Mexico - Program of Essential Social Services (PROSSE) Project

Document of The World Bank FOR OFFICAL USE ONLY Report No. P-6601-ME MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN THE AMOUNT EQUIVALENT TO US$500 MILLION TO NACIONAL FINANCIERA, S.N.C. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR A PROGRAM OF ESSENTIAL SOCIAL SERVICES (PROSSE) MAY 22, 1995 This document has a restricted distribution and may be used bY recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = New Peso (N$) US$1.00 = 5.9 New Pesos (Mayl995) FISCAL YEAR January 1 - December 31 (GOM; IDB) July 1 - June 30 (IBRD) ACADEMIC YEAR September 1 - June 30 ACRONYMS AND ABBREVIATIONS CAS Country Assistance Strategy CAPFCE Federal School Construction Committee (Comite Administrativo del Programa Federal de Construccidn de Escuelas) CONAFE National Council for Educational Development (Consejo Nacional de Fomento Educativo) CONALITEG National Textbook Commission (Comisi6n Nacional de los Libros de Texto Gratuitos) CONAPO National Population Council (Consejo Nacional de Poblaci6n) COTEIP Technical Committee for Budget Integration (Comite T&enico de Integraci6n Presupuestal) CPP Country Programming Paper DIF Integrated Family Development (Desarrollo Integral de la Familia) GDP Gross Domestic Product GOM Government of Mexico ICB International Competitive Bidding IDB Inter-American Development Bank NAFIN National Financing Company (Nacional Financiera, S.N C.) NCB National Competitive Bidding NBF Not Bank Financed PESE Special Employment Program (Programa de Empleo Especial). PROBECAT Labor Retraining Program (Programa de Becas de Capacitaci6npara Trabajadores) PROSSE Program of Essential Social Services (Programa de Servicios Sociales Esenciales) SEDESOL Secretariat of Social Development (Secretaria de Desarrollo Social) SEP Secretariat of Education (Secretaria de Educacion Piulica) SHCP Secretariat of Finance and Public Credit (Secretaria de Hacienday Credito Pzublico) SSA Secretariat of Health (Secretaria de Salud) STPS Secretariat of Labor and Social Welfare (Secretaria del Trabajo y Previsi6n Social)  FOR OFFICIAL USE ONLY MEXICO PROGRAM OF ESSENTIAL SOCIAL SERVICES (PROSSE) IBRD LOAN AND PROGRAM SUMMARY Borrower: Nacional Financiera, S.N.C. (NAFIN). Guarantor: United Mexican States. Implementing Agencies: Secretariat of Finance and Public Credit (SHCP), Secretariat of Education (SEP), Secretariat of Health (SSA), Secretariat of Labor and Social Welfare (STPS), and Secretariat of Social Development (SEDESOL). Beneficiaries: Same as above. Poverty Category: The PROSSE forms a central part of the program of targeted interventions to Mexico by protecting essential social services to the poor and providing a low-cost social safety net, through short- term employment generation to those adversely affected by the economic crisis, utilizing the CONAPO poverty index, nutrition indicators and self-targeting mechanisms. It thus falls under the Poverty Reduction category. Amount: US$500.0 million equivalent. Terms: Repayment in 15 years, including a three year grace period, at the Bank's standard variable interest rate. Financing Plan: See Schedule A. Net Present Value: Not applicable. Staff Appraisal Report: IBRD Report No. 14392-ME; dated May 22, 1995. IDB Report No. ME-0187; dated May 18, 1995. Map: IBRD Map No.23547. Project Code: MX-PA-40462. 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.l  I  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.N.C. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR A PROGRAM OF ESSENTIAL SOCIAL SERVICES 1. I submit for your approval the following memorandum and recommendation on a proposed loan to Nacional Financiera, S.N.C. (NAFIN) with the guarantee of the United Mexican States, for the equivalent of US$500.0 million to help finance a Program of Essential Social Services (PROSSE). The loan would be at the Bank's standard variable interest rate, with a maturity of 15 years, including three years of grace. NAFIN would be the Borrower and the Secretariats of Finance and Public Credit (SHCP), Public Education (SEP), Health (SSA), Labor and Social Welfare (STPS) and Social Development (SEDESOL) would be the executing agencies. 2. Background: Facing near-depletion of its foreign reserves, the Government of Mexico (GOM) was compelled to float the peso on December 20, 1994. A currency crisis ensued and, as a result, the economy is contracting sharply this year. The origins of the crisis, the Government's economic program for dealing with it, and an assessment of medium-term prospects are detailed in the 1995 Country Assistance Strategy (CAS), which is being distributed concurrently with this Memorandum. 3. The crisis in Mexico has prompted the Bank Group, in coordination with the Intemational Monetary Fund, the Inter-American Development Bank (IDB), the United States and other G-10 countries, to respond with a major program of support. The proposed PROSSE initiative is an important component of the assistance efforts of the IBRD and the IDB, in response to the crisis. 4. Social Implications and the Social Sectors. Economic conditions are expected to remain extremely difficult in Mexico over the next 18 months. Open unemployment has already risen sharply and is expected to increase further, with estimates of up to one million job losses in 1995 (the unemployment rate had reached 5.3 percent by February 1995, its highest level since 1987). Real wages will also decline sharply and poverty, which already affects about 34 percent of the population in varying degrees, is likely to increase. The GOM's economic program calls for a very strong fiscal adjustment, which necessarily requires major real cuts in aggregate public expenditures and defers a number of important investment programs and projects. 5. The GOM is deeply concerned about the possible dual impact of increasing poverty and the reduced budgetary resources available for essential social services targeted to the poor, and is therefore committed to protecting key social expenditures and to strengthen existing safety net measures. For that reason, in its revised programmable federal budget for 1995, the GOM has increased the allocation to social sector expenditures from 52.6 percent (1994) to 55.4 percent in 1995. The costs of the key social sector and safety net programs amount to 7.7 percent of total social sector expenditures programmed for 1995. To help finance these programs, the GOM is requesting US$500.0 million from the World Bank, and US$500.0 million from the IDB, to be disbursed over the two year period 1995-96. 6. In the education sector, failure to protect essential basic education (preschool, primary and lower secondary) expenditures could undermine the very high net enrollment rate of 98  percent, particularly for children in poor and isolated rural areas and indigenous populations, prevent attainment of increased access for these groups, and reverse the improvement in the quality and efficiency of basic education made so far in the 1990s. The GOM is seeking to protect investments in essential inputs to the sector, such as textbooks, so that educational quality, cognitive achievement, and thus the efficiency of expenditures across the sector, can be maintained, and so that the basic educational opportunities for the vulnerable poor can be expanded. 7. In the health sector, further cuts in expenditures on essential health services for the poor, who do not have health insurance coverage and therefore rely upon the SSA for their basic health care, could widen the existing large disparities in health status between geographic regions and income groups. Already life expectancy stands at 55 years in rural areas, versus 71 years in urban areas; and 53 years among the poor, as compared to 73 years among the wealthy. Similarly, infant mortality ranges from 20 per 1,000 in richer states to more than 50 per 1,000 in the poorer southern states. The budget for cost-effective preventive and curative interventions targeted to the poor need to be protected to prevent an exacerbation of these disparities. The GOM is seeking to protect the budget allocations for the basic health care for the poor and to raise the efficiency of service delivery. 8. With respect to key social safety net schemes, the GOM expects a markedly increased demand due to the economic crisis. Therefore, it is seeking external support for selected programs which it considers to be relatively effective and to address the most acute priorities. These include: (i) retraining and employment generation, expansion of the ongoing Labor Retraining Program (Programa de Becas de Capacitaci6n para Trabajadores: PROBECAT) for unemployed workers and for a temporary employment program (Programa Especial de Empleo: PESE), announced by President Zedillo on March 17, 1995, which would generate approximately 555,000 temporary jobs in 1995 in priority regions confronting the highest indices of open unemployment and poverty; and (ii) the high priority food and integrated nutrition program, which is well targeted to vulnerable population groups, such as young children, pregnant and lactating women, in the poorest states and integrates food, nutrition and other basic social services. 