Report No. PID8059 Project Name Mexico-Financial Sector Infrastructure... Loan (FSI) Region Latin America and the Caribbean Sector Finance Project ID MXPE47126 Borrower United Mexican States Implementing Agency Ministry of Finance Date this PID prepared August 18, 1999 Project Appraisal Date December, 1999 Project Board Date February 15, 2000 1. Country and Sector Background. The Mexican authorities have given a well deserved priority to strengthening the role and the institutions charged with dispensing an adequate supervision and regulation of financial intermediaries. However, there has been great neglect and long delays in tackling the problems related to the modernization of the legal framework, judicial practices and enforcement mechanisms. It is essential to have a more balanced approach, looking at the whole "production chain" for delivering fair and prompt justice if financial security is to be enhanced. Without addressing some of the fundamental structural problems in Mexico's financial infrastructure, which pre-date the latest banking crisis, financial intermediation will not deliver the expected results in supporting sustainable economic development. 2. After the debacle of the banking crisis following the December 1994 peso devaluation and the closing of a chapter in the resolution of the Mexican banking crisis with the passage of the new Deposit Insurance Law in December 1998, the authorities are determined to reach a political agreement aiming at modernizing key features of the legal infrastructure for the financial sector. A sequence of operations supporting this efforts are envisaged, and in particular the reform of Mexico's secured lending legislation and the Bankruptcy Law, accompanied by complementary investment operations aiming at modernizing public registries at the Federal and State levels and the judicial system. 3. Project Objectives. The proposed Financial Infrastructure Loan will support legal reforms in Mexico's secured lending legislation and the modernization of public registries. 4. Project Description. This is a first of a series of operations aiming at modernizing Mexico's basic legal infrastructure. Other non-lending services include the modernization of the Bankruptcy Law and legislation to facilitate securitization. In parallel, with the passage of the new draft Federal Guarantee Law by Congress, the bank will prepare an investment operation to modernize the Federal registry and assist the Mexican judicial system in improving efficiency. 5. Project Financing. A single currency loan of US$100 million with a US$ 25 million investment component will be disbursed. 6. Project Implementation. FY 2000 7. Project Sustainability. Conditional on Congressional approval of Secured Lending Legislation (Ley Federal de Garantias). 8. Lessons Learned. NA 9. Benefits of the Project. Improvement of legal infrastructure to support a liberalized and less risky financial market environment. 10. Project Risk. The main risks of the proposed project are: (i) possible delays to approve the new proposed draft law in a pre-election year and (ii) wrongly seeing this proposal as legislation favoring lenders at the expense of borrowers. The second risk is that additional, necessary, steps to modernize the Federal registry system are not undertaken in a timely fashion. In the latter event, even if the new law is passed, it will take longer for the reforms to achieve a measurable improvement in giving legal certainty, fair and expeditious justice. 11. Poverty Category. Not applicable. 12. Environmental Aspects. The project is not expected to have any environmental impact. 13. Project Objectives Categories. Contact Points: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202) 458 5454 Fax No. (202) 522 1500 Fernando Montes-Negret Task Manager (202) 458-9524 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending August 20, 1999. - 2 -