Document of The World Bank FOR OFFICIAL USE ONLY Report No. 22147-ME MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY PROGRESS REPORT OF THE WORLD BANK GROUP FOR THE UNITED MEXICAN STATES May 21, 2001 Colombia-Mexico-Venezuela Country Management Unit Latin America and the Caribbean Region 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. MEXICO-FISCAL YEAR January 1-December 31 CURRENCY EOUIVALENTS (as of 12 April 2001 ) Currency Unit = Peso 9.31 Pesos = US$1 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS AFORES Administradoras de Fondos para el Retiro INE instituto Nacional de Ecologia BANRURAL Banco Nacional de Credito Rural, S.N.C. INFONAVIT Instituto del Fondo Nacional de ta BOO Build, own, and operate Vivienda para los Trabajadores BSCH Banco Santander Central Hispano IPAB Instituto de Protecci6n al Ahorro CAS Country Assistance Strategy Bancario CFAA Country Financial and Accountability IPP Independent Power Producer Assessment LIBOR London InterBank Offered Rate CFE Comisi6n Federal de Electricidad LIL Learning and Innovation Loan CEM Country Economic Memorandum LPG Liquid propane gas CLA Latin America and Caribbean Region NAFTA North American Free Trade Agreement CNA Comisi6n Nacional del Agua OCDE Organizaci6n para la Cooperaci6n y CNBV Comisi6n Nacional Bancaria y de Valores Desarrollo Econ6micos COMPRANET Sistema Electr6nico de Contrataciones PAC Programra de Ampliaci6n de Cobertura Gubemarnentales PAREIB Programa para Abatir el Rezago en CONASUPO Compafnia Nacional de Subsistencias Educaci6n Inicial y Basica Populares PEMEX Petr6leos Mexicanos CONSAR Comisi6n Nacional del Sistema de Ahorro PROCAMPO Programa de Apoyos Directos al Campo para el Retiro PROCEDES Programa de Certificaci6n de Derechos CPAR Country Procurement Assessment Report Ejidales y Titulaci6n de Solares Urbanos DIF Sistema Nactional para el Desarrollo PROCYMAF Proyecto de Conservaci6n y Manejo Integral de la Familia Sustentabel de Recursos Forestales en ENIGH Encuesta Nacional de Ingreso y Gasto de Mexico los Hajores PRODEFOR Programa de Desarrollo Forestal FIRA Fideicomiso Instituido en Relacion con la PROMAD Programa de Medio Ambiente y Agricultura Descentralizaci6n FOVI Fondo de Operaci6n y Financiamiento PSD Private Sector Development Bancario a la Vivienda PSS Private Sector Strategy FOVISSSTE Fondo de la Vivienda del Instituto de RDMA Rural Development in Marginal Areas Seguridad y Servicios Sociales de los SECOFI Secretaria de Comercio y Fomento Trabajadores del Estado Industrial FSAP Financial Sector Assessment Paper SEDESOL Secretaria de Desarrollo Social GDP Gross Domestic Product SEMARNAT Secretaria de Medio Ambiente y Recursos GEF Global Environment Facility Naturales IBRD International Bank for Reconstruction and SHCP Secretaria de Hacienda y Credito Publico Development SIEFORES Sociedades de Inversi6n Especializada de IDF Institutional Development Fund Fondos para el Retiro IFC International Finance Corporation SME Small- and medium-size enterprise IMF International Monetary Fund WBG W'orld Bank Group IMSS Instituto Mexicano del Seguro Social WPA Work Program Agreement IBRD IFC Vice President David De Ferranti Executive Vice President: Peter Woicke Chief Economist: Guillermo Perry Vice President, Investment Operations: Assaad J. Jabre Country Director: Olivier Lafourcade Director, CLA: Karl Voltaire Lead Economist/Manager: Marcelo Giugale Unit Chief Toshiya Masuoka Task Manager: Marcelo Giugale Task Manager: Toshiya Masuoka Team Production Support: Michael Geller FOR OFFICIAL USE ONLY MEXICO COUNTRY ASSISTANCE STRATEGY-PROGRESS REPORT FY01 TABLE OF CONTENTS I. BACKGROUND AND MAIN MESSAGES ..........................................1 II. RECENT DEVELOPMENTS ........................................2 The Political Context .....2....................................2 Poverty and Economic Evolution .........................................3 Main Sectoral Development ..........................................5 III. PROGRESS IN IMPLEMENTiNG THE CAS .........................................8 Overall Progress ..........................................8 Progress Under the CAS Development Objectives ......................................... 10 Portfolio and Program Budget Performance ......................................... 16 IV. THE WORK A1-EAD ......................................... 17 The Work-Program Until the End of the CAS Period ......................................... 17 Likely Cross-Cutting Issues in the Next CAS (FY02-05) ......................................... 19 The Risks ......................................... 20 MATRIX TABLE 1. Mexico-GAS Progress Report-Summary Progress Matrix .. 21-25 TEXT BoxEs Box 1. Country Assistance Evaluation ...9 TEXT TABLES Table 1. Poverty Trends in Mexico, 1984-98 ...4 Table 2. Inequality in Total Current Income ...4 Table 3. Mexico-Commitments & Disbursement, FY99-FY01 .. 16 Table 4. Mexico-Distribution of WPA Resources, FY99-FYO ... 17 Table 5. Potential IBRD Lending Through the Beginning of the Next CAS .. 18 Table 6. Potential IBRD AAA Through the Beginning of the Next CAS .. 18 ANNEXES Al. Mexico-Key Economic Indicators .. 27 A2. Mexico at a Glance .. 29, 30 B2. Selected Indicators of Bank Portfolio Performance and Management .. 31 B3. Bank Group Fact Sheet-IFC and MIGA Program .. 33,34 B4. Summary of Non-Lending Services .. 35 B6. Key Economic Indicators .. 37-39 B7. Mexico-Key Exposure Indicators .. 41 B8. Status of Bank Group Operations in Mexico Operations Portfolio .. 43 B8. Statement of IFC's Held and Disbursed Portfolio .. 44 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. MEXICO Country Assistance Strategy-Progress Report FY01 I. BACKGROUND AND MAIN MESSAGES 1. The World Bank Group's (WBG) current Country Assistance Strategy (CAS) for Mexico was discussed by the Board of Executive Directors on June 8, 1999. In line with the Government's own development program, the CAS has focused on three core objectives-social sustainability; removing obstacles to growth and maintenance of macroeconomic stability in the context of globalization; and effective public governance. This Progress Report summarizes (a) the country's efforts toward achieving its development objectives; (b) the WBG interventions in support of those efforts; and (c) the forthcoming assistance program until the next CAS (tentatively scheduled for May 2002). 2. Over the last three years, Mexico has advanced along its development path, and is now poised to enter a new era of growth and poverty reduction. In the process surrounding the presidential elections of July 2000, its political system has shown an exemplary degree of maturity and has achieved a new level of openness, participation, and accountability. This has set the stage for long-overdue reforms to materialize. Economic performance has been equally strong. Six years after a major macroeconomic crisis, the country is now one of the fastest- growing economies in Latin America, an investment-grade borrower, and a model of financial and commercial integration. While other emerging economies stumbled, Mexico maintained high performance throughout the recent years of the international financial volatility. As a result, its poverty head-counts are again descending and its innovative social assistance programs are beginning to bear fruit. To be sure, formidable development challenges lie ahead. Mexico remains a country of contrasts-between rich states and states still struggling with poverty; between thriving urban centers and destitute rural areas; between Mexicans that can compete with their OECD counterparts and the segment of the population for whom the benefits of globalization have not yet materialized. 3. The WBG has closely and successfully supported Mexico's development progress. Using the program flexibility built in its CAS, the WBG was able to deliver over the last three years assistance both at the forefront of the broad reform agenda (for example, fiscal, finance, decentralization) and at the sectoral, field level (for example, rural development, health, gender). Throughout, the primary focus has been poverty reduction and the impact has been significant, especially in terms of intellectual contribution to policy design. The WBG's role as a catalyst of knowledge is perhaps best shown by the role it played during the presidential transition-its collection of Policy Notes became an analytical bridge across administrations and, at the request of the incoming authorities, was published as a book.' In parallel, WBG's financing flows toward Mexico remained strong and within the CAS envelope, the quality of its portfolio improved, and country exposure stayed manageable. Moreover, none of the potential risks envisioned in the CAS materialized (the end-of-sexenio did not lead to policy paralysis; the 1. Giugale, M., 0. Lafourcade, and V. Nguyen, eds., 2001, Mexico-A Comprehensive Development Agenda for the New Era, World Bank Publication, Washington D.C. 1 financial sector stabilized and strengthened; no externally or domestically generated macroeconomic slump took place; the social and political situation in the southern states did not worsen; and there was no reduction in projected counterpart funding). 4. The combination of country development progress and success in delivering assistance has placed the relationship between Mexico and the WBG at an encouraging high point. The current demand for WBG services vastly surpasses its operational capacity. At the same time, important country risks remain-notably, the possibility of a sharp down-turn in the US economy. Thus, until a new CAS is articulated, continuing to maintain selectivity and flexibility will be critical. IBRD will continue to support, through lending and ideas, both major reform efforts and direct, poverty-reduction initiatives, while IFC will focus on financial sector development, middle-market firms and SME, and sectors that are relatively new to private entrants. II. RECENT DEVELOPMENTS The Political Context 5. The Mexican political system is undergoing a rapid, profound transformation. President Vicente Fox's electoral victory in July 2000 ended 71 years of one-party domination and, more fundamentally, threw open the country's structure of political incentives, power equilibria, and decision-making mechanisms. Amid high hopes, Mexicans now expect that the elections will lead to a more open, more participatory, and more transparent administration-in short, a "better government." Delivering on those expectations will not be easy. Major reforms are pending, no single party dominates Congress, and civil society will claim its overdue role in the ensuing debates. The ability of the new president and his team to build consensus will be put to the test. The country itself has limited experience with legislative pluralism-it was only in 1997 that the then-ruling party lost, for the first time in seven decades, its majority control of Congress. 6. Initial signs are however very encouraging. Breaking with past record, the transition from the former administration of President Zedillo to the present government of President Fox has been remarkably smooth. Solid macroeconomic management avoided the resurgence of financial crises such as those experienced during the previous four end-of-sexenios (1976, 1982, 1988 and 1994). With the nomination of a plural and broad-based cabinet, including several highly-respected professionals from previous administrations, the new president showed his pragmatic style and managed to obtain political support for the approval of the 2001 budget. Soon after, the rights of indigenous peoples (and their related impact on the Chiapas peace process) were brought forward for open, public discussion in Congress, something that steered all participants toward a peaceful resolution. Markets quickly rewarded such steadiness, as evidenced in their pricing of Mexico risk (in spite of recent turbulence among developing country finance, Mexico's sovereign bonds maintained their investment grade). The stage is now set to start addressing, over the next three years, a rich legislative agenda that includes several difficult areas, such as fiscal reform (aimed at a substantial increase in non-oil tax revenue), financial sector modernization (to consolidate and complement recent banking restructuring efforts), energy (especially opening the power sector to private sector initiatives), labor (meant to keep Mexican workers competitive as their economy further integrates into world markets), water (to place its use and pricing on a sustainable path), and anti-corruption (a 2 pent-up demand for transparency and accountability explains much of the demise of the one- party regime). 7. While consensus building around major reforms is a politically demanding task for any government, it will be particularly challenging in Mexico because of a sweeping and accelerating shift in the geographical balance of power within the country-that is, because of decentralization. The democratization process of the last decade put in motion a resurgence of Mexico's constitutional credentials as a federal country. As sovereign entities, states (and their municipalities) control increasing portions of public spending, taxation and borrowing. More fundamentally, states now command a greater say in decisionmaking and, implicitly, are redefining the nature of the federal government-away from the roles that states can play for themselves, and toward capturing national externalities. Decentralization is thus expected to increase the proximity between those who make decisions about public services (and policies) and those who consume them-something that, if placed within an adequate institutional framework, should enhance the quality of the government function. President Fox has repeatedly expressed his enthusiasm for this federalismo. Decentralization adds a new dimension to governing however-today reforms in Mexico are contingent upon the states' support, and meaningful policy dialogue requires their direct participation. Poverty and Economic Evolution 8. Between 1984 and 1994, Mexico had made excellent progress in poverty reduction (the national headcount fell, on average, by 1 percentage point per year, to some 50 percent of the population). Those gains were completely undone by the macroeconomic crisis of 1994-95. As growth recovered (see below), poverty began to fall again but only gradually, and remains widespread. According to consumption-based poverty measures computed using the ENIGH survey (Table 1), the national rate of poverty (moderate and extreme) in 1998 was 58 percent, or some 58 million people.2 3 Preliminary calculations show that growth over 1999 and 2000 may have reduced that count by as much as 2 percentage points. However, it is clear that it will take years of sustained economic expansion to resolve Mexico's poverty problem. Moreover, while growth will remain a necessary condition, it is unlikely to resolve by itself two features of the country's poverty pattern-the sharp inequality underlying the distribution of income (which continues to deteriorate-see Table 2), and the high incidence of extreme poverty in rural areas (in 1998, one in every two Mexicans living in rural areas was extremely poor). 