Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 49491-MX

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED

FRAMEWORK FOR GREEN GROWTH DEVELOPMENT POLICY LOAN

IN THE AMOUNT OF US$1.504 BILLION

TO

THE UNITED MEXICAN STATES

OCTOBER 14, 2009

Sustainable Development Department Mexico and Colombia Country Management Unit Latin America and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective August 30, 2009)

Currency Unit = Mexican Peso MX$1.00 = US$0.075

US$1 = MX$13.3

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

AAA AQM BANOBRAS

Analytical and Advisory Activities Air Quality Management Banco Nacional de Obras (National Bank for Public Works)

BANCOMEXT Banco Nacional de Comercio Exterior (Foreign Trade Bank of Mexico)

BANSEFI Banco del Ahorro Nacional y Servicios Financieros SNC (National Bank of Savings and Financial Services SNC)

BRT CAS

Bus Rapid Transit Country Assistance Strategy

CC CCDPL CDM CF CFE CFL CH4 CICC

Climate Change Climate Change Development Policy Loan Clean Development Mechanism Carbon Finance Comisión Federal de Electricidad (Federal Commission for Electricity) Compact Fluorescent Light Methane Comisión Intersecretarial de Cambio Climático (Inter-Secretarial Commission on Climate Change)

CIF Climate Investment Fund CO Carbon Monoxide CO2 Carbon Dioxide CO2e Carbon Dioxide Equivalent COFEMER CONAE CONUEE

Comisión Federal de Mejora Regulatoria (Federal Regulation Commission) Comisión Nacional para el Ahorro de Energia (National Commission for Energy Savings) Comisión Nacional para el Uso Eficiente de Energía (National Commission for the Efficient Use of Energy)

CPS Country Partnership Strategy CRE Comisión Reguladora de Energía (Energy Regulatory Commission) CTF Clean Technology Fund DA DECDG

Designated Account Development Economic Development Data Group

DF DOF DPL ECLAC EE

Distrito Federal (Federal District) Diario Oficial de la Federación (Official Gazette) Development Policy Loan Economic Commission for Latin America and the Caribbean Energy Efficiency

EIA ENACC

Environmental Impact Assessment Estrategia Nacional de Cambio Climático (National Climate Change Strategy)

ENVDPL ENVSAL ERPA ESMAP ESMF

Programmatic Environmental Development Policy Loan Programmatic Environmental Structural Adjustment Loan Emissions Reductions Purchase Agreement Energy Sector Management Assistance Program Environmental and Social Management Framework

FARAC FCL FDI

Fideicomiso de Apoyo al Rescate de Autopistas Concesionadas (Trust for Supporting the Recovery of Licensed Highways) Flexible Credit Line Foreign Direct Investment

FINFRA FONADIN

Fondo de Inversión en Infraestructura (Infrastructure Investment Fund) Fondo Nacional de Infraestructura (National Infrastructure Fund)

FY Fiscal Year GAP Gender Action Plan GDP Gross Domestic Product GEF Global Environment Facility GEF-STAQ Global Environmental Facility - Sustainable Transport and Air Quality GHG Greenhouse Gases GoM Government of Mexico GTC GW HC

Grupo de Trabajo Consultivo (Consultative Working Group) Gigawatt Hydrocarbons

IBRD International Bank for Reconstruction and Development ICR Implementation Completion Report IDA International Development Association IDB Inter-American Development Bank IDF IEA IFC IFI

Institutional Development Fund International Energy Agency International Finance Corporation International Financial Institution

IMF INE IP

International Monetary Fund Instituto Nacional de Ecología (National Ecology Institute) Investment Plan

IPCC Intergovernmental Panel on Climate Change IPP ISCCS ITP

Independent Power Producer Integrated Solar Combined Cycle Systems Integrated Transport Plan

kWh Kilowatt hour LAC Latin America and the Caribbean

LGEEPA Ley General del Equilibrio Ecológico y la Protección al Ambiente (General Law of Ecological Equilibrium and Environmental Protection)

LyFC MASTU

Luz y Fuerza del Centro (Central Light and Power) Marco de Salvaguarda Ambiental y Social para el Proyecto Nacional de Transformación del Transporte Urbano Sustentable en México (Environmental and Social Management Framework for the Urban Transport Transformation Program)

MCMA Mexico City Metropolitan Area MEDEC MOU MtCO2e MW M&E NAFIN

Mexico Low Carbon Study Memorandum of Understanding Megatons of Carbon Dioxide Equivalent Megawatt Monitoring and Evaluation Nacional Financiera (National Financial Institution)

NGO NOx OECD OLADE PBL PECC PEMEX PEF PFM PM PM2.5

Non Governmental Organization Nitrogen Oxides Organization for Economic Cooperation and Development Organización Latinoamericana de Energía (Energy Organization for Latin America) Policy-Based Loan Programa Especial de Cambio Climático (Special Program for Climate Change) Petróleos Mexicanos (Mexican Petroleum Company) Presupuesto de Egresos de la Federación (Federal Expenditure Budget) Public Financial Management Particulate Matter Particles smaller than 2.5 microns

PM10 Particles smaller than 10 microns PND Plan Nacional de Desarrollo (National Development Plan) PROTRAM

Programa de Apoyo Federal al Transporte Masivo (Federal Support Program for Mass Transit)

PSBR PSP RE REMTI RMBS SAL SCT

Public Sector Borrowing Requirements Private Sector Participation Renewable Energy Renewable Energy Management Transition Initiative Residential Mortgage Backed Security Structural Adjustment Loan Secretaría de Comunicaciones y Transportes (Ministry of Communications and Transport)

SEDESOL Secretaría de Desarrollo Social (Ministry of Social Development) SEMARNAT Secretaría de Medio Ambiente y Recursos Naturales (Ministry of the

Environment and Natural Resources) SENER Secretaría de Energía (Ministry of Energy) SHCP Secretaría de Hacienda y Crédito Público (Ministry of Finance and

Public Credit) SHF SICC SIL SOx SO2 STAQ TESOFE UK UN

Sociedad Hipotecaria Federal Social Impacts of Climate Change Specific Investment Loan Sulfur Oxides Sulfur Dioxide Sustainable Transport and Air Quality Tesorería de la Federación (Treasury) United Kingdom United Nations

UNFCCC United Nations Framework Convention on Climate Change UT Urban Transport UTTP VOC

Urban Transport Transformation Program Volatile Organic Compound

WHO World Health Organization

Vice President: Pamela Cox Country Director: Gloria M. Grandolini

Sector Director: Laura Tuck Sector Manager:

Sector Leader: Philippe Benoit

Gustavo Saltiel Task Team Leader: Jordan Schwartz

Co-Task Team Leader:Co-Task Team Leader:

Arturo Ardila-Gómez Ariel Yepez-García

MEXICO

FRAMEWORK FOR GREEN GROWTH DEVELOPMENT POLICY LOAN

TABLE OF CONTENTS

LOAN AND PROGRAM SUMMARY ................................................................................. i 

I.  INTRODUCTION..................................................................................................... - 1 - 

II.  COUNTRY CONTEXT............................................................................................ - 3 - 

RECENT ECONOMIC DEVELOPMENTS IN MEXICO ........................................ - 3 - 

MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ..................... - 4 - 

III.  THE GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES ... - 6 - 

IV.  BANK’S SUPPORT TO THE GOVERNMENT PROGRAM ........................... - 22 - 

SUMMARY UPDATE ON THE IMPLEMENTATION OF THE CPS .................. - 22 - 

LINK TO COUNTRY PARTNERSHIP STRATEGY ............................................. - 23 - 

COLLABORATION WITH THE IMF AND OTHER DONORS ........................... - 24 - 

RELATIONSHIP TO OTHER BANK OPERATIONS ........................................... - 26 - 

ANALYTICAL UNDERPINNINGS ....................................................................... - 31 - 

LESSONS LEARNED .............................................................................................. - 33 - 

V.  THE PROPOSED FRAMEWORK FOR GREEN GROWTH DPL ................. - 34 - 

OPERATION DESCRIPTION ................................................................................. - 34 - 

POLICY AREAS ...................................................................................................... - 39 - 

VI.  OPERATION IMPLEMENTATION ................................................................... - 47 - 

POVERTY AND SOCIAL IMPACT ....................................................................... - 47 - 

ENVIRONMENTAL IMPACT ................................................................................ - 49 - 

IMPLEMENTATION, MONITORING AND EVALUATION .............................. - 51 - 

FIDUCIARY ASPECTS ........................................................................................... - 52 - 

DISBURSEMENT AND AUDITING ...................................................................... - 53 - 

RISKS AND RISK MITIGATION .......................................................................... - 53 - 

ANNEXES ANNEX 1: LETTER OF DEVELOPMENT POLICY ..................................................... - 57 - ANNEX 2: OPERATION POLICY MATRIX ................................................................. - 59 - ANNEX 3: FUND RELATIONS NOTE .......................................................................... - 62 - ANNEX 4: RELATIONSHIP OF OTHER WORLD BANK OPERATIONS ................. - 64 - ANNEX 5: MACROECONOMIC, FISCAL AND FINANCIAL SECTOR CONTEXT - 71 - ANNEX 6: PUBLIC CONSULTATIONS AND PARTICIPATION ............................... - 81 - ANNEX 7: PRIORITIES AND OBJECTIVES OF THE GREEN GROWTH DPL AND

MEXICO’S INVESTMENT PLAN FOR THE CLEAN TECHNOLOGY FUND (CTF) .............................................................................................................. - 83 - 

ANNEX 8: STATUS OF LENDING PROGRAM ........................................................... - 87 - ANNEX 9: COUNTRY AT A GLANCE ......................................................................... - 94 - ANNEX 10: MAP SECTION .............................................................................................. - 97 - 

i

LOAN AND PROGRAM SUMMARY

The United Mexican States

Framework for Green Growth Development Policy Loan

Borrower The United Mexican States

Implementing Agency

Ministry of Finance and Public Credit

Financing Data

US$1.504 billion variable spread, U.S dollar-denominated loan, 16.5 years of grace with bullet repayment in year 17. Front-end fee: 0.25 percent of the loan amount, capitalized.

Operation Type Single Tranche Development Policy Loan

Main Policy Areas

Climate Change, Energy, Transport

Key Outcome Indicators

Regulatory/Institutional, Financial and Monitoring Framework for Low Emissions Growth in Urban Transport and Energy

Program Development Objective(s) and Contribution to CPS

The Overall Program Development Objective is to support the Government of Mexico’s program to further develop the regulatory, monitoring and financial framework for low emissions evolution of the transport and energy sectors.

The three Policy Areas of the DPL thus aim to: implement a verifiable, targeted and cross-sectoral strategy for emission

reductions; establish institutions, regulations and monitoring capacity to allow for

the reduction of emissions in urban transport, energy generation and efficiency; and

institutionalize the appropriate financing mechanisms to allow for the reduction of emissions in urban transport, energy generation and efficiency.

The DPL fits within the framework outlined in the CPS, which states that the implementation of the Government’s climate change strategy could be supported by a possible stand-alone second phase climate change DPL, among other interventions.

ii

Risks and Risk Mitigation

A series of financial, economic, institutional, environmental and social risks are considered in the risk matrix as well as the on-going and proposed actions to mitigate those risks. Among those of particular concern is the risk posed by the current sharp downturn of Mexico’s economy which could diminish the Government’s ability to finance sectoral programs. In response to these concerns, the Government has confirmed that the projects and institutions supported by the DPL are given priority in its spending program and investment plans and has established several revenue stabilization funds. In addition, the Government is preparing sister loans with the World Bank in Urban Transport and Energy Efficiency which will initiate the programs in question.

The long-term aims of the program may be at risk in the absence of reforms which facilitate private investment in generation based upon market prices for renewable energy. To mitigate this risk, the Government program supported by the DPL and related technical assistance activities, require the design of power purchasing arrangements that value the external costs of renewable energy. This will support the development of a market for private investment in renewable generation. On the supply side, the financial crisis also raises the risk that private sector participation in the urban transport and energy sectors will be insufficient in the near future. With support from the Green Growth DPL, the latest stage in the Government’s program actively mitigates this risk on several fronts. The Urban Transport policies create a program of incentives to mobilize private investment in mass transit systems under a structure that will allow for profitability of the expected investments even at low and affordable tariff levels. The sister investment programs supported by the World Bank provide technical and financial resources for the program. In the Energy sector, there is the possibility that emission reduction targets will not be achieved if the energy supply matrix cannot shift toward renewable sources. Embedded in this scenario, is the risk of a lack of private interest in investment in renewable generation. This risk is being addressed through the new regulatory framework for Renewable Energy in which the Government, with support from the DPL, will derive a methodology for valuing renewable purchase prices and target levels for renewable generation that facilitate investment. In addition, the Government is demonstrating its commitment to attracting the necessary investment through the creation and capitalization of the Fund for the Energy Transition and the Sustainable Use of Energy. Grants will be available for credit guarantees and other financial support to projects that comply with the National Strategy for the Energy Transition and the Sustainable Use of Energy. The key political and institutional risks pertain to the need for a high level of inter-institutional coordination across sectoral agencies and vertically across federal, state and municipal governments as well as the implementation capacity of each institution individually. In an effort to address these issues, the Bank is currently supporting the Government through capacity-building programs and investment lending that strengthen the ability of the institutions to plan, implement, and monitor sectoral programs. The Urban Transport program, financed in part by a sister Bank SIL and CTF under preparation, provides incentives for municipal participation in the federally funded mass transit program as well as grant resources for urban master planning. The Consultative Working Group of

iii

PROTRAM brings together the federal agencies required to offer an integrated set of policies and financing instruments for urban development. The final decisions on financing come from FONADIN’s Technical Committee which brings together state governments with the Environment Ministry and Transport Ministry under the leadership of the Ministry of Finance. Likewise, the energy sector reforms underway and supported by this DPL strengthen the sector agencies responsible for the evolution of the renewable and efficiency programs, from the energy regulatory bodies, the Ministry of Energy, the Funds related to the financing support of the programs, and the environmental agency counterparts.

Operation ID P115608

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MEXICO

FRAMEWORK FOR GREEN GROWTH DEVELOPMENT POLICY LOAN

I. INTRODUCTION

1. To address the challenges posed by climate change, Mexico has publicly committed to reducing its Greenhouse Gas (GHG) emissions. The country has ratified the UN Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol, and is one of the first developing countries to commit to a specific carbon reduction target through the use of clean and efficient technologies. As part of its voluntary commitment to GHG emission reductions, Mexico also plans a domestic cap-and-trade system by 2012 to abate emissions from point sources. 2. At the January 2009 meeting of the World Economic Forum in Davos, President Calderón restated the Government’s target to halve GHG emissions by 2050 depending on financial international cooperation and on international agreements on mitigation. This commitment has been hailed by the UNFCCC General Secretariat as an example of a long-term vision for sustainable development. Moreover, in August 2009, the Government of Mexico formally committed itself to a detailed plan for emission reductions embedded in the Special Program for Climate Change (Programa Especial de Cambio Climático, or PECC) that provides an accounting of emissions by sector, creates a framework for monitoring improvements and establishes a blueprint for emission reduction initiatives, sector by sector1. As a result of its leadership in this area, Mexico has been ranked fourth in the world in the independent Climate Performance Index, which assesses country performance based on: per capita GHG emission trends in the energy, transport, residential and industrial sectors; absolute energy-related GHG emissions; and climate policy. 3. Building on the existing climate change mitigation policy agenda and a nascent set of sector-levels interventions that address Mexico’s GHG emissions, it is now essential to begin to lock in the reforms in the sectors that weigh most heavily in the country’s carbon footprint.2 The proposed Green Growth DPL supports Government reform in the transport and energy sectors, which are the greatest sources of Mexico’s GHG emissions, accounting for approximately 18 percent and 27 percent of the total, respectively.3 The policy actions supported by this Development Policy Loan (DPL)

1 The PECC was published in the Diario Oficial de la Federación (Official Gazette) on August 28th, 2009. 2 Carbon footprint, herein defined as "the total set of GHG (greenhouse gas) emissions caused directly and indirectly by an individual, organization, event or product" (UK Carbon Trust 2008 "Carbon Footprinting"). For an analysis of the several definitions of carbon footprint see: http://www.isa-research.co.uk/docs/ISA-UK_Report_07-01_carbon_footprint.pdf 3 Of Mexico’s total GHG emissions, 18 percent are emitted by the transport sector overall; however, urban transport accounts for a significant share of this total. Energy represents 27 percent of total emissions—2/3’s of which comes from the electricity sector (Special Program for Climate Change, 2009.)

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create a favorable framework for private and public investment in renewable energy and mass transit systems and technologies. These investments have a stimulative impact on the economy in the short-run, and over the medium term, the resulting improvements in urban mobility and energy efficiency improve the prospects for productivity growth. 4. More specifically, the DPL proposed in this Program Document supports the Government of Mexico in its long-term commitment to fighting Climate Change as laid out in the PECC through green sectoral policies, incentives and regulations—particularly as they relate to the reduction of Greenhouse Gas emissions. The timing of this support is crucial. Mexico, like many countries in the region, has committed itself to initiating infrastructure investments that combat the effects of the financial crisis on the Mexican economy. While infrastructure investment has been shown to generate employment and provide economic stimulus, the programs implemented during times of crisis may have mixed long term effects on the environment. The effects depend upon the policies, regulations and incentives that underpin those investments. An aggressive expansion of road networks, for example, could contribute to individual automobile use in the medium to long-term and lead to higher levels of GHG emissions as economic activity returns to its pre-crisis levels. Similarly, with energy prices at about half the level of the previous year, fast expansion of energy generation through thermal sources might seem expedient if long-term goals of GHG reduction are not valued and policies are not put in place that facilitate renewable generation. 5. Remarkably, throughout the deepening economic crisis, the Government of Mexico has explicitly retained—even strengthened—its commitment to the development of infrastructure policies that combat climate change and reduce GHG. At the heart of this long-term vision is a set of transport and energy sector reforms that are being promulgated with the dangers of Climate Change in clear focus. This DPL sets out to respond to the Government’s specific request for support of the key sectoral reforms that underpin the vision to help Mexico lock-in long-term sustainable growth benefits in the face of short-term financial pressures. In addition, this DPL is an integral part of a scaled-up financing package for Mexico that responds to the current macro-economic conditions of the country which are explained in detail in Annex 5. 6. As a single-tranche operation, the DPL provides part of the resources necessary for stimulating the economy while acknowledging the important steps being undertaken by the Government of Mexico to develop Urban Transport and Energy policies that combat climate change and reduce GHG and other emissions. Moreover, the Green Growth DPL serves as an umbrella policy operation that will be accompanied by two Specific Investment Loans (SILs) and two Clean Technology Funds (CTFs), both under preparation, in urban transport and energy efficiency, as well as a wide range of support being provided through advisory services in environmental capacity building, energy and transportation.4

4 The linkages between the Green Growth DPL and the other ongoing technical assistance and investment operations, including Mexico’s the CTF program, are explained in greater detail in Annexes 4 and 7.

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II. COUNTRY CONTEXT

RECENT ECONOMIC DEVELOPMENTS IN MEXICO 7. Despite stable economic conditions over the last several years,5 the Mexican economy is being severely impacted by the current global economic downturn. It now confronts the impact of sharp aggregate demand contraction in its major trading partners and continued strain in global financial conditions. Annual economic growth decelerated substantially as the economy entered into a recession towards the second half of 2008, leading to a more limited GDP growth of 1.3 percent for the year. The current base case scenario for Mexico includes a contraction of annual GDP by 6.8 percent in 2009 before a modest rebound of economic activity in 2010.

8. In response to these challenges, the Mexican authorities have implemented counter-cyclical fiscal stimulus policies to mitigate the impact of the external demand shock on the domestic economy. The fiscal stimulus policies adopted include additional public investment in infrastructure incorporated in the 2009 budget as well as employment programs, a reduction and freeze of public sector administrated prices in the energy sector and an expansion of development banks’ credit programs. The 2009 budget implies a fiscal stimulus at about 1.5 percent of GDP6 and is financed, in part, by increased public sector borrowing. In addition, monetary policy started to ease since January 2009 in order to support other efforts to reduce the downturn in economic activity.

9. The authorities also have taken several actions to maintain orderly conditions on foreign exchange and domestic financial markets in view of the unprecedented global financial shocks. The central bank intervened in foreign exchange markets providing foreign currency liquidity to the private sector. Bilateral and multilateral support, through a US$30 billion currency swap arrangement with the US Federal Reserve (recently extended until February 2010) and a US$47 billion Flexible Credit Line (FCL) with the IMF, provide for additional precautionary sources of external funds. Announcement of the FCL last April greatly reduced volatility of the peso.

10. Despite the significant challenges posed by the global economic downturn and strained financial conditions, the macroeconomic policy framework is adequate for the purposes of the proposed Development Policy Loan. This Green Growth DPL responds to the country’s needs under the current economic panorama and is consistent with the policies that have been put in place to mitigate the effects of the Mexican economy’s slowdown.

5 Mexico’s GDP growth averaged 3.8 percent during 2004-2007 and the economy enjoyed a stable currency, inflation of 3.8 percent in 2007, low levels of external indebtedness as a share of GDP, declining public debt ratios and a sovereign credit rating two steps above the lowest investment grade. 6 The State of Public Finances: A Cross-Country Fiscal Monitor, IMF July 30, 2009. Recently announced spending cuts, to an amount of 0.7 percent of GDP, in response to revenue pressures and focused on personnel and administrative costs slightly modified the size of the fiscal stimulus.

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MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

11. The current economic recession is characterized by a simultaneous sharp contraction in private consumption, investment and exports. While the latter is due to a more generalized drop in external demand and international trade, the rapid tightening in domestic demand can be attributed to increased uncertainty regarding global and domestic economic prospects, increased unemployment, reduced availability of credit, increased unemployment and significant currency depreciation.

12. With additional data becoming available, there seems to be an emerging consensus on the depth of the current global economic downturn, even though there remains considerable uncertainty with regards to the strength of the current rebound. Assumptions regarding the external environment have a major impact on the projection of Mexico’s main macroeconomic variables over the next few years. A base case scenario (Table 1) follows the Bank’s Unified Survey Assumption of September 2009 for global economic activity.7 The impact of such an external scenario on the Mexican economy is a significant recession in 2009 and a modest rebound by 2010 and 2011. The sharp reduction in the external demand in the base case scenario in 2009 is reflected in a significant contraction in the dollar value of exports, with the value of oil exports mainly declining as a result of lower oil prices whereas non-oil exports largely decline due to lower volumes of production and trade. The latter in combination with tighter credit conditions (both external and domestic) is projected to lead to a simultaneous sharp contraction of private consumption and investment. Countercyclical government expenditures cannot prevent a sharp contraction of aggregate demand and economic activity in 2009.

13. A gradual recovery of external demand by 2010 should allow, on the contrary, for an increase of manufactured exports, private consumption and investment demand providing for a modest expansion of overall economic activity. Risks to this scenario are largely tilted towards the downside and a second, low case scenario provides for the impact on Mexican macroeconomic indicators in case of a sharper reaction in terms of the domestic demand contraction in the short run and a more protracted recession in its largest trading partner and the global economy, reflected in a less vigorous rebound in the volume of exports and a lower international oil price in 2010 and 2011.

7 World output is projected to fall by 2.5 percent in 2009 and experience a gradual recovery in 2010 when growth is picking up to 2.3 percent. Similarly output in the United States is projected to contract by 2.5 percent in 2009 before rebounding by 2.3 percent in 2010.

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Table 1 Macroeconomic scenarios

14. In either scenario concerns are focused on the rising fiscal pressures in view of the rapidly deteriorating outlook for public sector revenue and the increasing public debt-to-GDP ratios. Fiscal discipline and strong fiscal policy frameworks, including the establishment of stabilization funds and the acquisition of oil price hedges, enabled a countercyclical policy response for 2009. The sharp economic contraction, the depreciation of the currency and a higher fiscal deficit contribute further to an increase of the public debt-to-GDP ratio in 2009.

15. Like many countries, Mexico faces the challenge of unwinding its fiscal stimulus in a way that does not jeopardize the economic recovery. Mexico has fewer degrees of freedom for charting this path, as compared to other countries. Even though there has been some room for an increase of public debt and the public debt-to-GDP ratio, the rapid increase and level to be attained by the latter by 2010 and 2011 suggests limits to possibilities of fiscal stimulus. In this regard, policymakers face a difficult trade-off between early fiscal consolidation that may aggravate the contraction of the domestic economy and a market reaction (as already expressed by credit rating agencies) that demand a clear and credible medium-term fiscal strategy of revenue-enhancing measures or sustainable spending cuts to compensate for the lower public sector revenue.

16. Public debt remains within manageable proportions despite a significant increase in the debt-to-GDP ratio until 2011. Debt sustainability analysis, based on average levels of economic growth, the primary balance and the real interest rate on public debt observed over the decade previous to the current economic crisis and applied to the debt-to-GDP ratios observed in the base and low case scenario by 2011, shows a return to a downward path of the debt-to-GDP as of 2012.

Indicator 2008 2009 2010 2011 2009 2010 2011Real GDP (%) 1.4% -6.8% 3.0% 3.5% -8.5% 2.0% 2.5%Consumption (%). 1.4% -6.3% 3.2% 3.4% -8.9% 1.6% 2.5%Investment (%) 5.3% -15.9% 5.5% 5.0% -16.5% 4.0% 4.0%External AccountsMerchandise Exports Current (US$ billion) 291.8 216.2 234.4 270.7 210.3 223.3 257.2

Oil Exports (US$ billion) 50.6 27.9 31.3 32.7 26.6 24.3 24.3Non Oil Exports (US$ billion) 241.2 188.3 203.1 238.0 183.7 199.1 232.9

Merchandise Imports Current (US$ billion) 308.6 229.4 251.7 291.3 217.1 234.4 272.3Remittances (US$ billion) 25.1 22.4 24.9 25.9 21.4 23.8 24.8Current Account Balance (US$ billion) -15.8 -14.0 -17.2 -20.3 -9.2 -12.5 -17.0Current Account Balance (% of GDP) -1.5% -1.6% -1.8% -1.9% -1.1% -1.4% -1.7%FDI (US$ billion) 22.48 16.86 18.50 21.00 13.49 15.50 18.00Gross Reserves (US$ billion) 85.4 81.0 82.0 82.7 81.0 79.2 80.5 External Debt (% of GDP) 16.5% 22.6% 22.3% 22.7% 23.5% 23.5% 24.1%Public Sector Public Expenditure (%) 4.2% 1.5% 0.0% 4.3% 1.5% -2.9% 3.4%PSBR Balance (% GDP) -2.1% -3.0% -3.4% -3.1% -3.1% -3.3% -3.2%Public Sector Debt (% GDP) 35.8% 39.9% 40.5% 40.8% 40.5% 41.0% 41.6%PricesInflation (e.o.p.) (%) 6.5% 4.4% 4.0% 3.3% 5.0% 4.7% 3.5%Nominal Exchange Rate (pesos/dll) 11.1 13.5 13.0 13.0 13.8 13.5 13.5 Oil Price (US$ per barrel) 86.3 52.0 58.9 61.5 52.0 48.0 48.0

Low CaseBaseline

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17. The latest assessment by the IMF’s Executive Board and a more detailed annex by Bank staff describing Mexico’s macro-economic situation can be found in Annexes 3 and 5, respectively.

