Report No. PID9769 Project Name Mexico-Estado de Mexico TA Region Latin America and Caribbean Region Sector Decentralization; Institutional Development Project ID MXPE73371 Borrower(s) BANOBRAS Implementing Agency Address GOVERNMENT OF THE STATE OF MEXICO Banco Nacional de Obras y Servicios Publicos, S.N.C. (BANOBRAS) Tecoyotitla No. 100 - 2 Piso, Colonia Florida, Mexico, D.F., C.P. 01030 Contact Person: Victor Manuel Gonzalez Molina, Subdirector de Programas Crediticios y Asistencia Tecnica Tel: 57-23-60-39 Fax: 57-23-62-33 Email: vmgonzal@banobras.gob.mx Environment Category C Date PID Prepared December 7, 2000 Projected Appraisal Date February 19 - February 23, 2001 Projected Board Date April 17, 2001 1. Country and Sector Background Mexico's process of decentralization started at the federal level in the 1980s in an environment dominated by an overly complex system of transfers, sub-optimal taxation at the sub-national level, unclear spending responsibilities, lack of the necessary institutional infrastructure, and an inadequate framework for sub-national borrowing. In the late 1990s, the Government emphasized the need to establish "hard budget constraints" on sub-national finance and in support of that effort in November 1999, the World Bank supported a US$600m Decentralization Adjustment Loan to assist with policy making at the federal level. With the implementation of this phase, the incentive framework in Mexico's sub-national finances has changed substantially - virtually all states are now seeking credit ratings, implementing reforms that can enhance those ratings, and de facto competing on the quality of their management performance. With the first phase of decentralization now complete, the federal authorities are moving towards the second phase in their decentralization agenda. The new phase has two main components: i) helping states adjust to the new market rigor; and simultaneously, ii) continuing efforts to address pending structural issues in the federal policy framework for decentralization (e.g. the tax and transfer system and the various sector programs such as health, education and water that have been decentralized to states). Those two components are mutually reinforcing - the hard budget constraints have fostered the states' interest in various sector reforms. The Estado de Mexico Structural Adjustment operation, about to be presented to the Board supports a comprehensive structural reform agenda that can place state's fiscal accounts on a sustainable path, allow the state and its residents to adjust to and take full advantage of the federation's overall decentralization strategy (especially under the recently imposed market discipline on sub-national finances), and become an example for similar adjustments in other states. This Technical Assistance operation aims at increasing the state's fiscal soundness and efficiency of service in meeting the social sector needs on a sustainable basis, while encouraging greater participation by the private sector, which has so far been largely excluded. 2. Objectives The project will provide technical assistance to support the implementation and institutionalization of the Government of Mexico's decentralization reform program. It will assist the Federal Government in creating the legal, financial, regulatory and institutional frameworks conducive to decentralization by taking the case of Estado de Mexico, as a very important initial case (the largest state in population in the country) and as an example for the rest of the country. The project's objective is to show, by taking the case of Estado de Mexico, that states can be made financially sound and that sustainable and efficient service delivery in the social sectors (education, health, pensions) and in the two main infrastructure sectors (water, roads) can be ensured at both the state level. 3. Rationale for Bank's Involvement The Bank's understanding of the fiscal reform agenda in Estado de Mexico after the preparation of the EdoMex Structural Adjustment operation was the major factor leading to the development of this Technical Assistance operation with the goal of supporting institutional strengthening for fiscal sustainability. Moreover, the Bank's insight into the countrywide agenda of sectoral and decentralization reforms at both the state and federal levels in Mexico gives an important role to the Bank's support of the project. And lastly, the Bank's international experience in decentralization, financial management and sectoral reforms draws added value to the design of this project by the Bank and the use of the lessons of experience accumulated. 4. Description 1. Financial Management: n Develop a framework for budgetary management at the state level n Implement an integrated financial management system at the state level n Strengthen political and fiscal control functions, at the state level, including reporting to the ContralorUa n Improvement of the state's procurement function n Support the state's program to improve tax collection and enforcement. n Increase the municipal tax revenues and grant legal security to real estate (in 8 municipalities) n Increase the efficiency of municipal expenditure, and ensure the availability of municipal accounts 2. Asset Management and Capital Revenue: n Strengthen the capacity of integrated management of DGCP (General Direction of Asset Control of Estado de Mexico), and develop a 5-year plan. Develop the functional capacity and management of the different areas of DGCP -2- 3. Health Sector/Pensions: n Develop a legal framework, resource allocation and contractual mechanisms at the state SecretarUa de Salud. n Cost recovery and optimization plan of state ISEM and ISSEMYM healthcare networks Corporate restructuring