Mexico - Mining Sector Restructuring Project

Document of The World Bank FOR OFFICIAL USE ONLY Rvport No. 9428-ME STAFF APPRAISAL REPORT MEXICO MINING SECTOR RESTRUCTURING PROJECT MAY 30, 1991 Infrastructure and Energy Division Country Department II Latin America and Caribbean Regional Office 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 UNIT PESO (MEX$) On May 20, 1991, the exchange rate in the controlled market was US$ Mex$2980.40; and in the free market US$1 = Mex$3002. The controlled exchange rate is currently being devaluec by Mex$0.40 a day. FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES Metric System PRINCIPAL ABBREVIATIONS AND ACRONYMS USED CETES Certificados de Tesoreria (Treasury Bills) CFM Comisi6n de Fomento Minero (Mining Development Commission) CRM Consejo de Recursos Minerales (Mineral Resources Council) DGM Direcci6n General de Minas (General Directorate of Mines) FFM Fideicomiso de Fomento Minero (Trust Fund for Mining Development) FMNMM Fideicomiso de Minerales No Metalicos Mexicanos (Trust Fund for Mexican Non-Metallic Minerals) FRR Financial Rate of Return GDP Gross Domestic Product LIBOR London Interbank Offered Rate NAFIN Nacional Financiera, S.N.C. NMMP National Mining Modernization Program NMR National Mining Reserve PECAN Programa Especial Complementario de Apoyo a a Pequefia y Mediana Mineria (Small and Medium Scale Mining Project) PFI Participating Financial Intermediary SEDUE Secretaria de Desarrollo Urbano y Ecologia (Ministry of Urban Development and Ecology) SEMIP Secretaria de Energia, Minas e Industria Paraestatal (Ministry of Energy, Mines and Parastatal Industry) SMM Small and Medium Scale Mining Enterprise  FOR OFmFCIAL USE ONLY MEXICO STAFF APPRAISAL REPORT MINING SECTOR RESTRUCTURfNG PROJECT Table of Contents Page No LOAN AND PROJECT SUMMARY .....**.............* *O*OQ**p*** 1 I. THE ECONOMY AND THE MINING SECTOR ............................. 4 A. Macroeconomic Context . . . . .. .... . .*****s..... * 4 B. Sectoral Context ................ ........ 5 1. Structure and Importance ....... ................. 5 2. Institutional Framework ........ . . . . . . . . . . . ........... . 6 11. REFORM AND RESTRUCTURING OF THE MINING SECTOR ................. 8 A. Mining Sector Potential so ....... ... 8 B. National Mining Modernization Program, 1990-1994 9 C. Mineral Rights Policies . ..... 10 1. Mineral Rights Allocation System 10 2. Mineral Rights Payments ..................se*........ 11 D. Foreign Participation ........... *.. ............. 12 E. Institutional Modernization 14 1. General Directorate of Mines (DGM).......... ... 14 2. Mining Development Commission (CFM)..CF...)........... 14 3. Trust Funl for Mining Development (FFM) 16 4. Mineral Resources Council (CRM)... ...........17 F. Mining and the Environment ......... .... ts .............. 18 1. Background ......... ... . .. . .. ,** .... 18 2. Mining Sector Environmental Issues .......st............ 19 II. TEPOCT......................o...................s.......... 21 A. Project History ....... ............ .. .............. 21 B. Project Obj ectives and Jus tification ................. . 22 C. Project Description .................... . .......... 22 D. Loan Amount and Terms ..... ses.... ..... 23 E. Financing Plan ....... .......... . ... .. ..... 24 F. Institutional Arrangements .25 G. Relending Terms and Conditions .................. 27 H. Procurement ............. .................. . ..... 28 I. Disbursement . ....... ...... .. . .. 30 J. Retroactive Financing .. .................... t ... ...... 30 K. Monitoring, Reporting and Auditing . *.30 L. Benefits and Risks ..... .... .................. . . . ..... 31 IV. AGREEMENrS REACHED AND RECOMMENDATION ......... . ..soo ........... 32 This report is based on the findings of an appraisal mission and a post- appraisal mission, which visited Mexico in September 1990 ard January 1991. Mission members were: Messrs. Alberto F. Jim6nez de Lucio (Task Manager, LAZIE), N. Hughes (Original Task Manager, AS11E), F. Remy (AFTIE), P. Fozzard (AFTIE), I. Rizo (LA2IE), I. Rivera (LA2C2). M. Stoller (Cons.), T. Heintz (Cons.), T. Loomis (Cons.) and K. Rock (Cons.). Mrs. Rafaela Reff assisted in the production of this report. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its rontents may not otherwise be disclosed without World Bank authorization.  - it - List of Annexes Paso No. Annex 1. Technical Assistance Program ........................ 34 Annex 2. Auditing Requirement3 38 Annex 3. Financial Analysis of NAFIN ......39 Annex 4. Financial Analysis of CFM and FFM ... 46 Annex 5. Key Indicators for Project Implementation ........... 53 Annex 6. Estimated Schedule of Bank Loan Disbursements**.*.*nt 54 Annex 7. Selected Data and Documents Available in the Project File ................. 55 Annex 8. Supporting Tables and Charts 56 Table 1. Mining Sector Share in Output, Exports and Employment, 1970-1990 .......... 56 Table 2. Mining-Metallurgical Output, 1970-1990 ..... 57 Table 3. Mexico in World Mineral Production, 1989 ... 58 Table 4. Value of Mining-Metallurgical Output 1970-1990 ............... o... ... 59 Table 4A. Structure of the Value of Mining-Metallurgical Output, 1970-1990 ...................... .... 60 Table 5. Mining-Metallurgical Exports, 1970-1990 .... 61 Table 5A. Structure of Mining-Metallurgical Exports 1970-1990 ..... ... ....... ........... 62 Table 6. Investment in the Mining-Metallurgical Sector, 1970-1990 ............. .......... . 63 Table 7. National Mining Reserves, 1990 ............. 64 Table 8. Land Assigned Outside National Mining Reserves, 1990 ..... ................. 65 Table 9. Land Under Concession to the Private Sector, 1990 ...0 .... ................ 66 Table 10. Cost of Holding a Mineral Concession for Exploration ....... .. ................... 67 Table IOA. Cost of Holding a Mineral Concession for Exploitat*oi ...... .. ................. 68 Table 11. SEMIP Organizational Chart ................ 69 Table 11A. DGlM Organizational Chart ................. 70 Table 12. CFM Organizational Chart ............... 71 Table 13. CFM Participation in State-.wned Enterprises 72 Table 14. CRM Organizational Chart . ................ 73 Table 15. CRH Balance Sheet, 1986-19V0 ............... 74 Table 16. CRM Income Statement, 1986-1990 ........... 75 Map IBRD 22988  MEXICO MINING SECTOR RESTRUCTURING PROJECT LOAN AND PROJECT SUMMARY Borrower: Nacional Financiera, S.N.C. (NAFIN) Guarantor: United Mexican States Executing Comisi6n de Pomento Minero (CFM), Fideicomiso de Fomento Aaenciest Minero (FFM), Consejo de Recursos Minerales (CRM) and Direcci6n General de Minas (DGM) Amount: US$200 million equivalent. Terms: 17 years, including 5 years of grace, at the standard variable interest rate. Relending NAPIN would relend the proceeds of the Loan to the Guarantor Terms: and CRM. The Guarantor would further onlend to FFM the amount (US$191.5 million) to be relent through the commercial banking system to small and medium scale mining enterprises (SMMs). Subloans would be denominated in Mexican pesos or U.S. dollars at the option of the subborrower. The cost to FFM of peso funds would be the 28- day CETES (Treasury Bills) rate and the cost of dollar funds would be the three month LIBOR (London Interbank Offered Rate) plus 0.5:, in line with Mexican Internal guidelines on the transfer of external resources from the Government to trust funds. The cost to participating financial intermediaries (PFIs) in pesos and dollars would be the respective rates plus an FFM fee, adequate to cover financial intermediation costs. For both peso and dollar denominated subloans PFIs would be free to set the lending rate to final borrowers. The Government of Mexico would assume the foreign exchange and cross-currency risks on peso subloans and the cross-currency risk on dollar denominated subloans. Prolect The main objectives of the proposed project are tot a) Obiectives: support the Government's program to deregulate the mining sector and stimulate private domestic and foreign investment through the establishment of an appropriate policy and institutional framework; b) build broader financial market support to the mining industry; and c) help finance the surge in demand for investment funding that is expected to result from the improved policy and institutional setting for mining operations.  . 2 - Project To accomplish its objectives the project, in addition to e9c?irtion: providing financing for 8MMs, would support the following policy changes and institutional reforms in the mining sector: (i) liberalizing private sector access to land with mineral potential and releasing state-held mining reserves; (ii) reducing barriers to foreign investment in mining enterprises; (iii) impl.mentin8 a mineral rights policy that is conducive to an improved allocation of resources; (iv) reforming the system of mining concessions; (v) phasing out state ownership of enterprises in the sector; (vi) modernizing the government agencies providing support to small and medium scale mining enterprises; (vii) establishing environmental standards for the mining sector; and (viii) phasing out direct Government financing of mining activities. The proposed loan would provide financing fort (i) a credit component of US$191.5 million, representing 95.751 of the loan, to help fund subloans to 8MMs fcr the acquisition of fixeC assets (including pollution control equipment), permanent working capital and the development of existing mineral reserves; and (ii) technical assistance of US$8.5 million, representing 4.252 of the loan, mainly to help fund institutional strengthening programs for DGM and CRM. Proiect The proposed project would help develop Mexico's mining Benefits and sector, which is believed to have strong growth potential, Risks: in an environmentally sound manner. The recent changes in the regulatory framework providing f inter alia, increased private sector access to i -d and mineral rights, and for the streamlining of concession procedures and majority foreign ownership of mining firms, should result in higher investment by private domestic and foreign companies. Furthermore, the reorientation of the sector's policies and public institutions in favor of sctivities that directly support private mining exploration and exploitation, and the increase in commercial bank lending for mining operations that would be expected to be initiated by the project, should also lead to higher investment in the sector. Increased investment would in turn result over time in higher mining output, exports and employment. Moreover, the establishment of environmental standards for the mining industry should help ensure that the sector's development is sustainable. Policy reversals, which would be the main concern to private investors, seem unlikely given Mexico's impressive and sustained efforts to open up and deregulate its economy. Hence, the main project risks relate to issues that could adversely affect loan disbursements: a) continued low  - 3 - international metal pricese b) an overvalued exchange rate; and c) lower than expected commzrcial bank participation in lending to mining, particularly during the coming years when these banks are to be privatized. The potential negative impact of these risks is, however, ameliorated by the fact that Mexico is a low cost mineral producer, the Government has export promotion as a key objective of its economic policy and CFMIFFM have been sunceseful in the past in attracting commercial banks to financing non-metallic mining operations. Moreover, the proposed loan amount has been based on a conservative demand estimate for financial resources. In this context, the risks faced by the project are considered acceptable. Estimated Costs: Local Foreian Total (Millions of U.S. Dollars) Equipment 114.0 191.5 305.5 Civil Works (Mine Dev.) 58.0 7.0 65.0 Working Capital 31.0 - 31.0 Exploration 21.0 3.0 24.0 Techaical Assistance 2.5 8.5 11.0 TOTAL 226.5 210.0 436.5 Financina Plan: Beneficiaries 138.9 10.0 148.9 World Bank - 200.0 200.0 Government (CFM) 66.3 - 66.3 PFIs 21.3 - 21.3 TOTAL 226.5 210.0 436.5 Estimated FY92 FY93 FY94 FY95 FY96 Disbursements: 50.0 40.0 45.0 45.0 20.0 50.0 90.0 135.0 180.0 200.0 Rate of Eligible subprojects should have financial rates Return: of return (FRR) of at least 12%, reflecting the cost of capital in the ZAexican market.  -4- I. THE ECONOMY AND THE MINING SECTOR A. Macroeconomic Context 1.1 Over the past three years macroeconomic policy in Mexico centered around the "Economic Solidarity Pact" (Pacto), an agreement between business, labor and government. This agreement called for accelerated structural reform, further tightoen:ng of monetary and fiscal policy, a freeze of minimum wages and of basic public and private sector prices, and, the cornerstone of the Pacto, a freeze of the nominal exchange rate against the U.S. dollar. This partial freeze was extended at three-month intervals through the end of 1988, and was renewed with some modifications by the present Mexican Administration, under the name of "Pact for Stabilization and Growth" (PECE). The main change under the PECE was a daily adjustment of the exchange rate against the U.S. dollar. The recent extensions of the Pacto have reduced price controls. Moreover, remaining controlled and public sector prices have been increased considerably. Thus, progress has been made towards the reduction of interference in private price setting behavior. The PECE is currently running until the end of 1991. 1.2 The fiscal measures, backed by the temporary exchange rate freeze aed the array of formal and informal wage and price controls, have had dramatic success in reducing the rate of inflation, from 1592 in 1987 to 201 in 1989. Some rebounding occurred in 1990, however, as inflation rose to 30X. The increase in inflation observed in 1990 cannot be ascribed to lack cf fiscal austerity. It is due, instead, to the above mentioned loosening of price controls and upward adjustment of controlled and public sector prices. On the whole, the program has clearly been a success. It is in particular noteworthy that a major recession has been avoided; in fact, this period has seen the recovery of economic growth, as GDP rose by 3.12 in 1989 and an estimated 3.9Z in 1990. 1.3 Mexico has transformed itself throughout this period of macroeconomic turmoil into one of the most open economies in the world by undertaking an extensive trade reform. Trade liberalization, most of which took place between 1985 and 1988, has lowered the percentage of domestic (non- oil) tradeable production covered by import quotas from 100 percent in 1984 to less than 15 percent at present. Maximum import tariffs were cut by similar magnitudes. Non-oil merchandise exports, which represented less than one- third of total exports in 1984, have since doubled their share. 1.4 The aforementioned reforms have been complemented by several others. Foreign investment regulations were considerably relaxed and made more transparent. The tax system underwent a series of reforms, as marginal tax rates were brought more in line with levels in major industrial countries, repatriation of flight capital was encouraged, and sanctions for tax evasion were increased. In addition, the impact of inflation on the corporate tax system was eliminated by removing purely inflationary gains from the tax base. At the same time, the Government initiated a process of financial market liberalization. Ceilings on commercial banks' deposit interest rates and  forced allocation of commercial credit towards favored sectors were abolished, and credit subsidies through official development banks were substantially eliminated. More recently, the privatization of the commercial banks, which were nationalized in 1982, was announcel. The process of bank privatization was initiated early this year. 1.5 Notwitbstanding the far reaching reforms implemented in Mexico, international capital markets did not provide the resources needed to service the external debt. The Government therefore initiated negotiations to restructure its external debt in early 1989. On Septembor 15, 1989, the Government of Mexico and the Bank Advisory Committee representing the commercial bank creditors reached agreement on a financing package covering the period 1989-92, that entailed restructuring US$48.9 billion of Mexico's external debt. The debt relief package has reduced Mexico's net transfer to its creditors by almost $4 billion per -ear over the 1989-1994 period, i.e. slightly below 2 percent of GDP on average. 1.6 The increase in oil prices caused by the Gulf crisis has had a substantial impact on the Mexican balance of payments. The oil windfall gain in 1990 is estimated to have been around US$3 billion. The situation, however, is one of uncertainty as to the future course of oil prices. Thus, the Government recently created an oil contingency fund to insulate its 1991 budget from oil price fluctuations, assuming oil prices don't fall below US$10 per barrel on average. Finally, the Government is scheduled to begin negotiations on a free trade agreement with the United States and Canada later this year. This agreement should help to both consolidate the structural change achieved so far, and to accelerate structural change in areas where adjustment has lagged, e.g. agriculture and services. 1.7 Mexico's fiscal adjustment over the past decade has been extraordinary, its primary balance turned from a deficit of 72 of GDP into a surplus of around 5X in the mid-eighties. This surplus was further increased to between 71 and 81 of GDP in the last couple of years. The period over which the adjustment has been sustained is as impressive as its extent. Today, the fiscal balance exerts no inflationary impulse, as it can be financed without reliance on monetary financing. Thus, Mexico's fiscal adjustment is more than adequate for controlling inflation and provides cause for optimism regarding future economic growth. B. Sectoral Context 1. Structure and Importance 1.8 The mining sector in Mexico contributes 1.5X and 12 to total GDP and employment, respectively (see Annex 8, Table 1). The sector is characterized by the concentration of production in 1 few big enterprises, mostly private, that coexist with a large number of small and a handful of  medium firms '8. The total value of Mexico's mining production in 1990 Was US$2.5 billion, of which about 902 was accounted for by the big firms. Another characteristic of the sector is the wide variety of metallic and non- metallic minerals produced (see Annex 8, Table 2). 1.9 Notwithstanding its relatively small GDP share, the Mexican mining sector is a world leading producer of a number of minerals, in addition to its traditional first place in world silver production. As of 1989, Mexico was the largest world producer of bismuth, sodium sulfate and strontium. It was second in barite and fluorspar, third in graphite, antimony and soda ash; and was a leading producer of many other minerals (see Annex 8, Table 3). 