Mexico - Low-income Housing Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4129-ME REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$150 MILLION TO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS, S.A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A LOW INCOME HOUSING PROJECT July 18, 1985 This docmet ha a reskicd diribUSem ad asy be med by reciplems only In the performance of ther alcida duls. Is cmik may ot soherwis be disosed without World Bank autrhoithm. Currency Unit - Peso (Mex$) On June 30, 1985, the exchange rate in the controlled market was US$1 = Mex$227.70; the freemarket exchange rate stood at US$1 = Mex$244.46. Both exchange rates are currently sliding at a rate of Mex$0.21 per day against the US dollar. Fiscal Year January 1 - December 31 ABBREVIATIONS BANOBRAS - National Bank for Public Works and Services BANXICO - Bank of Mexico CPI - National Consumer Price Index CPP - Index of Average Cost of Funds to Multipurpose Banks FONHAPO - Low Income Housing Fund FOVI-FOGA - Fund for Housing Operations and Bank Discounting FOVIMI/ISSFAM - Social Security Institute of the Mexican Armed Forces FOVISSSTE - Housing Fund for State Service Workers GIRA - General Agreement on Interest Rates INDECO - National Institute for Housing and Community Development INFONAVIT - Institute for the National Housing Fund for Workers MW - Minimum Wage NDP - National Development Plan for 1983-88 PNDV - 1983-88 National Housing Development Program PNV - 1978-82 National Housing Program PFV - Housing Finance Program SEDUE - Secretariat of Urban Development and Housing SHCP - Secretariat of Finance and Public Credit SPP - Secretariat of Programming and Budgeting FOR OFFICIAL USE ONLY MEXICO LOW INCOME HOUSING PROJECT LOAN AND PROJECT SUMMARY Borrower: Banco Nacional de Obras y Servicios Publicos, S.A. (BANOBRAS) Guarantor: United Mexican States Executing Fideicomiso Fondo Nacional de Habitaciones Populares (FONRAPO) Agency: Amount: US$150.0 million equivalent. Terms: 15 years, including 3 years of grace, at the standard variable interest rate. Relending Loan proceeds would be provided to FONHAPO by the Government Terms: as equity contributions. The proceeds would be relent by FONHAPO to states, municipalities, social and cooperative organizations and authorized banking institutions on terms and conditions which vary with the type of sub-borrower and the unit cost of sub-project facilities. Project (i) to increase the supply of public housing investment Objectives: provided to the poorest and largest segment of the housing market; (ii) to strengthen FONRAPO during a critical expansionary phase; and (iii) to support the Government in addressing sector issues. Project The project would finance sub-projects for the construction of Description: serviced sites and progressive construction units in rapidly growing medium size cities. FONHAPO would onlend funds to sub-borrowers who would implement sub-projects, participate in their financing, provide collateral guarantees and allocate constructed facilities to eligible beneficiaries (non wage workers earning less than 2.5 minimum wages) under appropriate mortgage arrangements. In addition, the project would provide technical assistance to FONHAPO required to support an increased lending program and to FONHAPO's sub-borrowers. Finally, the project would support the carrying out of a Housing Finance Study. The project would permit the settlement of about 142,300 families in serviced lots of which about 15,200 would include starter dwelling units. This document has a restricted distribution and may be used by recipients only in the performance o their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Project Risks: The main project risks are: (1) the possible reduction in FONHAPO's operational efficiency through its rapid growth; (2) the possible shortage of land sites of adequate quality, quantity and price; (3) possible discontinuity in the Government's housing sector policy; (4) eventual shortfalls or delays in beneficiaries repayments to sub-borrowers which would raise the level of implicit subsidy in the project. Estimated Cost: Local Foreign Total US$ million I. Land Purchases 23.3 - 23.3 II. Civil Works Infrastructure 78.2 38.4 116.6 Buildings 28.5 11.1 39.6 III. Other Costs Professional Services 13.5 0.7 14.2 Technical Assistance 0.5 - 0.5 Project Administration 6.0 0.3 6.3 PROJECT BASE COST 150.0 50.5 200.5 Physical Contingencies 15.0 5.0 20.0 Price Contingencies 60.0 19.5 79.5 TOTAL PROJECT COST 1/ 225.0 75.0 300.0 Financing Plan: Local Foreign Total US$ million Government 40.0 - 40.0 FONRAPO 75.0 - 75.0 Sub-borrowers 35.0 - 35.0 Bank 75.0 75.0 150.0 TOTAL 225.0 75.0 300.0 Estimated Disbursements: - USS millions Bank FY 86 87 88 89 90 91 92 Annual 31.1 17.2 19.4 21.7 23.8 22.0 14.8 Cumulative 31.1 48.3 67.7 89.4 113.2 135.2 150.0 1/ Net of taxes Economic Rate of Return: The economic rates of return are estimated at 20% for the sites and services component and 16% for the Progressive Construction component. Staff Appraisal Report: Report No. 5473a-ME, dated July 18, 1985. 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, S.A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A LOW INCOME HOUSING PROJECT 1. I submit the following report and recommendation on a proposed loan to Banco Nacional de Obras y Servicios Publicos, S.A. (BANOBRAS) with the guarantee of United Mexican States for the equivalent of US$150 million to . help finance a Low Income Housing Project to be carried out by the Fideicomiso Fondo Nacional de Habitaciones Populares (FONHAPO). The proposed loan would be repaid over 15 years, including 3 years of grace, at the standard variable interest rate. The Government would bear the foreign exchange risk. PART I - THE ECONOMY 2. An economic report on Mexico (Mexico: Recent Economic Developments and Prospects, No. 4996-ME) was distributed to the Executive Directors on May 14, 1984. The report's main conclusions and recent economic developments are summarized below. 3. Following an import-substitution growth strategy, Mexico experienced some two decades of high and stable growth after the early 1950s. By the late 1960s, however, Mexico had largely exhausted the "easy" and efficient possibilities for import substitution. Against the expectation of rapidly rising petroleum earnings, the Government attempted to foster growth through expansion of public sector expenditures and rising subsidies and protection of inefficient domestic production. Public sector expenditures as a percent of GDP more than doubled between 1970 and 1982, from 18.8% to 42.5% (Report No. 4996-NE, p. 114). By 1976, Mexico experienced a serious financial and economic crisis. Although the increase in oil revenues led Mexico to a quick economic recovery, it also removed the urgency of policy reforms. Primary . among these was the need to reduce protection and the anti-export bias of the trade regime to thereby move over time toward greater efficiency and international competitiveness. Oil revenues also temporarily helped finance the public sector deficit and reduced the need for greater fiscal restraint. Developments during 1977-1982 4. The stabilization measures initiated in 1977 and the discovery and exploitation of large oil resources in the mid-1970s allowed the Lopez Portillo Administration (January 1977-December 1982) to overcome the serious financial crisis of 1976 and to try to tackle more forcefully structural, social, and economic problems, including poverty, income and wealth inequality, unemployment, regional imbalances, and relatively slow -2- agricultural growth. In the early years of that Administration (1978-80), GDP growth was high (8.5% a year), 2.5 million jobs were created, domestic consumption recovered, and the share of investment and savings in GDP surpassed historical levels; but the economy became increasingly overheated. 5. Rapidly rising public expenditures unmatched by revenues led to increasing public deficits. While inflation rose, no significant pressure was felt to adjust the exchange rate, thanks to the oil earnings and the relative ease of obtaining foreign finance. By mid-1981, the economic situation began to mirror the scene prevailing before the 1976 financial crisis. The current account deficit of the balance of payments reached 5.2% of GDP, while the deteriorating international oil market conditions caused large revenue shortfalls with respect to budget expectations. The public sector deficit rose to just under 15% of GDP. Non-oil exports dropped, and the trade deficit reached record levels. External borrowing was used to finance part of the domestic fiscal deficit and to defend the exchange rate. Mexico's foreign debt increased rapidly, at a time of high and rising international interest rates. A stabilization program initiated by the Government in mid-1981 was not sufficient to redress the growing fiscal imbalance, the high cost of foreign loans, and the increasing private capital flight fueled by the public's anxiety over Mexico's financial troubles. 6. The crisis came to a head in 1982. In February, as capital flight intensified, the Bank of Mexico had to stop supporting the peso, which then experienced a 40% devaluation in US dollar terms. A large wage adjustment granted in March 1982, which tended to undo the effects of the devaluation, and continuing slack in the oil market kept the balance of payments under strain. Under the circumstances, the international banking community became reluctant to commit new funds to Mexico in the amounts required. These factors led to a second devaluation of 35% in August 1982, while the acute shortage of foreign exchange forced the Government to suspend the amortization payments of most of Mexico's external public debt, pending a broader agreement on its refinancing. Capital flight continued as private sector confidence was shaken by the nationalization of the banks in September 1982, and the mandatory conversion of US dollar deposits into pesos. Also put into effect were a generalized system of exchange controls and quantitative trade restrictions covering an unprecedented 100% of imports. Recent Developments 7. The Administration of President de la Madrid, that began its term in December 1982, lost no time in taking steps to recover domestic and external confidence, and stabilize the public sector and external finances. The Government's stabilization program, supported by an EFF agreement approved by the IMF in December 1982, laid the basis for restoring economic stability and for the renegotiation of that part of Mexico's public external debt on which amortization payments had been discontinued in August 1982. Commercial banks agreed to restructure some US$19 billion of public sector debt and provide US$5 billion in net new loans for 1983. All obligations falling due between August 23, 1982 and December 31, 1984 were restructured over an eight-year period starting from January 1983, with a grace period of four years and at an interest rate of 1-7/8 percentage points over LIBOR (or 1-3/4 over the New -3- York prime rate). The US$5 billion syndication had a 6-year maturity, with a 3-year grace period, at a spread of 2-1/4 over LIBOR (2-1/8 over prime). The restructuring