Document of The World Bank FILE COQP Y FOR OFFICIAL USE ONLY Report No. 1760-ME MEXICO STAFF APPRAISAL REPORT TOURISM DEVELOPMENT LOAN February 14, 1978 Tourism Projects Department 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. MEXICO TOURISM DEVELOPMENT LOAN CURRENCY EQUIVALENTS Currency Unit = Peso (Mex$) US$1 = Mex$22.80 - Mex$1.0 = us$o.o43 Mex$l million US$43,478 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet 1 square meter (m2) = 10.76 square feet 1 cubic meter (m3) = 35.29 cubic feet 1 kilogram (kg) = 2.205 pounds 1 metric ton (ton) = 2,205 pounds 1 hectare (ha) = 2.47 acres 1 kilometer (km) = 0.62 miles 1 liter per second (1/sec) 22,800 US gallons per day 1 cubic meter per day (m3/day) = 264 US gallons per day GLOSSARY OF ABBREVIATIONS BANOBRAS - National Bank for Public Works and Services CORETT - Land Regularization Committee Financieras - Investment or Development Banks FONART - National Fund for Craft Development FONATUR - National Fund for Tourism Development FONEI - National Fund for Industrial Equipment Hacienda - Ministry of Finance and Public Credit IDB - Inter-American Development Bank IMSS - Mexican Institute for Social Security NAFINSA - National Financing Agency Turismo - Ministry of Tourism GOVERNMENT OF MEXICO FISCAL YEAR January 1 to December 31 1/ The exchange rate was US$1 = Mex$12.5 until August 31, 1976. The peso is now floating. The appraisal mission used US$1 = Mex$23.00 to con- vert figures used in this report. FOR OFFICIAL USE ONLY MEXICO STAFF APPRAISAL REPORT TOURISM DEVELOPMENT LOAN TABLE OF CONTENTS Page No. I. THE TOURISM SECTOR ........................................... 1 II. FONDO NACIONAL DE FOMENTO AL TURISMO (FONATUR) ....... ........ 10 A. Role, Management and Organization ........................ 10 B. Development (Infrastructure) Department .................. 12 (i) ObJectives ........................................ 12 (ii) Characteristics of Operations ..................... 14 (iii) Evaluation of Performance ......................... 14 C. Operations (Lending) Department .......................... 15 (i) Objectives ........................................ 15 (ii) Characteristics of Operations ..................... 16 (iii) Evaluation of Performance ......................... 17 (iv) Internal Systems, Procedures, and Policies ....9.... 1 III. FONATUR'S FINANCIAL POSITION ................................. 23 A. Financial Position of the Development (Infra- structure) Department .................................. 23 B. Financial Position of the Operations (Lending) Department ............................................. 23 C. Overall Financial Position ............................... 24 IV. PROSPECTS ......................... ........................... 25 A. Tourism Demand ........................................... 25 B. FONATUR's Infrastructure Operations ...................... 27 C. FONATUR's Lending Operations ............................. 27 D. FONATUR's Equity Investments ............................. 29 E. Resource Requirements .................................... 30 This docunent 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. Page No. IV. PROSPECTS (cont'd) F. Financial Prospects .................................... 32 (a) Development Department ............................ 32 (b) Operations Department ............................. 33 (c) Overall Financial Prospects ....................... 34 V. THE TOURISM DEVELOPMENT LOAN ............................... 34 A. The Loan and its Objectives ............................ 34 B. Project Justification .................................. 36 C. Project Risks .................. 37 VI. AGREEMENTS REACHED ......................................... 38 ANNEXES I. Tables 4o II. Assumptions for Financial Projections 73 III. Analysis of Hotel Profitability 76 IV. FONATUR's Loan and Investment Policy 86 V. Economic Evaluation 92 VI. Related Documents and Data Available in the Project File 107 The appraisal mission consisted of Messrs. I.A. Menezes, J.R. Bentjerodt, D. Cook (IDF), T. Iizuka, and P. Murgatroyd who visited Mexico in May/June 1977. While in the field, the mission received assistance from Messrs. L. Vera, T. Hutcheson (IDF), K. Challa (IDF), and J.L. Forcina (LAC Region). A further visit was made by Messrs. Menezes and Murgatroyd in July 1977 for discussions of certain project issues. I. THE TOURISM SECTOR Tourism Assets 1.01 Mexico is one of the world's major and most richly endowed tour- ist destinations. Its varied attractions include architectural remains of a series of major civilizations, entertainment ranging from modern to traditional music and dance, a wealth of contemporary creative arts, oppor- tunities for shopping that include handicrafts and haute couture, an agree- able climate, excellent beaches along the Pacific and Caribbean sea coasts, and street scenes that reflect the varied cultural background of Mexico's populace. In addition Mexico is the most accessible foreign destination for tourists from the US and Canada, one of the world's richest tourist generating markets. Tourist Arrivals--Trends and Characteristics 1.02 The proximity to the US and Canada, their growing prosperity and close business ties with Mexico, the availability of direct air access to various destinations in Mexico, and rapid expansion in facilities combined to make for rapid growth of tourism to Mexico. The number of visitors in- creased by an average of over 10% per year from 1960 to 1974, reaching 3.4 million in 1974, not including border tourism. Foreign visitor's growth has also been fairly even. In no year from 1961 until 1974 when the energy crisis hit, was the growth rate less than 8.6%. Visitor arrivals to Mexico declined from the 1974 peak of 3.4 million to 3.2 million in 1975 and 3.1 million in 1976, but are showing recovery in 1977. This decline--the first since 1953--was due to worldwide economic recession and to Mexico's uncom- petitive position resulting from an overvalued peso 1/ (Annex I, Tables 1 to 5). 1.03 Mexico's accessibility by land, sea, and air, has been a major factor in the growth of the tourism sector. Air traffic has grown faster than total visitor traffic--at an average annual rate of 16% in the 1970-74 period and 8% in 1970-76--as a result of a decline in air costs and ani in- crease in direct flights from major North American cities to Acapulco, Meri- da, Guadalajara, La Paz, and Puerto Vallarta. Arrivals by eir constitulted 40% of total arrivals in 1970 and are expected to be over 50% in 1977. Ar- rivals by car, mainly from the border states, generate almost 65% of US tourism to Mexico. This traffic is less significant in evaluating the de- mand for tourist facilities as many are students or people visiting friends or relatives who use few tourist facilities. In 1975 a typical visitor coming by air spent US$11.25 a day for accommodation, a typical visitor by land only one-fifth that much. 1/ Visitor traffic in 1976 was also affected by the Jewish boycott and by the US Bicentennial celebrations and the Montreal Olympics. -2- l.04 Although about 85% of foreign visitors are from the US (Annex I, Table 2), the proportion of visitors from Japan and Europe is increasing steadily. 1.05 According to a study carried out in 1975, the main reasons for coming to Mexico were: pleasure, 68.1%; visiting family, 18.1%; business, 6.0%; and visiting friends, 3.4%. Many trips are made for more than one reason and include more than one destination. About 22% of all visitors enter Mexico via the Mexico City airport and 35% declare Mexico City their final destination. 1.06 Beach based tourism has grown considerably in recent years. Ar- rivals at Acapulco doubled in 10 years from 764,o00 in 1965 to 1,552,000 in 1974 and have continued to grow. The popularity of the resort towns of Puerto Vallarta and Mazatl6n has also increased (Annex I, Table 3). 1.07 The volume of overall tourism is greater than shown by statistics on visitors from abroad. A large border traffic--over 60 million crossings of US residents into Mexico--is officially treated separately. Although most of these visitors cannot be considered tourists, since they stay brief- ly and do not use tourist facilities, roughly four million are calculated to stay overnight in Mexico and can be rightly called tourists. 1/ Given the importance of this border traffic--revenues derived from it totaled US$1,600 million in 1976--and the little that is known of its characteris- tics, the Secretariat of Tourism is initiating a study to determine its size and nature. Domestic Tourism l.08 Domestic tourism in Mexico is also quite important, and with the increasing affluence of Mexico's middle class and the initiation of a five- day work week, this market is growing rapidly. Although no precise data are available, its growth rate is estimated to have been similar to that for foreign visitors. In 1976, some 20 million hotel visits by Mexican resi- dents were recorded, amounting to some 40 million guest nights. At the ma- jor resorts, Mexicans constitute an estimated 50% of guests in hotels of international class and 65% in hotels of lower quality. The three largest cities, Mexico City, Guadalajara and Monterrey, with 13.5 million inhabit- ants in 1975 (half the country's urban and most of its high income popula- tion), generate most Mexican visitors to domestic resorts. 1.09 The number of Mexicans traveling abroad increased from 273,000 in 1970 to 526,000 in 1975. After the September 1976 devaluation of the peso, many foreign trips were canceled and the number of Mexicans traveling abroad fell in 1976. As a consequence, trips to local resorts have become even more popular. 1/ There are some 20,000 hotel rooms available in border towns that accounted for an estimated 5.4 million tourist nights. -3- Seasonality 1.10 Because climatic conditions make Mexico a year-round resort area, the flow of visitors shows only a minor degree of seasonality. Small peaks occur in December, July and August and a low in September, when it rains (Annex I, Table 4). As a result, tourist facilities generally experience average annual occupancies much higher than those prevailing in many other tourist destination countries. 1.11 The popularity of Mexico for conventions and "incentive travel", and the skillful management of its convention capacity have helped reduce seasonality. Total hotel convention capacity of 34,000 includes approximate- ly 14,500 in Mexico City, 8,500 in Acapulco, and 550 in Canciun. Convention centers are planned for Ixtapa (2,500), Mazatl'an (2,000) and Merida (2,000). Average Length of Stay and Expenditures 1.12 In 1976 foreign visitors spent an average of US$23 per day, with air travelers spending more (US$36 a day in 1976) than those arriving by land--US$14 a day (Annex I, Table 5). The typical foreign tourist who comes by air and stays not more than three weeks spends even more (US$43 per day). 1.13 In 1976 foreign visitors spent a total of 35 million nights in the country, an average of 11.4 nights per visitor (Annex I, Table 5). There is no significant difference in length of stay by season. Foreign visitors coming by air for pleasure or business stayed an average of eight days. Hotel visitors average four nights in major tourist areas (Mexico City, Aca- pulco, Puerto Vallarta), suggesting that many tourists visit two or more destinations in the country. 1.14 The table below shows the breakdown of visitor expenditures for 1975. For visitors coming by air, lodging expenditures constitute 29% of total expenditures; for those coming by land, only 18%. Some food expendi- tures are incurred in hotels, but it is estimated that significantly less than half of total expenditures are captured by hotels. A particularly im- portant role is played by handicraft and souvenir shopping, which accounts for about 13% of total expenditures, generating an annual income from such items of more than US$100 million (para. 1.39). Expenditures Pattern of Visitors from Abroad, 1975 Visitors (%) By Land By Air Lodging 17.8 29.0 Food 29.8 28.5 Handicraft shopping 11.1 14.8 Other shopping 9.4 4.4 Local transportation 2.3 10.9 Fuel 18.0 0.3 Nightclub and entertainment 8.7 8.7 Other 2.9 3.4 Total 100.0 100.0 -4- Size of Hotel Industry 1.15 Hotel and other accommodation capacity has steadily expanded. In 1976 there were 6,450 lodging establishments with 195,000 rooms, compared to 3,314 establishments with 90,981 rooms in 1961. Since 1970 capacity has increased at an annual rate of more than 6.5%. The fastest increase in rooms has been in the first-class category. In 1976 about 88,000 rooms were categorized as international standard, about 45% of the total rooms regis- tered. 1/ Two thirds are located in four of the 32 states in the country: Federal District of Mexico City, 26%; Guerrero, 23%; Jalisco, 8%; and Quin- tana Roo, 6%. Rooms are equally divided between city and seaside resort ho- tels, but resort hotels are li:kely to become predominant. There is a trend towards building hotels with larger capacity. Annex I, Tables 6 to 9 show the present situation, growth rates, and distribution of accommodation by type and category. Occupancy Rates 1.16 Hotel occupancy statistics are available for the main destinations, not for the whole country. Although occupancy rates have fallen over the last two years with the decrease in foreign visitor arrivals, in 1975 they were still high (ranging from 60 to 75%) and were spread evenly over the year, particularly in Mexico City and in first-class hotels. In the first half of 1977, occupancy rates returned almost to the record level of 1974 because of a strong recovery of the foreign market and a big increase in do- mestic demand. Annex I, Table 10 shows relatively high occupancy rates for first-class hotels in established beach resorts. Very little is known about lower class hotels (classes C, D and E), which mainly cater to Mexican cli- entele; many are small family-type operations, and some remain open only during the peak season. Their annual occupancy rate is estimated at 50 to 65%. Operations and Profitability 1.17 A favorable factor for hotel operations in Mexico is their rela- tively low operating costs. Though payroll and related expenses have in- creased by 8 to 12% annually in recent years, current ratios of these costs to total sales are relatively low, in the range of 15 to 25%. Food costs are kept below 35% of food sales, and beverage costs between 17 and 25% of bev- erage sales. Cost ratios of other expenses and overhead are similar to those of international standard hotels in other countries (Annex III). Giv- en these favorable operating cost factors, well managed hotels in Mexico at- tain high gross operating prof'it (GOP) ratios of 30 to 40% of total sales. 1.18 Net profitability of' hotels varies considerably; a sound hotel project, after the third year, can expect to earn an annual rate of return on equity of about 8% in real terms. Profitability is not as great as the 1/ In Mexico, as in other countries, the system of categorizing hotels suffeisfrom several flaws, and is neither systematically applied nor universally accepted. T'he appraisal mission had to use its own judgment in hotel categorization questions. high level of occupancy would suggest, in part because average room rates in Mexico are relatively low. An analysis of sample hotels indicates that av- erage annual occupancy rates of large international standard hotels in 1977 were between 75 and 82% and average room rates from Mex$650 to Mex$850 a day. Lower class hotels had lower occupancy rates (50 to 65%) and charged up to Mex$400 a day. Room rates are fixed by the Government, in principle for four-year periods; in practice they are reviewed more often, particularly in view of the unprecedented inflation that Mexico has experienced recently. A 20% across-the-board increase was granted after the September 1976 devalua- tion and another 10% in early 1977. Since rate regulation is not intended to curtail hotel profits, further increases are likely to be granted as re- quired. Because of Mexico's very competitive position in terms of prices and the favorable demand-supply position that is developing, hoteliers are expected to be able to negotiate higher room rates with their clients, par- ticularly tour operators, without losing business or lowering occupancy rates in the near term. Investment Costs 1.19 The cost of constructing hotels in Mexico varies according to size, type, category, and location. Although construction costs increased by 8 to 10% annually in the early 1970s, and by 25 to 30% between 1976 and 1977 after the devaluation of the peso, they are still very reasonable when compared to other destinations. It is estimated that in 1977 prices, average investment costs per room for new hotels in Mexico ranged from over uS$40,ooo for luxu- ry-class hotels to less than US$25,000 for economy-class hotels. A luxury- class hotel in the Caribbean would cost over US$55,000 per room. Ownership and Management Patterns 1.20 In Mexico, ownership and operation of hotels of international class are typically in different hands. Most of the leading hotels are owned by Mexicans, although a few are owned by foreign interests. Some are owned by an individual or a group of individuals, and some, especially large interna- tional standard hotels, are owned jointly by individuals and financial in- stitutions. 1.21 The more important Mexican hotel companies which both own and op- erate hotels are Nacional Hotelera, Hoteles Camino Real, Consorcio Aristos, and Promotora Mexicana de Hoteles. Nacional Hotelera, of which FONATUR is the principal shareholder, operates 29 hotels (3,076 rooms) of which it owns seven (1,800 rooms). The Camino Real Group, of which a considerable share is owned by Banco Nacional de Mexico, operates several hotels (2,170 rooms) under a management contract with Western International, a US group, which also owns stock in the company. The Aristos Group, owned by a real estate developer based in Mexico City, operates hotels in Mexico City, Can- cun, and Ixtapa. Promotora Mexicana de Hoteles, owned by a Mexico City automobile dealer, operates four hotels in Acapulco, and one in Mexico City, all under a management contract with the Americana Group of the US. 1.22 Unlike ownership patterns, hotel operation in Mexico is often in the hands of foreign companies or of Mexican companies with substantial for- eign connections under lease or management contracts. The typical lease - 6 - contract provides for a rent of 15 to 18% of total sales with the hotel com- pany providing equipment and working capital. The typical management con- tract provides for a management fee of 2 to 5% of total sales and an addi- tional 8 to 10% of gross operating profit. Operating companies generally prefer a management contract because it entails less financial risk than a lease contract. Financing 1.23 Mexico's well developed banking system, comprising almost 200 pri- vate, mixed, and publicly owned institutions, has played a major role in supporting the growth of the productive sectors of the economy, including tourism. The banking system has traditionally been able to mobilize large amounts of savings because of a stable currency and sound interest rate policies, maintaining positive real interest rates and a small premium over rates offered by US banks. It has also intermediated successfully between the public's preference for relatively short-term savings instruments and the need to provide medium- and long-term funds for investment projects. 