Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 104752

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL FINANCE CORPORATION

AND

MULTILATERAL INVESTMENT GUARANTEE AGENCY

PERFORMANCE AND LEARNING REVIEW

OF THE COUNTRY PARTNERSHIP STRATEGY

FOR

THE UNITED MEXICAN STATES

FOR THE PERIOD FY2014 – FY2019

January 26, 2017

Colombia and Mexico Country Management Unit Latin America and the Caribbean Region The International Finance Corporation Latin America and the Caribbean Region The Multilateral Investment Guarantee Agency This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank Group authorization.

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The date of the last Country Partnership Strategy was December 12, 2013 (Report No. 80800-MX)

FISCAL YEAR January 1 – December 31

CURRENCY EQUIVALENTS (Exchange Rate as of January 26, 2017)

US$ 1.00 = 21.34 MXN

ABBREVIATIONS AND ACRONYMS AFORES Retirement Pensions Administrator (Administración de Fondos para el Retiro) AMC IFC’s Asset Management Company ASA Advisory Services and Analytics ASERCA Agency for Support Services for Agricultural Marketing (Agencia de Servicios a la Comercialización y

Desarrollo de Mercados Agropecuarios) BANOBRAS National Bank of Public Works and Services (Banco Nacional de Obras y Servicios Públicos) BANSEFI National Savings and Financial Services Bank (Banco del Ahorro Nacional y Servicios Financieros) CCS Carbon Capture and Storage Capacity Building Trust Fund CCT Conditional Cash Transfer Program CCUS Carbon Capture Utilization and Storage CEMEX Mexican Cement Company (Cementos Mexicanos) CMF China-Mexico Fund CNBV National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores) CNCH National Crusade against Hunger (Cruzada Nacional contra el Hambre) CNH National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos) COFECE Federal Economic Competition Commission (Comisión Federal de Competencia Económica) CONAFE National Council for Education Development (Consejo Nacional de Fomento Educativo) CONAFOR National Forestry Commission (Comisión Nacional Forestal) CONAVI National Housing Commission (Comisión Nacional de Vivienda) CONEVAL National Council for the Evaluation of Social Development Policy (Consejo Nacional de Evaluación) CPPR Country Portfolio Performance Review CPS Country Partnership Strategy CTF Clean Technology Fund CURB Climate Action for Urban Sustainability Tool DRM Disaster Risk Management ECD Early Childhood Development EDGE Excellence in Design for Greater Efficiencies ENIGH-MIC

National Household Income and Expenditure Survey (Encuesta Nacional de Ingresos y Gastos de los Hogares– Módulo de Condiciones Socioeconómicas)

ENLACE National Evaluation of Academic Achievement in Schools (Evaluación Nacional del Logro Académico de Centros Escolares)

ENOE Encuesta Nacional de Ocupación y Empleo (Labor Force Survey) FIP Forest Investment Program FND Rural Financial Development Agency (Financiera Nacional de Desarrollo Agropecuario, Rural, Forestal y

Pesquero) FONADIN National Infrastructure Fund (Fondo Nacional de Infraestructura) FSC Forest Stewardship Council GBV Gender-based Violence GDP Gross Domestic Product GEF GoM

Global Environment Facility Government of Mexico

GHG Greenhouse Gas GWh Gigawatt hours IBRD International Bank for Reconstruction and Development ICT Information and Communications Technology IDF Institutional Development Fund IEG Independent Evaluation Group IPF Investment Project Financing IFC International Finance Corporation

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INADEM National Entrepreneurship Institute (Instituto Nacional del Emprendedor) LCR Latin America and the Caribbean LIPI Labor Income Poverty Index M&E Monitoring and Evaluation MDF Medium Density Fiberboard MIC Middle Income Country MIGA Multilateral Investment Guarantee Agency MOMET Modernization of the National Meteorological Service Project MSME Micro Small and Medium Enterprises MtCO2 Million tons of carbon dioxide equivalent NDP National Development Plan (Plan Nacional de Desarrollo) NPF New Procurement Framework PA Programmatic Approach PDO Project Development Objective PEMEX Mexico Oil Company (Petróleos Mexicanos) PER Public Expenditure Review PforR Program-for-Results Financing PHI Social Protection System in Health (Seguro Popular) PLANEA National Plan for the Evaluation of Learning (Plan Nacional para la Evaluación de los Aprendizajes) PLR Performance and Learning Review PMR Partnership for Market Readiness PPP Public-Private Partnerships PROME Water Utilities Efficiency Improvement Program (Programa de Mejoramiento de Eficiencias de Organismos

Operadores) PROTRAM Federal Mass Transit Program (Programa de Apoyo Masivo al Transporte) PRORESOL Solid Waste Program (Programa de Residuos Sólidos) PROSOFT Information Technology Development Project RAS Reimbursable Advisory Services RIEMS Upper Secondary Reform (Reforma Integral de la Educación Media Superior) SACMEX Water Utility of Mexico City (Sistema de Aguas de la Ciudad de México) SEDESOL Ministry of Social Development (Secretaría de Desarrollo Social) SEZ Special Economic Zones SFP Ministry of Public Administration (Secretaría de la Función Pública) SHCP Ministry of Finance (Secretaría de Hacienda y Crédito Público) SME Small and Medium-sized Enterprises SORT Systematic Operations Risks Rating Tool SSE South and South-Eastern States TA Technical Assistance tCO2e Tons of carbon dioxide equivalent TEU Twenty-foot Equivalent Unit TRACE Tool for Rapid Assessment of City Energy USE Upper Secondary Education UTTP Urban Transport Transformation Project VMM Virgin Mobile Mexico WBG World Bank Group WSS Water and Sanitation Services

IBRD IFC MIGA Vice President: Director: Task Team Leader:

Jorge Familiar Gerardo M. Corrochano Gabriela Vidals Jutta U. Kern

Dimitris Tsitsiragos Irene Arias Ary Naim Luciana Harrington Jaya Anderman

Keiko Honda Merli Margaret Baroudi Gianfilippo Carboni

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UNITED MEXICAN STATES Performance and Learning Review (PLR) of the

Country Partnership Strategy (FY14-19) Contents I. INTRODUCTION............................................................................................................. 1 II. MAIN CHANGES IN COUNTRY CONTEXT ............................................................. 1

Recent Economic Developments and Outlook ................................................................... 2 Poverty and Shared Prosperity ............................................................................................ 3

III. SUMMARY OF PROGRAM IMPLEMENTATION.................................................... 5 Overview of Portfolio and Progress Toward CPS Objectives ............................................ 5 Summary of Progress .......................................................................................................... 7 Pillar 1. Unleashing Productivity ........................................................................................ 7 Pillar 2: Increasing Social Prosperity .................................................................................. 9 Pillar 3. Strengthening Public Finances and Government Efficiency ............................... 10 Pillar 4. Promoting Green and Inclusive Growth .............................................................. 10

IV. EMERGING LESSONS ................................................................................................. 11 V. ADJUSTMENTS TO COUNTRY PARTNERSHIP STRATEGY ............................ 12

Deepening Support............................................................................................................ 13 Changes to the Results Matrix .......................................................................................... 15

VI. RISKS TO CPS PROGRAM ......................................................................................... 16 ANNEXES .................................................................................................................................... 18

Annex 1. Revised CPS Results Matrix ............................................................................. 18 Annex 2. Matrix of Changes to Original CPS Results Matrix .......................................... 24 Annex 3. Matrix Summarizing Progress toward CPS Objectives ..................................... 35 Annex 4. CPS Original Structure ...................................................................................... 49 Annex 5. Mexico Structural Reforms 2012-2016 ............................................................. 50 Annex 6. Examples of Implementation Challenges and their Solutions ........................... 53 Annex 7. CPS Implementation Progress ........................................................................... 54 Annex 8. Gender Interventions in Mexico ........................................................................ 60 Annex 9. Knowledge Exchanges ...................................................................................... 64

TABLES Table 1. Mexico – Main Macroeconomic Indicators……………………………………...2 Table 2. Evolution of the Percentage of Population by Social Deprivations of the Official

Poverty Measurement, 2010-2014…………………………………………........5 Table 3. IBRD and IFC Portfolio Trends FY14-FY16………………………......………..6 Table 4. SORT: Risks to Mexico CPS Program ………………………………………...16

BOXES Box 1. Mexico’s Productivity Challenge and Structural Reform Agenda…......................8 Box 2. Cross Cutting Themes in the CPS…………………………………………….......9

FIGURES Figure 1. Revised CPS Pillars and Objectives……………………………..…………….15

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Acknowledgements This PLR was produced by a Task Team lead by Gabriela Vidals (Operations Officer, LCC1C and TTL), Jutta U. Kern (Country Operations Adviser, LCC1C and co-TTL), Luciana Harrington (Strategy Officer, CBCCE and co-TTL), Ary Naim (Country Manager, CLAMX and co-TTL), Jaya Anderman (Investment Analyst, CLAMX and co-TTL), and Gianfilippo Carboni (Risk Management Officer, MIGEC and co-TTL) under the overall guidance of Gerardo M. Corrochano (Country Director, LCC1C). The team is grateful for the contributions of a dedicated WBG team, composed of: Alexandra Ortiz (Program Leader, LCC1C), Alma Kanani (Operations Adviser, LCROS), Andrea Merrick (Senior Country Officer), Beatriz Elena Franco (Program Assistant, LCC1A), Carlos Rodriguez Castelan (Senior Economist, GPV04), Eduardo Wallentin (Senior Manager, CBCCF), Eva M. Gutierrez (Program Leader, LCC1C), Jozef Draaisma (Senior Country Economist, GMF04), Karim O. Lara Ayub (Operations Analyst, LCC1C), Karina M. Kashiwamoto (Language Program Assistant, LCC1C), Luciana Baltazar Vazquez (Investment Analyst, CLAMX), and William Wiseman (Program Leader, LCC1C). The team would like to thank the peer reviewers: Jose Ernesto Lopez Cordova (Practice Manager, GTCCS), Meskerem Brhane (Program Leader, AFCE2), and Samuel Freije-Rodriguez (Lead Economist, GPV02). They would also like to thank Jorge Familiar (Regional Vice President, LCRVP) and Manuela Ferro (Director, Strategy and Operations, LCRVP) for their strategic guidance and support throughout the preparation process.

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I. INTRODUCTION

1. This Performance and Learning Review (PLR) summarizes progress in the implementation of the FY14-FY19 WBG Mexico Country Partnership Strategy (CPS), which was discussed at the Board of Directors on December 12, 2013 (Report 80800-MX). The CPS set out a country engagement model based on a development solutions approach that delivers a customized package of WBG financial, knowledge, and convening services. The four key areas of engagement supported by the CPS are: (i) Unleashing Productivity; (ii) Increasing Social Prosperity; (iii) Strengthening Public Finances and Government Efficiency; and (iv) Promoting Green and Inclusive Growth. The CPS is fully aligned with Mexico’s National Development Plan (NDP) for 2013-2018 and supports the Government of Mexico’s (GoM) development agenda of increased productivity and inclusive growth. This PLR was discussed with the Government in July and December 2016.

2. The CPS remains a valid and effective framework for collaboration and engagement between the country and the WBG. This PLR proposes a deepening of support in the four main areas of WBG engagements in response to the authorities’ requests and takes the opportunity of this mid-course review to update the results framework of the strategy. The PLR shows that the WBG-supported program is on track and has advanced towards the achievement of the CPS objectives. The implementation of the GoM structural reform agenda has progressed, impacting positively on CPS implementation. For the remainder of the CPS period, the World Bank will continue supporting the Government’s development challenges with a flexible engagement building on a long-standing client relationship. IFC will continue developing frameworks for effective private sector participation in the context of the reforms with focus on infrastructure, access to finance, and productivity of the industrial sector. MIGA remains open to explore opportunities to support the private sector in the areas of infrastructure and energy via its political risk insurance and credit enhancement products.

II. MAIN CHANGES IN COUNTRY CONTEXT

3. President Enrique Peña Nieto assumed office in December 2012 for a six-year term and mid-term elections held in June 2015 assured a working majority for the President in the lower house of Congress. The President launched a comprehensive anti-corruption legal and institutional framework, and re-emphasized implementation efforts of the important structural reforms approved almost at the start of the current administration. The structural reforms are aimed at raising productivity, competitiveness and potential output growth benefiting from the greater economic integration of the past years. The areas covered are fiscal, energy, education, telecommunications, and the financial sector (see Annex 5). The energy reform sought to end state monopolies and encourages private sector participation. The education sought to improve the selection, training, and evaluation of teachers. In telecommunications, measures were introduced to increase competition and access to information. The financial sector reform aimed to improve sound access to credit by improving financial infrastructure, fostering competition, and enhancing consumer protection. The fiscal reform aimed to increase revenues through more efficient and progressive taxation and introduce unemployment insurance and a means-tested pension; among other things. At the time of CPS preparation, Mexico’s economic activity had fully recovered from the severe contraction experienced following the global financial crisis and continued growth of exports, domestic investment, and consumption managed to close the output gap. However since 2013, persistent growth challenges in advanced economies and a gradual rebalancing and moderation of growth in China led to subdued global growth and stagnant global trade with a negative impact on commodity prices, thereby creating a more challenging environment for the continued expansion of emerging markets economies. The Latin American and Caribbean region entered in a low-growth environment, with regional growth slowing from 2.9 percent in 2013 to -1.4 percent in 2016. With a much larger manufacturing export base that is highly integrated in global supply chains and U.S. industrial production, the Mexican economy was less affected by the slump

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in commodity prices though continued to expand at a more modest pace of 2.1 percent between 2013 and 2016.

RECENT ECONOMIC DEVELOPMENTS AND OUTLOOK 4. The Mexican economy continues to grow, though structural reforms are being implemented in a difficult external environment. The economy grew at 2.6 percent in 2015, and is projected to slow down to about 2 percent in 2016, due to the monetary and fiscal policy response to adverse external shocks weighing down on aggregate demand. While several beneficial effects from the reforms have already been observed, implementation takes time and the impact will only materialize over the medium to long-term. Assessing the effect of reforms on economic growth remains challenging. Over the same period the Mexican economy— Mexico being a net oil exporter—was impacted by a sharp drop in the oil price, falling oil production, modest global demand, and heightened international financial volatility.

5. Economic activity recovered from a brief cyclical downturn in 2013 and is currently facing renewed headwinds from an external environment of modest global growth, stagnant trade, and heightened policy uncertainties. Weak external demand and a slow start in public investment led to a dip in economic activity at the beginning of the current administration. A subsequent strengthening of manufacturing exports, and more recently, of private consumption managed to bring growth back to its longer term average without creating significant demand-side price pressures. The expansion of economic activity currently relies on private consumption, as weak investment and export demand are no longer contributing to growth. Increased external competitiveness following a substantial depreciation of the Mexican peso with respect to the U.S. dollar has not yet led to a boost in external demand. Strong vertical supply relations between U.S. and Mexican manufacturers have caused softness in U.S. industrial production to be transferred to Mexican manufacturing industry and exports. A decline in the volume of oil production, due to falling output from aging fields and insufficient investments in replacing exploration and exploitation capacity, further trimmed down annual growth rates in 2015 and 2016 by about half a percentage point. Heightened policy uncertainty, in particular in Mexico’s key trading partners, is likely to lead to a reduction in investment, having a negative impact on growth at least during 2017.

Table 1. Mexico – Main Macroeconomic Indicators (Percentage of GDP unless otherwise specified) Actuals Projections

2013 2014 2015 2016 2017 2018 GDP (US$, billions) 1,262 1,298 1,151 1,037 1,007 1,060 GDP growth rate 1.4 2.3 2.6 2.0 1.8 2.5 CPI Inflation rate (eop) 4.0 4.1 2.1 3.3 3.9 3.6 Fiscal 1/ Revenue 24.3 23.4 23.3 22.5 21.2 21.1 o.w. Oil 8.4 7.1 4.7 4.1 3.8 3.8 Expenditure 28.0 27.9 27.3 25.5 24.1 23.6 o.w. Interest 2.5 2.6 2.8 3.1 3.2 3.5 Overall Fiscal Balance 2/ -3.7 -4.6 -4.1 -3.0 -2.9 -2.5 Public Debt 3/ 40.4 43.2 47.6 50.0 50.0 49.7 External Accounts Export (nominal US$, annual % change) 2.5 4.4 -4.1 -5.2 3.8 5.3 Import (nominal US$, annual % change)) 2.8 4.9 -1.2 -3.4 3.3 4.9 Current Account Balance -2.5 -2.0 -2.9 -2.9 -2.8 -3.0

1/ General Government, data exclude state and local governments and include state-owned enterprises and public development banks

2/ Public Sector Borrowing Requirements (PSBR) as published by the authorities 3/ Net stock of PSBR as published by the authorities

Source: INEGI, SHCP, Banco de Mexico, IMF and Bank staff estimates 6. Prudent fiscal policies remain a priority under a scenario of low oil prices, modest growth and gradually tightening external financing conditions. A significant decline in oil related fiscal revenue by about 3 percent of GDP over the past two years is being compensated by a major hike in income tax

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revenue, significant non-recurrent revenue from an annually contracted oil price hedge and the transfer of central bank dividends to the federal government. Income tax revenue grew as a result of a deferred impact of the revenue-enhancing tax reform enacted end-2013 and an increase of the excise tax on domestic sales of gasoline and diesel. In addition, the government announced several rounds of public expenditure reductions as of 2015 in response to a looming longer-lasting scenario of low oil prices. The fiscal consolidation aims to reduce the fiscal deficit gradually from 4.6 percent of GDP in 2014 to 2.5 percent by 2018 and stabilize public debt-to-GDP. The steady increase in the latter as well as chronically disappointing economic growth led credit rating agencies to put Mexico’s sovereign credit rating on a negative outlook.1

7. Integration in global markets has strengthened the spillovers of external shocks to Mexican asset prices and the exchange rate poses policy challenges for maintaining economic and financial stability. A significant depreciation of the Mexican peso against the US dollar has taken place over the past two years while a flexible exchange rate is being effectively employed as an external shock absorber. A major pass-through of currency depreciation to domestic prices has not yet manifested itself as annual inflation has been moving close to the central bank’s target of 3 percent. Nevertheless, the possibility of a pass-through to inflation following an additional currency depreciation remains a major concern for the monetary authorities who, in response, have hiked the policy rate during 2016 by 250 basis points to 5.75 percent. The priority is thus clearly to maintain prudent monetary, financial, and fiscal policies to create the conditions for stronger growth in the medium term, which should also be helped by the structural reforms under implementation.

POVERTY AND SHARED PROSPERITY 8. Moderate economic growth over recent years has hampered significant poverty reduction and improvements in shared prosperity. As of 2014, Mexico still lagged behind on the World Bank goal of ending extreme poverty by 2030, and exhibited only modest progress in shared prosperity (growth of incomes of those in the bottom 40 percent of the population).2 In contrast, the official extreme poverty rate (which combines income poverty with indicators of social deprivation) declined from 11.3 percent in 2010 to 9.5 percent in 2014, driven by improvements in all six dimensions of social deprivation that define the official Multidimensional Poverty Index (see Table 2 below). Over the same period, the official moderate poverty rate3 stayed constant (the same percentage of the population, 46 percent,4 lived in poverty in 2010 as in 2014), which was driven by a stagnation of income poverty. Recent moderate growth has left the worse-off untouched. Between 2010 and 2014, the income growth of the bottom 40 percent of the population was practically zero (annualized rate of 0.13 percent)5 while overall income growth was just 0.46 percent.6 Income inequality is high and stagnant in Mexico; the Gini coefficient declined only slightly

1 S&P BBB+ negative outlook (Aug 23, 2016); Moody’s A3 negative outlook (March 31, 2016). 2 The World Bank has continuously worked on the comparability of poverty numbers based on a monetary measure. In the case of Mexico, data for 2014 reports that 5.7 percent of the population lived below the $1.90 a day poverty line (2011 PPPs) down from 11.7 percent in 2000, and that 14.8 percent lived with less than $3.10 a day (2011 PPPs) in 2014, down from 23.4 percent in 2000. 3 Since 2009, Mexico adopted a Multidimensional Poverty Index (MPI) as the official poverty measure, which combines monetary poverty with six indicators of social deprivation or social rights outlined in the Mexican Constitution: (i) educational gaps, (ii) access to health services, (iii) access to social security, (iv) quality and spaces of the dwelling, (v) access to basic services in the dwelling and, (vi) access to food. A person is considered poor if his income is below a poverty line (income poverty) and if he is deprived in at least one social right. A person is considered extreme poor if his income is below the minimum poverty line and if he faces three or more social deprivations. 4 Source: Data from Consejo Nacional de Evaluación de la Política de Desarrollo Social (National Council for the Evaluation of Social Development Policy, CONEVAL) using ENIGH-MCS 2014. There is no official poverty number for 2015 since ENIGH-MCS 2015 is not comparable to previous years. 5 The income aggregate to calculate shared prosperity is the official income aggregate that CONEVAL produces to measure the population below the well-being lines. 6 Recent trends of income-based indicators of welfare such as monetary poverty rates and growth of household incomes should be taken with some caution due to some recent evidence of higher non-response rates of better-off households, as well as earnings underreporting on the Labor Force Survey (ENOE in Spanish) and into a lesser extend in the budget household survey (ENIGH).

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from 0.51 in 2010 to 0.50 in 2014. Poverty is particularly concentrated in few states. In 2014, more than 40 percent of the poor (42.4 percent) were concentrated in only five of the thirty-two states: Chiapas (which held 7 percent of the total number of poor), State of Mexico (with 15 percent), Oaxaca (with 5 percent), Puebla (with 7 percent), and Veracruz (with 8 percent).

9. After 2014, real labor income has shown some improvements although it is still below the level observed before the 2008-09 global financial crisis. In contrast to an average growth of 0.9 percent between 2010 and 2014, real labor income per capita grew at an average rate of 3.6 percent during 2015 and until Q3 of 2016. Despite this recovery, the level of real labor income is still 9.7 percent below the pre-crisis level, since it had fallen 16.4 percent between 2007-Q3 and 2014-Q3. Lower inflation and higher labor incomes in recent years have improved the purchasing power of households. Although there is no official poverty number after 2014, the Labor Income Poverty Index (LIPI)7 –an indicator reporting labor income below the poverty line– shows a decrease of the percentage of people who cannot acquire a food basket with their labor income over the last years. After a steady increase between 2010 and 2014, the LIPI has shown a downward trend since 2015, particularly in rural areas. In addition, the international poverty projections foresee a reduction in monetary poverty rate (at US$4 a day in 2005 PPPs) as it is expected to drop less than one percentage point from 27.5 percent in 2014 to 26.9 percent in 2018. Extreme monetary poverty (at US$2.5 a day in 2005 PPPs) is expected to remain relatively stagnant throughout 2018.

10. Measures of social deprivation along numerous dimensions have shown significant improvements over the last 20 years as social spending has expanded and became more progressive. According to the adjusted social deprivation index8, an index of nonmonetary measures of welfare that includes education, water, sanitation, and electricity, along with housing-quality characteristics, the number of people facing deprivations and the average number of deprivations among those who are deprived have declined since 1990. Social programs, including Piso Firme, PROSPERA, and Seguro Popular have expanded over the years, significantly contributing to improved access to infrastructure, health care, and education for the poor and providing financial support through cash transfers. Table 1 shows the more recent evolution of social deprivations, as captured through the official poverty measurement in Mexico. In particular, access to health care services, boosted by the expansion of the non-contributory health insurance program Seguro Popular, has been the dimension with the largest decline between 2010 and 2014. In contrast, access to social security and food security have not improved much. Overall, the population with at least one non-monetary social deprivation has decreased since 2010 as has the percentage of people who face three or more social deprivations. However, over the same period of 2010-14 monetary poverty has not improved, and nor has the number of people below the minimum well-being line, which has been particularly due to higher food prices with respect to overall inflation. The implications of using a Multidimensional Poverty Index (MPI) is that it helps to highlight that policies and programs that focus purely on income growth will be insufficient for poverty reduction and, thus, need to be accompanied by investments in public goods and service delivery.

