/~ • •,\ Im'ERNATlONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Washington :I FOR THE PRESS FOR IMMEDIATE RELEASE Press Release No. 122 January 6, 1949 The International Bank for Reconstr~Qtion and Development today granted two loans totalling $J4,100,000 for electric po\\fer development in Mexico. The joint borrowers in the case or each loe.n are the Comision Federal de Electrj,cida.d (Federal Electricity Conmiisdon) , a Mexican Government agency cha.rged with the development of electric power facil~ties, ~nd Nacional Financiera, an official f'inancing inst,i tution whose fu11ctions. include ·the negotiation of foreign loans on'behalf of the Mexican Government. Both-loans are guaranteed by the ,.. Mexice.n Government. The first loe.n, tn the .amount of $24.• 100,900, is to be used by the Federal Electrielty Commission to finance imports or equipment.and materials·necessary for the completion of a number of pro,jects included in the Commission's 194?-5~ pro- gram of construction of new steam and hydroelectric generatlng stations', trans- mission lines and distribution systems in various parts of Me:.dco_, The loan is for a term or· 25· yea.rs, and .carries an interest rate of ~-1% which includes a ·et>mmission. charge of 1% annually to be set aside :ln the Bank I s special reserve fund in ·accordance with its Articles of Agreement. Amortization payments, eal- culated. so as to retire the loan by maturity, will begin in the fifth year. The second .loan, in the -amount of $10 million~ will be re-lent by the borrowers to the Mexican Light and Power Company, Limited. This Company-, with its subsidiaries, produces most of' the electric power and provides all of the di~- tribution· of. eleotrici ty in Mexico City and the surrounding area,; The loan is t<) finance pa,rt of the cost of imports of equipment and material$ to be made by the Company in· order to carry out a program for the expansion of its electrical geneTating and. distributive facilities in the Mexico City ar.ea,. The Mexican Light and Power Company proposes to U.YJ.d.ertake in 1949 a re..- organization of its capital structure. The present loan is designed to permit the expansion program to be carried fort,1ard pending the formulation and .consulllination of a reorganization plan. In view of the anticipated r.eorgapization proceedings, the loan is made through the inte1:171~diary of the Mexic.en Gov~rnment agencies mentioned ~bove, covers only expenditures to be made up to De~ember 31, 1949, and ~s for a term ,of one year only, repayment being due oh Deoe111ber 31, 1949. _:,Th~' loan earries an int.erest rate of /+}%, including the usual l% coll}JD.issicn ·Charge• If' the reorganization is satisfaQtorily completed in 1949 and other oon~tions wa?ra~~' the Bank will be prepared to consider the negotiaticn or a long-term. loan, • - 2 to be guaranteed by the Mexican Government, for the purpose of financing the re- mainder of the foreign exchange costs of the Company's program and refunding the short-term credit. Th;i.s is the second time the International Bank has granted loans for deve~opment purposes in the k"nerican RepublicsQ Last March the Bank approved t,s totalling $16 million to the Production and Development Corporation of credf1 Chile;and one of its subsidiaries, for the de,relopmcnt of hydroelectric power and agricultural productione Mexico, faced with a rapid gro'Wth ofr:opulation, urgently needs a greater supply of electric power in order to make possible the growth of industry, and the increase of agriet1l tural production through modP-rn methods of irrigation. Industrial expa-nsion has already been restricted by shortage of power in the more -developed areas, while in other areas, where the use of electricity is in the earliest stages,)' the instaliatio~ of reliable centrel sou::-ces of supply would immediately create ~ substantial demand 1~or po-wer for· productive uses. The Federal Electricity Commission has adopted the role of supplementing, 'Where necessary, the expansio:n of facilities prmrided by other elect:ric power enterprises in Mexico, the ltr:g.as:.t of which is the Mexican Light and Power Company. The projects of the Co~nission which the Bank is to finance tave been • coordinated with those of the Mexican Llgl1t and Power Co:::n:pany u:nc~ other enterprise~ in order to avoid overlapping and to secm.~e a balanced development of the Mexican electric power industry as a whole., In accordance with Bank policy., the loan agreements provide that the Bank shall be furnished with full information showing that the funds to be disbursed will be used only for the purposes specified in the agreements, and that repre- sentatives of the·Bank shall heve full opportunity to check tha end use to which all purchases ar2 put •. After being approved by the Bank's B9ard of Executive Directors, the two loan contracts 1,1ere signed today by John J. McCle;y, President, on behalf of the International Bank for Reconstruction and Development and by Jilexandro Paez Urquidi, the Executive Director, on behalf of the Corrdsion Federal de Electricidad and Antonio Carrillo Flores, the Direc'tor-Genere.l,. on behalf of the Nacional Fina.nciera. The guarantee agreements -were signed today by Luis Fernandez MacGregor, the Mexican Charge d'Af'fai:res Ad Interim, and Antonio Carrillo Flores, on behalf of the United Me::dcan States, and by John Jo McCloy on behalf of the International Bank for Reconstruction and Development. ·-i, - 3 - . January 6, 1949 SUPPLEMENTAL STATEMENT _ON THE lvfEXIQ!N LOANS During the war and postwar periods, financial deve·lopments in Me:Kico followed, in general, the same.pattern as in other Latin A~erican countries9 Ex~ port surpluses led to the aocumulation of :foreign exchange reserves, and a con- sequent growth of the money supply. Measures taken by the Government to l:i.mi t credit expansion were only partially successful. After the w~r the release of the pent-up demand for imports resulted. in the loss of most of tI:re accumulated reserves. There are, however, distinctive features in the Mexican situat:ton. Mexloo has advanced beyond the stage of early developmento Th~s advance has brien accompanied by progre"Ss towards a more mature and stable>soc~l structureo At the same time economic activity has become divers.ified, as reflected iri the d:9clining importance of mining relative to industry·., while t.he pattern of trade has become relatively inflexible. In the long rtm further economic progress must., except