This Technical Assistance report on Mexico discusses public investment management assessment (PIMA). It evaluates 15 key institutions in terms of their institutional strength and effectiveness across the planning, allocation, and implementation phases of the PIM cycle, identifies strengths and weaknesses in the existing PIM framework, and produces an action plan to improve PIM. This assessment found that most of Mexico’s institutions scored as medium strength in terms of institutional design and effectiveness. It is recommended to include a medium-term target for the public sector borrowing requirement, introduce an independent body to review and assess the quality of the macro-fiscal projections, and amend the fiscal rule’s escape clause so it is only used in exceptional circumstances. In addition, expand the economic assumptions report to include more information on fiscal strategy and analyses of medium-term fiscal parameters. It is also recommended to develop mechanisms for coordination of public investment plans at federal and subnational levels to enhance efficiency and synergies of planning and investment prioritization.

Abstract

This Technical Assistance report on Mexico discusses public investment management assessment (PIMA). It evaluates 15 key institutions in terms of their institutional strength and effectiveness across the planning, allocation, and implementation phases of the PIM cycle, identifies strengths and weaknesses in the existing PIM framework, and produces an action plan to improve PIM. This assessment found that most of Mexico’s institutions scored as medium strength in terms of institutional design and effectiveness. It is recommended to include a medium-term target for the public sector borrowing requirement, introduce an independent body to review and assess the quality of the macro-fiscal projections, and amend the fiscal rule’s escape clause so it is only used in exceptional circumstances. In addition, expand the economic assumptions report to include more information on fiscal strategy and analyses of medium-term fiscal parameters. It is also recommended to develop mechanisms for coordination of public investment plans at federal and subnational levels to enhance efficiency and synergies of planning and investment prioritization.

Executive Summary

The Federation of Mexico, with 31 States and Mexico City, has a population of 129 million people with large and diverse infrastructure needs. Successive Mexican governments have recognized the importance of public investment for promoting economic growth and have given priority to infrastructure needs in the National Development Plan and the National Infrastructure Program. Some progress has been made; however, large infrastructure needs remain.

Over the last fifteen years, public investment in Mexico has lagged behind the averages for Emerging Market Economics (EME) and Latin American Countries (LAC). Over the fifteen-year period (2001–2015) general government investment averaged 4.7 percent of GDP, compared with 7.1 percent for EME and 6 percent for LAC. Despite the privatization programs started in the 1980s and continued in subsequent decades, the stock of public capital in Mexico has been high in comparative terms, due to the diverse set of economic activities operated by government and public corporations (PC), and high rates of public investment in the 1990s. Although it has declined by 81 percent of GDP over the previous two decades, capital stock at 104 percent of GDP in 2015 remains higher than the average of all comparators including the OECD.

Public investment is an important driver of economic growth, and meeting infrastructure needs while maintaining sound fiscal policies requires efficiency improvements. The Mexican government’s fiscal consolidation efforts have placed debt on a downward trajectory; however, public investment has been cut back in the process. The administration of Mr. López Obrador has committed to preserving fiscal discipline, which is essential to maintain debt on a downward path and recognizes the importance of improving the efficiency of public spending.

There is significant room to improve public investment efficiency in Mexico. The efficiency gap between Mexico and the most efficient countries with comparable levels of public capital stock per capita is 40 percent. This gap is significantly wider than the averages for the OECD (13 percent), EME (27 percent) and LAC (29 percent). The perceptions of infrastructure quality in Mexico has improved over the last decade; however, in terms of access to physical infrastructure Mexico lags behind comparators, and significantly behind OECD countries, especially in roads. In other words, while the perceived quality of infrastructure has improved, Mexico could generate more and better infrastructure with similar public capital stock per capita by improving public investment efficiency.

Strengthening public investment management (PIM) will help to improve public investment efficiency and maximize the return from infrastructure investment. This report uses the IMF’s Public Investment Management Assessment (PIMA) methodology to review PIM in Mexico.1 It evaluates 15 key institutions in terms of their institutional strength and effectiveness across the planning, allocation, and implementation phases of the PIM cycle, identifies strengths and weaknesses in the existing PIM framework, and produces an action plan to improve PIM.2

This assessment found that most of Mexico’s institutions scored as medium strength in terms of institutional design and effectiveness. As in most countries, there is a difference between what is on paper, in terms of design features and legal frameworks, and actual practices. For some institutions, implementation is variable, and effectiveness is lower, particularly for national and sectoral planning, medium-term budgeting, procurement, portfolio management and asset management. Nonetheless, most institutions still score as medium in terms of effectiveness.

Mexico has stronger PIM institutional design scores at the federal level than the averages for EME and LAC countries, but they are much weaker than the OECD average (See Figure 1). Reflecting recently implemented reforms, institutions which are stronger than all comparators, including the OECD, are project selection, project appraisal and portfolio management. This is particularly noteworthy as these institutions tend to be amongst the weakest in many countries.

Figure 1.
Figure 1.

Strength of Institutional Design of Public Investment Management

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: IMF Staff

Some PIM institutions, however, are below the EME and LAC averages in both in institutional design and effectiveness (See Figure 2). These include: coordination between entities,3 medium-term budgeting, budget comprehensiveness and unity, maintenance funding and asset management. Some of these weaknesses reflect a PIM system that is fragmented, very compliance-focused, gives greater priority to compliance over efficiency and outcomes, and lacks a medium-term orientation. For federal systems, like Mexico, fragmentation is an issue, especially when there are many players and approaches for delivering and financing infrastructure.

Figure 2.
Figure 2.

Effectiveness of Public Investment Management Institutions

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: IMF Staff

Table 2 presents this report’s main recommendations for improving PIM and an action plan for implementing these recommendations over the short and medium term. Chapter IV provides detailed discussions on each recommendation. Below is a list of the recommended high-priority reforms.

Table 1.

Summary Assessment

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Table 2.

Indicative Action Plan

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Improve the medium-term fiscal framework (MTFF) and strengthen the independent oversight of fiscal planning. To achieve this, include a medium-term target for the public sector borrowing requirement (PSBR), introduce an independent body to review and assess the quality of the macro-fiscal projections, and amend the fiscal rule’s escape clause so it is only used in exceptional circumstances. In addition, expand the economic assumptions (Pre-Criteria) report to include more information on fiscal strategy and analyses of medium-term fiscal parameters.

Improve the effectiveness of national and sector strategies to guide investment project planning. Prepare national and sector plans within a realistic medium-term resource framework and concentrate plans on a limited number of high-priority strategic objectives that can realistically be achieved within the available resources.

Introduce a rolling medium-term budget framework (MTBF) for both capital and current expenditures, which will support more strategic and efficient investment planning. Strengthening the medium-term focus will create a more realistic alignment between budget, planning and the availability of resources.

Develop mechanisms for coordination of public investment plans at federal and subnational levels to enhance efficiency and synergies of planning and investment prioritization. Consider establishing a joint federal and state investment coordination committee(s) to help strengthen medium-term planning and encourage active consultation and regular sharing of information between Federal and subnational governments on public investment.

Revise procurement procedures and regulations to promote more open and competitive procurement. In the short term, review and implement reform proposals not requiring legislative changes, implement a program to re-train all procurement officials to promote a culture of competitive procurement and extend the use of standardized tender documents to all main procuring entities. In the medium term, develop a single Public Procurement Law based on a review of procurement and prevent the extensive use of exemptions from the competitive route through stricter enforcement.

Develop a systematic approach for maintenance planning. The Ministry of Finance, SHCP should require agencies to establish program-appropriate maintenance standards. It is important to identify the level of spending required to maintain infrastructure at a steady-state level and ensure adequate funding for maintenance.

Other medium priority recommendations include: Increasing the comprehensiveness of public investment project information in the project pipeline register; developing a system to track and report on project cost over/under-runs and implementation delays, and systematically conducting ex-post reviews for most major projects. It is important to improve agencies’ capacity to plan and implement projects effectively. This can be facilitated by providing commitment ceilings to ministries for the full fiscal year and requiring ministries to prepare implementation plans prior to congressional budget approval. The monitoring of assets can be improved by reviewing the current accounting practices to reflect better the value of non-financial assets and introducing asset-specific assumptions to guide the depreciation of fixed assets.

I. Introduction

1. Since the global financial crisis, several ambitious economic and social reforms have been introduced in Mexico mostly notably under the 2012 Pacto por México. The reforms aimed to promote economic growth, improve fiscal management, address regional and economic inequalities, improve coverage and results in health and education, and open the telecommunications and energy sectors to competition. The National Development Plan for 2013–2018 reflected these ambitious goals.

2. In many areas, considerable progress has been made but design and implementation gaps remain. Reforms to the telecommunication sector have increased competition. The energy reform is opening this sector to private investment and competition, but more remains to be done. Education enrollment rates for upper secondary and tertiary education has increased albeit with regional differences.4 The 2013 tax reform increased non-oil revenues, helping to reduce Mexican public finances’ dependency on oil, although it remains significant. Sound fiscal management, supported by the 2013 reform of the Fiscal Responsibility Law (FRL), facilitated the implementation of the fiscal consolidation program adopted after the 2014 drop in oil prices. This program has recently succeeded in reducing debt which had been increasing steadily over the last decade. Sound fiscal policies need to continue if debt is to remain on a downward path.

3. Despite this progress, challenges remain. Inequality is almost twice the OECD average, with significant regional inequalities and limited capacity in many states. Corruption and the perception of corruption are key issues and violent crime is at record highs.5 Public expenditure increased significantly in the last decade including on social spending and public security.6 These changes combined with long-term demographic trends will continue to place pressure on budgetary resources that are increasingly earmarked or mandatory, thus limiting space for discretionary spending. Despite recent reforms, non-oil tax revenues remain below regional and OECD peers. Economic growth has on average been below three percent for the past five years and infrastructure needs remain high.

4. Public investment (PI) is an important driver for economic growth, but the challenge, given the current fiscal constraints, is finding resources for infrastructure spending. Increasing non-oil tax revenues combined with restraining current spending, and improving the efficiency of spending, would provide fiscal space. The new administration is emphasizing improving public spending efficiency to create more fiscal space for PI and other initiatives.

5. Strengthening public investment management (PIM) will help improve public investment efficiency. This report identifies the strengths and weaknesses in existing PIM practices in Mexico and produces recommendations and an operational priority action plan to improve PIM in the short-to-medium term. The IMF, in collaboration with the World Bank and the IADB, stands ready to provide follow-up support to implement the priority action plan.

II. Public Investment in Mexico: Context

6. This chapter provides a comparative overview of public investment trends in Mexico. Section A describes recent trends in public investment and in capital stock and Section B explains the composition of public investment.

A. Trends in Public Investment and Capital Stock

7. For the past fifteen years, general government investment in Mexico has lagged behind the averages for Emerging Market Economies (EMEs) and Latin American countries (LAC). Over the fifteen-year period (2001–2015) general government investment has averaged 4.7 percent of GDP, below the 7.1 percent average for EME and the 6 percent average for LAC, albeit above the OECD average of 3.7 percent. During the 1990s, general government investment in Mexico was higher than comparators but since 2001, it has been consistently below EMEs and LAC averages (Figure 3). With the fiscal stimulus package introduced by the Mexico government during the global financial crisis, public investment levels increased to above 5 percent of GDP between 2008 and 2011; however public investment subsequently declined with the fiscal consolidation and fall in oil revenues.7

Figure 3.
Figure 3.