11. Looking forward poverty reduction will continue to be driven by further declines in social deprivations, although it is projected to remain modest due to low growth prospects. Modest improvements in household’ incomes have been linked to a sustained fall in labor productivity since 2000 in sectors such as mining, hotels and restaurants, real estate, health and social work, and education. The

For instance Campos (2013) finds that in the labor force survey the non-response for income has increased from 19 percent in 2005 to 30 percent in 2014. 7 The LIPI does not utilizes the same official methodology of the official measure of poverty since it does not consider all sources of income nor all non-monetary dimensions of the MPI. However, the index provides an indication in the short run of the purchasing power of the households based on the labor income and the cost of the food basket. The LIPI is produced by CONEVAL based on the Labor Force Survey (ENOE) since 2005. More information about this indicator (LIPI) can be found here: http://www.coneval.org.mx/Medicion/Paginas/ITLP-IS_resultados_a_nivel_nacional.aspx 8 Since the official MPI measure is only available since 2008, the adjusted social deprivation index has been constructed to fill the gap and measure nonmonetary poverty over the longer term. The index measures welfare at the municipal level based on a subset of the MPI deprivations derived from the population censuses of 1990, 2000, and 2010.

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recent process of structural reforms currently being implemented in the energy, telecommunications, and financial sectors as well as in competition policy, fiscal policy, education, and labor markets, is expected to lead to higher productivity which will be critical to generate income gains and contribute to poverty reduction. However, the impact of these reforms in terms of higher income growth and increased productivity is likely to materialize only over the medium to longer term. As the Mexican economy continues to face a complex external environment, poverty reduction will continue to be driven by social policies that have been effective in improving the non-monetary dimensions of welfare, which form part of the official poverty measurement. These policies, which include access to quality education, health and housing, are directly connected to sectors and programs supported by this CPS. Nevertheless, possible inflationary pressures coupled with cuts in public expenditure and investments may limit growth of household incomes and improvements in the multiple indicators of social deprivations of the MPI.

Table 2. Evolution of the Percentage of Population by Social Deprivations of the Official Poverty Measurement, 2010-2014

Social deprivation 2010 2012 2014 Gaps in educational attainment 20.7 19.2 18.7 Access to health care services 29.2 21.5 18.2 Access to social security 60.7 61.2 58.5 Quality and space in dwelling 15.2 13.6 12.3 Access to basic services in the dwelling 22.9 21.2 21.2 Access to food 24.8 23.3 23.4

Source: Consejo Nacional de Evaluación de la Política de Desarrollo Social (National Council for the Evaluation of Social Development Policy, CONEVAL) official poverty measurement using data form the ENIGH-MCS 2010-2014.

III. SUMMARY OF PROGRAM IMPLEMENTATION

12. Most of the original CPS objectives are on track to be achieved. With a focus on selective interventions based on client demand, the WBG’s comparative advantage in Mexico’s context, and alignment with the WBG’s twin goals, the CPS continues to be well aligned with Mexico’s development challenges. Progress on implementation is described in Annex 7. With the NDP’s 37 strategic development areas as a starting point, the FY14-19 CPS identified 12 outcomes through a systematic filtering process. These outcomes were organized into 4 themes and 11 sub-theme engagement areas. Progress on outcomes through a number of indicators and intermediate indicators are detailed in Annex 3. Going forward, the structure9 of the CPS has been simplified with this PLR.

OVERVIEW OF PORTFOLIO AND PROGRESS TOWARD CPS OBJECTIVES 13. Mexico remains one of the three largest IBRD borrowers per outstanding debt with US$14.7b as of end-December 2016. The active portfolio (as of December 31, 2016) was comprised of 13 projects (including 3 full Global Environment Facility –GEF– operations) totaling US$2.18b in net commitments. Disbursements in FY16 summed up to around US$423m which resulted in a disbursement ratio of around 32 percent. In FY16, nine projects closed (including three overage projects in the energy sector) reducing the active number of projects to 14 with 21 percent of problem projects and net commitments at risk amounting to US$217m. This includes projects in the transport, water, and agriculture sectors. The Bank has an active trust fund portfolio comprising 43 trust funds for a total net commitment of US$227m. This includes a large Clean Technology Fund (CTF) project implemented in conjunction with the national Urban Transport Transformation Project (UTTP) and a Forest Investment Program (FIP) funded project.

9 The CPS will align with the structure introduced by WBG Guidance on Country Partnership Framework. Accordingly, this PLR incorporates the current lexicon: what was originally called “Themes” will be called “Pillars” and “Outcomes” will change to “Objectives”. Sub-themes have been removed as part of an effort at simplification. Detailed changes are described in Section V, “Adjustments to Country Partnership Strategy”.

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14. Close collaboration between the Bank and the Government has helped improve the implementation of the WB portfolio. Disbursements have been strong, with a ratio of 30 percent on average over the past three fiscal years due to proactive portfolio management. However, a number of factors have caused delays in the implementation of Bank operations. At the federal level, budget cuts and difficulties in the use of commercial practices in procurement (e.g. the Urban Transport Transformation Project – UTTP and the Sustainable Rural Development Project), together with problems resulting from piloting innovative approaches in the energy and transport sectors are some of the challenges encountered. At the subnational level, weak institutional capacity and complex institutional arrangements have also contributed to implementation delays. During the implementation period of this CPS, the Bank has worked closely with government counterparts to find adequate solutions to tackle these issues. Annual CPPRs and continuous dialogue have led to several restructurings (i.e., Hybrid Solar Thermal Power Plant, and UTTP) that have provided adequate and timely solutions to turn around the implementation of the projects. Overall, around 35 restructurings were processed over the CPS period to date, demonstrating proactive portfolio management, including the full cancellation of an operation in the water sector (Meteorological Service, MoMet) after numerous attempts to address implementation bottlenecks were unsuccessful. Monthly disbursement forecast exercises with the Ministry of Finance (SHCP) have also been part of the continuous monitoring efforts to proactively manage the portfolio. As a result, the quality of the portfolio remains robust, with only 10 percent of commitments at risk as of December 31, 2016. See Annex 6 for examples of how certain implementation challenges were addressed.

15. The Advisory Services and Analytics (ASA) program has been strategically aligned to support the country’s needs and enhance the implementation of the CPS. The large majority of the ASA program is grouped under 13 active Programmatic Approaches (PAs). The WBG has provided Mexico with timely inputs in areas such as climate change, poverty reduction, urban development, public sector strengthening, and health. For instance, through the Public Expenditure Review (PER) the Bank played a key advisory role providing inputs to Mexico’s fiscal consolidation program and the 2016 budget preparation. In some cases the ASA program has also provided the analytical basis for the preparation of financial operations most notably in the case of the forthcoming Inner City Affordable Housing Program. The demand for Reimbursable Advisory Services (RAS) has increased substantially at all levels of government and has proven to be an effective tool for engagement, in particular, at the sub-national level. In FY16, seven RAS were delivered for a total amount of US$4.5m. During FY17-18, several RAS are planned to be delivered in areas such as monitoring and evaluation, governance, trade and competitiveness, among others.

Table 3. IBRD and IFC Portfolio Trends FY14-FY16

16. The IFC investment portfolio in Mexico has been composed of US$1.3b own account and US$794m in mobilization at the end of FY16, representing the second largest portfolio in the Latin America and the Caribbean region and the seventh largest portfolio for IFC overall. The portfolio represents investments across 54 companies, mostly in the chemicals sector (22 percent), followed by ports (20 percent), financial markets (9.5 percent), cement (9.3 percent), construction and real estate (8.8 percent),

IBRD PORTFOLIO FY14 FY15 FY16

Active Projects # 16 20 14Net Commitments Amt $m 1,570.9 2,380.7 2,184.9Total Disbursements $m 373.2 797.2 718.3Total Undisbursed Balance $m 1,197.7 1,566.5 1,466.6Disbursements in FY $m 132.9 476.6 423.4Disbursement Ratio for IPF only % 38% 21% 32%Slow Disbursements % 25.0 15.0 7.1

PORTFOLIO RISKINESS Actual Problem Project # 3 3 4Problem Project % 19% 15% 29%Commitments at Risk % 16% 13% 15%Proactivity % 57% 67% 67%

PORTFOLIO AND DISBURSEMENTSIFC Portfolio FY14 FY15 FY16Portfolio Committed IFC's Own Account Amt $m 1,556 1,383 1,295Committed Mobilization Amt $m 613 632 794Total Committed Amt $m 2,169 2,015 2,089Total Undisbursed IFC's Balance $m 447 271 352Active Projects # 80 78 71Commitments IFC's own account Amt $m 325 189 316Mobilization Amt $m 211 187 192Total commitments Amt $m 536 376 508Committed projects # 14 10 11

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agribusiness and forestry (5.2 percent), oil and gas (4.6 percent) and others (21 percent). Equity investments represent 20 percent of the total portfolio in FY16 for a total amount of US$263m.

SUMMARY OF PROGRESS 17. The implementation of the CPS program is on track to achieve the majority of the key objectives identified at the beginning of the CPS period, albeit some delays are being experienced. Of the 13 objectives identified in the FY14-19 CPS, nine are on track to be achieved, while three are showing delays and one objective has become obsolete. In the area of innovation (Objective 3), the GoM shifted its focus on implementation of the special economic zones (SEZ) initiative an important aspect of the productivity agenda; (ii) in the area of disaster risk management (Objective 8), the achievement of expected results is taking longer than envisaged; (iii) in the water sector (Objective 11), delays in the implementation of an operation at the subnational level and the cancellation of an investment operation at the federal level have delayed the achievement of expected results; and (iv) demand to support to the infrastructure sector (Objective 4) under the then new National Infrastructure Program 2014-2018, has not materialized and selected infrastructure activities are being supported under other objectives.

Pillar 1. Unleashing Productivity

18. Both IFC and IBRD have successfully supported financial inclusion and financial sector development. The Bank has assisted the country in adding 3 million new clients into the formal financial sector, 20 percent of whom have received credit, savings, and/or insurance in addition to a guaranteed bank account. Moreover, through advisory services, the Bank supported the implementation of key aspects of the Financial Reform Law such as the analysis of competition in financial markets. As a result of these studies, two enquiries were launched by the competition authority in the credit bureau and AFORES (Retirement Pensions Administrators) market. In addition, IFC’s investments in MSME on-lenders successfully penetrated frontier regions through branches in secondary cities, with a focus on women-owned microenterprises (321,458 reached as of 2016). IFC also guaranteed the first bond issued by Consorcio de Asistencia al Microemprendedor (CAMESA) to support fundraising for expanding lending services to microfinance institutions in Mexico, such as contributing to the bond’s favorable local AA credit rating by Fitch and HR Ratings (see Annex 7 - Objective 1).

19. GoM at the federal and state levels implemented several changes to improve the business environment based on the World Bank’s recommendations. Based on the roadmaps to eliminate regulations which hinder competition in specific sectors that were produced for three states (Oaxaca, Estado de Mexico, and Tabasco), a presidential Decree mandated all states to conduct the same analysis of regulatory barriers to competition following the World Bank methodology. Also, following Bank recommendations, the municipality of Oaxaca revised their regulation on retailers’ business hours prompting one large chain to begin operating, and a another one to plan an investment. The Bank is also supporting the implementation of oral judicial proceedings, which have had a significant impact on speeding up and reducing the costs of contract enforcement. In addition, the Bank has played a key advisory role in the formulation of special economic zones (SEZ) policies in Mexico’s poorest states, an area that will be deepened going forward (see Annex 7 – Objective 2).

20. IFC was able to make first investments in the competitive markets created by the Mexican reform agenda. Through the China-Mexico Fund (CMF), IFC made its first commitment to increase private sector participation in the oil and gas sector through a US$200m commitment in Citla Energy. This transaction demonstrated a strong signal of confidence by the markets in the Mexican reform agenda by supporting a new player that combined strong sector expertise, local and global know-how, and adequate capitalization. Other catalytic investments are expected in the power and telecommunications sectors.

21. The Bank has supported innovation in the Information and Communications Technology (ICT) sector and small and medium-sized enterprises (SMEs). As a result of this engagement, 701 IT

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companies increased their technical capacity, received quality standard certifications, and were able to access new markets (well above the 390 target). In addition, an inventory of IT legislation was conducted and delivered to the GoM, identifying regulatory best practices for adapting legislation at the subnational level. The Bank has also supported the National Institute of the Entrepreneur (INADEM), leading to the redesign of six SME programs and a 20 percent reduction in the overall number of programs (see Annex 7 – Objective 3).

Box 1. Mexico’s Productivity Challenge and Structural Reform Agenda Mexico’s growth has largely been driven by capital and labor accumulation and not by growth in productivity. Low productivity growth can be explained by several factors including: underdeveloped financial system, regulatory barriers for doing business, uncompetitive markets for utilities, weak innovation and limited market competition, labor market rigidities, and scarce skilled labor. While the government’s prudent fiscal and macroeconomic management has provided a solid foundation for stability and growth, the ambitious structural reform agenda introduced by the current administration has not yet yielded the desired results. However, the structural reform agenda has the potential to raise productivity and unleash growth in the medium term. During the first two years of implementation, major progress has been achieved on the enactment of legislative changes in the areas of fiscal policy, financial sector regulation, competition policy, energy and telecommunications, labor market regulation, and education. The Bank has provided support as follows: - Fiscal Reform. At the request of the government, the Bank prepared a Public Expenditure Review (PER) to

support its efforts to adjust expenditure policies consistent with the country’s evolving macro-fiscal circumstances.

- Financial Reform. An analysis of competition in financial markets was completed. The Savings and Credit Sector Consolidation project has supported the financial reform by strengthening the cooperative sector through the channeling of funds to help cooperatives comply with the new regulatory requirements.

- Competition Reform. The WBG Subnational Competition Tool has been adopted by Presidential Decree as part of the national strategy on regulatory improvement in Mexico. Now all 32 Mexican states will use this methodology to assess competition considerations in reviewing regulation in 3 priority sectors that will be specific to each state and dependent on that state’s economy/market failures.

- Energy and Telecommunications. In telecommunications, the Bank analyzed the competition impact of the national shared wholesale network program and advised in the design of tender rules. In the energy sector, the IFC has supported the entrance of new players to the oil and gas industries via the China-Mexico Fund (i.e., US$200m commitment in Citla energy).

- Labor and Education Reform. Technical and financial support has been provided to the design of the strategy to place “schools at the center of the system”, induce parents’ participation, improve school directors’ managerial capacities, and enhance the role of the supervisor as promoter of the Reform. Moving forward, the Bank will support the evaluation of key aspects of the education reform as well as teacher training methods.

22. IFC has been successfully supporting the opening of underdeveloped local markets to private sector participation. Some notable examples come from investments in the chemicals, agribusiness, and telecommunications sectors: IFC’s flagship client Etileno XXI 10 is expected to become a competitive producer of polyethylene (PE) and to reduce Mexico’s PE trade deficit by about 80 percent. In agribusiness, IFC has experienced a growth of its portfolio over the last 2-3 years reaching US$67m, with a special emphasis on frontier states, climate change, and energy efficiency. Finally, IFC has supported Virgin Mobile Mexico (VMM), enabling the company to expand mobile broadband usage to the youth segment and expand attractive data packages.

23. IFC’s investments in three new port container terminals promote increased competition in the port sector. It also encourages existing operators to increase their efficiency. In the long run, these investments aim at maintaining Mexico’s growing manufacturing platform, while also generating public

10 IFC provided US$285m loan for its own account and mobilized an additional US$350m loan provided by a syndicate of 5 mandated lead Arrangers. Additionally IFC was one of seven financial institutions acting as Anchor Agency Mandated Lenders. The total project cost was US$4.5b.

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revenues, jobs, and a boost to economic activity. At a broader level, strengthening Mexico’s port capacity contributes to facilitate international trade and in turn, economic growth (see Annex 7).

Pillar 2: Increasing Social Prosperity

24. The World Bank has supported the education sector and its reform agenda in the areas of early childhood development (ECD) and the upper secondary level. Improvements were observed in the standardized national test (ENLACE) scores in math in primary schools (from 557 to 620) and in Spanish (from 490 to 550) and math (from 522 to 570) in secondary schools supported by the second phase of the School-Based Management project. As a result of the technical assistance provided to the implementation of the Upper Secondary Reform: (i) improvements on internal efficiency and a downward trend on the annual dropout rate were observed (from 14.50 to 13.40); (ii) the Ministry of Education (SEP) designed a new strategy to address dropout rates; and (iii) SEP’s perception regarding the timing for successful implementation and the impact of the said reform was modified. On ECD, an increase of 34 percent in the number of children (between 0 to 4 years) who attended the sessions of ECD intervention in target municipalities was observed. Contributions from the Bank on the impact of minimum wages on firms, workers, and economy-wide productivity served as input to the current debate in Mexico on minimum wage policy. IFC is currently developing a mapping exercise for nontraditional education to assess opportunities in the market. This exercise has a focus on providing skills for employability, including corporate training, English language, tutoring, and teacher training (see Annex 7 – Objective 4). 25. The World Bank has been supporting Mexico’s efforts to develop a more inclusive, effective, and integrated social protection system. Building on the Bank’s previous support to Mexico’s social protection system (i.e. Seguro Popular – subsidized health insurance, and Oportunidades – conditional cash transfer, CCT), the WBG is currently contributing to the redesign of the CCT program relaunched under the name of PROSPERA to reflect its additional attention to access to higher education and formal employment. IFC, in supporting the private sector to improve social service delivery in health care, has supported Sala Uno, an eye care provider targeting low-income patients, which has become one of the top providers in Mexico City by volume with more than 10,000 surgeries performed (see Annex 7 – Objective 5). The significant progress in the social protection system is aligned with positive results in the non-monetary dimension of welfare (see Table 2 – lack of access to health care services was reduced from 29.2 to 18.2 percent between 2010 and 2014).

Box 2. Cross Cutting Themes in the CPS

A focus on the poorest states. Through a Memorandum of Understanding (MoU) that included the provision of the full suite of World Bank services, the Bank delivered multi-sectoral support to the State of Oaxaca in public sector modernization, sustainable development, finance and private sector, and human development. In addition, the Bank has contributed to the improvement of the quality and efficiency of the State of Oaxaca’s public expenditure management through a RAS. Based on the Bank’s previous subnational experiences and knowledge, the WBG has been chosen as the primary partner to support Mexico in the design and implementation of the SEZ initiative which aims to increase productivity in the poorest states of Mexico (i.e., Chiapas, Oaxaca and Guerrero). A focus on gender. Between FY14 and FY16, all newly approved projects for Mexico were gender-informed (i.e. incorporated gender in at least one of three dimensions: analysis, action, and monitoring and evaluation). This compares to 89 percent at the regional level. Out of the six new projects during this period, four projects in the water, social protection, education, and finance and markets were gender-informed in all three dimensions. For instance, under the Technical Assistance Program for Rural Microfinance project (Programa de Asistencia Técnica a las Microfinanzas Rurales, PATMIR) financial inclusion was higher for women than for men; out of the 1 million people financially included under the PATMIR, 50 percent were women. The Social Protection Project has also a strong gender-oriented component, as all the program’s beneficiaries are women. Moreover, technical assistance has been provided to the GoM on gender-based violence and statistics, and migration and human trafficking. Innovative gender-integrated transport solutions in Mexico City have also been explored to address violence on public transport. For further information on gender, see Annex 8.

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Pillar 3. Strengthening Public Finances and Government Efficiency

26. The Bank has supported the GoM in managing medium-term fiscal challenges. Playing a key advisory role, the Bank’s Public Expenditure Review (PER) provided inputs to Mexico’s fiscal consolidation program and the 2016 budget preparation. Furthermore, the Bank has made recommendations to improve the tax code and the assessment of public investment projects, and to design a legal framework for the regulation of subnational fiscal performance (see Annex 7 – Objective 6).

27. Some tangible results were achieved through technical assistance provided to increase the adoption of modern public sector management and information systems by select entities. For instance, a comprehensive diagnostic on public sector management for the State of Oaxaca –including recommendations for its modernization– was implemented. Through RAS, the Bank is also supporting public sector strengthening in Mexico City as well as in Veracruz, and the improvement of government statistical information systems in Jalisco, Morelos, and Guanajuato (see Annex 7 – Objective 7).

28. Through a package of knowledge activities on disaster risk management (DRM), the Bank has delivered concrete short-term outputs that have served as inputs to policy-making processes. For example, a RAS in DRM provided the government with recommendations to strengthen Mexico’s DRM structure at the Federal and subnational level. The Federal Government now possesses the necessary elements to promote disaster risk reduction investments in a cost-efficient way to manage disaster risk (see Annex 7 – Objective 8).

Pillar 4. Promoting Green and Inclusive Growth

29. To reduce the footprint of growth, progress has been made in reducing greenhouse gas (GHG) emissions through the promotion of low carbon initiatives in the transport, housing, solid waste, and energy sectors. Results from the support to the transport sector include the development of four integrated mass transit corridors which have resulted in an emission reduction of 1.43 MtCO2e (as of August 2016); and four cities have environment and climate change components integrated into the urban master plan. In housing, the Bank support for improving the efficiency of the housing subsidy program has led to the preparation of a new project to improve access to affordable housing for low income population and urban planning options to reduce GHG emissions. One of IFC’s critical investments in this area is its support to Cementos Mexicanos (CEMEX), a global player in building materials, in its climate change and environmental impact mitigation investment program, where all the proceeds of the financing will be placed in projects that have a positive impact on the company’s GHG emissions. In solid waste management, the Bank contributed to the review of the proposed national legal framework for integrated waste management with a view to reduce GHG emissions. The World Bank and IFC have collaborated to provide technical assistance to the National Infrastructure Fund (FONADIN) to improve the efficiency of its Municipal Solid Waste Program (PRORESOL). IFC expects that its involvement in these initiatives would foster the development of subnational Public Private Partnerships (PPP), not only for waste management but also for other municipal services. Combined IBRD/GEF support resulted in the reduction of approximate 9.15 MtCO2e emissions from 2012 to 2016 in the energy sector. IFC has supported two green building investments through IFC’s Excellence in Design for Greater Efficiencies tool (EDGE), promoting sustainable building design to reduce energy and water usage (see Annex 7 – Objective 9).

30. The Bank is helping to promote the use of natural resources in an optimal way as part of Objectives 10, 11, and 12. Through an IBRD loan in forestry, 1.8 million hectares have been brought under conservation or sustainable management practices since 2011, and more than 1,000 communities and ejidos are now benefiting from the National Forestry Commission (CONAFOR) programs. With support of several GEF grants, the Bank has also contributed to: i) bringing 11,861 hectares under enhanced biodiversity protection; ii) small and medium-sized agri-business having adopted environmentally sustainable technologies; and iii) the reforestation of around 50 hectares of mangrove ecosystem having

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been completed as well as 10 hectares of riparian zones. IFC has invested in Proteak, a leading teak producer in LAC with Forest Stewardship Council (FSC) certified commercial plantations and is expanding into Medium Density Fiberboard (MDF) production, vertically integrated with certified Eucalyptus plantations. In addition, IFC has supported exiting client Puertas Finas with advisory and investment for cleaner production. Through the Water Utilities Efficiency Improvement Program (PROME), the Bank has supported 91eligible water utilities to provide efficient, reliable water and sanitation services to their users. At the subnational level, the Bank approved the first Program for Results (PforR) project in Mexico and the third in LAC, to support the improvement of the institutional framework of the water supply and sanitation sector of Oaxaca. The Bank will continue its support to the water sector for the Integrated Management Plan for the Cutzamala Water System and the integrated Urban Water Management Strategy for Monterrey while an investment operation is being prepared to improve the efficiency, quality and financial performance of the water supply service of Mexico City (SACMEX). Finally, in the renewable energy sector, Mexico’s first Independent Power Producer (IPP) wind power plant developed in Mexico generated around 730 GWh of renewable energy and reduced 450,623 tCO2e emissions during the first half of the CPS. The Bank has also helped pilot the integrated combined cycle systems power generation technology in Mexico resulting in 11,800 tCO2e emissions avoided, once the plant is in full operations. Through the Integrated Energy Services project, 36 solar farms are either in operation or being tested, which brings electricity to around 1,800 remote, rural households.

