Chapter 4. Strengthening Hidalgo’s governance for an effective policy outcome

This chapter provides a diagnosis of the main multi-level governance mechanisms and the regulatory policy of Hidalgo, as well as an analysis of subnational governments’ finance of the state and its municipalities. The chapter has four sections. The first presents an overview of the national governance structure and the distribution of competencies between levels of government. The second focuses on the fiscal revenues and expenditures of the State of Hidalgo and its municipalities. The third discusses the State Development Plan and its governance mechanisms. The fourth analyses the regulatory improvement policy and the actions to enhance the business environment in Hidalgo.

The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank.

Key findings

1. Despite advancing on decentralisation in Mexico, states are still limited in their financial portfolio. Competencies and responsibilities are not clearly defined and there is an overlap between the levels of government. There is a misalignment between responsibilities allocated to subnational governments and the resources and capabilities available to them, with the federal government still controlling large spending areas.
2. Within the Mexican context, Hidalgo stands in a relatively weak position. The state has the fourth-lowest level of own revenues collection in Mexico and its dependency on federal transfers (90% of the state income) is above the national average. It has created a lack of accountability and low incentives for an effective and prudent fiscal policy.
3. Most of the transfers to Hidalgo stem from earmarked funds (62%), limiting the autonomy of the state and municipal governments, to adapt policies to local needs and circumstances. Furthermore, the non-earmarked transfers are highly volatile which limits subnational medium-to-long term planning.
4. Hidalgo has significant space to increase the fiscal revenues at the state and municipal level. The share of the state tax collection (2.8%) is below the country’s average (4.1%), with a lower collection of payroll and property taxes. High informality rates, low institutional capacity at local level coupled with a small tax base and relatively low levels of tax rates and fees hamper the own fiscal revenues in the state.
5. Property taxes are especially low at the municipal level. During 2012-16, the share of the land use tax in the municipal revenue (3%) was half the average in Mexican municipalities (6%). It is explained by a low enforcement in the update of cadastres and urban development plans and the low efficacy of tax collection.
6. Hidalgo is the state with the sixth lowest level of public investment per capita in Mexico and the existing investments do not target the strategic sectors for the state. At the state level there is no investment in productive projects and at the local level, most of it is allocated to security (96%), with sectors like agriculture or tourism receiving limited resources.
7. Hidalgo has made an important effort in elaborating a comprehensive State Development Plan closely linked to the Sustainable Development Goals (SDGs) objectives. Nonetheless, the plan could be further improved:
- State objectives are currently too broadly defined, lack of prioritisation and differentiation between short, medium and long term. This can lead to weaker monitoring and refocusing of public policies.
- The strategic pillars bear cross-cutting issues without promoting sharing responsibilities.
- Although the programmes are by nature multi-year, the provision of funds does not contemplate a multi-year budget.
8. Monitoring and evaluation of the State Development Plan (SDP) are made through a mechanism of indicator performance that present some challenges:
- The indicators tend to duplicate across secretaries and there is no real sense of transversality and complementarity. It hampers the scope for vertical or horizontal co-ordination and reduces clarity over the attribution of responsibilities to each secretary and level of government
- Priority indicators reflect outputs rather than outcomes. There is no clear differentiation between input, output and outcome indicators.
- Indicators lack a clear criterion on fulfilling objectives based on a benchmark with comparable regions, past objectives or a baseline value.
9. Hidalgo has enough fora and institutions to enhance vertical and horizontal co-ordination within and across the state, although there is no institutional mechanism to incentivise the co-ordination. The Regulatory Improvement Law and the performance indicators mechanism can be used as a tool for better co-ordination.
10. The understaffing, retention and motivation of public servants is a challenge in the state. Hidalgo has developed a policy of lean management, by reducing staff in the search for modernisation. However, it needs to be accompanied by strategies to change and make more efficient the operation of the public administration.
11. The State of Hidalgo is advancing on citizen participation and initiatives to promote public finance accountability. The state has set citizen participation as one of the strategic objectives of the State Development Plan. The Citizens Advisory Council of the State of Hidalgo (CCCEH) is enhancing the government-citizen dialogue.
12. The State of Hidalgo developed a Law on Regulatory Improvement that seeks to improve regulatory quality and is consistent with many of the practices adopted by OECD countries. However, it is still missing the elaboration of the subordinating regulation – El Reglamento –, the instruments to analyse draft regulation (RIA) and more clarity on the setup of a State Commission on Regulatory Improvement.
13. The main efforts of Hidalgo on regulatory improvement focus on administrative simplification, with a 100-priority process to be simplified and digitalised. However, simplification requires a formal strategy, which should be based on reducing administrative burdens.
14. The government of Hidalgo has a plan to digitalise the processes on a one-single-stop shop (Web portal). However, there is no clear classification of the processes and their link with specific economic or citizens activities.
15. Institutional co-ordination between ministries and agencies with the current office in charge of regulatory improvement is weak. A relevant practice seems to be the co-ordination with the judiciary power, which must comply with the law on regulatory improvement. It can serve as a good example to be generalised across agencies.

Introduction

Improving the territorial development in a state or municipality depends largely on the institutions, frameworks and processes shaping the territory’s public governance structure. The strength of this structure, how it is managed and its adaptability to changing circumstances are prerequisites to meet state objectives.

This review has stressed the efforts the State of Hidalgo is making to attract investment and increase productivity while attaining inclusive and sustainable growth. The state can unleash economic opportunities based on its favourable geographic location (closeness to the largest internal market), its well-developed infrastructure in the south coupled with a high endowment of natural resources and safety environment. However, the state still requires a clearer policy strategy to match large investment with local capacities and promote policy complementarities to unleash untapped opportunities across the territory. To allow these policies and strategies to be well conceived, applied and financed, Hidalgo needs the right governance and regulatory setting.

This chapter examines the governance and regulatory tools in the State of Hidalgo and provides recommendations to spur the effectiveness, efficiency and inclusiveness of government actions. It argues for the need for greater attention to fiscal management and co-ordination at different levels of government, the improvement of planning mechanisms and the importance of an efficient regulatory policy with stronger accountability instruments.

The first section begins with an overview of the national governance structure and the distribution of competencies between levels of government. It then examines the fiscal revenues and expenditures of Hidalgo and its municipalities. Next, it discusses the State Development Plan and its governance mechanisms and lastly, it analyses the regulatory improvement policy and actions to enhance the business environment.

The Mexican decentralisation context

Mexico is one of nine federal countries in the OECD.1 It is a presidential state with three levels of government. The President of the Republic, elected for a six-year term, heads the executive branch. At the subnational level, the country is divided into 32 states and each one of them is composed of municipalities. There are approximately 2 457 municipalities in the country, 84 of which are in the State of Hidalgo. The country has experienced several phases of decentralisation, transferring significant competencies to subnational governments particularly in the delivery of education and health services (Box 4.1). Nonetheless, subnational governments have limited margins of manoeuvre because the central government takes most of the strategic decisions and because states and municipalities, due to fiscal imbalances, are strongly dependent on earmarked funds from the central government.

The constitution defines that the states are free, sovereign, autonomous and independent from one another. Mexican states have their own constitutions and can enact their own laws as long as they do not contradict the national constitution. The division of powers in the states is similar to that of the national level, with a governor that is elected for a six-year term and who is head of the executive branch. Each state, however, has its own electoral calendar. In most of the states (26), the governor election coincides with that of the federal level, while in Hidalgo it occurs 4 years later (the mandate of the current governor is 2016-22). State governments also have their judiciary branch with their own civil and penal codes.

Box 4.1. Overview of Mexican decentralisation

The decentralisation process in Mexico is charged with two centuries of history and conflict. The 19th century saw strong opposition between pro-centralisation and decentralisation governments. In 1857, Mexico was definitively established as a federal government. Despite the constitution of a federal state, the fiscal agreements in the 1920s and 1930s, the hegemony at all levels of government of the Partido Revolucionario Institucional (PRI) and the import-substitution development model lead de facto to a highly-centralised political and fiscal model.

The movement towards decentralisation in Mexico was driven by a quest to reduce poverty and inequality and to improve public service provision representation and accountability (Giugale and Webb, 2000[1]). In Mexico, this transition took the form of three main reforms (Cabrera-Castellanos, 2008[1])(i) the creation of the Nacional System of Fiscal Co-ordination (Sistema Nacional de Coordinación Fiscal, SNCF) in 1980 which clarified the rules of fiscal transfers, centralised VAT collection and sought to avoid double or triple taxation; ii) the constitutional change in 1983, which decentralised functions to the states and municipalities while allowing local governments to have their own resources; and iii) the transfer of health and education services to the states between 1995 and 1998.

Source: Adapted from OECD (2017[1]), OECD Territorial Review of Morelos, Mexico, https://doi.org/10.1787/9789264267817-en.

At the third level of government, municipalities are autonomous local governments, but they are governed by state constitution and legislation. A mayor heads the local government and is supported by the municipal council. In 2014, Mexico issued an electoral reform to allow re-election of mayors at the municipal level, if their mandate is not higher than three years. The re-election does not apply to Hidalgo since the term of its mayors is four years, unlike most states where there is a three-year term.

There is an overlap of responsibilities across levels of government in Mexico

Mexico is characterised by a complex system of overlapping competencies and spending responsibilities, particularly in terms of implementation and financing. Federal powers are extensive and sometimes overlap with the responsibilities of states and municipalities. The federal government is responsible for matters relevant to the whole country, such as macroeconomic policy, defence and research and development policy. The sectors for which the federal government is not the single main responsible tend to pose strong multi-level governance challenges since they require two or three inter-dependent levels of government working together.

States are responsible or co-responsible for the delivery of several public services. They are in charge of delivering education and healthcare, co-responsible, with the federal government and municipalities, for poverty alleviation and water management. Tourism, agriculture and industrial policies are also shared between the national level and the states. While states have the primary responsibility for staffing and funding, they have little flexibility in the way money is spent, as most of the funding is earmarked for the payment of salaries (e.g. staff compensation absorbs over 90% of all education spending) (Caldera Sánchez, 2013[2]).

Municipal governments are responsible for local matters primarily. They are in charge of the implementation of social programmes and water distribution, and bear an important role in urban planning through the granting of construction permits, the update of cadastres and development of urban plans. They are also responsible for roads and school maintenance, garbage collection, public lighting, cemeteries, public parks and markets. Infrastructure and transportation are sectors that involve the three layers of government, with the central government mostly responsible for the financing and the subnational levels responsible for the maintenance. At the local level, healthcare and education are two of the most affected areas of overlap. Most of the spending of local governments in these sectors is allocated to staff expenditure, with a limited spending capacity on goods, services and investment.

The lack of clarity in the definition of spending responsibilities yields low incentives for subnational governments to be fully accountable for the public services’ provision. This potentially results in an inefficient provision and poor quality of public service (Caldera Sánchez, 2013[2]).

The imbalance in Mexican fiscal system

Developing a system for local governments to assume both fiscal and political responsibilities is an ongoing challenge in Mexico. Subnational governments (states and municipalities) are responsible for an important share of public expenditure, although they have limited own-revenue resources and low fiscal autonomy. This imbalance creates not only a lack of incentives for own-revenue generation and for effective fiscal policy but also low accountability and responsibility for outcomes.

While subnational governments are relevant for spending purposes, their role on fiscal revenues is quite limited

Mexico’s subnational governments have an important role in fiscal matters.

They carry out more than half of the public expenditure (52% in 2015), in line with the average of the 9 OECD federal countries (50%).
They are important public employers (65% of public staff expenditure).
They conduct a big share of total public investment (79%), significantly above the average of OECD federal countries (66%).

Nevertheless, the share of subnational tax revenue in both public tax revenue and total subnational government revenue is among the lowest of OECD federal countries (OECD, 2018[3]). Mexican subnational governments collect only 6% of the tax revenues of the federal government, far below the average of OECD federal countries (41%) (Figure 4.1). The proportion of taxes in total subnational government revenue (7.2%) is the lowest among OECD federal countries and ranks among the last within all OECD countries (OECD, 2018[3]).

The unbalanced assignment of responsibilities across levels of government in Mexico is especially harmful to local governments. Municipal governments have extensive responsibilities on paper but in reality, a quite limited economic role. The share of Mexican municipal expenditure in public spending (9%) is among the lowest of the OECD federal countries (15%). While Mexican municipalities are in charge of providing basic public services and adopting territorial and urban municipal development plans, they often lack enough resources and incentives to update such plans and miss adequate infrastructure and sophisticated tools to collect taxes on top of instruments for guiding spending and measuring success (OECD, 2015[4]).

Figure 4.1. The fiscal role of subnational governments in the OECD and Mexico, 2015

Federal transfers represent the main revenue source of subnational governments. While in federal countries the funding model of subnational governments is largely based on taxation, Mexican subnational governments are almost exclusively funded through grants and subsidies (92% of subnational revenue), whose share is by far the highest in the OECD federal countries (32% in average) (Figure 4.2).

Despite its federal structure and ongoing efforts of decentralisation, Mexico remains relatively centralised. Federal government control large spending areas and the autonomy of municipal government is still severely limited, which makes it the weakest tier of the Mexican government. The recent tax reform of 2014 is a step forward towards improving tax collection of subnational governments, the subnational governments’ spending efficiency and increasing tax powers of the states. In this regard, the recent OECD Economic Survey for Mexico developed some key findings and recommendations (Box 4.2).

Figure 4.2. Subnational government revenue by type, 2015

Box 4.2. OECD recommendations on the Mexican fiscal policy

The 2017 OECD Economic Survey issued some assessment and recommendations on the Mexican fiscal policy:

Key findings	Recommendations
Social expenditure is too low to eliminate poverty and make society more inclusive	- Strengthen social expenditure on programmes to eradicate extreme poverty, such as Prospera - Raise and broaden the minimum pension to expand the old-age safety net
Tax evasion and tax avoidance lower government revenue	- Co-ordinate the collection of income taxes and social security contributions - Make better use of property taxes - Further broaden income tax bases and remove inefficient tax expenditures
Fiscal data are difficult to interpret on an international basis	- Fully separate PEMEX from the federal budget when feasible - Present budget documents and fiscal data on both domestic and national accounts standards
Fiscal relations with state-owned enterprises (SOEs) are distortive	- Normalise the taxation of SOEs by shifting to a tax regime similar to that of the private sector
Source: OECD (2017[5]), OECD Economic Surveys: Mexico 2017, https://doi.org/10.1787/eco_surveys-mex-2017-en.

The Fiscal system in Hidalgo

The current government took office in 2016 within a difficult financial scenario of low levels of own revenue collection, increasing debt and interest rates (growth of 34% between 2011 and 2016) and a weak fiscal co-ordination with local governments. The state has been conducting actions to attain an efficient fiscal system, including a cut in unnecessary expenses and a lean management strategy. However, much more is to be done to achieve efficient fiscal revenue and spending.

Fiscal revenues

The System of Fiscal Coordination (SFC) establishes the regulation on the own resources that state and municipal governments can levy. Taxes on income, consumption, production and services are categorised as national taxes and are partially transferred to the subnational governments. States and municipalities are autonomous in setting their own tax rates and bases over payroll tax, vehicle taxes, property taxes and user fees. These taxes are designed at the state level and approved by the state congress.

Revenue sources of subnational governments in Hidalgo, as in Mexico, can be divided into four major groups: i) own resources; ii) non-earmarked transfers or revenue sharing (transfer participation – participaciones); iii) earmarked funds (aportaciones) and matching transfers (convenios); and iv) other sources of income such as revenues from state-owned enterprises and debt, among others.

Similarly to other Mexican states, the main income of the State of Hidalgo comes from federal transfers. Between 2012 and 2016, 90% of Hidalgo’s revenues stemmed from transfers (62% earmarked and 28% non-earmarked), while own revenues represented 5% and debt 3.6%. This dependency poses not only problems in long-term planning, due to the transfers’ fluctuation, but also creates negative incentives for the mobilisation and co-ordination of subnational government revenue. Furthermore, the budget negotiation of some transfers tends to be very complex and prone to political discretion.

Between 2000 and 2016, Hidalgo’s revenues have experienced a five-fold increase (from MXN 9.3 billion to MXN 46.1 billion), in line with growth at the country level. However, the composition of the state revenue’s sources has experienced important changes in recent years. While the share of own resources has decreased since 2011 (from 9% in 2011 to 5% in 2016), the revenues from earmarked transfers have gained prominence within Hidalgo’s revenues (from 60% in 2011 to 65% in 2016) (Figure 4.3). As discussed in the next section, most of the drop in own revenues has been explained by a decrease in the amount collected from advantages and taxes (specifically property tax).

The overall debt level has decreased in recent years from 2.2% of the state gross domestic product (GDP) in 2015 to 1.8% in 2017. In fact, in 2017, Hidalgo ranked as the 13th state with the lowest debt ratio to GDP in the country, below the median of Mexican states (2.2%) (Figure 4.4).

Figure 4.3. Evolution of revenues in Hidalgo by type

Figure 4.4. Public debt ratio to GDP per Mexican state, 2017 and 2015

The central government has long sought to increase levels of own resources in the states by increasing taxation powers and incentives. The 2007 fiscal reform aimed to transfer the ability to levy a surcharge on income taxes and levy a sales tax as well as taxes on diesel, gasoline and vehicle ownership or use. Further incentives such as including fiscal efforts in the formulas of several non-earmarked funds have been also tested (Caldera Sánchez, 2013[2]). The recent 2014 tax reform in Mexico allowed states to charge income tax on payrolls and, together with municipalities, fully participate in the income tax of their administrative staff. It also established an incentive for municipalities to transfer the administration of the property tax to the state government (OECD, 2017[5]). Nonetheless, in Hidalgo, such changes have not yet fully produced positive effects, leaving the share of own resources at similar levels as they were before the reforms (see Figure 4.3).

