Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 47396-MX

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED L O A N

IN THE A M O U N T OF US$10.025 MILLION

T O THE

UNITED M E X I C A N STATES

FOR A

CUSTOMS INSTITUTIONAL STRENGTHENING PROJECT

March 26, 2009

Poverty Reduction and Economic Management Mexico and Colombia Country Management Unit Latin America and the Caribbean Region

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

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CURRENCY EQUIVALENTS

(Interbank Rate Ef fect ive 20th M a r c h 2009)

C u r r e n c y U n i t = Peso 14148Pesos = U S $ l

ACCH ACP ACOA

AGA AGGC

AGR AGRS

BANOBRAS CAAREM CPS COMPRANET

CPAR

DBR DTA EMBI FMA FMR FFS GA GATT I G I GDP GOM IBRD ICB ICT IEPS

CQ

ISAN IMF LCS LPI MIS NAFIN

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

Central Administration Human Capital (Administracidn Central de Capital Humano) Central Administration for Planning (Administraci6n Central de Planeacih) Central Administration for Customs Operations (Admin is t rac ih Central de Operacion Aduanera) Customs General Administration (Administracion General de Aduanas) Central Administration for Large Taxpayers (Administracion Central de Grandes Contribuyentes) Central Administration for Collections (Administracion Central de Recaudacih) General Administration for Resources and Services (Administracion General de Recursos y Servicios) National Bank o f Public Services (Banco Nacional de Obras y Servicios P6blicos) Confederacih de Asociaciones de Agentes Aduanales de l a Repfiblica Mexicana Country Partnership Strategy Government Electronic Procurement System (Sistema Electrdnico de Contrataciones Gubernamentales) Country Procurement Assessment Report Selection Based on Consultant Qualifications Development Business Review Customs Transaction Fee (Derecho de Trcimite Aduanero) Emerging Markets Bond Index Financial Management Assessment Financial Monitoring Report Fee for Service General Administration General Agreement on Tariffs and Trade General Import Tax (Impuesto General de Importaciones) Gross Domestic Product Government o f Mexico International Bank for Reconstruction and Development International Competitive Bidding Information and Communications Technology Special Tax on Production and Services (Impuesto Especial sobre Produccidn y Servicios) N e w Vehicle Tax (Impuesto Sobre Automdviles Nuevos) International Monetary Fund Least Cost Selection Logistic Performance Index Management Information System National Financing Agent (Nacional Financiera S.N. C.)

NAFTA NBF NCB OECD PAD PCN PIU PMU PRONAFIDE

QCBS SAT SBD SEDENA SEMARNAT

SEPA SFB SFP SGS SHCP SOE VAT WBG wco W E 0 WTO

FOR OFFICIAL USE ONLY North American Free Trade Agreement Not Bank Financed National Competitive Bidding Organization for Economic Cooperation and Development Project Appraisal Document Project Concept Note Project Implementation Unit Project Management Unit National Program for Financing Development (Programa Nacional para Financiar e l Desarrollo) Quality and Cost Based Selection Tax Administration Service (Sewicio de Administracidn Tributaria) Standard Bidding Document Secretariat o f National Defense (Secretaria de Defensa Nacional) Secretariat of Environment and Natural Resources (Secretaria del Medio Ambiente y Recursos Naturales) World Bank’s publicly accessible Procurement Plans Execution System Selection Based on Fixed Budget Secretaria de la Funci6n Pdblica SociCtC GCnCrale de Surveillance Finance and Public Credit Secretariat (Secretaria de Hacienda y Crddito Publico) Statement o f Expenses Value Added Tax World Bank Group World Customs Organization IMF World Economic Outlook World Trade Organization

Vice President: Pamela Cox Country Director: Axel van Trotsenburg Sector Director: Marcel0 Giugale Sector Manager: Nick Manning . Task Team Leader: Enri ueFanta

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

Mkxico

Customs Institutional Strengthening Project

CONTENTS Page

1 . STRATEGIC CONTEXT AND RATIONALE ................................................................. 1 A . Country and sector issues .................................................................................................... 1 B . Rationale for Bank involvement ......................................................................................... 9

C . Higher level objectives to which the project contributes .................................................... 9

I1 . PROJECT DESCRIPTION ............................................................................................... 10 Lending instrument ........................................................................................................... 10

Project components ..................... : ..................................................................................... 10

A . B . C . D . E .

Project development objective and key indicators ............................................................ 10

Lessons learned and reflected in the project design .......................................................... 18

Alternatives considered and reasons for rejection ............................................................ 19

I11 . IMPLEMENTATION ............................................................................................ ; ....... 19 Partnership arrangements .................................................................................................. 19

Institutional and implementation arrangements ................................................................ 19

A . B . C . D . Sustainablllty ..................................................................................................................... 20

E . Critical risks and possible controversial aspects ............................................................... 21

F .

Monitoring and evaluation o f outcomes/results ................................................................ 20 . . .

Loan conditions and covenants ......................................................................................... 22

I V . APPRAISAL SUMMARY ............................................................................................. 23 A . Economic and financial analyses ...................................................................................... 23 B . Technical ........................................................................................................................... 24

C . Fiduciary ........................................................................................................................... 24

E . Environment ...................................................................................................................... 26 D . Social ................................................................................................................................. 25

............................................................................................................. 26 F . Safeguard policies

G Policy Exceptions and Readiness 26 . ......................................................................................

Annex 1: Country and Sector or Program Background ......................................................... 27

Annex 2:' Major Related Projects Financed by the Bank and/or other Agencies ................. 32

Annex 3: Results Framework and Monitoring ........................................................................ 33

Annex 4: Detailed Project Description ...................................................................................... 38

Annex 5: Project Costs ............................................................................................................... 69 . Annex 6: Implementation Arrangements ................................................................................. 76

Annex 7: Financial Management and Disbursement Arrangements ..................................... 79

Annex 8: Procurement Arrangements ...................................................................................... 87

Annex 9: Economic and Financial Analysis ............................................................................. 91

Annex 10: Safeguard Policy Issues ............................................................................................ 96

Annex 11: Project Preparation and Supervision ..................................................................... 97

Annex 12: Documents in Project File ........................................................................................ 98

Annex 13: Statement of Loans and Credits ............................................................................ 100

Annex 14: Country at a Glance ............................................................................................... 102

Annex 15: Map IBRD No . 33447 ............................................................................................. 105

List o f Tables Table 1: Trading Across Borders .................................................................................................... 4 Table 2: Clearance Times Indicators .............................................................................................. 4 Table 3: Summary Of Project Costs By Component .................................................................... 17 Table 4: Project Costs By Category .............................................................................................. 17 Table 5: Macro-Economic Scenarios ............................................................................................ 29 Table 6: Inspection Times For 2007, Grouped By Type Of Customs .......................................... 43 Table 7: Number Of Vehicles Crossing The Border In 2007 ....................................................... 43 Table 8: Tax Collection (2000-2007, Mx$) .................................................................................. 44 Table 9: Customs Declarations In 2006 & 2007 ........................................................................... 45 Table 10: Amounts In Customs Declaration For 2006 & 2007 (Mx$) ......................................... 45 Table 11 : Lpi Indicators ................................................................................................................ 46 Table 12: Doing Business Indicators - Trading Across Borders .................................................. 47 Table 13: Number o f Customs Personnel in March 2008 ............................................................. 59 Table 14: Academic Level O f Customs Personnel (March 2008) ................................................ 60 Table 15: Numbers Of Staff In The Customs Hierarchy (March 2008) ....................................... 60 Table 16: Financial Management Risk Summary ......................................................................... 80 Table 17: Expenditures By Category ............................................................................................ 84 Table 18: Audit Requirements for the Proposed Project .............................................................. 85 Table 19: Potential Economic Benefits From Enhanced Customs Administration ...................... 92 Table 20: Economic Analysis O f The Project .............................................................................. 93 Table 21: Sensitivity Analysis ..................................................................................................... 94 Table 22: Financial Analysis Of The Project ................................................................................ 95

.

MEXICO

CUSTOMS INSTITUTIONAL STRENGTHENING PROJECT

PROJECT APPRAISAL DOCUMENT

L A T I N AMERICA AND CARIBBEAN

LCSPS

Date: March 26,2009 Country Director: Axel van Trotsenburg Sector ManagerDirector: Nicholas Manning

Team Leader: Enrique Fanta Ivanovic Sectors: Central government administration (80%); General industry and trade sector (20%) Themes: Other economic management (P) Environmental screening category: Not Required

Project ID: P114271

Lending Instrument: Technical Assistance Loan

1

For Loandcreditdothers: Total Bank financing (US$m.): 10.025 Proposed terms: Fixed Spread Loan, new pricing, to be fully repaid, (bullet principal repayment) 17 year grace period and total maturity, all conversion options included and front-end fee paid

I Borrower I 44.50 I 0.31 I 44.85 I International Bank for Reconstruction and I 9.96 I 0.07 I 10.02

Development Total: 54.50 0.38 54.87

Borrower: Secretariat o f Finance and Public Credit (Ministry of Finance)

Responsible Agency: Servicio de Administracih Tributaria (SAT)

Estimated Disbursements (Bank FY/US$m) 1 FY FY09 FYlO FY l l FY12 FY13 1 Annual 0.80 1.76 2.23 2.62 2.61 Cumulative 0.80 2.56 4.79 7.41 10.02

Project implementation period: Start June 1,2009 End: May 31,2014 Expected effectiveness date: July 1,2009 ExDected closing: date: SeDtember 30.2014

[ ]Yes [d ] N o Does the project depart from the CAS in content or other significant respects? Re$ PAD I. C. Does the project require any exceptions from Bank policies? Re$ PAD I K G. Have these been approved by Bank management? I s approval for any pol icy exception sought from the Board? [ ]Yes [ IN0

[ d ] y e s [ 1 NO Does the project include any critical risks rated “substantial” or “high”? Re$ PAD III.E.

