Document of IL l C The World Bank FOR OFFICIAL USE ONLY Report No. 2947a-ME MEXICO STAFF APPRAISAL REPORT SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT May 30, 1980 Projects D,epartment Latin America and the Caribbean Regional Office This docunient 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 EQUIVALENTS Currency Unit = Peso (Mex$) US$1 = Mex$22.80 Mex$1 = US$0.044 LIST OF ABBREVIATIONS Acr Index of Average Cost of Funds to Multipurpose Banks BANAMEX Banco Nacional de Mexico BANCOMER Banco de Comercio CANACINTRA Camara Nacional de la Industria de Transformacion CENAPRO Centro Nacional de Productividad CEPSE Centro Empresarial de Perfeccionamiento Socio-Economico, A.C. CFM Comision de Fomento Minero COMERMEX Banco Comercial Mexicano CONACYT Consejo Nacional de Ciencia y Tecnologia CONCAMIN Confederacion de Camaras Industriales FIDEIN Fideicomiso de Conjuntos, Parques, 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 FONATUR Fondo Nacional de Turismo FONEI Fondo de Equipamiento Industrial FONEP Fondo Nacional de Estudios de Preinversion FOVI Fondo de Operacion y Descuento Bancario a la Vivienda GDP Gross Domestic Product 1DB Inter-American Development Bank IMCE Instituto Mexicano de Comercio Exterior IMIT Instituto Mexicano de Investigaciones Tecnologicas INFONAVIT Instituto de Fomento Nacional de Vivienda para los Trabajadores INFOTEC Servicio de Informacion Tecnologica IPADe Instituto Panamericano de Alta Direccion de Empresa NAFINSA Nacional Financiera, S.A. PAI Programa de Apoyo Integral a la Industria Mediana y Pequena SAHOP Secretaria de Asentamiento Humano y Obras Publicas SEPAFIN Secretaria de Patrimonio Nacional y Fomento Industrial SFBs Standard Factory Buildings SMI Small and Medium Scale Industry FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY MEXICO: SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Page No. THE INDUSTRIAL SECTOR AND PERFORMANCE OF SMALL AiND MEDIUM SCALE INDUSTRY ...............................1..... A. Recent Economic Developments ....1...................... I B. Performance of Small and Medium Industry ................... 2 C. Industrial Policy Issues .. ... . ... 4 Industrial Development Plan .. 4 Import Liberalization.. 6 Export Competitiveness ... . ......... 6 Employment .. 7 D. Perspectives for 1980-82 ....... ................. ........ 7 II. THE FINANCIAL SYSTEM AND SMI FINANCING .................. ...... 8 A. Institutional Structure .................... . . * 8 The Banking System. . . 8 The Trust Funds 9... .9 The Securities Market .... . . . . . . . ... .9 B. Credit Availability and Interest Rate Policy . ... 10 C. SMI Financing ........ 11 D. Outlook.. 12 III. THE INTEGRATED SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROGRAM (PAI)... 12 PAI's Coordinating Committees and Secretariat . .13 The Industrial Extension Service. 14 Specialized Technical Assistance Institutions ..17 Allocation of Technical Assistance Funds . .19 This report is based on the findings of an appraisal mission which visited Mexico in January/February 1980. The mission comprised Messrs. N.V. Santiago, C. Joseph, (Ms.) A. Velarde (LCPI2); J. Levitsky, C. Goderez (IDFD); D. Sarfaty and M. Fierro (Consultants). Mr. P. Glaessner (Assistant Director, LCP) participated in final mission discussions. Mr. I. Baskind (LCPI2) assisted in the preparation of this report. 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 Ban1K authorization. -2- Page No. IV. PRINCIPAL INSTITUTIONS SUPPORTING SMI ENTERPRISES ............ ... 20 A. Fondo de Garantia y Fomento a la Industria Mediana y Pequena (FOCAIN) .................................................... 20 Organization, Management and Staffing of FOGAIN ............. 21 Operating Regulations and Policies ........... .. ............. 22 Interest Rates and Margins to Intermediaries ................ 22 Participating Intermediaries ..... .......................... 24 Project Appraisal and Supervision ..... ...................... 24 Procurement and Disbursement . ................................ 26 Past Operations and Impact .................................. 26 The Credit Guarantee Scheme ................................. 27 Past Financial Performance .................................. 29 Accounting Procedures and Auditing Arrangements .......... ... 30 Operational and Financial Projections . . . . 30 B. Fondo Nacional de Fomento Industrial (FOMIN) .31 Background and Objectives. . ............ 31 Organization, Management and Staffing . . .32 Operations ...32 Portfolio Quality . . .37 Project Appraisal and Supervision . . 38 Procurement and Disbursement . . .38 Accounting Procedures and Auditing . . .39 Financial Position and Projections . . .39 C. Fideicomiso de Conjuntos, Parques y Ciudades Industriales, y Centros Comerciales (FIDEIN) .40 Background and Objectives .40 Organization, Management and Staffing .41 Development of Industrial Estates .42 Interaction with the "Fideicomisos Especiales" .44 FIDEIN - Status and Performance of the Industrial Estates Subprogram .45 FIDEIN - The Proposed Subprogram .47 Project Appraisal and Supervision .48 Procurement and Disbursement .49 Accounting, Control and Auditing .49 Operational and Financial Projections .50 -3- Page No. V. THEI PROJECT AND THE PROPOSED BANK LOAN ....................... 51 A. Allocation of Program Resources under the First SMI Project 51 B. The Project and the Proposed Bank Loan .52 Size of the Program and the Proposed Loan ............. 52 Description of the Loan Components 53 Channeling Arrangements, Repayment and Capitalization of PAI's Special Account .................... ..oo.**** 55 Disbursement, Procurement and Auditing ........ ...... 55 Approval Limits .. .................. ,........... *.. ...... . 57 Project Benefits and Risks .............................. 58 VI. AGREEMENTS REACHED AND RECOMMENDATION ....... .................. 59 A. Agreements and Understandings Reached .................... 59 B. Recommendation ........................................... 60 -4- LIST OF ANNEXES 1. The Average Cost of Funds (ACF) Index 2. Estimated Quarterly Schedule of Bank Loan Disbursements 3. FIDEIN's Plan of Action 4. FIDEIN's Pricing Criteria 5. Technical Considerations, Construction Schedule and Capital Costs of FIDEIN's Factory Building (SFB) Component. 6. Supporting Tables: Table 1: Gross Domestic Product, by Sector of Origin, 1965 and 1970-78 2: Annual Rates of Growth of GDP by Sector of Origin 3: Manufacturing Sector, Structure of Value Added, 1970-78 4: Indices of Industrial Production, 1970-79 5: Indices of Employment in Manufacturing, 1970-78 6: Gross Fixed Investment 7: Number of Industrial Establishments, Employment and Value Added by Manufacture, According to the Number of Employees, 1970 and 1975 8: Structure of Manufacturing Industry, 1970-75 9: Exports of Manufactured Goods by Sector: 1972-79 10: Composition of Imports, 1977-79 11: Summary of Principal Fiscal Incentives for Industrial Investment 12: Regional Distribution of Industrial Activities, 1970-75 13: Liabilities of the Banking System by Type of Institution and Instrument 14: Mexico's Largest Banks (October 31, 1979) 15: Indicators of Financial Development and Efficiency of the Banking System 16: Trust Funds Financing Outstanding Balances on September 30, 1979 17: Geographical Distribution of Deposits and Credit 18: Lending Terms, 1978-79 19: Selected Rates of Interest in Mexico, USA, and London Interbank Rates 20: Banking System Credit by Sectors, 1976-79 21: Organization Chart of FOGAIN and PAI Secretariat 22: Existing and Planned Regional Offices of PAI as of year-end 1979 23: Integrated Small and Medium Scale Industry Program (PAI) Financial Statements 24: Classification of FOGAIN's Operations by Financial Intermediaries (April 1954 - December 1979) 25: Analysis of Total Credit Operations of FOGAIN from Inception through 1979 26: FOGAIN's Balance Sheets as at December 31, 1977-79 27: Past and Projected Income Statements of FOGAIN 28: FOGAIN's Projected Sources and Application of Funds for the Period 1980-84 29: Organization Chart of FOMIN 30: Summary of FOMIN's Investments (List of Annexes, contd.) - 5- Table 31: Economic Activity of Firms Supervised by FOMIN, 1978-79 32: Analysis of FOMIN's Authorized Projects by Number, 1977-79 33: FOMIN's Equity Investments Held 34: FOMIN's Portfolio Development 35: Revenues of FOMIN's Disinvestments 1976-79 36: FOMIN - Audited and Projected Balance Sheets, 1977-84 37: FOMIN - Audited and Projected Income Statements, 1977-84 38: Resource Needs to Support FOMIN's Expected Level of Operations, 1980-84 39: FOMIN's Sources and Applications of Funds, 1980--84 40: Organization Chart of FIDEIN 41: Investment in Acquisition and Land Development of Industrial Estates as of December 31, 1979 42: FIDEIN Operating Results of the Industrial Estates as of December 31, 1979. 43: Consolidated Balance Sheet Summary for the Fide:icomisos Especiales as of December 31, 1978 44: Status of FIDEIN's Industrial Estates Subprogram as of March 1980 45: FIDEIN's Industrial Estates Subprogram Construction Chronogram with Committed Factory Buildings for 1980 46: FIDEIN's Industrial Estates Subprogram Execution Schedule of the Allocated PAI Funds for the Proposed Project Loan 47: FIDEIN - Unaudited and Projected Balance Sheets, 1977-84 48: FIDEIN - Unaudited and Projected Income Statements, 1977-84 49: Resources Needed for Support of FIDEIN's Expected Level of Operations, 1980-84 50: Government/Private Sector Complementarity 51: Estimated Breakdown of Technical Assistance Component by Institution for the Proposed Project Loan 52: Computation of the Foreign Exchange Cost Content of Program Financing 7. Selected Documents and Data Available in the Project File. MAP I. THE INDUSTRIAL SECTOR AND PERFORMANCE OF SMALL AND MEDIUM SCALE INDUSTRY A. Recent Economic Developments 1.01 The period since the end of 1977 has witnessed a resurgence of dynamism in the Mexican economy after four years of slow growth which had followed almost two decades of virtually uninterrupted economic expansion.l/ GDP rose by 7.0% in 1978 and 8.0% in 1979 after averaging 3.9% p.a. during 1974-77. The principal factor has been the substantial increase in output in the industrial sector, defined in Mexican statistics as mining, petroleum, petrochemicals, manufacturing, construction and electricity. Among these components, petroleum extraction has been the most buoyant since 1974, with annual rates of increase well above those of GDP, averaging 13%Y in the period 1974-78 and provisionally estimated at 15% for 1979. The increase in value added in manufacturing in real terms, after averaging less thani 4% in 1974-77, rose to 8.8% in 1978 and the provisional estimate is 8.5% in 1979 (Annex 6, T-1 and T-2). 1.02 The focus of this growth has been the petroleum sector, where real output expansion, combined with rising prices, has led to subsltantial increases in export earnings. Moreover, the new large hydrocarbon discoveries have led to highly optimistic expectations regarding future local demand for goods and services and the capacity of the Mexican economy to finance accelerated growth. As a consequence, there has been a strong surge in industrial invest- ment by the domestic private sector; foreign capital inflows, for investment in and long-term lending to industry, have also been substantial. Finally, government expenditures on current and capital accounts have exceeded budgetary forecasts, and in spite of sharply rising revenues, the public sector deficit for 1979 is provisionally estimated at about 6% of GDP, un- changed from 1978. As a consequence of the growth in both public and private investment, gross fixed capital formation in 1979 apparently wils about 50% higher in real terms than in 1977 (Annex 6, T-6). 1.03 Within the manufacturing sector, a large number of enterprises were reported to be working at close to full capacity at the beginning of 1980. In some instances, output growth was constrained by tight raw matierial supplies, due to transport bottlenecks and, in the case of agro-industriles, to shortages of domestically produced inputs. 1.04 The main weakness in the economic outlook has been tlhe relatively poor performance in the agricultural sector. Inclement weather adversely affected recent harvests of some key commodities and output growth rates have lagged behind the rate of population increase since the mid-1960s. As a conse- quence, industries drawing their inputs from agriculture have not performed as well as the rest of manufacturing. Moreover, the lack of growth in real income in the rural areas (representing 40% of the population) comparable to 1/ In each of the four years 1974-77, GDP growth rates fell below 6%; during the entire 20-year period 1954-73, the annual rate of growth fell below 6% in only five years (averaging 6.9%) and only once in two consecutive years (1961-62). -2- that being achieved in other sectors has similarly influenced industrial subsectors providing basic consumer goods. Thus, from the point of view of establishing conditions necessary for maintaining accelerated income growth and avoiding social unrest, the solutions to the problems facing the agricul- tural sector remain a high government priority. 1.05 Exports of manufactures rose sharply in the early 1970s in response to a major export development program but fell during 1975 and 1976, due to both external recession and the domestic inflation which resulted in a sub- stantially overvalued peso. Following the sharp peso devaluation of September 1976 and other measures taken during 1977, manufactured exports resumed their upward trend, and in 1978 exceeded in real terms the 1974 peak level. In 1979, the value of this trade was some 15% above the 1978 level, signifying very little change, if any, in the total volume (Annex 6, T-9). Of particular importance was the shift in composition, reflecting substantial declines in exports of many items (e.g., construction materials and durable consumer goods) where domestic demand expansion has put some pressure on supplies. On the other hand, exports of refined petroleum and petro-chemical products and motor vehicle parts have expanded sharply. For the petroleum derivates, this represented the coming on stream of a number of new installations which are expected to export a substantial share of output. For motor vehicle parts manufactures these exports reflect in great part the export commitments made by domestic vehicle manufacturers as part of their overall expansion plans established under the government's special program for the automotive industry. 1.06 In spite of the substantial rise in export earnings, particularly from the petroleum sector, the deficit in the trade balance has widened in recent years as a result of even larger increases in imports. The main element in this growth has been the expansion in imports of capital goods as well as of intermediate goods used in construction (including for rail- roads and refineries) (Annex 6, T-10). In 1979, there were also important increases in food imports (particularly grains), due to the shortfall in agricultural output. B. Performance of Small and Medium Industry 1.07 Indications are that small and medium industry 1/ (SMI) has been able to participate in the recent growth and that a number of former SMI enterprises have moved into the category of large industry during this period of expansion. Sample surveys undertaken by Banco Nacional de Mexico (BANAMEX) and the Fondo de Garantia y Fomento a la Industria Pequena y Mediana (FOGAIN) in late 1979 indicate substantial increase in sales and in the physical volume of production, relatively high capacity utilization (except in some non-durable consumer goods industries) and a large number of firms experiencing difficul- ties in obtaining adequate supplies of domestically produced raw materials. Most plants had undertaken expansion programs in the current or previous year or were planning such investments for 1980. In connection with lower levels of output from the non-durable consumer goods industries, production may be adversely affected by the imposition of price controls for basic wage goods, particularly the relatively inexpensive items, as well as by less buoyant demand from the rural population. 1/ Establishments with between 6 and 250 employees. - 3 - 1.08 The 1975 industrial census provides data summarized in Table 1.1, which suggest important changes in the size structure of industry. In common with other industrializing and industrialized countries, there has been a tendency towards increasing the average size of industrial establishments. _/ The growth patterns among the groups classified by numbers of workers suggest that the process has been dynamic, with many enterprises moving up from the smaller to the larger category. The total number of enterprises which employed 6 or more workers 2/ declined slightly between 1970 and 1975, dlue to reduction in the number of small scale enterprises with 6 to 50 employees. While the number of medium sized enterprises with 51 to 250 employees rose slightly there was a relatively substantial growth of large enterprises employing more than 250 workers. As a consequence, large industry increased its share in overall employment in organized industry from 49.4% to 51.2%' and from 56.1% of total value added to 61.2% between 1970 and 1975. Table 1.1: CHARACTERISTICS OF INDUSTRY CLASSIFIED BY SIZE OF ESTABLISIefENT Number of Value acAed ===i=- ~~~~~Est=bih::nts EmnloYment __(in millict-: Pesos~ 1970 2 1975 % 1970 2 1975 z 1970 2 1975 ' 6 - 50 workers 17,820 76.9 17.525 75.9 291,832 21.1 277,244 18.3 10,598 13.3 19,773 11.1 S1 - 250 workers 4,288 18.5 4,347 18.8 459.992 33.3 462,781 30.5 24,340 30.6 49,021 27.6 Over 250 workers 1,065 4.6 1,215 5.3 630444 45.6 776.331 51.2 44,700 56.1 108,700 61.2 TOTAL 23,173 100.0 23,087 100.0 1,382,26/ 100.0 1,516,356 100.0 79,638 100.0 177,494 LOO.0 Source: Induetrial Census for 1970 and 1975. 1/ The group of enterprises with up to 5 employees has been omitted from these comparisons. About half of the employees in this group are unremunerated family members. 2/ The discussion on size is based on census data which included mining and manufacturing activities. -4 1.09 Within SMI there have been significant changes in output structure (Annex 6, T-7 and T-8). Between 1970 and 1973, the share of the traditional consumer goods industries in the total value added by SMI (excluding mining) declined from 41.3% to 35.8% for food, beverages, tobacco, textiles, clothing and shoes. The share of the metal products and engineering industries rose from 23.3% to 29.7% between the two years. While this trend is typical for an industrializing country, these changes within the SMI grouping were more marked than those of industry as a whole (Annex 6, T-3). As a consequence, the share of SMI in total output of the metal products and engineering indus- tries (as measured by census data) rose slightly from 1970 to 1975. This has important implications for future growth patterns, since these branches will be the most dynamic as the industrialization process accelerates. 1.10 SMI has received considerable attention from the government in recent years. As described in para. 3.01, an Integrated Assistance Program (PAI) was organized in 1978, supported by Bank Loan 1552-ME, and has made substantial progress in expanding both technical and financial assistance services to SMI. The financial activities of FOGAIN within this program increased 30% in number and 60% in nominal terms in 1979 as compared to 1978 (para. 4.17). 1.11 In addition, the government recently initiated a nationwide system of subcontracting exchanges, whose benefits are expected to accrue especially to the SMI sector. The first clearing-house has been established in Guadalajara for metal fabricating industries and some 10 or 12 additional subcontracting exchanges are expected to be opened shortly. 1.12 The principal function of these subcontracting exchanges is to dis- seminate information, through such measures as publications and exhibitions, about potential subcontractors and contractors, including their relative capacities and specialties. Recent reports on the structure of Mexican industry 1/ have pointed out that the sector appears to be excessively vertically integrated as compared to other countries in a similar stage of development and that the growth of subcontracting, which would involve many SMI firms, could play a major role in improving efficiency in production. C. Industrial Policy Issues Industrial Development Plan 1.13 At the beginning of 1979 the government issued the National Indus- trial Development Plan for 1979-1982, a related National Urban Development Plan, and a series of presidential decrees which established the mechanisms for implementing the objectives of these plans. Regulations governing the application of the specific measures contained in the decrees were issued by mid-1979. The industrial plan 2/ does not provide the basis for a specific 1/ See, for example, Bank Report No. 1671-ME, Mexico - Manufacturing Sector: Situation, Prospects and Policies (May 1, 1977). 2/ The industrial plan and the relevant presidential decrees are described in more detail in the Staff Appraisal Report for the Fourth Industrial Equipment Fund (FONEI) Project, Report No. 2473b-ME, dated May 10, 1979. allocation of resources, but rather indicates the growth potential of the sector in the new economic environment based on the ample availability of the hydrocarbons. The plan also SeLS the basic sectoral objectives of the govern- ment, providing the rationale for using specific policy tools. The objectives include accelerated generation of employment opportunities, risiLng real per capita incomes, improved regional distribution of industry, a stronger outward orientation for the industrial sector, and the stimulation of tech- nological growth. 1.14 The major measures to achieve these objectives include public sector investment in infrastructure and in certain basic industrial subsectors (e.g., petrochemicals and steel) and an elaborate set of special pricing arrangements and fiscal incentives for the private sector to channel its investment into priority regions and industrial subsectors, to promote employment and to increase labor use.1/ Additional incentives are provided to small industries, defined in this context as enterprises whose fixed assets do not exceed 200 times the annual minimum salary for the Federal District (presently equivalent to US$400,000).2/ 1.15 Along with the focus on employment opportunities, the main objective of the reg:Lonal decentralization effort is to achieve a better spatial dis- tribution of industry and to control the growth in the main cities, in parti- cular Mexico City, where the burgeoning population has already created serious social, economic and ecological problems. Top priority is given to the devel- opment 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 nation- wide Urban Plan. The second group of areas (Zone II), which are considered state priorities, are specified in agreements 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 3/ and investment in those areas is practically excluded from receiving incentives, except for expansions of existing enterprises in Zone IIIB. Finally, as regards thie 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), (Annex 6, T-ll). 1.16 It is too early to assess the impact of the incentives, particularly in view of the general buoyancy of investment demand. Also most of the incentives granted through December 1979 were related to the rebates offered for the purchase of domestically produced capital goods, thus reflecting projects which had been largely formulated prior to the establishment of the 1/ A table summarizing the principal characteristics of the fiscal incentives is presented in Annex 6, T-11. 2/ This definition is approximately the same as that used by FOGAIN for small enterprises under the proposed loan. Based on FOGAIN's lending experience, it would cover mostly enterprises with up to 25 workers. 3/ The intention of the Plan is to channel 70% of new industrial invest- ment away from this area of concentration which currently accounts for about 50% of manufacturing output. - 6 - incentive system. Nevertheless, the appraisal mission found that many indus- trialists, in considering the location of new facilities, were taking into account the new set of incentives offered to promote investment in different regions. Import Liberalization 1.17 Among the goals which the present administration has established is that of opening the economy through import liberalization, mainly by reducing the number of imported goods which are subject to prior licenses. Consider- able progress has been made since the initiation of the liberalization program at the end of 1977. By the beginning of 1979, slightly more than two-thirds of the 7,400 items in the customs nomenclature were no longer subject to prior licensing procedures but the goods still under license accounted for about 65% of total imports in 1978. During 1979, further items were removed from the list but the remaining items, although less than one-fourth of the total in the nomenclature, still represent about 60% of imports. With present condi- tions of strong local demand and continued high levels of international reserves, further progress in this direction could play an important role in containing inflation and in improving the international competitiveness of the Mexican industry. In this connection, the government has delayed its decision to join the GATT while it continues to assess the overall impact of its entry. In announcing this decision, the President indicated that entering GATT at this time would limit the country's use of its oil and other national resources as instruments of trade policy and of national independent development. Export Competitiveness 1.18 From the level of more than 30% in 1977, domestic inflation dropped substantially in 1978 and 1979, and it is now around 20%, which is still above international inflation levels. However, there appear to be disparate price trends among product groups. While a large number of food items for basic consumption have been subject to price controls and subsidies are also being provided to keep the prices of many of these items from rising, price increases for many manufactured products have been substantial. Whereas the national consumer price index rose by about 22% between January 1979 and January 1980, food prices increased by 18%, i.e., well below the prices of clothing and shoes (36%), furniture (35%), and electric domestic appliances (23%). 1.19 These price changes largely reflect the pull of rapidly expanding domestic demand as well as increases in costs of production. Many of the items which experienced declines in export volume in 1979 are those for which domestic demand has been particularly strong (para. 1.05), and the extent to which competitiveness of these exporting subsectors has been adversely affected by rising costs is unclear. For example, in the August 1979 BANAMEX survey of SMI, about one-fourth of the respondents had undertaken exports and, within this group, three-fourths considered their prices still competitive in export markets. Nevertheless, the continuation of these price cost trends in the absence of an exchange rate adjustment would severely reduce the long-term competitive position of Mexican industry and endanger the goal of the author- ities to increase the external orientation of manufacturing. -7- Employment 1.20 The recent increases in industrial output have had a particularly beneficial impact on increasing employment opportunities. The annual increases in employment in manufacturing from the mid-1950s through the 1960s averaged about 3%, more or less equal to the percentage increase in Mexico's total labor force. Industrial employment increased sharply in 1977-79 (Table 1.2). According to the Industrial Plan, it would be possible to raise that growth rate to 5% and help to reduce the high level of unemployment in the country. The 1977-79 experience suggests that the recent pattern of indLustrial growth may provide more employment than in the past. This trend will have to be monitored to determine whether it is, in fact, sustainable in the long run, or whether additional measures are required to increase employment generation in the industrial sector. Table 1.2: AVERAGE ANNUAL INCREASES Index of Industrial Manufacturing Value Added in Manufacturing Employment Production (Based on Constant Prices) 1970-74 3.6% 8.2 7.3 1974-77 1.3 3.7 4.3 1977-79 6.2 1/ 9.2 1/ 7.0 1/ For 1979, January-October data compared to January-October 1978. Source: Annex 6, T-5 and T-7. D. Perspectives for 1980-82 1.21 Industrial growth in the medium term can be expected to maintain the 8.6% p.a. increase recorded in the past two years. AdditionaL capacity in a number of subsectors is expected to come on stream in 1980 as a result of the quickened pace of investment starting in 1978, while further capacity increases reflecting the recent accelerated pace of investmentL will be opera- tional beginning in 1981. The main constraints to output growth could arise from certain bottlenecks in infrastructure facilities, especially transport, causing delays and backlogs in the movement of goods, particularly of imports. 1.22 The longer-term capability for sustained output expansion will continue to depend heavily upon the government's ability to prevent severe inflationary pressures. With both public and private spending expanding at a rapid rate with little financial constraint, there is increasing competition for goods and services. There is, therefore, an urgent need for the public sector to establish budgetary priorities and to avoid excessive expenditures. Of particular importance is the need to focus on the agricultural sector, whose output is critical for a number of industrial branches. Perhaps more important in this context, however, is the role that expanding rural incomes could play in bringing about a more balanced income and demand growth (para. 1.04). 1.23 The continued improvement in the quality, as well as expansion of the resources devoted to SMI support as envisaged in the proposed loan should permit these establishments to play a major role in output growth during this period. In particular, with investment requirements per job created in SMI well below that in the larger-scale resource-based development projects (para. 5.14), the sector can make an important contribution to more rapid employment generation and thus to achieving the more balanced income demand growth essen- tial to the longer-term expansion of the Mexican economy. II. THE FINANCIAL SYSTEM AND SMI FINANCING A. Institutional Structure The Banking System 2.01 Mexico's banking system comprises about 150 financial intermediaries, including Banco de Mexico (the Central Bank), several public banks, and banks of private and mixed ownership. In 1979, the private and mixed banks accounted for 58% of the financial system's liabilities, while the public banks had 30%, and Banco de Mexico 11% (Annex 6, T-13). Foreign banks, which may not accept domestic deposits, provide an estimated 40% of the private sector's credit. Credit unions have also been increasing in number and importance, but their participation is less than 1% of total financing. Credit unions have been active, however, in SMI financing, particularly in the channeling of funds from FOGAIN, the principal government trust fund providing credit to SMI enterprises (see Chapter IV). 2.02 Traditionally, Mexican financial institutions were specialized as deposit and savings banks, financieras or investment banks, and mortgage banks. In recent years, however, as part of the financial system reform (para. 2.04), the authorities have encouraged a large number of mergers which have made the multipurpose bank (multibank) the dominant type of financial institution. Multibanks can offer a full range of financial services through their branch offices and provide a fairly broad regional coverage of the country. As of November 1979, 29 multibanks accounted for 95% of the private and mixed banking sector's liabilities (Annex 6, T-14). 2.03 Relative to Mfexico's level of economic development, its banking system is not yet well developed. The system experienced a rapid deepening from 1967 to 1972, when the non-monetary liabilities of the banking system as a percentage of GDP reached 40%. This trend was reversed when the economic uncertainties that ultimately led to the massive peso devaluation in 1976 began to manifest themselves, causing significant capital flight; the ratio now stands at 34% (Annex 6, T-15). Other structural weaknesses in the finan- cial sector also became apparent, such as the traditionalism in credit allo- cation, with collateral requirements normally far in excess of loan accounts. The system is also highly concentrated, with several of the large banks being associated to a great degree with the important industrial groups, which tends to distort credit allocation. Both of these characteristics make it difficult for SMI enterprises to obtain financial assistance from the banking system. - 9 - Administrative expenses of banks are also high, exceeding on the average 6% of deposits in 1979 (Annex 6, T-15). Finally, due in part to the liquidity preference of savers, liabilities of the banking system are highily skewed towards short-term obligations, making it difficult for banks to provide long-term project financing. 