Mexico - Third Railway Project

FILE COfPY Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-1788-ME REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO FERROCARRILES NACIONALES DE MEXICO AND NACIONAL FINANCIERA, S. A. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR A THIRD RAILWAY PROJECT March 17, 1976 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 Unit - Peso (Mex$) US$1.00 = Mex$12.50 Mex$1.00 = Us$ 0.80 Mex$1 million = US$bO,o0o Fiscal Year - January 1 to December 31  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO FERROCARRILES NACIONALES DE MEXICO AND NACIONAL FINANCIERA, S.A. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR A THIRD RAILWAY PROJECT 1. I submit the following report and recommendation on a proposed loan to Ferrocarriles Nacionales de Mexico (N de M) and Nacional Financiera, S.A., with the guarantee of the United Mexican States for the equivalent of US$100 million, to help finance a third railway project. The loan would have a term of 25 years, including Four years of grace, with interest at 8-1/2 percent per annum. PART I - THE ECONOMY 2. Some of the major structural features of the Mexican economy - past, present and future - were analyzed in "The Economy of Mexico: A Basic Report" (192-ME), distributed to the Executive Directors on June 26, 1973; short-run trends in 19731-74-were covered in "Mexico: Current Economic Posi- tions and Prospects", distributed on September 27, 1974. Another updating mission visited Mexico in July 1975. Its draft findings were discussed with the authorities at the highest level in Mexico in early December. Subsequently, the Mexican budget for 1976 has been presented to the Congress. A-further Bank mission visited Mexico in late January to review the Government's fiscal and monetary program for this year. The findings of this mission have been in- corporated in an economic report to be distributed to the Executive Directors during March 1976. Country data sheets are contained in Annex I. 3. For the three most recent decades, the Mexican economic system, measured in terms of GDP growth, has been outstandingly successful. Since 1940, the annual average growth rate has exceeded 6 percent. And from the mid-1950's to 1972, Mexico was among the few countries in the developing world to combine sustained and rapid growth with monetary and balance of payments stability. Inflation averaged less than 5 percent a year and the dollar value of the peso was maintained at the level fixed in 1954. 4. Rapid and sustained growth was the product of successful policies affecting the mobilization and use of both private and public sector resources. The role of government in promoting economic growth was expressed on the one hand in the development of strategic infrastructure and major utility indus- tries and, on the other, in policies which featured price support, import con- trol and agrarian reform measures in the agricultural sector and external pro- tection and the provision of fiscal incentives in the industrial sector.  2 - 5. The relative emphasis of public and private investment was, however, reflected in changes in the structure of output and employment and the expan- sion of manufacturing industry. Agriculture, nevertheless, continued to be the chief source of employment and in 1970 accounted for 39 percent of the economically active population. 6. In spite of rapid and sustained economic growth over this long period, the combination of a high demographic growth rate - about 3.4 percent per year - and, until fairly recently, primarily import substituting indus- trial policies, have prevented an adequate absorption of the labor force in productive employment. Industrial growth has been quite substantial - about 8 percent annually since the mid-fifties - but could have been even faster if industrial and trade policies had been primarily focused on exploiting Mexico's unique export opportunities based on its contiguity to a large in- dustrial market in which labor costs are much higher than those in Mexico. It was only in the early seventies that some important steps were taken to develop manufacturing exports on a large scale - the system of drawbacks on domestic taxes paid on exports and the "border industries" regime were intro- duced at that time, and these have been so highly successful as to suggest that a lot more could still be done. As it is, 40 percent of the labor force is estimated to be still engaged in marginal occupations, relatively unproduc- tive and hence poorly paid - or openly unemployed. 7. The Mexican strategy for development has, in the past, relied on a combination of public action and private profit. The government has played a highly important role in this process, both in promoting key industries, such as power and petroleum, and in creating a regulatory and institutional framework within which private and social groups could compete and contend, but which was both firm enough and flexible enough to ensure overall continuity and stability. As a formula for growth, this system has served Mexico well; it has however also led to a sharpening of contrasts in income and wealth bet- ween people and among regions. This was not entirely an incidental by-product of the process of growth; the share of the government in the economy was kept down quite deliberately for many years, and the scope of redistributive poli- cies was necessarily limited as long as the tax ratios remained under ten per- cent - among the lowest in the world. The government played a crucial role in the development of private commercial agriculture through irrigation and credit policies and of industry through the provision of infrastructure, edu- cation, social legislation and financial policies, but it did not concern itself primarily with the problems of the poorest sections of the population. While the land reform of 1915 was sustained, the absence of sufficient fiscal resources made it impossible to develop major programs to improve the economic status of its beneficiaries. The present government, however, came to power on a program of combining past growth policies with much greater efforts in favor of the rural poor, and has launched a number of ambitious initiatives in this direction.  - 3 - 8. The attempts which have been made by the present administration (1970-76) to alleviate the poverty of the countryside and to redress some of the imbalances between rural and urban Mexico have several dimensions. They include a revised Agrarian Reform Law (1971) and a new Federal Water Law (1972), both of which are intended to promote a more equitable distribution of basic agricultural resources. These measures have been complemented by changes in the sectoral. allocation of agricultural credit in order to increase the share of low-income farmers and ejidatarios (members of ejidos, which are a form of collective land tenure based on usufruct), and the introduction of higher support prices for basic foodcrops. The Government has also increased outlays for agricultural research, training and extension services, with particular regard to the needs of peasant farmers. Perhaps the most signifi- cant innovation has beEn a new program for integrated rural deveLopment with which the World Bank has been associated from an early stage. 9. The social and economic needs of the rural sector have not monopo- lized government attention; those of urban-industrial development have also been stressed in the form of heavy public investment in basic industries - delayed during the 1960's - and an innovative low-income housing program which has been financed with a five percent payroll tax. Productive investment has thus been complemented, in the urban as well as the rural economy, by institu- tional changes and public expenditures designed to improve the living condi- tions of the poor. This parallel effort has, however, generated several problems of short-run economic management. 10. In 1971, after monetary and balance of payments pressures had emerged during the previous year, the (then new) Government took stringent action to control demand with the effect that the GDP growth rate fell to 3.4 percent by comparison with the decade average of 7.1 percent in the 1960's. In 1972, renewed expansion was stimulated by public expenditure and the GDP growth rate rose to 7.4 percent. There was another year of rapid growth (7.6 percent) in 1973 - but this time associated with an increase of 12.4 percent in the GDP deflator which was strongly associated with the impact of external inflation. Inflation was not the only novelty; private domestic financial savings, which in the past had helped Einance sustained growth increased by only 8 percent, compared with an average annual rate of increase of 20.5 percent in 1966-72; the inflow of private capital was replaced by a net outflow; and private investment - particularly in the industrial sector - slackened, reflecting some uncertainty on the part. of the business community and a declining interest rate differential vis-a-.vis those prevailing on financial savings instruments in the United States. ]:n the public sector, the fiscal deficit amounted to 6.4 percent of GDP by comparison with an average of 2.6 percent in 1966-72. A major share of the linited expansion of real credit was used to finance part of this deficit while net external borrowing of US$1 billion (2 percent of GDP) was deployed to finance the rest. These trends were inevitably reflected in the balance of payments, where the current account deficit rose to 3 percent of GDP (by comparison with an average of 2,5 percent in 1966-72).  - 4 - 11. Noting these trends, the authorities had, by mid-1973, put a res- trictive monetary and credit policy into effect and complemented this with what was originally intended to be an austere public finance program for FY74. Taken together, these measures were expected to restrict demand to reduce both inflation and the size of the current account deficit. The results for 1974 indicate that whereas the former objective was achieved, the latter was not. Monetary and credit policies were, on the whole, carried out as planned. The rate of increase of prices thus decelerated from April onwards, and a positive differential between Mexican and foreign interest rates was reestablished by the end of the year, although credit was not allocated as originally intended because the public sector again pre-empted a large part of what was available. Higher than planned public expenditures and lower than expected revenues meant, moreover, that the fiscal deficit was larger than foreseen as were the growth rates of aggregate demand and real imports. The deficit in the balance of payments on current account thus amounted to 4.6 percent of GDP rather than the intended 2.8 percent. Net public external borrowing of more than one year rose to US$2.4 billion. 