General Government Investment

(Nominal, % GDP)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Sources: WEO and IMF staff estimates based on official data.

8. The decline in public investment has been accompanied by a rise in private investment. In 2015, public investment in Mexico accounted for less than 4 percent of GDP, down from 10 percent of GDP in 1990, while private investment rose from 9 percent of GDP in 1995 to 18 percent of GDP in 2015. Over this period (1995–2015), the level of private investment in Mexico, on average,16 percent of GDP has been near the EME average of 17 percent. This level of private investment has helped to keep Mexico’s total investment at a stable long-term average of about 21 percent of GDP for the last two decades (Figure 4).

Figure 4.
Figure 4.

2015 Public and Private Investment

(Nominal %GDP)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Sources: WEO and IMF staff estimates based on official data.

9. Mexico’s public capital stock has been consistently higher than the EME, LAC and the OECD. This reflects relatively high public investment spending during the decades before 2000. The level of the capital stock, however, started declining sharply after 1995. It went from a high of 185 percent of GDP in 1995 to 104 percent of GDP in 2015. During the period 1995–2015, Mexico’s public capital stock fell by 81 percentage of GDP, compared with EMEs’ public capital stock which fell by 12 percentage points, while LAC’s fell by only 1 percentage of GDP (Figure 5). Despite this decline, Mexico’s public capital stock per capita still compares generally well among a selected group of advanced economies and EMEs, standing at almost US$ 14.6 thousand compared to an average of US$ 12 thousand for the group of countries in Figure 6.

Figure 5.
Figure 5.

Public Capital Stock

(Nominal, % GDP)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Sources: WEO and WB database and IMF staff estimates based on official data.
Figure 6.
Figure 6.

2015 Public Capital Stock per Capita

(thousands)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Sources: WEO and WB database and IMF staff estimates based on official data.

10. Mexico’s ability to increase its public investment has been impeded by government debt and declining oil revenues. General government gross debt has until recently been increasing and stood at 56 percent of GDP in 2016, up from 38 percent of GDP a decade earlier, and the non-financial public sector balance has remained negative for the last decade (Figure 7). In late 2014, the government faced a sharp drop in oil prices and a continuing decline in oil revenues. Non-oil tax revenue performance lags behind regional and international peers. Despite recent tax reforms, which have increased revenues, Mexico’s tax-to-GDP ratio continues to be the lowest in the OECD, with particularly low VAT efficiency.8

Figure 7.
Figure 7.

Non-Financial Public-Sector Balance and Gross Debt

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: WEO and IMF staff estimates.

11. The government’s recent fiscal consolidation efforts have put the debt-to-GDP ratio on a downward trajectory. To deal with the declines in oil revenues, the government introduced a fiscal consolidation package focused on reducing expenditure. As a result, debt declined to 54.6 percent of GDP in 2017 and is projected to go down to 53.9 percent in 2019.9 However, public investment has also continued to decline and faced sharp cuts as part of the fiscal consolidation reforms.

12. Over the past twenty-five years, public investment in Mexico has presented a downward trend. Over the period, GDP growth has been quite volatile, while public investment has remained on a downward trend (Figure 8). Public investment levels are also impacted by the volatility of oil revenues. Oil revenues, despite recent declines, continue to play a significant role, and account for around one third of total public revenues over the last decade.10 The volatility of oil revenues influences the government’s capacity to fund public investment. Public investment is a discretionary expenditure and thus particularly vulnerable when revenue declines.

Figure 8.
Figure 8.

Public Investment (% GDP) and GDP Growth (% Growth)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Sources: WEO and staff estimates based on official data.

13. Mexico allocates less than LAC to capital spending but almost the same to current spending. Between 2011–2015, Mexico spent an average of 4.5 percent of GDP on capital spending which is less than the LAC average of 6.3 percent of GDP. In 2015, current spending accounted for 23.5 percent of GDP, around the LAC average of 23.4 percent of GDP (Figure 9). In the past decade, Mexico’s current spending has increased steadily to reach the average of regional peers. Mandatory expenditures represent over 60 percent of the budget while another 20 percent is technically discretionary, but effectively is inflexible spending.11 Wages, pensions (including social assistance benefits), subsidies and transfers account for 81 percent of Mexico’s current spending. A recent IMF report, suggested that reducing expenditure rigidities and improving the efficiency of current spending combined with tax reforms could create fiscal space for more public investment.12

Figure 9.
Figure 9.

Current Spending (2015) vs. Capital Spending ─ Average of Last 5 Years

(Nominal, % GDP)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Sources: WEO and staff estimates based on official data.

B. Composition of Public Investment

14. Public investment in economic and social infrastructure accounts for about 94 percent of total investment, which is higher than in EMEs. In 2015, the share of total public investment allocated to economic and social infrastructure in Mexico was 59 percent and 35 percent, respectively (Figure 10). By comparison, EMEs allocated an average of 45.3 percent of their total public investment to economic infrastructure and 26.8 percent to social infrastructure (Figure 11).

Figure 10.
Figure 10.

Mexico: Public Investment by Function 1/2/3/

(2015, Percent of total public investment)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Sources: Figure 10 and 11 MOF data, and WEO and IMF staff estimates based on official data.Notes:1/ Economic infrastructure is approximated by economic affairs and includes public investment for transportation infrastructure, among other components.2/ Social comprises public investment in education, health, housing, social protection, and recreation and culture.3/ Other, includes public investment for general public services, safety and public order, and environment
Figure 11.
Figure 11.

EMEs: Public Investment by Function 1/2/3

(2015, Percent of total public investment)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Sources: Figure 10 and 11 MOF data, and WEO and IMF staff estimates based on official data.Notes:1/ Economic infrastructure is approximated by economic affairs and includes public investment for transportation infrastructure, among other components.2/ Social comprises public investment in education, health, housing, social protection, and recreation and culture.3/ Other, includes public investment for general public services, safety and public order, and environment

15. Public investment spending is largely executed by the Federal government and public corporations in Mexico. In 2013, the Federal government’s investment spending accounted for 3.4 percent of GDP (54.8 percent of public sector investment, see Figure 12), while investment by public corporations stood at 2 percent of GDP (32.3 percent of public sector investment). However, the share of public sector investment directly executed by the subnational governments is limited, representing only 0.8 percent of GDP, or 12.9 percent of public sector investment (Figure 12). PEMEX, the state oil company, is the public corporation with the largest amount of average public investment, at 1.7 percent of GDP over the last five years.

Figure 12.
Figure 12.

Public Sector Investment Spending by Level of Government

(2013, % by level of government)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Sources: IMF Staff estimates.

16. Mexico’s Public-Private Partnerships (PPPs) capital stock is lower than that of LAC but higher than OECD countries. During the decade 1990–2000, Mexico’s PPPs’ capital stock increased rapidly from almost 0.2 percent of GDP in 1990 to more than 2 percent of GDP by the end of the 1990s, reaching the EME average during the mid-1990s. Increases have been more modest since then, stabilizing at 3 percent of GDP in 2014 which is half that of the LAC average (Figure 13). In the region, Mexico’s PPPs capital stock is less than other Latin American countries such as Brazil, Argentina, Chile, and Peru (Figure 14).

Figure 13.
Figure 13.

Public-Private Partnerships Capital Stock

(nominal, % GDP)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Figure 14.
Figure 14.

Public-Private Partnerships Capital Stock Cross Country Comparison, 2014

(% GDP)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

17. This chapter discusses how public investment impacts infrastructure in Mexico, and the efficiency of public investment. Section A describes perceptions of infrastructure quality and indicators for access to infrastructure. Section B compares these indicators to costs, to assess the efficiency of investment. Section C outlines other measures of investment performance, including execution rates and volatility.

A. Public Investment Impact

18. Perceptions of infrastructure quality in Mexico have improved significantly over the last decade. According to surveys conducted by the World Economic Forum13, on a 7-point scale, the overall score for the perceived quality of public infrastructure in Mexico was 4.12 in 2015, compared to 3.34 in 2008. These levels are above the averages for LAC and EME but below that of the OECD (Figure 15).

Figure 15.
Figure 15.

Perceived Infrastructure Quality

(2006–2015)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: World Economic Forum and staff estimates.

19. Mexico lags behind comparators in terms of access to physical infrastructure but the differences are more pronounced when compared with OECD countries’ performance. Scores relating to roads per capita are particularly low, but Mexico fares relatively well on access to treated water, with slightly better access than EME and LAC, and slightly behind the OECD (Figure 16). Performance on electricity and health infrastructure is poor, even compared to LAC.

Figure 16.
Figure 16.

Measure of Infrastructure Access*

(most recent year)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: World Economic Forum and staff estimates.*Public education infrastructure is measured as secondary teachers per 1,000 persons; Electricity production per capita as thousands of kWh per person; Roads per capita as km per 1,000 persons; and Public health infrastructure as hospital beds per 1,000 persons. The most recent year is used for each indicator depending on the availability of data.

B. Public Investment Efficiency

20. The IMF’s methodology for estimating the efficiency of public investment was set out in the 2015 policy paper Making Public Investment More Efficient.14 Simply stated, a country’s performance on an index of the output of public investment is compared to its input, or per capita public capital stock. A “frontier” is drawn consisting of the countries achieving the highest output per a unit of input. The IMF has prepared a database which enables the performance of each country to be compared relative to the frontier. To make the comparisons more meaningful, Mexico is compared with OECD, EME and LAC.

21. Based on this methodology, the efficiency of public investment in Mexico lags its comparators. Data indicates significant room to improve public investment efficiency in Mexico (Figure 17). The efficiency gap between Mexico and the most efficient countries is 40 percent. This gap is wider than the averages for the OECD (13 percent), EME (27 percent) and LAC (29 percent) (see Figure 18). There is thus substantial scope for the Mexican authorities to adopt policies that will help improve the level of efficiency of public investment. Chapter III of this report analyzes where these gaps are by assessing the strength of 15 PIM institutions across the planning, budgeting, and implementation cycle, and proposes recommendations to help close the efficiency gap.

Figure 17.
Figure 17.

Efficiency Frontier

Hybrid Indicator – Benchmark based on perceived quality and physical access to infrastructure

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: IMF Staff Estimates
Figure 18.
Figure 18.

Public Investment Efficiency

Hybrid Indicator – Benchmark based on perceived quality and physical access to infrastructure

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

C. Other Measures of Public Investment Performance

22. Mexico’s performance on other measures of public investment is mixed. The gap between planned and executed capital spending is higher in Mexico than in most of its comparable neighbors (Figure 19). On the indicator of investment volatility, Mexico’s public investment was less volatile than in most comparators (Figure 20).

Figure 19.
Figure 19.

Execution of Capital Expenditure

(average absolute deviation from planned general government capital spending, 2010–15) 1

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: IMF Staff Estimates1 This graph (and graph 2.I) is based on the IMF’s WEO database, which may not reflect execution rates as calculated through the annual budget; however, it allows for cross-country comparisons.
Figure 20.
Figure 20.