[d]Yes [ ] N o Does the project meet the Regional criteria for readiness for implementation? Re$ PAD IKG. Project development objective Re$ PAD II. C., Technical Annex 3 The project’s objective i s to improve the efficiency of Customs processes thus contributing to improving Mexico’s competitiveness and facilitating trade with foreign parties.

~~~~~ ~~ ~~

Project description [one-sentence summary of each component] Ref: PAD II.D., Technical Annex 4 A. Institutional Redesign: This component seeks to correct the structural impediments to increasing the efficiency o f the customs cycle, through a redefinition and redesign o f the services and processes which support Customs operations

B. Human Capital: This component i s geared towards increasing the professionalism and capacities o f the General Administration for Customs’ managers and staff.

C. Change Management: This component is aimed at communicating the changes to internal and external stakeholders, ensuring the understanding o f these changes and the involvement and engagement with the project o f said stakeholders.

D. Project Administration and Management: This component aims to ensure an effective coordination o f the efforts to define, develop and implement the project, to accomplish i t s stated objectives on time and within budget

Which safeguard policies are triggered, if any? Re$ PAD I K F., Technical Annex 10 None.

Significant, nonstandard conditions, if any, for: Re$ PAD III. F.

Board presentation: None.

Loadcredit effectiveness: As is a standard requirement for a l l projects in Mexico, a “Contrato de Mandato” will have been duly executed and the relevant legal opinions wil l have been provided.

Covenants applicable to project implementation: Project specific covenants include that the Borrower, through SAT, shall:

(a) maintain an Operational Manual, satisfactory to the Bank, containing, inter alia, specific provisions on detailed arrangements for the carrying out o f the Project, including the procurement, financial management and disbursement requirements thereof.

(b) maintain, in SAT, at a l l times during Project implementation, an implementation team, within SAT’S regular structure, with an organization, functions and responsibilities acceptable to the Bank, with respect to the Project, including, inter alia, the responsibility o f said team to coordinate and monitor the carrying out o f the Project; and

(c) ensure that the project implementation team referred under Section I.A.3(a) above is, at a l l times during Project implementation, led by a Project coordinator who i s assisted by adequate professional and administrative staff (including procurement and financial specialists), in numbers and with experience and qualifications acceptable to the Bank, operating under terms o f reference satisfactory to the Bank.

I. STRATEGIC CONTEXT AND RATIONALE A. Country and sector issues

1. The Mexican economy i s heading into a recession as it faces the impacts of a sharp aggregate demand contraction in its major trading partners and continued strained global financial conditions. Economic growth already decelerated in the f i rst three quarters o f 2008 and actually turned negative during the last quarter, thereby bringing GDP growth for the year at a modest 1.3 percent. In the near term, economic activity i s likely to contract as external demand drops and domestic and external credit conditions remain tight. On the basis o f the January 2009 IMF World Economic Outlook (WEO) projections for global economic activity, the Bank’s base scenario for Mexico includes a contraction o f GDP by 2.0 percent in 2009 before a modest rebound o f economic activity in 2010.

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

3. The global financial crisis led to a sharp tightening of financing conditions in a large number of emerging market economies. Mexico has been no exception. The sharp increase in risk aversion globally led to a large sell-off in global equity and bond markets. The Emerging Markets Bond Index (EMBI) global spread for Mexico peaked at 627 basis points in October 2008 before returning to about 430 basis points early March 2009, compared to an average o f 200 basis points in July and August. Sharply increased spreads on corporate bonds and reduced access to external finance are having an adverse impact on investment and business expansion plans.

4. Domestic financial markets have mostly stabilized although at weaker levels reflecting higher risk pricing and a weaker economic outlook. In response to the global financial crisis and generalized emerging market sell off, the Mexican authorities implemented several pol icy actions to maintain and restore liquidity on domestic financial markets including foreign exchange market interventions, the provision o f loans and loan guarantees to domestic f i r m s by government owned development banks and the repurchase and reduced issuance o f longer-term government bonds.

5. Ongoing deleveraging pressures and continued high levels of uncertainty have prompted a sharp downturn in global economic activity, world trade and international commodity prices. Economic activity and the prospects for near-term economic growth have deteriorated significantly throughout the wor ld as o f the last quarter o f 2008. Mexican GDP decreased by 1.6 percent in the fourth quarter o f 2008 compared to the same period o f the previous year and prospects show a further contraction o f economic activity in 2009.

6. There remains considerable uncertainty as regards to the depth and length of the global recession and the possibility of an extended recession in Mexico’s largest trading partner. Assumptions regarding the external environment have a major impact o n the projection

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of Mexico’s main macroeconomic variables over the next two years. A base case scenario follows the February Consensus forecast for global economic activity and includes an o i l price for the Mexican m i x o f o i l exports in 2009 and 2010 similar to the level observed on average in January o f 2009 o f US$38 per barrel. The impact o f such an external scenario on the Mexican economy i s a significant recession in 2009 and a modest rebound by 2010. The sharp reduction in the external demand in the base scenario in 2009 i s reflected in a significant contraction in the dollar value o f exports, with the value o f o i l exports mainly declining as a result o f lower o i l prices whereas non-oil exports largely decline due to lower volumes o f production and trade. The latter in combination with tighter credit conditions (both external and domestic) is projected to lead to a simultaneous contraction o f private consumption and investment. Countercyclical government expenditures mitigate but cannot avoid a contraction o f aggregate demand and economic activity in 2009. A gradual recovery o f external demand by 201 0 should allow, on the contrary, for an increase o f manufactured exports, private consumption and investment demand providing for a modest expansion o f overall economic activity. Risks to this scenario are largely tilted towards the downside and a second l o w case scenario provides for the impact on Mexican macroeconomic indicators in case o f a deeper and extended recession in i t s largest trading partner.

7. Trade thus plays a major role in the Mexican economy. Mexico has a free market economy in the tr i l l ion dollar range. I t contains a mixture o f modem and outmoded industry and agriculture. Recent administrations have expanded competition in seaports, railroads, telecommunications, electricity generation, natural gas distribution, and airports. Trade with the U S and Canada has tripled since the implementation o f NAFTA in 1994. Mexico has 12 free trade agreements with over 40 countries including, Guatemala, Honduras, El Salvador, the European Free Trade Area, and Japan, putting more than 90 percent o f trade under free trade agreements. The main industries are food and beverages, tobacco, chemicals, i ron and steel, petroleum, mining, textiles, clothing, motor vehicles, consumer durables, tourism. The GDP (purchasing power parity) i s US$1.544 tr i l l ion (2007), with exports at $291.8 bi l l ion f.0.b. (2008) and imports at $308.6 bi l l ion f.0.b. (2008).

8. Trade facilitation has become an important development issue in recent years. This i s reflected in increased levels o f investment in trade-facilitation reform by governments and donors. The importance o f trade facilitation i s also reflected in the numerous related provisions incorporated in various bilateral and regional trading agreements. I t i s also reflected in a desire by many countries to seek enhanced multilateral rules o n trade facilitation in the context o f the World Trade Organization (WTO), as part o f the Trade Facilitation Agreement currently being negotiated. Trade facilitation has also become a key driver o f the global “Aid for Trade” initiative.

9. Customs efficiency has an important impact on transaction costs for international trade. Realizing the importance o f trade, and export performance in particular, in achieving higher levels o f economic growth, countries have moved towards lowering tariffs to reduce the anti-export bias and take advantage o f opportunities presented by the global market.

World growth i s projected to fal l to 0.8 percent in 2009 and experiencing a gradual recovery in 2010 when growth I

i s picking up to 2.2 percent. Similarly output in the United States i s projected to contract by 2.1 percent in 2009 before rebounding by a similar 2.0 percent in 2010.

2

Competitiveness, however, i s affected by the transaction costs generated by customs procedures at both ends o f the line, and high costs and administrative difficulties associated with inefficient border clearance processes are now cited by users worldwide as more important barriers to trade than tariffs. It follows that more efficient customs procedures wil l reduce transaction costs and thus benefit: (a) exporters (profitability o f exports increases); (b) importers (profitability o f imports increases); (c) the government o f the importing country (increase in government revenue). Fewer opportunities for corruption in customs wil l similarly result in reduced transaction costs and in addition result in improved government credibility and integrity.

10. In Mexico, the Customs General Administration (AGA) i s a general administration within the Tax Administration ,Service (SAT), the main revenue agency of government. I t is one o f the most important areas for the Government and i s large in terms o f employees, transactions, and sheer size o f operations. Mexico has 49 customs houses: 21 border offices, 17 maritime offices and 11 inland offices. In 2006, trade in goods accounted for some 60 per cent o f GDP - Mexico i s one o f the world’s most trade dependent countries. Mexico accounted for almost 11 percent o f the total trade with U S - the third highest (as o f June 2008), while the U S accounts for 80 percent o f Mexico’s trade. The inherent complexity o f custom functions, make this institution one o f the most difficult to improve and manage easily, and this is revealed through difficulties in both policy-setting and administration. In addition, while revenue functions are similar for taxes and customs (Customs collects 22.3 percent o f the total national tax collections), Customs had additional functions concerning the control and inspection o f entry and exit o f merchandisea2 Whereas combining customs and tax administration functions presents problems, most developed customs administrations have managed to find an adequate balance between the two in their overall border-related responsibilities, and their experiences wil l serve as guidelines for the reform proposed.

11. Mexican trade costs are high compared to countries with similar proportions of international trade. High costs and administrative difficulties associated with inefficient border clearance processes are now cited by users worldwide as more important barriers to trade than tariffs. In the case o f Mexico, a comparison with other countries shows that i t has substantial room for improvement; as can be seen in TABLE 1 below, the cost to import a container is almost 3.5 times greater in Mexico than in Chile, and twice that in Brazil.

12. Customs clearance time, roughly the time the merchandise spends within customs control (and thus an important factor in import and export transaction cost), i s similarly too high. In Mexico it i s reported that the customs clearance time is on average seven days. This i s very high by accepted international standards (for example in Chile the customs clearance time i s one day) and international good practice i s considered to be less than one day. The data for Mexico can be seen in TABLE 2 below.

Note that Mexican Customs does not have national security functions: whereas customs inspection and control programs are indeed aimed at the identification and detection o f illegal activities as drug and arms smuggling, other Federal Government institutions, such as the Police and the Army, are charged with taking action.

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Table 1: Trading Across Borders

Type of Entry

Ground

Maritime

Air

Source:

Source: www.doingbusiness.org

Total Customs Customs Observations International good Clearance Inspection Clearance practices for Customs

Time time Time Clearance Times 7days Less than 5 5 days Add 2 transit days 3 to 5 hours

hours if “~ensitive”~ merchandise. 8 hours if by car.

8-9 days Less than 5 7 days Add 2 transit days Less than one day hours if “sensitive”

merchandise 2 days Less than 5 1 day Add 1 day if Air 2 hours

hours cargo not courier

Physical inspection rate i s 10% and 100% for X or Gamma rays for trucks and containers

express Less than 3%

Interviews with local administrators and Customs officials.

13. Mexican customs today suffers f r o m a number o f structural impediments to efficiency. Analytical work done by the Bank and the International Monetary Fund4, acknowledged openly within SAT, shows that i t is activity- rather than results-oriented; roles and responsibilities are in many cases unclear, and in some cases the private sector has taken over custom functions (and thus has a very large influence in the customs process); data is generated but not used for management, control, and forecasting (in the sense o f r isk management-based prevention o f events instead o f reaction to them); procedures and processes are complex, insufficiently standardized, shot through with duplication o f activities, confused responsibilities,

Protected merchandise, such as leather goods, textiles, chemicals and others “A Strategy for the Reform o f Customs Administration”, IMF, February 2007.

4

inadequate and non-timely information; automated systems are fragmented and do not communicate with each other, leading to further loss o f efficiency and inadequate control.

14. This situation i s recognized and addressed in SAT’s Strategic Institutional Development Plan 2007-2012. This five-year plan is prepared as part o f a cyclical and permanent process which l i n k s the short- and medium-term operations with the Institution’s long-term vision; the plans identify and integrate objectives, policies and basic activities, including the corresponding organizational changes to achieve SAT’s long term goals. The preparation and monitoring o f the Plan i s the responsibility o f SAT’s General Administration for Planning, which consolidates the Business Plans for each General Administration and provides guidelines for the preparation o f the annual operation plans.

15. The following are the S A T Strategic Objectives which are applicable to Customs:

(a) Develop the organization and human talent necessary to administer change and transformation. This requires that j ob functions as well as processes be aligned with the SAT/AGA mission and responsibilities, and positions f i l led with capable personnel motivated to accomplishing the SAT/AGA mission. Capable and motivated management and staff are necessary to deal with the constant change required by the changing trade environment and border needs, which globalization has accelerated, especially in a trade-dependent country l ike Mexico with important border transit.

(b) Redesign and automate key processes. Customs processes have changed worldwide, and new, faster and timelier processes are required for trade facilitation. These processes, and in particular the portions dealing with control, and critically dependent on electronic information. Moreover, automation has proven very effective in increasing control and decreasing corruption by decreasing arbitrariness in operational decision-making.

(c) Simplify client services using electronic means. E-services have proven worldwide to be very effective in reducing client cost as well as t ime in securing the services o f customs. E-services include forms transmitted through the internet, the provision o f information on-line, and communication between client and service providers.

(d) Improve the effectiveness of obligation activity control, client auditing, and collection. The use o f automation applied to well-defined processes and databases simplifies the automated verification o f information provided, comparison against existing information, and other means o f information verification. The availability o f this information in electronic form vastly simplifies the task o f auditing (for example, dossiers do not have to be manually gathered from different customs posts, but are kept centrally and easily available v ia the intranet). Finally, collection i s more timely, made against validated information, errors are detected early, and management exception reports produced automatically permit the detection and prioritization o f collection efforts as wel l as audits.

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(e) Improve the legal framework. Laws, regulations, and internal resolutions should be periodically upgraded to reflect the changing environment in which tax and customs administrations must operate, as well as the needs issued from the adoption o f new technologies and processes (e.g., electronic signatures).

(9 Improve information for decision-making. Management Information Systems based o n correct and timely information are necessary for decision-making, at the strategic level as wel l as the operational level for measuring and reacting to organizational and individual performance. Performance indicators must be defined and implemented, automated systems configured to produce the necessary information and management and exception reports, and organizational units prepared to veri fy the quality o f the information and the reports.

(g) Promote a fiscal culture. Tax and Customs Administrations seek to inform through various educational and informational campaigns as to the importance o f taxes for the country and explain why evasion and smuggling are h a r m h l to the country, as wel l as promoting voluntary compliance from taxpayers and clients.

(h) Establish systems and capabilities to ensure efficient and transparent planning, control, and systematic evaluation. Periodic planning, constant and continual control, and periodic evaluation are necessary to ensure that processes are efficient, effective, and o f the required quality and integrity.

(i) Promote honesty, transparency, and corruption control. Increasing transparency, honesty, and fighting corruption, can be accomplished through three broad approaches. First, ensuring that al l staff are aware o f the values o f the institution, and the steps the institution wil l take to promote these values; second, through clear and fair procedures to produce information on al l relevant aspects o f procedures and operation, thus increasing transparency and accountability, and by introducing measures o f control and evaluation through automated as well as manual means and using these to reduce opportunities for errors and deviations from normal procedures; and third, by acting promptly and openly to reward or sanction according to performance in a result-oriented institution.

16. The AGA Business Plan, entitled Customs Modernization Plan 2007-2012, i s aligned with the overall SAT strategic objectives and updated annually. It will guide al l efforts in investment in infrastructure and technology, simplification o f the trade legal, regulatory and operational framework, cooperation with the private sector as we l l as government institutions both national and foreign, among others. One o f the strategic initiatives identified in this plan is P15: Carry out the Reengineering o f al l Processes. This initiative seeks to establish a process- oriented administration to guide the analyses, documentation, measurement, control and improvement o f existing processes in order to make customs operations more efficient, introduce more effective services, customer orientation, and improved control, in an environment o f continuous improvement with productivity and cost-effectiveness measures.

17. This Customs Institutional Strengthening Project contemplates a total redesign of Customs processes, starting with a New Model for Customs based on the best international

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models and experiences. I t i s supported by a very strong Human Capital strengthening which includes a performance-based incentive system, introduction o f a modern career path, and considerable training. The activities to achieve are described further down. I t must be added that the Project Appraisal Document is an indicative document with approximate costs. Activities, timing and costs could change during implementation.

18. I t i s important to note at this point that the strengthening of the Customs General Administration i s the second major phase in the reform of the Tax Administration Service of which it forms part. The first phase, in which the Bank participated, finished in December 2007. The following excerpts f rom the Implementation Completion and Results Report for this project (IBRD 71270, ICR0000900, June 25,2008) highlight the key achievements.

"The operation has achieved its development objectives on all significant indicators of success. I n spite of a reduction in the maximum income tax rate to 28percent (VAT rate is st i l l the same at 15 percent), revenues have increased.

. _-_ - - _ - _ _ . I _-_ -I --̂-I__ - "I I_.---" -. C o l l e c t m i mil Percentqeo GDP

COllrCllOnS In nliilionr 01 con>tan1 peso5 per year II

233 7d4 150000

105

10

9 5

9

3 s

8 2W3 2004 2005 ?DO6 2017

SOUILL I n J U n m Triboloria 2007 SAT Mdy 2008 Suurcc loforn eTr!5ul?m2007. SAT May 2008

Figure I: Collections in Millions of Constant Pesos Figure 2: Collections as a percentage of GDP

The cost of collection has decreased. I n cost for each peso collected: Cost o r cob e r t l o n PG., &a%.%." c " l l t . c L e J

7 0 1 4 1 0 0 I C .

2oc 3 a 004. 2007

&our -,ma. T r r l r U t U r r o 2oL.7, =%AT. M 4 Y LOOY

Figure 3 Cost of Collection per Peso Collected

And in general taxpayer perception of SAT has climbed:

7

2003 2004 2005 2006 2007

-Good Image -Regular -Bad Image

Source: Informe Tributario 2007, SAT. May 2008 - __ __ _-__ - _ _ _- - - __ __ .

I n addition, the increase in eficiency in the management, control and operation of SAT, together with the large amount of transparency introduced have had an efect on the

of corruption within the institution: -______- ~ - - _ _ -__--I--

Perception of corruption within SAT, according to taxpayer surveys

2003 2004 2 0 0 5 2 0 0 G 2 0 0 7

Source: Informe Trl lutar lo 2007, SAT. M a y 2008

Figure 5: Perception of Corruption within SAT

SAT is to be commended likewise for the high degree of transparency it has achieved, both within through its internal dissemination methods and the information available through the SAT Intranet, which contains among others directives to staff and the personnel roster, and without via the SAT Portal available through the Internet, which contains, among others, a description of services, organization, instructions to taxpayers, various application systems designed to assist in preparing and submitting tax returns, payments, and other transactions including consulting the taxpayer s own transaction record, and the publishing of all multi-year strategic plans, and annual reports including accomplishment and performance indicators. "

19. Although the Customs General Administration did not participate in the first phase of the reform, the complex project envisaged will be carried out within and by a mature institution with a proven record for managing change. Many o f the management and staff involved in this project have the experience and knowledge necessary for its implementation.

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Moreover, and very importantly, the credibility o f the reform process for internal and external stakeholders is greatly improved by the previous success in reform.

B. Rationale for Bank involvement

Strengthening of customs i s specifically noted as an important element required to Ive the competitiveness of the Mexican economy in the Country Partnership Strategy for FYOS-FY13 (Report 42846-MX o f March 4, 2008). The CPS details that existing

international comparisons o f logistics performance (e.g., the ability o f countries to deliver goods in time and at l o w costs f rom origin to destination throughout the world) show that Mexico has substantial room for improvement, and thus identifies this as an important area o f work in support o f the objectives o f the National Development Plan.

21. SAT has explicitly requested the help of the Bank to strengthen customs. This is an area where success has been relatively l imited to date, but where SAT sees the potential o f relatively high returns from focused investments in improving customs. This success, if achieved, will result in the long term, in the shoring up o f Mexican competitiveness. The Bank has extensive international experience in the institutional reform o f customs administrations around the world, having financed over 120 customs-related projects over the past 20 years and currently managing a portfolio o f US$409 mi l l ion in customs projects with another US$94 mi l l ion in the pipeline. The Bank also has specific expertise in the context o f internal taxes and customs in Mexico. The Tax Administration Institutional Development Project I C R specifically recognizes the stated approval by SAT o f the Bank’s expert assistance and guidance based o n worldwide sector experiences, the provision o f continuity in a relatively unstable organizational environment, and the assurance that Bank oversight and procurement gives to stakeholders, including Congress. IMF and the Wor ld Bank are the two development institutions that have done the most work in the area o f customs modernization in Mexico. The Inter-American Development Bank (IDB) has been active in this sector, but not as much in Mexico, pointing out the need for increased donor involvement in this area.

22. In addition to a technical assistance loan, SAT has requested Bank assistance, through a Fee for Service (FFS) arrangement, to provide several specific products in the short-term in the areas of Human Capital and Performance Indicators. The FFS will work with SAT to identify modifications in Human Resource policies and procedures aimed primarily at introducing a performance-based incentive system and a career path for customs management and staff; determine indicators o f organizational and individual performance; and determine the overall characteristics o f macro-processes as input for the various re-engineering and redesign phases to follow. In addition, the FFS will provide in general guidance o n international best practices in Customs Administration, provide assistance the Customs’ Management to provide direction and guidance to the reform, and prepare certain studies and reviews o n specific aspects o f the reform.

C. Higher level objectives to which the project contributes

23. This project i s consistent with both the CPS and the National Development Plan and contributes to the higher level objectives o f both strategies, which include customs either directly

9

or indirectly. competitiveness for Mexico and contribute to trade facilitation.

In the medium- to long-term this project will contribute to improving

11. PROJECT DESCRIPTION

A. Lending instrument

24. (SIL) as this is a straightforward technical assistance loan.

The most suitable lending instrument was considered to be a Specific Investment Loan

B. Project development objective and key indicators

25. The project’s objective i s to improve the efficiency of Customs processes thus contributing to improving Mexico’s competitiveness and facilitating trade with foreign parties.

26. K e y performance indicators are:

Increase in the number o f exporthmport declarations processed per human resource unit involved; Decrease in clearance processing time. Increase in the perception by users o f the efficiency o f services offered by Customs.

27. These indicators will be refined as the project identifies and implements more precise indicators. Initially, the three selected indicators will directly measure the efficiency o f customs processes (indicators one and two), and indirectly measure the efficiency o f the processes through user surveys (indicator three), providing good if somewhat broad temporary indicators o f efficiency. In the case o f the f i rst indicator, to measure efficiency in cases o f changes in volume o f declaration, SAT intends to carry out a flexible and timely reassignment o f involved personnel. In the case o f the second indicator, SAT intends to decrease clearance processing time by at least ?4 and ?h day on the third and fourth year o f the project (see Annex 9) so that the number o f days wil l decrease from 7 days to 6 days - a modest goal and s t i l l far from internationally accepted targets but which wil l result in savings equal to the cost o f the project.

C. Project components

Component A: Institutional Re-design (estimated cost: US$38,869,200)

28. This component seeks to correct the structural impediments to increasing the efficiency of the customs cycle, through a redefinition and redesign of the services and processes which support Customs operations. This includes a revision o f the corresponding legal frameworks, organizational structure and supporting technology. The Institutional Re- Design Component wil l introduce new and upgraded processes, tools and an organizational

10

model which, based o n agreed strategic r isk management, control and enforcement guidelines5 and focusing o n Client Service, Security and Control. This component will permit:

(a) The simplification and improvement o f the efficiency and effectiveness o f the main customs services (declaration, review, verification, investigation, etc.);

(b) Increase in the levels o f quality and service to clients and agents o f international trade;

(c) Improvement o f the capacity for management and control o f customs operations to obtain a better balance between facilitation and control, improved service orientation, transparency and accountability;

(d) Integration o f the best practices in customs worldwide into the existing operation;

(e) Establishment o f mechanisms for monitoring, quality control, management, to guarantee the quality o f the services, their continuity and sustainability, and their continuous improvement;

(f) A totally integrated (beginning to end) operation, promoting collaboration among the Central Customs Administrations through a results-oriented rather than a task- oriented scheme;

(g) Greater opportunity for change and better adaptation to it;

(h) Improved availability o f information for decision-making at the strategic and operative levels.

29. The change envisaged contemplates all the processes and Central Customs Administrations, and it involves the SAT General Administration as well which i s either a clients or provider o f inputs for the processes. The component involves the implementation and operation o f the redesigned processes and the instrumentation o f schemes o f continuous improvement. The Institutional Redesign component i s closely linked and intertwined with the Human Capital Component, and critically supported by the Change Management Component.

30. This component has five subcomponents:

Subcomponent A S : Definition of the principle and policies for the Mexican Customs within the framework of the 2007-2012 Customs Modernization Plan This subcomponent seeks to establish, compare, and obtain consensus on the principles and policies that wil l guide the customs services, the development o f a reference model that defines the scope o f the customs internal and external environment, and the definition o f Customs’ macro-processes. Activities will include high-level seminars and workshops with the participation o f external consultants and the different levels o f the higher echelons o f the SAT management hierarchy.

’ A Strategy for the Reform of Customs Administration, International Monetary Fund, February 2007

11

Subcomponent A.2: Regulatory Framework Identify the modifications required to norms in the customs environment in light o f best international practice and o f the macro-processes, processes, and procedures identified by this component. This subcomponent wil l respect al l treaties and international agreements signed by the Mexican Government. This subcomponent wil l be implemented under the coordination o f the Legal General Administration using an internal specialist.

