a strategy for an awareness campaign on mortgage foreclosure enforcement, INFONAVIT's strategy, and urban real property registries and rights,respectively. SHF will have the responsibility for the other housing credit-related studies in 3. SEDESOL will have responsibility for components 5, 6, and 7 - national urban policy, slum upgrading and institutional strengthening, low/moderate income land development, and disaster prevention and management, respectively. CONAFOVIand SEDESOL will hire additional staff necessary for project execution, to support their current teams. Though a relatively new agency, CONAFOVI has experience with procedures of multinational entities through the ongoing IDB FOMIN program for property registry modernization. SEDESOL has ample experience in executing Bank projects and grants. SEDESOL can draw on these more experienced teams for support in project execution. SHF currently operates programs of both the World Bank and IDB in credit finance. 4.3 Procurement issues: CONAFOVI, SEDESOL, SHF and the states will carry out procurement tasks for their respective project components in accordance with the Bank's guidelines. The current structure of CONAFOVI, SEDESOL, and SHF i s adequate to conduct and process bidding, including preparation of the packages and the technical reports that will enable awarding the contracts. Regarding the states, due to the fact that most will be identified 17 during implementation, their procurement capacity will be analyzed prior to execution of project activities. The details of the arrangement for the participation of consultants and other entities in the project will be spelled out in the Operational Manual. The overall project risk for procurement is average. Procurement will consist mostly of consulting services and goods (mostly equipment and supplies). Details are provided in Annex 8. 4.4 Financial management issues: CONAFOVI, SEDESOL, and SHF (both implementing and financial agentareas) will be responsible for FM of the project under the direction of the SHCP, including: (a) supervising the project's financial resources; (b) maintaining accounting and budgeting records; (c) preparing disbursement requests for the World Bank to disburse from the Special Account; and (d) preparing and sending Financial MonitoringReports (FMRs) to the World Bank according to its requirements. A plan for FM before effectiveness was agreed on. 5. Environmental Environmental Category: C (not required) 5.1 Summarize the steps undertaken for environmental assessment As a TAL, this project does not finance investments and, therefore, does not entail direct environmental or social impacts. However, the HUTAL includes a wide variety of support that will improve environmental and social planning in affordable housing and urban poverty programs, includingTA for: A strategic environmental assessment (SEA) of the housingsector The federal agency in charge of housing subsidies to the poor, and local governments in planning and operating slumupgrading Housing credit to low/moderate-income households Strengthening property registries and rights, which helps secure the principal asset of the 70% of low/moderate-income families that have rights to the property they live in. Improving the efficiency (through participation and investment planning) of the main federal program (Habitat) that upgrades poor urban communities Access of low/moderate-income households to land Mitigationof natural disasters, which disproportionately impact poor households As preparation for the HUSAL,two environmental assessments (EAs) were completed - one for urban development, and the other for the housing. Local consultants analyzed the main environmental issues within both sectors. Key recommendations of their analysis are included below. 5.2 Main features of the EnvironmentalManagement Plan (EMP): As no investments will be financed by the HUTAL, no direct mitigation measures were recommended by the EA, and no formal EMP i s needed. The EA, however, contains recommendations for improved institutional coordination, strengthening of the legal and regulatory frameworks governing construction, production of low-cost formal-sector 18 housing solutions, increasing the share of formal-sector development, and development of a strategic environmental vision through an assessment process- SEA. 5.3 Timeline and status of EA: The EAs were completed and submitted to the Bank on January 28,2004. 5.4 How have stakeholders been consulted?: The EAs have been discussed with NGOs (see below) and with the relevant government agencies. The EAs have been made available to the public at the offices of SEDESOL and CONAFOVI. 6. Social 6.1 Summarize key social issues: As noted, the HUTAL does not make any direct investments, but the program that it supports (the HUSAL) contains milestones on GoM programs. The EAs conclude that these programs will have positive social impacts as they focus on affordable housing and alleviating urban poverty. As such, they target a range of low income groups and their communities - from the poorest (via slum upgrading and disaster mitigation) to moderate-income households (through credit and housing subsidies). 6.2 Participatory approach: The project was prepared in close collaboration with the agencies involved in affordable housing and urban poverty - CONAFOVI, CONAVI (a forum for public input into housing programs and policy) and SEDESOL, in particular, and also SHF, FONHAPO/FONAEVI, and BANSEFI, as well as the SHCP. These entities have jointly prepared, reviewed and agreed on the detailed TA program (listed in "2. Key policy and institutional reforms supported by the project") of the HUTAL. 6.3 How does the project involve NGOs and civil society?: NGOs and citizens groups involved in the sector have been consulted in the preparation of the EAs, which have been made available in the central office of CONAFOVI and SEDESOL. During project implementation, citizen involvement will be stimulated through a number of the Program's components, such as slum upgrading and disaster mitigation. 6.4 How will the project monitor performance interms of social development outcomes?: Social development outcomes will be measured by the project indicators noted in the Policy Matrix of the HUSAL. 7. Safeguard Policies 7.1 Do any of the following safeguard policies apply to the project?: 19 Safeguard Policies Triggered by the Project Yes No EnvironmentalAssessment (OP/BP/GP 4.01) Natural Habitats (OP/BP 4.04) Pest Management (OP 4.09) Cultural Property (OPN 11.03, being revised as OP 4.11) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OD 4.20, being revised as OP 4.10) Forests (OP/BP 4.36) 11 [XI Safety of Dams (OP/BP 4.37) [I [XI Projects inDisputedAreas (OP/BP/GP 7.60)- [ I [XI Projects on InternationalWaterways (OP/BP/GP 7.50) [ I [XI F. SUSTAINABILITY AND RISKS 1. Sustainability Fundamentally, the HUTAL and the programmatic sectoral adjustment loan it accompanies, the HUSAL, seek to make affordable housing and urban poverty programs more sustainable. Sustainability requires development of the three types of finance involved in such programs - credit, subsidies, and household savings - so that they join to provide sufficient funding to meet households' basic shelter and settlement needs. Virtually all the assistance provided by the HUTALsupportsthis goal in one way or another -through designing effective programs (e.g. for the unified housing subsidy system, low-income housing credit, land development), increasing the effectiveness of existing programs (slumupgrading), or by strengthening the institutions that deliver this support (the subsidy agency, and local government). Credit and household savings respond to market demand and, hence, constitute more sustainable forms of finance. Hence, the main issue concerns the degree of federal commitment to funding subsidies - an essential element in reaching many low-income households, which constitute 40% of the Mexican population - with adequate shelter and settlement solutions. From an international and Latin American perspective, Mexico spends a low share of on-budget federal resources for affordable housing and urban poverty programs. GoM allocates about 0.3% of the total federal budget to housing subsidy programs per annum compared to the typical range of 1% to 2% in Latin American countries. The slow progress of national fiscal reform, however, has blocked Mexico from substantially increasing monies for these purposes as well as for government programs, in general. Inthis context, the strategy of the HUSALand the HUTALconsists of supportingimprovement of the efficiency and equity of subsidy programs (for basic core units under the unified subsidy system; for access to land by the poor, and for slum upgrading under Habitat) and the rationalization of the sector. Once improved, these programs will then merit a greater commitment of federal resources when GoM's fiscal position makes more funding possible. 2. Critical Risks The main risk consists of GoM's political commitment to maintain the momentum of reform in housing and urban development during the last three years of this Administration. The first three `Bysupportingtheproposedproject,theBankdoesnotintendtoprejudicethefinaldeterminationof theparties' claims on the disputed areas 20 years of this government resulted in substantial improvements in the policy framework and in the institutional and regulatory structure of housing and urban development. The Fox Administration has also set an overall goal - production of 750,000 solutions per year by the end of the sexenium (2006) - as a key overall benchmark. To date, production (of housing, and accompanying land and basic services) has increased - from somewhat above 300,000 housing solutions per year to around 500,000 housing solutions. The sector has retained high visibility and the political priority of the President, who frequently cites housing and urban development as a key driver of socio-economic improvement. However, the relatively small amount of on-budget resources available to invest in the sector without overall fiscal reform impedes generalizing the advances necessary for increasing production. In this context, the HUSAL sets key milestones and provides budgetary support based on their achievement, while the HUTAL directly assists the key agencies in charge of reform. As such, this combined TA./programmatic adjustment program represents a vote of confidence by the Government in the efforts of the sectoral agencies and strengthens the commitment to continue. The Bank will focus on this duringimplementation. A related risk concerns the budgeting of the sums necessary for their role in this TAL by the implementing agencies, CONAFOVI and SEDESOL, for this three-year operation.' CONAFOVI and SEDESOL must follow the prescribed process for approval by SHCP of the budget for this TAL duringthe next three years. Inthis regard, SHCP has requestedeach of these agencies to do so for the next year, and has indicated that both of these agencies will have the budgetary space necessary for executing this project. Nonetheless, a continuing effort i s necessary to assure that the project receives the required allocation and priority in the formulation of the Government budget proposal for the next three years. 3. PossibleControversialAspects No controversial aspects, in addition to those indicatedabove, are foreseen. G. MAINLOANCONDITIONS 1. Effectiveness conditions SHFand Borrower enter into agreement setting out SHF's role as financial agent. Operations Manual has been issued and submittedto the Bank. 2. Other Standardretroactive financing will apply. The funding for SHF under the HUTAL i s miniscule relative to that agency's budget and these studies have already beenbudgetedas part of that agency's work. 21 H. READINESS FOR IMPLEMENTATION A project implementation plan has been appraised and found satisfactory. I. COMPLIANCEWITHBANKPOLICIES [XI This project complies with all applicable Bank policies. [ ] The following exceptions are recommended. 22 Annex 1:Sector Background MEXICO: HousingAnd Urban Technical Assistance Project 1. The Government has made significant progress in each of the following sector areas of affordable housing and urban development. The fundamental purpose of the HUTAL and the HUSALis to support this reformmomentum: A. National Housing Policy and InstitutionalFramework 2. Strategy. The recently formulated National Housing Policy and the Urban Development Plan for 2001-2006 states the importance of increasing access of the poor to shelter and of achieving sustainable and spatially-balanced urban development. The Government has committed to increase formal housing production by 2006 (to 750,000 solutions per year) through a decentralized and market-based approach. The pillars underlying this Administration's housing strategy include: (i) targeting low/moderate-income households; (ii)unified system of housing a subsidies to be administered by a single agency complemented by credit and savings; (iii) expanding housing finance by putting in place the methods and institutions to develop primary and secondary markets, and by working with financial institutions experienced in serving low/moderate-income groups to develop products for financing low-cost housing solutions (improvement, expansion, purchase of existing housing); and (iv) strengthening property rights. 3. Institutions. Institutionally, the Government has taken bold steps in the last 12 months to achieve these national priorities. By harmonizing and defining the roles of federal housing agencies. CONAFOV12- a new institution - now coordinates other federal housing agencies (SHF, FONHAPO, and - to some extent - the off-budget autonomous national institutions, LNFONAVIT and FOVISSSTE) and defines policy for the sector. CONAVI - also new - serves as a consultative forum of public and private stakeholders for CONAFOVI. GoM has created a new housing finance institution - SHF - to take the lead in developing market-rate primary and secondary mortgage markets. FONHAPO has been placed in charge of housing subsidies for all federal housing agencies, while FONAEVI - a new division within FONHAPO - receives, accounts for, and disburses housing subsidy fund. 4. Decentralized Execution. CONAFOVI has entered into coordination agreements (CODEVISU) with state governments that establish federal housing funding requirements and amounts and policy goals. These agreements joined with the strengthening of state housing institutes will contribute to effectively decentralizing housing programs. FONHAPO will assist municipal governments in assessing their needs, inventorying their resources, and developing a request for selected federal support programs best suited to local conditions. Eventually, this system could evolve into a housing block-grant program that flexibly allows a range of program options and requires a local match - an approach with wide currency in large federal countries with widely varying regional conditions (e.g. the U.S.). 5. While many of these issues of decentralization and local capacity buildingextend beyond the scope of this initiative, the HUSALprogram supports government in the following measures: a) CONAFOVI and SEDESOL will enhance systems for data-collection and analysis of CONAFOVI has formulated a five-year housing policy/strategy for the country and has: (i) assessed housing requirementsfor different incomegroups; (ii) establisheda decentralized andparticipatoryinstitutional architecture for the housing sector; (iii) formulated a general strategy for the four critical housing supply sectors - land, regulations/taxation, productiodinfrastructure and finance; (iv) prepared proposals for a unified housing subsidy system, and(v) starteda well-orchestratedagenda of committee/commissionmeetings at the federal and state levels. 23 housinghousing finance and urban planning, to inform local decision-makers; and b) FONHAPO will develop models for the administration and programs of state and local housing institutes. B. HousinP Subsidies 6. New Subsidy Proposal. The GOM has committed to standardize federal housing subsidies across its previously-fragmented, uncoordinated programs by: (a) conveying comparable amounts for comparable uses; and (b) placing all on-budget federal housing subsidies under the control of one operating fund, FONAEVI (a division of FONHAPO). The following basic principles will help ensure the consistency of this system and to lay the basis for expansion to more significant scale: a) Match objectives and instruments. A first step in the creation of a housing subsidy system consists of defining and balancing objectives. The implicit objectives of the housing subsidy structure in Mexico consist o f (i) helping low-income households acquire adequate shelter (e.g. Tu Casa); and (ii) teasing private housing development and lending down-market to serve moderate-income households that mainly require this extra purchasing power to afford a basic unit, and to develop financial and real estate markets (e.g. Prosavi). However, these two objectives require explicit definition and clear balancing in a unified subsidy system. b) Eficiency. The efficiency of housing subsidy programs depends most on three factors: (i) of subvention; (b)per-unitamount andchoice of housingsolution; and(iii) type benefit versus cost. Direct demand subsidies ("DDS") have proved the most efficient type of homeownership subvention for moderate and middle-income households in Latin America. Essentially, DDS are portable vouchers that bridge the affordability gap between the amount households can afford (by joining an affordable mortgage, a downpayment, and the subsidy) and a housing solution. This form of subvention most effectively stimulates competition among supply agents (developers and financial institutions) and furthers development of the financial sector. Securitization of accompanying market-rate home credit becomes feasible with DDS, whereas it i s generally unviable when subvention takes the form of below-market interest rate loans. Once subsidy programs reach a significant size and continuity, they also develop important economies of scale necessary for systemic improvement of housing conditions as supply agents increase their knowledge of and ability to use these programs (e.g. Chile and Costa Rica). However, developers, financial institutions, and other formal-sector institutions (e.g. secondary mortgage markets, insurers, property registries etc.) often find serving low-income groups uneconomic if they have other options even if these families have direct demand subsidies. Hence, countries with successful low-income subsidy programs have also facilitated supply through policy changes and through program^.