Report No MX

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized DOCUMENT OF THE WORLD BANK FOR OFFICIAL USE ONLY Report No MX INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED THIRD AFFORDABLE HOUSING AND URBAN POVERTY REDUCTION DEVELOPMENT POLICY LOAN IN THE AMOUNT OF US$ MILLION TO THE UNITED MEXICAN STATES October 15,2007 Sustainable Development Department Colombia and Mexico Country Management Unit Latin America and 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.

2 United Mexican States - Fiscal Year January 1 - December 3 1 CURRENCY EQUIVALENTS (Exchange Rate Effective as of October 1 1,2007) Currency Unit Peso Pesos = US$1 WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS BANOBRAS BANSEFI CAS CEPAL CGAP CNBV CONAFOVI CONAGUA CONAVI CORETT cso DIF DIRD DPL EIA ENIGH ES W FAIS FONAEVI FONHAPO FOVI FOVISSSTE FSAP GDP GoM HMF HUSAL HUDPL HUTAL IBRD IADB IMTA INFONAVIT ISSSTE LGS M&E MFL National Bank of Public Works and Services Bank of National Savings and Financial Services Country Assistance Strategy Economic Commission for Latin America and the Caribbean Consultative Group to Assist the Poor National Commission for Banking and Securities National Commission for Housing Development National Water Commission National Housing Commission (previous to June 06 CONAFOVI) Land Regularization Commission Civil Society Organizations Family Development Fund Decentralized Infrastructure Reform and Development Loan Development Policy Loan Environmental Impact Assessment Income and Expenditures Household Survey Economic Sector Work Federal Transfers for Social Infrastructure to States and Municipalities National Fund for Low-Cost Housing Low-Income Housing Fund Financial Housing Aid Fund Housing Fund, Social Security Services Institute of Public Workers Financial Sector Assessment Program (IMF and World Bank) Gross domestic product Government of Mexico Housing Microfinance Affordable Housing and Urban Poverty Sector Adjustment Loan Affordable Housing and Urban Poverty Development Policy Loan Housing and Urban Technical Assistance Loan International Bank for Reconstruction and Development Inter-American Development Bank Mexican Institute of Water Technology National Housing Fund for Private Sector Workers Pension Institute for Public Sector Workers Local governments Monitoring and Evaluation Microfinance Loans

3 MW NAFTA NDP NGO OECD OREVIS ONAVIS PFM PROSAVI PSIA SCAPS SEA SEDESOL SEMARNAT SENER SHCP SHF SME SOFOLs TA TDEI UDI VIVAH Minimum wage (1 MW = MX$1,537/month = US$140/month) North American Free Trade Agreement National Development Plan Nongovernmental organization Organization for Economic Co-operation and Development State Housing Finance Agencies National Housing Finance Agencies Public Financial Management Special Housing Subsidy Program Poverty and Social Impact Analysis Savings and Loans Cooperatives Strategic Environmental Assessment Social Development Secretariat Ministry of Environment and Natural Resources Ministry of Energy Ministry of Finance Federal Mortgage Corporation Small and Medium-sized Enterprises Special Purpose Financial Companies Technical Assistance Territorial Development and Environmental Improvement Inflation-adjusted unit of account Progressive housing subsidy and saving program Vice President: Pamela Cox Country Director: Axel van Trotsenburg Sector Director: Laura Tuck Task Team Leader: Abhas K. Jha

4 CONTENTS.. LOAN AND PROGRAM SUMMARY... II I. INTRODUCTION... 1 I1. COUNTRY CONTEXT... 3 Recent Economic Developments... 4 Medium-Term Macroeconomic Prospects and Debt Sustainability... 4 The Housing Sector in the Mexican Economy... 5 I11. MEXICO S AFFORDABLE HOUSING AND URBAN REFORM AGENDA, Areas of Bank Support for the Government s Program Policy Area 1 : Macroeconomic Framework Policy Area 2: National Housing Policies and Institutions Policy Area 3 : Improving the Housing Subsidy System Policy Area 4: Housing Finance Policy Area 5: Urban Property Registries and Rights Policy Area 6: National Urban Policy, Slum Upgrading, and Institutional Strengthening Policy Area 7: Low- and Moderate-Income Land Development Policy Area 8: Disaster Prevention and Management IV. THE BANK-SUPPORTED AFFORDABLE HOUSING AND URBAN POVERTY PROGRAM Relationship with Other Bank Operations Lessons Learned Analytical Underpinnings V. Proposed Loan Description VI. Operation Implementation Poverty and Social Impacts Environmental Aspects Fiduciary Aspects Disbursements Risks and Mitigation Appendix 1 Letter of Development Policy Appendix 2 Matrix of Policy Actions, Expected Outcomes, and Indicators Appendix 3 IMF Relations with The Bank Appendix 4 Description and Analysis of the New Esta es tu Casa Program Appendix 5 Summary Table: Potential Poverty and Social Impacts Appendix 6 Implementing the New Pro-Poor Housing Subsidy Policy in Mexico:. 62 Appendix 7. Public Consultations for Government of Mexico Plan de Desarrollo, including for the Housing Sector Appendix 8 Key Elements of Country Environmental Appendix 9. Average Subsidy amount by Income Segment (Base line data) Appendix 10 Country at a Glance Appendix 11 Mexico: Operations Portfolio (IBRDDDA) and Grants Appendix 12. Statement of IFC s Held and Disbursed Portfolio This loan was prepared by a World Bank team consisting of Abhas Jha. Angelica Nunez. Marja-Hoek Smit. Jozef Draaisma. Edgardo Mosquiera. Carine Clert. William Reuben. Juan Carlos Belaustegugotia. Victor M. Ordbilez Conde. Jessica Wunvarg and Manuel Vargas under the supervision of Laura Tuck and Axel van Trotsenburg. The team is grateful for the helpful input and suggestions provided by Todd Crawford. Angela Armstrong. Loic Chiquier. Christine Richaud and Dan Boyce. Peer reviewers were Robert Buckley and Maria Emilia Freire. Patricia Acevedo and Karina M. Kashiwamoto provided valuable administrative support.

5

6 LOAN AND PROGRAM SUMMARY UNITED MEXICAN STATES THIRD AFFORDABLE HOUSING AND URBAN POVERTY REDUCTION DEVELOPMENT POLICY LOAN Borrower Implementing Agency Poverty Category Amount Terms Front-End Fee Objectives, Description, and Benefits United Mexican States Ministry of Treasury and Public Credit Not applicable US$200,510,000 Fixed-spread US$-denominated loan, 5-year grace period, total repayment period of 15 years 0.25 percent of loan amount capitalized The proposed operation is the third in a three-loan program to support housing and urban development reforms under the Government of Mexico s National Housing Sector Programs and , and National Urban Development and Territorial Planning Programs and The overall objective is to support the Government s efforts to improve national policies and institutions for housing and urban development; make the federal housing system more efficient by designing and implementing a unified system of subsidies to facilitate access to housing by low- and moderate-income families; bolster systems for housing loans and savings and move them down-market; strengthen urban real property registries and rights; coordinate and support physical and social investments in poor neighborhoods; increase the supply of and access to urban land for poor people and improve this market s functioning; and increase capacity to prevent and manage the damage caused by natural disasters. The program of World Bank support includes 3 sector adjustment and development policy loans and a US$7.7 million Housing and Urban Technical Assistance Loan (HUTAL). The first loan in the series (HUSAL I) was approved by the World Bank s Board of Directors on April 27, That loan supported the design and implementation of a new national housing policy and accompanying institutional arrangements, establishment of programs to facilitate home loans for low- and moderate-income groups, and initial steps to harmonize disparate housing subsidy systems and modernize urban title systems. In parallel, a coordinated national urban development policy was developed and implemented at the federal and local levels. Its focus was to strengthen institutions, improve approaches to develop land for low-income housing, and introduce programs to mainstream natural disaster risk management in development plans. The second loan, (HUDPL 11)-approved in November provided continued support for the Government s program, in five main areas: reforming the operation and structure of federal housing subsidies; developing new financing mechanisms for home purchases, improvements, and additions for low- and moderate-income populations; expanding the program for modernizing property registries; strengthening the slum upgrading program; and expanding low- and moderate-income land development. All key actions in the government s program which were anticipated before appraisal of the proposed Third Affordable Housing and Urban Poverty Reduction Development Policy Loan (HUDPL 111) have been completed (Section V). The loan will support a number of the new administration s priorities and initiatives in the housing and urban sector. The loan consolidates and deepens the reforms undertaken under the first and

7 Risks and Mitigation second loans (HUSAL and HUDPL I). The loan s expected benefits include increased access to adequate housing and basic services for low-income households, higher sector efficiency and competitiveness, greater income opportunities and promotion of access to physical capital, and better environmental conditions. The program has made better than expected progress in some components, notably subsidy reform and mainstreaming environmental concerns in the housing sector. The overall government reform program has two major risks. Institutional and Sustainability The institutional risk is related to the difficulty of ensuring adequate coordination across agencies. The program s ambitious, multi-sectoral approach requires constant coordination between government agencies and ministries. A failure to do so would put parts of the program at risk. The new Housing Law considerably strengthens the coordinating and policy-setting role of CONAVI. Accordingly, this risk is rated as low. There is also a sustainability risk to the entire reform program at the end of the HUSAL/HUDPL series. The significant reforms undertaken by GoM over the past several years need to be sustained throughout the medium term to obtain the desired outcomes. There is a considerable risk that INFONAVIT captures a major portion of the new subsidy program and effectively shuts out the still nascent private sector fiom the lowest-income segments. It is worth reiterating that, as an institution, INFONAVIT enjoys virtual autonomy fi-om the federal government in terms of decision-making. The Bank will remain engaged with GoM on subsidy reform through the HUTAL and, as in the past, it is expected that GoM will seriously consider the Bank s recommendations in this regard. This risk is rated as moderate. Project Identification Number Overall project risk: Low. P101342

8 Box 1. Lexicon of affordable housing and urban poverty in Mexico BANSEFI (Bank of National Savings and Financial Services)-Federal institution created in 2001 to promote household savings, help popular financial institutions adjust to the 2001 Law for Popular Savings and Credit (which phased in new requirements between 2001 and 2004), and coordinate Government support to such institutions, which focus on serving low- and moderateincome households. ( CONAVI (National Housing Commission)-Federal institution formed in 200 1, originally part of the Social Development Secretariat (SEDESOL) but autonomous as of Develops and coordinates housing policy. Starting in 2007, with SHF also operates the new subsidy scheme, Esquemas de Financiamiento y Subsidio Federal para la Vivienda. ( CORETT (Land Regularization Committee )-Federal agency under SEDESOL responsible for regularizing informally urbanized ejido land. Operating on a massive scale, buys (expropriates) such land, regularizes titles to it, and sells it to existing occupants. ( Ejido land-form of communal property (often called social land ) created by the Mexican Constitution to protect rural farming communities and regulated by a complex set of federal laws and institutions. Two-thirds of land on the fringes of Mexican cities now consists of ejidos, which are the main source for new housing parcels. Esta es tu Casa -(Federal housing finance and subsidy scheme ) Program launched in February 2007 by CONAVI and operated by SHF. It provides an up-front subsidy for housing loans (including housing improvement, self-construction and serviced lots) for households earning less than 5 minimum wages (MW) FONAEVI (National Fund for Low-Cost Housing)-Trust fund, administered by FONHAPO, that manages and disburses funds under the unified housing subsidy system, and for Tu Casa. FONHAPO (Low-Income Housing Fund)-Trust fund that serves as the main source of federal support for low-income housing and channels FONAEVI s funds. FONHAPO s main programs are Tu Casa and PROSAVI. ( FOVI (Financial Housing Aid Fund)-Second-tier institution that provided market-rate mortgages until SHF was created in Now administered by SHF, FOVI primarily performs functions related to covering liabilities created by its former lending operations. FOVISSSTE (Housing Fund, Social Security Services Institute for Public Sector Workers)--Housing fund that receives 5 percent of the salaries of federal workers, which it uses to provide below-market-rate mortgages, with lower rates for poorer households. In 2004 provided approximately 10 percent of mortgage loans. Also part of the pension system (ISSSTE) for contributing workers. INFONAVIT (National Housing Fund for Private Sector Workers)-Pension fund and housing lender funded by a compulsory contribution of 5 percent of the salaries of private formal sector workers. It provides below-market-rate mortgages, with lower rates for poorer households. Governed by representatives of workers, employers, and Government. Provided 50 percent of mortgage finance in Also part of the pension system for contributing workers. Low-income household-household earning up to three minimum wages. iv

9 Minimum wage-income measure used for social programs, including housing. One minimum wage is approximately US$140 a month. Moderate-income household-household earning between 3 and 6 minimum wages. PROSAVI-Subsidy program created by FOVI and later run by FONHAPO that provided housing grants of approximately US$5,000 to households earning 3-5 minimum wages. Beneficiary households combined the grants with mortgage loans (from SI-IF-funded SOFOLs, which channel the grants to specific projects) and down payments to buy expandable units (each approximately 40 square meters and costing US$16,000). PROSAVI has been substituted by the new subsidy scheme, Esquemas de Financiamiento y Subsidio Federal para la Vivienda. Ram0 33-Earmarked federal transfers to States and municipalities. It accounts for almost half of all the federal transfers and is divided in seven spending categories (or funds). Ram0 33 subsidizes subnational government s provision of services with national externalities (such as health, education and basic infrastructure). SEDESOL (Social Development Secretariat)-Federal things, urban development. (www,sedesol.gob.mx) ministry responsible for, among other SHF (Federal Mortgage Corporation)-Created in 2002 as the successor to FOVI. Will receive 12 years of federal support to lead the development of primary and secondary market-rate home lending. A second-tier institution that provides liquidity and guarantees to first-tier lenders (mainly SOFOLs), SHF funded 13 percent of mortgage finance in 2002; since then, it has decreased to 5 percent in ( Sofols-Nonbank financial institutiodspecialized lenders set up as a result of the North American Free Trade Agreement (NAFTA) that have become Mexico s main source of private home lending since banks left the market in These institutions can make loans and raise capital on capital markets, but cannot accept deposits from the public. SOFOLs are legally allowed to finance a limited number of activities (for example, for consumer goods, education, and health). This document refers only to Mortgage SOFOLs (SOFOLs Hipotecarias.) Tu Casa (formerly VIVAHFSubsidy program run by FONHAPO that provides housing grants of approximately US$3,000 for a new finished unit, or US$1,400 for housing improvements, to households earning 3 minimum wages or less. The grants must be matched by state and local governments, typically in the form of serviced lots for finished housing. Local governments contract construction of basic units (up to 30 square meters), which beneficiary households buy by combining the grants with down-payments. V

10 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED THIRD AFFORDABLE HOUSING AND URBAN POVERTY REDUCTION DEVELOPMENT POLICY LOAN TO THE UNITED MEXICAN STATES I. INTRODUCTION 1. The Mexico housing and urban poverty reduction program continues to be robust with strong ownershipfiom the Government of Mexico. The number of housing subsidies continues to increase while being better targeted to the poor (<3MW segment) and (for the first time in Mexico) incentivizing the used housing market. The housing microfinance pilot has made steady progress and the number of microfinance loans is increasing. The number of plots allocated to beneficiaries of the program Habitat for low-income housing also has increased. 2. The Calderdn administration has maintained the previous government s commitment to address Mexico s critical housing and urban development needs. The National Development Plan (NDP) aims to increase access to housing for the poorest segments of the population in an orderly, rational, and sustainable context. The NDP emerged from the consultations held by the federal government in 205 fora held in the second semester of The housing and sector programs are being prepared by the sector agencies. These programs will derive from the NDP s main strategic objectives detailed below: Strengthen tenure security through standardizing property registries, municipal cadastres, and rural registries as well as the mandatory registry of properties Increase coverage and variety of available housing finance options Increase supply of adequate land for housing construction and economic development Use existing urban infrastructure more efficiently, Consolidate the National Housing System Generate a dynamic used housing market and assist the development of an efficient rental market Promote housing improvement and create conditions to foster progressive housing and social housing production through alternative financial products and support for the lower-income population. 3. The proposed Third Affordable Housing and Urban Poverty Reduction Development Policy Loan (HUDPL IIJ will support a number of the new administration s priorities and initiatives in the housing and construction sector. It consolidates and deepens the reforms undertaken under the first and second loans, HUSAL-I and HUDPL 11, which were approved in April 2004 and November 2005, respectively. 4. The Government of Mexico continues to demonstrate strong commitment and ownership of the program. The Government has completed all key actions in its program which were anticipated before appraisal of the third loan. 1 The National Development Plan may be seen at htto://ond.oresidencia.aob,mx/index.html. The section on housing and construction may be seen at htto://ond.calderon,~residencia.eob.nixl~d~~e2 Economia ComDetitiva Y Generadora de Em~leos/2 13 Construccion v Viviend a.odf 1

11 5. The components of the proposed loan draw Pom strong technical analysis conducted by the Bank and the Government of Mexico. Prior to HUSAL I, two Bank reports- A Contribution to an Urban Strategy for Mexico (Report ME, July 2002), and Low-Income Housing: Issues and Options (Report ME, September 2002)-provided the analytical underpinnings of the initial design of the program. Since the approval of HUDPL 11, the program has benefited from a number of analytical studies. These include Decentralized Service Delivery for the Poor (Report No , 2006), CGAP, Mexico: Country-level Savings Assessment (3d ed., March 2006), Mexico Financial Sector Assessment Program Update (Report No , December 2006), and Mexico : Creating the Foundations of Equitable Growth (Report No , 2007). These reports analyze the efficiency of public sector programs and policies and stress the importance of housing and shelter as a key sector to help the poor to access basic assets. The overall program has been designed based on the conclusions of these studies. 6. The proposed loan contributes to the objectives of the four pillars of the Country Partnership Strategy (CPS), most recently discussed by the Board on February 6, The CPS has four pillars designed to (i) reduce poverty and inequality, (ii) promote environmental sustainability, (iii) increase Mexico s competitiveness, and (iv) strengthen the country s institutions. The HUSAL/HUDPL series has resulted in better housing, basic services, and access to real assets for low-and moderate-income households-key aspects of poverty that the loan would address by providing support for a national slum upgrading program and for new land development and housing for low-income families. The project would enhance competitiveness by increasing the efficiency of housing and urban development, housing finance, and property registries. In addition to providing shelter, many low- and moderate-income homes contain microenterprises, and homeowners often build additional rooms to rent. Thus, housing often serves as a key source of capital accumulation and is critical to build a strong middle class. By supporting measures to reduce the housing system s reliance on inefficient public finance and strengthen the financial system, the loan would reduce risks to the federal government of bailouts and would lower demand for Government support. Finally, the project would have a strong environmental impact by improving conditions in slums and promoting formal development on appropriate, well-designed sites. Box 2. Good practice conditionality principles Principle 1: Reinforce ownership The three-loan series was developed to support the National Housing and Urban Development and Territorial Planning Sector Programs These programs established clear priorities derived from the National Development Plan , which took into account the results of an extensive consultation process. The original program was designed as a three-loan series to be completed in However, the Bank and GoM agreed to delay the third loan to 2007 to allow sufficient flexibility and adapt to the priorities of the new administration, which took office in December The proposed HUDPL I11 has a strong focus on housing subsidy reform, increasing access to housing finance for the lower-income population, strengthening urban property registries, and increasing the available options for adequate land for low-income housing. These policy areas continue to be priorities for the new Government as defined by the National Development Plan and have evolved from an important consultation process held in Principle 2: Agree up front with the Government and other Jinancial partners on a coordinated accountability framework The reform program is summarized in the policy matrix, which includes clear objectives and 2