2.04 The authorities recently have taken steps to strengthen the Mexican banking system, including the previously mentioned formation of multibanks, which is expected to raise the efficiency of the system over the long term through the economies of scale, increase competition by strengthening the financing capacity of the smaller banks through mergers, and improve the access to the full range of financial services for clients outside of the biggest cities. Official minimum collateral requirements have also been abolished, and overall exposure limits per client have been set. The Trust Funds 2.05 rhe government, over a number of years, has set up a number of trust funds, mostly operating through the banking system, to promote the economic and social development of the country, by allocating credit on appropriate terms to priority activities (Annex 6, T-16). These funds derive their resources principally from the legal reserves of the banking system, although several have also received loans from other local and international sources, including the Bank. Although the government trust funds had a share of only about 6% of the banking system financing in 1979, their share of medium and long-term financing is much higher due to the aforementioned concentration of banking system assets in shorter term financing. The most important among the trust funds are those administered by Nacional Financiera (NAFINSA) and Banco de Mexico. The former include FOGAIN, FOMIN and FIDEIN, all ofi which parti- cipate in the Programa de Apoyo Integral (PAI) to support SMI iLndustries and which would participate under the proposed project (see Chapter III). Among the latter is FONEI (Fondo de Equipamiento Industrial), which provides financ- ing for industrial clients larger than those normally financed by the three aforementioned NAFINSA trust funds. FONEI has been the beneficiary of four Bank loans totalling US$360 million. The other important trust funds of Banco de Mexico are FIRA (agriculture), which has received several bank loans, FOMEX (manufactured exports) and FOVI (housing). FONATUR, a trust fund for tourism facilities managed by NAFINSA, has also received support from the Bank. It is estimated that about 10% of trust fund credit was made to SMI enterprises as of year-end 1979. The Securities Market 2.06 Mexico's securities market is still relatively small and has not yet developed into a sufficiently important mechanism to finance industrial firms. Comparatively few and mostly well-established large companies are listed. However, due to a series of reforms taken by the government over the past few years and sharp increases in share prices, the market has grown rapidly, with the total value of shares traded reaching Mex$94,000 million in 1979, compared to Mex$30,300 million in 1978. Part of this volume of shares trade consisted of new public offerings of Mex$12,100 million in 1979, up from Mex$6,900 million in 1978. Another Mex$97,000 million in 1979 was accounted for by trading of debt securities. Recognizing these problems, the government created the Fondo Nacional de Fomento Industrial (FOMIN) in 1972 to help in the creation and ex- pansion of SMI firms through direct investment, using equity and quasi-equity - 10 - instruments on a temporary basis as a minority shareholder. FOMIN has had a useful, though still relatively minor, impact on SMI equity financing (para. 4.38). Steps are being taken under the proposed project to increase FOMIN's activities and improve their focus. B. Credit Availability and Interest Rate Policy 2.07 During 1977 and 1978, as the economy recovered from the 1975-76 crisis, the financial sector expanded rapidly. While in late 1978 infla- tionary pressures prompted the government to slow down the rate of expansion, growth began to accelerate again in 1979. Bank credit increased in nominal terms by 36% in 1977 (5% in real terms),. 15% (-2%) in 1978 and 30% (12%) in 1979. Credit to the manufacturing sector, which reached Mex$132,000 million in September 1979, has retained roughly the same share of about 17% of total financial system credit since 1970. Like industrial value added, industrial credit was also very heavily concentrated in the Mexico City area,l/ although there seems to have been a slight decrease from a share of 57% of total credit in December 1978 to 54% in September 1979 (Annex 6, T-17). Priority areas designated by the National Industrial Development Plan registered small gains in their respective shares of credit, a trend which is expected to continue in the future and which would be encouraged under the proposed project. 2.08 Aided by the widespread application of adjustable interest rates (para. 2.09), loans are moving slightly towards longer terms, though banks are still constrained by the high liquidity of their liabilities. As of September 30, 1979, private and mixed banks had only 46% of their loans and 32% of their deposits at terms exceeding one year (Annex 6, T-18). However, this is a marked improvement over 1978, when only 39% of loans by these institutions were made for terms longer than a year. Monetary authorities have taken measures recently to improve the term structure of liabilities of the banking system by eliminating the highly liquid investment and mortgage bonds and by increasing interest rates on 12-24 month certificates of deposit. The authorities have periodically adjusted interest rate ceilings on time deposit interest rates to boost domestic savings (Annex 6, T-19). 2.09 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 came after the inflation rate accelerated in late 1973. By 1977, practically all term loans were made at floating interest rates, using as an index the average cost of funds (ACF) to invest- ment banking departments of intermediaries (Annex 1) 2/. Since the trans- formation of the banking system from specialized banks to multipurpose institutions has been substantially implemented, the Banco de Mexico announced in December 1979 that the ACF index calculation would be based on the average 1/ Mexico City and the Mexico Valley. 2/ The index is a weighted average of interest rates paid on bonds, notes, and certificates of deposit and excludes checking and savings account. - 11 - cost of all term resources of the Mexican banks, making the index base broader and a better indicator of the cost of term funds in the Mexican financial market. In connection with the first Bank SMI project, FOGAIN and FIDEIN agreed to link their interest rates to the ACF, a policy which would be continued under the proposed project, and which would be expanded to cover lending rates implicit in FOMIN's operations as well. 2.10 Bletween the last quarter of 1977 and April 1980, the ACF index rose from ].4.30% to 19.83%. The margins that banks charge their clients over ACF generally range from less than 2 points for prime clients with reciprocal business, to about 7 points for marginal clients (generally SMI enterprises), implying current lending rates of about 22% to 27%, on average several points above the rate of inflation of less than 20% estimated for 1979. Under the formula agreed in connection with this proposed loan, FOGAIN's interest rate structure on average would be one percentage point above the average ACF for a 12 month period up to and including April 1980 (para 4.10). This structure of interest rates gives preference to small enterprises, those located in outlying regions and those engaged in priority activities (e.g., food process- ing and basic wage goods production) while charging higher rates to larger enterprises and those located in established centers of industrial production. Given the government's announced intention of setting interest rate ceilings sufficient to sustain a healthy growth in financial savings, the ACF should continue to be a reasonable indicator of the cost of mobilizing resources in the Mexican financial market in the future, and a suitable reference rate for onlending under the proposed project. C. SMI Financing 2.11 Although bank credit has been available to industrial firms that banks judge to be reasonable credit risks by virtue of their size, reputa- tion or coLlateral they could offer, smaller firms generally have had difficulty in securing adequate credit. SMI's share of banking system credit has been increasing in recent years, but remains low relative to its share of manufacturing value added. The manufacturing sector received close to 17% of total bank credit in 1979, but it is estimated that SMI enterprises received about 3.8%, or less than one-fourth, of the credit going to the sector (Annex 6, T-20), although their share of manufacturing value added was estimalted to be close to 40%. FOGAIN estimates that possibly as much as two-thirds of small scale enterprises in Mexico have not utilized banking system credit, which has prevented them from expanding more rapidly and contributing more significantly to industrial output and employment. Enter- prises survieyed by FOGAIN also cited the lack of technical assistance services as one important factor constraining growth. 2.12 The government is aware of the difficulties facing most SMI enter- prises in obtaining credit, and has devised several mechanisms to improve this situation, including increased financial support to the trust funds participating in PAI. Banco de Mexico has also required banks to allocate an amount equal to at least 2% of deposits to be lent to SMI enterprises. In addition, ongoing efforts aimed at improving the efficiency of the banking system, over the long run, should help to improve access of SMI enterprises to credit. Some banks such as BANAMEX, have already established special - 12 - programs to assist small enterprises. However, problems in increasing the share of SMI financing are likely to persist over the next few years. The proposed project contains several elements designed to assist SMI enter- prises, including the improvement of FOGAIN's credit guarantee mechanism to aid small enterprises with sound projects but insufficient collateral (para. 4.23), and the expansion of the industrial extension service established in connection with the first SMI project, which aims at establishing, inter alia, stronger links between banks and SMI enterprises. D. Outlook 2.13 The financial sector is now in the process of returning to a period of stability, after recovering from the crisis of 1975-76, and as the impact of the reorganization of financial system is consolidated. Inflation has been kept at or under 20% during 1978-79, but the outlook for the future will depend to a great extent on measures to be taken by the government on several fronts (para. 1.22). It is expected that interest rate policies would continue to be set taking into account international financial market trends, domestic inflation, and the need for a more adequate term structure of domestic savings. However, credit to SMI enterprises is likely to remain in short supply for the next several years. The proposed project would help to alle- viate the scarcity of financial and technical assistance to SMI enterprises and help to strenghten the institutions established to assist them. III. THE INTEGRATED SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROGRAM (PAI) 3.01 Recognizing the importance of promoting the growth of small and medium scale industrial enterprises, and the need to strengthen and integrate institutions serving SMI, NAFINSA created PAI with the support of the Bank. The program makes full use of and integrates the existing institutional framework in Mexico, and is aimed at providing a comprehensive and effective system of support for SMI by: (i) coordinating closely the activities of financial and technical assistance institutions; (ii) improving the access of SMI to these institutions; and (iii) expanding the volume and range of services that financial and technical institutions provide. At the same time the program attempts to improve the orientation of the institutional support to SMI towards the achievement of national industrial development goals such as creation of productive employment and increasing regional decentralization. 3.02 PAI is implemented principally through NAFINSA-administered trust funds dedicated to support SMI, and comprises four components: credit and guarantees to be provided by FOGAIN via commercial banks; risk capital (including debt instruments with equity features) to be provided by FOMIN, financing for industrial parks facilities and equipment leasing through FIDEIN, and technical assistance through extension agents hired and trained by PAI, and by specialized institutions such as CENAPRO (management and vocational training), INFOTEC (technical information and advice), IMIT (pro- duct and process development) and FONEP (feasibility studies). PAI, which provides assistance to SMI enterprises as defined in the operating regulations - 13 - of the respective trust funds 1/, incorporates several features (e.g., credit guarantee mechanism) to support small enterprises with equity up to Mex$5.0 million. The following provides a description of PAI's overalL organization, including the extension service and participating technical assistance insti- tutions. The operations of the three principal participating trust funds FOGAIN, FOMIN and FIDEIN are described in Chapter IV. PAI's Coordinating Committees and Secretariat 3.03 The highest governing body of PAI is its Program Coordinating Committee headed by the Director General of NAFINSA, which includes the heads of the participating institutions, and the representatives of the Ministry of Finance (Hacienda), the Ministry of National Patrimony and Industrial Development (SEPAFIN), and Banco de Mexico. The duties and responsibilities of the Committee include the setting of policies and priorities of PAI operations, coordinating activities of the various par- ticipating institutions, and reviewing the results of PAI's operations in- cluding the general characteristics of subprojects submitted for financing. The committee meets periodically and has been effective in providing policy guidance and direction to PAI. In addition, the Technical Coordinating Committee (Comite Tecnico de Coordinacion), composed of working level representatives of all participating institutions and headed by a senior official of the PAI Secretariat, was set up recently, and has lbegun to meet regularly. This working level committee coordinates the effortis of the par- ticipating institutions, focussing on subprojects requiring assistance from more than one institution, that are generated by the extension service or by the participating institutions themselves. 3.04 To provide the administrative mechanism necessary to implement PAI, NAFINSA created a secretariat which reports to the Program Coordinating Committee. The secretariat is responsible for the execution of the technical assistance and promotion subprograms, for linking up with other institutions that provide services for SMI, and for processing subprojects for PAI financ- ing. Initially, the Secretariat was based in NAFINSA. It was later moved to FOGAIN, the largest of the PAI participants, with the Director General of FOGAIN as Technical Secretary, in order to improve the linkage between the Secretariat and the operating units participating in PAI. This move succeeded in launching PAI's operations by mid-1979, after long delays connected with the change in heads of FOGAIN and FIDEIN and the resolution of an interest rate issue involving FOGAIN (para. 4.08). While these organizational arrangements had some shortcomings, the structure was considered acceptable during the transitional phase necessary to establish the program. Since the initiation of the program, some improvements have been made. For instance, PAI and FO)GAIN operations previously had been carried out by the same group of officers, making it difficult to distinguish the activities, objectives and interests of PAI as a whole from those of FOGAIN, and client referrals by the extension officers up to year-end 1979 were made almost entirely to FOGAIN (para. 3.13). 1/ Enterprises with total equity between Mex$50,000 and Mex$40.0 million (for FOGAIN and FIDEIN) and Mex$150 million (for FOMIN). - 14 - 3.05 A reorganization aimed at introducing some degree of separation between the PAI secretariat and FOGAIN was initiated last January (Annex 6, T-21, contains an organization chart for the secretariat and FOGAIN). The secretariat and FOGAIN would each have a deputy director reporting to Mr. Tomas Gonzalez Hinojosa, the dynamic and well-qualified Director General of FOGAIN and Technical Secretary of PAI. An officer who used to head the PAI promotion subprogram, Mr. Pablo Rhi, has been appointed Deputy Director, responsible for the secretariat, which would have three principal depart- ments--promotion, technical assistance and operations. In addition, there would be seven field departments overseeing the regional offices of PAI throughout the country. The heads of the promotion and operations depart- ments have already been appointed and report to the Deputy Director of PAI but the head of the technical assistance department, a position which was left vacant after a highly qualified senior officer left, has not yet been named. It is possible that the Deputy Director would perform this function as well until the extension service expands further, perhaps up to year-end 1980. This arrangement would be acceptable. 3.06 Due to the newness of the reorganization, it is not yet possible to determine its full impact on PAI. It appears to be a step in the right direction, although some uncertainties remain. As of mid-February 1980, several administrative, budgeting and financial management functions of the secretariat still remained with the FOGAIN wing of the organization and the heads of the regional departments would still be responsible for both tech- nical assistance and credit activities. W4hile the present organization is acceptable at this stage of development of PAI, a much greater operational separation of the PAI secretariat and FOGAIN is desirable in the future, leading eventually to two different organizational entities with different heads. In order to ensure sufficient coordination among the participating trust funds and the secretariat, the Technical Secretary would be given a rank within NAFINSA above those of the heads of the trust funds, and could be made a member of the Technical Committee (Board of Directors) of all participating trust funds. 3.07 Due to its short period of effective operations, an in-depth evaluation of PAI would be premature (para. 3.15). However, it would be possible to determine, inter alia, the impact of the recent reorganization on PAI's operations and assess the need for greater operational separation of the secretariat and FOGAIN by mid 1981. Agreement has been reached during loan negotiations on an in-depth review by NAFINSA in consultation with the Bank of (i) the progress of PAI as a whole; (ii) the appropriateness of the organizational set-up for the secretariat; (iii) the results of the technical assistance program (para. 3.15); and (iv) the experience with FOGAIN's new credit guarantee scheme (para. 4.28). The results of the review should be made available to the Bank no later than June 30, 1981, with a view towards discussing changes in the structure and operations of PAI that may be con- sidered necessary. The Industrial Extension Service 3.08 One of the most important developments regarding PAI has been the creation of an industrial extension service to provide technical assistance directly and indirectly to SMI enterprises and to implement an active strategy in support of industrial decentralization and employment creation in priority - 15 - activities. The extension agents provide direct technical assistance mainly in diagnosing problems of the firms concerned and, whenever required, refer cases to one or more of the financial and specialized technical assistance institutions. During the initial period of operation of each local unit, extension officers attempt to establish contact with as many SMI enterprises as possible directly, using banks, industry associations, and advertisements in the local papers, to make them aware of the range of institutions and assistance available through PAI. As a second step, extension officers are to develop strategies and specific programs of activities for their particular regions on the basis of an analysis of existing SMI and potential for devel- opment. This involves activities such as seminars on industrial management using modules developed by CENAPRO (para. 3.19) and on PAI activities and services for industrialists and commercial bankers alike. 3.09 After some initial delays in implementation, the extension service started operations in June 1979, following the training of 20 extension officers in a six-week program designed and implemented with the assistance of CENAPRO and IPADE. 1/ A further 20 extension officers were trained in a second course in August/September 1979, and by early October, 40 qualified officers had been deployed to 14 offices throughout Mexico (Annex 6, T-22). Great efforts were made to be selective in choosing candidates for the extension service. Candidates chosen had advanced qualifications (Masters Degree or equivalent) in either industrial engineering or business administration, and most had experience in banking, industry or government. Rigorous tests were used to screen candidates, and as a general policy preference was given to local persons to work in their respective regions. By all accounts, the standard of the extension officers is good, but due to the high entrance qualifications, the service also has high administrative costs. Due in part to high start-up costs, expenses of the PAI secretariat (a big percentage of which are accounted for by the extension service) are estimated to reach Mex$113 million, i.e., close to 9% of projected average total disbursed Program resources (PAI assets) for 1980. While this percentage would be expected to decrease gradually as PAI assets increase, a reasonable relationship would have to be maintained between administrative costs of PAI and the total financial and other assistance made available through PAI for SMI enterprises. While PAI suffered a net loss of Mex$48 million in 1979, which was covered by the government's contributions to PAI equity, this was largely due to its still low volume of operations (Annex 6, T-23). The government would also service the proposed Bank loan (principal, interest ancl commitment fee) in order to capitalize the PAI account and help finance its technical assistance subprogram (para. 5.06). 3.10 The expenses of the secretariat, including the extension service, are intended to be fully covered by the margins and commissions from the PAI funds utilized by FOGAIN, FOMIN and FIDEIN. However, this is virtually impossible at the present and expected level of costs, and alternatives for lowering the costs of the extension service while fulfilling its basic objectives are being considered including: (a) reexamining the program to ensure an appropriate balance between the growth in the number of offices and personnel and the overall growth of PAI; (b) containing the cost of the promotion subprogram; and (c) using a number of extension officers with lower qualifications (and lower costs). 1/ Instituto Panamericano de Alta Direccion de Empresa, a private business school. - 16 - 3.11 A reasonable objective being considered by PAI would be an ex- tension service which would reach about 200 extension officers located in 26 offices by year-end 1983. About 70 of these officers would be of the highly qualified type and the rest would have adequate qualifications (e.g., Bachelor's Degree). Each office would have a group of some five to eight extension agents, to reach a "critical mass" of whom one or two of the highly qualified officers would be expected to have supervisory and training responsibilities. This would ensure more efficient utilization of the highly qualified personnel of the program, while maintaining the quality of overall service provided. 3.12 In order to reduce administrative costs, the original plan was to locate extension officers in NAFINSA's 13 regional offices. However, this concept had to be changed to reach designated priority areas. The distribu- tion of the extension personnel and the priority of their postings have been based on a satisfactory analysis of criteria--zonal priority, the number of existing SMI enterprises in the area, and the assessed potential for creating new SMI. Annex 6, T-22 shows 49 major locations throughout Mexico ranked on the basis of these criteria, the distribution of the 40 extension officers operating at the end of 1979, and of the 90 expected to be on location by the end of 1980. All in all, it appears that an overwhelming majority of SMI enterprises can be served from the 26 offices in existence or being planned for 1980 (see map). 3.13 The PAI extension service is planned as a decentralized organization operating with only a small headquarters group (senior officers plus eight extension officers) to provide support to, and monitor the progress of, regional staff, and have overall responsibility for the setting of goals and objectives, staffing and budgets. Detailed targets are set for each of these regions for (i) the number of technical assistance and promotion seminars to be held, (ii) enterprises to be visited, and (iii) targets for referrals to institutions participating in PAI. 1/ The preliminary client referral targets for 1980, compared with 1979 (six months) are shown below. The four-fold increase in referrals is quite ambitious, but achievable given the increase in the number of extension officers projected. How- ever, more emphasis should be placed on the quality of these referrals. 1980 1979 (6 months) FOGAIN 2,547 384 FOMIN 143 4 FIDEIN 134 11 INFOTEC 783 60 CENAPRO 314 9 FONEP 274 26 IMIT 63 2 Others 56 10 4,314 506 1/ On the basis of visits by extension officers. - 1 7 - While the above figures are preliminary, certain conclusions can be drawn. The overwhelming majority of client referrals made during 1979 were to FOGAIN for credits, with little identification of suitable cases for FCIMIN equity or FIDEIN financing. FOMIN recently worked out a promotion program with the PAI secretariat in order to make increased use of the extension service (para. 4.50), and FIDEIN is considering a similar program. Projections for 1980 show large increases in client referrals expected for FOMIN and FIDEIN. This focus would appear satisfactory, but should be monitored by NAFINSA and the Bank in the future as to the nature of clients referred and compliance with targets set, to determine the effectiveness of t:he exten- sion service in promoting all three major participating trust fumds. 3.14 PAI is also helping to build up a system of "parallel" extension officers employed by commercial banks, and for this reason, extension train- ing courses have included a substantial number of representatives of the major banks and credit unions. Several multibanks--BANAMEX, Banco del Comercio, Blanco Internacional--have nucleus SMI assistance units, and some have individuals in major branches to help refer SMI clients to other insti- tutions for help. These parallel services could effectively complement those provided by PAI itself, even taking into consideration that banks might tend to concentrate on enterprises which are already their clients, and should be encouraged as a way of interesting major banks in SMI financing. 3.15 Since the extension service has been in effective operation for less than a year, an in-depth evaluation is not yet possible. However, PAI has made a very good start and is building up the service in a serious and competent manner. Preliminary results indicate that the program will make a positive impact on small enterprise development and on industrial decentralization, although some of the uncertainties mentioned above remain. In connection with the olverall review of PAI in early 1981, the extension service would be evaluated to determine: (a) the optimal size, number of regional offices, and budget size of the extension service, taking into consideration a reasonable relationship of its overall costs to the total financial and other assistance available through PAI; (b) the efficiency and cost-effectiveness of the system as regards the number of SMI enterprises assisted, quality of the technical assistance provided by the officers and by the participating agencies, and comprehensiveness of assistance being provided, impact of help given, relation- ship between direct assistance and referrals, experience with collective as against individual assistance; and' (c) the extent to which PAI has been able to make effective use of a "parallel extension service" by the banks and credit unions. Specialized Technical Assistance Institutions 3.16 The original proposal to involve in the implementation of PAI all the various specialized technical agencies assisting SMI in Mexico has now been implemented, on the whole, although with varying degrees of success. The experience involving each of the institutions is discussed below. - 18 - 3.17 INFOTEC. (Servicio de Informacion Tecnologica) has probably been the most successful example of collaboration. This institution, which concent- rates on programs and projects related to technical information services, has expanded and developed rapidly and at the end of 1979 employed a staff of over 70 persons as against 38 in August 1978. It is anticipated that INFOTEC's staff will approach 100 by the end of 1980, and will grow to some 120. While referrals from PAI extension services currently account for only a minor percentage of the total number of inquiries handled by INFOTEC, it regards PAI's extension officers as important elements in making available its services, especially since INFOTEC does not have any regional representatives. INFOTEC has also been the most active in utilizing funds allocated for technical assistance under the first SMI project for and has plans to use additional funds to purchase information and patent retrieval services (mainly from the USA), and documentation equipment such as microfilm readers as well as books and journals for use in providing services to SMI. INFOTEC is expanding its activities to include not only the provision of technical information, but also direct technological assistance in the field through plant visits. Eight of the cases referred to INFOTEC by PAI in 1979 resulted in a continuous relationship with the client, with INFOTEC helping the firm to overcome technological problems. During the implementation of the proposed project, INFOTEC is expected to play a major role in providing technological information, advice and assistance to SMI. 3.18 During the past two years, CONACYT (Consejo Nacional de Ciencia y Tecnologia), which is the national body coordinating science and technology policy, has developed several more regional service centers for specific industries, including a center for leather and footwear in Leon, a service center at Chihuahua, mainly for mechanical industries, and a similar center at Queretaro. The older centers at Guadalajara (jewelry and handicrafts) and Oaxaca (food processing) have continued to operate despite some difficul- ties in staffing. Relationships between PAI and these centers have been developed on an informal basis, and have evolved satisfactorily in several cases, such as Leon, where PAI has had an active office since June 1979. As CONACYT's program for the regional service centers develops further, PAI's secretariat intends to develop closer working relationships on a local basis between the industrial extension agents and the centers. 3.19 CENAPRO (Centro Nacional de Productividad), which was established in the 1960s with the objective of improving the efficiency of Mexican firms through appropriate training programs, played a key role in the initial devel- opment of PAI staff and activities by helping to design and by participating in extension officers' training programs, and by developing modules for SMI management development which were utilized by extension agents for this seminar. CENAPRO is also responsible for ARMO, a project for brief but inten- sive vocational training. There has been some demand, stimulated by PAI's extension activities, for introducing such programs in a number of SMI firms. CENAPRO will develop some training centers or workshops--partly financed under the first Bank project--at different provincial locations which would be especially designed to focus on the training problems of smaller enterprises. While the number of referrals to CENAPRO through the extension service are still modest, there are several indications that the collaboration of CENAPRO with PAI will increase as the extension service expands its activities. - 19 - 3.20 IMIT (Instituto Mexicano de Investigaciones Tecnologicas) is a government supported, independent institution carrying out research and development work to help improve products and production processes. IMIT is a highly respected and sophisticated institution operating main:Ly with larger industries. It has prepared a substantial number of project appraisals under the Bank's industrial credit operations through FONEI. Although IMIT has expressed an interest in and willingness to participate in the P?AI program, and has even offered to provide 1,000 man hours of work free of charge in connection with the first project, so far there has been little demand for its services. As the extension service spreads into a wider field in its promotion and diagnostic activities, particularly among some medium-sized enterprises, demand for IMIT's services should increase. Meanwhile, IMIT benefited from technical assistance funding under the first SMI project, and would receive another small allocation under the second project to equip it better to serve SMI. 3.21 There have been a number of referrals by the PAI extension service to FONEP (Fondo Nacional de Estudios de Preinversion), a NAFINSA- administered trust fund which helps to finance preinvestment studies for enterprises of all sizes. FONEP does not actually carry out the studies itself, but helps to locate and hire suitable consultants, and finances the cost. FONEP has helped to pay the costs of a few preinvestment studies for SMI firms referred by PAI extension officers. However, the costs of preparing a preinvestment study by the type of consultants who work with FONEP are generally beyond the limits feasible for small-scale and even for medium-sized firms. The PAI secretariat is exploring possible special arrange- ments with FONEP for preparing more basic investment studies at costs accepta- ble to SMI firms. 3.22 Some other institutions have been brought in on an ad hoc basis to help in PAI's program, such as the CFM (Comision de Fomento Minero) 1/ to assist small scale mining activities, CEPSE (Centro Empresarial de Perfeccionamiento Socio-Economlco, A.C.) an entrepreneural development program, and IMCE (Instituto Mexicano de Comercio Exterior) for promoting exports. As the number of clients in need of technical assistance identified by PAI's extension service increases, there should be more scop,e for using a wider range of specialized institutions. 