Mexico - Industrial Recovery Project

Document of The World Bank FOR OFFICIAL USE ONLY lepnR No. 12234 PROJECT COMPLETION REPORT MEXCO INDUSTRIAL RECOVERY PROJECT (LOAN 2746-ME) AUGUST 6 1993 MICROGRAPHICS Report No: 12234 Type: PCR Country Operations Division I Country Department II Latin America and the Caribbean Regional Office 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 authorization.  CURRENCY UNIT - PESQ (MEX$= Mexico has a managed exchange rate with a pre-announced devaluation of a maximum 40 centavos daily. On April 1, 1993, the exchange rate was US$1.00 = Mex N$3. 1381 FISCAL YEAR January 1 - December 31 ABBRIE-ATION EDL Export Development Loan FSAL Financial Sector Adjustment Loan FONEI National Trust Fund for Industrial Equipment (Fondo Nacional de Equipamiento Industrial) GIRA General Interest Rate Agreement UATr General Agreement for Trade and Tariffs GDP Gross Domestic Product GOM Government of Mexico IM International Monetary Fund IRL Industrial Recovery Loan NAFIN Nacional Financiera, S.N.C. NAFTA North American Free Trade Agreement PACrO Economic Solidarity Pact PVP System of Variable Payments Based on Present Value (Sistema de Pagos Variables al Valor Presente) SAR Staff Appraisal Report SHCP Secretariat of Finance and Public Credit (Secretaria de Hacienda y Credito Publico)  FOR OFFICAL USE ONLY THE WORLD BANK Wshinton, D.C. 2043 U.SA Ofti. of Dir.otor-4.neaw Opernatlo Evauatlon August 6, 1993 MEMORANDUM TO THE EXECUTIVE DIRECEORS AND THE PRESIDENT SUBJECr: Project Completion Report on Mexco - Industrial Recovery Project (Loan 2746-ME) Attached is the Project Completion Report on Mexico - Industrial Recovery Project (Loan 2746) prepared by the Latin America and the Caribbean Regional Office, with Part II of the report contributed by the Borrower. The broad objectives of the project were to improve the quality and broaden the scope of financial services to medium and large industrial enterprises. Ihe resource transfer objectiae of the project was met through the provision of a timely and valuable line of credit for industrial restructurng However, the objectives aimed at improving the quality of services and promoting financial sector development were largely unmet. These innovative aspects of the project suffered from deficiencies in design, lack of local commitment, and a rapidly changing economic environment. The Bank's performance in project preparation and supervision was poor. Preparation was based on insufficient understanding of financial sector issues and Bank supervision was cursory. Overall the project is rated as marginally satisfactory. Institutional development is rated as negligible and sustainability is uncertain. The PCR presents a candid assessment of the project's outcome, but lacks sufficient information on project management and the performance of subloas. Ihe Region notes that the latter is due to the Borrower's loss of project files during an inst>:-tional reorganization. The project will be audited along with several other financial and industrial sector operations. Robert Picciotto by IL Eberhard Kopp Attachment Ihi document has a tetricted dbtnbutbon ad may be used by retdpints only in the peform of thei offica dutu& Ift contents may not otheaw be disoased without Wrd Bak authoratio. I  lot OMCIAL tUS ONLY PRE ACEgr......... ..........*......*..............*...*..... 1 EVLUTONetSUMMARY *.........*......................... 6i P!4tectldeslts ...... ....... *...*..*.* ..1 Banck Obeciv ..Dscpto..................*.............. 14 l4ess Dns l.anud Or....ti*...........~..................... 16 prqject . ...# *..... *.....*. *.....**. ...*. * 1..8 PATLA14 EXES *............ 0 4. ..............**.e *...** 19 Annex!! Susaitaanb eif ...................................... 14 akPefrance2 onthly . lnltono...BE Rate . ... . . . ... . . ........ . . 20 PA sT ons PROECm RE..E ..PROM .T ...BO .ROW .R.....R ......V....... 216 PR lLo STATPOfoISTIAm. ...OR)1soN ... se .. . ... . . ... # . .. . .. . .. . .. 172 Tab!e2 loniljatoz .................................t* * * ** * * 32 Ta sleS Disi utinfSutionandDs .* .... ..................*****e**** 33 PATbL ANNE ..........................................*e******* 34 TAble L Aaboid -Subloms by Reg-n Ac. .. v.i. i . .. . . . . .. o .... es.. . 36 TAbleIL T Cmhat 1 Rep ayu in It .e...CDP**nd ..v*s t * *..............** 39 TabIe ExpCheart 2MndsyofRel tiu.. .. Ron .. .. . .... .... ... ...*..... 20 ~att Su Chant by ~uRed ofDstinatiRwon . . # . ............ see. ... . .. .. . ... 420 P.ART 2 STATusofSubALs INppRUone o b Ai . . . . ................ . .. 294 Tat 3 statu of Sublesand p vdb Numbe... .... . . . ... .0 . . ... . ....4 This 6 do pet haa rwestmite dsrby utiosadw may..be.used by re..in. onyI teprfrm T* 7 terofcAluthoizesd Isconet may sotd otherwise be .i.c.s ..wthot.o..........ulao. 3 T" T m ndRoyad ........................ 3 Cht R8ofSPosApp CbyNmer .................... , 44 Th ouenthaa LekOd dSUdbudi^ y b use ynpns0 nt wamf ofPAR kWdTI. t PoJtEnt a tbRW e DAVRi{TBBBANKSESE 1hm o aksddd  MEXICOMC s2lD~ sPRWAX This is the Prject Compleion Report (PCR) for the Industrial Recovy Project m Meuico, for which Loan 2746-ME in the amount equivaet to US$150 million was approved on July 29, 1986. The loan was closed on December 31, 1992. It has been fuly disbursed and the last disbursement was made on January 28, 1993. The PCR was prepared by the Mexico Coumtry Opeati Diision (LA2C1) in the Lain America and the Canibbean Regional Office (Peface, Evaluation Summary, Part I and III). Part II was pepared by the Borrower. Preparation of this PCR was starte in August 1992 and is based, WiMlr al on the Staff Appaisal Report, the Loan and Guarantee Agreements, supevisiokrepmo and ther sucessive ,upervion repos, corr dence between the Bank and the Borrower, and internal Bank msemorada.s  ii LdO" NO.,74d PROJEOMPLETVION PO EYALUAfl NSUMMARY 1. QMectives The Industial Recovery Loan (IRL) was the fifth in a series of loans to the National Trust Fund for Industrial Equipment (FONEI). he main objectives of the IRL were in ine with the preceding loans in the series and were to help consolidate a financial apex institution to hmdle the long term financial needs of large and medium size industral enterises. Adtionally, the objectives of the fifth loan put emphasis on financial sector development to help upgrade the competitiveness and efficiency of firms during a period of tranition through (i) reestblishing an adequate supply of long term invesunent capital as well as working capital funds to increase production and (ii) introducing financial innovations designed for a transiton period, namely a modified form of inteest capiton and a pilot schme to tes market acceptance and rles for equity investments. A technical assisce component was included with the objective of upgading the corporae finance capabilities of participating financial institutions and spporting deeper analysis of financial markets and financial needs of industrial companies to set the stage for a fiancial sector restcturing option. (para. 10) 2. The IRL was prepared during the inital period of gestation of implementation of the dramatic process of complete restucting of Mexico's economy. While the IRL did not contn policy conditionality, it was presented to the Board in July 1986 as patt of a broader assstance pacpage tat was conditnal on the trade reform program and on macreonomic arrangementswith the Mntetnational M roneay Fund. The package was for a total amount of US$698 million, including the IRL (US$150 million), the first Thrde Policy Loan I (La. 2745-ME, US$500 million) and the Industrial Technology Loan (Ln. 2747-ME, US$48 million). (para. 13) 3. Imp1mmn n Erince. Project implementation went well when masured by timely disbursment of project funds. During the first thr years of the commitment period actal disbursements stayed well ahead of SAR estimates, despite the diret competion