Mexico - Industrial Restructuring Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14679 PROJECT COMPLETION REPORT HEXICO INDUSTRIAL RESTRUCTURING PROJECT (LOAN 3047-ME) JUNE 26, 1995 Public Sector Modernization and Private Sector Dev. Division 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 Equivalents Currency Unit = Mexican Pesos (MlexS) = 100 cents Average Exchange Rates -1978 -IS1= 12.8- ' 1919:f- U- ;S$1 = Z - i.l-~~~~~~~~~ ~ ..;-.;...:.--::-.. 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FI1SCAL I'EAR Januarv 1 - December 31  FOR OFFICIAL USE ONLY ABBREVIATIONS AND ACRONYMS USED ACF - Index of Average Cost of Funds ANAPROM1EX - Asociacion Nacional de Productores de Horticultura - National Flower Industry Association ANlQ - Asociacion Nacional de la Industria Quimica - (National Association of Chemical Industries) BANCOMEXT - Banco Nacional de Comercio Exterior - (National Bank of Foreign Commerce) CEPROFI - Certif7cado de Promocion Fiscal - (Tax Promotion Certificate) CONASLTPO - Compania Nacional de Subsistencias Populares - (National Basic Foods Company) DCR - Domestic Content Requirement DRC - Domestic Resource Cost ERR - Economic Rate of Return FERTIMEX - Fertilizantes Mexicanos S.A. - (Mexican Fertilizer Company) FICORCA - Fideicomiso para la Cobertura de Riesgos Cambiarios - (Trust Fund to Cover Foreign Exchange Risk) FERA - Fondo Institutional de Recursos Agropecuarios - (Institutional Fund for Agricultural Resources) FONEI - Fondo de Equipamiento Industrial - (Industrial Equipment Fund) FRR - Financial Rate of Return GATT - General Agreement on Tariffs and Trade GIRA - General Interest Rate Agreement [IIT - Instituto Mexicano de Investigaciones Tecnologicas - (Mexican Industrial Technology Institute) INA - Instituto Nacional de A utaoparfes - (National Autoparts Institute) INFOTE C - lirstituxo de Inforntacion Tecnologica - (Institute for Information and Technological Development) ERP - Industrial Restructuring Project NAFIN - Nacional Financiera S.A. - (Government's National Industrial Development Bank) LIBOR - London Interbank Offered Rate MFA - Nultifiber Agreement PFI - Participating Financial Intermediarv PCR - Project Completion Report SAR - Staff Appraisal Report SECOFI - Secretaria de Comercio y Fomento Industrial - (Ministry of Trade and Industrial Development) SIMI - Small and .Mledium Scale Industry This document has a restricted distribution and may be used by recipients only in the performance of their I official duties. Its contents may not otherwise be disclosed without World Bank authorization.   FOR OFFICLL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 26, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Mexico - Industrial Restructurine Proiect (Loan 3047-ME) Attached is the Project Completion Report on Mexico - Industrial Restructuring Project (Ln. 3047- ME), prepared by the Latin America and the Caribbean Regional Office, with Part II contributed by the Borrower. The main objective of the project, approved in 1989, was to complement the Government's trade liberalization and export development policies by helping the industrial sector adjust to the changed economic environment, increased competition and high indebtedness. The project aimed to support restructuring of medium-sized companies through financial and technical assistance, as well as to establish a financial and institutional framework within which viable company-specific restructuring plans could be implemented, with emphasis on liberalization and financing of the textiles, auto parts, and cut-flowers sub-sectors. Financial instruments offered under the project included loans and equity participation. Funding was allocated for industry-level training, services and promotional programs, as well as for technical assistance to improve the delivery capacity of participating intermediaries. Both the policy environment and the institutional set up changed substantially after Board approval, and the original objectives became less relevant. Trade liberalization proceeded more rapidly than expected, and as a result, the project became essentially a line of credit for the industrial sector. The innovative features of the loan were hardly used, since the Bank had overestimated both the willingness of banks to engage in equity-type financing and the demand for this type of finance by enterprises. The loan resulted in the financing of 354 subprojects for an estimated total investment cost of US$760 million. Although information on the performance of the subloan portfolio is limited, the liberalized economic environment makes it likely that the resources were allocated efficiently and contributed to restructuring of the industrial sector. The project outcome is rated as marginally satisfactory, and institutional development as negligible. The expected evolution of the financial sector did not take place, but sustainability of the subprojects and of the industrial restructuring is likely. Major lessons are that a thorough sector analysis is critical before introducing innovative features into a project, and that the Bank should carefully assess the links between a proposed operation and its institutional environment. The PCR is of satisfactory quality. It provides a candid assessment of the project's performance and draws important lessons of experience. No audit is planned. Attachment This documnent 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.   PROJECT COMPLETION REPORT MEXICO INDUSTRIAL RESTRUCTURING PROTECT (Loan 3047-ME) Preface ......................................................... i Evaluation Sununary . ............................................... ii PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE ................... 1 I. Project Identity ........................................... 1 II. Background . ............................................ 1 III. Project Objectives and Description .............................. 3 IV. Project Design and Organization ............................... 4 V. Project Implementation ..................................... 7 VI. Project Results . .......................................... 10 VII. Project Sustainability ....................................... 12 VIII. Bank Performance ......................................... 13 IX. Borrower Performnance ...................................... 14 X. Project Relationships ....................................... 15 Xl. Consulting Services ........................................ 15 XII. Project Documentation and Data ............................... 16 XIII. Lessons Learned .......................................... 16 Part II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE .......18...... I I. Objectives . .............................................. 8 II. Project Implementation ..................................... 19 III. Project Results ........................................... 20 IV. Bank Perform ance ...................................................... . 21 V. Borrower Performance ...................................... 21 VI. Technical Assistance ....................................... 22 VII. Lessons Learned .......................................... 24 Part III: STATISTICAL INFORMATION Annex I. Related Bank Loans Annex II. Project Timetable Annex III. Cumulative Estimated and Actual Disbursements Annex IV. Project Estirnate Financing and Content of Financing Annex V. Allocation of Loan Proceeds Annex V1. Distribution of Bank Funds Annex VII. Use of Bank Resources AnnexVIII. Status of Covenants Annex IX. Project Benefits Annex X. Documento de Terrninacion de Proyecto (Original Part II in Spanish)  I  MEXICO INDUSTRIAL RESTRUCTURING PROJECT (Loan 3047-ME) PROJECT COMPLETION REPORT PREFACE This is the Project Completion Report (PCR) for the Industrial Restructuring Project, for which Loan 3047-ME in the amount of US$250.0 million was approved by the Bank on April 27, 1989 and made effective on February 6, 1990. No cofinancing was provided. The closing date of the Loan was extended from June 30, 1994 to June 30, 1995, to provide technical assistance to GOM, not anticipated in the original SAR. The PCR was prepared by Enrique Vanegas, Task Manager, LA2EU of the Latin American and the Caribbean Regional Office and reviewed by Robert Lacey, Division Chief, LA2PS and Carmen Hamann, Project Advisor. The Borrower provided comments that are included as appendixes to the PCR. Preparation of this PCR was begun during the Bank's final completion mission in June 1994. It is based on material in the project file. The Borrower contributed to preparation of the PCR by submitting Part II (Project from Borrower's Perspective).   ii MEXICO INDUSTRIAL RESTRUCTURING PROJECT (Loan 3047-ME) PROJECT COMPLETION REPORT EVALUATION SUMMARY Objectives and Design i. The general goal of the project was to continue the Bank's support of Mexico's trade liberalization and export development policies by helping the industrial sector adjust to a changed economic environment. It was one of a series of Bank Loans to Mexico combining policy advice with financial and technical assistance to manufacturing companies affected by trade policy changes. The project's specific objective was to aid the industrial sector in developing adequate restructuring policies and instruments. It consisted of provision of credit, equity and quasi-equity investments through participating financial intermediaries (PFIs), with three executing aaencies Nacional Financiera S.A. (NAFIN), Fondo de Equipamiento Industrial (FONEI), and Banco Nacional de Comercio Exterior (BANCOMEXT) acting as first/second-tier lending institutions. ii. Regarding the design of the project, it was targeted to textiles, autoparts and cut-flowers. These industries were selected for initial Loan concentration because they were to be in the forefront of restructuring. The project was later redesigned in response to the opening up of the economy. It was comprised of four components, two of which provided financing for investnents in equipment and working capital to: (i) above industries for which restructuring strategies had been designed; (ii) other industrial subsectors that have been liberalized by the trade policy reforms or subsectors for which QRs, ORPs and import prohibitions have been eliminated. The third component consisted of financing for industry-level investments such as training facilities, services provided by industry associations and subsector-wide promotional programs. The fourth component consisted of technical assistance financing for goods and services needed for improvement of the delivery capacity of PFIs and for project implementation (para. V.5.9). Implementation Experience iii. The Loan was approved on April 27, 1989, signed on September 25, 1989 and became effective on February 26, 1990. By the effective date. however, several factors began to blur the objectives of the project and affected its implementation. First, the GOM had started a swift process of trade liberalization that changed the purposes for which the Loan could be used. Second. NAFIN was being reorganized into a second tier institution aimed at micro and small enterprises, whereas the project was targeted to medium and large firms as main beneficiaries  iii (para. V.5.8). Third, the merger FONEI-NAFIN resulted in the dissolution of the former executing agencv and the latter managing the largest share (80%) of Loan proceeds, a role not anticipated in the implementation of the project (para. V.5.2). Also, BANCOMEXT which was expected to use a major portion of Loan resources, ended up having a reduced participation (20%). due to weaknesses in operational arrangements. iv. The absence of a thorough analysis of sectoral issues caused the project implementation to be unsatisfactory. For instance, the lack of demand for some of the innovative aspects (financial engineering and quasi-equity financing) of the Loan changed the project's focus from a physical and financial restructuring operation to general financing (subloans and equity participations) of any viable industrial project. The development of corporate financing capabilities among PFIs provided rare cases of assistance to over-leveraged companies. The third component (industry level investment) had zero lending because none of the users anticipated under the Loan qualified as acceptable credit risk. Loan Agreement was amended three times: (i) the extinction of FONEI as executing agency; (ii) replacement of CETES rates for on-lending by "prevailing interest rates" (ACF); and (iii) the financing of technical assistance for the development and supervision of Mexico's voluntary and compulsory pension regimes, improvement in supervision of financial conglomerates, and the evaluation of public investment projects - resulting in the closing date being extended from June 30, 1994 to June 30, 1995. v. The performance of the Bank (paras. VIII.8.1 - 8.5) was spotty at some stages of the project cycle. Although the project had a lengthy preparation, key operational details were not fully worked out for Board presentation nor resolved during appraisal. Project supervision concentrated on forrnal matters, resource transfer etc., and not enough on institutional flaws. Institutional and legal ramifications of the NAFIN-FONEI merger were not fully explored. vi. The performance of the borrower (NAFIN) was similarly mixed (paras. IX.9. 