3.23 The agencies involved in PAI are able to provide comprehensive assistance in a wide variety of fields, expect for some areas of management and marketing. In the near future PAI intends to arrange for this type of assistance (e.g., improving accounting and control procedures, plant layout, marketing advice) on a regional basis through extension officers with the help of regional consultants. Allocation of Technical Assistance Funds 3.24 Of the US$2.0 million allocated under Loan 1552-ME for technical assistance, only US$110,000 has been committed by PAI for INFOTEC so far, due to a misunderstanding as to eligible expenditures under the loan. 1/ A US$40 million Bank loan to CFM and other institutions supporting small and medium scale mining enterprises in Mexico was approved in March, 1980. - 20 - However, as previously mentioned, plans have now been drawn up by several of the participating technical assistance institutions for utilization of these funds, which are provided as grants and which have been tentatively allocated as follows: Mex$ millions PAI Extension Service 23.0 50 INFOTEC 10.0 22 CENAPRO 10.0 22 IMIT 3.0 7 46.0 100 The PAI allocation would be used for audio visual and specialized equipment for extension personnel. Although several of the above institutions received funds for their activities from other sources, it is the aim of PAI to encourage them to orient their activities increasingly towards SMI enter- prises, which the comparatively small sum allocated to these activities under the first loan has helped achieve. These activities deserve continued support under the proposed loan according to projections presented in Annex 6 Table 51. IV. PRINCIPAL INSTITUTIONS SUPPORTING SMI ENTERPRISES A. Fondo de Garantia y Fomento a la Industria Mediana y Pequena (FOGAIN) 4.01 FOGAIN, the oldest and best known of Mexico's institutions support- ing SMI, was established in 1954 as a government trust fund administered by NAFINSA. It has the largest volume of operations of the institutions participating in PAI. FOGAIN functions as a second-tier institution, rediscounting credits made by banks, credit unions and other financial inter- mediaries to SMI enterprises to improve their productivity, expand capacity or restructure debt. FOGAIN's Operating Regulations (see Project File) also authorize it to provide partial credit guarantees to banks for SMI loans and to subscribe to bonds issued by SMI enterprises through financial intermediaries. However, the latter possibility has practically not been used, due mainly to lack of interest among financial intermediaries. In connection with its partici- pation in PAI, FOGAIN's credit guarantee scheme is being revised to make it more attractive to intermediaries, and a more effective tool for improving the access of small enterprises to the banking system (para. 4.23), and FOGAIN modified its Operating Regulations to provide greater support to industrial decentralization and priority subsectors in accordance with the National In- dustrial Development Plan. SMI enterprises, as defined under PAI (para. 3.02) are eligible for FOGAIN's financing. 4.02 Under the first SMI project (Loan 1552-ME), Mex$1,122 million in Bank and local counterpart funds were allocated to FOGAIN to implement the PAI credit and guarantee subprogram, of which US$22.6 million had been committed as of May 30, 1980. FOGAIN was also expected to play an important role, which is gradually being realized, in promoting the activities of other institutions participating in PAI, since likely candidates for PAI assistance - 21 - involving additional equity funds, new factory buildings and specialized technical assistance were considered likely to have utilized or to request FOGAIN's assistance as well. Organization, Management and Staffing of FOGAIN 4.03 FOGAIN's highest decision-making body is its Technical Committee (comite tecnico), which is headed by a representative of the Miniistry of Finance, and includes representatives of the Ministry of National Patrimony and Industrial Development, NAFINSA, Banco de Mexico, Confederacion de Camaras Industriales (CONCAMIN), Camara Nacional de la Industria de Transformacion (CANACINTRA),1/ FOMIN and CENAPRO. The committee, which takes an active interest in FOGAIN's activities, decides matters related to policies, procedures, financial plans and budgets, and approves credit operations requiring more than Mex$3.0 million, on the basis of recommendations by FOGAIN's staff. FOGAIN's Director is autho- rized by the Technical Committee to approve on credit operations of up to Mex$3.0 million. 4.04 F'OGAIN's Director, Mr. Tomas Gonzalez Hinojosa, has headed FOGAIN since late 1978, having held a senior position with a large bank prior to joining FOGAIN. In the relatively short period of time that he has been with FOGAIN, he has introduced a comprehensive reorganization, as recommended by the Bank under the first SMI project, aimed at greater delegation of authority to middle management, consolidation of related functions and responsibilities, streamlining of procedures, upgrading of key middle management staff, and increasing geographic decentralization of staff (see organizational chart, Annnex 6, T-21). While FOGAIN's old structure was adequate for the level of past operations, it was clearly incapable of coping with a rapid growth in activities, particularly outside of Mexico City. Most key positions have now been filled, but a few vacancies, such as analysts for supervision activities remain. Salaries have been generally adequate to attract qualified staff, but FOGAIN has been constrained by lack of office space in the hiring of additional staff, which will be eased soon when it moves to new facilities. As mentioned in Chapter III, FOGAIN is in the process of separating staff handling its credit and guarantee operations from those involved in the PAI Secretariat's operations. The combined FOGAIN and PAI Secretariat staff numbered around 220 by year-end 1979, of whom close to half were professionals. About 130 of this total number were dedicated to FOGAIN's operations, and the rest to the PAT secretariat, including extension officers. The newly designated Deputy Director in charge of FOGAIN operations, Mr. Juan Quiroga, is well qualified for the position. He has been with FOGAIN for about a year. 4.05 FOGAIN has also begun to locate its credit staff in regional offices, starting with Monterrey and Guadalajara. It plans to extend this policy to cover Leon, Torreon and Villahermosa before the end of 1980, with the object- ive of decentralizing to some degree the evaluation and approval of credit operations, giving regional credit representatives the authorilty to decide on FOGAIN's small operations (e.g., up to Mex$1 million). The FOGAIN credit representatives would be reporting to the regional department directors of the PAI secretariat, who would also be responsible for FOGAIN operations in I/ Chamber of industries representing SMI. - 22 - their area. The management of FOGAIN is aware of the possible difficul- ties which could arise from the organizational structure being considered, and is trying to device reporting systems that would separate one activity from the other, so as not to mix, among other things, promotion and credit evaluation. Eventually, a complete operational separation of the PAI Secretariat and FOGAIN activities would be desirable (para. 3.06), and steps to be taken by NAFINSA to accomplish this have been discussed at negotiations. Operating Regulations and Policies 4.06 FOGAIN's operating regulations 1/ allow it to rediscount three types of credit, i.e., for working capital financing of up to Mex$5 million with terms of up to three years, for fixed asset financing up to Mex$7 million with terms of up to six years, and for debt consolidation for up to Mex$9 million with terms of up to 10 years. In practice, few loans are made with terms of over seven years. The total amount of credit that FOGAIN can grant any single enterprise is Mex$16 million. FOGAIN normally rediscounts 100% of individual bank subloans to SMI, but has been considering for some time the possibility of decreasing this percentage (e.g., to 80%) in order to shift at the margin some banking system resources to SMI enterprises and in order to spread FOGAIN's resources over a greater number of enterprises. Such a mechanism could be implemented selectively, taking into account the propensity of intermediaries to lend to larger clients, e.g., allowing up to 100% rediscount for small enterprises but only up to 70% for medium size enterprises. Interest Rates and Margins to Intermediaries 4.07 In connection with the previous SMI project, FOGAIN agreed to set its average interest rate at a level equal to the average cost of funds to financiera departments of multi-purpose banks in Mexico (ACF),2/ plus one to three points, with the exact structure of interest rates left open. The agreed system 3/ was a significant improvement over FOGAIN's old structure which utilized fixed interest rates (12-14% p.a. depending on geographic zone) with little relation- ship to the cost of mobilizing funds in the market. The ACF, has been a reason- able measure of the cost of raising domestic resources in the past and is now widely used as a reference rate for loans by the banking system (para. 2.09). 4.08 Subsequent to the signing of Loan 1552-ME, the management of FOGAIN changed and a long discussion regarding interest rates began. Finally, FOGAIN proposed a complex interest rate structure varying from ACF minus two points to ACF plus five points depending on the location, size and industrial activity 4/ of enterprises. Margins to financial intermediaries were also varied in accordance with the criteria mentioned above, as previously suggested by the Bank. The Bank agreed to the aforementioned structure shown in Table 4.1 below which was considered to be substantially in line with the objectives of the project. 1/ Information contained in the project file. 2/ See Annex 1. 3/ Rates under the new system are fixed once a subloan is committed, but the commitment rates vary with the ACF index. 4/ In accordance with the priorities established in the National Industrial Development Plan. - 23 - Table 4.1: FOGAIN'S INTEREST RATES TO FINAL BORROWERS AND MARGINS OF INTERMEDIARIES IN EFFECT SINCE SEPTEMBER 1979 Small Enterprises Medium Scale Enterprises Priority Activities Other Activities Geographical Interest Interest Interest Zone Rate Margins Rate Margins Rate Margins I ACF - 2 3.5 ACF - 2 3.5 ACF + 1 3.0 II ACF - 2 3.5 ACF 3.0 ACF + 2 3.0 III ACF + 2 3.0 ACF + 4 2.5 ACF + 5 2.5 Rest of the country ACF 3.0 ACF + 2 3.0 ACF + 4 2.5 4.09 According to the agreements reached under the first SMI project, FOGAIN's :interest rate is to be adjusted (i) once a year to reflect changes in the prevailing rate, and (ii) whenever the ACF varies by mcore than one point consistently for three consecutive months compared to the level of the ACF prevailing at the time the interest rates were set. However, this formula would be discontinued to reduce the impact on the ACF of such factors as the recent sharp fluctuations in the international money market. It would be replaced by a formula using a twelve month moving average. 4.10 During negotiations of the proposed loan, it was agreed to increase FOGAIN's interest rates on July 1980, so that their average would be one percentage point above the average ACF for the twelve month period from May 1979 to April 1980. It has been further agreed that FOGAIN's interest rates to final borrowers will be revised once a year to reflect changes in the av,erage ACF over the preceding twelve month period. Furthermore, there would be a review of rates of interest whenever the average prevailing interest rate diff,ers by three or more percentage points for a period of three consecu- tive months from the twelve month average of the prevailing interest rate used for the last adjustment. The proposed interest rate structure (Table 4.2 below) which is acceptable to the Bank, is reasonably in line with the cost of mobilizing resources and the expected rate of inflation. Table 4.2: FOCAIN'S PROPOSED INTEREST RATE STRUCTURE (PRESENT RATES SHOWN IN BRACKETS) Small Geographical Zone Enterprises Medium-Scale Enterprises Priority Non-Priority I - Poles of Development 14 (14) 15 (14) 18 (17) II - State Priorities 14 (14) 17 (16) 19 (18) III - Areas of Low Priority 21 (18) 22 (20) 22 (21) (Mexico City Metropolitan and surrounding areas) Rest of the country 17 (16) 19 (18) 21 (20) - 24 - Participating Intermediaries 4.11 All of Mexico's about 150 financial intermediaries are eligible to rediscount loans with FOGAIN, and almost all have channeled FOGAIN's funds. Participation by type of intermediary is shown below: Table 4.3: PARTICIPATION IN FOGAIN'S REDISCOUNTS BY TYPE OF FINANCIAL INTERMEDIARY Amount Discounted (Mex$ million) Cumulative 1979 % (1954-1979) % Government banks 576 12 1,270 8 Mixed banks 692 15 2,227 13 Private banks 3,168 68 12,186 72 Credit unions 230 5 1,146 7 4,666 100 16,829 100 The figures above show a relatively wide distribution of FOGAIN's rediscounts among types of intermediaries, including credit unions, due to some extent to FOGAIN's efforts to encourage the use of its funds by a large number of finan- cial institutions. In terms of individual institutions, the largest share on a cumulative basis was held by BANAMEX (15%), the second largest multi-purpose bank in the country (Annex 6, T-24). BANCOMER, the largest multi-purpose bank, had 11%, Grupo COMERMEX had 8%, while NAFINSA had a 7% share. The discussion in Chapter II and the tables on the financial sector provide some background on the intermediaries' overall operations. Project Appraisal and Supervision 4.12 Intermediaries evaluate the creditworthiness and prospects of client enterprises before submitting subloan requests for FOGAIN's financing. FOGAIN's analysis of subloans focusses on: (a) their eligibility for FOGAIN financing; (b) the expected economic impact of the credit taking into account employment generation, geographic location, and sources of technology; (c) technical and marketing aspects of the firm, especially when fixed asset financing is involved; and (d) the amount of the credit and the financing terms required. All requests for more than Mex$3 million (creditos mayores) require presentation of both historical statements and financial projections of the firm which form the basis for financial rate of return calculations. The economic rate of return (only for creditos mayores) is calculated simply by adding back taxes paid to the cash flow of the enterprise. For credits below Mex$3 million (creditos menores), only financial analysis is made, based on historical figures. Given the generally small size of FOGAIN's credits (92% by number and two thirds by amount is accounted for by credits of US$130,000 equivalent or less) and the need to process them speedily, the - 25 - procedures mentioned above are acceptable overall. However, in order to supplement its appraisal data and to continually assess the ex post impact of its operations, FOGAIN should analyze annually a representative sample of its operations (about 50 subprojects would be analyzed during the first year of the project implementation) to determine the economic rates of return (using shadow prices), employment impact, regional effect and other indicators of enterprises and projects supported. This could be related to its overall supervision efforts (para. 4.14) and the analysis periodically carried out by FOGAIN's economic studies department. An understanding was reached with FOGAIN during negotiations regarding this point. This would be done in addition to the reporting requirements for Bank-financed subprojects under the Subproject: Data System (SDS). 4.13 In order to expedite processing of credits for amounts up to Mex$1.0 million, FOGAIN is in the process of opening "lines of credit" to financial intermediaries. 1/ The amount of the line of credit would be determined on the basis of FOGAIN's prior experience with the intermediary concerned. In order to utilize the line of credit, a financial intermediary would submit the normal credit documentation required for FOGAIN's approval of "creditos menores." If FOGAIN does not reject the credit within a certain period of time (e.g., one week), the intermediary can automatically utilize the line of credit to disburse the subloan without the need for separate sub- loan contracts to be signed each time. FOGAIN intends to use this mechanism to promote in particular its financing of small enterprises and for those located in outlying areas. FOGAIN's experience with this new mechanism would be followed closely by the Bank to consider the need for possible changes in the mechanism and its possible replicability elsewhere. 4.14 Responsibility for follow-up of FOGAIN's credit rests primarily with participating intermediaries. The intermediaries engage in supervision with varying intensity, covering, inter alia, utilization of funds and prog- ress of projects and enterprises financed, but concentrating mainly on loans in arrears. On balance this approach has yielded satisfactory results. FOGAIN's economic studies department periodically carries out some analysis of a sample of FOGAIN-financed enterprises to determine client characteristics and needs more precisely. However, FOGAIN has not thus far implemented a systematic follow-up of a sample of individual projects to compare performance with anticipated results. A coordinator of supervision activities was hired recently, and concrete plans have been made for supervision, including a calendar of visits to intermediaries and client enterprises. FOGAIN is presently strengthening its supervision staff by two more analysts and this should enable it to perform field visits. Present plans call for supervision on a sample basis that covers clients of several intermediaries located in various regions. Aside from verifying the utilization of FOGAIN's funds, such supervision is intended to provide FOGAIN with some feedback on the economic impact of projects it has been financing (para. 4.12). FOGAIN's planned supervision scheme was reviewed during negotiations and found satisfactory. Its execution should be followed up closely by the Bank. 1/ This system has existed for some time but had to be revised due to pre- viously cumbersome procedures which discouraged banks from utilizing it. - 26 - Procurement and Disbursement 4.15 Due to the nature of FOGAIN's clients and its relatively small ave- rage loan size, it is often not practical for FOGAIN to insist on price quota- tions from several suppliers. However, as part of its evaluation, FOGAIN takes steps to ensure that the prices paid by client enterprises for goods and services acquired using FOGAIN's financing are reasonable. Where necessary, especially in the case of its "creditos mayores" involving fixed asset purchases, FOGAIN requests additional information from the borrower on the justification for the selection of the particular equipment and the corresponding purchase price. For working capital loans, FOGAIN normally requests additional justi- fication if the firm's level of working capital is significantly above industry averages. These procedures are satisfactory, given the nature of FOGAIN's operations. 4.16 The participating intermediaries are held responsible for ensuring that FOGAIN's financing is used for the purposes intended. Disbursements are made by FOGAIN to a participating intermediary once the intermediary certifies that it has in its possession purchase invoices, import documentation, certi- ficate of construction completion, or, if required, the report on a plant visit. Based on a sample of financial intermediaries and clients visited at the time of project preparation and appraisal, disbursement documentation for subprojects appeared to be generally acceptable. However, FOGAIN needs to incorporate disbursement checks on a sample of intermediaries and subpro- jects as part of its supervision program. Agreement has been obtained at nego- tiations that, for Bank-financed projects, FOGAIN would have in-house copies of subproject disbursement documentation accounting for at least 70% of each subloan amount disbursed. Typically, the remaining 30% consists of a large number of low value items. Past Operations and Impact 4.17 Between 1954, when it started operations, and year-end 1979, FOGAIN assisted about 17,000 enterprises with more than 34,000 credits amounting to about Mex$16,800 million (Annex 6, T-25). FOGAIN provided an estimated 14% of total banking system credit to SMI in 1979. FOGAIN's operations have increased sharply in recent years as shown below. Table 4.4: SUMMARY OF FOGAIN'S OPERATIONS 1977 1978 1979 No. of enterprises 3,061 3,545 4,420 No. of credits 3,430 4,052 5,390 Amounts disbursed 2,079 2,858 4,666 (Mex$ million) Operations in 1979 increased by more than 30% by number and 60% by amount (in nominal terms), reflecting the continued high level of investments by the Mexican manufacturing sector, particularly SMIs, and the successful promo- tional efforts of FOGAIN and PAI's extension service. - 27 - 4.18 Most of FOGAIN's assistance was focussed towards small enterprises with up to 50 employees, which accounted for 84% of credits by number and 61% by amount oi- FOGAIN's operations in 1979. This is satisfactory considering that small enterprises are estimated to account for less than 30% of value added of SM.[ enterprises (see Chapter I, Table 1.1). 4.19 FOGAIN's operations have also supported the government's goal of in- dustrial decentralization. An estimated one-half of industrial value added in Mexico comes from enterprises located in Zone III. However, in 1979, about 80% by number and 69% by amount of FOGAIN's credits were made to enterprises located outside of Mexico City and its surrounding areas (Zone III), reflecting the success of the measures taken by FOGAIN to increasingly diversify its lending activities. 4.20 The industrial activities most often supported by FOGAIN are metal working and machine fabrication (mostly capital goods), which accounted for 21% by amount of 1979 operations, food products (14%), and manufacture of footwear and clothes (13%). These manufacturing activities tend. to be rela- tively labor intensive, and are also in line with the subsectoral priorities established in the National Industrial Development Plan (i.e., industries producing capital and wage goods, and agroindustries). Firms suipported by FOGAIN in 11979 had an estimated assets/job ratio of about US$12,000, which is satisfactory. About 60% of enterprises supported by FOGAIN in 1979 used its credit facilities for the first time, indicating the success of its promotional activities. 4.21 FOGAIN has increasingly emphasized fixed assets financing in recent years to expand the scale and productive capacity of SMI firms, and complement the shorter-term financing available through the banking system. Fixed asset financing accounted for 52% by amount of 1979 operations, compared to a 38% share in FOGAIN's prior operations (1954-78). Debt restructuring, which used to account for more than 7% by amount of FOGAIN's operations, dropped to about 4% in 1979. The remaining amount was accounted for by working capital loans. 4.22 In shifting its activities towards priority areas, FOGAIN has relied on (i) its new structure of interest rates and curtailment 1/ of- lending to enter- prises located in Mexico City, (ii) a new system of margins to .intermediaries favoring lending to small enterprises, to enterprises located in preferred regions and to those engaged in priority activities, and (iii) the initial efforts of the PAI extension service. The success of FOGAIN in reorienting its operations towards priority activities is a significant element in ensuring the future impact of PAI. It also reflects to some degree the initial results of PAI's extension efforts which have added a new and active dirmension to the operations of the participating institutions. The Credit Guarantee Scheme 4.23 An important goal of PAI is to increase the number of efficient small enterprises eligible for credit by helping to provide collatera:L to satisfy the banks' requirements. FOGAIN estimates that only about a third of small enter- prises in Mexico presently have access to bank credit. Although FOGAIN has been operating a guarantee scheme from the outset, it had been little used for several 1/ Working capital loans are made only to enterprises in priority activities. - 28 - reasons. First, the guarantee coverage was severely restricted regarding both risk coverage and loan size, which effectively limited guarantee coverage to no more than Mex$200,000. Second, FOGAIN's past management was cautious in promoting and using its guarantee authority since it had not been provided with sufficient allocations to cover possible losses. 4.24 At the request of the Mexican authorities at the time the previous project was being prepared, the Bank made available a consultant to examine the existing guarantee scheme and suggest improvements. Based on the consultant's recommendations and subsequent discussions between PAI and the Bank, a new credit guarantee program has now been designed. However, due to the delays in initiating PAI operations, the elements of the guarantee program were defined only recently and it is now scheduled to be launched by June 1980. 4.25 The principal characteristics of the program would be: (a) only small enterprises as defined in para. 3.02 would qualify; (b) the guarantee would not exceed 75% of the value of a credit, which could not exceed Mex$1 million; (c) the premium would be 1.5% p.a. of the guaranteed amount outstanding, to be paid by the borrower; (d) 133% of the amount of the guaranteed portion of a credit would not be eligible for FOGAIN rediscounting;l/ and (e) repayments will apply pari passu to the guaranteed and un- guaranteed portions of outstanding credits. Several legal points relating to how and when the guarantee scheme will become effective are still being defined. FOGAIN's timetable for implementation of the guarantee scheme would be defined at a later date according to limits to be approved by the Ministry of Finance. 4.26 As under all of FOGAIN's credit operations, the participating inter- mediaries are expected to evaluate the merits of each credit proposal before its submission. The staff of the guarantee fund would then review the application, relying whenever possible on the advice of the PAI extension service regarding the clients concerned. 4.27 Regarding the specific features of the program, it appears that the 75% guarantee coverage is acceptable from the point of view of achieving the purpose of easing the collateral burden on new small enterprise borrowers, while leaving sufficient risk with the lending institutions. Under the first project, Mex$10 million of PAI funds have been assigned to capitalize the guarantee fund. 1/ For example, if Mex$100 of a Mex$150 credit is guaranteed by FOGAIN, only Mex$17 could be rediscounted. - 29 - Additional funds of about Mex$45 million would be provided by the government under the proposed project (para. 5.04). The premium of 1.5% p.a. is expected to cover fully the fund's guarantee losses. However, it may take about five years to build up sufficient reserves and obtain sufficient operating experience to calculate more precisely the adequate level of premium. 4.28 The program described above constitutes a marked improvement over the previous one. However, in a situation of credit scarcity, there may still be limited demand for the guarantee mechanism if guaranteed credits cannot be rediscounted. FOGAIN's management is aware of this and is prepared to modify the conditions on the basis of the experience with the actual utilization of the program. The natural market for the scheme appears to be dynamic, medium size credit institutions which could use the fund to attract and develop small enterprise c:lients. However, in order for the program to be a success, it would have to be promoted among the larger banks as well. Given the impor- tance of the credit guarantee program for achieving the objectives of PAI, the review of the progress of PAI prior to mid-1981 would place special attention on evaluating the results of FOGAIN's credit guarantee program (para. 3.07). Past Financiial Performance 4.29 FOGAIN's assets have grown at an explosive rate of over 40% to Mex$5.95 billion in 1979, reflecting its rapid growth in operations (Annex 6, T-26). FOGAIN's assets at year-end 1979 were financed mainly by certificates of participation (50%), which are credit instruments issued by Banco de Mexico, equity (17%), the Inter-American Development Bank (about 15%), NAFINSA (7%), PAI (6%), 1/ and accruals (5%). FOGAIN does not incur any credit risks vis-a-vis its subborrowers in its operations, with the exception of its guarantee operations which will have earmarked reserves, since the financial intermediaries are fully responsible for principal and interest payments on discounted credits. However, it is exposed to the full exchange risk on past IDB loans, which are denominated in a basket of currencies, and which resulted in significant exchange losses at the time of the peso devaluation in 1976. 4.30 F()GAIN has been following the accounting practice of deferring its foreign exchange losses, which amounted to Mex$473 million at year-end 1979, and amortizing them as principal repayments as the IDB loan become due. In keeping with generally accepted accounting principles, the external auditors noted this in their 1977 and 1978 audit reports. In part to offset these losses and strengthen FOGAIN's equity position, the government has been making annual contributions to FOGAIN's equity amounting to Mex$92 million in 1977, Mex$97 million in 1978, and Mex$391 million in 1979, and a government budgetary contribution of Mex$1,000 million is planned for 1980. Even if the deferred charges are netted out of FOGAIN's equity, its debt/equity ratio of 9.0:1 would still be within the present 10:1 limit specified in its operating regulations. Given FOGAI]N's position as a second-tier institution and the level of support that it has continued to receive from the government, its financial structure is, on balance, acceptable. 1/ Of whiczh about 2% came from the Bank. - 30 - 4.31 Due to the amortization of exchange losses (Annex 6, T-27), FOGAIN's income statements show losses which amounted to about 0.7% of average portfolio in 1979 and are expected to be offset in the next few years by upward adjustments in FOGAIN's level of interest rates, which would also increase its average spread. Administrative and general expenses as a percentage of average loan portfolio amounted to 1.3% in 1979, which is low considering FOGAIN's relatively small average loan size. This percentage would rise somewhat if the expenditures of PAI directly relating to FOGAIN's operations were taken into account. 4.32 Reflecting its position as a second-tier institution, FOGAIN suffered virtually no losses on its loan portfoio during its many years of operation. At year-end 1979, arrears on loans correspond to less than 0.3% of total portfolio involving delays in payment by four credit unions. Accounting Procedures and Auditing Arrangements 4.33 FOGAIN maintains an adequate internal accounting and control system, which has been computerized to prepare it for FOGAIN's projected rapid growth. The internal auditors of FOGAIN are Mancera Hermanos y Asociados, S.C., an established Mexican auditing firm of acceptable quality. Other than the exception noted before (para. 4.30), audit reports have been otherwise unqualified. The external auditing arrangements are satisfactory. Operational and Financial Projections 4.34 FOGAIN's operations are projected to expand sharply in the next few years, with disbursements in 1980 increasing 65% to Mex$7,690 million, and with projected increases of 50% annually in nominal terms up to 1984 (Annex 6, T-28). Over this period, FOGAIN intends to orient its assistance increasingly towards (i) regions outside of Mexico City and its surrounding areas; (ii) fixed assets financing, particularly to small clients who would be using FOGAIN's services for the first time; and (iii) manufacturing sub- sectors designated as priority areas in the National Industrial Development Plan. In addition to its internal mechanisms (e.g., differentiated margins and interest rates) FOGAIN intends to rely heavily on the extension service in order to help to focus its operations on priority activities. FOGAIN's projections are quite ambitious, but should be achievable, given the continued buoyant expectations and demand for financing of the Mexican industrial sector for the next few years. However, continuing attention will be required to orient operations towards priority activities and to build up FOGAIN's organizational structure (particularly its credit evalua- tion and supervision departments) in line with the growth in operations. 4.35 FOGAIN presently has limited resources that are expected to be utilized in 1980. As of year-end 1979, only some Mex$446 million equivalent of PAI funds had been disbursed, leaving a balance of about Mex$665 million, which FOGAIN expects to commit and disburse in 1980. FOGAIN also recently signed its eighth loan with IDB for US$50 million, which is expected to be available by the second half of 1980. This amount almost equals the total US$51 million equivalent made available to FOGAIN under the previous seven IDB - 31 - loans. FOGAIN also expects to obtain some Mex$1,000 million in budgetary allo- cations from the government in the form of equity, a loan of Mex$1,400 million from Banco de Mexico (certificados de participacion) and from NAFINSA of Mex$1,560 million (of which Mex$400 million has been disbursed). 