Mexico - Mexico City Drainage Project

RESTRICTED ILE COPYI Report No. P-535 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT. AND RECOMMENDATION OF T HE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO DEPARTAMENTO DEL DISTRITO FEDERAL (FEDERAL DISTRICT) AND NACIONAL FINANCIERA, S. A. FOR THE MEXICO CITY DRAINAGE PROJECT April 12, 1967  ITrERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMqENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO DEPARTAMENTO DEL DISTRITO FEDERAL AND NACIONAL FINANCIERA, S.A., MEXICO 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$37 million to the Departamento del Distrito Federal (Federal District) and the Nacional Financiera, S.A. PART I - HISTORICAL 2. The project for a drainage system to remove sewage and rain water run-off from the Mexico City metropolitan area has been discussed with the Bank for some time. A request for a loan for this project was received in October 1965 and supplementary information was received during the first half of 1966. An appraisal mission visited Mexico in August 1966. 3. Negotiations on the proposed loan were held in Washington from January 3 to 6, 1967. The Nacional Financiera was represented by its Sub- Director, Lic. V. Navarrete, and the Federal District by Treasurer, Lic. 0. Calvo and Comptroller-General, Lic. A. Elizundia; they were assisted by members of their staffs. 4. The proposed loan, the first for city drainage in Mexico, would increase the Bank's total lending to Mexico to $662.2 million (net of can- cellations). Mexico has received no IDA credits. The following is the summary of Bank loans to Mexico as of February 28, 1967:  -2- Year Loan No. Borrower Purpose Amount Undisbursed (US$ Million) 1949-62 Loans fully disbursed (net of cancellations) 386.9 nil 1963 336-ME Nacional Financiera, S.A. Irrigation 12.5 7.0 1963 354-ME Nacional Financiera, S.A. Roads 40.0 12.7 1965 401-ME Nacional Financiera, S.A. and Caminos y Puentes Federales de Ingresos Toll Roads 32.0 23.2 1965 430-ME Nacional Financiera, S.A. Agricultural Credit 25.0 22.4 1965 436-ME Nacional Financiera, S.A. and Comision Federal de Electricidad Power 110.0 51.2 1966 850-ME Nacional Financiera, S.A. Irrigation 19.0 19.0 Total (less cancellations) 625.2 Of which has been repaid 1014.2 Total now outstanding 521.0 Amount sold 1.6 of which has been repaid 37.0 7.6 Total now held by Bank 513.1 Total undisbursed 135.5 5. Construction and procurement for Bank-financed projects have been generally proceeding according to schedule with the exception of two loans: (a) the 1963 road loan (Loan No. 354-ME) where delays were caused by lack of engineering preparation and limited budgetary allocation, but remedial action has been taken; (b) the 1965 loan for the power sector's 1965/66 program (Loan No. 436-ME), where delays in the placement of orders in 1965 proved to be greater than estimated when the Loan was made. Current progress on procurement and constructicn is satisfactory.  - 3 - 6. The Government has requested loans for a fourth irrigation and a third roads project. Appraisal reports on these projects are now being prepared. 7. As of February 28, 1967, the IFC held net investments in Mexico, valued at US$4.2 million equivalent (of which US$2.8 million in form of equity and US$1.4 million in form of loans). IFC's commitments in Mexico have totalled US$21.7 million, ranking second only to Brazil, and have been mostly in the form of underwriting and standby commitments. PART II - DESCRIPTION OF THE PROPOSED LOAN 8. Borrowers: Departamento del Distrito Federal and Nacional Financiera, S.A., a financial agency of the Mexican Government which, under the existing Mexican legislation, has to be the borrower or co-borrower of Bank loans. Guarantor: United Mexican States. Amount: The equivalent in various currencies of US$37.0 million. Purpose: To assist in financing the foreign ex- change cost of the construction of three tunnels, totalling about 100 km in length, to remove waste and storm waters from Mexico City. Amortization: 20 years (including 4 years of grace); 33 semi-annual repayments beginning March 15, 1971, and ending March 15, 1987. Interest Rate: 6% per annum. Commitment Charge: 3/8 of 1% per annum. PART III - THE PROJECT 9. A report entitled "Appraisal of the Mexico City Drainage Project" (TO-571a) is attached. 