Hidalgo has unexploited potential to increase own revenues

In Hidalgo, own resources are divided into taxes, duties, products, special assessments and advantages. In 2016, most of the own resources came from taxes and duties:

Taxes represent the largest share of own revenues in Hidalgo (62%). More than half stem from payroll taxes (58% over total taxes), followed by the taxes for public works (8%). Instead, property tax in Hidalgo represented just 3% of total taxes.
Revenues from duties account for the other big share of own revenues (25%). They refer to the charge for services such as civil registry, public property registry, certificates, licences, permits, and roads and water rights.
Revenues from products (7%) refer to the use or sale of goods and other products such as the lease of public property, financial return from assets in firms or the return on official publication.
Advantages (5%) refer to revenues from fines and penalties, donations, contributions and others.
Special assessments (1%) are collected from charges to people and business that benefit directly from public works.

At the municipal level, taxes also represent the largest source of own resources (49%). Most of the taxes (72%) come from property tax and transfer tax. Duties represent the other important bulk of own resources for local governments (36%). It refers mainly to license and permits, where the most prominent are construction licences, and the charges from the public services provided by the municipalities (water, public lighting or garbage services). The share of advantages (fines and penalties) represent the third highest own revenue for municipalities (14%).

Hidalgo ranks as the state with the fourth-lowest share of own revenues collection in Mexico (Figure 4.5). In 2016, just 5% of its income came from this source, far below the country average (9%). These figures have been, on average, similar since 2012. The relatively low share of revenue collection is also reflected at the municipal level. In average, Hidalgo’s municipal governments collect 15% of their total revenues, below the average of Mexican municipal governments (21%). At the country level, the Mexican states with the highest share of own revenue collection, Nuevo León or Quintana Roo (17% and 16% respectively), can be characterised by a high degree of development (with higher levels of GDP per capita) and urbanisation (Caldera Sánchez, 2013[2]).

Out of own resources, the State of Hidalgo has significant scope to improve collection in taxes. Between 2012 and 2016, the average share of tax collection in Hidalgo (2.8%) was lower than the country average (4.1%). Moreover, the growth of tax collection in the state during this period (6%) has been below the country average (7%), ranking as the 12th state with a lower growth rate of tax revenue in the country (Figure 4.6). This phenomenon is mainly explained by the drop of the property tax’s collection in the state (-24% annual average), which contrasts with a positive average growth across Mexican states (average of 5%).

Figure 4.5. Sources of fiscal revenues across Mexican states, 2016

Figure 4.6. Growth of tax revenue in Mexican states between 2012 and 2016

Payroll and property taxes are especially low in the state. The share of payroll (1.4%) and property taxes (0.4%) over Hidalgo’s total revenue is lower than the average share across Mexican states (2.7% and 0.9% respectively) (Figure 4.6).

Payroll tax. The low collection of this tax in the state can be explained by the low tax rate and the high labour informality rate. In Hidalgo, the payroll tax rate ranges from 0.5% to 2%, while the national average is between 2% and 3% (Government of Hidalgo, 2017[7]).
Property taxes. The level of this tax at the state level is mainly affected by the low share of the ownership and use of vehicles tax. It contributes to 6% of the whole tax revenue, far below the figure of the country average (12%).

During 2012 and 2016, Hidalgo also underperformed in the collection of special assignments, duties and advantages (Figure 4.7). Within duties, the revenue from vehicles (0.6% over total revenue) is below the country’s average (1.4%). The state instead has a relatively better performance in the levy of products, which referred to specific selling of public assets.

At the local level, the municipalities underperform in the collection of most of the own revenues’ sources. During 2012 and 2016, the proportion of property tax in the revenue of Hidalgo’s municipal governments was lower (6.3%) than in the average of the Mexican municipalities (9.8%). In particular, the weight of the land use tax in Hidalgo’s municipal revenue (3%) was half the average in the country (6%). Duties, products and advantages at the local level also underperformed in comparison to the average of the country (Figure 4.8). Within duties, the municipalities of Hidalgo have a lower share on charges for the use and delivery of water (4% of the duties) and public lighting (2%) than the country average (8% and 10% respectively).

Figure 4.7. State own resources for Hidalgo and Mexico, average, 2012-16

Figure 4.8. Municipal own resources for Hidalgo and Mexico average, 2012-16

Hidalgo can increase the collection of own revenues by carry out a more efficient fiscal collection, improving law enforcement and broadening the tax base with special attention to the level of taxes.

In the case of payroll taxes. Hidalgo should revise the payroll tax rate, which is significantly lower than the country average. In terms of property tax, Hidalgo could make a greater use of this tax by considering the following actions:

Encourage local governments to develop and update cadastres, property registries and urban plans. As mentioned in Chapter 3, just a few municipalities have updated the cadastre (7 out of 84), either because of lack of resources and institutional capacities or low political incentives. Some municipalities even lack a clear traceable official registry of the quantity, value and ownership of properties. The low property tax is not just a problem in Hidalgo but the whole country. Mexico has a relatively low share of property tax (2% of total revenues in 2015) compared to Latin America (3.4%) and OECD countries (5.8%) (OECD, 2018[8]).
Hidalgo should further benefit from the policy introduced in the 2014 tax reform that allows states to manage the property tax of municipal governments, especially of the poorest municipalities.
The state could also support municipalities with the training of personnel and capacity-building programmes for local governments.
The digitalisation of urban development plans and exchange of digital information about cadastres would facilitate the process of updating the cadastres (see the fourth section in this chapter).

Concerning duties and advantages, improvements in the implementation of the rule of law (fines and charges) and a review of fees could lead the state and municipalities to increase the level of duties and advantages. Municipal governments could benefit from closely monitoring the collection of vehicle fines and parking area charges as well as the fees from the provision of public services, especially water and public lighting. The issue of the water tariff is also a challenge for the whole country. In Mexico, water tariffs are low compared to OECD countries, which may result in overexploitation of water resources, providing a limited revenue for a sustainable provision of the resource (Caldera Sánchez, 2013[2]). The state, jointly with the water commissions, can play a major role in revising and supporting the tariff setting at the local level.

Additionally, the high level of labour informality is hindering the capacity to increase own revenues in the state, especially in poor municipalities. Informality affects the amount of taxes the government can collect, which in Hidalgo is especially harmful to payroll and property taxes in poor municipalities. Labour informality in Hidalgo (74% of the occupied population) is the 4th largest in the country. Alongside agriculture and the informal sector, the public sector plays a key role in the high level of informality in the state (see Chapter 1). In this matter, the State of Hidalgo needs to lead by example and reduce informal contracts in the public sector. It should also involve municipal governments to conduct a policy of informality reduction in public administration.

Evasion is also a challenge for the state and the country. The recent OECD economic survey for Mexico stressed that tax evasion in Mexico is high since firms and business across the country tend to understate labour costs to the social security system (IMSS) and overstate them to the tax administration (OECD, 2017[5]). In this case, Hidalgo can benefit from merging or further improving the co-ordination between income and social security administrations to reduce tax evasion, by promoting a single tax ID number for firms, for example.

The weak incentives to increase tax collection and the limited public information available on spending patterns are other challenges to mobilising own revenues in Hidalgo. The dependency on transfers has had a negative effect on local tax collection. Given the high political cost of increasing taxes, local politicians may be tempted to rely on federal transfers to finance public service delivery (Caldera Sánchez, 2013[2]). Since the federal transfers take into account the level of tax collections to assign the resources, increasing the requirements of own resources collection within the transfer formula should boost incentives for local governments to increase local taxes. Mechanisms of naming and shaming can be established in order to single out which municipalities are improving their collection of own resources and increasing public investment in strategic projects. This can be done by replicating and expanding indicators such as the Productivity Indicator for Municipal Governance (developed by the Comunidad Mexicana de Gestión Pública) (2016[9]). This indicator measures the relationship between the quality of public services, tax collection capacity (property tax) and its bureaucratic cost.

Furthermore, encouraging municipalities to publish fiscal spending in a timely manner will improve accountability and increase trust from citizens on the use of their taxes. Involving the community in fiscal decisions can boost awareness in the importance of paying taxes. Awareness of tax benefits coupled with tax simplification programmes and subsidies can motivate citizens to declare and pay taxes and fees. The case of Quintana Roo and Brazil can be a guide for the state (Box 4.3).

Box 4.3. Incentives to pay taxes

Brazil. In 2006, the Brazilian government introduced a simplified tax and regulation system for micro- and small companies, called Simples Nacional. The rationale was to lower tax compliance costs for small firms and encourage them to move into the formal sector.

Simples Nacional combines a range of taxes in a single monthly collection. Taxes that are included are the most important federal taxes and contributions. Microbusinesses are defined as individuals or corporations with gross revenue less than or equal to BRL 240 000 (USD 120 000) in each calendar year. Participation in the system is optional, and firms have to apply through a website. All states and municipalities must offer Simples Nacional. However, small states can adopt a different enrolment threshold for local tax collection.

In addition to Simples Nacional, a special programme encourages individual entrepreneurs (IEs) to become formal. IEs must first register with Simples Nacional. They cannot earn more than BRL 36 000 (USD 18 000) per year, must work alone or have only one employee, and cannot own or be a partner or manager of another company. IEs are recorded in the National Register of Legal Entities, which facilitates the opening of a bank account, loan applications and issuance of invoices. IEs benefit from a simplified tax system. They are exempt from federal taxes and pay only a fixed monthly amount. In return, IEs have access to benefits such as a retirement pension, sickness and maternity leave and insurance for workplace accidents.

Simples Nacional is reported to have contributed to the observed decline in informality. According to official data, the size of informal labour markets declined steadily to 49% of total employment in 2010 (from 52% in 2006). However, it remains hard to disentangle the effect of Simples Nacional from that of buoyant economic performance. There is also evidence that the IE programme has encouraged unregistered workers to become entrepreneurs.

Quintana Roo, Mexico. Between 2012 and 2016, Quintana Roo has been the state with the highest growth of tax collection in the country (16% annual average growth). This state has developed a series of strategies to boost the tax of use and ownership of vehicles. During the first semester of 2017, the state issued a 100% subsidy for the payment of driver's license certificate and a reduction of MXN 335 for the renewal of car plates (a process that must be done every 3 years). During the first 2 months of the subsidy, the state received 140 769 applications from citizens.

The state has also subsidised 100% the cost of changing car ownership. To access the subsidy, the person must meet some requirements: payment of the tax on alienation of vehicles between individuals; circulation card and plates; invoice that proves legitimate property; recent proof of address (electricity, water or property receipt); current official identification; and Federal Taxpayers Registry (R.F.C).

Sources: Brazil case adapted from Arnold, J. (2012[10]), “Improving the Tax System in Indonesia”, https://doi.org/10.1787/5k912j3r2qmr-en; Simples Nacional (n.d.[11]), Website, (accessed August 2018), http://www8.receita.fazenda.gov.br/SimplesNacional; State Government of Quintana Roo (2017[12]), SEFIPLAN http://cgc.qroo.gob.mx/en-dos-meses-sefiplan-ha-recibido-casi-141-mil-tramites-para-cambio-de-placas/.

Improving the management of federal transfers

The system of federal transfers in Mexico is comprised of earmarked and non-earmarked transfers. Overall, most Mexican subnational governments strongly rely on transfers from higher levels of government. It creates disincentives for sub-national governments to exploit their own revenue potential and build up their administrative capacities. Because of the volatile nature of fiscal transfers, such reliance often limits the subnational of medium-to-long term investments and renders them vulnerable in times of economic difficulty, as also seen in other countries such as Chile and Peru (OECD, 2014[15]); (OECD, 2016[16])). However, some intergovernmental transfers tend to be less distorting than others. OECD work provides a number of guidelines that can help governments design less distortive grants (Box 4.4). Non-earmarked grants, for example, tend to provide subnational governments with more autonomy to generate cross-sectoral policies or co-ordinate policies with other administrative jurisdictions.

Hidalgo has a higher dependency from fiscal transfers than the average of Mexican states. Between 2012 and 2016, the share of federal transfers in Hidalgo’s annual fiscal income (90%), was above the average in Mexican states (82%). Such dependency has increased throughout the years from a share of 88% in 2012 to 95% in 2016. Most of the transfers in the state were earmarked (62% of the fiscal income), showing a higher dependency on this type of transfers than the average of the country (51%). Instead, Hidalgo has a relatively low share of non-earmarked transfers (28%) compared to the country average (31%).

The high dependency on transfers is mirrored at the municipal level. From 2012 to 2016, local governments received on average 83% of their fiscal income from transfers, above the average of Mexican municipalities (71%). Local governments experience, on average, a smaller dependency on earmarked transfers (47%) than the State of Hidalgo, although more than the national average (37%). Contrary to the state level, the share of transfers in local governments has been, on average, more stable during the last years. The fact that Hidalgo is relatively highly dependent on transfers is not surprising since they are based on the income of the state. However, as seen before, over-reliance on transfers can create negative incentives to change status and increase own revenues.

Box 4.4. The efficiency of intergovernmental grants

The table below summarises the efficient use of the various types of grants. The concrete aims are classified in terms of the general purposes of subsidisation, equalisation and financing. These, in turn, can be distinguished according to whether: i) the central government takes the initiative to impose or influence subnational service provision or investment (e.g. delegation of functions); or ii) the subnational government itself takes the initiative. The instrument column indicates the various types of grant instruments available, as well as some regulatory instruments that may achieve more efficiently the aims for which grants are often used. Discretionary grants are mentioned as a possible instrument for co-funding purposes. Co-funding arrangements are used in some countries to finance projects with objectives that are hard to achieve using matching grants and where both central and subnational governments have to be committed. The table should not be seen as a prescriptive blueprint since much depends on institutional architecture and country context. Nonetheless, it provides a framework that can serve as a starting point for thinking about the way grants are designed and used.

Table 4.1. Lessons for efficient use of grant instruments
Imposed programmes or standards	Compensation of spill-overs	Temporary projects and programmes	Basic services	Fringe services
Financing
Extension of subnational tax base	X			X
Non-earmarked general-purpose grants	X			X
Non-earmarked block grants	X
Earmarked discretionary grants			X (co-funding)
Earmarked matching and non-matching grants	(X)		X (risk sharing)
Subsidisation
Earmarked matching grants		X (national spill-overs)	X (experiments)
Imposition of co-operation		X (regional spill-overs)
Equalisation
Imposition of horizontal grants	X			X
Non-earmarked general-purpose grants	X			X
Sources: For table: Bergvall et al. (2006[17]), Intergovernmental transfers and decentralised public spending, OECD Journal on Budgeting vol 5/4;
OECD (2009[13]), Regions Matter: Economic Recovery, Innovation and Sustainable Growth, https://doi.org/10.1787/9789264076525-en.

Non-earmarked transfers lack clarity and are volatile

Non-earmarked transfers, also called tax sharing revenues (participaciones), do not imply specific obligations in the spending of states and municipalities, giving more freedom for their allocation. These transfers intend to allocate resources proportionally to the participation of the states in the economic activity and to their tax collection effort. Resources are transferred as general purpose resources to Hidalgo through funds and shared taxes under the so-called Ramo 28 (see Box 4.5). The central government collects the shared taxes, agreed upon the system of fiscal co-ordination, and distributes them to states and municipalities. The main shared taxes are income taxes, value added tax (VAT), oil and mining revenues or taxes on new vehicles.

Non-earmarked funds (28%, 2012-16) are the second source of revenues in Hidalgo. The main fund to channel these transfers is the General Participations Fund (Fondo General de Participaciones – FGP), accounting for over 72% of non-earmarked transfers. The resources coming from the fund are allocated to the states based on different criteria, where the most relevant is the state gross domestic product (GDP) growth (60% of weight), followed by the local revenue growth (30%) and local revenue level (10%). Despite the former criteria, as seen before (Figure 4.9), the mechanism has had a limited effect in the increase of Hidalgo’s own revenues.

At the municipal level, local governments receive most of their non-earmarked transfers from the FGP (56%), followed by the Municipal Support Fund (FFM) (31%). According to the Co-ordination Law of Hidalgo, the state must transfer 20% of FGP resources and other shared taxes to municipalities (in 2016 it transferred exactly 20%). The law also establishes the distribution criteria to the municipalities, which in the case of the FGP (and another 2 funds IEEP and taxes from new vehicles) and is based on population (40%), level of marginalisation (30%), the collection of property tax and water charges (10%), tax collection growth (10%) and number of communities per municipality (10%). Other funds and shared taxes have their own distribution formulas. The lack of clarity in the allocation criteria (e.g. the discretion to allocate funds over the 20% of FGP) and the variety of formulas across the funds can lead to rent-seeking and hampers investment planning at the local level.

The non-earmarked transfers are subject to variation and present high volatility (Figure 4.9). The standard deviation of the non-earmarked transfers’ growth (11%) is higher than the one of earmarked transfers (8%). Non-earmarked funds are heavily dependent on the performance of the national and global economy, especially when oil and mining prices are concerned. Although the Fund for Revenue Stabilisation of States (Fondo de Estabilización de los Ingresos de las Entidades Federativas – FEIEF) helps mitigate such variations, the volatility of the transfers is still high, which tends to limit the long-term strategic investments of subnational governments.

Figure 4.9. Change of non-earmarked and earmarked sources in Hidalgo

The non-earmarked transfers could be further used to decrease the level of inequality within Hidalgo. Since these transfers are mainly allocated on the basis of local tax efforts and population (i.e. the FGP), large municipalities with higher institutional capacity are receiving more resources than the poorest ones. In 2016, 22 municipalities (out of the 84) received 50% of the non-earmarked transfers. The municipalities receiving most of the transfers are not always the ones with lower poverty rates (Figure 4.10). Although, in theory, the distribution of earmarked transfers should be used to compensate this distortion, as seen in the next section, earmarked transfers’ distribution has ample room for improvement.

