Mexico - Capital Goods Industries Development Project

Document of g The World Bank -4 EL, FOR OFFICIAL USE ONLY Report No. P-3284-ME REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEN' TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S. A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR A CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT April 22, 1982 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS The Central Bank withdrew from the exchange market on February 18, 1982. Prior to that date, the exchange rate was 26.9 pesos to the US dollar. In recent weeks, the peso has traded around 46 to the dollar. FISCAL YEAR January 1 to December 31 GLOSSARY OF ABBREVIATIONS ACF Index of Average Cost of Funds to Multipurpose Banks COCOFIN Coordinating Committee on Financing for the Capital Goods Industrial Development Program (Comite Coordinador y de Evaluacion Financiera del Programa de Desarrollo de la Industria de Bienes de Capital) FISOMEX SOMEX Industrial Development Company (Fomento Industrial SOMEX) FOMEX Manufactured Products Export Development Fund (Fondo para el Fomento de las Exportaciones de Productos Manufacturados) FONEI Industrial Equipment Fund (Fondo de Equipamiento Industrial) GDP Gross Domestic Product IDB Inter-American Development Bank NAFINSA Nacional Financiera, S.A. PPAR Project Performance Audit Report Program Capital Goods Industries Development Program supported by the proposed project SOMEX Sociedad Mexicana de Credito Industrial (A Commercial Bank and Investment Company)  FOR OFFICIAL USE ONLY MEXICO CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT Loan and Project Summary Borrower: Nacional Financiera, S.A. (NAFINSA) Guarantor: United Mexican States Beneficiaries: Industrial Equipment Trust Fund (FONEI); Sociedad Mexicana de Credito Industrial (SOMEX); and NAFINSA Amount: US$152.3 million equivalent, including capitalized front-end fee of US$2.3 million Terms: Fifteen years, including 3 years of grace, at an interest rate of 11.6 percent per annum Onlending Terms: Implementing agencies (FONEI, SOMEX, and NAFINSA) would receive loan funds at an interest rate equal to four points less than the onlending interest rate applicable on subloans. The maximum amortizatici period for sub-loans would be 13 years including 3 years of grace. Project Description: The project is the first phase of the Capital Goods Indus- tries Development Program which seeks to promote balanced and efficient development of the capital goods manufacturing sub-sector. The project would provide financing and technical support to medium-size capital goods manufacturers and would help strengthen the institutional base for the Program. The Program would be co-financed by the Government, Mexican and foreign banks, export credit agencies, private Mexican and foreign entrepreneurs, and the Bank. The project includes the following components: Financing Operations: (a) Medium- and long-term loans for creation of new or expansion of existing capital goods enterprises; (b) Equity investments by participating agencies in new or expanding capital goods enterprises; (c) Sales finance; (d) Finance of technical assistance to manufacturers; and (e) Finance of technological research and development through a risk sharing mechanism. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Complementary Measures: (a) Training the staff of enterprises and participating financial institutions in the preparation, promotion, and evaluation of capital goods projects, including specialized training in aspects of subcontracting, quality control and export promotion; (b) An assessment of existing training programs and facilities; (c) Establishment of a mechanism to review progress in resolving technical and structural issues affecting the subsector; and (d) Strengthening and expansion of the information dissemination system for the subsector, including expansion of technological information services, assessment of the installed capacity of capital goods manufacturers, and special studies. About 22,000 new jobs would be created at an average investment of US$40,000 per job. Because of linkages with other parts of the economy, the project would yield important indirect employ- ment benefits. The project would also promote deconcentration of industrial activity, generate over US$2 billion in foreign exchange savings or export earnings during the first five years of operation, and accelerate technology absorption and development with consequent increases in productivity and employment. Project Risks: The project involves two important risks: (i) Effective institutional coordination and management is essential to the success of the project. The proposed structure and demonstrated capabilities of the executing agencies make this risk acceptable. (ii) The Government will have to maintain adequate policies to ensure that only efficient industries are promoted. The understandings in the project execution paper, the strong committment of the Government, and periodic joint reviews of the project reduce this risk. Overall, the project presents an acceptable degree of risk.  - iii - Estimated Cost: Local Foreign Total ---------US$ Millions-------- Financing Operations 622.5 519.0 1,141.5 Fixed Investment Loans 130.0 340.0 470.0 Permanent Working Capital 120.0 100.0 220.0 Equity Investments 116.0 77.0 193.0 Sales Finance 250.0 - 250.0 Technical Assistance Loans 3.9 1.1 5.0 Technology Development Finance 2.6 0.9 3.5 Complementary Measures 2.5 1.0 3.5 Training 0.5 0.1 0.6 Information Dissemination 1.6 0.8 2.4 Studies 0.4 0.1 0.5 Front-end Fee on Bank Loan - 2.3 2.3 Total Cost 625.0 522.3 1,147.3 Financial Plan: Local Foreign Total