Download Policy Area II: Streamlining Business Regulations

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.
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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
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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
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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
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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.
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Tentative Financing
Source:
Borrower
International Bank for Reconstruction and Development
Total
US$0 million
US$750 million
US$750 million
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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)
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