9. Program Objectives: The PROSSE has three objectives, to: (a) protect essential social services for the poor, through the provision of textbooks to all students, and on a targeted basis, teaching materials, maintaining access to pre-school, primary and lower secondary education in isolated rural areas, provision of a basic health care package, vaccines, pharmaceuticals and medical supplies, and community health outreach campaigns to the uninsured population; (b) strengthen existing social safety net measures, to cushion the poor from the effects of the economic crisis through retraining, the creation of short term employment opportunities for the unemployed and underemployed, and a nutrition program targeted to vulnerable groups in the poorest areas; and (c) lay the foundation for measuring and implementing efficiency gains in the social sectors over the medium term through technical assistance and program monitoring. 10. Program Description: The PROSSE has been designed as a time slice operation to finance ongoing high priority social sector programs within the existing budget allocations. It consists of five sub-programs: (a) basic education services; (b) basic health services; (c) retraining and employment generation; (d) an integrated nutrition program for vulnerable groups; and (e) monitoring and evaluation of social sector programs. In each sub-program, the  GOM will seek to improve the efficiency of public expenditures, within the constraints of the two- year implementation period, using agreed monitoring and evaluation indicators. Each of these sub-programs is summarized below: 11. The basic education services sub-program (total cost US$593.5 million or about 29.7 percent of total costs), to be implemented by SEP through dependent agencies, includes: * the provision of pre-school and primary school education to children in remote rural areas, indigenous populations and in low income urban areas, through the National Council of Educational Development (Consejo Nacional de Fomento Educativo: CONAFE); * the production and distribution of 91.5 million textbooks for primary education and 7 million teacher guides, through the National Textbook Commission (Comisi6n Nacional de los Libros de Texto Gratuitos: CONALITEG) and a productivity study on CONALITEG operations; and * the improvement of access to rural preschool and primary education (serving rural, indigenous and low income urban children), and rural lower secondary education utilizing television (Telesecundaria), through improvements to and construction of new facilities constructed by the Federal School Construction Committee (Comite Administrativo del Programa Federal de Construccion de Escuelas: CAPFCE). The IBRD loan would finance the costs of production, acquisition and distribution of textbooks. The IDB loan would finance the other costs noted above. 12. The basic health services sub-program (total cost US$746.5 million or about 37.3 percent of total costs) to be implemented by the SSA, would benefit mostly the population of 33 miillion uninsured through: . priority preventive programs, which are cost effective public health interventions, by: (a) immunizing 20 million children annually against the most common preventable diseases; (b) control and treatment of endemic and communicable diseases; (c) screening for early detection of cancer, diabetes, and other chronic diseases, involving over 4 million patients annually; (d) family planning and reproductive health for about 2.5 million new users per year; (e) maternal and child health, pre-and postnatal care, benefiting about 9 million individual patients annually; and (f) health and nutrition education and social marketing of public health programs; * basic curative health care, for the uninsured population, delivered through the basic health care and mobile outreach units; and * health infrastructure, equipment and maintenance for first and second level health facilities and public health laboratories, scheduled to be initiated in 1995 and concluded by the end of 1996. The IBRD loan would finance the civil works program, the acquisition, storage and distribution of vaccines, essential drugs, medical supplies and basic equipment to the first level care network, per diem and travel for supervision personnel, and community outreach.  - 4 - 13. The employment generation sub-program (total cost US$644.2 million or about 32.2 percent of total costs) includes two elements: (a) retraining and stipends for 800,000 unemployed and underemployed workers during 1995 and 1996 through PROBECAT, managed by STPS; and (b) a civil works program to generate approximately 550,000 short-term jobs in 1995 in infrastructure development targeted to poor areas with high unemployment through the PESE. In the case of PROBECAT, at least 150,000 of the trainees would benefit from a new training modality under PROBECAT, receiving on-the-job basic skills training in areas such as plumbing, electricity, brick-laying and receiving a stipend to work in rehabilitation and public works programs in low income areas whilst others would receive training to establish their own small businesses. The remaining trainees would follow the more traditional PROBECAT modality of training center and in-plant training. The average stipend would be for three months set at the level of one minimum wage (currently ranging from N$15 to 18 per day) plus a small transport allowance. In the case of the PESE, workers would receive compensation set at the level of 80 percent of the minimum wage. Utilizing these two programs, the GOM is seeking a balanced response to tackle rising urban unemployment and chronic rural underemployment, which is exacerbated by the contraction of the formal sector. Hence 70 percent of the beneficiaries under PROBECAT would be urban; whilst 70 percent of the short-term employment under SEDESOL would be generated in rural areas for works such as road, bridge and canal rehabilitation. The IBRD loan would finance the cost of training, stipends and up to 10,000 tool-kits required for the on-the-job training modality, under PROBECAT. The IDB loan would finance the scattered civil works under PESE. 14. The integrated nutrition sub-program (total cost US$8.7 million or about 0.4 percent of total costs) would be based on basic nutrition and health interventions to improve the nutrition status of vulnerable groups. The sub-program would provide a package of interventions for poor rural families with vulnerable groups (i.e. with children under age 5, pregnant and lactating women) consisting of: (a) distribution of a basic food basket containing maize flour, beans, iodized salt, sugar and vegetable oil; (b) distribution of micronutrients; (c) growth monitoring of children; and (e) basic nutrition and health education. The community would participate in the program by assisting in the food distribution process and developing activities such as construction of latrines, improved water supply, and establishment of vegetable gardens. At the central level, the SSA and DIF (Integrated Family Development) would be the apex organizations which would devolve to the states and municipalities the implementation of the program. The program would be implemented through SSA in 1995 in the state of Hidalgo, and would be financed by the IBRD loan. The extension of the program to other priority states would be implemented in 1996 and would be financed by the IDB loan through similar programs under SEDESOL. 15. The monitoring and evaluation sub-program (total cost US$2.1 million or about 0.1 percent of total costs) will strengthen the capacity of SHCP to measure and monitor the outputs of social sector expenditures thus providing the foundation for a system to increase efficiency in such expenditures over the medium term. Priority would be given to developing the system for those programs offering the greatest scope for efficiency gains, namely: (a) hospital care; (b) secondary technical education; and (c) food and nutrition programs. An outline of the methodologies and work program for this sub-program is attached in Annex 1. The LBRD loan would finance technical assistance to establish such a system and the costs of physical and financial auditing and qualitative beneficiary assessments of the PROSSE sub-programs.  