between FONEI's line of credit and NAFIN's similar pograms which were slighty cheaper and monsiderd much easier for potntial borrowers to obtain. Credit tightening  Hii during the second half of 1987 and the continuing shortage of long term investment credit gave the traditional component of the project a high appal. The loan was closed on December 31, 1992. The last disbursement was made on January 28, 1993. (par. 19-20) 4. On the contrary, implementation did not go well when measured by progress on fnancial innovations. There was little demand for the innovative 1RL aspects and components, which had been an essential rationale for the Bank's involvement. It appeas there were not enough interest by and incentives for commercial bank to promote and carry out innovative but potentially higher risk activities given the strong demand for traditional long- tem financing by financially sound borrowers. Moreover, private enterprises in Mexico, indeed in Latin Ameica, are known for their conservative approach especially when minority equity pardcipation by outsiders is concerned. In addition, as part of GOM's effort to increase efficiency of the firnacial sector, in June, 1989, FONEI was transferred to NAFIN, and ihortly thereafter it was fully absorbed into the bank's operations. The change in the role of FONEI, and related financial reforms that were taking place, led to substantial uncertnty among the staff of the two agencies as well as their clients. This also partly expWlains the difficulties in realizing the innovative components of the project. (paras. 21-24) 5. Resu tne IRL mobilized a total amount of credit equivalent to about US$307 million, spread over 262 subloans. As thmes funds were almost the only source of long term credit avalable to Mexican industralists dunng the first years of the project, the IRBL played a modest but effective role in helping the induswtrial recovery which began to appear in 1987 (para. 27, Annex I) Based on a sample of 41 subprojects, it is estimated that about 10,000 new jobs were generated, at an average cost of about US$28,000 per job. The figures suggest that the bias towards high capital intensity, which chaacteized previous loans (under FONEI IV, the average investment cost per job generated was US$63,000), may have been diminished. The lower cost per job created may be a reflecdon of the wider distribution of the credit among industrial sectors and a greater proportion of investments for balancing of capacity and technology improvements instead of capacity increases. This is an additional indication of the high allocative efficiency of the trade liberalizion reforms to which the IRL was linked. (paras. 28-30; Part m, Table 10) 6. From the point of view of the IRL specific task of contributing to fincial market transformation and innovations, the balance is clearly negative. Expected demand for such instrumts by enterprs and their banls never materialized. The imnovative PVP repayment option was chosen by only 5% of the subloan recipients, coresponding to 8% of the amount of  iv the IRL. Only 5 equity loans were made, for a total amount of US$5.7 million. The technical assistance program, as defined under the IRL, was not carried out by NAFIN. Originally, the traditional investment comriponents (equipment and worldng capital subloans) were allocated 86% of the IRL (52.3% for investment and 33.1 % for working capital). In comparison, the results show that the traditional parts of the project took up 97% of the loan proceeds (70% and 26% respectively). (paras. 21-22) 7. Sustainability. Although the actual economic and financial benefits of the subprojects cannot be sufficiently quantified, the findings of the PCR lead to the conclusion that the resources mobilized by the IRL were efficiently allocated, due to (i) the link with the trade reforms that meant that the subloans were granted within the framework of implementation of -t liberal trade regime and (ii) FONEI took special care in its project evaluation to assess international competitiveness, by using internaonal prices and not domestic prices. The quality of the evaluation is confirmed by the very low level of default and arrears for the subloans in spite of increased competition and very high interest rates during the initial phase of project implementation. (pam 31) 8. LeIssonsILameLd A series of important lessons can be drawn from project design, institution building, policy linkages and conditionality, and project implementation in a rapidly changing environment. The key is a rapidly changing environment, to which it should be added that at the ime of preparation of the IRL the Bank was not fully informed on GOM deliberations of financial sector issues due to political sensitivities. For the IRL project, it meant that the conceptual foundations of the innovative aspects of the project were not shared equally by all parties. The events during project implementation suggest however that it was premature politically to try to enihven a subsectoral assisance program with broader objectives of financial engineering of companies and capital market development. In cases of uncetainty due to lack of data and in a rapidly changing environment, risk could be reduced more effectively by tight and clear project design on components that are openly agreed. (pa. 36) 9. As regards project design, it was an error to ask FONT11, for administrative simplicity", to express the commercial banks' margins as fixed percentage points rather than as a percentage of Mexico's average cost of funds index (CPP). This arrangement had perverse effects: the real financial cost to the borrower decreased with accelating inflation, and increased as inflation declined. Thus the success of the macroeconomic stabilization policy supported by the Bank, led to a wave of advance repayments of IRL subloans. (paa. 37)  v 10. Tho IRL put a lot of weight on a small quaty institon to perform similarly well in new and vary complicated areas of copore finsan financial reuctring, capital maket analyis, and promoton of equity instuments. veopment of now ar of experse takoes tm and activ support from eperienced professionas a wel u sufficent demand for dth new serices. The results of the IRL indicat that greater a n of an Institution, even a good one, ls needed prior to piloti lnnovative prgrams. (pan. 38) 11. In the rpidly changing envi pv at th , the csoidatin of a number of th exing tut fds for gt dF.cemy became a ditinct possibility, which the Bank in punciple fkvored As PON was a relatively small insttuion, the probability of It being absorbd by a laWger entity was high and the probability ta Its prgrm would be disnmaed was also high. In such cases when devdopments las duing proect implementtion t suggest that substntiv changes in the project may be in the offing, the proect should be coverd with mor attenive upervisin to track developments and to prepare an appropra respn for the proe (paa 39) 12. No financial sector conditons were dietly placd on ts loan, although for Board pentaim it was a td with a poiUcy-bad lo suprig trade reforms. Deeper knowledge of the fini sctor undoubtediy would have heped to formulate aroproat md at providing more incentives for i mio of the Inovative pi componens which 'justdfied the operai at the tm. (pm 40)  PART PROJE REaIEW FROM THE BAK'S PERSPECRSE Name Industial Recovery Project Loan No. : 2746-ME RVP Unit : Latin America and the Caribbean Region Country : Mxico Sector Industry 1. Loan 2746-ME was the fifth loan channeLed through the Bank of Mpxico's tu fund FONg and one of the last under the Bn 's policy to SUpport second tier instittitons to fince specific target groups through p financial intermediares in Mexico. It was prepared during the initial period of gestation and implemenion of the dramatic process of complet recing of Mexdco's economy. The project was thus caried out m a rapidly changing economic environment. Furthermore, during loan iplementation the overall country astance strategy that te Bank was pursuing in Mexico was significantly modifid to support the shift in Govemment economic policy. For these reasons, it is of particular relevance for the ex-post evaluation of this prqoect to give an important weight to the macoecnomic context and to the formaton of the Mexican economy and its fincial istultion. 