^ These supply bottlenecks - particularly the lack of land and credit for low-income households - require direct action (eg, assistance in development of housing microfinance and low-income housing credit, expanding independent mortgage insurance, reducing land development standards and streamlining the process, etc.) Here, direct federal governmentdevelopmentand finance has generally worked poorly, whereas use of NGOs and municipalitiesto organize poorhouseholds andget access to a parcel has workedbetter (CostaRica). e 24 Provision of the lowest per-unit subvention feasible for the least costly type of housing solution appropriate to the family constitutes a second important aspect of efficiency. Third, calculating the costs and benefits of the subsidy types that compose a system provides critical information for the creation of an overall strategy, a key measure of efficiency, and the fiscaljustification for expansion of a subsidy system. Mexico has partly met these efficiency criteria, but has considerable distance to go. Prosavi has operated on a small scale as a direct demand subsidy programs for moderate income households - those earning up to 5 minimum salaries. Also on a minute scale relative to Mexico's size, Vivah/Tu Casa has provided both a grant and assistance to supply in order to serve low-income groups - those earning up to 3 minimum salaries. Prosavi and Tu Casa transfer a total of around US $5,000 and U S $6,000 per family, respectively. The experience of these programs since their inception in 1998-99 provides part of the basis for ramping up to more significant levels of funding and impact. However, neither of these programs has received a comprehensive evaluation nor incorporated important features that make similar programs work well in other countries. The available evidence, however, suggests two lines of reform. First, neither Prosavi or Vivah nor other government programs effectively address the two most critical supply barriers facing most low/moderate-income families in Mexico: (i)foremost in importance, access to an appropriately located serviced lot and; (ii) second, access to small loans to finance low-cost housing solutions (improvement, expansion, purchase of a serviced site etc.) In addition to mandating that local governments provide land to the project as the required match for the federal subsidy - the current approach of Tu Casa - further efforts are needed to improve the functioning of land markets. Second, the present subsidy level of both Tu Casa (including both federal and local subvention) and Prosavi i s quite high - about US$ 6,000 and US$ 5,000, respectively. Such high per-unit subsidies greatly limit the reach of the program. At current funding level of US$ 300 million per annum, Tu Casa and Prosavi served only about 33,700 households in 2002. Incomparison, low-income household formation (a proxy for need) runs at about 300,000 families per annum and moderate-income household formation (a group also frequently unable to access minimally adequate market-rate housing unassisted) at an additional 245,000 per year. As more sustainable modes of housing finance (market-rate credit and household savings) expand, per-unit subsidy amounts should be lowered and favor less costly solutions, such as serviced sites and home impr~vement,~as recommended by Mexico's official national housing strategy. In addition, it underlines the importance of reforming these subsidy programs and quantifying their benefits (relative to their cost) in order to justify increasing the level of on-budget housing subsidies towards international norms. 5 ~ With the current per-unitsubsidy levels, aprogramto benefit the 300,000 families eamingup to 3 MW that enter the market each year would total US$l.8 billion annually. However,the govemment budget allocated only US$200 million to VIVAH andProsavi,- the mainfederal housingsubsidy programs-in2002, andUS $300million in 2003. Countriesin Latin Americanandthe Caribbean-as those elsewhere- typically spend around 2% to 3% of the nationalgovernmentbudget on housing. InMexico, on-budget federalhousingsubsidiesrepresent0.3% of the federal budget. 25 In summary, both Prosavi and Tu Casa could operate with a lower level of subsidy, and could focus on more lower-costs housing solutions for lower-income households than currently. c) Equity. An equitable housing subsidy system typically has the following characteristics: (i)progressivity or neutrality in targeting of subsidies to income groups; (ii)delivering comparable subsidy amounts to households in comparable situations; and (iii) regional adjustments for price/cost/income levels and local fiscal capacity. "Progressivity" means targeting the subsidy system to lower-income families by either delivering more subvention per low-income family or by assigning more total resources to low-income groups. The first alternative - delivering a greater subsidy amount per family to low-income households - has proved difficult and, sometimes, impossible for many reasons. However, at a minimum, an equitable subsidy system assigns more resources to low-income groups, thus meeting the second criterion for progressivity. Taken as a whole, however, Mexico's current housing subsidy system i s heavily regressive as INFONAVIT - the main source of subsidies - goes disproportionately to moderate and middle-income families that are formally employed. Mexico has recently made progress in harmonizing the levels of subsidies across its on- budget programs (Prosavi and Tu Casa). These programs now deliver roughly comparable levels of subsidy per family taking into account all sources of subvention. However, Mexico requires development of regional housing cost/price indices in order to adjust subsidy levels as well as other parametersto reflect local pricekost variations and fiscal capacity - a task recently begun by SHF and CONAFOVI. d) Overcoming market and policy failures. In addition to neglecting credit and land bottlenecks, a number of other market and policy failures hinderthe creation of a national subsidy program. Heavily-subsidized lending by local governments as well as FONHAPO undermines development of credit markets for low/moderate-income households. Instead, FONHAPO and local housing institutes could usefully concentrate on the managementof an upfront grant program, rather than a subsidized credit system. 7. GoM is planning the following reforms to deal with these issues: a) FONHAPO and States will withdraw from the credit market. Government (SHF) will focus on measures to foster the capacity of the Cajas de Ahorro y PrCstamo, credit unions, and other financial institutions to extend housing credit to low/moderate-income families for a range of low-cost housing solutions. b) Intandem, Government (BANSEFI) will develop and expand housing savings programs with the goal of increasing the household contribution that complements the housing subsidy providedby various programs (TuCasa, Prosavi, INFONAVIT). c) INFONAVIT will focus its subsidies increasingly on low-income households. GoM will eliminate joining subsidy amounts from different programs - such as INFONAVIT and Tu Casa - to reach totals above those mandated for these programs separately ("double dipping"), or adjust the amounts for households receivingdifferent sources of subvention to correct for double dipping. d) Government will conduct a comprehensive and coordinated evaluation of all national subsidy programs, starting with Prosavi and Tu Casa, but also including those of 26 INFONAVIT and FOVISSSTE. This evaluation will include a quantitative analysis of the costs and benefits of these programs, and the fiscal, social, and economic implications of the expansion of Prosavi and Tu Casa once reformed. e) Both Prosavi and Tu Casa will be changed to deliver a small per-unit subsidy for lower- cost housing solutions for lower-income households, as follows: For Prosavi: (i) federal government subsidy per unit will decrease from its current the level of around $5,000 per unit; (ii) local or state government will be asked to contribute a modest amount in cash or in-kind(e.g. land) to these projects; and (iii) the total amount of subsidy will be progressive - that is, lower-income households will receive more than higher-income families. For Tu Casa: (i) the eligible solution will change from the purchase of a complete finished unit to a serviced lotjoined with a small loan to assist the construction of a basic unit; (ii) subsidy amount of both the federal and state/local governments (currently, the about US $3,000 each) will decrease; (iii) local government will facilitate land assembly for developers, NGOs, employers, and others to develop these projects and sell them to families. A series of studies will further define the parameters of the new Prosavi andTu Casa, the project cycle of these new interventions, and the transition from the current programs to the new ones. f) Government will conduct quantitative studies of the present value of subsidies embedded in INFONAVITfinancing. g) Capacity building for local governments aimed at dealing with supply constraints in urban land and property rights will help deal with these structural issues unaddressedby housing subsidies. C. Housing Credit and HouseholdSavings 8. The Government views reform of the housing finance system as critical to meeting its goals in both the housing and urban sectors. GoM's program builds on important structural reforms initiated under FOVI and continuing with SHF - the successor of FOVI - and includes: (i)leveraging market-oriented private resources, mainly through guarantees of private-sector debt on capital markets and elsewhere, rather than government borrowing directly to provide liquidity; and (ii)improving the efficiency and increasing the capacity of the existing home lending institutions (banks, SOFOLES, SHF, and the provident funds/housing lenders INFONAVIT and FOVISSSTE). Future actions will include the measures described inthe rest of this section. 9. Foreclosure and Transparency. All but three states have already modernized their legislation through civil code proceedings on mortgage liens and foreclosure. In some instances, however, foreclosure remains seriously ineffective due to judicial and political resistance. Congress has recently approved a financial transparency law to protect and better inform mortgage borrowers. The next step i s to build confidence of lenders and investors in the enforceability of mortgage contracts. The GoM i s movingforward on furtherjudiciary reforms at the national level, including recent passage of a set of reforms that allow expedited foreclosure through a trust collateral instrument. 27 10. Development of secondary mortgage markets, SHF, and SOFOLES. The growth and diversification of Mexican institutional investors provide ample opportunity for secondary market development.6 Since its creation in 2001, SHF has successfully advanced the development of primary and secondary Mexican mortgage markets. Its contributions include: (i) steady access to long-term priced funding; (ii) revised actuarially-priced first-loss credit insurance products; (iii) improved risk management and pricing (refinancing and guarantees); (iv) consistent rating policy applied to SOFOLES; (v) stimulating access to private bond markets and funding diversification; and (vi) an acceleration in Prosavi execution. Additional key actions to be tackled in the near future with related milestones under the HUSAL program include the following: (i) expand SHF mortgage-related products (refinancing, guarantees) both in UDIs and pesos; (ii)design and expand the use of products for the credit finance of low-cost housing solutions such as home improvement, serviced sites, and purchase of existing housing; and (iii) develop rules (valuation, comparative pricing, prepayment fee, etc.) as requiredby the new financial transparency law. 11. Commercial banks, which had been the main market-rate home lenders, largely withdrew from the mortgage market after large losses from the 1994-95 peso crisis. Since then, 16 SOFOLES' have become the main market-rate mortgage lenders and main clients of SHF. SOFOLES currently get 90% of their funding from SHF. The lead SOFOLES, however, have begun to issue debt on domestic and international markets as planned under the SHF's broader mandate. The HUSAL program will support SHF's development of and private-sector participation in a mortgage-risk database essential for secondary markets and mortgage insurance. 12. Subsidies and the Fideicomiso Fondo Nacional de Habitaciones Populares (FONHAPO). FONHAPO' has acted as Government's lead institution in funding low-income housing. Over the last five years, the organization has recovered from its quasi-bankruptcy resulting from the subvention and high arrears of on-lending to state housing institutes by pursuingdebt recovery. Continued below-market rate lending to state institutes would not only jeopardize FONHAPO's hard-won financial solvency, but also undermine the Government's strategy to promote market-rate lending.' Hence, this second-tier lending - which is already at a low level" - will phase out during the program and replaced by more financially sustainable approaches to supporting low income housing. The funding of social housing by FONHAPO from newly-budgeted monies will occur inthe form of grants and not loans. 13. Rather than channel home credit - a function of SHF - FONHAPO will unify the federal government's housing subsidy programs for low-income households. In this regard, FONHAPO will work with SHFto design and monitor Prosavigrants. 14. In lieu of FONAHPO's second-tier lending to states, SHF will guarantee micro and mortgage housing credits to low and moderate-income loans originated by private financial institutions for both to purchase and renovate existing homes. Sustainable low-income housing finance requires strengthening of the regulations and standards for this business, access to a range of new SFHproducts, and institutional capacity building. 'More than US$90billion between mutual funds, providentfunds, pensionfunds, and insurance companies. SOFOLES hipotecan`as are non-deposittaking private finance companies that have beenlargely fundedby FOVI. Following the withdrawal of the banks in 1995, SOFOLES hadbeen the sole mortgage providers to middle and low income groups, though banks are starting to lend on a small scale to upper, middle income groups. FONHAPO was created as a Banobras trust fund in 1981to attend to the housingneeds of the informal and poorest households. FONHAPO lends at minimum wage (MW) plus 4% to 6% to state housing institutes that provide state guarantees. loFundedonly by payments on FONHAPO's loan portfolio, which are small and shrinking fast inreal value. In addition, most of the re-flow from FONHAPO's loan portfolio goes to support this organization's administrative cost, leaving little for these below-market rate loans. 28 15. Redefining the role of the Instituto del Fondo Nacional de la Vivienda para 10s Trabajadores. (INFONAVIT)" has initiated an impressive array of reforms under the current government. In 2002, INFONAVIT made a record of 275,000 loans. This high production has relied on: i)large inflows of compulsory wage contributions of formal sector workers - many of whom will not receive a loan; ii)low servicing costs due to direct payroll deductions; and iii)less stringent capital and provisioning rules than for primary credit institutions. Improved management practices on the credit side have come from more transparent credit allocation, a better system for originating and managing loans; reformed internal organization, an active and out-sourced debt recovery program, improved management of credit risk'* and operation risks,13 new minimum down-payment requirement, a simplified scoring system, extraordinary loan-loss provisions (US$ 2 billion) made for non-performing loans, and piloting the use of INFONAVIT savings to leverage private credits for higher-income members (article 43 bis). On the savings side, INFONAVIT expects to pay an annual returnof the minimumwage ("MW') 2.5% on its + savings accounts, exceeding its minimumrequirement and paying closer to private pension fund benchmarks (net of managementfees). After many years of poor performance, this trend reflects the increasing importance of INFONAVIT's role as a mandatory saving institution, in addition to its traditional housinglender role. FOVISSTE- a providentiary institution that operates similarly to INFONAVIT but for federal public-sector employees - has also made important operational improvement^.'^ 16. Despite this progress in improving its operation, INFONAVIT's conflicting roles continue to undermine the development of housing credit markets. INFONAVIT's roles include functioning as: a) an efficient housing lender that provides loans to an ever higher proportion of contributing member~,'~achieving a better social match between the "taxed" contributors and borrowers, and leveraging more market-oriented credits with private lenders; b) a social housing agency contributing to the provision and targeting of subsidies; and c) a profitable pension fund increasing pension returns for retiring members and improving liquidity by permitting early withdrawals for housing investment purposes.16These three roles create multiple contradictions. Most fundamental, the extension of subsidized housing loans reduces the returns available to pay contributors' pensions. 