9. Because of the necessary, but not sufficient, role that growth plays in poverty reduction in Mexico, both the outgoing and the incoming administrations have implicitly employed a two- pronged strategy: efficient public expenditure is to address the microeconomic determinants of poverty, while sound macroeconomic management fosters growth. Specifically, and beyond broad-based social expenditures (like social security, healthcare, and education), the government has employed targeted programs to invest in the human capital of the poor, expand their income 2. While those poverty measures can be debated, their order of magnitude is consistent with estimates provided by the Ministry of Social Development (SEDESOL) in February 1999, according to which 26 million Mexicans live in extreme poverty (based on ENIGH 1996 data). 3. The two poverty lines were estimated separately for urban and rural areas to reflect differences in costs of living. In 1998, the extreme urban and rural poverty lines were, respectively, MXP445.47 (US$48 at the 1998 average exchange rate) and 390.30 (US$43) per person per month. Following the INEGI, the moderate poverty line was set at twice the extreme poverty line in urban areas, and 1.75 times that line for rural areas. 3 and employment opportunities, and improve the physical infrastructure of the areas in which they live. Funding for these programs has increased continuously. In 2000, it reached MXP$53 billion (an increase in real terms of 20 percent over 1994) and now represents 11 percent of social spending, 6 percent of programmable spending, and 1 percent of GDP. In general, social spending (broad-based and targeted) increased from 53 to 61 percent of total federal government's programmable spending, i.e., all expenditures other than interest and tax sharing outlays. More importantly, the quality of social expenditures continued to improve-as part of its general trend from universal to targeted social support, the Government expanded its flagship assistance programn, PROGRESA, an innovative income transfer mechanism for poor rural households (more specifically, mothers) conditional on their participation in selected education, health, and nutritional programs. Table 1. Poverty Trends in Mexico (unadjusted consumption-based measures), 1984-98 (Percentage of the population living with unadjusted per capita consumption below the poverty line) Extreme Poverty Line Moderate Poverty Line Urban Rural National Urban Rural National 1984 21.38 48.02 31.17 54.00 74.75 61.55 1989 18.13 41.83 27.04 50.70 69.32 57.84 1992 16.79 44.66 24.42 49.14 73.26 55.74 1994 10.95 49.78 21.46 40.64 78.82 50.97 1996 18.16 60.47 29.72 53.25 84.84 61.88 1998 16.16 56.83 27.18 49.70 81.80 58.40 Table 2. Inequality in Total Current Income (Gini Coefficient) Year National Urban Rural 1984 0.473 0.442 0.448 1989 0.519 0.498 0.444 1992 0.529 0.498 0.434 1994 0.534 0.508 0.419 1996 0.519 0.493 0.452 1998 0.543 0.511 0.480 10. Those public expenditure interventions to abate poverty were accompanied by the country's remarkable growth performance of recent years-about 5 percent per year on average since 1996 and 6.9 percent in 2000. A combination of factors contributed to that performance- NAFTA integration and fast growth in the United States, sound domestic macroeconomic management, a carefully designed public borrowing strategy (supported by an IMF Stand-by- Agreement), high oil prices (since 1999), and a smooth presidential transition. While the economy grew rapidly, tight monetary policy brought inflation down to 12.3 and 9.0 percent for 1999 and 2000. Mexico seems well placed to converge gradually to the inflation levels of its NAFTA partners. The economic record is also positive on the external front-the balance of payments current account deficit remained manageable at 3.0 and 3.1 percent of GDP in 1999 and 2000. Total foreign debt of the public sector fell, as a proportion of GDP, from 35 percent in 1995 to 15 percent in 2000. Markets seem to have underwritten Mexico's performance. The country's foreign direct investment is now equivalent to three quarters of the balance of payments' current account deficit, sovereign bonds have an investment grade rating by one of the international credit rating agencies (with a second one pending the fiscal reform), and Eurobond 4 bonds spreads hover around 340 basis points over LIBOR (compared to the LAC average of about 600 basis points). 11. Both optimism and caution are in order for 2001. The deceleration of the U.S. economy will play a critical role in Mexico's rate of growth. The dampening effect could be transmitted through several, direct and indirect, channels: i) lower import demand; ii) slower FDI flows (especially toward NAFTA-related exporting activities); iii) lower international oil prices; and iv) smaller commercial credit flows from large Mexican enterprises (which finance themselves in the United States) to medium-size firms with no or limited access to credit. At present, growth forecasts for Mexico range between 2 and 3.5 percent for 2001, with a likely inflation rate of about 7 percent. 12. A key component of Mexico's macroeconomic evolution has been, and remains, its fiscal policy. While fiscal tightening took place in the wake of the Russia (1998) and Brazil (1999) crises, the stance became more expansionary in 2000. Although the year-end fiscal deficit target for 2000 (1 percent of GDP) was overshot only slightly (the posted deficit was 1.1 percent of GDP), the overshooting took place in spite of the externally determined oil windfall. While oil- related income increased, the fiscal accounts registered payments into the oil stabilization fund and provisions against tax devolution disputes, and received less than expected revenues from privatization and central bank profits. This expansion in the non-oil fiscal deficit, plus the rapid accumulation of implicit and contingent domestic liabilities that will become due over this sexenio (notably those related to banking restructuring, private-sector-financed public investments in energy, and public pension systems), has driven the new administration to make fiscal reform, and more particularly non-oil tax revenue generation, a priority (the corresponding bill was sent to Congress in April 2001). Since the 2001 budget already provides for some fiscal tightening over 2000 (the 2001 fiscal deficit target is 0.65 percent of GDP), the proposed tax reform should generate resources for further fiscal consolidation. Tax reform will also prove essential for monetary policy -the above-mentioned fiscal slippage made the central bank's inflation targets more difficult to achieve, and resulted in a policy mix that contributed to the appreciation of the real exchange rate (by about 10 percent during 2000). Main Sectoral Developments i) Social Sectors 13. The government continues to place utmost priority on social development and the fight against poverty. As mentioned above, this has translated into increasing emphasis on social expenditures. These funding efforts are gradually bearing fruit. Today, primary education coverage exceeds 90 percent, and three out of four secondary-education-age students are enrolled. Similar improvements continue to be made in health service. Between 1990 and 1999, the mortality rate fell by one fifth (to 4.03 per thousand), infant mortality almost halved (to 14.6 per thousand), child immunization almost reached universality (97.2 percent), the number of new malaria cases is one tenth of its level at the beginning of the decade (some 6,400), and polio has all but disappeared. It is estimated that Mexico currently devotes just under 6 percent of its GDP to health, about half of which is financed by the government and half by households and businesses directly. To make that financing more effective, over the past three years the 5 government has begun to reform its largest public insurer, the Instituto Mexicano de Seguridad Social (IMSS). 14. In spite of that progress, significant policy challenges remain, especially on the institutional front. In education those challenges include broader accessibility, higher quality at all grade levels, and deeper decentralization-all of which should lead to a change in culture within the country's educational system. Likewise, the Mexican health care market has developed into a patchwork of subsidized and sometimes overlapping state health providers with uneven levels of funding and heterogeneous quality of service. Public providers, at both the federal and state level, also coexist with private sector providers (which remain largely unregulated) in an environment of limited coordination and interaction, resulting in redundant or idle capacity. ii) Finance, Infrastructure, and Private Sector Development (PSD) 15. Starting in late 1998, the Zedillo government adopted a new strategy for strengthening and restructuring the banking sector-a strategy that is now being furthered by the Fox Administration. Congress passed several pieces of new legislation: creating the Institute for the Protection of Bank Savings (IPAB, a deposit-insurance and bank resolution institution); providing for a gradual phasing in of a limited deposit insurance (to replace the existing universal deposit insurance); eliminating restrictions on the full participation of foreign investors in the Mexican banking industry; and improving the frameworks for contract enforcement, bankruptcy proceedings, and secure lending. Complementary legislation and regulations were also enacted to help achieve financial strengthening of undercapitalized banks via efficient restructuring operations, liquidation of unviable intervened banks (albeit the framework for liquidation requires further fine-tuning), and improved transparency. Major strides have since been made in implementing this strategy and the process of achieving a healthy and adequately capitalized banking system is now well under way. Notably, foreign investment has entered the banking system in a wave of merger and acquisitions of domestic institutions. While this has led to an improvement in liquidity, solvency and portfolio quality indicators, sector performance problems persist. Domestic financial intermediation is still extremely low, capital markets are not fully developed (especially longer-term instruments to mobilize savings), and credit for medium- and small-sized firms is relatively scarce. Critical issues pending policy action include a clearer definition of roles and closer coordination among the key supervisory and bank resolution entities, a new strategy for public development banks, and major reforms in specific financing areas (such as capital markets, housing, and rural finance). [As part of the governurrent's efforts to address those issues in March 2001, the World Bank and the IMF launched the joint preparation of a Financial Sector Assessment Paper.] 16. In the area of infrastructure and public services, important policy efforts were made in recent years, with encouraging but partial results. The commercialization and privatization of ports, airports, airlines, and the national railway are proceeding, a reassuring trend as the volume of Mexico's international freight transport continues to increase (reflecting the impact of NAFTA on cross-border road transport). Almost the entire railroad system has been privatized and the major objectives of promoting financial sustainability and competition in the sector have been largely achieved. Decentralization of ports has been completed and for most part, independent port authorities have been created; more than 80 concessions have been granted to 6 private entities for the operation of the main terminals, resulting in substantial productivity and efficiency gains. Tariff liberalization for ports has resulted in significant reductions in port tariffs. Of the 35 airports slated for privatization in 1998 (covering 97 percent of passenger movements in the country), concessions have already been awarded to private operators for the first package, covering the southeastern area. Privatization of a second group of 12 airports (the Pacific group), including Guadalajara and Puerto Vallarta is expected to be completed shortly, and will be followed by the north-central group of 13 airports, and finally by a tender for a second Mexico City Airport. New approaches are being developed to rationalize the toll roads program and its fiscal impact, and to achieve sustainable toll-road financing and road maintenance. On the other hand, attempts to decentralize and transfer to state management 11,000 kilometers of road network have been set back because of capacity problems in the state highway administrations and insufficient monitoring and accountability of the recipient states. 17. More recently, the government has announced its intention to reform, and increase the efficiency and transparency of, its two main energy sector companies, Petroleos Mexicanos (PEMEX) and Comision Federal de Electricidad (CFE). Major advances have been made in the regulatory framework and trade of liquid propane gas (LPG) and in liberalizing downstream natural gas activities. Gas distribution concessions are now in place in most major cities. Revision of an antiquated tax regime for oil and natural gas and improvements in the governance of PEMEX (including introduction of private sector representation into its Board) is under discussion. The new administration has also indicated that the private sector will have an increasing role in the energy sector via contracts and concession agreements with PEMEX (for example, private contracts and investments to explore for non-associated natural gas) and CFE (for example, through IPPs, BOOs, or other types of contracts for electricity generation). The details of the policy and administrative reforms for that private involvement to materialize, and for ensuring an efficient distribution of risk between private and public players, still need to be specified. Finally, the water sector continues to deteriorate, with low investment and declining service in most areas, especially in the northern region, where water resources are particularly scarce. While the new Secretaria de Medio Ambiente y Recursos Naturales (SEMARNAT) seeks to improve the efficiency of Mexico's water supply and sanitation systems through cost recovery and wastage reduction, institutional reforms within the federal Comision Nacional del Agua (CNA) and in the framework for state management of water services are also necessary. 