Mexico - Tourism Development Project

FILE t JP ) Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-2232-ME REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A TOURISM DEVELOPMENT PROJECT February 14, 1978 This document has a redricted dIstrIbutlon and may be used by recipients only In the performnce of their official duties. Its contents may not otherwise be disclosed witbout World fak authorization.  Currency Unit - Peso (Mex$) The fixed exchange rate of US$ 1 = Mex$12.50 which had prevailed since 1954 was abandoned on August 31, 1976 and the Mexican peso has been floating since then. In recent weeks the rate of exchange has fluctuated in the range of Mex$22-23 to the US dollar. On February 7, 1978 the peso traded at 22.74 per US dollar. Fiscal Year January 1 to December 31 Abbreviations and Acronyms ACF = Average cost of borrowed funds to financieras (investment banks). FONATUR Fondo Nacional de Fomento al Turismo IDB = Inter-American Development Bank NAFINSA = Nacional Financiera, S.A. LIBOR = London Interbank Offered Rate  FOR OFFICIAL USE ONLY MEXICO TOURISM DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY 1. Borrower: Nacional Financiera, S.A. (NAFINSA) 2. Guarantor: United Mexican States 3. Project Execut- Fondo Nacional de Fomento al Turismo ing Agency: (FONATUR) 4. Loan Amount: US$50 million 5. Cofinancing: A cofinancing loan is being arranged with a group of foreign commercial banks. The amount of the loan would be at least US$20 milliou. It is expected that the loan would have a final maturity of 10 years and would be repaid in equal semi-annual installments commencing 42 months from the date of signing. Interest would be at 1.25 percent per annum above LIBOR for deposits at six months. 6. Loan Terms: Interest on the loan would be 7.45 percent per annum. The loan would have a final maturity of 17 years, including 4 years of grace. The amortization schedule would be adjusted to accommodate FONATUR's parallel repayments to cofinancing commercial banks. 7. Relending Terms: The final maturity of subloans would be up to 15 years, including a grace period of up to 3 years; interest rates charged to financial intermediaries and final borrowers would float with the average cost of funds to financieras (ACF), as calculated monthly by the Banco de Mexico (the ACF stood at 14.6 percent in December, 1977). On average, financial inter- mediaries will be charged the ACF and final borrowers the ACF plus two percentage points. This new policy will be put into effect before September 1, 1978. rThis document has a restricted distribution and may be used by recipients only in the performance| |of their offcial duties. Its contents may not otherwise be discbced without World Bank authorization.|  - ii - 8. Project Description: The Project will help FONATUR finance the construction of hotel accommodations and related tourism facilities included in its 1977-79 program. Total loan approvals over this period are projected at US$212 million equivalent, of which about 90 percent for construction of 20,800 new hotel rooms. FONATUR will also carry out (i) a study of the demand for trained hotel personnel and sectoral training programs; and (ii) a study to identify means of increasing employment opportunities in tourism projects. Net foreign exchange earnings generated by FONATUR's hotel financing program would amount to some US$3 billion during the life of the assisted subprojects. Some 32,000 permanent jobs would be created directly and another 33,000 indirectly. There are no special risks. (US$ millions) 9. Estimated Cost: Total Cost of Subprojects 573 of which foreign exchange 172 FONATUR's loans 212 10. Resource Requirements: FONATUR's 1977-79 Financing Program US$ millions % Government 14.0 6.6 Banco de Mexico 98.0 46.2 World Bank 50.0 23.6 Other external sources 50.0 23.6 (including private cofinancing) 212.0 100.0 11. Disbursements: The loan is expected to be disbursed as follows (in US$ million): Calendar Year: 1978 1979 1980 Annual 10.6 27.6 11.7 Cumulative 10.6 38.3 50.0 12. Rate of Return: 14 percent 13. Staff Appraisal Report: No. 1760-ME, dated February 14, 1978.  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. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A TOURISM DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to Nacional Financiera, S.A. (NAFINSA) with the guarantee of United Mexican States for the equivalent of US$50 million to help finance a tourism development project carried out by the Nacional Fund for Tourism Development (FONATUR). Interest on the loan would be at 7.45 percent per annum. The loan would be repaid over 17 years, including 4 years of grace. It is expected that foreign commercial banks would provide a cofinancing loan of at least US$20 million with repayment terms providing for a final maturity of 10 years. The cofinancing loan would be repaid in equal semi-annual installments commencing 42 months from the date of signing and would carry an interest rate at 1.25 percent per annum above LIBOR for deposits at six months. PART I: THE ECONOMY 2. Some of the major features of the Mexican economy were analyzed in "An Updating Report on the Economy of Mexico" (1110-ME), distributed to the Executive Directors on March 23, 1976. An economic mission visited Mexico in April-May 1977 and its report is now in preparation. The discussion which follows reflects the preliminary findings of the mission. Past Performance 3. For most of the three decades preceding the mid-seventies, Mexico was outstandingly successful in achieving rapid economic growth while main- taining stability in prices and the balance of payments. From 1940 to 1970, average GDP growth exceeded 6 percent per year in real terms, inflation averaged less than 5 percent per year from the mid-1960s to 1972, and the dollar value of the peso, fixed in 1954, was maintained until the September 1976 devaluation. The Government's role in this achievement was to carry out direct investments in infrastructure and in key industries such as power, steel and petroleum, while creating a stable regulatory and institutional framework, as well as good profit prospects, to induce private sector growth. 4. This strategy produced rapid growth, but led to a sharpening of contrasts within the Mexican economy. While land redistribution under the reform of 1915 was continued, most of the peasants who received land could not improve their economic status in the absence of credit and technical assistance. Rapid population growth made social equity even more difficult to achieve. Population growth in Mexico accelerated steadily, primarily as a result of reduced death rates, and reached 3.4 percent per year by 1970. Despite economic growth, the high demographic growth rate made adequate absorption of the labor force in productive  employment difficult. Some 40 percent of the labor force is either relatively unproductive and poorly paid, or openly unemployed. 5. During the 1970s, Mexico experienced increasing public sector deficits, inflation, large balance of payments deficits, capital flight and a marked slowdown in the real rate of growth of GDP, which dropped to 2 percent in 1976-- the lowest annual growth rate experienced by Mexico since the mid-thirties. On September 1, 1976 the authorities abandoned the fixed exchange rate of 12.50 pesos per dollar that had remained unchanged since 1954 and let the peso float; in recent months it has remained rather stable at rates fluctuating between 22 and 23 pesos per dollar. Following the devaluation, Mexico obtained major support from the IMF. In the last quarter of 1976, Mexico was able to draw on the Fund for US$480 million. For 1977-79, an Extended Fund Facility accompanied by a comprehensive three- year stabliization program was negotiated, which could provide as much as an additional US$861 million once the increase in Fund quotas becomes effective. Thus, total IMF support for the government's program may exceed US$1.3 billion. The new Government ratified the agreement with the IMF shortly after taking office on December 1, 1976, and to date has complied with the program agreed upon with the IMF. Current Economic Policy 6. The present Government inherited a difficult situation upon taking office on December 1, 1976. High inflation, large public sector deficits, in- creasing foreign indebtedness and lack of confidence in economic management indicated a need for economic stabilization. However, the situation also called for more expansionary policies; economic activity had slowed down, net private investment was virtually nil, and the gap between new job creation and growth of the labor force was increasing. High world prices for petroleum offered profitable investment opportunities in the petroleum sector; indeed, increased production for export of these products seemed by far the best way to meet a large part of Mexico's high debt service requirements in the coming years. 7. Faced with these conflicting needs and opportunities, the Mexican authorities are adopting a mixed strategy aimed at reducing lower-priority public expenditures and increasing public revenues, while proceeding with petroleum and other high-priority investments. The objectives of the Govern- ment's program include progressive control of inflation together with a return to high rates of economic growth by the end of 1978. Better manage- ment of public sector expenditures, more rational pricing and cost control in public sector enterprises, promotion of private savings, limiting wage increases to justifiable levels, and more effective cooperation with the private sector are important parts of the Government's economic strategy. 8. The measures instituted by the new Administration have already produced good results. Inflation in the twelve months of 1977 slowed to 20.7 percent (December-December) as compared to an annual rate of 60 percent in the last three months of 1976. The deficit in the current account of the balance of payments has been reduced, and is estimated preliminarily at US$2.2 billon for 1977, compared to US$3.5 billon in 1976. Total public sector financial requirements dropped from 10.3 percent of GDP in 1976 to 7.9  percent in 1977. Mobilization of savings by the banking system is increas- ing. Perhaps most importantly, there is a general feeling of increased confi- dence in the Government's economic policy. 9. The stabilization effort during 1977 was absolutely necessary, but its price has been the continuation of economic stagnation; for a second year in a row GDP grew only by about 2 percent in real terms, implying a further decline of real per capita income. While control of inflation will remain as the overriding short-term objective--the Government's announced target is to reduce inflation to about 12-15 percent during 1978--the 1978 economic program aims at a simultaneous recovery of economic activity, through a recovery of private and public investment. Increased public sector savings, further strengthening of the financial system and therefore in- creased'availability of credit to the private sector, and continuation of a carefully managed wage policy (the annual increase in minimum wages agreed upon in January 1978 averaged about 14 percent) are the main means the Government will rely upon to attain the above objectives. Economic Issues and Prospects 10. As Mexico looks ahead, the key problems that its economic policies must address would seem to include the following: (a) Many Mexican families have not participated in the sustained economic growth of the last several decades. As of 1975, about 4,600,000 Mexican families--45 percent of the total-- receive incomes equal to less than one-half the national average. The members of most of these families work--more than half of them in agriculture--but they produce little and receive little. Mexico's labor force is now growing even more rapidly than in the past--it will grow at about 3.6 percent per year over the next decade, which implies an average annual increase by some 670,000 workers during 1978-82; during the 1960s the growth rate was 2.7 percent per year. The challenge of providing productive jobs for both new entrants and existing under-productive workers is an awesome one. (b) Crop and livestock production in Mexico, which had grown by 6 percent per year during 1944-55 and 4.2 percent per year during 1955-60, grew at only 2.1 percent per year during 1965-70. This near-stagnation of agricultural production signals the end of the strategy in which growth of agricul- tural production came from newly irrigated land, while rain- fed agriculture was relatively neglected. The continued expansion of large-scale irrigation, so successful from 1945 into the 1960s, has brought lower and lower returns as the works became costlier and easily accessible export markets for high-value crops became more nearly saturated. New approaches are required now to assure the increase of produc- tion and of incomes for Mexico's poor rural families.  -4- (c) The size and role of the State in the economy has been a subject of much discussion in Mexico in recent years. During 1970-76, private investment slowed down, and virtually stagnated since 1975. This was, in part, a consequence of the pre-emption of credit by the public sector (during the six-year period, the share of the public sector in the economy grew from 15.0 to 21.5 percent), combined with infla- tionary financing and accompanied by what some perceived as an "anti-business" attitude. The actions of the present Administration show that it intends to reverse this trend. (d) The present large foreign debt and sizable public finance deficit are mainly the direct outcomes of past public sector inability to mobilize adequate financial resources. By the early 1980s, large increases in export revenues, mainly from petroleum and related products, should make both the foreign debt problem and public finances much easier to manage. In the meantime, however, larger public sector savings are required to reduce inflationary pressures and to release credit for the private sector. (e) The rapid growth and heavy concentrations of people and production in Mexico City, and the scarcity of employment opportunities and services in rural areas, are important challenges which have to be confronted. Both equity and efficiency considerations imply a need for diversion of some of Mexico City's future growth to other regions, as well as the provision of basic public services and enhanced employment opportunities in selected villages and small towns. 11. In the medium term the prospects for resumption of economic growth with relative price stability are good. Poverty will remain a problem but the Government is taking steps to address it. The alleviation of the external constraint on growth brought about by the expected petroleum earnings (para. 14), together with the Government's efforts to increase public sector savings and to stimulate private investment could produce economic growth of 7 to 8 percent per year in the remaining five years of the present Administration. Resumption of economic growth combined with the intensification of the Government's family planning program (on October 28, 1977 President Lopez Portillo announced the ambitious goal of reducing the population growth to 2.5 percent per year by 1982, then progressing to 1.8 percent by 1988, 1.3 percent by 1994, and 1 percent by the year 2000), the new emphasis on rainfed agriculture, and the implementation of specific programs aimed at increasing productive employment should help to address the structural problems mentioned above (para. 10). 12. In agriculture, the Government's quick action to defuse tensions created by land invasions and expropriations at the end of 1976, and its intended decision to review the legislation concerning land and water use, should reduce uncertainty and induce a better use of the available land and water resources. In addition, the new emphasis on rainfed agriculture--which had been relatively neglected in the past--should lead to an increase in the  -5- production potential of vast areas currently under-exploited and to a reversal of the past trend towards larger income disparities between the modern and traditional agricultural subsectors. Development of tropical agriculture and of small irrigation and drainage works are also new features of the Government's agricultural policy. These initiatives, together with the more realistic exchange rate, all promise a resumption of growth of production for both domestic and export markets and increase the possibilities of an improvement in the living conditions of the rural poor. 13. Industry has potential for considerable growth in many sectors, including efficient import substitution in chemicals, petrochemicals and capital goods as well as exports of many different manufactured products. Increases in tourism export earnings are also expected. 14. Among the benefits of recent public sector investments are the new possibilities opened to the Mexican economy through the recent discover- ies of rich petroleum fields. Proven oil reserves are estimated to be at least 17 billion barrels, which gives a production/reserve ratio (computed at the 1977 production rate) of more than 45 years. The Government has decided to use these large hydrocarbon resources to help manage Mexico's heavy debt service burden and to enhance the country's over-all development prospects. To meet this objective, PEMEX (Petroleos Mexicanos, the State- owned oil monopoly) has launched an ambitious six-year investment program amounting to US$17.0 billion in 1977 prices (about 25 percent of total public investment). This program would: (a) almost triple the production of oil and condensates, from 292 million bbl/year in 1976 to 818 million bbl/year in 1982; (b) -more than double the country's primary distillation capacity, from 270 million bbl/year in 1976 to 577 bbl/year in 1982; (c) substantially increase production of primary petrochemicals (ammonia, ethylene, benzene, etc.) as well as downstream products (styrene, vinyl-chloride, polyethylene); and (d) enable export of natural gas at a rate of 2.0 billion cubic feet/day by 1982. Under this program, the value of exports of oil and related products would increase over ten times, from about US$0.9 billion in 1977 to more than US$10.0 billion in 1982. If this program were to be carried out on schedule, the balance of payments on current account would shift from a deficit of US$2.1 billion in 1977 to a surplus of about US$3.0 billion in 1982. 15. The prospect of rapidly rising petroleum exports, as well as previously mentioned prospects for increases in tourism earnings, recovery of agricultural exports, and resumption of growth of manufactured exports, have greatly strengthened the balance of payments outlook. Even on the basis  - 6 - of somewhat more conservative projections of petroleum production and exports than those mentioned above, the current account deficit can be expected to decline steadily over the next several years and become slightly positive by 1982, thus reducing Mexico's net external borrowing requirements (Annex I). The debt service ratio is expected to continue to rise over the next year or two and then to decline sharply, reaching about 30 percent by 1982. Debt service on Bank loans amounts to about 4 percent of public debt service; this ratio is projected to decrease over the next two years and to increase to some extent afterwards. The Bank currently holds about 8 percent of Mexico's total medium and long term public debt, and this ratio is likely to increase to some extent over the next few years. Mexico remains creditworthy for borruwing on conventional terms because of the Government's adoption of the coumprehensive economic strategy mentioned above, and Mexico's strong medium- ara. long-term potential. PART II - BANK GROUP OPERATIONS IN MEXICO Bank Operations 16. As of December 31, 1977, Mexico had received 49 loans from the Bank amounting to US$2,574.4 million net of cancellations; of these, 32 loans totalling US$1,451.4 million were fully disbursed. As of December 31, 1977, the Bank held US$2,097.7 million of which US$753.5 million had not yet been disbursed. Some 36 percent of Bank lending has been for agriculture and rural development (15 loans for US$923.7 million), 27 percent for power (12 loans for US$704.8 million) and 21 percent for transportation projects (12 loans for US$546.7 million); the remaining 15 percent has been for industry (US$205.5 million), water supply (US$130 million) and tourism (US$64 million) projects. Mexico is now in the midst of a stabilization program and because of scarcity of counterpart funds, several-projects have fallen behind schedule during 1976 and 1977. Following review with the Government, a steel loan has been can- celled (Sec M77-258 of April 5, 1977), the scope of an irrigation project has been reduced and US$100 million from the original US$150 million loan have been cancelled (R77-305 of December 13, 1977) and the scope of several other projects have been modified. Some other projects under implementation and affected by the stabilization program are being reviewed by a working group set up by the Government and further discussions will be held with the Bank shortly. By and large, adequate budget support for the ongoing projects has now been secured. Annex II contains a summary statement of Bank loans as of December 31, 1977 and notes on the execution of ongoing projects. IFC Operations 17. As of December 31, 1977, IFC has made 13 investment commitments in Mexico, for a total of US$69.2 million, of which US$38.3 million had been sold, repaid or cancelled. The balance held by the Corporation, US$30.8 mil- lion, consists of US$26.3 million in loans and US$4.5 million in equity. A summary statement of IFC investments as of December 31, 1977 is presented in Annex II.  -7- Bank Strategy 18. The main objectives of Bank lending in Mexico have been to; (i) support policies and programs leading to a wider distribution of the benefits of economic growth; (ii) strengthen policies and programs leading to continued economic growth, by helping to finance projects that are to make directly or indirectly significant contributions to output, exports, and employment; and (iii) help resolve critical adjustment problems that Mexico is currently facing. In this and the next fiscal year, the Bank will preferentially support projects that make relatively modest demands on budgetary resources and have a strong positive balance of payments effect, projects of high social priority that help the rural or urban poor, projects that promote higher levels of employment and those that help to decentralize economic activity. The pro- posed tourism project meets several of these criteria (see paras 60 and 61). 19. In view of the difficult structural problems of Mexico's agriculture and the sector's crucial importance to the country's further development, the Bank has made agriculture the leading sector for its lending. Consistent with the overall framework of country and sector objectives, a three-tier approach has been developed. First, to strengthen irrigation and agricultural credit programs so as to meet the demands of a rapidly growing population more ade- quately and to generate the foreign exchange needed for rising import require- ments. Second, to raise the incomes of the rural poor and improve their standards of living through a combination of directly productive support and social infrastructure investments. Third, to strengthen Mexico's institutional capability to use scarce agricultural resources more efficiently. In support of this strategy, the Bank has made seven loans over the past four years, totalling US$579 million, for irrigation, rural development and agriculture and livestock credit programs. In FY77, the Executive Directors approved a US$120 million loan for an Integrated Rural Development Project--PIDER II-- under which some 46,000 poor farm families will benefit from directly produc- tive activities. This fiscal year, an agricultural development project focusing on the humid tropics, and an agriculture and livestock credit project have been appraised and will be submitted to the Executive Directors in the coming months. 