Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
PROGRAM INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB5975 Operation Name Region Sector Project ID Borrower(s) Implementing Agency Date PID Prepared Estimated Date of Appraisal Authorization Estimated Date of Board Approval MX Strengthening the Business Environment for Enhanced Economic Growth DPL Latin American and Caribbean General finance sector (25%); General infrastructure sector (25%); General industry and trade sector (50%) P112264 Government of Mexico Ministry of Finance and Public Credit October 15. 2010 November 12, 2010 January 21, 2011 1. Key Development Issues and Rationale for Bank Involvement The Mexican economy is rapidly recovering from a brief but very deep recession. The collapse of external demand, particularly in durable consumer goods, in the last quarter of 2008 and the first quarter of 2009 led to an almost immediate and severe downturn in manufacturing industry and economic activity in Mexico. A subsequent rebound in external demand as of the second half of 2009 is giving rise to a swift recovery, even though private consumption and investment are trailing behind and have not yet contributed significantly to the recovery of economic growth. The outlook for Mexico’s longer-term economic growth, however, is not as encouraging. For a long period, Mexico’s annual average growth rates have lagged those of other countries and regions, such as East Asia and some of the more recently industrialized Western European countries that had similar levels of development almost five decades ago. Mexico and Latin American countries, with the exception of Chile, experienced a decline in their growth rates during the 1981-2008 period compared to the previous two decades, whereas Asian countries were able to sustain high growth rates. Growth decomposition studies show that the moderate level of output growth in Mexico is mainly due to the accumulation of production factors, while the contribution of changes in productivity has been very small. Relative weaknesses in education, infrastructure, financial development, the rule of law as well as a lack of competition arising from overly restrictive product market regulation are key factors cited in various studies as explaining why Mexico has not grown as fast as other countries during the past decade. The proposed DPL builds on a long engagement on competitiveness that will continue through program implementation as well as follow up activities envisioned in the Country Partnership Strategy. Besides knowledge sharing and financing resources, the proposed DPL will provide international recognition for the progress achieved on critical elements of the Government´s economic reform agenda. 1 2. Proposed Objective(s) The Overall Program Development Objective is to support economic policies that will strengthen Mexico´s business environment and the micro-economic foundations for enhanced economic growth and employment generation. This will be achieved by: (i) strengthening the conditions for competition in crucial markets, in particular the telecommunication sector and public procurement; (ii) streamlining business regulations that will lower trade and other transactions costs and facilitate the adoption of new technologies; (iii) improving the regulatory framework to foster financial sector access, stability and market transparency; and (iv) promoting public-private partnerships in infrastructure to help build a solid logistics platform for Mexican exports and expand other core infrastructure services essential to the productivity of Mexican firms. This DPL is consistent with the 2008 Country Partnership Strategy Framework. 3. Operation Description The proposed operation will support the following four policy areas: (i) competition in telecommunications and public procurement; (ii) streamlining of business regulations; (iii) fostering financial sector access with stability; and (iv) promoting public-private partnerships in infrastructure. Policy interventions supported by the operation are further discussed below. Policy Area I: Competition in Telecommunications and Public Procurement It has been widely recognized that competition promotes higher productivity rates and economic growth. By contrast the exertion of market power by a firm or group of firms in key goods and services results in an inefficient allocation of resources, rent seeking behavior, and limited firm innovation with a detrimental impact to growth and welfare. Recent studies have also shown that the existence of market power in basic consumption goods (e.g., corn tortillas, chicken, and eggs) in Mexico has negative distributional consequences. Mexico’s economy is notoriously concentrated. Its competition policy framework is relatively nascent and presents gaps. The Government is supporting various reforms to stimulate a more robust competition policy framework. Among others, it is implementing reforms to enhance competition in public procurement and telecommunications. The former includes regulatory and institutional changes to allow for framework agreements and reverse auctions and the expansion of Compranet’s role. The latter includes the leasing of part of the fiber-optic network owned and operated by the Federal Electricity Commission and the licensing of additional radio spectrum, which should result in better and cheaper access by firms and consumers to telecommunication services. The proposed operation would support the Government’s policies to increase competition in public procurement and telecommunications. Policy Area II: Streamlining Business Regulations Redundant, poorly designed and implemented business regulations increase