2. Tbe cises ienced by the Mexican economy in the first half of the 1980s were among the most severe tat the country had experinced in its hito. Beginning with the end of World War H through the mid-1970s, the economy enjoyed a strong GDP growth rate exceeding 6% per annum on aver, accompanied by exchange rate, monetay and fiscal stability. Consadve monetary and fiscal policies, however, were abandoned after 1972 leading to double digit inflation and a seies of peso devaluations. A short period, 1976-1978, involving some stabiliaton eftfots was followed by  2 highly expansionist policies, geneated by euphoric expectations for growing oil income and centering around the public sector as the engine of growth. GDP expanded by an annual average of 8% from 1979 through 1982 but this growth was unsustainable: it was characterized by soaring fiscal and balance of payments deficits, acceleated inflation and dependence upon massive foreign borrowing and oil revenues. 3. Tle debt crisis in mid-1982, triggered by the fall in international oil prices and rising world interest rates, forced the new administration, which took office at the end of ftat year, to adopt a stringent stabilization program and to seek external debt relief through the postponement of debt servicing. In 1983, the budgetary deficit was sharply reduced and the trade deficit was changed to a substantial surplus, but at the cost of a 4% decline in GDP. Some recovery in output was recorded in 1984 and early 1985 and the external accounts contnued to record surpluses. While the publc sector primary deficit also shifted to surplus, inflation rates continued at relatively high levels. A modest attempt was made to liberalize the external sector while some progress was achiev.ed in divesting mainly small public enterprises. 4. The economic difficulties confronting the authorities in the mid 1980s were primarily the result of past economic policies dominated by an oientation toward the internal market, the large role for the State and a highly regulated business environment, and of the mismanagement of the economic windfall provided by the discovery of substantial hydrocarbon resources in the 1970s at precisely the moment when the prices of those resources experienced a sharp rise in international markets. In mid-1985, the economy once more experienced a severe external shock as oil prices, which had hardened somewhat after the declines in 1981-1982 from historic high real levels, again began to tunble with serious repercussions on the public sector deficit as well as on the trade balance. A destructive earthquake in September 1985 inflicted fiurther damage on the economy. 5. Following the change in administration at the end of 1982, the Bank and Mexican policy makers initiated an extensive policy dialogue in connection with the first Export Development Policy Loan (EDL 1) approved in June 1983, and EDL II in 1985, as the Bank sought to provide urgently needed foreign exchange resources to assist the stabilizationi effort and to help design the subsequent trade reform process. Given the Limited results from the earlier stabilization effort, the Government recognized the need to embark on more comprehensive adjustment measures in order to change the basic economic structure and to improve resource allocation. As a consequence, renewed measures for stabilization were accompanied by a major external trade liberalization program and by a series of large peso devaluations. The program was supported by two Trade Policy Loans (IPL) from the Bank  3 approved in July 1986 and November 1987. It was widely recognized that trade liberalization would need to be matched by similar reforms in other key areas of domestic policies to achieve increased private investment and participation in the industrial sector. In December 1987 one of the principal features of the stabilization program was introduced in the form of an agreement (the PACTO) between the Govemment, labor, farming and business representatives. In return for fiscal and monetary restraint, the frezing of public sector prices and tariffs, and the freezing the nominal exchange rate vis- a-vis the dollar, wages and private sector prices also were frozen. 6. The Bank's lending activity to the industrial sector was focussed on addressing the financial needs of spefic target groups, in order to try to make up for the shortfall in long tem funds available from financial institutions. Small and medium-scale industry was assisted by four loans, totalling US$507 milion; the capital goods industry rceived a loan of US$152.3 million; the two EDL loans totalling US$600 million addressed industral export promotion; a loan of US$48 million was allocated to the development of industrial technology; another for US$60 million helped to reduce environmental pollution; and, five loans to FONET amounting to US$510 million (including the Industrial Recovery Loan-IRL) were devoted to providing supplemental medium- and long-term financing for investment projects. 7. The presentation of the IRL to the Board was linked to reaching agreement on the first Trade Policy Loan (TPL 1), which was itself conditional on the irreversible opening of the Mexican economy as well as on other macroeconomic criteria. TPL I, the IRL and the industrial technology loan were presented to the Board as one package. (See pam 13) After the IRL approval, a set of sector adjustment and hybrid loans, adding up to an impressive total of US$5.2 billion over the fiscal years 1987-92, provided incentives for a comprehensive reform package combining macroeconomic policy with micro adjustments in key areas. ftFect Objectives-and Descritom 8. Despite the temporary recovery of the industral sector in 1984/85, subsequent to EDL I and in parallel with EDL II implementation, serious constrains remained. The sudden growth in manufactred exports in 1983/84 was the result of a suppressed domestic market and a drastic cufrency devaluation, and not of increased internatonal competitiveness or export orientation. Mexican companies in general had not introduced much-needed improvements in their competitiveness. In addition, the financial situation of many companies remained precarious. As a result of the high foreign debt exposure and the massive devaluations of 1982-83, many companies faced  4 excessive debt/equity ratios and shaply increasee debt serce obligations in pesos. Furthermore, the supply of adequate financial resources for industral investment had severely deteriorated with increasing inflation and Government regulation. Trade opening was expected to put additional major stains on the financial situation of most industrial firms. The Bank and the GOM agreed that the poor competitiveness of the industl sector was aggavated by a lack of adequate long-term financing: the weak fuiancial position of many entaprises impeded further borrowing, even for promising projects or markets. The Bank supported the Government's view that, since improving competitiveness required additional investment in plant, equipment, and working capital, it was necessary both to improve the availability of financial services to the industrial sector and to strengthen the financial structure of individual companies. 9. As the previous Bank's loans to FONEI had succeeded in consolidating the trust fund into a mature financial apex institution with a record of efficient performance, FONEI was chosen as the vehicle for introducing innovative financial techniques for corporat financial restuctuing and facilitating cash flows and helping to build up the equity market in Mexico. The project also aimed at consolidating the long-run institution building purpose of the four preceding FONEI loans. 