1.24 Notwithstanding the progress achieved by the banking system, cer- tain structural weaknesses were apparent in the early 1970s. One was the traditionalism in credit allocation. Financial institutions tended to re- quire guarantees substantially in excess of the legal minimum (133% of the credit granted). Even credit for projects requiring term financing was judged mainly by the solvency of the sponsor, with little weight given to the appraised risk and income-earning characteristics of the project. This behaviour, though understandable as a way of reducing credit risks, tended to concentrate credit in firms and sectors that had proved themselves, to the detriment of new firms and activities. It was primarily to overcome this weakness that the financial authorities developed a system of trust funds, whose resources came mainly from reserve requirements kept with the Banco de Mexico, to allocate credit to specific activities not receiving adequate credit from the banking system. One such fund, FONATUR, was cre- ated to channel money to the priority sector of tourism. 1.25 In general, trust funds channel only a small portion of total credit. The funds are most useful in the long run in influencing the bank- ing system in its allocation of credit that does not flow through the funds themselves. Thus FONATUR can demonstrate that banks can risk tying up funds for 12 to 15 years in hotels when the project and its market are pro- perly evaluated. 1.26 Since 1973 increased inflation and tighter control of credit ex- pansion and interest rates have slowed the growth of financial savings and reduced credit availability (particularly longer-term credit). Nonmonetary liabilities of the banking system fell from 32% of GDP in 1972 to 22% in 1976, largely because of a failure to adjust interest rates rapidly enough in the light of inflation rates that increased from the 4 to 5% per annum characteristic of the 1960s to 24% in 1974, 15% in 1975, and 16% in 1976. The continuing high rate of inflation led to the devaluation and subsequent floating of the peso in late 1976. 1.27 Expansion of FONATUR's lending activities and the continued sup- -7- port it has received from the present administration reflect the Goverrnment's intention to channel funds to activities whose access to credit on appropri- ate terms is limited, particularly during periods of credit shortage as is the case at present. Much of the hotel expansion in Mexico in recent years has been due to the active role of FONATUR, which has supplied the bulk of hotel credit by rediscounting term loans of private and public financial in- stitutions. These institutions usually finance up to 50% of total invest- ment costs, though in some cases they have lent as much as 65%, with maturi- ties up to 12 to 15 years. Medium-term loans for less than five years and short-term loans of six months or less are available from commercial banks for additional capital needs, e.g., working capital, but they are limited in amount and carry high interest rates (18 to 22%). 1.28 Equity for hotel projects comes from various sources: individual investors, financial institutions, and more recently the Government. Since 1971 equity has been raised predominantly in Mexico, in part because of a change in the law that required a majority holding by Mexican investors in new corporations. This and the current banking practice of requiring debt/ equity ratios of 50:50 have put a burden on investors to come up with sub- stantial equity capital. In many countries loans covering 70 to 85% of ho- tel costs are not uncommon, since around 85% of total hotel investment costs are often in fixed assets. 1.29 Despite difficult market conditions of the past two to three years and increases in construction and operating costs, investors have been will- ing to provide equity funds for the expansion of existing hotels and con-. struction of new ones. Hotels may not generate high net profits, but in- vestors envisage other financial advantages from investing in them: tax shelters, hedges against inflation, substantial cash flow, and possible long- run capital gains. Both investors and FONATUR are aware of the financial difficulties investors face during the first few years it takes for a hotel to attain levels of operation sufficient to generate positive cash flows. Development of Other Facilities and Services 1.30 Tourist facilities other than hotels have also flourished wi-th the continued expansion of tourism. The number of travel agencies in Mexico in- creased by 62% in four years, from 468 in 1972 to 758 in 1976. The number of agencies catering to the transport needs of tourism has also grown rapid- ly: from 43 in 1973 to 320 in 1976 for specialized transport; from 159 to 205 in the same period for rent-a-car agencies. The number of restaurants, bars and similar facilities increased by about 14% between 1972 and 1976. 1.31 Mexico has given priority to developing its land, sea, and air transport network. During the period 1971-74 about US$2 billion was spent on road construction, increasing paved roads from 71,250 km in 1971 to 175,540 km in 1974. A ferry network has been developed, largely to link Baja California with the Mexican mainland. Accessibility by air has also improved, with 44 commercial airports now in operation. International air- ports were recently opened at Zihuatanejo and Canclun. Mexico City's air- port, which in 1974 handled about 50% of all flight arrivals from abroad, is being modernized and expanded. Although Mexico City, Acapulco, and some - 8 - other cities have good air connections with the US, Canada, South America, and Europe, some air access problems have developed for other Mexican desti- nations in the last few years. These relate not to infrastructure but to air policies. Because of the lack of a new bilateral civil aviation agree- ment between Mexico and the IJS since 1970, some airports were not being served with the frequency and variety that made Mexico City and Acapulco major tourist destinations. A new bilateral agreement has been signed in January 1978 which dramatically increases the number of points that can be served. For scheduled services the agreement includes new or expanded rights from 33 US cities to one or more of 21 Mexican destinations, particularly tourism resorts on the west coast and in the Yucat'an peninsula. Furthermore, the agreement will permit the free flow of charters between the two countries without many restrictions. Institutional Aspects 1.32 Until recently, there was no single entity at the federal level charged with the responsibility for developing tourism. This responsibility was shared, among others, by the Department of Tourism, the National Council of Tourism, INFRATUR, and FOGATUR. Each of these had both specific and over- lapping responsibilities and there was little coordination among them. Al- though the law that created the Secretariat of Tourism ( Turismo ) in 1974 entrusted it with a coordinating role for all aspects of sectoral develop- ment, including promotion and training, it is only recently that the Secre- tariat appears to be taking over this role. In 1976 the National Council of Tourism had a network of 15 offices abroad plus one in Acapulco, while the Secretariat had 19 delegations abroad and 126 in the country. The Council also had a budget higher than that of the Secretariat. The Government seems determined to strengthen Turismo so as to ensure effective coordination; the Council has been brought under the wing of Turismo, which in due course is likely to absorb its functions. The Secretary of Turismo is now Chairman of the Board of FONATUR, and fur-ther changes can be expected in the direction of closer coordination. Employment and Training 1.33 The tourism sector employs between 300,000 and 400,000 people di- rectly, about 2% of the labor force. Some 180,000 work in hotels, 76% of them at the lower level, 18% in administration, and 6% in management. Most have received little or no formal training. People in top management jobs have often been trained abroadl. 1.34 Though the greatest need is for training for lower and intermedi- ate jobs, existing institutions train people mainly for higher levels. The organization most geared to the needs of the sector is the Mexican Institute for Social Security, which has 11 schools offering 16-week courses for lower level staff. A large number of its recent graduates found work in the tour- ism sector. In August 1976, 17 universities offered programs (eight of them recognized by the Secretariat of Public Education) leading after four years to the degree of licenciado in tourisn administration or planning. Most of the 700 graduates in 1976 had difficulty finding jobs in the tourism sector. Practical training is lacking at all levels, partly because of labor laws and regulations and partly because of the orientation of curriculum planners. 1.35 Turismo very broadly estimates the demand for trained staff for 1976-82 at 15,000 people a year, of which 11,600 for lower level jobs. The present training structure cannot meet this demand. The new administration recognizes the need for studies to determine the amount and kind of demand for trained personnel, improve curricula, and provide more practical train- ing. Turismo and FONATUR have agreed with the Bank to carry out the needed studies not later than June 30, 1979. Economic Importance of Tourism 1.36 The major contribution of tourism is to the balance of payments and the generation of employment. Tourism foreign exchange earnings peaked at US$842 million in 1974 and amounted to US$821 million in 1976. 1/ This constituted 13.9% of exports of goods and services in 1974 and 12.1% in 1976: Balance of Payments Summary (in US$ million) Rate of Growth (%) 1965 1970 1973 1974 1975 1976 65/76 70/76 (a) Exports of goods and nonfactor services 1,902 2,745 4,603 6,o64 6,082 6,801 12.3 16.3 (b) of which tourism 275 415 724 842 800 821 10.5 12.0 (c) b:a (in %) 14.5 15.1 15.7 13.9 13.2 12.1 1.37 Tourism is the second most important export item after border trade, which comprises revenues from visitors who do not travel into the interior of Mexico. Export Detail (in US$ million) Items 1970 1975 1976 Border transactions 879 1,542 1,609 Tourism 415 800 821 Cotton 124 174 241 Cattle, meat 122 35 88 Coffee 86 184 343 Assembly industry 81 403 520 Petroleum, oil lubricants 38 460 557 All other goods and nonfactor services 1,000 2,484 2622 Total 2,745 6,o82 6,801 1/ Net foreign exchange earnings from tourism amount to about 90% of gross revenues. - 10 - 1.38 Between 300,000 and 400,000 jobs are directly generated in tourism (para. 1.33), i.e., in activities that sell goods and services to tourists. Although most workers in tourism are relatively unskilled, wages and bene- fits relative to skill levels are high. A survey undertaken in Acapulco in the early 1970s showed income of employees in tourism activities was 50% higher than average income. Acapulco, though it has other industries, is dominated by tourism; earnings in tourism nationwide are probably similar to those in other modern sector activities. 1.39 Handicrafts are an imnportant component, particularly with respect to the distribution of the benefits of tourism. In 1975 total sales of handicrafts were estimated at Mex$1.6 billion, affecting the lives and in- comes of at least five million Mexicans (including producers, market inter- mediaries, and their families) of the poorer income segments of the popu- lation. Mexican crafts are we:ll known for their diversity, colorfulness, and quality and are rightly considered and advertised as a major tourist at- traction. 1.40 Producers of crafts can be divided into various categories: over half belong to Indian ethnic groups; another 30 to 40% are mestizos. A small percentage can be considered craftsmen-artists who make a living based on the fame acquired from their individual products, but most are nameless. For most craft producers, agriculture is the basic occupation. Since on the average, however, there are over 200 days a year during which a family isnot ful- ly working in agriculture, some communities or families have specialized in craft production. Also, the amount of family effort devoted to crafts de- pends on the yields and income from agriculture. For instance, in 1975, a bad year in agriculture, the number registered as artisans at a large handi- craft institution showed a sizeable increase. 1.41 There are several institutions involved in preserving, producing and marketing crafts at various points in the production cycle. The largest and best known is the National Fund for Craft Development (FONART), created in 1971. Its role is to rescue, conserve, diffuse, and improve all expres- sions and objects of popular art and tc support the producers of this art. It disseminates information through regular publications, a weekly televi- sion program, and exhibitions. Its major task, however, lies with the pro- ducers. The first step in its work with producers is the organization of a "solidarity group," which collects orders, organizes and distributes work, and is eligible for credit, training, and other support; each group estab- lishes minimum quality requirements and prices. The producers receive half payment on delivery of the products and the other half the following month, a payment system that guarantees a more stable income per month and gives FONART a continuing relationship with the artisans. II. FONDO NACIONAL DE FOMENTO AL TURISMO (FONATUR) A. Role, Management, and Organization Background 2.01 In recognition of the major importance of tourism to Mexico as a - 11 - generator of foreign exchange earnings and employment, and of the need to promote a more rapid and better integrated development of the sector, the Federal Law for the Development of Tourism was enacted in January 1974. Its three main provisions strengthened the powers and responsibilities of the Department of Tourism (subsequently made a full ministry) to plan and coor- dinate the growth of national and foreign tourism; formed an interministerial commission on tourism development; and created FONATUR to be responsible for formulating and implementing projects to improve or expand facilities throughout Mexico. 2.02 FONATUR was established as a trust fund of the Federal Government under the administrative supervision of Nacional Financiera, S.A. (NAFINSA), the major public sector development financing institution, through the merg- er of two existing trust funds, INFRATUR and FOGATUR. INFRATUR (Fondo de Promocion de Infraestructura Turistica) had been established in 1969 to pro- mote and carry out tourism infrastructure development and by 1976 was suc- cessfully implementing two major projects at Ixtapa-Zihuatanejo and Canc'un with assistance from IBRD and IDB. FOGATUR (Fondo de Garantla y Fomento al Turismo) had been created in 1965 to finance hotel construction and related tourism facilities directly and by discounting loans made by financial in- termediaries. Its volume of operations had grown very slowly, amounting to only Mex$375 million in 1973. These two trust funds were merged: (a) to cre- ate a single institution able to implement the Government's tourism develop- ment plans and to coordinate more effectively the integrated development of tourism infrastructure and superstructure; and (b) to revitalize and great- ly expand the financing activities for which FOGATUR had been responsible, in light of the limited capacity of the banking system to provide hotel fi- nancing in adequate amounts and terms out of its own resources. FONATUR's Operating Regulations empower it to engage in all the activities previously performed by INFRATUR and FOGATUR and to undertake studies and implement projects pursuant to national tourism development goals. Board and Credit Committee 2.03 Responsibility for the overall direction of FONATUR is vested in its nine-member Board (called the Technical and Fund Allocating Committee), which is chaired by the Secretary for Tourism and comprises representatives of the Secretariats of Programming and Budgeting, Treasury and Public Cred- it, National Patrimony and Industrial Development, Banco de Mexico, Nacio- nal Financiera, S.A., and three representatives of the private sector (the Confederation of the National Chambers of Commerce and Industry, the Perma- nent National Agrarian Congress and the Congress of Labor). The Board meets four to six times a year to approve operating programs and budgets, set; policies and guidelines for FONATUR's financing and infrastructure opera- tions, and generally oversee operations. Approval of individual credit; op- erations is delegated to a four-member Credit Committee comprising repre- sentatives of the Ministries of Tourism and Finance and of Banco de Mexico and NAFINSA (normally the Board members or their alternates); this committee meets monthly and is the key decision-making body for FONATUR's hotel financ- ing operations. 