Mexico - Contractural Savings Development Program (CSDP) Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No: 17771 IMPLEMENTATION COMPLETION REPORT MEXICO CONTRACTUAL SAVINGS DEVELOPMENT PROGRAM (CSDP) Loan No. 4123-ME May 5, 1998 Finance, Private Sector & Infrastructure (FPSI) Country Management Unit 1 Latin America and Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCYEQUIVALENTS Currency Unit Peso (P) US$1.00 P$8.0 (January 1998) FISCAL YEAR January I - December3; ABBREVIATIONS AND ACRONYMS AFP Administradoras de Fondos de Pensiones (Pension Fund Administrator - Chile) AFORE Administradora de Fondos para el Retiro (Pension Fund Administrator) AMAFORE Asociacion Mexicana de Administradoras de Fondospara el Retiro (Mexican Association of Pension Funds Administrators) BANOBRAS Banco Nacional de Obras y Servicios Publicos, S.N. C. (National Bank of Public Works and Services) CNBV Comision Nacional Bancaria y de Valores (National Banking and Securities Commission) CONSAR Comision Nacional del Sistema de Ahorro para el Retiro (National Commission of the Retirement Savings System) FOBAPROA Fondo Bancario de Proteccion al Ahorro (Bank Fund for Savings Protection) FOVI Fondo de Operaci6n y Financiamiento Bancario a la Vivienda (Housing Financing Trust Fund) FOVISSSTE Fondo para la Vivienda de los Trabajadores del ISSSTE (Govemment Workers' Housing Fupid) FSRL Financial Sector Restructuring Loan FSRP Financial Sector Restructuring Program FTAL Financial Sector Technical Assistance Loan IMSS Instituto Mexicano del Seguro Social (Mexican Social Security Institute) INFONAVIT Instituto del Fondo Nacional de la Vivienda de los Trabajadores (National Workers' Housing Fund Institute) ISSSTE Instituto de Seguridady Servicios Sociales de los Trabajadores del Estado (Institute of Security and Social Services for Govemment Workers) IV Seguro de Invalidez y Vida (Disability and Life Insurance) IVCM Invalidez, Vejez, Cesantia en EdadAvanzada, y Muerte (Disability, Old age, Severance, and Death Insurance Coverages) PROCESAR Pension System Operator RCV Seguro de Retiro, Cesantia en Edad Avanzada y Vejez (Old Age and Severance) MPG Minimum Pension Guarantee NAFrA North American Free Trade Agreement SAR'92 Sistema de Ahorro para el Retiro (Retirement Savings System of Individual Accounts, operating from May 1992 to January 1997) SHCP Secrelaria de Hacienday Credito Publico (Ministry of Finance and Public Credit) SIEFORE Sociedaes de Inversi6n Especializadas de Fondos Para el Retiro (Specialized Pension Fund) Vice President: Shahid Javed Burki Country Managing Director: Olivier Lafourcade Sector Management Director: Augusto De la Torre Task Manager: Gloria Grandolini  FOR OFFICIAL USE ONLY TABLE OF CONTENTS page number Preface ............ i Evaluation summary .............. iii Part One Contractual Savings Development Program Implementation Assessment I. Background .................................................................1I II. Program Objectives. ................................................................. 2 Ill. Achievement of Program Objectives ........................... ....................................... 3 IV. Major Factors Affecting the Program ........................... ...................................... 13 V. Program Sustainability ................................................................. 14 VI. Bank Performance ................................................................. 15 VII. Borrower Performance ................................................................. 17 Vill. Assessment of Outcome ................................................................. 18 IX. Future Operations ..................... 18 X. Key Lessons Learned ..................... 19 Part Two Statistical Annex of ICR Tables ..................... 21 Appendixes A. Matrix of Compliance with Policy Actions B. ICR Mission's aide-memoire C. Borrower contribution to the ICR (SHCP) D. Cofinancier contribution to the ICR (IDB) E. Map This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  1. IMPLEMENTATION COMPLETION REPORT MEXICO CONTRACTUAL SAVINGS DEVELOPMENT PROGRAM (Loan No. 4123-ME) Preface This is the Implementation Completion Report (ICR) for the Contractual Savings Development Program (CSDP) in Mexico, for which Loan 4123-ME in the amount of US$400 million was approved on December 17, 1996 and made effective on August 18, 1997. This single tranche loan was fully disbursed upon effectiveness, August 18, 1997, following a six-month extension of the original closing date of June 30, 1997 to December 31, 1997. Cofinancing for the program in the amount of US$300 million was provided by the Inter-American