Infrastructure and other PERs in Mexico

S. Webb, IEG and J. Halpern, EWDPublic Finance Analysis and Management

Core Course,

PREM Learning Week, May 1-5, 2006

Overview• Programmatic approach

– public finance concerns including infrastructure– 2 state PERs (Guanajuato and Veracruz)– PER – distribution– Infrastructure PER– Water PER– Mexico Poverty III – decentralized services for poor, including municipal

infrastructure• Permitted building knowledge,

– trust of clients gradually– continuity of policy dialogue

• Shifted principal client and champion from line ministries to Finance• Heavy use of local consultants

– econ/fin/tech experts, not research assistants) – enhanced credibility and continuity of effort

Mexico PER

• client demand for PER focused on distribution • Difficulties in addressing infrastructure sectors

– WSS, electricity– Not: urban roads, highways,, telecoms)

• BIA in electricity– Methods—HH survey and electric co billing

• , results and recommendations• Benefit of looking across sectors at distributional

concerns• energy subsidy is pro-rich

– contrast with health, education, and social protection programs

Most programs are regressive in absolute terms…

Pensionados ISSSTE

Pensiones Activos ISSSTE

Edu Superior

Salud ISSSTE

IVA GASTO FISCAL

Pensiones Activos IMSS

Pensionados IMSS

Salud PEMEX

Salud Hospital

Subsidio Eléctrico

Salud IMSS

Media Superior

Salud Embarazo/Parto

Salud Primaria

TOTAL

Edu Secundaria

Procampo

Edu Primaria

Edu Preescolar

Salud SSA

Oportunidades

-0.800 -0.600 -0.400 -0.200 0.000 0.200 0.400 0.600 0.800

REGRESIVO (PRO RICO)PROGRESIVO (PRO POBRE)

Calculation methods

• Household surveys give data on how many households at each income level access most public services

• Correlation of rate of access with level of income gives correlation coefficient– Positive coefficient means more goes to the rich (regressive in

absolute terms)– Negative coefficient means a greater share to the poor

• Household Electricity subsidy– Assumes the standard rates for all (the HH survey only has

amount spent, not volume)

– Data from the electricity company billing show a similar pattern of regressivity

…but the progressive programs get about half of the resources whose distribution

could be measured.

Prog. más progresivos

Prog. más regresivos

Oportunidades

SSA

Educacion Basica

PROCAMPOEduc. Media Superior

IMSS Salud

Subsidios para Elect. Residencial

PEMEX Salud

IMSS Pensiones

ISSSTE Salud

Educ. Terciaria

ISSSTE Pensiones

Nature of progressive programs

• Targeted to the poor: – Oportunidades– ProCampo

• Open to all, but more used by the poor– Basic education– Basic Health

• Regressive – requires money to access more– Electricity subsidy

Public spending is very redistributive, if tax payments are about proportional to income:

households in the poorest access public services costing 150% of their own income

0% 20% 40% 60% 80% 100% 120% 140% 160%

Gasto público como proporción del gasto privado de los hogares

10% más pobre

2

3

4

5

6

7

8

9

10% más rico

Dec

iles

Primaria

SSA

Oportunidades

Secundaria

Preescolar

IMSS Salud

Procampo

Media-Superior

Subsidio Eléctrico

IMSS Pensiones Jubilados

PEMEX Salud

IMSS Pensiones Activos

ISSSTE Salud

Superior

ISSSTE Pensiones Jubilados

Critical assumptions

• Assumes that value equals cost• Assumes that value (quality) are the same

to rich and poor further sector studies needed

Municipal Social Infrastructure (FAIS) transfer and Social protection

transfer go mostly to poor states

Fig. 3.4. Geographic distribution of targeted anti-poverty spending, 2002

0

200

400

600

800

1,000

1,200

Chi

apas

Gue

rrero

Oax

aca

Vera

cruz

Hid

algo

San

Lui

s P

otos

í

Pue

bla

Cam

pech

e

Taba

sco

Mic

hoac

án

Yuca

tán

Zaca

teca

s

Gua

naju

ato

Nay

arit

Sin

aloa

Que

réta

ro

Dur

ango

Tlax

cala

Mor

elos

Qui

ntan

a R

oo

Méx

ico

Col

ima

Tam

aulip

as

Son

ora

Jalis

co

Chi

huah

ua

Baj

a C

alifo

rnia

Sur

Agu

asca

lient

es

Coa

huila

Baj

a C

alifo

rnia

Nue

vo L

eón

Dis

trito

Fed

eral

Nat

iona

l Avg

.

2002

MxP

per

cap

ita

FAIS OPORTUNIDADES

Electricity subsidies for agriculture go mainly to the richest (and driest) states

Fig. 3.7: Geographic distribution of agriculture electric subsidies, 2002

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

20

02

Mx

P p

er

rura

l p

op

ula

tio

n

Infrastructure PER • Client demand

– built on questions raised by clients in review of distributional PER – concern with program efficacy, not just distributional outcome– What is point of progressively distributing a poorly run program?

• Scope- multiple sectors, – sequence of analysis (sector performance, fund flows

(magnitude/purpose) – planning and budgeting, cost projections, government credit

guarantees/enhancement, prioritization and sequencing of recommendations)

• Full sectoral diagnostic as well as cross sectoral analysis and recommendations (not just editorial exercise).

• Tradeoffs in relative emphasis – comprehensive sectoral vs cross-sectoral topics – benefit to focusing on cross-sectoral issues.

