Mexico - Infrastructure Privatization Technical Assistance Project

Document of The World Bank Report No. T-6590-E TECHNICAL ANNEX -EXICO INFRASTRUCTURE PRIVATIZATION TECHNICAL ASSISTANCE PROJECT AUGUST 2, 1995  Currency Equivalents (As of July 21, 1995) Currency Unit = Mexican New Peso (MexN$) US$ 1.0 = MexN$ 6.10 Abbreviations and Acronyms Used API Autoridad Portuaria Integral (Integrated Port Authority) ASA Aeropuertos y Servicios Auxiliares (Airports and Auxiliary Services) BANXICO Banco de Mexico BIS Bank for International Settlements CAPUFE Caminos y Puentes Federales (Federal Highways and Bridge Authority) CFE Comisi6n Federal de Electricidad (Federal Electricity Commission) CID Comisi6n Intersecretarial de Desincorporaci6n (Interministerial Commission on Privatization) CRE Comisi6n Reguladora de Energfa (Energy Regulatory Commission) DGAC Direcci6n General de Aviaci6n Civil (General Directorate of Civil Aviation) FNM Ferrocarriles Nacionales de Mexico (Mexican National Railways) FTAL Financial Sector Technical Assistance Loan (ME-3838) ICAO International Civil Aviation Organization ICB International Competitive Bidding IDB Inter-American Development Bank IFC International Finance Corporation IMF International Monetary Fund IPP Independent Power Producer MIF Multilateral Investment Fund NAFIN Nacional Financiera S.N.C. NCB National Competitive Bidding PCS Personal Communications Services PEMEX Petr6leos Mexicanos SCT Secretaria de Comunicaciones y Transportes (Secretariat of Communication and Transport) SECODA Secretarfa de la Contralorfa y Desarrollo Administrativo (Secretariat of the Controller General and Administrative Development) SECOFI Secretaria de Comercio y Fomento Industrial (Secretariat of Commerce and Industrial Development) SHCP Secretarfa de Hacienda y Credito Publico (Secretariat of Finance and Public Credit) TELMEX Tehlfonos de Mexico S.A. de C. V. TELECOMM Telecomunicaciones de Mexico  MEXICO INFRASTRUCTURE PRIVATIZATION TECHNICAL ASSISTANCE LOAN TECHNICAL ANNEX TABLE OF CONTENTS Pae SECTION A: PROJECT DESCRIPTION Background ..................................... 1 Current Status of Privatization .......... .................. 2 Project Design ..................................... 4 Project Description ................................... 7 SECTION B: PROJECT ADMINISTRATION AND IMPLEMENTATION Project Organization .................................. 12 Training Plan ..................................... 12 Project Costs and Financing ............................. 12 Procurement ..................................... 12 Disbursements ..................................... 13 Accounts and Audits .................................. 13 ATTACHMENT: PROJECT IMPLEMENTATION PLAN .............. 15   MEXICO INFRASTRUCTURE PRIVATIZATION TECHNICAL ASSISTANCE LOAN TECHNICAL ANNEX SECTION A: PROJECT DESCRIPTION I. Background 1. Throughout the last decade privatization has been a key component of structural reform policies in Mexico in the pursuit of productivity gains for the economy. In the mid-1980s the Government complemented macro-economic stabilization policy with structural reforms, including privatization, to spur productivity growth. Sales of smaller state-enterprises dominated the period 1986 to 1988, after which followed a large scale privatization program of larger companies operating in competitive markets, mainly manufacturing firms and banks. Between 1989 and 1992 total privatization proceeds amounted to 6.3 percent of average annual national output. Proceeds were essentially used to repay debt and thus helped place the Government's debt exposure on a sound footing. In 1990 the Government began selling firms in sectors requiring economic regulation, most notably Telefonos de Mexico, S.A. de C. V. (TELMEX), the national telephony operator. Though the overall economic outlook brightened, the difficulties of selling other infrastructure businesses without greater attention to the legal and regulatory aspects became apparent. Consequently, the announced program, comprising power plants, roads, airports and ports, slowed significantly in 1993. 2. The successful implementation of these and other far-reaching structural reforms, along with reduced interest rates paid on investment alternatives abroad, induced a surge in net foreign capital inflows that averaged US$27 billion per year during 1991-93. Until the end of 1994, these inflows enabled Mexico to run a large current account deficit, which peaked at 8 percent of GDP in 1994. The capital inflows also caused the real value of the peso to appreciate. Strong political conflicts that arose in 1994, however, led to an abrupt slowing of the capital inflows, so that Mexico was forced to finance its current account deficit through a loss of foreign reserves. When the markets realized that the relative supply of pesos was growing too fast, panic selling further depleted the foreign exchange reserves of Mexico in late December 1994 and January 1995, and led to a major devaluation. Though the market appears to have stabilized, the peso depreciated by about 77 percent, from about 3.45 December 1994 to about 6.10 on July 21, 1995. 3. In March 1995 the Government announced an austerity program to reestablish trust in the economy and minimize the required macro-economic adjustment. The main targets of the program are to: (i) achieve a primary budgetary surplus of 4.4 percent of GDP for 1995; (ii) limit net domestic credit creation to a maximum of MexN$10 billion for 1995; (iii) achieve equilibrium in the current account; and (iv) restructure MexN$65 billion of outstanding debt of the private sector, representing 13 percent of the total commercial bank loan portfolio. The program is backed by unprecedented balance of payments support, announced to  2 amount to some US$50 billion, from sources including the International Monetary Fund (IMF), US government, Bank for International Settlements (BIS), World Bank and Inter-American Development Bank (IDB). As part of the program, the Government has announced its intention to accelerate the privatization of major state- owned enterprises, mainly in infrastructure. The program includes a large number of entities in telecommunications, energy and transport. Compared with others in Latin America and other regions, this is one of the most extensive privatization programs. The ambitious goal is to obtain sales revenues of about US$6 billion in 1995 and US$6-8 billion in 1996. II. Current Status of Privatization 4. The Government is advancing at a very fast pace in preparing the various sectors for privatization. The privatization of container terminals in four major ports is most advanced and the call for tenders was published in the Official Gazette on February 23, 1995. Concessions for two major terminals were awarded on July 7, 1995. Deregulation of basic telephone services and rail privatization are being pursued aggressively with basic laws submitted to Congress in April 1995. In a major departure from past policy, the Government also introduced a law on natural gas deregulation in Congress in April 1995. Groundwork has started in the areas of airports, roads, radio spectrum auctions, satellite privatization, power generation and secondary petrochemicals. Now that the immediate efforts to put in place a macro- economic program are no longer dominating the attention of top policy makers, the pace of reform in infrastructure is accelerating further. In support of the privatization process, however, a host of issues related to privatizing infrastructure firms with natural monopoly characteristics need clarification and analysis, e.g., design of market structures and regulatory arrangements, concession design, public procurement rules, contracting practices, rules for issuing Government guarantees, and the development of appropriate financial infrastructure for financing investments, including means of securing credit, issuing insurance contracts, etc. Lack of clarity about these matters has been a major obstacle for infrastructure privatization and the conclusion of financeable deals. 