III. THE GOVERNMENT PROGRAM AND PARTICIPATORY PROCESSES

18. The Mexican Government’s commitment to addressing Climate Change is evidenced by the specific emissions targets established in the National Climate Change Strategy and the steady march from broad policy to regulatory framework, institutional development and sectoral programs. In order to build coherent sectoral strategies for addressing Climate Change, in April 2005 Mexico established the Inter-Secretarial Commission on Climate Change (Comisión Inter-secretarial de Cambio Climático – CICC), with a mandate to formulate and coordinate national climate change strategies and their incorporation into sectoral programs. Associated with the CICC is a Consultative Council on Climate Change which creates a link between the CICC, the scientific community and civil society. The participatory process that defines the activities of the Consultative Council assures that the strategies and sector programs are developed with due consultation for potentially affected parties. Public Consultations

19. The design of the Framework for Green Growth DPL has benefitted from a long-standing consultation process carried out by the Government in the context of the National Development Plan (NDP) as well as the Special Climate Chance Program (PECC, Programa Especial de Cambio Climático). The public consultation of the PECC was carried out from March 24 to June 18, 2009 (see Annex 6). Comments and suggestions from ninety seven persons and institutions were recorded in the Environmental Ministry’s web page including participants from schools, universities, research centers, NGOs, private sector firms, national and sub-national government officials, and rural producers’ organizations. The Government of Mexico has also invited the scientific community and civil society to conform a Consultative Council to ensure that strategies and sector programs are developed with due consultation with potentially affected parties. 20. Consultations, including with relevant UN agencies and representatives of the countries engaged in Climate Change-related activities in Mexico, were carried out also as part of the preparation of Mexico’s Investment Plan (IP) for the Clean Technology Fund (CTF), which identifies programs to be co-financed by the CTF jointly with the World Bank, the IFC, and the IDB in the Urban Transport and Energy Sectors.8 Similarly, public discussions were held with the scientific community and civil society in the context of creating the inter-Secretarial Commission on Climate Change, while

8 See Annex 7 for the summary of the activities proposed to be financed under Mexico’s CTF IP.

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preparing for launching the Mexico Social Impacts of Climate Change (SICC) Report, and during the process of designing a Social and Environmental Framework (MASTU) for the Urban Transport Program.9

PECC Policy Areas

21. The Government of Mexico has designed the PECC to be its over-arching strategy for combating climate change. The PECC sets out a four pillar program that includes (i) a long-term vision for government action; (ii) sectoral plans for GHG mitigation; (iii) plans for adaptation; and (iv) cross-cutting policy initiatives. Under the long-term vision, the PECC establishes the formal objective of reducing GHG by 50 percent by 2050 against the baseline of 2000. The first phase of the long-term vision is defined in the PECC as the period 2008 – 2012 in which the Government’s program will focus on:

Evaluation of the vulnerability of the country to Climate Change, and Economic valuation of the priority measures for intervention.

22. At the sectoral level, in order to prioritize the proposed interventions for mitigation, the PECC quantifies the sectoral contributions to emissions in Mexico and projects their continued contribution to growing emissions under different scenarios of intervention. Figure 1 below illustrates the sectoral breakdown—highlighting the central and growing role of transport and electricity—in Mexico’s current and future emissions profile under a “do-nothing” scenario.

Figure 1: Base Case Growth in Emissions in Mexico, by Sector (2000-2050)

Source: PECC Consultative Draft, March 2009.

23. In establishing a plan to stabilize and reduce GHG emissions, the PECC identifies the interventions necessary at the sectoral and sub-sectoral level, quantifying the potential

9 Annex 6 provides a more detailed summary of the Public Consultation and Participation process.

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impact and cost of each change in policy, regulation and technology adoption. The Plan identifies four groups of policy interventions according to impact and cost of implementation as illustrated in the diagram below:

PECC Division of Interventions According to Size of Impact and Cost of Intervention

Lower Hanging Fruit:

Interventions that Pay for Themselves through Significant

Co-benefits

Higher Hanging Fruit: Interventions that May Contain Costs beyond

their Co-benefits

High Impact:

> 3 million metric tons per year of CO2e reduction

Group 1

Between US$5 and US$33 net benefit per tCO2e

Infrastructure Mass Transit and Public Transport Residential & Commercial Energy

Efficiency Industrial Co-generation in Industry, Petrol, Gas

Group 3

Between US$32 net cost and US$12 net benefit

per tCO2e

Infrastructure Renewable Energy Generation Agriculture/Forestry Reduced Deforestation

Low Impact:

< 3 million metric tons per year of CO2e reduction

Group 2

Between US$24 and US$65 net benefits per tCO2e

Infrastructure Municipal Services and Industrial

Energy Efficiency Electricity Transmission &

Distribution Industrial and Commercial Light Duty Vehicle Efficiency

Group 4

Between US$7 and US$17 net cost per tCO2e

Industrial and Infrastructure

CO2 Capture and Storage Agriculture/Forestry

Reforestation

Source: PECC Consultative Draft (March 2009); Bank illustration

24. The matrix highlights the potential for several sectoral initiatives to pay for themselves. That is, those policies and programs that fall into Groups 1 and 2 will produce reductions in CO2e emissions that also provide economic and social co-benefits—such as those from improved health benefits, lower energy prices or greater urban mobility—that are greater than the outlays in public transfers. Groups 3 and 4 will require longer-term commitment of resources although the Government recognizes the benefits—particularly in Group 3—to be crucial to the Climate Change strategy. The primary infrastructure area in Group 3 is renewable energy, a recognition that the pricing of contracts for renewable generation—particularly in the periods prior to the

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implementation of a cap and trade regime—will have to value the external benefits of emission reductions in order to attract sufficient private sector interest. 25. The cumulative effects of the implementation of the proposed policy changes in the PECC—which include urban transport development, energy efficiency improvements, renewable energy, reduced deforestation, adoption of new industrial processes as well as other measures that produce varying levels of emission reduction—can be seen in Figure 2 below.

Figure 2: Alternative Scenarios in Total Emissions in Mexico (2000-2050)

Source: PECC Consultative Draft, March 2009.

26. Two key sectors are targeted under the PECC, namely the transport (in particular the urban transport sub-sector) and energy sectors, which together represent about 45 percent of Mexico’s GHG emissions. Urban Transport: Issues and Government Programs 27. With 77 percent of its population living in cities, Mexico is one of the most urbanized countries in the developing world.10 Congestion, long commuting periods, pollution and the related health effects are a common feature of everyday life for tens of millions of Mexicans. Nonetheless, the federal government does not directly control the development of municipal services, even if it recognizes that mass transit programs are a key ingredient in fostering Mexico’s growth and improving the quality of life for Mexico’s poor. In effect, the ultimate responsibility for the implementation of urban transport policies rests with the states and municipalities, and local government support is key for both the Climate Change and the mobility agendas. The transport program supported under this DPL explicitly accounts for this aspect by offering strong financial incentives for cities to implement their urban transport programs with inherent climate benefits as well as capacity support in the design of integrated mass transit programs.

10 World Bank DEC DCLD Database.

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28. Over the last 17 years, Mexico has embarked on ambitious and region-leading plans to develop its transport infrastructure, concessioning its major highways, ports, and railroads and raising the capacity and quality of services offered in nearly every mode. Throughout that period, however, the urban transport agenda has remained stunted—particularly in the secondary and tertiary cities of the country. Public transport remains uncoordinated, organized around individual owners of buses that receive authorization from the local government to operate in a route. This arrangement typically leads to more buses than necessary, high pollution and fuel consumption, high travel times, retention of old buses beyond their useful life and high accident rates due to the competition for passengers. Moreover, dedicated infrastructure for public transport--be it light rail systems, metros, or dedicated bus lanes--still remains uncommon. 29. In recent months, however, the dynamics around federal-municipal relations and the development of urban transport systems that achieve the combined goals of pollution and congestion reduction have begun to shift. This is in large part due to the rising national importance given to the Climate Change agenda and the growing recognition, as detailed in the PECC, that Mexico’s targets related to emission reductions cannot be achieved without directly addressing urban transport practices. On the back of the Climate Change agenda, the Mexican Government is leveraging the growing rates of transport sector emissions as a rallying point for achieving the multiple co-benefits of urban transport reform. 30. Mexico’s transport emissions increased by 27 percent between 1990 and 2005. They now account for about 2 percent of the global transport sector’s GHG emissions and 18 percent of Mexico’s emissions.11 Emissions continue to grow at an annual rate of about 2 percent. The carbon intensity of the transport sector in Mexico is at the high end of those in the region. The relatively high carbonization and, consequently, large contribution of the transport sector to the country’s carbon footprint can be attributed to such factors as:

Mexico’s growing motorization rate--the highest in Latin America with 107 vehicles per 1,000 inhabitants;

increased road congestion; the composition of the public transport fleet, which favors smaller-capacity

vehicles and includes a growing share of older vehicles; inadequate fuel specifications that impede improvements in energy efficiency and

reduction of airborne pollutants; and inadequate regulation of emissions for cars, trucks, and motorcycles.

31. In addition, high levels of urban air pollution are exacerbated by inefficient transport and represent a major health and environmental concern in Mexican cities. In spite of technological improvements in fuel compounds and the fulfillment of its environmental legal framework, according to recent emission inventories, automobiles account for 52 percent of nitrogen oxide (NOx) emissions, 40 percent of hydrocarbon

11 Transport and Climate, World Bank (2007).

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(HC) emissions, and about 36 percent of particulate (PM) emissions. The transport sector is also the largest generator of methane (CH4) and volatile organic compounds (VOCs), making it the primary source of Mexico’s infamous air pollution.12 32. Mexico has aggressive emission reduction targets in transport. Therefore, a highly visible, sector-level policy commitment will be required followed by years of concerted effort and management that will cross several political administrative terms. The demand-side, or driver incentive, elements of the shift toward lower emissions behavior will constitute an important parallel set of policies and regulations to the mass transit development program. The growing ease of access to second-hand cars, as a result of the North America Free Trade Agreement (NAFTA), presents a particular challenge.

33. The NAFTA commitments obligate Mexico to allow the importation of used vehicles from the U.S. and Canada according to a specific schedule. As of January 2009, Mexico must, and does, allow the importation of used vehicles which are 10 years or older. This minimum age increases by 2-year increments until 2019, at which time Mexico is obligated to accept all used vehicle imports, regardless of age, a considerable source of pollution. In addition, the illegal importation of cars to Mexico is common given the ease with which cars can be brought across the northern border. It is estimated that almost a third of all vehicles operating in Mexico were imported used, mostly from the U.S. The average age of these used vehicles is 18 years, and over half are illegal and unregistered in Mexico.13

34. In light of Mexico’s commitment to curbing GHG emissions, the Government is developing a policy response to the importation of used cars that is multi-pronged. Although the PECC does not require explicit solutions to address the issue, several policies are under consideration within the framework of increasing the cost of purchasing and driving a used car. First is the use of federal regulatory tools, such as tougher tail-pipe emissions standards and expanding municipal schemes, for example, Mexico City’s “hoy-no-circula.” In this scheme, new cars are allowed to circulate all the time, but used cars face restrictions. Mexico has also begun strengthening its regulations for tail pipe emissions (for example NOM 041-SEMARNAT-2006), which also includes provision for addressing modified engines. Second, state governments can charge taxes from users of illegal used cars. This policy, attempted already by cities such as Tijuana, can also lead to the confiscation of the car. Effective scrapping programs ensure the old car does not circulate again.

12 Air pollution results mostly from a high concentration of ozone, produced by the reaction of VOCs and NOx in the presence of sunlight; carbon monoxide (CO), nitrogen oxides (NOx), sulfur dioxide (SO2) and hydrocarbons (HC) emitted by vehicles fueled with gasoline and diesel; sulfur dioxide (SO2) emitted by industrial processes and commercial services using liquid industrial fuels; and PM in the form of particles smaller than 10 microns (PM10) emitted by stationary and mobile sources using diesel and other fuels. 13 Sources: North American Free Trade Agreement (NAFTA), Annex 300-A: Trade and Investment in the Automotive Sector. El Universal, “Parque vehicular envejece por importación de autos usados,” June 6, 2009. Center for Sustainable Transport (CTS) Mexico. “MEDEC Reporte Final,” September 2008.

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35. At least three other policies complement the multi-pronged approach to the demand for automobiles. First, cities may carry out comprehensive planning studies to analyze additional measures that curb the use of automobiles, and old cars in particular. Given the levels of congestion in Mexico’s cities, the plans have the flexibility to recommend increasing the costs of parking, establishing congestion pricing or urban toll roads, creating car-free zones and car-free days, or targeting used cars with regulations. In parallel, cities need to invest in improving the supply of public transport and facilitate bicycle use and walking, so that car users have alternatives to travelling by car. Coupling measures that increase the cost of using a car to better supply of alternatives increases the political feasibility of successful reform. Mexico’s Federal Mass Transit Program explicitly incorporates these urban planning measures that address the relative attractiveness of private automobile versus public transport use.

36. The Federal Mass Transit Program: Mexico has chosen to follow a path of greater efficiency in urban transport use by creating the Federal Support Program for Mass Transit (PROTRAM), with the assistance of the World Bank.14 PROTRAM’s mission is to support the implementation of bus and train-based mass transit projects that are consistent with long-term integrated and sustainable mobility plans and that are developed by leveraging varying degrees of private sector participation. PROTRAM is thus set up to finance municipal investments in infrastructure, as well as preparatory studies and designs for urban mass transport projects. To participate in PROTRAM, a city must have an Integrated Transport Plan that reflects a holistic view of urban transport planning. The Plans must analyze both supply and demand policies, such as mass transit and public transport reforms, parking management strategies, congestion pricing and vehicle restriction, road pricing, non-motorized transport, and land use management strategies. By financing both the overall planning and mass transit lines, PROTRAM thus establishes a policy framework that also improves the technical and political feasibility of various demand-side measures--such as congestion pricing-as it creates a valid alternative for the drivers who are “tolled-off” by the charge.

37. Due to the complexity of the urban transport sector, a decision-making body that represents all the key federal agencies involved in transport is fundamental to the success of this innovative program. The main decision-making body in PROTRAM is the Consultative Working Group (Grupo de Trabajo Consultivo, or GTC), which is headed by the Ministry of Finance and Public Credit (SHCP). Other agencies that participate in the GTC include the Ministry of Transport and Communications (SCT), the Ministry of Social Development (SEDESOL), the Ministry of Environment and Natural Resources (SEMARNAT), National Bank of Public Works and Services (BANOBRAS), and the National Infrastructure Fund (FONADIN). The Consultative Working Group (Grupo de Trabajo Consultivo or GTC), supported by a recognized consultant with international experience, analyzes the projects from a technical, social, environmental, and financial viewpoint to determine basic feasibility and allow the process to continue. Members of the GTC vote to accept or request changes to a proposal. If accepted, the proposal is

14 See: World Bank (2008), “Programa Federal de Apoyo al Transporte Masivo: Fundamentos del Programa y Lineamientos para su implementación en el marco del FONADIN.”

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eligible in principle for support for either carrying out necessary studies (grants) or for infrastructure-related expenses (grants and/or loan guarantees). The final decision on funding rests with FONADIN’s Technical Committee. The committee is headed by SHCP and includes representatives of SCT, SEMARNAT, Secretaría de Turismo, and representatives of three state governments.

38. Financing mechanisms: PROTRAM lies within the National Infrastructure Fund (Fondo Nacional de Infraestructura or FONADIN), which is entrusted with financing, through grants and loans to municipalities and loan guarantees to the private sector, planning studies, and capital expenditures on infrastructure and equipment. FONADIN results from an unprecedented effort of the Government of Mexico to promote economic competitiveness in the areas of health, education and public services, as well as promoting the modernization of urban transport, highways, ports, airports, energy, and the hydraulic sector. FONADIN funding comes from proceeds from the concessioning of a package of inter-municipal roads, namely the Trust for Supporting the Recovery of Licensed Highways (Fideicomiso de Apoyo al Rescate de Autopistas Concesionadas or FARAC) and the Infrastructure Investment Fund (Fondo de Inversión en Infraestructura or FINFRA). This first capitalization of FONADIN amounted to over US$3 billion, and, while the financial crisis has interfered with the second round of road concessions, it is expected that, once the current financial crisis is over and economic growth resumes, Mexico will be able to continue with its program and provide additional funding for FONADIN.

39. FONADIN requires that projects have a minimum level of private sector participation. As part of FONADIN, PROTRAM follows the funds guidelines in combination with its own implementing rules and regulations enacted in December 2008, leveraging various forms of private sector participation in developing mass transit programs. In the case of bus-based mass transit, for instance, the fare paid by the users covers the capital, operation and maintenance costs of the buses, while the buses themselves are provided and operated by the private sector under concession contracts. For rail-based projects, on the other hand, fares usually cover only the operation and maintenance costs, and private sector participation is subject to whether or not an adequate project finance structure exists behind the concession contract. Because of the current financial crisis, however, it is uncertain whether all sustainable urban transport investments will be able to meet FONADIN’s private participation requirements. To address this risk, the Government is also creating the Urban Transport Transformation Program (UTTP), with support from the World Bank.15 This complementary program is an important element for Mexico to achieve the emission reduction targets pledged by the Government. The UTTP establishes city eligibility and project eligibility criteria for receiving financing. These criteria are aligned with PROTRAM’s guidelines, but differ in some respects to reflect the complementary nature of both programs. For example, the UTTP finances not only mass transit corridors but also complementary facilities, such as feeder road improvement and bikeway construction. The UTTP, similarly to

15 See World Bank (2008) “Programa Federal de Apoyo al Transporte Masivo: Fundamentos del Programa y Lineamientos para su implementación en el marco del FONADIN.”

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PROTRAM, aims to encourage private sector participation, at the same time, providing flexibility in this regard. PROTRAM and UTTP constitute the core of the strategy to transform Mexican urban transport. To finance the strategy there is a comprehensive package that covers project preparation and implementation as well as technical assistance. The proposed DPL provides appropriate policy-level support for the Federal Government’s urban transport strategy, while placing it in the context of parallel initiatives in the energy sector.

Energy: Issues and Government Programs 40. Given that Mexico is the world’s sixth largest oil producer and one of Latin America’s most intensive users of energy, the energy sector is a critical component of the country’s economy. In 2007, the energy sector (oil, gas and electricity) accounted for 8 percent of GDP and one-third of all government revenues.16 However, the Government of Mexico has recognized that the current energy supply and usage patterns of the economy are not sustainable and are incompatible with its Climate Change mitigation objectives. On the upstream supply side, production from existing oil fields is diminishing: oil production has dropped 18 percent over the last 2 years and new oil and gas developments are not keeping pace with the drop in Mexico’s reserves, which are being tapped for ongoing oil consumption. At current production levels, oil reserves could last up to ten years. Within electricity sector supply, the reliance on thermal products for generation has led to energy generation as a major contributor to greenhouse gas emissions in Mexico. 41. While the electricity sectors of many Latin American countries still struggle with basic connectivity and coverage issues, complex market structures and highly volatile prices, Mexico offers nearly universal access to electricity to its citizens -- over 97 percent of households are connected to the grid -- and a stable market structure that has been able to attract significant levels of private investment in generation over the past decade. Although residential and agriculture consumer subsidies are an important aspect of electricity service in Mexico (See Box 1 below), the Government considers its energy security and, in turn, the diversification of its electricity generation matrix to be the sector’s primary challenge. The domestic and agriculture sectors are responsible for only 29 percent of over-all electricity consumption, with the other sectors representing the remaining 71 percent and applying tariffs close to cost recovery. Although consumer subsidies may appear to work against emission reduction objectives, residential consumption levels are relatively low given the country’s level of income. This is probably because average tariffs are not particularly low by international standards. The diagram below illustrates Mexico’s residential consumption levels given its income.

16 Secretaría de Energía.

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Figure 3: Mexico and LAC Residential Electricity Consumption (kWh per Capita) versus Per Capita Income

(Energy Prices in Parentheses)

Source: 2005 data from OLADE (2008), World Bank for GDP figures.

42. Rather than a driving force for high consumption and, in turn, carbon emissions, the subsidies represent a fiscal cost that the Government plans to address in the near to medium-term. (See Box 1) 43. The current energy matrix in Mexico is heavily reliant on hydrocarbons which represent 90 percent of total energy consumption, and over 70 percent of installed power generation. By increasing energy efficiency and investing in renewable energy (RE) sources, Mexico’s prospects of diversifying its generation mix and consumption patterns are excellent. But this will require substantial investments in RE sources which currently cover less than 5 percent of total energy requirements.

0

100

200

300

400

500

600

700

800

900

1,000

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 11,000

Ele

ctr

icit

y C

on

su

mp

tio

n/p

c (K

Wh

/ha

b)

GDP/pc (current US$)

HTI* (0.084)

MEX (0.085)

BRB* (0.177)

CHL (0.098)

URY (0.117)

NIC (0.121)

PRY 0.057)BRA (0.144)

Average Consumption

VEN (0.055)

ARG* (0.035)CRI (0.109)

PAN (0.15)

SUR* (0.171)

DR (0.14)

COL (0.07)

ECU (0.098)

PER (0.115)

SLV (0.139)

GTM (0.08)BOL (0.061)

GUY* (0.059)

HND (0.083)

JAM* (0.161)

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44. To address many of Mexico’s energy sector challenges, the Congress approved an energy reform package in October 2008. Inter alia, the package aims at improving the efficiency of the management of the hydrocarbon sector, providing stronger incentives for investment in renewable energy, and fostering substantial energy efficiency gains. As with urban transport, the growing recognition of the need to address Climate Change through reduced emissions provides the impetus for a new set of laws and regulations. The package includes two key pieces of legislation relating to the Climate Change mitigation efforts of the Government: a law to promote the efficient use of energy; and a law to promote the use of renewable energy sources. While these laws are not

Box 1. Mexican Electricity and Gasoline Subsidies Although 71 percent of electricity consumption in Mexico is charged at rates that approach cost recovery, the remaining 29 percent of consumption—residential and agricultural consumers—benefit from subsidies that were valued at approximately US$9 billion in 2006. These tariffs have not been set high enough to cover the total cost of electricity, including the pension liabilities and technical and non-technical losses of the public distribution companies as well as the relatively high costs of generation which comes from relatively clean but expensive combined cycle, natural gas plants. The government transfers come in the form of reimbursements to the utilities of the dividends, or canon, that the utilities pay in lieu of taxes. Even with the canon reimbursement, Mexico’s electricity rates are not low per se. The average residential tariff in Mexico is about the same as that in the US, Chile and Colombia and consumption levels are well below regional consumption expectations given Mexico’s per capita income. According to the IEA and OLADE, Mexican households consume less than a quarter of the typical OECD household and consume at about the LAC regional average per capita even though Mexico is one of the region’s highest income countries (see Figure 3). Addressing the residential subsidies is thus primarily a fiscal concern, rather than one related to overall consumption and emissions..

While reducing residential electricity subsidies would provide greater incentives to promote energy efficiency by increasing tariffs among some residential consumers, the experience with residential energy efficiency programs in Mexico shows that there are sufficient price incentives to make it attractive for households to replace inefficient lighting and appliances. For example, at current average residential tariffs, a compact fluorescent light bulb would pay for itself in less than a year and generate savings of over US$20 over its lifetime. Although the deepening recession and the escalating unemployment in Mexico will make it difficult to address the subsidies in the immediate future, the government is committed to reducing the size of the sector’s fiscal gap through greater efficiency at the utility level and a reduction in the subsidies to the highest level domestic consumers.

As for gasoline subsidies, as a petroleum products net exporting country, Mexico has implemented a stable pricing program which has set a consumer or "pump" price dependent on inflation rates. During the recent surge in oil prices, the subsidy--that is, the difference between the established pump price in Mexico and the international trading price--rose significantly. The gap has all but disappeared since the fall of international commodity prices. Historically, Mexico's pump price is about the same as the average of Latin American prices and significantly higher than other net oil exporting countries such as Ecuador, Venezuela or the OPEC countries. As of July 14, 2009, gasoline at a Pemex station in Mexico City cost 7.72 pesos per liter, or US$2.17 per gallon, while on the Gulf Coast of the US, the same gallon costs US$2.20 before the federal excise tax. It appears that for this year, the net subsidy will likely by negligible or negative.

Sources: International Energy Agency, Key World Energy Statistics (2008); OLADE, Statistical Annex (2007); Komives, K., et al.; “Residential Electricity Subsidies in Mexico: Investigation of options for achieving improved targeting of subsidies for the poor,” World Bank Working Paper No. 160 (2009); Petroleos Mexicanos (Pemex) 20-F Form for the US Securities and Exchange Commission (2008); Energy Information Administration. “US Retail Gasoline Prices” ; http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.html.

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prescriptive in nature, they lay out an appropriate framework for a shift in energy policy in Mexico toward one focused on greater efficiency in the use of energy and sustainability in the production of energy. Law for the Sustainable Use of Energy17 45. This law establishes the enabling environment for promoting energy efficiency by providing the legal framework for the development and implementation of strategies, policies and programs to promote the sustainable and more efficient energy use. Its objective is to promote the sustainable use of energy in all of the processes and activities related to production, transformation, distribution and consumption of energy, including in the residential, commercial and industrial sectors. The Law provides for the following:

(i) The development by Secretaría de Energía (SENER)18 of a program for

the sustainable use of energy (Programa Nacional para el Aprovechamiento Sustentable de la Energía), containing strategies to promote the use of efficient technologies, equipment, appliances and vehicles, strengthened energy efficiency standards, and increased scientific and technological research in this area.

(ii) The establishment of the National Commission for the Efficient Use of Energy (Comisión Nacional para el Uso Eficiente de Energía, or CONUEE) as a subordinate agency of the Ministry of Energy (SENER), with technical and operational autonomy, to advise the Public Administration on energy efficiency issues, lead the dialogue on this issue, and promote the implementation of best practices related to energy efficiency.

(iii) The creation of the Consultative Group for Sustainable Use of Energy, Consejo Consultivo para el Aprovechamiento Sustentable de la Energía, as part of the above mentioned Commission to evaluate compliance with the objectives, strategies, actions and goals of the Program. This Council will consist of the Minister of Finance and six researchers with extensive experience in the area. The regulations setting the rules of operation are currently under preparation.

(iv) The establishment of the National Information System, Subsistema Nacional de Información, on Energy Efficiency to register, organize, update and disseminate information about energy consumption and its end-uses in sectors that use this energy, distinct geographical regions of the country, factors that impel these uses, and indicators of EE. The format for collecting information has already been created and is being used by the agencies.

17 Ley para el Aprovechamiento Sustentable de la Energía, herein referred to as the Energy Efficiency Law. The Law was published on November 28, 2008. 18 The Law provides for the Program to be published one year after the law entered into force (November 2008).

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46. While setting the legal basis for formulating strategies, policies and programs oriented toward the promotion of sustainable energy use, the Energy Efficiency Law requires strong secondary regulations to create the specific mechanisms for implementing the stated energy efficiency objectives and strategies. Likewise, as a self-contained piece of legislation, the Law does not provide for precise instruments for private sector and civil society participation in the implementation of energy efficiency activities, instead, explicitly leaving the provision of these specifics for subsequent regulations to be developed in the near future. 47. Nevertheless, the adoption of the Energy Efficiency Law is an important first step in developing a new and robust enabling regulatory framework to promote energy efficiency.19 Draft regulations to implement the Law have been prepared by SENER and are currently undergoing an internal consultation process. Once this consultation process is over, the regulations will be passed on to COFEMER (Comisión Federal de Mejora Regulatoria) for review and comments. The document is expected to be published before December 2009 in the DOF (Diario Oficial de la Federación), entering into effect at that moment.

Law for the Use of Renewable Energy and the Financing of the Energy Transition20 48. This Law is the foundation for the Government’s national strategy to transition away from hydrocarbon-based electricity generation to the broader use of renewable energy sources. It provides a broad legal basis for this transition and establishes mechanisms to foster the use of RE sources by independent power producers, and creates a fund for the promotion and adoption of renewable energy technologies. The Law also provides the regulatory instruments for tariff setting, considering capacity and variable costs, which will allow the private sector producers to recover the cost of their investments. Specifically, the Law:

(i) Establishes the Energy Regulatory Commission (Comisión Reguladora de Energía, CRE) as the institution in charge of regulating the payments that the utilities – CFE and LyFC (Luz y Fuerza del Centro) – will pay to independent generators from renewable sources, regulating the terms and conditions for interconnection with the public utility, and expediting rules and norms regarding the generation and exchange of electricity generated from renewable sources.

(ii) Makes the electricity utilities responsible for developing efficient and transparent selection bidding processes for renewable.

19 As part of the Energy Efficiency project for Mexico, currently under preparation, the World Bank will provide technical assistance to help identify and finance Energy Efficiency opportunities in residential, commercial and industrial consumption. 20 Ley para el Aprovechamiento de las Energías Renovables y el Financiamiento de la Transición Energética, herein referred to as the Renewable Energy Law.

