Report No. 35740-ME Mexico Improving Fiscal Transparency and Administrative Performance at the State Level September 12, 2006 Colombia and Mexico Country Management Unit Procurement, Operations Services Financial Management, Operations Services Latin America and the Caribbean Region Document of the World Bank MEXICO: ImprovingFiscalTransparencyandAdministrative Performanceat the State Level TABLE OF CONTENTS Acknowledgements ................................................................................................. i ExecutiveSummary .............................................................................................. .. 11 1 Introduction . .................................................................................................... 1 2. Key Issues ........................................................................................................ 5 3. Recommendations .......................................................................................... 6 4. TechnicalMattersto be Resolvedto Implement Recommendations ......10 5. An Agenda for Action .................................................................................. 13 Annexes ................................................................................................................. 15 Annex 1. RecommendedState IndicatorsandDefinitionof KeyTerms ....................... 15 Annex 2 . Establisha QualityInformationSystemandto SimplifyData Optionsto InputofProcurement PerformanceIndicators ................................................................. 21 Annex 3 . Timeline ............................................................................................................... 23 MEXICO: ImprovingFiscal Transparency and Administrative Performance at the StateLevel i ACKNOWLEDGEMENTS This report was prepared by Daniel Boyce, Senior Country Operations Officer inMexico and Efraim Jimenez, Lead Procurement Specialist with guidance from David Rosenblatt, L C lCC Lead Economist. Other staff and consultants that collaborated in the preparation o f the report are: Ram6n Aguirre, Albert0 Leyton, Maria Guadalupe Toscano, Mario Salguero, Alejandra Gonzalez and Silvia Porche. Managers Roberto Tarallo and Bernard Becq guided the team at key decision points. Peer reviewers were Josef Draaisma, Nancy Bikondo, and T.K. Balakrishann. The Bank team members thank the federal and state government officials who have enthusiastically embraced the concepts espoused in this document. The collaboration o f the Secretaria de la Funcidn Publica and Secretaria de Hacienda y Crbdito Publico, as well as the Comisidn Permanente de Funcionarios Fiscales and the Comisidn Permanente de Contralores Estados-Federacidn, i s especially noted. Other organizations, especially the US AID-funded Innovacidn Mbxico program have also assisted greatly inthis effort. MEXICO: ImprovingFiscalTransparency andAdministrative Performanceat the State Level ii EXECUTIVE SUMMARY This report i s intended to bring into the policy dialogue with the Government o f Mexico (GOM) the issue o f better performance and accountability in public financial management at the sub-national level in Mexico. It i s also designed to explain a multi- disciplinary technical assistance exercise that the Bank has been carrying out since September 2004. Sub-national governments in Mexico have made substantial progress in recent years in developing systems to support good governance, in particular, managing public expenditures, budget control and procurement. However, by and large these governments still lack systems and comparators based on internationally accepted parameters to assess performance and provide stakeholders with reliable, clear and objective assessments to correct course, define priorities or compare themselves with peers. Going forward, the Bank will support the continuing efforts o f the two state commissions that bring together the state fiscal professionals and state comptrollers to establish viable and verifiable indicators, with the goal to arrive at a continuous process o f government performance improvement. To do so, key challenges at the state level include the need to harmonize state accounting rules, to build administrative capacity at the subnational level, and to establish appropriate state legal frameworks, especially in the procurement area. The federal government can do its part to arrive at collaborative solutions by being flexible, providing resources, and coordinating the efforts o f the relevant commissions, as well as applying the same methodologies within its own performance monitoring processes, to the extent feasible. The states are the key actors in this process, since they receive funds from the federal government while also having an interest in monitoring their own performance and that o fmunicipalities. MEXICO: Improving Fiscal Transparency and Administrative Performance at the State Level 1 1. INTRODUCTION 1.1. Mexico's recent emergence as a more participatory and politically competitive country has facilitated efforts to improve the management o f public funds at the sub- national level. The Country's National Finance Convention (Convencibn Nacional Hacendaria CNH), completed in August 2004, emphasized the need to reach consensus - among and within the three main levels o f government (federal, state, and municipal) on fiscal management issues. While some have expressed concern about the slow pace o f implementing the CNH's recommendations, a number o f actors continue to work towards its stated goals. Many o f these goals relate to the need for improved management and fiscal transparency at the state and municipal levels. 1.2. While their administrative systems are advanced in many ways, many states do not have sufficient management-level information to monitor their fiscal, procurement and administrative performance, the result being that any efforts towards performance improvement may not be appropriately focused. This i s both a management problem for the states and an important issue for other stakeholders. The federal government would like to have more, better, and more consistently formatted information about how states are managing their financial, programmatic, budgetary and administrative affairs; the World Bank and other lenderddonors would like to have a clearer understanding o f the quality and performance o f state institutions, especially with regard to the use o f federal budgetary transfers; and other interested parties such as credit rating agencies and citizen groups would like the states to prepare information in a regular and consistent way. 1.3. The Mexican states operate within the National Fiscal Coordination System (Sistema Nacional de Coordinacidn Fiscal or SNCF). In this context, and as a consequence o f the banking capitalization requirements established by the Ministry o f Finance (Secretaria de Hacienda y CrCdito Publico or SHCP) in April 2000, when any subnational government or decentralized entity within a state or municipality wishes to take on debt, it must comply with the requirement to have an annual rating by two o f the three international credit rating agencies: Fitch Ratings, Moody's and Standard & Poor's.' This coverage o f Mexico's subnational governments by the rating agencies (and all states now are in fact rated by at least two o f them) i s a distinguishing