10. Mexico City is located in the Valley of Mexico, a naturally closed basin without any natural surface drainage. Over the centuries, drainage has been provided only through man-made facilities, more recently by a canal and two tunnels, to carry the waste waters out of the valley. At the same time, as Mqexico City draws most of its water supply from wells in the metro- politan area, the excessive removal of underground water has lowered the water table and resulted in a gradual subsidence of the ground surface of  - 4 - the city. Subsidence has now reached a point where the city is below the level of the above-mentioned canal and of a lake into which the drainage is discharged. Unless proper facilities for discharging the waste and storm waters are constructed, the very real danger of flooding Mexi.co City exists. 11. The Federal District has at present about 6 million inhabitants, or almost 15 percent of the country's population. It is Mexico's principal center in finance, commerce and industry. More than 30 percent of the country's commercial establishments and about 50 percent of the country's industries and investments representing jointly a value of about US$2.5 billion equivalent are located here. The project represents the least expensive means of removing the risk of flooding and providing an adequate drainage system. 12. The project would be executed by the Hydraulic Works Division of the Federal District which would be assisted by consultants. The Federal District is the largest single department of the Federal Government, per- forming the combined functions of a municipality and a state for the Federal District of Mexico City, a territory under the direct authority of the President of Mexico. The Organic Statute of 1941 determined its functions and organization. Its principal officers are appointed by the Chief of the District with the approval of the President. The officers and key technical staff of the Federal District, who will be responsible for the construction and execution of the project, are well qualified and experienced and are known to the Bank. 13. The project has been soundly designed and engineered after several years of technical and economic studies which considered alternative solu- tions. It consists of the construction of tunnels to remove sewage and rain water run-off from the Mexico City metropolitan area by gravity flow. It includes: (a) Two interceptor tunnels, one 25 km. and the other 27 km. long, both with diameters increasing from 4 to 5 m, laid about 4O m below the ground, which would join to dis- charge into (b) one central outfall tunnel, 47 km. long, 6.5 m in diameter, laid about 100 m below the ground, which would discharge into the Salto River and the Requena Reservoir. 14. The proposed loan would cover 29 percent of the total project costs. It would cover the direct foreign exchange costs of imported equipment and tools (estimated at about 21 percent of the total project cost) and imported tunnel supports (estimated at about 8 percent of the project costs). Pro- curement would be on the basis of broad international competitive bidding. Disbursements for payments to contractors for civil works would be on the basis of a percentage estimated to equal the estimated direct foreign ex- change costs. Disbursements are expected to be concentrated mainly in 1968 and 1969. Construction should be completed by the end of 1969.  15. The financial position of the Federal District is sound. It has no debts at present, although the possibility of a substantial French credit for the financing of a subway project is under consideration. It has a budget which in recent years on the revenue side reached the equiv- alent of US$200 million. In most of the years, revenues exceeded expenditures and a substantial cash surplus has been accumulated. However, there is a backlog in investments required to keep pace with the needs of the quickly growing metropolitan area, particularly in the field of water supply and drainage. In addition to the US$91.5 million equivalent which represents its contribution to the project under consideration, the Federal District's expenditure on water supply alone during 1966-1970 will total about US$167 million equivalent. This will include bringing in additional water from outside the metropolitan area in quantities which already in the current year should allow a reduction in overpumping from underground sources, and, by 1969, the complete cessation of overpumping, thereby eliminating the cause of the sinking of the city. In view of this necessary, heavy investment program of the Federal District, it has been agreed that additional revenues will be obtained in form of real estate taxes and various charges and fees, the sum of which will enable the District to recover the cost of its invest- ment in the project within ten years. PART IV - LEGAL INSTRUIENTS AND AUTHORITY 16. The draft Loan Agreement between the Bank, and the Departamento del Distrito Federal and Nacional Financiera, S.A., the draft Guarantee Agreement between the United Mexican States and the Bank and the report of the Statutory Loan Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, are being distributed to the Executive Directors separately. 