12. During 1975, the Government's original objective was to achieve sus- tained economic growth under what were expected to be adverse conditions asso- ciated with the world recession. The public finance program called for an increase in public expenditures, which was to be partly financed with a subs- tantial increase in public revenues based on tax reforms, and it was expected that the public sector deficit could be reduced to 4.3 percent of GDP by comparison with 6.7 percent in 1974. Given this, and assuming only a moderate growth of imports in real terms, a decline in the resource gap and in the current account deficit in the balance of payments were anticipated. With a modest level of public internal borrowing and an expected recovery in quasi- money deposits the intention was to maintain a restrictive monetary policy while allowing a modest increase in real private credit and on this basis to achieve a substantial reduction in inflation. 13. In the light of provisional results for 1975, it is clear that the objectives of this program were not fully realized. The real GDP growth rate is estimated to have been of the order of 4.0 percent, the current account deficit in the balance of payments is estimated at the equivalent of 5.0 percent of GDP and the public sector deficit was equivalent to 8.9 percent of GDP. On a more positive note however, quasi-money growth is estimated at 27 percent over the year, and the annual average rate of inflation is estimated at 15 percent. It is clear that the world recession had a much greater than expected impact on the economy and was moreover one of the factors that led to the growth of the public deficit because the Government attempted to counteract the slow-down in the economic growth with increased public expenditures. The increase in public sector revenues was somewhat smaller than expected but nevertheless amounted to an increase of about 1.2 percentage points of GDP, which repre- sents an important achievement in resource mobilization. The discrepancy between the original targets of the 1975 economic program and its estimated outcome will have a constraining influence on economic management in 1976.  - 5 - Aware of this situation, in designing the economic program for 1976, the Government decided to make a major effort to control public expenditures and to limit the size of this year's public deficit. The budget for 1976 features greater a priori realism than the budgets of the last two years. It makes only modest assumptions about the growth of revenues and puts more emphasis on controlling expenditures. Consistent with this, the Government expects that the consolidated public sector deficit will decline from 8.9 percent of GDP in 1975 to 7.5 percent of GDP in 1976. Given this fiscal program and assuming a low rate of growth of GDP (3.5 percent), an improvement in the balance of payments can be foreseen. The authorities are expecting the cur- rent account deficit of the balance of payments to drop from 5.0 percent of GDP in 1975 to 3.2 percent of GDP in 1976. The monetary and credit programs have been designed so as to maintain average inflation at the same level as in 1975, while allowing a credit expansion enough to finance a larger share of the consolidated public s,sctor deficit and to increase private credit by about 15 percent. In recent discussion with the Bank staff, the authoritities have stressed their determination to take whatever action may be necessary to avoid slippage from this program. They recognize that this is a first step towards restoring financial and balance of payments equilibrium. Further action has to be taken. This is going to be the first challenge for the new Administra- tion, which will be inaugurated next December. 14. On December 31, 1975, Mexico's outstanding and disbursed public debt of more than one year was US$11.3 billion. Net medium- and long-term public borrowing in 1974 of US$3.3 billion reflected heavy reliance on exter- nal as well as internal capital to finance the fiscal deficit and some borrow- ing - as in 1974 - to offset private capital movements. 15. During 1975, net public external borrowing of more than one year would be of the order of US$3.3 billion, which amounts to 4.2 percent of estimated GDP compared with 3.7 percent in 1974. Both in 1974 and 1975 a very large proportion of new borrowing has been in the form of credits from banking institutions. Mexico's abLlity to service a rising level of debt is closely associated with its export growth performance. The behavior of petroleum exports is an important element in export performance. After allowing for the growth of domestic consumption, the rate of growth of crude output and the export surplus will continue to rise through 1980 by which time net exports of crude and petroleum products are conservatively projected as US$1,200 million. Mexico's debt service ratio was 20.5 percent in 1974; the estimate for 1975 is 25 percent. The debt service ratio will probably be higher than this in the remainder of the 1970's and early 80's but can be expected to decline to about the present level by the mid 80's. The actual level of debt service-payments will, of course, depend on the management of the balance of payments. The Bank's share of the public debt outstanding and disbursed at the end of 1974 was approximately 12.9 percent and its share in debt service payments was about 8.5 percent. These shares are expected to fall during the remainder oE this decade. 16. Mexico is creditworthy for borrowing on conventional terms pro- vided the Government exercises due restraint in monetary, balance of payments,  - 6 - credit and fiscal policies and, above all, maintains a favorable climate for export expansion; its recent decision concerning economic policies for 1976 suggest it intends to do so and it is our intention to continue to monitor developments in close contact with the authorities. PART II - BANK GROUP OPERATIONS IN MEXICO Bank Operations 17. As of January 31, 1976, Mexico had received 43 loans from the Bank amounting to US$2,237.7 million net of cancellations; of these, 26 loans totalling US$1,239.9 million were fully disbursed. As of January 31, 1976, the Bank held US$1,880.1 million of which US$745.4 million had not yet been disbursed. During FY66-70, disbursements averaged US$69.5 million per year, increasing to US$112.7 million per year over the period FY71-75 and reaching US$202.6 million in FY75. Some 35 percent of Bank lending has been for agriculture and rural development (13 loans for US$780.5 million), 32 percent for power (11 loans for US$714.8 million) and 20 percent for transportation projects (11 loans for US$447.8 million); the remaining 13 percent has been for industry (US$165 million), water supply (US$130 million) and tourism projects (US$22 million). The execution of Bank financed projects has generally been satisfactory. A number of problems relating to the financing requirements of the power and ports sectors have now been either resolved or are in the process of resolution to the Bank's satisfaction. Annex II contains a summary statement of Bank loans as of January 31, 1976 and notes on the execution of on-going projects. 18. Bank lending was active in FY74 with five loans totalling US$309 million, and in FY75 with four loans totalling US$360 million. This would be the fourth loan proposed for approval in FY76; we have already presented to you during this fiscal year a water supply project, a DFC project and an agricultural and livestock credit project. IFC Operations 19. As of January 31, 1976, IFC had made 13 investment commitments in Mexico, for a total of US$69.9 million, of which US$36.6 million had been sold, repaid or cancelled. The balance held by the Corporation, US$33.3 mil- lion, consists of US$27.6 million in loans and US$5.7 million in equity. A summary statement of IFC investments as of January 31, 1976 is presented in Annex II. Bank Strategy 20. The main objectives of Bank lending in Mexico have been to: (i) support policies and programs leading to a wider distribution of the benefits of economic growth; (ii) strengthen policies and programs leading to continued  economic growth, by helping to finance projects that are to make directly or indirectly significant contributions to output and employment and by support- ing institutional change, that will make possible a more effective manage- ment in the key sectors of the economy; (iii) help resolve critical adjust- ment problems induced by Mexico's continued economic growth; and (iv) com- plement Mexico's domestic savings by helping to finance economic and social investments in a framework of internal and external financial stability. 21. Over the last few years, Bank lending to Mexico has evolved to the goals outlined above, as is evident from its sectoral mix and policy empha- sis. Thus, a Bank loan of US$70 million for the Las Truchas steel mill (FY74) attempts to further the country's industrial growth as well as to support the Government's policy of industrial decentralization. Likewise, a fertilizer project, for which the Bank made a loan of US$50 million (FY75), is expected to help promote new poles of development in the resource-rich southeast region and the north central area and to make Mexico independent of imported urea fertilizer in the medium term. Further projects with simi- lar aims are being prepared. 22. In view of the difficult structural problems of Mexico's agricul- ture and the sector's crucial importance to the country's further develop- ment, the Bank has made agriculture the leading sector for its lending. Consistent with the overall framework of country and sector objectives, a three-tier approach is being followed. First, Bank support is aimed at ex- panding and strengthening irrigation and agricultural credit programs so as to meet the demands of a rapidly growing population more adequately and to generate the foreign exchange needed for rising import requirements. Second, to assist the Government in its efforts to raise the incomes of the rural poor and improve their standards of living through a combination of directly productive, productive support and social infrastructure investment, Third, to strengthen Mexico's institutional capability to use scarce agricultural resources more efficiently. 23. The Rio Bravo/Rio San Juan Irrigation Rehabilitation Project (FY75) of US$150 million will thu:3 significantly increase agricultural and livestock production on more than a quarter of a million hectares and benefit more than 100,000 people. The Papaloapan and PIDER Integrated Rural Development Pro- jects (FY75) of US$50 and US$110 million, respectively, have their primary focus on improving the living standards and productivity of close to 1.5 mil- lion people through integrated, multisectoral development. Another rural development and two irrigation projects are now being prepared for possible Bank financing. In addition, we are exploring the possibilities for a lagoon fisheries project and for tropical agricultural development and research in the Gulf Coast; both of these projects are on the frontiers of our involve- ment in agriculture which would lead to community development in addition to laying the foundation for large-scale exploitation of Mexico's tropical agri- culture in the future.  - 8 - 24. As regards infrastructure, the Bank has focused on investments in key areas of the country as well as on institutional reforms and sector poli- cies aiming, inter alia, at suitable pricing mechanisms to help generate additional resources for investment financing. While the Airports Development Project (FY74) of US$25 million has been designed in support of the Govern- ment's policy of regional integration, the Mexico City Water Supply Project (FY73) of US$90 million has been instrumental in the establishment of a spec- ialized institution for efficient management of water resources in the Mexico Valley, and in the pricing of water at levels more closely related to costs. Likewise, the recently approved Medium Cities Water Supply Project of US$40 million seeks to mobilize additional resources for financing the large in- vestments required to meet the increasing demand in that sector, especially among low income groups whose standards of health are thus expected to im- prove. In addition, new institutional arrangements have been made to allow a more systematic and economic approach to investment planning for water supply. We are planning to present projects with a similar institutional focus in the ports, roads and power sectors for your consideration in the near future. 25. The proposed railway project includes a number of features which should lead to further gains in the operational efficiency and financial position of N de M, by far the largest public enterprise in the transport sector. It is an essential element of the Government's policy to rationa- lize this sector and to provide the infrastructure required for economic growth in the late 1970's and 1980's. PART III - THE TRANSPORT SECTOR IN MEXICO Bank Participation in the Transport Sector 26. Except for a railway loan of US$61 million made in 1954 for the rehabilitation and modernization of the Ferrocarril del Pacifico, Bank lend- ing in the transport sector up to 1970 had been confined to five highway loans totalling US$155 million. In 1970, the Bank conducted a study of the transport sector with Government assistance. The recommendations of this far reaching study have provided the basis for investment projects that the Bank has helped finance since then, and for the institutional and policy changes that these projects have helped identify. During the past five years, the Bank made two loans for highway projects (US$111.8 million), one each for a railway project (US$75 million) - which is being satisfactorily implemented -, and a ports project (US$20 million), and one for an airports development project (US$25 million). The two rural development projects and the irrigation project approved in FY75 also included provision of US$15 million to help construct about 5,000 km of rural roads. Sector Background 27. The large size and the rugged topography, as well as the disper- sion of its population have always made transport a crucial element of the  - 9 - country's development efforts. The initial emphasis was on railway infra- structure investments and 19,000 route kms were laid out before 1910. Tran- port infrastructure investments then stagnated until the mid-1930's after which the emphasis shifted to highway construction to provide connections between Mexico City, the state capitals, and the main border crossings and seaports. Transport iinfrastructure investments in 1975 amounted to Mex$13.7 billion, or 15 percent of the authorized public investment budget; about 45 percent of these investment expenditures went for roads and 35 percent for railways. The amount, composition and location of these investments are generally satisfactory and consistent with the needs of the economy. Highway Subsector 28. The highway network includes about 53,000 km of paved roads, 69,000 km of surfaced roads, cnd 47,000 km of dirt roads; generally, the network is adequately maintained and of good to very good standards. The highway sector is asserting its primacy over other modes for both national and international traffic. Interstate operators dominate the market, thereby giving the Fede- ral Government a strong position to regulate the sector by controlling tar- iffs and licenses. At the same time, the highway sector is extremely com- petitive and market oriented, offering its customers a high level of service. Total vehicle registration has reached about 2.4 million, accounting for about 650,000 trucks, 40,000 buses and 1.7 million cars; over the last de- cade, the number of private cars in circulation has almost tripled and the number of registered trucks almost doubled. Gasoline and diesel fuel con- sumption respectively doubled and tripled over the same period, suggesting a greater share of vehicular traffic by larger diesel powered trucks and buses. 29. Road user charges largely cover road maintenance and investment costs, especially since the creation of a federal retail tax on gasoline in December 1973; however, except for small state taxes, there is no direct levy on diesel fuel at the retail level and PEMEX (Petroleos Mexicanos, the Gov- ernment owned oil production and distribution monopoly) pays a turnover tax only on its output of gasoline. Other taxes levied on heavy diesel powered vehicles being relatively low, it is uncertain whether the distribution of road charges among users is appropriate. A Bank-financed study of possible distortions of the present charge structure is nearing completion and its findings are to be reflected in national transport policy. Despite the expected development of the railways' capacity for bulk, long haul cargo, large investments in the highway sector are still required, with a large share going to secondary and feeder roads. Aviation Subsector 30. The relatively advanced stage reached by air transport in Mexico reflects the dispersion of the country's population and economic activities, and the Government's policy of encouraging the development of growth poles  - 10 - away from the three main urban centers. Mexico has more than 1,200 airports and landing strips, over 200 of which are owned and operated by the Federal Government and its agencies; the rest is in private hands. Air transport is the fastest growing mode of passenger traffic; the number of commercial passengers more than tripled over the last ten years, reaching about 19 mil- lion in 1975. The two most important Mexican airlines account for about a third of international traffic and for the whole of domestic traffic. Prio- rities in the sector are the construction of a reliever airport for Mexico City (for which land is now being acquired), the sound expansion of the regional airport system, the continued strengthening of planning and coordi- nation and the continued good financial standing of the public enterprises involved with a view to keep financing much of the future airport investments from user charges. Ports Subsector 31. Port traffic has increased dramatically since 1970 because of the growth of coastal shipments of crude oil and of dry bulk foreign trade. As a whole, coastal shipments and foreign trade increased by about two-thirds over the period 1970-74 and amounted to about 27 and 15 million tons res- pectively in 1974. Increases in coastal shipments of oil products and in dry bulk and general cargo traffic for foreign trade, because of the rapid development of Mexico's petroleum industry and of the Government's efforts to stimulate and diversify exports are expected to keep up this momentum of growth over the next few years. 32. Since the first Bank loan to the port system was made (FY 72), a number of operational and related organizational changes have been made at the local level to increase productivity. In particular, the numerous labor unions have been consolidated into cargo handling enterprises in the eleven major ports, which handle three-fourths of total traffic. These enterprises, in which the Federal Government is a major stockholder, now perform various functions previously assumed by the labor unions; the objec- tive of this reform is to eventually place all cargo handling and storage operations under centralized management in every port while improving the productivity and commercial orientation of the system as a whole. Other priorities in this subsector are the expansion of the ports of Tampico and Veracruz on the Gulf of Mexico, and of Manzanillo on the West Coast, the introduction of container technology, continued improvements in the effi- ciency and financial standing of the public cargo handling enterprises, and in ensuring the efficient use of public resources for investments in port facilities and equipment. These priorities are reflected in a Second Ports Project now under preparation. Pipeline 33. Pipelines are a dominant mode for PEMEX internal shipments of crude, natural gas and refined products. PEMEX pipeline traffic has increased drama- tically in the early 1970's in line with the rapid development of new oil  - 11 - fields from about 3 billion ton-km in 1969, or one-fifth of total PEMEX ship- ments, to more than 18 billion ton-km in 1974, or 39 percent of the total. There are two major gas pipeline systems, one connecting the northern fields to consuming centers in the west and north of the country and the other supplying the central and western regions from the Tabasco area oil fields. An oil pipeline system interconnects the refineries located near Irapuato, Mexico City, Poza Rica and Tampico with the Poza Rica fields and marine terminals; a 590 km pipeline between Pajaritos and Poza Rica is now under construction. The National Railway System 34. While the eKtent of the railways network did not change signifi- cantly since the early 1960's, the system has been gradually consolidated under government control since 1964 from 11 to 5 public companies operating over some 20,000 km oE standard gauge tracks. N de M dominates the railway sector, carrying aboui: 80 percent of the total tonnage over about 71 percent of the network; it serves most of the country and includes the whole trunk network, except for a heavy traffic line along the Pacific Coast. This line is run by del Pacifico, the next largest railway, with about 10 percent of the total tonnage. Other railways are essentially branch lines feeding into the N de M-del Pacifico grid. Few additional railway lines will be con- structed over the nexi: few years; the most important one, a 200-km line from Corondiro to Las Truchas, will connect in late 1977 the new steel works at Lazaro Cardenas on the Pacific Coast (which the Bank helped finance) to the central industrial region. 