## 1mexea2019003 — PIMA mission report to Mexico (selected chapters) ## Source details **Canonical URL:** [1mexea2019003 — PIMA mission report to Mexico (selected chapters)](https://www.imf.org/-/media/files/publications/cr/2019/1mexea2019003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1mexea2019003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1mexea2019003.pdf.json) --- ### PREFACE, mission and methodology - Mission period: November 7 – 21, 2018. - Mission team led by Ms. Teresa Curristine (FAD); team members: Lewis Murara, Rui Monteiro (FAD), Mary Betley and Dick Emery (IMF FAD Experts), Alejandro Rasteletti (IADB), Maria Guadalupe Toscano, Fernando Andres Blanco Cossio, Francisco Rodriguez and Luis Barajas Gonzalez (World Bank). - Key interlocutors: SHCP senior officials including Mr. Marco Rivera (Head of the Investment Unit) and others; two state governments (Estado de Mexico and Nuevo León); procurement officials, PEMEX, CONAGUA, BANOBRAS, FONADIN, Ministries of Energy, Health, Communications and Transport, and the Supreme Audit Institution. - Two PIMA workshops conducted: one on PIMA methodology and a second presenting preliminary scores and results. - Methodology: IMF’s PIMA methodology evaluating 15 key institutions across planning, allocation, and implementation phases; assesses institutional strength (design) and effectiveness (implementation) and produces an action plan of recommendations. ### Context and recent trends in public investment - Over 2001-2015 general government investment averaged 4.7 percent of GDP in Mexico. - Comparator averages (2001-2015): - Emerging Market Economies (EME): 7.1 percent of GDP. - Latin American Countries (LAC): 6 percent of GDP. - OECD average: 3.7 percent of GDP. - Public capital stock in Mexico in 2015: 104 percent of GDP. - Reported decline in public capital stock over 1995-2015: fell from 185 percent of GDP in 1995 to 104 percent of GDP in 2015 — a fall of 81 percentage of GDP over the period. - Public investment composition (2015): - Economic infrastructure: 59 percent of total public investment. - Social infrastructure: 35 percent of total public investment. - Public vs. private investment (2015): - Public investment accounted for less than 4 percent of GDP (down from 10 percent of GDP in 1990). - Private investment: 18 percent of GDP in 2015; averaged 16 percent of GDP over 1995-2015 (EME average 17 percent). - Total investment approximately 21 percent of GDP over the last two decades. - Public capital stock per capita in 2015: almost US$ 14.6 thousand (selected group average US$ 12 thousand). ### Macro-fiscal context and fiscal rules - General government gross debt: - 56 percent of GDP in 2016 (up from 38 percent of GDP a decade earlier). - Fiscal consolidation led debt to decline to 54.6 percent of GDP in 2017 and projected to go down to 53.9 percent in 2019. - PSBR target included in projections: 2.5 percent (set each year through 2023 in projections accompanying the budget). - Target debt stabilization level noted: around 54 percent of GDP. - Potential growth assumption cited: 2.7 percent. - Exceptional-circumstances escape clause: - Stipulated in FRL regulations (Article 11 triggers; Article 17 timing agreed with Congress). - Invoked in 2010 and 2014. - Critique: clause described as "insufficiently tight"; recommendation to restrict use to cases of large output or oil price shocks and to require explicit path back to the fiscal rule. ### Public investment efficiency and infrastructure outcomes - Efficiency gap: Mexico lags the most efficient countries with an efficiency gap of 40 percent. - Comparator efficiency gaps: OECD 13 percent; EME 27 percent; LAC 29 percent. - Perceptions of infrastructure quality (World Economic Forum, 7-point scale): - Mexico score: 4.12 in 2015 versus 3.34 in 2008. - Access to infrastructure: Mexico lags comparators, particularly in roads per capita; relatively better on treated water; poor on electricity and health infrastructure compared to LAC. - Execution and volatility: - Execution gap (planned vs executed capital spending) higher in Mexico than most comparable neighbors (average absolute deviation, 2010-15). - Volatility: Mexico’s public investment less volatile than most comparators (average 2010-15). ### PIMA overall findings (institutional design and effectiveness) - Most PIM institutions scored "Medium" for institutional strength; effectiveness often lower than design features suggest. - Institutions scoring relatively stronger than comparators in design: - Project selection (Institution 10) — Institutional Strength: "High". - Project appraisal (Institution 4) — Institutional Strength: "High"; Effectiveness: "High". - Portfolio management (Institution 13) — Institutional Strength: "Medium" but noted stronger design features. - Institutions scoring below EME and LAC averages in both design and effectiveness: - Coordination between entities (Institution 3) — Institutional Strength: "Low"; Effectiveness: "Low". - Medium-term budgeting (Institution 6) — Institutional Strength: "Medium"; Effectiveness: "Low". - Budget comprehensiveness and unity (Institution 7) — Institutional Strength: "Medium"; Effectiveness: "Medium". - Maintenance funding (Institution 9) — Institutional Strength: "Low"; Effectiveness: "Medium". - Asset management/monitoring of public assets (Institution 15) — Institutional Strength: "Medium"; Effectiveness: "Low". - Systemic issues: fragmentation, strong compliance orientation (priority to compliance over efficiency and outcomes), and lack of a medium-term orientation — challenges amplified by federal system complexity. ### Monitoring of Public Assets — key findings (Institution 15) - Non-financial assets reported in government financial statements exclude large assets such as airports and highways. - Government accounting uses historical cost and does not apply depreciation; valuation/revaluation mechanisms (Valuation Institute) are not integrated with government accounting. - Asset registers exist across ministries/entities but are dispersed and not consolidated. - Lack of comprehensive asset information hampers development of optimal maintenance programs and tracking changes in national patrimony. - Maintenance funding lacks standardized requirements; maintenance competes with new projects for funding. - Project pipeline registers lack comprehensive information on public investment projects; consolidated data on cost over/underruns and implementation delays are not readily available or systematically used. - Project implementation plans generally prepared only after congressional budget approval, causing potential implementation delays. - Procurement law mandates competitive tendering and public disclosure via CompraNet, but frequent use of exemption/direct award reduces effective competition for non-major projects. - Monthly cashflow forecasts exist and donor funding is integrated into the TSA, but annual commitment ceilings are not provided; no systematic monitoring of payment delays despite Treasury target to pay invoices within 48 hours. ### Project appraisal, selection, procurement, and implementation — selected specifics - Project appraisal (Institution 4): - Article 34 requires socio-economic and financial analyses for projects registered in the cartera; appraisal methodology and CEPEP central support exist. - Around 2000 projects in the cartera with foreseeable short-term funding; around 1700 received funding in 2018. - IU receives ~500 project reviews per year (544 in 2017) and approves around 200 on average. - Project selection (Institution 10): - Two-phase selection including first-level "irreductible investment" prioritization and second-level ranking using five criteria (progress on feasibility studies; NPV; regional impact; extensiveness of beneficiaries; support to Green Budget). Reform priority: "Low". - Procurement (Institution 11): - Out of 228,000 public contracts awarded in 2017: - 12% subject to public tender, - 78% directly awarded, - 10% subject to negotiated procedure (invitation to at least three suppliers). - For contracts above one million pesos: - Direct award: 33% (amounting to 58% of financial value of all contracts). - Negotiated procedure: 29%. - Open public tender: 38%. - Issues: restrictions to effective competition, late budget allocation concentrates bidding in second half of year, short deadlines reduce competition. - Multiyear budgeting (Institution 6): - Institutional Strength: "Medium"; Effectiveness: "Low"; Reform priority: "High". - No multi-year budgets or ceilings for capital expenditure by ministry or program; Criteria report provides aggregates but no detailed outer-year ministry/program budgets. - Project database includes estimates for three outer years but outyear data may lack rigor. - Availability of funding (Institution 12): - Monthly cashflow forecasts prepared; distinction between "multianuales" and "plurianuales" noted. - Ministries not provided full-year commitment ceilings; in-year cutbacks have occurred; Treasury aims to pay within 48 hours but monitoring lacking. - Portfolio management and oversight (Institution 13): - Centralized monitoring via IU; ex-post reviews undertaken for some major projects (major defined as > 500 million pesos). - Consolidated data on cost over/underruns and delays not readily available or used for learning. ### High-priority policy recommendations (summary) - Strengthen fiscal discipline and MTFF: - Amend the FRL to restrict the escape clause to "cases of very significant output shocks and significant disruptions in the oil price." - Establish requirement to specify a clear path back to the fiscal rule after invoking the escape clause. - Expand Pre-Criteria report to include more fiscal strategy information, analyses of fiscal policy and medium-term parameters, and more medium-term disaggregated expenditure projections. - Require public corporations and entities with PPP contracts to provide annual reports on fiscal risks to SHCP. - Develop a medium-term debt limit for general government (Federal plus subnational), initially for internal purposes, then externally. - Introduce an independent body to review macro-fiscal projections and compliance with fiscal rules and assess debt sustainability. - Improve national and sector strategies to guide investment: - Prepare national and sector plans within a realistic medium-term resource framework. - Concentrate plans on a limited number of high priority strategic objectives linked to the rolling MTBF. - Provide realistic medium-term outcomes/targets; mid-point reviews after 3 years; train SHCP and ministries on results frameworks. - Strengthen medium-term budgeting and planning: - Introduce a rolling MTBF for capital and current expenditures; develop methodology, Draft Guidelines, training, and top-down medium-term ceilings earlier in the process. - Develop simple models for ministries to prepare baseline projections and a rolling investment costing exercise. - Improve coordination between Federal and subnational governments: - Consider joint federal-state investment coordination committee(s). - Require subnational governments accessing Federal funds to provide annual reports on fiscal risks including contingent liabilities. - Review Convenios and operating rules for Ramo 23; include Ramo 33-funded projects in registry and ensure SHCP systems interact for comprehensive federal transfers overview. - Develop maintenance funding methodology and budgeting: - Require agencies to establish program-appropriate maintenance standards and regularly survey capital stock. - SHCP to provide summary presentations on maintenance by agency/program and review allocations. - Expand and regularly update registers of infrastructure assets; implement top-down approach to protect maintenance funding. - Promote competitive procurement and pro-competition culture: - Review and implement COFECE, OECD, and other recommendations that do not require law changes. - Consolidate procurement legislation into a single Public Procurement Law over the medium term. - Structure and implement a training program for procurement officials and subnational counterparts. - Establish standardized tender documentation deadlines and procurement performance indicators; use electronic procurement platforms to monitor and publish analytical reports. ### Medium-priority recommendations (selection) - Improve comprehensiveness and quality of public investment planning: - Require extra-budgetary entities and public corporations to provide IU with planned project information and supporting documents; standardize formulation and evaluation for Ramo 23 and Ramo 33 projects; introduce external reviews of key CBAs. - Improve predictability of funding for major capital projects: - Update treasury systems to provide commitment ceilings; prepare provisional procurement and commitment plans 2-3 months before fiscal year; introduce carry-forward of budget authority for multi-year projects within clear limits. - Strengthen monitoring of cost overruns and project delays: - Prepare quarterly summary tables on cost over/underruns and implementation delays for policymakers; systematically conduct ex-post reviews for most major projects and broaden scope to output, impact and delivery alternatives. - Enhance capital project management during execution: - Require implementation plans for major projects prior to budget approval; communicate plans to the Supreme Audit Institution for audit programming. - Improve accounting and valuation of assets: - Recognize airports, highways and other large assets as non-financial assets in the government’s balance sheet. - Introduce asset-specific assumptions to guide depreciation. - Integrate Valuation Institute work within SHCP with Government Accounting Unit; review accounting standards for valuation/revaluation. ### Implementation shortcomings and capacity issues - Lack of multi-year budgets or ceilings for capital expenditure by ministry or program. - Funding focus remains on the coming budget year despite a pipeline eligible for 3 years of funding. - Frequent use of procurement exemption clauses limits competitive procurement for most non-major projects. - Payment processes target 48 hours but lack systematic monitoring of payment delays. - Data shortfalls hinder use of cost over/underrun and delay information for decision-making and learning. - Staff capacity concerns: need for training, retention and capacity building, especially at subnational levels; procurement officials require training on pro-competition practices and integrity. ### Cross-cutting observations and IT/Legal - IT support: computerized information systems exist (e.g., CompraNet, SEFIR, RFT, Modulo Cartera) and public access to data is substantial, but integration and automated analytical reporting need improvement. - Legal framework: recent legislative reforms on competition, PPPs, transparency, and procurement; recommendation to harmonize procurement frameworks across federal and subnational levels and consider codifying procurement into a General Law. - Subnational fiscal framework: Law on Subnational Fiscal Responsibility requires a single debt register at SHCP and uses a traffic light early-warning system; as of November 2018 one state classified overall red; monitoring by Secretariat of Fiscal Coordination. *Source: PREFACE, EXECUTIVE SUMMARY, Chapters 3, 10, 14, 15, 53, 88, Annex I of the PIMA mission report to Mexico (IMF Fiscal Affairs Department), content unit 1mexea2019003.