Document of g The World Bank -4 EL, FOR OFFICIAL USE ONLY Report No. P-3284-ME REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEN' TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S. A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT April 22, 1982 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS The Central Bank withdrew from the exchange market on February 18, 1982. Prior to that date, the exchange rate was 26.9 pesos to the US dollar. In recent weeks, the peso has traded around 46 to the dollar. FISCAL YEAR January 1 to December 31 GLOSSARY OF ABBREVIATIONS ACF Index of Average Cost of Funds to Multipurpose Banks COCOFIN Coordinating Committee on Financing for the Capital Goods Industrial Development Program (Comite Coordinador y de Evaluacion Financiera del Programa de Desarrollo de la Industria de Bienes de Capital) FISOMEX SOMEX Industrial Development Company (Fomento Industrial SOMEX) FOMEX Manufactured Products Export Development Fund (Fondo para el Fomento de las Exportaciones de Productos Manufacturados) FONEI Industrial Equipment Fund (Fondo de Equipamiento Industrial) GDP Gross Domestic Product IDB Inter-American Development Bank NAFINSA Nacional Financiera, S.A. PPAR Project Performance Audit Report Program Capital Goods Industries Development Program supported by the proposed project SOMEX Sociedad Mexicana de Credito Industrial (A Commercial Bank and Investment Company) FOR OFFICIAL USE ONLY MEXICO CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT Loan and Project Summary Borrower: Nacional Financiera, S.A. (NAFINSA) Guarantor: United Mexican States Beneficiaries: Industrial Equipment Trust Fund (FONEI); Sociedad Mexicana de Credito Industrial (SOMEX); and NAFINSA Amount: US$152.3 million equivalent, including capitalized front-end fee of US$2.3 million Terms: Fifteen years, including 3 years of grace, at an interest rate of 11.6 percent per annum Onlending Terms: Implementing agencies (FONEI, SOMEX, and NAFINSA) would receive loan funds at an interest rate equal to four points less than the onlending interest rate applicable on subloans. The maximum amortizatici period for sub-loans would be 13 years including 3 years of grace. Project Description: The project is the first phase of the Capital Goods Indus- tries Development Program which seeks to promote balanced and efficient development of the capital goods manufacturing sub-sector. The project would provide financing and technical support to medium-size capital goods manufacturers and would help strengthen the institutional base for the Program. The Program would be co-financed by the Government, Mexican and foreign banks, export credit agencies, private Mexican and foreign entrepreneurs, and the Bank. The project includes the following components: Financing Operations: (a) Medium- and long-term loans for creation of new or expansion of existing capital goods enterprises; (b) Equity investments by participating agencies in new or expanding capital goods enterprises; (c) Sales finance; (d) Finance of technical assistance to manufacturers; and (e) Finance of technological research and development through a risk sharing mechanism. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - Complementary Measures: (a) Training the staff of enterprises and participating financial institutions in the preparation, promotion, and evaluation of capital goods projects, including specialized training in aspects of subcontracting, quality control and export promotion; (b) An assessment of existing training programs and facilities; (c) Establishment of a mechanism to review progress in resolving technical and structural issues affecting the subsector; and (d) Strengthening and expansion of the information dissemination system for the subsector, including expansion of technological information services, assessment of the installed capacity of capital goods manufacturers, and special studies. About 22,000 new jobs would be created at an average investment of US$40,000 per job. Because of linkages with other parts of the economy, the project would yield important indirect employ- ment benefits. The project would also promote deconcentration of industrial activity, generate over US$2 billion in foreign exchange savings or export earnings during the first five years of operation, and accelerate technology absorption and development with consequent increases in productivity and employment. Project Risks: The project involves two important risks: (i) Effective institutional coordination and management is essential to the success of the project. The proposed structure and demonstrated capabilities of the executing agencies make this risk acceptable. (ii) The Government will have to maintain adequate policies to ensure that only efficient industries are promoted. The understandings in the project execution paper, the strong committment of the Government, and periodic joint reviews of the project reduce this risk. Overall, the project presents an acceptable degree of risk. - iii - Estimated Cost: Local Foreign Total ---------US$ Millions-------- Financing Operations 622.5 519.0 1,141.5 Fixed Investment Loans 130.0 340.0 470.0 Permanent Working Capital 120.0 100.0 220.0 Equity Investments 116.0 77.0 193.0 Sales Finance 250.0 - 250.0 Technical Assistance Loans 3.9 1.1 5.0 Technology Development Finance 2.6 0.9 3.5 Complementary Measures 2.5 1.0 3.5 Training 0.5 0.1 0.6 Information Dissemination 1.6 0.8 2.4 Studies 0.4 0.1 0.5 Front-end Fee on Bank Loan - 2.3 2.3 Total Cost 625.0 522.3 1,147.3 Financial Plan: Local Foreign Total …--------US$ Millions-------- Implementing Agencies and Local Banks: a. Own Resources 511.0 - 511.0 b. External Borrowings - 147.0 147.0 Industrial Beneficiaries: a. Own Resources 114.0 - 114.0 b. External Borrowings - 180.0 180.0 c. Foreign Partners 43.0 43.0 Bank - 152.3 152.3 Total 625.0 522.3 1,147.3 4 Estimated Disbursements: -----------US$ millions------------- Bank FY 1983 1984 1985 1986 1987 Annual 13.3 53.0 69.0 15.0 2.0 Cumulative 13.3 66.3 135.3 150.3 152.3 Rate of Return: The rate of return for sub-projects financed by the project is expected to be in the range of 15 to 35 percent; an overall rate of return has not been calculated. Staff Appraisal Report: Report No. 3756b-ME dated April 15, 1982. I I I I I I I . I  I - INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to Nacional Financiera, S.A. (NAFINSA) with the Guarantee of United Mexican States for the equivalent of US$152.3 million to help finance a Capital Goods Industries Development Project. Approximately $130 million of the loan would be onlent by NAFINSA, the Industrial Equipment Trust Fund (FONEI), and Sociedad Mexicana de Credito Industrial (SOMEX) to industrial enterprises for fixed investments at a variable interest rate equal to the cost of funds to multi- purpose banks (ACF) plus two points. Subloans would have a maximum amortization period of 13 years including 3 years of grace. About US$2 million would be onlent by the Industrial Equipment Trust Fund (FONEI) for technical assistance and technology development at an interest rate of ACF less three points; part of the technology development funds could be provided to enterprises on a grant basis. The balance of the loan, about $18 million, would be onlent to the implementing agencies to finance part of their equity investments in capital goods enterprises and to finance training, studies, and other comple- mentary measures. The implementing agencies would receive loan funds at an interest rate equal to four percen'age points below the onlending interest rate applicable on subloans; the maximum amortization period for such funds would be 13 years including three of grace. The loan would be repaid over 15 years, including 3 years of grace, with interest at 11.6 percent per annum. The Government would bear the foreign exchange risk on the Bank loan and would repay the principal. PART I: THE ECONOMY 2. The Mexican economic situation and major issues of economic policy were analyzed in "Mexico: Development Strategy - Prospects and Problems" (3605-ME), distributed to the Executive Directors on August 31, 1981. Country data sheets are attached as Annex I. Background 3. For the last thirty years, the Mexican economy recorded a high rate of growth: on average, GDP grew at 6 percent per year, in real terms, between 1950 and 1980, allowing output per capita to increase by 3 percent per year over the same period. Sustained growth brought about rapid industriali- zation: especially after 1955, industry has been the most dynamic sector of the economy, growing at an average rate of 7.5 percent per year, while agri- cultural output grew at 3.5 percent per year; thus, the share of the industrial sector in GDP went up from 26 percent in 1950 to 38 percent in 1980. A similar change took place in the structure of foreign trade, with manufactured products accounting for an increasing share of total exports between 1950 and 1975. Finally, the last thirty years witnessed the passage from a rural to a largely urban society: in 1980, the fraction of total population living in urban areas was estimated to exceed 60 percent, while it was less than 30 percent in 1950. - 2 - 4. Successful exploitation of profitable opportunities by a dynamic private sector has been the main engine of growth in the Mexican economy; but the market mechanism, left to itself, could do little to correct the effects of an uneven distribution of resources on the relative position of the poorer segments of the population and of the less favoured areas of the country; hence the Government has played a critical role in balancing the need to provide resources and incentives for growth against the demands for a fair distribution of its benefits. 5. In the early seventies, the Government sought simultaneously to build up infrastructure, expand basic industries, stimulate agricultural output and implement massive social programs; the difficulties it encountered in mobilizing enough resources to attain all these aims simultaneously led to excessive public sector deficits, while domestic supply rigidities caused a large part of aggregate demand to spill over into imports. Efforts to redress financial imbalances by strengthening public revenues fell short of their goal, and, in September 1976, the hitherto fixed parity of the peso was abandoned, while the Government imposed a strict stabilization program on the economy. Economic Performance, 1976-1981 6. The Administration of President Lopez Portillo, which took office in December, 1976, saw the control of inflation and the improvement of the current account balance as its most urgent tasks; it succeeded in reducing the rate of increase of domestic prices by half between 1977 and 1978 while, at the same time, the current account deficit decreased by over 40 percent. In 1978, the economy resumed its path of rapid growth. One of the major constraints on economic growth - the availability of foreign exchange - had been greatly relaxed by the successful exploitation of Mexico's oil reserves; these, which at the end of 1981 stood at 72 billion barrels (with potential reserves estimated at 200 billion barrels), enabled the economy to finance the purchases of raw materials and capital goods needed to sustain high GDP growth, while the revenues from federal taxes on oil exports provided the Government with resources, on a hitherto unprecedented scale, to pursue some of its long-standing policy goals. 