feature when compared to other countries o f similar size and economic level. ' See"The Debt Market, a Financing option for State and Local Governments", Fitch Ratings, February 2004 MEXICO: ImprovingFiscalTransparency and Administrative Performance at the State Level 2 1.4. The requirement for credit ratings gives states in Mexico a particular incentive to be transparent- with regard to their performance. A standard -system o f fiduciary governance indicators will potentially result in an improved credit rating, and will heighten the competition between states for better ratings. Better ratings will implybetter governance and lower transaction costs when doing business with state government. In addition, some decisions to be made in the future by the federal government with regard to fiscal and administrative decentralization could be subject to the performance demonstrated by the states based on a group o f indicators similar to those suggested here. MEXICO: ImprovingFiscal Transparency and Administrative Performance at the State Level 3 1.5. Procurement in the states i s carried out by a variety o f entities, but procurement oversight tends to be the responsibility of the Comptroller's office. These offices are State Secretariats but they maintain technical lies with the federal Secretaria de la Funci6n Pcblica. Together the state and federal comptrollers form the Permanent Commission o f State and Federal Government Comptrollers. 1.6. There have been some steps towards improving state procurement laws, in order to avoid confusion in the control and application o f procurement procedures, there i s a trend by the states to modify their state regulations to match the basic aspects of the procedures o f the federal regulations. At the same time, some state laws are designed to favor state-based industries by imposing conditions that firms established outside the state can not meet.' 'During a visit to Mexico's Contractor's Association, one member explained that his firm, based in Mexico City, has applied for registration in one o f the participant states for the last 8 years, without success. MEXICO: Imuroving. Fiscal TransDarencv andAdministrative Performance at the State Level 4 1.7. In the implementation of technical assistance to states aimed at establishing a monitoring system to assess performance of key indicators o f PFM at the state levelY3the Bank experienced a unique opportunity to learn about initiatives and obstacles confronted by a sample of state governments in developing such systems. This note reflects the experience of that technical assistance exercise, as o f March 31, 2006. A timeline o f activities o f the Bank Team and its counterparts is included here inAnnex 3. From September 1, 2004 to June 30, 2005, the Bank team worked with eight pilot states (Aguascalientes, Campeche, Chiapas, Durango, Guanajuato, Jalisco, Nuevo Le6n y Querktaro) and prepared the report "Mexico: State-Level Technical Assistance to Establish Performance Indicators for Procurement, Public Expenditure and Financial Management," World Bank Report No. 33404-MX December 30, 2005. Follow-up work from July 2005 to June 2006 resulted in this policy note and a more detailed report that is currently being finalized. MEXICO:ImprovingFiscalTransparency andAdministrative Performance at the StateLevel 5 2. KEYISSUES 2.1. After beginning with an initial set o f internationally accepted Public Financial Management (PFM) performance indicators, and then customizing them for the context o f the Mexican states, the Bank's technical assistance exercise recommended 42 initial indicators. These are fully detailed in Annex 1. However, it is recognized that states and state-level entities must choose their own performance indicators based on the information needs o f the states and other interested parties. The indicators to actually be used will be different from those identified by the Bank, but it is hoped that the Bank's recommendations have provided a useful starting point. The monitoring system agreed for the states should include a group o f common indicators to allow for comparison and transfer o f good practices 2.2. Inthe course o f the above-mentioned work, the importance o f resolving certain institutional issues became clear. Some o f the fundamental issues are the following: InProcurement, the states need to modernize their procurement laws, to establish the one-envelope system and the short-listing o f consultants, to remove local registers and to minimize the use o f non-competitive procedures. The states should make better use o f the forthcoming Compranet Plus of the federal government or establish their own e-procurement systems; and the state governments can develop performance indicator systems able to produce . performance indicators automatically or after minimal processing. Harmonization (homologaci6n) o f accounting practices across all three levels o f government is critical for being able to create and maintain comparable fiscal performance data. During 2006 a number o f efforts at accounting harmonization were inprocess. It i s important that these efforts go beyond the development o f a common framework for expenditure classification, to include other key accounting concepts. To do so, appropriate experts and professional bodies should be invited to the process, such as the Consejo Mexicano para la Investigacibn y Desarrollo de Normas de Informacidn Financiera (CINIF),4 which operates within the framework o f the Mexican Institute o f Public . Accountants. Cultural factors should also be recognized. In the first of two workshops organizedby the Bank, participants selected cultural change as the most important obstacle to the establishment o f a system to measure performance at state level. The need for cultural change was considered more important than other challenges such as lack o f resources or lack o f interest from state officials. For transparency to fully take hold o f Mexican state governments will have to continue to shift from a culture o f "control" to one o f "gestidn pziblica "-better public management. See www.cinif.org.mx MEXICO: ImprovingFiscalTransparency and Administrative Performance at the StateLevel 6 3. RECOMMENDATIONS 3.1. The current period o f economic stability and increasing state spending responsibilities provides a propitious environment for a coordinated capacity building effort to bring states in line with an understood framework for transparent fiscal reporting. This will require federal support and leadership and several policy changes as presented below. 3.2. Agree on Performance Indicators. The Bank has presented a proposed set o f Public Financial Management (PFM) indicators in line with internationally accepted benchmarks. Based on the Bank's recommendation and taking into account the various proposals that have been advanced, it is recommended that the states define the set o f indicators that they wish to integrate into a long term project to monitor government performance. 3.3. Establish a Common Base. The performance indicators system o f each state government may be independent in the sense that the data collection, software and sources may vary form state to state; however agreement on a substantial set o f common indicators would allow for comparison and peer competition. Those common indicators must be useful for state leaders, and for the federal government. They can be arrived at through appropriate consensual processes within established state/federal commissions. Chart 1 presents an example o f performance in government procurement that should be always offered in any monitoring system. 