Note on Cancelled Operation

Document of

The World Bank

Report No: NCO00001902

NOTE ON CANCELLED OPERATION

ON A

LOAN

IN THE AMOUNT OF US$491 MILLION

TO THE

UNITED MEXICAN STATES

FOR AN

INFLUENZA PREVENTION AND CONTROL PROJECT

November 22, 2011

Human Development Sector Management Unit

Mexico and Colombia Country Management Unit

Latin America and the Caribbean Region

CURRENCY EQUIVALENTS

(Exchange Rate Effective June 1, 2011)

Currency Unit=MXN

1 MXN = US$0.086

US$ 1.00 = MXN 11.668

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ACC / Applicable anticorruption clauses
AHIF / Avian and Human Influenza Facility Grant for the Influenza A/H1N1 Prevention
AIDS / Acquired Immune Deficiency Syndrome
BIRMEX / Laboratories of Biologics and Reagents of Mexico- Laboratorios de Biológicos y Reactivos de México
BP / Bank Procedure
CENAVECE / National Center for Epidemiological Surveillance and Disease Control -Centro Nacional de Vigilancia Epidemiológica y Control de Enfermedades
CENSIA / National Center for Child and Adolescent Health -Centro Nacional para la Salud de la Infancia y la Adolescencia
CNPHI / Canadian Network for Public Health Intelligence
CPS / Country Partnership Strategy
DGAE / Adjunct Directorate of Epidemiology - Dirección General Adjunta de Epidemiología
DGAPP / Adjunct Directorate of Preventative Programs - Dirección General Adjunta de Programas Preventivos
FY
GAC
GDP
GoM
GPAI
HDI
HIV
OP
PDO
RPMs
SARS
SHCP
SINAVE
SISVEFLU
SPSH
SS
UPPH / Fiscal Year
Governance and Anti-corruption
Gross Domestic Product
Government of Mexico
Global Program for Avian and Human Influenza Preparedness
Human Development Index
Human Immunodeficiency Virus
Operational Policy
Project Development Objective
Regional Procurement Managers
Severe Acute Respiratory Syndrome
Federal Secretariat of Finance - Secretaría de Hacienda y Crédito Público
National System for Epidemiological Surveillance -Sistema Nacional de Vigilancia Epidemiológica
Epidemiological Surveillance System for Influenza-Sistema de Vigilancia Epidemiológica de Influenza
Social Protection System in Health-Sistema de Protección Social en Salud, SPSS
Federal Secretariat of Health -Secretaría de Salud
Under-Secretariat for Prevention and Promotion in Health-Subsecretaría de Prevención y Promoción

Vice President:Pamela Cox

Country Director:Gloria Grandolini

Sector Manager:Joana Godinho

Project Team Leader:Christoph Kurowski

NCO Team Leader:Claudia Macias

UNITED MEXICAN STATES

Influenza Prevention and Control Project

CONTENTS

Data Sheet
A. Basic Information
B. Key Dates
C. Ratings Summary
D. Sector and Theme Codes
E. Bank Staff
F. Ratings of Project Performance in ISRs (if available)
1.Context, Project Development Objectives, and Design
2.Post-Approval Experience and Reasons for Cancellation
3.Assessment of Bank Performance
4.Assessment of Borrower Performance
5.Lessons Learned
Annex 1. Bank Lending and Implementation Support/Supervision Processes
Annex 2. List of Supporting Documents
MAP IBRD 33447R

1

1.Context, Project Development Objectives, and Design

1. Country Background. As Mexico neared the end of the annual influenza season in early 2009, health officials had noticed an unusual increase in patients presenting flu-like symptoms. Testing revealed that a new strain of influenza A/H1N1 was responsible for the infections. By mid-June, the spread of A/H1N1 around the world had led the WHO to declare a Phase 6 Pandemic Alert, which according to that agency was an indication that “a global pandemic is underway” and that “actions should shift from preparedness to response”. By the time the negotiations of a proposed loan in the amount of US$491 million to the United Mexican States (the Borrower) in support of the Influenza Prevention and Control Project (the Project) were being concluded in September 2009, there had been more than 52,000 laboratorial-confirmed cases causing the death of more than 350 people in Mexico. Health care providers had reported more than 175,000 clinical cases, according to which the Bank estimated that the total number of infections exceeded 347,000.

