Mexico - Third Road Project

RESTRICTED Report No. P-58 ' This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRES IDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S. A. OF MEXICO FOR THE THIRD ROAD PROJECT January 12, 1968  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.A., OF MEXICO FOR THE THIRD ROAD PROJECT 1. I submit the following report and recommendation on a proposed loan in the amount in various currencies equivalent to US$27.5 million to Nacional Financiera, S.A., of Mexico to cover the estimated foreign exchange cost of a road project. PART I: HISTORICAL 2. The Bank's lending program in Mexico has given considerable emphasis to highway development. Loans for this purpose were made in 1960 for $25 million, in 1962 for $30.5 million, in 1963 for $h0 million, and in 1965 for $32 million. The proposed project, which would further expand the Bank's activities in this sector, was appraised by a Bank mission in February-March 1967. Negotiations were held from September 27 - October 13 and December 11-13, 1967. Negotiators were Lic. Victor Navarrete and Lic. Pedro Galicia of the Nacional Financiera, S.A., Ing. Diaz Diaz and Ing. Duran Romano of the Secretariat of Public Works; they were assisted by members of the staff of their organizations. 3. The proposed loan, together with the $25 million Rio Colorado Irri- gation Project, which has recently been recommended, would increase the Bank's lending to Mexico to $677.6 million (net of cancellations). Mexico has received no IDA credits. The following is a summary of Bank loans to Mexico as at December 31, 1967:  -2- Loan Year Borrower Purpose Amount Undisbursed ($ million) 1949-1962 Loans fully disbursed 386.6 Nil (less cancellations) 336-ME 1963 Nacional Financiera, S.A. Irrigation 12.5 5.8 35h-ME 1963 Nacional Financiera, S.A. Roads 4o.o 7.0 4O1-ME 1965 Caminos y Puentes Federales de Ingresos and Nacional Financiera, S.A. Toll Transport 32.0 16.5 Facilities 430-ME 1965 Nacional Financiera, S.A. Agricultural 25.0 13.1 Credit 436-ME 1965 Comision Federal de Electricidad and Nacional Financiera, S.A. Power 110.0 15.6 45o-ME 1966 Nacional Financiera, S.A. Irrigation 19.0 18.2 Total (less cancellations) 625.1 Of which has been repaid to Bank and Others 122.6 Total now outstanding 502.5 Amount sold b5.5 Of which has been repaid 38.3 7.? Total now held by Bank 495.3 Total undisbursed 76.2  - 3 - 4. Construction and procurement have been generally proceeding satis- factorily. Delays have occurred in carrying out the 1965 power sector loan but the Closing Date of Loan 436-ME is being postponed from June 30, 1967, to March 1, 1968, following approval by the Executive Directors of my recom- mendation in R67-137. A part of the construction in one district financed under the 1963 irrigation loan has been postponed pending completion of studies to improve drainage and cropping patterns. Construction under the 1963 highway loan is now expected to be completed in late 1968, two years behind schedule, because of delays caused by unusually heavy rains, limited budgetary allocations, and a larger volume of works than had been estimated on the basis of preliminary engineering. 5. Loan negotiations have been completed for the Rio Colorado Irriga- tion Project and a $25 million loan has been recommended to the Executive Directors. Mexico has also requested further Bank financing for the power sector and appraisal is awaiting additional information; in the meantime arrangements are being worked out with major supplying countries for their participation in joint financing for the power project. 6. IFC's total commitment to Mexico amounted to $21.7 million as of December 26, 1967, of which $h.2 million was held by the Corporation. As a continuance of IFC's longstanding relationship with Compania Fundidora de Fierro y Acero de Monterrey, S.A., a recommendation has been made to the IFC Board for financing a further expansion, which would involve maximum potential commitments of about $,7.3 million. PART II: DESCRIPTION OF THE PROPOSED LOAN 7. BORRWER: Nacional Financiera, S.A., a financial agency of the Mexican Government which, under the existing Mexican legislation, has to be the borrower or co-borrower of Bank loans. GUARANTOR: United Mexican States AMOUNT: The equivalent in various currencies of $27.5 million. PURPOSE: To finance the estimated foreign exchange cost of the reconstruction of three primary roads, the improvement of four tertiary roads, and the construction of a primary road. AMORTIZATION: 20 years, with no repayments during the first 4-1/2 years; semi-annual installments beginning July 1, 1972, to retire the loan on January 1, 1988. INTEREST RATE: 6-1/4 percent per annum. COMMITMENT CHARGE: 3/4 of 1 percent.  