Mexico - Second Medium Size Cities Water Supply and Sewerage Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-2883-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, S.A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE October 15, 1980 This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorIatIon.  -CURRENCY EQUIVALENTS 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 October 2, 1980, the peso traded at Mex$ 23 per US dollar. ABBREVIATIONS AWS Companies - Autonomous Municipal or State Water Supply and Sewerage Companies BANOBRAS - National Bank for Public Works and Services (Banco Nacional de Obras y Servicios Publicos) CFE - Federal Electricity Commission (Comision Federal de Electricidad) COPLAMAR - Committee for Coordination for Depressed Areas (Comite de Coordinacion y Planeacion para Zonas Marginadas) CUCs - Coordination Agreements between Federal and State Governments (Convenios Unicos de Coordinacion) FIFAPA - Investment Fund for Water Supply and Sewerage Works (Fondo de Inversiones Financieras para Agua Potable y y Alcantarillado) IRR - Incremental Rate of Return PIDER - Integrated Program for Rural Development (Programa Integral para el Desarrollo Rural) PNH - National Hydraulic Plan (Plan Nacional Hidraulico) PNDU - National Plan for Urban Development (Plan Nacional de Desarrollo Urbano) SAHOP - Secretariat of Human Settlements and Public Works (Secretaria de Asentamientos Humanos y Obras Publicas) SARH - Secretariat of Agriculture and Water Resources (Secretaria de Agricultura y Recursos Hidraulicos) SCF - Financial Coordinating Unit - Directorate of Construction of Water and Sewerage Systems (SAHOP) (Sistema de Coordinacion Financiera - Direccion de Construccion de Sistemas de Agua Potable y Alcantarillado) SPP - Secretariat of Programming and Budgeting (Secretaria de Programacion y Presupuesto) VAT - Tax on Value Added (Impuesto al Valor Agregado) FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY MEXICO SECOND MEDIUM SIZE CITIES - WATER SUPPLY AND SEWERAGE PROJECT LOAN AND PROJECT SUMMARY Borrower: Banco Nacional de Obras y Servicios Publicos S.A. (BANOBRAS) Guarantor: United Mexican States Beneficiaries: Municipal or State Autonomous Water Supply and Sewerage Companies (AWS Companies) Amount: US$125 million equivalent Terms: Payable in 15 years, including three years of grace, at 9.25 percent interest per annum. Lending Terms to Beneficiaries: Payable in 15 years, after a grace period equal to the construction period (from 2 to 3-1/2 years), at not less than 9 percent interest per annum. Prolect Description: The project would extend water supply services to about 1.2 million people and sewerage services to nearly 1.3 million in several medium size cities. Water production facilities and sewer interceptors and outfalls have been designed to provide a water supply coverage of 90 percent and a sewerage coverage of 80 percent to the population of these cities by 1995. The project would include construc- tion of sewage treatment plants, where necessary, to keep the pollution level of effluents within acceptable standards. It would promote metering of house connections and would include leak detection and control programs. A technical assistance program to the local water and sewerage companies would help improve the operational and service capabilities of these institutions. About 36 percent of the additional population to be served with water supply and 34 percent of the additional population to be served with sewerage are expected to be urban poor consumers, whose incomes are lower than one-third of the national per capita income. Special Risks: The construction of the works faces no special risks. There is a possibility of delays in the achievement of improved managerial and financial performance of the beneficiary companies. These risks are considered acceptable given the commitment of the Government to the development of the sector and the technical assistance that SAHOP will provide to the companies. This document has a restricted distribution and may be used by recipients only in the performance of their otficial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Cost of Subprojects ---US$ Million Equivalent--- Local Foreign Total % Water Works 55 46 101 47 (Subprojects Submitted) (39) (32) (71) (33) (Subprojects to be Prepared) (16) (14) (30 (14) Sewerage Works 54 45 99 46 (Subprojects Submitted) (38) (32) (70) (33) (Subprojects to be Prepared) (16) (13) (29) (13) Development of Accounting System, Engineering and Administration 8 6 14 7 Base Cost 117 97 214 100 Physical Contingencies 17 14 31 Price Escalation 37 15 52 Total Project Cost 172 1/ 125 1/ 297 Value Added Tax 21 - 21 Total Cost 193 I/ 125 1/ 318 Financing Plan: US$ million % IBRD 125 39 Federal Government 193 61 318 100 Estimated ----------US$ Million Equivalent----- Disbursements: Bank FY81 82 83 84 85 Annual 5 27 47 36 10 Cumulative 5 32 79 115 125 Rate of Return: The aggregate rate of return based on incremental revenues and costs in the seven cities for which feasibility studies were available after post-appraisal (which account for 71 percent of the estimated total project costs) is estimated at 13 percent. The economic rate of return is expected to be considerably higher, because of benefits not reflected in revenues. Staff Appraisal Report: Report No. 3026-ME, dated October 7, 1980 1/ Because of rounding, the numbers do not fully add up.  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 SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT 1.. I submit the following report and recommendation on a proposed loan to Banco Nacional de Obras y Servicios Publicos, S.A. with the guaran- tee of United Mexican States for the equivalent of US$125 million to help finance a Second Medium Size Cities Water Supply and Sewerage Project. The loan will have a term of 15 years, including 3 years of grace, with interest at 9.25 percent per annum. PART I: THE ECONOMY 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 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 (or 2.8 percent of GDP) in 1978 and further to an estimated US$4.6 billion (under 3.8 percent of CDP) 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.  - 3 - 9. The growth outlook for 1980 continues to be favorable and the economy should increase at about 8 percent, but 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. These investments call for continued increase in imports of capital and intermediate goods. The import program will put a severe strain on the exi ring infrastruc- ture capacity, especially ports and rail transport in which bottlenecks already exist. Additional strain on the transport system is likely to come from the large imports of grains as a result of a bad crop this year. 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 cumulative increase in the consumer price index in 1980 through July 31, of about 18 percent, resulting in part from the newly introduced value-added tax, 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 signifi- cant 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 becoming increasingly a classical "oil producer 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 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, stagnation in agriculture, 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)  -4- 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 agriculture (where some two-thirds of the poot are principally employed), and slow absorption of labor in high-productivity jobs (mostly in industry). 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 under employment 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. 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 production increases 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 portion of budget resources than in the past. The banking system is being encouraged to provide greater support to Q.;ricultural 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 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. The 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.  - 6 - 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 of petroleum exports but also as a function of repayment of some of the debt contracted on the least favorable terms. 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 con-ventional terms. PART II - BANK GROUP OPERATIONS IN MEXICO 1/ Bank Operations 22. As of August 31, 1980, Mexico had received 65 loans from the Bank amounting to US$4,220.9 million net of cancellations and terminations; of these, 38 loans totalling US$1,870.4 million were fully disbursed. The Bank presently holds US$3,578.0 million of which US$1,616.9 million have not yet been disbursed. Some 43 percent of Bank lending has been for agriculture and rural development (22 loans for US$1,841.4 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 August 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 action to accelerate imple- mentation of the projects. Adequate budget finance has been provided. Projects which had important structural constraints were modified and rephased to account for changed circumstances. The Government and Bank officials have 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 Miexico, in FY79 the disbursements totalled US$233 million and in FY80 disbursements further increased to US$401 million or 40 percent of the undisbursed balance at the beginning of the year. 1/ This section is substantially unchanged from the President's Report for the Ocoroni Irrigation Project (Report No. P-2881-ME of September 24, 1980).  -7- IFC Operations 24. As of August 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 as of August 31, 1980, 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; and (iii) help reduce Mexico's urban-regional imbalances. Therefore, 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. 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 the productivity of presently cultivated lands through selected programs of irrigation and on-farm improvements; second, to improve the productivity of small farmers through programs for (a) rural development, (b) rainfed agricul- tural 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 FYs74-80 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. The Ocoroni irrigation project is under consideration by the Executive Directors; a rainfed agricul- tural development project and an integrated rural development project have been appraised. 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. 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 develop- ment 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 recently approved a project for the mining sector which up to now has received insufficient resources from the financial system. A capital goods industry project is under discussion for possible Bank support.  - 8 - 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 achieving 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. A highway sector project was approved by the Executive Directors in FY79. A fourth railway project has been appraised and is being processed for submission to the Executive Directors. 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; the project now considered would be the third operation of the Bank in this sector. 29. The Government and the Bank have long recognized the regional economic disparities prevailing in Mexico. In June 1976 the Government adopted the Law of Human Settlements to provide a new institutional framework to deal with the pressing problems of over-concentration of economic activities 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. A loan to assist in the develop- ment of the Lazaro Cardenas conurbation area on the West Coast, was approved by the Executive Directors in FY78, and a second urban development project for the southeast region has been appraised. 30. The Inter-American Development Bank (IDB) is the second largest source of multilateral aid to Mexico. The IDB has made loans totalling 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 each made loans for the National Program for Small-Scale Agricultural Infrastructure, the Integrated Program for Rural Development (PIDER), agricul- tural and livestock credit, small- and medium-scale industries, and hotel development. 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. PART III - THE WATER SUPPLY AND SEWERAGE SECTOR The Urban/Rural Setting 31. The mid-1979 population of Mexico was estimated at 67.9 million, of which 63 percent were urban and 37 percent rural (communities with less than 2,500 inhabitants). Total population is growing at an estimated rate of 2.9 percent and urban population at 4.6 percent annually. The overall growth rate has been declining from 3.5 percent, which prevailed in the 1960s, partly as a result of a major ongoing family planning program initiated in 1972. The Mexican authorities have the ambitious goal of reducing population growth to 1 percent per annum by the year 2000.  - 9 - 32. The provision of public services in Mexico presents special problems due to the geographic distribution of the population. The Mexico City Metropolitan Area, where water resources are severely limited, has an estimated population of 14.8 million, growing at 6.2 percent annually; at the other extreme, the rural population is dispersed in almost 100,000 small centers. 33. The National Plan for Urban Development (PNDU), approved by Presidential decree of May 1978, aims at improving the population/resource mismatch by controlling growth in the three main centers (Mexico City, Guadalajara and Monterrey), and promoting development in a number of in- termediate cities. In an effort to decentralize the economy, these inter- mediate cities are to serve as growth poles in a number of regions. These regions form priority zones and are to be particularly favored with public investments. Other centers, with a full range of public services, are planned to serve surrounding rural populations. The general policies out- lined in PNDU are now being translated into specific programs at regional, state and municipal levels. For the purposes of required water supply and sewerage investments, SAHOP has worked in close contact with the local authorities, and has prepared a 1980-82 investment program for urban areas. These cities are growing at an estimated rate of 4.2 percent per annum and are in urgent need of improvement and expansion of their basic services. Service Levels 34. It was estimated that by mid-1979, about 54 percent of the urban population (excluding the Mexico City Federal District) had access to potable water through house connections and about 42 percent were connected to sewerage systems. Service levels in the Mexico City Federal District were 83 percent for water supply and 80 percent for sewerage. Service levels in rural areas were lower, with about 38 percent of the population having access to water supply through house connections while access to waste water disposal systems was almost non-existent. 35. The percentage of total population served with water connections has risen slightly from 49 percent in 1970 to 53 percent in 1979, a substantial increase within the percentage of rural population served (21 percent to 38 percent) being offset by a significant decrease (65 percent to 54 percent) in service to the urban population (excluding the Federal District). The total population percentage served with sewerage systems in 1979 was 32 percent while it was 35 percent in 1970. It is estimated that about 21 million urban dwellers did not have access to waste water disposal systems in 1979. 36. These declining service levels pose significant threats to the health of the population of Mexico's rapidly growing cities. Heavy migration of low income rural population towards urban areas has not been accompanied by the necessary investments in the sector, resulting in lack of safe water availabil- ity for approximately 17 million people, mainly in low income areas.  - 10 - Sector Organization 37. At the national level, the Secretariat of Agriculture and Water Resources (SARH) is responsible for water resource planning and administration. SARH has retained direct control of water supply projects where competing demands on scarce water resources must be arbitrated. It has delegated the development of other water sources and construction and operation of non- controversial urban and rural water supply schemes to the Secretariat of Human Settlements and Public Works (SAHOP) and of hydroelectric projects to the Federal Electricity Commission (CFE). 38. SAHOP was formed in 1976 by adding to the Secretariat of Public Works certain "Directorates" (water supply and sewerage construction, opera- tions, desalination schemes and Federal Juntas) from the Secretariat of Water Resources. SAHOP is in charge of planning and establishing guidelines, norms and policies for the water supply sector. Additionally, SAHOP is responsible for the design and construction of water and sewerage works in urban and rural areas when such works are partially financed (or require loan guarantees) from the Federal Government. In cases where no Federal financing is involved, the entities which would undertake any water or sewerage project have to obtain SAHOP's approval. SAHOP is also responsible for the implementation of an ongoing national water supply and sewerage training program and for the operation of some 1,200 water supply and sewerage systems through "Federal Juntas". 39. In the initial years, SAHOP experienced difficulties in discharging its responsibilities but the situation has now improved considerably. Recent developments include the adoption of guidelines for preparation of feasibility studies and engineering design, and the creation of a planning division to coordinate sector activities at all levels and developing strategies to meet the sector goals. SAHOP is committed to a gradual decentralization process and has established offices in all the states to work in coordination with state and municipal authorities in developing water supply and sewerage projects. 40. At the state and municipal levels, local entities have varying degrees of autonomy in the operation of water supply and sewerage systems. In most cases, they are restricted to operating and maintaining those systems under the supervision of the SAHOP offices or State Boards. SAHOP is in the process of transferring the operations of federal water and sewerage systems to auto- nomous local entities while retaining sector planning and programming responsi- bilities at the central level. SAHOP is also assessing a program for the creation of statewide water companies which would be in charge of operations and -- eventually -- of construction of urban and rural water supply and sewerage systems. This program is consistent with the National Plan for Urban Development (PNDU) and would aim at developing -- in addition to local water companies -- strong state owned water companies that would operate in rural areas and cities too small to have the capacity for viable companies. SAHOP has requested the Bank to assist in the creation of these companies, which are expected to be operative by 1981.  - 11 - Sector Financing 41. SARH and SAHOP finance their projects through funds from the Federal Government, with the intention of recovering investments in 10 to 20 years. In most cases their loans are interest-free; in some cases, the debt is converted into a grant after a certain number of years. In addition to this, the Federal Government transfers funds to the State Governments under the CUCs (Coordination Agreements between Federal and State Governments) and other programs such as COPLAMAR (Committee for Development of Depressed Areas) and PIDER. The CUCs are instruments for distributing federal funds as grants to the states and are intended for a wide range of investments, mostly in the rural areas, including water supply and sewerage projects. 42. The Banco Nacional de Obras y Servicios Publicos (BANOBRAS) has been financing municipal works through several lending windows at different interest rates. BANOBRAS' regular credits bear annual interest rates of 18 percent, and it has a soft window -- the Fondo Fiduciario Federal de Fomento Municipal -- which lends at 4.5 percent per annum, while FIFAPA lends at a rate of 9 percent per annum. Sector Objectives and Programs 43. Mexico's long-term goals aim at providing -- by the year 2000 - 95 percent and 70 percent of urban and rural populations respectively with piped water, and 80 percent and 42 percent of urban and rural populations respectively, with sanitation services. Intermediate targets for the year 1982 have been developed by SAHOP for urban areas, excluding the Federal District. These targets are: provision of water to an additional population of 8 million and sewerage to 5 million, reaching a coverage of about 70 percent in water supply and 50 percent in sewerage. For rural areas, a recently approved SAHOP/COPLAMAR program would provide piped water to 8.2 million additional inhabitants and would rehabilitate existing systems to benefit 6.8 million people by 1982. With the implementation of these programs, 66 percent of the rural population would be receiving safe drinking water. 44. The investment programs for the sector in the period 1980-82 amount to Mex$ 18 billion (US$800 million) and Mex$ 20.7 billion (US$920 million) for urban and rural areas, respectively. About 90 percent of these investments would be financed by the Federal Government, more than doubling the average annual financing for the sector (excluding the Federal District) in the past decade. Financing for the sector by state or municipal authorities is not significant and has represented less than 5 percent of sector investment in recent years. Bank's Role within the Sector 45. The Bank has been assisting Mexico's water supply sector since 1973, when a US$90 million loan was made for a bulk water supply project for the Mexico City metropolitan area. A US$40 million loan was made in January 1976 to support a US$100 million project for water supply and sewerage for medium- size cities, and the proposed project would be a second operation for similar urban centers. In addition the Bank has participated in the financing of water supply and sewerage components of three rural development projects, two tourism projects and an urban development project.  - 12 - 46. The first Bank assisted medium-size cities water supply and sewerage project of January 1976 had a slow start. The basic concept of least-cost alternative for project design and of cost recovery from users met with considerable resistance from the municipal authorities, who took almost two years to be convinced on these features. Final design of acceptable sub- projects also took longer than anticipated. Construction started in late 1977 and the project is now expected to be completed by December 1981. As of August 31, 1980 the loan had been fully committed on seven sub-projects and US$16.2 million (41 percent of the total loan) disbursed. Learning from this experience, the managers of the Investment Fund for Water Supply and Sewerage Works (FIFAPA) mounted a major program to familiarize the local authorities with the basic concepts. Also, FIFAPA, with the cooperation of Secretariat of Human Settlements and Public Works (SAHOP), has been assisting the local authorities in a number of cities in sub-project preparation. As a consequence, about 70 percent of the proposed second project is covered by investment proposals already prepared and scrutinized by FIFAPA and it is likely that the problems of the first project will be avoided in this second one. 47. The financial performance of the seven beneficiary entities under the ongoing loan 1186-ME is satisfactory and all of them are in compliance with the financial covenants. Federal funds are being provided in a timely manner. 48. As noted in paragraph 35, water supply and sewerage services in the medium size cities of Mexico deteriorated in the decade of the 1970s. The Government has prepared an ambitious investment program to reverse this trend. The Bank is assisting the borrower (BANOBRAS) in building FIFAPA as a sound institution at the national level to oversee the sectoral development. By continuing its participation in financing water supply and sewerage projects for medium-size cities, through FIFAPA, the Bank would be contributing to: (a) the extension of water supply and sewerage services in priority areas, selected under the National Plan for Urban Development (PNDU); (b) the strengthening of the sector institutions, mainly at local levels, and the improvement of their operational efficiency; and (c) adoption of improved financial policies by the local water authorities resulting in reduced Federal financing for the development of the commercially viable portion of the sector, thus freeing resources to expand services to the poor segments of the urban and rural population. PART IV - THE PROJECT Project Origin 49. Following a Government request, three Bank missions have visited Mexico since early 1979 in order to asist FIFAPA/SAHOP in the identification and subsequent preparation of the proposed project, which was appraised in  - 13 - March 1980. A mission visited Mexico in mid-June 1980 to review progress in the preparation of subprojects. The project would be the Bank's third operation in the sector and the second operation through BANOBRAS/FIFAPA aimed at helping to develop water supply and sewerage services in medium-size cities throughout Mexico. A report entitled "Staff Appraisal Report - Second Medium Size Cities Water Supply and Sewerage Project" (No. 3026-ME, dated October 7, 1980) is being circulated separately to the Executive Directors. Negotiations with the Borrower, Guarantor and Executing Agency took place in Washington, D.C. on September 19 and 20 1980. The Mexican delegation was headed by Mr. Rodrigo Sanchez Mujica, Deputy General Manager of Finances of BANOBRAS. A supplemental project data'sheet, including a timetable of key events and a summary of special conditions is presented as Annex III. Project Description 50. The prQject would extend water supply services to about 1.2 million people and sewerage services to about 1.3 million people in several medium size cities of Mexico. Acceptable investment proposals, which account for 71 percent of the total project cost, have already been prepared for the following cities (see Map): 1979 City State Population Proposed Works 1. Monclova Coahuila 254,100 Sewerage 2. Nogales Sonora 115,100 Water 3. Tepic Nayarit 121,400 Water and Sewerage 4. Toluca Mexico 240,000 Water and Sewerage 5. Cd. Juarez Chihuahua 671,500 Water and Sewerage 6. Matamoros Tamaulipas 214,500 Water and Sewerage 7. Queretaro Queretaro 315,000 Water and Sewerage Investment proposals for three additional cities, which would account for the balance of the project, are in an advance stage of preparation. 51. Subproject cities have been selected by FIFAPA/SAHOP in accordance with the priorities set forth in the National Plan for Urban Development. Service coverage levels lower than the national average for urban areas and the existence of idle capacity allowing increase in coverages by complementary investments are factors taken into account for the selection. In addition, all subprojects financed under the loan would be subject to the following requirements: (a) all selected subprojects would have feasibility studies prepared under SAHOP guidelines; and (b) the proposed works represent the least-cost alternative for meeting the demand for water and sewerage services. As a condition of disbursement for the respective subprojects, establishment of autonomous water and sewerage companies would be required (Section 5.03 of the draft Loan Agreement). All the sub-loan agreements under the project are expected to be signed by June 30, 1982 (Section 3.02 and Schedule 5, para. B of the draft Loan Agreement).  - 14 - 52. Works in the cities covered by the project comprise the following: (a) provision of new production facilities and improvements to the existing ones to increase water production capacity to meet demands up to 1995; (b) chlorination of all water supplies to provide bacteriologically safe water by 1984; (c) construction of transmission pipelines to connect the new production facilities to the distribution systems and provision of additional storage capacity; (d) extension of water distribution networks to areas without service and imiprovement to the existing water distribution systems; (e) construction of metered house connections and installation of meters in existing unmetered connections to cover about 95 percent of all connections; (f) acquisition and installation of production meters and meter repair shops and implementation of leak detection and control programs to reduce unaccounted-for water to about 30 percent of the water entering the distribution system by 1984 and to about 25 percent by 1995; (g) construction of sewer interceptors and outfalls to eliminate discharge of sewage wastes within populated areas; (h) extension of sewer pipes to areas lacking the service and construction of house connections; (i) construction of sewerage pumping stations where topographic conditions preclude the use of gravity systems; (j) construction of sewage treatment plants where downstream use (domestic or agricultural) require preservation or improvement in water quality; and (k) a technical assistance program to the local water and sewerage companies to improve their managerial, financial, technical and administrative practices, including the implementation of an accrual accounting sytem and the acquisiton of accounting, water quality control and leak detection equipment. The Borrower and the Executing Agency 53. The Borrower, BANOBRAS, is a national development bank specialized on loans for public and social works (sanitation, urban development, market places, housing, and transportation). It grants loans to federal, state and municipal governments and their agencies and it is financed by the Federal Government and through international borrowing.  - 15 - 54. At the end of 1975, the Mexican Government established FIFAPA as a trust fund within BANOBRAS to finance water and sewerage investments in medium-size cities. To carry out the first operation, supported by the US$40 million Bank loan 1186-ME of January 1976, the Government authorized an equity capital for FIFAPA of US$100 million, to be financed by the pro- ceeds of the Bank loan and from the budget, and to be paid in -s the sub-loans were disbursed. In anticipation of Bank support for an expanded program, the Government has now authorized a substantial capital increase of US$500 million for FIFAPA, to be financed, as in the past, from the budget and the proceeds of the Bank loan as disbursements take place. FIFAPA's financial statements will continue to be audited by external auditors and their reports submitted to the Bank no later than three months after the end of each calendar year (Section 4.02 of the draft Loan Agreement). 55. FIFAPA will receive the proceeds of the Bank loan and the Mexican counterpart funds as equity contribution and will pay the interest on the loan to BANOBRAS, which would repay the loan to the Bank and would bear the exchange risks. FIFAPA will onlend the proceeds of the Bank loan and government contri- bution to the local water and sewerage companies at an interest rate of at least 9 percent per annum, and a 15-year term after a grace period equal to the construction period (from 2 to 3-1/2 years). These onlending terms are identical to those applied in the first FIFAPA operation. The beneficiary of these subsidized loans would primarily be the local water and sewerage insti- tutions, which now receive grants or interest-free loans. Although the 9 percent interest rate is lower than the cost of capital in Mexico, and negative at current rates of inflation, these rates would not distort investment decisions of the local institutions. This would be ensured as follows: (a) at the design and project preparation stage, only the least cost solutions would be supported by FIFAPA; and (b) only consumers of volumes of water considered essential would receive the benefit of the subsidy implied in the onlending rate, while all consumption above the basic volume would be charged at or above the long run average incremental cost of the service. 56. SAHOP would be the executing agency through the Financial Coordinat- ing Unit (SCF) under the General Directorate of Construction for Water and Sewerage Works. In addition, SAHOP would be providing technical assistance to the local water and sewerage companies. SCF has made considerable progress since its creation in 1976, but still faces problems associated with the rapid expansion of its responsibilities. SCF personnel is qualified but relatively inexperienced. To cope with its expanded tasks, SAHOP is strengthening SCF and will maintain at all times qualified staff in sufficient number to allow this department to meet the additional responsibilities entailed by the project (Section 4.02 of the draft Guarantee Agreement). The Beneficiaries 57. The beneficiaries of the proposed loan would be autonomous municipal or state water and sewerage companies (AWS Companies). The creation of these companies is a requirement to participate in the project and will contribute to the decentralization policy of SAHOP (Section 5.03 of the draft Loan Agreement). The AWS companies will be in charge of administering and operating  - 16 - the water supply and sewerage systems and, in the longer run, in charge also of the construction of the systems. Since in some project cities these companies are just being created, and therefore lack experience, SAHOP will implement a technical assistance program which includes: (a) specific programs to meet the needs of each company in order to improve their management and accounting practices and maintenance programs; and (b) technical assistance as required by each AWS Company and close monitoring of their financial performances and compliance with the subloan covenants, and adoption of remedial actions when required (Sections 3.01(a) and 4.03 of the draft Guarantee Agreement). 58. SAHOP has agreed to prepare not later than June 30, 1981, a frame- work tariff study which would establish the basic guidelines and criteria for tariff levels and structures (Section 3.04 of the draft Guarantee Agreement). The tariffs should provide sufficient revenues to meet the financial require- ments specified in para 61 below and promote efficient resource allocation; standard consumer categories should be established; tariffs for basic consump- tion should be set at levels affordable to low income groups; tariff structures should be progressive to discourage water wastes and to provide cross-subsidies to low income users; sewerage charges would be based on a proportion of water usage; and "other charges" would reflect a consistent policy of cost recovery. After the establishment of such guidelines and criteria by SAHOP, the AWS companies would develop specific tariff studies and implement them not later than September 30, 1981 or six months after the corresponding subloan signature (para B.l(v) of Schedule 5 of the draft Loan Agreement). The tariff struc- ture to be applied in each city would ensure that the richer sections of the population subsidize the poorer ones to enable the AWS companies to generate adequate revenues to cover the costs specified in para. 61(a). It would also ensure that tariffs and other charges on consumption above the basic volume be set so as to reflect the long run incremental cost of providing the service. Cost Estimates and Financing Plan 59. The estimated cost of the project is US$297 million equivalent, of which US$125 million represents the foreign exchange component. Base costs are expressed in prices of June 1980. Engineering and administrative expenses have been estimated at 7 percent on the basis of the experience obtained during the execution of the first FIFAPA operation. Physical contingencies vary from 5 to 18 percent (averaging out to 15 percent) according to the type and location of works and the degree of preparation of final designs. Contin- gencies for price escalation were based on a construction profile of four years starting in 1980 for the entire project; for local costs estimates on the Mexican price escalation index were used, while international inflation estimates were applied to the foreign component. Final engineering designs, supervision of construction and management consultant costs for the project are estimated at US$13.8 million and would require about 4,450 man-months of consultant services. The average man-month cost is estimated to be US$4,650 for professional staff and US$1,220 for supporting staff.  - 17 - 60. The proposed Bank loan would finance the foreign exchange component of the project in the amount of US$125 million; the Mexican Government would provide funds to finance the local cost component in the amount of US$193 million (including 21 million of the VAT). FIFAPA would finance interest during construction. Additional working capital requirements and other minor works of the water and sewerage companies (about 5 percent of the respective investment programs) would be financed through funds generated by the companies. Subloan Agreements and Charges to Consumers 61. The proceeds of the Bank loan and Government contribution will be onlent to the AWS companies in each subproject city for an amount equivalent to the construction cost, the corresponding value added tax and interest during construction. Each subloan agreement would include, as a condition of disbursement for the corresponding subproject, the obligation of the municipality or the state to establish an autonomous company to operate the water supply and sewerage services whithin 6 months of the date of the respective sub-loan agreement, whenever an AWS does not exist, and would be approved by the Bank. The agreements would be guaranteed by the respective state government and would include the conditions listed in Schedule 5 of the draft Loan Agreement. These conditions aim at: (a) ensuring financial self-sufficiency through a revenue covenant whereby each company -- during the project execution period -- would attain the target of generating enough revenues to cover: operating costs, working capital requirements, minor works and the larger of the debt service on the subloan or depreciation