18. Many of the policy actions undertaken in the financial and infrastructure sectors are expected to have a direct beneficial impact on private sector development (PSD). The government remains, however, rightly concerned about the dual nature of Mexico's private sector-large, export-led firms with good access to finance (including foreign finance) operate largely segregated from medium and small, domestically oriented, internally financed enterprises. This duality adds to north-south regional disparities in private sector activity and thus in levels of income and poverty. The new administration is committed to addressing these problems and is currently assessing options to facilitate intra-private-sector linkages and efficient mechanisms to support medium and small enterprises. In parallel, the government has put forward the so-called Puebla-Panama project, a framework idea for the development of the southern region through large infrastructure investments. 7 iii) The Rural Economy and the Environment 19. While agricultural growth has picked up since 1998 and aggregate poverty trends seem to be declining, productivity gains are still low and the incidence of extreme poverty is highest in the rural areas. This is particularly troublesome because under NAFTA, this sector will be exposed to open competition with the United States and Canada starting in 2008. To address that challenge, the government has recently implemented major policy initiatives. The abolition of CONASUPO (the federal government's grain purchasing institution) in 1999 effectively liberalized the grain sector. The role of public, rural financial institutions (BANRURAL, FIRA, AGROASEMEX) is being revisited, and a new legal framework for non-bank financial intermediaries (savings and loans, and micro-finance outlets) has been sent to Congress. The government has also started to modernize its subsidy system for the sector to avoid distortions and induce behavioral changes. In this respect, payment of the PROCAMPO income support program was disconnected from planting, the marketing-support scheme was reoriented to foster more efficient allocation of resources, and the Alianza para el Campo program is being reengineered to focus more directly (and more transparently) on productivity enhancement. While the new administration is still in the process of defining its new instruments and programs, it appears that the new strategy for rural development will emphasize the development of micro rural enterprises, the functioning of markets, the participation of the private sector, the strengthening of cooperatives and producers organizations, and the integration of the rural sector into the rest of the economy. In parallel, the government has also taken steps to address issues related to indigenous peoples development through the strengthening of indigenous institutions (INI, and the creation of a new office for indigenous issues in the office of the President) and has engaged a national debate by submitting a new law to Congress that could lead to a Constitutional change regarding the rights and autonomy of indigenous people. 20. Environmental degradation continues to be a serious threat to the country's sustainable development. The initiation in 2000 of a program for strengthening state-level environmental management capacity has been an important step in the right direction. Progress was also made in improving air quality in metropolitan Mexico City through the finalization of a third action plan that should be completed by June 2001 and that paves the way to new support programs in this critical area that affects the health of some 15 million people. The new administration wants to promote a new policy and institutional framework for environmental management including, as a priority, reforms in the water, forestry and waste sectors. It has also sought the inclusion of the environmental sector in the fiscal reform process that it has presented to Congress. Recently, the Ministry of Environment took steps to consolidate and strengthen its normative and permit- delivery authority by reassigning some of the functions of INE to a newly created sub-secretariat. Overall, the explicit inclusion of environmental protection as a key objective of the new presidential sexenio is expected to provide the visibility and the authority required to mainstream environmental concerns into sectoral policies and programs. III. PROGRESS IN IMPLEMENTING THE CAS Overall Progress 21. Implementation of the CAS has proceeded apace, and its impact has been substantial. Annex I presents an objective-by-objective summary progress table. Support was delivered at 8 several critical reform junctions (decentralization, banking, state adjustment, fiscal) through both major lending operations and analytical work. In parallel, project interventions with direct, poverty-reduction impact at the sectoral level were launched (health, rural development, gender, indigenous peoples). New frontiers in knowledge management and dissemination were reached-among others, a collection of policy notes for the new administration was, at its request, published as a book; another WBG publication distilled the lessons from Mexico's decentralization process;4 a comprehensive Financial Sector Assessment Paper is being produced jointly with the IMF; the findings of a fiscal reform CEM were brought into the authorities' awareness and consensus-building efforts; a book on Gender and the Mexican Economy is forthcoming. Overall lending flows remained strong and within the CAS envelope, the quality of the portfolio improved, and country exposure stayed within a comfortable range. 22. Across sectors, some activities envisaged in the CAS did not materialize while new opportunities opened to support the CAS objectives. Where feasible, and in partnership with the Government, those opportunities were seized. In some areas, such as reform of public sector pensions and electric sector, the government (prior to December 2000) did not find enough political consensus to proceed with the necessary reforms, and hence the envisaged WBG projects did not materialize. The political transition has added to the dynamism of the WBG program-in some cases, the new sectoral authorities had rapid hand-over processes while, in others, the settling-in period proved longer. Similarly, while some line ministries sought policy and program continuity, others are trying to define new strategic directions and tools. All ministries face the challenge of improving the quality of the public administration and governance mechanisms (a key objective of the CAS) in order to implement their programs- Mexico's strong economic performance and the success of its integration in NAFTA have not been matched by a corresponding development in its institutional capacity. 23. The Country Assistance Evaluation, being finalized by OED, provided some useful fmdings regarding the performnance of the WBG in Mexico over the past decade. See Box, below. As the evaluation notes, the Mexican government and economy today have considerable Box 1. Country Assistance Evaluation The WBG assistance program to Mexico during the period FY89-00 was reviewed by OED, and the report, Mexico Country Assistance Evaluation, is expected to be sent to the Board shortly. The report found that the WBG's assistance program was adequately adapted to the country's rapidly changing developmental challenges and noted that the Mexico operations of the period received more favorable OED ex post evaluations for outcome, likely sustainability, and institutional development impact than other operations in the region and Bank-wide. Still, the report argued that the effectiveness of the program varied in time and should be considered as partially satisfactory. ESW was considered marginally effective, partly because Mexican officials under the previous governments did not want to accept outside intellectual influence, or at least not acknowledge it. During the most recent period of evaluation, FY97-00, the report concurred that Bank's assistance program was relevant but argued that it was too ambitious, relative to which the results were partially satisfactory. The ambitiousness of the 1996 CAS program led the govermnent to expect high levels of new commitments and disbursements that were not fully met due to lack of policy progress and a tighter-than-expected fiscal stance, creating a shortage of counterpart finding. For the most part, the program in the 1999 CAS was not yet at a stage to be considered in the report. 4. Giugale, M., and S. Webb, eds., 2000, Achievements and Challenges in Fiscal Decentralization-Lessonsfrom Mexico, World Bank Publications, Washington D.C. 9 technical capacity as well as financial resources, so the WBG will need to maintain flexibility and selectivity in its dialogue, in order to assure that the Bank's operations and AAA are in the areas where they will have a strong impact. The recommendations contained in the evaluation will provide useful inputs in the preparation of the next CAS. Progress Under the CAS Development Objectives i) Social Sustainability 24. Protecting the Most Vulnerable. The search for quality and participation in the delivery of social assistance programs still guides the WBG's support in this area. The mix of instruments to deliver that support has relied more heavily on analytical work than lending, compared to the CAS projections. Policy Notes on Social Protection, Labor Markets and Gender were delivered and discussed with the new authorities, and the joint preparation of strategies for urban development and low-income housing has been launched. A formal Poverty Assessment, a report on Mexican Households' Responses to Economic Shocks, and an Earnings Inequality study were also completed. Regional lessons on social risk management were disseminated in Mexico through the presentation of LAC's 2000 flagship report (Securing our Future). While a programmed LIL operation in support of the decentralization of the DIF (Sistema Nacionalpara el Desarrollo Integral de la Familia; National System for the Comprehensive Development of the Family) did not materialize, an expected Technical Assistance grant for Gender Capacity Building was converted into a LIL (and approved by the WBG's Board of Executive Directors). This LIL has complemented well a promising program of support in the area -following the completion of a report on Pensions and Gender, the publication of a book on Gender and the Mexican Economy is forthcoming and a Gender Assessment of the Legal Framework is being produced. Other indirect vehicles of social assistance also received WBG support-notably, the Apoyo a la Gesti6n Escolar whereby public funds are transferred (on the basis of household demand) directly to schools in the poorest communities of the country. 25. Giving the Poor Better Access to Education. Development of quality basic education for the poor continues to be the central element of the WBG's sectoral strategy. The main vehicle to achieve that objective has been the Basic Education Development Loan Phase I (and the forthcoming Phase II). The education sector was also included in the Estado de Me'xico Structural Adjustment Loan as a clear indicator of the importance of protecting and improving the accountability and efficiency of the sector even in the context of an adjustment operation. Technical cooperation on the national level has materialized in the production of an Education Sector Policy Note and a formal report on Decentralization of Education ("Mexico: Transforming Schools into Effective and Efficient Learning Centers"). A series of workshops/seminars has also been held on the economics of education, quality of education, and education reform, as well as one international workshop on worldwide experiences with student loan schemes. Complementing these IBRD-supported efforts, IFC financed a private provider of primary and pre-school education, as a demonstration effect of the kind of delivery and quality that the private sector can bring to educational services. While much remains to be done, initial sector results are encouraging-in-service teacher services and teacher incentive mechanisms have begun to increase teacher retention rates in isolated rural schools, students' performance in those schools is improving faster than average, and lower repetition and drop out rates are being observed. 10 26. Making Basic Health Accessible to All. Since the mid-1990s, the Secretaria de Salud (SSA) has improved access to a basic package of clinical services for about 10 million rural and, more recently, peri-urban poor through the Programa de Ampliaci6n de Cobertura (PAC) and the Programa de Calidad, Equidad y Desarrollo en Salud (PROCEDES), both of which the WBG has supported analytically and financially through the Basic Health II project (FY96) and a third Basic Health project currently under preparation. The direct impact of these interventions is becoming visible-since 1998, 400,000 families with the main breadwinner in the informal sector of the economy have enrolled in the IMSS voluntary social security regime. In parallel, the WBG continues to support the reform of the health care systems administered by the IMSS (the main public health care provider) through a Health System Reform SAL and TAL (FY98), and the initial phase of reforms in ISSSTE (the federal government employee pension scheme and health insurer). In addition, the health sector was included as an important policy component in two adjustment operations (Decentralization SAL, FYOO and Estado de Mexico SAL, FYO1) with the view to introducing incentives for decentralization of the sector and to enforcing hard budget constraints more equally across the different institutions of the system. The observed progress in health reform, and the increasing role played by private firms in the Mexican health sector, led to IFC's first financing of a private hospital in Mexico. Technical cooperation has also been reflected in the production of a Health Sector Policy Note. 27. Attending the Needs of the Rural Poor. Implementation of the government's Rural Development in Marginal Areas project, with financial and analytical support from the WBG (FYOO), gained considerable momentum during the past three years. It has expanded from a pilot effort in Oaxaca and Huasteca to a national program now covering more than 30 regions which are among the poorest in the country and which have the highest relative concentrations of indigenous populations (the program promotes productive investments in both on-farm and off- farm activities, including innovative self-sustained saving-and-loan schemes at the group and community level). The completion of a Rural Indigenous Profile established a baseline system of geographic information on the indigenous peoples in the country, a product that is now publicly available on the web. Similar analytical efforts are now under way to understand grass- roots rural financing mechanisms, and to design policies that facilitate their operation. ii) Removing Obstacles to Sustainable Growth and Macro Stability 28. Assuring a Viable Macroeconomic Framework. As mentioned earlier, sound macroeconomic management has been a trademark of policy-making in Mexico over the last six years. A conservative monetary policy (increasingly independent from fiscal policy), a flexible foreign exchange regime, a prudent fiscal stance, and a wise external borrowing strategy have placed Mexico among the best macroeconomic performers in the LAC region. A precautionary Stand-By Arrangement with the IMF was successfully completed by November 2000; a history of booms-and-busts (especially in the balance of payments' current account) was avoided; and the country's sovereign debt is now rated investment grade by one of the international credit rating agencies. Of course, important macroeconomic challenges remain. In particular, strengthening the fiscal anchor of the macroeconomic framework is a key priority to make Mexico's fiscal, monetary and exchange rate policy mix consistent in the medium-term. That is why, in addition to its regular, close monitoring of the Mexican economy, the WBG has provided substantial analytical and advisory services in the area of fiscal strengthening (a Fiscal Sustainability Study and, most recently, a Fiscal Reform CEM). 