The World Bank Group in Mexico

THE World Bank Group IN MEXICO INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION INTERNATIONAL DEVELOPMENT ASSOCIATION January 1967  BASIC STATISTICS AREA: 760,000 square miles POPULATION: 1946, 23 million; 1966, 42.5 million Average growth rate in the 1960s about 3.6 % per year GROSS NATIONAL PRODUCT: 1965, $19.4 billion ($478 per capita ) Average growth rate of GNP, 1946- 66: 5. 7 % per year CONTRIBUTION TO GROSS DOMESTIC PRODUCT: % of GDP Sector 1946 1965 Agriculture 22.5 17.5 Mining and Petroleum . . . . . . . . . . . . 5 .7 5.1 Manufacturing and Construction . . . 23.6 28. 7 Other ( Mainly services ) . . . . . . . . . . . 48.2 48. 7 Source: Nacional Financiera, S.A., La Economia Me x icana en Cifras THE WORLD BANK GROUP IN MEXICO ] anuary 1967 JN TWO DECADES, Mexico has more than tripled its out- put of goods and services and raised the real per capita income of its people by three quarters, despite one of the world's highest rates of population increase. With political and financial stability and effectively ad- ministered investment programs in the principal sectors of the economy and in education, Mexico has maintained a high and relatively steady rate of economic growth throughout most of the postwar period. Mexico was one of the earliest members of all three institu- tions in the World Bank Group: The International Bank for Reconstruction and Development (World Bank), the Inter- national Finance Corporation ( IFC) and the International Development Association (IDA). It is the Bank's largest borrower in the Wes tern Hemisphere and its third largest in the world, with a net total of about $625 million in 16 loans through September 1966. It is IFC's second largest cus- tomer, with 12 investments totaling $21. 7 million. Under loans and credits by the Bank and IDA to other member coun- tries, it has exported a wide variety of goods valued at $9 mil- lion. It has not been eligible, however, for direct assistance from IDA, whose 50-year, interest-free credits have been re- served for countries with lower per capita income and more pressing financial problems. In subscriptions to the Bank, IDA and IFC, Mexico has pro- vided about $19.3 million in funds available for lending, in- cluding $3. 7 million in U.S. dollars. It has also repaid to the Bank about $60 million in borrowed funds, while paying in- terest on disbursed portions of effective loans at rates ranging from 3112 % to 6%. A rough measure of the World Bank's participation in Mexico's development is the fact that its loans outstanding at the end of 1965 constituted more than 54% of the country's public debt to international lending institutions and govern- ments. In addition to official assistance, foreign private in- vestors have also participated heavily in financing Mexico's growth, an indication of the country's international credit 1 standing. Since 1963, the Mexican Government has been able to place four long-term bond issues, totaling $128 million, in external capital markets at interest rates ranging from 61/4 % to 6% % , while the publicly-owned Federal Electricity Com- mission was able to borrow another $20 million, without gov- ernment guarantee, in European Units of Account. Over the years, private investors in the industrialized countries have purchased portions of the World Bank's own loans to Mexico totaling $44 million , $31 million of which has been repaid. More than 56 % of World Bank Group financing in Mexico ( $365 million ) has been for the generation and transmission of electric power. The second largest volume of lending ( $188.5 million) has been for the development of roads and railways. Of the remainder, $71.5 million has been for agri- cultural projects and about $22 million for industry. POWER Early postwar development in Mexico was seriously im- peded by the failure of electricity production to keep pace with residential demand, to meet the requirements of new factories or to permit the modernization of agriculture and the growth of associated processing industries. In 1949, therefore, the Bank began its lending program in Mexico with a loan to help overcome the power shortage and open the way to further in- dustrial and agricultural growth. Six subsequent loans have assisted the steady expansion of generating and transmission facilities to keep abreast of demand , which has been rising in recent years at an average annual rate of about 9.5 % . Mex- ico's installed capacity for power production, which totaled only 1.2 million kilowatts in 1949, had nearly quadrupled by the end of 1964, to 4.6 million kilowatts. The Bank had par- ticipated in financing more than three-fourths of the expan- sion and , in December 1965, lent another $110 million to help finance a further increase of 865,000 kilowatts and expand transmission and distribution systems. Of the Bank's total financing for power in Mexico, nearly 90 % has been in five loans