Box 4.5. Non-earmarked transfers (participaciones federales Ramo 28)

Non-earmarked transfers consist of funds and shared taxes that are collected by the federal government and then redistributed to the state and the municipalities. The revenue’s sources of non-earmarked transfers for Hidalgo are presented below (selected):

Fund	Purpose	Funding	Distribution criteria	Recipient	% Ramo 28 (2016)
Fondo General de Participaciones (FGP)	Revenue sharing with states and municipalities	20% of RFP	State GDP growth (60%); local revenue growth (30%); local revenue level (10%)	State and municipalities	74
Fondo de Fomento Municipal (FFM)	Revenue sharing with municipalities	1% of RFP	Municipal revenue (property tax and water fees) weighted by state population	Municipalities	8
Fondo impuesto sobre la renta	Revenue sharing with municipalities	100% of income tax	Collection of state’s tax	Municipalities	6
Fondo de Fiscalización (FOFIE)	Incentive for enforcement of tax laws	1.25% of RFP	Measures of local efforts of enforcement of tax laws	State and municipalities	4
Incentives over the IEPS on gasoline and diesel	Revenue sharing with states and municipalities	Nine-elevenths of the local gasoline tax collection	Participation of state in gasoline and diesel consumption	State and municipalities	4
Fondo de Extracción de Hidrocarburos (FEXHI)	Compensate for oil and gas extraction	0.6% of main oil royalty	Oil and gas production	State and municipalities	1
Impuesto Especial sobre la Producción y Servicios (IEPS)	"Sin tax" revenue sharing with states and municipalities	20% from tax to beer and alcohol; 8% tobacco	Percentage of taxes on tobacco, beer and alcohol relative to the national average	State and municipalities	4
Fondo de compensación (FOCO)	Compensate the 10 poorest states	Two-elevenths of the local gasoline tax collection	Opposite of nonoil GDP	State and municipalities	-
Note: RFP stands for Recaudación Federal Participable, the pool of federal revenues that is shared with states and municipalities. It includes income tax, VAT, all other federal taxes and oil revenues. It does not include revenue from public enterprises, federal government funding and certain other sources of non-tax revenue. States are required by law to share at least 20% of these resources with municipalities. Other shared taxes not included in the table are specific incentives over IEPS, participation from municipalities that conduct external trade and shared tax on new vehicles.
Source: CEFP (2017[14]), Recursos Identificados para el Estado de Hidalgo en el Proyecto de Presupuesto de Egresos de la Federación 2017, Centro de Estudios de la Finanzas Publicas.

Figure 4.10. Non-earmarked transfers per municipality and poverty rate, 2016

Earmarked transfers can aim for further equalisation and predictability

Earmarked transfers, the largest revenues in the State of Hidalgo (65% of total revenue) and in its municipalities (51%), can be divided into 2 main groups: those under a fund called Ramo 33 (71%) and those under reassigned funds (29%). Funds transferred under Ramo 33 focus mainly on education and health. These resources are transferred to states and municipalities under a specific formula that seeks similar per capita levels of transfers per municipality by taking into account both the original economic condition and incentives for improvements. The State of Hidalgo transferred 15% of Ramo 33’s resources to municipalities through the Funds of Infrastructure and Support to Municipalities. These resources represent, on average, 68% of the earmarked transfers in local governments. The earmarked transfers are intended to have a stronger equalisation effect among municipalities, which is not always met in Hidalgo. For example, as Figure 4.11 depicts, some municipalities in Hidalgo, such as Metepec, receive more resources than municipalities with double the poverty rate.

Figure 4.11. Federal transfers per capita and extreme poverty in Hidalgo’s municipalities

The transfers from Ramo 33 have a relatively high prominence in Hidalgo’s revenue. Hidalgo receives 70% of earmarked transfers from Ramo 33, above the average share in the country (66%) (Figure 4.12). From the different Ramo 33 funds, the Fund for Education is the one that channels most of the transfers to Hidalgo (73%), followed by from the Fund for Health Service (16%). The criteria for the transfers of education to the states is mainly based on the share of public student enrolment in the state’s spending on education and quality of education.

Most of the funds transferred through Ramo 33 give subnational governments little room for manoeuvre. In the case of education, 98% of the money transferred covers the financing of teachers’ salaries, giving little scope for subnational governments to assign funds to other priorities within this sector. Furthermore, the lack of quality and reliability of data definitions within the distribution criteria (e.g. quality of education) makes the improvement of the allocation difficult and the support to the incentive structures built into the funds (OECD, 2017[1]).

Reassigned resources, the other important source of earmarked funds, are determined by political agreements. In 2016, reassigned resources accounted for 30% of the earmarked resources in Hidalgo, slightly below the country average (34%). These transfers stem mostly from what are deemed to be unexecuted resources and under-estimation of income by the central government. Most of these transfers take the form of matching transfers or agreements (convenios de decentralización) agreed upon between ministries and agencies, and the different states and municipalities. These agreements are mostly used for investments intended to improve the delivery of public services.

Figure 4.12. Source of federal earmarked funds

Education, culture and social security are the sectors that receive most of the reassigned transfers. The agreement for education and culture (39% of total reassigned resources) allocates a large proportion of resources to strengthen higher secondary education. In the case of the agreement for health and social security (18%), almost all the resources are dedicated to health with a low proportion allocated to social security.

Reassigned transfers are subject to political bargaining and do not necessarily create incentives to carry out efficient revenue collection. High reliance on such funds may bear significantly negative impacts due to the discretion that is applied in their assignment. The transfer of these funds is in theory subject to the reassignment of the central government to match the objectives of the national development plan. However, in practice, their distribution is subject to strong political bargaining and there is lack of transparency in their allocation (Caldera Sánchez, 2013[2]). These funds do not improve incentives to increase own revenues, planning or link resources more closely to the budgetary mechanisms. These transfers are however subject to higher accountability and control from federal government, given their contractual nature.

Fiscal expenditure in Hidalgo has a limited space for own decisions

Public expenditure in Hidalgo is strongly linked to the responsibility attached to decentralisation system in Mexico. The transfer system leaves Hidalgo relatively little scope for resource allocation. After distribution, non-earmarked resources allocated to municipalities (8% of total income in 2016) and earmarked transfers (65% in 2016), the State of Hidalgo disposes of 36% of the income to current expenditures, financing capital and investments.

Between 2012 and 2016, the allocation of the expenditure in Hidalgo included (Figure 4.13):

Transfers and allocations (61%), which refer to transfers to sectorial programmes, mainly education (68%) and health (17%). This share of transfers is higher in Hidalgo than at the country average (46%).
Resources transferred to municipalities (17%) represent transfers by law that the state channels to local governments.
Functional expenses: personal services or wages (5%), public debt (3%) and other various expenses, such operational services and supplies (10%).
Public investments account for the remaining 4% of the budget, which results below the average of Mexican states (5%).

Figure 4.13. Distribution of expenses by type, average, 2012 to 2016

The distribution of public spending has changed significantly during the last years. Since 2000 to 2016, the share of the spending on transfers and assignments, especially to health, has increased (from 58% to 64%), contrary to the share of public investment which has substantially decreased from 12% in 2000 to 1% in 2016 (Figure 4.14). Hidalgo’s drop in public investment is larger than at the country average (from 7% in 2000 to 4% in 2016), mainly explained by a reduction in the investment in public works and in productive projects. A lower public investment is not only detrimental to economic growth in the long term but also to well-being at the local level.

Given its earmarked nature, the spending on transfers and assignments in Hidalgo mainly focuses on education. In 2016, education (educational institutions and programmes) represented the largest single expenditure from transfers and assignments in the state (43% of the total expenses), doubling the resources allocated to education as compared to the average in the Mexican states (20% of total expenses). The spending on health (10%) and infrastructure (3%) were the 2nd and 3rd biggest transfer. Resources allocated to tourism and agriculture did not represent a significant proportion of total expenses (0.04% and 0.05% respectively), and were lower than at the national average (0.6% and 0.1% respectively).

Figure 4.14. Expenditure in Hidalgo, percentage of total expenses

Hidalgo is one of the states with the lowest per capita expenditure allocated to personal services (MXN 656 compared with a country average of MXN 2 958 in 2015), despite its high proportion of public servants. Hidalgo ranks as the 9th state with the greatest number of public servants in the country (74 202 in 2015). Personal services refer to wages and payroll obligations such as social security and compensations. Low retribution or uncompleted wage schemes for public officers lead to high rotation and low incentives as well as making them prone to participate in corrupt practices. The relatively low level of personal services spending would also indicate that not all public servants are receiving full welfare payments. As mentioned before, the State of Hidalgo has high levels of labour informality, in which the public sector has an important role. This again stresses the need for Hidalgo to address labour informality in public administration.

Hidalgo is the state with the sixth lowest level of public investment per capita in Mexico (Figure 4.15). Since 2012, public investment in the state (4% of total revenues) has been below the national average (5%). In 2016, public investment in Hidalgo was mainly allocated to physical infrastructure, where roads and highways represented over 38% of the total investment. It is a positive sign of the effort the state is conducting to connect and build the basic enabling factors for economic development in the territory. Investments in urbanisation (15%) are particularly larger than the national average (11%), which underlines the rapid urbanisation process the state is carrying out. Nevertheless, there is no public investment allocated to specific sectorial projects, in contrast with the country average (10%). Most Mexican states use public investment to develop sectorial projects on agricultural or tourism development.

Figure 4.15. Public investment per capita, 2016

At the municipal level, public investment represents the most important share but is mainly allocated to urban development and security. Between 2012 and 2016, the spending of Hidalgo’s municipalities was allocated to personal services (32%), public investment (26%) and operational expenses (13%). The main public investments were land division and urbanisation (24% of total investment), non-residential construction (8%) and provision of infrastructure for water, oil, gas, electricity and telecommunications (7%).

Concerning the sectorial investment, municipalities allocated a smaller share to productive projects (1.1%) than the country average (2%). The resources for productive projects in Hidalgo’s municipalities are mainly allocated to public security (96% in 2016), far above the share of the country average (17%), which allocated greater resources to agriculture and forestry (10%). The State of Hidalgo should hence encourage diversification of sectorial investment (i.e. environment) and better link investment with the strategic sectors at the local level to increase well-being and contribute to economic objectives. For this, monitoring mechanisms (e.g. performance indicators) to tighten budget allocation with policy outcomes at the local level could be instrumental (see next section this chapter). Hidalgo should also seek ways to increase the quality and level of public investment by promoting projects that attain critical mass and public-private partnerships as well as evaluating the cost-benefit of new funding.

Despite the low property and land use tax collection, the above figures underline that the state and local governments have invested important amounts of resources on urbanisation. This is welcome since the Hidalgo’s rapid urban growth creates high pressure on the provision of public services (see Chapter 3). However, given the low property tax collection and the outdated cadastres in Hidalgo, the fiscal pressure to sustain urbanisation creates a negative effect on the state’s public finances by reducing the fiscal resources to invest in other projects. This phenomenon stresses again the need for the state to align public needs and fiscal revenues by making a greater effort to improve property tax collection.

To achieve efficiency of public spending, Hidalgo should consider increasing the capacity for municipal governments to adjust expenses and improve co-ordination among different levels of government. Currently, there are no mechanisms to incentivise joint spending among municipalities and to promote multi-year budget. At the local level, some spending decisions are driven by political interest with an aim of short-term results rather than meet the real needs of inhabitants and long-term outcomes (Valenzuela-Reynaga and Hinojosa-Cruz, 2017[15]).

In summary, this section underlined the following:

Hidalgo has one of the lowest levels of own revenues in the country, which in turn makes it highly dependent on federal transfers. Within own revenues, property taxes are especially low in the state.
The transfers are mainly earmarked, which provides little scope for decision and in some cases (i.e. reassigned resources) difficult investment planning. Non-earmarked transfers are volatile, lack clarity on the allocation criteria and present characteristics of discretionary decision making.
Overall, transfers have aimed to incentivise tax collection and decrease inequalities among municipalities. Nevertheless, incentives are still low or not well perceived by local governments and the effective distribution from both types of transfers falls short on lifting the poorest municipalities above the richest ones.
Debt in Hidalgo has decreased and is currently low for Mexican levels. A cost-benefit analysis of new funding can be instrumental in increasing quality and level of investment.
Public investment is one of the lowest in the country. It is mainly allocated to security over other sectors that could offer economic opportunities for the state.
Spending on urban development is welcome. However, there is a need to match this spending with fiscal sources that stem from this activity (property taxes).

Improving governance in Hidalgo

Hidalgo’s geographic location and its connectivity with key markets, international ports, logistic centres and industrial areas offer untapped opportunities for growth in the state. However, the development of the state also requires addressing several challenges such as the strong south-north divide, the high levels of poverty and informality and the limited capacities at the local level as well as weak design and use of co-ordination mechanisms across levels of government.

These challenges can be attributed, to some degree, to the endogenous characteristics of a small state, within the Mexican decentralised system, with three main features that stand out: i) limited scope of goals and activities; ii) predominance of strong informal relationships and procedures; and iii) limited steering or control (Box 4.6).

In particular, the deficient connectivity with and among the northern municipalities makes co-ordination difficult in Hidalgo (see Chapter 1 and 3). The physical barriers to reach municipal governments and create fluent interaction among them jeopardises the realisation of economic potentials. In some cases, it can take more than half a day to travel from Pachuca, where the main governmental institutions are concentrated, to northern municipalities. In addition, Internet access is still incipient across the territory with some municipalities even lacking a reliable Internet connection, which in turn creates uneven communications among municipal governments far from and close to the capital.

In this scenario, the government administration of Hidalgo has made a great effort to modernise and improve the quality of public administration, the efficiency of public services and create a sound business environment to spur on new and local firms. It has also developed a co-ordinated territorial agenda by encouraging municipalities to follow a private-led approach, focusing on business attention (Chapter 3).

This effort is materialised in the recent State Development Plan 2016-22. The current administration of Hidalgo elaborated a State Development Plan upon entering into office, as required by Mexican legislation. To do so, the state created the 2016 Law of Planning and Foresight, which is the legal framework for planning in the state, and upgraded the status of the former Secretary of Planning, Urban and Rural Development into a planning agency directly under the governor.

Box 4.6. Characteristics of small-state public administrations

Early research into the characteristics of small state governments highlighted five interrelated characteristics that are common to some degree across such states. While developed after studying sovereign nations, some or all of these characteristics can be relevant to administrations in federal countries where individual provinces or states have significant autonomy and decision-making power over the territory’s administration as well as policy design and implementation.

1. Limited scope of goals and activities. Small state administrations have to fulfil certain public prerogatives, such as maintaining health and education systems, regardless of the size of the country. Small states, therefore, need to prioritise and limit the number of goals and activities they pursue, the scope of action and the means of delivery (e.g. production versus the purchase of certain public goods).
2. Multifunctionalism of civil servants and organisations. Public officials in small administrations tend to have many, diverse responsibilities compared to their peers in larger administrations, who have more opportunities to specialise in a particular field. This is also seen in state bodies; for reasons of scale and resource sharing, there is a greater tendency to merge units (e.g. ministries, agencies, etc.) than to establish or maintain separate entities.
3. Informality of structures and procedures. Formal co-ordination mechanisms are more limited in small states and there is a tendency for structures to adapt to individuals rather than individuals to fit in formal organisational frameworks. While personal relationships are important in any system, senior civil servants in small states are more likely to use informal means of communication to consult and inform one another. Civil servants depend on these relationships – which can combine the professional and personal – in order to properly execute their responsibilities. These relationships can also serve as a bridge between executives and lower levels of organisations.
4. Constraints on steering and control. Independent scrutiny and reporting mechanisms tend to be less frequent in small states than in large ones due to limited resources, lack of specialisation and political partisanship. The political-administrative interface is usually less clearly defined in small states, with greater mobility between the administrative and political spheres. Senior civil servants, therefore, can have more autonomy in smaller states due to less formal oversight.
5. “Personalism” of roles and functions. The multifunctionalism, informality and limited control in small states allow a limited number of individuals to exercise a fair amount of influence based on their competencies, networks and personal qualities. While this can support agility and problem solving, it also leaves room for ad hoc decision making and subjective judgement.

These characteristics are not “good” or “bad” in and of themselves, but their interaction influences the governance contexts. For example, aspects of personalism that might be perceived as “leadership” in a system with institutional checks and balances can take on a less benevolent aspect in the absence of counter-balancing forces.

Sources: OECD (2016[41]), OECD Territorial Reviews: Córdoba, Argentina, https://doi.org/10.1787/9789264262201-en; OECD (2011[16]), Estonia: Towards a Single Government Approach, https://doi.org/10.1787/9789264104860-en; Sarapuu, K. (2010[17]), “Comparative analysis of state administrations: The size of state as an independent variable”, Halduskultuur – Administrative Culture, Vol. 11(1), pp. 30-43.

Hidalgo’s development plan is comprehensive but has room for improvement

The state plan is composed of 5 strategic pillars with 29 strategic objectives (Table 4.2). It has three transversal pillars, which are: i) gender mainstreaming; ii) development and protection of children and adolescents; and iii) incorporation of sciences, technology and innovation. The transversal pillars compose the strategic pillars, meaning that women’s equality, children’s protection and support for innovation are necessary for the development of these pillars and as such have to be mainstreamed into their specific objectives.

The plan’s elaboration started from a comprehensive diagnostic of economic, environmental and social conditions in the State of Hidalgo, across the five pillars. The data was provided by different state secretaries and from external sources such as the National Institute of Statistics and Geography (INEGI) and the United Nations. The diagnostic aimed to be consensual, with an element of civic participation through an online platform (#YoPropongoHgo) and the organisation of five regional fora for consultation. The plan is thus context-specific and has broad input from within the government as well as sectors of civil society.