11 29. Improving the Efficiency and Transparency of the Financial Sector. Following its establishment in 1999, IPAB, to which the WBG provided financial and analytical support in connection with the First Bank Restructuring Facility Adjustment Loan (FY00), quickly assumed its functions and has evolved satisfactorily. It has completed three major transactions to restructure the banking sector: (a) the sale of SERFIN, Mexico's third-largest bank, to a Spanish consortium (BSCH); (b) the merger of Promex and Bancomer and related restructuring; and (c) the sale of majority ownership of Inverlat, Mexico's seventh-largest bank, to the Bank of Nova Scotia. In addition, it has started resolving the remaining banks under its purview, including the sale of Bancrecer (Mexico's fifth-largest bank), the merger of Banco Atlantico and Bital, and the liquidation and/or sale of 10 smaller banks previously intervened by the regulatory authority (Comision Nacional Bancaria y de Valores-CNBV). In April 2000 Congress also passed new Bankruptcy and Secure Lending laws which strengthened foreclosure procedures and the framework for the collaterilization of movable assets (although this framework has not yet become fully operative); the WBG supported the design of this legislation through technical advice and access to comparative legal experiences (through two international seminars held in Mexico City in July and November 1999). Also, regulations issued by CNBV have improved and clarified the definition of regulatory capital and risk-weighted assets, loan classification, provisioning rules, and accounting practices. Overall, during 1999-01, Mexico made major strides in improving the transparency and functioning of the financial sector. The WBG supported that effort through IBRD's continuing technical assistance and IFC's complementary operations (for example, in private equity funds, factoring, partial credit enhancement, and credit lines for small- and medium-sized enterprises). IBRD recently delivered to the Government a comprehensive sector report on Capital Markets Development issues and options. The new Fox Administration has indicated that it will continue those reforms, strengthening banking regulation and supervision, delineating more clearly the responsibilities and coordination among key sector entities, introducing techniques for quick and efficient resolution of banks facing solvency problems in the future, and developing capital markets and a more effective housing finance system. The administration has already initiated steps in this direction and requested WBG assistance in implementing a well-thought-out program. 30. Removing Impediments to Private Sector Growth and Competitiveness. Under the previous administration, important progress had been achieved through various initiatives of the deregulation unit of the Trade and Industrial Development Ministry (SECOFI) to reduce the bureaucratic impediments faced by producers, especially the small- and medium-size enterprises (SMEs). Under the Fox Administration, the Ministry of Economy, which has taken over most of the functions of SECOFI, has indicated publicly that SME development is a major priority of the government and that it will build on and expand the work already done. The WBG continues to support these efforts through an integrated strategy between IBRD and IFC, as described in the CAS's Private Sector Strategy (PSS). While IBRD has sought to foster conducive PSD policy environments (most recently through the preparation of a Regional PSD LIL), IFC's interventions have followed three priority themes: (a) helping the Mexican private sector gain greater and more evenly distributed access to external private financing, (b) helping improve the efficiency of domestic financial intermediation and mobilize domestic resources, and (c) helping private firms grow and improve their international competitiveness. These have translated into IFC's sectoral focus on financial sector development, support for middle-market firms that lack access to long-term credit, private infrastructure, and the social sectors. During FY99-01, IFC approved operations totaling US$686 million (including syndications) for 20 projects, of which 9 12 were for middle-market firms, 6 were in the financial sector, 3 in infrastructure and 2 in health and education. As the Mexican economy improves, IFC has increasingly focused on projects that are perceived by the private sector as being more difficult or in new areas ("frontier" projects). This is reflected in more recent project approvals, in such areas as hospitals and primary schools (FY00), a private sector railway project in Chiapas (FY00), a credit enhancement instrument (FY00), microfmance (FY01), and sustainable development in mining (FY01). 31. Provision of Quality Infrastructure. While major challenges remain, the performance of the infrastructure sector has substantially improved over the last three years. In the telecommunications sector, the quality of services has improved, reducing average rates, and expanding coverage through the liberalization of entry (foreign and local) into the sector. Rationalization of approaches to toll-road financing and highway maintenance and operation is expected to contribute to increased participation by the private sector and improved efficiency of the roads system. As noted above, gradual but promising progress is also expected in the energy sector-a new tax and governance regime for PEMEX, better regulation of LPG and natural gas industries, and far-reaching restructuring of the electricity sub-sector (including the development of a competitive wholesale power market run by an independent system operator, vertical deintegration of CFE, concessioning distribution services, and rationalizing power subsidies worth US$4.5 billion in 2000). Important reforms were also undertaken in the housing sector, especially in FOVI (albeit other publicly owned housing institutions remain active and unreformed-INFONAVIT, FOVISSSTE, etc.). On the other hand, the water supply and sanitation sector has not seen major reforms (beyond innovative initiatives at the state level), especially in terms of cost recovery, private participation and broader access for the poor. The WBG participated in this varied process of reforms in the infrastructure sector. IBRD has delivered to the new Administration sector policy notes on transport, water and sanitation, energy, and private sector (including microenterprise) development, as catalytic inputs for further strategy and policy development in each of the sectors. Contrary to CAS predictions, the bulk of IBRD support took the form of non-lending services (for example, only the FOVI Restructuring loan, FY99, materialized from the initially envisioned portfolio, while Policy Notes were produced on all major infrastructure subsectors). IFC activity focused on financing individual private sector projects in transport and power-areas of CAS focus. 32. Fostering Agricultural Productivity and Efficiency in the Rural Sector. The structural reforms carried out in the sector during the past decade have fostered efficiency, and the sector is now poised to raise its productivity. The government has taken steps to expand access to basic infrastructure services in rural areas through municipal investments and continued implementation of the Alianza para el Campo program (which delivers opportunities for productive investments, support services, and technology). The irrigation sector all but completed the transfer of the irrigation districts to water users. Access to, and performance of, the factor markets (finance, land, labor, marketing channels) remain problematic, however, especially for the small farmers producing for the domestic market, and the new administration is anxious to start addressing this issue. The WBG completed three key pieces of sector work that are shaping the new administration's policies in food marketing (both grain and perishables), rural finance, and crop insurance. The WBG has also continued its support of productivity enhancement through the above-mentioned Alianza para el Campo program. In addition, it restructured the Second Decentralization and Regional Development program so as to better 13 support the new emphasis on decentralization and municipal development in rural areas, and established a new and promising operational dialogue directly at the state level. 33. Protecting the Environment. Progress on the environmental front has been mixed. Sufficient commitment to reforms in the water sector and in environmental decentralization was generally absent. Also, in the forestry sector, successful experience under the PROCYMAF project remained limited to Oaxaca and could not be mainstreamed into PRODEFOR. On the other hand, the situation of air quality in the Mexico City metropolitan area has steadily improved over the past years. In addition, with the completion of the new air quality plan (due in June 2001) the government will have a comprehensive and integrated instrument to address the remaining critical pollution concerns related to ozone, particles, and sulfur. Progress was also made on the topic of disaster management with the strengthening of the fund for natural disasters and the development of new catastrophic insurance instruments. Finally, considerable achievements were made in the area of biodiversity conservation through the approval by GEF of the Meso-American biological corridor operation; the indigenous reserves project in Oaxaca, Guerrero, and Michoacan; and the inclusion of four more protected areas under the endowment fund scheme. The WBG contributed to the country's sector knowledge base by completing a major piece of analytical work on policy options for groundwater stabilization. It also pursued preparatory work under the environmental management and decentralization project (PROMAD), but could not complete processing of the support loan due to lack of progress in establishing more effective decentralized instruments for cost recovery of environmental services at the local level. Renewed interest on the part of the new administration in the subject of environmental decentralization, fiscal reform, water and forestry may provide the required commitment for the design and implementation of a reform package for the environmental sector that the WBG could support. iii) Effective Public Governance 34. Offering a Sound, Decentralized Public Administration. During the last three years the process of decentralization gathered significant momentum. States and municipalities are increasingly reasserting their constitutionally given sovereignty, becoming responsible for decisionmaking over a wider range of public policy matters. This growing independence has been matched by deeper fiscal decentralization (for example, states and municipalities now control some 60 percent of total primary government spending). While the federal government encourages decentralization (most recently, greater federalismo was a priority commitment of then-candidate and now President Fox), it has rightly sought to put the process on a sustainable path. To that end, its core tool has been to apply "hard budget" constraints on subnational finances (through a combination of bank regulation, budgetary rules, and transparency). This has triggered strong incentives for the states to adjust and, in so doing, to start tackling long-overdue structural reforms (among others, in taxation, education, pensions, and water). While those adjustments will take time to complete, the final result is expected to be better, locally determined public services for all, especially the poor. 35. The WBG has therefore continued to provide technical and financial support to Mexico's decentralization process, on three fronts: (a) helping the federal government set the broad "rules of the game" for decentralization (through a Decentralization Adjustment Loan, and a subsequent technical publication distilling its lessons); (b) helping states adjust to the new fiscal 14 discipline (through the Estado de Mexico Structural Adjustment Loan, and through ad hoc technical support to other states expressing interest in reform and adjustment programs); and (c) helping municipalities (in particular, rural municipalities) develop their institutional capacity (through the DRD Il loan ). In the latter two cases, the WBG has helped the federal Government articulate financing tools that not only foster prudent borrowing but also are consistent with the Constitutional framework within which sub-national governments operate (for example, Mexican states and municipalities are not allowed to borrow in foreign currencies or from foreign lenders). Furthermore, as proposed in the CAS, the Government and the WBG have sought to maximize the comparative advantage of the WBG vis-a-vis other multilateral donors (for example, in regards to the Inter-American Development Bank's support for institutional capacity building at the state and municipal level), while preserving an incentive framework that fosters sustainability in sub-national finances. 36. Improving Dispute Resolution Mechanisms and the Quality of Tax Administration. Partly because of the timing of the presidential elections, no direct progress has taken place in implementing necessary reforms in Mexico's judicial system. The outgoing administration limited its efforts in recent years to fostering awareness of the need for change within the sector, initially through a series of technical seminars which the WBG supported. As a first step to better understand judicial performance in Mexico as a whole, the WBG is helping the Federal District to assess the constraints faced by its commercial courts. While various donors have contributed to diagnoses of the constraints to efficient judicial performance, a comprehensive strategy for reform shared with all stakeholders and civil society has not materialized (following the presidential elections, a broad Regulatory Reform Commission was created that may prove an useful forum to articulate that strategy). 