12 measurable key prior actions. During preparation of the second loan in the series, a set of monitoring indicators agreed between the Bank and GoM was included to improve the results focus of the loan. Currently, both the Bank and the IADB support GoM in the housing and urban sectors. In both cases, the programs have been derived from the national and sector programs, thus providing consistency of support. In particular, both institutions support the urban property registries modernization scheme and the slum-upgrading program. The IFC also provides important support to the housing sector reform program through expanding housing finance for the lower-income segments. Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The entire reform program has been customized to the needs of a sophisticated middle-income client like Mexico. The accompanying technical assistance loan (HUTAL) has provided cuttingedge analytical work to GoM on issues including the design of a housing-price-risk database and the cost-benefit analysis of various modes of supply of urban land for low-income housing. The politically sensitive issue of housing subsidy reform has been discussed through a subsidy working group that consists of all the principal stakeholders. The working group has been a useful discussion forum for this gradual approach to generate consensus on operational efficiency measures applicable in the short term and to discuss medium-term strategic options. Principle 4: Choose only actions critical to achieving results as conditions for disbursement The original matrix contained a relatively large number of benchmarks and key prior actions in the government s program (23 prior actions for HUSAL, 16 benchmarks and 6 prior actions for HUDPL 11, and 19 benchmarks and 4 prior actions for HUDPL 111). During preparation of the second operation, to improve its focus on results, this number was substantially reduced. The remaining prior actions (5 of 6) are critical elements of the GoM s reform program. These actions focus on reforming the subsidy system, expanding the population covered by the public registries modernization scheme, expanding the options of housing finance available to the lower-income population, and increasing the available modes of land development for low-income housing. Principle 5: Conduct transparent progress reviews conducive to predictable and pe flormancebasedfinancial support As agreed with GoM, this programmatic DPL series consists of three single-tranche operations timed to the country s budget cycle, with each operation monitored for results. This process enables a predictable release of the tranche during each fiscal year, allowing incorporation of financing into the subsequent year s budget. Starting with HUDPL 11, the policy matrix includes a set of indicators to closely monitor results. 11. COUNTRY CONTEXT 7. The Mexican economy experienced a recovery of economic growth over the past three years ( ). The growth acceleration was supported by a favorable external environment in terms of strong global economic growth, strong demand for Mexican manufactured goods, international liquidity and access to external finance, and high international oil prices. Vigorous economic activity has been broad-based and, as a result of clearly defined and consistently implemented monetary and fiscal policies, has not led to the emergence of macroeconomic imbalances. A deceleration in the pace of the global expansion and a slowdown of economic activity in the United States have already weakened Mexico s recent growth performance. These two factors should provide Mexico with a major motivation to press ahead with more ambitious efforts to tackle its own structural challenges and impediments to enhanced economic growth. 3

13 8. Afer a highly contested presidential election, a new administration headed by President Calderdn assumed office in December 2006 for a 6-year term and has begun to implement reforms. Without a single party commanding an absolute majority in Congress, to secure enactment of its legislative proposals, the administration must build a coalition among 2 of the 3 largest political parties. The federal public sector workers pension reform passed in March 2007 and the recently approved tax reform indicate the willingness and ability of the current administration to create the necessary political support for its legislative agenda and reform proposals. Recent Economic Developments 9. The Mexican economy has experienced a period of a balanced and broad-based expansion of economic activity. The average annual rate of economic growth over the past three years, , has been 3.8 percent. A vigorous global economic expansion contributed to the enhanced growth performance of the Mexican economy. The nominal dollar value of total exports increased at an annual rate of 15 percent during this period, in sharp contrast to the stagnation of exports observed throughout the preceding recession. Economic growth accelerated in 2006 to 4.8 percent, even though seasonally adjusted quarter-on-quarter growth rates signal a deceleration of the growth dynamics as of the second half of last year. 10. Domestic credit is boosted by enhancedprice stability and a series of reforms in the legal pamework of the financial sector. The financial savings held in domestic instruments (M4) increased from 41.7 percent of GDP in 2000 to 54.9 percent in This upward trend has enabled an important credit expansion to the private sector, in particular to households in the form of consumer credit and housing finance. The portfolio of credit to households increased from 9.3 percent of GDP in 2000 to 14.1 percent in More recently, after an extended period of decline, credit to private sector firms also has started to increase. Annual consumer price inflation is moving between 3 percent and 4 percent, the upper band of the medium-term inflation target interval set by the monetary authorities. This enhanced price stability is deepening the financial sector. Easing monetary policy conditions as of mid-2005 brought down short-term nominal interest rates to 7.0 percent for most of 2006, with rates on longer term government paper at approximately 8.0 percent. More recently, inflationary pressures stemming from international price increases in grains and basic foodstuffs have caused monetary authorities to raise the shortterm rates to 7.25 percent. 11. Higher-than-budgeted oil and tax revenues allowed the public sector to increase current and capital expenditures and, at the same time, post a modest fiscal surplus in Public expenditure increased by approximately 1.2 percent of GDP, providing an additional impulse to aggregate demand in At the same time, the public sector posted a fiscal surplus of 0.1 percent of GDP as fiscal deficit reduction continued to be a driving element of Mexico s budget formulation and implementation. A balanced budget requirement is part of a federal budget and fiscal responsibility law adopted in Regarding broader public sector borrowing requirements that include off-budget spending, the Mexican public sector also has managed to restrain its debt-financing requirements to approximately 1.O percent of GDP. The Mexican public sector remains heavily dependent on oil revenue, which in 2006 made up 38 percent of total public sector revenue. By comparison, non-oil-tax revenue remains at a modest 10 percent of GDP. Medium-Term Macroeconomic Prospects and Debt Sustainability 12. Economic growth is slowing down to about percent per year. Weaker external demand, with the growth of export falling back to single digit rates, already slowed down GDP 4

14 growth as of the second half of A sharper-than-expected slowing of economic activity in the U.S. is likely to hit Mexico harder than other countries and is an important risk to the Mexican economy. Despite a more generalized re-pricing of risk that has already been reflected in Mexican asset prices, there has been no major issue with Mexican financial intermediaries getting in trouble during the recent international liquidity and sub-prime mortgage crisis. The major risk to Mexico in the wake of this financial crisis is the possibility of a sharper downturn in the US. business cycle. 13, Tax reform has the potential to structurally enhance public finance, provide the resources for additional public spending and reduce the dependence on oil revenue. Congress recently adopted a tax reform that introduces an additional business tax levied on gross sales minus purchase of inputs (including investments). The tax is aimed at closing a series of loopholes and exemptions in the business tax legislation. At a rate of 16.5 percent initially, the tax is fully creditable against the income tax at a rate of 28 percent but with a considerably smaller net income tax base. Congress also adopted an increase in the excise tax on gasoline and diesel by 5.5 percent of the final consumer price over an 18-month period. The additional revenue generated by the tax reform is currently estimated at 1.1 percent of GDP in 2008 and 2.1 percent of GDP by 2013 compared to the current, total non-oil tax revenue of 10 percent of GDP. The additional revenue should allow the public sector to maintain a balanced budget while facing additional spending pressures in areas such as infrastructure investment needs, pensions and social expenditures. Additional tax revenue should also reduce the vulnerability of public finance to a sudden drop in oil revenue due to falling oil prices or oil production. 14. Inflation is hovering around the upper limit of the medium-term inflation target. International primary goods price increases (basic grains and dairy) have already moved annual consumer price inflation towards the upper limit of the medium-term inflation target interval and led the monetary authorities to tighten monetary policy through a modest increase in short-term interest rates. Persistence in these external price pressures raises the possibility of higher shortterm interest rates which could have an adverse impact on investment demand and economic activity with sectors such as construction and housing particularly sensitive to changes in interest rates. 15. Despite a substantial increase in (explicit) public debt as of 2008 following the public sector pension reform, the reform should enhance Mexico s fiscal sustainability and commitment to stay on a sustainable public debt path. The reform to the federal civil service pension scheme, adopted last March, will move the scheme to a fully-funded defined contribution pension system, a transition aimed at rebalancing the actuarial fairness of the benefits and strengthening long-term fiscal sustainability. In order to accelerate the transition, the current generation of workers is given the option to fully shift to the new system with a recognition bond for their past services turning the implicit pension debt into explicit public debt. Workers may opt for such a change during the first half of The amount of recognition bonds to be emitted if all workers opt for the new system is estimated at 18 percent of GDP. Even though the switching behavior of the current generation of workers is unknown, the amount of (explicit) public debt and the public debt-to-gdp ratio will increase significantly by The temporary hike in the public debt-to- GDP ratio should thus be perceived as a strengthening instead of a deviation of the government s commitment to a declining public debt path. The Housing Sector in the Mexican Economy 5

15 16. The construction industry and housing sector outperformed overall economic growth throughout the recent period of economic expansion. The construction industry has shown a vigorous expansion over the past few years, Figure 1 : GDP - Total and Construction sector outperforming overall economic growth. The (annual growth, real terms) industry showed a particularly strong 8% expansion in 2004 and 2006, confirming its strong pro-cyclical character. Private construction, which includes the housing sector, makes up approximately 55 percent of the total construction sector and has been the driving force of the sector s performance. However, in the first half of 2007, the construction sector showed a moderation in its rate of expansion. This slowdown is I attributed to a particularly weak public -Total GDP - GDP Construction sector 1 investment at the start of the new administration, even though private construction also observed a moderation in its rate of expansion. (Figure 1 and 2: Source INEGI) 17. The domestic credit expansion and increased housing finance provide important and continued impulses to housing construction. Figure 2: Value of Production Construction Total housing finance increased by almost a Sector full percentage point of GDP over the past (percentage of year-on-year nominal growth) few years, with most of the increase 50% 1 occurring in INFONAVIT still dominates the market. It holds approximately 60 percent of the total mortgage portfolio. However, the most remarkable development over the same period seems to have been the return of commercial banks to this segment of the credit market. Almost 10 years ago, following the 1995 financial and banking crisis, the Government introduced -Overall construction - Rivate construction Government-sponsored debt-restructuring programs. - - Commercial banks finally have managed to reduce their restructured mortgages so once again they are extending new housing loans. The renewed interest of commercial banks in housing finance also led to the acquisition of some SOFOLs by banks. These acquisitions further strengthened the rapid growth in the banks portfolios of non-restructured housing finance over the past two years. 18. The efect of the US subprime mortgage crisis has so far been limited in Mexico. No direct contagion effects have been visible so far. Indeed on September 25, 2007, the Government of Mexico returned to the international capital markets for the first time since the subprime problems started in July. GoM reopened its 2017 and 2034 sovereign bonds. The GoM raised US$5OOm reopening of the UMS 2017 at a yield of percent, a spread of 105bp over the comparable US Treasury. A simultaneous US$5OOm tap of the 2034s came at a yield of percent, or a spread of 122bp over the 30-year UST. 19. Within Mexico, the market for residential mortgage backed securities continues to be robust. Mexico now has the largest RMBS market in Latin America with 42 deals since

16 valued at US$4.4 billion. The latest issuance was done by GMAC Financiera for about MXNl.3 1 billion on July 27. In a recent report dated September 11, 2007, Standard & Poors commented that Mexico s RMBS market seems to be bucking the global trend of increased volatility. This is due to a number of factors including: all securitized mortgage loans in Mexico now carry a fixed rate, a valuable lesson the country took away from its Tequila Crisis in 1995, sound servicing practices, improvements in federal and local regulations, and a solid mortgage product portfolio that includes several features aimed at protecting borrowers from inflation and interest rate volatility. Over-collateralization and external credit enhancements such as mortgage insurance and full bond insurance are protecting investors against the credit risk involved. 20. Nonetheless, the Mexican mortgage industry could derive some important policy lessons JEom the subprime crisis. These would include the need for better appraisal norms, a comprehensive supervisory network for mortgage originators, and effective regulations on consumer information and disclosure. * 7

17 I Box 3. Summary of the housing sector in Mexico and the HUDPL support The National Housing program estimated the demand for housing - defined as the sum of new housing needs from household formation and the existing housing deficit - as million units per year. As much as 72 percent of this new housing corresponds to low-income housing for the population earning up to 5 MW (around US$ 680 per month), which represents around 65 percent of the total employed population in Mexico. The program acknowledged the low level of housing production during the recent past in Mexico (in 2000 less than 300,000 housing units were produced in the formal market) and set a realistic goal to produce 750,000 housing solutions (including acquisition and improvement) each year during the sixyear period in order to avoid an increase in the housing deficit. The Fox administration met this goal. The new administration has expressed its intention of continuing support to the housing sector and has set an annual target of 1 million housing solutions per year for the next six-year period. Since 2001 the GoM has made efforts to expand the housing options through: pure subsidy programs for the lower-income segment with income below -3 MW (Le. TU CASA), credit-linked subsidy programs (INFONAVIT, FOVISSSTE, PROSAVI and the new CONAVI s program Esta es tu Casa ) for the population earning between -2.5 to 7 MW, and through programs to increase access to housing finance for the middle-income population (FOVI and SHF second -tier loans) for households with income between -3.5 to 8 MW. As a result of the latter the private sector has increased its share in the housing market; although the sector is still dominated by public funding (INFONAVIT has a 65 percent market share). The housing finance expansion has also been accompanied by improvements in the loan portfolio; INFONAVIT has today a default rate of 4.8 percent and a coverage ratio of 322 percent, FOVISSSTE recovered around US$ 300 million between January and June 2007 and FONHAPO has modified its mandate to include only subsidy provision (Le. no new lending) and has launched a significant recovery campaign. The proposed HUDPL I11 supports reforms to increase access to housing for the lower-income population in the formal and informal sectors. In particular the new Esta es tu Casa program targets the population earning between 1.5 to 5 MW and reforms to the existing up-front subsidy program are intended for the households earning up to 3MW. The new housing microfinance schemes, the ongoing slum upgrading program Hibitat and the pilot schemes for land development are intended to address the housing conditions of the population between 2 and 6 MW. Overall the key actions under the Government program supported under the HUDPL I11 target the population marked in the diagram below. (Source ENIGH, INEGI) Formal income Market segmentation according to working status and level of income Informal income Ob3 3 to 6 6 to9 More than 9 Area of proposed HUDPL 111 support Minimun Wage Subsidies and micro lmns INFONAMT I FOVlSSSTE Pnvate lntermedianes 8

18 111. MEXICO S AFFORDABLE HOUSING AND URBAN REFORM AGENDA, The housing sector has seen a major expansion during the last six years. The number of loans for housing and housing improvements more than doubled in this period, from 293,000 in 2001 to 689,000 in Although, housing loans are still dominated by the public sector, private funding has increased its share gradually from 1 percent to 13 percent during the same period. Between 2000 and 2005, the system-wide mortgage portfolio grew 55 percent in pesos to reach 8.8 percent of GDP. This was an important achievement for Mexico, albeit still small compared to comparator countries (for example, 15 percent in Chile, 65 percent in the US, and 45 percent in Portugal). (Figure 3 source: CONAVI) 100 Figure 3: Number of new loans for housing aoquirition and improvrmrnt, The institutional set-up also has improved. Until 2001, the federal government lacked an effective vision of reform of the housing sector. Similarly, the federal agencies involved in housing operated with neither an overall strategy nor coordination, and no agency had responsibility for sector policy. Since 200 1, GoM has gradually constructed a housing system in which CONAVI acts as policy agency and main coordinator of the housing policy between the other national housing agencies and the state governments. In June 2006, Congress approved a new Housing Law that defines the National Housing System, strengthens CONAVI s role, and incorporates other relevant sectors such as environment, transport, and finance in the policy discussions. Developments under the New Mexican Administration 23. The new administration continues to recognize the housing and urban development sectors as a priority, with a strong emphasis on accessible housing finance for the poor and sustainable city growth. The National Development Plan (NDP)3 includes several strategic objectives for the housing and urban sectors. Those directly related to the issues discussed are highlighted below. The housing and urban sector programs in which the specific targets and instruments are defined are being prepared by CONAVI and SEDESOL, respectively, and are expected to be ready by the first week of December. 24. For the housing sector, the main strategies defined in the NDP are to: 0 0 Strengthen tenure security through the standardization of property registries, municipal cadastres, and rural registries as well as the mandatory registry of properties Increase the coverage and variety of housing finance options available 3 The National Development Plan may be seen at htto://ond,oresidencia,eob.mx/index,html. The section on housing and construction may be seen at htto://ond.calderon.~res~denc~a.eob.11w/odf/e~e2 Economia ComDetitiva Y Generadora de Emoleos/2 13 Construccion Y Viviend &f 9

19 0 Increase the supply of adequate land for housing construction and economic development Use the existing urban infrastructure more efficiently, Consolidate the National Housing System Generate a dynamic used housing market and assist the development of an efficient rental market Promote housing improvement and create conditions to foster progressive housing and social housing production through alternative financial products and support for the lower-income population. 25. The urban-development-related objectives are set as part of the strategic objective to increase access to opportunities: Strengthen and expand the existing urban upgrading and urban poverty alleviation programs Increase the access to property rights and public safety in urban areas with high marginality levels Promote regional planning to prevent disorderly growth of urban areas with instruments that incentivize the supply of adequate land for urban uses Strengthen the existing federal urban development legal framework by promoting new financial and technical instruments Prevent natural risks through increasing the awareness of local governments and the population and increasing access to funds for risk prevention and mitigation. Areas of Bank Support for the Government s Program 26. The first loan of the three HUSAL/HUDPL series was approved in April 2004 and supported the National Housing Sector Program and the National Urban Development and Territorial Planning Program The program was complemented by the parallel Housing and Urban Technical Assistance Loan (HUTAL) approved in November The second loan of the series (HUDPL 11) was approved in October It was agreed with GoM that the third loan, originally scheduled for 2006, would be delayed until 2007 to allow a policy dialogue with the new administration, which came into office in December The proposed HUDPL I11 supports seven policy areas within the Government program. The following paragraphs describe the HUSAL and HUDPL I1 support to Government actions as well as recent developments under the program in each of these areas. Policy Area 1: Macroeconomic Framework 28. The GoM has maintained a sound macroeconomic framework consistent with the policy objectives of the program. As mentioned previously, during , the Mexican economy experienced a recovery of economic growth. The growth acceleration was supported by a favorable external environment of strong global economic growth and strong demand for Mexican manufactured goods, international liquidity and access to external finance, and high international oil prices. A subsequent deceleration in global expansion and in US economic activity has weakened Mexico s recent growth performance. Yet, these outside forces have motivated Mexico to press ahead with more ambitious efforts to tackle structural challenges and impediments to enhanced economic growth. Mexico s recent public pension and tax reform should enhance the country s fiscal sustainability and commitment to stay on a sustainable public debt path. 10