20. Bank lending for industry has been aimed at assisting the Govern- ment's efforts to reduce the balance of payments deficit and decentralize industrial activities away from the major (and increasingly congested) urban areas. Thus, the Executive Directors approved a loan for a Second Industrial Equipment Fund Project in FY76 aimed at financing industrial projects with a positive effect on the balance of payments; a US$50 million loan made in FY75 to support a fertilizer project is promoting new poles of development in the resource-rich southeast region and the north central area and will help make Mexico independent of imported urea fertilizer in the medium term. A project to promote small and medium-scale enterprises, a third Industrial Equipment Fund project and a fertilizer project are currently being processed for submission to the Executive Directors in the coming months. 21. As regards infrastructure, the Bank's operations have been focused on investments in key areas of the country as well as on institutional reforms  -8- and sector policies aiming, inter alia, at suitable pricing mechanisms to help generate additional resources for investment financing: the Airports Development Project (FY74) was designed in support of the Government's policy of regional integration; the Third Railway Project (FY76) supported improve- ments of institutional aspects and financial management of the sector. The Mexico City Water Supply Project (FY73) has been instrumental in the estab- lishment of a specialized institution for efficient management of water resources in the Mexico Valley, and in the pricing of water at levels more closely related to costs. 22. The Government and the Bank have long recognized the regional economic disparities prevailing in Mexico. In June 1976 the Government adopted the Law of Human Settlements to provide a new institutional framework to deal with the pressing problems of over concentration of economic activi- ties in the larger metropolitan areas, and several projects are now being prepared to meet the needs for basic urban services for poor families in selected priority cities. 23. The Government, pressed to reduce the external deficit on current account, is giving emphasis to the tourism sector to generate higher foreign exchange earnings. Promotion of the sector which requires only limited budget support, will help increase employment opportunities, especially in a number of regions where the scarcity of jobs encourages migration to the already over-burdened metropolitan areas. In support of this policy, the proposed operation will provide resources for tourism superstructure investments and to help tap more fully the country's tourism potential. This would be the third tourism project in Mexico; experience with previous tourism projects is recorded in paragraph 41 below. PART III: THE TOURISM SECTOR General 24. Mexico stands out as one of the world's major tourism destinations and is the most accessible, truly foreign destination for U.S. and Canadian tourists who, together, account for about 90 percent of foreign visitors. It offers an impressive array of tourist attractions: the architectural remains of a series of major civilizations, an agreeable climate, and excellent and unspoiled beaches along the Pacific and Caribbean Coasts. Climatic conditions make Mexico a year-round destination and visitor flows show only a minor degree of seasonality. 25. Tourism is Mexico's leading foreign exchange earning sector; exclud- ing border transactions, the sector's gross earnings have been increasing at about 12 percent per annum over the last 10 years and amounted to some US$820 million in 1976 or about 12 percent of total exports of goods and non-factor services. Tourism plays a major role in Mexico's economy by its contribution to employment and towards a more balanced regional distribution of economic activities.  -9- 26. The tourism sector currently employs directly a work force estimated at between 300,000 and 400,000 persons. Significantly, most of those employed are drawn from the unskilled sections of the population and have obtained relatively well-paid jobs after little training. Moreover, tourist demands for handicrafts, transportation and other services help spread economic benefits. Because many touristic areas have few alternative development opportunities, tourism plays an important role in the Government's policy of promoting spatial decentralization, particularly along the Pacific Coast, in Baja California and in the Yucatan peninsula (See Map IBRD 13333). Tourism Sector Institutions 27. Until the late 1960s the Government's expenditure on tourism development was modest and its promotional role minimal, but the private sector was successful in building upon the country's unique assets. Such private development tended, however, to stress short-term profitability with little regard to the longer run impact on the economy and the physical and social environment. Recognizing the need to guide the growth of an increas- ingly important sector, the Government created in 1969 a special trust fund under the Banco de Mexico to develop and promote integrated tourism resorts. This institution was merged in 1974 with another trust fund for hotel financ- ing, and FONATUR was thus established, integrating most activities of the public sector in the tourism field. A Ministry of Tourism was created in 1974 to coordinate all aspects of sectoral development. Another institution is the National Council of Tourism whose principal task is the promotion abroad of tourism in Mexico; the Council has recently been brought under the Ministry. - Tourism Trends and Market Potential 28. The tourist industry of Mexico has three broad categories of clients: foreign tourists visiting the interior (classified as "foreign visitors" in this report), US residents crossing the border for short stays, and domestic tourists. 29. Between 1965 and 1974, the number of foreign visitors increased at an average annual rate of over 10 percent; during the same period, the number of foreign visitors arriving by air increased by almost 16 percent per year, increasing its share from 36 percent to 48 percent. Foreign visitors arriving by air make a greater demand on international class hotels, and spend on lodging about five times as much as those travelling by road. Total foreign exchange earnings increased from $275 million in 1965 to $842 million in 1974, or at about 14 percent a year in this period. However, after peaking in 1974 at 3.4 million, the number of visitor arrivals declined to 3.1 million in 1976 (the first decline since 1953); this decline was mainly attributable to the economic recession in the US, rising air transport prices and Mexico's uncompetitive position resulting from an over-valued currency. Visitor traffic in 1976 was also affected by the US Bicentennial celebrations and the Montreal Olympics, which attracted many North American tourists.  - 10 - 30. The foreign visitor market has now recovered because of the devalua- tion of the peso in 1976, the improvement in the U.S. economy and the exten- sion of direct air access to more points in Mexico. A major factor that will further improve Mexico's attractiveness for foreign tourists is the new bilateral air agreement with the U.S.A. Signed in January 1978, the new agree- ment provides for new or expanded scheduled service from 33 US cities to one or more of 21 Mexican destinations, including a number of tourism resorts in the Yucatan peninsula, in Baja California and on the Pacific Coast; restric- tions imposed on charter service are minimal. The Government projects foreign tourism to grow at an annual rate of 9 percent over the next 10 years; if this were to happen, the number of foreign visitors would increase to 4.5 million in 1980 and 7.3 million by 1985. Applying a more conservative projection of 6 percent annual growth, assumed for analyzing the project under consideration, the increase would be to 4.0 million by 1980 and 5.3 million by 1985. 31. The number of border crossings from the US into Mexico is estimated at some 60 million a year, but accounts for less than 2% of the total guest nights spent by foreign tourists. The Government is now investigating the potential of border tourism with the West and Southwest US. 32. An important recent development has been the emergence of domestic tourism and this clientele will continue to grow in the coming years, as foreign travel for Mexicans, who were spending approximately US$400 million a year abroad in the recent past, has become expensive since the devaluation. Domestic tourism complements foreign tourism in the country and compensates for the slight seasonal decline in foreign arrivals in the summer, thus helping the industry to achieve relatively high occupancy rates; foreigners contribute about one-half of the clientele of the international class hotels, the main target for support under the proposed project. 33. The combined effect of foreign visitor and domestic tourism on -the industry, at the assumed 6 percent a year growth rate, is summarized in the tab-le below: 1976 1980 1985 (Actual) --------(in millions)------- Number of Visitors Foreign 3.1 4.0 5.3 Mexican 20.9 26.4 35.3 Number of Visitor Nights Foreign 35.4 44.0 58.3 Mexican 41.8 52.8 70.6  - 11 - Hotel Industry and its Financing 34. Hotel and other accommodation capacity reached 195,000 rooms in 1976, of which 88,000 (45 percent) were in the international hotel category. Although hotel construction costs increased by 8 to 10 percent annually in the early 1970s, and by 25-30 percent in 1976 and 1977 after the devaluation of the peso, they are still very reasonable when compared to many other destina- tions; it is estimated that in 1977 prices, investment costs per room in Mexico ranged from over US$40,000 for international class hotels to less than US$25,000 for economy class hotels. The Mexican hotel industry also enjoys relatively low operating costs. However, analysis of a sample of representative hotels indicate that these favorable factors do not result in high financial returns because average room rates are also relatively low. These rates are controlled by the Ministry of Tourism to ensure orderly growth of the industry, and are periodically reviewed and adjusted to avoid disincen- tives for hotel investments. 