Document of

The World Bank

Report No. T-6590-E

TECHNICAL ANNEX

-EXICO

INFRASTRUCTURE PRIVATIZATION TECHNICAL ASSISTANCE PROJECT

AUGUST 2, 1995

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Currency Equivalents

(As of July 21, 1995)Currency Unit = Mexican New Peso (MexN$)

US$ 1.0 = MexN$ 6.10

Abbreviations and Acronyms Used

API Autoridad Portuaria Integral(Integrated Port Authority)

ASA Aeropuertos y Servicios Auxiliares(Airports and Auxiliary Services)

BANXICO Banco de MexicoBIS Bank for International SettlementsCAPUFE Caminos y Puentes Federales

(Federal Highways and Bridge Authority)CFE Comisi6n Federal de Electricidad

(Federal Electricity Commission)CID Comisi6n Intersecretarial de Desincorporaci6n

(Interministerial Commission on Privatization)CRE Comisi6n Reguladora de Energfa

(Energy Regulatory Commission)DGAC Direcci6n General de Aviaci6n Civil

(General Directorate of Civil Aviation)FNM Ferrocarriles Nacionales de Mexico

(Mexican National Railways)FTAL Financial Sector Technical Assistance Loan (ME-3838)ICAO International Civil Aviation OrganizationICB International Competitive BiddingIDB Inter-American Development BankIFC International Finance CorporationIMF International Monetary FundIPP Independent Power ProducerMIF Multilateral Investment FundNAFIN Nacional Financiera S.N.C.NCB National Competitive BiddingPCS Personal Communications ServicesPEMEX Petr6leos MexicanosSCT Secretaria de Comunicaciones y Transportes

(Secretariat of Communication and Transport)SECODA Secretarfa de la Contralorfa y Desarrollo

Administrativo(Secretariat of the Controller General andAdministrative Development)

SECOFI Secretaria de Comercio y Fomento Industrial(Secretariat of Commerce and Industrial Development)

SHCP Secretarfa de Hacienda y Credito Publico(Secretariat of Finance and Public Credit)

TELMEX Tehlfonos de Mexico S.A. de C. V.TELECOMM Telecomunicaciones de Mexico

MEXICO

INFRASTRUCTURE PRIVATIZATION TECHNICAL ASSISTANCE LOAN

TECHNICAL ANNEX

TABLE OF CONTENTS

Pae

SECTION A: PROJECT DESCRIPTION

Background ..................................... 1Current Status of Privatization .......... .................. 2Project Design ..................................... 4Project Description ................................... 7

SECTION B: PROJECT ADMINISTRATION AND IMPLEMENTATION

Project Organization .................................. 12Training Plan ..................................... 12Project Costs and Financing ............................. 12Procurement ..................................... 12Disbursements ..................................... 13Accounts and Audits .................................. 13

ATTACHMENT: PROJECT IMPLEMENTATION PLAN .............. 15

MEXICO

INFRASTRUCTURE PRIVATIZATION TECHNICAL ASSISTANCE LOAN

TECHNICAL ANNEX

SECTION A: PROJECT DESCRIPTION

I. Background

1. Throughout the last decade privatization has been a key component ofstructural reform policies in Mexico in the pursuit of productivity gains for theeconomy. In the mid-1980s the Government complemented macro-economicstabilization policy with structural reforms, including privatization, to spurproductivity growth. Sales of smaller state-enterprises dominated the period 1986 to1988, after which followed a large scale privatization program of larger companiesoperating in competitive markets, mainly manufacturing firms and banks. Between1989 and 1992 total privatization proceeds amounted to 6.3 percent of average annualnational output. Proceeds were essentially used to repay debt and thus helped placethe Government's debt exposure on a sound footing. In 1990 the Government beganselling firms in sectors requiring economic regulation, most notably Telefonos deMexico, S.A. de C. V. (TELMEX), the national telephony operator. Though theoverall economic outlook brightened, the difficulties of selling other infrastructurebusinesses without greater attention to the legal and regulatory aspects becameapparent. Consequently, the announced program, comprising power plants, roads,airports and ports, slowed significantly in 1993.

2. The successful implementation of these and other far-reaching structuralreforms, along with reduced interest rates paid on investment alternatives abroad,induced a surge in net foreign capital inflows that averaged US$27 billion per yearduring 1991-93. Until the end of 1994, these inflows enabled Mexico to run a largecurrent account deficit, which peaked at 8 percent of GDP in 1994. The capitalinflows also caused the real value of the peso to appreciate. Strong political conflictsthat arose in 1994, however, led to an abrupt slowing of the capital inflows, so thatMexico was forced to finance its current account deficit through a loss of foreignreserves. When the markets realized that the relative supply of pesos was growing toofast, panic selling further depleted the foreign exchange reserves of Mexico in lateDecember 1994 and January 1995, and led to a major devaluation. Though themarket appears to have stabilized, the peso depreciated by about 77 percent, fromabout 3.45 December 1994 to about 6.10 on July 21, 1995.

3. In March 1995 the Government announced an austerity program toreestablish trust in the economy and minimize the required macro-economicadjustment. The main targets of the program are to: (i) achieve a primary budgetarysurplus of 4.4 percent of GDP for 1995; (ii) limit net domestic credit creation to amaximum of MexN$10 billion for 1995; (iii) achieve equilibrium in the currentaccount; and (iv) restructure MexN$65 billion of outstanding debt of the privatesector, representing 13 percent of the total commercial bank loan portfolio. Theprogram is backed by unprecedented balance of payments support, announced to

2

amount to some US$50 billion, from sources including the International MonetaryFund (IMF), US government, Bank for International Settlements (BIS), World Bankand Inter-American Development Bank (IDB). As part of the program, theGovernment has announced its intention to accelerate the privatization of major state-owned enterprises, mainly in infrastructure. The program includes a large number ofentities in telecommunications, energy and transport. Compared with others in LatinAmerica and other regions, this is one of the most extensive privatization programs.The ambitious goal is to obtain sales revenues of about US$6 billion in 1995 andUS$6-8 billion in 1996.

II. Current Status of Privatization

4. The Government is advancing at a very fast pace in preparing the varioussectors for privatization. The privatization of container terminals in four major portsis most advanced and the call for tenders was published in the Official Gazette onFebruary 23, 1995. Concessions for two major terminals were awarded on July 7,1995. Deregulation of basic telephone services and rail privatization are beingpursued aggressively with basic laws submitted to Congress in April 1995. In amajor departure from past policy, the Government also introduced a law on naturalgas deregulation in Congress in April 1995. Groundwork has started in the areas ofairports, roads, radio spectrum auctions, satellite privatization, power generation andsecondary petrochemicals. Now that the immediate efforts to put in place a macro-economic program are no longer dominating the attention of top policy makers, thepace of reform in infrastructure is accelerating further. In support of the privatizationprocess, however, a host of issues related to privatizing infrastructure firms withnatural monopoly characteristics need clarification and analysis, e.g., design ofmarket structures and regulatory arrangements, concession design, public procurementrules, contracting practices, rules for issuing Government guarantees, and thedevelopment of appropriate financial infrastructure for financing investments,including means of securing credit, issuing insurance contracts, etc. Lack of clarityabout these matters has been a major obstacle for infrastructure privatization and theconclusion of financeable deals.

