IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-80040) ON A LOAN IN THE AMOUNT OF US$751.9 MILLION TO THE UNITED MEXICAN STATES FOR A

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank Report No: ICR2383 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IBRD-80040) ON A LOAN IN THE AMOUNT OF US$751.9 MILLION TO THE UNITED MEXICAN STATES FOR A DEVELOPMENT POLICY LOAN TO STRENGTHENING THE BUSINESS ENVIRONMENT FOR ENHANCED ECONOMIC GROWTH July 30, 2012 Finance and Private Sector Development Colombia and Mexico Country Management Unit Latin America and the Caribbean Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective July 30, 2012) Currency Unit = Mexican Pesos (MX$) MX$1.00 = US$ US$1 = MX$ FISCAL YEAR January 1 December 31 BANOBRAS BANSEFI CCDs CFE CFC CMs CNBV COFEMER COFETEL CONSAR CESF CPS CY DPL FONADIN FSAP FY GDP GoM IADB IBRD ICR IFC IL IMF LAC NDP OECD OSDs ABBREVIATIONS AND ACRONYMS Banco Nacional de Obras (National Bank for Public Works) Banco del Ahorro Nacional y Servicios Financieros (National Bank of Savings and Financial Services) Certificado de Capital de Desarrollo (Equity Development Certificate) Comisión Federal de Electricidad (Federal Electricity Commission) Comisión Federal de Competencia (Federal Competition Commission) Contratos Marco (Framework Agreements) Comisión Nacional Bancaria y de Valores (National Banking and Securities Commission) Comisión Federal de Mejora Regulatoria (Federal Commission for Regulatory Environment) Comisión Federal de Telecomunicaciones (Federal Telecommunications Commission) Comisión Nacional del Sistema de Ahorro para el Retiro (National Commission for the Retirement Saving System) Consejo de Estabilidad del Sistema Financiero (Financial Stability Council) Country Partnership Strategy Calendar Year Development Policy Loan Fondo Nacional de Infraestructura (National Infrastructure Fund) Financial Sector Assessment Program Fiscal Year Gross Domestic Product Government of Mexico Inter-American Development Bank International Bank of Reconstruction and Development Implementation Completion Report International Finance Corporation Investment Loan International Monetary Fund Latin America and the Caribbean National Development Plan (Plan Nacional de Desarrollo) Organization for Economic Co-operation and Development Ofertas Subsecuente de Descuentos (Reverse Auctions)

3 PND PPP SAT SCT SE SFP SHCP SIEFORES TA TAL U.S. VAT VUCEM Plan Nacional de Desarrollo (National Development Plan) Public-private Partnership (Asociación Pública Privada) Servicio de Administración Tributaria (Revenue Administration Service) Secretaría de Comunicaciones y Transportes (Ministry of Communications and Transport) Secretaría de Economía (Ministry of Economy) Secretaría de Función Pública (Ministry of Public Administration) Secretaría de Hacienda y Crédito Público (Ministry of Finance and Public Credit) Sociedades de Inversión de Fondos para el Retiro (Pension Funds) Technical Assistance Technical Assistance Loan United States Value Added Tax Ventanilla Única de Comercio Exterior Mexicano (Single Trade Window) Vice President: Country Director: Sector Manager: Task Team Leader: ICR Primary Author Hasan A. Tuluy Gloria M. Grandolini Lily L. Chu Eva M. Gutierrez Claudio A. Pardo

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5 MEXICO Strengthening the Business Environment for Enhanced Economic Growth DPL CONTENTS Data Sheet... i A. Basic Information... i B. Key Dates... i C. Ratings Summary... ii D. Sector and Theme Codes... iii E. Bank Staff... iii F. Results Framework Analysis... iv G. Ratings of Program Performance in ISRs... viii H. Restructuring (if any)... viii 1. Program Context, Development Objectives and Design Context at Appraisal Original Program Development Objectives (PDO) and Key Indicators (as approved) Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification Original Policy Areas Supported by the Program (as approved) Revised Policy Areas Key Factors Affecting Implementation and Outcomes Program Performance Major Factors Affecting Implementation: Monitoring and Evaluation (M&E) Design, Implementation and Utilization: Expected Next Phase/Follow-up Operation (if any): Assessment of Outcomes Relevance of Objectives, Design and Implementation Achievement of Program Development Objectives Justification of Overall Outcome Rating Overarching Themes, Other Outcomes and Impacts Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Bank Performance i

6 5.2 Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1 Bank Lending and Implementation Support/Supervision Processes Annex 2. Beneficiary Survey Results Annex 3. Stakeholder Workshop Report and Results Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders Annex 6. List of Supporting Documents MAP ii

7 Data Sheet A. Basic Information Country: Mexico Program Name: Strengthening the Business Environment for Enhanced Economic Growth DPL Program ID: P L/C/TF Number(s): IBRD ICR Date: 07/30/2012 ICR Type: Core ICR Lending Instrument: DPL Borrower: UNITED MEXICAN STATES Original Total Commitment: USD M Disbursed Amount: USD M Revised Amount: USD M Implementing Agencies: SHCP, SFP, SE, COFETEL, CFE, SCT, SAT, CNBV, CONSAR, FONADIN, CESF Cofinanciers and Other External Partners: None B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 08/31/2010 Effectiveness: 12/20/2011 Appraisal: 12/07/2010 Restructuring(s): Approval: 01/18/2011 Mid-term Review: 11/15/2011 Closing: 01/31/ /31/2012 i