The plan is aligned with the National Development Plan (NDP) The national plan has five objectives (peace, social inclusion, quality education, prosperity and global responsibility) and three transversal strategies, namely gender mainstreaming, modern government close to people’s needs and democratisation of productivity. The State of Hidalgo maintained this structure of five main pillars and three transversal ones, with some of the objectives being similar to the national ones. This shows that the state is committed to the goals set for the whole country, and in a federal state this harmonisation is necessary.

Table 4.2. The National Development Plan of the State of Hidalgo
Pillars of the State Development Plan	Strategic objectives
A modern government	1.Zero corruption 2. Increase citizens participation 3. Promote digital government 4. Improve regulation 5. Improve institutional capacity of municipalities 6. Strengthen fiscal capacity 7. Efficient fiscal management
Economic dynamism	1. Inclusive economic growth 2. Innovative economic environment 3. Co-ordination of productive sectors 4. Development leveraged on tourism 5. Modern and productive agriculture
Inclusiveness	1. Social and integral development 2. Quality of education 3. Quality of health 4. Quality of sport culture 5. Art and culture
Justice and security	1. Improve governance 2. Human rights 3. Comprehensive security 4. Justice with human approach 5. Social reintegration 6. Civil protection
Sustainable development	1. Equity of services and sustainable infrastructure 2. Culture and environmental training 3. Comprehensive and sustainable territorial planning 4. Sustainable and efficient mobility 5. Preservation of the natural heritage 6. Planning for a sustainable territorial development
Source: Government of Hidalgo (2016[25]), State Development Plan 2016-22

The plan is also aligned with the Sustainable Development Goals (SDGs), which are a collection of 17 global goals set by the United Nations Development Programme. The state shows commitment with the international agenda of social inclusion, poverty reduction, gender equality, environmental sustainability and just and peaceful societies. The SDGs compose the 2030 Agenda for Sustainable Development, which is reflected in Hidalgo’s plan as 2030 is the proposed timeline for the second evaluation of objectives. Table 4.3 shows the alignment of some provisions of the state plan with the SDGs and the PND.

Table 4.3. Alignment of objectives (selected)
2030 Agenda	National Development Plan 2012-18	State Development Plan 2016-22
Goal 16: Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels	Transversal approach (Mexico with global responsibility) Strategy II. Close and Modern Government 1.1.1 Contribute to the development of democracy Strategy 4.7.2 Implement a comprehensive regulatory reform	Axis 1. Honest, Close and Modern Government 1.1 Zero tolerance to corruption 1.2 Boosting citizen’s participation 1.3 Digital government 1.4 Regulatory reform 1.5 Institutional development of municipalities 1.6 Strengthened treasury 1.7 Effective administration of resources
Goal 8: Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all Goal 1: End poverty in all its forms everywhere Goal 9: Build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation	Transversal strategy - Democratise productivity Objective 3.5 Make sciences, technology and innovation pillars for economic and social sustainable progress Prosperous Mexico, objectives: 4.2 Democratise access to financing of projects with growth potential 4.3 Promote quality jobs 4.7 Guarantee clear rules that encourage the development of a competitive domestic market 4.8 Develop the strategic sectors of the country 4.9 Count on transport infrastructure that is reflected in lower costs for economic activity	Axis 2. Prosperous and Dynamic Hidalgo 2.1 Inclusive economic progress 2.2 Dynamic and innovative economic environment 2.3 Articulation and consolidation of the productive sectors 2.4 Tourism, development lever 2.5 Modern and productive countryside
Source: Government of Hidalgo (2016[25]), State Development Plan 2016-22.

The State Development Plan of Hidalgo has two timeframes: 2022, as the first year of the subsequent administration’s term, and 2030, as proposed by this international agenda. The 2030 timeline suggests a long-term vision which is not widespread in the practice of state development plans in Mexico, due to their very character as planning instruments which do not outlast an administration, since the subsequent administration is obliged to elaborate its own plan. For one, this vision is welcomed, as many objectives set in the plan require long-term changes to be achieved. Yet at the same time fulfilling this long-term vision can prove challenging, as local governments in Mexico tend to work to the election timetable. That is to say, the State of Hidalgo will need legal instruments that can formalise this commitment to the 2030 Agenda and guarantee that the objectives set in the plan will be pursued until then, as well as evaluated against that timeframe. The Secretary of Planning, Urban and Rural Development could envision such role if it has technical staff that outlasts election cycles.

The aspect of the two timeframes relates to having short-, medium- and long-term objectives. The state plan does not classify objectives according to the timeframe needed for implementation. It could be assumed that all objectives should be achieved until 2022, which is not reasonable since it contradicts the 2030 timeframe inserted in the plan and also fails to acknowledge that some objectives take longer to achieve than others. Moreover, in very practical terms, if there is no timeframe there is no setting of priorities, and with 29 strategic objectives and 116 general objectives, it is difficult to define which ones should receive more investment. When government priorities are too plethoric, they tend to disseminate resources and focus, leading to diminishing policy impact. Priorities in Hidalgo are not clearly stated over the short, medium and long term making it hard to articulate public policies into a clearer roadmap.

The State of Hidalgo could elaborate a strategic policy document to indicate which objectives the state is prioritising for the next few years, as well as clarify which ones are inscribed in the longer 2030 timeline. This would further help the definition of indicators and the activity of evaluation (see section below for further discussion). One possible way is to prioritise the objectives of transversal strategies, as they should be common to the other pillars and develop priorities that address bottlenecks and aim to raise enabling factors for growth (see Chapter 2). Another pathway, already indicated in the plan itself (Government of Hidalgo, 2016[24]), is to prioritise objectives and related programmes that generate greater social benefit/impacts and thus support social inclusion.

Implementation of the State Development Plan

Mexico has seen low levels of implementation of plans. One reason for that has been mentioned as low tax collection, which impacts local budgets and availability of resources, added to the fact that states depend heavily on transfers from the central government and thus have relatively low levels of revenue autonomy. Other reasons are low organisational levels in state administrations and difficulty in implementing the rule of law (Sustainable Governance Indicators, 2017[19]). The State of Hidalgo has to put in place instruments to tighten the link between the provisions of the plan and their operationalisation.

The main instrument to implement the State Development Plan is through programmes, which can be sectorial or special. Programmes make the link between the provisions of the plan and the annual budget. The three transversal pillars each have a transversal programme (gender mainstreaming, children’s protection and science and technology support). The plan does not spell out which secretaries of the state government are leading the work, but it is hoped that leadership will be balanced out by the division of responsibilities, making every sector of the government accountable for progress in these areas.

The five strategic pillars have three or four programmes under their heading, each one co-ordinated by the secretary responsible (Government of Hidalgo, 2016[24]). For instance, the pillar of sustainable development contains three programmes: i) environment and natural resources; ii) public works and spatial planning; and iii) mobility and transportation. The secretaries responsible for these topics are hence responsible for the corresponding programme. This sectorial division reproduces the existing structure of the state administration, which should facilitate implementation. Nonetheless, the strategic pillars bear cross-cutting issues: to illustrate, environmental sustainability cannot be achieved by simply dividing responsibilities between the Secretary of Environment and Natural Resources (SEMARNAT), the Secretary of Transport and Mobility (SEMOT) and the Secretary of Public Works and Territorial Planning (SOPOT). Instead, it requires sharing responsibilities, i.e. understanding that each of these elements has to be informed by the others and that only the composition of them together can promote this objective.

The programmatic side must include thus the creation of formal mechanisms for inter-sectorial co-operation. It could involve establishing special cabinets (composed by representatives of each secretary), joint authorities, special task forces, or inter-secretary working groups that can meet regularly and take stock of the progress made. These bodies could divide budgetary allocations and co-ordinate public investment decisions. The OECD Toolkit for Effective Public Investment across Levels of Government (henceforth the OECD Toolkit) includes as potential solutions for horizontal co-ordination the creation of joint authorities and platforms for dialogue and the adoption of co-ordinated investment strategies (Principle 3) (OECD, 2014[20]). It also indicates that formalisation of co-ordination mechanisms can help bridge information and policy gaps and identify joint investment priorities (Principle 2). As discussed in the next section, although Hidalgo has various examples of co-ordination mechanism, much more is to be done on this front.

As programmes are by nature multi-year, so should be the provision of funds to implement them. In Mexico, the National Law of Treasury Administration of 2006 foresees multiyear budgeting of expenditures (Article 32). The State of Hidalgo has not, however, made use of this provision. While Mexican states depend on transfers from the central government to carry out major projects, this dependency does not preclude the need to make their own annual budgetary allocations. In the referred OECD Toolkit, medium-term budget forecasting is mentioned as an instrument for sound and transparent financial management (Principle 10). Indeed, multi-year budgets or medium-term budget forecasts are tools that can be deployed to tighten the link between programming and spending and thus support the implementation of the State Development Plan.

Other instruments that can support the implementation of the plan, to make it more effective are strategic public procurement, consistent regulatory systems, risk assessment and reinforced expertise of public officials at the state level (OECD, 2014[20]). Strategic public procurement can ensure effective public service delivery while pursuing strategic government objectives (Principle 11 of OECD Toolkit). The OECD Review of Public Procurement in Nuevo León, Mexico (OECD, 2018[21]) provides concrete proposals for reform which can also be useful in the context of Hidalgo.

In Principle 4, comprehensive and ex ante risk appraisals are said to help identify the cumulative impacts of a given project and ensure value for money. Hidalgo should make use of risk assessment in project development, which would contribute to render implementation more efficient and effective. Consistent regulatory systems mean that different regulations enacted at the state level are not contradictory, overlapping, divergent and ever-changing (Principle 12). Strategies that can be deployed are co-ordinating regulatory policy and minimising the administrative burden of government formalities. Hidalgo’s Development Plan contains provisions for a regulatory reform, which would include administrative simplification, professionalisation of public servants, transparent channels of communication and incentives for streamlining approval processes. This reform could greatly support the advancement of other pillars of the plan, once administrative processes and regulations would be made simpler and more consistent, facilitating state action.

Table 4.4. Selected OECD principles for effective public investment
OECD Principles for Effective Public Investment Across Levels of Government
2. Adopt effective instruments for co-ordinating across national and sub-national levels of government
3. Co-ordinate horizontally among sub-national governments to invest at the relevant scale
4. Assess upfront the long-term impacts and risks of public investment
10. Require sound and transparent financial management at all levels of government
12. Strive for quality and consistency in regulatory systems across levels of government
Source: OECD (2014[22]), Effective Public Investment Across Levels of Government: Principles for Action, https://www.oecd.org/effective-public-investment-toolkit/Effective-Public-Investment-Brochure.pdf.

Monitoring and evaluation of the State Development Plan

When it comes to the evaluation of policy effects, governments tend to make systematic attempts to measure the effects of the policies and adjust them for greater effectiveness, instead of waiting for them to have the desired consequences. Performance indicators play a central role in achieving such effective public policy by generating regular and objective feedback about progress towards policy objectives (Schumann, 2016[23]). They can promote learning and orient stakeholders towards results, by addressing information asymmetries that arise between levels of government or between government and stakeholders. They are also effective tools for reinforcing accountability at all levels of government by improving transparency. When carefully coupled with specific incentive mechanisms and realistic targets, indicators can stimulate and focus actors’ efforts in critical areas. It can be used to promote a co-ordinated common long-term vision for the development of the state.

The State of Hidalgo has developed a planning instrument based on performance indicators to articulate, monitor and evaluate the implementation of the State Development Plan (SDP). This evaluation ultimately aims to follow up the performance of each secretary of the state in achieving the five axes in the SDP. The evaluation mechanism was formalised by the 2016 Law of Planning and Foresight, which is the legal framework for planning in the state. This law upgraded the status of the Secretary of Planning, Urban and Rural Development into a planning agency directly under the governor. Furthermore, the performance indicators must be linked with the budget plan of each secretary. In other words, the failure to meet the indicator would have an effect on the secretary’s future budget.

Overall, this state initiative is welcome and represents an important step towards an efficient implementation and better policy outcomes for the state. Nonetheless, the performance indicator mechanism has issues with the conceptualisation and the construction of indicators as well as lack scope for co-ordination. Hidalgo should improve some aspects of the current performance indicators mechanism:

Limit, prioritise and add sense of temporality to indicators. The lack of timeframe, the large number and the broad definition of the objectives in the State Development Plan (see former subsection) is mirrored at the level of the indicators. There are in total 245 indicators, with 88 indicators considered as priorities but without a clear hierarchical order or time-bound goals (e.g. until 2020). The wide range of indicators and their lack of prioritisation may lead to weaker monitoring and refocusing of public policies. For example, creating jobs is high in the priorities of the state. However, while some secretaries are implementing programmes related to job creation (i.e. creation of new touristic products), the outcome is not linked to a higher-level goal.
Avoid duplication and promote horizontal indicators. Indicators do not have a sense of complementarity and transversality. For example, key challenges in the state such as informality do not have a co-ordinated horizontal indicator. The lack of complementarity reduces the scope for co-ordination within the government. Furthermore, it reduces clarity over the attribution of responsibilities of each secretary and the state government towards achieving multi-dimensional objectives. One example on this is the indicator of SEMARNAT that measures the share of state secretaries and educative institutions that have environmental programmes (the target for 2018 is 10% of institutions). The indicator measures the effort of the secretary in isolation, without any incentive for other secretaries to collaborate in this. Joint efforts from different secretaries in the design of transversal and common indicators can help mitigate duplication and incentivise co-operation.
Differentiate between input, output and outcome indicators. Priority indicators must reflect outcomes rather than outputs.
- Outcome indicators are arguably the most important indicators, as is the reason for implementing the policy in first place. They will monitor the specific objectives that the government wants to achieve, taking into account regional challenges, needs and potentials. If they are well designed, outcome indicators have several advantages over other monitoring techniques. They provide regular, timely and unambiguous feedback to policymakers. They can help policymakers change course if policies are not working, can foster learning and capacity building and create transparency and accountability (Schumann, 2016[23]).
- Output indicators, instead, track the actions needed to achieve the specific objectives. Input indicators are a much lower level and track the functional and operative activities of the government. In Hidalgo, there are priority indicators such as the number of trees grown by the government or the number of new touristic products launched that are just measuring the number of products and services delivered by the government rather than the policy outcome (i.e. increase income in agriculture; increase income from tourism activities). Setting indicators that measure outcome is essential to monitor the ultimate policy impact and revaluate the strategies taken (Box 4.7).
Add benchmark and baseline values. The current use of indicators in Hidalgo lacks a clear criterion on fulfilling objectives based on a benchmark with comparable regions, past objectives or a baseline value. Some objectives can be achieved by external causes or may be a consequence of an unintended effect. If the number of students in university increased in a certain year, it might not be related to any specific policy to support high-level education within the state. It can instead be associated with a particular national programme that finances education or migration pattern (i.e. natural disaster-related) from other states. If a degree of comparability with other Mexican states is established, a similar increase of university students across all Mexican states might indicate the effect from a national programme.

Box 4.7. Example of a result policy chain in the European Union

The monitoring of the achievements of the 2014-20 European Cohesion Policy is based on specific indicators (common indicators), associated to the priority axis, category of regions (where relevant) and investment priority in each European Operational Programme. Each indicator has a baseline target to reach and is monitored during the entire programming period.

Figure 4.16 below shows an example of how an EU-funded project –in the field of early childhood education – would trigger (measurable) changes at different levels forming a “result chain”. After the initial financial commitment and the activities implemented on the ground, it generates a direct output (in this example the number of textbooks distributed to the students and the teachers trained by the project), producing the intended outcome of the project (increasing school completion). The outcomes of multiple projects generate the overall policy impact (e.g. increased literacy).

Indicators associated with each stage of the chain should be carefully monitored and evaluated against suitable counterfactuals (what would have happened without the project/policy?). Monitoring and evaluation should be part of a gradual transparent evidence-based policy learning (Crescenzi, De Blasio and Giua, 2018[24]).

Figure 4.16. Example of result chain in the European Union

Equally important to the indicators is the fact that the information provided translates into policies. This requires a framework to regularly analyse the indicators, to communicate the insights to all relevant authorities and most importantly to act upon them. It should include clear strategies of how the secretaries can use the information from the indicators for learning and capacity building (Schumann, 2016[23]).

Hidalgo should consider prioritising a limited set of objectives and including lower level objectives in a hierarchical structure (several objectives contributing to achieving one higher-level objective). Outcome indicators should be assigned to the different levels of the hierarchical structure, where the indicators are set for the right level of hierarchy. Therefore, the higher an indicator is located in the hierarchy, the more closely it monitors progress in achieving strategic goals. Overall, the state should take into account good practices for designing indicators stated in Box 4.8. The experience in Scotland can provide Hidalgo with a practical example to define and use indicators (Box 4.9).

An example from a good practice in Mexico is the MIDE (Monitoreo de Indicadores de Desarrollo) in Jalisco, an inter-institutional strategy that involves 34 local institutions and follows recommendations from the MIDE Citizen Council. It measures the progress of 298 indicators that have been ranked in 3 levels of priority (14 strategic, 118 sectorial and 166 complementary). Each indicator has been assigned to a specific government agency to implement and measure its progress and should be updated once a month. Indicators are also aligned with SDGs (Government of Jalisco, 2018[26]).

