Document of The World Bank FOR OFFICIAL USE ONLY Report No. 13050 PERFORMANCE AUDIT REPORT MEXICO INDUSTRIAL SECTOR POLICY LOAN (LOAN 3087-ME) MAY 13, 1994 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS 1989 US$ 1 = Mex$ 2,461.5 1990 US$ 1 = Mex$ 2,812.6 1991 US$ 1 = Mex$ 3,018.4 1992 US$ 1 = Mex$ 3,094.9 1993 (April) US$ 1 = Mex$ 3,095.5 ABBREVIATIONS DCR - Domestic Content Requirements ESW - Economic and Sector Work FDI - Foreign Direct Investment GATT - General Agreement on Tariffs and Trade GDP - Gross Domestic Product IMF - International Monetary Fund ISPL - Industrial Sector Policy Loan NAFTA - North American Free Trade Agreement OED - Operations Evaluation Department PAR - Performance Audit Report PACTO - Economic Solidarity Pact PCR - Project Completion Report PECE - Economic Stabilzation and Growth Program QR - Quantitative Restrictions SAR - Staff Appraisal Report SECOFI - Ministry of Trade and Industrial Development FISCAL YEAR January 1 to December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation May 13, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Mexico Industrial Sector Policy Loan (Loan 3087-ME) Attached is the Performance Audit Report on Mexico - Industrial Sector Policy Loan (Loan 3087-ME) prepared by the Operations Evaluation Department. The project formed part of a comprehensive and complementary program of Bank assistance in support of the Mexican Government's objectives to stabilize the economy and resume growth. The project aimed at modernizing and deregulating the industrial sector. The audit agrees with the main findings of the Project Completion Report. Overall, the project outcome is rated as highly satisfactory, its sustainability as likely, and the institutional development impact as substantial. The project demonstrates the importance of domestic deregulation, as a complement to trade reform, in improving competitiveness and in encouraging a supply response. Critical factors in the project's success were: the dynamic and reformist approach of a Government willing to undertake bold reforms; and the close collaboration and fundamental meeting of the minds between the Government and the Bank on the reform program. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT MEXICO INDUSTRIAL SECTOR POLICY LOAN (LOAN 3087-ME) TABLE OF CONTENTS Page No. PREFACE ......i.................... BASIC DATA SHEET ..................................... i EVALUATION SUMMARY ................................. vii I. INTRODUCTION ................................... 1 II. PROGRAM OBJECTIVES AND DESIGN ................... 2 Policy Content .................................. 2 Financial Plan .................................. 3 Program Design ................................. 4 m. PROGRAM PERFORMANCE .......................... 4 Improvements in Factor Quality and Mobility ............... 5 Deregulation of Sectoral Programs . ...................... 7 Further Trade Liberalization ......................... 9 Improved Competition in Trucking Services ................ 10 IV. EVALUATION AND SUSTAINABILITY . ................... 10 Economic Reform ................................ 11 The Deregulation Program .......................... 13 Institutional Development ........................... 14 Resource Mobilization ............................. 14 Role of the Bank and Borrower ....................... 15 Sustainability ................................... 16 V. LESSONS OF EXPERIENCE ........................... 17 VI. CONCLUSIONS .................................... 19 This report was prepared by Maina Varkie (Task Manager) and Derek White (Consultant) who audited the project in October 1993 and Jasmine Mason-Anderson provided word processing assistance. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (CONT'D) Page No. ANNEXES .......................................... . 21 1. Comments from Secretaria de Comercio y Fomento Industrial ..... .21 2. Comments from Nacional Financiera ....................... 63 PERFORMANCE AUDIT REPORT MEXICO INDUSTRIAL SECTOR POLICY LOAN (LOAN 3087-ME) PREFACE This is the Performance Audit Report (PAR) on the Industrial Sector Policy Loan (ISPL) to Mexico (loan 3087-ME). This loan, in the amount of US$500 million, was approved on June 13,1989 and was closed on June 30, 1991, one year behind schedule. An undisbursed balance of about US$2.5 million was cancelled. Cofinancing was provided in the form of a loan from the Export Import Bank of Japan (JEXIM) in the amount of US$ 300 million equivalent. The PAR was prepared by the Operations Evaluation Department (OED) and the Project Completion Report (PCR) was prepared by the Latin America and Caribbean Regional Office. The PAR is based on the PCR, the President's Report, the loan documents, economic and sector reports, and discussions with Bank staff. An OED mission visited Mexico in October, 1993 and discussed the effectiveness of the Bank's assistance with Government officials and representatives of the business and financial communities. Their kind cooperation is gratefully acknowledged. The PCR provides a very good account of the achievement of the project's overall objectives and the role of the Bank and the Borrower. The PAR focuses more on the short-term impact of the specific domestic deregulatory measures implemented under the project. A draft PAR was sent to the Government and the cofinancier. Comments were received from the Government and incorporated in this report, as appropriate. No comments were received from the cofinancier. - iii - PERFORMANCE AUDIT REPORT MEXICO INDUSTRIAL SECTOR POLICY LOAN (LOAN 3087-ME) BASIC DATA SHEET LOAN POSITION (Amounts in US$ Million) As of March 31. 1994 Loan Original Disbursed Cancelled RMaid Oustanding 3087-ME 500.0 497.5 2.5 497.5 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS (US$ Million) FY90 EX21 Appraisal Estimate 500 500 Actual 497 497.5 Actual as % of Estimate 99.4 99.5 Date of Final Disbursement: June 26, 1991 PROGRAM DATES ORIGINAL ACTUAL Appraisal Mission Departure 10/16/88 10/16/88 Negotiations 03/06/89 03/06/89 Board Approval 06/13/89 06/13/89 Loan Signature 06/16/89 06/16/89 Effectiveness 06/29/89 06/29/89 Closing Date 06/30/90 06/30/91 - iv - SUPERVISION RATINGS (Form 590) Evaluation Development Legal Management Availability I=a Overall Obiectives Covenants Performanc Fundj 1989 2 1 2 1 1 1990 1 1 1 1 1 1991 2 1 2 1 1 STAFFINPUT (Staffweeks) EYS2 EY20 E . EY22 I Preparation 6.3 - - - 6.3 Appraisal 23.0 - - - 23.0 Negotiations 32.2 - - - 32.2 Supervision 1.8 25.9 2.0 0.2 29.9 TOTAL 63.3 25.9 2.0 0.2 91.4 MISSION DATA No. of No. of Total Date of Month/Year WMU er Wk Bwd Appraisal 10-11/88 2 05/89 Supervision I 10/89 1 3 3 11/89 Supervision II 11/89 1 2 2 12/89 Supervision W 06/90 1 2 2 07/90 Supervision IV 11/90 1 1 1 01/91 Completion 06/92 2 2 4 - -v- OTHER PROJECT DATA Borrower/Executing Agency: Nacional Financiera S.N.C. Follow-on Projects: Project: Interest Support Loan Loan No.: 3159-ME Amount: US$1.26 billion Project: Road Transport and Communications Project Loan No.: 3207-ME Amount: US$380 million Project: Science and Technology Infrastructure Project Loan No.: 3475-ME Amount: US$189 million - vii - PERFORMANCE AUDIT REPORT MEXICO INDUSTRIAL SECTOR POLICY LOAN (LOAN 3087-ME) EVALUATION SUMMARY Introduction Export-Import Bank of Japan cofinanced the project with a loan of US$300 million. The 1. The Industrial Sector Policy Loan three adjustment operations provided a (ISPL) was prepared in 1988 when the comprehensive and complementary package of Mexican economy was in a state of crisis. Bank assistance in support of the Mexican Inflation was at triple-digit levels, real GDP Government's efforts to stabilize the economy growth per capita was negative, the budget and resume growth. They also provided deficit was above 9 percent of GDP, and there critical financial resources, US$1.6 billion in was a huge external debt overhang. total, at a crucial time when Mexico was concluding agreements with its commercial 2. The incoming Salinas Administration creditors. was prepared to take extraordinary measures to stabilize the economy and resume growth. Program Objectives and Design The policy agenda included consolidating the macroeconomic stabilization achieved through 5. Policy Content. The ISPL was an the PACTO (agreements with labor, business unusual adjustment operation in that it focused and farming on the elements of a price primarily on domestic deregulation. Its basic stabilization program), proceeding further with objective was to stimulate private sector the trade reform initiated in 1986, adopting a investment and growth through the debt and debt service reduction plan, and modernization and deregulation of the implementing far-reaching domestic industrial sector. The ISPL embodied a wide- deregulatory and financial sector reforms, ranging deregulatory program aimed at: 3. The Bank's economic and sector work, * Improving factor quality and mobility along with that of Mexican academicians, pertaining to foreign direct investment assisted the Government in formulating a (FDI), technology transfer, and labor; deregulatory program. This sector work served as the basis for the design of the ISPL. * Promoting non-distorted goods markets through further trade reform; 4. The ISPfn of US$500 million was presented to the Board in June 1989, along * Deregulating four priority industrial with a Financial Sector Adjustment Loan and subsectors (automotive, pharmaceuticals, a Public Enterprise Reform Loan. The petrochemicals and micro-computers); and - viii - * Improving the competitiveness of the taken ahead of study completions, based on trucking industry. the preliminary results of the studies or on progress made in discussions with industry 6. Financial Plan. It was recognized that representatives. A summary of the main the success of Mexico's growth-oriented actions taken follows: reform program and stabilization efforts critically depended on access to external Sweeping changes to FDI rules financing and debt relief. Therefore, the ISPL significantly liberalized provisions and the other two loans approved concurrently affecting foreign ownership, transparency, also had the immediate objective of providing and investment procedures. The substantial financial resources to help the institutional set-up for investment Mexican Government meet its resource promotion was also strengthened and a mobilization targets for FY89. Through private/public sector Mexican Investment support of these operations, the Bank also Board established in 1990. expected to play a catalytic role in encouraging international flows and debt relief Major changes were introduced to to Mexico. Thus, the timing and size of these deregulate technology transfer, free up operations were designed primarily to support royalty payments and develop a the Mexican debt restructuring program. promotional agency and data bank for technological modernization. The 7. Program Design. The ISPL was industrial property law was completely designed with open-ended second tranche overhauled, bringing regulations on the release conditions linked to the completion of acquisition and licensing of patents, studies and agreements on resulting action trademarks, technical assistance and other plans. This open-ended conditionality was intellectual property into conformity with driven, in part, by a desire to be politically international practice. sensitive to an incoming administration that needed time to build consensus on the actions A study on labor mobility contributed to a required and to safeguard confidentiality until better understanding of the determinants it was politically expedient to take the of Mexican labor mobility and necessary measures. It also allowed the new productivity, particularly regarding the team to get fully acquainted with some of the impact of labor laws and collective technical details and to make the necessary bargaining agreements. However, the structural and personnel changes in the political difficulties in modifying the labor implementing agencies. In all some 9 major laws were underestimated and they remain studies were expected to be completed by unchanged, even under the North second tranche release. American Free Trade Agreement (NAFTA). Implementation *Various decrees were issued, based on 8. The ISPL was a highly successful agreements with industry representatives, operation. In many instances the measures aimed at deregulating four priority taken were in advance of agreed schedules and industrial subsectors. These resulted in exceeded targets. Most of the actions were the gradual elimination of, inter alia. - ix - quantitative restrictions (QRs), domestic 11. The Deregulation Program. Mexico's content requirements (DCRs), production deregulatory program went well beyond the controls and entry barriers. measures embodied in the ISPL. Since 1991, further deregulation of the economy has * Further progress was made on trade encouraged a private sector role in, inter alia, liberalization, particularly in reducing the banking sector (through deregulation and QRs and voluntary export quotas. the reprivatization of the commercial banks), electricity production, and building and * The rapid deregulation of the trucking operating infrastructure. sector was perhaps the most impressive. The reforms included removing route 12. While deregulation has been wide- restrictions, streamlining and improving ranging, it is still not complete. Significant transparency of concession and permits; regulatory barriers remain at the state and eliminating price restrictions; allowing local levels, where authorities operate much private sector entry into container the same as in the past, with too many services; and abolishing mandatory use of regulations, and too much bureaucracy and cargo centers. rent-seeking. The judicial system does not allow for the efficient enforcement of Evaluation contracts, and labor mobility within firms (reliance on traditional seniority-based 9. Economic Reform. The Government's promotions and rigidity in the definition of stabilization efforts (debt rescheduling, fiscal jobs) remains an issue . Furthermore, legal austerity, tax reforms and divestiture) and reforms are still needed to support and give structural reforms (trade liberalization, permanence to many of the measures already deregulation and financial sector reform) met undertaken. with considerable success, particularly during the period 1989-91. The program succeeded 13. Institutional Development. The in curbing inflation from triple digit levels at process of deregulation did away with the height of the crisis to an average annual redundant institutional machinery, enhanced 21 percent in 1989 - 1992 and an estimated 8 the ability of existing institutions to function percent in 1993; bringing about positive real more effectively through the streamlining of growth per capita; and restoring confidence in procedures, and created new institutions where the economy, which encouraged capital necessary. The project preparatory work and inflows and permitted Mexico's return to the studies contributed to the strengthening of international capital markets. the Government's analytical and policy- form ulating capabilities. 10. While the fundamentals are in place for private-sector-led development, the 14. There are three interesting features of Government still has to continue its efforts the Mexican deregulatory program: its towards eliminating growth barriers management, the speed with which it was (especially infrastructure bottlenecks), accomplished, and the absence of serious deepening the reforms within and across political opposition. sectors, and addressing the poverty and environmental concerns. -x- * The administrative control and factors. Nonetheless, some initial indicators management of the program was placed in in key areas are noted below: a special unit within the Ministry of Trade and Industrial Development with direct Foreign Investment - From 1989 to June access to the President's office. The 1993, new authorized foreign investment, program was centralized, managed well including portfolio investments, is and decisions were approved quickly. estimated to have totalled US$32 billion, far exceeding the Salinas Administration's * The deregulatory program initially relied goal of attracting US$24 billion during its more on administrative solutions and new six-year tenure. Net annual flows of regulations issued by presidential decree, foreign direct investment increased from than on changes in the laws. Thus, about US$2.6 billion in 1988 to about actions could be taken quickly. The US$5.4 billion in 1992. A new law on program has more recently moved to the FDI, recently enacted, incorporates the politically difficult task of proposing the changes in the regulations plus the necessary bills to Congress for eventual implications of NAFTA. enactment into law. * Technology - As a result of deregulation, * The absence of any serious political the number of patents registered is opposition appears related to: the estimated to have doubled from 4,400 in widespread recognition of the need for 1988 to about 8,700 in 1993. A higher fundamental economic reform following number of trade marks has also been the oil shocks; private sector confidence processed and activity in combatting in the Government's commitment and piracy has been more successful. A ability to implement far-reaching reforms Mexican Institute for Industrial Property (already demonstrated by the measures was created in December 1993. taken to stabilize the economy and liberalize trade); and the sequencing of * Trade Liberalization - Mexico has moved those reforms. Trade liberalization from being a largely closed economy to brought to the forefront the need for one of the more open economies in Latin deregulation in order for firms to be America. NAFTA will serve to complete internationally competitive. Mexican the process. Trade liberalization appears officials contend that, without the trade to have contributed to increased efficiency reforms, it would have been difficult to in the manufacturing sector. Gross labor gain acceptance of the importance and productivity in the sector increased at a 3 urgency of widespread internal percent average annual rate over 1986-89 deregulation. and accelerated to 4.7 percent over 1989- 92. 