17. Over the mediumterm, the GoM aims to foster a transition to private market-rate housing finance and rationalize INFONAVIT's conflicting roles. However, the Mexican housing finance system's current dependency on INFONAVIT (which provides two-thirds of all mortgages) and the institution's complex governance structure complicate the transition. Hence, rationalization of INFONAVIT's role requires time and a clear plan in order to build broad support among stakeholders, avoid potentially devastating disruption of mortgage lending, and facilitate increased private lending. The Government will develop a strategy supported by the HUSAL program for INFONAVIT's transition. The challenges and path to reform of FOVISSSTE - an organization that operates similarly to INFONAVIT but for public-sector employees but at much '*INFONAVITmembersbecomeunemployed, I' i s a pensionfund and housinglender for privateformal sector employees. Mostly when or changejobs, notablyto the informal sector where there is no automatic payroll deduction. l3Mostly due to improperpayroll deductionby the employer. l4FOVISSSTEhas contractedSOFOLES as professionaloriginatorsof its loans, contributingto the transparencyof the organization. Bettermanagement and credit recovery have resultedinaccumulatedliquidity andincreasedlending in2002-2003. Non-performingloans are relativelylow, at 3%. The proportionof members(public-sectoremployees) expected to receivea subsidizedhousingcredit is expectedto rise from 26% to 40% by 2006. l5 a With currentlow "cover" ratio still less than 20%. l6These short-termaims to increaselendingandpensionreturns may also be constrainedby INFONAVIT's transition to CNBV loan-lossprovisioningrules as generallyappliedto all credit institutions(INFONAVIT still has a large stock of non-performingloans). 29 smaller scale -parallel those of the much larger institution and - hence - will be subsumedunder those of INFONAVIT inthe program and the remainder of this document. 18. Savings products and BANSEFI. In Mexico, over 60% of households that save in informal and formal-sector institutions dedicate these accumulated funds to housing, mainly to improvement of their existing home. Hence, housing savings product are crucial for low-income households, particularly non-wage earners without bank accounts, in order to help them build equity, encourage financial discipline, achieve a "bankable" credit score, make use of formal financial institutions (go from "unbanked" to "banked"), and facilitate eligibility for housing subsidies. Larger savings can also reduce the cost of the subsidy program, which tries to compensate for miniscule downpayments (i.e. savings) for purchasing a house by increasing the level of subvention. These higher downpayments also lower the credit risk of home lendingby reducingloan-to-value ratios. 19. BANSEFIwas createdinApril 2001 inorder to promotehousehold savings, help popular finance institutions adjust and prosper under the new Law for Popular Savings and Credit that phases in requirements between 2001 and 2004, and coordinate government support to financial institutions that focus on serving low/moderate-income households ("popular financial institutions"). In the last three years, the number of savers in BANSEFI's 560 branches has grown from 800,000 to 1.7 million, and is currently increasingby about 10,000 clients per month. BANSEFIhas created a technical platform to connect its branches with those of several other popular finance institutions - the "people's network." BANSEFIhas begun to partner separately with INFONAVIT and FONHAPO to help households applying to these institutions for support by opening savings accounts that help them meet eligibility criteria (similar partnership with SHF should begin shortly). The HUSAL program has milestones for developing these savings links to credit and subsidies. D. UrbanRealPropertv RegistriesandRights 20. It i s estimated that 40% of urban land and houses in Mexico are not protected and recognized by the legal system. They do not have legal permits, lack formal titles and are not incorporated to property registries or cadastres. This informal land has been occupied through invasions and irregular or illegal transfer of public, communal and private land, mostly rural. The houses were built and improved progressively, in most cases by the occupants themselves, without adhering to urban development regulations or using the formal financial system. Contributing factors to this situation include weak formal mechanisms for access to land - stemming from complications surrounding transfer and development of ejido lands and high transaction costs for urban housing development - and for access to real property registries - due to costly and cumbersome procedures to access information or registry rights in the 32 state real property registries. 21. A recent evaluation developed by CONAFOVI in 2001 shows that : a) 25 of 32 state registries use obsolete mechanisms to register property information (books with hand written information); b) 81% of the states do not have regulations for digital or magnetic record of property rights information; and c) all but two states lack mechanisms to share information between the cadastres and the property rights registries. Moreover, there is evidence that under the current institutional conditions, registries do not have adequate incentives for reform, Registries are used as mechanisms to collect revenues that contribute to the State fiscal accounts (in some cases up to one-third of State revenues) and do not have administrative, financial or functional autonomy. In the majority of the cases the registries have no control over their revenues. All the registries' fees are controlled by the state authorities, which establish the 30 annual budget of the RPPs. Finally property registries are frequently incompatible and lack systems to easily share information. Well aware of the importance of real property rights for many markets and social stability (including development of housing finance, urban real estate taxation, extension and charging of public utilities tariffs, safeguarding of family relations, and general well being of housing dwellers), the GoM has initiated a project to strengthen the real property registries in three states through CONAFOVI. 22. CONAFOVI's assistance matches each state's counterpart resources for action on registry modernization, financial policies, linking cadastres and registries, administration of registry records, human resources, information technology, client oriented services, alignment of registrationprocesses, and modernization of Civil Codes. The adjustment program (HUSAL)sets milestones for extending this project from the original two states to other states and the HUTAL will help to strengthen the program drawing on the experience in the three pilot states and Bank work on similar projects. E. Nationalurbanpolicy. slum upgradingandinstitutionalstrengthening 23. Unable to access formal housing or land, about 100,000 poor families each year settle in marginal areas with overwhelming infrastructure deficits and without urban planning. The layout of many Mexican barrios appears orderly in comparison to many of those of Venezuela or Brazil. However, location in hazardous or sensitive areas, scarcity of public facilities and goods, distance from infrastructure and services and the absence of mechanisms for community input frequently damage these neighborhoods and raise the cost of regularizing them to well above that of new formal-sector development (see "F. Lowlmoderate income land development" below). The cost to organize and provide public goods ex post exceeds the capacity of households as well as communities and usually requires public support. 24. Habitat Program. The GoM (SEDESOL) has developed an integrated program called Hdbitat to address precarious poor neighborhoods. Habitat provides support for neighborhood upgrading, access to land, and prevention of natural disasters and includes initiatives to support community facilities, day-care centers for working female heads of household, and municipal development centers that bring together community, private sector, and local government. Habitat channels federal funds (under Ram0 20) as matching grants to municipalities for programs that benefit families eaming around 1MW per family member. 25. The urban upgrading subprogram of Habitat includes: (i)preparatory studies such as municipal urban-poverty diagnostics and action plans, comprehensive barrio upgrading plans, and detailed engineering for infrastructure projects; as well as (ii)investments in urbanization including water, sewerage, storm drainage, paved access roads, electricity and street lighting, rehabilitation or construction of community facilities, and improved solid waste management. The program has started in 60 medium and large cities, and invested approximately US$ 90 million in 2003. HUSAL Iincludes as prior actions the integration of upgrading activities under Habitat and the program's approval andfundingby Congress. 26. HABITAT includes several design innovationsto improve targeting and programimpact: a) Capacity. Habitat will create local capacity among municipal authorities, NGOs and CBOs and related agencies. A capacity building program in proposed collaboration with the World Bank Institute (WBI) will help strengthen local actors to implement the upgrading program. 31 Poverty Targeting. SEDESOL has developed detailed geo-referenced poverty data down to the block level for eligible municipalities that allows for accurately allocating Ram0 20 funds. Neighborhoods must include at least 50% poor households - or 30% in special cases as specified in Habitat's regulations - with federal government support matchedby local government and beneficiaries. Eligibility criteria for participating cities include the level of poverty, city rate of growth, potential to generate wealth (per capita GDP), level of inequality, and environmental sustainability (availability of water). Based on the prioritization of such criteria, appropriate blocks and neighborhoods are selected. Multiyear programming of improvement. The program supports the development and execution of multi-year plans for neighborhood improvement, helping to overcome some of the transaction costs and capacity limitations of progressive investment. 27. Although an important advance, the upgrading component of Habitat requires further action for the program to fulfill its potential. The programdesign stipulates important procedures essentialto its performance such as community participation, neighborhood investment plans, and an appropriate level and sequencing of investment in each community. However, the rapid expansion of the Program in its first year (2003) and the urgency of meeting initial investment goals (the Programwill disburse the budgeted amount of somewhat over US$90 million in 2003) have sometimes'taken precedence over these other aspects. SEDESOL is fully committed to meetingthese other milestones by the HUSALProgram's second and third years of operation. F. Low/moderateincomelanddevelopment 28. In formal housing development, public goods such as environmental quality, green and community spaces, access, and storm drainage come at the beginningof the development process. Middle-income families can afford to pay for these services upfront inthe form of the price of the new house and local taxes. Most low/moderate-income households, however, lack the financial ability to pay these sums upfront, and must stage them over time to make them affordable, thus reversing the process, which often starts with informal settlement. 29. Thus, most of Mexico's low/moderate-income residential land development occurs illegally, often on ejido lands. The dominant method of land supply for the poor consists of an agile system of illegal subdivisions, followed by a costly and time-intensive process of expropriation and regularization by the Government through Corett. When unassisted by the formal-sector - as i s usually the case -the incremental settlement and building process has one crucial virtue: it puts low-income households on the first rung of the ladder of homeownership. Inthe process, however, it generates enormous public and private costs. From the families perspective, access to land and building a house over many years involves a huge investment in time and labor, during which the family must live in inadequate and unhealthy environments. From a public-sector perspective, informal settlement leads to a broken settlement pattern that often costs two to three times the amount (generally of government funds) to fix than planned formal-sector development (generally, private funds) would have initially.17 Hence, replacing informal settlement with low-cost formal sector land development holds crucial importance. Although some preliminary analysis has occurred in Mexico, the costs of informal development and their impact on diverse participants in the process - households, landowners, local l7 A Colombian study has calculated the costs of provision of basic infrastructure to informal development at three times the cost of that to formal-sector development. A number of studies of land development in Mexico has reached a similar conclusion, but without quantification. 32 government, federal government - have yet to be quantified and publicized. Ineffect, the costs of the dominant approach to low/moderate-income land development in Mexico - informal urban settlement of ejido land, regularization, and slum upgrading of many of the resulting areas - remain undocumented, as do the costs and benefits of other options. 30. Inturn, formal-sector low/moderate-income landdevelopment representsa small fraction of the total. Most formal-sector low/moderate-income land development occurs as part of housing projects financed by federal agencies (INFONAVIT, FOVISSSTE, SHF, and FONHAPO) and local and state government housing institutes. Local and state government usually provides the land at discounted rates to the developers of these federal and locally- assisted affordable housing projects. Most states and local governments, however, do not own substantial amounts of developable land. Hence, in order to attract and make possible these low/moderate-income housing projects, most state and local governments purchase land to constitute "land reserves". Here, too, however, no study has quantified the costs and benefits of land reserves, or of the feasibility of and changes necessary to improve profitability and spur formal private-sector involvement. Analysis of successful experience inMexican states and other Latin American countries could shed light on options for low/moderate-income land development from deregulation to land readjustment. 31. In summary, the next steps in land are to: (a) quantify the costs and benefits of informal vs. formal-sector development; and (b) analyze the experience of selected Mexican states and other Latin-American countries in low/moderate-income settlement in order to develop viable options for reform. Based upon this analysis, GoM intends to put in place a pilot program. The HUSALprogramsupportsthese actions. 32. A number of factors require consideration inthis analysis of costs, benefits, and options, and a subsequent reform program: a) Rural-to-Urban Land ConversiodEjido System. Without an agile process for talung ejido land to the market, ejidatarios illegally parcel their land without attention to urban plans and regulations yielding unserviced plots and leapfrog development. The PROCEDE certificate was clearly an important step forward, but it appears that the subsequent processes for conversion to full legal title or the development of ejido real estate companies remain cumbersome and complicated.'8 Thus, the next steps for reform are unclear and await definition. b) Regulations and standards. SEDESOL has carried out five studies (one at the national level and four regional studies), to identify the incongruities and omissions in urban and standards and problems in compliance. An analysis of the costs and benefits of informal vs. formal-sector development, and of viable options for low/moderate-income development representthe missingcomplements to develop a program. c) Government role in low/moderate-income land supply. In the face of the pressing need for increasedland supply, GOM continues to encourage and fund state and local governments to amass land reserves. In certain instances, this solution provides a short-term response but as experience from other countries has shown, it has some important shortcomings: (i)increases in land prices; (ii)slowness of the transactions under the reserve process; iii)inefficiency of government in identifying the most desirable land offerings; iv) tendency of the agencies handling land reserves to become `*PROCEDE i s a program to register and certify ejido property. Almost 100% of ejido lands in periurbanareas have PROCEDEcertificates. 33 large and inefficient; and v) a large percentage of the land reserves used for other than social purposes. SEDESOL is considering ways to minimize the shortcomings. Possible measures may restrict support for land reserves to housing agencies that are: (i) at the local level and target a limited range of objectives, (ii) capitalized and managed, (iii) well focused on functions that the private sector has difficulty performing, e.g. provision of costly trunk infrastructure to suburban areas; (iv) use the private sector to perform other aspects of development, such as the finance and construction of houses; and (v) is politically independent. SEDESOL will also explore alternatives to land reserves, from demand-side subsidies for purchaseof serviced lots to land readj~stment.'~ 33. More systematic land data i s essential in order to inform the analysis of costs, benefits, options, and land policy - in general. In 2003 and 2004, SEDESOL will carry out surveys in several major cities to collect land prices across formal and informal markets in order to pass this information on to local authorities to strengthen their planning capacity. SEDESOL will also develop a system for information and monitoring of urban land, including planning and development information (urban development plans, cadastres, legal subdivisions, identified informal settlements, etc.), drawn directly from local authorities and complemented with information from satellite images to register the process of settlements. G. Disaster prevention and mitigation 34. The reduction of vulnerability to nature disasters subprogram of Habitat addresses the risks resulting from unplanned urbanization in vulnerable areas by providing federal funding for planning and for investments in structural mitigation activities such as retaining walls and storm drainage as well as for non-structural activities, such as emergency planning and preparedness. The Habitat Program also includes resources for vulnerability assessments at the neighborhood level that identify risk areas, and structural and non-structural mitigation measures. These actions should be complemented with city-level assessments in order to provide a more complete view of risks helpful for strategically targeting limited resources. Traditionally, Mexico has focused on ex-post natural disaster reconstruction as opposed to ex-ante mitigation. Thus, this new focus on prevention supported by the HUSAL program represents an important step forward in SEDESOL's approach. l9The lots would be titled and the requiredlevel of services and infrastructure agreed upon with local authorities prior to initiating the pilot. It will be important to assure an elastic supply of low-cost formal land within reachof the target population with support of the new subsidy. 