IV. EMERGING LESSONS

31. The utilization of the WBG full suite of services and instruments of engagement with the public and private sectors is a good example of the Bank’s relevance in upper middle-income countries like Mexico. IBRD’s exposure with the country stayed more or less constant over the CPS period, resulting in relatively small new annual commitments of around US$400m to US$500m. Mexico is a a high income country with complex needs. Government demand for World Bank services and the WBG’s comparative advantage is on the complementarity of financing, provision of cutting edge global knowledge and WBG’s ability to provide development solutions tailored to the country’s needs, including in support of newly developing markets. Government demand plays a major role in stimulating private sector participation. The newly established China-Mexico Fund is an excellent example of helping to build investors’ confidence in Mexico’s newly opened energy market. Programmatic knowledge services have been effective in providing a flexible multiannual framework that integrates several types of support under one umbrella objective. This approach allows the timely response to medium and short-term demand. For example, a programmatic RAS to analyze options for the Cutzamala watershed built the critical base for possible financial engagements in order to contribute to securing Mexico City’s water security in the long-run. An in-depth urbanization review financed through World Bank budget, followed by a RAS on options for low-income housing and urban planning led to the request for investment financing in the housing sector. IBRD and IFC projects—unlike commercial lenders— are intertwined with advisory and knowledge services and often tackle bottlenecks that are hindering development. Other than mere lending numbers suggest, the WBG remains highly relevant in paving the way for solutions that can be scaled up, such creating global public goods in many areas.

32. RAS have proven to be an effective tool for collaboration when working at the subnational level. This knowledge product has proven to be in high demand and an important source of timely development solutions for subnational clients. For example, the World Bank has provided valuable technical assistance, in the form of a three-phase RAS for the development of an integrated management plan for the Cutzamala Water System –a very complex engineering and social system that is in distress due to the increasing water demands of Mexico City’s metropolitan area11. The final report will define

11 During Phase I of the RAS, the World Bank supported the Government in the elaboration of an integrated diagnosis of the Cutzamala System and its watersheds. As part of Phase II, the World Bank supported the design of an information management

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investments required to ensure the sustainability of the system, as well as an institutional proposal for its proper implementation and tracking. Similarly, the RAS for Strengthening Public Sector Management in Oaxaca became one of the first cases of partnership at the subnational level and shaped the Bank dialogue with one of the poorest states in Mexico. Through the RAS, the Bank delivered targeted technical assistance to help the Government of Oaxaca improve its administrative capacity. For instance, a strategy, processes, and tools were developed to institutionalize strategic planning to inform State’s government interventions and expenditure allocation. As a direct result of this work, the government was able to develop for the first time sectoral development plans for agriculture, forestry, housing, livestock, roads, and water sectors. The portfolio in similar RAS engagements is expanding to other states and includes work in Mexico City. Overall, the demand for RAS has substantially increased not only at the subnational level, but also at the federal level, and the Bank continues working closely with the Ministry of Finance in coordinating the RAS program.

33. The WBG should continue playing a key role as a global facilitator for knowledge exchange between Mexico and other countries. During the first half of this CPS period, Mexico has engaged in approximately 50 knowledge exchanges as both the host and recipient of knowledge from other countries. As an innovative MIC with critical lessons learned, Mexico continues to increase its engagement in sharing experiences with other countries in several areas such as climate change and social protection. Several countries such as India, Morocco, and Egypt have learned from Mexico’s experiences and have adjusted their own programs based on proven positive results (see also Annex 9).

34. Innovative procurement solutions have emerged in response to complex implementation issues of a client such as Mexico. For instance, the Independent Evaluation Group (IEG) has acknowledged that an “innovative procurement strategy can aid in making more efficient use of IBRD resources”12 and that the “use of country systems for the procurement of consulting services in countries with a strong fiduciary environment, such as Mexico, helps avoid unnecessary implementation delays caused by the application of dual (Bank and country) rules”13. Examples include the use of a transactional web procurement application and a non-price based selection criteria in the Sustainable Rural Development Project and simplified procurement procedures for the acquisition of rolling stock in the UTTP. The recognition of the areas in need of improvement led to a study of procurement bottlenecks that could later be improved in both the Bank’s and government processes. In addition, an analysis of national and international market participation in Bank financed activities was carried out to inform the tendering process. As a result, thresholds were increased for the use of National Competitive Bidding of Civil Works, Goods and Non-Consultant Services and Short Lists composed only by national firms. These actions helped to develop new collaboration approaches, including with financial intermediaries. Recommendations from Mexican stakeholders (government, private sector, and civil society) were considered during the consultation process of the new Bank Procurement Framework (NPF) and were included in the final version.

V. ADJUSTMENTS TO COUNTRY PARTNERSHIP STRATEGY

35. The CPS remains relevant and fully aligned with both Government’s development plan and the WBG’s twin goals of ending extreme poverty and promoting shared prosperity. Collaboration will remain focused on the four priority areas identified in the original CPS. Given the CPS’ flexible design, the WBG engagement has been adjusted, largely reflecting changes in government demand, deepening its support in select areas and rationalizing in the case of infrastructure support. The original CPS envisaged support to this sector in view of possible requests from the then new National Infrastructure Plan. The demand however, did not materialize as planned and focused infrastructure development support is being platform and a communication strategy. Based on the results from these two previous technical assistances, Phase III is expected to structure an Integrated Management Plan for the Cutzamala System. 12 Efficient Lighting and Appliances Project – IEG ICRR No. 0020266, p. 10. 13 School Based Management Project – IEG ICRR No. 14738, p. 9.

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provided under existing objectives. The CPS will maintain its flexibility to respond to client requests as the current administration prepares for elections in 2018. Areas of deepening are described in detail below. While at the time of the CPS discussion, two progress reports were considered useful, one PLR that aligns its assessment with the first half of the government’s mandate was considered more strategic. It serves as a mid-term review and will be the only progress report for the CPS. In addition, CPS monitoring has been conducted through annual CPPRs providing valuable inputs to the definition of the strategy moving forward.

Deepening Support

36. Mexico’s economic situation—as outlined above—in an adverse external environment and generally low growth expectations in Latin America as well as the expected deferred impact from Mexico’s reform agenda, led the Government to emphasize the productivity agenda and fiscal discipline. Areas of deepening for the remainder of the CPS correspond to Government demand. Productivity increase is at the forefront across many sectors in GoM’s requests, including its link to the social protection agenda and the rural economy. Other critical areas of increased demand are also directly linked to Mexico’s economic and fiscal management, such as follow-up support to the PER concluded in FY16 and in particular analytical work to support the implementation of the new Fiscal Discipline Law for Subnational Entities and related public sector management practices. At the same time, Mexico remains committed to the low-carbon urban development path it has chosen and requested additional support in this area.

Improved financial inclusion for productive purposes (Objective 1)

37. Government’s financial inclusion agenda is intertwined with its productivity program. An investment project approved in FY16 to the Rural Financial Development Agency (FND) will support the expansion of credit to the rural economy. An indicator has been introduced to measure the number of additional MSMEs in the rural economy with access to credit, with a 60 percent target for female owned MSMEs. This project will also support developing pilot programs to introduce agriculture commodity price hedging to the services provided by financial intermediaries, thus linking the financial inclusion agenda to agricultural support described below (paragraph 43). Financial technology (Fintech), mobile banking, savings in the micro segment, and insurance are priorities for IFC going forward.

Improved investment climate in target states and select infrastructure development for productive purposes (Objective 2)

38. At the heart of Mexico’s productivity agenda is the Government’s request to support the development of the special economic zones (SEZ) in the south and south-eastern states (SSE) of the country, the region lagging the most in terms of economic opportunity. In order to help create a more favorable investment climate, and drawing on the WBG’s global experience with SEZs, a series of high-profile workshops and technical assistance has already been provided to the Government on the SEZ law. After more than a year of collaboration, the Government views the WBG as the partner of choice on SEZs. While the CPS originally foresaw supporting the poorer states in formulating their innovation strategies, in response to Government demand, efforts were re-focused on SEZs in the SEE states. Moving forward, under the “Improved Investment Climate” objective, the Bank will continue providing technical assistance through RAS to: (i) assessing the viability and demand for each SEZ; (ii) setting up the institutional foundation; (iii) attracting investment and improving the local business environment; and (iv) supporting supplier innovation and linkages development. In addition, IFC’s role will be to work closely with the Bank project team to improve the capacity of states to attract and retain investment. IFC will focus on supporting investment promotion and facilitation and investor aftercare. The CPS will measure the number of recommended regulations/ amendments/ codes adopted in SEZ states.

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39. Government has requested additional support to strengthen productivity of the agriculture sector, a segment of the economy that accounts for 13 percent of Mexico’s GDP14 and employs some of the poorest parts of the population. A new project with the Agency for Support Services for Agricultural Marketing (ASERCA) will aim to improve agricultural storage and information systems for food security and competitiveness in priority areas of Mexico, and will review the Government’s agriculture commodity hedging strategies. A GEF operation (FY18) will complement these efforts throughout the environmental and agriculture sectors to foster integrated landscape management for sustainable rural development. IFC is supporting the integration of farmers into the agribusiness value chain to complement these efforts with private sector initiatives and an updated indicator has been introduced.

40. To support infrastructure development for productive purposes, IFC will continue providing a financing package to help modernize and expand Mexico’s ports. IFC’s financing is supporting new container terminals in several states (e.g. Veracruz, Colima, and Michoacán). These projects will help accommodate Mexico’s growing container trade, provide competition to the sector, encourage existing operators to increase their efficiency, and generate public revenues, jobs and a boost to economic activity. It is expected that some of these projects will also alleviate congestion and provide additional container cargo handling capacity (see Annex 7). The CPS measures this outcome by the number of containers handled in port operations.

41. The GoM has chosen IFC’s Asset Management Company (AMC) to manage the newly established China-Mexico Fund (CMF). The purpose of the CMF is to attract commercial risk capital to support Mexico’s reform agenda by “crowding in” equity investors into the infrastructure, oil and gas, manufacturing, agribusiness, services, and banking sectors. The CMF was established as a US$1.2b fund in December 2014, and is consistent with IFC’s role in mobilizing capital to support private sector growth in middle income countries. The IFC has supported the entrance of new players to the oil and gas industries via the CMF (i.e., US$200m commitment in Citla energy).The CPS monitors new private sector investments facilitated by IFC in opportunities generated by the Mexican reforms in its results framework.

Improved Access and Integration of the Social Protection System (Objective 4)

42. In response to the Government’s intention to better link its social protection system to productive programs, the Bank continues its support to the re-design of Mexico’s conditional cash transfer (CCT) program. Over the last decade, the Bank supported the GoM in promoting social inclusion through a series of financial, knowledge, and convening services. A project associated with the CCT program Oportunidades contributed to achieving significant development results during 2009-2011. Scaling up its support, the Bank is now providing assistance to the re-design of the CCT program, now known as PROSPERA. The Bank is specifically contributing to: (i) linking the poor to a broader set of income generating programs and to (ii) better targeting of the supply of social programs to areas and beneficiaries with the greatest needs. Moreover, the Bank is playing an important role in the development of a monitoring and evaluation strategy of PROSPERA’s productive inclusion activities (see Annex 3). The CPS will measure the number of PROSPERA beneficiaries that participate in social programs and in productive programs, respectively.

Improved Fiscal Management Capacity and Increased Adoption of Modern Public Financial or Information Management Mechanisms in Selected States (Objective 5)

43. Government’s capacity to manage medium-term fiscal challenges at national and subnational levels will also be further developed in response to fiscal pressures. In FY15, the Public Expenditure Review (PER) was a valued input to the Government and deepened the policy dialogue in many areas such as subnational borrowing regulations, and improvements in the targeting of social protection programs. The Government has requested the WBG to explore the possibility of providing more technical assistance in

14 This figure considers the forward and backward linkages created through primary production, post-harvest agro-industrial processes and food production.

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this area, specifically on fiscal consolidation policies for highly indebted states and a better use of federal transfers to state level, as well as managing financial risks from disasters. In addition, several states have requested targeted support to adopt mechanisms to improve public sector management in the areas of financial and information management, including statistical data. The CPS measures this area with three indicators on the number of: (a) states that are in compliance with reporting requirements under the new Fiscal Discipline Law for Subnational Entities; (b) states that have joined the disaster risk transfer pool; and (c) states that have adopted at least one new recommended mechanism to improve their public financial or information management.

Improved capacity for Low-Carbon Urban Development (Objective 6)

44. Government-WBG collaboration with respect to urban development will be strengthened, notably in municipal energy efficiency, solid waste management, and low-income housing. Technical assistance is being provided to tackle Mexico’s challenge of improving solid waste management in selected states and municipalities, which may lead to specific investment financing for target pilots. In the housing sector, the Bank is preparing a new project to support the Government’s Inner-City Affordable Housing Program. IFC has been working closely with the National Housing Commission (CONAVI) to support the update of the National Building Code (Código de Edificación de Vivienda). Both initiatives are focused on increasing the sustainability of the housing sector and successfully complementing each other as they aim to strengthen regulation while providing the right incentives to the private sector and sub-national entities. Complementing these operations is the Municipal Energy Efficiency project which promotes the efficient use of energy in selected municipal sectors. CPS measurements for this objective measure (a) avoided or reduced GHG emissions; (b) the number of cities using municipal energy diagnostics tools; and (c) number of projects with Excellence in Design for Greater Efficiencies (EDGE) certification.

Changes to the Results Matrix

45. The original structure of the CPS was simplified and the results matrix adjusted to improve attribution and measurement in line with the consolidation and deepening efforts explained above. Originally the CPS identified four thematic areas, 11 subthemes and 12 objectives measured by 29 indicators. The simplified structure introduced with this PLR maintains the four pillars but has reduced the number of objectives to seven with 25 indicators. Original “subthemes” were removed entirely. Figure 1 shows the new structure of the CPS after simplification (see Annex 4). This includes for example the merging of objectives under the “Unleashing Productivity” and “Strengthening Public Finances and Government Efficiencies”, as well as dropping the separate outcome for “Upgrading Infrastructure”, given that financing support to the infrastructure sector is being provided under Objectives 2 and 6.

Figure 1. Revised Country Partnership Strategy Pillars and Objectives

MEXICO COUNTRY PARTNERSHIP

STRATEGY FY14-19

Pillar 1Unleashing Productivity

Objective 1Improved financial

inclusion for productive purposes

Objective 2 Improved investment

climate in target states and select infrastructure

development for productive purposes

Pillar 2 Increasing Social Prosperity

Objective 3Improved access

and quality in target education

programs

Objective 4Improved access to and integration of

the social protection system

Pillar 3 Strengthening Public Finances

and Government Efficiency

Objective 5Improved fiscal management

capacity and increased adoption of modern public

financial or information management mechanisms in

selected states.

Pillar 4 Promoting Green and

Inclusive Growth

Objective 6Improved capacity

for low-carbon urban development

Objective 7Improved sustainable management of key

natural resources (i.e., forests, biodiverse areas, water, and

combined renewable energy)

16

VI. RISKS TO CPS PROGRAM

46. The overall risk for this CPS continues to be “Moderate” based on Mexico’s sound macroeconomic management, the political buy-in, and the progress made in implementing the structural reform program that will help mitigate the impact of fiscal tightening on program implementation. Critical risk categories are discussed in the order they appear in the Systematic Operations Risk-rating Tool (SORT – Table 4).

Table 4. SORT: Risks to Mexico CPS Program Risk Categories Rating (H, S, M or L) 1. Political and governance M 2. Macroeconomic M 3. Sector strategies and policies L 4. Technical design of project or program M 5. Institutional capacity for implementation and sustainability S 6. Fiduciary M 7. Environment and social M 8. Stakeholders L Overall Moderate (H: High; S: Substantial; M: Moderate; L: Low)

47. Political and Governance risks remain moderate. The main risk relates to possible delays in program preparation and implementation that could be caused by changes to the administration following the presidential elections scheduled for 2018. An important mitigation factor will depend on the WBG’s ability to rapidly engage with the new administration in order to ensure continuous dialogue with the authorities. As was proven successful in other countries, the Bank will commence the dialogue with new counterparts already during the transition period. While the pace of program implementation could be hampered as the change approaches, the Bank will seek early engagement with the new administration facilitated by a new set of Policy Notes to be prepared before the election. In addition, the reform program provided opportunities for WBG engagement consistent with the CPS program, such as the CMF managed by IFC in support of the energy and telecommunications sector reform. Some uncertainty remains regarding private sector development prospects and the associated risk that would have effects on IFC’s program. Possible external policy decisions regarding trade and migration could decrease FDI with a stronger impact expected on the manufacturing, agribusiness, and service industries. The infrastructure sector tied to trade (ports and roads) would also likely experience slowdowns. IFC is ready to support Mexican companies through monitoring current client cash flows, especially those that are vulnerable to the foreign exchange risk.

48. Crime and violence remain an important aspect of Mexico’s political and governance risks, although their direct impact on CPS implementation is limited. Most incidents of severe crime and violence are observed in the south and south-eastern states, as well as the northern-border states. So far, the Bank has not experienced direct impact on the preparation and implementation of its operations, although for example the Adaptation to Climate Change project refrained from including a state affected by crime and violence into its operation for security considerations. Teacher protests and blockades in several states against the education reform could cause temporarily logistic challenges to missions when visiting project sites. Exposure of Bank operations in these areas is limited and is being carried out with the necessary precaution and security arrangements to ensure staff safety. Logistics of mission travel are coordinated closely with the in-country security advisory teams. GoM has not requested specific Bank support in the security sector.

49. The macroeconomic risk is moderate, as Mexico maintains prudent and strong monetary, financial and fiscal policies and policy framework to preserve macroeconomic and financial stability. However, a complex external environment of modest global growth, stagnant trade, low oil prices, and

17

volatile capital flows to emerging market economies has led to monetary and fiscal policy responses including significant hikes in domestic interest rates, a major depreciation of the Mexican peso against the U.S. dollar and several rounds of public spending cuts. Nevertheless, economic activity has been resilient to these adverse shocks over the past few years even though the monetary and fiscal policy response did weigh down on aggregate demand. Yet, risks to the economic outlook, including rising protectionism among some of the country’s main trading partners, volatility in global financial markets, and a sharp reversal of capital flows to emerging markets, as well as a further unexpected decline in the country’s oil production may start to strain some of the considerable fiscal and monetary policy buffers.

50. Repeated public expenditure cuts as a result of the overall macroeconomic situation had a bearing on timely portfolio implementation, causing implementation delays in some operations. Due to the ‘non-additionality’ rule in Mexico, whereby all projects are being financed out of the general budget allocation, federal budget cuts have an immediate impact on project disbursements. Bank management maintains a strong dialogue on this issue with counterparts at the Ministry of Finance and relevant implementing agencies in order to raise awareness of the benefits of forward-looking and multi-annual budget planning in institutions where WB operations are active. Close portfolio monitoring will remain critical. Several actions have already been taken which include, among others, project restructuring to address issues such as the lack of counterpart funds and adjustments in the scope of projects. This has proven to be an effective strategy which will continue for the remainder of the CPS period.

51. Institutional capacity for implementation and sustainability may pose substantial risk to the implementation of the strategy, particularly at the subnational level. Constitutional limitations on external borrowing by subnational governments require a national development bank to act as intermediary, thereby increasing the complexity of project implementation. In addition, some states present high level of credit risk and weak institutional and management capacity that can significantly impact the quality and timeliness of project preparation and implementation. Two examples of implementation set backs are the Oaxaca Water and Sanitation Sector (WSS) Modernization Project and the Urban Transport Transformation Project (see Annex 6). In an attempt to mitigate the risk related to working at the subnational level, regular pipeline review meetings have been established with the Ministry of Finance that include discussions on possible subnational operations taking into account relevant credit worthiness of subnational entities. At the same time, a series of knowledge services has been provided to accompany the implementation of the new Law on Fiscal Discipline for Subnational Entities. In addition, timing of project preparation at the subnational level is critical to take advantage of the productive period within the political cycle. An early engagement with incoming state administrations is key. Lessons from the Oaxaca WSS and the Urban Transport Transformation projects will be taken into account for future project preparation.

ANNEX 1

18

ANNEXES

ANNEX 1. REVISED CPS RESULTS MATRIX

CPS Objectives CPS Objective Indicators WBG Program PILLAR 1: UNLEASHING PRODUCTIVITY

Objective 1: Improved financial inclusion for productive purposes.

(a) Number of clients [persons] mainstreamed into formal financial sector. • Baseline: 7.12 million (2014) • Target: 8 million (2016)

FINANCIAL SERVICES Ongoing • Rural Savings and Credit Sector Consolidation (P123367) • Expanding Rural Finance (P153338) • IFC: Mifel – SME Banking (29030)/DCM CS Mex trust –

capital markets (32407/36395); GTSF Nemak – Supplier finance (31922); GTSF Comercial Mexicana – Supplier finance (31999) GTSF Soriana TCM – Supplier finance (37664); DCM CAMESA PCG (34538/37284)/Progresemos – Microfinance (30905/36410)

Pipeline • IFC: Vector Mezz – Banking (TBD); Unifin– Leasing

(32147); E-factor Network- factoring (33270) ; Contigo – Microfinance (38960)

Closed • IFC: Banorte – Commercial banking (28213); Compartamos –

Micro credits for women (29634); Bankaool – Agribusiness loans (26206); Banco Bajio – SME Banking (29485/31017); Te Creemos II – Microfinance (32029)

KNOWLEDGE SERVICES Ongoing • IFC: Pronafim (599630) partnering with Sparkassen, TripleJump and IDB. Pipeline • PA Expanding Access to Credit (TBD) • IFC: Corporate Governance Platform (600514); Registro

Único de Garantías Mobiliarias (599921) Closed • PA Sound Financial Sector Development (P133788) • Commercial Real Estate Price Index CREPI (P157021) • Mexico Financial Capabilities Assessment (P122665)

(b) Number of additional MSMEs in the rural economy with access to credit (of which 60 percent are female) (cumulative). • Baseline: 0 (2015) • Target: 22,222 (2018) (of which 13,333

female) IFC (c) Number (#) and volume (US$) of MSME loans in outstanding portfolio. Number • Baseline: 2.2 million (2012) • Target: 4.07 million (2018) Volume • Baseline: 3.72 billion (2014) • Target: 4.3 billion (2018)

IFC: (d) Number of new issuers in the capital markets with IFC’s support. • Baseline: 1 (2012) • Target: 4 (2018)

ANNEX 1

19

Objective 2: Improved investment climate in target states and select infrastructure development for productive purposes

(a) Number of recommended regulations/ amendments/codes adopted in SEZ states. • Baseline: 0 (2013) • Target: 9 (2018)

FINANCIAL SERVICES Ongoing • IFC: APM TEC II - Ports (31939/31939); Tuxpan – Ports

(32817); CMSA Manzanillo – Ports (33776); Bioparques – Tomatoes (26328/29734); Norson – Livestock (32826); Etileno XXI – Petrochemicals (30417); Citla Energy – Oil & gas (37179)

Pipeline • Agricultural Services for Food Security and Competitiveness (ASERCA) (P160570) • IFC: Tarafert – Fertilizers (37974); Norson II – Livestock

(37803); Red Compartida (38474)– Wholesale telecomm network

Closed • Information Technology Development (P106589) KNOWLEDGE SERVICES

Ongoing • PA Productivity Democratization (P146293) • SEZ Initiative Implementation Support (P158466) Pipeline • Supporting Mexico’s SEZ (P160599) Closed • Competition Reform in Tabasco State (P147308) • Oaxaca Regulatory Barriers to Competition (P145476) • Competition Reform in Mexico State (P147382) • Oaxaca Judiciary RAAP (P155064)

IFC: (b) Containers Handled (Millions TEU Containers)/Port Operations. • Baseline: 0 (2014) • Target: 1.67 (2018) IFC: (c) Number of farmers integrated into the agribusiness value chain through projects financed by IFC. • Baseline: 5,300 (2012) • Target: 8,630 (2018) IFC: (d) New private sector investments facilitated by IFC in opportunities generated by the Mexican reforms. • Baseline: $285 million (IFC’s own account)

and $630 million (IFC’s own account plus mobilization) (2014)

• Target: $700 million (IFC’s own account) and $1.5 billion (IFC’s own account plus mobilization) (2019)

PILLAR 2: INCREASING SOCIAL PROSPERITY Objective 3: Improved access and quality in target education programs.

(a) Gross failure rate (%) among basic (primary & secondary) education schools in programs to strengthen School based Management (SBM).

Programa de la Reforma Educativa • Baseline (2014):

- Primary: 1.10 - Secondary: 3.32

• Target (2018) - Primary: 0.95 - Secondary: 2.50

Programa de Escuelas de Tiempo Completo • Baseline (2014):

FINANCIAL SERVICES Ongoing • School Based Management Project III (P147185) • Mexico Reducing Inequality of Educational Opportunity

Project (P149858) • IFC: Edilar – Educational material content (31095); FINEM

SME –Education sector lending (22540/28680) / FINAE: Student loans (31569); UAG – Higher education (30445); Harmon Hall - English Language School (29753)

Pipeline • MX Higher Education Project (P160309) Closed • School Based Management II (P115347) • Compensatory Education Project (P101369)

ANNEX 1

20

15 Gender disaggregated data for this indicator is expected to be available during the second half of 2017 after the Mid-Term Review of the Social Protection System is conducted.