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(iii) Appoints SENER as the entity responsible for determining the targets for renewable energy production as a percentage of total electricity generation. The contribution will be expressed in terms of minimum percentages of installed capacity and minimum percentages of electric supply and will also include targets for contribution by consumers in addition to producers. SENER is currently in the process of defining the best approach to set the targets for the different technologies.21

(iv) Appoints SENER as the entity responsible for the development of the “Prospectiva de Energías Renovables,” which will outline a roadmap for expanding the use of renewable energy in the sector, as well as puts it in charge of leading the Strategic Plan for Renewable Energy, which will set out the policies, programs and actions to foster the implementation of RE projects. The Law is designed to increase certainty to private investors by outlining and pinpointing the responsible entities (within the Federal Government) for each part of the process regarding the introduction of renewable energies.

(v) Establishes a catalogue of renewable resources, including wind, solar, water (in both natural and artificial waterways), ocean energy in its distinct forms, and geothermal energy. The Law does not govern the following energy sources: radioactive minerals for nuclear energy, hydraulic energy from plants of more than 30MW, industrial residues which have been incinerated or have undergone thermal treatment, and landfills that do not comply with national environmental norms.

(vi) Creates The Fund for the Energy Transition and the Sustainable Use of Energy to promote the financing of projects evaluated and approved by a Technical Committee chaired by SENER.

49. Like the Energy Efficiency Law, the Renewable Energy Law provides a strong regulatory basis for the mainstreaming of renewable energy sources in Mexico’s electricity generation mix, including from independent power producers. However, its full potential will be achieved--and the Law itself operationalized--through the promulgation and enforcement of comprehensive secondary regulations and programs, such as the National Program for the Use of Renewable Energy and Energy Transition, the National Strategy for Energy Transition and for Sustainable Use of Energy, and the Regulations defining the terms of the Law (Reglamentos).22 These additional programs and regulations are crucial, as they will further define and detail the specific mechanisms to promote renewable energy generation and use, clarify mechanisms for financial flows

21 The World Bank is supporting SENER in defining the methodology to determine criteria for the use of RE sources in the electricity generation mix. Among others, the Bank’s technical support will include such tasks as the preparation of cost curves by technology, estimation of appropriate targets based on avoided cost plus externalities’ value, and estimation of the regional impacts of RE development at target level. 22 Programa Nacional para el Aprovechamiento de Energía Renovable y la Transición Energética; Estrategia Nacional para la Transición Energética y el Aprovechamiento Sustentable de la Energía; and Reglamento de la Ley para el Aprovechamiento de las Energías Renovables.

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from carbon credits, and refine the methodologies defining the establishment of contracts and other transactions between the public utility and independent producers. 50. A draft regulation to implement the Renewable Energy Law has been prepared by SENER. The specific importance of these secondary regulations also lies in their role in promoting the right economic incentives for private sector participation in RE-based generation. 51. The Government, through SENER and CRE, has already begun carrying out specific background work to define the new rules required in order to comply with the obligations set forth in the Renewable Energy Law. SENER has started planning the necessary activities to put together the National Renewable Inventory, define specific targets by technology, and define a net economic benefit methodology to evaluate new system expansion projects. Such activities include the definition of the procedure to acquire information on RE potential, including information on existing projects; the elaboration of a methodology for the calculation of externalities associated with power generation; and the calculation of the supply curve of electricity generation using different RE sources. 52. As for CRE, the regulator is currently carrying out the relevant studies to (i) establish a methodology to calculate tariffs for dispatchable and non-dispatchable RE; (ii) calculate penalties for non-delivery of firm energy; (iii) establish rules for connection of renewable generation to the national or regional grid; (iv) analyze options for selection of RE projects and alternatives for RE contracting (e.g. bidding processes, auctions, feed-in-law, quotas) and propose a contractual framework; and (v) identify social and environmental safeguard policies as well as licensing procedures. 53. The Green Growth DPL recognizes the significance of these two legislative acts and aims to provide support for the subsequent efforts by the Government to create the supporting regulatory framework designed to produce the programs, policies and investments needed for the transformation and de-carbonization of the country’s energy sector. 54. The Government of Mexico has already put in place some of the institutions and other mechanisms provided for in these laws. On the institutional front, CONUEE (Comisión Nacional para el Uso Eficiente de Energía), for instance, has already been established, drawing staff from the pre-existing CONAE (Comisión Nacional para el Ahorro de Energía). CONUEE has been granted the authority to issue recommendations to states, municipalities and individuals in relation to best practices for sustainable use of energy; facilitate the optimal use of energy from the point of exploration to its consumption; develop and issue methodologies for the quantification of GHG emissions originating from the exploration, production, processing, distribution and consumption of energy, as well as the emissions avoided as a result of actions promoting more sustainable use of energy; provide technical assistance on sustainable use of energy to the agencies of the Federal Public Administration and to state governments and municipalities that request it; and implement the National Information Subsystem for the

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Sustainable Use of Energy. This represents an important expansion over the mandate of the antecedent CONAE, notably with respect to its expanded responsibility in the areas of monitoring and oversight of program implementation. The creation of CONUEE also provides a clearly differentiated distribution of responsibilities between SENER, in charge of sector planning, and CONUEE, in charge of the promotion of the sustainable use of energy in all sectors and levels of government and the implementation of the National Program for the Efficient Use of Energy. 55. Financing mechanisms: The Fund for the Energy Transition and the Sustainable Use of Energy called for in Renewable Energy Law has been established. Its purpose is to increase existing financing to propel the energy transition from hydrocarbons to renewable energy and energy efficiency, with associated energy savings. The Fund is an important vehicle to foster the implementation of renewable energy and energy efficiency projects in Mexico, as one of the most important barriers for the adoption of these sustainable energy practices is the limited financing available to the private sector. The Fund can provide loans, credit guarantees or any other financial support to projects that comply with the National Strategy for the Energy Transition and Sustainable Use of Energy (Estrategia Nacional para la Transición Energética y el Aprovechamiento Sustentable de la Energía). A Technical Committee, consisting of government officials and chaired by SENER, will select the projects suitable for funding (loan or grant) and will decide its terms and conditions. The Fund has specific criteria for selecting projects to receive funding, including the projects’ consistency with the National Strategy, the conceptual design, innovative content and technical and financial viability. The Fund has already begun to be capitalized and is expected to be fully capitalized by 2011. An initial contribution of US$60 million has been made to the Fund. 56. In July 2009, SENER officially submitted the Renewable Energy Development Strategy provided for under Chapter IV of the Renewable Energy Law. This Strategy outlines the framework to promote policies, programs, actions and projects targeting an increase in the use of RE, as well as to promote EE and energy conservation, together with decreasing the use of fossil fuels as primary energy source. The Strategy describes international experience in mitigation and prospects for the near future. It assesses Mexico's energy situation in the international context, and the structure of demand. The document describes the Government's strategy for the energy transition, objectives and planning instruments together with those derived from the energy reform. It also identifies the specific projects to be included in the Federal Budget (Presupuesto de Egresos de la Federación) for 2009, together with the regulatory actions in energy transition that are expected to be delivered this calendar year. 57. The recently approved Renewable Energy and Energy Efficiency Laws and the associated policy and institutional framework being developed by the Government could have a transformational effect on Mexico’s Energy sector, contributing meaningfully to the country’s ambitious agenda to combat Climate Change. The specific interventions supported by the two Laws, such as enhanced efficiency of the production and use of energy, coupled with efforts to reduce the country’s dependency on fossil fuels, will help mitigate global GHG emissions and lower the carbon intensity of Mexico’s economy, in

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addition to helping alleviate local air pollution in the country’s urban areas. These Laws provide the policy framework for the creation of norms, directives and methodologies to regulate electricity generation from renewable sources and the role of energy efficiency. Most importantly, the Laws ensure greater legal and regulatory certainty and, combined with the more specific secondary regulations that are being drafted, will provide the basis for creating a market-based approach to pricing in energy sales contracts between the electricity generators and the single buyer. This, in turn, will facilitate private sector investment in the sector, particularly, in RE-based generation.

IV. BANK’S SUPPORT TO THE GOVERNMENT PROGRAM

SUMMARY UPDATE ON THE IMPLEMENTATION OF THE CPS (See Annex 8 for a more detailed update of the Country Partnership Strategy)

58. The Country Partnership Strategy (CPS) for Mexico (Report No. 42846-MX, March 4, 2008) was endorsed by the Board in April 2008, and it builds on the Mexican authorities’ desire to maintain a strong financial and knowledge-based relationship with the Bank. The CPS stresses flexibility and innovation in responding to our Partner’s development challenges and borrowing needs, with higher levels of flows dependent upon evolving market conditions.

59. Since the time the CPS was drafted, the new Partnership has been characterized by the changing needs of Mexico in the face of a deteriorating international environment, during which the flexible design of the CPS has facilitated timely and effective Bank response with total lending in FY09 reaching US$3.4 billion, as detailed in Annex 8.23 While the original CPS envisioned a program characterized by most lending consolidated into a single, annual Development Policy Loan, in responding to the crisis the program has evolved to include a few large DPL’s supplemented by several, targeted investment loans and other innovative products. The framework for moving forward, agreed with Mexico, includes a major effort to alleviate the expected human consequences of the economic downturn, as well as efforts to promote the basis for gradual reactivation of the economy by strengthening the financial sector, supporting investment in infrastructure and climate change, and enhancing governance and counter-cyclical measures.

60. As the Mexican economy continues to deteriorate in the face of the ongoing global downturn, exacerbated by the AH1N1 influenza epidemic in Mexico, and the social impacts spread, the Government has requested access to an additional US$1 billion in CY09, over the US$4 billion agreed in February, and would like to access a further similar amount, US$5 billion, in CY10. In response to this request, US$6.7 billion in new lending commitments is proposed for FY10. With exposure at US$6.5 billion at end-July 2009, proposed FY10 lending commitments would increase this to around

23 A previous update was prepared for the Oportunidades Program Loan, which was approved by the Board in February 2009.

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US$12.5 billion by FY12-13, depending upon the pace of implementation. The composition and level of the lending program for FY11 will be developed in the coming year with due regard for client needs and dependent on IBRD’s overall lending capacity.

61. The IFC will continue to be a strong partner with Mexico as the crisis unfolds, with a focus on investment and advisory activities that complement IBRD efforts to improve the living conditions and economic opportunities at the base of the pyramid. Support includes broadening and deepening the financial sector, infrastructure investments and advice, strengthening of the investment climate, improving the quality of healthcare and corporate governance. Having identified Climate Change as a new priority area of support, the IFC will be working to support investments in renewable energy and energy efficiency projects in concert with the objectives of the Green Growth DPL. In response to the crisis, the IFC is focused on the implementation of systemic interventions, such as the recently announced US$150 million facility to support housing finance. Under current conditions, the IFC has a strong counter-cyclical role to play by partnering with the IBRD and Mexican development banks.

LINK TO COUNTRY PARTNERSHIP STRATEGY 62. As outlined in the Country Partnership Strategy (CPS) for the period FY2008-2013, the World Bank’s cooperation with the Government of Mexico has centered around four main pillars: (i) reduction of poverty and inequality; (ii) increasing competitiveness; (iii) strengthening institutions; and (iv) environmental sustainability. (See Annex 8 for a detailed update of the CPS.) This Green Growth DPL, which focuses on the urban transport and energy sectors, is consistent with each of these country priorities. Improvements in the provision of clean urban transport services, in achieving higher levels of energy efficiency and in promoting the use of renewables will likely have positive effects on poverty and inequality levels through increased affordability and accessibility of services. It will also have a positive impact on the country’s competitiveness, particularly in the energy sector. The Green Growth DPL, however, growing out of a legacy of sequential support to Mexico’s environmental policy and institutional framework—beginning with programmatic Environmental SALs and moving through the Climate Change DPL—will mostly contribute to the third and fourth pillars of the CPS: strengthening institutions and environmental sustainability. These are closely aligned with the Government of Mexico’s 2007- 2012 National Development Plan (PND). 63. More specifically, this Green Growth DPL recognizes that ensuring environmental sustainability and strengthening the institutions to achieve this goal at the cross-sectoral and sectoral level are key development challenges for Mexico. It also leverages Mexico’s efforts in meeting these challenges through the Special Program for Climate Change (PECC), aimed at quantifying GHG emissions, assessing the country’s vulnerability to climate change and evaluating potential areas of intervention in addressing both mitigation and adaptation issues.

64. In addition to being consistent with the key development areas as agreed upon by the Government of Mexico and the World Bank, the Green Growth DPL builds upon the

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experience from the implementation of the last CPS and takes into account the feedback from the Government, which indicated the need for increasingly flexible, on-demand services. Given the impact of the global economic crisis on the Mexican economy, this Green Growth DPL comes at a much needed time in the country’s development path, complementing a series of programmatic interventions including loans in addition to non-lending advisory services and technical assistance in the areas of environment, energy, transport, and climate change. 65. Finally, this Green Growth DPL fits within the framework outlined in the existing CPS for Mexico, which states that the implementation of the Government of Mexico’s climate change strategy could be supported by follow-up actions through a mix of the following interventions: (i) a possible stand-alone second phase climate change DPL; (ii) inclusion of activities to implement the Government of Mexico’s climate change strategy in a future multi-sector DPL; (iii) technical assistance loans to support DPL implementation and monitoring and evaluation (M&E) activities; and (iv) a Memorandum of Understanding (MOU) on advisory and analytic activities on climate change and the completion of those activities. This multi-sector DPL, which builds upon the Government of Mexico’s climate change strategy, represents an important step towards a streamlined approach to both lending and non-lending interventions and support and is a direct outgrowth of the priorities identified in the CPS.

COLLABORATION WITH THE IMF AND OTHER DONORS 66. World Bank and IMF staff meet on a regular basis to exchange views on the macroeconomic situation and prospects for Mexico. These consultations occur at least quarterly and also involve exchange of documents and recent reports conducted by the respective teams. Financial sector issues are often discussed as both institutions are actively engaged in policy advice in this area. 67. The IMF's Board approved a Flexible Credit Line (FCL) for approximately US$47 billion in April of this year. Mexico was the first country to qualify and request this new instrument, which is intended to be a one-year arrangement and is treated as precautionary by governments. This type of support during a global downturn is very much complementary to World Bank and IDB financing of the government budget. The scale and precautionary nature of the IMF program provides a backstop on international reserves of the Central Bank, thus limiting the possibility of speculative capital outflows that could cause further damage to economic prospects. Meanwhile, Bank financing provides counter-cyclical and long-term financing of government expenditure and allows the government to limit crowding out of private sector access to local (and international) capital markets. 68. More specifically, the collaboration between the World Bank and the IDB in supporting the Government of Mexico in fostering its Climate Change agenda is manifested through the recent adoption of the Investment Plan for the Clean Technology

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Fund (CTF),24 agreed on jointly by the two IFIs, the IFC, and the Government of Mexico. As with the Green Growth DPL, the programs identified under the Plan--to be co-financed by the IBRD, IDB, and IFC--fall in the three sub-sectors of Urban Transport, Renewable Energy, and Energy Efficiency, and aim to contribute to the low carbon objectives contained in the country's 2007-2012 National Development Plan, the National Climate Change Strategy, and the PECC. Additionally, the IDB is also preparing to provide technical and financial support to activities related to the PECC through a technical cooperation project (“Support to the Climate Change Agenda in Mexico”), related to a policy-based loan (PBL) that was approved in November 2008. The PBL consists of the following broad components: (i) macroeconomic stability, (ii) institutional framework, (iii) mitigation agenda, and (iv) adaptation agenda. Within component (ii), more specifically, the PBL aims to promote the national Climate Change policy through analytical activities and the advancement of national and state programs, and institutionally strengthen the implementation of the Climate Change policy, in particular, by building the capacity within SEMARNAT as the entity responsible for Climate Change programs, as well as through support for federal sector entities participating in the agenda for “greater mainstreaming of the climate change agenda in the sectors.” The alignment of the objectives of the IDB’s PBL with the Green Growth DPL will provide reinforcement of the policies promoted in the Government’s Climate Change and sectoral programs.

24 Annex 7 provides a discussion pertaining to the CTF and its links to the Green Infrastructure DPL.

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RELATIONSHIP TO OTHER BANK OPERATIONS (See Annex 4 for more details) Engagement and Dialogue on Climate Change 69. This Green Growth DPL grows out of a living legacy of support to Mexico’s Climate Change policy and institutional development that began with programmatic Environmental SALs and has continued through the Climate Change DPL that was approved in 2008. It is also part of a series of engagements related to the Urban Transport and Energy sectors that reflects a long-standing and comprehensive policy dialogue and operational relationship between the Government of Mexico and the World Bank. On the policy side, the Government of Mexico has publically committed to a significant reduction in GHG emissions by 2030 with even deeper cuts by 2050. 70. The policy response at the urban transport level is to place the sector on a low-carbon growth path though PROTRAM and the UTTP itself. The policy response on the energy side has been the drafting and passage of sectoral laws that redouble the Government’s commitment to the development of renewable generation and the implementation of an energy efficiency agenda. The World Bank recognizes these significant steps as well as the additional policy actions taken by the Government to implement a strategy aimed at reducing GHG emissions. The promulgation of regulations and implementation programs for energy efficiency and renewable energy-based electricity generation, as well as the implementation of urban planning programs that incorporate mass transit are the immediate next steps to will give meaning to the government’s strategy in the energy and transport sectors. The Green Growth DPL adds value to the Program by supporting the implementation of the key related policies and aligning the technical assistance of the Bank to these objectives. 71. The Bank’s engagement with Mexico on climate change issues dates back to the mid-1990s and, at present, comprises about 25 initiatives (Active or in the Pipeline), financed by IBRD loans, GEF grants, carbon finance emission reductions purchase agreements (ERPAs), and other financial instruments. The diagram below illustrates the relationship to other Bank operations, the flow of analysis and lessons learned from recent policy loans, technical assistance and investment programs into the Green Growth DPL. A more detailed version of the diagram with the major areas of relevance to the DPL for each Bank intervention can be found in Annex 4. That Annex also provides a schematic timeline for all of the Bank’s relevant sectoral activities in urban transport, energy efficiency and renewable energy, as well as brief descriptions of the objectives and components of each of them.

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Relationship of Recent Bank Operations and Analytical Work to Proposed DPL

Relationship to the Climate Change DPL 72. Most importantly, however, the proposed Green Growth DPL may be regarded as a natural follow-on to the Climate Change Development Policy Loan (P110849), an IBRD operation designed to support the Government of Mexico’s efforts to mainstream climate change and environmental considerations into public policy, specifically, in the following three areas: (i) improved analytical basis for policy responses through the submission of a Third National Communication to the UN Framework Convention on Climate Change; (ii) the approval of the National Climate Change Strategy by the Government’s Inter-Secretarial Commission on Climate Change and its announcement by the President; and (iii) the integration of climate change considerations into sector programs. The key objective of the DPL, expected to be completed by May 2011, is to promote socio-economic development within a context of environmental sustainability.

URBAN TRANSPORT MEXICO MASS URBAN TRANSPORT FEDERAL

PROGRAM Fee for Service (P110474) IMPLEMENTATION OF PROTRAM TA (P117624) ANCHORING GENDER IN TRANSPORT AND

DEVELOPMENT POLICIES OF URBAN CITIES IN MEXICO

ENERGY SEMARNAT MoU

(P112959) SENER MoU (P114892) STUDY on Residential

Electricity Subsidies

ENVIRONMENT / CLIMATE CHANGE

CAP AND TRADE STUDY (MoU) MEDEC (Technical Assistance) LOW CARBON, HIGH GROWTH: LATIN AMERICAN RESPONSES TO CLIMATE CHANGE

(Flagship)

INVESTMENTS AND FINANCING

URBAN TRANSPORT

CTF PROGRAM

URBAN TRANSPORT TRANSFORMATION PROGRAM

RENEWABLE ENERGY

LA VENTA II (P080104) and LA VENTA III (P077717)

HYBRID SOLAR THERMAL PROJECT (P066426)

INTEGRATED ENERGY SERVICES (P095038)

ENERGY EFFICIENCY

MEXICO LIGHTING AND APPLIANCES EFFICIENCY - CTF (P106424)

SUSTAINABLE RURAL DEVELOPMENT (Agr. Energy Efficiency)

Green Growth DPL

Objective: Strengthen the policy framework for low

emissions evolution of key sectors

Comprehensive Framework with

focus on:

Urban Transport

Renewable Energy Generation

Energy Efficiency

3 Main Policy Areas: Policy Framework

Enabling and Monitoring Framework

Financing Mechanisms

CLIMATE CHANGE DPL (P110849)

ENVIRONMENTAL DPL (P095510)

ANALYSIS AND TECHNICAL ASSISTANCE

POLICY

Public Policy Framework

Sectoral Policy Framework

Sectoral baselines for monitoring

Emissions regulation and cross-sectoral carbon plans

Financing, capacity and

safeguards for investments in

energy and urban transport

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The text below provides a summary of the Climate Change DPL and its direct relevance to the proposed DPL.

73. Demonstrating commitment to confronting climate change, the Government of Mexico requested that a Climate Change Development Policy Loan (CCDPL) in the amount of US$501.25 million be presented to the World Bank Board of Executive Directors for its approval jointly with the 2007-2012 Country Partnership Strategy (CPS). The CCDPL, approved on April 8, 2008, was designed to support the Government’s priorities within its climate change agenda. Specifically, its development objective was to assist the Government of Mexico in integrating climate change considerations in public policy.

74. The Green Growth DPL, consistent with Mexico’s commitment to reducing GHG emissions on a voluntary basis within a framework of medium to long term goals for climate change adaptation and mitigation, represents an important step towards the operationalization of the country’s National Climate Change Strategy (ENACC). The ENACC explicitly calls for the drafting of the Special Program for Climate Change (Programa Especial de Cambio Climático, or PECC), as an instrument to set forth sectoral contributions to the national mitigation effort, and proposes action plans, politics and strategies as basis for its development. Upon the drafting of the PECC in Spring 2009 based on these guidelines, the Green Growth DPL takes the process of mainstreaming climate change into public policy one step further by calling for the official approval and publication of the PECC and for its establishment as a comprehensive policy framework for the reduction of emissions across sectors. Moreover, the proposed loan delineates specific measures to be taken in order to establish an institutional, regulatory, and monitoring framework for the reduction of emissions in urban transport and energy and to set up financing mechanisms to enable this process. It provides a strategic framework for an expanded dialogue between the Government of Mexico and the Bank on climate change.

75. The achievements of the CCDPL – including the initiation of sectoral programs for energy, and support of policy incentives to reduce the carbon intensity of the Mexican economy – will be consolidated by the Green Growth DPL’s focus on low-carbon transport and energy use. In fact, several of the monitoring indicators used by the CCDPL, particularly in the areas of mitigation, knowledge base and institutional strengthening, will be used as prior actions for the proposed operation, representing the Bank’s programmatic approach in engagement on these issues. For example, on the mitigation front, the CCDPL supported the adaptation of the PECC, definition of sectoral contributions to the national mitigation effort, and setting of national emission reductions targets. Notably, under the proposed operation, the prior actions specifically include adoption of the PECC, definition of energy and transport contributions to the national mitigation effort, and the setting of national emission reductions targets. Likewise, regarding the knowledge base, the CCDPL supported an assessment of physical and economic impacts of climate change on Mexico, which were achieved through the MEDEC and Economics of Climate Change studies. These achievements serve as the knowledge foundations of the proposed Green Growth DPL.

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76. In summary, whereas the CCDPL focused on the National Climate Change Strategy (2007), where Mexico committed itself to reducing GHG emissions on a voluntary basis, and contains medium to long-term goals for adaptation and mitigation, the Green Growth DPL takes the NCCS one step further by encouraging cross-sectoral interventions in climate change. Similarly, while the CCDPL sets the adoption of the PECC as a monitoring indicator within a year, the Green Growth DPL provides follow-up to this measure by establishing it as a prior action. Finally, while the CCDPL was largely based on of the 3rd National Communication to the UNFCC as a monitoring indicator, the current DPL establishes the submission of the 4th National Communication as a target output. Overall, therefore, the Green Growth DPL represents the logical next step in implementing the Government of Mexico’s Climate Change strategy.

Relationship to the Environmental Sustainability DPL 77. The Framework for Green Growth DPL also leverages the Bank’s engagement in Mexico in the environmental arena. More specifically, the proposed DPL builds on the Environmental Sustainability Development Policy Loan (P095510), approved by the Bank on September 5, 2008 in the amount of US$300.75 million to support the Government of Mexico in mainstreaming environmental considerations in key development sectors (tourism, energy, water, forestry, agriculture, and housing). The overall objective of that operation is to balance socio-economic development with environmental protection and improvement. 78. The Environmental Sustainability DPL (ENVDPL) builds on Mexico’s 2007-2012 National Development Plan (NDP), whose fourth pillar is that of environmental sustainability and which stresses the importance of the environment in enhancing the country’s competitiveness and both economic and social development, as well as the importance of mainstreaming the environmental sustainability principle in sectoral policies. It pursues and expands on the objectives of the previous series of Environment DPLs,25 which intended to mainstream environmental concerns and improve the effectiveness and efficiency of local environmental management processes in four of the aforementioned sectors, namely in tourism, energy, forestry, and water, as prioritized by the Government. In pushing forward environmental considerations into sectoral programs, the ENVDPL also goes hand in hand with the CCDPL by placing specific sectors on a low carbon growth path. The CCDPL and the ENVDPL complement each other, as the CCDPL recognizes Mexico’s contributions at the global level, while the ENVDPL mainstreams domestic and local environmental considerations into national agendas and programs. 79. The proposed loan supports the efforts undertaken by the Mexican authorities in the environmental arena through the ENVDPL and the original Environmental DPL program by promoting the development of a comprehensive policy framework that will

25 Environment Structural Adjustment Loan and Second Programmatic Environment Development Policy Loan (ENVSAL I and ENVDPL II) (P074539 and P079748) were approved in August 2002 and September 2005, and closed in December 2003 and January 2006, respectively.

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enable such interventions to materialize more successfully. More specifically, the Framework for Green Growth DPL leverages the support provided to the energy sector in both renewable energy and energy efficiency, as outlined in the ENVDPL, and adds support to the low carbon development of the transport sector to ensure Mexico’s environmental sustainability in both sectors. 80. In the energy sector, specifically, the prior actions of the ENVDPL go hand in hand with those for the sector in the Framework for Green Growth DPL. Under the ENVDPL, the main prior action was the approval and implementation launch of the 2007-2012 Energy Sector Program by the Federal Government in order to increase energy efficiency and energy production from non-hydro renewable sources and to regulate sulfur emissions. The proposed loan takes these actions one step further by establishing a regulatory framework for the accomplishment of the Energy Sector Program through the passing of the Energy Efficiency and Renewable Energy Laws and by calling for a more precise roadmap of interventions through the definition of regulations under these two laws. Furthermore, the Framework for Green Growth DPL poses the creation of CONUEE as a prior action, which will develop methodologies for quantifying GHG emissions in the energy sector. In terms of financing mechanisms, the DPL sets as Prior Actions the establishment of the Fund for the Energy Transition and Sustainable Use of Energy and the promulgation of regulations to define the Fund’s operations. Consistent with the goals of the ENVDPL, the establishment of these financing mechanisms will facilitate the reduction of emissions in energy, incentivize and increase the share of renewable energy in Mexico’s energy matrix, and, in doing so, contribute to the carrying out of the National Energy Sector Program. 81. The Framework for Green Growth DPL, thus, mainstreams environmental and climate change considerations in sectoral policies and programs by focusing on the reduction of emissions in the transport and energy sectors and establishing monitoring and evaluation indicators to measure the country’s progress in these areas. Related Operational Work in Urban Transport, Renewable Energy and Energy Efficiency Urban Transport 82. On the urban transport side, the proposed Green Growth DPL builds upon the outcomes of several completed and ongoing projects supported by the Bank. For instance, the Mexican Medium Size Cities Transport Program helped strengthen local agencies and supported the federal urban transport decentralization process. The Introduction to Climate Friendly Measures in Transport, a GEF-financed project approved in 2002, assisted the GoM in developing policies and measures for stimulating a long-term modal shift toward cleaner and less carbon-intensive transport in the Mexico City Metropolitan Area, while the Mexico Mass Urban Transport Federal Program, which has been developed as a result of close cooperation between the Bank and the Government, helped in designing, creating and establishing a federal support program for

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mass transit. In parallel, the Mexico City--Insurgentes Bus Expansion Program and the Mexico: Low Carbon Bus Corridor Project were both aimed at reducing local airborne pollutants and GHG emissions from the transport sector. Finally, the proposed DPL will give the policy level foundation to the Clean-Technology-Fund- and IBRD-supported Urban Transport Transformation Program and the GEF-supported Sustainable Transport and Air Quality project, which are both currently in their final stage of preparation and aim at placing urban transport on a low-carbon growth path. Energy 83. The Bank currently supports a rich set of sector interventions related to the promotion of renewable energy sources and energy efficiency. These include sector dialogue around renewable energy policy, studies on renewable resources such as mini-hydroelectric plants and the social and environmental standards needed to develop wind farms. They also include investments (financed in part by GEF) in the development of wind plants, the installation of off-grid renewable energy sources for the poor in rural areas, and the building of a solar-thermal hybrid generation plant. Building on this rich set of sector interventions and a deep knowledge of low-carbon options studied in the context of the Mexico Low Carbon Study (MEDEC), the agenda under discussion between Mexico and the Bank now focuses on locking in the sector reforms that will most significantly reduce the country’s carbon footprint. This includes providing the authorities with technical assistance, just-in time advice, and the support of high level experts, as well as knowledge exchanges with countries that have successfully introduced renewables in their generation mix to implement the RE Law, funded in part by the ESMAP Trust Fund. Also, a large operation aimed at improving Energy Efficiency by replacing appliances in the residential sector and incandescent lighting in residential and municipal buildings and street lighting with more energy efficient technologies for public and private consumers alike is scheduled to be finalized by early 2010.