made jointly to the Federal Elec- 2 tricity Commission and the N acional Financiera ( NAFIN), aggregating $328 million. The Commission is an autonomous government agency responsible for nationwide electric power development, while NAFIN, Mexico's principal official devel- opment bank, is the government's financial intermediary for external borrowing. The remaining $37 million has been in two government-guaranteed loans to the Compania Mexicana de Luz y Fuerza del Centro, formerly The Mexican Light and Power Company ( Mexlight), which serves Mexico City and the surrounding area. In addition to electricity produced in its own plants, Luz y Fuerza purchases large quantities from the Commission, whose Miguel Aleman hydroelectric system near Mexico City has been expanded with the help of Bank loans. The Commission's borrowings have helped to expand power service throughout Mexico, in both rural and urban areas and through private as well as public distribution systems. The Bank's first two loans to the Commission, one of $24.1 million in 1949 and another of $29.7 million in 1952, helped to finance the installation of new generating capacity for more than 632,000 kilowatts in 28 different units in every major region. Nearly half of the increase was in the Miguel Aleman system. In the northwestern states of Sonora and Sinaloa, agricultural modernization and industrial growth were ad- vanced by the addition of capacity for 114,600 kilowatts. Small stations were built in Chiapas, Tabasco and Yucatan, providing relatively isolated areas in those states with their first reliable sources of power. A new 52,000 kilowatt hydro- electric plant was constructed at El Cobano in the state of Michoacan, spurring the growth of new industries and per- mitting the irrigation of previously arid regions. Other plants constructed and expanded under this program are providing power for towns and cities throughout Mexico. The Bank made its third loan to the Commission in 1958, providing $34 million to cover the foreign exchange costs of four major power projects in a five-year expansion program extending to 1962. These projects added 413,600 kilowatts to the power available in Mexico City, Puebla, Vera Cruz, Sonora 3 and Michoacan. By the end of the program, the Commission's generating capacity had increased from about 100,000 in 1949 to 1,200,000 kilowatts, making the Commission the largest producer of power in Mexico. A new four-year program, 1962-1965, provided for tripling output with the addition of new generating capacity for 2,550,000 kilowatts, and for greatly expanding the Commis- sion's transmission and distribution facilities. Of the total cost of $435 million, the World Bank provided $130 million in a loan made in 1962. The program has involved the construc- tion or enlargement of 13 thermal plants capable of producing 1,260,000 kilowatts, 10 hydroelectric plants with a total ca- pacity of 1,130,000 kilowatts, smaller plants to add 160,000 kilowatts to the capacity of the Commission's rural electrifica- tion system, the construction of about 2 ,800 miles of trans- mission lines, and expansion of distribution systems in most industrial and population centers. The Bank's most recent loan to the Commission, in Decem- ber 1965, provided $ll0 million to help finance a further expansion program for 1965-1966, at a total estimated cost equivalent to $300 million. The balance of foreign exchange needs , estimated at $35 million, was to be advanced by various governments to pay for procurement in their countries under conditions of international competitive bidding. The program calls for completion of generating plants with a capacity of 850,000 kilowatts and for starting work on projects to be completed after 1966. TRANSPORTATION Beginning in 1954, the World Bank has assisted the de- velopment of Mexico's rail and road transport network with loans totaling $188.5 million. A loan of $61 million in 1954 provided foreign exchange for imports of materials and equipment to rehabilitate the 1,200-mile Pacifico Railroad , which serves the west coast from Guadalajara to the United States, including the important ports of Guaymas and Mazatlan. 5  This project, which cost a total of $80 million, has been a key factor in the rapid agricultural and industrial growth of Mexico's northwest. The area is one of the country's most productive, and it depends largely upon the railroad to bring in manufactured goods and carry its products to market in Mexico and the United States. The railroad was purchased by the Government from a United States company in 1951. In the previous 15 years, annual freight tonnage had more than doubled, but the track, rolling stock and communications system were inadequate. Almost all track was replaced, bridges were repaired, steam locomotives were replaced by diesels, old freight cars were re- paired and new ones purchased, and the communications system was modernized. Most