- Primary: 1.00 - Secondary: 3.85

• Target (2018) - Primary: 0.92 - Secondary: 3.18

KNOWLEDGE SERVICES Ongoing • Mexico Supporting Education Evaluation Agenda (P150318) Pipeline • IFC: Infrastructure rehabilitation of public schools (TBD) Closed • Improving Skills for Enhanced Labor Market Prod. (P128775) • IFC: Laureate Results Measurement (600356)

(b) Transition rate (%) from primary to secondary education for the graduates of CONAFE administered schools in selected National Crusade against Hunger (CNCH) municipalities. • Baseline: 63 (2014) • Target: 70 (2018) IFC: (c) Number of students enrolled in higher level institutions financed by IFC (of which female). • Baseline: 52,000 (of which 26,000 female)

(2012) • Target: 105,000 (of which 52,000 female)

(2018) Objective 4: Improved access to and integration of the social protection system.

(a) Number of PROSPERA beneficiaries that participate in social programs (of which female15). • Baseline: 465,842 (of which X female) (2014) • Target: 726,779 (of which X female) (2018)

FINANCIAL SERVICES Ongoing • MX Social Protection System (P147212) • IFC: Hospitaria – Health services (30281; Sala Uno – Health

Eye Care (33770) Pipeline • Support in Health Loan Closed • Support to Oportunidades Project (P115067) • Social Protection in Health (P116226) • IFC: Centro Medico Puertas de Hierro - Health services

(26323/27603) KNOWLEDGE SERVICES

Ongoing • Social Protection System II (P148162) Closed • Social Protection and Health (P129698) • IMSS Efficiency and Effectiveness (P149767)

(b) Number of PROSPERA beneficiaries that participate in productive programs. • Baseline: 14,370 (2014) • Target: 22,402 (2018) (c) Number of instruments implemented for an integrated social information system. • Baseline: 0 (2014) • Target: at least 5 (2018)

IFC: (d) Number of low-income patients treated by private health-care providers financed by IFC. • Baseline: 226,000 (2012) • Target: 260,000 (2018)

ANNEX 1

21

PILLAR 3: STRENGTHENING PUBLIC FINANCES AND GOVERNMENT EFFICIENCY Objective 5: Improved fiscal management capacity and increased adoption of modern public financial or information management mechanisms in selected states.

(a) Number of states that are in compliance with reporting requirements under the new Fiscal Discipline Law for Subnational Entities. • Baseline: 0 (2014) • Target: at least 5 (2018)

FINANCIAL SERVICES • Mexico CAT Bond III Closed • Mexico CAT Bond II

KNOWLEDGE SERVICES Ongoing • Subnational Fiscal Topics (P156737) • Veracruz Public Sector Management (P156949) • Improving Evidence Based Policy Making (INEGI)

(P152808) Jalisco, Guanajuato, Morelos. • Strengthening Public Sector Management Systems in Mexico

City (P157558) Pipeline • Strengthening of Budgeting and Revenue Management

Capacity in Mexico City (P161793) • Improving Results-Oriented Practices in Jalisco’s Public

Administration (P159504) • Improving Transparency and Accountability Mechanisms in

the Federal Public Administration (P160357) Closed • Fiscal Challenges PA (P143967), • Mexico Public Expenditure Review (P150646) • Public Sector and Governance (P132906) • Agriculture Risk Management in Mexico (P132987) • Oaxaca - Strengthening PSM (P129050) • IDF: Congress Phase 2 (P125982) • IDF: Oaxaca: State’s Management Capacities (P129968) • IDF: Transparency, accountability & efficiency in Puebla

(P144701) • Strengthening DRM in Mexico (P146241) • Programmatic Engagement RAS in DRM (P130848)

(b) Number of states that have joined the disaster risk transfer pool proposed by the Federal Government. • Baseline: 0 (2014) • Target: 6 (2018) (c) Number of states that have adopted at least one new recommended mechanism to improve their public financial or information management. • Baseline: 0 (2014) • Target: at least 5 (2018)

PILLAR 4: PROMOTING GREEN AND INCLUSIVE GROWTH Objective 6: Improved capacity for low-carbon urban development.

(a) GHG emissions avoided or reduced in cities supported by Bank projects in the energy and transport sectors (tCO2e). • Baseline: 58,000 (2014) • Target: 827,919 (2018)

FINANCIAL SERVICES Ongoing • Urban Transport Transformation Program (UTTP) (P107159) • Municipal Energy Efficiency Project (P149872)

ANNEX 1

22

(b) Number of large and intermediate cities using the Municipal Energy Diagnostics Tools developed by the Bank (i.e. Tool for Rapid Assessment of City Energy–TRACE, Climate Action for Urban Sustainability–CURB). • Baseline: 2 pilot cities (2013) • Target: 42 additional cities (2018)

• IFC: Cemex Green – Energy efficiency projects (37840); Artha Fund – Sustainable urban projects (32665); Optima Energia – energy service company (ESCO) (28383); Vinte – NuEDGE – Low income housing (38374)

Pipeline • Inner City Affordable Housing Program (P157932) • Nat. Integrated Solid Waste Management System (P154801) • GEF: Sustainable Mobility and Clean Freight (P159989) • GEF: Additional Financing: Municipal Energy Efficiency Project (P160778) • IFC: Stiva Ceres – Construction (37211) Closed • GEF: Sustainable Transport and Air Quality Program (STAQ) (P114012) • Efficient lighting and appliances + GEF (P106424) • Mexico City Insurgentes Bus Rapid Transit System Carbon Finance Project (P082656) • IFC: Puebla Bus Rapid Transit Line (599589) OWLEDGE SERVICES Ongoing • Urban and Housing (P147899) • Mexico: Supporting a Low-Carbon Economy (P150562) • Partnership for Market Readiness – PMR (P129553) • IFC: Green building investment Pipeline • Capacity Building for CCUS in Mexico (P161360) • Development of CCUS in Mexico – Phase II (P161311) • IFC: Solid Waste (601768, 601834) Closed • Greening Mexico's Electricity Generation by Internalizing Externalities (P132533) • Gas Utilization and Flare Reduction (P132506) • Tool for Rapid Assessment of City Energy (TRACE) Model in Pilot Cities in Latin America (P133060) • Urban Environmental Services PA (P149131)

IFC: (c) Number of projects with Excellence in Design for Greater Efficiencies (EDGE) certification. • Baseline: 2 (2012) • Target: at least 5 (2018)

Objective 7: Improved sustainable management of key natural resources (i.e., forests, biodiverse areas, water, and combined renewable energy)

(a) Forest area under sustainable management practices and conservation schemes (hectares). • Baseline: 3,860,331 (2014) • Target: 4,500,000 (2017)

FINANCIAL SERVICES Ongoing • Forests and Climate Change SIL (P123760) • GEF: Sustainable Production Systems (P121116) • GEF: Adaptation to CCH in Coastal Wetlands (P100438) • GEF: Coastal Watersheds Conservation (P131709) • Oaxaca WSS Sector Modernization (P145578) • GEF: Sustainable Energy Technologies (P145618)

ANNEX 1

23

(b) Area brought under enhanced biodiversity protection (hectares). • Baseline: 0 (2013) • Target: 1,134,500 (2018)

• Sustainable Rural Development (P10626, P108766) • IFC: Proteak – Certified teak plantations (31195); Puertas

Finas – Certified wood products (33550/36529); EDF La Ventosa – wind power (28070); Comemsa – Solar energy equipment (30229)

Pipeline • GEF: Sustainable Productive Landscapes (P159835) • Water Supply Service Improvement Project (SACMEX) (P154998) • Sustainable Rural Development II (TBD) • IFC: Proteak Exp (38754); Envision Mex (38454); Biofields Mex (37156); Alten Mexico (36041) Closed • Water Sector Efficiency Improvement Program (P121195) • GEF: Large Scale Renewable Energy Development (La Venta III) – (P077717) • Wind Umbrella (La Venta II) (P080104) • Integrated Energy Services (P088996) • IFC: EURUS- (28434); Aura Solar (32871) KNOWLEDGE SERVICES Ongoing • Energy: Supporting a Low-Carbon Economy (P150562) Integrated Management of Agriculture Output (P158258) Pipeline • Forest and Climate Change: (P160730) • Cutzamala, RAS Phase III (P161224) • Extractives Value Chain: Strategic Positioning (P158672 • IFC AS: Hitachi energy efficiency (TBD) Closed • Urban Environmental Services (P149131) • Environmental and Climate Change (P146340) • Cutzamala, RAS Phases I & II (P157058) • Mexico GPOBA (P125716) • IFC: Sustainable Energy Finance Mexico (583007); La Huerta (600505); Rossini (600505); Puertas Finas (600332)

(c) Number of water utilities whose global efficiency increases by 2 percent. • Baseline: 0 (2010) • Target: 5 (2016)

(d) Power generated from renewable sources supported by WBG projects (i.e. eolic, solar, combined, biomass) (GWh). • Baseline: 1,005 (2014) • Target: 3,838 (2018)

(e) GHG emissions avoided or reduced from renewable sources supported by WBG projects (eolic, solar, combined, biomass) (tCO2e). • Baseline: 594,973 (2014) • Target: 4,500,000 (2018)

ANNEX 2

24

ANNEX 2. MATRIX OF CHANGES TO ORIGINAL CPS RESULTS MATRIX The original structure of the CPS has been simplified as part of this PLR to ease its monitoring and better reflect Bank’s interventions. Originally the CPS identified 4 thematic areas for WBG intervention. Within these themes, 11 specific areas of engagement with 12 specific CPS outcomes were identified. The revised results framework continues to be structured under the original 4 CPS Strategic Themes. Yet, the 11 subthemes have been removed given that, in most cases, only one outcome was supporting each subtheme. The number of outcomes was also reduced and their numbering has been adjusted accordingly in Annex 1. The Results Framework has also been reframed using the language introduced by the joint OPCS/IEG methodology. In consequence, this PLR incorporates the new lexicon: “Themes” are called “Pillars” and “Outcomes” became “Objectives”. The new 7 objectives and their respective indicators are now directly being presented under the 4 pillars improving alignment, efficiency and impact. For the remainder of the CPS period, milestones/intermediate indicators are no longer required.

Objectives CPS Original Objective Indicator CPS Revised Objective Indicator Rationale for Change Pillar 1: Unleashing Productivity

Thematic Engagement 1. Fostering Sound Financial Sector Development – Removed Objective 1: Increased access to finance and improved financial inclusion.

Changed. The objective was slightly rephrased to reflect the link between the financial inclusion and productivity agendas in Mexico.

New Objective:

Improved financial inclusion for productive purposes.

(a) Number of new clients mainstreamed into the formal financial sector using financial services. • Baseline: NA • Target: 1.6 million (July 2015)

(a) Number of clients mainstreamed into formal financial sector (of which female). • Baseline: 7.12 million (2014) • Target: 8 million (2016)

Under the original indicator, the baseline was 0 and the target was 1.8 million. This led to confusion from the counterparts about the baseline calculation. It was requested that the 2011 baseline be adjusted to 6.12 million and that the target simply be set about 1.8 million higher, in this case, 8 million. This change made the indicator much easier to monitor and verify. There is no gender target for the total number of clients mainstreamed into the financial sector given that the Bank does not have control over this, nor statistics are available. Yet, the Bank does tracks the number of women supported through the Program for Rural Microfinance (Programa de Asistencia Técnica a las Microfinanzas Rurales, PATMIR): out of the 1 million

ANNEX 2

25

Objectives CPS Original Objective Indicator CPS Revised Objective Indicator Rationale for Change people financially included under the PATMIR, 50 percent were women. Baseline number was adjusted (7.12 million) to make it consistent to CPS period.

IBRD: New Indicator.

(b) Number of additional MSMEs in the rural economy with access to credit (of which 60 percent are female) (cumulative). • Baseline: 0 (2015) • Target: 22,222 (2018) (of which 13,333

female)

The Rural Savings and Credit Sector Consolidation Loan (P123367) is expected to close in December 2016. This new indicator has been added to continue reflecting the WBG objective of expanding the availability of finance to the rural economy through the Expanding Rural Finance Project (P153338).

IFC: (b) Volume of new loans to SMEs in the portfolio of financial intermediaries. • Baseline: 2.9 million (2012) • Target: 3.4 million

IFC: (c) Number (#) and volume (US$) of MSME loans in outstanding portfolio. Number • Baseline: 2.2 million (2012) • Target: 4.07 million (2018) Volume • Baseline: 3.72 billion (2014) • Target: 4.3 billion (2018)

The indicator was slightly rephrased. In light of new investments such as Camesa and Progresemos, the target was revised to 4.07 million of MSME loans and the baseline adjusted to 2.2 million. The actuals for 2015 reported in Annex 3 are lower than expected as two large projects unexpectedly fell out of the portfolio (Agrofinanzas and Compartamos). Measuring just the number of outstanding loans (#) did not capture results related to objective 1 of the CPS. Thus, the previous indicator is supplemented with the Volume of Outstanding loans (US$ billion) to reflect IFC results on access to finance.

IFC (c) Number of new issuances in the capital markets. • Baseline: 1 • Target: 4

IFC (d) Number of new issuers in the capital markets with IFC’s support. • Baseline: 1 (2012) • Target: 4 (2018)

The indicator was slightly rephrased and is critical to IFC revised strategy in middle income countries (MIC). Mexico is the first country where IFC is measuring this indicator and intends to do so in other MICs going forward.

ANNEX 2

26

Objectives CPS Original Objective Indicator CPS Revised Objective Indicator Rationale for Change Thematic Engagement 2. Toward a More Competitive Business Environment –Removed Objective 2: Improved business environment to support private sector investment.

Merged. Objective 2 is merged with objective 3 to better reflect Bank’s engagement in productivity via its support to improving investment climate and infrastructure development.

New Objective:

Improved investment climate in target states and select infrastructure development for productive purposes

Number of recommended laws/regulations/amendments/codes enacted or government policies adopted to improve competition at subnational level. • Baseline: 0 • Target: 3

(a) Number of recommended regulations/ amendments/codes adopted in SEZ states. • Baseline: 0 (2013) • Target: 9 (2018)

New indicator incorporating the enhancement of investment climate through the SEZ strategy.

IFC: New indicator.

IFC: (b) Containers Handled (Millions TEU Containers)/Port Operations. • Baseline: 0 (2014) • Target: 1.67 (2018)

New indicator to capture infrastructure results of IFC investments in key Ports of Mexico such as Lázaro Cárdenas, Tuxpan, and Manzanillo.

Components of the innovation strategy have been implemented in target states and sectors. • Baseline: 0 • Target: 2

Dropped. The CPS foresaw supporting the poorer states in formulating their innovation strategies but in response to a change in authorities’ priorities, efforts focused on supporting the implementation of SEZs.

Number of farmers reached: • Baseline: 5,500 • Target: 7,000

(c) Number of farmers integrated into the agribusiness value chain through projects financed by IFC. • Baseline: 5,300 (2012) • Target: 8,630 (2018)

The baseline and target were adjusted given some precisions at project level. 2015 actuals in Annex 3 are lower than expected as two projects fell out of the portfolio unexpectedly (Agrofinanzas and Compartamos). The indicator is supported by the Norson and Acuagranjas projects.

IFC New private sector investment in oil, gas, petrochemicals and telecommunications sectors. • Baseline: US$600 million • Target: US$1.5 billion

IFC (d) New private sector investments facilitated by IFC in opportunities generated by the Mexican reforms. • Baseline: $285 million (IFC’s own

account) and $630 million (IFC’s own account plus mobilization) (2014)

Moved. This indicator was originally under the “Upgrading Infrastructure Theme” and reflects the opening for private sector participation in industries related to the reforms and the establishment of the CMF through IFC. It also differentiates IFC’s own account commitments and mobilization.

ANNEX 2

27

Objectives CPS Original Objective Indicator CPS Revised Objective Indicator Rationale for Change • Target: $700 million (IFC’s own

account) and $1.5 billion (IFC’s own account plus mobilization) (2019)

Thematic Engagement 3. Fostering Innovation for Productivity and Competitiveness - Removed Objective 3:

Enhanced innovation capabilities for companies and in target states and industries.

Merged. Objective 3 is being merged with objective 2. The delivery of sectorial and regional innovation strategies in target states and industries did not materialize as anticipated. However, further support on innovation is expected in the remainder of the CPS period and is reported in objective 2 together with its respective indicators.

Thematic Engagement 4. Upgrading Infrastructure – Engagement Dropped Given that financing support to the infrastructure sector is being provided under specific areas— transport, energy, telecommunications, ports, housing – the thematic engagement 4 will be dropped. Objective of infrastructure-related activities will continue to be monitored in other objectives in the results matrix.

Pillar 2: Increasing Social Prosperity Thematic Engagement 5. Promoting Labor Markets for Inclusive Growth - Removed Objective 4:

Increased skilled labor market participation.

Changed. The CPS original objective is broader than the Bank’s engagement in labor markets. Therefore, a new objective is being proposed which relates more directly to the support provided under the WBG education and knowledge products.

New Objective:

Improved access and quality in target education programs.

(a) Improvements in ENLACE scores (Math and Spanish in primary and secondary schools, including students living in marginalized areas). 2-year moving average of ENLACE test scores across school years (SY). • Baseline: (SY11 & SY12) Spanish primary: 546 Math Primary: 557 Spanish secondary: 490 Math secondary: 522 • Target (SY2017 & SY2018) Spanish primary: 610 Math Primary: 620 Spanish secondary: 550 Math secondary: 570

(a) Gross failure rate (%) among basic (primary & secondary) education schools in programs to strengthen School Based Management.

Programa de la Reforma Educativa • Baseline (2014):

- Primary: 1.10 - Secondary: 3.32

• Target (2018) - Primary: 0.95 - Secondary: 2.50

Programa de Escuelas de Tiempo Completo • Baseline (2014):

- Primary: 1.00 - Secondary: 3.85

• Target (2018) - Primary: 0.92

New indicator that is more attributable to Bank’s interventions in the Education sector.

ANNEX 2

28

Objectives CPS Original Objective Indicator CPS Revised Objective Indicator Rationale for Change - Secondary: 3.18

(b) % of Oportunidades/PROSPERA youth registered with the Servicio Nacional de Empleo. • Baseline: Does not exist • Target: 2% in 2018 (Disaggregated by

sex)

(b) Transition rate (%) from primary to secondary education for the graduates of CONAFE administered schools in selected National Crusade against Hunger (CNCH) municipalities. • Baseline: 63 (2014) • Target: 70 (2018)

The original indicator was linked to the work supporting labor markets. This revised indicator better reflects the WBG impact on retention rates.

IFC: (c) Number of students enrolled in institutions financed by IFC (female) • Baseline: 52,000 (26,000 female) • Target: 70,000 (37,000 female)

IFC: (c) Number of students enrolled in higher level institutions financed by IFC (of which female). • Baseline: 52,000 (of which 26,000

female) (2012) • Target: 105,000 (of which 52,000

female) (2018)

Since the end targets have been surpassed, the revised targets of students enrolled were increased to 105,000 (52,000 female). This indicator is mainly targeted to higher education institutions supported by IFC.

Thematic Engagement 6. Promoting an Integrated Social Protection System - Removed Objective 5:

Increased use of integrated social programs by eligible beneficiaries, and increased private sector participation in social services provision.

Changed. The objective was slightly rephrased to reflect the Bank’s impact in the social protection and health sectors.

New Objective:

Improved access to and integration of the social protection system.

(a) % of eligible PROSPERA families registered in the PROSPERA program. • Baseline: does not exist.

(methodology changed in 2014) • Target 30% (Source: CONEVAL)

(a) Number of PROSPERA beneficiaries that participate in social programs (of which female). • Baseline: 465,842 (of which female)

(2014) • Target: 726,779 (of which female)

(2018)

New specific indicator that measures the WBG impact on improving access to social programs. Disaggregated data for this indicator is expected to be available in the second half of 2017.

(b) Average unsatisfied basic needs of the extreme poor population • Baseline: 3.7 (2009) • Target: 3.0 (2018)

(b) Number of PROSPERA beneficiaries that participate in productive programs • Baseline: 14,370 (2014) • Target: 22,402 (2018)

The new indicator incorporates other productive programs such as “Support Program for Women Entrepreneurs” and “Program for the Improvement of Indigenous Production and Productivity” (see Annex 4 for more details). Disaggregated data for this indicator is not

ANNEX 2

29

Objectives CPS Original Objective Indicator CPS Revised Objective Indicator Rationale for Change available as the unit of measurement is at the households and not at the individual level.

(c) Percentage of poor registered in the Unified Registry of Beneficiaries. • Baseline: Not available (2014) • Target: 40% (2018)

(c) Number of instruments implemented for an integrated social information system. • Baseline: 0 (2014) • Target: at least 5 (2018)

The original indicator was not attributable to Bank interventions and no baseline is available from the Ministry of Social Development (i.e. Dirección General de Geoestadística y Padrones de Beneficiarios, DGGPB). Hence, the new indicator reflects the new instruments for an integrated social protection system supported by the Bank. These instruments are tools that will be developed and used by SEDESOL for better targeting and producing reports.

IFC: (d) Number of public patients treated by private players financed by IFC. • Baseline: 226,000 • Target: 260,000

IFC: (c) Number of low-income patients treated by private health-care providers financed by IFC. • Baseline: 226,000 (2012) • Target: 260,000 (2018)

The indicator was slightly rephrased. Actuals reported in Annex 3 seem low due to one project dropping out of the portfolio unexpectedly (i.e. CMPDH).

Pillar 3: Strengthening Public Finances and Government Efficiency Thematic Engagement 7. Managing Medium-Term Fiscal Challenges at National and Subnational Levels - Removed Objective 6:

Increased non-oil public revenues and improved expenditure equity at the federal level and in target states.

Changed and Merged. The CPS original Objective 6 is broader than the Bank’s engagement. A new objective —which merges 6, 7 and 8— is being proposed, which relates more directly to the support provided under the WBG program.

New Objective:

Improved fiscal management capacity and increased adoption of modern public financial or information management mechanisms in selected states.

(a) Taxes as a percentage of GDP • Baseline:

Non-oil Federal revenues as a percentage of GDP: 15.0% Subnational revenues as a percentage of GDP: 0.93% (2012)

• Target: Non-oil Federal revenues as a percentage of GDP: 18%

(a) Number of states that are in compliance with reporting requirements under the new Fiscal Discipline Law for Subnational Entities. • Baseline: 0 (2014) • Target: at least 5 (2018)

This revised indicator better reflects the WBG impact on attributable results. The number of states in compliance with the reporting requirements is zero given that the Fiscal Responsibility Law will be implemented starting in early 2017.

ANNEX 2

30

Objectives CPS Original Objective Indicator CPS Revised Objective Indicator Rationale for Change Subnational revenues as a percentage of GDP: 2.0 % (2019)

(b) Inequality after taxes and transfers. • Baseline: Difference between Final

Income Gini and Market Income Gini: 0.08 (2010)

• Target: Difference between Final Income Gini and Market Income Gini: 0.11 (2019)

Dropped. The original indicator was based in a methodology used in a particular study/report. There is no certainty that the actual and target values could be measured again, therefore this indicator is being dropped.

(a) Integrated system for risk management adopted by Federal Government. b) Comprehensive disaster risk management strategy adopted that balances efforts in risk identification, risk prevention and management, and post-disaster reconstruction. c) Comprehensive agriculture risk management (ARM) strategy adopted that improves the efficiency of agricultural insurance markets and sets effective mechanisms to manage risks arising from price volatility in agricultural commodities.

(b) Number of states that have joined the disaster risk transfer pool proposed by the Federal Government. • Baseline: 0 (2014) • Target: 6 (2018)

Building on work developed at the federal level during the first half of the CPS implementation, the new indicator reflects the Bank’s support at the subnational level with the aim to build Mexican States financial protection strategy against disasters. Drawing on the long experience of the federal government, this objective will support the expansion of disaster risk financing to the State level.

(a) Increase in transparency and Access to Fiscal Information Index • Baseline: average 70.8 (2012) • Target: 10% increase (2018)

(c) Number of states that have adopted at least one new recommended mechanism to improve their public financial or information management. • Baseline: 0 (2014) • Target: at least 5 (2018)

The original indicator was not attributable to Bank interventions, as it compares reforms in Mexico to those in other countries, over which the Bank has no control.

