Mexico - Fertilizer Sector Adjustment Project

Document of The World Bank FOR OFFICIAL USE ONLY t.Aj 21 Report No. P-4639-ME REPORT AND RECOMMENDATIONS OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSIRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED FERTILIZER SECTOR ADJUSTMENT LOAN IN AN AMOUJNT EQUIVALENT TO US$265 MILLION TO NACIONAL FINANCIERA, S.N.C. WITd THE GUARANTEE OF THE UNITED MEXICAN STATES February 29, 1988 This document has a resticted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otewise be disclosed without World Bank authorization.  CURRENCY UNIT - PESO (MEX$) The exchange rate as of the date of appraisal (April 20, 1987) US$1 - Mex$ 1,147.70. On February 19, 1988, the exchange rate in the controlled market was Us$ 1 - Mex$2,261; the free exchange rate was US$ 1 Mex$2,300. Fiscal Year January 1 - December 31 Weights and Measures 1 hectare (ha) 10,000 square meters (m2) - 2.47 acres (a) 1 kilometer (km) = 0.62 mile (mi) 1 square kilometer (km2) = 0.39 square miles - 100 ha 1 kilogram (kg) - 2.205 pounds (lbs) 1,000 kilograms = 1 metric ton (t) - 0.98 long ton i liter (1) = 0.26 gallons (gal) I British Thermal Unit (BTU) - 252 kCal ABBREVIATIONS ASL - Agricultural Sector Loan BANRURAL - National Rural Credit Bank CONASUPO - NationcU Basic Foods Company EFF - Extended Fund Facility ERR - Economic Rate of Returr. FERTIMEX - Mexican Fertilizer Company (Fertilizantes Mexicanos, S.A.) FSAL - Fertilizer Sector AdJustment Loan GDP - Gross Domestic Product ICB - International Competitive Bidding Il4F - International Monetary Fund IRL - Industrial Restructuring Loan NTB - Non-Tariff Barrier NAFIN - National Financing Company (Nacional Financiera, SNC) PEMEX - Mexican Oil Company (Petroleos Mexicanos) SARH - Ministry of Agriculture and Hydraulic Resources SEMIP - Ministry of Mining, Energy and Parastatal Industry SHCP - Ministry of Finance and Public Credit SIDERMEX - Mexican Steel Company SPP - Ministry of Programming and Budgeting TPL - Trade Policy Loan  F1O CIAL tN ONLY MEXICO - FERTILIZER SECTOR ADJUSTMENT LOAN I PRESIDENT'S REPORT Table of Contents Page No. LOAN SUMNARY ............... ............................***** i PART I - TME ECONOMY ......... A. Background ...e.............eeeee ........................ I B. Recent Economic Developments .. *0***o *e........e......e....e.., 4 C. Development Prospects....................................... 7 D. External Debt and Creditwortbiness.......................... 8 PART Il - THE FERTILIZER SECTOR ................................. 8 A. Fertilizer Use in Mexican Agriculture ...................... 9 B. Fertilizer Production and Distribution ..................... 10 C. Policy Environment ......................... ............... 12 PART III - THE PROPOSED RESTRUCTURING PROGRAM ................... 14 A. Policy Measures .....................................e....a. 15 (a) Physical Restructuring of Production Facilities .... 15 (b) Fertilizer Distribution ..................... 16 (c) Fertilizer and Fertilizer Inputs Pricing Policy .... 17 (d) Fertilizer Imports ....................*..... 20 Ce) Links Between PEMEX and FERTIMEX for Ammonia and Urea Production ..... ............................. 21 (f) OrguiWzation Restructuring ................0....... 21 (g) Flnancial Restructuring ............................ 22 (h) FERTIMEX's Investment Criteria ..................... 23 B. The Investment Program ....*....................ee....... 23 PART IV - THE PROPOSED OPERATION ............................... 24 A. Objectives ........................... 24 B. Description and Loan Components ......e................ 25 (a) The Import Comwponent ............................... 25 (b) Rationalization Investments - Production ........... 26 (c) Rationalization of Distribution Infrastructure...... 26 (d) Technical Aasistance Component ..... ................ 28 1/ Called "Fertilizer Sector Loan' in the Legal Documents. Thi document has mtkd distbuton and my be usd by npins onl in peajtfmsmo of thd oflk dutis Its contents may no othewie be kxd wiwhutr Wod Lwk au,..  - li - Table of Contents (Continued) C. Costs and Financing ....................................*... 28 D. Ialementation, Borrowing Arrangements, Monitoring and Auditing ...--.... 29 (e) Implementation. ... *...........0,,*oe ..............e.. 29 (b) Borrowing Arrangements, Onlending Terms and Conditions .....o..................**o**o ***** 29 (c) Monitoring and Reporting .......................... 29 (d) Auditing .*....oo.**.........o .o.....o.**o9**.****** 29 B. Procurement and Disbursements .............................. 30 (a) Procurement ......... ..... ........................o 30 (b) Disbursements oo.oo.eoeeeoo .............oo o *o . 31 (c) Effectiveness and Tranche Release .................. 32 P. Effects of the Proposed Program ............................ 32 (a) Economic and Financial Viability of FERTIKEX ....... 32 (b) Impact on the National Budget ..................... 