1.10 While Mexican mineral production includes a large variety of minerals, it is highly concentrated in a few products. Three minerals, silver, copper and zinc, accounted for 55-65% of the gross value of production in the last decade. However, their relative contribution changed significantly over the period. Thus, between 1980 and 1990 silver (partly reflecting historic lows in silver prices) reduced its participation from 422 to 14%, copper increased its share from 162 to 302 and zinc also increased its share from 8% to 202 (see Annex 8, Tables 4 and 4A). 1.11 A substantial part (about 602) of Mexico's mineral production is exported. Thus, mining output is more linked to international mineral prices than to fluctuations in domestic market demand. Mining sector exports reached US$1.5 billion in 1990, accounting for 5.72 of total exports (see Annex 8, Table 1). Export growth over the past 10 years has been due mainly to the increased production of copper and zinc, and to a lesser extent of non- metallic minerals; which have more than offset the decline in the value of silver exports, resulting from the collapse of its price during the last decade (see Annex 8, Tables 2, 5 and 5A). Nonetheless, silver remains at the ceutter of Mexican mining today. 2. Institutional Framework 1.12 Mining in Mexico is guided by Article 27 of the ConstituticI, and the Mining Law and its "Reglamento"I (implementing regulations). The Government's supervisory body for the sector is the Secretaria de Energia, Minas e Industria Paraestatal (SEMIP), through the Subsecretaria de Minas e Industria BAsica (see Annex 8, Table 11), with the support of two General Directorates (Direcci6n General de Minas and Direcci6n General de Operaciones Minero-Metaldrgicas) and three semi-autonomous agencies (Comisi6n de Fomento Minero, Fideicomiso de Fomento Hinero and Consejo do Recursos Minerales). 1/ A small (medium) scale mining enterprise, SMM, is defined by CPM as having an annual production value not in excess of US$3.0 (US$35.0) million and a daily production capacity of less than 200-300 (2,000-2,500) tons a day for metallic and non-metallic operations, respectively. This definition is also being used to determine eligibility for Bank financing under the proposed project.  -7- 1.13 The Direcci6n General de Minas (General Directorate of Mines; DGM) administers the sector and consequently is responeible for: a) establishing mining policy; b) granting and controlling mineral concessions and assignments; c) establishing and assigning National Mining Reserves (NMRo); d) keeping the Mining Public Registry and the Mining Cadastre; and e) applying and supervising the observance of the Mining Law and its "Reglamento". The GDM employs 259 people, 127 in its central office in Mexico City and 132 in its 8 regional offices throughout the country (see Annex 8, Table 11A). 1.14 The Direcci6n General de Operacioues Minero-Metalirgicas (General Directorate of Mining-Metallurgical Operations) is responsible fors a) coordinating and controlling mining parastatal enterprises; b) preparing and reviewing sectoral programs; and c) coordinating the activities of the public institutions that provide financial and technical assistance to miners, including managing their budgets. In addition, until mid-1989 it supervised the "Programa Especial Complementario de Apoyo a la Pequena y Mediana Mineria" (Small and Medium Scale Mining Project; PECAM), established under previous Bank lending for the sector 1.15 The Comisi6n de Fomento Minero (Mining Development Commission; CFM), was established in 1934 as a multi-purpose public entity to promote and develop mining, particularly SMMs, in the metallic subsector. CFM functions as: a) a holding company for state participation in mining enterprises; b) an owner and operator of mines and beneficiation plants; c) a credit and technical assistance agency; d) qn operator of research plants and laboratories, selling services to private and parastatal enterprises; and e) a major holder of land in National Mining Reserves. CFM has a staff of 1,206 people, including 506 professionals, located mostly in its Mexico City office (see Annex 8, Table 12). 1.16 The Fideicomiso de Fomento Minero (Trust Fund for Mining Development; FFM), was created in early 1990 to replace and supersede the Fideicomiso de Minerales No Metalicos Mexicanos (FMNMM), which had been established in 1974 as a trust fund of the Government under NAFIN. The main functions of FMNMN were to promote the development of non-metallic minerals and to allow indigenous agricultural communities ("ejidos") to benefit from the non-metallic operations located within their territory. Over time FM0MM had moved away from exploration and investment activities and become mainly an efficient and fast growing credit agency; however, it remained limited to the non-metallic subsector. The new trust fund, FFM, remains under NAFIN but is administered by CFM and provides financing and technical assistance to both metallic and non-metallic SMMs. 1.17 The Consejo de Recursos Minerales (Mineral Resources Council; CRM), was established in 1955 as the public institution responsible for: a) carrying out geologic-mining exploration and quantifying the country's mineral resources; b) supporting SMMs through financial and technical assistance; c) providing recommendations to the Government on the areas and minerals that should be considered NMRs; d) advising the Government on matters related to the exploration, exploitation and preservation of mineral resources; and e) coordinating its research work with other public entities and preparing the  country's mining Seology inventory. In the paot, CRM has not limited itself to the basic infrastructure and research work characteristic of w geological survey institute, but has also spent considerabl effoit in undertaking a wide range of exploration activities, including detailed exploration and pre- feasibility work under contract and in areas over which it has control. CRH has a full time payroll of 503 people and a larger pert-time and temporary staff, spread among its central office, four regional offices and a Mexico City office (see Annex 8, Tables 14, 15 and 16). II. REFORM AND RESTRUCTURING OF THE MINING SECTOR A. Mining Sector Potential 2.1 Mexico is a countr, with vast mining potential. Its comparative advantage as a mineral producer includes: a) polymetallic ores of high quality and high precious metal content, b) a wide range of exportable non-metallic minerals, c) a low wage structure, d) a broad base o' experienced mine workers and professionals, and e) a strategic location next to its most important market, the United States, plus access to both oceans. This comparative advantage is so significant, that although exploration efforts to date have been relatively modest, Mexico is a major mineral produc6r and exporte- (para. 1.9). 2.2 Notwithstanding the above, mining is today a relatively small and declining sector within the Mexican economy. Over the past 50 years mining output has decreased from 4.01 to 1.51 of GDP. Stringent policy barriers to entry to domestic and foreign investors, as well as a complex and discretionary regulatory framework, have impeded the realization of the sector's full potential by restricting private participation (e.g. 50S of the 12 million hectares of discovered mineral land are currantly reserved for the State). This regulatory framework also resulted in a very bureaucratic and inefficient administrative structure in the public agencies that deal w-ch the sector. 2.3 The Bank shares the view of the Government that Mexico's mining sector has significant growth potential. Total annual exploration investment in the recent past is estimated at US$40 million; however, based on statistics from other countries, exploration investment could reach 8 to 1OZ of output value or about US$200 million a year, i.e. five times the current level (see Annex 8, Table 6). A comprehensive 1989 Bank study of Hexico's mining sector, entitled Reoublic of Mexico-Minina Sector Review, states that increased access to land and mineral rights, reduced foreign ownership limitations, a revision of mining tax legislation, a restructuring of the existing institutional setup, and stabilization of the macroeconomic environment are the basic elements for Mexico to more fuslly exploit its comparative advantage in the mining sector. By helping to eliminate the sector's main policy and institutional constraints, the proposed project is expected to stimulate private investment in mining by both domestic and foreign firms.  -9- B. National Mining Modernization Program. 1990-1994 2.4 The National Development Plan 1989-1994, which provides the global context for economic policy, sets as the general objectives for the mining sector: a) providing an adequate supply of mining-metallurgical inputs for local industry, b) strengthening the commercialization of mining-metallurgical products in international markets, with emphasis on those of higher value added, and c) promoting profitable transformation processes. These objectives are to be reached through the modernization of the sector. 2.5 In 1990 the Government issued a sectoral strategy program entitled "National Mining Modernization Program 1990-1994" (NMMP), which complements the National Development Plan by providing the specific policy framework for the mining sector. The objectives of said program are: increasing mining exploration; revising and updating mining legislation; modernizing mining administration with emphasis on decentralization; updating tax legislation to make mining internationally competitive and to encourage investment; strengthening the Government's promotional role, and encouraging a more direct participation by the national private and social sectors, as well as by foreign investment; maintaining state participation only in those firms that exploit strategic minerals as defined by the Constitution and the Mining Law; developing mining projects in backward areas; promoting better industrial safety and social welfare conditions for miners; and taking measures to protect the environment, reducing the contamination caused by the mining- metallurgical activity. 2.6 In order to attain the above objectives, the Government has prepared a number of specific operational programs, where detail is provided on the various actions to be taken in each case. Moreover, the Government has already taken significant steps towards executing these programs, including in particular the recent iscuance of new implementing regulations ("Reglamento") to the Mining Law, which are discussed below. Given the importance of the new regulations, agreement was reached at loan negotiations that any material change in the "Reglamento" that could adversely affect the objectives of the proposed project or any occurrence that would prevent its implementation, would be an event of default (para. 4.1, i). 2.7 It is expected that the implementation of the NMMP will result in: a 2.2-2.6S annual real mining sector output growth for the 1990-1991 period, rising to 4.5-5.0Z for the 1992-1994 period; the release for private sector devolopment of half the land currontly under National Mining Reserves (NMRs) between 1990 and 1994; and a 3.72 annual employment increase in the mining industry. Progress towards achieving these goals would be monitored through annual reviews, to be conducted joint.< between the Government and the Bank (para. 4.1, Wi). C. Mineral Rights Policies 2.8 Ownership of all mineral deposits by the Mexican Nation creates a situation in which market processes cannot operate efficiently. Therefore,  - 10 - appropriate Government mineral rights policies are needed, in particular for two closely related issues that affect mineral output: a) the criteria and procedures for allocating mineral rights to private firms and individuals, and b) the taxes and other payments attached to mineral righ.s concessions and to mineral production. A brief description of the previous situation and of the major changes introduced by the new "Reglamento" of the Mining Law in relation to these matters is provided tbelow. 1. Mineral Rights Allocation System 2.9 Two aspects of the mineral rights allocation system have been hindering development of and investment in Mexico's mineral resources: a) the vast amount of land tied up by the State and thus unavailable to the private sector for exploration, and b) the inefficient administration of the concession system. Private sector access to land and mineral rights is an essential factor for vigorous mining development, but in the past was severely limited by the Government through the establishment of national mining reserves and the issuance of decrees assigning land to public entities, and the protracted, often discretionary, processing of requests for mining rights. 2.10 NMRs can be established with respect to both areas and minerals; afterwards they can be assigned to CFM, CRM, a state-owned enterprise (SOE) or may remain unassigned (see Annex 8, Table 7). When not dealing with "strategic" or "priority" minerals, special mining concessions within reserves can be granted to private parties. The area under NMRs at year-end 1990 was 4.4 million hectares. The Government can also assign land directly to public entities and institutions by decree (see Annex 8, Table 8). The areas assigned are often those where mineralization has been detected, thus, the negative impact of this policy is more significant than may be inferred from the absolute number of hectares involved, 1.9 million as of December 31, 1990. 2.11 Mineral land not reserved by the State is made available for private sector use through concessions; at year-end 1990 the total area tinder concession was 6.1 million hectares (see Annex 8, Table 9). However, due to cumbersome procedures and inefficient administrative practices, the award of a mineral concession took on average 6 years from the date of application. Since exploration concessions were issued for 3 years and could be renewed for 3 more years, the filing of an application for a concession could effectively lock up an area for up to 12 years. Moreover, the procedures for approving the transfer of a mineral concession were also slow and complicated. 2.12 Mexican mineral rights policies are in the process of being substantially reformed to promote more etfficient development of the mineral endowment. Noteworthy are! a) the release of state-held mining reserves and restrictions on future establishment of such reserves, and b) the modernization of the admir.istrative systems for processing concessions, as to substantially reduce the time required to obtain or transfer a mir.eral concession. 2.13 With regard to its land reservation policy, the Government has decided to: (i) release for private sector development not less than 502 of  - 11 - existing NRM within four years, which under the new regulation. only require. Ministerial approvall and (ii) limit the designation of new reserves to minerals for which future scarcity can be proved. Furthermore, SEMIP now Intends to release 2.7 million hectares in 1991, thereby exceeding in a single year the four year goal set in the NMMP and significantly increasing the area with mineral potential available for concession to the private sector. 2.14 With regard to its concessions policy, the Government hass (i) *treamlined administrative practices and substituted automaticity for discretion, thereby reducing the time required to issue an ordinary concession to 1 year, which a new computerized cadastral system will further reduce to three months in the near future; (ii) eliminated the requirement for DGM prior authorization for transferring concessions, making the same similar to any other transfer of rights and providing a major stimulus to the secondary market in mineral rights, and (iii) introduced an auction mechanism for allocating "special" (i.e. within NMRs) concessions. 2. Mineral Rights Payments 2.15 An important issue in the discussion of mineral rights payments is their effect on the efficient allocation of resources. Mexico uses three types of payments: royalties (ad valorem), surface taxes and work requirements. In the past, substantial ad valorem taxes applied to mining output, whereas surface taxes and work requirements became increasingly irrelevant due to inflation. This resulted in significant distortions in resource allocation, high ad valorem taxes discouraged production and minimal surface taxes and work requirements encouraged holding idle land. 2.16 The new "Reglamento" has introduced changes in relation to mineral rights payments that complement the modernization of the mineral rights allocation procedures. Surface taxes and work requirements have been increased from negligible to moderate levels and have been tied to inflation (see Annex 8, Tables 10 and IOA). In addition, the recent Federal Rights Law eliminated royalty payments from 1991 onwards. These changes shift payments from the production phase, during which they reduce the incentive to produce, to the exploration phase, during which they provide an incentive not to hold concessions that are not worth investment in explorAtion. Moreover, the new "Reglamento" provides that the surface taxes and work requirements apply equally to private holders and to reserve holders of mineral land, thereby Introducing an incentive for public entities to release those holdings they do not intend to explore or exploit soon. 2.17 The changes recently introduced regarding the allocation system and payments for mineral rights represent a major improvement over previous land management policies. In order to evaluate the impact of the new regulations and to provide an analytical basis for adjusting the same in the future, the proposed project would include financing for two studiess a) a first one on the effectiveness of the recent changes in the regulatory framework, particularly in terms of increasing private domestic and foreign investment in mining exploration and exploitation, and b) a second one on alternative approaches to mineral rights allocation and payments, which would include a  - 12 - comparative analysis of mining policy in other countries. Before evaluating the results of the new regulations they must be in place for a reasonable period. Therefore the terms of reference and timing for the studies, to be conducted by consultants satisfactory to the Bank, would be discussed and agreed upon during the first joint annual project review (para. 4.1, iii). D. Foreign Participation 2.18 A major constraint to the growth of the mining sector, until recently, originated from a provision of the Mining Law restricting direct foreign investment. Foreign ownership of mining enterprises operating in ordinary concessions was limited to a 492 equity share, and ownership of companies obtaining special concessions on national mining reserves was further limited to a 342 equity share only. Moreover, some of the "priority" minerals (i.e. sulfur, potassium and phosphates) could only be exploited by enterprises with state majority ownership. Such limits constituted a significant barrier to entry of foreign companies and thereby discouraged foreign investment in the mining sector. 