Development Bank (IDB). The ICR was authored by Mr. Truman Packard (Consultant), under the supervision of Ms. Gloria Grandolini, Senior Financial Economist, and Mr. John Stein, Principal Operations Officer (LCSFP) of the Latin America and the Caribbean Region, and was reviewed by Fernando Montes Negret, FPSI Sector Leader for Mexico. The borrower and cofinanciers provided comments that have been incorporated to the ICR and are reproduced (unedited) in appendices to the ICR. Preparation of this ICR was begun during the Bank's final supervision/completion mission, September 21 - 27, 1997. The report is based on material in the project file, interviews with key participants, and findings from other Bank operations in Mexico's financial sector.   iii. IMPLEMENTATION COMPLETION REPORT MEXICO CONTRACTUAL SAVINGS DEVELOPMENT PROGRAM (Loan No. 4123-ME) Evaluation Summary Introduction 1. One of the main points of financial vulnerability of the Mexican economy as it faced the 1994 peso crisis, was its shallow pool of domestic savings. The Zedillo administration considered social security reform as a key element of its long- term strategy to increase the volume of institutional savings and provide the basis through which domestic savings could be channeled to productive investment with greater efficiency. In addition to the expected actuarial and cash deficits that the existing public pension system would soon incur, the administration was aware of the important advantages of a confluence of economic and demographic trends that would make reform of the private-sector pension system both viable and affordable. 2. The Mexican Government's Contractual Savings Development Program (CSDP) was the first nation-wide pension reform program supported by a loan from the World Bank. A single-tranche Sector Adjustment Loan, CSDP, for US$400 million was cofinanced with a two-tranche loan of US$300 million, by the Inter-American Development Bank. Program Objectives 3. Based on an agreed medium-term strategy with the Government, this loan was the first in a planned series of operations to support the Mexican pension reform program and complementary financial sector reforms. The program has five long-term aims: (i) to increase the equity, efficiency, and sustainability of the old age security system and to gradually expand effective coverage; (ii) to establish a financially viable pension system; (iii) to limit the fiscal impact of the current pension system and ensure transparency of the fiscal costs of transition; (iv) to enhance the development of capital markets. by stimulating greater private financial intermediation, and to increase the array of financial instruments and contracts available; and (v) to raise the level of institutional savings and improve the allocative efficiency of domestic savings. 4. CSDP's specific objectives were to support the: (a) introduction of the legal and regulatory framework needed to establish the new pension system and to regulate and supervise private pension fund administrators; (b) design and issuance of an investment  iv. management regime; (c) assessment of the fiscal costs of the transition; (d) initiation of improvements in the performance of INFONAVIT; (e) individualization of accounts and strengthening the capacity of IMSS to manage the new pension system; and (f) encouragement of public confidence in the new system through education and promotion. Additionally, because the success of pension reform lies in the sustained, overall development of the larger financial sector, the program included complementary financial sector reforms toward: the continued restructuring of commercial banks; the modernization of regulatory and supervisory structures for mutual funds and voluntary pension plans; and the deepening of the insurance market for the provision of life and disability coverage and annuities. Complementary reform of the financial sector carried out in the first phase of the program, built on work already begun with the support of the FTAL, a supplementary FTAL, and FSRL. Implementation Experience 5. In December 1995 the Mexican Congress approved legislation modifying the public pay-as-you-go, defined-benefits scheme to establish a privately managed, mandatory, defined-contribution scheme for private-sector workers affiliated to IMSS. A second legislative package on the implementation of the reform, enacted in May 1996, sets out the structure and powers of CONSAR, the new pension system's regulator, and provides guiding principles for the establishment, operation and supervision of pension fund administrators (AFOREs) and specialized mutual funds for pensions (SIEFOREs). Under the 1997 reform, the public system was separated into Old-Age and Severance insurance, and Disability and Life Insurance. The new system came into effect on July 1, 1997. 