* ### PREFACE _________________________________________________________________________________________ 5 ### PREFACE ### Mission and scope - IMF Fiscal Affairs Department (FAD) mission to conduct a Public Investment Management Assessment (PIMA) in Mexico, during the period November 7 – 21, 2018. - Mission team led by Ms. Teresa Curristine (FAD) and comprised of Lewis Murara, Rui Monteiro (both FAD), Mary Betley and Dick Emery (both IMF FAD Experts), Alejandro Rasteletti (IADB), and Maria Guadalupe Toscano, Fernando Andres Blanco Cossio, Francisco Rodriguez and Luis Barajas Gonzalez (World Bank). - The team met senior officials in SHCP, including Mr. Marco Rivera (Head of the Investment Unit), Ms. Luisa Hurtado, Armando Montero, Carlos Guevara, Diana Manuel and Fernando Careaga. - Meetings also held with two state governments (Estado de Mexico and Nuevo León), procurement officials from the Ministry of Public Administration, representatives of PEMEX, CONAGUA, BANOBRAS, FONADIN, and the Ministries of Energy, Health, Communications and Transport, and the Supreme Audit Institution. - Two PIMA workshops conducted: one on the PIMA methodology (SHCP and spending ministers attended) and a second presenting preliminary scores and results (Investment Unit and SHCP staff attended). ### Institutional engagement and acknowledgements - Closing meetings included Ms. Ursula Carreño, Undersecretary of Expenditures (at that time), and transition team members Mr. Gerardo Esquivel and Mr. Jorge Nuño. - The mission thanks Mexican authorities for cooperation and specifically acknowledges Ms. Luisa Hurtado, Mr. Fernando Careaga, Ms. Fernanda Arenas, Ms. Erika Moreno and Ms. Fanny Montoya for mission support. ### Methodology - Assessment used the IMF’s Public Investment Management Assessment (PIMA) methodology to evaluate 15 key institutions across planning, allocation, and implementation phases of the public investment management (PIM) cycle. - The assessment evaluates institutional strength (design) and effectiveness (actual implementation) and produces an action plan of recommendations. ### Administrative details preserved from source - Population of the Federation of Mexico: 129 million. - Mexico’s federative structure: the Federation, with 31 States and Mexico City. --- ### Context and recent trends in public investment - Over 2001-2015 general government investment averaged 4.7 percent of GDP in Mexico. - Comparator averages: Emerging Market Economies (EME) averaged 7.1 percent of GDP; Latin American Countries (LAC) averaged 6 percent of GDP over the same period. - Public capital stock in Mexico in 2015: 104 percent of GDP. - The text reports that capital stock "has declined by 81 percent of GDP over the previous two decades" while remaining at 104 percent of GDP in 2015. - Public investment in Mexico has lagged behind EME and LAC averages over the last fifteen years. - Despite privatization programs and cuts to public investment during fiscal consolidation, the stock of public capital remains comparatively high due to historically high public investment in the 1990s and the breadth of public corporation activities. ### Macro-fiscal context - Fiscal consolidation efforts have placed public debt on a downward trajectory, but public investment has been reduced in the process. - The incoming administration (Mr. López Obrador at the time of writing) committed to preserving fiscal discipline and improving public spending efficiency. --- ### Public investment efficiency and infrastructure outcomes - The efficiency gap between Mexico and the most efficient countries with comparable public capital stock per capita is 40 percent. - Comparator efficiency gaps: OECD 13 percent, EME 27 percent, LAC 29 percent. - Perceptions of infrastructure quality in Mexico have improved over the last decade. - In terms of access to physical infrastructure, Mexico lags behind comparators and significantly behind OECD countries, especially in roads. - Conclusion: Mexico could generate more and better infrastructure with similar public capital stock per capita by improving public investment efficiency. --- ### PIMA assessment findings (institutional design and effectiveness) - Most Mexican PIM institutions scored as medium strength in institutional design and effectiveness. - Common pattern: stronger design features on paper than actual implementation and effectiveness in practice. - Institutions with relatively stronger-than-comparator design scores (noted as stronger than EME, LAC, and OECD) include: - Project selection - Project appraisal - Portfolio management - Institutions scoring below EME and LAC averages in both institutional design and effectiveness include: - Coordination between entities (including federative entities: 31 states plus Mexico City) - Medium-term budgeting - Budget comprehensiveness and unity - Maintenance funding - Asset management - Systemic issues identified: fragmentation, strong compliance orientation (priority to compliance over efficiency and outcomes), and lack of a medium-term orientation—challenges pronounced in a federal system with many actors and delivery/financing approaches. --- ### Key high-priority recommendations (summary) - Improve the medium-term fiscal framework (MTFF) and strengthen independent oversight of fiscal planning: - Include a medium-term target for the public sector borrowing requirement (PSBR). - Introduce an independent body to review and assess the quality of macro-fiscal projections. - Amend the fiscal rule’s escape clause so it is only used in defined circumstances. - A fuller set of recommendations and an action plan are presented in the report (Tables referenced in source). --- ### Actionability and next steps - The assessment produces an action plan with short- and medium-term steps to improve PIM; Chapter IV of the source provides detailed discussions of each recommendation. - Table 1 and Table 2 in the source provide a Summary Assessment and an Action Plan respectively (referenced in the source). *Source: PREFACE and EXECUTIVE SUMMARY, PIMA mission report to Mexico (IMF Fiscal Affairs Department), mission period November 7 – 21, 2018.* ### 15. Monitoring of Public Assets ### 15. Monitoring of Public Assets ### Summary assessment (from Table 1) - A. Planning - 1 Fiscal targets and rules: Institutional Strength — "Medium. Fiscal rules targeting the deficit and expenditures are in place. They do not cover general government and there is no debt target or limit." Effectiveness — "Medium. Only limited medium-term focus, the PSBR focuses on an annual target. The escape clause has been used a number of times over the last decade." Reform priority — "High" - 2 National and sectoral planning: Institutional Strength — "Medium. A clear national and sectoral planning framework is in place but does not really guide ministries’ investment planning." Effectiveness — "Low. Strategies are not based on likely resource availability, costing information is very limited, and investment budget allocations are made project by project." Reform priority — "High" - 3 Coordination between entities: Institutional Strength — "Low. There are no coordination mechanisms to ensure Federal and subnational plans are shared and used to guide planning decisions at each level" Effectiveness — "Low. Information on the value of transfers from Federal government to individual subnational levels comes very late for efficient subnational planning." Reform priority — "High" - 4 Project appraisal: Institutional Strength — "High. A standard methodology for project appraisal is in place, and proposed projects are legally required to be registered in the cartera and must undergo financial and socio-economic analysis, including risks." Effectiveness — "High. The socio-economic analyses for projects registered in the cartera are published and they show a good level of detail and in some cases include risk mitigation plans." Reform priority — "Low" - 5 Alternative infrastructure financing: Institutional Strength — "Medium. Competition in some infrastructure markets is required, regulators were recently established, and a PPP framework was established. Some PCs and trust funds are legally allowed to plan and implement projects with minimum oversight by the SHCP." Effectiveness — "Medium. Reforms have improved access to infrastructure markets and promoted competition but need further implementation. The PPP Unit faces a conflict of interest, operating as both PPP promoter and PPP filter. Investment plans of some PCs and trust funds are not systematically monitored." Reform priority — "Medium" - B. Allocation - 6 Multi-year budgeting: Institutional Strength — "Medium. Projections over the life of projects are set out, but there are no multi-year budgets or ceilings for capital expenditure by ministry or program." Effectiveness — "Low. Project details are broken down by year, but the multi-year nature of capital projects is not recognized in budget decisions." Reform priority — "High" - 7 Budget comprehensiveness and unity: Institutional Strength — "Medium. The information on capital investment is generally comprehensive, but current and capital spending decisions are not integrated." Effectiveness — "Medium. The budget does not present comprehensive tables showing capital spending from all sources of funding." Reform priority — "Low" - 8 Budgeting for investment: Institutional Strength — "Medium. Funding requirements for some on-going capital projects are given priority and transfers from capital to current spending is limited." Effectiveness — "Medium. Multi-year capital projects are subject to annual appropriations but future funding requirements for on-going programs are prioritized in budget formulation." Reform priority — "Low" - 9 Maintenance funding: Institutional Strength — "Low. There are no standardized requirements for maintenance, but some agencies establish and monitor maintenance requirements." Effectiveness — "Medium. Some agencies budget for routine maintenance and capital improvements, but improvements compete with new projects for funding." Reform priority — "High" - 10 Project selection: Institutional Strength — "High. Procedures for project selection are set out in legislation and in guidelines, and projects using budget funds are subject to these procedures, including those added by Congress." Effectiveness — "Medium. While a pipeline of good quality-assessed projects is in place and active projects in the pipeline are eligible for funding for 3 years, the funding focus is on the coming budget year, not a forward focus for project planning. Coverage is limited to Federally-funded projects." Reform priority — "Low" - C. Implementation - 11 Procurement: Institutional Strength — "High. The law requires all projects to be tendered competitively, and relevant information is required to be provided to the public through CompraNet. Complaints follow an independent and transparent review process." Effectiveness — "Medium. Major projects are tendered competitively. Those subject to public tender face some restrictions to effective competition. Most non-major projects are not competitively procured, due to the frequent use of exemption clauses." Reform priority — "High" - 12 Availability of funding: Institutional Strength — "Medium. Monthly cashflow forecasts are prepared, and donor funding is integrated into the TSA, but annual commitments ceilings are not provided." Effectiveness — "Medium. Ongoing projects are not protected from unscheduled cutbacks, and although the Treasury strives to pay invoices within 48 hours, there is no systematic monitoring of payment delays." Reform priority — "Medium" - 13 Portfolio management and oversight: Institutional Strength — "Medium. Financial and physical project implementation monitoring is centralized, reallocation procedures within projects are well-defined; and ex-post reviews of some major projects are conducted." Effectiveness — "Medium. Data on cost over/underruns, as well as on implementation delays, is not readily available, nor used for decision-making or learning purposes." Reform priority — "Medium" - 14 Management of project implementation: Institutional Strength — "Medium. Detailed financial plans are prepared prior to budget approval, but implementation plans are prepared only after budget approval." Effectiveness — "Medium. Preparation of implementation plans after budget approval by Congress can lead to delays in project implementation." Reform priority — "Medium" - 15 Monitoring of public assets: Institutional Strength — "Medium. Non-financial assets reported in the government financial statements exclude large assets such as airports and highways." Effectiveness — "Low. The mechanisms to value and revalue government assets are not integrated with government accounting, which only uses historical cost, with no depreciation." Reform priority — "Medium" ### Key findings on monitoring of public assets and related systems - Non-financial assets reported in government financial statements exclude large assets such as airports and highways. - Government accounting uses historical cost and does not apply depreciation; valuation and revaluation mechanisms are not integrated with accounting. - Maintenance funding lacks standardized requirements; some agencies monitor maintenance but routine maintenance competes with new projects for funding. - Project pipeline registers lack comprehensive information on public investment projects; data on cost over/underruns and implementation delays are not readily available or systematically used. - Project implementation plans are typically prepared only after congressional budget approval, which can delay execution. - Procurement law requires competitive tendering and public disclosure via CompraNet, but frequent use of exemptions reduces effective competition for non-major projects. - Monthly cashflow forecasts and TSA integration of donor funding exist, but annual commitment ceilings are not provided and there is no systematic monitoring of payment delays despite a Treasury target to pay invoices within 48 hours. ### High-priority policy recommendations (from Indicative Action Plan) - Strengthen fiscal discipline - Amend the FRL to restrict the use of the escape clause to exceptional circumstances: "cases of very significant output shocks and significant disruptions in the oil price." - Establish a provision requiring the specification of a clear path back to the fiscal rule after the exceptional circumstance clause is invoked. - In the Pre-Criteria report include more information on fiscal strategy and analyses of fiscal policy and medium-term fiscal parameters; provide more medium-term disaggregated expenditure projections; require PCs and entities with PPP contracts to provide annual reports on their fiscal risks to SHCP. - Develop a medium-term debt limit for general government (Federal plus subnational levels), initially for internal purposes, then externally. - Introduce independent body to review macro-fiscal projections and compliance with FRs and a debt sustainability path. - Improve effectiveness of national and sector strategies to guide investment project planning - Prepare the national development plan and sector programs within a realistic medium-term resource framework. - Concentrate plans on a limited number of high priority strategic objectives that can realistically be achieved within available resources. - Provide realistic outcomes and targets over the medium-term and link strategic objectives to investment project allocations in the rolling MTBF. - Review national and sector plans at the mid-point (after 3 years). - Train SHCP and ministries staff on development of results frameworks and linkage to sector/institutional programs. - Strengthen medium-term budget planning - Introduce a rolling medium-term budget framework (MTBF) for both capital and current expenditures. - Develop methodology and Draft Guidelines for the rolling MTBF; train SHCP and ministries; develop top-down medium-term ceilings by ministry earlier in the process. - Develop a methodology and simple model for ministries to prepare expenditure baseline projections for current and capital expenditures; develop baseline estimates of existing project spending and identify available fiscal space for new projects. - Establish a rolling investment costing exercise linked to the MTBF. - Improve coordination between federal and subnational governments - Consider establishing a joint federal and state investment coordination committee(s). - Require subnational governments accessing Federal funds to provide annual reports on their fiscal risks, including explicit and implicit contingent liabilities. - Review the Convenios structure and the operating rules for Ramo 23; include in the Registry all subnational investment projects funded under Ramo 33. - Ensure SHCP investment systems (SEFIR, RFT, Modulo Cartera) interact and allow a comprehensive overview of federal resources transferred to States and systematic follow up. - Develop maintenance funding methodology and budgeting - Require agencies to establish and submit program-appropriate maintenance standards to SHCP and regularly survey capital stock to determine maintenance needs and funding requirements. - SHCP to provide summary presentations on maintenance by agency and program; review maintenance to determine whether appropriate resources are allocated. - Expand and regularly update registers of infrastructure assets to support maintenance determination. - Promote competitive procurement and pro-competition culture - Review and compile procurement recommendations from COFECE, OECD and others; identify ones implementable without law changes and disseminate to procurement officials. - Consolidate federal public procurement legislation into a single Public Procurement Law and harmonize legal frameworks across government levels. - Structure and implement a training program for procurement officials, extend training to subnational officials. - Establish standardized tender documentation deadlines for main procuring entities, submit to COFECE for review, and make their use mandatory. - Define procurement performance indicators, use electronic procurement platforms to monitor them, and publish periodic analytical reports. ### Medium-priority recommendations and actions - Improve comprehensiveness and quality of public investment planning - Require extra-budgetary entities (non-organic funds) and all public corporations to provide the Investment Unit with information on planned public investment projects. - Standardize formulation and evaluation requirements for projects funded through Ramo 23; create a registry of PC’s