8 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Satisfactory Moderate Satisfactory Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Satisfactory Quality of Supervision: Moderately satisfactory Implementing Agency/Agencies: Satisfactory Overall Bank Performance: Satisfactory Overall Borrower Performance: Satisfactory C.3 Quality at Entry and Implementation Performance Indicators Implementation Performance Indicators QAG Assessments (if any) Rating: Potential Problem Program at any time (Yes/No): No Quality at Entry (QEA): None Problem Program at any time (Yes/No): No Quality of Supervision (QSA): None DO rating before Closing/Inactive status: Satisfactory ii

9 D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration General finance sector General industry and trade sector Micro- and SME finance Telecommunications Theme Code (as % of total Bank financing) Other financial and private sector development Public expenditure, financial management and procurement Regulation and competition policy Tax policy and administration E. Bank Staff Positions At ICR At Approval Vice President: Hasan A. Tuluy Pamela Cox Country Director: Gloria M. Grandolini Gloria M. Grandolini Sector Manager: Lily L. Chu Lily L. Chu Program Team Leader: Eva M. Gutierrez Esperanza Lasabagaster iii

10 ICR Team Leader: ICR Primary Author: Eva M. Gutierrez Claudio A. Pardo F. Results Framework Analysis Program Development Objectives (from Project Appraisal Document) The Overall Program Development Objective is to support economic policies that will strengthen Mexico s business environment and the micro-economic foundations for enhanced economic growth and employment generation. This will be achieved by: (i) strengthening the conditions for competition in crucial markets, in particular the telecommunications sector and public procurement; (ii) streamlining business regulations that will lower trade and other transactions costs and facilitate the adoption of new technologies; (iii) improving the regulatory framework to foster financial sector access, stability and market transparency; and (iv) promoting public-private partnerships in infrastructure to expand core infrastructure services essential to the productivity of Mexican firms. (a) PDO Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Competition in Telecommunications and Public Procurement Indicator 1: Value (quantitative or qualitative) Increase in internet users (connections, per 100 inhabitants) 26.3% 38.0% 36.15% Date achieved 12/31/ /31/ /31/2011 Comments Largely achieved. The reported 36.15% increase in the 2-year period came to be (incl. % achieved) 95.1% of the 38.0% targeted value. Indicator 2: Increase in broadband users (fixed lines, per 100 inhabitants) iv

11 Indicator Value (quantitative or qualitative) Baseline Value 9.2% (statistic later revised to 9.05%) Original Target Values (from approval documents) Formally Revised Target Values 12.5% 11.37% Actual Value Achieved at Completion or Target Years Date achieved 12/31/ /31/ /31/2011 Largely achieved. Although the number of fixed-line connections came short, the Comments original target was easily surpassed if new mobile broadband connections are (incl. % achieved) taken into account (7.17%), for an aggregated figure of broadband connections of 18.54% in Indicator 3: Value (quantitative or qualitative) Implementation of framework agreements ( Contratos marco ) to streamline public procurement procedures Date achieved 12/31/ /31/ /31/2011 Comments (incl. % achieved Largely achieved. Implementation of this new purchasing modality has been slower than anticipated. One more of these contracts was implemented in 1Q12. Indicator 4: Value (quantitative or qualitative) Implementation of additional reverse auctions ( Ofertas subsecuentes de descuento ) Date achieved 08/30/ /31/ /31/2011 Comments Achieved. Utilization of this procurement modality was substantially above (incl. % achieved) targeted levels. Streamlining and Improving the Quality of Business Regulations Indicator 5: Value (quantitative or qualitative) Improvement in the Doing Business sub-index of Time to Comply with Tax Obligations 517 hours 385 hours 347 hours v

12 Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Date achieved 12/31/ /31/ /31/2011 Comments Achieved. Time reduction was surpassed: actual time reduction was 39.9% vs. the (incl. % achieved) targeted decline of 25.5% targeted in the Policy Matrix. Indicator 6: Value (quantitative or qualitative) Cost savings obtained by the private sector from the implementation of the Zero Base Business Regulation Program % of GDP Not available Date achieved 12/31/ /31/ /31/2011 Although official cost savings estimates are not available at this time, indications Comments are that there has been considerable cost savings with the streamlining of tax (incl. % achieved) regulations and new public procurement modalities. Indicator 7: Value (quantitative or qualitative) Reduction in the number of international trade related processes linked to the Revenue Administration Service (SAT) and Ministry of Economy (SE) 107 processes 60 processes 107 processes Date achieved 12/31/ /31/ /31/2011 Not achieved. There were delays in the implementation of the electronic Single Comments Trade Window platform (originally programmed for September 2011 for (incl. % achieved) processes linked to SAT and SE), which was only opened in January 16, Fostering Access to Finance with Stability Indicator 8: Value (quantitative or qualitative) Number of financial transactions conducted through mobile phones 0 10,000 0 Date achieved 01/31/ /31/ /31/2011 Comments (incl. % achieved) Not achieved. Two operators have announced plans to start offering mobile banking ( cuentas móviles, as per Art. 325 Bis1of the CNBV regulations), vi