35. Hotel financing in Mexico usually involves at least 40 percent equity, often 50 percent or more. Although the return on equity of Mexican hotels is relatively modest, there are other considerations such as hedging against inflation and the potential for capital gains that can appeal to investors. Nevertheless, hotel projects are characterized by a long gestation period, low cash dividends in the early years, and bulkiness of investment. Private financial institutions in Mexico have been reluctant to play a pioneer- ing role in financing hotels because of their limited experience in the sector and because the hotel industry needs longer term loans than these banks normally provide. The mortgage banking system, an important source of hotel finance in many countries, is a relatively minor source of finance in Mexico. Finally, investors do not enjoy any special incentives such as tax exemptions or tax holidays which are commonly available in many other countries. Foreign banks have taken only a marginal interest in financing hotels and much of the hotel expansion in Mexico in recent years has been assisted by FONATUR, which has supplied the bulk of hotel credit by rediscounting term loans of private and public financing institutions. FONATUR's experience with this form of hotel financing has demonstrated that commercial banks can tie up funds for up to 15 years in hotels when the project and its market are properly evaluated. Investment Priorities 36. Since its inception in 1974, FONATUR has concentrated its tourism infrastructure development efforts on four new sites: Cancun in the Yucatan peninsula (with IDB assistance), Zihuatenajo-Ixtapa on the Pacific Coast (with Bank assistance), and Loreto and San Jose del Cabo in Baja California (also with Bank assistance); some modest infrastructure investments have also been made in Oaxaca (see Map IBRD 13333). FONATUR has at present no plans to open up new areas and will instead consolidate its position by promoting the above mentioned sites and ensuring the development or extension of the accom- modation capacity as needed. Private Mexican investors are considering to develop a number of resorts on the West Coast such as Las Hadas in the Manzanillo area; these investments, which will help to tap more fully Mexico's tourism market, are consistent with the Government's spatial strategy.  - 12 - 37. The average occupancy rates of large international standards hotels were between 75 and 82 percent in the first half of 1977; occupancy rates ranged between 50 and 65 percent for lower category hotels during the same period. Even assuming further inprovement in occupancy rates for existing hotels, some 33,000 new rooms would be needed over the period 1977-81; the international hotel category alone would account for 23,000 rooms. To reach this target, it is estimated that construction of some 24,000 new rooms would have to be started in the period 1977-79, of which 18,000 in the international category. FONATUR will continue to play a key role in channeling long-term funds into the sector and in encouraging the increased involvement of Mexican and foreign financial institutions. The proposed Bank loan would help fill an important gap in the financing of the Mexican tourism sector directly, and indirectly through complementary funds mobilized through co-financing arrange- ments (para. 51). PART IV - THE PROJECT Project History and Background 38. In early 1977, Mexico was facing a serious current account imbalance and the Government approached the Bank in February for assistance in stimulat- ing investments in superstructure facilities to attract foreign tourists and increase earnings from tourism. A pre-appraisal mission visited Mexico in March 1977 to review preparation, and the project was appraised in the months of May/June 1977. A staff appraisal report entitled "Tourism Development Loan," No. 1760-NE, dated February 14, 1978 is being circulated separately. A loan and project summary is presented at the beginning of this report. Negotiations took place in Washington from January 9 to 19, 1978. The Mexican team was led by Mr. Galicia (NAFINSA). 39. As stated earlier, Mexico's tourist potential is far from being fully developed (paras. 28-33 and 37) and its continued growth requires substantial investments in hotels and ancillary facilities. The proposed project would rely on the financial institutions and entrepreneurs of Mexico to implement these investments and would help provide FONATUR with the neces- sary complementary resources hotel financing program through 1979. 1/ FONATUR's Management and Organization 40. FONATUR's manager reports to a nine-member Board chaired by the Minister of Tourism, and comprising five other Government representatives and three from the private sector. The new manager in function since October 1977 has a long banking experience acquired in the private as well as the public sector. There are two major operating departments: one responsible 1/ FONATUR also helps finance a few non-accommodation subprojects (e.g. restaurants), accounting for a minimal share of FONATUR's portfolio. This ancillary activity has been included under "hotel financing operations" in this report.  - 13 - for tourism infrastructure projects, and the other (the Operations Depart- ment) for hotel credits, equity investments, and related financial and promotional activities. A third department provides accounting, admin- istrative and personnel services to the operating departments. FONATUR now employs some 450 persons, 250 of which are employed on fixed term contracts. FONATUR's Operations - The Past (i) Infrastructure Operations 41. FONATUR's infrastructure development aims at diversifying tourism destinations in Mexico to facilitate the orderly growth of tourism capacity, tap more fully Mexico's tourism potential by attracting a larger market and ensure a more equitable spread of economic benefits. The Bank is supporting FONATUR's infrastructure development projects at Ixtapa-Zihuatanejo ($22 million Loan 793-ME of January 1972) and in Baja California ($42 million Loan 1420-ME of July 1977); IDB has made two successive loans of US$21.5 million and US$20 million to help develop Cancun in the Yucatan Peninsula. The Bank's first loan supported tourism infrastructure investments in Ixtapa, on the Pacific Coast of Mexico, and related urban infrastructure in the neighboring town of Zihuatanejo. Besides developing a new resort, the project aimed to integrate tourism with urban development, to improve the quality of life of the local population, particularly the poorer sections. After initial delays due to land rights problems, the infrastructure works have now been completed; two hotels are open for business, and several others are under construction; over 2,600 rooms are expected to be available by the end of 1979 (by which time the last project component, a hotel training school in Zihuatanejo, will have been completed). The implementation of the project thus nears its expected physical targets. In addition, tourism to Ixtapa-Zihuatanejo has rapidly increased and is expected to accelerate following the bilateral air agreement with the USA (para. 30). The second loan supports the development of the sites of Loreto and San Jose del Cabo in the Baja California peninsula. This project has goals similar to those of the first operation and will provide the opportunity to further tap the west and southwest US which are among the largest and richest tourist-generating markets. Implementation is on schedule. (ii) Hotel Financing Operations 42. FONATUR's hotel financing operations are nationwide and are intended to facilitate investment on appropriate terms for tourist accommodation projects. To meet this objective, FONATUR (a) rediscounts loans of financial intermediaries; (b) provides technical assistance to both intermediaries and investors; and (c) provides equity and/or direct loans to hotel projects regarded as critical to promote the resorts where they are located. 43. Over the period 1973-76, FONATUR approved 428 loans amounting to Mex$3.6 billion. The loans helped finance projects with a total cost of Mex$8.9 billion, 90% of which was accounted for by the construction of 21,000  - 14 - new rooms and the renovation of 3,000 existing ones. FONATUR's equity portfolio expanded rapidly over the last three years and its book value reached Mex$1.0 billion at the end of 1976. FONATUR has now a controlling interest in 18 hotels and a majority participation in three more. More than half of the equity investments and direct loans have been made in hotels in the new resorts of Cancun and Ixtapa. FONATUR's performance compares favorably with other trust funds in Mexico. As operations continue to expand, FONATUR has felt the need to clarify its equity investment and lending policies so as to operate in the future with the discipline of a formal policy framework. To this end, FONATUR has adopted a satisfactory policy statement making more explicit its hotel-financing policies and priorities and setting operational guidelines for its involvement in hotel subprojects. Project Appraisal and Supervision 44. Appraisal of direct loans and equity investments by FONATUR is considered satisfactory. In the case of loans discounted from financial intermediaries, FONATUR appraises the construction, design and marketing aspects of the projects, and the financial intermediaries appraise the credit- worthiness of the subborrowers. Although appraisals are of good quality, they do not always shed sufficient light on some marketing, economic and managerial aspects. FONATUR will upgrade its procedures in this respect and will intro- duce more elaborate economic screening methods. 45. Equity investments and direct loans are supervised closely by FONATUR. In the case of rediscounted loans, financial intermediaries have the primary supervision responsibility, and FONATUR staff is available upon request. FONATUR is initiating a monitoring system of its portfolio to facilitate policy reviews, management and control. FONATUR's Financial Position 46. FONATUR's infrastructure operations are financially sound: total assets increased from Mex$241 million in December 1972 to Mex$2,261 million in December 1976, and FONATUR has earned a significant cash flow surplus from sales of developed land and other infrastructure facilities. 47. FONATUR's hotel financing activities accounted for total assets of Mex$3.5 billion at the end of 1976, more than three times the 1974 level of Mex$1.l billion. The underlying capital structure at the end of 1976 included Mex$l.l billion in equity, Mex$2.2 billion of medium term loans from the Banco de Mexico, and Mex$0.l billion of retained earnings. The net working capital stands at Mex$270 million and is considered to be adequate. 48. The earning record of hotel financing activities has been mixed in recent years with a profit of about Mex$20 million in 1975, offset by a loss of similar magnitude in 1976. The loss in 1976 was largely the result of significantly increased interest expense on new borrowings from Banco de Mexico, which were not passed on to borrowers thus resulting in a negative interest rate spread for the year (this situation was corrected in 1977; see  - 15 - para. 54 below). Administrative expenses have been consistently held below 1 percent of total assets. Gross income as a proportion of total assets is still modest (5.8 percent in 1976) for this reason and because new hotels in which FONATUR has invested are not yet generating significant incomes. FONATUR's Operations - The Future (i) Infrastructure Operations 49. Over the next few years, FONATUR will consolidate its infrastructure development program and complete its major projects (in Cacun, Ixtapa- Zihuatanejo, and Baja California). The resource requirements for this program are estimated at Mex $2.1 billion, and are being met from Government equity contributions and internal cash generation, and from IBRD and IDB loans which have already been made. (ii) Hotel Financing Operations 50. In support of the additional capacity needs over the period 1977-79 (para. 37), FONATUR's program would assist in financing 20,800 rooms, three fourths of which would be of international category. The total investment cost of these accommodation projects and related facilities is estimated at Mex$16.4 billion, of which about Mex$10.5 billion would be mobilized by financial intermediaries and investors from their own resources; the balance, Mex$6.1 billion, or 37 percent of the total costs, would be funded by FONATUR's loans. FONATUR would raise about half of the funds needed from the Banco de Mexico (medium term bonds) and the Government (equity contributions); the remaining half would come from net debt service inflows and external borrowings. In addition to the proposed Bank loan of US $50 million, foreign commercial banks would contribute about US$20 million in the co-financing operation described below. Co-financing with Foreign Commercial Banks 51. In connection with the proposed Bank loan, NAFINSA, on FONATUR's behalf, is arranging co-financing from foreign commercial banks for a loan of at least US$20 million and expects to obtain the terms and conditions summarized below: Borrower: NAFINSA Beneficiary FONATUR Purpose: Assist FONATUR's hotel financing operations Maturity: 10 years Repayments: In equal semi-annual installments commencing 42 months from date of signing.  - 16 - Interest Rate: 1.25 percent per annum above LIBOR for deposits at six months. Interest will be payable semi-annually. Commitment Fee: 0.5 percent per annum on the undrawn portion of the loan. The loan would be drawn down as required by FONATUR over a 24 month-period following the date of signing. Management Fee: About 0.5 percent of the amount of the loan. These terms would represent an improvement over those obtained in the recent past by Mexican borrowers in the eurodollar market. FONATUR will assume the foreign exchange risk and will service, through NAFINSA, the Bank and the cofinanciers' loans. FONATUR will mix cofinancing and Bank funds in the subloans taking into account the shorter term of the cofinancing loan, the differential in the interest rates applied to Bank and cofinancing funds, the debt servicing capability of the subproject, and the creditworthiness of the subborrower concerned. In order that the amortization requirements on FONATUR's external borrowings may conform as closely as possible to the amortization payments that it would receive on sub-loans, it is proposed that, as soon as the final amount and terms of the co-financing loan are determined, the amortization schedule of the Bank loan should be adjusted in such a manner as to assure that amortization repayments on FONATUR's external bor- rowings for the project would approximate those which it would have been required to make if it had borrowed the entire amount on Bank terms; the grace period of the Bank loan would not be extended. Schedule I of the draft loan agreement shows the normal amortization schedule; Annex 4 of this report shows how this schedule would be adjusted if the co-financing loan is finally obtained in the amount and on the terms summarized above. Terms and Conditions of the Proposed Bank Loan and Subloans 52. The proposed Bank loan of US$50 million would amount to about 9 percent of the total cost of projects in FONATUR's 1977-79 program (estimated at US$573 million equivalent) and about 29 percent of the estimated foreign exchange costs (estimated at US$172 million equivalent). Most of the Bank loan would be channelled to subprojects through intermediaries. The aggregate amount of the proceeds used for equity investments and direct loans would not exceed US$12 million and up to US$4.5 million could be used for non-hotel projects. Subloans would be up to 15 years, including a grace period not exceeding three years. The total amount of loan proceeds allocated to any subproject would not exceed the foreign exchange component, estimated at 30 percent of total costs on average (Section 2.02, draft Loan Agreement). 53. In the light of its appraisal capability and experience, FONATUR would approve subloans requiring not more than US$700,000 of the proceeds of the loan without prior review by the Bank (Section 2.02(b), draft Loan Agreement). About 30 per cent of FONATUR's subloans, corresponding to about  - 17 - two-thirds of the proceeds of the loan would be reviewed by the Bank. All proposed equity participations would be sent to the Bank for review (Section 2.03 (a) draft Loan Agreement). 54. As stated earlier (para. 48), FONATUR suffered a loss in 1976 on its hotel operations because of the negative spread between its borrowing costs and its lending rates. In June 1977, FONATUR's rates were increased by 2 percentage points and the financial intermediaries were charged interest rates ranging between 8 and 14.5 percent, and the ultimate borrowers between 11 to 17 percent (the rates vary with the amount of the subloan and the nature of the sub-project). The Government and FONATUR propose to introduce floating interest rates by September 1, 1978. The new interest rates to the intermediaries would be linked to the average cost of borrowed funds to financieras (ACF). This index, published monthly by the Banco de Mexico, represents the average interest rate paid by financieras (investment banks) on notes and bonds; it stood at 14.6 percent in December 1977. Final borrowers would pay interest charges reflecting, on average, the ACF plus 2 percentage points (Section 3.02, draft Loan Agreement). This is a marked improvement over the present practice and will result in final borrowers paying, on average, rates positive in real terms. Not more than US$10 million out of the proceeds of the loan will be used on subloans approved before the ACF floating interest rate policy is put into effect (Section 2.02(c) draft Loan Agreement). Manpower Training and Employment Studies 55. For the period 1976-1982, the demand for trained staff from the hotel industry is estimated at 15,000 a year of which 11,600 for lower level jobs. The present training structure cannot meet this demand. FONATUR has agreed to carry out a study to determine more precisely the demand fo-r trained hotel staff and the necessary arrangements to meet it. In parallel, FONATUR will carry out another study to identify means by which employment opportunities for less skilled persons can be increased through the design and execution of tourism projects. Both studies will be completed by June 30, 1979 (Section 3.07, draft Loan Agreement). Procurement and Disbursement 56. Procurement would follow standard Bank practice for DFC projects. The Bank would reimburse 40 percent of FONATUR's disbursements in respect of eligible subprojects, a percentage substantially lower than the estimated average foreign exchange component (para 52). Only expenditures made within 180 days prior to the date on which the Bank receives an application to disburse on a subloan or investment would be eligible for Bank financing (Section 2.02(c)(iv), draft Loan Agreement). Financial Prospects of FONATUR's hotel financing operations: 57. Projected income statements for these operations show only a small profit in 1977 and 1978, because of negative interest spreads on past  - 18 - loans (para 54). After 1978 profitability should increase steadily as a result of higher interest rates and improved income from the new hotels in FONATUR's investment portfolio. 58. The capital structure for the Operations Department on December 31, 1981 would include Mex$6.9 billion in funded debt, Mex$4.5 billion in paid-in capital, and Mex$1.0 billion in retained earnings. The long-term debt to equity ratio should drop steadily from 1.6 to 1 in 1977 to 1.4 to 1 in 1981. The current ratio and net working capital position would reach a low of 1.3 to 1 and Mex$165 million, respectively, before improving steadily, starting in 1981. Risks 59. Assuming that the quality of FONATUR's management is maintained, the project does not present special risks. As stated earlier (para. 30) the Government has projected foreign tourism to grow in the next ten years at an annual rate of 9 percent, but a more conservative projection of 6 percent has been assumed for the analysis of this project. In the unlikely event of a lower growth rate, the demand for loan funds would be lessened, and either the implementation period of the project would have to be extended or unused loan proceeds cancelled. Considering FONATUR's experience, the risk of uneconomic investments is minimal. Project Benefits and Justification 60. The individual subprojects financed by FONATUR would have to show acceptable economic rates of return, in addition to meeting sound technical and financial criteria. The economic rate of return of FONATUR's hotel finan- cing program is estimated at 14 percent. The proposed loan would strengthen Mexico's balance of payments by helping finance projects with foreign exchange earnings potential that might otherwise not be undertaken due to scarcity of long term financing: by 1985 annual net foreign exchange earnings from FONATUR's 1977-79 program would amount to about US$120 million. During the life of the investments, such earnings would add up to some US$3 billion. The pxogram would generate some 32,000 permanent jobs directly and another 33,000 indirectly; the bulk of these would be filled by semi-skilled or unskilled labor and about 40 percent could be filled by women. The ratio of investment costs to direct employment in man-years (both streams discounted at 10 percent) is $1,700 per man-year, which is considered appropriate. The relative importance of the number of indirect jobs comes from the fact that more than half of total tourist expenditures are incurred outside hotels: for example, almost 15 percent of total tourist expenditures are on handicrafts and souvenir shopping, affecting the incomes of more than five million Mexicans. Finally, many subprojects would be located in outlying areas and support the Government's spatial decentralization policy. 61. The proposed operation will help directly fill an important gap in the financing of the Mexican tourism sector and induce complementary foreign financing on attractive terms and conditions (para. 51). The loan will also  - 19 - support the introduction of more flexible interest rate policies which are conducive to efficient resource mobilization (para. 54). Additionally, the project will be instrumental in fostering institutional improvements in FONATUR and in the hotel training field (paras. 44 and 55). PART V - LEGAL INSTRUMENTS AND AUTHORITY 62. The draft Loan Agreement between the Bank and NAFINSA, the draft Guarantee Agreement between United Mexican States and the Bank, and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. Special conditions of the project are listed in Section III of Annex III. 63. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 64. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments February 1978   ANNEX I Page 1 of 4 pages TABLE 3A MEXICO - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2) ------------ ---- - ------ ----------- AREA KM2)MEXICO REFERENCE COUNTRIES (1970) TOTAL 1972.5 MOST RECENT AGRIC. 948.9 '960 1970 ESTIMATE BRAZIL CHILE SPAIN**** GNP PER CAPITA (USS) 370.0* 690.0* 1090.0*/a 550.0 820.0* 1580.0* POPULATION AND VITAL STATISTICS POPULATION (MID-YR. MILLION) 36.0 50.4 62.0 /a 92.8 9.4 33.6 POPULATION DENSITY PER SQUARE KM. 18.0 26.0 31.0 Ia 11.0 12.0 67.0 PER SQ. KM. AGRICULTURAL LAND 35.0 52.0 65.0 7-a 49.0 58.0 105.0 VITAL STATISTICS CRUDE BIRTH RATE (/THOU, AV) 46.1 43.8 42.0 38.4 32.9 21.0 CRUDE DEATH RATE (/THoU,AV) 14.0 10.2 8.6 9.9 11.0 8.8 INFANT MORTALITY RATE (/THOU) 74.0 68.5 52.0 110.0 79.0 27.9 LIFE EXPECTANCY AT BIRTH (YRS) 56.3 62.4 64.7 59.4 60.6 70.5 GROSS REPRODUCTION RATE 3.2 3.1 3.0 2.6 2.2 1.4 POPULAT1ON GROWTH RATE (%) TOTAL 3.1 3.4 3.6** 2.9 2.4 1.1 URBAN 4.9 4.8 5.1 5.0 3.5 2.0 URBAN POPULATION (% OF TOTAL) 90.7 58.7 63.3 55.9 76.0 59.1 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 45.8 46.2 46.3 42.0 39.0 27.8 15 TO 64 YEARS 50.9 50.1 50.3 55.0 56.3 62.5 65 YEARS AND OVER 3.3 3.7 3.4 3.0 4.7 9.7 AGE DEPENDENCY RATIO 1.0 1.0 1.0 0.8 0.8 0.6 ECONOMIC DEPENDENCY RATIO 1.6 2.0 1.8 /b 1.5 1.6 1.1 FAMILY PLANNING ACCEPTORS (CUMULATIVE, THOU) .. 55.5 321.1 250.0 403.5 USERS (X OF MARRIED WOMEN) .. .. 13.1 1.6 EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 11300.0 13000.0 16600.0 29400.0 2900.0 11900.0 LABOR FORCE IN AGRICULTURE (%) 54.0 45.0 41.0 40.4 21.0 25.0 UNEMPLOYED (X OF LABOR FORCE) .. .. .. 7.5 4.1 /a 1.1 /a INCOME DISTR.BUTION % OF PRIVATE INCOME REC o BY- HIGHEST 5% OF HOUSEHOLDS 28.7 /a 27.9 *** 35.0 /a 31.0 HIGHEST 20% OF HOUSEHOLDS 58.8 71 58.3 *** 62.0 7a 55.8 LOWEST 20% OF HOUSEHOLDS 7. a 10.5 3.0 77i 4.8 LOWEST 40% OF HOUSEHOLDS 1 .4 *** 10.0 71 13.0 DISTRIBUTION OF LANo OWNERSHIP ______________________________ % OWNED BY TOP 10X OF OWNERS .. 