exercise included an understanding that the international banks would maintain their exposure to the Mexican banks that had been nationalized. At the same time, it provided a mechanism that would eliminate 1982 private sector interest arrears and facilitate payment of the rescheduled principal on such debt. 8. A new two-tier exchange rate system was introduced, with a controlled market for imports, most proceeds from merchandise exports (except those of in-bond industries) and debt related transactions, and a free market for all other transactions including those relating to tourism. The controlled rate was originally set at MexS95 = US$1, a depreciation of some 35% in relation to the previously prevailing ordinary rate of Mex$70 per US dollar. The free market rate had remained at about Mex$150 per dollar until September 1983, when the authorities decided to let it slide as much as the controlled rate. Over the past two years, the peso has gradually appreciated in real terms as inflation in Mexico remained high (para. 11). The Government increased the rate of slide of the peso from 13 centavos a day to 17 centavos in December 1984, and to 21 centavos early March 1985, in order to bring it closer to the expected inflation differential between Mexico and its trading partners. Domestic deposit interest rates have also been raised since early March 1985 from an average of about 45% to nearly 54% by May. 9. Under the IMF Agreement, the Administration committed itself to a drastic reduction of the public sector deficit, from 18.0% of GDP in 1982 to 8.5% in 1983, 5.5% in 1984, and 3.5% in 1985. Substantial progress has been made during the past two years in meeting the program objectives, although the targets for 1984 were not fully met. The public finances were strengthened considerably and the public sector deficit was reduced to 8.7% of GDP in 1983 and an estimated 7.4% in 1984. The main reasons for the higher budget deficit than the 1984 target were the higher than =-pected interest payments on the domestic debt, lower than expected tax collections, and higher than expected transfers. Curbs on expenditures were wide ranging. The authorities have given priority to completing projects that were already far advanced and to those that were important for employment, equity, or foreign exchange earnings. Nonetheless, public investment expenditures are estimated to have declined to about 7% of GDP in 1983-84, well below the 1982 level of 11.7%. The fiscal performance was also aided by significant price increases for nearly all public goods and services, including petroleum products, electricity rates, food, etc. The Government has committed itself to a substantial reduction and eventual elimination of most subsidies, including those provided in the form of low interest rates. 10. The balance of payments experienced a major turnaround in 1983 with the current account moving from a deficit of almost US$5 billion in 1982 to a surplus of US$5.5 billion. The strength of the current account and the availability of external finance permitted Mexico to replenish its international reserves while paying the arrears accumulated in 1982. The net use of foreign financing by the public sector was US$4.2 billion for the year--below the ceiling of US$5 billion under the stabilization program. The -4- swing in the current account was mainly the result of a very sharp conttaction of merchandise imports, to US$7.7 billion, representing a decline of about US$7 billion from their 1982 level. The recession, the large devaluation of the peso, and the quantitative restrictions, all contributed to this. The balance of payments remained strong in 1984, with a current account surplus of US$4.0 billion; and a further US$3.4 billion were added to the nation's foreign exchange reserves, which at the year's end are estimated at about 7-1/2 months of imports. Although imports recovered considerably, a rapid rise in non-oil exports, particularly in the first quarter of 1984, ensured that the trade surplus remained at the same level as in 1983, i.e., about US$13 billion. Growth in tourism and in-bond industry was also strong, and helped in alleviating unemployment. 11. Fighting inflation remains the pivot of the Government's stabilization program. Although the Government's own inflationary targets have been missed by wide margins, the rate of inflation continued to decline through mid-1984. It declined from a rate of about 100% in 1982, to 80% and 59% in 1983 and 1984, respectively. The main factors in this were more restrained fiscal and monetary policies and moderate wage adjustments. The flow of savings into the banking system continued to rise through 1983-1984, reflecting the beneficial influence of interest rate policies. The impact of the severe and sudden cuts in public expenditure and imports on economic growth in 1983 was serious when GDP declined by over 5%. However, the economic recovery in 1984 was stronger than the Government's expectations: GDP is estimated to have risen by about 3.5%, compared to the earlier estimate of only 1%. 12. The Government also took steps to regain the confidence of both domestic and foreign private investors. These included efforts to deal with the problems of private external debt, procedures to compensate owners of nationalized banks, and a more flexible application of the foreign investment law. Private sector debts totalling approximately US$12 billion have been registered under a special Central Bank restructuring facility (FICORCA) at stretched out maturities varying between 6 and 12 years, with 3- to 4-year grece periods. Moreover, the Government undertook the restructuring of Mexican private sector obligations guaranteed by official credit agencies abroad. The Government has also transferred back to private ownership most of the 400 private firms that were controlled by the commercial banks prior to their nationalization. These measures and announcements have been beneficial, but more remains to be done to restore the confidence of Mexican entrepreneurs and foreign investors. The Government realizes that this is an issue of the greatest importance, as economic recovery beyond the current stabilization period will depend critically on the resumption of vigorous private investment. 13. The general improvement in the Mexican economy up to mid-1984 was widely noted, particularly by the international banking community. Mainly for this reason, the Government's 1984 borrowing of US$3.8 billion from commercial banks carried much more favorable terms than the borrowing in 1983 (10 year maturity, 5-3/4 year grace period, and a spread of 1-1/2% over LIBOR or 1-1/8% over prime). The negotiations'between the Government and foreign commercial banks on the rescheduling of foreign debt have been virtually - 5 - completed. The draft agreement, covering close to US$50 billion, has been submitted by the Banks' Advisory Group (consisting of the 13 largest lender.) to some 500 smaller regional banks for their acceptance. Under the proposed terms, the previously unrescheduled debt (amounting to about US$20 billion), which is due for repayment in 1985-90, will have its maturities stretched over 14 years. The maturities of the previously rescheduled debt coming due in 1987-90 will be stretched over 11 years. The 1983 syndicate loan of US$5 billion will be restructured, after prepayment of US$1 billion, to carry terms identical to the 1984 syndicate loan. In summary, the pending rescheduling agreement will stretch maturities of US$48 billion public debt in such a way that the debt service on these debts remains virtually constant between 1985-1998, in contrast to the present situation, where 75% of the debt service is due in 1986-89. The banks will have the choice of LIBOR, a domestic reference rate, or a fixed rate. These terms are based on the understanding that the Government will continue to adhere to prudent economic policies. The rescheduling agreement covering USS29 billion of Government debt was signed on March 29, 1985. This followed the approval on March 25 by the IMF of a third-year Extended Fund Facility. The balance of US$19 billion in loans to Mexican Government agencies is expected to be signed soon. Recenc Policy Measures 14. Mexico has experienced some deterioration in its economic performance since late 1984, with signs of domestic overheating of the economy and declining non-oil exports. In response, the Government has, during recent months, taken a series of corrective measures, and will have to take further measures during the remainder of 1985. In the last quarter of 1984, public sector expenditures rose in excess of the target of the EFF program. Consequently, the 1985 budget, which had been approved by Congress in late 1984, with a deficit of 5.1% of projected GDP, was cut in February and May 1985 to 4% of GDP, and a contingency expenditure reserve of 0.5% was dropped. In March 1985, the Government announced a program to reduce import licensing to cover 55-65% of total imports, as compared to 100% in 1983. As mentioned in para. 8, the exchange rate crawl was also twice adjusted, in December 1984, and again in March 1985, to stem the loss of competitiveness of Mexican exports. More recently, Mexican banks have been allowed to trade in the free foreign exchange market. Medium-Term Prospects 15. The Government's strategy, as outlined in the National Development Plan (NDP) for 1983-88, combines special efforts to recover from the present crisis with a longer-term perspective on regaining balanced and stable growth to overcome structural problems. The main problems facing Mexico in the years ahead include the still very high rate of population growth (2.6% estimated for 1983) together with an even higher rate of labor force growth (a little under 4%), slow growth in agriculture, widespread poverty, a highly skewed interpersonal and interregional income distribution, and an overly oil-dependent economy with a strong anti-export bias. 16. The medium-term strategy presented in the NDP focuses on the need for structural changes in the economy, including a greater export orientation -6- through revision of external trade policies, poverty alleviation through basic needs policies and-improvement in labor absorption, and decentralization of economic activity. The basic elements of policies to address structural problems are mentioned in the NDP, and further details on specific programs and schedules for policy adjustments are provided in the sectoral plans which were prepared subsequently. 