and extrabudgetary units’ investment projects funded under Ramo 33. - Introduce external reviews of cost-benefit analyses for key investment projects. - Improve predictability of funding for major capital projects - Update treasury systems to provide commitment ceilings to ministries to manage capital projects within ceilings. - Prepare provisional procurement and commitment plans two to three months prior to the beginning of the fiscal year to speed implementation once the budget is passed. - Introduce carry-forward of budget authority for multi-year capital projects within clear and transparent guidelines and limits. - Strengthen monitoring of cost overruns and project delays - Prepare quarterly summary tables on cost over/underruns and implementation delays for policy makers, sourcing data from ministry-provided information in the current database. - Use this information to identify areas of risk and improve implementation. - Systematically conduct ex-post reviews for most major projects and move the focus from compliance towards efficiency, expanding scope to cover costs, deliverables, output, impact and alternative delivery modes. - Enhance capital project management and control during execution - Prepare and submit project implementation plans for major projects at the same time as the project’s financial plan, prior to budget approval. - Communicate implementation plans to the Supreme Audit Institution for inclusion in its ex-post projects audit plan. - Improve accounting and valuation of assets - Recognize airports, highways and other large assets as non-financial assets in the government’s balance sheet. - Introduce asset-specific assumptions to guide depreciation of fixed assets. - Integrate the Valuation Institute’s work within SHCP with the Government Accounting Unit to capture asset values based on actual valuations and/or revaluations. - Review accounting standards for non-financial asset valuation and revaluation. ### Implementation shortcomings and capacity issues highlighted - Lack of multi-year budgets or ceilings for capital expenditure by ministry or program. - Funding focus remains on the coming budget year despite a project pipeline eligible for 3 years of funding. - Frequent use of procurement exemption clauses limits competitive procurement for most non-major projects. - Payment processes target 48 hours but lack systematic monitoring of payment delays. - Data shortfalls hinder use of cost over/underrun and delay information for decision-making and learning. *Source: 15. Monitoring of Public Assets (1mexea2019003) — IMF chapter.* ### 3. Despite this progress, challenges remain. Inequality is almost twice the OECD average, ### 1mexea2019003 - 3. Despite this progress, challenges remain. Inequality is almost twice the OECD average, ### Key challenges and fiscal context - Inequality is almost twice the OECD average, with significant regional inequalities and limited capacity in many states. - Corruption and the perception of corruption are key issues and violent crime is at record highs. - Public expenditure increased significantly in the last decade including on social spending and public security. - Long-term demographic trends combined with these changes will continue to place pressure on budgetary resources that are increasingly earmarked or mandatory, thus limiting space for discretionary spending. - Non-oil tax revenues remain below regional and OECD peers despite recent reforms. - Economic growth has on average been below three percent for the past five years. - Infrastructure needs remain high. ### Public investment (PI) importance and fiscal space - Public investment is an important driver for economic growth; the challenge is finding resources for infrastructure spending given current fiscal constraints. - Options to create fiscal space include: - Increasing non-oil tax revenues. - Restraining current spending. - Improving the efficiency of spending. - The new administration emphasizes improving public spending efficiency to create more fiscal space for PI and other initiatives. - Strengthening public investment management (PIM) will help improve public investment efficiency. - The report identifies strengths and weaknesses in existing PIM practices in Mexico and produces recommendations and an operational priority action plan to improve PIM in the short-to-medium term. - The IMF, in collaboration with the World Bank and the IADB, stands ready to provide follow-up support to implement the priority action plan. ### Trends in public investment and capital stock (2001-2015 and related) - Over the fifteen-year period (2001-2015) general government investment in Mexico averaged 4.7 percent of GDP. - Comparators over 2001-2015: - Emerging Market Economies (EMEs) average: 7.1 percent of GDP. - Latin American countries (LAC) average: 6 percent of GDP. - OECD average: 3.7 percent of GDP. - During the 1990s, Mexico’s general government investment was higher than comparators but since 2001 has been consistently below EMEs and LAC averages. - Fiscal stimulus during the global financial crisis increased public investment to above 5 percent of GDP between 2008 and 2011; public investment subsequently declined with fiscal consolidation and fall in oil revenues. - Public vs. private investment trends: - In 2015, public investment accounted for less than 4 percent of GDP, down from 10 percent of GDP in 1990. - Private investment rose from 9 percent of GDP in 1995 to 18 percent of GDP in 2015. - Over 1995-2015, the level of private investment averaged 16 percent of GDP (EME average 17 percent). - Total investment has been around 21 percent of GDP for the last two decades. - Public capital stock: - Mexico’s public capital stock was higher than EME, LAC and OECD due to high pre-2000 spending, but declined sharply after 1995. - Public capital stock fell from 185 percent of GDP in 1995 to 104 percent of GDP in 2015. - During 1995-2015, Mexico’s public capital stock fell by 81 percentage of GDP, compared with EMEs’ fall of 12 percentage points and LAC’s fall of 1 percentage of GDP. - Despite the decline, Mexico’s public capital stock per capita in 2015 stood at almost US$ 14.6 thousand compared to an average of US$ 12 thousand for the selected group of countries. ### Fiscal constraints, debt, and revenues - General government gross debt: - Stood at 56 percent of GDP in 2016, up from 38 percent of GDP a decade earlier. - Non-financial public sector balance has remained negative for the last decade. - In late 2014, the government faced a sharp drop in oil prices and a continuing decline in oil revenues. - Non-oil tax revenue performance lags regional and international peers. - Despite recent tax reforms increasing revenues, Mexico’s tax-to-GDP ratio continues to be the lowest in the OECD, with particularly low VAT efficiency. - Fiscal consolidation package focused on reducing expenditure led debt to: - Decline to 54.6 percent of GDP in 2017. - Projected to go down to 53.9 percent in 2019. - Public investment has continued to decline and faced sharp cuts as part of fiscal consolidation reforms. - Oil revenues account for around one third of total public revenues over the last decade. - Public investment is discretionary and particularly vulnerable when revenues decline. ### Composition and levels of spending (2011-2015 and 2015) - Between 2011-2015, Mexico spent an average of 4.5 percent of GDP on capital spending (less than LAC average of 6.3 percent of GDP). - In 2015, current spending accounted for 23.5 percent of GDP (around the LAC average of 23.4 percent of GDP). - Mandatory expenditures represent over 60 percent of the budget; another 20 percent is technically discretionary but effectively inflexible. - Wages, pensions (including social assistance benefits), subsidies and transfers account for 81 percent of Mexico’s current spending. - Reducing expenditure rigidities and improving efficiency of current spending combined with tax reforms could create fiscal space for more public investment. ### Public investment by function and actors (2015 and recent years) - In 2015, the share of total public investment allocated to: - Economic infrastructure: 59 percent of total public investment. - Social infrastructure: 35 percent of total public investment. - By comparison, EMEs’ averages in 2015: - Economic infrastructure: 45.3 percent. - Social infrastructure: 26.8 percent. - Public investment execution by level (2013): - Federal government’s investment spending: 3.4 percent of GDP (54.8 percent of public sector investment). - Investment by public corporations: 2 percent of GDP (32.3 percent of public sector investment). - Subnational governments: 0.8 percent of GDP (12.9 percent of public sector investment). - PEMEX average public investment: 1.7 percent of GDP over the last five years. - Public-Private Partnerships (PPPs) capital stock: - Rapid increase from almost 0.2 percent of GDP in 1990 to more than 2 percent of GDP by end of the 1990s. - Stabilized at 3 percent of GDP in 2014, half that of the LAC average. - Mexico’s PPP capital stock in 2014 is less than Brazil, Argentina, Chile, and Peru. ### Impact, access, and perceptions of infrastructure - Perceived infrastructure quality (World Economic Forum survey, 7-point scale): - Mexico overall score: 4.12 in 2015, compared to 3.34 in 2008. - Mexico’s levels are above LAC and EME averages but below OECD. - Access to physical infrastructure (most recent year indicators): - Mexico lags comparators, with particularly low roads per capita. - Mexico fares relatively well on access to treated water, slightly better than EME and LAC and slightly behind OECD. - Performance on electricity and health infrastructure is poor even compared to LAC. ### Public investment efficiency - IMF methodology (2015 policy paper Making Public Investment More Efficient) compares output of public investment to per capita public capital stock to define an efficiency frontier. - Based on this methodology, Mexico’s public investment efficiency lags comparators: - Efficiency gap between Mexico and the most efficient countries is 40 percent. - This gap is wider than averages for: - OECD: 13 percent. - EME: 27 percent. - LAC: 29 percent. - There is substantial scope for Mexican authorities to adopt policies to improve PIM and close the efficiency gap. - Other performance measures: - Execution gap: The gap between planned and executed capital spending is higher in Mexico than in most comparable neighbors (average absolute deviation from planned general government capital spending, 2010-15). - Volatility: Mexico’s public investment was less volatile than in most comparators (average 2010-15). ### Public Investment Management Assessment (PIMA) framework and application to Mexico - The IMF’s PIMA framework evaluates 15 key indicators ("institutions") across the three major stages of the public investment cycle: - Planning of investment levels for all public-sector entities to ensure sustainable levels of public investment. - Allocation of investments to appropriate sectors and projects. - Delivering productive and durable public assets. - For each of the 15 institutions, three dimensions are analyzed and scored (10, 5, 0 assigned for met in full, in part, not met respectively). - Each dimension is scored on: - Institutional strength (objective facts: organization, policies, rules, procedures). - Effectiveness (degree to which intended purpose is achieved). - Reform priority (importance of improvements in Mexico’s specific conditions). - Scores for institutional strength and effectiveness are averaged across the three dimensions to categorize institution-level strength and effectiveness. - Example assessment (Fiscal Targets and Rules - Institution 1): - Institutional Strength – Medium. - Effectiveness – Medium. - Reform Priority – High. - Fiscal rules are set out in the Federal Law of Budget and Fiscal Responsibility (FRL), including: - A modified balanced budget rule (excludes investment by PEMEX). - An expenditure rule limiting the real rate of growth of structural current spending (added in 2014). - A public sector borrowing requirement (PSBR) target as percent of GDP. - Requirement for Congress to approve annually the overall Federal debt limit (Article 73 of the Constitution). - An exceptional circumstances escape clause (Article 17) allowing for fiscal deficits and higher expenditures in periods of special economic and social conditions. - The five-year projections (excluding the draft budget year) for the PSBR are included in the General Economic Policy Guidelines accompanying the budget and are required to be consistent with a sustainable debt path. - Currently, the projections set a PSBR target of 2.5% of GDP each year through 2023. *Italic: IMF staff report content from the provided chapter excerpt.* ### 28. The exceptional circumstances under which the escape clause can be activated are ### 28. The exceptional circumstances under which the escape clause can be activated are ### Escape clause: design, use, and critiques - The escape clause is set out in the regulations to the FRL (Article 11) and stipulates five specific triggers including changes in economic circumstances, a revenue shock or natural disasters. - The escape clause allows for the fiscal target to be breached for a period of time; the time period is agreed with Congress (see Article 17, sub-section III). - The authorities invoked the clause in 2010 and 2014. - Previous reports, including from the IMF and the OECD 2017 Economic Survey, have noted that the exceptional circumstances clause, as stated in the FRL, is insufficiently tight. - Recommendations from previous reports have included: - (i) the use of the escape clause should be limited to cases of large output or oil price shocks; and - (ii) the fiscal framework should have explicit provisions to bring the PSBR back to the medium-term target after the escape clause has been invoked. ### Related fiscal rules and targets (Box 1 summary points) - Balanced budget rule (BBR): a zero-balance target on the fiscal deficit, applied to the federal public sector, excluding investments by PEMEX and its subsidiaries. - PSBR target: annual target for the PSBR, which has wider coverage than the BBR, is set each year in % of GDP in the General Economic Policy Guidelines which accompany the budget document. - Expenditure rule: a limit on the real rate of growth of structural current spending (equal to potential output growth which is currently estimated at 2.5 percent a year). - Notes: - Mexico’s PSBR definition is wider than in other countries, as it includes extra-budgetary units and other public sector entities. - Structural current spending excludes outlays governed by automatic rules (mandatory transfers to state and local governments, pensions, subsidies for electricity and subnational revenue-sharing). ### Debt trajectory, fiscal consolidation, and numeric anchors - There is no statutory limit or target set for public debt. - The fiscal consolidation plan has reduced the trajectory of debt; during the last two years, public debt has been on a downward trajectory. - The fiscal consolidation plan followed the authorities’ invoking the balanced budget rule’s exceptional circumstances clause in 2014 in response to a deterioration in the fiscal balance after the fall in the oil price. - To stabilize debt at around 54 percent of GDP, the government needs to meet its PSBR target of 2.5 percent over the medium term. - This debt trajectory is contingent on growth converging toward its potential of 2.7 percent and a steady path for interest rates. - The fiscal balance remained outside what has been established in the law for several years. Key statistics (preserved exactly as in the source): - PSBR target needed to stabilize debt: 2.5 percent - Target debt stabilization level: around 54 percent of GDP - Potential growth assumption: 2.7 percent ### Medium-term fiscal framework (MTFF) weaknesses and suggested improvements Findings: - Fiscal policy has only a limited medium-term focus, potentially reducing the government’s ability to plan and effectively use resources. - The initial macro-fiscal analysis published in April to guide budget preparation (the pre-criteria report) focuses mainly on the coming budget year and contains medium-term projections for only broad aggregate fiscal indicators. - The pre-criteria report would not be considered a fully developed medium-term fiscal framework (MTFF). - The PSBR, introduced to limit pro-cyclicality of the deficit rule, effectively focuses on an annual, not a medium-term, target. - The Annual Financing Plan includes outer-year projections, but they are projected to be at the same level as that for the coming budget year. Recommendations to strengthen the MTFF: - Broaden the scope of the pre-criteria report to include more elements of a medium-term fiscal strategy statement, specifically: - more in-depth discussion of fiscal policy objectives; - analyses of medium-term fiscal parameters, including fiscal risks; - more disaggregated macro-fiscal projections, including expenditures over the medium-term. - Restrict the exceptional-circumstances escape clause to provide further legal support for maintaining a sustainable debt path. ### Institutional checks and independent review - It would be helpful to have an independent body review the government’s projections and compliance with fiscal rules and to assess the sustainability of the debt path. - Currently, Congress’ Center for Public Finance Studies (attached to the Chamber of Deputies) and the Belisario Domínguez Institute (attached to the Senate) review but do not fully assess fiscal projections. - Recommendation: re-constitute this, or another body, as a separate, independent (to government) and objective council to undertake full assessments of projections, compliance with rules, and debt sustainability. *Source: IMF staff summary based on the Federal Law on Budget and Fiscal Responsibility (FRL) regulations and IMF staff analysis contained in the provided document.