6. The advent of the AFORE system has opened a new financial channel for private intermediation in the Mexican capital markets. Since January 1997, the regulatory authority CONSAR, began to accept applications and to authorize the establishment of the private AFOREs. Presently 17 AFOREs receive contributions under the new system, representing a robust private-sector response to the reform. At the close of 1997, pension assets under management totaled 6.2 billion pesos (equivalent to about US$775 million). 7. Private sector workers began to affiliate with the fund managers in February 1997. Although workers are obliged to participate in the new system, the new social security legislation allowed workers to forego affiliation with an AFORE for the first four years of the system's operation, in return for a real yield of 2% on their pension savings managed by the Government in an account at the Central Bank. This alternative has not been utilized to the extent expected since by December 1997, most privately-employed formal sector workers (96%) formerly covered under the public PAYG system, had elected a private fund manager to invest their pension savings. These results are seen favorably by the authorities and the Bank as a strong indicator of workers' acceptance of the new system. 8. The relative youth of the majority of private sector workers in Mexico, where 65% of contributors to the new system are between the ages of 15 and 30, is expected to give most a sufficiently long period of contribution into the system to accumulate adequate  V. retirement savinlgs, and minimize the Government's social security obligations. A model developed by technical staff at the SHCP estimates that the sum of the fiscal costs of the transition to the new system will be roughly 1% of Mexican GDP for the next 20 years. 9. The authorities have taken significant strides to safeguard workers' retirement savings. Guidelines governing the AFOREs' investment activity were published on June 30, 1997 in CONSAR Circular 15-1, and limit SIEFORE exposure to instruments issued by rated commercial banks to 10% of the funds,' within an overall 35% limit on investment in rated private securities. Further portfolio limits were negotiated, that included a 10% cap on funds invested in the instruments of a single issuer, a 5% limit (10% with previous authorization from CONSAR) on investment in instruments emitted by an own-group or parent company, up to 15% in related mutual funds, and on holdings of only 10% of any single issue. A critical separation between AFORE and SIEFORE capital is strictly required, and no limit is set on the portion of SIEFORE capital that can be invested in government bonds. 10. The investment regime has forced a new standard on Mexican capital markets, and especially on the mutual funds industry. The restriction requiring investment in rated instruments introduced a new dynamic to the Mexican system in which no instrument was credibly rated before. Further innovations, such as limits on investment in instruments issued by related companies, and limits on the portion of any single issue that can be held, represent an important regulatory change in the Mexican financial system. 11. Althougl IMSS retains the legal authority to enforce collection of contributions under the reform, the institute has appointed a private operator, PROCESAR, to orchestrate the flow of funds and information among the various actors in the new pension system. Each of the 17 AFOREs and the system's receiving banks, is a private shareholder in PROCESAR, dividing the costs of operating the system among them. The private operator has thus far succeeded in reconciling 96.9% of worker contributions with their individual accounts. To complement the efficiency of the centralized collection system the authorities developed a diskette-based computer software program with which employers are able to calculate and report their social security and INFONAVIT payments accurately. All employers with more than four employees are required to use the software that is expected to minimize errors, while providing the technological means to accelerate the flow of contributions from employers to AFOREs. 