Document of The World Bank FOR OFFICIAL USE ONLY FILE COPY Report No. 2473b-ME STAFF APPRAISAL REPORT MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FO May 10, 1979 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENT Currency Unit = Peso (Mex$) US$1 = Mex$22.70 Mex$1 = US$0.044 GLOSSARY OF ACRONYMS ACF Average Cost of Funds to Financieras ATA Average Total Assets CEDI Indirect tax rebate certificates EDI Economic Development Institute ERR Economic Rate of Return FIDEIN Fideicomiso de Conjuntos, Parques y Ciudades Industriales, y Centros Comerciales FIRA Fondo Instituido en Relacion con la Agricultura FOGAIN Fondo de Garantia y Fomento a la Industria Mediana y Pequena FOMEX Fondo para el Fomento de las Exportaciones de Productos Manufacturados FOMIN Fondo Nacional de Fomento Industrial FOVI Fondo de Operacion y Descuento Bancario a la Vivienda FOGA Fondo de Garantia y Apoyo a los Creditos para la Vivienda FRR Financial Rate of Return IFC International Finance Corporation IMIT Instituto Mexicano de Investigaciones Tecnologicas NAFINSA Nacional Financiera, S.A. SARH Secretaria de Agricultura y Recursos Hidraulicos SMI Small and Medium Industries SSA Secretaria de Salubridad y Asistencia SSMA Subsecretaria de Mejoramiento del Ambiente FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. I. THE INDUSTRIAL SECTOR ..........I..* .................... 1 A. Recent Performance ............................... I B. The National Industrial Development Plan 3 C. Major Issues Facing Implementation .7 D. Outlook for Industrial Growth 9 II. THE FINANCIAL SYSTEM. 9 A. The Banking System .............. 9 B. The Trust Funds ............ I ................... . . 11 C. The Securities Market ..... ....................... 12 D. Credit Availability and Interest Rate Policy ..... 14 E. Prospects ..... ................................... 16 III. THE INDUSTRIAL EQUIPMENT FUND (FONEI) .... ............. 16 A. Background ....................................... 16 B. Oroanization and Management ..... ................. 16 C. Operating Regulations and Policies ............... 17 D. Operating Procedures .... ......................... 21 E. Past Operations and Impact ............ ........... 26 F. Development Strategy Paper .............. I ........ 30 G. Financial Structure and Results .................. 30 H. Future Operations and Resource Needs ............. 32 IV. THE PROJECT .......................................... 34 A. Project Objectives . . .34 B. The Proposed Loan . . .35 C. Benefits and Risks .38 V. AGREEMENTS REACHED AND RECOMMENDATION .39 A. Agreements Reached .. . ................. 39 B. Recommendation ..40 This report is based on the findings of an appraisal mission which visited Mexico in January/February, 1979. The mission comprised Messrs. N. Santiago, N. Hughes (LCPI2); G. Castaneda, D. Sarfaty and J. Baranson (Consultants). Mr. I. Baskind assisted in the preparation of this report, and Ms. A. Velarde, in the preparation of statistical tables. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (Continued) LIST OF ANNEXES 1. Variable Interest Rates and the ACF Index 2. Organization Chart 3. Operating Regulations of the Industrial Equilpment Fund (FONEI) 4. Financing Technological Development at the Enterprise Level 5. Federal Legislation Pertaining to Environmental Pollution 6. FONEI's Declaration of Operational and Institutional Strategy 7. Estimation of the Foreign Exchange Component of Domestic Fixed Assets Financed by FONEI 8. Estimated Quarterly Schedule of Bank Loan Disbursements 9. Supporting Tables T-1 Rates of Growth of GDP by Sector of Origin 1965-78 T-2 Gross Domestic Products by Sector of Origin 1965 and 1975-77 T-3 Structure of Value Added in Manufacturing, Selected Years 1960-77 T-4 Indices of Industrial Production 1970-77 T-5 Import of Machinery and Equipment and Domestic Production of Machinery and Transport Equipment T-6 Gross Fixed Investment T-7 Indices of Employment in Manufacturing 1970-78 T-8 Composition of Exports T-9 CEDI's Indirect Tax Rebate Certificates, 1973-78 T-10 Credits Granted by FOMEX for Export Promotion and Import Substitution 1964-78 T-11 Structure of Manufacturing Industry T-12 Institutional Structure of the Financial Sector T-13 Financial Development T-14 The 12 Largest Banks as of December 31, 1978 T-15 Financial Indicators of the Private and Mixed Banks T-16 Multibanks' Share of Operations of Private and Mixed Banks T-17 Securities Traded Annually T-18 Securities Exchange Price Index T-19 Authorized Security Issues in 1978 T-20 Banking System Credit by Sectors 1970-78 T-21 Regional and Sectoral Distribution of Credit T-22 Lending Terms of Financial Institutions in 1977 T-23 Liabilities of the Financial Intermediaries (end of year) T-24 Financial System Interest Rates T-25 Interest Rate Differentials T-26 Indicators of Resource Mobilization and Credit Availability T-27 Classification of FONEI's Operations by Financial Intermediaries T-28 Characteristics of FONEI Subprojects T-29 Projected and Realized Exports in 1977 by a Sample of Enterprises Financed by FONEI T-30 Projected and Realized Import Substitution in 1977 by a Sample of Enterprises Financed by FONEI T-31 Number of New Jobs Created by a Sample. of Projects Financed by FONEI T-'32 FONEI: Past and Projected Balance Sheets T-33 FONEI: Past and Projected Sources and Applications of Funds T-34 FONEI: Past and Projected Income Statements TABLE OF CONTENTS (Continued) T-35 FONEI: Operations Projections (1979-1983) T-36 FONEI: Loan Commitments and Resources (1979-1983) T-37 FONEI: Resource Position (1979-1983) T-38 FONEI: Principal Assumptions Used in the Financial Projections 10. Selected Documents and Data Available in the Project File MAP I. THE INDUSTRIAL SECTOR A. Recent Performance 1.01 Since 1974, the Mexican economy has undergone sharp fluctuations. Prior to that year the country had experienced two decades of virtually uninterrupted economic expansion with GDP growth rates averaging 7% annually (Annex 9, T-1), levels of inflation generally in line with international price movements and only moderate balance of payments pressures. The four-year period 1974 through 1977, on the other hand, was marked by considerably reduced GDP growth rates, averaging 3.5% p.a., high inflation rates exceeding 20% p.a. and substantial fiscal and balance of payments deficits. 1.02 In 1978 the situation was radically reversed once again and there were indications of the initiation of a new period of accelerated development. Far outstripping the expectations held at the beginning of the year, GDP rose by an estimated 8-9% while inflation was reduced, falling to around 18% from 29% in 1977. Moreover, expanding exports, increased tourism revenues and substantial capital inflows permitted exchange accumulation in spite of a record level of imports. 1.03 These developments occurred in a changed policy framework established by the government which took office at the end of 1976, stressing efficient allocation of resources. These policies are characterized by (i) measures to achieve levels of real interest rates conducive to increasing the mobiliza- tion of private savings; (ii) a realistic exchange rate policy; (iii) further liberalization of imports; and (iv) renewed efforts at export promotion. This was further buttressed by increasing knowledge of the extent of the country's hydrocarbon resources which may virtually eliminate foreign exchange restraints on development policy in the future. 1.04 Manufacturing. From 1960 through 1973 manufacturing output increased at an annual rate exceeding 8%, its share of GDP rising from 19.2% to 22.8% (Annex 9, T-2). During the four-year period 1974-77, the growth rate decreased more than 50%, averaging less than 4% p.a. The recovery in 1978 caused output expansion to rise to record rates, the preliminary estimate being 10-11%. 1.05 Since 1960, structural changes associated with growing population and incomes have emerged within the sector. The share of the traditional consumer goods industries in manufacturing value added (i.e. food, beverages and tobacco, textiles, clothing and shoes) has fallen somewhat from 54% in 1960 to 51% in 1977, while those of intermediate goods and engineering indus- tries have risen (Annex 9, T-3). The engineering industries have experienced a particularly rapid expansion, with the share rising from 12.8% in 1960 to 18.3% in 1977. However, a substantial portion of this output is accounted for by durable consumer goods; production of capital goods remains at a relatively low level. As a consequence, to meet increasing investment requirements the country has had to rely heavily on imported capital goods (Annex 9, T-5) and this now has become the largest import category, representing more than a third of total imports. -2- 1.06 Exports of manufactured goods 1/ have risen sharply since 1970, reflecting the efforts initiated at that time to develop this trade (Annex 9, T-8). The measures have included indirect tax rebates (CEDI), 2/ credit on concessionary terms and institutional support for external promotion. Between 1970 and 1974 the value of these external sales 3/ rose almost fourfold, and their share in total merchandise exports rose from about 20% at the end of the 1960s to over 40%. While their share in the gross value of industrial output also rose, their contribution has remained at relatively low levels not much above 5%. 1.07 Domestic inflation and recession abroad made themselves felt in 1975, when manufactured exports fell to US$1,069 million, 13.5% below the 1974 level of US$1,236 million. The subsequent recovery abroad resulted in some increase in the value of these exports in 1976 (to US$1.191 million) but the failure to adjust the exchange rate in line with the difference between domestic and foreign inflation rates continued to influence external sales; as a result, the,1976 level was; almost 20% below the 1974 peak in real terms. The massive peso devaluation iLn September 1976 restored a substantial degree of competi- tiveness to Mexican exports of manufactured goods, and in 1977 the value of those exports rose to a new peak level of US$1,391 million, although still some 10-15% below the 1974 volume in real terms. This expansion continued into 1978, with the exports value rising to about: $1,800 million, exceeding the 1974 level in real terms by about 10%. Moreover, this sharp rise occurred at a time when growing domestic demand was putting increasing pressure on exportable supplies. 1.08 The government's incentive programs have continued to support the turnaround in exports. Export transactions receiving CEDIs and CEDI-related sales in 1978 were twice the level of the preceding year, which had been affected by the suspension of the CEDI program immediately after devaluation (Annex 9, T-9). A modified system was reintroduced, however, in mid-1977. The percentage of the taxe!s rebated to sales remained virtually at the same level in 1977 and 1978--6.77% and 6.87%, respectively. The CEDI program in its present form is scheduled to terminate beginning in 1980, when the Value Added Tax takes effect. The government intends, however, to continue the export incentive program, and procedures to this effect are under review. 1.09 Another element which has aided exports has been the availability of resources to finance both working capital neecls for production of export orders and longer-term credits for these sales, through FOMEX, the special 1/ Excluding assembly ("maquila") industries. 2/ Indirect tax rebate certificates. 3/ This discussion also excludes exports of sugar, which are included in the category of manufactured products in most Mexican sources. In 1970 sugar represented some 22% of manufactured exports, declining to about 11-13% during 1973-75. Since 1976, sugar exports have virtually dis- appeared. -3- trust fund of the Banco de Mexico created in 1964 (Annex 9, T-10). While the value of FOMEX export operations rose in 1978, the increase was less than the rise in the value of eligible exports. This reflected the upward adjustments made during 1978 in the interest rate charged by FOMEX for its operations, in line with the government's policy to achieve positive real interest rates. 1/ 1.10 Import liberalization. A key element in the goal of the present authorities to open the Mexican economy further is to liberalize import policy. In the past the import substitution approach to industrial develop- ment depended heavily on import controls, with generally moderate tariff levels. Nonetheless, internal competition, made possible by the relatively large market, the relatively open borders and various investment incentives, contributed to the growth of a reasonably efficient industrial sector with the exception of a few branches. With increasing emphasis being given to further improvements in international competitiveness, which would lead to higher levels of exports of manufactured products, the government began to liberalize imports at the end of 1977, reducing the number of products subject to prior licenses. Further products were freed in June and December 1978. Thus, by the beginning of 1979, slightly more than two-thirds of the items in the customs nomenculature were no longer subject to prior licenses. Nevertheless, the items still subject to controls accounted for about 65% of total imports in 1978. The inter-ministerial committee which is responsible for commercial policy is currently undertaking studies of effective protection and actual tariff levels, in order to develop the program for further liberalization integrated with moderate tariff levels appropriate for the industrial strategy which Mexico is now elaborating. B. The National Industrial Development Plan 1.11 With substantial progress having been achieved in meeting the short- term goals of stabilization, reviving economic growth and restoring investor confidence, attention is now being focussed on medium- and longer-term elements affecting the growth of the economy and the industrial sector. After consider- able preparation and detailed discussions within the government, the Secretaria de Patrimonio y Fomento Industrial (SEPAFIN) published in March 1979 the National Industrial Development Plan, 1979-1982. The quantitative aspects of the Plan document are presented in a simulation over the time span 1979-1982 of a number of important economic variables, based mainly upon historical expe- rience. However, it takes into account the considerably higher rate of public investment and iaports which are made possible by the exports of hydrocarbons. Thus, the Plan is not allocative but rather indicative of growth potential. Moreover, the aggregates which are extrapolated are already obsolete due to GDP growth higher in 1978 than expected, the continuation of that growth in 1979 again above the expected level,and the recent increases in international oil prices. Nevertheless, the Plan represents a fundamental document in that it sets out basic sectoral objectives of the Mexican Government and provides the rationale for using specific policy tools. 1/ See discussion of the financial sector, para. 2.06. - 4 - 1.12 The overall growth strategy of the Plan integrates certain key objectives, including (a) accelerating the generation of employment oppor- tunities; (b) increasing real income of the population; (c) promoting indus- trial growth in accordance with the human and nat:ural resources available in the country; (d) promoting industrial investment in accordance with regional and sectoral priorities; (e) orienting industrial, production towards external markets; and (f) providing impetus to indigenous technological growth in industry. To achieve these objectives, it is proposed to use a wide-ranging set of policy instruments,including substantial public investment in economic and social infrastructure, with emphasis on the new geographical areas for industrial growth, and in certain directly productive subsectors such as petroleum and petrochemicals, procurement practices for public sector insti- tutions which would favor efficient local production of capital goods, and fiscal and other incentives for the private sector to channel investment into the priority geographic zones and the priority sutbsectors and to promote employment. A significant element in the Plan is the critical role assigned to the private sector. While private fixed capital formation (including agri- culture, mining, tourism and commerce as well as manufacturing industry) is expected to decline as a share of total fixed capital formation, this change in relative shares reflects basically the expected sharp increase in public sector investment made possible through the increased financial resources from exploitation of the hydrocarbon resources. The rate of growth of private investment, in fact, is expected to rise sharply from the 7% p.a. level achieved in 1970-75 to 10% p.a. in the period 1977-82, with a peak of 14% in 1982. 1.13 The major policy tools affecting the private sector have already been put in place through the issuance of five presidential decrees. Regional priorities were defined in a decree published in the Diario Oficial of February 2, 1979 and sectoral priorities were set out in a decree published March 9, 1979. The specific fiscal incentives in accordance with those prior- ities were contained in a decree published on March 6, 1979. This decree included additional fiscal incentives to achieve other objectives,including promotion of small industry and generation of additional employment opportun- ities through better utilization of existing capacity. Promotional pricing for certain inputs for new industries in the highest priority zones, espe- cially export-oriented secondary petrochemicals, was provided for in a decree published on December 29, 1978. Finally, a decree establishing an interminis- terial committee to oversee the implementation of the Plan, and which outlined the general objectives, was published on March 19, 1979. 1.14 In terms of general economic magnitudes, industrial growth over the last 20 years averaging 8% p.a. has been able to provide an employment increase of no more than 3% p.a., about equal to the annual percentage increase in the labor force. Based on the increased import capacity provided by the hydrocarbon resources, the Plan considers it possible to achieve 10-12% annual increases in industrial output with increases in employment of the order of 5%. In addition, considerable emphasis will be given to the development of agro- industries, which will have important backward linkages to the agricultural sector, generating demand for those products and consequently offering further employment and income opportunities to those employed in agriculture and dis- tribution. 1.15 Among the industrial branches highest priority is given to expan- sion of capital goods producing industries and of output of certain interme- diates critical to the rest of the economy (steel and cement), as well as to the development of agroindustries. Capital goods currently represent the largest category of imports and their production is characterized by relatively low investment costs over new jobs created. Anticipated demand for these branches of industry indicate the ability to reach levels of output which will be technically efficient for a number of key product lines; however, appro- priate commercial policies will also have to be designed to ensure economically efficient levels. 1.16 Along with the focus on employment opportunities, the main objective of the regional decentralization effort is to achieve a better spatial distri- bution of industry and to control the growth in the main cities, in particular Mexico City, where the burgeoning population has already created serious social, economic and ecological problems. Top priority is given to the development of four "industrial ports" (Zone IA), embracing the areas around Lazaro Cardenas, Salina Cruz, Coatzacoalcos and Tampico, and selected other areas (Zone IB) whose development has been considered important within the nationwide Urban Plan. The second group of areas (Zone II), which are con- sidered state priorities, are still to be specified in agreements to be reached between the federal and state authorities. Growth in the Federal District and its immediate environs (Zone IIIA) and other nearby regions (Zone IIIB) is to be controlled 1/ and investment in those areas is. practically excluded from receiving incentives, except for expansions of existing enterprises in Zone IIIB. Finally, as regards the rest of the country (i.e., the areas not specifically included in Zones I, II or III), the incentives to be offered to investment are lower than for the two priority areas (Zones I and II). 1.17 The zonal and subsectoral priorities are reflected in the varying amounts of fiscal incentives which are to be granted. These will be given in the form of certificates which can be used for practically any federal tax payment. The main characteristics of the incentives are summarized in Table 1.1. The basic incentives refer to the value of investment (either new or expansions, as appropriate) and to the number of jobs which that investment will create. The value of the latter, on which the tax incentive depends, is computed by multiplying the number of jobs by the annual minimum legal wage, which varies among the geographic zones. By this means it is expected to offset any tendency for investment incentives to encourage inappropriate capital intensive production processes. 1/ The intention of the Plan is to channel 70% of new industrial investment away from this area of concentration which currently accounts for about 50% of manufacturing ioutput. TABLE l.l: SUMMARY OF PRINCIPAL FISCAL INCENTIVES FOR INDUSTRIAL INVESTMENT a/ Priority Sectors All Industrial Activities Geographic Location Other Purchase of Employment Generated of Investment Small Enterprises b/ Activity Category 1 c/ Activity Category 2 d/ Industries Local Equipment by Additional Shifts Zone I Preferential 25% Investment 20% Investment 15% Investment - 5% 20% Additional 20% Employment 20% Employment - Employment Zone II State Priorities 25% Investment 20% Investment 10% Investment - 5% 20% Additional 20% Employment 20% Employment - Employment Rest of the Country 25% Investment e/ 20% Investment 10% Investment e/ - 5% 20% Additional 20% Employment 20% Employment e/ Employment Zone III A. Controlled growth - - 5- B. Consolidated growth 25% Investment e/ 20% Investment e/ 10% Investment e/ - 5% 20% Additional 20% Employment e/ 20% Employment e/ - Employment a/ Geographic zones are defined in the decree published in Diario Oficial, February 2, 1979. Fiscal credits can be used for the payment of any federal tax which is not imposed for a specific use. The percentages shown in the table for investment are applied to the total value of construction and installations and the purchase of new machinery and equipment directly related to the production process; it is granted at the time of undertaking of the expenditure- in the case of emplo-ment, the percentagp is applied for a period of two years on the new employment valued at the annual minimum wage. b/ Enterprises with fixed assets not exceeding 200 times the annual minimum salary in the Federal District. c/ Includes agroindustries, capital goods producing industries and strategic inputs for the industrial sector (e.g. steel, cement) d/ Includes non-durable consumer goods, durable consumer goods and intermediate products specified in decree published in Diario Oficial, March 9, 1979. e/ Applied only to expansions of productive capacity in the same industrial activity. Source: Secretaria de Patrimonio y Fomento Industrial, Plan Nacional de Desarrollo Industrial, 1979-1982 (Mexico, 1979) p. 181. -7- 1.18 Fiscal incentives are also given in accordance with other criteria. Small industries, 1/ irrespective of product and location (except for the Federal District), receive higher fiscal incentives as regards investment than any other type of industry. Also, enterprises of all sizes which employ an additional shift will receive tax credits in proportion to the new employment generated (again with the exception of those located in the Federal District); the eligi- bility conditions for those credits are defined in the decree. Finally, as a means to promote the sale (and consequently the production) of domestically produced machinery and equipment, all enterprises investing in such items get a 5% tax credit of the value of the purchase. 1.19 In addition to the fiscal incentives, special prices for inputs provided by public sector entities are to be offered to favor investment in industries in the four industrial ports (cited in para. 1.16). All new indus- tries established in those areas are to receive a 30% discount on the prices of energy supplied to them (in the form of electricity, natural gas or fuel oil). Moreover, new enterprises producing specific secondary petrochemicals will receive a 30% discount on the prices of their requirements of basic petrochemicals, provided that they export at least 25% of their output. 1.20 Finally, the magnitudes of the public investment which will be under- taken both in infrastructure and the directly productive sectors are now being analyzed and are expected to be reflected in the annual budgets prepared by the federal government. Closely linked to this will be the investment of the state governments which are to be spelled out in agreements reached between officials of those areas and of the federal government. C. Major Issues Facing Implementation 1.21 Given these overall objectives, a complex network of questions remains to be confronted: reviewing production-consumption balances for critical materials to avoid future shortages (beyond those already apparent); adapting the incentive programs to the revised spatial and sectoral priorities (for exports, import substitution, new industries, small industry, rural development, etc.); establishing the targets for increasing the production of capital goods, particularly the requirements of the petroleum industry and of electricity generation; integrating the procedures for elimin- ating the quantitative restrictions on imports and substituting them for flexible tariff systems; organizing for the procurement of technical assis- tance; and the formulation of procedures for monitoring the progress achieved. One of the major issues to be solved concerns the provision of adequate professional and technical personnel that will be needed by each sector. In this connection, the Bank would finance under the proposed loan a study to 1/ These are defined as enterprises whose fixed assets do not exceed 200 times the annual minimum salary for the Federal District, equivalent to approximately US$400,000 at the present time. In this connection, the program of assistance to SMI supported by Bank Loan 1552-ME is expected to play an important role in providing that sector with required financial and technical assistance. - 8 - assess the requirements of human resources, and technical and vocational training for the industrial development of the country. 1.22 While it is evident that the government. and the private sector are facing the future with optimism, there are several potential bottlenecks that could impede the expected progress. Many of them represent the types of short-term problems that face an economy experiencing a period of rapid recovery and expansion. The recent surge in industrial output, combined with reduced levels of fixed investment during the mid-70s, has led to relatively high rates of capacity utilization. Utilization of capacity in 1978 is estimated to have exceeded 80% for the manufacturing sector as a whole, with the rate approaching 90% for nondurables, and is expected to rise further in 1979. Industrialists interviewed by the appraisal mission in early 1979 reported some shortages of intermediate goods and construction materials, and there have been cases of congestion in ports as well as shortage of railway facilities. Although substantial capacity expansion has been under- taken since the end of 1977, normal lags in bringing these projects into full operation suggest that these shortages may persist for some time. In addition, firms which export important shares of output were having difficulty in meeting these deliveries, as domestic demand was absorbing an increasing share of their production. 