13 Indicator Indicator 9: Baseline Value Original Target Values (from approval documents) although none was operational at end Formally Revised Target Values Actual Value Achieved at Completion or Target Years Increase in the number of entries (credits) present in the credit reporting databases (Trans Union and Círculo de Crédito credit bureaus data) Value (quantitative or qualitative) million 4% increase over the base (to million) 41.4% increase, to 376 million entries. Date achieved 09/30/ /31/ /31/2011 Achieved. Indicator does not include the credit entries of a third registered credit Comments bureau, Dun & Bradstreet (13 million entries at end-2011), specialized in (incl. % achieved) commercial credit. Indicator 10: Value (quantitative or qualitative) Production of Financial Stability Report by Financial Stability Council and activities completed by the Council Date achieved 12/31/ /31/ /31/2011 Comments Achieved. The Council released its first Report on April Last March, it (incl. % achieved) released its second Report covering the period April 2011 to March Indicator 11: Coverage of delinquent mortgage credit and non-revolving consumer credit from commercial banks under new methodology Value (quantitative or qualitative) A. Mortgages: 24 months of losses B. Non-revolving consumer credits: 7 months of losses Both types of loan-loss provisioning in line with the new 12 months-of-expected loan-loss rule Currently, and since March 2011, these two types of credits provision according to the new rule Date achieved 09/30/ /31/ /31/2011 Achieved. The new methodology, put in place for these two types of credits in Comments March 2011, requires banks to maintain loan-loss reserves equal to their projected (incl. % achieved) loan losses in the following 12 months. Fostering Private Participation in Infrastructure vii

14 Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 12: Average annual private investment in infrastructure ( ) Value (quantitative or qualitative) MX$7.5 billion MX$15 billion MX$18.8 billion Date achieved 12/31/ /31/ /31/2011 Comments Achieved. Figures are based on FONADIN s disbursements to PPP infrastructure (incl. % achieved) investment projects. Target overachieved by 25.3 percent. (b) Intermediate Outcome Indicator(s) None G. Ratings of Program Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD millions) 1 02/25/2011 Satisfactory Satisfactory /13/2011 Satisfactory Satisfactory 0.00 H. Restructuring (if any) Not Applicable viii

15 1. Program Context, Development Objectives and Design 1.1 Context at Appraisal 1. Following the sharp contraction of 2009, the Mexican economy was experiencing a solid recovery by the second half of 2010, when this DPL operation was negotiated. Output was severely impacted in 2009 (6.3 percent drop in GDP, according to the April 2012 WEO report) by the combination of the unprecedented global financial crisis and the 2009 AH1N1 influenza outbreak. Behind the rapid turnaround of 5.5 percent in real GDP in 2010 were the recovery in the United States, Mexico s main trading partner, and the capacity of the Mexican authorities to implement broad-based counter-cyclical policies to mitigate the impact of exogenous shocks. Although economic growth in Mexico has been rather disappointing in recent decades despite significant trade liberalization and market-oriented reforms, the authorities have had a consistent track record of implementing prudent macro policies which clearly have strengthened their ability to recover from exogenous economic disturbances. In fact, soon after the onset of the crisis the Mexican authorities implemented measures to mitigate the external shock and protect social expenditures, as well as several actions geared to maintain orderly conditions in foreign exchange and financial markets As part of the economic recovery efforts, the Calderon Administration launched a 10-point reform program to transform Mexico in September Its agenda was based on the ideas contained in the National Development Plan (NDP), the medium-term development plan presented to Congress in The NDP, which also constitutes the basis for the legislative and regulatory actions supported by the operation being reviewed, was the result of extensive consultations, as demanded by the National Planning Law. The new drive for reform contained in the 10-point agenda, to be carried out during the remaining second-half of the Calderon administration, set among other priorities the reduction of poverty, the widening of the tax base and reduction of evasion, the rationalization of federal spending, as well as the deepening of the efforts geared towards improving the business regulatory framework and reforming the country s telecommunications market. This group of initiatives was of prime interest to this DPL which sought to strengthen the business environment to enhance the prospects for economic growth. 3. Improvements in competitiveness have become increasingly important in Mexico as lack luster growth since the mid-nineties has been mainly the reflection of low productivity gains. Growth decomposition studies show that Mexico s moderate output growth can be explained mainly by the accumulation of production factors (labor 1 The World Bank made an important contribution to this effort in line with its broader, longer term and active support of Mexico s efforts to strengthen its foundations for sustained growth. As stated in the Bank s web site: The Bank has demonstrated to be a strong partner for Mexico during the global economic recession providing unprecedented resources for crisis response programs. As of June 31st, 2011 Mexico had the Bank s 4th largest portfolio, comprised of 18 active projects and 22 knowledge-service products. A summary of recent Bank engagement in the policy areas of interest to this DPL is provided in Box 1. 1