12. Observers and market participants have judged CONSAR's regulatory performance to be highly effective. CONSAR supervises the new system through remote, automated data analysis, as well as on-site inspections of the AFOREs and operates with a total staff of roughly two hundred professionals. The regulator's expanded technical capacity (supported by the Bank under the FTAL) has accelerated These guidelines forbid SIEFORE investment in commercial banks that have been intervened in by CNBV.  vi. response time, and reduced the amount of human resources necessary for supervision, thus contributing to the viability of the system. 13. Mexico's special housing funds that provide subsidized mortgages to eligible private and public sector workers, form part of the country's pension and social security system. Under the 1997 reform, 5% of workers' wages will continue to go to the housing fund for private sector workers. Efforts to improve the financial performance of INFONAVIT, the public housing institute managing this fund that receives between 30 and 40 percent of workers' mandatory contributions, are central to minimizing the future fiscal cost of the reform and yielding an overall adequate real return to pensioners. Each worker's contribution to his/her housing sub-account will be clearly shown on their pay statement. Additionally, each will receive an annual statement disclosing the balance in their sub-account managed by the AFOREs and the institute, and the rates of return earned on these funds. I is expected that these measures will enable contributors to monitor INFONAVIT, and in the long run, increase public pressure on the institute to improve its financial performance.2 Performance 14. Borrower performance in the identification, preparation and implementation of the first phase of the CSDP, was highly satisfactory. Under the leadership of the SHCP, an exceptionally qualified core reform team was created, that maintained a clearly coordinated, inter-institutional reform program. All of the necessary legal and technical preparations for the debut of the new pension system were carried out with a minimum of delay. The Mexican authorities should be commended on the degree of professional capacity that they brought to the achievement of the first-phase objectives of the program, and for their commitment to the reform of their social security system, even when faced by the challenges of a difficult political and economic climate. 15. Bank performance in the implementation of the first phase was also highly satisfactory. The Bank responded in a timely fashion to the Government's request for financial and technical support for the reform of its pension system. The Bank was also effective in raising the awareness of policy makers regarding the importance of reforming social security, and further reform of the financial sector. Staff correctly advised the Government of its opportunity to implement a feasible and affordable reform. Program Sustainability and Assessment of Outcome 16. The sustainability of the first phase of reforms supported by CSDP, is subject to a number of risks but appears likely. The sustainability of the new pension system can only be judged over the long run, in approximately twenty years, when the first of the 2Further reforms of INFONAVIT's governance and minimum-wage linked mortgage instruments would require changing its law.  vii. transition generation workers opt for their accumulated retirement assets, rather than the IMSS package of benefits under the lifetime switch, or the minimum pension guarantee. However, there are other measures of how sustainable the reform will be, principally, in two areas: (i) political intervention in the design of the pension system, and (ii) much higher than estirnated fiscal costs. A newly empowered political opposition has publicly registered concerns about the privatized pension system, and could modify critical aspects of its design through future legislation. However, it is important to note that the pre-electoral climate that so politicized the Government's reform, seems to have had little impact on worker affiliation. A further risk is posed by the considerable weight of INFONAVIT's iFuture financial performance on the outcome of the reform. Should the program of measures to restructure INFONAVIT fail, the Government's future pension liability could be significantly higher than currently expected. Despite the risks faced by the new system, the high rate of affiliation, the substantial investment made by the AFOREs, and an effective and well regarded regulator, all bode well for the sustainability of the reform. 