3.4. Participation of the Federal Government. Although the work ahead i s mostly at the state level, it i s recommended that the federal government includes it among the priorities o f its work agenda, by giving support to the general coordination and implementation, via the responsible ministries: SHCP and SFP. The federal government can also lead by example, by applying the same performance monitoring approach to its own operation. MEXICO: ImDroving Fiscal TransDarencv and Administrative Performance at the State Level 7 InProcurement, a clear linkage was madebetweenthe two studies inthat at the federal level for th g these indicators in the 3.5. Modernization of procurement laws. The federal government has advanced a - - modernization agenda simplifylng government procurement, and establishing mechanisms to resolve conflict and disputes, using electronic procurement. Many states need to get closer to the federal government procurement regulations by enacting new laws and regulations in priority areas as defined in the characterization o f the pillars or policy and institutional indicators assessment for each state as explained below. 3.6. Strengthening the regulatory bodies. One o f the features that is worth noting in the federal procurement system i s the existence o f a strong regulatory body. Many states could benefit from the creation or strengthening o f such a regulatory body to yield the benefits o f fast adjustment to ever changing markets. The adoption o f a performance indicator system will provide the regulatory body with the technical basis to change regulations, instructions, general practices, and ultimately, to seek legal changes. 3.7. Coordination and Implementation. To ensure a coherent, multi-sector and meaningful performance indicator system serving a reasonable number o f participant states, it i s recommended that coordinating responsibilities be assigned to an appropriate person or entity. 'Mexico: Review of Federal Government Procurement, Financial Management and Disbursements Systems, June 2005, World Bank Report No. 33403-MX MEXICO:Improving Fiscal Transparency and Administrative Performance at the State Level 8 3.8. With regard to procurement performance indicators, the Comisidn Permanente de Contralores Estados-Federacidn (CPCEF) could be vested with the authority and resources to disseminate the system and software on procurement data at the state level. This is consistent with the responsibilities o f state comptroller's office that includes issuing regulations to improve the accountability and efficiency o f the government bodies. The CPCEF could then develop capabilities to carry out the Policy and Institutional Indicators assessment and to develop action plans with the state authorities aimed at improving the legal and institutional aspects o f their state procurement systems. The Bank i s willing to invite CPCEF to participate in one or more assessments prepared bythe Bank. Chart 1: Performance indicator: time given to bidders to prepare their proposals. International standard is 21 days. Time for preparation of bids in days I I I I I Series1 26.3 9.4 15 7 I.S. - International Standard 3.9. At the state level, the Secretaria de Finanzas y Administracidn is the logical entity responsible for collecting and processing the financial management and public expenditures data for decision making. If the SFAs can prepare the information in an agreed format, it could then be shared with the Comisidn Permanente de Funcionarios Fiscales Estados-Federacidn (CPFF), which would have authorities similar to those o f the CPCEF with regard to the procurement and control-oriented indicators. The CPFF is already well established within Mexico's legal framework, as part o f the National System o f Fiscal Coordination. Besides the indicators to measure operational performance, the systemproposed by the Bank includes the evaluation of basic institutional aspects: legal and regulatory framework; structure and institutional capacity; procurement operations and market practices, as well as integrity of the public procurement system. MEXICO: Immovinp;FiscalTransparencvandAdministrativePerformanceat the StateLevel 9 3.10. Publication of indicators. It is recommended that efforts to publishprocurement and FM indicators be coordinated. The Bank identified three government units with broad contacts at the state level that may be involved in coordination: Direccidn General de Operacidn Regional y ContraloriaSocial at SFP; the UCEF o f SHCP; or INDETEC. 3.11. Financial Reporting and Auditing. A comprehensive set of public financial managed (PFM) indicators should include data with regard to the frequency, content, and timeliness o f fiscal reporting. The Bank's review o f unaudited Public Accounts reporting in eight states showed significant variation in reporting practices, as shown in Chart 2 below. A financial audit o f fiscal reports serves to enhance the credibility o f such reporting, and indicators can be established to measure audit quality and timeliness. It i s notable that some states have contracted private audit firms in order to improve performance in this area, and it would be interesting to have information about audit performanceunder such arrangements. Chart 2: Submissionof Public Accounts to the State Congress (Number of Days after the end of the period) P 0 20 40 60 80 100 120 140 160 180 Days of Legal Obllgatlon Limit Source: ConstitucidnPolitica de las Entidades Federativasy ordenamientos tales como Leyes de Presupuesto, Contabilidad y Gasto Ptiblico, y de Fiscalizacidn. MEXICO: Improving Fiscal Transparency and Administrative Performance at the State Level 10 4. TECHNICAL MATTERS TO BE RESOLVEDTO IMPLEMENT RECOMMENDATIONS 4.1. The role of the federal government. The federal government has an important convening role inthis process. It can also provide resources, either from federal revenues or loans, to support state efforts. On a technical level, while in some cases it may be best for states to follow federal government practices, in many areas the federal government should consider following the lead o f particular states. This approach i s applicable to the critical area o f accounting harmonization. Federal government to accounting fails to follow international good practices in many ways, and thus it is likely to be more valuable for the federal government to allow the states to agree on common accounting practices, which can then be adopted at the federal level. Such a "bottom up" approach i s likely to yield better results than the approach applied in recent years, in which "harmonization" has often meant that states adopt the same principles and rules used by the federal Finance Secretariat (SHCP). 