Mexico - Second Mexican Light and Power Project

R ESTR I CT E D FILE COPY R e p o r t N o. P-136 This report was. prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or- completeness of the information contained herein. INTERNATIONAL BANK FOR R-ECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE MEXICAN LIGHT AND POWER COMPANY, LIMITED IN THE UNITED MEXICAN STATES July 30, 1957  INTERNATIONAL BA1NK FOR RECONSTRUCTION -ND DEVELOPMENT REPORT AND RECOWIiENDATIONS OF TIE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TffE MEXICAN LIGHT AND POCER COMPANY LIMITED FOR THE EXPANiSION OF ITS GENERITING, TH-NSiMISSION A,`TD DISTRIBUTION FACILITIES 1. I submit herewith the following Report and Recommendations on a proposed loan in an amount in various currencies equivalent to 411 million to the Mexican Light and Power Company, Limited (Mexlight) to finance the foreign exchange costs of expanding its generating, transmission and distribution facilities. PART I HISTORIC-.L 2. The Bank, on April 23, 1950, rade a loan of "'26 million to Mexlight to help finance its 4-year construction program for the expansion of its electric power-generating, transmission and distribution facilities in Mexico City and surrounding area. 3. This loan was fully disbursed by June 16, 1956. The projects, which have been completed and operating since December 1955, have increased lIexlight's generating capacity by 155,600 kw bringing it to a total of 490, 100 k-wJ. 4. To meet the continually growing demand, Mexlight has over the past years been preparing plans for thie further expansion of its plants. The new capacity, and the corresponding expansion of transmission and distr' .oution systems, are the basis of the proposed new loan. 5. As a consequence of the !pril 1954 devaluation of the peso, the Mexican Government granted in October 1954 an increase of about 21% in Mexlight's average rate. Subsequent increases in the cost of fuel and labor made a further rate increase necessary, for which Plexlight applied in June 1955.. 6. Meanwhile Mexlight started informal conversations with the Bank on the first step of its expansion program, namely, the project described herein for expanding its thermal electric generation, transmission and distribution systems in the Mexico City area. An application for a loan of the equivJlent of pll million was presented to the Bank in June 1955. 7. A detailed field study of the project was carried out in July 1955 and informal discussions were hield in Mexico City and viashington during 1955, 1956 and 1957.  S. As indicated in the Secretary's Memorandum to the Executive Directors of May 10, 1957 (R57-34) :Iexlight's rate application was acted upon in DecEnber, 1956 and a rate increase of about 12.5k became effective on January 1, 1957; an agreement clarifying certair questions of interpretation of the present tax law and providing for a government grant in case Mexlightfs earnings fell short of an agreed amount was also reached and arrangements for local financing were concluded with Nacional Financiera. 9. Formal negotiations for a loan were, therefore, opened in Uiashington on May 16, 1957. The lexican Governrment was represented by Mr. Raul Martinez-Ostos, assistant Director-General of Nacional Financiera and Mexlight was represented by 1I-r. William H. Draper, Jr., Chaiman of the Board, Mr. E.A. Greydon, Vice-President and David G. Guest, Counsel. Ale negotiations were concluded by mid-July. 10. As proposed at the meeting of the Executive Directors on May 14, 1957 it had originally been intended to initial the loan documents and to submit them to the Executive Directors for final approval %when the Govern- ment had obtained thle necessary guaranteeing authority. During the negotiations, however, the Governirent indicated that it woould prefer to have the documents executed now makirg their effectiveness subject, among other tliings, to the passage by the ie:zican Congress of legislation ratifying the action taken by it. Mexlight and the Bank agreed to this procedure and the documents, therefore, are now being submitted for final approval by the Executive Directors. 11. If the proposed loan is made, it would increase the total amount o-