34 Annex 2: Major Related ProjectsFinanced by the Bank and/or other Agencies MEXICO: Housingand Urban Technical Assistance Project Complementarity with Other Operationsof the World Bank Group 1. Most fundamental, the proposed Technical Assistance Loan (HUTAL) will provide support for implementation of the policies and reforms of HUSAL I,and foster continuity between this first operation and the second and third HUSAL loans. The sector adjustment program will also complement the ongoing FOVUSHF operation. 2. Although both of these operations deal partly with "housing", FOVI and HUSAL have quite different target clientele, purposes, and methods. The FOVI project mainly provides liquidity and technical assistance for reform of SHF - an institution that serves primarily middle- income families - whose central role is to lead the development of primary and secondary mortgage markets for this group. The HUSAL program (supported by the HUTAL) mainly targets low-income families through broader sector reforms involving housing subsidies, moving housing finance and savings programs downmarket, slum upgrading, and low/moderate-income land development. Similarly, the adjustment loan will support a strong national policy and programming framework for the housing and urban sectors, and complement efforts for adjustment and funding for infrastructure at the state level by the DecentralizationProgram. 3. The HUSALand HUTAL will work with SEDESOL to develop policy and programming focusing on disaster mitigation. The ongoing Emergency Disaster Management Project provides for a programof risktransfer and retention at the national level. 4. The IFC has a number of operations in the housing finance area, and in the pipeline that total US $215 million. These projects offer different types of investments (equity, debt, and guarantees) and include primary and secondary mortgage finance and construction finance. The largest of these projects was an equity stake in General Hipotecario, the largest SOFOL, which was sold two years ago. At that time, the IFC invested as a shareholder in the second-largest SOFOL, Su Casita, and supported this financial institution's first mortgage bond issue. 5. Finally, the program helps lay the groundwork for a broader effort in property rights reformfor which the Government has requested Bank support. Complementaritywith IDB Operations 6. The proposed adjustment loan will complement the ongoing Inter-American Development Bank loan supporting Prosavi housing subsidies. As with the FOVI project, the proposed Bank adjustment loan goes beyond the more limited objectives of the IDB Prosavi loan to assess institutions and programs across both the housing and urban sectors, and to develop a unified and effective housing subsidy system. 35 Annex 3: ResultsFramework and Monitoring MEXICO: Housingand UrbanTechnical Assistance Project P@- OutcomeIndicators Use of OutcomeInformation To support the -HUSAL's triggers met (to the -Monitor the progress and quality of analytical and implementation, extent that they are supported preparatory work, training, strategies development, monitoring, by the TAL) assessments, make sure that instruments necessary evaluation and -Reform implementation, to refine the reformdesignare completed, and take continuous monitoring, evaluation, and correction actions, if required planning of the continuous planning based on Affordable the results of the analytical Housing and work of the TAL Urban Poverty Sector Adjustment Loan (HUSAL) To strengthenthe -Progress in meeting the -Assist GoM in adjusting policy and programs effectiveness of Government's overall goal in based on early implementation experiencein order lowlmoderate- the sector - production of to better achievestated goals. income housing, 750,000 housingsolutionsper land, and urban annumby 2006 poverty programs Intermediate ResultsIndicator for Each Use of ResultsMonitoring Results- One Component per Component Component One: ComponentOne: Component One: -Strengthen -FONHAPO and CONAFOVI -Monitor the quality and progress in the respective housing strategy strengthened activities and the ability of -Database for housing -Take corrective action if required key organizations decision-makingimproved to carry it out -Model for administration and programs of state and local government housing institutes developed Component Two: ComponentTwo: ComponentThree: -Evaluate existing -PROSAVI and Vivah -Monitor the evaluation reports and developmentof programs and evaluated a federal housing subsidy program develop afederal -Federalhousing subsidy -Support with international expertise housing subsidy program developed and -Take corrective action if necessary system implemented -Present value study of INFONAVIT subsidy conducted Component Three: ComponentThree: -Strengthen -Low-cost lending methods -Monitor development of low-income lending low/moderate- studied -Take corrective action if necessary income housing -Pilot programlaunchedand credit and savings mainstreamedfor low-income housing credit -Provisioning norms for SOFOLES developed -Use of remittancesfor 36 housing finance improved -Strategic plan for INFONAVIT develoDed Component Four: Component Four: Component Four: -Reform real -Studies on path to reform, -Monitor the property rights modernizationprogram property registries institutional structure, and -Take corrective action if necessary of eight states as a operation of effective property preface to rights systems conducted and nationwide change program undertaken in eight states Component Five: Component Five: Component Five: -Support national -Community-participation -Monitor evaluation of Habitat and poverty mapping urban policy, slum experience of Habitat analyzed -Take corrective action if necessary upgrading and -Poverty mapping modules related developed and disseminated institutional -Use of poverty maps development evaluated -SEDESOL strengthened Component Six: Component Six: Component Six: -Analyze and -Cost, benefits, and incidence -Monitor land analysis and program development develop a program of informal and formal modes -Support with international expertise for low/moderate- of land development -Take corrective action if necessary income land quantified development and -Low/moderate-income land local competitivity development pilot project developed and implemented -Local competitivity project develoDed and imdemented Component Component Seven: Component Seven: Seven: -Method for risk atlases -Monitor disaster risk-assessment methods and -Analyze disaster assessed and improved program riskprevention -Risk efforts at local level -Take corrective action if necessary efforts of evaluated SEDESOL and -Risk workshops and training of local authorities conducted 37 c .-n> .w .-C0v1 .- .-c .- v) LI n 8a Ga m ill ill 8a ii 62 62 62 c 2 g a ill a ill a ill a e a hl U 9 U L L LL L 2Z 5 % VI = 5 8 * 2 g * dl & a . a 8 c - sa3 - v o li 2c 2 a e , : c e, C E k 2 m 2 2 2 2 v! d a a a 2a vl a v! a v! a I e 0m se, Annex 4: Descriptionof PropertyRegistryand Rights Component MEXICO: Housingand Urban TechnicalAssistance Project 1. One component of the HUTALaccountsfor most of the operation's total cost: "complete property modernization project in three existing states and expand it to five states (US$ 7.8 million) as described below." 2. In Mexico, the framework for property rights is deficient. Forty percent of urban land and houses in Mexico lack legal/planning approval and formal titles, and remain unincorporated in property registries and cadastres.Between 1990 and 2000, 5.9 million new houses were built but only 2.7 million were financed through the formal financial system.20 Public officials from the Chiapas State Department of Cadastrecalculate that only 500,000 rural parcels and urban lots out of a total of 900,000 are incorporated inthe official cadastre. Households have occupied this land through invasions and irregular or illegal transfer of public, communal and private property. 3. The rigidity and high standards embedded in formal mechanisms for access to land -- for housing purposes -- and formal mechanisms for access to real property rights registries -- for legal protection and recognition of transactions - largely cause this problem. In particular, the complications of the "ejido" system (as described in Annex 1, paragraph 21) and the high transactions costs for urban housing development prevent the formal acquisition of land for urban purposes and the formal development of urban settlements. 4. The state public property registries contribute to the rigidity and high costs that keep many households informal. Records take long periods to access, and are sometimes unreliable. Costs are high and vested interests within and outside Government take advantage of the system. A recent evaluation (2001, CONAFOVI) shows that: (a) 79% of Mexico's states have made little progress in modernizing their property registry; (b) most (25 of 32 states) enter and retrieve information manually either partly or entirely into books with information on all property arranged chronologically - an antiquated method prone to corruption, manipulation, and other vices - rather than electronic files dedicated to specific properties2' (folios) - the modem standard; (c) 81% of states lack regulations permitting use of digital or magnetic media for recording property information; and (d) all but two states lack a connection between the property registry and municipal cadastre - the other important source of land information that modern systems usually integrate with the property registry. 5. The weak regime for property rights hinders economic development in many ways. Of particular importance to Mexico, it impedes the development of financial markets. Housing markets also suffer. 6. The public registry of property rights (PRR) is a state level affair, with state laws determining the registration and execution of rights to property, and state courts responsible for enforcing these laws. A state government agency - the property rights registry - largely maintains land records. State property rights registries are typically outdated and perform poorly - although conditions vary greatly among Mexico's states. Seven of the 32 states have made some advances. Even in these states, however the process of modernization i s far from complete. 2o CONAFOVI, "Programa de Mejora del Acceso a1CrCdito a travCs del fortalecimiento de 10s Derechos de Propiedad" '*Hence, under the book system, notaries must look through various volumes to pick out the information relevant to a specific property - a time consuming and difficult process prone to errors. 41 Thus, considerable work remains even in these progressive states for Mexico to have viable models for well-functioning property registries worthy of emulation at a country level. 7. Institutional and legal reform in the real property rights registries constitutes the basis for their modernization. The legal and institutional structure surrounding registries currently discourages positive change. State governments use property registries largely as mechanisms to collect revenues rather than provide a service. Typically, the fees from registries account for the second or third largest component of own-source revenue, and represent off-budget support for unprogrammed uses. Each state government legislates, regulates and organizes its PRR and the mechanisms to register property rights. Most registries lack administrative, financial or functional autonomy. In the majority of cases, the registries have no control over their revenues. State governments - rather than the registries - control the fees collected and establish the annual budget of the RPPs~~.Civil Service regimes do not exist. Registries lack competitive and transparent mechanisms for the selection, recruitment, contracting and promotion of public employees. 8. Thus, reforming the legalhnstitutional structure of registries forms an important part of improving their performance. Desirable changes includes: (a) a homogeneous set of rules or guidelines across registries of different states to facilitate information integration and cooperation without violating state autonomy; (b) the capacity to implement e-government solutions; (c) reengineering of registry processes to cut times and cost; and (d) new organizational structures that facilitate these other changes. 9. GoM has given CONFOVI - the National Housing Commission - the lead in property rights modernization reform. In this regard, CONAFOVI has launched a pilot project in three states - Baja California, Colima, and Sonora - as a means to creating replicable models that will then be disseminated nationwide to other states.23 Under the HUTAL, CONAFOVI will be finishing this property rights modernization project in these three existing states and expanding this project to five additional states. Each of these states and the five additional states are requiredto matchthe federal contribution 10. The activities financed for the property registry modernizationwill be grouped under one component, with four subcomponents: (i) systemic reforms necessary to change the character of the property registry from a record of filed documents to a record of legal rights in property as embodied in an agreement on "principles of modern property rights" and disseminate these principles broadly within Mexico. CONAFOVI will execute this sub-component; (ii) strengthening of property rights management via studies to support change of state civil codes, the economic impact of reforms, and performance indicators for the registries; (iii) a standard package of support necessary to modernize the function of RPPs in the participating states - the participating state governments will execute this package in accordance with an agreement detailing these activities between each state and CONAFOVI, which will monitor this execution; and (iv) technical support to strengthen the capacity of CONAFOVI through software and hardware, accounting, auditing, and evaluation.. 22Calculations show that RPPs annual budgets are lees than 50% of their annual revenues. 23 The pilot-project method includes the development or improvement o f the following areas: registry modernization, financial policies, cadastres and registries link, administration of registry records, human resources, information technology, client oriented services, registration processes alignment and modernization of Civil Codes. To participate in the program, the States authorities and CONAFOVI enter into agreements that include a diagnosis of registries situation in order to identify areas for intervention. 42 Sub-component 4.1.: systemic reform (US$0.55 million) 11. Modernization of the operation of RPPs (the activities of sub-component 4.3.) i s a necessary but insufficient condition for improving their performance substantially. RPPs now function largely as a significant source of off-budget revenue for state government rather than as a public service critical to the development of property and financial markets - the indicated direction of reform. Modernization will lower the cost of providing registry services, but - by itself - not necessarily result in significantly reducing fees to the public as long as the PRR functions mainly as a source of state-government revenue. Similarly, public notaries are a regulated industry of state government. Hence, the efficiency and equity of this regulation plays a key role in the property registry system. Finally, and most fundamental, the property registry in Mexican states currently functions as a record of documents. The courts are left to interpret the legal meaning of these filed documents - often, a problematic process. In contrast, most modern registry systems (the U.S.24 is a notable exception) - such as those of much of Western Europe - are records of legal rights to property. Government, in effect, provides legal guarantee for the information contained in property registries, often backed'financially by private insurance of accuracy and omissions of the property registrar. 12. Such broad change requires influencing the incentives under which RPPs and the property registry industry (composed of the RPP, public notaries, and others), i.e. the political economy of the property registration industry within state government. In contrast to modernization activities, these changes involve shifts in national policy. Hence, CONAFOVI will execute this sub-component which deals with these changes. 13. Activities of this sub-component will include support for: definition and dissemination of "principles of modern property rights", including the conversion from a record of filed documents to a record of rights in real property that also include the following key elements of property rights reform: (a) professionalization of the RPP career; (b) an organizational structure for the RPPthat guarantees registry budgetary and administrative autonomy; (c) assessment of the fiscal function of the RPP that includes a plan for transitioning the role of the fiscal role property registry charges into that of fees-for-service rather than an important source of off-budget revenue for state government; (d) the design of a long-term strategy to address registries' institutionaland financial sustainability and customer relations, and to improve the regulation of the state property registry industry; and (e) incorporation of these elements into a strategic plan for RPPreform and dissemination of this strategy nationwide. Sub-component 4.2. Strengthen property rights management (US$0.53 million) 14. This sub-component will include: (a) development of a system of indicators for performance of state property rights registries; (b) further definition of and focus groups to discuss the principles of modem property rights; (c) evaluations of the economic impact of the pilot project in the three initial pilot-project states; and (d) assessment of property rights in the civil codes in various Mexican states and legal interpretation of these civil codes. CONAFOVI will execute this sub-component directly. 