4.2. Procurement Indicators and Data. At the onset o f the deployment o f the procurement performance indicators information system, many o f the participant states would require a database or system to host the government procurement data. The current COMPRANET may still have the capacity to host additional data coming from new states. Currently 80% o f the used capacity pertains to volume o f data generated by federal government funded procurement, with 20% o f data belonging to participant state-funded procurement. An increase o f 30% in additional data will not clog the system but it would slow down queries and other functions o f the system that are already somewhat slow with the current COMPRANET. The new COMPRANET Plus recently contracted out by SFP will have additional capacity to handle in a web environment the data from participant states in a faster and more accurate manner. Moreover, COMPRANET Plus will have a module providing data for policy making and strategic decisions; this module may host the software and inquire routines that will produce the performance indicators. 4.3. Support among existing systems. A closer cooperation between the states and COMPRANET i s possible and would ease the data collection and processing o f the performance indicators7 and will reduce the cost o f the implementation o f the system substantially. Alternatively, the state governments could invest in developing software and systems able to collect and process the procurement performance indicators thus creating their own databases o f government procurement. Such local databases, although representing a possible duplication of data available in COMPRANET, would be easier to access, and may be useful for other economic and development policy decisions. Moreover, the comparison o f data in the two systems may help as a quality control buildingblock. Sonora has an agreement with COMPRANET for publishing all competitive procurement inthe state. The data collection for the state o f Sonora for the study that complements the Policy Note was partially made by COMPRANET staff with a simple request. MEXICO: Improving FiscalTransparency andAdministrativePerformanceat the State Level 11 4.4. Coordination at local level. At the state level, the Comptroller's office can serve as the local coordinator for the procurement matters. As in the case o f the federal government that is about to implement a similar performance monitoring system, the state Contraloria would collect, process and analyze the procurement data, sharing it periodically with the CPCEF and the Joint Coordinator. 4.5. Expanding the information systems, data integration and management information. States will need to have a database with current procurement data or alternatively could sign an agreement with COMPRANET covering national competitive bidding, invitation to at least three suppliers and direct contracting. The states manage their procurement in two segments clearly separated: procurement o f goods and procurement o f civil works. Goods and capital expenditures are generally supervised by Finance and Administration departments who seek economies o f scale or application o f restrictions on purchase o f assets. Civil works are managed by the Public Works Secretariat and a variety o f de-centralized institutions (water and sanitation, roads, urban works). It is only generally at the Comptroller's office where the two segments o f the state procurement merge for control purposes. For this reason, with a few exceptions, we are suggesting that the state Comptroller's office be the channel for consolidating, verifying, and sharing the localperformanceinformation. 4.6. Normative bodies at the state level. Mexico's federal government procurement has been assessed by the WB as robust and close to international standards due to the organization of the federal government on procurement: decentralized operation, a solid normative and regulatory body and an incipient independent resolution o f dispute mechanism. Many states could benefit from following the organization and institutional arrangements o f the federal government creating or strengthening such a regulatory body to yield the benefits o f fast adjustment to ever changing markets. The adoption of a performance indicator system will provide the regulatory body with the technical base to change regulations, instructions, general practices, and ultimately, to seek the change o f law. 4.7. Quality of the system: Policy and Institutional Indicators. It i s not recommended to place the performance indicators system in states with arcane procurement legislation or excessive restrictions to out-of-state competition. The investment in setting up i s justified when the reform and modernization on procurement law has begun at the state level. The performance system endorsed by the Bank provides an analytical tool to determine the quality o f the state law and its institutions: the Policy and Institutional Indicators. 4.8. Capacity building. The application o f policy and institutional indicators will allow for the comparison o f state laws vis-&-visthe federal procurement laws that are considered by the Bank to be generally adequate in a global environment. To play a larger role influencing good practices and fostering better governance at the state level, CPCEF shall develop a team o f staff from state comptrollers offices specialized in monitoring performance and knowledge sharing on procurement indicators. Such a team o f at least three technical specialists should be able to assess the Policy and Institutional Indicators at the state level and to draft action plans to improve the critical areas o f the MEXICO: Improving Fiscal Transparency and Administrative Performanceat the State Level 12 procurement system at the sub-national level thus catalyzing a dialogue on procurement reform and modernization.* 4.9. Financial Management and Public Expenditure Indicators. Accounting harmonization will make performance indicators more comparable and more easily understood. The Bank encourages the efforts o f SHCP and the states to achieve this goal. Inaddition, efforts to establish common performanceindictors would benefit from (i) an agreed definition o f key terms; (ii)consultation mechanism for states seeking advice in a applying the indicator framework; and (iii) common approach to indicator verification, a which is currently lacking. 4.10. Recent progress. Important progress has been made in this area. In February 2006, a working group o f the CPFF advanced an important proposal for states to prepare 43 indicators in four areas: (i) revenues; (ii) expenditures; (iii) debt; and (iv) net public income/expenditure ratios. Most o f these indicators are derived from the annual Public Accounts and thus reflect budgetary results. Although they do not cover every aspect o f the public financial management (PFM) cycle, the CPFF's indicators represent an important step toward improved fiscal transparency in the Mexican states. The data in these indicators should be subject to a reasonable verification process (e.g. by auditors or rating agencies) and the data should be made publicly available. 