16. Program Costs and Financing: Total costs of the PROSSE are estimated at about US$2.0 billion. The proposed program would be financed by a Bank loan of US$500.0 million, and an IDB loan of US$500.0 million, both to be disbursed over the two year period 1995-96, with the target of disbursing 60 percent of these resources in the critical year of 1995. By financing and strengthening existing programs both implementation and disbursements will be accelerated. Retroactive financing in the order of 20 percent of the IBRD loan amount is proposed to support the GOM's eligible expenditures incurred since February 19, 1995. The proposed IBRD and IDB loans would finance 50 percent of total program costs, or 54.3 percent of program costs net of taxes and duties. The two loans would finance 100 percent of foreign exchange expenditures and 38.9 percent of local expenditures, net of taxes. The loans would be made to Nacional Financiera, S.N.C. (NAFIN), which would make the funds available to executing agencies for the implementation of the program. For the IBRD loan, special account in US dollars with an authorized allocation of US100.0 million (20 percent of the loan amount) would be established at the Banco de Mexico. A breakdown of estimated costs and financing are shown in Schedule A. Amounts and methods of procurement and disbursement, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Mexico are given in Schedules C and D, respectively. The Staff Appraisal Report No. 14392-ME, dated May 22, 1995, is also attached. 17. Program Implementation: The program would be overseen by the SHCP through the existing Technical Committee for Budget Integration (Comite Tecnico de Integracion Presupuestal: COTEIP). The COTEIP is chaired by SHCP (Politica Presupuestal) and includes NAFIN, other elements of SHCP (such as Credito PuTblico) and would include high-level representatives of the other PROSSE implementing agencies for this purpose. COTEIP would monitor overall implementation and oversee the process of physical and financial auditing of PROSSE activities as a means of laying the foundation for future efficiency gains in social sector expenditures. SHCP would ensure that the budgetary resources for the programs supported by the PROSSE would be released in a timely manner. NAFIN would be responsible for ensuring that the executing agencies adhere to the Banks' procurement guidelines and that the requisite documentation is prepared promptly for disbursement by the Banks. SEP, together with its subsidiary organizations - CAPFCE, CONALITEG and CONAFE - would implement the basic education sub-program. SSA will implement the basic health services sub-program. STPS would implement the labor training sub-program and SEDESOL would implement the short-term employment generation sub-program through the state and municipal governments. SEDESOL, SSA and DIF would implement the priority nutrition sub-program through the state and municipal governments. SHCP would implement the monitoring and evaluation sub-program. 18. Program Sustainability: The program will be fully sustainable as it seeks to finance ongoing high priority Government programs which will revert to full GOM financing after the anticipated economic recovery. Furthermore, the efficiency gains anticipated over the implementation period under the monitoring and evaluation sub-program would help to increase the cost-effectiveness of the GOM's recurrent expenditures, thus further enhancing sustainability. 19. Lessons Learned: The relevant lessons which have been learned from the implementation of Bank-financed projects and incorporated into this program are as follows: (a) Education: Quality and Non-personnel Expenditures. The channeling of resources to non-personnel costs has been instrumental in improving the quality of primary education in targeted areas. Access to textbooks has been one of the most cost effective education  -6 - inputs to increase students' academic performance. There is vast empirical evidence, including studies financed by the Primary Education Project (Loan 3407-ME), indicating that textbooks improve student knowledge of science, mathematics and language. PROSSE builds upon this experience by financing textbooks, infrastructure and other educational materials in rural areas. Access to Basic Education in Rural Areas. Low access in rural areas is due in part by the poor living standards of the family, and by the lack of adequate schooling system and infrastructure. SEP regular services are not provided in many small rural communities, but a low cost alternative education modality, with strong community participation, has been successfully developed by CONAFE. PROSSE would expand infrastructure, mainly in rural areas, and ongoing CONAFE rural education programs. Targeting. The most effective way to reach the economically and educationally disadvantaged is by specifically targeting the poor. Both CONAFE and CAPFCE focus most project activities to the poorest areas of the country. (b) Health: The ongoing Bank-financed First Basic Health Project (Loan 3272-ME) was the first Bank experience with a health related project in Mexico and provided the most valuable source for lessons to consider in designing the proposed project. Drawing from the First Basic Health Project, the features that are critical for the SSA to accomplish its mandate to provide health benefits for the uninsured population are: Targeting. While the First Basic Health Project targeted poor states, resources often did not reach populations most in need within the state. Therefore, it is necessary to target delivery of a cost-effective basic health care package to the most disadvantaged municipalities within a poor state. This is the approach being followed under PROSSE. Improve Access to Basic Health Care. The First Basic Health project supported infrastructure rehabilitation of first level health centers and second level hospitals in order to provide an environment suitable for basic services of high quality for the uninsured. It has been demonstrated that the use factor of rehabilitated facilities increased significantly. PROSSE will continue to finance the rehabilitation of the first and second level care network to provide quality services to the uninsured. Rural staffing. The First Basic Health Project supported the training and recruitment of community health care workers which are selected by the community where they will serve. They were utilized in the project for staffing health posts in communities where no medical doctor was available. The PROSSE will build on this experience and finance training for community health workers to serve remote communities. (c) Employment Generation: Positive Impact of Training Programs and the Need for Targeting. The Bank's experience with both pre-service and in-service training has demonstrated their positive impact both in increasing the earnings profile of trainees and meeting the needs of private and public sector skilled employees. Careful use of the selection criteria agreed under the Bank-financed Labor Market and Productivity Enhancement Project (Ln. 3542-ME) will be continued under PROSSE for the regular PROBECAT programs. However, those trainees with lesser educational attainments and work experience would be able to participate in the on-the-job training modality. Public and Private Sector Linkages. Experience has shown that close collaboration is required between publicly funded training institutions and the private sector to ensure that course content and graduate output match employers' needs and hence employment opportunities available. PROSSE will promote a stronger linkage between public and private sector for the regular PROBECAT program. Flexibility and Adaptability. The economic crisis in  - 7 - Mexico has focused attention on the need to shift training and education programs away from rigid courses not directly related to available employment opportunities. PROSSE responds to this by supporting combined basic skills and direct employment in rehabilitation programs. Unemployment versus Underemployment. Experience in Mexico has shown that open unemployment is the tip of the iceberg. A more serious problem is underemployment, with the need being to increase the productivity of employees. Under PROSSE, PROBECAT will be opened up to the underemployed in the informal sector to acquire skills, enhance their productivity an obtain more secure employment. (d) Nutrition: The evaluation of the pilot nutrition-project conducted under the Mexico Second Agricultural Structural Adjustment Loan (Ln. 3357-ME, FY91) found that: (a) measurable results should not be expected before two years of program implementation; (b) the program should be targeted to the places with the highest rates of malnutrition; (c) the food basket should contain no rnore than a few commodities and yet address micronutrient deficiencies; (d) implementing agencies at the state level and community levels should be clearly defined; (e) the nutrition education, including growth monitoring, needs careful design and integration with the rest of the intervention package; and (f) the community volunteers need close supervision and monitoring. These lessons have been incorporated into the integrated nutrition sub-program to be supported under PROSSE, which will be closely monitored and objectively evaluated. 