the cost of firms, hinder new export opportunities, and create opportunities for corruption. Cognizant of the economic costs imposed by unnecessary regulations, the GOM has launched a new ambitious and comprehensive 2 reform that seeks to move toward a Zero Base Regulation Approach. The reform will eliminate and simplify procedures and norms, keeping only those strictly necessary and justified, with the aim of reducing costs imposed on businesses, facilitating the entry and exit of firms, and removing barriers that hinder innovation. The reform of business regulations, coordinated by the Ministry of Economy, is being implemented in parallel to a similar ambitious initiative to streamline internal regulations, coordinated by the Ministry of Public Administration. The Ministry of Economy has prioritized the 49 regulatory processes whose reform can achieve the biggest economic impact. According to preliminary estimates by the Ministry, the simplification of these regulations could lead to annual savings of 0.4% of GDP. The economic impact was estimated on the basis of incidence (the number of times that an individual or firm must comply with it) and the economic value associated to the regulatory compliance. The simplification of these norms is being implemented in stages and is expected to be completed by late 2011. The first three important packages of administrative reforms entail: (i) the simplification of tax payments; (ii) the harmonization of technical norms; and (iii) the establishment of a single trade window. The proposed operation would support the implementation of these first three packages of administrative reform. Policy Area III: Fostering Financial Access with Stability Overall, the Mexican financial system was fairly resilient to the global financial crisis due to improvements in prudential regulations and oversight as well as bank risk management. The sector, however, remains small relative to the size of the economy. Private sector credit as a percentage of GDP amounted to 21% in 2008, well below that of other high-middle income countries, such as Brazil, Chile, Malaysia, Thailand and Turkey. Although Mexico experienced double-digit credit growth prior to the global crisis, credit to firms in Mexico has traditionally lagged behind other high middle income countries. Small firms, in particular, face greater access constraints. In addition, an important share of the Mexican population (40% of adults) does not have access to basic formal financial services. In the wake of the global financial crisis, financial sector policy has continued to feature prominently in Mexico´s development agenda. On the one hand, the Government is addressing the vulnerabilities that emerged during the global crisis; on the other, it has put in place a comprehensive strategy to expand access to underserved segments of the population. On the stability front, the crisis has highlighted the need for a more systemic approach in prudential regulation and oversight. With the objective of moving towards a more macroprudential approach, the Government established in July 2010 an inter-agency Financial Stability Committee. Regulations on credit provisioning and credit to related parties are being upgraded in response to vulnerabilities observed prior to and during the crisis. Over the next couple of years, additional changes to prudential regulations are envisioned in line with international agreements on financial sector regulation. On the access to finance front, the Government is (i) facilitating the use of innovative delivery channels (e.g., the use of mobile phones for low-value transactions), (ii) enhancing critical financial infrastructure such as credit bureaus and the retail payment systems, and (iii) strengthening the framework for consumer protection as well as consumer education. The proposed operation would support the implementation of changes to the prudential framework (including the establishment of the Financial Stability Committee and the issuance of new 3 regulations on provisions for mortgages and non-revolving consumer credit) and parallel efforts to foster access to finance through mobile banking and a strengthened credit information system. Policy Area IV: Promoting Public-Private Partnerships in Infrastructrure Despite significant advances over the last two decades, Mexico´s infrastructure needs to support high growth and poverty reduction remain substantial. Infrastructure services are critical inputs to the production of both goods and services, and its inadequate supply constitutes one of the most important bottlenecks to doing business in Mexico. During the last three decades, Mexico´s investments in infrastructure were less than half those in fast growing economies. To address its growth and poverty challenges, Mexico needs to invest, at least, 4% to 6% of GDP. Given budgetary constraints and opportunities for efficiency gains, a large share of that financing will have to come from the private sector, which explains the need to foster a proper environment for publicprivate partnerships (PPPs) in infrastructure. Four key challenges have limited private participation in the sector: (i) shortcomings in the legal framework, (ii) capacity and resource limitations, (iii) difficulties in financing projects, and (iii) acute constraints at the sub-national level for PPP development. The Government, aware of the substantial infrastructure needs, has identified infrastructure as a national policy priority, including the leveraging of resources through private participation. Since 2007, it has systemically addressed the weaknesses described above and has formulated a coherent and comprehensive program to support PPP development. The main components of the program are: (i) definition of measurable targets; (ii) launching of a five year infrastructure plan; (iii) a strengthening of the legal and policy framework; (iv) implementation of a comprehensive financial support program; and (v) modifications to the strategy and structure of PPP projects. The proposed operation would support the Government’s efforts to put in place a strong framework for PPPs through the development of new financing instruments and the implementation of legal changes to facilitate the extension of concessions. 