24 Inthe U.S.system- which is sui generis in an internationalcontext - title insurancecompanies analyze propertyrecordsmaintainedby county governments, emit title policies stating the identity of the owner and the rights owned, and then insure individual home purchasers(or other beneficiaries of the title insurance) for accuracy and omissions of these title policies. 43 Sub-component 4.3.: Modernization of state public registries (US$6.15 million) 15. This sub-component starts with a diagnostic study in each of the five new states that will identify the required administrative, process, and data-management improvements necessary to increase the efficiency of the registry: (a) an efficient organizational structure; (b) reengineered process and reduced steps25;(c) lower transaction costs; and (d) mechanisms for accountability to registry customers (including citizens, firms and Governments agencies) and for client responsivenessincluding participationinthe discussion of reforms. 16. Based on this diagnostic study, CONAFOVI and each state will enter into a formal agreement specifying the activities to be financed under the project. The overall aim of this sub- component is to increase the ability of the RPPs to manage and manipulate data on thousands of transactions and enter and retrieve this information quickly and securely. The modem standardis an electronic folio system that integrates information from the property registry and the cadastre. The system should enable the users to easily update information and to view land title information by parcel, by area, or by owner. It should also give users access to related documents and allow receipt of certifications showing property encumbrances (or freedom from encumbrances), and include features to bill the appropriate parties and deliver information over the Internet. 17. The activities financed in each state are likely to include: (a) the reengineering of procedures for the registration of property rights; (b) information technology and, the design and implementation of new methods and systems (hardware and software) for managing data; (c) incorporation of registry information and property rights transactions into these systems;26and (d) linkage of property rights registries with municipal cadastre systems (hardware and software); and (e) integration of information and connect across registries of different states. The extent of finance of each of these categories will differ among states basedon their diagnosed needs. 18. The States will contribute by financing personnel to conduct the activities agreed with CONAFOVI and supported by the project, and other counterpart. States will execute the activities under this component directly based on the agreement with CONAFOVI, which will monitor their progress. Sub-component 4.4.: Technical support to strengthen CONAFOVI (US$0.57 million) 19. This sub-component supports the capacity of CONAFOVI to operate the whole component. Assistance will help CONAFOVI with software and hardware, training, coordination, local supervision of each state-project, accounting, auditing, and evaluation. CONAFOVI will execute this sub-component directly. 25 The pre-reform property registration process in most Mexican states typically involves as many as a hundredsteps fragmented among various physicallocationsand many people, and results inpoor service to users. 26Conversion from paper books and paper folios to an automated system requires inputting and verifying the historical informationin electronic form. Capturingthis backlogat once would require a large upfront investment, result in a relatively high degree of error (as it would be contracted to third parties without the incentive or training to be accurate), and - thus - be inefficient. Instead, experience has shown that the recordsof a particular propertyare best entered into the new system on demand - that is, when a transaction occurs that involvesthat property. The projectprovidesmodest support for this function. 44 Annex 5: ProjectCosts MEXICO: HousingandUrbanTechnicalAssistanceProject Project Cost By Component and/or Activity Local Foreign Total US $million US $millionUS$million 1. National housingpolicy andinstitutional 0.31 0.10 0.41 framework 2. Housing subsidies 0.14 0.07 0.21 3. Housing credit and household savings 1.46 0.74 2.20 4. Urban real property registries and rights 5.99 1.42 7.41 5. Nat'l urban policy, slum upgrading and 1.94 0.22 2.16 institutional strengthening 6. Low moderate income landdevelopment 0.75 1.06 1.81 7. Disaster preventionand management 0.04 0.34 0.38 Total Baseline Cost 10.62 3.96 14.58 Physical Contingencies 0.19 0.19 0.38 Price Contingencies 0.19 0.19 0.38 TotalProject Costs' 11.00 4.34 15.34 Front-end Fee 0.04 0.04 TotalFinancingRequired 11.00 4.38 15.38 45 Annex 6: ImplementationArrangements MEXICO: HousingandUrbanTechnicalAssistanceProject ImplementingAgencies and Responsibilities 1. The implementingagenciesare SEDESOL, CONAFOVI (and the state levelRPPs via CONAFOVI) and SHF. The following table gives an overview of the implementationagencies and activities for the loan. Responsibility CONAFOVI Component 1 - Kational Housing Policy and Institutional Framework. Component2 - Housing Subsidies Component 3 -Housing Credit and HouseholdSavings; Subcomponents 3.1 and 3.2, "A strategy for an awareness campaignon mortgageforeclosure enforcement" and "INFONAVIT's strategy", respectively. Component4 - Urban RealPropertyRegistriesand Rights, All subcomponents will be executed by CONAFOVI. Subcomponents 4.1, "Promotion and disseminationof property rights reform", 4.2, "Strengthening of property rights management" and 4.4 Technical " support for CONAFOVI" will be directly executedby CONAFOVI. Subcomponent4.3, "Modernization of the public registry in selected states" will be implementedby each state, under the close supervision by CONAFOVI. This last sub component will largely support the investments necessary to meet the performancestandards and results of the effort to modernizereal property registriesand rights. SHF Component 3 -Housing Credit and Household Savings (except subcomponent3.1 and 3.2) SEDESOL Component 5 -National Urban Policy, Slum Upgrading and Institutional Strengthening. Component 6 -Low and Moderate Income Land Development. Component 7 - Disaster Preventionand Management. 2. Each implementing agency will have the responsibility for defining an action plan, and will approve, evaluate, monitor and control the implementation of their corresponding project components. Each of these implementing agencies will have in place a full-time team to manage the project, and hire consultants to dedicate to this project, as required. The functions of each implementingagency will be to: Act as the executive secretariat for corresponding components of the project Identify the technical studies requiredand preparethe relevant TORS Assist inprocuring and contractingthe requiredconsultants, technicians and services Provide adequatefacilities for the implementationteam, consultants, and technicians Evaluate consultants' and technicians' performance Review all documents and reports produced Follow up on the physical component, if applicable (e.g. equipment under the property rights modernization component) Adjust the operational plan for the relevant components, as required Performthe financial management of the corresponding components of the project Provide support to auditors 46 0 Hold periodic reviews of the project together with the Bank, provide support for Bank supervision missions and prepare the Borrower's contribution to the project Implementation Completion Report. 3. The existing financial management and procurement arrangements in SEDESOL, CONFOVI, and SHF are operational and were found acceptable. SEDESOL, CONAFOVI and SHF will dedicate time of existing staff to project implementation. In addition, CONAFOVI and SEDESOL will each add one additional staff to support the procurement aspects of the project and one additional staff to support technical issues in project implementation. 4. As mentionedin the main text, pilot activities on property registries and rights have been initiated in three state RPPs and will be expanded to five additional state RPPs to be identified during the project (subcomponent 4.3). Prior to entering the project, candidate state RPP's financial management arrangements and procurement capacity will be assessed and require capacity ensured. CONAFOVI (possibly via individual consultants or a firm) will provide additional support to the state RPPs in project implementation. Smooth implementation will be further facilitated by the standard package of reforms and investments to be repeated in each state. 5. Further details on financial management and disbursement arrangements can be found in annex 7 and on procurement arrangements in annex 8. FinancialAgent 6. In addition to its role as implementingagency, SHF will serve as financial agent for the loan. SHF will provide administrative support to the implementing agencies as well as overall coordinationof the project. 47 Annex 7: FinancialManagementand DisbursementArrangements MEXICO: Housingand UrbanTechnicalAssistanceProject FinancialManagement 1. Country Issues. The Mexico Country FinancialAccountability Assessment (CFAA) was completed in October 2003. The CFAA focused on the national level public sector, which it considered to have generally sound I 3 4 systems and institutions. Country FM risk was rated as Moderate and all individualrisk factors were rated Low or Moderate. Nevertheless, the impact of this CFAA on Project FM system is low because: (a) project implementation will be handled by an decentralized institution CONAFOVI -approximately 70% of both project and loan- and the Secretariat SEDESOL -approximately 30% of project and loan-; and (b) the financial agent will be the Federal MortgageDepartment (Sociedad Hipotecaria Federal -SHF). 2. FM Assessment. A financial management (FM) assessment was conducted to evaluate the FM arrangements for the proposed project and the capacity of CONAFOVI, SEDESOL, and SHF (as both implementingand financial agent) to effectively manage and implement the project and to provide the Bank with accurate and timely information. The FM assessment involved (i) visits to both implementing agencies; (ii) meetings with SHF as financial agent, SHCP and the general auditor office Secretaria de la Funcidn Pziblica - SFP; (iii) review of FMinformation on previous projects implemented by SHFFOVI-; and (iv) discussions with project team. It involved ensuring that project design allows for an appropriate level of transparency, facilitating oversight and control while also supporting smooth implementation. 3. Regarding institutional capacity assessments of the states, required under Bank's internal directives to meet its fiduciary responsibility, such assessments will detail the special provisions to conduct financial management. Required activities to ensure institutional capacity in the states before entering the program will be agreed on in the respective action plan of each assessment. Loan covenants will be includedin the legal documents to ensure that, prior to disbursingfrom the loan, the project has complied with the assessments, and that the Bank has expressed its satisfaction to their qualification and risk assessment of each state (RPP). These assessments will bejointly carried out by CONAFOVI and SHF (the financial agent area) and Bank clearance will be mandatory, however the Bank will lead the first state FM-assessment. 4. On the basis of the assessment carried out, the financial management team concludes the following: (i)although some project-specific mechanisms will need to be implemented by SEDESOL and SHF as financial agent for the new project, existing financial management arrangements for the Bank project which is currently under implementation are operational and considered to form a sound basis; (ii) regarding CONAFOVI and SHF as implementing agency, although some project-specific mechanisms will need to be implemented for the project, existing financial management arrangements for those entities are operational and considered acceptable to the Bank; (iii)given that the FMrisk is Moderateto Substantial - depending on FM systems and capacity of the state RPPs that may be involved - project implementation should be accompanied by a close supervision that allows earlier detection of financial management issues and ensures the proper use of the project funds. In addition, this risk i s being mitigated by increasing the level of collaboration and coordination between CONAFOVI, SEDESOL and SHF. 48 5. The main reasons for a high risk rating in FM are: (i)it is the first Bank-financed operation for which SHF is designated the financial agent; (ii)CONAFOVI does not have experience with Bank projects; (iii)although SEDESOL and SHF are implementing Bank- financed operations, the specific areas which will implement the proposed project do not have experience on Bank projects; (iv) one component involves state-level institutions which do not have experience with Bank projects; and (v) all project funds need to be managed within the standardbudget of SEDESOL, CONAFOVI and SHF respectively. 6. Implementing entities. The project's implementing entities will be SEDESOL, CONAFOVI, and SHF. CONAFOVI will implement one component in coordination with state- level institutions (the RPPs). All these entities will have overall responsibility with the support of SHF as financial agent. The project components are mutually supportive, and correspond to the reform agenda of the HUSAL in these crucial areas: housing policy and institutional development; housing subsidies; home credit and household savings; property rights; slum upgrading; low and moderate income land development; and disaster mitigation. Project implementation of components one, two, and the INFONAVIT strategy of component three will be the responsibility of CONAFOVI. The other housing credit-related studies of component three will be the responsibility of SHF. Component 4 will be the responsibility of CONAFOVI, in coordination with the RPPs. Components five, six and seven will be under the responsibility of SEDESOL. These responsibilities includes project financial management responsibilities for these implementing agencies. Considering this, CONAFOVI, SHF, SEDESOL in conjunction with SHF as financial agent and SHCP, have been responsible for project preparation. 7. Flow of Funds and Information. Bank loan funds will flow from the loan account, to a Special Account managed by SHF (as financial agent) and established in US dollars at the Mexican central bank (Banco de Mexico). CONAFOVI, SHF (as implementing agency), and SEDESOL receive funds in Mexican pesos via its standard budget (fiscal budget) from the national treasury, Tesoreria de la Federacion-TESOFE, which will reimburse at the end of the cycle from the Special Account. The following chart shows agreedproject flow of funds. 49 US$ WORLD BANK ' ). CENTRALBANK A BANCODE MWCO Financial agency I SPECIAL ORDER ACCOUNT B US$ (in US dollar) REPLENISHMENT REPORTS I (As requiredby the (SOEs) operation) US$ 10 I I 11-FundsflowInformationflow 11 1-Transfer (StandardBudget) 5 - Each RPP reports to CONAFOVI 9 - Order to transfer. (informationfor SOEs) 2 - Payments made by SEDESOL, 6 - SOEs from SEDESOL, 10- Reimbursement (funds from the CONAFOVI and SHF (as CONAFOVI and SHF (as SA to the National Treasury to implementing agency) to their implementing agency and including reimburse funds transferred in step # respectivesuppliers. the consolidationof RPPs) 1) 3 - Transfers from CONAFOVI to 7 ConsolidatedSOE (submitting). - A - Initial deposit to the Special RPPs Account (establishment). 4 - Payments madeby each RPP 8 - Authorization B - Replenishments (as needed by the operation). 8. Likewise current Bank projects in Mexico, counterpart funds will be representedby the funds that CONAFOVI (for activities implementedby CONAFOVIor the state RPPs), SHF, and SEDESOL will include in their standard budget to complement project activities partially financed by this Bank loan. This i s based on agreed financing percentages by category cost. Both Bank funds and counterpart funds will be registered within the standard budget of CONFOVI, SHF, and SEDESOL in two separated budgetary lines (earmarked) but under the project Cre`ditoIntemacional para Asistencia Te`cnica. 50 9. Staffing. Key FM stufi Project teams, each per co-implementing agency, were established to carry out project financial management within those agencies. These teams are headed by experienced managers and will be supported by knowledgeable FM staff (Public Accountants who already work for CONAFOVI, SHF, and SEDESOL respectively) and will be supported by staff from all administrative areas of those co-implementing entities (accounting, treasury, budgeting, information systems, etc.). The supporting areas of SEDESOL have developed good experience with other Bank-financed projects. CONAFOVI i s implementing an IDB-financed project. SHF is implementing a World Bank-supported project and IDB-financed project. 10. The administrative teams will be supported by SHF (as financial agent). All financial management staff in both co-implementing agencies will be (actually are) financed through the standard budget of each institution. CONAFOVI, SHF, and SEDESOL officials have qualifications and public-sector experience adequate to undertake the financial managementtasks related to this proposed project. Additionally, these implementing agencies will be closely supervised by SHF as the financial agent, which will provide advice as needed. The main duties of the administrative teams of the co-implementing agencies are to: (i) prepare the project budgets, financial statements and disbursement requests; (ii) supervise internal controls and efficiency in the execution of funds; (iii) coordinate on financial management issues among them, with SHF, SHCP, SFP and the Bank; (v) coordinate annual project audits; and (vi) prepare and submit FMR reports on quarterly basis via SHF. Current staffing arrangements in both co- implementing agenciesare satisfactory to the Bank. 11. These arrangements need to be made official by appointing designated staff (which currently working on project preparation) by modifying TOR (responsibilities) to ensure enough resources (including time) for project implementation. 