17. Overall, the outcome of the program's first phase is considered highly satisfactory. Although it is too early to make a conclusive judgment on the operation of the Mexican system, or to cornpare its performance with that of other reformed systems in the region, the achievement of the objectives of the first phase of the CSDP was both substantial and timely. Lessons Learned 18. The main conclusions and principal lessons learned in the implementation of the first phase of the CSDP are: (i) The Importance of Borrower Ownership. As in any adjustment program, Borrower ownership of conditionality under the loan is critical. Because of the Government's strong commitment to reform of the pension system, the design, negotiation, and implementation of the program was carefully carried out in a collaborative environment. Strong technical and political leadership on the part of the Mexican authorities, complemented by a well qualified technical team, provided a good context for taking full advantage of the Bank's advice and facilitated the dissemination of best practice. The proactive nature of Borrower participation in the program contributed to the credibility and the sustainability of the reform. Furthermore, the Government's clarity of purpose in reforming its social security system, facilitated the coordination of macroeconomic policy of strict fiscal discipline, with microeconomic objectives of providing an enabling environment for increased institutional savings. (ii) Need for Sensitivity to Political Economy of Reform. The political economy surrounding the formulation of labor policy has consistently constrained the reform agenda of even the most resolute of governments. Social security reform is particularly treacherous, and especially so in the midst of an election year, and a deep, although short- lived economic crisis. Political factors and the legislative needs of the client need to be understood at entry, and should be included in the Bank's dialogue with the client. In the  viii. case of the Mexican reform, the Bank's willingness to lower its profile at the request of the authorities avoided the impact of domestic perceptions of outside interference in the reform process. (iii) Selection of an Appropriate Instrument. Rather than risk delays and failure in the achievement of the program's long term aims by locking the client into an overly ambitions and politically sensitive policy agenda, the implementation team chose to negotiate a medium-term reform strategy, and to allocate its reform goals over a series of single-tranche adjustment operations (STOs) - a lending vehicle design by the Bank specifically to protect the integrity of lengthy adjustment operations from significant political shifts in borrowing countries. The Bank's choice of the STO over the traditional multiple-tranche option provided the Bank with greater agility in the disbursement of the loan, and enhanced efficiency and leverage in the formulation of conditionality under the proposed second loan. So far the decision to agree on a medium term reform strategy supported by well focused STO's appears to be an innovative and tactically appropriate response, suggesting that new Bank products can make the institution a more effective partner in the development process. (iv) Close Cooperation with Cofinanciers. Coordination with the IDB was continuous and fruitful for both institutions and the client. However, in joint adjustment programs it is essential to maintain highly compatible if not identical conditionality between the cofinanciers. Conflicting conditionality can send mixed signals to the Borrower. To the extent possible, it is recommended to avoid setting different conditions which, in this particular case, had the IDB loan approved before an agreement on the World Bank conditions had been achieved. (v) Consistency in Objectives and Coordination Between Bank Operations. In the course of preparing and implementing complex sector operations, it is essential to orchestrate the objectives of related Bank projects in order to ensure consistency and the achievement of desirable outcomes. In implementing the first phase of the Contractual Savings Development Program, and the complex financial sector adjustments required under CSDP, both the Mexican authorities and staff at the Bank relied on extensive work carried out under the preceding FSRL and FTAL. Additionally, preparatory work for a proposed CSDP II related to reform of INFONAVIT, has been carefully coordinated with the Bank team preparing a FOVI loan.  Mexico: Contractual Savings Development Program (CSDP) Implementation Completion Report: Page I PART ONE: PROJECT IMPLEMENTATION ASSESSMENT I. BACKGROUND 1. In response to the financial crisis that erupted in December 1994, the Government of Mexico embarked on an ambitious program of fiscal and monetary reformn. As a result of this effort, Mexico has achieved substantial progress in its adjustment objectives. The country has rebuilt its depleted reserves, improved its external debt profile, and regained access to international capital markets. The World Bank has actively supported the Government's adjustment program, and the recovery of the Mexican financial sector with a Financial Sector Technical Assistance Loan (FTAL), a Supplemental Technical Assistance Loan, and a Financial Sector Restructuring Loan (FSRL I). 