7. In 1978-1981, output grew at an annual rate exceeding 7 percent, above what would have been needed to absorb the new entrants into the labour force; open unemployment is estimated to have fallen to 4-5 percent of the labour force in the modern sector although underemployment is likely to remain high in the medium run. The Administration succeeded in achieving investment growth of over 16 percent per year, strengthening its support to agriculture, reversing the trend towards a worsening trade balance on basic foods, containing to some extent rural migration and providing small farmers with access to more efficient production methods. Finally, a combination of fiscal incentives and administrative regulations (together with the increasing costs of congestion) had a positive effect on spatial decentralization, one of the major policy objectives of the Administration. 8. A marked increase in the size of the budget has been the first result of the Government's new commitments: the expenditure budget grew, in real terms, 20 percent per year between 1979 and 1981; furthermore, actual expenditures exceeded budget figures by significant amounts (as much as 12 percent in 1981). Revenues have grown more slowly, and, as a result, the public sector deficit amounted to over 14 percent of GDP in 1981. Despite a high rate of mobilization of private savings into the financial- system - made possible by a scheme of adjustable rates on peso deposits - the Government had to resort increasingly to foreign borrowing. By 1980, moreover, the side-effects of rapid GDP growth were making themselves felt; aggregate demand - with total investment growing at over 16 percent per year, in real terms, since 1979 - was exerting pressure on prices, and domestic inflation reached 26 percent, while the nominal exchange rate had remained practically stable since 1977; as a result, non-oil exports were decreasing in real terms, while imports - encouraged to some extent by a more liberal trade policy - had grown by 30 percent per year since 1979. At the end of 1980, the current account deficit amounted to 4 percent of GDP, as it had in 1976. Recent Developments 9. In 1981, the need to bring domestic inflation under control and to help restore the competitiveness of non-oil exports became obvious. The Administration opted for a policy of gradual adjustment, counting on slower demand growth in 1982 - brought about partly by a deceleration of public expenditures - to moderate inflation, and allowing a faster rate of float of the peso to reduce the gap between domestic and foreign prices over a two-year period. With a favourable outlook for oil exports, no major problems were expected in the external sector, and a path of gradual adjustment to a rate of growth of 6-7 percent appeared sustainable in the long run and was considered to be less costly in terms of inflation and unemployment than more drastic stabilization measures. Thus, the Administration attempted to reduce the extent of public overspending, while at the same time reintroducing import licenses on 80 percent of imports, tightening public procurement procedures and allowing the float to proceed at a faster pace. 10. This program suffered a setback when, in the second half of 1981, it became apparent that oil sales would not reach their target: actual oil revenues, at US$14 billion, turned out to be 25 percent below what had been forecast. The public sector had to increase its foreign borrowing by US$4 billion, and the current account deficit reached an estimated US$11.3 billion, or 8 percent of GDP, at the end of the year. The exchange markets reacted by increasing the downward pressure on the peso, and, in early 1982, two events combined to make a guided float increasingly costly to maintain: on the one hand, it seemed likely that oil sales for the year would again fall short of expectations; on the other, the 5 percent increase in domestic prices in January - due in part to the rise in domestic fuel prices decreed in December, 1981, and in part to a 34 percent raise in the minimum wage for 1982 - suggested that inflation, which had reached 27.8 percent in 1981, might well accelerate further in 1982. Once more, the exchange markets reacted unfavourably, and, in order to stop the steady drain on reserves required for maintaining the float, the authorities withdrew their support of the peso on February 18. Since then, the exchange rate has stabilized at about Mex$46 to the dollar, amounting to an adjustment of 40 percent in dollar terms. Simul- taneously, the Administration announced a stabilization program whose main component is a 3 percent cut in the 1982 budget - which, at the current rate of inflation, shows a decrease in real terms with respect to 1981 - the imposition of temporary price controls, the liberalization of certain necessary imports (basic foodstuffs, raw materials and capital goods) and the granting of financial support to firms affected by the parity change. Finally, a wage raise of 30 percent for the lower echelons of the Administration was announced, with higher employees receiving increases of the order of 10 percent; labour has been urged to limit its demands to what would be necessary to restore the pre-devaluation real purchasing power of wages. Prospects 11. The rate of inflation for 1982 has been forecast at 40 to 45 percent, while output is expected to grow at 4-4.5 percent. Both figures are plausible, but sensitive to unpredictable circumstances;: a 45 percent rate of inflation can be expected under a wage adjustment aimed at restoring the pre-devaluation purchasing power of wage income, since - given the low import coefficient and the still lower share of imports in consumption - such an adjustment could be significantly lower than the parity change; a 4.5 percent rate of GDP growth is compatible with a slight fall in imports - of 5 percent, say - which would bring about a substantial improvement in the current account balance. But, if labour obtains a large wage increase, the pressure on domestic prices might be much higher; and, if oil revenues fall short of their expected target of about US$17 billion, an improvement in the current balance might require a sharper fall in imports, which would in turn force a lower rate of GDP growth. 12. The Mexican Administration has sought to minimize the disruption caused by the stabilization measures, so as not to jeopardize the remarkable growth of the past years; in doing so, it has opted for a policy which is likely to bring little relief from high inflation and external imbalances in the very short run. Inflation is unlikely to fall below 40 percent in 1982, and this will offset part of the effects of the devaluation on the competitive- ness of non-oil exports. On the other hand, the external sector can improve, in the short run, only to the extent that imports show a substantial deceleration, since, even though the adoption of a more realistic parity has removed a major obstacle to non-oil exports, the stimulus to foreign sales is unlikely to have a significant effect on aggregate exports in the next few months, since oil accounts for three-fourths of total export revenues. Finally, the Administra- tion has little margin to reduce its expenditures during this fiscal year; the only item in which substantial cuts can be effected in the short run is public investment: general expenses (38 percent of the expenditure budget), debt service (21 percent) or transfers and subsidies are virtually fixed for the duration of the budget. But, if the Administration adheres to a strict budgetary policy, thereby contributing to moderate the rate of domestic inflation, significant improvements are likely to appear by the end of 1983: non-oil exports, led by tourism and certain consumer goods (clothing, footwear, appliances), will probably grow substantially; a reduced public sector borrowing requirement (new net foreign financing is scheduled at US$11 billion for 1982, -5- down from US$15-17 billion in 1981) will reduce the pressure on the peso, and, by 1984, Mexico could reach a sustainable rate of GDP growth of about 6 percent on average, while maintaining the current account deficit within manageable limits. Lastly, the Administration has an opportunity to overhaul the entire system of transfers and subsidies, reducing their levels and improving their cost-effectiveness. 13. In the long run, one of the main tasks of the Mexican economic policy is the allocation of future oil revenues to promote self-sustained growth; since a substantial base of non-oil exports is a prerequisite for such self-sustained growth, industrial policy will play a central role in the coming years. Historically, trade policies in Mexico have tended to favor import substitution of consumer goods at the expense of capital goods; this bias was partially corrected in the 1965-75 period, but the pressure of oil revenues has had an unfavorable effect on the competitiveness of domestic manufactures, and in particular on the domestic production of capital goods, by making imports more attractive. Thus, in 1981, imports of capital goods grew by more than 50 per- cent, and, by the end of the year, they were estimated to account for over one-third of total merchandise imports. 14. Given the relatively large size of the domestic market, the industrial sector has a vast potential for expansion (and hence for reaching an efficient scale of production, which would provide the basis for competitive exports) in many subsectors. The Administration is encouraging industrial expansion in a selective fashion, mainly through a system of fiscal incentives (paras. 37, 38) conditional on the attainment of specific production, export and price targets. 15. The high rate of growth experienced by the Mexican economy in recent years has provided the strongest weapon to tackle the long-term problems mentioned above. At the present time, Mexico is in the midst of an adjustment process which can be neither short nor painless, although its recent record of rapid growth, by generating jobs in excess of the rate of increase of the labor force, is likely to alleviate somewhat the main cost of such an adjustment, namely, unemployment. Lower growth, on the other hand, will afford an opportunity to reappraise many of the past years' goals and policy instruments - in particular the level and structure of subsidies; and there is evidence that the Administration, after having adopted unpopular decisions in a politically difficult year, intends to carry out such a reappraisal. 