Mexico - Financial Sector Technical Assistance Project

Docuaint of The World Bank FOR OFFlClAL USE ONLY ReportNo. T-6451-ME TECHNICAL ANNEX MEXICO FINANCIAL SECTOR TECHNICAL ASSISTANCE PROJECT DECEMBER 22, 1994 This document has a restricted distribution and may be used by recipients onJy in the perfornamce of their official duties. Its contents may not otherwise be disclosed witbout World Bank authorization.  Currency Equivalents (As of December 19, 1994) Currency Unit = Mexican New Peso (MexN$) US$ 1.0 = MexN$ 3.4 Abbreviations and Acronyms Used CAS Country Assistance Strategy CNB Comision Nacional Bancaria (National Banking Commission) CNSF Comision Nacional de Seguros y Fianzas (National Insurance and Bonding Commission) CNV Comisi6n Nacional de Valores (National Securities Commission) CONSAR Comisi6n Nacional del Sistema de Ahorro para el Retiro (National Commission of the Retirement Savings System) DVP Delivery versus Payment FOVISTE Fondo para la Vivienda de los Trabajadores del ISSSTE (Government Workers' Housing Fund) FSAL Financial Sector Adjustment Loan (3085-ME) GOM Government of Mexico ICB International Competitive Bidding IDB Inter-American Development Bank IEIU Investment, Energy, and Industry Unit EMF International Monetary Fund IMSS Insntuto Mexicano de Seguro Social (Mexican Social Security Institute) INDEVAL Insfituti6n para el Dep6sito de Valores (Securities Depository Institute) INFONAVIT Insuituto del Fondo Nacional de la Vivienda de los Trabajadores (National Workers' Housing Fund Institute) ISSSTE Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado (Institute of Security and Social Services for Government Workers) LCB Local Competitive Bidding NAFIN Nacional Financiera, S.N.C. NAFTA North American Free Trade Agreement OTC Over-the-counter PECE Pacto de Estabilizaci6n y Crecimiento Economico (Economic Stabilization and Growth Pact) SAR Sistema de Ahorro para el Reniro (Retirement Savings System) SHCP Secretarfa de Hacienda y Credito Pablico (Ministry of Finance and Public Credit) SIC Sistema Internacional de Codtzaciones (International Share Quotation System) SOE Statement of Expenditure SRA Self-Regulatory Association SRO Self-Regulatory Organization  MEXICO FINANCIAL SECTOR TECHNICAL ASSISTANCE LOAN TECHNICAL ANNEX TABLE OF CONTENTS SECTION A: PROJECT DESCRIPTION ............................ I Background ........................................... 1 Financial Sector Reform and Privatization .................... 1 Public Investment Evaluation ............................ 2 Benefits of Previous Reforms ............................ 2 The Remaining Agenda .................................... 3 Current Problems ................................... 3 Development of Institutional Infrastructure .................... 4 Financial Market Development ........................... 5 Financial Services for Micro-Enterprises and the Poor ............. 6 Public Investment Evaluation and Budgeting ................... 6 Project Design ....... ................................... 7 Project Objectives and Approach . ......................... 7 Institutional Framework ............................... 7 Relation with Other Multilateral Assistance ...... ............. 9 Project Risks ...................................... 10 Project Description ................ . . ............... 10 Financial Sector Regulation and Supervision ................... 10 Comisi6n Nacional Bancaria ........................ 11 Comisi6n Nacional de Valores ....................... 13 Comisi6n Nacional de Seguros y Fianzas ................ 15 CONSAR .................................... 16 Public Investment Evaluation and Budgeting ................... 17 SECTION B: PROJECT ADMINISTRATION AND IMPLEMENTATION ...... 18 Project Organization ...................................... 18 Training Plan .......................................... 19 Project Costs and Financing ................................. 19 Procurement ........................................... 19 Disbursements . ......................................... 20 Accounts and Audits ...................................... 21 ATTACHMIENT: PROJECT IMPLEMENTATION PLAN ................. 22   MEXICO FINANCIAL SECTOR TECHNICAL ASSISTANCE LOAN TECHNICAL ANNEX SECTION A: PROJECT DESCRIPTION I. Background 1. Following the debt crisis and the September 1982 nationalization of the banking system'', the Mexican financial system entered a period of turmoil. The de la Madrid administration, which entered office in December 1982, took steps to liberalize and strengthen securities markets and consolidate the operations of the state-owned banks. Despite these measures, the development of the financial system was hampered by forced lending requirements and other non-market oriented practices. Mandatory lending requirements, which represented more than 70% of bank deposits in 1985, resulted in active disintermediation. Credits to the private sector, as a percentage of total bank credit, shrank from 40% in 1982 to 25% in 1986. The development of the financial system was further hampered by macroeconomic instability with high and variable rates of inflation, peaking at 159% in 1987. 2. Financial Sector Reform and Privatization. The pace of financial sector reform and development accelerated substantially in 1988, as the Mexican Government undertook a series of efforts culminating in the re-privatization of the commercial banks in 1991-92. In 1988, with the support of the Financial Sector Adjustment Loan (FSAL), steps were taken to deregulate interest rates on deposits, eliminate forced lending and reduce the role of special trusts as intermediation channels for Government resources. A new legal structure for the financial system was created in 1990 with the approval by the Mexican Congress of laws governing commercial and development banks, financial groups, and auxiliary credit institutions. The resulting system is a hybrid of the universal and multiple banking models2' in which certain forms of intermediation may be undertaken both by a commercial bank and its brokerage subsidiaries, while other services may be offered only through separately capitalized subsidiaries. While offering potential economies of scope for the sector, the Mexican hybrid system complicates consolidated risk management and reduces ownership transparency. Nevertheless, with this legal framework in place, the stage was set for the re- 1/60 banks were nationalized in 1982 with only Citibank Mexico and Banco Obrero remaining outside of state control. Eleven of these institutions were subsequently liquidated. The remaining 49 banks were consolidated through merger into 18 institutions by 1986. 2'The universal banking model permits the full range of financial services to be offered under one entity, while the multiple bank model allows banking and non-banking services to be offered by separately capitalized subsidiaries under a holding company.  2 privatization of the 18 commercial banks. During 1991-92, the Government received the equivalent of US$ 12.4 billion from the privatization of these institutions. 3. Reform also benefitted the development of non-banking services such as insurance, securities trading, bonding, financial leasing, warehousing and factoring-'. Government regulation of insurance premiums and policies was simplified, as well as the operations of mutual funds. Prompted by the stock market crash of 1987, the main laws regulating the Mexican capital markets were subject to major modifications. Increased confidence and simplification of the administrative process were the major objectives of legal changes which imposed tougher penalties for insider trading, granted authority to brokers to act as dealers for their own accounts, and required more extensive use of external auditors. Legal reforms also liberalized pricing (leasing, factoring, insurance and brokerage), permitted the offering of new products (e.g. administration of individual retirement accounts) and rationalized taxation policies for the financial sector as a whole. 4. The GOM undertook reform of the national social security and pension systems through creation of the Sistema de Ahorro para el Renro (Retirement Saving System or SAR) in 1990. Under the SAR, employers are required to establish individual accounts at commercial banks for each employee to which 2% of gross wages must be contributed each pay period. To date, commercial banks have been restricted to provision of account administration services: all funds accumulated in SAR accounts must be kept in a specific Central Bank account paying no less than 2 percent in real terms. 5. Public Investment Evaluation and Budgeting. Given the enormous need to increase the quality and quantity of public investment, particularly in infrastructure, the GOM undertook measures to improve the capacity for project evaluation and budgeting. In 1991, the Investment Project Evaluation Unit was established under the Ministry of Programming and Budget (SPP) to serve as adviser on issues of public investment. Following the merger of SPP with SHCP, the Unit was renamed the Investment, Energy, and Industry Unit (IEIU) and was given broader responsibilities in establishment of standards for project evaluation inclusive or ex-post evaluations of all public investments and providing analytical support to the Ministry of Finance. Critically, the IEIU was given a central role in coordinating project evaluation activities throughout the federal government through an inter-agency roundtable. One result of IEIU's new broader role was the publication of the official methodological guide to project evaluation in the Diario Oficial on June 28, 1993. 6. Benefits of Previous Reforms. Financial sector liberalization has achieved a considerable measure of success in stabilizing domestic financial markets, thereby attracting large inflows of foreign private savings and reversing years of capital flight. Net capital inflows averaged over US$ 27 billion per annum during 1991-93, resulting in foreign 31 Factoring is the sale of receivables by a borrower to a factoring company. The factoring company may issue bills of exchange to finance the purchase of receivable instruments.  3 currency reserves of over US$ 25 billion by the end of 1993. By 1993, private sector lending comprised 86% of total bank assets, up from 25% in 1986 as discussed above. Broad measures of monetarization in the economy also indicate the increasing depth of financial markets: M4 as a percent of GDP rose from 35% in 1988 to over 45% in 1993. II. The Remaining Agenda 7. Current Problems. Although the recent accomplishments of the Government in financial sector reform have been significant, more needs to be done to ensure continued investor and depositor confidence, increase the access of low-income groups to financial services, improve efficiency of capital allocation and reduce overall systemic risk. The cost of capital remains high. As of September 1994, prime borrowers paid banks nominal interest rates of around 17% and small and medium-size firms paid over 24% (approximately 9% and 16% in real terms, respectively). These high rates restrict access to financial services, especially for small enterprises and low income individuals. 8. Securities markets are also characterized by high transactions costs and illiquidity. Underlying the high cost of debt and equity financing are both macroeconomic factors such as Mexican country and exchange rate risk as perceived by foreign investors, and microeconomic factors in the legal, regulatory and supervisory systems, problems in the public registries system, high operating costs of financial institutions, a lack of adequate competition -- particularly in the provision of banking services -- and the rising level of commercial bank overdue loans4'. 9. Another reason for the relative underdevelopment of Mexico's securities and capital markets is the lack of a large base of institutional investors. Indicators of market development such as insurance penetration, insurance density, and pension fund provision, as well as broader measures such as market capitalization and the value of privately issued debt obligations, highlight this problem. These indicators of Mexico's capital market development not only lag other NAFTA countries and key emerging economies in Asia, but also have fallen behind levels attained in other Latin American economies. Thus, there is the need to continue the development of legal and regulatory reforms consistent with the orderly development of this class of investors while maintaining the integrity of the securities markets. Part of this effort would also have to involve development of adequate operational capacity where the role of all commissions, including the newly created CONSAR (Retirement Saving System Commission), would be critical. This would ensure the integrity of the markets in the eyes of domestic and foreign investors. 4t By June 1994, overdue loans as a percentage of total loans for the consolidated banking system had grown beyond 10% from 2% in 1990. In addition, the disparity across banks has continued to grow as some banks have ratios of close to 20 percent while many had ratios in the 6-8 % range. Source: Comisi6n Nacional Bancaria.  