2. One of the main points of financial vulnerability of the Mexican economy as it faced the 1994 peso crisis, was its shallow pool of domestic savings. In repeated policy statements the authorities have madle clear that foreign savings should be only a compliment to domestic savings. The Zedillo administration considered social security reform as a key element of its long term strategy to increase the volume of institutional savings and provide the institutional basis through which domestic savings could be channeled to productive investment with greater efficiency. In addition to the expected actuarial and cash deficits that the existing public pension system would soon incur, the administration was aware of the important advantages of a confluence of economic and demographic trends that would make reform of the private-sector pension system both viable and affordable 3. Mexico had conducted an earlier experiment with a multi-pillar pension system in May 1992, that included a second pillar of individual retirement accounts. Although this first attempt at a defined-contribution system suffered from severe design problems, it provided a valuable introduction for Mexican authorities to the difficult task of pension reform. Eager to apply lessons learned and to build on its earlier experience, further reform of the social security system was high on the Government's policy agenda. 4. In December 1995 the Mexican Congress approved legislation (the new Social Security Law - Ley de Seguro Social) modifying the public pay-as-you-go, defined-benefits scheme to establish a privately managed, mandatory, defined-contribution scheme for private-sector workers affiliated to :IMSS. A second legislative package on the implementation of the reform (the Pension Systems Law - Ley de los Sistemas de Ahorro para el Retiro), enacted in May 1996, sets out the structure and powers of CONSAR, the market regulator, and provides guiding principles for the establishment, operation and supervision of pension fund administrators (AFOREs) and specialized mutual funds for pensions (SIEFOREs). Under the 1997 reform, the public IVCM system was separated into Old-Age and Severance insurance (RCV - Seguro de Retiro, Cesantia en Edad Avanzada, y Vejez), and Disability and Life Insurance (IV - Seguro de Invalidezy Vida). The reform became effective on July 1, 1997. The Mexican Government's Contractual Savings Development Program was the first nation-wide pension reform program  Page 2: Implementation Completion Report Mexico: Contractual Savings Development Program (CSDP) supported by a loan from the World Bank. The lending instrument was also novel, as the Region chose to support the reform through a series of single-tranche adjustment operations (STOs). ' CSDP, for US$400 million was cofinanced with a two-tranche Sector Adjustment Loan of US$300 million, by the Inter-American Development Bank. II. PROGRAM OBJECTIVES 6. The CSDP loan supported a number of major policy initiatives which were grouped together under the broad title, "Contractual Savings Development Program". The centerpiece of the reform was the restructuring of the existing pension system for formal, private sector workers, from a pay-as-you-go, defined-benefit system, to one of defined contributions under private management. CSDP focused on the initial phase of the reform program, which separated the mandatory pension contributions of private sector workers from the health insurance system, and established the legal, regulatory and institutional framework for the new old age security system of individually capitalized accounts. 7. Based on an agreed medium-term strategy, and as embodied in the CAS (October 15, 1996), this loan was to be the first in a planned series of operations to support the Mexican pension reform program and complementary financial sector reforms. The program has five long-term aims: (i) to increase the equity, efficiency, and sustainability of the old age security system and to gradually expand effective coverage; (ii) to establish a financially viable pension system; (iii) to limit the fiscal impact of the current pension system and ensure transparency of the fiscal costs of transition; (iv) to enhance the development of capital markets by stimulating greater private financial intermediation, and to increase the array of financial instruments and contracts available; and (v) to raise the level of institutional savings and improve the allocative efficiency of domestic savings. 