Mexico - Higher Education Financing Project

Document of The World Bank Report No. 17174-ME PROJECT APPRAISAL DOCUMENT ONA PROPOSED LOAN IN THE AMOUNT OF US$180.2 MILLION TO RANORAS, S.N.C. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR A HIGHER EDUCATION FINANCING PROJECT June 4, 1998 Mexico Country Management Unit Human Development Sector Management Unit Latin America and the Carihhean Region  CURRENCY EQUIVALENTS Currency Unit = Pesos ($) US$1.00 = $8.00 Fiscal Year Academic Year January 1 - December 31 September 1 - June 30 ABBREVIATIONS AND ACRONYMS BANOBRAS National Bank of Public Services and Works (Banco Nacional de Obrasy Servicios Publicos S.N. C.) CIEES The Inter-institutional Committees for the Evaluation of Higher Education (Comites Interinstitucionales para la Evaluacion de la Educaci6n Superior) CONACYT National Council of Science and Technology (Consejo Nacional de Cienciasy Tecnologia) CONAEVA National Commission for the Evaluation of Higher Education (Comisi6n Nacional para la Evaluaci6n de la Educaci6n Superior) FIMPES Mexican Federation of Private Universities (Federaci6n de Instituciones Mexicanas Particulares de Educaci6n Superior) ICEES Student Loan Institute of the State of Sonora (Instituto de Credito Educativo del Estado de Sonora) ICR Implementation Completion Report 1DB Inter-American Development Bank PAREB Second Primary Education Project (Programa para Abatir el Rezago en Educaci6n Basica) PIARE Primary Education Project, financed by IDB PRODEI Initial Education Project (Proyecto para el Desarrollo de la Educaci6n Inicial) RPF Reserve and Payment Fund - SHCP Federal Ministry of Finance (Secretaria de Hacienda y Credito Pzublico) SEP Federal Ministry of Education (Secretaria de Educaci6n Pblica) SOEs Statements of Expenses SOFES Society for the Promotion of Higher Education - FIMPES's financial intermediary for its student loan program (Sociedad de Fomento a la Educaci6n Superior) UNAM Autonomous National University of Mexico Managers and Staff Responsible Vice President Mr. Shahid Javed Burki Country Director Mr. Olivier Lafourcade Sector Leader Ms. Carmen Hamann Task Manager Mr. Jamil Salmi  MEXICO Higher Education Financing Table of Contents Page No. BLOCK 1: PROJECT DESCRIPTION .....................................2 1. PROJECT DEVELOPMENT OBJECTIVES ................................ , .2 2. PROJECT COMPONENTS ............................ . . . . . 2 3. BENEFITS AND TARGET POPULATION: ...........................................: .2 4. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS: ...........................................4 BLOCK 2: PROJECT RATIONALE .......................5.. , , ......5 5. CAS OBJECTIVE(S) SUPPORTED BY THE PROJECT ....................................... ...................5 6. MAIN SECTOR ISSUES AND GOVERNMENT STRATEGY: ...............................5...................5 7. SECTOR ISSUES TO BE ADDRESSED BY THE PROJECT AND STRATEGIC CHOICES: .............. 7 8. PROJECT ALTERNATIVES CONSIDERED AND REASONS FOR REJECTION: .......... .................7 9. MAJOR RELATED PROJECTS FINANCED BY THE BANK AND/OR OTHER DEVELOPMENT AGENCIES .....................................................................8 10. LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN: .............. ........................9 1 1. INDICATIONS OF BORROWER AND RECIPIENT COMMITMENT AND OWNERSHIP: ........... 10 12. VALUE ADDED OF BANK SUPPORT: .................................................................... 10 BLOCK 3: SUMMARY PROJECT ASSESSMENTS .................................................................... 11 13. ECONOMIC ASSESSMENT ..................................................................... I 1 14. FINANCiAL ASSESSMENT ...................... .............................................. 12 15. TECHNICAL ASS ESSMENT: .................................................................... 13 16. INSTITUTIONAL ASSESSMENT: .................................. .................................. 13 17. SOCiAL ASSESSMENT: .................................................................... 13 18. ENVIRONMEN TAL ASSESSMENT: .................................................................... 13 19. PARTICIPATORY APPROACH: ..................... 13 20. SUSTAINABILITY: ..................... 14 2 1. CRITICAL RISKS ..................... 14 22. POSSIBLE CONTROVERSIAL ASPECTS: .................................. 15 BLOCK 4: MAIN LOAN CONDITIONS ................................... 15 23. EFFECTIVENESS CONDITIONS ..........15............. 5 24. OTHER ...................15................ 15 BLOCK 5: COMPLIANCE WITH BANK POLICIES ................................... 16 ANNEx 1: PROJECT DESIGN SUMMARY .............................,, 17 ANNEX 2.A: DETAILED PROJECT DESCRPTION ............... 30 ANNEX 2.B: TARGETING STRATEGY ........................... . 34 ANNEx 3: ESTIMATED PROJECT COSTS .................. 41 ANNEx 4: ECONOMIC ANALYSIS ..42 ANNEx 5: FINANCIAL SUmmARY ..56 ANNEX 6: PROCUREMENT AND DISBURSEMENT ARRANGEMENTS ................ 57 ANNEx 7: PROJECT PROCESSING BUDGET AND SCHEDULE ............................................. 61 ANNEx 8: STATEMENT OF LOANS AND CREDITS ...................................... 62 ANNEx 9: DOCUMENTS IN THE PROJECT FILE .................... .......................... 65 ANNEx 10: COUNTRY AT A GLANCE .............................................. 66  INTERNATIoNAL BANK FOR RECONSTRUCTIoN AND DEvELoPMENT Latin America and the Caribbean Regional Office Mexico Country Department Project Appraisal Document Mexico Higher Education Financing Project Date: May 8, 1998 [ I Draft [Xl Final Task Manager: Jamil Salmi Country Manager: Olivier Lafourcade Project ID: MX-PE-49895 Sector: Education POC: Poverty Reduction, Private Sector Develpmt. Lending Instrument: Sector Investment Loan PTI: [XI Yes [] No Project Financing Data [x] Loan [ ] Credit [ Guarantee [ Grant [ Other [Specify] For IBRD Loan: Loan Amount (US$m): US$ 180.2 million Proposed Terms: [ ] Multicurrency [X] Single currency Grace period (years): 5 years [ I Standard Variable [ Fixed [X1 LlBOR-based Years to maturity: 15 years Commitment fee: Standard Service charge: Standard Financing plan (US$M): Source Local (Including. Foreign Total Taxes) IBRD 179.0 1.2 180.2 Government of Mexico (Federal) 3.7 - 3.7 ICEES (with support from State of Sonora) 1.3 0.2 1.5 SOFES 19.7 0.2 19.9 Student/Household Contributions 82.7 - 82.7 TOTAL 286.4 1.6 287.9 Borrower: Banco Nacional de Obras y Servicios Puiblicos, S.N C (BANOBRAS) Guarantor: United Mexican States Responsible agencies: 1. Sonora Student Loan Institute (ICEES, Instituto de Credito Educativo del Estado de Sonora) 2. The Society for the Promotion of Higher Education (SOFES, Sociedad de Fomento a la Educaci6n Superior), acting as the financial intermediary of private universities members of the Mexican Federation of Private Universities (FIMPES, Federaci6n de Instituciones Mexican as Particulares de Educaci6n Superior) Estimated disbursements (Bank FY/USSM): 1999 2000 2001 2002 2003 2004 Annual 15.8 24.5 36.0 47.6 41.5 14.8 Cumulative 15.8 40.3 76.3 123.9 165.4 180.2 Expected effectiveness date: August 1998 Closing date: February 29, 2004  Project Appraisal Document Page 2 Country: Mexico Project Title: Higher Education Financing Project BLOCK 1: PROJECT DESCRIPTION 1. PROJECT DEVELOPMENT OBJECTIVES (SEE ANNEX I FOR KEY PERFORMANCE INDICATORS): The general development objective is to assist the Government in promoting greater equity and quality in the preparation of university graduates. Specific goals are to: - improve access to higher education, particularly for academically qualified but financially needy students. - develop more effective and financially sustainable student loan institutions. Progress towards these development objectives will be monitored and assessed based on key output and development outcome/impact indicators shown in Annex 1. 2. PROJECT COMPONENTS (SEE ANNEX 2 FOR A DETAILED DESCRIPTION AND ANNEX 3 FOR A DETAILED COST BREAKDOWN): ComWanent Cateeov Cost ncl. Contingencies (US$M %ofTotal Investmnot Costs A. Development of the Private Sub-loans Private Sector Student Loan Scheme Private Sector Student Loan Scheme Sector Student Loan Equipment (USS 237.1 mllion) (SOFES) = 82% Scheme consultants I Student Loans StaffTraining Student Loans Studert Loans= 92% Reserve Fund Sub-loans = 147.9 Inst Development = 8% 2 Institutional Development Student Contributions = 63.4 Recurrent CoSts Reserve Fund = 7.4 Salaries of AdminL Staff Sub-total Sident Loans= 218.6 Equipment, Oper. & Maintenance Physical Contingencies InstItutIonal Development Price Contineencies Equipment = 1.2 Taxes Technical Assistance = 1.0 Foreien Exchanee Traiing = 0.4 RecurrentCosts= 15.8 Sub-toti Inst Development 18.4 B. Strengthening of the Sonora InvestenCosts Sub-loans SONORA Student Loan Scheme SONORA Student Loan Scheme Student Loan Scheme Equipment (US$ 50.8 mUlion) (ICEES) = 18% 1 Student Loans Consultants 2 Institutional Staff Training Student Loans Student Loans 95% Strengthening Sub-loans = 29.0 Inst Strengthening. = 5% Student Contributions = 19.3 Recurrent Costs Sub-total Stdent Loans = 48.3 Salaries of Admin. Staff Equipment, Oper. & Maintenance Insdtutional Strengtnng Physical Continencies Equipment = 0.5 Price Contingencies Technical Assistance = 0.6 Taxes Training= 0.2 Foreign Exchange Recurrent Costs = 1.2 Sub-totatInst Strengthening 2.5 Total US$287.9 million 100% IBRD Financing USS180.2 million 63% 3. BENEFITS AND TARGET POPULATION: Benefits. By increasing access to loans for qualified and financially needy students, the project would have a positive impact on the coverage, quality and equity of higher education. The student loans contribute to increased equitable opportunities for participation in higher education and ICEES managers and university administrators have observed that students who bear some part of the costs of their education, whether they pay this up-front or borrow against their future earnings by taking out student loans, tend to be more motivated and academically successful. For example, the completion rate of ICEES beneficiaries (85%) stands in sharp contrast with the overall rate for the State of Sonora (53%). Furthemnore, the increased educational purchasing power of students would allow them to place more legitimate demands on the quality of education. In other words, the demand-side financing supported by the project can also indirectly stimulate improvements in the quality of public and private higher education in Mexico by promoting  Project Appraisal Document Page 3 Country: Mexico Project Title: Higher Education Financing Project competition. The changes in terms of coverage, equity and quality in the Mexican higher education system would also, in turn, bring about economic and social benefits. More and better qualified graduates would improve the country's human resource pool, allowing increases in productivity and competitiveness. In the case of Mexico, Booz Allen & Hamilton estimates that a 1% increase in the number of professionals can lead to a 0.6% increase in national income, as well as a 0.4% increase in the level of salaries. Middle-income Latin American countries such as Argentina, Chile and Mexico, which have liberalized their trade regimes in recent years, have seen increased wage inequalities between secondary and higher education graduates. I As has happened in East Asia, the growing demand for highly educated labor may reflect labor saving technological changes, complementarities between inflows of new capitals and skill needs, and competitive pressures from lower-wage unskilled workers in poorer countries. Mexican primary and secondary education students may also be indirectly benefited. Supporting demand-side financing may lead to the protection of incremental public resources for primary and secondary education.2 The potential marginal impact of the incremental funds may be negligible in terms of expanding basic education but could be significant in relation to its impact on the non-salary basic education budget used to improve the educational quality. Target Population.3 The direct beneficiaries of the project - the project's target population - are academically qualified students facing difficulties to pursue their preferred advanced studies because of inadequate family income. Approximately 98% of these Bank-financed loans will reach these beneficiaries directly through student loans. More specifically, the direct beneficiaries of the SOFES loan scheme would be academically able but financially needy students attending or wishing to enroll in private universities throughout the country. According to the Booz Allen & Hamilton study, there is a potential market for the SOFES loans of 80,000 new students per year, as well as a significant proportion of the 320,000 students already enrolled in the private universities. Up to 66% of the potential market comes from low-income families and approximately 75% of them have good academic histories (an average score of 8 out of 10 or higher in the bachillerato examination). It has been estimated that, by the end of the project, SOFES will have provided loans to a minimum of 25,600 students, of which approximately 70% would come from middle-low to low-income families. Nonetheless, the complementary use of loans and scholarships provides the potential to double the amount of beneficiaries (estimated at approximately 52,700 students). SOFES aims at increasing the participation of low-income students from 20.7% in 1997 to 24.2% by 2003.4 The beneficiaries of the ICEES loan program would be academically qualified, low- and middle-income students born in or residents of the state of Sonora, who wish to enroll in a recognized higher education institution. ICEES is aiming at almost doubling its number of beneficiaries during the life of the project (five years) through a 12.5% increase in coverage per year. This additional coverage would be financed through the IBRD funds. By the year 2002, ICEES would be providing credits to approximately 21,000 students - of which about 76% would be undergraduates, 4% graduate students, and the other 20% attending other institutions such as technical schools. It is estimated that the proportion of Sonora students benefiting from a loan will grow from 16% to 23% for undergraduate students and from 11% to 34% for graduate students. Furthermore, the percentage of low- and middle-income students receiving ICEES loans will be maintained equal to or above the higher education enrollment rates in the State of Sonora for these socioeconomic groups. Presently, about 75% of the recipients of ICEES loans come from low-income families and 24% from middle-income families. In comparison, 72% of university students in the State of Sonora are low-income students and 26% are middle-income.5 OECD (1997). Estudios Economicos de la OCDE: Mexico 1997. Pards, p. 159. In 1992, the distribution of expenditures by educational levels was as follows: 28.6 for primary, 26.6% for secondary, 14.7% for higher education, and 23.9% unallocated. (OCDE, Exdmenes de las Politicas Nacionales de Educscidn. OCDE Francia, 1997.) See Annex 2.B for technical details on the targeting strategy and the methodology for defining the socioeconomic status of students. SOFES carried out a study of the socioeconomic status of students in a representative sample of their member universities. This study not only provided base indicators on which to gpge progres in social objectives but also insight into how to classify and evaluate students' socioeconomic background during the loan application process. This data is based on the 1997 socioeconomic suivey of university students that was casnied out by ICEES in the State of Sonora.  