20 Policy Area 2: National Housing Policies and Institutions Activities under the Government s Program Supported by HUSAL and HUDPL II 29. HUSAL sought to improve institutional coordination and increase transparency. One of the programs supported by the programmatic series primary objectives was to set a medium-term strategy and develop the institutional coordination needed to address the challenges facing the housing sector. Previously, several agencies had been responsible for various housing policies and programs, with no clear strategic vision of who was responsible for coordinating them. With Bank support through HUSAL I, the Government harmonized and defined the roles of federal housing agencies by creating the National Housing Commission of CONAFOVI (now CONAVI) to be responsible to define the sector policy and coordinate Government efforts. CONAFOVI was to coordinate the Federal Mortgage Corporation (SHF); the Low-Income Housing Fund (FONHAPO); and, to some extent, INFONAVIT and FOVISSSTE, the two Housing Funds serving the private and the public sector employees, respectively. In addition, the Government created the Consejo Nacional de Vivienda, a permanent consultation forum, to promote the dialogue between private and public stakeholders. Of equal importance was improving transparency in the sector-a responsibility also assigned to CONAVI in the national housing plan-through annual reports on policy implementation and information on related programs that would be available to the public on Internet4 HUSAL I also supported an Environmental Assessment of the housing sector. 30. CONA VI has made clear efforts to decentralize housing policy. Together with the state governments, the commission designed an instrument to define annual new housing requirements, investment amounts, and policy goals for federal housing f~nding.~ These agreements, together with strengthening state housing institutes, will contribute to effective decentralization of housing programs. HUTAL is supporting the development of a model to modernize and strengthen state and local housing institutes and that later can be used to design a comprehensive modernization program that will be partly co-funded with the States HUDPL 11 supported CONA VIS progress in creating state housing councils. CONAVI has been establishing state housing councils to strengthen the housing sector throughout Mexico and to align housing policies at different levels of government. The agency helped create 27 State housing councils (today 31 state councils have been created). The loan also supported implementation of the environmental action plan derived partly as a result from the environmental assessment prepared under HUSAL. For housing this plan included developing the sector s first Green Guidelines - a set of guidelines on water, solid waste, and energy resources management establishing alliances among agencies working on sustainable housing development. CONAVI initiated a pilot program for green housing design and signed an accord with the National Water Commission, Trust Fund for Electrical Energy Savings, National Forest Commission, Mexican Construction Industry Association, and National Industry Association of Housing Development and Promotion. Recent progress under the Program and Prospects for the Sustainability of Reforms 32. Since the approval of HUDPL 11 GoM has made signijicant improvements in the institutionalfiamework of the sector. Starting in 2004, INFONAVIT has taken steps to reform its operations and increase their financial sustainability. It has improved their corporate governance See Convenios de Desarrollo de Vivienda y Suelo (CODEVISU) 11

21 and financial management, targeting lower-middle-income households, increasing the portability of beneficiaries savings, and allowing those savings to leverage other available funds. FOVISSSTE, although lagging behind relative to INFONAVIT, has also made important efforts regarding loan recovery. 33. A new Housing Law was approved in June It renamed CONAFOVI as CONAVI (Comisidn Nacional de Vivienda). The new law strengthened CONAVI s mandate as policy coordinator, clarified its role relative to other federal agencies, and increased its coordination and policymaking powers. The law promotes community and private sector participation in housing and allows for better coordination between housing and urban issues. The new law contains two important changes from the previous law. It institutionalizes and strengthens CONAVI by incorporating its role and responsibilities in the law, which cannot be easily changed or revoked as a mandate; and grants it autonomy from SEDESOL. 34. At the same time the new Housing Law provides a more comprehensive institutional setting for the sector. It incorporates a governing body within CONAVI in which the Energy, Economy, Water, Transport, Environment, and Finance Secretariats all participate in formulating the sector programs. This joint planning is important since the rapid expansion in the sector in some cases has occurred without consideration of infrastructure-provision or access to job centers. In addition, the new law incorporates mechanisms for subsidy targeting in line with the Social Development Law issued by the Fox administration.8 The new law includes mandatory considerations of environmental best practice for the sector as well as access to information and a monitoring indicators system. In accordance with the new law, CONAVI will prepare the National Sector Program , which is expected to be ready in December 2007 This program will provide the main lines of action supporting the above-described priorities of the new administration for the housing sector (See Box 4 below). 35. Direct lending by FONHAPO has been stopped. In the past, FONHAPO acted as the primary Government institution providing funds for low-income housing. After it recovered from near bankruptcy, its role as a lending institution was revised. As an important first step, in August 2004, FONHAPO eliminated direct lending but continued its second-tier lending to state housing finance agencies (OREVIs) which could jeopardize its hard-won financial independence and undermine the Government s strategy of promoting market-rate lending. In January 2007, FONHAPO s finances were revised by the fund trustees, and a new mandate was approved that eliminated all lending activities. FONHAPO is now mandated to focus solely on operating the non-credit-linked, up-front subsidy program, Tu Casu. This latter component is a major departure from the Federal Housing Law of 1984, which focuses on the state s role in housing construction, management, and distribution. i.e. subsidies have to be targeted to the poor as defined by SEDESOL, have to differentiate between income levels, should be established with equity criteria, procedures for their operation should be transparent and with a fixed time for execution FONHAPO lends at an interest rate of 8 percent to OREVIS and other intermediaries such as Cajas. OREVIS can provide government transfers as guarantees. FONHAPO s loan portfolio is relatively small and shrinking fast in real value. In addition, most of the revenue from its loan portfolio goes to support its administrative costs, leaving little for below-market-rate loans. 12

22 Key objectives of the housing policy Box 4. Comparison of key items of the Housing Laws National Housing I W Promote access to housing for the lower income Promote access to housing for the lower income population, foster local government and private population, foster public supply of land for housing, sector investment, improve regulatory increase coverage of social housing finance, promote environment, foster housing quality, promote coordination between private sector and local and environmental sustainability and orderly growth federal governments, foster rental low-income of the sector, guarantee sufficient information housing, promote housing as an territorial planning for decision-making. factor, promote environmental sustainability, promotion of public programs. Responsible agency Coordination with other ministries Housing finance Subsidies Land CONAVI Sets a governing body and an Inter-Secretariat Housing Commission to discuss housing policy. Agencies include SEDESOLO, SHCP, SEMARNAT, SENER, Transportation, Public Education, Employment, Health and Agrarian Reform. Promote integration of housing credit, subsidies for low-income population and beneficiary savings, preference to co-financing mechanisms between public and private institutions, incorporates new instruments by development banks to foster housing finance. All housing finance with budget resources must provide beneficiary information to CONAVI. Exclusively to low-income population as defined by SEDESOL, amounts should differentiate by income level, must be transparent and eligibility must be set by public operational rules, proportionally distributed between states by poverty level. The government should foster the necessary conditions to stimulate an adequate supply of land for housing from public and private sources. Secretaria de Desarrollo Urbano y Ecologia [SEDUE] (Part of SEDESOL since 1993) Required but no operational mechanism specified. Promote access to housing finance at preferential market rates for low income housing. Not specified. Land for housing is considered public interest for the purpose of acquisition (allowing expropriation from government). Establishes several mechanisms to foster public supply of land for population below 4MW, SEDUE can set a maximum price on serviced lots developed in all public land, SEDUE must prepare and update a land inventory for housing. Environmental Sustainability and Housing quality Consultation, Participation and social housing Incorporates environmental and social criterion for housing developments through building materials, community participation, minimum infrastructure standards linking to SEMARNAT and other agencies. National Housing Council becomes the permanent consultation forum. Describes process to foster housing projects by cooperatives. Promotes orderly construction of housings and environmental criteria through building materials. Consultation required but no operational mechanism specified. Sets a social housing office within SEDUE to support NGO and civil society efforts on low-income housing. Describes process to foster housing projects by cooperatives. 36. Other important efforts to improve the institutional pamework are the preparation of the Strategic Environmental Assessment of the Sector and the development of a Construction Code. In January 2007, CONAVI started the process of conducting a strategic environmental lo Full text in: 13

23 assessment (SEA) that would serve as a master plan that would include environmental considerations in its policies and programs in coordination with SENER ( Ministry of Energy), CONAGUA (National Water Commission), IMTA (Mexican Institute for Water Technology) and SEMARNAT (Environment and Natural Resources Secretariat). In addition, CONAVI announced that CONAVI would finance the SEA and that the contributions of SENER, CONAGUA, IMTA, and SEMARNAT would be requested. Additionally, CONAVI is developing a federal construction code that will provide a framework for the standardization and continuous update of the existing local construction codes. These efforts are expected to translate to a decrease in the exposure to natural disasters and to foster the housing insurance market in Mexico. CONAVI has requested HUTAL support for the stages of the preparation and implementation of the code. 37. Important challenges lie ahead. Most important is to create effective linkages between the housing sector and urban planning to avoid the expected continuous expansion of the housing sector. These linkages should translate to sustainable city growth and increased quality of life for the population. The GoM is already exploring which institutional changes will be necessary to move to this direction and has requested Bank support in the form of an in-depth institutional analysis of the sector to better address the needs of the poor in both housing and urban issues through the HUTAL. Table 1: National housing policies and institutions: Monitoring indicators Indicator Total number of housing solutions for N.A. 277, ,972 households earning 4 MW or less Ratio of number of housing solutions N.A. 49% 47% for households earning < 4MW to total housing solutions Source: CONAVI 38. The housing sector in Mexico continued to expand in The GoM s efforts to increase the housing solutions (including subsidies and loans) to the population earning 4 MW or less are reflected in the 35 percent increase in the number of solutions for this income segment. Relative to the overall sector, this figure remains below 50 percent. The new subsidy program was launched in The continued efforts from the ONAVIs to address the lower-income population should increase the proportion of units targeted for the lower-income segment. Policy Area 3: Improving the Housing Subsidy System Activities under the Government s Program Supported by HUSAL and HUDPL II 39. Mexico s housing subsidy system has been fragmented into different agencies and programs. Overall two important groups of programs can be identified: 0 0 On-budget subsidies. Over the last 5 years, Mexico has operated through FONHAPO two small-scale housing subsidy programs-prosavi and Tu Casu-with a total budget in 2006 of US$270 million. Off-budget indirect interest-rate subsidies. The bulk of Mexico s housing subsidies come in the form of below-market interest rates provided primarily by INFONAVIT. In May 2005, the subsidy working group agreed on a methodology to measure the implicit subsidy levels of INFONAVIT and FOVISSSTE loans. In 2006 this type of subsidy 14

24 provided by INFONAVIT amounted to approximately US$2 billion." INFONAVIT and FOVISSSTE granted the highest subsidies on a per-credit basis, approximately US$8,000 and US$l 1,000 per borrower, respectively. Although all formal employees pay into these pension funds, subsidies had gone mainly to the moderate-income households that can afford the mortgage payments associated with the purchase of a finished, commerciallybuilt unit until INFONAVIT started important efforts to address the below-4mw affiliates. 40. HUSAL supported Government efforts to unifr housing subsidies. The National Housing Program defined FONHAPO as the operating agency for the main federally funded subsidy programs, Tu Casa and PROSAVI. With the goal of consolidating housing subsidy policies, HUSAL I also supported the creation of FONAEVI. In addition, the loan helped create and supported the multi-agency working group under CONAFOVI that was formed to consolidate subsidy objectives and programs and continuously refine them. The loan also helped create and support a database within FONHAPO that contains beneficiaries of Tu Casa and PROSAVI-a first step toward achieving a more equitable system in which no recipient receives more than one housing subsidy A key action in the Government's program that was implemented before HUDPL 111was completion of a comparative analysis of the housing subsidies received by different income groups from all the major subsidy programs-both on-budget federal programs and implicit subsidy programs.'* This study raised important concerns about the objectives of different programs, their beneficiary groups, the methods used to determine subsidies, and the need to adjust subsidies over time. It also showed how limited are the data on the different programs and on local contributions, and the negative effect that the lack of data has on their targeting, coordination, and adjustment. The study identified several procedural bottlenecks that limit the availability of both federal subsidy programs to reach their target populations. The working group reached agreement on key procedural reforms to address these, which were applied starting Based on the findings of the study, more detailed assessments of Tu Casa and PROSAVI are needed to determine how they can improve their interactions with private actors and subnational governments, leverage household contributions, and reach low-income groups and informal sector workers. CONAFOVI has taken steps to conduct such assessments. 42. As part of the efforts to reform the subsidy system, the subsidy working group was reconvened and expanded to discuss the findings of the study and made some key decisions. The working group met in May and June 2005 and reached important agreements on adjusting calculations of amounts of implicit housing subsidies and reducing inequities in current subsidy programs. The group agreed on a methodology toi4: 0 Align the subsidy amounts received by the households with recipients' income across programs 11 The estimate of total subsidies is calculated as the sum of the net present value of the implicit interest rate subsidy for the life of all INFONAVIT loans originated in 2000 (using the Government bond rate as discount rate). The implicit interest rate subsidy was estimated as the difference between the rate offered on a standard mortgage and the interest rate offered by MFONAVIT by income segment., 'I Conducted by Grupo de Economistas y Asociados (GEA) 'I Changes include simplified procedures for approval of subsidies, new provisions to share electronic information on beneficiaries and loans with SHF, and incorporating ways to better promote the program, including efforts to make financial institutions other than SOFOLs (such as banks and cajas-credit unions) participate in the PROSAVI program. It is worth noting that INFONAVIT and FOVISSSTE are among the institutions committed to these agreements. This is important since these institutions are the largest market players and subsidy providers, and so set the pace and direction for other market participants-particularly with respect to the housing products delivered by private developers. 15

25 Adjust the subsidy programs to take into account clear objectives for each program, transparency in the quantification of subsidy costs, publication of program objectives and beneficiary groups, horizontal and vertical equity, effects on the larger housing market, program efficiency, and optimal duration of the subsidy Share on a quarterly basis information provided by ONAVIs on the number and size of disbursed subsidies by income group and value of the houses financed. Coordinate among participants on a method for determining subsidies, to be set forth in a quarterly report Gradually expand the number of variables to be used to calculate income, harmonized with SEDESOL s definition of poverty Meet on a quarterly basis to discuss necessary adjustments to subsidy parameters. Recent progress under the Program andprospects for the sustainability of reforms 43. In September 2006, the transition team prepared a discussion paper on affordable housing called Programa de Vivienda para Hogares Desatendidos. The paper set out a comprehensive package of subsidy programs focused on the below-median (5MW) income groups in both urban and rural areas. The GoM wanted to establish a clear distinction between: Subsidies linked to mortgage- and microcredit for housing, whether issued by private/ nonprofit lenders, by INFONAVIT or FOVISSSTE, or by other public lenders Subsidies not linked to credit but rather tied to local Government contributions for land and infrastructure (or, as is being discussed, to local government credit). 44. Subsidies will be conditional upon regulatory and institutional improvements at the local government level (densijication, modernization of property registration). Programa de Vivenda includes programs for both rural and urban housing, new and used housing, home improvement, and progressive construction. The program includes both private and public 1e11ders.l~ 45. The new administration sets as a main priority to improve housing conditions for the lower-income population by expanding access to housing finance through a new subsidy program. The National Development Plan sets the goal of 6 million loans for housing acquisition and improvement during To this end, GoM recognized the need to expand access to housing finance for the population earning 5MW or less, emphasizing those not served by the national housing funds. With this in mind, the Government launched a new credit-linked subsidy program with a drastically expanded budget allocation of US$380 million for The new Programa de Esquema de Financiamiento y Subsidio a la Vivienda, or Esta es tu Casu provides the following : Up-front subsidy directly to the beneficiaries Credit guarantee to the financial intermediary for the acquisition of a housing unit or serviced lot Financing of housing improvements or self-construction for: The program incorporated many of the recommendations made in the Mexico Housing Subsidy Policy Note under the fee-forservice contract between the World Bank and SHF. The 2005 and 2006 budget allocations for the existing credit-linked subsidy program - PROSAVI were just below M%100 million, and even during the peak periods the budget was never higher than M$200 million. 17 See for the program rules. 16

26 a) Population with individual incomes below 4MW b) Non-insured persons with household incomes below 5MW c) Members from the national housing funds with individual incomes below 2.6MW d) Beneficiaries with access to mortgages if household incomes below 4 MW. The operational rules published by CONAVI describe the specific objectives of Esta es tu Casa: Increase access to (mortgage- and housing micro) credit and co-financing to lowerincome population Support capacity of low-income households to build up housing equity Increase joint responsibility of beneficiaries for their housing conditions by opening up ways for them to use their accumulated wealth or savings, Stimulate mobility in the new and used housing market Improve quality of life of the people by enhancing housing conditions and urban environment Promote production of social housing, and self-constructiordproduction of housing in sustainable urban and rural conditions. 46. As expected, INFONAVIT brought the program on line fast. It could qualify a larger proportion of its below 2.6MW individual/4mw household members with the combination of upfront subsidy and interest rate subsidy. It already had a pipeline of developer projects for its economic house. Through June 2007, the housing fund disbursed more than 20,000 subsidies (of which 8,000 had already been approved in 2006 as part of the credit-linked subsidy program operated by FONHAPO). 47. The response of the private mortgage sector has been slower. It disbursed just over 250 subsidies through June 2007, including loans under the cojnanciamento arrangement with INFONAVIT. Most private lenders did not have a pipeline of low-income housing developments that they could tap. During the last few years, the old PROSAVI subsidy program had seen sharply reduced allocations, and lenders had moved to other market segments. Additionally, several lenders had experienced higher defaults on the portfolio of first-time credit users and were cautious to expand their exposure to this market segment. More important, however, some major SOFOLs voiced concerns about program parameters (for example, relative to MFONAVIT s potential for market expansion under the program) and program profitability. They had this response despite several concessions on pricing of SHF financial products available to the private lenders, including its mortgage insurance, liquidity lending, and financial guarantees. 48. Additional concerns are the lack of incentives for the development of formal lower-cost housing solutions for INFONA VIT and hence the other developers, and the inequity between formal and informal sector low-income workers under the program. Last, the microcredit for the housing sector is new and still has to develop the systems for responsible subsidy allocation linked to home-improvement credit. In August 2007, CONAVI and SHF revisited and fine-tuned the Esta es tu Casa program to balance the different demands for program change by private and non-private lenders. 49. The mortgage-linked subsidies to private lenders rightfully focus on down-market expansion of private mortgage providers (including through the mortgage insurance program), in particular, for informally employed/noninsured workers. In addition, the cofinanciamento subsidy arrangement expands access to formal sector lowedmiddle income customers. The mortgage- 17