5. Electiricity and Secondary Petrochemicals. The Government's approach toprivate participation in these sectors has been rather gradual. Since 1992, it hasintroduced a number of measures to gradually open the electricity sector, within thelimits of Article 27 of the Constitution which reserves public electricity service for theState. It has introduced a new legal and regulatory framework which provides thebasis for private ownership in power generation in the form of: (i) independent powerproducers (IPPs); (ii) self-generators; (iii) cogenerators; and (iv) small powerproducers. Power sales by IPPs are made exclusively to the state-owned electricitymonopoly, Comisi6n Federal de Electricidad (CFE), while sales under the remainingthree classes may be to private parties. While private companies have shown muchinterest, lack of confidence in the fuel supply agreements (which would be with thestate-owned hydrocarbons monopoly, PEMEX) and questions about how powerpurchase agreements might be managed by CFE have so far stalled progress. TheGovernment is now exploring ways to reform policy such that existing and new power

3

plants may be privatized without the need for extensive government guarantees ofcontractual performance under the required supply and offtake agreements. Inparticular, the Government is exploring to what extent private power plants may begiven a choice of fuel suppliers, how to establish adequate tariffs to render CFEcreditworthy, and to what extent competition could be introduced in the power sector.

6. In late 1992, the Government announced plans to privatize some 60secondary petrochemicals plants. These plans were defacto shelved during 1993.Meanwhile, PEMEX has internally been reorganized into four major profit centers,one of which comprises secondary petrochemicals. Current discussions revolve aroundhow to privatize the secondary petrochemical business - as a whole or in parts.

7. Transport. Since the late 1980s, the transport sector has been deregulatedand services increasingly provided by the private sector. The Bank had in particularsupported trucking deregulation with sector work and an adjustment loan in 1990(Loan 3207-ME).

8. Between 1992 and 1994 some 76 terminals outside the major ports wereconcessioned to private operators. In the main port of Veracruz, three stevedoringconcessions were let in 1991. Tender announcements for concessions of containerterminals in Mexico's four major ports (Altamira, Veracruz, Manzanillo and LazaroCardenas) were issued in February 1995. Two concessions were awarded on July 7,1995 (Veracruz and Manzanillo). The legal underpinnings for this program are thePort Law, Navigation Law, and Customs Law and their corresponding regulations.The Port Law provides for the creation of integrated port authorities (APIs) to act aslandlord for each port and to be responsible for the concessioning and privatizationactivities within their port. Airlines were privatized in the large privatization wavearound the turn of the decade. Airports are currently under the management of agovernment agency, Aeropuertos y Servicios Auxiliares (ASA). The Government hasbegun to consider options for privatizing ASA's operations.

9. Until this year, privatization activities in the Mexican railways company(Ferrocarriles Nacionales de Mexico, FNM), which is essentially a transporter offreight, were limited to contracting out the operation of repair shops and some trackconstruction and maintenance. Now, the Government wants to proceed with theprivatization of FNM and is considering alternative plans to do this. Under thecurrent economic adjustment program, Congress, in early 1995, approved a change inthe Constitution to allow for railway privatization. A new railway law was presentedto Congress in April 1995.

10. Telecommunications. Major reform of the telecommunications sector waslaunched in 1989 with the privatization of TELMEX, the 56 percent state-ownedmonopoly telephone company. A 20 percent, controlling interest in TELMEX wassold in 1990 for $1.76 billion to a consortium of Mexican and foreign investors.Public offerings in 1991 and 1992 fetched a further $4.5 billion, bringing total salesproceeds to $6.3 billion. TELMEX now accounts for about 30% of the equity tradedin Mexico's stock exchange and also figures prominently in the US capital markets.

4

11. The results of this privatization have generally been satisfactory. Since 1990TELMEX has invested in excess of $2 billion annually, telephone density increasedfrom 6.3 lines per 100 inhabitants to over 9, rural service was extended to some8,000 rural communities, and the number of payphones increased from 83,000 to205,000. However, while investment performance met expectations, steps towardsopening up the core telephone business to competition have proceeded rather slowly.In particular, the agreed timetable for rebalancing TELMEX's tariffs has not beenmet. Weighted average rates remain among the highest of OECD countries. Highconnection fees stifle the demand for new lines. Quality of service has generallyimproved but remains below targets in the Federal District.

12. Other important elements of the 1989 reform were: (i) licensing anindependent private cellular service provider in each of nine regions; (ii) transferringthe remaining state telecommunications operations from the Secretariat ofComunicacion and Transport (SCT) to Telecommuniciones de Mexico (TELECOMM,a decentralized state entity); and (iii) expanding under TELECOMM the domesticsatellite system, including investments of about $0.7 billion.

In. Project Design

13. Project Objectives and Approach. The project aims to: (i) help theGovernment choose structural options for sector reform; (ii) develop a sound legaland regulatory framework in support of privatization; (iii) reduce, and if possible,eliminate constraints to privatization in selected sectors (ports, airports, railway,telecommunications, power, secondary petrochemicals); and (iv) provide support tothe privatization preparation process in each of these sectors, through theInterministerial Commission on Privatization (CID, para. 16).

14. The Government's overall framework on privatization is as follows.

First, those companies that operate in competitive markets for tradeablegoods and services can and will be sold as soon as possible with the goal ofmaximizing sales revenues.

Second, all other firms and institutions in the subsectors listed above whichproduce non-tradeable and largely monopolistic services, will require theestablishment of a suitable framework for economic regulation. In thesecases the Government will ensure that the establishment of efficient solutionstakes precedence over the quick generation of cash. The Government willalso maximize the scope for competitive forces and minimize the need foreconomic regulation, if need be by relying on intermodal and inter-concession competition rather than attempting to establish a system ofeconomic regulation, that requires significant fine-tuning. Forms ofprivatization will be chosen that minimize reliance on explicit and implicitgovernment subsidies and guarantees so as to strictly limit the exposure ofthe Government. This implies inter alia the need to set tariffs at levelssufficient to cover competitive costs, including the cost of capital, and to

5

allow investors maximum freedom to choose creditworthy and reliablesuppliers and customers.

Third, the proceeds of privatization will be used to improve the compositionof the Government's balance sheet.

Fourth, while the establishment of sound regulatory systems requires carefulpreparation, it will be undertaken with determination and without delay, suchthat the process of privatization and deregulation will be initiated in 1995 insome sectors and completed within three to five years in those sectorsrequiring more upstream strategic work.