1.23 In these circumstances, control of inflation, its effects on the real exchange rate, and the competitiveness of Mexican exports of manufactured products remain high on the agenda of priorities. Recent performance has demonstrated the wide range of products which the Mexican manufacturing sector can export with appropriate exchange rate policy. Official forecasts indicate a further drop in ithe rate of inflation from the 18% rate in 1978 to about 15% in 1979, thus bringing Mexico's rate close to external inflation. Attaining this objective will be particularly difficult. Increasing revenues from petroleum production will enable the Mexican Government to proceed quickly with urgently needed infrastructure and social programs. Shortages of mate- rials and skilled Labor, as well as capacity limit:ations, are already being experienced in various sectors and geographical areas. However, failure to achieve the desired inflation target will make the export program for manufactured goods difficult to attain, unless compensating changes take place in the foreign exchange rate. Furthermore, continuation of the existing level of inflation (not to mention any aggravation of it) would undoubtedly bring forth demands; for substantial adjustments in wage rates, and this would complicate further the matter of export competitiveness. The govern- ment is well aware of the interconnections betweern the rate of inflation and export competitiveness, between an appropriate! scale of production and competitiveness in national and international markets, and the crucial role of the exchange rate in the whole strategy. Since resort to price controls is seen as the less desirable alternative, the government may have to exercise spending restraint to avoid feeding the inflationary process. At the same time, import liberalization can be effective in helping to reduce inflationary pressures as well as in easing short-term supply bottlenecks for critical intermediate goods. -9- 1.24 The objectives of pushing ahead with export promotion, with all that this entails in terms of opening the economy further and of increasing employment, still must be regarded as being of the highest importance. In this regard, the results of the decree published with respect to the automobile and automotive parts industries (1977) are encouraging. Under this system, manufacturers are offered the choice of conserving foreign exchange by raising the national content of domestic production and/or of increasing the value of exports on a programmatic basis, leaving the specific decision to the firm. Similar systems may be appropriate for other industries, such as capital goods. D. Outlook for Industrial Growth 1.25 The annual rate of growth of total industrial production through 1981 is expected to reach the government's target levels of 10-12%. The relatively strong sectors will be petroleum, petrochemicals, electricity, and manufacturing industries. Petroleum production is expected to reach and possibly exceed its first-stage target of 2-1/4 million b/d in 1980 and will show further growth in 1981. Electric energy generation is expected to record annual increases of 8%, but could grow faster as capacity will increase at an annual rate of 10%. For manufacturing output to meet the goal of 10-11% annual growth rates, it will be necessary to solve certain physical problems-- start-up problems with the incoming new capacity, materials shortages, trans- port, and availability of additional trained workers. Not to be overlooked is the time required for the physical/economic decisions to be made with respect to new product lines and production levels for combined domestic-and-export markets. While for the immediate future there appears to be an adequate pipeline of projects ready for financing in both the public and private sectors, in the longer run there may be a need to strengthen project preparation mechanisms, particularly in view of the more complex nature of the new product lines to meet the needs of the rapidly expanding economy. II. THE FINANCIAL SYSTEM A. The Banking System 2.01 Institutional structure. Mexico's banking system consists of Banco de Mexico (the Central Bank), 22 public banks, and 132 institutions of private and mixed ownership (Annex 9, Table 12). Traditionally, the institutions were specialized as deposit and savings banks, financieras or investment banks, and mortgage banks. In recent years, however, the authorities have encouraged a large number of mergers which reduced the number of banks by 66 over a period of about 1-1/2 years. The dominant type of institution is now the multi- purpose bank (multibank), which is able to offer a full range of financial services through branch offices. Despite the sharp drop in the number of banking institutions, the number of branch offices increased somewhat from 3,540 in September 1977 to 3,770 at year-end 1978, and as of mid-1978 banking services were offered at 726 centers, providing a fairly broad regional coverage of the country. - 10 - 2.02 Relative to Mexico's level of economic development, its banking sector is not yet well developed. Although the system experienced a period of rapid deepening from 1967 to 1972 when the ratio of private sector deposits 1/ to disposable income increased from aLbout 0.28 to 0.36, this trend was reversed when the economic uncertainties that ultimately led to the massive peso devaluation in 1976 began to manifest themselves, leading to significant capitaLl flight. The ratio now stands at about 0.28 (Annex 9, Table 13). Other structural weaknesses in the financial sector have also become increasingly apparent. One is excessive traditionalism in credit allocation, with collateral requirements normally far in excess of the credit amount being asked for. The system is also highly concentrated, with about 80% of the banking system's assets being accounted for by 12 of the largest banking groups. F'urthermore, administrative expenses of banks are rather high, and exceed 5% of liabilities on average. 2/ Finally, due in part to the liquidity prefererLce of savers, liabilities of tbhe banking system are highly skewed towards short-term obligations and have forced the intermediaries into a high degree of term transformation to finance investment projects. 2.03 Amendments to the Banking Law. The financial crisis experienced in 1976-77, when the public made massive withdrawals of funds from the banking system, convinced the authorities of the urgent need to strengthen the sector. Thus, they introduced major changes in the operation and organization of the financial system that could have significant effects on its future development. In December 1978 the government passed a series of amendments and additions to the Banking Law, 3/ which are the most substan- tial since the original law was enacted in 1941. Several of the amendments complete a series of steps that have been taken since 1970 to favor the grouping of specialized banks into multibanks. T'his move is expected to raise the efficiency of the system by increasing competition through the increased financing capacity of the smaller banks, by lowering administrative costs of the system through economies of scale, by facilitating the implementa- tion of monetary and credit policies, and by improving access to the full range of financial services for clients outside of the biggest cities. As of year-end 1978, 26 multibanks had been formed. The capital requirements for banks were also changed, with the requirements now being linked to the risk classification of assets instead of to liabilities. Under this system, loans made using F'ONEI and other trust fund resources are classified as having relatively low risks. 2.04 The amendments, which include elimination of the 133% minimum colla- teral requirements,establish clearly the principles that loans should be granted taking into account the economic feasibility of the project being considered, and that repayment periods should be set on the basis of a project's expected cash flow. This new policy fully coincides with the lending principle 1/ With private and mixed banks. 2/ This figure would increase if taken as a percentage of risk assets. 3/ Ley General dLe Instituciones de Credito y Organizaciones Auxiliares. - 11 - promoted by FONEI since its establishment in 1971. The new legislation also includes some measures to limit excessive concentration of bank ownership and protect the Lnterest of minority shareholders. Some overall exposure limits per client have also been set to avoid excessive concentration of portfolio risks of individual banking institutions. These measures should go a long way towards increasing the efficiency of the Mexican banking system and have been well received by the financial community. B. The Trust Funds 2.05 The government, through the years, has set up a number of trust funds to promote the economic and social development of the country, by allocating credit on appropriate terms to priority activities. These funds derive their resources principally from the legal reserves of the banking system. While as of September 1978 there were a total of 204 government trust funds, few of them are of great significance. The most important among them are the trust funds managed by Banco de Mexico and those administered by Nacional Financiera (NAFINSA). The group administered by Banco de Mexico includes FONEI, FOMEX (industrial export promotion), FIRA (agriculture) 1/ and FOVI FOGA (housing), and NAFINSA administers FOGAIN (credit to small and medium industries), FOMIN (equity to small and medium industries) and FIDEIN (industrial parks). The Bank has made three loans to assist FONEI. A separate Bank project (Loan 1552-ME) supports the objectives and operations of the three trust funds administered by NAFINSA. 2/ A summary description of the most important trust funds (other than FONEI) designed to support industrial development follows. FONEI's operations are described in detail in Chapter III of this report. 2.06 The main objective of FOMEX (Fondo para el Fomento de las Exportaciones de Productos Manufacturados) is to contribute to the improvement of Mexico's balance of trade through the promotion of manufactured exports and import sub- stitution activities, principally by providing trade financing. It rediscounts post-export commercial banks credit at rates of 6-8% p.a. in US dollars to the final borrower. FOMEX also provides pre-export credits (up to 180 days) and promotes import substitution by financing the production and sale of locally produced capital goods; these credits are granted in local currency at floating interest rates, 2 points above the ACF index (Average Cost of Funds to Financieras, see Annex 1). In addition, it grants export credit guarantees and finances the commercialization of consumer goods in border towns and free trade areas. In 1977 FOMEX granted export credits in the amount of Mex$17,461 million, 32% of which went to finance pre-exports and 68% to 1/ FIRA has received six Bank loans for agricultural credit, and has parti- cipated in three other Bank projects. 2/ For a more detailed description of these trust funds, see Report No. 1811b-ME dated April 3, 1978. - 12 - finance exports (Annex 9, Table 10). FOMEX supported 39% of Mexico's manufac- tured exports during the year. While the value cf FOMEX export operations rose in 1978 (to Mex$20,447 million), the increase was less than that of eligible exports. Import substitution credit reached only a small fraction of export financing. Of the Mex$309 million total in 1977, Mex$184 million went to the production of capital goods and Mex$125 million for the commercializa- tion of consumer goods. FOMEX also granted Mex$2,431 million in export credit guarantees. 2.07 FOGAIN (Fondo de Garantia y Fomento a la Industria Mediana y Pequena), which was created in December 1953, is the oldest development- oriented trust fund in Mexico and Latin America. Its main function is to supply term financial resources to small and medium size industrial firms (SMI), for working capital, fixed assets and debt restructuring. It redis- counts up to 100% of credits granted to SMI enterprises by financial inter- mediaries, including credit unions established by groups of small enterprises. FOGAIN policies favor industrial decentralization., employment creation, manu- facturing exports, and import substitution; its main purpose is to lay the basis for future growth of small enterprises. In 1978 FOGAIN approved 5,380 operations to 4,363 enterprises for a total amount of Mex$4,278 million, and disbursed 4,050 loans to 3,545 enterprises for a total of 'tex$2,858 million. The interest rates charged were colucessional and varied according to the regions where the loans were made, 14% p.a. in Zone 1, 13% p.a. in Zone 2, and 12% p.a. in Zone 3. 1/ Sixty percent of the loans were granted to firms in Zones 2 and 3. 2.08 FOMIN (Fondo Nacional de Fomento Industrial) was created in 1972 to help in the creation and expansion of SMI firms by contributing equity, on a temporary basis, up to one-third of each firm's share capital requirements. FOMIN's operations are still rather limited. From 1973 to year-end 1978 FOMIN invested Mex$413 m,illiion in 108 firms. In 1978 alone it invested Mex$133 million in 17 enterprises, of which 8 involved new projects and 9 were expan- sions. FOMIN's investment operations are carried out directly with the enterprises concerned. C. The Securities Market 2.09 Mexico's securities market is relatively small and has not yet developed into a sufficiently important mechanism to finance industrial firms. In 1975 the government initiated, with the passing of the Seclrities Market Law, a series of reforms aimed at accelerating the development of this market, 2/ which has been retarded by a series of factors. As in many other 1/ Zone 1 comprises Mexico City, Guadalajara and Monterrey; Zone 2, the areas adjacent to Zone 1 and several intermediate cities near Mexico City; and Zone 3, the rest of the country. As noted in Chapter I, this system was recently modified in connection with the new National Industrial Development Plan. FOGAIN is expected to raise its interest rate level in connection with Loan 1552-ME and to take the system under the new Plan into account. 2/ IFC has given technical assistance to the authorities to improve this market mechanism. - 13 - developing countries, firms in Mexico resist going public, so as to minimize outside interference and to avoid the information disclosures required for publicly traded securities. On the other hand, savers had found share yields in the past less attractive than those of fixed return securities, which had lower risks and par value redemption on demand. In addition, some fiscal and legal considerations tended to hamper the development of an active market. 2.10 Responsibility for control and supervision of the security exchanges, which in the past involved the Banking Commission, now rests solely with the National Securities Commission (Comision Nacional de Valores). The Mexican Security Exchange was created in 1894 as a private institution, and until 1976 two other exchanges, one each in Monterrey and in Guadalajara, existed. The autlorities decided to close these two exchanges as pact of a strategy to develop a central exchange, capable of giving efficient service. The new law also authorized the creation of brokerage houses, which are better organized and capable of delivering the required service to the market, to supplement the existing individual broker agents. As of December 1978, 30 brokerage houses had been established, several of them associated with the largest banks. The Institute for the Deposit of Securities has also been created to expedite the rapid and efficient transfer of securities in the market. Other measures taken by the government to stimulate the development of the securities market include the introduction of exemptions from taxation of capital gains arising from securities traded in the exchange, and the autho- rization to enterprises to deduct, for tax purposes, the losses arising from operations in the securities market. 2.11 The measures taken to promote the securities exchange appear to have had positive results. Although the volume of securities traded fell from Mex$167.8 billion in 1977 to Mex$95.3 billion in 1978, the trading of stocks registered an impressive increase, rising from Mex$5.8 billion to Mex$30.3 billion (Annex 9, Table 17). The significant reduction in the fixed return securities traded has been due to the July 1977 abolition of financial and mortgage bonds, which had liquidity on sight and tended to distort the market. It is expected that the papers of this type still in circulation will be withdrawn by October 1979. While the security exchange price index also recorded an impressive increase of more than 128% from December 1977 to December 1978 (Annex 9, Table 18), industrial stocks registered the largest increase in the volume traded between 1977 and 1978, growing from 45% of all shares traded in 1977 to nearly 63% in 1978. In 1978 the National Securities Commission authorized the placement of a record number of 23 new share issues, and nearly all of them were placed well above their nominal prices. There were 10 issues of "obligaciones quirografarias," 1/ most of them at 7 years and carrying a net interest rate between 16.5% and 17.5% (Annex 9, Table 19). Other factors that had contributed to the boom in the stock exchange included the acceleration of inflation up until 1977, which forced many investors to look for better alternative investments than bonds and bank deposits yielding negative real returns, and the high profits generated by firms in 1977 in 1/ Medium and long term obligations of firms, which no longer carry repur- chase guarantees on sight, and now bear an adjustable interest rate. - 14 - the wake of industrial recovery. The supply of securities also increased due to the number of Eirms which were forced to go public and issue equity after the peso devaluation which weakened the financial structure, particularly of enterprises that had large foreign currency liabilities. 2.12 The prospects for the continuation of securities market growth are good. In January 1979 a new record was set in trading with an increase of more than 22% in the price index. The Mexican Sescurity Exchange is preparing a training program and carrying out a promotional campaign to increase investor interest in the market. A similar promotional campaign is being considered for the near future, aimed at the potential issuing firms. All in all, these measures, combined with the earlier policy changes instituted by the government, should make the security market a more significant source of investment funds for industries in the future. D. Credit Availability and Interest Rate Policy 2.13 Industrial credit, which reached Mex$162 billion in September 1978, accounted for about 26% of the credit granted by the banking system. Within the industrial sector, manufacturing accounts for two-thirds of credit granted (Annex 9, Table 20). Like industrial value added, industrial credit (Annex 9, Table 21) was also very heavily concentrated in the Mexico City area (about 67% of industrial credit in September 1978), in the state of Nuevo Leon, which contains Monterrey (about 13%), and in the state of Jalisco, including Guadalajara (4%). 2.14 Loans are heavily concentrated in the short to medium term range, due to the excessively short maturity structure of the banking system's liabilities. Only about 40% of the loans granted by the private and mixed banks exceed a term of one year (Annex 9, Table 22). However, the uncertain- ties which prevailed in 1976-77 aggravated this situation even further, as massive withdrawals of funds by savers caused considerable difficulty for banks that had made loans on much longer terms than would have been indicated by the term structure of their liabilities. In this situation the trust funds, such as FONEI, have been playing an increasingly crucial role in solving these shortcomings of the system. Foreign savings also considerably complement internal savings (Annex 9, Table 23). It is estimated 1/ that US bank loans to Mexico reached, US$13 billion at year-end 1976, equivalent to about 45% of the outstanding credits of Mexican banks. In addition, other industrialized economies had estimated credit claims on the Mexican economy of about US$4.9 billion. 2/ The share of foreign loans in domestic credit has probably decreased since then in percentage terms but has remained an important source of funds. 1/ Donald Baer, "Caribbean Basin Economic Survey," Atlanta Federal Reserve USA, June-July 1977. 2/ BIS, "Eurocurrency and Other International Banking Developments," fourth quarter, 1976, quoted by Donald Baer. - 15 - 2.15 To boost domestic savings, improve the term structure of the banks' liabilities and reverse capital flight, the Mexican authorities raised the ceilings on time deposit interest rates in the second quarter of 1977. These rates range from 7% for call money to 18.5% on 2-year certificates of deposit 1/ (Annex 9, Table 24). The authorities also increased the interest rate premium, relative to US$ or Eurodollar rates, to reverse the capital flight being experienced by the system (Annex 9, Table 25), but US banks still registered an increase in short-term obligations to Mexican residents in the amount of US$770 million in 1977. Total non-monetary liabilities of the financial system, which had reached 32% of GDP in 1972, fell to about 21% in 1976 and even further to 19% in 1977 (Annex 9, Table 26). The development achieved up to the early 1970s was encouraged by relatively low inflation rates, sound interest rate policies, a long period of exchange rate stability and an open financial system which allowed free movement of funds, but this upward trend was interrupted by the problems which became evident in the mid-1970s. However, the above-mentioned actions by the Mexican authorities have helped to improve the situation, and non-monetary peso liabilities of the financial system inched up to 21% of GDP in 1978. The authorities have stated their intention to continue to adjust interest rates if necessary, to sustain a healthy growth in financial savings. 2.16 Since 1974, financial institutions in Mexico have been adopting increasingly a variable interest rate system for term lending operations. The change from the previous practice of fixed rate lending came when infla- tion accelerated after 1973 and after the aforementioned raising of deposit interest rates by Banco de Mexico. By 1977 practically all term loans were made at variable interest rates, using as an index the average cost of funds (ACF) to investment banking departments of intermediaries (Annex 1). This is a weighted average of interest rates paid on bonds, notes and certificates of deposit and excludes checking and savings deposits. The monetary authorities encouraged the development of this system as a way of preventing an even more rapid contraction of the financial system in response to the uncertainties created by inflation, and it was adopted readily by banks as a way of avoiding a possible severe profit squeeze on term-transformed resources. Borrowers who wanted to avoid being locked into existing high interest rates in nominal terms also accepted the idea readily. 2.17 Between the last quarter of 1977 and January 1979, the ACF index increased from 14.30% to 16.25%. Part of this increase reflects the increased weight of medium term instruments, which in turn reflects the increased willingness of savers to hold longer term deposits. The margins that banks charge their clients over ACF generally range from less than 2 to about 7 points, implying interest rates ranging from about 18% to 23%. The number of points charged to a particular client varies principally in relation to the "reciprocity" obtained by the bank, or compensating balances and other business offered by the borrower. The aforementioned rates are somewhat above the rate of infla- tion, which was estimated at 18% in 1978 and is expected to decrease gradually to world levels by 1982 (para. 3.14). 1/ Gross of taxes. - 16 - E. Prospects 2.18 As noted in Chapter I, the industrial sector has now recovered and is expected to grow at 10-11% p.a. in the next few years, compared to less than 4% p.a. from 1974 to 1977. However, the banking system is not yet in a position to properly allocate and provide significant long-term financial resources, and the securities market, although growing at a fast rate, has not yet developed into an important source of finance for industrial firms. In this situation, the trust funds have a crucial role to play in supplementing and guiding industrial credit provided by the financial system. The proposed Bank loan to FONEI would contribute to the institutional development of partici- pating financial intermediaries and help finance efficient projects during a period of long-term credit scarcity in Mexico. III. THE INDUSTRIAL EQUIPMENT FIJND (FONEI) A. Background 3.01 FONEI was established in 1971, following extensive discussions between Mexican authorities and the Bank on the dlesign of appropriate mecha- nisms to address industrial inefficiency and ina'propriate structure of industrial financing, and to help improve the country's balance of payments. FONEI was set up as a trust fund of Banco de Mexico, to provide supplemental term financing through commercial banks for efficient industrial projects, which would have a positive impact on the balance of payments through higher exports or import substitution. Additional operational objectives were emphasized as FONEI became a more mature institution, the most important being for it to contribute to efficient allocation of resources through the financial system by inducing banks to make their lending decisions increasingly on the basis of comprehensive project appraisal, and to promote industrial efficiency by encouraging enterprises to prepare detailed feasibility studies. To help achieve these objectives, the Bank has made three loans to FONEI totalling US$185 million. The first Bank loan (824-ME), for US$35 million, was signed in June 1972 and was fully committed in September 1975, a year behind schedule due to some start-up delays. The second loan (1205-ME), for US$50 million, was signed in April 1976 and except for a small remaining amount is fully committed. The third loan (1598-ME), for US$100 million, presented to the Board in May 1978, was signed in September and is expected to be almost fully committed by FONEI by mid-1979, about a year ahead of schedule. B. Organization and Management 3.02 FONEI's highest decision-making body is its Technical Committee, which is composed of high level government officials. Its chairman is the Director of Public Credit of the Ministry of Finance, and other members include representatives of the Ministries of National Patrimony and Industrial Develop- ment, and of Commerce, Banco de Mexico, Nacional Financiera, Instituto Mexicano - 17 - de Investigaciones Tecnologicas (IMIT), 1/ and two representatives of the private sector nominated by the chambers of commerce and industry. The Committee, which takes an active interest in FONEI's activities, meets once a month to decide on all proposals for FONEI financing above Mex$15 million. Decisions for credits below this amount are delegated to FONEI's director to help speed up loan processing. 3.03 Banco de Mexico, as trustee, provides FONEI with the required staffing, office facilities and administrative services. Thus, FONEI's staff is subject to Banco de Mexico's regulations and salary scales, which are generally competitive. FONEI's chief executive is its director, and it has had three since inception. Mr. Villasenor, who has held this position since December 1976, is well qualified, dynamic and has paid particular attention to expanding FONEI's activities, promoting FONEI's operations throughout Mexico, and more recently, to developing subproject appraisal and supervision capabilities of participating intermediaries as far as possible. Heading a staff of 19 professionals, Mr. Villasenor is assisted by three subdirectors--Mr. Rodriguez, who has overall responsibility for the technical department, Mr. Acevedo, who has overall responsibility for loan administration and financial matters, and Mr. Romero, who heads the promotions department (organization chart, Annex 2). 