ANALYTICAL UNDERPINNINGS 84. In addition to the experience and lessons derived from the previous and ongoing operations, the preparation of this DPL has also benefitted from- and was informed by- an extensive set of analytical studies and a series of innovative technical assistance activities covering the transport and energy sectors, environmental institutional capacity building, and Climate Change more broadly. These include:

Low Carbon, High Growth: Latin American Responses to Climate Change. This report is the Bank's flagship report on LAC that explores how the region is exposed to climate change impacts and what it can do to avert its effects, both unilaterally and with the incentives of a global climate agreement to be negotiated next year in Copenhagen by the United Nations.

Clean Technology Fund (CTF) Investment Plan. The CTF Investment Plan is a “business plan” agreed between the Government of Mexico IBRD, the IDB and the IFC to provide support to the low-carbon objectives contained in Mexico’s 2007-2012 PND, its ENAAC and PECC (Special Program for Climate Change).

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This multi-year business plan identifies programs to be co-financed by the CTF and IBRD, IDB and IFC in the Urban Transport and Energy Sectors. Annex 7 provides a more detailed summary of the programs proposed for CTF financing under Mexico’s Investment Plan, and the Plan’s overall similarities and complementarities with the Green Growth DPL.

Mexico Low-Carbon Study (MEDEC). The World Bank assisted the Mexican Government in assessing the country’s potential for low carbon growth and the macroeconomic and fiscal implications of a low carbon development plan. The study highlights Mexico’s potential for reducing carbon emissions from a range of sectors, including transport, power generation, end-use energy efficiency, and land-use. Based on a common economic cost-benefit analysis, the study estimates the net costs, emissions reductions, and upfront investment that would be needed to maintain carbon emissions relatively constant over the next two decades while meeting existing economic and social development objectives.

Economics of Climate Change Study. In 2006, the British Government funded a global study to review the climate change effects on economic growth. The Stern Review on the Economics of Climate Change, which is a comprehensive review of potential economic costs of climate change impacts and costs of mitigation activities, was released in October 2006. With the assistance of the IDB, ECLAC, the UK government and the Bank, the Government of Mexico has carried out a similar study to assess the cost of climate change for Mexico.

Memorandum of Understanding (MOU) with SEMARNAT. The purpose of this MOU is to bolster the policy dialogue and further strengthen Mexico’s capacity to mainstream environmental consideration into productive sectors and to implement its National Climate Change Strategy and Special Program for Climate Change (PECC). The MOU includes the following activities: (i) design and implementation of environmental regulations; (ii) mainstreaming environmental considerations in the housing sector; (iii) mainstreaming environmental considerations in the energy sector; (iv) design of a Cap and Trade System for Mexico; (v) preparation of Sub-national climate change action plans; and (vi) Adaptation on the Gulf Coast. As part of the MOU with SEMARNAT, a major Cap and Trade study was undertaken to analyze Mexico’s options for regulating greenhouse gas (GHG) emissions and the economic implications of each option. Distinct strategies are considered in the study: continuation of current policies; the institution of emission caps on one or more sectors; and the implementation of policies to reduce emissions from selected emitting economic sectors while monetizing emission reductions in international GHG markets that accept sectoral offsets.

Federal Support Program for Mass Transit (PROTRAM). Through this Fee-based-service technical assistance, the Bank prepared the report “Programa Federal de Apoyo al Transporte Masivo: Fundamentos del Programa y Lineamientos para su Implementación”, that laid the foundations for PROTRAM.

Memorandum of Understanding (MOU) with SENER. The MOU supports the policy dialogue with the Government of Mexico and further strengthen Mexico’s

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capacity to implement its Energy strategy. This MOU includes the following areas of cooperation: (i) Support for integrating the policy to promote the use of renewables in power generation, (ii) analysis of options for modifying the regulatory framework for energy efficiency, (iii) best practices for reducing gas flaring, (iv) support in the design of programs to promote the use of efficient lighting and appliances, and (v) support to the development of a National Energy Strategy.

The Study on Residential Electricity Subsidies in Mexico focuses on subsidy distribution across households, according to income cohorts. Its results are relevant for the Mexican Government, in that they shed light on how the electricity pricing scheme could be modified. Results suggest there is room for improvement in both the magnitude and targeting mechanism for electricity subsidies for residential customers. They also suggest that efficiency gains in the operation of the utilities’ could reduce the burden of residential electricity subsidies on the Government’s budget.

85. While the technical assistance provided by the Bank to date has contributed directly to the Green Growth DPL’s design, the implementation of the PECC and the related sectoral objectives of the Program will be supported through continuing analytical and capacity-building activities. LESSONS LEARNED 86. As evidenced in the previous sections, the design of the proposed Green Growth DPL builds on the lessons learned from the World Bank’s long-term engagement with the Government of Mexico on environmental and climate change issues, and numerous sectoral investments and technical assistance in urban transport and energy. It also builds upon Bank activities around climate change in other middle-income countries. In particular, valuable lessons were learned from the CCDPL, the First Programmatic Environment Structural Adjustment Loan and Second Programmatic Environment Development Policy Loan (ENVSAL I and ENVDPL) -- including experience with the related technical assistance packages -- as well as the Colombia Sustainable Development DPL. Those loans recognized in particular the need for a sound analytical basis at the sectoral and institutional levels, inter-agency coordination, and a strong monitoring program. This DPL is also built on the foundation of the analytical work done for the PECC (including, inter alia, the Bank’s MEDEC and Cap-and-Trade Studies) as well as extensive analytical work to prepare for the Urban Transport program, and the energy efficiency and renewable energy investment programs. 87. Aside from underpinning the substance and Bank-Government dialogue on policy, the Bank-supported climate change and above-mentioned sectoral activities provided valuable lessons in designing this operation. The most important lessons from these various operations and activities, taken from a review of the Implementation Completion Reports and discussions with both line agencies and central government agencies, are the importance of:

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(i) Strong Country Ownership: Strong country ownership is critical to success, particularly when supporting cross-sectoral efforts, such as those included in the proposed loan. The proposed project responds to Government’s request to support specific priority programs and areas which reflect the outcome of national policymaking processes. It is grounded on the Government’s exemplary program and activities in climate change, including a comprehensive National Climate Change Strategy and the related Special Program for Climate Change. It also builds upon sustained, effective efforts to support climate-friendly urban transport and energy programs.

(ii) Using the Government’s Framework: The proposed operation builds upon the Government’s existing program for addressing climate change in priority sectors, focusing on a select number of central actions, impacts, and results in the design of the Program. Toward this aim, the monitoring indicators are drawn directly from those the Government is using to assess the success of its interventions.

(iii) Providing Just-in-Time Strategic Engagement and Support: The Government has repeatedly requested the Bank’s support on climate change, urban transport and energy. The experience with developing and providing comprehensive analytic and advisory packages on those priority issues, through various MOUs, as a complement to policy lending, has served to ensure that policy development is predicated upon a sound and strategic analytic basis.

(iv) Continued Engagement: The long-term engagement between the Bank and the Government on climate change has supported Mexico’s leadership in the climate change arena. At the Government’s request, the Bank has focused its continued support around this priority area. As such, the proposed operation represents the logical next step in this relationship.

V. THE PROPOSED FRAMEWORK FOR GREEN GROWTH DPL

OPERATION DESCRIPTION 88. Mexico has established a policy framework that could significantly reduce its carbon footprint in the years to come. The success of this program as detailed in the Special Program for Climate Change (PECC) is dependent upon the further evolution of regulations, institutions, financing mechanisms and monitoring and evaluation capacity. The PECC identifies two sectors as particularly central to its climate change agenda: transport and energy. The Green Growth DPL proposes to highlight the cross-cutting measures embedded in the objectives of the PECC that focus on climate change

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mitigation more specifically,26 such as the monitoring framework for emissions and the sectoral prioritization of interventions. In addition, the Green Growth DPL delves into the policy framework for the key “high impact” sectors of transportation and energy, focusing on the urban transport program, energy efficiency initiatives and the evolving renewable energy program. The Diagram below illustrates how these fit into the PECC’s design:

PECC Phase 1 Focus and Sectoral Priorities to be Supported in Proposed DPL

Cross-sectoral Policy Framework

Phase 1: 2008 -2012 Evaluation of the vulnerability of the

country to Climate Change Economic valuation of the priority

measures for intervention

High Impact Sectoral Interventions: > 3 million

metric tons per year of CO2e

Low Net Cost per Ton of CO2e

Higher Net Cost per Ton of CO2e

Urban Transport Energy Efficiency

Renewable Energy

Source: PECC Consultative Draft (March 2009); Bank illustration 89. The Overall Program Development Objective of the Framework for Green Growth DPL is thus to support the stimulus of the economy while strengthening the framework for long-term sustainable growth. By supporting the Government’s policy commitment to regulatory, institutional and financial resources in these sectors as well as monitoring and evaluation capacity, the proposed Green Growth DPL strengthens Mexico’s objective of launching the urban transport and energy sectors on a low-carbon growth path. The sections below address the Green Growth DPL’s links to the sector-specific goals and activities related to GHG emission reductions.

26 While the first phase of the PECC largely focuses on the economic valuation of the priority measures for intervention to mitigate climate change, the strategy for the country’s adaptation to climate change is part of the second phase (2020-2030).

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Urban Transport 90. The policies supported by the proposed Green Growth DPL will contribute to placing the urban transport sector in Mexico on a low-carbon path consistent with the needs of urban development by providing an enabling framework and a supportive financial structure. Specifically, these policies will foster comprehensive planning of urban mass transit, the backbone of the Government’s strategy for combating GHG emissions, local pollutants as well as congestion at the urban level. More specifically, mass transit–be it Light Rail, Heavy Rail, or Bus Rapid Transit—is key to environmental sustainability and improved mobility, as it promotes densification around stations, contributes to reducing the rate of growth of the length of the average trip, and improves the overall efficiency of the use of scarce resources.27 The comprehensive planning framework that is being supported by the DPL will foster an integrated approach to urban transport planning both on the supply and the demand sides, and will encourage private sector participation in the investment and operations of UT infrastructure and services.

91. The comprehensive planning approach and the financing of mass transit are particularly relevant in light of Mexico’s easy access to used cars in the international market, as high quality transit systems offer a valid alternative to car users. Further, as cities move to curb car use through the use of pricing mechanisms and other demand-side tools, the “tolled-off” drivers are more likely to accept this approach if there is a quality transit system in place. Mass transit makes more feasible from a social, economic and political point of view the use of demand side tools. The policies supported by this DPL, therefore, are at the core of the future agenda in urban transport for Mexico. 92. Finally, it is worth mentioning that PROTRAM is funded by the proceeds from the concessioning of a package of inter-municipal roads in México. These funds allowed the Government of Mexico to create the National Infrastructure Fund, FONADIN, and within it PROTRAM. Although the financial crisis has complicated and delayed the concessioning of a second round of roads that would have furthered capitalized FONADIN, the initial capital of FONADIN amounts to over US$3 billion. While the lack of additional funds could put at risk future infrastructure expansions beyond what is feasible to finance with the resources already in the FONADIN, it is expected that once the current financial crisis subsides, and economic growth resumes, Mexico will be able to continue with its road concessioning program. The additional inflow of funds will enable FONADIN to finance additional low-carbon transport infrastructure. In addition, PROTRAM’s financing is being complemented by a separate World Bank Loan, the Urban Transport Transformation Project (UTTP).

27 Rodriguez, D. A. and Targa, F. "Value of Accessibility to Bogotá's Bus Rapid Transit System," Transport Reviews, Vol. 24, Number 5, pp. 587-610, 2004; Targa, F. and Rodriguez, D. A. "Analysis of Bogotá's Bus Rapid Transit System and its Impact on Land Development," Carolina Planning Journal, Vol. 29, No. 1, 2004; World Bank, 2002, “Cities on the Move: A World Bank Urban Transport Strategy Review.”

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Energy 93. For the energy sector, the Green Growth DPL supports the Government of Mexico in its efforts to transition the country from its predominantly hydrocarbon-based energy matrix towards a cleaner, more diversified mix including renewable energy sources, while developing the appropriate regulatory framework for renewable energy and energy efficiency. The Government of Mexico’s agenda for promoting the sustainable use of energy in all of the processes and activities related to production, transformation, distribution and consumption of energy is fully in accord with the sustainable energy agenda of the World Bank. Given the Bank’s commitment to continue supporting the Government of Mexico in its fight against Climate Change, an evaluation of the impact of the regulatory framework underscored by this DPL in promoting and implementing renewable energy and energy efficiency projects will be conducted. There will also be a review of the framework’s role in mobilizing financial resources, including private sector participation in the development of emission reducing urban plans and energy projects.

Prior Actions and Other Policy Actions 94. Prior Actions that anchor the Green Growth DPL are summarized in the Box below. Annex 2 to this Program Document contains a more detailed Operations Policy Matrix, outlining the objectives for each Policy Area, the Prior Actions, Expected Outcomes, Medium-term Outputs and the proposed approach to Monitoring and Evaluation of each.

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95. The Prior Actions established above capture the two-level nature of the Government’s Program and the Green Growth DPL by first recognizing the importance of the over-arching framework defined through the Special Program for Climate Change (PECC) and by setting out the sectoral landmark institutions, regulations and financing mechanisms that will give substance to the transport and energy programs established in the PECC. These prior actions taken as a whole put Mexico on the path to achieving its ambitious green agenda with regard to emission reductions by granting it the capacity and resources to tackle Climate Change sector by sector. In addition, as described below, the Government of Mexico has also begun to take important follow-on actions to implement the enabling environment created by these prior actions.

Box 2. Prior Actions for the Mexico Framework for Green Growth DPL

The Government has agreed upon and implemented the following prior actions:

Policy Area 1: Comprehensive Policy Framework for the Reduction of Emissions across Sectors:

Approval and publication of the Special Program for Climate Change (Programa Especial de Cambio Climático or PECC) in the Diario Oficial de la Federación which lays out a long-term vision for combating climate change while establishing the sectoral level interventions that will result in emission reductions.

Policy Area 2: Enabling and Monitoring Framework for Reduction of Emissions in Transport & Energy:

Urban Transport: Resolution for the establishment of PROTRAM in accordance with PROTRAM Guidelines and

FONADIN’s participation in the Consultative Working Group (Grupo de Trabajo Consultivo) of PROTRAM.

Renewable Energy and Energy Use: Adoption of the Renewable Energy Law which sets out the framework for promoting the

broader use of renewable energy sources, including the establishment of a renewable fund Adoption of the Energy Efficiency Law which provides a framework and establishes

responsibilities for the development of programs to promote the sustainable use of energy, including the establishment of the CONUEE, the agency with monitoring and oversight responsibility.

Policy Area 3: Establishment of Financing Mechanisms for the Reduction of Emissions in Transport & Energy:

Urban Transport: Issuance of the Presidential Decree, Modifying Agreement and Operating Rules establishing

FONADIN and its operating principles which creates the framework for the financing of federal transfers to urban mass transport programs.

Renewable Energy and Energy Use: Establishment of “The Fund for the Energy Transition and the Sustainable Use of Energy” to

promote financing and foster the implementation of renewable energy and energy efficiency projects; and the promulgation of the regulations to define the Fund’s operations.

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POLICY AREAS

Policy Area 1: Comprehensive Policy Framework for the Reduction of Emissions across Sectors

96. Objective: Implement a verifiable, targeted and cross-sectoral strategy for emission reductions.

97. Context and Policy Area Description: The first Policy Area focuses on the development of a comprehensive, cross-sectoral framework for the reduction of Greenhouse Gas emissions. This approach puts sectoral actions into the context of Mexico’s over-arching framework for emission reductions, sets out monitoring standards, calls for full accounting—through a national inventory—of CO2e emissions and provides for sectoral prioritization. The primary instrument for the realization of the cross sectoral strategy is the PECC which includes a long-term vision for combating Climate Change; mitigation and adaptation plans at the sectoral level; and inter-ministerial working arrangements needed to achieve the objectives of the program.

98. Challenge: For the Government of Mexico, the challenges of putting in place such an ambitious cross-cutting framework are multiple. The challenges include the technical difficulties of identifying the baseline of emissions in each area of economic activity and developing actions which are practicable and which will have meaningful reductions. Other challenges include the cross-cutting nature of the program and the consensus required among both government institutions and the general public in order for the program to work. 99. Prior Action: The action to be undertaken is the official approval and publication of the Special Program for Climate Change or PECC in the Diario Oficial de la Federación. 100. Expected Results: Now that the Government has worked through the public consultation phase, the remaining legal approvals and formal approval and publication on behalf of the Presidency of the Republic is a Prior Action that will have significant effect on sectoral behavior. The baseline and goals for emissions reductions, to be achieved through specific interventions in the Energy and Transport sectors, have been established by the PECC, and will serve as the framework for monitoring and evaluation.

Policy Area 2: Enabling and Monitoring Framework for the Reduction of Emissions in Transport and Energy

101. Objective: Establish institutions, regulations and monitoring capacity to allow for the reduction of emissions in urban transport, energy generation and efficiency. 102. Context and Policy Area Description: The two sectors identified in the PECC as the primary emitters of GHG and the priority sectors for intervention have very different organizational, legal and regulatory structures. They thus require unique policy interventions. This Policy Area focuses on the decrees that have established the institutional arrangements for federal support for urban transport, particularly mass

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transit, planning and implementation, and the legal structure that will incentivize more efficient energy use and investment in renewable energy generation going forward. Both sectors share a need for the establishment of clear baseline indicators, and diligent oversight and monitoring of their emission reduction programs.

103. Urban Transport: There are several components to a successful urban transport planning program, which lead to greater efficiency and a reduction in emissions.28 These components include the strengthening of key institutions to promote a better coordination of planning and implementation at the city level; the mainstreaming of integrated transport and land use planning, (which also addresses air quality and climate change and considers both supply and demand-side policies); the establishment of adequate financing for planning and implementation of transport plans; and the promotion of private sector participation. The Urban Transport sub-category of Policy Area 2 will build on the creation of PROTRAM, whose structure reflects these four components for achieving sustainable urban transport.

104. Energy: The Energy sub-category of Policy Area 2 builds upon a set of legal and institutional achievements made by the Government of Mexico over the last several months: The enactment of the Energy Efficiency Law and the Renewable Energy Law. These are the first laws in Mexico to provide a legal framework for strategies, policies and programs that promote sustainable and more efficient energy use. The Energy Efficiency Law promotes the sustainable use of energy in all of the processes and activities related to production, transformation, distribution and consumption of energy. Both laws came into effect on November 28th, 2008.29

105. Challenge: In the Urban Transport sector, the Government of Mexico cannot directly order the establishment of efficient mass transit mechanisms at the municipal level, because urban transport is a municipal responsibility. However, it can use federal agencies and programs, such as PROTRAM, to steer participating municipalities. To achieve this objective, the Government of Mexico has to strengthen the capacity of relevant federal agencies (SHCP, BANOBRAS, SEDESOL, SEMARNAT, and SCT), as all of them play a role under the PROTRAM framework. The need for further strengthening, however, is not significant, given the existing expertise, and should focus mostly on achieving the required inter-agency coordination and cooperation to guarantee program success. Nevertheless, the Federal Government needs to update technical guidelines that cities can use to plan their transport and quantify associated emission reductions. These guidelines constitute outputs of this DPL.

106. In the Energy sector, the Renewable Energy Law and the Energy Efficiency Law provide a broad legal basis for the implementation of a national strategy to transition away from hydrocarbon-based electricity generation to the broader use of renewable energy sources and a more efficient use of energy. However, given the broad latitude

28 Rebelo, Jorge, 1996, “Essentials for Sustainable Urban Transport in Brazil´s Large Metropolitan Areas.” Policy Research Working Paper 1633. The World Bank. 29 Both Laws were published in the Diario Oficial de la Federación on that same date.

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established in the Laws, having specific implementing rules and regulations will be crucial to the development of the renewable generation segment and to the implementation of the stated energy efficiency objectives and strategies. Regarding the renewable energy sector more specifically, those regulations will have to set out incentives that can work within the confines of the integrated electric system of Mexico and take into consideration the constraints on energy charges, public transfers and private investment for new generation.

107. Prior Actions for Urban Transport: Approval of the establishment of PROTRAM in accordance with PROTRAM guidelines; and of FONADIN’s participation in the Consultative Working Group of PROTRAM by a resolution of the FONADIN Technical Committee. PROTRAM is the federal program that provides both the technical and financial support necessary for mass transit programs to be implemented at the municipal level. The GTC is the key decision-making body of PROTRAM with a mandate to review projects and recommend them for funding.

108. Prior Actions for Energy Sector: Adoption of the Renewable Energy Law which sets out the framework for promoting the broader use of renewable energy sources; and Adoption of the Energy Efficiency Law which provides a framework and establishes responsibilities for the development of programs to promote the sustainable use of energy, including the establishment of the CONUEE, the agency with monitoring and oversight responsibility on energy efficiency issues. 109. Expected Results: The incentive system for involving municipalities in sustainable Urban Transport programs has been established as a result of PROTRAM. Cities carry out comprehensive planning exercises that include both supply and demand-side policies, promote private sector participation, and incorporate sustainability and climate change considerations. It is expected that the parallel Urban Transport Investment Loan (under preparation) and associated Technical Assistance will provide support in the development and use of these tools. The associated output to this Prior Action is the adoption of Federal Guidelines for the Development of Integrated Transport Plans (ITPs) that will help mainstream demand management strategies to complement mass transit in maximizing the mobility and climate benefits of programs supported by PROTRAM and FONADIN.30 Another output consists of the adoption of methodology guidelines for developing corridor emission baselines. In the Energy sector, the drafting and promulgation of the specific rules and regulations to implement the Renewable Energy Law and the Energy Efficiency Law will serve as the target output by the time of the DPL’s completion. The Bank will work closely with the Mexican authorities in the development and promulgation of the regulations. 110. This Policy Area also focuses on the importance of monitoring progress toward the achievement of low carbon strategies at the sectoral level. On the energy side, the

30 Some of the activities the ITPs will address are: mass transit and public transport reform, parking management strategies, congestion pricing and vehicle restrictions, road pricing, non-motorized transport, and land use management strategies, among others.

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Government of Mexico has established CONUEE as a subordinate agency of SENER that will advise the Public Administration on energy efficiency issues and will take lead responsibility for monitoring of the sector on these issues. CONUEE was established, in part, to develop and issue methodologies for the quantification of greenhouse gas emissions by the exploitation, production, processing, distribution and consumption of energy as well as emissions avoided, and to implement the National Information Subsystem for the Sustainable Use of Energy. In addition, the PECC sets specific targets for GHG emission reductions for renewable energy sources and energy efficiency measures. The accomplishment of these targets will be monitored by SEMARNAT and reported annually.

Policy Area 3: Establishment of Financing Mechanisms to Facilitate the Reduction of Emissions in Transport and Energy

111. Objective: Institutionalize the appropriate financing mechanisms to allow for the reduction of emissions in urban transport and energy generation and through enhanced energy efficiency. 112. Context and Policy Area Description: In order to implement climate-friendly infrastructure programs with high up-front costs and potentially significant recurring maintenance expenditures, the Government recognizes that adequate and sustained financing mechanisms need to be established. Recognizing this need, the Government has established financing vehicles that can help defray the costs of investment. Through PROTRAM, FONADIN finances comprehensive transportation planning and the design and implementation of mass transit systems. FONADIN provides financing to municipalities through grants, and to the private sector through loan guarantees, thus promoting its participation in the urban transport sector. In the energy sector, the Fund for the Energy Transition and the Sustainable Use of Energy has been set up to support the financing of projects promoting the use of renewable energy and energy efficiency. The purpose of the Fund is to increase the existing financing to propel the energy transition from hydrocarbons to renewable energy, energy savings and the use of clean technology.

113. Challenge: The greatest challenge to the achievement of the financing strategies for these sectors is the capitalization of the funds given the fiscal pressures of the Government. In addition, financing from the private sector is further hampered by the current economic conditions and the tightening of international financial markets. 114. In urban transport, PROTRAM and the UTTP (the latter under preparation), which are supported by policies sponsored by this DPL, promote private sector participation (PSP). PROTRAM explicitly requires that 35 percent of the total cost of the project be covered through private sector participation. To achieve this goal, the PROTRAM offers loan guarantees to the private sector, while the UTTP promotes PSP but does not have explicit requirements. The directors of PROTRAM, moreover, have indicated that the PSP targets can be adjusted if the program does not attract sufficient private interest in its initial stages.

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115. Regarding private sector involvement in renewable energy projects, the Renewable Energy Law provides the framework to create the norms, directives and methodologies to regulate the electricity generation from renewable sources, and sets the regulatory instruments for the payment to independent generators to meet capacity and variable costs which is an important step towards creating the right economic incentives for private investment in the renewable energy arena. The Law establishes the commitment of the Ministry of Energy to set targets for renewable capacity generation to be supplied to the grid, and rules for interconnection. The Energy Efficiency Law provides the framework to incentivize the sustainable use of energy in all of the processes and activities related to its exploitation, production, transformation, distribution and consumption.

116. At present, private sector investment in generation from renewable sources is still significantly lower than the role of the private sector in generation overall, where it represents 31 percent of the country’s total capacity of 60 GW. Despite the benefits of investing in energy efficiency, these programs still face a number of information, financial and institutional barriers. Incentives or risk-mitigation products are needed to encourage the use of more efficient technologies and to establish new standards and benchmarks for such technologies in their respective industries. For promoting large-scale energy efficiency investment, some level of public involvement is needed to organize the market, catalyze investments and correct market failures. Currently, the Government of Mexico and the World Bank are working together on the design of a Program for replacement of incandescent light bulbs with CFLs, replacement of inefficient appliances and improved efficiency of street lighting in municipalities.

117. Prior Action for Urban Transport: Issuance of the Presidential Decree, Modifying Agreement and Operating Rules establishing FONADIN and its operating principles which creates the framework for the financing of federal transfers to urban mass transport programs. Despite the sound foundations of the urban transport program design with regards to attracting desired levels of investment from the private sector, PSP is currently more difficult given the economic crisis and tightening financial markets. While PROTRAM was designed at a time of solid conditions for PSP, the UTTP in particular was designed with this crisis in mind and hence offers a lighter requirement for PSP. The directors of PROTRAM have indicated that the PSP targets will be adjusted as a pragmatic measure if the program cannot attract sufficient private interest in its initial stages. 118. Prior Action for Energy: Establishment of the Fund for the Energy Transition and the Sustainable Use of Energy to promote financing and foster the implementation of renewable energy and energy efficiency projects; and the promulgation of the regulations to define the Fund’s operations. Given the current economic crisis in which there is reduced financing access anticipated over the short to medium term for the private sector, the role of the Fund becomes particularly important in the leveraging for these projects. While the ability of the Government to capitalize the Fund fully may be affected over the very short term, the Government has already mobilized US$60 million as an initial subscription.

