Mexico - Third Small And Medium Scale Industry Development Project : Loan 2325 - Guarantee Agreement - Conformed

LCLe LOAN KU~BER 2325 NE D0C U MEN_P4TS o Guarantee Agreement (Third Small- and Mediunr-Scale Industry Development Project) between UNITED MEXICAN STATES and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Dated /5,1983 LOAN NUMBER 2325 ME GUARANTEE AGREEMENT AGREEMENT, dated /- , 1983, between UNITED MEXICAN STATES (herernafter called the Guarantor) and INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (herein- after called the Bank). WHEREAS by the Loan Agreement of even date herewith between the Bank and Nacional Financiera S.A. (hereinafter called the Borrower) the Bank has agreed to make to the Borrower a loan in various currencies equivalent to one hundred and seventy-five million dollars ($175,000,000), on the terms and conditions set forth in the Loan Agreement, but only on condition that the Guarantor agree to guarantee the obligations of the Borrower in respect of such loan as hereinafter provided; and WHEREAS the Guarantor, in consideration of the Bank's enter- ing into the Loan Agreement with the Borrower, has agreed so to guarantee such obligations of the Borrower; NOW THEREFORE the parties hereto hereby agree as follows: ARTICLE I General Conditions; Definitions Section 1.01. The parties to this Agreement accept all the provisions of the General Conditions Applicable to Loan and Guarantee Agreements of the Bank dated October 27, 1980, with the same force and effect as if they were fully set forth herein, subject, however, to the modifications thereof set forth in Sche- dule 2 to the Loan Agreement (said General Conditions Applicable to Loan and Guarantee Agreements, as so modified, being herein- after called the General Conditions). Section 1.02. Wherever used in this Agreement, unless the context otherwise requires, the several terms defined in the General Conditions and in Section 1.02 of the Loan Agreement have the respective meanings therein set forth. -2- ARTICLE II Guarantee; Provision of Funds Section 2.01. Without limitation or restriction upon any of its other obligations under the Guarantee Agreement, the Guaran- tor hereby unconditionally guarantees, as primary obligor and not as surety merely, the due and punctual payment of the principal of, and interest and other charges on, the Loan, and the premium, if any, on the prepayment of the Loan and the punctual perform- ance of all the other obligatibns of the Borrower, all as set forth in the Loan Agreement. Section 2.02. Without limitation or restriction upon the provisions of Section 2.01 of this Agreement, the Guarantor specifically undertakes whenever there is reasonable cause to believe that the funds available to the Borrower will be inade- quate to meet the estimated expenditures required for the carry- ing out of the Project, promptly to provide the Borrower or cause the Borrower to be provided with such funds as are needed to meet such expenditures. ARTICLE III Other Covenants Section 3.01. (a) It is the policy of the Bank, in making loans to, or with the guarantee of, its members not to seek, in normal circumstances, specific security from the member concerned but to ensure that no other external debt shall have priority ovL_ its loans in the allocation, realization or distribution of foreign exchange held under the control or for the benefit of such member. To that end, if any lien shall be created on any governmental assets (as hereinafter defined), as security for any external debt, which will or might result in a priority for the benefit of the creditor of such external debt in the allocation, realization or distribution of foreign exchange, such lien shall, unless the Bank shall otherwise agree, ipso facto, and at no cost to the Bank, equally and ratably secure the principal of, and interest and other charges on, the Loan, and the Guarantor, in creating or permitting the creation of such lien, shall make express provision to that effect; provided, however, that, if for any constitutional or other legal reason such provision cannot be made with respect to any lien created on assets of any of its -3- political or administrative subdivisions, the Guarantor shall promptly and at no cost to the Bank secure the principal of, and interest and other charges on, the Loan by an equivalent lien on other governmental assets satisfactory to the Bank. (b) The foregoing undertaking shall not apply to: (i) any lien created on property, at the time of purchase thereof, solely as security for payment of the purchase price of such property or as security for the payment of debt incurred for the purpose of financing the purchase of such property; and (ii) any lien aris- ing in the ordinary course of banking transactions and securing a debt maturing not more than one year after Its date. (c) As used in this Section, the term "governmental assets" means assets of the Guarantor, of any of its political subdivi- sions or of any agency; and the term "agency" means any agency or instrumentality of the Guarantor or of any political subdivision of the Guarantor, and shall include any institution or oganiza- tion which is owned or controlled directly or indirectly, by the Guarantor or by any political subdivision of the Guarantor, or the operations of which are conducted primarily in the interest of, or