15. This audit focuses on the short-term impact of the measures adopted under the * Trucking - The results of deregulation ISPL. The full macroeconomic effects are not have been impressive: large numbers of possible to determine at so early a stage, and new entrants have registered, service to isolate, given the effects of quality has improved significantly, and contemporaneous changes in other economic prices dropped by about 20 percent in real - x1 - terms within the first year (1990). More signalled to the outside world that Mexico's than 60,000 new truck licenses have been reforms were likely to lead to improved issued and new services related to the stability, faster growth and increased trucking industry have also developed. creditworthiness. Role of the Bank and the Borrower Sustainability 16. The success of the ISPL was primarily 20. The benefits derived from the reforms due to the strong political commitment to supported under the ISPL are likely to be undertake bold and sensible economic sustained and strengthened in the future. reforms. The Bank was able to engage in an Although economic challenges lie ahead, the excellent policy dialogue with highly qualified macroeconomic situation is stable, the fiscal technocrats, who had a clear understanding of, and reserve position is strong; external and agenda for, the reforms required. A creditworthiness is good; there are well- frank intellectual exchange took place, based structured incentives and strong institutions; on mutual trust and respect. The Resident the regulatory framework is more conducive Mission in Mexico facilitated the process by to increased and efficient private sector maintaining an open and frequently used participation in the economy; the economic channel of communication. management team is competent; and the political commitment to address the 17. The ability to rapidly elaborate on a outstanding issues appears to remain strong. comprehensive deregulatory program reflected With the ratification of NAFTA, the economic the quality and depth of the background ESW. reform process will not only continue, but Mexican economists who had begun detailed acquire additional momentum. Thus, studies on the effects of deregulation provided Mexico's reforms have the underpinnings of inputs to the Bank's work. The Bank helped economic soundness, demonstrated success, finance their studies under unused technical and continuing momentum needed for long- assistance components from existing loans, term sustainability. 18. Bank staff also showed understanding Lessons of E sperience of the political process by designing the ISPL with open-ended conditionality, even though, 21. The success of the ISPL resulted from in many instances, they were aware of the the confluence of many factors, including: a Government's agenda at the outset. Government with a dynamic, reformist approach and a strong mandate to undertake 19. The Bank's role as a resource bold reforms; capable and highly qualified mobilizer was clearly important, as was the economic management teams both in Mexico role of the IMF. (In May 1989, the and the Bank who were willing to take Government and the IMF reached an initiatives; a fundamental meeting of minds agreement on an Extended Fund Facility for between the Government and the Bank on the SDR2.8 billion.) Mexico signed an agreement reform program; and preparedness on the with its commercial creditors in February Bank's part to commit major resources to 1990. The Bank's support, along with that of support a decisive and comprehensive reform the IMF and the Export-Import Bank of Japan, program. The overall success of Mexico's - xi - adjustment programs confirms the supportive and not a substitute for local appropriateness of the Government's strategy initiatives and, where possible, the Bank for dealing with stabilization, structural should work together with the local adjustment and debt reduction. The academic community. experience also shows that the Bank can play an important catalytic role in the mobilization Linking second tranche conditionality to of international financial flows. the completion of studies rather than specific well-defined measures should be 22. Although there were unique and ideal approached with caution. While not the circumstances surrounding this operation, its case under this project, in other success may serve as an interesting example circumstances it could lead to serious for other countries embarking on a process of delays in second tranche release, make deregulation. Some lessons of experience compliance difficult to monitor, and result follow: in a program that falls short of original expectations. * Strong political commitment and capability to undertake a program of While political sensitivity regarding public reforms, a meeting of minds between the disclosure of Government intentions is Government and the Bank on the direction important, Bank staff should ensure that and pace of reforms, and decisive action the potential for learning lessons (through and sustained momentum are critical the existence of an adequate paper record elements in a successful adjustment of confidential understandings) is not operation. foregone in the process. * Certain preconditions - credible progress Conclusions towards macroeconomic stabilization and trade reform - minimize political 23. Mexico's reform program stands out opposition and make for successful as a success story in Latin America. The deregulatory reform, success is essentially due to the unwavering and unambiguous commitment on the part of * A wide-ranging deregulatory program the Government to undertake the reforms benefits from a centralized and well required to stabilize, liberalize and organized institutional set-up, close to, or privatize the economy. The scale and with direct access to, a power center, intensity of the Bank's financial and intellectual support, at a time when * While deregulatory reform at the federal commercial lending had been withdrawn, were level is the important first step, legal also clearly critical to Mexico's success and reforms, and reforms at the state and local its restoration to commercial creditworthiness. levels must not be ignored. 24. Based on this audit, the outcome of * Both the content and conduct of this project is rated as highly satisfactory. background ESW are important for Institutional development achievements are successful policy dialogue and project rated as substantial and sustainability as likely. formulation. Bank fW should be PERFORMANCE AUDIT REPORT MEXICO INDUSTRIAL SECTOR POLICY LOAN (LOAN 3087-ME) I. INTRODUCTION 1. Following a period of highly expansionist policies, the Mexican economy experienced one of its worst crises in 1982. It was triggered by a fall in oil prices and a rise in international interest rates, and characterized by rising fiscal and balance of payments deficits, soaring inflation, and massive capital flight. It led to the refusal of Mexico's external creditors to roll- over the public debt and, eventually, to the Government's decision to suspend external debt service payments. 2. The crisis forced the Government to adopt a stabilization program and seek external debt relief. It also changed the Bank's perspective on its role in Mexico. The Bank's strategy, particularly for the latter half of the decade, shifted in the direction of sectoral adjustment lending, as it gradually assumed the role of "lead lender" and catalyst for international financial flows. The Bank's vigorous support of Mexico's adjustment program in the FY86-90 period is reflected in loans totaling almost US$9.5 billion, about half of which were quick disbursing sector adjustment and interest support loans. During this period, there was limited lending for physical infrastructure, poverty alleviation and the environment. Present Bank strategy places special emphasis on these problems. 3. At the time the Industrial Sector Policy Loan (ISPL) was prepared in 1988, the Mexican economy was still in a state of crisis. Inflation remained at triple-digit levels, real GDP growth per capita was negative, the budget deficit was above 9 percent of GDP, and there was a huge external debt overhang. 4. The incoming Salinas Administration was prepared to take extraordinary measures to stabilize the economy and resume growth. The policy agenda included deepening expenditure cuts, increasing taxes, extending the macroeconomic stabilization gains achieved under the PACTO', proceeding further with the trade reform initiated in 1986, adopting a debt and debt service reduction plan, continuing the large-scale privatization of public enterprises, and implementing far-reaching domestic deregulatory and financial sector reforms. 5. Trade liberalization had brought to the forefront the need to be internationally competitive. Policy makers within the Government realized that, to achieve the desired I In December 1987, the Mexican Government implemented a series of agreements with representatives of business, labor and farming on the key elements of a far-reaching price stabilization program which was called the "Economic Solidarity Pact" (PACTO). Subsequently, in December 1988 it was renamed the "Economic Stabilization and Growth Program" (PECE). -2- structural change and generate the required supply response, trade liberalization would need to be accompanied by domestic deregulatory reform. It was recognized that pervasive administrative regulations, entry restrictions and government participation in key sectors had favored the development of select groups of industries, reduced competitive pressures, and discouraged efficient change amongst producers. The Bank's economic and sector work (ESW), along with that of Mexican academicians, assisted the Government in formulating a program for regulatory reform.2 This sector work was an important input into the preparation of the ISPL, and served as the basis for the policy dialogue between the Government and the Bank. 6. The ISPL was presented to the Board on June 13, 1989, along with two other sectoral adjustment operations (the Financial Sector Adjustment Loan and the Public Enterprise Reform Loan).' These three loans, totalling US$ 1.6 billion, provided a comprehensive and complementary package of assistance in support of the Government's ongoing policy reforms aimed at stabilizing and restructuring the economy and fostering growth. They also provided vital financial support to the adjustment process at a time when agreements were being concluded with Mexico's commercial creditors. 11. PROGRAM OBJECTIVES AND DESIGN Policy Content 7. The basic objective of the ISPL was to stimulate private sector investment and growth within the framework of an internationally competitive industrial structure responsive to technological change. The ISPL focused on improving factor quality and mobility, promoting non-distorted goods markets, rationalizing the previous sectoral approach to industrial development, and improving the competitiveness of a key service sector, the trucking industry. The program of actions embodied a wide-ranging deregulation effort with the following specific objectives: * Foreign Direct Investment (FDI). Promotion of FDI through the liberalization and greater transparency of regulations, harmonization of tax treatment and active investment promotion; 2 See "Mexico - Industrial Policy and Regulation", Report No. 8165-ME, August 15, 1990. Although the report was not published until 1990, it was completed in mid-1989. This report focussed on, inter alia, policies and regulations affecting the manufacturing goods and factor markets, and the transportation sector. 3 See PAR, Mexico - Financial Sector Adjustment Loan (Loan 3085-ME), Report No.12077 dated June 24, 1993 and PAR, Mexico - Public Enterprise Reform Loan (Loan 3086-ME), Report No. 10849 dated June 30, 1992. - 3 - + Industrial Technology. Improvement in technology through the attainment of better access to foreign technology and promotion of domestic research and development activities; * Sector Programs. Improvements in efficiency of resource allocation through deregulation of priority sector programs in the automotive, petrochemicals, pharmaceuticals and microcomputer subsectors; * Goods Markets. Removal of entry barriers and simplification of administrative and regulatory procedures for goods markets; * Trucking Sector. Removal of impediments to competition and efficiency in the trucking sector; * Trade Liberalization. Further reductions in quantitative restrictions (QRs) and studies leading to action on export quotas and unfair trade practice regulations; and * Labor Mobility. Improvements in inter-industrial labor mobility. Financial Plan 8. It was recognized that the success of Mexico's growth-oriented reform program and stabilization efforts critically depended on access to external financing and debt relief." Therefore, the financial package of US$ 1.6 billion provided by the Bank, under the ISPL and the other two loans approved concurrently, also had the immediate objective of providing quick- disbursing funds to help the Government meet its resource mobilization targets for FY89. Through support of these operations, the Bank also expected to send a strong signal to Mexico's external creditors regarding its confidence in the Government's reform program and its support for enhanced resource flows. An amount of US$125 million from the second tranche release was set aside from each of the adjustment operations for debt reduction. The timing and size of these operations were thus designed primarily to support the Mexican debt restructuring program. 9. The ISPL loan amount of US$500 million was to be disbursed in two tranches over a six- month period and tranche releases were made contingent on Mexico's achieving substantial progress in obtaining adequate financing for 1989-1990 and beyond. To allow Mexico to maintain a comfortable foreign exchange reserve position, the Bank agreed to accelerate disbursements by establishing a Special Account in the amount of US$100 million. Second 4 At end-1988, Mexico's external financing gap over the period 1989-94 was estimated to be about US$36.5 billion. The total foreign debt outstanding at the time amounted to about US$100 billion and more than 90 percent of it was public or publicly guaranteed debt. -4- tranche release was contingent on evidence that payments out of the Special Account had been made exclusively for eligible imports. Program Design 10. All three sectoral adjustment operations were rapidly put together to lend support to the "Brady" debt restructuring initiative. Background ESW provided the foundations for the ISPL and enabled the Bank to quickly assemble a comprehensive program of support for deregulatory reform. The Bank's ESW benefitted from work on the effects of regulation carried out by Mexican academicians and Government officials, including staff from the research department of the central bank. 11. The incoming administration, which included many of the people who had participated in the sectoral studies, had a clear agenda for deregulatory reform.' However, it needed time, in many instances, to build consensus on the actions required and to safeguard confidentiality until it was politically expedient to take the necessary measures. There was also a need, in certain areas, to get acquainted with some of the technical details and to make the necessary changes in the structure and the personnel of some of the implementing agencies. Thus, the ISPL was designed with open-ended second tranche release conditions linked to the completion of studies and agreements on resulting action plans. This open-ended conditionality displayed the Bank's flexibility and willingness to be responsive to unfolding events and to the political concerns of an incoming administration. This approach was possible only because, in most instances, Bank staff were aware of, and in agreement with, the Government's reform agenda at the outset and were confident in the Government's commitment and ability to implement it. III. PROGRAM PERFORMANCE 12. The ISPL was approved by the Board on June 13, 1989 and became effective on June 29, 1989. The first tranche of US$250 million was released upon effectiveness, while the second tranche of US$ 247 million was released in February 1990. Disbursements were made against a negative list of imports. An amount of US$3 million had been set aside for technical assistance to finance studies necessary to identify further areas for liberalization and deregulation. Only US$ 500,000 of these funds were used since local, rather than international, consultants were hired to carry out the work. The remaining US$2.5 million was cancelled. Delays in the implementation of this component resulted in the loan closing one year later than expected, on June 30, 1991. 