4 10. Compliance with NAFTA's requirements to permit entry by foreign financial service providers and the authorization of charters to new financial interrmediaries5', even if not significant in increasing direct competition in all forns of financial services in the short term, should help reduce financial intermediation margins over time. 11. Development of Institutional Infrastructure. Financial sector regulation and supervision in Mexico have become increasingly difficult because of (i) the complex structures of financial conglomerates and (ii) the fragmentation of regulatory and supervisory powers across six Government agencies (see para. 26). Currently, prudential regulations are not applied consistently across all entities within financial conglomerates on a group-wide basis. Although the consolidated circular has not yet been issued, the commissions are already receiving consolidated financial statements. However, it is important to note that actual practices vary greatly across individual financial groups within the Mexican financial system. In order to enhance regulation and prudential supervision of financial conglomerates, individual institutions and markets, it is essential to continue to revise entry policies, harmonize valuation standards, require consolidated financial and regulatory reports, apply capital adequacy and large credit exposure rules on a consolidated basis, and modernize trading practice regulations in areas such as insider trading, conflicts of interest, front running, and dumping of securities. 12. It is furthermore essential to develop the capacity of supervisory agencies to conduct on- and off-site surveillance of conglomerates on a consolidated basis through the improved enforcement of existing regulations, increased harmonization of regulation and supervisory practices among agencies, and through the upgrading of the skills of supervisory personnel. There would also be a need for supervisors to establish performance criteria for directors, mangers, and external auditors so that there would be a greater focus on the capacity of fmancial conglomerates to properly measure and manage risk. In this context, the sequence with which assistance is provided will be important because actions to improve regulatory reports and to upgrade standards for off-site supervision if properly designed, will elevate the minimum standards at Mexican financial groups for proper measurement and management of risk. On-site supervision can then be used to reinforce these standards through the enforcement powers vested in the commissions. 13. The growth of many types of free-standing non-bank banks (such as mortgage finance companies and other specialized financial service providers) alongside financial conglomerates (which, at times, have not clearly represented the safety of various financial products to consumers) has created uncertainty regarding the extent of the government "safety net". It has become essential, therefore, to more carefully define the liability of the government and financial conglomerates with respect to all financial products, design and " In October 1994, 52 foreign financial institutions received clearance from the SHCP to initiate operations in Mexico. The firms included 18 banks, 16 brokerage firms, 12 insurance companies, 5 holding companies and 1 leasing company.  5 enforce proper non-accounting disclosure provisions for such products, and circumscribe explicitly the set of deposit-taking institutions covered by the safety net. In the case of a failure, it is essential that the respective roles of Banco de Mexico and the Ministry of Finance be redefined and that procedures for failure resolution be well understood by market participants. 14. Increased financial activity has created the need for a new regulatory and supervisory framework for the payments system. This new framework should include an appropriate system for large value transfers among commercial banks, ensure delivery versus payment (DVP) in trading of securities, and assure secure cross-border transactions. It is also essential to examine the legal implications of bankruptcy of clearing members while improving Banco de Mexico's supervision of the payment system for large value transfers. At the same time, CNV supervision of the Bolsa, INDEVAL (Securities Depository Institute), and any clearing house set up for exchange traded derivatives would have to be developed. 15. Financial Market Development. Mexico's financial sector remains small relative to East Asian and the other NAFTA countries, particularly in such areas of non-banking services like insurance, securities trading, pension and mutual fund management, and financial leasing (para. 9). Expansion of these services and other financial innovations would be likely to greatly improve the allocation of resources by the Mexican financial system through lowering the cost of managing risk, increasing the financing options for firms and individuals, providing increased channels for savings and improving the efficiency of allocation of investment through a greater role for institutional investors in corporate governance of non-financial companies. An approach relying on public- and private-sector monitoring would be necessary to encourage the development of these services. 16. On the public sector side, the regulatory, supervisory, and legal framework (para. 11) should be streamlined and harmonized across all activities and impediments removed to the provision of various forms of non-banking services. Regarding the private sector, ancillary financial services (including credit bureaus, ratings agencies, auditing firms, and actuaries) and Self-regulatory Organizations and Associations (SROs and SRAsV') should take on a greatly expanded role in monitoring financial intermediation and providing information to investors and the public. As the complexity and volume of financial transactions increases in Mexico, a strengthened role for private sector self-regulation and provision of information is critical in proper monitoring of financial institutions and markets -' The term SRO usually refers to include entities that establish rules for relations between members. and provide some sort of intermediary service, such as exchanges, clearing, and custody corporations. The term SRA generally refers to other groups whose members are subject to mandatory rules of conduct prescribed by their respective associations and which may be overseen by supervisory agencies. Examples of SRAs include associations of auditors, accountants, actuaries, appraisers, securities dealers, and warehouses.  6 17. As the pace of financial innovation in Mexico continues to accelerate, new instruments such as asset-backed securities, foreign exchange forward contracts, warrants for equities, OTC options on equities, OTC or exchange traded interest rate futures, and bonds with embedded options create new risks which require sound risk measurement and management systems. In addition, the increased use of derivative products offshore, in particular, highlights the importance of establishing the appropriate prudential regulation and supervision capacity in this area. These actions must be taken in tandem with efforts to strengthen private financial sector infrastructure in such areas as the payment system or risk safeguards used within SROs to monitor and provide reliable and timely information so that the use of scarce supervisory resources may be optimized. 18. Financial Services for Micro-Enterprises and the Poor. The Government has an important role in creating an environment where market-based schemes for the efficient delivery of financial services to the poor, micro-enterprises, and the housing sector can be developed. The first priority should be to strengthen the legal framework for private sector transactions including definition and enforcement of property rights, improvement of public registries, and enforcement of contracts. 19. Next, the Government should work to strengthen the institutional framework for private institutions providing financial services to the poor. Improved supervision, disclosure regulations, and legal reforms are needed to ensure the effective operation of institutions such as credit unions, popular savings banks, and pawn brokers. The strategic roles of the public- sector development banks and trust funds should be re-defined to ensure that their activities complement rather than substitute for the financial services provided by these formnal and informal private sector institutions. 20. Public Investment Evaluation and Budgetin . Given the urgent need for basic infrastructure investment in Mexico, further efforts are necessary to ensure the maximum efficiency and effectiveness of projects financed. The role of the IE[U should therefore be strengthened to provide increased inter-agency technical support and coordination in project evaluation and budgeting activities. To this end, the IEIIU should be strengthened in the areas of establishing standards for project evaluation, diffusing these standards throughout the Government, and training staff within the IEIU and federal government in state-of-the-art project evaluation and ex-post assessment. The IEIU needs to closely coordinate with the Banco Nacional de Obras y Servicios Pziblicos (BANOBRAS) and the proposed infrastructure fund that will constitute another source of public finance in association with the private sector.  7 El. Project Design 21. Project Objectives and Approach. The proposed operation is intended to meet three interrelated objectives: (a) to improve the safety and soundness of the financial system through improved prudential regulation and supervision, and through greater incentives for self-regulation by market participants; (b) to support the development of the pension system; and (c) to strengthen public investment evaluation and budgeting. 22. The project would aim to improve financial sector performance in Mexico through building capacity within the regulatory and supervisory agencies, integrating activities across regulatory and supervisory agencies to insure consistency of philosophy and implementation, and promoting economies of scale through sharing of scarce human resources. 23. In addition, the project is designed to modernize the philosophy of supervision and regulation by ensuring overall standards for risk measurement and management, shifting away from the current system which micro-specifies internal operating procedures such as the general ledger of each financial entity. The project would aim to improve transparency and timely disclosure of information through strengthened self-regulation by market participants and professional associations (SROs and SRAs). These two elements of the program, streamlined Government regulation and supervision and enhanced self-regulation, will act together to reduce the cost to Government regulatory agencies while helping to reduce the cost of compliance for financial institutions and markets. 24. The project would also aim to strengthen the evaluation and budgeting process for public investment projects throughout the Government through establishment and diffusion of technical standards and improved consistency in their application. To this end, the role of the interagency coordination committee would be significantly strengthened. 25. This project does not directly address the full range of critical issues for the financial sector in Mexico noted in Section II (paras. 7 - 19). A broader set of reforms will need to be developed to modernize Mexico's financial system and markets. Consistent sets of reforms will need to be developed to: improve the possibility for market-based provision of financial services to the urban and rural poor, including definition of a more focussed role for Mexican development banks and fideicomisos (trust funds); improve the public registries for commercial transactions, real estate and land titling; modernize the payments systems to reduce credit risk exposure of the Central Bank and permit reduction of the credit risk exposure of market participants in securities trading; modernize and rationalize Mexico's system of housing finance; finance basic infrastructure development with private-sector participation; and improve efficiency of social security and pension-related services at the federal and state level both by the Government and the private sector. These other critical areas of reform are currently being addressed through separate Bank ESW and project initiatives, other multi-lateral institutions, or independent GOM efforts. 26. Institutional Framework. Currently, financial sector regulatory and supervisory  8 functions are shared between the Central Bank, the Finance Ministry (SHCP) and four commissions which report to SHCP (CNB, CNV, CNSF and CONSAR). Chart I indicates the existing structure. Although regulatory and supervisory functions are shared across six agencies, the degree of fragmentation is limited because each Commission is legally part of SHCP. The Central Bank, which was given increased autonomy under the new Central Banking Law ratified in 1994, supervises all over-the-counter (OTC) markets with the exception of equity and commodity contracts, develops prudential regulations for commercial banks and auxiliary credit institutions which must be formally approved by SHCP, and regulates all aspects of the payments system and foreign exchange markets. SHCP is responsible for drafting and final approval of all legislation and regulations relating to financial institutions and markets. These SHCP functions are undertaken by the Direcci6n General de la Banca Multiple (banking and auxiliary credit institutions) and the Direcci6n General de Seguros y Valores (insurance and securities). 