Mexico - Fourth Railway Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Repo"t No. P-2918-ME REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS AND FERROCARRILES NACIONALES DE MEXICO WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A FOURTH RAILWAY PROJECT November 26, 1980 This document has a restricted distibution and may be used by recipients only In te performnce of their officidl duties. Its contents may not otherwise be disclosed without Wrld Bank authorizaton.  Currency Unit - Peso (Mex$) Since September 1, 1976 the Mexican peso has been floating; it has fluctuated around Mex$22.60 to the US dollar since mid-1977. On November 20, 1980, the peso traded at 23.02 per US dollar. Fiscal Year January 1 to December 31 Abbreviations ASA - Airport Authority (Aeropuertos y Servicios Auxiliares) BANOBRAS - National Bank for Public Works and Services (Banco Nacional de Obras y Servicios Publicos) CN - A state-owned manufacturer of freight cars (Constructora Nacional) CTC - Centralized Traffic Control Hacienda - Secretariat of Finance and Credit LCL - Less than Carload NAFINSA - National Development Bank (Nacional Financiera, S.A.) NdeM - National Mexican Railways (Ferrocarriles Nacionales de Mexico) PACIFICO - Pacific Railways (Ferrocarriles del Pacifico) PEMEX - Mexican Petroleum Company (Petroleos Mexicanos) SAHOP - Secretariat of Human Settlements and Public Works SCT - Secretariat of Communications and Transport SPP - Secretariat of Programming and Budgeting  FOR OFFICIAL USE ONLY MEXICO FOURTH RAILWAY PROJECT LOAN AND PROJECT SUMMARY Borrower: Banco Nacional de Obras y Servicios Publicos (BANOBRAS) as financial agent for the Government and Ferrocarriles Nacionales de Mexico (NdeM) Guarantor: United Mexican States Amount: US$150 million equivalent Terms: Fifteen years, including three years of grace, and interest at 9.25 percent per annum. Project Description: The proposed project is NdeM's investment plan for the 1981-1983 period and is aimed at enabling NdeM to meet the rapid increase in demand for railway transport that Mexican economic growth is generating. The project also aims at strengthening NdeM's operating performance and financial situation through an agreed Plan of Action. Investments will be made principally in track rehabili- tation, motive power and rolling stock expansion and modernization, communications improvements, and technical assistance. A shortfall in the realization of forecast traffic and in financial performance are the main risks. However, in view of Mexico's rapidly growing economy and the need for transport services as well as the Government's stated policies on tariffs, these risks are acceptable. This document has a restricted distribution and may be used by recipients only in the performanee of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.   - ii - Cost of Project: (in millions of US$ equivalent) Local Foreign Total Track and Structures 122 57 179 Signaling and Telecommunications 23 22 45 Locomotives and Rolling Stock 443 351 794 Engineering and Supervision 34 1 35 Consulting Services - 2 2 Subtotal 622 433 1,055 Contingencies - Physical 9 5 14 - Price 360 98 458 99 536 I/ 1_,527 Sources of Financing: (in millions of US$ equivalent) Local Foreign Total IBRD - 150 150 EXIMBANK USA - 94 94 NAFINSA 682 247 929 BANOBRAS 268 45 313 Government 41 - 41 991 536 1,527 Disbursements: (US$ millions) IBRD Fiscal Year 1981 1982 1983 1984 Annual 14 52 55 29 Cumulative 14 66 121 150 Economic Rate of Return: 22 percent. Staff Appraisal Report: 3078b-ME of November 20, 1980. 1/ Excluding import taxes.   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS AND FERROCARRILES NACIONALES DE MEXICO WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A FOURTH RAILWAY PROJECT 1. I submit the following report and recommendation on a proposed loan to Banco Nacional de Obras y Servicios Publicos (BANOBRAS) as financial agent for the Government and Ferrocarriles Nacionales de Mexico (NdeM) with the guarantee of United Mexican States for the equivalent of US$150 million to help finance a Fourth Railway Project. The loan would bear interest at 9.25 percent per annum and would have a repayment period of 15 years, includ- ing 3 years of grace. PART I: THE ECONOMY I/ 2. The Mexican economic situation and major issues of economic policy were analyzed in "Special Study of the Mexican Economy: Major Policy Issues and Prospects" (2307-ME), distributed to the Executive Directors on May 30, 1979. The most recent economic mission visited Mexico in February 1980 and is now preparing its report. Country data sheets are attached as Annex I. Past Performance 3. For the three decades preceding the mid-seventies, Mexico was very successful in achieving rapid economic growth while also maintaining stability in prices and the balance of payments. From 1940 to 1970, GDP growth exceeded 6 percent per year in real terms, inflation averaged less than 5 percent per year from the mid-1960s to 1972, and the dollar value of the peso, fixed in 1954, was maintained until 1976. The Government's economic role in this achievement was to carry out direct investments in infrastructure and in key industries such as power, steel and petroleum, while creating a stable regula- tory and institutional framework, as well as good profit prospects to induce private sector growth. 4. This strategy produced considerable progress and better living * standards for many Mexicans. However, the incomes of poor farmers and marginal urban dwellers, whose productivity was low and has not been increasing, have been lagging behind. There was, therefore, little reduction in contrasts within the Mexican economy. While land redistribution has continued, most of the peasants who received land could not significantly improve their economic status as they received only limited benefits from infrastructure, credit and technical assistance. Rapid population growth, which reached a peak of almost 3.5 percent per year by the mid-1970s, made social equity difficult 1/ This section is substantially unchanged from the President's Report for the Second Medium Cities Water Supply Project, No. P-2883-ME of October 15, 1980.  - 2 - to achieve. Even Mexico's sustained economic growth was not sufficient to absorb the rapidly growing labor force in productive employment)and by the 1970s some 50 percent of the labor force was either relatively unproductive and poorly paid, or openly unemployed. 5. During the mid-1970s Mexico experienced increasing public sector deficits, inflation, large balance of payments deficits, capital flight and a marked slowdown in the real rate of growth of GDP, which dropped to 2 percent in 1976--the lowest rate experienced since the mid-thirties. On September 1, 1976 the authorities abandoned the fixed exchange rate of 12.50 pesos per dollar that had remained unchanged since 1954 and let the peso float; since then it has remained rather stable at rates fluctuating around 22.60 pesos per dollar. Following the devaluation, Mexico obtained major support from the IMF. The new Government ratified a three-year extended facility agreement with the Fund shortly after taking office on December 1, 1976, and was generally successful in adhering to it. Recent and Current Situation 6. The present Administration inherited a difficult situation. High inflation, large public sector deficits, increasing foreign indebtedness and lack of confidence in economic management indicated a need for economic stabilization. However, the situation also called for more expansionary policies; economic activity had slowed down, net private investment was virtually nil, and the gap between new job creation and growth of the labor force was increasing. Rich new petroleum discoveries and high world prices offered profitable investment opportunities in the petroleum sector; indeed, increased production for export of these products seemed by far the only way to meet a large part of Mexico's high debt service requirements in the coming years. 7. Faced with these conflicting needs and opportunities, the Mexican authorities adopted a mixed strategy aimed at reducing lower-priority public expenditures and increasing public revenues, while proceeding with petroleum and other high-priority investments. The objectives of the Government's program included control of inflation to be followed by a return to high rates of economic growth. Better management of public sector expenditures, tax reform, more rational pricing and cost control in public sector enter- prises, promotion of private savings, limiting wage increases to justifiable levels, and more effective cooperation with the private sector were important parts of the Government's economic strategy. 8. This approach succeeded in bringing inflation down to 17 and 18 percent in 1978 and 1979, respectively, as against an annual rate of almost 29 percent in 1977. The deficit in the current account of the balance of payments peaked at US$4.2 billion (or 5.3 percent of GDP) in 1975 and declined to US$1.9 billion (equivalent to 2.5 percent of GDP) in 1977. Favorable oil prospects and increasing capital inflows brought about a rapid increase in imports reflecting both the resolve to reduce protectionism and the growing demand for capital and intermediate goods upon which the expansion of the economy depends. The current account deficit increased to US$2.6 billion (6r 2.8 percent of GDP) in 1978 and further to an estimated US$4.6 billion (under 3.8 percent  of GDP) in 1979. The public sector deficit peaked at about 9 percent of GDP in 1975 and declined to about 7 percent in 1979. Mobilization of savings by the banking system has recovered at a strong pace. GDP growth is estimated at about 7 percent in 1978 and 8 percent in 1979 as compared to 2 percent in 1977. 9. The growth outlook for 1980 continues to be favorable and the economy should increase at about 8 percent. However, inflation will remain a problem, essentially as a result of expansionary policies with investments increasing at a rate of more than 15 percent a year in real terms. A shortage of essential consumer goods and construction materials, aggravated by the inadequacy of the transport system to handle distribution of domestically produced goods along with increasing imports, is also likely to contribute to inflation. 10. Another threat to the efforts of the Government in preventing inflation from increasing much above 20 percent may come from the wage area. The agreed increase in the minimum wage for 1980 was about 21 percent and came after three consecutive years of decline in real wages. As indicated in para. 11 below, in the course of the year inflation has increased more rapidly than the expected 20 percent. This has caused serious concern among the trade unions. Bargaining of new national contract is now being based on substan- tially higher percentage increases than the one implied in the minimum wage adjustment. 11. The Government will not have an easy task in maintaining price increases within acceptable limits. The increase in the consumer price index in 1980 (January-December) is expected to be only slightly below 30 percent, resulting in part from the newly introduced value-added tax, and may adversely affect expectations about inflation. At the same time, the need to expand public investment in the key infrastructure sectors and to maintain in real terms the current programs in the energy sectors, leaves relatively little scope for significant adjustments in the level of public expenditure. Economic Problems and Prospects 12. Mexico has the institutional and natural resources necessary to attain her ambitious goals of rapid growth and alleviation of poverty. The acute short-run disequilibria that affected the country during the mid-70s have been brought under control; the new petroleum riches will greatly relax the financial constraints on growth. The proven oil and gas reserves are estimated at about 60 billion barrels. Exploitation of these reserves should allow Mexico to substantially increase production of crude oil and natural gas from the equivalent of about 1.2 million bbl/day in 1976. The stated goal of the Government is to reach a production level of about 2.7 million bbl/day in 1981, and to more or less maintain it at a level that will accommodate exports of 1.1 million bbl/day; by mid-year a production target of 2.3 mil- lion bbl/day had already been reached. The Mexican Government is unwilling to exceed this limit for fear of increasingly becoming a classical "oil producing country" with the economic and social tensions that would ensue. But even at this production level, the challenge for Mexico is how to mobilize its  - 4 - resources--its human skills, its institutions, and its experience--to help resolve its long term development problems. The most serious of these relate to poverty, unemployment, inadequate growth of agricultural production in non-irrigated lands, and urban-regional imbalances. 