1 - 9.3); it shared the responsibility for the actions taken - and those not taken - throughout the project cvcle. which affected the results of the operation. There was a lack of clear lines of responsibility and the policy coordinating committee (expanded COCOFIN) failed to play its role of project coordinator and facilitator. NAFIN's response to Bank's suggestions for improving subproject approval, supervision and reporting capabilities was weak. Following NAFIN's complaints about the Bank's long and cumbersome review procedures, the Bank agreed to waive NAFIN's obligation to submit subprojects for Bank review, for one year, (June 1991 to July 1992). The Bank. however, decided not to continue with the waiver after this period, when a supervision mission discovered that more than 100 subprojects were not eligible for financing. NAFIN, subsequently, took a number of measures to redress subproject screening and supervision deficiencies, including cancellation of the ineligible subprojects. Project Results vii. From the resource transfer point of view, the IRP achieved its objective of providing financial support to industrial enterprises. A total of 354 subprojects was financed under the Loan with an estimated aggregate cost of US$760 million, of which IBRD funding amounted to  iv USS248.6 million (33 % of the total). The IRP was the main source of scarce long term financing to NMexican industrialists during the first years of the project. Interviews with subborrowers carried out by the PCR mission indicated positive results in terms of growth in employment, production, sales and profits. viii. From the point of view of contributing to financial market transformation and innovations, the result is clearly negative. Expected demand for such innovations by enterprises and their banks never materialized. Only nine equity investments were made amounting to US$19.5 million (8% of Loan amount). No quasi-equity loans were made. Regarding the technical assistance component, as defined under the original Loan agreement, it was modified to assist the GOM on financial sector reform and to evaluate public investment projects. Sustainability ix. The sustainability of the project is difficult to determine because very little information on the performance of the subloan portfolio is available. The reorientation of NAFIN's lending aimed at the micro and small enterprises not only affected the investment objective of the project, but also the quality of recording and reporting procedures required under the Loan. NAFIN's new role is of a discounting window, passing on the credit risk to PFIs, rather than a development agency with the capabilities of tracking the development impact of its operations. This resulted in only a very small part of the required data for the preparation of the PCR being readilv available when the PCR mission arrived in Mexico City in March 1994. A subsequent PCR mission was required to complete PART III of the report. Considering that the Loan is not yet fully disbursed and that most of the disbursements were made in the previous 12 - 18 months, it is too soon to determine the full development impact of the subprojects. Many of them are still in their start-up period with limited repayment history. However, there are reasons to believe that Loan resources were efficiently allocated because of the steps taken by NAFIN to cancel subprojects that did not meet Bank eligibility criteria and financial appraisals of subprojects being transferred to the reprivatized banking system. Furthermore, the subloans were granted within the framework of a liberal trade regime, free of market distortions. Lessons Learned x. Original Project Design (para.13.1). Two key lessons about project design can be ascertained from the IRP. First, the Bank should closely assess and monitor the links between a proposed operation and the institutional setup within which the project is to take place and develop. especially in an ever evolving policy environment. The project was designed to nurture an investment banking culture in a state-owned commercial banking setting with three government finance development agencies as the main promoters. Commercial banks by their nature are risk - averse and do not generally engage in merchant banking activities. Similar Bank operations in Mexico had already shown disappointing results. Second. project design should be simplified when too many tools are being used to accomplish the same objective. The IRP was too complex with too many innovative features combining policy, an excessive number of overly sophisticated financial engineering and products. and the involvement of a multitude of  v institutions. The Loan was in fact a standard Apex line being disguised with policy and financially sophisticated features. xi. Project Restructuring (para. 13.2). The Bank should be more assertive on new conditions of effectiveness when legal clauses are modified. The FONEI-NAFIN merger changed many of the assumptions underlying the project design and this should have been reflected when amendmencs to the Loan agreement were made. The Bank should have been more forcible to ensure that FONEI's strong technical capabilities, under NAFIN, would remain intact for purposes of Bank Loan administration. Alternatively, the Bank should have insisted that NAFIN establish a technical advisory unit composed of qualified fnancial specialists including outside consultants that would be in charge of approving investment proposals. The Bank should not hesitate to reappraise and restructure project focus when necessary. xii. Underpinning Sector Analysis (para. 13.3). The Bank should do a thorough sector analysis before introducing non-conventional features into a project. The innovative components in equity-like financing were put into place without a good understanding of the institutional, regulatory and policy constraints hampering their growth.  I MEXICO INDUSTRIAL RESTRUCTURING PROJECT (Loan 3047-ME) PROJECT COMPLETION REPORT PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE I. Project Identity Name: Industrial Restructuring Project Borrower: Nacional Financiera S.A. (NAFIN) Loan No: 3047-ME RVP Unit: Latin America and the Caribbean Region Country: Mexico Sector: Industry II. Background 2.1 Between 1950 and 1974, Mexico enjoyed a remarkable period of high growth, low inflation and moderate external debt. Real growth averaged 6.4%, and inflation was in single digits throughout this period. But this era came to an abrupt end in the early seventies. Governrment involvement in the economy expanded rapidly, and increased public expenditure pushed up aggregate demand and the rate of economic growth. Higher government expenditure, however, was not matched by rising public sector revenues. As a result, the inflation tax and external debt became increasingly important sources of public finance. At the same time, a sharp downtum in real interest rates prevented a matching increase in private savings; external debt thus increased, increased oil revenues notwithstanding. Single digit inflation ended in 1973, the real exchange rate started to appreciate and external debt rose above the GNP growth rate. Then a comparatively brief crisis happened in 1976, but ended after major oil discoveries in 1977. The ensuing prosperity lasted until 1982, when falling international oil prices, rising world interest rates, and massive capital flight led to a refusal by external creditors to roll over Mexico's short-term debt and a subsequent suspension of Mexican payments of interest on its external debt.  2 2.2 The financial and economic crisis of 1982 brought explosive inflation and balance of payments difficulties. The Governrment responded by a fiscal adjustment effort of astounding depth and duration. A primary deficit of over 7% of GDP in 1982 was turned into a surplus of 5% of GDP within two years and was increased further to over 8% in 1989 and 1990. These efforts were hampered by external shocks, such as the collapse in international oil prices in 1986. however. Inflation, rather than slowing down, accelerated, partially in response to the sharp real devaluation of the exchange rate needed because of the 1986 downturn in the terms of trade. The subsequent de facto targeting of the real exchanae rate and an increase in the wage and cost adjustments, introduced instability into the system, culminating in a run on the peso in the last quarter of 1987 and triple digit inflation. 2.3 The Governrnent responded with the "Economic Solidarity Pact" (Pacto), an agreement between business, labor, and government. This agreement called for accelerated structural reform, further tightening of fiscal and monetary policy, a freeze of minimum wages and of basic public and private sector prices and the cornerstone of the "Pact.'" a freeze of the nominal exchange rate against the U.S. dollar. This partial freeze was extended at three-month intervals through the end of 1988, and renewed, with some modifications, by the Salinas Administration under the name of "PECE." The main change under the PECE was a daily adjustment of the exchange rate of about one peso against the U.S. dollar, in the first years. The overall effect of these reforms was a dramatic success in reducing the rate of inflation, from 159% in 1987 to 20% in 1989. While some slippage occurred in 1990 (inflation reached 30%), inflation fell to 19% in 1991. 12% in 1992 and 8% in 1993. 2.4 Trade liberalization since 1985 - subsequent to the payment crisis in 1982, practically all merchandise imports were under quantitative controls. After some initial modest liberalization efforts in 1983 and 1984, from July 1985 Mexico undertook a fast and far-reaching liberalization of the merchandise trading regime as part of the stabilization and adjustment program. The aim was to expand the tradables sector, and open the economy up to interniational competition to encourage efficiency in both export and import-substitution activities. Mexico moved from being a largely closed economy to being one of the more open economies in Latin America. The maximum tariff is now 20% and the average tariff is 12.4% which are respectively about one- fifth and one-half of what they were in June 1985; almost all tariffs are now in the range of 10% - 20%. Prior to the import liberalization, various programs were introduced to promote exports. The most substantial of these was the in-bond export manufacturing industry known as maquiladoras which were established in 1965 and have grown rapidly. In 1991 they accounted for about 16% of manufacturing employment and generated net exports of over US$4 billion. In the first quarter of 1994 these exports amounted to US$5.7 billion, an increase of 24.5% over the same period in 1993. Mexico acceded to the GATT in 1986 to establish the credibility of the reform program. On August 12, 1992. the United States, Canada and Mexico initialed a historic North American Free Trade Agreement (NAFTA), which came into force on January 1, 1994, after ratification by the three legislatures. 2.5 The Bank's role - the role the Bank played (1985 onwards) in helping Mfexico in its structural adjustment period was as important as the IMF's role in the debt crisis. Following the  3 change in administration at the end of 1982, the Bank and Mexican policy makers initiated a series of policy dialogues in connection with the Export Development Policy Loan (EDP 1) approved in June 1983 as the Bank sought to provide urgently needed foreign exchange resources and to help design the subsequent trade reforn process. Mexico's stabilization efforts, however proved to be short lived. The GOM recognized the need to embark on a more comprehensive adjustment measure and to change the basic economic structure and to improve resource allocation. As a consequence, renewed measures for stabilization were accompanied this time by a major external trade liberalization program and by a series of peso devaluations. The program was supported by two Trade Policy Loans (TPL) of US$500 million each from the Bank in July 1986 and November 1987. Between late 1986 and early 1988 the Bank approved six loans amounting to over US$3.3 billion, all of which supported, in varying degrees, changes in the trade regime. With rapid progress on trade liberalization beginning in mid-1985, the Bank decided to orient its economic and sector work (ESW) to examine domestic policies, particularly of a regulatory nature, which were also constraining efficient resource allocation. It was recognized that in order to generate the required supply response, trade liberalization would need to be matched by similar reforms in other key areas of domestic policies and the legal and regulatory framework. 