10. The Bank's m ai in making this fifth loan to FONE were in line with the previous loans, but put additional emphasis on financial sector development to help upgrade the competitiveness and efficiency of Mexican firms during a transition period, through re-estabLishing an important supply of long-term funds, upgrading the corporate finance capabilities of participating financial institutions, and setting the stage for possible limited financial sector restructuring. The IRL aimed at improving the quality, and broadening the scope, of financial services to medium and large industial companies. Given the poor financial stucture of many industial companies, the design of company-specific financial packages covering the long-tem financing and financial restructuring needs of a company as a whole was of particular concern, rather than the resource requirements related to a diwrete equipment investment. The Bank also expected to continue helping FONEI achieve institutional improvement, including having spillover effects on commercial banks. Thus, the project specific objectives were: (i) to adapt lending terms to a high-inflation environment through the introduction of a new repayment mechanism,  called UpypSi, which essendally capitalizes a major pordoan of the interest payments, thus reducing the cash drain on borowers during early maturites; A) to inoduce on a pi baus, the use of addidonal finaal instuments such as equity and quasi-quity (such as converible bonds and debt) by the commercial bakg stem; and (ii) to develop coporate finance capabilities within FONEI in order to offer compr ve financ packages and to prvide financia ur stance to over-leveraged but viable compnies. lle The effective implenatio of the Meican policy shift during the nego of the IML rised the prspect of an aggravation in the lquidity squeeze of Meican Industi firms as a result of increased foreign meaIt combined with onom stblizaon. This led the Bank and the GOM to conider this loan also a way to help maintain a addruy pace in indusial nvestmt during the adjustment period. As the pon of the Bank in the tal costs of subprojects was esdmaed at about 50%, the JRL was epected to have an investment impact of at least US$300 million. 12. The loa included trtee cm ats: (i) Crei for equipment and worldng cpital: USS128.5 mllion for ledn thro rediscounting medium- and long- tem bloas by financil i ears, of which US$50 million was ermarked for permanent worldng capital not necesaiy assated with plant and equipment investment; () Equity and quasi-equity inestment: US$20 million for a pil progrm to discount equity investment by commercial bab; and (Qi) Tecnial assistac US$1.5 milLion as a complement to FONE's supply of financidal seavices through: (a) cosulant services to deveo tining and promotion programs, (b) finacial market sudies on the long-term finaing needs and instru of indusial companies, in A^ The I? schemenap$itaUses ntwert paymnts. A loan in split into its indivil aturitos for each of these maturities, interest is accumulated over tl an d only oce the resective maturity becomes due. Thus interet nos the average outstanding balance in a given period, but is ace paid o each maturity individually. As a e.sult, principal payments in l tems i slowly and would therefore correspond better to the cashflow of an tent project. To avoid a period without paymets for the borrowr, a IV loan dos not carry any grace period.  6 order to develop more comprehensive solutions to the equity and long-term financing shortage, and (c) assistance in the design of restructuring plans of final borrowers. Pect Design and Organization 13. IRL project preparation started in December 1984 when the GOM and FONEI showed interest in Bank support to the industrial recovery process. in Februy 1985 a project was identified jointly with FONEI. The Staff Appraisal Report (SAR) was ready in October, and initially the project - which did not contain any policy conditionality - was expected to be negotiated with the Mexican authorities in December 1985 and presented to the Board in March 1986. However, the policy shift in Mexico towards stabilization and trade opening, the consecutive negotiations with the Bank and the JMM, and a general climate considered as insufficiendy supportive of the project objectives, resulted in a postponement of this schedule. Subsequently, the IRL was incorporated in a broader package conditional upon the trade reform program and upon macroeconomic arrangements with the IMF. The Board approved the IRL (US$150 million) on July 29, 1986, together with the TPL I (Ln. 2745-ME, US$500 million) and the Industrial Technology Development Loan (Ln. 2747-ME, US$48 million), for a package totalling US$698 milion. 14. Notwithstanding the historic changes takdng place in Mexico's economic policies, the Bank maintained the project as designed originally, for a combination of reasons. First of all, the IRL was seen as a complement to the trade lealizaon ss since it provided financing for enhancing the capacity of Madcan industry to adjust to the new trade regime. The inclusion of working capital financing not associated with plant and equipment investment was conceived in order to stimulate output through improved capacity uilization in industry in a context of a globally deflationary policy. Furthermore the project included the introduction of financial innovations specially designed for a transition period: a modified form of interest capitalization and a pilot scheme which was considered necessary to test both market acceptance and the application of the rules for equity investments. As the weakness of the financial marloets was considered to be a major impediment to private sect-led growth in Mexico these innovative features were considered the main justification for the IRL. The IRL was seen as a potential first step for preparing fiuther reforms of the finaricial sector, namely through the technical assistance component, which contemplated deeper analysis of the financial markets and financial needs of industrial companies. Finally, the loan was also seen as a contribution to the reduction of the balance of payments gap in an over-indebted country. On the basis of these arguments, the loan was thought to conform to the Bank's assistance strategy at that time.  7 15. There was general agreement between the GOM, FONEI and the Bank on the purposes and the modalities of the IRL. The GOM and the Bank shared the two basic assumptions on which the IRL was built: (i) the need for providing additional long-term fmancial resources to the industrial sector and (ii) the need for improving the supply of financial &.rvices. In 1984 the National Program for Development Financing (PROFINADE) was launched which emphasized the need to form risk capital funds and to foster primary and secondary equity markets. In early 1985 new legislation was enacted, which allowed the commercial banks to invest in equity in order to provide temporary assistance to companies in need of such funding. The pilot equity component of the IRL was designed in the fmmework of this new legislation. After an initial period of hesitation, the new repayment mechanism (the PVP) enjoyed the full support of the Bank and the GOM, as a way to reduce the liquidity squeeze facing subborrowers when nominal interest rates are very high. 16. The existence of the agreement among the parties on the three components of the loan cannot hide the deep divergences that remained between the Bank and the GOM about financial reforms and the role of development banks and trust funds. From 1984 on, the Bank had attempted to discuss with SHCP the need to address certain deficiencies in the domestic financial sector, but SHCP was reluctant to allow substantive Bank involvement in that area considered highly sensitive politically given the recent nationaLization of the commercial banks by the outgoing Administration in 1982. As a result the Bank had limited up-to-date, first-hand knowledge on the financial sector and little room for manoeuvre. The above mentioned new legislation of 1985 was clearly considered by the Bank as insufficient and overly restrictive. Furthermore, these reforms were effectively reversed by the GOM in the second half of the same year to meet the funding requirements of a sharply rising domestic debt. The Bank was also conscious that, notwithstanding the new legal incentives, the equity market would fail to attract resources as long as it had to compete with excessive government borrowing requirements which were driving up market interest rates. The need to develop a new policy on trust funds (the number of which was considered to have become unmanageable) which had aggravated the segmentation of the financial market and the fiscal burden, was supported by the Bank through signing with the GOM the General Interest Rate Agreement (GIRA). 