27. The CNB is responsible for supervising financial groups and free-standing auxiliary credit institutions which hold over 75% of all financial assets in Mexico: commercial banks, development banks, auxiliary credit institutions, and in most cases the holding company of a financial conglomerate. The CNV supervises and has some regulatory authority over brokerage firms, the Bolsa, and the smaller intermediate market and corporate issuers. The CNV also has authority to supervise and regulate all forms of self-regulatory organizations such as custody corporations (INDEVAL). The CNV role may be expanded in the future to cover exchange related futures and other derivatives clearing houses if and when developed. The CNSF supervises insurance and bonding companies. Finally, the CONSAR has responsibility for supervision and operations of the Retirement Savings System (SAR). Chart I Ministry of |7etl Finance 1 Bank l CNB CNV CNSF CONSAR 28. The emphasis of this project would be to upgrade the capabilities of the CNB, CNV, and CNSF to carry out current supervisory responsibilities and to support the creation of the CONSAR. The challenges currently faced by the four commissions vary widely. The CNB requires the most assistance, with intensive programs to improve staff technical skills in specialized areas of supervision and regulation to be supported under the project. In part,  9 this weakness is due to the period of state control of the commercial banks during the 1980s. With no need to focus on private market transactions during this time, the CNB did not develop the full set of modem supervisory capabilities nor staff with the skills to oversee the dynamic and innovative markets of today's increasingly borderless and liberalized Mexican financial system. The CNB is by far the largest of the four commissions, with over 1,000 professional staff (see Table I below). Assistance would include the purchase of computer systems, training, and the provision of specialized technical advisory services. 29. Unlike the CNB, the securities and insurance industries under the purview of the CNV and CNSF remained in private hands during the 1980s, requiring these two commissions to remain current in their supervisory practices. However, as the pace of financial innovation in Mexico has increased, the need for assistance here has grown. The CNV and CNSF, with 309 and 147 professional staff, respectively, will receive more narrowly-defined assistance. Finally, the newly-established CONSAR, with staffing expected to increase from 38 professionals as of November 1994 to approximately 200 by the end of 1996, will receive assistance in the start-up of operations through the purchase of computer equipment and the completion of key studies. Table 1 Commission Professional Staff CNB 1,050 CNV 309 CNSF 147 CONSAR 38 30. The Public Investment Evaluation and Budgeting component will support urgently needed improvements in the criteria and methodology used in prioritizing public investment projects. Upgrading this function of the IEIU has taken on special prominence in light of increased emphasis on the development of basic infrastructure in Mexico. The unit has been charged with ensuring that resources are channeled to infrastructure projects with the highest economic and social rates of return, thereby improving the efficiency of investment and the productivity of capital. The IEIU claims a staff of 25 professionals. This unit will also play an important role in administering the special infrastructure fund to be established out of privatization proceeds and in coordinating with public financial intermediaries engaged in either direct lending or guarantee operations to finance infrastructure projects. 31. Relation with Other Multilateral Assistance. The Bank has worked closely with the IMF since early 1993 to support this strategy and has diagnosed the shortcomings of  10 Mexico's system of financial conglomerate supervision. The FrAL represents the natural outgrowth of this joint Bank-IMF effort. The Bank has been able to offer the GOM several advantages when compared to other potential advisers, such as private consultants and representatives of national regulatory agencies. The key advantage has been the ability to field teams with a high degree of objectivity combined with international, multi-disciplinary experience. Finally, the Project complements the IDB's efforts in providing technical assistance to NAFIN to improve its internal risk measurement and management process since it would support efforts to improve supervision of development banks and enforce recently- issued capital regulations for such entities. IDB's program of technical assistance will also focus on direct provision of assistance to commercial banks on risk measurement and management techniques. 32. Projet Risks. Although the GOM has given every indication that the Project will continue to receive strong support, several risk factors remain at this time: (i) possibility that the recommended reforms to improve financial conglomerate supervision may be slowed due to political considerations; (ii) possibility that mandatory SAR contributions remain below the level required for economic viability of system despite the reforms undertaken through the project; and (iii) non-implementation of proposals derived from studies or inadequate follow-through in implementation of the program by counterpart agencies. 33. The design of the project will reduce these risks to the greatest extent possible. Notably, SHCP plays the central role of Executing Agency and Guarantor of the project - all of the functions to be strengthened are legal responsibilities of SHCP. In addition, the Board of Directors of each commission is constituted by officials of SHCP and the Central Bank, thereby improving inter-agency coordination and reducing the risks noted above regarding implementation of the assistance program. IV. Project Description 34. The project would consist of two components: (i) the Financial Sector Regulation and Supervision component to be implemented by the Government agencies responsible for regulation and supervision of (a) banking (CNB), (b) securities markets (CNV), (c) insurance and bonding (CNSF), and (b) the pension system (CONSAR); and (ii) the Public Investment Evaluation and Budgeting component to be implemented by the IEIU. Annex I provides greater detail concerning the objectives, activities, outputs, forms of assistance, timing, and costs associated with the project. A. Financial Sector Regulation and Supervision 35. This component consists of activities to strengthen the institutional performance of the four commissions charged with regulation and supervision of the financial system in Mexico, the CNB, CNV, CNSF, and CONSAR. The activities in each commission are mutually reinforcing and are designed to address priorities for strengthening and streamlining each commission while providing coordination and consistency of policies to avoid regulatory and  11 supervisory arbitrage by market participants. Comision Nacional Bancaria 36. The overall aim under the CNB sub-component of the project is to support CNB's current institutional development plan, which aims to develop a more modem regulatory and legal framework to govern the actions of financial institutions and groups. Such a framework would replace existing outdated procedures and consist of prudential regulations and supervisory practices based on accepted international practice. Issues which would be addressed under the program include the following: 37. Authorization Function. The objective of this module is to promote sound and transparent institutions through proper authorization procedures internationally acceptable and consistent with those used by other commissions in Mexico. This can only be achieved by developing appropriate written procedures for the processing of applications consistent with accepted international practices. Development of authorization procedures now underway will receive continuing support during implementation of the project. 38. Regulatory and Supervisory Policy. Prudential regulations are to be reviewed and recommendations made to address issues such as capital adequacy, large exposures (including issues such as related credits and concentration limits), diversification policies, intra- and inter-group transactions, conflicts of interest, and trading practices. This review would examine existing legal and regulatory constraints and assess the advantages and disadvantages of further de-regulation of financial services provision. The review of the regulatory and supervisory policy framework would include banks, SROs and anciLlary and para-financial service providers. 39. General On-Site Supervision and Inspection Process. This module aims to develop an effective inspection policy in line with internationally acceptable norms and procedures. This policy would be operationalized in a set of comprehensive inspections procedures manuals, on-the-job training for bank examiners, and the permanent training program discussed below. Assistance would be obtained from other supervisory agencies, foreign technical experts, seconded supervisors and inspection manuals of other countries. 40. Specialized Technical Expertise in On-Site Supervision and Inspection. In order to upgrade the quality and capacity of financial supervision, it is necessary to acquire technical expertise in new areas such as derivatives, asset-backed securities, and investment banking or asset liability management. This would be achieved by the development and implementation of a permanent training program for staff, through the secondment of external consultants within CNB, and training of supervisors abroad. 41. Financial Analysis Capability and Off-Site Supervision. Supervision can be made more effective if off-site supervision is undertaken through adequate financial and economic analysis. The project would support improvements in technical analysis capability, integrate  12 financial analysis into the supervision process (on-site or off-site) and help CNB to develop indicators of financial group solvency and financial distress which can be easily monitored by management. 42. Regulatory Reports and Regulatory Accounting Principles. The objective of this module is to upgrade the quality of data requested from individual financial institutions and groups, reducing the reporting burden for such institutions.2' To achieve this objective, the capacity of processing systems would be upgraded to ensure integrity of data; and regulatory and output reports would be redesigned to focus on assessment of the financial risk (including credit, market, price, and liquidity risks) undertaken by financial institutions. Efforts would also be made to develop policies regarding the publication and disclosure of financial information, as well as to redesign the format of existing published reports. 43. Information Systems and Budgetary Processes. The complexity and speed of financial transactions, coupled with the complex structure of financial conglomerates, make it critical to modernize CNB's information systemsY The project would support efforts to design a more responsive management information system, finance procurement of modern hardware and software, including laptop computers for supervisors undertaking on-site inspections, and finance training for support and professional staff in the use of such equipment. Finally, support would also be given to automate and to modernize CNB's budgetary processes. 44. Human Resource Development and Policy. There is currently no articulated policy regarding human resource development at CNB. No systematic evaluation of the adequacy of the existing skill mix has been undertaken, standards for the hiring of new employees are not defmed for CNB as a whole, job descriptions/promotion paths are not well defined, and wage compensation and benefits policies do not allow CNB management much flexibility in its attempts to reorient the skills mix. 45. To address these problems, assistance would be provided to develop a human resource development policy. To establish this policy, the project would finance an inventory of the skills of existing personnel at CNB. Assistance would also be provided to design minimum standards for new hires, develop job descriptions and career development and promotion paths, and evaluate changes to wage compensation and benefits policies to better link "' These regulatory reports will permit a gradual movement away from current Mexican supervision practice which requires financial institutions to prepare and submit the entire general ledger. Current requirements have not only led to excessive reporting, but may also hinder adoption of more modern risk measurement and management systems by Mexican financial conglomerates. 1' Currently, it can take up to several minutes to download data from CNB's centralized data base.  13 performance with wage compensation. Comisidn Nacional de Valores 46. The overall aim of the CNV sub-component is to: (i) develop appropriate regulatory and supervisory policies for new instruments and markets; (ii) promote self-regulation by market participants; and (iii) streamline and strengthen regulation and supervision of existing activities. The CNV sub-component would focus on ensuring consistency of regulation and supervision between CNV and other agencies involved in the project. The following areas would be addressed: 47. Self-Regulatory Organizations and Associations. This topic has become increasingly important as part of the overall strategy to ensure the integrity of Mexico's securities markets. As the number of market participants and the complexity of their business dealings increases, the development of better self-regulatory practices by Mexican exchanges, business and professional associations, custody corporations, and clearing corporations would help to conserve government resources needed for supervision. CNV staff and market participants would need to be educated about the philosophy and practical issues related to self- regulation. In particular, the distinction between the self-policing role of SROs and SRAs and the promotional and advocacy role currently played by some associations within the securities industry should be made explicit. Positive results in this area would require that knowledgeable and experienced CNV personnel perform careful oversight of the internal surveillance carried out by SROs and SRAs. Assistance in this area would be provided by external consultants familiar with worldwide experience with self-regulation. 