2.6 In December 1988, the incoming administration faced a seriously deteriorating economic situation. There had been no growth in economic activity in more than six years, with a consequent sharp decline in per capita income, and expressions of "austerity fatigue" were widely heard. Against this background the Industrial Restructuring Project emerged as one of a series of Bank loans linked to trade reform. The IRP was designed to support the physical and financial restructuring of firms that were being affected by the trade liberalization, yet had the potential to compete effectively in a changed economic environment. It was anticipated that PFIs would have the capabilities to identify and evaluate these enterprises. The project was to strengthen the supply response to the new policy signals, enabling firms to increase their competitiveness and efficiency, and to provide a source of term financing which was essential to the long term nature of the restructuring process. III. Project Objectives and Description 3.1 The project's general goal was to support the Government's trade liberalization and export development policies by helping key industrial subsectors adjust to a changed economic environment. The project was to complement policy adjustments designed to facilitate further trade liberalization and simplification of the regulatory environment by focusing on private sector activities in industrv. Textiles and apparel, automotive and horticultural products were the main subsectors for which restructuring studies were targeted. These industries were selected for initial Loan concentration because they were to be in the forefront of restructuring. Also, Mexico had prepared programs for trade development for these sectors. A limited amount was made available to other subsectors as they became liberalized by the Government's trade policy reform.  4 3.2 The project's specific objective was to establish an industry-wide financial and institutional framework within which viable, company-specific restructuring plans could be developed and implemented. The restructuring process would require a period of 3 - 5 years since significant changes wvere to take place. NAFIN, as the Borrower, would onlend the proceeds to industrial enterprises directly or through the commercial banking system: or pass on Loan funds to BANCOMEXT or FONEI for onlending directly to enterprises or onlending through the commercial banking system. Financial instruments offered under the project were loans, equity and quasi-equity participation, including conditional and convertible loans and subordinated debt. Financing was provided in Mexican pesos or U.S. dollars at the option of the beneficiary company. 3.3 The Loan included four components: (a) Subsector-Specific Restructuring Investments: US$150 million (60% of the Loan) was reserved for investment in subsectors for which restructuring strategies had been defined (e.g., textiles. autoparts and flowers). This component comprised the financing of fixed assets, working capital and consulting services which companies required to prepare and implement restructuring and development plans. (b) Other Investments: US$85 million (34% of the Loan) was to provide financing for investment and working capital projects in all other industrial subsectors that had been liberalized by the trade policy reforms or subsectors for which quantitative import restrictions (QRs), official reference prices (ORPs) and import prohibitions had been eliminated. (c) Industry-Level Investments: US$10 million (4% of the Loan) was to provide financing through the banking system for training facilities, expanded services offered by industry associations and subsector-wide promotional programs. (d) Technical Assistance: US$5 million (2% of the Loan) was to provide financing for goods and services needed to improve the delivery capacity of participating intermediaries and for project implementation. 3.4 The project financing plan anticipated investments in industrial companies in an estimated amount of US$500 million equivalent. The Loan was to finance the foreign exchange cost of the project. estimated to be 50% of total project cost. The remaining half of project costs was to be covered by subborrowers, financial intermediaries (20%), and executing agencies (30%). IV. Project Design and Organization 4. 1 The project had a long gestation period. In the context of the fast-moving changes in hmexico's policy refor-ms, events soon eclipsed the original purpose and concept of the project. The conceptual foundation of the project -restructuring- was misinterpreted by Mexican banks.  5 Project design was unsuited to BANCOMEXT, one of the leading executing agencies, and even the introduction of novel features such as the ICB method of procurement proved unworkable. The project eventually was redesigned in order to be of relevance to the Mexican economy. 4.2 By the time it was signed in September 1989 and made effective in February 1990, the industrial policy content of the Loan was only of limited value to Mexico's new liberalized economv. Also, investment objectives were out of focus considering that NAFIN" at the time was being transformed into a DFI aimed at micro and small enterprises (para. V.5.8) whereas the Loan was targeted to medium and large firms as the main beneficiaries. 4.3 The project was first identified in July 1986 and appraised in January 1988. Negotiations started in July 1988 but were not completed until March 1989. They were protracted for the following reasons: - First round of negotiations: discussion of the long term strategy papers for the autoparts and textile subsectors and agreement was reached with respect to the procurement procedures required by the Bank. - Second round of negotiations: policy statements were revised and agreed upon but outstanding issues still remained such as the amount of the Loan, interest rates and the need for the Guarantee Agreement to specify that the GOM would compensate the Borrower for any foreign exchange losses on the Loan. - Third round of discussions: agreements were reached on above issues but in December 1988 the Bank renegotiated procurement conditions and agreement was not reached with GONI till March 1989. 4.4 After negotiations other issues continued delaying Loan commitment and effectiveness: following Board presentation legal agreements could not be signed because FONEI, a trust fund and executing agency under Banco de Mexico as a trustee, was being transferred to NAFIN, the Borrower. This was the first time the legal documents were amended i.e., to reflect FONEI's extinction. The second time occurred when CETES were replaced by ACF rates. Another event arose also delaying the signing date. BANCOMEXT wished to bear the foreign exchange risk, although in the legal agreement the foreign exchange risk was to be absorbed by NAFIN. This issue was resolved bv a supplemental letter to the Guarantee Agreement. rather than a covenant, specifying that the GOM would compensate the Borrower for any foreign exchange losses. The GOM also had to present a promotional program satisfactory to the Bank, and other pending actions to comply with Loan effectiveness such as to liberalize cotton imports; to privatize Algodonera Nacional; to remove QRs and to reduce protection on terminal products for automobiles and autoparts. All these conditions were evenrually fulfilled. iLNacional Financiera 1989-1992: Hechos y Retos  6 4.5 Project concept was flawed because the term "restructuring" was understood differently by Mexican banks and the Bank. For the Bank the term meant to develop company - specific work out plans and the application of complex financial instruments. A typical example would be of a hiahly leveraged company with a financial strategy consisting of new money, assets sale, debt swaps and a re-orientation of its business activities including in some instances factory- retooling. In all cases requiring a combination of a cash infusion from existing or new shareholders, a partial loss to be absorbed by the banks and to convert part of the company's debt into equity (quasi-equity). A turn-around of the company's fortunes was expected in the near term, at which time the banks (or investors) would divest of their shares at a profit. This type of operation was inconsistent with Mexican commercial banking practices. 4.6 For Mexican financial institutions the term "restructuring" meant refinancing short term debt for existing borrowers in default. Commercial banks do not make new loans to restructuring enterprises in financial distress. The communication problem proved to be real as bankers interviewed by the PCR mission did not understand the purpose of the Loan4'. The core activities of a bank are to assess the creditworthiness of an enterprise and the financial viability of a discreet asset or working capital investment. Banking institutions are not designed to handle integrated financial packages. An attempt by the IRP to build up investment banking skills was incompatible with a commercial banking culture. 4.7 The project design proved to be too narrow and rigid for BANCOMEXT, one of the leadina executive agents, for the following reasons: - First, the targeting of the subsectors qualifying for Loan proceeds. The project was designed to support a small group of industrial subsectors adversely affected by the liberalization measures i.e., textiles, autoparts and cut-flowers. Financing by the project was supposed to be gradually opened up to other industrial subsectors, based on the findings of studies to be carried out by SECOFI. BANCOMEXT had decided to act as one of the executing agencies based on its large pipeline of industrial subprojects. BANCOMEXT, however, later discovered that few of its subprojects met Bank eligibility criteria of restructuring, under targeted subsectors. As discussed in the previous paragraph, there was a conmmunication problem among Mexican financial institutions as to the definition of the term "restructuring." BANCOMEXT's interpretation was "modernization." and most of its subloans fell under this category. - Second. the unspecified mechanism to channel Loan resources. The sharing basis of the Loan among executing agencies was left vague. NAFIN would onlend Bank funds on a "first come, first served basis" to FONEI and BANCOMEXT. Comnmitment fee payments became substantial for BANCOMEXT because there was no precise amount allocated on which to base the calculation for fee sharing. Since BANCOMEXT was supposed to be the largest user of the Loan. fee payments were also large "on an indicative basis,'" for funds that were unavailable to BANCOMIEXT because of the complications in Loan effectiveness previously mentioned. 2/Some banks know NAFIN's restructuring program (PROFIRI) by the name of modernization (PROMIRI).  7 - Third. operational difficulties emerged because BANCOMIEXT's subprojects were subject to two layers of approvals, the Bank and NAFIN, resulting in backlogs as long as nine months. Also. B,A.NCOMEXT found procurement requirements cumbersome and difficult to comply with, especially with what the Bank considered "international shoppine procedures." BANCOMEXT, in view of all these factors, informally agreed to the use of only 1/5 of the Loan, without amending the legal documents. 4.8 Besides its institutional and financial complexity that contemplated a range of borrowers, lending institutions, financial instruments, and policy objectives, the project introduced four novel elements. 4.9 First novel feature was the Bank inaugurating the ICB method of procurement into a DFI type operation in Mexico (the US$3 million proposed in the SAR was later increased to US$7 million). GOM accepted this requirement on the understanding that it would not create a precedent for future Bank operations, since previous credit programs negotiated with the Bank (2142-ME, 2746-ME) did not include the ICB procurement procedures requirement. In retrospect, the ICB method of procurement in a DFI type operation was unnecessary. Commercial banks bore the credit risk when using NAFIN's rediscounting window and would therefore make sure on-lent resources were used efficiently. On the other hand, subborrowers who had to repay the banks or risk legal action would employ the most cost effective technology/equipment in using subloan proceeds. Enforcement of efficient and economic methods of purchase is more appropriate in public sector works not in a private sector environment where best procurement practices are dictated by attention to the "bottom line" and market forces. A second novel feature of the IRP was the inclusion of pollution control equipment qualifying as stand alone, and not necessarily a component, investment subprojects. A third novel feature was interest rates based on ACF plus a spread, rather than on the traditional CETES percentage formula. LIBOR would be used as the base for US dollar subloans. The fourth novel feature was the large size of subprojects contemplated under the Loan. Executing agencies had a free limit of USS7 million to approve subprojects, with the maximum amount of investment for any subproject being USS15 million. 