15. The project's design builds on the conceptual approach adopted by theGovernment. The focus on legal and regulatory frameworks is an essential first step,aimed not only at identifying and eliminating obstacles to private sector participationbut also in ensuring that the "rules of the game" are applied transparently andconsistently.

16. Institutional Framework. The privatization program is complex and wideranging, addressing issues of sector structure, competition and efficiency. To steerthis undertaking, provide policy guidelines and ensure a consistent, comprehensiveapproach across sectors, the CID was established by Presidential Decree on April 7,1995. It is chaired by the Secretary of Finance and Public Credit (SHCP), and itspermanent members include the Secretaries of Commerce and Industrial Development(SECOFI), Control and Administrative Development (SECODA), and Labor. ThePresident of the Federal Competition Commission is a permanent observer. Sectorministries and entities (e.g. SCT) participate in the CID for matters pertaining tothose sectors. The CID is supported by a small Technical Secretariat, headed by asenior official in SHCP. The Technical Secretariat oversees the day-to-day affairs ofthe CID, coordinate contracting of consultants and advisers, reviews proposals, andensures consistency throughout the process.

17. The CID is charged with: (i) designing the privatization process andsupervising its implementation; (ii) naming a special commissioner (comisionadoespecial) to coordinate each specific privatization; (iii) reviewing the regulatoryframework and proposing changes; (iv) reviewing concession designs and agreements,particularly those aspects related to penalties for non-compliance with the conditionsof the concession agreement or the requirements of the basic laws under which it ismade; (v) establishing guidelines for valuation of state-owned entities and overseeingthe process; (vi) establishing and carrying out a communications strategy with respectto privatization; and (vii) contracting the advisers necessary to support its work. Thedecree also states that the CID has final approval of all privatizations and thatproceeds of the privatization process will revert to the federal treasury.

18. The privatization activities to be supported in each sector (power andsecondary petrochemicals, transport and telecommunications) are directed by workinggroups related to each ministry, under the direction of the special commissionerappointed by the CID. The Technical Secretariat provides support to the workinggroups. The decree requires that each working group: (i) define a sector strategy and

6

privatization plan; (ii) review the adequacy of the legal and regulatory framework;(iii) recommend changes; and (iv) supervise the operational aspects of the actualdivestiture, concession or auction. Each working group is, therefore, the primarylocus of responsibility for identifying and implementing policy studies and otheranalytical work, and for preparing and submitting options papers and decisionmemoranda to the CID. In addition to hiring of consultants, workshops, seminars,study tours and training would be organized and authorized by each working group.

19. Bank and Other Multilateral Assistance. To support the immediate needsfor technical assistance, the Bank is providing substantial direct support to help in thedevelopment of the overall strategy and sectoral policies, and in particular the draftingof sound laws and regulations. This assistance, which will continue throughout theproject, has taken the form of policy notes in response to requests by the authorities,draft terms of reference, the organization of consultations with international experts inrelevant areas, and comments on draft documents the Government has submitted toBank experts. Six workshops, on railways, power sector restructuring, regulatorypolicy, telecommunications deregulation, spectrum auctions and satellite privatizationhave already been organized.

20. The Bank's assistance strategy is being coordinated with both IDB and theIFC. It started with an aide-memoire on privatization strategy which was supportedby all three institutions and issued on January 13, 1995 to the Government at the endof a joint mission. The IDB is exploring ways to utilize its Multilateral InvestmentFund (MIF) in support of the program. IFC is similarly exploring ways to supportthe privatization process and to arrange financing and securitization for newinvestment projects.

21. Risks. The project faces several important risks. The first is that theprivatization program may be weakened in the face of opposition from unions, thestate owned enterprises themselves, private sector groups seeking to limit competition,or other organized groups. The broad composition of the CID, however, and plannedactivities (such as workshops, public relations campaigns, and briefings with thedomestic and international investors) will mitigate this risk. Continued macroeconomicinstability would also damage the program e.g. by increasing country risk forinvestors and by giving greater urgency to quick - though ultimately damaging -dispositions of assets before adequate legal and regulatory structures are in place. Anunfavorable public reaction to the Government's economic program, or to theprivatization program itself, may make it much more difficult to eventually effect thesales or concessioning process. The Government's economic plan, which wasannounced in March 1995, is currently succeeding in stabilizing the exchange rate.The Government is also taking steps to improve its relations with internationalinvestors by providing better access to central bank information and by undertakingmore frequent consultations, and is pursuing an active public information campaign.

7

IV. Project Description

22. The project provides support for: (i) the privatization preparation processes tobe undertaken in transport (ports, railways, and airports), electricity and secondarypetrochemicals, and telecommunications (basic services, satellites and radiospectrum); and (ii) cross sectoral studies and coordination to be undertaken by theCID. Depending on the readiness for privatization in each sector, the project supportsdiagnostic studies, strategy formulation and implementation, and regulatoryinstitutional strengthening. The CID component also includes support for anevaluation of the privatization process. The Attachment provides greater detailconcerning the objectives, activities, outputs, forms of assistance, timing and costsassociated with the project.

Transport

23. Ports. A process of restructuring the ports has been under way since early inthe last administration. More than 70 port terminals dealing with single products, suchas fertilizers, grain and cement, have been concessioned and a new Ports Law wasapproved in July 1993. This Law permits the creation of Integrated Port Authorities(APIs), with full responsibility for the operation of the port(s) under their jurisdictionand the possible concessioning of individual terminals or berths within the port and ofcommon port activities such as provision of navigation aides, pilotage and dredging.APIs have already been formed for 17 ports. They are all functioning as publiccompanies with 100% state ownership, but the new law provides for privateparticipation in their ownership with up to 49% foreign capital. Recently, SCT hasissued a call, on behalf of the relevant APIs, for pre-qualification submissions for theoperation of container and general cargo berths in the four largest ports - Veracruzand Tampico on the Atlantic/Gulf Coast and Manzanillo and Lazaro Cardenas on thePacific Coast. Two concessions were awarded in July 1995. The project wouldsupport privatization preparation activities for terminals as well as port authorities.