4.36 For the period up to 1982, FOGAIN would require some Mex$19,500 million in additional resources to finance its projected increased level of operations. Excluding the above-mentioned funds expected to be available for 1980, FOGAIN would require Mex$14,300 million, which it expects to obtain as follows: Mex$ millions % Government (budget) 3,000 21 Banco de Mexico 5,000 35 Other sources 6,300 44 Total 14,300 100 About Mex$2,900 million of the Mex$6,300 million expected from other sources would be covered through PAI resources to be provided in connection with the proposed second loan, consisting of some US$70 million equivalent in Bank funds and some Mex$1,300 million in local counterpart funds. The remaining amount from other sources is expected to be provided by lenders such as IDB. 4.37 The projected income statements (Annex 6, T-26), show acceptable growth in income and a reasonable level of administrative expenses, permitting FOGAIN to continue amortizing its foreign exchange losses while earning a modest return on its portfolio. These favorable profitability projections would not materialize in the unlikely event that significant exc'hange rate movements occur in the future to offset possible differences between Mexican and internaltional inflation rates. However, if this occurs, FOGAIN would be expected to adjust its interest rates, and thus maintain a sound financial structure ovier the next few years. B. Fondo Nacional de Fomento Industrial (FOMIN) Background and Objectives 4.38 FOMIN was established in April 12, 1972, as a government trust fund ("Fide:Lcomiso") administered by NAFINSA to assist in the implementation of national plans for industrial diversification and regional development. Its role is to stimulate the creation of new SMI enterprises or the expansion or strengthening of existing ones by subscribing up to one-third of the equity capital required, and to promote development of the capital market. At present FOMIN is awaiting the Ministry of Finance's clearance for its board-approved decision to raise its equity participation limit to 49% of share capital in eligible enterprises. This enlarged equity participation, which would also include debt instruments with equity features, will permit greater flexibility in designing investment packages. Its investments are - 32 - intended to be temporary and to be sold once the investee company achieves a satisfactory financial position. FOMIN thus serves to bring together groups of investors, enabling enterprises to have access to additional capital permitting them to operate on a larger and more economic scale. Its partici- pation frealitntly helps firms start the transition from a closed family enterprise to a more widely owned corporation with professional management. Organization, Management and Staffing 4.39 The governing body of FOMIN is its Technical and Funds Disbursement Committee ("Comite Tecnico y de Distribucion de Fondos"), formed by repre- sentatives from the Ministry of Finance, Ministry of National Patrimony and Industrial Development, NAFINSA, Banco de Mexico, plus two representatives from the private sector selected by the main industrial associations CONCAMIN and CANACINTRA. The Director General of NAFINSA is the chairman of the Committee. The Directors of FOGAIN, FIDEIN and FONEI and outside experts, as appropriate, are invited to participate in meetings to assist in reviewing particular invest- ments or problems. The committee meets periodically to approve operating programs and budgets, set investment policies and guidelines, consider specific investment proposals and set conditions for FOMIN's participation. 4.40 FOMIN's day-to-day operations are managed by an experienced Director General, Mr. Sergio Luis Cano Luebbert, who has been in this position for over five years. He has been delegated authority by the Committee to approve small investments up to Mex$500,000 after consultation with the Committee's chairman. An indicative organization chart of FOMIN is presented in Annex 6, T-40. 4.41 FOMIN has a relatively young but capable and well-motivated staff with adequate skills to ensure FOMIN's success. In December 1979, FOMIN had 45 employees (including 23 professionals). This number is expected to increase by three additional professional during the current year. Operations 4.42 Eligibility. While FOMIN may finance larger enterprises, only SMI enterprises with total equity ranging from Mex$50,000 to Mex$150.0 million 1/ would be eligible for financing under the PAI subprogram, which aims at implementing projects involving investments in (a) new or expanded existing productive capacity, or (b) relocation of productive capacity in accordance with national decentralization policies. Most of the firms selected would be those requiring, or likely to require integrated support involving assistance from one or more of the other elements of the overall program i.e., credit, facilities on industrial estates or technical assistance. 1/ Contrary to FOGAIN and FIDEIN, FOMIN evaluates in each case whether there is need to revaluate the assets of the firm where equity participation is being considered. Since this revaluation takes place before presentation to FOMIN's board, PAI confirmed that, for eligibility purposes FOMIN would consider the value of the firm's equity at the time of request for risk capital participation. - 33 - 4.43 Investment policies. FOMIN has gradually developed over the past few years a set of investment policies(see Project File) reflected in its operating regulations, which incorporate recommendations of a study carried out by private consultants 1/ in connection with the appraisal of Loan 1552-ME. These policies have enabled FOMIN to achieve a better portfolio diversification and more selectivity in its investments. Under the present administration, FOMIN has overcome excessive bureaucracy and deficient appraisal of new investments, which hampered the institution's performance dtring its early years, thus enabling FOMI]N to define its investment policies more precisely. 4.44 The most important elements to FOMIN's policies are currently those concerning: (i) the achievement of financial goals (para. 4.45); (ii) the impLementation of new investment instruments (paras. 4.46 to 4.48); (iii) supporting the industrial growth process in line with the new decentralization law of 1978 by setting differentiated return on equity criteria depending on each firm's location, and (iv) adopted policies to diversify its portfolio to achieve the proposed financial goals. Among other policy measures, it has established 10% of FOMIN's equity as the maximum exposure (including investments through equity as well as other instruments) in a single fEirm and 15% of FOMIN's equity as the total exposure in two or more firms belonging to the same industrial group. 4.45 Financial goals. During 1979 FOMIN's total income, including dividends and capital gains on the sale of equity participation, the return on short-term investment on available liquid funds and interest from sales of investments on credit terms, 2/ covered for the first time its operating and administrative expenses. 3/ FOMIN achieved breakeven if stock dividends are added at par value to its overall revenues. For 1980, it intends to maintain for the first time the value of its equity portfolio in constant prices. FOMtN intends to build up a diversified portfolio, in which risk of losses would be more than compensated for by possible gains. 4.46 Investment instruments. FOMIN aims to encourage the creation or expansion of economically sound and financially viable SMI enterprises by making risk capital available, primarily in the form of subscriptions to common and/or preferred shares. 4/ Until December 1976, FOMIN's investments 1/ Alan Patricof Associates, Inc. 2/ Current credit terms of equity sales include an annual interest rate of 18.5%. 3/ Operating expenses of FOMIN include fees charged by NAFINSA for its services and financial costs. 4/ In emergency cases, FOMIN can make a temporary advance for projects approved by the technical committee, where the documentation of the investments is still not complete. This advance without interest considers already the final share participation of FOMIN. Itf the investment is not carried out due to investees' fault a penalty is charged by FOMIN. - 34 - were mostly in the form of new issues of common stock. Since then, FOMIN has increasingly used preferred stock as well. Preferred stock allows FOMIN to project a guaranteed minimum return on equity portfolio, depending on the quality of the investments, and adequate timing and negotiation of its equity sales. Furthermore, compared with common stock, preferred st^^k has the advantage of receiving priority in liquidation. Common stock exposes FOMIN to the full risks of loss and usually does not reward FOMIN satisfactorily when the firm is successful, given the nature of companies it invests in. However, a disadvantage is that preferred dividends 1/ are not tax deductible; thus, the net cost to the investee of financing through preferred stock is higher than of common stock or of using FOGAIN's credit to SMI enterprises. 4.47 As a result of recommendations made in connection with the first SMI project, by mid-1980 FOMIN intends to start experimenting with the use of debt instruments with equity features (e.g. subordinated and/or convertible 1*oans) to broaden the range of its potential customers, design investment packages tailored to the particular characteristics and needs of individual enterprises, and improve FOMIN's own income position. Institutions making risk capital investment in other countries, even with more developed equity markets, have found it advantageous to use a wide variety of subordinated and convertible debt instruments in addition to common and preferred shares. The Ministry of Finance approved the use by FOMIN of these new risk capital instruments and, if successful, FOMIN plans to extend their use to a substantial portio of its operations. These new instruments would permit FOMIN to earn a higher and more constant income from its portfolio, as well as negotiate better terms of sale. FOMIN would be pioneering these instruments in Mexico, before a more elaborate legislation is introduced based on FOMIN's experiment. 4.48 Both instruments currently under study would consider terms not exceeding 7 years (including a grace period of up to 2 years). FOMIN will keep the exclusive right of exercising the option to convert under pre- determined conditions, while interest rates for these convertible debt instruments would be slightly lower (up to three points below the ACF index) than average rates to SMI enterprises. This would be compensated for by prospective additional yields when FOMIN exercises its option. FOMIN intends to utilize common stock purchase primarily in those cases where the prospects for eventual divestiture appear particularly favorable. 4.49 While FOMIN's staff has no practical experience with these new instruments, various staff members have received special training in institutions suggested by the Bank that are operating in highly sophisticated capital markets and have experience in issuing debt instruments with equity 1/ Preferred dividends are negotiated depending on the industry's location and destination of output. For industries located in (i) Zones IA/B and II -- dividends of 9.75%, except for 8.75% for export-oriented industries and, (ii) Zones III A/B (Mexico City and surrounding areas) -- 10.0% for any small SMI and 10.25% for expansion of medium-large or medium-sized SMI's (no support is provided for new enterprises). - 35 - features and design of investment packages for individual enterprises. Furthermore, FOMIN intends to engage an experienced consultant during 1980 to provide on-the-job direct technical assistance to FOMIN's staff inter alia, in the implementation of debt instruments, in matters such as the detailed design of the parameters of the debt instruments, appropriate investment packages, conditions for equity participation, supervision of portfolio, and accounting, and internal control of transactions. FOMIN intends to present to the Bank the financial criteria to be applied in designing debt instruments with equity features and contracts for exercising option. 4.50 Past performance. FOMIN's policies give priority to investments in SMI enterprises located in less developed areas. Although FOMIN has made some progress in supporting regional development, results are still unsatis- factory, due primarily to its location in Mexico City. Presently about 39% of FOMIN's total amount invested is in 23 operating enterprises located in Zones IIIA and IIIB (Mexico City Metropolitan and surrounding areas), the remainder is distributed in Zones IB and II, accounting respectively for 51% (23) and 10% (5) of its investments. A larger portion of thle new investments made by FOMIN during 1979 and all five companies und'er construc- tion or in preoperating stage are located in Zones IB and II, reflecting that FOMIN is shifting its emphasis to regional development (Annex 6, T-32). FOMIN's equity portfolio, including investment commitments, is expected to double by 1980. Substantial growth of operations should occur, particularly in the regions, due primarily to an intensive promotional prograLm being imple- mented and to the close support FOMIN is receiving from PAI regional offices' extension agents. The promotional program of FOMIN would be oriented towards attracting financially sound SMI enterprises with good growth prospects and good entrepreneurial leadership. A promotional campaign has been discussed at loan negotiations aiming at selected firms that have these characteristics. 4.51 About 39% of the Mex$410.3 million portfolio held by E'OMIN in December 31, 1979, is concentrated in metal processing; the remainder accounts for food products (19%), chemicals/pharmaceuticals .(16%), wood products (8%) and a large number of other industrial sectors (18%). The current status of the portfolio indicates its emphasis in supporting capital goods and agro- industrial activities (Annex 6, T-31). FOMIN expects its operations to grow, mainly in the field of consumer goods such as textiles, apparel and leather goods, deemphasizing its participation in areas of lesser priority 1/. FOMIN intends to avoid investments in activities where medium sized firms would be unable to compete with the marketing machine of large international firms (such as in pharmaceutical laboratories) or which are excessively dependent on large govern- ment institutions as purchasers. Industries supported by FOMIN present an estimated average cost per direct job created in the range of U;S$12,000-15,000 equivalent, reflecting relatively high employment impact of these enterprises. 1/ Industrial activities not included in the National Industrial Development Plan. - 36 - 4.52 FOMIN's portfolio has experienced significant growth during the past years, according to the following status of authorized equity participations: Table 4.5 Disbursement FOMIN's Investments Increases Authorized Committed Committed Disbursed Year-by-Year Year (No.) (No.) (Mex$ millions) % 1976 8 5 48.6 21.0 1977 10 8 60.8 41.0 95 1978 17 15 128.0 95.9 134 1979 35 28 276.8 162.4 69 Utilization of the equity investment component of the first Bank loan has been constrained somewhat by the fact that many firms need to use equity for working capital financing, rather than in connection with a specific investment project. However, FOMIN expects that the promotional campaign will help to overcome this limitation by influencing eligible SMI enterprises to seek its support under PAI. Investments for working capital financing are usually less desirable, since they often serve the purpose of offsetting existing debts without increasing productive capacity. Also, SMI enterprise often incur cost overruns due to bad planning or to drastic economic changes which force them to obtain working capital financing when the new or expanded project goes onstream or even during its preoperational stage. However, in some cases these investments help to increase permanently the utilization of existing capacity and reach a higher output level. FOMIN intends to study working capital financing thoroughly on a case-by-case basis to screen out those that do not achieve an effective increase in productive capacity or permanent output. As a general policy, FOMIN does not invest in firms to help them reorganize financially, except for some of the SMI enterprises held currently in its portfolio, which, if rehabilitated, would have good growth prospects. In its effort to rehabilitate individual investee firms, FOMIN's staff would seek support from institutions involved in providing technical assistance (such as CENAPRO, IMIT, INFOTEC and others) through PAI's extension agents stationed in the regions. Cost and risk factors, along with certain provisions of its charter, generally preclude FOMIN from having a significant role in financing very small firms. Therefore, as expected, most of FOMIN's assistance is focussed towards medium enterprises. Also, medium-large firms are increasingly interested in FOMIN. Investments by FOMIN in working capital financing and larger firms (not eligible within the Bank loan) are being suported by additional funds provided by the government. FOMIN's resources under PAI are expected to remain roughly equal to those investments not eligible within the Bank loan (Annex 6, T-38, gives a breakdown of FOMIN's resource needs). - 37 - Portfolio Quality 4.53 FOMIN's equity portfolio has grown by 35% from a total of Mex$303.5 million as of December 31, 1978, to about Mex$410.3 million by year-end 1979, when FOMIN owned shares of 76 SMI enterprises (Annex 6, T-33). Along with portfolio increases, quality has improved substantially during the last three years, due primarily to the improvement of FOMIN's appraisal capability and greater selectivity compared to the past when FOMIN assigned relatively little significance to financial viability of investments. 4.54 As of December 31, 1979, 26 companies representing 45.6% of FOMIN's total investments were operating profitably, compared to 20 companies accounting for 41.0% of FOMIN's portfolio in September 1977, when the first SMI project was appraised. Twenty-five firms operating with losses during 1979 accounted for 33.6% of the total portfolio, mostly involving recent investments in firms considered to have satisfactory prospects and some investments 'in earlier years which were unable to overcome serious difficulties. Out of the remaining port- folio, 5 firms accounting for 11.5% are under construction or in preoperational stage, and 20 firms representing 9.3% of the total investment are presently not operating (Annex 6, T-34). FOMIN is in the process of selling three of these non-operating firms, with the remainder intended to be either liquidated (and/or wriLtten off during 1980/81) or reorganized and rehabilitated under new management. 4.55 I't is FOMIN's policy to turn over its portfolio as soon as conditions permit. Although FOMIN would like to broaden stock ownership by selling some shares to outside investors, due to the types of companies it invests in and to present capital market conditions, it usually has little alternative but to sell to existing majority shareholders. Few, if any, of these investee companies could be expected to be quoted in the stock market in the near future. FC)MIN usually intends to sell out when an investee firm is operating profitably, but is prepared to sell earlier if requested by the other share- holders or, if necessary, to liquidate a firm. 4.56 Results of equity sales have improved substantially during the past few years ('Annex 6, T-35). Out of 26 firms sold by FOMIN, only 3 resulted in capital losses if investments are valued at historical costs. HIowever, if time value of money is considered, FOMIN has been unable to accrue net gains from its risk investments, due partly to the long gestation period and relatively small yields on investments. In determining the sales price FOMIN has usually considered the book value of shares as a starting point for dlivestiture, since SMI enterprises do not have an easiLly measurable market valtue. This price plus a premium reflecting asset revaluations is the basis for negotiations. Since the finally negotiated premium has been too mcdest for its profitable investments, FOMIN intends to base its asking price for common and preferred stock more on the firm's expected future earnings, goodwill, market value (if applicable) and the yield to FOMIN of the stocks sale over and above FOMIN's investments (variation in ACF index times original investment). With the implementation of debt instruments with equity features which will guarantee a fixed return for its investment port- folio, the return on investments is expected to meet FOMIN's financial goals (para. 4.45). A substantial portion of FOMIN's sales of equities has - 38 - been on credit terms, which is expected to decrease in the future through more appropriate design of investment packages, utilizing debt instruments with equity features. Project Appraisal and Supervision 4.57 FOMIN's project appraisals are carried out competently under the supervision of a well-qualified and motivated team of ten analysts/supervisors. Two more professionals are expected to be contracted during 1980, to deal with the anticipated increase in workload over the near term. All investments are subject to FOMIN's thorough appraisals which analyse satisfactorily the market- ing, technical, economic, administrative and financial aspects of the projects in which FOMIN intends to participate (Annex 6, T-30). Economic rate of return calculation is prepared for all investments using more than US$250,000 in Bank funds and often for projects below this obligatory limit. FOMIN's appraisal work needs to be strengthened further by giving more emphasis to evaluating the cash-generating ability of investments. 4.58 FOMIN's supervision is carried out by the same analysts in charge of project appraisal. While there is some feedback in following up firms they have evaluated, this system is insufficient to provide adequate portfolio control. Therefore, FOMIN's director intends to hire a well-qualified pro- fessional to carry out independent portfolio control on a continuing basis, responsible, among other things, for a financial analysis of the portfolio (including ratio and trend analysis), identification of the possibility of earnings capitalization to be distributed in the form of stock dividends to shareholders, distribution of cash dividends and share value for dis- investment purposes. 4.59 NAFINSA appoints at least one voting member to participate in the general meeting of shareholders of investee companies, and FOMIN the shareholders' representative in each firm it invests. The shareholder's representative is always one of the analysts/supervisors from the Appraisal and Supervision Department's team. This practice enables FOMIN to keep informed of the developments within each SMI investment enterprise. Although, as a minority shareholder, FOMIN cannot always correct problems it identifies, it attempt to influence the main shareholders after analyzing options for a solution. Procurement and Disbursement 4.60 Disbursement policy provides for the first 20% of FOMIN's investment to be disbursed when the firm has met all formal conditions set by FOMIN. The remainder is disbursed against a schedule agreed with the firm, which provides that FOMIN's subscriptions are made at the same pace or sometimes only once those of the other shareholders have been made. The program reimburses FOMIN for qualifying investments for purchases of fixed assets and associated permanent working capital against proof of acquisitions of the shares or any debt instrument with equity features. The description of each project includes a list of goods and expenditure schedules for disbursement purposes. Under PAI's equity investment component, fixed assets and associated working capital would be supported through equity and debt instruments with equity features. - 39 - Operations made for debt substitution and working capital financiLng not combined with investments in fixed assets would not be financed under the program. FOMIN's procurement procedures were discussed at negotiations. As a general policy, FOMIN obtains price quotations from several suppliers and focus more on quality and technical adequacy of purchased equipment. When- ever necessary, FOMIN intends to use the technical assistance of specialized institutions participating in the program. Accounting Procedures and Auditing 4.61 FOMIN maintains a satisfactory accounting system which permits an adequate analysis of its performance. In the past, FOMIN adopted the practice of recording stock dividends received as income, which could lead to a sub- stantial overstatement. Currently, FOMIN presents stock dividends adequately under a separate heading under special accounts ('partidas extraordinarias') after operational margin. In addition, FOMIN's proportionate share of revalued assets and capitalized earnings distributed in the form of stock dividends by investee companies is credited to income and added to the cost of equity investments. These practices are in accordance with generally accepted account- ing principles in Mexico and permit adequate analysis of the income statement. 4.62 For the past three years, FOMIN has been audited by Despacho Garcia Coronado, S.C. During 1979, the Ministry of Programming and Budgeting assigned Elizundia, Charles y Asociados to audit FOMIN's accounts. FOMIN's audit reports have not contained any qualification. NAFINSA separately assigns Mancera Hermanos y Asociados, S.C. to perform an annual audit of FOMIN. Annex 6, T-36 and T-37, presents summarized year-end audited balance sheets and income state- ments of FOMIN for the years 1977, 1978, and 1979 unaudited. 4.63 For the purpose of enabling FOMIN to maintain an adequaLte standard of accounting procedures and internal control, it has assigned an independent auditing firm to each equity investment, in agreement with its pa,rtners. These audit firms are requested to forward, for shareholders information, a report on internal control and accounting procedures for each of the enter- prises, together with the annual certified financial statements. Satisfactory auditing arrangements for FOMIN and its investee companies have been discussed at negotiations. Financial Poisition and Projections 4.64 Up to year-end 1979, FOMIN depended completely on financial resources provided by the government in the form of contributions to FOMIN's equity capital. For 1979, FOMIN was assigned a budget of Mex$120 million, compared to a budget of Mex$100 million for 1978. FOMIN is required to submit annually to SEPAFIN, for approval, its proposed investment and operating costs, in order to jusitify its budget allocation for the following year. F'or 1980, SPP has authorizted an additional budgeted capital contribution of Mex$170 million to FOMIN. Since Loan 1552-ME will start to be disbursed during this year to support eligible SMI enterprises, all of the government resources outside of PAI are going to be used to provide risk capital for larger enterprises (as de- fined in para. 4.42), and for working capital investments not covered under PAI. - 40 - 4.65 FOMIN's risk capital component of US$10 million under Loan 1552-ME is expected to be fully committed by the first quarter of 1981, as reflected in the proforma balance sheets and income statements of FOMIN for 1980 to 1984 (Annex 6, T-36 and T-37). Under the proposed project, allocations to FOMIN's subprogram would be set at US$12.0 million or 55% of the total esti- mated investments in eligible enterprises of US$21.8 million, which is ex- pected to be committed in two years. In addition, FOMIN may commit, by late 1982, part of the US$8 million unallocated portion of the proposed loan (para. 5.04). 4.66 After incurring losses in preceding years, FOMIN's 1979 revenues, including share dividends at par value -- see para. 4.45, covered, for the first time, operating and administrative expenses of Mex$26.9 (US$1.2 million equivalent). W4hile stock dividends represented about 6.0% of the total equity portfolio for 1979, 1/ only about 1.1% of which represents capital gains gene- rated by capitalized earnings. The difference is made up by revaluation of fixed assets and adjustments of book value. Increased net revenues on sales of equity are expected to be generated by FOMIN's portfolio. Although FOMIN's return on equity sales has increased substantially from 15% in 1976 to 36% in 1979 (in current terms), there is still room for improvement. Annex 6, T-39, shows the impact of internally generated funds which are expected to play a substantial role in FOMIN's cash flow during the projected years. In 1984, FOMIN's net operational income (including stock dividends) is projected to cover administrative and operating expenses. Operations do not involve unusual risks regarding the attainment of its projected growth, if the promotional program develops according to expectations. However, further attention needs to be put by FOMIN on increasing capital gails of its equity portfolio. C. FIDEICOMISO DE CONJUNTOS, PARQUES, CIUDADES INDUSTRIALES Y CENTROS COMERCIALES (FIDEIN) Background and Objectives 4.67 FIDEIN was established in December 3, 1970, as a government trust fund administered by NAFINSA to plan, promote and implement a national system of industrial parks, as part of a comprehensive program of industrial decentralization and regional development. At the time of appraisal of Loan 1552-ME, FIDEIN was principally a central promotional and advisory institution to the "Fideicomisos Especiales", i.e. the legal entities owning and operating the individual regional industrial estates. 4.68 As part of the expansion of its role in implementing the Industrial Estates Subprograms under PAI, FIDEIN allocated resources to finance directly or through loans to the "Fideicomisos Especiales" (a) the construction of factory buildings on industrial estates for rent, lease with option to purchase or sale to SMI enterprises, (b) construction and lease of common facilities to provide services to groups of SMI enter- prises on the estates (for example, warehouses, maintenance and repair 1/ No cash dividends were declared by investee companies. - 41 - shops, quality control and material testing laboratories and restaurants), and (c) equipment and machinery leasing to SMI enterprises operating in these industrial estates (para 4.85). These directly managed activities of FIDEIN are designed to support both new productive enterprises as well as to serve the expansion and/or relocation needs of existing SMI (as dLefined in para. 3.02) through the provision of the physical assets mentioned above at reasonable cost. 4.69 Loan 1552-ME assumed that factory buildings would be financed mostly by FIDEIN loans to the Fideicomisos Especiales. However, FIDEIN has opted for direct contracts between FIDEIN and the client firm, operating under the Industrial Estate Subprogram as a first-tier institution, financing directly sales, rent and lease operations to SMI enterprises of all physical installa- tions other than developed land, which is the responsibility of the Fideicomisos Especiales, i.e., the second-tier institutions. The Fideicomisos Especiales sell to FIDEIN the land designated for construction of factory buildings and they participate actively in the promotion of factory buildings in the market. Organization, Management and Staffing 4.70 FIDEIN's overall policy-making body is its Technical Committee, headed by the Minister of Human Settlements and Public Works (SA[OP). The Committee irncludes representatives of the Ministries of Finance, Commerce, Agrarian Reform, and National Patrimony and Industrial Development (SEPAFIN), National Institute for Workers Housing Development (INFONAVIT), NAFINSA, plus two representatives from the private sector selected by CONCAMIN and CANACINTRA. The directors of FOGAIN and FOMIN are also invited to attend committee meetings to improve overall coordination of PAI. The Committee meets periodically and is responsible for all decisions on policies, procedures, financiLal plans and budgets. Operational control is also a function of the Committee, since it approves all subprojects financed. 4.71 Mr. Alfredo Navarrete Romero, FIDEIN's Director General, is respon- sible for day-to-day operations; he is assisted by a Sub-Director who has recently been appointed by NAFINSA. Mr. Navarrete replaced the previous Director General only after the appraisal of the first SMI project, and this change of management, coupled with the resignation of several key staff professionals, may have contributed to some loss of continuity and momentum. Program implementation was further hampered by delays unrelated to FIDEIN in the overall implementation of PAI. Furthermore, the poor performance of FIDEIN's factory building construction component, despite high levels of demand, has been aggravated by a passive and inadequate technicaL and opera- tional management. Recognizing the need to strengthen staff capabilities, Mr. Navarrete intends to carry out a carefully planned and comprehensive program of staff expansion, technical assistance and training, which is reflected in the "Plan of Action" for 1980 (Annex 3). 4.72 Excessive turnover in FIDEIN's staff has been caused aLso by the inadequacy of salary levels, which are generally lower than for comparable positions in FOGAIN and FOMIN. This problem is expected to be resolved soon after completion of a proposed salary level review and a redefinition of staff functions by FIDEIN's management. FIDEIN is aware of the importance of bringing salaries to sufficiently competitive levels to attract and retain qualified professionals. - 42 - 4.73 At present, FIDEIN is understaffed, due to reasons mentioned above and to severe space limitations which appear to have been resolved with its move to its new facilities. To strengthen its technical and operational areas, FIDEIN hired recently an experienced architect/civil engineer and intends to strengthen its financial control, analysis and reporting functions. As of February 29, 1980, FIDEIN had a total staff of 43 employees including 27 professionals. The indicative organization chart, which is presented in Annex 6, T-40, incorporates structural modifications authorized by the Board at the time of appraisal, including the position of a qualified civil engineer or architect at the managerial level, responsible for central planning, appraisal and supervision of the construction program. The staffing of both FIDEIN's appraisal and supervision departments would be strengthened, includ- ing the hiring of engineering staff, to enable FIDEIN to continue performing its construction and supervisory activities, taking into account the antici- pated increased workload in connection with the implementation of the proposed project. FIDEIN is considering an arrangement to engage the Industrial Development Authority of Ireland to provide appropriate technical and manage- ment assistance for the program and within a time frame currently being designed. 1/ FIDEIN is also receiving the close attention of relevant govern- ment officials in NAFINSA and SAHOP to assist in strengthening FIDEIN's overall structure and performance. Development of Industrial Estates 4.74 Location and initial construction of estates. During the initial stages of planning, evaluation and design of each of the estates, for which SAHOP has been assigned overall responsibility, FIDEIN collaborates closely with SAHOP, particularly in selecting the locations of the industrial estates and carrying out the financial and market feasibility studies. Once the location of an estate project is approved, SAHOP acquires a site of about 500 ha. and, in consultation with FIDEIN and the municipal and state authorities, prepares overall plans, layouts and specifications. The first phase of construction covers the development of about 20 ha. of the site, including leveling, grading, laying access roads and installing power, water and sewage disposal facilities. The entire site is then turned over to a local Fideicomiso Especial, which assumes responsibility for future expansion and operation. 