Investment Volatility*

(average 2010–15)

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

*Volatility is calculated as the standard deviation of year-onyear growth of investment to nominal GDP ratios

III. Public Investment Management Assessment

23. This section provides a comprehensive assessment of the quality of public investment management in Mexico. Section A describes the assessment framework that is applied. Sections B, C and D analyze different features of public investment quality, related to the planning, allocation and implementation phases of the public investment cycle.

A. Public Investment Management Assessment (PIMA) Framework

24. The IMF has developed the PIMA framework to assess the quality of the public investment management. It identifies the strengths and weaknesses of institutions and is accompanied by practical recommendations to strengthen them and increase the efficiency and impact of public investment.

25. The tool evaluates 15 key indicators, referred to as “institutions”, that are involved in the three major stages of the public investment cycle as shown in the graph below.

  • Planning of investment levels for all public-sector entities to ensure sustainable levels of public investment;

  • Allocation of investments to appropriate sectors and projects;

  • Delivering productive and durable public assets

Figure 21.
Figure 21.

The PIMA Framework

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: IMF Staff

26. For each of these 15 institutions, three indicators are analyzed and scored, according to a score that determines whether the criterion is met in full, in part, or not met (10, 5, 0 are assigned respectively). Each dimension is scored on two different measures: institutional strength and effectiveness. The score for reform priority is assessed at the institution level.

  • - Institutional strength refers to the objective facts that an organization, policies, rules and procedures are in place. The score for an institution, which may be high, medium, or low, corresponds to the average of the institutional strength scores for each of its three dimensions.

  • - Effectiveness refers to the degree to which the intended purpose is being achieved or there is a clear useful impact. The score for an institution, which may be high, medium, or low, corresponds to the average of the effectiveness scores for each of its three dimensions.

  • - Reform priority refers to whether the issues contained within the institution are important to be improved in the specific conditions faced by Mexico.

The following sections will provide a detailed assessment according to this methodology for each institution in Mexico.

B. Planning Sustainable Levels of Public Investment

1. Fiscal Targets and Rules (Institutional Strength – Medium; Effectiveness – Medium; Reform Priority – High)

27. Mexico’s fiscal rules are set out in the Federal Law of Budget and Fiscal Responsibility (FRL). At the Federal level, the rules include a modified balanced budget rule, an expenditure rule, a public sector borrowing requirement (PSBR) target and a requirement for Congress to approve annually the overall Federal debt limit (Article 73 of the Constitution) (see Box 1 for a summary of the statutory rules).15 The FRL sets a balanced budget target which excludes investment by PEMEX and includes an exceptional circumstances escape clause (Article 17) which allows for fiscal deficits and higher expenditures in periods of special economic and social conditions. The FRL was amended in 2014 to add an expenditure rule, which places a limit on the real rate of growth of structural current spending16, as well as including the PSBR, as percent of GDP, as an explicit fiscal target in addition to the balanced budget rule (Article 16). The five-year projections (excluding the draft budget year) for the PSBR are included in the General Economic Policy Guidelines accompanying the budget. The projections are required to be consistent with a sustainable debt path. Currently, the projections set a PSBR target of 2.5% of GDP each year through 2023.17

28. The exceptional circumstances under which the escape clause can be activated are set out in the regulations to the FRL (Article 11) and stipulate five specific triggers including changes in economic circumstances, a revenue shock or natural disasters. The escape clause allows for the fiscal target to be breached for a period of time; the time period is agreed with Congress (see Article 17, sub-section III). The authorities invoked the clause in 2010 and 2014.18 Previous reports, including from the IMF and the OECD 2017 Economic Survey, have noted that the exceptional circumstances clause, as stated in the FRL, is insufficiently tight. They have recommended that: (i) the use of the escape clause should be limited to cases of large output or oil price shocks and (ii) that the fiscal framework should have explicit provisions to bring the PSBR back to the medium-term target after the escape clause has been invoked.

Overview of Mexico’s Fiscal Rules

The following fiscal rules are set out in the Federal Law on Budget and Fiscal Responsibility (Chapter II, Articles 16–17):

Balanced budget rule (BBR) – a zero-balance target on the fiscal deficit, applied to the federal public sector, excluding investments by PEMEX and its subsidiaries.

PSBR target– annual target for the PSBR1, which has a wider coverage than the BBR, is set each year in % of GDP in the General Economic Policy Guidelines which accompany the budget document.

Expenditure rule – a limit on the real rate of growth of structural current spending 2 (equal to potential output growth which is currently estimated at 2.5 percent a year).

Source: IMF staff based on Articles 16 and 17 of the FRL.1 Mexico’s PSBR definition is wider than in other countries, as it includes extra-budgetary units and other public sector entities.2 Structural current spending excludes outlays governed by automatic rules (mandatory transfers to state and local governments, pensions, subsidies for electricity and subnational revenue-sharing).

29. There is no statutory limit or target set for public debt, and up until recently debt has been rising, however the authorities’ fiscal consolidation plan has reduced the trajectory of debt. During the last two years, public debt has been on a downward trajectory (see Figure 22). The fiscal consolidation plan was in response to the authorities’ invoking the balanced budget rule’s exceptional circumstances clause in 2014 in response to a deterioration in the fiscal balance, following the fall in the oil price. To stabilize debt at around 54 percent of GDP, the government needs to meet its PSBR target of 2.5 percent over the medium term. This debt trajectory is, however, contingent on growth converging toward its potential of 2.7 percent and a steady path for interest rates.19

Figure 22.
Figure 22.

Budget Balances, PSBR and Gross Public Debt

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Sources: (left graph) Mexico Staff Report for the 2018 Article IV Consultation; (right graph), authorities and IMF.

30. However, fiscal policy has only a limited medium-term focus, potentially reducing the government’s ability to plan and effectively use resources. The initial macro-fiscal analysis published in April to guide budget preparation (the pre-criteria report, published before budget preparation begins), focuses mainly on the coming budget year and contains medium- term projections for only broad aggregate fiscal indicators. As such, it would not be considered as a fully developed medium-term fiscal framework (MTFF). In addition, the PSBR, introduced as part of the amended fiscal rules in order to limit the pro-cyclicality of the deficit rule, effectively focuses on an annual, not a medium-term, target. While the Annual Financing Plan includes outer-year projections, they are projected to be at the same level as that for the coming budget year.

31. The MTFF could be strengthened by improving the information and analysis in the pre-criteria report. This could be achieved by broadening the scope of the pre-criteria report to include more elements of a medium-term fiscal strategy statement, specifically more in-depth discussion of fiscal policy objectives and analyses of medium-term fiscal parameters, including fiscal risks, as well as more disaggregated macro-fiscal projections, including expenditures over the medium-term. Restricting the exceptional-circumstances escape clause would provide further legal support for the maintenance of a sustainable debt path.

32. To improve quality, it would be helpful to have an independent body review the governments projections and compliance with fiscal rules and to assess the sustainability of the debt sustainability path. Currently, Congress’ Center for Public Finance Studies, which is a technical support unit attached to the Chamber of Deputies, and the Belisario Domínguez Institute, attached to the Senate, review, but do not fully assess fiscal projections. This, or another body, could be re-constituted as a separate, independent (to government) and objective council to undertake this role.

2. National and Sectoral Planning (Institutional Strength — Medium; Effectiveness — Low; Reform Priority — High)

33. National and sectoral planning is guided by the Law on Planning.20 At the beginning of the new Presidential 6-year term, the incoming Administration must prepare and publish a National Development Plan (Plan Nacional de Desarrollo) (NDP) for the entirety of the term, with goals, objectives and non-financial performance measures. This is required to be done within 6 months of the new President taking office. Linked to the NDP are a series of 11 sectors and 3 cross-cutting strategic plans, which include objectives, strategies, lines of action, and non-financial performance indicators, comprising a mix of measurable output and outcome indicators. The strategic plans are not focused specifically on public investment, they do not include details of projects, and the plans are not required to be costed.

34. The National Infrastructure Plan (NIP, Programa Nacional de Infraestructura), prepared and published one year after the NDP, specifies projects and programmes in 6 sectors.21 This has the strategic aim of promoting private sector participation in these projects. Of the types of strategies and plans prepared by the Federal government (see Box 2), the NIP is the only plan that contains information on public investment projects and an estimate of their costs (aggregate and by sector) neither the overarching NDP nor the sector strategies and plans include such information. The NIP includes information on Federally-funded projects administered by Federal-level budgetary entities (e.g. ministries) and some, but not all, projects funded by subnational governments, PPPs and SOEs, particularly those funded by what in Mexico is referred to as non-productive public corporations, as well as non-organic trust funds.22 Donor-funded projects are not significant. Performance information in the NIP is provided at the sector level. For each sector, up to 6 measurable outcome indicators23 are set out but there are no indicators for projects.

Federal Government Planning Framework

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Source: Mission team.

35. However, national and sector plans do not effectively guide ministries’ investment project formulation and budget plans. The sector plans include very broad objectives and actions areas covering numerous and wide range policy areas. This suggests they are insufficiently targeted to provide effective guidance. The plans are not set within a realistic resource framework, meaning that the planned objectives and policy areas are not sufficiently prioritized to provide effective guidance for ministries to plan their investment budgets over the medium term. The plans are fixed for the whole period, meaning they are unable to reflect changes in economic or policy circumstance.

36. The performance targets (a single 2018 target for each objective) are also not set within a realistic resource framework; it is understandable that the targets are very conservative. In the absence of a mechanism to enable budgets to be planned with a medium-term focus, ministries are unable to plan their expenditures (both current and capital) to achieve their strategic objectives, which are medium-term by nature. The lack of a strong link between planning and budgeting is likely to contribute to the long wish-lists of projects ministries provide to SHCP throughout the year, as well as in their annual Planning Mechanism exercise prior to project selection for the budget.

37. In practice, there is currently no mechanism to link the sector plans with the budgets. This makes it difficult for ministries to use the plans to guide their public investment allocations towards achieving government’s objectives. In the absence of a mechanism to enable budgets to be programmed with a true medium-term focus, combined with insufficiently-prioritized strategic objectives, ministries are unable to plan their expenditures (both current and capital) to achieve their medium-term strategic objectives. In many countries, a rolling medium-term budget framework (MTBF) provides this mechanism (see Figure 23).

Figure 23.
Figure 23.

Illustration of Mechanism to Improve the Strategic Link Between Planning and Budgeting

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: IMF Staff

38. The mechanism ensures that the strategic planning documents are used actively by ministries to guide their medium-term budget allocation decisions as part of effective fiscal management. The rolling nature of the medium-term budget framework provides the strategic link and fills the gap between planning (to meet medium-term strategic objectives) and annual budget allocations. This ensures that the strategic objectives and plans in the strategy documents are actively linked to the allocation of resources. Additional flexibility for helping the strategies to stay relevant over the entire time period of the plan is given through the option of reviewing the main strategic activities in the national and sector plans half-way through the period.

3. Coordination between Central and Other Government Entities (Institutional Strength — Low; Effectiveness — Low; Reform Priority — Medium)

39. Inter-governmental relations between Federal and State levels center on a set of fiscal transfers to the States from the Federal budget. Federal transfers to subnational governments (SNGs) account for the overwhelming majority (more than 90%) of subnational government expenditures.24 The types of transfers and the associated rules are set out in the Law on Fiscal Coordination. The transfers cover rule-based, non-discretionary revenue-sharing arrangements (participaciones) and discretionary resources for earmarked purposes (aportaciones).