plan of DIFEM hospital network 4. Education: n Strengthen the management capacity of the sector, develop a legal and operative framework for the budgetary control of the sector n Design a framework of educational indicators n Implement an Integrated System of Personnel Management Pilot plan for the teaching of sciences 5. Roads/Transport: n Strengthen institutions of the state's SecretarUa de Transportes Develop the state strategy on toll roads 6. Water n Create a regulatory entity for the sector and the instruments involved n Reorganize and strengthen the state Comision de Aguas as service provider with a commercial orientation 7. Project Coordination Unit 8. Contingencies 5. Financing Total ( US$m) Total Project Cost 0 6. Implementation The project will be implemented over a period of four years beginning June 1, 2002 and ending June 1, 2005. The Project will be administered through the set-up of a Project Coordination Unit (PCU) that will be located within the SecretarUa de Finanzas of the Government of Estado de Mexico and report directly to BANOBRAS. The PCU will be in charge of the overall administration of the project funds; coordinate among the six different sector areas involved, and fulfill the requirements for procurement of goods and services, monitoring of financial management, disbursement and reporting requirements of both the World Bank and BANOBRAS. The core team of the PCU will be composed of a General Coordinator/Manager, a Procurement specialist and a Financial Management specialist, who will be employed full time by the Project. In addition to the above three full-time posts, six specialists will be assigned to be in charge of each of the six sectors covered in the TA; namely, education, health, water, transport, financial management, and asset management. These specialists will report directly to the core project team on a regular basis, but need not be employed full time. 7. Sustainability The Project's success will depend on a number of critical policy choices. The factors that are critical to the sustainability of the project's objectives beyond the project completion date, include the following: i) the Government's enthusiasm for reform, ii) improved monitoring and reporting that will create accountability to Congress and the public, by keeping the Executive accountable, iii) strengthening the legal bases of the functioning of the ContralorUa de Glosas (state comptroller's office). - 3 - 8. Lessons learned from past operations in the country/sector The project team aims to incorporate in the design and preparation of the project, lessons learned from previous technical assistance operations. Based on the OED's Lessons and Practices: Number 7, technical assistance projects have shown that poor performance is associated with: governance problems, inadequate ownership by clients, design and process problems, weak management, and shortcomings in assistance agencies. As contextual factors can make or break institutional development projects, assessing the cultural and institutional setting must be assessed at the earliest stages of design and throughout implementation. Institutional environment assessments are needed to identify and analyze the main systemic problems associated with technical assistance (TA). TA projects tend to succeed when the client has identified a strong need for specific kinds of TA, and to fail when it has not. In the first case, the client is likely to take the steps needed to ensure the assistance is implemented and its benefits are sustained. Moreover, having a local "champion" committed to making a project work goes a long way toward success, as contrasting experiences show. Thus an important key is ownership, as well as strong management/supervision by the Bank. Where institutional weaknesses are widespread, the Bank may need to help its borrowers identify and prioritize needs and from there try to engender commitment to the planned assistance. While having a committed and competent local "champion" is often crucial, it is also important to ensure that ownership is broad starting at the identification and design stages across the range of stakeholders who are to be involved. Institutional development strategies need to give due weight to capacity utilization vis-a-vis capacity building. The institutional and behavioral changes sought by Institutional Development Technical Assistance projects are difficult to measure. Consequently, past TA projects have tended to monitor mainly performance inputs, with less attention to identifying and monitoring processes, outputs, outcomes, and impact. But without predictable, reliable indicators of progress on these fronts, projects are more difficult to implement. The Bank is now giving more attention to 1) use of a core set of performance indicators that consider the quality as well as the quantity of inputs, outputs, and outcomes; and 2) strengthening monitoring and feedback processes so that project design or implementation can be adjusted as appropriate. When closely linked to objectives, performance indicators can serve as important milestones and facilitate timely and effective intervention when warranted. Also risks need to be identified better and project designs better fitted to risks. 9. Program of Targeted Intervention (PTI) N 10. Environment Aspects (including any public consultation) Issues 11. Contact Point: Task Manager Fernando Rojas The World Bank 1818 H Street, NW Washington D.C. 20433 12. For information on other project related documents contact: - 4 - The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http:// www.worldbank.org/infoshop Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID processed by the InfoShop during the week ending December 15, 2000. -5-