Mexico - Second Agricultural Marketing Project

Docunent of The World Bank FOR OFFICIAL USE ONLY Repwt No. 8095-ME STAFF APPRAISAL REPORT MEXICO SECOND AGRICULTURAL MARKETING PROJECT NOVEMBER 14, 1989 Country Department II Latin America and the Caribbean 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 Banok .uthorization.  CURRENCY AND EQUIVALENT UNITS US$1.00 - Mex$ 26001 Mex$ 1 = US$ 0.00044 WEIGHTS AND MEASUREMENTS 1 Hectare (ha) 10 000 m2 1 Metric ton (mt) = 1,600 kg 1 Kilometer - 1,000 m GLOSSARY OF ACRONYMS ACF - Average Cost of Funds to Banks AGSAL - Agricultural Sector Loan ANAGSA - National Crop and Livestock Insurance Agency BANCOMEXT - Foreign Trade Bank of Mexico BANRURAL - Rural Bank CAADES - Confederation of Agricultural Associations of the State of Sinaloa CETES - Treasury Bills CONASUPO - National Marketing Corporation for Basic Foods CONCANACO - Confederation of National Chambers of Commerce FERTIMEX - National Fertilizer Company FI - Financial Intermediary FICART - Trust Fund for Credit in Irrigated and Rainfed Areas FIDEC - Trust Fund for Commercial Development FIRA - Agricultural Trust Funds in Bank of Mexico FOMEX - Trust Fund for Development of Exports of Manufactured Products FONEI - Trust Fund for Industrial Equipment FSAL - Financial Seztor Adjustment Loan GATT - General Agrsement on Tariffs and Trade GIRA - General Interest Rate Agreem'*nt ICB - Internationa.. Competitive Bidding INEGI - National Institute of Statistics, Geography and Computer Science ISPL - Industrial Sector Policy Loan LIBOR - London Inter-Bank Offered Rate NAFIN - National Finance Agency NTBs - Non-Tariff Barriers PACTO - Economic Solidarity Pact PECE - Stabilization and Growth Pact PND - National Development Plan PRONAL - National Food Program PVP - Present Value Payments System SARH - Secretariat of Agriculture and Water Resources SECOFI - Secretariat of Commerce and Industrial Promotion SECOGEF - Secretaria de la Controloria Gineral de la Federacion (Ministry in charge of auditing) SEMIP - Secretariat of Energy, Mines, Industry and Parastatals SHCP - Secretariat of Finance SNA - National Supply System SNIM - National Market Information Service SOE - Statement of Expenditure UNPH - National Association of Fruit and Vegetable Producers FISCAL YEAR January 1 - December 31 1/ Average exchange rate at the time of the appraisal (May 1988) was 2280 Mexican pesos per U.S. dollar.  FOR FMCIL USE ONLY MEXICO SECOND AGRICULTURAL MARKETING PROJECT Table of Contents Page I. * LOAN AND PROJECT SUMMARY . . ... I II. THE FOOD MARKETING SECTOR ................. 3 A. Introduction: Economic Background .................. **..3 Background .......................................... 3 Macroeconomic Development in 1988 ... . 4 Macroeconomic Policies in 1989 . . . . 5 Towards Renewed Growth . ................ *..6 B. The Financial Sector . . 6 An Over-regulated Financial Sector ............... o..6 Initial Measures Taken by the Government After 1982.7 Significant Problems Remaining . . 7 Reforms since October 1988 .. 7 Problems of Development Banks and Trust Funds ... 8 Bank Actions within the Agricultural Credit System..8 C. Evolution of Food Marketing in Mexico .................. 9 The Food Sector in the Economy . . 9 Effects of Urbanization and Income . . 9 D. The Present System of Food Marketing in Mexico ... 10 Coexistence of Traditional and Modern System ....... 10 Overall Presentation . . . 10 Producers . ............................... ..... . 11 Wholesalers. ..................................... 12 Retailers . ..... .. 13 Agroprocessors and Exporters . ... 14 Regulatory Issues . .................................. 14 Information on Prices and Volumes of Transactions..16 Government Policy and Strategy ..................... 16 Demand for Credit .................................. 17 Bank Involvement in the Sector ......... ........... 18 Rationale for Bank Involvement . .21 This report is based on the findings of an appraisal mission that visited Mexico in April 1989. Mission members were Messrs. Jean-Jacques de Saint Antoine (task manager), Alain Tobelem and Andres Abramovich. 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 authonzation.  Table of Contents (Continued) Page III. THE PR..OJECT .............................................. 23 Origin of the Project ....23............ Project Objectives and Description.. ........... 23 Institutional Development . .24 Project Implementation . .26 Project Cost and Financing ..29 Procurement .......................... 