(b) Increase in the Open Budget Index • Baseline: 61 (2012) • Target: 70 (2018)

Dropped. The original indicator was not attributable to Bank interventions, as it compares reforms in Mexico to those in other countries, over which the Bank has no control.

ANNEX 2

31

Objectives CPS Original Objective Indicator CPS Revised Objective Indicator Rationale for Change Thematic Engagement 8. Promoting Public Sector Modernization – Removed Objective 7:

Increased adoption of modern public sector management and information systems at the federal level and in selected states.

Merged. Objective 7 is being merged with Objective 6 and 8 to reflect the Bank engagement in both fiscal and public sector management (information systems are also included as part of the latter). Consequently the original and revised indicators under this objective are now included as part of new Objective “Improved fiscal management capacity and increased adoption of modern public financial or information management mechanisms in selected states”.

Thematic Engagement 9. Implementing an Integrated Sovereign Risk Management Framework - Removed Objective 8:

Integrated and comprehensive risk management framework in place covering key fiscal, agricultural and natural disaster risks.

Merged. In order to simplify the CPS structure, Objective 8 is being merged with Objective 6 and 7 to reflect that sovereign risk management is part of the overall fiscal management strategy. As a result, the original and revised indicators under this objective are now included as part of new Objective “Improved fiscal management capacity and increased adoption of modern public financial or information management mechanisms in selected states”.

Pillar 4: Promoting Green and Inclusive Growth Thematic Engagement 10. Reducing the Footprint of Growth – Removed Objective 9:

Strengthened institutional framework to manage urban development and reduced GHG emissions.

Changed. The new objective better links the results to Bank projects and knowledge activities.

New Objective:

Improved capacity for low carbon urban development

(a) Increased capacity of the new Secretaría de Desarrollo Agrario, Territorial y Urbano (SEDATU) to address urban challenges. • Baseline: No capacity • End Target: Capacity in 3 areas: (i) strengthened land use planning; (ii) use innovative land-based financing mechanisms to provide infrastructure in new low-income settlements; and (iii) support urban mobility strategies geared towards public and non-motorized transport.

Dropped. Dropped indicator as it has been already achieved. The WBG technical advisory services with SEDATU paved the way to a new financial operation in the housing sector for low income population.

ANNEX 2

32

Objectives CPS Original Objective Indicator CPS Revised Objective Indicator Rationale for Change (b) Expanded use of TRACE to several large and intermediate cities • Baseline: 2 pilot cities • End Target: 10 additional cities

(a) Number of large and intermediate cities using the Municipal Energy Diagnostics Tools developed by the Bank (i.e. Tool for Rapid Assessment of City Energy – TRACE, Climate Action for Urban Sustainability – CURB). • Baseline: 2 pilot cities (2013) • Target: 42 additional cities (2018)

In addition to TRACE, the Bank has developed another diagnostic tool in supporting climate, energy, and sustainability planning efforts at the local scale in cities around the world. This new indicator captures the implementation of the CURB toolkit in Mexico’s large and intermediate cities.

(c) Reduction in GHG emissions attributable to:

(i) the energy efficiency projects • Baseline: 0 (2012) • End Target: 9 MtCO2e (2019)

(ii) other initiatives: PMR, CCS, and GV & FR (each program to set specific baselines and targets)

(b) GHG emissions avoided or reduced in cities supported by Bank projects in the energy and transport sectors (tCO2e). • Baseline: 58,000 (2014) • Target: 827,919 (2018)

The original indicator was achieved and surpassed. The new indicator now includes all urban GHG emission reduction initiatives and projects supported by the World Bank.

IFC: (d) Number of projects with EDGE certification • Baseline: 3 • Target: >5

IFC: (c) Number of projects with Excellence in Design for Greater Efficiencies (EDGE) certification. • Baseline: 2 (2012) • Target: at least 5 (2018)

The 3 original baseline projects included were: Vinte, Hospitaria and City Express. However, Hospitaria is a hospital investment of IFC and has been categorized as green but it does not have EDGE certificate. The baseline was therefore revised down to 2 projects to account for this.

Thematic Engagement 11. Using Natural Resources in an Optimal Way – Removed Objective 10:

Reduced deforestation together with increased certified forest areas.

Changed and Merged. A new objective —which merges 10, 11 and 12— is being proposed. This new objective aggregates the WBG support to improve the sustainable management of key natural resources in Mexico (i.e. forests, biodiverse areas, water, and combined renewable energy). Forested and highly biodiverse areas. The CPS original Objective 10 was narrower than the Bank’s engagement in the environment and climate change sector. Therefore, the new objective reflects both the support provided in the forestry sector as well as GEF operations that aim to conserve and protect nationally and globally significant biodiversity in Mexico.

New Objective:

Improved sustainable management of key natural resources (i.e. forests, biodiverse areas, water,

(a) Increase in Forest under improved management and reduced carbon emissions. • Baseline: 163 million ha (2012) • Target: 10% Improvement in 5 years

(a) Forest area under sustainable management practices and conservation schemes (hectares). • Baseline: 3,860,331 (2014) • Target: 4,500,000 (2017)

Baseline and target had been adjusted to reflect the new methodology avoiding double-counting and aligning with PRONAFOR (Programa Nacional Forestal) indicators. This new indicator needs to be formally agreed with the GoM through a restructuring of the Forest Project

ANNEX 2

33

Objectives CPS Original Objective Indicator CPS Revised Objective Indicator Rationale for Change and combined renewable energy).

(P123760) that is currently being processed and is expected to be formally approved by end 2016. Baseline number was adjusted (3.86 million) to make it consistent to CPS period.

IBRD: New Indicator.

(b) Area brought under enhanced biodiversity protection (hectares). • Baseline: 0 (2013) • Target: 1,134,500 (2018)

World Bank’s engagement in biodiversity has been included as part of this objective. Indicator incorporated to measure the areas brought under enhanced biodiversity protection.

Improved standard performance utility indicators in target municipalities and states. Baselines and targets to be developed with the Oaxaca water project now under preparation. • Baseline: Not Available • Target: Not Available

(c) Number of water utilities whose global efficiency increases by 2 percent. • Baseline: 0 (2010) • Target: 5 (2016)

Since the Oaxaca Water Project’s implementation was delayed, a new indicator was chosen to continue measuring Bank’s interventions to improve water management systems.

(a) Increased eolic energy production and avoided emission of MtCO2 (La Venta III) Production • Baseline: 0 • Target: 2,200 GWh Emissions • Baseline: 0 • Target: 1.15 MtCO2e

(d) Power generated from renewable sources supported by WBG projects (i.e. eolic, solar, combined, biomass) (GWh). • Baseline: 1,005 (2014) • Target: 3,838 (2018)

The original indicator was divided into two. These suggested new indicators capture the power generated and the emissions avoided/reduced from IBRD projects (La Venta III, Hybrid Solar, Integrated Energy, and Sustainable Rural Development) and IFC investments in renewable energy (EDF La Ventosa, Aura Solar). Therefore no actuals are reported at this stage.

(e) GHG emissions avoided or reduced from renewable sources supported by WBG projects (eolic, solar, combined, biomass) (tCO2e). • Baseline: 594,973 (2014) • Target: 5,000,000 (2018)

(b) Increased solar energy: Total Renewable Energy Technology consumption per beneficiary household in MWh/year • Baseline: 0 • Target 2,077

Dropped. New indicator (d) captures the increased solar energy production resulting from IBRD projects.

ANNEX 2

34

Objectives CPS Original Objective Indicator CPS Revised Objective Indicator Rationale for Change IFC (c) Number of renewable energy projects. • Baseline: 3 • Target: 7

Dropped. New indicator (d) captures the increased energy production resulting from IFC investments in renewable energy.

Objective 11:

Improved water management systems and expanded access to water services.

Merged. Objective 11 is being merged with Objective 10 and 12. Consequently the original and revised indicators under this objective are now included as part of new Objective “Improved the sustainable management of key natural resources (i.e. forests, biodiverse areas, water, and combined renewable energy)”. During CPS discussions, Bank’s support in the water sector was envisaged through the Oaxaca PforR project. Delays in the effectiveness of the loan agreement between BANOBRAS and the State of Oaxaca due to legal reasons have put on hold the implementation of the operation. Interest of the new administration that will take office in late 2016 will be assessed as a pre-requisite to resume the implementation of the Program. The objective has thus been adjusted to reflect other Bank’s intervention in the water sector.

Objective 12:

Increased production of combined renewable energy.

Merged. Objective 12 is being merged with Objective 10 and 11. As a result, the original and revised indicators under this objective are now included as part of new Objective “Improved the sustainable management of key natural resources (i.e. forests, biodiverse areas, water, and combined renewable energy)”.

ANNEX 3

35

ANNEX 3. MATRIX SUMMARIZING PROGRESS TOWARD CPS OBJECTIVES Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

Theme / Pillar I: Unleashing Productivity Thematic Engagement 1. Fostering Sound Financial Sector Development Outcome/ Objective 1: Increased access to finance and improved financial inclusion

(a) Number of new clients mainstreamed into the formal financial sector using financial services. • Baseline: 0 • Target: 1.6 million (July 2015) • Actual: 3.2 million

(September 2016) IFC (b) Volume of new loans to SMEs in the portfolio of financial intermediaries (# Millions). • Baseline: 2.9 (2012) • Target: 3.4 • Interim: 3.1 • Actual: 0.49 (2015) (c) Number of new issuances in the capital markets. • Baseline: 1 • Target: 4 • Interim: 1 • Actual: 2 (2016)

TA reports prepared to implement key aspects of the financial reform – Achieved Many World Bank recommendations were included in the COFECE (the competition authority) reports. As a result, two enquiries have been launched in the credit bureau and AFORES (Retirement Pensions Administrators) market. The Sound Financial Sector Development PA produced two policy notes on increasing coverage. Moreover, the Program has assisted the National Banking and Securities Commission (CNBV) in developing a certification program for evaluators of Anti-Money Laundering implementation in financial institutions and to improve risk base supervision. New products and financial literacy campaigns supported by WBG advisory and convening services have been launched - Achieved Findings from the Mexico Financial Capabilities Assessment have been used to inform numerous policy documents related to financial inclusion and financial education. These have been widely cited in the media, and have had tangible results in influencing financial education strategies of governmental authorities. Results from the Mexico financial capabilities report have been integrated into key policy documents such as CNBV’s 2nd Report on Financial Inclusion (RIF) and National Financial Inclusion Council (CONAIF) presentations. Mexican authorities and the National Committee on Financial Education (CEF) have also utilized inputs from this project to inform the national financial inclusion strategy and national financial education strategy that are under development. Financial education strategies are being developed in the National Commission for the Protection and Defense of Users of Financial Services (CONDUSEF) based upon weaknesses identified in the report. Additionally, the Savings and Credit Sector Consolidation and Financial Inclusion Project has provided technical assistance for the roll out of a large financial education program to support the implementation of the PROSPERA MÁS CON BANSEFI Government initiative.

Financial Services Ongoing Rural Savings and Credit Sector Consolidation Loan (BANSEFI) (P123367) IFC: Mifel – SME Banking (29030); Alta Growth Fund – Private Equity Fund (25352/31517); Alta Ventures – Private Equity Fund (28086) ; Nexxus III Fund – Private Equity Fund (24712); Capital Indigo – Private Equity Fund (34031); Carlyle Mexico – Private Equity fund (23860); Baring Mex-Fnd II – Private Equity Fund (9357/4594); Water Capital –water treatment and efficient water equipment leasing (29509/28108); DCM CS Mex trust – capital markets (32407/36395); GTSF Nemak – Supplier finance (31922) ; GTSF Comercial Mexicana – Supplier finance (31999); GTSF Soriana TCM – Supplier finance (37664); DCM CAMESA PCG (34538/37284); Progresemos – Microfinance (30905/36410) Closed IFC: Banorte – Commercial banking (28213); Compartamos – Micro credits for women (29634); Bankaool (before Agrofinanzas) – Agribusiness loans (26206); Banco Bajio – SME Banking (29485/31017); Te Creemos II – Microfinance (32029) Knowledge Services Ongoing Banxico Programmatic RAS (P154294) IFC: Pronafim – interest rates in the microfinance sector study (599630) partnering with Sparkassen, TripleJump and IDB. Closed

ANNEX 3

36

Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

Sound Financial Sector Development (P133788) Commercial Real Estate Price Index CREPI (P157021)\ Mexico Financial Capabilities Assessment (P122665) Mexico JIT Financial Literacy Impact Evaluation Mucho Corazón (P145817)

Thematic Engagement 2. Toward a More Competitive Business Environment Outcome /Objective 2: Improved business environment to support private sector investment

Number of recommended regulations/amendments/codes enacted or government policies adopted to improve competition at subnational level. • Baseline: 0 • Target: 3* • Actual: 2 (The original target was mistakenly set at 30. Correct target is 3).

IBRD: Roadmaps to improve competition at state level delivered in 3 States – Achieved. Roadmaps have been produced for Oaxaca (P150476 and P155064), Tabasco (P147308) and Mexico State (P147382). Additionally, the “Doing Business in Mexico 2016” project (P155282) updated the data and document reforms in 4 indicator areas across the 32 Mexican locations measured in 2013. IFC: Regulations for oil, gas and telecommunications issued – Partially Achieved. The implementation of the Reforms has been longer than expected. However, IFC has collaborated closely with the Ministry of Energy and the Ministry of Communications and has provided comments on the Energy and Telecommunication’s reforms and regulations. Increasing number of projects in oil, gas, petrochemicals and telecommunications – Partially Achieved. - See in Thematic Engagement 4.

Knowledge Services Ongoing Productivity Democratization PA (P146293) Subnational Business Regulation and Impact Evaluation of Construction Permit Reform (P157894) Closed Competition Reform in Tabasco State (P147308) Oaxaca Regulatory Barriers to Competition (P145476) Competition Reform in Mexico State (P147382) Oaxaca Judiciary RAAP (P155064) Assessment of Baja California IP (P158513) IFC: Sub-National Doing Business (585307)

Thematic Engagement 3. Fostering Innovation for Productivity and Competitiveness Outcome /Objective 3: Enhanced innovation capabilities for companies and in target states and industries.

(a) Components of the innovation strategy have been implemented in target states and sectors. • Baseline: 0 States/Sectors • Target: 2 States/Sectors • Actual: Not Achieved IFC (b) Number of farmers reached: • Baseline: 5,500

Changes in SME support programs have been implemented. Achieved. Through the assistance provided to INADEM, the Bank provided recommendations that contributed to: 1) the redesign of approximately 6 SME programs; and 2) a more focused approach in programs reducing the number of them by 20 percent. Delivery of sectorial or regional innovation strategy. Not achieved. Responding to high level requests from government, regional economic work has focused on the implementation of the SEZ initiative.

Financial Services Ongoing IFC: Grupo Calidra – construction materials (31587/26671); VMLA – Telecom (33958); APM TEC II - Ports (31939/31939); Tuxpan – Ports (32817); CMSA Manzanillo – Ports (33776); Bioparques (26328/29734); Norson – Livestock (32826); Acuagranjas – Fisheries (34073); Etileno XXI – Petrochemicals (30417); Citla Energy – Oil & gas (37179) Closed

ANNEX 3

37

Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

• Target: 7,000 • Interim: 6,100 • Actual: 8,750 (2015)

Information Technology Development (P106589) Knowledge Services Ongoing Productivity Democratization PA (P146293) Support to INADEM (P147354) Support to INADEM II (P158402) Impact evaluation of a large female entrepreneurship program (P150666) Convening Services Forum: Innovative Entrepreneur Forum with INADEM and CNN Expansion (P147313)

Thematic Engagement 4. Upgrading Infrastructure Outcomes/ Objectives related to specific infrastructure sectors are presented in corresponding thematic areas—in transport, energy, and telecommunications. This specific infrastructure outcome will be defined during CPS implementation over the first two years of the CPS where the WBG (IBRD, IFC, and MIGA) will work together in positioning the

IFC New private sector investment in oil, gas, petrochemicals and telecommunications sectors. • Baseline: US$600 million • Target: US$1.5 billion • Interim: US$800 million • Actual: US$851 million

IFC: Increasing number of projects in oil, gas, petrochemicals and telecommunications – Partially Achieved. IFC has discussed several opportunities to increase number in these sectors. However, up to now, only one investment in oil & gas has materialized in Citla Energy (Citla – O&G). IFC is currently pursuing opportunities in the power, telecommunications and petrochemical sectors.

Financial Services Ongoing IFC: Etileno XXI – Petrochemicals (30417); Citla Energy – Oil & gas (37179

ANNEX 3

38

Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

Bank within the Government’s new US$316B infrastructure program.

Theme / Pillar II: Increasing Social Prosperity Thematic Engagement 5. Promoting Labor Markets for Inclusive Growth Outcome /Objectives 4: Increased skilled labor market participation

(a) Improvements in ENLACE scores (math and Spanish in primary and secondary schools, including students living in marginalized areas). 2-year moving average of ENLACE test scores across school years (SY) • Baseline (SY11 & SY12)

Spanish primary: 546 Math Primary: 557 Spanish secondary: 490 Math secondary: 522

• Target (SY17 & SY18) Spanish primary: 610 Math primary: 620 Spanish secondary: 550 Math secondary: 570

• Actual (SY13) Spanish primary: 610 Math primary: 620 Spanish secondary: 550 Math secondary: 570

(b) % of Oportunidades / PROSPERA youth registered with the Servicio Nacional de Empleo. • Baseline: Not Available • Target: 2% in 2018

(Disaggregate by sex)

Teacher training programs Initiated – Achieved. On ECD, training workshops were carried out with the participation of 27,701 promoters (Oct. – Dec. 2015). On Community Education, a national training workshop for Mobile Pedagogical Support (API) teachers (Sept. 2015) was carried out with the participation of 1,822 APIs. Finally, a Basic Education training program for 785 school principals (Oct 20–5 - June 2017) covered the topics of School Based Management and leadership skills. Analysis of nutrition programs on learning outcomes prepared – Partially achieved. An impact evaluation is being designed with the Ministry of Education (SEP) to assess the results of the Programa de Escuelas de Tiempo Completo (Full Time School Program, ETC) in educational attainment and nutritional indicators for SY 2016-2017. Analysis of gaps in skills prepared – Achieved. As part of the Improving Skills for Enhanced Labor Market Productivity PA (P128775), diagnostic work on Upper Secondary Education (USE) was carried out, highlighting the linkage between USE and the labor market. This included the analysis of labor market conditions of upper secondary graduates; the causes of upper secondary dropout and international strategies to address dropout; the perceptions of returns to upper secondary education and their effects on schooling; and an assessment of the implementation of the Upper Secondary Reform (RIEMS). Partly as a result of the technical assistance received, SEP designed a new strategy to address dropout rates, and changed its perception regarding the timing for successful implementation and impact of the RIEMS.

Financial Services Ongoing School Based Management (P147185) Reducing Inequality of Education (P149858) IFC: Edilar – Educational material content (31095); FINEM SME –Education sector lending (22540/28680); FINAE: Student loans (31569); UAG – Higher education (30445); Harmon Hall - English Language School (29753) Closed School Based Management II (P115347) Compensatory Education Project (P101369) Upper Secondary Education DPL III (P147244) Knowledge Services: Ongoing Mexico Supporting Education Evaluation Agenda (P150318) Closed Improving Skills for Enhanced Labor Market Productivity (P128775) IFC: Laureate Results Measurement (600356)

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39

Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

• Actual: .07%, of which 0.03% are female and 0.04% are male.

(c) Number of students enrolled in institutions financed by IFC (female) • Baseline: 52,000 (26,000

female) • Target: 70,000 (37,000 female) • Interim: 59,000 (31,000 female) • Actual: 80,164 (40,192 female)

(2014)

Percentage of students with scholarship/financial aid, divided by gender (in private institutions financed by IFC) – Data not available. Number of new projects in health and education supported by IFC – Achieved. Three new projects: FINAE (Education FY16); Laureate (Education FY15);); Sala Uno (Health FY14) The IFC supported the execution of an impact evaluation on the effects of private sector education of Laureate University graduates in Mexico.

Thematic Engagement 6. Promoting an Integrated Social Protection System Outcome / Objective 5: Increased use of integrated social protection programs among the poor, together with increased private participation in social services provision.

(a) % of eligible PROSPERA families registered in the PROSPERA program. • Baseline: does not exist.

(methodology changed in 2014) • Target: 30% • Actual: 52.22% (2014) (b) Average unsatisfied basic needs of the extreme poor population • Baseline: 3.7 (2009) • Target: 3.0 (2018) • Actual: 3.6 (2015) (c) % of poor registered in the Unified Registry of Beneficiaries • Baseline: Not available • Target: 40% • Actual: 33% (2015) IFC:

Initial review of integrated social protection programs prepared together with initial M&E framework. – Achieved. The Bank supported the redesign of the flagship social program PROSPERA. The Bank is also supporting key operational, M&E framework and tools both within PROSPERA but also within SEDESOL. An advanced draft of the M&E framework for productive inclusion of PROSPERA beneficiaries is expected to be concluded in 2016.

Financial Services Ongoing Mexico Social Protection System (P147212) IFC: Hospitaria – Health services (30281); Sala Uno – Health Eye Care (33770) Closed Support to Oportunidades Project (P115067) Social Protection in Health (P116226) IFC: Centro Medico Puertas de Hierro - Health services (26323/27603) Knowledge Services Ongoing Social Protection System Programmatic Approach (P147212) Closed Mexico Poverty (P133559) Social Protection and Health (P129698) Poverty and Equity PA (P156617) Multi-sector & State Level Work (IO 2046548) The Distributional Effects of Drug Related Crime and Violence across Municipalities in Mexico (TF012498) IMSS Efficiency and Effectiveness (P149767)

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40

Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

(d) Number of public patients treated by private players financed by IFC. • Baseline: 226,000 • Target: 260,000 • Interim: 240,000 • Actual: 116,895 (2015)

Theme / Pillar III: Strengthening Public Finances and Government Efficiency Thematic Engagement 7. Managing Medium-Term Fiscal Challenges at National and Subnational Levels Outcome / Objective 6: Increased non-oil public revenues and improved expenditure equity at the federal level and in target states.

(a) Taxes as a percentage of GDP • Baseline:

Non-oil Federal revenues as a percentage of GDP: 15.0% Subnational revenues as a percentage of GDP: 0.93% (2012)

• Target: Non-oil Federal revenues as a percentage of GDP: 18% Subnational revenues as a percentage of GDP: 2.0 % (2019)

• Actual: Non-oil Federal revenue as a percentage of GDP 14.9% in 2012 (excluding negative excise on gasoline); 18.9% in 2015 (includes non-recurrent revenue oil price hedge) Subnational revenues as a percentage of GDP: in 2012 1.2% of GDP and for 2013 1.3% of GDP (2013 is the latest figure available in INEGI’s Finanzas Públicas Estatales y Municipales)

Submission to the Congress of a Federal tax reform that increases tax collection as a percentage of GDP – Achieved Submitted September 2013 approved by Congress November 2013 and enacted as of January 2014. Submission to the Congress, by SHCP, of a Law strengthening subnational government finances – Achieved Submitted mid-2015, approved by Congress March 2016 and enacted in April 2016. Adoption of official methodology for the computation of the Social Discount Rate for the evaluation of investments in the public sector and revision of the Social Discount Rate currently used – Achieved Social discount rate was reduced from 12 to10 percent as per Hacienda’s communication in January 2014. Delivery to SHCP of a CGE model and simulation tools to assess revenue potential of alternative tax reforms – Achieved Deliverable has been part of the tax reform assistance project (Fiscal Challenges PA).

Knowledge Services Ongoing Subnational Fiscal Topics PA (P156737) Poverty and Equity PA (P156617) Closed Fiscal Challenges PA (P143967) Poverty and Equity PA (P133559) Mexico Public Expenditure Review (P150646)

ANNEX 3

41

Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

(b) Inequality after taxes and transfers. • Baseline: Difference between

Final Income Gini and Market Income Gini: 0.08 (2010)

• Target: Difference between Final Income Gini and Market Income Gini: 0.11 (2019)

• Actual: NA The estimate of this indicator does not take place on a regular basis. It is based on the household income and expenditure survey published every two years with a significant delay and is subject to considerable methodological interpretations. Up to now there is no new estimate available.