4.75 Whenever feasible, industrial estates projects are planned to evolve into industrial cities, 2/ by integrating them with adjacent or nearby social infrastructure projects including housing, hospitals and clinics, commercial centers, schools, churches and recreation centers (carried out by other agencies). Through a 1972 decree the government broadened the activities authorized for FIDEIN to include promotion of commercial centers, 3/ which provide facilities for warehousing, retail and wholesale trade, general business offices and recreational activity centers aimed at the tourist market. 1/ A consultant from the Industrial Development Authority of Ireland financed under the first SMI loan, visited FIDEIN in September 1979. His report, which was submitted in November 1979, will form the basis for the compre- hensive Technical Assistance/Training Program scheduled for 1980/81. 2/ The concept is similar to planned "new towns" or "satellite towns" that have been developed in other countries. 3/ To date only one commercial center is in operation at Mexicali, B.C. del Norte. - 43 - 4.76 Operating and financial performance of the industrial estates. As of December 1979, sixteen industrial estates (Annex 6, T-42) and one commercial estate (at Mexicali) were operating (see map in Annex 9). The growing momentum of the program is evident from the following table: Table 4.6: INDTJSTRIAL ESTATE PROGRAM GROWTH a/ Cumulative Figures at Time of Project Appraisal First SMI Second SMI June 1977 December 1979 Estimated 1982 Operating Estates (numbers) 12 16 25-30 Land Sales (ha) 407 1,080.8 2,000-2,500 Occupant Companies (numbers) Operating 63 219 Industrial Premises Under Construction 72 211 Planning Construction 150 377 - Total 285 807 1,400-1,500 Employmenit b/ 15,000 37,000 70-80,000 a/ Covers construction program initiated in 1972, excluding Mexicali's commercial center. b/ Total employment estimated when all firms are operating at full capacity. By February 1980, 2 additional estates were about to inaugurate operations and 3 more were under construction. As of December 1979, land sales in the 16 industrial estates amounted to 1,080.8 ha. (equivalent to Mex$1,006.6 million) sold to 60,7 firms, compared to 407 ha. (equivalent to Mex$191 million) sold to 285 firms located in 13 industrial estates operating when the first SMI project was appraised. For the 2 1/2-year period from June 1977 to December 1979, the annual sales of land (256 ha.) and number of new occupant companies (161) averaged about three times the corresponding annual figures for the prior 5 year period starting in 1972, when construction was inaugurated (81 ha. and 57 companies p.a., respectively). The numbers of firms in the planning phase of factory construction are particularly significant in fore- casting demand for factory construction finance. In 1977, this category representecl 53% of all firms that had purchased estate land; in 1979, it was 43Z, but almost double (298 vs. 150) in absolute terms. - 44 - 4.77 Annex 6, T-43, presents summarized consolidated balance sheet data for the Fideicomisos at year-end 1978 which reflect their strong equity position. Assets of a newly created Fideicomiso Especial include the value of raw land, the value of land development, and the capitalized value of preinvestment ,tudies and assistance contributed by FIDEIN. In some cases, land contributed by the municipality or other local bodies form part of the assets in exchange for equity or a note issued by the Fideicomiso. Additional funds required for ongoing land development and working capital can be obtained from banks, using the estate owned by the Fideicomiso as collateral and, to a limited extent, from SAHOP and FIDEIN. By the end of 1979, the federal and state governments had invested Mex$811.7 million (including committed resources for 1979) in acquiring and developing land (Annex 6, T-41). In addition, Mex$323.8 million had been invested (including committed resources for 1979) by SAHOP, BANOBRAS, FIDEIN and private re- sources from the local commercial associations. 4.78 Capital investment in land and infrastructure ranges from US$800- 1,300 (in 1979 prices) per job created depending on location. Industrial estates are run efficiently by the individual Fideicomisos under FIDEIN's monitoring responsibility, and are projected to expand further geographically (para. 4.76), providing adequate support for the development of FIDEIN's proposed subprogram. Estate-based projects have been fairly labor intensive, with capital investment per incremental job estimated to be of the order of about US$15,000 equivalent (in 1979 prices). This ratio should drop as increasing numbers of SMI enterprises are assisted through FIDEIN's growing program of factory-building finance, common facilities and equipment leasing. Interaction with the "Fideicomisos Especiales" 4.79 The Fideicomisos Especiales which own and operate the estates are decentralized trust funds directed individually by their own Technical Commit- tees, chaired by the governor of the respective state in which they are located. Each committee also includes representatives of SAHOP, FIDEIN, NAFINSA, the Ministry of Finance, and SEPAFIN, and frequently the representa- tive of the municipal authority and other local or national bodies that may own part of the Fideicomiso Especial's assets. The state governor and the representatives of SAHOP and FIDEIN tend to be the most active members of these Technical Committees. The Fideicomisos Especiales have considerable autonomy in their day-to-day operations, but are subject to monitoring and overall coordination by FIDEIN, NAFINSA's agent in administering the national program. 4.80 The staff of a local Fideicomiso Especial typically consists of a manager and two or three other staff members, including an accountant. Although the managers of the Fideicomisos Especiales are under the formal direction of their respective Technical Committees, they work closely with FIDEIN's staff and seek its assistance on a variety of matters, such as locationad analysis, market analysis and demand forecasts, advice on factory buildings and general technical and financial assistance. Based on mission visits to more than half of the 16 operating industrial estates, managers of the Fideicomisos Especiales appear to be capable and business oriented, with sufficient experience to conduct effectively all estate activities, including project supervision and expansion (coordinated with SAHOP), promotion and public relations, and contract negotiation. FIDEIN assists the Fideicomisos Especiales in selecting managers and other staff and in monitoring to ensure that their activities are consistent with the policy objectives of the industrial estates program. - 45 - 4.81 FIDEIN also provides the Fideicomisos Especiales, as required, with assistance on a continuing basis in activities such as: promotion and market- ing; accotnting and financial control including preparation of annual budgets and financial statements; and internal procedures and practices. Finally, FIDEIN provides advice to relevant federal government agencies on such matters as allocation of budgetary and other resources to the Fideicomisos Especiales. FIDEIN - Status and Performance of the Industrial Estates Subprogram 4.82 The construction of industrial estates by SAHOP--including new estates as well as expansion of older operating estates--is progressing satisfactorily but only in terms of developed land and basic utilities available to those industries with the resources to build their own factories. Conversely, the provision by FIDEIN directly of factory buildings, common facilities and leased equipment on terms and conditions accessible to most SMI enterprises has been inadequate, due to its weak organizational capacity (para. 4.71). FIDEIN's objective is to assist SMI enterprises locating on the estates to overcome inherent credit constraints in acquiring such facilities. Of primary importance is the provision of factory buildings for sale, rent or lease with option to purchase at accessible prices. The two smaller components, provision of common service facilities and leasing of industrial machinery and equipment, are also needed but require lesser allocations of resources. 4.83 Factory buildings. Sizes of standard factory buildings (SFBs) range from a minimum of 500 sq. m. to 2,400 sq. m. with the large majority of applications expected to fall between 1,000 and 2,400 sq. m. However, in .order to provide some flexibility for FIDEIN to finance the larger medium- scale enterprises, factory buildings larger than 2,400 sq. m. and up to 5,000 sq. m. would be eligible for financing under the proposed loan on a case-by- case basis. The standard building design is modular, to serve general SMI requirements and to facilitate expansion by adding bays as needed (for tech- nical considerations see Annex 5). However, there exists the possibility of FIDEIN approving and financing factory buildings to special specifications under a signed sales or long-term lease contract. The number and sizes of buildings constructed at each estate would vary, depending on effective demand. The funds allocated to factory building construction under the first SMI loan have only been partially committed. Of the total US$5.0 million available, about US$1.1 million have been committed for 7 buildings with firm sales contracts totalling 13,000 sq. m. and advance construction of four industrial buildings (authorized by FIDEIN after thorough marketing analysis of potential demand in Tijuana) totalling 8,800 sq.m (Annex 6, T-44). Another 15-20 buildings are expected to be authorized in the second quarter of 1980, and the balance by the fourth quarter of 1980, when funding would become available under the proposed loan. About 70 factory buildings 1/ are expected to be constructed with the resources of the first SIII project loan. While the construction program has been lagging, negotiations and commitments 1/ These buildings will be occupied by an estimated 75-80 SMI enterprises employing some 4,000-5,000 workers. - 46 - are accelerating rapidly, as a result of procedural clarifications given during appraisal (para. 4.87), and the estimates for the balance of 1980, summarized in Table 4.6 below, are considered realistic: Table 4.7: FACTORY BUILDING CONSTRUCTION SCHEDULE UNDER FIRST SMI PROJECT - STATUS AS OF DECEMBER 31, 1980 Number of Status Factories Estimated Sq. m. Operating 38 60,800 Under construction 12 19,200 Pre-construction phase 20 24,000 Total Committed under 70 104,000 Loan 1552-ME 4.84 Common service facilities. Construction of common facilities has the purpose of increasing accessibility and reducing unit costs for certain services needed by the estate clusters of SMI enterprises. Typical common services include maintenance and repair shops, central warehousing, quality control and material testing centers, worker training centers, offices for bulk purchase of raw materials and assistance/advice on accounting, computer- ized data processing, marketing and promotion, canteens and restaurants. Common service facilities have not yet been financed under the first SMI project, but FIDEIN will attempt to identify specific demand for and the feasibility of such services during the implementation of the proposed project. 4.85 Machinery and equipment leasing. No commitments have yet been made under this component but demand has been increasing recently due to a more aggressive and promotional posture of FIDEIN, stimulating managers of the industrial estates to activate the sales, rent or lease of physical installa- tions other than developed land. FIDEIN is implementing a separate department to handle its leasing operations for which new experienced staff is presently being recruited. FIDEIN intends to launch the leasing operations once the construction program for factory buildings is well under way. As a pilot operation, up to Mex$10 million (US$440,000 equivalent) of PAI resources would be channeled to finance direct leasing operations by FIDEIN to help estate- based small enterprises. Loan 1552-ME assumed that FIDEIN would operate through leasing companies. However, Arrendadora Internacional, S.A. 1/ expected by FIDEIN to channel most of the leasing component, did not agree to operating with preferential interest rates to smaller enterprises located in the industrial estates, due to a possible conflict with prevailing market interest rates charged to its present clients. Therefore, Arrendadora Internacional, S.A. offered to provide assistance to FIDEIN under a technical assistance agreement to be developed, allowing FIDEIN to operate as a 1/ A subsidiary of Banco Internacional, S.A. which in turn is owned by NAFINSA. - 47 - first-tier institution. The leases will offer the client enterprise either a purchase option (usually in the case of general purchase equipment such as trucks and simple machine tools) or mandatory purchase before the expira- tion of the lease contract (in the case of specialized equipment not easily usable by other firms). FIDEIN - The Proposed Subprogram 4.86 The need for FIDEIN-financed factory buildings, whether as SFBs or special purpose units, is clearly evident from the demand registered by the industrial estates. Analysis of the size distribution of land parcels acquired by estate industries and the projections given in Annex 7, T. 42, show that SNI comprises over 80% of the estate population. Historically, a significant proportion of these have been medium scale according to the program's definition. However, trend data indicate that older operating estates, as they expand, tend to attract increasing numbers of small enterprises (apparently following the larger "pioneer" industries). Additional efforts will be made under the proposed loan to respond more selectively to the needs of small enterprises through the development of common service facilities and launching the machinery and equipment leasing activity (see plan of action, Annex 3). While a substan- tial number of SMI enterprises require FIDEIN's assistance to finance factory buildings, it would be impractical to attempt to disaggregate the forecast demand for factory buildings according to location, since the estates are in various stages of development and precise effective demand at each location is unpredictable. Effective aggregate demand over the two-year project execution period should easily exceed available funding (Bank loan plus counterpart resources) by a considerable margin, provided procedures are streamlined and modified as discussed below. FIDEIN intends to allocate funds in a manner that would allow rapidly expanding estates experiencing high demand to receive larger-than-average shares of available funds, while the remaining sites receive reasonable minimum levels of funding to enable them to initiate construction of some SFBs in advance of firm contracts as a promotional device. 4.87 Advance factory construction. To date, effective demand for factory building finance with FIDEIN's resources has been constrained by procedural guidelines requiring a legally binding commitment by S1II enterprises before an application could be processed. A number of such arrangements have been concluded, but the large majority of potential clients are unwilling to sign contracts entailing the financial burden of substantial deposits with no assurance as to delivery dates. In order to accelerate program implementation, FIDEIN would initiate the construction of a reasonable number of SFBs, a concept proven to be an especially effective promotional tool in Ireland (where it was started) and other countries. The success of the privately financed "maquiladora" 1/ projects in the Mexican border zone is due in large measure to the advance construction practice. FIDEIN's industrial estates 1/ Assembly plants built in advance and ready for immediate occupancy by interested firms. - 48 - program complements similar investments in the private sector (Annex 6, T-50), which are concentrated in the border zone but now spreading to other regions. FIDEIN intends to undertake advance construction of at least one to two factory units of between 1,000 to 2,400 m2 each per estate. It is expected that a contract will be signed with an occupant for practically all units long before construction is completed. Advance factory construction would always be based on appropriate market surveys. 4.88 Pricing policy and contract terms. The basic criterion adopted by FIDEIN for pricing of factory buildings and common facilities is to recover invested capital and earn a return of ACF plus one to two points on unpaid balances, which is reasonable. Rental and lease with purchase option oper- ations of factory buildings and machinery/equipment would be structured to yield a return equal to the ACF and ACF plus two points, respectively. The program is still in an early phase of implementation but the financial goal appears to be achievable, as indicated in the pricing criteria presented in Annex 4. Depending on the actual mix of rent or lease with purchase option or sale contracts, the minimum return averaging the ACF plus at least one percen- tage point should be achieved and may be exceeded. SFBs are normally rented or leased for a term of five years, and monthly payments may be adjusted upward each year. For non-standard buildings constructed to the occupant's specifications, rental contracts would be for a minimum term of 13 years. Sales of factory buildings would usually be on deferred payment terms, although exceptionally cash sales may occur. Rent and leasing operations would be favored primarily by smaller SMI enterprises. Project Appraisal and Supervision 4.89 FIDEIN's performance in project appraisal has been uneven, reflecting the lack of experience of its staff. Procedural guidelines requiring legally binding commitments (para. 4.87) have restrained FIDEIN from developing regional market studies for advance factory construction, but this point has since been resolved. FIDEIN is in the process of improving its project evaluation procedures to cover more thoroughly the technical, administrative, marketing, financial, economic, and credit aspects of proposed projects, including the preparation of regional market studies in support of projects including advance construction of factory buildings in the industrial estates. The quality of FIDEIN's appraisals is expected to evolve satisfactorily, since this area is handled by a well-qualified and motivated department head. Since market studies for advance construction of factory buildings would be a major responsibility of the project appraisal department, the present staff of two professionals would need to be expanded to support the anticipated increased workload over the near term. Mainly due to heavy staff turnover, FIDEIN projects have not been adequately supervised. Strengthening of project supervision is reflected in the "Plan of Action" for 1980, which was discussed at negotiations. In line with the Plan of Action (Annex 3), FIDEIN intends to hire, in the near future, additional appraisal staff and a qualified head for the supervision department who would be responsible for all stages of execution of civil works and construction of factory buildings according to a pre-established construction program. - 49 - Procurement and Disbursement 4.90 In view of the widely dispersed locations and limited construction at each location over the two-year project execution period--ranging from a minimum of 1,000-2,000 m2 to 10,000-12,000 m2 at a few of the more rapidly growing estates--international construction firms, even those already estab- lished in Mexico, would have little interest in bidding, and conventional ICB procedures would serve no useful function. Nevertheless, FIDEIN is announcing the factory building component in advance through advertisements in Mexican regional and large newspapers of wide circulation. Responses from interested national and international firms will form the basis for updating SAHOP's existing directory of prequalified construction firms, from which FIDEIN invites a minimum of three competitive bids. SAHOP's directory includes both large contrasctors based in Mexico City and smaller firms located in the regions that are often in a position to compete successfully for FIDEIN's contracts. 4.91 According to established procedures, FIDEIN's evaluation and subse- quent selection of the winning bid has to be reviewed by its Technical Commit- tee before contract award. Documentation related to all tenders and contract awards will be available in FIDEIN's files for ex post review by Bank personnel during supervision missions. 4.92 FI]DEIN intends to develop a technical assistance agreement ("convenio") with SAHOP under which technical support and supervision can be obtained at the request of FIDEIN or the Fideicomiso Especial, including assistance in the procurement of supplies for the construction of factory buildings (price quotations, specifications and suppliers) and procurement of construction firms (Plan of Action, Annex 3). 4.93 Disbursement of the credit proceeds are governed by FII)EIN's opera- tions manual. (in Project File) and by provisions contained in each construction contract between FIDEIN's and the winning contractor. Disbursements satisfac- tory to the Bank are made, in line with the physical progress of construction, every two weeks after certification by SAHOP's resident engineer or FIDEIN's supervising engineer or architect. If necessary, FIDEIN will obtain technical assistance f-rom SAHOP, particularly in the procurement of supplies for the construction of factory buildings (price quotations, specifications and suppliers) and procurement of construction firms according to the existing factory bui'Lding project and structural design. Accounting, Control and Auditing 4.94 F[DEIN has presently a less-than-adequate accounting system for the level of its operations. FIDEIN has agreed at negotiations to provide the Bank by October 1,980 with audited financial statements by auditors acceptable to the Bank for the years 1977 to 1979. Requirements for improving FIDEIN's accounting and internal control areas are contained in the Plan of Action (Annex 3). FIDEIN intends to contract an experienced consultant firm, which will revise and assist in improving accounting procedures, including the estab- lishment of an adequate collection system, procurement and disbursements procedures, internal audit and general policies and procedures necessary for strengthening the internal control of FIDEIN. - 50 - Operational and Financial Projections 4.95 Annex 6, T-47 and T-48 present summarized FIDEIN's unaudited financial statements for 1977 to 1979. During these three years FIDEIN received government funds to cover administrative and operati,'.al expenses of about Mex$20 million to Mex$25 million, which are reasonable. The factory building construction program started in the second semester of 1979 with funds advanced by PAI. 1/ Although PAI is prepared to provide working capital for FIDEIN's operations, government intends to provide additional equity funds to be used as a revolving fund in the construction program of factory buildings to cover disbursement lags for subprojects authorized under the Bank loan and also for the downpayment/installments for land purchase from the Fideicomisos Especiales up to the time a contract is signed with an enterprise. 4.96 The PAI funds provided to FIDEIN under Loan 1552-ME are expected to be fully committed by year-end 1980. Estimates of the construction schedule and capital costs (Annex 5) are based on the assumption that during 1980 uncommitted funds equivalent to about 80% of FIDEIN's subprogram under the first SMI loan will be sufficient to cover all approved projects involving construction of factory buildings (Annex 6, T-45). The initial allocation under this proposed project to FIDEIN's subprogram would be set at Mex$334.0 million, which is based on a conservative market projection which should be reached easily. Additional unallocated funds would be available to FIDEIN in the event that these resources are utilized ahead of schedule (para. 5.04). Financial projections of FIDEIN present acceptable growth in income, permitting a positive return on its portfolio (Annex 6, T-47 and T-48). 1/ Mex$40 million of PAI resources were advanced for constructing factory buildings. - 51 - V. THE PROJECT AND THE PROPOSED BANK LOAN A. Allocation of Program Resources Under the First SMI Project 5.01 lUnder the first SMI project, PAI received a total allocation of Mex$2,077 million, US$47 million equivalent (52%) of which was provided by the Bank. The allocations by subprogram and sources of funds aLre shown below: Table 5.1 Total World Amount % Bank % Government a/ % (Mex$ million) Credit 1,112 54 690 64 422 42 Equity investments 410 20 230 21 180 18 Industrial estates b/ 210 10 115 11 86 9 Technical assistance 196 9 46 4 150 15 Credit guarantees 10 - - - 10 1 Feasibility studies 30 1 - - 30 3 Small and Medium mining c/ 118 6 - - 118 12 Total 2,077 100 1,081 100 996 100 US$ Equivalent d/ 90.3 47.0 43.3 % of Total 100 52 48 a/ 54% in budgetary resources, 42% from Banco de Mexico and 4% from NAFINSA. b/ Including the machinery and equipment leasing component of up to Mex$ 10.0 million. c/ Part of the counterpart funds for FOGAIN were reallocated to CFM (para. 3.22). d/ At Mex$23.00 = US$1.00. Given the large amount of financing required by the vigorous SRI sector in Mexico, the relatively modest sum allocated to PAI was expected to be suffi- cient only to initiate operations, but not to satisfy a large part of SMI's financing requirements. Although PAI started operations effectively only in June 1979, about Mex$600 million had been utilized as of March 1980, with the remaining amount expected to be committed by the participating institutions during 1980. As of May 30, 1980, US$24.8 million had been committed under Loan 1552--ME, of which US$22.6 million was for credit, US$0.9 million for equity investments, US$1.1 million for factory buildings, and a modest US$0.2 million for technical assistance. The credit component is expected to be substantially committed by July 1980, while the components for equity invest- ments, factory buildings and for specialized technical assistance should be - 52 - fully committed by year-end 1980. Commitments under the technical assistance component were delayed by a misunderstanding regarding which expenditures qualified for Bank financing. This has been clarified and plans have been made for the commitment of these funds by specialized technical assistance agencies and Sy the extension service (para. 3.24). 5.02 For the limited time that PAI has been operational, its achievements are already significant, particularly in building up the industrial extension service, and preliminary results indicate that the program will make a positive impact on SMI enterprise development in Mexico. In view of the tight resource position of PAI, the high overall demand for funds by SMI enterprises, and in order to maintain the momentum of the program, the Mexican Government requested the Bank in November 1979 to prepare a second SMI project, which was appraised in January/February 1980. B. The Project and the Proposed Bank Loan 5.03 The proposed project would build and expand on the accomplishments of the previous operation. In particular, the project would support the government's objectives of employment creation and regional decentralization by fostering more rapid growth of SMI enterprises, particularly outside of Mexico City. Special emphasis would be placed on: (i) developing further the system of industrial extension agents to increase its reach to less developed regions; (ii) the introduction of a new credit guarantee system which would improve access to the financial system of small enterprises with good projects but insufficient collateral; and (iii) institutional objectives relating to the principal participating trust funds and to the PAI secretariat. An important element of the proposed project would be the review by mid-1981 by NAFINSA, in consultation with the Bank, of the progress of PAI as a whole, in order to ensure that this innovative program continues to develop satisfactorily in relation to its stated objectives. Size of the Program and the Proposed Loan 5.04 On the basis of the outlook for SMI investment demand, the project pipelines of the participating institutions, and their institutional capacity, PAI would be provided with Mex$4,500 million under the second project, con- sisting of the proposed Bank loan of US$100 million equivalent and Mex$2,200 million in counterpart resources of the Mexican Government. Table 5.2 below shows the proposed initial allocation of program financing by subprograms and sources of financing. During negotiations, assurances have been obtained from the Mexican Government that the local counterpart resources of no less than Mex$2,200 million will be made available by the federal government from fiscal resources or from the Banco de Mexico. - 53 - Table 5.2: ALLOCATION OF PROGRAM RESOURCES Mex$ million Subprograms Total Amount % World Bank ,' Government % Credit (FOGAIN) 2,930 65 1,610 70 1.320 60 Risk capital (FOMIN) 501 11 274 12 225 10 Industrial estates (FIDEIN) 334 7 184 8 150 7 Technical assistance 296 7 46 2 250 11 Credit guarantees (FOGAIN) 45 1 - -- 45 2 Feasibility studies 60 1 - -- 60 3 Unallocated (for use by FOMIN and FIDEIN) 334 7 184 8 150 7 Total 4,500 100 2,300 100 2,200 100 US$ million a/ 195.7 100 95.7 % of Total 100 51 49 a/ Mex$23.00 = US$1.00. As previously mentioned, FOMIN could benefit from increased promotional efforts, while FIDEIN, which faces strong demand for factory buildings outside of Mexico City, needs substantial institutional improvement (para. 4.71). Therefore, Mex$334 million (of which US$8 million under the proposed loan) would be set aside for use by either of these institutions in order to induce them to exert stronger efforts in the aforementioned areas. The terminal date for submission of subproject financing requests would be December 31, 1983, and the closing date, December 31, 1984 (Annex 2). Description of the Loan Components 5.05 The proposed loan would be allocated initially as follows: US$70 million for FOGAIN to support the Credit and Guarantees 1/ Subprogram; US$12 million for FOMIN to finance the Risk Capital Subprogram; US$8 million for FIDEIN to implement the Industrial Estates Subprogram; US$2.0 million to PAI to implement the Technical Assistance Subprogram; and an unallocated amount of US$8 million available for utilization by FOMIN and FIDEIN once they have committed their initial allocations. In view of the large number of PAI subprograms, and the possibility that their respective financing needs would change during program implementation, the initial allocations and related loan features would be reviewed and revised, as necessary, during the commitment period by agreement between NAFINSA and the Bank. Subloans or investments would be in accordance with the operating regulations of the respective implementing agencies and the eligibility criteria for each subprogram. 1/ Only local funds would be made available for the guarantee mechanism. - 54 - Since approvals under the multitier system may involve relatively long process- ing times, as under the previous loan subproject expenditures up to 180 days prior to receipt by the Bank of the financing application would be eligible for Bank financing. 5.06 The loan would provide financial and technical assistance to SMI (as defined in para. 3.02) through FOGAIN, FOMIN, 1/ FIDEIN, and specialized technical assistance agencies as specified below: (a) The credit component of US$70 million would finance 55% of FOGAIN's credits for machinery, equipment, civil works and associated working capital 2/ for qualifying subprojects (para. 5.09). Subloans would range from three to a maximum term of six years with a grace period of up to two years, which is reasonable given the nature of SMI projects. Since FOGAIN's operating regu- lations limits the maximum combined amount of fixed asset and working capital subloans per enterprise to Mex$12 million, maximum subloans would be about US$290,000 equivalent. The average lending rates to the final borrowers would be one percentage point above the average ACF for a 12 month period up to and including April 1980. They would range from 14 percent for small enterprises located in regions selected for industrial development, thus partly compensating for higher transport and labor training costs and insufficient social infra- structure and public utilities, to 22 percent for medium enterprises located in the established industrial centers. FOGAIN's interest rates would be adjusted once a year to reflect changes in the average ACF over a preceding twelve month period. In the event that there should be substantial changes in the ACF during the year (e.g. changes of 3 percentage points or more from the base used for the last adjustment) the Bank and NAFINSA would consult and consider further adjustments. Margins to intermediaries would average about 3%, but could range between 3.5% and 2.5% in line with the criteria used for a range of interest rates, to provide an incentive for the intermediaries to lend to small enterprises and those located outside of Mexico City. (b) The risk capital component of at least US$12 million would finance 55% of FOMIN's equity investments and other instruments with equity features to support expenditures of qualifying subprojects for machinery, equipment, civil works and associated working capital. FOMIN would manage its re- sources and set the return on its quasi-equity instruments with the objective of recovering the value of its investments in real terms. For subor- dinated convertible loans and other debt instruments with equity features, the minimum interest rate would be up to three points below the ACF. (c) The industrial estates component of at'least US$8 million through FIDEIN would finance 55% of construction of qualified factory buildings and common service centers for SMI enterprises, and of expenditures for the purchase of equipment to be leased to qualifying SMI enterprises. In setting lease and loan conditions, FIDEIN would impute interest rates that are not more favorable than for FOGAIN's credits. In line with this policy, imputed interest rates for credit sales and lease with the option to purchase 1/ For the purposes of FOMIN's investments, the equity of client enterprises would be calculated prior to asset revaluation. 