48. Asset-backed Securities (Securitization). This module would evaluate the regulatory framework for asset-backed securities currently traded in Mexico and help develop an appropriate regulatory and supervisory framework for new instruments, including mortgage- backed securities, which are expected to be introduced in the near term. Assistance would be provided by external consultants. 49. Investment Advisers and Managers. The growth of retirement savings plans, mutual funds and other publicly offered investment vehicles means that more and more investment would be influenced or directed by professional advisers and money managers. Regulation and supervision of investment advisers and managers would be evaluated by external consultants with respect to authorization, conflicts of interest, fee structures, and quality of investment advice given to individuals and investment companies. In addition, the appropriateness of a requirement that investment advisers be constituted as stand-alone entities subject to registration would be examined. 50. Conflicts of Interest. Potential sources of conflicts of interest among related brokerage houses, banks, insurance companies, investment advisers and managers along with conflicts that may arise because of special relationships between financial intermediaries, transaction counterparties, and issuers of securities would be examined and analyzed.  14 General principles to be applied to the identification of conflicts of interest would be developed with a goal of developing appropriate regulations. Assistance would be provided by external consultants. 51. Exchange-traded Derivatives. This module would help ensure that the future development of derivatives traded in organized markets such as the Bolsa and the over-the- counter market, is organized in the context of a consistent regulatory framework with well designed supervision systems in place.2' This assistance would focus on developing techniques to improve on-site supervision of brokerage firms' use of such contracts, as well as supervision systems for SROs such as the Bolsa, INDEVAL, and any private futures clearing corporation if established. External consultants including staff of the U.S. Securities and Exchange Commission (SEC), Commodities Future Trading Commission (CFTC), and Federal Reserve System, would be among the essential providers of assistance under this module. CNV staff would also be seconded to the SEC, CFTC, and other agencies and institutions. 52. Disclosure Standards. Public provision of reliable and timely information by issuers of securities is critical to strengthening the confidence of domestic and intemational investors. This module would aim to improve disclosure standards in connection with public offerings, extraordinary events, and standard periodic reports. Consistency of approach with the disclosure standards of other markets where securities of Mexican issuers are traded would need to be addressed to assure that Mexican and foreign investors are on an equal footing. Assistance would be provided by external consultants including seconded staff from foreign securities regulators, and Mexican attorneys with domestic and international experience. 53. International Ouotation System. The creation of a trading system for securities of non-Mexican issuers may have large potential benefits for the integration of Latin American capital markets and Mexico's position as a regional financial center. Current proposals to establish this system (Sistema Internacional de Cotizaciones - SIC) would be reviewed under the project to ensure the integrity and efficiency of this new market. Assistance to the CNV in implementation of the system in the form of external consultants and training abroad for CNV staff would also be provided. 54. Other Topics in Securities Regulation. Additional assistance on a number of other topics in securities regulation would also be provided including: (i) assessment of trading practice regulations relating to front-running, best execution, dumping of securities, 2' More precisely, this loan will provide assistance to CNV which has jurisdiction over exchange-traded derivatives. This work will be coordinated with independent initiatives of the Central Bank which has jurisdiction over most financial derivatives with the exception of over- the-counter equity-linked derivatives.  15 segregation of accounts, and conflict resolution; (ii) streamlining and updating of reporting requirements for securities firms to ensure maximum practicality and consistency with international standards; (iii) evaluation of capital regulations for broker/dealers and development of proposals to ensure consistency with capital adequacy requirements of banking operations; and (iv) analysis of the financing, structure, and operations of the guarantee fund for brokerage furms. Comision Nacional de Seuros v Fianzas 55. The overall aim of the CNSF sub-component would be to facilitate the effective development and functioning of insurance companies, reinsurance companies, insurance brokers and adjustors with supervisory policies consistent with those of other commissions and in line with international practices. The following areas would be addressed under the program: 56. Inspection Process. The project aims to improve the supervisory capacity of CNSF with respect to insurance companies, reinsurance companies, insurance brokers, and adjustors through a top-down inspection process where on-site supervision would be focussed on the most prominent risk(s) for a particular institution. Relevant risks should be identified by examiners together with senior management. In order to achieve this objective, it would be necessary to: (i) revise policies and procedures for on-site inspections; (ii) improve the relationship between regulators and auditors; and (iii) develop an effective training program for insurance company inspectors. These objectives would be met through a process whereby extemal consultants would first diagnose weaknesses in on-site inspection techniques with CNSF staff. Some CNSF staff would then be trained by external consultants and/or relevant supervisory agencies in the United States or Canada. Finally, the external consultants would evaluate how well CNSF has incorporated needed changes into its inspection process. 57. Regulatory and Supervisory Policies. As a guiding principle, all regulatory and supervisory policies should be fully consistent across all commissions and with international standards. In the case of CNSF, particular attention would be paid to the legal and regulatory framework governing insurance and reinsurance companies, brokers, and adjusters. Policies regarding consolidated accounting and capital adequacy rules would be reviewed. In the case of insurance brokers and adjusters, the review of existing laws and regulations would focus on the minimum standards for an SRA, including ethical standards, certification procedures for new entrants, and surveillance of member practices. External consultants with extensive legal and supervisory experience would provide assistance to CNSF to compile a summary of principal requirements and related recommendations for changes to the existing framework. 58. Actuarial Services of CNSF. The objective of this module is to design an effective monitoring system of the actuary's work with an appropriate degree of reliance on the work of the company actuary and an independent actuarial "auditor". Unnecessary tasks by CNSF  16 actuarial inspectors would be eliminated while reporting and reserving standards would be brought in line with international standards. These objectives could be achieved by: (i) reviewing actuarial inspection practices with emphasis on greater coordination of activities among inspectors; and (ii) reviewing international standards and publishing local actuarial standards where necessary. In addition, work is currently being undertaken towards developing an appropriate certification process for actuaries. The assistance program would involve international actuarial consultants and external training for CNSF actuaries. In addition, assistance in this area would be closely coordinated with assistance provided to CONSAR in the case of actuarial inspections or disclosures applied to retirement, pensions, and associated insurance products such as annuities, life, and disability coverage (see para. 65). 59. Desk Analysis. The role of desk analysis would be enhanced through the strengthening the development of a program to better monitor risks in financial institutions. This effort would entail the development of early warning tests, the use of financial analysis in the supervisory process, the review of current practices and the evaluation of procedures followed in other countries. Use would be made of external consultants and CNSF staff would receive training abroad. 60. Review of Accounting Standards and Regulatory Reports. Regulatory reporting standards consistent with international norms would be established under this module of the project. In order to do this, the format of existing regulatory reports would need to be reviewed and appropriate international practices incorporated. Use would be made of external consultants with the necessary experience. 61. Education of Financial Community. The final module of technical assistance to this commission is education of the financial community in the areas of actuarial standards, self- regulatory processes for insurance brokers and adjusters, and the management of risks. The education would need to include formal training along with the fostering of a closer working relationship between CNSF staff and the financial community. CONSAR 62. The technical assistance program for the newly created CONSAR would follow a two- pronged approach. First, the program would support efforts to moderriize the new commission and increase human resource capacity in order to strengthen proper supervision and ensure maximum integrity of private pension fund management and account administration. Second, a study would be financed jointly with CNSF on the further development of the Mexican annuities market. 63. Internal CONSAR Information Systems. Financing would be provided to develop the intemal information system of the CONSAR in order to establish state-of-the-art operations. This financing would cover: software and hardware for a staff expected to grow up to 150 employees over the next year, and development of computer links and interfaces with IMSS,  17 ISSSTE, FOVISTE, INFONAVIT, Banco de Mexico, SHCP, and PROCESAR. 64. CONSAR National Information Network. In addition to developing an internal infornation system for the CONSAR, the loan would finance assistance in the design of a communications network between CONSAR regional offices and the main office in Mexico City. The regional echis would provide information to different SAR system participants and handle complaints on a regional basis. 65. Special Studies. A preliminary study of Mexican annuities markets would be financed and will be undertaken jointly by CNSF and CONSAR with the assistance of external consultants. The study would look at the Mexican annuities markets with an emphasis on the impediments to the market's further development. In addition, the study would examine the regulatory framework and economics of annuities in other countries (e.g. Chile, US, and Canada). Issues to be examined would include: types of annuities to be offered (index- linked, fixed payment, and variable rate); disclosure provisions for insurance companies and brokers; reporting, fees, and commission structure; actuarial disclosures and standards; pricing by insurance companies; and the marketing of these products. B. Public Investment Evaluation and Budreting 66. The aim of this component would be (i) to strengthen the internal operations of the Investment, Energy, and Industry Unit (IEIU) of SHCP with respect to project evaluation and budgeting and (ii) support project evaluation and budgeting activities in other Government agencies through improved inter-institutional coordination, communication and training. 67. Inter-institutional Coordination. This module would aim to strengthen inter-agency communication and coordination between federal, state, and local entities engaged in project evaluation and budgeting activities. In addition, the module would assist in the evaluation of projects under future public-private partnerships for the financing of infrastructure. 68. Standards. Diffusion, and Training. The standards for evaluation of public investment projects will be established under this module with assistance from external consultants. Following the issuance of standards, the IEIU would conduct a program to ensure that all Government agencies engaged in project evaluation are informed of the standards. The Unit would also establish a training program in project evaluation for staff of the federal govermment. 69. Project Evaluation. Under this module, the IEIU would undertake the evaluation of specialized projects in specific sectors of the economy with the support of external consultants. Projects to be evaluated may include highways, airports, ports, railways, water/sanitation, solid waste and other priority sectors. In addition, studies of regional development projects would be undertaken. 70. Project Inventory and Prioritization. This module will undertake to develop and  18 maintain a national inventory of public investment projects which prioritizes and ranks projects within and across sectors according to economic, financial, and social benefits. The project will support the design and implementation of the inventory system, and assist the government to develop criteria and as associated methodology for prioritization of these projects. 