4. 10 Following Loan effectiveness, the project was redesigned in response to the GOM's new trade policies. In late 1989, the Salinas administration speeded the process to remove trade barriers, decontrol prices and simplify market regulation, reflecting its commitment to policy reform for the industrial sector. The IRP was therefore turned into a general purpose industrial credit line co accommodate the rapid pace of trade liberalization. V. Project Implementation 5.1 Project implementation was unsatisfactory. It had little impact from an institutional standpoint and there was no demand for its innovative components. Slow disbursements towards  8 the end of the project may have been due to an inadequate interest rate policy adopted by NAFIN. 5.2 The project had no instirution building component because the major executing agencies, BANCOMEXT and FONEI, were experienced and capable and expected to perform well their respective functions. The Borrower was NAFIN., which would relend the proceeds to industrial enterprises through the commercial banking system or channel the funds to BANCOMEXT or FONEI. institutions with strong technical capabilities. It was expected that FONEI and particularly BANCOMEXT would efficiently allocate Bank funds among project beneficiaries. FONEI was merged into NAFIN in June 1989 and legallv dissolved in December 1989. As a result, NAFIN became the major user of the Bank Loan. This sharply altered the institutional quality of project arrangements as NAFIN's institutional performance under previous Bank operations, namely the Capital Goods project, had been less than fully satisfactory. Although the Bank supported the rationing of trust funds and streamlining of DFIs activities, the financial sector reforms that took place did not differentiate the various levels of professionalism embedded in some of these institutions. FONEI had been a first rate second tier intermediary and with the merger FONEI senior staff disappeared and technical capabilities were scattered and rendered impotent. 5.3 Institutional implementation was weak. NAFIN was the Borrower, but also acted as executing agency, together with BANCOMEXT and FONEI. A potential conflict of interest arose by NAFIN also competing for Bank funds for its own subprojects. SECOFI was in charge of preparing the studies on which subsector restructuring strategies would be based, but once the economy opened up no further studies were necessary and SECOFI ceased to play a role in project implementation. Coordination of Loan implementation was given to a high level committee, expanded COCOFIN, but it never functioned. With the merger of FONEI, NAFIN replaced Banco de Mexico as new trustee and leaal amendments to the Loan agreement were made to reflect these changes. but FONEI's technical skills were not incorporated in the new institutional arrangements. 5.4 Promotional programs were developed by the executing agencies to comply with conditions of effectiveness and to advertise the industrial restructuring features of the Loan. During the January-August 1989 period five hundred and ninety industrialists had participated in workshops and seminars to learn about the IRP. In October-December 1989 ten more conventions took place as follow up in the marketing campaign. In spite of this massive diffusion of the IRP. there proved to be little demand for some of the innovative IRP aspects and components which were an important reason for the Bank's involvement. 5.5 This lack of demand is explained by the following factors. In Mexico, commercial banks rarely engage in investment or merchant banking activities. Consequently, there was no quasi- equity financing under the Loan. The development of corporate financing capabilities among PFIs provided rare cases of assistance to over-leveraged companies. Medium-scale industry in Mexico, as indeed in much of Latin America, tends to be family-owned and known for their conservative attitude especially concerning minority equity holdings in their enterprises. Overall,  9 the environment was not conducive to staging equity financing for these industries. NAFIN only reported nine equity investments amounting to USS19.5 million (8% of Loan amount). One component (Category C: industry-level infrastructure projects) had zero lending because none of the institutions (industry associations, promotional instirutes, research centers) anticipated as users qualified as acceptable credit risk. Consequently, the project now consisted in essence of two components: a) an investment component (loan and equity participation) open to the whole industrial sector - US$245 million and b) a technical assistance component for improving the delivery capacity of PFIs and for project implementation - US$5 million. 5.6 NAFIN was in breach of due diligence covenants, but later took corrective measures. Following NAFIN's complaints about the Bank's long and cumbersome review procedures, the Bank agreed to waive for one year, from June 1991 to July 1992, the obligation for NAFIN to submit all subprojects to be financed under the Loan for Bank prior review. After a slow start, disbursements moved faster and by June 1992, US$182.7 (73% of project amount) had been disbursed. US$15 million of which for BANCOMEXT i.e.. 8% of disbursements. Supervision missions would review at random a sample of subprojects in the field and if NAFIN complied with appraisal standards the waiver would be extended. A July 1992 supervision mission screened 8 subprojects and found that 4 did not meet the Bank's conditions and requirements. This finding triggered a comprehensive review by NAFIN of all the 442 Bank-financed subprojects and detected that 106 of them, representing 24% of the total were ineligible for Bank financing21. These subprojects were canceled. In October 1992, a special Bank mission took place to review the situation and found that by and large NAFIN's subloans under the IRP met Loan eligibility criteria. 5.7 After mid-1992, the pace of disbursements slowed considerably. NAFIN explained that this was due to: a) delays caused by the new regional decentralization in credit approvals and b) debugging problems in the computer/software used in rediscounting operations. However the PCR mission believed that the main reason was NAFIN's costly subloan pricing policv, which was in line with its new orientation to serve the micro and small industries but not competitive for targeted subborrowers (medium and large enterprises). Commercial banks were finding cheaper to fund their lending program for corporate customers out of their own resources. 5.8 Bank funds channelled through NAFIN may have been too expensive for PFIs at that stage of the project. Under NAFIN's new interest rate policy, applicable to all of its lending programs. the average lending rate to project beneficiaries was ACF + 6 % in pesos, and LIBOR + 6% in US dollars, including a 4% spread for the PFIs. Premiums were high to cover riskier transactions and high unit processing cost incurred by lending to the retailing sector (micro and small industries). But, medium-size corporate clients could negotiate lower spreads than those applied to small enterprises, and therefore lower lending rates. because the additional businesses e.g., letters of credit, compensatory balances, cash management etc. they bring to their bankers 3LThe ineligible subprojects consisted of 95 subloans and 11 equity investments which represented for NAFIN commitments of US$33.6 million out of which US$22.2 million had already been disbursed.  10 compensate for lower loan interest revenues i.e.. a fee-driven operation. In addition these companies tend to have a strong and loyal bank-client relationship which the banks reciprocate by providing better services and forfeiting immediate gains for lona term benefits. Commercial banks interviewed agreed that NAFIN's resources are still attractive because of its term lending characteristics (up to 13 years), irrespective of company size. However, corporate financial managers do not base their investment decision on subloan repayment periods alone but also on the level of lending rates. This trade-off may have resulted in medium-size companies preferring lower borrowing rates but a short term repayment period, rather than NAFIN's generous term lending under the Loan. A major Mexican bank indicated that unless NAFIN lowered its lending rate demand for NAFIN's resources would continue to fall in 19940'. 5.9 There was a variance between planned and actual project implementation concerning the US$5.0 million technical assistance component. The measures supported by the ISPL contributed to modernize the industrial sector by removing market distortions and to a positive change in the business climate. Therefore, the studies and sector work by SECOFI to be financed under the project were no longer necessary. In late 1993, GOM had new priorities regarding the financial system and a program for using the remainder of these funds (approximately US$3 million) was proposed and agreed by the Bank. The Loan agreement was amended for the third time to allow the financing of this technical assistance. Consequently closing of the project was extended from June 30, 1994 to June 30, 1995. VI. Project Results 6.1 From a resource transfer point of view, the IRP achieved its goal of providing financial support to industrial enterprises through PFIs with sound credit analysis capabilities. Term financing to Mexican industrialists to modernize their factories, including working capital, was made available at the right time contributing to the industrial recovery. The changed trade environment required and justified modifications of the project that had been designed when Mexico started its process of opening up the economy. IRP was one of a series of Bank Loans to Mexico combining sector policy with financial and technical assistance to manufacturing companies and subsectors. These included: two trade policy loans in June 1983 (US$350 million) and January 1987 (US$250 million); two export development loans in June 1983 (US$350 million) and Januarv 1987 (US$250 million); a steel - sector restructuring in March 1988 (US$400 million), and a fertilizer sector adjustment loan also in March 1988 (US$265 million). 6.2 From the point of view of achieving its specific objective of establishing an industrv-wide financial and institutional framework within which viable, company-specific restructuring plans 4L A recent trend being observed is of commercial banks reducing their use of NAFIN's funds, from 94.4% in 1990 to 68% in 1993, non-banking institutions, on the other hand taking up the slack, from 6% to 32% during the same period - Credit Unions' share has increased from 4.5% to 15.3% (NAFIN - Informe de Actividades 1993)  11 could be developed and implemented, the balance is clearly negative. Mainly because major enterprises prepare their own financial plans and business strategy, small businesses are engaged in long term multiple stage activities design to resolve their problems. i.e., most planning is ad- hoc. Also because the Loan supported restructuring investments in a commercial banking environment where "plain vanilla" lending was the rule and little or no merchant banking capabilities were of interest to the banking community. Few banks have an appetite for using borrowed funds for high risk equity investments. Normally banking supervision prefers that equity investments are sourced from capital. The Loan eventually operated as a standard industrial credit line through established governmental and comunercial bank channels. 6.3 As a result of NAFIN's new role of being a second-tier institution with an MIS geared to discounting operations that does not track development impact of subloans, limited information conformning to Bank's standards for PCR preparation was available. NAFIN was only able to obtain data from its regional offices on 273 subprojects (79% of NAFIN's total) amounting to US$166.7 million (84% of NAFIN's use of Bank funds). Based on this sample, the Bank was able to estimate project costs and content of financing. Only 153 subloans provided data on repayment terms. No data could be provided regarding the condition of NAFIN's loan portfolio and its development impact, not even ex-ante economic and financial rates of return. 6.4 The reprivatization of the banking sector which started in October 1991 was a major event in Mexico and affected project implementation with mixed results. On the positive side, one immediate effect for the economy was a more efficient and competitive financial intermediation system, in terms of reduced intermediation costs which were passed on to borrowers. With the aim of boosting profits and allocating resources the privately=owned banks spent the whole of 1992 in assessing the quality of their newly acquired loan portfolio and developing business plans. 