Thematic Engagement 8. Promoting Public Sector Modernization Outcome / Objective 7: Increased adoption of modern public sector management and information systems at the federal level and in selected states.

(a) Increase in transparency and Access to Fiscal Information Index • Baseline: average 70.8 (2012) • Target: 10% increase (2018) • Actual: 81.21 (14.7%

increase) (2014)\ (b) Increase in the Open Budget Index: • Baseline: 61 (2012) • Target: 70 (2018) • Actual: 66 (2015)

Production of a World Bank reports with diagnosis and recommendations for public sector modernization in: Oaxaca State, Puebla State, Federal District; Federal tax collection agency (SAT), Ministry of Social Development (SEDESOL), National Congress – Partially achieved. A comprehensive and depth diagnostic on public sector management and modernization was developed for the State of Oaxaca. A similar project is being developed with the Federal District for completion in FY17. In the State of Puebla, the Bank is supporting the institutionalization of a citizen participation mechanism to improve service delivery. Regarding the National Congress, the main contribution has been the full automatization of the back-office systems, carried out in two phases. Engagements with SAT and SEDESOL did not flourish, but a RAS was developed with the National Governors’ Conference, (CONAGO) to produce a set of technical standards for the implementation of the oral commercial lawsuits.

Financial Services Closed Results-based Management and Budgeting (P106528) Knowledge Services Ongoing Strengthening Public Sector Management Systems in Mexico City (P157558) IDF: Fostering Transparency, Accountability and Efficiency in Public Service Delivery in the State of Puebla (P144701) Closed Public Sector and Governance Programmatic Approach (P132906) Oaxaca - Advisory Services for Strengthening Public Sector Management (P129050) IDF: Institutional Strengthening of Congress Phase 2 (P125982)

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Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

IDF: Strengthening the State’s Management Capacities (P129968)

Thematic Engagement 9. Implementing an Integrated Sovereign Risk Management Framework Outcome / Objective 8: Integrated and comprehensive risk management framework in place covering key fiscal, agricultural and natural disaster risks.

(a) Integrated system for risk management adopted by Federal Government. Actual: Advances have been made by the GoM on the various management strategies for the main risks Mexico faces, among them agricultural, disaster and fiscal. (b) Comprehensive disaster risk management strategy adopted that balances efforts in risk identification, risk prevention and management, and post-disaster reconstruction. Actual: The Bank supported the GoM in this area through four activities As a result of this collaboration, the GoM adopted several measures to strengthen building a comprehensive DRM strategy. (c) Comprehensive agriculture risk management (ARM) strategy adopted that improves the efficiency of agricultural insurance markets and sets effective mechanisms to manage risks arising from price volatility in agricultural commodities. Actual: Ongoing. Implementation of an integrated ARM strategy has been delayed. The Bank continues its engagement in the sector with a TA to ASERCA as well with

Recommendations for the creation of an integrated system of risk management delivered – Achieved. The Bank supported the GoM in this area through four activities: 1) the review of the federal financial protection strategy against disasters; 2) The impact of FONDEN on economic reconstruction in Mexico; 3) the RAS in DRM (P130848) which had two components: the feasibility study of options for a joint catastrophe risk transfer mechanism for Mexican States and the assessment and impact evaluation of public investments in DRM; and 4) continuous targeted technical advisory and policy dialogue on improving the management of disaster risks with the Ministry of Finance. As a result of this collaboration, the GoM adopted the following measures that contribute to strengthen building a comprehensive DRM strategy: - Expanded the achievements and lessons learned of the federal financial protection strategy against disasters to support the Mexican States in the development of a strategy for integrated disaster risk management. - Integrated a cost-benefit analysis in the decision of designing and issuing risk transfer instruments. - Improved risk analysis for financial decision making. - Improved knowledge on the economic benefits of DRM investments to better promote the importance and key benefits of ex-ante risk management.

The implementation of a comprehensive DRM strategy is still far from being complete because of the weaknesses in the institutional and legal framework, in particular, the limited risk prevention and risk reduction investments and measures at the sectorial and subnational level which could allow the GoM to reduce the contingent liabilities to disasters. The Bank is currently having discussions with the GoM to continuing the technical support in this area through a RAS for the strategic evaluation of FONDEN and the possibility of implementing contingent lines of credit (CAT DDO) including a TA component with the Mexican States. It is expected that this work will further strengthen a comprehensive DRM strategy in Mexico. The Bank carried out a review of the Federal Disaster Risk Financing and Insurance (DRFI) strategy and a RAS in Disaster Risk Management was completed and delivered in FY14. This engagement supported the country’s analytic

Financial Services Ongoing Mexico CAT Bond III Closed Mexico CAT Bond II Use of risk management tools for outstanding loans (e.g. interest rate conversions, stand-alone interest rate swaps) Knowledge Services Closed Agriculture Risk Management in Mexico (P132987) Strengthening DRM in Mexico (P146241)

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Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

FND. It is expected that this work will further strengthen a comprehensive ARM strategy in Mexico.

capacity on the subject. Additionally, Mexico’s DRFI strategy is being evaluated to draw further evidence and recommendations applicable on the national and international levels.

Theme / Pillar IV: Promoting Green and Inclusive Growth Thematic Engagement 10. Reducing the Footprint of Growth Outcome / Objective 9: Strengthened institutional framework to manage urban development and reduced GHG emissions

(a) Increased capacity of the new Secretaría de Desarrollo Agrario, Territorial y Urbano (SEDATU) to address urban challenges. • Baseline: No capacity • End Target: Capacity in 3 areas: (i) strengthened land use planning; (ii) use innovative land-based financing mechanisms to provide infrastructure in new low-income settlements; and (iii) support urban mobility strategies geared towards public and non-motorized transport. • Actuals: (i) capacities

developed for strengthening land use planning; (ii) no activities reported so far; (iii) through the Sustainable Transport and Air Quality (STAQ) GEF, 4 cities have integrated environment and climate change components into the city’s master plans, including new urban mobility policy frameworks and regulation.

(b) Expanded use of TRACE to several large and intermediate cities

Completion of Urbanization Review – Achieved The Urbanization Review (UR) was delivered to clients in May, 2016. It provides an analytical basis to understand how well-managed spatial growth contributes to unlocking the gains from urbanization. The review focuses on (i) the patterns of spatial expansion within Mexican cities; (ii) the associated economic, social, and fiscal implications of spatial growth; (iii) the policy and institutional drivers of spatial expansion; and (iv) the key policy recommendations applicable to Mexico. Increase in the number of cities participating in Transport project to finance BRT (Bus Rapid Transit System) infrastructure and clean technology buses – Achieved. The first city successfully participating was Monterrey Nuevo León (ECOVIA 1) expanding to three other cities: Guadalajara (Metro Ampliación L-1), Tijuana (BRT) and Mexico City (Metrobus Reforma and L1 Extension), albeit approval is pending for the latter. Total Bank investment for this project will be of US$150M. Improvements to existing solid waste management program (PRORESOL) – Achieved. An assessment to the Solid Waste Program (PRORESOL) and the National Infrastructure Fund (FONADIN) identified the main bottlenecks, administrative and management processes requiring strengthening to increase PRORESOL’s efficiency. Moreover, PRORESOL’s technical capacity was also enhanced and articulation improved with stakeholders at the federal level, including the Secretaría de Hacienda y Crédito Público (SHCP) and Secretaría de Medio Ambiente y Recursos Naturales (SEMARNAT). Inputs in new national strategy for solid waste management and buy in from key actors – Achieved.

Financial Services Ongoing Urban Transport Transformation Program (UTTP) (P107159) Mexico Municipal Energy Efficiency Project (P149872) IFC: Cemex Green – Energy efficiency projects (37840); Artha Fund – Sustainable urban projects (32665); Optima Energia – energy service company (ESCO) (28383); Vinte – NuEDGE – Low income housing (38374) Closed GEF: Sustainable Transport and Air Quality Program (STAQ) (P114012) Efficient lighting and appliances (P106424) + GEF Mexico City Insurgentes Bus Rapid Transit System Carbon Finance Project (P082656) IFC: Puebla Bus Rapid Transit Line (599589) Knowledge Services Ongoing Market Instruments for Climate Change Mitigation - Participation of Mexico in PMR - energy, housing and transport (P129553) Support to the Government of Mexico on ICT (P149267) Urban and Housing PA (P147899) IFC: Green building investment across sectors: City Express (Tourism, 29520/31825), Vinte (Low income housing, 26292), through the EDGE (Excellence in Design for Greater Efficiencies) tool

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Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

• Baseline: 2 pilot cities • End Target: 10 additional cities • Actual: Trace exercises

completed in 30 additional cities by December 2015

(c) Reduction in GHG emissions attributable to: (i) the energy efficiency projects • Baseline: 0 (2011) • End Target: 9 MtCO2e • Actual: 9.15 MtCO2e (July

2016)16 (ii) other initiatives: PMR, CCS, and GV & FR (each program to set specific baselines and targets) PMR, CCS, Gas Venting and Flare Reduction: Supporting capacity building activities that are reported under intermediate indicators. Specific baseline and targets are defined in Annex 2. IFC: (d) Number of projects with EDGE certification • Baseline: 3 • Target: >5 • Actual: 2

As a result of the Bank’s technical assistance, SEMARNAT obtained a detailed review of the proposed national legal framework for integrated waste management. Priority elements in the solid waste management (SWM) strategy include valorization, e-waste, social inclusion, recycling, schemes to minimize food waste, among others. Additionally, SEMARNAT has incorporated the Bank’s advice in the updated national policy on final disposal sites. This exercise has included active participation from key actors such as the SHCP and FONADIN, as well as grant contributions to the SWM strategy from the latter and SEMARNAT. TRACE pilot completed and new set of cities determined and ready to roll out on public buildings and assets – Achieved. TRACE pilots were completed in Puebla and León by May 2014. In Puebla, the project was used to improve the public lighting modernization system, while in León, it helped develop the environmental sustainability strategy and to find other sources to finance non-motorized transport and a street lighting project. At the SHCP’s request, TRACE was expanded to 30 additional cities with planned investments to amount US$100M (from the Municipal Energy Efficiency Project, P149872). Exercises in the 30 selected cities were carried out by December 2015. Completion of Efficient Lighting and Appliances project and its additional finance – Achieved. The project achieved the following targets: almost 46 million compact fluorescent lights (CFLs) were distributed to residential consumers at no cost; 1.88 old household appliances were replaced with more efficient ones; over 3000 GWh were saved per year. The planned Additional Financing was substituted by a new project, Municipal Energy Efficiency Project, focusing on waste water, public lighting, transport, power and heating. This project fostered interest in a follow-up Bank engagement on energy efficiency in public facilities such as schools and hospitals. Completion of activities PMR, CCS, GV&FR. – Partially Achieved.

Closed Greening Mexico's Electricity Generation by Internalizing Externalities (P132533) Gas Utilization and Flare Reduction (P132506) Tool for Rapid Assessment of City Energy (TRACE) Model in Pilot Cities in Latin America (P133060) Urban Environmental Services PA (P149131)

16 Efficient Lighting 6.75 MtCO2e light bulbs and 1.74 MtCO2e refrigerators (July 2016). PERGE 0.66 (July 2016)

ANNEX 3

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Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

The Carbon Capture Utilization and Storage (CCUS) Capacity Building Knowledge Service supports CCUS related capacity building in government and technical institutions, including the Ministry of Energy (SENER) SEMARNAT, Federal Electricity Commission (CFE), PEMEX and the Electric Research Institute (IIE). Currently the Bank is supporting through technical assistance and a recipient executed TF for the construction of a pilot plant. On GV (Gas Venting) and FR (Flare Reduction) a workshop was prepared in coordination with Pemex's Upstream Planning division, and facilitated the identification of actual flare reduction project opportunities. The event was well attended with around 70 participants, including presenters from Brazil, Ecuador, and international experts from diverse technology companies. Local participants included staff from Pemex, the Energy Secretary (SENER), the National Hydrocarbon Commission, and the Environment Secretary (SEMARNAT). The workshop firmed Mexico commitment to continue working with the GGFR and others (the Global Methane Initiative) to reduce flaring and venting in the coming years. On Partnership for Market Readiness (PMR), the government is reviewing the final draft of the project document and the operations manual. Once the grant is approved, activities under the Market Readiness Proposal will start implementation. Specific tools to CNH in terms of data management and economic analysis of public policies – Achieved. The technical assistance provided during 2014-2015 served to develop a regulatory and technical framework for upstream gas utilization in Mexico. Two relevant results were produced: (i) new Upstream Gas Regulations were emitted in January, 2016; (ii) there is an increased capacity to supervise gas utilization in upstream oil and gas operations, due mainly to the development of a national regulatory oversight framework. Additionally, through a study tour in Alberta, Canada, the CNH gained direct exposure to international best practices on gas flaring and venting regulation; and the institution gained direct experience through a field audit exercise conducted at a PEMEX Upstream facility. IFC: Climate Business: Cemex Green Investment A priority for IFC is to support companies' investment programs aimed at mitigating the climate change and environmental impacts of their operations. After a thorough assessment of CEMEX's

ANNEX 3

46

Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

environmental, governance and social practices, IFC granted funding (corporate loan plus a blended finance tranche) for projects designed to mitigate the company’s impact on the environment in the cement industry. Projects are related to pollution control measures, clean energy, reduction of energy consumption and waste to heat recovery technologies. Additionally the project supports R&D to develop innovative pollution and GHG reducing technologies and products. IFC: EDGE Voluntary Certification: IFC commenced implementation in 2015 of AS regional project 601095 EDGE voluntary certification. Although the project is focused in Brazil, Costa Rica, Colombia, Panama, and Peru, it is scoping potential activities in Mexico.

Thematic Engagement 11. Using Natural Resources in an Optimal Way Outcome / Objective 10: Reduced deforestation together with increased certified forest areas

Increase in Forest under improved management and reduced carbon emissions. • Baseline: 163 million ha (2012) • Target: 10% Improvement in 5

years • Actual: 88% (Sep/2015)

Increased number of sustainable community enterprises in forests targeted by the Forests and Climate Change project – Achieved. The Forest and Climate Change project has been under satisfactory implementation since November 2012 (effectiveness). At its Mid-term review (in August 2015), 1.8 million additional hectares managed by Communities and Ejidos had been brought into Conservation/Sustainable Management practices (which represents an increase of about 90 percent since the beginning of the project) and more than 1,000 additional Communities and Ejidos have benefitted from CONAFOR programs, bringing it to a total of 2,972 (Dec 2014). Action plan prepared to increase certified wood production – Achieved. The Forest and Climate Change project supports various activities that enhance management of forest by communities and then can lead to certification. The establishment of a cohort of certified private technical service providers (more than 2,400 technicians have received certification), and the rehabilitation and strengthening of 40 CONAFOR field offices (out of the 72) has allowed to significantly expand the reach of CONAFOR’s programs to Communities and Ejidos and provide regionally and culturally appropriate technical support to potential and actual beneficiaries. During the period of implementation of the project, a total of about 1.2 million of hectares have been certified.

Financial Services Ongoing GEF: Adaptation to Climate Change on Coastland Wetlands (P100438) GEF: Sustainable Production Systems and Biodiversity (P121116) GEF: Conservation of Coastal Watersheds (P131709) Forests and climate Change SIL (P123760)/FIP (P124988) Sustainable Rural Development + GEF (P106261) IFC: Proteak – Certified teak plantations (31195); Puertas Finas – Certified wood products (33550/36529) Closed Meteorological Service (MOMET) (P126487) Knowledge Services Ongoing Environmental and Climate Change (P146340) FCPF readiness Preparation Grant (P120417)

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Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

Outcome / Objective 11: Improved water management systems and expanded access to water services

Improved standard performance utility indicators in target municipalities and states. Baselines and targets to be developed with the Oaxaca Water Program now under preparation. • Baseline: Not Available • Target: Not Available • Actual: Not Available

PROME developed an effective approach to increase efficiency in management systems at subnational level – Achieved. PROME efficiency activities have been implemented in a total of 81 water and sanitation service providers in Mexico. An example of increased efficiency of an operation is Guanajuato’s water utility (SIMAPAG). Specifically, physical efficiency of the OO (Organismos Operadores de Agua – Water Utilities Providers) was improved and leakages were reduced as a result of distribution network and tank rehabilitation activities and the telemetry activities in 22 tanks and 13 wells, all financed by PROME. As of March 2016, 25 (out of target of 30) OOs participating in the project have increased collection per cubic meter produced by 5 percent, 6 have improved energy efficiency, 19 have improved commercial efficiency by 5 percent and 6 have improved overall efficiency by 2 percent, as per the latest version of the Project Result Framework, updated in December 2015. Water law drafted and presented in Oaxaca Congress – Achieved. A draft new WSS (water and sanitation services) sector law was prepared in accordance with all the modernization principles agreed upon during preparation and submitted to the Oaxaca State Congress. Oaxaca Water Sector Modernization Program under implementation. Not achieved. The Oaxaca Water and Sanitation Sector Modernization Program is a loan to BANOBRAS (Banco Nacional de Obras y Servicios Públicos) in the amount of US$55M. BANOBRAS will on-lend to the Secretary of Finance, which is the operation implementing agency in Oaxaca. The project was approved by the Board on June 6, 2014, signed on June 13, 2014, and became effective on October 2, 2014. The operation’s original closing date is December 31, 2019 and to date 0 percent of the loan has been disbursed. The Subsidiary Agreement between BANOBRAS and the State of Oaxaca signed on August 14, 2014, however, has not become effective. As a consequence of the delayed effectiveness of the Subsidiary Agreement and delayed first disbursement, the State decided to put on hold the implementation of the operation in April 2015 and the

Financial Services Ongoing Oaxaca Water and Sanitation (P145578) Closed Water Sector Efficiency Improvement Program (P121195) Meteorological Service (MOMET) (P126487) Knowledge Services Closed Urban Environmental Services (P149131) Environmental and Climate Change (P146340) Cutzamala, RAS Phases I & II (P157058) Mexico GPOBA (P125716)

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Outcome / Objective

Outcome / Objective Indicator Status

Milestone or Intermediate Indicator Status WBG Interventions Status

operation was restructured by the end of 2015. Local elections were held in Oaxaca in June 2016 and a new administration will take office by the end of the year. In August 2016, BANOBRAS extended the validity period of the subsidiary agreement and it is expected that the agreement will be signed in early 2017.

Outcome / Objective 12: Increased production of combined renewable energy

(a) Increased eolic energy production and avoided emissions of MtCO2e (La Venta III) • Baseline: 0 • Target: 2,200 GWh • Actual: 1,069 GWh

(cumulative) (July 2016) • Baseline: 0 • Target: 1.15 MtCO2e • Actual: 0.66 MtCO2e

(cumulative) (July 2016) (b) Increased solar energy: Total Renewable Energy Technology consumption per beneficiary household in kWh/year17. • Baseline: 0 • Target: 2,077 (2015) • Actual: 799 (2015) IFC: (c) Number of renewable energy projects. • Baseline: 3 • Target: 7 • Interim: 2 • Actual: 0

Completion of La Venta project with analysis of lessons learned and recommendations to expand technologies in a sustainable way – Achieved. La Venta Project closed on April 30, 2016: Analysis of lessons learned will be prepared as part of the ICR. Completion of Integrated Energy Services Project – Achieved. The project closed on October 30, 2015. Major achievements include i) 36 benefited communities (6,235 people in 8 Mexican provinces; ii) 1.85 MW of installed capacity using renewable resources (solar PV); iii) direct and immediate impact on quality of life for beneficiaries (health, education and safety) addressed at early stages of implementation and should be continuously monitored all the way to closing. Report on geothermal energy prospects delivered – Not Achieved IFC AS project SEF Mexico (583007) was approved with the objective of increasing the implementation of sustainable energy projects among private companies in Mexico. However, The prevailing market conditions with the recent fall in oil prices and uncertainty about the concrete climate policy of the Mexican government are not conducive to local investments in renewable energy or energy efficiency investments in the short term. The Project will close in June 2016. An AS project (600332) provided advice to IFC client Puertas Finas. And recommended changes were implemented to achieve cleaner and more efficient energy use in 3 different plants. The replacements and improvement of equipment, mainly conventional electrical motors to high efficient ones, will potentially generate energy savings of 2,000 MWh/y, equivalent to US$352,000, implying a simple payback of less than 2 years.

Financial Services Ongoing GEF: Sustainable Energy Technologies (P145618) IFC: EDF La Ventosa – wind power (28070); Comemsa – Solar energy equipment (30229) Closed GEF: Large Scale Renewable Energy Development (La Venta III) – (P077717) Wind Umbrella (La Venta II) (P080104) GEF: Hybrid Solar Thermal Power Plant (P066426) Integrated Energy Services + GEF (P088996) IFC: EURUS- Wind power (28434); Aura Solar – solar power (32871); Knowledge Services Ongoing Approach for the Energy Sector (P150562) Closed IFC: Sustainable Energy Finance Mexico (583007); La Huerta – co and tri generation feasibility evaluation (600505); Rossini – energy efficiency and waste heat recovery evaluation (600505); Puertas Finas -Resource Efficiency (600332)

17 The correct unit of measurement is kWh/year and not MWh/year as in the original CPS.

49

ANNEX 4. CPS ORIGINAL STRUCTURE

MEX

ICO

PA

RTN

ERSH

IP S

TRA

TEG

Y

FY14

-19

Theme 1Unleashing Productivity

Subtheme 1. Fostering Sound Financial Sector Development

Outcome1Increased access to finance and

improved financial inclusion

Subtheme 2. Toward a More Competitive Business Environment

Outcome 2Improved business environment to support private sector investment

Subtheme 3. Fostering innovationOutcome 3

Enhanced innovation capabilities and in target states and industries

Subtheme 4. Upgrading Infrastructure

Theme 2 Increasing Social Prosperity

Subtheme 5. Promoting Labor Markets for Inclusive Growth

Outcome 4Increased skilled labor market

participation

Subtheme 6. Promoting an Integrated Social Protection System

Outcome 5. Increase use of integrated social

programs amonthe poor together with increased private sector participation in

social services provision

Theme 3 Strengthening Public Finances

and Government Efficiency

Subtheme 7. Managing Medium-Term Fiscal Challenges

Outcome 6Increase non-oil public revenue and improved expenditure equity at the

federal leval and in target states

Subtheme 8. Promoting Public Sector Modernization

Outcome 7Increased adoption of modern public sector management and information systems at the federal leval and in

selected states

Subtheme 9. Implementing an Integrated Sovereign Risk Management Framework

Outcome 8. Integrated and comprehensive risk management

framework in place covering key fiscal, agricultural and natural disaster risks.

Theme 4 Promoting Green and Inclusive

Growth

Subtheme 10. Reducing the footprint of growth

Outcome 9Strengthened institutional framework to manage urban development and reduced

GHG emissions.

Subtheme 11. Using Natural Resources in an Optimal way

Outcome 10Reduced deforestation together with

increased certified forest areas.

Outcome 11Improved water management systems and expanded access to water services.

Outcome 12 Increased production of combined

renewable energy.

50

ANNEX 5. MEXICO STRUCTURAL REFORMS 2012-2016 Status

Labor Reform

1. Its main objective is to provide more flexibility to the labor market. The reform admitted several types of new contracts: a) trial-periods and initial-training contracts (to permit workers to acquire knowledge and skills necessary to perform the job); b) discontinuous and seasonal work contracts; c) hourly-basis contracts.

2. Advances include: i) Improvement of conciliation and labor justice practices to avoid conflict. In the period of September 2014-June 2015 over 79 percent of the cases were solved in favor of the employees; ii) Promotion of safe and healthy labor practices through inspections, distinctions and specific programs, such as the Program for the Employment of People with Disabilities; iii) Provision of labor training and intermediation services. The National Employment Service (SNE) helped 12.7 million job-seekers, of which 3.6 million entered the labor market; iv) Launch of the National Observatory on Labor Productivity; v) New regulation on Safety and Security in the Workplace (Nov, 2014).