1/ 1/ Authority to approve loans of less than Mex$2 million (about US$90,000) has been further delegated to FONATUR's Director General. - 12 - Organization and Management 2.04 FONATUR's day-to-day operations are managed by its Director General, appointed directly by the President of Mexico. Reporting to the Director General are three departments: the Development Department, responsible for tourism infrastructure development; the Operations Depart- ment, responsible for hotel credit, equity investment, and related fi- nancing activities; and a third department under the Controller which pro- vides accounting, financial management, and personnel administration services to the operating departments. Past experience has shown FONATUR's management to be experienced and competent. An organization chart is presented on page 13. Staffing 2.05 On June 1, 1977, FONATUR's staff totaled 453, including 246 peo- ple employed on fixed-term ccontracts most of whom are employed in the in- frastructure operations of the Development Department. The Operations De- partment has only 37 staff members, 22 of whom are professionally qualified accountants, engineers, economists, and architects, but it receives back-up assistance (e.g., in conducting marketing studies) from other FONATUR de- partments and, to a lesser extent, from outside consultants. The Operations Department is organized in three subdepartments responsible for lending op- erations, financial promotion and equity investments, and sales of developed land. Although the credit operations subdepartment with 14 staff mem- bers is the largest, FONATUR will need to expand it further to enable it to better cope with its planned increase in activities, including supervision, operational analysis, and technical assistance. FONATUR has had little difficulty in attracting and retaining experienced and well-qualified pro- fessional staff. B. Development (Infrastructure) Department (i) Objectives 2.06 The primary objective of FONATUR's infrastructure development op- erations has been to diversify tourism destinations in Mexico, both to fa- cilitate a more rapid growth of tourism capacity and to ensure a more equi- table regional spread of the economic benefits of tourism. Initial efforts were concentrated on the development of Cancun on the coast of Yucat'an and Ixtapa-Zihuatanejo on Mexico's Pacific coast. More recently, FONATUR has initiated similar developments in Oaxaca and in Baja California. 2.07 With respect to its infrastructure developments, FONATUR's finan- cial objective has been to recover its investments and earn a reasonable rate of return by selling developed land to investors at appropriate prices. Land has either been sold on a cash or deferred-payment basis (e.g., 15 to - 13 - FONATUR'S ORGANIZATION / |Technical and Fund Credit Allocating Coxmittee Director DireciretotGorvior ;Deputy Director| General t1 Dircor Director for Developent for Operations (6) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~(6) Pl nning and Legal iPersonnel Investmn_t 1 Economic Studies Counsellor rContollers Unit Proootion |Unit (13) (9) (4) (4) Unkit (7) |Oaxaca ProjectAccounting C & Financ Unit (3) Unit Credit & Finance (22) Unit (14) I . _ _ | Fin ~~~~~~~ ~~ ~ ~~~~nce ' -- Cncun Proj(ct3 1 1 Sales Unit Unt (13) ___________ | General Services Ixtapa-Zihuata- 1 Unit (23) nejo Project - unit (23) J Baja California Project Unit | C~~~~~oreto O ffice San Jose del Cabo AdmxinistCrati n I I I I office & Finance Office |Marketing & Promo- tion Unit (6) IFIeld Unit Field Unit Field Unit Field Unit (Loreto) San Jose _1 Figures in parenthesis are the number of staff positions allocated to each unit. - 14 - 20% down, balance over five years, 12% interest p.a.) or has been sold in exchange for equity participation in new hotel projects. While its infra- structure developments are still in the initial stage, FONATUR has earned a significant amount of revenues generated from the sale of land and relat- ed operations. With growing investor interest in the new resorts, FONATUR should have little difficulty in achieving a satisfactory return on its in- frastructure investments. (ii) Characteristics of Operation 2.08 In 1970 FONATUR (then INFRATUR) chose two areas to develop after an elaborate exercise that took into account market, economic, touristic, social, and other factors. These were Canc'un and Ixtapa-Zihuatanejo. In January 1972, the Bank lent US$22 million equivalent to help finance the pro- vision of infrastructure for Ixtapa-Zihuatanejo. Earlier, in August 1971, the Inter-American Development Bank had made a loan of US$21.5 million for similar facilities at Cancun. 2.09 The project at Ixtapa-Zihuatanejo, in its first stage provides in- frastructure to support the development of 3,500 hotel rooms and 500 single- family houses. The project comprised three main elements: the first in- cluded the principal infrastructures--roads and streets, water and sewerage systems, electric power and telecommunications--needed for the tourism area at Ixtapa; the second consisted of infrastructure for the town of Zihuatane- jo, which would develop as a service center and secondary tourist attraction; the third was the construction of an international airport. The project also made provision for hotel training. The Canciun project was similar in pro- portion but included the construction of a whole new town because of the absence of urban areas nearby. More recently initiated are infrastructure projects in Oaxaca and Baja California. The Oaxaca development is at an early stage, and to date only modest investments have been made. The pro- ject in Baja California is similar in size to those in Ixtapa-Zihuatanejo and Canc'unand envisages the construction of infrastructure facilities that would support the development of 2,100 hotel rooms, 4,050 apartel rooms, and 960 condominium units and tourist villas at two sites: Loreto and San Jose del Cabo. The Bank in July 1977 extended a loan of US$42 million to help finance the infrastructure for this project. (iii) Evaluation of Performance 2.10 FONATUR's Development Department is well managed, has established a good reputation, and has acquired considerable experience and knowledge of the tourism sector. After encountering some delays due largely to land acquisition problems, the Ixtapa-Zihuatanejo project is now nearing comple- tion, with all of the Bank's loan expected to be disbursed by June 30, 1978. The airport has been open for more than a year and is serving both Ixtapa- Zihuatanejo and the rapidly expanding industrial town of Lazaro Cardenas, an hour's drive from the airport. Physical facilities of the town of Zihuata- nejo have been greatly improved. Its population has grown from 4,000 to over 10,000 and is expected to continue to grow faster than estimated at the time of appraisal. In the tourist zone of Ixtapa, two hotels are open for business (534 rooms) and several others are under construction. By 1979 -15 - about 2,600 rooms are expected to be available. 2.11 In Canc'un, as of mid-1977, 2,800 hotel and condominium rooms were completed and several hundred more were under construction. The new town developed nearby now has a population of over 10,000. Early in 1976 IDB ap- proved another loan of US$20 million to finance the second stage of the Can- cun project, which is underway. 2.12 The Baja California project, for which the Bank is providing as- sistance, is being implemented on schedule. 2.13 Between 1973 and 1976, FONATUR disposed of 62% of the land it planned to sell in the first stare at Cancuin and 15% at Ixtapa-Zihuatanejo. Pro- motional efforts to sell land have been intensified in Ixtapa this year. Prices average Mex$345 (US$15) per square meter for residential sites, Mex$115 (us$5) for commercial, and Mex$690 (US$30) for hotel sites. FONATUR plans to increase these prices by 12% a year to cover inflation and appreci- ation in land values. These prices are competitive with those in other tour- ist areas in Mexico. 2.14 With the Canc'un, Ixtapa-Zihuatanejo, Oaxaca, and Baja California projects in the pipeline, FONATUR does not intend at this stage to open up any new resort areas but to concentrate on fully developing and utilizing the investments already made or underway. C. Operations (Lending) Department (i) Objectives 2.15 Unlike its infrastructure developments, FONATUR's hotel financing activities are nationwide. The objective is to encourage and facilitate ex- pansion of tourist accommodations and related services, in line with nation- al goals for tourism development, by ensuring that long-term financing on adequate terms is available for economically sound and financially viable projects. To meet this objective FONATUR: (a) encourages the interest of banks and other financial intermediaries in hotel financing by helping them appraise projects and rediscounting their loans for such projects; (b) under- takes sector studies and assists hotel investors structure their projects and obtain financing from third parties; (c) makes equity investments in and direct loans to selected hotel projects if full financing cannot be obtained from other sources; and (d) finances directly or through intermediaries the development of other services necessary to promote or complement hotel in- vestments. 2.16 Apart from its Operating Regulations which specify the financing activities it is legally authorized to undertake, FONATUR does not have an explicit statement of its policies on hotel financing, but a broad framework of policies and priorities is implicit in the decisions taken by its Board, Credit Committee, and management. FONATUR believes its primary role should be as a second-tier institution, discounting loans made by financial inter- mediaries for the development of all categories of hotel accommodation throughout the country provided that analysis shows the project to be sound- 16 - ly designed, financially viable and reasonably efficient economically. Equity investments and direct lending are regarded as less important activi- ties and have been concentrated mainly in Cancun and Ixtapa where FONATUR had felt it necessary to stimulate further investment by the private sector. While the quality of the investment portfolio appears quite sound, individ- ual investments have been structured and approved case by case without the discipline of a formal policy framework to help decide the extent of FONA- TUR's equity participation, minimum participation required from private sector investors, FONATUR's total exposure in terms of equity and direct loans, or whether the intention is to invest permanently or sell its equity to private investors as soon as feasible. Similarly there are no formally established policies on the circumstances in which FONATUR will make direct loans or the terms of such loans. FONATUR's management has now reviewed and clarified its financing policies and appraisal criteria, particularly with respect to equity investments and direct lending, and has agreed to incorporate these in its Operating Regulations. These statements, which provide FONATUR with a much improved policy framework (Annex IV), have been discussed during loan negotiations, and have subsequently been approved by FONATUR's management and Board. (ii) Characteristics of Operations 2.17 (a) Lending Operations: During the four years 1973-76, FONATUR approved 428 credit applications totaling about Mex$3.6 billion to help fi- nance construction of about 21,000 new hotel rooms, renovation of 3,000 existing hotel rooms, and some miscellaneous tourism investments, represent- ing a total investment of about Mex$8.9 billion: FONATUR's Lending Program 1973-76 Total for 1973 1974 1975 1976 Period Number of approved loans 46 145 123 114 428 Number of additional rooms financed 2,090 8,275 5,025 5,240 20,630 Mex$ million Total hotel investment 770 2,905 2,145 2,325 8,145 Other investment 150 10 210 340 710 Total investment 920 2,915 2,355 2,665 8,855 Owner equity financing 505 1,680 1,290 1,440 4,915 Intermediary loans 40 115 95 105 355 FONATUR approvals 375 1,120 970 1,120 3,585 2.18 As of December 31, 1976, Mex$2,520 million of the approved credits (70%) had been disbursed; an additional Mex$540 million (15%) will be dis- bursed in 1977 and 1978; and Mex$525 million (15%) had been or will be can- celed. - 17 - 2.19 The table on page 18 summarizes the 1973-76 loan approvals by size, purpose, hotel category, interest rate, and maturity. Over 60% of the value of these approvals has been for loans of over Mex$10 million and for new ho- tel rooms; 79% of the value has been for Category I and II hotels. Typical terms were 9.5% interest (rate received by FONATUR--final borrowers pay at least 2 percentage points more) and 10 to 15 years' maturity. 2.20 The 428 approvals were distributed among 128 different cities in all but one of the states in Mexico. Annex I, Table 11, lists 21 cities that received about half the projects and over 75% of the value of approv- als. FONATUR worked with 56 different financial intermediaries over the 1973-76 period. The most active of these, processing 70% of the value of all approvals, are listed in Annex I, Table 12. 2.21 (b) Equity Investments: FONATUR's equity investments have expand- ed rapidly (Annex I, Table 13), increasing from Mex$44 million in 1974 to Mex$444 million in 1975 and Mex$1,045 million in 1976. About 60% of total equity investment is in Cancun and Ixtapa in hotels built by FONATUR as part of its effort to promote these projects. A further 13% represents the transfer to FONATUR of the Government's participation in the Nacional Hotelera chain. 2.22 At the end of 1977 FONATUR will have a controlling equity interest in 18 hotels (excluding the hotels owned by Nacional Hotelera) and a minor- ity participation in three more. These hotels are managed by professional operators who regularly submit detailed budgets and accounts to FONATUR. The Canciun investments are already profitable, and the Ixtapa investments are expected to be so in 1978. Only the new hotels built at archaeological sites are unlikely to show profits for several years (para. 2.25). To date, most hotels in which FONATUR has equity have reinvested annual pro- fits rather than declared dividends. 2.23 It is FONATUR's policy to make equity investments only in support of priority programs when private investment for these projects is not forthcoming. All of FONATUF's equity investments in projects, except the highly profitable Club Mediterranee in Canciun, will be sold if buyers can be found who will pay an acceptable price. With the exception of some ad- ditional investments in the resort areas it has developed, FONATUR plans to minimize its equity investment activities in the future. (iii) Evaluation of Performance 2.24 (a) Lending Operations: Lending operations performance has been improving over the past years. Although the staff needs to be expanded with the increasing workload, management and organizational structures are adequate. Implementation of the revised Operating Regulations (para. 2.16) would formalize present practices and articulate new policies in areas where none exist. The quality of some aspects of appraisal work would be strengthened (para. 2.27). Documentation of underlying expenditures would be required from the intermediaries as a condition of disbursements (para. 2.36). Supervision and technical assistance would be expanded for all of its subprojects (para. 2.37). Budgeting will be strengthened through computerization of the loan portfolio and adoption of three-year - 18 - FONATUR: CHARACTERISTICS OF LOAN APPROVALS 1973-76 No. Mex$ Millions % of Value I. BY SIZE: (Mex$) Under 2,000,000 158 173.0 5 2,000,000 - 10,000,000 109 570.2 16 Over 10,000,000 85 2,231.4 62 Not categorized by size 76 611.0 17 Total 428 3,585.6 100 II. BY PURPOSE: New hotel rooms 234 2,381.3 66 Expansion & remodeling hotel rooms 118 593.3 17 Trailer parks 5 3.8 - Condominiums 5 199.6 6 Suites 8 109.3 3 Furniture & equipment 53 125.4 3 Uncategorized 5 172.9 5 Total 428 3,585.6 100 III. BY HOTEL CATEGORY: Category I 39 1,657.7 46 Category II 88 1,195.6 33 Category III 129 374.1 11 Category IV 73 67.5 2 Category V 12 3.2 - Subtotal new hotel rooms 341 3,298.1 92 Uncategorized hotel rooms & other 87 287.5 8 Total 428 3,585.6 100 IV. BY INTEREST RATE: (received by FONATUR) 77. loans 91 104.6 3 8% loans 67 68.4 2 8.5% loans 75 421.8 12 9.5% loans 102 2,003.3 56 10% loans 5 3.8 - 10.5% loans 17 376.5 10 11% loans 53 125.4 3 11.5% loans 13 308.9 9 Uncategorized 5 172.9 5 Total 428 3,585.6 100 V. BY MATURITY: 5-year loans 5 199.6 6 8-year loans 53 125.4 3 10-year loans 222 811.0 23 15-year loans 143 2,276.7 63 Uncategorized 5 172.9 5 Total 428 3,585.6 100 - 19 - cash flow budgeting (paras. 2.39 and 2.40). 2.25 (b) Equity Investments: Operational, financial, and management control of equity investments is generally satisfactory. FONATUR's record of building 13 new hotels in 1977, all within time and budget limitations, is impressive. The sale of five projects during the year at satisfactory prices demonstrates an active commitment to using equity investment only where and when private investment is not available. The Nacional Hotelera chain, made up largely of hotels not built by FONATUR, is not yet profitable and should be subject to the same financial management monitoring as FONA- TUR's other projects. The six new hotels at archaeological sites were built at least partly because of political demands and may not be profitable for some time. This particular investment, however, represents only a very small portion of its total equity investments. A clearly defined statement of policies in this area should help FONATUR resist such pressure in the future. (iv) Internal Systems, Procedures, and Policies 2.26 (a) Project Appraisal: For loans made through financial interme- diaries and presented for discounting to FONATUR, the task of project ap- praisal is shared by FONATUR and the intermediary. In practice only a few com- mercial banks and intermediaries handle a sufficient volume of hotel lending to warrant their employing tourism specialists. Consequently, many interme- diaries devote their attention mainly to examining the creditworthiness of the borrower and the broad financial aspects of the project which are ade- quately covered by them and rely on FONATUR's help for appraising the con- struction, design, marketing, and other technical details. Thus most inter- mediaries start working with FONATUR early in the appraisal process and de- lay approval of a loan until FONATUR's appraisal has been completed. Simi- larly many of the smaller hotel investors approach FONATUR directly for advice and assistance during the project preparation stage. FONATUR regards such technical assistance as an important aspect of its support for the tour- ism sector. 