8. CSDP's specific objectives were to support the: (a) introduction of the legal and regulatory framework needed to establish the new pension system and to regulate and supervise private pension fund administrators; (b) design and issuance of an investment management regime; (c) assessment of the fiscal costs of the transition; (d) initiation of improvements in the performance of INFONAVIT; (e) individualization of accounts and strengthening the capacity of IMSS to manage the new pension system; and (f) encouragement of public confidence in the new system through education and promotion. Additionally, because the success of pension reform lies in the sustained, overall development of the larger financial sector, the program included complementary financial sector reforms toward: the continued restructuring of commercial banks; the modernization of regulatory and supervisory structures for mutual funds and voluntary pension plans; and the deepening of the insurance market for the provision of life and disability coverage and annuities. Complementary reform of the financial sector carried out in the first phase of the program, built on work already begun with the support of the FTAL, a supplementary FTAL, and FSRL I. l Operational rationale for the choice of single-tranche adjustment lending is given in the World Bank Memorandum, "Introducing Single Tranche Operations in LAC", by Aysegul Akin-Karaspan (LATSO), February 1996  Mexico: Contractual Savings Development Program (CSDP) Implementation Completion Report: Page 3 9. The loan's objectives were clear and appropriately designed for a single tranche operation. They were consistent with the Government's policy agenda, as articulated in the National Development Plan for 1995-2000, and the National Plan to Finance Development 1997- 2000. The Bank's Country Assistance Strategy (CAS) for Mexico issued on October 15, 1996 sets the establishment of a financial environment that will encourage greater domestic savings as a priority in the institution's lending program. III. ACHIEVEMENT OF PROGRAM OBJECTIVES 10. Unique to the single-tranche adjustment lending operation, most of the objectives of the first phase of the program were met prior to the loan's presentation to the Board. Details on the establishment of the legal and regulatory framework of the new system, the assessment of the fiscal costs of the reform, the measures taken to improve the performance of INFONAVIT, the individualization of accounts and strengthening of IMSS, and the encouragement of public confidence in the new system, can be found in the Memorandum of the President, No. P7018- ME. An in-depth analysis of the design of the new AFORE system, as well as the challenges to its sustainability are also contained in the same report. As a condition of effectiveness, the Borrower was required to adopt key regulatory guidelines for the market activities of the new fund managers as well as the supervision of the system, and to issue an investment management regime containing general principles acceptable to the Bank. Evidence of the Borrower's compliance with all of the loan conditions is provided in Appendix A: Matrix of Compliance with Policy Actions of this report. 11. Since CSDP is part of an incremental process of reform, it is too early to assess fully the feasibility of the reform in meeting its long-term aims, or to judge their sustainability. Nevertheless, an analysis of current indicators as to whether these long-term goals are likely to be achieved is vital to the continuing dialogue with the Borrower, and as a guide to future Bank operations for further reform of social security in Mexico. The key results of the reform during its first six months of operation are presented below. (i) Affiliation to the New System and Impact on Capital Markets 12. The advent of the AFORE system has opened a new financial channel for private intermediation in the Mexican capital markets. Since January 1997, the regulatory authority CONSAR, began to accept applications and to authorize the establishment of the private AFOREs. The privatized system of mandatory individual contributions has been in full operation since September 1, 1997. Presently 17 AFOREs receive contributions under the new system, representing a robust private-sector response to the reform.  