3.04 FONEI has a streamlined organization with relatively low administ- rative costs. Following the change in the presidential administration in Mexico in late 1976, FONEI experienced substantial staff turnover. This has declined significantly since then and, although second-level management and staff are relatively young, they have adequate experience. However, due to rapidly expanding operations and FONEI's desire to open some small offices in the interior to broaden its regional coverage of Mexican industry, there is a need to increase staff significantly. Plans have already been made to increase professional staff to 32 within one year, which would enable FONEI to cope with the expected growth in operations. FONEI is also planning to further strengthen its project evaluation and supervision capabilities by providing appropriate training for its staff (para. 3.22). These plans, which are reflected in FONEI's Strategy Paper (para. 3.38), would deserve full Bank support through funding under the proposed loan and through Bank-sponsored training programs including EDI courses. C. Operating Regulations and Policies 3.05 Nature of projects eligible for financing. The policies and pro- cedures which govern FONEI's operations are set forth in its Operating Regulations (Annex 3), which may be modified by FONEI's Technical Committee in consultation with the Bank. They define the types of projects that may be 1/ IMIT is a semi-public research and development institution partially financed by Banco de Mexico, and is frequently used by FONEI for project appraisals. - 18 - financed by FONEI, terms and limits of subloans, interest rates, criteria for project selection, responsibilities of the intermediaries and final beneficiaries, and procedures for FONEI's authorization of financing. These Operating Regulations specify that in the selection of each project for financing FONEI should consider, inter alia, the following economic criteria: (i) the project's foreign exchange generation or savings; (ii) its economic rate of return; (iii) its utilization of labor and its value added; and (iv) industrial decentralization aspects. 3.06 The Operating Regulations permit FONEI to support projects involving the production of industrial goods as well as service activities. Although FONEI has financed only the production of industrial goods in the past, last year the government assigned to it the task of promoting and assisting selected projects desi.gned to expand exports of services from the northern border zone. In thit connection, FONEI may now Einance projects involving the construction of factory buildings for lease to foreign assembly plants, setting up of car repair centers and similar buiLding complexes for the purpose of selling services and replacement parts to visitors, and the construction of large-scale commercial centers designed principally to sell Mexican goods and services to foreign visitors. Since FONEI has limited experience with this type of activity, it: is approaching service projects cautiousLy and to date has presented onLy one such project for Bank financing. 3.07 Technology develoCment projects. FONE:t's management has been searching for new and innovative ways of broaden:Lng FONEI's impact on industrial development, particularly high priority industries such as capital goods production. In this connection, FONEI recently introduced modifications to its Operating Regulations to permit it to finance tech- nology development projects. To date it has supported a prototype develop- ment project for an oil well pumping system and a pilot plant facility for a building materials project. Technology development will become increasingly important for Mexican industry in the future, as it has now reached a relatively high degree of sophistication and has a substantial pool of well-developed engineering and technical skills. To further increase local vaLue added and compete efficient:Ly in world markets, there is a need to broaden efforts aimed at stimulating industrial growth through the development of new or improved products, of more efficient production methods, and of new technology to exp:Loit available raw materials on a cost-efficient basis. 3.08 Recognizing the importance of technology issues, Mexican authorities have introduced in recent years various policies and institutional support to reinforce the technological development of Mexican enterprises (Annex 4). Several institutions have been formed to formulat:e and implement relevant national policies, to provide technical information as well as research and development (R&D) facilities, and to review foreign licensing agreements. The government also aLlows preferential tax treatmeni: of research and development expenditures, permitting firms to apply accelerat:ed depreciation schedules to R&D-related fixed asset investments and to consider current R&D expenditures as normal business expenses. However, despite a:Ll these measures, very - i94 - few opportunities exist in Mexico for ente-rprises to finance technology development projects. FONEI could help to fill this gap by concentrating oi- financing those technology development projests relatively close to commer- cialization and sponsored by enterprises with the capability to implement problem-specific technical solutions, with either internal resources or some external help. FONEI's technology development activities would be supported through an experimental component which would be included under the proposed loan. 3.09 FONEI also instituted recently a guarantee mechanism through which it would cover up to 90% of the credit (principal and interest payments) granted by an intermediary for technology development projects and prefeasibil- ity studies. Intermediaries wishing to avail themselves of the guarantee mechanism would pay a one-time charge of 0.5% of the credit granted. The guarantee scheme is designed for loans made to smaller enterprises unable to offer adequate collateral to banks. 3.10 Pollution control projects. Aided by the experience of Bank DFC operations elsewhere (in particular the most recent Colombian financiera loan No. 1598-CO), FONEI would finance, for the first time, industrial pollu- tion control subprojects under the proposed operation. Industrial pollution, coupled with pollution caused by extremely rapid growth in vehicular traffic, has become a problem in almost all industrial areas in Mexico, and has reached critical levels in cities with high population density and industrial concentration, such as Mexico City and Monterrey. A Law for the Prevention and Control of Environmental Pollution was enacted in 1971, and further laws were passed in 1972 and 1973 establishing responsibilities for formulating and implementing specific detailed regulations (reglamentos) for controlling pollution (Annex 5). At present, legislation has been implemented only through the establishment of appropriate reglamentos covering atmospheric pollution caused by smoke and dust. A draft reglamento dealing with gaseous emissions is being prepared. Two agencies, which would cooperate with FONEI under the proposed project, have primary responsibility for establishing, implementing and monitoring compliance with pollution control legislation. The Secretaria de Salubridad y Asistencia (SSA), through its Subsecretaria de Mejoramiento del Ambiente (SSMA), is responsible for air pollution control, while the Secretaria de Agricultura y Recursos Hidraulicos (SARH) is responsible for water pollution control. 3.11 A component would be included under the proposed loan covering the purchase of industrial pollution control equipment and technical assistance required in the design and/or selection of such equipment. If included in new plants or expansionsof existing plants, pollution control equipment would be financed as part of the increase in production facilities of a parti- cular enterprise, since such enterprises would, in any case, need to meet the environmental impact standards established under Mexican law. The purpose of establishing a separate project component would be to provide, through FONEI, financial assistance and technical expertise particularly to those firms with existing pollution problems. Experimental pollution control financing through FONEI would also permit the Bank to gain valuable experience, which may lead to much more extensive Bank involvement in efforts to cope with industrial pollution conitrol problems in the greater Mexico City area. - 20 - 3.12 Terms and limits of financing. Under its Operating Regulations, the maximum amount of financing FONEI could provide to a single investment project is Mex$100 million. In addition, to facilitate significant partici- pation in relatively large projects considered of high priority by the government, such as capital goods and petrochemicals, FONEI can approve financing in excess of the above amount provided prior authorization is obtained from the Ministry of Finance. FONEI's minimum loan size is Mex$4.5 million, which matches the upper limit of financing for fixed asset loans of FOGAIN, which specializes in small and medium industry financing (para. 2.07). FONEI's subloans have maximum maturities of 13 years, including up to 3 years of grace. 3.13 FONEI's Operating Regulations require FONEI's funds to be complemented by funds from clients and financial intermediaries. To ersure that projects are adequately capiitalized, final borrowers are required to finance at least 25% of fixed asset costs of new investment projects and 20% of expansion projects. The intermediaries are required to finance at least 15% of FONEI's financing for new projects, which in turn is limited to 65% of project cost, and 11% in the case of expansion projects where F'ONEI could provide up to 72% of project cost. In addition, the intermediary is required by FONEI to ensure that projects have adequate working capital finan,cing. In practice, FONEI finances about 40% of project costs on average. For technology development projects and prefeasibility studies, up to 80% of total costs could be financed by FONEI, as an additional incentive to client firms. 3.14 Interest rates. Under the first Bank loan FONEI charged a fixed interest rate of 11% p.a. in pesos to final borrcwers, including a spread of two percentage points to the intermediary bank. Although initially positive in real terms, this interest rate became significantly negative as the rate of inflation rose in 1973. As a result of this experience, and after several months of discussions between FONEI and the Bank, FONEI decided to modify its onlending rate under the second loan in two stages towards the use of variable interest rates based on the ACF index (Annex 1). This adjustable interest rate mechanism has been. implemented successfully and FONEI lending for standard investment subprojects 1/ is now made at the ACF index plus 2% to final borrowers. In January 1979 the ACF index was at 16.25%, resulting in a lending rate for FONEI of 18.25% compared to an estimated 18% 2/ rate of inflation for Mexico in 1978 and to rates in the financial system ranging from about 18% to 23% (para. 2.17). The rate of inflation, which reached 22% in 1976 and 29% in 1977, is expected to decline progressively to 15% in 1979, 12% in 1980, and to international levels by 1982. As the inflation rate decreases, FONEI's onlending interest rate is expected to rise gradually in real terms. In the unlikely event that inflation rises, the ACF should I/ Excluding lending for prefeasibility studies, technology development or pollution control. 2/ Average annual rate. - 21 - still be a suitable yardstick for determining FONEI's lending interest rates, given the government's announced intention of maintaining borrowing interest rate levels which would permit adequate resource mobilization in the financial system. 3.15 FONEI's interest rate for technology improvement projects is five points below its regular rate (i.e., ACF less 3%). This relatively small subsidy appears reasonable, considering that technological adjustments of the kind likely to be financed by FONEI can be highly beneficial to the Mexican economy but generally involve relatively high commercial risks, and is consis- tent with interest rate policies adopted in connection Twith Bank operations elsewhere (e.g., Colombian financiera loans 1223-CO and 1598-CO). Loans granted for pollution control projects would be made to final borrowers at an interest rate of between two points above and three points below the ACF. Only subprojects involving existing plant and equipment would be eligible for subloans at interest rates below FONEI's regular rate (para. 4.05). In many cases these investments would require important cost outlays for the respective firms, which in effect are being penalized for having purchased equipment at a time when specific laws or regulations governing admissible pollution levels had not yet been promulgated. In addition, pollution control investments benefit the welfare of vast segments of the population and, consequently, some degree of cost sharing would appear justifiable to encourage firms to utilize the proposed component. D. Operating Procedures 3.16 Division of responsibilities. When FONEI was first established, few if any Mexican banks had the technical skills or the inclination to carry out detailed project appraisals. Also, since the volume of FONEI's projects channeled through individual intermediaries had been low in the past, financial intermediaries were reluctant to set up in-house appraisal units. Thus, FONEI had to assume responsibility for the full appraisal and supervision of virtually all projects, while the intermediaries which carry the full credit risk focussed on evaluating the financial plan and risk of projects and on securing adequate collateral. Since FONEI felt it was best to maintain a streamlined staff and not use a large portion of staff capacity in carrying out detailed appraisals or to incur the excessive costs of acquiring full technical in-house capacity for a wide variety of product lines, it adopted a system of using outside consultants for detailed appraisal work, principally utilizing the skills of IMIT. FONEI's staff could thus concentrate on selecting and guiding the work of consultants paid for by FONEI, on reviewing the results obtained, and on making appropriate recommen- dations for FONEI financing. 3.17 Although clients may approach FONEI directly for preliminary credit applications, most of them are referred by participating inter- mediaries. Potential clients and financial intermediaries are encouraged to consult FONEI at a relatively early stage of project preparation, and to prepare prefeasibility studies of their projects along FONEI's suggested guidelines. This enables FONEI to review the preliminary information and - 22 - determine if the project meets the basic eligibility criteria, and if so, to indicate which areas should be covered in depth by the feasibility study. Once the feasibility study is received, FONEI proceeds with a full evaluation of the project, usually through a consultant or through the financial intermediary. In some instances FONEI has used its own staff to carry out full project evaluation,due to the large volume of projects to be processed. When completed, the evaluation is reviewed by FONEI's technical department, and, if the project is found adequate, it is then submitted for consideration and decision by the Technical Committee or FONEI's director. 3.18 In connection with the second Bank loan, FONEI agreed to place greater emphasis on increasing the role of intermediary banks in project appraisal in order to introduce them to appraisal banking techniques. To achieve this, the responsibility for coordination between final borrowers and consultants during project appraisal was to be transferred gradually to the intermediaries, and they were to be encouraged to set up in-house appraisal units. To induce intermediaries to do so, FONEI agreed to reimburse them for the cost of consultants' appraisals or pay them a fee for their in-house appraisal efforts. The intermediaries were also assigned the responsibility for coordinating the work of consultants for projects requiring subloans in excess of Mex$30 million. 3.19 Although a few subprojects were appraised by intermediaries along the above lines, FONEI had little success in transferring appraisal respon- sibility to intermediaries, mainly because the number of FONEI operations per intermediary had not yet grown to the point where even small permanent appraisal units could be fully occupied. Consequently, the scheme of reimburse- ment of expenses could not be expected to provide sufficient incentive to intermediaries, and there also appears to have been a lack of a clear commit- ment and proper publicity of FONEI's willingness; to reimburse intermediaries for costs incurred in appraising projects. The process of project evaluation, which took about seven to eight months on average, 1/ also diminished the value of the appraisal as a critical input to the banks' decision-making process regarding the loan to be granted. 3.20 In the context of the third Bank loan, FONEI took several steps to address more effectively the above-mentioned problems. FONEI's Operating Regulations were revised to allow an additional 0.50% spread for intermediaries appraising projects requiring subloans up to Mex$30 million and 0.25% for projects requiring subloans in excess of this amount, in effect making it attractive for banks to undertake project appraisal. FONEI has also taken several measures to pare down processing time, including encouraging pre- qualification of projects and the delegation of authority to FONEI's director to approve loans of up to Mex$15 million, although, due to rapid growth in the volume of projects, these measures have had marginal results so far. To facilitate the preparation of detailed appraisa:Ls, FONEI also encouraged client companies to undertake prefeasibility studies,using FONEI's subloans 1/ From the date of preliminary application to the date of approval by FONEI. - 23 - at preferential rates of interest. As a result of these measures, 4 sub- projects were appraised by intermediaries in 1978 (out of 63 projects) and 6 prefeasibility studies were financed. Only 2 projects had been evaluated by intermediaries prior to this. 3.21 Additional measures would be introduced under the proposed project to increase the role of intermediaries in the appraisal process. Although difficult to achieve immediately, FONEI's goals of inducing intermediaries to take responsibility for project appraisal and to set up core units for project lending are now more likely to bear fruit in the medium to long run, for several reasons. In addition to the introduction of differential spreads, which have been accepted with enthusiasm by banks, FONEI's volume has now grown to the point of enabling small core appraisal units in several banks to be kept fully occupied. Whereas only 2 banks processed more than 4 FONEI projects in 1977, 4 banks presented 5 or more projects in 1978 (Annex 9, Table 27). With the rapid growth in FONEI's approvals, the number is expected to increase in the future. FONEI is also planning to offer intermediaries an additional spread of 0.25%, to be determined annually on the basis of a specific program to induce intermediaries to undertake full subproject super- vision (para. 3.25), thus assuring fuller utilization of intermediaries' project evaluation and supervision units. The recently promulgated revised Banking Law (para. 2.03) also abolished the existing legal minimum collateral requirements and encourages intermediaries to lend on the basis of a thorough appraisal of projects. Thus, as much as one-third of subprojects presented in 1979 may be evaluated by intermediaries, using either consultants or their own staff. 3.22 While the process of delegation should prove beneficial in the medium term, in the short run little manpower savings would accrue to FONEI, as the intermediaries undergo the time-consuming learning process to develop acceptable procedures, requiring close cooperation from FONEI's staff. In addition to the intermediaries, the increasing number of new consultants and FONEI's new staff would all need to have intensive training in project evalua- tion and supervision and to familiarize themselves with the particulars of the FONEI system. Although IMIT and FONEP (a trust fund of NAFINSA financing principally feasibility studies) provide courses in project evaluation, additional efforts in this respect would be required from FONEI. These activities deserve full Bank support, and under the proposed loan funds would be available for technical assistance to support FONEI's training programs. 3.23 In the past, IMIT evaluated most of FONEI's subprojects and, as a consequence, there was little need for FONEI to develop its own engineering skills. With the increasing number of evaluations carried out by inter- mediaries and consultants other than IMIT, FONEI needs to develop access to specialized technical skills in order to enable it to fully evaluate the appraisals as a genuine second-tier institution. For this purpose, FONEI is considering an increase in the use of Banco de Mexico's engineers and other technical specialists to give summary reviews of evaluations, focussing on the appropriateness of processes chosen, capacity of equipment to perform at the production volume indicated and product quality required, cost competi- tiveness and similar aspects. FONEI's institutional plans, including its - 24 - intention to develop project appraisal and supervision capabilities in parti- cipating intermediaries as far as possible, and its promotional and training plans were discussed during negotiations and incorporated in its Strategy Paper. 3.24 Project appraisal and supervision performance. In FONEI's early years of operation, the quality and depth of its appraisals were uneven, reflecting the lack of experience of consultants and of FONEI's own staff. During a long period FONEI had limited success ini trying to impress on the consultants the need to focus their evaluations on key issues of individual projects. The quality of appraisals has since evolved satisfactorily and evaluations now generally include an adequate analysis of the organizational, marketing, technical, environmental, and financial and economic aspects of projects, including the calculation of the financial and economic rates of return. In the context of the third Bank loan, FONEI's free limit vis-a-vis the Bank was raised from US$750,000 to US$1.5 million. In recognition of the improvement in FONEI's project appraisal capabilities, the free limit for FONEI would be increased to US$2 million for standard investment subprojects under the proposed loan. This will enable the Bank to review about 40% of these sub- projects which would account for about AnT of the loan amount. nistinct free limits would be set for pollution control and technology improvement subloans (para. 4.08). 3.25 Project supervision. By law, intermediaries are required to supervise term loans to ensure that funds are utilized for the purposes intended. In this regard, intermediaries normally carry out regular supervision visits to a project during the construction period, but tend to forego supervision once the project is in operation. Under its loan contracts, FONEI could require intermediaries to submit periodic reports on the progress of FONEI-financed projects. However, FONEI has not rigidly enforced reporting requirements but rather has attempted to conduct its own field supervision visits to selected projects, and these are done in depth and with reports of generally good quality. However, due to FONEI's rapid operational growth, it has been forced to devote its own manpower resources to evaluations, and only about 10% of clients with projects in operation were visited in 1978. All in all, about 40% of FONEI's clients have submitted periodic reports covering financial performance and, in most instances, balance of payments and employ- ment impact of individual projects. FONEI realizes that it needs more exten- sive operational feedback on a regular basis and recognizes that, given the large number of clients it now has and the expected sharp increases in the future, it can visit only a limited number of enterprises. Therefore, FONEI is planning to grant intermediaries an additional margin of 0.25% to undertake supervision of projects, involving annual or more frequent visits to client enterprises and the submission of comprehensive reports. In addition, it is now requiring intermediaries to become formally responsible for the submission of summary reports from clients, involving financial statements and a few operational indicators. FONEI's own direct supervision efforts would be planned to supplement the results of the measures described above. The afore- mentioned plans have been incorporated in FONEI's revised Strategy Paper and would be included in its Operating Regulations prior to loan effectiveness. 3.26 Promotion. FONEI recently established a promotions department to help achieve an even wider geographical dispersion of FONEI-financed projects than has been the case thus far (para. 3.32), and to reach more medium-sized - 25 - and less established enterprises. The department is headed by a subdirector who would be directly involved in promotional activities and at the same time would oversee the few small FONEI offices that it intends to establish in the northern border areas and in the interior of the country. FONEI intends to open two such promotional offices this year, each with one or two professionals, and depending on the results, more may be opened in the future. Members of the promotional offices are expected to pay frequent visits to groups of bankers and industrialists in their respective regions to help them to identify and formulate projects, and to provide some assistance to inter- mediaries and clients experiencing minor project processing problems. 3.27 Participating intermediaries. All of Mexico's more than 150 finan- cial intermediaries are eligible to participate as channels for FONEI's financing. However, the financLal system is relatively highly concentrated, and most institutions are quite small and do not have clients with suitable projects (Annex 9, Table 14). Thus, as of year-end 1978, only 23 intermediaries had obtained financing from FONEI, with 5 of them having accounted for about 70% of cumulative commitments (Annex 9, Table 27). The distribution of FONEI's approvals is shown below: Table 3.1: DISTRIBUTION OF FONEI'S OPERATIONS Rank among banks in terms of Credit Amount (1978) Cumulative Amount (1973-78) asset size No. % Mex$ mil. % No. % Mex$ mil. % Somex/Banco Mexicano 5th 11 17 587 26 31 16 L,205 23 Banco Nacional de Mex. 2nd 15 24 302 13 51 26 1,091 21 Banco Comercial Mexicano 4th 5 8 285 12 20 10 589 11 Banpais 7th 5 8 232 10 14 7 377 7 Banco del Comercio 1st 7 11 185 8 16 8 397 8 Financiera Innova n.a. 4 6 167 7 8 4 337 7 Banca Serfin 3rd 3 5 137 6 12 6 273 5 Other institutions - 13 21 394 17 42 22 865 17 63 100 2,288 100 194 100 5,134 100 Somex/Banco Mexicano, which accounts for almost a quarter of FONEI's total ap- provals, is a financial group majority owned by the government but with a strong private sector representation. Banco Nacional de Mexico and all other institutions shown above are private banks. Among the other institutions which have participated are Banco Internactoaal (3.2% of total approvals) and NAFINSA (2.1%), both government-owned intermediaries. The six interme- diaries shown in Table 3.1 above (excluding Financiera Innova) account for - 26 - about 70% of the banking system's assets. In thLs context, the discussion in Chapter II and the tables on the financial sector (Annex 9; Tables 12, 14, 15, 21, 22, 23, 24 and 26) provide some background on the intermediaries' charac- teristics, including the sectoral distribution of their lending portfolios, lending terms, revenues and expenses, liabilities, and domestic resource mobilization performance. By and large these institutions to date have been effici,ent channels for FONEI funds. As previousLy noted (paras. 3.16 to 3.25), the role of the principal participating intermedLaries would be greatly enhanced in the future. 