for the account of, the Guarantor or any political sub- division of the Guarantor. Section 3.02. Except as the Bank and the Guarantor shall otherwise agree, the Guarantor shall exchange views with the Bank, not later than February 1, 1984, on the extent to h.aich the Prevailing Interest Rate is an adequate index for the interest rates charged for Sub-loans, FIDEIN Loans and FOMIN Equity Investments under the Project. If, either in the Guarantor's or the Bank's opinion, the Prevailing Interest Rate would not con- stitute an adequate index, the Guarantor and the Bank shall agree on alternative measures in line with the prevailing economic con- ditions in Mexico and in order to accomplish the purposes of the Loan. Section 3.03. The Guarantor shall (a) cause the Central Bank to have the Special Account audited annually by independent and qualified auditors appointed by the Guarantor and, promptly after the audit and not later than six months after the close of the Central Bank's fiscal year, the Bank shall be furnished with certified copies of such audit, together with a certified copy of the auditor's report; 4- (b) cause to be furnished to the Bank such other informa- tion concerning the audit thereof as the Bank shall from time to time reasonably request; and (c) cause to be furnished to the Bank each month certified statements of the Special Account, and from time to time such other information concerning such Special Account and such state- ments of expenditures as the Bank shall reasonably request. ARTICLE IV Representative of the Guarantor; Addresses Section 4.01. The Director General de Credito P'blico of the Secretarra de Hacienda y Credito Pu'blico of the Guarantor is designated as representative of the Guarantor for the purposes of Section 11.03 of the General Conditions. Section 4.02. The following addresses are specified for the purposes of Section 11.01 of the General Conditions: For the Guarantor: Secretarfa de Hacienda y Cr6dito Pi'blico Palacio Nacional Edificio 10 - ler Piso 06066 Mexico, D.F. Mexico Telex: 1777313 SHCDME For the Bank: International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Cable address: Telex: INTBAFRAD 440098 (ITT) Washington, D.C. 248423 (RCA) or 64145 (WUI) IN WITNESS WHEREOF, the parties hereto, acting through their representatives thereunto duly authorized, have caused this Agreement to be signed in their respective names in Mexico City, Mexico, as of the day and year first above written. UNITED MEXICAN STATES By Authorized Representative INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT By xs Senior Vice President Operations O INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT CERTIFICATE I hereby certify that the foregoing is a true copy of the original in the archives of the Interna- tional Bank for Reconstruction and Develop- ment. In witness whereof I have signed this Certifi- cate and affixed the Seal of the Bank thereunto this AS day of \, 1983. FOR SECRETARY \/VO rid Ban k 1818 H Street, N.W., Washington, D.C. 20433, U.S.A.* Telephone: (202) 477-1234 BANK NEWS RELEASE NO. 83/120 Contact: Ciro Gamarra June 24, 1983 (202) 477-5320 MTEXICO OBTAINS WORLD BANK LOANS TOTALLING $525 MILLION FOR EXPORT DEVELOPMENT AND SMALL AND MEDIUM INDUSTRIES SLargest Amount Ever Approved to Mexico at Single Meeting of Board of Directors *The World Bank has approved two loans to Mexico, totalling $525 million, to assist an export development program and a small- and medium-scale industry development project. This is the largest amount ever approved to Mexico by the Bank"s Executive Directors at one meeting. The first loan, of $350 million, was approved to the National Foreign Trade Bank (Banco Nacional de Comercio Exterior-BNCE) to assist in the establish- ment o.f an export development fund. This project will help Mexico in a critical period to revitalize its non-petroleum exports. The second loan, of $175 million, was authorized to Nacional Financiera, S.A. (NAFINSA), Mexico's National Development Bank. The project will support Mexico's integrated program of assistance to small and medium industry by providing credit and technical assistance to enterprises for maintaining or expanding production and employment levels. This is the third project of its type assisted by the World Bank i. Mexico. The Export Development project represents part of the World Bank's Special Action Program to help meet Mexico's critical needs following the financial crisis of 1982. It will complement the assistance being provided to bMexico by the International Monetary Fund and other financial institutions. Both loans were provided from the resources of the International Bank for Reconstruction and Development (IBRD), which, together with the International Development Association (IDA) form the World Bank. The loans will be repaid over 15 years, including three years of grace, at an annual interest rate linked to the cost of Bank borrowings. The loans also carry an annual commitment charge of 0.75% on undisbursed balances, and a front-end fee of 0.25% on the amount of the loans. The loans are guaranteed by the United Mexican States. .Export Development The Export Development project assisted by the $350 million loan will support the government's efforts to expand non-petroleum exports rapidly, which are a cornerstone of Mexico's strategy for economic