20. Rationale for Banks' Involvement: The proposed loan is consistent with the IBRD's CAS which will be discussed by the Board on June 15, 1995 and the IDB's Country Programming Paper (CPP) which will be discussed with the GOM later this year. The strategy focuses on the revival of growth, poverty reduction and human resources development, and environmental sustainability. The proposed loan is critical to the IBRD's CAS and the IDB's CPP over both the short and longer term. The loan is one of three proposed IBRD operations responding to Mexico's current financial crisis. It provides a safety net to the most vulnerable groups affected by the crisis and helps maintain the gains achieved in social indicators in recent years. Over the longer term, this project continues the work of both Banks in poverty reduction and human resource development, which remain key to achieving growth, equity and sustainable development in Mexico. 21. The IBRD and the IDB are the major institutions that have financed social sector investment in recent years and are the only institutions which can provide the magnitude of the external financial resources to support essential social service programs in Mexico during its current fiscal difficulties. The Banks have built up an in-depth knowledge of the social sectors in Mexico through their extensive operations and sector work. The Banks' experience in supporting project activities in the social sectors, provides the foundation for program improvements which, although limited due to the short duration of this program, are supported under the PROSSE. Moreover, the experience gained by the executing agencies with the Banks' policies and procedures, will facilitate the rapid disbursement of the loan funds, which is essential for purposes of the overall macroeconomic stabilization program. 22. Agreed Actions: During negotiations, the Banks and the GOM confirmed that the GOM would: (a) endeavor to execute budgetary policy in the social sectors, including mechanisms to protect budgetary allocations to the PROSSE during the financial crisis and measures to increase efficiency of social sector expenditures, according to the agreed letter of policy intent; (b) release  - 8 - budgetary amounts in a timely manner to the executing agencies under PROSSE in 1995 in accordance with the agreed 1995 budget allocations and physical targets included in Annex 2 of the SAR and that the GOM may substitute an alternative budget, if satisfactory to the Banks, for the PROSSE prior to June 30, 1995; (c) review the results of the CONALITEG productivity study and present an action plan to the Banks by July 31, 1996; (d) execute the PESE through SEDESOL according to the agreed operational modalities; (e) establish a satisfactory system of social sector expenditure efficiency monitoring indicators no later than June 30, 1996 and that the system would be implemented throughout the remaining life of the PROSSE; (f) through SHCP, NAFIN, SEP, SSA, SEDESOL and STPS, would: (i) have the records and accounts for each fiscal year audited by independent and qualified auditors with a separate opinion provided on SOEs, in accordance with generally accepted auditing standards and procedures, and with the specific current understanding with the Mexican authorities; (ii) furnish to the Banks, no later than six months after the end of each year, a certified copy of the agreed audit reports; and (iii) furnish to the Banks such other information concerning the records and accounts as well as the audit as the Banks would from time to time reasonably request; (g) the GOM would undertake the Quarterly Reviews of the budgetary releases and physical implementation progress of PROSSE with the Banks; and (h) prepare a preliminary action plan (including physical targets and budget, using Annex 2 of the SAR as a basis), for the programs to be supported by PROSSE in 1996 as part of the November 1995 review, and confirm a definitive action plan for the programs to be supported by PROSSE in 1996, satisfactory to the Banks, as part of the February 1996 review and that no changes would be made in the allocations for such programs without prior consultation with the Banks. There are no conditions for loan effectiveness other than the standard contractual arrangements and legal opinion conditions applicable to Mexico. 23. Program Objective and Poverty Category: The PROSSE forms a central part of the program of targeted interventions for Mexico by protecting essential social services to the poor and strengthening a low-cost social safety net, through short-term employment generation to those adversely affected by the economic crisis and food and nutrition programs to the most vulnerable groups of the population. It thus falls under the Poverty Reduction category. The essential social services included are focused on the poor in the following manner: CONAFE works only among the poor (mainly in isolated rural areas); civil works covered under PROSSE are exclusively in poor rural and peri-urban areas; and the SSA services are self-targeted to the poor, as they cover only the population without access to the social security system or without the financial means to utilize the private sector. The labor retraining and employment promotion program is self-targeted exclusively to the unemployed and underemployed as they are registered by the state employment services, in the case of STPS, or self-targeted to the poorest, by the payment at only 80 percent of the minimum wage, in the case of the short term employment program under SEDESOL. The nutrition program uses nutritional indicators, which have an extremely high correlation with poverty, and the CONAPO poverty index (based upon 10 census indicators of poverty) to identify the beneficiary municipios in the selected poor states. 24. Environmental Aspects: No major environmental issues are foreseen. However, due to the inclusion of the scattered small civil works physical projects under the employment generation sub-program, PROSSE is rated category "B" for environmental purposes. The environmental impact of sub-projects is expected to be handled according to the criteria and procedures agreed in the IDB financed Mexico Municipal Development Program (Loan ME-0051, FY 95). 25. Participatory Approach: A number of elements of PROSSE involve strong community participation, namely: (a) under the education sub-program, the community provides food and  - 9 - accommodation for the CONAFE community teachers in rural areas, whilst indigenous populations participate in the development and design of textbooks for indigenous education; (b) under the health sub-program, community participation is mobilized during the health campaigns; (c) under the employment sub-program, within the on-the-job training modality of PROBECAT and in PESE, communities would form committees and make proposals to the municipio for small infrastructure projects to be managed by themselves (with technical support from the states and municipios); and (d) the priority nutrition program involves close community participation in: health and school activities; food distribution logistics; and improvement of rural sanitation. 26. Program Benefits: The project would help reduce likely increases in poverty brought about by the economic recession, through preserving essential social services for the poor, providing training and employment enhancement opportunities for 800,000 unemployed and underemployed workers over the two year period through PROBECAT, plus approximately 550,000 short-term jobs annually for the unemployed poor through the SEDESOL program, providing enhanced food and nutrition supplements to women and children in priority areas. Indigenous populations will benefit in particular from the services provided under the basic education, health and nutrition sub-programs as these programs are targeted to the poorest areas where the indigenous populations are concentrated. The primary benefit of the PROSSE for the selected services and programs is that it commits SHCP and the executing agencies to support priority programs targeted to the poor. 27. Risks: The PROSSE is subject to four potential risks: (a) the uncertainty regarding budgetary allocations; (b) program diversity; (c) that PROSSE programs fail in their targeting arrangements and efficiency; and (d) failure to disburse adequately as a result of inexperience of some implementation agencies with the two Banks' procurement procedures. 28. Dealing with the first risk, uncertainty regarding budgetary allocations, is an essential element of PROSSE. Mexico continues to face a high degree of uncertainty in terms of the macroeconomic variables which determine the budgetary ceilings. The GOM has undertaken to protect high priority social service programs from further cuts under the PROSSE. The Banks will monitor budgetary releases carefully during implementation on a quarterly basis. 29. The second risk, program diversity, is being mitigated by concentrating upon a smaller number of agencies, most of which already have experience with IBRD or IDB procedures. Cofinancing has also greatly facilitated simplification: for example the IBRD will exclusively finance the SSA, building upon the MBRD's long operational experience with the SSA; whilst the IDB will finance the entire PESE under SEDESOL, where the IDB procedures are well adapted to the realities of a highly decentralized program. 