Project Appraisal Document Page 4 Country: Mexico Project Title: Higher Education Financing Project 4. INSTITUTIONAL AND IMPLEMENTATION ARRANGEMENTS: Implementation period: July 1998 to August 2003 Executing agencies: 1) Sonora Student Loan Institute (ICEES, Instituto de Credito Educativo del Estado de Sonora) 2) The Society for the Promotion of Higher Education (SOFES, Sociedad de Fomento a la Educaci6n Superior), acting as financial intermediary for pnvate universities members of the Mexican Federation of Private Universities (FIMPES - Federaci6n de Instituciones Mexicanas Particulares de Educaci6n Superior). Project Coordination: Each executing agency will coordinate the implementation of the component for which it is responsible. ICEES will coordinate the component aimed at strengthening the Sonora Student Loan Scheme and SOFES will coordinate the Development of the Private Sector Student Loan Scheme component. BANOBRAS will be responsible for overall supervision and financial coordination. At negotiations, BANOBRAS provided draft versions of the operational guidelines (Manual de Procedimientos ICEES/BANOBRAS and Manual de Procedimientos SOFES/BANOBRAS) that clarify and guide the responsibilities and relationships between the different executing agencies and BANOBRAS. It was agreed that new versions would be presented to the Bank by effectiveness. Project oversight. BANOBRAS will be the main agency responsible for project oversight. The Ministries of Finance (SHCP) and of Education (SEP) will be responsible for providing overall policy guidance. Legal and Financial Structure for Implementation. The Government has selected BANOBRAS to be the bofrower and trustee and thus, to serve as the financial vehicle to receive and manage the World Bank loan proceeds for this project. The Government, through SHCP, will constitute a Trust Fund for which BANOBRAS will act as Trustee and the Government as Grantor. The Trust will be the vehicle to transfer the proceeds of the Loan to SOFES and ICEES. The Trust will receive contributions to the Reserve and Payment Fund (RPF) from participating universities and from CONACYT, donations, and any additional resources aimed at improving the financial viability of the student loan schemes. The Trust Fund will also receive repayments from SOFES and ICEES corresponding to the servicing of the World Bank Loan and transfer the money back to the Federal Govermment (see Graph A and B of Annex 2). The contract for the derivation of funds through BANOBRAS and the Trust Fund contract will be conditions of effectiveness, as well as the necessary legal opinions. The agreements between BANOBRAS, SOFES and the Federal Government (i.e., SHCP and SEP) and between BANOBRAS, ICEES and the Federal Government, including the mechanisms for transferring the funds to executing agencies, were reviewed at negotiations. As a condition of effectiveness, one of the appropriate onlending agreements between (a) BANOBRAS (trust fund) and SOFES, or (b) BANOBRAS (trust fund) and ICEES must be drafted, approved and signed. Approval and signing of the other one will be a condition of disbursement. Annex 2 describes the institutional arrangements for managing the loan programs as well as the guarantee systems. A thorough description, including operational manuals, can be found in the project file. Procurement Arrangements. The procurement arrangements are detailed in Annex 6. The procurement of technology will be integrated (equipment, software, training and installment) in order to avoid problems with different manufacturers. Disbursement. The proposed project would be implemented over a period of approximately five years and is expected to be completed by August 31, 2003 and closed by February 29, 2004. Disbursements would be carried out in accordance with the category of expenditures and allocations shown in Annex 6. Training expenditures will include didactic materials, classroom use charges, instructor fees, tuition, and travel and per diem expenses of trainees. Retroactive financing of up to US$9 million equivalent (5% of the total loan amount) would be provided to help cover eligible initial project costs made after July 15, 1997. Proceeds of the proposed loan would be disbursed on the basis of statement of expenditures (SOEs) for: (a) staff training tuition or instructor fees costing less than US$50,000 (b) all individual student loans (sub-loans) expenditures less than US$150,000; (d) contracts with individual consultants of less than US$50,000, (d) contracts with consulting firms of less than US$100,000 per contract, and (e) goods, materials and equipment contracts of less than US$350,000 equivalent per contract. Claims for expenditures under contracts above these amounts must be presented to the Bank fully documented. Accounting, fnancial reporting and auditing arragements. The operational manual prepared by BANOBRAS clearly states, among others, the accounting, financial and auditing procedures for the project. ICEES and SOFES will each maintain a separate account and accounting system. Each of these executing agencies will record all project transactions and retain all corresponding  Project Appraisal Document Page 5 Country: Mexico Project Title: Higher Education Financing Project support documentation for Bank review during the course of normal project supervision, including the relevant financial reports from the universities participating in the SOFES program. BANOBRAS will be responsible for the overall monitoring of the transactions and for furnishing to the Bank the certified statements of the Special Account on a monthly basis. For all expenditures to which withdrawals from the Loan Account are made on the basis of SOEs, BANOBRAS would provide SHCP with the appropriate information that is requested in the Guarantee Agreement. Interim financial reports will be included in the trimester implementation reports. Each executing agency will be responsible for contracting annual financial audits, to be performed by independent and qualified auditors in accordance with generally accepted auditing standards. BANOBRAS will be responsible for furnishing to the Bank the report of such audits no later than six months after the end of each financial year. Monitoring and evaluation arrangements. In addition to the continuous monitoring of the project implementation and impact indicators, BANOBRAS with support from the executing agencies will be responsible for: (a) preparing and submitting project implementation reports every trimester, (b) carry out, along with the Bank, an annual review of the progress made in the implementation of the project, (c) conduct a mid-term review and final evaluation of the project, and (d) prepare the borrower's part of the Project Implementation Completion Report (ICR), which should include a discussion of the sustainability plan for each of the loan programs. The project performance indicators are presented in Annex 1. In addition to monitoring key indicators, each executing agency will be responsible for tracking complementary indicators and carrying out all the activities required for data collection (e.g., specialized surveys). BANOBRAS will be responsible for collecting and aggregating the indicators from each agency and submitting these to the Bank on a timely basis and in the appropriate manner (i.e., trimester report, annual review, mid-term review, or ICR). The indicators to be presented in each type of report were identified and agreed during appraisal. As a condition of effectiveness, ICEES and SOFES will complete the baseline data, projected targets and methodological notes to finalize the list of indicators in Annex 1. BLOCK 2: PROJECT RATIONALE 5. CAS oB;ECTIVE(s) SUPPORTED BY THE PROJECT Latest CAS document: Report No. 16135-ME discussed by the Board on December 17, 1996 and updated on March 26, 1998 The project is consistent with the CAS's objectives of economic growth and social development. Increasing the availability of student loans for low- and middle-income students will help increase equitable access to higher education in Mexico. The project would allow students - who otherwise could not have afforded it - to attend a good quality private university. By promoting competition, demand-side financing can also have a positive impact on the quality of education. More and better qualified grduates, thus, will be entering the workforce, contributing to increases in labor productivity. These improvements in the labor market are particularly important for the growing service sectors and the modern agricultural sectors and for helping Mexico build a modern labor market that can compete in the rapidly changing international markets. Furthermore, the project could have a catalytic role on the development of a private sector financial market for student loans, as a culture of "borrowing for human capital investment" develops in the country as has happened in the State of Sonora. With regards to the CAS's social development goals, the project will contribute to the targeting and efficiency of social sector spending. First, demand-side financing can foster the efficient use of public resources through increased competition in the sector. Second, strengthening the capacity of student loan institutions to target their services to low- and middle-income students and to provide financially sustainable programs will contribute to the more efficient use of public and private resources for higher education. Third, the student loan schemes supported by the project can serve as models for future policy and institutional changes aimed at promoting private participation in social sector spending. Fourth and last, greater private financing through cost-sharing in higher education may help protect incremental public resources for primary and secondary education. 6. MAIN SECTOR ISSUES AND GOVERNMENT STRATEGY: The Mexican higher education system is comprised of universities, technological institutes, teacher training institutes (escuelas normales) and others. In 1993, there were 88 universities (49 private), 110 technological institutes (all public), 326 teacher training institutes (111 private) and 223 others (198 private). Sixty-five percent of all higher education institutions have less than 1,000 students, and 53% have a student population of less than 500. The universities account for the highest enrollment rates - approximately 71% of total enrollments. Technology Institutes follow with 15% of total enrollment and teacher training institutes with 90/O. The 223 other entities only account for 5% of total enrollment. In 1993, private sector enrollments represented 21% of the total. This percentage has been steadily on the rise, reaching 25% in 1996.6 OCDE (1997) Exdmenes de las Politicas Nacionales de Educaci6n. OCDE Francia,.  Project Appraisal Document Page 6 Country: Mexico Project Title: Higher Education Financing Project The four main issues that the Mexican higher education system faces are: (a) a low participation rate that is insufficient to meet the country's growing needs for qualified manpower. In 1994, approximately 14% of the Mexican population between the ages of 20 and 24 were enrolled in higher education. This figure is far below similar figures for other Latin American countries in the same year - e.g., Argentina 38.9%, Uruguay 29.9%, Chile 26.6%, Costa Rica 29.3%, Bolivia 22.8%;7 (b) a scarcity of economic resources to spur growth, particularly after the financial crisis at the end of 1994. Public higher education institutions are highly dependent on public funds, making them extremely vulnerable in an era where the tendency is to reduce federal intervention. In 1994, it was estimated that only 8% of total available resources to these institutions derived from their own funds. It has also been estimated that a third of these funds came from student fees-which in most cases are very low or almost nonexistent. (e) deficiencies in the quality and relevance of services rendered by the institutions. There is a large variation in the quality of higher education institutions, with only a small few offering high quality programs. Although reliable indicators of quality are not easily available, certain proxies can shed some light on the condition of the services provided. For the period 1990-1994, for example, the percentage of students that graduated (eficiencia terminal) - an indicator which has been used for many years in Mexico as a proxy for the quality of the institutions - was only 49%. The lack of confidence in many of the diplomas that are offered also hints at the low quality of the education provided by some institutions. Furthermore, in 1994, only 30% of the university professors were full-time; 8% were part time and the rest were paid by the hour. The ability of higher education institutions to adapt their programs to the needs of the nation's evolving economy has also been deficient. (d) equity problems, particularly in light of the growing role of the private universities in meeting the demand for higher education, and the limited number of grants, scholarships and student loans. During the first five years of this decade, the Govermnent strategy has focused on improving the quality of the services rendered by higher education institutions. Evaluation tools and procedures were designed and set up to assess their performance. In 1990, the National Commission for the Evaluation of Higher Education (CONAEVA - Comisi6n Nacional para la Evaluaci6n de la Educaci6n Superior) was created to promote a process of self-evaluation in universities. The Inter-institutional Committees for the Evaluation of Higher Education (CIEES - Comites Interinstitucionales para la Evaluaci6n de la Educaci6n Superior) were also created during this period to evaluate university programs. Furthermore, FIMPES established a strict accreditation system for the admission of its members. Recently, six universities were expelled because they had failed to comply with the accreditation requirement. The Sub-Secretariat of Higher Education is now focusing efforts on increasing higher education participation levels within the overall context of the 5-year education plan (Programa de Desarrollo Educativo). The Government is aware that the planned expansion cannot be funded exclusively with public resources. Increasing coverage can be achieved only if public higher education institutions are able to generate additional resources, through tuition fees and other income-generating measures, and if private universities manage to absorb a growing share of higher education enrollments. This expansion strategy, however, raises equity issues that must be addressed. For example, private universities report that approximately 25% of the dropouts (of a 45% total dropout rate) can be attributed to economic factors. The expansion strategy, thus, must be coupled with appropriate and effective financial support mechanisms to guarantee equal access opportunities to students from low- and middle income families. Presently, the universities are required by law to provide grants to 5% of their student population. In fact, private universities have exceeded this required coverage by 4%. These efforts, nonetheless, are not sufficient. The grants are partial and are provided only after the first year of studies. Preliminary data thus suggest that these grants are given to middle- and middle-high income students who have the funds to supplement the grants and can finance their first year of higher education. Furthermore, the financial capacity of private universities is limited and their ability to finance students has already been stretched. Garcia Guadilla, Carmen. (1996) Situaciony Principales Dinamicas de Transformacion de la Educacion Superior en Ameinca Latina. CRESAI-UNESCO-Venezuela,  Project Appraisal Document Page 7 Country: Mexico Project Title: Higher Education Financing Project The credit options students have to finance their studies are few and restrictive. Only about four banks offer student and the terms and conditions of these loans are not very attractive and inaccessible to the majority of students, particularly to those coming from low-income farnilies. Some private universities provide highly subsidized short term credits - which are akin to scholarships given their subsidy level - but these are few in number and only cover tuition fees. This limited supply of credit options is exacerbated by the lack of government-supported loan schemes. The State of Sonora is the only state that supports a student credit program. It is in this context that the Mexican Government is keen to promote the strengthening and development of student loan schemes. It is expected that such efforts would contribute to their long term goal of achieving the needed increases in the tertiary enrollment rate while improving educational quality and equity of access. 