Three Methods –

• 1-benefit incidence analysis (from PER)• 2-investment cost projections under alternative

policy scenarios Estimation of spending needs in each sector -- converging to conclusion

• 3-differential impact of build-up of government credit enhancement programs-leading to distorted (and in some cases dysfunctional) development of the sectors

INTERNATIONAL COMPARISONS TO PLACE COUNTRY PERFORMANCE IN

PERSPECTIVE• Multi-sector• Roads• ELECTRICITY Distribution• BENCHMARKING-WSS

– – international and in country

International comparisons of the quality of infrastructure for business

PaísCalidad Global Puertos Ferrocarriles Electricidad

Argentina 3.6 3.6 2.7 4.2

Brasil 3.5 3.1 2.1 4.9

Chile 4.9 4.8 2.7 5.7

Colombia 2.9 3.0 1.4 4.7

México 3.4 3.3 2.5 3.9

China 3.4 3.6 3.9 4.2

Thailand 4.6 4.2 3.4 5.5

Malaysia 5.7 5.6 5.0 5.7

Philippines 2.5 2.6 1.4 3.5

Indonesia 4.2 4.4 4.1 4.1

Promedio muestra

3.9 3.8 2.9 4.6

E.U.A. 6.4 6.0 4.8 6.2Source: WEF (2004)

Road quality improving in Mexico, but still way behind OECD,

and behind projected needs for traffic

99% 99%

92% 91%

86% 76%

59% 35%

33% 29%

20% 6%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Spain Thailand

Greece

China Portugal Malaysia

United States Canada

Mexico Argentina

Chile Brazil

El servicio de transporte carretero tuvo grandes mejoras tras la desregulación iniciada en 1989 … pero

La porción de la red en mal estado es aún significativa (40%); se concentra en caminos secundarios y rurales

No está consolidada la información de estado de las redes subnacionales

Parte de la red aún presenta estándares inadecuados (ancho de carril, pendiente, etc.), incluido un 30% de los corredores clave.

La pavimentación es relativamente baja (un tercio; es dos tercios en países desarrollados)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

MALO

REGULAR

BUENO

Red Pavimentada - %b

Estado de la red

Electricity efficiency – distribution losses

0

2

4

6

8

10

12

14

16

18

1995 1996 1997 1998 1999 2000 2001 2002

CFE Totales

Peru Edelnor

Peru Luz del Sur

Chile Chilectra

Argentina Edenor

Argentina Edesur

Pérdidas en Distribución (%)

Collection efficiency of WSS

City / country Collection/billing

Monterrey. Mx 98

OECD average 95

Asian cities (18) aver. 88

Brazil major cities, aver. 87

Hermosillo, Mx 85

Mexico average city 72

Matamoros, Mx 45

Mexico small cities 20

COST/INVESTMENT PROJECION MODELS, feedback with growth

• México invests 1%-1.2% of GDP in infrastructure

• This would suffice to maintain current path of improvement if and only if it were spent more efficiently, because depreciation grows

• To reach the level of S Korea or compete with China, Mexico would need to invest 2.5 - 3% of GDP

Billion 2003 MXP

% GDP

1998 64 1.06

1999 64 1.02

2000 69 1.04

2001 68 1.02

2002 84 1.26

2003 83 1.23

Electricity Investment

0

10,000

20,000

30,000

40,000

50,000

60,000

1998 1999 2000 2001 2002 2003

Inversión directa CFE Pidiregas Luz y Fuerza del Centro

Inversión total en electricidad (%PIB)

0.71% 0.77%

2.51%2.79%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

México (2003) Argentina (2002) Chile (2001) Colombia (2001)

Millones de Pesos 2004

MEXICO POLICY & CREDIT SUPPORT FOR PSP/PRIVATE

OPERATORS/INVESTORS

• INTERNATIONAL COMPARISON-– Shows that Mexico is not that especially successful in attracting

infrastructure – Government credit enhancement has biased investment toward

greenfield projects• Un balanced sectoral development—to little at the distribution end,

where the private sector has the greatest advantages

• RESULT = COSTLY AND POORER QUALITY SERVICE

México has made limited use of Public-Private Investment

partnerships

• Bajo PPI comparado con sus pares– A pesar de la elevada

calificación de crédito soberano

– Y un amplio (y creciente) mercado doméstico de capitales

• Limitada a greenfield/off-take– Bajo impacto en eficicencia

$-

$100

$200

$300

$400

$500

$600

$700

1993-1997 1998-2002

Dolla

rs pe

r Inha

bitan

t

Argentina Brazil

Chile Colombia

Mexico

Water PER

• Mexico’s Water resources as well as fiscal resources– Emphasized conservation as well as traditional PER issues

• Key issue is how to bring the right mix of incentives to the decisions on both the water conservation and the fiscal issues.– River basins seem to be the right scale for decision power– How to make the requisite institutional reforms within the present

legal and political contexts

• Recommendations for implementation of new water law – calling for decentralization

Mexico- CONAGUA revenue and spending by cuenca

-100.0

100.0

300.0

500.0

700.0

900.0

1,100.0

1,300.0

1,500.0

0.0 500.0 1,000.0 1,500.0 2,000.0 2,500.0 3,000.0

Expenditures

Rev

en

ue

s

Lerma Santiago- Pacifico

Bravo

Golfo-Centro

Cuencas Centrales Norte

Balsas

Aguas del Valle de Mexico

Frontera Sur

Golfo Norte

Pacifico Norte

Peninsula Baja California

Pac. SurNoroeste

Pen. Yucatan

Dissemination

• shift emphasis away from producing long gray cover “reports”

• vehicle for interacting with federal and subnational policy makers and practitioners