4.11. Consistency with CNH recommendations. The preparation o f the CPFF's 43 indicators would be the responsibility o f each Secretariat o f Finance. The state-level efforts are supported by the Transparency Agreements that have been reached between the SHCP's States Coordination Unit (UCEF) and some states, as follow-up to the CNH. As o f March 2006, the states o f Aguascalientes, Sinaloa, Veracruz, Michoacin and Nayarit had signed such an agreement with SHCP, and other states were expected to do so in the near future. The agreements clarify the types o f information that the federal government would like to receive from the states regarding their fiscal activities, and commit the states to provide the information to SHCP within an agreed timeframe. * The results of the policy and institutional indicators applied to a few state procurement laws are available inAnnex 3 of the WB Report 33043 State-Level Technical Assistance to EstablishPerformance Indicators for Procurement, Public Expenditure and Financial Management. MEXICO: Improving Fiscal Transparency and Administrative Performanceat the State Level 13 5. ANAGENDA FORACTION 5.1. Movingforward. Mexico i s in a good position to establish a national mechanism for performance monitoring o f public expenditure, procurement, and financial management for its 31 states and the federal district. State institutions work within reasonably sound legal frameworks, implementation capacity i s good, and there are many examples o f world-class performance and implementation o f systems that monitor it. States have been receptive to the internationally accepted methodology presented by the Bank for measuringperformance, recognizingthat they operate within an environment o f global competition and comparison, with an ever-increasing openness and transparency of its processes and results. 5.2. . Two paths, one common goal. It appears that the best approach to establishing common performance indicators in procurement, financial management and public expenditure will be along two parallel tracks. Procurement and control-oriented indicators can be managed at the state level by state Comptrollers offices and consolidated through the CPCEF. Meanwhile, financial management indicators including those reflecting budgetary results should be managed by State Secretariats o f Finance and consolidated through a mechanism agreed within the CPFF. This note additionally encourages that a mechanism be established for both sets o f data which should be periodically combined and published jointly by the two Commissions, and by each State. 5.3. Resources needed. The definition, prioritization, and agreement on the technical and operational aspects o f implementing a system of performance indicators should include the determination o f technical support, software and other systems and resource requirements, both from the perspective o f central coordination within one state and for the overall coordination o f all states. As an example o f the decisions that will have to be undertaken, Annex 2 presents options for obtaining information with respect to procurement processes. Once a definitive proposal i s prepared and agreed, this effort could compete for an Institutional Development Fund (IDF) grant o f the World Bank, or other types o f financing from national and international organizations. In addition, other existing resources should be sought and channeled into this work. 5.4. Policy decision based on performance data. As the states progressively adopt the monitoring system, the states can develop capacity to understand, interpret trends and define improvement action^.^ If the data and results o f the performance are periodically published, the planningor finance authorities within state governments will be better able to define goals, areas o f opportunity for improvement, and priorities based on the scores o f the indicators. As an example, goals in government procurement may include: Systems in the audit and control unit at SFP have allowed the unit to establish goals and targets for improving the procurement performance o f the federal entities. Such system is described in the Report 33403-MX: Review o f the Federal Procurement, Financial Management and Disbursement Systems, December 2005; it is so interesting that the General Comptroller's Office o f Colombia is visiting SFP to learnabout the system for a possible use inthat country. MEXICO: Improving Fiscal Transparency and Administrative Performanceat the State Level 14 reducing direct contracting 10% every year, or broadening the base o f government suppliers by 10%every year. 5.5. Cost of implementation is marginal. The comparison o f performance indicators for the participant states among themselves and with those for the federal government would be o f interest to the individual states and useful in helping them to formulate their policy initiatives (legal reform, control systems, service standards). Priorities for change and modernization initiatives could be based on areas where a state's performance appears to be weaker than that o f its peers and/or the federal government. The expected costs o f implementation o f the performance indicators system are marginal when compared with the benefits from a more economic and competitive state administration. Consultation with several states confirms that most o f the data, particularly related to FM indicators would not require additional personnel or resources for collection and processing o f data; inprocurement only a few states have adequate data and systems. 5.6. Technical assistance. Once there are success stories in the deployment o f the performance indicator systems, these stories shall be promptly disseminated, both in terms o f the reporting o f state performance and the capacity building actions that were carried out. Capacity building activities could include giving newly interested states access to the software and macros o f the databases for processing the performance indicators, quality control protocols, training publications and live presentations. 5.7. Quality of the data. The importance o f data quality cannot be overemphasized. When using indicators for policy making and establishing priorities, the data must be reliable and relevant. The quality and timeliness o f the data depends on the manner in which data is collected and the purpose o f that data collection, and the verification mechanisms in place. The report accompanying this Note (see Table 2) presents an assessment o f the generally available sources o f procurement information at the state level. The overall conclusion o f the assessment is the state comptroller's office data are quite reliable inrespect to procurement processing at the state level. With regard to fiscal information, financial auditors and credit rating agencies can play an important role in verifying the accuracy o f the performance data that i s published. 