Box 4.8. Considerations for designing indicators

While indicators are always tailored to the outcome of the policy that they aim to monitor, there are some general considerations that should be taken into account when devising indicators:

Avoid the use of output measures for outcome indicators.
Match the indicator to the objective and ensure it is responsive to policy: Indicators should be influenced as little as possible by factors that lie outside of the policy objective.
Keep indicators consistent over time: The full potential of indicators is realised only by analysing how they develop over time.
Use data that becomes available without long time lags: Indicators need to be based on data that become available quickly and at a sufficiently high frequency.
Normalise indicators with appropriate denominators: Indicators should convey as much information as possible in a single number. Usually, the aim is to express the indicator per unit of another variable or as a share of a larger category.
Minimise the cost of data collection: The construction of an indicator should minimise the administrative burden and costs related to the collection and processing of data.
Design scoreboard indicators: Scoreboard indicators are the highest level of outcome indicators. They serve communication purposes and are supposed to provide general overviews of the conditions in entire policy fields.
Choose between composite and unitary indicators for scoreboards: Composite indicators that combine several measures into one indicator avoid the challenge of finding a single measure that contains all the relevant information in a scoreboard indicator.

Source: Schumann, A. (2016[23]), “Using Outcome Indicators to Improve Policies: Methods, Design Strategies and Implementation”, https://doi.org/10.1787/5jm5cgr8j532-en.

Box 4.9. Establishing strategic objectives and indicator outcomes in Scotland

In May 2007, the Government of Scotland set out to streamline government resources and improve overall territorial performance. To do so, it aligned the government around five strategic objectives – a Scotland that was wealthier and fairer, smarter, healthier, safer and stronger, and greener. From these 5 objectives, it established a series of 16 national outcomes articulating what Scotland wished to achieve over the subsequent 10 years. It then established a set of 50 indicators that cut across many of the national outcomes, helping decision-makers and policy designers identify policy complementarities, and helping citizens identify where progress could be made in more than 1 area. For instance, one national outcome was stated as: “our young people are successful learners, confident individuals, effective contributors and responsible citizens.” It linked to 3 strategic objectives: smarter, healthier, wealthier and fairer; and had 15 associated qualitative and quantitative indicators.

These indicators were primarily outcome oriented and ranged from improving people’s perception of their neighbourhood to reducing child deprivation. On its website, Scotland Performs, the government clearly communicated its strategic objectives and what it sought to achieve. It explained why each national outcome was important, the factors that could impact outcomes and the role of the government in achieving them. It also identified the related strategic objectives and the relevant national indicators.

The importance of each indicator was also explained on the website, as well as its current status, the indicator measure, what influenced change, the government’s role, how Scotland was performing in the indicator over time, criteria for change, partners engaged in creating change, and any related strategic objective. These latter two points highlighted not only the different stakeholders engaged but also the multidimensionality and complementarity of measuring well-being and taking an integrated approach to policymaking. Scotland constantly monitored and continues to monitor its performance, updating its objectives and indicators accordingly. For example, in 2011 a national outcome relating to older people was added. With respect to the indicators, Scotland also adjusted these when necessary, some of the initial indicators remain untouched, others have had adjustments made to their definitions.

Over the subsequent years, Scotland Performs was transformed into the National Performance Framework, but the concept of establishing a vision, clearly establishing a strategy with associated outcomes and appropriate indicators, remains valid and accessible online.

Sources: The Scottish Government (2014[27]), Scotland Performs, www.scotland.gov.uk/About/Performance/scotPerforms (accessed 23 February 2016).

Improving governance co-ordination

The decentralisation reforms in Mexico have resulted in the transfer of competencies from the central government to subnational entities. As a result, the relationship among levels of government has been characterised by mutual dependence of policy responsibilities and outcomes among levels of government. It is a complex relationship, simultaneously vertical, across different levels of government; and horizontal, among the same level of government (Charbit, 2011[28]). For this reason, multi-level governance co-ordination is a key ingredient to put in place an efficient territorial approach to development (OECD, 2014[35]) and requires that strong co-ordination mechanisms be adopted within and between levels of government.

Hidalgo and Mexico have long made great efforts to attain co-ordination. The state has made use of national and regional committees along with a strong political will to collaborate with the federal government and involve lower levels of government in the state development agenda. However, there is high municipal fragmentation (average of 34 388 inhabitants per municipality vs. 49 229 at the country average), with a lack of clarity on responsibilities and formal incentive to co-operate, thus creating challenges for effective co-ordination. This can be seen in the overlaps between environmental guidelines and housing projects in some municipalities (Chapter 3) or the low level of co-operation in strategic projects (i.e. tourism). In fiscal matters, the need for a system that allows investment co-ordination among local government and states is clear. To meet the state goals, the government of Hidalgo needs to identify ways to improve vertical dialogue with federal and local governments as well as inter-municipal and inter-state co-operation.

Improving vertical co-ordination with federal and municipal governments

Given the prominent role of the federal government in the delivery of public policy in Mexico, it is important for the states to reach the central government with a unified voice. Mexico and Hidalgo have various mechanisms, mainly fora, to support co-ordination among levels of government:

The National Development Plan (NDP) is the main formal instrument for co-operation between the federal government and the state governments. It aims to prioritise and promote policy alignment across levels of government by gathering policy inputs from subnational governments and leading the state administration to draft its regional development plan in accordance with the guidelines set out in the NDP. However, inputs from subnational governments are integrated on a case-by-case basis and determined by political affiliations (Ugalde, 2014[29]). Differing electoral calendars also lead to mismatches when drafting the state plan.
The National Conference of Governors (CONAGO) is a permanent forum that seeks to strengthen co-ordination among states and achieve a better balance of powers between the federal and state governments.
The National Institute for Federalism and Municipal Development (INAFED) promotes the co-ordination of states and municipalities to strengthen the institutional capacities of the local public administration.
The National System of Fiscal Co-operation is another forum that provides a platform for the Minister of Finance (SHCP) to meet state finance secretaries and discuss tax collection and other revenue-related issues.

For co-ordination inside the state, Hidalgo counts on committees and fora that carry out co-ordination mechanisms on a voluntary basis:

The Committee of Planning for the Development of Hidalgo (COPLADEH) is in charge of co-ordination between the state and municipalities. Most of the federal investment funds are channelled through this institution. It is organised in sectoral committees where local governments have a representative. Its main responsibilities are to:
- Guarantee the consistency between the state and municipal development plans with the development plan at the national level.
- Promote the participation of civil society within the planning, evaluation and implementation process of the State Development Plan.
- Identify federal programmes and policies that need to be co-ordinated between government levels and evaluate the co-ordinated activities between federal and municipal government.
The Committee of Planning for Municipal Development (COPLADEM) is in charge of co-ordinating the municipal development plan within the local governments (similar to COPLADEH but at the local level). It is a participatory platform for decision making between communities and municipal government. It also oversees the co-ordination with the state and federal level.
The Institution for Municipal Development (INDEMUN) co-ordinates municipal governments with main responsibilities such as:
- Perform co-ordination activities with municipal governments.
- Establish monitoring systems to ensure the quality of services delivered by municipal governments.
- Support local governments with institutional capacity. To do so, it can collaborate with universities or other institutions.
The recent Regulatory Improvement Law for the State of Hidalgo (LMR) and the National Commission on Regulatory Improvement (CONAMER) also provide a scope for co-ordination between levels of government (see next section). It contemplates the creation of co-ordination agreements among institution from different levels of government with the aim of improving the regulation policy. Reduction of administrative burden, training and knowledge exchange have been included.

Hidalgo has the Institute for Municipal Development of Hidalgo, a decentralised institution that aims to promote Hidalgo’s Agenda for Municipalities (La Agenda Municipalista Hidalguense). This agenda has the goal of strengthening the capacities of municipal governments. It has been a vehicle to align state and municipal development approaches. In the same line, the Secretary of Economic Development (SEDECO) conducted a process to align the state and municipal economic development plans through 200 consultation fora where all 84 councils of the state participated. The final result of this exercise was congruency between state and municipal economic development plans.

The Agenda for Municipalities has also guided local governments to conduct an efficient public policy through capacity building. Under this framework, the state conducted a municipal diagnosis to determine opportunities at the local level. In a joint co-ordination between INDEMUN and BANOBRAS, Hidalgo implements the federal programme Bank of Municipal Projects (Banco de Proyecto Municipales). This programme finances and co-ordinates the evaluation of municipal infrastructure projects.

The pool of existent co-ordination mechanisms can, however, be better exploited. Empowering existing institutions and fora can improve co-ordination between the national and state level. Hidalgo should better use the institutions that bring together state policy-makers and national policy-makers and foster joint responsibilities for fiscal and development plans. Notably, to attain vertical co-ordination, the state should:

Reproduce the existing technical steering groups for fiscal, health and security matters for other sectors such as transport or housing.
Strengthen the State Governor’s National Conference (CONAGO) with greater technical capacities in order to establish a better-articulated interaction with the federal government to negotiate broader political agreements. CONAGO can benefit from other experiences in OECD countries with co-ordinating institutions among levels of government, such as the Association of Regions of the Czech Republic (Box 4.10).
Hidalgo would benefit from a greater use of the COPLADEH and COPLADEM to improve policy and investment co-ordination. These committees can be used as an active tool to better plan investments at the right size, co-ordinate the implementation, and benefit from economies of scale within the state, while maintaining a bottom-up approach thanks to the involvement of municipalities. The information about the outcomes from these committees is scattered and hard to follow over time. The state level should closely revise the active participation and outputs from the comities by establishing mechanisms to make public the results and decisions taken.
Hidalgo can seize the CONAMER as a vehicle to promote efficient public service delivery at the state and municipal level. Alignment of government processes through the digitalisation of information and tasks will help to improve the quality of public administration.

The Mexican constitution also introduces the possibility of setting up contracts between the states and municipalities (Art. 115). The agreements can be designed to provide public services, execute and operate public works and formulate plans of urban development, territorial reserves and ecology. For example, the former Secretary Agriculture, Territorial and Urban Development (since 2016 divided between two secretaries) established an agreement with Mineral de la Reforma to directly deliver the subsidies assigned to the municipality from the Habitat Program. Hidalgo should make use of these agreements to conduct tasks so far unmet by municipalities such as the development of cadastres and urban and ecological plans (see section on fiscal revenues and Chapter 3).

The current co-ordination mechanisms are mainly based on voluntary agreement, mainly through fora, with a lack of formal instruments (i.e. in fiscal or budget) to incentivise co-operation (Government of Hidalgo, 2017[7]). Fiscal incentives are limited since transfer formulas or budget allocations are not defined on the basis of government co-ordination. Only municipalities inside metropolitan areas have a sort of fiscal incentives promoted by the budget allocation of the Metropolitan Fund. In this case, the state can benefit from performance indicators to formalise co-ordination since they are linked to budget efficiency. Hidalgo should hence build horizontal indicators that measure the level of co-ordination that secretaries undertake.

Box 4.10. Mechanisms for regional co-ordination in OECD countries

The governments of the German Länder co-operate through the Council of Prime Ministers and 19 subject-specific permanent conferences of ministers. The council/standing conferences are not part of the German government and cannot pass legislation. Nevertheless, they play an important role in the federal system. Councils have two primary functions:

In policy fields where legislative powers reside with the Länder, they are the main forum for policy co-ordination across the Länder.
In policy fields where Länder have limited powers, council/conference resolutions articulate common interests of the Länder to other actors, such as the federal government or the European Commission.

Co-operation in the council/conferences is consensus-based and most decisions are made unanimously. Formally, the Council of Prime Ministers and most other permanent conferences require the approval of 13 of the 16 German Länder to pass a resolution. Although resolutions are not legally binding, they have a strong symbolic power and are almost always enacted by Länder governments.

Some permanent conferences also draft model laws and regulations to support state administrations and to further harmonise laws across states. The Council of Prime Ministers convenes four times a year. After the council meetings, prime ministers meet with the German Chancellor. Subject-specific permanent conferences have their own meetings scheduled and tend to meet between one and four times a year. The federal minister in charge of the respective portfolio typically attends the meeting as an observer. Several permanent conferences have established additional committees to discuss particular topics in more detail. The administrative structure of permanent conferences varies depending on their responsibilities. Some permanent conferences have their own permanent secretariats with sizable staff numbers, while others use the administration of the state that holds the rotating presidency of the permanent conference.

The Association of Regions of the Czech Republic (AK CR) was founded in 2001 to represent the collective voice of the Czech regions. It associates the Czech Republic’s 13 regions and the capital Prague. The supreme body of the AK CR is the council composed of the president of each region and the mayor of the capital, Prague. The association offers services ranging from representing regional interests in parliament, the cabinet and European institutions, to drawing up various reports, standpoints and initiatives. The council elects a chair and three vice chairs, and decides on setting up commissions. Commissions serve as advisors to the council. Current commissions include the Commission for Regional Development, the Commission for Public Administration, the Commission for Regional Financing, the Commission for Education, the Commission for Health Services, the Commission for the Environment and Agriculture, and the Commission for Transportation. Commission sessions serve for monitoring and issuing position papers/recommendations on major national and European issues in their area of competency. The council meets once every six to eight weeks on a rotating basis in one of the regions. External guests, from the central government administration, members of parliament, public organisations or international companies may also be invited to the meetings. The association has a small secretariat and is financed through membership fees.

Source: OECD (2014[30]), Spain: From Administrative Reform to Continuous Improvement, https://doi.org/10.1787/9789264210592-en.

Improving horizontal co-ordination with other states and among municipalities

Given its small size, Hidalgo requires co-ordination with other Mexican states to have a bigger impact on policy decisions and better provide infrastructure projects. Furthermore, promoting co-ordination of investment and policies among municipalities can also help Hidalgo to reduce the cost of municipal fragmentation, which affects the quality of public services and limits the benefits of economies of scale in large projects, and influence productivity (Ahrend, 2014[31]). Such co-ordination will help to meet with a better provision of infrastructure and accessibility and cover the much-needed basic public services such as transport, education, and waste and water treatment.

Hidalgo lacks formal incentives for co-ordination among states and municipalities (Government of Hidalgo, 2017[7]). Instead, this type of co-ordination is done through a voluntary basis on fora committees. As for vertical co-ordination, Hidalgo has CONAGO as a mechanism to agree on joint projects among states. Other states in Mexico have benefited from this platform to conduct strategic collaborations. For example, the initiative for the development of the south-south-eastern region is based on high-level co-ordination of thematic projects between governors of the states in that region along with federal ministries. This initiative has conducted manifold projects: a plan to develop coffee areas across the states, engaging experts and universities to delimit zones and agree on cultivation process, the promotion of a joint package of tourism activities and the integration of road infrastructure projects across the states (Conferencia Nacional de Gobernadores, 2017[32]).

For co-ordination at the local level, the National Conference of Municipalities of Mexico (CONAMM) is a forum that aims to foster co-operation among Mexican municipalities and promotes policies under common objectives defined by the member municipalities (all 84 municipalities in Hidalgo are members). This association can bring together diverse stakeholders concerned with regional development and sets up agreements with national agencies to deliver services fitted to municipal needs. For example, this conference has conducted joint work with the National Institute for Education to train the workforce and illiterate populations within the member municipalities of this organisation. This was done through the use of regional level bodies, such as councils or agencies, and can provide strong support for designing, implementing and/or co-ordinating development policy efforts.

Experiences of co-ordination with adjacent states in the south have been positive due to Hidalgo’s favourable proximity to Mexico City. The participation of Hidalgo within the Metropolitan Development Council of the Metropolitan Zone of Valle de Mexico has promoted joint projects such as the modernisation of the Pachuca-Federal district highway. Another example of co-ordination occurs within the Environmental Commission for the Megalopolis (CAME), which includes several states of the megalopolis around Mexico City (Mexico City, Mexico, Puebla, Tlaxcala, Morelos and Hidalgo) and the Ministry of Environment. This commission has implemented co-ordinated measures to tackle traffic and vehicle emissions in order to reduce pollution levels in the megalopolis. Hidalgo should seize the participation in both the Council and the CAME to develop projects and partnerships with positive impact in the state. The structure of CAME can also be developed with other federal ministries to cover topics of economic development and housing.

Hidalgo also has positive examples of co-ordination among municipalities within the state. This is the case of Water and Sewerage Commission of Intermunicipal Systems (CAASIM), which is an association among the municipalities belonging to Pachuca Metropolitan Area with the objective to jointly provide drinking water, drainage and sewerage services. Following Principle 2 of the OECD Toolkit, Hidalgo should formalise and replicate the example of CAASIM for a co-ordinated delivery of other types of public services among different municipalities. A regional commission of this type for northern municipalities to provide water and electricity, among other things, can be beneficial for the development of this part of the state.

Hidalgo needs to benefit from greater co-ordination between the northern municipalities and their peers in Veracruz or San Luis Potosi. Co-operation on joint investments or on the delivery of public services can unlock the advantages of this geographic area. Municipalities like Huehuetla in the north of Hidalgo have long established links with the neighbour municipalities of Veracruz through either hospitals that provide services to inhabitants of both states or joint security strategies. The northern municipalities of Hidalgo are closer to the road network of Veracruz and ports in the Gulf of Mexico than to Arco Norte in the south of Hidalgo (Chapter 2).

Hidalgo should benefit from the possibility of promoting inter-state collaboration within CONAGO to attain joint projects with Veracruz and San Luis Potosi. The example of the south-south-eastern region initiative can guide Hidalgo in this process.
Particular projects among municipalities from different states can be developed by using CONAMM. It can follow former experience of this committee on collaborating with federal ministries to provide public services.

To formalise the co-ordination, the State of Hidalgo should explore the use of contracts and co-operative agreements that promote joint projects and investments among different municipalities or states. Contracts and co-operative agreements can promote greater co-operation among municipalities. Some countries find that contracts and co-operative agreements are of great value to help manage interdependencies and solve institutional weaknesses (Charbit and Michalun, 2009[40]). Contracts can clarify roles and responsibilities, establish clear accountability mechanisms, and ensure that all parties are working towards the same outcome. Hidalgo can implement these contracts by following experiences from the Contract Project in France or the Vancouver Agreement in Canada (Box 4.11).