5. Electiricity and Secondary Petrochemicals. The Government's approach to private participation in these sectors has been rather gradual. Since 1992, it has introduced a number of measures to gradually open the electricity sector, within the limits of Article 27 of the Constitution which reserves public electricity service for the State. It has introduced a new legal and regulatory framework which provides the basis for private ownership in power generation in the form of: (i) independent power producers (IPPs); (ii) self-generators; (iii) cogenerators; and (iv) small power producers. Power sales by IPPs are made exclusively to the state-owned electricity monopoly, Comisi6n Federal de Electricidad (CFE), while sales under the remaining three classes may be to private parties. While private companies have shown much interest, lack of confidence in the fuel supply agreements (which would be with the state-owned hydrocarbons monopoly, PEMEX) and questions about how power purchase agreements might be managed by CFE have so far stalled progress. The Government is now exploring ways to reform policy such that existing and new power  3 plants may be privatized without the need for extensive government guarantees of contractual performance under the required supply and offtake agreements. In particular, the Government is exploring to what extent private power plants may be given a choice of fuel suppliers, how to establish adequate tariffs to render CFE creditworthy, and to what extent competition could be introduced in the power sector. 6. In late 1992, the Government announced plans to privatize some 60 secondary petrochemicals plants. These plans were defacto shelved during 1993. Meanwhile, PEMEX has internally been reorganized into four major profit centers, one of which comprises secondary petrochemicals. Current discussions revolve around how to privatize the secondary petrochemical business - as a whole or in parts. 7. Transport. Since the late 1980s, the transport sector has been deregulated and services increasingly provided by the private sector. The Bank had in particular supported trucking deregulation with sector work and an adjustment loan in 1990 (Loan 3207-ME). 8. Between 1992 and 1994 some 76 terminals outside the major ports were concessioned to private operators. In the main port of Veracruz, three stevedoring concessions were let in 1991. Tender announcements for concessions of container terminals in Mexico's four major ports (Altamira, Veracruz, Manzanillo and Lazaro Cardenas) were issued in February 1995. Two concessions were awarded on July 7, 1995 (Veracruz and Manzanillo). The legal underpinnings for this program are the Port Law, Navigation Law, and Customs Law and their corresponding regulations. The Port Law provides for the creation of integrated port authorities (APIs) to act as landlord for each port and to be responsible for the concessioning and privatization activities within their port. Airlines were privatized in the large privatization wave around the turn of the decade. Airports are currently under the management of a government agency, Aeropuertos y Servicios Auxiliares (ASA). The Government has begun to consider options for privatizing ASA's operations. 9. Until this year, privatization activities in the Mexican railways company (Ferrocarriles Nacionales de Mexico, FNM), which is essentially a transporter of freight, were limited to contracting out the operation of repair shops and some track construction and maintenance. Now, the Government wants to proceed with the privatization of FNM and is considering alternative plans to do this. Under the current economic adjustment program, Congress, in early 1995, approved a change in the Constitution to allow for railway privatization. A new railway law was presented to Congress in April 1995. 10. Telecommunications. Major reform of the telecommunications sector was launched in 1989 with the privatization of TELMEX, the 56 percent state-owned monopoly telephone company. A 20 percent, controlling interest in TELMEX was sold in 1990 for $1.76 billion to a consortium of Mexican and foreign investors. Public offerings in 1991 and 1992 fetched a further $4.5 billion, bringing total sales proceeds to $6.3 billion. TELMEX now accounts for about 30% of the equity traded in Mexico's stock exchange and also figures prominently in the US capital markets.  4 11. The results of this privatization have generally been satisfactory. Since 1990 TELMEX has invested in excess of $2 billion annually, telephone density increased from 6.3 lines per 100 inhabitants to over 9, rural service was extended to some 8,000 rural communities, and the number of payphones increased from 83,000 to 205,000. However, while investment performance met expectations, steps towards opening up the core telephone business to competition have proceeded rather slowly. In particular, the agreed timetable for rebalancing TELMEX's tariffs has not been met. Weighted average rates remain among the highest of OECD countries. High connection fees stifle the demand for new lines. Quality of service has generally improved but remains below targets in the Federal District. 12. Other important elements of the 1989 reform were: (i) licensing an independent private cellular service provider in each of nine regions; (ii) transferring the remaining state telecommunications operations from the Secretariat of Comunicacion and Transport (SCT) to Telecommuniciones de Mexico (TELECOMM, a decentralized state entity); and (iii) expanding under TELECOMM the domestic satellite system, including investments of about $0.7 billion. In. Project Design 13. Project Objectives and Approach. The project aims to: (i) help the Government choose structural options for sector reform; (ii) develop a sound legal and regulatory framework in support of privatization; (iii) reduce, and if possible, eliminate constraints to privatization in selected sectors (ports, airports, railway, telecommunications, power, secondary petrochemicals); and (iv) provide support to the privatization preparation process in each of these sectors, through the Interministerial Commission on Privatization (CID, para. 16). 14. The Government's overall framework on privatization is as follows. First, those companies that operate in competitive markets for tradeable goods and services can and will be sold as soon as possible with the goal of maximizing sales revenues. Second, all other firms and institutions in the subsectors listed above which produce non-tradeable and largely monopolistic services, will require the establishment of a suitable framework for economic regulation. In these cases the Government will ensure that the establishment of efficient solutions takes precedence over the quick generation of cash. The Government will also maximize the scope for competitive forces and minimize the need for economic regulation, if need be by relying on intermodal and inter- concession competition rather than attempting to establish a system of economic regulation, that requires significant fine-tuning. Forms of privatization will be chosen that minimize reliance on explicit and implicit government subsidies and guarantees so as to strictly limit the exposure of the Government. This implies inter alia the need to set tariffs at levels sufficient to cover competitive costs, including the cost of capital, and to  5 allow investors maximum freedom to choose creditworthy and reliable suppliers and customers. Third, the proceeds of privatization will be used to improve the composition of the Government's balance sheet. Fourth, while the establishment of sound regulatory systems requires careful preparation, it will be undertaken with determination and without delay, such that the process of privatization and deregulation will be initiated in 1995 in some sectors and completed within three to five years in those sectors requiring more upstream strategic work. 15. The project's design builds on the conceptual approach adopted by the Government. The focus on legal and regulatory frameworks is an essential first step, aimed not only at identifying and eliminating obstacles to private sector participation but also in ensuring that the "rules of the game" are applied transparently and consistently. 