5.8. World Bank Role. A summary o f Bank support and government actions i s provided in Annex 3. The Bank will continue to provide technical assistance and liaise with the involved entities with regard to any initiative regardingthe PFM indicators at the state level and capacity building activities. The SHCP and SFP have specifically requested that the Bank continue to play the role o f facilitator and provider o f specific technical expertise. The Bank team will play this role with the state federal commissions referred to in this report, and with individual states that may request Bank technical support to establish a performance monitoring system." Further, in its own lending operations at the state level, the Bank will consider technical assistance aimed at establishing or upgrading the monitoring system duringthe project implementation. loAs of the date of preparation of thls report the Bank team had already begun working with the states o f Jalisco, Sonora, Aguascalientes and Durango. These states are active in the CPCEF and for the CPFF, and these engagements were to be more intensive efforts than those undertaken in the initial pilot phase o f the Bank's work. MEXICO: ImprovingFiscal Transparencv and Administrative Performanceat the State Level 15 ANNEXES Annex 1-RecommendedStateIndicatorsandDefinitionof Key Terms A. PFMOut-turns 1. Primary fiscal balance or i) Deviation level ofprimarv balance with respect to budget the primary deficit comparedto originally approved over the last threeyears. the original approved budget. ii) Deviation level of fiscal balance with respect to the amounts orininallv budgeted over the last three vears. Primary Balance: Total Revenue [Own Revenue + Federal Revenue (Federal PARTICIPACIONES + Ram0 33 + other Federal AF'ORTACIONES). [Recurrent Cost + Transfers + Investments (it does not include Debt is not included] - Primaw exuenditures payment o f interests and amortizations o f the contracted debt or to be contracted, neither includes ADEFAS]. Fiscal Balance: Total Income - Total Exuenditures (primary expenditures + interests + amortizations + ADEFAS) 2. Compositions of budget Percent variance between theprimaw executed expenditures expenditure out-turn compared and the approved budget in thepast 3. to the original approved budget. Budget originally approved. Primary Expenditure budgeted and originally approved. Primary Expenditure Executed: I t is the total primary expenditure executed through out the year at the endo f the period. 3. Aggregate revenue out-turns i) Percent variance between total revenue received and compared to the original revenue originally approved during the last threeyears. approved budget. ii) Percent variance between own revenue received and the total revenue budgeted during the last three years. iii)Percent variance between federal revenue received and the total revenue budgeted during the last three years. Revenue Originally Approved: Total budgeted revenue originally approved. Total Revenue: Use definition o f Indicator number 1. O w n Revenue: Taxes + Duties + Products + Gains Federal Revenue: Participants + Contributions (including PAFEF and FIES) + any other Federal Government contribution. MEXICO: ImprovingFiscal TransparencyandAdministrative Performanceat the StateLevel 16 Performance Indicator Measured by B.Key Cross-cuttingFeatures:Comprehensivenessand Transparency 1.. Extent to which budget reports Percentage of extra-budgetary activities of state government, include all significant with respect of total spending, and the extent to which these expenditures on government expenditures are included infiscal reports. activities, including those fundedby donors. Extra-budgetary Activity: Activities of the state government that are not included in the annual budget law (i.e. all those activities financed through funds or trust funds not considered within the budget.) 5. Adequacy of informationon Of thefollowing information, what is included in the budget? fiscal projections, budget and 1.-Microeconomic assumptions that include, at least, estimates out-turn provided inbudget on economic growth, inflation and exchange rate. documentation. 2.- Fiscal Balance (taking into consideration the definition of Indicator 1.) 3.- Financing of Deficit. Description of the debt composition to be contracted tofinance deficit. 4.- StateDebt (detailed at the beginning of theyear) 5.- Financial Assets 6.- Budget out-turns of theprevious year, included in the same document of the budgetproposal. 7,- Currentyear's budget (either the revised budget or the estimated out-turns), included in the same document of the budgetproposal. 8.-A summary of the budget data,for revenue and expenditures, according to the main items of classijkation used an referred to in indicator 6 (including data of theprevious and actualyear). 9.-Explanation of the recurrent cost implications of the new initiatives in the budget, including estimated impact on the budget of the main changes in expenditurespolicy or in the program of expenditures. 5. Administrative, economic, Extent to which the Budget and expenditures are: (i) classified functional, municipal, and on an administrative, economic,functional andprogrammatic programmatic classification of basis: and (ii)follow the SNCF's harmonization working the budget. group guidelines. 7. Publication and accessibility (i) Comprehensiveness,(ii) timeliness, (iii) accessibility and of key fiscal information and (iv) read-ability offiscal information and audit reports. audit reDorts. C. Budget Cycle 3. Extent of multi-yearPercentage of annual budget based on multi-year fiscal perspective in fiscal planning, forecasts and a StateDevelopment Plan.. expenditure policy-making and budgeting. MEXICO: ImDrovinnFiscalTransDarencvand Administrative Performance at the State Level 17 9. Timeliness of budget approval, (i) Number of days that the legislative branch hasfor reviewing the annual budget and (ii) whether the budget is passed before thefinancial year commences. 10.Effectiveness of cash flow i) Frequency of (should be daily) calculation and consolidation planning, management and of all the government's cash balances, and ii) Frequency of monitoring. (should be annual, updated monthly) calculation and consolidation of revenue and expenditures based on revenue forecasts and budget implementation plans. 11. Extent to which spending Expenditures are committed broadly in accordance with cash ministries and agencies are flow forecasts (agreed withfinance ministry) and with the able to plan and commit budget. Level of Frequency,predictability and transparency of expenditures inaccordance adjustments to budget allocations. with originalhevised budgets. 12. Extent to which budgeted Percentage of resources budgeted that service delivery units resources reach spending units receive, with minimal delay. inatimely manner. 13. Effectiveness o f internal Number of audit observations aspercentage of the number of controls. transactions auditedfor each substantive process of state administration, includingpayroll. 14.Timeliness, quality and Timing of regular dissemination of reasonable quality budget dissemination o f in-year reports, using classification that allows direct comparison to budget execution reports. the budget and that incorporate expenditure, revenue and debt information. 15. Timeliness of the presentation For the most recentfinancial statements: (i) number of weeks o f audited financial statementsor months after the end of thefiscal year by when thepublic to the legislature. accounts arepresented to the Congress after the end of the fiscal year, (ii) whether a complete set offinancial statements, certi3ed by the external auditor (OFSor private auditor), are presented to the legislature within 9 months of theyear-end. C (iv) External Accountability Audit and Scrutiny 16. Authority and relevance of i) Number of weeks or months after the end of thefiscal year by external audit reports. when thefinancial reports are audited by the OSF, ii) Total amount of the resources audited as apercentage of the total budget executed (by the OFSor an external auditor). 