17. The complexity and sensitivity of this situation was seen by the Bank as an additional reason for supporing a gradualist approach, combining traditional investment financing with a pilot operation linkd to deeper studies. It was also reason to support a familiar and proven operating partner (FONE, that was meant to build up institutional capabilities and to prepare cautiously for more comprehensive solutions through the studies supported by the loan.  8 The Bank perceived correctly that any significant policy changes had to result from the government's own studies and intemal diswussion. 18. The good tack record of the executing agency under previous Bank loans played an important role in the institutional design of the IRL. FONEI was seen by fte Bank as its own creaion, going back to 1971, and was considered a model of its kind. The IML design was therefore similar to ta of the four preceding operations of the Bank with PONEI: NAPINSA was the borrower as the financial agent of fte GOM and the GO3M guaranteed the loan, and was responsible for amor^tion payments to the Bank and carried the foreign exchange risk. FONEI was the executing agency chared with allocating the resources of the loan by on-lending project funds through commercial banks in order to finance their clients' long-term plant, equipment and worldng capital needs, or to make equity investments. Due to the proven high quality and experience of FONEI's staff supervising the participating commercial banks' operations, the Bank did not make use of loan proceeds conditional upon any Bank prior review of subprojects, but would review only V post samples of subprojects in excess of US$2 milion. However, as FONEI's equity financing program was new, the Bank required prior review of the three first subloans which included an equity component, as wel as all other equity investments which would exceed 10% of the recipient company's total capital or US$2 million, whichever was lower. tect LImplementation 19. During the three first years of the commitment period acta disbursements stayed well ahead of SAR estimates, though at a sdower Ste than planned by PONEI. At the beginning of project iml on, FONB's credit lines were in direct competition with NAFIs s progams, which were slightly cheaper and considered much easier to obtain by potential borrowers. However, credit tightening durinAg the second half of 1987 and the continuing shortage of long-term investment credit gave the taditional component of the project a high appeal. There was litde demand for the innovative IRL aspects and components, which had been an essential raonale for the Bank's involvement. It appears there were not enough interest by and incentives for commercial banks to promote and carry out innovative but potentially higher risk activities given the strong demand for tditional long- term financing by financially sound borrowers. As a consequence, over time, the Bank agreed to requests by FONEI for a substantial reallocation of fumds from Parts B, C and D of the project (working capital subloans, equity subloans and technical asstance, resWeclvy) to Part A, investmt subloans. The Bank agreed to NAFIN's request to exdend the co nt date of the IRL by a year, to December 31, 1991, in order to permit NAPIN, which had absorbed several tmst funds including FONEI in 1989, to submit new subloam  9 under the funds which had become available for investment financing, and to try to use the remaining, albeit reduced, equity component. 20. The loan was closed on December 31, 1992. The IRL financed 262 sub,loans amounting to a total project cost equivalent to US$307 million, including 5 sub-loans under the pilot equity component totalling US$5.7 million. 21. During implementation of the project, reallocation of loan proceeds followed perceptions of likely demand for resources. In April 1987, after the closing of the Pollution Control Loan (Ln. 2142-ME) and the cancellaton of its balancel, FONET proposed a modification of the IRL allocaion in order to be able to finance future pollution control subprojects. TheBank agreed to reallocate US$10 million from Part B, for worldng capital subloans where forecast demand had not materialized, to Part A (investment subloans) of the MRL, to meet the projected fast growing demand for this ldnd of project. Demand for FONEI's funds for long-term traditional investment had proved very strong during 1988, and much higher than expected at the time of appraisal. Thus, in February 1989, the Bank agreed to shift 3/4 of the amount reserved for the pilot equity sub-loans, for which hardly any demand had mateized, to the investment sub-loans category. The technical assisnce component was not used under the project apparently because the Bank and FONEI disagreed on the timeliness of FONEI financed training in corporate finance techniques. Delay by FONEI in undertaking the financial sector studies was related to the GOM's reluctance at the time to allow the Bank to get more deeply involved in financial sector issues, but a similar study was commissioned by FONEI with an international consultant firm using FONEI's own resources. Later, when the plan was announced for the absorption of FONET into NAFIN, FONEI technical assistance programs were effectively abandoned. The funding of technical assistance, NAFIN contended, could be done under other Bank loans to which it had access and which supplied them with 100% financing, as against only 50% under the IRL. In October, 1990, after FONEI's disappearance, the entire technical asistance component was also transferred to the investment category, with the intention of NAFIN using these funds for financing pollution control equipment. 22. The overall effect of the reallocations resulted in the investment component, which originally was to have accounted for 52.3% of the IRL, takdng up 70%; the working capital subloans component was to account for 33% and took up 26%; the equity and quasi-equity pilot was originally set to 2 The Bank agreed not to extend the closing date of this loan because it carried the historically highest Bank (fixed) interest rate.  10 absorb 13% of available funds and took up 4%. The emerging demand for investment in pollution equipment was short-lived, due to the economic recession, the lack of enforcement of pollution standards and the bureaucratic treatment of even small pollution control equipment loans. Nonetheless, about US$9 million was disbursed for this purpose to finance 27 subloans. 