16 and capital) and not by gains associated with total factor productivity (the later contributing just 0.6 percentage points annually to real GDP growth during , which averaged only 3 percent annually during that period). 2 Improvement in the country s competitiveness has been a key theme in recent Country Partnership Strategies (CPS). In particular, the current CPS has sought to increase efficiency and accessibility to the financial sector and the promotion of new infrastructure projects through Public- Private Partnerships, both of which are policy areas supported by this DPL. The Policy Matrix of this DPL operation sought to build on years of engagement by the Bank on addressing competitiveness issues faced by the Mexican economy (Box 1). 4. In March 2010, the 2008 CPS had a progress update which added an active financial services program for fiscal year 2011, following the request of the Government of Mexico (GoM). This updated CPS recognized the changing needs of Mexico in the face of a deteriorating global environment, which included higher levels of financing and knowledge support needs. This fast-disbursing operation was in line with the CPS s progress update and it was part of a broader programmatic Bank effort that included financial, knowledge, and convening services. The added flexibility introduced by the CPS progress update was seen as instrumental not only for assisting Mexico with the financing of its counter-cyclical policy package thus alleviating somewhat the expected human consequences of the economic downturn but also for giving more international recognition to the policy actions in the GoM s 10- point reform agenda, in particular those intended to improve the country s business environment. Knowledge Services: Box 1. World Bank Engagement in Mexico: Selected Policy Areas since 2006 Competition Policy Policy Notes: Creating the Foundations for Equitable Growth Country Procurement Assessment Review WB Publication: No Growth without Equity: Inequality, Interests, and Competition in Mexico Follow up TA on Public Procurement Convening Services: Regional Competitiveness Conference Financial Services First Programmatic Competitiveness DPL Investment Loan (IL): IT Industry Development Technical Assistance Loan (TAL): Results-Based Management and Budgeting Project (Component 1) This DPL: Strengthening the Business Environment for Enhanced Economic Growth 2 This state of affairs is explained in detail in the Program Document, pages 7 to 10. 2

17 Streamlining and Improving the Quality of Business Regulations Knowledge Services: FIAS: Business Regulation Simplification Project WB Publication: Does the Investment Climate Matter? WB Working Paper: A tale of two species : revisiting the effect of registration reform on informal business owners in Mexico Fee-based service: FIAS Implementation of Doing Business Reforms WB Publication: Doing business in a more transparent world economic profile : Mexico TA: Tax Administration and Customs Financial Services: First Programmatic Competitiveness DPL TAL: Institutional Strengthening of Customs This DPL: Strengthening the Business Environment for Enhanced Economic Growth Financial Sector Policy Knowledge Services: FSAP Update Policy Notes: Creating the Foundations for Equitable Growth DEC Policy Reports: Finance for Growth: Policy Choices in a Volatile World and Finance for All? Regional Studies: Access to Finance, SME lending and Capital Market Development Advisory Work on Financial Infrastructure: Payment Systems and Credit Bureau Assessment of the Equity Market Housing Finance Strategy Crisis Preparedness TA: Governance on Development Banks Financial Education and Consumer Protection Program (Trust Fund) Convening Services: Development Bank Conference Capital Markets Workshop Financial Services: Finance for Growth DPL Access to Rural Finance Loan (BANSEFI development bank) DPL: Economic Policies in Response to the Global Crisis IL: Private Housing Markets Development Loan (SHF) TAL: Savings and Credit Sector Consolidation and Financial Inclusion Project (BANSEFI) This DPL: Strengthening the Business Environment for Enhanced Economic Growth Promoting Private Participation in Infrastructure Knowledge Services: Policy Notes: Creating the Foundations for Equitable Growth TA: Regulatory Framework and Best Practice Design of PPPs (Banobras) TA: Adjusting PPP program to Global Crisis IPER: Federal Toll Road Reforms Financial Services: IL: Urban Transport Transformation Project This DPL: Strengthening the Business Environment for Enhanced Economic Growth 3

18 1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved) 5. The PDO supported economic policies that strengthened Mexico s business environment and the micro-economic foundations for enhanced growth and employment generation. Achieving the PDO required the adoption and implementation of mutually reinforcing policy actions in four specific areas. It aimed at: (i) Strengthening the conditions for competition in crucial markets, in particular the telecommunications sector and public procurement; (ii) Streamlining business regulations that will lower trade and other transactions costs and facilitate the adoption of new technologies; (iii) Improving the regulatory framework to foster financial sector access, stability and market transparency; and (iv) Promoting public-private partnerships in infrastructure to help build and expand core infrastructure services essential to the productivity of Mexican firms. 6. Program outcome indicators were monitored following the closing date of this operation (January 2012), during the ICR mission. The Policy Matrix defined the twelve outcome indicators presented in the PDO Indicators table in page iv. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and Reasons/Justification 7. The PDO was not revised and the outcome indicators were not changed or revised. 1.4 Original Policy Areas Supported by the Program (as approved) 8. Policy Area 1: Competition Policy. Of this broad policy area, the reviewed DPL supported government regulatory and administrative prior actions targeted to enhance competition in the telecommunications market and make public procurement more competitive, efficient and transparent. The specific prior actions supported by this operation were as follows: A. Telecommunications market. The Borrower, through CFE (the Federal Electricity Commission), SCT (Ministry of Communications and Transport) and COFETEL (Federal Telecommunications Commission), took administrative actions on two fronts: i. The leasing to a consortium of three new private players in July 2010, under a concession agreement with CFE, of a pair of dark fibers in CFE s 21,208 km fiber-optic network. 3 Due to a lack of bidding participants to its original public and open tender call, CFE assigned the lease for the use of this public-owned nationwide network to a single consortium of Telefónica, Televisa and Megacable, known as 3 Dark fiber is unused optical fiber available for use in fiber-optic communications (e.g., the transmission of digitalized data). CFE, a publicly owned entity, uses a small portion of its fiber-optic network for its own purposes managing its nationwide electricity business, which includes the operation and administration of the national power grid which provides electricity to practically all Mexicans. CFE is not in the telecommunications business but it built its extensive fiber optics network taking advantage of its right-ofway along its transmission line grid. 4