16. Institutional Framework. The privatization program is complex and wide ranging, addressing issues of sector structure, competition and efficiency. To steer this undertaking, provide policy guidelines and ensure a consistent, comprehensive approach across sectors, the CID was established by Presidential Decree on April 7, 1995. It is chaired by the Secretary of Finance and Public Credit (SHCP), and its permanent members include the Secretaries of Commerce and Industrial Development (SECOFI), Control and Administrative Development (SECODA), and Labor. The President of the Federal Competition Commission is a permanent observer. Sector ministries and entities (e.g. SCT) participate in the CID for matters pertaining to those sectors. The CID is supported by a small Technical Secretariat, headed by a senior official in SHCP. The Technical Secretariat oversees the day-to-day affairs of the CID, coordinate contracting of consultants and advisers, reviews proposals, and ensures consistency throughout the process. 17. The CID is charged with: (i) designing the privatization process and supervising its implementation; (ii) naming a special commissioner (comisionado especial) to coordinate each specific privatization; (iii) reviewing the regulatory framework and proposing changes; (iv) reviewing concession designs and agreements, particularly those aspects related to penalties for non-compliance with the conditions of the concession agreement or the requirements of the basic laws under which it is made; (v) establishing guidelines for valuation of state-owned entities and overseeing the process; (vi) establishing and carrying out a communications strategy with respect to privatization; and (vii) contracting the advisers necessary to support its work. The decree also states that the CID has final approval of all privatizations and that proceeds of the privatization process will revert to the federal treasury. 18. The privatization activities to be supported in each sector (power and secondary petrochemicals, transport and telecommunications) are directed by working groups related to each ministry, under the direction of the special commissioner appointed by the CID. The Technical Secretariat provides support to the working groups. The decree requires that each working group: (i) define a sector strategy and  6 privatization plan; (ii) review the adequacy of the legal and regulatory framework; (iii) recommend changes; and (iv) supervise the operational aspects of the actual divestiture, concession or auction. Each working group is, therefore, the primary locus of responsibility for identifying and implementing policy studies and other analytical work, and for preparing and submitting options papers and decision memoranda to the CID. In addition to hiring of consultants, workshops, seminars, study tours and training would be organized and authorized by each working group. 19. Bank and Other Multilateral Assistance. To support the immediate needs for technical assistance, the Bank is providing substantial direct support to help in the development of the overall strategy and sectoral policies, and in particular the drafting of sound laws and regulations. This assistance, which will continue throughout the project, has taken the form of policy notes in response to requests by the authorities, draft terms of reference, the organization of consultations with international experts in relevant areas, and comments on draft documents the Government has submitted to Bank experts. Six workshops, on railways, power sector restructuring, regulatory policy, telecommunications deregulation, spectrum auctions and satellite privatization have already been organized. 20. The Bank's assistance strategy is being coordinated with both IDB and the IFC. It started with an aide-memoire on privatization strategy which was supported by all three institutions and issued on January 13, 1995 to the Government at the end of a joint mission. The IDB is exploring ways to utilize its Multilateral Investment Fund (MIF) in support of the program. IFC is similarly exploring ways to support the privatization process and to arrange financing and securitization for new investment projects. 21. Risks. The project faces several important risks. The first is that the privatization program may be weakened in the face of opposition from unions, the state owned enterprises themselves, private sector groups seeking to limit competition, or other organized groups. The broad composition of the CID, however, and planned activities (such as workshops, public relations campaigns, and briefings with the domestic and international investors) will mitigate this risk. Continued macroeconomic instability would also damage the program e.g. by increasing country risk for investors and by giving greater urgency to quick - though ultimately damaging - dispositions of assets before adequate legal and regulatory structures are in place. An unfavorable public reaction to the Government's economic program, or to the privatization program itself, may make it much more difficult to eventually effect the sales or concessioning process. The Government's economic plan, which was announced in March 1995, is currently succeeding in stabilizing the exchange rate. The Government is also taking steps to improve its relations with international investors by providing better access to central bank information and by undertaking more frequent consultations, and is pursuing an active public information campaign.  7 IV. Project Description 22. The project provides support for: (i) the privatization preparation processes to be undertaken in transport (ports, railways, and airports), electricity and secondary petrochemicals, and telecommunications (basic services, satellites and radio spectrum); and (ii) cross sectoral studies and coordination to be undertaken by the CID. Depending on the readiness for privatization in each sector, the project supports diagnostic studies, strategy formulation and implementation, and regulatory institutional strengthening. The CID component also includes support for an evaluation of the privatization process. The Attachment provides greater detail concerning the objectives, activities, outputs, forms of assistance, timing and costs associated with the project. Transport 23. Ports. A process of restructuring the ports has been under way since early in the last administration. More than 70 port terminals dealing with single products, such as fertilizers, grain and cement, have been concessioned and a new Ports Law was approved in July 1993. This Law permits the creation of Integrated Port Authorities (APIs), with full responsibility for the operation of the port(s) under their jurisdiction and the possible concessioning of individual terminals or berths within the port and of common port activities such as provision of navigation aides, pilotage and dredging. APIs have already been formed for 17 ports. They are all functioning as public companies with 100% state ownership, but the new law provides for private participation in their ownership with up to 49% foreign capital. Recently, SCT has issued a call, on behalf of the relevant APIs, for pre-qualification submissions for the operation of container and general cargo berths in the four largest ports - Veracruz and Tampico on the Atlantic/Gulf Coast and Manzanillo and Lazaro Cardenas on the Pacific Coast. Two concessions were awarded in July 1995. The project would support privatization preparation activities for terminals as well as port authorities. 