Mexico - Industrial Technology Development Project

Document of The World Bank FOR OFFICIAL USE ONLY ,( 1 p> y > -_ Report No. P-4365-ME REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATTONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$48.0 MILLION TO NACIONAL FINANCIERA, S.N.C. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR AN INDUSTRIAL TECHNOLOGY DEVELOPMENT PROJECT July 10, 1986 This document has a restricted distribution and may be used by recipients only in the performance of their official dulies. i:s contents may not otherwise be disclosed without World Bank authorization.  Currency Unit - Peso (HexS) On July 10, 1986, the exchange rate in the controlled market was US$1 Mex$588.00; the freemarket exchange rate stood at Us$1 = Mex$627.00. Fiscal Year January 1 - December 31 Weights and Heasures Metric: British/US Equivalent I meter (m) = 3.28 feet (ft) 1 kilometer (km) 0.62 mile (mi) I kilogram (kg) 2.20 pounds (lbs) I metric ton (NT) 2,205 pounds I liter (1) 0 0.26 gallons (gal) Abbreviations ACF Average Cost of Funds - Costo Promnedio Porcentual (cPP) BdM Banco de Mexico CONACYT Consejo NacionaL de Ciencia y Tecniologia DGN Direccion General de Normas DGPI Direccion General de Promnoc ion Indlustrial EDI Economic Development Institute ERR Economic Rate of Return FOMIN Fondo Nacional de Fomenito Industrial FONEI Fondo de Equipamiento Industrial :ONEP Fondo Nacional de Estudios y Proyectos GATT General Agreement on TariFfs and Trade GDP Gross Domestic Product GIRA General Interest Rate Agrecinent ICB International Competitive Bidding IDB Inter-Amnerican Development Bank IFAD International Fund for Agricultural Development IMF International Monetary Fund IMIT Instituto Mexicano de Investigaciones Tecnologicas INFOTEC Servicio de Informacion Tecnologica ITU Industrial Technology Developmebnt LANFI Laboratorios Nacionales de Fomento Industrial LDC Less Developed Country NAFINSA Nacional Financiera, S.N.C. NIC Newly Industrialized Country PEDER Integrated Rural DeveLopment Program - Progratna Integral de DesarroLlo Econoinico Rural PVP Present Value Payment System - Sistema de Pagos al Valor Presente R&D Research and Development SAP Special Action Program SECOFI Secretaria de Comercio y Fomento Industrial SEMIP Secretaria de Energia, Minas e Industria Paraustatal SHCP Secretaria de Hacienda y Credito Publico SOEs Statements of Expenses SPP Secretaria de Programacion y Presupuesto UNESCO United Nations Educational. Scientific and Cultural Organization  FOR OMCIAL USE ONLY MCO TECHNOLOGY DEVELOPMENT LOAN Loan and Project Susiary Borrower: Nacional Financiera, S.N.C. (NAFINSA) Guarantor: United Mexican States Beneficiary: Secretaria de Comercio y FomenEo Industrial (SECOFI) Fondo de Equipamiento Industrial (FONEI) Amount: US$48.0 million equivalent Terms: 15 years, including three years of grace, at the standard variable interest rate. Rtelending Terms: NAFINSA would pass on through the Government nearly 96% of loan funds to FONEI and the balance of 4% to SECOFI. The Government would repay the principal of the Bank loan, pay interest and all oLner charges, and assume the foreign exchange risk. FONEI would onlend funds through financial intermediaries for conven- tional and conditional technology subloans to industrial enter- prises at interest rates to the intermediaries not less than 88% and 104% of the average cost of funds to the banking system (ACF), respectively. On conditional subloans, FONEI would charge an additional risk premium. FONEI would likewise onlend funds for industrial enterprises to invest in research and development centers, at interest rates not less than 95% of ACF to the intermediary. The intermediaries would take a margin of 6% of ACF. FONEI would additionally onlend funds to financial intermediaries at an interest rate of not less than ACF plus one percentage point, for them to take equity positions in indus- trial firms. Maturities would be up to 13 years, including a maximum grace period of 3 years for conventional and conditional technology subloans and 5 years for equity loans. Research and development investment loans would have up to 10 years maturity, including 5 years of grace. FONEI would offer, as an option, the Present Value Payment System (PVP) in order to ease the cash flow of borrowers. Project Description: The proposed project would be the Bank's first to support exclu- sively industrial technology development in Mexico. Its three main objectives would be to: (a) review instruments and related measures designed to encourage industrial technology develop- ment; (b) strengthen technology infrastructure and metrology services; and (c) expand and improve FONEI's specialized finan- cing program. These objectives would be achieved through five components: vi) industrial technology development analysis; 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 suthorization.  - il - (ii) strengthening of technology infrastructure through feasi- bility studies and private industry investments in restructured research and development centers; (iii) strengthening of metrol- ogy services by assessing the needs of the industrial sector and programs for initial improvement of metrology services; (iv) specialized finance for technology development investments of industrial enterprises; and (v) institutional strengthening of FONEI. The project would help accelerate industrial technol- ogy innovation, thereby helping private firms compete in domes- tic and export markets. Increased availability of funds on terms suitable for industrial technology development, selective use of Government subsidy, and improved assistance in identifi- cation and formulation of subprojects, are expected to result in more, larger, or earlier technological improvements in partici- pating firms. Project benefits would continue to accrue after project completion. Project Risks: This operation would face some uncertainty in that delays in economic recovery could reduce demand for technology development finance. It would also face five project-specific risks: delays in expanding FONEI's specialized staff, in implementing SECOFI's policy and metrology components, and in restructuring research and development centers; slow demand for FONEI's condi- tional loans; and potential financial losses due to failure of subprojects. To deal with some of these risks, the Government has already authorized expansion of FONEI staff, and recruitment is underway; feasibility studies for the research and develop- ment centers have been completed, and investment plans are under preparation with the assistance of cons-ultants. Delays in restructuring the four centers would not jeopardize other proj- ect objectives, while a slack demand for conditional loans would only extend the commitment periad for subloans by one year. Furthermore, adequate provisions have been made for potential losses under FONEI's conventional and conditional technology loans. The probability that these risks will materialize is low, and the arrangements proposed to deal with them are satisfactory. Estimated Cost: Foreign Local Total -- USS Millions ------- Policy Analysis 0.1 0.7 0.8 R & D Centers Studier & Promotion - 0.2 0.2 Investments 5.5 8.2 13.7  - lli - Estimated Cost: (continued) Foreign Local Total -- US$ Millions