13. Most of the reforms envisaged under the ISPL were successfully implemented and, in many instances, the measures taken were in advance of agreed schedules and exceeded targets. All the loan conditions were complied with, except the completion of the various studies, because the time allotted for this proved to be too short. However, in most instances, the ' The initiative for all three adjustment loans came from the de la Madrid government, while the appraisals were carried out in close coordination with members of the Salinas administration team. -5- Government took appropriate actions ahead of study completions based on preliminary results and progress in the dialogue with representatives of the sectors involved. Only one study on the trucking sector was completed by second tranche release. As discussed later, many of the studies, when eventually completed, provided important inputs for follow-on Bank projects. 14. This audit focuses on the short term effects of some of the specific measures supported under the ISPL. The full macroeconomic effects are impossible to determine at so early a stage, and difficult to isolate, given the effects of contemporaneous changes in other economic factors. Nonetheless, some initial indicators are discussed below. Improvements in Factor Quality and Mobility 15. Foreign Direct Investment (FDI). In 1989, the Government made sweeping changes to FDI rules, which significantly liberalized provisions affecting foreign ownership, increased transparency, and simplified investment procedures. These rules supplanted the existing, restrictive provisions governing FDI and liberalized the interpretation of the 1973 foreign investment law. The institutional set-up for investment promotion was also strengthened, under the leadership of the Ministry of Trade and Industrial Development (SECOFI), and a series of agreements were signed with local governments to promote FDI. A private/public sector Mexican Investment Board was also established in 1990 to assist foreign investors. 16. Foreign investment flows reacted strongly both to these measures and to the economic recovery, as shown in Graphs 1 and 2 below. From 1989 to June 1993, authorized foreign investment (including portfolio investment) is estimated to have reached about US$32 billion, far exceeding the Salinas Administration's goal of attracting US$24 billion during its six-year tenure. Over 50 percent of the FDI has been in manufacturing activities and a significant portion of the remainder in services. GRAPH 1: ACTUAL NET FOREIGN DIRECT INVESTMENTY GRAPH 2: AUTHORIZED FOREIGN INVESTMENTY ANNUAL FLOWS (Billions of dollars) CUMULATIVE STOCK (Billions of Dollars) 4D 50 20 1986 1987 1988 1989 1990 1991 1992 1986 1987 1980 1989 1990 1991 1992 Year Yea- Y Excludes portfolio investments. 1 Includes portfolio investments. Source: IMF Balance of Payments Statistics Source: SECOFI -6- 17. A new law on FDI, which incorporates the 1989 changes in the regulations and the implications of the North American Free Trade Agreement (NAFTA), has recently been enacted. The NAFTA investment chapter, inter alia, forbids restrictions on capital movements (except for prudential or balance of payments reasons), eliminates performance requirements, and provides for further sectoral liberalization, particularly in the financial sector. The new law extends NAFTA treatment to non-NAFTA nations. 18. Technology. The Government introduced sweeping changes in January 1990 aimed at encouraging technology transfer, freeing up royalty payments and developing a promotional agency and data bank for technological modernization. The Government is also trying to shift the relative burden for investment in technology from the public to private sector, and the public research and development centers are being rationalized. 19. The findings of the various studies supported under the ISPL provided important inputs into the complete overhaul of the industrial property rights law enacted in 1991 and into the Bank's follow-on Science and Technology Infrastructure Project. Box 1 provides highlights of the new law. With the enactment of this law and amendments to the Copyright Law in 1991, Mexico has similar provisions relating to industrial property protection to those in effect in the United States and Canada. The remaining agenda is to create an administrative capacity to enforce the new laws. For this purpose, the Mexican Institute for Industrial Property (IMPI) will be created shortly. IMPI's policy will be to modernize and maintain an advanced national system for the protection of industrial property rights, including a good information network. 20. The impact of the changes is already noticeable. The number of patents registered increased from 4,400 in 1988 to 6,961 in 1992, and is expected to have reached 8,700 in 1993. A higher number of trade marks has also been processed and activity in combatting piracy has been more successful. Box 1: Highlights of 1991 Law on Industrial Property Rights Industrial Property: * Patents given for 20 years for almost all types of inventions. * Utility models registered to protect simple inventions that generally occur in small enterprises. * Industrial and commercial secrets protected. * Protection of registered trademarks extended to 10 years (renewable) and conditions for registration and use simplified. * Administrative and judicial procedures strengthened for defence against unfair competition. Rights of Authors: * Computer programs protected against copying for 50 years. * Rights of producers of records protected. * Precise definition of protected works produced in public to avoid unattributed use. * Sanctions against infractions and delinquents. Source: SAR, Mexico: Science and Technology Infrastructure Project. Report No. 10468-ME. -7- 21. Labor Mobility. Under the ISPL, ongoing Government and Bank efforts to strengthen labor retraining were to be supplemented by a study of ways to improve labor mobility. The study was not completed until 1991, but the Bank approved second tranche release based on the progress made in a number of areas, including proposals to review collective bargaining procedures, training, and wages and salaries. 22. The study on labor mobility contributed to a better understanding of the determinants of Mexican labor mobility and productivity. The study found that: (a) in contrast with the past, the terms of collective agreements had responded flexibly to the exigencies of industrial restructuring, with the share of labor costs decreasing from 35 percent of product cost in 1982 to only 26 percent in 1988, and with wages becoming more closely linked to job and industry performance; and (b) costs relating to restrictions on the hiring and firing of workers represented only a small fraction of industrial firms' total labor costs and were thus less of a barrier to the mobility of labor than first thought. 23. The study also led to several other important studies, including, inter alia: (a) a comparative study of labor productivity in Mexico, Canada and the United States; and (b) a study of total Mexican factor productivity growth and its underlying causes during the period 1970 - 1989. The study was also an input into the Labor Market and Productivity Enhancement Project signed in 1992 and the 1990-94 National Program for Training and Productivity. It also provided inputs for the introduction of wage earner productivity bonuses at the firm level. 24. The political difficulties involved in modifying the labor laws were underestimated and they remain unchanged even under NAFTA. While a strict interpretation of the laws would suggest a restrictive and over-regulated labor market, the evidence shows that, in practice, firms enjoy considerable flexibility with some categories of labor (such as temporary and subcontracted workers and non-unionized "white collar" workers). However, labor mobility within firms (reliance on traditional seniority-based promotions and rigidity in the definition of jobs) remains an issue. Deregulation of Sectoral Programs 6 25. Between 1989 and 1990, the Government issued various decrees, based on agreements with industry representatives, aimed at deregulating four industrial subsectors (automotive, pharmaceuticals, petrochemicals and micro-computers) that had previously enjoyed considerable protection from the Government. The process of reaching agreements was facilitated by the Government's willingness to offer attractive transitional terms (such as, for example, permitting the automobile companies to import a broader range of vehicles and reducing requirements to 6 Sectoral programs were established in the early 1980s to develop certain target industries and to alleviate Mexico's balance of payments difficulties. The programs used import restrictions, domestic content requirements, export quotas, foreign exchange balance requirements, tax incentives, barriers to entry, and restrictions on FDI to accomplish their objectives. Success in meeting these objectives, particularly those relating to export growth and the attainment of sectoral trade balances, was at the cost of reduced economic efficiency and decreased competition. -8- maintain trade balances). Highlights of the deregulatory program are shown in the following box. Box 2: Highlights of Deregulation in Priority Industrial Sectors Automotive * Gradual opening of domestic market to imports. * Easing of domestic content rules. * Elimination of controls on production and models manufactured. * Easing of requirements on foreign trade balances. Pharmaceuticals * Gradual elimination of QRs and DCRs. * Gradual decontrol of prices. * Elimination of public procurement preferences to domestic producers. * Transparent quality and health standards. * Currently only 10-12 pharmaceuticals remain to be liberalized. Petrochemicals * PEMEX's (the national oil company) monopoly in the production of basic petrochemicals drastically reduced to 20 products. * Restrictions on production of over 700 secondary products eliminated Micro-Computers * QRs, DCRs and trade balances completely eliminated by 1991. Source: SECOFI 26. Some indication of the initial impact of deregulation of these programs may be obtained by examining the relationship between non-maquiladora7 imports and exports in each of the subsectors (Table 1). Since these programs were set up to protect and promote the growth of the domestic industry, deregulation would be expected to raise imports, thus lowering the ratio of exports to imports. This happened in the automobile and micro-computer subsectors. However, in the petrochemicals subsector, a long-term trend towards increased exports predominated, while in the pharmaceuticals subsector, liberalization had little discernible impact. The decline in the overall export/import ratio also reflected significant appreciation of the real exchange rate after 1986. 27. While the full impact of sectoral liberalization on restructuring and productivity enhancement will probably not be felt for some years, a study of total factor productivity growth from 1987 to 1991 nonetheless shows strong increases in the automobile (23.3 percent), ' Maquiladoras are assembly plants set up along the border with the United States that import components and export finished goods to the United States free of either country's duties. With NAFrA, the distinction between maquiladoras and other manufacturing operations will disappear. -9- electronics (7.0 percent) and basic petrochemicals (14.1 percent) sub-sectors. Pharmaceuticals show lower productivity growth at 3.8 percent during that period. ' Table 1: SUBSECTOR EXPORT - IMPORT RATIOS 1987 1988 1989 1990 1991 1992 Petrochemicals 22.6 31.6 29.0 91.2 54.6 52.0 Pharmaceuticals 17.4 16.9 11.3 14.2 20.4 20.4 Automotive 390.5 169.9 178.5 90.9 81.8 69.8 MicroComputer 46.0 50.9 51.4 48.5 35.1 24.9 Total Exports/ Imports 160.0 108.8 97.2 86.7 70.8 57.2 Source: World Bank Further Trade Liberalization 28. The process of trade liberalization, initiated in 1986 and supported by two Bank trade policy loans, received further support under the ISPL. Progress made in reducing quantitative restrictions (QRs) and export quotas exceeded requirements for second tranche release. While a study of unfair trade practices was not completed, an acceptable action plan based on its preliminary results was submitted to the Bank. It involved measures to ensure conformity with the GATT Code and also to ensure that internal practices agreed with the Government's liberalization strategy. 29. Over the last few years, Mexico has moved from being a largely closed economy to one of the more open economies in Latin America. NAFTA is an important step in completing the process. The few QRs that remain in industry apply to under 10 percent of the standard industrial classification, while the average tariff rate is down to 8.5 percent. Most export quotas have been removed and almost all restrictions on domestic prices have been lifted. Table 2 on the following page shows progress from 1985 to 1991. 30. Trade liberalization appears to have contributed to increased efficiency in the manufacturing sector. Gross labor productivity in manufacturing increased at a 3 percent average annual rate over 1986-89 and accelerated to 4.7 percent over the 1989-92. Total factor productivity growth also appears to have increased from 0.7 percent over 1970-81 to 2.9 percent over 1983-89, although the latter figure is biased upwards by the fact that 1983 was a recession year. Despite the overall improvement compared to the pre-reform period, Mexico's ' Alejandro Reynoso, "Analysis Sectorial de Ia Productividad en Mexico", mimeo, 1992. The estimated productivity increases partly reflect measures implemented before deregulation under the ISPL and may also overstate productivity growth in absolute terms. However, productivity growth in the automobile, micro-computer and petrochemicals sectors was relatively strong compared with most other subsectors. - 10 - manufacturing productivity growth still remains low compared with that in other countries, particularly Korea. ' Table 2: TRADE LIBERALIZATION, 1985-1991 Jun85 Jun86 Jun87 Jun88 Dec89 Dec90 Dec91 Import Licensing- 92.2 46.9 35.8 23.2 20.3 17.4 17.4 Reference Prices!' 