24. Railways. In February 1995 a Constitutional amendment was approved by Congress allowing for the railways privatization. In April, a new Railways Law, that would permit the concessioning of the railway as a whole or in parts, was presented in Congress. The project would finance a series of studies needed to implement the privatization process. (i) review of proposals. The project would finance a final evaluation of the current recommendations (made by external consultants), which divide the railways into a number of separate operations: three large concessions and a number of short lines to deal with short distance bulk movements of specific commodities and with regional lines that would not be viable as part of a larger concession. (ii) details of each concession. While the consultants' recommendations define the general extent of each concession, they leave open the details for the bidding documents that are to be prepared. The project would finance this work. (iii) alternative methods of dealing with current workshop concessions. As part of the previous administration's process of out-sourcing ancillary railway activities, seven locomotive workshops were concessioned in 1994 for a period of 15 years. These concessions could be seen as a disincentive for potential concessionaires of the lines  8 and services supported by these workshops. At the least, it is likely that the terms of the workshop concessions would need to be renegotiated. The project would review the alternative ways of resolving this problem and recommend a solution that best meets the Government's requirements. (iv) prepare and implement FNM regionalization. It is likely that the concession agreements will be expressed in regional terms, so that additional lines can be included or excluded from the concession without a need to make revisions to the agreement. To facilitate the hand- over process from FNM to the private concessionaires, FNM will be restructured on the same regional basis as implied in the concession agreements, and operate on that basis for as long as possible before the hand-over takes place. The project would finance the work to prepare, implement and monitor this process. (v) inventory and valuation of assets. The project would finance these inventories, including technical assessments, and valuations. This work would include all present FNM assets and would pay particular attention to the issue of land ownership, much of which is in dispute between FNM and the local authorities in whose area it lies. (vi) plan for resettlement of illegal settlers on FNM land. There is no reliable estimate of the number of illegal settlers on FNM land, but whatever their real number, resettlement issues will need to be resolved prior to awarding concessions. The project would finance the studies needed for FNM to develop a policy on resettlement. (vii) environmental assessment of railway facilities. As part of the preparation of a possible Bank-financed railway project, and as an antecedent to the privatization of the railway mechanical workshops in 1994, environmental assessments were carried out for twelve workshops and associated installations. In addition, an Environmental Action Plan was prepared, detailing the actions needed to remedy the problems. The project would finance the required environmental updatings and assessments, as well as advise on the most appropriate method of financing their resolution. (viii) training schemes for FNM staff. The project would evaluate alternative ways of structuring and financing retraining programs. 25. Airports. The growth in air transport since the deregulation of the airlines in 1989 has put pressure on the operational capacity and financing requirements of many Mexican airports. The opening of direct services between the US and many Mexican tourist destinations has also increased pressure on regional airports, although it has provided some relief in Mexico City, where the airport is approaching both runway and terminal capacity. The difficulty of finding public finance for the basic non-commercial facilities has led to a reorientation of policy towards a possible concessioning of airports, perhaps following the model of the APIs. The project would finance the development of an airports privatization strategy, and following completion of the report, a seminar would be held, with participation of representatives of the Directorate General of Civil Aviation (DGCA), ASA, SCT and SHCP and ICAO (International Civil Aviation Organization) and other specialists with experience in airport management, operations and finance. The objective of the seminar would be to recommend an appropriate structure for the management and development of airports. The project would also finance studies of specific issues critical to the implementation of a privatization process: (i) financial review and inventory and valuation of regional airports' assets as part of the evaluation of their attractiveness for future private participation; (ii) airport needs for Mexico City, including the use of existing facilities and the possible development of a new airport with private participation; and (iii) safety standards, to assess compliance with ICAO  9 standards. Finally, a restructuring of DGAC and ASA would be studied. Until now the DGAC and ASA have acted as providers of airport services. In the future they, or their successors, will need to act mostly as monitors and supervisors of services provided by others. This will require a profound change in their structures and staffs. The project will examine the future strategy for the provision of airport services, and once this has been determined, will recommend a new supervisory structure both for the management of airport concessions and for regulation of the sector, including the possible creation of a Civil Aviation Authority as part of a broader regulation and monitoring of the whole aviation sector. Electricity and Secondary Petrochemicals 26. Electricity. The effectiveness of past efforts to foster private investment in power generation has been limited. While by no means unanimous, a consensus is emerging in Mexico on the need to reassess basic policies in the sector. This is based on a growing recognition of the powerful role direct and indirect competition could play in fostering efficient private investment of the magnitudes required to meet the prospective demand for electricity over the next decade. The power sector component of the loan is designed to support the Government in identifying tractable options for choosing the best possible sector structure, including opportunities for introducing competition, and for initiating actions toward this end in the near term. More specifically, the project will support the Government in: (i) the definition of desirable future sector strategy and policy. The project will provide support for advisory services to assist the Government in undertaking a diagnostic study of past performance and future prospects of the electricity sector in Mexico. Guiding principles for this effort include: (a) reliance on commercial incentives to govern the operations of power sector companies with the goal of providing the best possible service at the best possible price; (b) strictly limiting the financial burden the power sector places on the Government; and (c) introducing competitive forces where possible. (ii) near-term restructuring. The project will provide advisory services to the Government to identify and evaluate options to restructure the power sector, in particular the separation of generation, transmission, dispatch and distribution into arms-length entities. This would include an assessment of options to introduce effective competition among generating units and competition for customers. The restructuring options would be based on an analysis of the current organization and performance of the power system as well as ownership and competition options possible under existing Mexican law (or suggestions for changes in such laws if they would improve the range of desirable options). (iii) electricity pricing policy. The project would finance advisory services to assist the Government in analyzing the current tariff system and in developing proposals which would: (a) set tariffs at economic levels, i.e. levels sufficient to cover the costs of capital required for system expansion and all operations and maintenance costs; (b) use tariff policy to provide incentives for companies to operate efficiently in the power sector; (c) enhance creditworthiness. 