40. Participaciones may be used by subnational governments for any purpose. By contrast, aportaciones, comprising 8 funds under Ramo 33, finance sector-specific spending, with the largest of such transfers targeting wages and salaries in the education, health and public security sectors. In addition, earmarked transfers for regional and local infrastructure projects (as well as for current expenditures) are allocated under Ramo 23. Finally, decentralization agreements (convenios) are matching grants used to finance programs of interest in specific sectors targeted by the federal government. They are negotiated on a case-by-case basis and executed by subnational governments. While some earmarked transfers may be used for investment projects, the overwhelming majority are not (see Annex 4). Table 3 shows the volume and value of earmarked transfers in the 2018 budget for capital investment.

Table 3.

Earmarked Transfers to States for Capital Investment by Type, 2018 Budget

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. Average may refer to groups of projects. Some projects are included in the database but not allocated funding in 2018.

Source: IMF Staff and SHCP

41. The Law on Fiscal Coordination sets out formulae for determining annually the amounts to be provided from the three funds supplying the main source of earmarked Federal support for infrastructure at subnational level.25 The Law provides for the Federal government to use a transparent, formula-based system for making some capital transfers to subnational governments.26 However, the law also specifies the end of January of the budget year as the deadline for informing the SNGs of the transfer amount they will receive that year which makes it difficult for SNGs to plan their capital expenditures efficiently.

42. In practice, there is very little coordination of public investment spending plans between Federal and SNGs, and communication of the transfer amounts is not timely, leading to inefficiencies in SNGs capital spending. The set of transfers provided to States from the Federal budget for earmarked projects is complex and fragmented and is provided through a complicated series of funds (see Annex 4). SNGs do not receive notification of the exact amounts they will receive for each type of transfer, especially for discretionary transfers (aportaciones), until January of the budget year. This means that SNGs cannot finalize their budgets before the start of the budget year. The specific projects to be financed from the earmarked transfers are not decided until after the specific transfer amounts by fund have been communicated to the SNGs. For each specific project, SHCP’s review and approval is required. SNGs have indicated that in some cases this review and approval process can take between 5–7 months, leaving subnational governments with less than half of the year to implement their projects.

43. There is no specific mechanism for collaboration in the production of public investment plans and projects. Central government ministries and agencies have no formal role in the development of state plans. The Federal government has no role in project planning by SNGs. While earmarked projects (i.e. most aportaciones, for education and health)27 are agreed with the relevant line ministry and SHCP, the Federal government does not have a role in State level monitoring or implementation of these projects. In addition, SNGs are not legally required to report on their contingent liabilities to SHCP (except on PPPs); the same is true of public corporations, although there is some reporting from these entities.28 SNGs account for around 35 percent of net public sector expenditure, these expenditures, including for investment, are not consolidated in any fiscal report.29

44. The Law on Subnational Fiscal Responsibility sets out the rules for contracting of subnational debt.30 Subnational governments may take on short-term debt obligations without Federal (or local legislature) approval, but Federal guarantees require SHCP’s approval. The Law requires that a single debt register be maintained by SHCP for subnational-level debts; and it instituted a traffic light early-warning system. States are classified as having manageable indebtedness (green), indebtedness in observation (yellow) or high indebtedness (red). Any subnational government classified as red is prohibited from borrowing.31 The Federal government monitors subnational borrowing operations through the Secretariat of Fiscal Coordination in SHCP, whose primary role is to monitor subnational debt.

45. Ensuring efficient resource allocations to capital projects across government levels and avoiding duplication of investments is an important priority. While respecting the autonomy of the states, more information sharing and coordination is in the interest of citizens and state and the federal governments. This is likely to involve improving the mechanism for coordination (e.g. through a forum like COPLADES -the State Committee for Development Planning- but between states and the Federal government) and increased transparency and information sharing on the medium-term public investment plans of Federal and subnational governments. In conjunction with the debt levels, the information communicated should be broadened to include the reporting of fiscal risks for both Federal non-budgetary entities and State level governments, including implicit and explicit contingent liabilities and consolidated data on public investment for general government, including Federal and subnational levels.

4. Project Appraisal (Institutional Strength — High; Effectiveness — High; Reform Priority — Low)

46. The main stages in Mexico’s public investment planning and budgeting process are specified in the Federal Budget and Fiscal Responsibility Law. These include the four stages described in Box 3 and Figure 24 and 25.

Mexico’s Public Investment Planning and Budgeting Process

Stage 1: Planning and prioritizing of investment projects by ministries. This includes the preparation of the Planning Mechanism (See figure 25), including the required documents for those projects under consideration in the upcoming budget, (but ministries can propose projects throughout the year). This must stage must be completed by the end of March.

Stage 2: Registration of approved projects in the portfolio (cartera). SHCP reviews the documents from ministries including socio-economic and financial analyses of each project, discussions with the line ministries and a Registration Code is issued for each approved project. For projects for potential inclusion in the coming budget this step must be completed by the 15th July.

Stage 3: Programming and Budgeting: This involves the initial selection of projects for inclusion in coming budget by the IU and the review and approval by the Interministerial Commission for Public Expenditure, Financing and Disincorporation. The deadline for presentation of the draft budget to the Chamber of Deputies is 8 September, the budget should be approved by 15 November.

Stage 4: Execution and Follow-up of the project upon completion. Figure 24 summarizes diagrammatically the steps in the cycle, and Figure 25 provides more detail on stages 1 and 2.

Source: SHCP
Figure 24.
Figure 24.

Investment Project Planning, Budgeting and Execution Cycle

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: SHCP
Figure 25.
Figure 25.

Schematic Overview of the Planning Mechanism and Portfolio Registration Stages

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: Proyectos México, SHCP.

47. The requirement for project appraisals to be carried out as part of the public investment planning process is set out in Article 34 of the Federal Budget and Fiscal Responsibility Law. Detailed socio-economic and financial analyses32 are required to be prepared for all projects registered in the Investment Unit ‘s portfolio of projects, known as the cartera.33 The details of the standardized methodology required for preparation of the appraisals is set out in separate Guidelines. The scope and level of detail of the analyses in the project appraisals are based on the size of the project according to thresholds stipulated in the law and in the Lineamientos published in 2013 (see Figures 26 and 27). The analytical requirements include an estimate of the future operation and maintenance costs of the infrastructure but not of non-infrastructure-related operating costs (e.g. personnel for a hospital). Central support to ministries preparing these evaluations includes a dedicated entity under SHCP (the Center of Studies for the Preparation and Socioeconomic Evaluation of Investment Projects CEPEP). Despite relatively limited staff, the central support unit provides ministries with a range of modalities of support, including on-line courses and training. Sector ministries did not express dissatisfaction with the level of support they received.

Figure 26.
Figure 26.

Types of Analytical Assessment for Investment Projects

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: IU, SHCP
Figure 27.
Figure 27.

Analysis Required for Each Type of Project

Citation: IMF Staff Country Reports 2019, 339; 10.5089/9781513520148.002.A001

Source: Mission team. based on “Guidelines for the Selection of Investment Projects” (Article 34 of the FRL).

48. In practice, appraisals are carried out for all projects funded from the budget, including those added by Congress after the draft budget has been submitted, plus the PPPs with payments from the budget or from FONADIN. Project appraisals of those projects in the project pipeline are made public. They show good coverage of the socio-economic and financial issues and a good depth and rigor of analysis, in line with the analytical requirements for thresholds of project size set out in the legislation. In particular, these reports include an analysis of various risk factors and some appraisals for major projects identify factors to mitigate these risks.34 While projects funded by public corporations and extra-budgetary units without Federal funding (e.g. projects funded by EPEs public corporations [e.g. PEMEX and CFE] and FONADIN projects receiving no grants) are not required to submit appraisals for their projects, EPEs carry out their own appraisals, which are uploaded to the relevant system as part of being registered in the cartera, but their appraisals are not approved by SHCP but by the EPEs themselves.35

49. Good-quality projects require high-quality socioeconomic assessments. There are currently around 2000 projects in the cartera with foreseeable funding in the short term. Around 1700 cartera projects received funding in 2018. During the year, IU receives around 500 projects to review (it received 544 in 2017), and it approves around 200 on average. Given the sheer number of projects being reviewed, additional quality control of the assessments would be usefully conducted through an independent review of project appraisals for a limited number of key projects. The IU faces a challenge which is common in many countries that it depends on the evaluations commissioned and provided by spending ministries, who have a vested interest in promoting their projects and ensuring they receive positive evaluations.

5. Alternative Infrastructure Financing (Institutional Strength — Medium; Effectiveness — Medium; Reform Priority — Medium)

50. Recent reforms, focusing on oil and energy but also addressing other infrastructure, improved access to infrastructure markets, promoted competition, established regulators, and defined a framework for private investment in infrastructure. Sectoral regulators have been established such as Instituto Federal de Telecomunicaciones (IFT) and Comisión Reguladora de Energía (CRE), and the Competition Authority (Comisión Federal de Competencia Económica, COFECE) was given a new and much more relevant role. Major reforms are being implemented which are introducing competition in infrastructure markets, creating conditions for modernization, expansion of service and ultimately price reduction. A published clear framework for the preparation, selection, and management of public-private partnerships (PPP) is in place, including legislation, regulations, and a PPP Unit in SHCP. PPP projects using budget funds or trust-fund grants (e.g. FONADIN) are subject to socioeconomic evaluation and a detailed assessment of the PPP option. A plethora of public corporations (PC) and trust funds (fideicomisos) are involved in public investment in infrastructure, with the SHCP reviewing and overseeing most of the investment projects, but not all of them.

Promoting Competition in Infrastructure Markets

The telecommunications sector is now experiencing the benefits of pro-competition reforms. A 2017 OECD review praised the recent reforms of the sector as leading to new players entering the market, significant price decreases and better access. Persevering in these structural reforms including in the energy sector reforms and opening up to private sector investment in infrastructure, is essential for promoting growth and reducing poverty and inequality. As in telecommunications, the energy and infrastructure reforms need perseverance and good regulation for the population and economic activity to reap the ultimate benefits.

Mexico’s Federal Competition Authority, COFECE, has been advising public entities on legislation and practices to promote competition in infrastructure markets, and punishing anti-competitive practices. These activities cover a broad range of activities, from the national markets for electricity, gas, and oil-related products, to local access to port, rail, and airport services.

In January 2018 COFECE presented to CFE a set of recommendations (see Reporte Mensual Enero) for opening the electricity infrastructure market, including: (a) effective unbundling of CFE horizontally and vertically; (b) elimination of preferential treatment of CFE’s electricity generating companies by CFE Energía in the access to natural gas, namely by not awarding directly gas contracts; (c) elimination of discriminatory access of new electricity generators and distributors to transmission and distribution networks under CFE management; and (d) open access by all competitors to CFE information on energy demand and needs. With contributions from COFECE, a 2018 OECD report includes a set of recommendations for adopting competitive procurement of CFE’s activities.

In June 2018, COFECE presented to the Energy Regulator (Comisión Reguladora de Energía, or CRE) a report focusing on the regulation of underused infrastructure for gas storage and distribution, the infrastructure is in the hands of PEMEX and a few private entities, in conditions that preclude the entry of competitors. COFECE has also been applying fines for anti-competitive behavior, including a recent fine of 418 million Pesos to PEMEX TRI for not implementing previous commitments for opening the market for marine diesel and other fuel oils (see Reporte Mensual Agosto).