insofar as new oilfieJ_ds are developed, come from the intensified use of exist.ing, resources. Mexico is faced with problems arising out of the rapid growth of populationc • Therefore., not only must food. production continue to expand, but industrialization must proceed in order to prevent a decline in the standard of living~ To solve Mexicots problems, a high rate of capital formation is necessary. Here, however, as in other countries, the growth of savings i~ retarded by the low leYel of in- comes and the inadequacy of the capital marketo Mexican Governments have attempted to fill the gap by financing extensive agri.cultural, industr!al and public utility projects through inflationary public finance, a principal ·cause or the maladjustment of the balance of nayments which led in July 1948 to the sus- pension of a fixed parity for the p~so-~,. In order to restore financial equilibrium without interrupting economic development, Mexicor s present deficiency of capital formation must be supple:.nented. by f2)reign investrnenta For a long period Mexico;s relations with foreign investors were unhappy as a result of the friction created by debt defaults, the expropriation of foreign investments, and the protracted subsequent negotiations. In the course of the pa st few yea.rs, however, Mex;ico has made efforts to re.- establish her credit. A settlement with foreign holders of the national debt ~as reached in 1942 and payments have been maintained since that time. An agreement reached in 1946 on the deot of the expropriated railroads is likely to be accep'tied by the requisite majority of bondholders in 1949. Compensation for expropriated investim~nts in oil:, and land has been made in full oris in process of payment. rr I ~bese steps, and the inducement of tax exemptlons and unrestricted transfer of capital and profits ~ve recently had encouraging results in the form of foreign investments in Mexican industry, but the flow of foreign capttal is not yet • sufficient to take care of the country's urgent development needs. The present stage is, therefore, one in whlch the assistan~e of the International Bank could do much to promote the continued and orderly development of Mexico's resources and to encourage a further influx or private capital. . ' - 4 •• These objectives cannot be attained, however, unless the Mexican Government t~kes all measures reasonably within its power to re-establish financial equili- brium. The Bank has in this connection .taken note of the statemEmt made by the Mexican Minister of Finance, :r.-h·. Ramon Beteta, on Oc,tober 29, 1948i in which he announced the int~ntion of his Government to balan~e the budget, to limit publie wor~s, to rovintain c:r;,edit restrictions, and to fix a new official parity for thg, peso in consultation with the International Monetary Fund at the earliest po~sible time. In his message submitting the 1949 budget to Congress, Pres:i.d.ent Aleman stressed that it would be "balanced and rigid". Encouraging signs of the deter- mination of the Mexican Government to realize these intentions have been the stability or the peso exchange rate since August 1948, and the fact that the 1949 budget as actuelly approved 'by Congress involves no net addition to the publio debt. ~ Electri the activities of priv~te enterprise in the provision of elect,rie power, partly by constructing generating and transmission facilities which it operates itself, and partly by making loans to assist private oomp~nies tic install r,i'f.V plant The managerial 3nd technical personnel of the Cornmission are of high quality. The Federal Electricity Commission has prepared a prQgram of electrio power expansion to be carried o.ut during the pe;riod 19Li-7-1952. The e~eeution of the whole of this program, which involves heavy internal expenditures, would bg dif.fi~ cult to justify at the present tim~ in view of M$xico's financi~l position. As a result of discussion between th~ Ban~, the Commission and the main private powe~ companies operating in Mexico, a selection has therefore been made of these pro- jects which are most urgently needed and which are complementary to th~ development programs of the private companies. The selected projects involv;e the construction or hydro and thermal electric plants, transmis$ion and distribution systems; a • scheme or :rural elec.trification, a.nd the provision of equipment and materials for expansion of the operations of small private compa.nies. Since 1902, the Mex!oap Light and Power Com~ny and its sub~idiaries have ,1u,:- •. • I• • .. 5 - • been the largest single enterprise engaged in the production and distribution of electricity in Mexico and, untii re~ently, they produced and distributed all the electric power used in the important Mexico City area. For some years thi~ ·region. with its rapidly growing population end industry, has suffered from a sbo1·t11ge of powero To rE:imedy t:his deficiency, the Federal Electricity Commisaton beean the construction of' the "Miguel Aleman" hydroelectric system in the Me2dco City area, of' which one plant is already in operation, its output l,)eing sold to the Company, and to which further uni ts will be added under the program approved by the Bank-:, The Company has proposed a three-year program of' expansion of generating and dis·· tribution facilities, which has been approved by the Commission~ The exacutiotl of ttis program has so far been delayed by the difficulty of 3ecuring the pecessa.r~ 1 capilalo Tho Company's program is on sound angine~ring ltnes and, in conjune::·ticn with the Commission is own program, represents t.he minimum expe.nsion necessary to make reasonable pro-v·ision for the needs of the near future, Any postponement of the Company's project would make necessary a corresponding aa.ditional expansion of the Conmrl.ssion' s generating caraci ty and would also lead to o. failure of dis- tributive capacity il:1 the Mexico City are~ to kellp pace with generating capacity. The Federal Electrid.ty Com1:rlission p!.. oject will increase the generat:hig capacity of Mexico, ,,at present about 1 million kilowatts, by 33 ,per 0ent and, when- the Mexican Light and Power. CO!!l.pauy project is comp].etedt a furth~r 14 per cent will have been addeu., Al though thesG projects ·will he.vB no direct effect on t.he • foreign exchange earni11gs of Mexico~ t,he increased industrial &11d agricul tllr"al production which they will make possible will in the long run tend to improve the balance -of. payrnentso ••