17. Mexico's medium-term prospects for recovery and stable economic growth are reasonably good, provided economic management continues to be prudent, private sector confidence is restored, and the international environment remains favorable. Adequate domestic policies inclu4e inter alia continued efforts to reduce the fiscal deficit, liberalize trade, minimize price distortions, and maintain a competitive exchange rate. With regard to the latter, there is concern that the continuing higher than projected domestic inflation rate, and the slow progress of the Government's trade liberalization program, have hurt Mexico's non-oil export performance. Restoration of private sector confidence is crucial, since only a strong and dynamic private sector will be able to raise investment from the present depressed levels and to supply the increasing non-oil export surplus required for the resumption of growth. As regards the external environment, the commercial banks are expected to maintain their exposure in Mexico in real terms, and foreign markets to be open to Mexico's non-oil exports. If interest rates on world financial markets do not rise again, Mexico will benefit substantially, while she will lose export revenue if oil prices continue to decline. A one percentage point drop means a savings of about US$800 million in overall interest payments, which compares to a loss of US$550 million in gross export revenues that would result from a one dollar drop in the export price of oil. 18. Under reasonably favorable external and domestic conditions, Mexico's economic growth could reach a sustainable 6% a year--the post-WWII average for Mexico-towards the late 1980s. If a more outward-oriented growth pattern comprising fiscal discipline, improved domestic efficiency and export development fails to materialize, it would likely entail a prolonged period of slow growth, characterized by insufficient labor absorption in internationally competitive activities, domestic price distortions, and a continued need for subsidies. External Debt and Creditworthiness 19. Mexico's external public debt increased by about US$4 billion during 1983, and by about half as much in 1984. With an expected net new borrowing of some US$2 to US$4 billion a year, and assuming that the Government implements policy adjustments, as needed, particularly in the area of trade policy, the ratio of external debt to GDP should decline steadily from about 50% in 1984, to 30% by 1990. The debt service ratio, after the proposed rescheduling, is projected to remain at the 1984 level of 45% through 1988; thereafter, it gradually declines to about 25% in 1995. 20. At the end of 1983, the last year for which a comprehensive external debt report is available at this time, the Bank's share in- Mexico's debt was 4.3% (excluding undisbursed). The Bank's share in Mexico's total public -7- external debt service payments during that year was 4%. In view of the good mediu- and long-term potential of its economy and the prospect of continued pursuit of sound economic policies by the present Administration, Mexico is considered creditworthy for IBRD borrowing. PART II - BANK GROUP DPERATIONS IN MEXICO Bank Operations 21. As of March 31, 1985, Mexico had received 85 loans from the Bank, amounting to US$6,831.3 million, net of cancellations and terminations; of these, 58 loans totalling US$3,495.2 million were fully disbursed. The Bank held US$5,465.6 million, of which US$1,948.9 million had not yet been disbursed. Some 42% of Bank lending has been for agriculture and rural development, 23% for industry, 11% for power, and 13% for transportation; the remaining 11% has been for water supply, tourism, urban development, vocational training and pollution control projects. Annex II contains a summary statement of Bank loans as of March 31, 1985. 22. Of the US$6.83 billion total lending, about US$3.5 billion was for establishing or strengthening institutions for channelling credit to areas where credit supply was deficient or non-existent, and setting up in the commercial banking system the ability to carry out project-related appraisal of investments in agriculture, industry and tourism. These credit programs have facilitated lending to low-income farmers and small- and medium-scale industrial and tourism enterprises based on productive investment plans, rather than credit granted on the basis of collateral. 23. The Government arranged adequate budget financing in the years 1978 to 1981, which significantly improved project implementation. Government and Bank officials met periodically to review project implementation, and greater attention was focused in Mexico on project monitoring. As a result of these measures, most of the Bank-assisted projects were being implemented satisfactorily until mid-1982, and disbursements rose from US$91 million in FY78, to US$448 million in FY82. 1Rowever, the present financial crisis is again causing delays in the pro"ision of counterpart funds; consequently, disbursements in FY83 declined to US$389 million. A Special Action Program was established in early 1983 to help the Government by alleviating the counterpart funding constraints on development projects, and 18 Bank-financed projects are receiving support under the Program. Partly as a result of the SAP, disbursements during 1984 improved significantly at US$528.87 million or 35% over disbursements in 1983. IFC Operations 24. As of March 31, 1985, IFC had made investment commitments in 27 companies in Mexico, foi. a total of US$753.9 million, of which US$562.5 million had been sold, repaid or cancelled. A summary statement of IFC investments is presented in Annex II. IFC has been working together with the Bank in preparing proposals to establish a facility for provision of foreign -8- exchange financing to private sector companies, for the importation of machinery, equipment and spare parts required for production of exportable products, for efficient import substitution, and for improvements in the utilization of their existing productive capacity. IFC approved a US$100 million facility (including funds mobilized from foreign commercial banks) in 1983, which is providing finance for fixed investments of a larger size than those assisted under the Bank loan for an Export Development Project. Bank Strategy 25. Prior to the 1982 crisis, the Bank's major objectives in Mexico were to : (a) support policies and programs leading to a wider distribution of the benefits of economic growth; (b) help finance projects that, directly or indirectly, contributed significantly to output and employment; (c) help reduce Mexico's urban/regional imbalances; and (d) help free bottlenecks which prevent rapid growth. These continue to be important objectives of Bank assistance to Mexico. More recently, however, in response to Mexico's requirements following the 1982 economic crisis, the Bank, in close coopera- tion with the IMF, has attempted to broaden its support for the Government's stabilization and recovery program through assistance for effective export promotion and intensified and broadened economic and sector work. As for the future, the volume and composition of Bank lending to Mexico will be related to progress in the implementation of policy reforms needed for structural economic adjustments. Specific policy reforms that are being pursued through a dialogue with the Government, conducted in parallel with the processing of lending operations, cover priority macroeconomic and cross-sectoral issues, such as trade policy and export development, interest rate policy, public sector pricing and investment, and subsidy reduction. 26. Because of the difficult structural problems of agriculture and the sector's crucial importance for the one-third of the nation's population living in the rural areas, the Bank has made agriculture the leading sector for its lending. The Bank's agricultural lending program in Mexico has four goals: first, to help increase productivity of presently cultivated lands in general; second, to give emphasis to improving the productivity of small farmers; third, to complement infrastructure investments with support services, such as extension, marketing programs and credit; and fourth, to promote employment-generating investments in rural areas. The Bank has made 14 loans in FYs78-83 totalling US$1,829.4 million for irrigation, rural development and agricultural, agro-industrial and livestock credit programs. A US$175 million loan for a rural development project and a US$180 million loan for an irrigation rehabilitation project were approved by the Executive Directors in FY82, and a US$138.4 million loan for San Fernando rainfed agricultural development was approved in early FY83. A US$115 million loan for marketing perishables was approved by the Executive Directors in April 1983, and a $300 million Eighth Agricultural Credit Project in June 1984. A US$90 million loan for a Chiapas Agricultural Development Project, together with a Chiapas Rural Roads Project, was approved by the Executive Directors on April 30, 1985. An agricultural credit project is expected to be presented to the Board in late July 1985. Projects for tropical agriculture, irrigation rehabilitation, extension and research, seed multiplication, forestry, agroindustries, and agricultural credit are in various stages of preparation. -9- 27. Bank lending for industry has aimed at: (a) reduction of the balance of payments deficit; (b) decentralizing industrial activities away from the major, increasingly congested, urban areas; and (c) promoting greater employ- ment. A steel project, which the Bank helped structure and finance, is now operating in a previously underdeveloped area on the West coast of Mexico, and the city in which it is located, Lazaro Cardenas, is developing into a new growth pole. Four loans for industrial projects-to promote the develop- ment of small- and medium-scale industrial enterprises, to finance expansion of small- and medium scale mining, and to support an industrial equipment fund (FONEI)--were approved by the Executive Directors in FYs78-80. A US$90.0 million loan for a vocational training project, which is assisting a program to increase the supply of skilled workers and technicians, a US$152.3 million loan for the development of a capital goods industries project, and a US$60 million loan for pollution control were approved by the Executive Directors in FY82. A modification in the capital goods project was approved by the Executive Directors in early 1983, to set up a pilot export develop- ment fund to help satisfy the foreign exchange needs of Mexican exporters. A US350 million loan for an Export Development Project and a US$175 million loan for a Third Small- and Medium-Scale Industry Development Project were approved by the Executive Directors in FY83. A US$105 million Second Small- and Medium-Scale Mining Development Project was presented to the Executive Directors on May 21, 1985, and a Second Technical Training Project, on May 28, 1985. In response to the current needs of the industrial sector, several projects to support non-oil export development, acquisition of modern technologies, financial restructuring of enterprises and industrial recovery and growth are in various stages of identification and preparation. 28. Bank lending for physical infrastructure has been focused on regional development and strengthening of institutions and sector policies. In transport, two highway sector projects (FY7.9 and FY84), en industrial ports project (FY84) and a recently approved railways sector loan support rationalization of public investment outlays and pricing policies, and improvement of the finances of the implementing sector agencies. Additional projects to support these goals are under consideration. In urban infrastruc- ture, the First and Second Medium-Size Cities Water Supply and Sewerage Projects (FY76 and FY81) reinforce the planning, management and finance of specialized water supply and sewerage institutions at the federal and mnicipal levels, and contribute to the establishment of tariffs more closely related to costs; a third project was approved by the Executive Directors on May 17, 1983. Projects for solid waste disposal, small cities water supply, urban transport, and municipal strengthening, which are in various stages of preparation, would further support these objectives in respective subsectors, while assisting the Government in its decentralization efforts. 