35. N de M and clel Pacifico are autonomous government agencies under the authority of the same General Manager; their Boards of Directors repre- sent various MinistriEs, the Chambers of Commerce and the Union of Railway Workers. The three other railways are operated as a Directorate of the Ministry of Communications and Transport (SCT); their General Managers are appointed by the Minister who also acts as Chairman of their Boards. Transport Planning and Coordination 36. The framework for transport coordination and sectoral policy making is complex. It includes four Ministries with direct responsibility over various policymaking aspects, numerous public enterprises responsible for the operation of modal services, and two recently created coordinating commissions. SCT supervises the operations of all modes of transport by controlling licenses, tariffs and other operational parameters; SCT is also responsible for running the three small state railways (Chihuaha-Pacifico, Sonora-Baja California and Unidos del Sureste) and is directly involved in the aviation subsector through the national air traffic control company (jointly owned by the Government and the airlines serving Mexico), and in regulating road transport on the federal highways. Despite its regulatory and operational responsibilities, SCT has had so far little say Ln the preparation and approval of investment programs in the transport field. By contrast, the Ministry of Public Works (SOP) has traditionally taken the lead in the programming of highway, railway and air- port infrastructure investments. SOP is also in charge of work supervision and maintenance for hiphways and airports.  - 12 - 37. The complexity and size of Mexico's transport system make strong coordination very desirable. Towards this end, one of the first acts of the present administration was the creation, in 1971, of the National Ports Coordinating Commission (CNCP), to supervise the establishment of the semi- autonomous ports enterprises mentioned earlier, to prepare a long-term plan for ports development, and to coordinate the various public and private interests related to ports. In 1973, another interagency coordinating com- mission under the authority of the Ministry of the Presidency was created to facilitate investment planning for infrastructure as well as equipment in the transport field. Finally, SCT's planning capability has been substantially strengthened and the Ministry is to shortly complete proposals for long- range transport sector policy. These proposals are based on the conclusions of a national transport study carried out by the Ministry, in an effort to systematically examine the long-run implications of the country's transport policies. The Government's desire to improve the management of the transport system is also reflected in the recent unification of railway freight rates and in improved road/rail freight rates coordination. It is expected that these efforts will continue and that the planning and management capabili- ties of the decentralized modal agencies will be further strengthened, leading to a substantial improvement in the administration and coordination of the sector. PART IV - THE PROJECT 38. The Government of Mexico and N de M have requested a Bank loan to help finance N de M's Five-Year Investment Plan (1975-1979). The pro- posed Project covers the period 1976-1977; it was appraised by a Bank mission which visited Mexico in May and October 1975. A report, entitled "Appraisal of a Third Railway Project," No. 957a-ME, dated March 15, 1976 is being cir- culated separately to the Executive Directors. A loan and project summary is presented in Annex III. Negotiations took place in Washington from February 9 to 13, 1976. The Mexican negotiating team was led by Messrs. P. Galicia (Nacional Financiera) and L. Gomez Z. (N de M). The 1975-1979 Investment Plan 39. The Five-Year Investment Plan for 1975-1979, prepared by N de M is estimated to cost US$1,401 million equivalent with a foreign exchange component of US$560 million equivalent, including physical and price contin- gencies. The Plan is based on detailed traffic forecasts, and N de M's programs of rehabilitation and improvement of its track and rolling stock and allows for anticipated operational improvements. The Plan does not include major construction and realignment works, which are prepared jointly by N de M, SCT and SOP and executed by SOP. Coordination between these agencies on matters affecting the planning, programming and technical standards of the works is good. No substantial changes in the Investment Plan will be made and no major SOP investment carried out during the period covered by the Plan without the Bank's having had the opportunity to review and comment upon the feasibility studies involved (Section 4.04, Loan Agreement and Section 3.04, Guarantee Agreement).  - 13 - Project Cost and Financing Plan 40. The total cost of the Project is estimated at US$576 million equiva- lent with a foreign exchange component of US$253 million, inclusive of physi- cal and price contingencies. The objectives of the Project, together with the accompanying Plan of Action, are: (a) to enable N de tl to cope with the increasing traffic it is required to carry, by the improvement of its operating efficiency, the rehabilitation of its track, the modernization of its telecom- munications system an(I the acquisition of urgently needed rolling stock and machinery; and (b) to improve N de M1's financial position. 41. The main items of the Project are: (a) track renewal on about 1,060 km of principal traffic lines; (b) continuation of a program for reballasting and sleeper replacement; (c) completion of a radio communication system, with the necessary ground installations; (d) purchase of about 124 new diesel locomotives, 5,800 new freight cars and 180 new passenger coaches. The proposed loan of US$100 million would finance about 40 percent of the foreign exchange cost Df the Project. The loan would help finance the pur- chase of 76,000 tons of new heavy rail, of track maintenance equipment, of a new radio communication system and of imported freight car components; it would also provide continued technical assistance in the areas of telecoramu- nications, and car/train operational control. As more fully detailed in Annex III, p.2, the Govternment will contribute a large share of N de M's financing needs over the next few years. Other major sources of funds, be- sides the Bank, will be the US Exim Bank (mostly for locomotives and sig- nalling equipment) and the Export Development Bank of Canada (mostly for locomotives). Loans from the Banco Nacional de Obras y Servicios Publicos (BNOSP) and credit from local suppliers will continue to help finance N de I1's domestic needs. Organization and Management 42. The current management, in charge since May 1973, has had consider- able experience of running public state enterprises, with most of the team coming from within N de 11 or from del Pacifico. With the assistance of con- sultants, it has improved operations and consolidated the earlier 17 districts into four regional units to ensure better liaison with and control from headquarters. 43. The total number of fulltime regular employees has been slowly in- creasing from about 59,000 in 1970 to about 63,300 in 1975. Strong traffic growth over the period has however improved productivity measured in terms of traffic units (ton-km plus pass-km) per employee from 375,000 in 1970 to 459,000 in 1975, well above the level envisioned under the Second Railway Project. N de M's staff training programs are well organized; however, there is need for modernizing both recruitment and training practices in order to keep in step with the new systems and equipment being introduced on the rail- way. On another manpower problem, N de 1'1 and the Governnent are now explor- ing the feasibility of providing N de M's staff with general Social Security coverage; this would in particular enable N de M to retire its staff mortc easily than at present and in general progressively reduce N de M's staff costs. As part of the PLan of Action under this Project, N de M will prepare  - 14 - a comprehensive manpower plan analyzing the manpower effects of the new equipment being introduced and addressing itself to the above matters (Para. 2(b), Schedule 5, Loan Agreement). Traffic (i) Freight 44. Although the relative share of N de M in total intercity freight movement has decreased since the early 1960's because of strong road transport competition, N de M freight tonnage has increased in absolute terms by 6 percent per annum since the latter half of the 1960's, reaching 51.5 million tons in 1974. Because of an increase in the average haul from about 450 km in the early 1960's to more than 500 km in 1974, the rate of growth of freight ton-km has been even higher, at 6.5 percent per annum over the period 1961- 1974, with traffic growing from 11 billion ton-km to about 25 billion ton-km. Since 1970, ton-km growth has further accelerated to almost 9 percent per annum, much of the increases coming from shipments of industrial and mineral products, mainly iron ore. Together, industrial and mineral products ship- ments now account for about 60 percent of the total traffic. Another 20 percent is composed of agricultural products shipments (mostly corn, wheat and sorghum), with inorganic, petroleum and other products making up the remaining 20 percent. 45. Major ongoing expansions in the steel and cement industries will contribute to further traffic growth by 1980. The railways' share of total oil and oil products shipments is, on the other hand, expected to remain low (less than 3 percent in terms of ton-km in 1974); large increases in the movement of crude, gas and refined oil products, due to increases foreseen in oil production, will take place mostly by pipeline; however, further traffic would accrue to N de M from production increases in related sectors such as fertilizers and petrochemicals. Overall, freight ton-km are expected to increase by about 7.8 percent per annum over the period 1974-1980, iron ore and steel shipments accounting for about two-thirds of the increase. Shipments of minerals, steel related products, fertilizers and bulk cereals will remain an essentially captive traffic where the railway has a clear cost advantage over road transport. (ii) Passengers 46. Passenger traffic over N de M has fluctuated from 34 million pas- sengers and 3.1 billion passenger-km in 1966 to a high of 35 million pas- sengers and 3.5 billion passenger-km, respectively, in 1969; and to a low of 25 and 3.1, respectively, in 1974. This indicates an average decrease in the number of passengers of 3.8 percent per annum over the period 1966- 1974; passenger-km have, however, not decreased, on average, reflecting an increase in average distance travelled from 91 km to 124 km in 1974. Sub- urban traffic, concentrated in the Mexico City area, is negligible. Network, Equipment and Productivity 47. Of N de M's 14,000 km network, 97 percent is standard gauge and 3 percent is narrow gauge; main traffic routes total about 7,600 km. The main  - 15 - routes connecting the central region to the sea ports were built in the last century with steep gradients and sharp curves; some of these routes now pre- sent major operating and maintcnance problems under progressively increasing gross tonnage of traffic; some regrading and realignment works are necessary on these sections. N de M is proceeding with a program of track renewal on its main lines to accommodate the increasing traffic and heavier axle loads. Secondary lines are being renovated with recovered rail and a program for track maintenance improvement is under way. 48. N de M has about 1,000 diesel locomotives. Over the period 1976- 1979, about one-fourth of these will have to be withdrawn for scrapping on an age/condition basis and about 300 higher horsepower locomotives will be introduced. The freight car fleet of about 26,000 units is relatively modern and of good design. However, to cater for the projected increase in traffic and reduce the use oE cars rented from US railways, new cars will be ordered at the rate of about 2,500 per year from 1976 through 1979. Almost half of the 1,400 passenger cars fleet is overaged, but minimum investments to replace overaged stock are foreseen because of the poor competitive position of the railways for serving most intercity passenger traffic. The maintenance of locomotives and of a large proportion of the car fleet has been reorganized and substantially improved by N de M since 1972 with the assistance of consult- ants. 49. Since 1970, N de M has combined the introduction of higher horse- power locomotives with an increase in freight train and in average car loads. A car control system has been introduced at Valle de Mexico, near Mexico City, the railway's largest yard, and will be extended to other yards. Locomotive utilization is improving and will continue to do so as the program for unit and through trains, recently introduced, is expanded. The modern telecommuni- cations facilities included in this project will also permit better control of rolling stock and operations. 