12. Accounting Policies and Procedures. SEDESOL,CONAFOVI (CONAFOVI and the state RPPs accordingly), and SHF will maintain records and accounts adequate to reflect, in accordance with accounting practices compatible with International Accounting Standards and in compliance with local requirements (which are compatible), its operations and financial condition, including records and separate accounts for the proposed project. Administrative procedures must be in place to ensure that financial transactions are made with consideration to safeguarding project assets and ensuring proper entry inthe accounting & monitoring systems. 13. Accounting systems complemented with information systems currently under use of SEDESOL, CONAFOVI and SHF as implementing agency, have the capacity to record assets, liabilities and financial transactions for its present operations and for those related to the proposed project, and produce financial statements and reports useful to project management and meeting the Bank's fiduciary requirements. However Financial Monitoring Reports (FMRs) will be prepared mainly in spreadsheets (MSO - Excel). SEDESOL, CONAFOVI (CONAFOVI and the state RPPs accordingly), and SHF (implementing agency) are responsible to keep files of all supporting documentation for their operations and must be accountable for all related to project expenditures. 14. The financial management section of the project manual for the proposed project will provide details on accounting policies and procedures. A project manual i s under preparation and i s expected to be concluded and adopted before Board presentation. SHF as financial agent i s leadingthis activity. 51 15. Information Systems. CONAFOVI's/SEDESOL' s/SHF's information systems will track every project transaction (SEDESOL for components five, six and seven, CONAFOVI (and the state RPPs) for components one, two, the mortgage foreclosure awareness campaign and INFONAVIT study of three and four; and SHF for the other studies of three. Existing systems, which are under use for the current operations of both co-implementing entities are considered satisfactory to the Bank. 16. Written Procedures. Project financial procedures will be documented in the project Operational Manual, which will define the roles and responsibilities of CONAFOVI (CONAFOVI and the state RPPs), SEDESOL and SHF (as both financial agency and implementing agency). A draft of this manual wassubmitted to the Bank before loan negotiations and contained, among other financial procedures: (i)accounting policies and procedures, includingbasis of accounting and chart of accounts; (ii) reporting requirements from the co- the implementing agencies to SHF and then to the Bank; (iii) formats of the FMR for the proposed project; (iv) internal controls including criteria and proceduresfor processing payments, transfers, disbursements, etc.; (v) records management; and (vi) audit arrangements. The planned arrangements for some of these aspects are summarized below. 17. Financial Reporting. CONAFOVI (including state RPP's operations), SHF and SEDESOL will prepare, on quarterly basis, the financial monitoring reports (FMRs) in accordance with applicable Bank guidelines. Those implementing agencies, via and with support of SHF, will submit financial reports which will sufficiently describe all project operations (including the Special Account) to the Bank. This is additional to the audited annual financial statements(Entity and Project financial statements). 18. The FMRs will not form the basis of disbursement, as it is agreed that SOEs will provide information on the disbursements made by SHF (financial agent) and the use of those funds by CONAFOVI, SHF (implementing agency), and SEDESOL. The format for the joint-FMRs which is currently under development (which will be ready -pre agreed- 15 days before negotiations) will be used for the proposed project, so FMRs format and periodicity will be agreedbetween SHF, CONAFOVI, SEDESOL and the Bank prior to loan negotiations. 19. The financial management section of project manual includes detailed information on reporting and monitoring, including the format of both FMRs and annual financial statements that will be prepared by CONAFOVI, SHF (financial agent and implementing agency), and SEDESOL. The implementing agencies will be audited in line with Bank new policy and requirements (detailed information i s being provided in the next two subsections on Internal Audit and External Audit). 20. Znternal Audit. CONAFOVI's internal audit department and SEDESOL internal auditor office, an extension of SHF, are responsible for permanent internal audit reviews, however no internal auditor will be assigned specifically to the project. Each involved area within CONAFOVI, SHF, and SEDESOL will make sure that proper internal control procedures are followed. This include SHF's internal control arrangements. The internal audit functions of each institution are operational and relatively independent. 21. External Audit. The audit process and audit report will follow the Bank's audit guidelines, reflectingthe new audit policy as of July 2003. The annual audits will be carried out in accordance with auditing standards, by independent auditors (a private firm) in the case of CONAFOVI and SHF, and by the internal auditor office -0rgano interno de Control de la SEDESOL - in the case of SEDESOL, all of them under Terms of Reference acceptable to the 52 Bank. As soon as available, but in any case not later than six months after the end of each audited year, CONAFOVI (including state RPPs' operations), SHF (as implementing agency and financial agent), and SEDESOL will furnishannual audit reports to SHF (as financial agent), who will submit them to the Bank. The Bank will review those reports, evaluate its acceptability, and provide comments and recommendations (if any). The Project Manual includes a section on financial management to provide detailed information on auditing. 22. The auditors would perform at least one interim visit per year. As a consequence of country characteristics, an audit report of the Special Account is required. The audit report on the Special Account is the responsibility of SHF as this financial agent i s responsible of SA'S management (this audit review is carried out under arrangements satisfactory to the Bank). The table below summarizes audit requirements. Audit report Duedates Project Financial Within the following six months after the end of the reportingperiod. Statements(CONAFOVI Startingby 06/30/2005 until 06/30/2007. The periodcovered will be and the state RPPs, from January the 1st to December 31st on annual basis. SEDESOL and SHF as implementingagency) Special Account (SHF as Within the following six months after the end of the reportingperiod. financial agent) Startingby 06/30/2005 until 06/30/2007. The periodcovered will be from January the 1st to December 31st on annual basis. 23. Disbursement Arrangements. Method. Disbursements would be in accordance with guidelines set out in the Bank's Disbursement Handbook i.e. transaction-based disbursement procedures. The proposed project will not use FMR-baseddisbursements. See the Flow of Funds section above for further details. 24. Statements of expenditures (SOEs). Loan withdrawal applications will be supported by SOEs for expenditures relating to contracts that are not subject to the Bank's prior review. Reimbursement of other expenditures would require submittal to the Bank of full supporting documentation. SOE information will be provided by CONAFOVI, SHF (as implementing agency) and SEDESOL to SHF (financial agent), who will review them and incorporate needed information in standard forms and, will submit the SOEs to the Bank. Documents in support of SOEs must be maintained by CONAFOVI, SHF (as implementing agency), and SEDESOL at least until one year after the Bank has received the audit report for the fiscal year in which the last loan withdrawal was made. Such documents must be available to review by the external auditors, OICs and Bank staff at all time. 25. Special Account (SA). The project will establish in the Mexican central bank Bunco de Mexico SA in US dollars. SHF will support and supervise project SA management (e.g. monthly reconciliation, 1903 Bank-form submission and coordination with the central bank), will coordinate reporting (including the incorporation of SA'Sinformation in project FMRs) and project audits. For replenishment of the advance to the SA, SHF will prepare monthly (in any case, no more than quarterly) requests for reimbursement of expenditures made. Total advances to the SA at any given time would not exceed an authorized allocation of US$ 3,500,000. However, that unless the Bank shall otherwise agree, the authorized allocation shall be limited to the amount of US$ 2,000,000 until the aggregate amount of withdrawals from the Loan Account plus the total amount of all outstanding special commitments shall be equal to or exceed the amount of US$7,000,000. 53 26. Other procedures. The proposed project most likely will not require other procedures, however upon request from SHF (financial agent) and subject to Bank's approval, payments may be made: (i) directly to a third party (CONAFOVI's/SEDESOL's/SHF's supplier or consultant) for goods, works, and services; (ii) to a procurement agent; or (iii) a commercial bank for to expenditures against a Bank Special Commitment covering a commercialbanks letter of credit. 27, Retroactive Financing (expenditures). The project will be eligible to submit for retroactive reimbursement, documentation on expenditures totaling up to 10%of the loan amount, for eligible expenditures incurredup to one year before the signing of the loan agreement. 28. Supervision Plan. One FM supervision mission will be conducted on annual basis (including visit to participating states). A Bank Financial Management Specialist will review project annual audit reports (entity, project and SA) and the quarterly FMRs. 54 Activity Responsible Target Date Organization and Staffing Participation of Project Financial Administration staff B M /CONAFOVU Project launching and SHF's staff in Bank Disbursement and Financial SEDESOL and SHF ManagementTraining. Operational Manual Submission of a draft manual for Bank review. The CONAFOVU Prior to negotiations financial section should include institutional SEDESOL/ SHF agency (CONAFOVUSEDESOL). Provision of comments and recommendations. BM Prior to Board Submission of revised draft to Bank to provide its no- CONAFOVU Prior to Effectiveness objection. SEDESOL/ SHF Provision of Bank No Obiection. BM Prior to Effectiveness Financial Reportingand Monitoring As part of preparing Ops. Manual (see above) the CONAFOVU Prior to Board format and content of Financial Monitoring Reports SEDESOL and SHF (FMRs) to be prepared by CONAFOVI and SEDESOL, with support of SHF, should be included. This activity will confirm the agreement on the format of the quarterly FMRs with the Bank (prior negotiations). Financial Management System Adjustment of existing systems to the specific needs of BM/CONAFOVU I IPrior to Board the- project (FM systems fully operational) and their SEDESOL and SHF written procedures (complement of the existing procedures in CONAFOVI, SEDESOL, and SHF). Disbursement 1Amount inUS$Financing ::::1 1 Category Million Percentage Goods 1 1 1.17 60% over all expenditures Services 60% over all expenditures ~ Training 60% over all expenditures Non-Consulting Services I 1.09 1 60% of all expenditures Total Project Costs 7.73 Front end fee 0.04 Total 7.77 55 Annex 8: Procurement MEXICO: Housingand Urban Technical Assistance Project A. Procurement Arrangements Procurement for the proposed project will be carried out in accordance with World Bank "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004 (the Procurement Guidelines); "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated May 2004 (the Consultants' Guidelines), and the provisions stipulated in the Legal Agreement. A general description of items to be procured, by expenditure category, is provided below and the estimated value of this procurement is summarized in Table A. For all contracts to be financed by the Loan, the procurement methods or consultant selection methods, the needfor pre-qualification, estimated costs, prior review requirements, and time frame are given in the Procurement Planin Attachment 1.The Procurement Plan (18 months) will be updated at least annually or as requiredto reflect actual project implementationneeds and improvements in institutionalcapacity. Procurementof Works: No works are expected inthe project. Procurement of Goods: Goods procured under this project may include: equipment and software for informationtechnology activities. ICB i s not expected. For contracts with values under $500,000, NCB procedures will be followed using the Standard Bidding Documents (SBDs) agreed by the Secretaria de la Funcidn Pziblica (SFP) and the Bank. For contracts valued less than $100,000 shopping procedures may be followed. When needed and if the requirements of paragraphs 3.1, 3.6, and 3.7 of the Procurement Guidelines are met, direct contracting of goods may be undertaken with prior agreement of the Bank. Attachment 1 includes details on specific thresholds for procurement of goods. Procurement of non-consulting services: Printing and digitalization services and other related services and organization and delivery of project events activities (logistics, organization, etc.) may be procured under a non-Consulting services bid document (trial version) dated December 2002. Selection of Consultants: Consultants services will be contracted in skill areas such as design, analysis and dissemination of housing, urban, and subsidy policies, strengthening of small savings institutions, modemization of property rights, analysis of experiences on community participatory schemes, analysis of land development, evaluation and strengthening of activities for disaster prevention and project management. The Global Procurement Plan (GPP) in the Attachment of this Annex contains a more ample detail on services to be procured by firms and individuals. For consulting services (T.A.) required under subprojects of the Public Property Rights Offices will be detailed in specific procurement plans submittedby participating states at time of approval of their subprojects. Single source selection (SSS) procedures may be used for procuring tasks that meet the requirements of paragraphs 3.10 of the Consultants' Guidelines. Contracts for these services may also be usedto hire universities, training institutions, and NGOs, as required. Operational Costs: There are no incremental operational costs allocated for the project. Incremental costs include mostly expenditures for additional consultants providing T.A. to units inexecuting agenciesto advance project activities. 56 B. Assessmentof the agency'scapacity to implementprocurement An assessment of the capacity of the Implementing Agency to implement procurement actions for the project was carried out by Rosa V. Estrada, PAS in March, 2004. The assessment reviewed the organizational and functional structure for implementing the project of the three executing agencies, as follows: SEDESOL (a) Procurement activities in the HUTAL will be carried out by Office of Assistant Director General (Direccio'n General Adjunta -DGA) of the Under Secretary of Urban Development and Regional Planning (USDTO). Its main function in the proposed project will be to ensure the quality and acceptability of procurement activity during project implementation. In close coordination with technical areas implementingcomponents of SEDESOL, this institutional (administrative) area will be involved in the preparation of bid documents, coordination of bid evaluation reports and proposal for awards, contracting, and monitoring and supervision of the legal and commercialconditions incontracts financed underthe loan. (b) The DGA in the USDTO is presently staffed with one high official with extensive knowledge and experience in procurement (formerly Administrative Director of SEDESOL in charge of the Office of Material Resources), with direct reporting responsibilities to the Office of the Under Secretary of SEDESOL (OFUS- SEDESOL). The qualifications and decision-making responsibilities of this official appropriately qualify the DGA's office to carry out procurement under Bank financing. Complementarily, two other qualified officials assist the DGA in the relevant procurement procedures and coordination with technical areas. If necessary, it has been agreed that SEDESOL may contract additional one qualified procurement consultant to assist the DGA's office. CONAFOVI (a) Procurement activities in the HUTAL will be carried out by Office of Assistant Administrative Director General (Direccio'n General Adjunta -DGA-CONAFOVI), reporting directly the Office of the National Commissioner for Housing Development (NCHD). Same as with SEDESOL, its main function in the proposed project will be to ensure the quality and acceptability of procurement activity during project implementation and coordinate procurement activity with technical areas. With assistance of the Office of Material Resources, it will be responsible in the preparation of bid documents, coordination of bid evaluation reports and proposal for awards, contracting, and monitoring and supervision of the legal and commercial conditions incontracts financed under the loan. (b) The office of the DGA in CONAFOVI i s staffed with one higher level official, assistedby a qualified procurement officer (PO) whose academic credentials and his 10 year's experience in the specific field of procurement (Public Administration with Post graduate studies in Government Procurement), sufficiently enables himbe the primary focal point to conduct bidding processes and contracting in the agency. The DGA's office has additionally at least two technical staff that assist in the tasks required for quality processes. This team will also be participating actively in the institutional strengthening strategy for the RPPs described below. In addition, during project implementation, extemal qualified consultants may be contracted to assist CONAFOVI. 