16. Mexico's public and publicly guaranteed debt service ratio has been increasing over the recent past and peaked at 69 percent in 1979. This high ratio reflected the still relatively low level of exports to GNP and the high proportion of Mexican borrowing from commercial banks. The public debt service ratio declined to around 30 percent in 1980, not only as a result of rapid increase in petroleum exports, but also because some of the debt contracted on the least favorable terms had been prepaid; but it had risen again to an estimated 43 percent by end of 1981. Debt service on Bank loans amounted to about 3.2 percent of public debt service in 1980; this ratio is projected to remain about the same during the mid-1980s. The Bank currently holds about 5.7 percent of Mexico's total medium and long-term public debt, and this ratio is not likely to change significantly over the next few years. Mexico is creditworthy for borrowing on conventional terms. PART II - BANK GROUP OPERATIONS IN MEXICO Bank Operations 17. As of March 31, 1982, Mexico had received 72 loans from the Bank amounting to US$5,218.1 million net of cancellations and terminations; of these, 44 loans totalling US$2,438.6 million were fully disbursed. The Bank held US$4,405.3 million, of which US$1,942.9 million had not yet been disbursed. 1/ Some 46 percent of Bank lending has been for agriculture and rural development, 14 percent for industry, 13 percent for power, and 15 percent for transporta- tion; the remaining 12 percent has been for water supply, tourism, urban development and vocational training projects. Annex II contains a summary statement of Bank loans as of March 31, 1982 and notes on the execution of ongoing projects. 18. Of the US$5.2 billion total lending, about US$2.5 billion was for establishing or strengthening institutions for channeling credit to areas where credit supply was deficient or non-existent, and setting up in the commercial banking system the ability to carry out project-related appraisal of investments in agriculture, industry, and tourism. These credit programs have facilitated lending to low-income farmers and small and medium scale industrial enterprises based on productive investment plans rather than collateralized credit. 19. Implementation of most Bank-financed projects was delayed during the period of economic difficulties in the mid-1970s and during the period of stabilization that followed the September 1976 devaluation of the peso. Since then, the Government has arranged adequate budget financing and has significantly improved project implementation. Four projects which had important structural constraints were modified and rephased to account for the changed circumstances. Government and Bank officials have met periodically to review project implementation, and greater attention has been focused in Mexico on project monitoring. As a result of these measures, most of the Bank-assisted projects are being implemented satisfactorily and disbursements have risen from US$91 million in FY78 to US$413 million in FY81. IFC Operations 20. As of March 31, 1982, IFC had made investment commitments in 23 companies in Mexico, for a total of US$551.2 million, of which US$404.1 million had been sold, repaid or cancelled. A summary statement of IFC investments is presented in Annex II. 1/ These totals do not include a $180 million loan for agricultural develop- ment approved in March 1982 but not yet signed. -7- Bank Strategy 21. The main objectives of recent Bank lending in Mexico have been to: (a) support policies and programs leading to a wider distribution of the benefits of economic growth; (b) help finance projects that make, directly or indirectly, significant contributions to output and employment; (c) help reduce Mexico's urban-regional imbalances; and (d) help break bottlenecks preventing rapid growth. 22. Because of the difficult structural problems of agriculture and the sector's crucial importance for the one-third of the population living in the rural areas, the Bank has made agriculture the leading sector for its lending. The Bank's agricultural lending program in Mexico has four goals: first, to increase productivity of presently cultivated lands; second, to improve the productivity of small farmers; third, to complement infrastructure investments with support services such as extension, marketing, and credit; and fourth, to promote employment generating investments in rural areas. The Bank has made eleven loans in FYs76-81 totalling US$1,466 million for irrigation, rural development and agricultural, agro-industrial and livestock credit programs. A US$175 million loan for a rural development project and a US$180 million loan for an irrigation rehabilitation project have been approved by the Executive Directors in FY82. Several projects for rainfed agriculture, rural development, irrigation, fisheries, and support services are in prepara- tion. 23. Bank lending for industry has aimed at: (a) reduction of the balance of payments deficit; (b) promoting greater employment; and (c) decentralizing industrial activities away from the major and increasingly congested urban areas. A steel project which the Bank helped structure and finance is now operating in a previously underdeveloped area on the west coast of Mexico, and the city in which it is located, Lazaro Cardenas, is developing into a new growth pole. Four loans for industrial projects to promote the develop- ment of small- and medium-scale industrial enterprises, to finance expansion of small- and medium-scale mining, and to support an industrial equipment fund (FONEI) were approved by the Executive Directors in FYs78-80. They offer support to the private sector at a time of rapid expansion and are directed at all three goals mentioned above. A loan for a vocational training project was approved by the Executive Directors in July 1981; it is assisting a program to increase the supply of skilled workers and technicians. A loan for a pollution control project is being negotiated. The project would assist the efforts being made to reduce the environmental consequences of rapid industrial and urban expansion. 24. Bank lending for physical infrastructure has focused on regional development and strengthening of institutions and sector policies. A highway sector project (FY79) and the fourth railway project (FY81) support these goals. The first and second medium size cities water supply and sewerage projects (FY76 and 81) reinforce the planning, management and finance of specialized water supply and sewerage institutions at the federal and municipal levels and contribute to the establishment of tariffs more closely related to costs; a third project has been appraised. 25. The Government has adopted a National Urban Development Plan that spells out its regional development priorities in operational terms. A project to assist in the development of the Lazaro Cardenas conurbation area was approved by the Executive Directors in FY78, and a second project for oil-producing southeastern Mexico was approved by the Executive Directors in FY81. Several projects are now being prepared to meet the needs for basic urban services for poor families and to provide key regional infrastructure in selected priority cities. 26. The Economic Development Institute (EDI) is assisting CECADE (a similar institute under the Ministry of Programming and Budget) in training Government staff in project preparation, monitoring and evaluation. EDI assistance is directed at urban and regional development, agriculture, rural development and agro-industries courses. The Bank has also assisted the Mexican authorities in training personnel for managing water supply and industrial credit projects. 27. The Inter-American Development Bank (IDB) is the second largest source of multilateral aid to Mexico. The IDB has made loans to Mexico totalling US$2,697.1 million as of March 31, 1982. Over 60 percent of the total has gone for agricultural and rural development projects, and the balance for transportation, industry, water supply, and tourism infrastructure. The IDB and the Bank have coordinated their assistance on several projects. Each has made loans for the National Integrated Rural Development Program (PIDER), agricultural and livestock credit, small- and medium-scale industries develop- ment, and hotel development projects. The International Fund for Agricultural Development (IFAD) has approved a loan of US$22 million for a rural development project in the State of Oaxaca which was appraised by the Bank's staff and for which the Bank is acting as cooperating institution for administering the loan. 28. Bank-supported power, steel, fertilizer and tourism projects in Mexico have been co-financed by several bilateral export credit agencies and commercial banks. The proposed project also would be co-financed with commercial banks, export credit agencies, and private enterprises. In January 1982, Mexico borrowed US$500 million to provide complementary financing for Bank-assisted projects where project specific cofinancing would be difficult. PART III - THE CAPITAL GOODS INDUSTRIES SUBSECTOR Background 29. Industry has led the growth of the Mexican economy in the last three decades (para 3) with its share of GDP rising from about 26 percent in 1950 to 38 percent in 1980. There has also been a shift in the composition of Mexican industrial production away from consumer goods toward intermediate goods and mechanical engineering industries. 30. Rapid economic growth has led to an annual increase in the demand for capital goods which exceeded 20 percent in recent years. Total domestic demand for capital goods over the next 10-year period is estimated to be on the order of US$375 billion equivalent. - 9 - 31. Domestic manufacture of capital goods has increased by 11 percent per annum in recent years, and now accounts for about 11 percent of manufactured output. Domestic production now supplies about half of the Mexican capital goods market. However, the share of imported capital goods, which had declined in the early 70's, has risen from 36 percent in 1978 to 42 percent in 1980 as a result of the developments reviewed in para. 13. 32. The capital goods industry is relatively underdeveloped in Mexico and lags behind its potential. In comparison to the Mexican situation cited in para. 31, capital goods account for 15 to 20 percent of industrial production in Argentina and Brazil, and Brazil produces about 80 percent of its capital goods needs. 33. The development of the capital goods industry has been limited by three factors. First, there was no unified policy to promote capital goods industries. The subsector was subject to low levels of nominal protection which at times of overvalued exchange rates led to negative net effective protection. Export incentives have also been inadequate. Second, the development of the subsector has been constrained by technical, structural and information deficiencies. Third, inadequate credit facilities to support domestic pro- duction and sales of capital goods, and a lack of expertise and coordination among the financial institutions in helping sophisticated capital goods manufacturing projects, have weakened the competitive position of Mexican firms vis-a-vis foreign suppliers. Policy Framework 34. Protection policy has undergone considerable review by Mexican authorities in the wake of the decision to resume the float of the peso. Tariff protection has been recently reduced on a larger number of items, including investment goods, and the Administration has announced that it will pursue a policy of continued opening of the economy to foreign competition. 