of the Bank's assistance for the improvement of Mex- ico's transport systems, however, has been in a series of four loans totaling $127.5 million for projects to build or improve more than 6,600 miles of roads , construct and equip eight toll bridges and establish ferry service between the western port of Mazatlan and La Paz, near the southern tip of Baja California. These projects have been part of a long-term pro- gram which has more than doubled Mexico's highway network since 1955, when the entire road system totaled about 16,000 miles. The first loan, made in October 1960 to the N acional Financiera, provided $25 million to help the Federal Highway Administration of the Ministry of Public Works in building or improving 2,000 miles of high priority roads , mostly in central and southern Mexico, as part of a four-year program involving 8,900 miles of highways. The second loan , of $30.5 million, was made jointly in June 1962 to the N acional Financier a and the Federal Toll Roads and Bridges Authority, for the construction of 240 miles of toll highways , four access roads , five toll bridges and the ferry service across the Gulf of California, including the purchase of a ferry boat and construction of a terminal at each end of the 250-mile crossing. 6  In September 1963, a third loan of $40 million was made to the N acional Financier a to complete or construct 40 roads in widely scattered parts of the country, totaling 4,100 miles, and to purchase maintenance and laboratory equipment re- quired to improve and expand maintenance operations and facilitate the control of road construction. The fourth loan was one of $32 million made jointly in February 1965, to the N acional Financier a and the Federal Toll Roads and Bridges Authority to help with further exten- sion and improvement of the toll road system. The project in- cluded the construction of four new toll roads totaling 88 miles, the widening and improvement of the 130-mile road from Mexico City to Queretaro, the construction of three toll bridges and the purchase of toll booth equipment. AGRICULTURE Mexico's farms produce 95% of its food requirements and more than half the value of its exports, while they absorbed only 52 % of the labor force in 1964 compared with 58 % in 1950. These results must be viewed against the background of a high population growth rate , a rising level of per capita food consumption, and the fact that only 16% of the country's land area is suitable for farming and much of it lacks ade- quate water. The key has been an intensive investment pro- gram which doubled the irrigated area between 1950 and 1962 and embraced a total of 10 million irrigated acres by 1966. In recent years , the government has also been giving emphasis to the rehabilitation and expansion of existing irri- gation systems. The World Bank's assistance to Mexican agriculture has taken the form of three loans totaling $46.5 million to help expand production through improving irrigation works, and another of $25 million to provide credit for farmers and processors of agricultural products. The irrigation loans-$15 million in January 1961, $12.5 million in April 1963 and $19 million in May 1966-were 8 made to the N acional Financiera for projects administered by the Secretariat of Hydraulic Resources. The first two loans have helped to rehabilitate and expand irrigation systems along the northwest coast and in northeast and north central Mexico, involving 2,250,000 acres of irrigated land. The third project will rehabilitate a total of 235,000 acres, including 92,000 acres of newly irrigated land in the central and north central areas. The total cost of the three projects is estimated at $170 mil- lion, including more than $123 million provided by the Mexi- can Government from its own resources. On completion, they are expected to increase the value of Mexican farm production by about $41 million per year. The Bank's agricultural credit loan of $25 million was made in September 1965 to the N acional Financiera, to be ad- ministered by the Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avi culture ( Fondo) , a trust fund established by the Bank of Mexico in 1955 to mobilize addi- tional credit for farmers. The Fondo's operations on behalf of small farmers were greatly accelerated in 1962 by a $20 million loan from the U.S. AID, and the Bank's loan was to enable it to expand assistance to the operators of medium- sized and commercial farms and to processing industries. Over a three-year period, it was expected that private banks would lend approximately $56 million equivalent for such purposes , with up to 90 % being rediscounted by the Fon do from its own resources and the Bank loan. About half the proceeds of the Bank loan were earmarked for the livestock industry, 20 % for general crop production, 10 % for processing facilities , 8 % for tree crops and the remainder for technical services. INDUSTRY By the standards of most developing countries, Mexico is highly industrialized. In 1965, 18.4 % of the country's la- bor force was employed in manufacturing and construction, while industry accounted for 28. 