27 linked component certainly has a distributional objective. However, the goal of private market strengthening and expansion is of equal importance to reduce future needs for such deep subsidies at this middleaower middle income level. A detailed description of the Esta es tu Casu scheme is included in appendix 3 along with an assessment prepared by the Bank. 50. The Esta es tu Casu scheme incorporates targeting mechanisms to increase transparency and reduce the possibility of benefiting the higher income population. The scheme s operational rules mandate that the entity operating the program - SHF - implements a beneficiary s database against which all applications are validated to avoid duplicating benefits to the same household. The original program rules gave the financial intermediary providing the loan the responsibility to check payment capacity with respect to income level and did not cap the household income directly. Instead, they set a maximum house value to be supported by the program. However, this was deemed as leaving some space for non-poor households benefiting from the subsidy program. To minimize this risk, a revision of the rules was published in August 2007 which includes a cap on individual (or household) income of the potential beneficiaries: 5 MW for informal workers and 2.6 MW for ONAVIS s affiliates The program rules of the non-credit-linked subsidy program-tu Casu-have been revised to better align with the Esta es tu Casu scheme and to gradually incorporate the lessons learnedfrom the impact evaluation. SEDESOL, through FONHAPO will continue to implement the non-credit-linked subsidy programs, Tu Casu and Vivienda Rural, with local governments. SEDESOL and FONHAPO modified the operational rules for the Tu Casu program to better align with the new Esta es tu Casu program. The main modifications include (a) lowering the maximum house value eligible to be su ported by the program, which now is intended as progressive housing to MXP loo,0oo1 and (b) increasing the allocated subsidies for improvement to 70 percent from their average of previous years of 30 percent. The latter is a direct response to the mixed results obtained from the impact evaluation by the Bank of the finished housing and the positive impact on the home improvement modalities. 52. An important evaluation of the subsidy system is being prepared with particular focus on implementation of subsidy policy at local level and should serve as the first evaluation of the reforms to the subsidy system. An additional subsidy evaluation to the one developed in 2005 is being conducted by a consultant contracted by CONAVI. This study will include an analysis of the Esta es tu Casu program launched this year with a strong emphasis on the implementation issues at local level. 53. Looking ahead, the two main concerns about the sustainability and deepening of subsidy reforms relate to the design of Esta es tu Casu. First, the housing funds may not have an incentive to provide a lower-cost housing option than the MX 180,000 economic house, which, with the additional up-front subsidy, can be acquired by households earning as low as 1.5MW. As it has done in the past, this will effectively put a floor in the formal low-income housing market. Second, there remains a major equity discrepancy between informal workers and insured workers of the same income group. The Bank team has recommended to GoM that, moving ahead, the housing funds use this additional up-front subsidy for their lowest-income workers to decrease the internal high cross-subsidy on interest rates, increase the savings rate on members accounts, and focus on lower-cost housing solutions. The Esta es tu Casu program could trigger a gradual leveling of the mortgage market across the housing funds and private lenders. l8 Previously housing units with a selling price of MXF 180,000 were eligible for subsidy under the program. 18

28 54. Given the macroeconomic situation, a slight increase in interest rates (25-50 bp) is likely as a result of recent increases in food-stufs and gas. The exact impact on long-term mortgage rates is related to inflationary expectations. Since the new subsidy program is operated through an up-front grant linked to a loan (at market-rate interest rates), a possible consequence could be a reduction in the number of subsidies delivered as a result of the increase in the average monthly payments for the same housing unit. Table 2: Improving the housing subsidy system: Monitoring indicators Indicator Total number of subsidies 302, , ,073 Total amount of subsidies of all the programslg (MXP million) 24,366 31,153 35,767 Total amount of subsidies to the population of less than 3MWZ0 (mp million) 1,705 10,323 13,096 Ratio of total amount of subsidies for up to 3MW to total amount of subsidies Number of beneficiaries who receive more than 1 subsidy 0 3,283 21,071 Ratio of up-front grants and interest-buydowns to total implicit interest rate subsidies Source: CONAVI 55. The number and amount of subsidies have increased yearly since In contrast, the market interest rates have decreased substantially. (See figure 5). More importantly, the ratio of subsidies for the lower-income population has increased due to INFONAVIT's explicit policy of financing low-income households and to operational improvements in the Tu Casu program made in Although the market is 'still dominated by the implicit subsidies granted by the ONAVIS, the number of up-front subsidies has increased to 13 percent. Although still low, this figure is up from the previous level. The GoM expects this ratio to increase substantially as Esta es tu Cam progresses. The number of beneficiaries who receive more than 1 subsidy has increased due to the INFONAVIT beneficiaries (earning below 2 MW) who in 2006 also received an up-front grant from the PROSAVI program. This issue remains a challenge for the new subsidy Figure 6: Reference Interest Fates, \ t system due to strong pressure from the ONAVIS to access budget resources for housing subsidies. Looking ahead, CONAVI can use the new subsidy scheme to request a gradual shift from implicit toward up-front grants from ONAVIS. (Figure 5, source: CONAVI) l9 For implicit subsidies the net present value calculation is used. 2o For implicit subsidies the net present value calculation is used. 19

29 Policy Area 4: Housing Finance Activities under the Government s Program Supported by HUSAL I and HUDPL HUSAL I supported Congressional approval of mortgage-related reforms. These reforms strengthened the legal framework for mortgages (cre dito hipotecario). The reforms allowed adjudication of defaulted mortgage liens in federal courts, simplified documentation required to prove the existence of a lien, and allowed extrajudicial foreclosure of collateral trusts. They also increased transparency by providing standardized, clear, comparative information and contracts to borrowers. In addition, SHF issued rules for licensing property appraisers. 57. The loan also supported the expansion of housing credit tools and products. HUSAL I supported SHF efforts to design and implement a database for mortgage risk assessment and to expand its products to include refinancing and guarantees in both UDIs2 and pesos. In addition, the first loan included actions to launch new savings programs by BANSEFI for low- and moderate-income households linked to loans from INFONAVIT and subsidies from Tu Casa. 58. Under HUDPL I, SHF launched a pilot program providing housing microjinance (HMF). In January 2005, SHF s board of directors approved up to 150,000,000 pesos (approximately US$14 million) for a pilot project to provide microfinance for home improvements through 2 or 3 SOFOLs. Under the home improvement program, SHF offered short-term funds to a few financial intermediaries for credits of up to MXP 30,000 with tenors of 24 months. The program did not have a great impact due to four reasons: a) The selected intermediaries did not need the SHF subsidy. b) The selected intermediaries were concentrated on other tasks. (Compartamos was in the process of transforming itself into a bank). c) Ignorance of the market. d) Lack of a full range of products. Recent progress under the Program andprospects for the sustainability of reforms 59. SHF has radically altered its business model by focusing on the affordability challenge: for the close to 46 percent of the households in semi-urban areas can not afford to pay a mortgage. SHF s new strategy focuses on (i) operating the federal subsidy programs to provide loans for the lower-income segments, (ii) expanding the affordability solutions by expanding the microfinance market, (iii) promoting efficiency in the market, and (iv) promoting the supply of social housing in a sustainable urban environment. These new priorities represented an important shift from SHF s traditional operations as a mortgage lending fund provider. Entering the microfinance market has required a fundamental shift in SHF s business model, operating mechanisms and financial structure to accommodate the new risk structure associated with microlending and a much larger and varied set of clients with different institutional capacity (including microfinance institutions, local governments, NGO s as well as SOFOLs and Banks). SHF is successfully moving into this new model as evidenced by its recent institutional restructure and by the agreements signed by its Board of Directors to work with micro-lending institutions moving forward from the original pilot scheme into a more streamlined approach. 60. Since mid-2006, SHF has mainstreamed different approaches to housing microfinance with a number of different intermediaries, such as Entidades de Ahorro y Cre dito Popular Mexico s inflation-adjusted unit of account. 20

30 (EACPs such as Sociedades Financieras Populares, or SOFIPOS) and Cajas Populares. The institutional market for housing microfinance (HMF) can be considered to include the Banca Popular (BP) institutions, that is, the Cajas and the deposit-taking MFIs, or SOFIPOs. Over the past few years, the HMF sector in Mexico has seen a trend of migrating away from offering a single product to offering multiple products. The market leaders (such as Credit0 y Casu or Finpatria) are all developing products for home improvement with greater amounts and lower rates than traditional microfinance products. In addition, selected SOFOLs that are expanding their mortgage lending (or consumer SOFOLs that are entering mortgage lending) down-market relative to their current target clientele also show interest in these products. Compartamos, a microfinance bank, is testing an HMF product. A recent survey of 112 BP entities found that approximately one-third offered some type of housing product. Two-thirds of all housin loans had terms between 36 and 60 months, and the average annual interest rate was 23 percent From the perspective of SHF s product line, the HMF financial intermediaries can be divided in two groups: a) Those that offer products of short-term consumption loans, such as SOFIPOS and SOFOLs. This group is interested in (i) funds, (ii) portfolio guarantees for microcredit, (iii) subsidies, and (iv) technical assistance. b) Those that are focused primarily on long-term capacity building of their members and provide credit for a maximum of 5 years. Examples are Cajas Populares and SCAPS (Sociedades Cooperativas de Ahorro y Prkstamo). This group is interested in (i) longterm funds, (ii) technical assistance for product development, and (iii) subsidies for home acquisition. 62. SHF Housing Microjnance Products: SHF now has four distinct product lines either under implementation or under development: a) Short-term funds: The standard product is for up to 24 months. The main challenge is the verification of the final-use of funds. b) Long-term funds: Cajas Populares are interested in long-term funds but require assistance in product development. Additionally, small cajas would find it difficult to come up with their 20 percent share of the credits (under the scheme of shared risks). c) Portfolio guarantee for housing microjnance: SHF is working with the Bank (under a fee-for-service contract) to set up a portfolio guarantee scheme for HMF. These models are fairly popular in microfinance and small and medium-sized enterprise (SME) financing for two reasons. They reduce the administrative costs of the guarantee mechanism, and induce expansion of portfolios that otherwise would be limited by access to funding or perceived risk in new market segments. The main feature of portfolio guarantee models is that they reduce the participation of the guarantor in the loan approval process and defer to the lender the choice of individual loans to include in the portfolio to be guaranteed. 22 BANSEFI, Strategic Planning. Unpublished, On the (ultimate) demand side, a survey of just over 2,000 households/clients of the BP sector indicated that approximately 17 percent of the households had applied for some type of housing loan (building, expansion, remodeling). Of these applicants, a large majority had applied to BP institutions, while only about 5 percent had submitted applications to banks or SOFOLs. 21

31 d) Card-based housing microjhance payment platform. A card-based platform is a technology-driven system that connects borrowers who wish to use funds obtained for home improvement and extension to suppliers of the necessary building materials. This platform has the potential to help scale up the provision of housing microfinance in Mexico. The platform also could sustainably reduce the interest rates charged on housing micro-loans through reducing certain costs and by standardizing key elements of the current micro or consumer lending process. 63. To fully scale up and mainstream housing microjnance in Mexico, two main challenges remain. First, microfinance interest rates in Mexico are generally much higher compared to poorer countries such as Bolivia and Peru. Mexico s higher rates can be attributed to a lack of viable competition in the sector. Despite the existence of many institutions, microfinance services only reach a very small number of clients. The estimated market penetration is less than 10 percent overall: demand far exceeds supply. Switching to a broad-based, card-based payment system would lessen administrative expenses so should impact lending rates. Nonetheless, clearly, the focus of public policy in this context over the medium term should be to encourage and facilitate a larger number of private players to enter the market while ensuring prudential regulation of the sector. Second, HMF needs to be tightly integrated with the general housing subsidy policy. For example, through its Home Improvement Program, SHF could develop a network of suppliers and incentivize the organizations to give micro-loans in clusters, using a common technological platform. Similarly, in the program of subsidies for acquisition of serviced lots, private developers could be linked through one microfinance institution. SHF could develop a competitive allocation system for subsidies tied to microfinance loans (MFLs) based on rates and credit risk performance. Table 3: Housing finance: Monitoring indicators Indicator Amount of mortgage financing of SOFOLs to 2,3 80 3,924 population earning between 3 and 8 MW (MXP millions) Amount of the housing microfinance by SHF to households with incomes up to 5MW (MXP millions) Total number of housing microfinance loans (SHF 45 1,336 program) Financial sustainability SHF* Note: * = Defined as total internally generated income /(total expenses + imputed cost of capital). Source: SHF 64. SHF continues to increase the amount of mortgage financing to the low- and middleincome population as shown in the table. This figure takes into account only those SOFOLs that receive SHF funding. However, since 2003, the strong growth of banks and SOFOLs has been funded by diverse sources other than SHF. As mentioned, the SHF-financed micro-loans have yet to increase to rates comparable to the mortgage loans. SHF expects to foster this segment by introducing new products, such as guarantees. 22

32 Policy Area 5: Urban Property Registries and Rights Activities under the Government s Program Supported by HUSAL and HUDPL Since 2001, the Government of Mexico has prioritized the importance of property rights in market development and social stability. In 2003 GoM launched a project to strengthen property registries. Under it, CONAVI provides matching funds (to the states contribution) to analyze and reform its institutional and legal frameworks for property registries and rights; reengineer the processes and work flows of its property registries to reduce approval time, increase efficiency and accuracy, and reduce costs; shift from manual entry of transactions to electronic folios of properties; digitize historical data for electronic storage; permit remote consultation of the registries; and link state registries to municipal cadastres to unify information. 66. The first loan supported the consensus on the content of the modernization model and its implementation in two states. CONAVI and SHF developed an integral and dynamic model defining the characteristics that property registries must implement to develop a modern organization and deliver adequate services. The adopted model makes use of best international practices, including the main elements for a modern legal framework, efficient and effective managerial tools, simplified procedures, and a modern information technology platform. The model represents a consensus on the main characteristics of property registries modernization agreed among the main public and private stakeholders. They include CONAVI, SHF, SOFOLs, the national property registries association, the national notaries association, and the banks association. The Property Registry Modernization Program was implemented in the states of Baja California and Colima. 67. As implementation of the model in other states continued, CONA VI and SHF continued to develop tools to evaluate property registries. Two additional tools have been developed by CONAVI and SHF. A baseline methodology to identify the characteristics of property registries in terms of the model determines the gap between the baseline and the model, and monitors the advances to adopt the model. In addition, a methodology to digitalize property records has been defined. 68. HUDPL II promoted the implementation of modernization agreements in five additional states. By October 2005, CONAVI had signed agreements with San Luis Potosi, Hidalgo, Michoacan, Sonora, and Distrito Federal -one more than agreed in the policy matrix. 69. As part of CONA VI S efforts, modernization agreements continued with more states. During initial program preparation, it was envisaged that by the time of the third operation under the program all 32 states would have entered into agreements with CONAVI to modernize their property registries. Given the speed at which negotiations occur and the voluntary nature of the program, in 2005 the Bank and the GoM jointly decided that it was unlikely that this target would be met before HUDPL 111. A more feasible approach would focus on the most populated states to impact the largest share of the population. The milestone of modernization of property registries in all states was modified to at least 18 states covering at least 80 percent of Mexico s urban population who could take advantage of the program benefits. Section V describes how this key prior action has been met and the additional activities undertaken by GoM to expand the scope of the modernization program. 23

33 Recent progress under the Program and prospects for the sustainability of reforms 70. CONA VI continues the expansion of the public registries modernization program. Overall, 18 states coverin 74 percent of the urban population have signed modernization 23 agreements with CONAVI. 71. The new administration fully supports the advances made through the modernization program operated by CONAVI and SHF, and has decided to expand the efforts to incorporate cadastre and rural registries. To achieve the important objective put forward in the National Development Plan to bring certainty to property rights through the homologation of public registries, in March 2007, the new administration launched a new program. It is called Lineamientos para la aplicacion del Programa de Modernizacion de Registros Publicos 2007 and has an allocated budget of US$40 million. This program builds on the model developed by CONAVI and SHF and supported by the DPL series as the standard institutional arrangements that all property registries in Mexico should attain. The new program assigns federal funds to cofinance modernization plans and gives the leading role to the Secretaria de Gobernacih and technical participation of CONAVI and SHF. Access to federal funds provides the necessary incentives to the states as well as necessary technical support. At the same time, it fosters the adoption of internationally recognized good practices for adequate property registries institutional organization and service delivery. 72. Monitoring indicators. It was agreed that CONAVI would periodically track the time required to register a property in each state that has signed a property registry modernization agreement. However the methodology to estimate this indicator has changed several times so is not comparable over time. SHF has developed baseline indicators that will measure progress in each state. This information will identify useful indicators to systematically measure progress. Policy Area 6: National Urban Policy, Slum Upgrading, and Institutional Strengthening Activities under the Government s Program Supported by HUSAL and HUDPL HUSAL I supported several activities to improve the institutional set-up to alleviate urban poverty. First, information on urban development became more widely available. One of the key prior actions for HUSAL I was the approval of the National Urban Development and Territorial Planning Policy As part of its commitment to transparency, GoM mandated the publication of an annual report on policy implementation and provision of information on related programs through the internet. Second, the new urban development program established that all social programs be targeted to poor areas. Third, SEDESOL prepared poverty maps for this purpose, and to improve the sustainability of urban policies, conducted an environmental assessment of urban areas. 74. In 2003 the Government combined various physical and social interventions in slums under an umbrella program called Habitat approved and funded by Congress and operated by SEDESOL. Habitat became the Government s flagship program to address slum-upgrading needs in an integrated manner. Habitat provides grants for slum-upgrading projects in predefined areas (Poligonos) that are matched by counterpart funds from local government^.^^ Habitat finances the development of self-diagnosis and action plans for comprehensive medium-term barrio (slum) The States are: Sonora, Baja California, Colima, Michoacan, Nuevo Leon, San Luis Potosi, Tamaulipas, Distrito Federal, Guanajuato, Estado de Mexico, Sinaloa, Morelos, Quintana Roo, Hidalgo, Jalisco, Queretaro, Zacatecas and Guerrero. * Poligonos are predefined by SEDESOL as geographical areas where more than SO percent of the population is below the poverty line. In almost all cases,poiigonos are smaller than the political boundaries of a municipality. 24

34 upgrading. On the physical side, Habitat finances detailed engineering plans for infrastructure projects; and invests in urban infrastructure including water, sewerage, storm drainage, paved access roads, electricity, street lighting, community facilities, and solid waste management. 75. A key Government action that HUDPL 11 supported was to strengthen community participation within the Habitat Program to avoid the program s being transformed into one more federal transfer to be allocated by the municipal government. SEDESOL provided training on participatory planning and self-diagnosis of neighborhood needs and priorities to local authorities and community members at barrios covered by Habitat. Recent progress under the Program andprospects for the sustainability of reforms 76. Habitat has continued to expand. Since its inception, Habitat has moved rapidly up to scale, supporting 818 barrios with US$170 million in financing in 2004, 972 barrios in 2005 with US$200 million and 972 barrios with US$193 million in Monitoring and evaluation (M&E) efforts for the program began in 2005 supported by an Institutional Development Fund grant from the World Bank. One of the main recommendations derived from the evaluation has been the need to reduce the number of available spending categories to increase the program s impact. This has been partially addressed in the program s operational rules. 77. In 2007 Habitats operational rules were revised to incorporate several changes that increase the coordination with other programs, simplifl the program s operation, and better align the projects with the city and municipality boundaries. As a result, funding for improving public spaces in large cities has been eliminated.25 In addition, the number of categories and modalities of the program has been reduced from 13 (5 geographical modalities and 8 types of interventions) to 5 (2 geographical modalities and 3 types of intervention). The new rules also permit certain projects (notably, infrastructure for low-income housing) a wider geographic area of intervention than the pre-defined poligono. This wider range is particularly important for projects that support the preparation of urban development plans and those related to infrastructure for new low-income settlements. 78. In March 2007, SEDESOL issued a new program, Rescate de Espacios Ptiblicos, with an allocated annual budget of US$l 00 million to finance the redevelopment and recovery of public spaces. Similar to Habitat, the program co-finances with local governments social and physical interventions destined to foster the rehabilitation, maintenance, and social cohesion of public spaces in large (> 50,000 inhabitants) cities. The aim is to increase social cohesion, promote community identity, and prevent violence and antisocial behavior.26 SEDESOL s target is to finance 550 projects in As of June 2007, 200 cities received funding from the program, in most cases to co-finance recreational spaces (parks, plazas) or sports facilities. These projects can receive funding from the new program Rescate de Espacios Publics described below. 26 See htto://~.~ede~0i.eob.mx/indcx/index.oho?sec=3013&len=i for more details on the program. 25