2/ No debt consolidation loans will be financed. - 55 - factory buildings, common service facilities and equipment lease arrangements with option to purchase, would be ACF plus one to two percentage points, and for rentals with no purchase option the imputed interest rate would be equal to ACF. Overall interest rates should at least average ACF plus one point. (d) The technical assistance component of US$2.0 million would finance the direct foreign exchange content of the cost of training extension agents, of the staff of the PAI secretariat and of the participating institutions, and of facilities and equipment needed for specialized technical assistance. Initial allocations of this amount were agreed at negotiations and are broken down by institution in Annex 6, Table 51. Channeling Arrangements, Repayment and Capitalization of PAI's Special Account 5.07 The proposed loan would be made to NAFINSA, which would channel the resources in pesos through a special Program Account (established in NAFINSA) to the individual trust funds and other participating institutions for quali- fying subprojects and expenditures. All debt service charges (principal, interest and commitment fee) related to the Bank loan would be paid by the government, in order to capitalize the special operating account of PAI, and permit PAl's earnings to cover the operating costs of the technical assistance program. In view of these arrangements, the loan would be repaid in accordance with a fixed 17-year amortization schedule including 4 years of grace. Pariticipating institutions, with the exception of technical assistance institutions, would pay back PAI resources as funds are recovered from subloan repayments and sales of investments. 5.08 FOGAIN and FIDEIN would be expected to repay to the PAI account the principal of the amounts lent to them and interests, leaving margins (around 2%) which would enable FOGAIN and FIDEIN to cover their operating costs from their respective lending spreads. FOMIN would repay PAI only the net amount recovered from its investments plus one-half of any realized capital gains. It would also pay to PAI a small portion (say, 2% of the cost of- PAI funds invested in companies paying dividends) of any dividends on investment and interest received from debt instruments. Resources paid back by the partici- pating trust funds to the PAI account would be utilized by PAI ior purposes similar to those under the proposed project. Disbursement, Procurement and Auditing 5.09 In view of the large number, relatively small size and varied nature of the individual subprojects, it would not be feasible to determine the foreign exchange content of each individual subproject. An analysis of samples of eligible subprojects prepared by FOGAIN, FOMIN and FIDEIN in connection with Loan 1552-ME showed that the foreign exchange content of program financing is likely to be at least equal to the standard 55% disburse- ment percentage for FOGAIN, FOMIN and FIDEIN subprojects set under the first loan (Annex 6, Table 52), according to the following breakdown: - 56 - Table 5.3: ESTIMATED TOTAL PROGRAM COSTS (Equivalent US$ million) Content Sources of Financing Foreign Local Total of Financing Foreign Local Total Imported Equipment 79.6 - 79.6 Beneficiary Enterprises - 54.5 54.5 Local Equipment 18.5 43.0 61.5 Financial Intermediaries - 22.4 22.4 Construction 6.4 57.4 63.8 Financing under Project 100.0 95.7 195.7 Working Capital Increases 5.0 45.2 50.2 for which: FOGAIN (70.0) (59.3) (129.3) Technical Assistance 3.1 12.4 15.5 FOMIN (16.0) (13.1) (29.1) Guarantee Fund - 2.0 2.0 FIDEIN (12.0) (9.8) (21.8) Technical 112.6 160.0 272.6 Assistance (2.0) (13.5) (15.5) 100.0 172.6 272.6 In view of this, disbursements of funds from the loan would be made on the following basis: (a) For FOGAIN, FOMIN and FIDEIN: 55% of all disbursements made by the three funds to finance machinery, equipment, civil works and associated working capital; and (b) For technical assistance: 100% of the cost of imported goods and services, 70% of expenditures for imported goods purchased off-the- shelf and services, or 25% of total expenditures for domestically manufactured goods and services rendered in Mexico. 5.10 Disbursements for the subloans, investments and leasing operations would be made against certificates of expenditure for specific subprojects issued by the respective trust funds; the detailed documentation evidencing final expenditures on machinery, equipment, civil works and related working capital would be retained by the respective trust funds 1/ and would be available for inspection by the Bank. Disbursement applications for sub- projects would include information required under the SDS (para. 4.12). In addition, disbursement requests by FOMIN and FIDEIN should be consistent with 1/ At least 70% of expenditures would be documented in the case of FOGAIN. - 57 - a brief description of the subproject, including a list of items financed, and an estimated schedule of expenditures and disbursements, which would be required to be submitted to the Bank prior to Bank authorization of the subproject. 5.11 The Borrower would ensure satisfactory arrangements for a full audit of the individual trust funds, as well as of the Program Account, to be submitted to the Bank annually and according to standards satisfactory to the Bank. 5.12 NAFINSA, through the PAI secretariat, together with FOGAIN, FOMIN, and FIDEIN would apply suitable procedures either directly or through the intermediaries to ensure that goods and services procured, using the financing of PAI, are competitive in quality and price, and are appropriate for the needs of the client enterprise. Detailed procurement procedures for factory construction financed through FIDEIN are described in paras. 4.90 to 4.93. Approval Limits 5.13 The approval limits would be as follows: (a) FOGAIN: W4hile Bank approval would not be required for FOGAIN's subprojects, 1/ the Bank could review at its discretion any withdrawal request prior to disbursement. The Bank would also review periodically a representative sample of subprojects on an ex post basis during supervision missions. (b) FOMIN: Investments requiring more than US$250,000 equivalent in Bank funds would require Bank approval. (c) FIDEIN: Bank approval would be required for: (i) all subloans for factory buildings constructed by FIDEIN without a firm purchase, lease or straight rent contract; (ii) all subloans for factory buildings constructed with a firm purchase, lease or straight rent contract with areas larger than 2,400 sq.m. and up to 5,000 sq.m.; (iii) the first two common service center subprojects; and (iv) the first two leasing operations of equipment and machinery. (d) Technical Assistance: All use of Bank funds for this purpose would riequire Bank approval. 1/ In line with FOGAIN's operating regulations, the maximum Bank subloan size would be about UJS$290,000 equivalent. - 58 - Project Benefits and Risks 5.14 The proposed project, which is ambitious in scope, is expected to assist a substantial number of SMI enterprises, with a correspondingly important impact on employment and decentralization of industry. Some 700 enterprises are expected to be assisted through the Credit Subprogram, many of which would utilize FOGAIN's financing for the first time, and about two thirds by amount of FOGAIN's credit is expected to be made to enterprises located outside of the Mexico City metropolitan area. The revised Credit Guarantee Subprogram, if successful, could be implemented on a much larger scale to improve significantly the access to financing of small enterprises. Some 90 enterprises would be assisted through the Risk Capital Subprogram and 80 enterprises through the Industrial Estates Subprogram. Finally, the Technical Assistance Subprogram of PAI is expected to provide assistance to several hundred more enterprises. As many as 20,000 incremental jobs are expected to be generated as a result of the investments supported through the proposed project, with a cost per job created in the order of US$13,000 equivalent, which is quite reasonable for a country at Mexico's level of development. About 60% of the subprojects financed are expected to involve small enterprises. 5.15 The project would also achieve important institution-building objectives by continuing the process started under the first SMI project of developing a more comprehensive and effective system of support for SMI by (i) coordinating more closely the activities of existing financial and technical assistance institutions; (ii) improving the access of small firms to these institutions; and (iii) expanding the volume and range of their services. In particular, the project would help to develop further the innovative industrial extension service for direct assistance to SMI enterprises, and induce the participating trust funds to identify clients more actively than in the past. Particular emphasis is being placed on developing FIDEIN's role as a specialized financial institution. 5.16 The major risk in the implementation of the proposed project involves the inherent difficulty in coordinating several diverse program elements and maintaining cooperation among several institutions. However, efforts made under the first SMI project and to be taken in connection with the present one reduce this risk to acceptable levels. There is also the risk that the implementation of some program components, the Industrial Estates Subprogram in particular, may lag behind the rest of the program. Concrete steps being taken by FIDEIN in connection with the proposed project would suggest that the level of this risk is acceptable. The review of the overall progress of PAI to be undertaken by NAFINSA in consultation with the Bank will help to ensure that PAI and its diverse elements continue to develop in accordance with its objectives. 5.17 Should inflation accelerate further, the ACF should continue to be a suitable yardstick for determining the onlending rate of FOGAIN, and the corresponding rates for FIDEIN and FOMIN, in particular given the government's intention of maintaining interest rate levels which would permit adequate resource mobilization in the financial system. On the whole, the project presents an acceptable level of risk. - 59 - VI. AGREEMENTS REACHED AND RECOMMENDATION A. Agreements and Understandings Reached 6.01 During loan negotiations, agreement or understandings were reached: (i) with the Mexican Government and NAFINSA on: (a) The loan amount, the allocation of the proceeds oi- the loan among the various components of the project, and arrangements for reviewing such allocation during the loan commitment period (paras. 5.04 and 5.05); and (b) the government's responsibility for servicing the loan, and providing counterpart funds of Mex$2,200 million and also arrangements for channeling the proceeds of the Bank Loan and the counterpart resources to the participating trust funds (paras. 5.04 and 5.07). (ii) wJith NAFINSA (in its own capacity and as the trustee Eor the participating trust funds) on: (a) review by NAFINSA by mid-1981, in consultation with the Bank, of the structure, operations and overall progress of PAT, focussing on the industrial extension service (paras. 3.07 and 4.05); and (b) satisfactory auditing arrangements for the Special Program Account and the individual trust funds, and free limits and procurement and disbursement arrangements (paras. 5.10 to 5.13). (iii) with NAFINSA (as the trustee for FOGAIN), and FOGAIN on: (a) onlending terms and conditions including interest rates to the final beneficiaries and margins to the inter- mediaries (para. 4.10); (1b) procedures for disbursement and procurement (para. 4.16); (c) pending issues regarding the new credit guarantee mechanism (para. 4.25); and (d) the ex-post analysis of economic impact of projects and improvement in FOGAIN's supervision activities (paras. 4.12 and 4.14); - 60 - (iv) with NAFINSA (as the trustee for FOMIN), and FOMIN on: (a) financial criteria to be applied in designing debt instru- ments with equity features (para. 4.49); (b) satisfactory auditing arrangements for FOMIN and FOMIN investees (para. 4.63); (c) procedures for disbursement and procurement (para. 4.60); (d) the increased level of promotion activities by FOMIN (para. 4.50); and (e) disinvestment procedures (para. 4.56). (v) with NAFINSA (as the trustee for FIDEIN), and FIDEIN ON: (a) onlending terms and conditions including interest rates to the final beneficiaries for sales, rent or leasing of factory buildings and common service facilities (para. 4.88); (b) presentation of FIDEIN's audited reports for years 1977 to 1979 by October 1980 (para. 4.94); (c) procedures for disbursement and procurement (paras. 4.90 to 4.93); (d) the Plan of Action for the institutional improvement of FIDEIN (paras. 4.71, 4.73 and 4.89). 6.02 The modifications of the FOGAIN, FOMIN and FIDEIN operating regulations to reflect the agreements reached during loan negotiations in manner satisfactory to the Bank would be a condition of loan effectiveness. B. Recommendation 6.03 With the above agreements, the proposed project would constitute a suitable basis for a loan of US$100 million to NAFINSA with a maturity of 17 years including 4 years of grace subject to the conditions outlined in Chapter V. - 61 - ANNEX I Page 1 MEXICO: SECOND SMALL AND MEDIUM INDUSTRY DEVELOPMENT PROJECT The Average Cost of Funds (ACF) Index 1. Floating interest rates vary according to changes in t]he average cost of funds as measured by the ACF index. Credit regulations establish that interest rates on bank loans may be adjusted upward and must be adjusted downward quarterly, according to the ACF index. The spread--the difference between the interest rate paid by the final borrower and the ACF index-- however, must remain fixed during the term of the loan. 2. Until December 1979, the ACF index had been calculated as a weighted average of interest rates paid (before tax) by financiera (the investment banks) and financiera departments of "multibancos" (multipurpose banks) on all term funds and deposits, except checking and savings accounts. As the transformation of the banking system from specialized banks and departments to multipurpose banks was consolidated, the government authorized the elimi- nation of departmental accounting in November 1979. Under the previous system, the banks were required to maintain and report separate accounts for each of their specialized departments: checking, savings, investment bEnking (finan- cieras), mortgage banking and discount departments. In connection with this change Banco de Mexico announced in December 1979 that the ACF index would be calculated in the future as a weighted average of interest rates paid on all term funds and deposits by Mexican private and mixed banks. 3. I'he net result of this change has been minor. Under the new defini- tion, ACF values are slightly lower (see Table A.1), reflecting the inclusion of some instruments issued by the former mortgage departments which were pay- ing lower rates. The difference in values implied by the two definitions is expected to approach zero since the mortgage bonds are being gradually eli- minated. This is shown in Table A.1. 6. Changes in the ACF index below reflect adjustments in interest rates paid on deposits, and in the term distribution of funds. The value estimated for February 1980 includes a partial adjustment for the increase in interest rates for ]L2, 18, and 24-month CDs which became effective on February 15. It is expected, therefore, that the ACF index for the following months will show most of the impact of this change. - 62 - ANNEX 1 T-1 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 1: ACF index, Highest Interest Rates on Deposits-, and Inflation Rates Highest Deposit ACF Annual Inflation Year Quarter Month Rate Old New Rate 1975 I 14.21 11.86 II 14.21 11.89 III 14.21 11.91 IV 14.21 11.97 15.1 1976 I 13.91 11.78 II 13.91 11.76 III 14.63 11.74 IV 15.17 11.99 15.8 1977 I 15.17 11.99 II 16.28 12.59 III 18.52 13.83 IV 18.52 14.30 28.9 1978 I 18.52 14.88 14.62 17.7 II 18.52 15.47 15.16 16.4 III 18.52 15.67 15.43 16.2 IV 18.52 16.10 15.93 18.1 1979 I 18.52 16.20 15.97 17.8 II 18.52 16.27 16.05 17.9 lII 18.52 16.62 16.54 18.6 Oct. 19.09 16.79 16.75 18.9 Nov. 19.52 17.42 17.37 18.8 Dec. 19.52 - 17.52 18.8 1980 Jan. 19.52 - 17.90 22.0 Feb. 23.5 a/ - 18.40 n.a. March - 19.20 April - 19.83 a/For 18-month CDs. Rates for 24-month CDs, which are free-market rates, may be higher. SOURCE: Banco de Mexico LCPI2 March 1980 - 63'- ANNEX 2 MEXICO - SECOND SMALL AND MEDIUM SCALE ENTERPRISE DEVELCIPMENT PROJECT Estimated Quarterly Schedule of Bank Loan Inisbursements (US$ million) IBRD Fiscal Year and Disbursements Cumu:Lative Quarter (Ending Date) in Quarter Disbursements 1980-81 March 31, 1981 3.0 3.0 June 30, 1981 5.0 8.0 1981-82 September 30, 1981 5.0 13.0 December 31, 1981 8.0 21.0 March 31, 1982 10.0 31.0 June 30, 1982 10.0 41.0 1982-83 September 30, 1982 10.0 51.0 December 31, 1982 12.0 63.0 March 31, 1983 12.0 75.0 June 30, 1983 8.0 83.0 1983-84 September 30, L983 5.0 88.0 December 31, 1983 a/ 4.0 92.0 March 31 , 1984 3.0 95.0 June 30, 1984 2.0 97.0 1984-85 September 30, 1984 2.0 99.0 December 31, 1984 b/ 1.0 100.0 a/ Terminal date for submission of subprojects. b/ Closing date. LCPI2 May 1980 - 64 - ANNEX 3 Page 1 MEXICO: SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT FIDEIN's Plan of Action This plan of action lays down particular organizational points to be undertaken by FIDEIN during the 1980 calendar year. A timetable for execution of this plan of action will be agreed during loan negotiations. Auditing 1. FIDEIN would present audited financial statements to the Bank for years 1977 to 1979. Furthermore, it would provide the Bank with financial statements of the Fideicomisos Especiales (Fideicomisos) for the above indi- cated time period. 2. This audit would include a report on internal control and account- ing procedures in FIDEIN, considering particularly aspects which should be strengthened. Internal Control and Accounting 3. FIDEIN would forward the external auditor's report to an experienced consultant firm, which would be contracted to implement standard and consistent accounting procedures in FIDEIN and the Fideicomisos, establish adequate col- lection system, procurement and disbursements, internal audit and general policies and procedures necessary for strengthening the internal control of FIDEIN. Such a contract with a consultant firm would be presented to the Bank by the same time as audit reports. 4. FIDEIN would prepare administrative and operational manuals to provide clear and standard guidelines for the management of the Fideicomisos. Staffing and Organization 5. FIDEIN would strengthen its technical and operational area by hiring a qualified civil engineer or architect on a managerial level to be responsible for the Industrial Estates subprogram. Furthermore, the staffing requirements of the supervision and appraisal departments would be reviewed to determine additional technical staff needed, taking into account the anticipated increased workload over the near term. 6. Furthermore, a salary level review and a redefinition of staff functions of FIDEIN would be carried out to bring salaries to sufficiently competitive levels to attract and retain qualified professionals and also support staff carreer development. Construction Program of Factory Buildings for 1980 7. FIDEIN intends to follow established construction program of factory buildings under sales contract and advance construction as indicated in Annex 6, T-45. - 65 - ANNEX 3 Page 2 Interest Rates 8. FTDvIN intends to raise the interest rates charged to final borrowers in line with the general increase in the ACF index published by the Banco Mexico. Technical Assistance for the Construction Program 9. FIDEIN would present a technical assistance agreement ("convenio") with SAHOP during loan negotiations in which the following technical support can be obtained at the request of FIDEIN or the Fideicomisos Especiales. (a) Support of SAHOP, in the procurement of supplies for the construct- icn of factory buildings (price quotations, specifications and suppliers) and procurement of construction firms accordling to the existing factory building project and structural design. (b) Supervision by SAHOP's resident engineer of all stages of executioti of civil works and erection of factory building according to a pre- established construction program. 10. FI]DEIN is considering an arrangement with the Industrial Develop- ment Authority of Ireland, which would provide technical assistance for a specific program and within a time frame to be designed jointly. - 66 - ANNEX 4 Page 1 MEXICO: SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT FIDEIN's Pricing Criteria 1. Building Cost: All-in cost 1/ including appropriated interest during construction plus 10% margin to cover FIDEIN's administrative and operational over- head expenses. Direct administrative and operational expenses of FIDEIN or the Fidei- comisos would be properly allocated to the all-in cost including commission on sales or lease of factory building. 2. Commission on Sales, A modest commission on sales, rent or lease Rent or Lease: in addition to the Fideicomisos manager salary is proposed as an incentive to improve per- formance. Presently, Fideicomisos managers are entitled to a commission paid by the Fideicomisos for land sale in the industrial estates. A differentiated commission schedule based on the size of the factory buildings oriented towards small-scale industry under PAI, would be discussed during Loan Negotia- tions. Options Available to Occupant Firm 3. Cash Purchase: All-in cost including interest during cons- truction plus 10% margin equals cash sales price. Any deferrement along one year period expressed as cash purchase would include in- terest of ACF plus two points. 4. Deferred Payment (a) Down payment of 20% of building cost Purchase: expressed in item 1. (b) Monthly installments over 5 to 13 years inputed interest on unpaid balance of ACF plus two points. Amortization period adjusted to financial capacity of client. 5. Straight Rent: Percentage ACF annually on building cost ex- pressed in item 1. Rent is adjustable annual- ly according to the prevailing ACF index. Two rent payments are advanced by client during contract signing. 1/ Total construction costs. - 67 - ANNEX 4 Page 2 6. Lease with Option to (a) Annual rent of ACF plus two points on Purchase: building cost expressed in item 1, ad- justed annually. (b) Building value is adjusted annually in line with inflation (replacement cost). (c) Option price in the replacement cost in year option is exercised less credit for past rent. Option in effec:t up to the 5th year. Credit allowance 1st year-50O of rent paid, 2nd year-40% of rent paid (cummulative), 3rd year-30%, 4th and 5th years-20%. (d) Terms on exercising option-cash on down payment of 20% of net option price plus five years payment period at inputed in- terest on unpaid balance of ACF plus two points. - 68 - ANNEX 5 Page 1 MEXICO: SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Technical Considerations, Construction Schedule and Capital Costs of FIDEIN's Factory Building (SFB) Component Technical Considerations 1. FIDEIN has developed four prototype designs for SFBs with covered areas of 1,000 m2, 1,200 m2, 1,600 m2 and 2,000 m2. Small firms requiring only 500-600 m2 can be accommodated by subdividing the prototype designs and medium-scale firms requiring more than 2,000 m2 can be accommodated by multiple modules of 1,000 m2 or 1,200 m2. FIDEIN's SFBs are standard shell buildings assembled from prefabricated components. As such, they can be erected rapidly-- completion of the shell in three-four months is normal after casting the slab--and at reasonable cost. FIDEIN plans to reduce costs even further by purchasing components such as A-frames in quantity and shipping to several separate sites where construction scheduling permits. Additional flexibility is built into the program since on the basis of firm contracts, FIDEIN is prepared to build to special specifications. 2. The standard specifications call for a concrete slab, steel portal frames (A-frames), either cinder-block walls or resin-coated steel sheet siding and roofing of corrugated galvanized steel or resin-bonded steel sheet. Clear height under the eaves is normally 16 ft. rising to 24 ft. under the central ridge line. These elevations are suitable for most SMI needs. Outside office and sanitary blocks are located in front of each factory unit (as is the cus- tom in Mexico). At any given location, depending on local availability of construction materials and climatic conditions, modifications are permissible, e.g., substitution of bowspring roof trusses for the portal frames or stronger framework, walls and roofs in areas subject to high wind conditions. Common facilities financed under the program would require special design, generally. Construction Schedule and Capital Costs 3. Estimates of FIDEIN's construction and capital costs are based on the assumption that during calendar year 1980, available funding under the first SMI loan will be sufficient to cover all approved projects following the construction chronogram presented in Annex 6, Table 45. The planned con- struction schedule for 88,000 sq.m. for factory buildings is presented in Annex 6, Table 46. Factory construction costs in 1980 are assumed by FIDEIN to be Mex$2,600 per sq.m., up about 30% from 1979. Field data gathered by the mission at five estates (Tijuana, Aguascalientes, Leon, Celaya and Queretaro) indicate that, depending on location and local availability of construction materials, unit construction costs currently range from about Mex$2,000 per sq.m. to 2,500 sq.m. For cost estimating purposes, the FIDEIN figure of Mex$2,600 per sq.m. for 1980 is a reasonable average. SAHOP expects construction cost price escalation of 20% in 1981 and 15% in 1982. Under the proposed second SMI project loan, allocations to FIDEIN's Industrial Estates subprogram were conservatively set at US$8.0 million. This would be complemented by unallocated PAI resources reserved by the program for FOMIN and FIDEIN. - 69 - ANNEX 5 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Page 2 Sample Designs of Standard Factory Buildings (SFB's) iso,o _A 000e2 10o . 4t .-XX'- . I p:q-. sooo sol \5( syoo W ~ ~~Area___ FB2 /_ 9 O1-2 20 sOL n 10 £ 000 *oooo a o j SFB(1) L \000i0 |fice SFB Constructed Area 0. / 1¶TIIPU ~(1) 1,060.80 sq. mo. _ 11< . *r::.il4,' t >X10 . (2) 1,264.80 sq. in. 000 .z r'SC g.q3 .Office Space 100 sq. m. Iro L A X 2 | e - P.0- so. .. _______ 000 1.0 00 j 000 00 III I -=I'M I I .444 1=.0i -4- - ~ SFB Constructed 00 | o Area - 2,080.8 sq. m. O2O | | | | > S S ~~~~Office Space I i I L u X t 2se.O~~~~~~~~sq. m. Oa ea ++ a Street I I'"~- MEXICO- SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 1: Gross Domestic Product, By Sector of Origin 1965 and 1970-78 1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 Value (billions of current Mex$) Agriculture,Forestry & Fishing 36.5 47.4 48.5 52.9 67.8 83.4 " 9.9 128.6 176.6 220.4 Mining 3.3 5.6 5.2 5.6 7.0 10.3 10.7 13.8 21.3 23.4 Petroleum & Petrochemicals 9.1 13.3 13.3 14.9 15.7 25.3 31.3 37.4 64.1 83.4 Manufacturing 52.4 94.7 104.2 118.6 141.0 188.4 227.1 289.8 405.7 511.7 Construction 10.1 21.4 21.5 77.3 36.3 49.6 63.3 78.1 99.1 133.5 Electricity 3.4 6.2 6.6 7.2 8.3 9.9 11.2 14.9 23.6 26.2 Commerce 76.3 124.1 133.8 148.0 180.9 243.7 288.2 334.6 447.7 558.8 Transport & Communications 7.3 11.1 12.2 14.5 16.8 21.8 29.0 36.2 53.0 68.7 Government 13.7 26.0 29.3 35.6 46.1 61.5 85.1 118.2 154.2 188.2 other Services 39.9 68.9 77.8 87.7 99.7 118.9 142.4 176.4 229.4 290.1 Total GDP ?52.0 418.7 452.4 512.3 619.6 813.7 988.3 1,228.0 1,674.7 2,104.5 Shares (in percent of total) Agriculture, Forestry & Fishing 14.4 11.3 10.7 10.3 11.0 10.4 10.1 10.5 10.6 10.4 Mining i.3 1.3 1.1 1.1 1.1 1.3 1.1 1.1 1.3 1.1 Petroleum 3.6 3.2 3.0 2.9 2.6 3.7 3.2 3.0 3.8 4.0 Manufacturing 20.8 2?.6 23.0 23.2 22.8 23.6 23.0 23.6 24.2 24.3 Construction 4.0 ".1 4.7 5.3 5.8 6.1 6.4 6.4 5.9 6.4 Electricity 1.1 1.5 1.5 1.4 1.3 1.2 1.1 1.2 1.4 1.2 Commerce 30.3 29.6 29.6 28.9 29.2 29.5 29.2 27.2 26.7 26.6 Transport & Communications 2.9 2.6 2.7 7.8 2.7 2.7 ?.9 3.0 3.2 3.3 Government 5.5 6.2 6.5 6.9 7.4 7.5 8.6 9.6 9.2 8.9 other Services 15.8 16.5 17.7 17.2 16.1 14.6 14.4 14.4 13.7 13.8 Total 100.0 100.0 100.0 300.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Bank of Mexico LCPI2 March lORO MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 2: Annual Rates of Growth of GDP by Sector of Origin (Based on i960 Constant Prices) (1970-79) 1970 1971 1972 1973 1974 1975 1976 1977 1978 197% Agricultural, Forestry & Fishing 5.0 2.0 0.3 2.2 2.8 0.7 - 3.0 2.7 3.1 - 0.4 Mining 2.9 0.4 - 0.2 10.6 14.6 - 6.1 2.0 0.9 - 2.0 4.0 Petroleum & Petrochemicals 9.9 3.4 8.8 2.5 14.8 7.9 10.6 16.4 15.3 14.8 Manufacturing 8.7 3.1 8.3 8.9 5.7 3.6 3.5 3.6 8.8 8.5 Construction 4.8 - 2.6 17.6 15.8 5.9 5.9 - 1.9 - 2.0 13.3 12.0 Electricity 11.3 8.0 8.9 11.0 9.4 5.8 7.4 8.5 9.0 9.0 Conmerce 6.5 3.0 6.9 7.6 5.2 3.4 - 1.0 1.2 6.0 n.a. Transport & Communication 7.8 7.5 9.9 11.6 11.9 8.9 5.0 6.1 10.2 n.a. Government 9.7 9.0 13.4 11.2 8.2 10.9 8.2 1.8 6.5 n.a. Other 5.1 4.9 5.6 5.0 3.4 2.8 1.6 2.2 3.0 n.a. Adjustment for Banking Services 6.7 6.9 9.1 6.0 0.5 5.8 4.8 0.0 8.0 n.a. Total GDP 6.9 3.4 7.3 7.6 5.9 4.1 2.1 2.3 7.0 n.a. 1/ Prelimiinary esti..mates. Source: Bank of Mexico LCPI2 March 1980 a.. MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 3: Manufacturing Sector, Structure of Value Added, 1970-78 (Based on Current Pesos) 1970 1971 1972 1973 1974 1975 1976 1977 1978 Value (millions of current Mex$) Food, Beverages & Tobacco 70,397 77,548 83,914 98,761 126,933 157,014 199,689 276,643 322,288 Textiles 17,122 18,356 20,146 25,016 30,823 33,008 40,425 55,595 61,581 Clothing, Shoes 19,987 22,779 26,301 33,735 40,403 47,979 60,428 86,871 108,997 Wood 3,987 4,071 4,071 4,713 6,216 7,720 9,449 13,455 17,249 Paper 6,503 6,847 7,804 9,358 14,243 15,439 20,287 27,428 35,108 Printing & Publishing 4,813 4,896 5,544 6,011 9,083 11,753 15,784 20,964 25,826 Leather & Leather Products 2,963 3,083 5,532 4,417 5,247 5,284 7,857 12,952 17,055 Rubber Products 2,693 2,906 3,189 3,862 4,654 5,548 6,985 7,635 11,124 Chemicals & Pharmaceuticals 22,305 24,323 27,809 33,007 42,800 51,034 64,293 87,808 102,183 Non-metallic Minerals 8,641 9,422 11,391 14,341 18,443 23,446 30,053 41,383 53,425 Basic Metals 14,280 14,474 16,380 18,661 30,753 35,181 42,886 60,832 83,999 1 Engineering Products 40,334 41,834 48,134 60,129 80,729 99,826 120,555 164,937 230,481 - Others 4,364 4,419 5,342 6,786 8,359 8,509 10,380 15,856 19,932 Total 218,389 234,958 263,557 318,797 418,686 501,741 629,071 872,359 1,089,248 Shares (in percent of total) Food, Beverages & Tobacco 32.2 33.0 31.8 31.0 30.3 31.3 31.7 31.7 29.6 Textiles 7.8 7.8 7.6 7.8 7.4 6.6 6.4 6.4 5.7 Clothing, Shoes 9.2 9.7 10.0 10.6 9.6 9.6 9.6 10.0 10.0 Wood 1.8 1.7 1.5 1.5 1.5 1.5 1.5 1.5 1.6 Paper 3.0 2.9 3.0 2.9 3.4 3.1 3.2 3.1 3.2 Printing & Publishing 2.2 2.1 2.1 1.9 2.2 2.3 2.5 2.4 2.4 Leather & Leather Products 1.4 1.3 1.3 1.4 1.3 1.1 1.2 1.5 1.6 Rubber Products 1.2 1.2 1.2 1.2 1.1 1.1 1.1 0.9 1.0 Chemicals & Pharmaceuticals 10.2 10.4 10.6 10.4 10.2 10.2 10.2 10.1 9.4 Non-metallic Minerals 4.0 4.0 4.3 4.5 4.4 4.7 4.8 4.7 4.9 Basic Metals 6.6 6.2 6.2 5.9 7.3 7.0 6.8 7.0 7.7 Engineering Products 18.5 17.8 18.3 18.9 19.3 19.9 19.2 18.9 21.2 Others 2.0 1.9 2.0 2.1 2.0 1.7 1.7 1.8 1.8 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Banco of Mexico G Gross domestic product and expenditure, 1970-78. t LCPI2 March 1980 ME"ICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVTELOPMENT PROJECT Table 4: Indices of Industrial Production, 1970-79 (1970 = 100) 1970 1971 1972 1973 1974 1975 1976 1977 1978 197924 GENERAL, - 100 102.1 112.4 123.8 132.8 139.1 142.9 147.8 162.6 175.5 Manufacturing 100 102.9 112.5 123.2 131.4 136.9 140.7 145.7 158.9 172.6 Sugar 100 102.8 108.0 115.4 119.3 109.8 115.0 120.0 129.8 140.0 Beer 100 87.2 102.4 119.9 135.4 136.0 132.7 148.9 156.2 175.4 Beverages 100 86.2 94.8 104.9 102.0 122.6 118.4 133.9 148.5 170.2 Tobacco 100 99.4 104.8 94.9 105.2 103.3 102.9 114.4 116.6 125.3 Textiles 100 127.8 159.9 205.2 215.7 237.5 133.0 140.8 143.1 152.6 Printing 100 103.7 113.9 104.0 92.4 111.6 Tires 100 110.5 124.1 130.8 136.5 151.2 180.3 162.8 200.6 200.9 Fertilizers 100 113.6 135.8 147.8 151.5 155.9 160.6 172.5 158.9 156.5 I Chemicals 100 108.4 114.1 127.8 142.4 134.7 141.9 153.9 145.6 133.5 . Artificial Fibers 100 125.5 153.0 184.3 194.7 222.9 242.3 261.1 279.5 307.7 Cement 100 102.6 119.8 136.3 147.5 161.7 174.4 181.1 192.3 204.4 Iron 100 104.5 118.8 123.0 142.6 131.3 152.2 186.8 224.6 219.8 Steel 100 99.4 115.2 122.6 133.6 136.9 137.9 145.8 175.6 184.7 Copper 100 109.1 117.0 113.1 135.7 128.0 149.1 139.8 150.3 171.8 Automobiles 100 112.0 115.1 140.3 172.0 166.1 150.7 139.1 176.56 203.2 Trtcks 100 102.3 120.3 151.0 187.2 231.3 193.1 157.7 225.5 284.2 Petroleum and Related Industries 100 102.4 108.6 110.1 126.1 140.1 153.5 174.0 200.3 227.4 Petrochenicals 100 109.4 128.1 143.8 169.6 177.4 192.8 185.1 218.5 244.4 Mining 100 96.7 101.2 107.7 119.2 112. 119.4 120.3 122.9 125.5 Electricity 100 109.8 121.4 131.7 145.6 156.7 169.2 183.6 200.1 215.0 Construction 100 97.4 113.9 133.9 142.0 150.4 147.5 144.5 163.7 185.6 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%), Electricity (2.6%), Construction (14.7%). 2/ January-October Source: Bank of Mexico, "Production and Sales of Industrial Sector" LCPI2, March 1980 ANNEX 6 - 74 - T-5 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 5: Indices of Employment in Manufacturin6, 1970-78 Index Annual rate 1970=100 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 125.3 4.7 1978 (January-October) 124.6 - 1979 (January-October) 134.2 7.7 Source: Bank of Mexico - Production and Sales of Industrial Sector, p. 54. LCPI2 March IJRn MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 6: Gross Fixed Investment (In Mex$ million ) PRIVATE TOTAL Public TOTAL % Total 1970 82,300 29,205 53,095 64.5 1971 81,600 22,328 59,222 72.6 1972 97,800 33,298 64,502 66.0 1973 126,400 49,838 76,562 60.6 1974 173,400 64,817 108,783 62,7 1975 221,700 95,767 125,933 56.8 1976 267,600 108,611 158,989 59.4 1977 339,100 153,800 185,300 54.6 1978 471,800 221,700 250,000 53.0 1979(Prov.) 645,000 n.a. n.a. n.a. 1980(Est.) 722,400 n.a. n.a. n.a. Source: Bank of Mexico (1970-1978); mission estimate for 1979 and 1980, based on data from Confederaci6n de Camara Industriales (CONCAMIN) and BANAMEX. LCPI2 March 1980 a ANNEX 6 - 76 - T-7 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 7: Number of Industrial Establishments, Employment and Value Added by Manufacture, According to the Number of Employees, 1970 and 1975 a/ 1970 Establishments Employment Value added Invested Capital Number 7O Number 7. VI$ Million 7e M$ Million % Less than small (Up to 5): Unremunerated 57,568 48.0 91,963 5.8 674 0.8 742 0.4 Remunerated 39,222 32.7 1.07.026 6.8 2,069 2.5 2,181 1.4 Total 96,790 80.7 198,979 12.6 2,743 3.3 2,903 1.8 Small: 6-50 17,820 14.9 291,832 18.5 10,598. 