Sources: OECD (2016) A review of the procurement rules and practices of PEMEX in Mexico; (OECD (2017) Telecommunication and Broadcasting Review of Mexico 2017; OECD (2018) Fighting bid rigging in Mexico: a review of CFE procurement rules and practices; COFECE (2018) Reporte Mensual – Enero; COFECE (2018) Reporte Mensual – Agosto; COFECE (2018) Transición hacia Mercados Competidos de Energía: Gas LP.

51. The largest PCs have an EPE status that gives them significant autonomy, namely in preparing and procuring their investment projects. It is the same case with regard to several trust funds. Therefore, the government has no consolidated report on the investment plans and financial performance of PCs or fideicomisos.

52. The development of effective competition in infrastructure markets and in public service delivery requires continue support for the reform, allowing regulations and oversight institutions to take the required next steps. In several infrastructure markets (such as the energy markets where the former public monopolies in practice still have dominant positions) new steps will be needed to make efficient use of current infrastructure and attract new investors, to fully reap the benefits in terms of modernization, expanded supply and price reductions. Regulatory institutions have been active in promoting these next steps and in discouraging anti-competitive behavior. The role of the regulators has been strengthened and the competition authorities have been empowered to deter collusion and other anti-competitive practices.36

53. The PPP framework has been effective in reviewing PPP proposals, and there is evidence that some projects have been filtered out. The framework includes specific legislation and regulations, including recent strategic guidance published by the SHCP. Further improving the framework, by removing the “PPP promotion” goal of the PPP Unit (a clear conflict of interest regarding its “PPP filtering” goal) and by reviewing the PPP selection methodology to ensure consistency with the latest international experience and best practices. This would foster efficiency and fiscal-risk mitigation. The PPP Unit’s materials focus on the benefits of PPPs and do not present their drawbacks, this does not help government entities to understand where PPP do present good value and where they do not. The evaluation of PPPs suitability is still too focused on quantitative value-for-money, meaning that some recent lessons from global experience have not yet been applied. There are still PPP projects (for instance, some of the projects promoted by FONADIN) that do not follow the standard SHCP assessment and prioritization processes.

54. Infrastructure efficiency and fiscal-risk management can be improved by developing uniformed processes and procedures. To obtain an overall picture of public investment, the IU should be able to coordinate with key providers to obtain information on all investment projects using federal funds including those from trust funds. All public investment projects (PPP or non-PPP) that use federal funds (including funds managed by non-organic trust funds) should be registered in the SHCP investment portfolio and undergo socioeconomic evaluation and rigorous assessment of the procurement options (if PPP).

55. The individual assessment of PPPs fiscal risks should be extended to include implicit fiscal risks, using tools like the PPP Fiscal Risk Assessment Model (PFRAM).37 This information should be integrated into the overall fiscal risk management process. There is still no systematic identification of explicit and implicit fiscal risks arising from all PPPs awarded at the federal level. There is no evidence of any risk management unit monitoring aggregate PPP fiscal risks. As has happened in other countries, subnational governments’ fiscal risks arising from infrastructure and PPPs38 do create implicit fiscal risks for the federal government, and mechanisms should be put in place (by agreements with the states) for fiscal risks assessment to be conducted at state and municipal level and communicated to the SHCP for review and register. To help review and manage fiscal risks, the SHCP, PPP Unit could see its role extended to major infrastructure projects, as it has happened in other countries (see Box 5).

The Trend Towards Broadening Infrastructure Governance

Countries with large infrastructure programs have been introducing changes to their institutional framework for governing infrastructure. A few countries, such as Chile, have for many years published a yearly Report on Contingent Liabilities. Chile’s report (see http://www.dipres.gob.cl/598/w3-propertyvalue-16136.html) covers explicit contingent liabilities arising from a variety of fields, including the pension system and PPPs, and presents itemized information of those risks and sensitivity analysis. In recent years, many other governments have created fiscal risk units and started publishing Fiscal Risk Statements where public investment and infrastructure are highly visible. As a matter of fact, infrastructure is a major source of fiscal risk in many countries.

Some countries with large infrastructure programs, and where the Ministries of Finance had PPP Units, have in recent years broadened the scope of those teams: Partnerships-UK was replaced by Infrastructure-UK; the French MAPPP, Mission d’Appui aux PPP, is now FinInfra, Mission d’Appui au Financement des Infrastructures, addressing all types of Infrastructure Finance. South Africa’s PPP Unit was incorporated into GTAC, the Government Technical Advisory Centre, with a mandate for providing specialized procurement support, advice on the feasibility of infrastructure projects, and knowledge management for projects undertaken.

Source: Mission team

C. Allocating Investments to the Right Sectors and Projects

6. Multiyear budgeting (Institutional Strength — Medium; Effectiveness — Low; Reform Priority — High)

56. The Mexican government does not forecast capital spending over a multi-year period or establish multi-year ceilings for capital spending. Two macro-economic overviews are developed as part of the government’s fiscal framework. The first, the Pre-Criteria report, is submitted to Parliament no later than April 1;39 and the second, the General Economic Policy Guidelines report (the Criteria report), accompanies the budget on September 8th, other than in years of Presidential transition when the budget is submitted by December 15th. The Pre-Criteria document describes the macro-economic outlook, but only considers spending in the aggregate as a percentage of GDP. The General Economic Policy Guidelines report provides multiyear spending aggregates for the budget year and five outer years. It identifies capital spending as a percent of GDP over that period. However, no detailed budget estimates are developed by minister or program, and no data is provided, for the outer years. Capital spending is not divided between ongoing and new projects or allocated by function, agency or program. There are no budget ceilings for the outyears.

57. All budget decisions in Mexico are made on an annual basis. Budget policy and spending priorities are developed each year. The budget and related reports that comprise the annual budget present data for the budget year and provide summaries by function, agency, and economic classification, but do not provide outer-year estimates.

58. The Mexican government does publish information on the total costs of individual projects. The project database that supports the investment budget does have substantial detail on project costs. This includes, the total project cost, amounts spent to date, current budget year funding and estimates for three outer years at the project level. The general public has open access to that database and are able to create lists of projects (for instance, by region or by public entity) and to obtain detailed information on each project, including the socioeconomic evaluation studies.

59. Implementing a medium-term budget framework would provide more information on the medium-term costs of public investment and facilitate better decision making. A medium-term approach to budgets (see Institution 3 above) provides a framework for informing public investment policy making. Many public investment programs extend beyond one budget year, some over multi-year horizons. Decisions to undertake a project should reflect the full cost of that project through its completion. An initial step, to obtain some basic information on medium-term costs could include summing the total of investment project outyear costs from the current cartera and providing summary outyear totals by sector, agency and program. The cost data for the outyears in the cartera’s project database may not currently be rigorous or of high quality especially for the outyears. Building medium-term budget estimates for current and capital expenditures is a first step to improve the realism of budget requests and visibility of funding commitments for forward years. Medium-term projections should be updated annually together with the macro-economic projections. Binding decisions would still be for the budget year with indicative ceilings of the outer year.

7. Budget Comprehensiveness and Unity (Institutional Strength – Medium; Effectiveness – Medium; Reform Priority – Low)

60. The federal government’s budget provides information on capital spending from most financial sources; some spending by trust funds is not included, as well as funding from subnational sources. There are different approaches for programs using alternative financing arrangements such as EPEs (PEMEX and CFE) and PPPs. The Federal government includes government entities, two social security funds (Instituto Mexicano del Seguro Social [IMSS]) for non-government workers, and Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado [ISSSTE]) for government workers and PCs. The PSBR target expands the budget coverage to include the extra-budgetary units (non-organic trust funds which comprise a set of accounts within a government ministry or entity which process transactions but have no separate legal/corporate identity); Fondo de Estabilizacion de los Ingresos Presupuestarios (FEIP), Fondo de Estabilización de Ingresos de las Entidades Federativas (FEIEF), Fideicomiso para la Infraestructura en los Estados (FIES), Mecanismo Financiero Piloto (MFP), Fondo Nacional de Infraestructura (FONADIN), Fondo de Estabilizacion para la Inversión en Infraestructura de Petróleos Mexicanos (FEIPEMEX), and Fondo de Apoyo para la Reestructura de Pensiones (FARP)40, the development banks, the IPAB, PIDIREGAS and the debt support program. The capital projects of these entities are not separately identified in the investment budget. Detailed tables in Tomo VIII show current and capital expenditure, including investment programs and projects by agency of government. PEMEX and CFE tables present similar information but are included as an annex in Tomo VIII. PPPs are also listed in a separate annex in Tomo VIII.

61. Capital spending is not integrated with current spending in policy discussions. Capital spending of SNGs is not considered spending of the Federal government, even if funded by funds transferred from the Federal government and is not included in the public investment budget. Capital spending is only integrated with current spending in summary tables, but not in budget policy discussions. There is a separate process for considering current and capital spending in the budget and ministries initially present their capital projects separately as part of the planning mechanisms. Capital spending priorities are developed by the IU of SHCP and current spending priorities are developed by DGs for expenditure. Agencies’ capital project data are reviewed by the IU. PEMEX and CFE develop comparable registers of data, which are included in the SHCP database, but which are not reviewed by the IU. Substantial capital spending is undertaken by extra-budgetary entities, but most public investment is presented in the budget.

62. Budget detail is generally comprehensive, but budget documents do not integrate infrastructure funded from all sources. The omission from the budget of information on Federally funded investment projects of SNGs and non-organic trust funds’ financed investment projects understates the scope of public investment. Information could be added to the budget on these activities in annexes presenting their unique characteristics, comparable to the treatment of PPPs in Tomo VIII. Investment project details could be organized by agency, function, and program. The budget would be improved by including more details on the spending of trust funds.

8. Budgeting for Investment (Institutional Strength — Medium; Effectiveness — Medium; Reform Priority — Low)

63. Investment programs are partially protected during budget formulation and implementation, but not over the medium term. The budget is developed within the context of a resource envelope for the budget year. Spending decisions are allocated between programmable and non-programmable spending. The budget requests for all spending reflect historical spending patterns, national planning goals, and government budget policy. Allocations between current and capital spending and among policy divisions by sector, agency, and program are made for the budget year. As described below under Institution 10, investment spending decisions are based on a prioritized ranking of capital projects. For investment spending, cost-benefit analyses, project status and future requirements are considered. The annual requirements for multi-year contracts and prior-year commitments are recognized and funded as part of the annual budget. Budget decisions are made, however, for the budget year only. During budget implementation, funding can be transferred from capital projects to current spending with approval of the SHCP.41

64. Multi-year capital projects are not protected directly, but funding requirements for on-going programs are recognized. Funding requirements for existing contracts (“plurianuales”) are treated as non-programmable obligations and are protected in budget allocations. Outer-year costs of multi-year projects funded by annual contracts (“multianuales”) are not protected but are considered by the IU in establishing priorities for funding public investment. The Mexican budget process does not provide separate allocations for ongoing and new investment projects. Some countries take this approach to give priority to completion of works in progress. Mexico, however, has devoted the great majority of its investment budget over recent years to making progress on or completing on-going projects.