27. Three other issues related to sector structure would be considered under the project. First, advisory services, training, and study tours would be financed to assist the power sector regulatory entity in order to provide a credible commitment to: (i) investors operating with reasonable efficiency that they will be allowed to recover  10 their costs and earn a profit commensurate with the risks that they bear; and (ii) consumers that they will be protected from the abuse of monopoly power by any public or private entity that operates with a de facto or de jure monopoly. Care would be taken to distinguish between activities that need to be regulated and those that need not. The regulatory entity could be structured to rule in disputes about contracts between participants in the power market relating to matters of economic regulation. Second, to enhance the management autonomy of power sector companies and to widen the scope for efficiency improvements, options to diversify fuel supply sources would be investigated based on an analysis of the existing arrangements for the supply of fuels. This would, in particular, cover the supply of petroleum products and natural gas. Various options to deregulate prices and supply arrangements of these products would be evaluated including deregulation of domestic distribution and liberalizing trade and their consequences for the organization of these markets. Third, the project would finance advisory services, study tours, and seminars to evaluate ownership options in the power sector including means of creating arms-length commercial relationships between Government and government-owned companies through commercialization and corporatization as well as ways to use private ownership to improve the performance of the power system. Privatization options would include the use of licenses and/or concessions for providers of energy services and new contracting options to allow retail consumers to enter into hedging contracts with power producers in a competitive power system. 28. Secondary Petrochemicals. After having temporarily abandoned plans to sell secondary petrochemical assets in 1993 the Government has now revived such plans. PEMEX has retained an investment banking firm to advise on the sale of all secondary petrochemical assets. The current privatization effort is to lead to the sale of all assets by the first quarter of 1996. To fully prepare a sound privatization strategy a number of analyses have to be prepared. As a first step, market prospects for petrochemicals would need to be assessed to help identify how best to package plants for privatization and which types of investors to target. Other issues include: (i) to what extent PEMEX might remain involved in the production of petrochemicals, particularly inputs for secondary plants; (ii) how feedstocks are to be priced; and (iii) to what extent there will be free trade in feedstocks. 29. The privatization strategy itself would need to be based on an assessment of the current state of the assets in Mexico, including operating, safety and security risks as well as an assessment of environmental issues. To support the process, the project would finance work that would complement that of the current advisors to PEMEX. In addition it would finance: (i) environmental assessments, (ii) technical, security and operational assessments and (iii) plant inventories. Telecommunications 30. The second phase of sector reform aims to liberalize the market for basic telephone services and stimulate some US$4 billion in new foreign investment by the year 2000, chiefly for competitive long distance and local services. Additionally, the reforms are intended to generate significant revenue from the sale of radio spectrum licenses and the privatization of the satellite business, as well as increasing tax revenues from existing and new operators as sector growth accelerates. At the center  I1 of this second phase of sector reforms lie four major tasks to be financed under the project: (i) opening basic services to competition. The project will finance a review of options for introducing competition in basic services. It will also finance the preparation of guidelines and international benchmarks for technical and pricing aspects of interconnection, with emphasis on facilitating new entry in basic services. SCT will also retain consultants to assist in rebalancing TELMEX's tariffs and negotiating revisions of the pricing rule under competition. (ii) privatizing the satellite business. Under the project, SCT will retain economic consultants as well as financial and legal advisers to help prepare the privatization of TELECOMM's satellite operations. The economic consultants will help develop a privatization strategy as well as maintain a policy and regulatory focus throughout the privatization process. Legal and financial advisers will be retained to restructure TELECOMM's satellite operations. (iii) auctioning part of the radio spectrum. The Government intends to move from the traditional approach of managing the radio spectrum (on a first-come first-served basis subject to relatively low flat fees or taxes) to an approach more responsive to market forces. The project will finance consultants to help define an economic approach to radio spectrum management, establish guidelines for implementation, define the scope and modality of spectrum auctions, and oversee initial auctions. SCT will also retain advisors to carry out the first auctions for personal communication services (PCS). (iv) regulatory function. SCT's regulatory capabilities have not kept up with sector development. Moreover, SCT's role as policy maker and licensing authority increasingly conflicts with its regulatory responsibilities. Under the project, consultants will be retained to help review options for divesting SCT's regulatory functions to a new federal agency and related staffing, financial, and legal matters; design the organization; outline a staffing and development program; and monitor progress during initial implementation. Cross Sectoral Activities 31. This component consists of activities to strengthen the CID and ensure a coordinated approach across sectors. The project will finance a diagnostic review of existing legislation and institutional frameworks, past privatization experience and sector specific privatizations plans and strategies, as well as consultations with the investment community and key interest groups. Additional support would be rendered to the CID in establishing and servicing the working groups. As appropriate, workshops, seminars and short courses would also be financed. Support for the CID would focus on three areas: (i) legal and policy issues arising from the privatization process that affect more than one sector; (ii) key regulatory issues including the rules governing the award, amendment and revocation of concessions, broader regulatory approaches such as application of anti-trust norms in each sector and principles governing the design and establishment of autonomous regulatory institutions; (iii) the overall business environment for private participation in infrastructure and hence affect the longer term sustainability of private capital flows in these sectors, e.g. taxation measures and granting and enforcing security interests.  12 SECTION B: PROJECT ADMINISTRATION AND IMPLEMENTATION 32. Project Organization. The United Mexican States would be the Guarantor for the loan made to Nacional Financiera, S.N.C. (NAFIN) a state-owned development bank. Execution of the project would be undertaken by CID and the working groups in each sector. 33. To ensure that the activities financed under the project remain closely tied to the evolving priorities for the privatization process, semi-annual reviews would be undertaken to update the rolling program of work and evaluate the proposed indicators of impact. A project launch seminar is planned as well. During the semi-annual reviews, the Bank, the Executing Agency, the Borrower and each working group would assess the status of project implementation, evaluate the workplan for the next six months and agree on any needed modifications to the originally proposed program. Project completion is targeted for December 31, 1998. 