19 GTAC. Previous to the lease of part of CFE s fiber optic network, the only other nationwide fiber-optic network available for telecommunications was owned by Telmex, by far the largest Mexican operator of telecommunications services. Prior to lightening the fiber for its telecommunications purposes, GTAC needed to make additional investments to connect the fiber to its regional and local loops. ii. The concession by COFETEL of 90 MHz of additional radio spectrum to increase the supply of mobile telephony services to end-users a 60 percent increase in band width availability through two open public bidding processes (the so called Tenders 20 and 21, finalized in July 2010). Tender 20 auctioned off 24 regional blocks of 1.9 GHz spectrum in the country s nine cellular regions to three existing operators (Nextel, Iusacell and Movistar). Tender 21 auctioned off 27 regional blocks in the 1.7 GHz spectrum to Movistar and Telcel, with the same general objective of increasing available spectrum for regional service. At the regional level, single blocks were capped at 10 MHz of band width, which in practice excluded the dominant mobile player, Telcel 4, from gaining spectrum under Tender 20. In addition, as part of Tender 21 a national block of spectrum suitable for offering 3G+ services was allocated to the smallest national operator, Nextel. A second national block offered by COFETEL at the time went without takers due to the absence of final bidders. The two national blocks of 30 MHz had been reserved for new and small operators. However, the issuance of several concession titles was challenged in Mexican courts by the incumbent Iusacell, which filed over 100 amparos (injunctions) in connection with spectrum tendered under auction 21. B. Public procurement of goods and services. Mexico has a decentralized procurement system with over 3,200 registered purchasing units, responsible for contracting with suppliers. The SFP has been trying to lower the cost, streamline, and promote competition and transparency in the procurement process via the introduction of new procurement modalities useful to purchasing units although their procurement choices remain voluntary. 5 In the course of 2010, the government, through the Ministry of Public Administration (SPF), took two sets of actions supported by this DPL to implement the 2008 and 2009 amendments to the Law of Acquisitions, Leases and Services of the Public Sector which were supported by this DPL. More specifically, supported prior actions helped with the implementation of two specific procurement tools promoted by the SFP: i. Enactment of regulations for the use of framework agreements. The regulations for the framework agreements ( Contratos marco or CMs) allow three or more suppliers the opportunity to pre-register as potential participants in future procurement auctions of a specific and well defined product, which one or more 4 Telcel is the Mexican mobile company controlled by the Telmex group (also known as the America Movil group). Telcel provides service to about 70 percent of mobile phone subscribers in Mexico. 5 Procurement of goods and services by the Federal Government and associated entities was equivalent to 7.7 percent of GDP in

20 public entities regularly buy. These CMs provide the legal framework that norms such eventual participation in a future procurement exercise. According to estimates of the SFP, around 15 percent of the total procured at the federal level is susceptible to this procurement modality. ii. Enactment of regulations for the use of reverse auctions. These regulations provide critical and practical implementation guidelines to facilitate the adoption of new procurement modalities by the different purchasing units, such as reverse auctions (known in Mexico as Ofertas subsecuentes de descuento or OSDs). OSDs are second-price electronic auctions whereby the first price is determined by the lowest first-bid price (as revealed by qualified participants at the beginning of the auctioning process when their sealed envelopes containing their quoting prices are released). The lowest first price sets a ceiling for the second stage, when the original bidders compete by offering the lowest price possible via electronic bidding using the CompraNet platform, the upgraded transactions based electronic platform used for carrying out public procurement. Six reverse auctions, conducted from late 2009 to mid-2010 in the context of a pilot program involving purchases of pharmaceuticals and coal, had shown that this type of procurement modality could bring about substantial savings when compared with purchases done via the traditional procurement method of offering a price in a closed envelope Policy Area 2: Streamlining and Improving the Quality of Business Regulations. The Program supported steps taken by the government that took aim at reducing business transaction costs and facilitating international trade. These were important first steps of the Zero Base Regulation program, an ambitious reform effort geared to eliminate unnecessary and redundant commercial legislation. The public entities singled out for taking these first steps were three: the Ministry of Finance and Public Credit (SHCP), the Revenue Administration Service (SAT) and the Ministry of Economy (SE). There was significant room at the time for streamlining business regulation, as many federal government transactions had yet to emigrate to electronic platforms, demanded excessive documentation, and followed outdated processes imposing unnecessary costs and delays on business operations. As a result, Mexico lagged substantially behind best practices applied in most OECD countries. 7 Three specific prior actions were supported by this DPL, as follows: i. Simplification and reduction of the number of tax declarations and payment procedures. A Presidential decree (Box 2) eliminated the need of filing a monthly declaration of the Flat-rate Business Tax and the annual declaration of the Valueadded Tax; it also obviated the need of having external audit reports accompanying annual tax payment and social security contribution declarations, and the review of a 6 The price in a closed envelope is a constitutional mandate, which has to be respected by reverse auctions. 7 According to the Global Competitiveness Report published by the World Economic Forum, Mexico ranked 116 among 139 countries in terms of the Burden of Government Regulation index in