30. The third risk, is that the PROSSE programs failing either their targeting arrangements or efficiency gains. All of the PROSSE supported programs are targeted to the poor to varying degrees, however, there are leakages with even the best targeted programs. Targeting effectiveness will be monitored carefully during supervision and through the physical auditing arrangements. Increasing the efficiency of the programs supported by PROSSE, along with other social sector programs, will need to be worked out over the medium-term. PROSSE will lay the foundation and develop methodologies to measure, and provide incentives to increase efficiency through the monitoring and evaluation sub-program.  - 10 - 31. Within the fourth risk, a potential problem that could impede disbursements is the inexperience of agencies such as CONALITEG, DIF, some health directorates and state health secretariats in Banks' procurement procedures. To minimize this risk, training of procurement staff in these agencies will be organized as part of the Banks' supervision programs, and technical assistance will be provided by staff at the Banks' Resident Missions. 32. Recommendation: I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank, and recommend that the Executive Directors approve it. Richard H. Frank President ad interim Washington, D.C. May 22, 1995 Attachments  - 11 - Schedule A MEXICO PROGRAM OF ESSENTIAL SOCIAL SERVICES (Total Costs) (US$ milfion) ..........,:....:.... ...........,... ...... ~~~~~~~~.. . . ... :.: : . ,0i,S: .... A. Basic Education Services 1. Basic Education for the Poor (CONAFE) 107.6 24.8 132.4 2. Textbooks for Basic Education (CONALITEG) 95.2 66.3 161.5 3. Basic Education Facilities (CAPFCE) 241.3 58.3 299.6 .... .... .. . .. B. Basic Health Services 1. Priority Preventive Programs 255.5 52.4 307.9 2. Basic Curative Services 317.7 18.0 335.7 3. Basic Health Infrastructure 75.3 27.6 102.9 ............ .. ...6~ C. Retraining and Employment Generation 1. Retraining for the Unemployed (PROBECAT) 200.9 25.0 225.9 2. Targeted Employment Generation (PESE) 334.7 83.6 418.3 D. Nutrition 1. Protecting Vulnerable Groups 6.0 2.7 8.7 :.:--....~~ ~ ~~ ~ :-::: -: .. .......:..... .. . . . .... :: : ... .. ..:. -. .. . .- .... ..-: E. Monitoring and Evaluation 06 2.1 F. PeV* 0.0 5.0 5.0 .......'.' ' ' ..... .:':"':"',''" '''.".'"."" ""."'.""."'.'.""'"."'''':''...'.'':""""''" . ''. '''"'. ''. *-FIV is the inspection fee charged by the IDB on its loans and represents one percent of t.he loan arnount. FINANCING PLAN Local Foreign Total --------------- US$ million ---------- Goverunment of Mexico 1,000.0 0.0 1,000.0 IBRD 308.5 191.5 500.0 IDB 327.2 172.8 500.0 TOTAL 1,635.7 364.3 2,000.0 ' Includes duties and taxes estim ated at about US$159.1 million.  12 Schedule B MEXICO PROGRAM OF ESSENTIAL SOCIAL SERVICES PROCUREMENT METHODS BY CATEGORY US$ nillion Category ICB NCB Other N.B.F. Total IBRD IDB IBRD IDB IBRD IDB IBRD IIDB IBRD IDB Works 68.9 130.4 418.3 67.6 68.9 616.3 (34.8) (84.0) (277.8) (34.8) (361.8) Goods & Equipment 7.4 14.1 0.9 1.6 13.57'7 0.1 0.8 24.3 22.6 40.1 (_ 55 (11.9) 0.7 (1.3) (9.7) (15.9) (13.3) Educational 10.2(2) 1.5 64.4() 0.3 72.4 145.2 1.8 Materials (7.5) (1.3) (45 9) (0.2) (52.5) (105.9) (1.5) Pharmaceut., Med. 9.275) 108.8(6) 2.2 118.0 2.2 Supplies & Food (5.3) (59.6) (1.3) (64.9) (1.3) Supplements T.A. and Studies 12.5 5.9 12.5 5.9 (10.7) (5.9) (10.7) (5.9) Temporary Fixed 39.5 0.3 39.5 0.3 Term Staff (29.3) (0.3) (29.3) (0.3) Training and 217.3 97.5 217.3 97.5 Stipends 98_(166.2)_ (84.8) (166.2) (84.8) Operational Expenses 76.9(8) 29.6 49.9(9) 9.8 389.9 50.8 516.7 90.2 ______________ ____ __ (49.3) (19.7) (23.0) (6.4) (72.3) (26.1) F.I.V.* 5.0 5.0 ___________________ ___________ ___________ ~~~~~~~(5.0) (5.0) Total 17.6 15.6 220.3 161.9 513.9 539.1 390.7 142.7 1,140.7 859.3 (13.0) (13.2) (136.0) (105.2) (351.0) (381.5) (500.0) (500.0) Figures in parentheses are the respective amounts financed by the Includes US$ 106.0 million equivalent for LIB for respective Banks. pharmaceuticals, and US$0.5 million equivalent for LIE for micronutrients and national shopping for US$4.5 million equivalent for acquisition and Includes US$11.5 million equivalent under LIB for medical distribution of food stuffs by DICONSA. equipment. (7) Does not involve procurement. (2) Includes US$10.2 million equivalent for paper for production of (8) Includes contracts for office supplies, surgical gloves, operating elementary school textbooks by CONALITEG in 1996. gowns and related protective gear. (3) For contracts of printing services for SSA for both 1995 and 1996 (9) Includes national shopping for equipment and building and CONALITEG for 1996. maintenance services and US$5.8 million for storage and distribution of (4) Includes US$63.1 million equivalent for contracts for paper and pharmaceuticals and medical supplies. printing services awarded by CONALITEG under retroactive financing by national shopping, and US$9.3 million equivalent, for transportation, *-FIV is the inspection fee charged by the IDB on its loans and represents warehousing and distribution of textbooks. one percent of the loan amount. (5) Includes financing of contracts for transportation, warehousing and distribution of US$9.2 million equivalent for pharmaceuticals and N.B.F. Amounts not financed by either of the Banks. medical supplies.  13 Schedule B MEXICO PROGRAM OF ESSENTIAL SOCIAL SERVICES WITHDRAWALS OF THE PROCEEDS OF THE LOAN Amount of the Category Loan Allocated % of Expenditures to be Financed (in US$ million equivalent) l 1. Civil Works. 26.0 85% for 1995, 50% for 1996 2. Goods & Equipment a. Educational Materials 98.0 85% b. Pharmaceuticals and 60.0 85% for 1995, 50% for 1996 Medical Supplies c. Other Goods and 14.0 85% Equipment d. Food Supplements 3.0 85% for 1995, 50% for 1996 3. T.A and Studies 10.0 100% 4. Remuneration for 25.0 100% for 1995, 75% for 1996 temporary Fixed Term Staff 5. Training & Stipends 166.0 100% for 1995, 75% for 1996 6. Operational Expenses 63.0 85% for 1995, 50% for 1996 7. Unallocated 35.0 Total 500.0 MEXICO PROGRAM OF ESSENTIAL SOCIAL SERVICES ESTIMATED DISBURSEMENTS TIMETABLE IBRD Fiscal Year 1995 7 1996 1997 Annual 100.01/ 300.0 100.0 Cumulative 100.0 400.0 500.0 1/Includes an initial SpecialAccountdeposit of US$100.0 million. Retroactive financing of uptoUS$100.0 millionwould be permitted for eligible expenditures incurred since February 19, 1995.  14 Schedule C MEXICO PROGRAM OF ESSENTIAL SOCIAL SERVICES TIMETABLE OF KEY PROJECT PROCESSING EVENTS (a) Time taken to prepare Two months (b) Prepared by The GOM: (Secretariat of Finance and Public Credit (SHCP); NAFIN; Secretariat of Education (SEP); Secretariat of Health (SSA); Secretariat of Social Development (SEDESOL); Secretariat of Labor and Social Welfare (STPS)) with the support of the two Banks. (c) First Bank mission : February 1995 (d) Appraisal mission departure March 1995 (e) Negotiations May 1995 (f) Planned date of effectiveness June 1995 (g) List of relevant PCRs Manpower Training (Loan 2876-ME), Nov. 1993 and PPARs  -15 - SCHEDULE D MEXICO PROGRAM OF ESSENTIAL SOCIAL SERVICES STATUS OF BANK GROUP OPERATIONS IN MEXICO As of April 30, 1995 Xd,.,.._.,,.,.,,,,,..,.,,,,.,.,..,. 0.............................................. 114 loans fully disbursed 14,551.84 Of which SECALs, SALs, Program Loans, and Interest Support Ln. 1929-ME 1981 BANOBRAS Railway IV 149.88 Ln. 2331-ME 1983 BANCOMEXT Export Development 349.33 Ln. 2745-ME 1987 BANCOMEXT Trade Policy Loan I 498.63 Ln. 2777-ME 1987 BANCOMEXT Export Development II 246.37 Ln. 2882-ME 1988 BANCOMEXT Trade Policy Loan I 500.00 Ln. 2916-ME 1988 NAFIN Steel Restructuring 100.00 Ln. 2918-ME 1988 NAFIN Agricultural Sector Loan 300.00 Ln. 2919-ME 1988 NAFIN Fertilizer Sector 200.00 Ln. 3085-ME 1989 BANOCOMEXT Financial Sector Adjustment 486.41 Ln. 3087-ME 1989 NAFIN Industrial Sector Policy 497.51 Ln. 3086-ME 1989 NAFIN Public Enterprise Reform 499.39 Ln. 3159-ME 1990 BANCOMEXT Interest Support Loan 1,260.00 Ln. 3207-ME 1990 BANOBRAS Road Transport & Telecom. 380.00 Ln. 3309-ME 1991 BANCOMEXT Export Sector 25.00 Ln. 3357-ME 1991 NAFIN Agricultural Sector Adj. II 400.00 Subtotal 5,892.52 Ln. 2658-ME 1986 NAFIN Agricultural Dev. ProderithII 88.30 24.98 Ln. 2666-ME 1986 BANOBRAS Municipal Strengthening 40.00 0.34 Ln. 2669-ME 1986 BANOBRAS Solid Waste Management Pilot 25.00 7.50 Ln. 2824-ME 1987 BANOBRAS Urban Transport I 90.98 15.50 Ln. 2858-ME 1987 NAFIN Small/Medium-Scale Industry IV 100.00 0.32 Ln. 2916-ME 1988 NAFIN Steel Sector Restructuring 321.01 49.78 Ln. 3047-ME 1989 NAFIN Industrial Restructuring 250.00 9.01 Ln. 3083-ME 1989 NAFIN Hydroelectric Development 460.00 38.42 Ln. 3140-ME 1990 BANOBRAS Low-Income Housing II 350.00 4.08 Ln. 3189-ME 1990 NAFIN Transmission & Distribution 450.00 3.57 Ln. 3208-ME 1990 BANOBRAS Telecomm. Technical Assistance 22.00 0.44 Ln. 3271-ME 1991 BANOBRAS Water Supply & Sanitation 300.00 0.56 Ln. 3272-ME 1991 NAFIN Basic Health Care 180.00 58.86 Ln. 3310-ME 1991 NAFIN Decentralization & Regional 350.00 11.97 Develop. Ln. 3358-ME 1991 NAFIN Technical Training m 152.00 50.77 Ln. 3359-ME 1991 NAFIN Minring Sector Restructuring 200.00 103.63 Ln. 3407-ME 1992 NAFIN Primary Education 250.00 88.21 Ln. 3419-ME 1992 NAFIN Irrigation & Drainage Sector 400.00 195.37 Ln. 3461-ME 1992 BANOBRAS Environment/Natural Resources 50.00 33.77 Ln. 3465-ME 1992 NAFIN Agricultural Technology 150.00 126.60 Ln. 3475-ME 1992 NAFIN Science & Technology 189.00 135.38 Infrastructure Ln. 3497-ME 1992 BANOBRAS Housing Market Development 450.00 133.50 Ln. 3518-ME 1993 NAFIN Initial Education 80.00 66.56 Ln. 3542-ME 1993 NAFIN LaborMarket&Prod. 174.00 95.74 Enhancement Ln. 3543-ME 1993 NAFIN Transport Air Pollution Control 220.00 185.69 Ln. 3559-ME 1993 BANOBRAS Medium Cities Transport 200.00 181.65 Ln. 3628-ME 1993 BANOBRAS Highway Rehab. & Traffic Safety 480.00 330.39 Ln. 3704-ME 1994 NAFIN On-Farm & Minor Irrigation 200.00 180.66  -16 - SCHEDULE D ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~....... , .. ..........., .,.,..::~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~.... .".'