Subcomponent A.3: Redesign key Customs processes This subcomponent seeks to develop in detail a comprehensive map o f the customs operation and management processes. At the same time, i t will seek to define the sub- processes, activities, tasks, as wel l as the management indicator scheme and control points associated to the same. The subcomponent will prepare the procedures and customs operation manuals and define the organizational architecture which wil l serve as input to the definition o f positions and other elements o f the organization structure to be development by component B--Human Capital. This subcomponent will develop in detail the functional requirements for the redesigned processes, produce a gap analysis between the existing information systems and those needed to fulfill the new requirements, and an identification o f requirements for updating or developing the desired information systems.

Based on the results o f this subcomponent, SAT will, outside the project, proceed to adapt existing application systems and develop new ones as required by the Institutional Redesign, integrating them with existing SAT systems. The activities are expected to include: (a) Preparation and implementation and development o f the strategy and plan; and (b) Acquisition or development o f the systems necessary to support the indicator management scheme; (c) the cleaning and migration o f the existing information. These activities wil l be implemented separately by the General Administration for Information Technology, based on the intermediate results produced by an international consultancy. As such, they are not costed within the project.

Subcomponent A.4: Implementation of the Institutional Redesign and Continuous Improvement. The subcomponent will be implemented gradually, staring with pilots and their eventual replication. This activity i s tightly related to the implementation o f the other components o f the project and with component D: Change Management. This subcomponent will be responsible for the definition o f the information map necessary for the management o f processes and services; o f the indicators and their correlations such that they permit the evaluation o f impacts and customs administration. This scheme will include the definition o f the different levels participating in the identification, development and analysis o f the indicators for decision-making at the strategic, tactical and operational levels. Likewise, the scheme includes the definition o f the functional requirements which wi l l be an input for the development or acquisition o f the corresponding information systems. Finally, this subcomponent wil l establish mechanisms to implement Quality Control in User Services and follow-up management indicators, as well as feedback mechanisms for trade stakeholders and users.

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Subcomponent A.5: Risk Management in the Control of Customs Operations. The objective o f this subcomponent is to strengthen, through specialized technical assistance, the development and implementation o f the system o f risk management for customs merchandise and passenger throughput processing. Risk Management has been adopted by customs worldwide as a means o f increasing merchandise control efficiency and effectiveness. Increases in global trade have made risk management increasingly important. SAT is likewise developing such Systems for the Evaluation o f Risk, applied a priori and a posteriori:

(a) A pr ior i . Based on the information sent ahead o f the arrival o f the merchandise, the systems determine which merchandise wil l be inspected upon arrival. This phase aims to decrease the risk o f illegal introduction o f drugs, chemical precursors, weapons, money, and pirated materials. In a second phase the customs declaration is evaluated when presented, aiming to decrease the risk o f commercial fraud. A priori risk management aims to make the throughput o f merchandise more fluid, as risk i s evaluated before arrival or whilst merchandise i s st i l l in the port terminals.

(b) A posteriori. Risk evaluation generates a risk ranking for each trade agent, through crosses o f information from various sources, including tax administration. A posteriori (after customs clearance) risk management aims directly to guide fiscal audit operations using post-operative analyses.

SAT is in the process o f developing and implementing risk management systems, based on international best practice and as stated in the commercial agreements Mexico has signed with various other countries. The highly contextual nature o f them, however, requires ut i l iz ing the latest methods and lessons learnt from other customs worldwide, to fine-tune them for better results through continually better models and guidelines, improved predictive and descriptive models, and ru le administration. To this effect, this subcomponent wil l finance the assistance required by SAT in the form o f international experts as well as visits by SAT personnel to selected Customs using the latest risk management systems.

- 1 2 3 4

5

Subcomponent costs (indicative) Definition of policies and guiding principles $3,866,600 Normative Framework $367,000 Redesign of the processes and procedures $2 1,414,400 Implementation of the Institutional Redesign $12,587,600 Risk Management in the Control of Customs $633,600 Operations Total $38.869.200

Component B: Human Capital (estimated cost US$10,213,483).

3 1. o f AGA’s managers and staff.

The general objective o f this component is to increase the professionalism and capacities

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32. The specific objectives o f this component are to introduce an incentive system based on results, to establish a Fiscal Career Service Scheme which wil l guide the career path o f staff and management, to train staff to fulfill the requirements o f the new processes to be introduced, and to establish a permanent training scheme to ensure that Customs can always depend on fully skilled staff for every j o b position. The activities in this component fol low the Human Capital Strategy and Model (see Annex 4) which SAT has recently used for the internal tax areas o f the institution. A longer full description o f actions for this component can be found in the “Human Capital Action Program” developed by SAT (Project Files), and there is a more extensive description in Annex 4.

Subcomponent B.1: Planning and Organization This subcomponent supports activities aimed at developing a human resource planning methodology, based on productivity parameters (e.g., workload, profiles, development plans) to permit an efficient response to demand and changes in the customs environment, including those caused by the introduction o f new processes in Customs.

Subcomponent B.2: Staffing This subcomponent includes activities to identify staff to recruit or promote within Customs, through a diagnostic and identification o f parameters for management decision- making in the selection o f candidates.

Subcomponent B. 3: Training This subcomponent would support the definition o f training strategies to enhance staff knowledge and sk i l ls to the levels required by their positions, including the new positions being defined. I t would also support the definition o f the SAT Comprehensive Training Plan, including Recruitment, Development and Specialization Training, to permit a continuous knowledge process through formal and computer-aided training. Other activities include support for the creation o f the Customs School and the improvement o f the organizational climate.

Subcomponent B. 4: Talent Development Activities in this subcomponent include support for the development o f the Fiscal Service Career Scheme as wel l as Career Planning for staff and Succession Planning for critical positions. These efforts include the identification o f matches between personnel and the skills required for positions

Subcomponent B. 5: Performance Evaluation This subcomponent includes activities to evaluate the performance and contribution o f staff to the Customs institutional objectives, using contributions to the work environment, performance indicators, and 360 degree evaluations.

Subcomponent B. 6: Separation This subcomponent includes activities to simplify the normative framework and the procedures o f the separation process for personnel as part o f the normal staff l i f e cycle (quitting, retirement, firing, etc). Other benefits sought would be the decrease in the number o f separation-related lawsuits, increase in the number o f such lawsuits won, and a strengthened institutional image o f social responsibility.

14

Subcomponent B. 7: Culture Activities in this subcomponent would aim to strengthen staff ethical behavior by emphasizing values and integrity, fol lowing the SAT “Conduct Code” (see project files); In addition, i t would support efforts to strengthen leadership within the management team, the institutional esprit-de-corps, and a results-oriented and service-oriented SAT culture. 6

- 1 2 3 4 5 6 7

Subcomponent costs (indicative) Planning and Organization 232,600 Staffing 196,079 Training 4,851,504 Talent Development 4,581,100 Performance Evaluation 45,000

Culture 207,200 Separation 100,000

Component C: Change Management (estimated cost US$2,48 1,500)

33. The objectives of this component are to (a) communicate the changes in AGA’s processes undertaken through the Project to internal and external stakeholders, and (b) ensure the understanding of these changes, and the involvement and engagement with the Project of said stakeholders. The component focuses on the changes produced by the f i rst two components (the others are deemed not to have a sufficiently large effect as to cause resistance to change).

34. I t must be emphasized that this i s a cross-cutting component, designed to complement the other components. Although SAT’S change management experts wil l define the change management strategy and carry out many o f the change management activities, many others wil l be implemented, with change management expert oversight, as part o f the implementation o f the other components.

35. In the previous reform effort, SAT prepared a careful change management campaign, which included lectures nationwide by senior management, the continual dissemination of “Change Files” detailing how the institution would look and feel after the proposed modernization, and e-magazines. SAT also prepared an extensive training program, beginning with the so-called “Re-induction into SAT” which presented, both through lectures, demos and e-learning, the new concepts o f process-based procedures, risk management, Citizen Language (i. e., how to interact with citizens and how to communicate clearly), the Ethics o f the Public Employee. SAT also offered specific training for management, auditors and analysts, and created special mass-training rooms, for the simultaneous training o f up to 300 staff o n individual, interconnected computers. Over 90 percent o f staff received training every year in one or another training program, in some cases al l programs. This approach, which proved successful in the previous reform effort, wil l be replicated for the Customs strengthening.

Note that “integrity” in this context refers to a SAT Institutional Value and not to specific activities to reduce corruption in customs operations, as mentioned in the Revised Arusha Declaration, which are developed through Component A.

15

36. In addition, specific attention will be given to the role of the private sector, and in particular Customs Brokers. At present, these brokers carry out control and pre-validation activities that are more properly the function o f Customs staff. In addition to the normal change management programs and techniques, i t i s envisaged that demonstrations o f strong political commitment (at the highest government levels) wil l be carried out, as well as one-on-one lobbying and other extraordinary activities.

37. To implement the Change Management component, teams of SAT personnel will be formed, strengthened with consultants where appropriate. The personnel selected to direct and form part o f the teams has proven expertise in the field, having for the past five years been in charge o f the operational and cultural transformation already carried out within SAT in the areas dealing with tax administration.

38, This component wil l finance technical assistance and training, for activities including diagnostics, preventive efforts and assistance activities, implementing communication and sensitization plans and programs through workshops, events, publications (including electronic media), and other tools and methods commonly used for these endeavors.

Component D: Project Administration and Management (estimated cost US$3,285,000)

39. This component aims to ensure an effective coordination of the efforts to define, develop and implement the project, to accomplish its stated objectives on time and within budget. The component supports the SAT-defined Governance Model, which defines the management and administration structure o f the project (see “Proyecto de Fortalecimiento Institucional de Aduanas: Modelo de Gobierno” in the project files).

40. This component wil l finance consulting and financial assistance to support the management o f the project and project-related coordination bodies. The component will ensure that adequate technical support i s provided to project management during al l stages o f project implementation. This component will include project management, and specialized technical assistance as needed.

16

Table 3: Summary Of Project Costs By Component (US$ million)

Front End Fee Total Financing Required

Cost by Component

0.03 0.05% 0.00% 0.03 0.05%

54.87 100.00% 44.85 81.73% 10.03 18.27%

World Bank United States o f Mexico Total Cost

Goods, Consultant Services, and Training and Workshops under

Goods, Consultant Services, and Training and Workshops under

Goods, Consultant Services, and Training and Workshops under

Goods, Consultant Services, and Training and Workshops under

1 Component A of the Project 6,500,000 100%

2 Component B of the Project 2,400,000 100%

3 Component C of the Project 500,000 100%

4 Component D of the Project 599,937 100%

% o f

I 5 I Front-endFee

A: Institutional Redesign B: Human Capital Development C: Change Management D: Project Management and Administration Total Baseline Cost

I 25,063

38.87 10.21 2.48

3.29 54.85

6

70.83% 18.61% 4.52%

5.99% 99.95%

Premia for Interest Rate Caps and Interest Rate Collars 0

32.37

44.85

I Total Amount

58.99% 6.50 16.72% 14.24% 2.40 23.50% 3.61% 0.50 20.15%

4.89% 0.60 18.26% 8 1.73% 10.00 78.63%

10,025,000

Table 4: Project Costs By Category (US$)

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D. Lessons learned and reflected in the project design

41. The Project incorporates lessons learned from Bank Institutional Development Projects considered to be relevant example^.^ I t also takes into account the OED’s Lessons and Practices - Technical Assistance, Report Number 7 (May 1996); “Reforming Tax Systems: The Wor ld Bank Record in the 1990s”, a report prepared by Tax Policy and Administration Thematic Group; “Simplification o f Customs Procedures”, edited by Salvatore Schiavo-Campo at the Asian Development Bank; The Customs Modernization Handbook, edited by Luc D e Wulf and JosC Sokol; and, as mentioned above, the ”Assessment o f Human Resources in the Mexico Customs”, by Enrique Fanta and Andrks Santoro, LCSPS, June 2008 and the “Una Estrategia para la Reforma de la Administracidn Aduanera”, prepared by the International Monetary Fund in February 2007.

42. In particular, this Project relies on the lessons learnt from the previous Bank project with SAT, the Mexico Tax Administration Institutional Development Project (ME- 24118), as stated in that project’s ICR (ICR0000900). First, there i s the paramount importance o f automated processes in an information-based organization. On the other hand, i t i s not the technology itself that i s crucial, but rather the efficiency o f the processes. For this reason, the first component for this Project revolves around the institutional redesign o f customs, beginning with a Business Process Reengineering set o f activities, which wil l drive the modification o f systems as appropriate. I t i s important to emphasize that i t i s a principle o f the Project that a l l improvements and modifications be “process improvement driven” rather than systems driven.

43. Second, good leadership and good management are critical. The extremely complex process o f modernizing any customs administration requires strong, committed leadership, fully convinced o f the need to modernize and enthusiastically championing the reform process. I t also requires managerially knowledgeable senior staff, experienced in management in both public and private sector institutions, very familiar with the intricacies o f complex project management. The traditional public sector i s not wel l versed in any o f these skills, and cognizant o f this fact, SAT is entering into a Fee for Service Agreement with the Bank to ensure that worldwide expertise in Customs Administration Reform i s available to assist and advise in the modernization o f Mexican Customs.

44. Third, a motivated and skilled work force i s critical in ensuring appropriate operations. To this effect, the second project component focuses on Human Capital, which as the name indicates, goes beyond the management o f human resources to emphasize individual growth within the context o f Customs.

45. Fourth, there i s the importance of change management and training to reduce resistance and prepare the administration for change. This i s reflected in the design o f a comprehensive Change Management Component which wil l accompany the Project f rom i t s beginning (preparation o f teams, project launch) throughout the l i f e o f the Project.

’ Mexico Tax Administration Strengthening (June 2002); Vietnam Customs Modernization Project (October 2005); Brazil Sustainable and Equitable Growth TAL (May 2004); and Kazakhstan Customs Development Project (October 2007).

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E. Alternatives considered and reasons for rejection

46. An incremental approach was considered and discarded. The Mexican Customs Administration has been improving i t s procedures incrementally for years; however, the nature o f customs has changed. N o t only have technology and the internet offered more efficient and paperless options, globalization and the plethora o f bilateral customs and trade agreements have changed the nature o f customs, increasing its trade facilitation role while decreasing i t s revenue potential. Further, the quantity o f trade and border crossing has increased to the point where qualitative rather than quantitative remedies are necessary. For these and other reasons, a totally integrated new look at a l l o f customs processes is required.

47. The scope of this Project was also narrowed to focus on efficiency of processes, rather than the broader mandate o f effectiveness which is harder to implement as wel l as measure. Hence the PDO o f effectiveness was considered and rejected.

48. One important decision refers to the exclusion of software development from the scope of this Project. The reason for this is twofold. First, the critical need for integrating customs system within the SAT Systems Architecture requires an integrated approach to software development as wel l as previous and detailed knowledge o f the existing systems with which the new systems wil l be integrated. The complexity o f these systems precludes an independent development to be integrated piecemeal later.

49. Second, the development and maintenance of all SAT systems i s carried out by consultants under an on-going contract, supported by SAT staff. Putting the responsibility for development and maintenance, as well as for the maintenance and replacement o f a l l computer and telecommunication equipment in the hands o f the private sector has not only permitted integrating the SAT business knowledge with the up-to-date specialized technology knowledge o f the providers, i t has also allowed SAT to avoid the obsolescence which often affects government institutions when they attempt to create and maintain software development expertise in-house. This approach, which has successfully worked for SAT for a number o f years, makes i t inadvisable to consider an independent procurement effort for the customs systems and for this reason project development has been left outside o f the project.

111. IMPLEMENTATION

A. Partnership arrangements

50. N o direct partnership arrangements are contemplated with other development partners or tax administrations. AGA will, however, seek stakeholder support, in particular within the private sector and the media, and wil l also benefit from advisors who have led or assisted successfbl customs worldwide: US, UK, France, Spain, Chile, Ped, Brazil, Bolivia, and others.

B. Institutional and implementation arrangements

51. The proposed project will be implemented by the Customs General Administration within SAT, using a governance model developed by SAT based on the governance model used for the implementation of the recently-finished Tax Administration Institutional

19

Development Project (241 18-MX). (For more details, see “Proyecto de Fortalecimiento Institucional de Aduanas: Modelo de Gobierno” in the project files and the summary provided in Annex 6.) The model will be staffed by SAT personnel, supplemented by project-financed consultants where appropriate.

52. Project administration, accounting and procurement wil l be carried out by SAT units, as was done for the previous project. They wil l receive support from Nacional Financiera WAFIN)*, a National Financing Agent appointed by the Directorate o f Public Credit. Agreement to the contract between SHCP, SAT and NAFIN i s a Condition o f Effectiveness. It i s important to note that a consulting firm will be hired to provide Independent Validation and Verification (IVV) for the l i fe o f the project. Staffing o f critical positions in the counterpart teams was a condition o f Negotiation for the Project.

C. Monitoring and evaluation of outcomes/results

53. A Project Management Office will be created to support the Project Director. (See Annex 6, Implementation Arrangements for a more detailed description o f their functions). Intermediate or Component indicators wil l be monitored by this office. Project indicators are routinely monitored by the Planning Administration within the Customs General Administration, and this Administration wil l be responsible for the evaluation o f outcomes and results

D. Sustainability

54. The institutional redesign i s aimed at ensuring that the functions, processes, organization, personnel and incentive system are aligned with Customs’ strategic objectives and values. This will enable the retrained and motivated corps o f professional staff and management to work in coordination and alignment towards the objectives o f Customs. The development o f an in-house capacity for continuous improvement fol lowing completion o f project activities wil l facilitate the sustainability o f the changes carried out, especially through procedures aimed at evaluating necessary changes and the on-going revision and continuous improvement in the effectiveness and efficiency o f processes.

55. Processes and procedures will, to the extent possible, be implemented through application systems. This wil l reduce arbitrary, subjective, and unnecessary decision making (thus reducing the potential for corruption). And additional safeguard i s that these systems, together with good automated internal control, cannot be changed by the internal user without extensive collusion with I C T professionals. Even then, audit trails and I C T internal security will make i t extremely dif f icult to change programs without being detected.

56. As noted above, there are strong indications of favorable Government commitment to the objectives of the proposed project. Moreover, there are reasonable prospects that the

* NAFIN i s appointed by the Secretariat o f Finance and Public Credit to act as the Government’s Financial Agent. It administers loan funds and supports SAT in complying with the Bank’s Guidelines with respect to procurement, disbursement, and auditing. The Financial Agent i s responsible o f assuring that the loan contract i s in the interests o f the Mexican Government. Finally, the Financial Agent transfers all allocated Bank resources to the National Treasury and eventually also for direct payments to providers abroad.

20

Government and SAT will provide and maintain the essential elements for sustainability. In the final analysis though, the successful perpetuation o f the Project’s outcomes wil l depend on continuing high level political support for Customs’ institutional improvements.

E. Critical risks and possible controversial aspects

Related to prerequisites for project implementation and GOM commitment

Related to counterpart capacity implement manage project

t o and the

Risks

Internal resistance to change, lack o f project credibility

External resistance to change due to the existing commercial value to customs brokers o f their control and pre-validation functions more properly the task o f Customs.

Lack o f clear responsibilities and authority o f Implementation Team vis-A-vis l ine officers and staff. Rivalry between Customs and Internal Taxes may preclude Customs from using the acquired expertise o f the rest o f the institution

Burn-out by the leaders o f the Tax Administration Project may preclude obtaining the necessary expertise

Mit igat ion Measures

Change management program to establish information dissemination campaign, pre- training and function simulators will be introduced. Staff feedback mechanisms will help tailor change management effectively. Credibility i s helped by this project being a continuation o f f ive years o f successful reform within the institution.

Demonstration o f strong polit ical commitment at the highest levels, strong lobbying program, and other change management techniques.

The highest authority in the Customs Administration has assumed leadership o f the project.

Joint teams will be created; responsibilities will be clearly allocated

A scheme to second or promote #2 staff in the previous project to assist in implementation will help retain and use the hard won expertise available.

Risk Rating with Mit igat ion

S

H

L

M

L

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Risks Mitigation Measures Risk Rating with

I Inadequate counterpart

F. Loan conditions and covenants

Mitigation Conformation o f the counterpart

57. The following Conditions o f Negotiation were met:

Related to

integrity

Overall Risk Rating

operation

(a) Agreement o n an Operations Manual which specifies, inter alia, procedures and requirements on project accounting system and internal controls; planning, budgeting, management and financial reporting, including format and contents o f the accounting reports to be submitted o n quarterly basis; auditing and disbursing; the f i rst year's detailed work program

project implementation implementation teams i s a condition o f Board L

new operations process design and implementation. Corruption M

teams formed Presentation '

Insufficient controls in Participation o f Internal Audit Unit throughout

has decreased within the institution due to the previous reform effort.

M

(b) Implementation o f the Project Governance Model, including appointment o f the Project Director and Coordinators, staffing o f critical positions in the counterpart teams, and agreement with SAT units for Project Administration.

58. There are no conditions for Board Presentation. N o Conditions o f Effectiveness apply except the mandatory legal opinions and, as a standard requirement for al l projects in Mexico, a "Contrato de Marzdato" which establishes the roles and responsibilities o f NAFIN as the financial agent for this Project wil l have been duly executed.

59. Covenants applicable to project implementation:

Project specific covenants include that the Borrower, through SAT, shall: (a) maintain an Operational Manual, satisfactory to the Bank, containing, inter alia,

specific provisions on detailed arrangements for the carrying out o f the Project, including the procurement, financial management and disbursement requirements thereof.

(b) maintain, in SAT, at a l l times during Project implementation, an implementation team, within SAT'S regular structure, with an organization, fbnctions and responsibilities acceptable to the Bank, with respect to the Project, including, inter alia, the responsibility o f said team to coordinate and monitor the carrying out o f the Project; and

22

(c) ensure that said project implementation team is, at al l times during Project implementation, led by a Project coordinator who is assisted by adequate professional and administrative staff (including procurement and financial specialists), in numbers and with experience and qualifications acceptable to the Bank, operating under terms o f reference satisfactory to the Bank.

IV. APPRAISAL SUMMARY

A. Economic and financial analyses

60. The Project i s appraised to be economic and financially feasible. Specifically, the project’s economic feasibility has been examined using a cost-benefit analysis that took into consideration the stream o f costs and economic benefits to be generated from its implementation. Likewise, the Project’s financial feasibility was examined by taking into consideration the stream o f public expenditures and fiscal revenues to be generated as a result o f its implementation to determine the Project’s impact on public finances. I t is important to underscore that these financial benefits are transfers from the private sector to the public sector and do not necessarily indicate that the Project i s welfare-enhancing. Alternatively, the Project’s economic analysis focuses on whether the project would yield net economic benefits for the society as a whole.

E con om ic Analysis

61. The proposed Project i s expected to yield significant economic benefits that will ultimately enhance Mexico’s overall competitiveness and facilitate trade. These benefits include the reduction in cost to traders as a result o f simplified import and export procedures, faster and more consistent cargo clearance times, and trade expansion as a result o f enhanced competitiveness (see Annex 9). These benefits, as wel l as the project’s costs, have been taken into consideration into the project’s economic analysis to determine the Project’s net economic impact. Other benefits, however, are more difficult to quantify and, as a result, have not been included in the cost-benefit analysis despite their significance. These non-quantifiable benefits include reduced corruption, improved international image, enhanced transparency and accountability, and improved national security.

62. The results from the cost-benefit analysis for the base scenario indicate that the Project i s highly beneficial from an economic standpoint (see Annex 9 for assumptions). Specifically, i t renders a Net Present Value (NPV) o f US$3.9 billion, and an internal economic rate o f return (IERR) o f roughly 508 percent. Likewise, the results o f a sensitivity analysis indicate that the ‘project can be expected to render robust economic benefits even under less optimistic assumptions in terms o f either lower growth rates for imports and exports @e., 50 percent o f the base scenario), and reduced estimates for the economic benefits o f lower administrative costs, shorter and more consistent clearance times, and enhanced competitiveness (Le., 50 percent o f the estimates utilized under the base scenario).

Financial Analysis

63. The financial analysis compares the stream of fiscal expenditures generated by the Project vis-&vis the expected additional fiscal revenues in discounted, real terms. Additional fiscal revenues are expected to be generated as a result o f enhanced tax compliance

23

for the value-added tax (VAT) o n imported goods. VAT collections represented approximately 84 percent o f al l Customs collections in 2007.

64. The proposed Project i s expected to be beneficial from the standpoint o f financial inflows, as the additional revenues to be generated from enhanced customs administration and procedures surpass project costs (see Annex 9 for assumptions). Specifically, the financial analysis renders a Net Present Value (NPV) o f U S $ US$270 mil l ion.

B. Technical

65. rest o f the SAT.

There are no critical technical issues; the technology used is already in operation in the

C. Fiduciary

66. Financial Management Assessment. The Bank updated a Financial Management Assessment (FMA) performed as part o f preparation o f the previous Tax Administration Institutional Development Project (ID: P077602). The aim o f the FMA was to assess the Project FM arrangements, identify risks and ensure these were properly mitigated in a structured manner throughout the l i fe o f the Project.

67. Based on the results o f the FMA, the Financial Management Team (LCSFM) concluded that: (i) FM arrangements are adequate to provide reasonable assurance that Bank loan proceeds wil l be used for the intended purposes; (ii) SAT, as implementing entity, satisfies the Bank’s project FM requirements; (iii) NAFIN, which wil l be the financial agent, wil l provide implementation support and oversight o f the Project based o n i t s many years o f experience with Bank projects; and (iv) the overall FM residual risk i s Modest. The main mitigating measure i s related to the updating o f the FM section o f the previous project’s Operations Manual (OM) before the negotiations.

