Mexico - Fourth CFE Power Project

R RE STRICTED FILE1., O R Report No P-281 This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the Bank's views. -The Bank -accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE COMISION FEDERAL DE ELECTRICIDAD (COMISION) AND NACIONAL FINANCIERA, S. A. FOR THE EXPANSION OF POWER FACILITIES IN MEXICO June 12, 1962  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVTLOP1NENT REPORT AND RECOG1-21NATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS OiN A PROPOSED LOAN TO THE COMISION FEDERAL DE ELECTRICIDAD (COMISION) QND NACIONAL FINANCGTERA, S.A. FOR THE EXPANSI OIN1 OF RMER FACILITIES IN MEXICO 1. I submit herewith the following Report and Recommendations on a proposed loan in an amount in various currencies equivalent to $130 million to Comision Federal de Electricidad (Comision) and Nacional Financiera, S.A., to assist in financing Comision's program for expand- ing its generating, transmission and distribution facilities. PART I - HISTORICAL 2. The Bank's first loan to Mexico was made in 1949 to Comision (and Nacional Financiera) to help finance Comision's program for en- larging its power facilities. The Bank has since made two additional loans to Comision for its power program, the latest in 1958. The three loans - totalling about $88 million - make Comision the Bank's biggest borrower in Mexico. The new facilities built by Comision during this period raised its generating capacity from about 100 114 to about 1,200 MiWJ, making Comision Mexico's biggest producer of power. 3. Since the last Bank loan to Comision, practically all the power industry in Mexico has become publicly owned. In 1960 the Government acquired the two largest private power companies operating in Mexico: Mexlight, controlled by Sofina (Belgium), and Impulsora, a subsidiary of American & Foreign Power (U.S.A.). During this period, Comision bought practically all the smaller private distributing companies and Mexicols Constitution was amended to provide that the generation, transmission and distribution of electric power for public use should be reserved to the public sector. Impulsora has been placed under the administration of Comision and the Government has given Comision the responsibility for building the generating capacity required for the entire Mexican power industry and for planning the industry's future growth. 4. The first discussions with the Bank about a fourth loan to Comision took place in 1959 with the Government and management of Comision which had taken office after the Presidential elections of 1958. At that time, the financial position of Comision did not permit the Bank to make adaitional loans for the program on which Comision was then embarking.  5. During 1960 and 1961 the Bank discussed with the Governmenlt and Coniision the need for raising rates to levels which would place Comision in a position to finance its expansion program on a sati.sfactory basis. Action to this effect was taken in January 1962 when the Government put into effect new rates for the entire country, which allowed Comision and the other major companies revenues adequate to operate and expand their facilities. 6. A Bank mission visited Mexico in February 1962 to make a final appraisal of Comision's financial position and expansion program. For- mal negotiations began in WJashington on May 1, 1962,with Mr. Raul Martinez Ostos, who represented the Mexican Government and Nacional Financiera, and Mr. Manuel Moreno Torres, Director General of Comision. Negotiations were concluded on May 15. 7. The proposed loan, together with a $30.5 million loan for a toll transport project, which is being presented to the Executive Directors along wiith this one, would increase the Bankts lending to Mexico to $386.8 million (net of cancellations and refundings). 8. The Bank has made the following loans to Mexico: Amount Mexico: ~~(ea,uiv. in Year No. Borrower Purpose mill'$) 1949 12 ME Nacional Financiera & Comision ELectric Power Dev 24.1 1949 13 ME Nacional Financiera & Comision Electric Power 10.0 1952 56 ME Nacional Financiera & Comision Electric Power 29.7 1958 194 ME Nacional Financiera & Comision Electric Power 34.0 1950 2)4 ME Mexlight Electric Power 26.0 1958 186 .E lMexlight Electric Power 11.0 1950 33 lIE Bank Consortium and Nacional Development of Small 10.0 Financiera Industrial Projects 1954 103 ME Ferrocarril del Pacifico Railway RehabLitation 61.0 1960 268 IE Nacional Financiera Road Construction and Improvement 25.0 1961 275 ME Nacional Financiera Irrigation 15.0 Total 245.8 Cancellations and Refundings 19 5 226:3 Of which has been repaid 34.6 Total now outstanding 19107 Amount sold $17.9 Of which has been repaid 15G4 2.5 Net amount now held by Bank lb9J2 1/ As of May 31, 1962. 7/ Includes $43.2 million not yet disbursed.  - 3 - PART II - rESCIIPTTON OF THE PiOPO3ED LOAN 9. Purpose: To help finance Comision's expansion program for the four year period 1962-1965, which will add about 2,550 Megawatts to Comision's present generating capacity and corresponding transmission and distribution facili- ties. Borrowers: Comision Federal de Electricidad, a public agency charged with the devel- opment of electric power in MvIexico; and Nacional Financiera, S.A., a financial agency of the Mexican Govern- ment, which, under the existing Mexican legislation authorizing loans from the Bank, has to be a co-borrower. Guarantor: The United Mexican States. Amount: The equivalent in various currencies of 4130 million. Amortization: 42 semi-annual installments from November 1964 to May 1985. Interest Rate: 5 3/4%. Commitment Charge: 3/4% per annum. Payment Dateo: May 1 and November 1. PART III - LEGAL INSTRUIENTS AND LE GAL AUTHORITY 10. Drafts of a Loan Agreement (No. 1) and a Guarantee Agreement (No. 2) are attached. The following provisions are of special interest: (a) Loan Agreement: (i) Section 5.10 provides that to major additions (other than the Project) wil1 be made to Comisionts plants and properties durintg the fcvur-year program without the prior approval of the Bank.  (ii) In Section 5.12 Comision undertakes not to incur any debt during 1962 and 1963 without the prior approval of the Bank; and not to incur any debt thereafter if, as a result, the funds required for servicing all Comisionts outstanding long- term debt shall in any fiscal year exceed two- thirds of its net revenues during the fiscal year immediately preceeding the incurrence of such debt, or during any later consecutive 12-month period prior to such incurrence. Nacional Financiera also undertakes not to incur any debt to finance facilities of Comision if the above test would not be met had such debt been incurred directly by Comision. (iii) Section 5.13 provides that Comision will take steps to cause such adjustments to its rates as shall be needed to meet the requirements of Section 3.07 of the Guarantee Agreement (mentioned below). (iv) Under Section 5.14 Comision undertakes to make arrangements during 1962-1965 with the other two major publicly-owned power companies in Mexico (Mexlight and Impulsora) to coordinate the oper- ation of their facilities and the planning of their investment programs for the following five-year period. As owner of Impulsora, Nacional Financiera undertakes to take all neces- sary action to make possible the coordination of the operations and investment described above. (b) Guarantee Agreement: (i) The Guarantor undertakes among other things in Section 3.06 to take all reasonable Governmental action and all action as owner of Mexlight to effect the coordination of operations and invest- ments in the power sector as provided for in Section 5.14 of the Loan Agreement. (ii) Section 3.07 provides that the Guarantor will grant and maintain power rates adequate to pro- vide Comision with funds sufficient to cover all its operating expenses and service on its debt, and to create a surplus adequate to meet a reasonable portion of the cost of expansion of its facilities.  11. Nacional Financiera is authorized by decree of the Mexican Congress of December 19, 1960 to contract the proposed loan and, as the Government's representative, to guarantee the loan on behalf of the Government. Comision is authorized to borrow for the expansion of its facilities. 12. The Report of the Committee provided for in Article III, Sec- tion h(iii) of the Articles of Agreement of the Bank is attached (No.3). PART IV - APPRAISAL OF THE PROPOSED LOAN 13. A detailed appraisal of the Project (TO-327) is attached (No.4). The Project 14. The Project is CFE's expansion program for the four years, Jan- uary 1962 to January 1966. It provides for the increase of Comision's power generating, transrtLssion and distribution facilities and would increase Comision?s installed capacity by about 2,550 NW. The program includes the construction or enlargement in the major systems of 13 thermal plants and 10 hydro plants with a total capacity of about 1,260 NW and 1,130 MW respectively. These plants will be installed in Comision?s 11 major systems. Smaller plants totalling about 160 SiW total capacity will be installed for Comision?s rural electrification program. The program will also include about 4,500 k-lometers of transmission lines, substations and the expansion cf Comision's own distribution system. The program would triple Comision's present capacity of about 1,200 MW and would more than double Mexico's presently installed capacity of about 2,200 MW. Execution of the Project 15. Over-all responsibility for the planning and execution of the program rests with the management and staff of Comision. For the works to be put into operation in 1962-1965, consultants will be ex- tensively employed to review the design of the major civil works, equipment and transmission lines and to assist in the supervision of the construction of the principal dams and in the performance of accept- ance tests of thermal and hydro equipment. Comision will also employ consultants to review the planning of the works to be initiated, during the period of the program but which will not be put into operation during this period nor be financed with the proposed Bank loan. 16. Comision will annually review,and if necessary revise, its ex- pansion program for the following five years (with the assistance of consultants in the first two years). Annual reviews will also be made to up-date and revise its financing plan. The revised financing plan will serve as a basis for an annual review of Comision's electricity rates.  - 6 - 17. In order to continue to improve its efficiencyr and ability to carry out its increasing responsibilities, Comision has in recent years employed consultants to study its internal or