23. Thus, the pilot equity component of the IRL was hardly used, and the addition of the working capital subloan feature was only modestly successful. The same applies to the promotion of the new repayment system in traditional subloans (PVP), as well as to the supply of financial restructuring assistance to over-leveraged companies. Only 5% of the sub-projects of the IRL (equivalent to 8% of the total amount of the authorized subloans) chose the innovative PVP option. The development of corporate finance capabilities within FONEI provided only one case of assistance to over-leveraged companies. The innovative aspects of the project did not prove to be attractive to commercial banks who were not willing to take the potentially greater nsks involved. Clients of FONEI, a large number of which were enterprises in rge industrial groups, were also not very interested due in part to prevailing conditions of great economic uncertainty. Moreover, medium-size private enterprises in Mexico, as indeed in much of Latin America, are known for their conservative attitudes especially concerning minority equity holdings in their entexprises. 24. As part of GOM's effort to increase efficiency of the financial sector, in June 1989 FONEI (as other existing trst funds for loan and equity financing and for technical assistance to small scale industry and industhal parks) was transferred to NAFIN, and shortly thereafter it was fully absorbed into the bank's operations. The change ir, the role of FONEI, and related financial system reforms that were taking place, led to substantial uncertainty among the staff of the two agencies as well as their clients. This ambivalence stemmed at least in part from the different perspectives of the programs of FONEI and NAFIN and may also explain part of the difficulties in realizing the innovative components of the project. In addition, during the first years of the project, the Bank and FONEI/NAFIN were at loggerheads on the issues of the adequacy of the promotion by these agencies of the equity pilot scheme and their bona fide commitment to undertake the analyses viewed by the Bank as important inputs for the financial sector reforms. The Bank may also have been well-advised to put more emphasis on formal supervision of the project (and not mainly of FONEI and NAFIN) in the critical period between December 1987 and June 1989, and especially on exploring altematives for successful implementation of the innovative aspects of the project, given that these aspects had been considered of great importance to the Bank at the time of loan approval. It is doubtful however that even such concerted efforts could  11 have reversed some of the above mentioned factors explaining the very limited effective demand for non-traditional financing under the loan. Project Results 25. From a resource transfer point of view, the IRL fully achieved its objective of providing financial support to the targeted group, medium and large industrial enterprises. While it may be argued that the loan was too small to have a significant impact, these funds were almost the only source of long- term credit to Mexican industrialists during the first years of the project. Thus, even if only marginally, the IRL contributed to helping the industrial recovery, which began to emerge in 1987. (Annex I) Furthermore, this transfer was more efficient and useful than previous similar loans (e.g. FONEI m and IV), since the IRL was implemented in parallel with a coherent set of major policy reforms. In addition this loan came at the right moment to compensate for some of the recessionary impact of the economic reforms, relieving somewhat the financial difficulties of taditional industrial groups. Lastly, the IRL was a modest piece of the more global role of the Bank to act as a catalyzing agent for a process of renewed growth by relaxing somewhat the external constraints and signalling that fresh resources were availble to trigger increased private investment. 26. However, from the point a view of the IRL specific task of contributing to financial market transformation and innovations, the balance is clearly negative. This leads to the question of the adequacy of the supporting analysis and design and modalities of this loan. In a way, the changes in the Bank's country assistance strategy following approval of the IRL gives a clear answer to this question. Increasing the range and supply of financial services (a basic assumption on which the IRL was founded) does not provide by itself a sufficient incentive to create an effective demand for such srvices and help establish an equity market if the underlying causes of the problem are not addressed with adequate fiscal and monetary policies and sector and institutional reforms. Furthermore, even the intended impact of the targeted credit could be questioned in as much as these subsidized resources risk to be absorbed by well-established industial groups which tend to have better access to credit and for which cheaper credit therefore may mainly raise their rents. 27. The timing of this loan was good from the point of view of the objective of sustaining manufacturing private investment. The loan played a role in helping the Mexican authorities to launch their reforms, because the IRL was by its nature complementary to the structural reforms. The "bridge- role' of the project during a period of rapid and profound reforms was limited by its dimensions: US$307 million equivalent corresponds to less than 5% of annual private investment in this sector. Despite its modest size, the long-term  12 financing aspects of the loan were usefiul for accelerating the changes since, in providing relief to traditional Mexican industrial groups, they also gave more room for manoeuvre to the most pro-reform partsa inside the government Such aspect gives to the IRL a more "systemic" dimension at appears at first glance. The resources of the loan were available at the right moment from a cyclical point of view as well. The project was in operation (October 1986) when GDP was still declining, with credit to private sector reaching a minimum in 1988, real interest rates cimbing and long-term contracts almost non-existent. (Annex II) In October 1988, the GOM sated implementation of a program of comprehensive financial sector reforms, in parallel with the completion of the consistent macroeconomic program. The effects of the changes were dramatic and commercial bank assets increased rapidly after ee quarters of the IRL were already committed. 28. An analysis of characteristics of the loan utilization and impact shows the following: (Part m, Statistical Information) o The total cost of the 262 subprojects approved under the IRL amounts to the equivalent of US$307 million. o 98% of the projects were presented by existing firms for expansion, and 89% of the total credit went to large enterprises, defined as those with value of annual sales over US$2.8 million (rable 3), but, in contrast with past FONEI operations, the majority of projects and subloans were relatively small. 