charges on revalued assets; (b) implementing an adequate accrual accounting system and revalua- tion of fixed assets; (c) creating specific programs to implement administrative and operational improvements as indicated in each feasibility study; and (d) monitoring of their operation and external auditing. Procurement and Disbursements 62. All procurement will be made in accordance with the Bank's procure- ment guidelines which are being used by FIFAPA/SAHOP in the first operation (Loan 1186-ME). Before bids are called for, BANOBRAS will furnish to the Bank for comments the list of all major contracts it intends to award for each subproject and will make such modifications as the Bank may suggest (Schedule 4 of the Draft Loan Agreement). Contracts in excess of US$2.5 million for civil works and US$500,000 for the purchase of equipment and materials would be awarded on the basis of international competitive bidding (ICB). Contracts for less than US$2.5 million but over US$250,000 for civil works, or less than US$500,000 but over US$150,000 for equipment, would be awarded on the basis of local competitive bidding, following procedures which are satisfactory to the Bank. Contracts for less than US$250,000 for civil works and US$150,000 for  - 18 - equipment could be procured directly on the basis of at least three quotations and subject to a maximum aggregate of US$12.5 million (5 percent of total project cost). Given the advanced degree of development of the construction industry in Mexico, all civil works contracts are expected to be won by local contractors; however, foreign firms would be eligible to bid. General condi- tions for tender documents to be used for ICB and local procurement have been prepared under the first FIFAPA operation and are acceptable to the Bank. Contract awards under local competitive bidding would be submitted to the Bank for ex-post review prior to disbursement. Goods manufactured locally and procured under ICB would be allowed a preference of 15 percent over the CIF price (or the level of import duty, whichever is lower) over imported goods. 63. The project is expected to be completed by June 30, 1984. Bank financing of the foreign exchange component would be achieved by disbursing 45 percent of all payments to contractors excluding the 5 percent retention which is withheld from civil works contractors during the guarantee period following the completion of works as well as SAHOP's direct costs for supervision and construction charged to the AWS companies. FIFAPA will also be reimbursed 45 percent of the sums paid for engineering design, construction supervision and technical assistance provided by consultants. 64. In order to permit work to proceed in the cities reviewed during appraisal, retroactive financing for contracts awarded after April 1, 1980 for up to US$5.0 million on sub-projects approved by the Bank is recommended (Schedule 1, para 3 of the draft Loan Agreement). Project Justification 65. The estimated aggregate return on investment for the four cities re- viewed in detail during appraisal (Monclova, Tepic, Nogales and Toluca) and three additional subprojects submitted by SAHOP (Cd. Juarez, Matamoros and Queretaro) is 13 percent. The combined base cost of these subprojects is US$173.0 million or 71 percent of the base project cost. This estimated return compares favorably to returns of similar projects in the sector in Latin America and the estimated opportunity cost of capital in Mexico of 11 percent. As in the case of other water supply and sewerage projects, benefits were estimated on the basis of tariffs and other revenues that would be collected for the services and do not fully reflect economic and social benefits. Benefits such as improvements in public health, increases in labor productivity, and environmental improvements are either not reflected or only partially reflected in the tariff paid for these services. Evidence indicates, however, that users assign a value to the initial volumes consumed significantly higher than the value of water tariffs. 66. Sensitivity analysis shows that with 20 percent increase in invest- ment costs and no change in tariffs, the IRR would decline to 10 percent. If costs increase, however, the tariffs would have to be increased too to meet the financial requirements under the covenants.  - 19 - 67. Information gathered in the cities of Cd. Juarez, Tepic and Nogales indicates that people lacking access to public supplies obtain their water mostly from private ve dors in receptacles of 290 liters at a price varying from Mex$ 6 (Mex$ 30/m ) to Mex$ 203(Mex$ 100/m ). These prices are more than 10 times the estimated tariff per m in the project cities. Moreover, families earning less than one monthly minimum salary (about Mex$ 3,600) who are 3 presently paying from Mex$ 120 to Mex$ 400 for a monthly consumption of 4 m of unsafe water, will now havS access to safe water, paying about Mex$ 30 for a monthly consumption of 10 m . The former considerations indicate that the project's economic and social rates of return, if quantifiable, would be signficantly higher than the estimated IRR. Population Benefited and Urban Poverty Impact 68. The project would provide water supply through house connections to about 1.2 million additional inhabitants by 1984 and sewerage to about 1.3 million additional inhabitants by 1984. About 36 percent of the additional population to be served with piped water (some 437,000 people) and 34 percent of the additional population to be served with sewerage (or about 453,000 people) are estimated to belong to the urban poverty target group, defined as people earning less than one-third of the annual national per capita income (estimated at Mex$ 9,420 or US$413 in mid-1979). The richer sections of the population in the project cities would be subsidizing the poorer ones to enable the water entities to generate adequate revenues to attain financial self- sufficiency, namely to cover the operating costs, working capital requirements and the larger of the debt service on the subloan or depreciation charges on revalued assets. 69. Water supply coverage for the urban poor will increase from 58 per- cent in 1979 to 81 percent in 1984, while the sewerage coverage will increase from 35 percent to 63 percent during the same period. Coverages will continue to increase in subsequent years. For this purpose, water intake works, major networks and sewage collectors have been designed for a period ranging from 10 to 15 years. 70. Expansion of water production and main distribution facilities and provision of sewage collectors and interceptors will permit a coverage of 90 percent of the 1990 projected population with water supply and 80 percent with sewerage services through the expansion of secondary networks. It is estimated that by 1995, in scattered areas on the outskirts of the cities where it would not be economical to provide services through house connections, about 10 percent of the population will continue to be served by public stand- pipes and about 20 percent by latrine or septic tanks. On the basis of the appraised cities and the additional feasibility studies prepared by SAHOP, it is estimated that as a result of the project about 2.4 million and 2.5 million additional inhabitants will be connected to the water supply and sewerage systems respectively by 1990.  - 20 - Project Risks - 71. Given the implementation capability of SAHOP, the availability of experienced local construction firms and the advanced stage of engineering designs, no major problems are envisaged in the construction of these relatively simple works. The main risks associated with this project relate to possible delays in the achievement of improved managerial and financial performance of the AWS companies. These risks are considered acceptable, since technical assistance will be provided by SAHOP, and because of the commitment of the Government to the development of the sector and the support expressed at state and local levels to the institutional and financial policies being implemented by SAHOP, which should ensure the realization of the project's goals. PART V - LEGAL INSTRUMENTS AND AUTHORITY 72. The draft Loan Agreement between the Bank and BANOBRAS, 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. The conclusion of subsidiary loan agreement, satisfactory to the Bank, between the Borrower and the autonomous water company or between the Borrower and the state or municipality where this company would be located, and the submission to the Bank of the list of all major contracts that BANOBRAS intends to award for each subproject before bids are called for, would be conditions for disbursement on the respective subproject (Schedule 1, para. 3(c) and Schedule 4 of the draft Loan Agreement). 73. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 74. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments October 15, 1980  -21 - ANNEX I TABLE 3A Page 1 of 5 MEXICO - SOCIAL INDICATORS DATA SHEET MEXICO REFERENCE GROUPS (WEIGHTED AVErAGES LAND AREA (THOUSAND SQ IUI.) - M0ST 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 (KILOGRAMS 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 PROJECT IONS POPULATION IN YEAR 2000 (MILLIONS) 116.0 STATIONARY POPULATION (MILLIONS) 205.0 YEAR STATIONARY POPULATION IS REACHED 2075 POPULATION DENSITY PER SQ. 1M. 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 POPUI4TION GROWTH RATE (PERCENT) TOTAL 3.1 3.3 3.3 2.7 1.6 URBAN 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 (PERCENT 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 OF WhICH ANIMAL AND PULSE 27.0 27.0 27.0 33.7 39.6 CHILD (AGES 1-4) MORTALITY 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 URBAN .. .. .. 