Mexico - Highway Construction Project

R E S T R I C T E D ~'1~Y S JE CrQ}R e p o r t N o. P-234 E Cr1; This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S. A. IN MEXICO October 5, 1960  INTERNATIONAL BANK FOR RECOINTRUCTION AND DEVELO.MENT REPORT AND RECCMMENDATIONS OF THE PRPSIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA,S.A., MEXICO L. I submit the following report and recommendations on a proposed loan in various currencies equivalent to $25 million to Nacional Financiera,S.A., to help finance the foreign exchange cost of a project for highway development in Mexico. PART I - HISTORICAL 2. In the summer and fall of 1959 preliminary discussions were held in Washington and Mexico City between representatives of the Mexican Government and the Bank to explore the possibility of financing by the Bank of a highway project in Mexico. In March- April 1960, a Bank mission visited Mexico to examine the technical and economic aspects of the portion of the Federal five-year high- way program for which the Government desired Bank financing. 3. Loan negotiations took place in Washington between September 7 and 20. Nacional Financiera was represented by Messrs. Martinez Ostos and Valladares, and the Government by Messrs. Espinosa, Rodriguez, Mendizabal and Calderon, all officials of the Secretariat of Public Works. 4. The proposed Bank loan would increase the Bankts lending to Mexico to $211.3 million (net of cancellations and refundings).  - 2 - The Bank has made the following loans to Me,xico: Amount Year No. Borrower Purpose (equiv.in $ mill.) 1949 12 ME Nacional Financiera & CFE Electric Power 24.1 Development 1949 13 ME Nacional Financiera & CFE Electric Power 10.0 Developmaent 1952 56 ME Nacional Financiera & CFE Electric Power 29.7 Development 1958 194 ME Nacional Financiera & CFE Electric Power 34.0 Development 1950 24 ME Mexlight Electric Power 26.0 Development 1958 1S6 ME Mexlight Electric Power 11.0 Development 1950 33 ME Bank Consortium & Development of small 10.0 Financiera industrial projects 1954 103 ME Ferrocarril del Pacifico Railway Rehabili- 61.0 tation _ Total 205.8 Cancellations and refundings 19.5 186.3 Of which has been repaid 23.1 Total now outstanding 163.2 Amount sold $15.9 Of which has been repaid 10.0 5.9 Net amouht now held by Bank 157.3 1 1/ Inacludes $17.8 million not yet disbursed  - 3 - PART II - DES CRIPTION OF THE FROPCGED LOANS 5. Purpose: To finance the construction or reconstruction of roads totaling about 3,200 km, all of which are part of Mexico's Federal Highway System. Borrower: Nacional Financiera, S.A. Guarantor: The United Mexican States Amount: The equivalent in various currencies of $25 million Amortization: 30 semi-annual instalments from May 1, 1965 to Novenmber 1, 1979 Interest Rate: 5 3/4% per annum, including commission Co.mmitment Charae: 3/4 of 1% per annum Payment Dates: May 1 and November 1 PART III - LEGAL INSTRUivENTS AND LEGAL AUTHORITY 6. Attached are a draft Loan hgreement between the Bank and Nacioilal Financiera (No. 1) and a draft Guarantee Agreement between the Uinited Mexican States and the Bank (No. 2). Nacional Financiera would be the Borrower since, under Mexican lawr and practice, it is the agency through which the Government contracts for foreign credits. Since the Project is not to be carri.ed out by the Borrower but by the Secretariat of Public Works, which is a branch of the Government, the provisions relating to the exe- cution and supervision of the Project, as well as the Description of the Project are in the Guarantee Agreement rather than in the Loan Agreement. 7. Other provisions of the Loan and the Guarantee Agree- ments of special interest are:  - 4- (a) Loan Agreement (i) Section 2.03 provides that disbursements from the Loan Account would be made on the basis of a percentage to be agreed from time to time between the Guarantor, the Bank and the Borrower representing the foreign exchange component of the amounts expended by the Cuarantor for the execution of the Project. Disbursements would be made in dollars or in such other currencies as the Bank might rea- sonably determine. (ii) In Section 5.01 the Borrower undertakes to make with the Guarantor arrangements satis- factory to the Bank for the transfer of the proceeds of the Loan from the Borrower to the Guarantor and Section 7.01 makes the com- pletion of such arrangements a condition of effectiveness. (b) Guarantee AGreement (i) In Section 3.01, by which the Guarantor would assume direct responsibility for the execution of the Project, the Guarantor would also under- take to give the Project priority within its highway construction program. 8. Nacional Financiera is authorized by decree of the Mexi- can Congress of December 30, 1957, to incur the proposed Loan and, as the Government's representative, to guarantee the Loan on behalf of the Government. 9. The report of the Comlittee provided for in Article III, Section 4, (iii), of the Articles of Agreement of the Bank is at- tached (No. 3). PART IV - APPRAISAL OF THE PROPSED LOAN Justification of the Project 10 The appraisal of the Project (TOD Report No. 256a)is attached (No. 4).  - 5 - 11. The expansion and improvement of Mexicots highway system is essential to the country's economic development. The size of the country and its difficult topography present serious obstacles to the establishment of an adequate system of land transportation. Mexico has given high priority to the development of its highway network, especially since the end of the war and Mexican paved roads now total 45,000 km. The number of vehicles and the consumption of gasoline has more than doubled in the last ten years. As a further step in the development of the Federal highway system, the govern- ment is undertaking a five-year program for the construction or improvement of 14,000 km. of highways. 