13. Poverty: Mexicans have participated unevenly in the remarkable economic growth of the last several decades. According to preliminary esti- mates for 1977, at least 2.4 million households (22 percent of the total) lived in absolute poverty, while at least 2.8 million (25 percent of the total) had incomes of less than one-third the national average. The root causes of this persistent problem are three: rapid population growth, past neglect of non-irrigated agriculture (where some two-thirds of the poor are princi- pally employed), and slow absorption of labor in high-productivity jobs. 14. The Government is acting on all three fronts. A family planning program, started in 1972, has already helped reduce population growth from 3.5 percent per year to an estimated 2.9 percent at the present time. The program is being further strengthened by the present administration, with the ambitious goal of reducing population growth to 2.5 percent per year by 1982 and to 1 percent by the year 2000. New approaches are also taking hold in regard to rainfed agriculture (see para. 17). On the employment front, new tax incentives have reduced the anti-employment bias and efforts to stimulate employment will have to be continued. The expected rapid growth of output should also create jobs more rapidly. In spite of this progress, however, the still rapid growth of population and the staggering increase of the labor force (at 3.7 percent p.a.) made unavoidable by the high percentage of young people in today's population, renders the eradication of absolute poverty a difficult goal to attain in the near future. The Government has under its consideration several types of subsidies for the poor. These could prove to be short-term palliatives and which would preempt resources which would otherwise be available for investment in employment-creating activities or for improving educational or health standards of the poor on a more permanent basis. 15. Open and hidden unemployment, which are now respectively at 8-9 percent and 40 percent of the labor force, will remain major problems in the years to come. With the expected GDP growth rate of 8 percent p.a., the economy should be able to absorb the additional labor force, assuming no significant change in the participation rate (now at about 29 percent) and some increase in labor productivity. In absolute terms, however the present levels of underemployment and unemployment are likely to remain. 16. A National Employment Plan was published early last year. It calls for a number of measures to strengthen the so-called informal sector in both urban and rural areas. To increase the productivity of those employed outside the modern sector, and their employment opportunities, a major effort will be required in the area of vocational training. Technical assistance programs are also needed to stimulate more organized and structured forms of activities, especially in the services sector. While there is no doubt that the authorities are concerned about unemployment, and underemployment, and while the institutional structure to carry out some important programs already exist, a concentrated effort will be required to take effective action and to make better use of human resources by substantially reducing the level of hidden and open unemployment.  - 5 - 17. In agriculture, crop and livestock production has shown inadequate growth since the mid-1960s, and, of late, demand has outstripped domestic supplies of grains. Faced with diminishing returns to expensive new large- scale irrigation works, as well as the continuing low productivity (and income per capita) in the non-irrigated ("rainfed") sector, the present administration has re-organized the parts of the Government that deal with agriculture in order to design and implement a new strategy. This strategy emphasizes increased production through a balanced development program. Greater emphasis is being placed on technical assistance, demonstration, and credit to develop the underutilized rainfed agricultural potential. Programs to rehabilitate existing irrigation serving nearly one million ha are underway. Small-scale irrigation development is being promoted. Construction of new large-scale irrigation units continues, but with a smaller proportion of budget resources than in the past. The banking system is being encouraged to provide greater support to agricultural production and processing programs. These initiatives should lead to an acceleration of production growth, more equal development opportunities for Mexico's farmers, and an improvement in the living conditions of the rural poor. 18. The main urban-regional problems are two-fold: (a) growing conges- tion, pollution, high-cost of services (especially water) and other manage- ment problems that stem from continued rapid growth of Mexico City (already the third most populous metropolitan area in the world) and other areas in the dry, densely populated central plateau, and (b) retarded development, poverty and great difficulty in providing either better jobs or adequate public services for the one-third of all Mexicans who live in towns of less than 2,500 inhabitants. The present Government has taken many positive steps to confront these problems, including an administrative re-organization, elaboration of a comprehensive plan, and introduction of a strong package of incentives to promote growth in a few well-selected growth poles. 19. The expected high growth rate of the economy in the years to come is the country's strongest weapon with which to reduce poverty and unemployment. Industry will be a leading sector in expanding domestic production and exports. A National Industrial Development Plan was published last year and it reflects the serious effort of the present administration in identifying the long-term prospects of the industrial sector and their implications for employment. Industry has the potential for considerable expansion in many areas, including efficient import substitution in chemicals, petrochemicals and capital goods as well as exports of many different manufactured products. While most of the above industries are known for their capital intensity, they are expected to promote secondary industries with considerable employment opportunities. These will be enterprises producing secondary petrochemicals, finished plastic goods, metal * parts and components for capital goods. Tourism export earnings are also ex- pected to increase substantially. 20. The main problems for the Mexican economy in the years to come remain the reconciliation of a high growth rate with a relative price stability and a larger participation of the low income groups in the expanding wealth of the nation. The National Development Plan, published last April, marks the final step in the planning activities carried out by the present administration and places in a consistent framework the specific targets indicated in a number of  - 6 - sectoral plans prepared in the previous two years. In addition to presenting a macroeconomic picture of the development prospects, the National Development Plan dwells in great detail on the policies required to achieve the various economic and social targets. These policies are essentially sound but call for a major implementation effort on the part of the Administration. Growth with low inflation would pose difficult challenges of adjusting prices of public goods and services without undermining the existing consensus of the country, and improving income distribution would call for policies that encourage labor intensive technologies in industry and agriculture without slowing down modernization of the economy. 21. Mexico's public and publicly guaranteed debt service ratio has been increasing over the recent past and peaked above 60 percent in 1979. This high ratio reflects the low level of exports relative to GNP and the high proportion of Mexican borrowing from commercial banks; the ratio of external public debt to GNP is average for middle-income countries. The public debt service ratio is expected to decline to around 40 percent in the early 1980s, not only as a result of rapid increases in petroleum exports but also because some of the debt contracted on the least favorable terms has been prepaid. Debt service on Bank loans amounted to about 2.9 percent of public debt service in 1978; this ratio is projected to remain about the same during the early and mid-1980s. The Bank currently holds about 6.1 percent of Mexico's total medium and long-term public debt, and this ratio is not likely to change significantly over the next few years. Mexico is creditworthy for borrowing on conventional terms. PART II - BANK GROUP OPERATIONS IN MEXICO Bank Operations 22. As of October 31, 1980, Mexico had received 66 loans from the Bank amounting to US$4,243.9 million net of cancellations and terminations; of these, 38 loans totalling US$1,870.4 million were fully disbursed. The Bank presently holds US$3,582.5 million of which US$1,554.7 million have not yet been disbursed. Some 43 percent of Bank lending has been for agriculture and rural development (24 loans for US$1,864.4 million), 17 percent for power (12 loans for US$704.8 million), 16 percent for transportation (13 loans for US$666.7 million), and 18 percent for industry (10 loans for US$747.5 million); the remaining 6 percent has been for water supply (US$130 million), tourism (US$114 million), and urban development (US$16.5 million) projects. Annex II contains a summary statement of Bank loans as of October 31, 1980 and notes on the execution of ongoing projects. 23. Implementation of most Bank-financed projects was delayed during the period of economic difficulties in the mid-1970s and during the period of adjustment and stabilization that followed the September 1976 devaluation of the peso. Since then, the Government has taken important actions to accelerate implementation of the projects. Adequate budget financing has been provided. Projects which had important structural constraints were modified and rephased to account for changed circumstances. The Government and Bank officials have  - 7 - periodically met to review project implementation, and greater attention in Mexico has been focused on monitoring project implementation and disbursements. As a result of these measures, implementation is proceeding satisfactorily on most of the Bank-assisted projects and plans have been formulated to strengthen execution of those projects where improvement is still needed. The effective- ness of these actions is reflected in disbursement totals. In FY78 US$91 million was disbursed to Mexico, in FY79 disbursements totalled US$233 million and in FY80 disbursements further increased to US$404 million, or 38 percent of the undisbursed balance at the beginning of the year. IFC Operations 24. As of October 31, 1980, IFC had made investment commitments in 22 companies in Mexico for a total of US$535.2 million, of which US$393.8 million had been sold, repaid or cancelled. A summary statement of IFC investments is presented in Annex II. Bank Strategy 25. The main objectives of Bank lending in Mexico have been to: (i) support policies and programs leading to a wider distribution of the benefits of economic growth; (ii) help finance projects that make directly or indirectly, significant contributions to output and employment; (iii) help reduce Mexico's urban-regional imbalances; and (iv) help clear bottlenecks preventing more rapid growth. The Bank is preferentially supporting projects of high social priority that help the rural or urban poor, projects that promote higher levels of employment and production and those that help to decentralize economic activity. Also, through the proposed railway project and a possible project to train technical personnel for industry, the Bank would assist to alleviate some of the key constraints to the growth process in the country. 26. Because of the difficult structural problems of Mexico's agricul- ture and the sector's crucial importance to the country's further development, the Bank has made agriculture the leading sector for its lending. The Bank's agricultural lending program for Mexico has four goals: first, to increase productivity of presently cultivated lands through selected programs of irri- gation and on-farm improvements; second, to improve the productivity of small farmers through programs for (a) rural development, (b) rainfed agricultural development, and (c) bringing new areas in the humid tropics under cultivation; third, to complement infrastructure investments with general support services including agricultural extension and marketing programs and provision of medium-term credit; and fourth, to promote employment opportunities in rural areas through programs of agro- and rural-industries. The Bank has made thirteen loans in FY74-80 totalling US$1,497 million for irrigation, rural development and agriculture, agro-industries and livestock credit programs. Several projects for water control and irrigation, rainfed agriculture, rural development, and support services are in preparation; a rainfed agri- cultural development project and an integrated rural development project are expected to be ready for presentation to the Executive Directors in the coming months.  - 8 - 27. Past Bank lending for industry has been aimed at (a) assisting the Government's efforts to reduce the balance of payments deficit, (b) decentralizing industrial activities away from the major and increasingly congested urban areas, and (c) promoting greater employment in the sector by supporting medium- and small-scale industry. A steel project which the Bank helped structure and finance is now operating in a previously under- developed area on the west coast of Mexico (Lazaro Cardenas) and the city in which it is located is developing into a new growth pole. The fertilizer sector has been strengthened by two Bank assisted projects which the state-owned fertilizer company (FERTIMEX) is carrying out. Loans for projects to promote the development of small- and medium-scale industrial enterprises and to support an industrial equipment fund (FONEI) were approved by the Executive Directors in FYs78-79; they offer support to the private sector at a time of rapid expansion. A second small and medium scale industries project was approved by the Executive Directors in June 1980. The Executive Directors also approved in May 1980 a project for the mining sector, which up to now has received insufficient resources from the financial system. Two capital goods industry projects are under discussion for possible Bank support; there aim would be to assist the transfer of high technology to Mexico so that employment might be increased in the engineering subsector, strengthening the base for manufac- turing industry. 