53% of the subloans financed investment projects whose total value was under US$610,000 and two thirds of the subloans were below US$600,000. The average subloan under the IRL (US$687,000) is significantly smaLler than in the previous Bank loans to FONEI (US$1.1 million under FONEI m and FONEI IV approved in May 1978 and May 1979), and only 20% of the sub-loans were above US$1 million. (Table 4) o Export projects were larger than projects for the domestic market: the former represent only 44% of the number of projects but 53% of the amount. (Chart I) These proportions of export projects were higher than under the previous FONEI m and IV (38% and 29% respectively of the amount of the loans), reflecting the increasing export orientation of industry as a result of trade reforms. O The geographical, sectoral and commercial bank distributions of the loan followed epected pattems for the most part. The traditionally most industrialized regions (Centro, D.F., North-East and West) absorbed 70% of the loan. able 5) There was a wider distribution of credit among sectors. The well established but more domestically oriented metal products and chemical sectors, which in the previous FONEI loans accounted for over two thirds  13 of the total number and amounts of subloans, accounted for only 23% of the total amount of subloans. Capital goods accounted for 20%, construction for 8%, and textiles and pulp and paper, each for 7%. (Table 6) The 4 biggest banks accounting for about three quarters of commercial bank assets, channeled 53% of the discounted credit. (Table 7) O The majority of the subloans (59%) carried a relatively short maturity (3 to 5 years); only 15% carried a maturity in excess of 7 years. (Table 8) o The innovative PVP repayment option was chosen by only 5% of the subloan recipients, corresponding to 8% of the amount of the IRL. (Table 8) FONEI financial prqjections assumed that the PVP option would be used by 50% of the borrowers at the beginning and would increase to 80% of the commitmer,ts over three years. O An important part of the loan (31%) was prepaid. (Chart I1) The explanation for such high rte of early reimbursement lies partly in the success of Mexica financial reforms and of the disinflation process, which reduced the demand for this kdnd of loan as other, less osdtly sources of long-term credit emerged; and pardy can be atibuted to the banks' margins increasing in real terms-' as the re of inflation fell off. These advance payments also point to the ending of the transition period for which the loan was conceived. O A total of 59 subprojects, for a total amount of US$54.7 million, chose the US dollar opton, i.e., to receive a loan amount in pesos that is indexed to an approved loan amount denominated in US dollars. Tbis amounts to 51% of the number of subloans for exporters and 57% of the amount of subloans. o Around 80% of the subprojects had ex-ante economic and financial rates of nestim ated toLe between 10% (the eligibility cut-off rate) and 15%, and 11% of the subprojects were expetd to yield returns of over 40%. (able 9) In comparison with the ex-ante estimation of the two previous FONEI loans, these estimates looked rather low. However, the higher previous evaluations turned out to be over-esdmates. 29. The availaility of the necessary data to evaluate the economic impact of the subloans was seriously affected by the disappearance of PONEI. NAFIN, as FONET's successor, was unable to provide the data required, in partiuar the actual ERR and FRR, arguing tht "these files are dead" (*ficher muertos!). However, representative Q_.W results were esdmated ,a Margins wer fixed as a percentage of the outstanding subloan amounts and therefore rose sharply as a percentage of total financial charges during a pwriod of rapid disinflation.  14 based on a sample of 41 subprojects. These subprojects (Table 10) generated 1,951 new jobs, for a total investment cost of US$53 million. The employment impact is slightly above the ex-ante evaluation which estimated 1,927 jobs. These figures imply that the average total investment cost of each job generated was only US$27,225 versus US$63,000 for the previous loan (FONEI IV). The lower cost per job created may be a reflection of the wider distribution of the credit arnong industrial sectors and a greater proportion of investments for balancing of capacity and technology improvements instead of capacity increases. Based on the sample, the IRL would have created in the neighborhood of 10,000 jobs. 30. For the sample of 41 subprojects, the financial results for 1990- 1992 show average annual net profits of 7.2% of sales, with 7 subprojects (17% of the sample) showing losses and 11 subprojects with net profit above 10% of sales. These results are far better than under the FONEI IV loan, where 41 % of the subprojects showed losses. roect Susainability 31. Although the actual economic and financial benefits of the subprojects cannot be sufficiently quantified, there are reasons to think that the resources mobilized through the IRL were efficiently allocated. The reasons are that: (i) the parallel implementation of the trade reforms allowed subprojects to be conceived and approved within the framework of the implementation of a liberal trade regime, and (ii) FONEI evaluation methods had improved with the previous experiences, and the staff took special care to assess international competitiveness (project evaluation used international prices and not domestic ones). The quality of evaluation is r.onfirmed by the low level of default and arrears for the subloans in spite of increased competition and very high real ints rates during the initial phase of project implementation. 32. In contrast with past projects, the risks for the future are considerably lower since structual reforms and privatizadon have reduced the room for discretionary interventions by govemment and the probability of macroeconomic imbalances. B]ank Bronn 33. The positive aspects of project management were its sequencing and its link with the TPL. Also, paradoxically, the availability of a traditional directed credit project with all its weaknesses, might have played a marginal role of "safety net" in the political process of reform decisions. However, the prepaation of the project was rather superficial. The focus placed in the IRL on financial engineering and innovation appears essentially to have been the  1S "icing on the cake" of a traditional directed credit. No fmancial sector conditionality was contemplated under the loan and the IRL was prepared without carrying out any substantial financial market analysis. No doubt, the GOM's reluctance to allow the Bank to get involved in fuiancial miarket analysis was a major factor. Although the "pilot project" was an excellent idea, it suffered from inadequate analysis and less than adequate preparation. It could have been used to improve the level of information and to start working with the Mexican partners on the actual causes of the lack of long-term and equity financing. In fact, the issue in both the banking sector and the equity market was not one of institution-building nor of financial engineering but of inconrect policy interventions. This argument was raised inside the Bank but was not pursued sufficiently given the GOM's stance on financial sector analysis by the Bank. The pilot component seems at the time to have served mainly to improve the "marketing" of the project, and to continue the previous policy of "institution building". The technical assistance component was strategically important, since it would have permitted improvement over time of the policy dialogue on financial market issues, thus allowing the Bank to get involved at an earlier stage. However, during project implementation the Bank could not reach agreement with FONEI and NAFIN on how to use the funds and FONEI's own study was more limited in scope and was only made available to the Bank "informally" which did not allow discussion of its fndings with the Mexican financial sectr authonties. 34. During that time of the rapidly changing environment, supervision was not necessarily done by loans but by institution. The Bank's Financial Sector Adjustment Loan (Ln. 3085-ME, Board, May 1989) provided the basis for development bank restructuing, and changes in NAPIN were closely watched in the context of the IRL preparation and implementation of the Small and Medium Scale Industry Loan (Board, 1987). In this broad coverage of institutional developments, however, supervision of the IRL and especially its pilot components does not appear to have been adequate to guide their implementation. The report from the first mission (December 1987) mentioned the difficulties for FONEI to handle risk capital operations and financial engineering, which were the main justification of the project, but this assessment was not followed up with any specific action. One of the studies under the technical assistance component was contracted out by FONEI to a consulting firm using FONEI's own resources and without refering to the Bank, although a Bank mission found that the pr- posals and work program of the consultant were sound. The December 1987 mission proposed to schedule the next mission in April/May 1988, in order to assess the progress of the technical assistance component and to carry out discussions with the consultant. This mission, however, never took place. Later, after a rather disappointing study was submitted, Bank action was limited to a few comments on positive aspects of the consultant's report.  