.' .......... Network Ln. 3722-ME 1994 NAFIN Primary Education ll 412.00 375.47 Ln. 3750-ME a> 1994 BANOBRAS N. Border I Environment 368.00 368.00 Ln. 3751-ME a> 1994 BANOBRAS Water/Sanitation II 350.00 350.00 Ln. 3752-ME a> 1994 BANOBRAS Solid Waste II 200.00 200.00 Ln. 3778-ME 1995 NAFIN Rainfed Areas Development 85.00 72.90 Ln. 3790-ME 1995 NAFIN Second Decentralization 500.00 428.75 Ln. 3805-ME a> 1995 NAFIN Technical EducationfTraining 265.00 265.00 Ln. 3838-ME a> 1995 NAFIN Financial Sector T.A. 23.60 23.60 Sub-total 8,425.89 4,216.97 Total 22,977.73 Of Which has been repaid 7,468.29 Total now held by the Bank 15,509.44 Amount sold : 92.34 Of which has been repaid: 92.34 Total Undisbursed 4,216.97 a> Not yet effective  -17 - SCHEDULE D MEXICO SUMMARY OF IFC INVESTMENTS as of March 31.1995 CUSS Millions) Uriginrl rLrao w.omminenes fl. M-ai Oy UmlEfNsad Fiscal Year IFC IFC Pstici- ioy articd- (nclursg Comm=ted Company Type of Busins Loan Equiiy ant Total IFC pa0th Pastlipntu) 1958 Bristol de Mexico SA.la AircraftEngineOverhaui 0.52 - - 0.52 - - - 1958/59 Industrias Perfect Circle SA. /a Industrial Equipment 0.80 - - 0.80 - - - 1961 Aceros Solar S.A./a TAwistDrilla - - 0.28 0.28 - - 196215/6/8 Fundidora Monterrey SA. /a Steei 1.81 21.45 0.48 23.74 - - 1963 Quimica del Rey SA. /a Sodium Sulphate 0.07 - 0.68 0.75 - - 1963 Tubos de Acero de Mexico(Tamsa) la Stainless Steel Pipes 0.81 - 0.1 9 1.00 - - 1964/86 Industria del Hierro S.A. Construction Equipment - 1.96 - 1.96 - - - 1970 MineradelNorte /a IronOreMining 0.75 - 0.75 1.50 - - 1971 Celanese Mexicana S.A. /a Textiles 8.00 - 4.00 12.00 - - 1972 Promotora Papal Periodico SACV /a Pulp& Paper /b - 0.03 - 0.03 - - 1973/79 CementosVeracruzSA./a Cement 11.35 - 4.50 15.85 - - 1974/81 Cancun Aristos Hotel /a Tourism 0.98 0.32 - 1.30 - - 1975/78 MexinoxS.A./a StainlessSteel 12.00 3.18 - 15.18 - - 1978/95 Tereftalatos Mexicanos, S.A. /a Petrochemicals 39.00 - 20.00 59.00 20.00 20.00 40.00 1978/81/84 Papeles PonderosaSA. /a Pulp & Paper 6.20 4.98 4.50 5.68 - - - 1979/81/87 Hotel Camino Real Ixtapa, SA. Tourism - 4.20 - 4.20 4.20 1979/84 EmprosasTolteca,SA. la Cement 30.00 7.95 13S.00 175.95 - 1979 Conductores Monterrey, S.A. Electrical Wire & Cable 8.41 - 13.00 21.41 1.49 1980 Industrias Resistol, SA. /a Particle Board 8.00 - 17.OC 25.00 - - - 1980 Minera Real deAngeles,S.A. /a Mining 30.00 - 80.00 110.00 - - - 1980 Vidrio Plano de Mexico, SA. a/ Flat Glass 15.00 - 99.90 114.90 - - - 1981/88 Grupo Industral Atfa (Giasa) a/ Pulp & Paper 15.50 - 44.00 59.50 - - - 1981 CorpAgrolndustrial, S.A.(Univasa) /a Agribusiness 6.30 3.00 5.00 14.30 - - 1984 Capital Goods Facility/a Capital Goods Financing 34.00 - 66.00 100.00 - - - 1984/88/94 Metalsa, S.A. Auto Chassis 32.00 1.40 45.00 68.40 24.53 35.00 25.00 1985 Proteison, SA. de C.V. /a Agribusiness 1.95 0.82 - 2.77 - - - 1985 Prom. Industrales Mexicanas, SA. Petrochemicals 32.00 - 4.40 36.40 13.50 1986/88 CelulosaYPapel de Durango,S.A.CV Pulp &Paper 10.00 3.07 - 13.07 - - - 1987 Agromex (AESA) /a Veg. & Fruit Processing 1.50 0.50 - 2.00 - - - 1987 Industrias Suitamex, S.A. DE C.V. a/ Chemicals & Petrochemicals 2.00 0.50 - 2.50 - - - 1989 Cicasa Constr. Guar. Fac /a Cons't. Guarantee Facility 20.00 - - 20.00 - - - 1988 Sealed Power de Mexico Auto Assembly 9.00 - - 9.00 0.75 - 1988/95 Sigma Alimentos, S.A. de C.V.(Salkni) Food & Food Processing 40.96 7.00 J2.00 79.96 27.00 32.00 7.50 1988 Vulica ShippingCompany Industrial services - - - 0.00 16.50 1988 Crescent Market Aggregates Construction Materials 73.00 - - 73.00 24.14 - 1988 Apasco, SA. de C.V. Cement & Const. Materials 46.00 - - 46.00 14.33 1991/92/93 Apasco, S.A. de C.V. /c Cement&Const. Materials 49.91 - - 49.91 - - 1994 Apasco, S.A. de C.V. /c Cement&Const. Materials 10.00 - 40.00 50.00 10.00 40.00 1989 Banca Sertn Development Finance 60.00 - - 60.00 52.00 - - 1989 Cementos Mexicanos Cement & Const. Mat 60.00 - 8.00 68.00 11.43 - - 1989 Grupo Femsa/Visa Consumer Goods Conglomerai 80.00 27.80 - 107.60 57.78 - - 1989/92 Polimar (ABS), S.A. de C.V. Petrochemicals 19.10 - 19.10 9.56 - - 1990 Bancomer Credit Line /a Development Finance 20.00 - - 20.00 - - - 1990 Banco Nacional de Mexico Development Finance 60.00 - - 60.00 39.64 5.00 2.40 1990/91 Condumex, S.A. de C.V. /c Electromanufacturing 35.00 9.54 18.00 62.54 24.06 9.00 - 1990 Indelpro, S.A. de C.V. Petrochemicals 31.00 - 3.CO 34.00 24.75 1.13 1991 Mexico Fund /a Money & Capital Markets - - 6.57 6.57 - - 1991 Petrocel, SA. Chemicals & Petrochemicals 32.00 - - 32.00 28.00 - 1991 Vitro Flotado S.A. de C.V. Glass & Related Manufacturing 25.00 - 101.00 126.00 24.38 63.13 1991 Vitro, SA. Glass & Reiated Manufacturing - 10.17 8.04 18.21 10.17 - 1992 Aislantes Leon SA. de C.V. Battery Manufacturing 10.00 7.03 - 17.03 9.50 1992 Banco Mercantil del Norte, S.N.C. Development Finance 20.00 - - 20.00 - - - 1992 Celular de Telefonia. S.A. de C.V. Telecommunications 15.00 1.00 37 00 53.00 16.00 36.73 2.88 1992 Grupo Financiera Probursa SA. de CV Development Finance - 7.50 - 7.50 7.50 - - 1992 Grupo Industrial Bimbo,S A. de C.V. Bakery 25.00 - 75.00 100.00 21.43 58.33 1992/93 Grupo Posadas S A. de C.V Tourism 20.00 3.72 33.50 57.22 20.00 33.50 1992 Mexico City Toluca Toll Road Transport & Storage 13.75 - - 13.75 9.55 - 1993 Celulosa y Cerivados S.A de CV. Textiles,Packaging 11.00 - 26.00 37.00 11.00 24.07  -18- SCHEDULE D MEXICO SUMMARY OF IFC INVESTMENTS as of March 31,1995 (USS Millions) onrginml w~ow uommaffimor n.aa ewa oy uncmsaumea Fiscal Year IFC IFC Paruici- by Partifc- Includc.g Commited Company Type of Business Loan Equity pants Total IFC pant Piwpants) 1993 MasterpakS.A. deC.V. Timber, pulp &paper 12.00 - 28.00 40.00 12.00 25.93 1994 Alimentos Naturales(Banorte-Sabrosa) Food &agribusiness - - - 0.00 3.00 - - 199 Aurum Heller, Factoraje Financial Services - 0.98 - 0.98 0.98 - - 1994 Grupo Idesa, S.A. de C.V. Chemicals & Petrochemicals 15.00 8.00 42.50 65.50 23.00 42.50 35.50 1993/94 Grupo Operador de Terminabs Maribmas S.A. (GOTM) Industrial Services 4.00 2.00 6.00 12.00 3.71 - - 1994 Internacional de Ceramica Cement & constr materials 21.00 - 17.50 38.50 21.00 17.50 1994 Mexicana de Cobre, S.A. Nonferoous metals 25.00 - 35.00 60.00 25.0o 35.00 1994 Banorte-Pyosa, S.A. de C.V. General manufacturing - - - 0.00 9.70 - 1994 Banorte-Arancia General manufacturing - - - 0.00 7.30 - 1995 Compania Tratadora de Aguas Negras de Puerto Vallarta (CTAPV) Industrial Services 7.00 - - 7.00 7.00 - 5.00 1995 Baring Venture Partners de Mexico Financial Services - 0.15 - 0.15 0.15 - 1995 Mexiplus Puertos Infrastructure - 1.04 - 1.04 1.04 Totat Gross Commitmentst /d 1,178.67 139.06 1,054.78 2,372 1 Less: Cancellations, Terminations, Repayment, & Sales 588.35 82.24 575.97 1,246.56 Net Commitrentsr No Held of 590.3 56.8 47.8 1,15- 8471 .47.8 118.28 Pending Commitments: Baring Venture Financial Services - 10.00 - 10.00 Total: Commnitmenr t Held.and Pending CommitmentsX 59.3 08.82 t478.1 -,13 -'6 Tot Undivsbwd. Commitments; :;: 50.28 0.00 6800 118.2: ...... a/ Investments which have been fully cancelled, terminated, written-off, sold, redeemed, or repaid. c/ Excludes placements of $30.0 million (Apasco), $20.0 million (Vitro), and $19.8 million (Condumex) d/ Consists of approved and signed projects (including underwriting, but excluding swap transactions i.e., Banca Serfin US6.5 million, Indelpro $6.0 million, Banamex $40.0 million and Grupo Posadas II $6.5 million). e/ Held Commitments consist of disbursed and undisbursed investments.  -19- ANNEX 1 Improving Efficiency in the Social Sectors I. Introduction 1. In an effort to improve the efficiency of public expenditure, the Secretaria de Hacienda y Credito Publico (SHCP) has requested the technical and financial assistance of the Banks to help link budgetary allocation decisions to performance in the social sectors. This task would involve: (a) defining output indicators and criteria for success; (b) measuring performance; and (c) creating incentives to promote efficiency and accountability. The Banks' support would begin as a sub-program of the PROSSE to be presented to the Board of Directors in June 1995, but would be expected to be carried out over several years as a technical assistance loan or as a sector investment program. II. Rationale 2. The effort is being undertaken because the GOM perceives there to be potentially large efficiency gains that could be realized in the social sectors. The need to realize the efficiency gains is especially important now that there is no longer as much scope for increasing social sector expenditures by reallocating resources from nonsocial to social sectors and now that social sector spending accounts for such a large proportion of the total government spending (more than 55 percent of the federal programmable budget). 3. During the previous administration, an explicit policy decision to reallocate expenditures towards the social sectors allowed the operating expenditures of the social sectors to grow at an average real rate of 11.5 percent at a time when the share of total public sector operating expenditures in GDP stayed roughly constant (18.9 versus 19.2 percent) and real GDP grew slowly. Over this time period, the shares of the energy and industrial sectors shrank from 27.4 and 12.9 percent of the total operating budget in 1988 to 20.0 and 0.3 percent of the budget in 1994, while the share of the social sector budget climbed from 33.2 percent in 1988 to 52.6 percent in 1994. 3. Already before the recent economic crisis, it was apparent that the period of major reallocation of the budget was over and, as a result, the rate of increase in social sector expenditures could probably not continue at the same level as it had in the past. What happens to the output of the social sectors over the immediate future will now depend more heavily on the behavior of the real price of the inputs and on increases in the efficiency with which the inputs are translated into outputs. 4. As efficiency is defined as the output achieved per unit of input, it is impossible to analyze efficiency without knowing what outputs are being produced. A preliminary assessment suggests that, in Mexico, output indicators are not currently being used to provide feedback to management in the operation of a program and are not used effectively to help allocate the budget in the social sectors. The lack of attention to outputs in the social sectors is not unique to Mexico and reflects, in part, the difficulty inherent in measuring outputs and establishing causal relationships between program inputs and outputs.  - 20 - ANNEX 1 5. Several countries (notably New Zealand2, the U.S.3 the U.K., and other OECD countries4) are attempting to incorporate indicators of output and performance in their budgetary allocation decisions. Some of the early lessons from this experience are: (a) The task is more than just a measurement problem. Explicit attention must be paid to how the information would be used to help allocate resources; (b) It is not enough to identify what indicators are to be used. Explicit criteria for success should also be established; (c) Performance indicators need to be defmed differently at different levels of government. The performance indicators that would be used as a basis for budget negotiations between the SHCP and the SSA would be different than those used for negotiations between the central level and the state levels within the SSA. Aggregating up indicators used at a lower level does not necessarily yield a useful indicator at a higher level; and (d) Performance targets should be subjected to a reality check. All too often, performance targets are chosen without working through what are the operational implications of meeting them. If the initial targets were not achievable in the best of circumstances, the discussions that take place during annual or midterm reviews of progress tend to be less fruitfil. 6. Mexico can expect to benefit from the experience in other countries. Of course, Mexico's decision of how much to invest in a system that links performance to budgetary allocation decisions depends on its specific opportunity costs of investing in information and its perceived value of the information in making decisions, or conversely the acceptable degree of uncertainty in decision making. The decision also depends on how public administration is to be managed in the future. The information required to operate a top-down command-driven bureaucracy may not be adequate for a system where services may be publicly financed but privately provided, where central administrative levels set policies and lower levels carry them out, and where principal-agent problems characterize many intragovemmental relations. In these circumstances, the principal and agents must reach agreement on what output is desired and what constitutes adequate performance. If greater flexibility in decision making within the governnent is to be introduced, the problem of establishing accountability must be confronted. mI. Approach 7. Developing a system that links budgetary allocations to performance in the social sectors will require efforts over the medium term, but would begin as a component of the PROSSE project. The effort would be led by the SHCP, with extensive collaboration with the 2 See State Services Commission, New Zealand's Reformed State Sector (Wellington: State Services Commission, 1994). 3 See National Performance Review, From Red Tape to Results: Creating a Government that Works Better and Costs Less (Government Printing Office, 1993) and Kettl, Donald and John J. Dilulio, Jr. (eds.) Inside the Reinvention Machine: Appraising Governmental Reform, (Brookings Institution, 1995) 4 See Organization for Economic Cooperation and Development, Public Management Developments: Survey 1993 (Paris: OECD, 1993).  - 21- ANNEX 1 undersecretaries in charge of planning and budgeting within the social sector secretariats. The Government would receive technical assistance from an advisory team to be formed of experts drawn from within and outside the Bank. The activities be conducted in this component are described below. Analysis of current practices 8. The first step will be to examine how the process of setting targets and measuring performance currently operates in Mexico. While this will be explored in more detail later, a preliminary conclusion is that administrators do set targets for their programs, but little attempt is made to explore variations in output indicators across similar programs or variations over time in the same program. 1. Comparing the targets that have been set for the same peso amount draws attention to the allocation choices that implicitly are being made. For example, existing budgetary data suggest that in 1994, N$100,000 could be used either to provide educational services to 102 students through the community primary school, or to 979 students through the PRONASOL schools. However, the indicators currently in use provide an incomplete picture. In order to conclude that resources should be reallocated to the PRONASOL schools and away from the community primary schools, the government would have to have some information on what students learn in the two programs and whether different population groups benefit from the two programs. 2. The targets per N$100,000 for the same program change over time and vary considerably from one program to another. In education, community primary schools set a target of 128 students attended in 1995, versus 102 students in 1994 for the same real expenditure. Community preschools set lower targets in 1995 than in 1994. In health, the apparent productivity of general external consultations is proposed to increase by 50 percent from 1994 to 1995. It is not clear whether the variation in apparent productivity reflects true differences in productivity gains, differences due to the nature of the clientele served in the two years or, as is likely in the case of health, problems with the quality and use of the data. 3. In the near future, the review of the use of output indicators would be extended to social and rural programs outside PROSSE. In addition, an analysis of the extent to which budgetary data capture the true costs would be undertaken for a select group of programs. The programs would be selected based on the relative importance of the program in the overall budget and on the government's assessment of the potential for efficiency gains. Identification of Output Indicators 4. Part of the explanation for an ineffective use of output indicators is that the wrong indicators are being used. For example, the target used for CONALITEG is how many textbooks are distributed to warehouses. A more appropriate measure would be what percentage of students receive their textbooks and with what delay. In health, it would be more meaningful to measure immunization coverage than just vaccine doses distributed. Instead of the number of consultations, it would be better to measure the percentage of visits to public health clinics that were viewed by the clients as being resolved adequately. As a further  -22 - ANNEX 1 example, if the GOM decides that it would like to guarantee the consumption of a package of essential clinical services, measures would have to be developed to ascertain how close the government is to providing that guarantee now and to allow the government to track progress towards meeting that goal. 5. The GOM, together with the advisory team, will identify a limited set of indicators to be used in each sector by the June 30, 1996. Establishment of Criteria for Success 6. Setting realistic targets for the indicators against which performance can be measured is as important as selecting the right indicators. In the near future, discussion of performance relative to the targets and the setting of targets over the next planning period should be part of a process of negotiation of the budget between SHCP and the social service delivery secretariats. This discussion should also take place between the central level of the secretariats that are responsible for setting policy and the lower operational entities charged with carrying out programs. 