79.4 RURAL .. 13.0 14.0 29.6 POPULATION PER PHYSICLAN 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 TOTAL 617.0 831.0 851.0 480.3 289.7 URBAN .. 549.0 758.0 RURAL .. 1289.0 1077.0 AD0ISSIONS PER HOSPITAL BED .. .. .. .. 17.0 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.4 5.7 URBAN 5.7 5.7 kURAL 5.2 5.8 AVERAGE NUMBER OF PERSONS PER ROOM 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 ..  - 22 - ANNEX I Page 2 of 5 TABLE 3A MEXICO - SOCIAL INDICATORS DATA SHEET MEXICO FEFERENCE GROUPS (WEIGHTED AVERAtES - MOST RECENT ESTIMATE) , MOST RECENT M7DDLE INCOME MIDDLE INCOME 1960 lb 1970 lb ESrIMATE /b LATIN AMERICA & CARIBBEAN EUROPE EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 80.0 104.0 116.0 99.7 105.9 MALE 82.0 107.0 119.6 101.0 109.3 YEMALE 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. (% 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 THOUSAt4D POPULATION 18.0 60.0 85.0 84.2 118.5 NEWSPAPER ("DAILY GENERAL !NTEREST") CIRCULATION PER -HOUSAND 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 FEMALE (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 PEMALE 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 HOUSEBOLDS 61.1/c 60.7 57.7 LOWEST 20 PERCENT OF HOUSEHOLDS 3.4/c 3.3 2.9 LOWEST 40 PERCENT OF HOUSEHOLDS 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 INCOMfE LEVEL (USS 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 countries 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 9'63A April. 1980  -23- ANNEX I Note.' Alobeeg) tb. data -n draw Era srcs gasteIy Jodg the met enthenitetiv and reliable, it boold also be nted that they may co be inter- eat in..lly -em-tebl b.ce. of' telak o fftnedadieed defleities "d -eePt. oee bY different ....ortiee In clcigthe deta. The dete ate. once-. tbelese, leefol to d-ecibe oElthe f mgiftade. WiMitat traie, cad eheratenies certaIn mjet difference.. betee- twetle Thereerme groeea()te acssygopo h ojo oe e 2 a t-aor gone with smwa higher evetSg Incom tha tha rootry group of the aejeot onosry (eacep fer "Captal Soeplc Oil Enprtete" step nicer.'Middle Ieoe Nethb Aftite cod Middle Bot" I. chees bece...e of enroaer eeoo-,ilerl afddtfs) E the refetane Stoop date the -.nSage ar pepoleti weightd atithetto -ee for each idir-t-o and ehoe ey hbec so least half of the -nentets On e grop ha. dccc f-o that ldicatot. fine the o-ereg of cettnies emeg the oio r dopede on the -vileblity et date aed Ie ct niEc.. erotic. mee he eerois-d in telatieg ev ,ege of -e ledictetr to onothet. Thee- otae t co, u..efol it c-Poolg the veIce of one indleotor Ae s tint.-ama the one,try an ref ..e.c grnp 1.81 ~ARE (thocecod eq.bm.) Peocllattoi crIhocto Poultin -rId. iy cute 00potlt phy-. Total - fetal suface - aneepricibS iad acne sad inload eaes iria.e qolif-rd "c a dica school at -cio-taoy 100*1. dgioer eelmtet of agitoltor..Ial at .cad e-P..trily or psom teey FP.eletion oao N ...in P.re.e -.Popolatiee divided by easer cf posicitig c for crops, ~~~~~~~Pactorsa sthet sod kbithe gardes or no lie fallow; 1977 data. ale sod Easel g-oedutoree.pr-titi caress cod ass istant ecr- littO CAiT 10 9 - MPpercaitaeaissesat ooectesheeprces 1 Popoletice ret noitale - total. -ohen. e- np - Popolation (noes), colcied by emS GN pcerio -pi,od 0.i..Wrdac kiotlost(97-7t basis); i96i orhas, ad tota) divided by their o.Pcti somber of heepite1 beds 19lt.d by-ehd1978 data. soat97-7 b.i);190, ..iable in pubio and private general an spectaliad heepit.l aed O- 1970, -d 1; 78 d.t- ~~~~~~~~~~~hebilitatioc cetes.tpitels are ctbliebh-tn peosacetly staffed 0010.0 iieocc' 00 Pg C! It -Aa,,a enrg byen eat sa physicIne. -tbioent oldg prircipaily -totdiol sody linie,psrosm nITAral ga - ,", rcol (oal can erat net included, total hepitele, h-.es, icolode enlih end meditel tti~tY)i. kl.g- f .. q.i .and . hydo t-, eu 960s cod70cibrma also- clotc coot pereseetly steffd by a physiclen (bee by a medical a..ieotne, e.ticty inklg-- fci qivlc e apt;16,190 o 98 ea,mdife, sec.) which offer lo-patirt ...co.datier an p-cide limited cargo of meical fneilitise. to aaiailp.rpoesa orb.e haspi- PopULATIOsI AND VITAL STATISTICS tala iolde WHO.s principal ga-o1 ced aP-cieised hoepitala. cod tors t ~~~~~~~~~~~~~~~ ~~~hosp itals loca ro tors hoepirai end mdice1 sod mat-rcty c ea Total PeroI.lsti. Midn-le (elio)- A. of Jicy 1; 196i. 197i, end 1978 Admlc-icc -n Ocen,itl fd - Tota ember of adeisi..a to or diLbargs. date. ire urlto - mar . ten oftotal) -btto of unbee to total popoletio; feaheiaedrdd by the ember of beda. diE fereo deficLiri- of orhs area ecY affect comPar..hility of date OSN a to cctris; 1960, 197, and 1978 data. Aea ieo eahl ornepr oab l-ttl re.aditl OcOolOtirO Projection ~ ti P.J.t.. -b ..d0 180 A heucbbld c0seicteIf gop ofi. vde roshr iigqetr Population i rear liRe -Coret populiocpojcion rabsd 0190 d their sale seals. A boarder or .aIdg- cay or say Oc be iciudtd Ic total popolattoc by age cod1 ecosodtheir soroslty ad fertility rater. tha household for stotieti-I -p--ni.. ProJaction Psraeer for nettalitY ecteecoprs of thnee ls-sl flee- Ivrcem rofrresarom-tslubn,odoal-Argea- log life sepecteny et birch Iec...e cub coith 'sPer cc.pits loom hoe.. of -rbo per coo t, al nc,co rural occpid -coe-oottoc lee, o 1fsl life soPectaocY tabiliateg at 77.1 yeat. The pars- d.toflies rse.Pertny t crrI" Iogs, eccluda no-panwned etroctore en metersf o fertilitY eetc else have threa leel-a1 oe deoIlIs it.uoccpied parts. ferility tccordiag to Ioros bow sofd Past fesily plucoig psoformoote. Accct oilorci mecn o wligs oal ne,an oo tech cutry- is tAco secigeed c o thsso ies combintiocs of entality Covetioa. elifacbcetiiyI livingt,t..l quarber asd prc-Io- sad fertility tree.d. for ptolortice puepo.... ot -total, orec kand. roesl dsltgetosspeo -ttively..oo. the hlrtb rats is oqoel~.. to the d-ch rte, sod also the ago ateatuts or- EDUCATION mo'le cosa Thl. is _rhis-d rely after fartility rtsdcnoto dutdiroleclto the telcno cno-erotcpootio rate, whec -o.h setn Piayehol-ttl ancdfnl -ba oa,el n ed of noc ..PI.c.. itealt sc-ttly. lhs stationary populatibonesc.erole fal agest-t ci heponlr lv a p-cdtge frapr tire esiae cthe hesis of the poJectod cheot-eisoice of the popolotiet primar sctlag oooos ecree-y inluescIdren aged -l Io the y-a li0d, oed the race of delc of fertility rte tooplt- years hut adJusted Pfor differ-tLeogi-bth of priosay edo..tiao; for leer satiecuo reolotiecis reahed -Th. year whet ettio...ry pepolotion.. cutrioae.ithoivrl edec..ttt -nr1is-t soy seceed 100. p.rc.et sier hoc hea.o reached. since some . pupile ar bol o above tha offi10151 schtl age. Per ~c. e. - Oci-yeer ppuIctico per equate ilonet-r (lOt hectatoaf of edcairqira_ ci lretfotyr of opprrd primary ieetrct ioc; tote1 ores. pro-ides geosro1, rocti.onl. rteacher treble8 icet-otiaon f or pupib Por so. Am. ctocir ad - iputed as above for egiat and usually of 12 to 17 years of age; ...o-poodr coor. c er. a....nraly _1ly. enc1aded. PooeicdnSict-- inrec)-Tldrek-l er),wrlg-age (10- yoctioesleertollmont(rn tofscdry -Vcaoelittuoa hiyas) n retird (65 .twr aod over) os po..c..rasee of mid-yearPeru- includ terbo tca ., tedc ftri ... cvod-y egeeeic prteidpe latioc; 1960, 1970. ard 1970 date. dnl rmdpreseo oodr ottros Gt-t ?.~~~~~~~~~~~~~~Pupe-teachorretie - rlery is d ec-d-ry - lotal studete strolled is Poolaion tooth ats forceo) - ttel -Asac. aronthitatee of total mid- priory ord sceaylvl divie by eushere of te-rhero it the yerPorulsiee for 1950-6t, 1960-70, sod 197170 7. loinsfr1951-61t 196:1-0, cod'b $A.latt .t.o 1970-7p0 Adult'literay .taco(- ... t) - Lit-rtsado1to (able to tacd rod wtite) Crdic os(roe th ....nd) - Aetol live hitho Per tbcomae..d of cid-yea.seeceto of toall adult populotict agod 1) y-sr oodovr CpopeatHtee; l"It9, 1970. sad 1978 data. C910T Cr .Be.th Rtt (ret th-ocod) - retool d-he Per thou....d of id-y-e PecNesrTo Ct cccoer uuaic usee ascsro ao Poyclocice; 96hi, 1970, cod 10 78 data..P.-t - - h... b..Ii. .-.t -t. G-rcn Osroocio Ot - Average conh- of d.uRhitresoso rll boo it caslaig esca ight pcreoco; coluc tebularc. hostes tod hernralrrodo-t- Psoird if h.e sop-riece Ptr....t og-pei trs- iliny vhice.1:t. tilfcycotas;ue....lIy five.- yea ovre audieg in 1960, 1907, ad 1977. Raisd cies(c cho _an reulto- All typae of reci-as for cede PI 11, "t d,). - A ... I -b-t f ..pt.t breadoate tc g..o..el public per thousand of ropulatioc; -eclude -sli- sallyPlerceg - rcecera, oousl(thouarof - .cloao.f cetr esd receives t. cJ. tio oad Ic years rhce rgisaretion of esdio n PoollyPlaneon - ser rroO o are toneo.l - Pecyceg of morrStty.. -b -p l it-t coce of cho-focgae(14 yer)gb s hrh feco deiebc onr 1eooishad lic-nolg. "Loo f7hiW-1-TO S ..... Rtl-' ~ ~ ~ ~ TVicosver (rY th1-sa roulhtco)-bTVrhcloor fo_hrcdcatto pllO dcc U-TITION Ia --utries ood Ie year wino -goi.-ti.. Of Vcts a it nifac.t lodnoof fod Prouotic oar arlin(19A971111 - ld.. of Per capicat r. corrrCiclto ( cuthousan oolanon h- Son thn -reo cirools prodccio ofallfoodcomditlc. rodutin -olcdec coed ard feed cad diygcrlnte nwsar,decdtyriedce pub-. ll ol ,I,,d,;.y, C,_"ti.. t._, 1.,.ty .... licsicn devoted ptisarily to r--odiog Ratr. -1ena.. It is coociderod 100 clooryo baht Coac dic cowe priacy cda(.g.' ocr to he 'doily" if it oppeaa atI best feetci-nocoeslrk ceo are ceclded). Aigreg to rdoctioc of each country i hab-d o :aiolaeeProduce price -igits; 1961-i5, 1970, oc 178 data. coeasl err h er ioccadie..... t drIv-ic is 1per_boY. "bilolt, cePP'le onrs dosn-tlo prod-crioc,isyorta oos: umABO Pf-- eocru,at "ccer Ic atock. Nec oupplico -cr lde _ti- fen,seo TclhrF.oc (thoosor.da - icvoiocily atlion perso.s-.iocloding quci e sdIcfood proc....ioc, and Iraces Ic diatoihetio ccie amd ocsrd cospJoyd hot -loldico hoo...cIver, tudeeta, tto. 00-0_ ocre oociaattd hy Plc lame.d cphyobologicol used. for -ona ccci Defiolti-c ee ioooutriseereotoo--.: 'An; 1910, 1970 eed viry oo mdc ccsdorig corloo7enocl temperture, bcdy woightie, ci P1ole (.toret.. eaelhrf rapocoaso dllbrfre urd ..r dlotribntinn of POpulrio, acd ollocica 10 perce- for eace t Foieto (eco)-1 Ibie oro I,- io, oree 'tr,hclg sod h...tehold leve, 1961-65, 1970, and 1073 data..bo t I - ty ho g.d Per cant aborly f yrctait (arsacano day)- Protein -cteoc of Per caPita fichicg as yprcccao of rotaI labor forc; 1960, 1971 c"d 1970 data. nor cuply cffood er day Cot epyly f.fod ic deficad as shv.