29. The Government has adopted a National Urban Develo?ment Plan that spells out its regional development priorities in operational terms. A project to assist in the development of the Lazaro Cardenas urban area was approved by the Executive Directors in FY78, and a second urban project for oil-producing southeastern Mexico was approved by the Executive Directors in - 10 - FY81. A loan for the preparation of a deconcentration program for the Mexico City Region was approved by the Executive Directors in August 1982. 30. The Economic Development Institute (EDI) is assisting CECADE ("Centro de Capacitacion de Desarrollo Economico" under the Secretariat of Programming and Budgeting) in training Government staff in project preparation, monitor- ing, and evaluation. EDI assistance is directed at courses on urban and regional development, agriculture, rural development and agro-industries. The Bank has also assisted the Mexican authorities in training personnel for managing water supply and industrial credit projects. 31. The Inter-American Development Bank (IDB) is the second largest source of multilateral aid to Mexico. The IDB has made loans to Mexico totalling US$3.4 billion as of March 31, 1985. Over 50% of the total has gone to agricultural and rural development projects, and the balance to transporta- tion, industry, water supply and sewerage, tourism infrastructure, education, municipal development, and pre-investment. The IDB and the Bank have coordinated their assistance on several projects. Each has made loans for the national integrated rural development program (PIDER), agricultural and livestock credit, small- and medium-scale industries development, and hotel development projects. The International Fund for Agricultural Development (IFAD) has approved a loan of US$22 million for a rural development project in the state of Oaxaca, which was appraised by the Bank's staff and for which the Bank is acting as cooperating institution for administering the loan. 32. Bank-supported power, steel, fertilizer, and tourism projects in Mexico have been cofinanced by several bilateral export credit agencies and commercial banks. In January 1982, Mexico borrowed US$500 million from commercial banks to provide complementary financing for Bank-assisted projects where project specific cofinancing would have been difficult. PART III - THE HOUSING SECTOR Main Features of Demand and Supply 33. Size and Characteristics of Housing Demand. Mexico's housing deficit is large. Official estimates put it at 4.5 million units in 1980. Government sources estimate that some 11 million additional housing units are needed through the year 2000 to satisfy new and replacement demand. Mexico's total housing stock was estimated at 12.2 million units in 1980. Without special action there is serious concern that the overall housing shortages, particularly at the low income end of the market, will grow. The housing problem is compounded by: (a) a high rate of population growth (2.6% p.a.); (b) a rapid pace of urbanization (during the last decade, centers with more than 2,500 inhabitants increased from 59% to 68% of total population); (c) the spatial polarization of a large share of demand (26.5% of Mexicans live in three main metropolitan areas); (d) the extreme dispersion of the rest (there are 95,000 centers with less than 2,500 inhabitants and 146 cities of - 11 - intermediate size); and (e) the uneven financial capacity of the consumers (72% of the economically active population earns less than 3 times the minimum wage, equivalent in present terms to US$425 per month). Rent control legislation is not a major problem in Mexico's housing sector. The last rent control decree dates back to 1948, before the expansion of major cities, and is limited to legislation governing "pockets" of downtown areas. 34. Unregulated (Informal) Housing Supply. Like other developing countries, Mexico has a segmented structure of housing supply. Most additions to the stock are not of up-to-code "standard". Although there has been improvement in recent years, during the past decade, as much as 65% of new housing was supplied either by consumers themselves or by informal builders operating at the margin of building codes and outside the regulated financial markets. 35. In the three main metropolitan areas (Mexico City, Guadalajara, Monterrey) as in many of the fast growing medium size cities, most of the new housing units are built by unlicensed developers on illegally occupied sites (generally public property) with inadequate public services and with little respect for planning ordinances and building codes. The lack of legal titles and inspection clearances prevents buyers from using land and improvements as acceptable collateral for new loans and forces them to continue to operate on the unregulated credit market. Because it is unregulated and operates with higher risk, loan conditions in this segment of the market are disadvantageous to the borrowers. The Government's strategy for reducing informal housing supply has centered upon increasing the regulated housing agencies' supply of basic facilities (serviced lots and progressive construction dwellings), Implemented under labor-intensive community efforts (paras. 39 and 41). 36. Regulated Housing Supply. The Government intervenes in the housing market through a large number of institutions, each with its own norms of operation and financial arrangements. These institutions can be grouped in three main categories. (1) Financial agents, mainly nationalized commercial banks, must apply a mandatory reserve on their total liabilities (currently 8.8%) in form of -social interest" housing loans, in addition to their normal commercial mortgage financing. These constitute the Programa Financiero de Vivienda (PFV), supported by a second-tier public agency (FOVI-FOGA) which finances and insures such loans and provides additional financing. Credits under the PFV are directed at individuals with incomes between 4 and 7.5 minimum wages. Although somewhat different in statute and operating under the supervision of the Secretariat of Urban Development and Ecology (SEDUE),,the Fondo Nacional de Habitaciones Populares (FONHAPO) can also be included in this category, since it operates as a wholesale lender and is empowered to borrow funds from the market. This category accounted for about 28% of regulated housing supply during the previous sexenio (1977-1982). FONHAPO's activities are cor-entrated on meeting the housing needs of individuals earning less than 2.5 minimum wages. (2) Three payroll funds, financed through a 5% compulsory payroll contribution on all wages and salaries paid by the private sector (INFONAVIT), the public sector (FOVISSSTE) and the military (FOVIlI-ISSFAM), offer financing to workers earning less than 5 minimum wages in their respective constituencies. They accounted for 63% of regulated housing supply in the previous sexenio. (3) Finally, there are a number of non-financial - 12 - public housing agencies, supported by Federal or State Treasury transfers which accounted for the remaining 9% of regulated supply. Some of these agencies are under the supervision of SEDUE, such as the State Housing Institutes or the Regional Development Funds, while others are autonomously managed as part of larger sector programs, such as the housing schemes for rural workers (PIDER), the employees of the petroleum industry (PEMEX) and the electricity corporation (CFE). The Federal District (DF) also has a housing scheme for its own employees. 37. Supply Distortions. Although improvements are being made, particularly through the FONHAPO program, there still are serious deficiencies with respect to efficiency and equity in the allocation of scarce resources for housing development. First, most of the programs remain beyond the reach of the poorest and neediest population. Second, a very low average rate of capital recovery (about 40% of real value during the period 1977-82) implies the need for very large implicit subsidies to consumers (estimated at .4% of GDP during the past sexenio). In 1984, total public subsidy for housing was estimated at about US$1.4 billion. Nearly half of this amount (47%) is attributable to the payroll funds, over one third (35%) to the PFV, and about 14% to the public agencies. FONHAPO accounted for only about 4% of the total housing subsidy while contributing 26% of the new housing units. Finally, the use of the payroll funds, financed through earmarked taxes, was characterized by inefficient and inequitable allocation criteria. Through support for the expansion of FONHAPO, the Bank would contribute to a gradual improvement in supply conditions at the lower end of the market and housing sector policies in general. 38. The 1982 Crisis and Beyond. The share of public investment in housing increased from 0.9% of GDP in 1978 to 1.2% of GDP in 1982. Public sponsored housing programs have been responsible for about 5% of gross capital formation and up to 12.5% of public capital formation during the last sexenio. In 1982 there was a sudden, severe drop in output in the Mexican construction industry and over half of the 1.9 million workers employed by the industry in 1981 were reportedly laid off. The present recession and the slower growth expected through the rest of the decade, as compared to the 1970s, heighten the importance of employment generation as a policy concern in the coming years. Because of its characteristics, the construction industry, and housing programs in particular, will have a central role in policies aimed at economic recovery with rapid employment growth. The Medium Term Housing Plan 1983-1988 39. Main Features. President de la Madrid's Administration has assigned high priority to resolving Mexico's housing shortages through i.a. a significant increase in the role of FONHAPO in meeting the housing needs of the poor. This priority is reflected in the Government's Medium Term Housing Plan for the 1983-1988 period (PNDV) which sets an ambitious construction target of 1.6 million new housing units during this period, doubling the supply of the regulated agencies with respect to the previous sexenio (para. 41). In order to achieve this objective, the Government has through the PNDV: (1) allocated additional resources to the housing sector (US$760 million in addition to the US$1,940 million of authorized budget); (2) assigned specific target rates of - 13 - growth for the various groups of regulated housing agencies (para. 40); and (3) modified the onlending terms for the PFV and the FONHAPO programs thereby improving capital recovery in "social interest" housing (para. 42). The rapid rate of growth assigned to the FONHAPO program (from 3% of regulated investment in 1983 to 14% in 1988) in the PNDV, reflects the Government's commitment towards increasing the availability of housing for the poor and rationalizing housing construction in the informal sector. 