2.19 The most effective measure to promote foreign investment in the mining sector would be to eliminate the existing foreign ownership restrictions. However, such a change entails modifying the Mining Law, an action the Government considers not desirable at present. Instead, the new "Reglamento" has introduced ownership alternatives, based on the use of trust funds and a pyramiding scheme, that enable foreign investors to circumvent the limits established under the Mining Law. These ownership alternatives, discussed below, represent a very significant advance in opening up the mining sector to foreign investment. 2.20 The new "Reglamento" extends to mining the trust fund mechanism successfully used for many years in the real estate and tourism sectors. The mechanism is simple. Foreign investors can own up to 100X of a trust fund established by a Mexican financial institution, which in turn can purchase the 512 equity share of a firm reserved for Mexican ownership by the Mining Law, as the trust fund is considered to be Mexican (the other 492 can be owned outright). There are two basic types of trust funds, the first one requires prior approval from SECOFI (Ministry of Trade and Industrial Development), whereas the second one needs only be recorded in the Mining Public Registry. The first type was already contemplated in existing legislation for other sectors and has now been made applicable to mining; however, the second type of trust funds has been introduced by the new "Reglamento" and applies exclusively to mining. 2.21 Under the new type of trust funds foreign investors interested in an exploration concession can establish a 30 year, renewable, exploration trust fund. If interested in an exploitation concession, they can establish a 13 year, non-renewable, exploitation trust fund. After that period the trust fund must be Mexicanized (512 ownership must be sold to Mexicans); however, the time limit only starts to run when the beneficiation plant begins industrial scale production. In other words, the exploration, development and  - 13 - construction phases are covered by the exploration trust fund. Moreover, the foreign investor can retain ownership and control of the firm beyond said time limit by pyramiding his investment, as described below. 2.22 The other important ownership alternative introduced by the new "Reglamento" relies on a pyramiding scheme, which in the case of a firm holding an ordinary concession operates as followes foreign investors acquire 492 of the stock in firm A (the other 51% is owned by Mexicans according to the Mining Law), which in turn acquires the 51% of firm B owned by Mexicans (the other 49Z of firm B is purchased directly by the foreign investors); firm B in turn acquires the 51% of firm C owned by Mexicans (the other 492 is again purchased directly by the foreign investors), and so on. In practice, foreign investors own 872 of firm C (742 of firm B), however, since the initial firm (A) acquiring 512 of firm B owned by Mexicans is itself 512 owned by Mexicans, both firms B and C are considered to be majority owned by Mexicans, and therefore in compliance with the limits set by the Mining Law. In the case of a firm holding a special concession the scheme operates in an analogous manner, except that foreign investors can only own directly 34Z of all firms (A, B, C...). 2.23 The new "Reglamento" also extends to mining an ownership alternative already applicable to other sectors, whereby international financial development institutions can acquire stock in mining companies without limits. However, said stock does not entitle its owner to management control (it is considered neutral), which remains in Mexican hands. Finally, the new regulations allow local private firms to exploit priority minerals previously limited to enterprises with state majority participation. 2.24 As a result of the aforementioned changes, the business climate for private investment in the mining sector has improved considerably and there are already indications of significant investor interest, reflected in the hiring of local law firms by foreign companies to set up trust funds for investment in mining. The potential contribution of foreign firms to the Mexican mining sector is not only investment in general, but also opening new mining districts outside the traditional mining areas where local firms prefer to invest, and improving the efficiency and productivity of the sector through the use of modern technologies. In addition, the geographical locatior- of Mexico should attract small scale foreign miners, who could bring risk capital and adequate technologies to the small and medium mining subsector.  - 14 - E. Institutional Modernization 1. General Directorate of Mines (DGM) 2.25 The implementation of the Mining Law's new "Reglamento" requires the use of modern technology and oystems, which will represent a qualitative change in the way DGM presently functions. More specifically, DGM's document control system, mining cadastral system (including both the public registry and cartographic offices), obligation control system and the statistics office are being reformed. This modernization will result in decentralization of many processes and increased effectiveness by: a) establishing more systematic, automatic and computerized internal controls and procedures, b) eliminating redundant and unnecessary requirements, and c) utilizing state of the art technology. 2.26 Agreement has been reached with DGM on a program to implement the modernization described above, to be partly funded by the proposed Bank loan (para. 4.1, iv). At present, off-the-shelf specialized software is being adapted and hardware is being installed for the areas of Document Control, Public Registry and Cartography, with financing under the Bank's seccnd small and medium scale mining project (PECAM II, Loan 2546-HE). In addition to the activities already under way, the program entails the acquisition of sottware and hardware for the areas of Control of Obligations and Statistics, the completion of the mining geodetic net of Mexico and the interconnection between DGM offices. These activities would require an estimated US$1.257 million in financing from PECAM II and US$0.790 million from the technical assistance component of the proposed loan (see Annex 1). 2.27 CFM would make loans to mining experts for the acquisition of positioning equipment, necessary to complement the installation of the mining geodetic net; up to an aggregate amount of US$0.8 million. In addition, the program requires the Government to train and hire adequate personnel, as well as to relocate DGM's head office, i.e. to provide DGM with the appropriate staff and working environment to achieve its objectives. Progress in the implementation of the modernization program would be assessed during the joint annual project reviews (para. 4.1, ii). 2. Mining Development Commission (CFM) 2.28 In early 1988, while preparing the Mining Sector Review, the Bank found that CFM was experiencing difficulties in all its activities. It could not manage effectively the large number of companies in which it held equity positions, its beneficiation plants were suffering substantial operating losses, and its direct lending operations were plagued by mounting loan arrears. Moreover, this adverse situation was not adequately reflected in the financial statements due to an inadequate accounting policy. Since FMNMM's competent former management assumed control of the institution in 1989, significant steps heve been taken to transform CFM into a more effective and efficient development agency.  - 15 - 2.29 First, CFM began an active policy of divestment and transfer of its equity participation in mining companies to the private sector, decreasing from 44 to 11 the firms in which it has an ownership interest, and intends to sell three more companies during 1991 (see Annex 8, Table 13). Moreover, it discontinued its involvement in the promotion (i.e. taking equity positions) of new mining projects. 2.30 Second, CFM sharply raised the traditionally low ore processing fees charged by its money-losing beneficiation plants. Furthermore, given the persistent deficits of its beneficiation plants, during 1990 CFM decided to sell or close down its main loss makers, and to experiment with the purchase of ore instead of tolling it for a fee. Ore trading is, however, expected to present its own difficulties due to fluctuations in the p-ice of metals. The economic viablity and overall adequacy of CFM's ore purc 4sing practices would be assessed during the joint annual project reviews, and adjustments introduced as needed (para. 4.1, ii). At present CFM operates 14 beneftciation plants and one mine ("El Bote"). 2.31 Third, CFM management introduced proper accounting policies and procedures for its loans, which made evident a serious portfolio problem. CFM's response to the problem was to significantly increase the provision for loan losses and to establish a committee to determine each project's true condition. The committee has determined that additional provisions for an estimated amount of Mex$72,000 million are still needed to fully write off CFM's non-recoverable loans, i.e. to clean up the institution's balance sheet. Agreement was reached during loan negotiations regarding the size and timing (September 30, 1991) of the necessary additional loan-loss provisions (para. 4.1, v). Non-recoverable loans (about 500) are being transferred to private collection agencies for collection on a commission basis. The salvageable portion of the portfolio (about 100 loans) will be subject to a restructuring exercise focussed on the 35 largest loans, which account for most of the arrears (see Annex 4). 2.32 Fourth, as a result of the difficulties on its credit operations CFM decided to: a) substantially suspend its long term first-tier lending operations (see para. 2.39); b) ckannel PECAM reflows to FFM for onlending through commercial banks; and c) upgrade staff capabilities in (i) credit analysis and management and (ii) technical appraisal and feasibility studies (plus use external geologic consultants for larger projects). Agreement was reached during loan negotiations to include under the project's technical assistance component training for CFM staff on project evaluation and supervision (para. 4.1, iv). 2.33 The decisions taken by CFM's managemer.. aim in the right direction and have improved the financial position of the institution, but need to be complemented with additional measures taken within a long term framework, i.e. with a clear view of the institution's future role. Thus, institutional restructuring and strengthening of CFM would focus on establishing: a) a planning and programming capability, and b) sound operating policies and procedures that ensure financial viability. To this effect, a comprehensive policy statement and a five-year financial plan have been prepared by CFM,  - 16 - reviewed by the Bank, and agreed upon during loan negotiations (para. 4.1, vi). 2.34 Another major element in defining CFM's framework for future operations is the preparation of a 5-year business plan for its beneficiation plants, currently under way. Presentation of said plan by December 31, 1991, and a comitment to put it into effect, in a manner satisfactory to the Bank, not later than June 30, 1992, were agreed to during loan negotiations (para. 4.1, vii). The remaining "El Botes mine will be sold In line with CFM's recent Board decision. In addition, a program to deal with its problem portfolio has also been prepared by CmH, reviewed by the Bank, and agreed upon during loan negotiations (para. 4.1, vi). Progress in the implementation of both CPM's plan for beneficiation plants and its program for dealing with the problem portfolio would be examined during the joint annual project reviews (para. 4.1, ii). 2.35 Finally, CFM has retained a consultant to study its organizational structure in the context of: a) the Government's mandate to decentralize its operations, b) its emergence as a large second-tier financial institution serving the entire mining sector, c) its sharply reduced role as a holding company for state-owned enterprises, and d) its 5-year business plan for beneficiation plants. The consultant's report is expected by mid-1991. At loan negotiations agreement was reached that this report be furnished to the Bank for review not later than September 30, 1991, and that the Bank be kept informed of any proposed modification to CFM'E organizational structure (para. 4.1, viii). 3. Trust Fund For Hining Development (FFN) 2.36 For many years since its establishment, FMNMM was virtually the sole direct lender to SMMs in the non-metallic mining subsector. It was only when FMNMM, with the support of the Bank, established a second-tier facility offering technical assistance in subproject identification and evaluation, as well as long-term financing to complement working capital financing from commercial banks, that the latter began to show interest in the subsector. Today, all financing provided to non-metallic enterprises is channelled through rediscount operations. Meanwhile, CFM maintained a direct lending relationship with metallic mining enterprises and commercial banks refrained from financing the subsector, mainly due to their inability to compete against CFM on account of its relaxed policy concerning arrears. 2.37 In 1989 the Government integrated the organization and operations of CFM and FMNMM, though they remained two separate legal entities, in an effort to rationalize its financiel and technical assistance support to small and medium mining. Furthermore, ia 1990 the Government broadened FMNMM's mandate to include the metallic mining subsector and changed its name, as indicated above. The new institution, FFM, remains a separate legal entity, but has no organizational structure and staffing of its own. An agreement between FFM and CFM, formalizing the latter's responsibility for the administration of the trust fund, has been signed and a copy provided to the Bank.  - 17 - 2.38 'he next step towards meeting the objective of phasing out direct financing of mining activities by the Government is to induce commercial banks to lend more to mining enterprises, particularly in the metallic subsector. A basic condition to this effect has already been fulfilled with the introduction of appropriate accounting and credit policies regarding overdue loans. Now it is necessary to familiarize commercial banks with the subsector and to develop their capability to evaluate metallic mining projects. Thus, CAM has prepared an ^dhoe program of promotion and technical assistance. This program has been reviewed by the Bank and agreed upon during loan negotiations (para. 4.1, vi). 2.39 At p-esent commercial banks finance 512 of the borrowing needs of SMMs, the Government's objective is to increase that percentage to 701 by 1994. Progress towards achieving the objective of increasing commercial bank financing to the sector would be assessed during the joint annual project reviews, together with a discussion of further measures that may be required (para. 4.1, ii). 2.40 During the transitional period until such time as commercial banks begin to actively seek and compete for mining business, CFM intends to continue to exercise its mandate to lend directly to artisan and small scale metallic miners. However, CFM would channel most of its resources, including all the proceeds from the proposed Bank loan and the reflows from the two PECAM projects, through its second-tier facility (FFH). During loan negotiations agreement was reached that CFM would engage in first-tier lending only for financing short-term working capital needs of SMs, and that its combined (CFM plus FFM) direct financing operations as percentage of total annual lending volume would not exceed, on an annual average basis, .:5X for 1991, 23% for 1992, 20% for 1993, 17Z for 1994, and 152 for 1995 and thereafter (para. 4.1, ix). 4. Mineral Resources Council (CRM) 2.41 The new management of CRM, in line with Bank reco-mendations, has been working over the past year to reorient the institution's activities away from the exploration and promotion of prospects in reserved areas and toward the data gathering and development work characteristic of a geological survey institute. The emphasis in CRM's future work will be on mapping, regional exploration, mineral inventories, collection and storage of relevant geological data, dissemination of geological information, deposit-model recognition, technical assistance (geology/deposit appraisal) to small scale miners and other similar related activities. 2.42 CRM has prepared a 5-year business plan, which spells out the institutional reorientation being pursued in terms of objectives, strategies and specific programs for the 1991-1995 period. The Bank has reviewed the plan and found it to be consistent with CRM's goal of becoming a modern geological survey institute. This document, agreed upon during loan negotiations, includes the recommendations resulting from three recently completed expert consultancy studies, a first one on CRM's aerial reconnaissance and ground verification work, a second one on CRE's laboratory  - 18 - operations, and a third one on CRM's information network (para. 4.1, vi). Progress in the implementation of the business plan would be assessed during the joint annual project reviews (para. 4.1, ii). 2.43 To support CRM in its efforts to become a modern geologic survey institute, funds would be provided under the technical assistance component of the project for: a) development of a computerized information network to handle exploratory and administrative work data; b) evaluation visits to sites with mineral potential; c) acquisition of laboratory equipment and the general upgrading of laboratory facilities; d) purchase of cartography and geophysical equipment; and e) training of personnel in Mexico and outside. These activities have an estimated total cost of US$6.812 million (see Annex 1) and were agreed to during loan negotiations (para. 4.1, iv). F. Mining and the Environment 1. Background 2.44 Over the last three years there has been increasing environmental concern and awareness in Mexico, reflected in the enactment of the General Ecology Law in early 1988, as well as in the establishment of mandatory environmental assessments (EAs) for new projects and for expansion of existing projects. In addition, the Ministry of Urban Development and Ecology (SEDUE), created in 1982, has promulgated general standards for air, water, and solid (including hazardous) wastes; and is now in the process of establishing industry-specific norms. 2.45 SEDUE is the public entity responsible for the implementation of the General Ecology Law, its functions include: a) establishment of regulations and norms or standards for the various industries and guidance on and review of EAs; b) identification and designation of ecologically sensitive or unique areas and ensuring that new projects do not conflict with these protected areas; c) inspection of facilities and operations for environmental compliance and responding to citizen complaints or requests by other agencies; and d) environmental education and community participation in environmental protection. 