3.28 The government's efforts in the recent past to encourage a large number of institutions, particularly small ones, to merge to form multibanks would tend to increase competition in the financial system in general and probably result in a slight increase in the number of medium size banks availing themselves of FONEI's facilities. FONEI's promotional efforts would help in this regard. As shown above, some medium size institutions already have begun to emerge as important channels of FONEI financing. 3.29 Procurement and disbursement procedures. In the course of ap- praisal of projects, FONEI verifies that goods and services procured under the project are competitive in price and quality, and are appropriate for the purpose intended. In addition, FONEI ensures through documentation require- ments, direct visits, and visits by intermediaries that proceeds of financing are used only for the goods and services authorized by FONEI at the time of loan appraisal. Overall, disbursement procedures are thorough and have resulted in smooth disbursement of the proceeds of the Bank loans to FONEI. E. Past Operations and Impact 1/ 3.30 Sectoral distribution. As of year-end 1978 FONEI had financed a total of 142 2/ investment projects involving Mex$14.8 billion in total costs and Mex$5.1 billion in FONEI financing (Annex 9, Table 28). Although FONEI's total portfolio amounted to only about 2.2% of total banking system credit to private manufacturing industry, it accounted for a significant percentage of long-term loans to the sector, roughly in the order of 15%. FONEI's portfolio growth rate is expected to exceed that of banking system credit for the next few years. FONEI's financing has been concentrated in the industries producing metal and electrical products, including a substantial number of capital goods industries, which are considered high priority by the government. These industries accounted for about half of FONEI's cumulative approvals up to year-end 1978, compared to their value-added share in the manufacturing sector estimated at 18% in 1977. Chemicals and petrochemicals accounted for / Details will be presented in the Project Performance Audit Report for Loans 824-ME and 1205-MF, now under preparal:ion. 2/ Excluding feasibility studies; some subprojects also received two subloans. - 27 - about a quarter of FONEI's approvals (8% of manufacturing value added) and paper for 8% (3% of value added). Other industries financed included cement (6% of approvals), textiles (4%), and other industries (4%). To date, one subloan has been committed for a service industry project amounting to 3% of total approvals. 3.31 Balance of payments impact. Subprojects financed by FONEI have had a substantial favorable balance of payments impact. Of the total number of projects financed to date, about 30% were export projects, another 28% involved both import substitution and exports, and 42% were pure import substitution projects. To qualify as an export project, the borrowing enter- prise must demonstrate to FONEI that the foreign exchange earnings generated by the project in the first five years of its operation will cover at least all investment and operating costs in foreign exchange. A similar criterion involving foreign exchange savings applies to import substitution projects. For projects financed by FONEI up to year-end 1978, the total discounted foreign exchange earnings and savings 1/ to be generated over the first five years of operation are projected to reach Mex$41 billion (about US$1.8 billion equivalent at the current exchange rate), which is reasonable compared to total investment costs of Mex$14.8 billion. About 20% of the foreign exchange amount mentioned above would come from exports. An ex post evaluation of enterprises previously financed by FONEI under the first two Bank loans showed satisfactory export and import substitution performance relative to projections in 1977 (Annex 9, Tables 29 and 30), as shown in Table 3.2 below. Table 3.2: EXPORT AND IMPORT SUBSTITUTION PERFORMANCE OF A SAMPLE OF FONEI'S PROJECTS 1977 No. of Enterprises a/ Projected Actual (US$ millions) Exports 25 59.5 59.9 Import substitution 32 84.6 142.1 a! Some projects involved both exports and import substitution. 3.32 Industrial decentralization. In addition to their substantial balance of payments impact, FONEI's subprojects have also contributed signifi- cantly to the geographic decentralization of Mexican industry (Annex 9, Table 28). The three principal urban areas of Mexico--Mexico City, Monterrey and 1/ Computed in equivalent present value terms, with a 16% discount rate. - 28 - Guadalajara--accounted for only 28% of the total subproject financing of FONEI as of year-end 1978, which compares very favorably with total value added for Mexican industry originating from these areas, estimated at about 70%. Indus- trial credit from the banking system was even more concentrated in these areas (80-85%). FONEI's increasing promotional efforts should result in even better geographical dispersion of activities in the future, and particularly towards the government-designated priority areas. 3.33 Employment impact. FONEI's operations have made a significant contribution to providing new industrial employment. For the 121 subprojects 1/ for which ex ante data were available, the average cost per job created was about US$29,600 equivalent, which is reasonable compared to corresponding figures for medium-to large-scale industry in countries at a similar stage of development. Since the bulk of FONEI's subprojects also utilize substantial domestic inputs, they would also be expected to have a substantial additional indirect employment creation impact. An ex post analysis of a sample of 41 enterprises financed by FONEI in the past showed very favorable employment creation performance relative to projections made at the time of subproject appraisal. New jobs created by these 41 FONEI subprojects amounted to 5,080 in 1978, compared to projections of 4,408 (Annex 9, Table 31). 3.34 Size of prolects and enterprises financed. The average invest- ment cost of projects financed by FONEI up to year-end 1978 was Mex$104 million or about US$4.5 million equivalent (Annex 9, Table 28). The average subloan size was about Mex$36 million or about US$1.6 million equivalent. Of the 142 projects financed by FONEI in this period, only 16 relatively small projects did not involve Bank financing. About 55% by number of the projects financed by FONEI were of comparatively moderate size and involved total investment costs of Mex$50 million or less. 3.35 Although some concentration of lending to larger and more financially solid enterprises occurred during FONEI's early years of existence when it still had a limited pipeline of projects and had yet to establish itself in the Mexican financial system, its present administration has pursued a policy of distributing FONEI's resources as widely as possible among industrial clients in Mexico. As a result, FONEI has supported an unusually high number of new enterprises, which accounted for about 36% of total enterprises financed as of year-end 1978. No single group 2/ of industrial enterprises has received more than 9% of the total value of loans granted by FONEI as of the same date, and its five largest client groups account for only 35% of total lending. The above figures are reasonable, taking into account the ownership distribution of Mexican industry, the tendency of financial intermediaries--who carry the 1/ Of the 21 subprojects not included in this estimate, 19 were comparatively small expansions for which data were not available, and two subloans in- volved one unusually large and capital intensive chemical project for which FONEI financed only about 7% of total project cost. 2/ An informal and loose agglomeration of companies with some common share- holders. - 29 - credit risk--to favor better established enterprises, and the presence of FOGAIN (para. 2.07) which, as previously mentioned, finances smaller enter- prises and is being supported by the Bank under a separate loan as part of a balanced strategy to finance efficient industrial enterprises of all sizes in Mexico. However, to make FONEI's policy of favoring medium size enter- prises more explicit and to ensure that the distribution of its resources is as wide as possible among industrial firms, FONEI's management intends to amend its Operating Regulations to establish a normal limit of Mex$300 million (about US$13 million equivalent) for loans to a single enterprise. Also, not more than US$5 million of Bank funds would be onlent for a single subproject. To encourage intermediaries to reorient their lending somewhat towards medium size enterprises, defined as enterprises with total equity of less than Mex$50 million, FONEI is planning to revise its system of spreads to give an additional margin to intermediaries for loans to medium size and smaller enterprises. Specifically, it is proposing the system described below: Table 3.3: SYSTEM OF SPREADS TO INTERMEDIARIES PROPOSED BY FONEI Spreads to Intermediaries Project Evaluated Project Evaluated Size of Enterprise by FONEI by Intermediary Large a/ 2.00% 2.25% Medium 2.25% 2.50% a/ Defined as an enterprise with total equity of more than Mex$50 million. 3.36 The measures described above, combined with an increasingly active promotional effort to reach medium size clients, particularly in areas out- side of the three principal cities, should achieve favorable results. The amendment of FONEI's Operating Regulations to reflect the system of spreads and limitations mentioned above in a manner satisfactory to the Bank, would be a condition of effectiveness of the proposed loan. 3.37 Economic and financial rates of return. Ex ante economic rates of return (ERR) were calculated for 118 of the 142 FONEI-financed subprojects. Of these, 116 had very satisfactory ERRs of 15% and above and only 2 had between 10% and 15% (Annex 9, Table 28). The financial rate of return (FRR) was calculated for a total of 124 subprojects, 28 of which had FRRs of between 10% and 15%, while the rest had projected FRRs of more than 15%. With the exception of one firm, no serious financial difficulties are being encountered by the enterprises financed by FONEI. Most of the firms which experienced financial and market difficulties arising from the peso devaluation in late 1976 have recovered, and several of them are working at, or close to, full capacity and are in the process of preparing expansion projects. - 30 - F. Development Strategy Paper 3.38 In connection with the third Bank loan, FONEI prepared a Development Strategy Paper for the period 1978-80, focussing on its medium-term institu- tional and operational goals, and its strategy for achieving them. Since the negotiations of that loan (April 1978), FONEI has begun to institute some of the measures chosen for the achievement of its objectives, such as differential spreads for intermediaries. FONEI's management revised and updated its Development Strategy Paper (Annex 6) to take into account the various aspects of its operations discussed in the preceding sections and summarized below: (a) FONEI's institutional plans,including, inter alia, its strategy to develop subproject appraisal and supervision capabilities in the participating intermediaries as far as possible, and training and development of the staff of FONEI, of the intermediaries, and of consulting firms (paras. 3.23 and 3.25); (b) FONEI's operational priorities covering plans to induce inter- mediaries to increase lending to medium. size enterprises, pro- motional efforts to support industrial decentralization measures, and pollution control and technology development activities (paras. 3.08, 3.11, 3.26 and 3.32); and (c) FONEI's efforts to support priority sectors identified in national plans for industrial development, including capital goods and medium size chemical projects. 3.39 The Strategy Paper was presented to the Bank and discussed during negotiations of the proposed loan. G. Financial Structure and Results 3.40 Sources of funds. At the time FONEI was established in 1971, the Mexican Government made an initial equity contribution of Mex$125 million (then US$10 million equivalent) to enable FONEI to start operations. Later, the government also undertook to repay the principal of three Bank loans to FONEI,amounting to US$185 million,in order to progressively capitalize FONEI. FONEI is responsible for servicing interest and other charges on these loans and is thus exposed to the foreign exchange risk to the extent that interest and other charges rise due to peso devaluation. Since Bank funds are available only to finance the foreign exchange costs of investment projects, the govern- ment, through Banco de Mexico, also made available to FONEI additional funds amounting to Mex$2.33 billion out of the reserves of the banking system in exchange for long-term bonds carrying interest: rates of 9-12% p.a. (Annex 9, Table 32). In 1978, Bank funds covered about 37% of disbursements, and Banco de Mexico's counterpart resources about 40% (Annex 9, Table 33). In order to bridge the gap of resources prior to the availability of the funds from the third Bank loan, Banco de Mexico also made a short-term loan of - 31 - Mex$150 million (about 11% of disbursements) which FONEI would repay in 1979. Portfolio recoveries have also become an increasingly important part of FONEI's sources of funds, covering about 12% of disbursements in 1978. 3.41 Assets and liabilities. FONEI's assets have grown at an explosive rate of 64% in 1977, and 69% in 1978 when total assets reached Mex$2.9 billion (Annex 9, Table 32). About 94% of FONEI's assets are accounted for by its loan portfolio. At present, FONEI's equity is negative due to the accounting treatment of foreign exchange losses suffered at the time of the peso deval- uation in 1976. Although the government has the obligation to repay the principal of the three existing Bank loans, in the external auditors' opinion the disbursed amounts under these loans should be shown in FONEI's financial statements to reflect the peso devaluation, and the corresponding exchange loss recorded as a reduction in FONEI's equity. As Bank loans are repaid by the government the exchange loss is reduced, and the difference shown as an increase in FONEI's equity. Thus, when the Bank loans are fully repaid, the exchange losses on account of the principal amounts of the loans will be eliminated and FONEI's paid-in capital will have increased by an amount equal to the peso equivalent of the Bank loans at the time of their disburse- ment. Under these circumstances and given the fact that FONEI, as a second-tier institution, does not incur credit risks in its operations (para. 3.43) and is not responsible for repaying the principal amount of Bank loans, the ratio of FONEI's total debt to its paid-in capital (16.8 at year-end 1978) is not a meaningful figure to consider in analyzing FONEI's financial situation. On balance, FONEI's financial position can be considered sound. 3.42 Profitability and costs. FONEI's operating results turned negative in 1976 and 1977 because of the higher interest charges it had to pay on Bank loans in pesos due to the currency devaluation, while most of its outstanding loans were made at fixed interest rates in pesos. The peso has since become a much stronger currency, and FONEI has raised its interest rates and now re- quires all borrowers to accept fully floating interest rates. These measures restored FONEI's profitability in 1978, when profits reached Mex$11 million (Annex 9, Table 34). With the growth in lending volume, FONEI's administrative expenses also declined markedly from 2.9% of average total assets (ATA) in 1974 to 0.91% of ATA in 1978. The latter figure, however, may prove to be rather low in the short to medium term. taking into account the need to increase FONEI's staff in anticipation of future growth and to provide more assistance to participating intermediaries. 3.43 Arrears and provisions. FONEI does not bear any credit risk in its operations, I/ since all intermediaries are responsible for principal and interest payments due, whether or not they receive payment from their indus- trial clients. In practice, since FONEI is a trust fund of Banco de Mexico, repayments to FONEI are made directly out of the accounts maintained by the intermediary banks as part of the reserve system. Nevertheless, as part of 1/ Except in connection with its small guarantee mechanism for technology development projects and prefeasibility studies (para. 3.09). - 32 - its supervision requirements, FONEI asks intermediaries to report on the status of client repayments and is prepared, in exceptional circumstances, to consider rescheduling the intermediaries' subloan repayments. To date this has been necessary only in the case of one project. 3.44 Auditing arrangements. FONEI's accounts have been audited for the past few years by Alonso Ochoa Ravize, a reputable Mexican auditing firm. In addition, Banco de Mexico's internal auditors also audit FONEI's accounts periodically. All the audit reports on FONEI's accounts since inception have been unqualified. The accounting procedures and auditing arrangements are satisfactory. H. Future Operations and Resource Needs 3.45 Operations forecast and project pipeline. While Mexico's continuing rapid economic recovery and buoyant expectations created by the recent large oil discoveries have stimulated a sharp rise in manufacturing sector invest- ment plans, the financial system lacks sufficient long-term resources to cover industrial financing needs. This situation, which is likely to continue for at least the next few years, as well as FONEI's good image with the private industrial and financial sectors, portends sharp increases in demand for FONEI funds. FONE['s total loan approvals doubled to about Mex$2,300 million in 1978 (from Mex$1,160 million in 1977) and are projected to reach Mex$3,500 million in 1979, an increase of about 50%. FONEI's rather conservative pro- jections (Annex 9, Table 34) show the growth rate of approvals (by amounts) tapering off gradually to about 29% by 1980, 11% in 1981 and 9% in 1983. The summary figures are shown below: Table 3.4: FONEI'S OPERATIONS PROJECTIONS Actual 1978 1979 1981 1983 Amount (Mex$ million) 2,288 3,500 5,000 6,000 No. of projects 63 102 146 176 The average subloan size (Mex$36 million in 1978) is projected to decline slightly in nominal terms (to Mex$34 million) and more sharply in real terms in view of FONEI's intention to reach a higher percentage of medium size enterprises. This implies that the number of projects would increase more rapidly (by 180%) than total amounts approved (162%) from 1978 to 1983. On the whole, the projected growth rate in approvals over the 1979-83 period of about 22% p.a. in nominal terms is quite conservative and could be exceeded easily, provided that sufficient additional resources will be made available to FONEI. The higher growth rate projected by FONEI for the first three years of the forecast period is also supported by its large project pipeline total- ling Mex$4,200 million as of January 1979. - 33 - 3.46 Resource requirements. Although the third Bank loan was approved only last May, FONEI would need additional resources for commitment by mid- 1979. As of year-end 1978, FONEI had only about Mex$1,600 million 1/ left in uncommitted funds to cover its expected approvals for the first half of 1979. Over the period from mid-1979 to mid-1981, given the previously mentioned high level of expected approvals, FONEI would need total resources amounting to Mex$8,900 million (Annex 9, T-36 and T-37). About Mex$2,100 million of this could be covered by internal resources derived from rapidly rising portfolio recoveries and increasing profits. The rest of the gap would be filled principally by the proposed loan and by additional complementary funds to be made available by Banco de Mexico. Additional local and/or foreign resources are likely to be required towards the second quarter of 1981. 2/ 3.47 During the negotiations of the third loan, Banco de Mexico requested the Bank to expand eligible expenditures under the loan to include the foreign exchange content of domestically manufactured fixed asset items financed by FONEI, estimated at about 25% of their cost (Annex 7). This, together with the Bank's financing of direct and off-the-shelf imports, was expected to result in the Bank's accounting for approximately 60% of FONEI's commitments (and subsequent disbursements) in 1978 and 1979, compared to close to 50% in the past. In practice, however, partly due to time lags arising from documen- tation requirements and the rapid growth rate of FONEI's operations, it appears unlikely that, even with the modifications mentioned above, the Bank would be able to cover more than about 55% of FONEI's disbursements. FONEI is also considering financing several types of projects (e.g., border service industries, technology development and pollution control projects) which tend to have high local cost components. Thus, a slightly higher amount relative to the Bank loan would be required from the government (through Banco de Mexico) in connection with the proposed loan. 3/ A Bank loan of US$175 million is being proposed, of which about US$173 million would be channelled to FONEI, to be committed as follows: US$40 million in 1979, US$100 million in 1980 and US$33 million in 1981. Counterpart funds of US$105 million equivalent would be required from Banco de Mexico. Since this would still leave a gap of about Mex$430 million, FONEI is likely to require additional resources before the end of the two-year period (i.e., by the second quarter of 1981) in the form of new borrowings from Banco de Mexico and other sources. 3.48 Projected financial results. Due to the rapid growth in approvals, FONEI's total portfolio and assets are expected to expand very rapidly over the forecast period. Assets would grow from Mex$2.9 billion at year-end 1978 to Mex$18.1 billion at year-end 1983, or at a compounded annual rate of close to 45% p.a. (Annex 9, T-32). Total liabilities would grow at a some- 1/ Including projected portfolio recoveries and operating profits. 2/ Some of these resources could come from the government's prospective oil revenues or from bonds which FONEI is considering issuiing in the future. 3/ Banco de Mexico's contribution would be equivalent to about 60% of the pro- posed loan, compared to about 85% of the first Bank loan, about 80% of the second loan, and 45% of the third loan. - 34 - what slower rate of about 38%, as equity would increase very rapidly due to the repayment by the government of the earlier Bank loans and to rapid growth in profits (para. 3.49). Thus, total equity would increase from a negative book value of Mex$87 million at year-end 1978 (para. 3.41) to a positive book value of about Mex$3.2 billion at year-end 1983. In sum, FONEI's financial structure would remain sound over the forecast period. 3.49 Net profits of FONEI are projected to rise rapidly within the next few years as the early subloans made at low fixed peso interest rates are repaid,and new loans made at more realistic (and floating) interest rates account for a much larger part of FONEI's portfolio (Annex 9, T-34). Reflect- ing this fact, total income as a percentage of average total assets (ATA) is projected to rise from 11.5% in 1978 to over 14% from 1981 to 1983. Interest expenses would correspondingly decline from about 10.1% of ATA in 1978 to 9.1% of ATA in 1981 and 8.1% by 1983, due to the increasing equity base of FONEI and the concomitant sharply decreasing debt/equity ratio over the forecast period. The somewhat lower interest rates to be charged for pollution control and technology improvement projects are not expected to affect significantly FONEI's profitability, which is projected to rise. from 0.5% of ATA in 1978 to 4.9% in 1981 and 5.4% in 1983. Administrative costs would rise slightly in 1979 to a still very reasonable 0.94% of ATA, due to non-recurring costs associated with FONEI's transfer of offices, and then stabilize at a very low level of about 0.5-0.6% of ATA. However, much would depend on the degree to which project appraisal and supervision responsibility could be transferred by FONEI to participating intermediaries, which wrould have the effect of gradually decreasing FONEI's own administrative expenses, at the same time lowering somewhat: total income due to the increased spread granted to inter- mediaries. 3.50 The above favorable profitability projections could be modified by significant exchange rate movements in the future to offset differences between Mexican and international inflation rates. However, given the projections of a declining rate of inflation in Mexico and the expectation that FONEI would adjust its interest rates as it did in 1977 should events contrary to projections occur, FONEI should be able to maintain a sound financial structure over the period up to 1983. IV. THE PROJECT A. Project Objectives 4.01 The proposed project would build and expand on the accomplishments of the past three Bank operations with FONEI. It is designed to: (a) help finance efficient projects expected to have a substantial economic and employment impact, and increasingly those sponsored by medium-sized enterprises and enterprises located outside of Mexico's three principal cities; - 35 - (b) support FONEI's efforts to build up project appraisal and super- vision capabilities in several of the participating intermediaries to improve resource allocation by the Mexican financial system and expand the appraisal and supervision capacity of the FONEI system; and (c) help broaden FONEI's impact on Mexican industry through two new components to finance technology development and industrial pollution control projects. B. The Proposed Loan 4.02 Loan amount and terms. The proposed loan of US$175 million would be available to cover the foreign exchange component of FONEI-financed sub- projects, human resource studies and training activities. Up to US$5 million each would be allocated initially for technology development and for industrial pollution control subprojects, respectively, and not more than US$10 million may be utilized to finance service export projects. Up to US$250,000 would be available to finance FONEI's training activities. The proposed loan would be made to NAFINSA (as agent for the Mexican Governineilt) wxhich would make arrange- ments satisfactory to the Bank for the transfer of the proceeds of at least US$173 million of the Bank loan to Banco de Mexico for the account of FONEI for implementation of the project. In addition, the Mexican Government, as the .twicitor, would assure availability of at least US$105 million equivalent as counterpart resources to be provided through Banco de Mexico (as Trustee), for channeling to FONEI under conditions satisfactory to the Bank. Up to US$2 million of the loan would be available to help finance the cost of studies to assess the human resource and technical and vocational training needs for industry in the light of the government's industrial development strategy. These studies would be coordinated by the Ministry of Education and the Bank would review the terms of reference. To help build up FONEI's resource base, as under prior Bank loans to FONEI, the Mexican Government would have the obligation to repay the principal amount of the loan and the interest and other charges on the US$2 million component for studies. FONEI would have the obligation to pay interest and other charges on the amount of the loan chan- nelled to it. In view of the above arrangement, the loan will be repaid according to a fixed 17-year amortization schedule including 4 years of grace, which are the maximum Bank terms for Mexico under the current guidelines. The terminal date for submission of subprojects to the Bank would be June 30, 1981, and the closing date for disbursements would be June 30, 1984 (see estimated disbursement schedule, Annex 8). 