* ### 40. Participaciones may be used by subnational governments for any purpose. By ### 40. Participaciones may be used by subnational governments for any purpose. ### Earmarked transfers and their use - Participaciones: may be used by subnational governments for any purpose. - Aportaciones: comprise 8 funds under Ramo 33 and finance sector-specific spending; the largest of such transfers target wages and salaries in the education, health and public security sectors. - Ramo 23: allocates earmarked transfers for regional and local infrastructure projects (as well as for current expenditures). - Decentralization agreements (convenios): matching grants negotiated on a case-by-case basis, executed by subnational governments and used to finance programs of interest in specific sectors targeted by the federal government. - While some earmarked transfers may be used for investment projects, the overwhelming majority are not. - Table 3 — Earmarked Transfers to States for Capital Investment by Type, 2018 Budget: - Transfers under Ramo 23: Number of projects 199; Average value of projects (million Pesos) 1,087,578 - Aportaciones – Ramo 33: Number of projects 18; Average value of projects (million Pesos) 4,460,355 - Total: Number of projects 217; Average value of projects (million Pesos) 1,150,370 - Note: "Average may refer to groups of projects. Some projects are included in the database but not allocated funding in 2018." ### Timing, coordination, and fragmentation challenges - Legal/administrative timing: - Law specifies end of January of the budget year as the deadline for informing SNGs of the transfer amount they will receive that year. - Practical consequences: - Notification of exact amounts, especially for discretionary transfers (aportaciones), is not received by SNGs until January of the budget year, preventing SNGs from finalizing their budgets before the start of the budget year. - Specific projects to be financed from earmarked transfers are not decided until after specific transfer amounts by fund are communicated to SNGs. - SHCP’s review and approval is required for each specific project; SNGs report that this review and approval process can take between 5-7 months, leaving subnational governments with less than half of the year to implement their projects. - Structural issues: - Federal budget for earmarked projects is complex and fragmented and is provided through a complicated series of funds. - There is very little coordination of public investment spending plans between Federal and SNGs, and communication of the transfer amounts is not timely, leading to inefficiencies in SNGs capital spending. - No specific mechanism for collaboration in the production of public investment plans and projects; central government ministries and agencies have no formal role in development of state plans, and the Federal government has no role in State level monitoring or implementation of most projects. ### Transparency, reporting, and fiscal risks - Reporting gaps: - SNGs are not legally required to report on their contingent liabilities to SHCP (except on PPPs); the same applies to public corporations, although there is some reporting from these entities. - SNGs account for around 35 percent of net public sector expenditure; these expenditures, including for investment, are not consolidated in any fiscal report. - Recommendation summary: - Improve mechanisms for coordination (e.g., a forum like COPLADES but including the Federal government) and increase transparency and information sharing on the medium-term public investment plans of Federal and subnational governments. - Broaden communicated information to include reporting of fiscal risks for both Federal non-budgetary entities and State level governments, including implicit and explicit contingent liabilities and consolidated data on public investment for general government, including Federal and subnational levels. ### Subnational debt framework and monitoring - Law on Subnational Fiscal Responsibility: - Sets out rules for contracting subnational debt. - SNGs may take on short-term debt obligations without Federal (or local legislature) approval, but Federal guarantees require SHCP’s approval. - Requires a single debt register be maintained by SHCP for subnational-level debts and instituted a traffic light early-warning system classifying states as green (manageable indebtedness), yellow (indebtedness in observation) or red (high indebtedness). - Any subnational government classified as red is prohibited from borrowing. - As of November 2018, the overall evaluation had one state classified as overall red; some states had red for some indicators and a number of states were classified as yellow overall. - Monitoring: - The Federal government monitors subnational borrowing operations through the Secretariat of Fiscal Coordination in SHCP. ### Project appraisal and investment planning (Institutional Strength — High; Effectiveness — High; Reform Priority — Low) - Legal framework and stages: - Main stages specified in the Federal Budget and Fiscal Responsibility Law; four stages in the public investment planning and budgeting process (Box 3): - Stage 1: Planning and prioritizing by ministries — must be completed by the end of March. - Stage 2: Registration in the portfolio (cartera) — SHCP review; for potential inclusion in the coming budget this step must be completed by 15 July. - Stage 3: Programming and Budgeting — draft budget presented 8 September; final budget approved 15 November. - Stage 4: Execution and Follow-up — monthly physical and financial progress reports; ex-post reviews listed 30 June. - Appraisal requirements: - Article 34 requires detailed socio-economic and financial analyses for all projects registered in the cartera. - Scope and level of detail based on project size thresholds in the law and Lineamientos published in 2013. - Analytical requirements include estimate of future operation and maintenance costs of the infrastructure but not of non-infrastructure-related operating costs (e.g., personnel for a hospital). - Central support: Center of Studies for the Preparation and Socioeconomic Evaluation of Investment Projects (CEPEP) in SHCP provides support including on-line courses and training. - Types of analytical assessment (as specified in Figures 26 and 27): - Technical fiche: general project information; strategic alignment; situation analyses; justification; technical, environmental and legal aspects; estimated supply and demand; identification, quantification and valuation of costs and benefits (including NPV, IRR for large projects). - Simplified cost-benefit analysis: technical fiche plus risk identification and conclusion on profitability. - Cost-benefit analysis: more detailed analyses, feasibility conclusions, risk identification and mitigation actions. - Simplified cost-efficiency analysis and cost-effectiveness analysis: socio-economic assessments with variations in quantification of benefits and comparisons of alternatives. - Practice and quality control: - Appraisals are carried out for all projects funded from the budget, including those added by Congress after the draft budget, plus PPPs with payments from the budget or from FONADIN. - Project appraisals in the pipeline are made public and show good coverage and depth of socio-economic and financial issues; some major project appraisals identify risk mitigation factors, though some did not include mitigation measures. - Public corporations and extra-budgetary units without Federal funding are not required to submit appraisals to SHCP, though EPEs carry out their own appraisals and register them in the cartera with internal approval. - Project volumes and IU workload: - Around 2000 projects in the cartera with foreseeable funding in the short term. - Around 1700 cartera projects received funding in 2018. - IU receives around 500 projects to review during the year (it received 544 in 2017) and approves around 200 on average. - Given the volume, additional quality control through independent review of appraisals for a limited number of key projects is recommended; IU depends on evaluations commissioned by spending ministries, which may have vested interests. ### Alternative infrastructure financing and institutional arrangements (Institutional Strength — Medium; Effectiveness — Medium; Reform Priority — Medium) - Reforms and market opening: - Recent reforms in oil, energy and other infrastructure improved access to infrastructure markets, promoted competition, established regulators, and defined a framework for private investment in infrastructure. - Sectoral regulators established: Instituto Federal de Telecomunicaciones (IFT) and Comisión Reguladora de Energía (CRE); Competition Authority (COFECE) given expanded role. - Published framework for PPPs exists, including legislation, regulations, and a PPP Unit in SHCP. - PPP projects using budget funds or trust-fund grants (e.g., FONADIN) are subject to socioeconomic evaluation and detailed PPP assessment. - Fragmentation and reporting gaps: - A plethora of public corporations (PC) and trust funds (fideicomisos) are involved in public investment; SHCP reviews and oversees most but not all investment projects. - The largest PCs with EPE status have significant autonomy in preparing and procuring investment projects; the government has no consolidated report on the investment plans and financial performance of PCs or fideicomisos. - Need for continued regulatory development: - Continued support for reforms and strengthened regulation and oversight is needed to develop competition in infrastructure markets, make efficient use of current infrastructure, attract new investors, and realize modernization, expanded supply and price reductions. - Competition promotion example (Box 4): - Telecommunications: pro-competition reforms led to new entrants, significant price decreases and better access (2017 OECD review). - COFECE activities: - Advises public entities on legislation and practices to promote competition and punishes anti-competitive practices across electricity, gas, oil-related products, and local access to port, rail, and airport services. - January 2018: presented recommendations to CFE including effective unbundling of CFE horizontally and vertically; elimination of preferential treatment by CFE Energía; elimination of discriminatory access to transmission and distribution; open access to CFE information on energy demand and needs. - June 2018: presented to CRE a report focusing on regulation of underused infrastructure for gas storage and distribution. - Applied fines, including a recent fine of 418 million Pesos to PEMEX TRI for not implementing previous commitments for opening the market for marine diesel and other fuel oils. *Source: IMF Staff and SHCP (content unit 1mexea2019003).* ### 53. The PPP framework has been effective in reviewing PPP proposals, and there is ### 53. The PPP framework has been effective in reviewing PPP proposals, and there is ### PPP framework effectiveness and shortcomings - The PPP framework has been effective in reviewing PPP proposals, and there is evidence that some projects have been filtered out. - The framework includes specific legislation and regulations, including recent strategic guidance published by the SHCP. - Conflict of interest: recommendation to remove the “PPP promotion” goal of the PPP Unit because it conflicts with the Unit’s “PPP filtering” goal. - The PPP selection methodology should be reviewed to ensure consistency with the latest international experience and best practices to foster efficiency and fiscal-risk mitigation. - PPP Unit materials focus on PPP benefits and do not present drawbacks, limiting government entities’ ability to discern where PPPs present good value. - Evaluation of PPP suitability is too focused on quantitative value-for-money; some recent global lessons have not yet been applied. - Some PPP projects (for instance, some projects promoted by FONADIN) do not follow the standard SHCP assessment and prioritization processes. ### Infrastructure efficiency and investment registration - The IU should coordinate with key providers to obtain information on all investment projects using federal funds, including those from trust funds. - All public investment projects (PPP or non-PPP) that use federal funds (including funds managed by non-organic trust funds) should be registered in the SHCP investment portfolio and undergo socioeconomic evaluation and rigorous assessment of the procurement options (if PPP). ### Fiscal-risk assessment and management for PPPs - Individual assessment of PPP fiscal risks should be extended to include implicit fiscal risks, using tools like the PPP Fiscal Risk Assessment Model (PFRAM). - The PFRAM, developed by the IMF and the World Bank, is an analytical tool to assess the potential fiscal costs and risks arising from PPP projects. - There is no systematic identification of explicit and implicit fiscal risks arising from all PPPs awarded at the federal level. - No evidence exists of any risk management unit monitoring aggregate PPP fiscal risks. - Subnational governments’ fiscal risks arising from infrastructure and PPPs create implicit fiscal risks for the federal government; mechanisms (by agreements with the states) should require fiscal risk assessment at state and municipal level and communication to the SHCP for review and register. - The SHCP PPP Unit’s role could be extended to major infrastructure projects, as has happened in other countries (see Box 5). ### Multiyear budgeting (Institutional Strength — Medium; Effectiveness — Low; Reform Priority — High) - The Mexican government does not forecast capital spending over a multi-year period or establish multi-year ceilings for capital spending. - Two macro-economic overviews are developed as part of the government’s fiscal framework: the Pre-Criteria report (submitted to Parliament no later than April 1) and the General Economic Policy Guidelines report (the Criteria report), which accompanies the budget on September 8th (except in years of Presidential transition when the budget is submitted by December 15th). - The Pre-Criteria document describes the macro-economic outlook but only considers spending in the aggregate as a percentage of GDP. - The Criteria report provides multiyear spending aggregates for the budget year and five outer years and identifies capital spending as a percent of GDP over that period, but no detailed budget estimates are developed by minister or program for the outer years and no budget ceilings for the outyears are provided. - All budget decisions in Mexico are made on an annual basis; budget policy and spending priorities are developed each year and the annual budget presents data for the budget year but not outer-year estimates. - The project database supporting the investment budget includes total project cost, amounts spent to date, current budget year funding and estimates for three outer years at the project level; the general public has open access to that database and can obtain socioeconomic evaluation studies. - Recommendation: implement a medium-term budget framework to provide more information on medium-term costs of public investment and facilitate better decision making; initial step could sum total of investment project outyear costs from the current cartera and provide summary outyear totals by sector, agency and program. - Note: the outyear cost data in the cartera’s project database may not be rigorous or of high quality; medium-term projections should be updated annually together with macro-economic projections; binding decisions would still be for the budget year with indicative ceilings for the outer year. ### Budget comprehensiveness and unity (Institutional Strength – Medium; Effectiveness – Medium; Reform Priority – Low) - The federal budget provides information on capital spending from most financial sources; some spending by trust funds and funding from subnational sources are not included. - The PSBR target expands budget coverage to include extra-budgetary units (non-organic trust funds): FEIP, FEIEF, FIES, MFP, FONADIN, FEIPEMEX, and