2.46 SEDUE maintains a delegation in each of Mexico's 31 States. These delegations monitor and enforce compliance by local firms with the general standards for discharges to air and water. Much of the enforcement is based on local complaints and it is generally sought to resolve problems by reaching agreement with the companies involved. SEDUE "letters of compliance", instructing companies to take corrective action, are often issued after minor problems are detected. For larger and more significant environmental problems, an assessment is made and formal agreements negotiated between SEDUR and the company involved. These agreements involve commitments for significant investments in environmental controls and are generally undertaken only by large companies.  - 19 - 2.47 Regulations for environmental assessments of new projects were published in late 1989, which are satisfactory. These regulat4Ons establish detailed requirements for the contents of an EA. The first step in the EA process is for the applicant to submit basic project information (i.e. a brief description of the project and process) to SEDUE. The information is used to determinet a) if the project site lies within an ecological reserve area as shown on maps prepared by SEDUE, and b) if not, which of three types of EAs will be required for the project. 2.48 Present SEDUE policy is to reject any projects proposed within ecological reserve areas. If the Gite is not within a restricted area, a decision is then made about whether to require a general, intermediate, or specific EA; which must be prepared by experts registered with SEDUE. Although EAs are required for all projects (including CFM financed mining projects), small projects with relatively minor environmental impact usually require only a general EA. Large projects, however, require a specific EA, which entails a detailed assessment of potential environmental problems. Once completed the EA is sent to SEDUE for review. Currently, SEDUZ's capability to effectively review mining sector environmental assessments is limited and only in few cases are EAs rejected. 2.49 SEDUE is ir. the process of establishing an ordering system for different ecological reserve areas. The ecological order assigned to an area will help determine if a proposed use is prohibited outright, allowed with conditions, or allowed with no conditions. The ecological ordering system is being developed with input from industry and is currently in a formative stage. Ultimate plans at SEDUE are to establish a framework for environmental and ecological planning that can be used by all 31 States in Mexico. The plan would require the States to notify SEDUE at an early stage about the major projects (including mining projects) that are intended to be carried out in their jurisdiction, and thus would help ensure that the potential environmental impact of these projects is considered in the planning process. SEDUE anticipates that the framework will be introduced in 1992. 2.50 At present the Bank is advanced in the preparation of an Environmental Project for Mexico, which aims to: a) reform and strengthen the administrative structure of SEDUE's federal and state offices; b) support development of a sectoral strategy and a coherent policy framework; and c) support SEDUE's efforts in three critical areas: (i) monitoring and control of water and air pollution, (ii) minimizing negative environmental impacts of investment projects, and (iii) conservation of biodiversity. This project would improve SEDUE's overall capacity to design and enforce environmental policy. 2. Mining Sector Environmental Issues 2.51 From the proposed project's perspective, the major shortcoming of the present environmental regulatory context is the lack of specific standards for the mining industry. Existing norms for industrial discharges to air and  - 20 - water are general in nature and do not addreGs the major environmental and safety problems associated with mining operations, which includes stability of tailings impoundments, discharges to air from smelters and refineries, mine dumps, wastewater discharges and reclamation. Industry-specific standards would provide a rational basis for project planning, meaningful environmental assessment and would facilitate monitoring and enforcement. 2.52 A second significant shortcoming refers to the limited effectiveness of the current mining environmental risk evaluation process. Existing legislation and regulations have established the framework for an effective environmental assessment and review process for mining sector projects. Unfortunately, the EA process is not yet well established at SEDUE and needs to be improved. Viewed within a broader context, including other governwent agencies and private industry, the process of environmental planning, impact assessment, and mitigation for the mining sector is generally at an early stage of development. ..53 Under the proposed project, industry-specific standards would be established for tailings dams, smelters and refineries, mine dumps and wastewater discharges. To this effect, SEMIP has signed an agreement with SEDUE, CFM and CMM (Camara Minera de Mexico) to establish a working group. The working group would initially attend a specially designed course at the University of Colorado School of Mines. Upon its return it would begin drafting the standards with the assistance of an international expert on the subject. The process would include a two month diagnosis of the environmental impact of mining operations in the major mining districts and would take into consideration the results of a study to be conducted by Japan's International Cooperation Agency on three of CFM's beneficiation plants. During loan negotiations agreement was reachec to have the new standards, satisfactory to the Bank, established by June 30, 1992 (para. 4.1, x). 2.54 To support the Government's efforts to establish environmental standards for mining operations US$0.155 million would be provided under PECAM II to: a) train the working group that would draft the standards, b) implement the two month study of environmental problems associated with current mining operations, and c) carry out other activities directly related to setting the standards. In addition, in order to facilitate implementation, monitoring and compliance with the standards to be issued, the proposed project would include US$0.150 million to fund workshops and other related activities, aimed at raising awareness and explaining the new environmental regulations (see Annex 1). Progress in the establishment and enforcement of the environmental standards would be monitored during the joint annual project reviews (para. 4.1, ii). 2.55 Once in place, the new environmental standards for the mining sector would apply to all new projects, including all subprojects presented for Bank financing under the proposed loan. In the meantime, all subprojects would have to comply with existing SEDUE regulations and procedures. In addition, CPM would be required to provide to the Bank a concise statement concerning the environmental impact of each subproject before any subloan is approved. Moreover, CFM would assume the obligation to provide advice to SMMs  - 21 - on how to deal with their respective project's potential environmental problems. Agreement to this effect was reached during loan negotiations (para. 4.1, xi). In order to satisfactorily fulfill the above two commitments CEM would strengthen its environmental capability, mainly through training, as agreed during loan negotiations (para. 4.1, iv). III. THE PROJECT A. Proiect History 3.1 Past Bank Experience. Past Bank lending for mining has been mostly oriented towards specific investment projects, limited experience exists with directed lines of credit to the sector as a whole (Loan 1290-BO, Credit 455- BO, Loan 1820-ME and Loan 2546-ME). Nonetheless, some important lessons emerge from previous operations, the main one is that investment in mining exploration and exploitation depends not only on the availability of funds, but more importantly on the existing policy and institutional framework. Policies that hinder private sector participation and institutions that impose cumbersome and unnecessary controls and procedures, constitute serious constraints to mining sector growth. 3.2 As indicated above, there have been two line of credit operations for mining to Mexico: the First Small and Medium Scale Mining Project (Loan 1820-ME) and the Second Small and Medium Scale Mining Project (Loan 2546-ME), i.e. the PECAM projects. In addition to the lesson outlined in the preceding paragraph, other lessons extracted from the PCR for the first PECAM project and the supervision reports for the second one, are the importance of avoiding lending segmentation and of addressing environmental issues. Under the PECAM projects there were three public institutions lending to SMMs and up to five investment categories. These arrangements proved highly inefficient. Furthermore, under those projects the potential environmental impact of mining projects was given cursory consideration. All these lessons have been taken into account in the design of the proposed project. 3.3 Proiect Origin. Notwithstanding previous Government efforts and the two Bank PECAM projects, investment in the mining sector remained below the levels reached in other countries with similar mining potential. A 1989 Bank Mining Sector Review (Report No.7379-ME) identified an inadequate regulatory and institutional framework as the major constraint to increased private investment and further growth (para. 2.3). The Government agreed with the report's findings, began to implement key recommendations and requested Bank support in achieving a full transformation of the mining sector. Thust the Mining Sector Restructuring Project (MSRP) was identified in conjunction with the Government in FY89, during discussion of the above mentioned mining sector report. The project was appraised during September 9-28, 1990 and a post-appraisal mission visited Mexico from January 21 to February 1, 1991. Loan negotiations took place in Washington from May 8 to May 16, 1991. The Mexican delegation was headed by Mr. Jose Garcia Torres from NAFIN.  - 22 - B. Project Obiectives and Justification 3.4 Ob1ectives. The main objectives of the proposed MSRP are tot a) support the Government's program to deregulate the mining sector and stimulate private domestic and foreign investment, through the establishment of an appropriate policy and institutional framework; b) build broader financial market support to the mining industry; and c) help finance the surge in demand for investment funding that is expected to result from the improved policy and institutional setting for mining operations. 3.5 Justification. In the more developed countries venture capital plays a major role in financing mining exploration and thereby sector growth. In Mexico no such market exists for small and medium scale mining enterprises. The Bank has partially filled this gap through the two PECAM operations, which made available almost US$145 million in term credit facilities to the sector; most of which were channr ed through the banking system and CFM's small mining credit operation. The Bank projects were instrumental in providing SMM8 with access to otherwise unavailable long- .erm investment financing. It has been estimated that the resotnrces mobilized by the two projects led to a 7% increase in sector output. 3.6 Mexico's financial sector is undergoing a major reform. It has become essentially market oriented, with the Government phasing out subsidized interest rates and first-tier lending by developmant banks and trust funds. Moreover, initial actions to privatize the commercial banks have been taken, a process that is expected to be completed in about two years. During that period and for sometime afterwards the newly privatized commercial banks are likely to be reluctant to engage in lending to sectors with a limited track record to assess risks (for a sample of 10 major banks the mining portfolio accounted for only 0.22 of their total portfolio), in particular to a sector such as mining, which is itself undergoing major policy reforms. This situation justifies the proposed Bank loan, that would provide credit to the mining sector during the transitional period until commercial banks become actively engaged in funding mining operations. In line with present Bank policy on directed credit, this loan is expected to be the last line of credit operation for mining to Mexico. C. Proiect DescriRtion 3.7 To accomplish its objectives the proposed MSRP, in addition to providing financing for SMMs, would support the following policy changes and institutional reforms in the mining sectort (i) liberalizing private sector access to land with mineral potential and releasing state-held mining reserves (paras. 2.7, 2.13); (ii) reducing barriers to foreign investment in mining enterprises (paras. 2.20-2.23); (iii) implementing a mineral rights policy that is conducive to an improved allocation of resources (para. 2.16); (iv) reforming the system of mining concessions (para. 2.14); (v) phasing out state ownership of enterprises in the mining sector (para. 2.29); (vi) modernizing the government agencies providing support to small and medium scale mining enterprises (paras. 2.25-2.27, 2.28-2.35, 2.41-2.43); (vii) establiching  - 23 - environmental standards for the mining sector (paras. 2.53-2.54); and (viii) phasing out direct Government financing of mining activities (paras. 2.38- 2.40). 3.8 More specifically, the objectives of the proposed project would be reached throughs (i) helping to implement a revised legal framework ("Reglamento" of the Mining Law) which, inter alia, liberalizes private sector access to land and provides for the release of NMRs, permits majority foreign investment in mining enterprises and establishes a modern mineral rights policy; (ii) streamlining the present system for granting and administering mining concessions; (iii) implementing a comprehensive and well focused five- year business plan for CFM, that includes a policy statement, a five-year financial plan, a business plan for its beneficiation plants and a program to deal with its problem portfolio; (iv) implementing a suitable five-year business plan for CRM, that includes a program for aerial reconnaissance, the modernization of laboratory services and the establishment of a computerized information network; (v) setting up an inter-agency work group to establish environmental standards for mining sector operations; and (vi) undertakinag a program to induce commercial banks to finance mining projects, particularly in the metallic subsector. 3.9 The proposed project has a significant technical assistance component that would help improve the capabilities of DGM, CFM and CRM to perform their new roles more effectively (paras. 2.25, 2.26, 2.42 and 2.43). Importan.t elements of the proposed MSRP include: a) the modernization of DGM's system of mining administration and control; b) two studies, one to evaluate the results from the recently introduced ihanges to mining regulations and the other to explore the possibility for as %urther policy adjustmonts in the future; c) the establishment of industry-specific environmental standards for mining; d) the training of CFM personnel to improve their project evaluation and supervision skills, as well as their capability to provide advice on the potential environmental impact of mining projects; and e) the upgrading of CRM's capability to generate, process and -'..vulge geological information (see Annex 1). 3.10 The proposed loan would provide fi ancing for: (i) a credit component of US$191.5 million, representing 95.752 of the loan, to help fund subloans to small and m3dium scale mining ezterprises for the acquisition of fixed assets (including pollution control equipment), permanent 3rking capital and the developmont of existing proven mineral reserves; and (ii) technical assistance of US$8.5 million, representing 4.252 of the loan, mainly to help fund institutional strengthening programs for DGM and CRM. D. Loan Amount and Terms 3.11 The proposed Bank loan would be for US$200 million. The loan would have a maturity of 17 years, including 5 years of grace, and it would be made at the Bank's standard variable interest rate.  - 24 - 3. Financing Plan 3.12 The proceeds from the Bank loan would help finance investments in metallic and non-metallic mining suLprojects for an estimated total amount of US$436.5 million equivalent. This figure includes project related technical assistance in the amount of US$11 million. Based upon the experience from PECAM II, the proposed Bank loan would be expected to finance 46Z of total project costs (see table below). The balance would be covered as follows: 341 by the beneficiaries, 151 by CFM 151 and 52 by the participating financial intermediaries (PFIs). PFIs would bear the credit risk on all subprojects and would be required to gradually increase their minimum average financing contribution using their own resources to: 52 during the period from July 1, 19i2 to June 30, 1993; 102 from July 1, 1993 to June 30, 1994; and 202 thereafter. Agreement to this effect was reached during loan negotiations (para. 4.1, xii). Proiect Financing Plan (Millions of U.S. Dollars) Mining Credit T. Assistance Total Proiect nSS z USS I uss s Beneficiaries 148.9 35.0 - - 148.9 34.1 World Bank 191.5 45.0 8.5 77.3 200.0 45.8 Government (CFM) 63.8 15.0 2.5 22.7 66.3 15.2 PFIs 21.3 5.0 - - 21.3 4.9 Total 425.5 100.0 11.0 100.0 436.5 100.0 3.13 Taking into consideration the different financing needs of individual subprojects and in order to allow sufficient flexibility in the application of project funds, the 502 Bank financing guideline would be applied on an average basis for subprojects as a whole rather than for each individual subproject. However, the maximum financinrg to be provided with Bank funds for any individual subproject would be 802 of its total cost. If the cumulative share of funding provided by the Bank is found to exceed the 502 average guideline, the ceiling on individual subprojects would be reduced temporarily. To monitor that the financing provided is in line with this agreement, CFM would inform the Bank quarterly, starting on September 30, 1991, on t1a funding granted to each subproject and would provide annually, starting on June 30, 1992, a composite financial plan for the project based upon actual disbursements. Agreement to this effect was reached during loan negotiations (pars. 4.1, xiii).  - 25 - F. Institutional Arrangements 3.14 Prolect Implementation. Under the Bank's previous two loans (the PECAN projects) to the mining sector a coordinating agency was organized to serve, inter alia, as a credit committee that would review a percentage of the projects presented for financing. In practice, however, the coordination and credit committee functions proved to be of little value and in the past two years the coordinating agency has become inactive. Under the proposed loan CFM would act as project coordinator and would therefore be the main interlocutor with the Bank on project implementation. Specific implementation responsibilities are outlined in the following paragraphs. 