17. Follow-up o f auditreports by Number of observations resolved as apercentage of total the executive or audited entity.number of observations. MEXICO: ImprovingFiscal Transparency and Administrative Performanceat the State Level 18 D.InstitutionalizedStakeholc `rsParticipation 18. Level o f public awareness and Veri3cation of actualpractices in stakeholder participation participation inthe budgetary throughout the budget cycle. process. a. Very High: Civic andprivate organizations/NGO's, legislative and judicial branch o f the Government, Entities, Parastatal and Private Organizations. b. High:Participation ofpublic entities (parastatals, entities, government branches, municipalities), but not o f the civic or private organizations andNGOs. c. Medium: Participation only of the central government entities and paraestatal. d. Low: Participation only of the central government entities. e. Very Low: N o significant participation outside the State's normative entities (Finance Secretariat, Administration, Planning or equivalent). 19. Effectiveness intax Percentage of own revenue with respect to total revenue. mobilization. 20. Tax collection efficiency Percentage of the Administrative cost (current expenditure done by the collecting agency) with respect to the total amount collected. Total amount collected:Own revenue + I S A N+ Property and taxes o f Annexes 3,7 and 8 o f the Convenio de CoordinacidnFiscal. F.Allocative Efficiency 21. Budget flexibility vs. rigidity. Injlexible expenditure with regard to the total budget. InflexibleExpenditure: Essential expenditure to comply with unavoidable government commitments (participations and contributions to municipalities, transfers to other government branches, service o f debt, payroll and any other type o f earmarked expenditure, etc.) 22. Quality and efficiency on Percentage of the total investment decisions made on the basis public investment expenditure. of cost-benefit analvsis or social return analvsis. 23. Temtorial integrationand Percentage of the totalpublic investmentprogram allocated to concurrence. co-Jnanced projects with municipalities. Cofinancing: Cofinancing with municipalities, it does not include contributions and participations, but does include contributions in kind.Inorder for the financing concept to be valid state resources in cofinancing should be under 100%. G.Monitoring & Evaluation 24. Existence and coverage of Percentage of the totalpublic expenditure subject to any type results-based evaluation of ex-post or ongoing evaluation systemfocused on results. svstems. MEXICO: ImprovingFiscal TransparencyandAdministrative Performanceat the State Level 19 25. Right sizing. (i) Number of civil servants who are members of unions and who are non-union; and (ii) wage bill as apercentage of the regional GDP. 26. Advertisement o fbidsand Percentage ofpublic contractingfor which bids comply with publication o f awards the requirement to advertisepublicly the invitation to bid and (measures transparency and the contract award results as well as the name of the awarded openness of system) company. 27. Time for preparationofbids Average number of days between the date of thepublication of (measures real opportunity for the invitation to bid and bid opening. biddersto submit bids) 28. Time for bidevaluation Average of the number of days between the date bids are (measures efficiency of received and the date bids are awarded biddingprocess) 29. Biddersparticipation Average number of bidders submitting bid in eachpublic (measures the level o f biddingprocess. confidence o f private sector in the process) 30. Method of procurement used Percentage of biddingprocesses using a method less (measures the level of competitive than theprocess recommendedfor the estimated competition) contract amount. 31. Direct contracting(measures Percent of contracts awarded on a sole-source basis. transparency and level of competition) 32. Direct contracting(measure Percent of total contract amount that were awarded through transparency and level o f direct contracting. competition basedon contract amount) 33. Contractingbased on Percentage of contracts awarded by the restricted bidding restricted bidding(measures method transparency and level of competition basedon contracts) 34. Contractingbasedon Percentage of the total contract's amount that were awarded restricted bidding(measures based on restricted bidding. transparency and level o f competition based on contract's amounts) 35. Processes cancelled (measures Percent of bidprocesses declared null before contract quality of the biddingprocess) signature. 36. Number o fprotests (measures Number of biddingprocessfor whichprotests were received the quality and fairness of the process) MEXICO:ImprovingFiscalTransuarencv and Administrative Performance at the State Level 20 Performance Indicator Measured by 37. Time to answer protests Average in the number of days between submission andJna1 (measure efficiency and response toprotests received. fairness o f the protest system) 38. Protest results (measures Percent ofprotests where the outcomefavors theperson effectiveness o f the protest presenting theprotest. svstem) 39. Timeliness o fthe payment Percentage ofpayments made more than 45 days late. process ~~ 40. Contract amount increase Average of thepercentage increase offinal contract amount (measures quality o f the due to changes and amendments. biddingand contract management) 41. Restricted competition for Percent ofprocesses for the selection of consultants using open consultants (measures quality competition instead of a restricted competition or shortlist o f the consultancv services) methodoloav. 42. Selection method for Percentage ofprocesses for the selection of consultants having consultants (measures the price weighted more than 20%of the total scoringpoints. quality o fthe consultancy services) MEXICO: Improving Fiscal Transparency and Administrative Performanceat the State Level 21 Annex 2 - Optionsto Establisha Quality InformationSystemandto Simplify Data Inputof ProcurementPerformanceIndicators Required Direct information High implementation Enter on a regular Participate in the directly from that canbe verified in costs; uncertainties basis all data on establishment of the contracting detail to avoid regarding long-term hiring processes to objectives and agencies and mistakes. viability o f the project; the system as soon follow a entities on an strong workload as the information performance individual increase when the areas is generated. review to ensure basis. are required to provide their information; achievement; difficulties and possible monitor the delays inintegrating the quality o f the whole data; deficient information quality that requires entered inthe close supervision. system. Generated with Umbrella institution Operational work that Obtain the Feasibility to information with links to all provides limited required implementnew from the government entities; required data; need to information controls based on Ministryof possibility to enhance data base through the data that will be Finance. generate data based beyond their priorities system that will be available inthe on their financial and objectives. implemented, thus system. management systems. obliging entities to perform a careful informationreport. Generated with Umbrella institution Inadequate system, Operate the Perform audits to information with links to all through which specially designed verify the from the government entities; integrating information electronic information Comptroller's possibility to becomes a costly and information quality, as a