18.7 19.6 13.4 0.0 0.0 0.0 0.0 Tariffs-Maximum 100.0 45.0 40.0 20.0 20.0 20.0 20.0 -Average ' 23.5 24.0 22.7 11.0 12.8 12.4 12.4 Export ControlsA' n.a. n.a. n.a. 23.4 17.9 17.6 17.4 a/ Percentage coverage of production of tradeables; 1986 weights. b/ Weighted by production of tradeables; 1986 weights; excludes 5 percent surcharge. Source: World Bank, Country Economic Memorandum. Improved Competition in Trucking Services 31. Prior to 1989, regulations in the trucking sector repressed prices and restricted entry through, inter alia, a system of route concessions and permits to haul products. Committees decided on who obtained additional concessions and fifteen families controlled the main corridors. In 1990, the Government implemented rapid reform of the trucking sector by: removing the route restrictions; streamlining and improving the transparency of concessions and permits; eliminating price restrictions; allowing private sector entry into container services; and abolishing mandatory use of cargo centers. The results of deregulation have been impressive: large numbers of new entrants have registered, service quality has improved significantly, and prices dropped about 20% in real terms in 1990. In the past three years, more than 60,000 new truck licences have been issued. The supply of trucking services has grown not only through new entry, but through more efficient use of existing capacity. New services related to the trucking industry have also developed. The remaining agenda is the enactment of a new law which will incorporate the regulations adopted in 1990. IV. EVALUATION AND SUSTAINABILITY 32. The evaluation of the ISPL needs to take account of the two major objectives the Bank had in supporting this operation: ' Sectoral performance information is from the latest Country Economic Memorandum (CEM) and the country data base. See the CEM for more details. The Bank is also currently engaged in a study of Mexican productivity. - 11 - * To assist the Mexican Government's ongoing reform program by providing advice and support for domestic deregulatory reform; and * To assist the Government at a time of financial crisis by rapidly transferring substantial resources and playing a catalytic role in the mobilization of external funds. Economic Reform 33. As one of the primary goals of the Bank's adjustment lending to Mexico was to support the Government's economic reform program, it is important to review the overall macroeconomic results. Table 3 on the following page shows that, particularly during 1989-92, the Government's stabilization efforts (debt rescheduling, fiscal austerity, tax reforms and divestiture) and structural reforms (trade liberalization, deregulation and financial sector reform) met with considerable success. The program succeeded in, inter alia: curbing inflation from triple digit levels at the height of the crisis to an average annual 21 percent in 1989 - 1992 and an estimated 8 percent in 1993; bringing about positive growth per capita; increasing the GDP share of private investment; and restoring confidence in the economy which has encouraged large capital inflows and permitted Mexico's return to international capital markets. 34. The scope and decisiveness of the Government's overall program and the speed with which it was carried out are indicated by the following: (a) government spending was cut from 45 percent of GDP in 1986-87 to 25 percent in 1992 (16 of the 20 percentage point reduction came from lower interest payments); (b) public non-oil revenues were raised from 12 to 16 percent of GDP from 1985 to 1992; (c) public enterprises were reduced in number from about 1,200 in 1982 to 217 in 1992; (d) the public sector economic balance (excluding revenues from the sale of public enterprises) shifted from a deficit of 14.5 percent of GDP in 1986 to a surplus of 1.6 percent in 1992; and (e) M2 growth was cut from 141 percent in 1987 to 21 percent in 1992. 35. The keys elements contributing to the success of the reform program were the fiscal austerity, the opening up of the economy, and the new, less interventionist, role of the Government. Regarding the sequencing of reforms, the macroeconomic stabilization (initiated in 1983) and trade reform (between 1985 and 1988) efforts preceded the deregulation, privatization and major financial sector reforms, and were crucial in restoring confidence in the economy.o The massive privatization program provided an easy and profitable investment outlet for investors encouraged by the more favorable economic environment. '0 Financial sector reforms began with the gradual deregulation of interest rates during the mid-1980s and culminated with the privatization and deregulation of the banking system over 1988-92. New rules of the game had to be established prior to the initiation of overall deregulation and privatization. - 12 - Table 3: MACROECONOMIC INDICATORS (Percentages) 1987 1988 1989 1990 1991 1992 Real GDP Growth Rate 1.9 1.2 3.3 4.4 3.6 2.6 Real GDP/Capita Growth Rate 1' 0.0 -0.5 1.6 2.7 1.7 0.6 Industrial Production Growth Rate 3.3 2.4 5.5 5.7 3.4 2.7 Consumer Price Index Change 131.8 116.8 18.6 26.7 22.7 15.5 Public Sector (Deficit) Surplus/GDP (Economic Balance) -14.4 -9.3 -4.8 -2.2 -0.3 1.6 Public Sector Debt/GDP 1' 87.5 66.9 56.0 49.7 43.4 31.4 Debt Service/Exports 3 40.1 48.0 41.3 26.3 30.2 44.4 Exports/GDP 19.5 16.8 16.0 15.8 13.9 12.6 Imports/GDP 13.4 15.3 16.2 16.9 17.0 19.1 Current Account/GDP 2.7 -1.7 -3.0 -2.9 -4.8 -6.9 Private Gross National Saving/GDP 30.4 23.6 14.2 16.2 13.5 9.9 Private Fixed Investment/GDP 13.2 14.2 13.4 13.7 14.9 17.4 Public Gross National Saving/GDP -8.8 -4.9 -0.8 2.7 4.2 5.9 Public Fixed Investment/GDP 5.2 5.1 4.8 4.9 4.6 4.1 1' Source: IEC Database. Net domestic debt (consolidated with the Bank of Mexico) and public and publicly guaranteed external debt. 'Source: World Debt Tables. Total Debt Service/Exports of Goods and Services. 36. While the fundamentals are in place for Mexico to realize accelerated longer-term growth, continuing efforts to restrain inflation are limiting the expansion of output in the short run. Furthermore, the Government still has to deal with a number of remaining growth barriers. Recent growth has been limited by the large increase in the trade deficit, linked, in turn, to an appreciating real exchange rate, caused by the large capital inflows. These inflows, initially responding to Mexico's improved economic prospects, have been maintained by tight monetary conditions designed to meet anti-inflation objectives. The Government will also need to address the causes of the sharp decline in private savings. 37. Another set of challenges for the Government relate to social concerns. The weakness in Mexican development so far has been the inability to provide enough jobs for its growing labor force and the failure to provide an adequate social safety net for those ill-equipped to make a living in the modern sector. In an effort to address this, the present administration has - 13 - increased social spending sharply and is attempting to target benefits more effectively to the poor through the National Solidarity Program (PRONASOL). The Deregulation Program 38. Mexico's deregulatory reform program went well beyond the measures embodied in the ISPL. Since 1991, further deregulation of the economy has encouraged a private sector role in, inter alia, the banking sector (through deregulation and the reprivatization of the commercial banks), electricity production, and building and operating infrastructure. As discussed earlier, the short term effects are impressive, but the full impact of deregulation will only be realized over the long-term as new investment comes on stream and new technology is adopted. 39. An interesting feature of the Mexican deregulation program was its management. In February 1989, a Presidential Decree established a program for deregulation. New rules of the game were clearly established prior to initiating the program. The administrative control and management of the program was placed in a special centralized unit within SECOFI, with direct access to the President's office. There were many advantages to this set-up; most importantly, management of the wide-ranging deregulation program was centralized and in capable hands, and any potential conflict of interest and opposition from entrenched bureaucracies was minimized. 40. A striking feature of the Mexican deregulation program is the speed with which it was accomplished. This was possible, because, inter alia, many of the deregulatory measures initially relied more on administrative solutions and regulations issued by presidential decree than on a change in the laws. Thus, they could be taken quickly, without submission to Congress, which could have resulted in protracted political discussion. The program has more recently moved to the politically difficult task of proposing the necessary bills to Congress for eventual enactment into law. 41. The absence of any serious political opposition to the reforms is also a noteworthy feature. This appears related to: widespread recognition of the need for fundamental economic change; the strong position of the President's political party; private sector confidence in the Government's commitment and ability to implement far-reaching reforms (already demonstrated by the measures taken to stabilize the economy and liberalize trade); and to other forces which favored regulatory reform, such as technological change, which required higher factor mobility and easier entry and exit, and domestic fiscal retrenchment, which called for a smaller role for the state. The timing of the deregulation program was therefore important. Trade liberalization, in particular, was a critical precondition, because it brought to the forefront the need for deregulation. This was clearly demonstrated by the rapid deregulation of the trucking sector, which had been controlled by powerful vested interests. Trade liberalization altered cargo transport demand patterns and exposed the serious inadequacies of transport services for firms feeling the pressure to be internationally competitive. Since only a few concession holders were able to capture the enhanced profits from the new demand patterns, most turned in favor of deregulation. The fact that many of the deregulation measures were taken in agreement with - 14 - representatives from the private sector, who were in many instances offered attractive transitional terms, no doubt also helped diffuse opposition. 42. While deregulation has been wide-ranging, it is still incomplete. Significant regulatory barriers remain at the state and local levels, where authorities still operate in much the same way as in the past, with too many regulations and too much bureaucracy and rent-seeking. The judicial system does not allow for the efficient enforcement of contracts and the antiquated system of commercial law handicaps business efficiency. As discussed earlier, labor mobility within firms also remains an issue. Furthermore, legal reforms are still needed to support and give permanence to many of the measures undertaken. Institutional Development 43. The contribution of the ISPL to institutional development needs to be assessed in the context of the project's main objective, which was to support, through deregulation, the Government's efforts to change an inefficient, state-dominated, inward-looking economy into one that was efficient, market-based and outward-oriented. Institution-building in this context implied, firstly, establishing a basis for the identification of sound policy measures, and secondly, improving the institutional framework within the economy. With regard to the former, the ISPL contributed to institutional development in two ways: (a) Bank staff, country officials and researchers, in preparing the loan, constructed a significant base of knowledge and analysis that was used to identify the specific actions embodied in the loan; and (b) studies were initiated to expand the Government's knowledge in the areas where contemporary information was inadequate. These efforts effectively contributed to a strengthening of the Government's analytical and policy-formulating capabilities. The process of deregulation also did away with redundant institutional machinery and procedures, enhanced the ability of existing institutions to function more effectively (for example, through the streamlining of customs administration), and created new institutions where necessary. As discussed in paragraph 37, the deregulatory program benefitted from a centralized and well organized institutional set-up. Resource Mobilization 44. Mexico signed an agreement with its commercial creditors in February 1990. Through this agreement, about US$48 billion of foreign public debt was restructured. The Bank's support, along with that of the IMF and the Government of Japan (through the Export-Import Bank, which cofinanced the ISPL with a contribution of US$300 million) provided the basis for this agreement. In May 1989, the Government and the IMF reached an agreement on an Extended Fund Facility (EFF) for SDR 2.8 billion. The immediate effect of the debt rescheduling was to reduce Mexico's annual interest payments by about US$1.3 billion per year, equal to nearly 20 percent of the interest flow prior to the debt buy-down. This reduced net external transfers to an annual average of 2 percent of GDP for the period 1989-1994, down from the previous 6 percent, and enabled Mexico to meet all its debt obligations while freeing considerable resources to strengthen and sustain economic growth. This boosted the level of - 15 - confidence in the private sector and almost immediately led to a significant decline in domestic nominal and real interest rates." Role of the Bank and Borrower 45. The success of the ISPL is due, ultimately, to the strong political commitment on the part of the Mexican Government to undertake bold and sensible economic reforms. The incoming Salinas administration had clear views on the policy direction it wished to pursue and was ready to take firm and decisive actions. The change in administration ushered in a team of technocrats with similar educational backgrounds to Bank staff. The Bank was, therefore, presented with a unique opportunity to engage in an intense, frank intellectual interchange, based on mutual trust and respect. The Resident Mission in Mexico facilitated this process by maintaining an open and frequently used channel of communications with the Mexicans. 46. As discussed in the PCR, the ability to rapidly formulate a comprehensive deregulatory program reflected the quality and depth of the Bank's prior ESW. (It is interesting to note that the total time required to prepare, appraise and negotiate the project was only 61 staffweeks.) The biannual Country Strategy Implementation Review process, initiated in 1985, proved to be an effective vehicle for encouraging the broadening of ESW. As mentioned earlier, the ESW was also supportive of initiatives from the Mexican academic community. Mexican economists who had begun detailed studies on the effects of deregulation provided inputs to the Bank's work and the Bank contributed to the financing of their studies under the technical assistance components from existing loans. 47. Bank staff also showed understanding of the political process by designing the ISPL with open-ended conditionality. This gave the new administration, whose political position was initially not as strong as that of the previous administration, time to build consensus and reveal plans when it was politically more expedient to do so. 48. The Bank's role as resource mobilizer was clearly vital at a time when Mexico was concluding agreements with its commercial creditors. The Bank not only succeeded in rapidly transferring substantial resources through the ISPL and the other two loans approved concurrently, but its support of Mexico's program signalled to the outside world that Mexico's reforms held the promise of improved longer-term economic growth." " For a more detailed discussion of the role of the "Brady" debt rescheduling and its benefits to Mexico, see the PAR for the Mexico: Public Enterprise Reform Loan (Loan 3086-ME). " The role of the Bank in the debt restructuring exercise is discussed in the PAR of the Interest Support Loan (Ln. 3159- ME), Report No. 12085, June 28, 1993. - 16 - Sustainability 49. The benefits derived from the reforms supported under the ISPL are likely to be sustained and strengthened in the future. Although economic challenges still lie ahead, the country enjoys a stable macroeconomic situation, with a strong fiscal and reserve position, and good external creditworthiness. This, combined with the changes in the regulatory framework and the consolidation of a well-structured system of incentives, have helped boost private sector confidence in the market place. With the ratification of NAFTA, the economic reform process will not only continue, but acquire additional momentum. Thus, Mexico's structural reforms have the underpinnings of economic soundness, demonstrated success, and continuing momentum that are needed for long-term sustainability. Finally, the economic management team is highly competent and the political commitment to address the outstanding issues appears to remain strong. Box 3: NAFTA Provisions Relevant to the ISPL * Tariffs NAFTA eliminates some tariffs immediately and phases out others over 5. 10 or 15 years. All tariffs on automobiles and auto parts will be eliminated over 10 years. * Foreign Investment NAFTA investors will receive national treatment, with freedom to seek binding arbitration from an international forum. The financial services market in Mexico will be substantially opened to U.S. and Canadian participation by the year 2000. * Intellectual Property This will be protected to industrial country standards. * Automobiles An integrated automobile market is expected to exist in North America by 2004. Regional content requirements will prevail. * Trucking Truck drivers will be able to cross the Mexican border freely by 1999. 