68. FM areas included in this assessment are: li) Flow o f Funds and Disbursement. The Bank will reimburse the borrower Federal Treasury (TESOFE) for eligible expenditures pre-financed by SAT from i t s own budgeting resources. NAFIN will operate a bank Account in U S dollars for reimbursement purposes where the Loan hnds received from the Bank will be deposited. The advance method i s also allowed. In this case, NAFIN will open a segregated Designated Account (DA) in USD; lii) Accountinn and Internal Controls. In general, S A T policies and procedures related to these areas meet Bank FM requirements. All project funds wil l be processed through the financial management system already in place in SAT, and wil l be supported by documentary evidence; liii) FM section o f the Operational Manual (OM). The FM section o f the OM o f the previous project (ID: P077602) will be updated before negotiations to contain recent & detailed arrangements on the six elements o f FM as defined in Bank policy; (iv) External Audit and Financial Reporting. Project Financial Statements, Statements o f Expenditures (SOEs) and b a w e s i g n a t e d Accounts will be subject to external audits on annual basis, carried out by auditors acceptable to the Bank. SAT will produce and submit to the Bank, through NAFIN, semiannual non-audited Interim Financial Reports (IFRs); lv) Bank Supervision. The Bank will carry out at least one full FM supervision mission per year.

24

69. Procurement activities will be carried out by the Servicio de Administracio'n Tributaria (SAT). The agency i s staffed with at least two officials with previous experience in procurement with the Bank within the Administrative Unit (Administracidn General de Recursos y Sewicios). In addition, NAFIN, the financial intermediary for the project, will be responsible through i t s special procurement unit for the review o f a l l procurement processes. An assessment o f the capacities o f these agencies to implement procurement actions for the project was carried out by the Bank's Mexico Country Office in January and February 2009 (summary in project files). The assessment reviewed the organizational structure for implementing the project and the interaction between the project's staff responsible for procurement and concluded that SAT has previous experience in implementing World Bank-financed projects, which ensures an appropriate level o f transparency and control while also supporting smooth implementation.

70. The key issues and risks concerning procurement were identified and include the absence of previous experience in procurement within the Project Implementation Unit, although staff with previous experience were identified in the Administrative Unit. The key corrective measures agreed centered mainly o n keeping at least one trained personnel o n Bank policies in the implementing agency and providing procurement training for staff responsible for each component as wel l as for procurement staff in the implementing agency as we l l as training to staff in the implementing agency o n the management o f the SEPA web-based information system o n Bank-financed projects. The overall Project risk for procurement i s Moderate. Annex 8 includes a detailed explanation o f Procurement-related issues.

D. Social

71. The Project has no direct social impact on the population, except of course in so far as economic growth and increased competitiveness benefit the country. There are, however, several direct beneficiaries o f this project. First, al l economic agents participating in international trade benefit (importers and exporters, transporters, Port and Airport Administrators, Customs Brokers, Warehouses, Messenger Firms, Passengers, Banks, etc.) as wel l as general users, due to the increase in efficiency, effectiveness, user-orientation, transparency and integrity o f customs procedures, which wil l reduce the cost and time o f customs operations and facilitate Mexican trade.

72. A number of important indirect social benefits were identified during project preparation: (a) Citizenship wil l indirectly benefit from the improvement in smuggling control, protecting public health and the environment through increased control o f illegal or dangerous merchandise; (b) General law and order throughout the country will benefit from the elimination (to the extent possible) o f a sore example o f corruption and avoidance o f law in al l border crossings; (c) Improved application o f the law will, in the short term, increase revenue, both directly through the control o f VAT refunds; in addition, improved information o n trade will assist in pol icy making and private sector decision-making., and (d) Customs professionals and staff wil l benefit from better defined jobs and responsibilities, the introduction o f measurable procedures, new career paths, training, and result-oriented incentive systems, which wil l increase ownership and accountability, motivate staff and reward performance.

25

E. Environment

73. The proposed Project i s expected to have no environmental impact.

F. Safeguard policies

The proposed Project does not trigger any safeguard policies. Safeguard Policies Triggered by the Project Yes No

3 Environmental Assessment (OPBP 4.0 1) [I Natural Habitats (OPBP 4.04) [I Pest Management (OP 4.09) [I [41 Physical Cultural Resources (OPBP 4.1 1) [I [dl Involuntary Resettlement (OPBP 4.12) [I [41 Indigenous Peoples (OPBP 4.10) 11 [41 Forests (OPBP 4.36) [I [dl Safety o f Dams (OPBP 4.37) [I [dl Projects in Disputed Areas (OPBP 7-60). [I [41 Projects on International Waterways (OPBP 7.50) [I [41

G. Policy Exceptions and Readiness

74. The proposed Project complies with all applicable Bank policies and does not require any exceptions. The Project Governance Model has been created and key staff assigned. Work i s in progress to develop terms o f reference for the init ial activities in the expectation o f starting the bidding process before effectiveness.

' By supporting the proposed Project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

26

Annex 1: Country and Sector or Program Background

Mexico: Customs Institutional Strengthening Project

Country Context - Recent Economic Developments

1. The Mexican economy i s heading into a recession as it faces the impacts of a sharp aggregate demand contraction in its major trading partners and continued strained global financial conditions. Economic growth already decelerated in the first three quarters o f 2008 and actually turned negative during the last quarter, thereby bringing GDP growth for the year at a modest 1.3 percent. In the near term, economic activity i s l ikely to contract as external demand drops and domestic and external credit conditions remain tight. On the basis o f the January 2009 WE0 projections for global economic activity, the Bank’s base scenario for Mexico includes a contraction o f GDP by 2.0 percent in 2009 before a modest rebound o f economic activity in 2010.

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

3. The global financial crisis led to a sharp tightening of financing conditions in a large number of emerging market economies. Mexico has been no exception. The sharp increase in risk aversion globally led to a large sell-off in global equity and bond markets. The EMBI Global spread for Mexico peaked at 627 basis points in October 2008 before returning to about 430 basis points early March 2009, compared to an average o f 200 basis points in July and August. Sharply increased spreads on corporate bonds and reduced access to external finance are having an adverse impact on investment and business expansion plans.

4. Domestic financial markets have mostly stabilized although at weaker levels reflecting higher risk pricing and a weaker economic outlook. In response to the global financial crisis and generalized emerging market sell-off, the Mexican authorities implemented several pol icy actions to maintain and restore liquidity on domestic financial markets including foreign exchange market interventions, the provision o f loans and loan guarantees to domestic f i r m s by government owned development banks and the repurchase and reduced issuance o f longer-term government bonds.

5. Ongoing deleveraging pressures and continued high levels of uncertainty have prompted a sharp downturn in global economic activity, world trade and international commodity prices. Economic activity and the prospects for near-term economic growth have deteriorated significantly throughout the wor ld as o f the last quarter o f 2008. Mexican GDP decreased by 1.6 percent in the fourth quarter o f 2008 compared to the same period o f the previous year’ and prospects show a further contraction o f economic activity in 2009.

In terms o f the seasonally adjusted annualized quarter-on-quarter rate o f growth GDP in the fourth quarter o f 2008 fe l l by 1 1.2 percent.

27

6. There remains considerable uncertainty as regards to the depth and length of the global recession and the possibility of an extended recession in Mexico's largest trading partner. Assumptions regarding the external environment have a major impact on the projection o f Mexico's main macroeconomic variables over the next two years. A base case scenario follows the February Consensus forecast for global economic activity lo and includes an o i l price for the Mexican mix o f o i l exports in 2009 and 2010 similar to the level observed on average in January o f 2009 o f US$38 per barrel. The impact o f such an external scenario on the Mexican economy is a significant recession in 2009 and a modest rebound by 2010. The sharp reduction in the external demand in the base scenario in 2009 is reflected in a significant contraction in the dollar value o f exports, with the value o f o i l exports mainly declining as a result o f lower o i l prices whereas non-oil exports largely decline due to lower volumes o f production and trade. The latter in combination with tighter credit conditions (both external and domestic) is projected to lead to a simultaneous contraction o f private consumption and investment. Countercyclical government expenditures mitigate but cannot avoid a contraction o f aggregate demand and economic activity in 2009. A gradual recovery o f external demand by 2010 should allow, on the contrary, for an increase o f manufactured exports, private consumption and investment demand providing for a modest expansion o f overall economic activity. R isks to this scenario are largely tilted towards the downside and a second l o w case scenario provides for the impact on Mexican macroeconomic indicators in case o f a deeper and extended recession in i t s largest trading partner".

lo World growth i s projected to fall to 0.8 percent in 2009 and experiencing a gradual recovery in 2010 when growth i s picking up to 2.2 percent. Similarly output in the United States i s projected to contract by 2.1 percent in 2009 before rebounding by a similar 2.0 percent in 2010. " Assumptions on the external environment under a second, low case scenario includes a more severe contraction o f world economic activity and output in the United States by 1.2 and 3.0 percent respectively in 2009 and a more modest recovery in 2010 by 1.8 and 1.2 percent respectively. This weaker external environment i s also reflected by lower international o i l prices that are assumed to drop to US$30 per barrel on average for the Mexican m i x o f o i l exports.

28

Table 5: Macro-Economic Scenarios

7. Trade thus plays a major role in the Mexican economy. Mexico has a free market economy in the tr i l l ion dollar class. I t contains a mixture o f modern and outmoded industry and agriculture. Recent administrations have expanded competition in seaports, railroads, telecommunications, electricity generation, natural gas distribution, and airports. Trade with the United States and Canada has tripled since the implementation o f NAFTA in 1994. Mexico has 12 free trade agreements with over 40 countries including, Guatemala, Honduras, El Salvador, the European Free Trade Area, and Japan, putting more than 90 percent o f trade under free trade agreements. The main industries are food and beverages, tobacco, chemicals, i ron and steel, petroleum, mining, textiles, clothing, motor vehicles, consumer durables, tourism. The GDP (purchasing power parity) i s $1.544 tr i l l ion (2007), with exports at $291.8 bi l l ion f.0.b. (2008) and imports at $308.6 bi l l ion f.0.b. (2008).

8. Trade facilitation has become an important development issue in recent years. This is reflected in increased levels o f investment in trade-facilitation reform by governments and donors. The importance o f trade facilitation i s also reflected in the numerous related provisions incorporated in various bilateral and regional trading agreements. It i s also reflected in a desire by many countries to seek enhanced multilateral rules on trade facilitation in the context o f the WTO, as part o f the Trade Facilitation Agreement currently being negotiated. Trade facilitation has also become a key driver o f the global “Aid for Trade” initiative.

9. Transaction costs play an important role in trade facilitation. Realizing the importance o f trade, and export performance in particular, in achieving higher levels o f economic growth, countries have moved towards lowering tar i f fs to reduce the anti-export bias and take advantage o f opportunities presented by the global market. Competitiveness, however,

29

i s affected by the transaction costs generated by customs procedures at both ends o f the line, and high costs and administrative difficulties associated with inefficient border clearance processes are now cited by users worldwide as more important barriers to trade than tariffs. It follows that more efficient customs procedures will reduce transaction costs and thus benefit: (a) Exporters (profitability o f exports increases); (b) Importers (profitability o f imports increases); (c) Government o f importing country (increase in government revenue). Fewer opportunities for corruption in customs wil l similarly result in reduced transaction costs and in addition result in improved government credibility and integrity.

10. The Customs General Administration (AGA) i s a general administration within the Tax Administration Service (SAT), the main revenue agency of government. Against this background, customs i s one o f the most important areas for the Government and i s large in terms o f employees, transactions, and sheer size o f operations. Mexico has 49 customs houses: 21 border offices, 17 maritime offices and 11 inland offices. In 2006, trade in goods accounted for some 60 per cent o f GDP - Mexico i s one o f the world’s most trade dependent countries. Mexico accounted for almost 11 percent o f the total trade with U S - the third highest (as o f June 2008), while the US accounts for 80 percent o f Mexico’s trade. The inherent complexity o f custom functions, make this institution one o f the most difficult to improve and manage easily, and this is revealed through difficulties in both policy-setting and administration.

11. An efficient Customs will help improve logistics performance and control illegal trade. Improved control and a more motivated workforce wil l help reduce corruption in Customs and thus improve trade. Existing international comparisons o f logistics performance (e.g., the ability o f countries to deliver goods in time and at low costs from origin to destination throughout the world) show that Mexico has substantial room for improvement.

12. Mexico customs has a reputation for both inefficiency and corruption, which need to change to improve governance and to deserve increased confidence from the public12. The Customs General Administration (AGA) is, by function and tradition, a quasi-independent general administration within the Tax Administration Service (SAT), the main revenue agency o f government, and responsible to tax and customs - both administration and policy. I t s main function, however, i s not the collection o f revenue, import duties having been consistently reduced over the years (they still, however, represent a significant portion o f national revenues). I t does, however, have one function that keeps it firmly tied to i t s internal tax administration peers, and this i s the control o f Value Added Tax refunds. I ts national safety responsibilities, however, are at odds with the functions o f the revenue agency, and this makes for an uneasy yoking o f the two (this has been found to be true in most countries in the wor ld - but no simple solution has been found).

13. Analytical work done by the Bank, as well as acknowledged openly within SAT, shows that Customs today suffers from a number of structural impediments to efficiency: i t i s activity- rather than result-oriented; roles and responsibilities are in many cases unclear; data i s generated but not used for management, control, and forecasting (in the sense o f risk management-based prevention o f events instead o f reaction to them); procedures and processes are complex, insufficiently standardized, shot through with duplication o f activities, confused responsibilities, inadequate and non-timely information, and fragmentary information technology

’’ However, the perception o f corruption in SAT overall has been decreasing - see Figure 5.

30

and communications. Existing international comparisons o f logistics performance (e.g., the ability o f countries to deliver goods in time and at l o w costs from origin to destination throughout the world) show that Mexico has substantial room for improvement. Unlike the sophisticated computer systems in SAT’S revenue wing, the existing computer systems are out o f date and have not been upgraded for a while.

14. Through this proposed project, Customs has opted for a an approach which contemplates a total redesign of its processes, starting with a New Model for Customs based on the best international models and experiences, supported by a very strong Human Capital strengthening which includes a performance-based incentive system, introduction of a modern career path, and considerable training. Change management, project management and administration wil l be carried out by staff who has gathered appropriate knowledge and know-how through the implementation o f the Tax Administration Institutional Development Project, which aimed at improving tax compliance and reducing evasion o f internal national taxes, and which finished very successfully last year.

31

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

MEXICO: Customs Institutional Strengthening Project

P095501Mexico - Mexico's competitiveness : reaching i t s potential (AAA, IBRD, US$152.000)

PO89865 - Innovation for Competitiveness 1 st phase APL (IBRD, US$250 M)

Ongoing Operations Report on Mexico's competitiveness to inform policy makers, the private sector, and the public at large about competitiveness priorities and shortcomings in Mexico, and to point the way forward on improving competitiveness Support to Government efforts to improve the competitiveness o f the Mexican economy by strengthening the innovative capacity o f the private sector, accelerating advanced human capital formation, and increasing the international integration o f the innovation system

NIA NIA

S S

Increase government tax collection by facilitating PO77602 - MX Tax Admin Institutional Development (IBRD, US$82.29 million)

voluntary compliance and reducing tax evasion thereby improving the efficiency and effectiveness o f the Mexican Government's Tax Administration Service (SAT)

S S

32

Annex 3: Results Framework and Monitoring

MEXICO: Customs Institutional Strengthening Project

Results Framework

PDO

The Project’s objective i s to improve the efficiency o f Customs processes thus contributing to improving Mexico’s competitiveness and facilitating trade with foreign parties.

Intermediate Outcomes

Component A : Institutional Redesign

Component B: Human Capital

Indic

Increase in the number o f export/import declarations processed per human resource assigned.

0 Decrease in clearance processing time from i t s present 7 days average.

Increase in the perception by users o f the efficiency o f the services offered by Customs.

In ome In Guiding principles, policies and new macro-processes defined in accordance with international best practices.

0

Processes, sub processes, activities, tasks and control points redesigned and documented.

Monitor ing and evaluation indicators scheme prepared

Scheme o f continuous improvement prepared

Design and dimensioning o f structures and profiles for the customs administrations and AGA departments

Design o f each position within AGA

Use of Project Outcome Information Assess the impact o f the project o n trade facilitation.

Permits the specification o f new processes, provides direction for reform efforts, and permits obtaining consensus o n the new directions and minimizing resistance.

A l lows the definit ion of operations and procedures manuals and the design o f a new organizational architecture

Al lows the creation o f systems to promote sustainability

Promotes the identification of areas for improvement

Measures the completeness of new definitions.

Measures the number o f new positions designed and evaluated with respect to the number of Dositions identified.

33

Component C: Change Management

Component D: Project Governance

Proportion o f identified personnel trained following the Transition Training Plan

Proportion o f customs personnel aware o f the project and i ts progress

Proportion o f customs personnel who agree with the project’s goals

Positive evaluation o f Change Leaders Consistent preparation o f status reports on the project with information on each activity giving results and costs.

Measures the effectiveness o f the implementation o f the Permanent Training Plan

Measures effectiveness o f the change management activities

Measures resistance to change

Measures influence o f change champions Permits monitoring Project advance against plan and budget Permits identifying changes needed to the Work Plan.

34

1

4

s 3 N

s

s e s 2 r

h CI

s s 0

s

P 3 0

/f

Annex 4: Detailed Project Description MEXICO: Customs Institutional Strengthening Project

Introduction

1. The Tax Administration Service (SAT) was created in 199513. Although s t i l l embedded in the organizational structure o f the Secretaria de Hacienda y Credit0 P~b l i co , and thus constrained by public administration rules, the new organization was given more managerial, b ~ d g e t a r y ’ ~ and technical autonomy. SAT’s main responsibility i s the application o f the tax and customs legal framework, to ensure that taxpayers (individuals and legal entities) contribute proportionally and with equity, to financing the public expenditures. SAT i s responsible for facilitating and encouraging voluntary compliance with the law as wel l as auditing the taxpayer to ensure that they comply with the law. Finally, SAT generates and provides information needed for the design and assessment o f tax and customs policy.

2. SAT’s mission i s “to collect federal contributions and control the entry and exit o f merchandise f rom the national territory, ensuring the correct application o f the law and encouraging voluntary and timely compliance”.

3. SAT’s vision is “to be an efficient and effective institution, oriented towards the taxpayer, with integrated processes and composed o f honest, professional, and committed staff, in the service o f a l l Mexicans”.

4. In 2002, SAT was s t i l l organized vertically by function, a type o f structure which was beginning to be obsolete and which favored “turfs” and power plays based on “ownership” o f information, as wel l as independent decision-making and action. Information was not shared easily or in a timely fashion internally, which made information-based processes such as taxpayer audit selection very difficult. I t was also not easily shared externally (an o ld and typical tax administration failing), which facilitated lack o f accountability and transparency as wel l as limiting customer service.

5. The Tax Administration Institutional Development Project (241 1 8-ME, 2002-2007), had the objective o f strengthening SAT’s institutional and operational capacity for purposes o f improving tax compliance and reduction o f evasion o f federal taxes. SAT was restructured along process lines, and several new units were created (e.g., a survey unit, a project administration unit). Technology was substantially improved, through the acquisition o f an Enterprise Resource Program which centralized front- and back-office application systems and the use o f leased equipment (re-bid yearly) to ensure equipment never became obsolete.

6. Transparency increased substantially, both within the organization through internal dissemination methods and making information available through the SAT Intranet, which contains among others directives to staff and the personnel roster, and outside the organization v ia the SAT Portal available through the Internet, which contains, among others, a description o f services, organization, instructions to taxpayers, various application systems designed to assist in

l3 Tax Administration Service Law, o f December 15, 1995. Starting on January 1998 14

38

preparing and submitting tax returns, payments, and other transactions including consulting the taxpayer's own transaction record, and the publishing o f al l multi-year strategic plans, and annual reports including accomplishment and performance indicators.

7. As a result, in spite o f a reduction in the maximum income tax rate to 28 percent (VAT rate i s st i l l the same at 15 percent), revenues have increased (the following are extracted from the June 25, 2008 Implementation Completion and Results Report IBRD 71270 for the Tax Administration Institutional Development Project).

8. I t i s important to note at this point that the strengthening o f the Customs General Administration i s the second major phase in the reform o f the Tax Administration Service o f which it forms part. The first phase, in which the Bank participated, finished in December 2007. To quote from the Implementation Completion and Results Report for this project (IBRD 71270, ICR0000900) o f June 25,2008, section 3.2 "Achievement o f Project Development Objectives":

"The operation has achieved its development objectives on a l l signi jkant indicators of success. I n spite of a reduction in the maximum income tax rate to 28 percent (VAT rate is st i l l the same at 15 percent), revenues have increased.

I - "_I_ - - - - - - --____I _I ^-_I ~ --I-_I- ~ - . -

Coltertionsob J Percentago GDP COIIGCL D m tr, "i8iliD"i ot con<t*nt PrLOb per year

11

123 764 '50000

i ""4 iU"4 4""s L""b lUU,

10 5

10

9 5

9

8 5

a ?W3 2004 2005 2wG ?9,7

S U U I I ~ i,ilorrn'. rrlbuiur~o zoo7 SAT 2008 Suurir l n / m E Trrhurirhi 2007 S&T, May 2008

Figure 1 Collections in millions of Constant Pesos per year Figure 2 Collections as a Percentage of GDP

The

0.016

0.0 14

0 012

0.01

0.008

0 . O O G

0 .o 04.

0.002

5

cost of collection _ . has . . decreased. - . I n cost for each peso collected: __ -

CULL o f Cu l le~L io i i p e r peso cullerled

2003 2004 2005 2006 2007 t I

39

And in general taxpayer perception of SAT has climbed:

. ...... ___ - . ........ ._ .................................... -.

__-__ .. . ............................. . ...... __. ..........

1 Q ..... ..-I.. .-- .... L--x-- _A_ -__. .___ ....... .__I --L& __ - 3 - - " . - . .

~ - ..~ _ _ T--

2003 2004 2005 2 006 2007

....... Goodlrnage - Regular - - - Bad Image

Source: l n f o r m e Tributario 2007, SAT. May 2008

Figure 4: Results of Surveys on the Image of SAT

I n addition, the increase in efficiency in the management, control and operation of SAT, together with the large amount of transparency introduced have had an eflect on the perception bY

ixpayers of corruption within the institution: Perception of- corruption within SAT, according to taxpayer surveys

50% ........ ..__________.__.-.._-______.__ ......... _____ 50%

30% :I ............. , I--_-. ,....--.~,~.--~,~, 4 0 3 6 ................................................................................................

2 0%

.- _. -_ .- ._ _ .- - __ --- 10%

00% 2003 2004 200s 2006 2007

Sourcc: lnformc Tributario 2007, SAT. M a y 2008 -~ _____- _ _ _ ~ - _ _ _ _ ~ ~ -___________

Figure 5: Perception of Corruption within SAT

SAT is to be commended likewise for the high degree of transparency it has achieved, both within through its internal dissemination methods and the information available through the SAT Intranet, which contains among others directives to staff and the personnel roster, and without via the SAT Portal available through the Internet, which contains, among others, a description of services, organization, instructions to taxpayers, various application systems designed to assist in preparing and submitting tax returns, payments, and other transactions including consulting the taxpayer's own transaction record, and the publishing of al l multi-year strategic plans, and annual reports including accomplishment and peflormance indicators. ''

40

9. Therefore, although the Customs General Administration did not participate in the first phase o f the reform, the complex project envisaged wil l be carried out within and by a mature institution with a proven record for managing change, and many o f the management and staff involved in this project have the experience and knowledge necessary for i t s implementation. Moreover, and very importantly, the credibility o f the reform process for internal and external stakeholders i s greatly improved by the previous success in reform.

10. SAT:

The Customs General Administration is one o f the nine General Administrations within

THE CUSTOMS GENERAL ADMINISTRATION

11. The Customs General Administration (Administracion General de Aduanas - AGA) is a Federal Government Entity depending from the Tax Administration Service (SAT), the entity responsible for the regulation and application o f Customs legislation. AGA intervenes in the study and modification o f customs duties, compensatory quotas, and other measures o f regulation and restriction o f trade. AGA i s responsible for the application o f al l treaties and agreements dealing with customs, verify transport o f trade merchandise and transit o f vehicles from abroad, determines taxes and duties on merchandise, and establishes the nature, state, origin and other characteristics o f merchandise and i t s appropriate tariffs.

12. AGA’s mission i s to “Contribute to the growth, prosperity and competitiveness o f the country, through an efficient, predictable and transparent customs operation which facilitates the movement o f passengers and merchandise, inhibits the i l l ic i t behavior o f firms, individuals and staff, and strengthens national security”.

13. AGA’s vision i s to “Be a Customs Service known for i t s professionalism and for the integrity o f i t s staff, operating at levels o f efficiency, transparency and control comparable to that o f the best Customs Services in the world”.

41

14. which the most relevant area:

AGA’s legal framework consists o f many different laws, treaties and agreements, among

The Customs Law. The L a w o f General Taxes to Imports and Exports has been in application since April lst, 1996. I t regulates entry into the national territory and the exit o f merchandise either transported or driven, and customs formalities.

VAT Law, published December 29, 1978, which deals with the payment o f value added taxes for various activities, which include importing goods and services.

NAFTA (North American Free Trade Agreement), which regulates the progressive decrease in duties over time for Mexico, U S A and Canada, to reach eventually 0 percent duties.

OECD (Organization for Economic Cooperation and Development). Established in 1961 , i t is a multilateral organization covering al l areas o f government activity, aimed at supporting sustainable economic growth, increasing employment, quality o f l i f e and financial stability. Mexico i s one o f 30 member countries.

Decrees applicable to the various border regions. The border regions have a special status, regulated by law. The main ones are the Northern Border Strip, which goes from the northern border approximately 20 kilometers into the country; the Border Region which includes the States o f Baja California, Baja California Sur, and Quintana Roo; The Partial Region o f the State o f Sonora; and the Southern Border Strip, which borders on Guatemala.

42

Quantitative view of Mexican Customs

-4 I

(*) being measured Source: AGA

15. In the aggregate, 80 percent o f inspections require less than 3 hours; only 35 percent require less than one hour. By type o f customs, however, the numbers differ, with an average o f 3.88 hours for Border Crossings, 4.30 hours for Airports, and 12.14 hours for Ports.

16. number o f vehicle crossings.

A very interesting data set showing the size o f the responsibilities o f AGA concerns the

I COLORADO I I I I USA I AGUAPRIETA I 1,769,925 I 12,038 I 5,256,747 I 0.68% I USA I CD.ACmA I 1,650,021 I 8,044 I 2,924,629 I 0.49% I

CD. MIGUEL ALEMAN TECATE ~ ~ - .

USA OJINAGA

43

PTO. PALOMAS 1 USA USA USA USA

Guatemala

COLOMBIA

Mexico has the largest number o f border crossing for vehicles by year in the world.

17. Collections, in millions o f Mexican Pesos (Mx$) has been as follows:

Table 8: T a x Collection (2000-2007, Mx$) ‘lax 2000 200 I 2002 2003 2004 2005 2006 2007

1 I 1 I I

Source: AGA

18. Collections by type o f customs i s as follows:

Coilectionr by Type of Customs for 2007, of a total of 223,638 million Pesos

p$i Mnritiirre

tiilcriur

.i Rordcr

I

Source: AGA

19. The number o f declarations (called “pedimentos”) in 2007 almost reached 8.5 millions, o f which two thirds were in Border Crossings, 10 percent in Maritime customs, and 25 percent in airports and other customs. This i s a 2 percent decrease compared to 2006, due exclusively to imports, which decreased by 3 percent.

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Table 9: Customs Declarations In 2006 & 2007

Source: AGA

20. With respect to the value o f the operations, they reach 2/3 o f a l l trade for border crossings, consistent with the number o f movements. As can be expected, airports by value represent 11.76 percent, compared to 23.54 percent by movement, whereas ports are the reverse.