1. At the same time, in 2009, Mexico was expected to experience its sharpest economic contraction since the 1994-95 peso crisis: theSecretaría de Hacienda y CréditoPúblico (SHCP, the Ministry of Finance and Public Credit) had in August projected that GDP would decline 6.8 percent, a sharp drop from the moderate growth of the previous four years. The cause of this contraction was the global financial crisis that had precipitated a sharp drop in the demand for Mexico’s exports. In addition, the global financial crisis had affected Mexico’s economy through lower oil prices, capital flight (and consequent credit contraction) and a decline in remittances (with resultant reduction in consumer demand). The economic contraction had contributed to a large projected budget deficit for 2009, at the time projected to reach 2.1 percent of GDP that circumscribed the Government’s ability to direct resources toward its response to the A/H1N1 influenza outbreak that was affecting its population.

1. Reciprocally, the A/H1N1 epidemic was further weakening fiscal and macroeconomic prospects. Direct public expenditures on the response to the first wave of A/H1N1 were estimated by the Government to have exceeded US$600 million, and the macroeconomic impact of the epidemic was estimated by the Government and the Bank to range from 0.3 to 0.8 percent of GDP. The A/H1N1 epidemic was affecting the economy through lost revenues due to reduced demand from social distancing, particularly in the retail sector, as well as through a severe drop in tourism revenue. Further, the economic downturn was expected to result in an increase in poverty, thereby creating conditions that could facilitate the spread of the A/H1N1 virus.

1. Adding to the Government’s concerns was the fact that epidemiologists, based on the patterns of past influenza pandemics, expected that a second wave of A/H1N1 would affect Mexico during the winter, and that by then the virus could have mutated into a more virulent strain.

1. At the same time, the A/H1N1 epidemic and the economic contraction threatened human development and specifically health outcomes in Mexico, many of which were already incommensurate with the country’s income level. While Mexico’s overall Human Development Index (HDI) was close to that of countries with similar levels of GDP per capita, some outcomes were closer to those much poorer countries. Infant mortality, at 28 per 1000 live births, was above the expected level for a country with Mexico’s per capita GDP. Further, human development outcomes varied widely across Mexico’s federal entities (31 states and the Federal District). For purposes of illustration, Mexico’s HDI ranked 52nd among countries in the world, while that of the State of Chiapas, would, if it were a country, result in a rank of 107th in the world.

1. Sector Background. Mexico’s health system was not ideally positioned to confront the twin challenges of the epidemic and the recession. The Government was spending about 2.9 percent of GDP in health, well below the regional average of 3.6 percent for countries in the Latin American and Caribbean region. Partly as a consequence of this, more than half of all health expenditures were out-of-pocket. Social health insurance programs and national health services operate in parallel with decentralized state-level health service provision; this fragmentation was problematic because it constrained effective planning and sector-wide coordination.

1. Conceived at the outset of the current administration, the Government’s National Epidemiological Surveillance System (SINAVE) Plan 2007-2012 and its National Health Sector Program 2007-2012, together focused, inter alia, on improving the epidemiological surveillance and strengthening the response capacity of health services. The Government’s five-year plan for SINAVE and the health sector emphasized the need for strengthening preparedness for disease epidemics. The Bank was already supporting several pillars of the Government’s National Health Sector Program through several ongoing and proposed operations (see Rationale for Bank Involvement, below), but not directly in the area of health surveillance. The proposed Project would complement and expand upon the Bank’s support to Mexico’s health sector, by supporting the country in addressing the A/H1N1 epidemic and, in parallel, improving health surveillance.