3.15 The Borrower and Guarantor. The Borrower for the proposed Bank loan would be NAFIN and the Guarantor would be the United Mexican States. NAFIN, established in 1934, is Mexico's largest development bank and is the borrower under 22 Bank loans currently in the stage of execution. NAFIN would be responsible for the establishment and management of the Special Account that would be set up for the project (para. 3.30). In addition, NAFIN would also be responsible for relending the proceeds of the Loan to the Guarantor and to CRM, as appropriate. The Guarantor would further onlend to FFM the proceeds of the loan allocated to finance the credit component of the proposed project. Presentation to the Bank of satisfactory signed and legally binding contractual arrangements between NAFIN, the Guarantor, FFM and CRM, would be a condition of loan effectiveness (para. 4.2). 3.16 Financial Position of NAFIN. NAEIN is a financially sound and creditworthy institution (see Annex 3). As described briefly below, NAFIN'S financial position has improved significantly since its reorganization in early 1989, due to: a) new operating policies, i.e. (i) focusing on low risk second-tier lending, (ii) limiting equity participation in private sector companies to 25% or less of the company's outstanding shares, and (iii) divesting itself from its holdings on public sector enterprises; and b) the sale to the Government of its huge non-performing public sector portfolio. 3.17 Until year-end 1988 NAFIN was a highly leveraged institution with a thin capital base. However, during 1989 the institution's net capital increased by about US$817 million equivalent, a consequence of the: a) merging of sevoral trust funds, with their own resources, which NAFIN and Banco de Mexico previously administered; b) capitalization of overdue interest payments on loans to the Government; and c) surplus from the revaluation of its remaining investments. As a result, the ratio of net worth to total assets increased from 5.9% at year-end 1988 to 11.31 as of December 31, 1989. This ratio declined to 10.7% at year-end 1990 due to write-offs on its "Minera de Cananea" investment, however, it remains very satisfactory for a second tier institution. 3.18 The quality of NAFIN's first-tier portfolio, in which the institution bears the full credit risk, has also improved significantly since the reorganization. This improvement is primarily the result of: a) the sale to the Government of US$4.7 billion equivalent of non-performing loans to  - 26 - parastatals and public trust funds, and b) US$563 million equivalent in write- offs related to its "Minera de Cananea" and "Minera de Autlan" portfolio. Arrears as a percentage of total first-tier outstanding loans (US$ 1.2 billion equivalent) reached 5.7Z as of December 31, 1990. However, NAFIN's remaining portfolio is well diversified and adequate loan loss provisions have been made. In addition, NAFIN's investment portfolio, with a book value of about US$124 million equivalent, is well diversified among 31 mostly public sector companies, several of which are being privatized. 3.19 Finally, NAFIN's profitability has also improved in recent years. Return on assets (ROA) increased from 0.212 in 1988 to 0.692 by year-end 1990, while return on equity (ROE) increased from 3.52 to 5.72 over the same period. The low return for 1990 reflects large charges for bad loans made against the year's results, otherwise ROE would have been 28.22, i.e. about equal to the rate of inflation. NAFIN's financial margin was about 1.92 in both 1989 and 1990, slightly below the average for international money center banks. 3.20 Executina Agencies. The executing agencies for the proposed loan would be CFM/FFM, CRM and DGM. All are experienced and capable institutions that can be expected to perform adequately their respective functions under the proposed project. CFM/FFM would onlend the proceeds of the loan to PFFI, in accordance to terms and conditions satisfactory to the Bank (an analyeis of the financial situation of CFM and FFM is presented in Annex 4). Agreement was reached during loan negotiations on the operating guidelines applicable to subloans (para. 4.1, vi). In addition, agreement was reached with CFM during loan negotiations on maintaining adequate staffing to discharge all its functions under the project effectively (para. 4.1, xiv). CFM would also participate in the technical assistance component of the project, along with CRM and DGM. All executing agencies would be involved in the joint annual project reviews. 3.21 Financial Intermediaries. The financial intermediaries eligible to participate in the project would be all legally established commercial banks, that are willing to comply with the following -equirements: a) observe CFM/FFM's operating guidelines; b) ensure that Bank procurement and disbursement provisions are met; c) provide all reasonable project related information requested by CFM and the Bank; and d) assume the credit risk for the subprojects rediscounted with CFM/FFM. 3.22 Over the past several years all major commercial banks and many of the smaller ones have developed adequate capacity to undertake term lending operations in the industrial, agro-industrial and the non-metallic mining sectors. However, the limited experience of commercial banks in term lending to SMMs operating in the metallic subsector would require that CFM carry out initially the technical evaluation for this type of subprojects. Supervision would be performed jointly by the commercial banks and CFM. With the purpose of progressively transferring to the banks the responsibility for subproject appraisal and supervision, CFM would implement a technical assistance program to train thia commercial banks' staff, as discussed above (para. 2.38).  - 27 - G. ellnding Terms and Conditions 3.23 OnIgnding Rateo. The loan proceeds allocated to the credit component of the proposed project (US$191.5 million) would be onlent by YFM, through PFIs, to help fund subloans to SMM8. Subloans would be denominated in Mexican pesos or U.S. dollar., at the option of the subborrower. The cost to FFM of peso funds would be the 28-day CETES (Treasury Bills) rate and the cost of dollar funds would be the three month LIBOR (London Interbank Offered Rate) plus 0.52, in line with Mexican internal guidelines on the transfer of external resources from the Government to trust funds. The cost to PFIs in pesos and dollars would be the respective rates plus an PFM intermediation fee, satisfactory to the Bank, which would be adequate to cover financial intermediation costs, including administrative costs, an adequate return on capital and provision for losses. For both peso and dollar denominated subloans PIle would be free to set the lending rate to final borrowers, i.e. the interest rates charged under the proposed project would be based upon market conditions. 3.24 The loan proceeds allocated to the technical assistance component of the proposed project (US$8.5 million) would be transferred to DGM and CRM in pesos at the CETES rate. Agreement on the interest rates and fees applicable under the project, as well as on examining their adequacy during the joint annual project reviews, was reached during loan negotiations (para. 4.1, xv). 3.25 Maturities and Grace Periods. The terms for each specific subloan would take into account the economic life of the assets to be financed and the repayment capacity of subborrowers. Fixed assets subloans would have a maximum maturity of 13 years, including a grace period of up to three years; and working capital subloans would have a maximum maturity of five years, including a grace period of up to one year. 3.26 Maximum Loan Amount and Free Limit. The maximum amount of Bank financing to any individual subproject would be US$5 million equivalent. A cumulative limit of to US$10 million equivalent would apply for subloans made to any SMM, individually or together with its related companies. Based on the positive experience with the PECAM I and II operations, aubprojects under a free limit of US$1.5 million equivalent would not require prior Bank approval. It is expected that about 202 of the subprojects, representing about 401 of loan resources, would be subject to prior Bank approval. 3ubprojects financed through subloans would have to yield financial rates of 'Aturn of not less than 12Z, reflecting the cost of capital in the Mexican .'et.  - 28 - H. Procurement 3.27 Procurement of Goods and Works under tho Technical Assistance Component. The participating institutions (CRM and DGM) would have the responsibility for ensuring the competitiveness, in price and quality, of the items procured and their suitability for the purpose intended. Consultant services financed with loan proceeds would be open to international recruitment, and corresponding Bank guidelines would be applied. Goods and works estimated to cost per contract: (i) less than US$50,000, would be procured under local shopping provided, however, that the aggregate amount for works does not exceed US$250,000; (ii) between US$50,000 and US$250,000, would be procured under local competitive bidding; and (iii) more than US$250,000, would be procured under international competitive bidding (ICB) according to Bank guidelines. 3.28 Procurement of Goods and Works under the Line of Credit Component. Contracts estimated to cost US$5 million equivalent or more would be procured under ICB procedures, in accordance with Bank guidelines. Contracts estimated to cost between US$1.5 million and US$5 million equivalent, would be procured through shopping procedures acceptable to the Bank, requiring at least three responsive price quotations from eligible suppliers. For contracts costing less than US$1.5 million, procurement would be done under established commercial procurement practices acceptable to the Bank. In all cases under both the technical assistance and the credit line components, a preference margin of 15i or the applicable duty, whichever is lower, may be granted to local producers under ICB contracts for goods, in accordance with Bank guidelines. 3.29 Prior Review of Procurement Decisions. Procurement documentation for all ICB contracts for goods and works would be subject to the Bank's prior review. In addition, the procurement documentation for the first three contracts for goods and works under the line of credit component, estimated to cost US$1.5 million or more but less than US$5 million equivalent (i.e. subject to shopping procedures), and the first three LCB contracts under the technical assistance component, would also be subject to the Bank's prior review.  - 29 - Procurement Method (Millions of U.S. Dollars) Project Element ICB LCB Other .AS. Total 1. Technical Assistance 1.1 Civil Works 0.3 0.4 0.7 (0.3) (0.0) (0.3) 1.2 Goods 6.0 0.9 1.4 8.3 (6.0) (0.9) (0.0) (6.9) 1.3 Consultants 0.8 0.8 (0.8) (0.8) 1.4 Operating Costs 0.5 0.8 1.3 (0.5) (0.0) (0.5) 2. Line of Credit 2.1 Works 0.0 65.0 b/ - 65.0 (0.0) (7.0) (7.0) 2.2 Goods 0.0 360.5 bl - 360.5 (0.0) (184.5) (184.5) Total 6.0 0.9 427.1 2.6 436.5 (6.0) (0.9) (193.1) (0.0) (200.0) Note: Figures in parenthesis correspond to the amounts financed from the proceeds of the Bank loan. al Government financed. b/ Procurement would be done under ICB, shopping procedures and established commercial procurement practices acceptable to the Bank (para. 3.28).  - 30 - I. Disbursement 3.30 In order to facilitate project execution, a Special Account would be opened and maintained in US dollars, with an initial deposit of US$20.0 million, representing the estimated loan disbursements over the peak four months. NAFIN, as financial agent of the Government, would manage withdrawals under the Loan, including the Special Account. Withdrawal applications would be made on the basis of statements of expenditures for contracts costing less than US$1 million. NAFIN would ensure that all supporting documentation is adequately maintained and made available for review upon the Bank's request. NAFIN would be required to submit to the Bank a monthly statement of the transactions of the Special Account, it would also be responsible for compliance with the corresponding audit requirements (see Annex 2). Only expenditures made no more than 180 days prior to the date of receipt by the Bank of the corresponding financing request would be eligible for reimbursement under the proposed Loan. 3.31 The Bank would finance 100% of amounts rediscounted by PFIs with FFM, under the line of credit component. It would also finance 1002 of expenditures for consultant services and equipment, operating costs and works, under the technical assistance component. The final date for submission of subloan requests to the Bank for approval would be June 30, 1995, and the Closing Date would be June 30, 1996. J. Retroactive Financing 3.32 Resources from loan 2546-ME were fully committed as of December 1990. It is proposed to permit retroactive financing of eligible expenditures incurred since September 10, 1990 (the date of project appraisal), up to a maximum amount of US$20 million. K. Monitoring. Reporting and Auditing 3.33 The Bank would monitor progress of project implementation through normal project supervision and the regular exchange of views with the Guarantor, the Borrower and the Executing Agencies. In addition, agreement was reached during loan negotiation3 on conducting joint annual reviews of the project to evaluate overall project progress, and to discuss the need and agree on further measures to achieve the project's objectives (para. 4.1, ii). The initial joint project review would take place not later than February 28, 1992. 3.34 The coordinating agency (CFM) would prepare annual reports on the progress of the project, starting on January 31, 1! 92. These reports would include, inter alia, an assessment of progress in the implementation of the provisions of the new "Reglamento" of the Mining Law, the institutional development programs for the public entities that support SMMs, and the environmental standards for the mining sector. The reports would also include  - 31 - information on the overall status of the project (credit and technical assistance components), the project's financial situation and portfolio quality, subprojects and their expected impact, and other relevant project elements (see Annex 5). 3.35 The executing agencies (CFM and CRM) would maintain adequate records to reflect their operations and financial situation, in accordance with sound accounting principles applied consistently. DGM would only be required to maintain and submit annual audit reports of pzaject related records. The accounts of the executing agencies including those kept for the purposes of the project, the Special Account, and the statements of expenditure, would be audited annually by independent auditors acceptable to the Bank (see Annex 2). The audit reports, with scope and format satisfactory to the Bank, including an opinion regarding the supporting documentation for disbursements based on statements of expenditure, would be submitted to the Bank no later than six months after the end of each institution's fiscal year. L. Benefits and Risks 3.36 The proposed project would help develop Mexico's mining sector, which is believed to have strong growth potential, in an environmentally sound manner. The recent changes in the regulatory framework providing for, inter alia, increased private sector access to land and mineral rights, and for the streamlining of concession procedures and majority foreign ownership of mining firms, should result in higher investment by private domestic and foreign companies. Furthermore, the reorientation of the sector's policies and public institutions in favor of activities that directly support private mining exploration and exploitation, and the increase in commercial bank lending for mining operations that would be expected to be initiated by the project, should also lead to higher investment in the sector. Increased investment would in turn result over time in higher mining output, exports and employment. Moreover, the establishment of environmental standards for the mining industry would help ensure that the sector's development is sustainable. 3.37 Policy reversals, which would be the main concern to private investors, seem unlikely given Mexico's impressive efforts to open up and deregulate its economy. Hence the main project risks relate to issues that could adversely affect loan disbursements: a) continued low international metal prices; b) an overvalued exchange rate; and c) lower than expected commercial bank participation in lending to mining, particularly during the coming years when these banks are to be privatized. The potential negative impact of these risks is, however, ameliorated by the fact that Mexico is a low cost mineral producer, the Government has export promotion as a key objective of its economic policy and CFM/FFM has been successful in the past in attracting commercial banks to finance non-metallic mining operations. Moreover, the proposed loan amount has been based on a conservative demand estimate for financial resources. In this context, the risks faced by the project are considered acceptable.  - 32 - IV. AGREEMENTS REACHED AND RECOMMENDATION 4.1 During loan negotiations agreement was reached with the Government (the Guarantor), NAFIN (the Borrower), CFM and CRM ons (i) considering any material change in the "Reglamento" of the Mining Law that could adversely affect the objectives of the proposed project or any occurrence that would prevent its implementation, an event of default (para. 2.6); (ii) joint annual reviews of the project to exchange views on overall project progress and to discuss the need for further measures to achieve the project's objectives. These reviews would focus, inter alia, on the: a) release of National Mining Reserves; b) institutional modernization of CFM, CRM and DGM; c) implementation of the technical assistance component; d) economic viability and overall adequacy of CFM's ore purchasing practices; e) participation of commercial banks in lending for mining projects; f) environmental standards for the mining industry; g) adequacy of interest rates and fees charged; and h) level of investment in the mining sector (paras. 2.7, 2.26, 2.27, 2.30, 2.32, 2.34, 2.39, 2.42, 2.43, 2.54, 2.55 and 3.24). The initial joint project review woulu take place not later than February 28, 1992; (iii) undertaking two studies, by consultants satisfactory to the Bank, to: a) evaluate the effectiveness of the changes introduced by the new "Reglamento" of the Mining Law and b) explore alternative approaches to mineral rights allocation and payments. The terms of reference, timing and cost of the studies would be discussed and agreed upon during the first joint annual project review (para. 2.17); (iv) the technical assistance component of the project (paras. 2.26, 2.27, 2.32, 2.43, 2.54 and 2.55); (v) the approval by CFM's Board by September 30, 1991 of the additional loan-loss provision needed to fully write-off non-recoverable loans (para. 2.31); (vi) the following documents: a policy statement and five-year financial plan for CFM, a program to deal with CFM's problem portfolio, a program of promotion and technical assistance aimed at increasing commercial bank lending for mining operations, a five-year business plan for CRM, and the project operating guidelines (paras. 