Table 10: Amounts In Customs Declaration For 2006 & 2007 (Mx$) I Total Customs I Imports I Exports _-

Border Crossings I 2.373.158 I 2.401.128 I 4.774.285 I 65.13% I AirDorts I 547.397 I 314.783 I 862.180 I 11.76% I

Source: AGA

Comparing Mexican Customs

21. The Logistics Performance Index (LPI) is based on a survey o f operators on the ground worldwide, providing feedback on the logistics “friendliness” o f the countries in which they operate and those with which they trade. The LPI methodology combines in-depth knowledge o f the countries in which they operate with informed perceptions o f other countries with which they trade, and experience o f global logistics environment. The L P I is supplemented with objective data o n the performance o f key components o f the logistics chain in the home country and data collected for 100 countries.

22. The LPI consists therefore o f both perception and objective measures and helps build profiles o f logistics friendliness for these countries. I t measures performance along the logistics supply chain within a country and has three parts:

Perceptions of the logistics environment of trading partner countries

0

0

0

0

Efficiency and effectiveness o f Customs and other border procedures, Quality o f Transport and IT infrastructure for logistics; Ease and affordability o f arranging shipments; Competence in the local logistics industry (e.g., transport operators, customs brokers); Ability to track and trace shipments; Domestic logistics costs (e.g., local transportation, terminal handling, warehousing); and Timeliness o f shipments in reaching destination.

Information of the logistics environment in the home country of operation 0 Direct freight costs,

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Quality o f transport and IT Infrastructure, Competence in the delivery o f input services logistics operators need, Performance o f the clearance process o f exports and imports, Constraints affecting logistics performance, Information was collected for 110 countries; and provides a useful guide to areas for further investigation. Trends

Real time-cost performance data for country of operation Number o f border agencies, Customs performance indicators (time release, inspection data, possibility o f review for imports), Percentage o f damaged shipments, Lead times to export and import (based on best 10 percent, median 50 percent and worst 90 percent o f shipments).

23. A subset o f LPI values for selected countries, where 5 i s the highest value, shows:

I income

24. respect to Customs, on the other hand, i t is placed below the mean for emerging economies.

In general Mexico i s highly placed vis. a vis. comparable Lat in American countries. With

25. Doing Business i s another useful comparator instrument. I t analyzes government regulations that enhance business activity and those that constrain it in 18 1 economies. Data are current as o f June 1, 2008. Regulations affecting 10 areas o f everyday business are measured: starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business. The indicators are used to analyze economic outcomes and identify what reforms have worked, where and why. With respect to Customs, Trading Across Borders indicators for Mexico and similar economies show:

46

Table 12: Doing Business Indicators - Trading Across Borders

Source: www,doinnbusiness.org

As can be seen, the cost to import a container i s almost 3.5 times greater in Mexico than in Chile, and twice that in Brazil.

THE ORGANIZATIONAL CHALLENGE

26. Customs has a number o f important challenges to addre~s '~. I t lacks a clear vision and no independent strategy which would help in leading and managing the operation, for example, in risk management, the sharing o f responsibilities with third parties, and the relationship with the private sector. Customs' strategy i s made up o f the aggregate o f proposed un-integrated activities; the strategy as i t stands has not proven sufficient to orient Customs' activities cohesively and it needs to be integrated with the overall SAT strategy. Although many countries have placed Customs under the tax or revenue administration umbrella, Customs has always retained i t s separate identify and functions. Economies o f scale dictate the need to integrate back-office functions such as information technology, human resources, accounting, etc.; however, Custom-specific functions are fundamentally different f rom tax functions: the operation i s carried in real time and directly with (impatient) users; they are carried out in out-of- the-way places; transactions may be worth millions o f dollars; basic information originates in other countries and forgeries are not therefore immediately identifiable - they require a Customs- specific approach. To this effect, the Customs Strategic Plan, and its corollary Plan for Integration within SAT, i s a critical priority. However, the business model under which AGA operates i s function rather than process-based and i s now considered obsolete; a new model is required, and moreover, one which wil l be s t i l l valid in the fast changing Mexican environment.

27. The organizational structure i s fragmented and unduly complex, and insufficiently integrated with complementary front- and back-office functions o f the other General Administrations within SAT, and also with each other. Weak links and information flows limit organizational direction, the relationship between headquarters and the local customs i s unclear,

l5 Strategy for the Reform of Customs Administration, IMF February 27, 2007

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execution o f central policies i s incomplete, and the lack o f adequate internal control makes management based o n results dif f icult to implement.

28. Procedures are unduly complex, repetitive, and overly formal and paper-based. Although backbone technology i s adequate, automation i s partial and fragmented, and application systems dif f icult to maintain and integrate with the main legacy systems in SAT.

29. The control strategy is not formal across the different units, there is no central control unit, and the responsibilities for planning and oversight are unclear. There i s l i t t le application o f r isk management principles, and inadequate information on which to prepare and fine tune r isk management models.

30. The Mexican Customs has developed, starting in mid-2007, a number o f initiatives to substantially improve the management o f risk in the control o f customs operations; this has permitted important increases in verification and control, a priori, concurrent, and a posteriori. The most important initiative, however, i s the development o f a structured system for risk management, to be applied comprehensively to al l areas and procedures; to-date, risk management has been introduced into some operations, and others are being tested. Sustainability o f efforts has been assured by the creation o f the General Administration for Planning and within i t the Central Administration for Tax Intelligence in Trade, responsible for the design and development o f the Customs risk management system.

3 1. The general objective o f the risk management system is to improve the chain o f customs control through a computerized system which permits the identification o f vulnerable events, starting before customs processing and ending with post-operative analyses to guide fiscal audit operations. The system will include mechanisms to validate and provide feedback to the r isk analyses, to permit decision-making with respect to a priori and a posteriori control, and to identify best practices. Initially, the scope o f the system wil l include sea cargo; after its implementation throughout 2009, throughput air and land cargo wil l be addressed.

32. Today risk management i s apbJlied to merchandise transit control and i t has two phases o f operation: a priori and a posteriori , With respect to a priori risk management carried out upon merchandise arrival, a computerized system i s applied to the selection o f clearance operations, using elements o f physical circuit determination. The analysis is carried out over a set o f pediment variables, using business rules updated online, based on probabilities, which permits guiding actions applied to merchandise. This system needs to be strengthened with more information and variables, better predictive models and scenarios, and improved selection rule management, among others.

33. I t should be pointed out that the a pr ior i phase will be enhanced with an information r isk analysis before arrival (manifests or bills o f lading) as wel l as pediments and the corresponding physical circuit. The model being developed (Automated a-Priori Customs System - Sistema Automatizado a Priori Aduanal (SAAPA)), will includes linkages to sources o f data (internal and external), processing o f information using behavioral rules and variables, family ties and social networks, predictive models, and criteria for adding variables at the central and local levels

l6 Customs uses a tool called “Trade Transparency Unit (TTU)” for the exchange o f information on trade operations wi th the United States.

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according to the types o f operations. Likewise, i t will include risk detection warnings, management and cargo balance schemes (keeping elements o f randomness to avoid predictability in control), selection o f r isks prior to unloading (modern non-intrusive methods, binomials or physical inspection), among others.

34. With respect to a posteriori control, Mexican Customs users a risk administration system (SARCE) whose objective i s to assign a r isk rating automatically to importers, using cross- checking o f tax and trade i n f ~ r m a t i o n ’ ~ , in order to become an analysis tools for the various SAT operative areas. The development and implementation o f SARCE wil l permit decreasing discretionality, assign ratings automatically, decrease the selection time for candidates for control, identify various irregularities in a timely manner, have and use indications for verification. In general, i t will mean automating, simplifying and making the programming o f audits more efficient, as wel l as concentrating the information from various institutional systems and databases, permitting substantial savings in resources.

35. AGA aims to address these challenges through the activities described below.

COMPONENT A: INSTITUTIONAL REDESIGN

36. The objective o f this component i s to improve the quality o f customs services through the redefinition, redesign, and implementation o f the operation and management processes; the adaption or reformulation o f the existing regulatory framework; the adaptation or modification o f the organizational architecture; and the development o f functional definitions for the information systems that support the processes.

37. The component wil l be implemented taking into account the best international practices on improving efficiency and effectiveness in customs, strengthening customs administration to obtain a balance between facilitation and control, adopting management by results models, strengthening the accountability and transparency mechanisms. The implementation will use schemes and methodologies to ensure quality control and facilitate continuous improvement.

38. Some aspects o f the component worth noting:

a. It i s based on SAT’S Strategic Institutional Plan and the Customs Modernization Plan

b. I t complies with the Arusha Declaration’* and in particular with: 2007-2012.

i. Commitment and accountability (key factor 1) ii. Simplification o f the Regulatory Framework (key factor 2) iii. Transparency: certainty, predictability, uniformity and consistency in

customs services (key factor 3)

” History o f compliance, compliance with customs and tax obligations, incidents detected in clearance, identification o f agents wi th whom they operate or relate, results o f audits, merchandise and its origin, exchange o f information with U S Customs, false, inexistent or unallocated producers or providers, false or altered documentation or invoices, among others.

Governance and Integrity in Customs. Done at Arusha, Tanzania, on the 7th day o f July 1993 (81sV82nd Council Sessions) and revised in June 2003 (101st/102nd Council Sessions).

The Revised Arusha Declaration - Declaration o f the Customs Co-operation Council concerning Good

49

C.

d.

e. f.

iv. Automation o f Functions (key factor 4) v. Elimination o f obsolete and inefficient practices (key factor 5) vi. Adequate control and inspection mechanisms (key factor 6) vii. Improvement in the relationship with the private sector (key factor 10)

I t covers the operation and management processes, strengthening the organization o f work through a process-oriented vision and management by results. I t will be the basis for the other components o f the project, for other SAT projects, and for the development o f related external trade processes. I t will be developed gradually over 5 years in three stages. In addition to World Bank assistance, expert international technical assistance and expertise on methodological aspects from a consulting firm will be brought to bear. 96 percent o f the cost o f the component i s made up o f the main consulting contract; the remainder consists o f seminars and workshops. The ten subcomponents fol lowing are related to: i. Strategy (19 percent o f the cost o f the component - subcomponents A.1 and

A.2) ii. Processes (48 percent o f the cost o f the component - subcomponents A.3 to A.8) iii. Implementation (33 percent o f the cost o f the component - subcomponents A.9

and A.lO) Almost 40 percent o f the cost o f the component corresponds to activities in the first three years. The cost o f technology development wil l be borne by SAT.

Subcomponent A.1: Definition of the principles, policies and macro-processes This subcomponent seeks to establish, compare, and obtain consensus o n the principles and

policies that wil l guide the customs services, the establishment o f a reference model that identifies the scope o f the customs internal and external environment, and the identification o f the customs macro-processes. It wi l l be held through the implementation o f high-level seminars and workshops with the participation o f external consultants and the different levels o f the higher echelons o f the SAT management hierarchy.

Definition of the principle and policies for the Mexican Customs within the framework of the 2007-2012 Customs Modernization Plan This set o f activities seeks to establish, compare, and obtain consensus o n the principles and policies that wil l guide the customs services, through the implementation o f high- level seminars and workshops with the participation o f external consultants and the different levels o f the higher echelons o f the SAT management hierarchy.

Activities: 1) Consultancy and technical assistance for the proposal o f policies and guiding principles; 2) Implementation o f an International Seminar/Workshop for the exchange o f experiences; 3) Implementation o f internal workshops to gather suggestions on operations and obtain consensus; 4) Definit ion o f the guiding principles which wil l guide customs operations; 5) Agreement o f policies and guiding principles; 6) Communication and sensitization addressed to senior

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management and Government (in coordination with Component D: Change Management); 7 ) Participation o f international consultancy (1 0 percent).

Definition of the Reference Model, Identification of Macro-Processes and Customs Services This set o f activities refers to the methodological definition for the development o f the redesign, the establishment o f a reference model that identifies the scope o f the customs internal and external environment, and the identification o f the customs macro-processes.

Activities: 1) Consultancies to provide methodological support to establish the Reference Model and to identify the macro-processes and customs services; 2) establish the Reference Model; 3) define the macro-processes and customs services; 4) approval by senior management; 5) identify principal areas o f impact and define an action plan for each; 6) carry out feasibility analyses o f processes whose area o f impact i s external to SAT; 7 ) Disseminate in coordination with Component D: Change Management); 8) Participation o f international consultancy (1 0 percent); 9) Seminars and Technical workshops (4 for about 30 people).

Subcomponent A.2: Regulatory Framework Identify the modifications required to norms in the customs environment in light o f best international practices and o f the macro-processes, processes, and procedures identified by this component. This subcomponent wi l l respect al l treaties and international agreements signed by the Mexican Government. This subcomponent wi l l be implemented under the coordination o f the Legal General Administration using internal specialist.

Activities: 1) Identification o f the modifications or proposals o f new norms for the legal and normative framework such that they support the changes proposed by the redesign; 2) Search consensus with the actors in the customs environment (consultancy, 50 events); 3) In coordination with the appropriate authorities, carry out the legal and normative changes; 4) approval by senior management; 5) Disseminate in coordination with Component D: Change Management); 6) Legal support consultancy (1 sr & 10 jrs).

Subcomponent A.3: Redesign key custom processes, procedures and operation manuals and requirements for technological support This subcomponent seeks to develop in detail a comprehensive map o f the customs operation and management processes. At the same time, i t wil l seek to define the sub-processes, activities, tasks, as wel l as the management indicator scheme and control points associated to the same, taking into account the SAT Institutional Architecture Guidelines. Based on these results, prepare the procedures and customs operation manuals and define the organizational architecture which wil l serve as input to the definition o f positions and other elements o f the organization structure to be development by component B: Human Capital. This subcomponent wil l also develop in detail the functional requirements for the redesigned processes, a gap analysis between the existing information systems and those needed to fulfill the new requirements, and

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an identification o f requirements for updating or developing the desired information systems. The team executing this subcomponent will use the results produced by subcomponent A. 1.

Identification and redesign of the custom processes This set of activities seeks to develop in detail a comprehensive map o f the customs operation and management processes. At the same time, i t will seek to define the sub- processes, activities, tasks, as wel l as the management indicator scheme and control points associated to the same, taking into account the SAT Institutional Architecture Guidelines.

Activities: 1) Identification o f the existing processes and sub-processes o f the customs environment; 2) Proposal o f processes, sub-processes, activities, tasks, management indicators and normalized control points; 3) Identification o f gaps between the existing and proposed situations; 4) Mapping o f redesigned processes and sub-processes; 5) Documentation o f the requirements for the development and implementation o f the redesign, including requirements for equipment, infrastructure, operation, etc. 6) Prepare the implementation plan and corresponding terms o f reference (in coordination with the other project components); 7) Participation o f international consultancy (30 percent).

Preparation of Procedure and Operation Manuals and Definition of the Organizational Architecture Based on the results o f the previous sets o f activities, prepare the procedures and customs operation manuals and define the organizational architecture which wil l serve as input to the definition o f positions and other elements o f the organization structure to be development by component B: Human Capital.

Activities: 1) Preparation o f the Procedure Manuals; 2) Preparation o f the Customs Operations Manuals (consultancy - 1 senior 10 juniors); 3) Approval by senior management and dissemination o f the manuals; 4) Preparation o f an Organizational Architecture which contains functions, roles and responsibilities; 5) Participation o f international consultancy (4 percent).

Identification of Needs and Requirements for Technological Support This set o f activities will develop in detail the functional requirements for from the redesigned processes, a gap analysis between the existing information systems and those needed to fulfill the new requirements, and an identification o f requirements for updating or developing the desired information systems.

Activities: 1) Preparation o f functional requirements; 2) Preparation o f feasibility analyses for technological solutions; 3) Gap analysis between the existing information system support and the systems which wil l be required to implement the proposed redesigns; 4) Preparation o f specifications and terms o f reference for the new

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information system requirements; 5) Definit ion o f evaluation and acceptance criteria for the required systems; 6) Participation o f international consultancy (1 6 percent).

Development and adaptation of I n formation Systems Based on the results o f this subcomponent, SAT will, outside the project, proceed to adapt existing application systems and develop new ones as required by the Institutional Redesign, integrating them with existing SAT systems. The activities are expected to include: (a) Preparation and implementation and development o f the strategy and plan; and (b) Acquisition or development o f the systems necessary to support the indicator management scheme; (c) the cleaning and migration o f the existing information. These activities wil l be implemented separately by the General Administration for Information Technology, based on the intermediate results produced by an international consultancy. As such, they are not costed within the project.

Subcomponent A.4: Implementation of the Institutional Redesign, Definition of the Management Indicator Scheme and Continuous Improvement This subcomponent uses the Process Map determined in subcomponents A. 1 , which are used to produce the detailed design through subcomponent A.3, and implements the detailed model so created (ie., puts them into practice). The subcomponent wil l be implemented gradually, staring with pilots and their eventual replication. This activity is tightly related to the implementation o f the other components o f the project and with component D: Change Management. This subcomponent wil l also be responsible for the definition o f the information map necessary for the management o f processes and services; o f the indicators and their correlations such that they permit the evaluation o f impacts and customs administration. This scheme wil l include the definition o f the different levels participating in the identification, development and analysis o f the indicators for decision-making at the strategic, tactical and operational levels. Likewise, the scheme includes the definition o f the functional requirements which wil l be an input for the development or acquisition o f the corresponding information systems. Finally, this subcomponent wil l establish mechanisms to implement Quality Control in User Services and follow-up management indicators, as well as feedback mechanisms for trade stakeholders and users.

Implementation of the Institutional Redesign Beginning with the implementation plan previously developed, detailed work plans wil l be developed where timelines, responsibilities and human and logistical resources assigned, fine-tuning the control mechanisms to monitor the development o f the same. Later, specific action plans wil l be implemented and reports generated on progress and results achieved. This set o f activities wil l be implemented gradually, staring with pilots and their eventual replication. This activity i s tightly related to the implementation o f the other components o f the project and with component D: Change Management.

Activities: 1) Fine-tuning o f the Plan and development o f detailed plans by segment; 2)

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Implementation o f the work plans; 3) Implementation and evaluation o f p i lot exercises in light o f proposed replications; 4) Procurement o f non-ICT equipment and rehabilitation o f offices; 5) Replication o f pilots throughout Customs; 6) Implementation o f a Help Desk (10 pos 16$/hr*6*20); 7 ) Stabilization and evaluation o f the process; 8) Participation o f international consultancy (30 percent);

Defnition of the Management Indicator Scheme This set o f activities will be responsible for the definition o f the information map necessary for the management o f processes and services; o f the indicators and their correlations such that they permit the evaluation o f impacts and customs administration. This scheme will include the definition o f the different levels participating in the identification, development and analysis o f the indicators for decision-making at the strategic, tactical and operational levels. Likewise, the scheme includes the definition o f the functional requirements which wil l be an input for the development or acquisition o f the corresponding information systems.

Activities: 1) Definit ion o f the map o f information and indicators (consultancy including the three subcomponent activities); 2) Preparation the proposal for management o f indicators; 3) Preparation o f the corresponding functional requirements.

Continuous Improvement Establish mechanisms to implement Quality Control in User Services and follow-up management indicators, as wel l as feedback mechanisms for trade stakeholders and users.

Activities: 1) Development o f methodologies and requirements to implement the continuous improvement process; continuous monitoring o f benefits, definition and monitoring o f levels o f service, review and upgrade o f processes, sub-processes, activities, tasks, control points and customs management indicator scheme; 2) Implementation o f the process defined in the previous activity; 3) Participation o f international consultancy (4 percent).

Subcomponent A.5: Risk Management in the control of customs operations

39. The objective o f this subcomponent i s to strengthen, through specialized technical assistance, the development and implementation o f the system o f risk management for customs merchandise and passenger throughput processing. This system has been adopted by S A T as a means o f increasing security in customs processes. The assistance wil l include the participation o f international experts as well as visits by S A T personnel to selected Customs using r isk management systems complying with the best international practices.

Defnition of the Technical Assistance Program This set o f activities has as objective to determine in detail the scope o f technical assistance according the different stages o f modeling, development or implementation o f

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the existing risk systems. Identifying international consultants and determining their availability, as wel l as selecting various customs worldwide which have implemented best practice risk models wil l permit the definition o f the final action plan for technical assistance.

1 2 3 4

5

Activities 1) Determination o f areas or aspects for the specialized technical assistance in risk management o f customs operations in the area o f input/output processing o f merchandise and passengers; 2) Identification o f international experts with proven experience in the development o f risk models whose primary focus has been on the prevention o f i l l ic i t traffic o f drugs, arms, money, pirated merchandise and insalubrious merchandise; 3) Preparation o f the detailed technical assistance action plan.

Subcomponent costs (indicative) Definition of principles and policies $3,866,600 Regulatory Framework $367,000 Redesign of the processes and procedures $2 1,414,400 Implementation of the Institutional Redesign $12,587,600 Risk Management in the Control of Customs $633,600 Operations Total $38,869,200

Technical Assistance by international consultants Visits to SAT by international consultants are contemplated, providing specialized technical assistance o n merchandise input/output risk management systems.

Activities 1) Specialized technical assistance for the development and implementation o f risk management systems for merchandise input, in both a priori and a posteriori phases; 2) Specialized technical assistance for the development and implementation o f r isk management systems for passenger exit.

Visits to Customs Visits to selected customs worldwide by SAT staff working o n this component wil l permit first-hand knowledge o f the fbnctioning and operation o f customs risk management systems in countries selected for best practices.

Activities 1) Visits and internships in customs selected for their best practices in risk management for the input/output o f merchandise and passengers; 2) Evaluation o f visits and internships and recommendations on legal, normative or operative aspects to be considered in the operational systems.

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HUMAN RESOURCES WITHIN SAT

40. In the past years, SAT has addressed the most important issues affecting human resources within SAT, with the exception o f Customs. Although Customs i s one General Administration within SAT, the different nature o f some o f i t s functions and to a certain extent the culture within Customs made i t advisable not to involve Customs in the institutional strengthening o f SAT carried out between 2002 and 2007, partly with Bank assistance (ref. Mexico Tax Administration Institutional Development Project - ME-241 18).

41. this period (but in general not within AGA):

As stated in that project’s I C R (ICR0000900), a number o f issues were addressed during

(a) A Human Resource database was designed and implemented.

(b) A survey o f staff competence, strengths and daily workload was carried out. Psychometric evaluation for al l staff performed.

(c) Staff ski l l requirements were identified - a profile for each staff was defined..

(d) A performance management system was designed and implemented.

(e) A Management Model was elaborated, and a pi lot for management career path, selection and training o f managers carried out (called the “Selection o f the Distinctive Talent Group”).

(0 A training program for al l staff was designed and implemented, including induction, specialized training, training spots, etc.

(g) A staff communication program was developed, and staff i s now kept informed though a web Portal as wel l as through several internal and external publications (e.g., the daily Information Synthesis, the monthly SAT Community Magazine, ad, hoc SAT Notes from the Chief o f SAT, the on-going Radio SAT for internal and external information, television programs through TVSAT, etc.

42. The SAT Human Resource Strategy used to accomplish these results i s summarized in the chart below. Its objective is to “Form an organization with the knowledge, abilities, conducts and values that wil l permit i t to accomplish the Mission and Vision o f SAT”. To this effect, plans and programs were created to:

(h) Increase acknowledgement o f staff efforts

(i) Associate remuneration to staff responsibilities and performance

(i) Increase transparency and accountability and increase evaluation o f performance

(k) Create a work environment to facilitate performance

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(1) Leverage personnel growth and institutional growth through, among others, training.

SAT Human Resources Strategic

43. based on seven pillars, as shown in the drawing below:

To implement i t s Human Resource Strategy, SAT has defined a Human Capital Model,

57

HUMAN RESOURCES WITHIN CUSTOMS

44. regulations:

The human resource legal framework is based o n the fol lowing main laws and

Statute o f Fiscal Career Service in the SAT, Unl ike most o f central government, which operates under the Law o f Professional Career Service for al l Federal Public Administration, SAT has its own C iv i l Career Service, regulated by the Statute o f Fiscal Career Service and i t s Specifics Rules. This Statute establishes the bases for the organization, operation and development o f careers for staff in the SAT. At the moment, the Statute is being reviewed to update i t and to satisfy the needs o f Customs.

L a w o f Tax Administration Service. Published o n December 15, 1995, modified last o n June 12, 2003, which establishes in Chapter Three the Fiscal Service Career Path, aimed at ensuring that SAT has professional, qualified and specialized personnel, with on-going training and development.

45. Recruitment into SAT i s a three stage process, beginning w i th a Selection Process (20 days), Evaluation (3 months), and Contracting, after which comes a 12 month training process. Performance Evaluation uses combination o f 360' evaluation (20 percent of points) o f sk i l ls and attitudes; Impact on the Work Environment (40 percent o f points),

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evaluated by the Unit Head; Evaluation by Objectives (40 percent), which measures the contribution o f each person to the Unit’s objectives.