7. SECTOR ISSUES TO BE ADDRESSED BY THE PROJECT AND STRATEGIC CHOICES: In line with the Goverrnent's long-term goals, the project will aim at increasing enrollment in higher education. The strategic choice to support student loan schemes stems from its implications not only for access but also for educational equity and quality. By supporting demand-side financing, the project will have a direct effect on expanding higher education coverage, and since the financial programs will be targeted to needy and able students, there will also be an indirect effect on equity. The increased purchasing power of students that receive the loans will stir competition, persuading universities to pay heed to the quality and relevance of the programs they offer. Furthermore, with the availability of credit, the universities will be able to reserve scholarships and grants for the financially neediest students as they shift low-middle-income students from grants to credits. The choice to support one private and one public student loan institution is also of strategic importance. The lessons learned from the two different experiences will be of great value to future demand-side financing initiatives. In the SOFES case, a private student loan agency would be established to provide financial support to students seeking enrollment in the private universities that are members of FIMPES. Although FIMPES currently only represents approximately 15% of the total number of private universities, its member universities represent over 70% of total private sector enrollment and are among the most reputable private universities. The latter is of particular importance because the project would therefore be focusing on the growth of good private universities. In the ICEES case, the project would support the expansion and strengthening of the activities carried out by this public student loan institution, the only one of such nature in Mexico. The State of Sonora, which in 1995 accounted for 4% of the national undergraduate population, is one of the few states in which public universities charge significant tuition fees. Although this State only accounts for a small percentage of the national undergraduate population, the experience built through the project will be invaluable for states wishing to introduce cost-recovery in their universities while preserving equity. It is expected that ICEES's strengthened experience will serve as a model. 8. PROJECT ALTERNATIVES CONSIDERED AND REASONS FOR REJECTION: Supply side vs. demand-side financing. World Bank-financed higher education projects have historically emphasized supply-side financing initiatives. These supply-side financing programs were frequently unsustainable in the long run. Demand-side financing initiatives are more likely to have a sustainable, positive impact on educational access, equity, and quality. Furthermore, supporting greater private financing through cost-sharing can help Mexico protect incremental public resources for investments in education. This project would be the first World Bank higher education project providing demand-side financing on such a scale in a large country. Supporting government scholarships. Increasing the number of government scholarships for needy students enrolled in public higher education institutions that agree to raise student fees was an alternative and/or complementary demand-side financing activity that was considered. The high political risk associated with imposing cost-sharing in public institutions and the limited margin for cost-recovery made this strategy less attractive - in terms of sustainability and feasibility - than supporting student loan initiatives. Nonetheless, linking the SOFES loan system to the existing scholarship programs in member universities was seen as a viable and important strategy. Supporting more student loan schemes. Limiting activities to the strengthening of the ICEES loan scheme and the establishment of the SOFES program was preferred for the following reasons: (a) cost-sharing is still rather controversial in Mexican public higher education institutions and focusing on these two activities would allow a growth in the country's experience while minimizing political risk; (b) the experiences of a public and a private institution would provide fruitful lessons for future investments; (c) there is a strong sense of commitment and ownership for these programs; and (d) the conditions in other states are not yet sufficient for the establishment of a local version of ICEES.  Project Appraisal Document Page 8 Country: Mexico Project Title: Higher Education Financing Project Implementation Arrangement: Collection Arrangements for SOFES loans. The following four alternatives for the collection of SOFES loans were analyzed: (a) a mixed (decentralized and centralized) strategy that would involve SOFES and small satellite offices in each university, (ii) a centralized SOFES system, (iii) outsourcing to a bank, and (iv) outsourcing to a collection agency. The outsourcing options were eliminated, among other reasons, because the banks and collection agencies showed little interest and/or experience in the area. The mixed collection strategy was chosen over the centralized system because it presented financial and qualitative advantages. For example, the participation of satellite offices would help establish closer relationships between students and loan administrators, thus increasing the likelihood of loan repayment (see Annex 4 for a further description of the quantitative analyses that were carried out). Legal and Financial Structure. Various alternatives for the overall legal structure of the project and for the institutional and managerial structure of the SOFES loan program have been explored. With regards to the overall structure, the Government has chosen BANOBRAS to be the borrower to on-lend the IBRD funds through a trust to SOFES and ICEES. BANOBRAS has already defined the legal structure for the project, which was agreed by executing agencies. A draft of the legal structure was reviewed at negotiations. 9. MAJOR RELATED PROJECTS FINANCED BY THE BANK AND/OR OTHER DEVELOPMENT AGENCIES (COMPLETED, ONGOING AND PLANNED). Sector issue Project Latest Form 590 Ratings (Bank-financed projects only) Bank-financed IP DO Technical Training Third Technical Training Project: Objective is to improve the CONALEP system which addresses S S technical education in Mexico. Science and Technology Second Science and Technology Project: Objective is to rationalize public funding for science and technology development and improve technology infrastructure S S (under preparation) Primary Education Primary Education III: under preparation. NA NA Equity in Basic Education and PAREB and PRODEI: recently restructured into one Initial Education project. Objectives of both projects include preparing children of low-income families for school, educating S S parents in child-rearing practices and strengthening institutional capacity to formulate and evaluate policies in initial education Other development agencies Science and Technology IDB is financing a program for the development of science and technology in U.N.A.M. Secondary Education IDB has earmarked funds within the P.I.A.R.E project for a study of upper secondary education that would help guide the development of a strategy to improve this educational level. Two -year Universities On the basis of a model developed by the autonomous university of Guadalajara, IDB is preparing a small grant to evaluate, adapt and expand two year university programs that are closely linked with employment. Distance Education (for Secondary IDB is supporting the preparation of distance education Education) modules for secondary school, including upper secondary education.  Project Appraisal Document Page 9 Country: Mexico Project Title: Higher Education Financing Project 10. LESSONS LEARNED AND REFLECTED IN THE PROJECT DESIGN: On the basis of operational and policy analysis, a review of existing literature and original studies, the World Bank's higher education policy study (Higher Education: the Lessons of Experience - presented to the Board in 1994), offers the following relevant recommendations: * the need for higher education institutions to diversify their sources of funding * the redefinition of the role of the State to rely more on incentives and less on direct financing to influence the development of the higher education system * the introduction of policies designed to give priority to quality and equity objectives. Many of the study's specific findings regarding international best practice, as well as the results of two comprehensive reviews of existing student loan schemes are being taken into consideration in the project design: * Cost-sharing strategy for expanding coverage. The project's strategic choice to focus on student loans is supported by international experience in higher education. Cost-sharing coupled with student financial assistance has proven to be an efficient strategy for attaining expanded coverage and better educational quality while protecting equity of access. * Administration of student loan programs. Experience with financial programs for students in developed and developing countries point to the importance of a centralized administration. A centralized administration allows students to take their financial package to the institution of their choice. Not linking the financial programs to particular institutions increases the educational purchasing power of poor students. Thus, by permitting students to make the same choices as students with more financial resources, market forces are put into play, stimulating changes in the quality of education. Both loan schemes supported by the project (SOFES and ICEES) will increase the educational choices of qualified, financially needy students. * Terms and Conditions of Loans. Every student loan scheme faces two conflicting challenges. On the one hand, the loan scheme must be financially viable, providing adequate cash flows and being sustainable without substantial government subsidies. On the other hand, it must also provide an equitable debt burden for students. A successful loan program thus needs to find the right balance between an interest rate that makes the loan financially viable and repayment terms that allow graduates to be in a position to pay. The loan terms and conditions have therefore been carefully analyzed during the project preparation process. On the basis of demand surveys and financial and labor market salary projections, the terms and conditions of the ICEES loan program were adjusted to help reduce the interest rate subsidy and the student's monthly debt burden. The terms and conditions of the SOFES loans were defined using similar analyses. Projections show that loan repayments under the terms and conditions of the SOFES loans will not exceed 18% of the student's salary. * Minimizing Default. Among others, sustainable loan programs require an effective collection agency with appropriate incentives to minimize default and evasion. Institutional disincentives to collect need to be removed. Furthermore, repayment terms should allow graduates whose income has fallen to defer payments. In order to minimize the default rate of the student loans schemes supported by the project, the institutional arrangements for collection have been carefully analyzed during project preparation. The project will support activities aimed at strengthening ICEES's loan collection capacity and at establishing an effective system for the SOFES loan program. * Effective Targeting. International experience has shown that efficient targeting to needy and qualified students will improve the financial viability of a program and increase the availability of support for those who need it. The SOFES and the ICEES programs will target qualified students from low- and middle-income families. The criteria used for targeting has been carefully reviewed and is presented in Annex 2.B. This Annex also provides a description of the methodology for classifying and verifying students' socioeconomic background. Albrecht and Ziderman (1992). Deferred Cost Recovery for Higher Education: Student Loan Programs in Develowing Countries. World Bank Discuaaion Paper 137, World Bank. Woodhall, M. (1990-1993). Student Loans in Higher Education. vol. 1-4. Paris: International Institute for Educational Planning.  Project Appraisal Document Page 10 Country: Mexico Project Trite: Higher Education Financing Project Among the preliminary lessons from the ongoing Bank-financed student loan projects in Venezuela and Jamaica are * Vulnerability. Student loan schemes are extremely sensitive to changing economic conditions (inflation, employment, exchange rate). * Financial Management. Working with a well functioning financial management system (and a good financial analyst) is important to be able to monitor developments and explore alternative scenarios to preserve the financial viability of the institution, especially in times of abrupt economic changes in the country. Consequently, ICEES added a full-time financial specialist to its staff. * Leadership. The Venezuela experience illustrates the crucial role of the leadership of the student loan institution in terms of rapid decision-making to adjust to changing circumstances. * Guarantees. There is a need to have a flexible third-party guarantee system to be able to serve the poorest students. ICEES will continue implementing its systemwhich is based on a moral guarantee signed by a close member of the family. With regards to the SOFES loan program, universities may become the guarantor of those students that cannot provide a third-party guarantee and the possibility of developing a bank of guarantees (provided as donations) is being explored. * Loan Collection. Effective loan collection depends on an adequate information system to follow-up on graduates and proper management and financial incentives. These aspects have been taken into consideration in the development of loan collection systems. 