24. Railways. In February 1995 a Constitutional amendment was approved byCongress allowing for the railways privatization. In April, a new Railways Law, thatwould permit the concessioning of the railway as a whole or in parts, was presentedin Congress. The project would finance a series of studies needed to implement theprivatization process. (i) review of proposals. The project would finance a finalevaluation of the current recommendations (made by external consultants), whichdivide the railways into a number of separate operations: three large concessions anda number of short lines to deal with short distance bulk movements of specificcommodities and with regional lines that would not be viable as part of a largerconcession. (ii) details of each concession. While the consultants' recommendationsdefine the general extent of each concession, they leave open the details for thebidding documents that are to be prepared. The project would finance this work. (iii)alternative methods of dealing with current workshop concessions. As part of theprevious administration's process of out-sourcing ancillary railway activities, sevenlocomotive workshops were concessioned in 1994 for a period of 15 years. Theseconcessions could be seen as a disincentive for potential concessionaires of the lines

8

and services supported by these workshops. At the least, it is likely that the terms ofthe workshop concessions would need to be renegotiated. The project would reviewthe alternative ways of resolving this problem and recommend a solution that bestmeets the Government's requirements. (iv) prepare and implement FNMregionalization. It is likely that the concession agreements will be expressed inregional terms, so that additional lines can be included or excluded from theconcession without a need to make revisions to the agreement. To facilitate the hand-over process from FNM to the private concessionaires, FNM will be restructured onthe same regional basis as implied in the concession agreements, and operate on thatbasis for as long as possible before the hand-over takes place. The project wouldfinance the work to prepare, implement and monitor this process. (v) inventory andvaluation of assets. The project would finance these inventories, including technicalassessments, and valuations. This work would include all present FNM assets andwould pay particular attention to the issue of land ownership, much of which is indispute between FNM and the local authorities in whose area it lies. (vi) plan forresettlement of illegal settlers on FNM land. There is no reliable estimate of thenumber of illegal settlers on FNM land, but whatever their real number, resettlementissues will need to be resolved prior to awarding concessions. The project wouldfinance the studies needed for FNM to develop a policy on resettlement. (vii)environmental assessment of railway facilities. As part of the preparation of a possibleBank-financed railway project, and as an antecedent to the privatization of the railwaymechanical workshops in 1994, environmental assessments were carried out fortwelve workshops and associated installations. In addition, an Environmental ActionPlan was prepared, detailing the actions needed to remedy the problems. The projectwould finance the required environmental updatings and assessments, as well asadvise on the most appropriate method of financing their resolution. (viii) trainingschemes for FNM staff. The project would evaluate alternative ways of structuringand financing retraining programs.

25. Airports. The growth in air transport since the deregulation of the airlinesin 1989 has put pressure on the operational capacity and financing requirements ofmany Mexican airports. The opening of direct services between the US and manyMexican tourist destinations has also increased pressure on regional airports, althoughit has provided some relief in Mexico City, where the airport is approaching bothrunway and terminal capacity. The difficulty of finding public finance for the basicnon-commercial facilities has led to a reorientation of policy towards a possibleconcessioning of airports, perhaps following the model of the APIs. The projectwould finance the development of an airports privatization strategy, and followingcompletion of the report, a seminar would be held, with participation ofrepresentatives of the Directorate General of Civil Aviation (DGCA), ASA, SCT andSHCP and ICAO (International Civil Aviation Organization) and other specialists withexperience in airport management, operations and finance. The objective of theseminar would be to recommend an appropriate structure for the management anddevelopment of airports. The project would also finance studies of specific issuescritical to the implementation of a privatization process: (i) financial review andinventory and valuation of regional airports' assets as part of the evaluation of theirattractiveness for future private participation; (ii) airport needs for Mexico City,including the use of existing facilities and the possible development of a new airportwith private participation; and (iii) safety standards, to assess compliance with ICAO

9

standards. Finally, a restructuring of DGAC and ASA would be studied. Until nowthe DGAC and ASA have acted as providers of airport services. In the future they, ortheir successors, will need to act mostly as monitors and supervisors of servicesprovided by others. This will require a profound change in their structures and staffs.The project will examine the future strategy for the provision of airport services, andonce this has been determined, will recommend a new supervisory structure both forthe management of airport concessions and for regulation of the sector, including thepossible creation of a Civil Aviation Authority as part of a broader regulation andmonitoring of the whole aviation sector.

Electricity and Secondary Petrochemicals

26. Electricity. The effectiveness of past efforts to foster private investment inpower generation has been limited. While by no means unanimous, a consensus isemerging in Mexico on the need to reassess basic policies in the sector. This is basedon a growing recognition of the powerful role direct and indirect competition couldplay in fostering efficient private investment of the magnitudes required to meet theprospective demand for electricity over the next decade. The power sector componentof the loan is designed to support the Government in identifying tractable options forchoosing the best possible sector structure, including opportunities for introducingcompetition, and for initiating actions toward this end in the near term. Morespecifically, the project will support the Government in: (i) the definition of desirablefuture sector strategy and policy. The project will provide support for advisoryservices to assist the Government in undertaking a diagnostic study of pastperformance and future prospects of the electricity sector in Mexico. Guidingprinciples for this effort include: (a) reliance on commercial incentives to govern theoperations of power sector companies with the goal of providing the best possibleservice at the best possible price; (b) strictly limiting the financial burden the powersector places on the Government; and (c) introducing competitive forces wherepossible. (ii) near-term restructuring. The project will provide advisory services tothe Government to identify and evaluate options to restructure the power sector, inparticular the separation of generation, transmission, dispatch and distribution intoarms-length entities. This would include an assessment of options to introduceeffective competition among generating units and competition for customers. Therestructuring options would be based on an analysis of the current organization andperformance of the power system as well as ownership and competition optionspossible under existing Mexican law (or suggestions for changes in such laws if theywould improve the range of desirable options). (iii) electricity pricing policy. Theproject would finance advisory services to assist the Government in analyzing thecurrent tariff system and in developing proposals which would: (a) set tariffs ateconomic levels, i.e. levels sufficient to cover the costs of capital required for systemexpansion and all operations and maintenance costs; (b) use tariff policy to provideincentives for companies to operate efficiently in the power sector; (c) enhancecreditworthiness.

27. Three other issues related to sector structure would be considered under theproject. First, advisory services, training, and study tours would be financed to assistthe power sector regulatory entity in order to provide a credible commitment to: (i)investors operating with reasonable efficiency that they will be allowed to recover

10

their costs and earn a profit commensurate with the risks that they bear; and (ii)consumers that they will be protected from the abuse of monopoly power by anypublic or private entity that operates with a de facto or de jure monopoly. Carewould be taken to distinguish between activities that need to be regulated and thosethat need not. The regulatory entity could be structured to rule in disputes aboutcontracts between participants in the power market relating to matters of economicregulation. Second, to enhance the management autonomy of power sector companiesand to widen the scope for efficiency improvements, options to diversify fuel supplysources would be investigated based on an analysis of the existing arrangements forthe supply of fuels. This would, in particular, cover the supply of petroleum productsand natural gas. Various options to deregulate prices and supply arrangements ofthese products would be evaluated including deregulation of domestic distribution andliberalizing trade and their consequences for the organization of these markets. Third,the project would finance advisory services, study tours, and seminars to evaluateownership options in the power sector including means of creating arms-lengthcommercial relationships between Government and government-owned companiesthrough commercialization and corporatization as well as ways to use privateownership to improve the performance of the power system. Privatization optionswould include the use of licenses and/or concessions for providers of energy servicesand new contracting options to allow retail consumers to enter into hedging contractswith power producers in a competitive power system.