PART III: THE PROJECT 8. An appraisal report entitled: "Appraisal of a Third Road Project - Mexico" (TO-602a) is attached. 9. Mexico has an extensive road system totaling 63,700 km of which over half is now paved. The project is focused on the improvement and expansion of sections of this network of priority importance in meeting the needs of Mlexico's rapidly expanding economy. The project comprises: (a) the reconstruction and resurfacing of three primary roads totaling 1,231 km; (b) the improvement and bituminous surface treatment of four tertiary roads totaling 885 km; and (c) the construction, including asphaltic concrete surfacing, of one primary road, 66 km long, and the acquisition of the necessary right-of-way. 10. The planning, construction and subsequent maintenance of the high- ways in the proposed project is a responsibility of the Secretariat of Public Works. This Secretariat has a competent staff and extensive ex- perience in highway construction and maintenance. 11. The total cost of the project, including contingencies, is estimated at the equivalent of about $76 million of which the proposed Bank loan of $27.5 million represents the estimated foreign exchange component. The balance of the financing for the project would be provided by the Federal Budget. The proposed loan would be disbursed on the basis of a percentage of the cost of the project. 12. Contracts for the project works would be let on the basis of inter- national bidding except for approximately $3.8 million of contracts, con- stituting about 7 percent of the total project cost, for bridges over 15 mete. span and miscellaneous works which would be awarded on the basis of local competition, The Government has agreed to take several major steps which, by comparison with past procedures, should encourage broader international competitive bidding, reduce costs and improve efficiency in construction, as explained in the appraisal report. 13. The project is clearly justified on the basis of the substantial resulting economic benefits, mainly through reducing transport costs. The estimated rate of return ranges from 12 to 23 percent for the various sections, with a weighted average of 19 percent for the project as a whole. PART IV: LEGAL INSTRUMENTS AND AUTHORITY 1h. The Draft Loan Agreement between the Bank and the Nacional Financiera, 3 A., the Draft Guarantee Agreement between-the United Mexican  - 5 - States and the Bank and the Report of the Committee provided for in Art. III, Section h (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 15. The provisions of the Loan and Guarantee Agreements are similar to those contained in loan documents for the previous 14exican highway projects. PART V: THE EGONONMY 16. In October 1967 a Report on Recent Economic Performance of Mexico was submitted to the Executive Directors (R67-160). The report noted that fiscal, monetary, and balance of payments management continued to be satis- factory and that the econom-y was growing at a high rate. The maturity structure of the external debt has been somewhat improved, but the debt service requirements still weigh heavily on the balance of payments. The report concluded that continuation of the Government's policies to further "stretch-out" debt maturities, to limit the volume of new external borrowing and improve its terms, and to strengthen the current account of the balance of payments should progressively reduce the debt service burden and maintain YIexico's good credit standing. No developments have taken place subsequently which call for a change in the major conclusions of the report. Mexico's performance continues to be satisfactory. Mexico should be considered creditworthy for further Bank lending. PART VI: COMPLIANCE WITH THE ARTICLES OF AGREEMENT 17. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII: RECO1004DATION 18. I recommend that the Executive Directors adopt the following resolution: "RESOLUTION NO. Approval of Loan to Nacional Financiera, S.A. in an amount equivalent to U.S. $27,500,000 to be guaranteed by United Mexican States. RESOLVED: TIUT the Bank shall grant a loan to Nacional Financiera, S.A. to be guaranteed by United Mlexican States, in an amount in various currencies equivalent to twenty-seven million five hundred thousand United States dollars (U.S.$27,500,000), to mature on and prior to January 1, 1988, to  - 6 - bear interest at the rate of six and one-quarter percent (6-1/4%) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agree- ment (Third Road Project) between the Bank and Nacional Financiera, S.A., and the form of Guarantee Agreement (Third Road Project) between United Mexican States and the Bank, which have been presented to this meeting." Attachments George D. WToods President Washington, D.C. January 12, 1968