65. More recognition should be given to the total cost and outer-year funding requirements of ongoing capital projects. The budget process has worked in Mexico to support investment project completion. Nevertheless, more emphasis should be given to total project cost and multi-year requirements. A medium-term approach to budgeting would facilitate a more strategic approach (see discussion under institution 6 above). Budget documents should highlight the full requirements of projects to inform decision makers and the public. This emphasis should result in a more realistic understanding of the funding and time requirements of proposed projects. This could be done by highlighting project completion in budget documents.

9. Maintenance Funding (Institutional Strength — Medium; Effectiveness — Low; Reform Priority — High)

66. Maintenance funding provisions are not in place in Mexico’s budgeting. The adequate maintenance of public infrastructure is both a matter of keeping its ability to deliver service to users and optimizing the value of the assets (see Box 6). Maintenance and operations costs are required to be included in project proposals. Maintenance costs, along with other recurrent costs, are considered during project assessment. There is, however no mechanism for creating allowances for maintenance in future budget years as new capital expenditure is being approved. It is even common for maintenance programs to compete for resources against new construction projects. As the consequences of poor maintenance may not be as obvious or politically attractive as proposed benefits from new construction work, sectoral departments and agencies need to present evidence of the need for adequate standards for maintenance and capacity for implementing them. Without this information it will be difficult for SHCP to protect maintenance funding in future budgets. Conversely, PPP projects are structured in such a way that funds for maintenance will be available for the long term.

Public Infrastructure Maintenance

In Mexico, the Public Works Law requires that project preparation includes a study on maintenance, and that maintenance manuals are available upon construction completion. Several departments and agencies have developed standards for maintenance. Adequate maintenance allows public infrastructure to keep delivering service to users over its (usually long) life and protects those users from malfunctions. Potholes in roads, poor lighting in schools, and leaks in water pipes, are usual results from inadequate maintenance; but it may also lead to life-threatening results, such as the failure of critical equipment in a hospital.

Adequate maintenance is also critical for optimizing the life-cycle cost of infrastructure. A review of road maintenance by the South African National Roads Agency indicates that delaying road maintenance for three years leads to cost increases of 6 times the original costs of preventive maintenance; if maintenance is delayed for five years, costs rise to 18 times the preventive cost.

Source: South African National Roads Agency, Annual Report 2004, www.nra.co.za/content/sanralAR04.pdf

67. Standard methodologies for determining requirements for routine maintenance and major improvements exist for some but not all types of infrastructure assets. SHCP does not establish guidelines for maintenance funding. Some ministries responsible for fixed assets have established program-specific maintenance standards. The Secretaries of Health and Energy have developed maintenance standards for assets they operate. The Secretary for Communication and Transport has developed a road conservation program to identify maintenance and improvement requirements. In some instances, this ministry has used PPPs to rehabilitate, operate and maintain some of its highways. FONADIN maintains and operates 46 highways taken over from failed PPPs. PEMEX has a five-year maintenance program, which is updated annually and is funded by PEMEX. A subjective perception from operating agencies was that maintenance was being underfunded. Maintenance projects are visible in the investment budget; all are coded with a standard code (K027) which is identifiable in the project listings. There is no comparable coding to identify maintenance in the budget for current operations. Maintenance and improvement requirements and funding are not highlighted or summarized in the tables of the budget.

68. Developing a standard methodology for determining maintenance requirements for all types of infrastructure assets, and budgeting for them, is a high reform priority. This will ensure savings over the life cycle cost of the facility. Current practices for determining routine maintenance are not credible and may result in poorly maintained facilities. A top-down approach for capital budgeting should protect adequate minimum funding for maintenance of the stock of public infrastructure. When implementing a top-down approach to the budget, it is important to increase the share of the budget directed toward maintenance and rehabilitation expenditure to prevent degradation of the existing capital stock. In the budget process, it is important to identify the level of spending required to maintain infrastructure at a steady-state level, using a regularly updated register of infrastructure assets to determine appropriate maintenance levels.

10. Project Selection (Institutional Strength — High; Effectiveness — Medium; Reform Priority – Low)

69. The process for the selection of public investment projects for the Federal budget is governed by Article 34 of the Federal Budget and Fiscal Responsibility Law. The Law is supplemented by Project Selection Guidelines. Following the criteria set out in the Law, selection42 is carried out in two phases; the first-level prioritization is for what is called “irreductible investment” (e.g. pluri-annual projects, on-going projects and maintenance for productive infrastructure, followed by administrative acquisitions and maintenance; and then new projects). The second level of prioritization (primarily for new or re-formulated projects) uses the following criteria: (i) progress on feasibility studies; (ii) Net Present Value (NPV); (iii) regional impact; (iv) extensiveness of beneficiaries; and (v) support to the Green Budget initiative. Each project is ranked following a valuation of all projects based on weights assigned to each of these 5 criteria.43 The project ranking relative to the total expenditure budget ceiling (see discussion of the ceiling below) generates the list of selected projects. This IU approved list of projects is reviewed and formally approved by the Inter-ministerial Commission for Public Expenditure, Financing and Disincorporation (Comisión Intersecretarial de Gasto Público Financiamiento y Desincorporación).

70. While the selection of projects by the IU for inclusion in the budget is primarily a technical exercise,44 project selection follows a clear, criteria-based and consistent process. This process is applied to all ministry submitted projects approved by IU and registered in the project portfolio. Nonetheless, additional projects of up to 10% may be proposed by Congress for inclusion in the budget. These projects must be registered in the cartera and thus go through the same review and selection process by IU required for ministry submitted projects, including the carrying out of socioeconomic and financial analyses. In principle, the IU can reject poor projects. Active project selection by the IU is limited to projects funded by the Federal budget; other projects funded by non-budgetary sources, e.g. EPE public corporations such as PEMEX or CFE, or extra-budgetary sources and from some trust funds are not part of the selection process (see Box 7).

Classification of Investment Projects by Extent of Coverage in IU Process

Sources: IMF Staff based on information provided by SCHP.

71. While a pipeline of good quality-assessed projects is in place and active projects in the pipeline are eligible for funding for three years, the focus of funding is the coming budget year, rather than a forward focus for project planning. As such, while the project portfolio (cartera) contains projects covering multiple years, it is not a true tool for selecting projects for funding over the medium term, which would require the inclusion of projects that were not scheduled to begin in outer years (e.g. budget year plus 2). The introduction of a medium-term focus to budgeting (see Section B) would address this issue.

D. Delivering Productive and Durable Public Assets

11. Procurement (Institutional Strength — High; Effectiveness — Medium; Reform Priority — High)

72. The legal framework requires all public investment to be tendered competitively, and relevant information must be disclosed to the public. The requirement for competitive procurement is a constitutional principle in Mexico and has been inserted into several pieces of legislation, with major projects being open and transparently procured. Nevertheless, the Public Procurement Law and Public Works Law regulations allow for too many exceptions to the competitive route, resulting in most smaller projects being directly awarded. Detailed information on the procurement process, including the procurement plan, information notices, and award notices, is publicly disclosed through CompraNet, the electronic procurement portal that serves also as mandatory registry (and disclosure portal) for Federal government procurement. The general public can browse and download procurement data from CompraNet, which has hundreds of thousands of public contracts in a single file, however no procurement statistics or analyses are provided. Procurement complaints follow an independent and transparent review process, controlled by the Ministry of Public Administration, and conducted in a fair and timely way, with final decisions published in CompraNet.

73. Most major investment projects are transparently and competitively procured, however most smaller projects are not competitively procured. For contracts above one million pesos, direct award is used for 33% of the contracts which amounts to 58% of the financial value of all contracts (see Table 4). However, the picture is very different for smaller projects which make up the majority of projects, in number, but not financial value. Out of the 228,000 public contracts awarded in 2017, only 12% were subject to public tender, with 78% directly awarded, and the remaining 10% subject to the negotiated procedure (invitation to at least three suppliers). Projects which are subject to public tender (even large projects) face some restrictions to effective competition. For instance, terms of reference are designed to restrict competition and many bids not accepted, either based on small legal technicalities or “abnormally low prices”. Despite the abundance of information on public procurement, there is no evidence that it is being used by the contracting authorities or the procurement system to guide reform and promote better practices. Late budget allocation tends to concentrate bidding in the second half of each year, creating pressure for shorter work completion deadlines (which lead to lower competition, as some potential bidders cannot cope with too short deadlines) and procurement activities are sometimes also adversely affected by slow budget reallocations.

Table 4.

Percentage of Contracts by Procurement Type, in 2017

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Source: Computation by COFECE based on CompraNet data. See COFECE (2018) Agenda de Competencia para un ejercicio íntegro en las Contrataciones Públicas.

74. The Mexican Competition Authority, COFECE, has presented a good portfolio of concrete recommendations for the implementation of effective competition in public procurement. These recommendations (see Box 8) address mainly the introduction of good practices in designing and implementing procurement plans. This can be put in practice immediately, without requiring changes to the legislation. Recommendations also identify loopholes in the legal framework that may be corrected in a future revision of the public procurement legislation. For instance, the too permissive exceptions to mandatory public tender in the Public Works Law and regulations (e.g. Articles 41–43), and in the PEMEX Act and others. Mandatory standard procurement documents (bidding documents, contracts, evaluation criteria, evaluation reports, etc) should be developed.

Recommendations for Competition in Public Procurement

Several reports published by COFECE and OECD produce a very useful set of recommendations to help make Mexico’s public procurement more competitive. Some of those recommendations require changes in law, but most can be implemented under the current legal framework. A sample of recommendations include:

  • a) Limit the use of exceptions to open tender procedures;

  • b) Avoid charging potential bidders for the tender documents required to present a bid;

  • c) Increase the use of functional requirements instead of prescribing technologies and materials;

  • d) Avoid physical clarification meetings (opportunities for bidders to collude);

  • e) Eliminate prequalification procedures which restrict participation to preselected bidders only;

  • f) Do not exclude bids under a certain price threshold (exclude only if bidders cannot justify their prices);

  • g) Avoid changes of scope and contract modifications;

  • h) Set up regular training of public procurement officials on how to avoid collusion;

  • i) Create incentives for public procurement officials to fight bid rigging;

  • j) Temporarily exclude bidders convicted for having participated in bid rigging;

  • k) Create a hotline and a system to report suspicions of bid rigging;

  • l) Establish closer co-operation between procurement authorities and COFECE.

Sources: OECD (2016) Fighting bid rigging in Mexico: A review of the procurement rules and practices of PEMEX in Mexico (http://www.oecd.org/mexico/fighting-bid-rigging-mexico-pemex-review-2016.htm); OECD (2017) Public Procurement Review of Mexico’s PEMEX: Adapting to Change in the Oil Industry (http://dx.doi.org/10.1787/9789264268555-en); OECD (2018) Fighting bid rigging in Mexico: A review of CFE procurement rules and practices (http://www.oecd.org/competition/fighting-bid-rigging-mexico-cfe-report-2018.htm); COFECE (2018) Agenda de Competencia para un ejercicio íntegro en las Contrataciones Públicas (https://www.cofece.mx/wp-content/uploads/2018/07/CPC-ContratacionesPublicas.pdf#pdf).