6.5 As a result of this review banks started to reduce lending to the public sector and to what they considered high risk industrial subsectors eg., textiles, shoes and leather, computers. At the same time this measure by the banks resulted in a small share (15%) of financing to the textile industry, whereas the project relied on a much higher share. This meant that the Loan's focus on this industry was misplaced because it proved to be that after the trade liberalization Mexico's competitive advantage was not in the textile sector. 6.6 Loan utilization and the characteristics of the subprojects financed are shown on Tables IV - VI. The Loan was used to finance 354 subloans/equity investments and technical assistance subprojects. 280 industrial enterprises benefitted for a total of US$248.6 million. Of the total Loan. NAFIN used US$197.4 million for 346 operations with an estimated subproject cost of about USS460 million -based on above sample- of which the Bank is assumed to fund 33% of the total. the balance financed by enterprises and financial intermnediaries - NAFIN's own resources were not used. Of the 346 subprojects financed by NAFIN, only 11 were relatively large (in excess of US$2 million, the largest being USS8.2 million). The majority of the subloans. based on above sample, carried a relatively short maturity (3 to 5 years) only 2% carried a maturity in excess of 7 years. In terms of sectoral distribution 22% and 15% of the  12 subprojects by number were in the agroindustries and textiles, respectively. Of the remaining sectors. metal-mechanic and chemical/petrochemicals represented about 16% and 6% respectively, the other sectors (autoparts, paper, capital goods. wood, construction, leather and shoes) each represented less than 6% of the total. In terms of amount disbursed, the average subloan was US$570,000, large enterprises represented about 46% of the total number of subprojects with medium and small ones each absorbing 38% and 16%, respectively. In dollar terns. working capital and fixed assets financing were 43% and 48%, respectively. 6.7 The majority of the subprojects were concentrated in the most industrialized regions (Center, D.F., North-East and West) utilizing about half of the Loan. Most commercial banks participated in the Loan, but about 70% of the number of projects financed was channeled through six commercial banks: Banamex, Banca Serfin, Bancomer, Multibanco Comnmermex, BITAL and Banco Mexicano. 6.8 BANCOMEXT, in contrast, utilized Loan proceeds more in harmony with the objective of the IRP and maintaining subloan statistics i.e., financing large subprojects and meeting Bank's reporting requirements. Of the total Loan, BANCOMEXT used US$49. 1 million for 8 operations with an aggregate subproject cost of US$302.6 million, of which the Bank funding amounted to 16% of total - indicating the high rate of resource mobilization, including use of BANCOMEXT's own funds (12%). Only one enterprise received two subloans, therefore the total number of companies financed was only 7, all of them large and medium-sized and in the export business. The average subloan was US$6.1 million and the largest US$15 million. In terrns of sectoral distribution, 4 companies representing 56%, in dollar terms, were in the textile industry, 2 in agroindustry (14%) and 1 in the steel industry (30%). All subloans, except one for workina capital, were for equipment and fixed assets financing. In terms of geographic distribution, similar pattern as in NAFIN's case, was observed of the subprojects e.g., North- East and West, and D.F. All subloans were denominated in US dollars with shortest maturity, with the exception of working capital subloan for 180 days, being 5 years and longest 13 years. BANCOMEXT acted as first-tier institution in the majority of operations (5), participating the followin2 commercial banks in each of the remaining 3 operations: Banamex, Banco Mexicano and Multibanco Mercantil. Four of the subprojects had ex-ante economic and financial rates of return estimated to lie between 10% and 20%. Most of the subloans are in the grace start-up period, therefore it is too early to draw any conclusions concerning subproject viability or to show their full impact. VII. Project Sustainabilitv 7.1 As mentioned in the previous paragraph, it is too soon to determine the full development impact of the subprojects because many of them are still in their infancv and the Loan is not vet fully disbursed. However, field interviews conducted by the project completion mission with beneficiaries and PFIs provided overall positive feedback on subproject sustainability, in aspects such as employment creation, product sales increases, and improvement in operating efficiency.  13 7.2 In addition, there are reasons to believe that the resources mobilized through the IRP were efficiently allocated. at least in terms of quality of the subprojects. because of the following reasons. First. after the July 1992 Bank supervision mission. NAFIN took corrective steps to eliminate all subprojects from the pipeline that did not meet Bank criteria and strengthen approval procedures to avoid future occurrence. Second, followina the events of June 1992, NAFIN submitted all subprojects to be financed under the IRP for Bank's approval. Third, NAFIN was reorganized into a second tier institution, except for equity investments, and the evaluation of subprojects was transferred to the reprivatized banking system. Furthermore, the subloans were granted within the framework of a liberal trade regime, free of market distortions. VIII. Bank Performance 8.1 The Bank's performance was spotty. Although the project had a lengthy preparation, key operational details were not fully worked out. Project supervision concentrated on formal matters, resource transfer, audits etc., and not enough on institutional flaws. There was no justification to include financial engineering and quasi-equitv financing in the IRP. 8.2 During project preparation, the Bank did not thoroughly investigate Mexico's financial and capital markets and the main factors constraining the use of these equity-type financial instruments by medium-size enterprises. The Bank therefore sharply overestimated the ability or interest of comrnercial banks to engage in complex or high risk merchant banking activities and did not understand well the operations of commercial banks. Indeed, there was evidence from previous Bank operations in Mexico (e.g., Industrial Recovery project, Industrial Technology Development project, Capital goods project, Small and Medium industry projects) that there would be little or no demand for the more sophisticated forms of term financing. The overly complex project design resulted in unrealistic expectations reearding interest of commercial banks in developing "an investor mentality" and skills for using these sophisticated instruments. Had FONEI not been dissolved and a larger BACOMEXT participation in the ILoan materialized it would have been likely that significantly more progress could have been made in this area. 8.3 Many of the important issues normally resolved during appraisal or before condition of effectiveness were never ironed out during the life of the project. The major ones were: the Bank to request from NAFIN to establish a financial working group to approve the economic and technical viability of investment proposals; to create a forum with the PFIs to resolve project management problems; to determine the precise mechanism for the executing agencies to channeling and accessing Bank resources: to resolve the ambiguous, and at times coniflicting, nature of NAFIN as both the Borrower and executing agency; and to address, from project inception. NAFIN's inadequate subproject evaluation. The institutional and legal ramificaUions of the NAFIN-FONEI merger were not fully explored.  14 8.4 The Loan was intended to support trade policy but had no conditionality either in the financial or industrial sector. But. the hybrid nature of the Loan, combining policy advice with investment may have been justified if it is viewed as an integral part of a broader strategy of structural reform supported by the Bank which began in 1985 when the initial steps were taken to liberalize trade and open up the economy. The achievements under the Loan (investment components) were to reinforce the ISPL by providing incentives to industrial subsectors to speed up the adjustment process. 8.5 The Bank performance of its Loan supervision responsibilities for the first 24 months of operation was not effective. In March 1990 shortly after the Loan became effective, a supervision mission detected and reported on the absence of project coordination, NAFIN's limited implementation capacity, and BANCOMEXT's reduced involvement in using Loan proceeds. These assessments were not followed up with specific actions. NAFIN agreed to submit periodic status reports on the implementation of the Loan, including a qualitative assessment, but never delivered on its promise and the Bank never reacted to this failure of compliance. In fact, the only project progress report ever submitted to the Bank by NAFIN was in March 1993, following Bank decision to discontinue with the waiver. On the other hand, after the July 1992 Bank supervision mission, NAFIN took a number of measures to redress subproject screening and supervision deficiencies but was not responsive to other firm and specific Bank recommnendations e.g., lending rate policy, monitoring subloan repayment experience, exit formula on equity investments etc. IX. Borrower Performance. 9.1 The performance of the Borrower was mixed. NAFIN shared with the Bank the responsibility for the actions taken throughout the project cycle that affected the execution and results of the operation. NAFIN did not perform adequately, under the waiver, in accordance with sound financial and administrative practices nor maintained an adequate reporting system on the Loan financed portfolio. 9.2 As mentioned earlier, a steering committee responsible for overseeing project execution never functioned. There was no authority to redress operational difficulties that emerged between NAFIN and BANCOMEXT. This triggered BANCOMEXT's withdrawal from playing a larger role in the Loan. 9.3 Earlier in the project implementation the Bank staff found that there was little informnation on the repayment experience of subprojects and advised NAFIN to require PFIs to provide data on arrears, prepayments, non-performing subloans and subsectors affected. NAFIN did not act on the Bank's recommendation and consequently made it difficult to assess the quality and outcome of the Loan financed portfolio.  15 9.4 Although NAFIN did strengthen information system flaws. subsequently to the July 1992 Bank mission. at both the credit review and supervision phases, the quality of NAFIN's project appraisal and supervision work remained weak. In too many cases the Bank had to ask for additional information during subproject review and this. as well as the cancellation of many approved subprojects. requiring the appraisal by NAFIN and approval by the Bank of replacement subprojects, continued to delay Loan utilization. X. Project Relationships 10.1 Bank-Borrower relationships have matured over almost a decade of Bank's operations with Mexico's DFIs. In some instances NAFIN being in agreement concerning identification of a problem and the mechanism to be used for solution or improvement. As discussed in para. V.5.2 the Loan had no provision for institution building and NAFIN, a development bank with about US$30 billion in assets5' and sixty years in existence, has not always been receptive to Bank advise. The Bank did not express its concerns at an early stage about NAFIN's quality and efficiency of project cycle activities and NAFIN did not respond assertively to the signals received from the Bank, until the supervision mission of July 1992. 10.2 The Bank-BANCOMEXT relationships have also grown over a number of operations, an institution familiar with Bank requirements for both data and legal compliance. In fact BANCOMEXT was the only executing agency that could provide complete data at the subproject level for the PCR. However, a weakness in operational arrangements resulted in BANCOMEXT's utilization of Loan funds to only 20%. XI. Consulting Services 11.1 As mentioned in para. V.5.9 more than half of the technical assistance component was used to finance the development and supervision of Mexico's voluntary and compulsory pension regimes. improvements in supervision of financial conglomerates, and the evaluation of public investment projects. The Loan agreement was amended to expand the description of the project to include the emplovment of consultants, studies, training, computers and software equipment not contemplated under the original Loan agreement and a postponement of the expected completion date until June 1995. This limited program of support was developed to meet the immediate needs of the GOM for advice and assistance to consolidate reforms in the financial system. Consultants were also used to develop NAFIN's risk management capabilities. The agreed TA program is being carried out. S/ NAFIN Annual Report 1993.  