2.27 FONATUR appraisals are undertaken by teams of two professionals, an economist/financial analyst and an engineer or architect, who visit the project site often with a representative of the intermediary. Their ap- praisal is comprehensive and covers investment, operational, financial, and marketing aspects. However, the results are summarized in a standardized report format that has several defects as a document for decision making. It is difficult to distinguish which aspects are of special importance for a particular project, and the treatment of some aspects appears superficial. The procedure should be strengthened by tailoring the appraisal document to the characteristics of individual projects and when appropriate: (a) devot- ing greater attention to the managerial and administrative competence of the proposed hotel operator; (b) including balance sheets and sources and uses of funds statements in financial projections; (c) analyzing in greater depth the market and marketing aspects; and (d) including a more explicit and quantitative treatment of economic aspects rather than relying on quali- tative judgments. The shortcomings are caused in part by the heavy travel and analytic workload of appraisal staff, each of whom is involved in 20 to 25 appraisals a year. FONATUR's management has agreed that a more flexible, - 20 - issue oriented appraisal format should be developed and has begun to experi- ment with new approaches. It has also agreed to upgrade its appraisal pro- cedures and expand the staff of its Operations Department as required to effectively carry out FONATUR's programs. 2.28 Appraisals of direct loans are handled in much the same way as loans through intermediaries except that FONATUR devotes more attention to questions of credit risk. Appraisals of prospective equity investments are handled by a separate subdepartment, which carries out its evaluations in greater depth. Apart from a failure to treat the economic and social as- pects explicitly, these appraisals are generally thorough and of good quality. 2.29 (b) Interest Rate Policy: Since 1974 banks and financieras 1/ have increased their interest rates in response to higher inflation, and because of increased uncertainty about their future resource costs, many banks have switched to a system of floating interest rates related to the index of the average cost of funds to financieras (the ACF index). 2/ 2.30 Until recently, under FONATUR's interest rate structure, the ulti- mate borrowers paid fixed peso interest rates of 10 to 13% for 10 to 15 years, including a grace period of two to three years. Loans for condomini- um development were for shorter periods (five years) and at a higher inter- est rate (14%). The interest spread for the financial intermediaries was 2 to 3%, depending on the size of the loans. These interest rates were set in July 1974 and were 2 to 4% below those charged by commercial banks at that time for medium- and long-term loans financed out of their own resources. The rates were fixed and did not allow FONATUR to break even on its credit operations. 2.31 Under the proposed project, the Government and FONATUR have agreed that: i. FONATUR would charge floating rather than fixed interest rates, such that interest rates on outstanding loans would be adjusted periodically to reflect changes in the ACF index; ii. FONATUR would on-lend to intermediaries at interest rates whose weighted average is approximately equal to the ACF index (cur- rently 14.1%). This would mean that the final borrowers would pay an average rate of 16% which would subsequently vary accord- ing to the ACF index. (A similar scheme has been introduced,by another trust fund, FONEI, to which the Bank has lent in the past.) Given present projections of future rates of inflation (20% in 1978, 12% in 1979, and 7% thereafter) and the relation between inflation and the average cost of funds to financieras, this new structure should result in average interest rates charged to hotel investors equivalent to 2 to 3% in real terms S/ Investment or Development Banks. 2/ This index is published monthly by the Banco de Mexico. It re- presents the average interest rates paid by financieras to savers on short and medium notes and bonds. - 21 - over the life of FONATUR's subloans. As a first step in this direction, FONATUR's Board and the Government increased FONATUR's interest rates in June 1977, whose weighted average was approximately equal to the ACF index current at that time (Annex I, Table 14). No changes in the interest rate have, however, been made since then. During negotiations, the Mexican Government and FONATUR have agreed to make the next adjustment before September 1, 1978 and thereafter allow it to float in accordance with the changes in the ACF index; and iii. FONATUR would require larger investors to bear the foreign exchange risk on the part of their total debt requirements financed out of cofinancing resources that FONATUR is plan- ning to raise from foreign commercial banks (para. 4.14). 2.32 The above principles reflect a substantial improvement over past policies. While slightly below commercial levels, the new interest levels are commensurate with promoting desired levels of investment in the hotel sector to compensate for modest financial returns to hotel investors and the lack of fiscal or other incentives available to the hotel sector. 2.33 (c) Procurement Procedures and Cost Controls: FONATUR's proce- dures for controlling procurement and project costs are satisfactory. For smaller projects, procurement control is delegated to the intermediaries, which for many items tend to rely on the prospective borrower's judgment, experience, and self-interest to select contractors and equipment that are competitive in price and quality and appropriate for the purpose in view. However, FONATUR applies certain construction cost criteria, so that bor- rowers cannot inflate their resource needs. 2.34 FONATUR requires the larger prospective borrowers to submit with the loan application at least three bids for civil works and a short analy- sis evaluating each bid and enabling bids to be compared. Bidders are re- quired to have experience in hotel construction and a solid financial posi- tion. Supply and installation of fixed equipment is normally carried out by specialized contractors registered with FONATUR. The borrower is re- quired to obtain quotations from at least two such contractors and to pur- chase furniture, fixtures and non-fixed equipment from a list of qualified suppliers and local manufacturers registered with FONATUR. 2.35 For the more important and the largest subprojects, and those in which FONATUR has a majority equity interest, FONATUR employs the services of a local consulting firm specialized in construction management. This firm is well equipped to supervise the entire execution of any hotel pro- ject. Its experience includes involvement in building 38 medium-size and large hotels in Mexico in the last five years. The firm has developed de- tailed parameters for the design of hotels and procedures for preparation of bidding documents and for cost control of hotel construction and, equipment. 2.36 (d) Disbursement Policies and Procedures: Disbursement schedules and legal documentation, usually in the form of signed notes required as - 22 - guarantees, are set up in conjunction with appraisal and approval processes. No commitment fees are charged. Disbursements are made to intermediaries on request, and they disburse this money immediately to the borrower. In the past no documentation of underlying expenditures or physical inspection hab been specifically required as a condition for disbursement. Intermediaries have been held generally responsible for assuring themselves that the money was spent as intended. On direct loans FONATUR is often involved in the construction process and has opportunities through physical inspection and direct control of expenditure decisions to provide evidence of expenditure. During negotiations, FONATUR agreed to require receipt of documentation of underlying expenditures equal to or exceeding the amount of FONATUR dis- bursements. It also agreed to place a limit on the elapsed time between the date of FONATUR's authorization of the disbursement and the date of initial expenditures by the final borrower. 2.37 (e) Supervision of Subprojects: Intermediaries have the primary responsibility for supervising indirect loans. FONATUR engineers and finan- cial analysts however, are made available for supervision and technical as- sistance on request for problem projects. FONATUR has agreed that more emphasis should be put on supervision and technical assistance for its sub- projects. During negotiations, FONATUR agreed to initiate a reporting system whereby each intermediary would submit to FONATUR a written report at least quarterly summarizing the status of each subproject loan, together with selected data on occupancy rates, average tariffs, and financial re- sults. Direct loans are usually made to subprojects in which FONATUR has an equity participation, and professional managers of these projects are required to submit budgets and detailed monthly financial reports. 2.38 (f) Loan Collection Procedures: Intermediaries are responsible for loan collection on their subprojects and for paying FONATUR on agreed schedules whether or not they have received anticipated payments from the borrower. For direct loans, which represent 15% of the total value of loan approvals, FONATUR gets repaid directly by the borrower. Collections pre- sent little problem for FONATUR: only Mex$l.9 million, less than 0.1% of the loan portfolio, was in arrears on December 31, 1976, and this has since been repaid. FONATUR usually agrees to the few requests for rescheduling received from intermediaries or borrowers. It is often unaware when borrow- ers are delinquent in their payments to intermediaries, but this weakness will be corrected by the new reporting system (para. 2.37). 2.39 (g) Accounting and Budgeting: Financial statements and summaries are prepared monthly and submitted to management before the end of the next month. Accounting and financial control are generally adequate. Though no provision for bad debt expense is accrued, historical experience suggests this is justified. Consultants are designing a system for dealing with an accounting deficiency: the lack of a method for writing off capitalized in- frastructure project development costs or for associating these costs with revenues from land sales to measure relative profitability of projects on an interim basis. FONATUR is computerizing its loan portfolio which should facilitate the adoption of an accrual system for interest income and ex- pense--an improvement over the present cash basis accounting for these items. - 23 - 2.40 Budgeting within FONATUR is the responsibility of the Controllers Department. Budgeting for equity investments is separately monitored by staff of the Investment Promotion Unit. Annual income and expenditure and cash flow budgets are prepared and updated monthly with actual data. New forecasts for the remaining months are not regularly made. Since new ap- proval decisions affect cash flow over a three-year period, FONATUR has agreed to prepare and put into effect new three-year cash flow budgets for each year. 2.41 (h) Audit: FONATUR's financial statements are audited annually as of June 30 by the firm of Mario Su'arez del Real, whose past performance has been acceptable to the Bank. None of their reports on FONATUR's ac- counts has had qualifications. Audited financial statements prepared by auditors acceptable to the Bank, will continue to be submitted to the Bank within five months after the end of each fiscal year. III. FONATUR'S FINANCIAL POSITION A. Financial Position of the Development (Infrastructure) Department 3.01 Annex I, Table 15 summarizes the financial position of FONATUR's Development Department as of December 31, 1976. The financial position of the Development Department is sound, with adequate working capital generat- ed from its operations during the period 1972-76. Total assets increased from Mex$241 million in 1972 to Mex$2,261 million in December 1976, of which 82% (Mex$1,860 million) represented budgetary contributions from the Govern- ment. Net working capital generated amounted to Mex$380 million in 1976 and the current ratio of 4.8 to 1 provides FONATUR with adequate liquidity for its ongoing operations. 3.02 It is only recently that FONATUR has begun disposing of its devel- oped land, and no income statements are as yet available (para. 2.39) to judge the profitability of each of its individual tourism infrastructure projects. The situation is further complicated because FONATUR has sold land to developers in exchange for equity, valued at about Mex$45 million as of December 1976. Balance sheet data indicate a significant surplus earned in cash flow terms from the sale of land and other developed facil- ities, increasing from Mex$18 million in 1973 to Mex$236 million in Decem- ber 1976 on a cumulative basis before adjustments for cost deduction. After writing off the costs of land sold and related expenses, however, the balance sheet shows a deficit of Mex$124 million as of December 1976 (An- nex I, Table 22). Such a deficit is to be expected since FONATUR's infra- structure operations are in the early stages of development. Substantial surpluses from the sale of land are projected during the 1977-81 period. B. Financial Position of the Operations (Lending) Department 3.03 (a) Balance Sheet and Capital Structure: Balance sheets for the years 1974-76 are shown in Annex I, Table 16. Total assets more than tri- pled from Mex$l.l billion in 1974 to Mex$3.5 billion by December 31, 1976. Both loans outstanding and equity investments increased rapidly, reaching - 24 - Mex$2.3 billion and over Mex$l billicn respectively in 1976; these large in- creases were funded by Mex$1.5 billicn in additional borrowings from Banco de Mexico and Mex$850,000 in Government equity contributions. The Capital structure on December 31, 1976 included about Mex$2.2 billion in debt, Mex$l.l billion in equity contributions, and Mex$O.l billion in retained earnings. The long-term debt to equity ratio of 1.7 to 1 is sound. 3.04 (b) Liquidity: The current ratio of 4 to 1 and net working capital of Mex$270 million provide adlequate liquidity for ongoing operations. They do not allow for funding of undisbursed commitments of about Mex$540 million or disbursements on new loans without continued new borrowing and Government equity contributions. The sources and uses of funds statement shown in An- nex I, Table 17 indicates that disbursements substantially exceed loan re- payments received because of increasing lending levels and unexpired grace periods. Repayments received, however, are greater than principal payments to Banco de Mexico. 3.05 (c) Profitability: Income statements shown in Annex I, Table 18 indicate a mixed earnings record, with a profit of about Mex$20 million in 1975 offset by a loss of similar size in 1976 leaving 1976 retained earn- ings at the 1974 level of about Mex$100 million. The loss in 1976 was due to significantly increased interest expense on new borrowings from Banco de Mexico (most recent borrowings at 12%) which were not passed on to borrowers in higher interest rates and a Mex$10 million loss on equity investments, largely in Nacional Hotelera. Gross income of only 5.8% of total assets is due to low revenues generated by relatively new hotel investments and inter- est rates that had not been adjusted since 1974. Administrative expenses have been consistently held below 1% of total assets. Although the June 1977 increases in FONATIE's interest rates will have little effect on 1977 earnings, profits are expected because of improvements in equity invest- ment results. Operational profitability, and financial structure indica- tors are given in Annex I, Table 19. C. Overall Financial Position 3.o6 Since FONATUR's budgeting, planning, and recording of lending is done on a calendar year basis, analysis of historical and projected finan- cial position and prospects is based on the calendar year. Balance sheets for calendar years 1974-76 are shown in Annex I, Table 20. 3.07 Both Development Department and Operations Department activities expanded rapidly over the three-year period, total assets increasing from Mex$2 billion on December 31, 1974 to Mex$5.4 billion on December 31, 1976. By the end of 1976, 40% of FONATUR's assets were invested in the Develop- ment Department and 60% in the Operations Department. Long-term debt to equity ratio was a conservative 0.7 to 1. Current ratio of 3.1 to 1 and net working capital of Mex$540 million are adequate for ongoing operations but do not provide sufficient liquidity for funding undisbursed commitments without continued new borrowings and Government equity contributions in 1977. Capital structure consists of borrowings from Banco de Mexico (Mex$2.2 billion), Government equity contributions (Mex$3 billion), and re- tained earnings which in 1976 showed a deficit of Mex$30 million. - 25 - 3.08 Consolidated income statements show profits in 1974 and 1975 and a loss of about Mex$20 million in 1976. Income statements do not properly reflect Development Department activities at this juncture and hence do not provide an overall view of the profitability of FONATURts activities. The historical financial statements, therefore, approximate Operations Depart- ment performance. IV. PROSPECTS A. Tourism Demand 4.o0 Mexico's experience indicates that the size of Mexico's tourism and its growth depend heavily on the neighboring US travel market. Over 85% of all foreign visitors to Mexico come from the US. The number of US visi- tors going abroad, excluding Canada, increased from 4.7 million in 1967 to 9.8 million in 1975, an average growth rate of 9.6% per year. Until 1973 the rate of growth was 13.2%, but in 1974 and 1975 the rate declined as a result of the recession in the US. With the resumption of growth of the US econo- my, albeit at a slower rate than in the past, and with the steep devaluation of the peso in the fall of 1976, 1/ the growth of foreign tourism to Mexico can be expected to resume, though probably less dynamically than in the past. 4.02 The present administration projects foreign tourism to Mexico to grow at an annual average rate of 9% over the next 10 years beginning with 1977. This implies that the number of foreign visitor arrivals will in- crease from 3.1 million in 1976 to 4.5 million in 1980 and 7.3 million by 1985. Although these projections may be an attainable target in the light of past experience and the continued dynamism of air travel 2/, this report assumes an annual average rate of 6% over the same period; representing an increase in arrivals from 3.1 million in 1976 to 4.0 million in 1980 and 5.3 million by 1985. These assumptions may be conservative, but reasonably so in view of the still rather unclear long-term effects of the energy cri- sis on short and long-haul travel. On the basis of these assumptions and assuming the average length of stay to remain at 11 nights, the volume of foreign tourism to Mexico would increase from 35 million tourist nights in 1976 to 44 million in 1980 and 58 million in 1985. 