46. SAT has defined a number o f Critical Positions, which for AGA include Inspectors, Verifiers, Re-inspectors and Lawyers, for a total o f 2,466 employees, or 43.26 percent o f AGA’s staff. They are defined o n the basis o f Organizational and Personal Basic Skills, the desired permanence in position, and the training and development needs.

47. management, and today’s figures show that AGA staff remain on average 6 years.

Permanence in the job is expected to be between 5 and 7 years for a l l staff and

48. Remunerations for AGA personnel are calculated the same way as for the rest o f SAT personnel, without any special bonuses. There i s a basic salary and a guaranteed compensation. Social Laws stipulate contributions f rom the employee and the firm amounting to 21 percent o f the remuneration. In addition, there are a number o f benefits, stipulated by the Secretariat o f Expenditures and the Secretariat o f Public Function. All modifications are done through the Budget Law.

49. Training follows the Integral Training Plan (Plan Integral de Formacion -PIF) prepared annually by the Central Training Administration for al l General Administrations. I t has four main areas: Induction, On-the-job Training, Skill-based Training, and Specialization.

50. With respect to fighting corruption, SAT has carried out an analysis to identify aspects related to types and forms o f corruption, including ways o f corrupting staff in critical posts. In parallel, since 2001 SAT has introduced Conduct Codes at a l l levels o f the General Administration; in 2005 this was consolidated into a single SAT Code o f Conduct and in 2007 it integrated the concept o f Model o f Integrity.

5 1. Associated with vulnerability to corruption i s physical vulnerability. Studies are on-going to identify issues o f personal safety for AGA staff, especially in areas where organized crime has most possibilities to influence actions.

Some aspects of Human Resources in AGA TABLE 13: NUMBER OF CUSTOMS PERSONNEL IN MARCH 2008

Source: ACCH

52. AGA personnel i s concentrated at Headquarters (43 percent), composed o f Young (37.3 years old) staff with about 7.5 years in SAT on average and a bit over one year in their present position. Salaries are o n average similar among the different groups. As o f March 2008, there were 407 vacancies (6.8 percent).

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Not indicated _I

Grand Total

53. and only 10 percent have only Secondary School or less.

50 percent o f a l l staff thus have been to university, 25 percent have a technical specialty,

29 1 ll1 IISs----"---- 206 693 2,291 956 I 796 1,535 5,578

Table 15: Numbers Of Staff In The Customs Hierarchv (March 2008) Level HQ Airports Ports Border Grand

Cross. Total

About 12 percent o f total staff are considered management, and the majority (46.8 percent) o f management un i t s are at headquarters.

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THE HUMAN RESOURCE CHALLENGE

54. HR Administration i s carried out by the SAT General Administration for Innovation and Quality (this i s a recent change). The particular context and requirements o f Customs have not yet been integrated into the general HR function, which presents a serious problem for the operation o f HR, the definition o f positions, recruitment, reassignments and training.

5 5 . HR Policies for Customs are not yet aligned with SAT norms, which were recently modernized. I t i s necessary to extend these recruitment, internal promotion, training and salary policies to Customs. To date, recruitment i s mostly ad hoc, and lack o f a career path and low salary levels, among others, have encouraged high staff turnover.

5 6 . Corruption i s a serious issue, due in part to the lack o f staff motivation and to an ineffective internal control and lack o f adequate sanctions which fai l to dissuade i l l ic i t behavior. To a large extent, the unclear and oflen manual procedures contribute substantially to the possibilities for corruption. The whole i s aggravated by the inadequate use o f r isk management techniques.

57. The salary levels are not, in this case, a critical issue19, although the link between salary, performance and job position requires review, and recruitment does not suffer because o f this. On the other hand, this same salary level presents a problem when ending a contract, as the retirement incentive i s not sufficient.

5 8 . I t is necessary to adapt SAT norms to the particular context o f Customs, which includes a different career path and training. In addition, a transition HR Strategy wil l be required to upgrade and modify the skills o f the existing personnel to comply with the requirements o f the new customs model defined by the new structure and procedures.

5 9 . The HR Strategy should consider the special context o f Customs:

Work Schedules: although an 8 hour day is defined for inspectors and re-inspectors, 12 hour days are not uncommon. Better workload planning as wel l as compensatory elements for extended hours, night work and weekends must be introduced

Rotation and Reassignments. A systematic rotation and reassignment procedure, independent o f individual Customs areas and aimed at preventing corruption must be introduced. The procedure should take into account Physical Safety, Performance Indicators, Perception, Types o f Service, Service Demand Level, Special Services required, and Level o f Risk.

Benefits. The Benefit Policy needs to be revised, in particular for reassignments between geographic areas.

A more detailed diagnosis can be found in the IMF February 2007 document (see archives).

l9 In 2007, the average annual salary was US$8,426, which i s considered competitive

61

COMPONENT B: HUMAN CAPITAL

60. The general objective o f this component i s to increase the professionalization and capacities o f Customs management and staff to better accomplish the mission o f Customs. In this it complies with the 1993 Arusha Declaration*’, and in particular with:

(a) Code o f Conduct (key factor 7)

(b) Management o f Human Resources (key factor 8)

(c) Morale and Organizational Culture (key factor 9)

61. The specific objectives o f this component are to introduce an incentive system based on results, to establish a Fiscal Career Service Scheme which wil l guide the career path o f staff and management, to train staff,to fulfill the requirements o f the new processes to be introduced, and to establish a permanent training scheme to ensure that Customs can always depend o n fully skilled staff for every j o b position. The activities in this component fol low the SAT-defined “Human Capital Model” (see project files) to Customs. The full description o f actions for this component can be found in the “Human Capital Action Program” developed by SAT (Project Files).

62. The component relies o n a number o f existing elements:

Sufficient information for customs personnel The Model for Recruitment and Selection o f Personnel The SAT Culture Model The results o f Organizational Alignment project The results o f the Position Redesign project The results o f the Risk and Security project The Performance Evaluation Model The Model for Training for Critical Positions The existing “Separation Process Guidelines” The “Integrity Model”

Subcomponent B.l: Planning and Organization Activities aimed at developing a human resource planning methodology, based on productivity parameters (e.g., workload, profiles, development plans) to permit an efficient response to demand and changes in the customs environment, including those caused by the introduction of new processes in Customs.

Activities in support o f understanding the changes caused by the Redesign 1) Preparation o f the catalog o f processes

2o The Revised Arusha Declaration - Declaration o f the Customs Co-operation Council concerning Good Governance and Integrity in Customs. Done at Arusha, Tanzania, on the 7th day o f July 1993 (81st/82nd Council Sessions) and revised in June 2003 (101st/102nd Council Sessions).

62

Activities in support of sizing of staff 2) Identify measure units for processes; 3) Identifying volumes with respect to the measure units identified; 4) Updating the catalog o f functions; 5) Develop Function surveys to identify Full Time Equivalents (FTEs); 6) Identification o f FTEs by function; 7) Results analysis; 8) Identification and alignment o f FTEs for processes and functions; 9) Updating o f the Productivity Analysis; 10) Apply the survey o f control steps; 11) Redesign o f structures o f representative customs types as well as in the central levels; 12) Distribution o f FTEs for Customs.

Activities in support of Presenting the Structure 13) Presentation o f Results and Structures

Activities in support of updating Profiles and Technical Competencies 14) Updating Technical Competencies; 15) Updating the catalog, profiles, and position descriptions.

Subcomponent B.2: Staffing Activities to identify staff to induct or promote within Customs, through a diagnostic and identification o f parameters for management decision-making in the selection o f candidates.

Activities 1) Gap diagnostic for staff competencies; 2) Modernization o f the Customs selection and recruitment process; 3) Upgrading o f the hiring process (adding hiring guidelines for Customs’ needs).

Subcomponent B. 3: Training Definit ion o f training strategies to bring up staff knowledge and skills to the levels required by their positions, including the new positions being defined. Definit ion o f the SAT Comprehensive Training Plan, including Induction, Development and Specialization Training, to permit a continuous knowledge process through formal and computer-aided training.

Activities in support of the Project work teams 1) Workshops to strengthen the SAT project team.

Activities in support of preparing and implementing the Transition Strategy and Plan 2) Application o f the diagnostic o f training needs; 3) Preparing the training plan (contents and time); 4) Identification o f internal and external providers; 5) Organization o f implementation resources; 6) Program implementation; 7) Training evaluation; 8) Evaluation o f the program during and at i t s conclusion.

Activities in support of the Permanent Training Plan 9) Identification o f specific Customs requirements; 10) Preparation o f the Customs Training Plan; 1 1) Identification o f internal and external providers; 12) Development o f educational materials and activities; 13) Organization o f implementation resources; 14) Program implementation; 15) Training evaluation; 16) Evaluation o f the program during

63

and at its conclusion; 17) Evaluation o f the impact o n performance o f the Induction Program.

Activities in support of creating the Customs School 18) Development o f the School, including arrangements with academic institutions

Activities in support of the improvement of the organizational climate. 19) Diagnostic o f specific customs to be addressed; 20) Preparation and implementation o f the action plan; 2 1) Monitoring and evaluation o f the plan.

Subcomponent B.4: Talent Development Activities to support the development o f personnel to increase efficiency and retain personnel, through the development o f the Fiscal Service Career Scheme as wel l as Career Planning for staff and Succession Planning for critical positions. These include the identification o f matches between personnel and the skills required for positions

Activities in support of the Fiscal Career Service Scheme (FCSS) 1) Definit ion o f the FCSS for Customs; 2) Upgrading o f the SFCS normative framework; 3) Update inputs for the technical knowledge evaluation process; 4) Identification o f eligible personnel; 5) Writ ten evaluation; 6) Oral Evaluation; 7) Presentation o f Results; 8) Award o f Certificates and Assignments; 9) Define and implement the monetary and non-monetary benefit scheme; 10) Review o f the criteria for the Customs School to adapt i t into the FCSS normative framework;

Activities in support o f the Definition of Career Paths 11) Verify inputs for the design o f Career Paths (CPs); 12) Design CPs including mobil i ty options; 13) Disseminate CPs; 14) Register, control and monitor CPs.

Activities in support o f implementation of the Career Paths 15) Agree a career path with individual stafe 16) Reach timed career path agreements; 17) Monitor agreements and objectives.

Activities in support o f the Succession Plans 18) Create successions including the selection o f key positions; 19) Management succession planning.

Activities in support o f the Incentive Plan 20) Define and implement the monetary and non-monetary incentive scheme

Subcomponent B. 5: Performance Evaluation Activities to evaluate the performance and contribution o f staff to the Customs institutional objectives, using work environment, performance indicator, and 360" evaluations.

Activities 1) Linking performance indicators to specific Customs positions; 2) Evaluation o f Customs personnel; 3) Consequence analysis o f the Consequence system with EIDD.

64

Subcomponent B.6: Separation Activities leading to simplifying the normative framework and the procedures o f the separation process for personnel as part o f the normal staff l i fe cycle.

Activities 1) Legal analysis for separation for corruption; 2) Application o f separation tools to Customs; 3) Preparation o f timeline for possible separation cases

Subcomponent B.7: Culture Activities aimed at strengthening staff ethical behavior by emphasizing values and integrity, following the SAT “Conduct Code” (see project files); at strengthening leadership within management, the institutional esprit-de-corps, and a results-oriented and service-oriented SAT culture.

Activities 1) Gap closing plan, based on a diagnosis o f the existing culture; 2) Acknowledgments

to distinctive behavior following the existing SAT methodology; 3) Leadership and teamwork workshops.

1 1 Total 10,213,483 I

CHANGE MANAGEMENT

63. Functional, cultural, operational, and organizational changes can result in strong resistance by the personnel o f an institution. This resistance i s due in large measure to ignorance o f or lack o f acceptance o f the impacts and real benefits to be realized through the project. This i s phenomenon is widely recognized, and has commonly resulted in project delays and cost increases, and in extreme cases has resulted in the complete abandoning o f the project.

64. Contrary to this scenario, what i s sought i s the active participation o f a l l personnel in carrying out a change which wil l so closely affect them. For this, it is necessary that senior management and the project leaders embark in a specific and focused effort directed to dispelling doubt and eliminating uncertainty through specific programs o f sensitization and communication.

65

COMPONENT C: CHANGE MANAGEMENT

65. The objectives o f this component are to (a) communicate the changes in AGA’s processes undertaken through the Project to internal and external stakeholders, and (b) ensure the understanding o f these changes, and the involvement and engagement with the Project o f said stakeholders. The component focuses on the changes produced by the first two components (the others are deemed not to have a sufficiently large effect as to cause resistance to change).

66. To implement the Change Management component, teams o f SAT personnel wil l be formed, strengthened with consultants where appropriate. The personnel selected to direct and form part o f the teams has proven expertise in the field, having for the past five years been in charge, using best international practices, o f the operational and cultural transformation already carried out within SAT in the areas dealing with tax administration.

This component will finance technical assistance and training, for activities including diagnostics, preventive efforts and assistance activities, implementing communication and sensitization plans and programs through workshops, events, publications (including electronic media), and other tools and methods commonly used for these endeavors.

Activities Support to the Project prior to initiation of project activities 1) Central and local diagnostic; 2) Resistance to Change Study; 3) Sensitization (focal groups, interviews and personnel testimonials - 3 people in 5 customs); 4) Sponsorship within the Governance Model; 5) Motivation and Recognizance Plans (Acquisitions o f promotional material)

Support to the Project: Start-up of activities 6) Formal Startup and communication o f the loan signature; 7 ) Information meeting with the project leaders.

Support to Subcomponent A.l 8) Final validation o f the identity and project image by senior management and project leaders.

Support to Subcomponent A.2 9) Change Leader Strategy and identification o f same (Workshop)

Support to Subcomponent A.4 (prior to startup and startup) 10) Off icial project startup in event in Cuernavaca; 11) First printed communication to al l personnel in Customs.

Support to Subcomponents A.4, AS, A.6 12) Celebration o f first milestone; 13) Change Files: documentation o f services and processes; 14) Teamwork integration workshops (6 two-day workshops per year- assuming redesign implementation in three distinct waves).

66

Support to Subcomponent A.9 15) Massive Media Communication Strategy: identification o f audiences, key messages, definition o f media, sponsor roles, printed material; 16) Communication to Customs personnel; 17) Communication to external customs environment agents and authorized representatives; 18) End-user sensitization strategy (local and central units): design, travel expenses; 19) Implementation o f technical and process practice training (change workshops); 20) Implementation o f technical and process practice training for external customs environment agents and authorized representatives; 2 1) Customs General Administrator message (using SAT Avisa, the internal newsletter and a first videoconference); 22) Customs General Administrator message (using SAT Avisa and a second videoconference); 23) Customs General Administrator message (using SAT Avisa and a third videoconference); 24) Customs General Administrator message (using SAT Avisa and a fourth videoconference); 25) Communication o f history o f successes and challenges; 26) Permanent update o f webpage.

Support to the Human Capital Component 27) Information dissemination on structures, positions and technical competencies; 28) Information dissemination o f the incentive scheme associated to performance indicators; 29) Information dissemination o f the identification o f gaps in technical competencies (evaluation and consequences); 29) Communication and sensitization for the Career Path Planning; 30) Promotion o f a culture o f objective evaluation based on real indicators that contribute to make performance more efficient and strengthen the orientation towards goals and results.

PROJECT GOVERNANCE

67. Institutionally SAT is well placed to carry out a customs reform, having last year finished a tax administration reform process during which it acquired extensive experience in project management, change management, and project administration using Bank guidelines (see Annex 6 for a more detailed description o f implementation arrangements).

68. AGA @.e., Customs) has a number o f challenges ahead o f it. L i ke the previous tax administration project, this project brings together several General Administrations; unlike it, the project leader is one o f the General Administrators, for the purposes o f the project primus inter pares, and careful coordination and mediation i s required. T o this effect, a Governance Model has been prepared by AGA; i t s highlights are described in Annex 6. Implementation o f the Model i s a condition o f Board Presentation.

COMPONENT D: PROJECT MANAGEMENT AND ADMINISTRATION

69. This component aims to ensure an effective coordination o f the efforts to define, develop and implement the project, to accomplish its stated objectives on time and within budget. The component supports the SAT-defined Governance Model, which defines the management and administration structure o f the project.

67

This component wil l support the management o f the project and project-related coordination bodies. The component will ensure that adequate technical support is provided to project management during al l stages o f project implementation. This subcomponent will include project management, and specialized technical assistance as needed, and in particular, to ensure quality o f deliverables, the services o f an Independent Validation and Verification firm. The subcomponent wil l be complemented through the Component D: Change Management.

Activities

1) General Coordinator, an expert in project management for large projects; 2) an Independent Verification and Validation consultancy; 3) miscellaneous strengthening o f the Project Management Office.

Project Administration wil l be carried out by SAT and i s described in Annex 6: Project Implementation Arrangements.

68

Annex 5: Project Costs MEXICO: Customs Institutional Strengthening Project

A. 1 D e h i h n o f p r i n e i p l e s andprinciples DslinidonufiheprinriplPsandpolieies forthe MenicanCustonwwifhin the fiammwkofthe 2007-2012 Custonls ModernizationPlan. A.l . 1

A.1. 2

A.1. 3

A.1. 4

A.1. 5 A.1. 6

A . I . 1

Consul tancy and technical assistance fo r t h e proposa l o fpo l i c i es and guiding principles; Implementat ion o f an InternationalSeminarNorkshop f o r t h e exchange o f experiences Implementat ion o f internal workshops t o gather suggestions o n operations and ob ta in consensus; De f in i t i on o f t h e guiding principles w h i c h wil l guide customs operations (editing printing and distn’bution ofmaterials) Agreement o fpo l i c i es and p i d i n g p r i n c i p l e e Communicat ion and sensitization addressed t o senior management andGovemment (in coordinat ion w i thComponen t D: Change Management) Part ic ipat ion of internat ional consul tancy (9.62%)

A. 2 Regulaely Frvncwork A.2. 1

A.2. 2

A.2. 3

A.2. 4 A.2. 5

A.2. 6

Ident i f icat ion of the modif icabons or proposals o f new norms f o r the legal and normat ive h u n e w o r k s u c h that they support t h e changes p roposed b y t h e redesign Search consensus wi th the actors i n t h e customs environment (consultancy, 50 events) T rave l expenses In coord ina t i onw i th the appropriate authorities, c a n y ou t the legel andnormat ive changes A p p r o v a l by senior management Disseminate in coordinationwithComponent D : Change Management) Lega l support consul tancy(1 sr& 10 jrs)

A. 3 Redesign o f the prncesses andpmcsduras Dsfjnition oflJie RpPrmce &del, Identification o f h r o - P r o c e s s e s and Customs Services A.3. 1

A.3. 2 A.3. 3 A.3. 4 A.3. J

A.3. 6

A.3. 7

A.3. 8 A.3. 9

Consultancies t o p rov ide methodological s u p p o r t t o establish t h e Reference M o d e l a n d t o i den t i f y the macro-processes and customs sewices Establ ishthe Reference M o d e l Define t h e macro-processes and customs services Review and approval by senior management Identr fypi incipd areas o f impac t and define an act ion plan for each Canyoutfeasibilityanalyses ofprocesses whose a reao f impac t i s e x t e r n a l t o SAT Disseminate in coordinationwithComponent D : Change Management) Part ic ipat ion o f internat ional consul tancy (9.62%) Seminars andTechn ica l workshops (4 fo r about 30 people).

A.3. 10

A.3. 11

A.3. 12

A.3. 13 A.3. 14

A.3. I S A.3. 16

A.3. 17

Identification of the erdstingprocesses and subprocesses o f t h e customs environment Proposal o f processes, subprocesses, activities, tasks, management indicators and normalized con t ro l po in ts Ident i f icat ion o f gaps between t h e t i s t i n g andproposed situations M a p p i n g o f redes igned processes and subprocesses Documentat ion o f t h e requirements fo r t h e development and implementation o f t h e redes igh i nc lud ing requirements for equipment, int?asttucture, operat ion etc. Viaticos, Tderes y Logist ica Mqpingofredesignedprocesses andsubprocessesPreparethe implementation plan and corresponding terms ofreference (in coordinat ion with t h e other project components) Patt ic ipat ion o f i n t e m a t i o n d consul tancy (28.86%)

50,000 50,OOU

57,000 57,000

229,600 229,600

30,000 30,000

3+500,000 1,050,000 2,450,000

100,000

15,000

252,000

3+500,000 30,400

240,000

l o ~ o o p o o

20,000 50,000 30,000

7,sw 7,500

72,000 72,000 108,000

1,750,000 1,7S0.000 15,200 15.200

120,000 120,000

5.250,oOO 5,250,000

69

Pmpntinn dPmcedxm ann Opratinn khmm~s and nofiinitinn o f t l w A.3. 18 Preparation ofthe Procedure Manuals A.3. 19 Preparation ofthe Customs Operations Manuals (consultancy - 1

SI 10 jm) A.3. 20 Approvalby senior management and dirssdnation ofthe mMUdS A.3. 21 Prepuation of anOrgwstiond Architecture vhich contains

Rmctions. roles andresponsibilitias A 3. 22 Pmticipataon of international consultancyp.85%)

Ileniiiimliun u f Needs ;uul Rcq-rmmts fur Trehnebpirnl Suppurl A.3. 23 Preparation offunctional requuements A.3. 24 Prsparataon offenuibhty analyses for technological rolutaonr A.3. 25 Qap analysis between the ensting informatron system support and

t h e systims~chlpiuberequiredto implementthe proposed redesigns Preparation of specfications and terms ofreference forthe new information system requuements Def i t ionof evaluation and accaptdnce critenaforthe requued systems. Pdcipation of international consultancy(l5.3896).

A.3. 26

A.3. 17

A.3. 1 8

A. 4 Lqbmnt . t ionof the InstltutiodRsdesign A.4. 1

A.4. 2 A.4. 3

A 4. 4 A.4. 5 A 4. 6 A.4. 7 A.4. 8 Pdcipation ofinternational consultancy(28.86%)

D~hnitiinn d t h o Man-cment Indiratai S c h e m A.4. 9

A.4. 10 A.4. 11

ContinmMUs Imp,wv~mcnt

Fine-turdng of t h e Plan and development of detailed plans by repent Implementation of t h e work plans lmplcmentation and evaluation of pilot exercises mlight of proposed rspkcataons Procurement ofnon-ICT equipment andrehabbrlitation of owlces Rspkcataon ofpilots Uvoughout Customs Implementation of aHelp Desk(1O pos 16$hr*6"29 Stabiliratton and evaluataon ofthe process

Dofi t ion of t h e map of information and indicators (consultancy including t h e !bee subcomponent activities) Prepuationthe proposal for management ofindicators Preparation of t h e consspondingfmctional requirements

A 4. 12 Development ofmethodologes andrequuements to implement t h e continuous improvement process: continuous monitoring of benefits, defvlllion and monitoring of levels of SIMC~. renew and upgrade ofprocesser. subprocesses, activities. tasks. control points and customs management indicator scheme lmplemsntarion o f t h e process dsfmsdinthepravious activity A.4. 13

A.4. 14 Pmticipation ofintsrnatiDnalconsultancyp.SS%)

A. 5 Risk M-amgcmnt in Ikc Control o f C w b m o Opentiom Dttinition o f OU TechniEd .4ssistulcc Program to s b n g i l u n r w m m A.5. I Detcrmjnstion of areas or aspects forthe spccialiredtechnical

assstance inriskmanagement of customs operations mthe u e a o f inpuUoutputprocessing of merchandise and passengers Identification ofinternational experts withproven experience in t h e development ofriskmodels whose pmuyfocus has been onthe prevention o f rlLcd traffic of dnrgr, -8, money, plratsd merchandise and unralubnour merchan&re Preparation ofthe detdedtechucal assistance actaonplan

A.S. 2

A.5. 3

'L%ehnird Assiskncr thtnqh inhrnitionnl e y r r t s A.5. 4 Spscialredtecluucal assistance fortha development and

implementstaon of nsk management systems for merchandrse inpuh m both apnon and apostenonphaiis

Tickats Living expenses Specialiredtechnical assistance forthe development and implementation ofnsk management systems for passenger exit Visits by international expsrts Tickets Living expenses

A.5. 5 Visits bymternational experts

A.5 6

Twits or in i rmhipshy SAT~sra€fto Cwloms withbesi internatiolul A.5. 7 Visits andintcrnslvps y1 customs seloctedforthevbestplacticcs

mriskmanagsment f o r t e inpuUoutput ofmerchandise and p ass engers Tickets Ocsania(Aurt.alia) Livmg expensesOceatuaQ0 dias) Tickets Asia(Japon Singapore) Lnng expenses Aaa(18 dias) Tickets Europe L i m g expenscs(l0 dias) Tickets USA/CanadarSp&dEn@Md Living expenses ( I O dias) Tickets Southammica (?em) Living expensas ( I O dias) Evaluation ofvisits andinternrhipr andrccmcndationr on leg& normatave or operative aspects to be considered in t h e operational systems

A.5. 8

144,000

1400,000

5MOP00

537600

I O f O O p W

1sop00

1,400POO

120,000 M1.000 3 4 ~ 0 0 17.000 20800 10,400

120 PW 34000 20800

20800 10,400 48,000 24.000 42,000 14ooO 75600 as.aw 14,400 7.200 218,000 14,000 11 200 5.600 26POO 13.000 9200 9.m 8800 8.800

60,000 17.m 10.4DO

60,000 17,000 10.40

36,wO 72.000

1.4)0.000

5

115,MD 230,400

5.250.000 5

75.000

1

60.000 17.000 10.400

10,400 24,000 14,000 14000 25.200 15,200 7,200

14000 5,600

13,000

B. 1 Plvvring and Oqvrization Acti*'ities ia szippori qfnndarstanding. ika ckan,gw ruawwd by the li;rd+n

B. I . 1 Preparationofthe catalogofprocesses Activities in ~ ~ p p o t l of of&@

B.I . 2 Identifymeasureunits forprocesses B.I . 3 Identrfyrngvolumes with respect to t h e measure units

identified B.I . 4 Updatingthe catalog offunctions B.1, 5 Develop Function sweys t o idenWy FullTime

Equivalents (FTEs) B.1. 6 Identification ofFTEs byfunction B.I . 7 Results analysis B.I . 8 Identification and Sgnment ofFTEs for processes and

h c t i o n s B.I . 9 Updating o f t h e Productivity Analysis B.I . 10 Apply t h e swey o f control steps B.I. I 1 Redesign o f stnactures ofrepresentative customs types

as well as in t h e central levels B. I . 12 Distribution o f FTEs for Customs

Activitiw in ~ ~ p p o r t qf&lsentiqq tke Bnictsve B.1. 13 Presentation ofResults andStnactures

Activities in ~ p o t l qfpelatin,g Prsflles and Teclinical B.1. 14 Updating Technical Competencies B.1. 15 Updatingthe catalog profiles. andposition descriptions

B.2 Sta€ihg B.2. I

B.2. 2

Gap diagnostic for s ta f f competencies Travel expenses Modernization ofthe Customs select ion andrecfilitment process Procurement ofmeasures for t h e better identifcation o f candidates Qudiitcation o f MMPI (urgent phase) Upgrading of the hiring process (adding hiring guidelines for Customs' needs)

8.2. 3

B.3 Training Actdvitdzs ia sqpnrt qf &e h j e & wwk earn Workshops t o strengthenthe SAT project tern pTf7pam nrad imp&m?ni fhe Ttwn.s&i~?t Str&?gy lrnrl Plun Application o f t h e diagnostic oftrainingneeds a) Forthe new Customs processes b) diagnostic c) Organization ofEvaluations (Specidked and common knowledge) d) reading cel ls e) Identifation of training gaps

B.3. 3 Prepkngthe trainingplan(contents andtime) B.3. 4 Identification ofinternal and external providers B.3. 5 Organization ofimplementationresources B.3. 6 Programimplementation B.3. 7 Training evaluation

B.3. I

B.3. 2

Definition ofpersonnel to pbtticipate in the

Local application of the diagnostic, reproduction o f

12,000

15,000 8,750

8,750

15,000

l5pOO 8,750 l5pOO

l5POO

15,000

15,000 80,600

39,216 156863

112poo

34,708

13,333

9,708

138834

16,668

12,000

12,000 7,000

7,000

7,000 12,000

12,000 7,000

12,000

12,000

12,000

12,000 62,000

3,OC 1,7:

1,7:

1.7: 3,OC

3,OC 1.7: 3.0C

3,OC

3,OC

3,OO I8.Q

39,216 156863

112,000

34.708

13,333

9,708

69,417 69,417

8,334 8,334 B.3. 8 Evaluation o f t h e program dwhg and at i t s conclusion

71

Acti~&s in srrppors of .?he P e m f u Training P h Identification o f specific Customs requirements a) Program (critical positions) b) Requestf iomthe PersonnelStafbg Area: profile andnumber o f staff for InductionTraining

B.3. 10 Preparation of the Customs Training Plan a) Core Positions b) Function Development e) CriticalPositions

B.3. 11 Identification of internal and external providers 8.3. 12 Development o f educational materials and activities B.3. 13 Orgbnization ofimplementation resources 8.3. 14 Programimplementation 8.3. 15 Training evaluation 8.3. 16 Evaluation of the program during and at i ts conclusion B.3. 17 Evaluation of the impact onperfonnmce o f the Induction

Program

SckooI B.3. 18 Development of the School, including mrangements with

academic institutions

B.3. 9 D e f i t i o n ofpersonnel t o participate i n t h e T r h g

Activ&s in suppoFtof cmatkg t b cmfm?zs

Actit&?s in supporf. of the i?npm*urmend of the o f p m i r d o ~ c ~

B.3. 21 Diagnostic o f specific customs to be addressed B.3. 22 Preparation andimplementation of action plan B.3. 23 Moni tor ing and evaluation of the plan

E. 4 Talent Development Activ&s in sqporr of #te EiscaI Cmer S e n h S c k m (ECXY] Defrniton of the FCSS for Customs Upgrading o f t h e SFCS nonnative framework Update inputs for the technical knowledge evaluation pro c e s s Identification o f eligible personnel

Upgrade o f computer too l Acqui r i t ion o f computer equipment for evaluation Preparation o f appropriate environments

B.4. 1 B.4. 2 B.4. 3

B.4. 4 B.4. 5 Written evaluation

B.4. 6 OralEvaluation B.4. 7 Presentation ofResults 8.4. 8 Award ofCettificates andAssignments B.4. 9 Define and implement t h e monetsty and non-monetary

beneKt scheme 8.4. 10 Review o f t h e criteria for t h e Customs School t o adapt it

in to t h e FCSS nonnative framework Actii*&s kr sqporr: of t h &f&n qf Career P&

B.4. 11 Ver i fy inputs for the design ofCareerPaths(CP5) B.4. 12 DesignCPs includingmobil i ty options B.4. 13 Disseminate CPs B.4. 14 Register, control andmonitorCPs

Activ&s kr srrppoFt of h & i w i e m n of cmer Pfl&s

Develop a web-based too l t o @aide career pa th selection for staff(consultancy). Training in t h e operation of the tool, materials and manuals.

B.4. 16 R e a c h b e d career pa th agreement$ 8.4. 17 Moni tor agreements and objectives

Activities in support of tiae Succsssion Phis 8.4. 18 Create successions including t h e selection o f key

positions

B.4. 15 Agree acareerpathwithindividudstaff

9 .667 250,000

2,916,668

656350

16,668

350,000

192,000 48,000

22600

300.000

3,250,000

150,000 498,600

96,667

5,556

350,000

22,500

100,000

3 2 5,O 0 0

15,000 99,720