16 35. The second formal Bank supervision mission for the project was postponed untl June 1989 (18 months after the first one), and limited to two days. By that time FONEI had been transferred to NAFIN and the mission was informed by NAFIN that the executing agency no longer existed, as it was being absorbed into NAFIN. This event was part of the overall financial market reforms that the Mexican authorities were putting in place in close contact with the Bank beginning in late 1988 in the context of the preparation and implementation of the FSAL. Thus, the risk of merger of the FONEI with a larger institution was known in the Bank, but there is no evidence of recommendations on how to handle the impact of these changes on the project, except to amend the legal text of the Loan in order to reflect the new situation. It was only after the next mission in June, that the success of "Project Development Objectives" was shown as doubtful. At that time, 907 of the loan was committed. The Bank mission in June 1990 requested from NAFIN a strategy and action plan about equity promotion, to be submitted to the Bank by the end of August 1990. NAFIN never sent this program, and the Bank never reacted to this failure of compliance. In addition, there was an intrruption in the submission to the Bank by NAFIN of the project progress reports. 36. Less Leamed. A seies of important lessons can be drawn from project design, institution building, policy linkages and conditionality, and project implementation in a rapidly changing environment. The project was designed when financial sector reforms were at a very early stage of consideration by Government. The issues involved in the sector had a heightened political sensitivity as one of the final and controversial acts of the previous Administration in 1982 was nationalizion of the banks. As it was felt that the Bank would support reprivatization of the banks and this would appear to impinge on Mexico's sovereign rights, the GOM did not want Bank involvement in sectr analysis at this time. This led to a lacuna in available data on the financial sector and important issues such as the characteristics and prospects for capital market development, demand for equity instruments by enterprises and participating financial institutions. For the IRL project, it meant that the conceptual foundations of the innovative aspects of the project were not shared equally by all parties. The events during project implementation suggest however that it was premature politicaUy to try to enliven a subsectoral assistance program with broader objectives of financial engineering of companies and caital market development. The Bank tried to deal with the risks of moving ahead with inadequate data by doing a pilot and loosely defining the technical assistance that was included to assist in gathering data in key areas. The lesson is that in cases of uncertainty due to lack of data and in a rapidly changing environment, risk should be reduced by tight and clear project design on components that are openly agreed.  17 37. As regards project design, it was an error to ask FONEI, "for administrative simplicity", to express the commercial banks' margins as fixed percentage points rather than as a percentage of Mexico's average cost of funds index (CPP). This arrangement had perverse effects: the real financial cost to the borrower decreased with accelerating inflation, and increased as inflation declined. Thus the success of the macroeconomic stabilization policy supported by the Bank, led to a wave of advance repayments of IRL subloans. 38. The experience with institution-building has several important facets. The key institution in the project (FONEI) had experience and demonstrated good quality staff in project analysis and supervision. However, the IRL put a lot of weight on FONEI to perform similarly well in new and very complicated areas of corporate finance, financial restructurng of company balance sheets, capital market analysis, and promotion of equity instruments. Development of new areas of expertse takes time and active support from experienced professionals as well as sufficient demand for the new services. The results of the IRL indicate that greater preparation of an institution, even a good one, is needed prior to piloting innovative programs. 39. In another area, PONEI's high quality past performance was good reason for the Bank to continue to support the stitution. However, in the rapidly changing environment prevailing at t'e time, the consolidation of a number of the existing trust funds for greater efficiency became a distinct possibility, which the Bank in principle favored. As FONEI was a relatively smaRl institution, the probability of it being absorbed by a larger entity was high and the probability that its programs would be dismantled as also high. In such cases when developments arise during project implementation to suggest that substantive changes in the project may be in the offing, the project should be covered with more attentive supevision to track developments and to prepare an appropriate response for the project 40. No financial sector conditions were directly placed on this loan, although for Board presentation the IRL was associated with a policy-based loan supporting trade reforms. The lack of conditionality in the IRL was positive in that it allowed greater flexibility in movement of funds to areas of high demand. Deeper knowledge of the financial sector would undoubtedly have helped to formulate appropriate conditionalit aimed at providing more incentives for implementation of the innovative pilot components which "justified" the operation at the time. Borrwe Perfomnance 41. The performance of FONEI and NAFIN was good in terms of producing a portfolio of subloans that was economically successful. Taking into account the genuine economic revolution and the accompanying  18 institutional tumult, the Mexican partners behaved satisfactorily. The quality of the evaluation/supervision methods and the professional competence of the NAFIN/FONEI staff are high. NAFIN saved some essential parts of FONET's skIs. 42. On the negative side, points deserving mention are: O a significant part of FONEI's human capital was lost o the Mexican executing agent was in difficulty in carrying out the financial engineering components of the project but did not effectively use available technical assistance funds to avail itself of needed sector analyses or expertise and training, even for future purposes o the duplication of efforts between FONEI and NAFIN was a waste of resources o NAFIN's rationalization process needs to be pursued. Poect Relationship 43. The main weakness of the Bank-Borrower relationship was the lack of preparation for the innovative components of the project and, once agreed to be included in the project, the lack of resources put into teir successfil implementation. There were no incentives on either side to look after the more difficult pilot project component and it was too easy to transfer the reurces to the traditional component. Consultinlg Servies 44. The technical assistance component of the IRL was not used to fnance the services of an international consulting firm. The preference was to finance any agreed program of technical assistance under the Industral Technology Development Project, because it covered 100% of expenditure versus 50% under the IRL. FONEI paid for one study from its own funds. lF