28. As regards infrastructure, the Bank's operations have been focused on investments in key areas of the country as well as on institutional reforms and sector policies aiming, inter alia, at suitable pricing mechanisms to help generate additional resources for investment financing. The Airports Development Project (FY74) was designed to support the Government's policy of regional integration; the Third Railway Project (FY76) supported improve- ments of institutional aspects and financial management of the sector. The Mexico City (FY73) and Medium Cities (FY76) Water Supply projects have been instrumental in the establishment of specialized institutions for efficient provision of drinking water and in the pricing of water at levels more closely related to costs. A Highway Sector Project was approved by the Executive Directors in FY79. A loan for a Medium-Size Cities Water Supply Project was approved by the Executive Directors in November 1980. 29. The Government and the Bank have long recognized the regional economic disparities prevailing in Mexico. In June 1976 the Government enacted a law of human settlements to provide a new institutional framework to deal with the pressing problems of over-concentration of economic activi- ties in the larger metropolitan areas. The Government has adopted a National Urban Development Plan that spells out its regional development priorities in operational terms, and several projects are now being prepared to meet the needs for basic urban services for poor families and to provide key regional infrastructure in selected priority cities. One such project, to assist in the development of the Lazaro Cardenas conurbation area on the West Coast, was approved by the Executive Directors in FY78, and a second project for oil-producing southeastern Mexico is being negotiated. 30. The Government has under its consideration a program to construct three industrial ports with a view to promoting economic development away from the central highlands and along the Pacific Coast (at Lazaro Cardenas) and the Gulf of Mexico (at Altamira and Ostiones). The Bank is examining the possi- bilities of providing technical assistance through a project preparation  - 9 - loan and would be assisting in preparation of an urban development project at Altamira. The Economic Development Institute (EDI) is assisting CECADE (a similar institute under the Ministry of Programming and Budgeting) in training Government staff in several aspects of project preparation, monitoring and evaluation. A course on urban and regional development has recently been concluded and several for agriculture, rural development, and agro-industries are programmed for the near-term. 31. The Inter-American Development Bank (IDB) is the second largest source of multilateral aid to Mexico. The IDB has made loans totaling US$2,148 million to December 31, 1979. Over sixty percent of this lending has gone for agricultural and rural development projects, and the balance for transportation, industry, and tourism infrastructure. In 1979, the IDB approved five loans totaling US$251 million for industrial credit, irrigation, human resources, highways and export promotion projects. The IDB and the Bank have worked in parallel on several projects; most recently the IDB and the Bank have each made loans for the National Program for Small-Scale Agricultural Infrastructure, the Integrated Program for Rural Development (PIDER), agricultural and livestock credit, small- and medium-scale indus- tries, and hotel development. The International Fund for Agricultural Development (IFAD) has approved a loan of US$22 million for a rural develo- merit project in the state of Oaxaca which was appraised by the Bank's staff. PART III - THE TRANSPORT SECTOR 32. Transport has played an important role in the economic development of Mexico. The expansion and evolution of Mexico's transport system has been supported over the years by adequate public investments in infrastructure in all modes, and strong, privately financed, bus, truck and aviation industries provide adequate services. This combination produced a transport system which was generally satisfactory until the mid-1970s, with good modal balance and sufficient capacity to serve demand. The system then only required selective expansion and modernization to meet the needs of a growing economy and support Mexico's strategy of spatial decentralization of population and economic activity. However, reductions in public sector investments since 1975, coupled with a surge in economic growth since 1978 and rapidly increasing demand for transport services, have led to serious bottlenecks in the railway system, which in turn have affected some ports and the highway system. 33. Mexico relies on extensive road and rail networks for its transport- ation needs. Pipelines and coastal shipping are important but specialized, while aviation, the most dynamic mode in terms of growth, is relatively small and highly specialized. In 1978, road transport carried about 41 percent of all cargo traffic in the country, while the railways carried about 21 percent. The remaining traffic, mostly of petroleum products, was moved by pipelines (23 percent) and coastal shipping (15 percent). Roads carried 94 percent of all passenger traffic, while aviation and the railways carried about 3 percent each.  - 10 - 34. Overall, traffic grew at about 10 percent annually between 1970 and 1978. Increases were experienced by all modes, especially since the economy began to recover from the 1976-1977 recession. The implications for the trans- port sector of rapid and sustained economic growth in the future are of high rates of increase in demand for land transport and port facilities. This demand would affect, in particular, the railways, which carry a high propor- tion of the heavy, long-haul traffic. In order to be able to meet demand through the 1980s, judicious investments to expand rail carrying capacity are required. The financing of such an investment program is the main objective of this project. Highways and Road Transport 35. The road network was expanded rapidly in the last 30 years, from 22,500 km in 1950 to 200,000 km in 1978 (of which 62,000 km are paved). The highway network covers most populated areas of the country adequately and the main highway network can be considered almost complete. In recent years, increased emphasis has been given to the construction of low standard roads in lightly populated areas. This emphasis, coupled with a relative decline of budgetary allocations for highways, and a steady increase in traffic, has resulted in localized capacity constraints. Furthermore, there is a growing need to rehabilitate and improve existing roads. 36. The vehicle fleet grew at 12.5 percent annually between 1968 and 1978. The overall level of motorization is about one vehicle per 16 inhab- itants, with one passenger car per 25 inhabitants. Trucking services are sup- plied by a fleet of 1.1 million vehicles and there are about 60,000 registered buses. The current trend is to gradually tighten the enforcement of government road transport regulations with the objectives of improving the reliability and geographic distribution of services and improving driver working conditions. The supply of trucking services since the upsurge of economic activity in 1978 has been adequate and tariffs have remained at reasonable levels; however, there are indications that if urgent steps are not taken to relieve bottlenecks in the railway system, the trucking industry would not be able to manage the overspill. Railways 37. The Mexican railways earry about one third of total inter-urban traffic, mainly bulk, long-haul consignments of foodgrains, minerals, fertilizers, petroleum products and cement. The length of the railway net- work has not changed significantly since the early sixties. Ferrocarriles Nacionales de Mexico (NdeM) is the largest of five separate government-owned railways. It has 14,200 km of track, or 70 percent of the total network, and carries 80 percent of total rail traffic. Ferrocarriles del Pacifico (Pacifico), the second largest railway, carries about 14 percent of traffic. The other three railways, to a large extent, feed into the NdeM and Pacifico systems (see attached Map IBRD 3655R1).  - 11 - 38. In January 1977, the Government authorized the integration of the five railway enterprises into a single operating unit, and this is being gradually accomplished. The first phase, consisting of the consolidation of the management boards under the NdeM General Manager, has been completed. The entire process of consolidation, including unification of operating practices, administration and accounts, is expected to be completed within the next three to four years. Over the past few years, substantial improve- ments in NdeM's operations were brought about by the introduction of new ideas and technologies, and, as a result, the Mexican railway system is one of the most modern and competently run in Latin America. Steadily increasing traffic demand provides an incentive for further improvement. Air Transport 39. Mexico's extensive area, rugged topography and the considerable distances separating population and commercial centers, have made air trans- port an important element in the country's transport system. Domestic passenger traffic from 1970 to 1978 grew at 17.4 percent annually; over 14 million domestic and international passengers were carried that year. Freight cargo in domestic air traffic is minimal; air freight rates compare unfavorably with competing modes and aircraft carrying capacity is limited by the high altitude of several key airports. Airport infrastructure is, in general, well developed; there are some 50 airports capable of handling medium or larger aircraft. The Mexico City airport accounts for about 40 percent of total commercial passenger traffic and 55 percent of the air cargo. Increased traffic and the introduction of larger aircraft in domestic routes, have recently strained facilities at several airports. Runway extensions, new or larger terminal buildings, navigational and communications equipment and improved utilities are needed. Some airports are located in heavily populated areas and would have to be relocated; plans for relocating the Mexico City air- port are under active consideration. Ports 40. Port traffic, if petroleum is excluded, is surprisingly small in view of the size of Mexico's economy. Much of the foreign trade is with the US, for which overland routes (railways and roads) are used. However, port traffic is expected to become more important in the coming years as the economy grows. Shipping is largely concentrated in domestic coastal traffic, mainly of petroleum. International trade consists mostly of the export of minerals, agricultural products and petroleum and the import of capital goods, grain and food supplies. There are some 30 ports on the long Mexican coast- lines, of which 12 are international. In all, they handled some 40 million tons of international traffic in 1978, of which about 55 percent were petroleum products. Port infrastructure capacity is generally adequate; however, difficul- ties in handling grain imports have recently been experienced at some ports, although the problem seems to be that there is insufficient carrying capacity in the land transport systems servicing ports, rather than in the ports themselves. Nevertheless, to ensure that the ports sector is able to cope with grain imports and general traffic increases in the coming years, a study of port capacity is being prepared. The Government is also considering  - 12 - investments in ports in the context of regional development plans aimed at shifting population concentration and economic activity away from the central plateau to the coastal areas (see para 30). Pipelines 41. In 1978, pipelines accounted for more than half of the petroleum product transport in the country. There are about 5,300 km of crude oil pipe- lines in operation or under construction, 6,300 km of refined products pipe- lines and about 9,300 km of gas pipelines in the trunk system. All are owned and operated by PEMEX, the state oil enterprise. Pipelines connect oil fields and refineries to export ports and the Central Valley area. The vast network is designed to serve the main consuming centers (such as Mexico City and Guadalajara) and, through ongoing expansions, the Yucatan Peninsula and the Pacific coast. Plans to expand the network by some 6,700 km are currently under study. Planning and Coordination 42. Investment decisions for public transport expenditures are made within the framework of the overall Government planning and budgeting system managed by the Secretariat of Programming and Budgeting (SPP). While SPP, in coordination with the Secretariat of Finance and Credit (Hacienda) approves investment budgets, other Government secretariats prepare sectoral plans in cooperation with various federal and state agencies. The Secretariat of Communications and Transport (SCT) is responsible for the overall planning of the transport sector, and its leadership is being gradually established in accordance with the administrative reform of 1976. Its role is to prepare multi-year plans for investment, which are submitted to SPP with annual budget requests. Subsectoral plans are in some cases prepared by other agencies. For example, the Secretariat of Human Settlements and Public Works (SAHOP) is responsible for the detailed planning of highways while NdeM prepares plans for railways. 