160,000 80,000

150,000

50,000

30,000

10,000

125,000

1,458,334

5,556

48,000 12,000

100,000

6 5 0,O 0 0

30,000 398,880

120,000

40,000

125.000

1,458,334

328,125

5,SS6

48.000 12,000

100,000

650,000

30,000

328,125

4,000 12,000

650,000

30,000

80,000

48,oo 12.00

975,OO

45,OO

B.4. 19 Management successionplanning

72

B. 5 Perfbrmance Edtdon Lnldngpetfomnnce indicators t o specitic Customs positions

Consequence analysis of the Consequence systemwith EIDD.

B.5. I

B.5. 2 Evaluation ofCustoms personnel B.5. 3

B.6 Sepatation B.6. 1 B.6. 2 B.6. 3

Legal aalysis for separation for conuption Application o f separation tools t o Customs Preparation oft imel ine for possible separbtion cases

45000

100,000 100,000

33.750 11,250

B.7 Culture B.7. I

B.7. 2 Acknowledgments t o distinctive behavior following t h e 7,200

Gap closing plan, based on a diagnosis o f t h e existing c u l t u r e

existing SAT methodology B.7. 3 Leadership and teamwork workshops 200poo 100,000 100,000 Base Costs 10,213,483 1638806 3,144,247 3,044,455 1,259275 1,126,600

5,760 1,440

73

C. 1 Change Management Support to tho h j o c t p d o r to initiation of pmjrct activities

C.I. I Central andlocddiagnostic C.I. 2 Resistance to Change Study C.1. 3 Sensitization(focal groups, interviews andpersomeltestimonials - ' C.1. 4 Sponsorship withinthe G o v ~ m ~ ~ e M o d e l

,

C.1. 5 Motivation andRecognkMce Plans (ACq~kltiOn6 ofpromotional ' C.1. 6 C.1. 7 Infomationmsetink,withthe projectleaders

C.I. 8

Support to the Project: stortap of activitim FomalStartup and communicationofthe loansignature

Support to SlrbcomponentA.f Finalvalidation ofthe identity and project hags by senior manap;ement andproject leaders Support to JkBcomponent A.2

C.1. 9 Change Leader Strategy andidentification of same (Workshop) ' Support to Subcomponent A.4 erior to starhvp and Startnp)

C.1. 10 Officialproject startup in eventinCuemavaca C.I. 11 Firstprintedcommunicationto allpersomelinCustoms.

Support to JkBcomponrskA.4, A.5, A.6 C.1, 12 Celebration of f i s t milestone C.I. 13 Change Files: documentationof services andprocesses C.1. 14 Temworkintegfation workshops

6 two-day workshops per year- assuming redesign implementation ' i n t h r e e distinct waves Support to Slrbcomponent A.9

C.1. I S Massive MediaComunicationStrategy: identification of audiences, keymessages, definition ofmediq sponsorroler, printed material

C.1. 16 Communication to Customs personnel C.1, 17 Communication to external customs environment agents and

authorized representatives C.1, 18 hd-user sensitization strategy(l0cal and centralunits)): design

travel expenses C.1. 19 Implementationoftechnicalandprocess practice training(change

workshops) C.I. 20 Implementation o f t e c h n i c a l andprocess practice training for

external customs environment agents and authoized representatives

C.1. 21 Customs General Administrator message (usingSAT Avisq t h e internalnewsletter and a f i s t videoconference)

second videoconference) C.1. 23 Customs General Administrator message (usingSAT Avisa and a

thLd videoconference) C.l. 24 Customs General Administrator message (usingSAT Avisa and a

fowth videoconference) C.1. 25 Communication o f h i s t o y o f successes and challenges C.1. 26 Permanent update ofwebpage

C.1. 27 Information dissemination on stnrctures, positions and technical competencies

C.1. 28 Information dissemination of t h e incentive scheme associated to petformance indicators

C.I. 29 Information dissemination of t h e identification o f gaps in technical competencies (evaluation and consequences)

C.1. 30 Communication and sensitizationfortheCareerPathPlanning C.1. 31 Promotion o f a cultwe of objective evaluation based onreal

indicators that contribute to make performance more efficient and ctrenghen t h e orientation towards goals and results

r r

r

C.1. 22 Customs General Administrator message (UsingSAT Avisa and a

Suppoll to the Humpn Cspital Conrponent

1300 5,000

380pOO

4,000

100,000 10,000

20,000

192,000

24pOO

800,000

892,000

4SPOO

5,000

1,500 5,000

10,000 70,000

4,000

100,000 10,000

M.OOO

6,000

200,000

223,000

12.000

100.000 100,000

48.m 48,000

6,000 6,000

200,000 200,000

223,000 223.000

12,ow 12,000

100,001

48,OOl

6,001

200,001

223.001

12.00

Base Costs 2,481,SOO 130600 579,000 594,000 589,000 589,000

74

75

Annex 6: Implementation Arrangements MEXICO: Customs Institutional Strengthening Project

1. The proposed Project wil l be implemented by the Customs General Administration within SAT, with the participation o f other units from SAT, such as the Planning General Administration and the Resources and Services General Administration. A Governance Model (see document in Project Files) has been developed by SAT; its implementation i s a condition o f Board Presentation for the Project.

I i

76

2. The Chief o f SAT chairs the Directive Committee, composed o f the General Administrators, o f whom the head o f customs is one. This Committee meets monthly or in extraordinary sessions. I t looks after the general project strategy and overall project progress monitoring.

3. The Executive Committee i s chaired by the Customs General Administrator and composed o f representatives o f the various General Administrations directly supporting the project as wel l as a Project Director. I ts secretariat function is carried out by the Project Management Office (PMO). I t establishes the Project Implementation Plan, directs al l project activities, and monitors detailed progress.

4. The Project Director i s proposed by the Executive Committee and appointed by the Chief o f SAT. The Project Director wil l be responsible for the day-to-day management o f the project. The Project Director’s primary responsibility wil l be the timely execution o f the Project Implementation Plan, through the Component Directors. Project performance indicators will be monitored to track progress in project execution. The Project Director will be supported by a small supporting staff and:

(a) A Project Management Office

(b) An Independent Verification and Validation consultancy

(c) Technical Assistance and Support as required in the areas o f Legal, Information Technology, and various Customs Business areas.

(d) A Project Administration Unit within the General Administration o f Resources and Services;

5. The Component Directors, known as the “Responsables” or the person ultimately accountable for each component, i s proposed by the General Administrator o f the area involved, and confirmed by the Executive Committee. The Component Director may directly coordinate al l activities for the component, or appoint a Coordinator. The Coordinator i s supported by staff from the Project Management Unit.

6. The Director or Coordinator if required wil l be responsible for the day-to-day management o f their component, ensuring that implementation is closely linked with the other components. This i s particularly critical as each component depends o n intermediate results from the other components throughout the l i fe o f the project. Appointment o f the Component Directors and Coordinators i s a condition o f Board Presentation o f this Project.

7. The Project Management Unit is composed o f SAT personnel with experience in administration, monitoring and control o f projects, budgeting, contracts, and others as appropriate. Among i t s duties i s the administration o f work plans, the maintenance o f the project’s technical archive, and the preparation o f periodic progress reports.

8. quality control o f work plans, implementation, progress and deliverables.

Independent Validation and Verification i s carried out by a consulting firm to provide

77

9. Support and Technical Assistance are experts in the disciplines o f Law, Information Technology and Customs Business areas, called ad hoc to provide services and support to the Project Director in matters affecting the whole project or to provide advice in specific technical areas.

10. Project Administration wil l be the responsibility o f the Resource and Services General Administration (AGRS). The Project Administration Unit wil l channel a l l formal communication and documentation from and to the Project to the Bank and NAFIN. The AGRS be the link with the Central Administration for Financial Resources, in charge o f project accounting; the Central Administration for Material Resources, in charge o f procurement; and the Central Administration for Legal Support within the Legal General Administration, for verification o f contracts and other legal matters.

11. Other specific tasks are: (a) Preparing semiannual progress reports on project implementation, to be submitted to the Bank by December 31 and June 30 o f each year; (b) manage the formal agendas for Bank visits; (c) manage al l logistics necessary for workshops; (d) preparing the Implementation Completion Report upon project’s end. These responsibilities and tasks will be agreed at negotiations.

12. Implementation wil l be carried out by SAT management and staff seconded to the Project, assisted by consultants and consulting f i r m s as appropriate. Staffing o f the teams wil l require the assigning, in some cases full time, o f staff from the General Administrations o f Customs, Human Capital, Information Technology, Planning, Evaluation, Resources and Services, Legal, and others. Staffing o f critical positions in the counterpart teams i s a condition o f Board Presentation for the Project.

78

Annex 7: Financial Management and Disbursement Arrangements

MEXICO: Customs Institutional Strengthening Project

1. In general, Sewicio de Administracibn Tributaria - SAT’S financial management (FM) arrangements are consistent with Bank’s policies applicable to investment project FM. Therefore, the Customs Institutional Strengthening Project will use existing FM arrangements, complemented as needed given the particularities o f the operation.

Background.

2. Financial Management Assessment. Bank staff updated a Financial Management Assessment (FMA) carried out as part o f preparation o f the Tax Administration Institutional Development Project (ID: P077602) during C Y 2002. The a im o f the FMA was to assess the project FM arrangements, identify risks and ensure that these are properly mitigated in a structured manner throughout the l i fe o f the project.

3. Based on the results o f the FMA, the Financial Management Team (LCSFM) concluded that: (i) FM arrangements are adequate to provide reasonable assurance that Bank loan proceeds wil l be used for the intended purposes; (ii) SAT, as implementing entity, satisfies the Bank’s project FM requirements; (iii) NAFIN, the financial agent, will provide implementation support and oversight o f the project based o n i t s many years o f experience with Bank projects; and (iv) the overall FM residual risk is Modest. The main mitigating measure i s related to the updating o f the FM section o f the previous project’s Operations Manual (OM) before the negotiations.

4. FM areas included in this assessment are: (i) Flow o f Funds and Disbursement. The Bank wil l reimburse the borrower Federal Treasury (TESOFE) for eligible expenditures pre-financed by SAT f i om its own budgeting resources. NAFIN will operate a bank/Designated Account in U S dollars for reimbursement proposes where the Loan funds received from the Bank will be deposited. The advance method wil l be allowed. In this case, NAFIN will open a segregated Designated Account (DA) in USD; (ii) Accounting and Internal Controls. In general, SAT policies and procedures related to theses areas meet Bank FM requirements. All project funds wil l be processed through the financial management system already in place in SAT, and wil l be supported by documentary evidence; (iii) FM section o f the Operational Manual (OM). The FM section o f the OM o f the previous project (ID: P077602) wil l be updated before negotiations to contain recent & detailed arrangements on the six elements o f FM as defined in Bank policy; (iv) External Audit and Financial Reporting. Project Financial Statements, Statements o f Expenditures (SOEs) and b a W e s i g n a t e d Accounts wil l be subject to external audits on annual basis, carried out by auditors acceptable to the Bank. SAT wil l produce and submit to the Bank, through NAFIN, semiannual non-audited Interim Financial Reports (IFRs); (v) Bank Supervision. The Bank will carry out at least one full FM supervision mission per year. At the end o f each mission an FM rating for the Implementation Status and Results (ISR) will be recommended and the FM-related risk wil l be updated as needed.

79

5. Modest, as explained by the fo l lowing table:

Risk Assessment. On the basis o f the FMA, the overal l FM residual r isk i s considered

Inherent Country level Entity Project

Control Budgeting

Accounting

Internal Control

Funds Flow

Financial Reporting

Auditing

Overall Risk rating €-High; S - S

M M M

M M

M

M

M

TABLE 16: Financial Management Risk Summary

M

M

M

xtantial; I

Risk Rating Summary

CommentvlRisk bfltigating Measure incorporated into Project Design

SAT has previous experience in Bank-financed projects. The project implementation arrangements and the type o f expenditures to be financed are relatively simple from a FM perspective.

Project’s budget will be embedded in SAT’S standard budgetary procedures, including formulation, execution and control. In addition, a new financial information system: Administracibn General de Sewicios (AGS) improves the level o f control and quality o f the financial information. SAT’s accounting policies and procedures are established for the entire Mexican Federal Government by Secretaria de Hacienda y Crddito Publico (SHCP). AGS also counts with a general accounting module, which automates the process o f financial transactions records. The SAT’s Internal Control Unit constantly carries out control review o f the implementation o f different institutional programs, including those financed by the Bank. In addition, the FM section o f the Operational Manual will be prepared before negotiations. SAT will pre-finance all project activities at a 100%. The loan funds flow will be through the Federal Treasury (TESOFE). Project will report i t s financial progress on a semiannual basis through unaudited Interim Financial Reports (IFRs), which formats are based on the annual Financial Statements. The general framework for financial reporting o f al l Bank-financed projects implemented in Mexico has been agreed between the Bank and the GOM, through the Ministry o f Public Management (SFP). The general framework for the audit of all Bank-financed projects implemented in Mexico, including this project, i s the technical M O U on auditing, which was agreed between the G O M and the Bank. SFP will designate an external audit firm acceptable to the Bank.

- Modest; L - Low

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General Arrangements

6. Implementing entity. S A T will be the implementing entity for the project. The entity has previous experience as executing agency o f Bank-financed projects, particularly o f the Tax Administration Institutional Development Project (ID: P077602).

7. SAT is satisfactorily staffed as key FM personnel have acceptable credentials and experience to carry out FM-related responsibilities associated to the project. Also, SHCP has designated NAFIN as a financial agency for the project, which wil l provide implementation support and oversight based on i t s many years o f experience with Bank-financed projects.

8. Project’s budget is embedded in SAT’s standard budgetary procedures, including formulation, execution and control; overall budgeting policies and procedures have not changed since the previous project. Therefore, SAT will provide funding in local currency (Mexican Pesos) to pre-finance the project, and the Bank will reimburse ex-post only for eligible expenditures that were registered in budgetary lines earmarked for the project (digit0 2). Budget execution i s regulated by national legislation, particularly the L e y Federal de Presupuesto y Responsabilidad Hacendaria and its regulations.

Budget arrangements.

9. Since the end o f CY05, SAT substituted the use o f the Sistema Contable y Presupuestal (SICOPEL) for a new system: Admin is t rac ih General de Servicios (AGS). This new financial information system is an important move forward in the information technology’s modernization process o f the entity. AGS improves automatic recording o f data, and preparation o f financial reports in real time. The World Bank considered the budgeting module (commitment control) o f this new system adequate for project purposes.

10. Accounting system. In terms o f project cash-based financial statements, such as for the project financed by Bank Loan 7127-ME (ID: P077602), SAT’s accounting policies and procedures have been considered acceptable to the Bank, because the entity was able to maintain adequate records and accounts to reflect its operations and financial condition, including records and separate accounts for the previous Bank-financed project, also in compliance with local requirements established by SHCP (Sistema Integral de Contabilidad Gubernamental).

11. In fact, since the implementation o f AGS (November, 2005) some adjustments have taken place to ensure proper recording o f project’s transactions, as well as to strengthen the accountability and opportunity o f the financial institutional information within SAT.

Financial Management Information System

12. Since 2005, the SAT’s institutional IT capacity has improved and controls were strengthened as a result o f the implementation o f the Government Resource Planning system (PeopleSoft), named Admin is t rac ih General de Servicios (AGS), which includes modules for budgeting, accounting and treasury (flow o f funds including payments), among others, that were being used by the previous operation. The results o f the review performed in December 2007 were positive.

81

13. The system allows, among others, the fol lowing features: (i) linking accounting and budgeting transaction with payment activities; (ii) controlling and management o f budgeting data; (iii) automatic process o f accounting records, and (iv) consultation and preparation o f financial reports.

14. Internal auditing. In general, the internal control environment i s satisfactory for project purposes. SAT has an internal audit function which i s carried out by its Orguno Interno de Control (OIC). This Internal Audit Unit reports tokoordinates with the Ministry o f Public Administration (SFP) and carries out periodic control activities (including audits and reviews) o f SAT’s institutional operations and programs. No major FM-related control issues were identified during implementation o f the previous project (ID: P077602).

15. Project funds wil l be processed through the financial system in place in SAT and wil l be supported by documentary evidence. The FM section of the Operational Manual will be prepared before negotiations.

16. behalf o f the government in financial agent capacity, for which i t has ample experience.

Funds Flow and Disbursement Arrangements. NAFIN will administer the loan on

17. The project will continue to use the previous project’s (ID: P077602) arrangements for the flow of funds and disbursements. Project funds will be included in the SAT’s institutional budget during the calendar years o f the project implementation. Therefore, a l l payments to suppliers o f goods or services wil l be pre-financed by the federal government. Later, the information in the format o f SOEs in Mexican Pesos (MXP) is submitted to the Bank via NAFIN; then the Bank reimburses an equivalent amount in dollars (USD), and finally, NAFIN reimburses TESOFE. The following flowchart provides general information on the f low o f funds and information for the proposed project:

BankAccount [ (#G)USD$ I TESOFE The World Bank 1 eimbursemen (#5)USD$ I NAFIN Reimbursemen Budget (PEF) I I I

I (#I) MXP$

Pre-financing t

(#4) Reports + Information

NAFIN (F.A.) (#3) Reports + lnformatio

F.A. = Financial Agent PEF = Prespuesto de Egresos de la Federacion

(#2) MXP$ or USD$ Payment

Consultants and suppliers

82

Disbursement Method

18. The Bank will reimburse the borrower Federal Treasury (TESOFE) for expenditures eligible for financing pursuant to the Loan Agreement that were pre-financed by SAT from its own budgeting resources, earmarked with digit 2 (funds from external credit). Deposits to the bank account for reimbursement purposes will be made upon request and against Statements o f Expenditures (SOEs). All reimbursements will be processed through NAFIN.

Statements o f Expenditures

19. Loan withdrawal applications corresponding to the project will be supported by SOEs. NAFIN will provide support to SAT o n the processing o f SOEs. All supporting documentation (evidence o f payments to contractors and suppliers, etc) must be available for review by the external auditors and Bank staff at a l l times, at least until one year after the audit report covering the last disbursement has been received by the Bank.

Retroactive Financing

20. Disbursement from the Loan would begin immediately after effectiveness. Additionally, an amount o f USD$2.0 mi l l ion wil l be available from this Loan to disburse according to expenditures incurred prior to the Loan Agreement signing date (this is not applicable in any case o f expenditures incurred earlier than the twelve months immediately before the signing o f the Loan Agreement).

Other procedures

21. The proposed Project most likely will not require other procedures; however, upon request from NAFIN and subject to Bank's approval, payments may be made: (i) directly to a third party (SAT'S supplier or consultant) for goods, works and services; (ii) to a procurement agent, or (iii) to a commercial bank for expenditures against a Bank Special Commitment covering a commercial bank's letter o f credit. The Wor ld Bank also could advance loan funds to the DA to finance the project eligible expenditures, which should be documented to the Bank by SAT though NAFIN on monthly basis.

Proiect Costs and Financing Plan

22. The total project cost is expected to be USD$54.87 mi l l ion and would be financed as follows: Bank - US$10.02 mi l l ion (including a Front-end Fee commission), and Borrower, through counterpart funding, US44.85 mil l ion. The project costs are provided below:

83

Table 17: Expenditures By Category

1

2

3

4

6

Mi l l ion US$

Training and Workshops under 6.5 32.4 38.9 100%

Training and Workshops under 2.4 7.8 10.2 100%

Training and Workshops under 0.5 2.0 2.5 100%

Training and Workshops under 0.6 2.7 3.3 100%

Part 1 o f the Project (Goods, Consultant Services, and

Part 2 o f the Project Goods, Consultant Services, and

Part 3 o f the Project Goods, Consultant Services, and

Part 4 o f the Project Front End Fee 0.02 0.02 Total (including FEF) 10.02 44.85 54.87

23. Financial reporting. SAT, through and with support o f NAFIN, will prepare and submit to the Bank not later than 45 days after the end o f each calendar semester, unaudited Interim Financial Reports (IFRs) for the Project covering the semester, in form and substance satisfactory to the Bank. I t s standardized formats wil l be based o n the formats o f the annual Financial Statements, as we l l as on the financial reports submitted o n a quarterly basis by al l Bank-financed implementing entities that form part o f the federal public administration to the SFP.

24. External audit. Annual financial audits will be carried out according to Bank policy, as reflected in the Memorandum o f Understanding on Auditing agreed between SFP and the Bank. The terms o f reference for annual financial audits are also agreed with SFP. An external private audit firm designated by SFP and acceptable to the Bank will perform the project annual financial audits. The Bank has recommended that the auditor that currently audits SAT, as continuing entity, audits the project as well.

25. Since 2005, the Tax Administration Institutional Development Project (ID: P077602) was audited by an external private firm, which did not identify any major FM-related issues during the audit reports corresponding to the CY 2005-2007; therefore, the auditor’s opinions were unqualified (clean). The audit reports were received in a timely manner.

26. In addition to the project Financial Statements, NAFIN is responsible to prepare and submit to the Bank a separate audit report on the bank/Designated Accounts o f a l l i t s administrated projects.

27. Both audits wil l be carried out by auditors acceptable to the Bank and respective reports wil l be submitted to the Bank within the six months after the end o f each calendar year. The table below summarizes audit requirements for the proposed Project:

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TABLE 18: Audit Requirements for the Proposed Project

Designated Accounts

period, starting from effectiveness and unti l the last transaction has been audited. The standard covered period will be the fiscal year o f SAT (from January 1 to December 31). One audit report i s submitted for al l bank accounts administrated by NAFIN within six months following the end o f the reported year. This report wil l include the DA o f this project.

28. Staffing. SAT has consistently demonstrated its capacity and focused approach to the management o f project activities under i t s umbrella. The SAT’s institutional unit o f financial resources, through coordination with the project administrative coordination unit (as presented below), wil l be responsible for project budget planning and reporting, including preparation o f annual financial statements and IFRs, internal control and disbursements. Therefore, SAT’s FM staffing arrangements were reviewed and considered adequate. The operational manual wil l reflect al l related information for this project i.e. organizational chart, j ob descriptions, and specific responsibilities for this Project.

Coordi naci on Adrninistrativa del

I I I

Adrninistracion Central de Recursos

Financieros

Subadministracion

Control de Gestion Ad rn i n i st raci on de Adrninistracion de Adrninistracion de

29. Operations Manual (OM) and Written Procedures. SAT wil l update the FM section o f the previous Project’s Operations Manual (OM). Specific project FM-related procedures wil l be documented in this section to define roles and responsibilities and project-specific arrangements.

30. Supervision Plan. The Bank’s supervision o f the project’s financial management wil l be based on: (i) at least one full FM supervision mission per year carried out by an FMS; (ii) review o f the IFRs and annual audit reports by an FMS. At the end o f each mission an FM rating for the

85

Implementation Status and Results (ISR) will be recommended and the FM-related risk will be updated as needed. The supervision work carried out for the previous project did not identify major FM-related issues.

86

Annex 8: Procurement Arrangements MEXICO: Customs Institutional Strengthening Project

A. General

1. Procurement for the proposed Project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated M a y 2004, and revised in October 2006; and “Guidelines: Selection and Employment o f Consultants by Wor ld Bank Borrowers” dated M a y 2004 and revised in October 2006, and the provisions stipulated in the Legal Agreement. The general description o f various items under different expenditure category is described below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan wil l be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

2. Procurement of Works: Not expected in the Project

3. Procurement of Goods: Goods under the Project would include adaptation or development o f information systems, computer hardware and network infrastructure under Components A and B.

4. Procurement of non-consulting services: Procurement o f non-consulting services wil l include al l cost associated with training; logistics, organization o f seminars, workshops, as wel l as printing, materials reproduction, publication and dissemination related activities, as included in the Procurement Plan.

5. Selection of Consultants: All the components o f the Project will require the assistance o f consultants’ services. Particularly, these services will be required for methodological definitions for the redesign o f processes and custom services; review o f legal framework; prepare procedures and customs operations manuals; identification o f requirements for updating or developing information systems; quality control in user services and design o f monitoring o f satisfaction to users. Consultants’ services under this project will include: design, technical assistance, monitoring, evaluation and training services. Consultants Services wil l be procured using Harmonized Standard Documents including the revised clause on fraud and corruption. Short l i s ts o f consultants for services estimated to cost less than $500,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Selection o f Consultant Guidelines. Where f i r m s are not required, individual consultants wil l be hired according to Section V o f the Guidelines.

6. Operational Costs: Reasonable expenditures to carry out the Project such as travel and per diem cost for supervision activities and training for staff directly related to the project, sundry items and office utilities, maintenance o f proj ect facilities and equipment wil l be financed by the Loan using SAT’S administrative procedures.

87

7. Others: The Project foresees specially under Component C the possibility o f study tours, and of workshops and conferences regarding the objectives o f the project. Related costs may be covered by the Loan using administrative procedures under SAT’s rules and subject to the Bank’s prior agreement in each case.

Issue Staffing the Project Administration Unit with one procurement responsible Procurement training for staff accountable for each component and for procurement staf f in the administrative unit SEPA training for technical and administrative staff.

B. Assessment of Capacity and Risk to Implement Procurement

Responsible Target Date SAT March 2009

Bank March 2009

Bank March 2009

8. All procurement activities will be carried out by SAT. The agency i s staffed with at least one official with previous experience in procurement with the Bank. In addition, Nacional Financiera-NAFIN the financial intermediary for the project wil l be responsible through its special procurement unit for the review o f a l l procurement processes. NAFIN’s performance under Bank financing projects has been satisfactory.

9. An assessment o f the capacity o f the Implementing Agency to implement procurement actions for the project has been carried out by the PAS assigned to the project in January and February 2009.The assessment reviewed the organizational structure for implementing the project and the interaction between the project’s staff responsible for procurement and SAT’s administrative unit.

10. The key issues and r isks concerning procurement for complementation o f the project have been identified and include the absence o f previous experience in procurement within the Project Administration Unit, although the administrative unit in charge o f procurement processes has previous experience in Bank’s procurement.

1 1. The overall Project risk for procurement is Medium.

12. The main corrective measures which have been agreed are:

C. Procurement Plan

13. The Borrower developed a procurement plan for project implementation which provides the basis for the procurement methods. This plan was agreed between the Borrower and the Project Team before negotiations. I t i s available in the Project’s database and in the Bank’s external website. The Procurement Plan will be updated in agreement with the Bank annually or

88

as required to reflect the actual project implementation needs and improvements in institutional capacity.

Contract Value Contracts Expenditur (Thresholds) U S $ Subject to

D. Frequency of Procurement Supervision Missions

e Category thousands Procurement Method Prior Review 2. Goods >3,000 ICB All

100-3,000 N C B None <loo Shopping None

sss All

14. In addition to the prior review supervision to be carried out from the Mexico team, the capacity assessment o f the Implementing Agency has recommended annual supervision missions to update SAT'S procurement capacity assessment and carry out post review o f procurement actions.

3. Consulting Services 3.a Firms >200 QCBS, QBS, FBS, LCS All

sss All 4 0 0 QCBS, QBS, FBS, LCS, CQS None

E. Thresholds for Procurement Methods and Prior Review

3.b According to Chapter V o f the Individuals Guidelines All sole-source

15. Thresholds recommended for the use o f the procurement methods specified in the project procurement plan are identified in the table below, which also establishes thresholds for prior review.

Note:

hresholds for procurement methods and prior review (000 USD)

ICB = International Competitive Bidding NCB = National Competitive Bidding D C = Direct Contracting QCBS = Quality- and Cost-Based Selection QBS = Quality-Based Selection FBS = Fixed Budget Selection LCS = Least-Cost Selection CQS = Selection Based on Consultants' Qualifications SSS: Single Source Selection

89

F. Details of the Procurement Arrangements Involving International Competition

1 2 3 4 5 6 7 8 9 Ref. Contract Estimat Procureme P-Q Domesti Review Expect Comme No. (Descriptio ed Cost nt Method C by Bank ed nt

n> Preferen (PriorPo Bid- ce st> Openin (yesho) g Date

1. Goods and Non-Consulting Services

1 Ref. No.

2 3 4 5 6 7 Description o f Estimated Selection Bank Exp. Date Comments Assignment Cost (US$) Method Review o f

(PriorPost) Proposals Submission

(b) All I C B contracts will be subject to prior review by the Bank as agreed in the procurement plan.

2. Consulting Services