2.33, 2.34, 2.38, 2.42 and 3.20); (vii) presentation to the Bank by December 31, 1991 of a business plan for CPm's beneficiation plants, including a commitment to put it into effect not later than June 30, 1992 (para. 2.34); (viii) presentation to the Bank by September 30, 1991 of the consultancy study on CFM's new organizational structure, and keeping the Bank informed of any proposed modification to CFM's organizational structure (para. 2.35);  - 33 - (ix) the scope of CFM's first-tier lending, which would be limited to financing short term working capital needs of SMM.s and on the combined (CFM plus FFM) direct financing operations as percentage of total annual lending volume which would not exceed, on an annual average basis, 252 for 1991, 232 for 1992, 20Z for 1993, 172 for 1994, and 152 for 1995 and thereafter (para. 2.40); (x) the issuance of environmental standards for the mining industry, satisfactory to the Bank, by June 30, 1992 (para. 2.53); (xi) providing the Bank a concise statement concerning the environmental impact of each subproject before any subloan is approved, and strengthening CFM's environmental capability as to be able to provide advice to SMMs on how to deal with the environmental impact of their projects (para. 2.55); (xii) requiring PFIs to bear the credit risk on all subprojects, and on having PFIs gradually increase their minimum financing contribution using their own resources to: 52 during the period from July 1, 1992 to June 30, 1993; 102 from July 1, 1993 to June 30, 1994g and 202 thereafter (para. 3.12); (xiii) providing the Bank information to monitor the 502 average Bank financing guideline; quarterly, starting on September 30, 1991, the funding granted to each subproject, and annually, starting on June 30, 1992, a composite financial plan based upon actual disbursements (para. 3.13); (xiv) CFM maintaining adequate staffing to discharge all its functions under the project effectively (para. 3.20); and (xv) the applicable interest rates and fees, and an examination of their adequacy during the joint annual project review (para. 3.24). 4.2 A condition of effectiveness would be that contractual arrangements for the transfer of loan proceeds between NAFIN, the Guarantor, FFM and CRM, which are satisfactory to the Bank, have been signed and are legally binding (para. 3.15). 4.3 Subject to the above assurances and conditions the proposed project would be suitable for a Bank loan of US$200 million to NAFIN, for a period of 17 years, including a grace period of 5 years, at the standard variable rate.  ANNEX 1 Page 1 of 4 - 34 - Technical Assistance Program 1. The proposed project includes a technical assistance component of US$11.0 million, of which US$8.5 million, representing 4.25% of the total loan amount, would be Bank financed. The technical assistance comporent would help fund: (i) the modernization of DGM's system of min%ng administration and control; (ii) two studies, one to evaluate the results from the recently introduced changes to mining regulations and the other to explore the possibility for any further policy adjustments; (iii) the establishment of industry-specific environmental standards for mining; (iv) training for CFM personnel to improve their project evaluation and supervision skills, and to increase their environmental knowledge and expertise and (v) the upgrading of CRM's capability to generate, process and divulge geological information (see table 1). A. General Directorate of Mines (DGM) 2. The implementation of the new "Reglamento" of the Mining Law requires the use of modern technology and systems by DGM to achieve the goal of administrative deregulation and simplification. To this effect, the project would provide financing for the: a) implementation of a mining geodetic net, and b) automation and interconnection of DGM offices. The estimated cost of these activities is US$0.790 million (see table). In addition, the Bank would also finance under PECAM II the: a) purchase of hardware and software for the areas of Document Control, Public Registry, Cartography, Control of Obligations and Statistics, and b) training of personnel. The estimated cost for these activities is US$1.257 million, of which US$1.1 million have already been approved and are being disbursed. CFM would make loans to mining experts for the acquisition of positioning equipment, up to an aggregate amount of US$0.8 million. In addition, the Government would provide DGN the financing necessary to relocate its head office and acquire miscellaneous equipment. 3. The establishment of a mining geodetic net would simplify the preparation of the expert report that parties interested in obtaining a mining concession or assignment must present to DGM, as it would only be necessary to determine the distance and the astronomical direction between a control point and the starting point of the mining lot in question to clearly identify the same. The modernization of the positioning equipment used by mining experts to establish a lot's location is a necessary complement to the above effort. Finall-, the automation and interconnection of DGM's field offices would expedite the issuance and registration of mining concessions. 4. The new "Reglamento" of the Mining Law is expected to lead to increased investment in the mining sector and to significantly increase the sector's efficiency. In order to assess the effectiveness of the recently introduced changes in the allocation system and payments for mineral rights, and to provide the analytical basis for further improvements in the regulatory framework, the project would finance two studiess a) one to evaluate the impact of the new legislation, particularly on the level of investment in mining exploration and exploitation, and b) another one to explore alternative approaches to mineral rights allocation and payments, which would include a  ANNEX 1 roage 2 f 4 - 35 - comparative analysis of mining policy in other countries. The terms of reference, timing and cost of undertaking the two studies would be determined at the time of the first joint annual project review. 5. A major element of the proposed project is the issuance of standards to address the major environmental problems generated by mining operations. To assist in this effort, the Bank would provide US$0.155 million under PECAM II for: a) training the working group that would draft the standards, b) a diagnosis of the environmental impact of mining operations in Mexico's main mining districts, and c) other activities directly related to the establishment of the standards. In addition, the Bank would provide US$0.150 million in financing under the MSRP for carrying out workshops and other related activities aimed at raising awareness and explaining the new environmental regulations, i.e. ensuring compliance with the same. B. Minin, DeveloRment Commission (CPM) 6. An examination of CFM's problem portfolio showed that weaknesses in the technical appraisal of projects, as well as in credit analysis and management, were a major factor behind the large number of bad loans. To help address CPM's shortcomings in these areas the proposed project would include personnel training. The nature and cost of the training program would be determined after further evaluation of the institution's specific needs and how best to meet them. CFM would finance the training program with its own resources. 7. Under the project CGM would be required to provide to the Bank a statement concerning the environmental imoact of each subproject. Moreover, it would assume the obligation to give advice to SMNs on how to best deal with potential environmental problems in their operations. In order to satisfactorily fulfill these two commitments CFM needs to strengthen its in- house environmental capability, mainly through training. The various activities to be undertaken to this effect have been discussed and agreed with the Bank, and would be self-financed by CFM. C. Mineral Resources Council (CRM) 8. The five-year business plan prepared by CRM envisions the organization do-emphasizing its role as an evaluator and developer of mineral resources and gradually becoming a modern geological survey institute. To assist in the transition process, the Bank would help finance the: a) development of a computerized information network to handle exploratory and administrative work data, b) evaluation visits to sites with mineral potential, c) purchase of laboratory equipment and general upgrading of laboratory facilities, d) purchase of cartography and geophysical equipment, and e) training of personnel. The estimated total Bank contribution to the above activities amounts to US$6.812 million (see table 1). 9. A vital element in CRM's efforts to become a modern and efficient organization is the implementation of an automated system, that will improve its technical and administrative capacity. In addition to financial  ANNEX 1 Pag-e3 of 4 - 36 - management and planning functions, the system will enable CRM to carry out specialized functions such as the creation of a geological-mining information center providing services to the public and the compilation of a technical data base. Recent consultancy advice to CRM etrongly reco-mmends the careful introduction of this system, with considerable attention placed on training. 10. With the objective of increasing the country's mining production, survey visits will be carried out at the request of small and medium scale miners. This technical assistance work will provide miners with recommendations for exploration and evaluation activities that should take place to ensure the development of more efficient mining operations. 11. Modern equipment is required to upgrade CRM's physical-chemical laboratory activities, which are vital to proving the correct assessment of contained minerals, ore grades, and the geological and mineralogical setting of mineral deposits. The present equipmer.t is becoming obsolete and expensive or impossible to maintain. In addition, laboratory facilities will be upgraded through minor civil works to improve deficient work areas. This will enable CRM to adequately support its field activities. 12. The upgrading of cartography and drafting equipment will allow CRM to better produce maps and plans for both internal reporting, and publication and general dissemination of information. CRM's exploration programs also require the systematic carrying out of geophysical investigations to analyze and evaluate geological and mining potential. Modern geophysical equipment is needed to provide accurate geophysical information. The new equipment will also permit CRM to effectively undetake contracting assignments for third parties. 13. Training of CRM staff is esseitial, both within and outside Mexico, to increase professional knowledge of state-of-the-art technology and procedures. It is particularly important in relation to the implementation of the computerized management and information system, as well as in the early recognition of mineral deposits. Moreover, CRM provides an early training ground for young earth science graduates.  ANNEX 1 Page 4 of 4 - 37 - Table 1. TECHNICAL ASSISTANCE PROGRAM Estimated feginning Duratton Cost Financing (Millions of .S. Dollars) A. General Directorate of Mines (DGI) 1. Hardware and software for the areoa of Document Control, Public Registry and Cartography under vay until 1.057 PECAM 11 _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____Jun.91 _ _ _ _ _ _ _ 2. Software for the area of Control of Obligations under way until 0.037 PECAN 11 3. Hardware *nd software for the area of Statistics under way until 0.0S2 PECAN It _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ___ Jul. 91 4. Load of historical data base for the ares of Ccntrol of Peb. 91 5 ao. 0.051 PECAN 11 Obligations 5. Establishment of ecology norms and standers f,r the mining May 91 20 so. 0.155 PECAM II industrn _ 0.150 _RF 6. Training of DQG persomnnl Jan. 91 4 no. 0.030 PECAN 11 7. Purchese of positioning equipment Jul. 91 6 no. 0.800 GOtl S. Implenatation of mining geodetic net Jul. 91 6 so. 0.500 _ tSRP 9. Automtion and interconnection of DGtS offices Jul. 91 6 so. 0.290 HSRP IV. Provision of adequate buildin for D0G Jul. 91 6 so. 0.370 012 11. Acquisition and renewsl of miscellaneous equlpment under way until 0.596 GM To be id Id MSRP 12. Two studies On the effectiveness of the changes Introduced defined by the new leglento" of the Mining Law and the possibilities for further improvemet Sub-Total Ba finncing Under MSRP (A). - 0.940 D. M.InDvelo Commission (C.) ... .. 1. Personnel training To be Id id GQf defined C. Mineral Resources Council (CRI1) 1 Information network under wsY 60 no. 3.697 MSRP 2. Property evaluation visits Jul. 91 48 mo. 0.395 $SRP _________ _________ 0.758 GON4 3. Laboratory *qulmnt and upgrading of laboratory facilities under wy 1a mo 1.785 HSRP 4. Cartography equipment under wuy 1me o 0.281 ISRP 5. Geopbysical equLEment under way 8 no. 0 234 MSRP 6. Personrnel training under way 48 mo 0.420 MSRP Sub-Total Bank Financing Under MSRP (C). 6 812 Unalloceted Amotnt To be 0 748 MSRP defined _ _ Total Blank Financing for Technical Assistance Under the MSRP -8.300 _____ ''~~~~~~ - = = - . _ .....,'...'.  ANNEX 2 - 38 - AuditinR Requirements A. The Executing Agencies (CFM. FFM. CRM and DGM) The audit report should include an examination of and an opinion on thet (a) Basic Financial Statements. - Statement of financial position - Statement of income (and retained earnings) - Statement of changes in financial position, or statement of cash flow. The following special reports should also be presented to the Bank: (b) Compliance Opinions. Covering the loan's financial-managerial covenants. (c) Management Letter. As a complement to the audit of the financial statements. (d) Disclosure of the audit procedures utilized. (e) Supplementarv Financial Information. Should include a summary of: (i) the budgetary execution and (ii) the financial performance of the entity execusting the project. (f) Audit of the Proiect. This audit report covers the financial execution re'orded in the "separate or identified accounts" for the project. (g) Auditor's ORinion on the Certificates of Expenditures. The scope of the audit is an examination of the expenditures with respect of which withdrawals from the Loan Account were made during the fiscal year on the basis of statements of expenditure. Note: DGM would only be required to comply with (f). B. The Borrower (NAFIN) In addition to (b) and (d) the following report should also be presented to the Bank: (h) Audit of the Special Account. This audit report covers the move ment and availability of the funds in the Special Account. The scope of the audit is an examination of and an opinion on: ti) the statement of transactions and availability of funds, (ii) the accounting, administrative and control procedures, as well as the system of authorizations maintained by the Central Bank.  liNNEX 3 Page 1 of 7 - 39 - Financial Analysis of NAFIN Background 1. NAFIN is the Government's main development bank for supporting the industrial sector and has been the borrower for the majority of Bank loans to Mexico, including the two previous loans to the mining industry. NAFIN is both a financial agent (FA) of the Mexican Government and a development bank. As a FA, NAFIN borrows funds from external sources (mainly the World Bank, Inter-American Development Bank (IDB) and the EXIMBANKS), and onlends these resources to public agencies (Government entities, trust funds and parastatal enterprises) to fund their operations. As a development bank, NAFIN provides resources, through a variety of credit programs, to meet the long-term credit needs of micro, small and medium-size private industrial companies. NAFIN also functions as an investment and holding company, taking temporary minority equity positions in private industrial companies. For its operations as a development bank, NAFIN relies mainly on funds from bilateral and multilateral agencies. In addition, it has started to raise, on a limited scale, long-term funds in foreign and domestic capital markets. 2. Under its bylaws, NAPIN is managed by a "Consejo de Administracion" (Board of Directors), which is composed of top level Government officials plus the institution's General Manager. The Chairman of the Board is the Minister of Finance, other members include the Ministers of Programming and Budgeting, Trade and Industrial Development, and of Energy, Mines and Parastatal Industry, the General Managers of Banco de Mexico and Petroleos Mexicanos, the Chairman of the Confederation of Industrial Chambers (CONCAMIN), and two other representatives of the private sector. 3. NAPIN has experienced a major change in the scope of its operations since it embarked in early 1989 on a reorganization program that included: a) closingdown its retail deposit-taking activities, b) discontinuing first-tier lending, c) phasing out its lending and investment activities with the public sector, and d) absorbing the functions and assets of the trust funds that rediscounted loans to the industrial sector. Asset/ Liability Com2osition 4. The bulk of NAPIN's assets is concentrated on those operations in which NAPIN acts as a FA of the Government. As of December 31, 1990, lAPIN's total assets amounted to about US$14.9 billion equivalent, of which loans to the Government and Government agencies as PA accounted for 712. In terms of currency, 702 of total assets and a corresponding percentage of the liabilities are denominated in foreign currency. NAFIN's asset composition changed between 1988 and 1990, as a result of management's decision to become a second-tier lending institution. Cash and liquid assets declined from 1.652 to 0.412 of total assets, as NAPIN closed-down its retail banking operations; and the second-tier lending portfolio increased to 6.742 of total assets as of December 31, 1990. Moreover, total assets declined by US$3.30 billion during that period, due to the acquisition by the Government of about US$4.7 billion  ANNEX 3 Page 2 of 7 - 40 - equivalent of NAFIN's non-performing public portfolio and the write-off of about US$337 million equivalent in loans to two mining compani.s,"Minera de Cananea" and "Minera Autlan". 