35. The government's protection policy emphasizes the promotion of industries that can become internationally competitive through temporary and reasonable tariffs and import licensing. The goal is that prices of domestically manufactured capital goods should be no more than 15 percent above prices of similar goods in their national markets. Tariff levels on mature industries would be set so as to be consistent with this goal. Infant industries would receive greater levels of protection through higher tariffs and import permits for a fixed period not exceeding five years. These policies are summarized in a policy statement, a draft of which has been reviewed with the Bank. Receipt of the approved policy statement, satisfactory to the Bank, would be a condition of Loan Effectiveness (Section 7.01(b) of draft Loan Agreement), and the policies would be changed only in agreement with the Bank (Section 3.07 of draft Guarantee Agreement). 36. Measures have been taken to stimulate exports. These include provision of sales financing and risk insurance for exports at interest rates competitive with those charged by export credit agencies in the main capital goods exporting countries, rebates for indirect taxes and import tariffs on inputs, and special incentives for industries to achieve international competitiveness. - 10 - 37. Fiscal incentives are provided for investment in capital goods producing industries. Investments for expansion or creation of capital goods manufacture are eligible for a 20 percent investment tax credit and an additional tax credit proportional to the number of new jobs created. A 10 percent tax credit is granted to investments by enterprises which agree to meet targets for exports and foreign exchange earnings. Purchasers of domestically manufactured capital goods are eligible for a tax rebate equal to 15 percent of the purchase price. 38. To be eligible for these incentives, capital goods manufacturers must agree to meet targets for production, prices, domestic content, and exports. Enterprises must commit themselves to achieving prices in the medium run which are not more than 15 percent above the price prevailing in the domestic market in the country of origin of the technology. Normally, enter- prises must reach at least 50 percent domestic value added within five years and export a reasonable proportion of production. Sanctions of up to four times the original tax credit can be applied if the agreed targets are not met. Main Factors Affecting Capital Goods Industries Development 39. Technology absorption and development. While Mexican companies have absorbed new technologies from their foreign partners, few have made great efforts to adapt or develop new technologies. To stimulate such activities, the government is now providing a broad range of tax credits for promoting: (a) institutions devoted to technological research, development, or adaptation, technological assistance and the elaboration of basic engineering designs; (b) technological research, development and adaptation activities by productive enterprises; and (c) the sales of the technology developed by domestic enter- prises. FONEI has initiated a program for financing such activities on a risk-sharing basis which would be supported under the proposed project. 40. Subcontracting. Excessive vertical integration is evident among many Mexican capital goods industries. The lack of specialization in component manufacture and the relatively small use of subcontracting has led to a fragmented market and insufficient specialization in the production of many capital goods components. To correct this trend, the government has initiated a system of subcontracting exchanges where small and medium enterprises can make known to larger enterprises their capabilities to supply parts, components or services. These efforts would be complemented under the proposed project through financing of technical assistance to component manufacturers and the assessment of subcontracting possibilities as part of the appraisal of specific investment projects. 41. Information Dissemination System. Insufficient dissemination of information regarding the subsector has increased the uncertainties associated with investments in capital goods projects and makes it difficult for the private sector to plan its investments. The proposed project would help establish a broader and more effective information dissemination system which consolidates available information on current and projected installed capacities, technologies, domestic and international markets for capital goods and their components, supply-demand characteristics and other factors. - 11 - 42. Engineering Software. Mexican industry has not generally developed the capacity to design and engineer complete plants as opposed to pieces of hardware. This is a major area with potential for future growth, Such a capability would also help Mexican companies to expand into service areas by providing their clients with maintenance services and technical assistance in plant operation. 43. Technical Standards. Mexico has yet to develop an agreed set of engineering standards to ensure interchangability of components and provide assured performance and reliability. In the interim most enterprises are relying on various international standards. A comprehensive program has begun 4 to establish a national standards system which would be supported under the proposed project. Such a system would also facilitate the expansion of subcontracting. 44. Technical Manpower and Training Needs. The shortage of qualified manpower with the skills and experience required to manufacture capital goods is a serious constraint. The deficiencies are most critical at the skilled worker and technician levels but are also evident at the professional and managerial levels. Although there are many public, semi-public and private institutions providing technical training at various levels, industry representa- tives need to be better informed about the various existing training facilities and their suitability for each industry's specific requirements. Steps would be taken as part of the proposed project to address these deficiencies. Financing 45. The main source of industrial finance has been the banking system, which accounts for over three-fourths of the total financial intermediation in the country. There are 64 bank chains in Mexico with around 4,500 branch offices. Multipurpose banks offering a full range of banking services account for 90 percent of bank assets. Most are privately owned, and several have majority government ownership. Despite rapid growth in the 1970's, the securities market plays only a limited role. 46. NAFINSA is the most important public bank serving the industrial sector. It provides commercial banking services, makes equity investments, conducts industrial promotion, administers several government trust funds (para 47), and acts as agent of the government to borrow abroad. 1/ SOMEX, a banking conglomerate that functions as a private sector organization although the government has a controlling share, is another important source of indus- trial finance. A SOMEX subsidiary, SOMEX Industrial Development (FISOMEX), makes equity investments in industrial enterprises, and has acquired an important position in three general areas - engineering equipment, transporta- tion equipment, and product engineering. 47. To improve the amount and terms of credit available to industry and to provide additional financial resources to priority sectors, the govern- ment developed a system of trust funds, most of which make available additional loan funds through the banking system. The most important funds supporting the 1/ NAFINSA has been the borrower (as Government's agent) for the majority of Bank loans to Mexico. - 12 - industrial sector are those managed by NAFINSA -- FOGAIN (credit to small- and medium-scale industry), FOMIN (risk capital to small- and medium-scale industry), FIDEIN (promotion and development of industrial estates), and FONEP (financing of pre-investment and other studies in connection with project preparation)-- and those administered by the Banco de Mexico, including FONEI (term financing for export and efficient import substituting investment projects) and FOMEX (pre- and post-export financing). 48. Because of the relatively long maturation periods for capital goods industries, the availability of long-term finance is important. Most commercial bank loans have maturities of less than 5 years. NAFINSA, SOMEX, and the trust funds are the largest sources of long-term finance; they provided over US$350 million in long-term credit for capital goods industries in 1980. 49. Interest rate policies have been shaped by the need to mobilize private savings in the face of high domestic rates of inflation and no restrictions on international movement of capital. Variable interest rate savings instruments have been successfully introduced, while differential reserve requirements on peso and dollar deposits have prevented excessive "dollarization" of domestic savings. The need to preserve a substantial differential with respect to world interest rates and the persistence of substantial inflation have exerted continuing upward pressure on the cost of funds to the banking system; the index of average cost of funds to the banking system (ACF) has risen by 80 percent over the last two years and now stands at about 34 percent per annum. Under the proposed project, credit would be provided at interest rates that vary with movements of the ACF (para 66). Past Operations in the Sector 50. The Bank has made four loans to FONEI totaling US$360 million. About one third of the financing provided by FONEI has gone for capital goods industries. The balance has gone for chemical, petrochemical, other manufac- turing, and service industries. Execution of these loans has progressively improved (para 52); subprojects have been well prepared and properly appraised. Most sub-projects have been carried out successfully with actual output, exports, and employment exceeding appraisal projections. Appraisal estimates of economic rates of return for sub-projects, mostly in the range of 20 to 40 percent, appear to have been met in practice by the majority of sub-projects. 51. A Project Performance Audit Report (PPAR) of the First and Second Industrial Equipment Fund (FONEI) Projects (SecM79-535) of June 1979 commented on two important aspects of FONEI's early operations: (a) Given FONEI's attractive onlending interest rates (which proved to be below the rates offered by Mexican banks to their best clients), the relatively small spreads allowed to FONEI's participating intermediaries, and the prevailing conditions of credit rationing, the intermediary banks (which assume the full credit risks) tended to allocate loans preferentially to their 'prime' borrowers; this led to a disproportionately high concen- tration of FONEI's lending in large and well-established borrowers; and - 13 - (b) FONEI made little progress towards achieving its objective, set under the second Bank loan, of encouraging the intermediaries to use project appraisals as a major input to their lending decisions, rather than lending primarily on the basis of loan collateral. At the same time, the report acknowledged that FONEI financed sound investments that resulted in substantial foreign exchange savings. 