11. INDICATIONS OF BORROWER AND RECIPIENT COMMITMENT AND OWNERSHIP: There is a strong sense of commitment and ownership for the SOFES loan scheme, as well as for the strengthening of the ICEES program. Approximately three years ago, FIMPES began exploring the feasibility of a student credit system for undergraduate and graduate education. Booz, Allen & Hamilton of Mexico was hired to carry out a feasibility study of the loan scheme and design a proposal for its establishment. The study was completed in February 1995 and by 1996, the Government through SHCP had agreed to support SOFES' initiatives. During project preparation, SOFES has commissioned various studies, sought technical assistance, hired key staff, obtained new office space and started a pilot program. SOFES (through the financial support of its members) has invested approximately US$1.2 million in these activities. With regards to ICEES, their actions have also demonstrated commitment to the proposed changes. With the pro-bono support of McKinsey & Company, ICEES prepared an institutional strategic plan for the 1997-2006 period. ICEES has also financed and carried out various studies (e.g., an evaluation of the socioeconomic background of university students in the State of Sonora) and analyses (e.g., thorough financial simulations and review of accounting procedures) to support project design. Furthermore, the new Governor of the State of Sonora has confirmed his full commitment to the project. 12. VALUE ADDED OF BANK SUPPORT: The Bank's financial and non-lending services will provide valuable contributions to the project's design and the development of the student credit market in Mexico. Student loans are a new area of financing in Mexico that is not likely to attract further private sector financing until a track record is established. The Bank's support of this project would play a catalytic role in developing the market for student loans. In addition, the Bank has accumulated a substantial amount of lending experience in higher education projects, including projects that support student loan schemes. In fact, the Bank presently has two ongoing projects that support demand-side financing - the Venezuela Student Loan Reform Project and the Jamaican Student Loan Project. This operational experience, coupled with the expertise that stems from the Bank's higher education policy study puts the Bank in a favorable position to offer advice and help avoid the mistakes incurred elsewhere. The Governments of Argentina and Chile have recently indicated interest in mounting similar operations to stimulate the growth of the private sector. The results of the proposed Mexico operation will be of value to orient their efforts. The project's monitoring system is being carefully designed in order to provide valuable information not only for guiding the project's implementation but also for assisting future operations.  Project Appraisal Document Page 11 Country: Mexico Project Title: Higher Education Financing Project BLOCK 3: SUMMARY PROJECT ASSESSMENTS 13. EcoNoMic ASSESSMENT [XI Cost Effectiveness Analysis: (see Annex 4): The economic analysis presented in Annex 4 starts with an introductory discussion of how the project fits into the CAS, what are the links with Economic and Sector Work, and what is the rationale for public sector intervention. Subsequently, the analysis is focused on: (i) a cost-effectiveness analysis to justify the choice of interventions, (ii) a financial analysis to establish the viability of the proposed schemes, (iii) an analysis of the macroeconomic impact to assess the fiscal burden of the project, and (iv) an equity impact analysis examining the social benefits of the project. The main conclusions are presented below. A thorough description of the analyses and their methodology can be found in the annex. Choice of Interventions: Cost-Effectiveness Analysis Since rate of return analysis alone cannot fully capture all benefits in a comprehensive way, the discussion of the justification of the project's choice of interventions focuses on the comparison of the cost-effectiveness of: (i) student loans versus traditional grants such as those offered by the Government through the National Council for Science and Technology (CONACYT), and (ii) two loan collection approaches for the SOFES loan program, one involving a centralized organizational model (SOFES responsible for all aspects) and one relying on decentralized SOFES satellite offices (windows) in each participating university. Loans vs. Grants. The main purpose of comparing a loan and a grant program was to determine which of the two programs was less costly in terms of the Government's financial contribution. The main conclusions were: * The SOFES student loan program is more cost-effective than a traditional grant program, except when the default rate is extremely high (greater than 26%). * The ICEES student loan program is more cost effective than administering a traditional grant program, even when default rates are high (greater than 26%). Collection Methods for the SOFES loan program. The analyses supported the choice of a decentralized collection arrangement because: (i) a centralized collection arrangement is estimated to be approximately 5% more expensive than a decentralized program, and (ii) the overall cost-effectiveness of a decentralized strategy is greater since experience has shown that repayment rates are higher under a decentralized structure. Financial Feasibility and Sustainability Analysis Financial projections were carried out to assess the long-term viability of the proposed student loan schemes. The results indicated that: * The SOFES student loan program will have a positive net present value even under very difficult conditions, such as high default rates, zero Government subsidy, and high interest rates to the students. * The financial viability of the ICEES loan program is guaranteed over the next fifteen years. * The World Bank loan would help ICEES reduce its dependence on budgetary funds from the State of Sonora. Macroeconomic Fiscal Impact The macroeconomic fiscal impact of the project was measured by comparing the direct impact of the following on the Govermment's budget: (i) the subsidies offered in support of SOFES and ICEES and (ii) the savings associated with the operation of student loan schemes. The main assumptions behind the analyzed scenarios are: (i) in the absence of the SOFES and ICEES loan schemes, a larger number of students would have to be accommodated in public universities as they would not be able to attend private universities (substitution effect), and (2) public universities such as the University of Sonora would not be allowed to charge tuition fees. Given the distinctiveness of each loan program, the analyses were carried out separately with slightly different methodologies. SOFES. The analysis reveals that the SOFES student loan program would generate considerable savings of public resources (on average 300 million pesos per year), regardless of the level of subsidy. The savings are in the order of 90% of what the Federal Government would have had to spend if it incurred the total costs of providing education to those students. Moreover, the analysis predicts that the loan program would generate additional public resources from income taxes (generated once the students enter the labor market), even after taking the subsidies into account. ICEES. The analysis of the macroeconomic fiscal impact of the expansion of the ICEES student loan program indicates that, by the year 2002, the loan program would account for an additional 109 million pesos for public universities and 196 million pesos for private higher education institutions. The analysis also reveals that, owing to the better academic performance and graduation rate of the beneficiaries of a student loan, the existence of the Student Loan Institute facilitates a more optimal use of public sector resources.  Project Appraisal Document Page 12 Country: Mexdco Project Title: Higher Education Fnancing. Project Equity Impact The equity impact analysis focuses on the changes in the rate of access to higher education (particularly for low- and middle-income students) that may result from project interventions. The main conclusions were: * The capacity of the loan schemes to significantly alter the socio-economic distribution of the student population during the project years is limited. It is important to be realistic about the number of years needed to achieve notable changes. The financial sustainability of the programs is therefore of critical importance. * It has been estimated that SOFES's loan program would help increase the number of low-income students in its member universities by 4 percentage points. The percentage of middle-income students would increase by one percentage point. * The proportion of ICEES beneficiaries from low- and middle-income groups is slightly higher than the share of these groups in the overall student population. The social importance of the ICEES student loan scheme is even more visible when comparing the situation in the public and private universities. The proportion of loan beneficiaries is significantly higher in the latter case, and it is twice as high for low-income students. ICEES is committed to maintaining these proportions. 14. FINANcu1L ASSESSMENT (see Annex 5) The yearly breakdown of the total project cost by investment and recurrent expenditures as well as by financing sources is shown in Annex 5. Project Costs. Total project cost, including physical and price contingencies, is estimated at US$287.9 million. This total was estimated assuming a mixed loan collection strategy, whereby SOFES and its satellite offices at the universities will participate in the collection process. Base costs. Base costs were estimated at US$260.3 million and were based on September 1997 prices. Cost estimates for tuition, furniture, computer equipment and maintenance are supported by recent price quotations and past experience. Estimated costs for training and technical assistance reflect prevailing local and international standards. Costs for all other expenditure categories (operational costs) were based on expert advice and projections. Contingencies. Physical and price contingencies amount to approximately US$27.5 million (9.6% of total project costs). Price contingencies take into account an estimated 4% real growth of educational costs. Foreign Exchange and taxes and duties. The foreign exchange component is estimated at US$1.6 million, less than 1% of total project costs. Foreign exchange costs stem mostly from expenditures for computer and general office equipment. Local taxes and duties amount to less than 1% of total project costs. Locally procured goods and services are subject to a value added tax (VAT) of 15%. Sources offinancing. An IBRD loan of US$180.2 million would cover approximately 63% of total project costs. Eighty-three percent of this loan amount (US$150.2 million) would be allocated to the development of the SOFES loan program. The loan proceeds would be used for financing student loans, office equipment, technical assistance and training. The remaining US$86.9 million required to finance the SOFES loan program would be provided by the Federal Government, by SOFES member universities, and students and their families. Federal funds would cover 50% of the Reserve and Payment Fund (RPF) for the SOFES program.9 SOFES would be responsible for financing 50% of the RPF, and covering all operational costs, taxes and duties. The incremental recurrent costs of the SOFES program (US$15.8 million) will pay, inter alia, for personnel in the satellite offices at the universities. Seventeen percent of the IBRD loan (US$30 million) would be allocated to the expansion and strengthening of the Sonora Student Loan Program. IBRD loan proceeds would be used to finance student loans, goods and equipment, technical assistance and training. ICEES, with the support of the State of Sonora, would cover the additional recurrent costs created by the project (US$1.2 million) and some investments in equipment. Contributions for educational costs from students and their families account for the balance of the financing of this component. A Reserve and Payment Fund (RPF) would be maintained as part of a guarantee systemn for the SOFES loan program. Five percent of the total amount of funds distributed for student loans will-be held in the RPF. Half of the funds for the RPF (2.5%) will be covered by the Federal Ministry of Education (SEP - Secretaria de Educaci6n Publica) through CONACYT (Consejo Nacional de Cienciasy Tecnologia) and the other 2.5% by the SOFES member universities. An official letter from CONACYT confimning its commitment to support the RPF was presented at negotiations.  Project Appraisal Document Page 13 Country: Mexico Project Title: Higher Education Financing Project 15. TECHNICAL ASSESSMENT: During the project preparation process, emphasis has been given to design elements - such as the loan's terms and conditions, collection arrangements and targeting mechanisms - that are key to the success of student loan programs. These aspects have been examined on the basis of financial and labor market projections, student demand surveys, and socio-economic background studies, as well as analyses of the institutional and financial capacity of participating institutions. Furthermore, the lessons learned from experiences with student loan programs in Mexico and other countries around the world have been taken into account. All the analyses have been carried out with technical support from area specialists. The numerous technical documents that have been prepared during project preparation, including thorough operational plans and manuals for the SOFES loan program, are in the project file (see Annex 8 for the list of documents). 16. INSTITUTIONAL ASSESSMENT: In order to ensure an effective implementation of the loan programs, various institutional issues have been addressed during the preparation of the project. With regards to the overall institutional arrangement for project implementation, the Government has opted to use BANOBRAS as the financial vehicle through which the IBRD loans will be on-lent to the executing agencies. The institutional assessment that was carried out for ICEES revealed that only by strengthening the Institution's capacity would the program's objectives be reached. Some immediate actions, such as the hiring of a financial specialist and the upgrading of the management information system, have already begun. An auditing firm has also been hired to help ICEES adjust its financial reporting system to reflect loans in severe arrears as acknowledged losses. During negotiations, ICEES presented its work plan for carrying out the necessary adjustments. Other broader institutional development actions would be carried out during the implementation of the project. These actions would be based on a long-term institutional development plan that would be designed by specialists during the first years of the project. Various options have been analyzed for the legal structure and institutional arrangements for the operation of the SOFES loan program. A final agreement on these issues has already been reached, and a draft was reviewed and agreed at negotiations. 