37.1 . 45.0 X OWNED BY SMALLEST 10% OWNERS .. 0.3 . 1.5 HEALTH AND NUTRIT ITON POPULATION PER PHYSICIAN 1800.0 1480.0 11. 200 700l POPULATION PER NURSING PERSON 28300 lb 1620.0/a 3220.0 /b 5830.0 740.0 b POPULATION PER HOSPITAL BEO 590.0 _E 960.0 830.0 /c 260.0 - 270.0 220.0 PER CAPITA SUPPLY OF - CALORIES (% OF REQUIREMENTS) 107.0 114.0/b 117.0 109.0 101.0 107.0 PROTEIN (GRAMS PER DAY) 65.0 65.0- 61.0 64.0 71.0 81.0 -OF WHICH ANIMAL AND PULSE 29.0 /d 28.0/C , 39.0 32.0 40.0 DEATH RATE (/THOU) AGES 1-4 12.7 9.8 8.4 /d . 3.9 0.9 EDUCATION ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 80.0 104.0 111.0 87.0 107.0 123.0 SECONDARY SCHOOL 11.0 22.0 30.0 39.0 57.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 1".0 12.) 12.0 11.0 12.0 11.0 VOCAT IONAL ENROLLMENT (% OF SECONDARY) 24,0 24.0 . 17.0 33.0 20.0 ADULT LITERACY RATE (X) 62.0 /e 76.0 76.0 64.0 90.0 94.0 HOUSING PERSONS PER ROOM (URBAN) 2.6 2.2 .. 1.0 1.3 Ic OCCUPIED DWELLINGS WITHOUT PIPED WATER (X) 76.0 /f 61.0 /d .. 73.0 /c 40.0 /Cd ACCESS TO ELECTRICITY (x OF ALL DWELLINGS) 5. 59.0 ,, 48.0 RURAL DWELLINGS CONNECTED TO ELECTRICITY (X) .- 28.0 ., 8.0 . CONSUMPTION RADIO RECEIVERS (PER THOU POP) 95.0 276.0 311.0 60,0 143.0 214.0 PASSENGER CARS (PER THOU POP) 14.0 24.0 31.0 25.0 18.0 71.0 ELECTRICITY (KWH/YR PER CAP) 313.0 567.0 724.0 491.0 806.0 1634.0 NEWSPRINT (KG/YR PER CAP) 2.A 3.2 2.5 2.7 .0 SEE NOTES AND DEFINITIONS. ON REVERSE  ANNEX I Page 2 of 4 pages ROTES Uclees otherwie noted, data for 1960 refer to any year between 1959 end 1961, for 1970 between 1968 end 1970, and for Moat Recent Estimate between 1973 and 1975. ^ GPP par capita d-ta are based so the World Bank Atla methodology (1974-76 basis). sa Recant data indicate tat total population growth has slowed to 3.2% per year since 1975. 0*0 Inco di tribution data for 1975 currently being revised. *05* Spain has ben selected es an objective country becau-e ita par capita incee is higher then Mexico's, and because both countries have in cmnion the Importance of tourise end the influence of nearby richer countries. MEXICO 1960 /a 1963; /b Includes midwifery and nursing nXilierias; Ic 1962; /d 1961-62; /e Six years end over; /f Inside only. 1970 /s Including assistant nursea; lb 1969-71 average; /c 1964-66; /d Inside oniy. MOST RECENT ESTIKATE: /a 1976; /b Ratio of population under 15 and 65 end over to total labor force; /c 1971; /d 1972. BRAZIL 1970 /a Economically active population; /b Hoopital personnel; /c Inside only. CHILE 1970 /a Gran Santiago; Lb Personal in goveran_t services only; /c DOta refer to households; /d Inside nly. SPAF1 1970 /a Employment office estimate; /b Registered, not all practicing in the country. R9, October 11, 1977 DCFINrTIOUS OP SOCIAL INDICAfDS Land Area (thou _kb) Poulation etr murtine person - Population divided by number of practicing Total - Total surfsce rea comprising land area nd inland water, els nd fmale graduate nur.sa, "treimed" or "certified" nurses, and Aric.- Most recent estimate of agricultural area used tmporarily or pares- aweiliary pernoonel with training or experience. neatly for crop, patures, markct & kitchen gardana or to lie fallow. Population per boapitel bed - Population divided by asbher of hospital beds avilable in public and private general and peciultoed hospital asd iNP oar copita (tIS) - GNP per capita estimates at current market prices, rehabilitation centers; excludes nursing hones and etdhb talehants for calculated by sae conversion rethod as World Bank Atlas (1973-75 basis); cuetodial ad preventive c.re. 1960; 1970 and 1975 data. Par capita supply of calories up of requirements) - Caputed fra energy squiw-lent of set food supplies availble in country par capita par day; Population and vital statiatlcs avilabla supplies caprise donmstic production, imports less e.ports, and Population (aid-year illio) Aj of July firat: if not available, average chagee in stock; net eupplies seclde animal feed, seeds, quantities used of rtw end-year estimtes; 1460, 1970 ad 1975 datas in fosd proceasing end losse in distribution; requirtents ware estimated by FAO based on physiological neada for no-ma activity and health ronaid- Ppculation dcnaitv - ear aquars b - Mid-yer popultion par square kilostar rAing engta paratur, body wights, ge and se diatributions of (1O0 hectares) of total area. population, end allowing 10 for waste at household level. Population density - per square km of asri. land - Coputed as above for Par capits sUDPly of rotein (gre per day) - Protein content of par capita ogricultural land only. net supply of food par day; net supply of food is defined as above; require- ants for all countries eastabliabed by USDA Econaic Research Srvices Vital statistics provide for a einimu allowance of 60 gres of total protein par day, nd Crude birth rete per thousand. erage - Annual liv birth. par thouaand of 20 gress of animl and pule protein, of which 10 gras should be animal lid-year population; ten-year rithtic averages ending in 1960 and 1970, protein; thee stendands are loer than those of 75 greas of total protein and five-year average ending in 1975 for nest recent estimate. and 23 grasm of nimal protein as an average for the world, proposed by FAO Crude death rate per thousand. average - Aasual death per thousand of mid-year in the Third World Food Survey. population; ten-year arithasetic avaregea ending in 1960 and 1970 and five- Per capita protein supply frm animal and puls - Protein supply of food year av-roge ending in 1975 for ms.t rerest estimste. darived fra animals and pulses in gras per day. In fant mortality rate C/thou) A-Anua deaths of infests under one ysear of see Death cats i/thou; eases 1-4 - Ansual deaths per thousand in oS. group 1-4 per thouasnd live births. ye tr, to children is this age group; suggested as an indicator of Life e-pectancy at birth (r.) - Average nusber of years of life reaiing at malnutrition. birth; usually five-year averages ending in 1960, 1970 and 1975 for develop- log countries. Education Gtros repocduction rate - Average number of live daughters a women will bear Adjusted enrollaent ratio - primary schol - Enrollmnt of a11 aegs as par- in her normal reproductive period if she axpriences present ge-apacific centnge of primary scbool-age population; includes children aged 6-11 years fertility rates; aus lly five-year averages ending in 1960, 1970 and 1975 but adjuted for different lengths of primary educeation; for countries with for devaloping nountrias. universal education, enrollment may seceed 1002 aloes ses pupils are belov PoPulation grwth rate (C) - total - Compound snnual grwth rate of nid-yesr or above the official school ge. populotion for 1950-60, 1960-70 and 1970-75. Adjusted enrollment ratio - seondary school - Computed as above; secondary Population growth rate (2) - urban - Cmputed like growth rate of total eduation requires at least four years of approved priary instruction; populotion; different definitions of urban areas say affect caparability of provides gen-rsl; vocational or taacher training ins trutions for pupils data among coutries, of 12 to 17 years of ege; correspondence courses are generally excluded. Urban population (% of total) - Ratio of urban to total population; different Yers of schooling providad (first nd seond leele) - Total years of definitions of urban aresa wy affect comparability of data _ng coantrisa. schooling; at secondary level, vocatinl instruction may be partially or eaplately excluded. A. structure (percent) - Children (0-14 year), workiag-ege (15-64 year), Vocational *nrollsent (f of secondary) - Vocational institutions include and retired (65 years and over) as parcentages of sid-year population, technical, industrial or other progras which operate independently or as Age dependency ratio - Ratio of population under 15 and 65 nd over to those departments of secondary institutions. of ages 15 through 64. Adult literacy rate (%) - Literate sdulta (able to read and utite) s- por- 0 tcono-ic drpecdency ratio - Ratio of populetlon under 15 and 65 and over to cent.ge of total adult population aged 15 yesro and oer. the lsbor fore. in age group of 15-64 years. Fatly piancino - acceptors (cu-lative. thou) - Cumulative number of aceptors Housing of birth-control device under suapices of national fily planning progra Persona por roo (urban) - Average number of persona per ron- in occupied since inception, conventional dwellings in urbsn areas; dwellings sxclude con-permanent Fonily planning - jeers (. of married women) - Percentages of married women of structures and unoccupied parts. child-bearing age (15-44 years) who ue birth-control d-vices to 11 married Occupied dwellings without piped water (%) - Occupied conventional dwellings woenn iL aine age group, in urban and rural area without inside or outside piped uster flcilities as percentage of a11 occupied dwellings. mployent Access to electricity (i of a11 dwellings) - Conventional dwellings with Total labor force (thouand) - Enonaically active persona, including ared elctricity in living qurters as percent of total dvellings in urban and forces and uneployed but excluding housewives, students, etc.; definitions rural areas. in v-rioas countries are not caperable- Rural dwellings connnntad to s1actricity (2) - Ctnpoted as abovr for rural Labor force in agriculture (%) - Agricultural labor force (in faming, forestry, dwellings oly. hunting and fishing) as percentage of total labor force. Unenployed (% of labor force) - Ulnonployed are usuaIly defined as persona who Consuavtion are able nd willing to take a Job, out of a Job on a Siven day, r-nained out Radio receivers (par thou pop) - All typee of rscsivsrs fcr radio broadcasts of a job, and sseking work for a specified minimum period not exceeding one to general public per thousand of population; e.cludes unlicensed- receivers week; my not be caparable between countries due to different definitions in countries and in years when registratiom of radio sets was in effect; of uneoployed and source of data, e.g , amployent office statistics, sample data for recent years may not be conparable sie most countries abolished urveys, coapulsory uneaployment mnsurace. licensing. Pesseocer cars (par thou pop) - Passsnger cars capriss otor cars seating Incse distribution - Percantage of private incooe (both in cash and kind) less than eight persona; secludes anbulasnc, hearses and ilitary received by richest 5%, richest 20%, poorest 20%, and poorest 40% of house- vehicles. ho1ds. Electricity (kwh/yr per cap) - Annual conatanption of Industrial, canrcie.1 public and private electricity in kilowatt hours par capita, generally Distribution of lsnd ownership - Percentages of land owned by wealthiest 10% baed on production dsta, without allowance for losses in grids but ally- end pooreat 10% of land owners. ing for imports and exports of electricity. Neweprist (kg/yr per cap) - Per c.pita n-nul coneumption in kilograms 4tind Nujtrpltiou estimsted from domastic production plus net imports of newsprint. p cian - Population divided by nushber of practicing physicians qualified from a medical school at univ-rsity lvel  P.ge 3 of 4 MEIICO - ECONOMaC DVErOPMNT DATA SREET Actual PYrseisiarr lEtimates Projected Growth Rates As 7. of GDY 1965 1970 1975 1976 1977 1978 1982 1966/70 1971/73 1976/82 1965 1975 1982 NATInaL AGOZOUS Constant 1972 Prices. U# MIllioos Gross Dsatic Prodsct 26,472.0 36,952.0 48,680.0 49,683.0 50,570.6 53,938.9 72,275.7 6.9 5.7 5.8 99.6 99.1 97.2 Gains fro- Tarts of Trade 904.0 104.0 424.0 482.6 328.6 418.5 2,075.3 -35.1 32.5 25.5 3.4 0.9 2.8 Gross Dratic Incae 26,576.0 37,056.0 49,104.0 50,165.6 50,899.2 54,357.4 74,351.0 6.9 5.8 6.1 100.0 100.0 100.0 IEports (including N8S) 2,768.0 3,928.0 5,648.0 5,339.0 4,549.4 5,269.6 7,118.3 7.3 7.5 3.4 10.4 11.5 9.6 Exports (ixport capacity) 2,624.0 3,152.0 3,960.0 4,470.5 4,761.2 5,223.6 9,057.9 3.7 4.7 12.6 9.9 8.1 12.2 Resource Gap 144.0 776.0 1,688.0 868.5 - 211.8 45.9 -1,939.6 40.1 16.8 - 0.5 -3.4 - 2.6 Coneution 21,704.0 30,288.0 39,752.0 39,476.4 39,799.0 41,643.5 54,421.4 6.9 5.6 4.6 81.7 80.9 73.2 Irn-et.ent 5,016.0 7,544.0 11,040.0 11,557.7 10,888.4 12,759.8 17,989.9 8.5 7.9 7.2 18.9 22.5 24.2 Gross Docastic Serings 4,872.0 6,768.0 9,352.0 10,689.2 11,100.2 12,713.8 19,929.5 6.8 6.7 11.4 18.3 19.1 26.8 Cross National Serigs 4,520.0 6,312.0 8,296.0 9,385.8 9,701.7 11,258,4 18,501.0 6.9 5.6 12.1 17.0 16.9 24.9 TRADS IN GOODS AND NFS Current Priceg. U0# Millions Ao 7. of Total ILPOES. TOtAL 2,073.2 3,416.9 8,636.7 8,135.1 7,512.2 9,410.9 16,216.0 10.5 20.4 9.4 100.0 100.0 1oo,0 Food 5.9 74.6 443.0 140.2 223.4 220.7 302.3 66.1 42.8 -5.3 0.3 5.1 1.9 Petrolean sad Products 26.2 54.2 291.1 291.5 358.0 415.2 - 15.7 40.0 - 1.3 3.4 - Other Goode 1,527.5 2,223.4 5,879.7 5,631.7 4,855.3 6,400.0 11,586.1 7.8 21.5 10.2 73.7 68.1 71.4 Nra-Factor Services 513.6 1,064.7 2,022.9 2,063.7 2,075.5 2,375.0 4,327.6 15.7 13.7 11.5 24.8 23.4 26.7 EDOBrs. TOTAL l.ff4.6 2,745.5 6.081,7 6.81108 7.862.1 9.328.8 20,634.6 6.9 17.2 19.1 100. 