50. Because detention ot cars in terminals and intermediate yards has increased, freigh cars turnaround time deteriorated over the period 1970-1973. Combined with accelerated traffic ,-,owth after 1970, poor freight car usage caused N de M to rely increasingly on cirs rented from the U. S. railways. Yard and operational improvements as well as the introduction of unit and through trains have recently improved car utilization and reduced the use of U.S. cars. However, rurther gains in productivity are essential to make N de M more cost effective aid to improve service; a number of key productivity targets have therefore becn included in the Plan of Action under this Project. (Para. 1, Schedule 5, Loan Agreement.) N de It Finances 51. (1) The Financial Picture Up to 1974. N de M's financial results l1Ave deteriorated gradually over the period 1964-1974. The net operating loss increas.sd fivc times, reaching Mex$2,218 million in 1974. This situa- tion arose largely because: (a) on the revenue side, freight rates were last iicreased in 1959; and, (b) on the expenditure side, staff costs steadily  - 16 - -increased after the mid 60's; other working costs and interest charges also increased at a fast pace after 1973. Overall, the operating ratio steadily worsened and peaked at 173 in 1974, compared to 149 in 1970 and 128 in 1964. Most of the net deficit has been financed by the Government through periodic subsidies. 52. Passenger services, while contributing only 5 percent of total revenues, continued to generate a very large share of operating deficits. A traffic costing study of N de M's operations in 1974, made by Bank staff in conjunction with the appraisal of the proposed Project, showed that passenger services accounted for more than four-fifths of the total gross loss, defined as long-run variable costs minus operating revenues. 53. (ii) Action and Prospects. Effective January 1, 1975, the Govern- ment approved substantial freight and express rate increases for N de M. As a consequence, freight revenues covered long-run variable costs and a part of fixed costs in 1975. Total revenues have increased in 1975 by 55 percent, resulting in a dramatic improvement of the operating ratio to 136 from 173 in 1974. 54. Since mid-1974, the Government and N de M also have taken satis- factory action in respect of passenger services. First, in February 1975, passenger fares were increased by 22 percent on the average. Secondly, out of the 54 passenger services in ope-ration in late 1974, N de M has already discontinued 14 uneconomic services and the Government has approved in late 1975 and early 1976 the elimination of an additional 10 services, which N de M will discontinue in 1976. 55. During negotiations, the Government agreed to compensate N de M every year for the losses due to passenger services and low density branch lines and to specifically identify in its budget the amount paid on such account (Section 3.03, Guarantee Agreement). This will enable the Government to better identify the burden it incurs by letting N de M continue to operate these uneconomic services and lines. This will also eliminate the possibility of internal cross subsidies from freight services, the financial results of which are expected to continue to improve in the future. N de M will also (i) review annually the operating and financial status of its passenger serv- ices and take appropriate action (such as rationalization, and/or disconti- nuance of uneconomic services and/or fare increases) to progressively reduce the losses therefrom (Section 5.06(i), Loan Agreement); and (ii) conduct periodic cost analyses of its low density branch lines and recommend to the Government that it either permit abandoment of uneconomic branch lines or continue to pay compensation (Para. 2(c), Schedule 5, Loan Agreement). 56. Future prospects are dependent on the growth of freight traffic and of operating costs, and on the timely fulfillment of the Plan of Action, par- ticularly the financial and productivity targets included therein (Para. 1, Schedule 5, Loan Agreement). The progress made in implementing the Plan of Action will be reviewed annually and the Government and N de M will take prompt action as required, including inter alia the revision of tariffs, fares and other charges (Section 3.01(c), Loan Agreement and Section 3.02, Guarantee Agreement). Under the agreed Plan, N de M would achieve an operating ratio of  - 17 - 110 in 1979 and should be able by 1983 to meet all operating expenses and interest charges, and by 1986, to cover operating expenses and debt service charges (Para. 4, Schedule 5, Loan Agreement). Project Execution 57. N de M, assisited by suitable consultants, will carry out the Pro- ject. N de M plans to utilize local consultants to assist in the design and preparation of documents for its bridge strengthening, general works con- struction and operational improvement programs. Provision has also been made for consultants to continue technical assistance in the areas of telecommuni- cations and car/train operational control. Procurement 58. All goods financed by the proposed loan would be procured through international competitive bidding. There are now no local manufacturers for the items the proposed loan would help finance; the possibility of any local cost financing is therefore remote. Nevertheless, should any bids be made by local suppliers, they would be granted, for the purpose of bid comparison, a margin of preference of 15 percent on CIF prices or the prevail- ing custom duty, whichever is lower. Tenders have already been called for the new radio communication system and the orders placed with firms in the United States and Japan (no retroactive financing is envisaged, as part of this system will be financed under the Second Railway Loan). About 5,300 freight cars in the Project will be manufactured by Constructora Nacional (CN), a state-owned enterprise, the imported components of these cars being financed by the proposed loan. ON is an efficient enterprise producing cars of good quality on a commercial basis. Contractual arrangements between N de M and CN will continue to be closely supervised and monitored by the Government through a special commission of the Ministry of Finance set up for this purpose. This commission ensures, on t:he one hand, that CN has a steady work load and, on the other, that N de M obtains a fair deal in respect of prices for and delivery schedule of freight cars. This system of supervision and monitoring works well; in particular freight car prices in recent years have been reason- able and in accord with international price levels. This arrangement will continue in the future. Disbursements 59. Disbursements would be made on the basis of CIF costs for imported goods, and, should bids be made and won by local suppliers under ICB, on the basis of 100% of the ex-factory costs. The Bank will also disburse against the full foreign exchange costs of consulting services. Project Justification 60. An economic analysis was made for the Five-Year Investment Plan, of which the present two-year Project is an integral part, because most of the benefits from the Project will accrue fully only if related investments in the Plan are carried out. Separate economic analyses were undertaken for six  - 18 - investment categories into which the Plan is divided, accounting for 89 per- cent of total costs (track renewal, track rehabilitation, realignments and bridges, locomotives and rolling stock, shop equipment and telecommunications and signalling). Generally, the direct effect of these investments, asso- ciated with productivity gains resulting from implementing the Plan of Action, will be to enable N de M to carry at reduced cost increasing traffic volumes which would otherwise have to be transported by road at higher economic cost. Economic rates of return for the above investment categories vary from 14 to 35 percent. Based on these results, and considering the remaining invest- ments as overhead, the Plan would yield an economic rate of return of 17 percent. A sensitivity analysis indicates that in the event of an increase in costs of 15 percent, the Plan as well as its components, would still be economically justified. 61. The implementation of the Plan of Action under the Project would ensure that freight tariffs will be progressively set and maintained at an economic level while uneconomic passenger lines will be identified as such and, if necessary, will be rationalized or discontinued, with due regard to social considerations and to the availability of alternative means of trans- portation. Efficiency of operations will continue to improve through better utilization and availability of locomotives and rolling stock. This would lower operating costs and also reduce the needs for foreign cars and the associated foreign exchange costs. Overall, N de M's financial position is expected to show continued improvement, which will in turn free more govern- ment resources for use in other sectors. PART V - LEGAL INSTRUMENTS AND AUTHORITY 62. The draft Loan Agreement between the Bank, Ferrocarriles Nacionales de Mexico and Nacional Financiera, S.A., the draft Guarantee Agreement be- tween United Mexican States and the Bank, the Report of the Committee pro- vided for in Article III, Section 4(iii) of the Articles of Agreement, and the text of a Resolution approving the proposed loan are being distributed to the Executive Directors separately. Features of the draft loan and guarantee agreements of special interest are referred to in paragraphs 50, 55 and 56 of this Report. 63. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 64. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments March 17, 1976  ANNEX I Page I of 4~ OuMi DATA - NfCOC MU7,5 l Eloa(i-17)NSIT 1, 972,547 km 2 W lli.n (aid-1972) ~ ~~~~~~~~~Per heof arable land SOCIAL flDICAIOR Reference Coutries W3 PER8 CAPITA US$ (ATLAS Nesia1 A .75 750 Z_. 610 Z& 770 / ~ 1,210 / DEDGROAPMC TRW1Tth rate (per thouBsr.d) 4.6 l 3841_ 30 19 Ab I crude death rate (per thao.sacd U6L3o 1 9 a95 7 . Infant mortality rate (per thousan live births) 76 Id. mc 61 9a.ac 1100 . 799 15 lab.] Life expectancy at birth (yearo) 58 63 O 63 ~ 63 /b 70 Gross rtprod.tiou rate f 3.23. : Population growtb rate - urban 5A55I. Ag. .ia (paerrat) 0-214 4.. 46 1.2ab 3928 15-61 52 50 , a 55559 63 6 dover 4.1. ab 36 9 Urban popelatio,. as poroant oj'toa 51 62 /1h..b 58 /i.ab 76 /,j 19 /c.k pasdly planning, N~ of accep'ors cmumlative (thous.) ... 250 Zo. of user,, (5 of ,oarriad .men) ... .6 PE N .,bo force (thousands) 11,300 13,000 29.600 /O 3,000 Lp 2,700 / Pero5ntaga employed in agri,ultore 5. /m 1.0 441 19 / 28 / Prerantage unemployd *.1 2 Is.O.,L 1 'p. se r om r no fina income received by highest 5% 29 /g. 3h6 t 33 30 g percent of notional incom received by highest 20% 59 1 iI 62 / 57 Percent of notional incoome recevd by lovest 20% 1.ae . t 3 g 5 i ecn f national ncome, reoivd by lowest 4.0% 10 II t~ 10 / 13 s MSI8To OF LAND OWNERSHIP S ~ ytop 10% or ownersa.. % Owned by osalleet 10% of owner.... W MruaIon pe physician 1,80 /y 11102,070 ~ 2,2 p 770 Population per nusm g erso 269 1,:570 2,9O,~1 5,170 ~~ population per hospital bed 590 /s 810 , 260 250 190 Per capita calorie supply em % of requirement. /5 107 /y 11 109 101 107 Per cepita Protein mopPly, totjI (gre.a per day) A 65 i 65 61. 71 81 Of which, animal mnd Pulse 29 s 28Ln 39 32 1.0 Lf Death rote 1-1. years 11. U . 3/t 0.9 '1CATd c~picymhool nrcl.lment ratio 82 101. /ad 130 ZaIjLe 119 /-.ad 83 -djuse eodrysho nolmn i 9 23 27 /ad 29 1.9 Ter o looling provided, firet andsecod level 12 12 13 22 1lb Vocational enrollment as % of sec. school enrollment 21. 21./ 17 33 20 Adclt litsracy rates% 62 /.f.aa 81. 68 90 " 91.Aoof.M wODIM rvyaeNo. of perason per roomt (uream) 2.6 . 2.2 L. 1.01.3 a Percenttof o cupied uodt. witho,t Piped water 76 61 go,,~ 67. aso 1 ..0 k AcceBs to letr Icit, (me % Of total population) ..59 4.7= 8 / Percent of dural populatimn connected to ealectricity .2 8 ~ pj 0 p .. pee r 1000OD population 95 31a62/ 11.9 o 210 Z., Paasengr cars per 100 poplatIOn oi.t.. 28 29c 19 ~ 95 I7Laotrio Power consumption (kwh P-c) 33d~C 662 :!'*h a 9 a 1L Newsprint consumption p.c. kg per year 228 .87 21.3 . 5.7/ 1,9.60 Notse, Figure refer either to ths latest periods or to aoeoifanroetal tesperaTura by eleights, n the latest years. latest periods r,fer in principle in distribution by age and Box of national populations. the Year. 1956-60 or 1966-70; the lntest yearo in pr.ci- /6. I raisi standard. (req.iremente) for 1 al cuntr~i.o -as etab- ciple in 1960 end 1970. Uihad by t08DA Economi Rasearc.h SsvIco. preside for a sinimu /L The Per Capita GNP setinute is ..t maerket Prices for alowance of 60 grmn.. of total protein per day, andA 20 grams of years other than 1960, calculete,; by the asse conversion a.inml and pulse protein, of which 10 grams should be aninal technique as the 1972 World Bnil Lilas. pretein. Thewe stwAnards "ar ewhat lower tha these of 75 /2 Average numter of daughters per woeen of roproduotive grazz of total protein and 23 grass of animal protein as an age. average for the world, proposed by PLO in the Third World Food /L Population growth rates are for the deco.des ending in Survey. 1960 cod 1970. /7 Som atudies have euggeot.d that crude death rate. of children Ratio of population under 15 azntI 65 and over to popula- age. 1 through 4. may be used as a first approximatiofi index of timn of ages 15-61 for age depetdnecy r5tio and to lahor malnutrition. force of nags 15-61. for economic dependency retio. /j Percentage enrolled of corrempoding populatico of school gag LiLAO referen standards repreast pbysiological e- aso dmfined for mach country. VA"D.amots fo r aoul activit-y ead health, taking /a 1972;' L 1965-70; /c Estimate; /d 1959; Li. 1970-75 UN ectimete; Lf 1969-70; /L 1960-72; /h Localities of 2,500 or mmre U3 rbs.n ad suburban mones Of administrative centere of municipalities and 'districts; Populated centers whA. have definite urban characteristics contributed by csrtain public and municipal. se-ice.; localities of 10,000 or cor Lhbabitanta; a Excluding Cent& an Melilla; La 1960-731 Lin 1961.-66; /O T'his conpaer with the Bank Atlas ligure of US530 for 1972. The Atlas figure does not reflect recent revision in natioral accounts which has resulted 1.. 20 percent increase in estimates of GD9j &5 1971; Li Based on 1.3 percent sample tabulation of census returns, excluding Indian Jungle population; &L 19637; Hi ouseholds; /t 1969; / 1968; jy 1961; /. Peraconnl in geve:,nmsnt services; /- Nunber on the register, not all werking in the country; Hospital poreonnel; /z 1962; /58 1961462; Zlb 1973; Lea Regiatered only; /ad Gossa enrollment which includes overage students; /as Net mcrollmant raLtios in 1971 were 81. percent and 18 percent for basic and secondary education, reopectively; /5f Definition unhmown; /5U 15 yeare end over; /5h Data refer to living quarters; /al 1961-62;j Data refer in housing units; /-k Data ref ar to households; /el Estimate based on sample tabulation of census returac; data refer to dwelling.; /m Inside or outside; /-p Including sendta-perennt dwellings; /a. Inside only; / 191.5-62; 5j& Includes nurses, nurees with midwifery qualifications; miwfeyed nursig au ariea / r Incluee vehicles operated by police or, other governmental security orgenisatiuns; Aak Six years and over; /at Ton yeurc end overl /ou 1959-61. aSpain has been selected as an objective, coutr-y because its par capita incom is higher then Mexico, and hemusee bu,th countries hotve in co0n the Import-ace of touriss and the influenc of nearby, rilaber countries. PI. September U1, 1975  ANNEX I FSqRofh 4 MEXICO: Economic Development Data Sheet Actual Prelim. Estimates Growth Rates As of Y0 1960 1965 1T970 -1974- 1975 1 161c966 19-71 1976 TlY 10g 197 10 - - - - -- - 1965 1970 1975 1980 1985 _ National Accounts CoStat 97-1969 Averag,e P5rice s. $Millions Gros DmsiPrdc15726 2,4. 310.1 39,41. '0995. 51372 7,67.7 7.1 6.9 5.7 4.6 7.5 99.8 100.3 100.4 GainS from Terms of Trade 26.3 -6o.6 -5.0 -330.4 -71.8 -177.6 -249.4 -- -39.3 70.41 19.9 7.0 0.2 -0.3 -o.4 Gross Domestic Income 15,798.9 22,189.2 31,082.1 39,088.5 40,923.9 51,139.6 73,418.3 7.0 6.8 5.7j 4.6 7.5 100.0 100O.0 100.0 Imports (including N.F.S.) 1,910.1 2,126.5 3,1-17.7 3,974.1 4,069.4 4,030.6 5,779.9 2.2 8.i 5.5 -0.2 7.5 12.1 9.6 7.9 Export (Import Capacity) 1,683.6 2,000.4 2,505.5 3,203.9 2,850.1 4,305.9 7,473.4 3.5 4.6 2.6 8.6 21.7 10.7 9.0 8.4 Resoure Gap 226.5 126.1 612.2 870.2 1,219.3 -275.3 -1,693.5 -11.1 37.2 14.8 -- 43.8 i.4 o.6 -0.5 Consumption 12,775.6 17,866.2 25,445.8 32,193.2 34,067.1 40,600.9 56,254.6 6.9 7.3 6.o 3 6 6.7 8O.9 80.5 79.4 Investment 3,249.8 4,449.1 6,248.5 7,765.5 8,076.1 10,263.4 15,470.2 6.5 7.0 5.'. 4.9 8.6 20.5 20.1 20.1 Gross Domestic Savings 3,023.4 4,323.0 5,636.3 6,895.3 6,856.8 10,538.7 17,163.7 7.4 5.5 i. c 9.0 10.3 19.1 19.5 20.6 Gross Netio.ss Savings 2,950.0 4,146.8 5,191.4 6,288.1 6,204.7 9,644.1 16,513.5 7.1 4.6 3.6 9.2 i1.4 18.-7 18.7 18.9 Trade is Goods and N.F.S. Current Prices, US$ Mil-lions As % uS Total 1imports Food 17.6 25.4 33.7 525.1 632.6 358.0 457.4 7.6 5.8 79.8 -io.8 5.0 1.2 1.0 3.0 Petroleumi and Products 34.o 23.9 44.1 382.0 161.o 0.0 0.0 -'*.8 13.0 29.6 -_ 0.0 2.2 1.3 0.0 Other Goods 917.6 1,236.0 2,274.4 5,i85.1 6,002.4 8,933.1 18,51o.( 6.1 13.0 21.4 8.3 15.7 59.5 66.5 75.9 Nos-Fsctor Services 572.3 792.3 1,064.7 1,671.4 1,721.6 2,481.5 4,563.5 6.7 6.1i10.1i 7.6 13.0 37.1 51.2 21.1 Total Imports 1,541.5 2,077.6 3,416.9 7,763.6 8,517.6 11,772.6 23,531.6 6.2 10.5 20.0 6.7 14.9 100.0 100.0 100.0 Exports Selected Agricultural Goods 304.5 441.3 421.8 609.3 510.7 967.6 1,714.7 7.7 -0.9 3.3) 13.6 12.1 22.1 15.4 7.7 Petroleum mand Products 20.6 4o.i 38.4 124.0 438.4 1,036.7 2,341.8 14.3 -0.9 62.8 i8.8 17.7 1.5 1.4 8.2 Selected Minerals 92.5 77.9 91.5 212.0 155.4 442.2 879.4 -3.4 3.3 11.2 23.3 14.7 6.7 3.3 3.5 Manufacturers 101.5 206.8 353.5 1,212.2 1,146.7 3,305.5 10,606.3 15.3 11.3 26.5, 23.6 26.3 7.4 12.9 26.3 Other Goods 285.6 353.6 442.5 841.5 80a.6 1,189.7 1,668.5 . 4.6 12.7 8.2 7.0 20.7 i6.1. 9.5 Non-Factor Services 572.5 792.3 1,397.7 3,064.7 2,92-1.7 5,635.0 13,215.7 6.7 12.0 15.8 14.i 18.6 4i.6 50.9 44.8 Total Exports 1,377.2 1,912.0 2,745.4 6,o63.7 5,965.5 12,576.7 30,426.4 6.8 7.5 16.8 16.1 19.3 100.0 100.0 100.0 Trade indices Aversge 1967-196 = 100 Export Price Iaden 83.1 92.8 109.4 176.6 204.2 280.5 394.0 2.2 3.4 13.3 6.6 7.0 Import Price Tndex 80.7 97.7 105., 195.4 209.3 292.1 407.1 3.9 2.3 13.8 6.9 6.9 Terms of Trade 103.0 95.0 99.8 90.4 97.5 96.0 96.8 -1.6 1.0 -0 ' 0.3 0.2 Export Volume 69.9 86.9 105.9 i44.8 123.2 189.0 325.6 4.5 4.o o.l 8.9 11.5 Value Added by Sector Consstsnt 1967-1969 Average Prices: US$ Millions Primar..y 2,760.2 3,417.6 4,025.1 . .. . .. 4.4 3.4 .. 17.5 13.0 - Secondary 14,353.2 6,717.2 10,415.5 . .. . .. 9.1 9.2 .. 27.6 33.5 Tertiary 8,659.9 12,115.0 16,646.5 .. . .. . 7.0 6.0o. 54.9 52.5 - Total (coP) 15,772.6 22,249.8 31,087.1 . .. . .. 7.2 7.0 5.9 4.7 6.2 100.0 100.0 200.0 Consolidated Public Sector Financeal] Constant 1967-1969 Average Prices; Oi$ million Is. of GCY Current Receipts 21 2,554.5 3,503.7 4,677.8 5,358.0 8,837.4 13,566.4 - 6.5 8.9 10.5 9.0 - 11.3 17.3 Currcnt Expenditures- - 1,955.5 2,511.1 4,i84.8 '5,526.2 5,637.2 7,845.2 - 5.1 17.1 0.4 6.8 - 8.1 11.0 Public Savonga - 599.0 992.6 493.0 -167.2 3,200.2 5,721.2 - lo.6 . .. 12.3 - 3.2 6.3 Resources for Investment - 651.8 1,074.1 532.4 -124.3 3,302.4 5,867.9 - 10.5 . .. 12.2 - 3.5 6.5 Investment - 1,462.2 1,718.5 3,194.1 3,704.1 3,933.4 6,103~.2 - 3.3 16.6 1.2 9.2 - 5.5 7.7 Deficit (net) - 8io.4 644.4 2,661.7 3,828.4 631.0 235.3 - -4.5 42.8 -30.3 -27.9 - 2.0 1.2 Allocataon of Consolidated As of Total Public Sector Erpendotures 1970 1975 1980 Agriculture - - 708.2 2,168.2 2,725.2 - - 8.6 15.9 - Industry - - 2,939.0 4,625.3 5,525.0 - - .. '6. '. 32.4 - Social Welfare - - 2,001.8 3,163.1 3,584.9 - -.24.' 21.0 - Transport and Cuomuications - - 954.6 1,294.6 1,708.3 - - .. 1i.8 10.0 - General Administration and Others - - 1,488.1 2,377.0 3,528.5 - - i. 1.4 20.7 - Total V/ - - 8,091.7 13,628.2 17,071.9 - - .. . . 100.0 100.0 - Selected Indicators Period Averages 1961 1966 1971 1976 1981 1965 1970 1975 1982 1985 TCOR 2.42 2.91 2.89 3.28 4.93 3.25 2.62 .. 2.90 3.20 3.63 4.32 2.94 Ixport Elasticity 1.20 0.75 1.51 3.22 o.6o o.88 1.05 0.s1 1.i6 0.96 -0.04, 1.00 Marginal Savings Ratio o.48 -0.16 -0.24 -0.10 -0.05 0.37 0.28 .19 0.13 0.10 0_35 0.31 Labor Force and Olutput per Worker Total Labor Force Value Added per Worker (1967-69 Average Prices) In Millions A%of Total 1960-1970 *Aer~ Agrie.iture ~ ~ ~ ~ 96 4701960 1970 Growth Rate 7Q12 196192 Growth Nate AgIcdulture 7 51- 50.5 3. T C 511.2 789.2 3. 