50. The passage of NAFTA gives permanence to many of the reforms and consolidates many of the gains achieved under this project. It is the most comprehensive free trade pact ever negotiated between regional trading partners and introduces sweeping reductions in tariff and non-tariff barriers between the three countries involved. It will change the profile of winners and losers in Mexico. Inefficient industries, including those that have not invested sufficiently in worker training and new technology, will have to adjust to the realities of integration. Box 3 highlights some NAFTA provisions that are of particular relevance to the ISPL. - 17 - V. LESSONS OF EXPERIENCE 51. The success of Mexico's structural adjustment program, particularly during the Salinas administration, was the result of a confluence of many factors, including: a Government with a dynamic, reformist approach; capable and highly qualified economic management teams both in Mexico and in the Bank that were willing to take initiatives; and a fundamental meeting of minds between the Government and the Bank on the direction and pace of reforms. The success of Mexico's adjustment program confirms the appropriateness and sequencing of the Government's reforms. 52. The success of the adjustment loans underscores the importance of a well formulated and integrated Bank lending strategy that is responsive to, and supportive of, sound Government policy initiatives. The experience also shows that the Bank can play an important catalytic role in the mobilization of financing from others. 53. The ISPL was a unique operation and one of the first (if not the first) sectoral adjustment loans to focus almost exclusively on domestic deregulation. The 1992 OED study on Bank structural and sectoral adjustment points out that little attention has been paid by the Bank in its adjustment programs to the many policies that give rise to distortions and inefficiency in many countries' industrial sectors. The initial success of the ISPL points to the potentially high pay- off obtainable from swift and wide-ranging deregulation. 54. Although there were unique and ideal circumstances surrounding this operation, its success may serve as an interesting example for other countries embarking on a process of deregulatory reform. Some lessons of experience are summarized below. * Strong political commitment and capability to undertake a program of reforms, a meeting of minds between the Government and the Bank on the direction and pace of reforms, and decisive action and sustained momentum are essential to a highly successful adjustment operation. This was clearly borne out by the experience of the ISPL. The Government brought to the table a clear mandate and policy agenda for reform, and the Bank brought its cross-country experience, technical advice, underpinned by solid ESW, and financial support. The policy dialogue was based on mutual trust and this enabled the Bank to design the project with many open- ended second tranche release conditions. * Certain preconditions - credible progress towards macroeconomic stability and trade liberalization - make for successful deregulatory reform. In Mexico, improved macroeconomic stability and trade liberalization raised the confidence of the private sector in the Government's commitment and ability to implement far reaching reforms. Trade liberalization, in particular, brought to the forefront the need for domestic deregulatory reform in order for the economy to be internationally competitive. Political momentum towards, and acceptance of, deregulation - 18 - depended on the proper sequencing of reforms and on gaining the confidence of the private sector. Mexican officials contend that, without trade liberalization it would have been extremely difficult to gain acceptance of the importance and urgency of widespread internal deregulation. In addition, without adequate transitional incentives (as discussed earlier for the automobile subsector) it would have been difficult to gain acceptance of some aspects of the deregulatory program. * A wide-ranging deregulatory program benefits from a centralized and well organized institutional set-up close to, or with direct access to, a power center. In Mexico, a special office in charge of deregulation was established in SECOFI, and the head of SECOFI had direct access to the President's office. This centralization minimized any conflict of interest and potential opposition from entrenched bureaucracies and facilitated the management of a comprehensive program. * While deregulatory reform at the federal level is the important first step, reforms at the state and municipal levels, and in the legal system must not be ignored. The incomplete nature of reforms at the micro-level in Mexico remains an issue, and is cited as one of the factors contributing to the slow down in economic growth. The persistence of bureaucratic attitudes and burdensome state and local regulations and procedures continue to affect both the cost of doing business and the establishment of new firms. * Both the content and conduct of background ESW are important for successful policy dialogue and project formulation. The following points from the experience of this project are worth noting: (a) Bank staff familiarity with the economy and the ability to work with highly trained officials generated respect from Mexican counterparts and contributed to a high quality product; (b) Bank ESW was supportive and not a substitute for initiatives by the Mexican counterparts; and (c) Bank staff supported and worked together with the Mexican academic community." * Linking second tranche conditionality to the completion of studies and agreements on resulting action plans, rather than specific, well-defined measures, should be approached with caution. This is not desirable Bank practice, because it could lead to significant delays in second tranche release, compliance is difficult to monitor, and the end results could fall short of original objectives and intentions. This fortunately was not the case under the ISPL. The approach that was followed was possible because of the fundamental agreements reached between the Bank and the Government at the outset, coupled with the Government's good track record in delivering on policy commitments under previous adjustment operations. This open- ended conditionality, driven in part by a desire to be politically sensitive, also raises an interesting procedural challenge for the future: how best Bank staff can maintain " This audit supports these conclusions, which have been drawn in the Bank/Mexico Country Relations Study, currently under preparation by OED. - 19 - their sensitivity to the problems of public disclosure and at the same time benefit from wide discussion of the issues within the Bank and at the Board. The lack of an adequate paper record of confidential understandings, and thus of foregone potential for lesson-learning, is also an issue. VI. CONCLUSIONS 55. Mexico embarked on the quest for economic stability following the crisis of 1982, initiated trade reforms in 1986, sharply accelerated the pace of overall reform with the new Salinas administration which took office end-1988, and consolidated the process over 1991-93 with the negotiation and ratification of NAFTA. This reform program stands out as a success story in Latin America. Bank lending supported this decade-long reform process with a series of appropriate, policy-based loans entailing an escalating degree of financial involvement that culminated in policy-based loans totalling US$1.6 billion in 1989. 56. Mexico's success is primarily due to the unwavering and unambiguous commitment on the part of its Government to undertake the reforms needed to stabilize, liberalize and privatize the economy. The scale and intensity of Bank financial and intellectual support, at a time when commercial lending had been abruptly withdrawn, was also clearly critical to Mexico's success and to its restoration to commercial creditworthiness. The Bank's lending strategy, based on sound economic analysis, was, in turn, a decisive element in the Bank's ability to contribute to Mexico's turn-around. - 21 - ANNEX 1 Page 1 of 41 SECRETARIA DE COMERCIO Y FOMENTO INDUSTRAL Mexico, D.F. January 8, 1994 Manuel Penalver, Division Chief, Country Policy, Industry and Finance Division, Operations Evaluation Department. 1818 H. Street, N.W. Washington, D.C. 20433 U.S.A. Dear Mr. Penalver: RE: MEXICO - Industrial Policy Loan (Loan 3087-ME) Draft Performance Audit Report Letter of January 26, 1994 Given that the report was sent to other SECOFI officials, I would like to mention that the following comments are related only to the issues of direct interest to the Deregulation Unit of SECOFI, but do not include the comments of other SECOFI officials. We agree with the report in general, both factually and in its diagnostic of how has the deregulation program functioned. However, we think a few specific paragraphs deserve to be commented. In page x, par. 2, it is not accurate that most deregulation actions were taken by presidential decree. Our count shows 26 legal reforms (that is, acts of Congress), 22 regulations ("reglamentos", issued by presidential decree and 18 additional administrative actions (issued by public officials of lower rank). Then, it is not easy to relate these legal actions to actual political actions, because one legal action may affect several important markets (e.g., the telecommunications regulation), while in other cases, several legal actions may be required to achieve a single policy goal, Perhaps it is more accurate and illustrative to say that the program rested more on administrative solutions ANNEX 1 -22 - Page 2 of 41 SECRETARIA DE COMERCIO Y FOMENTO INDUSTRIAL during the first years, but it has gradually moved to the politically more difficult but legally more solid strategy of proposing bills to Congress. This comment applies also to par. 40, page 13. On par. 39 (page 13), there is a confusion. The program for administrative simplification has no relation to the deregulation program. The presidential order of february 1989 was to establish the Deregulation Program at SECOFI. On the other hand, it may be interesting to mention that the administrative simplification program may be important to reduce red tape, but works under given regulatory rules, while the deregulation program really does not care about the issue of excess bureaucracy in itself, and instead starts by asking what is the optimal regulation and determining the bureaucratic structure thereafter. On par. 42 (page 14), it may be useful to mention that another question mark on the regulatory policy is the extent in which a new dynamic has been imposed on the different agencies of the federal government. The deregulation office is a centralized office that has been supported strongly by cabinet members and the bureaucracy of several ministries. However, even when part of the new legislation is directed precisely at disciplining the regulatory process, parts of that process have not been reformed, and in sectors where regulation is needed, additional and sometimes permanent efforts will have to be made to avoid a return to protectionist regulations. Finally (and I am not sure this is interesting for your report), I think it is important to mention that besides SECOFI, other agencies have taken actions or made proposals. Sincerely, - Oabriel Martinez, Coordinador del Programa de Desregulaci6n Econ6mica, Secretaria de Comercio y Fomento Industrial. Deregulation in Mexico: A Summary of the Main Deregulation Actions During the Administration of President Salinas July, 1989 to January, 1994 NOTE: Mexican federal laws are enacted by the federal Congress. The President can issue regulations to those laws, and ministries can issue regulations on specific technical issues if the law mandates them to do so. In this.document, regulations issued by the President are called "Rules" or "Regulations", and those issued by the ministries are called "Standards" or "Administrative rules". There are also laws and regulations issued by the states. In a few cases, the deregulation action did not require publication in D.O. D.O. means "Diario Oficial de la Federaci6n", the Mexican official federal publication. Dates appear in the format month/day/year. The translation of the titles of laws and other regulations is not an official and does not pretend to be literal. The Diario Oficial should be consulted by specialists interested in the topics. Headings such as "trade" or, "agriculture", are used only for presentation purposes and do not pretend to describe the way in which tasks are performed by different ministries in the Mexican government. Deregulation actions promoted without participation of the Deregulation Unit may not be included in this presentation. 0. RECENT DEREGULATION ACTIONS AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS FEDERAL LAW OF Federal Law of 1. Establishes regulations in accordance with the Federal Law of VEGETABLE Vegetable Health Metrology and Normalization. HEALTH (D.O. JAN/5/94) 2. Modernizes the system of inspection and vigilance. 3. Increase the penalties for infrigement. 4. Creates the possibility of authorizing private verification units and private certification organisms. NAVIGATION LAW Navigation Law 1. Establishes a new system to grant concessions to build and up-ratu maritime and port services and infrastructure. (D.O. JAN/4//94) 2. Modernizes the Public Maritime Registration Office and related institutions. 3. Adequates the navigation law to the port law issued in 1993. 0. RECENT DEREGULATION ACTIONS AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS ROADS, BRIDGES Federal Law of Roads, 1. Consolidates deregulation actions issued since 1989 and in general AND ROAD Bridges and Road embraces a procompetitive stance. TRANSPORT Transport. 2. Establishes regulations about concessions to build and operate roads (D.O. DIC/22/93) and bridges, and to promote a modern regulation of public services and to enhace safety to investment. ROADS, BRIDGES Regulation over the 1. Establishes rules on weight, size and capacity in passenger, tourist AND ROAD weight, size and and cargo transports in federal roads and bridges, required for its TRANSPORT capacity of transport conservation. in federal roads and bridges .2. Establishes the characteristics or specifications of vehicles through official standards (NOM). (D.C). JAN/26/94) 3. For transportation of goods of heavier weight or larger size than allowed by standards, a special permit is required. 4. Establishes penalties of approximately 1,500 to 15,000 new pesos for infringement. 5. Establishes "grandfather" regulations to allow a gradual adjustment of transport equipment. 6. Roads and bridges are classified in accordance with its capacity. 7. Traffic from roads of higher classification to a road of lower classification, allowed if distance traveled in the lower classification road is less than 50 kmts. ER6 0. RECENT DEREGULATION ACTIONS AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS NATIONAL WATERS Regulation to the Law 1. Gives more security in administrative process to define rights and of National Waters conditions in national waters concessions. (D.O. JAN/12/94) 2. Regulates "compensation" of water in the payment of rights: users that return clean water to streams and deposits can reduce payments due for water use and pollution. 3. Gives more autonomy to local councils and commissions to solve their problems of assigments. 4. Gives more flexibility to concessioned and assigned waters to permit use by third parties, and to the transmition of titles without interference of the government, except to register the operatioi 5. Reduce discretion of the authority in the establishment of concessions, and to determine general conditions for the use of national waters. 6. Creates the Public Registry of National Waters. Ca 0. RECENT DEREGULATION ACTIONS AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS LIQUEFIED GAS Regulation of 1. Transport and sale activities require only notice to SECOFI. Distribution of (eliminates exclusive territories to allow competition) Liquefied gas of petroleum. 2. SECOFI authorizes activities of storage, supply and sale in gas stations. (D.O. NOV/25/93) 3. Regulation of technical issues by Mexican Official Standards (NOM). 4. Regulates sales in gas stations to reduce risks. S. Substitutes the inspection system by a verification system in terms of the Federal Law of Metrology and Normalization. 