FARP, the development banks, the IPAB, PIDIREGAS and the debt support program. - Capital projects of these entities are not separately identified in the investment budget. - Detailed tables in Tomo VIII show current and capital expenditure, including investment programs and projects by agency; PEMEX and CFE tables are included as an annex in Tomo VIII; PPPs are listed in a separate annex in Tomo VIII. - Capital spending is not integrated with current spending in policy discussions; capital spending of SNGs is not considered Federal spending even if funded by Federal transfers and is not included in the public investment budget. - Agencies’ capital project data are reviewed by the IU; PEMEX and CFE develop comparable registers which are included in the SHCP database but are not reviewed by the IU. - Omission of Federally funded investment projects of SNGs and non-organic trust funds understates the scope of public investment; recommendation to add information on these activities in annexes comparable to the treatment of PPPs in Tomo VIII and to organize investment project details by agency, function, and program. ### Budgeting for investment (Institutional Strength — Medium; Effectiveness — Medium; Reform Priority — Low) - Investment programs are partially protected during budget formulation and implementation, but not over the medium term. - The budget is developed within the context of a resource envelope for the budget year; allocations between current and capital spending and among policy divisions are made for the budget year. - For investment spending, cost-benefit analyses, project status and future requirements are considered; annual requirements for multi-year contracts and prior-year commitments are recognized and funded as part of the annual budget. - Budget decisions are made for the budget year only; during implementation, funding can be transferred from capital projects to current spending with approval of the SHCP (Article 59 (a) of the Federal Budget and Fiscal Responsibility Law). - Multi-year capital projects are not directly protected, but funding requirements for existing contracts (“plurianuales”) are treated as non-programmable obligations and are protected; outer-year costs of multi-year projects funded by annual contracts (“multianuales”) are not protected but are considered by the IU in establishing funding priorities. - The Mexican budget process does not provide separate allocations for ongoing and new investment projects; nevertheless Mexico has devoted the great majority of its investment budget over recent years to making progress on or completing on-going projects. - Recommendation: give more recognition to total cost and outer-year funding requirements of ongoing capital projects; budget documents should highlight full project requirements to inform decision makers and the public and highlight project completion. ### Maintenance funding (Institutional Strength — Medium; Effectiveness — Low; Reform Priority — High) - Maintenance funding provisions are not in place in Mexico’s budgeting. - Maintenance and operations costs are required to be included in project proposals and are considered during project assessment, but there is no mechanism for creating allowances for maintenance in future budget years as new capital expenditure is approved. - Maintenance programs commonly compete for resources against new construction projects; sectoral departments and agencies need to present evidence of maintenance needs and implementation capacity to enable SHCP to protect maintenance funding. - PPP projects are structured to ensure maintenance funds will be available for the long term. - Some ministries have developed program-specific maintenance standards: Secretaries of Health and Energy; the Secretary for Communication and Transport has a road conservation program and has used PPPs for rehabilitation, operation and maintenance; FONADIN maintains and operates 46 highways taken over from failed PPPs; PEMEX has a five-year maintenance program updated annually and funded by PEMEX. - Maintenance projects are visible in the investment budget and are coded with a standard code K027 which is identifiable in project listings; there is no comparable coding to identify maintenance in the budget for current operations. - Recommendation (high reform priority): develop a standard methodology for determining maintenance requirements for all types of infrastructure assets and budget for them; implement a top-down approach to capital budgeting to protect adequate minimum funding for maintenance and rehabilitation to prevent degradation of the capital stock. - Recommendation: identify the level of spending required to maintain infrastructure at a steady-state level using a regularly updated register of infrastructure assets. - Evidence on life-cycle costs: delaying road maintenance for three years leads to cost increases of 6 times the original costs of preventive maintenance; delaying for five years raises costs to 18 times the preventive cost (Source: South African National Roads Agency, Annual Report 2004). *Source: Mission team* ### 10. Project Selection (Institutional Strength — High; Effectiveness — Medium; Reform Priority – ### 10. Project Selection (Institutional Strength — High; Effectiveness — Medium; Reform Priority – Low) ### Project selection process - Governed by Article 34 of the Federal Budget and Fiscal Responsibility Law and supplemented by Project Selection Guidelines. - Selection carried out in two phases: - First-level prioritization for “irreductible investment” (e.g. pluri-annual projects, on-going projects and maintenance for productive infrastructure, followed by administrative acquisitions and maintenance; and then new projects). - Second-level prioritization (primarily for new or re-formulated projects) uses five criteria: - (i) progress on feasibility studies; - (ii) Net Present Value (NPV); - (iii) regional impact; - (iv) extensiveness of beneficiaries; - (v) support to the Green Budget initiative. - Each project is ranked following a valuation of all projects based on weights assigned to each of these 5 criteria. The project ranking relative to the total expenditure budget ceiling generates the list of selected projects. - The IU approved list is reviewed and formally approved by the Inter-ministerial Commission for Public Expenditure, Financing and Desincorporation (Comisión Intersecretarial de Gasto Público Financiamiento y Desincorporación). - Additional projects of up to 10% may be proposed by Congress for inclusion in the budget; these must be registered in the cartera and go through the same IU review and selection process, including socioeconomic and financial analyses. - Active IU selection is limited to projects funded by the Federal budget; projects funded by non-budgetary sources (e.g. EPE public corporations such as PEMEX or CFE), extra-budgetary sources, and some trust funds are not part of the selection process. ### Coverage and forward planning of the project pipeline - A pipeline of good quality-assessed projects is in place; active projects in the pipeline are eligible for funding for three years. - The focus of funding is the coming budget year rather than a medium-term project planning horizon. - The project portfolio (cartera) contains multi-year projects but is not a true tool for selecting projects over the medium term (e.g., budget year plus 2). - Introducing a medium-term focus to budgeting (see Section B) would address this issue. ### Procurement (Institutional Strength — High; Effectiveness — Medium; Reform Priority — High) - Legal framework requires all public investment to be tendered competitively and mandates disclosure of relevant information to the public. - CompraNet is the electronic procurement portal and mandatory registry/disclosure portal for Federal government procurement; the public can browse and download procurement data but no procurement statistics or analyses are provided on the portal. - Procurement complaints are reviewed through an independent and transparent review process controlled by the Ministry of Public Administration; final decisions are published in CompraNet. - While most major projects are transparently and competitively procured, most smaller projects are not competitively procured: - Out of the 228,000 public contracts awarded in 2017: - 12% were subject to public tender, - 78% were directly awarded, - 10% were subject to the negotiated procedure (invitation to at least three suppliers). - For contracts above one million pesos: - Direct award is used for 33% of the contracts, amounting to 58% of the financial value of all contracts. - Table 4 (COFECE computation based on CompraNet data): - Direct award: For all contracts 78%; For contracts above 1 million pesos 33% - Negotiated procedure (invitation to at least 3 suppliers): For all contracts 10%; For contracts above 1 million pesos 29% - Open public tender: For all contracts 12%; For contracts above 1 million pesos 38% - Restrictions to effective competition noted even in tenders: terms of reference designed to restrict competition; bids rejected for small legal technicalities or “abnormally low prices”. - Late budget allocation concentrates bidding in the second half of each year, creating pressure for shorter work completion deadlines and reducing competition. - COFECE and OECD recommendations (see Box 8) propose immediate, mostly non-legislative reforms to improve competition and procurement design; examples include limiting exceptions to open tender, avoiding charging bidders for tender documents, increasing use of functional requirements, eliminating restrictive prequalification procedures, and creating incentives and tools to fight bid rigging. ### Availability of funding (Institutional Strength – Medium; Effectiveness – Medium; Reform Priority – Medium) - Monthly cashflow forecasts are prepared, but ministries are not provided with commitment ceilings for the full fiscal year. - System distinguishes between: - “multianuales” — projects whose scope is multi-annual but contracting is done on an annual basis only and funding is determined yearly; - “plurianuales” — projects whose contracts are signed for at least two years and funding legally assured for the duration of the contract (FRL article 32). - Ministries are authorized to commit capital projects expenditure up to the full budget allocations; SHCP’s Treasury centralizes all payments. - The Treasury ensures cash availability and is responsible for mobilizing resources to meet government obligations, including through debt issuance when needed. - Donor funding is fully integrated into the main government bank account structure (FRL article 36); it is earmarked for capital spending and the chart of accounts allows tracking and reporting in Cuenta Pública. - Challenges and observed practices: - Ministries do not have commitment ceilings and sometimes experience unscheduled cutbacks, including to ongoing projects. - In-year cutbacks have occurred during fiscal consolidation; “plurianuales” are protected but “multianuales” may not be. - The Supreme Audit Institution documented cases of cutbacks leading to unfinished projects (example: 2012 report reviewed 80 contracts and found incomplete/unfinished projects). - The Treasury strives to pay within 48 hours following receipt of a payment order from a ministry, but there is no systematic monitoring of payment delays and no evidence the 48-hour standard is always observed. - Ministries report returning significant unspent balances at year-end due to approval delays; SNGs report federal approvals generally take between five to seven months, leaving less than half the year for implementation. - Only amounts committed before the end of the year are allowed to be paid during the first quarter of the next year. - Procurement plans are prepared after budget approval, contributing to implementation delays. - Recommendations to improve predictability and implementation: - Update treasury systems to provide annual commitment ceilings to ministries for full fiscal-year planning. - Ensure monthly cashflow forecasts by ministries take into account spending patterns beyond budget allocations. - Prepare a provisional procurement plan and a commitment plan two to three months prior to the fiscal year to speed project implementation once the budget is passed. ### Portfolio management and oversight (Institutional Strength — Medium; Effectiveness — Medium; Reform Priority — Medium) - SHCP Investment Unit (IU) operates a strong centralized portfolio management system; project monitoring is conducted at the agency level while cost and physical progress for the entire portfolio is centralized. - The IU maintains a database of projects; ministries report financial and physical progress on a monthly basis as required by current guidelines. The database includes projects with federal funding. - Adjustment procedures for individual projects are well-defined, but there are no procedures for funds reallocation between projects within the portfolio; reallocations are considered on a case-by-case basis and require SHCP approval. - Ex-post reviews are undertaken for some major projects, often by independent experts; selection is by the IU from the centralized database and ministries conduct the reviews. The operational definition of “major project” is any investment project above 500 million pesos. - Limitations of current monitoring and review practices: - Consolidated data on cost over/underruns and implementation delays is not readily available nor used for decision-making or learning purposes. - Information on cost overruns and delays can be obtained on a project-by-project basis but is not presented in summary tables. - Few ex-post reviews are undertaken each year; they generally focus on project cost and deliverables and rarely on output and impact or alternative delivery modes. - Results of ex-post reviews are not an important input into the budget process and only sometimes lead to adjustments of project management guidelines. - Recommendations to strengthen oversight and learning: - Systematically conduct ex-post reviews for most major projects. - Improve the scope of ex-post reviews to cover not only costs and deliverables but also output and impact when possible. - Develop a system to track and report on consolidated project cost over/underruns and implementation delays to shift monitoring focus beyond compliance towards efficiency. *Source: 1mexea2019003 - 10. Project Selection (Institutional Strength — High; Effectiveness — Medium; Reform Priority – Low).