Box 4.11. Contractual arrangements in France and Vancouver, Canada

France uses project contracts (contrat de projet) to bring together state (including European Structural Funds) and regional funding to finance projects that can help leverage other objectives (e.g. digital services, transitions to more environmentally friendly practices, etc.). Territorial contracts (contrat de pays) are also used to encourage a group of local authorities to undertake a development project, sometimes straddling or crossing administrative boundaries, thereby adapting to the functional space or space where people live. The project is directly prepared by the relevant area (group of local authorities) and the contract provides fiscal incentives to enterprises involved.

In Vancouver, Canada, the first Vancouver Agreement was signed for a five-year period in 2000 and renewed in 2005 until 2010. The scope of the Vancouver agreement was broad, with three main components: health and safety, economic and social development (including housing), and community capacity building. Its main objective was to promote co-operation between the three levels of government to address local issues of poverty, homelessness, substance abuse, safety and economic revitalisation, concentrating on Vancouver’s Downtown Eastside. While the Vancouver Agreement was unfunded, it made use of existing mandates, authorities and programmes to finance initiatives. There was an agreement by each party to use funding available from existing federal, provincial and municipal programmes to finance projects and programmes and strategically focus a portion of those expenditures on agreed-upon activities.

Sources: Adapted from OECD (2006[33]), Competitive Cities in the Global Economy, https://doi.org/10.1787/9789264027091-en; Vancouver Agreement (n.d.[34]), The Agreement, www.vancouveragreement.ca/the-agreement; OECD (2014[35]), Effective Public Investment Across Levels of Government: Toolkit, www.oecd.org/effective-publicinvestment-toolkit/.

Develop the civil service to improve public administration capacity

The public service in Hidalgo suffers from limited capacities, especially at the local level (Government of Hidalgo, 2017[7]). Moreover, every state and municipal election cycle is accompanied by a substantial overhaul of state and municipal civil servants. In smaller municipalities, low resources and poor facilities detract people to perform and deliver efficient policies. Low levels of capacity coupled with limited co-ordination across and between levels of government hamper the capacity of the state to benefit from synergies and policy complementarities.

The understaffing, retention and motivation of public servants is a challenge in the state. Hidalgo has adopted a policy approach of lean management, with reduction of staff in the search of modernisation. This measure can result in positive effects, yet it should be supported by the right strategy that acknowledges the operational challenges within the state. For example, lack of staff affects secretaries that are key to accomplish state goals, such as the case of the Secretary of Mobility and Transport or the Secretary of Environment in Hidalgo (see Chapter 3). These secretaries accomplish important tasks to meet state goals but they experience issues with staff retention and attraction of skilled workers. For many local governments, attraction and motivation of high performing people also remains a challenge.

The lean public service strategy should be accompanied by changes in how the public administration (and its agencies) operates. OECD analysis suggests that arbitrary staff cuts are generally restored within five to ten years if the public’s demand for services is not reduced or if no change in the operational delivery modes is undertaken (OECD, 2011). If the reduction of staff is not supported by task complementarities among roles or better technology to provide public services, then the delivery of government services will be affected, as staff will be overworked. It will in turn reduce the ability of public organisations to achieve their organisational missions

Investment in developing a forward-looking management and planning can help Hidalgo to meet the changing needs of the public service. This is a much-needed tool in the face of tight budgets and lean management. It involves conducting workforce planning to anticipate possible future developments and maintaining a well-structured workforce of an appropriate size. One basic step for Hidalgo is to keep a record and database of the number of staff, promoting a better use of existing data at all levels of government to identify what it has. This is essential to track the number of employees, costs and competencies.

Hidalgo should strength the Institution for Municipal Development (INDEMUN), to increase training and capacities in local governments.

This decentralised agency can conduct partnerships with universities and local governments to strengthen the institutional capacities of public servants in municipal governments.
It can also enhance the certification mechanism of public servants. This mechanism is used by the state to boost quality in public service. The System of Municipal Professionalisation of Hidalgo promotes a certification programme that seeks to guarantee the training and professionalisation of public officials by incorporating technology for distance training. This policy is welcomed and Hidalgo should enhance it by supporting public servants to effectively access the technology and implementation of new learning methods.

Hidalgo can also implement strategies to transition towards a merit-based recruitment process for public sector workers. Politically-based recruitment decisions extend to senior management positions, further contributing to the absence of a career civil service in Mexican states (OECD, 2013[36]). The political environment, the lack of prospect for re-election in Hidalgo along with poorly competitive salaries may further prevent public authorities from attracting the best management talent. A merit-based recruitment system should ensure consideration of a candidate’s educational background, competencies and experience and link qualifications to clearly articulated competencies required for the job. Hidalgo can benefit from examples from other countries such as Belgium where the tests for the selection of new civil servants is based on generic competency profiles (OECD, 2007[37]). Overall, Hidalgo may benefit by including some of the OECD recommendations developed for Mexico with regards to the professionalisation to the public workforce (Box 4.12).

Box 4.12. Key recommendations for professionalising the local public workforce in Mexico

The lack of professionalisation and the constant renewal of elected and appointed municipal authorities weaken the capacity of the public administration to promote appropriate urban development policies. Dealing with these challenges requires redesigning municipal administrations to make them suitable to a new context that requires a strong knowledge base and experience on the part of the workforce, as well as fairness and transparency in the management of public employees. To this end, it would be desirable to:

Encourage merit and develop strategic workforce practices. This implies developing a merit-based recruitment process focused on competencies and through the development of standardised job profiles.
Improve forward-looking management and planning. This involves engaging in strategic workforce planning to anticipate future developments and to maintain a well-structured workforce of appropriate size.
Enact legislation for the professionalisation of the public workforce at the local and municipal level. The federal Professional Career Service could be used as a model.
Make training more strategic, focusing on ongoing skill development, the certification of competencies (i.e. those of urban planners) and the training of middle and senior managers.
Create a body for the professionalisation of the workforce that could also promote teaching and research on urban development.
Institutionalise collaboration across levels of government for professionalisation.

Sources: OECD (2015[4]), OECD Territorial Reviews: Valle de México, Mexico, https://doi.org/10.1787/9789264245174-en; OECD (2011[38]), Towards More Effective and Dynamic Public Management in Mexico, https://doi.org/10.1787/9789264116238-en.

Citizen engagement and accountability

Those who are the ultimate recipients of governance/policy – such as citizens, businesses and universities – need to be brought on board at the very beginning of the policy process (OECD, 2014[39]). These actors not only have inside knowledge about the effectiveness of a policy but have also the continuity that political bodies do not. Policymakers, citizens and relevant parties require clear information both in the short and long term.

Hidalgo has experienced various challenges regarding citizens’ participation:

In 2015, Hidalgo ranked as one of the eight states with the lowest ranking on activities and spaces for civic engagement (Government of Hidalgo, 2016[24]).
In the same year, the Mexican Index of Access to Information (IADIM) ranked Hidalgo as the state with the lowest quality of laws in transparency, which refers to the institutional design and procedure to access public information.
Some specific policies in Hidalgo have also failed in engaging with citizens. The cases of public discontent include the construction of TOZIBUS stations in the wholesale market of Pachuca or the development of housing projects in environmentally fragile areas and should yield lessons for the state to better raise awareness and communicate policies in advance to the community (see Chapter 2).
Between 2013 and 2015, the number of acts of corruption in Hidalgo doubled (from 13 000 to 27 000), which placed the state as the 11th with the most corruption in the country (Government of Hidalgo, 2017[7]).

The state has acknowledged this situation and has set citizen participation as one of the strategic objectives of the State Development Plan. It aims to improve transparency and accountability to citizens and show citizens that spending is aligned with citizen priorities. Some of the recent actions to achieve this goal are:

The creation of The Citizens Advisory Council of the State of Hidalgo (CCCEH), which is an independent institution that promotes the government-citizen dialogue. It works through five different platforms to analyse sectorial policies: social development, economic development, environmental management and sustainable development, security and justice, and governance.
The creation of a citizen participatory budget, still at a first stage. This is a step forward that, if well managed, can improve efficiency in public spending.
The public information of the indicators performance mechanisms with its goals and results is also a welcome method to communicate and engage citizens in implementation monitoring.

The Regulatory Improvement Law (LMR) also seeks to improve the link between citizens and government (see next section). This law aims to ease processes (for example permits and registries) and expand the dissemination of public information in the state. It also promotes a consultation process as an essential part for the policymaking process.

Citizen engagement is a critical component for building trust in government. This does not just refer to making public information available but also to encouraging active participation and constant consultation. Citizen engagement can be broken down into three categories: information, participation and consultation. Generally, participation is more challenging than information exchange or consultation, as it requires governments to share in agenda setting, to ensure that policy proposals are collaboratively generated and citizen needs are taken into account when making decisions (OECD, 2010[40]). Hidalgo should consider some of the practices of OECD countries to strengthen its citizen participation practices (Box 4.13). Notably, the state should:

Involve citizens in the different co-ordination fora. A chair for a representative from civil society in COPLADEH, COPLADEM and INDEMUN.
Create a formal co-ordination mechanism between the CCCEH and planning (COPLADEH) and implementing (state secretaries) actors.

Box 4.13. Methods for strengthening citizen participation practices in OECD countries

All levels of government face barriers to citizen engagement, and citizen participation can be particularly difficult although perhaps exceptionally rewarding when actively pursued. Tools for citizen participation include those described below.

Citizen Fora: provide a means to deliver policy proposals generated by citizens or their representative organisations (e.g. civil society organisations) directly to policymakers. In December 2006, thousands of current and former residents of New Orleans, Louisiana, were invited to an unprecedented Community Congress that took place at 21 meeting sites across the United States (half of the residents of New Orleans had not yet been able to return home). More than 2 500 people, representing the demographic diversity of pre-Katrina New Orleans, took part in the deliberative forum. Linked together by satellite and the Internet, residents struggled with the tough choices facing the city and articulated a set of collective priorities for rebuilding their home city. One month later, 1 300 people came back together to review a recovery plan that had been developed based on their priorities. Support for the plan was overwhelming; 92% of participants agreed that the plan should move forward. For the first time, community leaders had a public mandate to act. Building off this support, the city’s recovery plan was soon approved by the city and the state and has begun to be implemented.

Citizen juries: allow a group of citizens – selected to reflect the general population – to question experts and offer recommendations after deliberation. The Department of Sustainability and Environment in Victoria, Australia, and the United States Environmental Protection Agency (EPA) have both established guidelines for citizen juries as part of larger citizen engagement toolkits. These are intended to involve citizens in a decision-making process. Citizens are generally selected at random or in a stratified way, and provided with a detailed brief of the issue at hand (i.e. a policy or project that has an impact across the community and where a representative or democratic decision-making process is required), its background and current thinking. They are then asked to discuss potential approaches and potential impact on the community. The jury might be presented with possible alternatives to consider and asked to judge which is the most desirable option for the community. They are asked to deliver a report, which could include recommendations for future action or directions. These juries can be used to broker a conflict or provide a transparent and non-politically aligned perspective to a matter. It is expected that the jurors add value based on their own knowledge and personal experience, and the juries provide an opportunity to build knowledge and exchange ideas.

Dialogue processes: enable governments to engage a large number of citizens directly in identifying needs and developing policy solutions. In 2008, Bilbao, Spain, launched a highly successful renewal project to transform from an industrial city to a service-based one. In addition to establishing a clear vision and an implementation plan sufficiently flexible that it could be changed if the situation warranted, it also had leadership that was committed to ensuring citizen participation when preparing and implementing policies and programmes. Public consultation opened the door for citizens to express their concerns and discuss potential solutions to the problems the city faced, including unemployment, slow economic growth, poor quality education, etc. This provided the city with an overview of citizen priorities and the issues and challenges that a plan had to address. The city was committed not only to speaking with citizens but also to listening. At the same time, citizens had to be willing to enter the conversation – this often required faith that they would be heard; that they would see themselves, their needs and hoped for benefits, reflected in project plans and outcomes. This is particularly sensitive and important at the subnational level, where actors often know each other, community interests and individual interests may not align, and outcomes directly impact individual households.

Consensus conferences: enable a panel of non-experts (with access to a range of experts) to discuss a complex issue over several days and report on their conclusions. In the mid-1980s, the Danish Board of Technology developed the consensus conference technique and used it until 2011. These conferences allowed citizens to provide informed input into technical and complex subjects. More than 20 consensus conferences were organised by the board, based on a standard model: about 16 randomly-selected “lay-persons” (non-experts) are invited to meet over a 4-day period around a pre-selected issue, first to hear experts’ and policy officials’ views, and then to deliberate among themselves. On the final day of the conference, they present their agreed upon or “consensus” views. A final document may be written by “lay” participants and is generally aimed at communicating with parliamentarians, other policy and decision makers, and also the general public. The Danish Board of Technology publishes these contributions in a series of reports and disseminates them to interested parties. These documents have contributed to informing politicians and policymakers on citizen views and attitudes towards new technology.

Citizen panels: assess public preferences and opinions, and are often used for assessing service needs and identifying local issues; they can be useful for engaging stakeholders with the development of new policy areas. In Bristol, England, 2 200 panellists reflecting the city’s population were recruited through random sample and interviews to form the Bristol Citizens’ Panel. The panel keeps the council informed about public opinion. Since its establishment in the late 1990s, the panel has been asked more than 600 questions on topics ranging from recycling to changing the selection process for the city’s mayor. Panel members receive up to four questionnaires annually, that they can compete on paper or electronically. Results from the panel enrich the decision-making process.

Participatory strategic planning: a consensus-building approach to help a community or an organisation articulate how they would like their community (or organisation) to develop over the next few years. This can be used to help a group agree on where they want to go and how they are going to get there. It is particularly useful to build a sense of ownership and commitment in a group and to build consensus. Participatory strategic planning was used by Ponders End, North London, to empower and enable residents and the communities to address local economic, social and environmental concerns, and improve their quality of life. This four-stage process served as a reference point for the Community Development Trust in its movement forward and helped the trust find and deliver a programme of community events and infrastructure based on the agreed plan.

User panels: regular meetings of service users. These panels help identify the concerns and priorities of service users and can help identify problems or generate ideas for improvement. These can be particularly helpful for constituencies whose voice is not usually heard (e.g. children, the elderly, etc.) and is a good way to establish a two-way dialogue between service providers and service users. Since 1992, Age Concern Scotland’s Fife User Panels have provided an opportunity for the ageing population to influence the delivery of services that can help them maintain an independent lifestyle, for example, an enhanced cleaning service for home care clients and good practice for hospital discharge.

Sources: Adapted from OECD (2016[41]), OECD Territorial Reviews: Córdoba, Argentina, https://doi.org/10.1787/9789264262201-en; OECD (2001[42]), Citizens as Partners: Information, Consultation and Public Participation in Policy Making, https://doi.org/10.1787/9789264195561-en.

Improving regulatory policy and business environment in Hidalgo

Policies and institutions for regulatory improvement

National and sub-national governments issue regulatory instruments or regulations with the purpose of interacting with society to reach policy objectives. Regulatory policy strives for these instruments to be of public interest and provide net benefits to citizens and society. For regulatory policy to be successful, it is necessary to have a high-level political commitment with a comprehensive focus at all government levels, with the support of an institutional framework that allows its implementation and oversight (OECD, 2014[20]).

During the last years, the government of the State of Hidalgo has conducted a regulatory improvement policy, mainly through the elaboration of the Regulatory Improvement Law for the State of Hidalgo (LMR) (Government of Hidalgo, 2017[49]). While the law provides the creation of the institutional framework required for the implementation of regulatory policy, the corresponding institutions have not yet been set up, and the by-law (reglamento) for such law has not been issued. This hinders the potential of the regulatory improvement policy in the state and its municipalities.

Legal framework and legal instruments

According to Article 83 of the Political Constitution of the State of Hidalgo, regulatory improvement must be part of the state and municipal public policies (Government of Hidalgo, 2017[50]). Therefore, the Regulatory Improvement Law of the State of Hidalgo was issued in April 2017 (Government of Hidalgo, 2017[49]), which has as objectives the following:

Promotion of government efficiency and effectiveness through the implementation of a State System of Regulatory Improvement.
Creation of the State Catalogue of Formalities and Services.

The LMR provides the establishment of regulatory policy in the three branches of the state – the executive, legislative and judiciary branches – and is mandatory both for government agencies and autonomous bodies. It is worth mentioning that the LMR covers subjects such as administrative simplification, the use of the regulatory impact assessment to evaluate public policy proposals, and the creation of a catalogue with relevant information of the formalities (tramites) that can be performed in the state and the municipalities. Additional to the LMR, the State of Hidalgo has a set of legal instruments that influence the regulatory improvement policy. Such instruments are depicted in Figure 4.17.

Figure 4.17. Legal framework of the regulatory improvement policy in the State of Hidalgo

As mentioned before, the scope of the law varies according to the state’s branch. Most of the regulatory improvement responsibilities are located in the executive branch. However, it is necessary to complete the framework of legal instruments so that the application of regulatory policy is effective, regardless of the government branch, such as the need to issue the reglamento of the LMR. Therefore, an analysis of the provisions of the regulatory improvement policy and the opportunity areas for each branch is needed.

Executive branch

The LMR sets forth the creation of a State System of Regulatory Improvement, which comprises the Regulatory Improvement State Council, the Regulatory Improvement State Commission and the Regulatory Improvement Municipal Commissions. The purpose of this system is to order, co-ordinate and systematise the actions required for the implementation of a policy of quality regulatory (Government of Hidalgo, 2017[49]).