12.9 18,571 11.9 Medium: 51-250 4,288 3.6 459,992 29.0 24,340 29.5 47,660 30.5 M4ore than 250 1,065 0.9 630,444 39.9 44,700 54.3 87,263 55.8 Total 119,963 100.0 1,581,247 100.0 89 381 100.0 156 417 100.0 1975 Establishments Employment Value Added Invested Capital Number h Number ¢. M$ Million % MS Miillion % Less than small (Up to 5): Unremunerated 62,666 52.6 102,044 6.0 1,799 1.0 1,427 0.5 Remunerated 33,459 28.0 89,519 5.2 3,53 1.9 2,606 1.0 Total 96,125 80.6 191,563 11., 5,332 2.9 4,033 1.5 Small: 6-50 17,525 14.7 277,244 16.2 19,772 10.8 23,551 9.0 Medium: 51-250 4,347 3.7 462,78i 27.1 49,021 26.8 65,271 24.9 More than 250 ],215 1.0 776,331 45.5 108,700 59.5 169,337 64.6 Total 19,2]J2 100.0 1 7(',9 q l00.0 182,833 100.0 62 192 100.0 1/ Includes mining Source: Industrial Censuses 1970 and 1975 LCPI2 March 1980 E o~~~~ 1~ o1 z w e t O' z 'f.6_ St e'f CO H H ot ft _t f t ~ r eO wS_F3ft * _ w o se b n 3 Qe s~1a Of '2t f t I" s.t s ft a - > - ft 0' ft °O ft fti fti - _ t ft ft a_l Of OIf f _tf t00 _W 0I ' Af b1 'ft~§@~ 0f O'f ft = sa 5 - & r W _ r o o_ X M_ c vcX W _ > o S b W~~~~~~~~~~~~~~~~~ iLX~~~~ H' ~oXt~S troa8t9 o 11N w_ w_ ~Oat at_ ~o _o. ot o _s _C aao -a H C wa CDWsWo D5HP . O || t|IototoH w to HtH H - o, ~' t0w> 1 g lWo ft I-O t-@- ft -- - t ft-g- °Ct .g .-[. 1 a ..'-oaan 9 vOf-o t>o - ao a t 0g aHaa3ft - Baa- atto t'o aa H> g.' Q asrw rr_ > D ~ ~ ,ol°|t to~~ ~ ~ i-''- 't WOW |H a HO O O H as a - a A° > **0*OH H cH'O toO IO C;,z ewsO t6 Iw>M |I I2~ s tw s pft IA .......... > oN > X8SXw$ | 11@ ~- ° > r -¢r - '- :2' r- to ~~B I H. I- H tO *ftW., C~ SC$i° I - II to t a t Ha t Ht t t I I | ' I lts C ft'ft'Ct'rC ar HHtO'H, oaCrartftft 1l Ow loz g S S' S t w @ H oHO o 9 t _ 9 ° t1 72 H ~~~~~~~~~~~~~0; - -g-ooc' ov.S o °E* 11 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~t ''f_wgtw~S-_w c9>sos c @s c= 9 niiin 11 ^ k > - t Vs 9 g _ - g 0> s rs rS > wO 0 3< S S~~~~to j ' X£CO S SECOND SaiLa AND MEDIUM SCALE INDUSTSY DEVELoPKEIT PROJECT Table 9: Exports of Msnufactursd Good by Sector: 1972-1979 / In thousands of US dollars and pere-tanag 1972 1973 1974 1975 1976 1977 1978 1979 1972-1979 1976-1979 Proceased Foods and Beverages 171,265 218,147 343,836 228,561 127,265 163,839 163,508 197,255 . 2.0 * 15.7 Of which: Canned Abalone 4,562 4,670 8,120 6,760 8,822 10,565 9,553 9,310 * 10.7 + 1.7 Ena-ted Coffee Beans - 10,520 6,514 8,419 20,265 26,203 17,150 15,950 - -7.7 Frozen Strab-rriee ./ougar 16,581 29,025 35,714 21,511 18,849 29,011 22,684 37,909 o 12.5 + 26.4 Canned Pineapple 5,340 5,090 8,190 6,908 10,516 13,836 16,264 13,099 . 13.6 * 7.5 Canned Vegetables 23,190 33,153 38,322 23,042 29,924 51,388 60,638 63,835 * 15.5 + 28.5 Sugar 102,066 114,646 192,011 117,606 - - - 23,646 - 18.7 - Tequila 8,648 12,988 19,625 14,623 15,575 14,938 20,086 19,325 t 12.1 * 7.4 Holeesee 10,878 8,055 35, 349 29,692 23,314 17,898 17,110 14,181 t 3.8 - 15.2 Textile., Clothing, Leather & Footwear 77,669 167,657 267,891 141,144 156,207 150,252 155,383 180,808 * 12.8 4 4.8 Of which: Footwear 4 Cosponentt 10,221 bj 13,700 b/ 19,502 k/ 12,718 11,952 13,641 26,673 35,037 + 19.2 + 30.8 Cotton Yarn 10,866 27,177 46,193 24,893 27,058 29,311 27,429 29,533 t 15.3 - 2.9 Synthetic Fiber Yarn 7,510 9,790 11,000 7,032 8,628 10,151 13,836 14,646 * 15.6 + 19.1 enrequen Yarn Products 26,534 41,164 73,650 31,271 35,231 36,495 35,726 43,958 + 7.5 * 7.6 Hides 4 Skins b/ hl b/ 1,946 1,750 6,468 7,477 9,077 - 0 72.0 Clothing 4 Textiles 6,937 23,434 41,779 22,312 25,074 22,615 26,208 32,520 a 24.7 * 8.9 Cotton Fabrics 13,603 43,831 57,525 40,972 46,514 31,571 18,034 16,037 o 2.3 - 30.1 Chemicals 6 Pharmceutical 102,381 152,317 261,113 204,204 227,735 235,736 311,947 450,467 + 23.6 + 25.5 Of which: Liquid Ahonia - - - 14,404 13,027 1,254 50,535 78,816 - + 82.0 Lead Oxide 10,552 16,104 25,058 11,517 15,477 22,433 26,101 39,591 * 20.7 * 36.8 Tanning Products 6 Dyes 2,310 3,540 8,180 7,275 9,507 16,618 20,039 29,520 * 3.6 a 45.8 Essential II Lime) 4,068 5,432 7,526 6,605 5,076 11,838 13,382 20,120 + 25.5 + 58.2 Fertilizer. 7,614 d/ 8,454 4/ 16,444 4/ 1,531 2,096 4,611 1,557 12,449 a 7.2 + 79.0 Ph.reaceotLcale 9,625 14,827 20,750 14,166 15,321 23,809 29,092 29,096 + 17.2 . 24.1 Hormones 17,330 29,792 35,809 3C,090 20,199 21,266 6,232 4,681 - 16.8 - 38.0 Maiec Ms tel Producte 72,705 L295 8 3802 ±L!!Ž 583652 68 497 65,692 - 1.5 + 16.1 Of which: Steel tubing & Pieccs 15,211 1,l180 40,422 36,009 31,926 34,199 33,776 36,646 + 13.3 - 4.5 Structural Steel 11,141 c/ 10.254 c/ 14,735 1,714 6,621 17,388 23,224 17,853 * 6.9 + 28.0 Machinery 4 Equipment, Except Tranaport 164,160 79,960 144,630 184,491 203,183 292,602 319,078 290,013 a 8.5 a 12.5 Transport VehIclea & Equipment 48,983 107,243 128,194 85,336 46,941 187,593 273,867 307,345 . 29.2 + 86.6 Of which: loude Vehicles 1,615 4,291 6,929 4,466 3,452 17,780 30,808 24,210 o 47.2 + 91.3 Passenger Vehicles 2,772 35,368 36,467 3,780 6,171 11,566 56,408 93,046 + 64.0 +179.0 Bodice & Space parto for v-hicie 44,596 67,584 84,798 75,085 36,203 151,590 182,339 188,615 * 22.7 0 72.0 Mschanieed fL-hing boats -- - 2,005 1,115 6,657 4,313 1,474 - * 9.7 Other Manufactured Products 287,087 ,38 205,498 305,127 387,606 555,912 962,247 1,032,143 + 20.0 . 38.6 Of which: Csemct - 3,280 4,310 6,845 14,392 43,429 34,496 20,407 - o 12.3 Glee, 6 GI... products 18,329 21.566 26.190 25,901 36,519 50,229 52,323 47,493 c 14.5 c 9.1 ilss 4 Mlostiet 5,793 6,945 6,345 2,440 9,144 2 ,358 2,943 2,203 - 12.9 a 60.1 B.oka 12,782 7,952 24,074 22,986 27,174 38,715 39,793 44,838 * 19,6 o 18.1 Wood Furniture 5,567 7,779 12,062 1,764 1,377 2,866 6,201 8,839 a 6.8 * 86.0 Other Wood Products, Wood 6 Cork 14,082 15,308 22,785 23,204 32,934 44,433 61,811 57,814 * 22.3 o 20.7 a/ el Total Manu-ctuced Goods, includin. ctlhrtr 677,019 959,669 1,434,336 1,186,935 1,190.818 1,644,586 2,234,884 2,431,990 * 20.0 c 26.8 Pe-ecntage Ch-c8 fto Prec Percentage Change from Preceding Ye-r * 24.3 i 41.7 o 49.5 - 20.8 a 0.3 * 38.1 + 35.9 c 8.8 - a/ Eo.loding pecrtcheeicaln .ed offshore ..seobly nduatriss.' b/ Fuoctear, leathes and hides grouped tugech r. c/ Including c-rrucgted iron. d/ Triple naperphoaphate. e/ Eecluding frozen shrimp *nd fresh and frozen seat. Source: Manmo de MexIco, 18RD stff ecieotss. LCP12 March 1980 ANNEX 6 T-10 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 10: Composition of Imports, 1977-79 (Millions current US$, percentages) 1977 1978 1979 Value % Value % Value % TOTAL 5,889.8 100.0 8,139.6 100.0 10,614.1 100.0 = = - For final use, mainly consumption 320.2 5.4 472.8 5.8 658.0 6.2 Private Sector 251.4 4.3 381.1 4.7 529.4 5.0 Public Sector 68.8 1.1 91.7 1.1 128.6 1.2 Intermediate Goods 3,698.4 62.8 5,184.2 63.7 6,437.8 60.7 Private Sector 2,249.5 38.2 3,039.2 37.3 4,177.4 39.4 Public Sector 1,448.9 24.6 2,145.0 26.4 2,260.4 21.3 Capital Goods 1,871.1 31.8 2,482.6 30.5 3,518.4 33.1 Private Sector 3,658.9 62.1 5,063.4 62.2 7,115.9 67.0 Public Sector 2,230.9 37.9 3,076.2 37.8 3,498.2 33.0 Total Private Sector Total Public Sector a/ January-November only. Source: Banco de Mexico LCPI2 March 1980 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 11: Summary of Principal Fiscal Incentives for Industrial Investmen 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% lavestment 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 0 A. Controlled growth - - 5% - 0 B. Consolidated growth 25% Investment e/ 20% Investment e/ 10% Investment e/ - 5% 20% Additional I 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 im,)osed 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 employment, the percentage 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. (D X LCPI2 March 1980 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 12: Regional Distribution of Industrial Activities, a/ 1970-1975 1 9 7 0 1 9 7 5 Total Employment Value Added Total Employment Value Added States or Districts Months % Mex$ millions % Months % Mex$ millions % Total 1,581,247 100.0 82,383 100.0 1,707,919 100.0 182,831 100.0 Federal District 492,281 31.1 27,554 33.4 493,993 28.9 55,779 30.5 Valle de Mexico 229,336 14.5 15,742 19.1 273,937 16.0 36,246 19.8 Sub total 721,617 45.6 43,296 52.5 767,930 44.9 92,025 50.3 Nueva Leon 125,771 8.0 8,664 10.5 135,944 8.0 20,044 11.0 Jalisco 97,119 6.1 4,585 5.6 116,070 6.8 11,590 6.3 Coahuila 52,397 3.3 3,253 3.9 66.418 3.9 8,012 4.4 Vera Cruz 62,475 4.0 3,074 3.7 66,146 3.9 7,456 4.1 Puebla 58,372 3.7 2,630 3.2 65,087 3.8 6,403 3.5 Chihuahua 40,059 2.5 2,211 2.7 54,467 3.2 4,968 2.7 Hidalgo 27,296 1.7 1,291 1.6 32,749 1.9 3,562 1.9 Baja California 31,443 2.0 1,502 1.8 31,095 1.8 3,139 1.7 Sub total 466,932 29.6 27,210 33.0 569,976 30.4 65,174 35.7 Other States 392,698 24.8 11,877 14.4 421,013 24.7 25,632 14.0 a/ Includes mining and manufacturing, all establishments. Source: Industrial Censuses for 1970 and 1975. LCPI2 March 1980 -z XI fr MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 13: Liabilities of the Banking System by type of Institution and Instrument (Mex$ millions) 1976 a/ 1977 a/ 1978- /_ 1979_-/ Banco de Mexico 98,477 16.5 107,811 14.1 126,604 13.1 128,312 11.2 National Banks 200,752 33.5 252,508 33.0 290,993 30.0 349,641 30.4 Demand deposits 2,285 0.4 3,307 0.4 4,730 0.5 6,191 0.5 Bonds 24,201 4.0 25,689 3.4 33,031 3.4 32,550 2.8 Promisory notes 600 0.1 1,721 0.2 13,467 1.4 20,206 1.7 Certificates of deposit 11,847 2.0 19,091 2.5 18,518 1.9 19,246 1.7 Time deposits b/ - - 1,400 0.2 7,334 0.7 14,124 1.2 Foreign bank loans 129,380 21.6 146,129 19.1 148,144 15.3 182,524 15.9 Other 26,006 4.3 48,924 6.4 59,496 6.2 66,240 5.9 Capital 6,433 1.1 6,247 0.8 6,273 0.6 8,560 0.7 Private and Mixed Banks 299,146 50.0 403,496 52.8 552,270 57.0 670,599 58.4 Demand deposits 81,319 13.6 112,404 14.7 151,455 15.6 164,124 14.3 Savings 28,979 4.8 42,842 5.6 53,297 5.5 61,926 5.4 Bonds c/ 50,257 8.4 41,583 5.4 16,022 1.6 665 0.1 Promisory notes 68,045 11.3 79,535 10.4 132,142 13.6 166,475 14.5 Certificates of deposit 38,969 6.5 81,160 10.6 119,480 12.3 162,163 14.1 Time deposits b/ - - 3,863 0.5 24,978 2.6 54,313 4.7 Foreign bank loans 6,790 1.1 9,680 1.3 14,371 1.5 14,239 1.2 Other 18,366 3.2 22,236 3.0 28,127 3.0 32,511 2.9 Capital 6,421 1.1 10,193 1.3 12,398 1.3 14,183 1.2 Total 598,375 100.0 763,815 100.0 969,867 100.0 1,148,552 100.0 a/ On December 30. h/ Time deposits which may be withdrawn on predetermined days (one and two days per week and one day per month). c/ Financial and mortgage bonds. d/ On September 30. SOURCE: Banco de Mexico LCPI2 March 1980 Lo 1 - 83 - ANNEX 6 T-14 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 14: Mexico's Largest Banks (October 31, 1979) Bank Assets % (Mex$ millions) Bancomer 191,872 23.9 Grupo Banamex 184,358 23.0 Grupo Serfin 79,156 9.8 Grupo Somex Mexicano 71,777 8.9 Grupo Comermex 63,437 7.9 Grupo Internacional 35,926 4.5 Grupo Banpais 18,351 2.3 Banco BCH 17,397 2.2 Grupo del Atlantico 17,057 2.1 Banca Cremi 16,974 2.1 Grupo Confia 11,556 1.4 Other 95'475 11.9 TQtal 803,336 100.0 SOURCE. Comisi6n Nacional Bancaria y de Seguros LCPT2 March 19180 - 84 - ANNEX 6 T-15 MEXTCO - SECOND SMALL AND MEDnTM SCALE INDUSTRY DEVELOPMENT PROJECT Table 15: Indicators of Financial Development and Efficiency of the Banking System Non-monetary Total income Costs of financial liabilities as as % of intermediation as Year as percentage of GDP deposits percentage of deposits 1971 40 14.3 5.3 1972 40 13.1 4.7 1973 39 12.7 4.5 1974 35 13.6 4.9 1975 36 14.5 5.1 1976 36 15.0 5.4 1977 34 15.4 5.9 1978 34 15.6 5.3 1979 34 18.2 6.3 Source: Banco de Mexico LCP12 March 1980 - 85 - ANNEX 6 T-16 MEXICC - SECOND S?4ill. ANT' MEDITM SCALE INDUSTRY DEVELOPMENT PROJECT Table 16: Trust Funds Financing Outstanding Balances on September 30, 1979 (Millions of Mex$) National Private & Mixed Credit Total Banks Banks Unions FOGAIN 4,247.8 104.2 3,769.5 374.1 FIRA 23,122.5 5,058.2 18,064.3 - FOMEX 11,964.6 419.5 11,541.1 - FONEI 2,995.8 - 2,995.8 - FOVI 91.2 - 91.2 - FONATUR 3,142.9 97.9 3,045.0 - Total 45,564.8 5,679.8 39,510.9 374.1 Source: Banco de Mexico LCIT,2 Ntch l238Q MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 10: Geographical Distribution of Deposits and Credit June 1979 Dec. 1978 Private and Mixed Banks Total Total State CREDIT DEPOSITS CREDIT DEPOSITS Billions Mex$ % Billions Mex$ % Billions Mex$ % Billions Mex$ % Distrito Federal 161.7 39.7 300.3 49.2 400.5 50.5 348.8 53.4 Nuevo Leon 35.3 8.7 40.7 6.7 45.8 5.8 40.0 6.1 Jalisco 27.0 6.6 40.6 6.6 39.4 5.0 29.0 4.4 Mexico 22.7 5.6 5.3 0.9 27.6 3.5 23.8 3.6 Sonora 15.9 3.9 19.3 3.2 29.1 3.7 21.6 3.3 Chihuahua 14.9 3.7 16.7 2.7 17.0 2.1 12.7 1.9 I Sinaloa 14.1 3.5 12.1 2.0 24.6 3.1 18.3 2.8 X Veracruz 13.6 3.3 20.3 3.3 19.0 2.4 13.4 2.1 Tamaulipas 12.2 3.0 18.3 3.0 15.5 1.9 11.5 1.8 Baja California N. 11.7 2.9 20.8 3.4 15.6 2.0 12.6 1.9 Guanajuato 11.0 2.7 14.9 2.4 13.8 1.7 10.4 1.6 Coahuila 9.7 2.4 15.7 2.6 21.8 2.8 16.6 2.5 Other states 57.1 14.0 85.6 14.0 122.5 15.5 94.5 14.5 Total 406.9 100.0 610.6 100.0 792.2 100.0 653.2 100.0 SOURCE: Banco de Mexico 0' LCPI2 March 1980 - 87 - ANNEX 6 T-18 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 18: Lending Terms, 1978-79 Private & TOTAL mixed banks National Banks 1978 1979 1978 1979 1978 1979 30 days - 0.1 - - - - 90 days 8.7 12.0 5.9 12.2 11.0 12.1 180 days 22.8 24.2 37.1 36.0 11.7 13.3 360 days 26.7 17.7 17.9 6.0 34.6 29.4 More than 360 days 41.8 46.0 39.0 45.8 42.7 45.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 SOURCE: Banco de Mexico LCPI2 March 1980 MEXICo - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 19: Selected Rates of Interest in Mexico, USA, and London Interbank Rates 1978 1979 1980 II III IV I II III IV February Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net Mexico a/ Time Deposits 1 day a week 7.3 5.8 7.3 5.8 9.5 7.5 11.7 8.8 12.0 9.5 12.0 9.5 14.5 11.5 15.8 12.5 1 day a month 10.1 8.0 10.1 8.0 10.7 8.5 12.9 10.2 13.9 11.0 13.9 11.0 15.9 12.6 19.6 15.5 Certificates of Deposits 3 months 13.5 11.0 13.5 11.0 13.5 11.0 14.? 11.7 14.5 12.0 14.5 12.0 16.6 13.7 19.3 16.7 12 months 17.5 15.0 17.5 15.0 17.5 15.0 17.5 15.0 17.5 15.0 17.5 15.0 17.5 15.0 18.5 16.0 23.0 20.5 24 months 18.5 16.0 18.5 16.0 18.5 16.0 18.5 16.0 18.5 16.0 18.5 16.0 18.5 16.0 19.5 17.0 24.5 22e0 e/ CETES hI 9.7 9.7 10.5 12.2 13.9 14.4 15.6 17.9 18.1 USA c/ Certificates of Deposit 3 months 6.5 7.1 7.9 9.7 9.5 9.3 11'.3 13.0 12 months 7.? 7.7 8.5 10.3 10.5 9.3 10.8 11.6 London Eurodollar Deposits "Call Money" 6.8 7.3 8.1 9.6 10.2 10.4 11.5 13.4 3 months 7.2 7.8 8.7 1 .0 10.6 10.5 12.6 14.5 12 months 7.8 8.4 9.2 11.2 10.7 10.2 12.1 12.9 24 months 8.1 8.4 9.0 9.9 10.1 9.6 10.6 11.8 Rate of Inflation in Mexico 17.7 17.6 16.4 16.2 18.0 17.8 17.9 17.8 a/ Withdrawable on specific days. b/ Mexican Treasury Certificates. c/ US$100,000 minimum. d/ After tax. ea kstimate of free-market rate. Source: Banco de Mexico LCPI2 Ah March 1980 MEXICO -SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 20: Banking System Credit by Sectors, 1976-79 (Outstanding balances as of September 30) sect-or 1979 1978 1977 1976 Millions 2'exC Mi ii'lions Mex$ % Millions liex$ % Miillions Mex$ % Primary '19,613 15.1 86,697 14.? 70,?90 13.2 49,784 12.7 InduFtry 281,707 35.5 237,898 38.9 189,570 36.6 150,136 38.3 r.nergy 36,774 4.6 29,292 4.8 25,029 4.7 19,208 4.9 Nanufacturin6 12,142 16.7 106,530 17.4 92,123 17.3 65,856 16.8 Non-metallic minerals h,375 .8 4,941 .8 3,728 .7 3,136 .8 Mineral products 29,171 4.9 40,560 6.6 32,482 6.1 22,344 5.7 Electricity 13,91f6 1.7 10,375 1.7 7,987 1.5 6,664 1.7 Construkction r53,788 6.8 46,200 7.5 38,872 7.3 32,928 8.4 liousing 2, ,300 3.3 ?3,148 3.8 18,637 3.s 9,016 2.3 oervices 132,958 i 6.81 9;,402 ]5.6 8L,135 15.8 68,208 17.4 Commercial 123,03.3 l5.8 8',827 13.7 08,60? 12.9 48,216 i2.3 Government 103,562 13.0 84.230 1 .8 935,85 13.0 66,640 17.0 TOTAL 7 9'38 100.0 611,202 100.0 L3_ 5^,5 100.0 392,000 100.0 Sill '0, 427 1.8 20,41/ 3.3 9,n9' 1.8 5,880 1.5 FUGAIN, (.s ¾ of SMI) 4,247 (14.0) 3,515 (17.2) 2,66C' (U995) 1,882 (32.0) ISource: Banco de Hexico LCPI2 March 1980 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 21: Organization Chart of FOGAIN and PAI Secretariat Program Technical Coordinating .Committee - Committee-PAI . .FOGAIN Director General-FOGAIN and Technical Secretary-PAI _ | ~~~~~~~~~~FOGAIN l Marc 1980 Advdvisersle l Economic ~~~~~~~~~~~~~~~~~Studies. | Deputy Director ll Deputy Director { ~~PAI llFOGAINl |Operations XITechnical ||Promotion| Regona Operations ||Finance ||Administration |Datal l Assistance Offices Processing l l . ] . l i ~~~~~~~~~~~~~~~~~~and Systems| LCPI2 March 1980 - 91 - ANNEX 6 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT T-22 Table 22 Existing and Planned Regional Offices of PAI as of Year-erld 1979 Total No. Potential for No. of ex- of extension Number of creation of tension officers officers by Regional existing new SMI Total presently year-end priority Points industries enterprises points assigned 1980 (zone) (points) (points) Existing 1. Mexico City Headquarters - - - 8 8 2. Torreon lb 5 4 1 10 3 5 3. Leon Ib 5 4 1 10 2 4 4. Aguascalientes Ib 5 3 1 9 2 3 5. San Luis Potosi Ib 5 3 1 9 1 3 6. Tijuana lb 5 3 1 9 2 3 7. Monterrey Other 3 4 1 8 7 7 8. Tampico Ia 5 2 1 8 1 3 9. Guadalajara Other 3 4 1 8 6 7 10. Morelia II 4 3 1 8 1 3 11. Veracruz Ib 5 2 1 8 2 3 12. Villahermosa Ib 5 2 1 8 2 5 13. Puebla Illb 2 4 1 7 2 4 14. Hermosillo II 4 2 1 7 1 3 Planned for 19tO 15. Reynosa Tb 5 4 1 10 - 3 16. Chihuahua Ib 5 3 1 9 - 3 17. Ciudad Juarez lb 5 3 1 9 - 3 18. Queretaro Ib 5 3 1 9 - 2 19. Merida lb 5 4 0 9 - 3 20. Mexicali Ib 5 2 1 8 - 2 21. Culiacan lb 5 2 1 8 - 2 22. Mazatlan Ib 5 2 1 8 - 2 23. Irapuato Tb Ciudac Obregon II . Durango I- 26. Mat:zanillo lb '1 1- Other Areas Considered 27. Monclova Ib 5 1 1 7 - 28. Piedras Negras Ib 5 1 1 7 - 29. Celaya lb 5 1 1 7 - 30. Los Mochis Tb 5 1 1 7 - 31. Jalapa II 4 2 1 7 - 32. Poza Rica Ib 5 1 1 7 - 33. Cordoba-Orizaba II 4 2 1 7 - 34. Nogales Ib 5 1 1 7 - 35. Oaxaca Tb 5 2 0 7 - 36. Saltillo II 4 2 1 7 - 37. Ensenada lb 5 1 0 6 - 38. Zacatecas Ib 5 1 0 6 - 39. Lazaro Cardenas Ia 5 1 0 6 - 40. Coatzacoalcos Ia 5 1 0 6 - 41. Tuxtla Gutierrez Ib 5 1 0 6 - 42. Campeche Ib 5 1 0 6 - 43. Salina Cruz Ia 5 1 0 6 - 44. Cuernavaca IIIb 2 2 1 5 - __ 45. Toluca Illb 2 2 1 5 - 46. La Paz II 4 1 0 5 47. Tepic II 4 1 0 5 - 48. Acapulco Other 3 2 0 5 - 49. Pachuca IIIb 2 1 1 4 - Total No. of Extension Officers 40 90 LCPI2 March 1980 - 92 - ANNEX 6 T- 23 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 23: Integrated Small and Medium Scale Industry Program (PAI) Financial Statements (in ?ex$ millions) BALANCE SHEET 1978 (Prelii&n9ary) ASSETS Current Assets Cash and Other Short-Term Assets 40.7 126.6 Accounts Receivable 2.3 148.5 43.0 275.1 Long-term Assets Loan Portfolio 198.7 354.5 Net Fixed Assets 0.5 2.4 Deferred Charges - 2.1 199.2 359.0 TOTAL ASSETS 242.2 634.1 LIABILITIES AND EQUITY Short-term Liabilities (including current portion of Loans) 1.1 45.6 Loans Payable 105.0 255.0 Equity Capital 135.0 380.3 Retained Earnings 1.1 (46.7) 136.1 333.5 TOTAL LIABILITIES AND EQUITY 242.2 634.1 INCOME STATEMENT Interest Income 1.5 23.9 Other Income 1.3 - TOTAL INCOME 2.8 23.9 Interest Expense 1.0 14.4 Commissions, etc. 0.3 8.2 General and Administrative Expenses 0.4 48.8 Depreciation and Amortization - 0.4 1.7 71.8 ..et Profit (Losr' I_,_7 ('7.9) a/ Includes current portion. LCPI2 March 1980 93- ANNEX 6 T- 24 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECI Table 24: Classification of FOGAIN's Operations by Financial Intermediaries (April 1954 - December 1979) 1978 1979 April 1954 - December 1979 Financial Intermediary Amount Amount Cummulative Amount (Mex$ millions) % (Mex$ millions) % (Mex$ millions) % GOVERNMENT BANKS NAFINSA 246 9 519 11 1,114 7 GRUPO BANOBRAS 13 - 57 1 81 1 Banco Nacional de Comiercio Exterior S.A. - - - - 75 - 259 9 576 12 1,270 8 MIXED BANKS GRUPO INTERNACIONAL 249 9 425 9 1,045 6 GRUPO SOMEX 147 5 222 5 759 5 Banca Promex, S.A. 5 - 17 - 104 - Independent Institutions 25 1 28 1 319 2 426 15 692 15 2,227 13 PRIVATE BANKS BANAMEX 509 18 771 17 2,458 15 BANCOMER 360 13 669 14 1,797 11 ORUPO COMERMEX 224 8 402 9 1,327 8 Banca Serfin, S.A. 85 3 139 3 755 5 GRUPO BANATLAN 62 2 100 2 338 2 Associated Regional Banks 71 2 179 4 424 3 Banco Sofimex, S.A. 49 2 44 1 188 1 BANPAIS, S.A. 38 1 143 3 376 2 Polibanca Innova, S.A. 30 1 76 2 208 1 GRUPO CONFIA 30 1 48 1 203 1 Banca Cremi, S.A. 31 1 39 1 270 2 BANPACIFICO, S.A. 17 1 33 1 236 1 UNIBANCO, S.A. 26 1 33 1 111 1 GRUPO POPULAR 20 1 12 - 220 1 BANCRESER, S.A. 18 1 42 1 152 1 Banco Continental, S.A. 22 1 26 1 122 1 BANCAM, S.A. 21 1 32 1 69 - Multibanco Mercantil de Mexico, S.A. 15 1 36 1 198 1 Banco Mercantil de Monterrey, S.A. 9 - 20 - 67 - Banco B.C.H., S.A. 11 - 10 - 96 1 GRUPO GENERAL HIPOTECARIO 13 1 6 - 58 - Actibanco Guadalajatra, S.A. 10 - 12 - 64 - GRUPO LONGORIA 9 - 3 - 93 1 Credito Mexicano, S.A. 5 - 9 - 56 - GRUPO GENERAL DE CREDITO 8 - 6 - 46 - Banco Occidental de Mexico, S.A. 10 - 8 - 26 - Banca Metropolitana, S.A. 9 - 10 - 43 - Banco Regional del Norte, S.A. 1 - 9 - 30 - GRUPO SOFIDES - - - 2 _ Independent Institutions 227 8 251 5 2,153 13 Sabtotal 1,940 68 3,168 68 12,186 72 CREDIT UNIONS 233 8 230 5 1,146 7 Total 2,858 100 4,666 100 16,829 100 LCPI2 March 1980 M88XI0 -SECa SNAL AM H&8ty1K sALc 168T3LY 911OIf P10WCT 1ab4t 25I Aalysti of Total Cr-dLt Opera.ti-o of ff61 fr-j-ptertibo through 1979 ______________________ ~1976 it 79 prl1954 Vgny Ncehar 1939 fo. of Int-rpri.. 7 b f Mount . of laterpoisro tf Amont N. of Eat t r of Amount CredIts /. lNeo3 mIllIons) % Credits t. (rSno olillono 7 ia Credits t. (Neo$ millioos) 1 BY A6tUNT 07 CREDIT (He-$ mIll-ons) bp to 1.0 2,771 78 3,055 75 1,057 17 3,178 72 3,671 68 1,293 77 16,397 86 30,186 88 8,170 48 1.0 to 3.0 626 764 19 1,115 39 961 22 1,717 24 1,839 40 2,217 11 3,385 10 5,676 34 ore thot 3.0 048 4233 6 691 24 281 6 442 8 1,534 33 g99 3 791 2 2,981 18 Total 3,545 4032 100 2100 64,420 100 5 0 1o0_ 4.666 10 19.113 70 34,362 107 16 829 bY N0MI0ER OF EMLtYEEt IN TIIE ENTEFrFISE 4p so IS ~~~~~~ ~~~~~~~ ~~~ ~~1,241 35 2211 1,623 36 1.121 36 616 13 6,227 34 10,018 29 1635 10 11 to 20 80936 235A 464 16 1,601130 2391 1 220 23 643 1 46 303 23 7,288 21 5078 30 21 to 50 913 2~~~~~~ ~~ ~ ~~~~~~ ~~ ~~~ ~~~6 937 33 1,1001.7 25 1404 70 02$ 26 9,456 2707 1 to 100 390 31 634 2? 430 10 5 10 937 20 2,100 4,672 3834 23 hir - Ilat 700 195 5 _ 500 -8 257 6 253 6 866 19 1,145 6 .202 it 3,778 22 To-al 3j.543 1O _ 100 7,85 100 4.420 1ic IJ.A 100 4,666 100 19.113 1500 14362 10 1 LoZ 0Y TYTE OF ACTIVITY Food prod-ots 577 16 464 16 386 14 733 17 896 17 661 14 2,948 15 5,209 15 2,536 15 lonotogos 32 1 37 1 30 1 40 1 49 - 7 264 1 509 1 338 2 Tobacco 3 - 3 - 2 -_1 - I - I - I 10 - 7 - bTetilco 95 3 109 3 116 6 132 3 167 3 727 6 728 6 1,399 4 1,206 7 Foo-so- and lothco 642 la 492 17 386 14 816 19 953 18 628 13 107 06 3,464 16 2,081 12 Wood p-od-cto 67 3 106 3 2S 1II 3 145 3 116 2 445 2 794 2 395 2 Foroltuto -d accessories 217 7 255 6 104 4 308 7 387 7 21 5 ,12 1,868 5 678 4 Fapetprodocto 45 1 21 1 54 2 47 1 60 1 02 2 279 1 538 2 368 2 Frlnting sod lltogeaphy 129 4 145 4 87 3 147 4 173 3 130 3 867 5 1,468 4 504 3 leathler and leabFh- pto-d-tto 113 3 124 3 93 3 104 2 132 2 96 2 552 3 1,054 3 449 3 Robber 47 1 4 50 0 58 1 5 2 2 562 2 284 2 Cheolcals 177 5 212 5 233 8 216 5 229 5 350 8 5 1,893 6 1,346 8 Fettoleoo prodp cts-5 ,6 5 _6 3 - 5 - 4 - 16 35 - 21 - basic metals 55 1 60 0 66 2 73 1 102 2 168 4 310 2 611 2 458 3 Othor i-etalo 284 8 356 9 229 M 372 a 459 9 463 10 1,543 8 23761 8 1,336 8 EbOot torklog sod machIne fattlcotioo 675 19 754 19 562 20 938 21 1,172 21 972 21 35420 19 6,555 19 3,303 20 Othee o iotactrlog 249 7 290 7 234 8 251 5 302 6 274 6 1,176 6 2,791 7 1,111 7 Co__tr_ct_oo 9 - - 9 - 1 - 13 - 57 - 66 - 44 - Se-vi-es IY1 3 112 3 57 2 76 2 88 2 68 1 872 5 1,227 4 344 2 Total 3.545 O0 411 _____I_l2,850 4~,420 134,30 10 631062___ Total 3._5 130 4,052 100 10058 _____ 4,420 100 - 39fl 10 4,666 1 19,113 103 34.362 100 146.29 100 BY bLCATION-1 Loot I 973 27 1,118 28 1,030 36 1,438 33 1,729 3? 1,393 30 7,280 38 13,940 41 7,056 42 Zone I1 198 6 236 6 229 7 2,081 47 2,562 48 1,834 39 2,777 35 3,906 11 2,644 16 Zone I11 2.374 67 2,608 66 1,619 S7 901 20 1,099 20 1,439 31 9.056 47 16.516 48 7,129 42 Total 3.545 100 4_052 120 2 013941 11003392 46_ 34,362 100 16,829 100 BY TYFE OF FINANCING Floed assets MA 1,472 36 1,172 39 MA 2,301 44 2.439 52 NA 12,808 37 7, 107 42 Workiog caVAtul N 2,469 61 1,544 54 NA 2 914 54 7,064 44 MA 20,465 60 8,677 52 Debt rostructorlog N_A 111 3 189 7 A 95 2 163 4 ILL 1.089 3 1,045 6 3,145 100 4_052 100 2058 m5o0 6,420 1 5.90 100 4,666 100 18 113 100 34,362 100 16,829 '100 A) .s d.fi.sd It t18 atiootI Itdoatit-l D-Slopeeot Pl-n. Karoh 1980 ANNEX 6 - 95 - T- 26 MEXICO -SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 26:FOGAIN's Balance Sheets as at December 31, 1977 - 1979 - Audited Preliminary 1977 1978 1979 ASSETS Current Assets Cash and otlher short-term assets 72.1 88.7 156.0 Accounts receivable (incl. arrears on principal and interest on loan port- folio)- Net 26.8 30,1 70.7 98.9 2/ 118.8 yj 226.7 y Long-term Assets Loan portfolio 2,574.2 3,506.7 5,240.1 Net fixed assets (furniture & equipment) 1.6 2.1 11.7 Deferred charges (due to foreign exchange fluctuation) 355.5 512.8 473.1 2,931.3 4,021.6 5,724.9 TOTAL ASSETS 3,030.2 4,140.4 5,951.6 LIABILITIES AND EQUITY Current Liabilities Interest Payable 35.9 95.4 ( 334.6 Other accounts payable (incl. current portion of long-term liabilities) 66.3 96.7 ( Certificates of participation of Banco de Mexico 200.0 1,300.0 N.A. 302.2 1,492.1 334.6 3/ Long-term Liabilities Certificat:es of participation of Banco de M'exico 1,350.0 900.0 2,950.0 IDB Loan 800.0 925.5 910.2 PAI Loan - 163.8 325.9 NAFINSA - 400.0 Other Creserves, etc.) 2.0 1.9 12.1 E2,152.4 1,921.2 4,598.2 Equity Share capital from government 551.4 648.7 1,039.3 Retained earnings 24.2 8.4 (20.5) 575.6 657.1 1,018.8 TOTAL LIABILITIES AND EQUITY 3,030.2 =4,0.4 5,951.6 1/ Fiscal year changed from June 30, to December 31, as of 1977. 2| Excludes current portion of loan portfolio. 3/ Excludes current portion of certificates of participation of Banco de Mexico LCPI2 March 1980 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 27 Past and Projected Income Statements of FOGAIN (in Mex$ millions) 19771/ 1978 1979 1980 1981 1982 1983 1984 INCOME Interest Income 108.5 280.8 398.4 852.8 1,549.1 2,517.8 3,797.6 5,669.9 Other Income - 0.1 0.1 - - - - - 108.5 280.9 398.5 852.8 1,549.1 2,517.8 3,797.6 5,669.9 EXPENSES Interest Expense 84.9 180.4 284.7 689.4 1,009.8 1,536.4 2,140.3 2,800.4 Commissions, etc. 5.0 8.4 8.4 54.6 3.0 12.1 .12.1 12.1 I General and Administrative Exp. 18.2 33.6 57.8 96.3 172.4 278.6 432.1 658.3 Depreciation and Amortization 0.2 0.5 1.1 2.5 3.5 4.5 5.5 6.5 Losses due to Exchange Rate Fluctuations 2/ 13.4 73.9 75.4 76.1 70.0 62.9 56.1 53.7 121.7 296.8 427.4 918.9 1,258.7 1.894.5 2,646.1 3,531.0 Net Income (Loss) (13.2) (15.9) (28.9) (66.1) 290.4 623.3 1,151.5 2,139.0 RATIOS Total Income as % of aver. loan portfolio 10.1 3/ 9.2 9.1 11.7 11.9 11.5 11.0 10.7 Financial Cost 4./ as % of aver. loan portfolio 9.6 3/ 8.6 8.4 11.3 8.3 7.4 6.4 5.4 Gross Spread as % of average loan portfolio 0.5 3/ 0.6 0.7 0.4 3.6 4.1 4.6 5.3 Administrative cost as % of aver. loan portfolio 1.7 3/ 1.1 1.3 1.3 1.3 1.3 1.3 1.2 Net income (loss) as % of average loan portfolio ( 1.2)3/ (0.5) (0.7) (0.9) 2.2 2.9 3.3 4.1 1/ Due to the change in fiscal year from June 30, to December 31, the income statement shows only the results of operations from July 1 to December, 1977. 2/ Losses suffered on interest and principal repayments due to exchange rate fluctuation. 3/ Annualized 1977 ratios. e 4/ Includes losses due to exchange rate fluctuations. LCPI2 C' March 1980 - 97 T- 28 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 28 FOGAIN's Projected Sources and Application o:f Funds for the Period 1980-84 1980 1981 1982 1983 1984 SOURCES Net Profit (Loss) (66.1) 290.4 623.3 1,151.5 2,139.0 Add: Depreciiation and Amortization 2.5 3.5 4.5 5.5 6.5 (63.6) 293.9 627.8 1,157.0 2,145.5 Increase in Share Capital from the Government 1,000.0 1,500.0 1,500.0 1,500.0 1,500.0 Borrowings: PAI 688.0 460.0 460.0 460.0 460.0 BANXICO 1,400.0 2,000.0 3,000.0 4,000.0 4,500.0 BID 690.0 172.5 690.0 690.0 690.0 Other 1,558.6 2,000.0 2,500.0 3,000.0 3,500.0 Other Payable - 1,589.9 3,748.9 6,340.4 13,005.7 Loan Collections 3,623.0 4,175.0 7.035.3 11.105.0 17,051.9 TOTAL SOURCES 8,896.0 12,191.3 19,562.0 28,2'i2.4 42,853.1 USES Loan Disbursements 7,694.2 11,541.3 17,311.9 25,968.0 38,951.9 Repayment of Borrowings PAI - 43.5 62.9 120.4 177.9 BANXICO 400.0 500.0 500.0 -- 1,000.0 BID 43,8 43.8 39.6 35,4 35,4 Other - - 1,558.6 2za.0o 2,5QQ.0 Fixed Assets Purchases 14.4 10.0 10.0 10.0 10.0 Other 697.8 - - - - TOTAL USES 8,850.2 12,138.6 19,483.0 28,l.33.8 42,675.2 Increase in Cash 45.8 52.7 79.0 118.6 177.9 LCPI2 March 1980 MEXICO - SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 29: Organization Chart of FOMIN 1/ Technical and Funds Disbursement Committee Chairman: Jorge Espinosa de los Reyes Director General Sergio Luis Cano Luebbert %0 Manager (position open) Assistant Managerl | | ~~~~~~~~~~~~Jorge Luis Gonzalez Urdiales| Legal Department Appraisal & Supervision Dept. Promotion & Equity Sales Dept. Administrative & Financial Dept. Jesus Perez Martinez Moises Pardo Rodriguez Rodolfo Villareal Cardenas Angel Mordragon Alvarez 3 (3) 10 (12) 2 (2) 4 (4) 1/ Figures represent number of professionals currently working in each unit, and figures in parentheses, total professionals proposed for 1980. LCPI2 March 1980 :4 ANNEX 6 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT T-31 Table 30: Sunary of FOMIN's Investments (in Mex$ million) Year-to-date Year-to-date Year-to-date December 31, 1977 December 31, 1978 December 31, 1979 No. of Firms Amount No. of Firms Amount No. of Firms Amount Studies 170 498.0 188 643.0 224 941.3 Rejections 16 63.8 19 80.8 26 82.3 Approvals 154 434.2 169 562.2 198 859.0 Not Finalized 1/ 77 157.6 87 169.8 66 195.6 In Process 3 45.8 6 64.7 16 203.5 Completed Investments 2/ 74 247.0 76 347.6 116 459.9 Investments sold 5 5.4 4 35.1 31 38.8 Companies Being Liquidated 2 0.2 4 9.0 8 10.8 Portfolio as of year-to-date 67 241.4 30 3 . S 1/ These include projects approved by FOMTH, but not implemented typically because the client enterprise has not agreed to conditions required by FOMIN for its investment. 2/ Reinvested dividends included in the investments of portfolio year-to-date. 1977 Mex$16.2 millions 1978 Mex$19.9 millions 1979 Mex$25.4 millions Table 31: Economic Activity of Firms Supervised by FOMIN 1978-79 (in Mex$ millions) Economic Activitv As of December 31,1978 As of December 31, 1979 Subsector No. of Amount Average Amount No. of Amount Average Amount Firms Invested 1/ X Per Firm Firms Invested 1/ X Per Firm Chemicals/Pharmace,uticals 13 51.0 16.8 3.9 16 665.4 16.2 4.2 Food Products 13 66.0 21.7 5.1 14 79.2 19.3 5.7 Metal Processing 16 97.8 32.2 6.1 20 158.2 38.6 7.9 Wood Products 4 29.4 9.7 7.4 5 33.7 8.2 6.7 Construction Materials 6 11.7 3.9 2.0 5 11.9 2.9 2.4 Electrical Machinery 3 2.3 0.8 0.8 4 4.3 1.0 1.1 Textiles/Apparel 2 3.0 1.0 1.5 2 11.9 2.9 6.0 Other 11 42.3 13.9 3.8 10 44.7 10.9 4.5 TOTAL 68 303.5 100.0 4.5 76 410.3 100.0 5.4 1/ Amounts include reinvested dividends. LCPI2 March 1980 - 100 - ANNEX 6 T-32 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 32:Analysis of FOMIN's Authorized Projects by Number, 1977-79 1977 1978 1979 Total No. % No. % No. % No. % By Economic Activity Food Products 2 20 - - 4 11 6 10 Metal Processing 5 50 4 24 10 29 19 31 Chemicals/Pharmaceuticals 1 10 5 29 4 11 10 16 Textile/Apparel - - - - 13 38 13 21 Other 2 20 8 47 4 11 14 22 TOTAL 10 100 17 100 35 100 62 100 By Destination of Output Domestic Consumption 5 50 11 64 25 71 41 66 Import Substitution 1/ 3 30 3 18 6 17 12 19 Primarily for Exports 2 20 3 18 4 12 9 15 TOTAL 10 100 17 100 35 100 62 100 By Geographic Location Zone I B (Border Zones) 3 30 5 29 13 37 21 35 Zone II - - 2 12 8 23 10 16 Zone III A (Mexico City) 10 59 5 14 20 32 (Metropolitan Area) Zone III B (Mexico City) 2 20 - - 9 26 11 17 (Surrounding Areas) 2 2 TOTAL 10 100 17 100 35 100 62 100 1/ Also for domestic consumption. LCPI2 March 1980 MEXICO SE0COND8 SHALL AND MEDIUM SCALE INDUSTRY DEVELODPHENT PROJECT Tobte 33:FOK0N' Equity invetmets Held (in ken thousad.) Bald Dividends li Statmets Location % noher of Slates Held Par HaV. f Hrima(oe o et in Share C Rau Daa and _Montsf 068IN'. Zones Coned Pretecred Caooson - Cost Total 1~~~~~~979 0197 1977 1970 1979 Date riginal Pe.tiipatio A. C-soiru Corait tfitAbI, A.uraIad-tIsoss Se .A. I-A 30.0 3,000 - 15,00'0 4,351 182,67) 1,6H0 (35061) 1,8C DePt-he 19 78 (15.300) Adhesivos, S.A. i110 09.0~ ~ ~ ~~~~~~ ~~ ~ ~~~~~~~ - 3,7 ,762 8 700 2,I 1 Dec. r 974 (2.000) 1979 11,276) Aurrtnst Soujoaca * 8.4. 011-A~~~~~~~~~~~~II 16.4 - 00,202 6,020 .97 1,10 4,4 2,970 6,743 Nunnb-t 1972 14,420 Acrsun- Hoderoo 1.A. IT-A 162 600 - 6,000 4,26 91. 600 be-se 19377 6,000) Bicicietoc Condor. S.A. 05B 30.0 12,000 12,000 4,793 5,439 5,065 975 -J-n L97H (12,000) Chapas y Triplay del Socete S .A. i-s 12.5 7,50 360 0- 5,020 (0,32) (15) 3 -Dsc...b- 194I400 D'5B0,a, S.A. Ill-A 3:3. - 6,000 6,000 1, 406 801L - J-s 19 78 6 ON00 Dalicise Tropi-sie, S.4. 15 33. - 2.000 2,200 0,700 2,300 1,244 (5,955) - Deceshet 1974 12 2002 Fotmados Pir.etds, S.A. ILL-A 33. 9,660 - 9,000 1,933 505 - - 249 Jun 19 79 1 9,000) lspt.lsora y Diatclboidoti faa-Dan, 1.4. 101~~~ ~~-A 33.3 6,006 6,000 3912 0,884 95 67 98 Msd 979 16,000 Sodonri 34401ic lag-, 0.A. 0- 17.3 259 434 6,930 1,034 1641) 96 302 4,863 June 1973 4 4340) 1977 1650) 1978 (1.940) lodust ..aIon, 1.4. ItI-H 9.2 - 60,000 6,000 11.454 (4, 107) - - - Nacc 19 72 6.000) Sudu-Ille S .A. III-I 33.3 20.500 - 22,500 1,073 - -675 kMtc 1979 (22,500) Losiu- D-ntl,gdo. 3.A. IC 33.3 13,508 - I3,50 3,869 1,796 -L 1582 Daei 9 78 (12,50D) 1979 01.000) p01540, 2.A. 1.0 37. =M6 6 5 04 - --Dc,hr(' (2663 ProdHotos Ketne, S.4. IH 22.6 80,000 8,000; 1,490 3,389 2,205 -- N'y 1979 S ,00 So-lpus, 1.4. M- 33.3 - .822 2,0822 300 79 . 