57 State Governments (CONAFOVI) (a) Under the ModernizationAction Plan (MAP) of Component 4 of the project (CONAFOVI), eight State Governments, specifically their Public Registries of Real Property (Registros Pu'blicos de la Propiedud - RPPs), will also be executing agencies in the HUTAL. The framework of their participation will be under a standard package of activities proposed as Component 4.3. External qualified consultants will be contracted out competitively to provide technical assistance to the states to achieve institutional strengthening objectives included in the project for the state RPPs. (b) CONAFOVI will sign agreements with states in Mexico in order to implement the Modernization Strategy proposed. In the operational annexes of these agreements with the States, as it relates to procurement, there will provisions to ensure that, for all subprojects approved under the project and proposed for financing under the loan, the States will (i) apply the World Banks Procurement and Consulting Guidelines dated May 2004; (ii) use Standard Bidding Documents for NCB, as agreed by the GOM and the Bank; (iii) the in selection of consultants' services, States RPPs will be required to use World Bank's Standard Request of Proposals (W), as agreed by the GOM with the Bank; (iv) allow for bidders of all countries to participate in national biding; (v) clearly define the obligation to prepare and maintain a Specific Procurement Plan (SPP) of a rolling character, that would identify contracts to be financed by the Bank both for prior and post review procedures, with annual updates or earlier as it may be necessary; and (vi) maintain procurement documentation available for Bank staff and auditors. (c) Before the MAP of the first RPP i s launched, the Bank will conduct a full procurement capacity assessment using a simplified standard formulary for this purpose. As part of a Bank's capacity building exercise, CONAFOVI staff will be asked to join Bank's procurement team in the field in the collection of relevant information and later in the drafting of the assessment, with the goal of developing the requiredskills in CONAFOVI's staff (which may include SHF) to apply the assessment formulary and draft subsequent reports on RPPs in other states. Assessments will be submitted to Bank's consideration as states begin to join the project. Not until Bank has expressed its full satisfaction to each assessment and to the risk assessment proposed by CONFOVI, a state RPP may access Bank financing. The Action Plan to be agreed for the project includes training on procurement to CONAFOVI and SHF staff in support of this capacity buildingstrategy. SHF Procurement activities of SHF in the project will be limited to a series of studies under Component 3, which will be carried out by its HousingDivision. The installed capacity and the substantive program presently in this division demonstrate the agency's capability to engage itself in additional execution activities as proposed under the project. SHF's procurement team in its executing branch will be responsible for bidding and awarding contracts proposed in Component 3, as they may be applicable, including contributing with counterpart funding of such studies. Two of its regular staff members in its administrative-financial team have substantial qualifications, after having been part of the procurement teams in three Bank projects, therefore promising acceptable procurement implementation. The GOM has selected SHF as the intermediary financial institution, in addition to its role as an implementing agency. As financial agent, the SHF will be responsible for the supervision of procedures and contracts, including issuance of no objection to 58 documentation and awards of contracts subject to ex-post review under the delegation the Bank makes of its fiduciary responsibilities to the intermediary agency, which are not included inthe prior review of legal arrangements. (d) Implementation of the project in the above executing agencies will be carried out without the involvement of coordinatiodimplementation units. Staff training and capacity building, especially of CONAFOVI staff, is included in Action Plan proposed below, to be agreed at negotiations. OperationalManual: SEDESOL, CONFOVI and SHF have internal instruction manuals for operation of their activities. However, these agencies will prepare specific instruction sections whereby procurement agreed for the HUTAL would be detailed. By negotiations, the Bank will receive a draft of these specific sections to be includedthe OM. The Bank will review these sections, so that final versions are in place by project effectiveness. RiskAssessment Most of the implementation issues/ risks arising from procurement for the project have been identified with the exception of those in the states. Assessment of states is planned for a later time, as each State enters the program. The risks presently identified relate to the substantial amount of complex consultants' activities that will be contracted under the project in a relatively short period of implementation. Also, the administrativeAega1 areas will need to be sufficiently trained to ensure that their procurement teams clearly identify the great importance of contracting, usingthe Bank's standard procurement documentation. Although SEDESOL, CONAFOVI and SHF show great potential for successful outcomes based on their internal organization, there are critical factors in the project, especially those related to procurement activities by state RPPs in subcomponent 4.3 (which make up for a large portion of the project costs). Therefore, the assessment predicts some difficulties inthe ability of the borrower inreducingrisks. The overall project risk for procurement is h&. This assessment may be revised after the project completes at least one year of implementation, and that at least 3 state RPPs are fully and successfully involved in developing their proposed Modernization Plans. C. ProcurementPlan The Borrower has delivered to the Bank a Global Procurement Plan for project implementation, which provides the basis for the procurement methods. This plan will be discussed at negotiations and agreed with the Project Team. The Borrower will update the Procurement Plan (18 months) at least annually or as requiredto reflect the actual project implementationneeds and improvements in institutional capacity. All updates will be agreed with the Project Team. The plans for the states will be prepared, based on the activities in their subprojects, as states move into the project. D. Frequency of Procurement Supervision In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the ImplementingAgency has recommended that yearly supervision missions carry out post review of procurement actions. The frequency of supervision in Component 4 activities may be updated as the state governments enter the project. 59 The Procurement Action Plan, to be agreed at negotiations, is shown below: MEXICO HUTAL - PROCUREMENT ACTION Area of Interest Activity Proposed leadline Legal framework -Bank 1 Training seminar to train/ 0 Already delivered by Procurement and retrainprocurement staff in the Bank to three ConsultantsGuidelines, three executing agencies, with executingagencies. November 2003. emphasis on Bank'sprocurement principles,policiesand standard StandardBank docs. and to expandon the new and Procurement enhancedprovisionsof Bank documentation:RFPs and Guidelines of May 2004, that will NCB bid documents. be mandatory for projectssigned after May 2004. Capacity building of Trainingby Bankstaff of 0 As soon as notice is borrower's agencies to CONAFOVI and SHF staff in the received of state RPPs conduct State RPPs use and proceduresto conduct intention to join assessments, including procurement assessments of the project. risk assessments. state RPPsprior to entering the project. ProcurementPlan(PAC) 1 PAC for the 18 first months of 0 No later thanBoard executionfor each executing presentation. agency. 1 PACs for each State that 0 Together with each includes all investmentsin their procurement ModernizationPlans. assessment. Staffing 1 SEDESOL and CONAFOVI 0 As required. may contract qualified external procurementconsultants during implementation. Organization 1 All executing agencies 0 Ongoing. requiredto establisha good data base on consultant firms and individualsthat encompasses backgrounds, skills and experience in the topics to be analyzed or discussedunder the HUTAL. OperationalManual (OM) 1 Specific sectionof OM to 1 Includedin final includeprocurement methodology version of OM, not later and procedures, especially with than effectiveness, regards to contractingof consultants' services. No later than two 1 Simplified instructionbooklet 1 60 to be developed by external weeks before the consultants (and approved by the consultants initiate Bank) to assist state RPPs in technical assistance conducting procurement under program. Bank procedures and standard documentation. Controls Auditing - 1 TORSfor auditors to include Annually, with each Audit verification of specific compliance Report of procurement covenants included the legal documentation. 61 Annex 8, Table A: Project Costs by Expenditure Category (inUS $millionequivalent) Expenditure Category Total costs 1. Works 0 (0) 2. Goods 2.30 (1.17) 3. Non Consulting 2.29 Services (1.09) 4. Consultant Services 8.98 (4.43) 5. Training 1.77 (I.04) 6. Front -EndFee 0.04 (0.5%) (0.04 Total 15.38 (7.77) 62 ATTACHMENT 1TO ANNEX 8 PROCUREMENT- GlobalProcurementPlan I.General 1. Agreed Date of the ProcurementPlan Original: August 30,2004 Revision 1 :.................... 2. Dateof GeneralProcurementNotice:September 15,2004. 11. GoodsandWorks and non-consultingservices. 1. PriorReviewThreshold:Procurement Decisions subject to Prior Review by Bankas stated inAppendix 1to the Guidelinesfor Procurement : Works are not expectedin the project. GOODSAND SERVICES (NOT RELATED TO CONSULTINGSERVICES) Procurement Prior Review Method Threshold Comments 1 ICB More than US$500,000 All contracts Not expected. 3 NCB Less than US$500,000 First contract, each State RPPs 4 Shopping Less than US$lOO,OOO None 5 Direct contracting N/A ALL 2. Pre-qualification.No applicable in this project. 3. Any Other Special ProcurementArrangements: (a) State's RPPs will be required to prepare a Specific Procurement Plan before they can begin disbursing expenditures they incurredfor goods and services. (b) SHF will oversee procurement activities of the State RPPs, as agreed in the Modernization Agreements to be signedby CONAFOVI with each participating State. 4. ProcurementItemswith MethodsandTime Schedule. CATEGORY OF GOODS AND SERVICES NOT RELATED TO CONSULTING SERVICES 63 COMISION NACIONALDEFOMENTOA LA VIVIENDA (CONAFOVI) NON-CONSULTINGSERVICES Indicative Concept 1Estimated 1PrG:[:znt 1Date of RFP/ITB i Date to award "1 1 corn letion / de-daieliii I I I I I Printed material for awareness campaign for statel and local authorities on mortgage foreclosure enforcement 20,000 Shopping Mar-07 Apr-07 May-07 T.A. Support teams to Strengthen Property Rights Registries (2004-2006 256,000 Total Non-Consulting Services CONAFOVI - $ 276,000 COMISION NACIONALDEFOMENTOA LA VIVIENDA CONAFOVI - REGISTROSPUBLICOSDELA PROPIEDAD(STATEREGISTRIES) GOODSAND NON CONSULTINGSERVICES Indicative Estimated Cost Procurement completion I ACTIVITY (US$) Method Date of RFPllTB Date to award delivery date GLOBALPROCUREMENT PLANS NOT REQUIRED UNTILSTATES SIGN THEIR MODERNIZATION AGREEMENTS WITH $2,000,000 TBD Jan-05 TBD Jun-07 CONAFOVI 64 SECRETARIADEDESARROLLOSOCIAL (SEDESOL) GOODS Subcomponent 5.3. Dissemination of poverty maps among local authorities and training on use. First purchase: Computing equipment, accessories and software for the design and development of dissemination package of poverty maps, in Hibitat localities, as well as continuous 250,000 Shopping Mar. Jun-06 Dec. monitoring of impact of execution and operation of actions and 2006 2006 operations. Second purchase: software for the package of poverty maps, in Hibitat 200,000 Shopping Apr. Jun-07 Dec. continuous monitoring of impact of execution and operation o 2007 2007 actionsand operations. Subcomponent 6.3 National Urban InformationSystem (GIS) I 1 I 1 1 Computing equipment to support the development of the Ix-.. n- - /National urban Information System(GIS) l V l a l . JT... UI1. U G C . 60'ooo Shopping 2005 2005 2005 Accessories and software to support the development of the National Urban Information System(GIS) 1 30,000 1Shopping 1gi i::i f:ii 1 1 I I I I T O T A L GOODS - SEDESOL: $540,000 111. Selectionof Consultants 1. PriorReview Threshold:Selection Decisions subject to Prior Review by Bank as stated inAppendix 1to the Guidelines Selection and Employment of Consultants: Selection Method Prior Review Threshold Comments 1. QCBS More than US$l50,000 All contracts 3. Fixed Budget More than US$200,000 All contracts 4. Least Coast More than US$lOO,OOO All contracts 5. Single Source (Firms) NIA All contracts 6. Individual consultants More than US$lOO,OOO All contracts 7. Single- Source (Individuals) NIA All contracts 2. Short list comprisedentirely of nationalconsultants:Short lists of consultants for services, estimated to cost less than US$500,000 equivalent per contract, may include only national consultants in accordancewith the provisions of paragraph 2.7 of the Consultant Guidelines. 3. Any Other SpecialSelectionArrangements: (a) State's RpPs will be requiredto prepare a Specific Procurement Plan before they can begin disbursing expenditures they incurredfor consulting services. 65 (b) SHF will oversee procurement of consultants activities of the State RPPs, as agreed in the Modernization Agreements to be signed by CONAFOVI with each participating State. Employment of public servants as consultants for the project shall not be acceptable, unless individual consultant has resigned hidher position and official confirmation of this resignation is delivered to the Bank, prior to issuing contract. 4. ConsultancyAssignments with SelectionMethodsandTime Schedule: CATEGORY OF CONSULTANTS'SERVICES COMISION NACIONAL DEFOMENT0A LA VIVIENDA (CONAFOVI) Indicative r Concept EstimatedCost (US$) Procurement coz Method RFPiITBli Datetoaward date[iil Component 1. Housing Policy and Institutional Development. Conduct study on FONHAPOiFONAEVI capacity to manaeement of housingsubsidv urogramnationwide. 120,000 QCBS Feb-06 May-06 Aug-06 v - I Conduct study to develop models for state and local housing institutesaligned to nationalhousinggoals. 60,000 LC Feb-05 Apr-05 Jul-05 Development and management of information system to managehousingdata. 4 Modules 170,000 NCB Jun-04 Aug-04 Dec-04 Conduct study/workshopto develop a strategic environmental assessment of the housingsectors. 60,000 LCS Feb-05 May-05 Aug-05 T.A. Project managementspecialist2004-2005 12,000 IC Jun-04 JuI-04 Dec-05 T.A. Technicalsupport specialist2004- 2005 12,000 IC Jun-04 Jul-04 Dec-05 Component 2. HousingSubsidies Conduct evaluation of actual federal housing subsidy programs taking into land and infrastructure subsidies delivered at the local level to federally assisted housing 140,000 QCBS Feb-05 Apr-05 Dec-05 projects. Conduct a study to develop a method for calculation of the present value of selected INFONAVIT interest-rate subsidy packages 80,000 LCS Feb-05 May-05 Aug-05 t I I I I I Component3. Homecredit and householdssavings T.A. to design the strategic, materials, schedules and negotiations for awareness campaign for state and local 200,000 QCBS Dec-06 Feb-07 Apr-07 -authoritieson mortgageforeclosure enforcement Printed services. Material for awareness campaign for state and local authoritiesonmortgageforeclosureenforcement 20,000 Shopping Mar-07 Apr-07 May-07 Component4. StrengtheningPropertyRightsRegistries. Organization and Delivery Services of Ibero-American congress of property rights at Cancun, Mexico. (2004), Conferencesfor promotion of Modemity Principlesof Public 222,000 NCB NOV-04 Feb-05 Mar-05 Registry Offices. T.A. Analysis and dissemination of Property Registry ModemizationPrinciples 60,000 LCS Jun-04 JuI-04 Sep-04 Study to develop prototype legal framework for RPPs, focusing on process standardization and reduction of operational costs, facilitating the interactions of RPPs in loo,ooo LCS Aug-04 Sep-04 Dec-04 Mexico. 66 Nov-04 Jan-05 Jun-05 150,000 Nov-05 Jan-06 Jun-06 SOCIEDAD HIPOTECARIA FEDERAL(SHF) Indicative Estimated Cost Procurement completionI ACTIVITY (US$) Method Date of RFP/ITB Date to award delivery date Component 3.c. Saving andLoan Credit Unions. Study and analysis on the housing credit experience, financial condition, and regulatory regime of the Caja industry and other low income housing finance 100,000 QCBS Oct-04 Dec-04 Apr-05 institutions. Study and analysis on the potential of Cajas, home- credit SOFOLES, other types of SOFOLES, micro- finance institutions, home building material retailersknders, land developers, and others to extend 250,000 QCBS Apr-05 Jun-05 Oct-05 credit for low-cost housingsolutions. Study and analysis on evaluation of the risks involved in such lending.. 250,000 QCBS Feb-05 May-05 Ago2005 2omponent 3.e Improving the efficiency of migrant remittances for housing finance. Study for assessment of the extent and methods by which migrant remittances finance housing, strategy to use remittances to support housing (2 andl 150,000~ LCS I Sep-04 I Nov-04 I Feb-05 I phases). Design and implementation of a data base to support the developmentof national, regional, and local house 500,000 QCBS Oct-04 Dic-2004 Abr-2005 priceindexes. Component 3h. New Legal and regulatory framework for mortgage related securities. Conduct a study to better understand the legal and regulatory framework, updatingaprevious studies done 200,000 QCBS MU-05 Abr-2005 Ago-2005 duringthe latenineties. TOTAL CONSULTANTS SERVICES SHF 1,450,000 67 SECRETARIA DE DESARROLLO SOCIAL (SEDESOL) Indicative ACTIVITY Estimated Cost Procurement RFP/ITB Date of (US$) Method Date to award completion/ delivery date community members on subjects related to the Study and analysis of communityparticipationin the Hdbirur PmLTrrrm 95.000 LCS Mar. 2006 Jun. 2006 Dec. 2006 Developmentof methodologies and materialsfor the designof disseminationpackages of poverty maps to local authorities. 