The Regulatory Improvement State Council is the body in charge of co-ordinating the regulatory policy in the state and is composed by executive branch officers of the state, and representatives of educational institutions, the business sector and citizens. According to the LMR, the council must meet for sessions at least three times a year; nevertheless, since the council’s creation, only one session has been held. In this context, it is worth mentioning that effective functioning of the council is an essential requirement in order to co-ordinate efforts in regulatory policy matters in the state.

Another body which is part of the State System of Regulatory Improvement is the Regulatory Improvement State Commission. This commission is an autonomous body of the state’s Secretary of Economic Development (SEDECO) and has technical, operational and management autonomy. Additional to the co-ordination of the Regulatory Improvement State Programme, the commission is the agency in charge of co-ordinating the council (Government of Hidalgo, 2017[49]). Although the LMR provides the commission’s competencies, it does not specify its composition.

Despite the fact that the Commission has not been created yet, SEDECO is making efforts to set up this body. Therefore, SEDECO has worked in defining the optimal institutional design for the commission. Even though the design and allocation of duties of each one of the commission’s units are relevant, the state government should not overlook the capacity of the agency to reach its policy objectives. This implies that the resources aimed at the creation and operation of the Commission must be aligned with its functions.

Article 14 of the LMR lists the commission’s duties, the most important of which include: development and monitoring of a system of indicators; revision of the state regulatory framework; promotion of rapid business start-up; among others (Government of Hidalgo, 2017[49]). With the purpose of complying with the abovementioned responsibilities, the commission must have sufficient financial and (trained) human resources, as well as the necessary tools so as to duly fulfil its mandate.

The third body participating in the Regulatory Improvement State System is the Regulatory Improvement Municipal Commissions. According to Article 71 of the Municipal Organic Law, each municipality must create a regulatory improvement commission (Government of Hidalgo, 2018[52]). However, up to the present, only 41 out of 84 municipalities in the state have one. Municipal commissions have the same powers as the State Commission, adjusted to their scope of authority.

Legislative branch

In regulatory improvement matters, the LMR states that the legislative branch must only review the regulatory impact assessments received as part of a regulatory project and must carry out revisions of existing regulations, with the purpose of assessing if they are meeting the purposes for which they were issued.

In spite of the LMR clearly describing the legislative power’s duties in this matter, the manner in which they should be carried out is not explicit. That is, the law does not provide the guidelines that the legislative branch must follow or the indications about the timing of regulatory revisions. Beyond that, the law also fails to indicate which body is in charge of co-ordinating, supervising and executing a quality regulatory policy in this branch.

Judiciary branch

According to the LMR, the judiciary branch must carry out four main actions: i) create a Regulatory Improvement Commission; ii) elaborate a statistical system for monitoring and evaluating business judicial procedures; iii) set a notification system for these procedures; and iv) commission a judicial information management system (Government of Hidalgo, 2017[49]).

The Regulatory Improvement Commission of the judicial branch was set up on 8 March 2018. Also, the judiciary branch is the only one of the three branches with clear guidelines about the duties and tools with which the commission must work. That is, the judiciary branch has the regulatory framework needed in order to develop a quality regulatory policy, as well as the body in charge of its execution.

Co-ordination among branches

The co-ordination between the state branches is provided for in the Joint General Agreement 1/2017. In the agreement, the plenum of the Superior Court of Justice of the State of Hidalgo, through the Regulatory Improvement Commission of the judiciary branch (CMRPJ) should co-ordinate with the state government’s Regulatory Improvement Commission (CMR) in order to obtain training regarding regulatory quality tools and policies.

However, the CMR has not been set up yet and co-ordination is with SEDECO. The CMRPJ is currently working to fulfil the obligations set forth in the LMR. In this sense, it is recommended to set a collaborative work agenda with the state government’s CMR so as to keep the transmission of knowledge, tools and training.

It is important to acknowledge that the State of Hidalgo has made good progress in regulatory policy. The LMR is a step in the right direction. However, without a reglamento and without the establishment of the oversight body in the executive and legislative branches, it will be difficult to take advantage of all the benefits resulting from a policy of regulatory quality.

Multi-level regulatory improvement policy

In most OECD countries, whether with federal or unitary systems, different government levels design and implement regulations according to their competency scope. One of the challenges for these systems is that regulation should be coherent in order to reach public policy objectives. Also, regulation must not create unnecessary administrative burdens. In order to overcome these challenges, the 2012 Recommendation of the OECD Council on Regulatory Policy and Governance (OECD, 2012[47]) recommends members countries implement formal co-ordination mechanisms between national and sub-national governments. That is, the state must co-ordinate both with the national and municipal systems in order to improve the regulatory system

The LMR defines co-ordination between different government levels in Hidalgo. In practice, this co-ordination has become a reality in the federal and municipal scopes through collaboration agreements with the National Commission on Regulatory Improvement (CONAMER) and with most of the municipalities of the state. Also, the judiciary branch of the State of Hidalgo has established formal co-ordination mechanisms with CONAMER.

As one of its main policies, CONAMER regularly signs collaboration agreements with states and municipalities and the objectives are manifold: capacity building, diagnostics and recommendations, all aimed at improving the implementation and effectiveness of regulatory improvement policy at state level. The projects focused mainly on administrative simplification and reduction of burdens. These agreements take the form of formal signing of legal documents, and they become part of the outputs that CONAMER reports to the Federal Ministry of Economy and the Federal Ministry of Finance, as part of the federal system of the Matrix of Indicators of Results.

The executive branch of the State of Hidalgo has worked with CONAMER since 2013 in the Regulatory Improvement State Agenda, setup of Systems for Rapid Business Start-Up (SAREs) and reduction of administrative burdens (SIMPLIFICA project). However, a pending issue on the agenda is the use of tools to assess regulation in an ex ante and ex post basis.

Co-ordination agreements between institutions of different government levels are deemed appropriate to start a collaborative work. It is nonetheless desirable to prepare a work agenda for the short, medium and long run, and make it public, with specific objectives and goals. This agenda should include an implementation plan and should be prepared jointly by the federal and state level authorities. The purpose is for the work not to be affected by changes in the stakeholders with direct responsibility in the agreement. Having a well-defined agenda of work allows for a co-ordinated effort among different tasks such as continuous training, knowledge transfer, use of assessment tools and collaborative work to reach common goals.

The LMR currently binds the state and its municipalities to carry out a regulatory impact assessment that includes a regulatory coherence study. In order to achieve this objective, it is very important to choose an assessment instrument according to the capacities and needs of the state and the municipalities. The evaluation method must consider institutional capacities, such as human and financial resources. It is worth mentioning that the assessment instruments can evolve as the capacities and experience of officials increase. In this way, it is possible to use a low-complexity evaluation method in the first stages and increase such complexity as the officials gain experience. For instance, it can start with a qualitative analysis to evolve into a quantitative one.2

The state’s work with the municipalities has focused on ordering and issuing information related to municipal formalities. In many cases, these formalities have been published on the State Catalogue of Administrative Formalities and Services (CETS) of the State Government’s website. Another collaboration axis between the state and the municipality has been the installation of eight Systems for Rapid Business Start-Up (SAREs) that promote simplification of business setup processes in the most important municipalities of the state – Pachuca, Mineral de la Reforma, Tepeapulco, Tizayuca, Tula, Tepeji del Río, Tulancingo and Atitalaquia.

A very important exercise organised by the state with the municipalities is process analysis fora, which have been set up (at least for the time being) to improve processes and formalities required to obtain a construction permit. In these fora, SEDECO officials present to the representatives of municipalities and business owners of the sector an optimised process of the construction permit in order to achieve an agreement regarding its adoption – simplifying the current process of each municipality.

The objective is also to initiate a conversation about the main problems (in terms of schedule and obligations) faced by the citizens when attempting to obtain such permits. Despite the existence of these fora and the commitment expressed (at least informally) by the municipalities to adopt an optimised process, efforts have not materialised. It is recommended that these fora include an agenda with specific goals and entities responsible for their correct implementation, as well as the specific needs required for such purposes.

One of the main areas of opportunity in the municipal scope lies in the systematic lack of urban and metropolitan development plans. In the few cases in which they exist, they have not been updated (see chapter 3). This situation not only promotes disorderly growth of cities and urban areas, but can also produce discretion in the application of the regulation, as well as corruption opportunities and administrative burdens. An updated urban development plan is one of the priority actions that the state could foster with municipalities to improve regulation efficiency and effectiveness.

The State of Hidalgo has worked in building a regulatory policy from a multi-level perspective. However, these relevant efforts are seen as isolated examples. Due to this, designing a comprehensive strategy linked to regulatory policy is recommended, including co-ordination with different government levels. The document listing the strategy should be made public and include the policy objectives, as well as the work plan with other government levels. In order to improve multi-level co-ordination, the following objectives are considered as pending:

Creating transactional electronic portals to manage state formalities and services, with links to municipal or federal ones.
Connecting the state Public Registry and municipal cadastres to exchange digital information that will help to facilitate cadastral formalities.
Implementing the federal government’s electronic signature in state and municipal formalities to homologate processes and reduce administrative burdens, and facilitate access to digital formalities.

Administrative simplification

Administrative simplification is a dimension of regulatory policy seen in practically every OECD Recommendation of the Council on Regulatory Policy and Governance. The working field of administrative simplification covers identification of effectiveness and relevance of regulation to the way in which the government interacts with citizens or companies. This relationship can exist through specific formalities, information provision or public services, or the way in which existing regulation is implemented. The OECD recommends that regulations have a clear objective, with the minimum administrative burden. Thus the importance of carrying out ex post evaluations of regulation, publishing administrative formalities inventories and quantifying administrative burdens to implement a re-engineering of processes on government formalities and information requirements using information technology and with the purpose of improving the regulatory framework.

The government of the State of Hidalgo has defined objectives related to administrative simplification in the State Development Plan 2016-22 (SDP); it has, for instance, provisions in the reduction of administrative burdens. It is nevertheless necessary to integrate such objectives into one agenda in the short, medium and long term, providing order and priority in the strategy. This agenda would help make it possible to provide a precise follow-up and evaluate the implementation of the simplification work.

The SDP recognises the value of regulatory improvement, as well as some of the positive effects related thereto. For example, it is recognised that efficiency and professionalisation of government officials, as well as quality in public services, are effects deriving from administrative simplification. It also includes a brief analysis with some indicators related to the regulation in force, such as the World Bank indicator on ease of doing business and the Regulatory Improvement State Ranking.

Regarding administrative simplification, the State of Hidalgo has carried out several actions which lead to the improvement of formalities’ status. For example, they have started to measure administrative burdens through an agreement with CONAMER and have identified a set of 100 formalities with simplification priority. These actions are consistent with OECD recommendations; it remains, however, necessary to boost efforts by seeking a more comprehensive strategy on administrative simplification.

Administrative simplification strategy

Administrative simplification is an instrument to control the quality of regulation and is present in the agenda of most OECD member states because it identifies and reduces unnecessary costs generated by poor quality regulations. It is of major importance to identify the regulation that potentially goes beyond the policy objective since it can create entry barriers in the setup of businesses or limit access to public services.

Simplification strategy in the State of Hidalgo is based on the regulatory framework that was recently reformed, as mentioned in the section on policies and institutions. At first, the State of Hidalgo meets the obligation to uphold a policy of simplification of formalities established in the LMR (Government of Hidalgo, 2017[49]). Said law includes the incorporation of electronic means for exchanging information in administrative formalities, including the substitution of handwritten signatures for digital means.

Nonetheless, the strategy takes greater shape through the objectives incorporated in the SDP and the sectorial plans of SEDECO. For instance, the SDP provides administrative simplification goals: on the percentage of simplified formalities for 2022 (50%) and 2030 (70%); or regarding the percentage of formalities and services offered in digital format or remotely for 2022 (25%) and 2030 (50%) (Table 4.5). These goals are relevant to evaluate the progress of the administrative simplification objectives. Nevertheless, it is recommended to assess the actions in order to identify if they have effectively reached the underlying objectives.

Table 4.5. Percentage of formalities and services of transactional type offered online in the state public administration
	Reference Base Value	Goal	Goal
Year	2015	2022	2030
Value	8.6	25.0	50.0
Note: State Development Plan, Axis 1: Honest, close, and modern government. State estimation that expresses the percentage of formalities and public services offered in internet in the state public administration and which allow carrying out and/or following up on associated formalities and payments “online” (without needing to visit a public administration office).
Source: INEGI (2017[48]), Encuesta Nacional de Calidad e Impacto Gubernamental (ENCIG) 2017 [National Survey of Governmental Quality and Impact (ENCIG) 2017], http://www.beta.inegi.org.mx/proyectos/enchogares/regulares/encig/2017/ (accessed on 15 May 2018).

It is worth mentioning that SEDECO has goals defined regarding different projects related to administrative simplification, such as the investment gateway, inventory of formalities, etc. These projects should have a thorough follow-up through management indicators that support decision-making.

Formalities and services

The state government has signed a collaboration agreement with CONAMER for burden measurement and simplification of formalities (SIMPLIFICA). This project’s purpose is to identify opportunity areas in formats and templates. It also aims to disentangle the process through which the state’s formalities are managed, and in such a way, reduce administrative burdens for citizens and business owners.

When elaborating this report, the initial diagnosis of the SIMPLIFICA project had been carried out, which identified 850 active formalities in the State Catalogue of Formalities and Services (CETS), 730 of which are in force. 82% of the formalities are made in person and CETS presents their basic information. 15% can be started on line and be concluded at a government office, and 3% can be made completely on line (CETS website: www.ruts.hidalgo.gob.mx). To date, the portal lists some formalities from specific municipalities, but only of an informative nature.

From the total amount of formalities incorporated into the analysis of the SIMPLIFICA project, 57 were considered a priority but there are plans to simplify 760 formalities and digitalise them by November 2018, in view of administrative simplification.

The construction of a formalities and services portal with legal foundations and standardised, updated, concise information in the citizen’s language is crucial to start any regulatory improvement action. In virtue of this, it is important for CETS to be comprehensive and dynamic. However, in order to continuously incorporate information, an institution in charge of CETS, with a real capacity to oversee the quality and relevance of information, will be required.

In parallel, the state government has identified 100 formalities susceptible to be digitised. This group of formalities was proposed based on its ability to raise funds for the government.3 However, criteria that identified administrative burdens or citizens’ suggestions– as can be provided by the SIMPLIFICA project – were not taken into consideration. It is important to prioritise the simplification of formalities based on objective indicators and taking the view of citizens into account, that is to say in accordance with the total administrative burdens of each formality. The widely employed methodology of the Standard Cost Model can help to measure administrative burdens (see Box 4.14).

Box 4.14. Standard Cost Model (SCM)

The SCM methodology is an activity-based measurement of businesses’ administrative burdens, making it possible to follow the development of administrative burdens. At the same time, the results from the SCM measurements are directly applicable to governments’ simplification work, as its outcome shows the specific regulation that is especially burdensome for businesses. The SCM goes beyond defining the cost of formalities as the fees paid by users. Instead, it allows for the calculation of administrative burdens by considering the time and money that citizens and business allocate to comply with the formality.

The SCM breaks down formalities into a range of manageable components that can be measured while focusing on the administrative activities that must be undertaken in order to comply with regulations. SCM measurements highlight the existence of areas of regulation suitable for administrative burden reductions. Given the action-oriented nature of SCM results, it provides a crucial baseline and source of ideas for simplification opportunities.

The adoption of the SCM in the simplification process has several advantages:

It draws attention to the specific parts of the legislation that are most burdensome for businesses’ compliance as well as identifying the total costs of administrative burdens.
A baseline measurement reveals where administrative costs occur in business processes, highlighting where the greatest effect of simplification can be achieved.
The classification of the causes for the administrative burdens and the identification of which department/ministry is responsible for burdensome regulation allows to target the simplification efforts.
Collected information enables to simulate how changes or amendments in the regulation may impact on the costs faced by stakeholders.
The SCM may also stimulate the share of data between government agencies.

According to the SCM, there are three types of costs that businesses face due to the regulation: direct financial costs (fees), long-term structural costs and compliance costs. The latter is the cost category that the SCM focuses on. Within this category, the SCM takes into account the administrative costs of complying with the regulation which only emerges because of the regulatory burden.

The calculation of these costs is constructed through the monetisation of all the resources directed towards the development of information that is to be handed to the regulatory authorities.

The structure of the SCM is as follows:

Figure 4.18. The structure of the Standard Cost Model

The digitalisation of the formalities should be considered as a re-engineering of the entire process to eliminate unnecessary or duplicate steps. The digitisation process should also be planned to incorporate tools to make online payments and adopt an electronic signature in two ways (citizens and official). On this objective, it is important to establish a specific agenda that allows locating priorities and execution times.

An example of the digitisation process in the Ministry of Environment and Natural Resources of Hidalgo is the Environmental Impact Assessment (MIA), which aims to reduce the response times from three to one month and eliminate five of the requirements that are currently requested. The Ministry of Environment is currently considering the use of a platform with georeferencing able to locate the associated properties in real time as part of the MIA process.

The state also plans to work with municipalities to digitise formalities associated with business start-ups and construction permits. Nevertheless, SEDECO faces challenges in allocating resources for these purposes, as it needs to lobby for resources with the State Ministry of Finance or with federal agencies. To expedite this objective, some alternatives have been identified, such as the participation of external developers. In this case, it is very important that property rights over computer systems are properly defined; as well as participation schemes, in order to ensure their continuous updating, validity and technical and financial maintenance.