35 Table 4: National urban policy, slum upgrading, and institutional strengthening: Monitoring indicators P Indicator Number of slums that have prepared or updated selfdiagnosis Number of slums that have prepared participatory planning based on their self-diagnosis financed by Habitat Number of social auditing processes Source: SEDESOL 79. Habitat continued to make progress in the community participation activities that it supports. The numbers are not expected to increase sharply from year to year since both the budget allocation to the program and the average fund allocation by beneficiary have remained relatively stable since Notably, some qualitative aspects are improving the social auditing projects. Accessibility to basic technology is more widespread, and the program has launched a special fund for social auditing projects through online and multimedia technology implemented by the young pop~lation.~ Policy Area 7: Low- and Moderate-Income Land Development Activities under the Government s Program Supported by HUSAL and HUDPL Under this component, HUSAL I supported two studies to address the lack of systematic data on land availability. The first study provided an inventory of developable urban land. The second analyzed the legal and financial options for residential land development. To rationalize and simplify the land development process, SEDESOL also completed a full assessment of state and municipal land regulations in two regions The original policy matrix for HUDPL 11 included the preparation of an analysis of the costs and benefits of land development for low-income households, which was shifted to HUDPL III. SEDESOL has been seeking to enlarge the menu of land policy instruments through Habitat or other mechanisms. The policy matrix originally included the completion of a cost-benefit analysis of different modes of land development as well as the design of an action plan to implement selected alternatives. The analysis will be finished by December To increase the options for local governments, Hcibitat rules were modified in 2005 to allow the financing of serviced lots. This was a significant advance as previously such funds could be used only to purchase land reserves, the most common form of land development for the poor. Despite the large demand for land for low-income housing, local governments seem not to find Habitat a good alternative for serviced lot provisions. The number of serviced lots financed through the program remains low at 2,900 and 2,500 for 2005 and 2006, respectively. This is partially explained by the low amount received by local governments under the program for this purpose and the relatively small number of beneficiaries compared to other types of expenditures also financed by the program. The serviced lots modality was cancelled in Details can be found at the Habitat website (httd://ww.habitat.eob.mxi) The hvo regions included the states of Baja California, Baja California Sur, Chihuaha, Coahuila, Durango, Nuevo Leon, Sinaloa, Sonora, and Tamaulipas. 26

36 Recent progress under the Program andprospects for the sustainability of reforms 83. The Government has completed an important study on costs and benefits analysis of land development. The aim of the study is to obtain and analyze data on the price determinants of land destined for formal and informal settlements. Understanding the relative importance of each of the legal, economic, and spatial variables to the price of land will clarify the main constraints that drive the prices of land to higher levels, making land unaffordable for low-income housing. The study makes a set of important policy recommendations and instruments (subsidies and regulatory reforms) to increase the supply of land for low-income housing. The analytical methodology incorporates economic, legal, and spatial analyses to be conducted in eight selected cities throughout the country. Cities were selected based on size, population growth, ercentage of poor population, barriers to city growth, and change in land uses in the last 20 years. Pg 84. A first draft of the study including results and recommendations is currently being revised by SEDESOL. Given the scope of the study it is likely that several iterations and discussions of the document will continue after October. In parallel, SEDESOL will prepare a pilot land diagnostic, assessment, and action plan in the city of Mexicali, Baja California. The plan will have the dual purpose to pilot this scheme in the city and to prepare a systematic operational guide to land assessment that will be applied in additional cities. The main objectives of this operational guide are to provide local governments a practical tool to prepare land assessments in their respective cities and to increase the information on land demand and supply in the middle and large cities. Accomplishing these objectives will enable a more effective launch, at a later stage, of the policy instruments recommended by the land study being prepared. 85. Led by SHF, four pilots on land development for housing are being implemented in the States of Michoaccin, Yucatcin, San Luis Potosi, and Quintana Roo. The Macro-lotes Para Vivienda project has been designed to provide a new alternative to the provision of adequate land for affordable housing. The project intends to leverage private sector resources to improve the quality and sustainability of the housing developments. Essentially the pilot consists of setting up an adequate institutional framework to foster public-private participation in land development. This includes the creation of a trust fund mechanism, and preparation of generic partial urban development plans with the consensus of the relevant government agencies. 86. It is important to note that at this stage no funds are being invested in land or housing. Rather, SHF is coordinating efforts from state and municipal governments, national development banks, private banking institutions, and other federal government agencies to develop four pilot macro-lotes projects; The specific objectives of the pilots are to (i) set an adequate institutional and administrative framework in which development of suitable land for housing in a sustainable environment can occur,(ii) strengthen the local government capacity to strategically plan the areas of city growth, and (iii) develop a sustainable financing structure for land development for low-income housing. The projects incorporate four innovations: a) The generic partial development plans will be subject to public consultation, approved by the State Congress, and published in the state s official gazette with a transparent modification process. b) The macro-lotes include mixed land-use for housing (residential, middle, and lowincome), commercial, and service uses. In effect, the macro-lotes are implementing a *9 Selected cities are Tijuana, Ciudad Juarez, Queretaro, Xalapa, Durango, Colima, Campeche y Los Cabos. 27

37 cross-subsidy between the higher-income land uses to the lower-income uses, making affordable housing feasible and sustainable. c) At least 60 percent of the housing built in the macro-lote must be low-income housing (MXP 180, ,000). d) The operational vehicle (a trust fund in all cases) integrated by public and private stakeholders is responsible to implement the project under a strict timing schedule to minimize speculation. 87. At a later stage it is expected that private sector investments will happen that incorporate mixed land use and that take advantage of cross-subsidies among different land uses to fund access to infrastructure services for the low-income housing. Table 5: Low- and moderate-income land development: Monitoring indicators - Indicator Number of serviced plots that have been 2,600 2,464 allocated to low- and moderate-income beneficiaries Source: SEDESOL 88. The decrease in the number of serviced lots financed through Habitat is explained by the large advance investments that local governments have to make to service the land for housing and the relatively low level of Habitat financing that they receive. The pilots being implemented by SHF address this issue by establishing a partnership with the private sector to provide the necessary funds for land development for low-income housing. Policy Area 8: Disaster Prevention and Management Activities under the Government s Program Supported by HUSAL and HUDPL The Hdbitat slum upgrading program focuses on disaster prevention to mitigate the vulnerability ofpoor neighborhoods. The Mexican population, particularly the poor, is vulnerable to natural disasters. The Government has decided to use the Habitat slum-upgrading program to improve the effectiveness of prevention activities and reduce the vulnerability of poor neighborhoods. Habitat s Territorial Development and Environmental Improvement (TDEI) program incorporates disaster prevention and mitigation actions. First, by addressing the risks resulting from unplanned urbanization in vulnerable areas. Second, TDEI provides federal funding for planning and for preventive works such as retaining walls and storm drainage. Most importantly, third, TDEI will support the preparation of risk atlases and, fourth, provide resources for vulnerability assessments at the neighborhood level, identifying risk areas and suggesting structural and nonstructural mitigation measures. 90. HUSAL I helped Hdbitat implement three important types of projects to reduce disaster vulnerability. Habitat co-financed 30 community-level risk analyses and 15 sensitization and mitigation projects, and prepared 10 proposals to organize land use to prevent natural disasters. 91 I The Government achieved signijkant benchmarks under this component in preparation for HUDPL II. Habitat helped local governments and communities prevent and manage natural disasters. It has also helped to increase the sustainability of their efforts. In 2004 Habitat 28

38 incorporated disaster prevention and environmental improvements in disaster management practices. To promote a medium-term vision for disaster prevention, Habitat's operational rules for 2005 were strengthened to allow co-financing of land and urban development plans that incorporate disaster prevention criteria. The operational rules for 2005 also increased cofinancing for risk atlases and risk maps from 50 percent to 66 percent-the highest of any Habitat program-to encourage local governments to invest in disaster prevention. To widen its scope beyond slums and taking advantage of the methodology already developed, Habitat will enable risk atlases and risk studies to be prepared for cities, metropolitan areas, and municipalities. 92. During the Fox administration, an inter-ministerial group supported the inclusion of disaster prevention in Government policies. Two working groups were formed at the federal level under the leadership of SEDESOL. One, comprising representatives from a disaster risk-related institution-the National Center for Disaster Prevention of the Ministry of the Interior-focuses on the exchange of technical information among ministries. The other group, with members from various ministries, is devoted to building capacity for disaster risk management as a component of long-term institutional strengthening. 93. SEDESOL's progress on disaster prevention and management is ahead of the schedule developed for the program. Habitat is responsible for creating incentives for local governments to invest in disaster prevention and management, a sector not usually an investment priority for those governments. Thus it is impressive that most of the risk maps and related work have been undertaken in the urban areas of Chiapas and Oaxaca, two of the poorest states in Mexico. Recent progress under the Program and prospects for the sustainability of reforms 94. The federal government continues its efforts to promote and finance disaster prevention and mitigation with local governments. The Habitat program helped local governments and communities prevent and manage natural disasters, and have taken steps to increase the sustainability of these efforts. Since 2003, a total of 1,200 risk prevention projects have been supported. To date, 105 risk atlases have been prepared and 200 training courses on risk mitigation have been c~nducted.~' Habitat also finances prevention and mitigation works such as alert systems, community resettlement, and stabilization of risk areas. Close to 650 such projects have been financed to date. Nine cities have incorporated, or are in the process of doing so, the information from the risk atlases in their planning in~truments.~' Table 6: Disaster prevention and management: Monitoring indicators - Indicator Number of cities that have risk atlases Local regulations and planning instruments being modified that incorporate information provided by risk atlases (%) Source: SEDESOL 95. The two indicators increased modestly in 2006 as local governments and Habitat barrios increased their demand for instruments to prevent the effects of natural disasters that had severely damaged several states in southern Mexico in This increase despite the fact that the Hhbitat 3" Eleven atlases were prepared in I' The cities are Chihuahua (Chih.), Manzanillo (Col.), Tehuach, Teziutlh, (Pue.), Benito Juhrez, Cozumel, Othon Blanco, Solidaridad (Quintana Roo), Jerez (Zac.) 29

39 budget and average funding by beneficiary have remained constant suggests the positive impact of SEDESOL s awareness campaigns in Habitat communities. IV. THE BANK-SUPPORTED AFFORDABLE HOUSING AND URBAN POVERTY PROGRAM 96. The proposed loan is consistent with the four pillars of the Country Partnership Strategy (CPS) Progress Report discussed by the Board on February 6, The four pillars are designed to (i) reduce poverty and inequality, (ii) promote environmental sustainability, (iii) increase Mexico s competitiveness, and (iv) strengthen the country s institutions. HUDPL I11 has a strong focus on increasing access to real assets for low- and moderate-income households and improving the existing living conditions of the poor. The loan would address these key aspects of poverty by providing support for a comprehensive reform in housing subsidies, expanding the property registries modernization program, and fostering new land development and housing for low-income families. The project would enhance competitiveness by increasing the efficiency of housing and urban development, housing finance, and property registries. Many low- and moderate-income homes contain microenterprises in addition to providing shelter, and home owners often build additional rooms to rent or for family members. Thus housing often serves as a key source of capital accumulation and is critical to building a strong middle class. Finally, the project would have a strong environmental impact by improving conditions in slums and promoting formal development on appropriate, well-designed sites. Relationship with Other Bank Operations 97. The proposed program has been prepared in close coordination with other Bank operations in Mexico. The associated Housing and Urban Technical Assistance Loan (HUTAL) supports the design and implementation of the policies and reforms under HUDPL 111, and fosters continuity between the operations. The overall program draws on the experience and results of the now-closed FOVVSHF operation. That operation was designed to provide liquidity and technical assistance to reform SHF in its role to lead the development of primary and secondary mortgage markets for middle-income households. The three-loan program has deepened these efforts by targeting low-income households through broader sector reforms that provide housing subsidies, move housing finance and savings programs down-market, upgrade slums, and foster low- and moderate-income land development. 98. The Bank is currently advising GoM on policies that will foster competition in the local Jnancial markets through an ongoing economic and sector work (ESW). This study can complement the efforts supported under the proposed HUDPL I11 to develop new models of lowincome land development with the participation of BANOBRAS. 99. Additionally, the HUDPL 111 has drawn upon the analysis, particularly regarding housing subsidies and microjnance, the second advisory project on Housing Finance signed between the Bank and SHF. The proposed loan also has benefited from close coordination with the Environmental DPL series. The main objectives of the latter are to mainstream environmental considerations in sectoral policy-making and to increase SEMARNAT s capacity to collaborate with other agencies. The housing SEA supported by the 32 Report no : httd://wwwwds.worldbank,oreiextertial/defaul~dscontentserver/~sp/~/2007/02/16/ iRendered/PDF/37934.o - df 30

40 proposed HUDPL I11 will follow the methodology used for the tourism sector SEA under the ENVDPL series Similarly, the program complements housing reforms at the local level supported by the Decentralized Inpastructure Reform and Development (DIRD) Loan. The decentralized infrastructure loan is helping the State of Guanajuato strengthen the capacity of its housing institute, implement a coordinated housing strategy at the local level, and improve the sustainability of its housing sector.33 The DIRD project will also support a small pilot project for progressive housing development. This pilot will follow the new federal subsidy scheme launched by CONAVI to increase access to housing for the lower-income population and foster private sector participation in this market. 101, The loan involves collaboration with other donors. The proposed loan would complement the program financed by the Inter-American Development Bank (IADB) to support CONAVI in the modernization of property registries; (ii) facilitate access to housing finance for recipients of remittances through SHF, and (iii) support the dbitat program through a multiphase program, 102. HUDPL I11 is complemented by several IFC operations that support the expansion of housing finance for the middle-income sector through the provision of funding for important SOFOLs operating throughout the country. Lessons Learned 103. The working group on housing subsidy reform within CONA VI continues to be efsecti~e.~~ The program as envisaged at the time of HUSAL I is ambitious and involves multiple sectors. More importantly, subsidy reform cannot be achieved in a short period, and its success depends on close coordination among the different stakeholders, particularly given the large market share of the semiautonomous housing funds. To address the institutional problems and lack of a culture of coordination, in 2004 a working group on housing subsidies was formed in CONAVI to bring together all the major actors involved in housing subsidy policy, including CONAVI, SEDESOL FONHAPO, SHF, INFONAVIT, FOVISSSTE, and SHCP. This working group was crucial in agreeing key reforms of subsidy programs in 2005 and continues to meet regularly to discuss the subsidy report prepared semiannually by CONAVI. The working group, under the leadership of CONAVI, is responsible for supervising the ongoing analysis and evaluation of the subsidy system A comprehensive reform program such as this one demands a strong coordinating and analytical role by CONA VI. Given the number of agencies and responsibilities involved, a strong coordination role is important for delivering results in the sector. The new Housing Law approved in June 2006 strengthens CONAVI's role as a policy leader and coordinator in the sector. To fulfill its new mandate, a necessary next step is for CONAVI to strengthen its technical team and improve its analytical tools to be able to provide in-time analysis and policy guidance Monitoring indicators are crucial to monitor progress, measure impact, and adjust the pace and content of the reform program. Monitoring indicators have been agreed with the Government of Mexico for each component of the three-loan program. The Mexico Decentralized Infrastructure Reform and Development Loan also supports the State of Guanajuato's water and sanitation and transport sector programs. I' Lessons learned for HUSAL I mainly derive from the Implementation Completion Report, Report No , June 2005 and for the HUDPL 11 from the Simplified Implementation Completion and Results Report, Report No , December

41 106. The most signijicant challenge for urban development and upgrading programs is capacity building at the local level for comprehensive urban planning that takes into account the needs of the poor. Given that most responsibilities are shared among the federal, state and municipal governments, such capacity building is necessary for practically all urban and housing sectors. Programs such as Habitat, or implementing housing policy through OREVIS, and fostering good practice in modernizing public registries all will depend on adequate financing and implementation skills in local governments. This capacity building needs to include a comprehensive review and updating of the existing local regulations for, among others, land use, municipal finance, participatory schemes, and the environment. Pending tasks in this regard include the integration of territorial and environmental planning; improved coordination between Habitat and FONHAPO on serviced lots; enhanced community participation in investment planning; and enhanced decision-making and integration of social and infrastructure projects. Analytical Underpinnings 107. The three-loan program rests on a solid foundation of technical analyses conducted by the Mexican Government, the Bank, and other development partners. These analyses include: Mexico Financial Sector Assessment Program (Report No 25850, 2001). Evaluates the main aspects regarding policy issues in housing finance. The report suggests a comprehensive reform strategy to address interrelated challenges including the (i) redesign of subsidy programs, (ii) restructuring of the state-owned housing finance institutions, and (iii) development of mortgage securitization and private mortgage originator^.^^ A Contribution to an Urban Strategv for Mexico (Report ME, July 2002). Examines Mexico's urban sector and makes policy recommendations on land use, housing, and transport; backlog of infrastructure investment; concentration of poverty in peri-urban areas; and development of institutions to manage and implement these policies.36 Low-Income Housing: Issues and Options (Report ME, September 2002). Examines poor people's access to housing, quantifies housing needs, and discusses the inefficiencies created by the current system of indirect and direct subsidies. It defines the main building blocks of a more sustainable low-income housing ~trategy.~' Income Generation and Social Protection for the Poor: Urban Poverty in Mexico (Report ME, August 2005). Analyses the main trends and characteristics of urban poverty, features of Door urban barrios, and mechanisms that the urban Door possess to cope with poverty as well as their ability to build assets. It provides pd.licy recommendations to fight urban poverty, building on current policies and program^.^' '5http://imagebank,worldbank.org/servlet/WDSContentServer/IW3P/IB/2003/05/05/ ~ /Rendered/PDF/ pdf '6http://imagebank.worldbank.org/servlet/WDSContentServer/IW3P/IB/2002/09/06/ _ I 1340/Rendered/PDF/muI ti0page.pdf '' l/rendered/pdf/mul ti0page.pdf '8http://imagebank,worldbank.or~servlet/WDSContentServer/IW3P/IB/2005/10/l4/ I41 757/Rendered/PDF/ v20rev.pdf 32