43. Early this year, SPP published an economic plan (Plan Global) for the period 1980-1982. The Plan contains recommendations for transport poli- cies and development strategies which are to be taken into account in formu- lating the budget. Transport sector investments are planned to grow at 11.5 percent yearly in real terms during 1980-1982, reflecting the high priority given to the sector. 44. SCT plays an important role in establishing and coordinating trans- port policy, particularly on matters such as tariffs, road user charges, regulation and intermodal transport coordination. It also reviews and approves investment programs in the transport sector and carries out some investments itself (see paras 53 and 55). It is one of the main agencies involved in establishing prices in the transport sector. Pricing issues present acute problems both in the railways, where the relatively efficient system requires heavy subsidies (US$160 million equivalent in 1979), and road transport, where  - 13 - reconstruction and modernization may have to be postponed because of fund shortages, while road vehicles benefit from underpriced fuel 1/ and low or no road user charges. 45. The pricing issues are difficult and in many cases inherited from the past; in the case of railways, tariffs were virtually unchanged for 15 years before 1975 and a large gap between costs and revenues resulted. Such situa- tions can only be resolved gradually and in the context of the Government's efforts to reduce inflation. A major policy statement was included in the Plan Global and was reiterated by President Lopez Portillo during his state of the union address to Congress in September 1980. Prices and tariffs for goods and services provided by the public sector would be revised and updated periodically with the objective of increasing the revenues of public sector enterprises and of reorienting subsidies toward those social and economic sectors which are most in need of them, making subsidies more explicit. Prices and tariffs would be adjusted to: (a) cover direct production costs; (b) permit the accumulation of savings for the purpose of investment; and (c) be consistent with economic development and social welfare goals. Past Bank Participation and Experience 46. The Bank has provided broad support to the development of transport in Mexico. Since 1970, seven loans have been made to support investments in highways, railways, ports and aviation. A number of institutional and policy objectives have been sought in assisting transport development. For the sector as a whole, the goal has been to improve transport planning and adminis- tration. Progress in this respect has been made since the administrative reform of 1976, which gave SCT overall responsibility for policies and planning. In highways, the emphasis has been on improving planning and project analysis, controlling truck overloading and rationalizing road user charges. Planning and project analysis improved to the point where it was possible to grant a sector loan (Loan 1671-ME August 1979). Work is beginning on a system to control overloading of trucks and some improvements have begun in road user charges. In ports, more efficient operating methods, and a commercial approach to tariffs and services have been sought. The Bank also recommended central- izing investment planning in a national port authority. Substantial oper- ational improvements have been achieved in some ports, but little has been 1/ The retail price for diesel fuel and gasoline (regular) is Mex$ 1/liter and Mex$ 2.8/liter, or US$0.167 and US$0.468 per U.S. gallon respectively. "Super" gasoline, which accounts for only 6% of all gasoline sales and is used mainly by higher price motorcars, retails at Mex$ 7/liter, or US$1.17 per US gallon (the price has just been increased by 75%). While there is no direct diesel fuel tax, the retail prices of regular gasoline includesa tax of Mex$ 0.70/liter. The equivalent export prices (1980) for these fuels are estimated at Mex$ 5.20/liter for diesel fuel and Mex$ 5.80/liter for regular gasoline. Consumption by the transport sector is estimated at 15.4 billion liters of regular gasoline and 7.9 billion liters of diesel in 1980. These levels of consumption imply potential revenue foregone by the Government of about Mex$ 79 billion in 1980 (US$3.4 billion). Potential revenue foregone is measured as the export price less the domestic retail price multiplied by consumption.  - 1-4 - accomplished so far in rationalizing port tariffs. Instead of a national port authority, a new Subsecretariat in SCT has been made responsible for monitoring port operations and controlling investment planning, a clear improvement over the previous arrangements. In aviation, a basic objective of the first loan was to install a commercial accounting system in the airport authority (ASA) for better knowledge of costs and charges. Such a system was recently installed. 47. Three Bank-financed projects in the railways sector, one for Pacifico and two for NdeM, have included important rehabilitation and modernization works such as track renovation, strengthening of bridges, purchase of motive power and rolling stock. The first loan (103-ME) of $61 million for the rehabilitation and modernization of Pacifico was made in 1954 and the works were completed successfully in the late fifties. The second loan (825-ME) of $75 million for the rehabilitation of NdeM was made in 1972 and the project was completed in 1977. The Completion Report for this project concluded that its main objectives, the rehabilitation of NdeM's operations and the improve- ment of its organization and management, were largely achieved, although financial performance was below appraisal targets mainly because of inadequate tariff increases. The overall economic rate of return of 20 percent was better than the appraisal estimate of 18 percent. The Third Railway loan (1232-ME) was made in 1976 for NdeM and the works are now being executed according to an investment plan which was revised in 1979 in consultation with the Bank. The project is expected to be completed in 1981 and has included important modernization works such as the installation of a telecommunications network, modern yard and train control systems and the introduction of unit train operations. As in the Second Railway Project, performance in respect of implementation of important covenants has been good, except in regard to tariff increases. However, the Mexican Government has in recent years shown increased awareness of the need for cost-based tariff increases and there have been improvements in this field (see paras 45 and 60). Improvements in techni- cal and operational areas continue. PART IV - THE PROJECT Investment Plan for the Railway Sector 48. The proposed project is NdeM's Investment Plan for 1981-1983 and is part of the 1981-1985 investment program for the railway sector. NdeM's invest- ments under the project would principally be made in track rehabilitation, motive power, rolling stock, and technical assistance. Total project invest- ments are estimated at US$1,527 million equivalent, with foreign exchange costs of US$536 million. NdeM's Investment Plan is complemented by SCT's infrastructure investment program, which includes realignments of mainline rail sections and construction of new lines and yards and which involves expenditures of about US$1.8 billion equivalent between 1981 and 1985. The Bank has been asked by the Mexican Government to participate in the financing of NdeM's Investment Plan for rehabilitation and equipment; SCT's infrastruc- ture program will be financed entirely by the Government. About 80 percent of the subprojects in SCT's program have been examined by the Bank and were  - 15 - found to be technically and economically justified. The rest are under preparation and will be reviewed as and when ready. There would be regular consultations on the investment programs between NdeM, SCT and the Bank during project execution (See Section 3.05 of the Draft Guarantee Agreement). The Project and Proposed Loan 49. The proposed project was identified in 1978. After preparation missions in 1979 it was appraised in May 1980 and negotiations were carried out in October and November 1980. The Mexican negotiating team was headed by Mr. Sanchez Mujica of BANOBRAS and included representatives of SCT, NdeM and Hacienda. A Staff Appraisal Report No. 3078b-ME, dated November 20, 1980, is being circulated separately to the Executive Directors. A brief description of the project may be found in the Loan and Project Summary at the beginning of this report. Supplementary project data are provided in Annex III. 50. The project combines NdeM's Investment program for 1981-1983 with a Plan of Action aimed at improving its operating and financial performance. The objectives of the project are to: (a) increase carrying capacity by con- tinuing track rehabilitation, improving signaling, and acquiring additional motive power and rolling stock; (b) continue improving NdeM's operating efficiency according to targets set forth in an agreed Plan of Action; (c) reduce NdeM's operating deficits and improve its financial position with the objective of eventually reaching financial viability; and (d) improve information systems for the management of NdeM. The major project components are: (a) track rehabilitation, using (i) new and heavier rails, sleepers and ballast on principal traffic routes on about 780 kms, and (ii) recovered rails, with new sleepers and ballast, on secondary lines on about 560 km; (b) track maintenance machinery and equipment; (c) strengthening and, where necessary, replacement of older bridges; (d) lengthening of existing sidings and construction of additional sidings to make longer trains and more frequent services possible; (e) installation of a Centralized Traffic Control (CTC) System on about 960 km of lines; (f) acquisition of 192 main line diesel locomotives, 50 shunting locomotives and 9,350 freight cars; (g) replacement and addition of workshop machinery; and (h) technical assistance in three main areas: (i) development of a comprehensive Management Information System; (ii) computerized line and yard capacity planning; and (iii) improvement of train and yard operations and freight car and locomotive utilization.  - 16 - The Plan of Action (see Schedule 5 to the Draft Loan Agreement), specifies quantitative targets in key operational, technical and financial areas to be met during 1981-1985 as well as the steps which are to be taken to achieve them. 51. The estimated cost of the project is based on prices prevailing in mid 1980 and exclude import taxes. Costs of local materials and labor are based on contracts for similar work carried out by NdeM. Physical contingen- cies have been estimated at 5 percent of work items. Price contingencies for local costs assume price increases of 23 percent in 1980, 20 percent in 1981, 17 percent in 1982, 15 percent in 1983 and 13 percent in 1984. For foreign costs, price contingencies have been taken at 10.5 percent for 1980, 9 percent for 1981, 8 percent for 1982 and 7 percent per year for 1983-84. The cost of consulting services has been based on estimated requirements of 222 man-months at about $9,000/man-month. 52. The proposed loan of US$150 million would help finance the purchase of about 94,000 tons of rails, about 7,000 sets of freight car components, 504 service and freight cars, 8,000 axle and roller bearing sets, and consulting services for technical assistance. Since NdeM was in urgent need to start its investment program, the proposed loan would retroactively finance up to US$15 million of track and freighter components purchased after November 1, 1980 (see Schedule 1, para 4 of the Draft Loan Agreement). Loans from BANOBRAS and NAFINSA in local currency and Government contributions would finance the balance of project costs as indicated in the financing plan included in the Loan and Project Summary. It is expected that there will be parallel financing by EXIMBANK USA (about US$94 million) to finance the purchase of locomotives and loans from foreign banks through NAFINSA and BANOBRAS of about US$292 million to complete the financial package. NdeM would not borrow directly in inter- national markets; the financial authorities prefer that these resources be obtained through the Government's financial agents. NdeM Organization, Management and Staff 53. NdeM is a Government-owned enterprise which has considerable autonomy in its management. However, the Government, through SCT, reviews its investment plans, tariff levels, and its annual operating and capital budgets. SCT is responsible for large scale construction works such as for new lines, marshaling yards and major realignment works; when completed, these works are then passed on to NdeM for operation and are incorporated in NdeM's assets and capital. Since 1979, a Tripartite Commission headed by the Comptroller General for Accounts of SCT and including the Financial Director of NdeM, has been entrusted with overseeing the financial performance of NdeM. This Commission performed its task well in its initial year; it has made NdeM more cost-conscious and brought about a revaluation of fixed assets for the first time in NdeM's history. 