71. Multi-annual Budgeting. Under the project, the IEIU will finalize and implement arrangements for multi-annual budgeting under public investment projects. Extemal consultants will be contracted to review and evaluate findings of a recent study regarding the design of a system for multi-annual budgeting and develop detailed recommendations regarding the implementation of this system. 72. Ex-post Evaluation and Monitoring. This module will support the development of systematic ex-post monitoring and evaluation of public investment projects. The aim is to improve the incentive system for maximizing efficiency and productivity in the execution of public investment projects. SECITON B: PROJECT ADMINISTRATION AND IPLAEMENTATION 73. Project Orfanization. The United Mexican States would be the Guarantor for the loan made to Nacional Financiera, S.N.C. (NAFIN), a state-owned development bank. Execution of the project would be undertaken by SHCP in conjunction with the following commissions which are legally under SHCP: (i) CNB, CNV, and CNSF for the Financial Sector Supervision and Regulation component; and (ii) CONSAR for the Pension Funds component. Each commission would establish a small Implementation Unit (IU) that would coordinate assistance to be provided by the Bank and work closely with the Borrower (NAFIN) and the Executing Agency (SHCP). As the commissions do not have experience in implementing a Bank project, consultants would be hired with the proceeds of the Loan to support each IU in Bank administrative procedures and procurement. 74. To ensure that the activities financed under the Project remain closely tied to the evolving priorities for the financial system, a Project Implementation Review would be conducted on a semi-annual basis to update the rolling annual program of assistance. The goal of this review would be to ensure the flexibility and continuing relevance of the FTAL program of assistance, and not to increase the burden of procedures. The frequency of the meetings may be adjusted according to the needs of project implementation. During each review, the Bank, Executing Agency, Borrower and each Commission would assess the status of project implementation, evaluate the workplan for the next six months, and agree on any needed modifications to the originally proposed program. Project completion has been targeted for December 31, 1997. 75. The signing of the Subsidiary Agreement between NAFIN and SHCP would be the sole condition of effectiveness applicable to the project. Conditionality for the Loan would  19 be minimal due to the broad agreement in terms of sector policy between the Government and the Bank, and the need to rapidly deploy resources to implement the program of assistance. 76. Training Plan. The coordinator within each of the commission and the Public Investment Unit will be responsible for the collection of relevant data and information regarding the training courses financed through this project within their entity. The specific area responsible for training within each of the commissions will be responsible for providing the with a yearly training program. This program will be included in the annual work program submitted to the World Bank during the first trimester of each year. 77. The yearly training program will include: (i) Summary of previous year's training program (including any courses which were programmed for the previous year but did not take place); (ii) Proposed changes to training courses; (iii) Title and budget for each course; (iv) Name of Consultant(s)/firm(s) responsible for training; (v) Location of course; (vi) Estimated number of participants; and (vii) Procurement status of each i.e. firm/institution selected, awaiting contract, etc. 78. Each coordinator will be responsible for maintaining the following information for each of the training courses to be reviewed during the semi-annual reviews: (i) Executive Summary; (ii) Title and location of course; (iii) Name of institution or consulting firm; (iv) Budget; (v) List of participants (including name and organization/institution he/she represents); and (vi) Copy of Evaluation of course completed by the commission. 79. Pro1ect Costs and Financin . Estimated Project costs (total cost including Bank and GOM financing of US$ 31.36 million) are as follows: Financial Sector Regulation and Supervision component including the CNB (US$ 17.50 million), CNV (US$ 1.94 million), CNSF (US$ 1.86 million), CONSAR (US$ 1.93 million), and a Project Implementation Consultant Fund for the four commissions (US$ 0.44 million); and the Public Investment Evaluation and Budgeting component (US$ 7.69 million). The Bank would provide US$ 23.6 million, approximately three-quarters of the total financing, and the GOM the remaining US$ 7.76 million. As noted above, the project would finance consultants and procurement of hardware and software, but would not finance any recurring expenditures. 80. Procurement. Two types of procurement would be undertaken through the Loan: (i) consultant services for each of the four commissions; and (ii) goods, primarily computer hardware and software and communications equipment, for the CNB and the CONSAR. As financial agent, NAFIN would act as the coordinator and adviser to the Commissions for all procurement activities under the Loan. Consultants would be hired with proceeds of the Loan to finance consultants to assist each Commission in procurement activities (para. 73). 81. Selection and appointment of consultants for studies, technical assistance, and support of project execution would be carried out in accordance with the Bank's "Guidelines: Use of Consultants by World Bank Borrowers and by The World Bank as Executing Agency"  20 (August 1981). 82. Procurement of goods would follow the Bank Guidelines for Procurement (May 1992). To the extent feasible and practicable, the procurement of goods would be done by grouping the various items in bid packages estimated to cost US$ 350,000 equivalent or more. Packages in this category would be required to follow International Competitive Bidding (ICB) procedures using the Bank Standard Bidding Documents. Local Competitive Bidding (LCB) would be undertaken for goods estimated to cost more than US$ 100,000 but less than US$ 350,000 using the Standard Bidding Documents for Goods satisfactory to the Bank. For equipment which cannot be grouped in packages valued at US$ 100,000 or more, local shopping procedures would be followed. In the case of procurement and implementation of complex informnation and communication systems, the Bank would recommend that a 2-stage bidding process which includes a stage for technical qualification prior to economic evaluation. 83. Bank review of procurement procedures would be as follows: (i) for consulting services, the Bank would conduct prior review for all contracts exceeding US$ 50,000 equivalent for individuals and US$ 100,000 equivalent for firms; and (ii) for procurement of gQoas the Bank would review ex ante documentation pertaining to each ICB undertaken and for the first two LCBs; (iii) all other procurement documentation is subject to ex post review. This review process would result in a prior review of approximately 90% of all Bank- financed contracts for goods. 84. Disbursements. Proceeds of the proposed Loan would finance: (i) 100% of the cost of foreign goods, consulting services, training and technical assistance; and (ii) 90% of the cost of local goods, consulting services, training and technical assistance. The proceeds of the Loan are expected to be disbursed in accordance with the allocation by categories shown in Schedule B of the Memorandum of the President. To expedite project execution, a special account in U.S. dollars would be established at the Central Bank, with an authorized allocation of US$ 2.3 million equivalent, representing the average amount equivalent to four months of eligible expenditures that are expected to be paid from the account. Separate accounts of all expenditures financed by the Project would be maintained by the Borrower and the Commissions. Withdrawal applications would be fully documented, except for contracts smaller than the following specified levels: US$ 350,000 for goods; US$ 50,000 for individual consultants; and US$ 100,000 for consulting firms. In the case of contracts below these specified levels, NAFIN would prepare certified Statements of Expenditure (SOE) to be used as the basis for disbursement. Supporting documentation for SOEs would be retained by NAFIN and made available for examination by Bank staff during supervision missions. 85. Retroactive financing of up to US$ 1.9 million equivalent would be provided for eligible expenditures incurred after October 1, 1994. Such financing is necessary to put in place the institutional structure required to carry out the project and avoid delays in the first year of project implementation. It would be used to finance consultant support for  21 institutional strengthening of the three executing agencies and for preparation of support materials for procurement of goods and services. The project completion date would be December 31, 1997 and the closing date would be June 30, 1998. 86. Accounts and Audits. NAFIN and the Executing Agency would maintain adequate records to reflect all expenditures made under the project. The accounts and statements of expenditures would be audited each year by auditors satisfactory to the Bank, in accordance with appropriate auditing principles consistently applied. The audit reports would be submitted to the Bank not later that six months following the close of the fiscal year.   ATTACHMENT: PROJECT IMPLEMENTATION PLAN   PROJECT IMPLEMENTATION PLAN: CNB Matrix of Objeciives, Activities, Outputs, Tining and Costs OBJECTIVES ACTIVITES OUTPUT FORMS OF TIMING COST ASSISTANCE l Slart Fm~~~~~~~~~~~~~~~~~~~~~~iish Totall (In US$) 1. AUTHORIZATION 1. Provide the CNB with 1. Written policy. Foreign consultants Jan. June $370,000 FUNCTION relevant inibrmation with (supervisors skilled in 1995 1995 respect to the authorization 2. Written authorization process). 1. Promote sound and policies and procedures procedures. transparent institutions and followed by other countries. Training of CNB financial groups. personnel abroad. 2. Survey currently utilized 2. Analyze the possibility of implicit and explicit incorporating authorization policies, and prepare process into overall written policy statement and World Bank supervision program. written implementation Procurement procedures to follow in the Breakdown: 3. Promote consistency with authorization process. Consultants other agencies within $290,000 Mexico. Goods/Equip $0 4. Promote consistency with international best practice. NBF1,1 $80,000 (operating expenses) TOTIAL: ____ ___ ___ ___ _ _ ___ ___ ___ ___ ___ __ ___ ___ ___ $370,000 POSSIBLE REQUIRED STEPS: Revision of the legal framework and distribution of faculties among regulatory commissions (CNB, CNV, and the CNSF). Note: This matrix is a highly aggregated version of a much more detailed description of the technical assistance program for the Comision Nacional Bancaria (CNB). The more detailed description includes a break down by objectives, activities, and outputs by type of assistance and Vice Presidency. Both this matrix and the more detailed program description are based on an explicit institutional development plan for the CNB which was agreed upon prior to the development of the technical assistance program. a] NBF: Not Bank Financing  PROJECT IMPLEMENTATION PLAN: CNB Page 2 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE Start Finish Total ____________ j_I j(In USS) 11. REGULATORY AND 1. Review existing laws, 1. Inventory of relevant Foreign 1. June 1. Dec. 1995 $1,390,000 SUPERVISORY POLICY regulations and policies for provisions of law policy and consultants with 1995 .1 1. Initiate the work to obtain comprehensiveness and regulations, and a summay legal and I clear rules governing legal consistency with CNB's of principal informational supervisory 2. June 2 Ma 1997 responsibilities of individual objectives and international requirements. expertise. 1995 institutions and financial groups best practice. 'i (law and regulatory policy). 