34 (c) Impact on the Balance of Payments ................. 35 (d) Impact on the Agricultural Sector *.......*.. **.. -. 35 (e) Social Impact of Adjustments .. ..................... 36 (f) Environmental Impact ................ ........ *eo 37 G. Benefits and Risks .................... 38 (a) Economic and Financial Viability of Investments Financed Under the Loan .........................*.. 38 (b) Loan Justification and Risks ...................... 39 PART V - BANK GROUP OPERATIONS IN MEXICO ...... .................. 40 A. Bank Operations *.................... ............e.... 40 Be IPC Operations ............................... 40 C. Bank Strategy *o....................... ..*ee 41 D. Past Bank Lending in the Fertilizer Sector .................. 43 PART VI - COLLABORATION WITH THE IMF .................. 44 PART VII - RECOMMENDATION .......* ......................*... 44  - ili - Annex I. Social and Economic Indicators: Social Indicators, Balance of Payments, Macroeconomic Indicators; Status of Bank Group Operations Annex II. Supplementary Loan Data Sheet Annex III. Government's Statement of Sectoral Policies - Draft Annex IV. Policy Matrix Annex V. Production and Distribution Structure Table I - Summary of International Competitiveness of Existing Plants Table 2 - Plant Closure Program - 1986-89 Table 3 - Fertilizer Distribution By Channels Table 4 - Distribution of Warehousing Capacity - 1985 Table. 5 - Warehousing Capacity for Primary Storage Annex VI. The Investment Program and Supply and Demand Balances Table 1 - Tentative Medium-Term Investment Program - 1987-92 Table 2 - Fertilizer Supply and Demand Projections - 1986-95 Annex VII. Fertilizer.in Mexican Agriculture - Current Status and Possible Impact of Prcposed Price Changes Table 1 - Fertilizer Prices Table 2 - Nominal Pritection Coefficients for Major Crops Table 3 - Projected Changes in Weig'hted Average International and Domestic Prices Table 4 - Tariff Duties On Selected Fertilizers Annex VIII. Project Costs, Procurement and Disbursements, Implemetntation Schedules and Economic Justification Table 1 - Total Project Costs Table 2 - Procurement and Disbursements Table 3 - Projected Imports of Fertilizer and Fertilizer Raw Materials Table 4 - Capital Cost Estimates - Project Investments Table 5 - Institution Building and Technical Assistance Table 6 - Implementation Schedules of Proposed Investments Table 7 - Plant Rehabilitation Projects - Summary Table 8 - Primary Warehouses - Summary Table 9 - Maritime Terminals - Summary Table 10 - Ammonia Spheres - Summary Table 11 - Economic Analysis and Sensitivity - Ammonium Nitrate Plant Table 12 - Primary Warehouses - Sensitivity Analysis Table 13 - Maritime Terminals - Sensitivity Analysie Table 14 - Ammonia Spheres - Sensitivity Analysis  - iv - ANNEXES (Continued) Annex IL Past and Projected Financial Performance of FERTIMEX Table 1 - FERTIMEX Balance Sheet - 1982-86 Table 2 - FERTIMEX Profit and Loss Statement - 1982-86 Table 3 - Projected Financial Statements of FERTIMEX - Profit and Loss Statement Table A - Projected Financial Statements of FERTINEX - Funds Flow Statement Table 5 - Projected Financial Statements of FERTIMEX - Balance Sheet Table 6 - Projectec Financial Statements of FERTINEX - Working Capital Requirements Annex X. Distribution Study - Terms of Reference, Study Arrangements and Proposed Calendar. Annex XI. Organization Study of FERTIMEX - Terms of Reference, Study Arrangements and Proposed Calendar Annex XII. List of Documents in the Project File MA- IBRD 20435  MEXICO FERTILIZER SECTOR ADJUSTMENT LOAN M Loan Summary Borrower : Nacional Financiera, S.N.C. (NAFIN) Guarantor : United Mexican States Beneficiary : Fertilizantes Mexicanos S.A (FERTIMEX) Amount : US$265 million equ..valent Terms : 15 years, including three yeare of grace, at the standard variable interest rate. Relending Terms e NAFIN would relend funds for investments, studies and training components to FERTIMEX at the Bank rate plus 10l of that rate with the same repayment and grace periods as Bank funds to NAFIN. Funds for the imports of fertilizer and fertilizer raw materials and other imports would be passed on by NAFIN to the Government. FERTIMEX would take the foreign exchange risk for funds relent for invest- ments, technical assistance and training, and the Government for funds for imports. Project Description : The proposed loan is a hybrid policy and investment loan intended to support the first steps in the implementation of the Government's and FERTIMEX's five-year program to put the fertilizer subsector on a sound competitive basis and eliminate Government subsidies through a series of reforms of tte policy framework and the implementation of supporting rationalization investments. Major policy reforms involve dignificant price adjustments of inputs and outputs, closure of uneconomic plants, liberalization of distribution and imports, setting up a better orgacnza- tional structure in the sector, financial restructuring of FER