34. Training Plan. The Technical Secretariat will be responsible for the collection of relevant data and information regarding the training courses financed through this project. Each working group will provide the Technical Secretariat with a yearly training program, derived from the particular privatization strategy for its sector. The Technical Secretariat will compile these plans (including its own training needs), which will be evaluated at the time of the semi-annual review with the Bank. While the training plan will be based on strategic objectives, the data required will include: (i) historical information on training taken (or committed) to date; and (ii) current year's plan, with title and budget for each course, number of participants to be financed, name of individual or institution responsible for training, time and location of training. 35. Project Costs and Financing. Estimated total project costs are US$46.0 million. (Schedule A) They include: (i) cross sectoral support, US$6.0 million (13% of total); power and secondary petrochemicals, US$15.25 million (33%); transport sector, US$14.35 million (31 %); and telecommunications, US$7.7 million (17%); and price contingencies, US$ 2.7 million (6%). The Bank would provide US$30 million, the Government the remaining US$16 million. 36. A fixed rate US dollars single currency loan is proposed in accordance with the Government's request. The loan would have a repayment period of up to 15 years; and each semester's disbursements would have a maturity of 12 years from the rate fixing date, including 3 years grace. The Government of Mexico is eligible for single currency loans. The proposed US$30 million represents 3 percent of the FY96 lending program for Mexico (US$920 million). 37. Procurement. Two types of procurement would be undertaken through the loan: (i) consultant services; and (ii) goods, primarily computer hardware and software. As financial agent, NAFIN would act as the coordinator and adviser to the CID for all procurement activities under the loan. Selection and appointment of consultants for studies, technical assistance and support of project execution would be carried out in accordance with the Bank's "Guidelines: Use of Consultants by the  13 World Bank Borrowers and by the World Bank as Executing Agency (August 1981). All contracts with lawyers or law firms will follow specific Bank guidelines for their selection and appointment. Procurement of goods would follow the Bank Guidelines for Procurement (January 1995). To the extent feasible and practical, the procurement of goods would be done by grouping the various items in bid packages estimated to cost US$350,000 equivalent or more. Packages in this category would be required to follow International Competitive Bidding (ICB) procedures using the Bank Standard Bidding Documents. National Competitive Bidding (NCB) would be undertaken for goods estimated to cost more than US$150,000 but less than US$350,000 using standardized bidding documents to be agreed upon with the Bank. For equipment that cannot be grouped in packages valued at US$100,000 or more, international and national shopping procedures would be followed by comparing price quotations received from at least three suppliers. 38. Bank review of procurement procedures would be as follows: (i) for consulting services, the Bank would conduct prior review for all contracts exceeding US$50,000 equivalent for individuals and US$100,000 equivalent for firms; and for procurement of goods the Bank would review ex ante documentation pertaining to each ICB and the first two NCBs; (iii) all other procurement documentation would be subject to ex post review. This review process would result in a prior review of approximately 75 percent of all Bank financed contracts for goods and 90 percent of all Bank financed contracts for consulting services, both expressed in value. 39. Disbursements. Proceeds of the loan would finance: (i) 100 percent of the cost of foreign goods, consulting services, training and technical assistance; and (ii) 90 percent of the cost of local goods. The proceeds of the loan are expected to be disbursed in accordance with the categories shown in Schedule B of the Memorandum of the President. To expedite project execution, a special account in U.S. dollars would be established at the Banco de Mexico, with an authorized allocation of US$2 million equivalent, representing the average amount equivalent to four months of eligible expenditures that are expected to be paid from the account. Separate accounts of all expenditures by the project would be maintained by the Borrower. Withdrawal applications would be fully documented, except for contracts smaller than the following specified levels: US$350,000 for goods; US$50,000 for individual consultants; and US$100,000 for consulting firms. In the case of contracts below these specified levels, NAFIN would prepare certified Statements of Expenditure (SOE) to be used as the basis for disbursement. Supporting documentation for SOEs would be retained by NAFIN and made available for examination by Bank staff during supervision missions. 40. Retroactive financing of up to US$3 million would be provided for eligible expenditures incurred after April 1, 1995. Such financing is necessary to put in place the institutional structure required to carry out the project and avoid delays in the first year of project implementation. The project completion date would be December 31, 1998 and the closing date would be June 30, 1999. 41. Accounts and Audits. NAFIN and the Executing Agency would maintain adequate records to reflect all expenditures made under the project in accordance with sound accounting practices. The accounts and statements of expenditures would be  14 audited each year by auditors satisfactory to the Bank, in accordance with appropriate auditing principles consistently applied. The audit report would be submitted to the Bank not later than six months following the close of the fiscal year.  15 ATTACHMENT: PROJECT IMPLEMENTATION PLAN  I  PROJECT IMPLEMENTATION PLAN: CID Matrix of Objectives, Activities, Timing and Costs TIMING OBJECTIVES ACTIVITIES OUTPUT FORMS OF ASSISTANCE Start I Finish A. CROSS-SECTORAL PRIVATIZATION FRAMEWORK: This sub-component will focus on key cross-sectoral issues raised by the proposed privatization transactions themselves. Examples of issues that may be addressed under this sub-component include: (i) treatment of debt, environmental and other liabilities of enterprises; (ii) labor and tax issues; (iii) contracting approaches, including issues offorce majeure, alternative dispute resolution procedures etc; (iii) strategic sequencing of programs etc. Cost: US $2.5mm 1. Identification of legal and polcy issues raised by Support to CI in establishing and servicing cross- Diagnostic study Consultants/Legal advisors 05/95 12/95 privatization transactions in more than one sector which: sectoral working groups (i) raise important questions of policy coherence, (ii) offer net benefits from adopting consistent approaches Review existing and proposed legislative and across sectors, or (tii) offer significant efficiency benefits institutional frameworks, past-privatization Seminars/Workshops from dealig with issues centrally rather than on a sector experience and sector-specific privatization plans by sector basis and strategies. Consultations with investor community and other Consultations key interest groups. 