29 Disbursesmento ...... .* ........... 30 Accounting and Audits...... .......... ......... . ..... 30 Management Information System .30 Financial Analysis of Investment Models .31 Project Risk ......... ... ..**....... +31 Environmental Effects ......31 IV. AGREEMENTS REACHED/TO BE REACHED 32 Annexes 1. FIDEC's Operatios. .............. ............ . ........... 34 2. FIDEC's Historical Statements ............................36 3. Financial Projections ..................... .............. 39 4. Illustrative Investw nt Plans ........................... 44 5. Project Cost ........ ..... .*........59 6. Disbursement Schedule ......o...........................60 7. Terms of Reference for Special Studies ..................61 8. Daily Prices of Fruits and Vegetables Produced . 64 by National Market Information Service 9. Documents isi Files...... . 66  MEXICO SECOND AGRICULTURAL MARXETING PROJECT I. LOAN AND PROJECT SUMMARY Borrower: Nacional Financiera, S.N.C. (NAFIN) Guarantor: United Mexican States Beneficiaries: The Trust Fund for Commercial Development (FIDEC), private sector enterprises through commercial banks, and the National Marketing Information Service (SNIM). Amount: US$100 million equivalent Terms: Seventeen years, including five years of grace, at the standard variaole interest rate. Relending Terms: The Borrower would transfer US$100,000 to SNIM as a grant; the balance of the loan amount would be made available to FIDEC, of which US$98.6 million would be on-lent to private enterprises through commercial banks. Subloans would be denominated in Mexican pesos or U.S. dollars at the option of the sub-borrower. For loans in pesos, the Borrower would make the funds available to FIDEC in pesos at the one month CETES (Mexican Treasury Bills) rate, which represents the marginal cost of funds to the Government, or at any other reference rate mutually agreed between the Borrower and the Bank; FIDEC would repay principal and interest with the same terms and grace periods as the Bank loan. The Government would take the foreign exchange risk on the loan. The CETES rate, being a market based rate in an open capital market, includes a foreign exchange risk component. For loans denominated in U.S. dollars, the Borrower would make funds available to FIDEC at the three-month LIBOR rate plus 0.5 percentage point. FIDEC would on-lend the funds to commercial banks either in Mexican pesos or U.S. dollars at a weighted average interest rate to provide FIDEC a margin of at least 2.0 percentage points over FIDEC's weighted average cost of funds (either in Mexican pesos or in U.S. dollars, respectively). These banks would relend the funds to sub-borrowers at rates established in the General Interest Rate Agreement between Mexico and the Bank (peso subloans) and at a rate equal to LIBOR plus 4.0 percentage points (dollar subloans). Proiect Description: This project is designed to: (i) help improve the efficiency of the food marketing system through the adoption of modern technology and improved marketing practices, and (ii) improve the transparency of the system and thus competition through a better dissemination of infotmation on price and volume of  products traded. To that end, the project would include a general line of credit (99? of total project cost), expansion of market information services, special studies, technical assistance to retailers and producers, and institutional development (1 of total project cost). This project fits well within the Government's integrated financial sector reform. Prolect Risks: The principal project risk would be a possible contraction of credit demand due to currently high real interest rates; although these rates are still quite high, they decreased by over 20 percentage points during the last few months after a tentative agreement was reached on Mexico's external debt reduction. In addition, the external debt reduction agreement, expected soon between Mexico and its commercial creditors. would have a beneficial impact on Mexico's fiscal situation and renew Mexico's confidence in its future econom-ic stability. This, in turn, is expected to bri.,g about further decreases in real interest rate and a gradual restoration of growth. Moreover, the Government's commitment to open up the economy through structural adjustments in the agricultural, industrial, and financial sectors mitigates the possible risk of contraction of demand as these adjustments are already inducing substantial private sector investment. Estimated Cost: Local Foreign Total