* ### 14. Management of Project Implementation (Institutional Strength — Medium, ### 14. Management of Project Implementation (Institutional Strength — Medium, Effectiveness — Medium; Reform Priority – Medium) ### Findings on project planning and implementation - Detailed financial plans are prepared prior to budget approval, but implementation plans are prepared after budget approval. - Senior project managers are systematically identified for major projects. - Ministries submit financial plans every year, before budget preparation. - Project implementation plans are prepared annually for major projects, but only after budget approval. - Standardized rules and procedures for project adjustments exist for major projects and if needed can require a fundamental review and reappraisal of a project’s rationale, and expected outputs. - The existing procedures consider that an investment program or project has modified its scope when the total amount of investment varies by more than 25 percent in real terms, with respect to the amount foreseen in the last cost-benefit analysis presented to register the program or project in the SHCP’s portfolio. Beyond this margin, a project has to be reappraised and resubmitted for SHCP’s review. Below this margin, a request for reallocation of funds has to be submitted for SHCP’s approval. - Extensive audits of ministries’ accounts and of the government’s consolidated financial statements are undertaken annually by the Supreme Audit Institution, which covers project spending as part of its financial audits. - The Supreme Audit Institution’s 2017 audit program included: 13 projects by CFE and PEMEX; 2 projects in the energy sector; and 58 projects in the transport sector. - There is no evidence that most major capital projects systematically undergo an ex-post external audit. ### Effectiveness constraints and risks - Preparation of implementation plans after budget approval by Congress can lead to delays in project implementation. - Ministries generally limit project adjustments so that they are below the cost ceiling that would trigger a fundamental review and resubmission of project, meaning fundamental changes such as on project rationale, objectives, and expected outputs do not often trigger a fundamental review. - The lack of systematic ex-post external audits of all major capital projects limits legislative scrutiny. - The 2017 audit report of the Supreme Audit Institution includes findings related to public works such as differences between estimated, paid and actual volumes; payments made on the basis of incorrect unit costs, payments for unexecuted or undocumented works, lack of environmental assessments, etc., but there is no evidence that all major projects are systematically subjected to such audits. ### Policy recommendations (project management) - Require ministries to prepare implementation plans for major projects prior to budget approval to speed up implementation as soon as the budget is approved. - Implementation plans could be prepared and submitted at the same time as the project’s financial plan. - Communicate implementation plans for major capital projects to the Supreme Audit Institution for inclusion in its audit plan, which would allow for systematic ex-post audits to be programmed and conducted and reported to the legislature. ### 15. Monitoring of Public Assets (Institutional Strength – Medium; Effectiveness – Low; Reform Priority – Medium) ### Findings on asset accounting and registers - Since 2012, Mexico has been implementing accrual-based accounting. - Asset registers exist in ministries and entities but are not consolidated. - Non-financial assets are recognized at historical cost. - Government financial statements include the value of some non-financial assets, which are updated only irregularly based on major events such as disposals and new acquisitions. - The Organic Law on Federal Public Administration requires the SHCP to maintain a register of federal fixed assets. - An institute for the valuation of government assets exists within the SHCP (Instituto de Administración y Avalúos de Bienes Nacionales). - Government fixed assets are not depreciated despite the recent introduction of accrual accounting. - Non-financial assets reported in the government financial statements are incomplete: they include only assets such as buildings, cars ─ so-called immovable and movable assets ─ but exclude large assets such as airports and highways which are recorded as expenditure instead of non-financial assets. - Expensing large assets understates government’s non-financial assets, which may hamper their monitoring. - Mechanisms to value and revalue government assets through the Valuation Institute within the SHCP exist, but these are not integrated with government accounting, which only uses historical cost, with no depreciation. - Asset registers are dispersed in government entities with no single register of government assets. - The absence of comprehensive information on the government’s assets may prevent the development of an optimal maintenance program or the determination of changes in the nation’s patrimony from year to year as a result of investment expenditure. ### Policy recommendations (asset monitoring and accounting) - Review current accounting practices to better reflect the value of non-financial assets by: - Recognizing airports, highways and other large assets as non-financial assets in the government’s balance sheet. - Introducing assets-specific assumptions to guide the depreciation of fixed assets. - Integrate the work of the Valuation Institute within the SHCP with the Government Accounting Unit to help capture the value of the government’s assets based on actual valuations and/or revaluations. *Source: 1mexea2019003 - 14. Management of Project Implementation (Institutional Strength — Medium, Effectiveness — Medium; Reform Priority – Medium)* ### 88. This section presents the mission’s recommendations on how to strengthen public ### 1mexea2019003 - 88. This section presents the mission’s recommendations on how to strengthen public ### A. High Priority Recommendations - Recommendation 1: Strengthen fiscal discipline by improving the medium-term fiscal framework, the application of fiscal rules and the independent oversight of fiscal planning - Issue: - Fiscal policy has mostly focused on the annual horizon; a more medium-term orientation would improve planning, predictability and decision making. - The frequent use of the deficit rule’s escape clause has the potential to undermine the rule. - Independent external review of the government’s medium-term macro-fiscal projections and compliance with fiscal rules is limited. - Recommendation: - Strengthen fiscal discipline by improving the medium-term fiscal framework, the application of fiscal rules, and the independent oversight of fiscal planning. - Implementation measures: - Short-term measures: - Amend the FRL to restrict the use of the escape clause to exceptional circumstances, that is cases of very significant output shocks, including due to significant disruptions in the oil price. - Establish a provision requiring the specification of a clear and swift path back to the fiscal rule after the exceptional circumstance clause is invoked. - Introduce an independent body to review and assess the quality of the macro-fiscal projections, including compliance with fiscal rules and the realism of the debt sustainability path. - Medium-term measures: - Strengthen the medium-term fiscal framework by expanding the coverage and the analysis in the Pre-Criteria report and include more information on the fiscal strategy, including more in-depth discussion and analyses of fiscal policy objectives and medium-term fiscal parameters, including fiscal risks. - Require public corporations and entities with PPP contracts to provide annual reports of their fiscal risks (including contingent liabilities) to SHCP. - Provide more disaggregated expenditure projections over the medium-term. - Consider establishing or setting a medium-term debt limit initially for internal purposes, then externally. - Recommendation 2: Improve the effectiveness of national and sector strategies to guide investment project planning - Issue: - A clear national and sectoral planning framework with strategic objectives is in place but the plans do not effectively guide ministries’ investment planning. - Strategies are not based on likely resource availability, and costing information is very limited. - Recommendation: - Improve the effectiveness of national and sector strategies to guide investment project planning. - Implementation measures: - Short-term measures: - Prepare national and sector plans within a realistic medium-term resource framework. - Concentrate in the national and sector plans on a limited number of high priority strategic objectives that can realistically be achieved within the available resources. - Provide realistic desired outcomes and targets for key strategic objectives over the medium-term, based on likely available resources. - Link the strategic objectives in the national/sector plans to the investment project allocations in the rolling medium-term budgetary framework. - Medium-term measures: - Review the national and sector plans at the mid-point (after 3 years) to reflect changes in economic or policy circumstances. - Train SHCP and ministries staff on the development of results framework for investment projects and its linkage to the sector/institutional programs. - Recommendation 3: Strengthen medium-term budgeting and planning - Issue: - There are only weak links between investment planning and budgeting, and sector plans do not effectively guide ministries’ strategic investment budget allocations. - This results in a long wish-list of projects submitted to SHCP for potential budget financing, leading to significant time spent by staff on projects which end up not getting funding. - Since investments are typically medium-term in length, the current annual focus for the budget is inconsistent with efficient planning. - Recommendation: - Introduce a rolling medium-term budget framework for both capital and current expenditures, which will support more strategic and efficient investment planning. - Implementation measures: - Short-term measures: - Develop the methodology for preparing a rolling medium-term budget framework process to cover both current and capital expenditures. - Draft Guidelines for the preparation of the rolling MTBF. - Train staff in SHCP and in sector ministries in the new methodology. - Medium-term measures: - In conjunction with the strengthened medium-term fiscal framework, consider developing top-down medium-term ceilings by ministry earlier in the process (at the beginning of budget preparation). - Develop a methodology and a simple model for ministries to prepare expenditure baseline projections for their programs, covering both current and capital expenditures. - Develop baselines estimates of existing project spending and identify available fiscal space for new projects. - Train SHCP and sector ministries’ staff in the preparation of baseline projections. - Begin implementation of the rolling MTBF including baseline projections. - Establish a rolling investment costing exercise linked to the MTBF and consistent with expected results and investment goals for overall federal investment. - Recommendation 4: Improve coordination between the Federation and states - Issue: - Federal transfers (Ramo 33, 23 and Convenios) are a significant and valued source of funding for public investment at the subnational level. - As currently defined, they also introduce distortions in budget management and investment performance. - There is a lack of effective and sound coordination within a longer-term perspective. Late budget allocations and a short period for budget execution generates fragmentation. - Current coordination mechanisms are ad hoc and not effective. Federal and subnational plans are not shared or aligned as needed, and investment planning decisions are independent at each level. - Recommendation: - Improve the mechanisms for coordination of the medium-term public investment plans of federal and subnational levels. Improved coordination will help to enhance efficiency and synergies in the planning and prioritization of investments. - Implementation measures: - Short-term measures: - Consider establishing a joint federal and state investment coordination committee(s) to promote strengthening medium-term planning, encouraging active consultation, transparency and regular sharing of information between Federal and SNGs, particularly in terms of their medium-term and annual investment plans (particularly, State plans), and fostering capacity building in subnational governments for budgeting and planning. - Require State-level governments accessing Federal funds to provide annual reports on their fiscal risks, including explicit and implicit contingent liabilities. - Medium-term measures: - Review the Convenios structure and the operating rules for Ramo 23.55,56 - Include in the registry all investment projects funded under Ramo 33, using the cartera to structure investment pipelines per State and then agreeing with SNGs on priority and strategic projects that require federal funding. - Ensure that SHCP investment systems (SEFIR, RFT, Modulo Cartera) are interrelated and allow for a comprehensive perspective of federal public resources transferred to States as well as for a systematic follow up. - Recommendation 5: Develop a standard methodology for determining maintenance funding requirements, for all types of infrastructure assets, and budget for them - Issue: - Maintenance of assets created from capital spending remains underfunded due to the lack of systematic assessment of needs. - Neglecting maintenance risks impairments to assets, resulting in loss of asset productivity and lower service/revenue generation potential. - Postponing maintenance may mean higher future maintenance costs and, in many cases, lower value from future maintenance. - Recommendation: - Implement a top-down approach for maintenance of capital assets to provide adequate minimum funding for asset maintenance. - When implementing a top-down approach for maintenance of capital assets, increase the share of the budget directed toward maintenance and rehabilitation expenditure to prevent degradation of the existing capital stock. - In the budget process, try to identify the level of spending required to maintain infrastructure at a steady-state level, using a regularly updated register of infrastructure assets to determine appropriate maintenance levels. - Implementation measures: - Short-term measures: - SHCP should require agencies to establish program appropriate maintenance standards. - Agencies should regularly survey their capital stock to determine maintenance needs and funding requirements. - Agencies should report to SHCP annually on maintenance: operations, needs, and funding requirements. - SHCP should provide summary presentation on maintenance highlighting expenditures by agency and program. - Medium-term measures: - SHCP should review maintenance (operations, needs and expenditures) to determine whether appropriate resources are being allocated to maintain public capital stock. - Expand registers of infrastructure assets and ensure that they are updated on a regular basis to support determination of appropriate maintenance levels. - Recommendation 6: Promote more competitive tendering and pro-competition culture among public procurement officials - Issue: - According to COFECE, in 2017 only 12% of contracts registered in CompraNet were subjected to competitive tender; among contracts above one million pesos, only 38% were subjected to competitive tender. - Competition authorities and regulators have raised the need for effective competition in public procurement and in infrastructure markets and have proposed methods for fostering competition. - Recommendation: - Procurement procedures and regulations should be revised to promote open and competitive procurement. - Review and implement reform proposals that do not require legislative changes and disseminate them among contracting authorities. - Develop an extensive training program to re-train all procurement officials, creating a culture of competition in public procurement. - The standardization of tender documents, already initiated by some government departments, should be extended to all main procuring entities. - In the medium-term, a review of public procurement should lead to a codification of federal public procurement into a single Public Procurement Law. - Implementation measures: - Short-term measures: - Review and compile the concrete recommendations on public procurement presented by COFECE, OECD and other entities, identifying the ones that can be implemented without changes in law. - Disseminate those recommendations among procurement officials. - Structure, with support from COFECE and OECD experts, a training program for procurement officials, aiming at pro-competitive innovation in public procurement. - Implement the training program. - Establish deadlines for each main government procuring entity to produce standardized tender documents and submit them to COFECE for review. - Medium-term measures: - Define performance indicators for public procurement and use electronic procurement platforms to monitor them and publish periodic analytical reports on the performance of public procurement. - Make the use of standard procurement documents mandatory. - Review public procurement practices and results, identifying opportunities for improvement within the current legal framework, and legal rules that should be revised to promote more competitive, fair, transparent and efficient public procurement. - Compile the legislation addressing federal public procurement into a single Public Procurement Law incorporating the results of the procurement review. - Invite SNGs to share public procurement experiences and best practices with the federal government and public corporations, and promote the harmonization of the legal frameworks across levels of government. ### B. Medium Priority Recommendations - Recommendation 7: Improve the comprehensiveness and quality of public investment planning - Issue: - With the extent of the investment planning process actively managed by IU limited to projects funded by the Federal budget (notwithstanding the reporting by some entities to IU of their projects for inclusion in the cartera), the overall transparency of public investment is not comprehensive. - Non-comprehensive information makes it difficult to assess the trade-offs of investments across the Federal government and hence the extent to which public investment is contributing to achieving the government’s strategic objectives. - Recommendation: - Increase the comprehensiveness of public investment project information in the cartera. - Implementation measures: - Short-term measures: - Require extra-budgetary entities (non-organic funds) and all public corporations to provide to the IU with information on their planned public investment projects and upload relevant related documents to the IU portal (including financial and socio-economic assessments). This data would be for information purposes and would not undermine the legal independence of these entities. - Medium-term measures: - Introduce a process of external reviews of cost-benefit analyses for key investment projects. - Include in the registry all public corporations’ and