17. SoCIAL ASSESSMENT: The project preparation strategy has been highly participatory. Representatives from all stakeholder groups have been systematically consulted (SHCP, SEP, students, graduates, present and former beneficiaries of student loans, public and private university leaders and administrators, professors, private sector representatives). Institutional representatives, SOFES member universities, and ICEES beneficiaries have actively participated in the design of the components. A social marketing plan was prepared by SOFES to assess political risks and propose a communication strategy to minimize them. A survey of students and university graduates was carried out in the State of Sonora to evaluate the demand for student loans and the repayment difficulties encountered by former beneficiaries. The broad consultation undertaken during project preparation would continue during the implementation phase to inform and mobilize beneficiaries and the SOFES constituency. In order to reach the project's social objectives, special attention has been given to the student loan's terms and conditions and targeting mechanisms. The terms and conditions that are being sought are ones that permit a high level of financial viability and an equitable debt burden for students. Financial models and demand surveys have been used to analyze the feasibility and affordability of various scenarios and strategies. With regards to the targeting mechanisms, clear and transparent selection matrices are being finalized and a methodology for classifying and verifying student's socioeconomic background has been established. Studies of the socioeconomic status of students in project-related universities will help provide additional baseline indicators on which to gauge progress in social objectives. Annex 2.B provides further details on the targeting methodology. 18. ENVIRONMENTAL ASSESSMENT: Environmental Category [ A [I B lX] C 19. PARTICIPATORY APPROACH: Identification/Preparation Implementation Operation Beneficiaries (students) IS/CON IS/CON CON Intermediary Institutions (e.g., ICEES) COL COL COL Academic institutions (FIMPES Universities and COL COL COL Universities in the State of Sonora) Teachers IS IS IS Local government (State Government of Sonora) CON COL COL Other donors (IDB) IS IS IS Policymakers COL COL COL IS = Information sharing; CON = Consultation; COL = Collaboration  Project Appraisal Document Page 14 Country: Mexico Project Title: Higher Education Financing Project The project preparation process has relied on extensive consultation and collaboration. Student demand surveys were carried out for both the SOFES and the ICEES programs. All participating institutions have been actively involved in the project design process. Furthermore, the IDB has expressed strong interest in supporting the ICEES and SOFES loan schemes through a subsequent project. 20. SUSTAINABILITY: The financial sustainability of the ICEES loan scheme will largely depend on: (i) the fulfillment of Sonora's State Government's promise to support ICEES at a level equal in real terms to its present funding level, and (ii) the strengthening of the Institution's financial management capacity, particularly with regards to loan recovery. During project preparation, actions aimed at addressing these issues have been taken or incorporated into the project. For example, a financial specialist has been hired and the project will finance the elaboration and implementation of a short- and long- term institutional development plan. The State Government has officially confirmed its commitment to continue its funding of ICEES at its present level. Sustainability issues have also been taken into consideration in the design of the private sector student loan scheme. For example, special analyses of the universities' financial and management capacity have been carried out to provide insight into the sustainability of the proposed arrangements (whereby the universities carry most of the financial risk of the project). Financial projections for a representative sample of six universities indicated that SOFES member universities could absorb a 15% default ratio and still reflect a surplus from operations each year. However, in order to increase the number of students after the project is completed, additional resources will be required. A fundraising strategy has therefore been defined. 21. CRITICAL RisKs (see fourth column of Annex 1): Project components to outputs Risk Risk Rating Risk Minimization Measure The terms and conditions of loans are not High For both loan schemes, financial models designed with reliable job adequate for achieving a financially viable and market salary projections and financial data have been used to explore equitable loan program various scenarios and strategies. The terms and conditions that would best respond to ICEES's loan program have been chosen on the basis of these analyses. A final analysis of the affordability of the SOFES loan program from different labor market positions has been carried out. The terms and conditions of the SOFES loans were confirmed during negotiations. Effective targeting is not implemented. Moderate The criteria used for targeting has been carefully reviewed. ICEES and SOFES will use a common methodology for identifying and classiffing socioeconomic background. This methodology has been empirically tested. The selection matrix that has been developed for the SOFES loan program is transparent and equitable. ICEES's selection matrix has been revised to support institutional targeting goals. Furthermore, both ICEES and SOFES will monitor their targeting of low- and middle-income students, as well as their coverage in terms of gender and region of origin. Institutional and managerial structure of Moderate The institutional arrangements for the Private Sector Loan Scheme SOFES is not efficient and effective (e.g., too have been carefully analyzed and an appropriate organizational and many layers, insufficient financial legal structure was defined before negotiations. responsibility of universities) Loan repayment is hindered by: (a) ineffective High Based on lessons learned from past experience in Mexico (Sonora loan collection strategies -especially for the Institute and Universities) and from international best practice, an new scheme (SOFES), and/or (b) economic adequate loan collection strategy has been defined for ICEES and conditions (e.g., recession with high inflation) SOFES. The SOFES RPF is designed to cushion adverse effects of potential economic problems. Overall project risk rating Moderate to High  Project Appraisal Document Page 15 Country: Mexico Project Title: Higher Education Financing Project 22. POSSIBLE CONTROVERSIAL ASPECTS: In Mexico, the Government's use of the loan to support the private sector in lieu of reserving these funds for the expansion of the public sector may be questioned. In order to address this issue, SOFES has developed a political marketing plan that would help avoid or at least minimize adverse reactions. Furthermore, in Mexico, cost-sharing in public higher education institutions is still rather controversial. This is why, in order to minimize possible negative reaction, the project focuses on demand-side financing activities in institutions that already charge tuition fees. Within the Bank, supporting higher education in Mexico (versus basic education) may be a subject of debate. However, the proposed project design corresponds to the recommendations of the Bank's higher education policy paper, namely the importance of moving away from traditional supply-side financing to demand-side financing. This would be a major change in the incentives framework for higher education institutions in Mexico. Moreover, increased demand-side financing in higher education could lead to the protection of incremental resources to primary and secondary education. BLOCK 4: MAIN LOAN CONDITIONS 23. EFFECrIVENESS CONDITIONS (a) The signed derivation of funds contract and the trust fund contract between BANOBRAS and SHCP and the necessary legal opinions are presented to the Bank; (b) Either one of the intermediary agreements between BANOBRAS (Trust Fund) and SOFES or between BANOBRAS (Trust Fund) and ICEES will have been signed, and the necessary legal opinions issued; (c) The legal documentation that supports operation by SOFES as a SOFOL (Sociedad Financiera de Objeto Limitado) has been presented to the Bank (if the BANOBRAS-SOFES intermediary agreement is the one signed for effectiveness); (d) SOFES has submitted to the Bank its revised operational manuals (Reglas de Operaci6n del Sistema de Credito Educativo SOFES and Manual de Credito) (if the BANOBRAS-SOFES intermediary agreement is the one signed for effectiveness); (e) ICEES has presented to the Bank its revised project implementation document (Plan de Ejecuci6n) (if the BANOBRAS-ICEES intermediary agreement is the one signed for effectiveness); and (f) the Bank has received baseline data and targets as required to complete Annex 1 hereto. 24. OTHER Disbursement Conditions: (a) For the SOFES Component (Component A), the signed intermediary agreement between SOFES and BANOBRAS (Trust Fund) with the necessary legal opinions, the SOFOL documentation and the SOFES operational manuals (unless already met under effectiveness condition (b)) must have been presented to the Bank. (b) For the ICEES Component (Component B), the signed intermediary agreement between ICEES and BANOBRAS (Trust Fund) with the necessary legal opinions and the ICEES implementation document (unless already met under effectiveness condition (b)) must have been presented to the Bank.  MAY 12 'S 9 11:53 wORLDBRNK mExiCO 525-4804222 PPGE 3 Project Appraisal Document . lb Country: Mexico Project Titlk: Higher EducaPtoii Fl-hancing Ptojecq BLOCK 5: COMPLIANCE WITH BANK POLICIES F[X1 This project complies with all applicable Bank policies. I ask Manager: Jamil Salni C'ountry Manager: Olivicrilafourcadc  Project Appraisal Document Page 17 Country: Mexico Project Title: Higher Education Financing Project ANNEX 1: PROJECT DESIGN SUMMARY Table 1. List of Key Indicators Narrative Summary Key Performance Indicators (See Monitoring and Supervision Critical Assumptions and Risks Table below for baseline, mid-terrn and end-of-project targets) CAS Objective Econornic growth Social Deveopment Project Development (Development Objecfives to CAS Objectives Objective) Greater equity and quality in the * Higher education enrollment rate Monitoring systems for the SOFES and Sonora Assumptions: preparation of university graduates. * Enrollment in SOFES universities as a % of Student Loan Schemes. In addition to primary (a) More and better qualified graduates will be total higher education enrollment data collected by the institutions, SOFES and entering the workforce. * Enrollment in universities in the State of ICEES will also rely on national higher education (b) improve equity in higher education would Sonora as a % of total higher education statistics and intemal university figures. The increase the potential eamings of lower income enrollment exact sources that will be used in each students. * Enrollment in universities in the State of monitoring system are specffied in the (c) Targeted demand-side financing would Sonora and SOFES-member universities by methodological notes which can be found in the contribute to the more efficient use of public socioeconomic status project file. and private resources for higher education * Dropout rate of students in universities in the through Increased competition. State of Sonora and of those in SOFES- (d) The project would have a catalytic role in member universities the development of a private sector financial market for student loans.  Prbect Appraisl Document Page 18 Counby Mexico Project Title: Higher Education Financing ProJed Table 1. List of Key Indicators (continued) Narrative Summary Key Performance Indicators (See Table Monitoring and Supervision Critical Assumptions and Risks below for baseline, mid-term and end-of- project targets) Project Outputs (Outputs to Development * Increased access to higher * % of undergraduate students in project-related Monitoring systems for SOFES and Sonora Objectives) education for academically qualified universities receMng ICEES or SOFES loans Student Loan Schemes. Specialized Assumptions: but financially needy students. * Students receiving ICEES or SOFES loans by surveys will be carried out for some (a) Demand-side financing will foster socioeconomic status indicators (e.g., product and service competition, thus promoting improvements * Dropout rate of students receiving ICEES or SOFES satisfaction index, % of secondary school in the quality and relevance of higher students familiar with loans, socioeconomic education institutions. * More effective and financially With regards to SOFES: status) (b) Increasing the purchasing power of sustainable student loan institutions. * Number of applications received (and % approved) academically qualified but financially needy * % of loans in arrears (overdue 61 to 180 days) students would improve the equitable * % of loans overdue 61 to 90 days cartera access to higher education. extrajudicial (c) Students who bear some part of the * % of loans undergoing legal process to collect (over costs of their education are better 91 to 180 days) motivated and have higher academic * Loan recovery rate results. * Defauit rate * Operational Costs as a % of Total Loan Portfolio * % of students (in their last year of secondary school and attending SOFES universities) that have participated in SOFES loan information sessions. * % of students in SOFES member universities receivng non-SOFES loans by university * Product and service satisfaction index * % of students receMng SOFES loans that obtain a job In 6 months (after graduation) With regards to ICEES: * Contribution to ICEES from the State of Sonora in real terms (millions of pesos) * Number of applications received for higher education loans (and % approved) * Loans due vs. Total Loan Porfolio * % of loans in arrears (1-8 months past due) * % of Loans undergoing legal collection process (over 9 months past due) * Loan Recovery Rate * Default Rate * Level of Subsidy * Operational Costs as a % of total loan portfolio * Product and service satisfaction index * % of University and last year secondary school students that are familiar with ICEES's loan product * % of students receing ICEES loans that obtain a I job in 6 months (after graduation)  Proect Appralsal Document Page 19 County: Medco Project Title: Higher Education Financing Project Narrative Summary Key Performance Indicators (See Table Monitoring and Supervision Critical Assumptions and Risks below for baseline, mid-term and end-of- project targets) Project Components (Components to Outputs) A. Devebpment of the Private Sector * Loan Funds Distributed vs, Programmed Amount Monitoring systems for FIMPES and Sonora Assumptions/Risks: Student Loan Scheme * Equipment for MIS has been purchased and installed Student Loan Schemes. Basic tracking of 1 student loans * % of SOFES Program Staff Trained activities. (a) The terms and conditions of loans are 2 Institutional Development adequate for achieving a financially viable and equitable loan program. * Loan Funds Distributed vs. Programmed Amount (b) Effective targeting is implemented. B. Strengthening of the Sonora Student * Basic computer equipment is purchased and (c) Organizational and legal structure of Loan Scheme installed to respond to more immediate needs SOFES facilitates an effective and efficient 1 Student Loans * TA for long -term Institutional Development Plan loan scheme. 