4.03 Participating intermediaries. Any of the more than 150 financial intermediaries of public or private ownership assisting projects eligible for financing by FONEI could participate under the loan. 4.04 Subloans for investment projects. The terms and conditions of sub- loans made using the proceeds of the Bank loan would be consistent with FONEI's Operating Regulations. The funds would be available to final borrowers at the ACF index plus 2%, and subloans would have a maximum term of 13 years, includ- ing up to 3 years of grace. In order to spread Bank funds over a wide number - 36 - of recipients, a limit of US$5 million would be placed on Bank funds that could be provided to any single investment subpro.jject. Exceptions to this limit could be made with the explicit approval of Banco de Mexico and the Bank for projects of high economic merit that do not have access to alte-na- tive sources of finance on adequate terms. As stated in FONEI's Operating Regulations, the economic rate of return would be calculated for all investment subprojects, except: for service export industries and other industries with non-tradeable products, for which the financial rate of return, net balance of payments and employment impact would be calculated. 4.05 Subloans to finance industrial pollution control projects. Up to US$5 million would be included in the proposed project for pollution control subloans. Unused resources towards the end of the loan's commitment period would be available to finance other types of investment projects. On the other hand, should actual demand exceed expectatiLons, the Bank would be prepared to consider increasing the US$5 million allocation. Preferential funds under the component would be available to fiLrms which had entered into commitments to purchase production equipment prior to the date of issuance of the specific reglamento relevant to the pollution problem at hand. In those instances in which subprojects for plant modernization would result in no production increase, enterprises would also be el-Lgible for financing at preferential rates of the cost incurred for pollui:ion control activities under this component. Such eligibility, however, would be decided on a case-by-case basis, after consu:Ltation between FONEI and the Bank. 4.06 In addit:Lon, pollution control subloans would also be subject to the following special conditions: (a) Subloans granted for the purchase of po:Llution control equipment, or for related technical ass:istance, would be made to final borrowers at an interest rate of between 2.0 points above and 3.0 points below the ACF. Only qua:Lified enterprises as defined above would be eligible for funds at interest rates be:Low FONEI's standard onlending rates. (b) All subprojects submitted under this coraponent would require (i) a full description of the firm's po:Llution problem; (ii) a detailed analysis and justificat:Lon of the equipment and/or technical assistance required to meet government standards for controlling the type of pollution involved; and (iii) an analysis of the repayment capacity of the firm. (c) As part of its subproject review, FONEI would obtain,as needed, the comaents of SSA and/or SARH regarding the adequacy of solutions proposed by subborrowers to meet the standards set by the government. FONEI's Operating Regulations would be amended prior to loan effectiveness to incorporate the conditions mentioned above and in para. 4.07 below. 4.07 Technology development subloans. A compcnent of up to US$5 million to finance technology development projects would be included under the pro- posed loan. The principles established in para. 4.05 above would apply for any possible reallocation or increase in the loan allocation for technology - 37 - development subloans. Subloans would finance the development of new products and production processes, technical information searches and overseas training, visits by technical experts and related needs (Annex 4). In addition: (a) Subloans would be made available to subborrowers in pesos at the ACF index less three points. (b) Subproject evaluations would cover, inter alia, current sources of technology and their costs, a description of the technological adjustment needs, the objectives and scope of the proposed technology development program, expected results and benefits, and repayment capacity of firms. 4.08 Approval limits. FONEI's limit for subloans for investment sub- projects not requiring prior Bank approval would be US$2 million. The free limit for subloans for pollution control subprojects would be US$750,000 and for technology development subprojects US$500,000, except that Bank approval would be required for the first three projects under each of these components. All subloans for service export projects would continue to be subject to prior review and approval by the Bank. 4.09 Spreads to intermediaries. Spreads to financial intermediaries under Bank subloans would be consistent with FONEI's operating regulations and would vary between 2.0% and 2.75%, depending on the size of the borrowing enterprise and the intermediary's assumption of responsibility for subproject appraisal and supervision. The full foreign exchange risk would be carried by the government on the principal of the loan, and by FONEI for interest payments and other charges. 4.10 Procurement and disbursement. Procurement procedures for goods and services financed under the proposed loan would be simiLlar to those under the first three Bank loans and would follow the procedures customary for Bank IDF-type projects, with FONEI having the responsibility for ensuring the competitiveness, in price and quality, of items procured and their suitability for the purpose intended. FONEI would pay particular attention to analyzing procurement decisions in the exceptional case of subloans exceeding its maximum lending limits. Disbursement of funds from the loan would be on the following basis: (a) 100% of foreign expenditures for directly imported items; (b) 70% of total expenditures for imported items purchased off the shelf in Mexico; (c) 25% of total expenditures for domestically manufactured machinery and equipment, and of the costs of installation and industrial construction; (d) 40% of total expenditures for technology improvement projects; - 38 - (e) 50% of total expenditures for the training activities; and (f) 47% of total expenditures for the human resources studies. The disbursement percentages (b) through (f) above represent estimated average foreign exchange costs. C. Benefits and Risks 4.11 Project benefits. The proposed project would help fill a gap in the financing of efficient industrial projects in Mexico at a time when the financial system lacks sufficient long-term resources to cover industrial invest- ment needs. On the basis of experience with the past three Bank loans to FONEI, the proposed loan is expected to finance some 150-160 investment subprojects involving total investment costs of about Mex$16.8 billion (about US$740 million) in a wide range of industries which would increase output, employment and exports. Most subprojects are expected to have economic rates of return (ERR) in the range of 15-40%. The ERR would be calculated for all investment subprojects (para. 4.04), which would ensure the utilization of the loan for efficient projects. Based on past experience, the subprojects to be financed under the loan are expected to have a substantial employment impact, generating a total of 22,000 to 26,500 new jobs at an investment cost: per job created of US$27,000 to US$34,000. A substantial indirect employment impact is also expected due to domestic linkages. 1/ The proposed loan is expected to contribute signifi- cantly to industrial decentralization and regionaL development, with about 60-70% of funds expected to go to projects located outside of Mexico City, Monterrey and Guadalajara. A substantial portion of the loan is expected to be utilized for medium size enterprises (about 40% by amount and over 50% by number)) which are expected to have a higher employment creation impact. The investment projects to be financed by the proposed loan are expected to result in foreign exchange earnings and savings of about US$2 billion during the first five years of operation of subprojects. As in the past, about 20% of the above amount should derive from increased exports. The proposed loan would also help upgrade the competitiveness and efficiency of Mexican firms through technology development projects, and help lessen pollution from existing industriaL plants and equipment. The humaan resource study to be financed under the loan is expected to improve the planning process to help ensure availability of adequate manpower in the future for Mexico's industrial development. 4.12 The project is expected to have a significant positive institutional development impact on the FONEI system and, to a 'Lesser degree, on the project evaluation capacity of the Mexican financial system as a whole. It would support FONEI's effEorts to build up project appraisal and supervision capabili- ties of participating intermediaries and encourage them to set up small 1/ For a comparabLe analysis of the likely indirect employment generation, see Colombia: Special Study of Development Imapact of Financiera-assisted Projects (Report No. 1027-CO), dated January 23, 1976. - 39 - in-house project lending units, in the process contributing to the government's goal of improving resource allocation by the Mexican financial system. About one-third of the subprojects financed under the loan are expected to be appraised by the financial intermediaries, compared to only 6% in 1978. 4.13 Risks. As the fourth Bank operation with FONEI, which is a reason- ably efficient and mature financial institution, the project presents no special risk in respect of the soundness and efficiency of subprojects financed. On the other hand, the institutional goals of the project are likely to be more difficult to achieve. However, the combination of the lending policies for intermediaries enunciated in the new Banking Law, the new system of variable spreads to the intermediaries, FONEI's promotional efforts, and the training program to be undertaken by FONEI, involving intermediaries' staff and consultants, should increase greatly the chances that the institutional goals will be achieved. 4.14 On the sectoral side, should the government depart from its present policy of maintaining a realistic exchange rate, industrialists might be less willing to mount export and import substitution projects. However, this subject and its implications for achieving desired employment creation goals are discussed regularly between the Mexican Government and the Bank in the context of the Bank's economic work and will be followed closely. In this con- nection, the recently issued National Industrial Plan and the decrees to implement its key policy elements give priority to both of these objectives. Also, in the unlikely event that inflation rises, the ACF should continue to be a suitable yardstick for determining FONEI's lending interest rates, given the government's announced intention of maintaining interest rate levels which would permit adequate resource mobilization in the financial system. On the whole, the project presents a moderate level of risk. V. AGREEMENTS REACHED AND RECOMMENDATION A. Agreements Reached 5.01 During loan negotiations, the following agreements were reached: (i) with the Mexican Government and Banco de Mexico on: (a) the loan amount, and the provision by Banco de Mexico of the required counterpart resources to FONEI at satisfactory terms and conditions to complement the Bank loan and FONEI's internal resources (para. 4.02); (b) the government's repayment of the principal of the loan and assurance of the availability of the required counterpart resources to Banco de Mexico (para. 4.02). (ii) with the Mexican Government, Nacional Financiera and Banco de Mexico on: (a) expenditures eligible for Bank financing (para. 4.10); and - 40 - (b) FONEI's onlending interest rates (paras. 3.14 and 3.15) for investment, pollution control and technology development projects, and its responsibilities for payment of interest and other charges on the Bank loan (para. 4.02). (iii) with Banco de Mexico as trustee for FONEI on: (a) the cumulative limit on the total l,ank financing for service export projects (para. 4.02); (b) the allocations, terms and conditions of lending for pollution control and technology development sub- projects (paras. 3.15 and 4.05 to 4.07); (c) the free limit arrangements for investment, service export, pollution control and technology development subprojects (para. 4.08);. and (d) the limit of US$5.0 million for the maximum amount of proceeds of the loan that could be onlent for a single investment subproject (para. 4.04). (iv) with the Mexican Government and NAFINSA on the terms and conditions of the human resources study (para. 4.02). 5.02 A special condition of effectiveness of the proposed loan would be the amendment of FONEI's Operating Regulations to include, inter alia, measures to encourage a wide distribution of its resources among industrial enterprises (paras. 3.25, 3.36 and 4.06). B. Recommendation 5.03 The proposed project would constitute a ;suitable basis for a loan of US$175 million with a maturity of 17 years including 4 years of grace on conditions as outlined in Chapter IV. - 41 - ANNEX 1 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Variable Interest Rates and the ACF Index 1. Since 1974 financial institutions in Mexico have been increasingly adopting variable interest rate schemes for term lending operations. The change from fixed rate lending, which had been the practice in the past, came after inflation had accelerated post-1973 to levels--20% and more p.a.--unknown in Mexico for twenty years and after Banco de Mexico had raised the maximum interest rate on deposits by almost 4 percentage points above the 1972 level. Variable rates were used for the first time on a large long-term loan from a group of banks and financieras (investment banks) to several large public enter- prises, where it was agreed that the rate would be set several points above the average cost of funds to financieras 1/ and would vary as this base rate varied. Since that time, the use of variable interest rates has become more generalized and by 1977 practically no term loans were being made except at variable interest rates. 2. The average cost of funds to financieras (ACF) is a rate calculated monthly by Banco de Mexico in order to determine how much to pay the financieras for required reserves kept with Banco de Mexico. Thus, it is a ready-made indi- cator of financial costs. It is a weighted average (gross of tax) of interest rates paid on financial bonds and certificates, promissory notes, and certifi- cates of deposit, instruments whose maturity varied from sight to three years. The ACF excludes checking accounts, savings deposits and mortgage bonds and certificates issued by commercial and mortgage banking departments even though in practice the latter pay rates approximately equal to rates paid by the investment banking departments. 3. Banco de Mexico generally looked with favor upon the development of variable-rate lending, recognizing it as a way of preventing an even more rapid contraction in term lending activity of the financial system in response to the uncertainties created by inflation in the past. Banks favored the principle, since it could prevent a profit squeeze on deposits accepted at short term and re-lent at longer term. Borrowers accepted the idea, basically because the alternative would have been a considerably higher fixed rate, because of its similarity to a series of rolled-over short-term loans and because many were familiar with variable-rate Eurodollar loans. 4. Movements in the ACF are determined chiefly by the rates paid on various classes of deposit instruments and changes in the volume of savings attracted by different instruments. Maximum rates that banks can pay on each instrument are set by Banco de Mexico to avoid excessive fluctuations in rates and undesirable large movements in deposits between financial institutions or 1/ The financieras are the term lending arms of banking conglomerates which now are becoming formally fused into multipurpose banks (multibanks), with commercial and mortgage banking departments as well. Resources mobilized by the financiera departments continue to be the main source of term loans from multibanks and to be subject to their own regulating regime. - 42 - ANNEX 1 between instruments with different term characteristics. Nevertheless, through 1972 rates were set high enough to attract substantial real increases in re- sources and the banking system was growing faster than GDP. During that time, the ACF, at around 10%, was 5-7 points greater than inflation (Appendix). During 1973-76, the inflationary period leading up to the abandonment of the fixed parity of the peso in relation to the US dollar in September 1976, the ACF rose to near 12% as deposit rates were raised several times but never by enough to exceed inflation (except for brief periods). Resource mobilization, consequently, suffered and the financial system shrank when measured in constant prices. 5. The new administration has set a policy of maintaining interest rates which, in relation to inflationary expectations, would permit adequate resource mobilization. The first step in this policy was taken in May 1977 when interest rates on the longest term deposits (2 years) were increased from 15.17% to 18.52% (12.75% to 16% after tax); the ACF reached about 16.25% by January 1979. 6. A secondary determinant of changes in the ACF is fluctuation in the relative amounts held in the various instruments. On at least two occasions changes in those relative amounts have iiportantly affected the ACF. In late 1976 deposit rates were raised but the ACF did not: rise because the public, due to general uncertainty, shifted a larger portion of its deposits into financial bonds paying lower rates but withdrawable at sight:. On the other hand, the effect on the ACF of the May increase,mainly in longer term deposit rates,was reinforced by a relative shift from shorter to longer term deposit instruments. The increase in deposit rates in May 1977, accompanied by a decline in inflation from the first to the second semester, led to an encouraging increase in the volume of peso-denominated financial savings. 7. If the annual rate of inflation decreases gradually as expected from about 18% in 1978 to international levels by 1982, and the recent rapid growth of deposits is susitained, the level of ACF over the next few years can be ex- pected to be relatively stable, with only slow and gradual changes. If, how- ever, the progress in controlling inflation were significantly less successful, the monetary authorities could be expected to adjust deposit rates accordingly. ANNEX 1 - 43 - T-1 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 1: Deposit Rates, the ACF and Inflation Inflation during diij t Highest Deposit quarter,annualized Ri t to. Year Quarter Rate ACF rate F(NLLs Borrowers 1971 1 11.48 10.53 4.9 _ 2 11.11 10.41 3.9 - 3 11.11 10.30 4.3 - 4 11.11 10.19 4.2 - 1972 1 10.60 10.03 7.7 2 10.60 9.97 4.1 3 10.60 9.91 5.8 4 10.60 9.90 4.6 1973 1 10.60 9.87 13.6 2 10.88 9.87 14.6 - 3 12.71 10.41 29.9 11.00 4 12.71. 10.65 28.5 11.00 1974 1 12.78 10.88 29.9 11.00 2 13.74 11.35 13.1 11.00 3 14.21 11.57 15.7 11.00 4 14.21 11.88 24.5 11.00 1975 1 14.21 11.86 10.4 11.00 2 14.21 11.89 16.7 11.00 3 14.21 11.91 9.9 11.00 4 14.21 11.97 8.3 12.30 1976 1 13.91 11.78 21.0 12.00 2 13.91 11.76 7.4 12.00 3 14.63 11.74 22.8 13.50 4 15.17 11.99 64.0 13.50 1977 1 15.17 11.99 32.7 14.00 2 16.28 12.59 15.4 14.50 3 18.52 13.83 21.7 15.75 4 18.52 14.30 13.9 16.25 1978 1 18.52 14.88 20.6 17.00 2 18.52 15.47 14.8 17.50 3 18.52 15.67 18.2a/ 17.75 4 18.52 16.25a/ 17.7a/ 18.25 a/ Estimates LCPI2, March 1979 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Organization Chart Technical Committee Director [ < | ~~~~~~~~~~~~~~Technica ll Operations r ~~~~~~~~~~~~~Subdlirector Subdirector rJs l t. l~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ters".I Chief of ll Chief of |Chief of ll Chief of Prom |epresentatives Appraisal Supervision Operations Accounting Appraisal Projects Fo rei inancial Portfolio App a sa Control Supervision Contracts Information & Control Officers Officer Officers Analysis Officer Officer | Assistant n ecords l Administrator lM World Bank - 20307 Z Nl) -45 -ANNEX 3 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Operating Regulations of the Industrial Equipment Fund (FONEI) 1/ (Translation) The Federal Government, represented by the Secetaria de Hacienda y Credito Publico, created in Banco de Mexico, S.A. a trust fund, Fondo de Equipamiento Industrial. The resources of this fund will be devoted to promoting the establishment and expansion or modernization of industrial or service firms whose scale and efficiency permit them to supply foreign markets or to sub- stitute imports, thereby helping to strengthen the balance of payments and to raise the productivity of national industry. In July 1978 the Technical Committee of FONEI approved new General Operating Regulations which appear below. These replace the ones approved in March 1978. 1. The objectives of the Industrial Equipment Fund (FONEI) are: (a) To promote the efficient production of industrial goods and services that generate or save foreign exchange, by making loans for export-oriented or import-substitution projects, with efficiency such that they have reason- able export prospects. (b) To ensure that the auxiliary lending institutions and organizations of the country (financial intermediaries) evaluate such projects. 2. FONEI may undertake the following operations: (a) To provide financing to auxiliary lending institutions and organiza- tions of the country for loans that they grant for the purchase of fixed assets: machinery, industrial equipment aad facilities; their installation and assembly; construction of buildings to install such fixed assets; and preoperating costs. (b) To provide financing to financial intermediaries for loans that they grant to entrepreneurs or promoters for the preparation of preinvest- ment studies and for the adaptation, production, integration and development of technology, preferably for the design and development of capital goods, defined as machinery and equipment used in the production of goods and the provision of services, including spare parts and components, as well as special tools, attachments, dies and molds. (c) To carry out financing operations related to those mentioned in the preceding subparagraphs. 1/ To be revised prior to effectiveness of the proposed loan. - 46 - ANNEX 3 (d) To extend its guarantee to protect finanacial intermediaries against risks of default in payment of the loans referred to in (b) above. 3. The operations mentioned in the preceding regulation shall relate to the following: (a) The equipping of new industrial plants or the expansion or moderniza- tion of existing plants whose products have reasonable prospects of competing in foreign markets, or which substitute imports efficiently. (b) The equipping, expansion or modernization of firms whose purpose is to provide services that generate or save foreign exchange. (c) The development of technology and designs for capital goods that tend to generate or save foreign exchange, including the development of prototypes. 4. The following requirements must be met in order for FONEI to provide financing for industrial projects whose objective is import substitution: (a) The products manufactured by the firm must be competitive in quality and price with identical or similar products man,ufactured abroad. (b) The products manufactured as a result of the project must be of a priority nature. 5. FONEI may grant loans for preinvestment stuLdies and technology develop- ment programs, on the following conditions: (a) Up to 80% of the cost shall be financed in the case of projects eligible for financing by the Fund itself. (b) The repayment period shall be up to ten years, in accordance with the nature and scale of the study or program. (c) If the preinvestment study or the technology program results in the execution of a specific project, it shall be con.solidated with the loan that may be granted by FONEI for the execution of that project. 6. The guarantee of FONEI referred to in sub-paragraph 2(b) of these General Operating Regulations may not exceed 90% of the loan amount, including principal and ordinary interest. The financial intermediary or, if appropriate, the entrepreneur or promoter requesting the guarantee, shall pay a lump sum premium to the Trustee equal to 0.5% of the principal amount of the loan on the date of signing of the guarantee contract. 7. A lending institution acting as financial intermediary in loans made by FONEI shall be subject to the following basic requirements: (a) It shall ensure that the borrowing enterprise will have sufficient resources to meet its working capital needs. - 47 - ANNEX 3 (b) The cost incurred in the evaluation of the project shall not be passed on to the borrower. (c) The financial intermediary shall be obliged to service its debt punctually and in full, regardless of whether it has received payment froln tcs borrower. In addition, it shall immediately pay to FONEI any sums received as advance payment of principal. (d) The financial intermediary shall carry out preliminary and periodic supervision of the project during the life of the loan, covering periods not exceeding one year, and shall send the corresponding reports to FONEI. 8. In the selection of projects to be financed with resources of FONEI, the following general aspects, among others, shall be considered: (1) Generation or saving of foreign e>cchange. (2) Economic and financial rates of return. (3) Value added. (4) Utilization of labor. (5) Industrial decentralization and regional development. 9. The lending operations of FONEI shall be denominated in Mexican currency. 10. The minimum amount of financing granted by FONEI shall be Mex$4.5 million and the maximum Mex$100 million in each case. The lower limit shall not apply to financing for preinvestment studies or technology development programs. With the prior approval of the entity establishing the trust, having heard the opinion of the Trustee, the Committee may grant loans for amnounts exceeding the maximum of Mex$100 million for high priority projects, such as the manufacture of capital goods. 11. Within the limits of the foregoing regulation, FONEI shall finance the purchase of fixed assets in the following proportions: (a) For projects whose purpose is the establishement of new enterprises, up to 65% of the fixed assets. The financial intermediary shall provide funds equal to at least 15.4% of the FONEI loan from its own resources, and the final borrower shall finance at least 25% of the said assets. (b) In the case of projects for the expansion or modernization of existing plants, FONEI may finance up to 72% of the fixed assets. The financial intermediary shall provide funds equal to at least 11.1% of the FONEI loan from its own resources, and the final borrower shall finance at least 20% of the said assets. - 48 - ANNEX 3 The contribution of the final borrower shall be made through in- creases in share capital, or through the internal generation of funds during the construction period of the project in the case of existing enterprises. In the financing of projects supported by FONEI, other lending institutions, equipment suppliers, and in genera:L any other source of funds may participate in addition to the financial intermediary. 12. In accordance with the nature of the project, the Technical Committee shall determine the amortization period and other conditions of each loan for the purchase of fixed assets granted from FONEI resources. The maximum period shall be 13 years, including a grace period of u]? to 3 years. Within the limits set forth in the preceding paragraph, the loan amortization period may be extended for up to two years beyond that which the financial analysis indicates as necessary, to meet the costs of preinvest- ment studies incurred by the enterprise for the contracting of external consultants acceptable to FONEI. 13. The annual interest rate that financial intermediaries are authorized to charge their borrowers on loans from FONEI resources for the acquisition of fixed assets shall be calculated on the unpaid balances and shall not be greater than two percentage points above the average percentage interest rate charges and surcharges for the borrowing operations in Mexican currency of all private and mixed banking institutions of the country, on the basis of estimates prepared monthly by the Banco de Mexico. The average percent- age cost shall be rounded to the nearest one-fourth of one percent. The initial rate applied shall be that in effect for the month immediately preceding that of the contracting of the loan between the insti- tution and its borrower and shall be modified semiannually if necessary, even though the amortization payments may be monthly or quarterly, as stipulated in the preceding paragraph. 