16 XIL. Project Documentation and Data 1'2.1 Project documentation and data includes the legal documents, the staff appraisal report (SAR). missions' back-to-office reports, supervision reports, audit reports and one progress report provided bv the Borrower. 12.2 The many amendments to the legal agreements soon made it difficult to have an overview of all relevant Loan provisions. It would have been helpful if a consolidated document could have been prepared but because the Legal Counsel needed to process a number of new operations for FY94 and considering the late date of the last set of amendments, this was less of a priority. Also, the SAR lost its value as a framework and guideline for project implementation, due to the redesign of the project. 12.3 The main outcome of NAFIN passing on the credit risk of subprojects to PFIs was a supervision and monitoring system resting entirely on the financial intermediaries, resulting in inadequate recording and reporting procedures for purposes of Loan administration. As mentioned in para. IV.4.2, NAFIN scarted in 1989 a reorganization process which consisted in a reorientation of its lending activities to become a second-tier institution. NAFIN, therefore, had little incentives in keeping track of subprojects' financial perforrnance, since repayment by PFIs was guaranteed, irrespective of subloan accrual status. Comrmercial banks, for instance, have discretionary subloan approval limit for discounting up to US$1 million with minimum financial disclosure provided to NAFIN. Also, there is no systematic collection of subproject performance data at NAFIN main office, since regional branches can approve loans of up to USS6.5 million without authorization from Mexico City and minimum credit information is requested from headquarters. Only a verv small part of the usually required data for the preparation of the PCR was readily available at NAFIN when the first PCR mission arrived in Mexico City in March 1994. Therefore, a second PCR mission was arranged in June 1994 with limited results. NAFIN graciously extended assistance in facilitating meetings with project beneficiaries and PFIs, and some agencies/institutes connected with sector analysis. XIII. Lessons Learned 13. 1 Original Project Design. Two key lessons can be ascertained from the IRP. First, the Bank should closely assess and monitor the links between a proposed operation and the institutional serup within which the project is to take place and develop, especially in an ever evolving policy environment. The IRP was designed to nurture an investment banking culture in a state-owned commercial banking setting with three governrnent finance development agencies. as the main promoters. Commercial banks bv nature are risk averse and do not generally engcage in merchant banking activities. Similar Bank operations in Mexico had already shown disappointing results. Second, project design should be simplified when too many tools are being used to accomplish the same objective. The IRP was too complex with too many  17 innovative features combining policy, an excessive number of overly sophisticated financial engineering and products, and the involvement of a multitude of institutions. The Loan was in fact a standard Apex line, but disguised with policy and financially sophisticated features. 13.2 Project Restructuring. The Bank should be more assertive on new conditions of effectiveness when legal clauses are modified. The FONEI-NAFIN merger changed many of the assumptions underlying the project design and this should have been reflected when the Loan agreement was amended. The Bank should have been more forcible to ensure that FONEI's strong technical capabilities, under NAFIN, would remain intact for purposes of Bank Loan administration. Alternatively, the Bank should have insisted that NAFIN establish a technical advisory unit composed of qualified financial specialists including outside consultants that would be in charge of approving investment proposals. The Bank should not hesitate to reappraise and restructure project focus when necessary. 13.3 Underpinning Sector Analysis. The Bank should do a thorough sector analysis before introducing non-conventional features into a project. The innovative components in equity-like financing were put into place without a good understanding of the institutional, regulatory and policy constraints hampering their growth.  18 PART II: PROJECT FROM BORROWER'S PERSPECTIVE I. Objectives 1.1 In the Executing Agency's view, the Bank would have been better advised, instead of analyzing the meaning of "restructuring" as interpreted by the different project participants, to have examined whether its own understanding of this concept was fully consistent with the dynamics and needs of the Mexican economy at the beginning of the nineties. 1.2 In Nacional Financiera's opinion, the enterprises were clearly in need of financial support to carry out investments specifically designed to increase their productive efficiency and improve their competitiveness, whether this be termed restructuring, reactivation, reconversion or industrial modernization. 1.3 Within the original project context, the intention was for the Federal Government to identify the sectors for which development bank support was urgently needed, and for the Secretariat of Trade and Industrial Development to set the appropriate criteria and priorities for determining whether a proposed investment project could be classified under the heading of "modernization. " 1.4 Nevertheless. in 1989 Mexico adopted the political decision to become fully integrated into the world economy, then in the throes of radical transformation. 1.5 This meant that the entire industrial apparatus had to meet certain standards of efficiency and modernization as the economy opened up irreversibly to external competition, since the only way for Mexican industry to survive, let alone develop and take advantage of the new trading opportunities, was to strengthen its own potential to compete. 1.6 It was in this light that NAFIN viewed the World Bank loan, and it was on this basis that it made its decisions regarding on-lending of the loan proceeds.  19 1.7 It is important to emphasize the above, because while it may seem that NAFIN was unable to comply with the Bank's requirements for a program with few resources [sic], the truth is that at the beginnina of 1990 the needs of the industrial sector and NAFIN's overriding priorities did not match the loan objectives. Particularly because the instruments used by NAFIN in its operations with medium-sized and large enterprises were never eligible for rediscounting under the loan. In addition. the "novel" policies cited by the Bank, involving the use of ICB procedures for private sector procurement, never got off the ground. 1.8 It should be emphasized that right from the loan negotiation stage NAFIN was included as one of the "executing agents," and not, as the Bank states in section 4.5 of the document, solely as Borrower, and we do not therefore understand how its inclusion could alter the institutional quality of the project. II. Project Implementation 2.1 Most of the loan funds were used by NAFIN in a manner consistent with the agreements among the participating institutions and with the instructions issued by the Secretariat of Finance and Public Credit. At no time was there any conflict of interest among the participants. 2.2 Nor is it true that the project coordination requirements were not met, since the requisite provision was made in the loan agreement with the appointmnent of a Project Manager, a fact that was duly reported. 2.3 As mentioned above, while it is not true to say there was no effective promotion or boosting of the loan's "novel features, the fact is that they never worked out, and whenever there was a move to suggest to the Bank that an instrument more appropriate to the Mexican context be adopted. it was not possible to set up a dialogue. For example, it is not true that "commercial banks are do not have the capacity [sic] to engage in investment or merchant banking activities. Consequently there was no quasi-equity financing." In reality, this instrument has a cost problem related to the tax aspect with which it is associated, which has nothing to do with the banks' investment policies. 2.4 We agree with the Bank that the main reason why disbursements came to a standstill cannot be the workload and problems of our computer systems, initially the Regional Discount System (SIREDE) and now the Integrated Discount and Portfolio Monitoring System (SIDECC). This is basically explained by the assessment and radical changes undergone by NAFIN, with respect both to its financial policies and to its discount facilities, which to a large extent no longer correspond to a loan signed some five years ago, whose procedures have not kept up with the evolving characteristics of our refinancing operations. 2.5 NAFIN's change of approach is marked, inter alia, by its reorientation to serve micro, small and medium-sized businesses; the awareness that our second-tier operation is based on the  20 assumption by the commercial banks of the entire operational risk: the redesign and continued updating of our discounting facilities, involving implementation of large-scale automated operating systems: and the simplification of our supervisory procedures to enable them to handle those large-scale automated systems. 2.6 The aim of all these changes has been to substantially increase NAFIN's exposure, basically in the area of micro and small enterprises. It has resulted in an appreciably smaller volume of information being made available per subproject, a volume that may be inadequate for the traditional discounting and rediscount facilities still offered by many development banks in Mexico and elsewhere, as well as by the multilaterals. 2.7 Moreover, it is important to remember that in Mexico's present economic situation, policies covering support for liabilities restructuring, procurement of used equipment, expansion of NAFIN's support for certain sectors, etc. while not included in the Bank's early decision and quick disbursement criteria, are essential to ensure the sustainability of enterprises and expand investment opportunities for micro and small enterprises. 2.8 Those enterprises do not necessarily need to procure new equipment, since we have different levels of technology within our production system. It is noteworthy that the procurement of used equipment is an option now in use in all countries of the world, including, of course, the most highly industrialized nations. 2.9 With respect specifically to the waiver, we should like to recall the original basis and reason for the exceptional treatment given to this loan. The majority of subprojects submitted for consideration by the Bank have usually suffered considerable delays, since in many cases the authorization process takes several months. 2. 10 This was discussed with Bank missions, since the lack of a timely response was affecting not only the pace of loan disbursement but also the institution's finances, all the accumulated delays being reflected in the commitment fee. The Bank accordingly granted a waiver, which, by helping to simplify NAFIN's lending procedures and promote deconcentration, enabled the institution to expedite its disbursement process. 2. 