40. Proposed Role of Regulated Housing Agencies. The changing role of different housing agencies, with respect to their past and present activities, is presented in the following table: Table 1: Past and Future Role of Regulated Housing Supply Agencies Financial Agencies Non-Financial FONRAPI) BANKS BOTH FUNDS OTHER TOTAL (in 1980 US$ Investments (in percentages of total investment) billions) 1977-1982 ave. 3.4 24.3 27.7 63.3 9.0 100.0 10.7 1984 Program 4.8 44.9 49.7 40.3 10.0 100.0 2.7 1983-88 Plan 14.2 30.2 44.4 49.2 6.4 100.0 11.8 Shelter Units (in percentages of total No. of Units) Units 1977-1982 ave. 4.4 21.5 25.9 43.0 31.1 100.0 803,500 1984 Program 25.9 34.3 60.2 29.5 10.3 100.0 270,236 1983-88 Plan 42.4 22.7 65.1 30.7 4.2 100.0 1,624,800 41. FONHAPO Output Targets. By 1988, the PNDV expects the realization of 1.6 million units, through an 11% annual increase in real investments, combined with a reduction in unit construction cost of 45%. This implies a large shift in output towards least cost housing (sites and service and progressive construction unite), almost exclusively financed by FONBAPO. The annual production of this agency should therefore increase from 69,000 starts in 1984 to 200,000 by 1988. FONHAPO's medium-term (1985-88) and long-term (1985-92) investment programs amount to US$676 million and US$1.4 billion, respectively, in constant 1984 dollars. Approximately 85% of FONHAPO's investment program consists of credit for sites and services and progressive construction units. Because of the rapid growth assigned to the FONHAPO program, the agency would, as expected, require substantial provision of budgetary resources during the initial years of its investment program. However, FONHAPO would need to establish and achieve a predetermined rate of capital recovery so as to ensure the predictability of the volume of budgetary resources required to sustain the projected level of operations. Furthermore, FONHAPO would require limited institutional improvements and modifications, including greater decentraliza- tion of operations, in order to maintain the present level of efficiency during a period of rapid growth. 42. Capital Recovery. The housing finance system was developed in an environment of considerably lower inflation than the present level. With current average cost of funds to the banking system of the order of 50% p.a. -14- and high inflation in housing production costs (53%), the present onlending conditions of some regulated housing programs involve considerable decapitalization of the financial intermediaries. In early 1984, the Government modified the onlending terms of the PFV and FONHAPO. The revised onlending terms of both the PFV and FONHAPO tie repayments to a predetermined fixed proportion of the minimum wage. Repayments are increased as the minimum wage increases (in the case of PFV, by only 70% of increases in the minimum wage). Starting interest rates vary from 15% to 30% under the PFV and from 9% to 15% for FONHAPO. Under both programs, the interest rates applicable to unpaid principal are adjusted annually. Those of the PFV are incremented by a formula based on changes in the minimum wage until the interest rate approaches the average cost of funds to the banking system. FONHAPO's terms provide for an annual interest rate increment of 10% of the previous year's rate. Under both programs, repayment periods are flexible and dependent on the pace of minimum wage adjustments. The revised onlending terms have improved capital recovery under these programs. Under present assumptions of inflation capital recovery should approach 70% for the FONHAPO program and slightly higher for the PFV. However, they do not provide for either indexation of principal or variable real rates of interest, and capital recovery therefore, remains unpredictable and sensitive to the rate of inflation. The proposed project would address these latter problems through a covenant that would protect FONHAPO's capital recovery in the event inflation should rise above the current level (para. 70). 43. The modifications in onlending terms referred to in the previous paragraph do not apply to all regulated housing programs. For example, those of the payroll funds, which also provide for tying repayments to a fixed percentage of wages, continue to carry interest at a flat 4% p.a. over the entire repayment period (maximum 20 years). While large implicit subsidies are justified by the Government as a method of transferring income to low-income groups and in lieu of adjustments in salary scales, because of the low rates of capital recovery, the payroll funds are only capable of satisfying a small portion of their captive demand. The proposed project would address this problem through a comprehensive study of housing finance which would i.a. focus on the supply and demand implications of policies and practices in the housing sector (para. 45). Bank Strategy 44. The Government has officially stated its objective of improving the public management of subsidies generally. In the financial sector, this involves controlling and budgetting the subsidy element of preferential credit and making it explicit and transparent. For credit components under Bank-financed projects in sectors other than housing, the Government's commitment to the control and gradual reduction of subsidies was formalized in the General Agreement on Interest Rates (GIRA). Signed in August 1984, and effective since November 1984, the GIRA framework provides for the progressive adjustment of preferential interest rates in accordance with variations to a central reference rate. Housing credit was not included in the GIRA because of the conceptual difference in the adjustment mechanism applied to such credits, which instead provide for linkages between mortgage payments and the minimum wage. The Government felt that adjustment through linkages with the minimum - 15 - wage, such as provided under the FONHAPO program, was socially and politically more acceptable in the case of housing credit, since this formula offers a more direct expression of affordability and can be easily explained to and understood by the target population. 45. The proposed project would be the first in Mexico's housing sector. It would assist the Government in its efforts to increase the availability of low cost housing through the expansion of the FONHAPO program while at the same time strengthening FONHAPO's capital recovery. Bank participation would complement necessary initial budgetary allocations and require FONRAPO to meet specific standards of financial performance, thereby gradually increasing its own contribution towards new investment financing, and reducing the need for incremental fiscal transfers. The proposed project would provide technical assistance required as a result of the projected growth of FONHAPO's regional offices, necessary to accommodate their expanded investment program. At the same time, the project would support a longer term sector policy dialogue through the carrying out of a Housing Finance Study which would address system-wide issues such as replicability, cost recovery, measurement and budgetting of subsidies, the adequacy of the payroll retention system, and the impact of general housing policy on financial savings, employment and the budget. During negotiations, the Government agreed to carry out the Housing Finance Study and exchange views with the Bank, not later than December 31, 1986, on the conclusions and recommendations of the study (Section 3.02 of the draft Guarantee Agreement). Furthermore, the Government agreed to forward terms of reference for the study, including a schedule for the implementation of the various components, to the Bank for comment by December 31, 1985 and exchange views with the Bank regarding progress of the study by June 30, 1986. Future Bank loans in the housing sector would support gradual reform of sector wide issues as addressed and discussed in connection with the study. Experience with Past Lending 46. Bank involvement in the urban sector began with Loan 1554-ME approved in April 1978 (US$16.5 million, now fully disbursed) to help address a variety of urban and regional development issues in Lazaro Cardenas. Loan 1990-ME signed in December 1981 (US$164 million) addressed similar issues in the oil- producing areas of Tabasco, Veracruz and Chiapas. Both the above projects were aimed at providing infrastructure, community facilities and low-cost housing to complement expanding economic activity in growing peripheral regions.. Experience under Loan 1554-ME was satisfactory, although some administrat!ve problems arose in implementation. The loan was fully disbursed in 1983 and a project completion report is being prepared. The Government remains committed to the original objectives of Loan 1990-ME, but has requested revisions to the project's administrative arrangements in light of a new decentralized institutional organization for regional development. As a result of these changes, as well as reduced absorptive capacity in the project area, disbursements currently lag behind schedule. However, BANOBRAS has taken an active role in project promotion, supervision and monitoring and a possible modification which would achieve the original project objectives, in light of the present institutional and financial conditions is being reviewed. A third project, under implementation, Loan 2194-ME signed in August 1982 (US$9.2 million), supports the preparation of the pre-investment stage of a development - 16 - program for the Mexico City region. In addition, two completed and two ongoing water supply projects, as well as three completed tourism projects, contained urban infrastructure components. Experience under these projects has been satisfactory. PART IV - THE PROJECT 47. A Staff Appraisal Report (No. 5473a-ME dated July 18, 1985) is being distributed separately. The proposed project was appraised in August 1984. Annex III contains a timetable of key events in processing the project and a description of special conditions of the proposed loan. Negotiations for the proposed loan took place in Washington, D.C. on June 19 through 26, 1985. The Mexican delegation was headed by Mr. German Sandoval of BANOBRAS, and included representatives from SHCP and FONHAPO. Project Objectives and Description 48. The objectives of the proposed project would be to: (a) direct an increasing percentage of total public housing investment to the poorest and largest segment of the housing market; (b) support FONHAPO during a critical expansionary phase by promoting the application of new onlending terms while assuring specific standards of financial performance and by providing technical assistance for institutional strengthening; and (c) support the Government in addressing sector issues. The project objectives would be achieved through the implementation of subproject investment and institutional strengthening components described below, and through the carrying out of the Housing Finance