2. Revised plicy regulations Mexican World Bank 2. Develop proposals for applcable to financial consultants Procurement 2. In the long term, clear new prudential regulations, groups, banks, SROs, SRAs, specializing in Break wn: stmndards outlining CNB market practice regulations and ancilluy and par- financial law Consultants requirements, as well as and supervisory policies, financial service providers, and regulation. $1,055,000 discretionary faculties regarding Goods/Equip the sound operations of 3. Develop TFaining of S0 institutions and financial groups recommendations for CNB personnel should be established. In this changes to law and abroad. way, the CNB will be able to regulations. NBF: more effectively exercise its $335,000 authority to promote its (opemting objectives (supervisory policy). expenses/taxes) 3. Develop proposals for changes in the regulatory and supervisory policies applicable to self- regulatory organizations and associations, and for the provision of para-fin.ancial 1TOAL: services.'I $1,390,000 Ia Self-regulatory orgsnizations (SROs) include the Bols* de Valores, INDEVAL, Bolsas de Agropecuarios, cleanrghouses (includirg CECO IAN), and clearing houses to be formned (nim in process) for trading derivatives on the Bolsa. Self-regulatory associations (SRAs) refers to all associations whose membe amre subject to internal guidelines of their respective associations (includirg associations of auditors, accountants, actlaries, appraisers, warehouses, and securities dealers). bl This review would incilide examination of minimuns capital and capitol adequacy regulations applied to all entities in the financial conglomemte; authorization policies; permissible activities; credit exposuie limits; Iarge exposire limits; related lending limits; concentralion limits by types of operations (e.g. mortgage lending) or sector; investment limitations; foreign exchange or interest rate exposure limits; liquidity regulstions; provision for losses; conflict of interest rules; market prctice niles; nules for SROs; and rules for SRAs. CONSIDERArIONS: New supervision policies and procedures have to be developed by the CNB on: (i) capital adequacy; (ii) exposure to credit risk and landing limita; (iii) relted credits; (iv) concentration limits, diversification policies; (v) intercompany tInsfers; (vi) market practices; and (vii) conflicts of interest  PROJECT IMPLEMENTATION PLAN: CNB Page 3 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACrIVITIES OUTPUT FORMS OF TIMING T COST ASSISTANCE Start Finish Total _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ .1 _ _ _ _ 1 [~(In U S $) Ill. GENERAL ON-SITE 1. Develop supervision 1. Written policy with Training Jan. Inspection $490,000 SUPERVISION AND practices regarding respect to inspections. program 1995 policy by INSPECTON PROCESS inspection of banks and i nfbrmation December financial groups and 2. Comprehensive from other 1994 RI 1. Upgrade quality and adequate consolidation inspections procedures and supervisory capacity of on-site suipervision procedures. manual for asset quality, agencies. Inspections and inspection. procedures 2. Enhance and complete 3. Inspections of banks Foreign manual by World Bank existing inspection and on-the-job training, technical July 1995 Procurement procedures manuals, and experts. Breakdown: develop manual for asset 4. Permanent training Consultants quality, program for bank Seconded $380,000 inspectors. supervisors. Goods/Equip 3. Conduct on-site $0 inspections in conjunction Inspection with on-the-job training. manuals from other countries. NBF: 4. Develop permanent $1I0,~000 training program for Training of (operating "ordinary" inspections. CNB personnel expenses) abroad. TOTFAL ____ ____ ____ ____ ____ ____ ____ ____ _ __ ____ ___ $490 ,000 a] Other more specialized manuals will be developed in the case of very specialized transactions or financial group operations (See Module IV). CONSIDERATIONS: This part of the program is most critical and will be coordinated with the upgrading of functional technical expertise in on-site supervision (Module IV); off-site supervision (Module V); and upgrading of the MIS (Module VII) of bank inspectors and high level management.  PROJECT IMPLEMENTATION PLAN: CNB Page 4 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE I - Start Finish Total (In US$) IV. SPECIALIZED 1. Training programs for 1. Improved on-site Foreign and Jan. Jan. $2,510,000 TECHNICAL EXPERTISE technical experts. inspection process Mexican 1995 1997 IN ON-SITE SUPERVISION focused on immediate technical AND INSPECTION 2. Training of regular priorities. experts. inspection staff by technical World Bank 1. Upgrade quality and experts in specialized 2. Permanent training Seconded Procurement capacity of on-site supervision technical supervision areas. program for technical supervisors. Breakdown: and inspection. experts in specific Consultants 3. Development of areas. Training for $1,900,000 2. Acquire technical expertise specialized supervision technical abroad Goods/Equip necessary to perform focused manuals. 3. Training program experts. S0 assessments of financial for regular inspection institutions'l staff in specialized supervision. NBF: $610,000 4. Comprehensive (operating inspection procedures expenses/taxes) manuals on asset/liability maniagement, and TOlTAL investment banking. $2,510,000 a] Priority areas for development of technical expertise include: (i) investment banking (including securities activities of financial groups, derivatives trading, position taking and market risk, discretionary fund management and advisory services provided to third parties); and (ii) asset/liability management (including foreign exchange, interest rate risk management, liquidity management, and cash management). CONSIDERATIONS: Although investment banking is an increasingly relevant activity of banks in Mexico, traditional banking is still dominant. Therefore, this part of the program will also finance assistance to develop experts in areas such as retail banking, related credits, international operations, and mortgage lending.  PROJECT IMPLEMENTATION PLAN: CNB Page 5 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST J ASSISTANCE -l Start Finish Total l_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ I [ (In U S()UJ V. FINANCIAL 1. Deliver training in 1. Permanent financial Foreign and Jan. Dec. $1,520,000 ANALYSIS CAPABILITY financial analysis. analysis training progrm. Mexican 1995 1997 AND OFF-SITE financial SUPERVISION 2. Develop permanent 2. Recommendations analysis experts. financial analysis training regarding the integration 1. Conduct adequate program. of financial analysis in the Seconded World Bank financial analysis of supervision process. supervisors. Procurement individual institutions, 3. Formally assist in other Brakdown: financial groups and the components ("General On- 3. Recommendations Training abroad Consultants financial system. site Supervision and regarding the infbrmation for financial $1,155,000 Inspection Process", and needs of CNB financial analysts, Goods/Equip 2. Identify systemic risks. "Regulatory Reports, analysts. starting with a $0 Report Processing and small core Output, and Public 4. Policies to determine group. Disclosure"). the level of coordination NBF: between in-situ and extra- $365,000 situ. (operating expenses/taxes) CTOTaAL __________ ____ _____$1,520,000 CONSIDERATIONS: Will be carefully integrated with other parts of the program, particularly that relating to megulatory reporting.  PROJECT IMPLEMENTATION PLAN: CNB Pagc 6 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING | COST ASSISTANCE Stakrt Finish Total | (In USS) VI. REGULATORY REPORTS, 1. Perform survey of the 1. Recommendations Foreign Jan. 1. $310,000 REPORT PROCESSING AND manner in which CNB staff regarding appropriate consultants. 1995 Modifications OUTPUT, AND PUBLIC and others (e.g. Banco de regulatory accounting to RAP by DISCLOSURES Mexico) currently use principles (RAP). December information submitted by 1994. 1. Upgrade the information content institutions. 2. Analysis and of data requested from individual recommendations 2. Survey of World Bank institutions and groups. 2. Redesign regulatory reports regarding the flow and information Procurement required to be submitted to use within CNB of users done by Breakdown: 2. Upgrade information content of CNB to provide relevant information received from March 1995. Consultants data disclosed to the public. information, institutions. $240,000 3. New Goods/Equip 3. Ensure integrity, efficiency, and 3. Perform analysis (i.e. 3. New regulatory regulatory $0 on-going capacity of data processing systems audit) of the data repors, report designed systems (hardware, software and processirg systems and by December administration), procedures by which 4. Systems audit and 1995. NBF: information received from recommendations for $70,000 4. Reduce the reporting burden for institutions is processed into improvements. (operating institutions, and the burden of output. expenses) retrieving and lack of timeliness in 5. New or modified access to data by CNB staff (See 4. Redesign the output reports output reports. Module VIl). used by CNB staff in order to facilitate the utilization of the 6. New reports for public information, disclosure. 5. Develop a policy regarding publication of financial information and redesign the format of existing published TOTAL reports. $310,000 a) To be financed with technical assistance funds within the Industrial Restructuring Loan (Ln-3047-ME). CONSIDERATIONS: This process will involve a logical sequence of steps that will begin with a careful survey of users of reports (including government agencies, the public at large, and sophisticated domestic and foreign investors).  PROJECT IMPLEMENTATION PLAN: CNB Page 7 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE Start Finish Total (In US$) VIl. INFORMATION 1. Design and implement 1. Improved MIS Technical Jan. Dec. $5,580.000 SYSTEMS AND BUDGETING more modem information Experts. 'I 1995 1996 PROCESSES systems (including MIS). 2. Increase the percentage of professional staff with Purchase of World Bank 1. Relevant information available 2. Upgrade access of CNB access to micro-computers software and Procurement to management in timely manner personnel to modem linked to local area hardware to Breakdown: (Management Information computer software and networks. upgrade existing Consultant Systems - MIS). hardware. system if $340,000 3. Increase the needed. Goods/Equip 2. Acquisition of specialized 3. Train personnel in use of competency of $3,500,000 software and hardware to modem software. professional staff in the External upgrade speed and timeliness of use of software and training for CNB functional responsibilities hardware to reach 70-80% systems staff. NBF: in on-site and off-site supervision of total staff. $1,740,000 including local area networks. Permanent (operating training expenses, 3. Modemization of budgeting program for taxes, process within the commission. professional and installation) support staff. TOTAL $5,580,000 a] Includes Mexican and foreign consultants. CONSIDERATIONS: Effective modernization of the CNB is inconceivable without adequate information systems. Today, it can take as much as three minutes to downlond one piece of data, an example of an excessive amount of time spent in simple procedures.  PROJECT IMPLEMENTATION PLAN: CNB Page 8 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE Start Finish Total . ~~~~~~~~~~~~~~~~~(In USS) l VIIl. SUPERVISION OF 1. Survey currently utilizd 1. Training. Formign 1995 1997 $130,000 DEVELOPMENT BANKS supervision procedures in training and other countries. 2. New or modified seminars. 1. Upgrade quality and capacity written procedures of supervision. 2. Review operational inclusive of modifications Foreign accounting practices and to development bank consultants. World Bank valuation and registration supervision manual. Procurement techniques for securities and Breakdown: international transactions. Consultants $100,000 3. Develop better supervision Goods/Equip processes and capabilities to $0 assess adequacy of risk management and management NBF: practices of such specialized $30,000 public banks. (operating expenses) TIUITAL _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _1 30$1 0,0 0  PROJECT IMPLEMENTATION PLAN: CNB Page 9 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES AClIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE Start Finish TotA I ~~(In US$) IX. HUMAN RESOURCE 1. Undertake a skills 1. Statement of human Foreign 1995 1997 $5,200,000 DEVELOPMENT inventory of the existing resources policy. consultants and personnel at CNB. training. 1. Develop policies governing 2. Strategic plan to human resource development. 2. Design minimum implement human resource Seconded standards for hiring new policy objectives over 3-5 specialists. 2. Establish training programs staff. year period. World Bank for new and existing staff. Procurement 3. Develop job descriptions, 3. Training programs for all Bmakdown: 3. Establish criteria and career development and levels of staff. Consultants requirements for hiring of promotion paths. $4,040,000 new staff and promotion of 4. Clear job descriptions Goods/Equip existing staff. 