28. Secondary Petrochemicals. After having temporarily abandoned plans tosell secondary petrochemical assets in 1993 the Government has now revived suchplans. PEMEX has retained an investment banking firm to advise on the sale of allsecondary petrochemical assets. The current privatization effort is to lead to the saleof all assets by the first quarter of 1996. To fully prepare a sound privatizationstrategy a number of analyses have to be prepared. As a first step, market prospectsfor petrochemicals would need to be assessed to help identify how best to packageplants for privatization and which types of investors to target. Other issues include:(i) to what extent PEMEX might remain involved in the production of petrochemicals,particularly inputs for secondary plants; (ii) how feedstocks are to be priced; and (iii)to what extent there will be free trade in feedstocks.

29. The privatization strategy itself would need to be based on an assessment ofthe current state of the assets in Mexico, including operating, safety and security risksas well as an assessment of environmental issues. To support the process, the projectwould finance work that would complement that of the current advisors to PEMEX.In addition it would finance: (i) environmental assessments, (ii) technical, security andoperational assessments and (iii) plant inventories.

Telecommunications

30. The second phase of sector reform aims to liberalize the market for basictelephone services and stimulate some US$4 billion in new foreign investment by theyear 2000, chiefly for competitive long distance and local services. Additionally, thereforms are intended to generate significant revenue from the sale of radio spectrumlicenses and the privatization of the satellite business, as well as increasing taxrevenues from existing and new operators as sector growth accelerates. At the center

I1

of this second phase of sector reforms lie four major tasks to be financed under theproject: (i) opening basic services to competition. The project will finance a review ofoptions for introducing competition in basic services. It will also finance thepreparation of guidelines and international benchmarks for technical and pricingaspects of interconnection, with emphasis on facilitating new entry in basic services.SCT will also retain consultants to assist in rebalancing TELMEX's tariffs andnegotiating revisions of the pricing rule under competition. (ii) privatizing the satellitebusiness. Under the project, SCT will retain economic consultants as well asfinancial and legal advisers to help prepare the privatization of TELECOMM'ssatellite operations. The economic consultants will help develop a privatizationstrategy as well as maintain a policy and regulatory focus throughout the privatizationprocess. Legal and financial advisers will be retained to restructure TELECOMM'ssatellite operations. (iii) auctioning part of the radio spectrum. The Governmentintends to move from the traditional approach of managing the radio spectrum (on afirst-come first-served basis subject to relatively low flat fees or taxes) to an approachmore responsive to market forces. The project will finance consultants to help definean economic approach to radio spectrum management, establish guidelines forimplementation, define the scope and modality of spectrum auctions, and overseeinitial auctions. SCT will also retain advisors to carry out the first auctions forpersonal communication services (PCS). (iv) regulatory function. SCT's regulatorycapabilities have not kept up with sector development. Moreover, SCT's role aspolicy maker and licensing authority increasingly conflicts with its regulatoryresponsibilities. Under the project, consultants will be retained to help review optionsfor divesting SCT's regulatory functions to a new federal agency and related staffing,financial, and legal matters; design the organization; outline a staffing anddevelopment program; and monitor progress during initial implementation.

Cross Sectoral Activities

31. This component consists of activities to strengthen the CID and ensure acoordinated approach across sectors. The project will finance a diagnostic review ofexisting legislation and institutional frameworks, past privatization experience andsector specific privatizations plans and strategies, as well as consultations with theinvestment community and key interest groups. Additional support would be renderedto the CID in establishing and servicing the working groups. As appropriate,workshops, seminars and short courses would also be financed. Support for the CIDwould focus on three areas: (i) legal and policy issues arising from the privatizationprocess that affect more than one sector; (ii) key regulatory issues including the rulesgoverning the award, amendment and revocation of concessions, broader regulatoryapproaches such as application of anti-trust norms in each sector and principlesgoverning the design and establishment of autonomous regulatory institutions; (iii) theoverall business environment for private participation in infrastructure and henceaffect the longer term sustainability of private capital flows in these sectors, e.g.taxation measures and granting and enforcing security interests.

12

SECTION B: PROJECT ADMINISTRATION AND IMPLEMENTATION

32. Project Organization. The United Mexican States would be the Guarantorfor the loan made to Nacional Financiera, S.N.C. (NAFIN) a state-owneddevelopment bank. Execution of the project would be undertaken by CID and theworking groups in each sector.

33. To ensure that the activities financed under the project remain closely tied tothe evolving priorities for the privatization process, semi-annual reviews would beundertaken to update the rolling program of work and evaluate the proposed indicatorsof impact. A project launch seminar is planned as well. During the semi-annualreviews, the Bank, the Executing Agency, the Borrower and each working groupwould assess the status of project implementation, evaluate the workplan for the nextsix months and agree on any needed modifications to the originally proposedprogram. Project completion is targeted for December 31, 1998.

34. Training Plan. The Technical Secretariat will be responsible for thecollection of relevant data and information regarding the training courses financedthrough this project. Each working group will provide the Technical Secretariat witha yearly training program, derived from the particular privatization strategy for itssector. The Technical Secretariat will compile these plans (including its own trainingneeds), which will be evaluated at the time of the semi-annual review with the Bank.While the training plan will be based on strategic objectives, the data required willinclude: (i) historical information on training taken (or committed) to date; and (ii)current year's plan, with title and budget for each course, number of participants tobe financed, name of individual or institution responsible for training, time andlocation of training.

35. Project Costs and Financing. Estimated total project costs are US$46.0million. (Schedule A) They include: (i) cross sectoral support, US$6.0 million (13%of total); power and secondary petrochemicals, US$15.25 million (33%); transportsector, US$14.35 million (31 %); and telecommunications, US$7.7 million (17%); andprice contingencies, US$ 2.7 million (6%). The Bank would provide US$30 million,the Government the remaining US$16 million.

36. A fixed rate US dollars single currency loan is proposed in accordance withthe Government's request. The loan would have a repayment period of up to 15years; and each semester's disbursements would have a maturity of 12 years from therate fixing date, including 3 years grace. The Government of Mexico is eligible forsingle currency loans. The proposed US$30 million represents 3 percent of the FY96lending program for Mexico (US$920 million).

37. Procurement. Two types of procurement would be undertaken through theloan: (i) consultant services; and (ii) goods, primarily computer hardware andsoftware. As financial agent, NAFIN would act as the coordinator and adviser to theCID for all procurement activities under the loan. Selection and appointment ofconsultants for studies, technical assistance and support of project execution would becarried out in accordance with the Bank's "Guidelines: Use of Consultants by the

13

World Bank Borrowers and by the World Bank as Executing Agency (August 1981).All contracts with lawyers or law firms will follow specific Bank guidelines for theirselection and appointment. Procurement of goods would follow the Bank Guidelinesfor Procurement (January 1995). To the extent feasible and practical, theprocurement of goods would be done by grouping the various items in bid packagesestimated to cost US$350,000 equivalent or more. Packages in this category would berequired to follow International Competitive Bidding (ICB) procedures using the BankStandard Bidding Documents. National Competitive Bidding (NCB) would beundertaken for goods estimated to cost more than US$150,000 but less thanUS$350,000 using standardized bidding documents to be agreed upon with the Bank.For equipment that cannot be grouped in packages valued at US$100,000 or more,international and national shopping procedures would be followed by comparing pricequotations received from at least three suppliers.