2. Definition of strategy for elaborating a cross-sectoral Support CID in working with cross-sectoral Proposed implementation strategy, Consultants/Legal advisors 08/95 12/95 privatization framework that deals effectively with working groups and other interests. including, as appropriate, cross- issues identified in phase 1. sectoral coordination mechanism and Develop detailed recommendations on legal and draft list of maters to be subject to institutional responses to cross-sectoral issues cross-sectoral policies, legislation or regulation. Seminars/Workshops 3. Effective implementation of cross-sectoral Support CID by providing general legal counsel Draft policies, legislation or Consultants/Legal advisors 10/95 End of privatization framework and in working with cross-sectoral working groups regulations dealing with cross-sectoral process issues. Liaise with sector working groups to promote Dissemination products (eg, booklets, Seminars/Workshops 10/95 06/96 effective cross-fertilization, communication and pamphlets etc). coordination Draft policies, legislation and regulations 4. Evaluation of privatization process, including Record analysis, surveys, econometric studies. Final report(s). External consultants 06/96 One year economic and social impacts after end Seminars of process  PROJECT IMPLEMENTATION PLAN: CED Matrix of Objectives, Activides, lming and Costs OBJECTPIES I ACTIVITIES OUTPUT F3ORNMS OF ASSISTANCE I TIMNG I I I I Stant zI B. CROSS-SECTORAL REGULATORY FRAMEWORK: This sub-cmponent winl focas on key ross-sectoral regulatory issues: it, those defining the longer-term relationship between investors, consumers and the State. Examples of issues that may be addressed under this sub-component include: (Q) rules governing the award, amendment and revocation of concessions; (ii) broader regulatory approaches, such as the rote of the Competition Commission in each sector, and (iii) principles governing the design and establishment of autonomous regulatory institutions. Cst: US S2.Smm 1. Idlfdcation of polcy, legal and intbuional issues Support to CID in establihing and servicing c- Diagnostic study Consultants/Legal advisors 05195 1V95 raised by the elaboration of regulatory frameworks secoral workig groups in more than ot ecor which: () raise important queios of polic cohre, () offer net benefits Review existing and proposed legislative and Seninars/Workshops from adop6ng ce _m ap ccs ectors, instiiona framework, past privatization and or (iii) offer sigifiat efficiency benefits from regulatory experience and sector-specific dealing with isue ceirlly rather than on a sector privatization plans and regulatory strategies. by ector bass Consultations with investor community and oWher key interest groups. 2. Definition of tategy for elaborating a cross- Devdop detailed recommendations on legal nd Proposed implementation Consultants/Legal advisors 0S/95 06/96 ecal regulatory framework that deals effectively institutional response to crosaecctoral regulatory Strategy, including, as with is s idanified in phase 1. framework issues appropriate, cros-aectoral coordination mechanism and draft list of regulatory matters to be subject to croasedoral Seminars/Workshops policies, legislation or regulation 3. Impleatation of cross-sectors regulatory Support CID m working with crss-sectoral Draft policies, legislation, Consultants/Legal advisors 01/96 End of frmavork working groups. Liaise with sector working regulations, organizational process groups to promote effective cros-fertilization, arrangements etc deling with commaunication and coordination cross-sectoral regulatory issues Draft poliaes, legishtion, regulations, Seminars/Workshops organztional arrangements etc 4. Dcvdopment of reglatory institutions Formulate and implement a cross-wectord program Outputs might include: ) Consultants/Legal advisors 01/96 Endof to support the devdopment of institutional capacity Training programs and process by regultors. material; and (ii) Support to Seminars/Workshops developnment of research As appropriate, coordinate assistance to regulatory institute/program for regulators Training programs & agencies. materials  PROJECT IMPLEMENTATION PLAN: CID Matzix of Objecives, Activities, Timing and Costs TEMING OBJECTIVES ACTIVITIES OUTPUT FORMS OF ASSISTANCE start I C. GENERAL BUSINESS ENVIRONMENT FOR PRIVATE PARTICIPATION IN INFRASTRUCTURE (PPI) This sub-component will focus on legal, regulatory and institutional constraints to effective private participation in infrastructure (PPI) that are not addressed by sub-components A and B. Given the potential breadth of this work, the focus will be on the key constraints that have a signflcant impact on the PPI business environment. Examples of issues that may be addressed under this sub-component include approaches to granting permits; alternative dispute resolution processes; financing issues, including the granting and enforcng of security interests; environmental aspects; transparency of legal system; and taxation. Cose. US S1.Omm 1. Identification of key legal, institutional and Support to C1D in establishing cross-aectoral Diagnostic study indicating nature and Consultants/Legal 05/95 12/95 regulatory constaints in the general business working groups relative significance of key constraints. advisors enviriomen that are not covered by A & B (above) but have a ignificant impact on efficient private Review existing and proposed legislative and participation in infradructure (PPI). institutional frameworks and sector-spedfic Seminars/Vorkshops development objectives and privatization plans. Consultations with investor community and other key interest groups. 2. Definition of strategy for improving the general Support CID in working with crosa-sectoral Proposed implementation strategy, Consultants/Legal 08/95 06/96 buins environment for PPL working groups. including, as appropriate, advisors coordination/consultationmechanisms and Develop detailed recommendations on legal, draft list of matters to be subject to institutiona and institutional responses to issues priority reform. identified in phase I Seminars/Workshops 3. Implementation of strategy for improving the As required, work with CID and other key entities Draft policies, legislation or regulations Consultants/Legal I10/9 End of genaal business environment for Pm. in drafting policies, legislation and regulations dealing with cross-sectoral issues. advisors process 4. Promotion and dissemination of investment Recompilation of relevant laws and regulations Brochures, booklets, videos. Road shows 08/95 12J96 opportunities Presentations to financial intermediaries, consulting Inventory of investment opportunities and Seminars firms and investment community appropriate databases. Workshops Liaise with Mexican Investment Board TOTAL FOR SUB-COMPONENTS A-C $6. 0mm 3  PROJECT IMPIMiENTAlION PLAN: ElECTRICrTY AND SECONDARY PEITROCHEMICALS Matrix of Objectives, Actiities, Thing and Costs OBJECTIVES | AClIVrITES J OUP1UT | FORMS OF ASSISTANCE | _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ J j ~~~~~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Start Finish A. ELEC1RICrrY SECTOR: ThLis sub-comoetllsupport the review of key stategic options, sector restrcturing and preparation of privatization. Cot US $12.25m 1. Identify appropriate policy framework for Evauate amative suttural, ownership and market Sector diagnostic. Local consultints. 05/95 12/95 private sector participation in the coordmation options for introducmg competition mto the electricity sector. electricity sector. Sector restructuring sategy. External consultuats. 05/95 12/95 Identify regulatory and polcy/planning functions and ExLernal reviewers. swttures commensurate with restructuring options. |2. Define stategy for implementing revised policy Analyze electricity pricig poliies Tariff polcy ad subsidy criteria. External consultants 10/95 03/96 framework for the electricity sector. Assess options and make recommendationa for grouping Sector re=icturing strategy. Study tours 07/95 06/96 upfaing Imits. Inventory of assets External advisors Review divestiture options and scquencing. Privatization strategy, auction schemes and plmn Seminars 08/95 06/96 of action. Evaluate options for ensng efficient fuel supply. 10/95 03/96 Draft fuel supply contracts/agreements Specify regulatory and institutional arrangements Action plsa for implementing regulatory and 02/96 03/96 Identify ekmlems of publc relations strategy. instiul modifications as needed. 