Study, described in para. 45. Sub-Project Investments 49. The investment ccmponent would support sub-projects for infrastruc- ture works (earthworks, drainage, roads, sewerage, water and electricity networks) and starter dwelling units. To be eligible for financing under the loan sub-projects should (Annex to Schedule I of the draft Loan Agreement): a) be directed to families in which the head of household earns an income equal to or below two and one half times the minimum wage in the area in which the sub-project is located; b) consist of sites and services or progressive construction units. The two selected lines of credit account for 85% of FONHAPO's lending; c) exceed the equivalent of US$500,000 so as to reduce supervision and disbursement to a manageable number of sub-projects; d) yield a financial rate of return exceeding 9%; and e) be located in 59 priority cities identified in the Government's Urban Development Program (1983-88) on the basis of: - 17 - (i) relative size and growth rate; (ii) relative role in the national urban and productive systems; (iii) industrial develop- ment potential; (iv) local entrepreneurial and management capacity; (v) accessibility and area of influence; (vi) diversity and quality of available urban services; and (vii) role as regional administrative centers. Institutional Strengthening 50. The first part of the institutional strengthening component consists of technical assistance to FONHAPO required to support an increased lending program and coordination with regional offices. Specifically, this would include: 1) establishing a complete computerization program; 2) developing more comprehensive reporting on financial information; and 3) designing and promoting the use of payment collection models for FONHAPO's borrowers. This component would also support the development and implementation of a program of technical assistance and extension services to FONHAPO's borrowers for sub-project preparation, appraisal and implementation, beneficiary selection, allocation and transfer of facilities, collection of mortgage payments, monitoring and evaluation of sub-projects and sub-loan agreements. FONHAPO would prepare a technical assistance program based on an evaluation of sub-borrowers' requirements. This program would be forwarded to the Bank for its comments by December 31, 1985 and put into effect by March 31, 1986. (Section 5.07(a) of the draft Loan Agreement.) 51. FONRAPO would carry out a study of the medium-term financial viability of the institution and of alternative mechanisms to maintain adequate levels of capital recovery. The results of this study would be forwarded to the Bank for comments not later than December 31, 1985 and its recommendations would be adopted as a Four-Year Financial Program not later than December 31, 1986 (Section 5.07(b) of the draft Loan Agreement). The Borrower 52. The loan would be made to Banco Nacional de Obras y Servicios Publicos, S.A. (BANOBRAS), a public development Bank and a financial agent of the Government. The federal Government controls its policies and directs its borrowing and lending activities. BANOBRAS operates several trust funds each corresponding to a specific investment program. BANOBRAS also makes direct loans to states, municipalities and other public sector enterprises and is the borrower for a number of Bank loans in the urban, water supply and transport sectors. FONHAPO 53. FONHAPO is a public trust fund administered by BANOBRAS that finances non-conventional housing schemes for low-income, non-wage workers. From 1949 through 1980, FONHAPO existed as a division of BANOBRAS, which had the mandate to construct and promote low-cost housing. The statutory objectives of the trust fund established in 1981, grant it the authority to finance: 1) land reserves; 2) sites and services; 3) progressive construction dwellings; 4) home upgrading; 5) finished houses; and 6) production and distribution of building - 18 - materials to assist in self-help construction. Budgetary allocations are included within the budget of SEDUE, which has regulatory and supervisory responsibility for FONHAPO's activities. 54. Organization of FONHAPO. FONHAPO's policy is guided by a Board of Directors chaired by the Secretary of SEDUE and including representatives of SHCP, SPP, BANOBRAS and Banco de Mexico, as well as the Federal Controller, a Secretary and FONRAPO's General Director. Internally, FONHAPO has an effective organization comprised of seven Departments under the General Director: 1) Administration; 2) Finance; 3) Real Estate; 4) Legal; 5) Technical; 6) Plan- ning; and 7) Social Promotion. In addition, there are offices of Operational Coordination and of the Internal Controller. All departments are well staffed with qualified and experienced personnel. Nine regional offices have recently been established to assist FONHAPO's borrowers in the preparation, implementa- tion and supervision of subprojects. 55. Performance of FONHAPO. FONHAPO's records have been adequately maintained. Internal planning and financial projections are based upon marketing and implementation results of previous operations. Since its establishment as a trust fund, FONHAPO has expanded its operations to the 31 states with a total of over 250 subloans to-date. In 1984, FONRAPO invested US$107 million equivalent of which 25% in Sites and Services, 59% in Progressive Construction Dwellings and 16% in House Upgrading. The subloan disbursement period of a sample of completed sub-projects averaged less than one year. 56. FONHAPO's authorized budget for 1985 amounts to US$140 million equivalent of which US$107 million would represent government transfers and US$33 million would be internally generated resources. At current prices, this amount would enable FONHAPO to finance 98,000 housing starts and complete 69,000 units presently under construction. Sub-borrowers 57. FONHAPO channels its credits to sub-borrowers which act as the implementation agencies for the corresponding sub-projects and are responsible for the allocation of individual units to final beneficiaries. Sub-borrowers would be: i) federal public sector entities, when their schemes and budgets have been approved by the federal government; ii) 31 state and approximately 2400 municipal governments, decentralized agencies and parastatal or paramu- nicipal entities; iii) authorized banking institutions; iv) cooperative housing associations; and v) legally constituted groups implementing programs consis- tent with the norms of FONHAPO. In order to cover administrative costs, sub- borrowers apply a one point spread above the applicable FONHAPO interest rate on the mortgages executed with beneficiaries. This spread adequately covers administrative costs, in view of the technical assistance and extension services which would be provided by FONHAPO to sub-borrowers (para. 50). The Beneficiaries 58. Beneficiaries of FONHAPO's credits must: a) preferably, but not necessarily, be non-wage workers (generally workers in independent, service - 19 - occupations whose housing needs are not met by other programs); b) receive incomes (head of household.) no larger than 2.5 times the minimum wage (about US$355 per month in January 1985); c) purchase the home for residence; d) not own other real estate property. Although FONHAPO collects data on household income, only the income of the head of household is considered for purposes of defining eligibility, since it is more readily available and is generally adopted for normative purposes under other housing programs. In order to qualify for FONHAPO's credits, sub-borrowers must submit evidence that the selected beneficiaries satisfy the above criteria. Project Cost and Financing 59. The estimated total project cost, excluding taxes, but including physical and price contingencies, is US$300.0 million equivalent, with a foreign exchange cost of US$75.0 million. The appraisal of project cost has been based on the average unit prices during the first half of 1984 (US$890 for a serviced lot and US$3,700 for a 3-room unit in constant 1984 dollar equiva- lents). The project would support investments equivalent to US$267.0 million and another US$32.0 million of professional, administrative and technical assistance services. Physical contingencies are estimated at 10 percent of base cost. Price contingencies are estimated according to a seven year disbursement profile on US dollar based values in accordance with projections of international inflation of 5% in 1985, 7.5% in 1986, 8% in 1987-90 and 5% for 1991 onwards. 60. The proposed Bank loan of US$150.0 million equivalent would finance 50% of project cost or the estimated foreign exchange component plus 33% of local costs. The balance would be financed by the Government through additional equity contributions (13%), by FONHAPO through internally generated resources (25%), and by sub-borrowers (12%). BANOBRAS would enter into contractual arrangements satisfactory to the Bank with the Government providing for the transfer of loan funds to FONHAPO as equity contributions of the Government and repayment of the loan by the Government (condition of effectiveness, Sections 3.01 and 8.01(a) of the draft Loan Agreement). The Government would provide the required counterpart funds through FONHAPO's annual budgetary allocations (Section 2.02 of the draft Guarantee Agreement). Project Execution 61. FONHAPO would be responsible for project coordination and would channel funds to sub-borrowers who would execute sub-projects according to economical design standards. FONHAPO would, through regional offices, super- vise the physical progress and proper execution of works financed and provide technical assistance, as necessary, to sub-borrowers for the implementation of subprojects and the carrying out of their obligations under subloan agree- ments. BANOBRAS would ensure that FONHAPO's regional offices are properly operated and staffed (Section 5.09 of the draft Loan Agreement). 62. Subproject Appraisal. Once viable sub-projects have been identified through the promotional efforts of FONHAPO's Department of Social Promotion, the prospective sub-borrower, with FONHAPO assistance, prepares technical, financial, legal and social sub-project documents. After the engineering draw- - 20 - ings, cost estimates and subloan documents are finalized, the sub-project, which is formalized through a subloan agreement (para. 68), is submitted for approval by FONHAPO's Loan Committee. Sub-projects under the proposed project would be selected on the basis of FONHAPO's general appraisal criteria in addition to the criteria described in para. 49. 63. Reporting Requirements. FONHAPO's procedures for supervision of subprojects are sound. Not later than December 31, 1985, BANOBRAS would submit a formal Monitoring and Evaluation Program to monitor the economic, financial, and social impact of FONHAPO's sub-projects. This program would be adopted not later than March 31, 1986. The preliminary results and values of agreed monitoring indicators would be forwarded to the Bank beginning March 31, 1986 and annually thereafter. FONHAPO would, by December 31 of each year forward to the Bank for review and comment, its proposed investment program for the following fiscal year as well as the final evaluation of activities during the previous fiscal year (Section 5.06 of the draft Loan Agreement). Furthermore, FONHAPO would forward to the Bank quarterly reports on project progress and expenditures according to an agreed format. 