3 Industry ~~~~ ~~~~ ~~~~~~2.1 3.0 19.6 23.1 3.6 2,073.0 3,471.6 140.6 145.2 5.3 Services 4/ 3.2 49j1 29.9 37.7 4.4 2 706.0 3,396.2 183.6 i42.0 2.3 Total ~~~~~ ~~~~~ ~~~~10.7 13.0 100.0 100.0 2.0 N ot available Rot applicable Includes Federal Government, Federal District, Social Security Agencies, Rudgetary Controlled Enterprises and Decentralized Agencies (net Savings and investment expenditures) and deficit. o/ Includes es-ira-system transfers and the deficit financing of part of the son-budgetary controlled Public Sector. YIncludes total expenditures of ihe Budgetary Controlled Elnterprises and Decentralized Agencies and debt mortic-tion. / Includes unallocted labor force.  ANNEX I Page 3 of 4 BALANCE OF PAYMENTS, EXTERNAL ASSISTANCE AND DEBT (us$ million at current prices) Actual Prelimin Estimates ProJections 1970 1973 17 1975 1976 197 10 SUMMARY BALANCE OF PAYMENTS Exports (including N.F.S.) 2,745.4 4,602.4 6,o63.7 5,965.5 6,869.7 8,889.7 12,576.7 Imports (including N.F.S.) -3,416.9 -5,236.8 -7,763.6 -8,517.6 -8,767.8 -9,350.7 11,772.6 Resource Balance -671.5 -634.4 -1,699.9 -2,552.1 -1,898.1 -461.0 804.1 Interest (net) -301.3 -563.0 -908.5 -1,107.4 -1,420.9 -1,972.8 -2,254.2 Direct Investment Income -:267.5 -419.8 -549.1 -535.0 -535.0 -664.3 -842.4 Workers Remittances L22.7 140.4 158.1 162.5 178.8 228.7 286.9 Current Transfers (net) 55.3 74.5 113.4 115.0 125.0 156.o 196.7 Balance on Current Account -1,062.3 -1,402.3 -2,886.0 -3,917.0 -3,550.2 -2,712.6 -1,808.9 Private Direct Investment 322.8 456.3 678.1 585.0 550.0 950.0 1,204.7 Public M and L.T. Loans a. Disbursements (gross) 781.5 1,948.5 2,968.8 4,070.1 4,061.6 4,333.5 4,124.3 b. Repayments -174.7 -800.9 -541.8 -809.2 -964.o -2,695.9 -3,526.9 c. Disbursements (net) '-o6.8 1,147.6 2,427.0 3,260.9 3,097.6 1,637.6 597.4 Other Capital 534.8 -79.3 -182.2 71.1 -500.0 200.0 81.8 a. Public short-tern 59.0 596.0 642.0 570.0 300.0 -100.0 -300.0 b. Other Capital n.e.i. 475.8 -675.3 -824.2 -498.9 -800.0 300.0 381.8 Change in Reserves (- = increase) -102.1 -122.3 -36.9 - 402.6 -75.0 -75.0 GRANT AND LOAN COMMITMENTS PUBLIC M AND L.T. LOANS IBRD 146.8 270.0 289.0 360.0 - -- IDA - - - Other Multilateral 1:12.3 89.5 102.0 110.0 - - - Governments 81.0 476.o 129.7 165.6 - - Suppliers 69.7 60i2 118.0 248.4 - - - Banks and Financial Institutions 414.4 1,918.2 2,085.1 2,999.1 - - - Bonds - 104.6 100.0 160.0 - - - Total 844.1 2,918.5 2,823.8 4,043.1 - - - DEBT AND DEBT SERVICE EXTERNAL DEBT Public Debt Outstanding and Disbursed Outstanding and Disbursed (end of period) 3,226.9 5,577.0 8,oo4.o 11,264.9 on Dec. 31, 1974 Interest on Public Debt 215.9 359.4 576.1 715.8 Repayments on Public Debt 474.7 800.9 541.8 809.2 $ Millions Percent Other Debt Service (net) '224.3 203.6 332.4 391.6 Total Debt Service (net) 915.9 1,363.9 1,450.3 1,916.6 Public M & L.T. Burden on Exports Earnings (%)1 Loans a. Public Debt Service 24.0 24.5 18.0 24.9 b. Total Debt Service 3;.8 28.8 23.3 31.3 IBRD 973.2 12.2 c. Total Debt Service and Direct IDA - - Investment Income 44.8 37.6 32.1 40.0 Other Multilateral 441.1 5.5 Average Terms of Public Debt Governments 979.8 7.2 a. Interest as % of prior years Suppliers 323.4 4.o D.O. and D. 7.4 8.1 10.3 8.9 Financial b. Amortization as % of prior Institutions 4,647.1 58.1 years D.O. and D. 16.3 18.1 9.7 10.1 Bonds 573.4 7.2 IBRD'Exposure Public Debt n.e.i. 446.o 5.8 a. IBRD Debt 0. and D. as % of Public Debt O. .and D. 18.0 14.5 12.2 9.4 Total Public b. IBRD Debt Service as % of M & L.T. Debt 8,004.0 100.0 Public Debt Service 7.8 7.6 8.4 7.3 IDA Exposure - - - - - Not available. 1/ Includes workers remittances  ANNEX I Page 4 of 4 MEXICO: SOURCES AND SECTORAL ALLOCATION OF PUBLIC EXTERNAL DEBT CONTRACTED 1969-1974 (Thousands of US Dollars) Suppliers Private Publicly Other International Gover-ment Total Percent Banks Issued Private Organizations of Bonds Total Agriculture. Forestry and FishinR 19,793 28.238 0 0 54 .067 0 593,098 6.3 - Agriculture 0 15,000 0 0 23,100 0 38,100 - Agriculture, Livestock 0 10,129 0 0 410,477 0 420,606 - Fishing 19,793 1,109 0 0 0 0 20,902 - Ocean, Coastal Fishing 0 2,000 0 0 0 0 2,000 - Other 0 0 0 0 111,490 0 111,490 Mining and Quarrying 2,980 582.601 20.000 105.750 0 17.175 728.506 7.7 - Coal 513 0 0 0 0 0 513 - Crude Petroleur, Gas 2,395 400,680 20,000 105,750 0 2,828 531,653 - Metal Ore Mining 72 165,500 0 0 0 11,134 176,706 - Other 0 16,421 0 0 0 3,213 19,634 Manufacturing 293.742 611,631 0 226,897 9.000 232,731 1.374,001 14.6 - Food Manufacturing 2,396 0 0 0 0 1,317 3,713 - Textile Manufacturing 115 24,614 0 0 0 637 25,366 -Paper 254 0 0 0 0 416 670 - Printing 1,338 416 0 0 0 0 1,754 - Chemicals 6,707 6,300 0 0 0 12,054 25,061 - Fertilizers, Pesticides 0 26,000 0 0 0 0 26,000 - Petroleum Refining; Gas; Oil 83,701 232,034 0 90,897 0 6,719 413,351 - Plastics 136 0 0 0 0 0 136 -Glass 0 255 0 0 0 0 255 - Iron and Steel 8,909 254,447 0 96.000 0 157 528 516 884 - Metal Machinery 16 26,866 0 0 0 34,490 61,372 - Metal Products NEL 0 169 0 0 0 0 169 - Non-Electrical Machinery 68,890 0 0 0 0 1,692 70,582 - Basic Metals 0 30,066 0 0 0 4,160 34,226 - Transport Equipment 121,114 10,368 0 0 0 11,018 142,500 - Other 166 96 0 40,000 9,000 2,700 51,962 Electric Pover and Water Supply 49.359 809,297 30.000 222,428 353,823 203,146 1,668,053 17.7 - Electricity, Gas, Water Production 0 65,000 0 65,000 0 0 130,000 - Electricity, Gas, Steam 49,359 744,297 30,000 157,428 250,000 203,146 1,434.230 - Water (Non-Agric.) 0 0 0 0 103,823 0 103,823 Tourism 0 0 0 0 44,029 0 44.029 0.5 Transport and Coc=unications 75,396 511.087 32.486 106.350 279.312 199,915 1.204.546 12.8 - Transport, Storage and Co-unications 0 48,000 0 15,000 47,512 0 110,512 - Land Transport 40,771 380,366 32,486 88,580 186,800 127,734 856,737 - Ocean, Coastal Transport 1,468 13,304 0 0 20,000 2,709 37,481 - Air Transport 2,445 61,639 0 2,770 25,000 61,373 152,227 - Comunications - Other 30,712 7,778 0 0 0 8,099 46,589 Financial and Monetary Institutions 29 1.099,518 27.322 55.45,000 21,591 1.248,460 13.2 - Financial Institutions 29 931,018 27,322 55,000 45,000 21,591 1,079,960 - Monetary Institutions 0 168,500 0 0 0 0 168,500 Other Sector Uses 8.312 284,933 0 31,948 174.000 4.46 503.655 5.3 - Social Perso-al Services 0 101,000 0 0 0 0 101,000 - Public Ad,sinistration (Defenre) 4,620 155,413 0 31,948 174,000 4,393 370,374 - Education Administration 1,265 28,451 0 0 0 0 29,716 - Medical and Dental 873 0 0 0 0 0 873 - Military 1,468 0 0 0 0 0 1,468 -Radio, T.V. 86 0 0 0 0 0 86 - Construction 0 69 0 0 0 69 138 Sector Not Specified. Multisector, etc. 509 381.379 96,856 101.202 118,161 31,914 730,021 7.7 - Sector Not Specified 171 83,620 0 27,141 0 29,846 140,778 - Multisector 0 120,326 0 34,061 80,263 0 234,650 - Sector Not Identified 338 177,433 96,856 40,000 35,935 2,068 352,630 - General Purpose 0 0 0 0 1,963 0 1,963 Other Purposes 0 5,438 0 10.000 0 0 15,438 0.2 - Admin. Budget Support 0 26 0 0 0 0 26 - Debt Relief 0 5,412 0 0 0 0 5,412 - Other Debt Reorganization 0 0 0 10,000 0 0 10,000 Purpose Unknown 5.000 724,585 103.058 196,535 1/ 160.700 128,995 1.318,873 14.0 TOTAL 455,120 5,038,707 309,722 1,056,110 1,729,092 839,929 9,428,680 2/ Percent of Total 4.8 53.5 3.3 11.2 18.3 8.9 1/ Includes 111,500 from Privately Placed Bonds. 2/ Does not include US$223,001 thousands of unclassified debts.  R? ' . II ?age I of 6 T-E -STThUS OF 3ABh GROUP_1O ' i-PTONS TN MEXlICO A. STPTa4lPT OF BAlNX LOANS (as at Ozinuar-; 31, 1976) u- .1 ''_n Loan Amount Less Nuuiber Year Bor.ro-wer ?Truo so Cancel lations UMad U;bursel 26 loan3 a fully disbursed 1,239.9 527 1968 NacionaL Financiera, S. A. Irrigation 25.0 1.8 695 1970 Naciona:L Financiera, S. A. Roads 21.8 3.6 793 1972 Nacional i.nanciera, S. A. Tourism 22.0 8.7 820 1972 Naciona. Y'inanciera, S. A. Ports 20.0 3.1 824 1972 Naciona]. Financiera, S. A. Industry 35.o 12.2 825 1972 Ferrocarriles Nacionales de Me:xico and Nacional Financiera, S. A. Railways 75.0 12.3 909 1973 Nacional Financiera, S. A, Water SuLpply 90.0 79.3 934 1973 Siderurgica Lazaro Cardenas - Las Truchas, S. A. and Nacional Financiera, S. A. Steel 70.0 1.6 968 1974 Nacional Financiera, S. A. Roads 90.0 86}. ? 969 1974 Nacional Financiera, S. A. Irrigation 77.0 59.2 97C 1974 Nacional Financiera, S. A. Irrigation 47.0 45. 1022 1974 Naconal FLnanciera, S. A. Airports 25.o '3.2 1053 1974 Nacional Financiera, S. A. Integrated Rural fDevelopment 5C.o 50.C 1110 1975 Nacional Financiera, S. A. Integrated Rural Dcvelopment 110.0 110.0 1111 1975 Nacional Financiera, S. A. Irrigation 150.0 150.0 1112 1975 Guanomex and Nacional Financi.era, S. A. Industry 50.0 47.6 11856 1975 Banco Nacional de Obras y Servicios Publicos, S. A. Water Supply 40.0 140.0 TOTAL 2,237.7 745.4 Of which has been repaid 357.6 Total now outstanding 1,880.1 Amount sold 76.2 of which has been repaid 53.4 22.8 Total now held by Baik 1,857.3 Total undisbursed 74:4 a/ No IDA Credits havo been made to Mexico.  ANNEX II Page 2 of 6 B. STATFZJI;T OF IFC INVESTI.UITS (as at Januarl' 31, 1976) US$ Filliojn Year Obligor Type of Business Loan EqZit T 1958/59 Industrias Perfect Circle, Indastrial Equipment 0.8 - 0.8 S.A. 2;/ 1958 Bristol de Mexico, S.A. j A/C Engine Overhaul o.5 - 0.5 1961 Acero Solar, S.A. / Twist Drills 0.3 - 0.3 1962/65/ Companiia Fundidora Fierro y Steel 2.3 21.4 23.7 66/68 Acero de Monterrey, S.A. 1963 Tubos de Acero de Mexico, Steel 0.9 0.1 1.0 S.A. 1/ 1963 Quimica del Rey, S.A. / Sodium Sulphate 0.8 - 0.8 1964/66 Industria del Hierro, S.A. Constraction Equipment - 2.0 2.0 1970 Minera del Norte, S.A. Iron Ore Mining 1.5 - 1.5 1971 Celanese Mexicana. S.A. Textiles 12.0 - 12.0 1972 Promotora de Papel Periodico, Pulp and Paper j S.A. de C.V. 1973 Cemento Ve.:.acraz Cement 10.5 - 10.5 1974 Cancun Aristos Hotel Tourism i.0 0.2 1.2 1975 Mexinox, S.A. Steel 12.0 3.6 15.6 Total Gross Conrnitments 42.6 27.3 69.9 Less cancellations, terminations, repayment and sales 15.0 21.6 36.6 lotal cormi.iuents now held by IFC 27.6 5.7 33.3 Total Undisbursed t12.0 2.9 14.9 1/ Investments i-iich have been fully canlcelled, terminated, written off, sold, redemned or repaid. ] uS$2S5,0o0.  ANNEX II Page 3 of 6 C. PROJECTS IN EXECUTION 1/ Ln. No. 527 Fourth Irrigation Project: $25 Mi lion Loan of January 26, 1968; Effectiveness Date: March 1. 1969. Closing Date: June 30, 1976. Civil works to be executed under the project were complei. I by the end of 1975. The loan is expected to be fully disbursed by the present closing date. Annual net agricultural production values, valued in terms of 1967 prices (appraisal date) are already at a level equal to 87% of those projected at appraisal for full development. Ln. No. 695 Fourth Road Project: $21.8 Million Loan of June 26, 1970; EffectLveness Date: October 1, 1970. Closing Date: December 31, 1976. Seven project roads have been completed and opened to traffic. The remaining four roads are expected to be completed at varLous dates up to the end of 1976, or about two years be- hind schedule. This delay was caused by the lag in budgetary appropriations for project works and by increased quantities of works, There have been cost increases on five of the project roads I-or these same reasons, and also because of design revi- sions and sharp price increases since late 1973. Ln. No. 793 Zihuatamejo Tourism Project: $22 Million Loan of January 22, 1972; lffectiveness Date: March 30, 1973. Closing Date: Decembtr 31. 