37. The outgoing government did not overhaul the tax administration system, but the incoming administration made it a critical component of its fiscal reform which, in turn, was the first major legislative initiative sent to Congress (it is currently under Congressional consideration). The WBG has directly contributed to the effort through a comprehensive Fiscal Reform CEM that covers the quality of tax administration (the authorities invited the WBG to present the findings of the CEM in a series of government-sponsored seminars on fiscal reform). 38. Enhancing Governance Mechanisms. The federal government continued to seek improvements in the transparency and efficiency of its procurement tools, notably through the implementation of COMPRANET, an innovative, electronic open-bidding system. To assess its effectiveness in promoting the participation of a larger number of local and foreign bidders, procurement under three Bank financed projects is now taking place, on a pilot basis, under this system. A Country Procurement Assessment Report (CPAR) and a Country Financial and Accountability Assessment (CFAA) are currently being carried out and are expected to be discussed with civil society by the end of FYO1. Some of the major findings of the CPAR include: the need for a separate law for the contracting of consultant services; the requirement of bidding on completed final project designs to avoid large cost overruns; promotion of the practice of multi-annual contracts for major works; and the need to establish standard bidding documents. The CFAA largely concentrates on strengthening of the Government's efforts to establish an integrated, comprehensive and standard financial management system in particular for an improved control of budgetary expenditures, as well as on the issue of public financial reporting and public access to information. Broader anticorruption efforts did not materialize but 15 now top the new administration's agenda, an effort that the WBG is initially supporting through technical advice (for example, a Policy Note on anticorruption mechanisms was delivered in October 2000). Further technical advice in the design and implementation of the government's anti-corruption strategy is envisaged for the remainder of this CAS cycle. Portfolio and Program Budget Performance 39. As of March 31, 2001 there were 24 active IBRD projects in the portfolio. With three projects exiting the portfolio and two expected to enter by June 30, 2001, the Mexico program will start FY02 with a total of 23 projects. Since FY00, considerable effort has been expended to address performnance issues through restructurings, cancellations (a total of US$837 million over this period), and the closing of poor-performing loans. This has resulted in a stronger portfolio overall, even though there still remain three unsatisfactory projects in the portfolio (13 percent); two of these will close in FY01. 40. Disbursements in FY99, FY00, and the first nine months of FY01 totaled US$3.9 billion, of which US 2.3 billion was for adjustment lending (Table 3). Three general observations arise from Table 3: (a) adjustment lending is increasing as a share of total lending, (b) disbursements under investment lending are on par with or a little better than IBRD averages, and (c) total lending was below the CAS-allowed envelope (US$5.2 billion). The latter observation is noteworthy, for it reflects the general principle of flexibility and opportunity embedded in the CAS-IBRD is to support major reforms as they are brought forward and committed to by the Government. Since some of the reforms (for example, financial sector) have only recently begun to materialize (in some cases strongly so), the corresponding lending effort was timed accordingly. Total commitments were below the CAS envelope but fast-disbursing adjustment commitments were slightly above the levels planned in the CAS, and as a result IBRD exposure remains close to US$11.5 billion-slightly above 9 percent of IBRD's total portfolio. The combination of a further US$1 billion in adjustment lending in FY02, coupled with US$1 billion in investment lending, will result in projected exposure peaking at around US$12.7 billion in FY04-even if lending levels are somewhat lower in future years. This compares to IBRD's portfolio concentration limit of US$13.5 billion for a single, large borrower. These projections are sensitive to both the level of new lending and to disbursements from the existing pipeline of some US$3 billion in loans already approved. Management is monitoring both lending and disbursements carefully, and the issue of exposure and its implications for IBRD's strategy in Mexico will be treated more fully in the upcoming CAS Table 3. Mexico-Gommitments & Disbursement, FY99-FYOI (US$ million) FY99 FY00 FYO1 (3/31/01) Commitments during period' 950 1,169 1,127 o/w adjustment lending 0 1,111 505 o/w investment lending 950 58 622 Disbursements during period 1,309 1,339 1,257 o/w adjustment lending 750 661 855 o/w investment lending 559 673 402 Undisbursed Balance at beginning of period 4,282 3,381 2,964 o/w adjustment lending 1,100 350 800 o/w investment lending 3,182 3,031 2,164 1. Approved loans 16 41. In terms of program budget performance, the overall Mexico WPA budget envelope stayed the same during FY98-FY0O and declined slightly in FY01. The distribution of WPA resources across the main types of business processes is shown in Table 4. The relatively low share devoted to supervision reflects the program's overall tendency toward fewer and larger loans, while the relatively high allocations to AAA are evidence that the country places high value on the WBG's analytical work. With the change in government, the trend toward a stronger AAA program is expected to continue. Table 4. Mexico-Distribution of WPA Resources, FY99-FYO1 (in percent) Category FY99 (Actual) FY00 (Actual) FY01 Budgeted FYOI Actuals' AAA 36 30 36 35 Lending 29 39 29 33 Supervision 34 28 35 29 Other 1 3 0 3 1. Through March 15, 2001 42. As of January 31, 2001, IFC's portfolio in Mexico stood at US$1.39 billion, including syndications. The net disbursed portfolio amounted to US$1.28 billion, representing 7.1 percent of the total IFC portfolio and ranking Mexico as IFC's third in disbursed volume. This relatively large exposure in Mexico has been accompanied by the high overall quality of the portfolio. As of January 31, 2001, only 0.8 percent of the loan portfolio was in nonaccrual status, and the interest collection remained a good 98.2 percent. These figures compare favorably with the nonaccrual rate of 12.9 percent and interest collection rate of 86.5 percent, respectively, for the total IFC portfolio. IV. THE WORK AHEAD The Work-Program Until the End of the CAS Period 43. The discussion of the WBG's next CAS is tentatively scheduled for May 2002. This will allow time for the new administration to define more fully its medium-term development strategy, to give this strategy a broad range of participation, and to identify areas of comparative advantage for WBG assistance. In the meantime, the existing CAS objectives remain highly relevant and will continue to guide the WBG program. The 1999 CAS triggers remain applicable for the timeframe of this CAS Progress Report. None of the triggers for a downside scenario, laid out in the 1999 CAS (para. 64), have materialized; rather the strength of Mexico's policy performance would justify lending fully at the base case scenario discussed in 1999. 44. Since at present the new government's initial demand for specific WBG services, both lending and non-lending, vastly surpasses WBG capacity (perhaps a reflection of the new administration's rich reform agenda), the flexibility and selectivity underlying the existing CAS will be critical in the coming year. Therefore, over this period IBRD will focus on: (a) supporting, with adjustment lending, major reforms as they are brought forward (such as fiscal reform, financial sector, and state-adjustment-and later on, ISSSTE-health and labor). As explained before, these reforms will contribute greatly to the sustainability of growth and, thus, to avoiding crisis-driven spikes in poverty. 17 b) addressing in-depth, with investment operations, the direct roots of poverty. This will include interventions in basic education, urban poverty, and rural services. 45. These strategic objectives implicitly define IBRD's expected lending for FY02, as shown in Table 5. That lending would be underpinned by a corresponding program of formal and informal AAA, as shown in Table 6. This program will include analytical work and advisory services for the design of both broad policy reforms (for example, labor, health, energy) and approaches to addressing poverty concentration in specific geographic areas (for example, the Southern States Development Strategy, state-level PER, follow-up work to the Fiscal Reform CEM regarding tax sharing with states and revenue-transfer formulae). Table 5. IBRD Expected Lending Through the Beginning of the Next CAS (May 2002) Adjustment Investment • Financial Sector Reform SECAL * Basic Education Develop. APL- Phase II * Fiscal Reform SAL * Low Income Urban Housing • Rural Finance SECAL * Urban Microbusiness • State-Level Strengthening Program a Micro-Finance Development * Rural Municipal Development (DRD III) * Financial Sector TAL * Estado de Mexico TAL Total Adjustment Envelope: US$1 billion Total Investment Envelope: US$1 billion Table 6. IBRD AAA Through the Beginning of the Next CAS (May 2002) Formal: * Southern States Development Strategy * Environmental Degradation and Poverty * Deepening and Spreading the Benefits of NAFTA * Labor Reform Agenda * State-level Financial Auditing Assessment • State-level PER * Training Mechanisms Reform Informal: * Anti-Corruption Mechanisms Review * Energy Sector Reform * Health Reform * PSD Strategy * Strengthening SEP organizational structure * Urban Strategy 46. IFC's priorities, as articulated in the CAS's Private Sector Strategy, also remain valid. Since the CAS discussion (June 1999), Mexico has obtained an investment grade credit rating and private access to external financing has improved, but remains highly uneven across firms (blue chip firms and maquiladoras dominate most of the access). This uneven access reflects medium- to long-term issues: (a) low domestic financial intermediation, (b) lack of access to financing for expansion and modernization in industries and services, and (c) still nascent private participation in sectors perceived as "riskier" by investors. Those are, therefore, the areas where IFC will operate until the next CAS; they generate a menu of potential operations in housing finance; wholesale financing support for small- and medium-sized firms; institutional 18 strengthening and credit enhancement in the financial sector; middle-market firms in industry, services, and agribusiness that have high impact on employment and/or sustainable development; infrastructure improvement; and the social sectors. In implementing its program, and depending on market conditions, IFC will maintain its high selectivity, focusing on financial sector development, growth-generating middle-market firms and SME, and "frontier" sectors that are relatively new to private entrants. This, depending on market conditions, could result in an overall volume that is lower than the annual average of US$200 million observed during the past three fiscal years. Mexico is not a member of MIGA. 47. The program of Mexico with the IDB is complementary to the program with the WBG, as staff of the two institutions maintain frequent and fruitful communications, both formal and informal. In some areas-such as education, roads, water, decentralization, gender, and financial sector reform-both banks are working, with detailed coordination and divisions of labor. In some areas-tourism development, gas pipelines and large electric projects-the IDB is active but not the WBG. In other areas-health, alternative electric generation, and air quality-the WBG has been active but not the IDB in recent years. Likely Cross-Cutting Issues in the Next CAS (FY02-05) 48. The changes following on the 2000 presidential elections and new administration since December have not yet fully unfolded. While broad strategic directions are becoming clear, reform implementation will bring about new uncertainties as well as unforeseen opportunities in the years that lie ahead. Still, five features are likely to remain present in the WBG's assistance program. 49. First, the program will continue to require flexibility. As the new administration "tests the waters of reform," it may have to adjust the timing and tools of its strategy. The WBG will have to remain nimble for its support to be useful and effective to the client. Second, overall fiscal discipline will be maintained at the federal level, making it probable (and, indeed, desirable) that IBRD investment operations with the federation remain "non-additional" to the sector ministries' budgets. The "non-additionality" feature means that from the point of view of those ministries the marginal value of IBRD interventions depends on the knowledge transfer that they carry, rather than on the accompanying loans. Third, with many fronts of reform opening at the same time, integration and consistency will be critical. The WBG will have to rely more on broad, integrative, programmatic operations where synergies across issues are exploited, rather than on the more traditional sector-by-sector divisions (for example, reforms in financial markets and agents across sectors; water issues across geographical locations, users, and suppliers). Fourth,fiscal decentralization will accelerate and deepen even further, and states (and municipalities) will be increasingly in charge of decision-making in key development areas-sub-national governments will become full counterparts (and clients) in IBRD's policy dialogue (and, indirectly, in lending) in all sectors. Finally, partly as a result of the above- mentioned fiscal decentralization process, and to avoid unsustainable regional disparities, the WBG's program will put particular strategic emphasis and poverty-reduction efforts on poorer states. 19 The Risks 50. Three types of risks will be present during the conclusion of this CAS period (that is, until May 2002). First, negative external developments may unsettle Mexico's macroeconomic framework. Two such possible developments stand out-an abrupt slow-down in the U.S. economy, and a contagion-driven effect triggered by a crisis in a major emerging-market country. While these risks are not negligible, Mexico's sound macroeconomic management (especially its flexible foreign exchange regime) has served the country well in accommodating external shocks, as evidenced by its robust performance through the international financial crises of recent years. As mentioned earlier, however, further strengthening of the fiscal anchor through the proposed tax reform will play a critical role in the medium-term sustainability of the country's fiscal, monetary and exchange rate policy mix, thus enhancing its capacity to accommodate external shocks. 