4.c3 Foreign visitors' demand for accommodation facilities, however, is projected to grow faster (between 7 and 7.5% per year on average between now and 1981) than total visitor's traffic because the composition of for- eign visitors is expected to continue changing in favor of air visitors who use accommodation facilities to a greater extent than other visitors 1/ The peso was devalued from 12.5 to around 20 to the US dollar in late August 1976 and has since fluctuated in the low to mid-twenties. 2/ The US Bureau of Labor Statistics projects that US air trans- portation will continue to grow much faster than the economy in general, i.e., at about 8% per year on average up to 1980. - 26 - (para. 1.03). The demand for accommodation facilities by Mexican visitors is projected to grow at a similar rate. 1/ The number of visitors that do not demand commercial accommodation is projected to grow at a rate of 4 to 5% a year. 4.0o4 As tourism demand increases, new hotels will have to be construct- ed and other facilities and services expanded. The Government has given the tourism sector high prior-ity and plans to invest further in it. Much of this investment will be channeled through FONATUR. The following table shows the expected demand for and supply of hotels in Mexico over the next five years. 2/ Supply of and Demand for Accommodation, 1976-81 Average Annual Growth Rate 1976 1977 1978 1979 1980 1981 1976-81 Hotel rooms in operation (thousands) */ - International class 88.o 91.7 95.4 99.8 105.4 111.4 4.8% - Lower class 107.0 108.7 110.4 112.2 114.0 116.4 1.7% Total 195.0 200.4 205.8 212.0 219.4 227.8 3.1% Hotel guest nights */ - Foreigners 28.0 30.1 32.4 34.8 37.0 39.2 7.0% - Mexicans 41.8 46.8 50.3 54.1 57.o 60.1 7.5% Total 69.8 76.9 82.7 88.9 94.0 99.3 7.3% Hotel occupancy rates (%) - International class 65i 70 72 74 76 77 - Lower class 449 52 55 59 60 61 *1 Based on rooms under construction, FONATUR's hotel investment program, and hotels expected to be built without FONATUR's financial assistance (1,000 rooms a year). In addition, 400 rooms, or 2 per 1,000 are esti- mated to be retired from supply each year. **/ In 1976, foreign visitors accounted for 50% of the guest nights spent in international class hcotels and 33% in lower category hotels. For 1977 foreign guest nights are projected to increase by 7.5% and Mexican guest nights by 12%, in line with estimates for the first half of 1977. For 1978 and 1979 both foreign and Mexican guest nights are projected to increase by 7.5% per annum. For 1980 and 1981, however, growth rates are projected to fall to 6.4 and 5.9% for foreign guest nights and 5.5 and 5.1% for Mexican guest nights; this is because hotels are expected to be full during the high season, therefore restricting growth to new hotel rooms available and to growth of off-season traffic. For footnotes 1 and 2 see next page. - 27 - These projections are consistent with the Government's determined efforts to increase direct flights from major traffic-generating points to tourist destinations in Mexico, and with the projected overall growth of tourism. They assume a substantially improved utilization of existing capacity to levels that Mexico has already experienced in the past and that seems to be economically efficient (para. 5.07). B. FONATUR's Infrastructure Operations 4.o5 With the three large projects it has in Cancun, Ixtapa-Zihuata- nejo and Baja California and the development in Oaxaca, FONATUR has no plans to open up new areas,. Instead it plans to consolidate its position in the areas it has financed and developed by: (a) promoting the develop- ment of superstructure and other facilities needed, and (b) investing in extensions to infrastructure to complete the second and third stages of each of the three large projects. Given the expertise it has built up, however, the Government may rely on FONATUR to provide (as a minimum) tech- nical assistance for solving the infrastructure problems that some of Mexico's existing destinations are now facing. C. FONATUR's Lending Operations h.o6 The projections for the demand of hotels and other commercial accommodation covers a five-year period, 1977-81 (para. 4.04). The pro- posed project is limited to financing these facilities over a three-year period, and only to FONATUR-assisted projects which would cover about 85% of total needs. It is assumed that the remaining 15% would be built with- out FONATUR's assistance and financed by other means or institutions. FONATUR's projected lending program for the three years (1979-81) is shown in the table on page 28. Assumptions used for the projections are listed in Annex II. Total loan approvals net of cancellations 1/ This is consistent with the experience of resort hotels, and is part- ly the result of a growing middle class, improvement in accessibility to resorts from the main urban centers in Mexico, the introduction of a five-day work week, and more recently, the devaluation of the peso which has made holidays abroad more expensive. With respect to the last point, expenditures of Mexican visitors going abroad decreased from Mex$400 million in 1975 to about Mex$380 million in 1976, after having grown at 16.5% a year since 1960, and at 19% per annum since 1970. 2/ Foreign visitors are estimated to have spent 23 million nights in ho- tels and other commercial accommodation facilities and 12 million nights in non-commercial facilities in 1976, i.e., with friends and relatives. Included in the foreign hotel guest nights' estimates in the table are 5.4 million nights spent by foreign visitors in border town hotels, which are not included in Mexico's official tourism statistics which cover only visitors to the interior of the country (para. 1.07). These border tourist guest nights are projected to grow at the same rate as those of foreign visitors to the interior of the country. FONATUR PROJECTED LENDING PROGRAM 1977-79 (current Mex$ million) Total 1977 1978 1979 1980 1981 for Period Number of new rooms financed 5,800 7,000 8,000 - 20,800 Investment Requirements Investment/new hotel rooms 3,130 5,480 5,870 - - 14,480 Investment/other facilities 650 320 990 - - 1,960 Total Investment Requirements 3,780 5,800 6,860 - - 16,440 Type of Financing Owner equity 2,060 3,900 3,930 - - 9,890 Intermediary loans 110 140 230 - - 480 FONATUR 1,610 1,760 2,700 - - 6,070 FONATUR'S Funding Requirements Total disbursements (new program) (50) (1,500) (1,950) (2,160) (410) (6,070) co Existing program new cash flow 60 70 (l0) (65) (90) (35) Total funding requirements (excluding equity investments) 10 (1,430) (1,960) (2,225) (500) (6,105) FONATUR'S Funding Sources Mexican Government sources - Banco de Mexico - 630 730 800 850 3,010 - Hacienda - 150 195 215 4o 600 Gap before external funding sources 10 (650) (1,035) (1,210) 390 (2,495) IBRD loan - 425 710 160 - 1,295 IDB or other loans - - - 675 _ 675 Cofinancing - 280 210 - - 490 Net debt service inflows - 20 90 180 65 355 Subtotal external funding 725 1,010 1,015 65 2,815 Surplus (deficit) 10 75 (25) (195) 455 320 Cumulative surplus (deficit) 10 85 60 (135) 320 - 29 - for the 1977-79 period are projected at about Mex$6.1 billion in current pesos, of which about 90% is for construction of 20,800 new hotel rooms. This is an average 15% annual increase in the number of new hotel rooms for which credit was approved in 1976 and is well within FONATUR's capacity to handle, particularly with the expansion in staff that is planned. (Between 1973 and 1976, FONATUR financed the construction of 21,000 new hotel rooms and the remodeling of another 3,000; para. 2.17.) The value of FONATUR loans is expected to average about 37% of total project investment costs and to elicit an additional Mex$10.4 billion in investment in the sector from owner equity and intermediary lending sources. Very few projects were approved during the first six months of 1977. In May 1977 FONATUR had a backlog of unapproved loan requests of about Mex$3 billion for financing 60 projects. 4.07 The following table shows the composition of the lending program by category: Projected Composition of FONATUR's 1977-79 Lending Program by Hotel Category (number f rooms) % of 1977 1978 1979 Total Total Category I 2,600 4,100 3,200 9,900 48 Category II 1,800 1,400 2,400 5,600 27 Category III 700 900 1,600 3,200 15 Category IV 500 400 600 1,500 7 Category V 200 200 200 600 3 Total new hotel rooms 5,800 7,000 8,000 20,800 100 About 15,500 (74%) of the hotel rooms will be Category I and II, in the so- called international categories. FONATUR hopes to increase the proportion of projects in the lower Categories IV and V, but this change in emphasis will have little impact before 1979, as the 1977-78 program is composed mainly of projects already identified. Average investment cost per new hotel room (both new and expansion projects) is about Mex$540,000 or US$23,500 in 1977 prices. D. FONATUR's Equity Investments 4.o8 The table on page 30 presents a rough projection of FONATUR's eq- uity investment program over the 1977-81 period based on estimated cash and land requirements for new investment, projected receipts from properties al- ready sold, projected earnings and dividends from existing properties, and an assumed continued future sale of investment properties in line with an- nounced policies. The 1977-81 projection suggests that FONATUR will make an additional Mex$5.7 billion in equity investments and sell Mex$2.1 billion from the present portfolio over the five-year period. Net earnings on the - 30 - portfolio for the period are projected at Mex$555 million. FONATUR's Equity Investment Program 1977-81 (current Mex$ millions - Pro Forma) Total Investment Program 1977 1978 1979 1980 1981 for Period New investment funding composition: Cash 600 700 1,100 1,000 800 4,200 Land contribution to equity 100 300 400 400 200 1,400 Reinvested earnings 10 25 15 15 30 95 Total new investment 710 1,025 1,515 1,415 1,030 5,695 Less sales of invest- ment properties (book-value) (445) (250) (350) (480) (600) (2,125) Net increases in in- vestment 265 775 1,165 935 430 3,570 Funding Requirements Cash for new investm. (610) (725) (1,115) (1,015) (830) (4,295) Cash receipts from sales 90 120 165 230 305 910 Net income 25 65 105 160 200 555 Net cash requirement (495) (540) (845) (625) (325) (2,830) Funding Government equity contributions 440 54o 845 625 325 2,775 E. Resource Requirements 4.09 (a) Development Department: Resource requirements for infrastruc- ture investments over the 1977--81 period are estimated to be Mex$2.1 bil- lion. These requirements have been funded through Mex$1,150 million in Government equity contributions and internal cash generation, Mex$550 mil- lion in IBRD loans, and Mex$400 million in IDB loans. - 31 - Projected Infrastructure Investment Program (in Mex$ million) 1977 1978 1979 1980 1981 Total A Cancun 200 200 200 - - 600 29 Ixtapa-Zihuatanejo 100 100 - - - 200 10 Loreto 50 160 180 140 40 570 28 San Jose del Cabo 30 80 100 70 20 300 14 Subtotal 380 540 480 210 - 1,670 F Contingencies _ 108 163 92 32 395 19 Total 380 648 643 302 92 2,o65 100 In addition, FONATUR expects to reinvest Mex$1,400 million generated from its infrastructure projects in the form of land contributions to equity pro- jects over the 1977-81 period. (b) Operations Department 4.10 (i) Equity Investments: Cash requirements for the Opera- tions Department's equity investments are projected at Mex$2.8 billion for the 1977-81 period, net of cash inflows from earnings and sales of invest- ments. These requirements are expected to be funded by the Government through budgetary contributions, although some of the Bank loan funds may be used for equity investments (para. 5.02). 4.11 (ii) Lendin Program: Resource requirements for FONATUR's 1977-79 lending program table on page 28) are Mex$6.1 billion, summarized as follows: Resource Requirements (Current Mex$ millions) Annual Cumulative 1977 (10) (10) 1978 1,430 1,420 1979 1,960 3,380 1980 2,225 5,605 1981 500 6,105 4.12 The table on page 28 also shows Mex$3.6 billion (50% of the pro- jected requirements) being funded by the Government through a continuation of Banco de Mexico's annual lending of Mex$500 million in 1977 prices, and Government equity contributions to the lending program equal to 10% of dis- bursements of new loans. Government officials have indicated that this funding level is feasible. Assurances were obtained from the Government during negotiations that counterpart contributions would be made available - 32 - to FONATUR for carrying out its program, 4.13 It is projected that remaining funding requirements of about Mex$2.8 billion will come from external sources and from net debt service inflows relating to the new lending program. Projected external sources are Mex$490 million in cofinancing (US$20 million), Mex$675 million from IDB or other sources (US$25 million), and Mex$1,295 million from IBRD (US$50 million). 4.14 (c) Cofinancing: NAFINSA is making arrangements to borrow US$20 million from foreign banks that will be used to finance FONATUR's program. Terms on these funds are expected to be somewhat better than obtained by the Mexican Government in recent borrowings. The loan would be for a period of eight years with repaymernts beginning 42 months from the date of signa- ture and at an interest rate of 1.5% over the London Inter-Bank Offer Rate (LIBOR) on a floating basis. In addition to using funds from foreign banks, FONATUR plans to promote cofinanced lending directly to some of the larger subprojects. 4.15 Cofinancing has been secured in the form of a line of credit that can be drawn down as required. Borrowers will take the foreign exchange risk on the cofinancing funds they receive and will pay FONATUR an interest rate equal to that charged by the cofinancier plus a margin, averaging 1%, to cover administrative costs and bad debt risk. 4.16 While FONATUR would like to establish amortization schedules for cofinanced loans approximating its own debt service repayment requirements, it is unlikely that this can be done successfully because of the inability of subproject borrowers to amortize debt in less than 12 to 15 years for hotel projects. The Bank has therefore proposed to adjust its own amorti- zation requirements to allow FONATUR to repay cofinancing loans on a priority basis. 4.17 FONATUR expects to have positive net debt service inflows of Mex$355 million over the 1977-81 period from new lending. which will help fund the program. Based on 'FONATUR's new interest rate schedules (approved in June 1977), average subproject lending terms are expected to be 13% interest received by FONATUR, and 12 years to pay including a 2-1/2 year grace period. By September 1L, 1978 FONATUR's interest rate schedules will be adjusted up or down with :increases or decreases in the indexed average cost of borrowing' funds by financieras. Final borrowers would pay interest charges reflecting, on average, the ACF plus two percentage points, F. Financial Prospects 4.18 (a) Development Department: Forecasts of balance sheets, income statements, and sources and application of funds for FONATUR's Development Department are presented in Annex I, Tables 21, 22 and 23. Projections for the period 1977-81, while ref'lecting the costs of large new investments in Baja California and the urban area of Zihuatanejo, do not take into account - 33 - the income that would eventually be generated by these investments. In Ba- ja California the infrastructure would not be completed until 1980/81 and for the town of Zihuatanejo, the method of disposing of the land has not been finalized. Furthermore, the initial investments made in the project areas would also benefit the second and third stages of the project, but the relevant revenues do not appear within the 1977-81 period. Even so, the fi- nancial projections for 1977-81 indicate that FONATUR is financially healthy with adequate internal cash generation. 4.19 FONATUR expects to sell all of the land developed in the first phase of each tourism infrastructure project (Cancun and Ixtapa-Zihuatanejo) by 1981. The department's net operating income would increase to Mex$315 million in 1978 and Mex$424 million in 1979. The department would show a surplus of Mex$54 million for the period ending December 1978, increasing to Mex$711 million by 1981. The annual rate of return on total investments would be 15.6% in 1978 and 17.3% in 1979, decreasing thereafter to 1.6% in 1981. After 1981 the rate of return increases again because of income generated from the Baja California project and the second stage developments in Cancun and Ixtapa-Zihuatanejo. Since FONATUR will incur relatively small development expenses on these activities, significant cash surpluses should be produced. (b) Operations Department 4.20 (i) Balance Sheet and Capital Structure: Projected balance sheets for the five-year period 1977-81 are shown in Annex I, Table 24. Total assets are projected to increase at an annual rate of 32%, reaching about Mex$14 billion in 1981. Lending program and equity investment grow at relatively similar rates, reaching Mex$7.4 billion and Mex$4.6 billion respectively by the end of the period. Projected sources of funding for future expansion as shown in Annex I, Table 25 include about Mex$3.5 billion in loans from Banco de Mexico, Mex$3.4 billion in Government equity contri- butions, Mex$2.5 billion in external borrowings, and the remainder from in- ternally generated sources. The capital structure at December 31, 1981 would include Mex$6.9 billion in funded debt, Mex$4.5 billion in paid-in capital, and Mex$1 billion in retained earnings. The long-term debt to eq- uity ratio drops from 1.6 to 1 in 1977 to 1.4 to 1 in 1981. 4.21 (ii) Liquidity: The current ratio and net working capital position for the projected program drop steadily through 1980, reaching a low of 1.2 to 1 and Mex$155 million respectively before improving in 1981. The projections assume minimum funding requirements necessary to achieve the desired program. The program would have to be reduced to maintain acceptable liquidity if funding sources are reduced. 4.22 (iii) Profitability: Projected income statements (Annex I, Table 26) show small profits in 1977 and 1978, depressed largely because of negative interest spreads on past loans. After 1978 profitability should increase steadily as the result of higher interest rates and improved profit- ability of new hotel equity investments as they become established. Admin- istrative expenses are expected to increase slightly in 1978 and to decline - 34 - as a percentage of average total assets thereafter. 