21 public accountant to claim a credit reimbursement on the Cash Deposit Tax. Also, the validity of Electronic Signatures was extended from two to four years. ii. Development and operation of an electronic Single Trade Window (VUCEM). Each foreign trade transaction involved a large number of processes, heavy paper work and many participants. According to SAT, there were 30 actors involved in a given transaction, which had to present 40 documents, go through 165 different processes and supply 200 pieces of data, many of which had to be filled out several times over. VUCEM allows presenting requested documentation for foreign trade transactions just once through an electronic platform accessible from a computer. iii. Recognition of the standards and conformity assessment procedures applied in the United States or Canada for electronic appliances and data processing equipment. This was a seminal change in regulation since it initiated the process of harmonization and validation of technical norms with major trading partners, basically certifying the U.S. and Canadian norms for these two types of products as valid under the Mexican technical norm and product standards ( Norma Oficial Mexicana ).The reform simplified procedures for importing such goods. 10. Policy Area 3: Fostering Financial Access with Stability. Although the Mexican financial system was shown to be fairly resilient to the shocks resulting from the global financial crisis 8, access to the financial sector remains low (about 50 percent of the population does not use the financial system). Improvements in this area by fostering responsible access while preserving stability in order to increase productivity were thus prominent in the government s development agenda. In the course of 2010, the government adopted specific measures to promote responsible access to financial services, four of which ended up being supported by the reviewed operation. The public entities in charge of implementing the Borrower s policy decisions were principally the SHCP and CNBV, and the supported prior actions were as follows: i. Enactment of regulations for the operation of mobile phone accounts. The new mobile accounts are basically bank accounts of low risk and light transactional volume as defined by the regulations that reside in mobile phones. They offer basic financial services such as cash withdrawals, deposits, transfers between mobile phone and other banking accounts, bill payment and consultation of past account transactions and balance. Credit institutions must offer these accounts through administrators (mobile phone network providers acting on behalf of credit institutions) which are wholesalers managing groups of retailers or agents willing to offer and give support to mobile accounts at their point-of-sale on behalf of credit institutions for a fee. 9 The central idea behind this new type of banking account is to 8 For example, non-performing loans were 2.5 percent of the banks lending portfolios in September 2010 while the capital adequacy ratio of the commercial banking system stood at a healthy 17 percent. 9 Mexico s model has some similarities with the type of mobile banking implemented in Kenya, although in Kenya the service is offered through retailers or agents working directly for the leading mobile network provider Safaricom via its M-PESA platform without involving a traditional credit institution in the process. As in Kenya, the idea in Mexico is to offer e-money that resides in a mobile phone SIM card, which acts as the individual s crucial means of identification. 7

22 offer basic financial services at a lower cost via a widely available channel to the rural poor. ii. Enhancement of coverage, data quality and consumer service provided through credit bureaus. The reforms broadened and made more precise the reasons a bureau could lose its license and increased the incentive to share information among bureaus. 10 They also improved the quality of the information disclosed to the bureaus by credit institutions by establishing their obligation to report credit origination and the date a delinquency takes place. Consumer protection was also improved by reducing to five working days the time a bureau had to inform the reporting credit institution of a specific complaint received from a client. iii. Establishment of the Financial Stability Council (CESF). This high level interagency council is chaired by the Minister of Finance and comprises all financial regulatory authorities. The CESF, assisted by a Technical Committee, is responsible for making recommendations and coordinating policy actions and their implementation aimed at mitigating financial systemic risks with the actions implemented by each agency according to their legal mandates. The Council also acts as a consultation group for the Federal Government on financial systemic risk and has to produce and publish an Annual Report with an assessment of the state of the financial system, including diagnostic work done and any other activities of the Council during the previous twelve months. iv. Enactment of prudential regulations strengthening provisioning requirements for mortgage loans and non-revolving consumer credits. In mid the CNBV started to modify prudential regulations for loan provisioning from a system based on incurred losses (backward looking) to one based on expected losses. Loan-loss provisioning based on a forward looking models normally do a better job at projecting future losses, increasing lender resilience to portfolio deterioration. This forward looking and paradigm-changing approach in line with Basel Committee guidelines was already applied to credit card loans. 11. Policy Area 4: Promoting Private Participation in Infrastructure. Aware of Mexico s substantial infrastructure needs 11, the federal government adopted a National Infrastructure Plan covering the years that sought to commit a total of almost US$240 billion in new infrastructure for the country, both publicly and privately financed. The Plan set the private sector share of the financing at 58 percent of that amount; the rest was supposed to come from public resources. This was expected to be Mexico s greatest infrastructure investment effort in 25 years. Significant progress was achieved in the Plan s implementation during its first three years, a period when 40 percent of the 10 However, due to the acceptance of injunctions (amparos) presented by Trans Union de Mexico, the largest credit bureau, and Dun & Bradstreet, S.A., the sharing of positive information in Art. 36 Bis of the Law still is not implemented. 11 Excluding hydrocarbons, Mexico invested annually less than 2 percent of GDP in infrastructure over the last three decades ending in