14. The interest rate charged by FONEI to financial intermediaries on loans for the purchase of fixed assets shall be that estimated by the Banco de Mexico as indicated in the preceding paragraph. However, when the financial intermediary undertakes the evaluation of the project, using either its own technical staff or external consultants, in accordance with terms of reference established by FONEI and with its prior agreement, the Fund may reduce its rate by up to 0.5 percentage points when the loan is less than Mex$30 million and 0.25 points when it exceeds that amount. 15. The interest rates charged by the financial intermediaries and by FONEI on loans for preinvestment studies and technology development pro- grams shall be five percentage points less than those indicated in the two preceding clauses. 16. FONEI shall charge the financial intermediaries a commitment fee of 1% per annum on the undisbursed balances, in accordance with the schedule of disbursements of the loan approved by FONEI. The financial inter- mediaries in turn may pass this fee on to the fiinal borrowers. - 49 - ANNEX 3 17. FONEI shall not make loans for projects or programs for which adequate alternative sources of financing are available. 18. The contract signed by FONEI with the financial intermediary, and that signed by the latter with the final borrower, shall stipulate that FONEI is entitled at all times to obtain information it may consider necessary re- garding the execution of the project or program and to require the final borrower to submit financial statements certified by external auditors. 19. FONEI may enter into coordination agreements with other trust funds or entities for the granting of integrated financial and technical assistance to firms, under the terms of its General Operating Regulations. 20. The approval of the Technical Committee or of the Trustee shalt be required in accordance with the powers delegated to the latter by the former, for each and every one of the financial operations and guarantees of the Fund as provided in these regulations. - 50 - ANNEX 4 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Financing Technological Development at the Enterprise Level Background 1. Industry in Mexico has now reached a relatively high degree of sophistication and there exists a substantial pool of important engineering and technical skills. If Mexican industry is to Eurther increase local value added and compete efficiently in world markets, there is a need to focus increasingly on the technology factor in industrial development. There would be a need to develop indigenous capabilities for technological acquisition, adaptation and innovation in order to stimulate industrial growth through the development of new or improved products, of more efficient production methods, and of new processes to exploit on a cost-efficient basis avail- able raw materials. Recognizing the importance of technology issues, Mexican authorities have introduced various policies and institutional support to reinforce the technological development of the country, partic- ularly of industrial enterprises. 2. The Instituto Mexicano de Investigaciones Tecnologicas (IMIT) was one of the pioneer institutions established in the area of industrial re- search and development, having been established in the fifties with the help of the Armour Research Foundation. IMIT is partly funded by the Mexican Government, through Banco de Mexico, and partly by revenues from industrial and banking clients for project preparation and evaluation. IMIT conducts research projects for enterprises for a fee, and also has a risk-sharing fund whereby 50% of the cost of a research project conducted by IMIT for an enterprise is written off and does not have to be paid by thre ernierprise if the project does not go forward, with some possibility for IMIT to share in the benefits of the project if implemented successfully. 3. More recently, in 1970 the government created the Consejo Nacional de Ciencia y Tecnologia (CONACYT) to formulate and implement national policies aimed at strengthening the links between research organizations and industrial enterprises. CONACYT has been instrumental in establishing regional technical sLupport centers in the food processing, leather products, and jewelry handicraft areas. Included among the services of the centers are laboratory testing of raw materials and finished products, training of tecinical personnel and technical advisory functions. 4. The Servicio de Informacion Tecnologica (INFOTEC), a spin-off of CONACYT, provides technical information and related support services to Mexican firms of varying size and industrial sophistication. Among the services offered to clients are technology searches involving an analysis of world information sources for new products, processes and equipment develop- ments relevant to a firmn's product line. About 60% of INFOTEC's budget is - 51 - ANNEX 4 presently funded by contracts from over 250 firms which pay fees ranging from about US$1,000 equivalent for periodic technical information services to US$100,000 equivalent for complete technology audits and world market scanning on a continuing basis. 5. The National Registry for the Transfer of Technology (RNTT) was created in 1972 to review all foreign licensing of industrial technology to minimize the cost of acquired technology, eliminate restrictive or disad- vantageous clauses in licensing agreements, and enhance the bargaining position of Mexican enterprises. 6. Since 1976, the government has also permitted accelerated depreciation for tax purposes on capital equipment used for R&D purposes. Moreover, current R&D expenditures are considered as normal business expenses for tax purposes. The Enterprise Survey 7. As part of preparation of the proposed FONEI project, a limited survey was undertaken of Mexican enterprises to determine technology-related problems they were facing and to ascertain whether the Bank, through FONEI, could provide some assistance in connection with the proposed loan. On the basis of enterprise profiles prepared by FONEI, 14 firms located in Mexico City, Cuernavaca and Monterrey were selected for more detailed analysis. They represented a relatively broad range of industrial subsectors, company sizes, and stages of commercial and technical development (Appendix). The principal aim of the survey was to determine (a) their sources of industrial technology, (b) their technical needs, and (c) projects they would like to undertake. Survey Results 8. The principal sources of industrial technology mentioned by surveyed firms were (a) comprehensive licensing and purchase agreements with various foreign industrial firms, (b) assistance from both foreign and domestic engineers and technicians, (c) training abroad of the company's technicians, and (d) in-plant research, design and engineering efforts (Appendix). 9. The cross-section of firms surveyed indicated that in terms of in- plant research, development and engineering capabilities, enterprises could be classified under three categories, viz: (a) Firms that have at least a nucleus technical staff to diagnose problems, to carry out segments of technical solutions, and to find and negotiate for complementary foreign technical inputs where necessary. (b) Firms that rely, to a substantial degree, on outside sources to diagnose and resolve their technological adjustment problems, but generally are able to contract for such services from Mexican or foreign sources. - 52 - ANNEX 4 (c) Inventors or small enterprises that have a technical innovation at a stage between laboratory and commercial prototype stage and need funding to bring the innovation to a stage where it can be considered by commercially oriented institutions. Although very few opportunities exist in Mexico to finance all three types of projects, IMIT and INFOTEC have small funds to address needs in category (c) above. These projects generally involve an excessively high level of risk and uncertainty which should not be funded with credit resources, but rather with venture capital funds. Given the nature of FONEI as a second-tier credit institution working through the banking system, it appears that it could make the greatest contribution by concentrating on technology development projects fairly close to commercialization sponsored by enterprises in categories (a) and (b) above. Consideration should be given only to projects that develop capabilities in Mexico to diagnose and resolve technological adjustment problems rather than to those seeking package solutions from foreign sources. Categories of Eligible Expenditures 10. On the basis of the needs cited by the surveyed firms and previous experience with Bank projects elsewhere (e.g., Turkey, Colombia and Israel), the following expenditure categories should be considered eligible for financing under a technology development component: (a) Expenditures external to the firm for research, design, or engineering projects involving adjustments in product or component design, new or improved production methods or materials processing, new or improved equipment design, experimentation with new industrial materials, or other related RD&E activities, including pilot plant construction. (b) Training of Mexican engineering or technical personnel abroad, in connection with actual or anticipated technical problems, including visits to industrial plants, research laboratories, or other industrial technical facilities, or for specialized training in applied research fields in foreign research institutes. (c) Visits to Mexico by foreign technicians and engineers to advise on solutions to technical adjustment problems; to train research, design, or engineering personnel to find solutions to technical problems; or to provide other technical adjustment support services. (d) Quality control or testing equipment; or other tangible hardware needed in the technical adjustment process. - 53 - ANNEX 4 (e) Technology audits and world market scanning services (for new product developments and equipment designs) of the type carried out by INFOTEC, and related to technical problems faced by the enterprise. FONEI may even suggest a technology audit in border- line cases involving firms with limited experience in diagnosing and resolving technological adjustment problems. Project Appraisal and Review Procedures 11. A simple and straightforward procedure should be established to facilitate lending for technology improvement projects. Specifically, appraisals should include: (a) summary information on the enterprise; (b) previous technology sources and current R&D capabilities; (c) objectives of the proposed technology development effort; (d) expenditures to be covered with credit funds; (e) expected results and benefits; and (f) repayment capacity of firms. Although FONEI has the core staff necessary to operate a line of credit for technology development projects, it would need the assistance of technical specialists to give summary reviews of evaluations. In a case where the firm appears to be inexperienced, FONEI may recommend, prior to evaluation of the project, that INFOTEC carry out a "technology audit" including, inter alia, an analysis of the firm's operational characteristics and a survey of alternative production processes and equipment. Promotion and Monitoring 12. A new component to finance technology development projects would require special promotional efforts on the part of FONEI's staff to explain to participating financial intermediaries and to potential clients the nature of projects that may be financed, categories of expenditures eligible for financing, and terms and conditions of available resources. Once an application is received, it would probably be necessary in several cases to assist the intermediaries and clients in formulating credit requests. IMIT and INFOTEC, each with their unique network of contacts, could probably assist the intermediaries in identifying potential clients and in helping prepare proposals. 13. The proposed new component should be viewed as a structured pilot operation which may require further adjustments in the future. Based on the actual level of demand for funds and the nature of proposals submitted, some flexibility should be maintained in respect of total allocation within the proposed loan for this type of project, as well as cost categories covered. On the basis of this pilot operation, there may be a possibility of developing a "free standing" project in the future. - 4 - MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT ANNEX 4 T-1 Table 1: Suryey of Mealcan FIrms Technical Needs and Patential Demand far Fends 1978 aSouceLL of Technical Prapaasd Estimated Cant Sales Technical Main Prodoct TechnalagY Adosteant Needs Solution million) (Nsa) millio) Eepleyemst Pereanne 1. Steal prodocc- Mae deveioped can dl- Inproned production of aponge Porch one eqoipmenct He$308.00 13,900 19,500!-5 42 reot reduction procene iron and lncreaeed gao ad- and materials to In- US$13.60) for sponie iron. ficlency. peace prcd-ctlce preceesL a. 2. Eqoup-ent for oil "lnafaotorlng licensee Denign of ur new linesL of .ii Lee own deaign ani en- Mee$193.00 1,650 2,500 32 cell ponping a from F-ante. aell rigs, including dnilliof ginrercng groop no (US$8.50) heads and cod purping equip-ent. design and constrict fi_t prototypes. 3. Paper Inttnds no adapt orig- Desige of an eonomicalp ef- Uae own engineeri 100.00 ---_----w e coal procens deve.oped ficilent nrall sacale plant to groap to deedign facility. (US54.40) p subsidiary of rurerican procena sugar cane bagasae P-rchaee foreign equip- parent _copany. into kraft paper, auth nodular nent to build prtotype dlesign feaatore so farilit7 ran plaLnt. ha enlarged oPen denand in- 4. .91chinery for triginal taoheolngy froe Denign of higher volume and Train 11ecican taco- M'ex321.00 630 1,500 70f 'lasn produotion Lt., U.s., acong othera. moltiparpose glasa ord odd- iciane abroad to aet-i_ (UDS$.40) ing eacheceryl inproved for- cipate in new research, nacee, materiale, and spenda deaign, and nnginsericg glans deelgn. prnjecte. 5. Cahibl hnno-hcc for forne electric- Develop aneeelecnrc- 540 prcjecc to in:lude 9ea)SO.OD 540 1,100 25 nocharucal cabin Iron .h. neohanical table for oil en_ technical iliertanre (U01 2.31) ploracion. Inproon predaction seaarh, alid nsit pby nethodo and quLlity control on hexican engineers to _co ting product linea. foreign fac-litie-. o. C-doucr -d coo..non-Uo, eqoipme-t, and Improvec production technology Negotiate -ew lic-nsing MecS15.90 1,560 1,I13 2 CYcles cat_c-a iIron Canada and in za0h-rclnago, high-cenacon agreerent etch Sweden (U150.70) U.S. robIns. or Japan. - c1 popin0 Unag,nai crctnologn Iron Derelop a net nype of p -tUchydrLe non de-ign ant en- Mex$S1.00 115 140 ^7 rotten, U .S. Ontanic, deep, secondary ccl ginenniog tear to con- 10.57) rec-Yerpcpcste. rp cot technical etndceh and to dealign and osrt frat prototyp-s. ltchntial knc-horfron t-hiiry pand -no-o fo- L -f fe ownsaf -totie -Mgn- MeiS7.L0 7 13 dnolnuoriog rcain- ng in two the produ-tion of odditieoa engineer processen end (1S00.30) U .u.uocoereition. prtrol,eotoalz?rcdcctn. eqaipmenc for new prodect Ľ. builclng PHas cur product, ornoen, Develop cnnnrcla - prototype Contracts signed aith IMIT hAoS7.0e materlals - andcncoipmrnt pstents. productor.d p11cc plant to help denigt pilot plant (US$0.301 - -- faccltAp. facilipy. i0. Aoontinline hnoductccc loono-hun Iron AdaPt eqoip-ent and -ethode vinit U.S. and Ge-nan -ec)l.36 86 35 xcTponpunnUe ooctoto American plants. c neo matenel and copo- pLanta. Plea foreign S30 067 n.a. -nt deaigns. engineHe fora peer. 11. Anooctoco and Oeoelouod wnt nohnologp Inproved machods for octrect- Tacheocal inlorracion f-en$I.13 310 250 splces under technical aervicen ing ran materials. Sea pro- and foraigen aroecn -arch. (US$0.05) 310 agreementa ofh a S-edish ceases for tanufacturing ond Techncala3rLies noopanp. deriratives. agreement with foreign manufacturer. L7. Pcci1ckinp Squip.nent and natorla In Design coo fanilies of path- Tecbnical infornation n.a. 430 540 macor cl, frnn m Lancr. agti ngatenlain, e.g., search, poan t Iec vI. ts n.a pIlastti Tainacted. and trainIng n Msxinan technicians abroai. 13. Penacon fruato Prcoons and eculpmeni Pighernvolnee prod ontcnn menth_ Use IMIT and local 10.0.) 30 100 decign froc 131T (Macito): ndc, i'pr--ed oan disposal equneni dirt teh-h_ toctoicol a -itonance dfit and nualitp control; newly nicians to redesign 1.5. deaugned oculp_ent for sorttig procesn and epuiprent. frcot. 14. Poirnlcrm ˝ecboucl assistance Iton Depelopent fof ne produrco Use ocn 054 staff cc io.a.l 1,03C 1,000 ' dcrunotcnoc Anerican and JapacKeaa and matertial proncacsing denign prodocto,re dasanic-pleni techno.ogp. design procesc and equcp- Oft fantlity, cent, cupplanetatd pos- siblphy bp Mitan techni- ccincviniting foreign tat dce andInrigo ;tper r ii is to c cao. d/ A cgegent nf this project preniuoIsy funded bp FOEi---for one nf the oil well punpang spsnem pectooppen (fen$l nillion; US$44,000). b/ Fro act arecqp funded In paro (Piec)l million; US)44,000) by FOp EI and conpleted. Nnw cegoocaning with U.S. firm for (o100 venture to c/ Poe the tonal industrial group. LCF12 March, 1979 - 55 - ANNEX 5 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Federal Legislation Pertaining to Environmental Pollution Basic Federal Law 1. On March 23, 1971, the Mexican Congress passed a "Ley Federal para Prevenir y Controlar la Contaminacion Ambiental," (Federal Law to Prevent and Control Environmental Pollution) which first defined pollution and what can be considered a pollutant. The law also specifies that its application is the responsibility of the Ejecutivo Federal as implemented by the Secretaria de Salubridad y Asistencia (SSA) for air pollution, in coordination with the Secretaria de Recursos Hidraulicos (SRH) 1/ for water pollution, the Secretaria de Agricultura y Ganaderia (SAG) 1/ for land pollution, and the Secretaria de Industria y Comercio (SIC) for industrial or commercial pollution. Coordination of the activities of the separate secretariats is not dealt with by the law. In addition, coordination with federal, district, state, and local governments is mentioned only in the context that they are autoridades auxiliares. Ultimately, the Ejecutivo Federal is held responsible for classify- ing and locating sources of contamination and for establishing the means to control and/or prevent it. Smoke and Dust Pollution 2. Under its responsibility for controlling air pollution, SSA has as yet only dealt with smoke and dust regulation. On September 17, 1971, the "Reglamento para la Prevencion y Control de la Contaminacion Atmosferica Originada por la Emision de Humos y Polvos" (Regulation to Prevent and Control Air Pollution due to the Emission of Smoke and Dust) was issued, establishing a system of licensing of new industrial enterprises, in which the granting of a license de- pends upon compliance with air pollution standards. The reglamento also sets maximum emission standards for both new and existing industrial enterprises, as well as for new and existing equipment (e.g., stationary combustion equipment, mobile combustion equipment, incinerators); types of combustion processes (e.g., diesel, gasoline); amount of heat energy expended (kilocalories); and types of fuel (e.g. solid, liquid). It also provides for a monitoring system which includes on-site inspections and monitoring stations to sample air quality. Sanctions against existing polluters involve fines, which can range in amount assessed against particular code violations from Mex$50-50,000, the temporary closing of the offending plant, or even the permanent closure of a factory in cases of a grave and immediate threat to public health. 3. All enterprises which were not in compliance with the reglamento subsequent to its effectiveness were to be allowed six months to file a plan for pollution control and two additional years to implement the plan. Owners of individual vehicles or combustion equipment were given just six months to fall within emission standards. 1/ Both are now combined as the Secretaria de Agricultura y Recursos Hidraulicos (SARH). - 56 - ANNEX 5 4. A "Reglamento para la Prevencion y Control de la Contaminacion de Aguas" (Regulation to Prevent and Control Water Pollution) was promulgated on March 29, 1973, and established three stages in which the government would carry out its activities towards the prevention and control of water pollution throughout Mexico. In the first stage, the SARH was to register all discharges of residual waters from the municipalities, industries, agricultural activities, commercial entities and other sources throughout Mlexico. However, discharges from individual households were not included in this survey. All existing dis- charges from the above sources were required to be registered with SARH within six months of the promulgation of the above regulation, and any new discharges were to be registered within four months of the start of their operations. Within 3-5 years of their registry, the discharges of residual waters had to be controlled or corrected through the installation of suitable equipment by the producers of the pollutants to comply with limits specified for five pollutant characteristics: (i) sedimentable solids; (ii) fats and oils; (iii) floating matter; (iv) temperature of the discharge; and (v) the pH value (hydrogenion concentration) of the discharge. The maximum concentrations allowed are the following: Sedimentable solids: 1.0 ml/'liter of the discharge Fats and oils: 70 mg/liter Floating matter: Discharges to contain no floating matter that can be retained by a 3 mm x 3 mm sieve Temperature of the discharge: 35 C pH value of the discharge: Between 4.5 and 10.0 5. During the second stage, SARH would ensure, through inspections, licensing procedures and appropriate fines, that the limitations on the five specific pollutant characteristics were complied with and that satisfactory arrangements had been made for primary treatment of the discharges as necessary for future compliance. In the third stage, SARH would undertake, in cooperation with SSA, a survey and detailed analysis of the state of water pollution in the different water bodies throughout Mexico, and use this information to establish, wherever necessary, conditions of waste water discharges (i.e. special physical, chemical and bacteriological characteristics) that should be met by water discharges in particular locations, and the time limits within which such conditions should be met. Noise Pollution 6. The most recent federal legislation passed by Congress dealt with noise pollution. The "Reglamento para la Prevencion y Control de la Contaminacion Ambiental Originada por la Emision de Ruidos" (Regulation to Prevent and Control Environmental Pollution due to Noise) was promulgated - 57 - ANNEX 5 on January 2, 1976. The SSA is responsible for establishing a Comision Consultiva del Ruido in each city or urban neighborhood. All major political, industrial and commercial entities would be represented on the commissions. Maximum noise levels of 65 decibels from 10 p.m. to 6 a.m. and 68 decibels from 6 a.m. to 10 p.m. were established for existing fixed sources of noise, and a term of six months was established to allow noise polluters to comply with these levels. A formula based on age of equipment and weight was established for mobile sources of noise pollution, and specific regulations for controlling noise were established in the construction of new transportation terminals for airplane and railroad passengers. In addition, the installation of specific sound-producing equipment (i.e. whistles, bells, etc.) was prohibited on vehicles. 7. Although the reglamento mentions the need to establish acceptable levels of noise frequency, intensity and acoustic pressure, as well as decibel level, it has established explicit maxima only in regard to the latter. In addition, although the SSA has overall authority for implementing this reglamento, initial inspection and monitoring is the responsibility of local authorities working with the appropriate secretariat or subsecretariat. Once a possible source of noise pollution is identified, it is up to the SSA to establish whether a violation of the maximum allowable levels has occurred. Fines varying from Mex$50-50,000 can be levied for failure to comply with the regulations. Sanitary Code 8. The maintenance of a clean environment is an explicit goal of the "Codigo Sanitario de los Estados Unidos Mexicanos," (Health Code of the United Mexican States) which was promulgated on March 13, 1973. The enforcement of the code is the primary responsibility of the President, the Consejo de Salubridad General and the SSA. The code devotes an entire chapter to the environment. While the Federal Law of 1971 emphasizes the coordinative relationship between the SSA and other secretariats, the code stresses the pre-eminent role of the SSA, in preventing and controlling not only atmospheric pollution, but also land and water pollution, and even pollution of the territorial seas. The focal point in assigning such direct overall responsi- bility to the SSA involves the determining of whether or not air, land, water and sea pollution injure or could injure the health of human populations. If this is the case, then it is the SSA's responsibility to prevent such pollution or keep it within acceptable levels. Proposed Legislation 9. The SSA is presently preparing draft legislation covering gaseous emissions. It expects to submit this legislation for review by interested parties in the government, industry and commerce in the near future. - 58 - ANNEX 6 MEXICO FOIJRTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT FONEI's Declaration of Operational and Institutional Strategy 1. The dynamism that has characterized FONEI's operations during recent years, ancd the pipeline of projects that it currently has under study, justify the optimism that operational growth will be sustained although not necessarily at the same high rate as in the past. This exper:ience is incdicative of the suitability both of amendments made to the Operating Regulations and the criteria used in applying them. But it points also to the desirability of moving forward by widening FONEI's field of act:ivity and also by proposing a number of changes with a view to quali- tative improvement of its operations in general. 2. FONEI'S main field of activity will continue to be that of provi- ding financial support, through long-term loans,, to projects for the efficient production of goods and services capable of replacing imports or with the ca- pacity to export 3. Among sectors with good export prospects, FONEI will give special attention to projects for processing agricultural, fishing or mining pro- ducts, Among import-substitution projects, we intend to continue the support that FONEI has been providing to capital-goods manufacturers and to enlarge its participation in secondary petrochemicals. These have been designated as priority areas by the Authorities and, under the provisions of the Operat- ing Regulations, could continue to receive FONEI] loans in excess of Mex$100 million. 4. As regards services that generate or save foreign exchange, a growing response is expected on the part of frontier-area entrepreneurs promoting the construction of factory buildings for rent or lease to parts manufacturers (maquiladoras), automobile service centers, health centers, etc., large commercial centers and other service projects, not necessarily located on the country's frontiers (as in the case of the establishment of international air freight lines). 