One-stop shops

The government of the State of Hidalgo is developing the website www.investhidalgo.mx, with information focused on potential investors in the state. Its main strengths include the following:

The website allows to establish communication between investors and specialised officials of the state government. In this way, the government follows up on the information needs and specific requirements.
Some of the information that is provided is related to the potential formalities that the investor should fulfil in the three government levels.
Additionally, it provides information on main industries settled in the states, and on industrial and high-tech parks in which new companies can operate.

This website is under development and its main areas of improvement are:

Currently, it contains basic information on formalities (a map with generic priorities), sectoral and infrastructure data. However, to take advantage of its potential, it should be linked to the CETS to allow consultation of specific information on each formality. This could turn into a link to digital formalities at a later stage.
It is also advisable to include statistical information that can be downloaded and analysed, since currently only basic information without interactive capacity is presented (see Box 4.15 for an international example).

The website can be a good starting point for an administrative simplification strategy. Nevertheless, as mentioned previously, it should also be able to offer more detailed information and be coupled with a strategy of digital formalities.

At the municipal level, there are one-stop shops to carry out formalities related to business start-ups. Particularly, in the municipality of Pachuca de Soto (capital of the state), the SARE is in operation, which can issue a license in 48 hours. However, this office has a limited spectrum of business formalities, so it is recommended to keep incorporating business and citizen formalities continuously

In the State of Hidalgo, no overarching strategy of administrative simplification has been observed but several actions give the impression of being separated, although there is convergence in actions and formalities. For example; there are efforts to identify the 100 priority formalities, along with the 55 formalities that the SIMPLIFICA project identifies, and other efforts through the one-stop shops or electronic websites. It is advisable to integrate all efforts to have a comprehensive strategy and avoid duplication or working on low priority issues.

Box 4.15. Website of formalities in Australia

The Government of Australia, through its websites, has encouraged the reduction of administrative burdens for businesses and citizens. The websites australia.gov.au, business.gov.au and my.gov.au are the main sites where you can find the information necessary to carry out formalities focused on business start-ups and some government services. These websites are linked and make up a one-stop shop of formalities and services, which allows for interaction between citizens and authorities.

The website australia.gov.au is the main government website. It is organised based on life events and provides information on all the services provided by the government. In particular, it has a section dedicated to business and industry where useful links are found to specialised information according to the needs of the users.

The business.gov.au website focuses specifically on the three stages that a business follows: creation, operation and closure. This site has reference information, provides the current legal framework and allows the execution of relevant formalities for business. For example, it is possible to register a business and obtain the identification code of the business, find disaggregated information according to the type and direction of the business, know the process to follow in case of bankruptcy of the business and obtain specific information according to the physical location of the business.

Finally, my.gov.au brings together some of the services offered by the government. On this site, users can digitally access services such as employment exchanges, medical records and tax collection, among others. In addition, notifications can be received from the institutions in charge and it allows users to modify their contact information. Particularly, MyGov offers the option of linking several Australian Business Numbers so that entrepreneurs can have centralised access to a variety of sites of interest to entrepreneurs.

Sources: Australian Government (n.d.[50]) Australian Government, https://www.australia.gov.au/ (accessed on 14 May 2018); Australian Government (n.d.[51]), Business, https://www.business.gov.au/ (accessed on 14 May 2018), Australian Government (n.d.[52]), myGov, https://my.gov.au/LoginServices/main/login?execution=e1s1 (accessed on 14 May 2018).

Ex ante regulatory impact assessment

The OECD recommends integrating a Regulatory Impact Assessment (RIA) in the first design stages of public policies that require new regulatory instruments (OECD, 2012[47]). The RIA is a tool that allows making decisions based on an analytic, systematised and transparent process and is usually presented as a report along with the regulatory proposal.

The LMR states the obligation of applying a regulatory impact evaluation, which can be of ex ante nature, that is previous to the regulation’s issuance and that in the OECD countries is known as Regulatory Impact Analysis (RIA); or of ex post orientation, which is used to assess the regulation’s effectiveness after it has been implemented. The ex ante analysis referred to by the LMR is aligned with international practices. The LMR mentions the elements that this evaluation should include:

Analysis of the problem at the origin of the regulation and its objectives.
Analysis of regulatory and non-regulatory alternatives.
Analysis of costs and benefits of the regulatory proposal for the affected groups.
Analysis of implementation mechanisms and capacities.
Mechanisms, methodologies and indicators used to evaluate the regulation’s objectives.
Description of the consultation processes carried out.

Despite the compulsory nature of the application of ex ante analysis at a legal level, the state’s government has not yet concluded the implementation of the tool. In fact, the lack of the reglamento for the LMR and the delay in the creation of the CMR can limit or reduce the capacity to adopt a RIA model. This is due to the fact that the reglamento is supposed to define the scope of the law and offer provisions for the functioning of the RIA system. Also, for a RIA system to be effective, proper oversight is needed, and this is where the role of the CMR is important. On the other hand, it is worth mentioning that the availability of specialised human resources is fundamental to reach the objectives and goals of this tool. See Box 4.16 for an international example of the application of ex ante assessment of draft regulation by a sub-national government.

Box 4.16. The use of regulatory impact assessment in British Columbia, Canada

The Ministry of Small Business and Red Tape Reduction, which in June 2016 was in charge of the regulatory reform in British Columbia province, proposed a policy that allows reducing the regulatory burdens that citizens and businesses face to a minimum. Such policies sought that reforms and new regulations along with their formats would not produce an excessive burden on citizens, but protect public health, safety and environment. To reduce to a minimum the effects of the regulation on citizens and businesses, five principles were established which must be considered to elaborate or to modify a regulation:

Identify the best option.
Evaluate the impact on citizens, businesses and public administration.
Consult and communicate.
Make the design more efficient.
Evaluate the effectiveness of the regulation.

To fulfil this policy, the government provides assistance in how to minimise the regulatory impacts due to changes in bylaws, regulations, policies and procedures. For instance, the ministries that try to issue legislative proposals that must go through the Executive Council’s revision must start the Request for Legislation Process that includes a checklist (or a statement to request exemption from the presentation of such list) and a document that quantifies administrative burdens. Such a verification list is a simplified RIA which is also used in the issuance of other types of legislation such as the Orders in Council.

Source: Government of British Columbia (n.d.[53]), Regulatory Reform Policy, https://www2.gov.bc.ca/gov/content/governments/about-the-bc-government/regulatory-reform/resources (accessed on 16 May 2018).

The strategy in the implementation of the RIA must be consistent. That is, the instrument (type of report) selected must be chosen according to the flow of the regulation that is issued annually and the financial and human capacities of the government. A common practice that may create obstacles in the adoption process of the RIA (at least in the early stages) is to set the most advanced practice at the national level as a standard, for example, to establish RIAs of high and moderate impact, in which the former must have a monetised cost-benefit analysis. National systems usually have several years of experience and more financial and human resources; for this reason, starting the exercise at the sub-national level with these templates and standards can impose goals with little feasibility of being reached or even reduce the quality of the analysis. Failure to achieve the goals runs the risk of generating a misperception about the capacity of the tool, and it may gradually lead to disuse of the tool or become only part of a bureaucratic step with no policy assessment whatsoever.

Regardless of the instrument (RIA report) selected, it is important to implement it gradually, ideally with a pilot programme that involves the institutions that could have the most resources. It is important to remember that the implementation of the RIA requires trained human resources; not only in the CMR where the regulatory projects will be reviewed but in each institution that issues regulations. For this reason, it is necessary to implement a continuous and permanent training programme, since the movements in personnel affect the institutional capacity.

Other regulatory improvement tools

The OECD recommends the use and adoption of diverse tools to improve the regulatory quality such as RIA or the administrative simplification (OECD, 2012[47]), which have already been analysed in the previous sections. However, there are other instruments which are complementary and contribute to improving regulation quality. These are public consultation, ex post evaluations and management of the stock of regulation. The activities carried out by of the State of Hidalgo in each one of them are described below, as well as the main strengths and opportunity areas.

Public consultation

The OECD recommends involving the stakeholders in the process of creation and issuance of regulation, since this practice has shown to have positive effects in improving the quality of regulation (OECD, 2012[47]). On the one hand, the consultation processes improve transparency, efficiency and effectiveness of the regulation. The consultation also allows in the first stages of policy development the dissemination of government plans and learning the different points of view about the regulatory proposal and the potential impacts. On the other hand, consultation is a process that allows the identification of benefits or impacts that could have gone unnoticed.

There are different arrangements, stages and objectives for a consultation process. For instance, early consultation is very important to define the public policy issue; on the other hand, public consultation at later stages is relevant to adjust or improve a specific regulatory proposal.

In Hidalgo, consultation processes are indicated in the LMR. First of all, the consultation process is indicated as one of the elements that should contain the regulatory impact assessment (Art. 30, LMR) which is attached to the regulatory proposals; besides, it points out that the implementation of an impact assessment should assist consultation processes.

The LMR also indicates that the CMR and the municipal commissions are responsible for making the regulatory impact assessments public (Art. 33), in order to collect public opinions and comments. This practice is similar to what can be observed nationwide where CONAMER is the entity that provides a platform to carry out consultation processes, and similar to various OECD countries such as the United States and the United Kingdom.

The consultations process is also indicated in the LMR to implement simplification actions carried out by the state government (Art. 57 LMR) and gives powers to the CMR and municipal commissions to promote the elaboration of annual programmes based on public consultation (Art. 44 LMR). In fact, one of the first exercises of public consultation was carried out for the elaboration of state and municipal economic development plans. This process included a total of 200 consultation fora for 84 town councils. The finished plans included follow-up indicators and were authorised by the Hidalgo State Congress.

Another exercise is headed by the SEDECO to simplify processes related to construction permits (for constructions over 1 500 m²) in municipalities of the state. The SEDECO, the personnel in charge of municipal construction permits and business representatives participate in this exercise.

The consultation processes in Hidalgo have a basic legal framework and some exercises in this matter have been made. However, it is very important to establish this practice in a systematic fashion, maintaining standardised quality levels. For such a purpose, it is necessary to issue the LMR’s reglamento and operation manuals for consultation programmes so the state and municipal commissions can exercise their faculties more efficiently. For instance, the LMR indicates that the commissions should publish the regulatory projects with an impact assessment to collect comments. However, the reglamento must set guidelines about the use of information technologies, sanctions over law breaching, etc. On the other hand, the reglamento can provide more information about how and in which cases it is a priority to implement early consultation processes.

Ex post assessment of regulation

Once regulations have been implemented, their assessment has the purpose to determine if the foreseen effects were reached. In this way, the ex post evaluation’s purpose is to analyse the relevance, efficiency and effects of the regulatory decisions, including undesired results, causes of failure or elements that had contributed to its success. Ideally, these evaluations start from the intensive use of reliable and precise statistical information. Nevertheless, it is possible to start the assessment exercise with qualitative techniques.

In the State of Hidalgo, there is a reference to the ex post regulatory impact assessment in Article 27 of the LMR (where the use of RIA is provided too). This article mentions that the obligated subjects will adopt review schemes about existing regulations. Article 38 mentions that those regulations issued in the official gazette and that generate compliance costs for businesses must be analysed 5 years after to determine their application effects.

In practice, the five-year term, defined since the publication of the LMR, has not been fulfilled and therefore there have not been evaluations regarding this rule. Additionally, there is no evidence of ex post evaluations as part of the process of reviewing the inventory of regulations.

Management of the stock of regulations

The recommendation of the OECD Council on Regulatory Policy fosters systematic review to ensure regulations comply with the public policy goals for which they were designed (OECD, 2012[47]). These inventory reviews do not only refer to ex post evaluations but also include identification and elimination of regulations that are not applied, that generate duplicities or that do not have a current goal.

Regarding this subject, the LMR provides in Article 43 that the CMR and the municipal commissions can suggest to the regulated entities the modification or elimination of regulations, according to state and municipal programme objectives.

One of the first steps to review the regulatory inventory is the identification and publication of the complete body of regulations. The LMR (Art. 20) obliges the CMR and the commissions to elaborate the electronic inventory of the regulation in force. However, this obligation has not been met. One of the reasons for not having this inventory completed is that the CMR has not been created and there is no specific agency responsible for this project.

There are existing regulation inventories which are administrated by the judicial and legislative branches in the State of Hidalgo. Nevertheless, the corresponding websites (www.pjhidalgo.gob.mx/transparencia/leyes_reglamentos/leyes.html and http://www.congreso-hidalgo.gob.mx/biblioteca_legislativa.html) do not have the full inventory at the state and municipal levels. For instance, at state level, primary laws are include but subordinate regulations are not published systematically. Additionally, these websites do not include information on local level regulations, such as municipal by-laws (reglamentos) or municipal ordinances (bandos).

Another dimension of the regulatory inventory reviews refers to the inventory of formalities. Currently, the formalities’ inventory is in the construction process and is mainly informative www.ruts-hidalgo.gob.mx. In this case, it is necessary to work with the integration of municipal procedures.

Considering that the inventory websites of regulations and formalities are incomplete, reviews of the regulatory stock can have limited effects. Thus, it is of high priority to set up the CMR so it can work and finish the construction of the regulatory inventory and of the registration of procedures. In any case, there is currently no evidence of a systematic effort to build an inventory of regulations with the goal to simplify and improve the quality of the legal framework.

Business environment

The OECD recommends that in order to improve the business environment at a subnational level, governments must support the implementation of policies and programmes on better regulation, with the purpose of reducing costs and barriers that limit competition and investment (OECD, 2012[54]). This does not only imply the simplification of formalities related to businesses opening and operation, but also the use of more effective strategies for the compliance and enforcement of regulations.

Hidalgo’s SDP recognises that the business environment improvement implies:

Simplification and harmonisation of the regulatory framework.
Use of electronic means for the simplification of procedures.
Improvement of SARE and one-stop shops.
Creation of a catalogue of formalities and services.
Risk-approach-based inspections.

These actions are expected to streamline regulations, formalities and government requirements for businesses to start and operate, hence contributing to more economic activity.

In the State of Hidalgo, the average time for an entrepreneur to obtain a business license is 29.5 days. A possible cause that may contribute to this rather long period of time may be the inconsistency between the information published in official websites and the information provided in the government offices granting the licenses. The state government is undertaking actions to simplify the business license, with the target of issuing licenses in 9.5 days.

Another important procedure to improve the business environment is linked to construction permits. While SEDECO works to simplify and harmonise such permits in the municipalities through specialised fora, information technologies must be adopted to boost the simplification benefits. SEDECO has already designed a streamlined process for construction permits and promotes its implementation at a municipal level. Despite that, in such fora, an explicit commitment from most of the representatives from the municipalities has been made to adopt the streamlined process, no specific actions have materialised to implement the simplified process.

issuance of construction licenses. Currently, the process to obtain a construction permit According to representatives from the construction sector, there are no harmonised criteria for the takes 107 days in the Municipality of Pachuca de Soto, the state’s capital, and the government goal is 4 days for permits under 1 500 m² with only 1 information requirement. This objective is ambitious, and an agenda with specific activities and timelines is required. See Box 4.17 for an example of a sub-national government in Mexico which established and implemented a plan to improve the business environment.

According to the Government of Hidalgo, the Council of Regulatory Improvement approved 3 simplified processes to be adopted in 84 municipalities. The processes are a three-day business setup, a seven-day construction license and a seven-day simplified municipal authorisation to develop infrastructure in telecom. Thus, in the coming months, the government will work on the implementation of such models.

Box 4.17. Simplification of formalities of high impact on business activity in Merida, Mexico

On November 2016, the OECD and the Municipality of Merida signed a co-operation agreement aimed at enhancing the business environment through the simplification of formalities of high impact on business activity in Merida.

On June 2017, the OECD provided the Municipality of Merida with 235 recommendations for improving business licences and construction permits. Recommendations for promoting regulatory transparency and increasing the efficiency of formalities were also included. The recommendations were based on national and international good practices for the simplification of municipal formalities available in the OECD Guide to Improve the Regulatory Quality of State and Municipal Formalities and to Enhance Mexico’s Competitiveness.

The recommendations included an implementation plan with milestones, an office responsible for each action and milestone, a co-ordinating office, critical path and timeframes to reach each milestone. In order to meet the recommendations, the Mayor of Merida nominated the Deputy Directorate of Regulatory Improvement as project leader, and official contact points for each of the 14 agencies in charge of the recommendations were appointed. In this way, a group of about 70 people was created, working for almost 18 months to comply with OECD’s recommendations.

On 22 March 2018, the OECD released its third and final evaluation of Merida’s implementation of the recommendations. Merida reached full implementation of all the recommendations under objective and verifiable criteria.

The main achievements of the project were:

The online one-stop shop abretuempresa was created, which allows submitting and managing formalities online to start a company or obtain construction permits, using the electronic signature of the Tax Administration Authority.
Abretuempresa includes a “risk-map”, in order to identify areas of risk of flooding for instance.
The approval of the Civil Protection Programme for businesses was implemented on line, and the response time reduced to ten business days.
The New Civil Protection Regulation was approved and published.
An application was created for the inspection process for new constructions, reducing burdens for citizens and inspectors.
The online Municipal Registry of Formalities and Services was established as the single source for all government offices when providing information.

Source: OECD (2018[61]), (accessed 1 September 2018).http://www.oecd.org/gov/regulatory-policy/merida-implements-100-the-recommendations-to-improve-high-impact-formalities.htm

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Notes

← 1. The nine OECD federal countries at 2018 refer to Australia, Austria, Belgium, Canada, Germany, Mexico, Spain, Switzerland and the United States.

← 2. See, for instance, the regulatory criteria checklist of the government of British Columbia, Canada, https://www2.gov.bc.ca/gov/content/governments/about-the-bc-government/regulatory-reform/additional-information (accessed 30 August 2018).

← 3. Some of the formalities are: new license to drive vehicles, exchange of driver's licenses, issuance of no criminal record certificate, registration to the suppliers’ registry.

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