52. The difficulties noted in the PPAR are in large part due to the fact that FONEI, in the period covered by the PPAR, was a new institution. Each of these difficulties has been addressed in the Third and Fourth projects subse- quently approved by the Bank. FONEI's onlending rates have since been increased and are now on a floating basis linked to the ACF index (para. 66). Interest rate spreads to participating banks have been increased to reasonable levels to provide an incentive for banks to assume greater lending risks in the utilization of FONEI rediscounts and to participate more actively in the appraisal and supervision of investment projects. Recent evidence indicates that these measures, together with changes in the banking law, have helped to reduce banks' collateral requirements and to increase appraisal-based lending. FONEI's lending is also becoming increasingly diversified, with a lower propor- tion of the subloans going to the largest clients. FONEI's loan portfolio at year-end 1981 was distributed among 270 companies of which 86 borrowed from FONEI for the first time in 1981. PART IV - THE PROJECT 53. A report entitled "Capital Goods Industries Development Project" (No. 3756b-ME dated April 15, 1982) is being distributed separately. Negotia- tions for the Loan took place in Washington, D.C. on April 1-9. The Mexican delegation was led by Mr. Pedro Galicia of NAFINSA. Project Objectives 54. The proposed project would form the first phase of a long range Capital Goods Industries Development Program (the Program) whose objective is to achieve a balanced and efficient development of the Mexican capital goods manufacturing subsector and thus help improve productivity, employment, balance of payments and technology assimilation and development in Mexico. To this end the project would help correct existing technical structural, and other deficiencies in the subsector and would provide the needed financial and technical assistance to individual capital goods manufacturing industries. Project Description 55. The project includes two main components. The first is provision of finance for establishment or expansion of medium-sized capital goods manufacturing industries, sales, and technical assistance. The second component would be complementary measures to benefit the entire capital goods manufacturing sub-sector by providing technical training, technological information services, and studies to assist industries and institutions participating in the Program. These components are described in the Loan and Project Summary at the beginning of this report. - 14 - Project Cost 56. The project, which represents the first 2-3 years of the Program, is estimated to cost US$1,147 million of which US$522 million would be in foreign exchange. The project would finance 40-60 investment subloans, 10-15 equity investments, 20-30 technical assistance subloans, and 5-10 technology development loans. The final distribution of project cost will depend on the aggregate of the financial plans of the industries supported under the project. The estimated cost of each project component is presented in the Loan and Project Summary. Project Finance 57. The project would be financed by the resources of the beneficiary industries and their technical partners, loans from domestic and foreign commercial banks and bilateral sources, resources of the principal agencies implementing the Program (NAFINSA, FONEI, FOMEX, SOMEX), and the proposed Bank loan. The financial plan for the project is given in the Loan and Project Summary. Incremental sales financing, of about US$200 million equiva- lent would be made available by FOMEX and would not be financed by the Bank. The proposed US$152.3 million Bank loan would finance about thirty percent of the project's foreign exchange cost, and includes a capitalized front-end fee on the Bank Loan of about US$2.3 million. Co-financing Arrangements 58. The remaining foreign exchange needs would be partly covered by NAFINSA, FONEI, and SOMEX which would raise US$150 million from banks, suppliers, and bilateral sources. Each institution has experience in raising such funds. Some of the necessary funds have been contracted; for example, NAFINSA has concluded bilateral agreements with 13 European, Asian, and American countries 1/ for funds that would be utilized under the Program. SOMEX and some of the private banks participating through FONEI also have access to open lines of credit offered by the official export credit agencies. Efforts would be made during project implementation to increase such facilities to help provide the private sector an easier access and a greater choice among foreign credits. 59. The balance of foreign exchange needs, estimated to total about US$220 million, would be provided through foreign borrowings by beneficiaries or the participating local banks, supplier credits, and equity contributions by foreign technical partners. Equity investments would also be fostered by NAFINSA's program of "coinvestment funds," under which NAFINSA and a foreign bank together make a minority equity investment in a joint venture between Mexican industries and partners from the respective foreign country. 60. Adequate resources are available under the arrangements discussed above to ensure initiation of the project. Because the resources are needed by beneficiary enterprises on a gradual basis, much of the cofinancing will be arranged in the course of project execution. The financial plan for each proposed industrial development subproject under the project would be reviewed during subproject appraisals to ensure the soundness and the avail- ability of complementary external resources. 1/ Belgium, Brazil, Canada, Czechoslovakia, France, Italy, Japan, Norway, Poland, Spain, Sweden, Switzerland, and the United States. - 15 - Implementing Agencies 61. NAFINSA, SOMEX, and FONEI would provide investment financing under the project. Loans would be made by NAFINSA, Banco Mexicano SOMEX (SOMEX's banking subsidiary) and FONEI, and NAFINSA and FISOMEX (the industrial holding company subsidiary of SOMEX) would make equity investments. FONEI would also provide credit for technical assistance and technology development. FOMEX, the Bank of Mexico trust fund specializing in export and sales finance, would provide sales financing. These agencies have demonstrated in the past their capacity to function effectively in their respective spheres of action, and are together expected to support a balanced mix of capital goods projects. Program Coordination 62. The Coordinating Committee on Financing for the Capital Goods Industrial Development Program (COCOFIN) would oversee the implementation of the Program. COCOFIN is chaired by the Secretary of Finance and includes representatives of all implementing agencies. It would establish operating policies and guidelines for the Program, ensure that subprojects submitted for financing under the Program are consistent with these policies, review the progress achieved by each of the implementing agencies in achieving Program objectives, and supervise the channeling of Program resources. In view of the institutional maturity of the principal implementing agencies, the COCOFIN would grant them considerable operational autonomy. COCOFIN would pay particular attention to ensuring the implementation of the training, information dissemination, technical assistance and other complementary measures included as part of the Program. 63. A Technical Secretariat within NAFINSA would assist COCOFIN in its day-to-day activities. It would be responsible for the operational and administrative aspects of channeling the Program resources to the principal implementing agencies for approved projects, collection of respective repayments from the agencies to the Program, and maintenance of a separate account for the Program to record major inflows and outflows and facilitate monitoring. It would also assist COCOFIN in annual allocations of Program resources and in monitoring the use of these resources by participating agencies. The individual agencies would be responsible for project appraisal and supervision. However, COCOFIN, through its Technical Secretariat, would conduct periodic reviews of projects financed with Program resources in order to verify compliance with Program rules. The arrangements would substantially preserve the autonomy of the individual agencies in project evaluation and supervision and would not imply unduly cumbersome procedures. 64. The proceeds of the Bank loan would be made available through a project account in NAFINSA to each of the executing agencies to finance part of the foreign exchange cost of fixed asset loans, equity investments, and operations for the financing of the technical assistance or technology research, development and adaptation. The implementing agencies would repay such proceeds to the project account in accordance with the subloan amortization schedule and at an interest rate four points lower than the subloan interest rate. Resources used for equity investments would be treated as subloans with a 13 year maturity. - 16 - The Government would assume responsibility for repayment of the Bank loan, entrusting the repayments mentioned above to NAFINSA for relending under the Program (Section 3.01 (a) of the draft Loan Agreement). Financing Limits, Terms and Conditions 65. Consistent with the proposed focus on the development of medium size capital goods industries projects, only projects with total investment costs below US$50 million equivalent would be financed. Most of the projects financed are expected to involve total investment costs in the US$5-40 million range. To avoid undue concentration of Bank funds, a maximum limit of US$10 mil- lion would be applicable for total Bank financing of any single project. Enter- prises receiving loans under the Program would be required to provide at least 20 percent of the total investment costs of the project financed. In the case of equity investments, Bank financing for a single project would be limited to one half of the total equity contribution by the respective implementing agency in connection with the project, subject to a maximum of $2 million in Bank financing per project. Moreover, no Bank funds would be available for financing loans to enterprises in which the financial agency making the loan holds majority ownership. Total disbursement from the Bank loan for any individual project would be limited to one fourth of the total estimated project cost. The above limits are summarized in Section 2.02(e) of the draft Loan Agreement. 