Office. generate data based time consuming task; system, which will complementing on their own control information is normally be operated by the measure to ensure systems; harmonious requested directly to the own staff as well the system work with their entities; many different as by the entities reliability. objectives and work systems and on-line. responsibilities. capacities inthe comptroller's offices nationwide. MEXICO: Improving Fiscal Transparency and Administrative Performanceat the State Level 22 Obtained from Lower time and cost Higher costs at national Recommend to Recommend to Information investment to level resulting from give the maintain inthe System at integrate data; system multiple systems used responsibility o f system a group o f (individual) designed and for the same purpose; the system indicators agreed State level. adjusted to the Sate different platforms that operation to the inanational needs and criteria; can hamper or render Comptroller's project, to ensure possibility to modify difficult to share Office, that will finctionality o f the system to comply information inthe verify the the system in the with new information future; possible information future. requirements; discontinuity when quality. facing government changes and with the arrival o f new government officials with different criteria. Information Strengthening a Integrationo f a system The Permanent The system could System national project parallel to Compranet, Commission o f count on two compatible geared to improving providing all State and Federal components, the among States. performance; savings information on biddings Government first part with the inthe system cost with federal funds; this Comptrollers is system o f itselfand the data would mean duplicating the Body where a indicators adopted gathering; more efforts to provide such national at the national opportunities o f data. agreement can be level, and the sharing information reached on the second optional among states and the indicators that can part where each federation. be adopted ina State could add its national project. preferences. Compranet Use o f a solid system Inflexibility o f the Analyze the Compranet canbe with wide system to adapt itself to possibility that adapted to information that specific needs, other Compranet automatically could be adapted to thanthose foreseen; provides generate federal automatically would be necessary that information with management generate performance all States required all data that can be indicators, which indicators for hiring information on State- included inthe would facilitate processes. resource biddings to be information its integration in included inCompranet. systems inthe the national States, inorder to program with the avoid duplicating States. efforts for data inuut. MEXICO: ImprovingFiscal TransparencyandAdministrative Performanceat the State Level 23 Annex 3 -Timeline Table 1: Toward a Systemof PerformanceIndicators A Timeline - Date Activity September 20,2004 Internal Concept Review held inthe Bank November 17-18,2004 Bank team presents concept of work at semi-annual meetingof CPCEF inthe stateofCampeche December 2,2004 First Workshop heldinMexico City. Workshop includes three consultationexercises: (i) a written questionnaire; (ii) electronic an survey; and (iii) work inbreakout groups. January-March 2005 Visits carriedout by Bank team to eight pilot states April 2005 Internal review inthe Bank focuses on the proposed indicators April 14-16,2005 Bank team participates inmeeting of the Commissionon Evaluationof Public Management and Internal Control Systems, a sub-commission of the CPCEF, inEnsenada, Baja California April 26,2005 SecondWorkshop i s heldinMexico City. Attended by approximately sixty officials, including representatives from eight pilot states and four others. Focus of the workshop i s on refining the indicator set and makingplans for Next Steps. March-May 2005 Pilot states submit data to the Bank with regards to the indicators May 17,2005 Decision Meetingheld inthe Bank with regard to first phaseo f work May 29-30,2005 Bank FMPEMteam works with officials from the states of Jalisco and rove precision of indicators and arrive at a brief MEXICO: ImurovingFiscal TransuarencvandAdministrative Performanceat the State Level 24 Date Activity February 24,2006 HarmonizationGroup of the CPFF presents its proposal for 43 indicators. Proposal includes technical formats for each indicator, and a glossary o f terms March 2006 Two meetings heldwith SHCP's states unit (UCEF). After receiving final comments from these officials, June 2005 Progress Report i s published inEnglishand Spanish March 9-10 Bank Procurement team visits Aguascalientes to begin in-depth support to establishprocurement indicators inthe state. See press release: http://www.aguascalientes.gob.mx/Difusion/com- boletines/boll337.asp March 10, 2006 Bank FMPEMteam attends meeting of the Harmonization Group in the state of Durango, which includes representatives from 26 states. Bank team makesbriefpresentation and commits to continue providing facilitation and technical support March22,2006 Decision Meetingheld for Draft report of secondphase (this report) March 31,2006 Draft report of the secondphase, including recommendations, delivered to government counterparts MAP SECTION To Los Angeles 115°W 110°W 105°W 100°W 95°W 90°W 85°W To Albuquerque To To Gila Bend Alamogordo Tijuana Mexicali UNITED STATES OF AMERICA Ensanada Sonoita San Ciudad Juárez To Felipe Midland Nogales BAJA G Agua Prieta MEXICO CALIFORNIA Rio Brav o RioGrande To 30°N 30°N ulf San Antonio of SONORA Yaqui C H I H U A H U A To Ojinaga San Antonio C Hermosillo To Guaymas Santa M Rosalia Conch os Sierra ado Sal BAJA a l i f o r n i a Sierra Houston Chihuahua Laredo Navojoa adre A CALIFORNIA Fuert C O A HMU I LFrontera SUR O e Loreto NUEVO Los Mochis adre LEON Gulf of Mexico 25°N 25°N ccidenta Matamoros Torreón Torreón Monterrey Saltíllo Saltíllo Culiacán Culiacán PACIFIC S I Nl O La Paz D U R A N G O TAMAULIPAS Durango OCEAN A L O A ZACATECAS riental Ciudad Victória Victória Mazatlán Mazatlán Cabo San Lucas Zacatecas SAN LUIS AGUASCALIENTES POTOSI Tampico QUERÉTARO QUERÉTARO San Luis This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information NAYARITLeAguascalientes Potosí Potosí YUCATAN Cancun shown on this map do not imply, on the part of The World Bank Tepic rma VERACRUZ Merida Group, any judgment on the legal status of any territory, or any GUANAJUATO Guanajuato HIDALGO endorsement or acceptance of such boundaries. 110°W Cozumel PuertoVallerta Guadalajara Querétaro Querétaro DISTRITO FEDERAL JALISCO Pachuca TLAXCALA Campeche MEXICO 20°N QUINTANA MEXICO MEXICO Morelia Jalapa CITY Bay of Campeche ROO Tlaxcala Veracruz Colima Toluca Chetumal Citlaltépetl (5,747 m) Citlaltépetl COLIMA Cuernavaca MICHOACAN Puebla CAMPECHE SELECTED CITIES AND TOWNS PUEBLA TABASCO Ba lsa s Villahermosa Gulf of STATE CAPITALS GUERRERO Chilpancingo BELIZE Honduras NATIONAL CAPITAL Oaxaca CHIAPAS Usumacinta RIVERS Acapulco S i e r r aM a d r e OAXACA Tuxtla Gutierrez MAIN ROADS d e l S u r Tehuantepec MORELOS Puerto NOVEMBER RAILROADS 0 100 200 300 Kilometers Escondido Gulf of GUATEMALA 15°N Tehuantepec HONDURAS IBRD STATE BOUNDARIES 15°N Tapachula To 0 50 100 150 200 Miles San Salvador EL 33447 2004 INTERNATIONAL BOUNDARIES 105°W 100°W 95°W SALVADOR