1975. Most project-related construction works in the Ixtapa touristm zone were completed in 1975. A trust fund has been organiz:ed for the provision of urban infrastructure in the town of Zihttatanejo and the necessary works have been undertaken since December 1974. It is now estimated that all works related to this project will be completed early in 1976, by which time over 500 hotel rooms should also be available in the tourism area. Another 400 hotel rooms are expected to be in service by the end of 1976. 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.  ANNEX 11 Page 4 of 6 Ln. No. 820 Ports Project: $20 Million Loan of May 17, 1972; Effectiveness Date: August 17, 1972. Closing Date: June 30, 1976. Progress in execution of the project continues to be satis- factory. Various actions to insure proper operation, maintenance and user charges are being discussed with the government. Ap- praisal of a second ports project based largely on studies carried out as part of this project, is underway. Ln. No. 824 Industrial Equipment Fund (FONEI) Project: $35 Million Loan of June 2, 1972; Effectiveness Date: October 12, 1972. Closing Date: December 31, 1975. After a slow start due to organizational problems, all funds under this project were committed by June 1975. Ln. No. 825 Second Railway Project: $75 Million Loan of June 2, 1972; Effectiveness Date: August 17, 1972. Closing Date: June 30, 1977. Progress in implementation of the Investment Plan, procure- ment and disbursement is satisfactory. The telecommunications system has been redefined and expanded. Freight traffic has increased consideraly above the levels envisioned at appraisal time. Locomotive utilization has significantly improved. Yard and operational improvements and the introduction of unit and through trains have recently improved car utilization. Out of 54 passenger services in operation in mid-1974, it is expected that 24 will have been eliminated by July 1976. Ln. No. 834 Fourth Power Sector Program: $125 Million Loan of June 23, 1972; Effectiveness Date: April 13, 1973. Closing Date: June 30, 1975. The loan is fully disbursed. The construction program has been delayed by over a year except for frequency unification, which is ahead of schedule. Recently, the borrower has taken steps to improve its overall construction performance by strengthening its construction management and the results of the last six months have been encouraging. The sector's financial performance is unsatisfactory and the Government is considering remedial measures to improve it.  ANNEX II Page 5 of 6 Lu. No. 909: Mexico City Water Supply Project: $90 Hillion Loan of June 18, 1973; Effectiveness Date: April 30, 1974. Closing Date: December 31. 1977. Physical execution of the project is progressing satisfac- torily. However, disbursements from the loan account have been delayed due to delays in the resolution of administrative arrange- ments beitween the Mexico Valley Water Commission (the executing agency) and the Federal Government. A sales contract between the Water Commission and the State of Mexico, which is a con- dition for disbursement of funds aggregating over $40 million, has recently been signed. Ln. No. 934 Las Truchas Steel Project: $70 Million Loan of September 12, 1972; Effectiveness Date: October 29, 1973. Closing Date: December 31, 1977. Execution of the project and procurement of the equipment financed by the loan are progressing as scheduled. Ln. No. 968 Seventh Eighway ProJect: $90 Million Loan of March 1, 1974; Effective,ness Date: May 29, 1974. Closing Date: December 31, 1978. Substantial delays have been encountered in the initiation of project works caused mainly by shortage of budgetary alloca- tions. The Government is aware of the need for increased bud- getary allocations during the forthcoming years to compensate for the delays and to cover significant cost increases; it has assured the Bank that all efforts will be made in this respect. Ln. No. 969 Rio Panuc1o Irrigation Project: $77 Million Loan of March 1, 1974; Effectiveness Date: May 29, 1974. Closing Date: December 31, 1980. Very good progress is being made on implementation of this project; :lt is anticipated that irrigation service will be initiated on a 10,000 ha unit of the Las Animas unit by early 1976. Owners of private land in the project area are largely electing l:o be paid for their land in cash rather than by accepting a 20 ha irrigated holding. This will make more land available for forming ejiidos than anticipated at appraisal.  ANNEX II Page 6 of 6 Ln. No. 970 Rio Sinaloa Irrigation Project: $47 Million Loan of March 1, 1974; Effectiveness Date: May 29, 1974. Closing Date: December 31, 1980. Construction of the Sinaloa de Leyva Diversion Dam and the first 17 km of the Bamoa Canal is virtually complete. Construc- tion will start-soon on the Bacurato dam and storage reservoir, the major feature of the project. Negotiations are still underway between SRH and the private land owners having water rights concerning the size of holding which may be retained by the owner under the project. These will take time but no major problems are foreseen at this time in project implementation. Ln. No. 1022 Airport Development Project: $25 Million Loan of May 28, 1974; Effectiveness Date: September 16, 1974. Closing Date: June 30, 1978. The first group of contracts for this Regional Airports Development Project was awarded in November and December 1974, for amounts averaging 15 percent above appraisal estimates in- cluding contingencies. Because of Governmental budget con- straints, the executing agency, SOP, has proposed a rescheduling of the future contract awards to extend the construction period by two years. Such an extension would add additional escalation costs. This matter is now under discussion with the Government. Ln. No. 1053 Papaloapan Integrated Rural Development Project: $50 Million Loan of November 15. 1974; Effectiveness Date: January 27, 1975. Closing Date: June 30, 1980. Ln. No. 1110 Second Integrated Rural Development Project: $110 Million Loan of May 8, 1975; Effectiveness Date: October 29, 1975. Closing Date: December 31, 1982. Ln. No. 1111 Seventh Irrigation Project - Bajo Rio Bravo and Bajo Rio San Juan: $150 Million Loan of May 8, 1975; Effectiveness Date: July 30, 1975. Closing Date: December 31, 1982. Ln. No. 1112 Fertilizer Project: $50 Million Loan of May 22, 1975; Effectiveness Date: July 30, 1975. Closing Date: December 31, 1978.  ANNEX III Page 1 of 3 MEXICO Third (N de M) Railway Project Loan and Project Summary Borrowers: Ferrocarriles Nacionales de Mexico (N de M) and Nacional Financiera, S. A. Guarantor: United Mexican States Amount: US$100 million equivalent Terms: Payable in 25 years, including 4 years grace at 8-1/2 percent interest per annum. Project Description: The Project consists of a two-year tranche, 1976 and 1977, of N de M's Five Year (1975-1979) Investment Plan. The main Project components are as follows: (a) track renewal and renovation of 660 km and 400 km respectively, of principal traffic lines; (b) continuation of a program for reballasting and resleepering of worn out track; (c) bridge strengthening and realignment and improvement of track; (d) drainage and earthworks for station, terminal and marshalling yard extensions, and cons- truction of workshops, depots and other buildings; (e) improvements of signalling and telecommunication facilities; (f) purchase of about 124 new diesel locomotives, 5,800 freightcars, 30 mail vans and 180 passenger coaches; (g) consulting services for civil works and operational improvement programs, and telecommunications and car/train operational control.  ANNEX III Page 2 of 3 ---US$ Million-------------__ Estimated Costs: Local Foreign Total Bank Finaneing Track and Structures 52.9 39.6 92.5 30.0 Construction Works 42.2 0.2 42. - Signalling & Telecommunination 16.5 25.5 42.0 15.0 Locomotives & Rolling Stock 132.1 154.9 287.0 30.0 Consulting Services 2.2 0.8 3.0 0.6 Total Base Cost 3stimate: 245.9 221.0 466.9 75.6 Physical Contingency 7.8 4.5 12.3 3.3 Price Contingency 69.6 27.3 96.9 21.1 Total Estimated Cost 323.3 252.8 576.1 100.0 Financing: The projected cash flow and financing plan for 1975 - 1979, assuming execution n- F only of the Project hut also of the Invest3tent Plan, is as follows: 1975 1976 1977 1978 1979 Total % -i--------------- r-llions of 1975 Mge$------------------- Requirements of Funds N de M operating deficits (excluding depreciation) 1,674 1 ,143 843 656 451 4,767 18 Debt service payments Local 886 829 852 1,137 1,113 4,817 18 Foreign 748 980 947 968 846 4,489 16 Capital investment 2,492 2,669 3,103 2,411 1,172 12,457 46 other 181 120 110 100 100 611 2 5,951 577b1 B3 5, 5,272 2-9 2 27,171 10 Sources of Funds N de M depreciation 300 340 360 385 4oo 1,785 7 Government subsidy 3,189 2,732 2,392 2,386 2,210 12,909 48 Loans Local 840 1,063 1,823 1,792 1,359 6,877 25 Foreign 1,652 1,606 1,280 709 323 5,570 2C 779T ,7741 57,7 772- ,292 27,141 loP  ANNEX III Page 3 of 3 Estimated Disbursemenits: Year-by-Year Cumulative Amount FY (US$ Million) (US$ Million) 76 4.1 4.1 77 37.7 41.8 78 42.8 84.6 79 15.4 100.0 Procurement Arrangements: All goods financed under the proposed loan would be acquired on the basis of international competi- tive bidding. Local bidders would be granted a margin of preference of 15 percent of the c.i.f. price or the prevailing tariff, whichever is lower. Technical Assistance: N de M will retain local consultants to assist in the design and preparation of its bridge strengthening, general works construction and operational improvement programs. Foreign consultants will provide assistance in the areas of telecommunications, and car/train operational control. Rate of Return: The economic rate of return of the Five Year Plan is at least 17 percent. Completion Date: Project completion is expected by December 31, 1978. Appraisal Report: Report No. 957a-ME. Dated March 15, 1976, Regional Projects Department, Latin America and the Caribbean Regional Office.   IbRD 3655R MAY 1972 =21~~~~~~~~~~~~~~~~~~~~~~~~~'O . CDI D PO E X I C RAILWAYS 01 100 200 000 00dfb 0 000 2. GL/I F OF MEXICO NACIONALES OE MEXICO PUg sA --0-* O_ThER RAILWAYS AlPt OD DEL PACIFICO ,A I0 SONORA -BAJA CAL IFORNA C- O./I.D.IIA i CHIHIJAHUA AL PACIFICO E.....I . U ONICOS DEL SODESTE _____MAIN ROADS AIRPORTS A C-, O4D S_a;ED _1bDl,i BR. HONDURAS ,I ,f~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~0 / 5TDuAss00ME5~ HA5TrD S Ab.dDsPnd,47 ,,ao Ibrm0 ODPb0 .D - ODUD DI~~~~~~~~~~~DODO1 <V' EDDaDAA ~~~~~~~~~~ ~~~ ~HODUA ove. G>rL&sAv>ooS P f>,__ \ >~~~~~~~~~~~~~~~~~~~~~~A0. GUATEMALA ./ cr STL RlC4<.LAS ............ _ A . IOD- Inoo _ _ g < 4-~~~~~~~~~~~~~~~~~~ < H O IiJ D U if A S0 - 0   IBRD -11844 9 ( ~ ~~~~~~~~~~~~~ NOVEMU{iR 1975 ;1 1E60 '