66. Investment subloans to final beneficiaries would bear variable interest rates, adjustable every six months to equal the latest monthly ACF index plus 2 percent, and the maximum amortization period would be 13 years including not more than 3 years of grace (Section 4.03 of draft Loan Agreement, Section 2.02 (b) of draft Banco de Mexico Project Agreement, and Section 2.04 of draft SOMEX Project Agreement). FONEI's subloans for financing technical assistance would bear onlending interest rates of 3 percentage points below the ACF; financing for technology research, development and adaptation activities on a risk-sharing basis would be on terms and conditions consistent with FONEI's operating regulations which allows FONEI to lend at ACF less three points or to provide grants of up to 30 percent of an enterprise's research budget for high priority research. The ACF tends to move in parallel with the inflation rate, so that over the life of the subloans the proposed on-lending rates can be expected to be positive in real terms. 67. All project appraisals accompanying requests for Bank financing under the Program would have to contain a full analysis of the incremental economic impact of the project, including an economic rate of return calcula- tion following guidelines satisfactory to the Bank; appraisals for investment projects would also have to include an adequate consideration of subcontracting possibilities and training needs. Approval Limits 68. Prior Bank approval would be required for: (a) the first three fixed asset subloans submitted by each implementing agency; (b) all fixed assets subloans involving more than US$2.0 million in Bank financing; (c) all equity investments requiring Bank financing of more than US$1.0 million; (d) all equity investments by participating agencies in enterprises in which they already hold or are expected to hold a majority ownership; - 17 - and (e) all subloans for technical assistance financing or financing of risk-sharing contracts which involve Bank funds of US$200,000 equivalent or more (Section 2.02(c) and (d) of draft Loan Agreement). Operating Regulations 69. The arrangements discussed above for Program coordination, channeling and repayment of funds, maximum amounts, terms and conditions of financing, onlending interest rates, and criteria and responsibilities for project evaluation and supervision have been incorporated in the operating regulations of the Program. Any substantial change in the operating regulations would have to be agreeable to the Bank (Section 6.01(c) of the draft Loan Agreement). Project Execution Paper 70. In view of the complexity of the project and to facilitate close monitoring of progress, a project execution paper providing the full details and time schedules for implementing each of the project components has been prepared. The paper includes details of the division of responsibilities among the implementing agencies, the arrangements to review periodically the adequacy of the policy framework for the capital goods manufacturing subsector, and a description of the training, technical assistance and other complementary measures. The provisions of the paper would be applied under the project and would be changed only in agreement with the Bank (Section 6.01(c) of the draft Loan Agreement). Annual Reviews 71. COCOFIN and the implementing agencies would carry out joint annual reviews of the project in which the Bank would participate. The reviews would cover the adequacy of the policy framework relevant to capital goods industries, progress on the financing components, and implementation of the complementary measures with a view to identify any needed adjustments in the Program's design, financing conditions, subproject selection criteria or implementation procedures. Disbursements 72. Disbursements under the proposed Bank loan would be made for up to the following percentages of costs of individual items financed through subloans, equity investments, or the complementary measures under the Program: (a) 100% of foreign expenditures for directly imported equipment or services contracted for implementing the technical assistance activities and other complementary measures under the Program; (b) 70% of total expenditures for imported equipment purchased off-the-shelf in Mexico; and (c) 45% of ex-factory cost for domestically manufactured equipment. - 18 - Procurement 73. The principal implementing agencies are responsible for ensuring the competitiveness in price and quality of items procured and their suitability for the purpose intended. Subloan contracts signed by them with the client enterprises or participating banks (in case of FONEI) would contain provisions to ensure satisfactory procurement procedures including requirements to provide evidence of adequate international shopping. These provisions are reflected in the Program's operating regulations. Audit 74. The accounts of NAFINSA, FONEI, Banco Mexicano SOMEX and FISOMEX, including those to be kept for purposes of the project, would be audited yearly according to standards acceptable to the Bank (Section 5.02 of draft Loan Agreement, Section 3.03 of draft Banco de Mexico Project Agreement, and Section 3.02 of draft SOMEX Project Agreement). Project Benefits 75. The proposed project is expected to help the efficient development of the capital goods manufacturing subsector in Mexico through the financial assistance, policy measures and other complementary measures to remove some of the existing structural and technical deficiencies. It would thereby support the development of a subsector whose growth is critical to Mexico's immediate and long-term needs. The project would have important effects in increasing employment, promoting deconcentration of industrial activities, and generating or saving foreign exchange. 76. Most projects are expected to have real economic rates of return (ERR) in the 15-35% range. ERRs would be calculated for all investment projects to ensure that loan resources are used only for efficient projects. Between 20,000 and 24,000 incremental jobs are expected to be generated by the investments supported at an average investment cost of about US$38,000 to 42,000 equivalent per job. Since capital goods industries tend to have particularly strong forward and backward linkages with other parts of the economy, the indirect impact on production as well as employment would be substantial. An important regional development impact is also expected as a result of the existing incentives that encourage industrial decentralization away from the big cities. About 60 percent of the investment projects supported can be expected to be located in the highest priority zone identified for new industrial development, and less than one-tenth of the investments are likely to be in areas in the immediate vicinity of Mexico City. Total foreign exchange earnings or savings of US$2-3 billion are expected during the first five years of operation of the subprojects supported; exports generated by the projects would account for US$500-600 million equivalent of this amount. Perhaps the most important long term gain would be the technology absorption and development which would accompany capital goods manufacturing projects which would have substantial unquantifiable effects on productivity, employment and balance of payments. - 19 - Project Risks 77. The project involves two kinds of risks. First, the government could hesitate to make the appropriate adjustments in the protection policies in the light of future macro-economic changes, which could encourage ineffi- ciency among some capital goods producers. The understandings on this point reflected in the recent policy statement and the proposed annual reviews would help to contain this risk to within acceptable limits. Moreover, two major public enterprises, PEMEX, the national petroleum company, and CFE, the national power company, which account for substantial capital goods purchases in the country, have stated their desire to purchase domestic equipment at * competitive prices that are within the 15 percent margin over international quotations. Second, the Program involves complex institutional and coordination arrangements. Effective management and coordination on the part of COCOFIN, including delegation of the operational tasks to specialized agencies, are required. The substantial prior experience of the implementing agencies and the provisions of the project execution paper (para 70) would facilitate monitoring and would help limit this institutional risk. On the whole, the project presents a moderate degree of risk. PART V - LEGAL INSTRUMENTS AND AUTHORITY 78. The draft Loan Agreement between the Bank and Nacional Financiera, S.A., the draft Guarantee Agreement between United Mexican States and the Bank, the draft Project Agreement between the Bank and Banco de Mexico, S.A., the draft Project Agreement between the Bank and Banco Mexicano SOMEX and FISOMEX, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 79. A special condition of Loan Effectiveness would be that the Statement of Policy on Protection, satisfactory to the Bank, had been received (para 35). 80. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 81. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President by Ernest Stern Attachments April 22, 1982 Washington, D.C. - 20 - ANNEX I Page 1 of 5 TABLE 3A MEXICO - SOCIAL INDICATORS DATA SHEET MEXICO REFERENCE GROUPS (WEIGHTED AVERAGES LAND AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)- TOTAL 1972.5 MOST RECENT MIDDLE INCOME MIDDLE INCOME AGRICULTURAL 977.2 1960 lb 1970 lb ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE GNP PER CAPITA (US0) 400.0 750.0 1640.0* 1616.2 2609.1 ENERGY CONSUMPTION PER CAPITA (RILOGRAMS OF COAL EQUIVALENT) 769.2 1141.0 1672.7 1324.1 2368.4 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) 36369.0 50313.0 65509.0 * URBAN POPULATION (PERCENT OF TOTAL) 50.8 59.0 65.9 64.2 53.2 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 108.9 STATIONARY POPULATION (MILLIONS) 188.0 YEAR STATIONARY POPULAT'ON IS REACHED 2075 POPULATION DENSITY PER SQ. KM. 18.4 25.5 33.2 34.3 80.6 PER SQ. KE. AGRICULTURAL LAND 36.0 52.0 65.1 94.5 133.9 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 45.6 46.5 45.3 40.7 30.1 15-64 YRS. 51.0 50.0 51.2 55.3 61.5 65 YRS. AND ABOVE 3.4 3.5 3.5 4.0 8.3 POPULATION GROWTH RATE (PERCENT) TOTAL 3.1 3.2 2.9 2.4 1.5 L'RBAN 4.9 4.8 4.2 3.7 3.1 CRUDE BSNTH RATE (PER THOUSAND) 45.0 42.3 36.0 31.4 22.9 CRUDE DEATH RATE (PER THOUSAND) 12.0 9.0 7.3 8.4 9.1 GROSS REPRODUCTION RATE 3.4 3.2 2.6 2.3 1.6 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 25.1 842.0 USERS (PERCENT OF HARRIED WOMEN) .. . 40.0 FOOD AND NUTRITION INDEX OF FOCD PRODUCTION PER CAPITA (1969-71'100) 97.0 100.0 101.0 108.3 119.8 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 110.0 112.0 114.0 107.6 125.7 PROTEINS (GRAMS PER DAY) 65.0 66.0 66.0 65.8 92.5 OF WHICH ANIMAL AND PULSE 27.0 27.0 27.0 34.0 39.7 CHILD (AGES 1-4) MORTALITY RATE 13.0 8.8 5.7 7.6 3.4 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 58.3 62.4 66.0 64.1 68.9 INFANT MORTALITY RATE (PER THOUSAND) 78.3 74.0 60.0 70.9 25.2 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL 23.5 54.0 62.0 65.7 URBAN 71.0 70.0 79.7 RURAL . 