1. Rationale for Bank Involvement. The rationale for the Bank’s involvement was strong. At the Bank and IMF Spring Meetings in April 2009, Mexico’s Minister of Finance and Public Credit and the Bank’s President agreed upon a package of assistance to help close the gap between the costs of controlling the first wave of influenza A/H1N1, improving detection, expanding its response capacity and the budget resources available that included the reprogramming of an ongoing operation, preparing a new loan to support the Government’s efforts, and securing grant funding under the Avian and Human Influenza Facility (AHIF). The Bank responded initially by reprogramming US$25.7 million from the then ongoing Third Basic Health Care Project to reimburse expenditures on laboratory equipment, laboratory supplies, anti-viral medicines and medical supplies.[1] Assistance under the AHIF was to support state health systems in promoting preventive behaviors. The Project was expected to supplement these resources.
2. At the same time, the Bank had a long history of providing assistance to Mexico’s health sector. Starting with the First Basic Health Care Project in the late 1980s, the Bank had supported expanding the reach and improving the quality of health services, ensuring the financial sustainability of social health insurance programs, expanding non-contributory health insurance coverage of the poor, and developing institutional capacity in the health sector. Following the implementation of three successive health projects, the Bank was, at the time, working with the Government on the preparation of a project in support of the Government’s non-contributory health insurance program, Seguro Popular, that provides universal health coverage to Mexico’s population. The Bank had also engaged in extensive analytical work and advisory services on health care issues in tandem with implementation support and project preparation.

1. The Bank also had extensive experience in supporting Governments throughout the world in preparing for and responding to influenza epidemics, in controlling infectious disease, and in strengthening national epidemiological surveillance systems. This experience included that acquired through the Global Program on Avian Influenza, the response to the SARS epidemic and HIV/AIDS, especially in Latin America, and strengthening national epidemiological surveillance systems also in Latin America.

1. The flexible design of the World Bank Group’s Country Partnership Strategy (CPS) 2008-2013 discussed by the Bank’s Board on April 8, 2008 facilitated a timely and effective response to Mexico’s changing development needs in the face of the deteriorating global financial and economic environment. The Project was consistent with the objectives and principles of engagement of the CPS that included flexibility, fast response and selectivity in addressing developing challenges. The Project, processed as an emergency response in accordance with OP/BP 8.00, demonstrated the Bank’s flexibility and fast response capacity to Mexico’s changing financing and development needs, and was closely aligned with two of the development challenges identified in the CPS, namely sustainable growth through investment in human capital and strengthening institutions.

1. The Project was consistent with OP/BP 8.00 since it would provide resources that the Government needed to preserve human capital, restore economic activity, and prepare and mitigate the effects of potential future health emergencies. By strengthening the Government’s ability to monitor and control influenza epidemics, the Project was expected to support these eligible objectives defined in OP 8.00. Alternative sources of financing had been considered, including from the Bank’s Global Program for Avian and Human Influenza Preparedness (GPAI), but given the magnitude of the resources that Mexico would require, the Bank opted for preparing a stand-alone project that would be considered directly by its Board of Directors.

1. Development Objectives. The development objective of the Project was to strengthen the capacity of the Mexican health system to monitor the spread of influenza viruses and to control epidemic waves. The capacity to monitor the spread of influenza viruses rested on the robustness of the SINAVE, the improvement of which entailed developing SINAVE’s information technology system, upgrading Mexico’s national reference laboratory, training staff, and strengthening data analysis, research and evidence-based public health decision making. The capacity to control influenza epidemic waves depended on the infrastructure to effectively distribute medicines, vaccines and medical supplies and the strategic reserves thereof.

Project Components. The Project comprised two components, as described below.

1. Component I: Strengthening the capacity to monitor the spread of influenza viruses (US$64 million). The objective of this first component was to strengthen the capacity of the Mexican health system to monitor influenza activity. The Project was expected to accomplish this by: (a) strengthening the management and technical quality of the SINAVE through developing SINAVE’s information technology system and upgrading the Borrower’s national reference laboratory for epidemiological surveillance, including construction and equipping; (b) ensuring the quality, relevance and timeliness of epidemiologic information through organizational reforms in the Secretaría de Salud (the Borrower’s Federal Secretariat of Health, SS) including the establishment of a central analysis unit and mobile units, setting up epidemiological research programs to assess the relevance and deepen the understanding of information collected, and certifying SINAVE according to international standards; and (c) improving SINAVE’s human resource capacity through training its staff in new processes, management schemes and bio-security in laboratories, applying new information technologies and platforms, carrying out knowledge events promoting a culture of analysis, research and dissemination of information for policy-making.