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119. Expected Results: The DPL prior actions in this Policy Area recognize that funding mechanisms to help finance both sustainable Urban Transport investments as well as Renewable Energy generation and energy efficiency initiatives in Mexico are a necessary part of the enabling framework for the evolution of the two sectors. The target outcomes on the urban transport side for this Policy Area would be the active engagement of FONADIN in the financing of at least two urban transport programs. For the energy side, the expected outputs would be the development of a publicly available inventory of public and private sector projects eligible for financing from the Fund for Energy Transition and Sustainable Use of Energy, and the capitalization of the Fund at a sufficient level for financing at least one pilot project in Energy Efficiency. The longer-term outcomes, on the other hand, are related to the number of megawatts being added by renewable energy generation.

Summary of Prior Actions 120. The Prior Actions discussed above are derived from the legislative and juridical measures taken by the Government of Mexico under each of the respective policy areas beginning with the official approval and publication of the PECC. In the Policy Area of Enabling and Monitoring Framework, the Government of Mexico has made a number of key initial steps to mainstream the climate change agenda in the country’s key infrastructure sectors. In the Urban Transport sector, the Government has created PROTRAM, a federal framework that supports mass transit programs and integrated urban transport planning, addressing issues like land use, low carbon strategies, and demand management. In the Energy Sector, the Government of Mexico has passed the Energy Efficiency and Renewable Energy Laws, thus establishing a legal framework for strategies, policies and programs that promote sustainable and more efficient energy use and the mainstreaming of Renewable Energy sources in Mexico’s electricity generation mix. In monitoring, the Government has established specific institutional mechanisms to progress toward the achievement of low carbon strategy at the sectoral level. In the Urban Transport sector, it has established federal guidelines for measuring transport-related GHG emissions; in the Energy sector, institutional mechanisms have been put in place for developing and issuing methodologies for the monitoring and quantification of GHG emissions. 121. In the Policy Area of Financing Mechanisms, the Government has launched several initiatives to ensure the availability of sustainable financing sources for implementing climate-friendly Urban Transport and Energy programs. Namely, FONADIN has been established with the mandate, inter alia, of financing mass transit support programs at the municipal level in the Urban Transport sector, while the Fund for the Energy Transition and the Sustainable Use of Energy has been set up to promote the financing of projects promoting the use of Renewable Energy and Energy Efficiency.

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Box 3. Good Practice Principles for Conditionality

Principle 1: Reinforce Ownership President Calderón announced México’s National Climate Change Strategy (ENACC) in May 2007,

culminating a two-year process of preparation and public consultation. Adoption of the SpecialProgram for Climate Change (PECC) followed in 2009 to operationalize the strategy and achieve its medium- to long-term goals for climate change mitigation and adaptation. ENACC and PECC are at the heart of the environmental sustainability pillar of México’s National Development Plan (PND) for 2006-2012, which Congress approved, and are also central to Calderón’s vision for México in 2030.

The energy and transport sectors are major sources of México’s GHG emissions. The Government’s strong commitment to reducing their emissions is evidenced by recent approval of laws for the Sustainable Use of Energy and Use of Renewable Energy and Finance of Energy Transition, as well as by the initiation of the Federal Mass Transit Program (PROTRAM) and the creation of a financing mechanisms, the National Infrastructure Fund (FONADIN).

As a single-tranche operation, this DPL acknowledges and reinforces these important steps to develop and implement transport and energy sector policies necessary to achieve México’s climate change goals.

As indicated in chapter IV, the policies and actions supported by this operation are underpinned by a substantial body of analytical work and by an in-depth and on-going dialogue with the Government.

Principle 2: Agree up front with the government and other financial partners on a coordinated accountability

framework The prior actions outlined in Box 2 and in the Operation Policy Matrix (Annex 2) have been agreed with the

Government. They are all key elements of the Government’s own strategy and programs to ensure that the energy and transport sectors make their intended contributions to México’s climate change mitigation goals as established in PECC.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The choice of a single-tranche DPL responds directly to the Government’s request for support for its debt

management strategy in light of the exigencies of the global economic downturn and credit tightening. As indicated under Principle 1, the policies supported by this operation are all core aspects of the

Government’s own program to strengthen the regulatory and institutional framework, financing mechanisms, and M&E systems pertaining to low carbon transport and energy use and generation.

As noted under Principle 2, all of the policies reflect the Government’s extensive internal deliberations and public consultations and are also underpinned by the Bank’s on-going dialogue with the Government and the substantial body of analytical work to which the Bank has contributed.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement The Bank has agreed with the Government that the seven prior actions are all steps that are critical to the

achievement of México’s climate change adaptation and mitigation goals. These goals cannot be attained without a strengthened legal and regulatory framework for RE and EE and financing mechanisms to promote low carbon urban mass transit and other investments for efficient and sustainable use of energy.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial

support Reviews of progress will be conducted jointly by the Bank, SHCP and concerned line ministries and other

agencies, including SEMARNAT, SENER and PROTRAM. The outcome indicators in the Operation Policy Matrix have been agreed with the Government and, together with the description of the Government’s emission reduction program in the Letter of Development Policy, will provide a transparent basis for monitoring progress in program implementation.

Support for the Government’s actions in the DPL’s first and second policy areas will also promote transparent progress monitoring, as will the on-going dialogue between the Bank and the Government as it develops its National Program for the Use of Renewable Energy and specific low carbon urban transport investments.

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Looking Forward: The Programmatic Potential of the Green Growth DPL 122. The proposed Green Growth DPL is the latest unifying policy loan that evolves out of a series of environmental and Climate Change-related SALs and DPLs while bringing to the forefront sectoral initiatives to combat GHG emissions. Its focus as such is on the GHG mitigation program and two key sectors of energy and urban transportation. The Framework for Green Growth DPL has been given a sufficiently broad title that the programmatic nature of the Bank’s support to Mexico’s environmentally sound infrastructure initiatives can run its course through this proposed DPL, both thematically and sectorally. As the diagram below illustrates, the green framework can be expanded from GHG emissions monitoring and mitigation into Climate Change adaptation or environmental protection for energy and urban transport development, and/or it can expand to other sectors. Expansion to other sectors could be done through the mitigation focus or, in turn, through adaptation or environmental protection.

Diagram: Potential Programmatic Continuation of Green Growth Policy Series

Regulations, Institutions and Monitoring Capacity

Financing Mechanisms

In other sectors

From CC Mitigation to

Adaptation

or

Environmental Protection

in Energy/Urban Transport

Green Growth DPL

Framework for Green Growth Programmatic Potential

Financing Framework

Enabling & Monitoring Framework

for Mitigation

Mitigation Policy

Framework

Energy

Urban Transport

Adaptation Policy

Framework

Environmental Protection Policy

Framework

Other Sectors:

Water Sanitation Solid Waste Roads Rail Ports Housing

Energy

Urban Transport

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VI. OPERATION IMPLEMENTATION

POVERTY AND SOCIAL IMPACT 123. Through its support to the strengthening of the regulatory, monitoring, and financial framework for low emissions evolution of the transport and energy sectors, this DPL—and the three policy areas that comprise the program—are expected to have significantly positive social impacts, particularly as it relates to policies that extend the availability of public transportation and reduce the energy bills of the poor. On the urban transport side, the country faces the challenge of decreasing its urban transport GHG emissions while improving the transport system, particularly in large cities where low quality of public transport services and heavy traffic mainly affect the poor urban population. The rationalization and expansion of public transport services in a country as urbanized as Mexico are expected to generate significant co-benefits related to: (i) improved mobility for the poor who disproportionately rely on public transport; (ii) improved travel conditions and increased safety for passengers;31 (iii) improved mobility for women who, more than men, depend on public transport; (iv) lesser overall street congestion and improved travel times; (v) lower levels of particulate emissions;32 and (vi) improved health impacts from lower exposure to air pollutants. Additional positive social impacts of the development of mass transport systems will include better use of public space and associated urban renewal, which would benefit both passengers and urban dwellers in the areas influenced by these systems. 124. Specifically, this DPL supports policies that will help to implement urban mass transit projects under PROTRAM, which can benefit urban populations representing 70 percent of the country’s total. In fact, the four Metropolitan Areas which concentrate around 25 percent of the national population; namely, Mexico City, Guadalajara, Monterrey, and Puebla, have already started to implement mass transport systems. Cities like Tijuana, León, Ciudad Juárez, Toluca and Torreón with more than one million inhabitants, as well as 15 other cities with more than 500,000 inhabitants are also targeted by PROTRAM. 125. Typical mass transit projects consist of a Bus Rapid Transit (BRT) facility that uses articulated buses (two-body buses for 160 passengers maximum) on exclusive lanes, stations throughout the alignment that permit payment upon entering the station, and at-grade boarding of the buses. Additionally, the typical BRT has terminals at the end points of the exclusive lanes for buses. In them, passengers transfer from feeder buses to the trunk (or articulated) ones. The typical BRT project entails fewer buses—thanks to the exclusive lanes and the stations—than when buses operate in mixed traffic. In

31 Personal safety and the avoidance of harassment are major concerns for women public transit users. Mexico City’s BRT system, Metrobus, has an innovative gender component that includes “ladies-only” cars during rush hour. 32 As shown by the Formulation of the Third Air Quality Management Plan, an IBRD-funded study in Mexico, obtaining air quality compliance with the WHO standards would yield health and environmental benefits of about US$2 billion per year.

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addition, economies of scale translate into lower total operating costs. Therefore, the typical BRT project is affordable to any user that already uses public transport. Fares do not increase because of implementing a BRT project as the examples of Mexico City and León de Guanajuato illustrate for Mexico. Furthermore, because BRT and mass transit lines in general also use electronic fare collection systems, it is possible to implement progressive fare schemes. 126. On the distributive side, implementing a BRT implies transforming the current bus operators from a one-bus-one-owner (hombre-camión) scheme to a more organized and efficient operation. Under this scheme, Mexican law grants hombres-camiones solid rights on their bus and route permits. However, with the implementation of the BRT, owners will have to sell their bus, which will then be scrapped in order to reduce the number of buses that compete with the new BRT, and they will have to capitalize to obtain the right to operate the new BRT. Cities such as Mexico City and León have introduced mechanisms to help the existing owners transition to the new scheme. For bus owners, the transition’s impact has been mitigated through compensation such as: (i) support for capitalization and credits to finance the acquisition of new buses;33 (ii) distribution of dividends to the hombres-camiones now dubbed shareholders, as a result of higher efficiency and economies of scale of the BRT; and (iii) increased work stability and benefits such as life insurance, health services, and retirement plans. Finally, the neighborhoods along the routes of BRT systems also benefit from newly paved roads that are put in place for the feeder buses.

127. When the mass transit line uses rail technology, the transition from hombre-camión to operator is more difficult if not impossible. The tariffs in rail transit systems tend to cover only operation and maintenance costs, and, contrary to bus-based systems, do not cover capital costs. For rail projects, therefore, a compensation scheme is usually established to compensate the bus owners with routes that compete with the new rail transit line.

128. Furthermore, mass transit systems tend to benefit disabled people, allowing for easy boarding. Female passengers are also likely beneficiaries due to their particular travel patterns as a result of the various household and child-related responsibilities, lower travel budgets, fewer options for commuting, and greater security concerns. Given the specific interest surrounding the nexus of mass transit and gender issues, the UTTP loan will be supplemented by a grant to carry out a study on Anchoring Gender in Transport and Development Policies of Urban Cities in Mexico. This initiative, funded by the Gender Action Plan (GAP), will contribute to the development of gender action plans through which women, who oftentimes inherit bus ownership licenses in the traditional hombre-camíón bus system, will be able to participate in--and benefit from--the new BRT scheme.

33 The financial model undertaken for the preparation of the UTTP shows that BRT lines are profitable for private investors at a fare of 5 pesos per ride.

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129. Finally, as mass transit projects need to accommodate the transit corridor, stations, or other facilities, a comprehensive social and environmental management framework has been designed as part of the UTTP to address displacement and other social and environmental impacts of mass transit interventions.

130. The energy efficiency policies supported by this DPL are also likely to have significant positive and progressive social impacts through the reduction of electricity bills brought about by targeted replacement of high energy-use appliances and bulbs. On renewable energy projects, it is conceivable that the policies supported in this program will lead to projects with negative social impacts for those living in and around a site location while providing positive social impacts for others, including health benefits from lower particulate emissions.

131. The country systems and engagement of the Bank with Mexico to address these potential downstream social and environmental impacts are discussed at the end of the Environmental Impact section below. At the same time, however, the new policy framework for renewable energy development will have a significant positive impact on several specific consumer groups. Namely, while the overall rate of electricity access in Mexico approaches 98 percent, still, through the new policy framework, in particular the policies promoting the use of solar energy, the Government aims to provide electricity access to an additional 3.5 million people-- 60 percent of which are indigenous peoples –living mostly in isolated rural areas in the country’s Southern States.

ENVIRONMENTAL IMPACT 132. In addressing climate change issues, the proposed reforms are expected to have significant positive environmental impacts that will be brought about through the building of incentives and regulations that reduce emissions and through the improvement of environmental licensing and regulations. The policy actions that comprise the Green Growth DPL are expected to contribute to overall positive environmental impacts particularly as they relate to emission reductions and co-benefits from reductions in urban local pollutants.

133. In Urban Transport, the operation of well-run and designed BRT systems has the potential to reduce exposure to airborne pollutants and air toxics, the experience of Mexico City being a case in point. According to the measurements conducted to estimate the effects of the METROBUS operation on local pollutants, the concentrations of CO, PM2.5, PM10, and benzene decreased significantly. Additionally, the operation of Insurgentes, the main BRT artery, has resulted in a 95 percent reduction in accidents, representing an additional economic benefit.34 The reasons for this significant reduction and associated health benefits from the METROBUS system include: (a) improved technologies with better emission controls; (b) fewer stops than in the previous system, thus reducing major emissions during start-ups; and (c) separate bus lanes and reduced generation of airborne pollutants in the area of influence of the corridor. 34 Clean Technology Fund Investment Plan for Mexico. January 16, 2009.

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134. Although the Green Growth DPL does not finance or elicit particular projects, downstream environmental impacts of BRT program and other mass transit systems include possible property requirements and disturbances during construction, such as higher emissions of particulate matter and traffic detours that increase travel time. However, the prototypical Mexican city tends to have wide streets that can be adapted to one exclusive lane per direction for buses. The width of the existing road usually makes it unnecessary to purchase nearby properties. In downtown areas streets could be narrow, in which case the typical solution is to split the corridor in two and send one direction of travel along one street and the other direction of travel on a different street. Therefore, no properties need to be purchased. Impacts during construction, on the other hand, can be mitigated through adequate management plans that follow Mexican law. 135. In the Energy sector, the environmental impacts expected from the implementation of Renewable Energy and Energy Efficiency programs, similarly, are significant and positive. The adoption of RE and EE measures will provide a variety of local and regional air quality benefits through their role in reducing the use of fossil fuels for electricity generation. Additionally, the replacement of fossil fuel-based generation is expected to reduce pollution of water supply, reduce harm to public health and, potentially, enhance local ecosystem services. On the environmental impacts of scaling up wind power, specific relevant studies35 are already underway. 136. In its dialogue with the Government of Mexico, through these kinds of studies and through the MOUs with SENER (Energy) and Hacienda (Urban Transport), the Bank will continue to help the relevant agencies in developing a framework and, where necessary, the capacity to identify, assess, monitor and evaluate, and manage such effects with a view to mitigating any adverse effects and optimizing the positive. Through the Energy Sector Management and Assistance Program (ESMAP), for instance, the World Bank will support the Government of Mexico, over the next two years, in identifying mechanisms to address environmental and social issues when developing renewable energy projects, including the expected sharing of costs and benefits. 137. The Bank has a long track record of engagement with the Government of Mexico to enhance the identification and management of infrastructure-related environmental impacts. These efforts include improvements to the management of sectoral impacts associated with urban transport and energy projects – such as the recently approved Environmental and Social Management Framework (ESMF) prepared by the Government of Mexico, outlining comprehensive procedures for environmental and social management of, for example, urban transport investments supported through the UTTP, and large-scale wind investments in La Venta II and La Venta III (located in Oaxaca, Mexico). In addition to efforts to support environmental mainstreaming within the sectors, there is a long history of engagement with SEMARNAT, the federal environmental authority, to improve environmental regulation and management of infrastructure investments, including, for example, through promoting improved

35 For example, Guidelines for Scaling-up Wind Energy Development (P109850) and La Venta II (P080104).

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environmental licensing practices. The Bank has also worked with the Government of Mexico to incorporate environmental and social management considerations at more programmatic and strategic levels, including through the recent engagement with the Federal Electricity Commission (Comisión Federal de Electricidad or CFE) on incorporating Strategic Environmental Assessment into their planning process, as well as with SENER for management of their mini-hydroelectric portfolio. Moreover, projects pushed forward by the Government of Mexico must prepare an Environmental Impact Assessment (EIA) in compliance with the Mexican Environmental Law (Ley General del Equilibrio Ecológico y la Protección al Ambiente, LGEEPA). 138. In addition, demonstrating the robustness of Mexico’s legal framework for environmental management, Mexico is the only country in Latin America where a pilot project – supporting roads, water and sanitation, and housing infrastructure – was implemented using “Country Systems” for safeguards, in accordance with OP 4.00. 139. In sum, this DPL, supported by the Bank’s other investment and advisory efforts – and building on existing and ongoing engagement -- in Mexico’s energy and transport sectors, is expected to contribute positively to the sectors' ability to manage environmental and social impacts and risks, and to strengthen stakeholder engagement and transparency. CFE has previously requested assistance from the Bank in developing capacity for strategic environmental and social assessment. Two successful workshops were held in 2007 and 2008, and CFE has expressed interest in continuing this dialogue with the eventual aim of strengthening the sector's overall management of safeguards-related issues. The dialogue facilitated by the DPL will include these issues, with likely engagement both on reform processes and institutional capacity building.

IMPLEMENTATION, MONITORING AND EVALUATION 140. The proposed program addresses monitoring and evaluation on two planes. On one substantive level related to the over-all program objective, the DPL includes a Policy Area on institutional and regulatory arrangements that is itself focused on monitoring and evaluation. It calls for the institutional and regulatory framework to establish baseline valuation of emissions and sector-level monitoring capacity for the emissions reduction program at the sectoral level. 141. On a second level, the program establishes clear monitoring and evaluation criteria for each of its proposed policy areas. Because of the focus on policy, regulatory and institutional development, the majority of the monitoring steps involve one-step evaluation of program achievements. The medium-term objectives related to capacity development of financing mechanisms, however, require monitoring and evaluation criteria that signal the programs’ momentum and early success in promoting low emission programs in urban transport as well as energy efficiency and renewable energy. 142. The implementation and sustainability of the Urban Transport program defined in the DPL (under Policy areas 2 and 3) are intricately linked to the implementation of the Government’s Urban Transport Transformation Program (supported by a World Bank

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SIL under preparation). The Monitoring and Evaluation of the relevant components of the Green Growth DPL (listed in Annex 2) and the parallel SIL will be mutually reinforcing, for example in data collection. Regarding the Energy sector programs supported by the DPL, each one of the sectoral Ministries and agencies involved in this operation (SHCP, SEMARNAT and SENER) will be responsible for the implementation of their proposed components and for reporting their progress. The Ministry of Environment (SEMARNAT) will be responsible for the coordination among these agencies in the DPL. Annex 2 lists the indicators that will be monitored for the program under each of the Policy Areas. 143. The World Bank will provide assistance in Monitoring and Evaluation as part of its Environmental MOU with the Government by financing the hiring of an expert to work with SEMARNAT to ensure that the M&E system for the PECC is being set up properly, supporting data collection on environmental indicators, including indicators fitting the activities from the PECC to complement the Climate Change indicators already included in the Programa de Transversalidad, and financing assistance to SEMARNAT for an annual stock-taking of the implementation of the PECC and communication of the findings to review policy design and progress and maintain accountability and transparency. 144. The implementation of the sector reforms and the regulatory framework embedded in the PECC is likely to require strong inter-institutional coordination capacity, horizontally as well as vertically. In response to this anticipated need, the World Bank will be engaged through lending instruments and technical assistance programs in supporting the Government of Mexico in implementing its Urban Transport, Energy Efficiency and Renewable Energy programs. A core element of the assistance is helping to build the capacity of the institutions involved and to strengthen the linkages of those institutions in their policy-setting, investment review and financing capacities. In urban transport, a parallel investment program and technical assistance program is concurrently being prepared by the Bank that will help address institutional capacity constraints at both municipal and federal levels through the primary planning, financing and monitoring requirements of the program. These sister initiatives are described in detail in the Analytical Underpinnings and Operation Description sections of the Program Document, as well as in Annex 4.

FIDUCIARY ASPECTS 145. In general, public financial management (PFM) systems in the Mexican federal administration are adequate for DPL lending, as documented in the 2003 Country Financial Accountability Assessment, 2007 Country Procurement Assessment Report, and other analytical work. The DPL would fund the Federal Expenditure Budget (PEF) and, accordingly, be subject to provisions of the annual PEF Law, the Federal Budget and Fiscal Responsibility Law, the Government Accounting Law, the Manual of Budget Procedures, and others. This set of legal and regulatory arrangements, together with their implementation systems, provides for sound budget formulation, execution and control arrangements. Other internal control aspects are ruled by the Federal Public

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Administration Internal Control Standards. As for external oversight, the Federal Supreme Audit Institution executes regularly a number of performance, financial and compliance audits on government programs, and their results are made public in the annual audit report on the Federal Public Accounts. Good systems are in place for follow-up to internal and external audit findings. There is room for improvement in some PFM areas, such as certain procurement and accounting practices that are not completely up to international standards, but there are plans underway –which the Bank is supporting- to move in that direction.

DISBURSEMENT AND AUDITING 146. The flow-of-fund arrangements are those customarily observed in DPLs for Mexico, as per long-standing agreements with the Government. The Ministry of Finance (SHCP) has informed the World Bank that BANSEFI will be the financial agent of the Borrower with regard to the DPL. Under this arrangement, upon effectiveness the Bank would make the single tranche disbursement to a designated account in US Dollars of BANSEFI,36 for subsequent credit to an account of the National Treasury (SHCP/Tesorería de la Federación, or TESOFE) used for general budget expenditures. The funds would thus become available for financing of budget expenditures through the PFM systems mentioned in the previous paragraph. If requested by the Bank, the SHCP would provide the Bank with a written confirmation of the described transaction. 147. Based on the review of external audit reports and the extensive flow-of-fund experience between the Bank and BANSEFI, nothing has come to the attention of Bank staff that would indicate that the banking control environment into which the DPL proceeds would flow is other than adequate. 148. Based on the assessment of the PFM and banking environments, no additional fiduciary arrangements are deemed necessary for the DPL.

RISKS AND RISK MITIGATION 149. The matrix below set out a set of key risks, and their mitigating measures, that might be anticipated as part of the Green Growth DPL proposed in this program document. The matrix focuses on economic, fiscal, regulatory, institutional, environmental and social risks that reflect the breadth of the policy initiatives proposed as well as the depth of the sectoral reforms.

150. The matrix outlines not only the risks of immediate concern over the one-year timeframe of the Green Growth DPL, but also addresses the risks pertaining to the medium- and longer-term sustainability of the Government’s program to be put in place with the support of the DPL.

36 The use of a financial agent and dedicated account is a local standard procedure established by the Government of Mexico for their control purposes, not an additional arrangement requested by the Bank.

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Risks to the Sustainability of the Programs Supported by the Green Growth DPL

Economic and Fiscal Risks Mitigation Measure

The global financial crisis may cause a sharp downturn of Mexico’s economic activity and falling tax revenues, and possibly have an effect on the Government of Mexico’s ability to finance sectoral programs, including the energy fund.

The Bank is engaged in a continued dialogue with the Government of Mexico, and the Government has confirmed that the projects and institutions supported by the Green Growth DPL are given priority in its spending program. FONADIN and other revenue stabilization funds can also be seen as a risk mitigating factor, allowing the Government of Mexico to draw financing for infrastructure investments.

Falling tax revenues may diminish the resources available to states and municipalities for making investments.

The significant assistance package--of which this operation is part--includes the technical and financial resources needed to manage those situations.

The long-term aims of the program may be at risk in the absence of reforms which facilitate private investment in generation based upon market prices for renewable energy.

The Government Program, the Green Growth DPL and related technical assistance activities require the design of power purchasing arrangements that value the external costs of renewable energy. This will support the development of a market for private investment in renewable generation.

The current financial crisis could cause the private sector to refrain from investing in urban transport projects. (PROTRAM, in particular, has an indicative minimum requirement for private sector participation of 35 percent of total costs.)

A similar risk exists for the Energy program, in that the financial crisis may cause private investors to refrain from participating in Energy investments until international and local financial markets recover.

With support from the Green Growth DPL, the latest stage in the Government’s program actively mitigates this risk on several fronts. The Urban Transport policies create a program of incentives to mobilize private investment in mass transit systems under a structure that will allow for profitability of the expected investments even at low and affordable tariff levels. The sister investment programs supported by the World Bank provide technical and financial resources for the program.

This risk of lack of private sector interest is being addressed through the new regulatory framework for Renewable Energy in which the Government, with support from the Green Growth DPL, will derive a methodology for valuing renewable purchase prices and target levels for renewable generation that facilitate investment. In addition, the Government is demonstrating its commitment to attracting the necessary investment through the creation and capitalization of the Fund for the Energy Transition and the Sustainable Use of Energy. Grants will be available for credit guarantees and other financial support to projects that comply with the National Strategy for the Energy Transition and the Sustainable Use of Energy.

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Political and Institutional Risks Mitigation Measure

The implementation of programs supported by the proposed DPL will require significant multi-institutional and federal-state-municipal collaboration. For example, Urban Transport planning and financing will require vertical collaboration among federal and municipal agencies. Likewise, close coordination among the Ministry of Energy, the Ministry of Environment, Public utilities, and federal sub-national institutions will be key to success in mainstreaming electricity generation from RE sources. The cross-institutional nature of the program and the uneven capacity across the sectoral agencies at federal, regional, state, and municipal levels, thus, present a risk to an even and timely implementation of reforms going forward.

In an effort to address the vertical and horizontal collaboration issues as well as the related concerns about institutional capacity, the Bank is currently supporting the Government through capacity-building programs and investment lending that strengthen the ability of the institutions to plan, implement, and monitor sectoral programs. The Urban Transport program, financed in part by a sister Bank SIL and CTF under preparation, provides direct incentives for municipal collaboration and participation in the federally funded mass transit program as well as grant resources for urban master planning. The Consultative Working Group of PROTRAM brings together the federal agencies required to offer an integrated set of policies and financing instruments for urban development. The final decisions on financing come from FONADIN’s Technical Committee which brings together state governments with the Environment Ministry and Transport Ministry under the leadership of the Ministry of Finance. Likewise, the energy sector reforms underway and supported by this DPL strengthen the sector agencies responsible for the evolution of the renewable and efficiency programs, from the energy regulatory bodies, the Ministry of Energy, the Funds related to the financing support of the programs, and the environmental agency counterparts. The process for gaining approval of the Special Program for Climate Change (PECC) has entailed a strong collaboration among federal government agencies as well as with sub-national institutions embedded within a set of agency-level commitments to implement the program at the sectoral level.

Political and Institutional Risks (Ctd.) Mitigation Measure

PROTRAM projects might not deliver the full range of possible benefits because of inadequate preparation, institutional capacity or problems during implementation.

The overall urban transport package includes an IBRD investment loan as well as concessional financing through a Clean Technology Fund investment loan and has resources to help cities prepare projects and advise them on adequate implementation. This will substantially increases the attractiveness of the program for uptake by municipalities. Since the investment loan will cover a subset of projects of PROTRAM, the Government of Mexico and the WB will work together through an MOU and in the context of the UTTP to replicate good practices to the overall PROTRAM program.

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Political changes can potentially threaten the sustainability of program implementation.

Political developments, to the extent that they affect decision-making processes in the Congress, are not expected to have an impact on the programs supported by the DPL, at least in the short-term. For example, Mexico’s energy sector laws have already been approved, and the Ministry of Energy is committed to the implementation of the RE Law. Inevitably, the long-term commitment of the Government to addressing emission reductions and the Climate Change agenda more broadly will depend upon growing public awareness and institutional strength of the agencies involved. To this end, the Bank’s holistic program of support attempts to address both the public’s involvement in the agenda—through the PECC consultations for example, and the institutions that will carry out the sectoral (e.g., PROTRAM, FONADIN, SENER, CONNUE) and cross-sectoral (e.g., SEMARNAT, Presidencia, SHCP) initiatives.