38. Bank review of procurement procedures would be as follows: (i) forconsulting services, the Bank would conduct prior review for all contracts exceedingUS$50,000 equivalent for individuals and US$100,000 equivalent for firms; and forprocurement of goods the Bank would review ex ante documentation pertaining toeach ICB and the first two NCBs; (iii) all other procurement documentation would besubject to ex post review. This review process would result in a prior review ofapproximately 75 percent of all Bank financed contracts for goods and 90 percent ofall Bank financed contracts for consulting services, both expressed in value.

39. Disbursements. Proceeds of the loan would finance: (i) 100 percent of thecost of foreign goods, consulting services, training and technical assistance; and (ii)90 percent of the cost of local goods. The proceeds of the loan are expected to bedisbursed in accordance with the categories shown in Schedule B of the Memorandumof the President. To expedite project execution, a special account in U.S. dollarswould be established at the Banco de Mexico, with an authorized allocation of US$2million equivalent, representing the average amount equivalent to four months ofeligible expenditures that are expected to be paid from the account. Separate accountsof all expenditures by the project would be maintained by the Borrower. Withdrawalapplications would be fully documented, except for contracts smaller than thefollowing specified levels: US$350,000 for goods; US$50,000 for individualconsultants; and US$100,000 for consulting firms. In the case of contracts belowthese specified levels, NAFIN would prepare certified Statements of Expenditure(SOE) to be used as the basis for disbursement. Supporting documentation for SOEswould be retained by NAFIN and made available for examination by Bank staffduring supervision missions.

40. Retroactive financing of up to US$3 million would be provided for eligibleexpenditures incurred after April 1, 1995. Such financing is necessary to put in placethe institutional structure required to carry out the project and avoid delays in the firstyear of project implementation. The project completion date would be December 31,1998 and the closing date would be June 30, 1999.

41. Accounts and Audits. NAFIN and the Executing Agency would maintainadequate records to reflect all expenditures made under the project in accordance withsound accounting practices. The accounts and statements of expenditures would be

14

audited each year by auditors satisfactory to the Bank, in accordance with appropriateauditing principles consistently applied. The audit report would be submitted to theBank not later than six months following the close of the fiscal year.

15

ATTACHMENT: PROJECT IMPLEMENTATION PLAN

I

PROJECT IMPLEMENTATION PLAN: CIDMatrix of Objectives, Activities, Timing and Costs

TIMINGOBJECTIVES ACTIVITIES OUTPUT FORMS OF

ASSISTANCEStart I Finish

A. CROSS-SECTORAL PRIVATIZATION FRAMEWORK: This sub-component will focus on key cross-sectoral issues raised by the proposed privatization transactions themselves. Examples of issuesthat may be addressed under this sub-component include: (i) treatment of debt, environmental and other liabilities of enterprises; (ii) labor and tax issues; (iii) contracting approaches, including issues offorcemajeure, alternative dispute resolution procedures etc; (iii) strategic sequencing of programs etc.

Cost: US $2.5mm

1. Identification of legal and polcy issues raised by Support to CI in establishing and servicing cross- Diagnostic study Consultants/Legal advisors 05/95 12/95privatization transactions in more than one sector which: sectoral working groups(i) raise important questions of policy coherence, (ii)offer net benefits from adopting consistent approaches Review existing and proposed legislative andacross sectors, or (tii) offer significant efficiency benefits institutional frameworks, past-privatization Seminars/Workshopsfrom dealig with issues centrally rather than on a sector experience and sector-specific privatization plansby sector basis and strategies.

Consultations with investor community and other Consultationskey interest groups.

2. Definition of strategy for elaborating a cross-sectoral Support CID in working with cross-sectoral Proposed implementation strategy, Consultants/Legal advisors 08/95 12/95privatization framework that deals effectively with working groups and other interests. including, as appropriate, cross-issues identified in phase 1. sectoral coordination mechanism and

Develop detailed recommendations on legal and draft list of maters to be subject toinstitutional responses to cross-sectoral issues cross-sectoral policies, legislation or

regulation.Seminars/Workshops

3. Effective implementation of cross-sectoral Support CID by providing general legal counsel Draft policies, legislation or Consultants/Legal advisors 10/95 End ofprivatization framework and in working with cross-sectoral working groups regulations dealing with cross-sectoral process

issues.Liaise with sector working groups to promote Dissemination products (eg, booklets, Seminars/Workshops 10/95 06/96effective cross-fertilization, communication and pamphlets etc).coordination

Draft policies, legislation and regulations

4. Evaluation of privatization process, including Record analysis, surveys, econometric studies. Final report(s). External consultants 06/96 One yeareconomic and social impacts after end

Seminars ofprocess

PROJECT IMPLEMENTATION PLAN: CEDMatrix of Objectives, Activides, lming and Costs

OBJECTPIES I ACTIVITIES OUTPUT F3ORNMS OF ASSISTANCE I TIMNG

I I I I Stant zIB. CROSS-SECTORAL REGULATORY FRAMEWORK: This sub-cmponent winl focas on key ross-sectoral regulatory issues: it, those defining the longer-term relationship between investors,consumers and the State. Examples of issues that may be addressed under this sub-component include: (Q) rules governing the award, amendment and revocation of concessions; (ii) broader regulatoryapproaches, such as the rote of the Competition Commission in each sector, and (iii) principles governing the design and establishment of autonomous regulatory institutions.

Cst: US S2.Smm1. Idlfdcation of polcy, legal and intbuional issues Support to CID in establihing and servicing c- Diagnostic study Consultants/Legal advisors 05195 1V95

raised by the elaboration of regulatory frameworks secoral workig groupsin more than ot ecor which: () raise importantqueios of polic cohre, () offer net benefits Review existing and proposed legislative and Seninars/Workshopsfrom adop6ng ce _m ap ccs ectors, instiiona framework, past privatization andor (iii) offer sigifiat efficiency benefits from regulatory experience and sector-specificdealing with isue ceirlly rather than on a sector privatization plans and regulatory strategies.by ector bass

Consultations with investor community and oWherkey interest groups.