- Re rdsryIocu co lht oc ..coc, roric auacro qoirecoco fo all cectrie socaiiehed yUSIo pc_vdo for oli.un und e1letiitiy, ot-trard taoR.. nr ftoa mc force; 1960, uS loroacco ~~~f if 00000 of rrtoi ptccstr pnr day en 10 graec cE acinal aci 1970 atd 1970 deta.d 7 . 1978 d . poonyrtec,of,hih 1 rae hol h aOcl roci.Tiseared rctcreie tte(rrcc) cto, r d Iel-I. tcpetoc ards err icer tilt ohos yr Ps gras of totalpoctelo md 23ga f c-tivityrc.teeareccnputed oe tocel, eel, and female lhor fEroa Prr caric Occisletorply frm aclelcod pei P ..- P byel FOupl of food do pg-ceol errortert ofdtin patdoo andI p'pcc tim crn. tee. earl-y tlso dar drived free lfe, ya.e Oh,17 ord 1977 dataP, icfofoodTOIiTdlt Life ioeccorcot 00cc (esor) Avnrgooeeb of naru o lifercne diog E.i per -ooc riohac 1 eceti. pofra 20 rct. cod poo65 40 -ecet 00 hioch; 910, 1970 sod 1970 dote, ~~~~0 .d 177 .t INOfE households.I lofoncrcccalctv Rac (coo ohnosaod( - Ionel doorto or tofoca under ccc deor po.. iy Tdoby oiou- ofccppthtodlv little.A _f_lif___i_i____f__-___d _ docor ) pepY (tta,-1 ic addorl otttraeoeld I ce tt-to taf d -utriti-olly adrou.tt dirt ples ..c..ttia1 co-fod r-qnireeocet Ia -c oa hrupupIlcfd- crea.tedcIt.at raoeOoterdbrlrcolae ffordble.. P-rce-tir o their Irpo de cplaloc -tcuhceeopblic' "noIdeo ctigd rnaoval acot,oftha hIo.....r.baeo Porea ...Icovoc of rhevon-toY. Prior lr-- in de-i-d foc the rura deoooicoct- 001 hsPlY chat rho .. too Jcfe or esabe.o y tir ho...ebcld - lrc eith adjoc,.tr fcr hiohe t.pot of I 8 Or utbc. arose. dooflhnoc csd adlcvP-crcip...te por of thn day ic f-chibe the -slctd P .. aIoc. haohnut oet cn e e rrcr)-r u tunic ocac- -odo ardoera - Percet of popoleoloc (-re ' rrl h ae"bolt or lOovocl cc orortoto of ce cc ccoroclo popoatioct Iccotta dc. itJonl o ole aeIvs ocool py Icoldo tIcoolnotoc ad oaccua . oho-o -icn oaac. toonoi- lolyo A coiPro ec1980 eetn   - 24 - MEXICO - ECONOMIC DEVELOPMENT DATA SHEET ANNEX I page, 4 of 5 Frellminary Actual Estimates Proiectione Groth Eatee As % of GDY 1970 1975 1977 1978 1979 1980 2 1985 NATIONAL ACCOUNTS Constant 1972 Prices. _U3 Millions (,,eS Domestic Product 36,970.4 48,510.8 50,969.6 54,-se.2 58,802.9 63,511.9 74,260.2 94,042.9 5.6 3.9 8.1 100.3 99.4 93.5 Gains from Teras of Trade - 114.1 438.8 801.9 327.5 1,283.8 3,525.6 5,125.0 6,844.3 - -9.3 98.9 -0.3 0.6 6.5 Gross Domestic Income 36,856.3 40,949.6 51,171.6 54,763.6 60,086.7 67,037.5 79,385.2 100,887.1 5.8 3.8 9.7 100.0 100.0 100.0 Import. (including NFS) 3,754.4 5,835.8 4,787.8 6,426.5 9,256.3 10,428.4 13,931.6 18,416.6 9,2 3.3 21.3 1082 11.7 17.5 Exports (import capacity) 3,016.6 4,109.4 4,751.3 6,264.0 7,646.7 10,662.0 13,677.7 17,809.0 6.4 15.1 21.6 8.2 11.4 17.2 Res.urre Gap 737.8 1,786.4 36.5 162.5 609.6 - 233.7 253.9 607.7 18.4 -54.5 - 2.0 0.3 -0.3 Cossomption 30,425.4 40,149.0 41,831.4 44,093.2 47,921.7 52,396.0 61,457,4 78,492.2 507 3.2 8.7 82.6 80.5 77.4 T.vestment 7,168.7 10,326.9 9,376.6 10,233.0 12,774.6 14,408.1 18,181.9 23,003.2 8.0 i.A,i 13.8 19.5 19.8 22.9 Gross Dom.estic Savingo 6,430.9 8,800.6 9,340.1 10,670.5 12,165.0 14,641.8 17,928.0 22,395.6 6.5 6.6 13.9 17.4 19.5 22.6 Groom National Savings 5,995.3 7,701.9 8,247.3 9,373,3 10,529.1 13,022.6 16,450.8 20,938.2 5.1 6.8 15.1 16.3 17.1 20.7 TRADE IN GOODS AND NFS Correct Prices, US$ Millions As Z of Total MORdTSTOTAL 2,073.2 8,636.7 7.855. 11,466.4 16,739,9 24 263.2 38,299.6 61,827.8 20.4 9.8 35.1 100.0 100.0 100.0 Food 5.9 499.3 475.1 605.7 723.0 1,422.5 1,729.7 2,704.8 46.1 6.7 30.-0 0.3 5.3 4.5 Petrolem and Products 26.2 269.1 107.5 167.1 259.5 298.4 354.5 434.2 37.8 -14.7 20.7 1.3 1.5 0.9 Other Goods 1,527.5 5,845.4 5,338.1 7,444.8 11,272.2 16,086.1 26,246.4 42,006,2 21.3 8.4 37.0 73.6 64.9 68.5 Noe-Factor Services 513.6 2,022.9 1,934.3 3,248.8 4,485.2 6,456.2 9,969.0 16,682.6 13.7 17.1 32.4 24.8 28.3 26.0 EXPORTS. TOTAL 1J 1,964.6 2,745.5 6,081.7 11,176.4 15,503.6 24,806.9 37,601.6 59,787.7 6.9 22.5 35.4 100.0 100.0 100.0 SDlected Agricultural Goods 642.4 711.6 954.2 1,974.7 2,308.9 2,709.0 3,419.7 4,591.4 2.1 28,4 14.7 32.7 17.7 9.1 Petroleum snd Products 40.1 38.4 460.1 1,793.3 3,789.3 10,321.7 17,534.9 28.541.2 -0.9 57.4 76.8 2.0 16,0 46.6 Selected Minerols 189.7 244.3 457.6 548.8 952.2 .1,127.8 1,447.3 1,992.0 5.2 9.0 27.4 9.7 4.9 3.8 Manufacturma 132.5 326.9 1,069.3 2,143.6 2,372.6 2,946.8 4,083.4 6,301.4 19.8 26.1 17.5 6.7 19.2 10.9 Other Goods 153.9 26.6 63.3 - - - Non-Factor Services 806.0 1,397.7 3,077.2 4,716.1 6,080.6 7,701.5 11,116.4 18,311.7 11.6 15.3 23.9 41.1 42.2 29.6 TRADE INDICES Average 72-100 Export Price Index 87.7 165.7 1713 188.3 243.7 347.6 439.6 454.3 13.6 4.4 23.6 Import Price Index 91.0 146.0 164.1 178.4 202.7 232.7 274.9 335.7 10.2 6.4 11.4 Terms of Trode 96.4 112.0 104.4 105.5 120.2 149.4 159.9 162.4 3.0 -2.0 ll.O VALUE ADDED BY SECTOR .o.stant 1972 Prices, US$ Millions As % of Total Primary 3,644.6 4,139.0 4,483.2 4,347.1 4,920.7 5,019.1 5,221.9 5,541.5 2.6 1.6 1.4 19.2 12.7 7.0 Secondary 8,139.9 12,416.9 16,948.2 17,428,6 21,958.6 24,066.6 28,909.2 37,869.3 8.8 6.4 9.6 26.4 30.5 38.9 Teciary 14,818.7 20,422.7 27,075.5 27,507.8 31,923.5 34,426.2 40,129.1 50,632.1 6.6 5.8 6.0 54.4 56.8 54.0 Total GDP 26,603.2 36,978.6 48,506.9 49,283.5 58,802.9 63,511.9 74,260.2 94,042.9 6.8 5.6 8.1 100.0 100.0 100.0 As 1 of GDS CONSOLIDATED PUBLIC SECTOR FINANCES Cutrert Receipte 5,841.8 9,447.1 10,497.1 12,196.4 13,716.7 16,482.8 20,328.5 26,284.3 10.1 8.9 13.6 15.9 27.3 25.6 Cnrrent Expenditures 4,316.6 8,947.2 9,108.7 10,346.6 10,885.9 12,488.5 15,016.3 19,718.7 15.7 5.0 9.8 11.7 18.9 18.9 Public Savings 1,515.2 499.8 1,388.4 1 849,8 2,830.8 3,994.4 5,312.1 6,565.6 -20.0 54.7 30.2 4.1 3.4 6.7 Resourc.e for Investment 1,602.8 570.1 1,484.6 23065.0 2,871.7 4,112.8 5,469.8 6,716.7 -18.7 53.6 22.6 4.3 3.8 6.9 Investment 2,265.2 4,842.9 4,381.4 5 409.0 6,842.7 7,512.8 9,698.0 11,929.6 16.4 3.7 15.7 6.1 9.9 12.2 Deficit (net) 662.4 4,275.8 2,896.8 3,344.0 3,971.0 3,400.0 4,228.2 5,212.9 45.2 -7.9 6.0 1.8 6.1 5.3 ALLOCATION OF G0808 PUBLIC SECTOR So I of Total EXPENDITURE81 A0 17 o t Energy - 5,369.1 6,474.1 7,736,9 6,936.2 - 12.9 - 27,0 31.7 Treospert and Comemunicationo - 1,751.1 1,503.3 1,537.4 1,612.2 - - -4.2 - 8.8 6.3 - Social Welfare - 4,221.9 4,602.0 4 771.8 5,020.2 - - - 4.2 - 21.3 19.6 - Industry - 1,640.0 1,455.6 1,392.4 1,641.5 - - - -5.3 - 8.3 5.7 - Agriculture and Rural Development - 1,977.1 1,617.5 1,562.7 1,991.9 - - - - 7.5 - 10.0 6.4 - G.enral Adulnistration and Defence - 3,290.8 5,160.8 5,552.2 5,450.0 _ - - - 19.0 - 16.6 22.8 - Cor rer - 1,531.7 1,436.9 1,785.2 1,481.7 - - - 5.2 - 7.7 7.3 - Toorisa _ 63.2 73.5 53.9 57.2 - _ _ - -5.2 - 0.3 0.2 - Total - 19.843.9 22,323.7 2 24.505,4 _ - _ - 7.1 - 100.0 100.0 - Period Avers e SRLECTED INDICATORS 0966/70 1971/ 75 1976/82 ICOR 2.82 5.31 6.92 2.70 2.48 2.71 2.94 2.97 4.11 6.75 3.22 3.28 3.98 3.28 Import Elastirity 1.29 0.60 -4.54 5.03 3.55 3.29 1.64 1.14 1.65 0.83 2.64 1.11 1.44 1.47 Marginal Savings Ratio 0.01 -0.02 0.20 0.31 0.22 0.36 0.20 0.22 0.14 0.29 0.30 0.15 0.16 0.28 Value Added Per Worker (1972 Prices) In Millions As 2 of Total 1960-1970 X of Averi,Se LA80R FORCE AND OUTPUT PER WOREER 1960 1970 1960 1970 Growth Rate 1960 1979 1960 1970 Growth Rate Agriculture 5.4 5.1 50.5 39.2 -0.6 608.0 939.0 34.7 33.0 4.4 Industry 2:1 3.0 19.6 23.1 3.6 2,468.9 4,134.9 140.6 145.0 5.3 Services 3.2 4.9 29.9 37.7 4.4 3,222.8 4,044.8 183.6 142.0 2.3 Total 10.7 13.0 100.0 100.0 2.0 1,755.6 2,847.6 100.0 100.0 0.0 1/ Includes esgar. 2/ This low rate of growth is caused by a peak in public investment in 1975. The projected rate for 1977-82 is about 13Y.   - 25 - BALANCE OF PAYMENTS, EXTERNAL ASSISTANCE AND DEBT (US$ million at current prices) ANNeX I Page 5 of 5 Preliminary Actual Estimates Projections 1970 1975 1976 1977 1978 1979 1980 1982 1985 SUMMARY BALANCE OF PAYMENTS Exports (including NFS) 2,745.4 6,081.7 6,836.3 7,795.1 11,176.4 15,503.6 24,806.9 37,601.7 59,787.7 Imports (including NFS) 3,416.9 8,636.7 8,421.7 7,855.0 11,466.4 16,739.9 24,263.2 38,299.6 61,827.8 Resource Balanli - 671.5 -2,555.1 -1,585.4 - 59.9 - 290.0 -1,236.3 543.6 - 698.0 -2,040.1 Interest, net - - 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 Investment Income - 267.5 - 657.5 - 666.7 - 401.4 - 477.4 - 587.0 - 587.0 - 587.0 - 587.0 Workers' Remittances 122.7 174.6 239.6 251.0 277.0 320.0 320.0 320.0 320.0 Current Transfers, net 55.3 123.4 156.0 168.5 197.9 218.0 239.8 290.2 386.2 Current Account Balance -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 Private Direct Investment 322.8 748.8 626.2 555.9 530.0 666.5 738.4 928.3 1,380.7 Public Med. and Long Term Loans, net 258.6 3,565.8 4,262.5 3,937.3 4,079.0 3,129.1 3,375.6 4,230.3 5,656.6 (Disbursements) (821.3) (4,418.6) (5,417.9 (6,232.3) (8,343.3) (10,415.0) (7,203.0) (9,617-3) (15,939.6) (Repayments) (-562.7) (-852.8) (-1,155.4) (-2.295.0) (-4,264.3) (7,285.9) (-3,827.5) (-5,387.0) (10,283.0) Other Capital 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 Term) (139.6) (764.7) (879.5) (-950.0) (-1,489.4) (205.5) (400.0) (529.0) (804.5) (Other Capital, 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 in Reserves (-- increase) -102.1 -165.2 320.9 -504.2 z222.5 -288.9 -1,880.9 -1,744.5 -2,239.5 GRANT AND LOAN COMMITMENTS PUBLIC MED. AND L.T. LOANS IBRD 146.8 310.0 410.0 162.0 494.5 467.0 - IDA Other Multilateral 112.4 121.8 171.2 122.0 152.2 268.4 - Governments 78.8 265.2 280.1 224.3 407.9 21.2 - Suppliers 69.7 158.6 132.3 105.3 133.4 2.0 - Banks and Financial Institutions 443.5 3,360.7 4,561.2 6,996.6 8,240.5 11,690.9 - Bonds - 139.9 318.6 1,262.3 36.4 160.0 - DEBT AND DEBT SERVICE Public Debt Outstanding & Disbursed 3,238.0 11,541.7 16,062.6 20,832.2 25,774.1 28,192.3 EXTERNAL DEBT (end of peridd) Outstanding and Disbursed Interest on Public Debt 218.0 850.4 1,096.6 1,326.7 1,823.2 2,849.6 on Dec. 31, 1979 Repayment on Public Debt 475.6 762.6 1,154.9 2,232.2 4,416.2 7,737.2 Other Debt Service (net) - - - - - - $Millions Percent Total Debt Service (net) 693.6 1,612.9 2,252.5 3,658.9 6,239.4 10,586.8 Public M & L.T. Burden on Export Earnings 2/ (%) Loans a. Public Debt Service 24.2 25.8 31.8 45.5 54.5 66.9 b. Total Debt Service 24.2 25.8 31.9 45.5 54.5 66.9 IBRD 1,730.6 6.1 c. Total Debt Service and Direct Other Multilateral 995.4 3.5 Investment Income 33.5 36.3 41.3 50.5 58.6 70.6 Governments 895.6 3.2 Average Terms of Public Debt Suppliers 384.0 1.4 a. Interest as % of prior year's Bonds 2,515.0 8.9 D.O. and D. 7.4 10.2 9.5 8.3 8.8 11.1 Other Financial b. Amortization as % of prior Institutions 21,671.8 76.9 year's D.O. and D. 16.3 9.2 10.0 14.5 21.2 30.0 IBRD Exposure Total 28,192.3 100.0 a. IBRD D.O. & D. as % of Public D.O. and D. 18.0 9.7 7.6 6.6 5.7 6.1 b. IBRD Debt Service as % of Public Debt Service 7.7 7.2 5.9 4.2 2.9 - Not applicable or available 1/ Includes interest on short-term private and public debt 21/ Includes worker remittances   - 26 - ANNEX II Page 1 of 8 THE STATUS OF BANK GROUP OPERATIONS IN MEXICO A. Statement of Bank Loans (as of August 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 26.6 968 1974 NAFINSA Roads 90.0 11.5 970 1974 NAFINSA Irrigation 47.0 26.5 1022 1974 NAFINSA Airports 25.0 3.0 1053 1974 NAJ'INSA Integrated Rural Development 50.0 36.2 1111 1975 NAFINSA Irrigation 50.0 39.1 1112 1975 FERTIMEX and NAFINSA Industry 50.0 5.4 1186 1975 BANOBRAS Water Supply 40.0 23.8 1232 1976 Ferrocarriles Nacionales de Mexico and NAFINSA Railways 100.0 42.3 1420 1977 NAFINSA Tourism 42.0 31.8 1462 1977 NAFINSA Integrated Rural Development 120.0 68.7 1524 1978 NAFINSA Tourism 50.0 13.3 1552 1978 NAFINSA Industry 47.0 18.1 1553 1978 NAFINSA Agriculture 56.0 51.0 1554 1978 BANOBRAS Urban Development 16.5 14.6 1560 1978 NAFINSA Industry 100.0 40.6 1569 1978 NAFINSA Agricultural Credit 200.0 37.9 969-1 1979 NAFINSA Irrigation 25.0 9.9 1643 1979 NAFINSA Small-scale Agri. 60.0 58.3 1671 1979 BANOBRAS Highways 120.0 119.9 1686 1979 FERTIMEX and NAFINSA Industry 80.0 59.6 1706 1979 NAFINSA Irrigation 92.0 92.0 1712 1979 NAFINSA Industry 175.0 161.8 1820 1980 NAFINSA Small and Medium Mining 40.0 40.0 1858 1/ 1980 NAFINSA Irrigation 160.0 160.0 1881 1/ 1980 NAFINSA Small and Medium Scale Industry 100.0 100.0 1891 1980 NAFINSA Agricultural Credit 325.0 325.0 TOTAL 4,220.9 2/ 1,616.9 Of which has been repaid to the Bank 642.2 Total now outstanding 3,578.7 Amount sold 92.3 of which has been repaid 91.6 0.7 Total now held by Bank 2/ 3,578.0 Total Undisbursed 1,616.9 1/ Loan signed on September 29, 1980. 2/ Prior to exchange adjustments.   - 27 - ANNEX II Page 2 of 8 B. STATEMENT OF IFC INVESTMENTS (as of August 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/ US$25,000. 3/ Gross commitment including amounts sold to participants.  - 28 - 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 kin) 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.  - 29 - 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 - Ba,o 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 MIay 22, 1975; Effectiveness Date: July 30, 1975. Closing Date: March 31. 1981. The Bajio Urea Plant has been completed and the Pajaritos Urea Plant is expected to be completed by October 1980. The Parathion Plant has also been completed. 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.  - 30 - 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. At the Government's request, the closing date was recently extended from December 31, 1980 to January 14, 1982. Ln. No. 1232 Third Railway Pro_ect: $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 stabilization period) was inadequate. The traffic took an upward swing in 1977, continued to rise in 1978, and 1979. As a result, the operating and working ratios improved significantly. The railway company has prepared a revised investment plan on the basis of which new financial targets and a revised list of goods have been prepared and accepted by the Bank. Due to delays incurred in 1976-1977, the project will be completed in late 1980, about two 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 FONATUR indicate that bottlenecks are being eliminated.  - 31 - ANNEX II Page 6 of 8 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. Ln. No. 1524 Tourism Development Project: $50 million Loan of March 21, 1978; Effectiveness Date: January 12, 1979; Closing 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 Prolect; 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 two-thirds 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 Project: 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.  - 32 - ANNEX II Page 7 of 8 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. The Bank Loan has been fully committed to date. 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. Project completion is delayed by about 12 months, to July 1982, due to a revision of foundation requirements made after a severe earthquake in the project area in March 1979. Preliminary estimates indicate cost increases of about 20 percent. Civil construction work is progressing satisfactorily. Basic engineer- ing is about 95 percent complete, and detailed engineering is about 50 percent complete.  - 33 - ANNEX II Page 8 of 8 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. 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$46.6 million of the loan have been committed to subprojects to date, and additional subprojects requiring US$17.4 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: Closing Date: March 31, 1984. Not yet effective.  - 34 - ANNEX III Page 1 of 2 MEXICO SECOND MEDIUM SIZE CITIES WATER SUPPLY AND SEWERAGE PROJECT SUPPLEMENTARY DATA SHEET Section I. Timetable of Key Events a. Time taken by country to prepare project: 11 months b. Project prepared by: FIFAPA/SAHOP c. First presentation to the Bank: March 1979 d. Identification of project: March 1979 e. Departure of appraisal mission: March 10, 1980 f. Post appraisal mission: June 1980 g. Completion of negotiations: September 19, 1980 h. Planned date of effectiveness: February 1981 Section II. Special Bank Implementation Action None. Section III. Special Conditions a. Subprojects still to be incorporated in the project, or which would replace any of the previously selected subprojects, will be selected according to the priority criteria agreed upon with the Bank (para. 51); b. Feasibility studies for subprojects to be financed under the proposed loan will be prepared following SAHOP guidelines and in a manner satisfactory to the Bank (para. 51); c. FIFAPA's financial statements will be audited by independent auditors and copies of such reports submitted to the Bank (para. 54); d. SAHOP will establish specific sub-programs within its national train- ing program to satisfy the particular needs of the AWS companies and will provide technical assistance through its Financial Coordinating Unit as required by the AWS companies (para. 57); e. SAHOP will prepare not later than June 30, 1981 a framework tariff study, satisfactory to the Bank, which will provide the basis for individual tariff studies to be undertaken by each AWS company in accordance with the provisions of the subsidiary loan agreements (para. 58); and  - 35 - ANNEX III Page 2 of 2 f. The following would be a condition of disbursement for each subproject: FIFAPA should enter into a subsidiary loan agreement with a state, municipality or autonomous water company, before June 30, 1982, under terms and conditions specified in paras. 55 and 61. When an AWS company is not in existance the subloan agreement would include the obligation of establishing one within six month of the date of the agreement. Each subsidiary loan agreement should be guaranteed by the State Government and should have been approved by the Bank before disbursements are made on account of such subproject (paras. 51 and 61). Before bids are called for, BANOBRAS will furnish to the Bank for comments the list of all major contracts it intends to award for each subproject and will make any modifications requested by the Bank (para 62). r   SBRD 15092 /0 00ljoz 3 06- 90- JUNE 1980 UNITED STATES OF AMERICA MEXICO MEDIUM SIZE CITIES I \ BAJA t > \ ~guaPnx 2 WATER SUPPLY AND SEWERAGE PROJECT X LOCATIONS OF APPRAISED SUBPROJECTS 171 a, tA<}gR"S9' G f 09 ~< i Medium SizE JoMpproised ct/n <9 C//k X / Maio Sic I cite lEn + oho Plo/PduNo, h bmzIciet1186 NEI Notiona capitol sosux X cA C' Poo ~- Selaoa seh on ronds c 0 ;\\9 \ Dun- > < C A IA 4 'ro cisol air po rts - CAII ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- Diodt hiogdorie |. ,etoo mi/.'d^sr/es shrMltSFu r~~~~~~J g09Zbi"l D9d,; it;;-J=00)0030=;NsB;J )i(c 4C\ 5W W f