Social and Environmental Risks Mitigation Measure

The proposed reforms could have unforeseen distributional and environmental impacts through changes in fiscal/subsidization policy, environmental licensing and regulation.

In its dialogue with the Government of Mexico, the development of the CTF and Urban Transport programs, and in related AAA, the project team will continue to support the Government of Mexico in developing a framework and the capacity to identify, assess, monitor and evaluate, manage and mitigate any adverse effects caused by the program. In general, the Government of Mexico has the data, resources, and institutional capacity to manage these issues effectively.

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ANNEX 1: LETTER OF DEVELOPMENT POLICY

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ANNEX 2: OPERATION POLICY MATRIX

Program Development Objective: 1. The Overall Program Development Objective is to support stimulus of the economy while strengthening the framework for long-term sustainable growth. This will be achieved by further developing the regulatory, monitoring and financial framework for low emissions evolution of the transport and energy sectors.

2. The three Policy Areas of the DPL thus aim to:

implement a verifiable, targeted and cross-sectoral strategy for emission reductions;

establish institutions, regulations and monitoring capacity to allow for the reduction of emissions in urban transport, energy generation and efficiency; and

institutionalize the appropriate financing mechanisms to allow for the reduction of emissions in urban transport, energy generation and efficiency.

Policy Area 1 Comprehensive Policy Framework for the Reduction of Emissions Across Sectors

Policy Area Objective Prior Actions Outputs (at DPL

ICR date) Medium Term

Outcomes Monitoring and Evaluation

Indicators

1. Implement a verifiable, targeted and cross-sectoral strategy for emission reductions.

1. Approval and publication of the Special Program for Climate Change (PECC) in the Diario Oficial de la Federación.

1a. Completion of the National Emissions Inventory (Inventario Nacional de Emisiones) which serves as basis of 4th Communication.

1b. Submission by the Government of the 4th National Communication to the UNFCCC.

1. Reduction of emissions of MtCO2e according to PECC plan. For the electricity sector, the goals are defined in M.14-18 of the PECC for RE and in M.36-37 and 44 for EE.

In the transport sector, goals are defined in M.24-M.35 of the PECC. 37

1. For the Electricity sector, the measures according to the PECC timeline are specified in M.14-18 for RE-related reductions and in M.36-37 and 44 for EE-related reductions. 38

RE: Baseline: 0

Target 7.99 MtCO2e (2012)

EE: Baseline: 0 Target 5.33 MtCO2e (2012)

For transport sector-related reductions, the measures are specified in M.24-35.39

Baseline: 0

Target: 11.35 MtCO2e (2012)

37 “M.” = “Meta” or “Goal” as defined in the PECC. 38 M.14-18 refer to annual CO2 emissions reductions to be achieved through an increase in hydro, wind, geothermal, and solar-based generating capacity and its share in the overall generating mix, financed by both public and private investors. M.36-37 and 44 aim for electricity savings and associated emissions reduction through improved energy efficiency in the commercial sector, public buildings and municipalities and through replacement of inefficient electric appliances.

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Policy Area 2 Enabling and Monitoring Framework for the Reduction of Emissions in Transport and Energy

Policy Area Objective Prior Actions Outputs (at

DPL ICR date) Medium Term

Outcomes Monitoring and Evaluation

Indicators

Establish institutions, regulations and monitoring capacity to allow for the reduction of emissions in urban transport, energy generation and efficiency.

Urban Transport

2a. Resolution for the establishment of PROTRAM in accordance with PROTRAM Guidelines; and FONADIN’s participation in the Consultative Working Group (Grupo de Trabajo Consultivo) of PROTRAM.

2a(i). PROTRAM has adopted guidelines for urban transport planning that mainstream climate change.

2a(ii). PROTRAM has adopted methodology guidelines for developing corridor emission baselines.

2a. Municipalities’ programs for urban transport incorporate sustainability and climate change considerations.

2a(i).Municipalities that have prepared urban transport programs based on PROTRAM adopted guidelines.

Baseline: 0

Target: 2

2a(ii). Municipalities that have developed emissions baselines for transit corridors. Based on PROTRAM adopted methodology guidelines.

Baseline: 0

Target: 2

Energy

2b. Energy Efficiency Law passed; CONUEE created.

2c. Renewable Energy Law passed.

2b&c. Regulations defining the terms of the two laws.

2b&c. Development of methodologies for the quantification of GHG for the exploitation, production, transformation, distribution, and consumption of energy, as well as for the avoided emissions.

2b&c. An effective regulatory framework that promotes energy efficiency and renewable energy.

2b&c. Annual Evaluation Report by SEMARNAT of GHG emissions in the energy sector.

2b&c. Publication of regulations in the Diario Oficial de la Federación for the Program for the use of renewable energy; and the Program for the sustainable use of energy.

2b&c. Verification by SEMARNAT of the sector’s compliance with the energy efficiency and renewable energy-related emissions reductions goals established in M.14-18 for RE-related reductions and in M.36-37 and 44 for EE-related reductions.

39 M.24-M.35 refer to annual CO2 emissions savings that will be achieved through reduced consumption of diesel and gasoline by freight and passenger transport vehicles, expanded use and modernization of public transport and mass transit systems, and technical improvements and regular renovation of the vehicle fleet, among other sectoral interventions.

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Policy Area 3 Establishment of Financing Mechanisms to Facilitate the Reduction of Emissions in Transport and Energy

Policy Area Objective Prior Actions Outputs (at DPL

ICR date) Medium Term

Outcomes Monitoring and

Evaluation Indicators

Institutionalize the appropriate financing mechanisms to allow for the reduction of emissions in urban transport, energy generation and efficiency.

Urban Transport

3a. Presidential Decree, Fourth Modifying Agreement, and Operating Rules establishing FONADIN.

3a. FONADIN’s technical committee approves funding for urban transport programs that incorporate climate change considerations.

3a. FONADIN has evolved into a source of funding that facilitates sustainability and climate change considerations for municipalities preparing their mass transit support programs.

3. Number of requests for funding received by FONADIN (Grupo de Trabajo Consultivo) for urban transport programs that promote reduction of emissions

Baseline: 0

Target: 10

Energy 3b. Establishment of the Fund for Energy Transition & the Sustainable Use of Energy; and the promulgation of regulations to define the Fund’s operations.

3b. The Fund has been capitalized so as to finance at least one pilot project in Energy Efficiency.

3c. The Technical Committee, chaired by SENER, has developed a publicly available inventory, including geographical mapping, of projects eligible for financing from the Fund.

3b. Increase electricity generation from renewable sources as established in M. 14-18 of the PECC by end-2012.

3b(i). Targets established in M. 14-18 of the PECC and monitored by SEMARNAT.

Baseline: 0

Target: 3,367 MW

3b(ii). Program delineated for replacement of incandescent light bulbs with CFLs, replacement of inefficient appliances; and improved efficiency of street lighting in municipalities.

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ANNEX 3: FUND RELATIONS NOTE

Publications Staff Report Mexico: Arrangement Under the Flexible Credit Line April 7, 2009

Press Releases Mexico and the IMF

IMF Executive Board Approves US$47 Billion Arrangement for Mexico Under the Flexible Credit Line Press Release No. 09/130 April 17, 2009 The Executive Board of the International Monetary Fund (IMF) today approved a one year SDR 31.5 billion (about US$47 billion) arrangement for Mexico under the Flexible Credit Line (FCL). The Mexican authorities have stated they intend to treat the arrangement as precautionary and do not intend to draw on the line. The arrangement for Mexico is the first commitment under the IMF’s FCL, which was created in the context of a major overhaul of the Fund’s lending framework on March 24, 2009 (see Press Release No. 09/85 and Public Information Notice 09/40). The FCL is particularly useful for crisis prevention purposes as it provides the flexibility to draw on the credit line at any time. Disbursements are not phased nor conditioned on compliance with policy targets as in traditional IMF-supported programs. This flexible access is justified by the very strong track records of countries that qualify for the FCL, which gives confidence that their economic policies will remain strong. Following the Executive Board discussion of Mexico, Mr. John Lipsky, First Deputy Managing Director and Acting Chairman of the Board, made the following statement: “Today is a historic occasion. The IMF Executive Board has approved the first Flexible Credit Line (FCL) arrangement and, at the same time, the largest financial arrangement in the Fund’s history. The approval of this arrangement for Mexico represents the consolidation of a major step in the process of reforming the IMF and making its lending framework more relevant to member countries’ needs. “For over a decade, Mexico’s macroeconomic performance has been very strong, exemplified by solid growth with low inflation; a steady reduction in public debt, and strengthened corporate balance sheets; a contained current account deficit; and a profitable and well capitalized banking sector. This has been underpinned by a highly credible and very strong policy framework, including a successful inflation targeting regime that has supported the commitment to the flexible exchange rate; a rules-based fiscal framework; and strong and sophisticated financial sector supervision. “However, the current difficult global economic and financial environment poses challenges even for countries with very strong fundamentals. As the global situation has deteriorated, Mexican

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asset prices have fallen sharply in line with the global market sell off, and GDP growth has slowed sharply. While Mexico’s underlying fundamentals remain very strong, and the balance of payments position is manageable, the open capital account and close global financial linkages––on top of close trade links with the United States––could expose the country to potential downside risks. “The authorities have taken robust and timely measures to respond to the deteriorating global situation, including steps to maintain orderly functioning of domestic markets, and to facilitate the refinancing of corporate external debt; fiscal stimulus to support demand, while simultaneously announcing measures to ensure medium term fiscal sustainability; and monetary policy easing. Looking forward, policies will continue to be underpinned by the rules based macroeconomic framework, accompanied by continued close monitoring of financial and corporate sector developments, and the authorities intend to continue to react as needed to any future shocks that may arise. “It is against this background that, at the authorities’ request, the Executive Board today approved a one year arrangement under the IMF’s FCL, which the authorities intend to treat as precautionary. The Executive Board considered that Mexico was an excellent candidate to pioneer this facility. The FCL will play an important role in supporting the authorities’ overall macroeconomic strategy and in bolstering confidence until external conditions improve, complementing the previously agreed swap line with the U.S. Federal Reserve, as well as financing from other multilaterals. All told, Mexico’s combination of strong macroeconomic policies, institutional policy frameworks, and economic fundamentals, together with the additional insurance provided by the arrangement under the FCL, provides assurance that Mexico is in a very strong position to manage any potential risks and pressures in the event that the global situation were to deteriorate further,” Mr. Lipsky said.

IMF EXTERNAL RELATIONS DEPARTMENT Public Affairs

Media Relations

Phone: 202-623-7300 Phone: 202-623-7100 Fax: 202-623-6278 Fax: 202-623-6772

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ANNEX 4: RELATIONSHIP OF OTHER WORLD BANK OPERATIONS

TO THE FRAMEWORK FOR GREEN GROWTH DPL

Previous and Currently Ongoing Analytical Work

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Aside from the Climate Change and Environmental DPLs that are described in detail in the main document, recent Bank operations in Mexico in the areas of environment and Climate Change as well as their related Memoranda of Understanding for Bank Technical Support include:

Memorandum of Understanding (MOU) with SEMARNAT. The purpose of this MOU is to enhance climate change policy dialogue, and further strengthen Mexico’s capacity to mainstream environmental consideration into productive sectors as well as to implement its National Climate Change Strategy and Special Program for Climate Change. The MOU comprises a variety of activities, including: (i) support to key studies, such as the MEDEC Low Carbon Economy study, the Economics of Climate Change Study, and the Clean Technology Fund Investment Plan, all of which have been completed; (ii) a legal and institutional assessment for implementation of the Special Program for Climate Change (PECC); (iii) preparation of Sub-national climate change strategies; (iv) mainstreaming climate change and other environmental considerations into energy-intensive and/or climate-prone sectors, including energy, housing and agriculture; and (v) design of a Cap and Trade System for Mexico. On the final point – Design of a Cap and Trade System – the Government of Mexico, with Bank support, is assessing Mexico’s options for mitigating GHG emissions, through regulation and CO2 pricing, and the respective economic implications. Specifically, the study is considering the following options: continuation of current policies; the institution of emission caps on one or more sectors; and the implementation of policies to reduce emissions from targeted sectors while monetizing emission reductions in international carbon markets that accept sectoral offsets.

The Environmental MOU with SEMARNAT follows the Mexico Environmental Sustainability Development Policy Loan (P095510), initiated in early 2008 and closed in late 2009. The DPL supported policy and institutional reforms to promote sustainable development with the overarching objective of balancing socio-economic development with environmental protection and improvement. The operation was intended to complement actions supported by the Climate Change DPL and to further pursue the general objectives of a previous Environment DPL Program, by integrating environmental concerns in the sectoral policies and programs of key development sectors--tourism, energy, forestry, water, agriculture, and housing--as prioritized by the Government of Mexico.

The Memorandum of Understanding (MoU) for Technical Assistance to the Implementation of PROTRAM (P117624) is being developed as a framework of collaboration between the SCHP and the World Bank for the effective implementation of the PROTRAM. Work will focus on five areas: (i) support for the preparation of urban transport projects, (ii) mass transit program performance

monitoring, (iii) support in the development of methodologies for evaluation and risk management, (iv) contribution to the institutional organization of urban transport at the federal level, and (v) support for capacity building activities, horizontal collaboration, and systematic analysis of urban transport in Mexico. As

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part of this MoU, the Carbon Partnership Facility will support cities in developing methodologies for transport emissions trading.

Low Carbon, High Growth: Latin American Responses to Climate Change, the Bank's flagship report on LAC, provides a scientific background to the specific instances of policy engagement and operational work. The comprehensive study explores how the region’s countries are exposed to climate change impacts and, on the flipside, what they can do to avert its effects, both unilaterally and with the incentives of a global climate agreement to be negotiated next year in Copenhagen by the United Nations.

Through the Mexico Low-Carbon Study (MEDEC), implemented from August 2007 until mid-2009, the Bank assisted the Government of Mexico in assessing the country’s potential for low carbon growth and the macroeconomic and fiscal implications of a low carbon development plan, highlighting Mexico’s potential for reducing carbon emissions from specific sectors, including transport, power generation, and end-use energy efficiency. Based on a common economic cost-benefit analysis, the study estimates the net costs, emissions reductions, and upfront investment that would be needed to maintain carbon emissions relatively constant over the next two decades while meeting existing economic and social development objectives.

Through the CDM Technical Assistance project (P104731), which was implemented by Centro Mario Molina and Banco Nacional de Comercio Exterior or BANCOMEXT, the World Bank provided technical assistance for the design of the Mexican Carbon Fund and project screening and carbon finance due diligence. The project was approved in late 2008 and closed in March 2009.

By providing the Government of Mexico with an Institutional Development Fund (IDF) grant, the World Bank supported the government in its effort to strengthen institutional capacity by establishing a Climate Change Office (CCO). Likewise, the IDF supported the identification of economic instruments for the internalization of climate change concerns in economic planning.

The Mexico’s Energy Sector Memorandum of Understanding with SENER (P114892), to be implemented from February 2009 until May 2010, is another example of technical assistance to the Government of Mexico to further strengthen the country’s capacity to implement its Energy strategy. Specifically, the MOU supports the Government of Mexico in integrating its policy to promote the use of RE sources in power generation, analyzing options for modifying the regulatory framework for energy efficiency, designing programs to promote the use of efficient lighting and appliances, and integrating the National Energy Strategy.

The Mexico Memorandum of Understanding on Subnational Climate Change Plans (P105849) will be implemented until early 2010.

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Related Operational Work

Urban Transport

The Bank has supported Mexico through the Mexican Medium Size Cities Transport Program (P007648), which strengthened local agencies and supported the federal urban transport decentralization process. This project also helped cities develop their first Integrated Transport Plans, a comprehensive approach to transport planning at the city level. Having an ITP is required for a city to participate in the PROTRAM and the UTTP.

Through a fee for service Mexico Mass Urban Transport Federal Program (P110474), the Bank worked closely with Mexico in designing, creating and establishing PROTRAM. The resulting report, “Programa Federal de Apoyo al Transporte Masivo: Fundamentos del Programa y Lineamientos para su implementación en el marco del FONADIN,” laid the foundations for PROTRAM. This technical assistance program was implemented from late 2007 until August 2008.

The Urban Transport Transformation Program or UTTP (P107159) is expected to be approved in August 2009. The UTTP is a comprehensive urban transport intervention loan (with a contribution from the CTF) that particularly emphasizes the development of mass transit, NMT, and introduction of low-emissions vehicles. Its aim is to improve the long-term sustainability, efficiency and quality of urban transport in Mexico, and reduce GHG emissions and local criteria pollutants. Through BANOBRAS, the UTTP/CTF loan will allow cities to receive credits at significantly lower rates than market rates for projects that contribute to placing urban transport in low-carbon growth path.

The Sustainable Transport and Air Quality (STAQ) project (P114012), a Global Environment Facility (GEF) operation to be approved in September 2009, will offer grants for preparing projects in four Mexican cities (Puebla, Monterrey, León, and Ciudad Juarez), all of which are currently part of the PROTRAM pipeline of projects. It will thereby help reduce the amount of CO2 and air pollutants by facilitating the use of public transportation and non-motorized modes, as well as planning for physical investments and regulatory frameworks that reduce the need for excessive movement of people and goods. Likewise, the project will facilitate the ability of policy makers, civic leaders, and technical staff in cities to articulate a sustainable transport vision adapted to local conditions, and to identify concrete and measurable steps to move toward that vision. Finally, it will facilitate the ability of cities to share knowledge, information, and methodologies relevant to their development of sustainable transport visions.

The Anchoring Gender in Transport and Development Policies of Urban Cities in Mexico This initiative, associated with the Urban Transport Transformation Project (UTTP), intends to mainstream gender in the transformation process to a BRT system in the city of León. The is financed by the Gender Action Plan (GAP) multi-donor trust fund and is closely tied to GEF financing from the Sustainable Transport and Air Quality initiative, involved in the preparation of

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the transformation process from the bus system to the BRT in the city of Leon. The “Anchoring Gender” project will address gender through three specific activities: (i) the design of BRT routes and/or other transport programs, (ii) the ownership acquisition/transition from the traditional bus system to the industrial BRT scheme, and (iii) the operation of the new BRT system. The results and lessons learned from the pilot project, whose launch is dependent upon the UTTP’s expected approval in August 2009, could be later integrated in other participating cities under the UTTP.

Introduction to Climate Friendly Measures in Transport (P059161) is a GEF-financed project, approved in 2002 and completed in March 2009, that assisted the Government of Mexico in developing policies and measures for stimulating a long-term modal shift toward climate-friendly, more efficient and less polluting, less carbon intensive transport in the Mexico City Metropolitan Area (MCMA). The operation also supported aspects of the Third Air Quality Management Plan (AQM-III 2002-2010).

Mexico City--Insurgentes Bus Expansion Program (P082656), a Carbon Finance operation approved in late 2005 and to be completed by mid-2016, aims to reduce local airborne pollutants and GHG emissions from the transport sector in the Metropolitan Area of Mexico City through the development of the first surface mass transport corridor in Mexico City (Insurgentes Avenue) and associated traffic management measures.

Mexico: Low Carbon Bus Corridor Project (P106305), a carbon finance operation approved in May 2009, to be implemented by the end of 2012, will contribute to the transformation of the transport sector through improvements in the long-term sustainability, efficiency and quality of urban transport in Mexico City. The improvements sought (expansion of the bus corridor program, the maximization of modal shift, and the use low carbon bus technologies) will result in major reductions in GHG emissions and local criteria pollutants.

Renewable Energy

Guidelines (Environmental and Social) for Scaling-up Wind Energy Development (P109850) is expected to be completed by December 2009. The study reviews and documents the lessons learned in wind power project implemented by the Bank in Mexico and a number of other countries, providing guidelines and recommendations for future projects on the management of environmental and social aspects.

Through the above-mentioned Mexico Low-Carbon Study (MEDEC) (P108304), the World Bank assisted the Mexican Government in assessing the country’s potential for low carbon growth and the macroeconomic and fiscal implications of a low carbon development plan. Among other options, the study highlights Mexico’s potential for reducing carbon emissions from power generation, providing estimates of the respective net costs, emissions reductions, and upfront investment that would be needed.

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The Energy Sector Memorandum of Understanding with SENER (P114892) described above will assist SENER and the Government of Mexico in further strengthening the country’s capacity to promote the use of RE sources in power generation.

The Hybrid Solar Thermal (P066426) project (GEF funded) aims to demonstrate and encourage replication of the Integrated Solar Combined Cycle Systems (ISCCS) power generation technology in Mexico and elsewhere, thereby contributing to the reduction of global GHG emissions. The project was declared effective in 2008 and the bidding documents are near finalization.

The Integrated Energy Services (P095038) project supports the use of renewable energy in rural areas for the provision of electricity. The project was declared effective in July 2009.

The Large-Scale Renewable Energy Development GEF Project (P077717)40 is being financed through GEF funds, and aims to assist Mexico in developing initial experience in commercially-based grid-connected renewable energy applications by supporting construction of an approximately 101 MW IPP wind farm, while building institutional capacity to value, acquire, and manage such resources on a replicable basis. The project was approved on June 29, 2006 and declared effective May 18, 2007. The contract with the IPP developer was signed by CFE in June 2009. It is expected to close by December 2016.

Wind Umbrella, or La Venta II (P080104), a carbon finance operation, aims to reduce GHG emissions from power generation by 4 million tons CO2e over a 20-year operation period, promote investment in wind energy, and contribute to further development of the international carbon market in Mexico. The Emissions Reductions Purchase Agreement (ERPA) was signed on December 12, 2006, and the closing date for the project is December 31, 2019.

The Mexico Biomass Residues Based Co-generation Project (P109794) is a Carbon Finance project of the amount of US$7 million, fully funded by the Bank’s administered carbon funds. The ERPA is expected to be signed by the end of FY2010. The Grupo Modelo Biomass Residues Based Co-generation Project consists of the replacement of fossil fuel used for heat and electricity generation at the brewery, specifically replacement of heavy fuel oil by biomass. The Bank has requested a revision of the methodology to include the use of waste bagasse to generate electricity.

Renewable Energy Management Transition Initiative (REMTI) - The ESMAP Trust Fund under the REMTI is supporting a 2 to 3 year program of just-in time advice, TA and analytical work to design, disseminate and implement policies pertaining to the use of Renewable Energy.

40 The World Bank. (2006). Mexico - Large-Scale Renewable Energy Development GEF Project. Project Appraisal Document. May 19.

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Energy Efficiency

The Mexico Lighting and Appliances Efficiency Project (P106424), a CTF project expected to go to board on March 13, 2010, will help Mexico in increasing efficient use of energy and thus support its efforts to mitigate climate change. The project is being financed through IBRD, CTF and CF funds, and is expected to include four components: (i) replacement of incandescent light bulbs with CFLs; (ii) replacement of inefficient refrigerators and air-conditioners; (iii) measures to increase the efficiency of street lighting in municipalities; and (iv) technical assistance and institutional strengthening of relevant energy sector agencies to operationalize and implement the new Energy Efficiency Law. The project may include carbon finance. By implementing targeted energy efficiency measures, this project will help the country enhance its energy security, while lowering prices through avoided incremental investments.

The Rural Development Project in Mexico: Energy Efficiency and Renewables: The project objective is to promote the adoption of environmentally sustainable technologies in agri-businesses. The global environment objective is to contribute to the goals of the National Strategy on Climate Change by reducing GHG (CO2) emission through the adoption of emission-reduction technologies and the support to the implementation of the President’s Special Program for Climate Change (PECC). The project has four components aiming at:

channeling resources toward the installation of solar thermal water heating systems to be used in meat packing, food processing, and distilleries;

supporting agribusinesses that seek to complement their energy consumption with photovoltaic solar systems connected to the national grid while simultaneously promoting the installation of biodigestors to capture biogas generated from animal waste at hog and dairy farms;

supporting at least 140 agribusinesses with training on the adoption of energy efficiency practices; and

conducting specific energy efficiency measures.

The MEDEC and Energy Sector Memorandum of Understanding with SENER (referred to above) also address energy efficiency activities.

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ANNEX 5: MACROECONOMIC, FISCAL AND FINANCIAL SECTOR CONTEXT

1. Mexico is in the midst of a deep recession as it faces the impacts of strained global financial conditions, a sharp contraction in international trade and the outbreak of the A/H1N1 flu. Based on seasonally adjusted quarterly GDP statistics the economic recession in Mexico started as early as the third quarter of 2008 and the downturn has been particularly sharp during the fourth quarter last year and the first quarter of 2009 (see figure 1a). The outbreak of the flu epidemic in the last week of April aggravated the economic downturn during the second quarter of the year as a result of social distancing, the closure of selected businesses (restaurants, bars and theaters) during a critical 2-week period in significant parts of the country and a longer-lasting reduction in international travel and tourism.41 Economic activity during the first half of this year has been down by 9.2 percent compared to the same period of the previous year.

2. The global financial crisis led to a sharp tightening of financing conditions in a large number of emerging market economies. Mexico has been no exception. In response to the global financial crisis and emerging market sell-off, the Mexican authorities implemented several policy actions to maintain and restore liquidity on domestic financial markets including foreign exchange interventions, the provision of loans and loan guarantees to domestic firms by government owned development banks and the repurchase and reduced issue of longer-term government bonds. Nevertheless, there was a substantial depreciation of the currency, and the flexible exchange rate continues to operate as a key instrument and signaling device for the rapid adjustment of the economy to external shocks.

3. Prior to the onset of the global economic downturn, Mexico experienced moderate growth within a framework of enhanced macroeconomic stability. GDP growth averaged 3.8 percent annually between 2004 and 2007; fiscal policy successfully focused on a reduction of the public sector deficit and a decline in the public sector debt-to-GDP ratio, and enhanced price stability contributed to a healthy domestic credit expansion and growth of domestic demand.

4. Economic activity suffered a severe contraction throughout the world. Mexico’s annual economic growth decelerated substantially as the economy entered into a recession towards the second half of 2008, leading to a more limited GDP growth of 1.3 percent for the year. The current base case scenario for Mexico includes a contraction of economic activity by 6.8 percent in 2009 which, in view of the dismal performance of the economy during the first semester requires a substantial recovery of activity in the second half of the year.

41 The Government estimates that the contraction of economic activity that can be attributed to the flu outbreak is about 0.3 to 0.5 percent of GDP this year and is concentrated in the 2nd quarter of the year (Presentation Dr. Carstens to the Senate August 11, 2009)

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Figure 1 a-f: Real Economy Indicators

a) The Mexican economy faces the worst recession since the Tequila crisis…

b)... the result of a sharp aggregate demand contraction

c) Fall in exports, due to a weaker external demand, has been accompanied by a strong reduction in imports

d) Manufacturing industry is closely correlated to a rapidly weakening US industry….

e) …leading to job losses and increasing unemployment. f) Under this scenario, economic perspectives are sharply adjusted downward

GDP Growth

-30%

-22%

-14%

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07:I 07:II 07:III 07:IV 08:I 08:II 08:III 08:IV 09:I 09:II

y oy % qoq% annualized

Demand and Supply Components (yoy%)

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Consumption Inv estment Ex ports Imports

Exports

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M exico M anufact. Prod. 2003=100

Unemployment Rate (%)

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M ex USA

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5. The Mexican government implemented counter-cyclical fiscal stimulus policies to mitigate the impact of the external demand shock on the domestic economy. The fiscal stimulus policies adopted include additional public investment in infrastructure incorporated in the 2009 budget as well as employment programs, a reduction and freeze of public sector administrated prices in the energy sector and an expansion of development banks’ credit programs. The 2009 budget implies a fiscal stimulus at about 1.5 percent of GDP42 and is financed, in part, by increased public sector borrowing.

6. The contraction of economic activity is leading to a sharp decline in tax revenue making it difficult to sustain planned public expenditure levels. During the first seven months of this year non-oil tax revenue dropped by 13.6 percent in real terms while Value Added Tax revenue plummeted by 20 percent. The government plans to compensate lower oil and non-oil budget revenue this year, currently estimated at MXN 477.5 billion (US$35 billion, 4 percent of GDP) with non-recurrent resources from a successful oil hedge, an extraordinary transfer of profits from the central bank and drawing resources from the government’s revenue stabilization funds. In addition, lower federal government revenue automatically translates in less revenue shared with states and municipalities. Finally, the government announced public expenditure cuts to a total amount of MXN 85 billion (US$6.5 billion, 0.7 percent of GDP) last May and August in order to keep the 2009 budget balance targets on track.