51. Second, it may take longer than expected for the new administration to work out a fluid modus operandi with a Congress that is controlled by no single party, resulting in delays or even abandonment of some reform initiatives. This problem will surely be compounded by the richness of the pending reform agenda (fiscal, finance, labor, energy, decentralization, etc.). There will almost certainly be a "learning period" before the executive and legislative branches find a mutually acceptable equilibrium; however, the more open and participatory nature of Mexico's democratic process has changed for the better the framework of political incentives toward dialogue and common ground, giving reforms a greater legitimacy and stronger sustainability. Finally, in their new, more independent role, state governments will have a larger say in policymaking and, especially, in actual implementation. The federation will have to build consensus not just across parties but also across geographical entities. The key to fostering that consensus will be the enhancement of local accountability mechanisms (like market-driven financial discipline). Fortunately, over the last three years Mexico has started to move in that direction. James D. Wolfensohn President By: Sven Sandstrorm Peter Woicke Washington, D.C. May 11, 2001 20 Matrix Table 1. Mexico-CAS Progress Report-Summary Progress Matrix GOVERNMENT DEV. STRATEGY/ PROGRESS OBJECTIVE ACTION BENCHMARKS STATUS COMMENTS Strengthened system of social protection and improve Greater emphasis was put on social assistance in the federal budget, especially for social infrastructure at the effectiveness offederal anti-poverty programs in the municipal level. In the context of the PAREIB Phase I (and forthcoming PAREIB 11) some the poorest municipalities. instruments have been introduced for demand-driven investments at the school level in poor rural areas i) Protecting the ---(Apoyo a la Gestion Escolar). The Social Decentralization LIL and the Poverty Reduction Loan did not most vulnerable Widened coverage of vulnerable population as a result materialize (albeit the concomitant background work proved useful for policy design). A Gender LIL of decentralization of financing and introduction of In Progress (previously envisioned as an IDF grant) was approved, the publication of a book on Gender and the demand-driven approach. Mexican Economy is forthcoming and a Gender Assessment of Mexico's Legal Framework is under For WBG performance production. A Social Protection Policy Note was produced together with the SHCP and a study of Mexican Household Responses to Economic Shocks and of the Determinants of Economic Inequalities S Effectiveness of Social Decentralization LIL and were completed. 0 Poverty Reduction Loan both by FY00. c i Improved quality of teachers & retention of teachers in Different modalities of in-service training are under implementation. Higher retention of teachers and a ii) Giving the isolated rural areas. lower student repetition and drop-out rates were achieved in isolated rural areas. In addition, SEP poor better -- statistics show that students in areas under the Education Compensatory program (supported by several access to better Improved acad. achievement of target population, WBG loans) are improving at a faster rate than students in other areas. Enhanced state and municipal education reduced student repetition & dropout rates. capacity for education management, as well as increased community participation in schools, have eduction ----------------------------------------In Progress triggered the preparation of PAREIB Phase II. IFC approved a complementary project in primnary S Increased fed. & state-level man. & strtegic capacity education. Several technical activities, especially a WBG study on quality of schooling, provide a & increased comm. part, in school mianagement. u &------------ -----------------------------framework to gain effectiveness in education programs. s For WBG performance t Delivery of WBG technical assistance leads, within a this CAS period, to the removal of policy constraints, l such as inefficiencies in the allocation of resources n across states, and to substantial increases in the a coverage and effectiveness of educational prograrns. b Increased access to basic health care to the poor, espec. Reforms at IMSS have increased the number of beneficiaries of its voluntary social security scheme for iii) Making in urban areas. the informal sector by 400,000 families since 1998. PAC 11 has begun to prove effective in increasing basic health -access in peri-urban areas. PROCEDES loan will focus mainly on the urban poor. Institutional reforms accessible to ali Strengthen the fin. structure of public health care at IMSS and SSA were supported by PAC 11 and PROCEDES, Decentalization SAL, and the Estado de t institutions & improve the qual. of their services. Mexico SAL, and are showing positive initial results. IFC approved a complementary private hospital Y For WBG performance In Progress project. Successful assistance for the delivery of a basic health care package for 11 million uncovered and underserved rural and peri-urban poor by FY01. con2inued 21 GOVERNMENI DEV. STRATEGY/ PROGRESS OBJECTIIVE ACTION BENCHMARKS STATUS COMMENTS Expansion and dev. ofGeografic Inform. System on Achieved through the preparation, and posting on the web, of the indigenous people profiles. Approval of iv) Attending to indigenotis peoples. the APL 11 of the Rural Development in Marginal Areas (RDMA) project is expanding WBG financial Social the needs of the --- support to 9 more areas. 'I'he RDMA and specific analytical/policy work currently under completion will rural poor Expanded marginal areas project from 6 regional to facilitate the development of more effective rural finance mechanisms. Sustain- nat'i program. ability Developm. of local rural fin. structures in marginal Achieved/ areas. In Progress (continued) For WBG performance Enhanced uniderstanding of, and more effective efforts toward addressing, the needs of the rural poor (especially in health, education, productive and key rural services), with particular attention to indigenous populations. i) Assuring a Continued sound fiscal and monetary policies IMF Stand-by was successfully completed. Growth has remained strong (in spite of international financial viable including reduced dependency on oil-related revenues, crises), one-digit inflation has been achieved (and the inflation rate continues to fall), the balance of miacroeconomc coupled with structural fiscal reform. payments' current account deficit is manageable, and the external debt position is comfortable. macroeconomic -------------------------------------------------International markets underwrite that solid macro performance (Eurobond spreads are about half the Latin framework Achieve and maintain arTangement with IMF. American average, and Mexico's sovereign debt obtained one investment grade). A comprehensive fiscal Achieved reform package was recently tent to Congress. The WBG closely supported the fiscal stTengthening efforts Sustainable balance of payments current account (through both a Fisca Suttainability Study and aFsl Reform CEM). deficits. Removing For WBG performance Obstacles Enhanced country awareness and debate around key to macro vulnerabilities, notably the need for Sustainable comprehensive fiscal reform as evidenced by relevant Growth reform proposals by core interest groups and ii) Improving Present new secured lending and bankruptcy laws to Congress passed a Commercial Reorganization and Bankruptcy law which strengthens foreclosure Main- the efficiency Congress. procedures; and a Miscellany of Secured Lending which creates conditions for lending based on movable taining and --collateral (the WBG supported the design of those legislations through technical advice and access to Macro- transparency of Establishment ofpolicies and incentive frameworks to comparative country experiences through the organization of two international seminars). It also passed economic the Yinancial encourage safe and sound operation of banks. new legislation creating the Institute for the Protection of Bank Savings (IPAB). The law gradually Stability sector Develop strategy to extend pension system reform to Achieved/ phases-in a limited deposit insurance to replace the existing universal insurance guarantee. In addition, the in ~~~~~~~~public sector. Pnig authorities announced a series of regulatory reforms to change the definition of regulatory capital and in ------------------------------------------------ Pending Trequire the disclosure of its composition, improve the definition of risk weighted assets, establish the For WBG performance classification and new provisioning rules, improve accounting practices and standards, and improve Context of disclosure. IBRD technical assistance and lending opelrations have been instrumental in getting those Globaliza. WBG technical assistance as a catalyst for reform in reforms initiated and implemented. In parallel, IFC approved follow-on projects supporting financial the overall incentive structure for the operation of the sector development (private equity fund, factoring, partial credit guarantee, credit line to SMEs). Further financial sector, especially in the area of legal work on Capital Markets Development on which a WBG Sector Report has been recently delivered to the framework for banking operations (secured lending, government and the on-going FSAP (joint with IMF) should also have a significant role in catalyzing bankruptcy, etc.). required further reforms. Additional WBG lending support is envisaged to support further financial sector reform. Complementary IFC projects in housing finance, credit lines to SMEs credit enhancement and other capital market development could follow. Although the government expressed strong interest in pursuing public-pension reform, the decision on the overall strategy is still awaited. continued 22 GOVERNMENT DEV. STRATEGY/ PROGRESS OBJIECTIVE ACTION BENCHMARKS STATUS COMMENTS iii) Removing Facilitate autonomy of CONSAR and revise The revision of the investment regime for the AFORES or the introduction of new SIEFORES have not impediments to investment regime for the AFORES, been initiated. The new administration has expressed a strong desire to craft a new comprehensive SMF. impediments toe ------------------------------------------------- strategy and regards it as a high priority. The WBG continues its support in this area-via preparation of private sector Introduce new SIEFORES. a PSD LIL in Yucatan and Quintana Roo, urban micro-finance work in DF, and continued IFC financing growth and ----. ----Rtoaieadsralngve- nagn suppo---Pendin--support for middle-market firms, SMEs and microfinance. PSD LIL and urban micro-business .. Rationalize and streamline govenmment agency support conmpetitiveness to SMEs. Pending/ development operations have an explicit focus on development of exports and linkages with larger firms. In Progress Select pilot PSD programs at state level with adequate availability of counterpart funds. For WBG performance Delivery through FY01 of lending and non-lending Removing services focused on the removal of barriers to efficient Obstacles linkages between export-oriented, large firms and to domestic, small and medium enterprises. Sustainable Complete "white paper" on energy reform. Major advances have been made in creating a regulatory framework for LPG and liberalizing its trade. Growth -Downstream natural gas operations also have been liberalized. Although an integrated "white paper" has and iv) Ensuring the Continue progress on regulatory framework for energy. not yet been produced, several individual studies on petroleum taxation, fuel specifications and their Main- rov of -environmental impact, and renewable strategy issues in the energy sector have been completed by the taining qpvis o Develop renewable energy polcy. WBG and submitted to the govemment. A further group of studies focusing on broader regulatory tann uality Macro- infrastructure Develop sound, market-based tools to assist In Progress/ structure and governance issues are planned over the next 6-12 months to complete this program. IFC economic municipalities in accessing funding. Pending provided financing to two independent power producers. Stability Establish community investment trusts for slum Studies on off-grid rural electrification, solar; thermal energy (both supported by GEF) and renewables in upgrading. programs are in progress. the upgrading. Context of Implement FOVI's efficiency enhancement program. A model for community investment funds for slum upgrading was prepared in the context of the Border Glob- -i--.- Infrastructure LILs, and a trust investment mechanism is being prepared for a proposed DF Urban Gilobaliza. Continue reforms in other public and quasi-public Upgrading Project. housing agencies. housing----------------agencies.