42 e Gertler Paul, Evaluacibn de Resultados de Impacto del Programa de Ahorro, Subsidio y Cre dito para la Vivienda Progresiva Tu Casa, modalidades Iniciamos Tu Casa y Mejoramos y Crecemos Tu Casa (December 2005 and October 2006) contains impact evaluation assessments prepared in coordination with SEDESOL of the main non-creditlinked, up-front subsidy program operated by FONHAPO. The results show positive results for the improvement modalities of the program and mixed results, mostly due to high land prices, for the finished housing modality. Decentralized Service Delivery for the Poor (Report No , 2006). This report analyzes the fiscal overview, performance, and institutional dimensions of service delivery to the poor in Mexico, including the delivery of basic infrastructure. The report uses the analytical framework for service provision from World Development Report The report makes recommendations to the three levels of government that would strengthen basic infrastructure service delivery through increased accountability and monitoring and evaluation (Mc%E).~ e e CGAP, Mexico: Country-level Savings Assessment (3d ed., March 2006). Summarizes results of the first test of the country savings assessment toolkit under development as part of CGAP s savings initiative. The initiative identifies opportunities and constraints to increasing poor people s access to high-quality deposit services. The report suggests possible strategies to improve the quality and quantity of deposit services available to poor and low-income household^.^^ Mexico Financial Sector Assessment Program Update (Report No , December 2006). Assesses progress in the financial sector reform agenda for and identifies reform gaps and priorities that could be addressed by the incoming administration. It provides key recommendations for a medium-term reform agenda on mortgage lending and housing s~bsidies.~ Mexico : Creating the Foundations of Equitable Growth (Report No , Chapters, or policy notes, explore Mexico s level of economic development relative to its NAFTA trading partners and other OECD member states. In particular, the chapter covering the infrastructure and housing sectors assesses the recent trends in the sector recommendations for reform in the short and medium term.42 Housing, Health and Happiness (Policy Research Paper No. 4214, April 2007). Investigates the impact of a GoM-funded program to replace dirt floors with cement floors and the effects on child health and adult happiness. Its findings indicate that replacing dirt floors with cement significantly reduces parasitic infestations in young children, reduces diarrhea and anemia, and improves cognitive development. Findings also suggest that adults are substantially better off, as measured by satisfaction with their housing and quality of life, and present lower rates of depression and perceived stress.43 9http://imagebank.worldbank.org/servlet/WDSContentServer/IW3P/IB/2006/12/2 1/ ~ /Rendered/PDF/ v loenglil30povertyl30 1 PUBLIC 1.pdf O.pdf 4zhhnp://imagebank.worldb~k,org/servlet/WDS~IBank~Servlet?pcont=details&menuPK= &searchMenuPK= &theS itepk=501889&eid= ~ &sitename=imagebank 4 9/ /Rendered/PDF/wps 4214.pdf 33

43 V. PROPOSED LOAN Description 108. HUDPL 111 would consolidate the reforms made under the first and second loans. The proposed HUDPL I11 continues to support strategic areas of action under the overall I-IUSAL/HUDPL reform program. The specific areas are reforms toward achieving a unified and more equitable system for federal housing subsidies; deepening the systems for housing loans and savings for lower-income groups, expanding the modernization programs for urban real property registries and rights; and increasing the supply of and access to urban land for poor people The five key actions in the government s program which were anticipated before appraisal of the third operation have been completed. In some cases the original wording of the policy matrix has been redrafted to adequately reflect the Government s program andlor to clarify the achieved result. Table 7 shows the status of each Table 7: Status of key actions taken in the GoM s Program Policy area Original text in policy Key action Status matrix Macroeconomic Maintenance of sound Maintenance of sound Completed framework macroeconomic framework macroeconomic framework consistent with policy consistent with policy 4 objectives and programs objectives and programs described in the Letter of described in the Letter of Development Policy Development Policy Housing subsidies Government has designed - Government has reformed the Completed as reflected in the approved existing subsidy system to budget - a unified improve equity across subsidy system that: (a) programs; prevent combining improves equity, subsidies from multiple federal progressivity, and increases programs44; establish consistent beneficiary contributions rules for beneficiary selection, across programs; (b) does including by income group; and not allow joining subsidies link receipt of the subsidy to from a variety of federal household savings through the programs ( double (i) design of operational rules, dipping ) thereby resulting corresponding budget allocation in a total amount of (2007) and implementation of a subvention per-unit that new federal subsidy program exceeds agreed-upon and (ii) modification of ceilings; (c) adjusts state operational rules of existing and municipal contribution subsidy programs. requirements to federal subsidy programs based on With the exception of the lowest income members of the housing funds, who under the new integrated Casu Apda program receive an up-front subsidy. Looking ahead the Bank team has recommended that the up-front subsidy gradually replace internal interest rate cross-subsidies in the housing funds

44 the poverty level in the jurisdiction; d) establishes consistent rules for beneficiary selection, for linking receipt of the subsidy to household savings, and for the subsidy amount; and e) increases portability of subsidies Housing credit and household savings SHF mainstreams financing of home improvement and addition and purchase of existing housing in accordance with standards agreed between GoM and World Bank. SHF mainstreams financing of Completed home improvement and 4 addition and purchase of existing housing in accordance with standards agreed between GoM and World Bank through the introduction of new partnerships and products for housing micro-finance. Urban property registries and rights The property registry program is expanded to cover at least 18 states which cover at least 80 percent of the urban population (potential users) Property registry modernization Completed program is expanded to 4 cumulatively cover at least 18 states (representing 11 additional states) Low- and moderateincome land development Government has completed a quantitative cost-benefit analysis of land development and has developed an action plan that facilitates low-and moderate income residential land development. The plan incorporates a pilot program that facilitates low-and moderate income land develonment Government has completed a Completed quantitative codbenefit 4 analysis of land development and has implemented a pilot program that facilitates lowand moderate-income land development The original wording of the key action for the subsidy policy area was redrafted to better reflect the mechanisms through which the subsidy reform is being implemented. There are two important changes in the new text. First, the original text described the main characteristics of a new subsidy system linking them to the approved budget for As early as November 2006, the transition team confirmed to the Bank its interest in continuing the reforms supported by the DPL program. Accordingly, the draft 2007 budget already incorporated the budget allocation to support a new subsidy system that was approved by Congress Second, although the new subsidy system is based on adequate budget allocation, the budget is not the instrument whereby the 35

45 program characteristics are set. Hence it will not reflect the necessary changes in the program rules that improve the system s equity and progressivity. The new wording of the trigger maintains the requirement of a budget allocation for a new subsidy system, linking the main characteristics to the program s operational rules, which are the mechanisms whereby the main features of eligibility criteria and subsidy amounts are set The key action for the housing credit and household savings policy area was complemented to increase clarity. SHF is technically operating this shift in their strategic objective through partnerships with new micro-lending companies and the design and implementation of new products for housing micro-finance. This specification was incorporated to the policy matrix to better reflect the GoM s efforts The property registries modernization program achieved the target of covering 18 states, although in terms of percentage of covered population the result was slightly below the 80 percent target. Clearly, the GoM is committed to the modernization of the State s administrated public registries, and this year has increased the scope of the program and the allocated budget beyond what had been originally envisaged which more than makes up for the lower percentage of the urban population covered to date which is 74 percent The key action for the land policy area has been redrafted to highlight the importance of the implementation ofpilot schemes for land development relative to the preparation of an action plan. The original text of the agreed prior action incorporates the completion of a quantitative study and the preparation of an action plan, which was to include a pilot program for the low-and moderate income land development. The new wording emphasizes the importance of actual implementation of a pilot scheme rather than merely the preparation of an action plan that describes it. This new wording also reflects better the progress achieved by SHF (in coordination with local governments, SEDESOL and the private sector) in the four pilot schemes already under implementation. Poverty and Social Impacts VI. OPERATION IMPLEMENTATION 114. The proposed operation is expected to have significantly positive poverty and social impacts. HUDPL 111 benefited from a Poverty and Social Impact Analysis (PSIA). Given the scope of the proposed reform, this PSIA focused on affordable housing. It included, among others things, (i) a review of existing analytical work (Bank and non-bank assessments); (ii) a review of secondary data (ENIGH) and (iii) an institutional analysis of FONHAPO, the key operating agent for pro-poor housing subsidy policy. This institutional analysis also included interviews with multiple stakeholders, including OREVIs and municipios that execute FONHAPO s subsidy program, Tu Casa. A quantitative analysis of subsidies is about to be completed. Key issues and social impacts emerging from the PSIA are summarized below Overall, the continued dialogue with GoM and other stakeholders through the DPL program has been instrumental in raising critical issues and policy challenges to reduce urban poverty and vulnerability in Mexico. Key issues emerged from existing analytical work-the Bank s recent Urban Poverty Assessment in Mexico Housing 2006 Report, and evaluation of the Tu Casa program. The issues include: Is This study is part of the Income Generation and Social Protection for the Poor Report, World Bank 36

46 0 The positive poverty and social impacts that can be derivedfiom increasing the access of the poor to housing and urban services are tremendous. Housing is a key asset for the poor to provide shelter, to use as a risk-mitigating strategy, and to substitute for formal retirement systems. In particular, housing has a significant impact on poverty in terms of basic social support. Housing plays a unique role in protection as the center of family and community life, and health and social well-being. The importance of housing also reflects its economic role. Many low-income homes are a place of economic activity as well as shelter. Housing is a key asset that supports households strategies to survive, meet future needs, improve their lot, and reduce their exposure to shocks or minimize their consequences. 0 Key for the poor is not just access to housing per se, but housing well located to allow access to jobs and services. The dialogue with GoM in the context of this HUDPL I11 benefits from the impact evaluation of the Tu Casa Federal Housing program. The evaluation showed beneficiaries dissatisfaction with the remote location of their new housing. There is also evidence that when this mismatch occurs, new housing can be abandoned. 0 Access to jobs and services in turn raises the issue of access to land for pro-poor housing. This is addressed under the HUDPL policy track for land development for lowand moderate income beneficiaries. 0 Finally, affordability of housing, and therefore appropriate targeting of scarce federal resources, is a challenge. According to the report Current Housing Situation in Mexico percent of Mexican households do not have access to mortgage lending. Households typically excluded from mortgage lending include those with very low wages (1-2 MW), informal workers, and/or workers with great job instability and precariousness. All these critical challenges are addressed by the proposed HUDPL III The proposed loan will support actions that are likely to generate poverty and social impacts through four main policy tracks: (i) federal housing subsidies; (ii) housing credit; (iii) strengthening Habitat for slum upgrading; and (iv)land development for low- and moderateincome beneficiaries. The key poverty and social impacts for each of these policy tracks are summarized in appendix 4. The summary table also highlights the major instruments that will be used to assess and track these impacts and to inform government policies in these areas supported by DPL. 117, Regarding affordable housing specifically, the PSIA indicates that four complementary series of actions supported by the HUDPL 111are likely to generate positive social impacts: a) Thanks to the provision of up/front grants and guarantees, the creation of the new subsidy program-esta es tu Casu-will increase coverage of the demand from lower-income groups who traditionally could not be served by private sector financing. b) Tu Casa operational rules. GoM asked FONHAPO to focus on pure subsidies vs. lending. In doing so, GoM may create an opportunity for FONHAPO to reallocate resources and skills to improve social targeting and field monitoring to focus on the low- 37

47 income groups (informal workers) who cannot afford the formal requirements of programs that combine subsidies with credits c) By increasing Tu Casa s emphasis on home improvements, scarce federal resources will focus on increasing coverage of the demands for access to infrastructure, service, and jobs of low-income groups who are in adequately located landplots. d) Beyond the Housing Subsidies reform, the HUDPL 111 will address the issues of housing affordability, location, and related access to land through two main tracks. First, housing microfinance will continue to be expanded down-market and to home improvements vs. new housing. Second, the HUDPL I11 will help provide the necessary economic, legal, and spatial analyses and a related set of recommended policy and regulatory actions that should inform GoM s approach to increase the supply of land for low-income housing According to discussion with key stakeholders, the main social risk associated with these actions would relate to the possible side effects of a sole emphasis by Tu Casa on home improvement. This option would deprive key social groups with no existing homes from access to new housing. These social groups comprise women heads of households living in overcrowded conditions with families and small children, new rural immigrants, or young families with very low wages and precarious jobs. For these groups, self-production of housing is hardly an alternative. Therefore, a proposed risk-mitigation approach would be to support a gradual and progressive emphasis on home improvements, with some remaining allocations for a new house acquisition program but with better targeting Another social risk may relate to the potentially adverse impacts on particular groups caused by the expansion of the housing supply and subsidies for construction and upgrading. This risk will be particularly corrected by the increasing focus on home improvement rather than constructing new dwellings for vulnerable people. However, this focus may not be sufficient to address the structural problem of Mexico s legal and policy gaps in protecting informal settlers from displacement and the country s resettlement policy. A solid mitigation measure would include an upstream approach that focuses on these legal gaps and strengthens the capacity of key federal and state agencies to implement a revisited resettlement policy. This measure, however, extends beyond the scope of the HUDPL Moving forward, the PSIA findings also suggest the need to ensure a proper implementation of the pro-poor housing subsidy reform. Implementation should focus on outreach and effective targeting. This challenge, in turn, raises broader institutional implications for federal and state agencies (Appendix 5). 121 I Continuing dialogue and consultations. As highlighted above, this proposed HUDPL 111 was informed by the PSIA exercise. The operation also supports the involvement of civil society and users-particularly the poor-in monitoring and evaluating the implementation of Habitat program (The DPL matrix will be complemented by technical assistance to Habitat through the HUTAL). More importantly, HUDPL I11 was developed in the context of a new administration that set out to formulate a new comprehensive Plan Nacional de Desarrollo. The policy reforms supported by the HUDPL I11 are therefore informed by the series of public and technical consultations that GoM organized as part of this Plan Nacional de Desarrollo, especially on housing and urban development. Appendix 6 details these GoM s consultations. 38

48 Environmental Aspects 122. Policy reforms supported by the program will have signijkant environmental benejts. Informal settlements suffer fiom numerous environmental and social problems due to lack of basic services. The proposed loan will support policies such as promoting slum upgrading; pursuing formal housing development in suitable, well-selected and well-designed areas; and streamlining environmental considerations in housing policies. These policies will improve infrastructure provision, access to green spaces, public transportation, and social services. They also will reduce vulnerability to natural disasters as well as energy and water consumption. According to the analytical work completed to date, none of the reforms is expected to have significant negative environmental or social impacts. Some localized negative environmental impacts are possible from eventual implementation of programs supported by the loan, such as inconveniences due to construction activities or resettlement from risk-prone areas. As in many other Bank projects, these impacts will be managed through existing institutions and regulations The GoM is preparing a Strategic Environmental Assessment (SEA) of the housing sector to include environmental considerations in the federal housing policies. In January 2007, CONAVI started to conduct a SEA that would serve as a master plan to include environmental considerations in its policies and programs in coordination with SENER, CNA, IMTA, and SEMARNAT. In addition, CONAVI announced that it will finance the SEA and that the contributions of SENER, CNA, IMTA, and SEMARNAT will be requested. CONAVI prepared the terms of reference for the SEA and for five environment-related studies. They will be (i) Building Code, (ii) monitoring houses that use environmentally friendly technologies, (iii) costbenefit analyses of energy- and water-saving technologies, (iv) guidelines to certify environmentally friendly building materials and energy- and water-saving technologies, and (v) a program to disseminate the benefits of sustainable housing. SEMARNAT and the other organizations complemented the terms of reference The SEA calls for regional diagnoses and recommendations with regard to: 0 Zoning and land use (including considerations on water availability, air quality, and green areas) 0 Technologies (building materials and systems) 0 Demography 0 Financing (innovative instruments to finance environmentally friendly houses) 0 Utilities and public services (transport, access, energy use, water use, drainage, solid waste disposal) 0 Standards (such as construction) 125. It is expected that the final version of the SEA will be ready by February 2008 and the final document submitted in May A quality enhancement committee is being created to monitor and supervise the SEA activities. Fiduciary Aspects 126. In general, the public financial management (PFM) systems in Mexico are adequate for DPL lending, as documented in the 2003 Country Financial Accountability Assessment, 2007 Country Procurement Assessment Report (under preparation), and other analytical work. There is room for improvement in some areas, such as procurement and accounting practices that are not up to international standards. However, there are plans underway, which the Bank is supporting, to move in this direction. 39

49 Disbursements 127. In recent DPLs, the Ministry of Finance (SHCP) has designated a national development bank as financial agent of the Borrower with regard to the loans. For this operation, SHCP has designated SHF as financial agent and coordinating unit. Under this arrangement, the Bank would make the single tranche disbursement to a designated account in US$ of the financial agent4 for subsequent credit to an account of the National Treasury (SHCP/TESOFE). This credit thus would become available to finance general budget expenditures through the PFM systems cited in the previous paragraph. If requested by the Bank, the SHCP would provide the Bank with a written confirmation of the described transaction Based on the review of external audit reports and the extensive flow-of-fund experience between the Bank and the financial agents usually designated by the SHCP, nothing has come to the attention of Bank staff that would indicate that the banking control environment into which the loan proceeds would flow is other than adequate. This general view will be confirmed specifically once a financial agent for this DPL is designated by the SHCP Based on the assessment of the PFM and banking environments, no additional fiduciary arrangements are deemed necessary for the DPL. Risks and Mitigation 130. Two risks have been identified associated to the proposed HUDPL 111: The institutional risk related to the difficulty of ensuring adequate coordination across agencies. The program s ambitious multi-sectoral approach required constant coordination between government agencies and ministries, and a failure to do so could have put parts of the program at risk. The Housing Law of 2006 has considerably strengthened CONAVI s mandate to coordinate the numerous stakeholders. Accordingly, this risk is rated as low. A future priority should be to strengthen CONAVI s technical capacity for it to better fulfill this role There is a sustainability risk to the entire reform program in that the significant reforms undertaken by GoM over the past several years need to be sustained throughout the medium term to obtain the desired results. The National Development Plan incorporates the strategic lines to continue and deepen the reform program, notably in public registries and housing subsidies. The sectoral programs being prepared will incorporate the particular action lines to be taken. There is also a considerable risk that INFONAVIT captures a major portion of the new subsidy program and effectively shuts out the still nascent private sector from the lowest-income segments. It is worth reiterating that, as an institution, INFONAVIT enjoys virtual autonomy from the federal government in terms of decision-making. The Bank will remain engaged with GoM on subsidy reform through the HUTAL and, as in the past, it is expected that GoM will take seriously the Bank s recommendations in this regard. Overall this risk is rated as moderate Overallproject risk: Low. The use of a financial agent and dedicated account is a local standard procedure established by the GoM for control purposes, not an additional arrangement requested by the Bank. 40

50 APPENDIXES Appendix 1, Letter of Development Policy Appendix 2. Policy Matrix Appendix 3. IMF Relations with the bank Appendix 4. Description of the New Estu es tu Casu Program, Appendix 5. Summary of Potential Poverty and Social Impacts Appendix 6. Implementing the New Pro-Poor Housing Subsidy Policy in Mexico: Key Challenges for Inclusiveness Appendix 7. Summary on Consultation and Participation (pending translation) Appendix 8. Key Elements of Country Safeguards Systems for Environmental Issues Appendix 9. Average Subsidy Amount by Income Segment Appendix 10. Country at a Glance Appendix 11. Mexico - Operations Portfolio (IBRD/IDA) and Grants Appendix 12. Statement of IFC s Held and Disbursed Portafolio 41