11 With respect to the cancellation of certain subprojects originally included in the project, this is basicallv explained by the differences between the original loan objectives and the goals of NAFIN's present refinancing programs. III. Project Results 3.1 From the Executing Agency's perspective, the project resources made a very small contribution to achieving the institution's objective of preparing enterprises to compete in the  21 ongoinr process of globalization through improvements in their efficiencv or upgrading of their production processes. IV. Bank Performance 4.1 Under this heading, it should be stressed that communications between the Bank and NAFIN have been slow, difficult, and sometimes impossible to arrange. Reference was made repeatedly to the need to modify certain provisions of the loan that were not appropriate to the economic environment, but the Bank was quite unyielding on this point. We would mention, by way of example, the case of the Sociedades de Inversion (SINCAS), which were never accepted by the Bank. V. Borrower Performance 5.1 From the Bank's comments in this section, and, in general, from the overall tenor of the document. it would appear that the Bank is perhaps not very familiar with the way in which NAFIN's new discounting procedures and monitoring and supervision system operate. The main features of the monitoring and supervision system are as follows: (a) the supervision system was overhauled in mid-1992 to-enable it to cope with NAFIN's large-scale and newly automatized discounting operations. During the four years of the loan. NAFIN discounted commercial bank loans to 288,425 enterprises, of which only 346 were submitted to the World Bank (0.001 %); (b) the supervision and monitoring system is based on the following principles: (i) NAFIN's second-tier operation rests entirely on its financial intermediaries; (ii) as a result, NAFIN's activities in the area of commercial bank supervision, as well as other areas, are basically promotional; (iii) to facilitate the evaluation process and ensure achievement of the institution's objectives. the supervision and monitoring system verifies the proper use of funds and provides the following information: increases in production capacity resulting from a given investment: project contribution to improvements in an enterprise's productivity; increase in sales: permanent jobs created; savings on water and energy consumption; and, as appropriate, any effects upon the enterprise concerned in terms of deconcentration of production (sic]; (iv) given the huge scale of NAFIN's operation. this supervisory task can only be performed through representative sampling. For this reason, a mandatory system of  22 supervision by intermediaries has been set up. whereby they have to furnish proof to NAFIN that the funds are being properly used and that our Rules of Operation are being duly observed. Direct supervision by NAFIN is performed only on a sample basis. Any misuse of funds or violation of the Rules of Operation can give rise to a withdrawal of funding and to the imposition of a penalty rate [sobretasa] 50% higher than the agreed rate. VI. Technical Assistance Component 6.1 It should be emphasized that one of the main problems affecting loan implementation arose in connection with the TA component. The fact is that most TA activities take a long time to set up, while the demand for them is usually immediate, so that the specific needs of the promoters can be handled as promptly as possible. This situation was compounded by the World Bank's excessively long approval procedures. 6.2 Furthermore, these actions were not isolated, but were part of a coordinated and specific course of action set out in the Plan of Institutional Strategy, under the specific heading of "Promotion of Advisory, Training, and Technical Assistance Activities, " for which an ambitious Business Development Program was put into effect. 6.3 NAFIN's Business Development Program was set up to promote widespread dissemination of information through an extensive comprehensive national network comprising business institutions, universities, technological institutes, the National College of Technical and Vocational Training (CONALEP) and other institutions of secondary and advanced education, and professional associations and firms, among many others. 6.4 The over 1700 members of the Business Development Network have signed agreements with NAFIN for the following purposes: - training and technical assistance; - creation of development institutions; - technological research programs and projects, training and technical assistance; - rnational investment project forum; - financial support for technological development projects; - consultancy for technological development projects; creation of the National Industrial Technology Consulting Service;  23 interinstirutional collaboration on training geared to business development; creation of consulting and technical assistance firms: design and preparation of teaching materials in the area of business development. 6.5 Another aspect was the preparation of self-training materials. Texts on management topics were prepared jointly with ITAM (Instituto Tecnol6gico Aut6nomo de Mexico), covering such aspects as accounting, finance, management, marketing, production and human resources. ITESM (Instituto Tecnol6gico de Estudios Superiores de Monterrey) collaborated in the launching of a process of continuing improvement (total quality). In addition, Small Business Guides in various fields, including consultancy, printing, business development, furniture manufacture, and maintenance services were translated and adapted for local use. 6.6 Furthermore, based on this philosophy of boosting the development of competitive information. training-related expenses were included as specific items of investment expenditure, covering training as such, business development, and technical assistance, and are expected to become self-financing in the long run. Such expenses, like those related to buildings and machinerv, are regarded as essential to the operation of a business. 6.7 Another very important point was the installation of NAFIN's Center for the Development of Micro and Small Enterprises, which brought together in one place banks, credit unions, leasing companies, factorage firms [empresas de factoraje], under-writers [afianzadoras], accounting firms, lawyers' offices, oficinas de trdmite de gobierno, and all that a company needs to enable it to progress and develop. 6.8 With the creation of this NAFIN center, and at least with the other eight centers of each Regional Directorate. NAFIN has acquired the status of administrator [gestor] and supplier of all types of support. 6.9 Based on a study performed in 14 Mexican cities, which surveyed the type of information needed bv different enterprises to support their decision making and service delivery, it was decided to develop the Business Center concept, NEGOCENTRO, through the sale of franchises to the various sectors of production. 6. 10 In addition. the business sensitization campaign was supported by the media, through the promotional campaign of the National Publicity Council, whose task is to sensitize entrepreneurs to the need for training and to the importance of using technical assistance services. 6. 11 To achieve the institution's objectives, the Strategic Plan also included ambitious training programs for NAFIN staff, which have already been attended by some 95% of its personnel.  24 6.12 Progress has also been made in the systems area. with consolidation of the office automation process through the procurement of computer equipment and its connection to the nationwide networks. 6.13 MIention should also be made of the various activities in the area of international cooperation such as the Fifteenth Seminar on Business Financing and Promotion held in 1992, and the International Seminar on the Role of Micro, Small, and Medium-sized Enterprises in the World Economy Globalization Process held in March 1993, all of which are indicative of the extensive institution-building program that NAFIN has been implementing since 1989, which continues to expand and to adapt to the changing needs of Mexico's present-day economy. VII. Lessons Learned 7.1 Lastly, we should point out that we view the implementation of these programs as a dynamic process, one in which the exchange of experiences can result in improving and perfecting the support mechanisms of both our institutions. 7.2 We appreciate the fact that both the World Bank and NAFIN are dedicated to the arduous task of consolidating development. Thus an ongoing dialogue and exchanges of viewpoints and experiences are surely the best instruments through which to arrive at a joint approach, and we wish to underscore our readiness to pursue the review of our operating systems.  25 ANNEX I PART III: STATISCAL INFORNIATION RELATED BANK LOANS Loan Title Purpose Year of: Status Comments _________ ________ approva'l _ _ _ _ _ _ _ _ 1552-ME. Capital Goods Develop Mexico's 1982 Closed Closed 3-1/2 years lndustries Development capital goods behind schedule. Fully Project. manufacturing subsector disbursed. PCR No and improve technology 9019 issued in assimilation. September1990. 2331-ME. Export Trade policy reform. 1983 - Closed Fully disbursed. PPAR Development 1. No 8875 isued in June 1990. 2746-ME. Industrial Improve the quality and 1986 Closed Fully disbursed. PCR Recovery Project. broaden the scope of No 12234 issued in financial services to August 1993. medium-sized and large companies. 2777-ME. Export Trade policy reform. 1987 Closed Fully disbursed. PPAR Development 11. No 8875 issued in June 1990. 3087-ME. Industrial Industrial policy reform. 1989 Closed Fully disbursed. PCR Sector Policy Loan. No 1239 issued in August 1993.  26 ANNEX 11 PROJECT TIMETABLE Item - ~~~~~~~~~~~~~~~...s......... rgalat Acu rvsdde ., , , ,,, ,,~.,,....... . ....... ... Identification 7/ -/86 7/1- /86l Appraisal Missions .___________l____. 1st Mission 1 1/ 20/ 87l 2nd Mission 2/ 27/ 87 1/ 27/ 88l Loan Negotiations 12 /8/ 88 3/ 14/ 89 Board Approval 4/127/ 89 4/ 27/ 89l Loan Signature 9/ 25/ 89 9/ 25/ 89l Loan Effectivenes 2/6/ 90 2/6/ 90l Loan C!osing 6/ 30/ 94 6/ 30/ 95  27 ANNEX III CUMULATIVE ESTIMATED AND ACTUAL DISBURJSEMENTS (US$ million) Aestrnatestnae25. 292 - Actua :: %': ..0..OO:%...............:- .: 33 --:f.: 33 :4.7%f.2. 3%... :S.4 -8,4 tDae f First Disbursement - - :/5-990 Anual Loan iiCoing' i. ..0. - Actual LonCosing- Date- 6/-/t9  28 ANNEX IV (A) PROJECT ESTIMATE FINANCING (US$ million) - . . . . .X Equipment/Fixed 143.3 90.8 175.8 29.8 439.7 Assets Subloans Working Capital 83.7 0 84.1 65.4 235.2 Subloans Equity Investments 19.5 0 60.7 4.8 85.0 Industry Level 0 0 0 0 0 Investments Technical Assistance 2.1 0 0 0 2.1 Total 248.6 90.8 320.6 100.0 760.0 % Participation 33 12 42 13 100 Note: The data is based on a sample, provided by NAFIN, of 273 subprojects (79% of NAFIN's total) amounting to US$380.4 million of total project cost. BANCOMEXT's use of Bank funds is based on actual (not estimated) total project cost.  29 ANNEX IV (B) CONTENT OF FINANCING (US$ million) Componem . L.c..Cos.....g..a.k inancin& ... ...a.. i; a~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ geim ,--i Ml Equipment/Fixed Assets 304.7 135.0 8.3 Subloans Working Capital Subloans 156.5 76.7 7.0 Equity Investments 69.0 16.0 3.5 Industry Level Investment 0 0 0 Technical Assistance 2.1 0 2.1 Total 532.3 227.7 20.9 Percentage 70 30 3 Note: The data is based on a sample, provided by NAFIN, of 273 subprojects (79% of NAFIN's total) - of which 87 were denominated in foreign currency - amounting to US$166.7 million (84% of NAFIN's use of Bank resources), of which US$87.8 were denominated in foreign currency. BANCOMEXT'S data is based on actual (not estimated) content of financing costs.  30 ANNEX V ALLOCATION OF LOAN PROCEEDS (US $ million) Equipment/Fixed Assets Subloans 146 143.3 Working Capital Subloans 46 83.7 Equity Investments 43 19.5 Industry Level Investment 10 0 Technical Assistance 5 2.1 Total 250 248.6  31 ANNEX VI DISTRIBUTION OF BANK FUNDS 1 ~~~~~~~~.... .. .. ...... . * Equipment/Fixed Assets 97.8 3 Subloans * Working Capital Subloans 80.1 32 * Equity Investments 19.5 8 * Technical Assistance 2. 1 1 Equipment/Fixed Assets 45.5 18 Subloans * Working Capital Subloans 3.6 2 Grand Total 248.6 100  32 ANNEX Vif USE OF BANK RESOURCES A. Staff Inputs |Stage of Proaje Cycle staff Weeks.. Through Appraisal 117.7 Appraisal through Board Approval 16.5 Supervision 116.3 PCR 25.0 B. Missions Activity MonffonYear Number of Specialization: :Nwi :Yber :-Staff Dates of - -:0 Persns.__j o:f Weeks We ks Reor Appraisal 11/87 3 IS, FNA. ECO, 2 6 3/89 (1) Appraisal 1/88 5 IS,AG.POF,FNA, - 2 10 3/89 (2) _ Supervision j 6/89 3 ECO.FNAIE 2 7 7/89 Supervision 31/90 3 POF,IS.BS 2 8 5/90 Supervision 6/90 3 POF,BS,E, 2 8 6 Supervision 5/91 2 POF,S,FNA I 4 5/91 Supervision 6/91 2 POF,ECO,FNA I 4 6/91 Supervision 7/92 J4 POF,S4FNA,E 1 5 7/92) Supervision 9/93 ] POF 2 3 9/93 Supervision 2/94 2 POF,FNA 12 _/94_ | PCR () 3/94 2 ECO,FNA 2 5 | PCR (2) 5/94 |2 FNA,POF 2 8 8/94 IS: Industry Specialist: POF: Project Officer; ECO: Economist: FNA: Financial Analyst: E: Engineer: S: StatiStician; BS: Banking Specialist; AG: Agricultural Specialist: OTH: Other  33 STATUS OF LEGAL COVENANTS Loan Agreement 3047-ME ANNEX VIII Covenant Description of Condition status Comments Section 3.01 Tr- Borrower dxlares its In compliance. com=itments to the objectives of the prcjt and to ca lend the proceeds of the :.an. Section 3.02 The Borrower shall issue Reglas de In compliance. Operation, satisfactcry to the Baik. Section 3.03 (a) The Borrower shill enter into Ir compliance. contractual arrangeents with the Guarzator, Bancomext 2nd the Trstee, providing for i) on lending a portion of the proceeds of the Loan on a fist com,e, first served basis to th. Executing Agencies under terms and conditions acceptable to the Bankc; ii) transferring to the Guarantor the portion of the proceeds of the Loan retizsted by the Guarantor to cary out Pxrc D of the Proia-, iii) provision by the Guarantor to the Bxecudng agencies in accordance with the noratividad and by mes of specific ann budgetary allocations of a&U amohts required to cover CEIPS rate differentials and operating costs iv) payrnent by the Guarantor to the Borrower of all amounts requires by the Borrower to pay back the Loan to the Bank. Section 3.03 The Borrower shall maintain separato In compliance NAFI's financial position is (a)(v) records and accounts to reflect: i) for strong emough to find peso denominated subloans, the interet expenditur fom its own rate should include 1 percentage point resources even though it does to cover La expenditures; ii) for dollar not keep a separate accoumt to dencminated subloans, the interest rate rean a portion of its Loa should include 0.25 percentage for t.a. recoveries for such purposes. ____ expenditures. . Section 3.04 The 3orrower shall canry out Direct ln compliance. Investments and exercise its rights. Secticn 3.05 The Borrower shall exercise its right in In compline. relaticn to each Subproject. .