64. Implementation Schedule. The implementation period of FONHAPO's sub-projects average nine months for serviced sites and twelve months for progressive construction units. Loan funds would be committed by December 31, 1990. After allowing for the completion of final sub-projects, the project would be completed by June 30, 1992 and the closing date would be December 31, 1992. Procurement and Disbursement 65. Mexico's construction industry is highly developed and capable of executing works at costs competitive with international bidders and none of the individual contracts would be large enough to attract foreign bidders. There- fore, most construction contracts would be awarded through local competitive bidding procedures (LCB) acceptable to the Bank. Works not exceeding in the aggregate US$50.0 million would be executed on the basis of force account procedures. This large amount of force account is in line with FONHAPO's actual experience with the execution of sub-projects which consist of geographically dispersed and labor-intensive works, many of which are executed by municipalities and cooperative associations who use force account as the most economic and efficient means of carrying out sub-projects. Individual contracts exceeding US$1.5 million equivalent would be subject to prior review by the Bank. Other contracts would be reviewed ex-post (Schedule 6 to draft Loan Agreement). 66. To facilitate administration of the Bank loan, disbursemerts would only be made against civil works expenditures under approved subloans at the rate of 65 percent of such expenditures (Section 2.02(a) of the draft Loan Agreement). Up to US$8.5 million of loan proceeds would be made available as retroactive financing for expenditures incurred after January 1, 1985 (Section 2.02(a) of the draft Loan Agreement). Disbursements in respect of - 21 - expenditures under contracts not exceeding US$650,000 would be made against statements of expenditures adequately identifying the relevant sub-project and cc=tract. All other disbursements would be fully documented. To accelerate disbursements. BANOBRAS would establish and maintain under its control, a Special Account, with an initial deposit of US$8.5 million, which would be operated in accordance with terms and conditions satisfactory to the Bank (Section 2.02(b) and Schedule 3 of the draft Loan Agreement). BANOBRAS would disburse from the Special Account against requests submitted by FONHAPO and would subsequently forward withdrawal applications to the Bank for replenishment of the Special Account. Accounts and Auditing 67. FONHAPO's accounts have been adequately maintained and have been regularly auditied by a firm of independent auditors acceptable to the Bank. FONHAPO would maintain separate project accounts to reflect the operations, resources and expenditures of the project. The independent auditor's reports of FONHAPO's accounts would be submitted to the Bank no later than six months after the end of each fiscal year (Section 6.01 of the draft Loan Agreement). The Special Account would be audited by BANOBRAS' independent auditors and their report would be submitted not later than six months after the end of each fiscal year (Section 4.01 of the draft Loan Agreement). Onlending Terms and Procedures 68. The subloan agreements would follow a standardized format in accordance with FONHAPO's Politicas de Adrinistracion Crediticia y Financiera and Reglas de Operacion (Statement of Policy). The conclusion of satisfactory subloan agreements between FONHAPO and each sub-borrower would be a condition of disbursement for the respective sub-project (Section 2.02(a) of the draft Loan Agreement). 69. FONRAPO's onlending terms are established in their Statement of Policy (para. 68). FONHAPO would adopt the Statement of Policy (condition of effectiveness, Section 8.01(b) of the draft Loan Agreement), follow established onlending terms and procedures and make no changes to the Statement of Policy which would materially and adversely affect the carrying out of the Project or the financial position of FONHAPO (Sections 5.02 and 7.01(a) of the draft Loan Agreement). The unit costs of eligible sub-project facilities (total sub-project cost divided by number of units) are established as a multiple of the minimum wage. The percentage of sub-project cost financed by FONHAPO varies from 75% to 95% and is a function of the unit cost and of the sub-borrower. The downpayment would be on average 10% of the subloan amount. Starting interest rates are 9% for sites and services and 1iz for progressive construction unit sub-projects and are adjusted annually by a factor of 1.1. Monthly payments of principal and interest are fixed as stated percentages of the minimum wage, and range from 11% to 45% of the minimum wage for project-related subloans, depending on the sub-project unit cost categories. Under this formula, principal amortization is calculated as a residual of total monthly payments minus interest payments. The subloan is repaid when the sum total of monthly amortization payments thus calculated equals the original subloan amoant. The amortization period is therefore flexible and dependent on - 22 - inflation (to the extent that minimum wage adjustments follow inflation). Although the maximum repayment period is 20 years, at present levels of infla- tion, subloans are generally repaid within four to seven years. Capital Recovery and Financial Performance of FONHAPO 70. Under assumptions of inflation declining by 30% each year from about 60% in 1984 to 9% by 1990, estimates of capital recovery to FONHAPO are in the order of 70% in real terms for subloans to be made by FONHAPO in 1985. If these inflation projections materialize, capital recovery would reach 100% under subloans made by FONHAPO in 1989 and thereafter. By March 31 of each year, FONHAPO would forward to the Bank, a calculation of expected levels of capital recovery under typical sites and services and progressive construction subloans granted in their previous fiscal year. FONHAPO agreed, during negotiations, upon methodology and assumptions to be applied in the yearly calculation of expected capital recovery. Throughout project implementation, FONHAPO would be required to achieve at least the level of expected capital recovery estimated for subloans granted in 1985 (estimated at 50% in accordance with agreed methodology and assumptions). If in any year, the result of the calculation of the expected level of capital recovery falls below this level, the Guarantor would enable FONHAPO to, and FONHAPO would, take appropriate measures to achieve at least this minimum rate with regard to all subloans to be made after December 31 of the year in which the calculation is made (Section 6.02 and Part A of Schedule 7 of the draft Loan Agreement and Section 3.01(a) of the draft Guarantee Agreemenz). This would occur in the event that inflation should rise above the level projected for 1985. Further, the Government would monitor FONHAPO's economic cost recovery on the basis of a formula incorporating a measure of the opportunity cost of equity capital and dficuss the results of this exercise, as well as the calculated level of capital recovery, during annual reviews of the FONHAPO program (Section 6.03 and Part B of Schedule 7 of the draft Loan Agreement and Section 3.01(b) of the draft Guarantee Agreement). Economic Justification 71. The project would permit the settlement of about 142,300 families in serviced lots of which about 15,200 would include starter dwelling units. Beneficiaries under the project would be non-wage workers earning less than 2.5 times the minimum wage. According to the 1980 Census, 72% of the economically active population earn incomes below 3 times the minimum wage and 57% earn income below 1.6 times the minimum wage. It is estimated that an average sub-project of 500 units would generate 216 temporary jobs over a period of 8 months. 72. The economic rates of return for a sample of sub-projects already implemented by FONRAPO have been calculated using the flow of rental value as a proxy for economic benefits. Economic rates of return were estimated both using sales prices paid for equivalent units after moving into project sites, and also, using rental values derived from current levels of rent paid by the target population before moving into subproject sites. Economic rates of return range from 16% to 26%. - 23 - Risks 73. The main project risks are: (1) the possible reduction in FONHAPO's operational efficiency through rapid growth; (2) the availability of land sites of adequate quality, quantity and price; (3) possible discontinuity in the Government's housing sector policy; (4) shortfalls in beneficiaries repayments to sub-borrowers which would raise the level of implicit subsidy in the project. 74. The risk related to FONHAPO's limited growth capacity would be reduced by the provision of technical assistance, by concentrating the agency's efforts on fewer large subprojects and through financial covenants. Problems of land availability should be alleviated by FONHAPO's program for financing land acquisition and by SEDUE's special powers for advance purchase of land reserves and priority utilization of public property. Discoutinuity in the Government's housing sector policy relates to three possibilities. First, the Government could find it difficult to sustain fiscal allocations to FONHAPO. This would not affect the project since Government financing represents only a portion of the planned 1985-88 investment program. Second, the Government could seek alternative sources of funding for FONHAPO which could imply modification to FONHAPO's rules of operations. Assurances were provided that FONHAPO's Statement of Policy would not be altered in a manner that would materially or adversely affect the carrying out of the project or the financial situation of FONHAPO (para. 69). The Government could conceivably establish new competitive housing credit schemes under softer terms than those offered by FONHAPO. However, this is unlikely in view of the high level of commitment the Government has accorded to the FONHAPO program. Finally, the risk of shortfalls in beneficiaries' repayments to sub-borrowers would be mitigated by closer monitoring and supervision procedures and technical assistance provided by FONHAPO to the sub-borrowers. PART V - LEGAL INSTRUMENTS AND AUTHORITY 75. The draft Loan Agreement between the Bank and Banco Nacional de Obras y Servicios Publicos, S.A., 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 under separate cover. 76. Special conditions of effectiveness and other covenants of the project are listed in Section III of Annex III. 77. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. - 24 - PART VI - RECOMMENDATION 78. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments July 18, 1984 � -Z3- � A�I т а в�� Р� �о! S иевт аевt •�se a:ai.тs) � �ае иwвt :.