100,000 QCBS Mar. 2005 Jun. 2005 Dec. 2005 Development of 83 packages of poverty maps and related training of local authorities. 500,000 QCBS Mar. 2006 Jul. 2006 Dec.2006 Development of 67 packages of poverty maps and related training of local authorities. 39.5.000 QCBS Mar.2007 Jul. 2007 Dec. 2007 Subcomponent5.4. Evaluation study Studyto evaluateof the povertymaps. 50,000 I LCS I Mar. 2007 1 Jun.2007 I Dec. 2007 Subcomponent5.5. Institutional Strengthening and technology transfer T.A. required to support SEDESOL in project implementation (individual consultants) 12 Financialand procurement specialist 100,000 IC Jan05 NIA Dec06 1 TechnicalSpecialist 100,000 1I IC 1I Jan05 II N/A 1I Dec06 Subcomponent6.1. Study on land market Preparing TORSfor a study to analyze costs and benefits oi' the different methodologies of low/moderate income land 15,000 IC Sep-04 NIA Oct-04 develonment (individual consultants) Study to analyze costs and benefits of the different methodologiesof low/moderate incomelanddevelopment. 380,000 QCBS Mar.2005 Jun-05 Dec. 2005 T.A. to suoervise the studv on analvsisof costs and benefits of the different methodologies of lowimoderate income land 20,000 IC Jun-05 N/A Jun-06 development(individual consultants) Subcomponent 6.2 Study for the development of land policies T.A. to draft TORSand carry out supervision of the study and make recommendations on low/moderate income land 20,000 IC Mar-05 N/A Dec-05 developmentpoliciesand programs (individnulconsdrunr.y) Carry out the first stage of the Action Plan developed during the study on low/moderate income land development policies 360.000 QCBS Mar-05 Jun-05 Dec-05 and programs(includesfieldreview fo ut leust mo states) Carry out the second and last stage of the Action Plan developed during the study on lowimoderate income land developmentpoliciesand programs (includesfield review ro ur 110,000 SSS Apr-06 Jun-06 Dec-06 68 Supervision services of the second stage of the Action Plan developed during the study on lowhoderate income land 1 1 1 1 development policies and programs (includes field review to at 10,000 I C Jun-06 Dec-06 least &Istates-by individual consultant) Subcomponent 6.3 National Urban Information System (GIs) Standardization of urban information to develop the National Urban Information System (GIS) 103,636 sss Sep-04 Oct-04 Dec-04 Subcomponent 6.4 Support development agencies in fast- growing urbanareas to foster localdevelopment Development of training materials for regional, strategic, local - - and participative planning and provision of training seminars to relevant actors in the cities in urban and economic 110,000 QCBS Mar. 2005 Jun. 2005 Dec. 2005 development. Update of training materials for regional, strategic, local and participative planning and provision of training seminars to relevant actors in the cities in urban and economic 200,000 sss Mar. 2006 Jun. 2006 Dec. 2006 development, (completion by samefinn selected for 2005) Development of strategic projects to support Development Agencies infast-growing urban areas 150,000 QCBS Mar. 2006 Jun-06 Dec. 2006 Update of training materials for regional, strategic, local and participative planning and provision of training seminars to relevant actors in the cities in urban and economic 150,000 sss Mar. 2007 Jun. 2007 Dec. 2007 development. (completion by samefinn selected for 2005) Subcomponent6.5. Evaluation study Study to review management and use of land inventories at city level. 95,000 LCS Mar. 2005 Jun-05 Nov. 2005 Subcomponent6.6. Evaluation study Study to evaluate the competitiveness program for development agencies. 95,000 LCS Mar. 2006 Jun-06 Nov. 2006 Subcomponent7.1. Evaluation study Study to assess SEDESOL methodological guide for the elaboration of risk Atlases at city level 95,000 LCS Mar. 2005 Jun. 2005 Dec 2005 Subcomponent 7.2. Training of local authorities in risk lareventionand disaster mitigations. I I I Dissemination of training materials for local authorities on risk prevention and disaster mitigation 35,000 sss Jul. 2004 Ago. 2004 Dec. 2004 Development of materials and training courses for local authorities on risk prevention and disastermitigation. 125,000 QCBS Mar. 2005 Jun. 2005 Dec. 2005 Update of materials andtraining courses for local authorities on risk prevention and disaster mitigation. 145,000 QCBS Mar. 2006 Jun. 2006 Dec. 2006 Total ConsultantsServices -SEDESOL - $3,558,636 COMISIONNACIONALDEFOMENT0A L A VIVIENDA CONAFOVI - REGISTROSPUBLICOS DEL A PROPIEDAD (STATE REGISTRIES) CONSULTANTS SERVICES I Estimated Cost Procurement completion/ ACTIVITY (US$) Method Date of RFPATB Date to award REQUIRED UNTIL STATES SIGN THEIR MODERNIZATION AGREEMENTS WITH $2,000,000 TBD Jan-05 TBD Jun-07 CONAFOVI (PURSE) 69 Annex 9: Project Preparation and Supervision MEXICO: Housingand Urban Technical Assistance Project ___ Planned Actual PCN review NA NA InitialPID to PIC NA NA Initial ISDS to PIC NA NA Appraisal February 16-25,2004 February 17-25,2004 Negotiations September 1,2004 September 28, 2004 BoardRVP approval September 23,2004 Planned date of effectiveness February 28,2005 Planned date of mid-term review January 2006 Planned closing date June 30,2008 Key institutions responsible for preparation of the project: - CONAFOVI(National Commission for Housing Development) - SEDESOL (Social Development Department) - SHF(Federal Mortgage Corporation) - SHCP (Ministry of Finance) Bank staff and consultants who worked on the project included: Name Title Unit Robert Buckley Adviser, Urban Housing TUDUR Tim Campbell Lead Specialist WBIFP Loic Chiquier Lead Financial Officer OPD Bruce Ferguson Senior Housing and Urban LCSFU Economist Maria Emilia Freire Regional Adviser, Urban LCSFP Housing and Munic. Serv. William Gwinner Senior Housing Finance OPD Specialist Marja Hoek-Smit Consultant LCSFU Edgardo Mosqueira Senior Public Sector Specialist LCSPS Kirsten Oleson Environmental Specialist LCSEN Victor Ordofiez Financial Management Specialist LCOAA Carolina Piedrafita Consultant LCSFU Mariangeles Sabella Counsel LEGLA David Sislen Economist LCSFU Tova Solo Senior Urban Specialist LCSFU John Henry Stein Manager LCSFU Rosa Valencia Estrada Procurement Analyst LCOPR Cristina Velazco-Weiss Language Program Assistant LCSFU Anna Wellenstein Senior Urban Specialist LCSFU 70 Annex 10: Documents inthe Project File MEXICO: Housing andUrbanTechnical Assistance Project 1. National Housing Development Policy 2001- 2006 (SEDESOL) 2. Annual Report on Housing Policy Implementation (SEDESOL) 3. Decree - Creation of CONAFOVI as Overarching Policy Body in Charge of Coordinating Other Housing Entities. 4. Decree - Creation of CONAVI, within CONAFOVI as a Consultative Body representingPublic and Private Sector. 5. Decree - Creation of SHF to Take the Lead in the Development of Primary and SecondaryMortgage Markets 6. Decree- Establishment of FONAEVI within FONHAPO as the Entity to Receive andDisburseSubsidy Funds. 7. Environmental Assessments for the Housing andUrbanSectors 8. Decree - Establishment of a Policy to increase Housing Subsidy Program Coordination, Equity, Progressivity andEfficiency. 9. New Housing Credit GuaranteeLaw 10. Financial Transparency Law to Mortgage Housing Loans, ProvidingStardardized, Clear andComparative Information and Contracts to Borrowers. 11. Rules for the Licensing of Property Appraisers (SHF) 12. Credit Risk Assessment Database 13. Modifications to General Financing Conditions (SHF) 14. Donors Memorandum for the Project: "Bankable Property Rights InMexico" 15. National UrbanDevelopment Policy (SEDESOL) 16. Habitat Program, Operations Manual 2004 (Draft) (SEDESOL) 71 Annex 11:Statementof Loansand Credits MEXICO: Housingand UrbanTechnicalAssistance Project Differencebetween expectedand actual Original Amount in US$Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev'd PO68290 2004 MX E-Businessfor Small Bus.Devpt. Pr. 58.40 0.00 0.00 0.00 0.00 58.40 0.00 0.00 PO35752 2004 MX Irrigation & DrainageModernization 303.03 0.00 0.00 0.00 0.00 303.03 0.00 0.00 PO35751 2004 M X CommunityForestry I1 21.30 0.00 0.00 0.00 0.00 21.30 0.00 0.00 (PROCYMAF11) PO59161 2003 GEFMX-ClimateMeasuresin Transport 0.00 0.00 0.00 5.80 0.00 5.86 1.66 0.00 PO60686 2003 M X Municipal Dev in RuralAreas 400.00 0.00 0.00 0.00 0.00 396.00 156.00 0.00 PO70108 2003 MX Savings& Credit Sector 64.60 0.00 0.00 0.00 0.00 39.40 -2.80 0.00 Strengthening PO74655 2003 M X RuralFinanceDevelopStruct Adj 505.06 0.00 0.00 0.00 0.00 300.01 0.01 0.00 Loan PO65988 2002 GEFM X Consolidat.ProtAreas (SINAP 0.00 0.00 0.00 16.10 0.00 7.29 11.19 0.00 11) PO77602 2002 M X Tax Admin InstitutionalDevelopment 52.00 0.00 0.00 0.00 0.00 51.45 15.15 0.00 PO60577 2002 M X Southeast Reg'lDevelopmentLIL 5.00 0.00 0.00 0.00 0.00 4.28 1.73 0.00 PO57531 2002 M X Basic Ed.APL I1 300.00 0.00 0.00 0.00 0.00 85.39 -9.61 0.00 PO66321 2001 MX: I11BASIC HEALTHCARE 350.00 0.00 0.00 0.00 0.00 327.73 56.33 0.00 PROJECT PO65779 2001 M X FEDERALHIGHWAY 218.00 0.00 0.00 0.00 0.00 83.20 58.20 0.00 MAINTENANCE PROJ. PO64887 2001 MX DISASTERMANAGEMENT (ERL) 404.05 0.00 0.00 0.00 200.00 181.27 207.22 0.00 PO63463 2001 METHANE CAPTURE & USEAT A 0.00 0.00 0.00 6.27 0.00 1.18 5.35 4.45 LANDFILL PO60908 2001 GEFMX-MESO AMERICAN 0.00 0.00 0.00 14.84 0.00 15.64 6.39 0.00 CORRIDOR PO66674 2001 GEFMX-Indigenous&Community 0.00 0.00 0.00 7.50 0.00 6.49 4.62 0.00 Biodiversity PO66938 2000 M X GENDER (LIL) 3.07 0.00 0.00 0.00 0.00 2.02 2.02 1.67 PO60718 2000 GEFM X ALTERNATIVE ENERGY 0.00 0.00 0.00 8.90 0.00 5.21 8.90 0.00 PO07610 1999 MX FOVIRESTRUCTURING 505.50 0.00 0.00 0.00 0.00 182.40 182.40 0.00 PO44531 1998 M X KNOWLEDGE& INNOV. 300.00 0.00 0.00 0.00 0.00 108.45 108.45 -23.15 P049895, 1998 M X HIGHER ED. FINANCING 180.20 0.00 0.00 0.00 0.00 84.69 77.27 0.00 PO07713 1996 MX WATER RESOURCESMANA 186.50 0.00 0.00 0.00 54.00 39.71 93.71 10.71 Total 3,856.71 0.00 0.00 59.41 254.00 2,310.40 984.19 - 6.32 72 STATEMENT OF IFC's HeldandDisbursedPortfolio InMillionsof US Dollars Committed Disbursed IFC IFC FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1988191/92/93195 Apasco 7.20 0.00 0.00 28.80 7.20 0.00 0.00 28.80 1998 Ayvi 6.43 0.00 0.00 0.00 6.43 0.00 0.00 0.00 0 BBVA-Bancomer 42.35 0.00 0.00 0.00 42.35 0.00 0.00 0.00 1995199 Baring MexFnd 0.00 1.89 0.00 0.00 0.00 1.78 0.00 0.00 1998 CIMA Mexico 0.00 4.80 0.00 0.00 0.00 4.80 0.00 0.00 1998 CIMA Puebla 6.75 0.00 0.00 0.00 3.25 0.00 0.00 0.00 0194 CTAPV 1.93 0.00 1.05 0.00 1.93 0.00 1.05 0.00 0 Chiapas-Propalma 0.00 1.02 0.00 0.00 0.00 0.89 0.00 0.00 1997 Comercializadora 1.75 0.00 1.25 2.50 1.75 0.00 1.25 2.50 2001 Compartamos 1.oo 0.66 0.00 0.00 1.oo 0.66 0.00 0.00 2003 Copamex 75.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2002 Coppel 30.00 0.00 0.00 0.00 30.00 0.00 0.00 0.00 1999 Corsa 8.36 3.00 0.00 0.00 8.36 3.00 0.00 0.00 2001 Ecomex 5.00 1.50 0.00 0.00 3.00 1S O 0.00 0.00 2000 Educacion 6.50 0.00 0.00 0.00 4.90 0.00 0.00 0.00 0197 FondoChiapas 0.00 3.53 0.00 0.00 0.00 0.11 0.00 0.00 1998 Foja Monterrey 9.29 3.00 0.00 9.29 9.29 3.00 0.00 9.29 2001 GFNorte 50.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1991196 GIBSA 13.52 0.00 0.00 45.48 13.52 0.00 0.00 45.48 1993 GIDESA 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1996100 GIRSA 38.57 0.00 0.00 51.43 38.57 0.00 0.00 51.43 Grupo BBVA 0.00 2.67 0.00 0.00 0.00 2.67 0.00 0.00 0 1998 Grupo Calidra 8.00 6.00 0.00 5.00 8.00 6.00 0.00 5.00 Grupo FEMSA 0.00 2.85 0.00 0.00 0.00 2.85 0.00 0.00 1989 1997 GrupoMinsa 13.14 0.00 0.00 18.78 13.14 0.00 0.00 18.78 0192196199 Grupo Posadas 23.68 0.00 10.00 0.00 23.68 0.00 10.00 0.00 1998 Grupo Sanfandila 6.08 0.00 0.00 2.45 6.08 0.00 0.00 2.45 2000 HospitalABC 30.00 0.00 0.00 14.00 10.29 0.00 0.00 7.21 2000 ITR 12.00 0.00 0.00 3.33 12.00 0.00 0.00 3.33 2000 Innopack 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 0 Interoyal 0.00 0.01 0.00 0.00 0.00 0.01 0.00 0.00 2000/01 InverCap 0.00 0.07 0.00 0.00 0.00 0.06 0.00 0.00 1998 Merida111 27.78 0.00 0.00 64.34 27.78 0.00 0.00 64.34 2003 Mexmal 10.00 0.00 0.00 0.00 6.00 0.00 0.00 0.00 0195199 Mexplus Puertos 0.00 1.41 0.00 0.00 0.00 1.41 0.00 0.00 1996199/00/01 NEMAK 0.00 0.00 1.51 0.00 0.00 0.00 1.51 0.00 2003 OccidentalHo... 30.00 0.00 0.00 40.00 30.00 0.00 0.00 40.00 0 Occihol 0.00 9.99 0.00 0.00 0.00 9.99 0.00 0.00 73 2003 POLOMEX S.A. 8.00 0.00 0.00 0.00 8.00 0.00 0.00 0.00 2000 Pan American 0.00 9.00 0.00 0.00 0.00 9.00 0.00 0.00 2001 Plata 10.00 0.00 0.00 0.00 8.00 0.00 0.00 0.00 2002 Puertas Finas 13.00 0.00 0.00 0.00 13.00 0.00 0.00 0.00 2002 Qualita 0.00 2.50 3.50 0.00 0.00 2.50 3.50 0.00 2000 Rio Bravo 47.69 0.00 0.00 55.06 47.69 0.00 0.00 55.06 2000 Saltillo S.A. 33.31 0.00 0.00 39.46 33.31 0.00 0.00 39.46 2000 Servicios 9.00 1.90 0.00 8.33 9.00 1.90 0.00 8.33 2001 Su Casita 1.76 10.62 0.00 0.00 1.76 10.62 0.00 0.00 1997 TMA 1.98 0.00 2.75 6.86 1.98 0.00 2.75 6.86 1992 Toluca Toll Road 1.25 0.00 0.00 0.00 1.25 0.00 0.00 0.00 0 ZN Mexico I1 0.00 10.00 0.00 0.00 0.00 2.57 0.00 0 00 1998 ZN Mxc Fqty Fund 0.00 15.30 0.00 0.00 0.00 15.30 0.00 0.00 Total portfilio: 590.32 106.72 20.06 395.11 432.51 95.62 20.06 388.32 Approvals PendingCommitment FY Approval Company Loan Equity Quasi Partic. 1999 BANAMEX LRF I1 0.05 0.00 0.00 0.00 2001 BBVA-BancomerCL 0.10 0.00 0.00 0.00 1998 Cima Hermosillo 0.01 0.00 0.00 0.00 2003 Copamex 0.01 0.00 0.00 0.06 2001 Ecomex 0.00 0.00 0.00 0.00 2000 Educacih 0.00 0.00 0.00 0.00 2001 GFNorte-CL 0.05 0.00 0.00 0 10 2003 Mexmal 0.00 0.00 0.01 0.00 2003 Polomex 0.00 0.00 0.00 0.00 2003 Rio Bravo 111 0.05 0.00 0.02 0.17 2003 Rio Bravo IV 0.05 0.00 0.02 0.17 2003 Tizayuca 0.03 0.00 0.01 0.03 Total pendingcommitment: 0.35 0.00 0.06 0.53 74 Annex 12: Country at a Glance MEXICO: Housingand UrbanTechnicalAssistanceProject I Latin Upper- POVERTY and SOCIAL America middle- Mexico & Carib. income Development diamond' 2002 Population,mid-year(millions) mo.9 527 331 Lifeexpectancy GNIper capita (Atlas method, US$) 5,920 3280 5,040 GNI (Atlas method, US$ billions) 597.0 1,727 1,668 Average annual growth, 1996-02 T Population PA) 1.4 15 12 Laborforce (%%) 2.4 22 18 GNI per + M o s t recent estimate (latest year available, 1996-02) capita Poverty (%ofpopulationbelownationalpo vertyhne) Urban population(%of totalpopulation) 75 76 75 I Lifeepectancyat birth (years) 74 71 73 1 infant mortality (per 1,000livebirths) 25 27 B Childmalnutntion(%ofchildrenunder5) 8 9 Access to improved water source Access to an improvedwatersource (%ofpopulation) 88 86 90 Illiteracy(%ofpopulationage E+) 8 11 7 Gross pnmaryenrollment (%ofschool-age population) 10 M) 105 --Mexico Male 1i4 0 1 106 Upper-middle-incomegroup Female lt3 P8 D5 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 1 Economic ratios* GDP (US5 billions) 7737 3636 6239 6372 Gross domestic investmentlGDP 229 233 20 9 20 3 Exports of goods andsewices/GDP 153 152 274 272 Trade Gross domestic savingslGDP 279 183 186 183 - Gross national savingslGDP 215 166 i79 BO T Current account balance/GDP -34 -6.7 -29 -22 InterestpaynentslGDP 4.5 16 19 17 savings Domestic Investment Total debtiGDP 49.6 30.9 25 4 242 Total debt setvice/exports 52.3 33.8 26 3 188 Presentvalue of debt/GDP Presentvalue of debtiexports I Indebtedness 1982-92 1992-02 2001 2002 2002-06 (averageannualgrowth) - GDP 19 32 -03 0.9 38 *-- Mexco GDP percapita -0 1 16 -18 -0.6 21 __Upper-middle-incomegroup ~ STRUCTURE of the ECONOMY 1982 1992 2001 2002 (%ofGDP) Agriculture 8.1 6.7 4.1 4.0 Industry 33.4 28.1 27.1 26.6 Manufacturing 21.7 20.2 19.6 18.9 Setvices 58.4 65.2 68.7 69.4 Private consumption 61.6 718 69.6 70.0 Generalgovernment consumption D.5 9.9 11.8 11.8 Imports of goods andservices D.3 20.3 29.7 292 -GDI +GDP 1982-92 1992-02 2001 2002 I (averageannualgrowth) Growth of exports and imports ( O h )I Agriculture 0.7 17 3.3 -0.4 Industry 2.5 3.7 -3.5 0.o Manufacturing 3.0 4.3 -3.7 -0.6 Services 2.0 3.1 0.7 1.4 Private consumption 2.7 2.9 2.7 12 Generalgovernment consumption 2.1 15 -1.2 -1.3 Gross domestic investment 2.5 4.7 -5.2 0.5 I --Exports +Imports Imports of goods and services 112 11.8 -1.5 1.6 75 Mexico PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 D o m e s t i c prices (%change) Consumer pnces 58 9 15.5 6.4 50 implicit GDP deflator 60.9 14.4 6 5 4.6 Government finance (??ofGDP, includes current grants) Current revenue 27.4 23.7 21.8 22.6 97 98 99 00 01 02 Current budget balance -6.0 5.0 1.9 0.2 Overall sumlusideficit -14.1 1.4 -0.7 -1.2 I -----GDPdeflator --Q-CPI T R A D E 1982 1992 2001 2002 1 (US$ miiiions) Export and import levels (US$ miii.) Total exports [fob) 24,055 46,196 158,443 160,813 I Oil 8,477 8,307 2,799 14,475 ~200,000 - I Agriculture 1,233 2,lP 3,903 3,998 Manufactures 5,843 35,420 141,353 141,951 Totai imports (cif) I 7 , O l l 62,P9 88,396 88,949 Consumer goods 1,517 7,744 8,752 21,778 intermediate goods 10,991 42,830 P6,149 26,778 I Capital goods 4,502 11,556 22,496 20,992 Exportprice index(1995=WO) 2 7 91 103 0 3 I 96 97 98 99 00 01 02 import price index(1995=W0) 74 91 w3 104 ZExports .IImports Terms of trade (1995=W0) T71 100 101 I32 B A L A N C E of P A Y M E N T S 1982 1992 2001 2002 (US$ miilions) i Current a c c o u n t balance t o GDP ( O h ) Exports of goods and services 28,169 55,387 T7l,W3 73,374 imports of goods and sewices 22,841 73.67 184,614 185.419 Resource balance 5.328 -18,230 -0,511 -P,045 Net income -2,261 -9,595 -0,835 -2,282 Net current transfers 1,043 3,386 9,338 10,268 Current account balance -5,890 -24,438 -18.008 -14,058 Financing items [net) 2,38 26 184 25,347 19,851 Changes in net reserves 3,574 -1,745 -7,339 -5,793 Memo: Reserves including gold (US$ millions) 914 18,975 44,814 50,607 Conversion rate (DEC,iocal/US$) 5 64E-2 3.1 9.3 9.7 EXTERNAL D E B T and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) i C o m p o s i t i o n o f 2002 debt (USS mill.) Totai debt outstanding anddisbursed 86,081 12,315 158,291 153,923 IBRD 2,692 11,966 10,883 10,596 IDA 0 0 0 0 Total debt service 15,684 20,751 48,729 35,254 IBRD 328 1,874 2,78 2,093 IDA 0 0 0 0 Composition of net resourceflows Official grants 76 14 Official creditors 1,577 615 -669 -432 Private creditors 6,391 -531 3,198 -3,932 Foreign direct investment 1,655 4,393 25,334 W 2 7 Portfolio equity 0 4,783 151 - a 4 i Worid Bank program F 116,503 Commitments 540 1,30 860 1,322 1A - IBRD E- Bilatere. Disbursements 408 1,352 749 1,247 1B .IDA D. Other multilateral F - Private Principal repayments t33 981 1,314 1,356 C-IMF G - Short-term 76 Annex 13: M a p MEXICO: Housingand Urban Technical Assistance Project 77