12. The Project to be financed by the proposed Loan consists of the construction or improvement of thirteen roads, totaling 3,200 km. in length, which are among the most important roads in the overall five-year program. The economic benefits to be derived from the completion of each of these roads fully justify the invest- ment requiired. Appendix B in the project report analyses these benefits in detail. In brief, six roads will provide shorter and faster lines of communication between important cities and areas in the country; two roads will be reconstructed to higher standards since they are no longer adequate for the volume of traffic they must carry; and five roads will either provide access to populated areas now largely isolated from the rest of the country or will open up .t settlement underdeveloped regions having a substantial agricultural potential. 13. On the whole, the Project will improve transport conditions, reduce road distances, lower the operating cost of vehicles and reduce the cost of transportation. It will help the development of agriculture, cattle production, industry and mining and facilitate trade within the country as well as international trade. Execution and Methods of Procurement 14. The Project will be carried out under the supervision of the Federal HighwayT Authority (F.H.A.) which is the agency within the lMinistry of Public Works responsible for the planning, construc- tion and maintenance of Federal highways in the country. The F.H.A. is staffed by about 450 engineers and technicians and about 1,400 administrative employees in Mexico City and in the field. Its organ- ization and operations are efficient and its technical equipment adequate for the planning, design, supervision of construction and maintenance of the present and the proposed Federal highway system.  15. Actual execution of the PF;oject would be done by con- tractors whose services would be obtained through international competitive bidding. Bids would be invited on sections of the Project of a size adequate to make possible the participation of foreign as well as national contractors. However, with respect to work on five roads, on which construction must resume when the short dry season starts in November, bidding will be done only by Mexican contractors. In subsequent years, the remaining contracts for work on these roads will be 'et after international competition. Less than 15% of the total cost of the Project is affected by the one-year exception. Financing 16. The total cost of the Project is estimated at about USj 68.6 million equivalent. The loan funds of $25 million would cover the foreign exchange component while the local currency cost, about p43.6 million equivalent, would be financed from annual ap- propriations in the Federal budget. 17. The amounts that the Government would contribute for the local cost of the Project represent only about 23% of its planned budgetary allocations to the 1960-1964 Federal highway program. Economic Position 18. A report on the "Current Economic Position and Prospects of Mexico" (R 60-98) was distributed on Auguist 12, 1960. This report points out that the Mexican economy has been expanding at an average rate of 5.6% per year over the past twenty years and that growth has been uniform as between sectors, with agriculture expanding at a pace comparable to that of the manufacturing and the service indus- tries. Mexico's foreign exchange earnings capacity has also risen rapidly through diversification of commodity exports and increasing tourism. Exchange receipts on current account in 1959 reaclhed the all-time peak of 41.5 billion, although the proceeds from traditional exports (cotton, coffee, copper, lead and zinc) fell since 1957 be- cause of declines in the prices of these commodities. The high rate of growth must be attributed largely to the great flexibility of the econormy, to sound economic management and to an extensive pro- gram of public investment in basic facilities.  - 7 - 19. Notwithstanding substantial deficits in Federal Govern- ment accounts over the past few years, the monetary authorities have succeeded in maintaining a large measure of price stability in the economy. The budget deficits are, however, being cut down by reductions in Federal support given to certain public enterprises. As a result, the 1959 Federal deficit was about half as large as that of 1958. Indications are that the reduction of fiscal defi- cits is likely to continue. 20. At the end of June 1959 the total external public debt of Mexico was estimated to amount to US$ 774 million equivalent. During the second half of 1959 and early 1960 the Goverrment resorted to heavy external borrowing. The service of this debt, however, is not excessively burdensome in terms of the country's current fo-eign exchange receipts and of the levels they may be expected to attain in the future. Until 1958, service payments on the official foreign debt of Mexico represented considerably less than 10% of current foreign exchange receipts. The ratio rose to 12.3% in 1958 and to 11.8% in 1959. In 1960 the ratio would have been about the same but will be around 1U4% because of the voluntary retirement of a block of outstanding bonds. Service of the debt outstanding at present would amount to about 10% of estimated current foreign exchange receipts in 1961 and falls rapidly there- after. Prospects for Fulfillment of Obligations 21. The Project has been well prepared by the Mexican Federal Highway Authority which is also well qualified to supervise its execution. The Government has undertaken to make available promptly as needed all sums required for the carrying out of the Project and to give priority to the Project within its highway construction program by revising, if necessary, the construction schedules of other parts of the program. 22. Mexico should be-able to service the proposed Loan in addition to its existing debt. PART V - COMPLIANCE WITH ARTICLES OF AGREEIMNT 23. I am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank.  - 8 - PART VI - RECOM4E.NDATIONS 24. I recommend that the Bank make a loan to the Nacional Financiera,S.A. with the guarantee of the United Mexican States in an amount in various currencies equivalent to $25 million with interest (including commission) at 5 3/4% per annum and on such other terms as are specified in the attached Loan and Guar- antee Agreements and that the Executive Directors adopt a Resolution to that effect in the form attached (No. 5). W.A.B. Iliff, Vice President for Eugene R. Black, President Washington, D. C. October , 1960