2 Institutional Strengthening * Equipment to support Long-term Development Plan (d) Effective loan collection is purchased and installed. (e) Economic conditions do not hinder loan I repayment.  Pvc App'm Doawu Pap 20 Cay Mdo Project Tl: Hbher Educwon F cin P Table 2. LiSt of Comolhmentarv Indicators Narrative Summary Complenentary Indicators (See Table Monitoring and Supervision Critfcal Assumpffons and Risks below for baseline, mid-term and end- _______________________ of-project targets) CAS Objective Econornm growth Social Deve.p ent Project Development (Development Objecfives to CAS Objectives Objecfive) Greater equily and quality in the * Students in project-related universties by Monitoring systems for the SOFES and Sonora Assumptions: preparation of university graduates. gender Student Loan Schemes. In addtion to primary (a) More and better qualified graduates will be * Students in project-related universities by data collected by the institutions, SOFES and entering the workforce. field of study ICEES will also rely on intemal university (b) Improve equity in higher education would * Students in the universities in the Stat of figures.The exact sources that will be used in increase the potential eamings of lower income Studntsin he nivrsfiesin he tat of each monitorng system are specifie in the students. Sonora by region of ongin. methodological notes which can be found in the (c) Targeted demand-side financing would * Average grades of students in the universdies project file. contribute to the more efficient use of public in the State of Sonora and private resources for higher education * SOFES-member university students with through increased competition. high academic performance (equal to or (d) The project would have a catalytic role in greater than 8) the development of a private sector financial * Average number of years to graduate for market for student loans. students in universities of the State of Sonora I and in SOFES-member universities.  Project Appraisal Document Page 21 Country: Mudco Project Title: Higher Educaton Financing Project Table 2. List of Complementarv Indicators (continued) Narrative Summary Complementary Indicators (See Table below Monitoring and Supervision Critical Assumptions and Risks for baseline, mid-term and end-of-project targets) Project Outputs (Outputs to Development * Increased access to higher * Students receiving ICEES or SOFES loans by Monitoring systems for SOFES and Sonora Objecives) education for academically qualified gender and field of study. Student Loan Schemes. Assumptions: but financially needy students. * Student receiving ICEES loans by region of origin. (a) Demand-side financing will foster * Average grades of students receiving ICEES loans. competition, thus promoting improvements * Students receiving SOFES loans with high academic in the quality and relevance of higher performance (equal to or greater than 8) education institutions. * Average number of years to graduate for student (b) Increasing the purchasing power of receiving ICEES loans or SOFES loans. academically qualified but financially needy * Students receiving mix of SOFES loans and students would improve the equitable scholarships by socioeconomic status access to higher education. (c) Students who bear some part of the * More effective and financially With regards to both, SOFES and ICEES: costs of their education are better sustainable student loan institutions. * Past due loans by reason (lost track of student, no motivated and have higher academic income, insufficient income) results. * Composition of resources * Average number of months for students receiving loans to find a job. With regards to SOFES: * Average cost of treasury * Average interest rate of loan * % of resources retained from SOFES universities for Reserve Fund * % of resources retained from SOFES universities for Loans in Arrears With regards to ICEES: * % of students that receive response to application in scheduled time * Turn-around times for resource transfer  Project Appraisal Document Page 22 Country: Mexdco Project Title: Higher Education Financing Project Table 3. Baseline and Tareet Values for Key Performance Indicators Narrative Summary . Key Perfornance Indicators Indicator Baseline Mid-term target End-of-project target (1997) Mid-Year 2000 Mid-Year 2003 Project Development Objectives Greater equity and quality in * Mexican higher education enrollment rate 14.0% 15.8% 17.9% the preparation of university graduates. * Enrollment in SOFES universities as a % of Total 14.2% (1996) 19.1% 24.6% Higher Education Enrollment * Higher education participation rate in the State of 26% 30% 33% Sonora * Enrollment in SOFES universities by See Table 3.A below socioeconomic status * Enrollment in universities in the State of Sonora Low: 72.4% Low: 73% Low: 73% by socioeconomic status Middle: 26.4% Middle: 26% Middle: 26% * Dropout rate of students in universities in the State of Sonora BEING ANALYZED * Dropout rate of students in SOFES-member 25.0% 23.1% 18.9% universities Project Outputs * Increased access to higher education for academically * % of undergraduate students in SOFES member 0% 7.48% 18.2% qualified but financially needy universities receiving SOFES loans students. * % of undergraduate students in universities in 16.3% 19.8% 22.7% the State of Sonora receiving ICEES loans * Students receiving SOFES loans by See Table 3.B below socioeconomic status a Students receiving ICEES loans by Low: 75.3% The percentage of low- and middle-income students receiving credits will socioeconomic status Middle: 24.0% be maintained or increased, attempting to keep the coverage equal to or above the higher education enrollment rates of these socioeconomic groups. * Dropout rate of students receiving SOFES loans Not applicable 1.0% 1.0% * Dropout rate of students receiving ICEES loans BEING ANALYZED * More effective and financially sustainable student loan institutions. SOFES: *Number of applications received (and % Not applicable 126,905 - 14.0% 452,489- 11.6% approved) *% of loans in arrears (overdue 61 to 180 days) Not applicable 2.8% 3% *% of loans overdue 61 to 90 days (cartera Not applicable 2.0% 2.0% extrajudicial)  Project Appraisal Document Page 23 Country: Mexico Project Title: Higher Education Financing Project Narrative Summary Key Performance Indicators | Indicator Baseline Mid-term target End-of-project target (1997) Mid-Year 2000 Mid-Year 2003 * % of loans undergoing legal process to collect Not applicable 0.5% 0.5% (over 91 to 180 days) * Loan recovery rate Not applicable >- 3% - 14% * Default rate Not applicable * Operational Costs of SOFES as a % of Total Not applicable < 7.5% < 2.0% Loan Portfolio * % of students (in their last year of secondary Not applicable SOFES: >= 60% SOFES: >= 90% school and attending SOFES universities) that have participated in SOFES loan information Secondary: >= 35% Secondary: > 50% sessions % of students in SOFES member universities 2%I 1% 0.5% receiving non-SOFES loans (by university) * Product and service satisfaction index Not applicable > 80% - 95% * % of students receiving SOFES loans that obtain Not applicable >= 40% -= 40% a job in 6 months after graduation ICEES: * Contribution to ICEES from the State of Sonora 23.0 million >= 23.0 million >= 23.0 million in real terms (pesos) (real terms) (real terms) *Number of applications for higher education loans 8,800 14,000 19,000 received (and % approved) (100%) (98%) (91%) * Loans due as a % of Total Loan Portfolio 14.46% 9.5% 7.0% *% of loans in arrears (1-8 months past due) New policy being established; baseline and targets to be provided 6 months after effectiveness * % of loans undergoing legal process to collect New policy being established; baseline and targets to be provided 6 months after effectiveness (over 9 months past due) * Loan recovery rate New policy being established; baseline and targets to be provided 6 months after effectiveness * Default rate New policy being established; baseline and targets to be provided 6 months after effectiveness * Level of Subsidy -15.6% -7.2% -21.2% * Operational Costs as a % of Total Loan Portfolio 4.37% 2.1% 1.3% * % of students (in their last year of secondary Secondary: 67% Secondary: 85% Secondary: 100% school and attending Sonora universities) that are University: 43% University: 79% University: 100% familiar with ICEES loan product * Product and service satisfaction index BEING DEFINED AND ANALYZED * % of students receiving ICEES loans that obtain BEING ANALYZED a job in 6 months after graduation Project Components A. Development of the SOFES Private Sector Student Student Loan Funds Distributed vs. Not applicable Less than 10% deviation from Less than 10% deviation from Loan Scheme Loans Programmed Amount annual program annual program Institutional Equipment for MIS has been Installation complete by December Development purchased and installed 2000 % of SOFES Program Staff 100% by July 2000 'This is the present average but infonnation disgregatd by university will be presented by effectiveness.  Project Appraisal Document Page 24 Country: Mexico Project Title: Higher Education Financing Project Narrative Summary Key Performance Indicators Indicator Baseline Mid-term target End-of-project target (1997) Mid-Year 2000 Mid-Year 2003 Trained . B. Strengthening of the Sonora Student Loan ICEES Scheme Student Loan Funds Distributed vs. Less than 10% deviation from Less than 10% deviation from Loans Programmed Amount Not applicable annual program annual program Basic computer equipment is 100% completed by Jan. 2000 Institutional purchased and installed to Development respond to more immediate needs Technical Assistance for Long- 100% completed by Jan 2000 term Institutional Development Plan Equipment to support Long-term 50% completion 100% completion Development Plan is purchased and installed .  Project Appraisal Document Page 25 Country: Mexico Project Title: Higher Education Financing Proect Table 3.A - SOFES Enrollment Targets by Socio-economic Status Baseline Estimates Mid-term target End-of-project target (to be reviewed after Mid-Year 2000 Mid-Year 2003 completion of study) High C 207 230 271 High B 8,713 9,698 11,388 High A 27,383 30,478 35,788 Medium C 43,356 49,268 59,681 Medium B 47,090 53,511 64,821 Medium A 37,755 42,903 51,971 Low C 23,856 28,343 36,705 Low B 13,692 16,267 21,067 Low A 5,394 6,409 8,299 Marginal 1 1 2 Totals 207,447 237,109 289,992 Table 3.B - SOFES Targets for Students Receiving Loans by Socio-economic Status Baseline Estimates Mid-term target End-of-project target Mid-Year 2000 Mid-Year 2003 High C N/A 0% 0% High B N/A 0% 0% High A N/A 2.7% 2.7% Medium C N/A 8.7% 8.7% Medium B N/A 18.8% 18.8% Medium A N/A 30.2% 30.2% Low C N/A 21.0% 21.0% Low B N/A 13.1% 13.1% Low A N/A 5.5.% 5.5.% Marginal N/A 0% 0%  Prot Appwl Doment Page 26 count Meadco Project Tit: Higher Education Financing Projt Table 4. Baseline and Target Values for Complementary Performance Indicators Narfrive Summary Compbmentary Perfomnance Indicators Indicator Baseline Mid4erm target End-of-project target (1997) Mid-Year 2000 Mid-Year 2003 Project Development Objectives Greater equity and qually in * Students in SOFES-memnber uniwrsities by Men - 54.2% (1996) Men - 50.9% Men - 49.4% prepateon of uisity gender Women - 45.8% (1996) Women - 49.1% Women - 50.6% gracduaes.gne * Students in the universities in the State of Women: 52 % (1992-1996) Sonora by gender Men: 48% *Students in SOFES-menber uniersities by fid Engineering: 24.2% Engineering: 25.4% Engineering: 26.6% of study Accounting: 14.2% Accounting: 14.6% Accounting: 11.7% Law. 11.0% Law: 11.0% Law. 11.0% Management: 9.8% Management: 10.3% Management: 10.3% Education: 7.5% Education: 7.5% Education: 7.5% Medicine: 5.2% Medicine: 4.4% Medicine: 4.4% Architecture: 3.9% Architecture: 3.9% Architecture: 3.9% Communication: 2.9% Communication: 3.8% Communication: 4.9% Economics: 1.5% Economics: 2.6% Economics: 3.3% Marketing: 0.7% Marketing: 1.2% Marketing: 1.6% * Students in the universtles in the State of Administration: 56% Sonora by field of study Heaith: 2% No targets; monitoring for comparison purposes only Agricuiural: 3% Engineering Tech.: 26% Natural Sciences: 3% Humanities and Education: 10% * Enrollment in universities in the State of Sonora Hermosillo: 34% by region of origin Desierto: 6% No targets; monitoring for comparison purposes only Centro Sierra y Rio: 5% Sur: 43% Frontera: 8% Out of state: 4% * Average grades of students in the universities in 82 No targets; monitoring for comparison purposes only the State of Sonora * Students in SOFES-member universities vwith high academic performance (equal or greater than >= 75% >= 71% >= 71% 8) * AVerage number of years to graduate for BEING ANALYZED students in universities in the State of Sonora * Average number of years to graduate for 3.4 3.4 3.6 students in SOFES-member universities.  Project Appraisal Document Page 27 Country: Mexico Project Title: Higher Education Financing Project Narrative Summary Complementary Performance Indicators Indicator Baseline Mid-term target End-of-project target (1997) Mid-Year 2000 Mid-Year 2003 Project Outputs * Increased access to higher education for academically Men - 53.5% Men - 51.9% qualified but financially needy * Students receMng SOFES loans by gender Not applicable Women - 46.5% Women - 48.1% students. * Students re;eiving ICEES loans by gender Women: 53% Maintain the proportion of women receiving loans at least equal to the .___________ _ Men: 47% proportion in the general university student population * Students receMng SOFES loans by field of See Table 4.A below study * Students receMng ICEES loans by field of study Administration: 51% Maintain coherence with regional Health: 4.3% and national educational strategies Agricultural: 2.1% and with the demands of the labor Engineering Tech.: 22.9% market. Natural Sciences: 2.3% _Humanities and Education: 17% * Students receiving ICEES loans by region of Hermosillo: 27% Increase access to higher origin Desierto: 7% education to those students from Centro Sierra y Rio: 6% areas that do not have universities Sur: 56% in their region of origin. Frontera: 5% Out of state: 1% * Average grades of students receiving ICEES Maintain or improve this average. It loans 85 should be above the average for the general student population. * Students receMng SOFES loans wih high Not applicable >= 67% academic performance (equal to or greater than 8) * Average number of years to graduate for Not applicable 2.9 3.2 students receiving SOFES loans I * Average number of years to graduate for 4.6 years (1996) Maintain or decrease. It should be below the average for the general students receiving ICEES loans student population. * Students receiving mbc of SOFES loans and Not applicable See Table 4.B below scholarships by socioeconomic status * More effective and financially sustainable student loan instiutions. SOFES: * Past due loans by reason (lost track of student (1) -1.5% (') - 1.5% (1), no income (2), insufficient income(3)) Not applicable (2) 2.0% (2) - 2.0% (3) - 3.0% (3) - 2.5% * Composiion of resources BEING ANALYZED See Table 4.C below * Average cost of treasury Not applicable UDI + 4 UDI +4 * Average interest rate of loan Not applicable UDI + 2 UDI + 2 * % of resources retained from SOFES Not applicable No more than 8% universiies for Reserve Fund * % of resources retained from SOFES Not applicable No more than 10% universties for Loans in Arrears * Average number of months for students Not applicable 6 months 6 months receiving loans to find a job I  ProJet Appraisal Document Page 28 Country: Mexco Project Title: Higher Education Financing Project -Narrative Summary Complementary Performance Indicators Indicator Baseline Mid-term target End-of-project target ._________________ _______________________________ (1997) Mid-Year 2000 Mid-Year 2003 ICEES: . * Past due loans by reason (lst track of student, Lost Track of Student: no income, insufficIent Income) BEING ANALYZED No Income: BEING ANALYZED Insufficient Income: 68% * ComposRiton of resources State Govt: 44% State Govt: 18% State Govt: 16% Loan Recovery: 38% Loan Recovery: 27% Loan Recovery: 24% Bank of Mexdco: 2% Bank of Mexico: 1% Bank of Mexico: 1% PaVSEDESOL: 13% PatVSEDESOL: 5% PaVSEDESOL: 5% Adm/Donations: 3% Adm/Donations: 2% Adm/Donatlons: 2% Intrnatinal Credft: 0% International CredRt: 47% Intemational Credit: 53% * Average number of months for students BEING ANALYZED receMng loans to find a job * % of students that receive response to BEING ANALYZED application In scheduled time . * Turn-around times for resource transfer 7 days Maintain comparable tum-around times.  