4. Design training pmgrams and promotion criteria. $0 which can be 4. Develop modem wage institutionalimd for staff at 5. Explicit wage compensation and benefits all levels at the CNB. compensation and benefits NBF: policies for CNB personnel. policy recommendations. $1,160,000 5. Evaluate changes to (opemting compensation and benefits expenses) policies, determining ways to link performance with wage compensation. TOTAL $5,200,000  PROJECT IMPLEMENTATION PLAN: CNV Page 10 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCEi Start Finish Ttal (In US$) 1. REGULATORY AND 1. Review existing Prioritize areas where External a. Jan a. Dec $740,000 SUPERVISORY POLICY regulatory framework and further work will be consultants 1995 1995 supervisory policies in such needed across areas listed b. Jan b. Dec 1. Analysis of supervisory areas as: (a-g) and recommended 1995 1995 and regulatory policy for a. Broker dealer capital modifications in c. Jan c. Dec selected topics standards a/ regulation or introduction 1995 1996 b. Trading practice b/ of new regulations. d. Jan d. Dec World Bank c. Asset backed securities 1995 1996 Procurement (securitization) c/ e. e. Dec Breakdown: d. Guarantee fund for June 1996 Consultants brokerage firms d/ 1995 f. Dec $550,000 e. Investment advisers and f. Jan 1996 Goods/Equip managers e/ 1995 g. Dec S0 f. Conflicts of interest f/ g. Jan 1996 g. Framework for exchange 1995 traded derivatives g/ NBF: 2. Review supervisory $190,000 policies now in place in (operating respect to aseas (a-g) listed expenses) above. TOTAL: $740,000 a/ Evaluate chRes in the capitl adequacy regulations and capifal standaids for brokenge finss, to the extent bmkekcge opesationr are consolidsted. b/ Assessment of design of lading pfactice regulations relating to fmnt-ntnnirg. best execution. dumpirg of securities connict resolution nd segreption od account. c/ Analysis od appropriat frmmework for instsumenta includirg mortpge-baked securilies, expected lo be offemed in the near term. d/ Analysis of fees chsrged to new enamnb to the industry: examination of the structum of charges ad linkage to risk in pos2iions taten vs. trading volume on account of thid panics. e/ Evaluation od regulation and supervision of adviso. ad manern. including with respect to authorizstion, conflict of interest. coinveitment. fee structue mand quality od advice. Analysis of desirability of stu,nd-alone entities. rf Analysis od potential soutces od conflict od ink-mrst mong elatcd financial intermediaries along with conflicb that mmy arise between financial intermediaries and issuen of securities. Development of generd principles for identification of conlics and appioprisa regulations nd supervisory polices. g/ Evaluation of jurisdictional problems in supervision of derinutives (e.g. cme of commodity deri stives (e.g. k RM4A)) issues relating to margin regulation in respect to derivntive contracts. SR) risk ,ansgenv.ent sisfcguads betwcen brokengp finnrs and cfiena clacirisag vuse ibe. and othicr issarkct participan.ts  PROJECT IMPLEMENTATION PLAN: CNV Page II of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACI1VITIES OUTPUT FORMS OF TIMING COST ASSISTANCE -b- l __________________ ________________ _________ ______IStart Finish l Ubtal S l ~~~~~~~~~~~~~~~~~~~~~~~(In US$)l 11. DISCLOSURE 1. Undertake review of Recommended External Jan Dec $210,000 STANDARDS all Mexican disclosure changes to existing consultants 1995 1995 provisions for all classes Mexican disclosure including 1. Improve disclosure of issuers. Analyze and liability seconded staff standards for Mexican appropriateness of provisions for from other issuers in connection different standards for issuers. securities with public offerings on small and medium-size regulators and a periodic basis and in companies. Mexican connection with atttomeys with World Bank extraordinary events. 2. Evaluate the need for domestic and Procurement greater disclosure of intemational Breakdown: 2. Bring disclosure special risks (e.g. experience. Consultants requirements in Mexico environmental, $120,000 up to international derivative transactions, Goods/Equip standards, consistent unfunded pension $0 with other markets liabilities, other where Mexican contingent liabilities) securities are issued. NBF: 3. Analyze current $90,000 disclosure provisions in (operating light of international expenses) standards and evaluated implications of changes to existing standards. 4. Evaluate current incentives for careful analysis and review of corporate disclosure by other market TOTAL: participants. $210,000  PROJECT IMPLEMENTATION PLAN: CNV Page 12 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING_I COST ASSISTANCE - Start Finish Ibtal (In US$) 111. SUPERVISION FOR 1. Initial Diagnostic of: (i) 1. Team of well- l. External consultants to Dec Dec $440,000 EXCHANGE TRADED current CNV supervision trained inspectors undertake initial 1995 1996 DERIVATIVES systems; and (ii) existing specialized in on-site diagnostic, develop regulatory framework of inspection of exchange training program, and 1. Development of derivative activities the traded derivatives, assist in preparation of supervision systems for Bolsa, INDEVAL and any 2. Supervision manual manuals exchange-traded other SROs. for on-site inspection derivatives (on-site 2. Assessment of of brokerge firm and 2. International regulatory World Bank inspections and off-site implementation by CNV of SRO derivative agency staff assistance Procurement surveillance). processes for on and off- activities. Breakdown: site supervision of 3. Off-site surveillance 3. Secondment of CNV Consultants brokerage derivative procedures and personnel to international $320,000 operations and SRO techniques regulatory agencies, Goods/Equip processes. Evaluation of implemented by CNV investment banks, So changes recommended in and Bolsa. broker/dealers and futures internal surveillance or dealers to gain experience inspection process by Bolsa itself. NBF: 3. External training and $120,000 secondment for inspectors (operating examining derivative expenses) trading by brokerage firms, and assessing risk safeguards and monitoring systems of SROs. 4. Training of senior personnel in charge of CNV off-site surveillance of exchange traded derivatives TUfAL: $440,000  PROJECT IMPLEMENTATION PLAN: CNV Page 13 of 30 Matrix of Objectives, Activities, Outpuits, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE Start Finish Total | (In US$) IV. SELF- 1. Develop a strategy for 1. Series of seminars 1. External June Dec $180,000 REGULATORY establishing the pre- (some open only to consultants to 1995 1995 ORGANIZATIONS requisites of self-regulation CNV staff, other conduct in Mexico and program for seminars open to seminars, I. Eduication of CNV implementing a system of staff from all including staff and market SROs. regulatory consultants with participants about self- commissions, market experience in World Bank regulation and the role of 2. Formulation of patrticipants and the SRO Procurement self regulatory educational program on the public at large). administration Breakdown: organizations (SROs) role of external supervision and supervision. Consultants and SROs. Useful to have $140,000 2. Develop a consistent consultants with Goods/Equip understanding of 3. Formulation of series of experience in S0 principles, and goals of seminars on various transition to self- self-regulation between aspects of self-regulation, regulatory CNV and SRO members. emphasis on international environment. NBF: experience, open to the $40,000 financial community at (operating large. expenses) 'TOTAL: ________________________ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ______$ 180 ,000  PROJECT IMPLEMENTATION PLAN: CNV Page 14 of 30 Matrix of Objectives, Activities, Outputs, liming and Costs OBJECrIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE ( Start Finish Total l(In US$)l V. REPORTING 1. Examine nature and 1. New and 1. External Jan Dec $250,000 REQUIREMENTS uses of all infbrmation modified formats consultants 1995 1995 now collected noting for regulatory experienced in: 1. Develop a modem gaps in the collections reports where international format for regulatory of needed data. applicable. regulatory filing reports, consistent with standards for international standards, 2. Design format for brokerage houses World Bank in place of catalogo de regulatory reports in and recent country- Procurement cuentas as the starting light of key specific refbrms; Breakdown: point for supervision of responsibilities of design of regulatory Consultants brokerage houses. CNV consistent with reports for $180,000 revisions to regulatory insurance Goods/Equip reports contemplated companies, $0 by CNSF, CNB, insurance brokers, Banco de Mexico, adjusters, and SHCP, and CONSAR. reinsurance NBF: companies. $70,000 (opeeting expenses) T'OlTAL: _____ ____ ____ __ _ _____ ____ ____ _ __ ____ $250,000  PROJECT IMPLEMENTATION PLAN: CNV Page 15 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TMING COST ASSISTANCE _ Start Finish Ibtal l _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ J _ _ _ _ _ _ (In U S $ ) VI. SISTEMA 1. Analyze the potential 1. Proposals External Jan Dec $120,000 INTERNACIONAL DE demand by issuers, establishing consultants with 1995 1996 COTIZACIONES broker/dealers, and appropriate experience in investors for this market. regulation of the SIC regulation and 1. Analyze current 2. Examine advantages system. supervision of proposals for the and disadvantages of markets for off- regulatory framework to different regulatory 2. Proposals for the shore securities World Bank be applied to the Sistema provisions for the listing, CNV processes and (e.g. SEAR). Procurement Iniernational de disclosum, order, policies to supervise Breakdown: Cotizaciones (SIC) to execution and pricing of the SIC. Training abroad Consultants ensure the integrity of publicly offered shares for a small group $90,000 this new market. and debt securities. of CNV Goods/Equip 3. Examine experience in supervisors. $0 2. Aid in the this area in other implementation of the markets, and their final regulatory applicability to Mexico. NBF: framework adopted by 4. Examine implications $30,000 the CNV. for CNV supervision (operating responsibilities given the expenses) SIC system. 'TOTAL: _____________________ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~$ 120 ,000  PROJECT IMPLEMENTATION PLAN: CNSF Page 16 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE 1 Start Finish Total -__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ I. I I _ _ _ _ I (In U S$) 1. INSPECTION 1. Review and revise policy 1. Written policy Foreign Marc Dec. $450,000 PROCESS regarding on-site concerning inspections technical h 1996 inspect ions experts 1995 1. Upgrade supervision 2. Revisions to capacity, quality. 2. Amend procedures for inspection procedures Inspection efficiency and on-site inspections to reduce manual manuals from effectiveness redundancy other countries 3. Training of existing World Hank 2. Policy should call for a 3. Review and enhance CNSF staff in new CNSF Procurement top-down inspection relationship between procedures supervisors Breakdown: process, with on-site work regulator ' and auditor. seconded to Consultants focused on areas of 4. Permanent training other $330,000 highest risk for an 4. Revise inspection program established for countries. Goods/Equip institution. procedures manual for each inspectors of insurance $0 type of entity supervised. and reinsumance Training of 3. Areas of risk should be companies. CNSF staff. identified jointly with 5. Conduct on-the-job NBF: senior management of the tmining and seminars for 5. Permanent training $120,000 institution based on the existing staff program established for (operating results of analysis, early inspectors of insurance expenses) warning indicators, and 6. Develop a permanent brokers and adjusters. the assessment of training program management itself. 4. Improve inspection processes for insurance and reinsurance companies. 5. Improve inspection processes for insurance brokers and adjustors as well as the SRA for these TOTAL: entities. $450,000 a] In the case of insumnce companies, brokerage houses, adjusting companies, and reinsunmnce companies, a key player in the "audit' process is the independent actuary.  PROJECT IMPLEMENTATION PLAN: CNSF Page 17 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING _ COST ASSISTANCE Start Finish Total I(In US$) II. REGULATORY 1. Review existiW laws, 1 Inventory or revent External 1. Inventory and 1. Sept $290,000 AND regulations and policies in provisions of law, consultants with summary - March 1995 SUPERVISORY respect to insurance companies, regulations and policies, legal *nd 1995 POLICY brkers, adjustersn t and and a summary of principal supervisory Preinsuntnce companies for requirements end experience for 2. Drafts of new 2. Sept 1. Design regulations and consistency with those at CNB. recomnmendations insunnce recommendations 1996 supervisory policies in line companies, regardirig with international 2. Ensure that laws, reinsuntnce regulations and standards regulations, and policies are companies, and policies - March consistent with international brokers and 1995 2. Ensure the that design best practice, adjusters. World Bank of new regulations and Procurement supervisory policies for 2. Develop new supervisory Breakdown: consolidetion accountirl, policies. Consulbnts and capital adequisay rules $210,000 are consistent with other 3. Develop recommendations Goods/Equip entities in the financial for chariges to laws and So Btoup. prudential or other rejubations related to insurnce and 3. Ensure that policies for bonding. insurtnce and reinsutance NBF: companies are consistent 4. Review regulatory $S0,000 with those of other frmeworks adopted toward (operating commissions. reinsurnee. expenses) 4. Establish regulations 5. Study prcesses used by (e.g limits for reinsutrance) insurance and reinsurtnce and supervisory policy in companies to limit risks. respect to reinstiunce TOTAL: companies $290,000 aI The proposal is not to conduct a complete review of all prudentiAl regulationts and stipervisory policies applicable to insurnce companies. CNSF officials have worked to keep their policies up-to-date with international prectices. However, the need to harmonize policies for all types of financial institutions will likely lead to foriher revisions to the existing regulations, practices and policies. This review and analysis should be coordinated closely with that being undertaken at the CNB. In addition, the review will pay specific attention to the regulstory framework for reinsumunce companies, and for instirince brokers and adjusters. b. In the case of insuirance brokers and adjusters, this service shotild focus on minimum standards for a self-regulatory association, inclusive of ethical standsrds, certification procedures for new entrnts, surveillance of member practices, etc.  