6. Increase the penalties, specially those related to security issues, up to nearly N$500,ooo new pesos. 7. Abrogates seven regulations. 0. RECENT DEREGULATION ACTIONS AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS TRANSPORT OF Regulation to the 1. Establishes conditions for more efficient and safe transport of TOXIC WASTE AND transportation of dangerous substances and toxic waste. DANGEROUS dangerous substances SUBSTANCES and toxic waste 2. Establishes a classification of dangerous substances in accordance with international standards. (D.O. 07/APR/93) 3. Regulates packaging and bottling of dangerous substances. 4. Determines safety rules in transportation, in accordance with the Mexican Official Norms (NOM)- 5. Establishes a simpler official control system that requires unly one 00 permit to transport such substances, establishes limits between jurisdictions of the ministry of social development and the ministry of communications in this issue, and determines responsibilities between transporters and manufacturers of regulated substances. 6. Establishing substantial penalties covering a range from approximately NS1500 to N$75000. Do Oa 1. COMMUNICATIONS AND TRANSPORTATION TRANSPORTATION AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS TRUCKING Rules for trucking in 1. Freedom of transit through all federal highways. federal highways. 2. Freedom to transport any cargo, except highly toxic and explosive products. (D.O. 7/7/89). 3. Eliminates geographical loading and unloading restrictions. 4. Eliminates the assignment of cargo on the basis of a "roll call" in cargo stations. 5. Free negotiations of tariffs and service conditions between trucker and user. 6. Authorizes "private cargo" permit holders to transport third persons cargo. After deregulation, all permits became "public cargo" permits. 7. Legalizes "pirate" transport companies. 8. Eliminates the intervention of established permit holderq in the process of granting new permits and plates. 9. Authorizes "double box" trucks of up to 30 meters. 10. Eliminates the need to stamp the invoice at the cargo station. 11. Tariff deregulation. 12. Eliminates the extra charge for imported merchandise. 13. Eliminates the compulsory use of cargo stations. 14. Substitutes permits for licenses (granted within a 45 days maximum interval) . MULTIMODAL Rules for the 1. Establishes contractual liberty for the use of multimodal TRANSPORTATION international transportation (eliminates the need for intermediaries) multimnodal 2. Releases multimodal transportation firms from the obligation to hire transportation. services through a cargo station. 3. Deregulates the process to grant permits. (D.O. 7/7/89). 4. Establishes the freedom to use mexican or foreign ports without the previous authorization of the Communications and Transport Ministry. 5. Substitutes permits for licenses. DOMESTIC National air 1. Deregulation of tariffs and routes of the national air passenger AIRLINES transport, rules and transport with some restrictions in regional routes in order to guarantee tariffs (July, 1991) . supply of service to smaller cities. 1. COMMUNICATIONS AND TRANSPORTATION --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS TOURISM Rules for the federal 1. Deregulates the process to grant permits. TRANSPORTATION transport servicing 2. Freedom of transit in all federal highways. Freedom to board and tourism exclusively. leave passengers in ports, airports and train stations. (D.0. 3/9/90) 3. Eliminates "tourism circuits". 4. Permits granted for indefinite periods of time. 5. Establishment of new services according to comfort and luxury of service, establishing the maximum age of vehicles in each case and requiring "luxury" and "tourism" vehicles to offer "complementary services". 6. Authorizes "luxury" and "tourism" services to be marketed through travel agencies and wholesalers. 7. Deregulates tariffs. 8. Freedom for tourists to board the bus in any location, as long as it is permitted by the rour package. PASSENGER Rules for the public 1. Openness and simplification in the granting of permits and licenses. TRANSPORTATION service of federal 2. Freedom to provide service in ports and airports. transport of 3. Permits granted for indefinite periods. passengers. (road 4. Freedom of choice of itineraries for the permit holders. W transportation). 5. Establishment of clear rules concerning timetables and entry and exit (D.O. 5/30/90) into routes. 6. Establishment of information mechanisms for the user concerninmg timetable modifications. 8. Liberation of tariffs in "luxury" and "executive" service. RAILWAYS Administrative Rules 1. Authorizes "unit trains" to provide services to third persons. for the modernization 2. Sets the tariff charged to unit trains, which includes a charge for of the mexican the engine. railways system. 3.The tariffs for foreign trade can not be higher than those charged by (Not published in connecting U.S. trains. D .0.) 4. Explicit recognition in the tariff of the value of user's equipment. 8. Application of promotional tariffs equal to marginal cost for trains with empty haul backs. railway system 1. COMMUNICATIONS AND TRANSPORTATION --continues PORTS AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS STEVEDORES IN Rules for stevedoring 1. Users to choose the supplier of the cargo handling company. FEDERAL ZONES in federal areas (borders and railway 2. Grants general permits for the supply of all kinds of stevedoring, stations) . without any limitation in terms of exclusive areas of action in federal zones. (D.O. 1/24/90) 3. Users can not be liable to pay for services not rendered. 4. Deregulation in the process to grant permits. Clarity in the requirements to obtain them. 5. Deregulation of tariffs. 6. No permit is required to handle cargo in private installations for private use. STEVEDORES IN Rules for stevedoring 1. Single permit for all kinds of stevedoring (loading, unloading, PORTS in federal areas of stowage etc., as well as for mooring. the ports. (D.O. 6/1/91) 2. Application of the Federal Labour Law to the relationship between the provider of the service and his employees. The relationship between the provider of the service and the service users will be regulated by the commercial legislation. 3. Prohibition to hinder, impede or make more expensive the services provided by another permit holder, or to hinder the port access to authorized trucking companies. 4. No exclusive permits can be granted and the Ministry of Communications and Transportation can at any time issue new permits. 1. COMMUNICATIONS AND TRANSPORTATION --continues PORTS AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS STEVEDORES IN Administrative Rules 1. Three new firms were granted stevedoring permits. THE PORT OF for the operation and VERACRUZ management of the Port 2. Compliance with the labour, maritime, civil and commercial regulations of Veracruz. imposed. (D.O. 6/1/91) "Requisa" of the port . 3. Rules for the internal operation of the port. (Started: 6/1/91, lifted 8/1/91) 4. The government took over the port temporarily, while the new argo handling companies got ready to operate PORT SERVICES Reforms to article 45 1. Licensed docks and complementary port facilities are authoriz,d to of the Navigation and provide services to third parties. Previously, only permits for private Maritime Trade Law. service" were allowed. (D.O_. 7/18/91) O 1. COMMUNICATIONS AND TRANSPORTATION --continues TELECOMMUNICATIONS AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS USE OF Administrative rules 1. Elimination of the permit required to connect and operate the TELECOMMUNI- for the installation following equipment: fax machines, telex, computing equipment, PBX, C.B. CATIONS and operation of terminal equipment, land stations for the reception of tv. signals and EQUIPMENT terminal other kinds of terminal equipment. telecommunications 2. Prohibition of tied sales of equipment by suppliers of public equipment. telephone services. (D.O. 12/21/89) These rules were abrogated by the new Telecommunications rules. TELECOMMUNI- Rules of There was no regulation dealing with telecommunications and the few rules CATIONS telecommunications that could have been applied were technologically out of date and were (D.O. 10/29/90) not consistent with a policy of increased competition. License for TELMEX. 1. Establishes Telmex's commitments for expansion of the public network. (Tel6fonos de M6xico). 2. Regulates Telmex as a monopoly in public telephone service, but (D.O. 12/12/90) prohibits the exclusion of other firms in the provision of other services. 3. Establishes a system of tariff regulation through price caps, that will not need government intervention for eight years. 4. Regulates the negotiations pertaining switching between Telmex and other providers of telecommunication services. 5. Authorizes Telmex and other firma to transmit any type of signal with the exception to T.V. and radio signals (broadcasting) 6. Introduces competition into cellular telephone services, private networks and other services (e.g. trucking), 7. Modernization of the equipment testing procedures and compliance with technical standards. n. International long distance service to be opened to competition after 1996. 9. Establishment of antitrust regulations in markets complementary to the service under license. 3. Etabishs a ystm o tarff eguatio thoug prie cps,tha 1. COMMUNICATIONS AND TRANSPORTATION --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS FEDERAL LAW OF New Federal Law of 1. Establish the basis to the integral administration of th parL Ly PORTS Ports individuals established in mercantile societies. D.O. 01/jul/93 ) 2. Create the API (Integral Port Administration), to make the bulJing, designing, promotion, operation, and development of the port. 3. API operates the vigilance and security systems, and make the contracts of right transfers with the interested persons in develop lands and port areas. 4. Create a zone of port development managed by API, to establisn industrial and service infrastructure; and establishes the obligation API to supply port services by thirst persons in ports with potential internal competition and to select the suppliers of services by c-ntest. 5. Eliminates the profit to government established by the Generil Communication Law, and establishes a obligation in services to th-- Federal Government by the use of the public goods and an annual profit. 6. In ports without API, will be given grants to use and operation of port installations to public or private use, and permits to supply port services and to build and use the infrastructure. 7. Establish a new system of grant by contest, instead of the procedure of the General Communication Law. 8. Grant until fifty years, and could be extended by the same length depending on the kind of project and investment. 9. Eliminates the granting in federal maritime-land zones by SEDESOL, and substitutes it by a common agreement between SEDESOL and SCT. 10. Submits the authority and the granting to the conditions of competition in accordance with the Federal Competition Law. 11. Establishes a tariff regulation when there are not a reasona. - competitive environment. oQ 2. INDUSTRY DERIVATES OF OIL AND PETROCHEMICALS AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS PETROCHEMICALS Administrative rules 1. Reclassification of basic petrochemicals from 34 to 19 products and that classify secondary petrochemicals from 800 to 66 products. petrochemical products 2. Permits for the industry to be granted in no more than 45 days. into basic 3. Releases more than 748 chemical products. No permit will be needed for petrochemistry or their production. secondary petrochemistry. (D.O. 8/15/89) OIL AND Oil and lubricants: Establishes the information that must be provided to marketing these LUBRICANTS commercial information products. It substitutes the production permit previously required. standard. NOM-L-21-1990. (D.O. 10/22/90) PRODUCTS Decree that reforms 1. Eliminates the permit required to elaborate products resulting from DERIVED FROM article 11 of the other products derived from refining. (paraffin, lubricants, industrial REFINING. Petrochemical Law. oils etc.) (D.O. 1/8/90) 2. Obligation to provide the Ministry of Energy Mines and State Industry, only with the basic annual investment figures and production volume. 3. Foreign investment may exceed 51% of total investment. 4. Eliminates the production and import permit for lubricants that are the basis for the production of other specialized lubricants, paraffins, asphalt and grease. 2. INDUSTRY --continues MANUFACTURING AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS PACKAGING AND Administrative rules 1. Eliminates 90 previously existing regulations concerning pacm.3in9, BOTTLING on net contents, bottling, etc. tolerance, drained 2. No restrictions apply to the materials used as long as there is mass, and information compliance with health standards. to the consumer of 3. No limits apply to the number and size of presentations of a product. packaged goods 4. Establishes a single statistical method to verify the net content of (bottled, canned all packaged goods. etc.) . (D.O. 6/1/89) TEXTILE Decree that abrogates Among other things, it eliminates INDUSTRY the laws which 1. The obligation to sell to firms authorized by the Ministry of 'Xmmerce regulated the and Industrial Promotion. production and 2. The necessity to obtain a permit from the Ministry of Commerce and marketing of textiles, Industrial Promotion. silk and its 3. Need to obtain permits to import machinery and raw materials, for the by-products. installation of a factory and to change the installed capacity. (D.C. 1/7/91) SALT INDUSTRY Decree which regulates Deregulation of the salt industry, allowing competition in prices. the national salt quantities and markets. activity. (D.C. 3/9/90)_________________________ MATCHES Decree which abrogates 1. Eliminates the prohibition to establish matches factories hat could INDUSTRY the Rules for cause "excess supply". factories of matches . 2. Eliminates the need of a permit issued by the Ministry of Commerce and (D.O. 7/9/90) Industrial Promotion to be able to install and expand existing plants. 3. Eliminates the obligation of producers to supply the ministry of Commerce and Industrial Promotion bimonthly information concerning costs. inventories, employment, wages and other affairs. activity 2. INDUSTRY --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS CINEMATOGRAPHY Cinematography Law. 1. Substantial reduction of direct controls over the industry through the LAW elimination of import and export permits and the requirement of Abrogates the Law of registration of movies, titles, and other movie related items in the the Cinematographic Public Cinematography Registrar (which disappears). Industry 2. Establishment of new measures an reinforcement of existing ones (D.O. 12/29/92) against illegal copying and distribution of movies. 3. Frees movie theaters from municipal controls by stating that the regulation of exhibition prices, if any, is a federal matter (ther is no federal control). 4. Delineates the powers of the Ministry of State and the Ministry of Education. 5. Eliminates gradually the obligation to have at least a 50% of exhibition time reserved for national movies. 6. Establishes that only children's and educational movies may be dubbed into Spanish. ELECTRICITY Rules of the Public 1. Permission to invest in plants for self generating collective Service in Electrical electricity. Energy Law, in the 2. Establishment of the rules on how to transfer excess generated energy area of self supply. to the Federal Electricity Commission. (D.O. 5/31/91) 'p 2. INDUSTRY --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS TOURISM Federal Law on Tourism 1. Substantial reduction of direct controls over the tourism industry. Abrogates old Tourism 2. Use of information mechanism to order markets instead of controls on Law (1984) operators. (D.C. 12/31/1992) 3. Elimination of price controls and compulsory registration of operators. 4. In general, the role of the Ministry of Tourism as a promoter and organizer of tourism is confirmed. 5. Avoids duplicity in inspection and sanction powers between the Ministry of Tourism and the Consumer Protection Attorney. ELECTRICITY Reforms to the Law on 1. Sustains the Constitutional rule that the public service of the Public Service of electricity is an strategic activity reserved to the State. Electrical Energy 2. Promotes cogeneration, self-supply and independent producers. (D.O. 12/23/92) 3. Facilitates interconnection between plants, which will raise Regulations to the Law efficiency of the Federal Electricity Commision's (CFE) electricity on the Public Service network and will substantially reduce operational costs. The electricity of Electrical Energy bought by CFE must be the one offered at the lowest price among the producers. (D.O. 5/31/93) 4. Permits electricity import and export and the use of the CFE transmission network on a public basis. 