54. NdeM's day-to-day operations are the responsibility of Departmental Managers, whose work is coordinated by a Deputy General Manager working directly under the supervision of the General Manager. Productivity has improved considerably. Between 1970 and 1979, traffic carried by NdeM increased 55 percent whereas staff increased by only 6 percent. Productivity per worker, in terms of traffic units (freight ton-km plus passenger-km) increased from 366,000 units in 1970 to 532,000 in 1979; this compares favorably with other  - 17 - railway systems, including leading European railways. Productivity per worker is expected to reach 649,000 units by 1982. NdeM has a large and well managed training establishment. A Manpower Study conducted under the ongoing project established manpower and training needs up to 1982; as part of the Plan of Action for this project, NdeM would update the Manpower Plan to 1985. NdeM Facilities, Traffic and Operations 55. Of the 14,200 km of railways operated by NdeM, principal traffic routes account for about 7,600 km. The principal lines between seaports and the central plateau were built in the 19th century; their steep gradients and sharp curves now present operating and maintenance problems as tonnage and traffic increases and heavier rolling stock and motive power are brought into use. Capacity constraints have arisen on these and some other heavily used routes; a major program of grade and curvature realignments is being carried out by SCT to remove bottlenecks and make higher speeds possible, thus increasing line capacity. 56. NdeM has a wholly diesel powered system and operates about 1,160 diesel locomotives. Apart from additional locomotives for increased traffic, NdeM requires heavier locomotives to replace old and smaller horsepower units. Some 192 main-line locomotives will be purchased in 1981-1983. The NdeM freight car fleet totaled about 32,100 units at the end of 1979; in addition, considerable use is being made of hired foreign cars which enter the country carrying imports from the US. In general, NdeM's fleet of freight cars is relatively modern and of good design. The passenger car stock totals 1,300. 57. An important component of the ongoing Third Railway Project was the installation of a modern VHF/UHF telecommunications network spanning the entire railway. In addition, computerized yard and train control systems have been introduced with the aid of consultants. Centralized traffic control (CTC) has so far been provided on 950 route-km, and future plans include ex- tension of this system to lines carrying the highest traffic densities. Improvement in the communications system being carried out under the Third Railway Project will be followed up under the proposed project by the intro- duction of a modern management information system which should help improve efficiency further. 58. NdeM's freight traffic grew from 18.1 billion ton-km in 1970 to 30.1 billion ton-km in 1979, an average annual growth of 5.8 percent. It is antici- pated that traffic growth over the coming years will be rapid and sustained as the economy as a whole is stimulated by oil production and exports. For the 1980-1985 period, freight traffic, in terms of ton-km, is expected to grow at 7.3 percent a year. Passenger traffic declined from 33.2 million passengers in 1970 to 18.7 million in 1979. This can be attributed to the expansion of public road transport and private automobile ownership, and to deliberate reductions in passenger services on uneconomic lines between 1974 and 1978. NdeM is currently carrying out a study of passenger services. Pending the results of this study, NdeM has tentatively forecast that passenger traffic will remain constant over the plan period; this assumption is considered to be reasonable.  - 18 - 59. Operating performance improved in 1976 and 1977, but declined in 1978 because of reduced investments in 1977-78 due to budgetary constraints and an unprecedented upsurge of freight traffic in late 1978 and 1979. These two factors resulted in over utilization of locomotives; scheduled maintenance was reduced, increasing locomotive down-time and freight car turnaround time. A renewed drive to improve maintenance with the assistance of consultants, and a program to scrap old locomotives and purchase new ones, are already improving operating efficiency. NdeM Finances 60. NdeM's financial performance since the Third Railway Project Loan (1232-ME) was granted in 1976, has combined major achievements in some areas and less impressive performance in others. The major achievements were: rationalization of services, including the closure of uneconomic lines and curtailment of more than 40 percent of passenger train services; payment of specific subsidies to NdeM by the Government to compensate operating losses identified with the remaining uneconomical passenger services; elimination of taxes on gross revenues; reimbursement to NdeM of the total cost of operating mail services by the Government and, lastly, the revaluation of NdeM's fixed assets. On the other hand, tariff increases have been inadequate. However, in examining the extent of tariff increases in the past, the fact that tariffs had been kept virtually constant for 15 years up to 1975 by previous adminis- trations must be kept in mind. The 44 percent freight tariff increase in 1975, while substantially above the cost-of-living increase that year, only partially made up the gap that had developed between revenues and costs. In 1976, a further effort was made to reduce the gap (freight tariff increases of 38 percent as compared to a cost-of-living increase of 15.8 percent). During 1977, the Government was engaged in a program to overcome the consequences of the financial crisis of late 1976, and chose to keep tariffs constant in order not to accelerate inflation, which that year reached 30 percent and threatened to get out of hand. NdeM's costs, in the meantime, rose sharply as a result of the large devaluation of the peso. Freight tariff increases were made in 1978, 1979, and early this year, roughly to keep pace with current inflation. However, the substantial improvements in NdeM's productivity since 1975 and the tariff adjustments thereafter resulted in the improvement of the working ratio 1/ from 155 in 1976 to 128 in 1979, and the operating ratio 2/ from 163 to 134 in the same period. 61. The Plan of Action aims at achieving steady improvements in the financial performance of NdeM by restructuring and raising tariffs so as to allow revenues to catch up with past cost increases. Tariff levels would be adjusted each year by 5 percent more than cost increases; this implies tariff increases ranging from 25 percent in 1981 (assuming cost increases of 20 percent) to 18 percent in 1985 (assuming cost increases of 13percent).The Plan of Action further stipulates that, by 1988, revenues would cover all operating 1/ Operating expenses, excluding depreciation, and interest costs, over operating revenues, not including Government compensation payments. 2/ Operating expenses, including depreciation, but excluding interest costs over operating revenues, not including Government compensation payments.  - 19 - and interest costs. On these bases, the working ratio is expected to improve from an estimated 134 in 1980 to 94 by 1985 and the operating ratio from 154 to 107 in the same period. During negotiations both the Government and NdeM endorsed the financial targets in the Plan of Action, and the Government agreed to authorize increases in NdeM's tariffs in order that financial targets be net, unless such increases are inconsistent with broader national or sectoral objectives (see Section 3.02(b) of the Draft Guarantee Agreement). NdeM would further carry out a study, by June 30, 1981, on improving its tariff structure in order to eliminate tariff anomalies by which some goods are carried at below costs. NdeM would then review each year the adequacy of its tariff structure and request approval of changes in its tariff structure when and as needed (see Sections 3.01(b) and 5.05 of the Draft Loan Agreement). 62. To continue improvements initiated under the Third Railway Project, NdeM would further agree under the Plan of Action to (a) periodically review the financial and operational conditions of passenger train services and take action to reduce losses while continuing to request Government compensation for losses on uneconomic passenger services; (b) periodically carry out a cost analysis on low density branch lines and request the Government to compensate losses on them or to permit abandonment of services; (c) furnish the Bank by June 30, 1981, a plan to accelerate action in reducing losses on less than carload (LCL) traffic; (d) claim from the Government reimbursement of the total cost of mail services. The Government in turn has agreed to pay compensation as required in (a), (b) and (d) above (see Section 3.03 and 3.04 of the Draft Guarantee Agreement). 63. NdeM has agreed not to incur any debt, unless otherwise agreed with the Bank, if the debt/equity ratio, based on revalued fixed assets and includ- ing the debt to be incurred, is more than 45/55 (see Section 5.03 of the Draft Loan Agreement). This covenant is an improvement over the one in the Third Railway Loan, which only limited short- and medium-term debt to 10 percent of NdeM's capitalization and did not establish an overall ceiling on debt. 64. A sensitivity analysis shows that NdeM's financial performance is particularly sensitive to tariff levels. If tariffs are 10 percent lower than assumed, the operating ratio for 1985 would be 157 instead of 107. The combination of tariff decreases by 10 percent and cost increases by 10 percent would produce much poorer results. The financial results are moderately sensitive to traffic growth because a slower growth in traffic would result in decreased variable costs. The conclusion is that all efforts should be made to ensure that tariffs are increased as needed to meet the objectives set forth in the Plan of Action. Auditing 65. NdeM's accounts are audited yearly by private, external auditors according to standards acceptable to the Bank. This arrangement would be continued under the proposed project (see Section 5.02 of the Draft Loan Agreement).  - 20 - Procurement 66. All items to be financed under the proposed loan, other than consultant services, would be subject to international competitive bidding in accordance with Bank guidelines. In evaluating bids, Mexican manufacturers would be allowed a margin of preference equivalent to 15 percent of the CIF cost of competing imports, or the relevant prevailing custom duty, whichever is lower. 67. Among the items to be purchased under international competitive bidding would be components for freight cars which would be manufactured locally by Constructora Nacional (CN), a state-owned enterprise. CN, which operates efficiently and produces good quality cars, would then sell the cars to NdeM at prices which are subject to Government control and are consistent with market prices. As under the Second and Third Railway projects, the proposed loan would finance the cost of the imported components for freight cars, which are estimated to amount to about 18 percent of the price of cars manufactured by CN. Disbursements 68. Disbursements for imported goods would be made on the basis of 100 percent of CIF costs and, for bids won by local suppliers, on the basis of 100 percent of the ex-factory costs of locally manufactured goods. The Bank would also finance 100 percent of the foreign exchange costs of consulting services. Justification, Benefits and Risks 69. Mexico's railways play a key role in the development of the coun- try's economy. They are the principal means of transporting bulk commodities over long distances, including food grains, minerals and fertilizers. The project aims at expanding NdeM's carrying capacity to meet the transport demands of a rapidly growing economy. At the present time, and largely because of postponements of investments in the railway sector in 1977-78 when the Government was carrying out its economic rehabilitation program, there are bottlenecks in the railways system which caused serious problems in the supply of grains and other commodities in 1980. The project would help relieve these bottlenecks. The project would also improve the efficiency of NdeM's operations and its financial performance, continuing programs initiated under previous projects. 70. Economic returns were calculated for investments in motive power and rolling stock, track renewal and associated track machinery, bridge rehab- ilitation and the centralized traffic control system. Benefits from the acquisition of motive power and rolling stock are transport cost savings for the overall economy, calculated as the difference between rail and road economic costs, taking into account the traffic which would be diverted if the investments were not made. Benefits from main line renewal are reduction of maintenance costs and avoidance of track deterioration. The benefits of bridge improvements are improved equipment utilization by avoiding abnormally low  - 21 - speeds and those for the CTC system are mainly savings due to avoiding delays on the line with the consequent increase in capacity. The returns on the motive power and rolling stock components (84 percent of total economic costs) are estimated at 18 percent; on main line track renewal 17 percent; on track renewal with recovered rails 21 percent; on the bridge improvement 26 percent, and on the centralized traffic control system 39 percent. The overall economic rate of return is estimated to be 22 percent. 