17. The draft Agreements are in the usual form. The following pro- visions are of special interest: Loan Agreement (a) Section 5.11 provides that the Federal District will develop additional sources of water from outside the metropolitan area of Mexico City to prevent excessive pumping of underground water in the metropolitan area in order to safeguard it from further sinking; (b) Section 5.12 provides that the Federal District will make suitable provision for the recovering within ten years from the beneficiaries of the project of *the monies in- vested by the District in the project; and (c) Section 7.01(a), to be read jointly with Section 1.02(c), makes the agreement of neighboring states (Mexico and Hidalgo), which could be physically and adversely affected by the project, a condition of effectiveness.  - 6 - PART V - THE ECONOMY 18. The most recent Bank assessment of the Mexican economy was sub- mitted to the Executive Directors on November 18, 1966 (R66-151).1/ This report reviewed the impressive manner in which the Mexican economy has managed to change and grow over the past decade and a half in an environ- ment of political, social and financial stability. It summarized the manner in which the Mexican Government intends to realize its goal of continued growth with stability and the policy implications of the constraints within which the Government will be operating. The report observed that the Govern- ment is following policies designed to increase the amount of resources avallable for public sector investment, prevent the deficit in the balance of payments on current account from growing unduly and keep the public sector's annual foreign debt service payments from increasing any further. It concluded that with these policies, Mexico's economic prospects remained good and continued support by external lenders was well justified. 19. The information that is now available about Mexican economic de- velopments during 1966 and about the measures that are being implemented to realize the above-mentioned policy objectives give no ground for alter- ing any of the major conclusions of the last report. 20. Real GNP is estimated to have risen by between 6 and 7 percent in 1966, continuing the growth rate of recent years, and prices to have increased by less than 3 percent. Industrial and agricultural output, as well as tourism, increased in the first nine months of 1966 at a similar, if not even a slightly higher rate, than in the recent past. Balance of payments developments appear to have been satisfactory. Exchange earnings and imports have increased about as expected. Despite large external debt repayments during the year, the level of exchange reserves has not been impaired. lMeasures which have been taken recently to increase taxes on cigarettes and automobiles, to modify the application of the income tax law to increase its yield and to limit current expenditures of government agencies are expected to increase 1967 public sector savings to about M4ex$9.1 billion, in line with the estimate in the economic report, and make possible a reasonable financing plan for the Mex$15-16 billion of investment expenditures planned for the year. 21. External debt information received since the last report was pre- pared (Tables 1 and 2) suggests that annual service payments on Mexico's external public indebtedness will be higher in coming years than last esti- mated (WH-164b, Annex II, Table 19). Partly because of improved reporting, and partly because of the apparent impact of the world capital market tight- ness on the average terms of new borrowing during 1966, the official debt service ratio will approximate 22 percent in the 1967 and is more likely to remain at the 20-21 percent level through 1970 than fall to the 18 percent level estimated earlier. While Mexico has been able to handle her external debt, this prospect underlines the importance of the steps the Government has taken to improve the control by the M4inistry of Finance over the planning and the execution of the budgets of all parts of the public sector and thereby over the amounts, and also the terms, of all new external public sector borrow- ing. 1/ "Current Economic Position and Prospects of Mexico" (WH-164b), in five volumes; October 26, 1966.  - 7 - PART VI - COMPLIANCE WITH THE ARTICLES OF AGREEMEtT 22. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMEMNDATION 23. I recommend that the Executive Directors adopt the following reso- lution: RESOLUTION NO. Approval of Loan to Departamento del Distrito Federal and Nacional Financiera, S.A. in the amount equivalent to U.S.$37,000,000 to be guaranteed by United Mexican States. RESOLVED: TIHAT the Bank shall grant a loan to Departamento del Distrito Federal and Nacional Financiera, S.A. to be guaranteed by United Mexican States, in an amount in various currencies equivalent to thirty-seven million United States dollars (U.S.$37,000,000), to mature on and prior to MTarch 15, 1987, to bear interest at the rate of six percent (6p) per annum, and to be upon such other terms and conditions as shall be sub- stantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Mexico City Drainage Project) between the Bank and Departamento del Distrito Federal and Nacional Financiera, S.A., and the form of Guarantee Agreement (Mexico City Drainage Project) between United Mexican States and the Bank, which have been presented to this meeting. George D. Woods President Attachment Washington, D.C. April 12, 1967  TABLE 1: MEXICO - EXTERNAL MEDIUM- AND LONG-TERM - PUBLIC DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF JUNE 30, 1966, WITH M4AJOR REPORTED ADDITIONS JULY 1 - DECEMBER 31, 1966 (Debt Repayable in Foreign Currency) (In thousands of U.S. dollar equivalents) Debt Outstanding Major Reported June 30, 1966 Additions Net of Including July 1 - Item Undisbursed Undisbursed December 31, 1966 TOTAL EXTERNAL PUBLIC DEBT 1,775,900 2L15~207~ 238,869 Publicly issued bonds 156,687 156,687 25,000 Privately placed debt 906,680 921,512 154,091 Suppliers' credits 270,415 274,187 19,925 Other 636,265 647,325 134,169 IBRD loans 355,253 534,830 _ IDB loans 25,1797 12_775- U.S. Government loans 184,960 267,522 59,775 Export-Import Bank 133,780 186,642 2/ 57,775 AID, ICA, Lend-lease 51,180 80,880 2,000 Loans from other governments 105 581 105,581 - Canada 2,2588 - France 49,982 49,982 3/ - Germany 18,021 18,021 - Italy 34,990 314,990 3/ Nationalized properties _41,560 h11,560 _ 1/ Debt with an original or extended maturity of one year or more. 2/ Does not include $90 million standby credit authorized and extended by Eximbank. Will only be signed in the event that Mexico draws against this credit. It is not anticipated by Eximbank that Mexico will do so. 3/ Does not include the undisbursed portion of the following lines of credit whose status as of June 30, 1966 was as follows: (continued)  PAGE 2 TABLE 1 - MEXICO (continued) 3/ (continued) (in U.S. dollar equivalents) Creditor Total Disbursed & Principal Outstanding Repayments Undisbursed French Credit 150,000,000 39,5b7,191 3,753,809 106,699,000 Istituto Mobiliare Italiano 75,000,000 43,757,645 4,800,355 26,442,000 Istituto Mobiliare Italiano 100,68,750 0 0 10,068,750 Istituto Mobiliare Italiano 4,931,250 0 0 4,931,250 Statistical Services Division IBRD-Economics Department March 2, 1967 (Revised April 5, 1967)  TABLE 2: MEXICO - ESTIMATED CONTRACTUAL SERVICE PAYMENTS ON EXTERNAL MEDIUM- AND LONG-TERM PUBLIC DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF JUNE 30, 1966 WITH MAJOR REPORTED ADDITIONS JULY 1 - DECEMBER 31, 1966 1/ (Debt Repayable in Foreign Currency) (In thousands of U.S. dollar equivalents) GRAND TOTAL DEBT OUTST. PAYMENTS DURING PERIOD (BEGIN OF PERIOD) AMORTI- INCLUDING ZATION INTEREST TOTAL YEAR UTIDISBURSED 1966 2,096,077 2/ 382,514 81,955 h6h,469 1967 2,158,963 368,860 95,657 464,517 1968 1,790,892 286,280 85,835 372,114 1969 1,505,088 228,122 76,113 304,236 1970 1,277,463 191,037 69,809 260,847 1971 1,087,047 148,492 57,680 206,173 1972 938,960 113,584 49,966 163,509 1973 825,759 106,470 43,759 150,229 197T 719,317 89,713 38,087 127,800 1975 629,604 80,672 32,920 113,593 1976 548,932 70,037 28,444 98,481 1977 478,895 65,995 214,524 90,518 1978 412,900 63,370 20,880 84,251 1979 349,530 58,720 17,339 76,059 1980 290,810 50,1405 14,261 64,666 1/ Includes service on all debt listed in Table 1 prepared March 2, 1967, except for the following, for which amortization terms are not available: Outstanding IncludinE Undisbursed as of June 30,1966 Suppliers' Credits $ 7,555,000 Other privately placed debt 35,278,000 IDB Loan 5,000,000 U.S. Government Lend-Lease 6,750,000 Loans from other Governments 1 807,229 $56,390,000 2/ Amount outstanding is as of June 30, 1966; payments are for the entire year. Statistical Services Division IBRD-Economics Department March 2, 1967