Page 4: Implementation Completion Report Mexico: Contractual Savings Development Program (CSDP) gYYEL~~~~~ t, _,~~t< ATLANTICO Valores Finamex, S.A. de C.V. (50% ME), GBM Grupo Bursatil, S.A. de C.V. (50% ME) BANAMEX Banco Nacional de Mexico, S.A. (99.99%, ME), Acciones y Valores de Mexico, S.A. de C.V. (00.01%, ME) BANCOMER Bancomer, S.A., Institucion de Banca Multiple, Grupo Financiero Bancomer (51%, ME), Aetna International Cia, S. en N.C. de C.V. (33%, US), Santa Maria International, S.A. (16%/, CH) BANCRECER Bancrecer, S.A., Instituci6n de Banca Multiple, Grupo Financiero Bancrecer (51%, ME), Dresdner Pension Fund Holdings (44%, US), Allianz Mexico, S.A. (5%, ME) BANORTE Banco Mercantil del Norte, Instituci6n de Banca MAltiple, Grupo Financiero Banorte (51%, ME), Belgica Insurance Holdings (24.5%, BE), Maatschappij Graafschap Holland N.V. (24.5%, HO) BITAL Banco Intemacional, S.A. Instituci6n de Banca Muiltiple, Grupo Financiero Bital (51%, ME), ING America Insurance Holding (49%, US) CAPITALIZA GE Capital de Mexico, S.A. de C.V. (00.01%, ME), GE Capital Assurance Co. (99.99%/o, US) CONFIA-PRINCIPAL Confia, S.A. Instituci6n de Banca M6ltiple, Abaco Grupo Financiero (51%, ME), Principal International Inc. (490/o, US) GARANTE Banca Serfin, S.A., Instituci6n de Banca M6ltiple (51%, ME), Citibank, S.A., Grupo Financiero Citibank (40%, US), Habitat Desarollo Intemacional (9%, CH) GENESIS Seguros Genesis, S.A. (00.01%, ME), Metropolitan Life Insurance Co. (99.990/o, US) INBURSA Banco Inbursa, S.A. Instituci6n de Banca Multiple, Grupo Financiero Inbursa (99.99%, ME), Compania de Servicios Inbursa, S.A. (00.01%, ME) PREVINTER Boston AIG Company, LLC (90%, US), Bank of Nova Scotia (10%, CA) PROFUTURO GNP Grupo Nacional Provincial Pensiones, S.A. de C.V. (51%, ME), Banco Bilbao Vizcaya - Mexico, S.A. (25%, ME), Provida Intemacional, S.A. (24%, CH) SANTANDER Banco Santander Mexicano, S.A. Instituci6n de Banca Multiple (75%, ME), Santander Investments S.A. (25%, SP) TEPEYAC Seguros Tepeyac, S.A. (66.01%, ME), MAPFRE International Vida, S.A. (33.9%, SP) XXI IMSS (50%/o, ME), IXE Banco, S.A., Grupo Financiero (50%, ME) ZURICH Zurich Vida, Compania de Seguros, S.A. (80%, SW), Gabriel Monterrubio, (10%, ME), Private Investors (10%, ME) Source: CONSAR 1998 [a] partner listed first is either a Mexican company or the Mexican subsidiary of an international parent corporation This partner is entitled to a 51% stake in the venture ME: Mexico; US: United States; CH: Chile; SP: Spain, BE: Belgium, HO: Holland, CA: Canada, SW: Switzerland 13. At the close of 1997, pension assets under management totaled 6.2 billion pesos (equivalent to about US$775 million), and after a period of intense competition for affiliates involving considerable expenditure on promotion AFOREs owned and operated by Mexico's two largest banks, Bancomer and Banamex, hold market shares of 19.2% and 17.0% of total assets respectively. The managers with the lowest share of assets under management are Genesis and Tepeyac, each with 1.2% of the market. By law in the first four years of the system's operation, no AFORE will be allowed to affiliate more than 17% of the market. The two largest managers, Bancomer and Banamex have affiliated 16% and 11% of former IMSS workers respectively,  Mexico: Contractual Savings Development Program (CSDP) Implementation Completion Report: Page 5 while Genesis and Tepeyac account for 1% and 0.8% of potential affiliates. The authorities established this limlit on market share to encourage competition, and will raise the ceiling to 20% to accommodate consolidation in the long term. CONSAR expects that some consolidation of the market will begin soon. CONSAR is formulating a process that safeguards workers' savings for such an eventuality. 12...............------ -------- - -.-] 10 _ 00 60_00 500 ,A~~~~~~~~~AV l ~~~~~~~~~~~~Year l Y_0.0 5 ,wl l X 4I500. 0 lODOMr : 3I5 .00nll1allr lw. l....F.I - 3,OfDee ecp .00de 2,000  Page 6: Implementation Completion Report Mexico: Contractual Savings Development Program (CSDP) 14. The investment guidelines that were agreed to and published on June 30, 1997 in CONSAR Circular 15-1, limit SIEFORE exposure to instruments issued by rated commercial banks to 10% of the funds,2 within an overall 35% limit on investment in rated private securities. Further portfolio limits were negotiated, that included a 10% cap on funds invested in the instruments of a single issuer, a 5% limit (10% with previous authorization from CONSAR) on investment in instruments emitted by an own-group or parent company, up to 15% in related mutual funds, and on holdings of only 10% of any single issue. A critical separation between AFORE and SIEFORE capital is strictly required, and no limit is set on the portion of SIEFORE capital that can be invested in government bonds.3 - PP