- Section 3.C6 Procuremenrt of goods azd services will In compliance. be governed by the provisions of the Bank lrocurement guidelines.  34 STATUS OF LEGAL COVENANTS Loan Agreement 3047-MhE (continued) Covenant Description of Condition Stats Comments Section 3.07 The Bank and the Borrower agree on In compliance the obligations set forth in their respetive sections. Sction 3.08 (a) The Borrower shall: i) retain a Project Ia compliance manager, and ii) employ consultants. Section 3.08 (b) Tlw Borrower shall esur that a In compliace The extraordinary openig of program, satisfactory to the Bank, to the Mexica economy enLted promote inut restructuring in a less strucured and govemn- regional implementation of the project ment directed indstrial shll be caried out in accordance with sasey. its terms. Section 4.01(a) The Borrower shall have all the In compliance accounts audited, including auditors' opinion. Also to enable the Bank's representatives to examine such records and to furnish each month a certified statement of the Special Account.  35 ANNEX IX PROJECT BENEFITS A) Direct Benefits .......... .. . ......... .* . A c ~ i a l e s lt Number of Project Beneficiaries 287 * NAFIN 280 * BANCOMEXT 7 Technical Assistance Over 500 firms B) Indirect Benefits Technical Assistance Subprojects Studies & Research 9 1,302.0I Training (including purchase 27 583.7 of computer equipment)l Pro motions 9 238.1 Total 45 2 ,123 . 8 .... .................... ...~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~  36 rCilI59Ln'QL _U ANNEX X EL PO~RMA RSD ELPtNTO DR VITA DXRL 11JECEITOR OBJETIVOS DEL PROGRAnA. Desde el punto de vista del Ejecutor nos parece que m-As que un anAlisis sobre el concepto de reestructuraci6n y su interpretaci6n por las diferentes instancias que participan en el Programa, el Banco debiera cuestionarse si su concepto respondi6 a los requerimientos de la din&mica de la economia mexicana al inicio de la decada de los noventas. Para Nacional Financiera resultaba clara la necesidad de las empresas, de un respaldo financiero para llevar a cabo las acciones de inversidn cuya finalidad especlfica fuera el aumento de las niveles de eficiencia productiva y el incremento de la competitividad de la oferta, llamese esto reestructuraci6n, reactivaci6n, reconversidn o madernizacifn industrial. En el contexto inicial del Pristamn se consideraba que el Gobierno Federal deberia determinar los sectores a las cuales era urgente que la Banca de Desarrollo atendiera, inclusive la Secretaria de Comercia y Pomento Industrial determinaria los criterios y prioridades para que las inversiones se consideraran co3m "modernizaci6n". Na obstante, en 1989 H6xico adopt6 la decisi6n politica de lograr su integraci6n plena a la economia mnundial en indudable y trascendente transformaci6n. Lo que signific6 que todo el aparato industrial debe cumplir con requisitos de eficiencia y modernizaci6n ante la irreversible apertura de la economia a ia competencia del exterior, ya que la finica alternativa que tiene la planta productiva del pais, no s6lo para desarrollarse y aprovechar las oportunidades del cambio, sino incluso para sobrevivir, ser& su propia capacidad de competencia. Este fue el sentido que dio NAFIN a la utilizaci6n de los recursos del Banco, y bajo este contexto decidi6 hacer uso del financiamiento. Es importante seflalar lo anterior porgue tal parece que NAFIN fuera incapaz de cumplir con los requisitos del Banco para un Programa de pocos recursas, y lejos de eso, La verdad es que al inicio de 1990, las necesidades del sector industrial y las prioridades que absorbi6 la Institucifn ya no compaginaban con los objetivos del prOstamo. Sabretodo, porque los mecanismas para atender a las medianas y grandes empresas par los que optd La Instituci6n nunca fueran elegibles de redescuento con los recursos del prestamo. Inclusive, politicas "innovativas" como las llama el Banco, de aplicar "licitaci6n p1blica" para adquisiciones del sector privado resultaron TOTALMENTE INOPXRANTES. ncaclonai financlef, b.  37 Vale la pena seIalar, que desde la etapa de negociaci6n se incluy6 a NAPIN como otro "ejecutor" de los recursos del financiamiento, y no como seiala el Banco en el n1mero 4.5 del documento, enicamente en BU calidad de Prestataria, por lo qua no entendemos como su incorporaci6n pudo alterar la calidad institucional del proyecto. inst nmgnt-_ai6n aAl Prngrama La mayorla de los recursos fueron utilizadas por NAFIN, de conformidad con los acuerdos entre las instituciones participantes y las instrucciones de la Secretaria de Hacienda y CrAdito Piblico. En ningGn momento se prosent6 algGn conflicto de intereses entre los participantes. Tampoco es cierto que no se cumpliera con la Coordinaci6n del Programa, ya que este requisito se plasm6 en el Contrato como la designaci6n de un Project Manager, lo cual se comunic6 en su oportunidad. Como se coment6 anteriormente, no es que no se realizara una efectiva promocifn e impulso de los "componentes innovativos" del pr6stamo, sino que 6stos nunca operaron en la prz-ctica y cuando se quiso plantear al Banco, alg-dn mecanismo m&s adecuado al contexto nacional, no fue capaz de establecer un diAlogo de negociaci6n. Por ejemplo, no es cierto que las "bancos comerciales no sean capaces de invertir en empresas" y por eso no funcione el cuasi-capital, este instrumento tiene un problema de costo inherente al asunto fiscal al que se asocia y no tiene que ver con las politicas de inversi6n de los bancos. Coincidimos con el Banco en que la principal raz6n par la cual no se pudo avanzar en el desembolso de los recursos, no puede ser las cargas de trabajo y dificultades de nuestros Sistemas de C6mputo inicialmente Sistema Regional de Descuentos (SIREDE) y ahora el Sistema Integral de Descuentos y Control de Cartera (SIDECC). Esto se explica en la fundamental por la evaluaci6n y los profundas cambios que ha experimentado Nacional Financiera, tanto en lo que toca a sus politicas de financiamiento, como a la mecAnica de sus operaciones de descuento, las cuales, en buena medida, han dejado de corresponder a un pr6stamo que fue suscrito hace cinco a?ios, cuyos procedimientos, no se adecuaron a las caracteristicas actuales de nuestras operaciones de descuento. El cambio que ha experimentado la Instituci6n cons iste en la reorientacion de Nacional Financiera a la atencifn de la micro, pequeila y mediana empresa; en el reconocimiento de que nuestra operaci6n de segundo piso descansa en la asuncidn total del riesgo de las operaciones, por parte de la banca comercial; en el rediseffo y mejora constante de nuestras mecAnicas de dexcuento, lo cual ha implicado la instrumentaci6n de esquemas operativos masivos y nac'onal fsnancwe-r,-u  38 automatizadas; en la simplificaci6n de nuestros esquemas de supervisi6n, para hacerlos acordes y operantes con el carActer masivo y automatizado de nuestra actividad, entre otras importantes medidas. Todo lo anterior ha tenido como prop6sito el multiplicar los apoyas de NAEIN, fundamentalmente a la micro y pequefia empresa; ella ha implicado una disponibilidad sustancialmente menor de inforxMacidn por subproyecto; quiz6s insuficiente para las mec6nicas tradicionales de descuento y redescuento con que operan todavia muchos bancos de desarrollo en Mdxico y otros paises, asi coma las organismos multilaterales. Por otra parte, es Lmportante considerar tambi6n que en la coyuntura econ6mica qua vive el pals, los apoyos para la reestructuracifn de pasivos, la adquisici6n de equipo usado, la ampliaci6n de los apoyos de NAFIN a ciertos sectores, etc., son politicas que, si bien no esthn consideradas en los criterios operativos de decisi6n oportuna y hgil desembolso del Banco, son fundamentales para asegurar la permanencia de las empresas y ampliar las oportunidades de inversi6n para la micro y pequefla empresa. Estos estratos de empresas, no necesariamente requieren de .la adquisici6n de equipo nuevo, en virtud de que en nuestro aparato productivo existen diferentes estadias tecnol6gicos. Es importante senlalar que la adquisici6n de equipo usado es una opci6n que opera en todos los paises del mundo, incluyendo por supuesto a los m6s industrializados. Por lo que se refiere especificamente al WAIVER, consideramos conveniente recardar cual fue el origen y causa del tratamiento de excepci6n que se dio a este prestamo. Normalmente, la mayoria de los subproyectos sometidos a la consideracidn del Banco sufrian retrasos considerables, en muy diversos casos la autorizacidn llev6 varios meses. Esto se discuti6 con las Misiones del Banco, ya qua la falta de respuesta oportuna, no s6lo afectaba el ritmo de desembolsos del pr6stamo, sino las finanzas de la Instituci6n, ya que todos los retrasos acumulados se reflejan en la comisi6n de campromiso, en virtud de esta problem6tica el Banco instrument6 un WAIVER para devolver la agilidad y la oportunidad a los desembolsos. Por supuesto, 4sto facilit6 las acciones de NAFIN tendientes a incorporar una mayor oportunidad al financiamiento a trav6s de la desconcentraci6n y la simplificaciOn operativa. nactonia flnancmu4er>  39 Por lo que se ref iere a las empresas incluidas en el Programa y fueron canceladas, 6sto se explica fundamentalmente par las diferencias que existen entre los objetivos originales del pr6stamo y las que actualmente tienen los programas de descuento de NAFIN. RRSTITh=:DS DRTJ PUO(RAMA Desde el punto de vista del Ejecutor, 10 recur6as del Programa contribuyeran en un pequeflo porcentaje a alcanzar el objetivo institucional de lograr una mayor eficiencia en las empresas, para mejorar sus procesos de producci6n, a fin de prepararlas para competir en el actual proceso de globalizaci6n. D=S lREL] Sobre este punto vale la pena insistir en que la comunicaci6n entre el Banco y NAFIN ha sido lenta, dificil y a veces inaccesible. En retiradas ocasiones se hizo hincapie en la necesidad de modificar algunos de los planteamientos del Contrato, que ya no resultaban adecuados para el entorno economico y en ese sentido el Banco fue bastante inflexible. A manera de ejemplo, basta citar el caso de las Sociedades de Inversi6n (SINCAS), las cuales nunca contaron con la aceptaci6n del Banco. DESAwRROLT DRr. UR.fflI-TfR De los comentarios del Banco en este apartado y, en general, del contenida mismo del documento, se desprende que quiz6s no se tiene conocimiento detallado de la forma en que opera el nuevo sistema de descuento y de supervisi6n y seguimiento de NAFIN. Conviene destacar aqul las principales caracteristicas, de este Oltimo: a) El sistema de supervisi6n se adecu6, a mediados de 1992, para responder al car5cter masivo y automatizado de la operaci6n de descuento. Durante las cuatro ailou de ejecuci6n del pr6stamo, NAFIN descont6 a la banca operaciones de cr6dito en beneficio de 288 425 empreoas, de las cuales s6lamente 346 fueron presentadas al Banco Mundial (0.001%). b) El sistema de supervisi6n y seguimiento responde a los siguientes principios: nacional financiewk-.  40 i) El esquema de segundo piso con que opera NAFIN, descansa totalmente en sus intermediarios financieros. ii) En este sentido, la labor de supervisidn de NAFIN, respecto de la banca comercial, al igual que otras actividades, adquiere un cardcter fundamentalmente inductor. iii) Con el prop6sito de evaluar y asegurar el cumplimiento de los objetivos institucionales, el sistema de supervisi6n y sQguimiento prev6 la verificaci6n de la correcta aplicaci6n de los recursos, asi como la entrega de la siguiente informaci6n: incrementos en la capacidad de producci6n con la inversi6n realizada; contribuci6n del proyecto al mejoramiento de la productividad de la empresa; incremento logrado en las ventas; empleos permanentes generados; ahorros en el consumo de aqua y energia; y en su caso, efectos en la desconcentraci6n productiva de la empresa. iv) Considerando la magnitud de la operaci6n de NAFIN, esta labor de supervisifn s6lo es factible realizarla a trav6s de muestreos. Asi, el sistema establece la supervisifn obligatoria por parte de las intermediarios; los cuales deben comprobar a NAFIN la correcta aplicaci6n, de los recursos y el cumplimiento con nuestras Reglas de Operacidn. NAFIN por su parte, realiza supervisiones directas par muestreo. E1 desvio de recursos asi coma el incumplimiento con la normatividad establecida en las Reglas de Operacitn, son causa de rescate de los recursos de financiamiento y de la aplicaci6n retroactiva de una sobretasa del 50% sobre la tasa pactada. Es importante destacar que uno de los principales problemas que se presentaron en la ejecuci6n de este pr6stamo, correspondi6 a la utilizacifn de los recursos de Asistencia Tdcnica, en virtud de que, por una parte, la mayoria de estas actividades toman un largo perlado an *u estructuraci