Pject Appraisal Document Page 29 Country Mexdco Project Title: Higher Education Financing Project Table 4.A - Students Receiving SOFES Loans by Field of Study Baseline Mid-term target End-of-project target Mid-Year 2000 Mid-Year 2003 Engineering X Not applicable (0) 27.9% 30.7% Accounting Not applicable (0) 7.3% 7.7% Law__________________ Not applicable (0) 8.8% 8.8% Management Not applicable (0) 10.8% 13.0% Education Not applicable (0) 9.7% 9.7% Medic_ine _ Not applicable (0) 0.0% 2.0% Architecture Not applicable (0) 3.9% 3.9% Communication Not applicable (0) 4.9% 6.4% Economics Not applicable (0) 3.6% 5.0% Marketing Not applicable (0) 1.6% 3.1% Table 4.B -Students Receiving SOFES Loans/Scholarships by Socio-economic Status Baseline Mid-term target End-of-project target Mid-Year 2000 Mid-Year 2003 High C NoA applicable (0) 0 0 High B Not applicable (0) 0 0 High A Not applicable (0) 479 1,423 Medium C Not applicable (0) 1,543 4,585 Medium B Not applicable (0) 3,334 9,907 Medium A Not applicable (0) 5,356 15,915 Low C Not applicable (0) 3,725 11,067 Low B Not applicable (0) 2,323 6,904 Low A Not applicable (0) 975 2,898 Marginal Not applicable (0) 0 0 Table 4.C - Composition of SOFES Resources (US$ million) _ Baseline Mid-term target End-of-project target (1997) Mid-Year 2000 Mid-Year 2003 Total Available Resources 24.0 382.8 1,336.9 Loans (for on-lending to students) 0.0 323.2 1,182.8 Capitalization Funds 24.0 40.2 83.1 Donations 0.0 19.4 71.0  Project Appraisal Document Page 30 Country: Mexico Project Title: Higher Education Financing Project ANNEX 2.A: DETAILED PROJECT DESCRIPTION In line with the Government's long-term development goals for the education sector, the project aims at increasing enrollment in higher education. The strategic choice to support student loan schemes stems from its implications not only for access but also for educational equity and quality. By supporting demand-side financing, the project will have a direct effect on expanding higher education coverage, and since the financial programs will be targeted to needy and able students, there will also be an indirect effect on equity. The increased purchasing power of students that receive the loans will stir competition, encouraging universities to pay heed to the quality and relevance of the programs they offer. Furthermore, with the availability of credit, the universities will be able to reserve scholarships and grants for the financially neediest students as they shift middle-income students from grants to credits. The project will support one private and one public student loan institution. This mix of private and public interventions is of strategic importance. The lessons learned from the two experiences will be of great value to future demand-side financing initiatives. The Government of Mexico has agreed to take the primary responsibility for the World Bank loan and to, through BANOBRAS, on-lend to the corresponding implementation agencies - the Sonora Student Loan Institute (ICEES - Instituto de Credito Educativo del Estado de Sonora) for the strengthening and expansion of its present loan program and the Society for the Promotion of Higher Education (SOFES - Sociedad de Fomento a la Educacion Superior) for the establishment of the private sector student loan scheme. Proiect Description The proposed project will have the following two components: (i) Development of the Private Sector Student Loan Scheme, and (ii) Strengthening of the Sonora Student Loan Scheme. Each component, in turn, has two subcomponents - one that will help finance the student loans and one that will support the institutional development of the executing agencies. Project Component 1 - Development of the Private Sector Student Loan Scheme (US$237.1 million, including contingencies, 82% of total project cost) Student Loan Program. FIMPES, an association of Mexican private higher education institutions, has decided to operate a higher education student loan program through its financial intermediary, SOFES. The student loan program would be aimed at improving access to private higher education for students who are academically qualified but whose financial conditions limit their opportunities for higher education. This subcomponent would finance student loans through funds that would be on-lent by the Government, through BANOBRAS, to SOFES. Beneficiaries. The beneficiaries of the SOFES loan program are academically able but financially needy students attending or wishing to enroll in SOFES member universities. It has been estimated that, by the end of the project, SOFES will have provided loans to a minimum of 25,600 students, of which approximately 70% percent would come from middle-low to low-income families. Nonetheless, the complementary use of the loans and scholarships renders the potential to double the amount of beneficiaries (estimated at approximately 52,700 students). SOFES aims at increasing the participation of low-income students from 20.7% in 1997 to 24.2% by 2003.1. Important steps are being taken to ensure that these objectives are met, particularly those regarding targeting lower income students. First of all, a selection matrix has been designed that adequately weighs lSOFES carried out a study of the socioeconomic status of students in a representative sample of their member universities. This study not only provided base indicators on which to gage progress in social objectives but also insight into how to classify and evaluate students' socioeconomic background during the loan application process.  Project Appraisal Document Page 31 Country: Mexico Project Title: Higher Education Financing Project academic background, financial need, and area of study in order to define a student's eligibility to financial aid and determine the most appropriate mix of scholarships and loans for each profile. The percentage of tuition covered by the loans varies according to economic need and the elected area of study. (See Annex 2.B) Second, efforts are being made to standardize, as much as possible, the information used by the universities to evaluate students. For example, a methodology has been developed for determining students' socioeconomic background. Third, in order to adequately implement the selection and loan assignment process, a training program for SOFES and university-level staff has initiated. Fourth, in addition to socioeconomic background, other characteristics such as gender and region of origin will be monitored in order to ensure a desirable distribution across these categories. Fifth, the university may become the guarantor for students that cannot provide a third-party guarantee. Terms and Conditions of Student Loans. The student loan product is being designed to respond to the program's financial and social demands as best as possible. In the first phase of the program, the loans would only be used to cover registration, insurance and tuition fees. After SOFES has acquired more experience, a second phase will be initiated in which books and supplies, living allowances and transportation may also be covered by the loan. The terms and conditions have been determined on the basis of financial and labor market salary projections, assuming, among others, that loan repayments should not exceed 18% of the debtor's salary. The present proposal includes a variable positive real interest rate that would be compounded monthly and the students would have the option of graduated or fixed repayment schemes.2 The repayment term for graduating students would be double the study period for which a loan was taken (i.e., if the loan was for one academic year, then the repayment term would be two years), in addition to a six-month grace period. Legal and Institutional Arrangements for Program Administration. SOFES, BANOBRAS and the Federal Government (i.e., SHCP, SEP, CONACYT) have reached agreement on the legal structure for SOFES and the mechanisms for the transfer of funds. The Government has selected BANOBRAS to be the borrower and trustee and thus, to serve as the financial vehicle to receive and manage the World Bank loan proceeds for this project. The Govemnment, through SHCP, will constitute a Trust Fund for which BANOBRAS will act as Trustee and the Government as grantor. The Trust will be the vehicle to transfer the proceeds of the Loan to SOFES. The Trust will receive contributions to the Reserve and Payment Fund (RPF) from participating universities and from CONACYT, donations, and any additional resources aimed at improving the financial viability of the student loan schemes. The Trust Fund will also receive repayments from SOFES corresponding to the servicing of the World Bank Loan and transfer the money back to the Federal Government (see Graph A). Presently, forty of the seventy-six universities that are members of FIMPES have signed on to the SOFES student loan program.3 The SOFES student loan program would be managed by a central SOFES office and small satellite offices that would be located in each university. The satellite offices would be financed by each university and would only be responsible for the loans in their account. The students would submit their loan applications at the satellite office of the university of their choice. Then, if approved by the university, the completed file would be sent to SOFES, where the technical committee would review the loan to make sure it is in line with SOFES policies. A promissory note would then be issued by SOFES for those loans that received final approval. 2 The real formula is based on UDIs. UDIs (Unidades de Inversi6n) are Mexican national investmnent units that are a function of the performance of the National Consumer Price Index (INPC - Indice Nacional de Precios al Consumidor). FIMPES universities represent approximately 70% of private sector enrollment and the forty SOFES universities account for a high percentage of this participation in the sector.  Project Appraisal Document Page 32 Country: Mexico Project Title: Higher Education Financing Project Each satellite office would be the first instance responsible for loan collection. Once the loan becomes 90 days in arrears, the responsibility would be shifted to the central office who would collect the loan with legal support. Each university would be entirely responsible for the repayment of the loans they have issued to their students through a two tier guarantee system. The first level is the Reserve and Payment Fund (RPF). If a loan is past due over 90 days, then the appropriate amount would be transferred from the RPF to cover the missed payment. The second guarantee is put into effect at the beginning of each academic cycle when the RPF funds are insufficient. In addition to the regular deductions for the RPF fund, the amount of funds allocated to the university for the new academic cycle would be reduced by the amount required to cover the loans that are past due over 90 days. In addition to the loan approval and collection responsibilities described above, the central SOFES office would be responsible for all legal issues, the general administration of the Guarantee and Reserve Fund, the loan program's marketing strategy, fund raising, updating the management information system, and monitoring the loan program as a whole. Institutional Development. Through this subcomponent, the project would support the start-up costs of the student loan program. All activities related to the establishment of the central and satellite offices, the set up of a coherent management information system, as well as the development of a marketing and promotion strategy would be supported. Equipment and technical assistance would be financed by the IBRD loan. Additional technical assistance and staff training would be financed by SOFES member universities. Project Component 2 - Strengthening of the Sonora Student Loan Scheme (US$50.8 million, including contingencies, 18% of total project cost) Student Loan Program. The Institute of Educational Credit of the State of Sonora (ICEES - Instituto de Cr6dito Educativo del Estado de Sonora) has been successful in providing student loans in this state since 1981 and has developed a ten-year strategic plan for the improvement and expansion of its student loan program. This subcomponent would support this plan, thus contributing to increased access to higher education and to the strengthening of a demand-side financing experience that could serve as a model. Beneficiaries. The beneficiaries of the ICEES loan program would be academically qualified, low- and middle-income students born in or residents of the state of Sonora who wish to enroll in higher education institutions. ICEES has estimated that it will increase its beneficiaries during the five project years by 12% each year (increasing to a total of approximately 21,000 students by the year 2002). This estimate was deemed the most realistic given the 1994 crisis and the projections of student enrollment and educational loan demand for the State of Sonora. The percentage of low- and middle-income students receiving ICEES loans will be maintained equal to or above the higher education enrollment rates in the State of Sonora for these socioeconomic groups. Presently, about 75% of the recipients of ICEES loans come from low- income families and 24% from middle-income families. In comparison, 72% of university students in the State of Sonora are low-income students and 26% are middle-income.4 In order to reach these objectives, ICEES has been revising its evaluation and selections instruments to better reflect targeting goals (see Annex 2B). Furthermore, in order to ensure effective monitoring of its goals, ICEES has carried out a survey of the socioeconomic background of its beneficiaries and of university students in the State of Sonora. A similar survey would be carried out on a yearly basis. Terms and Conditions of Loans. Each individual ICEES contract will continue to cover a maximum study period of 12 months (on average 4 to 5 months). The present loan product, however, distinguishes itself 4This data is based on the 1997 socioeconomic survey of university students that was carried out by ICEES in the State of Sonora.  