29.0 49.0 43.9 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. .. 59.9 URBAN ., .. .. 75.7 RURAL . 13.0 14.O 30.4 POPULATION PER PHYSICIAN 1798.0 1480.6 1815.0 1728.2 973.3 POPULATION PER NURSING PERSON .. 1612.2 1398.0 1288.2 896.6 POPULATION PER HOSPITAL BED TOTAL 577.6 828.1 851.0 471.2 262.3 URBAN ,, 1151.2 758.0 558.0 191.8 RURAL .. 1350.9 1077.0 ADMISSIONS PER HOSPITAL BED .. .. .. .. 18.2 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.4 5.7 URBAN 5.7 5.7 RURAL 5.2 5.8 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL 2.9 2.5 URBAN 2.6 2.2 RURAL 3.4 3.2 ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL .. 58.9 URBAN .. 80.7 RURAL .. 27.8 - 21 - ANNEX I Page 2 of 5 TABLE 3A MEXICO - SOCIAL INDICATORS DATA SHEET MEXICO REFERENCE GROUPS (WEIGHNTED AVERAGES - HOST RECENT ESTIMATE ) - MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 80.0 104.0 116.0 101.7 105.9 MALE 82.0 107.0 119.0 103.0 109.6 FEMALE 77.0 102.0 114.0 101.5 102.2 SECONDARY: TOTAL 11.0 22.0 39.0 35.3 66.3 MALE 14.0 27.0 42.0 34.9 73.2 FEMALE 8.0 17.0 36.0 35.6 59.5 VOCATIONAL ENROL. (X OF SECONDARY) 24.0 27.0 9.0 30.1 28.4 PUPIL-TEACHER RATIO PRIMARY 44.0 46.0 41.0 29.6 26.8 SECONDARY 13.0 14.0 17.0 15.7 23.6 ADULT LITERACY RATE (PERCENT) 65.0 74.2 82.4 80.0 75.4 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 14.0 24.5 42.4 42.6 83.9 RADIO RECEIVERS PER THOUSAND POPULATION 90.7 278.4 306.0 215.0 181.6 TV RECEIVERS PER THOUSAND POPULATION 17.9 59.5 88.7 89.0 131.1 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 79.0 .. 66.6 62.8 123.8 CINEMA ANNUAL ATTENDANCE PER CAPITA 10.0 5.0 4.2 3.2 5.7 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 10990.9 144"4.8 18965.4 FEMALE (PERCENT) 15.2 17.4 19.3 22.6 32.9 AGRICULTURE (PERCENT) 55.1 45.0 36.8 35.0 34.0 INDUSTRY (PERCENT) 19.5 23.0 25.7 23.2 28.7 PARTICIPATION RATE (PERCENT) TOTAL 30.2 28.8 29.0 31.8 42.3 MALE 51.1 47.4 46.5 49.0 56.5 FEMALE 9.2 10.1 11.2 14.6 28.5 ECONOMIC DEPENDENCY RATIO 1.6 1.7 1.7 1.4 0.9 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. HIGHEST 20 PERCENT OP HOUSEHOLDS 61.1/c 60.7 57.7 LOWEST 20 PERCENT OF HOUSEHOLDS 3.477 3.3 2.9 LOWEST 40 PERCENT OF HOUSEHOLDS 9.8/c 9.9 9.9 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 270.0 RURAL .. .. 216.0 187.6. ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URaAN .. .. 471.0 513.9 RURAL .. .. 471.0 362.2 385.1 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. RURAL .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and 1979. /c 1963. May, 1981 * The updated 1980 GNP per capita and population estimates shovwn in the 1981 World Bank Atlas are $2,130.0 (at 1978-80 prices) and 67,458 thousand. ANN~EX I - 22 - Page 3 of 5 DEFINITIONSI OF SOCIAL ItOICAftOS Notes: Although the dat are droa Iron sources e-eraly judged the motaubytato n aellab~la OFtshould. als be totedt,hat theyT sop . no beele ta only opanable be--m oF the lr ofsadodd tef In raad concpts used by diff ltn o ra in rolerto thedata. 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Fopoletlor pet Ooo(OFoI god - totolf, uthaol. ...... ruoa t- _oplatt roIt Asri-ulueIt ateat of .. tgirlero -re useed aror- h rpesovl relhet pbi-n roaegnra 0 poot dhs to o o Try pir aIT-A (II)f Ify e o te etOste t-urepraukt eoe ,to-detrot r tnlolue.-urltopoos,hsaot eoud eed Foised y eae roneetotnetod a dold Bnk_ tla (9l-e hel)fly,adndts Ie ttpoee.Fyeofd oapyica bth 1911, end 1919 Ists. ae"dIl,oal,r Iaestanort.,, oenI elif, et. 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C a-a a aa..aiaaiaai.ia-- I a a- I-n a a a a alaa a aaaaa-aaaaaaa-o-a IC a a a a a- a-a a-a aaaC a .naa-aiaCaaCa Ca a a I I.-, a I aaa-a- a abaaaa aaaa ala C i - ImlI a aa-aa a-ana a I aaaaa-aan"-Jaa-a C a,, a- a a a.aa-a a-a. a I a a a-.-aaa a Ca-aaaaa-  - H a a a a aaaaaa a- Ca a a Cl-.aaa Ca-wa aa a-ia b o a a a a -ana n-a- a C a a-a-aa-aaa-aaaa-wa a it H a- a -a -. a- aa.aaaaiaawa-aa anna a-n- a - aa I I a I I a-a a I---- I - it H ii. U- aaa-aa aaa-aa C a ca-a Ca,aaaaaa a aaaaa-Ct-CaanaC lao nEC a. in aa-I al a-C aaaa-aaaa- a-n I a itit ala aaaaaaaa aoa--aa I a -k - - 25 - ANNEX II Page 1 of 8 THE STATUS OF BANK GROUP OPERATIONS IN MEXICO A. Statement of Bank Loans (as of March 31, 1982) 1/ Loan Amount less Undis- No. Year Borrower Purpose Cancellations bursed 44 loans fully disbursed 2,438.6 970-5 1974 NAFINSA Irrigation 47.0 4.2 1022 1974 NAFINSA Airports 25.0 0.2 1053-5 1974 NAFINSA Integrated Rural r Development 38.0 15.2 1111-5 1975 NAFINSA Irrigation 50.0 21.3 1186 1975 BANOBRAS Water Supply 40.0 11.8 1420-5 1977 NAFINSA Tourism 42.0 3.0 1462-5 1977 NAFINSA Integrated Rural Development 120.0 25.1 1552-5 1978 NAFINSA Industry 47.0 1.0 1553-5 1978 NAFINSA Agriculture 56.0 36.8 1554 1978 BANOBRAS Urban Development 16.5 9.2 1560-5 1978 NAFINSA Industry 100.0 4.9 969-6 1979 NAFINSA Irrigation 25.0 1.2 1643-5 1979 NAFINSA Small-scale Agri. 60.0 51.7 1671 1979 BANOBRAS Highways 120.0 80.8 1686-5 1979 FERTIMEX and NAFINSA Industry 80.0 36.6 1706-5 1979 NAFINSA Irrigation 92.0 82.7 1712-5 1979 NAFINSA Industry 175.0 97.4 1820-5 1980 NAFINSA Small and Medium Scale Mining 40.0 36.1 1858-5 1980 NAFINSA Irrigation 160.0 159.2 1881 1980 NAFINSA Small and Medium Scale Industry 100.0 54.7 1891-5 1980 NAFINSA Agricultural Credit 325.0 262.1 1908 1981 NAFINSA Irrigation 23.0 21.0 1913 1981 BANOBRAS Water Supply 125.0 117.4 1929 1981 BANOBRAS Railways 150.0 118.3 1945 1981 NAFINSA Rainfed Agri. 280.0 249.3 1964 1981 BANPESCA Port Development 14.0 14.0 1990 1981 BANOBRAS Urban Development II 164.0 164.0 2042 1982 NAFINSA Technical Training 90.0 88.7 2043 1982 NAFINSA 2/ Integrated Rural Development 175.0 175.0 TOTAL 5,218.1 3/ Of which has been repaid to the Bank 812.8 Total now outstanding 4,405.3 Amount sold 92.3 of which has been repaid 92.3 0.0 Total now held by Bank 3/ 4,405.3 Total undisbursed 1,942.9 1/ Loan 2100, for $180 million, made in FY1982 to NAFINSA for an Irrigation Project, was approved by the Executive Directors on March 16, 1982, but has not yet been signed. 2/ Loan not yet effective. 3! Prior to exchange adjustments. - 26 - ANNEX II Page 2 of 8 B. STATEMENT OF IFC INVESTMENTS (as of March 31, 1982) Fiscal US$ Million Year Obligor Type of Business Loan Equity Total 1958/59 Industrias Perfect Circle, S.A. 1/ Industrial Equipment 0.8 -- 0.8 1958 Bristol de Mexico, S.A. 1/ A.C. Engine Overhaul 0.5 -- 0.5 1961 Acero Solar, S.A. 1/ Twist Drills 0.3 -- 0.3 1962/65/ Compania Fundidora 66/68 Fierro y Acero de Monterrey, S.A. Steel 2.3 21.4 23.7 1963 Tubos de Acero de Mexico, S.A. 1/ Steel 0.9 0.1 1.0 1963 Quimica del Rey, S.A. 1/ Sodium Sulphate 0.7 -- 0.7 1964/66 Industria del Hierro, S.A.1/ Construction Equipment -- 2.0 2.0 1970 Minera del Norte, S.A, 1/ Iron Ore Mining 1.5 -- 1.5 1971 Celanese Mexicana, S.A. Textiles 12.0 -- 12.0 1972 Promotora de Papel Periodico, S.A. de C.V.1/ Pulp and Paper 2/ 2/ 2/ 1973/79 Cemento Veracruz, S.A. Cement 15.9 -- 15.9 1974/81 Cancun Aristos Hotel Tourism 1.0 0.3 1.3 1975/78 Mexinox, S.A. Steel 12.0 3.2 15.2 1978/81 Papeles Ponderosa, S.A. Pulp and Paper 9.0 3.5 12.5 1978 Tereftalatos Mexicanos, S.A. Petrochemicals 19.0 -- 19.0 1979 Cementos Tolteca, S.A. 3/ Cement 100.0 -- 100.0 1979/81 Hotel Camino Real Ixtapa, S.A. Tourism -- 3.1 3.1 1979 Conductores Monterrey, Electrical Wire S.A. 3/ and Cable 18.0 -- 18.0 1980 Industrias Resistol, S.A. 3/ Particleboard 25.0 -- 25.0 1980 Vidrio Plano de Mexico S.A.3/ Flat Glass 114.9 114.9 1980 Minera Real de Angeles, S.A. de C.V. 3/ Mining 110.0 -- 110.0 1981 Celulosicos Centauro S.A. 3/ Pulp and Paper 59.5 -- 59.5 1981 Corporacion Agroindustrial, S.A. Agri-Business 11.3 3.0 14.3 Total Gross Commitments 514.6 36.6 551.2 Less Cancellations, Terminations, Repayment and Sales 382.0 22.1 404.1 Total Commitments Now Held by IFC 132.6 14.5 147.1 Total undisbursed (including participants) 35.4 1.5 36.9 1/ Investments which have been fully cancelled, terminated, written off, sold, redeemed or repaid. 2/ US$25,000. 3/ Gross commitment including amounts sold to participants. ANNEX II - 27 - Page 3 of 8 C. Status of Projects in Execution (as of March 31, 1982). I/ Ln. No. 970 Rio Sinaloa Irrigation Project: US$47 Million Loan of March 1, 1974; Effectiveness Date: May 29, 1974. Closing Date: June 30, 1982. Project authorities have rephased construction; a substantial reduction in project scope was approved by the Executive Directors (R79-51 of March 13, 1979). Progress is now satisfactory and the project will be completed on schedule. C Ln. No. 1022 Airport Development Project: US$25 Million Loan of June 28, 1974; Effectiveness Date: September 16, 1974. Closing Date: June 30, 1982. Although behind schedule, this project is proceeding satis- factorily. Project components that have been completed are achieving higher rates of utilization than envisaged at time of appraisal because of greatly increased air traffic in Mexico. Four of the six project airports are completed, and the other two will be finished by mid-1982. Ln. No. 1053 Papaloapan Integrated Rural Development Project: US$50 Million Loan of November 15, 1974; Subsequently reduced to US$38 million; Effectiveness Date: January 27, 1975. Closing Date: December 30, 1982. Project implementation experienced delays mostly due to management difficulties and inadequate budget support. At the borrower's request US$12 million of the loan were cancelled on March 5, 1981. A reprogramming of the project and extension of the closing date to December 30, 1982 were approved by the Executive Directors on January 4, 1982 to allow completion of the modified project. Ln. No. 1111 Seventh Irrigation Project - Bajo Rio Bravo and Bajo Rio San Juan: US$150 Million Loan of May 8, 1975; Subsequently reduced to US$50 Million; Effectiveness Date: July 30, 1975; Closing Date: December 31, 1982. In view of the project's size, complexity and high cost, the Government and the Bank agreed to phase project development over a longer period of time and substantially reduce the scope of the project to be financed under the Bank loan (R77-305 of December 13, 1977 and R79-56 of March 19, 1979). Progress on most components of the revised project is now satisfactory. The project is expected to be completed ahead of schedule. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution and, in particular, to report any problems which are being encountered and the action being taken to remedy them. They should be read in that sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. - 28 - ANNEX II Page 4 of 8 Ln. No. 1186 Medium-Size Cities Water Supply and Sewerage Project: US$40 million Loan of January 13, 1976; Effectiveness Date: April 26, 1976. Closing Date: January 14, 1984. Subloan agreements have been signed with all cities included in the project, fully committing the loan. Five out of seven subprojects have been completed and works are progressing satisfactorily. Ln. No. 1420 Baja California Tourism Project: US$42 Million Loan of July 5, 1977; Effectiveness Date: June 28, 1978; Closing Date: June 30, 1982. After extension of the closing date by one year, due to difficulties in internal coordination, the project is progressing satisfactorily. Ln. No. 1462 Integrated Rural Development Project - PIDER II: US$120 million Loan of July 5, 1977; Effectiveness Date: October 28, 1977; Closing Date: July 31, 1982. The project is proceeding satisfactorily; major efforts to decentralize project planning and execution have been made. The result is increased beneficiary participation and better coordination between executing agencies at the field level. However, decentralization, reprogramming of micro- region investment plans, and several changes in management have resulted in delay in project execution; the closing date will have to be extended. Ln. No. 1552 Small- and Medium-Scale Industrial Development Project; US$47 million Loan of May 4, 1978; Effectiveness Date: January 12, 1979; Closing Date: June 30, 1982. After some initial delays, the integrated program to assist industrial enterprises is making rapid progress. Forty-eight extension agents have now received full training and have been assigned to 14 regional offices. The loan has been fully committed. Ln. No. 1553 Tropical Agricultural Development Project: US$56 Million Loan of September 27, 1978; Effectiveness Date: January 12, 1979; Closing Date: December 31, 1983. The six pilot projects have been approved by the Bank. Project authorities are making good progress in the agricultural development program of each pilot project. The applied research programs are proceeding on schedule. Disbursements are improving. - 29 - ANNEX II Page 5 of 8 Ln. No. 1554 Lazaro Cardenas Conurbation Development Project: US$16.5 Million Loan of September 27, 1978; Effectiveness Date: February 14, 1979; Closing Date: June 30, 1982. The shelter-related component and the training centers are progressing satisfactorily. Progress has also been made in the production credit component, but delays still remain in the implementation of the industrial premises and river control components and the studies. A request from the Borrower for reallocating funds to the shelter-related components is expected soon. Ln. No. 1560 FONEI III: US$100 Million Loan of September 27, 1978; Effectiveness Date: January 12, 1979; Closing Date: June 30, 1982. The loan has been fully committed. Ln. No. 969-6 Rio Panuco Irrigation Project; US$25 Million Loan of September 27, 1978; Effectiveness Date: January 12, 1979. Closing Date: June 30, 1982. Major project civil works are on schedule and expected to be completed by the closing date. Progress in agricultural development has been slower than infrastructure construction. The technical assistance program has been strengthened to emphasize better water utilization and intensive agriculture. Ln. No. 1643 Small Scale Agricultural Infrastructure Project: US$60 Million Loan of February 6, 1979; Effectiveness Date: April 13, 1979; Closing Date: June 30, 1983. Most livestock and irrigation subprojects to be included in the Project have been approved by the Bank, and the Government is accelerating preparation of withdrawal applications. Ln. No. 1671 Highway Sector Project: US$120 Million Loan of August 23, 1979; Effectiveness Date: October 12, 1979; Closing Date: June 30, 1984. Commitments are ahead of schedule but disbursements are behind schedule because of budget cuts in 1979 and because of delays in submitting reimbursement applications to the Bank. The authorities have agreed to increase budget allocations and speed up disbursement requests. - 30 - ANNEX II Page 6 of 8 Ln. No. 1686 Second Fertilizer Project - Lazaro Cardenas: US$80 Million Loan of May 18, :979; Effectiveness Date: September 21, 1979; Closing Date: October 31, 1982. Orders for most of the equipment have been placed and about 30 percent of the construction work is committed with about 22 percent completed. The project is now about 17 months behind schedule and runs the risk of further delays unless implementation arrangements are improved. FERTIMEX's manage- ment is considering steps to improve implementation. Ln. No. 1706 Rio Fuerte/Rio Sinaloa Irrigation Project: US$92 Million Loan of July 30, 1979; Effectiveness Date: October 5, 1979; Closing Date: July 31, 1986. Project implementation is on schedule. Ln. No. 1712 FONEI IV: US$175 Million Loan of July 30, 1979; Effectiveness Date: October 5, 1979; Closing Date: June 30, 1984. Demand for industrial financing continues to be strong, and most of the loan has been committed. Ln. No. 1820 Small and Medium Scale Mining Development Project: UStSL0 Million Loan of August 18, 1980; Effectiveness Date: December 4, 1980; Closing Date: June 30, 1984> Project execution is being initiated. Demand for credit has been less than originally anticipated due to softening of mineral prices. Ln. No. 1858 Apatzingan Irrigation Project; US$160 Million Loan of September 29, 1980; Effectiveness Date: December 19, 1980; Closing Date: June 30, 1987, Contracting for the main civil works is progressing satisfactorily and a strengthened technical assistance program is underway. How- ever, disbursements are lagging behind due to delays in processing. Ln. No. 1881 Second Small and Medium-Scale Industry Development Project; US$100 Million Loan of September 29, 1980; Effectiveness Date: December 22, 1980; Closing Date: December 31, 19840 About one-third of the loan has been committed. The program is making satisfactory progress. Ln. No. 1891 Seventh Agricultural Credit Project: US$325 Million Loan of August 15, 1980; Effectiveness Date: November 17, 1980: Closing Date: March 31, 1984. No major problems in implementation are foreseen. The review panels in the regional offices for speedy loan processing have been established. - 31 - ANNEX II Page 7 of 8 Ln. No. 1908 Ocoroni Irrigation Project: US$23 Million Loan of March 2, 1981; Effectiveness Date: July 1, 1981; Closing Date: June 30, 1986. Project implementation is on schedule. Ln. No. 1913 Second Medium-Size Cities Water Supply and Sewerage Project: US$125 Million Loan of January 23, 1981; Effectiveness Date: June 23, 1981; Closing Date: December 31, 1984. Subloan agreements have been signed between BANOBRAS and seven cities, and investment proposals amounting to 88 percent of project costs have been submitted to the Bank. Completion of works is ahead of schedule in Toluca and Queretaro, but overall the project is one and a half years behind schedule due to delays in completion of final designs. Ln. No. 1929 Fourth Railway Project: US$].50 Million Loan of February 12, 1981; Effectiveness Date: June 9, 1981; Closing Date: June 30, 1984. Project execution is proceeding on schedule. Ln. No. 1945 Rainfed Agricultural Development Project: US$280 Million Loan of March 2, 1981; Effectiveness Date: July 1, 1981; Closing Date: June 30, 1986. Project implementation has begun on schedule. Staffing of the ten project districts is near completion, and district operational committees have been established. Ln. No. 1964 Ports Development Preparation Project: US$14.0 Million Loan of May 7, 1981; Effectiveness Date: August 24, 1981; Closing Date: December 31, 1984. Project implementation is on schedule; about 40 percent of the loan has been committed. Ln. No. 1990 Second Urban and Regional Development Project: US$164 million Loan of August 13, 1981; Effective Date: January 12, 1982; Closing Date: December 31, 1986. Signing of subsidiary loan agreements is still proceeding. Good progress is taking place in the shelter-related component in Tabasco, but the remaining components are suffering delays. Ln. No. 2042 Technical Training Project: US$90 Million Loan of July 31, 1981; Effectiveness Date: November 25, 1981; Closing Date: June 30, 1984. Project implementation is proceeding rapidly. Ln. No. 2043 Integrated Rural Development (PIDER III): US$175 Million Loan of November 6, 1981; Effectiveness Date: Closing Date: September 30, 1985. The loan is not yet effective. - 32 - ANNEX II Page 8 of 8 Ln. No. 2100 Bajo Rio Bravo/Bajo Rio San Juan Irrigation Rehabilitation Project II: US$180 million Loan of Effectiveness Date: ; Closing Date: December 31, 1984. This loan, approved by the Executive Directors on March 16, 1982, has not yet been signed. - 33 - ANNEX III Page 1 of 2 MEXICO CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT SUPPLEMENTARY PROJECT DATA SHEET Section I: Timetable of Key Events (a) Time to prepare project: About 2-1/2 years (b) Project prepared by: NAFINSA/SOMEX/FONEI (c) First presentation to Bank: February, 1979 (d) Departure of Appraisal Mission: June, 1981 (e) Completion of Negotiations: April, 1982 (f) Planned date of effectiveness: August, 1982 Section II: Special Bank Implementation Actions None. Section III: Special Conditions (a) Delivery of a Statement of Policy on Protection, acceptable to the Bank, would be a condition of Loan Effectiveness (para. 35). (b) Interest rates on investment subloans would be ACF plus 2 points; technical assistance subloans and technology development finance operations would bear interest rates of ACF less 3 points (para. 66). (c) The Bank loan would reimburse no more than one fourth of the cost financed by an investment loan or equity investment for each project (para. 65). (d) The provisions of the Incentive and Protection Policy Statement, Program Operating Regulations, and Project Implementation Paper would be applied under the project and any changes would have to be acceptable to the Bank (paras. 35, 69 and 70). - 34 - ANNEX III Page 2 of 2 (e) Prior Bank approval would be required for: (i) the first three fixed asset subloans submitted by each implementing agency; (ii) all fixed asset subloans involving more than US$2.0 million in Bank financing; (iii) all equity investments requiring Bank financing of more than US$1.0 million; (iv) all equity investments by participating agencies in enterprises in which they already hold or are expected to hold a majority ownership; and (v) all subloans for technical assistance financing or financing of risk-sharing contracts which involve Bank funds of US$200,000 equivalent or more (para. 68). (f) Resources provided by the Program would be repaid by the implement- ing agencies into the Project Account, together with an interest equal to 4.0 percentage points below the onlending interest rate applicable on subloans. The amortization schedule for the repayments by the implementing agencies would be identical to the amortization schedule agreed with the final borrower in the case of subloans; resources provided to the implementing agencies for making equity investments would be repaid into the Project Account according to a fixed equal principal payment amortization schedule over 13 years including up to three years of grace (para 64). (g) A limit of US$10 million would be applicable for total Bank financing for any single project. Bank financing for equity investment in a single project would be limited to one half of the total equity contribution by the respective implementing agency in connection with the project, subject to a maximum of US$2 million in Bank financing per project. Moreover, no Bank funds would be available for financing loans by implementing agencies to enterprises in which they hold a majority ownership (para. 65).