7. A practical approach would be to define the criteria for success broadly, by defining ranges of acceptable values for each of selected indicators. From a policy perspective, it is more important to know whether performance is acceptable, rather than whether an indicator has a particular value. Given the costs and strong assumptions that are sometimes required to estimate the exact value of an indicator of performance, it will be useful to explore the possibility of expressing knowledge about the indicator in the form of bounds. In certain instances, determining bounds on the values of specific indicators may be all that is needed to take policy decisions. In other instances, stronger maintained assumptions may be required to yield more informative bounds. 8. If actual performance (measured by bounds on the indicator) were to overlap or fall within the acceptable range, this would suggest that there is no pressing problem that requires management attention. If performance falls outside the range, then there is a problem that requires further analysis. If the corrective action fails to improve the situation, the government may have to conclude that the nature of the intervention is inadequate to deal with the problem. It may be better to tackle a lower priority problem with a program that works than a high priority problem with a program that does not work. 9. Initially, it may be necessary to set wide ranges of acceptable performance, reflecting considerable uncertainty about what is achievable and measurable. Over time, the ranges should narrow as new information is acquired. It may also be possible to calibrate the performance standards with experiences obtained from other countries. Analysis of Operational Implications of Meeting the Targets 10. Before ranges for the targets are set, a reality check needs to be undertaken including the operational implications and productivity implications of meeting such targets. Are the targets consistent with the resources available to meet them? Are the targets roughly in line with what has been achieved in other countries?  - 23 - ANNEX 1 11. It is also important to consider the possible adverse consequences of setting specific targets. In particular, it is important to avoid creating incentives to improve indicators by restricting services to those at the lower end of the distribution of a specific indicator. 12. With the participation of operational staff of the social sector secretariats and the Banks, PROSSE would analyze the operational implications of achieving different targets. Simulation models of the production processes would be developed to help the government analyze different scenarios. Measurement 13. A critical issue if output or performance indicators are going to be used to help allocate resources is to define which agencies are responsible for measurement. If the same agency that carries out the program is responsible for measuring performance, there is a potential moral hazard problem. 14. Given that some of the new indicators are likely to be collected at the household level, INEGI would be used in data collection. This will involve a careful analysis of the data already collected by INEGI and possibly, reorienting their activities to make the data collection more useful for policy makers. 15. A second issue is to determine the relative efforts directed towards monitoring outcomes as opposed to measuring the impact of program inputs on outcomes. In some instances, decision makers may be willing to make decisions based only on monitoring outcomes. In other instances, policy makers may be interested in attributing the outcomes to specific program inputs. An example from the education sector reflects this. If, after two years of being in the program, students do not meet minimum standards, it is difficult to argue that the program has been successful even if the children may be better off than they were without the program. From a policy makers perspective, meeting the standards might be viewed as a necessary condition to establish the program's success. This could be observed by monitoring the outcomes. 16. While monitoring the outcomes is useful as a management tool, it does not establish that the program was instrumental in achieving the results for it is not known how the students would have fared without the program. Although this is not observable, it is possible to estimate what the effects would be by comparing the outcomes of participants with a control group. It is especially important to take advantage of a planned expansion of a program to learn what the impact of the program is. If a program must be expanded gradually to different communities, then how the expansion is handled can strongly affect how easy or difficult it is to draw conclusions about the program impact. If there are 1,000 equally eligible communities, but only 250 are to be introduced to the program each year, then selecting the 250 communities who will receive the program first by a lottery is not only fair, but also generates an ideal control group. The last communities to receive the program can serve as a perfect control group for the first communities to receive the program. However, because measuring impact is more complicated and costly, it should be done selectively, when the expected gains from the information would be greater. Modification of Budgetary Allocation Process  - 24 - ANNEX 1 17. It is not possible to move away completely from budgetary allocations based on historical trends, especially in the short term. However, if an increased emphasis on output or performance indicators is to have any effect on the efficiency of the social sectors, what happens to the indicators must affect budgetary allocations. It is also important to review the regional allocation of the budget to ensure that budgets are being allocated across states in such a way as to ensure that targets are met. IV. Organization 18. The PROSSE program would finance an institution building sub-program set at US$2.0 million to identify appropriate indicators, establish base lines, formulate strategies for using performance indicators in negotiating budgets and undertake a program of evaluations, fmancial and physical audits to measure actual performance. The work should begin in the very short term as the first draft of the 1996 budget is due to be presented in July 1995. To the extent possible, the work on improving efficiency should be connected to the budgetary support provided to the 1995 and 1996 budgets. However, it is important to recognize that the timing for the two activities may not coincide and that the work on improving efficiency should go on for a longer period. Government 19. This program would be under the general supervision of the Subsecretaria de Egresos within the SHCP, which would name a full-time coordinator. Extensive participation would be required of the sector specialists within SHCP as well as representatives of the social sector secretariats and of INEGI. Advisory Group 20. The Bank would form an advisory group, consisting of experts in evaluation and the use of performance indicators, drawn from within and outside the Bank. The advisory group would be divided into teams to cover specific areas. Staff from the Banks with operational experience in Mexico would be paired with the experts in evaluation. The work would also be expected to benefit from the experience gained from analysis of case studies under the research project "Evaluation of Social Sector Investments" being managed by the World Bank.  - 25 - ANNEX 1 MONITORING AND EVALUATION SUB-PROGRAM COST ESTIMATES (US$) 1. Establishment of Monitoring System 1995 1996 Consultant Services International (12 pm) 360,000 48,000 Local (6 pm) 300,000 60,000 Equipment 90,000 Training of Staff 50,000 40,000 Study Visits 35,000 55,000 2. Operation of Monitoring System Short-term Staff 24,000 48,000 Supplies 10,000 20,000 Per diem and Travel 10,000 20,000 3. Physical Audits (@ US$35,000 per 105,000 315,000 audit) 4. Beneficiary Assessments (@ US$60,000 60,000 240,000 per assessment)) Contingency 40,000 160,000 TOTAL 1,094,000 1,006,000   t -j