4. Environmental aspects The proposed operation is expected to have a negligible environment impact. The recently enacted reform to foster private participation in public infrastructure is consistent with Mexico’s environmental framework. In addition, institutions will be required to conduct environmental assessment before launching the PPP process. The development of the single trade window will simplify and expedite import and export processes, reducing costs to firms, but the existing environmental regulations will continue to apply to all traded goods. Similarly, the harmonization of technical norms with those of key trading partners is undergoing a thorough case-by-case review to ensure that international product standards accepted in Mexico are compliant with Mexican environmental guidelines and health and safety protection standards. Moreover, environmental sustainability is a policy priority within Mexico’s 2007-2012 National Development Program and an adequate legal and institutional framework is in place. The Federal Government has a legal and regulatory framework in place to apply environmental safeguards in the execution of infrastructure works. The General Law on Ecological Equilibrium and Environmental Protection (Ley General de Equilibio Ecológico y Protección Ambiental--LGEEPA) states that the Federal Government has the authority and responsibility to apply the environmental policy instruments specified in the law and to take regulatory actions for the preservation and restoration of the 4 environment in areas under federal jurisdiction. Thus, the Federal Government has the authority to require Environmental Impact Assessments (EIA) for all activities specified by the law, including infrastructure, and provide its clearance accordingly. The LGEEPA also establishes the procedures to be followed for infrastructure works that are not subject to EIA. The key agencies implementing the National Infrastructure Program have also made great strides in developing mechanisms to support environmental compliance and enforcement. 5. Social Impact Analysis The proposed operation is expected to have a positive social impact. Until recently little was known on the direct welfare losses of weak competition in Mexico, but recent empirical analysis has found that the poor are disproportionately hit. These studies found that the combined welfare losses (as a share of income) accrue disproportionately to poor households, rural households, and households in Southern states (Chiapas, Oaxaca, Campeche, Tabasco, Quintana Roo, and Guerrero). In rural areas, welfare losses to the poorest households from the exertion of market power in basic consumption goods was on average 23% higher than welfare losses imposed on the highest income households. A stronger competition policy framework can reduce poverty in Mexico by increasing purchasing power among the poorest households, as well as indirectly, by promoting higher productivity and job creation. A more competitive telecommunications market, in particular, is likely to lead to an expansion of services and lower prices to firms and households and support Mexico’s transformation to a knowledge economy. Improved competition in public procurement will result in fiscal savings over the medium term that could possibly be reallocated to social programs. Improving the quality and expanding the quantity of infrastructure services through greater private participation is likely to have a positive impact on growth and poverty reduction as extensive empirical evidence supports. Infrastructure can affect growth through many channels, including productivity effects, durability of private capital, and the demand and supply of both health and education services. The implications for the poor of limited access or low quality infrastructure are significant. Unsafe water and sanitation affect health outcomes, increasing mortality rates for children under 5, while lack of reliable electricity and access to internet is associated to weaker educational outcomes. Access to reliable and low cost electricity, as well as reliable transportation, increases the productivity of the poor, allowing them to access jobs, engage in new economic activities, and sell goods in markets. The 2009 financial access survey confirmed that 40% of Mexico’s population does not have access to basic financial services in Mexico, and that the problem is most acute among lower income households and in rural areas. The empirical literature has shown that improved financial access by lower income households can help them manage household risks better, smooth consumption, and develop new economic ventures, especially if accompanied by consumer education. 6. Tentative Financing Source: Borrower International Bank for Reconstruction and Development Total US$0 million US$750 million US$750 million 5 7. Contact Points Contact: Esperanza Lasagabaster Title: Sr Financial Sr. Economist Tel: 202-473-2880 Email: [email protected] Contact: Jozef Draaisma Title: Sr Country Economist Tel: +52-55-5480-4208 Email: [email protected] Location: Mexico City, Mexico (IBRD) 6