5. In accordance with the country's broacl economic policy goals, we consider that FONEI should give greater attention than in the past to pro- jects that create a substantial number of jobs, are located in areas where it is desired to promote industrial development, relate to priority areas or are of relatively small size. In parallel, we intend to refuse or restrict credit---depending on whether the projects concern the establish- ment of new or the expansion of existing enterprises--in the area at present designated Zone III and possibly also to set a ceiling, of perhaps Mex$300 million, on FONEI resources that can be committed to any one enter- prise. - 59 - ANNEX 6 6. In view of the understandable lack of interest on the part of the commercial banks in promoting and financing projects of medium size and smaller enterprises, it seems appropriate to offer them an incentive of 0.25 percentage points in the margin for their intermediary services when they finance enterprises with capital of less than Mex$50 million. 7. One category of investment projects that is receiving increasing attention on the part of various Authorities in Mexico and which lacks financing on suitable terms is that of air and water pollution control, particularly in the large urban areas of the country with a high concentra- tion of industry. From consultations with relevant Government Authorities, and with the World Bank, we conclude that FONEI could include in its financial program support for investment in anti-pollution equipment by enterprises already established in the major urban areas. 8. What could be called the spontaneous demand for FONEI's services comes from the larger enterprises and those located in the areas of high industrial concentration. This implies that the aim of diversifying FONEI's operations can be achieved through a promotional campaign that generates a large number of applications from which those of interest to FONEI can be selected. 9. As already indicated in FONEI's program of activities for the current year, it proposes to conduct the above-mentioned campaign by arranging visits to entrepreneurs by its staff, holding meetings, distributing leaflets and audio-visual material, and setting up regional agencies in the areas of highest potential outside Mexico City. Emphasis would be placed on the financing of technology development projects. 10. Since it was first established, FONEI has pursued the aim not only of financing Mexico's modern industrial development, and thereby providing balance of payments support, but also of persuading the banks to base their lending decisions on the feasibility of investment projects. This aim has already been embodied in the new Banking Law which entered into effect in January of this year. 11. Although FONEI was not successful in this aim in its initial years, the offering of a higher margin to intermediary banks that assume responsibility for appraising projects submitted to FONEI is yielding en- couraging results. 12. It is felt that, in addition to maintaining the present margins, consideration could be given to FONEI's absorbing part of the cost of the appraisal when the latter turns out to be negative. 13. Because most of the entrepreneurs are not familiar with project- preparation techniques, nor the financial intermediaries with their appraisal, FONEI will step up its work of distributing guidelines and instructions. - 60 - ANNEX 6 14. In support of this, courses are being organized for entrepreneurs, financial intermediaries and consultants to fami.liarize them with the various aspects of investment-project formulation and appraisal. 15. Supervision of the projects after a loan has been granted has the following basic purposes: (a) to ensure that the funds have been duly invested in accordance with the conditions of the agreement; (b) to aid the enterprise in resolving any problems and unforeseen situations that arise during execution of the project; (c) to compare the results of operation of the project with the estimates on which approval of the loan was based, with respect to, inter alia, generation and saving of foreign exchange, price levels, job creation, and economic and financial returns, to enable FONEI to introduce new criteria that can improve the impact of its operations in the future; and (d) to familiarize the private banks with the purposes and procedures of project supervision, so closely related to the decision to grant loans on the basis of project feasibility. 16. Quite apart from the fact that superv!lsion of all the projects supported by FONEI would mean that it would have to maintain a large staff, FONEI's aim is to act as a second-tier institution in all its fields of operation. For this reason, and in the light of the experience it is acquiring in persuading banks to appraise projects by offering them incen- tives, it is considering offering a margin of, perhaps, 0.25 percentage points on outstanding balances to intermediaries following submission to FONEI of supervision reports covering the financial, teclnical and economic aspects of the projects. The aim would be to obtain quarterly or semiannual reports during the stage of execution of the project and annual reports thereafter until the loan is repaid. 17. By persuading the banks to supervise lhe projects we would be able to involve them more in the concept of basing their decision on project feasibility,and they would be able to justify more readily the setting up of a technical team responsible for project appraiSal and supervision. 18. In the medium term, as FONEI succeeds more and more in persuading banks to appraise and supervise FONEI-financed projects, the needed increase in FONEI's technical staff should lag behind the expansion of its operations. In the short run, however, the work of advising the enterprises, the con- sultants and the banks will place an additional burden on FONEI's staff. 19. As a specialized financial institution, FONEI is suffering high turnover among its technical staff, recognized to be well qualified. There is accordingly an urgent need to step up the training courses for the staff of other institutions, among other reasons, as a means of relieving the pressure on them to recruit already experienced personnel. - 61 - ANNEX 7 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Estimation of the Foreign Exchange Component of Domestic Fixed Assets Financed by FONEI 1. This annex outlines the methodology used to estimate the foreign exchange component of domestic fixed assets financed by FONEI. It deals first with projects involving the establishment or expansion of capacity to produce manufactured goods, which are expected to account for about 91% of FONEI's financing over the next 2-3 years. It then examines briefly the foreign exchange component of service export projects, which are expected to account for about 9% of FONEI's financing. Manufactured Goods Projects 2. By its Operating Regulations, FONEI is authorized to finance the cost to the investing company of procuring, and installing fixed assets including the cost of any associated civil works and construction. An analysis of the projects financed by FONEI over the past two years indicates that, on average, about 70% of FONEI financing of domestically supplied fixed assets has been for the procurement of machinery and equipment made in Mexico and about 30% for installation, civil works and construction. 3. In order to estimate the foreign exchange component of machinery and equipment manufactured in Mexico, the recent NAFINSA-UNIDO study of Mexican capital goods production has been used. Based on a survey of 72 producers, this study concludes that on the average, 24% of the production cost of locally manufactured capital goods is represented by directly imported production inputs. A further 42% of production cost is represented by locally produced parts, components and raw materials. These locally produced items themselves have an import content, which the study estimates at 13% of their cost, and use locally produced inputs accounting for a further 53% of their cost. 1/ Thus, to determine the overall direct and indirect foreign exchange component of capital goods production in Mexico it is necessary to take into account the foreign exchange component of the locally produced inputs by summing the following series: F.E. component of production cost = .24+.42 (.13+.53 (.13+.53 (.13+..... = .24+.42 (.13+.13 (.53+.532+.533 ... = .24+.116 = .356 Thus, the direct and indirect foreign exchange component of domestically manu- factured machinery and equipment is estimated to be 35.6% of the production costs. Allowing for profit margins and distribution costs (of about 20%), this 1/ These local inputs in turn have an estimated foreign exchange content of 13%. - 62 - ANN!X 7 percentage would be equivalent to about 29.7% of the delivered price to the companies purchasing the machinery and equipment. It is on this delivered price that FONEI bases its financing. 4. The foreign exchange component of civil works, including construction and installation, has been estimated at 15%, based on statistics provided by Banco de Mexico for all such activities in Mexico and the results of a recent study of hotel construction costs undertaken by civil engineering consultants in connection with the Tourism Development Loan. 5. To determine the average foreign exchange component of domestically supplied fixed assets financed by FONEI,we have to take into account that 70% of such fixed assets are machinery and equipment with a foreign exchange component of 29.7%, and that the other 30% of the fixed assets are installation, civil works and construction having a foreign exchange component of 15%. On this basis, the average foreign exchange component of all domestically supplied fixed assets financed by FONEI would work out at about 25%. Service Export Projects 6. FONEI has approved only one service export project to date. There- fore, it is not possible to estimate accurately the foreign exchange content of such projects at this time. However, an approximation should suffice,since service export projects are expected to account for only about 9% of FONEI's total financing. 7. The service export projects are likely to comprise mainly the construction of industrial buildings and construction and equipping of commercial centers and-automotive repair shops. Consequently, a higher proportion of their domestically supplied fixed assets will be represented by civil works and con- struction than is the case for manufactured goods projects. Thus, one would expect their foreign exchange component to be lower. However, these projects will be located in the northern border zone where typically a higher proportion of imported inputs are used in civil works and construction than is the case for projects in the interior of the country. For example, hotel projects in the border area were estimated by the civil engineering consultants to have a foreign exchange component of 40%, compared witb 20% for hotels built in the rest of the country. Consequently, it seems reasonable to use the same figure (i.e. 25%) for the foreign exchange component of domestic fixed assets used in service export projects as for the manufactured goods projects. - 63 - ANNEX 8 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Estimated Quarterly Schedule of Bank Loan Disbursements (US$ millions) IBRD Fiscal Year Disbursements in Cumulative and Quarter Quarter Disbursements 1979-80 March 31, 1980 2.00 2.00 June 30, 1980 3.00 5.00 1980-81 September 30, 1980 4.00 9.00 December 31, 1980 8.60 17.60 March 31, 1981 15.00 32.60 June 30, 1981 28.00 60.60 1981-82 September 30, 1981 30.00 90.60 December 31, 1981 23.80 114.40 March 31, 1982 18.00 132.40 June 30, 1982 14. 00 146.40 1982-83 September 30, 1982 12.00 158.40 December 31, 1982 8.80 167.20 March 31, 1983 3.00 170.20 June 30, 1983 2.00 172.20 1983-84 September 30, 1983 1.00 173.20 December 31, 1983 1.00 174.20 March 31, 1984 0.60 174.80 June 30, 1984 0.20 175.00 LCPI2 March 1979 MEXICO - FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 1: ltates of Growth of GDP, By Sector of urigin 1965-1978 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 a/ Agricultural, Forestry & Fishing 1.8 2.5 2.8 0.8 5.0 2.0 0.3 2.2 2.8 0.7 -3.0 2.7 3.1 Mining 3.0 3.7 2.4 4.6 2.9 0.4 -0.2 10.6 14.6 -6.1 2.0 0.9 -2.0 Petroleum 5.9 14.8 10.2 6.5 9.9 3.4 8.8 2.5 14.8 7.9 10.6 16.4 15.3 Manufacturing 9.4 6.8 10.1 8.1 8.7 3.0 8.3 8.9 5.7 3.6 2.7 3.4 8.5 Construction 14.4 13.0 7.4 9.4 4.8 -2.6 17.6 15.8 5.9 5.9 -1.9 -2.0 12.5 1 Electricity 14.1 11.8 19.7 13.8 11.4 7.9 8.9 11.0 9.4 5.8 7.4 7.7 10.0 a Commerce 7.5 5.5 8.5 7.0 6.5 3.0 6.9 7.6 5.2 3.4 -1.0 2.0 n.a. Transport & Communication 8.3 4.9 10.8 7.3 7.9 7.5 9.9 14.3 9.2 8.9 5.1 5.2 n.a. Government 7.7 8.0 9.6 3.3 9.7 9.0 13.4 11.2 8.2 10.9 8.2 1.8 n.a. Other 4.7 5.4 6.4 5.9 5.1 7.3 5.6 4.9 3.6 2.6 2.3 2.1 n.a. Total GDP 6.9 6.2 7.9 6.2 6.8 3.4 7.2 7.7 5.6 4.0 1.6 2.9 6,6 a/ Preliminary estimates. Source: Bank of Mexico and IBRD staff estimates LCPI2 March, 1979 XI - MEXICO - FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 2: Gross Domestic Product, By Sector of Origin 1965 and 1970-1977 1965 1970 1971 1972 1973 1974 1975 1976 1977 Value (billions of current Mex$) Agriculture,Forestry & Fishing 36.5 47.4 48.5 52.9 67.8 83.4 99.9 118.9 164.5 Mining 3.3 5.6 5.2 5.6 7.0 10.3 10.7 13.8 21.5 Petroleum 9.1 13.3 13.3 14.9 15.7 25.3 31.3 37.4 64.6 Manufacturing 52.4 94.7 104.2 118.6 141.0 188.4 227.1 289.9 399.9 Construction 10.1 21.4 21.5 27.3 36.3 49.6 63.3 78.1 99.1 Electricity 3.4 6.2 6.6 7.2 8.3 9.9 11.2 14.9 24.2 Commerce 76.3 124.1 133.8 148.0 180.9 243.7 288.2 342.5 466.5 Transport & Communications 7.3 11.1 12.2 14.5 16.8 21.8 29.0 36.2 53.1 Government 13.7 26.0 29.3 35.6 46.1 61.5 85.1 118.2 154.2 Other Services 39.9 68.9 77.8 87.7 99.7 118.9 142.4 178.2 228.6 Total GDP 252.0 418.7 452.4 512.3 619.6 813.7 988.3 1,227.9 1,676.0 Shares (in percent of total) @ Agriculture, Forestry & Fishing 14.4 11.3 10.7 10.3 11.0 10.4 10.1 9.7 9.8 Mining 1.3 1.3 1.1 1.1 1.1 1.3 1.1 1.1 1.3 Petroleum 3.6 3.2 3.0 2.9 2.6 3.2 3.2 3.0 3.9 Manufacturing 20.8 22.6 23.0 23.2 22.8 23.6 23.0 23.6 23.9 Construction 4.0 5.1 4.7 5.3 5.8 6.1 6.4 6.4 5.9 Electricity 1.1 1.5 1.5 1.4 1.3 1.2 1.1 1.2 1.4 Commerce 30.3 29.6 29.6 28.9 29.2 29.5 29.2 27.9 27.8 Transport & Communications 2.9 2.6 2.7 2.8 2.7 2.7 2.9 2.9 3.2 Government 5.5 6.2 6.5 6.9 7.4 7.5 8.6 9.6 9.2 Other Services 15.8 16.5 17.2 17.2 16.1 14.6 14.4 14.6 13.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Bank of Mexico LCPI2 March, 1979 | MEXICO - FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 3:Structure of Value Added in Manufacturing Selected Years, 1960-1977 (In Percentages of Total, Based on Current Mex$) 1960 1965 1970 1972 1974 1976 1977 Food, Beverages and Tobacco 36.7 31.5 26.5 27.7 28.0 28.8 28.9 Textiles 9.3 9.5 10.2 9.2 8.3 7.9 7.7 Clothing & Shoes 8.1 9.0 13.5 14.2 13.6 13.5 14.0 Wood and Wood Products 3.1 2.3 1.9 1.6 1.5 1.6 1.6 Paper and Paper Products 2.4 3.1 2.5 2.6 3.4 3.2 ( 3.2 Printing and Publishing 2.4 3.1 3.2 2.8 2.8 3.3 3.2 Leather and Leather Products 1.4 1.1 1.5 1.4 1.2 1.3 1.5 Rubber and Rubber Products 2.1 1.9 1.5 1.4 1.3 1.2 1.0 Chemicals and Pharmaceuticals 9.3 8.0 8.1 8.3 8.0 8.0 7.8 Non-metallic Minerals 4.2 4.6 5.1 5.4 5.3 5.6 5.7 1 Basic Metals 6.2 5.9 5.4 5.3 6.2 5.4 5.4 0 Engineering Products 12.8 17.7 18.5 17.6 18.7 18.6 18.3 Others 2.1 2.3 2.1 2.1 1.8 1.5 1.7 LCPI2 March, 1979 l~~Ii MEXICO - FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 4: Indices of Industrial Production, 1970-77 (1970 = 100) 1970 .1971 1972 1973 1974 1975 1976 1977P/ GENERAL, 100 102.1 112.4 123.8 132.8 139.1 142.9 147.9 Manufacturing 100 102.9 112.5 123.2 131.4 136.9 140.7 145.5 Sugar 100 102.8 108.0 115.4 119.3 109.8 115.0 120.0 Beer 100 87.2 102.4 119.9 135.4 136.0 132.7 148.9 Beverages 100 86.2 94.8 104.9 102.0 122.6 106.0 119.8 Tobacco 100 99.4 104.8 94.9 105.2 103.3 102.9 114.4 Textiles 100 127.8 159.9 205.2 215.7 237.5 238.7 269.4 Printing 100 103.7 113.9 104.0 92.4 111.6 117.1 99.5 Tires 100 110.5 124.1 130.8 136.5 151.2 179.7 164.5 Fertilizers 100 113.6 135.8 147.8 151.5 155.9 160.6 172.5 Chemicals 100 108.4 114.1 127.8 142.4 134.7 141.9 147.2 Artificial Fibers 100 125.5 153.0 184.3 194.7 222.9 242.3 261.6 Cement 100 102.6 119.8 136.3 147.5 161.7 175.2 184.2 1 Iron 100 104.5 118.8 123.0 142.6 131.3 152.2 191.6 o Steel 100 99.4 115.2 122.6 133.6 136.9 137.9 144.5 Copper 100 109.1 117.0 113.1 135.7 128.0 152.3 144.3 Automobiles 100 112.0 115.1 140.3 172.0 166.1 150.7 139.8 Trucks 100 102.3 120.3 151.0 187.2 231.3 193.1 157.7 Petroleum and Related Industries 100 102.4 108.6 110.1 126.1 140.1 153.6 178.8 Petrochemicals 100 109.4 128.1 143.8 169.6 177.4 192.9 185.1 Mining 100 96.7 101.2 107.7 119.2 112.2 119.4 119.2 Electricity 100 109.8 121.4 131.7 145.6 156.7 169.2 184.9 Construction 100 97.4 113.9 133.9 142.0 150.4 147.5 143.9 P/ Preliminary. 1/ The general Index represents 60% of total industrial production in 1970 with the following (laspeyres) ^ fixed weights: Manufactures (72.3%), Petroleum (6.6%), Petrochemicals (0.6%), Mining 3.2%), 4 Z Electricity (2.6%), Construction (14.7%), ) Source: Bank of Mexico LCPI2 March, 1979 ANNEX 9 -68 - T-5 MEXICO - FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 5:Import of Machinery and Equipment and Domesl:ic Production of Machinery and Transport Equipment Imports of Machinery Domestic Production of Machinery (US$ million) (Mex$ million) 1971 866.9 8,272.3 1972 1,075.9 9,384.5 1973 1,326.2 12,463.6 1974 1,704.6 17,267.3 1975 2,360.8 19,047.6 1976 2,477.6 21,120.9 1977 1,953.0 28,608.0 1978 (10 months) 2,054.9 36,435.7 Source: Secretariat of Budgeting and Programming,, Monthly Bulletin, November 1978 LCPI2 March, 1979 MEXICO - FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 6: Gross Fixed Investment (In Mex$ millions) P R I V A T E TOTAL Public TOTAL % Total 1970 82,300 30,582 51,718 62.8 1971 81,600 28,538 53,062 65.0 1972 97,800 42,057 55,743 57.0 1973 126,400 57,606 68,794 54.4 1974 173,600 69,207 104,393 60.1 1975 221,700 99,053 122,647 55.3 1976 269,500 111,794 157,706 58.5 1971 319,400 170,925 168,475 49.6 1978 441,200 213,625 227,575 51.5 1979(Estimate) 570,000 275,000 295,000 51.7 Source: Bank of Mexico (1970-1977); Confederacion de Camara Industriazes (CONCAMIN) for 1978 and 1979; and BANAMEX. LCPI2 March, 1979 IMV ANNEX 9 - 70- T-7 MEXICO - FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 7:Indices of Employment in Manufacturing, 1970-1978 Index Annual rate 1970=100 of change 1970 100.0 1971 100.4 0.4 1972 103.3 2.9 1973 108.1 4.6 1974 115.1 6.5 1975 118.1 2.6 1976 120.7 2.2 1977 119.7 -0.8 1978 (January-October only) 124.6 4.1 Source: Direccion General de Estadistica, Secretarla de Programacion y Presupuesto. LCPI2 March, 1979 MEXICO - FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 8: Exports of Selected Manufactured Products, 1972-78 (US$ million) 1972 1973 1974 1975 1976 1977 1978 Total, exports of manufactures-/ 541.3 805.1 1,236.1 1,069.3 1,190.8 1,390.6 1,800.0-1 Cotton yarn 10.9 27.2 46.2 24.8 27.0 29.3 27.4 Shoes 5.9 7.7 13.8 12.7 12.0 13.6 26.7 Synthetic & artificial yarns 5.3 9.8 11.0 7.0 8.6 10.2 13.8 Hen,nequen manufactures 2.7 4.2 74.1 31.3 35.2 36.5 35.7 Clothing 20.8 21.5 41.8 22.3 25.1 22.6 26.2 Cotton fabrics 13.5 43.3 57.4 41.0 46.5 31.5 18.0 Non-ferrous materials 74.1 70.6 169.0 135.7 123.9 129.4 117.2 Non-metallic minerals 33.5 39.0 43.5 37.9 62.3 99.8 96.0 Printing & publishing 14.9 20.7 27.1 32.8 37.7 50.1 55.4 Wood products 19.6 23.1 28.0 25.9 34.3 47.2 67.3 Industrial chemicals & pharmaceuticalsSc/ 77.6 109.7 186.5 124.1 118.8 140.6 146.4 Auto, trucks and parts 47.4 107.2 158.7 83.3 45.8 65.9 163.3 Copper products 3.5 6.4 6.6 2.8 3.3 6.2 5.6 Iron and steel products 59.0 32.6 51.8 49.6 67.0 86.8 90.3 SOURCE: Based on data from Banco de Mexico and IMCE. a/ Excluding processed foods, petrochemicals and assembly industry products. b/ Preliminary estimate by appraisal mission. c/ Including fertilizers. LCPI2 3 May 1979 1. tTj MEXICO - FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 9: CEDI's (Indirect Tax Rebate Certificates) 1973-78 (1) (2) (3) (4) (5) (6) Value Return of Return of Total Returns/ Ntimber of Indirect Taxes General. Returns Export Sales Exports Import Tax (3)+(4) (5) + (2) (Million Pesos) 1973 10,804 1,054 24 1,078 9.98 1974 15,925 17,839 1,723 23 1,746 9.79 1975 16,838 15,499 1,748 30 1,778 11.47 1976 19,456 16,823 1,935 11 1,946 11.56 1977 6,448 16,850 1,140 16 1,156 6.80 1978 29,764 33,087 2,205 38 2,243 6.77 (11 months) Source: Secretary of the Treasury and Public Credit, Bureau of Revenues Policy LCPI2 March, 1979 t11 x MEXICO - FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 10: Credits Granted by FOMEX for Export Promotion and Import Substitution 1964-1978 (Mex$ million) E X P O R T S I M P O R T S U B S T I T U T I O N T 0 T A L PRE-EXPORTS CREDIT SALES CAPITAL GOODS CONSUMER GOODS Years Ainual Cumulative Annual Cumulative Annual Cumulative Annual Cumulative Annual Cumulative 1964 57 57 - - 57 57 - - - - 1965 127 184 - - 127 184 - - - - 1966 404 588 50 50 346 530 8 8 - - 1967 640 1,228 165 215 470 1,000 5 13 - - 1968 870 2,098 183 398 679 1,679 8 21 - - 1969 1,504 3,602 234 632 1,166 2,845 104 125 - - 1970 2,083 5,685 399 1,031 1,523 4,368 161 286 - 1971 2,421 8,106 500 1,531 1,900 6,268 21 307 - - 1972 3,309 11,415 758 2,289 2,440 8,708 111 418 - - 1973 4,526 15,941 1,245 3,534 3,152 11,860 129 547 - - 1974 6,412 22,353 1,292 4,826 5,055 16,915 65 612 - - 1975 6,645 28,998 1,302 6,128 5,193 22,108 114 726 36 36 1976 10,268 39,266 2,654 8,782 7,418 29,526 104 830 92 128 1977 17,770 57,036 5,174 13,956 12,287 41,813 184 1,014 125 253 1978(E) 20,930 77,966 n.a. n.a. n.a. n.a. 483 1,497 n.a. n.a. Source: FOMEX LCPI2 March, 1979 MEXICO - FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 11: Structure of Manufacturing Industry (in numbers and thousands of Nex$) Total Less than Small Medium and Small Large Industry Manufacturing Industry Industry Industry Quantity % Quantity % Quantity x Number of Establishments 120,274 26,290 21.86 93,293 77.57 691 0.57 Capital Invested (Mex$ '000) 245,514,183 725,391 0.30 149,529,142 60.90 95,259,650 38.80 Value of Production " 462,548,858 2,873,279 0.62 314,121,111 67.91 145,554,450 31.47 Value Added 190,142,780 1,022,283 0.54 130,494,865 68.63 58,625,632 30.83 Inputs 67,325,434 196,639 0.29 47,028,246 69.85 20,100,549 29.86 Fixed Assets 161,560,448 697,658 0.43 92,977,572 57.55 67,885,218 42.02 Employment (number) 1,707,877 59,430 3.48 1,383,012 80.98 265,435 15.54 Wages & Salaries (Mex$ '000) 75,908,637 362,776 0.48 55,500,488 73.11 20,045,373 26.41 Source; Preliminary figures ol ±UlI ±I1uustrLaL Census(19 \16J elaborated buy FOGAIN. Stnall and Medium firms have tixed-capital assets ranging from Mex$25,000 to Mex$35,000,000. LCPI2 March, 1979 Ix -75- ANNEX 9 T-12 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 12: Institutional Structure of the Financial Sector September 30, 1977 December 31, 1978 Number of Number of Number of Number of Institutions Offices Institutions Offices Public Banks a! 22 694 22 701 Private & Mixed Banks 198 2,841 132 3,073 Multibanks 14 1,245 26 2,324 Deposit Banks 93 1,456 52 667 Financieras 66 95 43 60 Mortgage Banks 14 28 3 7 Other Private Banks 11 17 8 15 TOTAL 220 3,535 154 3,774 a/ Does not include Banco de Mexico, S.A. Source: Comision Nacional Bancaria y de Seguros LCPI2 March, 1979 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 13: Financial Development Private Sector Disposable Deposits Percentage Income Percentage (D) Change (Y) Change D/Y 1967 75.4 28.9 284.2 9.2 O.27 1968 88.0 16.7 314.0 10.5 0.28 1969 105.3 19.7 346.9 10.5 0.30 1970 124.9 18.6 386.6 11.4 0.32 1971 143.0 14.5 416.4 7.7 0.34 1972 167.1 16.9 471.0 13.1 0.36 1973 189.6 13.5 568.6 20.7 0.33 1974 220.7 16.4 745.1 31.0 0.30 1975 276.3 25.2 897.0 20.4 0.31 1976 292.7 5.9 1,094.0 22.0 0.27 1977 393.3 34.4 1,477.1 2/ 35.0 0.27 1978 508.8 29.4 1,809.4 3/ 22.5 0.28 1/ In private and mixed banks as of December 31, except 1978 as of November 30. 2/ Preliminary figure. 3/ Mission estimate. Source: Banco de Mexico 1-3 LCPI2 2 M March, 1979 77 - ANNEX 9 T-14 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 14: The 12 Largest Banks as of December 31, 1978 (Mex$ millions) Institution Assets Percentage Bancomer, S.A. 152,957.1 23.3 Banco Nacional de Mexico, S.A. 144,474.3 22.1 Banca Serfin, S.A. 61,239.4 9.3 Multibanco Comermex, S.A. 48,075.6 7.3 Banca Somex, S.A. 35,504.2 5.4 Banco Internacional, S.A. 21,351.6 3.3 Banpais, S.A. 13,694.2 2.1 Banco del Atlantico, S.A. 12,760.6 1.9 Banco B.C.H., S.A. 11,914.5 1.8 Banca Confia, S.A. 7,639.0 1.2 Multibanco Merc. de Mexico, S.A. 7,104.8 1.1 Banpacifico, S.A. 6,360.0 1.0 a! Others 132,155.7 - 20.2 TOTAL 655,231.0 100.0 a/ Estimate Source: Comision Nacional Bancaria y de Seguros, and mission estimates. LCPI2 March, 1979 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 15: Financial Indicators of the Private and Mixed Banksl' (in percentage terms) Administrative Financial Net Income Net Income Gross Income Lending Income Total Expenses Expenses - Expenses Tear , Equitv Liabilities2/ Liabilities2/ - Loans Liabilities2/ Liabilities 2 Liabilities22/ 1966 12.762 0.882 12.146 13.256 11.264 5.310 5,953 1967 12.217 0.778 12.088 13.419 11.310 5.178 6,132 1968 13.889 0.893 12.649 13.131 11.756 5.177 6.579 1969 13.972 0.871 13.226 13.145 12.355 5.252 7.103 1970 13.150 0.776 14.115 13.775 13.339 5.238 8.100 1971 12.955 0.737 14.425 13.751 13.688 5.317 8.371 1972 13.560 0.750 13.087 13.179 12.337 4.648 7.689 -4 1973 13.029 0.708 12.755 13.550 12,047 4.511 7.535 1974 13.262 0.716 13.736 14.779 13.020 4.916 8. In,. 1975 19.001 0.920 14.366 16.079 13.446 5.029 8.418 1976 18.781 0.862 14,871 16.446 14.009 5.326 8.6 83 1977 22.957 0.921 15.264 16.930 14.343 5,881 8.462 19783! 26,594 0.857 15.786 17.891 14.929 5.596 9.333 1/ Do not include Fiduciarias, Capitalizadoras, Savings and Loans, nor those under special legislation. 2/ Resources mobilized. 3/ January - October (annualized). Source: Banco de Mexico. LCPI2 March, 1979 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 16: Multibanks' Share of Operations of Private and Mixed Banks 1 9 7 7 1 9 7 8 April August December April August December Credit Granted In local currency (x) 33.7 47.7 72.7 76.5 79.5 85.5 In foreign currency (%) 27.5 50.2 76.9 79.1 79.3 93.1 Resources Mobilized In local currency (%) 30.0 46.9 73.4 76.5 79.6 85.5 in foreign currency (.) 28.3 46.8 70.5 73.2 75.1 92.7 Number of Multibanks 7 14 16 19 21 24 Source: Banco de Mexico LCPI2 March, 1979 '.0 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 17: Securities Traded Annually (Million M..$) 1970 1971 1972 1973 1974 1975 1976 1977 1978 Amount % Amount % Amount °l Amount % Amount % Amount % Amount % Amount % Amount % Total 33,752,5 38,864.8 55,620.8 75,389.2 96 342.8 113,612.6 136,699.7 167,760.3 95,323.2 Shares 722.2 100.0 830.6 100.0 1.660.8 100.0 4 100.0 2538.4 100.0 3,684.6 100.0 6,054.7 100.0 5,784.1 100.0 30,310.2 100.0 Industry 386.9 53.6 361.7 43.6 847.2 51.0 1,523.4 61.1 992.9 39.1 1,583.5 43.0 2,680.2 44.3 2,597.5 44.9 19,029.2 62.8 Services 164.8 12.8 292.6 35.2 361.8 21.8 421.3 16.9 452.3 17.8 876.7 23.8 1,492.5 24.7 1,346.0 23.3 3,561.6 11.8 Banking 79.9 11.1 87.1 10.5 156.9 9.4 272.7 10.9 406.1 16.0 629.5 17.1 1,191.0 19.7 1,047.7 18.1 5,391.8 17.8 Commerce 41.8 5.8 46.8 5.6 86.6 5.2 124.0 5.0 128.4 5.1 161.6 4.4 451.9 7.5 432.5 7.5 1,028.8 3.4 Mining 36.3 5.0 32.2 3.9 12.5 0.8 111.7 4.5 486.9 19.2 403.3 10.9 171.1 2.8 305.6 5.3 1,218.0 4.0 Insurance 11.2 1.5 8.6 1.0 190.6 11.5 40.6 1.6 71.7 2.8 28.9 0.8 61.1 1.0 51.3 0.9 40.4 0.1 Other 1.3 0.2 1.6 0.2 5.2 0.3 0.6 - 0.1 - 1.1 - 6.9 0.1 3.5 - 40.4 0.1 Fixed Return 33,030.3 38,034.2 53,960.0 72,894.9 93,804.4 109,928.0 130,645.0 161.976.2 65,013.0 Bone Financiero 3,686.2 4,156.4 23,333.4 33,936.5 43,392.5 47,665.5 37,563.3 64,319.7 8,912.4 Boo. Hipotecario 12,601.3 17,384.2 21,845.6 28,213.6 37,045.2 42,670.7 56,237.5 57,105.8 26,693.9 Cedulas Hipotecarias 8,602.9 6,862.6 2,647.7 1,269.0 2,016.5 2,857.9 8,173.5 7,482.1 909.9 Obligaciones 1/ 126 9 150.7 149.9 240.1 196.2 275.5 1,257.1 3,523.2 4,937.2 Titulos Financieros- 1 5,391:1 6,487.4 2,613.9 4,253.4 4,984.3 5,921.8 11,004.8 60.6 - Cert. do Participacion- 2,621.9 2,992.9 1,118.6 955.4 1,291.1 4,338.4 4,930.0 12,869.8 23,559.6 Cert. deo articipocionl/ - - 2,250.9 4,026.9 4,878.6 6,198.2 11,478.8 16,615.0 - InmobIlaria. 