71. A shortfall in traffic and increases in costs are usually the main risks in railways projects. The risk of a shortfall in traffic growth is not considered great given Mexico's rapidly growing economy and the prospect that freight allocation is unlikely to change between different transport modes; moreover, investments are required at the present time to relieve bottlenecks. However, in order to relate yearly procurement to possible changes in the type and volume of traffic as it develops, it was agreed during negotiations that freight car requirements would be reviewed annually with the Bank (see Section 3.05 of the Draft Loan Agreement). The overall economic return, considering a 25 percent reduction in traffic growth, is 17 percent, and considering a 10 percent increase in project costs, 19 percent. If both these factors are taken together, the overall economic rate of return would be 16 percent. Thus, the economic viability of the project is not very sensitive to these changes. The risk of a shortfall in the financial objectives for NdeM is closely tied to the prospect of timely and adequate tariff increases. In view of the Government's stated policies on the pricing of goods and services provided by the public sector, this risk can be considered acceptable. PART V - LEGAL INSTRUMENT AND AUTHORITY 72. The draft Loan Agreement between the Bank and BANOBRAS and NdeM, the draft Guarantee Agreement between the United Mexican States and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, are being distributed to the Executive Directors separately. Special conditions of the project are listed in Section III of Annex III. 73. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 74. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President November 26, 1980  - 22 - ANNEX I TABLE 3A Page 1 of 5 MEXICO - SOCIAL INDICATORS DATA SHEET MEXICO REFERENCE GROUPS (WEIGHTED AVE9.AGES LANED AREA (THOUSAND SQ. KM.) - MOST RECENT ESTIMATE)- TOTAL 1972.5 AGRICULTURAL 977.2 MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE GNP PER CAPITA (US$) 380.0 710.0 1290.0 1384.1 2381.1 ENERGY CONSUMPTION PER CAPITA (KILOGRAhS OF COAL EQUIVALENT) 770.0 1047.0 1384.0 1055.9 1641.4 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) 36.4 50.3 65.4 URBAN POPULATION (PERCENT OF TOTAL) 51.0 59.0 65.2 63.4 53.9 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 116.0 STATIONARY POPULATION (MILLIONS) 205.0 YEAR STATIONARY POPULATION IS REACHED 2075 POPULATION DENS ITY PER SQ. KM. 18.0 26.0 33.0 28.1 77.2 PER SQ. KM. AGRICULTURAL LAND 36.0 52.0 67.0 81.7 129.5 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 45.6 46.5 45.6 41.4 30.6 15-64 YRS. 51.0 50.0 50.9 54.7 61.1 65 YRS. AND ABOVE 3.4 3.5 3.5 3.9 8.2 POPULATION GROWTH RATE'(PERCENT) TOTAL 3.1 3.3 3.3 2.7 1.6 UREAN 5.0 4.8 4.6 4.1 3.3 CRUDE BIRTh RATE (PER THOUSAND) 45.0 42.0 38.0 34.8 22.8 CRUDE DEATH RATE (PER THOUSAND) 12.0 9.0 8.0 8.9 8.9 GROSS REPRODUCTION RATE 3.2 3.1 3.0 2.5 1.5 FAMILY PLANNING - ACCEPTORS, ANNUAL (THOUSANDS) .. 25.1 845.7 USERS (PERCENT OF MARRIED WOMEN) .. .. 21.0 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71=100) 97.0 100.0 101.0 106.9 113.1 PER CAPITA SUPPLY OF CALORIES (PERCEliT OF REQUIREMENTS) 110.0 112.0 114.0 107.4 125.3 PROTEINS (GRAMS PER DAY) 65.0 66.0 66.0 65.6 91.0 UF WHICH ANIMAL AND PULSE 27.0 27.0 27.0 33.7 39.6 CHILD (AGES 1-4) M^iORTALITY RATE 14.0 9.8 6.0 8.4 4.3 hEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 58.0 62.4 65.0 63.1 67.8 INFANT MORTALITY RATE (PER THOUSAND) 78.0 74.0 60.0 66.5 55.9 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 54.0 62.0 65.9 URBAN .. 71.0 70.0 80.4 RURAL .. 29.0 49.0 44.0 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. .. .. 62.3 ORBAN .. . - * 79.4 RURAL .. 13.0 14.0 29.6 POPULATION PER PHYSICIAN 1700.0 1481.0 1815.0 1849.2 1030.1 POPULATION PER NURSING PERSON .. 1613.0 1398.0 1227.2 929.4 POPULATION PER HOSPITAL BED TITAL 617.0 831.0 851.0 480.3 289.7 URBAN .. 549.0 758.0 RURAL .. 1289.0 1077.0 ADMISSIONS PER HOSPITAL BED .. .. .. .. 17.0 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.4 5.7 CRBAN 5.7 5.7 RURAL 5.2 5.8 AVERAGE NUM1BER OF PERSONS PER RGOM TOTAL 2.9 2.5 URBAN 2.6 2.2 RURAL 3.4 3.2 . ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL *. 59.0 *- URBAN '- 80.7 ** RURAL .. 28.0 ..  - 23 - ANNEX I TABLE 3A Page 2 of 5 MEXICO - SOCIAL INDICATORS DATA SHEET MEXICO REFERENCE GROUPS (WEIGHTED AVERAES - MOST RECENT ESTIMATE)-8 MOST RECENT MIDDLE INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 80.0 104.0 116.0 99.7 105.9 H4ALE 82.0 107.0 119.6 101.0 109.3 FEMALE 77.0 102.0 114.0 99.4 103.0 SECONDARY: TOTAL 11.0 22.0 39.0 34.4 64.0 MALE 14.0 27.0 42.0 33.5 71.1 FEMALE 8.0 17.0 36.0 34.7 56.9 VOCATIONAL ENROL. (Y OF SECONDARY) 24.0 24.0 .. 38.2 28.8 PUPIL-TEACHER RATIO PRIMARY 44.0 46.0 46.0 30.5 29.4 SECONDARY 13.0 14.0 17.0 14.5 26.1 ADULT LITERACY RATE (PERCENT) 65.0 74.0 76.0 76.3 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 14.0 24.0 42.4 43.0 84.6 RADIO RECEIVERS PER THOUSAND POPULATION 91.0 278.0 306.0 245.3 192.2 TV RECEIVERS PER THOUSAND POPULATION 18.0 60.0 85.0 84.2 118.5 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 79.0 .. .. 63.3 93.0 CINEMA ANNUAL ATTENDANCE PER CAPITA 10.0 5.0 4.2 .. 5.7 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 10993.0 14493.5 18951.2 PEMALE (PERCENT) 15.2 17.4 19.0 22.2 30.4 AGRICULTURE (PERCENT) 55.1 45.0 39.0 37.1 37.0 INDUSTRY (PERCENT) 19.5 23.0 26.0 23.5 29.3 PARTICIPATION RATE (PERCENT) TOTAL 30.2 28.8 28.8 31.5 40.9 MALE 51.1 47.4 46.8 48.9 55.9 FEMALE 9.2 10.1 10.7 14.0 26.2 ECONOMIC DEPENDENCY RATIO 1.6 1.7 1.7 1.4 1.0 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. HIGHEST 20 PERCENT OF HOUSEHOLDS 61.1/c 60.7 57.7. LOWEST 20 PERCENT OF HOUSEHOLDS 3. 4L 3.3 2.9 LOWEST 40 PERCENT OF NOUSEHOLDS 9.8/c 9.9 9.9 POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 270.0 RURAL .. .. 216.0 190.8 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 332.0 474.0 RURAL .. .. 332.0 332.5 385.8 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. RURAL .. .. Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of coutries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970. between 1969 and 1971; and for Most Recent Estimate, between 1974 and 1978. /c 1963. April, 1980  - 24 - ANNX I Page 3 of 5 00109N1Tf095 OF SOC IAL INODICATORS Not..: Although the doto so. dros fno. sota orlyjdged she s.t sushoritaotos hsodi;rliablu,. Ittshould also h. s.tod sht they -a out hs. tte- sostoogly oo~oahls bes... ofcbs lok of *t:Sderdls1ddaffstte -cod oosopta usd by 41f tuo uoriais coll.ttlog oh. data. The duot. , us h1 .., u...fol to dseorih. ordars of sgntd d*todlot. trsudo, 0.4 oharsoosrlss i.ASJ cdifa-o..ujutb41 ....os o .o o.otL.s.. Ths tsfsr..s.. Stoop. sOs (1) tbs sas oocuar grou.p of ohs suh).ot -outry and (2) o. -ouoy grop siob aossshot htgf,- aw..gS' istua shu t.h. otustoy group of ohs suhisot -ouoty (osos.po for 'Cupitsl Surplus oil top-rosra" grou.p shuts '01d41. Iooos Sooth Atftlos cod Middle oU.t' Is oh.ss b..eu.. of sstsgsr Isol- .ul .fe effioitisa(. Is she rsfseo group duos ths s-ras so. S poPolotis v.ighosd orIohaS I sat foo ..,h isdiosor Ws show osly vh55 A0 isaso haf of ohs tougoi.s Is A group has dots fo thst todo'tuor. OSi.. ohs oo ...g o turlcis aso ohs siooods.d toOs vteotyof dote cod is so uif.r-, osts ss hs sosrotssd to r-altiaver- .S. of os tdfost-r so eoothsr. ThIss trtgs t oly ousflit o lpoog ths oslo_ of ... iodto-tt- us aott asg ohs ro..tosy ed t-f-t- gr-p.. LulARIA (thousoed Sq.ha.)...uueslo 00 P'hooIiclo- topoistlos d55050 by o-os 05 pretttlog 9h7- Total - Towt .. sufooser -tspistog lsd All.u sod 1l.ud osar. tisso quslifird 3oS ne diosl s-hoo1 so usios-ity lto.1 Aurlouturs Ossesof sgolou tol. ...au.a.d-tsosrl'o P. - I,ssl Popto.iss- o oeo P s .i,tso..- .Populsto dtutdsd hy ousb- of pto-itous fot ro., P Stuoale serht sod 1itIh. gordes or . to l. fellow; 1977 dsts. ads sod fs.sls grudotososs,psolootl1. outs.a sd ..asiste- 05 GM? PRO CAPITA SIf ) - 10(0 Psr .upite sastitas So outost aetkt pttosa. tol- u P". n ttl di' de hIohi ot s ote f opls bd ouutod hy ss to-osraioo sthod ss World Book Atlas (1976-78 bosia); 1960, ilbhla to puhlir sod pri-ts gSaralI -d apotilitsd hospito1 so Os- 1950. oo 1978 detu. hsilltutSl.o .. tsoora. Hoaptlossa. - StoblishSSts pe-sassolyStaffd by aI ostiosa physloifs. EsoohLahasst prrotdisg polulpolly tostodia1 fNROthY COOOUOPTI0OPot CAPITA - Aunool tsopisof t -aril nrgp (roe1 cus r .s.lldsd. Ra.-l ho.rtsls., ho-oa. Ostluds heIlth Od sdltul sod lgi sross uus..gs od hydro-.. o.. oer ood Oscbth. l slat- bessroo psssotly .50tefd by o physiLoto (boo by o asddtel oesstett. totIoily)It IJllgrs ofto s4utoa.loot Pot teplos; 1960, 1970. sod 1978 ot.siwf,st,.) luto offa- i-pstaot ottodeotos cod prs~,tds date. liaistd resgs of sedital fetiltlse. For sttisstiosi porp ss. u.hs hospt- toli. ltld. WHO. priotlipolgse eod Pstilaltsd hosoilto1. sod .roro POPMPATION AND1 VITAL STATISTICS hoapsols IosI to -utu h.pitnols osd sudito1 ad astsrslty -stare. Toosl Pouolo.id-Y.u- (slllluoo - As of July 1; 1960, 1970, sod 1978 AssOoot slolBed - etooJ sabar of edais..o. to 00 disohargss dosei. (t.1hstul.dVivie h y the bshs of bsds. Orho. P ulttoo_(osro..s_s tO 000) - Ratio of urhes to total populetioo; differest daflotitos of u-bao o soY uffatt oooypo..shlitsy of dsOa UoSXts ooog touoiss; 1960, 1970, s.d 1978 dato. AoSres Si.. of Hogashold(sso Pro hou.bohd) - stool, orbs. o mroal- PPorlusiso Prosolomos .. ..gt. .J. A h...shold ..ssiss. of e rop of iedioldus. oh. hr h otli quarsqr- PopltulOo o sr20 - utsnppuolspoltt auohad .s 1990 god their solo _ss.A hoordatr or lodgs soy or sey .s h isoludad is tou1 populolos. hy gS. sod ses end shalt -otulity uod ftltsytstse. ohs house.hold for tsotistiol1 putpOsSs. 5'ojattton paltossst for sotslity rots. tospoiss of thros lavol sc- vru mms f0s05 0 t--Ste.uh.=sdrr- Aairugs 05 tog lit s soyato..ooY S. birth s-o..usLog o1sh c-uory's pot tepots .sos hSfposo o-taI olobs.sdruo tupa sosSoo ise. sod= 1 s ls 1f. s spsoteoy stbilisiog St 77.5 yact. Th. pota- doolitoga, -sps.tiloly. Dooilos. Soolodo o-preotetosro sote rs fot fsrOIltoy ltot ala hvathra. lavlssso1 ,s daollss I. usootpiod p.ts.. folttlity o.t..diog to boo- ls-s ed pest f ally plaootog perforsaso. Atoa..o Olotict (tars ofdollg. stl. orhb co .trol1 Euthoo..toy tshut u.sigosd 000 of ths.. i1..osiooo.of sorltoltoy Coovsotioell dwgllitgs sIhelttl Iy toY Sto qoerosa OaP....tog sod f-rtilitty trsod. fot projotti. pdtr.s. o os, re,cd us osloarspolsy ths hirth, tot IS oqou1 to ohs dssh ret., ord as -hs -g - EDooCAts _bSetoatoosost. This to sobheved coly oftsr fg-tilityrss.t doolioe 50 Adjustad EIo..llsoot WIso rho _aylooeo.o 100.1 of ..it Sto r.p-odu-tio rots, tIes s_h goselo P-ur ool-ttl.sl o 1sa. - Gross ot0t1, salo sod fos1l of tosso osyloosa Iseof ..ootly. Ths sltloostly .o.o..esoa oolsto i ae stsplun ao sprstss ftsss oet-cd ItItstet to i. yr-jstsd coutcito f ths Soosto rsr sohool-egappato; to vol tolds thilt'so gdhl to shr yr- 2000, cod ths ruts of doous offotiytt orplt-yeshtojso.frdf to sgfsofpyuyousis o aba los boos raoohsd. Oscuodotyt ll00lt1001 -l..- ' to Al sohs cod sauy -1 Cosuod hos arodt Porulostot Osoetto odutor~~~~Y.. bto 0-t10. atlrdat f -to lyosth. of opprond priorytostrcosf o Pot o. h. - td-yot ppolttot700 cour ktlmeor (10 hetor.) ofprtld.. gsirsh otoettool, or . s.. hr ...I_trelott lo totort _ for pot Peotly - i-wPP..inP qr i-- 10h..rVooeos-loSo.. soolsono- osruss o saodey -n iototooa totit. otlpo i IA oet), od tot... I6 yssod e- cos.t)dI bV - f-roogsoiof1o-yIe PPdO.. dtly rs.odtoosodotooy1005008 lton;l 97y 90 od17 u.Prl-ote ol trlsu t sod . saodro - To.te1 oo i.tS stotid t Potolottonbooth boo R-rot--tna Aoo gos rotos of tota aid.- poion7so ftpsc tod ty rofs ..d.odo ysahaoftehtsish P.,eto ot Rt tr...so) - Cthonld At,cl800 os t re O dl lOto4cyy rots (rotri I trs ot ebt sdedot C6d 1t y Rats (tsr ohuiseod) - Acuoul lhos irolt pot choohgod of oid-yeo toiluto; 196 19170. cod 1978 dote.d P,001f90t.I08 ZId -d.~TS :oldi CP.d ltoonGth RaEl(00 ohouss ) - Atotal dtotA ps- hotodo Sl-yaryad-es Cer (ts thuoo oo_logiond -Yussgsror uysto t po,Pu,""it; .1910 1970, uqdt 19T60d7so cuo odcoglso970-igt7sooo;ccldo fhloos. ora- ho sil oy oos usuo 96lly fo- dorcooo otgt 90 90 n 87 reoost gso0nspubli ps1t pnPoossid of 1 poplotto eonlds oslo Pastlop...t... Peroi-A tooso. Auol(huu. ctltoo fOtPOO otortusst oooo o tyssso stosloo sl e of. Etclcuooh doio -oo Aooptoo ofl bisthool tall 01....d o iOtOtO.