51 Appendix 1. Letter of Development Policy SUBSECRETARiA DE HACIENDA Y CREDIT0 PUBLICO SECRETARIA De HACIENDA Y GReDIM PUBLICO M&lco, D.F,, 3 de octubre de Mr, Robert Zoellick President The World Bank Washington, D.C, USA Dear Mr. Zoetlick, Thu letter of Sector Development Policy describes the current siluatron of the housrng and urban sectors in Mexico It provides an ovetview of the main reforms performed, the strategies and actions been implemented to achieve the goals set in the National Development Plan ( ) The reforms are focused towards reducing the currently existing housing gap, with special emphasis in the low income families, through dtfferent programs for housing acquisition and sustained urban development. To continue this ongoing effort, the Mexican Government is requesting the World Banks support through the Third Development Policy Loan for Affordable Housing and Urban Poverty Reduction, I. Macroeconomic Context In 2006 Mexico registered a moderate economic activity mainly due to the political atmosphere and the lack of structural reforms. In spite of this scenario, GDP grew in that year at a rate of 4 8% in annual terms. the best figure since 2000 Inflation rate reached 3.8% for 2006, in line with the official target of 3% (ti %). Under the first year of President Calderon's administration several positive changes have occurred in economic policy: among these changes its worth to mention i) the new pension law for public employees (Ley del ISSSTE) which ensures the ftnancial viability of the pension system and generates srgnificant savmgs in public sector accounts in net present value terms, due to the elimination of a future high deficit 11) the new Law for Federal Budget and Financial Responsibility which guarantees the best practices for the achievement of a balanced budget with a bettet control over estimated oil prices and responsible management of resources, and iii) the recently approved fiscal reform will provide more funds for the federal and local governments to achieve a more balanced social development During the first half of 2007, GDP grew, in annual terms, at a rate of 2.7%. inferior In comparison to the 5.2% recorded in the same period last year, due to significant lower growth rates in the manufacturing, construction and mining sectors and the real state turmoil in the US economy 42

52 SUsSECRETARiA DE HACIENDA Y CREDIT0 POBLICO From January to July inflation reached an annual increase of 4.0% due to some short-term supply socks, particularly in the food sector. However this result is still consislent with the official target. Regarding financial markets developments, in September 19, Fit& increased their grade for Mexican sovereign long-term debt denominated in foreign currency from "BBB" to "EBB+", and from "BBB*" to "A-* long-term debt in local currency due to the positive expectations on domestic economy. in June 1, the sovereign risk of Mexico decreased to its minimal historical level. 71 points. For 2007 and 2008, GDP is expected to grow at 3.0% and 3.5%, respectively and inflation will be around in each year. However, there are still three main risks that can affect these results. a le= favorable economic performance of the US economy, particularly if the unsteady situation in the real state sector continues; international financial volatility and significant changes in oil prices. The goal of the current mnomic policy is to maintain a strong fiscal policy aimed at impulsing an accelerated and sustained economic growth to create the jobs required by the society and increase the quality of life and the number of opportunities for the Mexican people. 2. Housing and Urban Sector Mexico's successful growth in the housing sector over the last five years has been essential to the country's economic and social development. Housing has been a priority on the government's agenda, addressing the needs and demands of less fortunate population, making it possible for families lo create their own wealth. To this effect. important changes were furthered in the housing sector. aimed at enabling growth, promoting more financing, increasing productivity and favoring land supply. The government's platform for transforming the structural components on which the national housing effort is built, is the new Housing Policy issued last year. The major reforms already impremented in housing policy include: 2.1. The National Housing Commission (CONAVI) has successfully managed the coordination of the national policy with most of the 32 states through: (if cream of State Housing Councils, (ii) implementation of programs to reduce indirect costs associated with construction and titling, and (iii) dissemination of best-practices information on building standards and titling documentation, The supply 01 financial products has ken adapled to the current demographic dynamics with new products such as programs for housing rental, microfinance, expansion, and remodeling, and schemes with upfront subsidies. The new Housing Law, passed in June 2006, strengthen CONAVI mandate as policy coordinator and promotes community and private sector participation in housing, allowing better attention to housing and urban issues. CUNAVl has initiated the selection and employment of consultants to develop the Housmg Building Code. This code will serve as an updated normative model For the approval of regulations, in order to develop safe, reliable and affordable housing in a sustainable urban context. 43

53 SUBSECRETARIA DE HACIENDA Y CREDIT0 PU8LICO CONAVI has also developed the National Housing Information and fndiitors System, with the participation of the national housing finance agencies, which has the purpose of integrating, generating and disseminating the required information for the appropriate planning, implementatcon and monitoring of the housing policies, as well as the strengthening of a coordinated housing supply Socredad Hipolecarie Federal (SHF). This institution has the mission of promoting the devebprnent of a competitive housing financing market for all Mexicans to be able to acquire a house. Accordingly, the following housing finance measures have been implemented: Granting funds and mortgage insurance for housing acquisition. promoting the development of residential mortgage-backed securities and providing bridge loan financial guaranties. * Design guidelines for an adequate capitalization of the financial entities. 0 Develop new products to improve the access of more Mexican families to financing. Work jointly with other institutions to operate more housing finance options, such as impelling the subsidies program with the INFONAVIT and the administration of subsidies received from CONAVI. 0 Consolidate the development of the secondary mortgage market and promote new alternative funding mechanisms. Develop a micro-financed program for housing improvement or expansion. faking advantage of the recent expenence with federal programs such as "Esta cas tu Casa" (-This is Your House"), a program of Finance Schemes and Federal Subsidies for Housing was announced as the substitute for the Special Housing Credit and Subsidy Program (PROSAVI). This new program combines an up-front subsidy, credit. savings and a guaranty,(in the cases that it is applicable) according to some housing modalities: Acquisition of new or used houses, 0 Improvement, 0 Self-construction and 0 Acquisition of serviced lots Congress authorized US $545 million for subsidies for the 2007 fiscal year in two programs: "Esta es tu Casa" which plans to give around 115,100 subsidies, and "Tu Caw' ("Your House") which plans to deliver about 128 thousand subsidies that will give continuity to their housing programs. both in a semi-urban and rural environment The modifications to legal and operational institutional frameworks have resulted in the continuity of housing programs, which at the end of 2006, reached an unprecedented amount of 952,763 financial supports granted from financial institutions and housing institutions, of which correspondsd to acquisition of new or used housing and 229,961 were for housing improvements and other modalities. important progress has been achieved in the urban sector, including. 44

54 SUBSECRETARiA DE HACIENDA Y CREDIT0 PbBLlCO t An analysis of the economic features of formal and informal land development for housing of low and lower-middle income population is in progress This will facilitate the access to hcwsing for urban poor groups 2 5 An integral pilot program that has incidence over the growth on land supply In Mexicali, B c has initiated. This project will increase land supply for urban development. priorittang the one that IS aimed to low income population, starting with the design of tntegral plans to modernize the urban management and proposals for land management tools Atso. reforms allowing to take advantage of the cadastre as an instrument for financing and managing development (tax policy, valuation, technology, real estate development) will be proposed 3. Strategies and Actions This section describes the main strategies implemented by the Federal Government in recent years, as well as changes and actions that will take place in the medium and long term to deepen ongoing reforms to provide the framework for the improvement of housing programs and urban development. These measures focus on strengthening market and institutions in order to find solutions for lower income families that without these actions wouldn't be provided with housing and services. Housing Strategy end Institutions. The National Development Plan , establishes the search for Sustainable Human Development as its main premise; defined as the ongoing process of development of capabilities to enable all Mexicans to have a worthy life without compromising the heritage of future generations. To achieve this purpose, CONAVI has established the following strategies: (a) to provide legal ceitainly on ownership through the homologation of public property registries; (b) to extend the coverage of service and the founding alternatives for housing and construction: c) to increase the availability of suitable land for economic development and housing construction; (d) to re-use urban infrastructure and its existing equipment: (e) to strengthen the National Housing System; (f) to promote improvements for the existing housing stock; (g) to generate a greater dynamism of the used housing mafket. The current administration has a clear determination towards more ambitious goals, like giving financial support for six million houses during the following six years, primarily oriented for the lower income population. Low-income families, that are defined as those with monetary perceptions that do not exceed 5 minimum monthly wages (around $ 133 USD), will receive financial support from federal subsidies to buy a house or land with services, fw improvement or self construction. Housing Subsidy Programs and Policy. Additional to other measures taken in 2005 related to the housing subsidy programs, an "Evaluation of the Housing Subsidy Programs in Mexico" is been canid out aided by the Housing and Urban Development Technical Assistance Program supported by the World Bank. Direct subsidies and implicit subsidies (those derived from the interest rates offered by National Housing Institutions. OrJAVIS) will be evaluated in order to update and complement the results of the 2005 study. This will help to develop a new national subsidies scheme, ensuring the establishment of guidelines for subsidy programs, emphasizing the importance of carrying out transparent actions that promote an equitable and efficient treatment to avoid negative impacts on the participation of the private sector, both in financing and housing production. 45

55 SUBSECRETARiA DE HACIENDA Y CREDIT0 PUBLICO Hotisin@ Credit and Household Savings. The distribution of credits granted by banks and non-bank financial institutions (sofoles) has increased substantially; nevertheless INFONAVIT and FOVISSSTE still have a very high market share of more than 6Wo. SHF's efforts wilk aim at increasing the private sector participation mainly in areas that are unattended by ONAVIS, primarily in the lower income sector and non-waged population. Together with INFONAVIT the registration window for projects has been consolidated. This simpliftes the operation for builders and starts a single database of housing supply that is very useful for the housing sector. SHF's strategy will manage the efforts to considerably reduce the gap between the Annual Total Cost (CAT) and the risk free interest rate. The lines of action will be focused on: (a) The creation of the Mortgage Insurance Company to trigger the widespread use of new branches, authorized in the amendment of the Insurance Companies and Mutual Funds Law; (b) Focus its funding efforts on undersewed population segments, mainly in households with an income below 5 minimum monthly wages; (c) Strengthen the micro-credit founding for housing improvement through specialized brokers, and broaden the base of micro credit operation through more financial intermediaries; (d) Foster bank and sofoles portfolio securitization and supporting small intermediaries through platforms which allow them to participate in mortgage securitization, promoting the reduction in time and cost related to credit origination Properfy Rights Modernization. CONAVI, SHF, The National Notaries Assocjation (ANNM) and the Mexican Institute for Register Law (IMDERAC) developed the Public Property Registry Modernization Model, which integrates the following components: legal framework, information technology, quality management, properly rights professionalizing, institutional policies, documentation management and collection, participation with other sectors and perfomance indicators, which together ensure compliance with the property rights principles, the legal security and the real rights dissemination. Subsequently, this model was endorsed by the main stakeholders of the housing sector: INFONAVIT. FOVISSSTE. FONHAPO. the Notaries College, the Mexican Banking Association, the Mexican Sofomes Association and others. The model takes into account the internalional best practices and integrates the pilot plan lessons from the property rights modernization implemented in the States of Baja California, Colima and Sonora. On March 6th 2007, the guidelines for the 2007 Public Property Registry Modernization Program were published in the Official Gazette, where the Federal Government establishes as one of its first actions during the current Administration the need lo work together with slate governments to undertake iegal adaptations and develop the technological platform that allows them to standardize the Public Property Registry. Furthermore, the Evaluation Committee conformed by CONAVl, Secretaria de Gobernacibn and SHF was created as an instance to analyze, evaluate and authorize the inclusion of projects that proceed from the Baselines and Periodic Measurement results. as well as the work plan of the State Modernization Projects (SMP), National urban development policy and slum upgrading. The Urban Development Plan proposes to reduce regional disparities through an orderly territorial development and a social infrastructure that would allow the integration of marginal regions to the development processes and trigger their productive potential. 46

56 SUBSECRETARIA DE HACIENDA Y CRCDITO PUBLICO To reduce rural marginalization, the Government will improve those areas where people with greater disadvantages live. This will achieve a more orderly society where all citizens have equal participation opportunities, choice and decision, starting with the poorest municipafities through a plural and balanced development. Actions to seek synergies, order and harmony between the regions, using their comparative advantages, promoting their productive potential and promoting environmental and social sustainability will be initiated. The National Infrastructure Program , sets the objective to provide qua{ opportunities for all Mexicans, particularly those living in isolated. marginalized conditions, with lack of drainage, that have no electricity or housing, Upgrading the living conditions for the low and medrum income families and promoting the creation of new i nme and employment sources for this sector of the population has required the integral actions implemented through the Habitat program, which has a budget for 2007 of more than USD 215 million and will include 215 cities and metropolitan areas at the end of the year. Land Development for low income housing. The government is working to improve the quality of life in cities, especially in the poorest areas. through the provision of social infrastructure and adequate housing, as well as the consolidation of efficient and competitive cities. The country faces the challenges of poverty and urban marginalization; the Government will seek to improve these conditions through basic infrastructure provision and equipment, in the marginalized areas. The proportion of serviced households in the urban-marginalized zones, which have been identified based in the percentage of households in poverty, will increase to 89%.The infrastructure, equipment and services (water. sewage and ebctricity) deficit and the pefcentage of unoccupied lots in the mentioned areas will be reduced. The Federal Government is developing new mechanisms to provide housing for this sector of the population through housing construction and the promotion of an orderly city growth under a primary and secondary urbanization scheme which should include mechanisms of coordination among different participants. In particular SHf has initiated integral urban projects in various states to pilot a new mechanism for land development for medium and low income housing. It is estimated that it wll benefit around 2 million people, with the joint work of BANOBRAS and other participants, which have suitable soil for popular housing. These projects are linked to the housing subsidies policy. Mitigation of natural disasters. To raise the level of human and wealth development of Mexicans who live in high risk areas, SEDESOL is working to prevent and attend natural disasters in coordinated actions with the communities. The conservetbn of the natural capital of the country will be integrated with the social and economic development, identifying and exploiting the guidance and the productive potential of the territory through an ecological management that includes actions in harmony with the envtronment that ensure the sustainable use of natural resources. SEOESOL has set as a target that 80% of the municipalities with a high marginality index cany out integrated disaster risk management actions and plans, helped by ths incorporation of information from tha Natural Hazard Atlas. 47

57 SUsSECRETARiA DE HACIENDA Y CREDIT0 P&3LlCO World Bank Support In recent years, the Mexican Government has achieved significant progress in housing and urban development However, given the demographic trends for the next few years and the weaknesses and shortcomings in the identification of adequate land for the housing development it will be necessary to boost the supply of SIX million housing solutions during the current administration The Third Development Policy Loan for Affordable Housing and Urban Poverty wll be important for the achievement of the present Administration s objectives Undersecretary of Finance, Alejandro Werner Wainfeld 48

58

59 0 m

60

61

62 Appendix 3. IMF Relations with The Bank Under Article IV of the IMF s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. The IMF released the attached Public Information Notice (PIN) on October 11, 2006 summarizing the views of the Executive Board as expressed during its discussion of the staff report that concluded the Article IV consultation. Additional information on recent developments is being provided separately. 53

63 54

64

65 4.2 3.c ' IS.? ,7 0 "I tl

66 57

67 Appendix 4. Description and Analysis of the New Esta es tu Casa Program Program Description Objectives. The Esta es tu Casu program provides federal subsidies for different types of affordable housing solutions for low-income households. The specific objectives are to (a) increase access to (mortgage- and housing micro-) credit and cofinanciamento, (b) support the capacity of low-income households to create housing wealth, (c) increase joint responsibility by beneficiaries for their housing conditions by opening up ways to use their accumulated wealth or savings, (d) stimulate mobility in the new and used housing market, (e) improve the quality of life of the people by enhancing housing conditions and the urban environment, and (f) promote the production of social housing, and self-constructiodproduction of housing in sustainable urban and rural conditions. Program components and beneficiary groups. The latest and still preliminary version of the Reglas identifies several categories of beneficiaries (table 1): 1. Lower-income persons who receive housing finance support from INFONAVIT, FOVISSSTE, ISSFAM, or other federal, state, or municipal entities: a. Incomes at or below 2.6MW for individuals and 4MW for households or persons older than 50 years of age Non-INFONAVIT and FOVISSSTE members: a. Incomes at or below 4MW for individuals or 5MW for households. 3. Low-income households that are beneficiaries of other social programs affiliated with CONAVI and individuals whose homes were lost or damaged due to natural disasters. Table 1 gives an overview of the different components of the latest version of the program, the subsidy amounts and target groups each is meant to serve, and down-payment requirements. In addition to the subsidy amounts shown, there are additional subsidies for each venue: 0 Beneficiaries receiving their subsidies through private lenders are given an additional upfront subsidy to pay for SHF mortgage insurance, which is required for all programlinked mortgage loans. The mortgage insurance premium is capped at 3.75 percent of the loan amount, which is a concessionary rate subsidized by SHF (that is, ranging from roughly between M$2000-M$6000 for house values between M$120,000-M$227,000, respectively). Nonprivate lenders such as INFONAVIT can access the mortgage insurance, but their members must pay for it.49 Through INFONAVIT and FOVISSSTE, beneficiaries receive an additional deep interest rate subsidy. For INFONAVIT, this subsidy amounts to M$38,500-M$45,000 for persons in the 1 SMW-2.6MW bracket). 48 Up from 2MW and 3.5MW respectively under the original program. 9 This arrangement is a main departure from the original (April 2007) program that first set the subsidy amount per beneficiary and subtracted the mortgage insurance premium from that amount as part of the up-front subsidy (in other words the mortgage insurance premium which is higher for larger loans, did not affect the progressive structure of the original program, while under the current scheme those with larger loans receive a higher MI subsidy). Additionally, the original program did not allow the housing funds to access federally subsidized mortgage insurance. 58

68 v1 e % Y 3 CI.I Q 0 0 m a e Q F a" a" a, *.-.I a e a, e c).. a, s 2. E Ir; % 8 is 1 m K a $ v) e %.I 3 I.I Q u 5 E ed 5: F ; a ed c a,.-.i e c a"