23 projected investment in infrastructure was put in place. However, despite active private participation about 80 percent of that investment was made with public resources. It was clear that in the remaining three years of the Plan ( ) the private contribution had to be much more substantial if its targeted share of 58 percent was going to be achieved. In that context, the reviewed DPL sought to support prior actions that fostered private participation in infrastructure projects during years , particularly those that promoted public-private partnerships (PPPs) at the national and sub-national levels. There were three prior actions related to this sector that received support under this DPL: i. Enactment of a decree allowing for the extension of a concession at any time during its lifetime. Prior to this decree, the law allowed extensions to the length of concessions under a PPP, such as toll roads, only in the last fifth of the life span of the PPP contract. The amendments to the law recognized the fact that for a variety of reason and circumstances it is often advantageous to have the flexibility to change the terms and conditions of the original contract or the project itself at any time of the concession period. 12 ii. Authorization to the more risk-prone Pension Funds (SIEFORES) to allocate up to 15 percent of their investment portfolios in structured securities. This authorization allowed SIEFORES with more aggressive investment strategies targeted towards younger workers to invest in a new type of security, the so-called Equity Development Certificates (Certificados de Capital de Desarrollo CCDs). CCDs are securities similar to stocks, but with a final redemption date. They are issued by fiduciary trusts created with the purpose of financing projects. 13 This opened up a potentially big new source of long term funding for infrastructure projects, given that the SIEFORES industry was managing approximately US$105 billion in June iii. Participation of the National Investment Fund (FONADIN) as a minority investor in private equity funds. This fiduciary trust fund is managed by Banobras on behalf of the GoM and funded with public money for investing in infrastructure among other activities. The reform aimed at promoting the creation of new private funds interested in investing in domestic infrastructure projects. New guidelines set some basic parameters to guide FONADIN s selection of investment opportunities in infrastructure-oriented private equity funds: a) a minimum fund size of MX$2,000 million; b) a participation of at least 5 percent of the fund resources by the fund manager; c) maximum FONADIN 12 Concessions for infrastructure projects are long-term undertakings lasting 15 years or longer, so it is very difficult to properly cover at inception for all eventualities (e.g., traffic flows, additional investment needs, etc.) and for the life of a contract. Thus, it usually makes economic and technical sense to have contractual flexibility at any time during the lifespan of PPP contracts. 13 CCDs type A are issued to finance a variety of investments by private equity or investment funds which issue them as liabilities to get long-term funding. Type B is a single-purpose vehicle issued to directly finance a specific investment project, like a toll highway or other infrastructure project. 9

24 participation capped at 20 percent of the total and/or 1:1 with other investors different from SIEFORES, and d) fund must be invested only domestically. Box 2. Prior Actions Under the Program As stated in Schedule 1 of the Loan Agreement, prior actions of the Borrower under the Program were as follows: 1. Enhancement of competition in the telecommunications markets and enhancement of competition, efficiency and transparency of public procurement. A. The Borrower, through CFE, SCT and COFETEL, has taken actions to enhance the competition in the telecommunications markets in the territory of the Borrower as evidenced by: (i) the issuance of a concession on July 5, 2010 to use a pair of fibers of the state-owned power utility's fiber-optic network for the provision of telecommunication services; and (ii) the issuance, through Decision (Acuerdo) of COFETEL dated December 14, 2009, of bidding documents (bases de licitación) for public bidding of multiple concessions for the use of radio spectrum in the bandwidths of: (a) 1.9GHz in eight of the nine spectrum regions of the Borrower s territory, and (b) 1.7/2.1 GHz in the nine different spectrum regions of the Borrower s territory, all for the provision of mobile telecommunication services. B. The Borrower, through SFP, has taken steps to enhance the competition, efficiency and transparency of public procurement of goods and services as evidenced by the enactment of: (i) a regulation of the Law of Acquisitions, Leases and Services of the Public Sector (Reglamento de la Ley de Adquisiciones, Arrendamientos y Servicios del Sector Público), issued by the President and published in the Borrower s Official Gazette on July 28, 2010 establishing, inter alia, the regulations for the use of framework agreements; and (ii) Guidelines on Acquisitions, Leases and Services and Public Works and Services related thereto (Lineamientos en Materia de Adquisiciones, Arrendamientos y Servicios y de Obras Publicas y Servicios Relacionados con las mismas), issued by SFP and published in the Borrower s Official Gazette on September 9, 2010, establishing, inter alia, the rules for the use of reverse auctions (Ofertas Subsecuentes de Descuentos) in public procurement processes. 2. Streamlining and Improving the Quality of Business Regulations. A. The Borrower, through SHCP, SAT and SE, has taken steps for the reduction of business transaction costs and the facilitation of trade as evidenced by: (i) the enactment of a Presidential decree simplifying and reducing the number of tax declaration and payment procedures, published in the Borrower s Official Gazette on June 30, 2010; (ii) the execution of a contract between the Borrower, through SAT, and a technology integration company for the development and operation of an electronic single trade window, dated November 11, 2010; and (iii) the enactment of four Ministerial Decisions that eliminate redundant certification requirements by recognizing the use, in the Borrower s territory, of standards and conformity assessment procedures applied in the USA or Canada for electronic appliances and data processing equipment, issued by SE and published in the Borrower s Official Gazette on August 17, Fostering Access to Finance with Stability A. The Borrower, through SHCP and CNBV among other entities, has adopted measures to enhance the access to finance and the stability of the financial system as evidenced by the enactment of: (i) a resolution amending the General Provisions Applicable to Credit Institutions (including, inter alia article 325 Bis1 of the said general provisions) to facilitate 10