----------------- Some studies to help enhance FOVI's efficiency have been completed. Other more strategy oriented Implement low-income housing strategy. studies are awaited. FOVI has already reformed its subsidy system, replacing the old interest rate subsidies with targeted up-front subsidies for low-income housing. Progress has been slow in other public Develop new financing mechanisms for transport. and quasi-public housing agencies due to lack of key decisions on institutional roles and strategies. Sector Improved legal, regulatory, and financing framework work on low income housing has been initiated and a draft report should be ready this fiscal year. for water and solid waste. SEDESOL officials are active counterparts in this work. The government has expressed interest in -----------------------------------------a------- reformig the housing sector (across all income ranges), and has sought WBG technical support to develop For WBG Performance their strategy. Enhanced catalyst role in progress toward structural Major progress has been made in privatizing railroads, ports, and airports via concession agreements reform in key infrastructure subsectors, notably which rely on private sector capital and financing. Work is on-going on rationalization of toll road electricity, as evidenced by the production ofa finance and maintenance to make them fiscally sustainable and develop appropriate market-related collection of subsectoral strategies through FY0 1. financing mechanisms for them. IFC supported private railway in Chiapas. Very limited progress took place in water and solid waste. Under the Estado de Mexico SAL, important sector reforms were introduced to create a budget constraint to the state water utility and an appropriate regulatory body and regulations at state level. continued 23 GOVERNMENT DEV. STRATEGY/ PROGRESS OBJECTIVE ACTION BENCHMARKS STATUS COMMENTS v) Fostering Improved performance of factor markets (marketing The WBG is contributing to these objectives through analytical work (crop marketing and insurance, agricultura] channels, warehousing, water, land). labor markets, rural finance, land policies) and financial support (especially, through the Alianza para el agricultural ------ ------------------------------------------ Campo program). The second municipal decentralization program closed on June 2000. A follow up productivity and Improved access of small farmers to productive operation is being prepared directly with the states to support municipal development and basic municipal efficiency in the investments, support services, tech., and information. infrastructure in rural areas. The Irrigation sector project also closed on June 2000, and a follow up rural sector Implement a decentralized strategy promoting better In Progress operation is being prepared with an integrated approach to water resources management. inst. coordination and strengthening, and establish a Rural finance will be a future area of WBG emphasis, to support both the restructuring of rural direct dialogue with states for rural and social development banks and the development of micro-finance schemes in poor regions. infrastructure financing. Complete and consolidate the transfer of irrigation Removing districts to water users and promote irrigation district Obstacles modernization. to - Sustainable For WBG Performance Growth Contribution, through timely delivery of programmed and sectoral studies and loans, to the completion of the Main- reform agenda in the agriculture sector, to the taining decentralization of key rural public services, and to Macro- necessary local capacity building. economic Design and implement decentralized env. mgmt. Little progress was achieved in decentralizing environmental management, with the exception of some Stability vi) Protecting schemes and establish Env. Mgmt. Funds in pilot states which proceeded on their own and a significant step in environmental capacity building through the in the environment states. environmental component of the Decentralization Adjustment Loan. An overall strategy is also pending the ---------- ----------------------------- -------- on water sector reforms, albeit the new administration has put priority on this area. The community the Build consensus on required reforms in groundwater forestry operation continued to perform well but could not be expanded to new states or mainstreamed Context of sector. Pending/ into PRODEFOR. Biodiversity conservation efforts were considerably strengthened and expanded Globaliza. ---------------------------------------- ------ through the inclusion of four new areas under the GEF-financed endowment fund and through the (continued) Expanded forestry develop. Initiatives to new states In Progress approval of the Meso-American corridor operation, and the indigenous reserves project. and integrate with PRODEFOR. ------------------------ -The WBG has supported the government's efforts in environmental matters where policy decisions were Expanded protected areas system to new reserves and forthcoming-the Air Quality Action Plan Ill (expected by June 200) and a Disaster Management project establish- Mesoamercanbological corridor (approved in December 2000). Also, subject to government commitment, WBG support in the Improved air quality in DF by addressing ozone and environment area could be pursued through the preparation of a policy-based operation that would cover particles pollution (through the promotion of natural the areas of water, forestry, waste, environmental decentralization, and the incorporation of the gas conversion in transport and power sectors), environment in the forthcoming fiscal reform Establish better disaster prevention and management mechanisms. For WBG Performance Contribution to the efficient decentralization of environmental management systems, to improved cost recovery of environmental services, and to effective management of natural resources, with special monitoring emphasis on water, air, forests, soil and biodiversity. continued 24 GOVERNMENT DEV. STRATEGY/ PROGRESS OBJECTIVE ACTION BENCHMARKS STATUS COMMENTS Continue progress in the decentralization process with Decentralization is proceeding apace. The government is setting up effective accountability mechanisms i) Offering a matching institutional development capacity at the state (initially through banking regulation, budgetary rules and transparency). The new administration is sound, level and adequate accountability mechanisms. strongly committed to federalilsmo. The WBG is closely involved in supporting this process. It decentralized --successfully completed the Decentralization Adjustment Loan, is facilitating fiscal adjustment in Estado Effective public For WBG Performance de Mdxico (through a policy-based operation), a municipal capacity-building loan (DRD II, and its Public administration Continue playing a catalyst role in the implementation Achieved possible successor DRD III). It also continues to provide substantial analytical work in this area-most Governance of efficient decentralization, as evidenced by the recently, through the publication of a book distilling the lessons of fiscal decentralization in Mexico. dissemination of a comprehensive policy agenda for Subnational adjustment (and later investment) operations are likely to remain an area of priority for the decentralization and ensuing policy based operation. new administration and for the WBG. Launch comprehensive and participatory reform of In the judicial area, the outgoing administration limited itself to creating awareness about the need for ii) Improving commercial dispute resolution mechanisms. reform. The WBG provide technical assistance through a series of stakeholder workshops and through a the Commercial --diagnostic study of the Federal District's commercial courts. Similarly, reform in tax administration is Dispute Implement suitable fiscal reform program. being launched as part of the broader fiscal reform initiative that the new administration has sent to Resolution For WBG Performance Congress in April 2001. The WBG group supported this initiative through analytical work as part of a Mechanisms and Pending fiscal reform CEM, and may be called upon to support its implementation through policy-based lending.. Tax Triggering, through policy advice, initial steps (such as the production of sector reform strategies by FYO 1) Administration toward the reform of commercial dispute resolution Systems mechanisms and more comprehensive reform of tax administration. Implement pilot governance reform initiatives in key, Although SECODAM launched its open-bidding, internet-base procurement system (COMPRANET, an iii) Enhancing selected public institutions. effort supported by the WBG through technical assistance), no broader strategy for reform has been Governance --articulated. The new administration places high priority on transparency, and the WBG has been called Mechanisms For WBG Performance upon to continue providing support. A Policy Note on Anti-corruption Mechanisms was produced and is being published.. Building country consensus around specific initial Pending steps toward reform in public govemance tools, especially through country-sponsored seminars and publications on the causes and costs of weak governance. 25 26 Annex Al Mexico -CAS Progress Report Annex Al. Economic Indicators Growth rates (%) GDP 3.0 5.0 5.0 3.8 6.9 3.0 Exports 10.0 8.8 8.3 12.4 16.0 6.1 Imports 4.2 10.7 8.5 13.8 21.4 5.4 Inflation (%) 13.0 10.0 10.0 12.3 9.0 7.4 (end of period) National Accounts (As share of GDP) Current Account Balance -2.2 -2.8 -3.2 -3.0 -3.1 -3.9 Gross investment 22.8 23.3 24.0 23.6 23.3 23.7 Public Finance (As share of GDP) Overall Balance "1 -1.3 -1.0 -1.3 -1.1 -1.1 -0.7 International reserves 21 30,849 31,832 36,258 30,733 33,555 33,447 (US$ million) US$ million Lending 1,600 1,700 1,900 950 1,169 1,959 Gross disbursements 1,584 1,973 1,740 1,309 1,339 1,837 1/ Refer to the officialy posted fiscal balance which does not include full service of oo-balance fiscal liabilities such as those of the bank deposit insurance agency IPAB. 2/ Includes use of IMF resources. 27 28 Annex A2 Mexico at a glance Latin Upper- POVERTY and SOCIAL America middle- Mexico & Carib. Income Development diamond 1999 Populabon, mid-year (miflons) 97.4 509 S73 Life expectancy GNP per capita (Atlas method, US$) 4,400 3,840 4,900 GNP (Atlas method, USS billions) 428.4 1,955 2,811 Average annual growth, 199349 l Population(N) 1.7 1,6 1 A G r Labor force (S O 3.0 2.5 2.1 GNP . Gross per - S - primary Most recent estimate (latest year available, 1993-99) capita * . enrollment Poerty (ff of population below national poveoy line) Urban population (% of totalpopoat/on) 74 75 76 Life expectancy at birth (years) 72 70 70 Infant mortality (per 1,000 live biths) 30 31 27 Child malnutrition (% of children under 5) .. 8 7 Access to safe water Access to improved water source (% of population) 83 75 78 Illiteracy (% of popubation age 15+) 9 12 10 Grossprimaryenrollment (% of school-age population 114 113 109 Mexico Male 116 .. .. ------Upper-middle-income group Female 113 .. .. . : KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1979 1989 1998 1999 Economic ratios* GDP (US$bilbons) 134.5 223.0 416.1 479.9 Gross domestc investment/GDP 26.0 22.9 24.3 23. Exports of goods and services/GDP 11.2 19.0 30.8 30.8 Trade Gross domestic savings/GDP 24.7 22.9 22.2 22.0 Gross national savings/GOP 21.7 20.3 20.5 20.6 T Current account balance/GOP -4.1 -2.6 -3.9 -3.0 Do* Interest payments/GDP 2.5 3.5 2.2 2.1 Domes* Investment Total debt/GDP 31.8 42.1 38.4 34.8 Savings - Total debt service/exports 72.4 32.9 20.0 25.4 I Present value of debtGOP .. .. 37.4 33.7 Present value of debt/exports .. .- 111.5 102.2 Indebtedness 1979-89 t989-99 1998 1999 1999.03 (average annual gDwth- GDP 1.3 2.9 4.9 3.8 4.7 Mexico GNP per capita -0.9 1.1 3.3 2.5 3.1 - - - - - -Upper-middle-income group Exportsofgoodsandservices 8.4 13.5 12.1 12.4 9.9 STRUCTURE of the ECONOMUY 1979 1989 1998 1999 Growth of Investment and GOP (%) (% of GDP) 40 Agriculture 9.8 7.8 5.2 4.8 .0 Industry 33.4 29.4 28.5 28.7 20 -- ManufaGduring 22.7 21.9 21.3 21.1 0o __- Services 56.7 62.9 66.3 66.4 -20 94 7 9e 97 Oa 99 Private consumption 64.4 68.9 67.3 67.1 -40 General government consumption 10.9 8.3 10.4 10.9 -G DI OGDP Imports of goods and services 12.5 19.1 32.8 32.4 1979-89 1989-99 1998 1999 Growth of exports and Imports (%) (average annual growth) Agriculture 1.2 1.8 3.0 0.8 40 Industry 0.9 3.5 6.3 4.2 30 Manufacturing 1.1 4.0 7.3 4.2 20 Services 1.8 2.7 4.5 3.8 10 Private consumption 1.4 2.2 5.4 4.3 0 94 97 sa 99 General government consumption 3.1 1.9 2.2 4.1 10 9 Grossdomesticinvestment -4.3 4.4 10.2 4.1 -20 Imports of goods and services -1.1 11.9 16.5 13.8 -Exports 0-Imporls Gross national product 1.2 2.9 5.0 4.2 Note: 1999 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete. 29 Annex A2 Mexico PRICES and GOVERNMENT FINANCE 1979 1989 198 1999 Inflation (%) Domestic prices (% change) 40 Consumer prices 20.0 15.9 16.7 f Impiicit GDP deflator 19.6 26.5 15.4 15.0 20 Government finance 10 (% of GOP, includes current grants) Current revenue 25.8 20.4 20.8 94 95 96 97 98 99 Current budget balance -1.8 2.1 1.5 - GDP deflator - I CPI Overall surplus/deficit -4.6 -1.2 -1.1 TRADE (UJS$ millions) 1979 1989 1998 1999 Export and Import levels (US$ mill.) Total exports (fob) 35,171 117,460 136,391 1600W0 Oil 7,876 7,134 9,928 140,ooo Agriculture 1,754 3,797 3,926 120,000 Manufactures 24,936 1068062 122,085 1cro _ Total imports (cif) 34,766 125,373 141,975 80, tU Consumer goods 3,499 11,108 12.175 40000 Intermediate goods 26,499 96,935 109.270 20,000_ Capital goods 4,769 17,329 20,530 o 92 94 90 98 97 08 09 Export price index (1995=100) .. 92 95 98 Imprort price index (19s5= 100) 88 100 99 U Exports U Imports Tenrns of trade (1995=100) .. 104 94 99 BALANCE of PAYMENTS (US$ millions) 1979 1989 1998 1999 Current account balance to GDP (%) Exports of goods and services 15,131 42.362 128,982 148,083 0 Imports of goods and services 16,704 42,426 137,801 155,465 1 Resource balance -1,573 -83 -8.818 -7,382 2 Net income -4,111 -8,302 -13,284 -13,256 23 Netcurrenttransfers 131 2,544 6,012 6,313 -4 I Current account balance -5,553 -5,821 -16,090 -14,325 Financing items (net) 5,868 6,093 18,227 14,919 7 Changes in net reserves -315 -272 -2,137 -594 j Memo: Reserves including gold (USS millions) .. 6,376 29.032 31,829 Conversion rate (DEC, local/USS) 2.28E-2 2.5 9.2 9.6 EXTERNAL DEBT and RESOURCE FLOWS 1979 1989 1998 199 (US$ millions) ComposItIon of 1999 debt (USS mill.) Total debt outstanding and disbursed 42,774 93,841 159.778 186,960 IBRD 1,731 7,821 11,514 11,027 11rv27 IDA 0 0 0 0 24062 4473 Totaldebtservice 11,591 15,559 27.990 40,195 5M3 IBRD 221 1,244 2,024 2,155 IDA 0 0 0 0 Composition of net resource flows Official grants 26 37 32 Official creditors 283 942 -805 -1,703 Private creditors -882 -3,338 13,225 -24,475 Foreign direct investment 1,332 3,037 10,238 11,568 Portfolio equity 0 0 730 3.769 116641 World Bank program Commitments 527 2,325 2.212 1,671 A - IBRD E - Bilateral Disbursements 326 1.301 1,283 844 B - IDA D - Ohw multilateral F - Private Principal repayments 76 677 1,257 1,323 C - IMF G - Short-term Net flows 250 624 26 -479 Interest payments 145 567 767 832 Nettransfers 106 57 -741 -1,311 Development Economics 30 Annex B2 Mexico - CAS Progress Report Annex B2. Selected Indicators of Bank Portfolio Performance and Management As of April 27,2001 Indicator 1998 1999 2000 2001 Portfolio Assessment Number of Projects Under Implementation a 33 26 26 24 Average Implementation Period (years) b 2.8 3.4 3.6 3.2 Percent of Problem Projects by Number"C 7.1 12.5 7.4 4.2 Percent of Problem Projects by Amount"a 9 10.1 11.6 8.7 Percent of Projects at Risk by Numbera d 7.1 12.5 7.4 4.2 Percent of Projects at Risk by Amount ad 9 10.1 11.6 8.7 Disbursement Ratio (%) e 17.2 17.6 22.4 22.2 Portfolio Management CPPR during the year (yes/no) No No No No Supervision Resources (total US$000) 1,621.5 1,866.6 2,386.6 2,144.5 Average Supervision (US$000/project) 49.1 71.8 91.8 89.4 Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 112 22 Proj Eval by OED by Amt (US$ millions) 21,407.3 5,366.3 % of OED Projects Rated U or HU by Number 29.1 15.0 % of OED Projects Rated U or HU by Ami 22.9 19.4 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. 