1. Component II: Strengthening the capacity to control epidemic waves of influenza viruses (US$426 million). The objective of this second component was to strengthen the capacity of the Mexican health system to control influenza epidemic waves. The Project expected to accomplish this by strengthening the infrastructure to effectively distribute medicines, vaccines and medical supplies, replenishing and expanding the country’s strategic reserves thereof. In particular, the Government planned to vaccinate more than 20 million Mexicans against A/H1N1 in the winter of 2009, as soon as the vaccine became available. The proposed loan would reimburse the Government for the expenditures it had incurred during the first wave of influenza A/H1N1 for the purchase of medicines, vaccines and medical supplies on or after April 23, 2009, once it met the eligibility criteria under each of the Project components.

1. Costs and Funding.The Project cost by Component is presented in the Table below.

Project Cost by Component / LocalUS$ million / LoanUS$ million / TotalUS$ million
I. Strengthening the capacity to detect an influenza outbreak / 63.700 / 0.3 / 64.000
II. Strengthening the capacity to respond to an epidemic / 36.775 / 389.000 / 425.775
Total Baseline Cost / 100.475 / 389.300 / 489.775
Front-end Fee / 1.225 / 1.225
Total Loan amount / 491.000
Price Contingencies / 11.000 / 36.000 / 47.000
Interest during Construction / 0.800 / - / 0.800
Total Financing Required / 112.275 / 426.525 / 538.800

1. Implementation Arrangements. The Project would have been coordinated and implemented using organizational structures and staff of the Federal Secretariat of Health (SS), specifically through organizational units under the Under-Secretariat for Prevention and Promotion in Health (UPPH), including the National Center for Epidemiological Surveillance and Disease Control (CENAVECE), the National Center for Child and Adolescent Health (CENSIA) and the Directorate of Operations. Within CENAVECE, the Adjunct Directorate for Epidemiology (DGAE) and the Adjunct Directorate for Preventive Programs (DGAPP) would have had important roles. The DGAE would have served as the Project Coordination Unit and have led the implementation of the Project’s Component I. In close collaboration with DGAE, DGAPP and CENSIA would have led the implementation of the Project’s Component II. Although not formally incorporated as an implementing agency under the Project, BIRMEX, a financially autonomous public limited company registered in Mexico, was the only agency responsible for purchasing and delivering A/H1N1 vaccines, which were at the time in limited supply, for the Government.[2]

1. The Directorate of Operations was to have supported DGAE, DGAPP and CENSIA in all fiduciary tasks, including preparing and updating the Project’s Operational Manual and procurement plans, carrying out the procurement of goods, works and services, preparing ex-post procurement reviews, non-audited Interim Financial Reports, Project Financial Statements and Statements of Expenditures, Records and Summary Sheets and preparing for Project audits. On fiduciary matters, all units and in particular the Directorate of Operations would have been supported by Nacional Financiera, a public financial agent with ample experience in supporting the implementation of Bank-financed projects.

1. The Project was to have been implemented at the national level, including the central acquisition of all works, goods and services. Yet, the impact of the Project was to depend on complementary activities carried out by federal entities. For this, DGAE was to ensure that project activities were incorporated into Cooperation Agreements that were routinely entered into by the Federal Secretariat of Health with each of the federal entities. These Cooperation Agreements were to include, inter alia, the federal entities’ obligations to carry out complementary activities, for the distribution of medicines and vaccines and to comply with the Project’s safeguard requirements.

1. Eligible expenditures financed by the Federal Secretariat of Health with resources from the National Budget were to be reimbursed by the Bank on the basis of supporting documents. Eligible expenditures paid by the Government between April 23, 2009 (the date the new influenza strain had been identified) and the date of loan signing could have been reimbursed up to an amount not exceeding 40 percent of the loan amount.

1. Risk Analysis. The Emergency Project Paper, in its section on Project Risks and Mitigating Measures, identified four key risks (although it provided no risk ratings), and corresponding mitigating measures, as follows:

1. Mexico could face challenges in preparing for a second wave of the A/H1N1 influenza epidemic in particular, its response capacity could be insufficient to control a second wave.