12. Availability of Funding (Institutional Strength – Medium; Effectiveness – Medium; Reform Priority – Medium)

75. Although monthly cashflow forecasts are prepared, ministries are not provided with commitments ceilings for the full fiscal year. The system distinguishes between “multianuales” ─ projects whose scope is multi-annual but the contracting is done on an annual basis only and funding is determined yearly ─ and the very few “plurianuales” ─ projects whose contracts are signed for at least two years and funding legally assured for the duration of the contract (FRL article 32). Ministries are authorized to commit capital projects expenditure up to the full budget allocations. SHCF’s Treasury centralizes all payments. Ministries submit payment orders to the SHCF’s Treasury which makes payments on their behalf.45 The Treasury ensures cash availability. The Treasury is responsible for mobilizing resources to meet government obligations, including through debt issuance when needed.46 Donor funding is fully integrated into the main government bank account structure (FRL article 36). It is earmarked for capital spending, and the chart of account allows to track it and report it in Cuenta Pública.

76. Ministries do not have commitment ceilings and sometimes experience unscheduled cutbacks, including to ongoing projects. Annual commitment ceilings enable ministries to plan and commit capital projects expenditure in an efficient and timely manner. Lack of certainty over available funding, delays in payments and cutbacks in-year impact project implementation. In the past few years, there was significant in-year cutbacks to a number of ongoing projects due to fiscal consolidation efforts. When cutbacks happen, for instance as a result of lower than expected revenue performance or other factors, “plurianuales” are protected but “multianuales” may not be. The Supreme Audit Institution has documented cases of cutbacks during project implementation leading to unfinished projects.47

77. Although the Treasury strives to pay within 48 hours following receipt of a payment order from a ministry, there is no systematic monitoring of payment delays. Ministries reported that it is common for them to return to Treasury significant unspent balances at the end of the year due to delays in project approvals. Once Ministries’ projects are approved, cash is generally released fast.48 This was echoed by SNGs for whom projects funded by the federal government take too long to approve – generally between five to seven months – leaving only less than half of the year to implement projects, which leaves them with significant unspent balances to be returned at the end of the year. The practice of returning unspent balances at the end of the year also concerns ongoing projects – in particular the “multianuales” for which funding is not guaranteed beyond one year – this may hamper their smooth implementation. Only amounts committed before the end of the year are allowed to be paid during the first quarter of the next year. Furthermore, procurement plans are prepared after budget approval, which contributes to delaying project implementation.

78. Updating treasury systems to provide annual commitment ceilings to ministries would make funding for capital spending more predictable. Commitment ceilings should be provided for a full fiscal year to allow better planning of capital projects expenditure by ministries. Monthly cashflow forecasts by ministries should take into account the spending patterns, beyond the mere budget allocations. This information is crucial for the SHCP’s Treasury in consolidating the government’s cashflow forecast. A provisional procurement plan, and a commitment plan, should be prepared two to three months prior to the beginning of the fiscal year in order to speed up project implementation as soon as the budget is passed.

13. Portfolio Management and Oversight (Institutional Strength — Medium; Effectiveness — Medium; Reform Priority — Medium)

79. The SHCP Investment Unit has a strong centralized portfolio management system. Project monitoring is conducted at the agency level, however information on cost and physical progress of the entire portfolio is centralized. The SHCP’s IU maintains a database of projects, and ministries access it to report financial and physical progress of capital projects in their respective sectors, on a monthly basis, as required by current guidelines.49 The database includes projects with federal funding. Whereas adjustment procedures for individual projects are well-defined (see Institution 14), there are no procedures for funds reallocation between projects within the portfolio. During project implementation, ministries and other implementing entities can request reallocation of funds between projects which require the approval of the SHCP. They are considered on a case-by-case basis, due to the lack of portfolio-wide review procedures. Ex-post reviews of some major projects50 are undertaken, often by independent experts, and their results published, but these reviews are limited in scope. The SHCP’s IU selects projects for ex-post reviews from its centralized database and communicates the list to ministries which are responsible for conducting the reviews. In other countries, a challenge with spending ministries conducting reviews of their own projects is that these reviews tend to be always positive.

80. Despite the existence of a centralized monitoring system for financial and physical progress, consolidated data on cost over/underruns, and on implementation delays, is not readily available, nor used for decision-making or learning purposes. There are examples of cost overruns, delays in project implementation and changing project scope.51 If needed, information on cost overruns and implementation delays can be obtained on a project-by-project basis, but it is not presented in summary tables for use in decision-making. The few ex-post reviews of completed major projects conducted each year focus generally on project cost and deliverables, and rarely on output and impact or alternative ways of project delivery. The results of ex-post reviews are not an important input into the budget process but may sometimes lead to adjustments of project management guidelines issued by the SHCP’s IU each year.

81. Developing a system to track and report on consolidated project cost over/underruns and implementation delays can significantly improve the usefulness of the centralized project monitoring system. There is a need to move the focus of project monitoring beyond compliance towards efficiency. This can be achieved by (i) systematically conducting ex-post reviews for most major projects; and (ii) improving the scope of ex-post reviews to cover not only costs and deliverables, but also output and impact when possible.

14. Management of Project Implementation (Institutional Strength — Medium, Effectiveness — Medium; Reform Priority – Medium)

82. Detailed financial plans are prepared prior to budget approval, but implementation plans are prepared after budget approval. Senior project managers are systematically identified for major projects, and ministries submit financial plans every year, before budget preparation. Project implementation plans also are prepared annually for major projects, but only after budget approval. Standardized rules and procedures for project adjustments exist for major projects and if needed can require a fundamental review and reappraisal of a project’s rationale, and expected outputs.52 Furthermore, extensive audits of ministries’ accounts and of the government’s consolidated financial statements are undertaken annually by the Supreme Audit Institution, which covers project spending as part of its financial audits. They also examine separately some investment projects, but there is no evidence that most major capital projects systematically undergo an ex-post external audit.53

83. Preparation of implementation plans after budget approval by Congress can lead to delays in project implementation. Despite the existence of standardized procedures for project adjustments, ministries generally limit project adjustments so that they are below the cost ceiling that would trigger a fundamental review and resubmission of project. Thus, fundamental changes such as on project rationale, objectives, and expected outputs, do not often trigger a fundamental review. The lack of systematic ex-post external audits of all major capital projects limits legislative scrutiny. For example, the 2017 audit report of the Supreme Audit Institution includes findings related to public works such as differences between estimated, paid and actual volumes; payments made on the basis of incorrect unit costs, payments for unexecuted or undocumented works, lack of environmental assessments, etc. but there is no evidence that all major projects are systematically subjected to such audits.

84. Requiring ministries to prepare implementation plans for major projects prior to budget approval can help to speed up implementation as soon as the budget is approved. Implementation plans could be prepared and submitted at the same time as the project’s financial plan. Implementation plans for major capital projects should be communicated to the Supreme Audit Institution for inclusion in its audit plan, which would allow for systematic ex-post audits to be programmed and conducted and reported to the legislature.

15. Monitoring of Public Assets (Institutional Strength – Medium; Effectiveness – Low; Reform Priority – Medium)

85. Since 2012, Mexico has been implementing accrual-based accounting.54 Asset registers exist in ministries and entities but are not consolidated. Non-financial assets are recognized at historical cost. Government financial statements include the value of some non-financial assets, which are updated only irregularly based on major events such as disposals and new acquisitions. The Organic Law on Federal Public Administration requires the SHCP to maintain a register of federal fixed assets. An institute for the valuation of government assets exists within the SHCP (Instituto de Administración y Avalúos de Bienes Nacionales). Government fixed assets are not depreciated despite the recent introduction of accrual accounting.

86. Non-financial assets reported in the government financial statements are incomplete. They include only assets such as buildings, cars ─ so-called immovable and movable assets ─ but exclude large assets such as airports and highways which are recorded as expenditure instead of non-financial assets. Expensing large assets understates government’s non-financial assets, which may hamper their monitoring. There are mechanisms to value and revalue government assets through the Valuation Institute within the SHCP, but these are not integrated with government accounting, which only uses historical cost, with no depreciation. In addition, assets registers are dispersed in government entities with no single register of government assets. The absence of comprehensive information on the government’s assets may prevent the development of an optimal maintenance program or the determination of changes in the nation’s patrimony from year to year as a result of investment expenditure.

87. There is a need to review the current accounting practices to better reflect the value of non-financial assets. This can be done by: (i) recognizing airports, highways and other large assets as non-financial assets in the government’s balance sheet; and (ii) introducing assets-specific assumptions to guide the depreciation of fixed assets. Also, integrating the work of the Valuation Institute within the SHCP with the Government Accounting Unit can help capture the value of the government’s assets based on actual valuations and/or revaluations.

IV. Recommendations

88. This section presents the mission’s recommendations on how to strengthen public investment management in Mexico based on the analysis in this report. The recommendations discussed below are grouped according to the priorities.

A. High Priority Recommendations

Recommendation 1: Strengthen fiscal discipline by improving the medium-term fiscal framework, the application of fiscal rules and the independent oversight of fiscal planning

Issue: Fiscal policy has mostly focused on the annual horizon; a more medium-term orientation would improve planning, predictability and decision making. The frequent use of the deficit rule’s escape clause has the potential to undermine the rule. Independent external review of the government’s medium-term macro-fiscal projections and compliance with fiscal rules is limited.

Recommendation: Strengthen fiscal discipline by improving the medium-term fiscal framework, the application of fiscal rules, and the independent oversight of fiscal planning.

Implementation measures:

Short-term measures

  • Amend the FRL to restrict the use of the escape clause to exceptional circumstances, that is cases of very significant output shocks, including due to significant disruptions in the oil price.

  • Establish a provision requiring the specification of a clear and swift path back to the fiscal rule after the exceptional circumstance clause is invoked.

  • Introduce an independent body to review and assess the quality of the macro-fiscal projections, including compliance with fiscal rules and the realism of the debt sustainability path.

Medium-term measures

  • Strengthen the medium-term fiscal framework by expanding the coverage and the analysis in the Pre-Criteria report and include more information on the fiscal strategy, including more in-depth discussion and analyses of fiscal policy objectives and medium-term fiscal parameters, including fiscal risks.

  • Require public corporations and entities with PPP contracts to provide annual reports of their fiscal risks (including contingent liabilities) to SHCP.

  • Provide more disaggregated expenditure projections over the medium-term.

  • Consider establishing or setting a medium-term debt limit initially for internal purposes, then externally.

Recommendation 2: Improve the effectiveness of national and sector strategies to guide investment project planning

Issue: A clear national and sectoral planning framework with strategic objectives is in place but the plans do not effectively guide ministries’ investment planning. Strategies are not based on likely resource availability, and costing information is very limited.

Recommendation: Improve the effectiveness of national and sector strategies to guide investment project planning.

Implementation measures:

Short-term measures

  • Prepare national and sector plans within a realistic medium-term resource framework.

  • Concentrate in the national and sector plans on a limited number of high priority strategic objectives that can realistically be achieved within the available resources.

  • Provide realistic desired outcomes and targets for key strategic objectives over the medium-term, based on likely available resources.

  • Link the strategic objectives in the national/sector plans to the investment project allocations in the rolling medium-term budgetary framework.

Medium-term measures

  • Review the national and sector plans at the mid-point (after 3 years) to reflect changes in economic or policy circumstances.

  • Train SHCP and ministries staff on the development of results framework for investment projects and its linkage to the sector/institutional programs.