4  3- Prepare strucijug and privatiation Fmae legl/re story oriL Draft regulations. External consuants 06/95 1296 Estabish opeating entities. Prepare entities to point of divesure Study tours 01/96 09/96 Desgn qsyem openticn/coordinationprocedures and 01/96 12/96 initiate stial aragemcma. Extermal advisors Reommend apropriae tariff polices and wrvice 01/96 12/96 staidards for distrbution, tmxsion (and genention Tnranng (regulation, systems during t ndtio pes operations, setdement systems) Caduct mnat and mveannen prfecaabiIy stdies. 01/96 12/96 Priorite existhg fwiliaew capacity to be offered to PrivatiuAtion strategy. 01/96 12/96 private investors. Draft model cntracts for tr_inson services. 01/96 12/96 Undertake saes promotion. InformAonMemorandsnn 12/96 06/97 Prepa bidding documents. une biddig documents. 01/96 12/97 4. hwns latetung Suportpolicy nd regulatoty insttin Extemal consultnts 1 10/98 5  PROWECT IMELUITATION PLAN: XClRUCITY AND SICCONDARY FETROCUEWICALS Nd of <Oedma, Ahid., IThg i Cub OBJECTIVES ACTIVITIES OUTPUT FORMS OF ASSISTANCE I I I Start Fsidh B: SECONDARY PETROCEM CAIS: Asidance would fous on support to prepare for privatization. Cost US S3.0mm 1. Define privatization options and aess Inventory of asses ernal consultants 05/95 12/95 inveaet climate. Speify grouping of auets and rnles of accs Privatization strategy and pricing of common use facilities Specify feedstock supply arrangements Draft feedstock supply contracts Design auction/bidding pzocedures Aucdion strategy Prepare environmental assement 2. Prepa privatiztion Sales promotion Information Memorandum External consultants 10/9S 06196 Prepae bidding do en-ts Ise bidding documents. TOTAL FOR SUB CO (ONENTS A-B: US S15.25mm 6  PROJECT IMPLENENTATION PLAN: TELECOMMUNICAnONS Mhbix of Objedvl, Ad tbsu T g g d COds OBJECTIVES ACTivnIES OUTPUT FORMS OF TINMNG ASSISTANCE sun | Fibb A: BASIC TELEPHONE SERVICES: This sb-component will addres specific issues related to deregulation of local/long distance services. Cost: US S2.5mm 1. Economic analysis of sector structure Assess pricing, new entry, and social Sector diagnostic report Extemal consultants 7/95 6/96 obligations 2. Numbering and other technical plans Design implementation of numbering, Implementation of numbering, External consultants 7/95 4/96 signalling, billing, routing and signalling, billing, routing and synchronization synchronization 3. Support for legal and regulatory framewori Draft rtviews and comments External consultants 07/95 4/96 7  PROJECT IMPLEMENTATION PLAN: TELECOMMUNICATIONS Mautix of Objectives, Activities, Timing and Costs OBJECTIVES ACTIVITIES OUTPUT j FORMS OF TIMING ASSISTANCE B: SATELLITES: Preparatory work has been undertaken. This sub-component will assist with preparing the privatization of the satellites. COst US S1.0mm 1. Idedify appropriate policy framework and Prepare recommendations for sector structure Sector diagnostic External consultants 05/95 02/96 istitutional arrangements Prepare privatization option Privatization strategy Study tours Prepare regulatory framework Seminars 2. Prepare privatization Inventory of assets Information Memorandum External consultants 09/95 12/96 Sales promotion External reviews Issue bidding documents Investment Bank Prepare bidding documents 8  PROJECT IMPLEMENTATION PLAN: Matrix of Objectives, Activitis, Timing and CO0ts OBJECTIVES ACTIVITIES OUTPUT FORMS OF ASSISTANCE TIMING Start Finish C: RADIO SPECTRUM: This sub-component will focus on the sector tucture and the design and implementation of the auction process. Cost: US S3.0mm 1. Review of spectrum issues Economic analysis of spectrm management Sector diagnostic External consultants 05/95 4/96 2. Formulation of auction strategy Feasibility of auction of spectrum for new Auction strategy including External consultants 08/95 6/96 services frequency planning Establish auction rules Define auction process 3. Prepare privatization Auction software and management Information Memorandum External consultants 08/95 03/97 Prepare bidding documents Issue bidding documents External reviews 4. Investment promotion support Promote opportunities to potential investors Maximize auction results Investment bankers 07/95 06/96 5. Legal and regulatory support Draft reviews and comments External consultants 07/95 06/96 9  PROJECT IMPLENENTATION PLAN: TELECOMMUNICATION Matrix of Objecives, Adies, Tim ad Cast OBJECTIVES J ACTIVITEES OUTPUT FORMS OF ASSISTANCE TIMING D. REGULATORY STRENGTHENING: This sub-component will support the redesign and strengthening of a regulatory entity. CosLd US S1.2mm 1. Strengthen regulatory and institutional Analysis of existing institutions Establishment of new regulatory External Consultants 10/95 03/97 development entity Create regulatory entity Short courses Training . Seminars TOTAL FOR SUB-COMPONENTS A-D: US 7.7m 10  PROJECT IMPLEMENTATION PLAN: TRANSPORT Matix of Objectives, Activities, Timing and Costs I ~~~~~~~~~~~~~TEIUNG OBJECTIVES ACTIVITIES OUTPUT FORMS OF ASSISTANCE str Finish A: PORTS: This sub-component would support the privatization process that has been inhtiated. Cost US S2.5m 1. Preparation of privatization and melated Prepare APIs, terminals and other External consultants 05/95 6/97 rgulatory framvwork faclities for privatization Exteral reviews Design regulatory framework (where appropriate) Seminars Regulatory framework Prepa bidding documents Information Memorandum Bidding documents 2. Invedment promotion support Promote oppotunities to potential Maximize auction results Investment bankers 05/95 06/97 investo 3. Intionl Skengtening Support for pott planning and Extenal consultants 10/95 12/97 supervison/adaptation of concessions (as neceau7y)  PROJECT IMPLEMENTATION PLAN: TRANSPORT Matrix of Objectives, Activities, Timing and Coets TIMING OBJECTIVES ACTIVITIES OUTPUT FORMS OF ASSISTANCE Finis B: RAILWAYS: This sub-component would support the formulation of a privatization strategy and regulatory framework. Cose US $6.5mm 1. Formulation of privatization strategy and Review of market structure proposals for Privatization strategy External local consultants 04/95 12/95 regulatory framework privatization Semiinars Review alternatives for trackage and haulage rights 06/95 12/95 for each concession Study tours Define passenger/freight service for social reasons 08/95 02/96 Design regulatory framework Regulatory framework 05/95 03/96 2. Prepare privatization Prepare privatization plan Information External consultants 07/95 12/95 Memorandum FNM regionalization plan 07/95 09/95 Inventory of assets. 07/95 09/95 hinvestment banikers Resettlement and environmental assessment 07/95 12/95 Design auction/bidding procedures Auction strategy 06/95 03/96 Sales promotion 07/95 02/96 Issue bidding Retraining proposals documents 11/95 03/96 3. Regulatory Strengthening Support regulatory institutions and process External consultants 10/95 12/97 12  PROJECT EMPl4MfENTAT[ON PLAN: TRANSPORT Matrix of Objectives, Actiitlies, Tbning and Costs 4ThllNG OBJECThES ACTIVIrEES OUIPtrl FORMS OF ASSISTANCE Start | flni6h C: AERPORTS: This comiponent would emphasize the review of strategic options, preparation of a straegy, and dte regulatory fumntion. Cost: US 5.35mm 1. Review of sector structure Disaggregation of ASA accounts by airport Sector duignostic External consultants 07/95 06/96 Review sources and uses of airport revenues 10/95 06/96 Financial and economic assessment of airports 11/95 06/96 Strategy for airport needs for Mexico City 11/95 12/96 ICAO review of safety standards at all passenger airpons 8/95 06/96 2. Formulation of privatzation strategy Prepare concessioning plan Privatiation plan External consultants 09/95 09/96 Detailed concessioning plan each airport 3. Prepare privaioatou Inventory of assets Extemal consultants 07/95 06/96 Concesion design Investment bankers 06/96 12/96 Prepare bidding documents Issue Bidding Documents 06/96 06/97 Sales promotion 4. Regultory stngSthening Design regulatory framework Regulatory framework and External consultants 12/96 12/97 institntions Seminar Traning of staff in regulatory function. Short courses SUB TOTAL FOR SUB-COMPONENTS A-C: US $14.35mm 13    I