0 100.0 10 Seleoted Agrio1ltrral Goods 1/ 642.4 711.6 954.2 1,202.8 1,785.6 1,503.5 2,200.2 2.1 6.0 12.7 32.7 15.7 10,7 Petrole and Products 40.1 -38.4 460.1 567.5 835.4 1,687.5 7,002.1 -0.9 64.3 47.5 2.0 7.6 33.9 Selected Minerals 189.7 244.3 457.6 456.7 509.6 593.4 1,050.1 5.2 13.4 12.6 9.7 7.5 5.1 OIa,n,faoturea 132.5 326.9 1,069.3 1,192.0 1,410.7 1,752.1 4,035.6 19.8 26.8 20.9 6,7 17.6 19.6 Other Goe". 153.9 26.6 63.3 46.5 52.4 61.2 117.9 -29.6 18.9 9.3 7.8 1.0 0.6 Non-Factor Seroi-oa 806.0 1,397.7 3,077.2 3,345.3 3,268.4 3,731.1 6,228.7 11.6 17.1 10.6 41.0 50.6 30.2 TRADE INDICE1 Average 1972 100 Export Price Index 78.0 90.0 172.1 170.8 177.4 194.1 295.5 2.9 13.8 8.0 - - - Import Price lodee 75.0 87.0 153.6 152.4 165.1 178.6 227.8 3.0 12.0 5.8 - - - Ter of Trade 104.0 103.4 112.0 112.1 107.4 108.7 129.7 -0.1 1.6 2.1 - __ __ VALUE ADDRD BY SECT2R Consteot 1972 Prices. 0S3 Millions Primary 5,082.6 6,244.9 6,183.4 6,260.1 6,725.9 7,443.6 9,612.7 4.2 -0.2 6.5 19.2 12.7 13.3 S-oodqry 6,988.6 10,790.0 14,649.8 15,103.6 15,322.9 16,451.3 23,923.2 9.1 6.6 7.1 26.4 30.5 33.1 Tertiary 14,400.8 19,917.1 27,654.8 28,319.3 28,521.8 30,044.0 38,739.8 6.7 6.8 4.9 54.4 56.8 53.6 Total (GDP) 26,472.0 36,952.0 48,688.0 49,683.0 50,570.6 53,938.9 72,275.7 6.9 5.7 5.8 1I0.0 100.0 100.0 CONSO.IDATED PUNLIC SECTORI FI7 NSS Constant 1972 Prices. US$ Millions A. % of GDY C-rroot Receipts 3,042.0 4,942.6 7,346.3 8,325.2 7,853.1 9,410.3 17,315.4 10.2 8.3 11.0 11.4 15.0 23.3 Corront Eapeoditrres 2,329.0 3,156.4 6,222.4 6,902.5 6,643.8 7,416.7 10,652.0 6.3 14.5 6.4 8.8 12.7 14.3 Public S vings 713.4 1,786.2 1,124.0 1,332.7 1,209.3 2,260.9 6,663.6 20.1 -8.9 25.9 2.7 2.3 9.0 Resources for 1oorotneot 776.3 1,864.0 1,193.7 1,427.5 1,259.4 2,315.2 6,736.3 19.2 -8.5 24.8 2.9 2.4 9.1 Onveetneot 1,741.5 2,400.5 4,485.8 4;843.7 4,425.0 5,606.0 7,880.3 6.6 13.7 7.2 6.6 9.1 10.6 Doficit (ont) -965.2 -536.5 -3,292.1 -3,416.2 -3,165.8 -3,290.8 -1,144.0 -11.1 43.7 -13.5 -3.6 -6.7 -1.5 ALLO&ATION OP tOENLISATRE A. % of Total PUP.IC SEcTOR RIPEIIDITUX85 1970 1975 1982 Agriultoro 8 943.2 3,Z45.5 - _ - - _ _ - 8.8 15.9 - Industry 3.500,3 6,880.3 - - - - - - - 36.3 32.4 - Social Welfaro - 2,384.1 4,269,.6 - - _ _ _ - _ 24.7 21.0 Troosport and Co.ssnictabone - 1103649 2,034.6 - - - _ _ - - 11.8 10.0 Goncral Adninietretios sod Others _ 1,772.3 4,202.4 - - _ _ _ _ _ 18.4 20,7 Total - 9,637.2 20,332.6 - - - -- 100.0 100.0 - SELECTED INDICATORS ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Period A-ergo ESELECTED INDICATORS 1966/70 1971/75 1976/82 ICOR 2.91 2.89 4.99 11.10 13.02 3.23 3.41 - _ 2.90 3.63 5.76 Import Elasticiry 0.75 1.51 - 0.52 - 2.68 -8.28 2.38 1.16 - - 0.31 0.96 -0.64 Marginal Saviogs Ratio -0.16 - 0.24 0.11 0.94 0.50 0.46 0.35 - - 0.19 0.10 0.53 LABOR FORCE AND OUTPUT P8R WEOR A. 7.Rf T.Ul 1ff-1970 V.lnR Add.d EW e 72 1960 1970 Grorth RSte 1960 1970 1960 1970 Grovth Rate Agriclt-re 5.4 5.1 50.5 39.2 -0.6 608.8 939.9 34.7 33.0 4.4 I.duetry 2.1 3.0 19.6 23.1 3.6 2,468.9 4,134,9 140.6 145.0 5.3 Servicee 3.2 4.9 29.9 37.7 4.4 3,222.8 4,044.8 183.6 142,0 2,3 Total 10.7 13.0 100.0 100.0 2.0 1,755.6 2,847,6 100.0 100.0 5.0 ... Not ppltceble or vailable 1/ Inoledes ugwar  ANNEX I Page 4 of 4 BALANCE OF PAYMENTS. EXTERNAL ASSISTANCE AND DEBT (US$ million at current prices) Actual Preliminary Estimates Projections 1970 1975 1976 1977 1978 1980 1982 SUMMARY BALANCE OF PAYMENTS Exports (including NFS) 2,745.4 6,081.5 6,811.8 7,862.1 9,328.8 13,879.9 20,634.6 Imports (including NFS) 3,416.9 8,636.6 8,135.1 7,512.2 9,458.7 12,256.1 16,271.5 Resource Balan1, - 671.5 -2,555.1 -1,323.4 349.8 - 129.9 1,623.8 4,363.1 Interest, net - 307.0 -1,266.5 -1,872.0 -2,126.5 -2,350.9 -2,746.6 -2,713.4 Direct Investment Income - 267.5 - 657.5 - 636.6 - 739.8 - 856.4 -1,135.8 -1,486.2 Workers' Remittances 122.7 174.6 193.0 207.5 224.1 257.7 295.1 Current Transfers, net 55.3 123.4 146.9 157.1 171.6 204.9 245.0 Current Account Balance -1,068.0 -4,181.2 -3,491.9 -2,151.7 -2,941.3 -1,795.8 703.8 Private Direct Investment 322.8 748.8 688.0 688.0 777.4 983.9 1,234.2 Public Med. and Long Term Debt, net 258.6 3,565.8 4,906.9 3,075.1 2,467.0 - 213.4 -1,588.5 (Disbursements) (821.3) (4,418.6) (6,123.3) (5,551.1) (5,996.2) (4,748.8) (3,355.2) (Repayments) (-562.7) (-852.8) (-1,216.4) (-2,476.0) (-3,529.2) (-4.962.2 (-4,943.8) Other Capital 588.7 31.7 -3,043.0 - 861.4 21.9 1,233.3 - 133.3 (Public Short Term) (139.6) (842.8) (839.8) - - (-200.0) (-200.0) (Other Capital, n.e.i.) (449.1) (-811.1) (3,882.8) (-861.4) (21.9) (1,433.3) (66.7) Change in Reserves (- = increase) -102.1 -165.1 940.0 - 750.0 -325.1 -207.5 - 373.6 GRANT AND LOAN COMMITMENTS 844.1 4,305.7 6,560.5 5,356.8 PUBLIC MED. AND L.T. LOANS - - IBRD 146.8 310.0 725.0 187.0 - - - IDA - - - Other Multilateral 112.3 121.8 355.1 280.0 - - - Governments 81.0 316.8 118.6 250.0 - - - Suppliers 69.7 116.7 201.9 150.0 - - - Banks and Financial Institutions 434.4 3,300.1 4,454.8 3,889.8 - - - Bonds - 140.3 707.5 600.0 - - - DEBT AND DEBT SERVICE EXTERNAL DEBT Public Debt Outstanding & Disbursed 3,226.9 11,095.9 16,002.9 19,078.0 Outstanding and Disbursed (end of period) on Dec. 31, 1977 Interest on Public Debt - 216.9 - 810.5 -1,069.9 -1,237.0 Repayment on Public Debt - 474.7 - 852.8 -1,216.4 -2,476.0 $ Millions Percent Other Debt Service (net) - 224.3 - 193.3 - 325.7 - 367.7 Total Debt Service (net) 2/ - 915.9 -1,856.6 -2,612.0 -4,080.7 Public M & L.T. Burden on Expsrt Earnings (7.) - Loans a. Public Debt Service 24.0 26.6 32.6 46.0 b. Total Debt Service 31.8 29.7 37.3 50.6 IBRD 1,456.8 7.6 c. Total Debt Service and IDB 772.7 4.0 Direct Investment Income 44.8 40.2 46.4 59.7 Governments 853.5 4.5 Average Terms of Public Debt Suppliers 320.8 1.7 a. Interest as 71 of prior Bonds 1,821.6 9.6 year's D.O. and D. 7.4 10.8 9.6 7.7 Other Financial b. Amortization as 7 of prior Institutions 13,852.6 72.6 year's D.O. and D. 16.3 11.3 11.0 15.5 Total 19,078.0 100.0 IBRD Exposure a. IBRD D.O. & D. as 'b of 18.0 10.1 7.7 7.6 Public D.O. and D. b. IBRD Debt Service as % of Public Debt Service 7.8 7.0 5.8 4.2 IDA Exposure - - - Not applicable or available 1/ Includes interest on short-term private and public debt 2/ Includes worker remittances  ANNEX II Page 1 of 8 THE STATUS OF BANK GROUP OPERATIONS IN MEXICO A. STATEMENT OF BANK LOANS (as at December 31, 1977) US$ Million Loan Amount less Number Year Borrower Purpose Cancellations Undisbursed 32 loans fully dis- 1,451.4 bursed 793 1972 Nacional Financiera Tourism 22.0 0.6 S.A. 824 1972 Nacional Financiera Industry 35.0 0.0 1/ S.A. 909 1973 Nacional Financiera Water Supply 90.0 50.8 S.A. 968 1974 Nacional Financiera Roads 90.0 61.1 S.A. 969 1974 Nacional Financiera Irrigation 77.0 21.6 S.A. 970 1974 Nacional Financiera Irrigation 47.0 43.9 S.A. 1022 1974 Nacional Financiera Airports 25.0 14.9 S.A. 1053 1974 Nacional Financiera Integrated Rural S.A. Development 50.0 46.5 1110 1975 Nacional Financiera Integrated Rural S.A. Development 110.0 62.0 1111 1975 Nacional Financiera Irrigation 50.0 50.0 S.A. 1112 1975 GUANOMEX & Nacional Financiera S.A. Industry 50.0 26.5 1186 1975 Banco Nacional de Obras y Servicios Publicos S.A. Water Supply 40.0 39.4 1205 1976 Nacional Financiera Industry 50.0 36.5 S.A. 1217 1976 Nacional Financiera Agricultural and S.A. Livestock Credit 125.0 49.6 1232 1976 Ferrocarriles Na- cionales de Mexico & Nacional Finan- ciera S.A. Railways 100.0 88.1 1/ Undisbursed amount is US$24,000.  ANNEX II Page 2 of 8 US$ Million Loan Amount less Number Year Borrower Purpose Cancellations Undisbursed 1420 1977 Nacional Financiera Tourism 42.0 42.0 S.A. 1462 1977 Nacional Financiera Integrated Rural S.A. Development 120.0 120.0 TOTAL 2,574.4 753.5 Of which has been repaid to the Bank 446.7 2,127.7 Total now outstanding 92.3 Amount sold 62.3 of which has been repaid 30.0 Total now held by Bank 2/ 2,097.7 Total Undisbursed 753.5 2/ Prior to exchange adjustments.  ANNEX II Page 3 of 8 B. STATEMENT OF IFC INVESTMENTS (as of December 31, 1977) Fiscal US$ Million Year Obligor Type of Business Loan Equity Total 1958/59 Industrias Perfect Circle, S.A. 1/ Industrial Equipment 0.8 -- 0.8 1958 Bristol de Mexico, S.A. 1/ A.C. Engine Overhaul 0.5 0.5 1961 Acero Solar, S.A. 1/ Twist Drills 0.3 -- 0.3 1962/65/ Compania Fundidora 66/68 Fierro y Acero de Monterrey, S.A. Steel 2.3 21.4 23.7 1963 Tubos de Acero de Mexico, S.A. 1/ Steel 0.9 0.1 1.0 1963 Quimica del Rey,S.A. 1/.Sodium Sulphate 0.8 -- 0.8 1964/66 Industrial del Hierro, S.A. Construction Equipment -- 2.0 2.0 1970 Minera del Norte, S.A. Iron Ore Mining 1.5 -- 1.5 1971 Celanese Mexicana,S.A. Textiles 12.0 -- 12.0 1972 Promotora de Papel Periodico,S.A. de C.V. Pulp and Paper 2/ 2/ 2/ 1973 Cemento Veracruz Cement 10.5 -- 10.5 1974 Cancum Aristos Hotel Tourism 1.0 0.2 1.2 1975 Mexinox, S.A. Steel 12.0 2.8 14.9 Total Gross Commitments 42.6 26.5 69.2 Less Cancellations, Terminations, Repayment and Sales 16.3 22.0 38.3 Total Commitments Now Held by IFC 3/ 26.3 4.5 30.8 Total Undisbursed 1/ Investments which have been fully cancelled, terminated, written off, sold, redeemed or repaid. 2/ US$25,000 3/ Prior to exchange adjustments.  ANNEX II Page 4 of 8 C. PROJECTS IN EXECUTION 1/ Ln. No. 793 Zihuatanejo Tourism Project: $22 Million Loan of January 22, 1972; Effectiveness Date: March 30, 1973. Closing Date: June 30,1978. After encountering some delays due largely to land acquisition problems, the Ixtapa-Zihuatanejo project is nearing completion with 97% of the Bank loan disbursed. The airport is open and the physical facilities of the town have greatly improved. The population in Zihuatanejo has grown from 4,000 to over 10,000. In the tourist zone of Ixtapa, two hotels are open for business and several others are under construction.(Further details in para. 41 of this Report). Ln. No. 909 Mexico City Water Supply Project: $90 Million Loan of June 18, 1973; Effectiveness Date: April 30, 1974. Closing Date: December 31, 1978. Project works are well advanced except in the Texcoco Region. Overall, more than half the project works as originally defined have been completed,and the works in progress are expected to be completed by end of 1978. The Government has proposed that savings in carrying out some components of the projects be applied to finance new works which would serve the objective of increasing bulk water supply to the Mexico City metropolitan area. Also the Government is considering revision of the bulk water rate, on conclusion of which a recommendation on changes in the project description will be submitted to Executive Directors. Ln. No. 968 Seventh Highway Project: $90 Million Loan of March 1, 1974; Effectiveness Date: May 29, 1974. Closing Date: December 31, 1978. About 25 percent of the works have been carried out and about US$25 million have been disbursed. Substantial delays have been encountered in the initiation of project works because of the shortage of budgetary allocations. Substantial cost increases caused by price escalation were also encountered. Taking this into account, a change in the scope of the project was made in August 1977, from 16 roads (1,975 km) to ten roads and part of an eleventh road (1,216 km) which, because of cost increases, have the same total cost as the original project. The roads remaining in the project continue to be justified as benefits have kept pace with costs. Works are now expected to be completed by late 1980 or about two and a half years behind schedule. 