- csusft;ds o 000oessyoth oprhsso sa 00000 :tf' chldhol, pttous 00(1-4 er) o . Id.ho Ps htth-.....sdoo idsyt- to.T . OsalsCro (puLt sotn otlto ) - P...s..toRs fot. h-pds s o - 00 -00 -mto- 0P00iOf 0if00h. psons .u...t 0thosd popul.i-to - soilutyp. oofos TV.. fsto-ost POOl 00 "I,,;1 ....0 "Y toouootIendingdlo 1960.197ot eng 1s77. RosiofRT-i-sts sos to ,-d,Y offo rdoio70Cona(997-0)-Odoo .or 001ccoutuo lsto of. "dil t.gOost1 pbIto prsath .....r' deoftpopd oaopon-io,:dtt pi- ,rd Itls fll fod,, cInodlS.os. yr-odootiooootidfools cod Otg uodr- litnttdvtdptotys oodo gsooS fP.os.bIt is ooldos to 00 _loodo you lot.. Cofdttt_oos poh _r 004 Ifog Y.aoo ohodly Oiopsre s torS sao k to oo ohilodod-i.g Afforg 5ss prodcito of. suth iooh-r to loss4 . to o.toltos ebld duhtog I oh. yonttodo udos foo todobr- 'tIno IPor tofi F.0d0ro of ulrlo psrooooft"otssot) -Coyotdhro dooy qlolo of uI foodt su 71too te0l Ind toutf ps- topita.... tiol P001i1" " n noor P at hso oook e opio tld oolfr,eoo c,od noross otd oo.. loys hotet' aoudp-gloosoinfooS. sOudonts- s pt. quod-iloson tfod rtoSlu, u.d.ltionos to ...dlsonlo feo d oqiro lnit-tiont d tod oprios tunolos 000000. .. . _ooals 1960 197 cod ~_ rosbldbo; I I165 90 god 1977 dooc. l:~g.:ff- n CishlA-o-t Os porootg ft ur-d10frts160 197 cod 1976 done qoroot t oil ooooo oulso o thpoiofrotoo17 o 50 boo.hp : aloccoo I100 ftod posl 0 dyeA20gcu fc-l o cultuio 00(orst -Otl slolo,1i... . dtdfsslo-Po nt lintlo 0 Idpd-'otou 0 0 coreo o oigi. 1961d 65 poopt0o bynd to7 ohto Td1,17, o 91ds. thoeoe00spoutotoeonfoso .ord .oo toty; 19t1-05 1970 .. ofd17 0c Cp.df. Andootooono ht pplot, o o lu to.A o sl for o IVito ot to sorl fro oisl od -ilsb - Proit odyp- P t food. do- BOR0 FO foRCEool 000 o: lyod fro 11l,blo 004 i to i. ..t.pld-i..ip.1... toguTtrdy;16-5 90 o 97b ttloLtor Fonodott (toobo d.)- tot o.. po.lycl -iouds 15 cod 6i-sod 000 CIlP_ .d hcos 14)Noru inooo (too Nthococod): -doo dotoho- perd thosod. Ittto:,o,socn,loho.(0000 out goooo' -4 70000, o ohildootto sIlo ugogroup; forotto droolp togitout Irno d_t doIloo f-onotlft pphloi; 1960 .1970cod 197 doto.. f-CO... tTiTIIsITSo h.birth;l 1960. 1970 o1d 0, 970, dots. t of co po tooood 100hlroe. eoloto Aholoo Pdott IsosoIrol ( i9ftoota - ooe codloe l doors. 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Otu -nsso los ofi'tt -ftotoen oo igho toloffloog-0 Oh roudoou-l 000000 wool4 10010 the t7 n E_oooootf of onohor of Elo foohl touoo oo.utoOOw louoOoot oos150 rs do otbo toin4adooootooopp of.tIn dop to I fooho 010 onToh 'roo fppltio(na nIrrl h r "oePt por" Fcty 000000IRS ott do.ly ootol-Oouhoo of p00010 (toosl 00100 a97odend1975 t! 00001) IL.onosdt.ihyt.. teloJo ofboouFotodsco ot-oo h9'7 -1torbo7o d yotoes orolg ceofoftpril, 198 pIt pojolts ood ulolico lootollooflosppO.i., nd on ti. l... f--i  1O 9 5 N OONI10100 ooo.0r0 a-N 10000.-ION '0 0 .-I'-(IO 00-'ON(0- 0-O(0IN ON'-' II 9 N - N Noo oooooiiS 1,000000 0000 N (00010 oO.-000,0 N 1,100 '101 090-00000-000 NO ,(000OoH 100 OH 00(00(0,00 00-NO-I 000 09 0,00 10 000 00,0 10000N (000-N - 000 0 000 ON 0,,000HO(O0 00,100000- 00-0 N (ON 0 001-N 0 - r NOHON 000 N S520-i0- 5I ON 0. OON 10 0H00NH9N - 910N9.O,OO 000 000 0-NONII-lOMO 000 00-010 OOOH 00N -- '0001000 0100 '0(ON9 0l1 oo oooo(9o '1 -<    oc. 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N (00 100,00100-0-0 N000N0010(0000000010100'10IO 10000N01000NNNH(0(00H 00-01 0-0-01 0N01000 0-000-NO 0-0-No 0 000 0(010100-0,00(000-0- 0 100- 0-H I NooO'H0- 00-N 1010(0(00-10 0-00(0 0 0- 0'N 100-01010-01(0 000-1010 00N0001NN 00- 10010(000-000 0100-0100 100-NN 000- 10000-HNN ooOO(0 H 0001000-0-0(100-0- 010 01 I oH 0 01 ON N 11000-0 00 (10 oH ONO N 0 I 0 000 0-0-H NI (000010010N 0-00NH 010 100000 ONONN 0-0 N 1000-0 0-NO O N I 000-0- NH 0 - - 0 - I - 0 10 I 0N000000 000 0-00 10000,0000 NH'00(00 10000-(O 0 0-N0-N100100 00 0 010 I '001000-1010(00- 00-0-0010 (00-NO 0 0110(0 00010100000-0-0- 10(0010010-100-1000 '0 ON 00-N NOON10NHNN 0100100-0- 00(010 0 001(0 0-10(0000- 0-010010- 00001000-0100- 0 O 0010 O1010NNO(0010 0-0-0-0-NO 00-NH 000 00-0-0100 0-0-0100- 000-1000-0-NO 000-ON N 0 000 0 0- 01 1001 HON 000-NO- 0- 001101000 (0000 0-100-NO 00 0- 0-101010 010000- 00 9 F 101000- - 0 0010N0N10 100-0-0-0-10 (0101010 01010 0- 0101000 0010010 000(00-0-100-100-0,00 01  [ 01100-0- 10 000-01000-00 100100-NH 0-NON 100-0 (0 1000100 0-100-100 100-0100-00-0-0-0 10 N 010(010 N 0010010000,00-N N 01100000-NO 0-0 0100 0' 101010(00-01010010 '000-0100-0-0-010 01(0100- 1000010001001101010 ONN0-'010 1000-0 101010 0- 0-10(0100- 10100-0(0 000-100-10010(010 00 0 N 5 0 01(0 10 HNNN,0000(HN 0- 0- 01000100- 0000- 10 100(0100 0-0- 00 00010 010-1000- 1000 - - 00,0(000 000-0 NNO 0100000- 00-100-10 0-0-00100-00-010-N I F .4. (000(0 0 0,00100-0- ONNO 000 N 01010001 00-(0100- 10001000-10010,0 10 100010 10 . OONOObO . . ( 0- 00(00 10 00-N (((((((11 0-101000-N 00-0-10 10100 0(0-NH 1001 N0-(0100 1000-0-010(000-0 I 0- :01010 0(00-001(0 (010010 0100- 0 10000110 0-0-00-100-000-10 0 01010010 H 00100 0,000-0000 01 0-1010000-100 V 0 0 100000 00(00 00010100 10 0- 0 (0 0-10(00 (001000 - 0 0 N 00 100-000-010,01010 0100000000- '01001010 010H0100- 1000100 10(00-0010 0-10010 000 H(0000 0- 0-0-0110(0 0110(00000(0100- 100 0-0-0(0 10 . . (0(0(0100-N 010100 10010 0-I 0-0010N 100101010 0-0-010000000- 00 0000-00 100(0,000110010(0 10100-000(0100- 000-100- (0010010100110010 H - 010 1000 0 101000 I N 1010101000010 oNN0-100- 00100 (0 0-0(0010 0-10 1010 01000- 0(0010-0 101000010 00-0-0 000 (0o'0L0-V10 0-0000- 100000-0-00-0-0 lo (0,00 I N 0010 '('(1(11 10(001010-01010100 10010 0(010000 10010010 (00(01010100-100-10 I 0-000 I 0- .-.. . 00,00-0(0 00010 0-0-ON(010O 100- 0-0100110 010,010000(000 110 (0 100-100-10(010000 0100000100100-1010(00- 100-10101000-0010 I 00010- 10 0 00H10(.0 00 0 N I 0 10(0010 01 0- (00 0- 0- 10 0 00-NOON 0-0-0-10 oN0 ,0('0O0-0000110N0 o. ..0010000100- 0 ONO 100100100 (00-0-0- ONN 0- 0-1010,0101000-00 1.10010000 0 0 N 1010000 1(0(1 10 (000(0000-H 100-0 0(0-1010(010 100-0N110 0-0-0000-00100- 0 . . ' N 00-0-N001101000010 No00. . . . . 010 0-0-ON 0100 000000- 00010110 19 N 0 0 ,0NN 100100,00 00-100-0 0001010 0- 10 0 0 0 0 100 N 0- 10 0 000 0(1010N001 1010 0 0 01 01 0- 0 N I -010 0-No (IIIIIIII 0100-00-01 000-0' 000- 0- 000-10000000 0100-10 0-010 10 0- HHNN No' 0010,0 0 N100 0000- 00- NoO[0- OONNO0-0100 o00000 000-0- 01 o-ooHO O(000000000 '0 I.0 0 0-0-000 000-N 0-1010000 1001 0 O 0 0 0 10 0 00 0 I 0 10 0 0 0 0 ONONON 0- 000,00-0-00 10 0-001000-0-10100-01000 .' 0-10000-100 00-010 N N (1000-100 (00-100 1010(00100001010 100 10 0 10 --. 010000100-1010001001000 0 0- 0- 01 10 0 0 0100100 1010000-0 000-00010 10 0- 0 (00 0-0(0100 N 0 01 I ON 0 0 0 10 0 0 0 0 0 0-100-0 01 J O 0101000(00 100001100- 01 0-000100 00010 10(000-100- 0-10000- 01010000 .OONO 10 0010(10 o10o100- 00100 0- 0-0-000 001000 100-100010 1010  - 26 - EALANCE OF PAYNIENTS. TIAL ASS0STARCE 88D DEbT 7US$ illioe *t current prices) Pe5 of 5 Preleiciary Actual E6ti steD Projections 1970 1975 1976 1977 1978 1979 1990 1982 1985 SUBHARY BALANCE OF PAYKENTS Exports (includin" NFS) 2,745.4 6,081.7 6,836.3 7,795.1 11,176.4 15,503.9 24,806.9 37,601.7 59,787.7 Inperto (l-cleding 60S) 3,416.9 8,636.7 8,421.0 7,655.0 11,466.4 16,739.9 24,263.2 36,299.6 61,827.8 Reso rcc - - 671.5 -2,555.1 -1,585.4 - 59.9 - 290.0 -1,236.3 543.6 - 696.0 -2.040.1 BO1eres, ne- - - 307.0 -1,266.5 -1,551.2 -1,811.0 -2.311.9 -3.267.8 -4.070.5 -4.751.8 -6.244.2 Direct Inveececnc Inccce - 267.5 - 657.5 - 666.7 - 401.4 - 477.4 557.0 - 5B7.0 - 5&7.0 - 587.0 Workerb Ro=ittaocen 122.7 174.6 239.6 251.0 277.0 320.0 320.0 320.0 320.0 Currect T7.n.fe.e, net 35.3 123.4 156.0 168.5 197.9 218.0 239.8 290.2 3B6.2 Currenr A-coun eslooce -1,068.0 -4 ,181.1 -3,407.7 -1 ,852.8 -2,604.4 -4.553.1 -3.223.5 -4,759.1 -6,932.8 Frlcoto O1cecL Onsestnee n 322.0 748.8 626.2 555.9 530.0 666.5 738.4 928.3 1,380.7 Public Med. and tong Trn L.one, net 258.6 3,565.9 4,262.5 3,937.3 4,079.0 3,129.1 3,375.6 4,30.3 5,656.6 (Diubrn-een-) (821.3) (4,418.6) (5,417.9 (6,232.3) (8,343.3) (10,415.0) (7,203.0) (9,617.3) (15,9i9.62 (Repay-ectc) (-562.7) (-952.8) (-1,155.4) (-2.295.0) (-4,264.2) (7,285.9) (-3,827.5) (-5,387.0) (10,283.0) O he- Capitol 588.7 31.7 -1,801.9 -2,136.2 -1,782.1 -1.046.4 990.4 1,345.0 2,135.0 (Public Short Ter-) (139.6) (764.7) (879.0) (-950.0) (-1,489.4) (205.5) (400.0) (529.0) (804.5) (Other Copital, n.e.i.) (449.1) (-733.0) (-2,681.4) (-1,186.2) (- 292.7) (840.9) (590.4) (816.0) (1,330.5) Change n I e R rven (-- incre ..) -102.1 -165.0 320.9 -504.2 -222.5 -208.9 -1,880.9 -1,744.5 -2,239.5 G0221T AND LOAN CO 7ITKZNT0 PUBLIC 97D. AND L.T. LOANS I1RD 146.8 310.0 410.0 162.0 494.5 467.0 _ _ IDA - - - - - - - 0th-r Moltilot-1el 112.4 121.6 171.2 122.5 152.2 268.4 Go-erneent. 78.8 265.2 280.1 224.3 407.9 21.2 Suppltors 69.7 15.6 132.3 105.3 133.4 2.0 B-nk. and Financial Ietitnutio.s 443.5 3,360.7 4,561.2 6,996.6 8,240.5 11,690.9 rends - 139.9 318.6 1,262.3 36.4 160.0 0EBT AND DEST SERVICE Public Debt Outs-endirg & Di.bureed 3,238.0 11,541.7 16,062.6 20,832.2 25,774.1 28,192.3 EXTERNAL4 DEBT (end of period) Outerendins end Dishoreed Int-r.et on Public Debt 218.0 950.4 1,096.6 1,326.7 1,823.2 2,849.6 aD D-c. 31, 1979 R.p.y-eet or Peblic Debt 475.6 762.6 1,154.9 2,232.2 4,416.2 7,737.2 Other Debt Service (net) - - - - - - bOtilIocs Percent Totl leObt Servic (net) 693.6 1,612.9 2,252.5 3,658.9 6,239.4 10,586.8 Public M2 & L.T. Bnrdee on Frport Etrnoee 2/ (7.) Loans s. Public Dobn Osrvlce 24.2 25.6 31.8 45.5 54.5 66.9 b. T1t01 Debt S rvic 24.2 25. 31.9 43.5 54.5 66.9 I0RD 1,730.6 6.1 c. Total Debt Serviec and Direct Oth rbutil.t-l 995.4 3.5 1n-v t -nt Incoen 33.5 36.3 41.3 50.5 58.6 70.6 Goverptest. 995.6 3.2 Av raEs Terne of Puhbli 0040 Suppliers 384.0 1.4 A. Inc Tre oe 2 of prier yeer a bond 2,515.0 S.9 D.. end D. 7.4 10.2 9.5 8.3 8.9 il.1 Other Finencial b. Arorti-tion .. X of prior In-titotlon 21,671.8 76.9 yc_r'n D.O. and D. 16.3 9.2 10.0 14.5 21.2 30.0 IR8D E.po.uro Petal 28,582.3 100.0 a.IBRD D.O. & D. es 0 of Pu.'le D.O. and D. 18.0 9.7 7.6 6.6 5.7 6.1 b. IB5D Debt Sernic as X of Public D.bt Servic 7.7 7.2 5.9 4.2 2.9 2.1 - Not Oppli-rble or .e..ilobl 1/ Ircludee interoet cc short-tere pctVeto -nd phblic debt 2/ Includes vorker renitt-ncee  - 27 - ANNEX II Page 1 of 8 THE STATUS OF BANK GROUP OPERATIONS IN MEXICO A. Statement of Bank Loans (as of October 31, 1980) Loan Amount less Undis- No. Year Borrower Purpose Cancellations bursed 38 loans fully disbursed 1,870.4 909 1973 NAFINSA Water Supply 90.0 25.0 968 1974 NAFINSA Roads 90.0 8.8 970 1974 NAFINSA Irrigation 47.0 21.6 1022 1974 NAFINSA Airports 25.0 3.0 1053 1974 NAFINSA Integrated Rural Development 50.0 35.7 1111 1975 NAFINSA Irrigation 50.0 37.0 1112 1975 FERTIMEX and NAFINSA Industry 50.0 5.2 1186 1975 BANOBRAS Water Supply 40.0 23.8 1232 1976 Ferrocarriles Nacionales de Mexico and NAFINSA Railways 100.0 39.9 1420 1977 NAFINSA Tourism 42.0 27.5 1462 1977 NAFINSA Integrated Rural Development 120.0 64.6 1524 1978 NAFINSA Tourism 50.0 7.9 1552 1978 NAFINSA Industry 47.0 15.5 1553 1978 NAFINSA Agriculture 56.0 46.7 1554 1978 BANOBRAS Urban Development 16.5 14.2 1560 1978 NAFINSA Industry 100.0 32.2 1569 1978 NAFINSA Agricultural Credit 200.0 10.8 969-1 1979 NAFINSA Irrigation 25.0 9.7 1643 1979 NAFINSA Small-scale Agri. 60.0 58.3 1671 1979 BANOBRAS Highways 120.0 116.2 1686 1979 FERTIMEX and NAFINSA Industry 80.0 55.9 1706 1979 NAFINSA Irrigation 92.0 92.0 1712 1979 NAFINSA Industry 175.0 155.2 1820 1980 NAFINSA Small and Medium Mining 40.0 40.0 1858 1980 NAFINSA Irrigation 160.0 160.0 1881 1980 NAFINSA Small and Medium Scale Industry 100.0 100.0 1891 1980 NAFINSA Agricultural Credit 325.0 325.0 1908 1980 NAFINSA Irrigation 23.0 23.0 TOTAL 4,243.9 1/ 1,554.7 Of which has been repaid to the Bank 660.7 Total now outstanding 3,583.2 Amount sold 92.3 of which has been repaid 91.6 0.7 Total now held by Bank 1/ 3,582.5 Total Undisbursed 1,554.7 1/ Prior to exchange adjustments.  - 28 - ANNEX II Page 2 of 8 B. STATEMENT OF IFC INVESTMENTS (as of October 31, 1980) Fiscal US$ Million Year Obligor Type of Business Loan Equity Total 1958/59 Industrias Perfect Circle, S.A. 1/ Industrial Equipment 0.8 -- 0.8 1958 Bristol de Mexico, S.A. 1/ A.C. Engine Overhaul 0.5 -- 0.5 1961 Acero Solar, S.A. 1/ Twist Drills 0.3 -- 0.3 1962/65/ Compania Fundidora 66/68 Fierro y Acero de Monterrey, S.A. Steel 2.3 21.4 23.7 1963 Tubos de Acero de Mexico, S.A. 1/ Steel 0.9 0.1 1.0 1963 Quimica del Rey, S.A. 1/ Sodium Sulphate 0.7 -- 0.7 1964/66 Industria del Hierro, S.A.1/ Construction Equipment -- 2.0 2.0 1970 Minera del Norte, S.A, 1/ Iron Ore Mining 1.5 -- 1.5 1971 Celanese Mexicana, S.A. Textiles 12.0 -- 12.0 1972 Promotora de Papel Periodico, S.A. de C.V.1/ Pulp and Paper 2/ 2/ 2/ 1973/79 Cemento Veracruz, S.A. Cement 15.9 -- 15.9 1974 Cancun Aristos Hotel Tourism 1.0 0.3 1.3 1975/78 Mexinox, S.A. Steel 12.0 3.2 15.2 1978 Papeles Ponderosa, S.A. Pulp and Paper 9.0 2.6 11.6 1978 Tereftalatos Mexicanos, S.A. Petrochemicals 19.0 -- 19.0 1979 Cementos Tolteca, S.A. 3/ Cement 100.0 -- 100.0 1979 Hotel Camino Real Ixtapa, S.A. Tourism -- 2.3 2.3 1979 Conductores Monterrey, Electrical Wire S.A. 3/ and Cable 18.0 -- 18.0 1980 Industrias Resistol, S.A. 3/ Particleboard 25.0 -- 25.0 1980 Vidrio Plano de Mexico S.A.3/ Flat Glass 114.9 -- 114.9 1980 Minera Real de Angeles, S.A. de C.V. 3/ Mining 110.0 -- 110.0 1981 Celulosicos Centauro S.A. 3/ Pulp and Paper 59.5 -- 59.5 Total Gross Commitments 503.3 31.9 535.2 Less Cancellations, Terminations, Repayment and Sales 371.7 22.1 393.8 Total Commitments Now Held by IFC 131.6 9.8 141.4 Total Undisbursed (including participants) 317.5 __ 317.5 1/ Investments which have been fully cancelled, terminated, written off, sold, redeemed or repaid. 2/ TJS$25,000. 3/ Gross commitment including amounts sold to participants.  - 29 - ANNEX II Page 3 of 8 PROJECTS IN EXECUTION: PROGRESS AND PROBLEMS 1/ Ln. No. 909 Mexico City Water Supply Project: $90 Million Loan of June 18, 1973; Effectiveness Date: April 30, 1974. Closing Date: June 30, 1981. In December 1979, the Executive Directors agreed to amend the Project Description to include new works which would serve the same objective of increasing bulk water supply to the Mexico City metropolitan area (R79-307). Overall, the majority of the project works as originally defined have been completed and the physical targets of the project have been achieved. There are, however, disagreements between SARH and the Comision de Aguas del Valle de Mexico (CAVM) concerning the need to carry out works in Presa Madin and the decision by the Govern- ment not to give priority to the Ecatepec sewage treatment plant. During a recent programming discussion, the Government has indicated its intention to seek partial cancellation of the loan, and no extension of the closing date is envisaged. Ln. No. 968 Seventh Highway Project: $90 Million Loan of March 1, 1974; Effectiveness Date: May 29, 1974. Closing Date: June 30, 1982. Substantial initial delays have been encountered in project works because of the shortage of budgetary allocations. Substantial cost increases caused by price escalation were also encountered. Taking this into account, a reduction in the scope of the project was made in August 1977, from 16 roads (1,975 km) to ten roads and part of an eleventh road (1,216 km) which, because of cost increases, have the same total cost as the original project. The roads remaining in the project continue to be well justified as benefits have kept pace with costs. Completion is now expected in early 1981, or about two and a half years behind schedule. Ln. No. 970 Rio Sinaloa Irrigation Project: $47 Million Loan of March 1, 1974; Effectiveness Date: May 29, 1974. Closing Date: December 31, 1980. Project authorities have rephased construction; a substantial reduction in project scope was approved by the Executive Directors (R79-51 of March 13, 1979). Progress is now satisfactory. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution and, in particular, to report any problems which are being encountered and the action being taken to remedy them. They should be read in that sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  _ 30- ANNEX II Page 4 of 8 Ln. No. 1022 Airport Development Project: $25 Million Loan of May 28, 1974; Effectiveness Date: September 16, 1974. Closing Date: June 30, 1981. The project originally included the construction of seven regional airports and the expansion of an existing one at Campeche. Of these, the Guaymas airport works have been post- poned by the Government because of interim improvements of the existing airport carried out by the local municipality with its own resources. At Campeche, the Government has decided to construct a new airport with its own funds instead of improving the existing airport. Loan proceeds allocated to Guaymas and Campeche were reallocated in August 1977 to complete construction of the six airports retained in the project. One of the six airports has been completed and works in the other five airports are proceeding satisfactorily. Ln. No. 1053 Papaloapan Integrated Rural Development Project: $50 Million Loan of November 15, 1974; Effectiveness Date: January 27, 1975. Closing Date: June 30, 1981. Project implementation is improving after delays due to inade- quate budget support. Reprogramming of the project is underway to adjust for these delays. The closing date has been extended accordingly. Ln. No. 1111 Seventh Irrigation Project - Balo Rio Bravo and Bajo Rio San Juan: $150 Million Loan of May 8, 1975; subsequently reduced to $50 Million; Effectiveness Date: July 30, 1975; Closing Date: December 31, 1982. In view of the project's size, complexity and high cost, the Government and the Bank agreed to phase project development over a longer period of time and substantially reduce the scope of the project to be financed under the Bank Loan (R77-305 of December 13, 1977 and R79-56 of March 19, 1979). Progress on the revised project is satisfactory. Ln. No. 1112 Fertilizer Project: $50 Million Loan of May 22, 1975; Effectiveness Date: July 30, 1975. Closing Date: March 31, 1981. The Bajio Urea Plant is in operation but construction of the Pajaritos Urea Plant has been delayed mainly because of material shortages and difficulties with contractors. Construction is now expected to be complete in March 1981. The Parathion Plant is to be completed before year-end 1980. The project is, on average, 2-1/2 years behind schedule. Most of the commissioning work will take place during the next 6-8 months, and no major problems are expected. The estimated cost is about 35 percent above the original budget, mainly due to.increases in equipment and civil works costs.  - 31 - ANNEX II Page 5 of 8 Ln. No. 1186 Medium Cities Water Supply and Sewerage Project: $40 million Loan of January 13, 1976; Effectiveness Date: April 26, 1976. Closing Date: January 14, 1982. Subloan agreements have been signed with all cities included in the project, and works are now progressing satisfactorily. This is the result of several positive measures taken by the Mexican authorities to accelerate project execution, including the preparation and implementation of guidelines for project design and the reorganization of the special project unit in charge of project execution. Ln. No. 1232 Third Railway Project: $100 Million Loan of April 30, 1976; Effectiveness Date: June 16, 1976. Closing Date: June 30, 1981. The project had a slow start, traffic growth in 1976 was less than anticipated, and funding in 1976-77 (the stabiliza- tion period) was inadequate. The traffic took an upward swing in 1977, and continued to rise in 1978 and 1979. Works are now being executed according to a revised investment plan which has been agreed upon with the Bank. Due to initial delays the project is expected to be completed by mid-1981, about two-and- a-half years behind schedule. Ln. No. 1420 Baja California Tourism Project: $42 Million Loan of July 5, 1977; Effectiveness Date: June 28, 1978; Closing Date: June 30, 1981. Construction of infrastructure at both project sites has begun. The first 250-room hotel at Loreto was completed in August 1980. Project implementation is slightly behind schedule due to shortages of building materials in the area now over- come. An outline for the ecological and environmental study is being reviewed in the Bank. The marketing studies of domestic as well as North American tourism and the economic study of tourism have been completed. Overall, progress is satisfactory, although difficulties in internal coordination have caused disbursements to lag behind schedule. Recent communications with FONATUIR indicate that bottlenecks are being eliminated. Ln. No. 1462 Integrated Rural Development Project - PIDER II: $120 million Loan of July 5, 1977; Effectiveness Date: October 28, 1977; Closing Date: July 31, 1981. Implementation is on schedule. Project authorities have made important progress in implementation of inter-agency agreements to improve investment planning and execution.  - 32 - ANNEX I1 Page 6 of 8 Ln. No. 1524 Tourism Development Prolect: $50 million Loan of March 21. 1978; Effectiveness Date: January 12. 1979; ClosinR Date: December 31, 1981. A cofinancing loan of US$25 million was provided to the borrower on December 1, 1978 by a group of commercial banks. Progress of commitments is satisfactory. Ln. No. 1552 Small- and Medium-Scale Industrial Development Project; US$47 million Loan of May 4, 1978; Effectiveness Date: January 12, 1979; Closing Date: June 30, 1982. After some initial delays, the integrated program to assist industrial enterprises is making rapid progress. Forty-eight extension agents have now received full training and have been assigned to 14 regional offices. About 80 percent of the loan have been committed. Ln. No. 1553 Tropical Agricultural Development Project: US$56 Million Loan of September 27, 1978; Effectiveness Date: January 12, 1979: Closing Date: December 31, 1983. Five of the six pilot projects have been approved by the Bank; the sixth is expected to be submitted shortly. Project authorities are making excellent progress in the agricultural development program of each pilot project. The applied research programs are proceeding on schedule. Ln. No. 1554 Lazaro Cardenas Conurbation Development Pro-ject: US$16.5 Million Loan of September 27. 1978: Effectiveness Date: February 14, 1979; Closing Date: June 30. 1982. The shelter-related component is having better than expected results. Satisfactory progress has been obtained for the training centers, but delays still remain in the implementation of the productive credits, industrial premises and river control components and the studies. Steps to speed implementation in these areas have been recently discussed with the Government. The possibility of reallocating funds to the shelter-related components is being contemplated. Ln. No. 1560 FONEI III: US$100 Million Loan of September 27, 1978; Effectiveness Date: January 12, 1979; Closing Date: June 30, 1982. Demand for industrial investment financing continues to be strong. Over 97 percent of the loan has been committed.  - 33 - ANNEX II Page 7 of 8 Ln. No. 1569 Sixth Agricultural Credit: US$200 Million Loan of September 27, 1978; Effectiveness Date: January 12, 1979; Closing Date: June 30, 1982. Implementation is proceeding rapidly. The loan is expected to be fully disbursed by the end of 1980, 18 months ahead of schedule. Ln. No. 969-1 Rio Panuco Irrigation Project; $25 Million Loan of September 27, 1978; Effectiveness Date: January 12, 1979. Closing Date: December 31, 1980. Major project civil works are on schedule and expected to be completed by the closing date. Progress in agricultural devel- opment has been somewhat slower than infrastructure construction. The technical assistance program has been strengthened and will emphasize better water utilization and intensive agriculture. Ln. No. 1643 Small Scale Agricultural Infrastructure Project: US$60 Million Loan of February 6, 1979; Effectiveness Date: April 13, 1979; Closing Date: June 30, 1983. A number of livestock and irrigation subprojects have been approved by the Bank, and the Government is accelerating preparation and presentation of the balance of the program. Ln. No. 1671 Highway Sector Project: US$120 Million Loan of August 23, 1979; Effectiveness Date: October 12, 1979; Closing Date: June 30, 1984. Commitments are ahead of schedule but disbursements are behind schedule because of budget cuts in 1979; the 1980 budget is adequate. Ln. No. 1686 Second Fertilizer Project - Lazaro Cardenas: US$80 Million Loan of May 18, 1979; Effectiveness Date: September 21, 1979; Closing Date: October 31, 1982. Orders for most of the equipment have been placed and about 30 percent of the construction work is committed with about 22 percent completed. The project is now about 17 months behind schedule and runs the risk of further delays unless implementation arrangements are improved. FERTIMEX's management is considering steps to improve implementation. Ln. No. 1706 Rio Fuerte/Rio Sinaloa Irrigation Project: US$92 Million Loan of July 30, 1979; Effectiveness Date: October 5, 1979; Closing Date: July 31, 1986. Implementation is on schedule.  - 34 - ANNEX II Page 8 of 8 Ln. No. 1712 FONEI IV: US$175 Million Loan of July 30, 1979; Effectiveness Date: October 5, 1979; Closing Date: June 30, 1984. Demand for industrial financing continues to be strong; US$92.1 million of the loan have been committed to subprojects to date, and additional subprojects requiring US$26.8 million are being considered. Ln. No. 1820 Small and Medium Scale Mining Development Project: US$40 Million Loan of August 18, 1980; Effectiveness Date: Closing Date: June 30, 1984. Not yet effective. Ln. No. 1858 Apatzingan Irrigation Project; US$160 Million Loan of September 29, 1980; Effectiveness Date: Closing Date: June 30, 1987. Not yet effective. Ln. No. 1881 Second Small and Medium-Scale Industry Development Project; US$100 Million Loan of September 29, 1980; Effectiveness Date: ; Closing Date: December 31, 1984. Not yet effective. Ln. No. 1891 Seventh Agricultural Credit Project: US$325 Million Loan of August 15, 1980; Effectiveness Date: November 17, 1980: Closing Date: March 31, 1984. Ln. No. 1908 Ocoroni Irrigation Project: US$23 Million Loan:approved by the Executive Directors on October 14, 1980 and not yet signed.  -- 3, - ANNEX III MEXICO FOURTH RAILWAY PROJECT SUPPLEMENTARY PROJECT DATA SHEET Section I - Timetable of Key Events (a) Time taken by country to prepare project: about 12 months (b) Project prepared by: NdeM (c) First Bank Mission: June 1979 (d) Departure of Appraisal mission: May 1980 (e) Negotiations completed in: November 1980 (f) Planned date of effectiveness: March 31, 1981 Section II - Special Bank Implementation Actions A continuous review of NdeM's operating and financial performance will be made by the Bank; NdeM's freight car procurement program and the Government's investment plans for railway infrastructure will be reviewed yearly. Section III - Special Conditions (a) NdeM to carry out a Plan of Action aimed at improving its operating and financial performance, such plan to include quantitative targets in key operational, technical and financial areas (para. 50). (b) Nde M to propose periodic tariff adjustments to the Government to permit it to achieve the financial targets stipulated in the Action Plan. The Government would authorize such adjustments unless they conflict with broader national or sectoral objectives (para. 61). (c) NdeM to periodically examine: (i) passenger train services, (ii) low density branch lines, (iii) less than carload traffic and (iv) mail services and request compensation from the Government for losses on (i), (ii) and (iv) as appropriate. The Government would make such compensations (para. 62). (d) NdeM not to incur any debt if the debt/equity ratio, based on revalued fixed assets, is more than 45/55 (para 63).   080D 3655Ri OAR -.---------------------1 -