2. Definition of tategy for elaborating a cross- Devdop detailed recommendations on legal nd Proposed implementation Consultants/Legal advisors 0S/95 06/96ecal regulatory framework that deals effectively institutional response to crosaecctoral regulatory Strategy, including, aswith is s idanified in phase 1. framework issues appropriate, cros-aectoral

coordination mechanism anddraft list of regulatory mattersto be subject to croasedoral Seminars/Workshopspolicies, legislation orregulation

3. Impleatation of cross-sectors regulatory Support CID m working with crss-sectoral Draft policies, legislation, Consultants/Legal advisors 01/96 End offrmavork working groups. Liaise with sector working regulations, organizational process

groups to promote effective cros-fertilization, arrangements etc deling withcommaunication and coordination cross-sectoral regulatory issues

Draft poliaes, legishtion, regulations, Seminars/Workshopsorganztional arrangements etc

4. Dcvdopment of reglatory institutions Formulate and implement a cross-wectord program Outputs might include: ) Consultants/Legal advisors 01/96 Endofto support the devdopment of institutional capacity Training programs and processby regultors. material; and (ii) Support to Seminars/Workshops

developnment of researchAs appropriate, coordinate assistance to regulatory institute/program for regulators Training programs &agencies. materials

PROJECT IMPLEMENTATION PLAN: CIDMatzix of Objecives, Activities, Timing and Costs

TEMINGOBJECTIVES ACTIVITIES OUTPUT FORMS OF

ASSISTANCE

start I

C. GENERAL BUSINESS ENVIRONMENT FOR PRIVATE PARTICIPATION IN INFRASTRUCTURE (PPI) This sub-component will focus on legal, regulatory and institutional constraints to effectiveprivate participation in infrastructure (PPI) that are not addressed by sub-components A and B. Given the potential breadth of this work, the focus will be on the key constraints that have a signflcant impact onthe PPI business environment. Examples of issues that may be addressed under this sub-component include approaches to granting permits; alternative dispute resolution processes; financing issues, includingthe granting and enforcng of security interests; environmental aspects; transparency of legal system; and taxation.

Cose. US S1.Omm1. Identification of key legal, institutional and Support to C1D in establishing cross-aectoral Diagnostic study indicating nature and Consultants/Legal 05/95 12/95

regulatory constaints in the general business working groups relative significance of key constraints. advisorsenviriomen that are not covered by A & B (above)but have a ignificant impact on efficient private Review existing and proposed legislative andparticipation in infradructure (PPI). institutional frameworks and sector-spedfic Seminars/Vorkshops

development objectives and privatization plans.

Consultations with investor community and otherkey interest groups.

2. Definition of strategy for improving the general Support CID in working with crosa-sectoral Proposed implementation strategy, Consultants/Legal 08/95 06/96buins environment for PPL working groups. including, as appropriate, advisors

coordination/consultationmechanisms andDevelop detailed recommendations on legal, draft list of matters to be subject toinstitutiona and institutional responses to issues priority reform.identified in phase I Seminars/Workshops

3. Implementation of strategy for improving the As required, work with CID and other key entities Draft policies, legislation or regulations Consultants/Legal I10/9 End ofgenaal business environment for Pm. in drafting policies, legislation and regulations dealing with cross-sectoral issues. advisors process

4. Promotion and dissemination of investment Recompilation of relevant laws and regulations Brochures, booklets, videos. Road shows 08/95 12J96opportunities

Presentations to financial intermediaries, consulting Inventory of investment opportunities and Seminarsfirms and investment community appropriate databases.

WorkshopsLiaise with Mexican Investment Board

TOTAL FOR SUB-COMPONENTS A-C $6. 0mm

3

PROJECT IMPIMiENTAlION PLAN: ElECTRICrTY AND SECONDARY PEITROCHEMICALSMatrix of Objectives, Actiities, Thing and Costs

OBJECTIVES | AClIVrITES J OUP1UT | FORMS OF ASSISTANCE |_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ J j ~~~~~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Start Finish

A. ELEC1RICrrY SECTOR: ThLis sub-comoetllsupport the review of key stategic options, sector restrcturing and preparation of privatization.

Cot US $12.25m

1. Identify appropriate policy framework for Evauate amative suttural, ownership and market Sector diagnostic. Local consultints. 05/95 12/95private sector participation in the coordmation options for introducmg competition mto theelectricity sector. electricity sector. Sector restructuring sategy. External consultuats.

05/95 12/95Identify regulatory and polcy/planning functions and ExLernal reviewers.swttures commensurate with restructuring options.

|2. Define stategy for implementing revised policy Analyze electricity pricig poliies Tariff polcy ad subsidy criteria. External consultants 10/95 03/96framework for the electricity sector.

Assess options and make recommendationa for grouping Sector re=icturing strategy. Study tours 07/95 06/96upfaing Imits.

Inventory of assets External advisors

Review divestiture options and scquencing. Privatization strategy, auction schemes and plmn Seminars 08/95 06/96of action.

Evaluate options for ensng efficient fuel supply. 10/95 03/96Draft fuel supply contracts/agreements

Specify regulatory and institutional arrangements

Action plsa for implementing regulatory and 02/96 03/96Identify ekmlems of publc relations strategy. instiul modifications as needed.

4

3- Prepare strucijug and privatiation Fmae legl/re story oriL Draft regulations. External consuants 06/95 1296

Estabish opeating entities. Prepare entities to point of divesure Study tours 01/96 09/96

Desgn qsyem openticn/coordinationprocedures and 01/96 12/96initiate stial aragemcma. Extermal advisors

Reommend apropriae tariff polices and wrvice 01/96 12/96staidards for distrbution, tmxsion (and genention Tnranng (regulation, systemsduring t ndtio pes operations, setdement

systems)Caduct mnat and mveannen prfecaabiIy stdies. 01/96 12/96

Priorite existhg fwiliaew capacity to be offered to PrivatiuAtion strategy. 01/96 12/96private investors.

Draft model cntracts for tr_inson services. 01/96 12/96

Undertake saes promotion. InformAonMemorandsnn 12/96 06/97

Prepa bidding documents. une biddig documents. 01/96 12/97

4. hwns latetung Suportpolicy nd regulatoty insttin Extemal consultnts 1 10/98

5

PROWECT IMELUITATION PLAN: XClRUCITY AND SICCONDARY FETROCUEWICALSNd of <Oedma, Ahid., IThg i Cub

OBJECTIVES ACTIVITIES OUTPUT FORMS OF ASSISTANCE

I I I Start Fsidh

B: SECONDARY PETROCEM CAIS: Asidance would fous on support to prepare for privatization.

Cost US S3.0mm

1. Define privatization options and aess Inventory of asses ernal consultants 05/95 12/95inveaet climate.

Speify grouping of auets and rnles of accs Privatization strategyand pricing of common use facilities

Specify feedstock supply arrangements Draft feedstock supply contracts

Design auction/bidding pzocedures Aucdion strategy

Prepare environmental assement

2. Prepa privatiztion Sales promotion Information Memorandum External consultants 10/9S 06196

Prepae bidding do en-ts Ise bidding documents.