extrabudgetary units’ investment projects funded under Ramo 33. - Standardize the formulation and evaluation requirements for projects funded through Ramo 23. - Recommendation 8: Improve the predictability of funding for major capital projects - Issue: - The availability of resources over the lifetime of the project, and sometimes during the year, is not certain, except for the so-called “plurianuales”. - Although previous year commitments are paid during the three to four months of the following year, there are no multi-year appropriations, and ministries are not provided cash commitment ceilings covering the full fiscal year, with which they could plan and commit their capital projects expenditures. - Recommendation: - Make funding for major capital projects more predictable to allow ministries, agencies to plan and implement projects as effectively as possible. - Implementation measures: - Short-term measures: - Update treasury systems to provide commitment ceilings to ministries for the full fiscal year in order to allow them to prioritize major capital projects within the ceilings (this is a best practice). - Prepare a provisional procurement plan and a commitment plan, two to three months prior to the beginning of the fiscal year in order to speed up project implementation as soon as the budget is passed. - Medium-term measures: - Introduce carry-forward of budget authority for multi-year capital projects within established, clear and transparent limits. - Recommendation 9: Strengthen the monitoring of cost overruns and project delays - Issue: - Consolidated data on cost over/underruns, as well as on implementation delays, is not readily available, nor used for decision-making or learning purposes. - The current centralized monitoring system can capture information on cost overruns and implementation delays on a project-by-project basis but it does not present aggregate figures in summary tables which could facilitate decision-making. - The few ex-post reviews of major projects conducted each year focus generally on project cost and deliverables, and rarely on output and impact or alternative ways of project delivery. The results of ex-post reviews are not an important input into the budget process. - Recommendation: - Develop a system to track and report on project cost over/under-runs and implementation delays; use this information to identify areas of risk and to improve implementation; and move the focus of project monitoring beyond compliance towards efficiency. - Implementation measures: - Short-term measures: - Prepare quarterly summary tables on cost over/underruns and implementation delays for policy makers, pulling data from information provided by ministries in the current database. - Systematically conduct ex-post reviews for most major projects, identify areas of risk, and use the results in the budget process. - Medium-term measures: - Improve the scope of ex-post reviews for major projects to cover not only costs and deliverables, but also output, impact and alternative ways for project delivery. - Recommendation 10: Enhance capital projects management and control during the execution stage - Issue: - Detailed financial plans are prepared prior to budget approval, but implementation plans are prepared after budget approval, which can lead to delays in project implementation. - Legislative scrutiny is limited by the lack of systematic ex-post external audits of all major capital projects. - Recommendation: - Require ministries to prepare implementation plans for major projects prior to budget approval to help speed up implementation as soon as the budget is passed by Congress. - Implementation measures: - Short-term measures: - Prepare and submit project implementation plans for major projects at the same time as the project’s financial plan. - Communicate project implementation plans to the Supreme Audit Institution for inclusion in its ex-post projects audit plan. - Recommendation 11: Improve the accounting and evaluation of assets - Issue: - Non-financial assets reported in the government financial statements are incomplete. They include only assets such as buildings, cars and exclude large assets such as airports and highways which are recorded as expenditure instead of non-financial assets. - There are mechanisms to value and revalue government assets, but these are not integrated with government accounting, which only uses historical cost, with no depreciation. - Recommendation: - Review the current accounting practices to reflect better the value of non-financial assets. - Implementation measures: - Short-term measures: - Review the current accounting practices to reflect better the value of non-financial assets by: (1) recognizing airports, highways and other large assets as non-financial assets in the government’s balance sheet; and (2) introducing assets-specific assumptions to guide the depreciation of fixed assets. - Medium-term measures: - Integrate the work of the Valuation Institute within the SCHP with the Government Accounting Unit in order to capture the value of government assets based on actual valuations and/or revaluations. - Review the accounting standards for non-financial assets valuation and revaluation. *Source: 1mexea2019003 - 88.* ### Annex I. PIMA Questionnaire ### Annex I. PIMA Questionnaire ### A. Planning Sustainable Levels of Public Investment - 1. Fiscal targets and rules: Does the government have fiscal institutions to support fiscal sustainability and to facilitate medium-term planning for public investment? - 1.a. Is there a target or limit for government to ensure debt sustainability? - There is no target or limit to ensure debt sustainability. - There is at least one target or limit to ensure central government debt sustainability. - There is at least one target or limit to ensure general government debt sustainability. - 1.b. Is fiscal policy guided by one or more permanent fiscal rules? - There are no permanent fiscal rules. - There is at least one permanent fiscal rule applicable to central government. - There is at least one permanent fiscal rule applicable to central government, and at least one comparable rule applicable to a major additional component of general government, such as subnational government (SNG). - 1.c. Is there a medium-term fiscal framework (MTFF) to align budget preparation with fiscal policy? - There is no MTFF prepared prior to budget preparation. - There is an MTFF prepared prior to budget preparation but it is limited to fiscal aggregates, such as expenditure, revenue, the deficit, or total borrowing. - There is an MTFF prepared prior to budget preparation, which includes fiscal aggregates and allows distinctions between recurrent and capital spending, and ongoing and new projects. - 2. National and Sectoral Planning: Are investment allocation decisions based on sectoral and inter-sectoral strategies? - 2.a. Does the government prepare national and sectoral strategies for public investment? - National or sectoral public investment strategies or plans are prepared, covering only some projects found in the budget. - National or sectoral public investment strategies or plans are published covering projects funded through the budget. - Both national and sectoral public investment strategies or plans are published and cover all projects funded through the budget regardless of financing source (e.g. donor, public corporation (PC), or PPP financing). - 2.b. Are the government’s national and sectoral strategies or plans for public investment costed? - The government’s investment strategies or plans include no cost information on planned public investment. - The government’s investment strategies include broad estimates of aggregate and sectoral investment plans. - The government’s investment strategies include costing of individual, major investment projects within an overall financial constraint. - 2.c. Do sector strategies include measurable targets for the outputs and outcomes of investment projects? - Sector strategies do not include measurable targets for outputs or outcomes. - Sector strategies include measurable targets for outputs (e.g., miles of roads constructed). - Sector strategies include measurable targets for both outputs and outcomes (e.g., reduction in traffic congestion). - 3. Coordination between Entities: Is there effective coordination of the investment plans of central and other government entities? - 3.a. Is capital spending by SNGs, coordinated with the central government? - Capital spending plans of SNGs are not submitted to, nor discussed with central government. - Major SNG capital spending plans are published alongside central government investments, but there are no formal discussions, between the central government and SNGs on investment priorities. - Major SNG capital spending plans are published alongside central government investments, and there are formal discussions between central government and SNGs on investment priorities. - 3.b. Does the central government have a transparent, rule-based system for making capital transfers to SNGs, and for providing timely information on such transfers? - The central government does not have a transparent rule-based system for making capital transfers to SNGs. - The central government uses a transparent rule-based system for making capital transfers to SNGs, but SNGs are notified about expected transfers less than six months before the start of each fiscal year. - The central government uses a transparent rule-based system for making capital transfers to SNGs, and expected transfers are made known to SNGs at least six months before the start of each fiscal year. - 3.c. Are contingent liabilities arising from capital projects of SNGs, PCs, and PPPs reported to the central government? - Contingent liabilities arising from major projects of SNGs, PCs, and PPPs are not reported to the central government. - Contingent liabilities arising from major projects of SNGs, PCs, and PPPs are reported to the central government, but are generally not presented in the central government’s budget documents. - Contingent liabilities arising from major projects of SNGs, PCs, and PPPs are reported to the central government, and are presented in full in the central government’s budget documents. - 4. Project Appraisal: Are project proposals subject to systematic project appraisal? - 4.a. Are major capital projects subject to rigorous technical, economic, and financial analysis? - Major capital projects are not systematically subject to rigorous, technical, economic, and financial analysis. - Major projects are systematically subject to rigorous technical, economic, and financial analysis. - Major projects are systematically subject to rigorous technical, economic, and financial analysis, and selected results of this analysis are published or undergo independent external review. - 4.b. Is there a standard methodology and central support for the appraisal of projects? - There is no standard methodology or central support for project appraisal. - There is either a standard methodology or central support for project appraisal. - There is both a standard methodology and central support for project appraisal. - 4.c. Are risks taken into account in conducting project appraisals? - Risks are not systematically assessed as part of the project appraisal. - A risk assessment covering a range of potential risks is included in the project appraisal. - A risk assessment covering a range of potential risks is included in the project appraisal, and plans are prepared to mitigate these risks. - 5. Alternative Infrastructure Financing: Is there a favorable climate for the private sector, PPPs, and PCs to finance in infrastructure? - 5.a. Does the regulatory framework support competition in contestable markets for economic infrastructure (e.g., power, water, telecoms, and transport)? - Provision of economic infrastructure is restricted to domestic monopolies, or there are few established economic regulators. - There is competition in some economic infrastructure markets, and a few economic regulators have been established. - There is competition in major economic infrastructure markets, and economic regulators are independent and well established. - 5.b. Has the government published a strategy/policy for PPPs, and a legal/regulatory framework which guides the preparation, selection, and management of PPP projects? - There is no published strategy/policy framework for PPPs, and the legal/regulatory framework is weak. - A PPP strategy/policy has been published, but the legal/regulatory framework is weak. - A PPP strategy/policy has been published, and there is a strong legal/regulatory framework that guides the preparation, selection, and management of PPP projects. - 5.c. Does the government oversee the investment plans of public corporations (PCs) and monitor their financial performance? - The government does not systematically review the investment plans of PCs. - The government reviews the investment plans of PCs, but does not publish a consolidated report on these plans or the financial performance of PCs. - The government reviews and publishes a consolidated report on the investment plans and financial performance of PCs. ### B. Ensuring Public Investment is Allocated to the Right Sectors and Projects - 6. Multi-Year Budgeting: Does the government prepare medium-term projections of capital spending on a full cost basis? - 6.a. Is capital spending by ministry or sector forecasted over a multiyear horizon? - No projections of capital spending are published beyond the budget year. - Projections of total capital spending are published over a three to five-year horizon. - Projections of capital spending disaggregated by ministry or sector are published over a three to five-year horizon. - 6.b. Are there multiyear ceilings on capital expenditure by ministry, sector, or program? - There are no multiyear ceilings on capital expenditure by ministry, sector, or program. - There are indicative multiyear ceilings on capital expenditure by ministry, sector, or program. - There are binding multiyear ceilings on capital expenditure by ministry, sector, or program. - 6.c. Are projections of the total construction cost of major capital projects published? - Projections of the total construction cost of major capital projects are not published. - Projections of the total construction cost of major capital projects are published. - Projections of the total construction cost of major capital projects are published, together with the annual breakdown of these cost over a three-five-year horizon. - 7. Budget Comprehensiveness and Unity: To what extent is capital spending, and related recurrent spending, undertaken through the budget process? - 7.a. Is capital spending mostly undertaken through the budget? - Significant capital spending is undertaken by extra-budgetary entities with no legislative authorization or disclosure in the budget documentation. - Significant capital spending is undertaken by extra-budgetary entities, but with legislative authorization and disclosure in the budget documentation. - Little or no capital spending is undertaken by extra-budgetary entities. - 7.b. Are all capital projects, regardless of financing source, shown in the budget documentation? - Capital projects are not comprehensively presented in the budget documentation, including PPPs, externally financed, and PCs’ projects. - Most capital projects are included in the budget documentation, but either PPPs, externally financed, or PCs’ projects are not shown. - All capital projects, regardless of financing sources, are included in the budget documentation. - 7.c. Are capital and recurrent budgets prepared and presented together in the budget? - Capital and recurrent budgets are prepared by separate ministries, and/or presented in separate budget documents. - Capital and recurrent budgets are prepared by a single ministry and presented together in the budget documents, but without using a program or functional classification. - Capital and recurrent budgets are prepared by a single ministry and presented together in the budget documents, using a program or functional classification. - 8. Budgeting for Investment: Are investment projects protected during budget implementation? - 8.a. Are total project outlays appropriated by the legislature at the time of a project’s commencement? - Outlays are appropriated on an annual basis, but information on total project costs is not included in the budget documentation. - Outlays are appropriated on an annual basis, and information on total project costs is included in the budget documentation. - Outlays are appropriated on an annual basis and information on total project costs, and multiyear commitments is included in the budget documentation. - 8.b. Are in-year transfers of appropriations (virement) from capital to current spending prevented? - There are no limitations on virement from capital to current spending. - The finance ministry may approve virement from capital to current spending. - Virement from capital to current