5. NAPIN's liabilities are re cated mainly to loans received from multilateral agencies. Since the Mexican crisis of 1982 until recently, NAPIN was excluded from access to long-term international financial market. (the last foreign bond placement was in July 1982). The World Bank, the IDB and the EXIMBANKS continued to be the major sources of foreign funds throughout this period; however, most of these funds corresponded to loans in which RAFIN acted as a FA of the Government. From 1985 to year-end 1990 the World Bank approved 22 loans with NAFIN as the borrower, but NAFIN is the executing agency for only five of those loans. NAFIN is currently trying to diversify its sources of funds. In June 1990, for the first time in eight years, NAFIN was able to place bonds in the international capital markets (US$85 million in Eurobonds with a five year maturity). Domestic funding has been based on short-term instruments; however, in 1989 NAPIN issued succesfully long-term bonds (BONDIS). NAFIN is expected to continue to rely on the World Bank and 1DB for its long-term funding needs. Table A-1 provides a sumary of KAPIN's financial statements. Capital Base 6. As of December 31, 1990, NAPIN's equity was about US$1.7 billion equivalent (including subordinated debentures). Until yaar-ond 1989 lAPIN was a highly leveraged institution, with a very thin capital base; however, this situation has now greatly improved. The ratio of net worth to total assets has increased from 1.061 in i986 to 6.36 1 in 1900 (10.68Z including subordinated debentures). Between year-end 1988 and December 31, 1990, NAPIN's capital base increased by about US$620 million equivalent, net of the deduction of about US$226 million equivalent from the write-off of its "Minera de Cananea" investment. The merger of two trust funds (FOGAIN and FON8l) that NAPIN and Banco de Mexico had previously managed off-books contributed about US$646 million equivalent, and the capitalization of overdue interest owed by the Government and the surplus from revaluation of investmcnts added about US$200 million equivalent. NAFIN is further strengthening its capital base by setting aside 102 of its net Income into the legal reserve. This practice will continue until the legal reserve is equal to its paid-in capital. As of December 31, 1990, NAPIN's capital base is very satisfactory to support the type of low risk operations that the institution intends to undertake in the future.  ANNEX 3 Page 3 of 7 - 41 - TABLE A-I NACIC-AL FINANCIERA S.N.C. SUMMARY OF FINANCIAL STATEMENTS 1985-1990 (Millions of U.S. Dollars) 1985 1986 1987 1988 1989 1990 Total Revenues 3,178 3,133 3,445 3,131 2,930 1,276 Interest Expenses 3,027 3,013 3,183 2,808 2,528 916 Financial Margin 151 120 262 323 402 360 Operating Income 43 39 47 49 74 113 Net Income 31 28 34 38 69 110 Total Assets 15,956 16,067 17,118 18,306 16,809 15,912 (Cash & Securities) (842) (625) (745) (1,879) (1,494) (1,508) (Loan Portfolio) (14,599) (14,917) (15,873) (15,395) (13,711) (12,900) Total Liabilities 15,777 15,896 16,964 17,913 15,999 13,981 (Financial Debentures) (683) (492) (360) (200) (596) (1,775) (Bank Loans) (11,340) (12,491) (13,673) (13,110) (11,938) (11,280) (Subordinate Debentures) (436) (486) (686) (686) (686) (686) Capital and Reserves 179 170 154 393 1,210 1,244 Number of Employees - - - 4,586 3,457 3,291 Sources NAPIN audited financial statements, except for 1990. Liauidity 7. Liquidity risk is not a problem for NAFIN since its portfolio, both as a PA and as an executing agency, is tied to liabilities of the same maturity. Interest rate risk is also minimal, because the entire portfolio is denominated in variable rate instruments. Moreover, since NAFIN is no longer in retail banking, it does not have to face an unexpected demand from depositors. The only liquidity risk NAPIN might face is from loan demand.  ANNEX 3 Fagoe 4 f 7 - 42 - However, demand for NAFIN's funds has slowed-down recently due to high liquidity in the commercial banking system. The privatization of the commercial banking system will likely affect future demand for NAFIN's funds, as NAFIN and the Government will no longer be able to have a strong influence on the lending decisions of commercial banks. As of December 31, 1990 NAPIN held about US$1.01 billion equivalent, 6.392 of its assets, in highly liquid Government securities, primarily Certificados de Tesoreria (CETES) and Bonos de Desarrollo (BONDES). However, 5.95Z of NAFIN's liabilities are in short- term instruments, mainly bankers acceptances (BAs), a proportion which is considered high for an institution concentrated in long-term lending. This is expected to be transitory. Portfolio and Investments 8. Portfolio. Given the nature of NAFIN's operations, about 901 of its US$12.9 billion equivalent portfolio is implicitly or explicitly guaranteed by the Government. The quality of NAFIN's first-tier portfolio, in which the institution bears the full credit risk, has improved considerably s.'nce the reorganization. Up to year-end 1988, NAFIN continuously restructured and refinanced its loans to parastatal enterprises and public trust funds. These operations were very costly to NAFIN, because it funded these loans by issuing expensive bankers acceptances. To correct this situation the Government and NAFIN undertook two major transactions during 1989 and 1990. In the first transaction, known as the "Bankers Acceptances Agreement", the Government acquired US$0.9 billion of NAFIN's bankers acceptances in exchange for an equal amount of NAFIN's portfolio. In the second transaction, the Governwent assumed US$3.8 billion of NAFIN's restructured foreign debt, again in exchange for an equal amount of the institution's portfolio. Thus, NAFIN was able to dispose of US$4.7 billion equivalent of its non-performing portfolio, which had originated from loans made as a first-tier lender to public trust funds and parastatal enterprises. 9. In September 1989 "Minera de Cananea", a company ir, which NAFIN had an exposure of about US$1 billion equivalent between loans and investments, declared bankruptcy. Later in the same year "Minera Autlan" defaulted on a major loan guarantee. This serious situation has now been resolved. In mid- 1990 "Minera de Cananea" was sold to provate investors for US$475 million equivalent, proceeds from the sale were used to partially offset outstanding loans and the balance was written-off against provisions that NAPIN had made during 1989 and 1990. Total NAFIN write offs, related to its loans and holdings in "Minera de Cananea" and "Minera Autlan", amounted to US$ 563 million equivalent. Existing provisions for bad loans were affected ir the amount of US$337 million equivalent, and US$226 million equivalent were charged against equity.  ANNEX 3 Page 5 of 7 _ .443 - TABLE,A-2 NAFIN'S PORTFOLIO STATUS (Millions of U.S. Dollars) Amount S2 Status A. Financial Agent 9,055 70.03 Fully guaranteed by Gov. B. Debt Service 1,819 14.07 The Gov. has assumed full Assumed by Government service of the debts. C. Second-tier loans 871 6.74 Low risk, guaranteed by CBs D. First-tier loans 1,185 9.16 5.71 of it is in arrears. Source: NAlIN report on status of loan portfolio, December 1990. 10. Investments. Following its new investment policy, NAPIN will now invest only in privately held companies, and its equity participation will be limited to no more than 252 of the company's outstanding shares. As of December 31, 1990, NAFIN's equity investments were concentrated mostly in 31 public sector companies with a book value of about US$124.0 million equivalent. The investment portfolio is well diversified, the largest investment is in "Carbonifera Rio Escondido", which accounts for only 2.71 of the total investment portfolio. The Government and KAFIN have embarked on a dis- investment and privatization program. NAFIN has already divested itself from a number of firms and fully expects to recover its investments from the remaining ones.  ANNEX 3 Page 6 of 7 - 44 - TABLE A-3 NAMIN'S LARGEST EQUITY INVESTMENTS (AS OF DECEMBER 31, 1989) VALUE EQUITY (Millions of OWNED COMPANY ACTIVITY US Dollars) M Carbonifera Rio Escondido Coal Mining 9.3 24.8 Mexinox, S.A. Steel 9.0 39.7 Intermex Holding Banking 6.2 13.7 Altos Hornos de Mexico Steel 6.0 56.9 Fertilizantes Mexicanos Fertilizers 4.5 59.9 Gine Komatsu Ind. Machinery 3.1 31.5 ICA Plasticos Plastics 3.1 24.0 Celulosa y Papel de Durango Celulose 2.8 21.6 Total Equity Investments 124.0 Source: NAFIN annual reports. Financial Performance 11. NAFIN steadily improved its profitability between 1986 and 1990. Its return on assets (ROA) rose from 0.17Z in 1986 to 0.392 in 1988 and 0.69Z in 1990. The return on equity (ROE) also improved, rising from 4.21 in 1986 to 5.712 in 1990. The low return for 1990 reflects large charges (about USS 615 million equivalent) made against the year's results as pro-isions for bad loans. Including these charges ROE for 1990 rises to 28.23Z, which is about equal to the rate of inflation for the year. The improvement of NAFIN's financial performance during 1989 and 1990 is mainly a result of the: a) incorporation of FOGAIN's and FONEI's highly profitable portfolio, b) gains from transactions in the securities market, and c) disposal of its parastatal enterprises investments and non-performing portfolio. Net income, after staying around 0.201 of average assets between 1968 and 1988, increased to 0.38% in 1989 and to 0.47Z in 1990. Table A-4 presents some selected financial ratios.  ANNEX 3 - 45 -Page 7 of 7 TABLE A-4 NACIONAL FINANCIERA S.N.C. Selected Financial Ratios (In Percentages) 1986 18 1988 1989 1990 I. Financial Structure Ratios 1. Total Assets/Net Worth 94.30 118.9 46.5 13.88 12.20 2. Net Worth/Total Assets 1.06 0.9 2.0 7.20 8.18 3. Total Equity/Total Assets 4.00 4.9 5.9 11.28 12.68 II. Operating Expanses Ratios 1. Operating Expenses/ Operating Revenues 98.70 98.6 98.4 97.5 91.10 III. Profitability Ratios 1. Net Income/Total Assets (ROA) 0.17 0.20 0.21 0.39 0.69 2. Net Income/Equity (ROE) 4.20 4.04 3.51 3.64 5.71 Source: NAFIN annual reports. Overhead Costs 12. NAFIN's overhead costs, as a percentage of average assets, increased from 0.36Z in 1986 to 0.652 in 1988, and declined to 0.60Z in 1990. The decline is the result of a staff reduction of about 1129 persons between 1988 and 1989. Many people retired from the institution and others decided to leave once NAFIN allowed them to keep their benefits regarding housing and car loans. As a percentage of overhead costs, salaries and fringe benefits have increased from 582 in 1988 to 802 in 1990, as a result of salary adjustments. NAFIN's salaries are now competitive with those of the commercial banking system. NAPIN's present overhead costs are not out of line with those of other Mexican development banks; moreover, its overhead costs should decrease significantly over time due to NAFIN's shift to second-tier operations, which are less labor intensive than first-tier operations. Creditworthiness 13. The above analysis of NAFIN, focussing on the institution's financial position, quality of portfolio and profitability, indicates that during the last two years NAEIN's creditworthiness has improved as a result of: a) better portfolio quality, b) higher profitability and financial margins, c) a strengthened capital base, and d) phasing out both first-tier lending and off-balance sheet activities, and focusing on second-tier operations. It confirms that NAFIN is a financially sound and creditworthy institution.  ANNEX 4 - 46- Page 1 of 7 Finanigal Analysis of CFM and FFI A. Miining Develogment Commission (CFM) 1. Financial structure and 08sition: CFM's total resources in Mexican pesos were reported to be equal to about US$300 million as of December 319 1990. These resources originated mainly from CFM'. paid-in capital and more recently from the reflowe of the Bank's PECAM loans. CFM currently has a 98X capital to total asset ratio and operates free of debt service charges. CFM'e capital structure has been diminished by almost MP$145,000 million in the past two years because it is classified as an industrial operation, rather than a financial or holding company, and must therefore take substantial write-offs for all monetary assets that are not offset oy debt (the accounting adjustments are actually made by devaluing fixed assets). 2. CFM has dramatically changed the structure of its assets in the recent past. About 43% of CFM'e total assets (US$130 million equivalent) are currently liquid and int3rest earning, up from 102 in 1988. Of these, about 60% are on deposit or in short-term paper, while the balance is on loan to FFM for reinvestment in its second-tier operations. CIM's term loan portfolio and overdue collectables amounted to 172 of total assets at the end of 1990, compared with 46% in 1988, aS a result of a major provision for bad debts (see para 5). Finally, fixed assets presently account for about 25S of total assets, down from almost 40Z, two years ago, i.e. prior to their downward accounting adjustment. 3. CFM's balance sheet is currently stronger and more realistically established than it has been in the past for the following reasons: a) CRM made a major loan-loss provision and wrote-off more than MPP$70,000 million in overdue and uncollectable loans that it had been carrying on its booksa b) its new term lending operations in 1990 were limited to about 202 of term loan reflows, thus reducing risk while building a strong cash basel and, c) it wrote off about US$40 million (equivalent) of plant and equipment, mostly inflation gains. In short, CFM has cleaned out a substantial portion of its balance sheet and is now poised to take on the costs of decentralization and reduction of staff. 4. Overatina results: CFM has suffered losses from its operations in four of the past five years. These losses have been more than compensated for by budgetary allocations in support of CFM's social lending programs, equal to about US$13 million (equivalent) in 1990. Thus, CFM has been able to report net profits in each of the past five years (Table 2). CFM's operating losses result mainly from the losses sustained by its beneficiation plants. In 1990, despite sharp increases in the plants' tolling fees to approximate market rates, CFM suffered a loss of about US$7.5 million from plant operations (inclusive of the metal buying and selling activities and overhead associated with it). These operations, established to promote artisan and small mining operations in remote provinces, are currently under study to establish a program to rationalize, close or sell plants. 5. CFM has consistently earned profits on lending operations and cash investments, as they bear no interest expenses. Its high interest income of about US$30 million in 1990 (332 return on average invested liquid asset. plus loan portfolio) was adequate to offset a major loan-loss provision of US$25  ANNEX 4 - 47 - TPage 2 of 7 million, that was taken to write ofr bad loans and interest accrual that past CFM administrations had continued to carry on corporate books. Considering the size and delayed timing of the provision taken, it is clear that CFM's prior years' earnings were overstated. Based upon its new policy on income accruals and provisions for bad debt, it is expected that CFH's profit and loss statements will fully reflect operating results. C1M's future profits will depend upon the pace at which: (a) the current cost reduction program reduces operating expenses below the US$20 million level reached in 1990; (b) interest income can be increased by improving the overall quality of portfolio operations through: (i) continued shifting of its portfolio reflow. to FIM for investment in second-tier lending operations and (ii) tightening the criteria for lending under its reduced direct lending programs, through the creation of a credit officer system; and (c) the scope of plant operations is reduced and the efficiency of surviving plant operations is improved. 6. Cash flow from oDerations: CFM's cash flow results for 1990, as shown below, present a view of the outcome of its operations that is unaffected by accounting conventions and adjustments. CFH had a total inflow of funds of aboLt US$185 million (equivalent). It received about US$23.5 million in cash from its operations and spent US$26.3 million in cash to fund these operations, the difference was funded by a cash contribution from the government. As a result of more vigorous enforcement of debt collection policy, CFM recuperated about US$136 million in outstanding debt, about 302 more than was recuperated in the prior year. CFM'. lending operations were sharply reduced in 1990, reflecting its management's determination to raise the quality of its lending and the depressed state of silver prices. Thus, only about one-half of 1990's reflows were reloaned, with 712 of those funds being channeled through FFM for second tier operations. 7. Loan portfolio: In 1989 CPM's new management adopted appropriate policies on income recognition and reexamined and reclassified its loan portfolio, including the 292 loans advanced under PECAM I and II. More than 552 of the loans reviewed were found to be non-performing, most of these were overdue for more than one year and were considered not recoverable. About 35 large loans, accounting for more than half of arrears, were reviewed and found to be subjects for restructuring. Management responded to these findings by instituting an aggressive collection program, taking some write-offs and setting plans to launch a restructuring effort. By the end of 1990, with silver prices at a highly depressed US$4 per oz., it was clear that rescue efforts could not solve the problems of most non-performing loans and despite some earlier success, collections of bad debt slowed in the face of an industry wide crisis. 8. As of December 31, 1990 CFM's portfolio of loans and interest due amounted to MP$238,000 million (excluding FPM's dues to CFM), of which almost MP$100,000 million (42Z) were overdue for more than six months. In line with discussions held with the Bank, CFM's Board of Directors approved an extraordinary loan-loss provision of almost NP$71,000 million in April 1991, which raised CPM's total provisions for bad debt to 862 of debt more than six months in arrears and covered about 702 of the total amounts affected. This provision is satisfactory in the context of CYM's total debt recovery program. CFM clearly has the capital strength needed to take the further provision that could be necessary, if the silver mining industry continues to suffer from highly depressed prices.  ANNEX 4 Page 3 of 7 - 48 - 9. Measures to strenQAhen portfollo: To overcome the difficulties experienced with direct term lending operations, CEM sharply red" ad direct term operations in 1990 and directed almost all PECAM reflowe th.rough FNf. In 1991 and beyond its main portfolio strengthening tasks will be to help commercial banks to finance eound mineral projects, while continuing to reduce its own direct lending operations. This will require that CFIf (a) improve its capability to prepare technically sound projectst (b) develop policy and technical guidelines to ensure that the projects advanced for financing are fully bankable; and (c) develop credit officers, skilled in credit and financial analysis to prepare and supervise projects from a bankers perspective. CFM's capability to take ouch measures would be reinforced under the proposed project's technical assistance program. B. trust Fund for M4inina DeveloDment (FFM) 10. Financial Structure and Condition: FFM's total resources were almost US$117 million at the end of 1990, compared with its small resource base of US$11.9 million in 1985. Despite its ten-fold growth, FFM remains very conservatively structured, with a capital to total asset ratio of 531. All of its borrowings are from CFM, that onlends reflow. from PECAM I and II to FFM for rechanneling through commercial banks to the mining sector. 