1/ Net income for the five-year period is expected to generate about Mex$900 million in retained earnings which will be reinvested to help fund the new program. From the negative level of 1976, profitability is expected to steadily increase, reaching 7.6% on equity and 2.9% on average total assets by 1981. Opera- tional profitability and financial structure indicators are shown in Annex I, Table 27. 4.23 (c) Overall Financial Prospects: Projected FONATUR consolidated balance sheets, income statements, and sources and uses of funds statements for the 1977-81 period are shown in Annex I, Tables 28, 29 and 30. The bal- ance sheets show a strong capital structure and liquidity position. The long-term debt to equity ratio remains at 0.6 to 1 and the current ratio does not fall below 2 to 1 during the period. Income statements show a loss of about Mex$100 million in 1977 due to relatively slow development of in- frastructure land sales, followed by profits during 1978-81 averaging about Mex$450 million annually. Of sources of planned funding for the five years on-'an overall basis, Mex$6 billion (38%) will come from borrowings, Mex$5.6 billion (36%) from equity contributions and Mex$4 billion (26%) from net in- ternal funds generation. Planned uses for this funding include Mex$6.6 bil- lion (42%) for new lending, Mex$5.9 billion (38%) for new equity investment, Mex$2.1 billion (13%) for new infrastructure development, and Mex$l billion (7%) for increases in working capital. V. THE TOURISM DEVELOPMENT LOAN A. The Loan and its Objectives 5.01 Considering that during the forthcoming years, credit in general will expand rather moderately, while the demand for it may increase steeply, Mexico's bank credit for the private sector may run short of the require- ments, and therefore hotels cannot count on its demand for long-term loans being met wholly by local banks' own funds. Similarly, lending by foreign banks is not expected to be substantially higher than in the past. The fi- nancing of hotels therefore has to continue to rely to a large extent on FONATUR. However, given the budgetary constraints being exercised to stabi- lize the economy, FONATUR which fully depends on government funding and credit, is not assured in the next few years, of its required financing. 5.02 The proposed Bank loan of US$50 million would be used to cover a portion of the foreign exchange costs of expansion of accommodation and other tourism related facilities financed by FONATUR. The loan would constitute less than 10% of the total investment projected for the period 1977-79, and about one fourth of the estimated direct and indirect foreign exchange cost of the program. Assuming all of the Bank loan would be used for lending rather than using some of it for equity investments, it would amount to / This is after FONATUR empLoys additional staff to carry out the ex- panded supervision and technical assistance functions that are re- commended. - 35 - about 20% of the projected value of FONATUR's loans and would support the construction, improvement, and remodeling of about 22,000 rooms. FONATUR will not use more than US$12 million of the Bank loan proceeds for equity investments and direct loans. Similarly, not more than US$4.5 million of the loan could be used for non-accommodation projects. In cases where FONA- TUR makes investments and loan financing available to the same project, the total amount of Bank financing will not exceed the foreign exchange cost of the project, estimated to be 30% on an average. Furthermore, the Bank will not disburse more than US$10 million equivalent out of the proceeds of the loan in respect of subloans made prior to changes in the interest rate pol- icy scheduled to take place by September 1, 1978. 5.03 The main beneficiaries of the loan would be private sector enter- prises investing in hotel and other tourism facilities. The loan would help the Government to continue to fill a critical gap in hotel financing by sup- porting financially and economically sound hotel subprojects that might otherwise not be implemented. The Bank could thus make a useful and timely contribution to Mexico's balance of payments and employment. Moreover the proposed Bank loan is encouraging additional long-term financing from abroad under cofinancing arrangements. 5.o4 The Bank loan would be for a term of 17 years. The borrower would be NAFINSA, which would transfer the proceeds of the Bank loan to FONATUR on approximately the same terms that it borrows from the Bank. Responsibili- ty for repaying the loan through NAFINSA would be that of FONATUR which would also bear the foreign exchange risk. The Mexican Government would guarantee the loan. The commitment period of the loan would be two to three years. 5.05 The proposed free limit for FONATUR loans to subborrowers under the loan is US$700,000 enabling the Bank to review approximately one third of all FONATUR rediscounted lending projects for which Bank funds are used. In addition, all projects involving FONATUR equity investment for which Bank funds would be used, would be submitted to the Bank for prior approval. While the quality of FONATUR's appraisal processes and the homogeneity of its lending program justify this fairly high free limit, the discipline in- herent in Bank review of the larger projects will assist FONATUR in more rapidly achieving desired improvements in appraisal methods and more rigor- ously examining potential equity investments. 5.06 Because of the difficulty of estimating the direct and indirect foreign exchange costs of a number of small and large subprojects, the Bank would reimburse a standard 40% of disbursements made by FONATUR for approved projects. This disbursement percentage would be substantially lower than the estimated average foreign exchange component of the average hotel project. Only expenditures made within 180 days prior to the date on which the Bank receives an application to disburse on a subloan or invest- ment would be eligible for Bank financing. The Bank's normal 90-day limit would be modified because in most cases FONATUR's double intermediation makes it a longer process. Because Bank's financing would amount to less than 10% of total investment, and because of the large number of small con- tracts involved, disbursement for subprojects will be made against a certi- ficate of expenditure, the documentation for which is not submitted for re- - 36 - view, but is retained by FONATUR and available for inspection by the Bank during the course of project supervision missions. In addition, FONATUR would be required to make arrangements, satisfactory to the Bank, for the audit of expenditures covering disbursements under this procedure. The terminal date for submission of subprojects under the loan would be Decem- ber 31, 1980, the closing date for disbursements, December 31, 1981. Promptly after completion of the project, but not later than one year after the closing date of the loan, FONATUR shall prepare and furnish to the Bank a completion report on the execution and operation of the project. 5.07 The proposed Bank loan will be repaid on a fixed amortization schedule, adjusted for repayments to cofinanciers. B. Project Justification 5.08 For purposes of economic evaluation, the investment program is defined to consist of 20,800 hotel rooms to be partially financed by FONATUR's 1977-79 lending program, some 3,000 rooms not financed by FONATUR, and of all other related goods and services such as restaurants, local transportation, handicraft shops and infrastructure facilities which would be used by tourists staying in the hotel rooms to be constructed under the program. The results of this evaluation is necessarily approximate as there is no precise knowledge about each and every hotel to be built under the program. Nevertheless, such information as is available is sufficient to deem the analysis meaningful and indicates that the expected economic impact of the investment program will be high. Based on an assumed econom- ic life of 30 years, the economic rate of return (ERR) is estimated at 14%. This rate relates to the economic impact of the last unit of the pro- gram and therefore allows one to conclude that the size of the program is more or less optimum. By being higher than Mexico's opportunity cost of capital (estimated at close to 10%), this rate indicates that it might be economically desirable to allocate additional investment resources to tour- ism. However, in view of the uncertainties surrounding these calculations, the present program's size can be considered as adequate. The question of optimum size requires a more refined analysis, which needs to be done in connection with addressing the related questions of whether the present set of taxes, credit arrangements, and promotional policies is such as to maxi- mize economic returns from tourism. Ideally one would want to determine prices and occupancy rates of tourist facilities and the level of Govern- ment efforts in promotion that are consistent with such an optimum program. To enable the Government to tackle some of these questions, a market and economic study seeking to gather and analyze the necessary information is being undertaken under the Baja California tourism project, which has been partially financed by the Bank (Loan 1420-ME). 5.09 FONATUR has agreed to carry out a screening of proposed subpro- jects on explicitly economic grounds, as well as on financial and technical criteria. Economic screening of most hotel subprojects, which constitute small components of larger subprograms of hotels of a similar type, is most efficiently accomplished by verifying that their revenue and cost structures - 37 - conform to those of the subprogram of which they are a part. The economic analysis of the subprograms would ascertain the target revenue/cost struc- tures, occupancy rates, and program's size. FONATUR has agreed that once the economic study referred to above is complete (end-1978), FONATUR will identify subprograms for particular regions and categories of accommodation, and determine the criteria which will apply to subprojects. In the mean- time, FONATUR has agreed to finance particular hotel subprojects which have revenue and cost structures typical of those of the program appraised by the Bank only if they also are expected to have incremental occupancy rates of at least 55% and 47% respectively for international class and other hotels. For subprojects whose revenue and cost structures are atypical of the program, or whose investment costs come to US$15 million or more, FONA- TUR will carry out a complete economic evaluation (i.e., estimate receipts and costs external to the hotel which are due to construction of the hotel, and the receipts and costs which are incremental to the economy as con- trasted with the receipts and costs which are actually expected to occur in the hotel). For the project to be acceptable, the resulting rate of return should be at least equal to the opportunity cost of capital in Mexico. 5.10 The project is expected to generate substantial foreign exchange even though half the guest nights in the facilities are spent by domestic visitors. By year eight, the program would generate annual net foreign exchange earnings of US$117 million. During the life of the investments, such earnings would total about US$3 billion. The program is expected to generate over 32,000 permanent jobs directly and another 33,000 indirectly. Most significantly, the indirect employment impact would be on the handi- craft industry, which is calculated to affect five million of the poorest Mexicans. The ratio of investment costs of the program to direct employ- ment in man-years (both streams discounted at 10%) is US$2,200 per man- year, which compares favorably with the urban poverty lending benchmark for Mexico on employment generation grounds. In order to pay special attention to the objectives of creating employment for less skilled persons, and of avoiding facilities which are overdesigned and overcostly for their target markets, FONATUR has agreed to carry out an analysis of the financial and economic impacts of appropriate hotel technologies and designs to meet specific target markets. 5.11 Besides the impact of the proposed loan in developing accommoda- tion capacity, the project is expected to have substantial institution- building effects on FONATUR. The proposed loan will enable the Bank to par- ticipate in both of FONATUR's major activities and assist FONATUR to expand its operations and upgrade some aspects of its lending policies, criteria, procedures, and practices. C. Project Risks 5.12 The main risk in implementing the proposed program is a fall in market demand. Such a fall would have to be substantial to endanger the economic viability of the program. A reduction in the rate of growth of demand for Mexico's accommodation facilities from 7.5% a year, as has been - 38 - conservatively assumed in this report, to 5% would reduce the economic rate of return from 14 to 10% under the assumption that the same program is im- plemented. It is unlikely, however, that such large an expansion of ca- pacity will occur if the demand for accommodation slows. VI. AGREEMENTS REACHED 6.01 During loan negotiations, agreement was reached and assurances obtained on the following: (a) that FONATUR will upgrade its appraisal proce- dures of subprojects, including devoting more attention in their appraisal reports to eco- nomic, market and managerial aspects of subpro- jects (paras. 2.27 and 5.09); (b) that FONATUR will take steps to expand its Operations Department's staff as required to carry out its investment program (para. 2.27); (c) that FONATUR will upgrade its disbursement and budgeting practices and put more emphasis on supervision and technical assistance for each of its subprojects (paras. 2.36, 2.37 and 2.40); (d) that audited financial statements satisfactory to the Bank will continue to be submitted with- in five months after the end of each fiscal year, which would include audit of expenditures covering disbursement under procedures satisfac- tory to the Bank (paras. 2.41 and 5.06); (e) that FONATUR will be provided with the necessary counterpart funds to implement its proposed in- vestment program (para. 4.12); (f) that FONATUR will apply a new interest rate schedule by September 1, 1978 that will be allowed to float and on average be approximately equal to the average cost of funds to financieras (ACF). Final borrowers would pay two percentage points above the ACF (paras. 2.31 and 4.17); (g) that FONATUR will not use more than US$12 million of the Bank loan proceeds for equity investments and direct loans, and not more than US$4.5 mil- lion for non-accommodation projects, and that the Bank funds that would finance FONATUR' s participa- tion in any single project whether in the form - 39 - of equity or loans will not exceed the estimated foreign exchange cost of the subproject (para. 5.02); (h) that not more than US$10 million equivalent out of the proceeds of the loan will be used in respect of subloans made prior to the change in interest rate structure scheduled to take place by September 1, 1978 (para. 5.02); (i) that promptly after completion of the project, but not later than one year after the closing date of the loan, FONATUR will prepare and furnish to the Bank a completion report on the execution and operation of the project (para. 5.06); and (j) that FONATUR will carry out the hotel training and employment studies by June 30, 1979, and consult with the Bank on the terms of reference and the recommendations of the studies (paras. 1.35 and 5.10). - 40 - ANNEX I MEXICO: TOURISM DEVELOPMENT LOAN List of Tables Table 1: Visitors from Selected US States to Mexico (Percentage of US Visitors), 1960-76 Table 2: Foreign Visitors to Mexico by Country of Residence, 1970-75 Table 3: Parameters of Tourism Growth in Selected Destinations Table 4: Visitor Arrivals by Month Table 5: Guest Nights and Average Expenditures per Day of Visitors from Abroad, 1970-76 Table 6: Lodging Establishments by Type and Category Table 7: Distribution of Lodging Establishments by Type and Category in Selected Years (Percentages) Table 8: Lodging Establishments per Category and Type, per December 31, 1975 Table 9: Number of Establishments and Rooms of Selected States, 1972-75 Table 10: Hotel Occupancy Rates, Selected Destinations, by Category, 1970-76 Table 11: Geographical Distribution of FONATUR Loan Approvals, 1973-76 Table 12: Distribution of :FONATUR Loan Approvals by Intermediary Institution, 1973-76 Table 13: Summary of FONATJR's Equity Investments, 1974-77. Table 14: FONATUR - New Interest Rate Structure Table 15: Balance Sheet (Development Department) as of December 31, 1976 Table 16: FONATUR's Operations Department Balance Sheets, 1974-76 - 41 - ANNEX I List of Tables (cont'd) Table 17: FONATUR's Operations Department - Sources and Uses of Funds, 1975-76 Table 18: FONATUR's Operations Department - Income Statements, 1974-76 Table 19: FONATUR's Operations Department - Financial Ratios, 1975-76 Table 20: FONATUR's Consolidated Balance Sheets (1974-76--Unaudited) Table 21: FONATUR (Development Department) - Pro Forma Balance Sheet, 1976-81 Table 22: FONATUR (Development Department) - Pro Forma Income State- ment, 1977-81 Table 23: FONATUR (Development Department) - Pro Forma Cash Flow State- ment, 1977-81 Table 24: FONATUR's Operations Department Balance Sheets, 1977-81 Table 25: FONATUR's Operations Department Sources and Uses of Funds, 1977-81 Table 26: FONATUR's Operations Department - Income Statements, 1977-81 Table 27: FONATUR's Operations Department - Financial Ratios, 1977-81 Table 28: FONATUR's Consolidated Income Statement, 1977-81 Table 29: FONATUR's Consolidated Balance Sheets, 1977-81 Table 30: FONATUR's Consolidated Sources and Uses of Funds, 1977-81 Table 31: Estimated Schedule of Disbursements MEXICO: TOURISM DEVELOPMENT LOAN Visitors from Selected US States to Mexico (Percentage of US Visitors) 1960-76 Average Annual Growth 1960 1965 1970* 1971* 1972* 1973* 1974* 1975* 1976** 1960-65 1965-70 1970-75 Texas 1/ 32.8 34.8 29.9 29.3 29.1 26.8 26.5 30.7 28.9 13.5 7.5 7.0 California 1/ 22.6 27.3 24.9 24.7 23.7 22.3 21.3 24.0 23.3 16.5 8.7 5.6 Arizona 1/ 7.6 11.8 11.2 11.0 10.0 9.0 10.0 10.3 10.4 22.5 9.5 4.7 Illinois 6.6 5.5 5.0 4.8 5.2 5.3 5.5 5.2 5.2 8.1 8.7 7.3 New York 7.6 6.8 5.0 5.0 4.8 4.9 4.7 5.2 4.9 9.8 4.2 7.1 Florida - - 2.2 2.4 2.5 2.8 2.9 2.2 2.4 - - 6.0 Michigan 1.7 1.7 1.6 2.0 1.8 1.8 1.6 1.7 1.9 11.9 10.9 7.0 New Mexico 1/ 1.7 1.6 1.6 1.5 1.4 1.5 1.5 1.6 1.3 10.4 10.6 6.9 Louisiana 2.0 1.9 1.3 1.3 1.4 1.2 1.3 1.3 1.5 10.9 3.2 6.0 Ohio 1.3 1.0 1.1 1.1 1.2 1.3 1.5 1.0 1.2 7.0 12.4 4.3 Other States 16.1 7.6 14.8 15.5 17.9 22.3 22.3 15.8 18.0 - - 7.9 Officials - - 1.4 1.4 1.0 0.8 0.9 1.0 1.0 - - - Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 - - - Total number of US visitors (thousands) 669.0 1188.0 1981.0 2210.0 2543.0 2758.0 2861.0 2722.3 2869.0 12.2 10.8 6.4 1/ Border states * Preliminary figures ** Estimated figures Source: Direccion General de Estadistica, S.I.C. F- > Q X I- IH MEXICO: TOURISM DEVELOPMENT LOAN Foreign Visitors to Mexico by Country of Residence. 