7. Extraordinary revenue sources used to compensate the shortfall in fiscal revenue this year will not be available in 2010 prompting additional fiscal adjustment in next year’s budget. The government’s budget projections for 2010 show a revenue shortfall of MXN 374 billion (US$29 billion, 3.0 percent of GDP) compared to the expected revenue in the 2009 budget. The government proposes to close this gap by a combination of expenditure reductions, revenue enhancing measures and allow for a higher deficit.43 The Mexican fiscal responsibility law requires a balanced budget44 and allows for a deficit only under “exceptional circumstances” and conditioned by the adoption of a medium term fiscal framework to return to a balanced budget. The sharp decline in public sector revenue due to the current cyclical downturn is further aggravated by a rapidly falling volume of oil production leading to a more structural challenge to

42 The State of Public Finances: A Cross-Country Fiscal Monitor, IMF July 30, 2009. Recently announced spending cuts, to an amount of 0.7 percent of GDP, in response to revenue pressures and focused on personnel and administrative costs will slightly modify the size of the fiscal stimulus. 43 The government submitted its budget proposal for 2010 to Congress on September 8, 2009 in which it proposes to cover the permanent component of the revenue shortfall, estimated at 1.7 percent of GDP, by expenditure cuts and revenue enhancing measures, leaving a transitory component of the shortfall to be financed by additional deficit spending, 0.5 percent of GDP, and non-recurrent extraordinary revenue, 0.8 percent of GDP. 44 A modification to the law adopted by Congress in 2009 includes all investments by the public sector oil company in the budget but excludes these investments from the budget balance requirement. Those investments are currently estimated to amount to 2.1 percent of GDP for 2009 and 2.0 percent in 2010. As a result the budget deficit for 2009 is estimated at 2.1 percent of GDP, while for 2010 the government proposes a budget deficit of 2.5 percent of GDP (i.e. 2.0 percent oil sector investment and an additional 0.5 percent temporary deficit spending).

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replace diminishing oil revenue by more permanent sources of revenue. The government is proposing a mix of tax policy measures and adjustment in public sector administrated prices (mainly in the energy sector) and a complicated political debate is underway to decide on the mix of revenue and expenditure measures. Even though an incipient economic recovery could be jeopardized by premature fiscal consolidation, there is a need to signal a clear medium term adjustment in order to assure markets of fiscal sustainability. In this regard, rating agencies have already subjected maintaining the country’s current sovereign credit rating to a satisfactory resolve on revenue enhancing measures.

8. Monetary policy started to ease since January 2009 in order to support other efforts to reduce the downturn in economic activity. Even though consumer price inflation continues at a level, 5.1 percent last August, that is substantially above the authorities medium-term target of 3 percent the severity of the economic downturn has led the authorities to reduce its target for the overnight interbank interest rate by an accumulated 375 basis points between January and July this year, from 8.25 to 4.50 percent. The central bank currently projects to reach its medium-term inflation target towards the end of 2010 and forecasts an inflation of 4.0-4.5 percent by the end of 2009. Adjustments in public sector administered prices may provide an additional challenge to the monetary authorities to assure that the impact of these price hikes on headline inflation remains a one-off event.

9. The authorities have taken several actions to maintain orderly conditions on foreign exchange and domestic financial markets in view of the unprecedented global financial shocks. The central bank intervened in foreign exchange markets providing foreign currency liquidity to the private sector. Sales of international reserves through different intervention mechanisms summed to US$30 billion between October 2008 and August 2009. Though Mexico maintains a level of international reserves relative to short term debt and imports that is below the level observed in several other emerging market economies and currency interventions reduced reserves to US$76 billion by August 2009 compared to US$85 billion in September 2008, indicators of foreign reserve adequacy continue well above conventional thresholds of 100 percent relative to short-term external debt or three to six months of imports. Furthermore, bilateral and multilateral support, through a US$30 billion currency swap arrangement with the US Federal Reserve (extended until February, 2010) and a US$47 billion Flexible Credit Line (FCL) with the IMF, provide for additional precautionary sources of external funds. Announcement of the one-year FCL last April greatly reduced volatility of the peso.

10. The Mexican government, through its development banks, also stepped in to facilitate refinancing of corporate debt and to support securitized private housing finance on the private domestic bond market. Issuance of private domestic securities (financial and non-financial) was severely disrupted. No medium-term bond issues were made during October and November last year and the issuance of short-term paper also

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declined significantly (see figure). A bankruptcy filing of a major AAA45 rated company following large losses on currency related derivatives (see box 1) impaired the non-financial corporate commercial paper market. To maintain the flow of credit and allow corporations to refinance, NAFIN and Bancomext designed an emergency program through which they guaranteed up to 50 percent of domestic corporate paper issuances. Sociedad Hipotecaria Federal, the government’s private housing finance development bank, stepped in to avoid a collapse of the nascent Residential Mortgage Backed Security (RMBS) market and support the flow of credit to mortgage originating non-bank credit institutions (Sofoles and Sofomes). After a default by two mortgage Sofoles on the commercial paper, the SHF designed a program to guarantee up to 65 percent of bonds issued by mortgage Sofoles enabling them to refinance debt maturing in 2009 and 2010.

Box 1 Derivates-related exposures in the corporate sector

The global financial crisis revealed substantial off-balance sheet foreign exchange exposure by several Mexican corporations through complex derivate structures. Low currency volatility and nominal appreciation before August 2008 led companies to bet against the depreciation of the peso by selling foreign exchange options in the offshore market. These contracts allow corporates to sell US dollars at a favorable rate when the exchange rate rises above a “knock-out” price (i.e. the domestic currency appreciates), but force them to sell dollars at an unfavorable rate if the exchange rate falls below a “knock-in” price (the domestic currency depreciates), offering financing and currency trades at favorable rates, but with the drawback of having to deliver dollars at a loss if the domestic currency depreciates past a certain threshold.

The sharp currency depreciation observed after September 2008 resulted to corporate losses on derivates estimated at about US$5.5 billion in the fourth quarter of 2008. The discovery of these derivates as well as the efforts of some large corporations to close their unhedged foreign currency positions fuelled the demand for dollars, increased exchange rate volatility and led to some unexpected commercial paper defaults.

The complexity of these deals and the fact that they were done privately highlights the lack of transparency in these markets, as many of these companies did not disclose any information on their derivative position.

Source: Jara, Moreno and Tovar (2009) The global crisis and Latin America: Financial impact and policy responses, BIS Quarterly Review, June, pp 53-68.

11. Growth of credit to the non-financial private sector has started to decelerate and may soon turn negative. Despite a brief period of double digit growth over the past few years, the level of credit to the private sector in Mexico remains, at about 30 percent of GDP, low compared to other countries in the region or at comparable levels of economic development. Growth of credit slowed down significantly over the past few months once one adjusts credit growth, in constant domestic currency terms, for the depreciation of the exchange rate. About a quarter of the amount of credit outstanding to the private sector is expressed in foreign currency and a depreciation of the peso increases the peso equivalence of the amount outstanding without any additional credit flow taking place. As can be observed from figure 3, the growth of credit in real, domestic currency terms dropped sharply over the past two quarters to a slight contraction by the first quarter of 2009 of 0.2 percent. 45 On a local scale

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Figure 2 a-f: Financial Indicators

a) Increased risk pricing has been reflected in significantly higher sovereign risk spreads…

b)...and in a sharp depreciation and volatile exchange rate

c) The share of foreign holdings of government bonds declined abruptly…

d)...the financial asset sell-off is reflected in a sharp increase in the yield on long-term government bonds.

e) Domestic finance cost for the Mexican companies increased…

f)…as private domestic issuance of medium- term securities was disrupted.

Sovereign Risk Spreads(EMBI Global basis points ov er US Treasury )

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Exchange Rate(peso/dollar)

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-06

Mar

-07

Jul-0

7

Nov

-07

Mar

-08

Jul-0

8

Nov

-08

Mar

-09

Jul-0

9

Government bond yields (%)

4

5

6

7

8

9

10

11

12Ja

n-08

Mar

-08

May

-08

Jul-0

8

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Cetes 28dBond 3YBond 10YBond 20Y

Spread in national currency

(commercial paper to ov ernight rate in basis points)

0

50

100

150

200

250

300

350

Jan-

08

Feb-

08

Apr-0

8

May

-08

Jul-0

8

Aug-

08

Sep-

08

Nov

-08

Dec

-08

Feb-

09

Mar

-09

May

-09

Jun-

09

Aug-

09

Corporate Securities Issuance

0

15

30

45

60

Jun-

07

Sep-

07

Dec

-07

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

billi

on p

esos

Medium Term

Short Term

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12. The most affected sector for this slowdown trend in credit is the household sector. After a six-year period of high, double digit growth of consumer credit, led by the credit card business, a significantly increasing non-performing consumer credit loan portfolio led financial intermediaries to cut back on the expansion of consumer credit already before the impact of the global financial crisis was felt in Mexico. Consumer credit started to present a negative growth rate since the last quarter of 2008 and data at March 2009 showed a sharp contraction of 12.5 percent (Figure 3). The more remarkable development over the past few months in the slowdown of growth and eventual contraction of credit is observed in the performance of credit to non-financial private sector firms and in housing finance, accounting for some 59 and 27 percent of total credit to the non-financial private sector. Housing loans presented a moderate expansion of 1.7 percent at the first quarter of 2009. As expected, the credit crunch is particularly noted in the externally originated and foreign currency denominated segment of credit to private sector firms that observed an annual contraction by 8.4 percent in the first quarter this year (after adjusting for the depreciation of the peso). The positive trend persisting in the internal finance to companies barely compensates the dramatic drop of external credit flows; total financing to Mexican firms increased just 3 percent in the first quarter of 2009.

Figure 3 Credit to the non-financial private sector, 2006-2009

13. The current economic recession is characterized by a simultaneous sharp contraction in private consumption, investment and exports. While the latter is due to a more generalized drop in external demand and international trade, the rapid tightening in domestic demand can be attributed to increased uncertainty regarding global and domestic economic prospects, increased unemployment, reduced availability of credit, and a significant currency depreciation. First quarter GDP data show a particularly fast and sharp response by households and businesses to the rapidly deteriorated financial and economic situation as private consumption contracted by 9 percent and investment by 7.6 percent contributing significantly to the overall contraction of GDP. Weak private consumption and investment activity is also reflected in a rapid decline of imports, down by 31 percent in nominal dollar terms during the first seven months of the year. Exports over the same period were down by 30.9 percent. It

Growth of total financing

0%

3%

6%

9%

12%

15%

18%

Non adjustedAdjusted

Adjusted growth of financing by user

-15%

-5%

5%

15%

25%

35%

45%

CompaniesConsumptionHousing

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should be noted that there is a close link between export and import declines, as more than 70 percent of imports are intermediate goods, many of which are used as inputs for export production.

14. With additional data becoming available, there seems to be an emerging consensus on the depth of the global economic downturn, even though there remains considerable uncertainty with regards to the strength of the current rebound. Assumptions regarding the external environment have a major impact on the projection of Mexico’s main macroeconomic variables over the next two years. A base case scenario (Table 1) follows the Bank’s Unified Survey Assumptions of September 2009 for global economic activity.46 The impact of such an external scenario on the Mexican economy is a significant recession in 2009 and a modest rebound by 2010 and 2011. The sharp reduction in the external demand in the base case scenario in 2009 is reflected in a significant contraction in the dollar value of exports, with the value of oil exports mainly declining as a result of lower oil prices whereas non-oil exports largely decline due to lower volumes of production and trade. The latter in combination with tighter credit conditions (both external and domestic) is projected to lead to a simultaneous sharp contraction of private consumption and investment. Countercyclical government expenditures cannot avoid a sharp contraction of aggregate demand and economic activity in 2009. A gradual recovery of external demand by 2010 should allow, on the contrary, for an increase of manufactured exports, private consumption and investment demand providing for a modest expansion of overall economic activity. Risks to this scenario are largely tilted towards the downside and a second, low case scenario provides for the impact on Mexican macroeconomic indicators in case of a sharper reaction in terms of the domestic demand contraction in the short run and a more protracted recession in its largest trading partner and the global economy, reflected in a less vigorous rebound in the volume of exports and a lower international oil price in 2010 and 2011.

46 World output is projected to fall by 2.5 percent in 2009 and experiencing a gradual recovery in 2010 when growth is picking up to 2.3 percent. Similarly output in the United States is projected to contract by 2.5 percent in 2009 before rebounding by 2.3 percent in 2010.

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Table 1. Macroeconomic scenarios

15. In either scenario concerns are focused on the rising fiscal pressures in view of the rapidly deteriorating outlook for public sector revenue and the increasing public debt-to-GDP ratios. Fiscal discipline and strong fiscal policy frameworks, including the establishment of stabilization funds and the acquisition of oil price hedges, enabled a countercyclical policy response for 2009. The public debt-to-GDP ratio posted an important increase end-2008 that can be attributed in part to the issue of a recognition bond to public sector workers that opted for the individual savings account in the public sector pension reform. The sharp economic contraction, the depreciation of the currency and a higher fiscal deficit contribute further to an increase of the public debt-to-GDP ratio in 2009. Even though there has been some room for an increase of public debt and the public debt-to-GDP ratio, the rapid increase and level to be attained by the latter by 2010 and 2011 suggests limits to possibilities of fiscal stimulus. In this regard, policymakers face a difficult trade-off between early fiscal consolidation that may aggravate the contraction of the domestic economy and a market reaction (as already expressed by credit rating agencies) that demand a clear and credible medium-term fiscal strategy of revenue-enhancing measures or sustainable spending cuts to compensate for the lower public sector revenue.

16. Debates on the size of the fiscal stimulus and the moment to change toward fiscal consolidation are taking place in many countries and Mexico is no exception. The size of the fiscal buffers going into the recession, projections on the depth and duration of the economic contraction and possible market reactions with respect to increased fiscal deficits and higher levels of public debt are some of the major elements that have to be taken into account in policy decisions on the size and length of fiscal stimulus. Mexico adequately used its fiscal space –created by consistent fiscal policies and falling debt-to-GDP ratios, the accumulation of resources in revenue stabilization

Indicator 2008 2009 2010 2011 2009 2010 2011Real GDP (%) 1.4% -6.8% 3.0% 3.5% -8.5% 2.0% 2.5%Consumption (%). 1.4% -6.3% 3.2% 3.4% -8.9% 1.6% 2.5%Investment (%) 5.3% -15.9% 5.5% 5.0% -16.5% 4.0% 4.0%External AccountsMerchandise Exports Current (US$ billion) 291.8 216.2 234.4 270.7 210.3 223.3 257.2

Oil Exports (US$ billion) 50.6 27.9 31.3 32.7 26.6 24.3 24.3Non Oil Exports (US$ billion) 241.2 188.3 203.1 238.0 183.7 199.1 232.9

Merchandise Imports Current (US$ billion) 308.6 229.4 251.7 291.3 217.1 234.4 272.3Remittances (US$ billion) 25.1 22.4 24.9 25.9 21.4 23.8 24.8Current Account Balance (US$ billion) -15.8 -14.0 -17.2 -20.3 -9.2 -12.5 -17.0Current Account Balance (% of GDP) -1.5% -1.6% -1.8% -1.9% -1.1% -1.4% -1.7%FDI (US$ billion) 22.48 16.86 18.50 21.00 13.49 15.50 18.00Gross Reserves (US$ billion) 85.4 81.0 82.0 82.7 81.0 79.2 80.5 External Debt (% of GDP) 16.5% 22.6% 22.3% 22.7% 23.5% 23.5% 24.1%Public Sector Public Expenditure (%) 4.2% 1.5% 0.0% 4.3% 1.5% -2.9% 3.4%PSBR Balance (% GDP) -2.1% -3.0% -3.4% -3.1% -3.1% -3.3% -3.2%Public Sector Debt (% GDP) 35.8% 39.9% 40.5% 40.8% 40.5% 41.0% 41.6%PricesInflation (e.o.p.) (%) 6.5% 4.4% 4.0% 3.3% 5.0% 4.7% 3.5%Nominal Exchange Rate (pesos/dll) 11.1 13.5 13.0 13.0 13.8 13.5 13.5 Oil Price (US$ per barrel) 86.3 52.0 58.9 61.5 52.0 48.0 48.0

Low CaseBaseline

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funds and the oil price hedge– to enact a substantial fiscal stimulus in 2009 and is currently in the midst of discussing the economic package for 2010.

17. Public debt remains within manageable proportions despite a significant increase in the debt-to-GDP ratio until 2011. Debt sustainability analysis based on average levels of economic growth, the primary balance and the real interest rate on public debt observed over the decade previous to the current economic crisis and applied to the debt-to-GDP ratios observed in the base and low case scenario by 2011, shows a return to a downward path of the debt-to-GDP as of 2012 (figure 4). Bound tests47 with respect to the key growth and primary balance variables show that only in the case of a combined growth and primary balance shock the debt-to-GDP ratio will continue on an upward path and additional corrective policy actions will be needed.

Figure 4: Mexico Fiscal Sustainability Analysis: Public Sector Debt to GDP ratio, 2005-2016

18. The external current account deficit is not a cause of concern. The rapid deterioration of the external financing and economic conditions to the Mexican economy has been rapidly reflected in the country’s exchange rate which led to a rapid adjustment of consumption and investment plans by Mexican households and businesses. This in turn has led to a sharp contraction of imports, in line with or even more pronounced to the fall in exports. The low case scenario provides for a slightly sharper functioning of this adjustment mechanism resulting in an even more modest current account deficit.

47 Shocks are permanent one-half standard deviation shocks.

Shock in Growth Rate

30%

32%

34%

36%

38%

40%

42%

44%

B aseline

B aseline w. sho ck

Lo w case

Lo w case w. sho ck

Shock in Primary Balance

30%

32%

34%

36%

38%

40%

42%

44%

B aseline

B aseline w. sho ck

Lo w case

Lo w case w. sho ck

Combined shock in

Growth Rate & Primary Balance

30%

32%

34%

36%

38%

40%

42%

44%

B aseline

B aseline w. sho ck

Lo w case

Lo w case w. sho ck

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ANNEX 6: PUBLIC CONSULTATIONS AND PARTICIPATION

1. The design of the Framework for Green Growth DPL has benefitted from a long-standing consultation process carried out by the Government in the context of the National Development Plan (PND) as well as the Special Program for Climate Change (PECC). Additionally, Bank engagement in infrastructure and climate change related activities in Mexico regularly include consultations and participation of key stakeholders.

2. The Mexican Government’s main instrument to move forward the ENACC is the PECC, which is part of the National Development Plan, and therefore produced under the standards of the General Planning Law which mandates a participatory process.

3. The public consultation of the PECC was carried out from March 24 to June 18, 2009. Comments/suggestions from ninety seven persons/institutions were recorded in the Environmental Ministry’s web page (www.semarnat.gob.mx). Participants included: 25 Schools, Universities, and Research Centers; 23 Environmental and Non-Government Organizations (NGOs), 23 Consultants and Firms, 12 National and Sub-national Government Officials, and 2 Rural Producers Organizations.

4. Along with the creation of the Inter-Secretarial Commission on Climate Change (Comisión Inter-secretarial de Cambio Climático – CICC), the Government of Mexico invited the scientific community and civil society to form a Consultative Council to ensure that strategies and sector programs are developed with due consultation with potentially affected parties.

5. Preparation of the Clean Technology Fund (CTF) Investment Plan (IP) was carried out jointly by the Government of Mexico, the IBRD, the IDB, and the IFC and also included consultations with relevant UN agencies as well as representation from various countries engaged in Climate Change related activities in Mexico. This multi-year business plan identifies programs to be co-financed by the CTF jointly with the IBRD, IDB and IFC in the Urban Transport and Energy Sectors.

6. A Technical Assistance MOU on Environmental Sustainability and Climate Change is the framework for the Bank’s support to the Climate Change Program in Mexico. The monitoring and evaluation of implementation, support to sub-national initiatives, the public consultation design and the study on Social Impacts of CC are some of the relevant activities under the MOU.

7. Currently, the Bank is preparing a stand-alone Mexico Social Impacts of Climate Change (SICC) Report based on all the Mexico-specific findings accumulated during the preparation of the climate change regional study, based on the combination of desk research and fieldwork that was carried out as part of the SICC report preparation. Preparation of this study has incorporated consultations with a series of communities, as well as the National Ecology Institute (INE); SEMARNAT; and Universities.

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8. The Bank has prepared a Social and Environmental Framework (MASTU) for the Urban Transport Program48, which falls under the umbrella and objectives of the Green Growth DPL. The MASTU includes the public consultation of the framework itself, plus three types of activities to: (a) Inform the public on proposed investments; (b) Consult with relevant actors in each of the sites about potential impacts and mitigation options; and (c) Disseminate the relevant documentation on the project and safeguards compliance.

9. The Bank is also assisting the State of Michoacán in the design and implementation of a participatory planning process, based on a Strategic Environmental Assessment multisectoral type of approach, to define and implement an Environmental Sustainability and Climate Change Program. There are two key mechanisms established: i) a Technical Group, which will contribute to build the scientific capabilities in local academia and government institutions to produce and update inventories and CC scenarios for the State of Michoacán, and ii) a Consultation Mechanism, which operates as a liaison to guarantee the flow of information and to facilitate regional and sectoral consultations (a first public meeting with representatives from private sector, academia, producer’s organizations and NGOs has already been held).

48 Includes a US$200 M IBRD Loan and a US$200 M Clean Technology Fund (CTF) concessional Loan.

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ANNEX 7: PRIORITIES AND OBJECTIVES OF THE GREEN GROWTH DPL AND MEXICO’S INVESTMENT PLAN FOR THE CLEAN TECHNOLOGY FUND (CTF)

1. In July 2008, the World Bank Board of Executive Directors, after consultations with the other multilateral development banks, developed and developing countries, and other development partners, approved the creation of two strategic Climate Investment Funds (CIF): the Clean Technology Fund (CTF) and the Strategic Climate Fund (SCF). The CTF seeks to promote scaled-up financing for demonstration, deployment and transfer of low carbon programs and projects with a significant potential for long-term Green House Gas (GHGs) emission savings. The CTF promotes the realization of environmental and social co-benefits thus demonstrating the potential of low-carbon technologies to contribute to sustainable development and the achievement of the Millennium Development Goals.49

2. During the design of the CTF, it was agreed that the first step in country programming is to develop an Investment Plan (IP) for the use of CTF resources in major sectors of the economy through a joint multilateral bank program. The IP is critical to allowing potential activities and investments financed by the CTF so as to respond to each country’s existing strategies and plans, and to account for on-going operations in key sectors or sub-sectors in a country.

3. Hence, the CTF Investment Plan for Mexico is a “business plan” owned by the Government of Mexico and agreed upon with the International Bank for Reconstruction and Development (IBRD), the Inter-American Development Bank (IDB), and the International Finance Corporation (IFC) to provide support for the low carbon objectives contained in Mexico’s 2007-2012 National Development Plan, its Special Program for Climate Change (PECC), and the overall National Climate Change Strategy (ENACC).50 The IP, adopted in January 2009, identifies the programs that are proposed to be co-financed by the CTF jointly with the IBRD, IDB and IFC and is considered a flexible document adaptable to changing circumstances.

4. The programs proposed for CTF support fall in three sub-sectors, namely Urban Transport, Renewable Energy, and Energy Efficiency. These are the result of several months of discussions between the Government of Mexico and the IBRD, IDB and IFC, and build on years of development experience and policy dialogue between these institutions and the government of Mexico. The sector programs proposed to be financed through the CTF are being identified by a number of studies already completed or underway; however, not all the measures identified by these various studies are presented as programs to the CTF. The choice of programs reflects a combination of the government’s priorities and sector implementation readiness, the development banks’ capacity and focus, and priorities established by the CTF.

49 The specific programs that the Government has proposed for CTF support do not involve new technology per se. They involve technology that is readily available to Mexico today, but face institutional, regulatory, or cost barriers that must be overcome for large scale deployment. Support from the CTF would help overcome these barriers. 50 Mexico’s National Climate Change Strategy (Estrategia Nacional de Cambio Climatico, or ENACC) identifies end use energy efficiency, power generation, and transport among the sectors with the largest emissions reductions potential.

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5. Thus, there are clear complementarities between the objectives of the CTF IP and the Green Growth DPL. The prior actions under the Green Growth DPL establish the policy framework that enables the promotion of cost-effective reductions in the growth of GHG emissions the CTF seeks to achieve. Also similarly to Mexico’s IP for the CTF, the DPL is closely aligned with the ENACC and the PECC, specifically, capturing the Regulatory and Institutional, Financial and Monitoring elements required for a number of high impact interventions in the Urban Transport, Energy Efficiency, and Renewable Energy sub-sectors.

Urban Transport and Energy Programs Proposed for CTF support Urban Transport

6. The proposed CTF co-financed program aims for a significant reduction in emissions from the urban transport sector in the cities that are ready to engage in the adoption of transformational measures and are among the largest GHG emitters in the country (Guadalajara, Monterrey, Puebla, Leon, Mexico City Metropolitan Area), as well as others (Chihuahua, Mexicali). The program co-financed by the CTF is expected to result in GHG emissions savings of about 2 million tons of CO

2 per year.

7. The priority areas in Urban Transport that have been proposed for CTF support have been selected on the basis of their role in promoting a modal shift in urban areas. CTF support will focus on consolidation and acceleration of BRT programs in the target cities, physical integration and optimization of public transport systems, seeking an optimization of modal shift toward low-carbon modes of transport, introduction of a scrapping program to eliminate the rolling stock displaced by the BRT, introduction of hybrid articulated buses, and adoption of a program to reduce congestion through travel management measures geared to maximize modal shift. The specific investments proposed to be co-financed by the CTF include:

(i) Modal shift to low carbon alternatives - support to development or accelerated expansion of BRT systems in a number of cities as part of an integral strategy linked to urban development options and air quality and transport safety goals. This will also include measures to ease congestion, scrap inefficient vehicles, link to other low carbon or non-motorized transport options, urban zoning tied to improvements in access to public space and others that promote modal shift. The project will finance the infrastructure and support scrapping and modal shift measures, and will benefit from the World Bank’s experience in Mexico City, Bogota, and Lima, facilitating its expansion and replication.

(ii) Promotion of low carbon bus technologies, particularly hybrid diesel electric and CNG electric vehicles, expected to deliver substantial reductions in GHG emissions, while lowering emission of local criteria pollutants. The project will support part of the incremental cost in comparison to the standard technology buses thus making it possible to initiate operation at a commercial scale and providing an experience of global value while reducing its cost; and

(iii) Capacity Building – i.e. helping to expand local capacities to manage project activities, in consonance with the needs to cope with a growing transport demand

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in the MCMA. The component will focus on business, financial, operational, administrative, procurement, environmental, infrastructure, safeguards, regulatory, institutional capacity building for key agencies involved in transport, as well as provide support for the development of a rational framework to address overarching urban transport issues in the metropolitan areas in order to maximize cost-effectiveness for the institutional and financial resources allocated to the sector.

8. Particularly by supporting the Institutional Framework and capacity for mainstreaming climate change considerations in the Urban Transport sector, the intervention focus areas listed above closely mirror those supported through the Green Growth DPL (specifically, the ones under Policy Areas 1 and 2) and are all expected to contribute to the efficient allocation of public space for transport and rank among the most cost-effective in the sector. The adoption of these measures in target cities also represent major scaling-up of current efforts, and is expected to stimulate a transformation of the urban transport system of Mexico and the wider region.

9. In effect, the policy actions supported by the proposed DPL lay the foundation for implementation of the CTF IP in urban transport. Specifically, without the financing mechanisms of FONADIN and PROTRAM, the CTF Investment Plan cannot be expected to be able to cover the financial gap of the additional climate-related investments.