25 the supply of financial services using mobile phone accounts, issued jointly by SHCP and CNBV, and published in the Borrower s Official Gazette on April 15, 2010; (ii) a decree amending the Law of Credit Information Societies including Articles 19, 20, and 42, to support the enhancement of coverage, data quality and consumer service provided through credit bureaus, issued by the President and published in the Borrower s Official Gazette on May 25, 2010; (iii) a decree establishing the Financial Stability Council, issued by the President and published in the Borrower s Official Gazette on July 29, 2010; and (iv) prudential regulation strengthening provisioning requirements for mortgage loans and nonrevolving consumer credit, issued by CNBV and published in the Borrower s Official Gazette on October 12, Promoting Private Participation in Infrastructure A. The Borrower has taken measures to foster private investment in infrastructure as evidenced by the enactment of: (i) a decree amending the Law on Federal Roads, Bridges and Auto Transport to allow extensions of concessions during any of its stages, issued by the President and published in the Borrower s Official Gazette on November 4, 2010; (ii) a circular letter issued by CONSAR amending the investment regime of SIEFORES to authorize them to invest in structured securities up to 15% of their portfolio, depending on the risk profile of the relevant SIEFORE, published in the Borrower s Official Gazette on June 11, 2010; and (iii) guidelines issued by the board of FONADIN allowing it to participate as a minority investor in private equity funds specialized in infrastructure with the purpose of promoting the creation of such funds, dated May 14, Revised Policy Areas 12. The original policy areas of this DPL were not modified. 2. Key Factors Affecting Implementation and Outcomes 2.1 Program Performance 13. The program substantially achieved its objectives; nine of the twelve outcome indicators were met or close to it; two were not achieved and the ICR team was not able to obtain information for one. On the basis of the most recent statistics available, the status and values of the twelve outcome indicators in the Policy Matrix are presented in Table 1 below: See also the PDO Indicators table in the Data Sheet on page iv. 11

26 Table 1: Program Outcome Indicators Outcome Indicators (As stated in Policy Matrix) Baseline Target Value by End-2011 Status A. Telecommunications market Indicator 1: Increase in the number of users of internet services (per 100 inhabitants). Indicator 2: Increase in the users of broadband services (per 100 inhabitants) B. Public Procurement Indicator 3: Number of framework agreements in place Indicator 4: Implementation of additional reverse auctions Policy Area 1: Competition Policy Percentage of internet subscribers in the population: 26.3 percent end 2009 Percentage of broadband subscribers in the population: 9.2 percent end 2009 Percentage of subscribers in the population: 38 percent, at end at end at end carried out from July 2008 to August 2010 Percentage of broadband in the population (fixed-line connections): 12.5 percent, at end-2011 Largely achieved: 36.15% Largely achieved; 11.4% Largely achieved: 8 8 carried out from September 2010 to December 2011 Achieved: 27 Policy Area 2: Streamlining and Improving the Quality of Business Regulations Indicator 5: Reduction in the time to comply with tax obligations as measured by the relevant Doing Business sub-index Indicator 6: Cost savings obtained by the private sector from the implementation of the Zero Base Business Regulation Program (as measured by the OECD methodology) Indicator 7: Reduction in the number of international trade related processes linked to SAT and SE 517 hours (Doing Business 2010) 0 percent of GDP in 2009 Number of processes linked to SAT and SE: 107 in hours (Doing Business 2012) 0.15 percent of GDP in 2011 Number of processes linked to SAT and SE: 60 at end-2011 Policy Area 3: Fostering Access to Finance with Stability Indicator 8: Number of financial transactions conducted through mobile phones (Art. 325 Bis1 of credit institutions provisions) Number of transactions: 0 as of January 2010 Number of transactions: 10,000 as of end-2011 Indicator 9: Estimated number of entries (credits) present in the credit reporting databases (Trans million (2010) Increase of 4 percent over the base by end-2011 (to million) Achieved: 347 hours Not available Not achieved: 107 (due to delays in VECUM implementation) Not achieved: 0 transactions Achieved: 41.4% increase, to 376 million entries 12