1970-75 (in thousands) 1970 % 1971 7 1972 % 1973 % 1974* % 1975* 7 Africa 0.1 - 0.2 - 0.2 - 0.4 - 0.6 - 0.4 - America 2,192.5 97.4 2,445.0 97.4 2,519.4 96.8 3,095.0 95.6 3,214.0 95.6 3,037.7 94.4 Canada 65.9 2.9 80.1 3.2 101.2 3.5 122.1 3.8 131.1 3.9 115.8 3.6 U.S.A. 1,980.9 88.0 2,209.8 88.0 2,543.0 87.3 2,758.1 85.2 2,861.0 85.1 2,722.3 84.6 Guatemala 43.3 1.9 49.8 2.0 56.6 1.9 65.4 2.0 67.2 2.0 57.9 1.8 Other countries 102.4 4.6 105.3 4.2 118.6 4.1 149.3 4.6 154.7 4.6 141.7 4.4 Asia 6.2 0.3 6.8 0.3 11.9 0.4 16.6 0.5 13.5 0.4 12.9 0.4 Japan 4.6 0.2 5.0 0.2 9.3 0.3 13.9 0.4 10.1 0.3 9.7 0.3 Other countries 1.6 0.1 1.8 0.1 2.6 0.1 2.7 0.1 3.4 0.1 3.2 0.1 Europe 47.1 2.1 53.0 2.1 74.8 2.6 91.7 2.7 94.1 2.8 80.4 2.5 Federal Republic of Germany 9.2 0.4 12.1 0.5 20.2 0.7 23.7 0.7 23.5 0.7 16.1 0.5 Spain 4.8 0.2 4.9 0.2 5.0 0.2 4.5 0.1 3.4 0.1 3.2 0.1 France 9.3 0.4 13.5 0.5 18.7 0.6 20.2 0.6 20.1 0.6 12.9 0.4 Netherlands 1.4 0.1 1.6 0.1 2.5 0.1 3.5 0.1 3.4 0.1 3.2 0.1 Great Britain 8.2 0.4 5.7 0.2 6.5 0.2 7.4 0.2 6.7 0.2 3.2 0.1 Other countries 14.2 0.6 15.3 0.6 21.9 0.8 32.4 1.0 37.0 1.1 41.8 1.3 South Pacific 4.0 0.2 4.9 0.2 6.1 0.2 7.3 0.2 3.4 0.1 3.2 0.1 Australia 3.3 0.1 4.1 0.2 5.0 0.2 6.0 0.2 3.4 0.1 3.2 0.1 Other countries 0.7 0.1 0.8 - 1.1 - 1.3 - - - - - Unknown 0.3 - 0.0 - 0.0 - 30.9 1.0 36.4 1.1 83.3 2.6 Total visitors 2,250.2 100.0 2,510.0 100.0 2,912.4 100.0 3,241.9 100.0 3,362.0 100.0 3,217.9 100.0 * Preliminary figures Source: Direccion General de Estadtstica, S.I.C. i1 - 44 - ANNEX I Table 3 MEXICO: TOURISM DEVELOPMENT LOAN Parameters of Tourism Growth in Selected Destinations Number of Hotel Guests (thousands) Puerto Vallarta MazatlAn Acapulco Year (Jal.) (Sin.) (Guer.) 1968 72.2 126.7 955.2 1969 92.8 141.7 1,001.5 1970 129.4 162.0 1,061.5 1971 157.5 204.6 1,120.2 1972 196.6 247.0 1,341.3 1973 218.8 305.3 1,457.8 1974 240.9 326.1 1,551.8 - of which foreigners 102.0 164.0 737.5 - of which visitors arriving at destination on inter- national flights 46.1 96.4 387.7 Source: Documentos de la Gerencia de Planeacion y Estudios Economicos, FONATUR, Nos. 40, 41 y 44. MEXICO: TOURISM DEVELOPMENT LOAN Visitor Arrivals by Month (in thousands) 1960 1965 1970 1971 1972 1973* 1974* 1975* 1976* January 58.3 105.9 161.4 186.8 215.7 242.1 252.9 253.4 252.7 February 62.0 105.1 170.1 187.8 229.0 244.9 271.8 264.4 270.4 March 52.5 90.9 214.6 176.3 278.2 271.3 295.3 327.6 267.3 April 60.3 106.7 143.4 219.4 210.4 283.1 296.4 216.2 279.3 May 51.6 93.6 180.2 180.8 195.5 238.1 244.8 237.3 230.2 June 73.2 123.1 213.9 223.0 276.1 289.6 301.9 280.1 255.0 July 90.8 152.8 236.5 270.0 297.6 305.8 317.2 303.9 288.8 August 80.3 143.2 222.3 238.1 262.4 314.7 321.0 305.2 259.8 September 51.3 89.9 130.5 146.2 178.5 191.8 183.8 173.6 175.1 October 47.7 91.1 149.0 176.8 206.2 220.5 235.2 233.7 231.4 November 51.5 100.4 171.4 201.8 222.8 273.4 277.2 260.3 238.8 December 81.1 147.7 256.9 303.1 344.0 366.9 364.5 362.2 358.4 Total 760.6 1,350.4 2,250.2 2,510.0 2,916.4 3,242.2 3,362.0 3,217.9 3,107.2 * Preliminary figures 4SH MEXICO: TOURISM DEVELOPMENT LOAN Guest Nights and Average Expenditures per Day of Visitors from Abroad. 1970-76 1970 1971 1972 1973 1974 1975 1976 Number of Tourists (thousands) Total 2,250 2,419 2,915 3,226 3,362 3,218 3,106 Arriving overland 1,375 1,523 1,737 1,794 1,817 1,786 1,667 Arriving by air 875 896 1,178 1,432 1,545 1,432 1,439 Only foreigners by air who stay at most 22 days n.a. n.a. n.a. n.a. n.a. 1,314 1,316 Length of stay (days) All visitors 12.3 11.9 10.5 11.0 10.9 10.6 11.4 Arriving overland 13.3 12.8 10.8 11.7 11.1 10.6 12.4 Arriving by air 10.8 10.5 10.0 10.2 10.5 10.6 10.2 4 Only foreigners by air who stay at most 22 days n.a. n.a. n.a. n.a. n.a. 7.9 8.0 Guest Nights (millions) Total 27.7 29.9 30.6 35.5 36.4 34.1 35.3 Arriving overland 18.3 19.5 18.8 21.0 20.2 18.9 20.7 Arriving by air 9.4 9.4 11.8 14.6 16.2 15.2 14.7 Only foreigners by air who stay at most 22 days n.a. n.a. n.a. n.a. n.a. 10.4 10.5 Average Expenditures per day (US$) All visitors 15.0 15.5 18.5 20.3 23.1 23.4 23.2 Arriving overland 9.8 9.9 11.9 13.1 15.4 14.4 14.0 Arriving by air 25.1 25.9 28.9 30.8 32.6 34.7 36.2 Only foreigners by air who stay at most 22 days n.a. n.a. n.a. n.a. n.a. 43.1 42.5 Source: Banco de Mexico MEXICO: TOURISM DEVELOPMENT LOWN Lodgtng Eateblisbments by Type and Category 1/ TYPE OF ACCCNODATION | Total Hotels Motels Guest Houses Ape tot Soas No. of Eet b- No. of No. of Estab- No. of No. of 1.1gb- No. of No. of Estab- llo. of No. of E tab- No. of Yer lishbmnts RBos lisbhmnts Roos lishmants Rooms lishisnts Rooms lishments RDoo lisbhents Roo 1961 3,314 90,891 2,243 76,666 195 4,240 699 7,800 177 2,185 _ _ 1965 3,452 96,653 1,987 75,909 371 8,205 866 10,203 228 2,336 - _ 1970 4,765 132,701 2,534 100,377 510 12,127 1,381 16,019 340 4,178 - - 1972 5,892 163,016 3,567 128,507 653 15,228 1,239 13,053 417 5,659 16 569 1973 5,970 166,107 3,605 130,849 673 15,623 1,248 13,201 427 5,857 17 577 1974 6,159 171,551 3,759 135,581 695 16,136 1,254 13,241 434 6,016 17 577 1975 6,269 190,513 3,880 150,917 752 18,419 1,149 12,754 455 7,181 33 1,242 CATEGORY OF ACRCOAnDATION I Total AA A B C D E No. of Eeteb- No. of No. of istab- No. of No. of Estab- No. of No. of Estab- No. of No. of Estab- No. of No. of Estab- No. of No. of Estab- No. of Y_ar lishate RooMs lisbusnts RoOs lishments Rooms lidhets Rooms lishmnts ROOs liehueta Roms lisbants Rooms 1961 3,314 90,891 121 6,267 354 14,713 419 13,278 382 10.564 942 26,541 1,096 19,528 1965 3,452 96,653 233 10,994 739 26,047 478 14,170 347 8,862 846 20,814 809 15,766 1990 4,765 132,101 398 21,008 711 23,069 714 22,392 846 23,526 1,218 27,118 878 15,588 1972 5,892 163,016 167 14,700 422 19,642 912 32,867 1,002 28,015 1,541 31,935 1,848 35,857 1973 5,970 166,107 176 15,699 437 20,489 935 33,535 1,015 28,194 1,556 32,256 1,851 35,934 1974 6,159 171,551 192 16,500 449 20,954 986 35,345 1,058 29,214 1,600 33,184 1,874 36,354 1975 6,269 190,513 169 24,484 295 18,100 977 41,245 1,203 35,626 1,474 32,840 2,151 38,218 As of December of year shown. Hotels are re-categorized from time to time. Notels in Category "A" have been downgraded recently, mainly due to changes in classification criterion. Source: Secretarfa de Turiao. MEXICO: TOURISM DEVELOPMENT LOAN Distribution of Lodging Establishments by Type and Category in Selected Years (Percentages) Rooms Establishments 1961 1965 1970 1975 1961 1965 1970 1975 Type Hotels 84.3 78.5 75.6 79.2 67.7 57.6 53.2 61.8 Motels 4.7 8.5 9.1 9.7 5.9 10.7 10.7 11.9 Guest houses 8.6 10.6 12.1 6.7 21.1 25.1 29.0 18.3 Apartments 2.4 2.4 3.2 3.8 5.3 6.6 7.1 7.3 Spas - - - 0.7 - - - 0.5 Category AA 6.9 11.4 15.8 12.9 3.7 6.8 8.3 2.7 A 16.2 26.9 17.4 9.5 10.7 21.4 14.9 4.7 B 14.6 14.7 16.9 21.7 12.6 13.8 15.0 15.6 C 11.6 9.2 17.7 18.7 11.5 10.1 17.8 19.2 D 29.2 21.5 20.4 17.3 28.4 24.5 25.6 23.5 E 21.5 16.3 11.8 16.9 33.1 23.4 18.4 34.3 Source: Secretarfa de Turismo I- - MEXICO: TOURISM DEVELOPMENT LOAN LodtinR Establishments per Category and Tvpe. per December 31. 1975 CATEGORY E Ma-AAEtb A B C D E Total Eatab- Estab- Estab- Estab- Estab- Estab- Estab- .Type lishments Rooms lishments Rooms lishments Rooms lishments Rooms lishments Rooms lishments Rooms lishments Rooms Botels 132 22,925 184 15,218 588 31,486 794 27,423 1,022 26,481 1,160 27,384 3,880 150,917 Hotels 9 591 34 1,460 229 7,040 240 5,592 205 3,156 35 580 752 18,419 Guest houses 1 24 7 23 19 262 49 757 151 1,849 922 9,840 1,149 12,754 Apartments 26 857 68 1,001 130 2,000 113 1,662 92 1,308 26 353 455 7,181 Spas 1 87 2 398 11 457 7 192 4 47 8 61 33 1,242 Trailer parks - - - - - - - - - - - - 190 10,366 v g Refers to spaces. Ig - 50 - ANNEX I Table 9 MEXICO: TOURISM DEVELOPMENT LOAN Number of Establishments and Rooms of Selected States (1972-75) Establishments Rooms States 1972 1975 1972 1975 Baja California N 1/ 355 407 9,355 11,281 Baja California S 47 88 969 1,774 Guerrero 2/ 5:30 535 16,414 19,898 Jalisco 3/ 427 561 13,093 18,776 Sinaloa 169 188 4,815 6,694 Mexico City 5:34 443 26,484 28,133 Chihuahua 277 281 7,379 7,907 Sonora 120 147 3,984 4,805 Nuevo Leon 101 113 4,100 4,855 Coahuila 328 322 3,852 4,178 Guanajuata 271 306 6,193 7,655 Michoacan 311 330 6,807 7,752 Tamaulipas 303 304 7,421 8,221 Veracruz 538 570 14,786 16,009 Quintana Roo 4/ 48 74 1,193 2,344 Other States 1,533 1,600 36,171 40,231 Total 5,892 6,269 163,016 190,513 1/ Includes Tijuana, Mexicali and Ensenada. 2/ Includes Acapulco. 3/ Includes Puerto Vallarta and Guadalajara. / Includes Cancun. MEXICO: TOURISM DEVELOPMENT LOAN Hotel Occupancy Rates. Selected Destinations, by Category. 1970-76 (in percentages of installed rooms) Mexico City Acapulco Puerto Vallarta Mazatlan La Paz Tiluana Cancun Year AA A I II III I II III I II III II I II I II III 1970 68.4 62.5 74.0 61.0 57.0 50.0 66.0 59.0 76.0 65.0 54.0 65.0 68.0 55.0 - - - 1971 58.1 60.1 78.0 65.0 56.0 67.0 66.0 59.0 76.0 66.0 55.0 67.0 70.0 55.0 - - - 1972 68.5 65.3 70.0 64.0 58.0 76.0 67.0 66.0 77.0 71.0 55.0 63.0 65.0 55.0 - - - 1973 77.5 70.9 81.0 74.0 67.0 81.0 67.0 69.0 85.0 81.0 56.0 70.0 45.0 59.0 - - - 1974 79.7 72.8 81.0 65.0 66.0 84.0 71.0 70.0 83.4 75.2 65.8 60.0 55.8 45.6 - - - 1975 76.7 70.1 72.0 57.0 61.0 73.0 62.0 71.0 66.7 67.2 56.9 55.0 57.6 57.2 58.4 43.6 58.2 1976 74.4 68.5 63.0 67.0 57.0 60.0 59.0 61.0 66.1 54.2 52.7 - - - 66.3 56.3 55.7 Hotel Categories: AA-class is luxury hotels; A, first-class international standard; I, combines luxury and first-class hotels; II and III correspond to good, reasonably priced hotels. Source: FONATUR studies. 01- MEXICO: TOURISM DEVELOPMENT LOAN Geographical Distribution of FONATUR Loan Approvals 1973-76 Number of Approvals and Value (Mex$ millions) Value as a % Cities Representing over No. of Approvals Value of Approvals of Total 1% of Approvals 1973-76 1973-75 1976 Total Approvals Cancun 35 350.2 120.9 471.1 13.1 Mexico City 24 196.0 182.0 378.0 10.5 Acapulco 17 274.1 0.5 274.6 7.7 Coztmnel 22 156.2 71.8 228.0 6.4 La Paz 10 126.5 49.3 175.8 4.9 Mazatlan 23 168.9 4.2 173.1 4.8 Zihuatanejo 5 56.0 100.0 156.0 4.4 Villahermosa 6 95.9 21.0 116.9 3.2 Queretaro 6 37.0 72.6 109.6 3.1 Jarvetaderas 2 - 107.4 107.4 3.0 Puerto Vallarta 6 55.5 49.0 104.5 2.9 Ciudad Lazaro C&rdenas 9 26.4 44.4 70.8 2.0 Bahfa de Banderas 1 60.6 - 60.6 1.7 Costa de Jalisco 1 60.0 - 60.0 1.7 Cabo San Lucas 4 39.0 12.0 51.0 1.4 Guadalajara 11 44.5 6.2 50.7 1.4 Cullacan 6 44.6 - 44.6 1.2 Oaxaca 10 30.3 13.9 44.2 1.2 Puerto Escondido (Oaxaca) 8 14.8 27.0 41.8 1.2 San Miguel de Allende 7 29.3 6.0 35.3 1.0 Monterrey 3 13.1 21.2 34.3 1.0 Subtotal: 21 cities 216 1,878.9 909.4 2,788.3 77.8 Subtotal: 107 other cities 212 587.6 209.7 797.3 22.2 H Total: 128 cities 428 2,466.5 1,119.1 3,585.6 100.0 --al-I MEXICO: TOURISM DEVELOPMENT LOAN Distribution of FONATUR Loan Approvals by Intermediary Institution, 1973-76 (Mex$ millions) Intermediaries Representing over Value of Approvals 1% of Approvals 1973-75 1976 Total 7. of Total Sociedad Mexicana de Credito 641.6 168.4 810.0 22.6 Financiera de Aceptaciones, S.A. 130.4 61.5 191.9 5.3 Financiera Banamex 171.3 - 171.3 4.8 Nacional Financiera, S.A. 156.9 11.4 168.3 4.7 Banco Nacional de Mexico, S.A. 145.1 22.0 167.1 4.7 Financiera Internacional, S.A. 147.0 8.0 155.0 4.3 Banco Mexicano, S.A. 63.1 86.3 149.4 4.2 Financiera Comermex, S.A. 95.0 23.8 118.8 3.3 Financiera del Atlantico, S.A. 113.0 - 113.0 3.2 Banco Minero y Mercantil, S.A. 108.6 - 108.6 3.0 Financiera de Fomento Industrial, S.A. 63.8 30.9 94.7 2.6 Banco del Atlantico, S.A. 34.6 52.0 86.6 2.4 Financiera Comercial Mexicana, S.A. 36.0 33.4 69.4 1.9 Sociedad Financiera Mexicana, S.A. 67.2 - 67.2 1.9 Banco Internacional, S.A. 20.2 39.3 59.5 1.7 Subtotal: 15 largest borrowers 1,993.8 537.0 2,530.8 70.6 Subtotal: 41 other intermediaries 337.4 161.3 498.7 13.9 Subtotal: Direct loans 135.3 420.8 556.1 15.5 Total Approvals 2,466.5 1,119.1 3,585.6 100.0 Source: FONATUR I- . - 54 - ANNEX I Table 13 MEXICO: TOURISM DEVELOPMENT LOAN Summary of FONATUR's Equity InvestmentS (Book Value in Mex$ millions, 1974-77) FONATUR Ownership (%) 1974 1975 1976 1977 CANCUN Hotel Aristos 39 - 12.0 15.0 15.0 Hotel El Presidente 26 - 11.3 12.9 12.9 Kin-Ha Condominios 74 2.7 7.2 47.8 48.2 Casa Popular Condominios 100 - 9.7 11.7 11.7 Hotel Garza Blanca 70 - 12.6 18.2 24.4 Cancun Caribe 100 - 54.8 61.5 61.5 Club Mediterranee 100 - 90.8 152.4 171.5 Cancun Nautico 100 - 0.8 1.7 1.7 Restaurante Cancu'n 100 - - 2.2 4.5 Other - 4.2 6.7 0.2 Total Cancun 2.7 203.4 330.1 279.0 IXTAPA Aristos 77 - 13.8 32.4 32.4 Conjunto El Palmar 100 - - 26.8 187.5 * Presidente Las Palmas 100 - 33.4 137.6 167.6 Villa Pelicanos 100 - - 54.1 63.6 Ixtapa Pacifico 100 - - 9.9 142.1 * Famitel 98 - - - - Other - - 1.9 0.7 38.0 Total Ixtapa - 49.1 261.5 301.6 OTHER Puerto Escondido (Oaxaca) 100 - - 6.4 44.6 Hotel Zazil-Ha 100 - - 29.3 60.0 Isla Mujeres 100 - - 16.0 16.3 Nacional Hotelera 86 33.5 171.8 171.8 151.8 El Presidente (Chapultepec) 81 - 0.5 130.0 156.6 Impulsora de Empresas Turfaticas 40 7.7 15.4 15.4 15.4 Archaeological hotels 100 - - 34.2 142.5 Other - 0.2 4.2 51.1 5.8 Total Other 41.4 191.9 454.2 548.4 Total Equity Investments 44.1 444.4 1,045.8 1,129.0 * Sold in 1977 MIOflO: 1TOURIS1 DEVELOPKWN LOAN FONATUR - NEW INTEREST RATE STRUCTUREi INTERSST RLT SCHEDULES- Rate Nargin for Loan as raid by jIztor 10t.rndLaries Received by FONTUR Percent a Maimmm No. of Years Type of Project Zrevaou !zuausd Previous * Previous Froposed Discounted Percent of Grace Rates Rates Rates Rates Rates Rates by FONATUR Investment Total Period 1. Loans of under Mex$2 million NOv 10.0 11.0 3.0 3.0 7.0 8.0 90 65 10 2 Expansion 11.0 13.0 3.0 3.0 8.0 10.0 90 65 10 2 2. Loans fra Mox$2 million to Mex$10 million in value NeW 11.0 12.0 2.5 2.25 8.5 9.75 90 65 15 3 Expasion 12.0 14.0 2.5 2.25 9.5 11.75 90 65 10 2 3. Loans from Mex$10 million to V Mex$100 million in value Nov 11.5 13.0 2.0 1.75 9.5 11.25 90 65 15 3 Expansion 12.5 15.0 2.0 1 75 10.5 13.25 90 65 3D 2 4. Trailer Parks 12.0 ).4.0 2.0 2.0 10.0 12.0 90 80(A) 10 2 5. Condsuiniums 14.0 15.0 2 5 2.0 11.5 13.0 90 50(B) 5 2 6. Time-sharirg Aprtela - 16.0 - 1.75 - 14.25 90 50(B) 4 2 7. Suites Neow 14.0 16.0 2.5 2.5 11.5 13.5 80 50 10 2 Expansien 15.0 17.0 2.5 2.5 12.5 4. 5 80 50 10 1 8. Furnitare & Equipment 13.0 15.0 2.0 2.0 11.0 13.0 90 - 8 2 9. Other Projects Subject to Analysis NOTES: 1/ Interest rate structure as of June 1977. (^A Fixed assets do not include land. Excluding funding from pre-sales. - Total time includes grace period. - 56 - ANNEX I Table 15 MEXICO: TOURISM DEVELOPMENT LOAN Balance Sheet (Development Department) (As of December 31, 1976) Breakdown (in Mex$ million) Total Cancun Ixtapa Other Current assets 481 158 320 3 Current liabilities 101 50 51 - Net working capital 380 108 269 3 Fixed assets 1,780 1,148 586 46 (Less) Long-term debts (64 (18) (42) _U4 Total net assets 2,096 1,238 813 45 Equity Represented by: Paid-in capital 1,860 1,037 778 45 Retained earnings 236 201 35 - 1/ Includes preliminary infrastructure investments at Loreto and San Jose del Cabo. - 57 - ANNEX I Table 16 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR'S OPERATIONS DEPARTMENT BALANCE SHEETS 1974-76 Actual (MexS millions) 1974 1975 1976 Current Assets Cash + other current assets 165 321 195 Current portion - loans receiv. 76 120 165 Total current assets 241 441 360 Investment + Fixed Assets Long-term loans receivable 1! 793 1,417 2,100 Equity investments 44 445 1,045 Furniture and equipment 1 1 5 Total Assets 1,079 2,304 3,510 Current Liabilities Accounts payable + other 2 48 45 Current portion long-term debt - 25 45 Total current liabilities 2 73 90 Long-term debt 700 1,275 2,130 Reserves for pensions, etc. 1 7 15 Due Development Department - - 45 Total Liabilities 703 1,355 2,280 Government paid-in capital 285 835 1,135 Retained earnings 91 114 95 Total equity 376 949 1,230 Total Liability and Equity 1,079 2,304 3,510 1/ Loans receivables include direct loans amounting to about 15% of total. - 58 - ANNEX I Table 17 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR'S OPERATIONS DEPARDMENT--SOURCESW -,ND USES OF FUNDS (1975-76) Actual (Mex$ millions) 1975 1976 Beginning working capital balance 239 368 Source of Funds New borrowings - Banco de Mexico 600 900 Government equity contributions 550 300 Reductions in long-term loans 120 165 Land from Development Department - 45 Miscellaneous 6 4 Net income 23 (19) TOTAL SOURCES 1,299 1,395 Uses of Funds Disbursements 744 848 Net investment in new equity 401 600 Reductions in long-term debt 25 45 TOTAL USES 1,170 1,493 Net change in working capital 129 (98) Ending working capital balance 368 270 - 59 - ANNEX I Table 18 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR'S OPERATIONS DEPARTMENT - INCOME STATEMENTS (1974-76) Actual (Mex$ millions) 1974 1975 1976 Income Interest-existing loans 36 104 148 Interest - short-term investments 5 13 18 Interest income 41 117 166 Income (loss) on equity investments - - (10) Total income 41 117 156 Expense Interest expense 26 78 150 General and administrative expense 10 16 25 Total expense 36 94 175 Net income 5 23 (19) Beginning retained earnings balance 86 91 114 Ending retained earnings balance 91 114 95 - 60 - ANNEX I Table 19 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR'S OPERATIONS DEPARTMENT - FINANCIAL RATIOS (1975-76) Actual 1975 1976 Operational Indicators Gross income as % of average total assets 6.9 5.8 Administrative expenses as % of average total assets .9 .9 Interest expense as % of average total assets 4.6 5.2 Income from loans as % of average loan portfolio 8.6 7.8 Cost of long-term debt as % of average long-term debt 7.8 8.6 Spread .8 (.8) Interest expense as % of average loan portfolio 6.5 7.9 Profitability Indicators Net income as % of average equity 3.5 (1.7) Net income as % of average total assets 1.4 (.7) Financial Structure Indicators Total debt/year-end equity 1.4/1 1.8/1 Long-term debt/year-end equity 1.3/1 1.7/1 Current assets/current liabilities 6/1 3.9/1 Interest coverage ratio 1.3 .9 - 61 - ANNEX I Table 20 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR'S CONSOLIDATED BALANCE SHEETS (1974-76 - Unaudited) Calendar Year Ending December 31 -/ (Mex$ millions) 1974 1975 1976 Current Assets Cash + other current assets 198 351 232 Receivables 211 392 564 Total current assets 409 743 796 Investments and Fixed Assets Long-term receivables 793 1,417 2,100 Equity investments 44 445 1,045 Land 37 43 50 Infrastructure net, and others 734 1,287 1,375 Total Assets 2,017 3,935 5,366 Current Liabilities Accounts payable + other 157 322 210 Current portion - long-term debt ___ 25 45 Total Current Liabilities 157 347 255 Long-term Liabilities 705 1,363 2,145 Total Liabilities 862 1,710 2,400 Paid-in Capital 978 1,969 2,995 Retained earnings 177 256 (29) Total Equity 1,155 2,225 2,966 Total Liabilities and Equity 2,017 3,935 5,366 1/ These unaudited balance sheets are reasonably consistent with audited balance sheets for the years ending June 30 with the exception of 1976 where certain adjustments have been made in anticipation of the June 30, 1977 audit which was not completed at the time of appraisal. 