5. CFE will receive public bids to determine its acquisitions of energy from private producers. 'p 3. TRADE CUSTOMS BROKERS AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS CUSTOMS BROKERS Reforms to Customs 1. Deregulates the requirement to use a customs broker, the reform Code . authorizes the use of customs agents by export and import firms that post (D.O0. 12/28/89) a bond. Firms which are under an export promotion program authorized by (D.O0. 12/26/90) the Ministry of Commerce and Industrial Promotion are exempt from the (D.( . 12/20/91) bond. 2. Customs brokers may design customs representatives. 3. Faster process to grant of licenses to custom brokers. 4. Free movility (with a few restrictions) of custom brokers between customs offices. 5. Authorizes brokers to operate in customs different to the one they are assigned to. 6. Customs brokers may set up branches. 7. Deregulates customs brokers tariff. INDUSTRIAL PROPERTY, FRANCHISING, MARKETING TECHNOLOGY The new law on 1. All regulations and restrictions to the acquisition and licensing of TRANSFER AND industrial property patents, trademarks, technical assistance and other intellectual property CONTROL, USE OF eliminates all (software, etc.), are eliminated. PATENTS AND regulations to control 2. Better protection for industrial secrets. TRADEMARKS technology transfer. 3. Promotion of franchise systems. (D.O. 6/27/91) SALES A.ND Deregulation of sales 1. Eliminates the need of authorization for all types of sales and PROMOTIONS and promotions. promotions. Only those consisting of lotteries need to register (D.( . 9/26/90) 2. Eliminates the prohibition of sales of imported goods. 3. Establishes a notification system in the authorization of promotions that involve homogeneous goods of frequent or stational appearance. 4. Eliminates overseeing and inspection tariffs. 5. Equal treatment for imported goods. 6. Obligation to inform the consumer of the probability of winning in sales promotion consisting of lotteries. o 3. TRADE --continues TORTILLA AND MAIZE INDUSTRIES AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS MAIZE INDUSTRY, Decree which abrogates (MILLS AND the following decrees: TORTILLA (D.O. 7/6/90) FACTORIES, FLOUR FACTORIES) 1. Decree which 1. Eliminates barriers to entry to the maize flour, Imasa nixtamalizada declares of public (dough) and tortilla industry, as well as the concept of "exclusiv, interest the maize territory" of tortilla shops. flour, dough (masa nixtamalizada) and maize tortilla industry. 2 . Decree which 2. Eliminates uniform working schedules and compulsory closing of shops establishes the basis on Sundays and holidays. for the planning, 3. Eliminates the "order of preference" in the granting of permits for organization and the establishment of flour, dough or tortilla factories in the functioning of the region. maize flour, dough (masa nixtamalizada) and maize tortilla (d g)n tr la nur_s el s h industry.concept_of_"exclusiv _ terrtory of ortila sops 3. TRADE --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS MAIZE INDUSTRY 3. Decree that 4. Eliminates the need of a permit granted by the Ministry of Commerce (CONTINUED) regulates the and Industrial Promotion to undertake activities related with the industrial and production, distribution and sale of corn flour (harina nixtamalizada, commercial activities dough and maize tortillas, to change their official address and to modify related to the the installed capacity). production, 5. Eliminates the "ruinous competition" and "economic viability" organization and sale criteria, that allowed the creation of regional monopolies. of corn flour (harina de masa nixtamalizada), dough and maize tortillas. Decree that 6. Eliminates the mandate to the ministry of Commerce and Industrial established that maize Promotion to indicate the surplus of corn that can be used for non human and its flour produced consumption. in the country were 7. Eliminates the obligation of persons who undertake activities related prioritarilly destined with maize seeds, to present the Ministry of Commerce and Industrial for human consumption. Promotion with documents on the origin and final use of the seed. COCOA SUGAR AND COCOA Abrogation of the Law 1. Eliminates the 50% tax on first hand acquisition not done through the TRADE CONTROL on the Acquisition of state owned corporation, Azucar S.A. or the National Cocoa Commission Sugar, Cocoa and Other (CONADECA). Goods . 2. Deregulates the commercialization of these products. (D.O. 12/28/89) 3. CONADECA has been liquidated and Azacar S.A. is in a liquidation process. 0 3. TRADE --continues FOREIGN EXCHANGE CONTROLS AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS FOREIGN DECREE THAT ABROGATES Eliminates controls on toreign exchange tradirg and rates, which pratud EXCHANGE THE EXCHANGE RATE since 1982. CONTROLS CONTROL (D.O. 11/10/91) 1. Abrogates other rules and dispositions concerning exchange rat. controls such as the decree which first establishes it (D,O. 13/--,/82) 2. Eliminates the obligation of firms to sell at the controlled r.te the currency obtained through the export of goods in order to be able to export. 3. Eliminates the need to obtain currency from a national crediu institution in order to import, with the obligation of returning iny unused currency. The system implied a tax on exports, plus a higi bureaucratic cost. 4. Eliminates the dual-exchange rate policy. 5. Provides certainty to investors about the policy on capital mcu-.ments. o 3. TRADE --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS CORPORATE LAW Decree that Reforms 1. Opens the possibility of forming corporations with 2 or more the General Law of partners. Previously, a minimum of 5 was required. Commercial Corporations (D.O. 2. Allows formation of partnerships of limited responsibility with up to 6/11/92) 50 partners. 3. Eliminates the need of obtaining authorization from a court to register corporations in the Public Register of Trade. 4. Authorizes informal meetings of corporate boards and shareholders meetings when there is unanimity. L. 5. Recognizes the validity of powers granted through authorized delegates by the administrative body. 6. Establishes a procedure to split up corporations. Previously, in the absence of a legal procedure, there was uncertainty about the rights and obligations of the parent corporation and of the new companies after they became separate entities. o 3. TRADE --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS COMPETITION LAW Federal Economic 1. Establishes a modern competition policy Competition Law (D.O. 12/24/92) 2. Creates the Federal Competition Comission, which will be independent from, the Ministry of Commerce and Industrial Promotion and other Abrogates the Law that agencies, and will be formed by commissioners appointed for ten year Regulates Article 28 periods. of the Constitution on the Matter of 3. Classifies anticompetitive practices as "absolute practices 9. Monopolies (1934), and cartels and bid-rigging) and "relative practices" (e.g. tied the Law on the Powers exclusive dealing) of the Federal Executive on Economic 4. Establishes a policy of control to prevent anticompetitive Matters, the Law on concentrations. Transformation Industries and the Law 5. Adopts a policy of deterrent sanctions against anticompetitiv, on Producers practices. Associations for the Distribution and Sale of their Products. 3. Cassfie anicometiivepratice as"abolue prcties"0 q carelsandbi-rigin) ad reltiv pactces (eg.tie sae* exclsivedealng)0 3. TRADE --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS CONSUMER Federal Law on 1. Merges the National Consumer Institute into the Office of the Consumer PROTECTION Consumer Protection Protection Attorney with the objective of making consumer protection more (D.O. 12/24/92) efficient, without reducing the powers of the State. Abrogates the Consumer 2. Reduces direct controls over economic activity: eliminates the Protection Law (1975) requirement to register all "adhesion contracts" (drawn up unilaterally by suppliers and applied in a uniform fashion to all sales) . Only those required to do so by an official standard ("Norma Oficial Mexicana") must be registered. 3,Eliminates controls over sales and reduces those applied to special promotions (which include lotteries). 4. Includes rules to protect consumers' privacy and to guarantee the disclosure to those concerned of information kept by credit or marketing agencies on consumers. 5. Reinforces the inspection and surveillance policy. 6. Reduces discretionality in the ordering of sanctions by the Consumer Protection Attorney. 7. Eliminates rules on consumer credit that prohibited the use of floating rates and current accounts and in general made commercial credit more expensive. Establishes instead stricter rules on information provided to the consumer. t oL 3. TRADE --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS SANITARY Decree which reforms 1. Eliminates the authorization to the publicity in food, non alcoholic CONTROL OF THE and derogates beverages, perfumes and beauty items. PUBLICITY dispositions in the Regulation of the 2. Eliminates restrictions in the publicity of fertilizing, and pioducts General Health Law in which in normal consume condition don't have risk in the human hQalth. issues related with sanitary control of 3. Eliminates restriction in the publicity related with supplier's the publicity information, reducing the time and content to the publicity in radio and (D.O. 10/MAY/93) 4. Encourage actions vs. harmful publicity of tobacco increasing Lhe length of precaution announcement. OD 3. TRADE --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS ANIMAL SANITY Animal Sanity Law 1. Submit the zoosanitary regulation to the expedition of the official LAW mexican norms (NOM), justifying plentifully such regulation tc scientific (D.O. 18/JUN/93) principles, risk analysis and international standards. 2. Establish a National Emergency Device of Animal Sanity when exist emergency situations justified. 3. Establishes a periodic supervision of public supervisor's knowledge. 4. Eliminates zoosanitarian permits to move products and to import it, and instead of this establish a certificate of compliment with NOMs, remitted by the Ministry of Agriculture or by one accredit organism. 5. Establishes the Ministry or Agriculture like the authority accredited to remit zoosanitarian certificates, to export zoosanitarian products. 6. Eliminates the traditional concept of exterior quarantines, avoiding discretionary restrictions. 7. Establishes the limits of free zones and zones of low risk of animal disease or plagues, and eliminates the exclusiveness of some slaughter-houses to export meat in channels. 4. AGRICULTURE AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS SUGAR INDUSTRY 1. Regulation on 1. Links the price of sugar cane to the wholesale price of sugar in a REGULATIONS farming, growth, fixed proportion. (Price of the cane - 50% of the wholesale price of a harvesting and kilo of plantation white sugar). industrialization of 2. Establishment of a payment method for the cane on the basis of its sugar cane. recoverable sugar. The measurement is done at the entrance of the sugar (D.O. 5/31/91) mill. 3. Establishment of two payment methods, average and individualized payment (before, all payments were made according to averages). 4. Formation of a "Committee of the Sugar Industry" to formulate the guidelines for the sugar cane decree and to solve controversies. 5. Sets the guidelines relative to the the characteristics of sugar cane as a raw material, the guidelines which the sugar mills and their suppliers must adhere to, and the guidelines for contracted cane that is not industrialized. 6. Establishment of a uniform contract for the farming, growth, harvest, delivery and reception of sugar cane. Decree which amends 7. Establishment of a variable tariff on imports of sugar, equal to the 00 the tariff of the difference between the reference price and the competition price when the General Tax on Imports former is larger than the latter. The reference price is the result of Law. subtracting the import costs from the wholesale price. The conpetit.ion (D.O. 8/2/90, reforms price is an average of the international prices for a given perioi. 1/30/91) Restructuring and 8. Deregulates the commercialization of sugar by limiting the eventual liquidation participation of Azucar S.A. in the market to defined sectors and without of Azucar S.A. exclusive privileges. 9. AzQcar S.A.'s assets are being sold as part of the restructuring process of the sector. 00 C9 4. AGRICULTURE --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS HENEQUEN Abrogation of the Law 1. Eliminates the State of Yucatan's authority to oversee all INDUSTRY regarding Growth, in relation with henequen (land and soil preparation, sowing, growth, REGULATIONS Marketing and transport, packaging, classification, fibre removing industrialization, Industrialization of and commercialization. Henequen. 2. Eliminates the obligation of the ejido (collective farms) to sell all (Congress of the State of their production to Cordemex (a state owned corporation) of Yucatdn. 3. Eliminates the requirement of a license for the classificaii of (D.O. 3/31/90) henequen. 4. Eliminates the restriction that the State of Yucatan be "technically saturated" in order to be able to sell outside the state. 5. Eliminates the obligation of private fiber removers to hand all of their production to Cordemex. 6. Eliminates the restriction of volume of fiber which can be assigned to private industry. 7. Eliminates the need of an agreement between private henequen plantation owners and Cordemex regarding the use of the fiber by the former. 8. Eliminates the prohibition to interrupt the fiber removing activity. Decree that abrogates 1. Eliminates tne need of an authorization from the Ministry of Commerce the regulation that and Industrial Promotion to install, substitute and expand henequen established that an textile plants. authorization from the Ministry of Commerce and Industrial Promotion was required for the installation, expansion and substitution of new henequen textile plants and equipment. (D.O. 7/9/90) 7. Eimiatestheneedof n ageemnt btwen prvat henque platatonownrsandCoremx rgadin te ue o te fbe byth former- 4. AGRICULTURE --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS COCOA INDUSTRY Decree which orders 1. Eliminates the import and export permits and quotas of cocoa REGULATION the liquidation of 2. Eliminates the quota system to national users of cocoa. CONADECA. 3. Eliminates the exclusive rights of cocoa producer's unions to export (D.O. 1/10/90) 4. Eliminates the obligation of the industry to keep inventories uf at least two months of the national supply quota. 5. Eliminates the right of the National Sweet and Chocolate Producers Association to distribute the industry quotas. SEEDS New Seed Production, 1. Eliminates restrictions on research and development of seeds certification and 2. In general, eliminates the concept of lagroclimatic zones", that (A Trade Law. restricted trade of certified seeds. (D.0. 7/15/91) 3. Certification of seeds now open to qualified private laboraLories Verification of seeds by their producers now admitted. 4. Eliminates the official evaluation as a prerequisite for the reyistry of protected varieties. 5. Substitutes restrictions and permits for commercial informatior requirements. 00 4. AGRICULTURE --continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS COFFEE INDUSTRY Deregulation of .. Eliminates the national supply quotas. REGULATION foreign trade. 2. Eliminates export permits. Restructuring of 3. Gradual removal (in two years) of INMECAFEs functions in financing, INMECAFE (Mexican storage, industrializa ion and commercialization. It will only be Coffee Institute) and concerned with research, technical assistance and the organization of deregulation of producers. domestic trade. 4. Privatization of Dicamex and Cafemex (manufacturing and marketing branches). 5. Transition programs to aid poor producers, to make the producers' association subject of credit, and to allow smaill producers to industrialize coffee beans Ley de Torrefacci6n 6. Establishes information rules concerning coffee products. 