11. FFM's second tier lending operation is very profitable, given the unusually high financial margins that it receives, 9.51 on average assets (low-risk bearing second tier institutions often work with a spread of 2.52 or less). However, FFM's administrative plus payroll expenses are also exceptionally high for a service-based financial institution. Its operating costs of 5.72 on average assets are twice those of a commercial bank and at least 352 higher than the expense ratios that prevail in full line development finance companies. FFM has ample scope to reduce costs, margins and spreads. In 1990 it earned 222 on average assets (successful commecial banks operate on 1.52 on assets) and made a net profit of MP$66,529 million, which is equal to 372 on capital. 12. Portfolio Conditior,: As of December 31, 1990 FFM's total loan portfolio was equal tc US$105 million, of which 852 were rediscounts of commercial bank loans to the non-metallic mining sector. All 23 participating banks are servicing their debt to FFM on time. Banks reported no subloan failures to FFM. During the first half decade of operations, FFM's predecessor made 40 direct social sector loans to cooperatives ("ejidos"). These account for about 12.52 of total portfolio and have presented continuous problems of arrearages and collection. FFM has undertaken a more aggressive program of collection aimed at reducing this problem and has written-off the uncollectables, so that its portfolio is currently in excellent shape. Its mandate to lend directly to the social sector continues, though FFM plans to reduce such lending to 102 of the portfolio.  - 49- ANNEX 4 iage 4 of 7 Table 1. CFM BALANCE SHEET, 1986 - 1990 ..**** (Millions of Mexican Pesos) 1986 1987 1988 1989 1990 ...................................................................................................... 1. Assets 1. Cash and Equivalent 7,585 13,686 9,215 63,185 215,352 2. Documents and Loans Due 19,578 55,456 92,264 179,892 23,045 3. Due from Subsidiaries 7,432 18,905 36,836 14,334 153,525 4. Inventories 16,344 24,854 21,716 21,299 24,408 A. Current Assets (1+2+3+4) 50,939 112,901 160,031 278,710 416,330 ........................ ............................. ............ ....... ........... ....... ...... ............... 5. Long Term Loans 11,012 31,831 105,423 19 928 128,677 6. Advances to Subsidiarles 3,024 760 13,643 12,428 4,763 7. Equity Investments (Subsid.) 19,414 46,800 42,064 51,764 82,831 8. Plant & Equipment 81,560 129,594 187,704 193,124 239,111 9. Other Assets 5,023 9,604 3,619 261 1,911 S. Total Assets (A+5+6+7+8+9) 170,972 331,490 512,484 656,215 873,614 .......................... ................................ . ....... ........... ....... ...................... ... .......... II. Liabilities & Capital ..................... 10. Due to Vendors 3,574 7,816 3,995 1,763 17,357 11. Other Short Term Dues 4,352 18,405 6,769 15,544 3.613 C. Current Liabilities (10+11) 7,926 26,221 10,764 17,307 20,970 .................... . . .............................. .......... ...... ......... ...... .............. ... 12. Other Liabilities 40 103 109 120 20 D. Total Liabilities (C+12) 7,966 26,324 10,873 17,427 20,990 ........................ .............................. .......... ...... ......... ...... .............. ... 13. Paid-In Capital 139,342 228,778 343,105 468,063 559,024 14. Pecam Grant 18,862 42,973 147,370 214,432 395,299 15. Accumulated Surplus (Losses) 2/ 4,802 33,415 11,136 43,707 (101,699) E. Total Capital & Reserves (13+14+1;, 163,006 305,166 501,611 638,788 852,624 III. Total Liabilities and Capital (D+E) 170,972 331,490 612,484 656,215 873,614 .............................................................................................. 1/ Non-ConsoLideted equity holdings in non-banking subsidiaries are carried at net worth. 2/ Includes adjustments for monetary posItlon In 1989 and 1990, in Line with new accounting regulations.  - 50 - ANNEX] 4 Table 2. CFM INCOME STATEMENT, 1986 - 1990 Page 5 of 7 .----.. (Nil lions of Mexican Pesos) ............ ........................ n........................................ ........... ....................... .. .......................... 1986 1987 1988 1989 1990 1. Sale of Minerals 78,716 55,545 40,764 18,405 13,850 2. Other Income from Operations 1/ 11,265 Y.460 32,441 14,815 18,182 A. Gross Income Plant Operations (1.2) 89,981 94,505 73,211 33,220 32,032 3. Cost of Mineral Sales (101,608) (51,219) C 71,723) ( 16,770) C 18,659) 4. Other Costs of Operations 1/ C 28,291) (39,429) ( 29,290) ( 28,399) C 28,994) B. Tottl Expenses Plant Operation (3+4) (129,899) (90,648) (101,013) ( 45,169) ( 47,643) I. Net Income (Loss) Plant Operations (A-B) C 39,918) ( 3,857) ( 27,802) ( 11,949) ( 15,611) 5. Interest Income 2/ 23,479 17,396 32,897 43,698 86,441 6. Dividend Income 17,968 21,832 25,304 19,508 13,680 C. Gross Income Loans & Equities (5+6) 40,447 39,228 58,201 63,206 100,121 7. Provisions for Losses or Valuation Gains 3/ 11,342 22,285 270 C 20,022) C 70,685) II. Net Income (Loss) Financial Operations (C+7) 51.789 61,513 58,471 43,184 29,436 111. Income from Plant and Financial Operations (l+1l) 11,87' 65,370 30,669 31,235 13,825 8. Costs of Admfnistration & Other C 32,475) (27,752) ( 47,494) C 34,157) C 60,021) 9. Misc. Incowe (Costs) 2,910 C 3,983) ( 6,435) (0) 22,334 IV. Profit (Loss) from Total Operati,ns (111-8+9) ( 17,694) 33,635 ( 23,260) ( 2,922) C 23,862) .............................................. ...... ..... ...... ...... ...... 10. Grants & Allocations 45,151 43,671 40,057 27,413 40,971 V. Net Gain (Loss), (IV+10) 28,457 76,405 16,790 24,491 17,109 ....~~~~~~~~~~~~~~~~~~~~...... .............. ...... ...... ..... . ....... ...... 11. Less Monetary Adjustment 4/ ( 68,198) (118,788) VI. Net Results (V-11) ( 43,707) (101,699) 1/ Income (Expenses) from operations of beneficiatlon plants, mines, mills snd laboratories. 2/ Interest Income for 1989 and 1990 reftlects new accounting policy under which interest accruals are suspended for non-performing loans (overdue 180 days). 3/ IncluPes other costs for 1989. 4/ Initiated in 1989.  - 51 ~~~~~~ANNBX 4 - 51- -WX' Page 6 of 7 Table 3. fFM BALANCE SHEET, 1986 - 1990 - ------ ((Mllions of Mexican Pesos) 1986 1987 1988 1989 1990 I. Assets 1. Cash in Banks e Equivalent 864 10,064 16,471 86,424 35,085 2. Loans & Interest Due 4,056 7,249 24,953 52,704 56,477 3. Due fron Subsidiaries 234 95 - 4. Other Accounts Due 1,157 404 3,807 4,043 330 5. Paid in Advance 8 44 63 14 54 A. Current Assets (1+2+3+4+5) 6,300 17,856 45,299 143,185 89.952 6. Long Term Loans 4,786 22,252 96,470 115,473 248,352 7. Equity Ihvestment 2.230 1,228 26,856 - 8. Machinery & Equipment 59 477 408 673 674 9. Deferred Charges S8 95 102 1 1 B. Total Assets (C+6+7+8+9) 12,718 67,524 142,279 259,333 338,981 II. Liabilities & Capital 10. Due to CFM 1,010 1,686 3,877 38,366 40,060 11. Other PayabLes 318 819 2,131 414 7,090 C. Current Liabilities (10+11) 1,328 2,505 6,008 38,780 47.151 12. CFN, .ong term loans 5,509 20,768 87,374 107,539 112,287 0. Total Liabilities (C+12) 6,837 23,273 93,382 146,319 159,438 13. Paid In Capftal 2,911 3,644 3,644 4,944 4,944 14. Anmuol Allocations 491 3,408 13,923 45,066 107,874 15. Reserves to be Applied 429 27,101 196 196 195 16. Retained Earnings 2,500 10,097 31,134 62,818 66,529 E. Total Capital & Reserves (13+14+15+16) 6,330 44,252 48,897 113,015 179,542 111. Total Liabilities and Capital (D+E) 12,718 67,524 142,279 259,333 338,981  Table 4. FFN INCOME STATEMENT, 1986-1990 --- ----- (Niltiots of Meican Pesos) 1986 1987 1988 1989 1990 1. Interest & Comission income 4,465 11,656 37,765 60,250 80,747 2. Interest Expense 628 2,226 8,174 15,940 52,437 A. Finnmcial Margin (1-2) 3,837 9,430 29,591 44,310 28.310 3. Costs of Administration & Other 767 2,098 4,167 4,173 16,884 I. Met Income from Lending Activity tA-3) 3,070 7,333 25,424 40,137 11,426 ............................................................... . ...... . ........... ------ ...... ------ 4. Income from Short Tenm Investments 208 3,501 7,965 23,583 57,619 5. Other income 19 195 178 195 293 it. Financial Income (1+4+5) 3,297 11,029 33,567 63,915 69,338 ... ............. ............................. ----- ------. . ...... ------... ...... 6. Provision for Debt 0 621 1,984 955 2,631 7. Depreciation & Amort. & Other 798 309 447 143 177 111. Net Profit for the Period (11-6-7) 2,500 10,097 31,135 62,818 66,529 .......... ................... ..... ..... .... .. ...... ...... .. ..... ..... ................................................................................................................................... ........................................  ANNEX 5 - 53 - Rev Indicators for Prolect Implementation CFM would prepare the following information: 1. Socio-economic aspects (annually): a) Incremental jobs and cost per job generated; b) Incremental output; c) Direct and indirect exports generated; d) Subproject location; e) Type of subproject, expansion or new; f) Investment in mining, private and public, domestic and foreign. 2. Lending asDects (annually): a) Number of subprojects financed, total investment, financing breakdown by source; b) Number of subprojects financed and total investment, classified by investment item (fixed assets, permanent working capital, etc.), by participating financial intermediary, by size of subloan and by type of mineral; c) Same information as in a) and b) for subprojects under consideration for a possible subloan. 3. Operating aspects (annually): a) Progress report on the implementation of CFM's and CRM's business plans; b) Progress report on the execution of the technical assistance program for DGN, CFM and CRM; c) Number of hectares released from National Mining Reserves; d) Number of concessions granted, by type and size.  ANNEX 6 - 54 - MEXICO MINING SECTOR RESTRUCTURING PROJECT Estimated Schedule of Bank Loan Disbursements (Millions of U.S. Dollars) IBRD Fiscal Year Quarterly and Quarter (Ending Date) Disbursements Cumulative 1992 September 30, 1991 27.5 1/ 27.5 December 31, 1991 10.0 37.5 March 31, 1992 7.5 45.0 June 30, 1992 5.0 50.0 99_3 September 30, 1992 7.5 57.5 December 31, 1992 10.0 67.5 March 31, 1993 11.0 78.5 June 30, 1993 11.5 90.0 1994 September 30, 1992 13.0 103.0 December 31, 1993 11.0 114.0 March 31, 1994 11.0 125.0 June 30, 1994 10.0 135.0 1995 September 30, 1994 11.0 146.0 December 31, 1994 12.0 158.0 March 31, 1995 12.0 170.0 June 30, 1995 10.0 180.0 1996 September 30, 1995 8.0 188.0 December 31, 1995 5.0 193.0 March 31, 1996 4.0 197.0 June 30, 1996 3.0 200.0 A/ Special Account  ANNEX 7 - 55 - Selected Data and Documents Available in the Proiect File A. tinins 1. Reglamento de la Ley Reglamentaria del Articulo 27 Conotitucional en Materia Minera 1990. New implementing regulations of the Mining Law. 2. Programa Nacional de Modernizacion de la Mineria, 1990-1994. The National Mining Program for 1990-1994. 3. SEMIP-SEDUE Agreement to Establish Environmental Norms for Mining. B. Institutions 1. CFM-Policy Statement and Five-Year Financial Plan. 2. CRM-Five-Year Business Plan. 3. CFM-Program to Increase Commercial Bank Lending for Mining Projects. 4. CFM-Program to Handle its Problem Portfolio. 5. CFM/FFM-Credit Regulations. 6. FFM-CFM Management Agreement. 7. NAFIN-Financial Statements, 1986-1990.  Table 1. PINING SECTOR SHARE IN OUTPUT, EXPORTS AND EMPLOYMENT, 1970 - 1990 1970 1975 1980 1985 1986 1987 1988 1989 1990 1. Ouput (Billions of 1980 pesos) 1) ining GDP 40.2 48.0 62.2 75.4 74.9 78.4 76.1 75.5 p/ 71.7 ef 2) Total 0P 2,340.6 3,171.4 4,470.1 4,919.9 4,738.6 4,819.5 4,888.9 5,040.9 p/ 5,237.5 e/ 3) Nfnfno Share (X) 1.7 1.5 1.4 1.5 1.6 1.6 1.6 1.5 1.4 II. Expowts (MiioLs of U.S. Dolltrs) 1) Mining 198.7 462.9 1,296.5 905.6 967.9 1,172.5 1,410.2 1,555.9 1,526.0 0' 2) Total 1,289.6 3,062.4 15,511.9 21,663.8 16,031.0 20,656.0 20,565.1 22,764.9 26,M.1 3) Nining Share 15.4 15.1 8.4 4.2 6.0 5.7 6.9 6.8 5.7 4) Mon-oIl N.A. N.A. 5,070.5 6,897.1 9,723.8 12,026.4 13,853.9 14,888.9 16,669.4 5) Nining Share (2) - - 25.6 13.1 10.0 9.7 10.2 10.5 9.2 I I I. Eeptoy ent (Thoinands) 1) Mining 110.2 138.9 182.5 213.4 212.0 217.7 224.3 252.6 p/ 284.4 e/ 2) Total 13,873.0 16,510.0 20,282.0 21,956.0 21,640.0 21,842.0 21,892.0 23,621.5 p/ 25,487.6 e/ 3) Nining Share (X) 0.8 0.8 0.9 1.0 1.0 1.0 1.0 1.1 1.1 ........._._..------------.---.----.----..'.'.''.''.''''''.''''.'''''''.'.'....... ............ ........... ............ ........... p/ Prelinwry. @ Esttimted. Ii'OR 0  Table 2. MINING-METALLURGICAL OUTPUT, 1970-1990 ------- (Thousands of Metric Tons) 1970 1975 1980 1985 1986 1987 1988 1989 1990 ............. .......................... .................... .............................................. . ........................... . 1. Precious Metals (a) 1) Gotd (Thous. of Kg.) 6.2 4.5 6.1 7.5 7.8 8.0 9.1 8.6 8.3 2) Silver (Thous. of Kg.) 1,332.4 1,182.8 1,472.6 2,153.0 2,303.1 2,415.0 2,358.9 2,306.1 2,346.3 11. Non-Ferrous Industrial Metals (a) ............. .... .... 3) Lead 176.4 178.6 145.1 206.7 182.7 177.2 171.3 163.0 179.9 4) Copper 61.0 78.2 175.4 168.0 174.6 230.6 268.4 249.3 298.7 5) Zinc 266.4 228.9 238.2 275.4 271.4 271.5 262.2 284.1 322.5 6) Antimony 4.5 3.1 2.2 4.3 3.3 2.8 2.2 1.9 2.6 7) Arsenic 6.9 4.6 5.3 4.8 5.3 5.3 5.2 5.6 4.8 8) Bismith 0.6 0.4 0.8 0.9 0.7 1.0 1.0 0.9 0.7 9) Tin 0.5 0.4 0.1 0.4 0.6 0.4 0.3 0.2 0.0 10) Cadsium 2.0 1.6 1.8 1.1 1.2 1.2 1.7 1.4 1.4 11) Setenium 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12) Tungsten 0.3 0.3 0.3 0.3 0.3 0.2 0.2 0.2 0.2 13) Nolibdenu 0.1 0.0 0.1 3.8 3.4 4.4 4.5 4.2 2.0 III. Foundry Netals and Ninerats ------ .- ----------------- 14) Coal (b) 188.1 176.8 408.5 2,440.4 3,677.6 4,251.7 4,210.8 4,243.8 4,219.8 15) Coke (b) 1,299.6 2,088.0 2,409.2 2,390.0 2,050.0 2,340.3 2,332.2 2,260.5 2,337.2 16) Iron (a) 2,612.4 3,369.3 5,586.7 5,161.1 4,817.4 4,965.1 5,564.5 5,373.1 5,327.9 17) Manganese (a) 98.6 154.2 161.0 150.6 174.4 146.4 168.6 149.9 138.9 IV. Mon-Metallic Minerals (b) . ... ... ... . . . . . . 18) Sulfur 1,380.8 2,164.3 2,102.3 2,019.8 2,050.7 2,303.8 2,138.2 2,086.3 2,047.8 19) Graphite 55.6 60.8 44.5 35.4 37.8 37.9 43.8 40.2 24.9 20) Barite 319.1 300.0 269.3 467.7 321.2 401.3 535.0 324.7 305.0 21) Dolomite 474.5 348.7 378.3 318.1 376.2 361.7 340.7 469.6 482.2 22) Fluorite 978.5 1,088.8 916.5 697.4 756.8 723.6 756.1 779.4 633.8 23) Kaolin 78.5 120.4 29.5 33.0 10.1 12.8 11.6 15.7 5.4 24) Silica 355.9 519.0 728.3 976.2 893.6 1,083.1 1,081.3 1,216.4 1,298.3 25) Gypsum 1,290 .9 1,255.9 1,708.9 2,366.0 2,625.2 2,457.8 2,649.3 2,898.6 2,814.4 26) Phosphorite 46.7 282.5 283.2 645.3 660.4 633.2 666.8 625.4 557.1 27) Salt N.A. N.A. M.A. 5,450.9 5,926.8 6,393.2 6,965.2 6,942.2 7,135.1 28) Woltastonite N.A. N.A. N.A. 2.3 0.2 N.A. 0.3 0.6 0.5 29) Celestite N.A. N.A. N.A. 30.5 24.3 32.4 38.8 37.8 51.3 ~~... . . .. . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .................. ..... ... .. ..... . . . . . . .. ... OQ1 (a) Metallic content. N (b) Gross weIght. 0co  ANNEX 8 Page 3 of 20 - 58 - TabLe 3. MEXICO IN WORLD MINERAL PRODUCTION, 1989 ................................................................... Domestic World Share ........ ----- . ................. ..... Mineral Unit Production Productlon (X) Rank .......................... .... ---- ---- .......... ............. .................. .................................. ............ ........................... ..................... .................. Silver metric tons 2,306 14,452 16.0 1 Bismuth metric tons 1,050 2,762 38.0 1 Sodium SuLfate th. short tons 500 2,432 20.6 1 Strontiun metric tons 91.000 244,300 37.3 1 Barite th. metric tons 566 5,700 9.9 2 Fluorspar th. metric tons 861 5,731 15.0 2 Graphite th. metric tons 47 631 7.5 3 Antimony metric tons 2,500 68,362 3.7 3 Soda Ash th. short tons 198 34,910 0.6 3 Arsenic metric tons 5.100 52,000 9.8 4 Mercury metric tons 300 5,840 5.1 4 Cadmciun metric tons 1,200 21,002 5.7 5 Molybdenun th. kiLograms 4,490 115,404 3.9 5 Nitrogen th. short tons 2,310 109,340 2.1 5 Lime th. short tons 6,610 149,184 4.4 6 Lead th. metric tons 163 3,400 4.8 7 Zinc th. metric tons 284 7,140 4.0 7 Sulfur th. metric tons 2,367 58,348 4.1 7 Manganese th. short tons 473 26,500 1.8 8 Salt th. short tons 8,435 209,988 4.0. 8 Diatomite th. metric tons 35 1,838 1.9 9 Selenium metric tons 20 1,553 1.3 10 Gypsum th. short tons 5,305 108,624 4.9 10 .................................................................... Source: Mineral Comnmodity Summaries 1991  Table 4. VALUE OF NINING-NETALLURGICAL OUTPUT. 1970-1990 .. . - - - Nlittions of U.S. Dollers) ................................... ................................................................................ ............... ....................... ............... ............ ..................... 1970 1975 1960 1985 1966 1967 1968 1969 1990 ................................. ........................................................................... .................................. ......................................... ... ........... .......... I. Pvecous Metals (a) 83.1 191.5 1,101.1 505.2 501.4 666.5 617.9 512.? 463.5 ..------ --- . --- ..... . ...... . ....... --- ---. i 1) Gold 7.1 23.4 122.9 80.3 95.8 117.8 127.0 105.2 102.3 2) Silver 76.0 168.1 978.2 424.9 405.6 548.7 490.9 407.5 361.2 11. krn-Fe'rous Industrial Metals (a) 311.4 409.7 733.8 568.5 515.3 710.9 1,138.6 1,391.5 1,484.5 ... ... . . ...... ........... .. ..--.-- -. . .....--- - - - -- - - - - 3) Lead 61.8 79.4 140.5 74.7 70.2 111.1 127.6 128.1 164.0 4) Copper 88.4 92.8 377.0 221.9 213.0 331.3 637.9 704.1 764.5 5) Zinc 93.3 196.7 184.4 215.1 185.4 217.7 297.5 491.0 518.5 6) Antiony 25.4 11.0 6.5 10.8 8.4 6.8 5.5 4.3 5.1 7) Arsenic 1.0 2.1 3.8 4.2 4.3 4.5 4.6 4.4 3.7 8) Bismuth 7.5 6.8 4.1 9.6 4.5 6.0 10.4 11.0 5.8 9) Tin 2.1 3.0 1.1 4.8 4.6 3.1 2.5 1.9 N.S. 10) Cadiu 16.2 10.8 10.1 2.2 2.3 3.5 22.4 20.0 11.3 11) hercury 11.4 2.6 0.0 2.2 2.2 2.6 3.4 N.A. N.A. 12) Selenius 2.2 1.8 0.9 0.6 0.2 0.3 0.3 0.3 0.2 13) Tungsten 1.5 2.6 3.8 1.8 1.3 0.9 1.2 0.9 0.8 14) Nolibdeni 0.6 0.1 1.6 20.6 18.9 23.1 25.3 25.5 10.6 111. Fouridry Metals and Ninerals 100.0 228.5 237.9 149.1 112.0 86.4 175.2 190.2 210.9 15) Cosl (b) 1.6 2.2 2.9 1.5 1.0 0.5 27.8 25.9 22.5 16) Coke (b) 32.0 94.4 59.2 5.3 1.9 1.0 54.3 48.6 44.0 17) Iron (a) 53.3 111.4 150.8 123.7 88.5 68.0 69.4 88.? 99.6 18) _anganese (a) 13.1 20.5 25.0 18.6 20.6 16.9 23.7 27.0 44.8 IV. Non-Metallic Ninrrals (b) 100.2 196.5 264.1 372.0 380.3 412.1 436.5 403.0 353.6 19) Sulphur 47.2 99.9 149.7 246.1 243.3 257.7 249.2 218.7 193.6 20) Graphite 2.8 3.0 3.3 3.3 3.6 3.8 4.6 4.2 2.7 21) Barite 5.7 7.6 11.8 19.7 11.0 13.4 18.9 11.4 10.8 22) DolomIte 2.2 1.7 1.0 0.1 h.S. 0.1 0.7 1.0 0.9 23) Fluorite 32.7 71.0 83.5 55.5 56.3 56.6 63.7 65.7 53.2 24) Kaolin 0.5 0.8 0.1 N.S. N.S. U.S. U.S. U.S. N.S. 25) Silica 4.2 6.2 4.7 0.6 0.2 0.4 2.4 2.5 2.3 26) 6s 4.6 4.5 3.7 0.5 0.2 0.5 3.5 3.5 3.0 27) Phosphorite 0.3 1.8 6.3 1.3 0.6 0.4 1.5 1.3 1.0 28) Salt N.A. N.A. N.A. 64.9 65.1 79.2 91.9 94.6 86.0 29) Woltlastonite N.A. N.A. N.A. 0.0 N.S. 0.0 u.S. M.S. M.S. 30) Celestite N.A. N.A. N.A. 1.S. 0.0 U.S. 0.1 0.1 0.1 V. Total (I+11+11+IV) 594.7 1,026.2 2,336.9 1,594.6 1,509.2 1.875.8 2,368.2 2,497.5 2,512.S ., ....... .................. ....... ........ ...... ....... ........ ......... ........ .......... ......... .......... _.......... ---- -------------------.-9............................................................................... ......................... ........................................, ,,,,,,,,,,,,,,,,,, (a) Metallic content.