1/ Securities issued by NAFINSA 7:-/ S-friL;i- ;s__d by Baz.cv 'Naci-..alld ob-;as y S=r-viciosrulcs Source: Comision Nacional d Valores. LCP12 March, 1979 - R1 - ANNEX 9 MEXICO T-18 FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 18: Securities Exchange Price Index Year Month Maximum Minimum Last 1967 154.00 145.59 151.66 1968 164.59 152.00 152.48 1969 170.50 147.14 147.28 1970 150.26 135.44 147.47 1971 155.17 127.27 139.74 1972 185.27 140.01 177.70 1973 207.01 178.81 184.74 1974 215.11 185.52 207.99 1975 215.02 194.75 213.65 1976 335.34 213.74 274.81 1977 392.15 266.99 388.37 January 275.25 266.99 271.98 February 285.48 270.36 225.48 March 306.14 285.76 297.02 April 296.94 291.97 294.83 May 308.33 290.36 293.15 June 300.16 291.14 291.72 July 303.50 290.41 302.68 August 310.09 299.31 310.09 September 319.29 301.99 319.29 October 339.16 318.77 339.16 November 369.44 337.14 368.41 December 392.15 367.14 388.37 1978 889.06 390.61 889.06 January 457.61 390.61 455.21 February 529.05 457.48 516.49 March 548.77 511.03 548.77 April 642.42 544.69 636.48 May 699.92 639.22 699.92 June 728.00 688.40 727.69 July 757.65 724.03 728.87 August 730.32 677.40 713.44 September 749.19 732.85 749.19 October 782.40 741.09 781.62 November 788.71 758.93 785.42 December 889.06 786.11 889.06 1979 January 1,090.60 879.03 1,090.60 Source: Bolsa Mexicana de Valores LCPI2 March, 1979 - 82 - MEXICO ANNEX 9 T-19 FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 19: Authorized Security Issues in 1978 Date of Amount Number Placement Nominal Firm Placement (Million Mex$) (thousand) Price Value Shares Colanese Mexicana 3- 1-78 95.0 500.0 190.0 100.0 Industrias Nacobre 3-15-78 103.5 690.0 150.0 100.0 Hilera El Centenario 4-17-78 188.2 1,530.0 123.0 100.0 Organizacion Robert's 5-17-78 97.7 1,628.0 60.0 25.0 Industrias Purina 5-31-78 280.0 28,000.0 10.0 n.e. Aurrera 7-11-78 318.5 4,899.9 65.0 10.0 Industrial Electrica 7-17-78 21.5 580.0 37.0 25,0 La Dominicia 7-19-78 55.1 2,754.0 20.0 n.a. Empresa La Moderna 8- 7-78 307.2 3,613.9 85.0 50.0 Grupo Condumex 8- 3-78 186.8 795.0 235.0 100.0 Empresas Villarreal 8- 8-78 60.0 2,400.0 25.0 10.0 Grupo Industrial Alfa 8-14-78 600.0 2,000.0 300.0 100.0 Grupo Industrial Camesa 9-12-78 158.4 1,131.5 140.0 100.0 EPN 9-12-78 42.0 420.0 100.0 100.0 Valores Industriales 9-20-78 519.7 3,849.9 135.0 n.a. Altro 10-23-78 56.3 1,125.0 50.0 10.0 Cydra 10-30-78 66.5 350.0 190.0 25.0 Texaco Mexicana 11-15-78 87.8 1,254.0 70.0 50.0 Kelsey Hayes de Mexico 11-24-78 120.0 2,400.0 50.0 n.a. Ponderosa Industrial 12-14-78 500.0 5,000.0 100.0 100.0 Grupo Industrial Minero Mexico 11- 7-78 762.0 15,240.0 50.0 50.0 Telefonos de Mexico n.a. 1,131.8 11,318.0 100.0 100.0 Bancomer 7-17-78 812.5 25,000.0 32.5 10.0 Multibanco Comermex 11- 1-78 173.3 5,500.0 31.5 10.0 Banco Internacional 12- 1-78 201.3 575.0 350.0 100.0 Total 6,945.1 122,554.2 Fixed Return Securities Net Yield Period (%) (years) Securities Without Real Asset Guarantee Grupo Industrial Saltillo 2- 2-78 150.0 150.0 17.5 7 Cristales Mexicanos 3-15-78 150.0 150.0 17.5 7 Union Carbide Mexicana 5- 8-78 250.0 250.0 17.0 7 Vidriera Los Reyes 6-16-78 150.0 150.0 16.5 7 Vidriera Monterrey 8- 2-78 150.0 150.0 16.5 7 Cementos Tolteca 3- 2-78 400.0 400.0 16.5 8 Grupo Industrial Alfa 8-15-78 500.0 500.0 16.5 12 Industrias Nacobre 9- 2-78 300.0 300.0 17.0 7 Formex Ibarra 11-14-78 50.0 50.0 17.0 7 Eaton Manufacturera 12- 5-78 100.0 100.0 17.0 7 Mortgage Bonds Telefonos de Mexico "UU" 2- 2-78 300.0 300.0 12.0!/ 20 Cannon Mills 11-20-78 60.0 60.0 17.0 7 Telefonos de Mexico "VV" y "NW" 11 - 78 600.0 600.0 12.0a/ 15 Total 3,160.0 3,160.0 a/_ Gross. Source: Comision Nacional de Valores. LCPI2 March, 1979 C' rC CC lola) C00) - o-O OO, COn3ca S : p-N O C 00 0 CC 00f 0 p 000p ° - ~ ~ ~ ~~0 8 ODOOOOOtp ZoC-p'-- 00 01° : 'C00° t: r =- o (D D X sO0.--o0 , 2n c ACAz>O ,,3C o ~ ~ ~ C 0 00 0 00 0 00C 000 =4 >X a 0 ~ ~~~ ~ x ' 0000-00c 000000 c0 CCO CA 0 CO C 0 0 0 CS~~ ~~ Co CA p. 'C 3 . 000 00 . P' ~ ~~ 10 0-u 00IN 000 0000 0 H~~ ~ ~ ~ ~~~ ~ g -C .-COO0 00 00C-I CACC- CO I 0 e~v > ~~~~~~~~~~~~.UL 00 O ^^ 0 1 s .DvO>o 0>> sW0ss ~ asw'00 C CAO OC o00 0000000 0 00 0000 o o 0 0 C W .Wk 0 - O._. I o~ ooO Io~ 0- 09 W 0WioSWU ,_ I~~~~~~~~00 o Io P C I10 OCrJ.400C.P 100 0044 000 O oM -w0 Wo0 >p~ 0 Dt O 1 ľ 2 01wro_wHc O_po2 -_Cch 1o D~~~~~~~~~~~~~~~~~~0 00 0 0 0o 0 0 0 0 IWWJsWM°H~° c en co0 JIS 0000x nWo e k 0 I01 0 0 0 - 00 I o00 00 0 00 0 00 000 - - a> ~~s - °W e o ˘M 0.40 .4 o.0 0 1 01Os8O AN1IEX 9 ro i 4^ S nN |o T_21 vl a a79eun 8˘>4 00000Ar 0_ O0 C4O.4 |O N 400000.4000 - I n iV O 0-O_ o00 O00 | 00 DNN0000000 m 0; O I 0b_o 1NHU 01~~ 1- R 04-- o v oeIi-c*: : I aeI 0 'G0 - '0 I_O_I= I~~~~' | 0.0 0 0 c - ^c^^^ a0.40000.4000 0 .. ~ ~ ~ 0 41~~~~~~. _~~~ 00 0 00 0 101 No^RR O~~~~ ~ 0 0, V0 . PH4~~~~ ~ 0 O, 0_ g~~ ~ ~ 00 '0 |- o 0 ,,°g 001.0.0400 1' . =O ~ ~ 00 '0 =00 E zSI o_ S |S 0E 00 0000 00010.0 0D _ C 0 E MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 22:- Lending Terms of Financial Institutions in 1977 a/ (Percentage) Deposit Savings Financial Mortgage Total Private Public Departments Departments Departments Departments : Mixed Banks Banks Total Up to 180 days 78.3 19.7 39.8 - 43.1 22.7 31.6 From 181 to 360 days 5.1 38.9 26.3 - 17.9 34.6 26.6 More than 360 days 16.6 41.4 33.9 100.0 39.0 42.7 41.8 100.0 100.0 100.0 100.0 100.0 l0o. g! l00. & . a/ Balances outstanding as of December 31. b/ Excludes "Fondos Comunes de Nafinsa". Source: Banco de Mexico LCPI2 March, 1979 MEXICO FOURTH INDUSTRIAL EQUIPMENT FIIND (FONEI) PROJECT Table 23: Liabilities of the Financial Intermediaries (end of year) (Mex$ million) 1967 1971 1975 1976 1977 1978 LI Amount 7. Amount ___ Amount e/d Amount % Amount / Amount 7. 1. Domestic Currency Liabilities L07,296.8 80.7 195,464.0 83.0 376,276.2 77.8 413,465.0 69.1 517,698.2 67.8 650,625.8 71.2 (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) Banco de Mexico 16,286.6 ( 15.2) 23,917.4 ( 12.2) 55,260.0 ( 14.7) 96,405.0 ( 23.3) 103,283.9 ( 19.9) 104,911.7 ( 16.2) Public Banks 18,920.7 ( 17.6) 31,614.7 ( 16.2) 53,843.1 ( 14.3) 56,701.6 ( 13.7) 73,308.2 ( 14.2) 97,205.4 ( 14.9) Private Banks 72,089.5 ( 67.2) 139,931.9 ( 71.6) 267,173.1 ( 71.0) 260,358.4 ( 63.0) 341,106.1 ( 65.9) 448,508.7 ( 68.9) 2. Foreign Currency Liabilities 25.711,9 19.3 40.091.2 17.0 107,336.1 22.2 184,911.3 30.9 246.116.7 32.2 263.371.5 28.8 (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) O 00 Banco de Mexico 121.2 ( 0.5) 153.5 ( 0.4) 68.6 ( 0.1) 2,072.3 ( 1.1) 4,527.6 ( 1.8) 7,040.0 ( 2.7) Public Banks 19,760.1 ( 76,9) 32,886.0 ( 82.0) 92,449.5 ( 86.1) 144,050.9 ( 77.9) 1.79,199.5 ( 72.8) 190,975.7 ( 72.5) Private Banks 5,830.6 ( 22.6) 7,051.7 ( 17.6) 14,818.0 ( 13.8) 38,788.1 ( 21.0) 62,389.6 ( 25.4) 65,355.8 ( 24.8) 3. Total (1 + 2) 133.008.7 100.0 235.555.2 100.0 483.612.3 100.0 598,376.3 100.0 763,814.9 100.0 913.997.3 100W0 A / As of Navc ber, 3. Source: Banco de Mexico. LCPI2 March, 1979 , 1 D~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - 87 - MEXICO ANNEX 9 FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT T-24 Table 24: Financial System Interest Rates (Annual Percentages) Mortgage Financial Three Months One Month Three Months Six Months One Year Two Years Year Quarter Bond b/ Bond b/ Treasury Bills C.D. S/ C.D. c/ C.D. c/ C.D. c/ C.D. 1972 I 7.52 7.92 - - - 9.01 9.01 II 7.52 7.92 - - - - 9.01 9.01 III 7.52 7.92 - - - - 9.01 9.01 IV 7.52 7.92 - - - - 9.01 9.01 1973 I 7.20 7.56 - - - - 8.37 8.37 II 7.34 7.72 - - - - 8.66 8.66 III 8.25 8.75 - - - - 10.50 10.50 IV 8.25 8.75 - - - - 10.50 10.50 1974 1 8.25 8.75 - - 9.50 10.50 10.58 10.58 II 8.25 8.75 - - 10.31 11.04 11.54 11.54 III 8.25 8.75 - - - 11.00 11.50 12.00 12.00 IV 8.25 8.75 - - 11.00 11.50 12.00 12.00 1975 I 8.25 8.75 - - 11.00 11.50 12.00 12.00 II 8.25 8.75 - - 11.00 11.50 12.00 12.00 III 8.25 8.75 - - 11.00 11.50 12.00 12.00 IV 8.25 8.75 - - 11.00 11.50 12.00 12.00 1976 I 7.25 7.50 - 8.00 10.00 10.75 11.50 11.50 II 7.25 7.50 - 8.00 10.00 10.75 11.50 11.50 III 7.25 7.50 - 8.00 10.00 11.46 12.21 12.21 IV 7.25 7.50 - 8.00 10.00 12.00 12.75 12.75 1977 I 7.25 7.50 - 8.00 10.00 12.00 12.75 12.75 II 7.25 7.50 - 8.00 11.00 13.00 13.88 16.00 III 7.25 7.50 - 8.00 11.00 13.00 15.00 16.00 IV 7.25 7.50 - 8.00 11.00 13.00 15.00 16.00 1978 I 7.25 7.50 9.75 8.00 11.00 13.00 15.00 16.00 II 7.25 7.50 9.67 8.00 11.00 13.00 15.00 16.00 III 6.63 7.24 10.52 8.50 11.00 13.00 15.00 16.00 IV 6.63 7.11 12.19 10.17 11.67 13.00 15.00 16.00 1979 January (2 - 15) 6.32 7.11 13.30 11.00 12.00 13.00 15.00 16.00 a/ Net of tax, including "sobretasa". b/ Repurchasable at sight. c| Certificate of Deposit. Source: Banco de Mexico LCPI2 March, 1979 MEXICO FOURTH INDUSTRIAL EOUIPMENT FUND (FONEI) PROJECT Table 25: Interest Rate Differentials (Difference in annual percentages) Mexican Sight Mexican One Week Mexican Three Months Mexican One Year Mexican 2 Years Instruments Instruments Instruments Instruments Instruments - Eurodollar - Eurodollar - Eurodollar - U. S A, - Eurodollar - U. S. A. - Eurodollar Year Quarter (Call Money) one week 3 months 3 months CDsa/ 12 months 12 months CDs_ 24 months 1972 I 3.81 - - - 3.05 4.28 2.47 II 3.99 - - - 2.96 3.80 2.45 III 2.79 - - - 2.74 3.45 2.38 IV 3.00 - - - 2.62 3.29 2.22 1973 I 0.09 - - - 0.90 1.94 0.85 1I - 0.14 - - - 0.06 1.51 0.08 III - 1.61 - - - 0.15 2.25 0.90 IV - 0.69 - - - 1.25 2.65 1.48 1974 I - 0.04 - 0.31 0.91 1.72 3.17 1.83 II - 2.22 - - 1.17 - 0.33 0.86 2.62 1.29 III - 2.69 - - 2.17 - 0.65 - 0.35 2.78 0.92 IV - 0.52 - 0.53 2.17 1.98 3.80 2.17 1975 I 2.29 - 3.45 4.46 4.11 5.76 3.79 II 3.39 - 4.55 5.15 3.95 5.57 3.62 1 III 2.55 - 3.69 4.40 3.43 4.75 3.46 X IV 3.24 - 4.19 4.87 3.93 4.91 3.67 X 1976 I 2.55 - 4.45 4.87 4.63 5.58 4.00 II 2.31 - 4.13 4.b6 4.33 5.17 3.S7 III 2.24 - 4.34 4.65 5.51 6.16 4.88 IV 2.67 - 4.77 5.20 6.87 7.51 6.41 1977 I 2.78 - 4.90 5.32 6.77 7.50 6.12 II 2.30 0.41 5.10 5.66 7.98 8.73 8.37 III 1.71 - 0.80 4.79 5.42 8.37 8.88 9.13 IV 1.04 - 0.74 3.93 4.58 7.52 8.03 8.51 1978 I 0.67 - 1.08 3.75 4.45 7.20 7.74 7.90 II 0.22 - 1.67 3.16 3.89 6.61 7.23 7.62 III - 0.88 - 0.75 2.30 3.04 5.84 6.48 7.00 IV - 2.47 - 0.81 0.67 1.94 3.65 4.68 6.05 1979 January (2- 15) - 3.30 n.a. 0.57 1.77 3.04 3.78 5.71 a/ More than US$100,000. Source: Banco de Mexico. LCPI2 March. 1979 MEXICrO FOURTH INDUSTRIAL EOUIPMENT FUND (FONET) PROJECT Table 26: Indicators of Resource Mobilization and Credit Availability (As of December 31) 1970 1971 1972 1973 1974 1975 1976 1977 197&= 1. Non-moneta-y peso liabilities of Banking system b/ Mex$ billions 119.9 142.4 165.1 180.1 206.8 258.0 258.7 321.7 409.9 as X GDP 28.6 31.5 32.2 29.1 25.4 26.1 21.1 19.2 21.3 2. Total Banking System Credit Outstanding (peso denominated) Mex$ billions 130.1 154.0 173.5 192.5 232.2 290.5 392.2 532.5 611.2 as ° of GDP 31.1 34.0 33.9 31.1 28.5 29.4 31.9 31.8 31.7 3. Banking System Credit to Private Sector Mex$ billions 93.5 109.7 116.4 124.9 153.4 183.2 223.5 294.9 385.8 as % of b/ 71.9 71.2 67.1 64.9 66.1 63.1 57.0 55.4 63.1 as % of GDP 22.3 24.2 22.7 20.2 18.9 18.5 18.2 17.6 20.0 1 4. Banking System Credit to Manufacturing e Industry Mex$ billions 33.3 38.5 40.0 42.6 55.5 71.0 98.1 136.5 162.4 as 7/ of * b/ 25.6 25.0 22.7 22.1 23.9 24.4 25.0 25.6 26.6 5. Banking System Credit to Private Ma- nufacturing Industry Mex$ billions 27.2 31.8 30.2 32.5 42.4 48.7 63.0 80.8 108.7 as % of b/ 20.9 20.6 17.4 16.9 18.3 16.8 16.1 15.2 17.8 a/ As of September 30, 1978. -b The term "non-monetary liabilities" is used in this context to refer to all liabilities in local currency of the Banking system except checking accounts and other demand deposits. Source: Banco de Mexico and mission estimate. LCPI2 March, 1979 - 90 - ANNEX 9 7-27 OOO 00CC 0 040 _ o o A 1 °C _ N.0 0 - C 00 C00400°X 1 °t _ o0.0.0.00< _ X 0 0 1S.0 n^' - X IC-HO4a C:0 \0>0 0 00400 Ł , .l C 0 4 !0 0 0 . Z04o0 00 ,,,,. - _000 A01 E °S1 ~ ~ . 0 co 00> 80020 3 88841 80 888039 888 560 0.84l"3.1 11. A- 0 A300080402 S 0-024o3 32I oofIt 598.0 99240 32 3830 8. 203 oo 214 921.8 2,082.2 19 10.2 3,180.3 2o.0~~~~~~~~~~197 9 4 220 to 302 020.2~~~~~~~~~a13*91 o 27.5 A529 ,33.5 1. 003 oo 0(2 ~~~~~~~~~~~~~~~~~4 0 - 2~~~~~~~1 88. 26 2.23 99.. 431 00 4 52253002.858 4,04.2 14 0.4~ 14808.2 21.9 Osoot 3200 542 ~~~~~~~~~1 117 0,9.9 362,30.9 20 8.4 9,203.2 92.0 Tool ~~~~~~~~~~ 9 5.,38.2. 4o flj, 42 102.2 11M0A 02. Msoloo O3oy 209.0 2 282~~~~~~~~~4 35 ? .9 57 21.1 1,271. 1.20. M2.1 14 I~~~3,418 728.2 42 22.1 2,22.2 0. Alto Ootos '40 2 0~~~~~~~~~~ ~ ~~~ ~~~~ ~ ~~~~2 -,3- j665~ 48 28.9 4L557.6 50.9 Ito 975032' 2,21.I7 5,8.S 0.7 9682 9. T- 23..8.. 2 'I52 222.2 14~8A0j 392.0 ZOt 20 40113133.3 04 3925.2 44 202 ,822.2 29.0 00 00 75 ~~~~~~~~~~~~D ~2,023-' 81 0,D27.3 24 009 5. 29,05.0 22.5 1- h.. 10 1~~~~~A 390, 9_49 '..01 2089.2 0_2 22.2 0282.2 100.0 0 40 3 0 404,2 80 9~~~~ ~ ~~~~~~~~~~ ~ ~ ~ ~~ ~~~~~~~4:12.01 22110 3 2. ,820.2 3. 5,3 00 0 ~~~ ~~~~~~~~~~23 ,2. 29 2,2. 1 2,222. 339 30.0 6,7.9 4.5 0,1 oo 32 9 412.3 3 396.2 -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 . 10710, 2,320, 3. Oo -otso43 29_0,2 0 . _92o. 0 1 24_1,9 42 00.9 2030 1 2,9. o( Stool 40 ~~~~~~~~~~~~~12192.9 49 ,2461.2 A4 LP%8t 0022 !Ž 31.2 003.2 A tObptOjtftt 20~~~~~~~~9 00.0 29 4,27.6 0,672 5 4.3 10,20.03 6. loostolOsoA tondt 0 209.9 4 9~~~~~~~~~~~~~~~~~~~~~~,C9.9 3051 11.2 5672.29 . toosO ~~~ ~~~~~~48 2.4012, 49 5,A48.0 45 7092 140 102.0 AŽ4ŽU*4 0083.2 LPoo 1 7853 2 1 946,9 43 03. 1,99 9 8. 05800045 1 17.6 . - - 1 9.0 07.8 2.1~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 8YosOfOs 8 308.I 1 6.0 0 137.1 A 9.8 540,40 2.8 tottOst 1 00.0~~ ~ ~~~~ ~ ~ ~ ~ ~~~~~~~ 8 042 . .4 38. . Foot, A 1 2~~~~ ~ ~ ~ ~~~~~~~ ~~~~12.3 0 292 203.4 0 2.4 ,8. . - ~~~'..-os~~,t0tj too 9t05.00 ~4 166,0 2 93.2 24223. 12 . 69. 23 ---- 0 91.d- 20088 3840 50 29,6 8,590.8 AI.21: 108,t,8oo8 potdtoit 3 ~ ~~~~ ~ ~ ~ 03.2 8 600.5 1 228.9 82 3. . - . . _________ 0 038.5~~~~~~~~~~~~~~~~~~~~~~~~~ 0 3.702.0 2.7 28 0245352 22~ ,0922 038.2 1482084 ____0 03 to 12,0 8 8~~~~ ~ ~~~ ~~~~~~~~69. 8 1,24511092 22 00.0 8,301.8 22, 00 0 8. 8 6, .16 ,2. 20 2,4100939 3. 304, 02, 2) to O.9 239. 2 422.4 912.2 09 502 1,284. 9. 2I t 29.9 21 98.3 51 207.I 4326,0C 0I98 8. I 20 to 34.9 0 73, 2 329,I8 2 024.8 01 7.2 I9.2 5.8 05 oo tort 0 ~ ~~~~ ~ ~ ~ ~~~~ 73,8 4 33.4 8 085.8 33 9,2 534,8 0. Not ot2oolotto 09 030.1 ~ ~ ~~~4 99.9 . 9_ 18 12. 46.60 4.3 toO, 1 09 ~~~~~~~~~~~~ _5-259 .045 7,1. 123 100.0 14,820.I 0Ž9 15 00 89,9 006,9 0 ~ ~~~~~~~ ~ ~ ~ ~~~~~~ ~~ ~ ~~~ so085 2 67.0 09 9. 3,52.0 25.3 20 0 2o.0 5 303.0 7 723.4 1I220 . 888,9 .0. 22 80 9. 4 13270 9 049.5 0357,0 09 08. 084.8 7.7 30 80 42.9 8 102.,8 042 22.9 8 5.8 4, . 05 to tooo 09 399,0 22 1,2~~1472.5 29 .5,59,6 65 43.8 - ,1362 48.0' -t ot-l-td 80 205. 4 9 3 9097- ,0 214 09.5 3,862 .2 T-s 40 2 4oSO.7 299 5,348.0 45 7,,O2Ž% 240 9, 02~.47, 822,01 80002 00911 ON~~~~~~~~~~4 8,208.7 29 1,782.5 I5 3,5.142 ",001. 33883, 0 of Totol . 44,2 20.~~~~~~~~~~~~~~~~~~~~~~~~480 42 20,4 0. 220 00 oB88888 01 18 088802 8 4 8,03,08, 082110.. 2 89 7303088. ,8888ots3 olllloo,t)... (~~ -M .13 821VSWbTT to --o tSoo800t 51 24 522.972,780 08 582.4 1,559 22 659. 1,059 88 55.2 0,784.2 85.6 5,945 85.0 298,354 50 t 020 8 30. 43 N 000. 9 ,80 7 505,8 901 24 19,5 0,78940 02.0 31,00 008 061,053 0.31 to 3309 2 ~~~~~~ ~~~~ ~ ~~~224. 288 7 986 0237 106,90.2 981 88 0. 086,3 15. ,93 03.5 725,888 220to 30 '0 230 0 0 132 782 2 88.8 8,173 8 6.5 ,A. 80300 1. 0,7 323 to 030 302,2 250 . 8.72 0 3.5 987.7 7.0 1.022 8.0 066,429 22ItC 20! -Do8 4933, 750 1 54,4 21 0- 1,6 868.0 62, 009 0,0 858,69 tt 9,509 . 1 23,9I.8 276 1_ 0,718.0 076 8 1.8 4,,,Ž921I 53.5 432 21 81,378,389 Ootbots 29 1,98.8, 4,308 40 5,038.0 0,091 45 0,593 5,0 23 00 00,8 82,014.7 1000.0 14,790 120.0 800,909 :oo.olIoAIo 10~~~~~~~~~~_i 00,I I 0A1.J . - - 1 - 802.7 To-1 48 2,203,2 49 5 ,240.0 95 70,29.3 142 19,820.0 43fo ostti--tt ot ot oo 43 -Itoldso 23502- 3 fo,. tt 00 foods, 80,0000 0 0080 osoot d 000900 Bto sod sOot-oto to--ooloyfods 02 ooo .0 lolid fttltI jy ftodo 8~ inot . t308oit2 tt00t 89-ooldo 19 lOtoto8,oto tt o9480 ANNEX 9 - 92 - T-29 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 29: Projected and Realized Exports in 1977 by a Sample of Enterprises Financed by FONEI (US$ '000) Enterprise Projected Actual Cementos Anahuac del Golfo, S.A. 7,775 23,855 Cementos de Chihuahua, S.A. 1,074 1,953 Ladrillera Industrial, S.A. 423 1,110 Fabricacion de Miquinas, S.A. 1,947 4,542 Condumex, S.A. 4,230 3,183 Camera, S.A. 1,161 5,165 Promociones Industriales Mexicanas, S.A. 1,427 292 Fabricas Orion, S.A. 3,090 974 Fundidora de Aceros Tepeyec, S.A. -- 647 Tubos Flexibles, S.A. 1,455 152 DeKormex, S.A. -- 31 Qulmica Mexama, S.A. 2,913 3,312 Cla. Fundidora del Norte, S.A. 10,128 6,116 Hlerramientas Nacionales, S.A. 716 677 Autoforjas, S.A. -- 16 Polynova, S.A. 10,605 _ QuŹmica Central de Mexico, S.A. 922 294 Ind. de Baleros Intercontinental, S.A. 913 1,780 Casa Aries, S.A. 1,562 470 Resinas Sinteticas, S.A. 900 137 Transejes, S.A. - 752 Automanufacturas, S.A. 2,145 2,366 Taloquimica, S.A. 734 983 Industrias Resistol, S.A. 4,783 404 Negromex, S.A. 625 736 Total 59,528 59,947 LCPI2 March, 1979 ANNEX 9 - 93 T-30 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 30: Projected and Realized Import Substitution in 1977 by a Sample of Enterprises Financed by FONEI (US$ '000) Enterprises Projected Actual Fabricacion de Maquinas, S.A. 2,129 3,620 Condumex, S.A. 8,670 29,504 Swecomex, S.A. 2,859 4,032 Comesa, S.A. 700 5,422 Materias Primas y Minerales Lampazos, S.A. 1,620 2,215 Promociones Industriales Mexicanas, S.A. 1,986 6,118 La Florida, S.A. 8,865 7,108 Fenoqulmica, S.A. 5,896 14,905 Fundidora de Cueros, Tepeyac, S.A. 2,533 2,522 Tubos Flexibles, S.A. 1,819 1,450 DeKormex, S.A. 1,208 619 Metalurgica Almena, S.A. 499 1,086 Qulmica Mexama, S.A. 343 3,425 Industrial Papelerla Mexicana, S.A. 8,129 6,537 Herramientas Nacionales, S.A. 697 1,139 Autoforjas, S.A. 4,678 6,198 Productos de Estireno, S.A. 2,948 9,682 Eutectic Investment Casting de Mexico, S.A. 1,401 439 Cla. Qulmica Ameyal, S.A. 1,909 58 Quimica Central de Mexico, S.A. 848 2,972 Ind. de Baleros Intercontinental, S.A. 3,946 3,970 Conductores Monterrey, S.A. 2,976 878 Resinas Sinteticas, S.A. 2,514 649 Transejes, S.A. 2,079 1,614 Automanufacturas, S.A. 3,329 4,166 Industrias Resistol, S.A. 1,496 14,339 Hulva, S.A. 217 113 C;a. Mexicana de Especialidades Industriales, S.A. 1,096 1,347 Aceros de Chihuahua, S.A. 781 1,062 Industrias Monterrey, S.A. 2,128 2,010 Multitex, S.A. 685 520 Reconstructora Mexicana de Maquinaria Industrial, S.A. 3,606 2,340 Total 84,590 142,059 LCPI2 March, 1979 - 94 - ANNEX 9 KEXICO T-31 FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 31: Number of New Jobs Created by a Sample of Projects Financed by FONEI (as of December 1978) Enterprise Projected Actual Cementos Anahuac del Golfo, S.A. 52 375 Cementos de Chihuahua, S.A. 40 100 Ladrillera Industrial, S.A. 32 80 Fabricacion de Maquinas, S.A. 50 110 Swecomex, S.A. 55 6 Camesa, S.A. 82 100 Motores y Refacciones, S.A. 240 200 Materias Primas y Minerales de Lampazos, S.A. 120 158 Promociones Industriales Mexicanas, S.A. 20 49 Fabricas Orion, S.A. 175 175 La Florida, S.A. 88 205 Fenoquimia, S.A. 170 330 Fundidora de Aceros Tepeyac, S.A. 33 14 Tubos Flexibles, S.A. 50 40 Dekormex, S.A. 40 0 Metalurgica Almena, S.A. 15 0 Quimica Mexama, S.A. 15 40 Aceros de Chihuahua, S.A. 60 55 Industrial Papelera Mexicana, S.A. 161 210 CTa. Fundidora del Norte, S.A. 700 359 Herramientas Nacionales, S.A. 55 17 Autoforjas, S.A. 155 368 Productos de Estireno, S.A. 17 12 Polynova, S.A. 668 650 Eutectic Investment Castings de Mexico, S.A. 112 52 Cia. Quimica Ameyal, S.A. 24 111 Qu'mica Central de M'exico, S.A. 25 0 Industria de Baleros Intercontinental, S.A. 35 25 Conductores Monterrey, S.A. 20 40 Casa Aries, S.A. 206 147 Resinas Sinteticas, S.A. 14 40 Transejes, S.A. 61 186 Automanufacturas, S.A. 388 397 Taloqu'mica, S.A. 30 9 Industrias Resistol, S.A. 76 76 Hulva, S.A. 36 14 Cia. Mexicana de Especialidades Industriales, S.A. 36 46 Negromex, S.A. 27 0 Industrias Monterrey, S.A. 15 82 Multitek, S.A. 40 23 Reconstructora Mexicana de Maquinaria Industrial, S.A. 170 179 Total 4,408 5,080 LCPI2 March, 1979 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 32: FONEI: Past and Projected Balance Sheets- (Mex$ millions) HISTORICAL PROJECTED 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 ASSETS Cash and deposits 51 4 29 63 92 221 341 483 517 666 Interest and commissions receivable 8 15 20 37 74 157 248 344 432 508 Loan portfolio 295 726 995 1,613 2,735 5,242 8,279 11,464 14,393 16,919 Fixed and other assets - - I 1 1 2 2 2 2 2 Total Assets 354 745 1,045 1,714 2,902 5,622 8,870 12,293 i5,344 18,095 LIABILITIES IBRD - FONEI I 116 260 606 730 700 668 633 596 557 514 IBRD - FONEI II - - - 307 782 1,111 1,058 1,001 939 871 IBRD - FONEI III - - 1,300 2,272 2,272 2 272 2,097 IBRD _ FONEI IV - - - - - - 400 2,600 3,800 3,932 Banco de Mexico A 100 332 375 375 375 375 375 375 375 375 Banco de Mexico B - - 100 400 920 920 920 920 920 920 Banco de Mexico C - - - - - 1,035 1,035 1,035 1,035 1,035 Banco de Mexico D - - - - - 1,500 2,158 2,386 2,386 Banco de Mexico E - - - - - - - - 872 2,561 and other new resources Other liabilities 6 9 21 32 213 110 142 190 224 244 Total Liabilities 222 601 1,102 1,844 2,989 5,518 8,336 11,148 13,381 14,935 EQUITY Paid-in capital 125 132 146 161 178 220 291 369 453 719 Retained earnings 5 7 13 7 (9) 2 137 480 996 1,713 Current year's profits (loss) 2 6 (6) (16) 11 135 343 516 717 911 Exchange rate losses - - (210) (282) (267) (253) (237) (221) (203) (184) Total Equity 132 145 (58) (130) (87) 104 534 1,144 1,963 3,159 Total Liabilities and Equity 354 745 1,045 1,714 2,902 5, 622 8,870 15,344 18,095 .~~~~~ ~ ~ ~ _ _ _ a/ As of December 31. LCPI2 March, 1979 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 33: FUNEI: Past and Projected Sources and Applications of Funds (MexS millions) HISTORICAL PROJECTED 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 BEGINNINU WORKING CAPITAL 87 51 4 29 63 92 221 341 483 517 SOURCES IBRD - FONEI I 116 151 373 156 - - - - - - IBRD - FONEI II - - - 307 474 345 - IBRD - FONEI III - - 1,300 972 - - - IBRD - FONEI IV - - - - 400 2,200 1,200 132 Banco de Mexico A 100 232 43 - - - - - - Banco de Mexico B - - 100 300 520 - - - - - Banco de Mexico C - - - - - 1,035 - - - - Banco de Mexico D - - - - 1,500 658 228 - Banco de Mexico E and other new resources - - - - - - - - 872 1,689 Portfolio recoveries 2 13 59 107 161 353 493 1,340 2,171 3,074 Profits 2 6 ( 6) (16) 11 135 343 516 717 911 Increase in paid-in capital - 7 14 15 16 42 72 77 84 266 Increase in payables (10) 3 12 11 181 a/ (104) 32 48 34 20 Total Sources 210 411 595 881 1,363 3,115 3,812 4,840 5,306 6,091 APPLICATIONS Subloan disbursements 243 444 328 725 1,283 2,860 3,530 4,525 5,100 5,600 Increase in interest, commissions and other receivables 3 7 5 18 37 83 91 96 88 76 Amortization of FONEI I Loan - 7 27 32 30 32 34 37 40 42 Amortization of FONEI II Loan - - - - - 25 53 57 62 68 Amortization of FONEI III Loan - - - - - - - - 175 Exchange rate losses - - 223 89 - - - - - - Amortization of exchange rate losses - - (13) (17) (15) (14) (15) (17) (18) (19) Total Applications 246 458 570 847 1,335 2,986 3,693 4,698 5,272 5,942 INCREASE (DECREASE) IN WORKING CAPITAL (36) (47) 25 34 28 129 120 142 34 149 ENDING WORKING CAPITAL 51 4 29 63 92 221 341 483 517 666 a/ Includes a Mex$150 million bridge loan from Banco de Mexico. LCPI2 March, 1979 ' MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 34: FONEI: Past and Projected Income Statements (Mex$ millions) HISTORICAL PROJECTED 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 Income Interest income 19 48 78 132 262 581 1,070 1,528 1,974 2,344 Commissions - 1 1 3 3 2 1 1 1 1 Total Income 19 49 79 135 265 583 1,071 1,529 1,975 2,345 Expenses Interest expense 6 33 69 125 221 367 630 892 1,112 1,276 Commissions expense 3 2 6 15 12 41 55 67 79 74 Gross Spread 9 14 4 (5) 32 175 386 570 784 995 Administration Expense 7 8 10 11 21 40 43 54 67 84 Operating Profit (Loss) 2 6 (6) (16) 11 135 343 516 717 911 Note: Arithmetical differences due to rounding of figures. LCPI2 March, 1979 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 35: FONEI: Operations Projections (1979-1983) (current prices) Actual Projected 1978 1979 1980 1981 1982 1983 Approvals No. of projects 62 102 131 146 161 176 Average size (Mex$ million) 37 34 34 34 34 34 Total (Mex$ million) 2,288 3,500 4,500 5,000 5,500 6,000 Disbursements (Mex million) 35% of approval for the year ( 1,225 1,575 1,750 1,925 2,100 50% of approval 1 year ago (1,283 (1,635 1,750 2,250 2,500 2,750 15% of approval 2 years ago ( ( 205 525 675 750 Total 1,283 2,860 3,530 4,525 5,100 5,600 _~~~~~~~~~~~~~~~~ LCPI2 z March, 1979 x 1.D MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 36: FONEI: Loan Commitments and Resources (1979-1983) (Mex$ millions) 1979 1980 1981 1982 1983 Loan Commitments 3,500 4,500 5,000 5,500 6,000 Resources Available for Commitment IBRD - FONEI III 8071/ Bancode Mexico - Series C 588 Subloan repayments 353 493 1,340 2,171 3,074 Profits and other 135 343 516 717 911 New Resources Needed for Commitments 1,617 3,664 3,144 2,612 2,015 IBRD - FONEI IV 890 2.233 808 - - Banco de Mexico - Series D 727 1,431 228 - - Banco de Mexico Series E and - - 3,108 2,612 2,015 other new resources 1/ Amount not yet committed by FONEI. LCPI2 LI March, 1979 e MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 37: FONEI: Resource Position (1979-1983) (Mex$ millions) 1979 1980 1981 1982 1983 Disbursements 2,860 3,530 4,525 5,100 5,600 Other Uses 317-/ 178 189 88 206 Resources available for disbursements IBRD - FONEI II 354 IBRD - FONEI III 1,300 972 Banco de Mexico - Series C bonds 1,035 Repayment of subloans 353 493 1,340 2,171 3,074 Profits and other sources 135 343 516 717 911 0 New resources needed for disbursements - 1,900 2,858 2,300 1,821 IBRD - FONEI IV - 400 2,200 1,200 132 Banco de Mexico - Series D bonds 1,500 658 228 - Banco de Mexico - Series E bonds - - - 872 1,689 and other new resources Total Funding 3,177 3,708 4,714 5,188 5,806 1/ Including repayment of Banco de Mexico's bridge loan made in 1978. LCPI2 March, 1979 - 101 - ANNEX 9 T- 38 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Table 38: FONEI: Principal Assumptions Used in the Financial Projections 1. Disbursements and Resources: See Tables T-35, T-36 and T-37. 2. Exchange Rate: Mex$22.72 = US$1.00, 1979-1983. 3. Administrative Expenses: 1979 as budgeted, with annual increases of 25% from 1980 to 1983. The 1979 amount includes an extraordinary expense of Mex$6 million arising from FONEI's transfer of offices, and which has been excluded in the base for computing future administrative expenses. 4. Interest Rates and Commissions (in percent): Interest Income Interest Expense A. IBRD Funds-l First loan 9.00 7.25 + 0.25-/ Second loan Fixed at 11.5; ,8.50 + 0.50a/ Floating at 16.00-' Third loan 16.00c/ 7.50 + 0.50- Fourth loan 16.00c/ 8.00 + 0.50a/ B. Government Funds Series A 9.00 9.00 Series B Fixed at 11.5; / 10.00 Floating at 16.00 Series C 16.00c/ 12.00 Series D 16.00c/ 12.00 C. Other Resources Series E 16.00c/ 12.00 Other Resources 16.00c/ 8.00 + 0.50a/ 5. Average term of subloans assumed to be 7.0 years, including 2 years of grace. a/ Commission paid to NAFINSA for loan administration. b/ The commitment fee for all Bank loans is 0.75% on the undisbursed balances. c/ Floating at ACF. LCPI2 March, 1979 - 102 - ANNEX 10 MEXICO FOURTH INDUSTRIAL EQUIPMENT FUND (FONEI) PROJECT Selected Documents and Data Available in the Project File A. On the manufacturing sector and financial system 1. Indicadores Economicos, Various issues, published monthly by Banco de Mexico 2. Informe Anual, 1976 and 1977; annual report of Banco de Mexico. 3. Informacii6n Economica, various issues, published by Banco de Mexico. 4. El Mercado de Valores, January 8, 1979, published by NAFINSA. 5. Estadisticas del Comercio Exterior, Janu,ary-November 1977 and 1978; published by Instituto Mexicano de Comercio Exterior. 6. Transformacion, various issues; published by the Camara Nacional de la Industria de Transformacion. 7. Actividad Economica, various issues; pub:Lished by the Centro de Estudios Economicos del Sector Privado. 8. Examen de la Situacion Economica de Mexico, various issues; published by the Banco Nacional de Mexico. 9. Boletin Mensual de Informaci6n Econ6mica, November 1978; published by the Secretaria de Programaci6n y Prestupuesto. 10. Plan Nacional de Desarrollo Industrial (1979-82), 1979; issued by the Secretaria de Patrimonio y Fomento Industrial. B. On FONEI 1. FONEIT's audited financial statements 1974 to 1977. 2. FONEI's Annual Report, 1978. LCPI2 March, 1979 * I I S -. q z z m x N   7j7 ->-V C jS  55 (S