31 32 Annex B3 Mexico - CAS Progress Report Annex B3. Bank Group Program Summary, FY 2001-2002 Proposed IBRD/IDA Base-Case Lending Program, FY 2001-2002 Amount Strategic Impl. FY Project (US$ million) Rewards a/ Risks a/ 2001 Bank Restructuring Facility 11 505 H L Basic Health Care Project III 323 M L Disaster Management 404 M M Federal Highway Maintenance 218 M M State of Mexico Adjustment Loan 505 H H 2002 Basic Education Development (PAREIB) 11 300 M L Estado de Mexico TAL 25 H H Fiscal Reform SAL 250 H L Financial Sector Reform SECAL 250 H L Financial Sector TAL 25 H M Low Income Urban Housing 125 M L Urban Microbusiness 40 M M Rural Finance SECAL 300 H H Municipal Development (DRD 111) 400 M M Micro finance Development 60 H H State-Level Strengthening SAL 200 H H a. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), moderate (M), or low (L). 33 Annex B3 Mexico - CAS Progress Report Annex B3. IFC and MIGA Program, FY 1998-2000 1998 1999 2000 IFC approvals (US$m) 143.3 84.1 318.4 Sector (%) Chemicals and Petrochemicals 14 Financial Services 23 78 16 Food & Agro-Business 14 Infrastructure 24 2 31 Manufacturing 13 19 14 Motor Vehicles & Parts 12 1 13 Social Services 14 12 Total 100 100 100 Investment instrument (°) Loans 65 75 75 Equity 34 24 6 Quasi-Equity I 0 Other I 0 19 Total 100 100 100 MIGA guarantees (US$m) 0 0 0 34 Annex B4 Mexico - CAS Progress Report Annex B4. Indicative Summary of Non-Lending Services FY2002 Product Completion FY Cost (US$000) Audience a/ Objective b/ Underway Food Marketing FY01 341 G B K Decentralization Education System FY01 442 G B PS Rural Finance in Marginal Areas FY01 193 G B K PS Fiscal Reform CEM FY01 278 G B P PD Crop Insurance FY01 141 G B K PS Capital Markets FY01 122 G B K Indigenous Country Profile FY01 453 G D B P K PD Land Policy Review FY01 240 G B K Facilitating Regionalism FY01 127 G B K Technology Difussion & Job Creation FY01 95 G B K PS Training Mechanisms Reform FY02 230 G B K PS Household Response to Economic Shocks FY02 87 G B K Planned Restructuring of SEP FY02 90 G B PS Labor Reform FY02 88 GBP K PD Southern States Development Strategy FY02 250 G D B P K PD Health Reform FY02 90 GBP PD NAFTA Assessment FY02 175 G B P PD Energy Sector Reform FY02 90 G B P PD PSD / SME Strategy FY02 45 G B K Urban Strategy FY02 45 G B K Environmental Degradation & Poverty FY02 88 GDB K State-Level PERs FY02 88 G B K State-Level Financial Auditing Assessment FY02 165 G B K Anti-Corruption Technical Assistance FY02 90 G D B P PD Participation & Empowerment FY02 90 G D B P PD Rural Enterprise Development FY02 175 G B K a. Government (G), donor (D), bank (B), public dissemination (P). b. Knowledge generation (K), public debate (PD), problem-solving (PS) 35 36 Annex B6 Mexico - CAS Progress Report Annex B6. Key Economic Indicators National accounts (as % GDP at current market prices) Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculturea 6.1 5.5 5.2 4.8 4.4 4.5 4.5 4.4 Industrya 28.4 28.6 28.5 28.7 28.4 27.9 28.3 28.5 Servicesa 65.5 65.9 66.3 66.4 67.3 67.6 67.2 67.1 Total Consumption 74.8 74.2 77.8 78.0 78.5 78.4 77.5 77.3 Gross Domestic Investment 23.1 25.9 24.3 23.6 23.3 23.7 24.6 24.6 Government Investment 3.0 3.1 2.6 2.9 2.9 2.7 3.0 3.0 Private Investment 14.9 16.4 18.3 18.3 18.0 18.8 19.5 19.5 Increase in Stocks 5.2 6.3 3.3 2.4 2.4 2.2 2.2 2.2 Exports (GNFS)b 32.2 30.4 30.8 30.8 31.4 32.1 33.1 34.3 Imports (GNFS)b 30.1 30.4 32.8 32.4 33.2 34.1 35.2 36.2 Gross Domestic Savings 25.2 25.8 22.2 22.0 21.5 21.6 22.5 22.7 Gross National Savingsc 22.4 23.9 20.5 20.6 20.2 19.8 20.4 20.5 Memorandum items Gross Domestic Product 332,339 401,091 416,117 479,940 574,512 602,117 641,231 688,105 (US$ million at current prices) Gross National Product per 3,660 3,710 4,000 4,440 5,080 5,660 6,170 6,510 Capita (US$, Atlas method) Real Annual Growth Rates (%, calculated from 1993 prices) GDP at market prices 5.2 6.8 4.9 3.8 6.9 3.0 4.0 5.0 Gross Domestic Income 5.3 7.7 4.2 4.5 8.3 2.6 3.4 4.8 Real Annual per Capita Growth Rates (%, calculated from 1993 prices) GDP at market prices 3.5 5.2 3.5 2.3 5.4 1.5 2.5 3.5 Total Consumption 0.2 4.4 3.5 2.8 7.2 0.9 0.7 2.9 Private Consumption 0.6 4.9 3.9 2.9 7.9 0.8 0.5 2.6 (Continued) 37 Annex B6 Mexico - CAS Progress Report Annex B6. Key Economic Indicators (continued) Balance of Payments (US$ m) Exports (GNFS)b 106,779 121,701 128,982 148,083 180,136 193,524 212,135 236,053 Merchandise FOB 96,000 110,431 117,460 136,391 166,424 178,799 196,303 219,064 Imports (GNFS)b 99,700 121,608 137,801 155,465 190,509 205,611 225,794 249,057 Merchandise FOB 89,469 109,808 125,373 141,975 174,473 188,745 207,832 229,782 Resource balance 7,079 94 -8,818 -7,382 -10,372 -12,087 -13,659 -13,003 Net current transfers 4,531 5,247 6,012 6,313 6,701 6,644 6,977 7,327 (including official current transfers) Current account balance -2,330 -7,448 -16,090 -14,325 -17,690 -23,233 -27,029 -28,384 (after official capital grants) Net private foreign direct investment Portfolio investment 3,708 3,800 -451 3,901 478 1,502 1,577 1,655 Long-term loans (net) 4,417 356 12,420 12,162 11,372 8,380 10,754 12,973 Official -7,597 -4,567 -805 -1,703 -76 555 581 267 Private 12,014 4,922 13,225 13,866 11,448 7,825 10,173 12,706 Other capital (net, including -1,975 17,225 7,321 2,538 12,971 13,244 14,889 14,879 errors and omissions) Net use of IMF resources -2,052 -3,439 -1,063 -3,682 -4,310 0 0 0 Change in gross reserves -1,768 -10,494 -2,137 -594 -2,822 108 -190 -1,123 Memorandum items Resource balance (% of 2.1 0.0 -2.1 -1.5 -1.8 -2.0 -2.1 -1.9 GDP at current market prices) Current account balance -0.7 -1.9 -3.9 -3.0 -3.1 -3.9 -4.2 -4.1 (% of GDP at current market prices) Real annual growth rates (%) (1993 prices) Merchandise exports 20.7 15.0 6.4 16.1 22.0 7.4 9.8 11.6 Merchandise imports 23.5 22.7 14.2 13.2 22.9 8.2 10.1 10.6 (Continued) 38 Annex B6 Mexico - CAS Progress Report Annex B6. Key Economic Indicators (continued) hudic lw ;r Public finance (as % of GDP at current market prices)d Current revenues 23.0 23.1 20.4 20.8 21.8 21.9 22.2 22.2 Current expenditures 19.2 19.9 18.3 19.3 19.8 19.7 19.5 19.4 Current account surplus(+) 3.8 3.1 2.1 1.5 2.0 2.2 2.7 2.9 or deficit (-) Capital expenditure 3.9 3.7 3.3 2.7 3.1 2.9 3.2 3.2 Overall Balance 0.0 -0.7 -1.2 -1.1 -1.1 -0.7 -0.6 -0.4 Monetary Indicators M2/GDP (at current 26.5 28.3 27.9 26.2 21.1 ... ... ... mnarket prices) Growth of M2(%) 25.3 33.9 19.7 11.8 -4.5 ... ... Private sector credit growth/ total credit growth (%) Price indices (1993=100) Merchandise export price index 115.9 114.8 108.0 112.1 120.6 121.8 122.7 124.8 Merchandise import price index 108.5 109.2 108.4 107.5 110.6 113.3 116.0 118.5 Merchandiseterms of trade index 106.8 105.1 99.6 104.2 109.0 107.6 105.8 105.3 Real exchange rate (LCU/US$)e 95.3 101.6 97.9 100.2 91.3 91.8 91.8 91.8 Consumer price index 34.4 20.6 15.9 16.6 9.5 8.8 7.2 5.2 (% growth rate, period average) Consumer price index 27.7 15.7 18.6 12.3 9.0 7.4 5.8 4.5 (% growth rate, end of period) GDP deflator 30.7 17.7 15.4 15.0 10.7 8.3 6.5 5.0 (% growth of rate) a. GDP components estimated at factor cost, as a % of GDP at factor cost. b. "GNFS" denotes "goods and nonfactor services". c. Includes net unrequited transfers excluding official capital. d. Consolidated non-financial public sector e. "LCU" denotes "local currency units". A decrease in LCU/US$ denotes appreciation. 39 40 Annex B7 Mexico - CAS Progress Report Annex B7. Key Exposure Indicators Total debt outstanding and 157,496 148,696 159,778 166,960 173,696 182,661 193,486 206,546 disbursed (TDO) (US$m)a Net disbursements (US$m)a 2,365 -3,083 11,357 -29,860 7,362 8,440 10,826 13,060 Total debt service (TDS) 41,031 43,480 27,990 40,195 41,867 38,366 51,803 57,132 (US$m)a Debt and debt service indicators (%) TDO/XGSb 141.9 117.5 118.7 108.4 93.2 91.2 88.3 84.9 TDO/GDP 47.4 37.1 38.4 34.8 30.2 30.3 30.2 30.0 TDS/XGSb 37.0 34.4 20.8 26.1 22.5 19.2 23.6 23.5 IBRD exposure indicators (%) IBRDDS/publicDS 8.9 7.4 11.5 13.5 14.8 13.7 10.7 10.7 Preferred creditor/ 21.4 23.7 24.0 51.7 57.5 19.5 15.4 15.6 public DS (/o)C IBRD DS/XGSb 2.1 1.7 1.5 1.4 1.2 1.1 1.0 0.9 IBRDTDO(US$m)d 13,078 11,906 12,109 11,456 11,431 11,971 12,487 12,803 Present value 510 550 595 429 116 0 0 0 of guarantees (US$m) Share of IBRD portfolio (%) 11.5 10.5 9.9 9.2 9.4 9.5 9.6 9.4 IFC (US$m) Loans 528 495 338 402 424 ... ... Equity and quasi-equitye 65 76 78 57 75 ... ... a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank of International Settlements. d. Includes present value of guarantees. e. Includes equity and quasi-equity types of both loan and equity instruments. 41 42 Annex B8 Mexico - CAS Progress Report Annex B8. Status of Bank Group Operations in Mexico Operations Portfolio As of April 27, 2001 Original Amount in US$ Millions Diference between expected Last PSR and actual disbursements a/ Supervision Rating b/ Project ID Fiscal Year Borrower Purpose iBRD IDA Cancel. Undisb. Orig Fon Rev'd Dev Obj Imp Prog Number of Closed Projects: 17' Active Proiectt MX-PE-7667 1993 BANOBRAS HWY R1HB & SAFETY 480.00 0.00 0.00 0.05 0.05 0.00 S HS MX-PE-7723 1993 BANOBRAS MEDIUM C17iES TRANSP 200.00 0.00 23.00 98.90 121.90 98.90 S S MX-PE-7725 1994 NAFIN PRIiARY EDUC.1i 412.00 0.00 40.00 47.56 87.60 47.60 HS S IvlX-PE-7710 1994 BANOBRAS N. BORDER I ENVIRONM 368.00 0.00 313.40 23.80 330.40 51.60 S S MX-PE-7712 1994 NAFIN ON-FARM & MiNOR IRR 200.00 0.00 30.00 30.00 60.00 16.60 S S MX-PE-7612 1994 BANOBRAS SOLID WASTE 11 200.00 0.00 193.06 1.48 4.50 1.50 S S MX-PE-7707 1994 BANOBRAS WATER/SANIT 11 350.00 0.00 84.30 36.85 155.70 0.00 U U MX-PE-34490 1995 NAFIN TECHNICAL EDUC/TRAINING 265.00 0.00 30.00 103.90 133.90 103.80 S S MX-PE-7689 1996 NAFIN BASIC HEALTH II 310.00 0.00 0.00 58.90 58.90 58.90 HS HS MX-PE-7713 1996 NAFIN WATERRESOURCESMANA 186.50 0.00 0.00 122.70 73.50 16.00 S S MX-PE-7700 1997 NAFIN COMMUNITY FORESTRY 15.00 0.00 0.00 6.60 3.00 0.00 S S MX-PE-44531 1998 NAFIN KNOWLEDGE & INNOV 300.00 0.00 0.00 231.97 41.00 0.00 S S MX-PE-7720 1998 BANOBRAS HEALTH SYSTEM REFORM- SAI 700.00 0.00 0.00 150.00 150.00 0.00 S S MX-PE-40199 1998 NAFIN BASIC EDUC.DEVELOPMENT PHASE 1 115.00 0.00 0.00 55.56 40.50 0.00 S S MX-PE-43670 1998 BANOBRAS HEALTH SYSTEM REFORM TA 25.00 0.00 0.00 1.50 1.50 0.00 S S MX-PE-49895 1998 BANOBRAS HIGHER ED. FINANCING 180.20 0.00 0.00 153.70 40.80 0.00 S S MX-PE-7711 1998 NAFIN RURAL DEV. MARGAREA 47.00 0.00 0.00 32.40 16.90 0.00 S S MX-PE-48505 1999 NAFIN AGRICULTURAL PRODUC1 444.45 0.00 0.00 250.30 50.20 0,00 S S MX-PE-7610 1999 BANOBRAS FOVI RESTRUCTURING 505.05 0.00 0.00 326.80 226.80 0.00 5 U MX-PE-66938 2000 NAFIN GENDER (LIL) 3.07 0.00 0.00 3.07 0.10 0.00 S S MX-PE-57530 2000 NAFIN RURAL DEV.MARG.AR 11 55.00 0.00 0.00 47.70 0.70 0.00 S S MX-PE-64887 2001 NAFIN DISASTER MANAGEMENT 404.05 0.00 0.00 404.05 0.00 0.00 N # MX-PE-65779 2001 NAFIN FEDERAL HIGHWAY MAINTENANCE PRO. 218.00 0.00 0.00 218.00 0.00 0.00 S S MX-PE-70479 2001 NAFiN EDO DE MEXICO SAL 505.06 0 00 0.00 300.00 -204.90 0.00 S S Total 6,488.38 0.00 713.76 2,705.79 1,384.05 394.90 Active Proiect c/ Closed Project, c/ Total c/ Total Disbursed (IBRD and IDA) 4,796.91 21,551.67 26,348.5E of which has been repaic 255.24 14,387.91 14,643.14 Total now held by IBRD and IDA 7,336.87 7,163.76 14,500.63 Amount sold 0.00 92.34 92.34 of which has been repaic 0.00 92.34 92.34 Total Undisbursed 2,795.20 0.00 2,795.20 a. Intended disbursements to date minus actual disbursements to date as projected at appraB b. Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system was introduced (IIS highly Satisfactory, S satisfactory, U tunsatisfactory, HU highly unsatisfactoi proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-90 1), August 23, 19 c. As of March 31, 2001 43 Mexico - CAS Progress Report Annex B8 Annex B8. Statement of IFC's Held and Disbursed Portfolio As of December 31, 2000 (In US Dollars Millions) Held Disbursed FY Approval Company Loan Equity Quasi Paric Loan Equity Quasi Partic 198819l19219319' Apasec 12.60 0.00 0.00 50.40 12.60 0.00 0.00 50.40 1998 Ayvi 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.00 1990/92/96 BANAMvIEX 86.61 0.00 0.00 22.67 86.61 0.00 0.00 22.67 1997 Banco Bilbao MXC 65.88 0.00 30.00 0.00 65.88 0.00 30.00 0.00 1992 Banorte-SABROZA 1.50 0.00 0.00 0.00 1.50 0.00 0.00 0.00 1995/96 Baring Mex. FMC 0.00 0.02 0.00 0.00 0.00 0.02 0.00 0.00 1995/99 Baring Venturu 0.00 2.73 0.00 0.00 0.00 1.00 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 7.00 0.00 0.00 0.00 3.50 0.00 0.00 0.00 1994 CTAPV 3.44 0.00 2.11 0.00 3.44 0.00 2.11 0.00 0 Chiapas-Propa1ma 0.00 0.80 0.00 0.00 0.00 0.31 0.00 0.00 1997 Comercializadora 2.84 0.00 2.03 5.63 2.84 0.00 2.03 5.63 1999 Corsa 13.00 3.00 0.00 0.00 13.00 3.00 0.00 0.00 1993 Derivados 1.10 0.00 0.00 0.00 1.10 0.00 0.00 0.00 1997 Fondo Chiapas 0.00 4.20 0.00 0.00 0.00 0.43 0.00 0.00 1998 Forja Monterrew 13.00 3.00 0.00 13.00 13.00 3.00 0.00 1300 1991/96 GIBSA 21.64 0.00 10.00 72.76 21.64 0.00 10.00 72.76 1993 GIDESA 5.00 8.00 0.00 0.00 5.00 8.00 0.00 0.00 1996/00 GIRSA 45.00 0.00 0.00 60.00 45.00 0.00 0.00 60.00 1993 GOTM 0.82 0.00 0.00 0.22 0.82 0.00 0.00 0.22 1997/98 Gen. Hipotecaris 0.00 1.20 0.00 0.00 0.00 1.29 0.00 0.00 0 Grupo BBVA 0.00 2.67 0.00 0.00 0.00 2.67 0.00 0.00 1998 Grupo Calidr. 12.00 6.00 0.00 10.00 12.00 6.00 0.00 10.00 1989 Grupo FEMSA 0.00 9.43 0.00 0.00 0.00 9.43 0.00 0.00 1997 GrupoMinsE 16.00 10.00 0.00 24.00 16.00 10.00 0.00 24.00 1992193195196/9S GrupoPosadar 25.00 0.00 10.00 10.00 25.00 o0 10.00 10.00 1998 Grupo Sanfandil 9.17 0.00 0.00 4.40 7.17 0.00 0.00 3.40 1994/96/98/06 Heller Financia 0.00 0.32 0.00 0.00 0.00 0.32 0.00 0.00 2000 [TR 14.00 0.00 0.00 4.00 10.90 0.00 0.00 3.10 2000 Innopack 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 1994 Interceramic 7.00 0.00 6.00 1.75 7.00 0.00 6.00 1.75 2000 InverCap 0.00 0.07 0.00 0.00 0.00 0.06 0.00 0.00 1993 Masterpak 1.20 0.00 0.00 0.00 1.20 0.00 0.00 0.00 1998 Meridalll 30.00 0.00 0.00 73.95 28.31 0.00 0.00 69.79 1995/99 Mexplus Puertos 0.00 1.41 0.00 0.00 0.00 1.41 0.00 0.00 1996/99/00 NEMAAK 0.00 O0.0 0.83 0.00 0.00 0.00 0.83 0.00 1998 Punta Langosts 2.50 1.00 0.00 4.27 2.50 1.00 0.00 4.27 2000 Rio Bravc 50.00 0.00 0.00 59.50 35.62 0.00 0.00 42.38 2000 SaltilloS.A 35.00 0.00 0.00 43.00 18.85 0.00 0.00 23.15 2000 Servicios 10.50 1.90 0.00 10.00 10.50 1.90 0.00 10.00 1999 SudamericE 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.00 1997 TMA 2.77 0.00 2.10 9.60 2.77 0.00 2.10 9.60 1992 Toluca Toll Roac 6.53 0.00 0.00 0.00 6.53 0.00 0.00 0.00 1991/92 Vitro 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1991 VitroFlotadc 3.31 0.00 0.00 1.38 3.31 0.00 0.00 1.38 1998 ZN Mxc Eqty Func 0.00 25.30 0.00 0.00 0.00 11.88 0.00 0.00 Total Portfolio: 514.41 115.85 63.07 480.53 473.59 96.52 63.07 437.50 Approvals Pending Commitment Loan Equity Quasi Partic 2000 Teksid Aluminic 25.00 0.00 0.00 0.00 2000 Teksid Hierrc 15.00 0.00 0.00 30.00 1999 BANAMEX LRF 11 50.00 0.00 0.00 0.00 1999 Baring BMPEF FMC 0.00 0.06 0.00 0.00 1998 Cima Hermosillk 7.00 0.00 0.00 0.00 2001 Compoartatno! 1.00 0.90 0.00 0.00 2000 Educacion 3.20 0.00 0.00 0.00 2000 Hospital ABC 30.00 0.00 0.00 14.00 2000 Innopack 15.00 0.00 0.00 0.00 Total Pending Commitment: 146.20 0.96 0.00 44.00 44