Education Reform

3. The Education Reform to improve the quality of education is one of the 2012-18 administration’s priorities. A Constitutional Amendment (February 7, 2013) resulted from the political will and coalition stemming from the Pacto por México, signed by the President and the leaders of three major political parties on December 2, 2012.2 The reform aims to improve the quality of education through: i) establishing a professional system for hiring, evaluating, training, and promoting teachers (Servicio Profesional Docente, SPD) and a new unit within the Secretariat of Public Education (Secretaría de Educación Pública, SEP) to coordinate it; ii) providing full autonomy to the National Institute for the Evaluation of Education (Instituto Nacional para la Evaluación de la Educación, INEE) to oversee all evaluation functions throughout the education system, including the performance of students, teachers, school directors, supervisors, and schools; (iii) establishing a federal census of education data and a national Education Management Information System (Sistema de Información y Gestión Educativa, SIGED); and (iv) fostering school autonomy and school based management, among other goals. The articulation between the different elements of the reform will be crucial for achieving the expected results. In order to implement the reform, the Government recently published the Education Sector Program (Programa Sectorial de Educación, PSE) 2013-18, which provides clear strategies and implementation arrangements to achieve the education objectives defined in the NDP.

4. Advances include: i) The new standardized test for Basic and Upper Secondary Education, PLANEA, was applied in 2015; ii) Over 183,073 participants entered the examination process Servicio Profesional Docente for teaching and managerial positions; iii) Infrastructure and equipment improved for 15,812 schools, based in the 2013 Education Census; iv) Scholarship programs coverage increased from 6.9 million (SY12) to 7.8 million (SY14); v) Scholarized and non-scholarized Upper Secondary Education increased to 71.5 and 34.1 percent, respectively (SY14).

Telecommunications

5. Aims to increase competition in telecommunications and broadcasting through the modernization of the legal framework on telecommunications and radio broadcasting; and establishes a digital inclusion policy and a national digital strategy. It increases users’ rights and eliminates monopolist and anti-competitive practices; requires the existing TV networks to offer their programming at no cost; and forces cable operators to carry all broadcast channels.

6. Advances include: i) long distance fees were eliminated; decrease in prices in telecommunications services, including cell phone fees; ii) New actors have entered the industry and have improved wireless

51

broadband service penetration, which doubled from 23 to 43 subscribers per 100 inhabitants from December 2012 to December 2014; iii) Advances in transition to Digital TV.

Energy

7. Its main objective is to end state monopolies and encourage private investment in energy. It forbids monopolies in Mexico except for those strategic activities that are an exclusive responsibility of the State. Power generation for public service is no longer exclusive of the State. The National Hydrocarbon Commission (CNH) and the Regulatory Energy Commission (CRE) become entities with legal identity and autonomy. Creation of three new agencies: the National Center for Natural Gas Control (Centro Nacional de Control del Gas Natural, CENEGAS), the National Center for Energy Control (Centro Nacional de control de Energía, CENACE), and the National Agency for Industrial Safety and Environmental Protection (Agencia Nacional de Seguridad Industrial y de Protección al Medio Ambiente, ANSIPMA).

8. As of August 2016, (i) institutions in the sector were strengthened and new institutions were created; (ii) PEMEX is regulated by a new legal framework which will allow for its technical, managerial and budgetary autonomy; (iii) Sectoral secondary laws and regulations published in October 2014 have led to a decrease in electric fees for the industry and households. Additionally, new laws were established for the commercialization and supply of electricity, including fees for these services, and; (iv) Hydroelectric energy production increased by 40 percent in 2014, permitting fee reductions for the industrial (between 28 and 38 percent), and commercial (between 12 and 24 percent) sectors, and for household consumption (11.9 percent).

Financial

9. Seeks to foster sound access to credit by improving financial infrastructure, fostering competition and enhancing consumer protection and the role of development banks. On the financial infrastructure side the main changes introduced are improvements to the regime for secured transactions and corporate bankruptcy. In competition, the competition authority was mandated to carry out a review of the financial industry and to made recommendations to the financial regulator. The reform also creates a “financial entities bureau” to make it easier for consumers to access and compare information about financial institutions.. To preserve financial stability in a context of increase financial activity the reform makes Basel III requirements legally binding, and improves the bank resolution framework as well as the oversight framework for credit unions.

10. Over 34 legal systems were modified or created to provide a legal framework to the financial system. Credit to the private sector increased from 28.8 percent of GDP in 2013 to 32.3 percent in December 2015 Credit supported by development banks, directly or through guarantees, amounted to 7.4 percent of GDP by the end of 2015.

Fiscal

11. Its main objective is to raise tax revenues, close loopholes and expand fiscal deficit. The Fiscal Reform modifies the Value-added Tax Law, the Income Tax Law, the Special Tax for Production and Services Law (Excise tax), and the Federal Rights Law, and repeals the Business Tax Law and the Cash Deposit Tax Law. The implementation of reforms include: i) new measures for fiscal responsibility to maintain macroeconomic stability; ii) the creation of rules for the management and use of surplus income; iii) a new fiscal regime for PEMEX; and iv) mechanisms to improve the quality of expenditure, oriented to more transparency, accountability and better budget control.

Competition

12. Seeks to increase competition in key sectors. Implements a new system of economic competition to foster a more dynamic market and more efficient economic processes, better technology and improved infrastructure. It creates two autonomous regulators and specialized courts assessing competition matters and widens the catalogue of possible actions to be taken against anti-competitive behaviors in the market.

52

Political / Electoral

13. Seeks to end the century-old ban on no re-election (except for Presidents). Limits Mexican presidents and state governors to a single, six-year term. It allows independent candidates to run for public offices, set out rules for coalition governments, and strengthen Congress at the expense of the president. Also, it authorizes Mexico’s National Electoral Institute (INE), to name the president and the members of each of the 32 states electoral institutes and empowers electoral authorities to annul elections if the winner exceeds campaign spending limits.

Transparency

14. Aims to increase transparency and access to information by strengthening the right to access public information and consolidates the new National Transparency System. It also establishes new faculties for the federal institution that guarantees this right and widens the catalogue of persons obliged to disclose public information.

15. Advances include: the establishment of the new and autonomous federal institution, INAI (Instituto Nacional de Transparencia, Acceso a la Información y Protección de Datos Personales); the National Transparency, Access to Information and Data Protection System (SNT) was created. This will be coordinated by the INAI to standardize mechanisms related to public information access. The new portal for Budget Transparency (PTP) was presented. The first Information Quality Index was published in 2015. It includes local government reports on the use of federal transfers.

Financial Discipline for States and Municipalities

16. The objective is to protect the stability of public finances and the financial system. It enables Congress to legislate on public debt.

17. Advances include i) the establishment of the Agreement for the Collaboration on Federal Fiscal Matters (CCAMFF); ii) the monitoring of the Social Development Infrastructure Investment Fund (FAIS) by which state and municipal governments register the use of federal funds and the relevance to reduce unsatisfied social needs; and iii) proposed changes to the Fiscal and Financial Discipline in states and Municipalities Law that focus on: Financial Discipline Regulation, an Alert System linked to debt levels, payment of obligations and liquidity conditions, State Debt guaranteed by the Federation and a Unique Public Registry to monitor state debt. The Law was promulgated on April 27th, 2016.

New Appeals Law

18. Seeks to simplify the appeal trial process. Integrally modifies the appeal trial process to make it more expedite and strengthens the Supreme Court’s faculties to attend to this issue. It also grants citizens the protection of the appeal and guarantees a more expedite and efficient application of justice.

National Criminal Procedures Code

19. Its objective is create an accusatory model of justice. It generates a federal model for accusatory criminal proceedings to be implemented in federal and local jurisdiction crimes and civil courts to facilitate coordination between authorities. It includes the general principles and the stages of the process as well as innovative figures such as alternative mechanisms, early forms of process termination, cautionary measures and special procedures.

Anti-Corruption

20. The reform aims to prevent and sanction corruption. Creates the National Anti-corruption System as a coordinating agency for the prevention, detection and sanction of corruption, and for the control of public resources. As of today, the secondary laws for the implementation of this reform, particularly for the National Anti-corruption System, are still under discussion in the Mexican Congress.

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ANNEX 6. EXAMPLES OF IMPLEMENTATION CHALLENGES AND THEIR SOLUTIONS Implementation Challenges Solutions

Urban Transport Transformation Project (UTTP)

• Weak internal coordination and slow performance by the borrower Banco Nacional de Obras y Servicios Públicos (BANOBRAS). • Long project approval cycles not in synch with political cycles at subnational level. • Necessary adjustments to procurement methods to accommodate commercial practices to allow private sector participation in sub-projects. • Debt limits in some states and municipalities have reduced the possibility or incentive to request resources under the loan. • Safeguards arrangements and responsibility needed to be further clarified between BANOBRAS and the Bank.

• Increased technical assistance including preparation of a RAS to improve internal coordination, including with sub-national entities, of the Federal Mass Transit Program (PROTRAM), which the UTTP is partially financing. Also, since the Mid-Term Review, Bank and BANOBRAS teams have implemented better coordination protocols to improve the project’s overall implementation, supervision and monitoring capacity. • A level II restructuring improved (i) the clarity on the definition of different actors’ roles and responsibilities with regard to safeguards; (ii) the procurement mechanisms to evaluate the acceptability of private-sector commercial procurement practices. • Counterpart discussions at CPPR agreed on firm pipeline decisions to bring the project to closure. Also, pipeline projects possibly financed by the UTTP have to align better with political cycles.

Oaxaca: Water and Sanitation Services Sector Modernization Project

• In light of the new Fiscal Discipline Law for Subnational Entities, the operation’s dedicated technical assistance component was not deemed consistent with Mexico’s legislation and as a result, one effectiveness condition of the Subsidiary Agreement could not be met as expected. • The political transition at the state level posed further delays to implementation.

• A level II restructuring incorporated the reclassification of the funds of the Technical Assistance (IPF) Component financing to the Program for Results (PforR) Component. Technical Assistance (TA) had to be funded out of the State’s own funds. An extension of the closing date given the delays the project had suffered. • Senior Management efforts to engage early with the new State Administration ensuring ownership of the project.

Sustainable Rural Development Project

• Changes in Mexican government norms made disbursements of GEF resources not possible resulting in the delay of several activities (i.e., recruiting an administrative agency). • Procurement methods considered for the project posed several difficulties when applied to the private sector. • Lack of federal budget allocation has delayed the implementation of activities under this project.

• Level II restructuring addressed the institutionality of implementing arrangements and incorporated commercial practices into the procurement mechanisms under the project • Joint CMU-GP High Level meetings with the administration managed to get Government buy-in to provide the necessary federal budget allocation. • An 18-month extension of the closing date will allow to disburse all funds under the project, responding to strong demand of sub-projects.

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ANNEX 7. CPS IMPLEMENTATION PROGRESS Pillar 1. Unleashing Productivity

1. The WBG has contributed to increase productivity by facilitating access to finance for businesses and individuals; improving the investment climate in select states; and promoting select infrastructure development for productive purposes.

Increased access to finance and improved financial inclusion (Objective 1)

2. Substantial gains have been made in financial inclusion with the Bank’s support. Through the Rural Savings and Credit Sector Consolidation project, 3.2 million new clients were incorporated into the formal financial sector as of September 2016. A million PROSPERA beneficiaries in alliance with this program have been reached, of which 600,000 received credit, savings and/or insurance in addition to the guaranteed bank account, debit card and financial literacy sessions. BANSEFI has also been successful in reaching marginal areas and populations which were previously uncovered, including 58 percent of women beneficiaries and 29 percent living in indigenous areas. Going forward the Bank will continue supporting Mexico in its efforts to expand the availability of finance through the recently approved Expanding Rural Finance loan that aims to increase access to finance to the rural economy.

3. IFC identified active players of digital financial services in Mexico as the next frontier in access to finance. To support SMEs inclusion, IFC has provided CS Trust II, which is meant to direct the mobilized funds to mid-sized enterprises with limited access to financing. Through the Progresemos project, IFC aims to have development impact by increasing access to financial services, including both credit and deposits in the underserved frontier regions. Capital Indigo, a Mexican private equity Fund Manager, is raising a US$60-80m growth private equity fund (“Capital Indigo Fund I”) for investments in local SMEs. In addition, IFC has provided a guarantee to the first bond issued by Consorcio de Asistencia al Microemprendedor S.A. de C.V. (CAMESA) to support the company’s fundraising towards expanding its lending services to microfinance institutions in Mexico. With IFC’s guarantee the two-year bond received a local credit rating of AA- by Fitch Ratings and HR Ratings.

Improved business environment to support private sector investment (Objective 2)

4. Based on Bank recommendations, the GoM has carried out changes to improve the business environment, both at the federal and subnational levels. Roadmaps to eliminate hindering regulations for competition in specific sectors were produced for the states of Oaxaca, Tabasco and Mexico. Frameworks were established to assess state-level regulatory barriers to competition and to monitor the implementation of reforms. As a result of this experience, a presidential Decree was issued mandating the states to conduct analysis of regulatory barriers to competition at the state level using the World Bank methodology coordination mechanism between the federal and subnational governments to improve regulation. At the federal level, the bank provided support to the National Competition Commission (COFECE) in the analysis of competition in financial markets. Bank’s recommendations were included in the COFECE reports and as a result, two enquiries have been launched in the credit bureau and AFORES (Retirement Pensions Administrators) market. The bank also supported the Mexican Telecommunications Federal Institute (IFT) in the design of the Red Compartida (Shared Wholesale Network) program to ensure fair access to market. The Bank has also played a key advisory role in the formulation of the special economic zones (SEZ) policies in Mexico’s south and south-eastern states (SSEs) and has brought its global experience to establish a roadmap for SEZ development with preliminary costing projections. Going forward, the Bank will continue providing support through a RAS that will aim to develop the implementation of such policies.

Enhanced innovation capabilities for companies and in target states and industries (Objective 3) 5. The Bank is supporting innovation focusing on the Information Technology (IT) sector and on the development of programs that foster small and medium-sized enterprises (SMEs). As part of

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the Information Technology Development Project (PROSOFT), the Bank improved the quality of IT professionals in the industry, contributing to close to 70,000 improved jobs from IT certification, and 41,000 new jobs through MexicoFIRST18 (almost one-third of the annual new jobs in the industry during 2008). In addition, 500 companies have been certified and over 65,000 certifications (among more than 344 international and 40 national offered) have been delivered nationally, thus increasing the skills of the labor force and facilitating SMEs’ access to international markets and financing. Moreover, the Bank reached a total of 701 companies (compared with the target of 390) that received certifications providing that they and their staff developed capacities enabling them to qualify to compete in international markets. An inventory of IT legislation was also performed and delivered to the GoM, identifying best practices in regulation to be used for adapting legislation at subnational level. To support SMEs programs, the Bank produced a diagnostic of the key drivers for innovation, entrepreneurship and productivity growth, which resulted in the strengthening of the National Institute of the Entrepreneur’s (INADEM) program design and evaluation capacities. Two RAS activities are directly supporting INADEM in the alignment of its programs to achieve increased productivity and economic growth.

6. IFC continues to give priority to investments related to the production of value-added products in underdeveloped sectors in which Mexico has a competitive advantage and in companies with strong impact in the development of SMEs through the supply chain. With the financing of the flagship project Etileno XXI, this company is expected to become a competitive producer of polyethylene (PE) that will help reduce Mexico’s PE trade deficit by about 80 percent. IFC has supported the growth of a local lime producer (Grupo Calidra) which has become the leading company in Mexico in terms of sales, production efficiency and high environmental and social standards. With the support to Virgin Mobile Mexico (VMM), the company will offer mobile phone services primarily to the youth segment expanding mobile broadband usage with attractive data packages. On Agribusiness, IFC has experienced a growth of its portfolio in the last 2-3 years reaching US$67m in allocated resources. Special emphasis is seen in impact on frontier states (Oaxaca, Guerrero, Chiapas and Nayarit), in animal protein and in climate change investments (almost all the investments in the agri-portfolio have a climate change/energy efficiency component).

Upgrading Infrastructure (Objective Undefined)

7. To support Mexico’s infrastructure sector, IFC’s financing helped Riveras Del Pantepec to develop a new container terminal on Mexico’s Atlantic coast in the Municipality of Tuxpan, State of Veracruz. The US$75m (own account) Project will create a new gateway and add 576,000 twenty-foot equivalent units (TEUs) of modern container handling capacity to Mexico’s Atlantic coast. The terminal will provide competition to the port sector, encourage existing operators to increase their efficiency, and generate public revenues, jobs and a boost to economic activity in the State of Veracruz. In addition, IFC has provided a US$117m funding (own account plus mobilization) for the development and operation of a green-field container terminal within the Port of Manzanillo in the State of Colima. The terminal is expected to alleviate congestion and provide additional container cargo handling capacity. Moreover, IFC supported APM Terminals in developing a specialized container terminal in the Port of Lazaro Cardenas, in the State of Michoacán, which is expected to be the first partially automated container handling terminal in Latin America with an annual capacity of 1.27 million TEUs.

Pillar 2: Increasing Social Prosperity

8. The WB has supported the government on its efforts to increase social prosperity and alleviate poverty by improving the quality of target education programs as well as the access and the integration of Mexico’s social protection system. The two objectives of the Pillar were on track to reaching their established targets in the remainder of the CPS period.

18 Mexico Federal Institute for Remote Services and Technology (MexicoFIRST) is an institution created in 2008 to provide training grants for the IT industry in Mexico.

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Increased skilled labor market participation (Objective 4)

9. The World Bank has supported Mexico’s labor productivity agenda focusing on the education sector from Early Childhood Development (ECD) to Upper Secondary level. To increase skilled labor participation, the Bank has helped the government improve education attainment and learning outcomes. Several training workshops covering topics on ECD, community education and basic education were conducted. As of end FY16, around 29,523 participants comprising mobile pedagogical support teachers (APIs), school principals and promotores (promoters) have been trained. The Upper Secondary DPL series that closed during the CPS supported the implementation of the Upper Secondary Education Reform (Reforma Integral de la Educación Media Superior, RIEMS). As a result, improvements in internal efficiency and a downward trend on the annual dropout rate (from14.50 to 13.40) were observed. The PA on Labor Market Productivity highlighted the linkage between Upper Secondary Education and the labor market. Under the MX Social Protection System PA II, the Bank has recently concluded work for the Ministry of Finance that explores the link between the level of the minimum wage and productivity in Mexico. The main objective of the study was to understand the impact of minimum wages on firm, worker, and economy-wide productivity as well as to propose options and dynamics for the Government's minimum wage setting strategy. The study results have provided input to the current debate in Mexico on minimum wage policy and there is the possibility of future work. Through knowledge activities, an evaluation of the impact of education policies was conducted, and the improvement of skills to enhance labor market productivity was assessed. Going forward, the Bank will keep providing support to Mexico’s productivity and equity agendas through two recently approved IPF operations in education which results are expected by the remaining of the CPS period.

10. IFC has continued supporting skills development and employability. IFC investment services is currently elaborating a mapping exercise for the nontraditional education business that have a focus on providing skills for employability, including corporate training, English language, tutoring, and teacher training, in order to assess the opportunities in the market.

Increased use of integrated social protection programs among the poor, together with increased private participation in social services provision (Objective 5)

11. The Bank will continue assisting Mexico’s efforts in increasing the use of a more inclusive, effective and integrated social protection system among the poor. Over the last two decades, Mexico has made significant progress in the coverage and effectiveness of its social protection system. Through the Social Protection in Health Project (PHI, Seguro Popular), 55.6 million of new affiliates were registered by the Project’s completion, representing a 78 percent increase over the baseline and far exceeding the end-of-Project target of 48.4 million. Under the Bank’s support to the Oportunidades program (2009-2013), 700,000 families were incorporated into it, representing a total of almost 26 million additional beneficiaries. The WBG has also proudly partnered with Mexico on the redesign of its CCT program, now called PROSPERA. The Bank is supporting PROSPERA in the implementation and evaluation of a new component linked to social, productive and financial inclusion, as well as aiding the Ministry of Social Development (SEDESOL) in the design and implementation of key instruments such as the Unique Registry of Beneficiary and an Integrated Social Information System to better target interventions to the poor.

12. IFC investments and advisory services have focused on supporting the private sector players engaged with the public sector in the delivery of social services. IFC has supported Sala Uno- Health Eye Care which has become one of the top eye care providers in Mexico City by volume with more than 10,000 surgeries performed. The company specifically targets low-income patients (prices are 40 percent lower than competitors) in a number of ways, including alliances with non-governmental organizations (NGOs), community outreach, referrals from government entities and word of mouth.

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Pillar 3. Strengthening Public Finances and Government Efficiency

13. To improve Mexico’s public services delivery, WBG support has focused on improving public sector performance and expenditure quality. Out of the three objectives that are part of this Pillar, two of them were on track and one presented delays on reaching its target during the remainder of the CPS implementation period.

Increased non-oil public revenues and improved expenditure equity at the federal level and in target states (Objective 6)

14. The Bank has supported the GoM in making significant changes to structure the utilization of fiscal revenues for a more efficient and equitable expenditure at federal and state levels. So far, from 2012 to 2015, the non-oil Federal Revenue as a percentage of GDP has increased to 18.9 percent (includes non-recurrent revenue oil price hedge). The Bank has played a key advisory role providing, inter alia, support to Mexico’s fiscal consolidation program and the 2016 budget preparation through an in-depth Public Expenditure Review (PER). Furthermore, the Bank has made recommendations to improve the tax code and the assessment of public investment projects, and to design a legal framework for the regulation of subnational fiscal performance, specifically preparing fiscal consolidation policies for highly-indebted states and a better use of federal transfers at state level.

Increased adoption of modern public sector management and information systems at the federal level and in selected states (Objective 7)

15. The Bank continues supporting the public sector modernization agenda in Mexico including providing technical assistance directly to subnational entities. Progress to increase the adoption of modern public sector management and information systems both at the federal and the state level, contains, for instance, a comprehensive and in-depth diagnostic on public sector management for the State of Oaxaca, including recommendations for its modernization, which were also implemented. A similar effort is currently being developed with Mexico City and is expected to be completed in FY17. In the State of Puebla, the World Bank worked in institutionalizing a citizen participation mechanism to improve service delivery. Through an IDF to the National Congress, the Bank contributed in the completion of a full automatization of the back-office systems (i.e. Budget, Treasury, Accounting, Procurement and Human Resources).

Integrated and comprehensive risk management framework in place covering key fiscal, agricultural and natural disaster risks (Objective 8)

16. The GoM has continued strengthening their financial protection strategy against disasters. The WBG has supported this effort through the delivery of an ongoing package of knowledge services. The PA on disaster risk management is delivering concrete short-term outputs that have served DRM policy-making processes in Mexico at different stages and in various fronts. Since 2011, the Government has issued an insurance coverage program for FONDEN (Fondo de Desastres Naturales – Natural Disasters Fund) to increase its financial capacity to respond to disasters and finance reconstruction of public infrastructure and assets. The RAS in DRM provided the government with a final technical publication with recommendations to strengthen Mexico’s DRM structure at the Federal and subnational level. The Federal Government has now the necessary elements to promote disaster risk reduction investments as a cost-efficient way to manage disaster risk. The implementation of an integrated agriculture risk management strategy is still far from being completed as several reforms require modification to their legal framework.

Pillar 4. Promoting Green and Inclusive Growth

17. This Pillar encompassed WB contributions to reduce the footprint of growth, including urban planning, solid waste management, energy efficiency, and manage natural assets under pressure,

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focusing on forest, biodiversity and water management, and renewable energy. Three out of the four objectives measuring the success of this Pillar were on track.

Strengthened institutional framework to manage urban development and reduced GHG emissions (Objective 9)

18. Progress has been made in reducing GHG emissions through the promotion of energy efficiency initiatives in the transport, housing, solid waste, and energy sectors. The development of 4 integrated mass transit corridors under the ongoing Urban and Transport Transformation Project (UTTP) has resulted in an emission reduction of 143,232 CO2e tons since 2010. Technical assistance to tackle environmental problems and implement sustainable transport policies has being provided under the Sustainable Transport and Air Quality (STAQ) GEF. Today, 4 cities have integrated environment and climate change components into the city’s master plans, including new urban mobility policy frameworks and regulation.

19. The Urbanization Review (UR)—delivered to clients in January, 2016—presented a set of policy recommendations and regulations to effectively manage the system of cities in Mexico. The ongoing RAS on housing policy and housing finance seeks to improve the efficiency of the main up-front subsidy program (Esta es tu Casa) to align it to the new housing policy objectives. Going forward, a new Bank loan to support an Inner-City Affordable Housing Program is being prepared.

20. On solid waste management, the Bank elaborated a detailed review of the proposed national legal framework for integrated waste management. A new lending operation is under preparation that will support, among other things, Mexico’s National Program for the Prevention and Integrated Management of Solid Waste on its efforts to reduce GHG emissions.