7. Eliminates restrictions to different coffee mixes. L PROGRAM FOR THE Administrative Rules 1. Eliminates the permit to grow fruits and vegetables destined for GROWTH AND that cancel the need EXPORT OF of a permit for the 2. Eliminates the exclusiveness of the National Confederation of VEGETABLES AND growth of fruits and Vegetable Growers (Confederaci6n Nacional de Productores de Hortalizas) FRUITS vegetables destined to issue certificates of origin and sanitary guides. for export. ________________ (D.O. 6/28/90) 4. AGRICULTURE ---continues AGRARIAN REFORM AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS LAND REFORM Decree that Reforms The modernization process of agrarian reform is not finished yet. The Article 27 of the Constitutional reforms have been approved by the state legislatures, but Constitution the law creation process still requires that the Federal Congress approves a new Agrarian Reform Act and that state congresses approve (D.O. 1/6/92) state laws. The new article 27: 1. Eliminates the prohibition to societies having capital stock (sociedades mercantiles por acciones) to own agricultural land. 2. Eliminates the restriction for institutions other than those specified in the law, to own and manage property other than the buildings needed to achieve their specific goals. 3. Includes the "ejido" and the "communal land" as a form of property in the Constitution. In both ejidos and communities, persons usually have personal rights over specific pieces of land, but were not allowed Lo buy and sell or mortgage those rights freely. 4. Protects Indian communities from territorial break up 5. Guarantees freedom of association and organization for the "ejidatarios" and "comuneros". Their rights over the land are regulatLd. Rights over ejido and communal land can be transformed into tradeable property by decision of the owner of e)ido or communal land --certainly, public use areas are not covered by that provision--. 6. Eliminates the obligation to expropriate in order to endow population centers with arable land and water in fixed proportions. This eliminates the danger of "invasion" of agricultural fields in order to force expropriation and endowment. 7. Establishes agrarian courts for matters concerning land, land regulation, and other agricultural questions. Beforehand, dispute resolution mechanisms were based in the Agrarian Reform Ministry. 4. AGRICULTURE ---continues AGRARIAN REFORM AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS FEDERAL WATER Federal Water Law 1. Creates a system of concessions and allocation for the use of federal LAW water. Abrogates the Federal Water Law (1972) 2. Reestructures the National Water Commission (Comisi6n Nacional del Aguas), which will be formed by a technical council with specific powers. (D.O. 12/1/92) 3. Opens the possibility to trade rights over the use of federal water without previous authorization. 4. Concentrates regulatory powers formerly dispersed between several agencies in the National Water Commission. S. Reinforces the powers of the National Water Commission to prevent and regulate environmental issues. 6. Modifies regulations over irrigation districts and units to improve their operation and facilitate administration by users. 'pq 4. AGRICULTURE ---continues AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS GROWER OF Scheme of quotation in 1. Eliminate the perverse effects created by the previous scheme in SUGAR'S CANE the Social Security quoting over the production, but instead the quote is over extension of System to producers of land cultivated. cane of sugar. 2. Let more flexible negotiation between cane producer and sugar mill (D.O. 20/JUL/93) owner. 3. The whole reforms let an efficient operation of the sector and a fair contribution to the social system. 5. OTHER DEREGULATION PROGRAMS POPULATION AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS IMMIGRATION Decree that reforms 1. Eliminates the requirement of a permit from the Ministry of State to AFFAIRS the General Population among other activities: acquire urban real state, stocks and bunds and to Law is reformed. open bank accounts. (D.O. 7/17/90) (D.O. 12/26/90) 2. Extension of the "non immigrant visitor" status for investors, allowing them multiple entries. 3. Establishes the possibility of acquiring the "immigrant investor" 1A status, as long as the amount invested does not fall during the period of residence. 4. Eliminates the discretionality of the Ministry of State in the determination of the minimum amounts needed to obtain the "immigrant investor" status. LA FISHING AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS FISHING Reforms to the Federal 1. Eliminates the exclusive farming rights of cooperative societuis over Fishing Law. "reserved species" (shrimp, lobster, mussels etc.). (D.O. 12/30/89) 2. Liberalization of the License requirements for aquaculture. (,.,ept Decree which modifies when undertaken in zones of federal jurisdiction). the Rules of the Federal Fishing Law. 3. Eliminates the required permits to transport pro<ucts from fishing. (D.O. 2/7/91) 4. Eliminates the required permits to buy "reserved species". 5. Eliminates the obligation that the ejido (collective farm) be organized as a cooperative society. 6. Deregulation of permits to cooperative societies engaged in f, hing, ejidos and communities for the collection of larvae, newly hatnrt- fish, a eggs and seeds. LA NEW FISHING LAW Decree that publishes 1. Widens the deregulation policies of 89-90, the New Federal Fishing Law (6/25/92) . 2. Eliminates altogether the "reserved species" regulation, whi implied that only coops could fish shrimp, lobster, oysters w ri r 5 species. Now, any company or person can obtain a permit. 3. Establishes a procedure for bidding in permits. 4. Strengthens the instruments of control in ecological issues. o HEALTH AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS SANITARY Reforms to the General 1. Eliminates the need of a sanitary license in premises concerned with REGULATION Health Law. food processing, beverages, beauty and cleaning products and tobacco. It (D.O. 6/14/91) is substituted by-a Eotification scheme, sanitary standards regarding good manufacturing practices and random inspection. 2. Eliminates the need for registration of the above mentioned products 3. Eliminates the permit of "responsible person" and "auxiliary responsible" for the above mentioned premises 4. Of the above mentioned products, only those considered a serious health hazard will be subject to import permits. 5, Deregulates the imports of products as long as they have a sanitary certificate issued in the country of origin, or by laboratories recognized by the Ministry of Health or the Ministry of Commerce and Industrial Promotion (those arriving in Mexico for the first time must be I certified by one of these laboratories). 6. Only tobacco and alcoholic beverages (and some other products) will need authorization for their advertisement. 7. Eliminates the need for pharmacies to have a "chemist in charge" unless the shop sells narcotics and psicotropic substances- 8. Exempts X-ray machines for odontological use from the need of authorization to buy or sell. This is only needed to notify the authorities of its sale or acquisition and its final use. USE OF FEDERAL ZONES (MARITIME) AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS USE OF FEDERAL New rules for the use 1. Eliminates the concept cf federal zone for cliffs. LAND-MARITIME of the territorial ZONES (ZONAS sea, navigable ways, 2. Possibility of granting licences for more than 25 years for l,rge FEDERALES beaches, federal investors. MARITIMO land-maritime zone and TERRESTRES) land won from the sea 3. Granting of a period of time before the expiration date of the license (D.0. 8/21/91) is calculated in order th.t the investor can start building infrastructure. 4. More flexibility given to undertake defensive actions by owne-3 and license holders threatened or actually suffering with flooding. 5. The federal zone is reduced to three meters for touristic dev, (pments and agricultural lands. FEDERAL PROPERTY (BIENES NACIONALES) AREA REGULATORY CHANGES SUMMARY OF 1EFORMS AND AMENDMENTS REFORMS TO THE DECREE THAT REFORMS Some federal property CannL be sold, but only licensed. Thi : LAW REGARDING THE NATIONAL PROPERTY regulates the licensing pin.- us. This is a reform to a law tfot -nna NATIONAL LAW (D.O. 1/3/92) the reach of the policy ini- implemented through regulations to :i PROPERTY federal-maritime zone. In, -eform: 1 Raises the maximum lic.nstng period over federal real state 1i i 20 to 50 years, in order to prc:cure long term investment in infrastrucc.-e. 2. Allows a five year period, previous to the termination of the license, to apply for an extension of the license, in order to provide mor- certainty to investors. 3. Reduces the federal-maritime zone to 3 meters in artificial mainas and in areas established for aquaculture, and eliminates it in cliffs (in general, it is a band of land 20 meters wide around the sea). 00 0 STANDARDIZATION AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS REFORMS TO THE DECREE THAT REFORMS This law applies to functions performed by all federal ministries in FEDERAL LAW ON THE FEDERAL LAW ON Mexico. In the past, these functions were concentrated at SECOFI and METROLOGY AND METROLOGY AND there was not a unified process to issue standards. The new law contains STANDARDI- STANDARDIZATION (D.0. the following innovations: ZATION 7/1/92). 1. Establishes a uniform procedure to issue regulations by federal ministries: a) Regulations must be drafted by National Consulting Committees, where representatives of producers, consumers and scientific institutions participate. b) All proposals of regulations presented to the committees must be supported through cost-benefit analysis. c) Regulations drafted by the committees will be published ano comments by the general public will be received during a 90 day period d) Ministries must publish answers to public comments before issuing the regulation. Li, e) In emergency cases, there is an exemption to this procedure, and 0 ministries can issue regulations that will be in force only for a 6 1 months period, after which the general procedure must be followed before issuing them permanently. 7. The law privatizes the standard writing function, which in the past was exclusive to the Ministry of Trade and Industry. Private organizations will be responsible for development of standards. The government will only supervise that standards do not create monopolies or barriers to the entry of new competitors to the markets. 3. The National System of Testing and Measurement laboratories is enhanced. 4. The law allows the creation of private certification and inspection entities, which will support the process of drafting and discussing regulations and will assist government ministries to verify the compliance with regulations. STANDARDIZATION AREA REGULATORY CHANGES SUMMARY 01' REFORMS AND AMENDMENTS MEASUREMENTS Reforms to the Law on 1. Substantive change ii policy on measurements and si. AND STANDARDS Measurements and Standards 2. Opens the possibil. : private corpoanies to verify m,su: rs and standards, (D.O. 7/1/92) 3. Widens the process c :andard's crea- -on. It force. Lh .,.!It agencies to perform preL ation and to receive comments bef.,! -1 1 standards. 4. Unifies the federal, iit.ragency stanuardization process.. process was the sole re ,- .bility of SECOFI, but now there )s d responsibility of all ag es involved, to avoid duplications contradict ions. 5. Simplifies the procediies for obtaining official seal of appr val for test laboratories, and f.r inernational, mutual recognition of -indards and tests. O COMMERCE AREA REGULATORY CHANGES SUMMARY OF REFORMS AND AMENDMENTS MERCANTILE Federal Law on 1. Draws a clear dividing line between functions that can be performed BROKERS Mercantile Brokers only by mercantile brokers or only by public notaries and functions that Act as Notary accorded to both of them. The latter case refers to mercantile Public (Correduria corporations ("sociedades mercantiles"), thereby increasing competition Piblica) and reducing costs. Abrogates title 3 , 2. Limits mercantile broker's functions to mercantile issues. Their book 1 of the Commerce participation in real state matters is allowed only when a law or Code (art. 51-74) regulation so indicates. New functions are added to the figure of the mercantile broker. (D.O. 12/29/92) 3. Strengthens the figure of the mercantile broker and incorporates new functions. Provides legal certainty in all operations in which the broker intervenes. 4. Strengthens the supervision of federal authoiitiei and increu-a< th1 minimum professional requirements to become a mercantile broker, due to the increase in complexity of their role. Regulation to the 1. Establishes the criteria for the new functions exercised by mercantile Federal Law on brokers. Mercantile Brokers. 2. Establishes strict requirements for compliance by all acts undersigned (D.O. 4/6/93) by mercantile brokers, in order to increase legal certainty. 3. Establishes an objective system of examination in order to obtain the authorization to act as a mercantile broker. 5. Establishes sanctions for violation of these rules or the Federal Law on Mercantile Brokers. IR -63 - ANNEX 2 Page 1 of 2 NACIONAL FINANCIERA Multilateral Finance Department Our ref: BBL-164-III-94-(1232) March 14, 1994 Mr. Manuel Peialver Chief, Country Policy, Industry and Finance Division Operations Evaluation Department The World Bank Washington, D.C. Dear Mr. Pefialver: In the matter of World Bank Loan No. 3087-ME, which funded Mexico's Industrial Sector Adjustment Program and is now in the reimbursement phase, I wish to acknowledge receipt of your letter of January 26 last, to which was attached the draft version of OED's Project Performance Audit Report in this case. Set out below you will find observations on the PPAR which we have received from the Office of the Coordinator of Policies, Studies, and Labor Statistics, within the Secretariat of Labor and Social Welfare: Paragraph 21 contains inaccuracies: (a) Implementation of labor training at the firm level was recognized in 1977 as being justified by the Constitution, with the result that labor/management training committees were then set up; they were thus not dependent on the agreements that predated the labor mobility study, conducted in 1990-1991. (b) The Government of Mexico has never committed itself to establishing a tripartite commission to draft a new Federal Labor Act. Paragraph 22 contains some inaccuracies and would be eliminated if it were rewritten as follows: The study on labor mobility contributed to a better understanding of the determinants of Mexican labor mobility and productivity. The study found that: (a) in contrast with the past, the terms of collective agreements had responded more flexibly to the -64- ANNEX 2 Page 2 of 2 total labor costs and were thus less of a barrier to the mobility of labor than first thought. It is recommended that paragraph 23 be rewritten thus: This study also led to several other important studies, including inter alia: (a) a study of total Mexican factor productivity growth and its underlying causes during the period 1970-1989; (b) a comparative study of labor productivity in Mexico, Canada and the United States; and (c) and was also an input into both the 1990-94 National Program for Training and Productivity, and the Labor Market and Productivity Enhancement Program, signed in 1992. Besides, it provided elements for the introduction of wage earner productivity bonuses at the firm level. The following version is suggested for paragraph 24: While a strict interpretation of the laws would suggest a restrictive and over-regulated labor market, the evidence shows that, in practice, firms enjoy considerable flexibility with some categories of labor (such as temporary and subcontracted workers and non- unionized "white collar" workers). However, labor mobility within firms (reliance on traditional seniority-based promotions and rigidity in the definition of jobs) remains an issue. I would also draw your attention to the following: Paragraph 9, page ix: The inflation rate in 1993, according to official figures, rose to 8.01 percent. Paragraph 15, page x (Technology): The Mexican Institute for Industrial Property was created on December 10, 1993. Yours, etc. Is/ Juan Manuel Izquierdo Sosa Director CC: Julio Alfredo Genel, SECOFI (Secretariat of Trade and Industrial Development) Gustavo Ponce Meldndez, STPS (Secretariat of Labor and Social Welfare) Ramdn Benftez Galarza, SHCP (Secretariat of the Treasury and Public Credit) Timoteo Harris Howard, NAFIN (Nacional Financiera)
World Bank Group · Project Performance Assessment Report
Mexico - Industrial Sector Policy Loan
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World Bank Group
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Project Performance Assessment Report
Country
Mexico
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World Bank