оав )авгs 1�ai! t��aLt атагв�L! ыт. �ввкга а мв вавовt , ' ввв пвwвв в�. an :�, 1втв. � 1о2:. в 1оп. s ._ . . вавтогаnw, и�.: +».в �n.s . . ав ws аrета ри� ж.о тю.о :rn.o пао.• ц.s.3 ' sвео оrrдв wa nвroв (s:waгnu а on. оQакгивве) s».о »�.о 1ж.о � пs.! 11и.а � ваwlвтsв бв вstп в:боепдеs • гргПи►ттlуlаа-sвба (ifooiввq 770».0 3117М0 7]L2i.0 ' 1tM11 !'OM11JSi0в (= OI тоlAL) 30.� 3�.0 {{.0 К.3 Чд . 7ог01wтi0в l�1вСllОаб г0l11i�ri0в iM !t� 1000 (NiW 10l.• . . srAiLOПвR г0г01атi011 сМiц.) 19в.3 . . !0!U(iTiOв Ф11LвlО1 1.9 . . !'0г04п01f OL1iTK • . па р. а. и.в ц.f 3в.1 3s.t п.9 гвl !р. Ы. AOII. LAMO ]7.7 l2.в 72.� 92.а • lSв.9 гоепипов �с sквиетав с:3 . о-1а тва вs.б и.3 вв.s ».9 31.в 1s_бв tiи 31.а 3о.о цs ц.о е1.1 бS А1Ф MOVi ].4 ].! 3.♦ a.i 7.l мгиитlм аопв мп (к) ima. ].о ].: ].о 2.i 1.6 w�ввr s.в а.7 ь.г 3.в ].� C100L вLвтМ 1ит[ (г[l I110Uf) •s.в и.• з3.9 31.3 23.6 GОПС OLI12N мтt (гбв 21qU!) 12.2 9.7 7.l ' в.1 в.s fioSS вLM00UCSI0M мП ].3 ].2 2.2 2.0 1.6 гАмцх гwмквс - _ AOCLFlDIS, АМIФЬL (rNDOS) .. 25.1 l1вS.0, �е . У5[В (2 OF Мв�lц0 110oZ1I) .. .. ]!.О !� а0.] .. • /ООв � в�IПОв ' - I110ц 0/ г000 lIOD. RR WIiA - (19бl-т1�100) 97.0 • 100.0 106.0 11а.] 1И.3 f!R GfIiA SOlfLr Ог глиацis (к ог в�sгвоисмкs) ит.о цг.о 121.о иав сгв_в гбоке2еs caw�a rп ах) в9.о бв.0 7а.о � ьтs ss.7 а жsси Aиnw. Aim гnьss 29.0 . 2т.о :в.а L ц.1 х.3 аiкг.о (Aгzs 1-у имтr мп 1а.3 в.s в.а s.t s.2 � atiu.a Lir! гУгСС7. Ат в1lIN (У[Ац) 57.0 61.] 65.• bв.7 67.• t:arw..r моат. мп (гсв тноов) 91.t 7s.s sz.s w.6 sa.x лП�s 1и sArc wп[ (zron . тОТАС 22.3 i9.0 /в lв.0 /в 63.а .. Св�А11 .. бв.3 !в Ы.в %в �в.1 .. - аивм. .. 21.о Т. s1.o Т ьб.2 .. AOCESS т0 �""`�*� DI5гO5AL (S Ог lOгOLtTIuN) rOrAL .. 77.0 /в ]6.0 /в ц.9 " иаиМ .. бо.о Т. so.1 Т. ы.а .. � аиш. .. �..оТ. 13.ОТ. и.s •- юпплтlоr тЕг rитsпкаи 1ею.о 131о.0 .. 1п7.т 1oes.a гог. па xn:sк:�c пasor збs0.о 1»о.о .. e1s.s �и.А гог. ти tasetru. �кс - тиии. ио.о 97о.о .. ]вт.2 пв.] иаиr sто.о п и�0.о .. a11.s 201.s ROW. .. 1]тП.0 .. 267б.3 -• ' AO11IцI0N5 PLl tlDSK?AL ц0 .. .. .. 27.] 20.0 � . . - АУЕIIАСЕ SIZL Ог MOO5d10LD тОтц. s.a s.t .. .. .. ORмN - 3.7 S-t .. .. .. RaRAL 3.2 3.i .. .. .. AVLмCL в0. О! !l1301р/вD01! - tOSAC 2.9 2.S .. .. .. ОRвwв 2.6 2.2 .. .. .. so�u. s.• э.: .. .. .. _ Аошs то �г.о�т. (s Ов aRкures) = т'ОгЧ. .. 3в.f .. • .. • .. ` _ Iц1У .. W.7 .. .. .. i0вА6 .• 2Тв " .. .. 26 ANNEX I Tå% i L& M Page 2 of 5 90~ =Walm mU amr~ Omre ÅTZL4CU) la MOT ~ ~T rnom> ýL 2% NGOL9 Z~ NIWL9 D~ 196QL imå zu ulb La. Atom= & cm Utom STOD LU0JAKET TOM 80.0 104.0 121.0 103.4 101. L NAU 82.0 11».0 122.0 106.3 103.3 rem= 77.0 102.0 12940 104.5 96.7 39CUMRyg TOM 11.0 11.0 31.0 43.1 39.1 14.0 16.0 34.0 42.3 5GA 5.0 17.0 49.0 44.3 30.6 VQCA=UL (Z W SECDOURT) 23.6 16.7 11.6 33.6 21.6 POPIL-TEACKER RATIO Pan~ 44.0 46.0 37.0 30.1 23.1 atom~ L3.0 14.0 14.0 16.4 10.5 AMT LITUACT RåTE 65.4 74.2 82.7 79.3 73.6 9 DM Påsm= CANS/MUSAND PÖP 12.9 24.1 61.3 46.0 34.7 Raja RECZ1VERSITUUmn POP 89.0 273.7 293.4 225-6 164.9 TV UCWKRS/TMUSKOD POP 17.5 38.5 108.1 107.2 123.8 muspärER, CDAM% GeNERAL Innur) CIUMATIOK PER 1659~ p~ Tu 73.3 64.3 t 63.3 96.3 C13m Amm ATTENDANCZ/CAPITA 9.8 4.9 4.4 C- 2.8 2.9 TOTAL LAWIL FONCE C%lwus> 11191.0 14722-0 21398-0 FELUZ (PERCENT) L5-2 0.4 20.0 23.2 34.3 Ac~ TUl£ (PERCEOT) 55.1 45.2 35.6 31.5 40.7 ZmUSTRY (PERCENT) L9.5 22.9 25.8 23.9 23.3 PARTICIPATw¥ Lag VERJ=) rom 30.2 26.8 29.3 32.2 42.9 Lux 51.1 47.4 46.7 49.3 54.7 FEKAU 9.2 10.1 11.7 154 31.0 E~ = qzpc~ RATIG 1.6 1.7 1.6 1.4 0.9 PLURIer= PERCENT 07 PRIVATZ 1~ RECErm ny jac~ 5% ar KomfflLDS RIGRUT 20X 07 MUSENULDS 605 57:7* Id LOWESr = ar MUSENOLDS 3.4 W 3.3 m 77 LomT 4= or BDUSz~ 9.8 9.9 9.9 rov~ TARCU GRUEFS £5%j~ AOSM6TZ P~TT %»Cm£ LEVEL (M PER, CAPITA) om 288.2 RWAL 184.0 ZSmum RELATM PMuT n~ LEVEL 059 PER CAPITA) LWAN 471.0 le 522.8 RUM 471.o 7é 372.4 ESTD~ rop. scum A850= POVERTT 1~ LEVEL NOT AvAll~ wT APPLICULE M 0 T Z 5 n* Z~p averages for cach indicator are po~clan~ed arlehmelc =««. 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RM iLOM Sy1' 1У1' 1Э1УlY71h-1 6i1i11i11Y М1 Э1УN1.1 1Ч1- и1к- иц� :[fF Ми' !цL МС[ �LSf и1 7YU�J BW иа и!г ак1 иег гя аг- к1. -- -- +ии бп гиог ии тмг гги га! ии аа ем� nc YuoYьw�r 11►1i 01ц tCi /L1i1 ОцУI СКt1 иН ц11 1р1 61N111ЭiYN1U и10 w1 гт !1п nu t1a гesr 1х 1и 1эУ'wYO� wu rrг омг•а1 �1�и � Уи Ук 1к ьа ьа ип к=1 ю1 яг 1Уlцимг 1иУ1У эlwиw . нт е[� [ж Укс ьб»- ма1- ац- гау- гк1- э�ммw lwыar твУУго 1Rl1- lцll- qta 1!р- �ци- Лli� цк- LIOt- Nt- 6UYlLLW 11l101Nu wu- 1це1- nrol- аа0- 1а1- Мги- wr и►1- иь- >�1t wr�r! 1эt1 ии �01 а1п вlьl tцс �w- !аo- спк- nи э�мпw а�1 .� tt1a ии1 ост 1иlг кигг к»к Увп пи ик ив �и0пАУи wwц � L1f� гlик сгiУС аГ1L MlIL кУК У�цi ti[f 1n! 1цМ 6Y161n711' иУ0т иацw 1М лlrм 1rw1м ' 1Ч1 iM1 М 1Mt W1 р11 1611 1М1 ц!I 0�11 ' 610117�МУ1 ��� 7MY71r с�0 е�и гимr uoYna и Уемт wa 1!тУ n 1а rY nYYiuвY �УУшо Чиииw в аУrм �6i� . 30 ANNEX II Page 1 of 2 THE STATUS OF BANK GROUP OPERATIONS IN MEXICO A. Statement of Bank Loans (as of March 31, 1985) Loan Amount less Undis- No. Year Borrover Purpose Cancellations bursed 58 loans fully disbursed 3,495.2 1553-5 1978 NAFINSA Agriculture 56.0 0.5 1643-5 1979 NAFINSA Small-scale Agri. 60.0 3.3 1706-5 1979 NAFINSA Irrigation 92.0 46.7 1712-5 1980 NAFINSA Industry 175.0 31.8 1820-5 1980 NAFINSA Small and Medium Scale Mining 40.0 18.9 1858-5 1980 NAFINSA Irrigation 160.0 147.9 1881-5 1981 N&FINSA Small and Medium Scale Industry 100.0 1.5 1908 1981 NAFINSA Irrigation 23.0 4.6 1913 1981 BANOBRAS Water Supply 125.0 72.7 1929 1981 BANOBRAS Railways 150.0 48.3 1945 1981 NAFINSA Raiufed Agriculture 264.6 104.3 1964 1981 BANPESCA Port Development 10.0 6.5 1990 1981 BANOBRAS Urban Development 11 164.0 119.6 2042 1982 NAFINSA Technical Training 90.0 6.2 2043 1982 NAFINSA Integrated Rural Development 175.0 111.9 2100 1982 NAFINSA Irrigation. Rehab Il 65.0 61.7 2142 1982 NAFINSA Capital Goods Industry 152.3 117.4 2154 1982 NAFINSA Pollution Control 60.0 49.4 2191 1983 NAFINSA San Fernando Agri. 48.4 41.8 2194 19-0613 BANGBRAS Urban Engineering 9.2 6.3 2262 1983 NAFINSA Agri. Marketing 115.0 92.8 2281 1983 BANOBRAS Third Water Supply 100.3 88.0 2325 1983 NAFINSA Third Small Medium Industry 175.0 134.2 2331 1983 BANCOMEXT Export Development 350.0 294.5 2428 1984 BANOBRAS Highways 200.0 164.4 2450 1984 BANPESCA Ports 76.3 76.1 2454 1984 NAFINSA Agricultural. Credit 300.0 97.6 TOTAL 6,831.3 Of which has been repaid to the Bank 1,365.7 Total now outstanding 5,465.6 Amount sold 92.3 of which has been repaid' 92.3 0.0 Total now held by Bank 2/ 5,465.6 Total undisbursed 1,948.9 1/ The status of the projects listed in Part A is described in a separate report on all Bank/IDA financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30, and October 31. 2/ Prior to exchange adjustments. - 31 - ANNEX II Page 2 of 2 B. Statement of IFC Investments (as of March 31, 1985) 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 - 6.5 1961 Acero Solar, S.A. /1 Twist Drills 0.3 - 0.3 1962/65/ Compania Fundidora Fierro 66/68 y Acero de Monterrey, S.A. Steel 2.3 21.4 23.7 1963 Tubox tAcero 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./1 Textiles 12.0 - 12.0 1972 Promotora de Papel Periodico, S.A. de C.V. /1 Pulp and Paper /2 /2 /2 1973/79 Cemento Veracruz, S.A. Cement 15.9 - 15.9 1974/81 Cancun Aristos Hotel Tourism 1.0 0.3 1.3 1975/78 Hexinox, S.A. Steel 12.0 3.2 15.2 1978/81 /84 Papeles Ponderosa, S.A. Pulp and Paper 10.7 5.0 15.7 1978 Tereftalatos Mexicanos, S.A. Petrochemicals 19.0 - 19.0 1979/84 Cementos Tolteca, S.A. /3 Cement 168.0 7.9 175.9 1979/81 Hotel Camino Real Ixtapa,S.A. Tourism - 3.1 3.1 1979 Conductores Monterrey, S.A./3 Electrical Wire and Cable 18.0 - 18.0 1980 Industries Resistol, S.A. /3 Particleboard 25.0 - 25.0 1980 Vidrio Plano de Mexico S.A. /3 Flat Glass 114.9 - 114.9 1980 Minera Real de Angeles, S.A. de C.V. /3 Mining 110.0 - 110.0 1981 Celulosicos Centauro, S.A./3 Pulp and Paper 59.5 - 59.5 1981 Corporacion Agroindustrial, S.A. /3 Agri-Business 11.3 3.0 14.3 i984 Metalsa, §.A. Motor Vehicles and Accessories 3.0 1.4 4.4 1984 Capital Goods Facility Industrial Equipment 100.0 - 100.0 1985 Preteison Cotton Seed Flour 2.0 0.8 2.8 1985 Primex /3 16.4 - 16.4 Total Gross Commitments 705.7 48.2 753.9 Less Cancellations, Terminations, Repayment, and Sales 540.4 22.1 562.5 Total Commitments Now Held by IFC 164.2 26.1 190.3 Total Undisbursed (including participants) 150.9 6.5 157.4 /1 Investments which have been fully cancelled, terminated, written off, sold, redeemed or repaid. /2 US$25,000. /3 Gross commitment including amounts sold to participants. - 32 - ANNEX III Page 1 of 2 MEXICO LINE OF CREDIT FOR LOW INCOME HOUSING PROJECT SUPPLEMENTARY PROJECT DATA SHEET I. Timetable of Key Events (a) Time taken by the country to prepare project: 8 months (b) Project prepared by: FONHAPO (c) First Bank mission to review project: March 1984 (d) Departure of appraisal mission: August 1984 (e) Negotiations completed: June 26, 1985 (f) Planned date of effectiveness: December 1985 II. Special Bank Implementation Action None III. Special Conditions (a) The Government would carry out a Housing Policy Study, and discuss the study's conclusions and recommendations not later than December 31, 1986 (para. 45). (b) FONHAPO would prepare and forward to the Bank, for comment, not later than December 31, 1985 a teclnical assisLanc= program based on an evaluation of sub-borrowers' requirements and carry out such program not later than March 31, 1986 (para. 50). (c) Not later than December 31, 1985, FONHAPO would forward to the Bank for its comments a program to monitor the economic, financial and social impact of sub-projects. This program would be adopted not later than March 31, 1986. The preliminary results and values of agreed monitoring indicators would be forwarded to the Bank beginning March 31, 1986 and annually thereafter. FONRAPO would, by December 31 of each year, forward to the Bank for review and comment, the proposed investment program for the following fiscal year as well as the final evaluation of activities during the previous fiscal year (para. 63). (d) FONHAPO would, by December 31, 1985, furnish to the Bank for its comments the results of a study of FONHAPO's medium term financial viability. The recommendations of the study, would be adopted not later than December 31, 1986 (para. 51). -33- ANNEX III Page 2 of 2 (e) FONHAPO would adopt the Statement of Policy (condition of effectiveness) (para. 69). (f) BANOBRAS would enter into contractual arrangements with the Government providing for the transfer of loan funds to FONHAPO as equity contributions of the Government and repayment of the loan by the Government (condition of effectiveness) (para. 60). (g) FONRAPO would calculate expected capital recovery on a yearly basis for typical sites and services and progressive construction subloans and would forward results to the Bank by March 31 of each year. If in any year capital recovery, calculated in accordance with agreed assumptions, falls below 50%, FONHAPO would take appropriate measures to increase capital recovery to such level (para. 70). (h) The Government would monitor FONHAPO's economic cost recovery on the basis of a formula acceptable to the Bank and to exchange views on the results of this calculation during annual reviews of the FONHAPO program (para. 70).