2 22 Detr.he (- 979 1 ,60 20t h Caniut.y COne.,O alo ..I 33.3 - 8,500 8,10 1,30'6 492 020 794 M ke 1979 1 0.000 Vint 505 dal Horns24 II 31.8 - 7 700 140 266) - 235 3 78 Jut1976 (700) I.b.N-.. . Itoa d. ke,. RraetS*D.A. 1- 20 - 17,880 17,010 2,167 (3,964) 809 1,723 -D.tebar 19 73 112.420) 1976 (3.780) tadusttla* Ats.uit, 5.4. i-H~ ~~~~~ ~~~~~~~ 330 2940 10,978 13,060 5,300 2140 17674) (100)29Deebt17 15,0) 97 1860 ladrlllta icaooto, .4.E1- 33.'3 - 1,800 1,00 61 (8 514 (65) . D-cno 1 976 1 1,800 Lonia, 8.4 El~~~ ~ ~~~~~ ~ ~ ~~~~~~ ~~I-IA 33.3 - 1,670 1,620 119 (50D084( 22.349 961 . -t 192 ,60 Lodriler Coc .A.. -I: 20.0 - 3,333 3,333 271 47 (23) - Dec. br 974 13,333) Nag. y ermeta snllo,84 s-..tCA 20.01 1,904 - 1,904 644 (6894) - -191 Icaht1977 11942 Prodoctos Co-e, 5.A. 11.4 23.3 - 40,571 4,5 599 42 7 (6,909) 170 - Decbhe 1973 14,000) Tota 26 Compaotes 187,008 45.61 12 695 orFinentla Diffiliiulle Acit . o isrindo,: 3.4. 001-A 16.8 12,276 12,349 26,625 (894 (5,785 (2.416) 3,569 1,261 Deceber 1972 16,600) 1972 (6,002)) Acaunrs Co_erio,8.,I. 235 1,0 ,5 14,80 3.90 u.. ns ,2 eehr1976 4 4950) 1978 (10,000) I Algodanes y Cases, 0.4. 1. 33.0 - 4,9 ,90(00) (2,988) (1,704 (357) -Dcme 95 1420 Alimeuto Delantadoe de Sinalos, 0.4. B- 30.80 7,500 7,500ie (2.532) (722) (4,'882) -D-tne b1974 1 7,00) Crapeo- y Hesiquss, 0.4. 010-A 25.2 - 160 160 (73) - - - - DeOmbe 1979 (860) Crm Meie- ,84 -I_ 333B 2.200 2,200 (9762 106 1,26B (645) .Jo.- 19 79 02,200) Ci_rras yTraqoale.", S.4. I-_ 333B 1,991 1,991 (847) 731 1,233 14 -D-neber 1975 61,99 1) Cia. Foresta Lo. lacados 5.4. 0-B 7.7 - 6,500 6,500 (7.596) (28,082) (4,0 14) - .Decmbr19727 6,500 Ciclnece 1.4 (-A 33.3 - 000B800 306) 72) 650 (2,131) - eabr1979 1066)) EqolposIuntralsEspscialioados, 5.4. 0.B 24.3 - 65,009 6,509 (3,96) (2,600) (2,096) (1.490) -Joo 1973 13.350) ForseeAcvoo,S.u_01. 3). - 14,7)0 1,472 (97(3)) 83 (42) ILH Dneber 1923 1.472)) Inr. yAeeint S ,4 011-A 33.)3 -I 1,400 1,400ne (ID)) (264) 627 December 1974 1,400 I.p, or ndt.l ectrrlc *S.A. IllA 32. 11 - 112 (5) (45) . (29) - etnbr1973 (112 Aut Air-He, 0.4. Ill-IA 3 2.1 ' 2,200 2,000 (1,206) (228) (4709 1254) 166 D-ueber1- 1200 Indotis Topyec, 3.4. 011A 325 - 2,60 2,68 (402)) (1) . - - Deoember 198a 2,400) iot 8O - ac,54 I- 33.0 . 13,200 13,200 (10,932) 4,071 1,784 (13) D scabr1975 (13,2 08) .:.raIrI o d Sy. 5.. 001-B 30.0 2,000 - 2,000 0060) (29 42 3 6 D.oubr187 a 2 ,008 Lah-rtorlu Brooig, 1.4. 011-A 30. 9(01 961 (1,'407) (697) (195) 192 78Dembr17(9) lab-rataIo AHn, S.A. -0 33.0 - 0,06 2,065 (6,223) 2,92 1,2I56)IDeobt17 2,65) LabrtoIos Alphe, 8.4. 0-B 330 - 3200 3,0 (58,8)7 (3,9619) 8 663) Deceber 1975 (13,200) Sat irA.t rHoc,84 III- 32.2 180 -,80 (975) - 00 rcember 19 79 11,000) Torbac 0.4. II 33.3 1,52 -1,50 (70) 189 (10) (381) 30 Dember 1929 t ,50) Criley Osd Pluo,S.A. [.0 17.9 . 10,500 12,500 (7,516) (13,932) (5,627) --D-nsb-r 1976 (12,500) NoVate S. A.. II 24.0 8 3,333 0,333 (624) 1,437 --Deo-ber 1970 6,000) E.p-cdor Or Con...n. yHNinett, 0.4. l-D 33.3 . 5,000 5.000 (399) (94 1,207 564 - Deceber 1979 15,000) Toa 25Cunene 1)7,740 33.61 6,347 C. Cossis ne Consrutie o i P-r-a-00r n Si.o. Stat-ut Dett Multipcek, S.A. I-B 33. 3 - (,000 18,000 J- -. a 1900 locenbe 1979 (10,008) ormr 3..dv 0.8, 2-D 5.0 400 - 400 J. - ms 1980 DetebRr 19 79 1400) Fis=tero, 8.. CI 3).) 22,000 - 25,006 0 October 1980 D-teber 1979 (23,020) Snolss p P1s(e. Or Coohnllo, 5,4, ~~~ ~~ ~~~~II 3)) - ,94 6,994 - . - - April 1980 Deeber(90 (694 DitrloldoI daDedads eer 04 I-B 33.3 4,876 - 4.876 - aur 90Decme 17 406 Tatol I Capns 47,278 11.5% D. C-,.,n.. so Ors11t.tl an is Proc.a. of g.iud-tia A-tion Con.eidaad lfiute Acato Tra,tsfomsdocs OsH0d0100, S.A. 222 - 1,000 1,I - - --mae P-..es 197 Fissui Cal Qu.in, 5.A. 23. -I3300 00. h -Ebahlltue972 Ta.uie Alimeutos Lecos, 1.4. ~~~~~ ~ ~ ~~~~~~ ~~~~~~~21,4 . 6,00 6,00 . Rh-Dbhilitau 1873 Taclslos Cares osI= e elSayr 3.4. 33.0 - 165 165 L .-iq.id-n 1973 FEn.sois Cal..o. da1 DejSo, S.4 2672,000 2,6 aeiiaa1972 lout Lbor Strtba Cia. Ot-rn Windsor OsA HeII,8.. 23 Lg8 8 -Lqias17 2ina=ole rusDfrig-radas S .A. 12.5 - " 2,5002,6 - . - Liqidant 1974 Flaais Csrde eio,54 33.3 - 2050 2,0580 ae rnea17 laca Herreisutas P Naq. y Csrpint-r, S.A. 9).3 644 644 . ,-iq'sidsPte 1976 (066) 1976 (400) Floanial 00.d Construtor N-1e WeIto, S.4, 33.1 - 2250 2,25 L iqudIa 974 Fimeunie1 12. M-bl-tr SI3 .4. 24. - 640 660 - - . . Liq taa1973 Fi-a!cIf ItO. ForasteLs. de Ney-rit S.A. 33. 64,410 6, 441 LiquIate1973 Det. Se.Det 06.d N.o, A.. 33.) 165 02.5 Liqudas1973 Jsts Tu.Ifs-e, 5.A. 3.0 - 495 495 . - - - Liq.id=i 1973 F~isca Debts InO..To-a., A ilsy Ladrillos, 5.A. 13. - ,60 360 . - . - Dbbltn 93Fiocs La Meritima, S.A. 32 .3 - 2,000 2,80 . - - . Lqiae1975 I-ap--atd by Ejido LeIn.U Dbike, 5.A- 32.3 1 500 - - - igidta 19)3 Fimeutle ke.-I-o, S.A. 25.0 - 2,51 2,530 - - - - Liqidtdan 1973 Fisa IslEs hewn Xa. A 54 2.7 - 4,000 6,00 " --eie ooe 1973 FEsamOi1 TaLe 20 ORWss. 38,298.5 9.31 C14A1 TOTAL 76 CH9M'MIIZDL 4l2.5 1020.0 17 No tosS dividends -t paid durluk 0979, alE aber dilLdends in c -eoo ktnb - 102 - ANNEX 6 T-34 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 34: FOMIN'S Portfolio Development Second First SMI Appraisal SMI Appraisal Dec. 1976 Sept. 1977 Dec. 1979 Operating Profitability Number 23 20 26 % Investment 34 41 46 Operating with Losses Number 34 19 25 % Investment 51 40 33 Under Construction, Pre-operating Stage or in Special Situation 1/ Number 10 26 25 % Investmnet: 15 20 21 TOTAL Numbet 67 65 76 = Investment 100 100 100 1/ Firms in special situation are those which are expected to be liquidated or rehabilitated under new management. LCPI2 March 1980 - 103 - ANNEX 6 T-35 MEXICO -SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 35: Revenues of FOMIN's disinvestments 1976-79 (in million Mex$) Company 1/ Par Value 2/ Sales Value 3/ Earnings (Loss) % Return on Sales Amercoat Mexicana, S.A. 394 656 262 Aparejos Electricos, S.A. 500 630 130 Cia. Vinicola de Ensenada, S.A. 2,000 2,000 - Empacadora Garza, S.A. 1,584 1,828 244 Fabrica de Muebles Excelentes, S.A. 100 30 (70) Mosaicos Vetrum, S.A. 300 390 90 Pall, S.A. de C.V. 2,152 2,755 603 Zetra Solventes, S.A. 60 93 33 Sub-total Sales - 1976 7,090 8,382 1,292 15.4 Amercoat Mexicana, S.A. 497 988 491 Centro de Computacion y Proc. de Datos, S.A. 244 332 88 Empac-0-Matic, S.A. 1,080 2,506 1,426 Empacadora La Concordia, S.A. 563 636 73 Elementos Maquinados,, S.A. 1,500 2,370 870 Formas y Moldes MetaLicos, S.A. 2,333 3,033 700 Jugos y Frutas de Zacatlan, S.A. 1,071 1,392 321 Silicatos Especiales, S.A. 2,000 2,200 200 Sub-total Sales - L977 9,288 13,457 4,169 31.0 Amercoat Mexicana, S.A. 452 605 153 Vitro Proceso, S.A. 300 500 200 Deval de Mexico, S.A. 297 396 99 Industrial Productos de Mexico, S.A. 212 366 154 Ind. Citricolas de Montemorelos, S.A. de C.V. 3,500 5,960 2,460 Industrias Formesa, S.A. 492 700 208 Manufacturas Xochi, S.A. 120 50 (70) Zetra Solventes, S.A. 60 131 71 Sub-total Sales - 1978 5,433 8,708 3,275 37.6 Zetra Solventes, S.A. 180 443 263 Alimentos Compean, S.A. 1,000 1,700 700 Cia. Turati Industrial, S.A. 726 1,060 334 Industrias Rimko-Rain, S.A. 566 466 (100) Productos Alimenticios Cabanas, S.A. 700 1,260 560 Trejo Industrial, S.A. 450 720 270 Sub-total Sales - 1979 3,622 5,649 2,027 35.9 Total Sales - 1976/79 25,433 36,196 10,763 29.7 1/ Amercoat MexicaLna, S.A. and Zetra Solventes, S.A. disinvestments proceeded through partial sales of shares. 2/ Par value for allI these cases equalled cost of FOMIN's equity participation. 3/ Does not include interest on credit sales which is presently 18.52. LCPI2 March 1980 - 104 - ANNEX 6 T.-36 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 36: FOMIN-Audited and Projected Balance Sheets, 1977 - 84 (in Mex$ millions) Audited Unaudited Projected 1977 1978 1979ut 1980 1981 1982 1983 1984 Assets Current Cash, Banks and .1 .2 .6 Marketable Securities 46.8 78.9 82.8 65.8 52.6 47.3 42.6 40.5 Accounts Receivable: Interests Receivable - - .8 1.2 1.6 2.1 2.7 3.5 Dividends Receivable - 4.2 28.4 24.0 28.8 31.7 34.8 38.3 Loans on Portfolio Sales 8.6 11.0 6.5 19.0 46..O 74.7 86.8 95.5 Employee Loans 2.0 2.8 2.5 3.6 5.5 8.0 11.3 13.0 Other Receivables - - .5 .5 .5 .5 .5 .5 Sub-Total 57.4 96.9 121.5 114.1 135.0 164.3 178.7 191.3 Portfolio Investments Investments (at cost): 892.9 1,268.1 1,733.1 2,302.0 2,968.1 Common Stock 214.1 248.1 256.6 Preferred Stock 18.3 62.2 153.8 Adjustment for Revaluation J (21.8) (31.2) (14.2) Subscribed Investments - - 34.8 Loans on Portfolio Sales 3.1 .8 - Sub-Total 213.7 279.9 431.0 892.9 1,268.1 1,733.1 2,302.0 2,968.1 Fixed Assets Furniture and Equipment 1.2 1.4 1.6 Less Accumulated Depreciation (.5) (.6) (.7) Sub-total - Net Fixed Assets .7 .8 .9 .9 1.1 1.3 1.5 1.8 Other Long-term Assets Employment Loans 3.6 5.5 7.0 9.1 10.9 13.1 15.7 18.9 Sub-total 3.6 5.5 7.0 9.1 10.9 13.1 15.7 18.9 Deferred Assets Installation Expenses .9 1.0 1.0 Accumulated Depreciation (.6) (.8) (-9) Sub-total - Net Deferred Assets .3 .2 .1 .6 .7 .9 1.0 1.2 TOTAL 275.7 383.3 560.5 1,017.6 1,415.8 1,912.7 2,498.9 3,181.3 Liabitities and Equity Current Subscriptions Payable 3.0 .5 40.8 95.0 76.0 60.0 48.0 S8.0 Taxes Payable 3.0 1.7 1.0 | 5-5 6.2 7.2 8.2 9.3 Accounts Payable 1.8 3.4 4.3 Sub-Total 7.8 5.6 46.1 105.5 82.2 67.2 56.2 47.3 Long-Term Liabilities Pension Reserves .6 .8 1.0 1.3 2.8 4.3 6.0 9.1 Long-Term Liabilities - - - 240.0 442.0 694.0 981.0 1,292.0 Total Liabilities 8.4 6.4 47.1 341.8 527.0 765.5 1,043.2 1,348.4 Equity Government Capitals Contributions 316.7 436.7 550.7 720.7 924.7 1.169.7 1,463.7 1,816.7 Adjustments for Revaluation j/ (21.8) (31.2) (14.1) (28.0) (36.8) (48.1) (62.7) (77.9) Prior Term Profit (Loss) (26.9) (27.6) (28.6) (23.2) (16.9) .9 25.6 54.7 Current Year's Profit (Loss) ( 7) (1.0) 5.4 6.3 17.8 24.7 29.1 39.4 Total Equity 267.3 376.9 513.4. 675.8 888. 8 1.147.2 1. 4557 1.8.32. 9 TOTAL 275.7 383.3 560.5 1,017.6 1,415.8 1.912.7 2.498.9 3.181.3 1/ Considers Revaluation of fixed assets, retained earnings (losses) and adjustment for book value of firms. 2/ Considers adjustment for book value and revaluation of fixed assets of firms. LCPI2 March 1980 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 37: FOMIN-Audited and Projected Income Statements, 1977 - 84 (in Mex$ millions) Audited Unaudited Projected 1977 1978 1979 1980 1981 1982 1983 1984 Income Interest 1/ 3.2 5.0 7.5 4.3 10.8 12.9 15.5 20.2 Dividends .4 4.2 - 6.0 8.6 14.7 18.6 24.0 Net Income of Portfolio Sales 2/ 4.0 3.3 .2 9.8 8.5 12.5 15.9 20.1 Other Income - .1 .2 .2 .2 .2 .2 .2 Total Income 7.6 12.6 7.9 20.3 28.1 40.3 50.2 64.5 Expenses Administrative and Operating Expenses 18.2 22.3 25.4 Commissions to NAFINSA 1.9 2.0 1.2 Depreciation .3 .4 .3 - Total Expenses 20.4 24.7 26.9 38.2 44.8 50.0 55.7 61.1 Operating Margin (12.8) (12.1) (19.0) (17.9) (16.7) (9.7) (5.5) 3.4 Special Accounts Stocks Dividends 12.1 10.9 24.4 24.1 34.5 34.4 34.6 36.0 Subscription of Stock below Par Value - 1.0 - - - - - - Operating Expenses of Prior Term - _^8) - - - - - Total Special Accounts 12.1 11.1 24.4 24.1 34.5 34.4 34.6 36.0 Profit (Loss) ( .7) (1.0) 5.4 6.2 17.8 24.7 29.1 39.4 1/ Represented primarily by interest on marketable securities credit sales of FOMIN's equity participation, and assumes 2Z spread on PAI funds used in financing debt instruments with equity features. 2/ Net income on portfolio sales breakdown: Portfolio Sales Gains 4.2 3.4 2.1 13.7 13.2 15.6 18.0 21.6 Portfolio Sales Losses (2) (.1) (1.9) (3.9) (4.7) (3.1) .1) (1.5) Net Income 4.0 3.3 .2 9.8 8.5 12.5 15.9 20.1 LCPI2 L March 1980 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 38: Resource Needs to Support FOMIN's Expected Level of Operations 1980-84 Government Resources PAI Resources Possible Later Outside of Total Yearly Year Bank Government Total 1/ Stages of PAI PAI Resources 1980 2/ 132.0 108.0 240.0 170.0 410.0 1 1981 137.5 112.5 250.0 204.0 454.0 0 1982 192.5 157.5 350.0 - 245.0 595.0 1983 130.8 107.0 237.8 217.2 294.0 749.0 1984 - - - 570.0 353.0 923.0 TOTAL 592.8 485.0 1,077.8 787.2 1,266.0 3,131.0 1/ Does not include subscriptions for the subsequent years, 1.50% of the unallocated funds of US$8.0 million reserved to FOMIN and FIDEIN are being used by the Risk Capital Subprogram. 2/ 1980 considers use of resources for projects approved during 1979, due to the delay in implementing the PAI program. I 00 M Ir - 107 - ANNEX 6 T-39 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 39: FOMIN's Sources and Applications of Funds 1980-84 (in Mex$ millions) 1980 1981 1982 1983 1984 Initial Working Capital 30.4 33.8 27.9 31.0 40.8 Sources Dividends 6.0 8.6 14.7 18.6 24.0 Equity Sales 9.8 8.5 12.5 15.9 20.1 Government Resources 170.0 204.0 245.0 294.0 353.0 PAI Resources 240.0 250.0 350.0 455.0 570.0 Interest 1/ 4.3 10.8 12.9 15.5 20.2 Other 2/ 1.5 2.0 2.0 2.5 2.5 Total Sources 431.6 483.9 637.1 801.5 989.8 Applications Investments PAI Program 3/ 240.0 250.0 350.0 455.0 570.0 Not Eligible Under PAI 4/ 150.0 195.0 234.0 281.0 337.0 Adm. and Operating Expenses 5/ 38.2 44.8 50.0 55.7 61.1 Total Applications 428.2 489.8 634.0 791.7 968.1 End of Period-Working Capital 33.8 27.9 31.0 40.8 62.5 1/ Considers 2X spread assumed on PAI's resources used to fund debt instruments plus interest on marketable securities. 2/ Considers sources such as amortization of employee loans. 3/ Excludes subscribed shares not disbursed. 4/ Medium-large enterprises (total equity above Mex$40 million) and working capital financing. 5/ Overall expenses are including commission to NAFINSA and depreciation. MEXICO - SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 40:0rgamization Chart of FIDEIN Technical and Funds Disbursement Comittee Chairman! Jorge Espinosa de los Reyes Director General Alfredo Navarrete Romero I o General Sub-director Jose Luis Felix Lopes Technical and Operations Legal, Adinistrativ. & Finacil ManagerMenager Ernesto Resos Orozco Enrique Torre. Planning and a Leasing t- anSles |Apdr & Promotion Dept. i Adm. & Accounting Dept Fin ncial Dept. Legal Dept. Internl Audit Dept Department Suprv aDet Appr:aisa C&e t.u Development Dept. Special Studies Agustin Guillen Control Dept. Studies Dept. Carmen Ortuno German Oyosa Roldan |SManuel de Alba Jesus Reynoso Garcia (poatiom open) JoFqulore morle. j r Osorio Fernando Saave Rafaels Herrer Florso ~ Kaio draade.iGaa May129°0 My 198D - 109 - ANNEX 6 T-41 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 41: Investment in Acquisition and Land Development of Industrial Estates as of December 31, 1979 (in Mex$ million) Government Location Federal 1/ State 1/ Other 2/ Total Industrial Estates in Operation Aguascalientes, Ags. 58.8 58.8 Celaya, Guanajuato 42.8 26.6 69.4 Durango, Dgo. 31.4 6.0 3.0 40.4 Framboyan, Veracruz 35.9 41.1 77.0 Iguala, Guerrero 41.5 41.5 Leon, Guanajuato 19.6 10.0 48.4 78.0 Linares, Nuevo Leon 28.2 20.3 48.5 Merida, Yucatan 19.6 7.5 27.1 Morelia, Michoacan 17.4 17.4 Queretaro, Qro. 8.5 40.4 48.9 Tepic, Nayarit 24.1 24.1 Tijuana, Baja Cal. 31.3 245.8 277.1 Tizayuca, Hidalgo 30.0 30.0 Torreon, Coahuila 17.0 8.4 25.4 Villahermosa, Tabasco 50.4 3.7 54.1 Kicohtencatl, Tlaxcala 30.4 30.4 Sub-Total 486.9 137.4 323.8 948.1 Industrial Estates under Construction Matamoros, Tamaulipas 44.3 44.3 San Juan del Rio, Queretaro 43.0 43.0 El Salto, Jalisco 22.0 22.0 Sub-Total 109.3 109.3 Commercial Center Mexicali, Baja Cal. 18.2 42.7 60.9 Total 614.4 180.1 323.8 1,118.3 1/ Include committed resources for 1979. Does not include federal resources Mex$15.2 million and Mex$2.0 million appropriated for industrial estates in Ocotlan, and Reynosa, Tamaulipas, respectively. 2/ Includle SAHOP, BANOBRAS, FIDEIN and specifically for Leon private resources from the local commercial association. LCP7I2 March 1980 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 42: FIDEIN Operating Results of the Industrial Estates (as of Dec. 31, 1979) I N D U S T R I e s Planned New nemna Under Pre-Construction Investments Employent to be Under Pre-Construction ~in Fixed Assets 2J Generated 3/ L 0 C A T I 0 N S Land Sales Operating Construction Phase Total (sx$ millions) (enor.te)t (ha) (Mex' million) Industrial Estates: 1. Aguascalientes, Age. 81.4 110.8 24 25 59 108 887 7,241 2. Celaya, Guanajuato 73.8 72.0 11 16 21 48 1,479 2,676 3. Durango, Dgo. 90.2 31.5 24 20 9 53 363 1,896 4. Framboyan, Veracruz 101.0 73.1 15 13 27 55 1,608 2,506 5. Iguala, Guerrero 43.4 32.8 2 4 9 15 400 1,400 6. Leon, Guanajuato 4/ 60.0 250.0 - 40 85 125 1,000 4,000 I 7. Linares, Nuevo Leon 7. 7 7.4 1 4 16 21 93 597 8. 'erida, Yucatan 59.4 34.2 37 12 24 73 1,064 3,036 9. Morelia, Michoacan 29.3 29.4 18 15 5 38 767 1,079 10. Queretaro, Qro. 178.5 95.2 6 9 20 35 1,726 3,324 11. Tepic, Nayarit 59.7 37.5 6 10 22 38 216 1,525 12. Tijuana, Baja California 30.0 53.3 16 6 21 43 526 2,534 13. Tizayuca, Hidalgo 63.7 66.9 20 9 13 42 1,253 3,108 14. Torreon, Coahuila 30.2 10.3 5 12 21 38 216 1,149 15. Villahermosa, Tabasco 81.4 94.9 34 12 22 68 1,302 4,421 16. Xicohtencatl, Tlaxcala 91.1 7.3 - 4 3 7 1,663 1,780 SUB-TOTAL 1,080.8 1,006.6 219 211 377 807 14,663 42,272 Comsercial Center: 17. Mexicali, Baja California 34.4 165.1 103 164 91 358 736 5,000 TOTAL 1,115.2 1,171.7 322 375 468 1,165 15,399 47,272 1/ All projects are industrial parks except for Mexicali, which is a coimercial center. Three industrial parks under construction: San Juan del Rio, Queretaro; El Salto, Jalisco (near Guadalajara) and Matamoros, Tamaulipas are not included in the above listing. 2/ These figures represent the total new investment in fixed assets to be implemented by firms locating on the industrial estate. It does not include the value t|n of equipment already owned or operated by those firms who are transferring their activities to the estate. 3/ These figures are rough estimates which do not account for possible reduction of jobs in other locations by existing firma transferring to the estate. 4/ The Industrial Estate of Leon is the only joint-venture with private participation. Leon is presently developing a complex (under construction) for grain and produce wholesale warehousing ("bodegaS") for 526 individual operations using 20 ha of land, additionally 3 ha have been allocated for shoe factories which will be transferred to this area during 1980/82. LCP12 March 1980 - 111 - ANNEX 6 T-43 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 43: Consolidated Balance Sheet Summary for the Fideicomisos Especiales as of December 31, 197P (in Mex$ million) Assets Unaudited 1978 Cash, Bankcs and Marketable Sec. 63.3 Mortgage Receivables 1/ 105.0 Other Receivables 87.3 Net Fixed Assets (Bldgs. and Equipment) 5.6 Land Inventory 2/ 1,046.3 Net Deferred Charges 72.9 Total Assets 1,380.4 Liabilities Current 235.0 Long Term 209.3 Deferred Credits 74.0 Total Liabilities 518.3 Equity Federal Government 470.2 State Government 177.6 Other 299.9 Prior Term Surplus (deficit)3/ (70.5) Current year's surplus (deficit)3/ (15.1) Total Equity 862.1 Total Liabilities and Equity 1,380.4 1/ Deferred payments on land sales. 2/ Value of developed land turned over to the Fideicomisos by SAHOP, net of sales. 3/ The deficit reflects losses on land sold below costs of dLevelopment. LCPI2 March 1980 - 112 - ANNEX 6 T-44 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 44: Status of FIDEIN's Industrial Estates Subprogram as of March 1980 Size (sq. m.) Factory Buildings Factory Authorized by FIDEIN Companies Industrial Estate Economic Activity Building Land (Mex$ thousands) Factory Buildings in Operation 1/ Nipomex, S.A. Tijuana, B.C. del Norte Metal Processing 2,400 10,000 3,537 Elegance de Baja California, S.A. Tijuana, B.C. del Norte Leather ware 2,200 10,000 2,906 Sub-total 6,443 Factory Buildings under Construction 1/ Profit de La Laguna, S.A. Torreon, Coahuila Textile/Apparel 2,400 6,034 2,996 Bordados Maty, S.A. Aguascalientes, Ags. Textile/Apparel 2,000 4,725 3,948 Sub-Total 6,944 Factory Buildings in Pre-Construction Phase 1/ Condimentos del Norte, S.A. Torreon, Coahuila Food Products 1,000 5,000 1,703 Acabados Suaves, S.A. Xicohtencatl, Tlaxcala Textile/Apparel 2,000 20,000 3,829 Productos de Filamentos Xicohtencatl, Tlaxcala Textile/Apparel 1,000 2,000 3,668 Elasticos, S.A. (Profilsa) Sub-Total 9,200 Advance Construction of Factory Building 2/ Presently, four factory buildings were authorized by FIDEIN for construction in Tijuana, Baja California del Norte. Constructed area (sq. m.)-2x2,000 and 2x2,400 ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,880 Total Authorized by FIDEIN (under PAI). . . . . . . . ........ . 45,467 1/ Factory buildings with firm sales contract. All sales consider deferred payments for a period of over five years with 18% interest rate on unpaid balance. Factory Buildings in operation got on stream during 1st quarter 1980. 2/ Based on thorough marketing analysis of potential demand including collated applications for factory buildings in Tijuana. LCPI2 May 1980 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 45: FIDEIN's Industrial Estates Subprogram Construction Chronogram with Commited Factory Buildings for 1980 (in Mex$ thoisands) Industrial Estates Up-to-date 1/ April May June July Aug. Sept. Oct. Nov. Dec. Total As of March 1980 Factory Buildings Aguascalientes, Ags. 3,948 6,340* 6,340 16,628 Celaya, Gto. 6,340* 6,340 Durango, Dgo. 5,830* 5,830* 11,660 Framboyan, Ver. 6,280* 6,280* 12,560 Iguala, Gro. 6,100* 6,100* 12,200 Leon, Gto. 7,300* - 7,300 Linares, N.L. 6,010* 6,010 E Matamoros, Tamps.2/ 6,520* 6,520 13,040 Merida, Yuc. 6,880* 5,545 12,425 Morelia, Mich. 6,280* 6,280 Queretaro, Qro. 5,925* 5,925 Tepic. Nay. 5,650* 5,650 Tijuana, B.C. 28,576 7,585 7,585 43,746 Torreon, Coah. 4,699 6,025 6,025 16,749 Tizayuca, Hgo. 6,400 6,400 12,800 Villahermosa, Tab. 8,200* 8,200 Xicohtencatl, Tlax. 5,958 7,120* 13,078 TOTAL 43,181 6,280 12,860 13,220 18,510 19,235 19,050 19,260 27,220 31,775 210,591 * Advance-construction factory buildings. 1/ Cumulative figures for factory buildings committed by FIDEIN. 2/ New industrial estate on stream in 1980. LCPI2 March 1980 - 114 - ANNEX 6 T-46 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 46: FIDEIN's Industrial Estates Subprogram Execution Schedule of the Allocated PAI Funds for the Proposed Project Loan Factory Area Unit Cost Total Cost Completed 1/ Current Prices 2/ Current Prices (sq. m.) (Mex$) (Mex$) (US$ Equiv.) 1981 Quarter 1 -- 2,900 -- -- Quarter 2 8,000 3,100 24.8 1.09 Quarter 3 10,000 3,300 33.0 1.45 Quarter 4 12,000 3,500 42.0 1.84 Sub-total 30,000 - 99.8 4.38 1982 Quarter 1 14,000 3,650 51.1 2.24 Quarter 2 16,000 3,800 60.8 2.67 Quarter 3 16,000 3,900 62.4 2.74 Quarter 4 8,000 4,000 32.0 1.40 Sub-total 54,000 - 206.3 9.05 1983 Quarter 1 2,000 4,100 8.2 0.36 Quarter 2 2,000 4,200 8.4 0.37 Sub-total 4,000 - 16.6 0.73 TOTAL 88,000 322.9 14.16 1/ Includes specialized common service areas. 2/ Base year 1980 - construction cost Mex$2,600/m2; 1981 price escalation factor of 20%; 1982 price escalation factor of 15%. LCPI2 March 1980 - 115 - ANNEX 6 NEXICO - SSCOND SM&LL AiD NEDIUN SCALE INDUSTRY DRVRLWPMNNT PROJECT T-47 T-48 Table 47: PIDEIN - Unaudited and Projected Bialance Sheets, 1977-84 (in Mex$ million) 1n a u d i t e d Pr o 1 e c t e d 1977 q1978 1979 1980 1981 1982 1983 1984 Assets Cash, Ranks and Marketable Sec. .3 8.3 49.2 97.2 68.o 43.4 41.2 39.2 Accounts Receivable - - - 114.0 366.2 659.5 948.7 1,332.8 Other Receivables 4.5 3.5 8.0 7.3 6.5 3.7 4.9 4.1 Loans to Fideicomisos Especiales 12.5 17.4 24.5 21.9 19.5 17.0 14.6 12.2 Factory Building Inventory - - - 69.9 78.3 94.8 142.4 167.6 Equipment and Machinery Inventory - - - 1.5 7.0 10.0 15.0 20.0 Net Fixed Assets .4 3.6 2.8 3.7 3.5 3.4 3.2 3.0 Net Deferred Charges .4 .5 .4 1.4 1.3 1.2 1.2 1.1 TOTAL ASSETS 18.1 33.3 84.9 316.9 550.3 835.0 1,171.2 1,580.0 Liabilities and Equity Liabilities Accounts payable 1.6 3.3 4.4 4.8 5.2 5.8 6.3 7.0 Payables to Pial - - 40.3 164.0 360.6 587.8 852.0 1,171.8 Other Payables .5 - 1.8 2.0 2.2 2.4 2.7 2.9 TOTAL LIABILITIES 2.1 3.3 46.5 170.8 368.0 596.0 86t.0 1,181.7 Equity Government Capital Contributions 79.7 102.0 128.2 250.1 290.0 339.8 402.0 476.1 Prior Term Profit (Loss) (56.8) (63.7) (72.6) (89.8) (104.0) (107.7) (100.8) (91.8) Current Year's Profit (Loss (6.9) (8.3) (17.2) (14.2) (3.7) 6.9 9.0 14.0 TOTAL EQUITY 16.0 30.0 38.4 146.1 182.3 239.0 310.2 398.3 TOTAL 18.1 33.3 84.9 316.9 550.3 835.0 1,171.2 1,580.0 Table 48: FTDEIN -Unudl ted Incomi Statements, 1977-84 ( in HexS mi llIiono8 U n a u d i t e d P r o i e c t a d 1977 1978 1979 1980 1981 1982 1983 1984 Income Net Sales of Factory Bldge. 1/ - - - 78.7 221.3 319.1 374.1 450.0 Cost of Salea - - - (70.8) (199.2) (287.2) (336.7) (405.0) Net Interest 2/ 1.1 2.2 4.6 5.7 8.6 17.4 23.1 29.8 Net RentfLeaCe 3/ - - - - .4 1.3 3.6 5.2 Services 1.3 1.4 3.0 4.0 5.0 6.0 7.0 8.0 Other .1 - .1 .1 .1 .1 .1 .1 GROSS PROFIT 2.5 3.6 7.7 17.7 36.2 56.7 71.2 88.1 Expenses Ads.& Operating Expenses 9.0 11.2 21.6 28.7 36.7 46.6 59.1 70.9 Financial Expenses - - 1.7 Comniauions .3 .5 1.4 3.0 3.0 3.0 3.0 3.0 Depreciation .1 .2 .2 .2 .2 .2 .2 .2 TOTAL EXPENSES 9.4 11.9 24.9 31.9 39.9 49.8 62.2 74.1 NET PROFIT (IOSS) (6.9) (8.3) (17.2) (14.2) (3.7) 6.9 9.0 14.0 I/ Includee land not eligible for Bank financing. 2/ Contidet 27 spread for FIDEIN on PAI's resources used under the industrial estates subprogra,m plus interest on amarketa,le securities. 3/ Includes factory buildings and machinery/equipment. 4/ Technical Assistance to the Fideicomisos Especiales. - 116 - MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 49: Resources Needed to Support FIDEIN's Expected Level of Operations, 1980-84 PAI Resources Possible later Year Bank Government Total stages of PAI 1980 91.2 72.8 164.0 1981 118.3 96.8 215.1 1982 150.5 123.1 273.6 - 1983 27.4 22.4 49.8 300.0 1984 - 455.0 TOTAL 387.4 315.1 702.5 755.0 Assumptions: 1. Resources outside of the Program are funded by the government to cover only for administrative and operating expenses of FIDEIN. 2. "Seed capital" of about Mex$ 90.0 million would be provided by the government to be used as a revolving fund in the construction program. 3. 50% of the unallocated funds of US$8.0 million reserved to FOMIN and FIDEIN are to be used by the Industrial Estates subprogram. 4. Considers that 80% of Loan No. 1552-ME is disbursed during 1980 and the remainder during 1981. Although all of it is committed by year-end 1980. LCPI2 March 1980 - 117 - ANNEX 6 T-50 Page 1 MEXIC - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 50: Government/Private Sector Complementarity Private projects tend to attract larger well-financed (generally medium-scale) firms that perceive the advantages of acquiring estate sites-- a clean, attractive industrial environment and adequate infrastructure and services. FIDEIN's program goes far beyond the useful but limited objectives of private estates. Most importantly, FIDEIN targets its resources towards the smaller and financially more constrained SMI enterprises through selective promotion, more accessible terms and conditions and prices which may be below those of private estates but still yield a positive return. Furthermore, in that same context, prices set by the government industrial estates act as a barrier against industrial land speculation that otherwise could take place. Another nioteworthy feature is the attention paid to social infrastructure and related needs of population growth poles--housing, schools, hospitals and commercial centers--and the eventual emergence of planned urban center (ciudades industriales) wherein both jobs and the quality of life are equally important. Larger Private Industrial Estates by Location Location Private Industrial Estates Gonzalez Ortega, Baja Calif. Nte. Ciudad Industrial El Vigia Tijuana, Baja Calif. Nte. Ciudad Industrial Barranquita Tijuana, Baja Calif. Nte. Centro Industrial Los Pinos Monclova, Coahuila Parque Industrial Monclova Piedras Negras, Coahuila Parque Industrial Castanos Ciudad Juarez, Chihuahua Parque Industrial J. Bermudez, S.A. Ciudad Juarez, Chihuahua Parque Industrial Juarez Gomez Palacio, Durango Parque Industrial Lagunero Irapuatc), Guanajuato Parque Industrial Irapuato Guadalajara. Jalisco Parque Industrial El Alamo Cuamant:La, Mexico Complejo Industrial Cuamantla El Oro, Mexico Zona Industrial El Oro Huehuetoca, Mexico Parque Industrial Huehuetoca La Luz, Mexico Parque Industrial La Luz Naucalpan, Mexico Parque Industrial La Perla Netzahualcoyotl, Mexico Parque Industrial Netzahualcoyotl Ocoyoacac, Mexico Zona Industrial Oc:oyoacac Santiago Tianquistenco, Mexico Parque Industrial Santiago Tianquistenco Tenango, Mexico Parque Industrial Tenango Tlalnepantla, Mexico Centro Industrial Tlalnepantla Toluca, Mexico Zona Industrial Toluca-Lerma Tultitlan, Mexico Parque Industrial Cartagena Ciudad Lazaro Cardenas Michoacan Ciudad Industrial Lazaro Cardenas - 118 - ANNEX 6 T-50 Page 2 Location Private Industrial Estates Cuernavaca, Morelos CIVAC Puebla, Puebla Parque Industrial El Conde Puebla, Puebla Fraccionamiento Industrial Resurreccion Puebla, Puebla Parque Industrial 5 de Mayo Queretaro, Queretaro Parque Industrial de Queretaro San Juan Del Rio Queretaro, Queretaro Parque Industrial Valle de Oro San Luis Potosi, San Luis Potosi Zona Industrial de la Ciudad de S.L.P. Mazatlan, Sinaloa Parque Industrial Portuario A.V. Bonfil Guaymas, Sonora Ciudad Industrial Pesquera R. Sanchez T. Nogales, Sonora Parque Industrial de Nogales, S.A. de C.V. Matamoros, Tamaulipas Parque Industrial de Matamoros MEXICO: SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 51: Estimated Breakdown of Technical Assistance Component by Institution for the Proposed Project Loan (in Mex$ millions) Patent & Other Total Consultants 1/ Information Machinery & Other Services Equipment 2/ INFOTEC-CONACYT 16.4 4.5 5.7 4.9 1.3 CENAPRO 18.2 4.0 3.3 9.1 1.8 IMIT 3.0 0.2 0.1 2.4 0.3 FONEP 1.8 1.5 0.1 - 0.2 FOGAIN 7.3 3.4 1.0 2.2 0.7 FOMIN 3.6 2.7 0.2 0.4 0.3 FIDEIN 3.6 2.7 0.2 0.4 0.3 PAI 20.1 6.0 1.0 12.1 1.0 Other Institutions 3/ 8.6 - - 8.6 - Total 82.6 25.0 11.6 40.1 5.9 1/ Sufficient to finance technical assistance of about 250-300 man/months by private consultants. 2/ Includes among others audio-visual equipment, laboratory equipment, information, communication qnd training equipment. 3/ Includes among others the regional laboratories (Centros de Investigacion y Asistencia Tecnica de los Estados), and technical training schools (Colegio Nacional de Educacion Profesional Tecnica (CONALEP)). LCPI2 May 1980 a. MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PROJECT Table 52: Computation of the Foreign Exchange Cost Content of Program Financing (All amounts in millions of Mex$ unless otherwise specified) Percentage Distribution of Total Investment Off-the Shelf Estimated Percentage Purchases of Direct and Directly of Locally Cons- Other Indirect Foreign Estimated Total Foreign Exchange Total Invest- Imported Manufactured truc- Working Local Exchange Content Total Foreign Program Cost as % of Subprogram ment Cost Equipment Equipment tion Capital Costs of Project Costs a/ Exchange Costs Financing Total Program Financing Credit and Guarantees 3,952 - - - - _ - 1,789 2,975 60.1 - Credit 3,907 34.0 26.0 18.5 21.5 - 45.8 1,789 - - - Reservz for Guarantees 45 - - - - 100.0 - - _ - - Risk Capital b/ 1,460 34.0 26.0 18.5 21.5 - 45.8 672 668 100.6 Industrial Estates b/ 501 - - - - - - 59 501 11.8 - Factory Buildings 451 - - 100.0 - - 10.0 45 - - - Common Services 25 - - 100.0 - - 10.0 2 - - - Equipment Leasing 25 25.0 75.0 - - - 47.5 12 - - Technical Assistance c/ 356 20.0 - - - 80.0 20.0 71 356 20.0 TOTAL Mex$ 6,269 2,591 4,500 57.6 US$ equivalent 272.6 112.6 195.7 a/ Using conservative assumptions of indirect exchange cost content - 30% for off-the-shelf purchases of locally manufactured equipment (based on the estimates of the Report of the NAFINSA 1UNIDO Capital Goods Study), and 10% for construction and for working capital (the latter two based on Banco de Mexico estimates). b/ Investment costs and program financing figures have been computed on the assumption that half of the unallocated amount of the loan would be utilized by FOMIN and half by FIDEIN. The breakdown of FIDEIN's financng is a rough estimate and does not represent allocations. c/ Bank financing for the Technical Assistance Subprogram would cover only the costs of any directly imported equipment needed for specialized technical assistance, and the direct fDreign exchange costs of providing training to the extension agents, to the central staff of the Program's Secretariat, and to the staff of participating institutions. LCPI2 March 1980 IN - 121 - ANNEX 7 Page 1 MEXICO - SECOND SMALL AND MEDIUM SCALE INDUSTRY DEVELOPMENT PRtOJECT Selected Documents and Data Available in the Project File A. On the manufacturing sector and financial system 1. Informacion Economica, various issues; published by Banco de Mexico. 2. Informe Anual, 1977 and 1978; annual report of Banco de Mexico. 3. Examen de la Situacion Economica de Mexico, various issues; pub- lished by Banco Nacional de Mexico. 4. El Mercado de Valores, various issues; published by NAFINSA. 5. Transformacion, 12 monthly issues for 1979; published by the Camara Nacional de la Industria de Transformacion. 6. Boletin Mensual de Informacion Economica, October 1979; published by the Secretaria de Programacion y Presupuesto. 7. X Industrial Census, 1976 (1975 data); published by the Secretaria de Programacion y Presupuesto (1979). 8. Plan Nacional de Desarrollo Industrial (1978-82); issued by the Secretaria de Patrimonio y Fomento Industrial. 9. Informacion Economica: Producto Interno Bruto y Gasto, Cuaderno 1970-78; published by Banco de Mexico (September 1979).. B. On PAI 1. Actividades PAI-FOGAIN 1979 y Proyeccion a 1980, 1979; draft report issued by the PAI Secretariat. 2. Programa de Apoyo Integral a la Pequena y Mediana Industria, Segunda Parte, 1980; draft report issued by the PAI Secretariat. 3. Programa General de Actividades 1980, internal report prepared by the PAI Secretariat. C. On FOGAIN 1. FOGAIN's audited financial statements, 1977 and 1978. 2. FOGAIN's draft Annual Report, 1979. 3. FOGAIN's report on 25 years of operations. 4. FOGAIN's Operating Regulations. - 122 - ANNEX 7 Page 2 D. On FOMIN 1. FOMIN's audited financial statements for 1977 and 1978. 2. FOMIN's Annual Report (Draft), 1979. 3. FOMIN's Budget for 1979. 4. FOMIN's Operating Regulations. E. On FIDEIN 1. FIDEIN's unaudited financial statements for 1977 to 1979. 2. FIDEIN's operations manual. 3. Report on FIDEIN by the Industrial Development Authority (IDA) of Ireland. 4. FIDEIN's Operating Regulations. I IBRD 15005 5,, A, ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~6A I40 -N.~~~~~N N --N~~~~~~~~~~~~~~~~~A LiE E X2 I CMOI C 5 "' 's05~~~~) / >, '>4-..>Z OF/NElC SECOD SMLL AD MEILM CALEj4),-E 0 IN'USTYDVLOMN ROET4-9AAT FEI' NOUSTRK ESTTE SUE ¾'R I IL "INDUSTRIAL ESTATES UNUE. WNSTRUC 4' -- nll..~IIIALL11.11 IN 1I-1-STIECTO PHAS N ~~~~~~~~~'-' 44.40~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~, BLZ 0 C-WEI.IA1 OS )3 444 0T 4> 'V. 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