62 ANNEX I Table 21 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR (DEVELOPMENT DEPARTMENT) - PRO FORMA BALANCE SHEET (in Mex$ million) 1976 1977 1978 1979 1980 1981 ASSETS Actual Adj. Current Assets: Cash on Hand 37 37 84 131 202 305 400 Accounts Receivable 444 117 204 507 703 700 599 Other (Due from FIBAZI) - 282 282 282 282 282 282 Total Current Assets 1481 436 570 920 1,187 1,287 1,281 Fixed Assets: Land 64 64 116 116 221 221 221 Transfer of Land - (14) (18) (54) (73) (94) (114) Subtotal 64 50 98 112 148 127 107 Investment in Process 932 932 328 926 1,314 916 1,008 Infrastructure 784 784 1,716 1,716 1,916 2,616 2,616 Subtotal 1,716 1,716 2,o44 2,642 3,230 3,532 3,624 Depreciation - (346) (483) (620) (777) (1.o04) (1,231) Subtotal 1,716 1,370 1,561 2,022 2,453 2,528 2,393 Other Investments _- 145 445 845 1,245 1,445 Total Fixed Assets 1,780 1,465 1,804 2,579 3,446 3,900 3,945 TOTAL ASSETS 22_61 1,901 2,374 3,499 4,633 5,187 5,226 LIABILITIES Current Liabilities 165 165 225 285 345 405 405 EQUITY Government Contribution 1,462 1,462 1,862 2,262 2,562 2,762 2,762 IBRD Contribution 159 159 209 409 609 709 709 IDB Contribution 239 239 339 489 639 639 639 Total Paid-in Capital 1,860 1,860 2,410 3,160 3,810 4,110 4,110 Retained Earnings 236 (124) (261) 54 478 672 711 Total Equity 2,096 1,736 2,149 3,214 4,288 4,782 4,821 TOTAL LIABILITY & EQUITY 2,261 1,901 2,374 3,499 4,633 5,187 5,226 _63_ ANNEX I Table 22 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR (DEVELOPMENT DEPARTMENT) - PRO FORMA INCOME STATEMENT (in Mex$ million) REVENUES: 1977 1978 1979 1980 1981 Sales from Land - Urban Zone 7 107 46 53 78 - Industrial Zone 7 3 3 3 3 - Tourist Zone 206 456 490 307 143 Total Sales 220 566 539 363 224 Adjusted Sales 220 708 787 595 41o (Less) Cost of Land () 36) j1) (21) (20) Gross Margin from Land Sales 216 672 768 574 390 OPERATING COSTS: Project Administration 30 38 46 41 4o Operation and Maintenance 16 16 16 29 29 Development Costs 1179 143 _ 63 Total Costs 243 233 205 168 132 Adjusted Costs 243 280 275 242 203 GROSS OPERATING INCOME: (27) 392 493 332 187 Other Income 27 60 88 89 79 GROSS OPERATING PROFIT: - 452 581 421 266 Depreciation 137 137 157 227 227 NET OPERATING INCOME: (137) 315 424 194 39 Cumulative Operating Income (261)v 54 478 672 711 Rate of Return on Investment - 15.6 17.3 7.7 1.6 1/ Including accumulated deficit of Mex$124 million, shown in the 1976 ad- justed Balance Sheet. -64- ANNEX I Table 23 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR (DEVELOPMENT DEPARTMENT) - PRO FORMA CASH FLOW STATEMENT (in Mex$ million) SOURCE OF FUNDS 1977 1978 1979 1980 1981 Net Operating Income (137) 315 424 194 39 Non-Cash Charge 137 137 227 227 Subtotal - 452 581 421 266 Increase (or Decrease) in Accounts Payable 60 60 60 60 - Total 60 512 641 481 266 Government Contribution 40o 400 300 200 - IBRD Contribution 50 200 200 100 IDB Contribution 100 150 50 - - Total 550 750 650 300 - TOTAL FUNDS 610 1,262 1,291 781 266 APPLICATION OF FUNDS Land 52 50 55 - - Infrastructure 328 598 588 302 92 Project Cost 380 648 643 302 92 Decrease in Assets (4) (36) (19) (21) (20) Total 376 612 624 281 72 Other Investment 100 300 4oo 4oo 200 Increase (or Decrease) in Accounts Receivable 87 303 196 (3) (1o0) TOTAL APPLICATION OF FUNDS 563 1,215 1,220 678 171 SURPLUS: 47 47 71 103 95 Cumulative Surplus 84 - 131 202 305 4oo 1/ Including the amount of Me:-$37 million as Cash on Hand, shown in the 1976 Balance Sheet - 65 - ANNEX I Table 24 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR OPERATIONS DEPARTMENT BALANCE SHEETS 1977-81 Pro Forma (current Mex$ millions) 1977 1978 1979 1980 1981 Current Assets Cash + other current assets 215 305 270 145 740 Current portion - loans receivable 240 255 365 465 605 Current portion - land sale receivables 70 95 135 185 245 Total current assets 525 655 770 795 1590 Investment + Fixed Assets Long term loans receivable 2410 3695 5280 6975 6780 Equity investments 1310 2085 3250 4185 4615 Receivables from sale of equity 285 390 535 735 970 Furniture and equipment 5 10 10 10 10 Total Assets 4535 6835 9845 12700 13965 Current Liabilities Accounts payable + other 50 65 75 80 85 Current portion long-term debt 95 220 350 550 775 Total current liabilities 145 285 425 630 860 Long-term debt 2535 3650 4925 6035 6110 Reserves for pensions, etC. 20 25 30 35 40 Due Development Department 145 445 845 1245 1445 Total Liabilities 2845 4405 6225 7945 8455 Government paid-in capital 1575 2265 3305 4145 4510 Retained earnings 115 165 315 610 1000 Total Equity 1690 2430 3620 4755 5510 Total Liabilities and Equity 4535 6835 9845 12700 13965 - 66 - ANNEX I Table 25 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR OPERATIONS DEP'ARTMENT SOURCES AND USES O? FUNDS 1977-81 Pro Forma (current Mex$ millions) 1977 1978 1979 1980 1981 Begining Working Capital balance 270 380 295 345 155 Sources of Funds New borrowings 500 1335 1625 1660 850 Government equity contributions 440 690 1040 840 365 Reductions in long term receivables 310 350 500 650 850 Sale of equity investments 445 250 350 480 600 Land from Development Department: 100 300 400 400 200 Miscellaneous 5 - 5 5 5 Net income 20 50 150 295 390 Non-cash expenses 30 40 45 50 50 TOTAL SOURCES 1850 3015 4115 4380 3310 Uses of Funds Disbursements 550 1540 1950 2160 410 Investment in new equity 740 1065 1560 1465 1080 Increase in long term receivables 355 200 280 385 480 Reductions of long term debt 95 220 350 550 775 TOTAL USES 1740 3025 4140 4560 2745 Net change in working capital 110 (10) (25) (180) 565 Ending working capital balance 380 370 345 165 730 - 67 - ANNEX I Table 26 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR OPERATIONS DEPARTMENT - INCOME STATEMENTS 1977-81 Pro Forma (Current Mex$ millions) 1977 1978 1979 1980 1981 Income Interest income 240 350 555 795 960 Net income - equity investments 25 65 105 160 200 Total Income 265 415 660 955 1160 Expense Total interest expense 215 320 460 605 710 General and administrative expense 30 45 50 55 60 Total expense 245 365 510 660 770 Net Income 80 50 150 295 390 Ending retained earnings balance 115 165 315 610 1000 _ 68 _ ANNEX I Table 27 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR'S OPERATIONS DEPARTMENT - FINANCIAL RATIOS (1977-81) Pro Forma 1977 1978 1979 1980 1981 Operationgl Indicators Gross income as % of average total assets 6.6 7.3 7.9 8.5 8.7 Administrative expenses as % of average total assets .7 .8 .6 .5 .5 Interest expense as % of average total assets 5.3 5.6 5.5 5.4 5.3 Income from loans as % of average loan portfolio 9.0 9.8 10.9 11.7 12.3 Cost of long-term debt as % of average long-term debt 8.9 10.0 10.2 10.2 10.5 Spread .1 (.2) .7 1.5 2.0 Profitability Indicators Net income as % of average equity 1.4 2.4 5.0 7.0 7.6 Net income as % of average total assets .5 .9 1.8 2.6 2.9 Financial Structure Indicators Long-term debt/year-end equity 1.6/1 1.7/1 1.6/1 1.5/1 1.4/1 Current assets/current liabilities 3.6 2.3 1.9 1.3 1.8 Interest coverage ratio 1.1 1.2 1.3 1.5 1.5 Net working capital (Mex$ millions) _ 380 370 370 165 730 - 69 - ANNEX I Table 28 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR'S CONSOLIDATED INCOME STATEMENT 1977-81 Pro Forma (Current Mex$ millions) 1977 1978 1979 1980 1981 Income Interest income 240 350 555 795 960 Net income - equity investments 25 65 105 160 200 Land sales - gross margin 216 672 768 574 390 Other income 27 60 88 89 79 Total Income 508 1,147 1,516 1,618 1,629 Expense Interest expense 215 320 460 605 710 Development costs 197 215 192 141 97 General + admin. - operations 30 45 50 55 60 General + admin. - development 46 65 83 101 106 Depreciation 137 137 157 227 227 Total Expense 625 782 942 1,129 1,200 Net Income (117) 365 574 489 429 - 70 - ANNEX I Table 29 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR'S CONSOLIDATED BALANCE SHEETS, 1977-81 Calendar Year ending December 31 Pro Forma (Current Mex$ millions) 1977 1978 1979 1980 1981 Current Assets Cash + other current assets 299 436 472 450 1,140 Receivables 796 1,139 1,485 1,632 1,731 Total current assets 1,095 1,575 1,957 2,082 2,871 Investments and Fixed Assets Long-term receivables 2,695 4,085 5,815 7,710 7,750 Equity investments 1,310 2,085 3,250 4,185 4,615 Land 98 112 148 127 107 Infrastructure, investment net, + others 1,566 2,032 2,463 2,538 2,403 Other _ __ _ _ Total Assets 6,764 9,889 13,633 16,642 17,746 Current Liabilities Accounts payable + other 275 350 420 485 490 Current portion - long-term debt 95 220 350 565 785 Total Current Liabilities 370 570 770 1,050 1,275 Long-term liabilities 2,555 3,675 4,955 600 6,150 Total Liabilities 2,925 4,245 5,725 7,105 7,415 Paid-in capital 3,985 5,425 7,115 8,255 8,620 Retained earnings (146) 219 793 1,282 1,711 Total 4quity 3,839 5,644 7,908 9,537 10,331 Total Liabilities and Equity 6,764 9,889 13,633 16,642 17,746 _ 71 - ANNEX I Table 30 MEXICO: TOURISM DEVELOPMENT LOAN FONATUR'S CONSOLIDATED SOURCES AND USES OF FUNDS, 1977-81 Pro Forma (Gurrent Mex$ millions) 1977 1978 1979 1980 1981 Beginning Working Capital 541 725 1.005 1.187 1,047 Sources of Funds New borrowing 500 1,335 1,625 1,660 850 Gov't. equity contributions 990 1,440 1,690 1,140 365 Sale of equity investments + land 449 286 369 501 620 Reductions in long-term receivables 310 350 500 650 850 Net income (117) 365 574 489 429 Non cash expense + miscellaneous 172 177 207 282 282 Total Sources 2,304 3,953 4,965 4,722 3,396 Uses of Funds Disbursements 550 1,540 1,950 2,160 410 New equity investment 740 1,065 1,560 1,465 1,080 Infrastructure development + land 380 648 643 302 92 Increase in long-term receivables 355 200 280 385 480 Reduction in long-term debt 95 220 350 550 775 Total Uses 2,120 3,673 4,783 4,862 2,837 Net Change in Working Capital 184 280 182 (140) 559 Ending Working Capital Balance 725 1,005 1,187 1,047 1,606 - 72 - ANNEX I Table 31 MEXICO: TOURISM DEVELOPMENT LOAN ESTIMATED SCHEDULE OF DISBURSEMENTS Yearly Cumulative Disbursements Disbursements (in thousands of Dollars) Year 1 First Quarter Second Quarter Third Quarter 5,480 5,48o Fourth Quarter 5,160 10,640 Year 2 First Quarter 6,430 17,070 Second Quarter 7,540 24,610 Third Quarter 8,630 33,240 Fourth Quarter 5,030 38,270 Year 3 First Quarter 4,810 43,080 Second Quarter 3,480 46,56o Third Quarter 2,290 48,850 Fourth Quarter 1,150 50,000 - 73 - ANNEX II MEXICO: TOURISM DEVELOPMENT LOAN ASSUMPTIONS FOR FONATUR'S OPERATIONS DEPARTMENT FINANCIAL PROJECTIONS 1977-81 A. Operational Forecasts Lending Program Approvals 1. Approvals are based on FONATUR's projected program calling for an average 15% annual increase in the number of hotel rooms financed. Projections for 1977 and 1978 are based on actual identified projects ad- justed by a probability factor. 2. Inflation assumptions used were 32% in 1977, 20% in 1978, 12% in 1979, and 7% thereafter. Disbursements 3. Subproject loan disbursements are assumed to be in five equal quarterly installments beginning the first quarter after approval for fourth quarter 1977 approvals and the second quarter after approval for all other loans. As most 1977 approvals are scheduled for the fourth quarter of the year, disbursements on the new program in 1977 are low. Terms and Conditions 4. All new loans will be made on the average terms for the 1977-78 projected approvals of identified projects, i.e., 13% interest, and a 12- year maturity, including 2-1/2 years of grace. It is assumed that the new interest rate schedule will be implemented for all new loans and that the index of the average cost of funds to financieras will remain con- stant over the period. Equity Investment Activity 5. New investment activity is assumed equal to FONATUR projections of cash and land requirements for new investment. Sale of investments is assumed to average Mex$200 million in 1977 prices each year, or 45% of 1977 sales, at book value to be paid in five equal annual installments with 10% interest. Borrowing 6. Banco de Mexico--Mex$500 million constant pesos a year at 13% interest with an 8-year maturity, including 2-1/2 years of grace, and equal semi-annual payments of principal and interest. Cofinancing--US$12 - 74 - ANNEX II million in early 1978 and US$8 million in 1979 at 8.5% interest (LIBOR plus 1.5%) with an 8-year maturity including 3 years of grace, and equal semi- annual payments of principal. Inter-American Development Bank or other sources--US$25 million at 8-1/2% interest to be disbursed in 1980 to supple- ment other funding sources. World Bank--US$45 million at 8.5% interest with repayment conditions based on skewing to accommodate cofinancing repayment requirements. Disbursements are a fixed 30% of FONATUR disbursements on eligible subprojects with no retroactive financing. 1/ Equity Contribution 7. It is assumed the Government will contribute equity equal to net cash requirements of FONATUR's equity investment program plus 10% of dis- bursements for new loan approvals. B. Financial Forecasts Interest Income 8. Assumptions are actual on existing portfolio, an average 13% on new loans, and 1-1/2% of average total assets for short-term investments. Interest Expense 9. Based on terms and conditions of existing and projected borrow- ings, assuming no change in the indexed average cost of borrowing funds by financieras. Equity Income 10. As projected by FONATUR less Mex$30 million a year in 1977 prices in write-offs under the equity method of accounting for investments. General Administrative Expenses 11. Assumed to increase 15% in constant prices in 1978, and to re- main equal in constant prices thereafter. 1/ Because of the current uncertainties related to the IDB loan, the Mexican representatives requested the Bank to increase the amount of the loan from US$45 million to US$50 million, and to increase the disbursement percentage from 30 to 40%. These changes do not materially affect the analysis and the recommendations of this staff appraisal report. - 75 - ANNEX II Provisions 12. In accordance with FONATUR practice and historial experience, no provision is made for bad debt. Foreign Exchange Risk 13. It is assumed that FONATUR will take no foreign exchange risk on cofinancing. While FONATUR will bear the foreign exchange risk on the IBRD loan, it is assumed that any costs related thereto will be reimbursed by NAFINSA. Appropriation of Net Income 14. It is assumed all net income will be reinvested. - 76 - ANNEX III MEXICO: TOURISM DEVELOPMENT LOAN ANALYSIS OF HOTEL PROFITABILITY 1. A variety of indiv-idual hotels were analyzed to evaluate the fi- nancial profitability of current hotel investments in Mexico. Operating results vary significantly from one hotel to another. Nevertheless, cer- tain assumptions and estimates were made both to evaluate the likely pro- fitability of future investments in hotels and to determine appropriate financial criteria for hotel financing purposes. Types of Hotels 2. Hotels were classified by size and cost of investment in 1977 prices as follows: Investment Cost Number of Per Room Total Type Rooms Mex$ us$ Mex$ millions US$ millions I 300 920,o000 4o,ooo 276.0 12.0 II 200 690,000 30,000 138.0 6.o III 100 46o,ooo 20,000 46.o 2.0 IV 100 345,000 15,000 34.5 1.5 The categorization of hotels is closely related to the quality of facili- ties and the prices to be charged, which are usually based on investment costs. It is, therefore, appropriate to use the investment costs as a basis for classifying the types of hotels for the purpose of hotel profit- ability analysis. Assumptions 3. Operating projections were based on the following assumptions: Occupancies: In keeping with the current experience average oc- cupancies have been conservatively assumed to level off at 75% for Type I, 70% for Type II, 65% for Typeb III, and 60% for Type IV. These occupancies have been assumed to be achieved in the third year of operations. Room Rates: Based on the current experience of hotel operations in the country, average room rates in 1977 prices have been assumed to be as follows: - 77 - ANNEX III Average Room Rates Type in Mex$ in US$ I 800 34.78 II 600 26.09 III 4oo 17.39 IV 250 10.87 Although a 20% increase in hotel tariffs was granted after the devaluation of the peso in September 1976 and another 20% in 1977, room rates charged by hotels in Mexico are still very competitive in US dollar terms. Given the high rates of inflation, however, the Government will have to be pre- pared to review hotel tariffs more often than in the past so that it does not put hoteliers in a weak bargaining position to negotiate higher room rates vis-a-vis the tour operators, if necessary. Non-Room Receipts: Sales from food and beverages, and other op- erational departments for each type of hotel have been estimated based on their sales ratio to room sales or total sales, reflecting the operating results experienced by different types of existing hotels. The ratio of food and beverage sales to room sales has been estimated to be 1.2 for Type I hotels, 1.0 for Type II hotels, Q.8 for Type III hotels, and 0.6 for Type IV hotels. Sales from other operational departments including valet service, telephone and other miscellaneous items have been estimated to be 2% of the total sales for Type I and II hotels, and 1% for the other types of hotels. Operating Costs: One of the most favorable factors for hotel op- erations in Mexico is the relatively low operating costs. Although payroll and related expenses have increased substantially in recent years, the cost ratio to gross sales annears to be relatively low in the range pf 19-25%. The daily average wage per employee is 100-156 pesos (US4. 3
Группа Всемирного банка · Staff Appraisal Report
Mexico - Tourism Development Project
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