PROJECT IMPLEMENTATION PLAN: CNSF Page 18 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING l ASSISTANCE COST Start Finish Total (In US$) Ill. ACTUARIAL 1. Develop and establish 1. Institutionalizd To include the Mar. Dec. $490,000 SERVICES FOR CNSF an appropriate certification certification training following: 1995 1996 process for actuaries in programs for international 1. Design effective Mexico. actuaries. actuarial monitoring of actuary's work, consultants, establishing an appropriate 2. Review actuarial 2. Recommendations seconded degree of reliance on work of inspection practices to regarding the supervisors. company actuary and ensure greater coordination of work independent actuarial coordination with the of the inspectors. External "auditor' work of other CNSF training for World Bank inspectors 3. Recommendations CNSF staff Procurement 2. Eliminate unnecessary regarding the actuaries Breakdown: detail work on the part of 3. Review international revisions of actuarial Consultants CNSF aciuarial inspectors standards, and make standards. $360,000 recommendations to Goods/Equip 3. Establish actuarial upgrade Mexican practices $0 reporting and reserving where necessAry. standards in line with international standards 4. Publish actuarial standards when necessary NBF: (To be done in $130,000 conjunction with the (opernting CONSAR to establish expenses) similar certification standards for provision of pensions services). TOTAL: $490,000 CONSIDERATIONS: The activities financed here will be closely coordinated with support to CONSAR and related to certification, actuarial standards, and assessment of actuarial modelling in respect to vArious types of pensions offered.  PROJECT IMPLEMENTATION PLAN: CNSF Phge 19 of 30 Matrix of Objectives, Activities, Outputs, liming and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE i TI l Start Fi~~~~~~~~~~ ~ ~~~~~~~~~~~~~~~~~~~~nish Totall IV. DESK ANALYSIS 1. Develop early warning 1. Early warning tests External June Dec. $240,000 tests in respect to financial developed related to consiultants 1995 1996 1. Identify financial risks risks to Mexican insurance financial risks or facing institutions and reinsurance companies. operations of insurance Training of companies, or CNSF staff 2. Identify infbrmation reinsurance companies. abroad. and monitoring program 2. Develop reporting for insurance companies, requirements for companies 2. Recommendations World Bank and reinsurance and the necessary software regarding: integration of Procurement companies. to enable the effective financial analysis in the Bmakdown: application of the tests. supervision process and Consultants 3. Assess the role of the infbrmation needed $170,000 desk analysis in 3. Review current practices for financial analysis; and Goods/Equip monitoring insurance and assess applicability of elimination of $0 brokers and adjusters. procedures adopted in other redundancies in jurisdictions. regulatory reporting mquirements. NBF: $70,000 3. Training program for (operating staff. expenses) 4. Revised procedures for desk analysis of the work of insurance brokers and adjusters. TOTAL: $240,000 l . .~~~~~~~~~~~~~~~~~~~~~~~~~~~0  PROJECT IMPLEMENTATION PLAN: CNSF Page 20 of 30 Matrix of Objectives, Activities, Outptits, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE Start Finish Total (In US$) V. REVIEW OF 1. Review international 1. Assessment of CNSF International Mar. Sept $140,000 REGULATORY practices and and accounting institut consultants with 1995 1995 ACCOUNTING recommend necessary proposal for experience in STANDARDS AND updates to Mexican harmonization of regulatory REGULATORY regulatory accounting regulatory and Mexican reporting to assist REPORTS practices. generally accepted in the design of World Bank accounting principles. new regulatory Procurement 2. Evaluate adequacy of reporting Breakdown: 1. Establish regulatory existing regulatory 2. Design modifications or requirements and Consultants reporting standards reports. new regulatory reports. to assess $100,000 consistent with accounting Goods/Equip international practices. principles. $0 NBF: $40,000 (opemating expenses) TOTAL: _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _1 40$1 4 ,0 0  PROJECT IMPLEMENTATION PLAN: CNSF Page 21 of 30 Matrix of Objectives, Activities, Outptuts, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING__J COST ASSISTANCE Start Finish Total (In US$) VI. EDUCATION OF 1. Focussed seminars 1. Increased External consultants June June $250,000 FINANCIAL covering topics (i - communication between with international 1995 1997 COMMUNITY iii). CNSF staff and private experience in each market. area. 1. Education of the financial community in 2. Greater knowledge by the areas of: (i) private market participants actuarial standards; (ii) about international World Bank self-regulatory experience in areas (i) - Procurement processes for insurance (iii). Breakdown: brokers and adjusters; Consultants and (iii) practices in $180,000 controlling risks in Goods/Equip reinsurance operations. So NBF: $70,000 (operating expenses) TOTAL: _____ ____ ____ ____ ___ ____ $250,000  PROJECT IMPL8MENTATION PLAN: CONSAR Page 22 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE -il Start Finish Toal (In US$) I. INTERNAL 1. Equip staff of 1. Automate Software/hardware 1. 1996 1. 1996 $800,000 INFORMATION CONSAR with maximum number and Mexican SYSTEMS FOR software and of functions. Consultants. 2. 1996 2. 1997 CONSAR hardware. 1. Increase efficiency. 2. Investigate 2. Computer links computer links and interfaces 2. Ensure adequate needed to IMSS, established to World Bank communication links ISSSTE, FOVISTE, IMSS, ISSSTE, Procurement with other key INFONAVIT, Banco FOVISTE, Breakdown: supervisory agencies or de Mexico, SHCP INFONAVIT, Consultants the special Interbank and PROCESAR. Banco de Mexico, $100,000 Clearinghouse SHCP and Goods/Equip (PROCESAR) for SAR PROCESAR. $500,000 accounts. NBF: $200,000 (operating expenses/taxes) TuOAL: $800,000  PROJECT IMPLEMENTATION PLAN: CONSAR Page 23 of 30 Matrix of Objectives, Activities, Outputs, Timing and Costs OBJECTIVES ACIlVITIES OUTPUT FORMS OF TIMING COST l . ~ASSISTANCE -i A.SS E Star Finish lbtal (In ] us$)l 11. CONSAR NATIONAL 1. Equip CONSAR main 1. A reliable and External 1996 1997 $950,000 INFORMATION office in Mexico City with efficient network of consultants NETWORK communications equipment, offices of CONSAR hardware and software to to provide Mexican 1. Establish an information serve as a communication information and consultants to network to provide center for representation receive complaints design system. employers and employees offices of CONSAR from employers and with the SAR infbrmation throughout the country. employees ExternaI and they require. throughout the domestic World Bank 2. Equip CONSAR country. training. Procurement 2. Ensure that CONSAR representation offices with Breakdown: offices are adequately all the necessary equipment 2. Provide the best Hardware and Consultants staffed and equipped to to perform its duties. * possible service to software for data $100,000 perform duties and process the user. communications Goods/Equip information. 3. Train personnel in the and processing. $600,000 CONSAR representation offices, in how to use the network. NBF: $250,000 (operating expenses, taxes, installation) TOTAL: _________________________ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ______$9 50 ,0 0 0  PROJECT IMPLEMENTATION PLAN: CONSAR Page 24 of 30 Matrix of Objectives, Activities, Outputs, liming and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE ________________ Start Finishi Total (In USS) Ill. SPECIAL STUDIES 1. Conduct a study with 1. Initial Mexico External and 1997 1997 $180,000 CONSAR and CNSF of the study Mexican existing structume of the consultants. 1. Preliminary study to Mexican annuities market 2. Study of determine how to further and impediments to its intemational annuities develop the Mexican further development. markets. annuities market (inclusive of the links to 2. Examine regulatory SAR accounts). frmework and economics of annuities markets in other World Bank countries (e.g. Chile, US, Procurement and Canada). Breakdown: Consultants c. Based on $150,000 recommendations from Goods/Equip initial study, develop $0 specific options for the further development of the market (e.g. types of annuities products to be NBF: permitted fixed payment, $30,000 index-linked, variable rate, (operating etc.), disclosun: and expenses) reporting requirements, actuarial standards in the sale of such products, and pricing by insuance TOTAL: companies. $180,000  PROJECT IMPLEMENTATION PLAN: IEIU Page 25 of 30 Matrix of Objectives, Activities, Timing and Costs OBJECTIVES | ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE Si ___ ___ __ ___ __ start JFinish J (SS)l 1. INTER-INSTITUTIONAL 1. Improve coordination 1. Recommendations External consultants June Dec. $200,000 COORDINATION between federal, state, and regarding procedures for 1995 1996 local agencies in activities interaction of Public 1. Strengthen inter-agency relating to project evaluation Investment Unit with communication and and budgeting. other federal, state and coordination between fedeaI, local agencies. World Bank state, and local entities 2. Provide support to the Procurement engaged in project evaluation evaluation of projects under 2. Recommendations Breakdown: and budgeting. potential public-private regarding the role of the Consultants patnerships in financing of Public Investment Unit in $150,000 infrastructue, the evaluation of public- Goods/Equip private partnerships in S0 financing of infrastructufe. NBF: $50,000 (opemIting expenses) tTWAL: $200,000  PROJECT IMPLEMENTATION PLAN: IEIU PFge 26 of 30 Matrix of Objectives, Activities, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST m ASSISTANCE Start Finish (USS) II. STANDARDS, 1. Establish and diffuse 1. Recommendations External consultants Jan. Dec. $270,000 DIFFUSION AND TRAINING criteria for formulation and regarding development of 1996 1997 evaluation of pubuc standards for project Seminars I. Establish standards for investment projects. evaluation. evaluation of public investment Training abroad of World Bank projects. 2. Establish criteria for 2. Diffusion of standards Public Investment Procurement multi-annual projects. to other federal agencies. Unit staff Breakdown: 2. Ensure the diffusion of Consultants established standards to all 3. Establish criteria for 3. Training of Public $200,000 government entities engaged in multi-sectoral, regional, and Investment Unit and other Goods/Equip project evaluation and ernvironmental projects. federal staff in project S0 budgeting. evaluation. 4. Strengthen activities of 3. Strengthen the project Public Investment Unit and evaluation capacity within the other project programming NBF: Public Investment Unit and agencies in Federal $70,000 other government agencies. Government. (operating expenses) TOT'AL: $270,000  PROJECT IMPLEMENTATION PLAN: IETU Page 27 of 30 Matrix of Objectives, Activities, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST I I ASSISTANCE PU Start Fminih (t)ss) Ill. PROJECT 1. Evaluation of specialized 1. Identification of External consultants April Dec. S5.89 million EVALUATION projects in specific sectoDr econonic, financjal, 1995 1997 of public investment, environmental, and social 1. Provide specialized Projects to be evaluated impacts of project expertise in the evaluation of include highway, airport, development. Wrld Bonk sector- or region-specific port, railway, water Procurement public investment projects. sanitation, solid wasle and 2. Recommendations for Brealukon: other priority sectors. public and/or private Consulbtnts financi,g of project. $4,650,000 2. Identification and Goods/Equip completion of regional so development studies. NBF: SI1,240,000 (opermting expenses, ta1xes) 1TOTAL: $5.89 million  PROJECT IMPLEMENTATION PLAN: IEIU Page 28 of 30 Matrix of Objectives, Activities, liming and Costs [OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE Start Finish (SS) IV. PROJECT INVENIlRY 1. Design and implement 1. Recommendation for External consultants June Dec. $530,000 AND PRIORITIZATION methodology for prioritizing design of system for 1995 1996 public investment projects. project ranking and 1. Develop and maintsin a prioritization within and World Bank national inventory of public across economic sectors. Procurement investment projects. Breakdwn: Consultants 2. Prioritize and rank $400,000 inventoried projects within and Goods/Equip across sectors according to so economic, financial, and social returns. NBF: $130,000 (operating expenses) 1UJAL: $530,000  PROJECT IMPLEMENTATION PLAN: IEIU Page 29 of 30 Matrix of Objectives, Activities, liming and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE _ Start Finish (IJS$) V. MULTI-ANNUAL 1. Review and evaluate 1. Recommendations External consultants April Dec. $670,000 BUDGETING findings of recent study of regarding processes and 1995 1996 design of multi-annual procedures to be I. Finalize and implement budgeting system. implemented in support of arrangements for multi-annual multi-annual budgeting. World Bank budgeting under public 2. Develop detailed P>curement investment projects. recommendations regarding Breakdown: the implementation of the Consultants multi-annual budgeting $500,000 system. Goods/Equip $0 3. Promote rationalized budgeting activities within federal agencies to allow NBF: efficient use of project cost $170,000 ssvings. (operting expenses) 1ITAL: $670,000  PROJECT IMPLEMENTATION PLAN: IEIU Page 30 of 30 Matrix of Objectives, Activities, liming and Costs OBJECTIVES ACTIVITIES OUTPUT FORMS OF TIMING COST ASSISTANCE . . _________________[ _____________ __Start Finish (USS) VI. EX-POST 1. Strengthen capabilities 1. Taining course$ and Exernal consultants. Jan. Dec. $130,000 EVALUATION AND of Public Investment Unit seminaf for Public 1997 1997 MONITORING and other federal Investmnt Unit nd other government agencies in fedral government sutff 1. Provide systematic ex-post techniques for ex-post involved in budgeting nd Vkbrd Bank monitoring and evaluation of project evaluation and project evaluation. Procurement public investment projects. monitoring. Bmakdown: Consultants 2. Improve incentive system S100,000 for maximning efficienqc and Goods/Equip productivity in the execution of SO public investment projects. NBF: $30,000 (operating expenses) TOTAL- ____________________ SI130,000