Renewable Energy 10. In the Renewable Energy (RE) sub-sector, the CTF Investment Plan for Mexico proposes to finance the Government’s efforts towards implementing a comprehensive national Renewable Energy program. The IP specifically emphasizing the following activities:

(i) Design of policy and regulatory incentives for scaling-up renewable energy investments and commercialization of these technologies in the medium-term;

(ii) Establishment of a financing facility in NAFIN (Nacional Financiera) to leverage and complement the proposed Energy Transition Fund, and support investments for accelerating public and private investment in RE;

(iii) Provision of financing instruments and capacity-building for developers and local financial intermediaries to develop projects and/or programs for scaling-up private sector investments in renewable electricity, heat and transport fuels;

(iv) Technical and financial assistance to lower the costs of interconnection associated with increased installed capacity of RE power within the power system;

(v) Support to local RE research centers for demonstration of technologies designed to optimize local conditions;

11. Regarding wind power generation, more specifically, the CTF Investment Plan also envisages technical cooperation among the IDB, the Bank and Mexico’s policy and regulatory agencies (notably CRE), as well as with the CFE, to support the design, development and implementation of appropriate incentives. This assistance would also extend to the existing research centers and guarantee adequate capacity building activities.

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Energy Efficiency

12. In the Energy Efficiency (EE) sub-sector, the CTF co-financed program will support SENER in the design and implementation of energy efficiency interventions in accordance with the Law for the Sustainable Use of Energy. These will include:

(i) Development of a large-scale EE transformational program for efficient lighting (residential, commercial, street and public lighting) and efficient domestic appliances in low income households (refrigerators and air conditioners);

(ii) Modernization of the Tortilla Industry by substituting obsolete and energy intensive equipment through energy-efficient appliances and introduction of efficient lighting and solar water heaters in the production facilities; and

(iii) Water pumping EE in water utilities.

13. Complementary to the CTF IP objectives outlined above, the World Bank’s Mexico Lighting and Appliances Efficiency Project (P106424), currently under preparation, will finance upfront investments needed for large-scale purchases of efficient lighting and appliances, in order to bring down upfront costs to consumers, and thus create a massive and sustained shift in Mexico’s domestic market.

14. In order to ensure sustainability of the market transformation, support would be provided as part of the World Bank’s CTF financing package in the CTF proposed intervention under the IP to support the development of the various policy tools, inter alia: (i) the normalization of standards for efficient lighting and appliances, (ii) regulatory measures to prevent imports of second-hand inefficient domestic appliances, and (iii) the prohibition of manufacturing and imports of inefficient lighting and appliances once the program is completed. Capacity building, together with awareness and promotion campaigns on energy efficient new technologies and uses are also being considered key factors of success. These, in turn, will be addressed through technical, organizational and financial assistance to strengthen the relevant federal technical agencies and participating municipalities. Additional support will be provided with respect to activities that leverage carbon finance – specifically, for the development of programs for programmatic CDM to pursue carbon credits that would allow scaling up the proposed interventions.

15. Additionally, aside from the clear link the CTF IP has with such technical support and investment operations as the Mexico Lighting and Appliances Efficiency Project, the Investment Plan is also complementary with the Energy Transition Fund – namely, in terms of financing energy efficiency interventions. While CTF resources would be applied to reducing the financial costs of the lines of credit provided by the development banks, the Government is considering using the Energy Transition Fund to finance (i) the subsidy support of the replacement of lighting and appliances for low income levels, and (ii) the set up of the guarantee facility within NAFIN to secure the line of credit of the program.

16. As with the Green Growth DPL, the CTF IP thus proposes to support the Government of Mexico both in Developing a Regulatory and Institutional Framework (Policy Areas 1 and 2 of the DPL, corresponding to activities i and vi above) and in Establishing Financing Mechanisms (Policy Area 3, corresponding to ii, iii, and iv).

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ANNEX 8: STATUS OF LENDING PROGRAM

This document aims to provide the Board of Directors with an overall view on the status of the Country Partnership Strategy (CPS) discussed in April 2008 in light of the global economic situation, Mexico’s emerging needs within the Partnership and the Bank’s proposed response.51 A CAS Progress Report is under preparation and is expected to be finalized in FY10.

The Partnership

1. The Country Partnership Strategy is built on the Mexican authorities’ desire to maintain a strong financial and knowledge-based relationship with the Bank, and stresses flexibility and innovation in responding to our Partner’s borrowing needs and development challenges. Five principles of engagement were agreed: (i) a base level of borrowing of around US$800 million per year, with higher levels dependent upon IBRD pricing competitiveness and evolving market conditions; (ii) flexibility in delivering agreed volumes of lending and non-lending activities; (iii) selectivity in areas of support within the framework of the country’s National Development Plan (NDP) to ensure value-added; (iv) responsiveness in meeting demands for knowledge with a range of instruments; and (v) coordination within the World Bank Group, and with other donors, in support of the NDP.

Operational Support

2. The Bank has reaffirmed its continuous support to Mexico providing fast response in delivering assistance as global economic conditions deteriorated and began to negatively affect the Mexican economy, exacerbated by the recent impact of AH1N1 influenza epidemic in Mexico. Following the Government’s request in February for US$4 billion in lending during CY09, the Bank began to scale up lending, committing about US$1.6 billion in the first half of FY09 and reached a total of US$3.4 billion (80 percent investment lending) at the end of FY09. As the domestic economy continues to deteriorate and the social impacts spread, the government has now requested an additional US$1 billion in CY09 and another US$5 billion in CY10, in order to have access to a total of US$10 billion over the two-year period to meet the challenge. The Bank has agreed to significantly step up its lending commitments to around US$6.7 billion in FY10, thereafter the lending program will depend among other things on IBRD’s overall lending capacity.

3. The scaled up lending program supports several key areas of the government’s long term development program, as well as its response to the crisis. Key areas of support include:

(i) Poverty alleviation and social services. The Board approved in FY09 a US$1.5 billion operation to support Mexico’s conditional cash transfer program, Oportunidades. In FY10, the Bank would continue to provide support for the social sectors through a proposed US$1 billion Seguro Popular Program to ensure access to healthcare by the poor, along with the support to small farm households

51 A previous update was prepared for the Oportunidades Program Loan which was approved by the Board in February 2009. The CPS Progress Report is currently scheduled for early FY11.

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Box 2. Bank Response to the Mexico Influenza Crisis In light of the recent influenza epidemic, which originated in March of this year and has occasioned close to 10,000 cases and more than 100 fatalities in the country, the Government requested the Bank’s support in strengthening its capacity to monitor the spread of the A/H1N1 and influenza viruses more generally and to respond to future waves of the epidemic. The Bank agreed to assist the country through three mechanisms:

a) First, the Government and the Bank negotiated the restructuring of the Mexico Third Basic Health Care Project (shortly to be approved by the Regional Vice-President) to provide immediate financial assistance of approximately US$25 million;

b) Second, the Government and the Bank are preparing a new loan of US$480 million for an influenza prevention and control project to strengthen the National Epidemiological Surveillance System, replenish and maintain emergency stocks of medicines, vaccines and medical supplies, upgrade the associated distribution system and strengthen the treatment capacity of intensive care units; and

c) Third, the Government requested grant funding (US$1.7 million) under the Avian and Human Influenza Facility to support health systems of federal entities in promoting preventive behaviors.

through PROCAMPO. To confront the recent influenza epidemic and a potential next wave this winter, the Bank has agreed with the government to prepare an assistance package which includes a US$480 million investment loan to be presented in early FY10. Details of this package are offered below in Box 2. Demand side support in the social sectors would be complemented by operations to enhance access and the quality of services including an education package which comprises three operations with an Education Reform DPL for US$500 million in support; a US$220 million “second phase” APL for School-Based Management promoting local community and parental participation in schools; and a US$100 million investment operation targeting schools and school children in poor rural areas.

(ii) Climate Change and Environmental Sustainability. Climate change is a major policy objective of Mexico, as is ensuring the environmental friendliness of public investment during and after the crisis. Further to the Climate Change DPL that accompanied the CPS in April 2008, three more operations were prepared and approved during FY09 for a total lending amount of US$751 million seeking to support Mexico’s Climate Change Agenda and its commitment to reduce GHG emissions. The Bank will continue to assist Mexico in the context of the National Climate Change Strategy with the preparation of a US$1.5 billion Green Growth DPL to support green sectoral policies, incentives, and regulations, expected to be presented in FY10. This would serve as a policy umbrella operation to be complemented by investment lending during FY10, including a proposed Urban Transport Transformation Project of US$200 million, co-financed with US$200 million from the Clean Technology Fund (CTF); and a proposed US$400 million operation to reduce electricity consumption by introducing more efficient technologies in lighting systems.

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(iii) Financial Sector. The Bank has a longstanding and productive policy dialogue with Mexico on financial sector development. In FY09 a US$1 billion loan was approved to support mortgage lending via the second tier development bank Sociedad Hipotecaria Federal (SHF). For FY10, a NAFIN-BANCOMEXT operation to support small and medium-sized enterprises for an amount of US$1 billion is being prepared and expected to be presented to the Board in December 2009.

(iv) Public Sector. Ongoing support in the public sector to assist efforts to improve governance includes the Customs Institutional Strengthening Loan for US$10 million along with the US$17 million Results Based Management and Budgeting loan, both approved in FY10. For FY10 a US$1,000 million Multi-sector Crisis Response DPL to assist further advances in the broader dimension of measures to meet the economic crisis is being currently discussed with the government.

Figure 1. Response to Crisis FY09-FY10

Innovation and Responsiveness in Lending

4. In keeping with the agreed principles of engagement, the Bank has made considerable efforts to provide Mexico with a broad range of Bank products to meet its needs and to improve our responsiveness. As detailed in the last update, Mexico has benefited from a variety of innovative financing solutions. At the federal level this has included the embedded flexibility of IBRD loans to fix the interest rates on their loans as well as the signing of the master derivatives agreement (ISDA) to execute stand-alone swaps with the Bank hedging liabilities with IBRD or other creditors. At the state level, customized solutions have been implemented such as the

Luz Eficiente

DPL Urbano

SOCIAL SERVICESPROTECTION

TOTAL: US$4.6 Billion

INFRASTRUCTURE & CLIMATE CHANGE

TOTAL: US$2.4 Billion

Customs Results Based

Multisector Crisis

FINANCE SECTORTOTAL: US$2.0 Billion

PUBLIC SECTORTOTAL: US$1.0 Billion

Education Quality Program (PEC)Education for the Poor (CONAFE)

Education Sector DPLSmall Farmers (PROCAMPO)

Health for the Poor (Seguro Popular)Support to the Oportunidades Program

Influenza Control & Prevention

Housing FinanceNAFIN‐BANCOMEXT

Green DPLGreen DPLEfficiency LightningEfficiency Lightning

Sustainable Rural DevelopmentSustainable Rural DevelopmentUrban Transport TransformationUrban Transport Transformation

ENVDPL III + SupplementalENVDPL III + SupplementalLuz Eficiente

DPL Urbano

SOCIAL SERVICESPROTECTION

TOTAL: US$4.6 Billion

INFRASTRUCTURE & CLIMATE CHANGE

TOTAL: US$2.4 Billion

Customs Results Based

Multisector Crisis

FINANCE SECTORTOTAL: US$2.0 Billion

PUBLIC SECTORTOTAL: US$1.0 Billion

Education Quality Program (PEC)Education for the Poor (CONAFE)

Education Sector DPLSmall Farmers (PROCAMPO)

Health for the Poor (Seguro Popular)Support to the Oportunidades Program

Influenza Control & Prevention

Housing FinanceNAFIN‐BANCOMEXT

Green DPLGreen DPLEfficiency LightningEfficiency Lightning

Sustainable Rural DevelopmentSustainable Rural DevelopmentUrban Transport TransformationUrban Transport Transformation

ENVDPL III + SupplementalENVDPL III + Supplemental

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conversion of a loan into local currency. This has allowed the Bank to continue working with sub-national entities providing them with competitive funding. The Bank has also worked closely with the government and other Donors to prepare the investment plan for the Clean Technology Fund (CTF) that was recently approved by the CTF Committee. This plan includes concessional financing, IBRD and IDB loans, as well as federal, state and municipal resources and private sector participation for a total of about US$6 billion. The investments proposed will further contribute to reducing GHG emissions from the Transport and Energy sectors. Mexico is expected to be the first recipient of CTF funds.

5. The Bank’s responsiveness has been facilitated by a strong knowledge base and close working relationship with the client, the availability of a broad menu of Bank products, and a less pre-determined design of the CPS framework to facilitate reacting to changing client needs. This has enhanced both our effectiveness and efficiency. For example, project preparation has been considerably reduced. Since the new Partnership (FY08-13) was discussed by the Board, the average time elapsed from PCN review to Board has been 7 months. In contrast, as shown below, during implementation of the FY05-08 CPS the average time to the Board was 18 months.

Figure 2: Average Time Lag: PCN – Approval vs. Average Loan Size: FY04-09

Facilitating Knowledge Transfer

6. The Bank is bringing to bear a wide range of instruments to channel knowledge to Mexico. Formal studies for FY10 include support for the social impacts of modernizing the health and education system, strengthening finance and competitiveness, micro-regions, and harmonizing financial management among state governments. This ESW is being augmented with a variety of non-lending services to deepen dialogue and to meet emerging needs, including in-time TA (energy, social protection, monitoring and evaluation), and fee-based-services (public sector management, tax system strengthening, state results based monitoring systems, and administrative restructuring of the government petroleum enterprise—PEMEX).

0

5

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15

20

25

FY04 FY05 FY06 FY07 FY08 FY09

Mo

nth

s

0

100

200

300

400

Lo

an A

moun

t (U

S$M

illio

ns)

Ave. Months Ave Lending Volume

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Coordinating Bank Collaboration (IFC)

7. The IFC’s priority areas focus on investment and advisory activities that complement IBRD efforts to (i) improve the living conditions and economic opportunities at the base of the pyramid, (ii) improve living conditions in frontier regions and (iii) support climate change-related projects. Support includes broadening and deepening the financial sector, infrastructure, strengthening the investment climate, improving quality in healthcare, good corporate governance and climate change projects.

8. In finance, through its Advisory Services unit, IFC is currently implementing projects to (i) support innovative models in microfinance; (ii) the development and improvement of risk management systems of financial intermediaries focused on agricultural SMEs; (iii) jointly with SHF and in support of IBRD’s program is currently piloting a test that will allow savings and credit institutions become intermediaries and become a new distribution channel for housing finance; and (iv) at an exploration stage, IFC is exploring mechanisms to support local banks to enter and provide sustainable finance to mid-sized companies.

9. To promote infrastructure development, IFC is using its transaction and private expertise in partnership with the IBRD’s sectoral expertise to partner with the IBRD to improve the Mexican road concession mechanisms and to provide co-advisory for infrastructure projects at the sub-national level through BANOBRAS, a Mexican development bank.

10. Through its Business Enabling Environment advisory services unit, IFC is currently focused on programs that aim to help reduce transaction costs between the public and the private sector. The program is currently implementing municipal simplification projects in municipalities in the states of Guerrero, State of Mexico, and Mexico City, and is discussing potential projects in other municipalities in poorer Southern Mexico and requests to explore projects in trade logistics have been received from the public sector.

11. On the investment side, IFC continues to support the development of the Mexican private healthcare sector by providing long-term financing to private hospital operators. On the advisory side, through Infrastructure Advisory services, IFC is advising the development of two public hospitals to be developed under a PPP mechanism in the State of Mexico. In addition, IFC is considering the development of additional advisory projects in Southern Mexico.

12. IFC continues to support the adoption of best corporate governance practices. It has recently revamped its Senior Advisory Board to enhance its effectiveness by expanding the scope beyond corporate governance to include other related and key areas such as climate change. In December 2008, IFC co-organized the development of the first Latin American Corporate Governance roundtable in Mexico City.

13. Finally, for climate change, a new priority area not previously included in the last CPS, IFC is currently collaborating with IBRD in the development of the Climate Investment Fund. In addition, several IFC investment departments (e.g. Global Financial Markets, Infrastructure, Global Manufacturing and Services, Agribusiness) and advisory areas (e.g. Access to Finance, Infrastructure Advisory) are targeting and developing climate change driven projects.

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14. In response to the crisis, IFC is focused on the implementation of systemic interventions (such as the recently announced US$150 million facility) to support housing finance and in the development of risk-sharing facilities to continue supporting SME lending and NPL recoveries by partnering with large banks. Its current approach consists of: (i) a pro-active approach to portfolio management; (ii) a selective approach to new business to ensure additionality and development impact (e.g. focus on countercyclical opportunities such as infrastructure, health and education, agribusiness); (iii) a pro-active approach to seize the counter-cyclical opportunities that are expected to emerge (e.g. investments in large, 1st tier companies that act as anchors to large value chains); (iv) a pro-active stance to develop systemic interventions and structures that maximize the impact of IFC’s resources (e.g. guarantees, risk sharing facilities); and (v) a strong cooperation and alignment with IBRD and close consultation with authorities for systemic interventions.

Bank Portfolio Performance and Quality

15. Mexico is the Bank’s sixth largest borrower with US$6.45 billion debt outstanding representing 6.3 percent of the IBRD’s total portfolio as of end-July, 2009. The portfolio consists of 16 IBRD projects under implementation for a net commitment of US$3.7 billion, of which US$2 billion remain undisbursed. The disbursement ratio as of end-June on investment operations was of 214 percent52 compared to an average of 27 percent during the period 1999-2008. During the first half of FY09, four projects were considered at risk, of which net commitments added up to 8.5 percent of the total net commitment amount. And the last CPPR (June 2009) these projects were reviewed and agreed actions will be implemented between the Bank and the government. The emerging economic downturn and fiscal constraints will require ongoing collaboration to help maintain the health of the portfolio.

Lending Levels

16. Mexico is in the midst of a deep recession as it faces the impacts of strained global financial conditions, a sharp contraction in international trade and the outbreak of the A H1N1 flu epidemic. The Bank has agreed with the government on a continued, balanced response to the request for increased lending. Actual and planned lending for FY09/FY10 is shown below. A CPS Progress Report would provide details on FY11 lending as Mexico’s needs in term of lending volumes within the amounts requested for CY09-10, as well as the critical areas to be supported by Bank operations and AAA, become more defined. Lending in FY11 and beyond will also dependent on IBRD’s overall lending capacity.

52 Figure is above 100 percent because it is based on disbursements relative to investment projects in the portfolio at the beginning of the fiscal year. FY09 has seen strong disbursements, as well as a major increase in investment lending. Even discounting new entrants into the portfolio, the disbursement rate in FY09 was 37 percent.

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Figure 3: FY09 Actual and FY10 Planned Operations

752

1,503

1,060

107

1,020

1,600

2,080

1,000

1000

0

1000

2000

3000

4000

5000

6000

7000

FY09 FY10

Education Green Social Protection Finance Public Sector+Others

Assistance Packages FY09-10

752

1,503

1,060

107

1,020

1,600

2,080

1,000

1000

0

1000

2000

3000

4000

5000

6000

7000

FY09 FY10

Education Green Social Protection Finance Public Sector+Others

Assistance Packages FY09-10

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ANNEX 9: COUNTRY AT A GLANCE

Mexico at a glance 7/20/09

Latin Upper

Key Development Indicators America middleMexico & Carib. income

(2008)

Population, mid-year (millions) 106.4 563 823Surface area (thousand sq. km) 1,964 20,421 41,497Population growth (%) 1.0 1.2 0.6Urban population (% of total population) 77 78 75

GNI (Atlas method, US$ billions) 1,061 3,833 7,472 GNI per capita (Atlas method, US$) 9,980 6,780 7,878 GNI per capita (PPP, international $) 14,270 10,309 12,297

GDP growth (%) 1.3 4.2 5.8GDP per capita growth (%) 0.3 2.9 5.1

(most recent estimate, 2000–2007)

Poverty headcount ratio at $1.25 a day (PPP, %) 2 8 ..Poverty headcount ratio at $2.00 a day (PPP, %) 5 18 ..Life expectancy at birth (years) 75 73 70Infant mortality (per 1,000 live births) 29 22 22Child malnutrition (% of children under 5) 3 5 ..

Adult literacy, male (% of ages 15 and older) 93 91 94Adult literacy, female (% of ages 15 and older) 90 89 92Gross primary enrollment, male (% of age group) 114 120 112Gross primary enrollment, female (% of age group) 111 116 109

Access to an improved water source (% of population) 95 91 95Access to improved sanitation facilities (% of population) 81 78 83

Net Aid Flows 1980 1990 2000 2007 a

(US$ millions)Net ODA and official aid 55 156 -56 247Top 3 donors (in 2006): United States 9 23 24 154 Germany 15 9 15 26 France 15 51 -11 22

Aid (% of GNI) 0.0 0.1 0.0 0.0Aid per capita (US$) 1 2 -1 2

Long-Term Economic Trends 1980 1990 2000 2008

Consumer prices (annual % change) 26.3 26.7 9.5 5.1GDP implicit deflator (annual % change) 33.4 28.1 12.1 6.6

Exchange rate (annual average, local per US$) 0.0 2.8 9.5 11.2Terms of trade index (2000 = 100) 194 106 100 116

1980–90 1990–2000 2000–08

Population, mid-year (millions) 67.6 83.2 98.0 106.4 2.1 1.6 1.0GDP (US$ millions) 194,357 262,710 581,426 1,085,951 1.1 3.1 2.7

Agriculture 9.0 7.8 4.2 3.8 0.8 1.5 2.1Industry 33.6 28.4 28.0 37.1 1.1 3.8 1.9 Manufacturing 22.3 20.8 20.3 18.8 1.5 4.3 1.8Services 57.4 63.7 67.8 59.1 1.4 2.9 3.1

Household final consumption expenditure 65.1 69.6 67.0 65.5 1.4 2.3 3.8General gov't final consumption expenditure 10.0 8.4 11.1 10.3 2.4 1.8 0.4Gross capital formation 27.2 23.1 23.9 26.4 -3.3 4.7 1.5

Exports of goods and services 10.7 18.6 30.9 28.3 7.0 14.6 5.7Imports of goods and services 13.0 19.7 32.9 30.5 1.0 12.3 6.3Gross savings 22.0 20.3 20.5 24.9

Note: Figures in italics are for years other than those specified. 2008 data are preliminary. .. indicates data are not available.a. Aid data are for 2006.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

15 10 5 0 5 10 15

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80+

percent

Age distribution, 2007

Male Female

0

10

20

30

40

50

60

1990 1995 2000 2006

Mexico Latin America & the Caribbean

Under-5 mortality rate (per 1,000)

-10

-8

-6

-4

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2

4

6

8

90 95 00 05 08

GDP GDP per capita

Growth of GDP and GDP per capita (%)

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Mexico

Balance of Payments and Trade 2000 2008

(US$ millions)Total merchandise exports (fob) 166,455 291,807Total merchandise imports (cif) 174,458 308,645Net trade in goods and services -10,661 -23,844

Current account balance -18,684 -15,527 as a % of GDP -3.2 -1.4

Workers' remittances 6,573 25,145

Reserves, including gold 35,585 95,302

Central Government Finance

(% of GDP)Current revenue (including grants) 21.4 23.6 Tax revenue 10.6 8.2Current expenditure 20.1 19.3

Technology and Infrastructure 2000 2007Overall surplus/deficit (PSBR) -3.4 -2.1

Paved roads (% of total) 32.8 37.0Highest marginal tax rate (%) Fixed line and mobile phone Individual 40 28 subscribers (per 100 people) 27 84 Corporate 35 28 High technology exports

(% of manufactured exports) 22.4 18.9

External Debt and Resource Flows 2000 2007Environment

(US$ millions)Total debt outstanding and disbursed 150,901 178,108 Agricultural land (% of land area) 55 55Total debt service 58,509 40,301 Forest area (% of land area) 33.7 33.0Debt relief (HIPC, MDRI) – – Nationally protected areas (% of land area) .. 5.3

Total debt (% of GDP) 26.0 17.4 Freshwater resources per capita (cu. meters) .. 3,967Total debt service (% of exports) 30.4 12.5 Freshwater withdrawal (% of internal resources) 19.1 ..

2000 2008Foreign direct investment (net inflows) 17,942 18,589 CO2 emissions per capita (mt) 4.3 4.3Portfolio equity (net inflows) 447 -3981

GDP per unit of energy use (2005 PPP $ per kg of oil equivalent) 7.1 6.6

Energy use per capita (kg of oil equivalent) 1,534 1,712

World Bank Group portfolio 2000 2008

(US$ millions)

IBRD Total debt outstanding and disbursed 11,444 5,769 Disbursements 1,748 1,940 Principal repayments 1,330 600 Interest payments 890 200

IDA Total debt outstanding and disbursed 0 0 Disbursements 0 0

Private Sector Development 2000 2008 Total debt service 0 0

Time required to start a business (days) – 28 IFC (fiscal year) 2000 2007Cost to start a business (% of GNI per capita) – 12.5 Total disbursed and outstanding portfolio 1,234 1,184Time required to register property (days) – 74 of which IFC own account 723 798

Disbursements for IFC own account 179 209Ranked as a major constraint to business 2000 2007 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 66 134 Anticompetitive or informal practices .. 19.0 Corruption .. 17.8 MIGA

Gross exposure – –Stock market capitalization (% of GDP) 21.5 38.8 New guarantees – –Bank capital to asset ratio (%) 9.6 13.2

Note: Figures in italics are for years other than those specified. 2008 data are preliminary. 7/20/09.. indicates data are not available. – indicates observation is not applicable.

Development Economics, Development Data Group (DECDG).

Bilateral, 1,895

Private, 158,091

Other multi- lateral, 4,576

IBRD, 4,540

Composition of total external debt, 2007

US$ millions

Short term 9,006

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Millennium Development Goals Mexico

With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)

Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2007

Poverty headcount ratio at $1.25 a day (PPP, % of population) .. .. .. .. Poverty headcount ratio at national poverty line (% of population) .. .. 24.2 17.6 Share of income or consumption to the poorest qunitile (%) 3.2 4.3 3.9 4.6 Prevalence of malnutrition (% of children under 5) 13.9 .. 6.0 3.4

Goal 2: ensure that children are able to complete primary schooling

Primary school enrollment (net, %) 98 .. 97 98 Primary completion rate (% of relevant age group) 86 95 99 104 Secondary school enrollment (gross, %) 53 .. 72 87 Youth literacy rate (% of people ages 15-24) 95 96 97 98

Goal 3: eliminate gender disparity in education and empower women Ratio of girls to boys in primary and secondary education (%) 97 .. 99 99 Women employed in the nonagricultural sector (% of nonagricultural employment) 37 36 37 39 Proportion of seats held by women in national parliament (%) 12 14 18 23

Goal 4: reduce under-5 mortality by two-thirds Under-5 mortality rate (per 1,000) 52 45 38 35 Infant mortality rate (per 1,000 live births) 42 36 32 29 Measles immunization (proportion of one-year olds immunized, %) 75 90 96 96

Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) .. .. .. 60 Births attended by skilled health staff (% of total) .. 86 .. 93 Contraceptive prevalence (% of women ages 15-49) .. 67 70 71

Goal 6: halt and begin to reverse the spread of HIV/AIDS and other major diseases Prevalence of HIV (% of population ages 15-49) .. .. 0.3 0.3 Incidence of tuberculosis (per 100,000 people) 61 44 32 20 Tuberculosis cases detected under DOTS (%) .. 13 64 99

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 88 90 93 95 Access to improved sanitation facilities (% of population) 56 66 76 81 Forest area (% of total land area) 35.5 34.6 33.7 33.0 Nationally protected areas (% of total land area) .. .. .. 5.3 CO2 emissions (metric tons per capita) 5.0 4.4 4.3 4.3 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 6.1 6.2 7.1 6.6

Goal 8: develop a global partnership for development

Telephone mainlines (per 100 people) 6.4 9.7 12.6 18.8 Mobile phone subscribers (per 100 people) 0.1 0.8 14.4 64.8 Internet users (per 100 people) 0.0 0.1 5.2 21.7 Personal computers (per 100 people) 0.8 2.6 5.8 14.4

Note: Figures in italics are for years other than those specified. .. indicates data are not available. 7/20/09

Development Economics, Development Data Group (DECDG).

Mexico

0

25

50

75

100

125

2000 2002 2004 2006

Primary net enrollment ratio

Ratio of girls to boys in primary &secondary education

Education indicators (%)

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60

70

80

90

2000 2002 2004 2006

Fixed + mobile subscribers

Internet users

ICT indicators (per 100 people)

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1990 1995 2000 2006

Mexico Latin America & the Caribbean

Measles immunization (% of 1-year olds)

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ANNEX 10: MAP SECTION

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