recovery. It will assist in the formulation and implementaticn of a comprehensive export development strategy and in providing exporters access to increased foreign exchange~ on reasonable terms for imports of production inputs and equipment during a period of critical foreign exchange scarcity. NOTE: Money fi ures are exoressed in U.S. dollar equivalents. .. -2- The loan will be channeled through the Banco Nacional de Comercio Exterior, the Trust Fund for the Promotion of Export of Manufactured Products (FOMEX), the Trust Fund for Industrial Equipment (FONEI), the Trust Fund for Tourism Development (FONATUR), and other government entities providing technical assistance to exporters. About $275 million of loan proceeds will be allocated initially to FOMEX to expand a $100 million Export Development Fund established on an interim basis to finance imported inputs of Mexican exporters. The,Fund was established on April 1, 1983, under the amended Capital Goods Industries Development Project, which was also financed by the Bank. As part of the emergency action to help Mexico, the Capital Goods project was modified to help initiate a mechanism to finance urgently needed imported inputs for exporting industries. About $71 million will be allocated either by BNCE or through FONEI or FONATUR to provide medium- and long-term subloans for financing fixed invest- ments by industries to help them maintain, expand or generate export capacity, and by hotels to help increase revenues from foreign tourism. The loan also includes about $3.1 million for technical assistance subloans to exporters, and studies to help improve the government's export development strategy and to strengthen the agencies related to the export sector, including the provision of equipment. The project will make an important contribution to the formulation and implementation of a comprehensive export development strategy, encompassing policy orientation towards exports, improvements in administrative procedures, and improved services to exporters and export promotion activities. In addition to strengthening the export promotion agencies in the country, the project is expected to help Mexico lay the basis for achieving the stated goal of a four-fold increase of non-petroleum exports over the next five or six years. An estimated 400 to 600 export enterprises are likely to benefit from working capital finance and about 120 to 125 firms from credits for fixed investments under the project. The annual export plans of these firms are expected to account for between one-quarter and one-third of Mexico's manufactured exports during the project period. Based on estimated import requirements for exports, it is expected that most of the Export Development Fund resources will be disbursed over a period of about 12 months after loan effectiveness and that resources under the fixed investment and technical assistance components will be disbursed within 36 months. Small- and Medium-Scale Industry A Third Small- and Medium-Scale Industry Project assisted by the $175 million loan will continue support for the integrated program of assistance to small- and medium-scale enterprises (PAI), which was initiated with Bank help in 1978. The project will also help refocus its activities to respond to the present economic situation. -3- In addition to financing fixed investments, the project will assist small- and medium-scale enterprises to maintain production and employment levels by ensuring access to credit and equity resources to finance their substantially increased permanent working capital requirements. The loan will be channeled by NAFINSA through the Trust Fund for Guarantees and Development of Medium and Small Industry (FOGAIN), National Trust Fund for Industrial Development (FOMIN), and Trust Fund for Industrial Estates (FIDEIN). About $150 million will be used by FOGAIN to provide credit through financial intermediaries to finance fixed assets including equipment and common service facilities, and working capital requirements. FOMIN will use $18 million to make minority equity investments and loans convertible into equity, to help finance fixed investments and permanent working capital. About $4.6 million will go through FIDEIN to provide credit for infrastructure works in industrial estates and about $2 million for technical assistance through NAFINSA and specialized institutions for extension services, including training. Altogether, about 3,000 small- and medium-sized firms are expected to receive finance and benefit from technical assistance programs by FOGAIN, FOMIN, and NAIINSA, and about 12 industrial estates will be assisted through FIDEIN. An estimated new 10,000 jobs will be generated in 1983-86 through investment finance from the loan. A further 20,000 to 30,000 jobs will be preserved through helping to provide firms with adequate working capital. The World Bank had already provided two loans, since 1978, totalling $147 million, to assist Mexico's program of assistance to small and medium- sized industry. Although the Bank's assistance to Mexico for industrial develop- ment has become broader, involving support to larger enterprises with import substitution or export potential, capital goods industries and industrial pollution control, the small and medium-scale industry operations remain a central focus of the assistance strategy.