7 % of gross domestic product. The chief contribution of World Bank lending to the indus- 10  trialization of Mexico has been in the development of an effective infrastructure, principally in the fields of power and transport. The Bank Group's direct financing of industrial enterprises in the country has been assumed by the Inter- national Finance Corporation, which operates without govern- ment guarantee and provides equity as well as long-term loan capital. By the end of September 1966, IFC had made commit- ments of $21. 7 million to seven Mexican companies. In Mexico, as in all countries in which IFC operates , it is the Corporation's practice to enlist the support of local and foreign investors in its commitments. In this way, IFC has '~ helped to complete financing plans totaling $104 million in Mexico. For every $1 invested by the Corporation in Mexican enterprises , other investors have provided nearly $4. Approxi- mately $2 has come from local private sources, $1 from public institutions, mainly in the U.S., and about $1 from private investors in the U.S., Canada and France . Furthermore, some 70 % of IFC's investments and standby and underwriting commitments to Mexican enterprises, or $15.4 million, has subsequently been acquired by other investors . Financial in- stitutions in the U.S ., Switzerland, Panama, Italy, Kuwait and Germany, as well as investors in Mexico, have participated in IFC commitments or purchased parts of investments from its portfolio. IFC's first investment in Mexico was made in 1957 to assist a manufacturer of automobile parts. Since then the Corpora- tion has made loans to a company engaged in the repair and overhaul of aircraft engines , a manufacturer of high speed twist drills and a producer of sodium sulphate. Two equity investments have been made in a manufacturer of construc- tion and industrial equipment. In 1962 IFC took part in the first issue of convertible debentures in Mexico , when $5 mil- lion were priva tely placed with foreign institutions on behalf of Tubos de Acero de Mexico, S.A ., the country's only manu- facturer of seamless steel tubular products. IFC purchased outright $250 ,000 of the debentures and took up a further $150 ,000 under a standby agreement. 11 12  IFC's most important contribution to the financing of in- dustry in Mexico is represented by the continuing assistance the Corporation has given to Compania Fundidora de Fierro y Acero de Monterrey, S.A. (FUNDIDORA), the largest pri- vately owned steel producer in the country. This assistance began in 1962 when IFC joined with Credito Bursatil, a Mexi- can investment bank, for the first of three underwritings of public share offers by Fundidora and also subscribed directly to shares of the company. The second of these operations, in 1964, involved $12.5 million and was by far the biggest under- writing in Mexico on behalf of a private company. Including a private placement of convertible debentures which accom- panied the latest underwriting, in 1966, these operations have yielded more than $30 million toward the completion of financing plans designed to raise Fundidora's annual capacity from 200,000 to 750 ,000 tons. IFC's total commitment in the three operations was $16.4 million. All of the Fundidora shares underwritten by IFC have been bought by private investors, most of them in Mexico. Since 1962, the number of Fundi- dora's shareholders has grown from under 700 to about 2,000. MEXICO BANK LOANS AND IFC INVESTMENTS 1949- September 30, 1966 by Sector Amounts Expressed in U.S . Dollar Equivalents IFC BANK LOANS INVESTMENTS TOTAL Amount Amount Amount No . ( thousands ) No . ( thousands ) No . ( thousand s) POWER 7 $364,800 7 $364,800 RAILWAY 1 61,000 1 61,000 ROADS, FERRY 4 127,500 4 127,500 AGRICULTURAL CREDIT 1 25 ,000 1 25,000 IRRIGATION' FLOOD CONTROL 3 46,500 3 46,500 INDUSTRY 9 $21,700 9 21,700 16 $624,800 9 $21,700 25 $646,500 13  PHOTOGRAPHS Page 4. Installing a 27-ton rotor in the 82,400-kilowatt generating unit at the Lecheria thermal elec- tric power plant, near Mexico City . Page 7, Constructing a new highway between Mon- top . terrey and Saltillo. Page 7, Two new diesel locomotives at Nogales, the bottom. northern terminal of the Pacifico Railroad. Page 9. A field worker adjusting siphon pipes in an irrigated cotton field in the Yaqui Valley. Page 12. Welding large beams for the new open hearth furnace being erected at the FUNDIDORA steel plant at Monterrey. •  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 1818 H Street, N.W., Washington, D. C. 20433 U.S.A. Telephone number: EXecutive 3-6360 Cable address: INTBAFRAD Office for. Europe: 4, A venue d'Iena, Paris 16e, France Telephone number: KLEber 25-10 Cable address: INTBAFRAD PARIS