MEXICO: Decentralized Infrastructure Reform and Development Program

Jose Luis IrigoyenOctober 2003

Program Concept Long range program to support infrastructure

development at subnational levels, anchored to comprehensive sector strategies fully owned by respective authorities: direct assistance in first stages limited to States

(although municipalities may benefit indirectly) …and three main infrastructure sectors (Transport,

W&S, Urban Dev.&Housing) TA to prepare other sectoral strategies /programs,

and to strengthen institutional capacity of key state entities (including fiduciary and safeguard areas)

Program Concept “Holistic” approach to reform &

development of selected sectors through program financing: implementation of fully articulated reform and

investment programs adapted to State’s priority needs, typically over 3-4 year period

… reflected in specific sector strategy statements to be provided to BANOBRAS

strong results orientation, with Bank loan disbursements linked to meeting certain specific (performance) / output targets

Program Concept Demand driven program open to all States

which meet certain “entry” conditions Conditions ensure state’s financial, fiscal & debt

management policies are satisfactory/sustainable Each State can choose the specific (sub) sector(s)

in which wishes to participate Strategies and programs proposed by State

would have to meet “sector elegibility” criteria Guidance for design of measures to promote sector

efficiency, cost recovery, financial sustainability, quality/access of infrastructure services to the poor

Not a mechanical screening device

Program Concept Guidelines /rules defined through “Program

Operating Regulations” Manual to be agreed with BANOBRAS: Entry conditions and sector eligibility criteria Overall rules of operation and fund channeling

arrangements (Bank- BANOBRAS – States) Framework for handling fiduciary and safeguard

responsibilities (program preparation & execution) BANOBRAS: borrower /main executing

agency Processes for due diligence and approval by

BANOBRAS and the Bank

Program implementation set up

BANOBRAS

World BankGOM

Loan US$

State X

State EntityState Dept.

Own program

s(state

infrastr.)

Guarantee

Cofinanced programs(municipal infrastr.)

Municipality X1

Loan M$

Cofinanced programs(municipal infrastr.)

Municipality Y1

Own program

s(state

infrastr.)

State EntityState Dept.

State Y

Loan M$

Program

Some operational challenges & their effect in product design

Simultaneous pursuit of performance & output targets to exploit synergies between implementation of reforms and achievement of physical outputs Performance-based disbursement provides strong

incentive for states to carry out remaining reforms beyond those established through eligibility criteria

Output-based investment operation allows to stay with reforms & development program until actual results are achieved in the form of agreed outputs

“Hybrid” loan combining performance-based & output-based disbursement rejected

Some operational challenges & their effect in product design

Emphasis on customizing sector programs and targets to situation/needs of individual states to maximize strategic impact detailed sector performance/output targets (and

disbursement parameters) available only at time sector program is agreed upon with BANOBRAS

… but this makes more difficult delegation of responsibilities under open “wholesale” approach

Series of programmatic loans each one dealing with a state (at least in early stage) Loans involving various sectors within parameters

of longer term framework described in first loan

Program implementation set up

BANOBRAS

World BankGOM

Loan US$

State X

State EntityState Dept.

Own program

s(state

infrastr.)

Guarantee

Cofinanced programs(municipal infrastr.)

Municipality X1

Loan M$

Project

Cofinanced programs(municipal infrastr.)

Municipality Y1

Own program

s(state

infrastr.)

State EntityState Dept.

State Y

Loan M$

ProgramLoan 2 US$

Some operational challenges & their effect in product design

Output-based disbursements to maximize efficiency of entity in reaching output target Use of benchmarked unit cost indicators to

determine ceiling on disbursement for production of a given output by state (or municipality)

Evidence of “eligible” actual expenditure through ex-post demonstration that total expenditure under eligible sectoral program equal or exceed amount of disbursements which state has earned via meeting output objectives

Report-based disbursements (evidence in the form of audited statements of accounts)

Some operational challenges & their effect in product design

Application of SWAP beyond pre-specified pools to entire sector investment program, regardless of source of financing use of state-level public expenditure reviews, state

program level financial management, procurement, environmental and social assessments, as needed to determine compliance with agreed frameworks

action plans agreed with State to strengthen relevant practices, if policies are substantially in line but further improvement desirable

Yet many unresolved issues around fiduciary and safeguard frameworks

Eg., Guanajuato road sector program and WB financing

Item Decription Financing Total CostSource (MDP)

1 Institutional Strengthening SOP 4.02 Conservation of state road network SOP 2,063.7

Routine Maintenace (2071km) SOP 402.6Periodic Maintenance (2071km) SOP 761.1Rehabilitation 200km/y in poor condition - 900.0

3 Expansion of State paved network SOP 7,715.34 Improvement of bridges and critical points SOP/IDB 361.55 Construction of toll highways SOP/IDB 566.06 Rural Roads Program SOP 49.4

State funding for construction (73km/yl) 23.9State funding for maintenance (1500km/y) 25.5Total 10,759.9SOP budget 4,771.1IDB 500.0Other Sources 0.0Financing gap 5,488.8

Guanajuato Sexenio Program (2001-2006)

Gap to be covered after adjusting

program

Sub-programs for which partial WB

financing will be used

Possible approaches to organization risk management Framework applies to entire Sector Program or

to Bank financed subprograms ?

Bank financed subprograms

Sector Program & Policies

State 1

Bank financed subprograms

Sector Program & Policies

State 2

Fully consistentW/Bank policies

Country legislation improved practices

Framework

Possible approaches to organization risk management What provisions for risk aversion ?

Zero tolerance for Bank financed programs vs comparability (not exactly matching)

Distinction between substantive & non-substantive gaps/departures from WB policies, and their implications for pooling under SWAPs

SWAPs call for increased delegation to country procedures and frameworks activities/transactions become a large multiple of

Bank financing, a problem for prior reviews ring-fencing not a solution in long run (especially

for infrastructure sectors)

Eg., tentative framework for safeguards based on global risk Sectoral Risk is a function of:

Technical complexity of program Potential for triggering safeguards Potential departures from SG in local policies

Institutional Risk: Ability of institutions to screen projects, design

risk mitigation measures, enforce procedures Assessment of sectoral & environmental

agencies

Eg., tentative framework for safeguards based on global risk Global risk as function of sectoral and

institutional risk

Sectoral Risk

Institutional Risk

Low Medium High

Low GR1 GR1 GR2

Medium GR1 GR2 GR3

High GR3 GR3 GR3

Eg., tentative framework for safeguards based on global risk

Level of delegation based on Global Risk Global Risk 1: DL1 - Bank accepts State

procedures Global Risk 2: DL2 - Bank accepts State

procedures contingent onstrengthening program

Global Risk 3: DL3 - Bank reviews ex-ante all Sectoral Risk 3 projects

Sectors can have different levels of delegation Level of delegation reassessed at MTR once

capacity demonstrated

Some issues regarding the role of BANOBRAS Financial intermediation & administration of

program resources: On-lends to state(s) assuming full credit risk (can

charge differential risk spreads to take account of variations in creditworthiness)

… but spreads non-competitive under current market conditions

Scope of due diligence review/approval/supervision of sector strategy &

financing proposals in line with agreed Operational Manual, in consultation with Bank

specific performance /implementation targets incorporated into loan agreement with states