69

70 2 0 a 2 0 c.' - w tn 0 a

71 Appendix 6. Implementing the New Pro-Poor Housing Subsidy Policy in Mexico: Key Challenges for Inclusiveness 1. As part of the PSIA, a Bank mission inquired into stakeholders views and suggestions on operative challenges that would need to be addressed if GoM is to enhance the effectiveness and inclusiveness of a federal housing subsidy program such as Tu Casa (or other housing for the poor policies). Discussions focused on issues and options in: incentives structure for the relationship with FONHAPO s executing partners at the state level (OREVIS and municipios); coverage, targeting, and inclusiveness (that is, responsiveness to specific difficulties encountered by marginalized groups). This appendix focuses on key findings related to implementation challenges. While the HUDPL I11 is informing the revision of the Tu Casa rules at the federal level, implementing the success of the affordable housing reform in terms of reaching out to the poorest will depend on key variables related to the institutional capacities of, and relationships among key federal, state, and municipal agencies responsible for the execution of the program. 2. At a general level, stakeholders recommendations to enhance the pro-poor profile of the Tu Casa program included the need to (i) improve outreach and communication about the program, and (ii) provide assistance to the most marginalized, especially groups with low levels of education, with the application process itself (paper filling, small cash for required notarization process when needed). Officials who receive the public in OREVIS or municipios on a daily basis should identify those vulnerable groups and refer those cases to social workers or assistants for help with the application process. Despite improvements, anecdotal evidence was confirmed during field visits that many applicants still hear about the program through local leaders. This creates risks of political influence and reduces prospects for reaching out to those who need the program the most. Good practice includes going through the files of the DE (Desarrollo Integrales de Familia?) and through mobile visits of social workers to poor areas. 3. More specifically, there is scope to improve targeting criteria and methods at state level, reaching out to the poorest and most vulnerable. Within the long list of applicants who meet the basic criteria of earning an income below the 3MW, how do OREVIS and municipios prioritize? Some OREVIS have a sophisticated approach, giving priority to groups such as female heads of households, or households living in areas prone to natural disasters. FONHAPO operative rules provide guidance on this, but it is not always known or disseminated. Others admit that they select within these eligible applicants based on first come, first served. Furthermore, some OREVIS make a strict interpretation of Tu Casa operative rules, rejecting applicants from very poor and precarious backgrounds who cannot even afford to bring the amount of savings required (aporte del benejciario). For Tu Casa rural for example, jornaleros [day laborers] typically earn the equivalent of 1 MW (or less) and cannot manage to pay the full contribution required on a one-off basis. By contrast, other OREVIS and municipios allow for payment in different stages (pago aplazo), which enables them to reach the poorest applicants. 4. These findings raise implications for, and beyond, processes at the OREVIS level. When OREVIS adopt specific criteria for targeting and prioritizing within the list of eligible applicants, these rules should be published and made fully transparent. SEDESOL and FONHAPO should be fully informed and be given the opportunity of objection, or no-objection (regulatory role). 5. An institutional strengthening in FONHAPO could make a difference. First, an effective strategy for human resources is needed. More staff should be dedicated to field monitoring (seguimiento). At least one advisor and one technical person should be recruited to bring social policy and planning expertise to FONHAPO. Key terms of reference would include (i) providing advice on operative rules, ensuring that they be inclusive, and ensuring that they be responsive to 62

72 the difficulties encountered by poor and vulnerable groups to successfully apply to the program (see Operative Challenges below); (ii) acting as FONAHPO liaison for contacts and information exchange with social sections of SEDESOL deconcentrated units, departamentos de promocion social in OREVIS, and municipios; and (iii) overall, helping to implement the vision of a trust fund with a human face (con sentido humano) and a high capacity to ensure an effective targeting of scarce federal resources. Finally, (iv) staff with engineer and architect profiles should be trained in ways to operationalize these concerns for a more-poor focus of programs exemplified by Tu Casa. 6. Secund, FONAI-IPO has the potential to develop a strong capacity building and knowledge-sharing function with lower-income segments of the population. by drawing on the strong experience of its staff A complementary capacity building, or technical assistance program for OREVIS and selected municipios (for example, the 100 poorest municipios) could be envisaged. Typical modules would focus on effective, pro-poor targeting. The knowledge-sharing program would typically include the dissemination of innovation and good practices in the implementation of housing policies for the lower-income segments. 7. Third, FONHAPO s renewed mission would benefit from a strong communication strategy. Externally, goals and performance targets, as well as regular progress on them, should be widely communicated. FONAHPO should constantly clarify operative rules, that is, what is not negotiable vs. flexible within these rules. 8. At the same time, institutional challenges toward more inclusive housing subsidy programs extend beyond FONHAPO. FONHAPO operates the Tu Casu rules, but the normative agent is SEDESOL. The coordination between SEDESOL and FONHAPO therefore must be strengthened. So should the collaboration between SEDESOL-FONHAPO and other housing institutions (SHF, CONAVI, HABITAT) to provide a more integrated approach to lowincome housing. Improved coordination would increase the ability of OREVIS to use the different programs and instruments more strategically to meet their populations needs. 9. The relationship with, and the capacity building of OREVIS and rnunicipios which are now both entitled to execute FONHAPO subsidies, deserve particular attention. Existing indepth studies5 show that OREVIS vary in their institutional capacities and approaches to targeting, with varying results in terms of pro-poor housing outcomes of federal programs executed by them. This problem of varying capacity, performance, and engagement becomes exacerbated in the case of urban and rural municipios, which are also now eligible to execute the Tu Casu program. 10. A change in the incentive structure of the relationship between FONHAPO and its executing partners (mainly OREVIS) could be considered. Currently, FONHAPO assigns resources on a formula basis. The merits of this formula are that it rests on objective indicators, and benefits from a political agreement between the states and the Federation. However, it does not reflect basic demographic changes that may affect changes in the demand for housing. Examples are the formation of new households and the increase in the minimum wage. More importantly, it does not provide incentives to states, through OREVIS and municipios, to effectively implement the housing subsidies. Examples of deficiencies in performance include abandoned new housing financed by Tu Casu (due to use of cheap lands resulting in poor location); or misuse of subsidies (homes that ended up being rented and not occupied by the Eibenschutz See selected references. 63

73 original applicant). A federal block grant program for housing subsidies to states or OREVIS that would be based on outcomes and/or performance would seem an effective and efficient way to redress these problems. 11. Finally, there is also scope for greater transparency, monitoring, and accountability in the implementation process. Once a subsidy certificate is approved, the federal resource becomes a localkate resource. While state audit courts are responsible for controlling the good use of these funds, there would be scope to look into budget-tracking methods to follow up exactly what happens with the initial federal expenditure. Field-based monitoring also should be strengthened. FONHAPO already does this to some extent with its Direction of Operations, but it is clearly understaffed to do this well52 and does not benefit from state-level representation. FONHAPO relies on SEDESOL deconcentrated units for supervision (through a convenio). References Eibenschutz, R Comparative Study on OREVIS., Universidad Autonoma Metropolitana -Xochimilco, unpublished. Titiunik, R., S. Martinez, P.J. Gertler, S. Galiano, and M.D. Cattaneo Housiny Health, and Happiness. Policy Research Working Paper Series World Bank and University of Nevada, Reno, Department of Resource Economics. CIDOC and SHF Current Housing Situation in Mexico. INFONAVIT,CONAVI- SEDESOL, Mexico Torres Banos, R.E., and R. Eibenschutz Hartman. La produccion social de la vivienda en Mexico. UAM-CONAVI-CONACYT-SEDESOL, Mexico City, The regional arm of the operations Division is divided between the North, Center and South regions, with sub-division by geographic zones. There is a total of 12 Zones coordinators (Jefes de Zona with an engineering or architect profile) and only 34 operative staff (Tecnicos operativos). 64

74 Appendix 7. Public Consultations for Government of Mexico Plan de Desarrollo, including for the Housing Sector 1. At a general level, consultations for GoM Plan Nacional de Desarrollo were carried out through: Panel discussions with members of different commissions of Congress and the Senate Panel discussions with the political parties Working meetings with specialists Consultations carried out by the Comisidn Nacional del Desarrollo de 10s Pueblos Indigenas (National Commission of the Development of the Indigenous Peoples) in indigenous communities Fora of popular consultation made by the ministries and diverse agencies of the federal government Citizen consultations made by the Office of the Presidency through a telephone service center Delivery of consultation forms through the Postal Service Proposals received through the Internet site. Altogether, 5 1,997 people participated through 205 fora of popular consultation. Among them were 4,334 members of indigenous communities in fora carried out in 57 communities; 79,921 people participated individually sending their opinions and proposals by different means. 2. Specifically on housing, the citizen consultations on housing were carried out through regional fora in the Spring 2007 in 3 cities representing the South, North, and center of Mexico (Merida, Hermosillo, and Morelia). Additionally, CONAVI set up an electronic address to receive comments and suggestions and a mailbox on its webpage to receive citizens proposals. CONAVI also carried out a consultative session with members of Congress. A total of 374 people attended the regional meetings, of whom 173 actively participated. Fortrysix written comments were received. The consultation fora were organized in 5 discussion panels, in which all the subjects related to housing in Mexico were discussed (table A6.1). Table A6.1 Discussion panelslissues (subjects) Land for housing Housing Mortgage and Strengthen ing construction, Legal and housing supply and patrimonial security housing sector improvement, and demand finawing participants self-produdion Land Infrastructure Coordination among the three levels of government Licenses Permits Environment Urban planning Self-production Social production Housing quality Technical standards Water and water treatment. Rural housing Indigenous housing Vulnerable groups Mortgage market Portfolios securitization 9 Mortgage Portability Secondary housing markets Housing subsidies Social aspects of housing acquisition Public registries Cadastre 0 Notaries Patrimonial mobility Used housing market Increased opportunities for low-income families to access Newmortgage originators Supply channels for housinghodgagelsubsidies New participants in the sector with added value Certification 65

75 Civil protection programs housing Strengthening Financing of Human rights institutional construction Gender approach framework materials The participation of the citizenship in the consultation fora improved the following strategic targets established by the federal government: Generate the financial, legal, and institutional conditions to extend access to finance for lowincome segments of the population through addressing their needs, preferences, and priorities for the acquisition, improvement, construction, self-production, and rental of housing by means of the designing and implementation of schemes and innovating products that promote social and economic development. Foster the value, mobility, and the regularization of land and housing tenure through appropriate and timely information and administrative simplification. Agree and induce schemes for greater coordination among the three orders of government and the socie to promote a sustainable housing and urban environment that increases the quality of life an Y guarantees the security of the population. References GoM. Decree of the National Plan of Development Official Gazette, 2007 Memory and Conclusions of the Fora of Citizen Consultation on Housing,

76 Appendix 8. Key Elements of Country Environmental Safeguards Systems Element Extent of use/issues/actions 1. Legal and regulatory framework e Existence of laws and regulations that meet international good practice on environmental and social risk management. 0 Existence of laws and regulations that are consistent with applicable international agreements/ conventions. Existence of appropriate Regulatory Framework is in place. Even though it is considered good, there is room for improvement with regard to public information/ participation and the appropriateness of regulation for peasants and urban poor. Appropriate institutional frameworks. Adequate managerial/ Administrative capacity. Adequate coordination mechanisms among key institutions involved. Adequate implementation capacity among key institutions and supporting entities involved: government at different levels, contractors, consultants. Adequate provisions and capacity for citizen and rightsholders participation Citizen participation in mechanisms for redress and enforcement Adequate involvement of designated project/program rights-holders Adequate participation of independent organizations or groups such as CSOs. Adequate consultation, Institutional capacity is generally good. The institutions have undergone IS09000 certification and improved organization and transparency. Yet, most of the entities are understaffed which demerits celerity and quality of outputs. Probably the weakest general area in safeguards is participatory mechanisms. The EIA bylaws provide for a public information meeting when requested by an interested party, but only whedif the authority considers it necessary. 67

77 Element dissemination, and disclosure mechanisms. Mechanisms for citizen to claim adequate provision of services and benefits guaranteed. a 0 s X Extent of uselissueslactions In practice, many requests are denied due to lack of people and resources to organize and attend such meetings. There is no legal resource to demand such information meetings be held. In Bank projects, we have agreed on mechanisms to make sure that these demands are duly responded to. 68

78 Appendix 9. Average Subsidy amount by Income Segment (Base line data) (Mexican Pesos) ,281 77, ,787 98,837 87,817 67,203 71,284 67,298 58,894 71,591 44,091 z ,113 41,095 41,292 41, ,165 16,447 30,091 29, ,876 28,172 26,576 +IO 12,209 25,212 23, , , , , ,245 E , UJ v) , , ,965 5 > , ,032 B , , , , , , , , ,800 +IO 87, , , z ,072 68,516 62,232 g ,574 35,456 31, ,043 25,907 11, ,717 29,376 ga ,784 29,403 a ,005 52,434 I n.a. 47,968 E t +5-6 n.a n.a. 39, ,516 ua F ,041 24,935 19,575 sa ,268 20,048 48, ,556 24,095 42,723 E ,312 38,000 41,618 69

79 Mexico at a qlance Key Oeuelopment Indicators /-3 Population, mid-year [millions] Surface area [thousand sq. km) Population growth [Z] Urban population [Z of total population] Appendix 10. Country at a Glance Mexico WR 1.0,w Latin America & Carib , Upper middle income tlOt07 Age distribution Mdc Fcrndc GNI [Atlas method, US$ billions) GNI per capita [Atlas method, US$] GNI per capita (PPP, international $1 GDP growth [Z] GDP per capita growth [z] , , , I@ 15 pcrccnt /-5f feeeflf esfk~afe. A%lW-mj Poverty headcount ratio at $1 a day [PPP. x) Poverty headcount ratio at $2 a day (PPP. Z] Life expectancy at birth [years] Infant mortality [per live births] Child malnutrition [X of children under Under-5 mortality rate [per 1.000) Adult literacy, male [Z of ages 15 and older) Adult literacy, female [Z of ages 15 and older] Gross primary enrollment. male [z of age group] Gross primary enrollment. female (Z of age group] Access to an improved water source [Z of population] Access to improved sanitation facilities [x of population] ZOO Mexico Latin Amcrica & the Caribbean Net Aid Flors pm*q Net ODA and official aid Tsjo.?dm#-c{&Lwmt United States Germany France Grovth of GDP and GDP per capita rxi I Aid [A of GNl] Aid per capita [US$] Long-Term Economic Trends Consumer prices [annual x change] GDP implicit deflator (annual Z change] Exchange rate [annual average, local per US$] Terms of trade index (2000 = 1001 Population. mid-year [millions] GDP [US$ millions] Agriculture Industry Manufacturing Services ,426 [:?de? , SO {a-w?pe amud-wwa.g;r Household final consumption expenditure General gov t final consumption expenditure Gross capital formation Exports of goods and services Imports of goods and services Gross savings Note Figures in italics are for years other than those specified data are preliminary a Aid data are for 2005 indicates data are not available Development Economics, Development Data Group (DECDG) 70

80 Balance of Payments and Trade pw /?a!w-mj Total merchandise exports [fob) Total merchandise imports (cif) Net trade in goods and services Current account balance as a x of GDP Workers' remittances and compensation of employees [receipts] Reserves. including gold Central Government Finance f?:::r'cb'l33=i Current revenue [including grants] Tax revenue Current expenditure Overall surplusfdeficit Highest marginal tax rate [x) Individual Corporate External Debt and Resource Flows {Lm-?i Total debt outstanding and disbursed Total debt service Debt relief [HIPC, MDRI) ,661-11,829-18, L-l>';%- 35, , ,335 58,809-43,563 I Gouernance indicators and 2006 Voice and accountability Political stability Regulatory quality Rulc OF law Control OF corruption Mexico 6 Z$ $ BOOB Country's pcrccntilc rank (0-100) &&.v n.&*rarrlhrrrrrrrrw -6wch. K.u~m.nn.Ki..r-M~rrurrl. Wmrld B-nk Technology and Infrastructure 2000 Paved roads [x of total) Fixed line and mobile phone subscribers [per 1,000 people) High technology exports [A of manufactured exports] Enuironment Agricultural land [Z of land area) Forest area [Z of land area) Nationally protected areas [Z of land area].%? M d w mz Total debt [Z of GDP] Total debt service [A of exports) Freshwater resources per capita [cu. meters] Freshwater withdrawal [x of internal resources) A'+! Foreign direct investment [net inflows] 16,075 15,000 Portfolio equity [net inflows) 447 I Composition of total external debt C02 emissions per capita [mt] GDP per unit of energy use [2000 PPP $ per kg of oil equivalent] 6.0 Energy use per capita [kg of oil equivalent] cib tki-7 fm5x-d 000 IBRD Total debt Outstanding and disbursed 11,444 Disbursements Prinoipal repayments 1,330 Interest payments Priuate Sector Development ID A Total debt outstanding and disbursed Disbursements Total debt service Time required to start a business [days] Cost to start a business [x of GNI per capita] Time required to register property (days] Ranked as a maior constraint to business [Z of managers surveyed who agreed] Anticompetitive or informal practices Corruption Stock market capitalization (x of GDP] Bank capital to asset ratio [x) &?ff IFC {kwa?.wffi Total disbursed and outstanding portfolio of which IFC own account Disbursements for IFC own account Portfolio sales, prepayments and repayments for IFC own account MlGA Gross exposure New guarantees , Note Figures in italics are for years other than those specified 2006 data are preliminary..indicates data are not available. -indicates observation is not applicable 9flOtO7 Development Economics. Development Data Group [DECDG] 71

81 Millennium Development Goals Mexicw Goal 1: hahe the rates for $1 a day pouertg and malnutrition Poverty headcount ratio at $1 a day [PPP, x of population] Poverty headcount ratio at national poverty line [A of population] Share of income or consumption to the poorest qunitile [z] Prevalence of malnutrition [Z of children under 5) Goal 2: ensure that children are able to complete primary schooling Primary school enrollment [net. x] Primary completion rate (z of relevant age group] Secondary school enrollment [gross, x] Youth literacy rate [z of people ages 15-24] Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education [A] Women employed in the nonagricultural sector [Z of nonagricultural employment] Proportion of seats. held by women in national parliament (z] "L? nnn 2005 R! d.?>?f 24.2 A?#.? fi 3.3 AT.? a? v M Goal I.: reduce under-5 mortality by two-thirds Under-5 mortality rate [per 1.000] Infant mortality rate [per 1,000 live births] Measles immunization [proportion of one-year olds immunized. x) &W A?? w Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio [modeled estimate, per live births) Births attended by skilled health staff [z of total],w 83 Goal 6: halt and begin to reverse the spread of HIVtAIDS and other maior diseases Prevalence of HIV [A of population ages 15-49) Contraceptive prevalence (z of women ages 15-49] Incidence of tuberculosis [per people] 49 Tuberculosis cases detected under DOTS [z] Goal 7: halue the proportion of people without sustainable access to basic needs Access to an improved water source [A of population] Access to improved sanitation facilities [Z of population] Forest area [x of total land area) Nationally protected areas [x ol total land area] C02 emissions [metric tons per capita] GDP per unit of energy use [constant 2000 PPP $ per kg of oil equivalent] # t? m 68 RJ $!,7, m J $8 Goal 8: deuelop a global partnership for deuelopment Fixed line and mobile phone subscribers [per 1,000 people] Internet users [per 1,000 people) Personal computers [per 1,000 people] Youth unemployment [x of total labor force ages 15-24] Education indicators (XI Measles immunization [X of 1- I year olds] ICT indicators [per people] ~~~~ zoo C- Primary net enrollment ratio - Ratio of girl5 to boys in primary & sccendaru education I005 ci Mexico Latin America & thc Caribbean zoo Fixed + mobile r;ubscribrr$ 0 Internet usws Note Figures in italics are for years other than those specified indicates data are not available. 9!10!07 Development Economics, Development Data Group [DECDG]. 72

82 W E Q 2 n M b

83 Appendix 12. Statement of IFC s Held and Disbursed Portfolio 3611,. *a >A3. a*&. 2 c*) 74