21. With the Efficient Lighting and Appliances project an approximate of 8.49 MtCO2 were reduced from 2011 to 2016. The GEF grant linked to this project supported diverse studies such as an assessment on energy efficiency in hospitals, schools and hotels and also an energy efficiency diagnostic on 30 municipalities of Mexico. The Bank has recently approved (FY16) the Municipal Energy Efficiency Project (PRESEM) aiming to promote the efficient use of energy in the Borrower’s municipalities by carrying out energy efficiency investments in selected municipal sectors and contribute to strengthening the enabling environment.

22. The Bank will continue working in Carbon Capture and Storage (CCS) activities. Phase 1 of the Carbon Capture Utilization and Storage (CCUS) Knowledge Service was funded by the WB CCS trust fund in the amount of US$1.3m. Moving forward, Phase 2 of the CCUS Capacity Building activity will be implemented as two parallel TA projects: 1) a Bank executed grant of US$2m for capacity building; and 2) a recipient executed grant of US$10m for design and implementation of two pilot CCUS operations and establishment of a CCUS Center, outlined below. Pilot operations, funded in Phase 2, include will support the following: CO2 Capture Pilot Project (2017-2019); Pilot CO2-EOR permanent storage project (2016-2019); and Support for Mexico Centre for CCUS (2016-2017).

23. Once operational, the grant under the Partnership for Market Readiness (PMR) will play a major demonstrative effect as it will be the first grant to directly support the Fondo para el Cambio Climático (Climate Change Fund). The Mexican Ministry of Environment (SEMARNAT) will directly benefit from institutional capacity strengthening which will later allow it to draw resources from other initiatives. The grant will support TA activities and institutional capacity strengthening, without actual infrastructure involved. Therefore, it will certainly contribute to National Mitigation efforts,

24. IFC’s contribution to reduce the footprint of growth has involved advisory services. The Bank and IFC have collaborated to provide technical assistance to the National Infrastructure Fund (FONADIN) in order to improve the efficiency of its Waste Projects Financing Program (PRORESOL). IFC expects that its involvement in these initiatives would foster the development of subnational PPPs, not only for waste management but also for other municipal services. Through the Leadership in Energy and Environmental

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Design Certification Program, the IFC has promoted green building investments across different sectors (City Express and Vinte).

Reduced deforestation together with increased certified forest areas (Objective 10)

25. The Bank is contributing to promoting a sustainable management of Mexico’s forests and developing biodiversity-friendly management practices. Through the Forest and Climate Change project, 1.8 million hectares have been brought into conservation/sustainable management practices since 2011. More than 1,000 communities and ejidos are now benefiting from CONAFOR programs. With the Sustainable Production System and Biodiversity project, 11,861 hectares have been brought under enhanced biodiversity protection and a total of 27 biodiversity-friendly sub-projects are currently under implementation. Under the Sustainable Rural Development project, 1,463 small and medium-sized agri-business have adopted environmentally sustainable technologies resulting in 3.8 MtonCO2e emissions avoided. The implementation of a GEF supporting adaptation to climate change impacts, have resulted in the reforestation of around 50 hectares of mangrove ecosystem as well as 10 hectares of riparian zones.

Improved water management systems & expanded access to water services (Objective 11)

26. Progress has been made to improve Mexico’s water management systems. Through the PROME project, eligible water utilities are benefiting from interventions to provide more efficient, reliable water and sanitation services to their users. Around 25 water utilities have increased their collection of revenues per cubic meter produced and 6 are showing an increase in its global efficiency by 2 percent. More than 600 employees have been trained in efficiency programs. Bank’s support at the subnational level was envisaged through the Oaxaca PforR. Delays in the effectiveness of the loan agreement between BANOBRAS and the State of Oaxaca due to legal reasons have put on hold the implementation of the operation. Interest of the new administration that will take office in late 2016 will be assessed as a pre-requisite to resume the implementation of the Program. Nevertheless, progress has been made. A new Water and Sanitation Services (WSS) sector law was prepared and submitted to the State’s Congress; as well as several studies underpinning the first tranche of investments. For the remainder of the CPS period, the Bank will continue supporting the water sector with the ongoing RAS in support of the development of an integrated management plan for Mexico City’s Cutzamala Water System. In addition, an investment operation is being prepared aiming to improve the efficiency, quality and financial performance of the water supply service provided by Mexico City utility (SACMEX).

Increased production of combined renewable energy (Objective 12)

27. The Bank has supported Mexico break ground on renewables and energy diversification through a wide range of financial products. Through the Large Scale Renewable Energy project—the first Independent Power Producer (IPP) wind power plant to be developed in Mexico—around 720 GWh of renewable energy have been generated and between January 2014 - July 2016, 450,623 tCO2e emissions have been reduced. To promote the replication of integrated combined cycle systems power generation technology in Mexico, the Bank supported the construction of the Hybrid Solar Thermal Power Plant, which will be the first in Latin America and the seventh worldwide. Issues related to the completion of the construction of the plant have impeded this project to achieve expected results related to the production of electricity using solar energy. It is expected that the plant will enter into full operation during the last months of 2016 which will result in 11,800 tCO2e emissions avoided. The Integrated Energy Services project remains as part of the flagship rural electrification program of the Government. As a result, 35 solar farms are either in operation or being tested, which represent around 1,800 households being electrified.

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ANNEX 8. GENDER INTERVENTIONS IN MEXICO 1. WBG engagements throughout the CPS pillars have included gender-specific actions and targets to help increase equality and the well-being of women. Several ongoing projects have incorporated a gender-perspective in their project indicators, while others have started tracking indicators during its implementation as specific needs to measure impact and benefits for women arise. 2. From FY14 onwards, the portfolio performance in terms of gender mainstreaming improved, being 100 percent of the projects gender-informed. According to the Mexico Country Gender Scorecard (June, 2016), in FY14, two new projects (i.e. education and water) were gender informed: the Oaxaca WSS Sector Modernization in all three dimensions (analysis, actions, and M&E), and the Upper Secondary Education DPL only in analysis. In FY15, out of the 3 projects, 2 were gender informed in all the three dimensions (i.e. Reducing Inequality of Educational Opportunity Project and Social Protection System) and the other (i.e. School Based Management project) only included gender in the M&E framework. And finally, with regards to FY16, portfolio reviews show that the new Expanding Rural Finance project is gender informed in all three dimensions. 3. In addition to increasing access to finance, the Rural Savings and Credit Sector Consolidation loan to BANSEFI greatly increased women’s access to financial services. Proportionally, as part of the Technical Assistance Program for Rural Microfinance project (Programa de Asistencia Técnica a las Microfinanzas Rurales, PATMIR) supported through the BANSEFI loan, financial inclusion was higher for women than for men: out of 1 million beneficiaries, 50 percent are female. Additionally, through the Bank’s convening power, BANSEFI is now working with PROSPERA program to increase the coverage and quality of financial services and to provide financial education to women benefitting from this program’s financial inclusion component. 4. As part of increasing social prosperity, the Bank has provided significant support to gender interventions through the PROSPERA and Seguro Popular projects. The PROSPERA Program in its entirety is gender-focused since the recipients of PROSPERA cash transfers are women. The program empowers women through social participation, encouraging women to act as promoters and put special emphasis on education of girls, since they receive higher education grants than boys. Moreover, the productive and financial inclusion components of the project have benefitted mostly women, which are now empowered to improve the families’ income through their direct decisions and actions. The Social Protection System in Health Project (Seguro Popular) increased the number of women and girls affiliated from 16.9 million to 30 million, much above the original target of 22 million. Women and children have also benefitted from the additional programs financed through the PHI. The PHI gives pregnant women, mothers and children priority access to health care services through a Strategy for Healthy Pregnancies (Estrategia de Embarazo Saludable) and the Health Insurance for a New Generation (Seguro Médico para una Nueva Generación). 5. Although no gender interventions are directly linked to projects within the Promoting Green and Inclusive growth pillar, the Forests and Climate Change project has enacted actions to foster gender equality. In line with the GoM’s gender and productive democratization themes, the project is implementing actions such as providing training on differentiated service and gender through high-level conferences, regional workshops and forums, such as the National Forum with Women of Forestry. These actions represent and advance in gender specific interventions, but since they were recently incorporated into the project, their impact in the well-being of women is yet to be measured. 6. The WBG also provides technical assistance for designing and effectively tracking gender interventions in Mexico. The Poverty and Equity PA supported the GoM to develop specific gender indicators on issues such as violence and migration. The initial stock-taking exercise with INMUJERES (National Institute for Women) and the Ministry of the Interior (SEGOB), and a case study of a one-stop service model for victims of gender-based violence carried out in Nuevo León, served as the opportunity for further dialogue and engagements on these issues. Additionally, through the Bank’s social safeguards compliance, many projects include gender-specific plans and actions in the Indigenous Peoples Plans to

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ensure that the condition of women, especially indigenous women, is not further hindered and is instead enhanced and strengthened. 7. The World Bank, through its Transport and ICT Global Practice, is currently studying gender-based violence (GBV) in public transportation in Mexico City. From previous studies, GBV in public transportation was detected as a real concern among users. The World Bank developed a study to characterize GBV in public transportation in Mexico City and design a strategy of different solutions to address this issue. The strategy has three components: (i) a marketing campaign, which provides information to bystanders about what they can do to interrupt harassment in a non-confrontational way; (ii) training for bus drivers on non-confrontational strategies for intervening when harassment occurs; and, (iii) a mobile application, which enables bus users to report when they are either victims of harassment or witnesses to it.

8. IFC systematically tracks gender through its project indicators targeting female employment, female students and female patients reached through IFC investments. Greater efforts are being made going forward to disaggregate all indicators by gender, where applicable. In Mexico, IFC has several projects in the health and education sectors where the portion of female beneficiaries is being tracked. In the CPS period, the IFC teams are actively looking for opportunities to support women owned businesses and other projects with a gender focus. For example, IFC’s client Etileno XXI during the construction period of the project made a large effort in providing jobs to women. Now that the project is in operations there are fair number of women that have retained their jobs. On other fronts the client’s community investment has targeted development of SME by providing training and general support to start these SMEs, which are mostly led by women.

9. Going forward, the World Bank will continue to support gender equality through the tracking of specific indicators and the implementation of targeted actions in its financial and knowledge services. The Bank recognizes this is an important target in its engagements with Mexico and is working in integrating a gender outlook in its current and new projects, with the support of the Gender Cross-Cutting Solution Area.

Table 1. Original CPS gender-specific indicators by objective. Indicator Gender specific target

Objective 1: Increased access to finance and improved financial inclusion Number of new clients mainstreamed into the formal financial sector using financial services. (July 2015)

Baseline: 6.12 million (2011) Target: 8 million (2016) (800,000 female) Actual: 9 million (under the PATMIR, out of 1 million, 50 percent are female)

Objective 3: Enhance Innovation Capabilities for SMEs and in target states and industries Number of farmers reached: Baseline: 5,300

Target: 8,630 Actual: 8,750 *Data disaggregated by gender is no longer available for the remaining of the CPS period

Objective 5: Improved employment support for vulnerable youth Number of students enrolled in institutions financed by IFC (female) Baseline: 52,000 (26,000 female) Target: 105,000 (52,000 female) Interim: 59,000 (31,000 female)

Target: 105,000 (52,000 female) Actual: 80,164 (40,192 female)

Percentage of Oportunidades (now PROSPERA) youth registered with Sistema Nacional de Empleo. Baseline: Does not exist yet Target: 2%

Target (2018): total 2.0 % (males 2.0%, females 2.0%) Actual: 0.07% (0.04% male, 0.03% female) *Data disaggregated by gender will no longer be measured and a new indicator has been incorporated – see Annex 2

Objective 6: Increased use of integrated social assistance programs among the poor Average unsatisfied basic needs of the extreme poor Baseline (2009): 3.7 Target (2018): 3.0

Baseline (2012): total 3.7 (males 3.7, females 3.6 ) Target (2018): total 3.0 (males 3.0, females 3.0) Actual: total 3.6 (males 3.6, females 3.6)

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MEXICO - COUNTRY GENDER SCORECARD, JUNE 2016 Indicators in this scorecard are a combination and slight modification of the IDA 17 and the WBG Corporate Scorecards, and contribute to measure progress of the SDG 5: "Achieve gender equality and empower all women and girls", and its targets. The scorecard shows the latest country data available, comparisons of country performance and development results relative to LAC and UMC averages in same or similar year, and the Bank's operational progress in regards to regional averages in gender mainstreaming.

Summary Paragraph: Country Performance In indicators measuring gender equality in the endowments of health and education, Mexico shows mixed results when compared to UMC and LAC averages for nearly every indicator. Primary completion rates increased for both girls and boys. As in the rest of the LAC region, an area of concern is growing inequality in secondary enrollment (favoring girls). In Mexico, the female to male secondary enrollment ratio grew from 103 in 2000 to 107 in 2013, being above the UMC (100) and close to the LAC average of 110. Mexico made great strides in reducing maternal mortality, falling from 82 to 38 (per 100,000 births) between 2000 and 2015, which is well below the UMC (55) and LAC (67) averages from 2015. Pregnant women receiving prenatal care and births attended by skilled health staff is almost universal (at 98% and 96%, respectively in 2012). Women's share of population living with HIV in the country (21) is below the estimated LAC average of 28 in 2014. With respect to indicators measuring women's economic opportunity, Mexico made gains between 2000 and 2014 on almost all indicators, but still falls below both UMC and LAC averages in key indicators. Female labor participation grew from 39% in 2000 to 48% in 2014, but remains lower than the UMC (62%) and LAC (58%) averages. Both men and women in Mexico are less likely to have an account at a formal financial institution than their counterparts in the Upper Middle Income countries and LAC. A more positive scenario is observed in unemployment rates for women: in spite of a slight increase from 3% in 2001 to 5% in 2014, this is still lower than for women in UMC and LAC. The same trend can be observed in unemployment rates for youth. Concerning indicators measuring female agency, Mexico reduced adolescent fertility rates for 15-19 year olds from 76 (per 1000) in 2000 to 64 in 2014. This result is similar to the LAC average, but remains more than double the UMC average (31 in 2014). Female representation in the national parliament increased remarkably from 18% in 2000 to 42% in 2015, exceeding the LAC average of 28% and the UMC average of 24%. The percentage of firms with female top manager (15) is below the LAC average (21) for 2010-2015. Finally, the percentage of spousal physical or sexual violence suffered in the last 12 months (7%) is below the LAC average of 9% (circa 2014). According to the Women, Business and the Law report 2016, Mexico has made significant progress in the following indicators: "Accessing institutions", by increasing gender quotas for party lists in federal district elections from 46% to 50%, and by introducing the requirement that male and female candidates alternate placement on the list; "Building Credit", by facilitating women’s access to credit by amending its legislation to provide for equality between men and women when accessing goods and services; "Providing incentives" to work by establishing a new law that makes payments for childcare tax-deductible.

Country Performance: Human Endowments

COUNTRY

Year

COUNTRY BASELINE*

Year

UMC~

Year

LAC^

Year

Primary completion rate, female (% of relevant age group) 104 2013 100 2000 103 2010 102 2013 Primary completion rate, male (% of relevant age group) 102 2013 98 2000 104 2010 100 2013 Ratio of female to male primary level enrollment (%) 99 2013 98 2000 100 2013 100 2013 Ratio of female to male secondary level enrollment (%) 107 2013 103 2000 100 2013 110 2013 Maternal mortality ratio (modeled est. per 100,000 births) 38 2015 82 2000 55 2015 67 2015 Births attended by skilled health staff (% of total) 96 2012 95 2003 98 2012 93 2012 Pregnant women receiving prenatal care (%) 98 2012 no data 96 2012 97 2012 Women´s share of population ages 15+ living with HIV (%) 21 2014 16 2000 no data ¨28 2014 Contraceptive prevalence, any methods (% of women ages 15-49) no data 70 2000 82 2012 ¨57 2014 Country Performance: Economic Opportunity

COUNTRY

Year

COUNTRY BASELI

Year

UMC

Year

LAC

Year

Labor force participation rate, female (% of female population 15+) ◊ 48 2014 39 2000 62 2014 58 2014 Ratio of female to male labor force participation rate (%) ◊ 55 2014 47 2000 75 2014 68 2014 Account at a financial institution, female (% age 15+) 39 2014 22 2011 67 2014 ¨48 2014 Account at a financial institution, male (% age 15+) 39 2014 33 2011 74 2014 ¨54 2014 Unemployment, female (% female labor force) 5 2014 3 2001 6 2014 8 2014 Unemployment, youth female (% of female labor force ages 15-24) ◊ 11 2014 7 2001 16 2014 17 2014 Ratio of female to male youth unemployment (% ages 15-24) 118 2014 141 2000 103 2014 142 2014 Country Performance: Voice and Agency

COUNTRY

Year

COUNTRY BASELI

Year

UMC

Year

LAC

Year

Adolescent fertility rate (births per 1,000 women, ages 15-19) 64 2014 76 2000 31 2014 65 2014 Proportion of seats held by women in national parliaments (%) 42 2015 18 2000 24 2015 28 2015 Firms with female top manager (% of firms) 15 2010 no data 18 2010-2015 21 2010-2015 Spousal physical or sexual violence in the last 12 months (%) 7 2011 no data no data ¨9 2014 Sources: World Bank World Development Indicators (WDI), World Bank Gender Statistics (WBG) and DHS * Country Baseline provides a simple point of reference for indicator data available. Circa 2000

^ LAC = Includes the 41 countries (all income levels) in Latin America and the Caribbean, as classified by The World Bank Group

~ UMC = As of 1 July 2015, upper-middle income countries are defined as those with a GNI per capita of $7,926 in 2014 (calculated using the World Bank Atlas method)

◊ Modeled ILO estimate

¨Weighted average for LAC was calculated using total population for countries where indicator data was available. Circa 2014

˘El Instituto Nacional de las Mujeres (INMUJERES) y el Instituto Nacional de Estadística y Geografía (INEGI). Encuesta Nacional sobre la Dinámica de las Relaciones en los Hogares, 2011

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Between FY10 to FY16 (Q1-Q2), 70% of projects for Mexico that went to Board were considered gender-informed (incorporated gender in at least one of the dimensions analysis, actions and M&E). This compares to 74% at the regional level. Out of 27 projects in Mexico during this period, only 8 were gender-informed in all three dimensions, 30%, compared to the regional average of 38% gender informed in all three dimensions. The weakest dimension throughout this period is M&E (44%); and the strongest are analysis and actions (52% respectively). In FY10, the share of new projects that were gender-informed, 78%, surpassed the regional average of gender-informed projects of 57%. However, the quality of gender mainstreaming was poor, since only 2 out of the 9 projects were gender-informed in all the three dimensions. Contrary to FY10, in FY11 only 40% of the projects were gender-informed, compared to the regional average of 80%. In this case, only one project was informed in all the three dimensions; the other only had gender-specific actions. In FY12, Mexico had six new World Bank projects, 67% of which were considered gender informed, and in FY13, the single project in ARD was not gender informed at all. From FY14 onwards, the portfolio performance in terms of gender mainstreaming improved being 100% of the projects gender-informed. In FY14, the two projects were gender informed: one in all the three dimensions, and the other one only in analysis; in FY15, out of the 3 projects, 2 were gender informed in all the three dimensions and the other only included gender in the M&E framework; and finally, with regards to FY16, although only Q1 and Q2 have been reviewed up to now, portfolio review shows already that the only project from the GP Finance and Markets is gender informed in all the three dimensions.

Latest CAS/CPS/ISN rating**

Share of new projects that are gender-informed (FY10) 7/9 78% 43/75 57% Share of new projects that are gender-informed (FY11) 2/5 40% 35/44 80%

Share of new projects that are gender-informed (FY12) 4/6 67% 43/75 57%

Share of new projects that are gender-informed (FY13) 0/1 0% 40/42 95%

Share of new projects that are gender-informed (FY14) 2/2 100% 40/42 95%

Share of new projects that are gender-informed (FY15) 3/3 100% 27/32 84%

Share of new projects that are gender-informed (FY16 - Q1,Q2) 1/1 100% 19/22 86%

"Data in the WBG Portfolio Review section provided by the Gender CCSA. Please note that to be considered gender-informed, it is enough to incorporate one out of the three dimensions: analysis includes gender, actions aim at closing gender gaps or empowering women, and there are sex-disaggregated and/or gender specific indicators in the results framework (M&E)

** CAS/CPS dimensions are for: analysis, actions, and results framework ˠ The portfolio review analysis includes projects that were approved by the Board from FY10 to FY16 (Q1, Q2)

WBG Portfolio Performance" COUNTRY LAC PROJECT SCORES

3 (2014) 3 (2015) Yearˠ Project Sector/GP Rating

FY10

P101369 ED 3 P107159 TR 0 P112262 ED 1 P115347 ED 0 P115608 EMT 2 P116226 HE 2 P116965 HE 1 P118070 EP 2 P120134 WAT 2

FY11

P106424 EMT 0 P112264 FPD 1 P121195 WAT 0 P121800 EMT 0 P122349 SP 3

FY12

P120170 SDV 0 P126487 WAT 0 P126297 ED 1 P123505 EP 2 P123367 ARD 3 P123760 ARD 3

FY13 P130623 ARD 0

FY14 P147244 ED 1 P145578 WAT 3

FY15

P147185 ED 1 P147212 SP 3 P149858 ED 3

FY16 -

P153338

FM

3

Summary Paragraph: WBG Portfolio Performance

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ANNEX 9. KNOWLEDGE EXCHANGES 1. During the first half of the CPS implementation, Mexico has engaged in 54 South-South knowledge exchanges (SSKE), acting as the host or receiving knowledge from other countries on various themes including social protection, financial sector, energy, water and sanitation, and disaster risk management, among others. Some examples by CPS pillar include:

2. Under Pillar 1, “Unleashing Productivity”, a two-day seminar shared best practices on the regulation and implementation of agent banking models and identified practical solutions to further expand the model to other countries. In addition, a study tour to support the Ethiopian Financial Inclusion Framework, took place with the participation of the CNBV and the National Bank of Ethiopia (NBE). This included an in-depth insight into the functions of the Mexican Financial inclusion unit, the effectiveness of its operation and the implementation of a comprehensive M&E system, as well as insights on possible bottlenecks and challenges that NBE needs to consider. A study tour of an Egypt and Jordan delegation visited Mexico to learn about the IT Industry Development Project and the MexicoFirst program together with PROSOFT strategy. Best practices of this project were also shared with a delegation from Nicaragua.

3. Within Pillar 2, “Increasing Social Prosperity”, 16 activities took place in the first half of the CPS period. Mexico shared best practices and experiences on the implementation of large safety net programs—Oportunidades and PROSPERA— receiving government officials from Bangladesh, Honduras, Vietnam, and Turkey. Interaction was directly with government officials from SEDESOL and program beneficiaries, mainly to learn on consolidation of benefits and reduction of overlapping programs, use of harmonization/integrated delivery systems, process and sequencing of benefit consolidation and system development. Mexico shared its experiences in conditional cash transfer (CCT) programs at an international panel that took place as part of the LAC Labor Community of Practice in Brasilia.

4. As part of Pillar 3, “Strengthening Public Finances and Government Efficiency”, Dominican Republic government officials visited Mexico to learn from experiences on budget transparency, enhancements on disclosure of information in the budget transparency portal and the use of social networks as a mechanism to support the approach with citizenship. A delegation from Vietnam’s Ministry of Planning and Investment (MPI) traveled to Mexico and Chile to learn more about the experiences in undertaking reforms in macroeconomic stabilization, privatization of state-owned enterprises (SOEs) and public investment management. SSKE to enhance service delivery through better public sector management took place with government officials of South Asian countries (Afghanistan, Bhutan, Maldives, Nepal and Pakistan) to share knowledge on good practices and modern tools of public procurement used by Mexico and Brazil.

5. Pillar 4, “Promoting Green and Inclusive Growth”, is the one showing more SSKE activities with 25 activities in the areas of energy, water and sanitation, solid waste, agriculture, transport and urban development. These activities include, but are not limited to, a two-phase exchange between Mexico and Morocco to share knowledge on the construction and operation of hybrid solar thermal plants, policy and strategy in energy efficiency. Mexican government officials traveled to Korea to learn from a successful experience regarding solid waste management, recycling programs, energy recovery plants and technological development. This exchange fed the preparation of the proposed project on solid waste in Mexico. With the aim of improving key natural resources, Kenya government officials came to Mexico learn from the transformation of the water sector, exchanging experiences on water resources management and water supply reform processes, with a strong emphasis on the decentralization and governance reforms that have taken place over the last 40 years.