TOTAL FOR SUB CO (ONENTS A-B: US S15.25mm

6

PROJECT IMPLENENTATION PLAN: TELECOMMUNICAnONSMhbix of Objedvl, Ad tbsu T g g d COds

OBJECTIVES ACTivnIES OUTPUT FORMS OF TINMNGASSISTANCE

sun | Fibb

A: BASIC TELEPHONE SERVICES: This sb-component will addres specific issues related to deregulation of local/long distance services.

Cost: US S2.5mm

1. Economic analysis of sector structure Assess pricing, new entry, and social Sector diagnostic report Extemal consultants 7/95 6/96obligations

2. Numbering and other technical plans Design implementation of numbering, Implementation of numbering, External consultants 7/95 4/96signalling, billing, routing and signalling, billing, routing andsynchronization synchronization

3. Support for legal and regulatory framewori Draft rtviews and comments External consultants 07/95 4/96

7

PROJECT IMPLEMENTATION PLAN: TELECOMMUNICATIONSMautix of Objectives, Activities, Timing and Costs

OBJECTIVES ACTIVITIES OUTPUT j FORMS OF TIMINGASSISTANCE

B: SATELLITES: Preparatory work has been undertaken. This sub-component will assist with preparing the privatization of the satellites.

COst US S1.0mm

1. Idedify appropriate policy framework and Prepare recommendations for sector structure Sector diagnostic External consultants 05/95 02/96istitutional arrangements

Prepare privatization option Privatization strategy Study tours

Prepare regulatory framework Seminars

2. Prepare privatization Inventory of assets Information Memorandum External consultants 09/95 12/96

Sales promotion External reviews

Issue bidding documents Investment Bank

Prepare bidding documents

8

PROJECT IMPLEMENTATION PLAN:Matrix of Objectives, Activitis, Timing and CO0ts

OBJECTIVES ACTIVITIES OUTPUT FORMS OF ASSISTANCETIMING

Start Finish

C: RADIO SPECTRUM: This sub-component will focus on the sector tucture and the design and implementation of the auction process.

Cost: US S3.0mm

1. Review of spectrum issues Economic analysis of spectrm management Sector diagnostic External consultants 05/95 4/96

2. Formulation of auction strategy Feasibility of auction of spectrum for new Auction strategy including External consultants 08/95 6/96services frequency planning

Establish auction rules

Define auction process

3. Prepare privatization Auction software and management Information Memorandum External consultants 08/95 03/97

Prepare bidding documents Issue bidding documents External reviews

4. Investment promotion support Promote opportunities to potential investors Maximize auction results Investment bankers 07/95 06/96

5. Legal and regulatory support Draft reviews and comments External consultants 07/95 06/96

9

PROJECT IMPLENENTATION PLAN: TELECOMMUNICATION

Matrix of Objecives, Adies, Tim ad Cast

OBJECTIVES J ACTIVITEES OUTPUT FORMS OF ASSISTANCE TIMING

D. REGULATORY STRENGTHENING: This sub-component will support the redesign and strengthening of a regulatory entity.

CosLd US S1.2mm

1. Strengthen regulatory and institutional Analysis of existing institutions Establishment of new regulatory External Consultants 10/95 03/97development entity

Create regulatory entity Short courses

Training . Seminars

TOTAL FOR SUB-COMPONENTS A-D: US 7.7m

10

PROJECT IMPLEMENTATION PLAN: TRANSPORTMatix of Objectives, Activities, Timing and Costs

I ~~~~~~~~~~~~~TEIUNGOBJECTIVES ACTIVITIES OUTPUT FORMS OF ASSISTANCE

str Finish

A: PORTS: This sub-component would support the privatization process that has been inhtiated.

Cost US S2.5m

1. Preparation of privatization and melated Prepare APIs, terminals and other External consultants 05/95 6/97rgulatory framvwork faclities for privatization

Exteral reviewsDesign regulatory framework (whereappropriate) Seminars

Regulatory frameworkPrepa bidding documents

Information Memorandum

Bidding documents

2. Invedment promotion support Promote oppotunities to potential Maximize auction results Investment bankers 05/95 06/97investo

3. Intionl Skengtening Support for pott planning and Extenal consultants 10/95 12/97supervison/adaptation of concessions (asneceau7y)

PROJECT IMPLEMENTATION PLAN: TRANSPORT

Matrix of Objectives, Activities, Timing and Coets

TIMINGOBJECTIVES ACTIVITIES OUTPUT FORMS OF

ASSISTANCE Finis

B: RAILWAYS: This sub-component would support the formulation of a privatization strategy and regulatory framework.

Cose US $6.5mm

1. Formulation of privatization strategy and Review of market structure proposals for Privatization strategy External local consultants 04/95 12/95regulatory framework privatization

SemiinarsReview alternatives for trackage and haulage rights 06/95 12/95for each concession Study tours

Define passenger/freight service for social reasons 08/95 02/96

Design regulatory framework Regulatory framework 05/95 03/96

2. Prepare privatization Prepare privatization plan Information External consultants 07/95 12/95Memorandum

FNM regionalization plan 07/95 09/95

Inventory of assets. 07/95 09/95hinvestment banikers

Resettlement and environmental assessment 07/95 12/95

Design auction/bidding procedures Auction strategy 06/95 03/96

Sales promotion 07/95 02/96

Issue biddingRetraining proposals documents 11/95 03/96

3. Regulatory Strengthening Support regulatory institutions and process External consultants 10/95 12/97

12

PROJECT EMPl4MfENTAT[ON PLAN: TRANSPORTMatrix of Objectives, Actiitlies, Tbning and Costs

4ThllNGOBJECThES ACTIVIrEES OUIPtrl FORMS OF ASSISTANCE

Start | flni6h

C: AERPORTS: This comiponent would emphasize the review of strategic options, preparation of a straegy, and dte regulatory fumntion.

Cost: US 5.35mm

1. Review of sector structure Disaggregation of ASA accounts by airport Sector duignostic External consultants 07/95 06/96

Review sources and uses of airport revenues 10/95 06/96

Financial and economic assessment of airports 11/95 06/96

Strategy for airport needs for Mexico City 11/95 12/96

ICAO review of safety standards at all passengerairpons 8/95 06/96

2. Formulation of privatzation strategy Prepare concessioning plan Privatiation plan External consultants 09/95 09/96

Detailed concessioning plan each airport

3. Prepare privaioatou Inventory of assets Extemal consultants 07/95 06/96

Concesion design Investment bankers 06/96 12/96

Prepare bidding documents Issue Bidding Documents 06/96 06/97

Sales promotion

4. Regultory stngSthening Design regulatory framework Regulatory framework and External consultants 12/96 12/97institntions

Seminar

Traning of staff in regulatory function. Short courses

SUB TOTAL FOR SUB-COMPONENTS A-C: US $14.35mm

13

I