Project Appraisal Document Page 33 Country: Mexico Project Titl: Higher Education Financing Project from the previous ICEES product in three ways. First, the interest rate for each contract would be (according to the proposed ICEES operational manual) equivalent to the official inflation rate estimate for the contract year as published by the Bank of Mexico. Second, compounded interest rates would be used in the calculations of student debt. Third, a longer repayment period would be provided. These changes have been made on the basis of financial projections and demand surveys and are directed at reducing the interest rate subsidy and decreasing the student's monthly debt burden. Legal and Institutional Arrangements for Program Administration. ICEES, BANOBRAS and the Federal Government (i.e., SHCP, SEP, CONACYT) have reached agreement on the legal structure for ICEES and the mechanisms for the transfer of funds. The Government has selected BANOBRAS to be the borrower and trustee and thus, to serve as the financial vehicle to receive and manage the World Bank loan proceeds for this project. The Government, through SHCP, will constitute a Trust Fund for which BANOBRAS will act as Trustee and the Government as grantor. The Trust will be the vehicle to transfer the proceeds of the Loan to ICEES. The Trust Fund will also receive repayments from ICEES corresponding to the servicing of the World Bank Loan and transfer the money back to the Federal Government (see Graph B). Financial Sustainability. In order for ICEES to be financially sustainable, it is crucial that the State of Sonora does not reduce its level of budgetary support to ICEES. Only this way will the World Bank funds contribute to the Institute's equity objectives. The State Government of Sonora has already submitted to the SHCP an official document confirming the State's commitment to continue to financially support ICEES at a level equal - in real terms - to the present funding level. Institutional Strengthenin . ICEES will continue being responsible for all loan operations. ICEES has valuable experience in terms of evaluation and selection mechanisms and its loan collection record has been relatively good (10% default rate until the 1994 peso crisis). Furthermore, all loan applications, loan processing, payments and loan collection are fully automated. However, the following problems were detected in an analysis of the institution's capacity to absorb the expansion of their operations: (i) an accounting code structure that does not take into account management control requirements, (ii) the absence of explicit financial administration policies, (iii) insufficient integration of the accounting and loan collection processes, and (iv) the lack of professional development plans. In order to address these issues, technical assistance to help the Institute design and implement a long-term institutional development plan will be financed under this subcomponent. The equipment and training this plan would require for its implementation would also be financed. In the short term, the subcomponent would finance basic computer equipment and technical assistance in order to respond to the Institution's more immediate needs.  Project Appraisal Document Page 34 Country: Mexico Project Title: Higher Education Financing Project ANNEX 2.B: TARGETING STRATEGY ICEES and SOFES are targeting their loans to low- and middle-income students. Both institutions are using the same methodology for classifying students by socioeconomic background. However, due to the differences in the character of the two institutions and the products they offer, SOFES and ICEES will use different methodologies for selecting beneficiaries. This annex will briefly describe: (i) the methodology that has been developed to define students' socioeconomic background and (ii) the evaluation and selection methodology that will be used by each institution. More details on the selection process and methodology, including sample case studies, can be found in the project file. Definition of Socioeconomic Status The classifications of socioeconomic background that were available in Mexico (e.g., INEGI) did not provide the finer categorization required for targeting SOFES and ICEES loans. What was needed was a methodology that would not only differentiate students by high, middle and low-income but would also allow further sub-classification of each of these three categories. An appropriate methodology that responded to these needs was developed by a research team at the University of Monterrey. The development of the instrument began with a thorough literature review of different methodologies used around the world, particularly in Europe. One-hundred and forty indicators were identified and through various validation processes, a group of indicators that were appropriate for Mexico were selected. The capacity of these indicators to differentiate the socioeconomic levels of public university students was demonstrated in a study that was carried out at the Autonomous University of Coahuila. Further studies have helped distinguish a set of indicators that are valid for both public and private universities. For example, the number of books at home was a highly discriminating variable for students in public universities but its discriminating capacity did not hold among students enrolled in private universities. The following nine variables have been selected to assess the socioeconomic status of: (i) students enrolled in project-related universities and (ii) potential beneficiaries of the ICEES and SOFES loan programs: VI. Ownership of a car by student (Yes or No) V2. Type of primary school student attended (primary or public) V3. Ownership of a computer by student (Yes or No) V4. Father's level of schooling (none, primary, secondary, technical education, bachillerato, higher education or normal superior, postgraduate) V5. Principal economic activity of father or father figure (Twenty-one different activities. The weight attached to each activity has been empirically proven with samples over 1000 students.) V6. Ownership of a car by student's mother (Yes or No) V7. Size of home (5 different ranges) V8. Average monthly family income (8 different categories of net monthly income. The categories were selected to differentiate among potential higher education candidates - differentiation is greatest between 5000 and 60,000 pesos a month.) V9. Economic security for completing university studies (Yes, No, or Urnkown) The stratification levels and index were determined using cluster analyses. The resulting stratification index is expressed by: Vl + V3 + V9 + [.61279*(V2 + V6)] + [.5834*(V4+V5)] + [.58865*(V7+V8)] The ranges used to define the various socioeconoznic levels are presented in Table 1. The minimnum value of the index is 2.1 and the maximum is 28.1. The potential market for the SOFES and ICEES loans is students who fall on or between the High A and Marginal socioeconomic levels.  Project Appraisal Document Page 35 Country: Mexico Project Title: Higher Education Financing Project Table 1. Classification of Students' Socioeconomic Level using Stratification Index Socioeconomic Level Interval of Stratification Index High C 27.0 to 28.99 High B 24.0 to 26.99 High A 21.0 to 23.99 Middle C 18.0 to 20.99 Middle B 15.0 to 17.99 Middle A 12.0 to 14.99 Low C 9.0 to 11.99 Low B 6.0 to 8.99 Low A 3.1 to 5.99 Marginal 2.1 to 3.0 Evaluation and Selection Process and Matrixes SOFES The selection process and matrix for the SOFES loan program takes into consideration academic background, financial need and field of study to deternine a student's eligibility to financial aid, as well as the most appropriate mix of scholarships and loans for each profile. Students are eligible to SOFES student loans if they: (i) have a minimum grade point average of 7, and (ii) fall on or between the Marginal and High A socioeconomic categories. The student's socioeconomic background is defined by using a questionnaire that follows the methodology described in the previous section. The loans are assigned to eligible candidates on the basis of the amount of available loans, the institutional targeting goals, the level of economic need and the elected area of study. If there is a larger demand than supply of loans, preference will be given to students with higher academic standing. The socioeconomic targeting goals that will guide the overall assignment of loans are presented in Table 2. The percentage of tuition covered by the loans will vary according to the level of economic need and the elected area of study. For example, students with the greatest financial need would be eligible to receive a larger proportion of scholarship funds and a smaller-sized loan in order to cover tuition fees. In contrast, individuals with less financial need in fields of study that have greater earning potential would have less access to scholarships but would be eligible for a larger-sized loan. The guidelines that would be used for distributing loans and scholarships are presented in Table 3 and 4. The maximum level of tuition that would be covered with loans and scholarships is 100 percent.1 The entire process of evaluation, selection and loan assignment would be computerized, facilitating greater accuracy and speed in the assignment and targeting of the loans. The socioeconomic data provided by the students would be verified by an external firm specialized in this work. The maximnum level of tuition that can be covered with loans is 70% and with scholarships is 50%.  Project Appraisal Document Page 36 Country: Mexico Project Title: Higher Education Financing Project Table 2. Distribution of SOFES beneficiaries by socioeconomic level (targeting goals) Percentage Distribution of Socioeconomic Level SOFES Loan Product (including Loan/Scholarship Mix) High C 0% High B 0% High A 2.7% Middle C 8.7% Middle B 18.8% Middle A 30.2% Low C 21.0% Low B 13.1% Low A 5.5% Marginal 0% Total 100% Table 3. Loan and Scholarship Assignment for Regular Loan Beneficiaries Max. % of Tuition that could be covered by Loans Max. % of tuition Category I Category II Category III that could be Economic Need Humanities and Economics and Engineering covered with Factor (FNx)2 Social Sciences3 Administration (excluding Scholarships Chemical) FNx <.08 30% 40% 50% 50% FNx <.15 40% 50% 60% 25% FNx <.30 40% 55% 60% - FNx <.50 50% 60% 70% FNx <.68 50% 60% 70% 2The economic need factor (FNx) is determined by dividing the amount of income available for education by the average cost of the university. The amount of income available for education (LAE) is defined as 15% of total family income divided by the number of dependents age four to twenty-two. The average cost of the university (ACU) is defined as the enrollment fee plus the monthly tuition. In other words: IAE = 15%/o(total family income/number of dependents age 4 to 22) ACU = enrollment + monthly tuition FNx = IAE/ACU Also including odontology, architecture, and the last two years of Medicine and Chemical Engineering.  Project Appraisal Document Page 37 Country: Mexico Project Title: Higher Education Financing Project Table 4. Loan and Scholarship Assignment for High Risk Loan Beneficiaries4 Max. % of Tuition that could be covered by Loans Max. % of tuition Category I Category II Category III that could be Economic Need Humanities and Economics and Engineering covered with Factor (FNx) Social Sciences Administration (excluding Scholarships Chemical) FNx<.08 20% 30% 40% 50% FNx <.15 30% 40% 50% 25% FNx <.30 30% 45% 50% FNx <.50 40% 50% 60% FNx <.68 40% 50% 60% ICEES For the ICEES loan program, the selection process that has been designed takes into consideration: the student's individual characteristics (e.g., academic background, study plans, financial need, socioeconomic background), the potential for loan recovery, and the institutional targeting goals. The instruments used during the process have been computerized and will be linked to ICEES's monitoring system. The process involves the following three steps. The first step is aimed at determining a student's eligibility to a student loan for higher education. Students are deemed eligible to the loans if they: (i) are natives of Sonora or residents for at least three consecutive years immediately prior to receiving the student loan, (ii) wish to enroll in a higher education institution and present a study plan (proyecto educativo); (iii) fall in any socioeconomic category (other than the categories "high C" and "high B"), and (iv) have a guarantor. The second step is aimed at classifying and prioritizing eligible students, taking into consideration the student's financial need, their academic profile and the potential for loan recovery. The evaluation matrix that has been developed for this purpose considers the following factors: With regards to financial need. * Total cost of education * Purpose of loan proceeds (e.g., main educational costs such as tuition, books and supplies, transportation) * Available financial support from family * Student's socioeconomic background (evaluation using the variables described in the previous section, that is: principal economic activity of father or father figure, average monthly family income, father's level of schooling, economic security for completing university studies, size of home, personal use of car, ownership of a computer by student, type of primary school student attended, and ownership of a car by student's mother). With regards to the potentialfor loan recovery: * Field of study * Guarantor * Stability of household location * Educational institution chosen for studies (related to potential for employment). 4 Grade point average is lower than 8 and does not have a mortgage-free property.  Project Appraisal Document Page 38 Country: Mexico Project Title: Higher Education Financing Project With regards to the students academic background: * Average academic record (grade point average) The exact weight provided to each factor in the matrix is being revised. The third step is the selection of loan recipients on the basis of the classification and prioritization resulting from the previous evaluation (step 2) and the institutional targeting goals. The targeting goals may vaiy during the project years since an effort will be made to maintain the percentage of low- and middle-income students receiving credits equal to or above the higher education enrollment rates of these socioeconomic groups in the State of Sonora. The targeting goals for the first project year are: Socioeconomic % of Students Receiving Category Student Loans Low-income 73% Middle-income 26% High "A" 1% If there is a larger demand than supply of loans for a specific socioeconomic level, preference will be given to those students receiving the highest score in the financial need/loan recovery evaluation (first step).  Project Appraisal Document Page 39 Country: Mexico Project Title: Higher Education Financing Projed GRAPH A GENERAL STRUCTURE FOR THE OPERATION OF SOFES STUDENT LOAN 1 BANO~~~~~~~BRAS WORLD IBRD Loan Financial agent BANK j*Legal Agent Guarantees IBRD loan Transfers IBRD loan proceeds I on behalf of Federal Government (SHCP). GOVERNMENT FEDERAL GOVERNMENT * SHCP - Creates Public Trust Fund;