1/ These notes are designed to inform the Exeeutive Directors regarding the progress of projects in execution and, in particular, to report any problems which are being encountered and the action being taken to remedy them. They should be read in that sense, and with the understanding that, they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  ANNEX II Page 5 of 8 Ln. No.969 Rio Panuco Irrigation Project; $77 Million Loan of March 1, 1974; Effectiveness Date: May 29, 1974. Closing Date: December 31, 1980. Construction is over 60 percent completed and termination of all works is scheduled for 1980. About 16,000 ha were irrigated in the previous season and about 30,000 ha are currently irrigated; on full development the project will provide irrigation to 137,000 hectares. The technical assistance program and the land settle- ment program are proceeding satisfactorily. However, inflation has been greater than estimated at the time of appraisal and therefore, project costs have risen to about US$348 million equivalent from the original estimate of US$202 million; Government's request for a supplementary loan is under consideration. Ln. No. 970 Rio Sinaloa Irrigation Project: $47 Million Loan of March 1, 1974; Effectiveness Date: May 29, 1974 Closing Date: December 31, 1980. Construction of major project works remain substantially behind the original schedule; the pace is however, accelerating as works for the major storage dam have now begun. About 15 percent project works are complete and water is being supplied to 25,000 ha of the 100,000 ha to be served by the project. Total project costs have risen from US$146 million to US$341 million because of higher inflation than projected at. the time of appraisal and changes in the volume of physical works. The Government's request for a supplementary loan is under consideration. Ln. No.1022 Airport Development Project: $25 Million Loan of May 28, 1974; Effectiveness Date: September 16, 1974 Closing Date: June 30, 1978. The project originally included the construction of seven regional airports and the expansion of an existing one at Campe- che. Of these, the Guaymas airport works have been postponed by the Government because of interim improvements of the exist- ing airport carried out by the local municipality with its own resources. At Campeche, the Government has decided to construct a new airport with its own funds instead of improving the existing airport. Loan proceeds allocated to Guaymas and Cam- peche were reallocated in August 1977 to complete construction of the six airports retained in the project. Works in all the six airports are proceeding satisfactorily.  ANNEX II Page 6 of 8 Ln. No. 1053 Papaloapan Integrated Rural Development Project: $50 Million Loan of November 15, 1974; Effectiveness Date: January 27, 1975. Closing Date: June 30, 1980. Project implementation is accelerating after delays due to inadequate budget support. A reprogramming of the project was begun in 1977 to adjust for these delays. The project is presently being given priority managerial attention and budget levels have been increased to an adequate level. While, as a whole, the project remains behind the original implementation schedule, some elements, most notably extension service, are ahead of schedule. Provided the present tempo is maintained the project would be completed around the original closing date. Ln. No.1110 Integrated Rural Development Project (PIDER I): $110 Million Loan of May 8, 1975; Effectiveness Date: October 29, 1975 Closing Date: December 31, 1982. Project investments are generally on schedule and management is taking actions to further strengthen project implementation. Special inter-agency agreements regarding the development credit, agricultural extension, and farmer organization compo- nents are being implemented. The new PIDER management is giving priority to ensuring the proper operation and maintenance of earlier PIDER investments. Emphasis is also being given to strengthening effort regarding cost recovery, investment analysis and programming, monitoring, and rural industries. Ln. No.1111 Seventh Irrigation Project - Bajo Rio Bravo and Bajo Rio San Juan: $150 Million Loan of May 8, 1975, subsequently reduced to $50 Million; Effectiveness Date: July 30, 1975; Closing Date: December 31, 1982. The Government and the Bank have agreed that, in view of the size and complexity of the project, its high cost and the Government's current policy of restraining fiscal expenditures, it would be advisable to carry out the project in several phases, over a longer period of time than the seven years originally visualized. As explained in Memorandum R77-305 of December 13, 1977, the loan amount has now been reduced from $150 million to $50 million to be applied to the first phase of the project. This first phase works would be implemented over four years. Contracts for priority works are being placed and studies for the remaining works under the reduced project are in progress. A technical assistance component of the project is under implementation.  I ANNEX II Page 7 of 8 Ln. No. 1112 Fertilizer Prolect: $50 Million Loan of May 22, 1975; Effectiveness Date: July 30, 1975. Closing Date: December 31, 1978. The devaluation of the peso in September 1976 affected the project cost and its implementation schedule. Preliminary estimates indicate a capital cost increase of 36 percent in pesos and a delay of 7 to 8 months in implementation. The Bajio Urea Plant will be completed in June 1978, the Pajaritos Urea Plant in June 1979 and the Parathion Plant in May 1978. Ln. No. 1186 Medium Cities Water Supply and Sewerage Project: $40 million Loan of January 13, 1976; Effectiveness Date: April 26, 1976. Closing Date: December 31, 1980. Subloan agreements have been signed with three cities where construction has begun. It is expected that agreements will be signed by the end of the year with the local authorities for four additional subprojects which would fully commit the loan funds. funds. Ln. No. 1205 Industrial Equipment Fund (FONEI) Project: $50 Million Loan of April 30, 1976; Effectiveness Date: August 30, 1976. Closing Date: December 31, 1979. After some delays in committing resources to new projects in late 1976 and early 1977, demand for financing for industrial projects has strengthened and FONEI has numerous applications on hand. As of December 31, 1977, 73 perent of the loan had been committed. Ln. No. 1217 Fifth Agricultural and Livestock Credit Project: $125 Million Loan of March 11, 1976; Effectiveness Date: August 30, 1976. Closing Date: January 1, 1980. Commitments under this project are running ahead of schedule. Funds for medium-income producers and agro-industries are fully committed. The National Rural Credit Bank has been declared eligible for rediscount under this project thereby increasing the rate of commitment of funds to low-income producers.  Annex II Page 8 of 8 Ln.. No.1232 Third Railway Project: $100 Million Loan of April 30, 1976; Effectiveness Date: June 16, 1976. Closing Date: June 30,1979. Execution of the project has been generally satisfactory. Orders have been placed for rails, car components, track and workshop machinery. Following the devaluation in 1976, and the budgetary cuts in the stabilization period, and the slackening in the traffic growth, the railway has proposed substantial rephasing of its investment plan and procurementschedule, details of which are being worked out. The execution period of the project will require to be extended by about two years. Operational and technical improvements of the railway continue, though they have not yet been reflected in the financial per- formance of the railway on account of inadequate tariff increases. Ln No. 1420 Baia California Tourism Project: $42 Million Loan of July 5, 1977; Effectiveness Date Closing Date: June 30, 1981. Though the loan is not yet effective, satisfactory progress on implementation of the project is being made. Ln. No. 1462 Integrated Rural Development Project - PIDER II: $120 million Loan of July 5, 1977; Effectiveness Date: October 28, 1977; Closing Date: July 31, 1981. The loan became effective on October 28, 1977 and implementation is on schedule.  ANNEX III Page 1 of I MEXICO TOURISM DEVELOPMENT LOAN SUPPLEMENTARY PROJECT DATA SHEET I. Timetable of Key Events (a) Time taken to prepare project: About 6 months (b) Agencies which prepared the project: FONATUR (c) First presentation to the Bank: February 1977 (d) First mission to review project: March 1977 (e) Departure of appraisal mission: May 31, 1977 (f) Completion of negotiations: January 19, 1978 (g) Planned date of effectiveness: April 17, 1978 II. Special Bank Implementation Actions None III. Special Conditions 1. The free limit would be US$700,000. All equity investments would be reviewed by the Bank. No more than US$12 million would be allocated to FONATUR's equity investments and direct loans and no more than US$4.5 million would be allocated to non-accommodation operations (paras. 52 and 53). 2. The financial intermediaries would be charged rates reflecting, on average, the average cost of funds to the financieras (ACF) and the final borrowers would pay interest rates reflecting , on average, the ACF plus two percentage points. Interest rates will be periodi- cally adjusted to reflect changes in ACF. This new interest rates policy will be put into effect before September 1, 1978. Not more than US$10 million of the loan would be used in respect of subloans approved under the present interest rates regime (para. 54). 3. FONATUR will, not later than June 30, 1979, carry out: (i) a study to determine the demand for trained hotel personnel and to make recommendations for a sectoral training program; and (ii) a study to identify means by which employment opportunities for less skilled persons can be increased through the design and execution of tourism projects (para. 55).  ANNEX IV Page 1 of 1 MEXICO TOURISM DEVELOPMENT LOAN */ SKEWED AMORTIZATION SCHEDULE- Date Payment due Payment of Principal**/ (in US$) On October 1, 1982 125,000 On each April 1 and October 1 beginning April 1, 1983 through October 1, 1987 1,265,000 On April 1 and October 1, 1988 1,980,000 On each April 1 and October 1 beginning April 1, 1989 through October 1, 1994 2,560,000 On April 1, 1995 2,545,000 */ Based upon a US$20 million loan from the cofinanciers with a final maturity of 10 years, repaid in equal semi-annual pay- ments beginning 42 months after date of signature. **/ To the extent that any portion of the Loan is repayable in a currency other than dollars (see General Conditions, Section 4.02), the figures in this column represent dollar equivalents determined as for purposes of withdrawal.  I BR D 13333 --,~~~~~~~- $OURISM DEVELOPMENT PROJECT m -m IAJ~~~~~. -ON-R A 19. <0100 SWC ED 1RI .44 M-.7X .U: 10 .g ROLL 00*00. I.0*001*-0.0000 01000 MAI -RAR 0. -ORRI 21. -oEI 0 - - RILWAYs N- 00 00 210. 01*0*ROR * AIRPORTS T* 0000(00 T CO 004140 (;0,;E~ ~ QV108 '4ft 2AS 4k X, w -SNEi( ow. <ORYNO. ONN 00 ST 00 IOI1*N00120'OT 60 Wall00* 20. 01,0014 - ,1 <* 110 0<01 01 0**0 f