(b) Consultancy services (firms) costing above US$500,000 wil l be subject to prior review by the Bank. Consultant services (individuals) costing above US$200,000.00 will be subject to prior review by the Bank. All single source selection o f consultants will be subject to prior review by the Bank.

(c) Short lists composed entirely o f national consultants: Services estimated to cost less than US$500,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines.

90

Annex 9: Economic and Financial Analysis MEXICO: Customs Institutional Strengthening Project

1. Mexico i s one o f the world’s most trade-dependent countries, with trade in goods accounting for roughly 60 per cent o f GDP in 2006. More than 90 percent o f i t s trade falls under the 12 free trade agreements that have been subscribed with over 40 countries. The U.S. i s Mexico’s largest trading partner. Since the implementation o f NAFTA in 1994, trade with the U.S. and Canada has tripled. As o f June 2008, Mexico accounted for almost 11 percent o f the U.S.’s total trade (i.e,, the third highest), while the U.S. accounted for 80 percent o f Mexico’s trade. The advantage o f preferential access to the US. market, however, has eroded in recent years and illegal trade and corruption are reducing the benefits o f trade. Moreover, inefficiencies, delays and costs at the border undermine Mexico’s competitiveness, either by taxing imported inputs with deadweight inefficiencies or by adding costs and reducing the competitiveness o f exports.

2. Against this background, strengthening the Customs General Administration (AGA) i s o f vi tal importance for Mexico to ultimately accelerate and sustain economic growth in the medium and long term. As mentioned earlier, international comparisons o f logistics performance (e.g., the ability o f countries to deliver goods in time and at l o w costs f rom origin to destination throughout the world) show that Mexico has substantial room for improvement. The proposed Mexico’s customs institutional strengthening technical assistance project directly addresses these challenges, as i t is aimed at improving the effectiveness o f Customs processes to facilitate safe trade and improve competitiveness.

3. This annex examines the economic and financial feasibility o f the proposed project. The project’s economic feasibility i s examined using a cost-benefit analysis that takes into consideration the stream o f costs and economic benefits that will result f rom i t s implementation. The focus o f the economic analysis i s to determine whether the project wil l yield net economic benefits for the society as a whole. Alternatively, the project’s financial feasibility i s examined by analyzing the stream o f public expenditures and fiscal revenues that will be generated as a result o f its implementation to determine the project’s impact on public finances. I t i s important to underscore that these financial benefits are transfers f rom the private sector to the public sector and do not necessarily indicate that the project i s welfare-enhancing.

A. Economic Analysis Methodology21

4. The proposed project i s expected to yield significant economic benefits that will ultimately enhance Mexico’s overall competitiveness and facilitate trade. These benefits include the reduction in cost to traders as a result o f simplified import and export procedures, faster and more consistent cargo clearance times, and trade expansion as a result o f enhanced competitiveness (see TABLE 19). These benefits, as well as the project’s costs, have been taken into consideration into the Cost-Benefit Analysis to determine the project’s net economic impact. Other benefits, however, are more difficult to quantify and, as a result, have not been included in

21 The methodology adopted for the economic analysis and the estimates for the various economic benefits is based on the PREM Note No. 112, Estimating Economic Benefits for revenue Administration Reform Projects, prepared by Tuan Minh Le, Duc Minh Pham, and Luc De Wulf, March 2007.

91

the cost-benefit analysis despite their significance. These non-quantifiable benefits include reduced corruption, improved international image, enhanced transparency and accountability, and improved national security.

Table 19: Potential Economic Benefits From Enhanced Customs Administration

Enhanced customs administration wil l lower the costs for traders

Lower compliance costs

Shorter clearance times

for the preparation o f customs clearance documentation (incl. reducing the facilitation money that might be involved in the process). Shorter clearance times will result in a decrease in traders’ costs as a result o f reduced loss o f business opportunities, lower

“ -__ I_ __I_ _I ” inventory costs, and lower depreciation o f the-goods in transport. More consistent clearance times will aiio& traders to reduce

- - inventory as a result o f reduced uncertainty. __ - - -- __ I Better customs clearance procedures and lower trader costs will ultimately result in enhanced competitiveness, thus resulting in

Lower variability o f clearance times

Enhanced competitiveness

Source: Based on PREM Note No. 112. __I_____ I I faster I export growth. - - -- - I ____I ~

Key Assumptions

5. In the absence o f hard data, estimates from the international literature on trade facilitation have been used to estimate the economic benefits that are expected from the project.22 These estimates, as wel l as the assumptions that have been made for the Cost-Benefit Analysis base scenario are summarized below:

1.

2.

3.

4.

5.

6. 7.

Based o n international experience, the time span o f customs projects i s o f roughly 12 years. However, the cost-benefit analysis considers only the five years that corresponds to the project’s implementation. Thus, the benefits that the project i s expected to yield during the remaining o f i t s l i fe are not included in the analysis, for which the results should be considered as a lower bound. Projected import and exports over the 2009-2013 period are based on 2007 data and the average growth rate for the period o f 1991-2007 (INEG, 2008). Lower compliance costs due to simplified customs procedures are expected to reduce cargo costs by 0.1 percent by the end o f the project. The number o f days required for customs clearance i s expected to decrease by ?4 and ?4 day on the third and fourth year o f the project’s implementation, respectively. Reduced cargo clearance and release time by one day i s expected to lower the cost o f imports by 0.5 percent. Reduced variability in cargo clearance time (Le., reducing i t s standard deviation by half) i s expected to lower the cost o f imports by 0.1 percent. Enhanced competitiveness i s expected to increase exports by 0.5 percent. An annual discount rate o f 7 percent has been utilized for the economic analysis.

These estimates are more conservative than those suggested in the PREM Note No. 112 and by the United 22

Nations Conference on Trade and Development (UNCTAD).

92

Outcomes

6. The results f i om the cost-benefit analysis for the base scenario indicate that the project i s highly beneficial f i om an economic standpoint. Specifically, the relative small investments corresponding to the project’s costs have an enormous economic impact given the magnitude o f Mexico’s trade. Specifically, the project i s expected to render a N e t Present Value (NPV) o f over US$3.9 billion, and an internal economic rate o f return (IERR) o f roughly 500 percent (see TABLE 20).

Projected imports of goods (FOB) wlo project (US$ Million)’ Projected exports of non-oil goods (FOB) wlo project (US$ Million)’

314,151 350,031 390,009 434,553 484,184 257,577 289,901 326,281 367,227 413.31 1

Reduction in cargo costs due to lower compliance costs (%) 0 1 Reoxtion n cargo costs 0.e to ,ewer comp1,ance cos’s (LSS Mill on) 897

Reduction in clearance times (days) 0 25 0 5 -0 13 -0 3 Reduction in imports costs due to lower clearance times (%)

Reduction in imports costs due to lower clearance times (US$ Million) 543 1,210

Increased in exports costs due to enhanced competitiveness (Oh) 0 5

Future values (I e , undiscounted) -3 9 -9 1 -11 9 5282 46437 P-eseni \ a ,es [ e d sco,nieo) -3 9 -85 -104 4312 35427

2007 imports of goods - FOB (US$ million)* 281,949

Growth in imports (%)’ 11 4

RedJCt,On in cargo costs oue to lower compliance costs (To) 0 1 Reductton m imports costs per oneday reductton in ctearance times (%) 0 5 Reo,ct on m imports costs dde 10 reducing by half tne standard deviation of clearance limes (%) 0 1

Increased tn exports due to enhanced competitiveness (46) 0 5 Discount rate (%) 7 0

’ FOB Free on board refers to the value of the merchandise place at border ot at domestic port

’ Growth of imports and exports based on average growth between 1991 and 2007 (INEG, 2008) Based on Mex/co at a Glance (INEG, 2008)

7. TABLE 21 presents the results o f a sensitivity analysis under a range o f scenarios using more pessimistic and optimistic assumptions. Specifically, the results indicate that the project can be expected to render robust economic benefits even under less favorable conditions, such as lower, growth rates for imports and exports (Le., 50 percent o f the base scenario), and more

93

conservative estimates for the economic benefits resulting from lower compliance costs, shorter and more consistent clearance times, and enhanced competitiveness (ie., 50 percent o f the estimates utilized under the base scenario).

‘Baseline scenario

B. Financial Analysis Methodology

8. The financial analysis compares the stream o f fiscal expenditures generated by the project vis-a-vis the expected additional fiscal revenues in discounted, real terms. Additional fiscal revenues are expected to be generated as a result o f enhanced tax compliance for the value-added tax (VAT) o n imported goods. VAT collections represented approximately 84 percent o f al l Customs collections in 2007.

Key Assumptions

9. The fol lowing assumptions have been used in the project’s financial analysis:

1. Projected imports over the 2009-2013 period are based on 2007 data and the average growth rate for the period o f 1991-2007(INEG7 2008).

2. VAT collections amounted to US$14.2 bi l l ion in 2007, representing 85 percent o f a l l Customs collection. In the absence o f the project, VAT collections are assumed to increase at the same rate as imports.

3. Enhanced customs procedures and enforcement are expected to increase VAT collections on imported goods. For the purpose o f the financial analysis, the project i s estimated to yield an additional 0.25 percent increase in annual VAT collections each year after the third year o f project implementation. Actual increases, however, are expected to be larger.

4. The time frame utilized for the financial analysis coincides with that o f project implementation. However, increased fiscal collections are expected to continue wel l beyond the l i fe o f the project, for which results should be considered as a lower bound.

5. An annual discount rate o f 7 percent has been utilized for the financial analysis.

Outcomes

1. TABLE 22 shows that proposed project i s expected to be beneficial from the standpoint o f financial inflows, as the additional revenues to be generated from enhanced customs administration and procedures amply exceed the cost o f the project. Specifically, the financial analysis renders a Net Present Value (NPV) o f approximately US$270 mil l ion.

94

Table 22: Financial Analysis Of The Project

Projected imports of goods (FOB) w/o project (US$ Million)' 314,151 350,031 390,009 434,553 484,184 Proiected VAT collection on irnoorts of aoods w/o oroiect (US$ Millionl 15817 17624 19637 21880 24378

Additional VAT collections with the project (%) 0.25 0.50 1 .o Additional VAT collections with the project (US$ Million) 49 109 244

Future values (Le., undiscounted) -3.9 -9.1 37.2 94.4 228.8 Present va.ues (.e., discouniea) -3.9 -8.5 32.5 77.1 174.5

2007 imports of goods - FOB (US$ million)' 2007 VAT collections on imports (US$ million)

281,949 14,196

Growth in imDorts (%I3 11.4 . , Discount rate (%) 7.0

' FOB : Free on board refers to the value of the merchandise place at border ot at domestic port. * Based on Mexico at a Glance (INEG, 2008).

Growth of imports based on average growth between 1991 and 2007 (INEG, 2008).

95

Annex 10: Safeguard Policy Issues

MEXICO: Customs Institutional Strengthening Project

This Project does not trigger any World Bank Environmental or Social Safeguard Policies.

96

Annex 11: Project Preparation and Supervision

MEXICO: Customs Institutional Strengthening Project

Planned Actual P C N review 09/24/2008 09/25/2008 In i t ia l PID to PIC 0913 01200 8 09/30/2008 Virtual QER 1211 212008 12/15/2008 Appraisal 02/09/2009 02/04/2009 Negotiations 0211 912009 03/23/2009 BoardlRVP approval 0412 112009 Planned date o f effectiveness 0610 112009 Planned date o f mid-term review 0610 1 I20 1 1 Planned closing date 0913012014

K e y institutions responsible for preparation o f the project:

Tax Administration Service (Sewicio de Administracibn Tributaria - SAT)

Bank staff and consultants who worked on the project included:

Name Enrique Fanta Albert0 Leyton Amparo Bal l iv ian Jeffrey Rinne Henry Forero Laura Calderon JosC Eduardo Gutierrez Luis-JosC Me j ia AndrCs Santoro Cecilia Zanetta Maria del Carmen MiAoso Mar ihge les Sabella Jose Janeiro Tomiis Socias Dmitri Gourfinkel Gerard McLinden Graeme Ludlow Jose Guillerme Reis Tanya Gupta Gabriela Calderon Mar ia Guadalupe Toscano

Ti t le Senior Public Sector Specialist, TTL Resident Representative El Salvador, co-TTL Lead Economist Sr. Public Sector Specialist Senior ITC Specialist Customs Expert Public Sector Specialist Project Design and Editing Customs, e-Government & HR Project Finance Expert Sr. Operations Officer Sr. Counsel Sr. Finance Officer Sr. Procurement Specialist Financial Management Specialist Sr. Trade Facilitation Specialist, Peer Reviewer Sr. Economist and Customs Advisor, Peer Reviewer Lead Private Sector Devel. Specialist, Peer Reviewer Resource Management Officer Staff Assistant Public Sector Specialist

Unit LCSPS L C C S V LCSPP LCSPS CITPO Consultant LCSPS Consultant Consultant Consultant LCSPS LEGLA LOAFC LCSPT L C S F M PRMTR IMFIFAD LCSPF LCSPS LCSPS LCSPS

Karla Lbpez Flores Program Assistant LCSPS

Bank funds expended to date o n project preparation:

1. Bank resources: US$210k 2. Trust funds: 0 3. Total:US$210k

Remaining costs to approval: (US$30k) Estimated annual supervision cost: US$93k

Estimated Approval and Supervision costs:

97

Annex 12: Documents in Project File MEXICO: Customs Institutional Strengthening Project

e

e

e

e

e

e

e

e

Country Partnership Strategy for the United Mexican States for the Period FY2008-2013.

March 4,2008.

Tax Administration Institutional Development Project, Project Appraisal Document

Report No: 241 18-ME. The World Bank. May 2002

Tax Administration Institutional Development Project, Implementation Completion

Report No: 71270-ME. The World Bank. June 2008

Assessment of Human Resources in the Mexico Customs, Enrique Fanta and AndrCs

Santoro, MS LCPCS, June 2008

Customs Modernization Project Preparation and Implementation Guidelines. Luc De

Wulf and Gerard Mclinden: World Bank, Feb. 2006.

http://www.~fptt.org/uploadedEditorIma~es/OOOOO344.~df

Estimating Economic Benefits for Revenue Administration Reform Projects; Tuan Minh

Le, Duc Minh Pham, and Luc D e Wulf (2007), PREM Note No. 112; March 2007; World

Bank, Washington, DC.

“Plan Estratkgico 2007-201 2. Sewicio de Administracibn Tributaria. MCxico: Talleres

Grbficos de MCxico. 2007, p 126

Plan de Modernizacidn de Aduanas 2007-201 2. Administration General de Aduanas.

MCxico: Talleres Grbficos de Mexico. 2007, p 129

Examen de las Politicas Comerciales, Informe de Mexico, Organization Mundial del

Comercio, enero 2008. www.wto.ordspanish/tratop s/tpr s/s 195-00 s.doc

Evaluacibn y Reingenieria de Procesos en la Administracibn Pliblica. Buenos Aires:

Subsecretaria de la Gestion, noviembre 2006. p 201. ISBN 987-9483-14-6

Programa de Apoyo a la Direccibn Nacional de Aduanas. Documento Conceptual de

Proyecto Uruguay. Marzo 2007.

UR-L1037.http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=964828

Una Estrategia para la Reforma de la Administracidn Aduanera. Fondo Monetario

Intemacional, Febrero 2007

98

e

e

e

e

e

Mexico: Fortalecimiento de la Administracibn Tributaria Federal. Casanegra, dos

Santos, Escolano & Castro, IMF Report, February 1997.

La Tecnologia como habilitador del Cambio en las Instituciones: Cas0 SAT. JosC Maria

Zubiria Maqueo. Academia de Ingenieria. Abril. 2008.

www.ai.ora.mx/publicaciones/coloquio4/pdfs/Ina. JoseMariaZubiriaMaqueo.pdf

Plan Nacional de Desarrollo 2007 - 2012. Presidencia de la Republica, MCxico.

http://pnd.presidencia.gob.mx/

Primer informe de ejecucibn del Plan Nacional de Desarrollo. Presidencia de la

Republica, Mexico. http://pnd.calderon.presidencia.gob.mx/index.php?page=primer-

informe-de-ej ecucion

Human Capital Action Program, MS SAT November 2008

Proyecto de Fortalecimiento Institucional de Aduanas: Modelo de Gobierno, MS SAT

Noviembre 2008.

Cbdigo de Conducta del SAT, MS SAT. 2008.

Mexico at a Glance, Instituto Nacional de Estadistica y Geografia - INEG (2008),

Mexico City.

Summary of SAT’S Procurement Capacity, World Bank, 18th Feb 2009

99

Annex 13: Statement of Loans and Credits MEXICO: Customs Institutional Strengthening Project

Project ID FY Project Name

Orieinal Amount in US$ Millions

Difference between expected and actual

Disbursements ' IBRD GRANT Cancel. Undisb. Orig. Frm Rev'd

P 10626 1 P 106589 P112258 P106528 P112327 PO88996 PO95038 PO66426 P106 103 PO85593 PO88728 PO88732 PO87038 PO89171 PO77717 PO9 1695 PO74755 PO89865 PO87152

PO80149 PO59 16 1 PO70108 PO65988 PO60908 PO66321

2009 2009 2009 2009 2009 2008 2008 2007 2007 2006 2006 2006 2006 2006 2006 2006 2005 2005 2004

2004 2003 2003 2002 2001 200 1

M X Sustainable Rural Development (FIRCO) M X I T Industry Development Project M X Priv Housing Finance Markets Stmgth M X Results-based Mgmt. and Budgeting M X (Suppl) SINAP I1 - Fourth Tranche M X (CRL2) Integrated Energy Services MX-GEF Integrated Energy Services M X Hybrid Solar Thermal (Agua Prieta) MX-SINAP I1 - Third Tranche -Addl Fin M X (APL I) Tertiary Educ Student Ass M X (APLl) School-Based Management Prog M X Access to Land for Young Farmers MX Environmental Services Project MX GEF Environmental Services Project M X GEF Largescale RE Dev (La Venta 3) M X Modernization Water & Sanit Sector TA MX State Judicial Modernization Project MX-(APLl) Innov. for Competitiveness MX (CRL1)Savings & Rural Finance (BANSEFI) M X Decentralized Infrastructure Development M X GEF Climate Measures in Transport M X Savings & Credit Sector Strengthening M X GEF Consolidat. Prot Areas (SINAP 11) MX GEF MESO AMERICAN CORRIDOR MX: I11 BASIC HEALTH CARE PROJECT

50 80.0

1,010.0 17.2 0.0 15.0 0.0 0.0 0.0

180.0 240.0 100.0 45.0 0.0 0.0

25.0 30.0

250.0

154.5

108.0 0.0 85.6 0.0 0.0

350.0

10.5 0.0 0.0 0.0 5.4 0.0 1 .o

49.4 7.4 0.0 0.0 0.0 0.0 15.4 25.0 0.0 0.0 0.0

0.0

0.0 5.8 0.0

25.7 14.8 0.0

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.8 0.0 0.3 0.0 0.2 0.0 0.0

0.4

0.0 0.0 0.0 0.0 0.0 0.0

50.0 80.0 10.12 17.2 0.0 15.0 0.0 49.4 0.0

123.98 4.8

46.6 23.8 13.2 25.0 14.48 30.0 64.1

54.6

2.6 0.2 17.8 1 .o 2.4

25.67

0.0 11.8

(366.7) 1 .o 0.0 4.0 0.0 0.0 0.0 94.9

(1 8.9) 38.6 6.8 7.8 4.8 13.3 28.0 5.8

(25.6)

2.8 0.2

(11.8) 2.4

25.7

(3.2)

0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0.0

0.0 0.0 0.0 0.0 2.4 14.0

Notes: 1) The MX Sustainable Rural Development was recently approved by the Board in February 24", 2009. 2) FY09 Approvals also include the MX ENVDPL I11 and Supplemental totaling US$701 million. They were fully disbursed by

end-December 2008. 3) The undisbursed balance o f IBRD loans amounts US$580.85 million.

100

M EXlCO STATEMENT OF IFC's Held and Disbursed Portfolio

in Millions of US Dollars As of February 28,2009

2008 20071 2008 20061 200812009 19951 19961 19981 1999 20 08 20051 2008 2006 20011 200512007 2004 20 02 20051 2007 20031 2005 20051 20061 2009 19981 20041 2008 19971 2000 1992 19931 19961 2000 19991 2007 20061 2009 20081 2009 20 07

20 07 19981 1999 19951 19971 1999 20071 2009 20071 2009 20 07 20 03

20001 20041 2008 2007 20 09 20 02

20011 2002 20041 20051 20061 2007 1997 20 08 2006 20 02

Aka Growth Fund Banco Arnigo Banco del Bajio Baring MexFnd

Bioparques CMPDH Carlyle Mexico Corn partamos DTM Ecomex FIN EM GFNorte GMAC Fi nanaera Grupo Calidra Grupo Kuo Grupo Posadas

Grupo Sanfandila Grupo Su Casita Hipotec VeFtice lnfrainvest lnteroyal lrapuato Merida 111 Mexplus Puertos MiaoCred Mexico Monex Financiera Nexxus 111 Fund Occidental Mex Occihol Pan American Petstar Progresernos Puertas Finas Savoy Sierra Nevada Su Casita

TMA Vinte Vuela ZN Mexico II

7 .O 26.8

7.3 4.3 3.5

21.4 72.1 48 .O 51.4 6.4

18.7

21.5

16.7

8.5 2.7 4.9

7.5 143.0

0.6 9.2

40 .O

20.0 2.6

56.3 1.7

5.2 0.3

0.3 0.8

20.2 6.0

50.0 0.0

0.8 0.6

20.0

8.0 4.4

1.7

7.2

2.9 i n

5.0

0.2

10.0

5.1

3.9

20.0 2.6

56.3 1.7

12.0 26.8 5.2 7.6 4.3 4.0

221 72.1 79.6 53.4 6.4

11.6

20. 2 24.7 50.0 0.0 8.4

21.5 0.8 0.6 1.0

20. 0 16.7 8.0 4.4

14.1 2.7 4.9 1.7 7.5

143.0

4.5 16.4 40.0 2.9 1 0

8.6

0.0

38.1

22.2

11.1

2.1

7.0 26.8

4.3 3.5 9.5

72.1

36.4 6.4

8.0

21.5

16.7

8.5 1.3 4.9

7.5 143.0

0.6 4.2

25.8

1.3 2.6

55.8 1.7

1.3 0.3

0.3 0.8

20 .2 5.7

0.0

0.8 0.6

9.6

8.0 4.4

1.7

7.2

2.8 1 0

5.0

0.2

I O . 0

5.1

3.9

1.3 2.6

55. 8 1.7

12.0 26.8 1.3 0.3 4.3 4.0

10.2 72.1 10.1 37.7 6.4

IO. 0

20. 2 13.8

0.0 8.4

21.5 0.8 0.6 1.0 9.6

16.7 8.0 4.4

14.1 1.3 4.9 1.7 7.5

143.0

4.5 11.4 25.8 2.8 1 0

8.6

38.1

22 2

11.1

2.1

1999, 2000 ZN Mxc Eqty Fund 24.3 802.1 82.1 407.9 12h0 24.3 5794 82408 Total Porttolto 521.3 211.5

101

Annex 14: Country at a Glance

MEXICO: Customs Institutional Strengthening Project

Mexico a t a d a n c e 3/5/09

Key Deve lopmen t I n d i c a t o r s

(2007)

Population. mid-year (millions) Surface area (thousand sq. km) Population growth (%) Urban population (%of total population)

GNI (Atlas method, US$ billions) GNI per capita (Atlas method, US$) GNI per capita (PPP, international $)

GDP growth (%) GDP per capita growth (%)

(most recent estimate, 2000-2007)

Poverty headcount ratio at $1.25 a day (PPP, Oh) Poverty headcount ratio at $2.00 a day (PPP, %) Life expectancy at birth (yearn) Infant mortality (per 1,000 live births) Child malnutrition ( O h of children under 5)

Adult literacy. male (% of ages 15 and older) Adult literacy, female (Oh of ages 15 and older) Gross primary enrollment, male (% of age group) Gross primary enrollment, female (% of age group)

Access to an improved water source (% of population) Access to improved sanitation facilities (% of population)

Mexico

105.3 1,958

1 .o 76

989.4 9,400

12.580

3.2 2.2

75 22

93 90

110 108

97 79

Latin Amenca & Canb

563 20,421

1 2 78

3.118 5,540 9,320

5 7 4 5

8 18 73 22

5

91 89

120 116

91 78

Upper middle

income

823 41,497

0 6 75

5,750 6.987

11.868

5 8 5 1

70 22

94 92

112 109

95 83

N e t A i d Flows

(US$ rni//ions) Net ODA and offlcial aid Top 3 donors (in 2006)

United States Germany France

Aid (% of GNI) Aid per capita (US$)

Long-Term Economic T rends

Consumer prices (annual % change) GDP implicit deflator (annual % change)

Exchange rate (annual average, local per US$) Terms of trade index (2000 = 100)

Population. mid-year (millions) GDP (US$ millions)

Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation

Exports of goods and services Imports of goods and services Gross savings

Manufactunng

1980

55

9 15 15

0 0 1

I980

26 3 33 4

0 0 194

67 6 194,357

9 0 33 6 22 3 57 4

65 1 10 0 27 2

10 7 13 0 22 0

1990

156

23 9

51

0 1 2

1990

26 7 28 1

2 8 106

83 2 262,710

2000

-56

24 15

-1 1

0.0 -1

2000

9.5 12.1

9.5 100

2007 *

247

154 26 22

0.0 2

2008

5.1 6.7

11.2 114

98.0 106.4 581,426 1,085,951

(% of GDP) 7 8 4 2 3 7

28 4 280 356 20 8 203 189 63 7 678 608

69 6 670 643 8 4 11 1 9 8

23 1 239 27 1

18 6 309 281 19 7 3 2 9 298 20 3 205 253

Age distribution, 2007

Male Female

15-79

69.64

4549

3034

15-19

0.4

15 10 5 0 5 10 15

Oercent

Under4 mortality rate (per 1,000)

I U Mexiw El Latin Amriw 8. the Caribbean

Growth of GDP and GDP per capita (x)

8 6 4 2 0 2

-4 6 8

95 05

-+-GDP -GDP per capita

1980-so 1990-2000 200048 (average annual growfh %) 2.1 1.6 1 .o 1.1 3.1 2.4

0 8 1 5 2 3 1 1 3 8 1 3 1 5 4 3 1 2 1 4 2 9 2 0

1 4 2 3 3 5 2 4 1 8 0 0

-3 3 4 7 0 6

7 0 14 6 4 8 1 0 12 3 5 7

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

Development Economics, Development Data Group (DECDG).

102

Mexico

Balance of Payments and Trade

(US$ millions) Total merchandise exports (fob) Total merchandise imports (cia Net trade in goods and Services

Current account balance as a O/O of GDP

Workers' remittances

Reserves, including gold

Central Government Finance

(% of GDP) Current revenue (including grants)

Current expenditure

Overall surpiuddeficit (PSBR)

Highest marginal tax rate (%)

Tax revenue

Individual Corporate

External Debt and Resource Flows

(US$ millions) Total debt outstanding and disbursed

Total debt (% of GDP)

Foreign direct investment (net inflows) Portfolio equity (net inflows)

2000 2008

166,455 291.807

-10,661 -23,844 174,458 308,645

-18,684 -15,527 -3.2 -1.4

6,573 25,145

35,585 95,302

19.7 23.6 9.7 8.2

18.3 19.3

-3.5 2 7

40 28 35 28

2000 2007

150,313 172,966

25.9 16.9

2000 2008 17.773 18,589

447 -3981

Technology and Infrastructure

Paved roads (% of total) Fixed line and mobile phone

High technology exports subscribers (per 100 people)

(% of manufactured exports)

Environment

Agricultural land (% of land area) Forest area (% of land area) Nationally protected areas (% of land area)

Freshwater resources per capita (cu. meters) Freshwater withdrawal (% of internal resources)

C02 emissions per capita (mt)

2000 2007

32.8 37.0

27 a4

22.4 18.9

55 55 34.3 33.7

.. 5.2

.. 3,967 19.1

4.3 4.3

7.1 6.8 GDP per unit of energy use

(2005 PPP $ per kg of oil equivalent)

Energy use per capita (kg of oii equivalent) 1,534 1,712 O t k r nldtl. lBRO ,62 lateral 4 329

(US$ millions)

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

200 I

IDA Total debt outstanding and disbursed Disbursements

Private Sector Development 2000 2008 Total debt service

Time required to start a business (days) Cost to start a business (Oh of GNI per capita) Time required to register property (days)

Ranked as a major constraint to business (% of managers surveyed who agreed)

Anticompetitive or informal practices Corruption

Stock market capitalization (%of GDP) Bank capital to asset ratio (%)

2000

21.5 9.6

- 0 0 0

- -

28 IFC (fiscal year) 2000 2007 12.5 Total disbursed and outstanding portfolio 1,234 1.184

74 of which IFC own account 723 798 Disbursements for IFC own account 179 209

repayments for IFC own account 66 134 2007 Portfolio sales, prepayments and

19.0 17.8 MiGA

Gross exposure - - 38 9 New guarantees - - 13 2

Note: Figures in italics are for years other than those specified. 2008 data are preliminary. .. indicates data are not available. -indicates observation is not applicable.

3/5/09

Development Economics, Development Data Group (DECDG).

103

Millennium Development Goals Mexico

With selected targets to achieve between 1990 and 2015 (esfimafe closest fo dafe shown, +/- 2 years) Me

Goal 1: halve the rates for extreme poverty and malnutrition 1880 1885 2000 2007

24.2 17.6 Poverty headcount ratio at $1.25 a day (PPP, % of population) Poverty headcount ratio at national poverty line (% of population) Share of income or consumption to the poorest qunitiie (%) 3.9 4.3 3.9 4.3 Prevalence of malnutrition (% of children under 5) 16.6 16.9 7.5

Goal 2: ensure that children are able to complete primary schooling Primary school enrollment (net, %) g8 98 98

Secondary school enrollment (gross, %) 53 72 87 Youth literacy rate (%of people ages 15-24) 95 96 97 98

Primary completion rate (% of relevant age group) 86 95 99 104

Goal 3: eliminate gender disparity In education and empower women Ratio of gids to boys in primary and secondary education (%) 98 100 101 Women employed in the nonagricultural sector (% of nonagriculturai employment) 35 36 37 37 Proportion of seats held by women in national parliament (%) 12 14 18 24

Goal 4: reduce under4 mortality by two-thirds Under-5 mortality rate (per 1,000) 46 36 30 27 infant mortality rate (per 1,000 live births) Measles immunization (proportion of one-year olds immunized, %)

37 30 25 22 75 90 96 96

Goal 5: reduce maternal mortality by three-fourths Maternal modality ratio (modeled estimate, per 100,000 live births) Births attended by skilled health staff (% of total)

83 86 63

Contraceptive prevalence (% of women ages 15-49) 65 70 73

Goal 6: halt and begin to reverse the spread of HlVlAlDS and other major diseases Prevalence of HIV (% of population ages 15-49) 0.3 0.3 Incidence of tuberculosis (per 100,000 people) 64 45 32 23 Tuberculosis cases detected under DOTS (%) 15 77 110

Goal 7: halve the proportion of people without sustainable access to basic needs Access to an improved water source (% of population) 82 87 93 97 Access to improved sanitation facilities (% of population) 58 67 75 79 Forest area (% of total land area) 36.2 34.3 33.7

CO2 emissions (metric tons per capita) 5.0 4.4 4.3 4.3 Nationally protected areas (% of total land area) 5.2

GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 6.1 6.2 7.1 6.6

Goal 8: develop a global partnership for development Telephone mainlines (per 100 DeoDle) 6.4 9.7 12.6 18.8 Mobile phone subscribers (per'lO0 people) Internet users (per I00 people) Personal computers (per 100 people)

Education indicators (%)

:L 25 2000 2w2 2004 2006

-Primary net enrollrent ratio

+-Ratio of girls to boys In primary &

Measles immunization

103 1

1090 less

% of 1-year olds)

2wo 2006

UMexico OLatin Amrica 8 the Canbbean

0.1 0.8 14.4 64.8 0.0 0.1 5.2 21.7 0.8 2.6 5.8 14.4

ICT indicators (per 100 people) 1 80 80 70 60 50 40 30 20 10 0

2000 2 w 1 2004 2m

0 Fixed + mbile subsaibers PJ Internet users

Note: Figures in kalics are for years other than those specified. .. indicates data are not available. 3/5/09

Development Economics, Development Data Group (DECDG).

104

MAP SECTION

Citlaltépetl (5,747 m) Citlaltépetl (5,747 m)

Si e r r a

Ma

dr e O

c c i d e n t a l

S ierra Madre del Sur

Si e

r r a M

ad

r e O

r i e nt a

l

CAMPECHECAMPECHE

CHIAPASCHIAPAS

TABASCOTABASCO

OAXACAOAXACA

GUERREROGUERRERO

COLIMACOLIMA

JALISCOJALISCO

NAYARITNAYARIT

ZACATECASZACATECAS

TAMAULIPASTAMAULIPAS

NUEVONUEVOLEONLEON

C O A H U I L AC O A H U I L A

C H I H U A H U AC H I H U A H U ASONORASONORA

D U R A N G OD U R A N G O

SAN LUISSAN LUISPOTOSIPOTOSI

MICHOACANMICHOACAN PUEBLAPUEBLA

VERACRUZVERACRUZ YUCATANYUCATAN

QUINTANAQUINTANAROOROO

S INA

LOA

S I NA

LOA

MazatlánMazatlán

TorreónTorreónMatamorosMatamoros

LaredoLaredo

OjinagaOjinaga

Los MochisLos Mochis

NavojoaNavojoa

NogalesNogalesSanSan

FelipeFelipe

LoretoLoreto

SonoitaSonoita

AguaAguaPrietaPrieta

GuaymasGuaymas

TehuantepecTehuantepec

FronteraFrontera

VillahermosaVillahermosa

TuxtlaTuxtlaGutierrezGutierrez

OaxacaOaxaca

ChilpancingoChilpancingo

ColimaColima

GuadalajaraGuadalajara

TepicTepic

DurangoDurango

SaltílloSaltíllo

ChihuahuaChihuahua

CuliacánCuliacán

HermosilloHermosillo

MexicaliMexicali

GuanajuatoGuanajuato

PachucaPachuca

AguascalientesAguascalientes

QuerétaroQuerétaro

MoreliaMoreliaTolucaToluca

CuernavacaCuernavaca PueblaPuebla

TlaxcalaTlaxcala

JalapaJalapa

San LuisSan LuisPotosíPotosí

CiudadCiudadVictóriaVictória

ZacatecasZacatecas

MonterreyMonterrey

MEXICOMEXICOCITYCITY

Yaqui

Rio Bravo

Fuerte

Salado

Lerma

Balsas

Conchos

BAJABAJACALIFORNIACALIFORNIA

BAJABAJACALIFORNIACALIFORNIA

SURSUR

MEXICOMEXICO

MORELOSMORELOS

DISTRITO FEDERALDISTRITO FEDERAL

HIDALGOHIDALGOGUANAJUATOGUANAJUATO

AGUASCALIENTESAGUASCALIENTES

TLAXCALATLAXCALA

QUERÉTAROQUERÉTARO

Usuummacinta Rio Grande

GUATEMALAGUATEMALATapachula

PuertoEscondido

Acapulco

Puerto Vallarta

Mazatlán

TorreónMatamoros

Laredo

Ojinaga

Los Mochis

Navojoa

Nogales

Ensanada

Tijuana

SanFelipe

SantaRosalia

Loreto

Cabo San Lucas

Sonoita

AguaPrieta

Ciudad Juárez

Guaymas

Veracruz

Tampico

Tehuantepec

Cozumel

Cancun

Frontera

Chetumal

Merida

Villahermosa

Campeche

TuxtlaGutierrez

Oaxaca

Chilpancingo

Colima

Guadalajara

Tepic

Durango

Saltíllo

Chihuahua

Culiacán

Hermosillo

Mexicali

La Paz

Guanajuato

Pachuca

Aguascalientes

Querétaro

MoreliaToluca

Cuernavaca Puebla

Tlaxcala

Jalapa

San LuisPotosí

CiudadVictória

Zacatecas

Monterrey

MEXICOCITY

CAMPECHE

CHIAPAS

TABASCO

OAXACA

GUERRERO

COLIMA

JALISCO

NAYARIT

ZACATECAS

TAMAULIPAS

NUEVOLEON

C O A H U I L A

C H I H U A H U A

BAJACALIFORNIA

BAJACALIFORNIA

SUR

SONORA

D U R A N G O

SAN LUISPOTOSI

MICHOACAN

MEXICO

MORELOS

DISTRITO FEDERAL

PUEBLA

HIDALGOVERACRUZ

GUANAJUATO

AGUASCALIENTES

TLAXCALA

YUCATAN

QUINTANAROO

S INA

LOA

QUERÉTARO

UNITED STATES OF AMERICA

GUATEMALA

BELIZE

HONDURAS

ELSALVADOR

Yaqui

Rio Grande

Rio Bravo

Fuerte

Salado

Lerma

Balsas

Usumacinta

Conchos

PACIFICOCEAN

Gulf of Mexico

Bay of Campeche

Gulf ofTehuantepec

Gulf of

Honduras

Gu

l f of C

al i f o

r ni a

To Los Angeles

To Gila Bend

To Albuquerque

To Alamogordo

To Midland

To San Antonio

To San Antonio

To Houston

To San Salvador

Si e r r a

Ma

dr e O

c c i d e n t a l

S ierra Madre del Sur

Si e

r r a M

ad

r e O

r i e nt a

l

Citlaltépetl (5,747 m)

115°W

30°N30°N

25°N

15°N

25°N

20°N

15°N

110°W

110°W

105°W 100°W 95°W 90°W

105°W 100°W 95°W

85°W

MEXICO

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 100 200

0 50 100 150 200 Miles

300 Kilometers IBRD 33447R

NO

VEM

BER 2008

MEXICOSELECTED CITIES AND TOWNS

STATE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

STATE BOUNDARIES

INTERNATIONAL BOUNDARIES