spending requires the approval of the legislature. - 8.c. Is the completion of ongoing projects given priority over starting new projects? - There is no mechanism in place to protect funding of ongoing projects. - There is a mechanism to protect funding for ongoing projects in the annual budget. - There is a mechanism to protect funding for ongoing projects in the annual budget and over the medium term. - 9. Maintenance Funding: Are routine maintenance and major improvements receiving adequate funding? - 9.a. Is there a standard methodology for estimating routine maintenance needs and budget funding? - There is no standard methodology for determining the needs for routine maintenance. - There is a standard methodology for determining the needs for routine maintenance and its cost. - There is a standard methodology for determining the needs for routine maintenance and its cost, and the appropriate amounts are generally allocated in the budget. - 9.b. Is there a standard methodology for determining major improvements (e.g. renovations, reconstructions, enlargements) to existing assets, and are they included in national and sectoral investment plans? - There is no standard methodology for determining major improvements, and they are not included in national or sectoral plans. - There is a standard methodology for determining major improvements, but they are not included in national or sectoral plans. - There is a standard methodology for determining major improvements, and they are included in national or sectoral plans. - 9.c. Can expenditures relating to routine maintenance and major improvements be identified in the budget? - Routine maintenance and major improvements are not systematically identified in the budget. - Routine maintenance and major improvements are systematically identified in the budget. - Routine maintenance and major improvements are systematically identified in the budget, and are reported. - 10. Project Selection: Are there institutions and procedures in place to guide project selection? - 10.a. Does the government undertake a central review of major project appraisals before decisions are taken to include projects in the budget? - Major projects (including donor- or PPP-funded) are not reviewed by a central ministry prior to inclusion in the budget. - Major projects (including donor- or PPP-funded) are reviewed by a central ministry prior to inclusion in the budget. - All major projects (including donor- or PPP-funded) are scrutinized by a central ministry, with input from an independent agency or experts prior to inclusion in the budget. - 10.b. Does the government publish and adhere to standard criteria, and stipulate a required process for project selection? - There are no published criteria or a required process for project selection. - There are published criteria for project selection, but projects can be selected without going through the required process. - There are published criteria for project selection, and generally projects are selected through the required process. - 10.c. Does the government maintain a pipeline of appraised investment projects for inclusion in the annual budget? - The government does not maintain a pipeline of appraised investment projects. - The government maintains a pipeline of appraised investment projects but other projects may be selected for financing through the annual budget. - The government maintains a comprehensive pipeline of appraised investment projects, which is used for selecting projects for inclusion in the annual budget, and over the medium term. ### C. Delivering Productive and Durable Public Assets - 11. Procurement - 11.a. Is the procurement process for major capital projects open and transparent? - Few major projects are tendered in a competitive process, and the public has limited access to procurement information. - Many major projects are tendered in a competitive process, but the public has only limited access to procurement information. - Most major projects are tendered in a competitive process, and the public has access to complete, reliable and timely procurement information. - 11.b. Is there a system in place to ensure that procurement is monitored adequately? - There is no procurement database, or the information is incomplete or not timely for most phases of the procurement process. - There is a procurement database with reasonably complete information, but no standard analytical reports are produced from the database. - There is a procurement database with reasonably complete information, and standard analytical reports are produced to support a formal monitoring system. - 11.c. Are procurement complaints review process conducted in a fair and timely manner? - Procurement complaints are not reviewed by an independent body. - Procurement complaints are reviewed by an independent body, but the recommendations of this body are not produced on a timely basis, nor published, nor rigorously enforced. - Procurement complaints are reviewed by an independent body whose recommendations are timely, published, and rigorously enforced. - 12. Availability of Funding: Is financing for capital spending made available in a timely manner? - 12.a. Are ministries/agencies able to plan and commit expenditure on capital projects in advance on the basis of reliable cash-flow forecasts? - Cash-flow forecasts are not prepared or updated regularly, and ministries/agencies are not provided with commitment ceilings in a timely manner. - Cash-flow forecasts are prepared or updated quarterly, and ministries/agencies are provided with commitment ceilings at least a quarter in advance. - Cash-flow forecasts are prepared or updated monthly, and ministries/agencies are provided with commitment ceilings for the full fiscal year. - 12.b. Is cash for project outlays released in a timely manner? - The financing of project outlays is frequently subject to cash rationing. - Cash for project outlays is sometimes released with delays. - Cash for project outlays is normally released in a timely manner, based on the appropriation. - 12.c. Is external (donor) funding of capital projects fully integrated into the main government bank account structure? - External financing is largely held in commercial bank accounts outside the central bank. - External financing is held at the central bank, but is not part of the main government bank account structure. - External financing is fully integrated into the main government bank account structure. - 13. Portfolio Management and Oversight: Is adequate oversight exercised over implementation of the entire public investment portfolio? - 13.a. Are major capital projects subject to monitoring during project implementation? - Most major capital projects are not monitored during project implementation. - For most major projects, annual project costs, as well as physical progress, are monitored during project implementation. - For all major projects, total project costs, as well as physical progress, are centrally monitored during project implementation. - 13.b. Can funds be re-allocated between investment projects during implementation? - Funds cannot be re-allocated between projects during implementation. - Funds can be reallocated between projects during implementation, but not using systematic monitoring and transparent procedures. - Funds can be re-allocated between projects during implementation, using systematic monitoring and transparent procedures. - 13.c. Does the government adjust project implementation policies and procedures by systematically conducting ex post reviews of projects that have completed their construction phase? - Ex post reviews of major projects are neither systematically required, nor frequently conducted. - Ex post reviews of major projects, focusing on project costs, deliverables and outputs, are sometimes conducted. - Ex post reviews of major projects focusing on project costs, deliverables, and outputs are conducted regularly by an independent entity or experts, and are used to adjust project implementation policies and procedures. *Annex I. PIMA Questionnaire* ### 14. Management of Project Implementation: Are capital projects well managed and controlled during the execution stage? ### 14. Management of Project Implementation: Are capital projects well managed and controlled during the execution stage? ### 14.a. Project management arrangements - Ministries/agencies do not systematically identify senior responsible officers for major investment projects, and implementation plans are not prepared prior to budget approval. - Ministries/agencies systematically identify senior responsible officers for major investment projects, but implementation plans are not prepared prior to budget approval. - Ministries/agencies systematically identify senior responsible officers for major investment projects, and implementation plans are prepared prior to budget approval. ### 14.b. Rules, procedures and guidelines for project adjustments - There are no standardized rules and procedures for project adjustments. - For major projects, there are standardized rules and procedures for project adjustments, but do not include, if required, a fundamental review and reappraisal of a project’s rationale, costs, and expected outputs. - For all projects, there are standardized rules and procedures for project adjustments and, if required, include a fundamental review of the project’s rationale, costs, and expected outputs. ### 14.c. Ex post audits of capital projects - Major capital projects are usually not subject to ex post external audits. - Some major capital projects are subject to ex post external audit, information on which is published by the external auditor. - Most major capital projects are subject to ex post external audit information on which is regularly published and scrutinized by the legislature. ### 15. Monitoring of Public Assets: Is the value of assets properly accounted for and reported in financial statements? ### 15.a. Asset registers updated by surveys - Asset registers are neither comprehensive nor updated regularly. - Asset registers are either comprehensive or updated regularly at reasonable intervals. - Asset registers are comprehensive and updated regularly at reasonable intervals. ### 15.b. Recording of nonfinancial asset values in government financial accounts - Government financial accounts do not include the value of non-financial assets. - Government financial accounts include the value of some non-financial assets, which are revalued irregularly. - Government financial accounts include the value of most nonfinancial assets, which are revalued regularly. ### 15.c. Depreciation of fixed assets in operating statements - The depreciation of fixed assets is not recorded in operating statements. - The depreciation of fixed assets is recorded in operating statements, based on statistical estimates. - The depreciation of fixed assets is recorded in operating expenditures, based on asset-specific assumptions. ### Cross-cutting issues and institutional observations ### A. IT support - Public Investment Management (PIM) processes use computerized information systems that allow for information to be shared across different units from planning to budgeting to procurement and follow-up activities. - Integration of individual information systems is gradually moving ahead; crossing information from different systems remains a costly activity. - The general public has access to a large volume of information, although not always presented to facilitate comprehension and interpretation. - For public procurement, the electronic portal (CompraNet) provides technical support for mandatory registration and disclosure of public contracts (although its use for procurement is not mandatory). - A major area for improvement is the automated production of analytical information on budgeting, financial reporting, and procurement. ### B. Legal framework - Recent wide changes in legislation and regulations promoting competition, innovation, and transparency are currently being implemented. - A major legal reform (including amendments to the Constitution) addressed areas impacting PIM, including infrastructure regulatory reforms and the new framework for PPPs and private investment in infrastructure. - Relevant laws include the General Transparency Law and legislation on Open Data. - Mexico has undertaken a legislative transformation of entitlements of each government authority and initiated cooperation agreements with subnational entities. - The legal and regulatory reforms have generally reinforced effectiveness and transparency of PIM processes and promoted competition and transparency. - Procurement legislation integrated different laws into a comprehensive Public Procurement Law framework and eliminated loopholes that allowed avoidance of competitive tender. - Given Mexico’s federal character and heterogeneous subnational legal frameworks, homogenization of national procurement legislation would create legal clarity, improve legislation, and attract domestic and foreign investment. - COFECE suggested amending Article 73 of the Constitution to create a General Law on Public Procurement to establish principles and procedures applicable at every level of government. ### C. Staff capacity - Recent efforts to control growth of personnel expenditure may have affected sizing of some PIM units; more relevant is current staffing and retaining capacity. - In SHCP departments, staff demonstrate ability to understand issues and are actively involved in developing new systems to improve PIM effectiveness, transparency, and accountability. - Major concern: retaining capacity and maintaining/reinforcing career attractiveness. - On the downstream side of PIM, public procurement issues (corruption concerns and lack of a pro-competition approach) indicate procurement officials should engage in comprehensive training covering procurement principles, practices, and integrity standards. - Staff capacity varies widely across spending ministries; state and municipality level capacity is generally much weaker. - OECD cooperation has promoted recommendations on procurement professional standards, certification, regular training, and merit-based career options for procurement officials. ### Annex highlights (PIMA context and funding) - Annex II presents PIMA Detailed Scores for Mexico using score color coding 1 (Low), 2 (Medium), 3 (High) across Planning, Allocation, Implementation and Institutional Strength and Effectiveness dimensions. - Annex IV summarizes three sources of funding for public investment in the States of Mexico: - 1. State Fiscal Resources: includes own taxes, rights, products, incentive benefits, social security contributions; includes Ramo 28 “Participaciones Federales a Entidades Federativas y Municipios” (Participaciones) as state-own unconditional revenue-sharing transfers. Major distribution channels include General Fund for Participaciones; Municipal Development Fund; Special Tax on Production and Services; Fiscalization Fund; Compensation Fund; Hydrocarbons Extraction Fund; New Automobile Tax Compensation Fund. - 2. Federal Resources: grouped into (a) Ramo 33 (Aportaciones), (b) Ramo 23 (ad hoc federal transfers), and (c) Agreements. - a) Ramo 33 (Aportaciones): earmarked resources distributed for education, health, educational and social infrastructure, and public security; structured through multiple earmarked transfer funds including FONE, FASSA, FAIS (FISE and FISM), FAM, FAFEF, FAETA, FASP. - b) Ramo 23: flexible, ad hoc source administered by SHCP; supports contingency and public investment programs; considered extrabudgetary because use is not fully defined in the expenditure budget approved by Congress; main 2017 funds include Fund for Financial Strengthening; Regional Programs; Regional Development Projects; Metropolitan Fund; Regional Fund; Fund for the Strengthening of the State and Municipal Infrastructure; Border Fund; Implementation of the Criminal Justice System; Infrastructure and Productivity Support Fund; Guerrero Fund. Projects under Ramo 23 use SEFIR for registration and are evaluated by UPCP of SHCP; these funds provide significant financing margin but are least structured and generate unpredictability for state budgets. - c) Agreements (Convenios): matching transfers between state and federal government for execution of specific investment projects; projects funded through Agreements are entered into federal budget investment portfolio, reviewed with IU, and approved by Congress; execution begins at start of approved fiscal year. - 3. Internal Financing: obligations contracted with national creditors (issuance of bills and bonds, credits of banks and private financial system) payable in national currency; by law States cannot access external financing; resources from these obligations must be earmarked for public investment. *Source: 1mexea2019003 - 14. Management of Project Implementation: Are capital projects well managed and controlled during the execution stage?* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1mexea2019003.pdf_