Recommendation 3: Strengthen medium-term budgeting and planning

Issue: There are only weak links between investment planning and budgeting, and sector plans do not effectively guide ministries’ strategic investment budget allocations. This results in a long wish-list of projects submitted to SHCP for potential budget financing, leading to significant time spent by staff on projects which end up not getting funding. Since investments are typically medium-term in length, the current annual focus for the budget is inconsistent with efficient planning.

Recommendation: Introduce a rolling medium-term budget framework for both capital and current expenditures, which will support more strategic and efficient investment planning.

Implementation measures:

Short-term measures

  • Develop the methodology for preparing a rolling medium-term budget framework process to cover both current and capital expenditures.

  • Draft Guidelines for the preparation of the rolling MTBF.

  • Train staff in SHCP and in sector ministries in the new methodology.

Medium-term measures

  • In conjunction with the strengthened medium-term fiscal framework, consider developing top-down medium-term ceilings by ministry earlier in the process (at the beginning of budget preparation).

  • Develop a methodology and a simple model for ministries to prepare expenditure baseline projections for their programs, covering both current and capital expenditures.

  • Develop baselines estimates of existing project spending and identify available fiscal space for new projects.

  • Train SHCP and sector ministries’ staff in the preparation of baseline projections.

  • Begin implementation of the rolling MTBF including baseline projections.

  • Establish a rolling investment costing exercise linked to the MTBF and consistent with expected results and investment goals for overall federal investment.

Recommendation 4: Improve coordination between the Federation and states

Issue: Federal transfers (Ramo 33, 23 and Convenios) are a significant and valued source of funding for public investment at the subnational level. However, as currently defined, they also introduce distortions in budget management and investment performance. There is a lack of effective and sound coordination within a longer-term perspective. Late budget allocations and a short period for budget execution generates fragmentation. Current coordination mechanisms are ad hoc and not effective. Federal and subnational plans are not shared or aligned as needed, and investment planning decisions are independent at each level.

Recommendation: Improve the mechanisms for coordination of the medium-term public investment plans of federal and subnational levels. Improved coordination will help to enhance efficiency and synergies in the planning and prioritization of investments.

Implementation measures:

Short-term measures

  • Consider establishing a joint federal and state investment coordination committee(s) to promote strengthening medium-term planning, encouraging active consultation, transparency and regular sharing of information between Federal and SNGs, particularly in terms of their medium-term and annual investment plans (particularly, State plans), and fostering capacity building in subnational governments for budgeting and planning.

  • Require State-level governments accessing Federal funds to provide annual reports on their fiscal risks, including explicit and implicit contingent liabilities.

Medium-term measures

  • Review the Convenios structure and the operating rules for Ramo 23.55,56

  • Include in the registry all investment projects funded under Ramo 33, using the cartera to structure investment pipelines per State and then agreeing with SNGs on priority and strategic projects that require federal funding.

  • Ensure that SHCP investment systems (SEFIR, RFT, Modulo Cartera) are interrelated and allow for a comprehensive perspective of federal public resources transferred to States as well as for a systematic follow up.

Recommendation 5: Develop a standard methodology for determining maintenance funding requirements, for all types of infrastructure assets, and budget for them

Issue: Maintenance of assets created from capital spending remains underfunded due to the lack of systematic assessment of needs. Neglecting maintenance needs risks impairments to assets, ultimately resulting in a loss of asset productivity and in lower service/revenue generation potential. Postponing maintenance may also mean higher future maintenance costs and, in many cases, lower value from future maintenance.

Recommendation: Implement a top-down approach for maintenance of capital assets to provide adequate minimum funding for asset maintenance. When implementing a top-down approach for maintenance of capital assets, increase the share of the budget directed toward maintenance and rehabilitation expenditure to prevent degradation of the existing capital stock. In the budget process, try to identify the level of spending required to maintain infrastructure at a steady-state level, using a regularly updated register of infrastructure assets to determine appropriate maintenance levels.

Implementation measures:

Short-term measures

  • SHCP should require agencies to establish program appropriate maintenance standards.

  • Agencies should regularly survey their capital stock to determine maintenance needs and funding requirements.

  • Agencies should report to SHCP annually on maintenance: operations, needs, and funding requirements.

  • SHCP should provide summary presentation on maintenance highlighting expenditures by agency and program.

Medium-term measures

  • SHCP should review maintenance (operations, needs and expenditures) to determine whether appropriate resources are being allocated to maintain public capital stock.

  • Expand registers of infrastructure assets and ensure that they are updated on a regular basis to support determination of appropriate maintenance levels.

Recommendation 6: Promote more competitive tendering and pro-competition culture among public procurement officials

Issue: According to COFECE, in 2017 only 12% of contracts registered in CompraNet were subjected to competitive tender; among contracts above one million pesos, only 38% were subjected to competitive tender. Competition authorities and regulators have raised the need for effective competition in public procurement and in infrastructure markets and have proposed methods for fostering competition.

Recommendation: Procurement procedures and regulations should be revised to promote open and competitive procurement. Review and implement reform proposals that do not require legislative changes and disseminate them among contracting authorities. Develop an extensive training program to re-train all procurement officials, creating a culture of competition in public procurement. The standardization of tender documents, already initiated by some government departments, should be extended to all main procuring entities. In the medium-term, a review of public procurement should lead to a codification of federal public procurement into a single Public Procurement Law.

Implementation measures:

Short-term measures

  • Review and compile the concrete recommendations on public procurement presented by COFECE, OECD and other entities, identifying the ones that can be implemented without changes in law.

  • Disseminate those recommendations among procurement officials.

  • Structure, with support from COFECE and OECD experts, a training program for procurement officials, aiming at pro-competitive innovation in public procurement.

  • Implement the training program.

  • Establish deadlines for each main government procuring entity to produce standardized tender documents and submit them to COFECE for review.

Medium-term measures

  • Define performance indicators for public procurement and use electronic procurement platforms to monitor them and publish periodic analytical reports on the performance of public procurement.

  • Make the use of standard procurement documents mandatory.

  • Review public procurement practices and results, identifying opportunities for improvement within the current legal framework, and legal rules that should be revised to promote more competitive, fair, transparent and efficient public procurement.

  • Compile the legislation addressing federal public procurement into a single Public Procurement Law incorporating the results of the procurement review.

  • Invite SNGs to share public procurement experiences and best practices with the federal government and public corporations, and promote the harmonization of the legal frameworks across levels of government.

B. Medium Priority Recommendations

Recommendation 7: Improve the comprehensiveness and quality of public investment planning

Issue: With the extent of the investment planning process actively managed by IU limited to projects funded by the Federal budget (notwithstanding the reporting by some entities to IU of their projects for inclusion in the cartera), the overall transparency of public investment is not comprehensive. Non-comprehensive information makes it difficult to assess the trade-offs of investments across the Federal government and hence the extent to which public investment is contributing to achieving the government’s strategic objectives.

Recommendation: Increase the comprehensiveness of public investment project information in the cartera.

Implementation measures:

Short-term measures:

  • Require extra-budgetary entities (non-organic funds) and all public corporations to provide to the IU with information on their planned public investment projects and upload relevant related documents to the IU portal (including financial and socio-economic assessments). This data would be for information purposes and would not undermine the legal independence of these entities.

Medium-term measures

  • Introduce a process of external reviews of cost-benefit analyses for key investment projects.

  • Include in the registry all public corporations’ and extrabudgetary units’ investment projects funded under Ramo 33.

  • Standardize the formulation and evaluation requirements for projects funded through Ramo 23.

Recommendation 8: Improve the predictability of funding for major capital projects

Issue: The availability of resources over the lifetime of the project, and sometimes during the year, is not certain, except for the so-called “plurianuales”. Although previous year commitments are paid during the three to four months of the following year, there are no multi-year appropriations, and ministries are not provided cash commitment ceilings covering the full fiscal year, with which they could plan and commit their capital projects expenditures.

Recommendation: Make funding for major capital projects more predictable to allow ministries, agencies to plan and implement projects as effectively as possible.

Implementation measures:

Short-term measures

  • Update treasury systems to provide commitment ceilings to ministries for the full fiscal year in order to allow them to prioritize major capital projects within the ceilings (this is a best practice).

  • Prepare a provisional procurement plan and a commitment plan, two to three months prior to the beginning of the fiscal year in order to speed up project implementation as soon as the budget is passed.

Medium-term measures

  • Introduce carry-forward of budget authority for multi-year capital projects within established, clear and transparent limits.

Recommendation 9: Strengthen the monitoring of cost overruns and project delays

Issue: Consolidated data on cost over/underruns, as well as on implementation delays, is not readily available, nor used for decision-making or learning purposes. This is despite the existence of a centralized monitoring system for financial and physical progress. The current system can capture information on cost overruns and implementation delays on a project-by-project basis but it does not present aggregate figures in summary tables which could facilitate decision-making. The few ex-post reviews of major projects conducted each year focus generally on project cost and deliverables, and rarely on output and impact or alternative ways of project delivery. The results of ex-post reviews are not an important input into the budget process.

Recommendation: Develop a system to track and report on project cost over/under-runs and implementation delays; use this information to identify areas of risk and to improve implementation; and move the focus of project monitoring beyond compliance towards efficiency.

Implementation measures:

Short-term measures

  • Prepare quarterly summary tables on cost over/underruns and implementation delays for policy makers, pulling data from information provided by ministries in the current database.

  • Systematically conduct ex-post reviews for most major projects, identify areas of risk, and use the results in the budget process.

Medium-term measures

  • Improve the scope of ex-post reviews for major projects to cover not only costs and deliverables, but also output, impact and alternative ways for project delivery.

Recommendation 10: Enhance capital projects management and control during the execution stage

Issue: Detailed financial plans are prepared prior to budget approval, but implementation plans are prepared after budget approval, which can lead to delays in project implementation. Furthermore, legislative scrutiny is limited by the lack of systematic ex-post external audits of all major capital projects.

Recommendation: Require ministries to prepare implementation plans for major projects prior to budget approval to help speed up implementation as soon as the budget is passed by Congress.

Implementation measures:

Short-term measures

  • Prepare and submit project implementation plans for major projects at the same time as the project’s financial plan.

  • Communicate project implementation plans to the Supreme Audit Institution for inclusion in its ex-post projects audit plan.

Recommendation 11: Improve the accounting and evaluation of assets

Issue: Non-financial assets reported in the government financial statements are incomplete. They include only assets such as buildings, cars and exclude large assets such as airports and highways which are recorded as expenditure instead of non-financial assets. There are mechanisms to value and revalue government assets, but these are not integrated with government accounting, which only uses historical cost, with no depreciation.

Recommendation: Review the current accounting practices to reflect better the value of non-financial assets.

Implementation measures:

Short-term measures

  • Review the current accounting practices to reflect better the value of non-financial assets by: (1) recognizing airports, highways and other large assets as non-financial assets in the government’s balance sheet; and (2) introducing assets-specific assumptions to guide the depreciation of fixed assets.

Medium-term measures

  • Integrate the work of the Valuation Institute within the SCHP with the Government Accounting Unit in order to capture the value of government assets based on actual valuations and/or revaluations.

  • Review the accounting standards for non-financial assets valuation and revaluation.

Mexico: Technical Assistance Report-Public Investment Management Assessment
Author: International Monetary Fund. Fiscal Affairs Dept.