Mexico - Livestock and Agricultural Development Project

RESTRICTED FILE COPY Report No. P-696 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 The report may not be published nor may it be quoted as representing their views.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 THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NACIONAL FINANCIERA, S. A., OF MEXICO FOR A LIVESTOCK AND AGRICULTURAL DEVELOPMENT PROJECT WITH THE GUARANTEE OF MEXICO May 7, 1969  Il-TERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPM?T REPORT AND RECOD1MENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.A., OF MEXICO FOR A LIVESTOCK AND AGRICULTURAL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$65 million to Nacional Financiera, S.A. to assist in the financing of a livestock and agricultural development project in Mexico. PART I - HISTORICAL 2. In August 1968 the Government requested a loan to continue the agricultural credit program initiated with the assistance of Loan No. 430-SE and to concentrate on cattle development in the southeastern region of Miexico. A Bank mission appraised the project in September/ October 1968. 3. Negotiations for the proposed loan were held in Washington from April 14 to 21, 1969. The Borrower and Guarantor were represented by lMessrs. Pedro Galicia, Fernando Ruiz de la Pena and Fernando Torres from Nacional Financiera, S.A., Banco de Mexico was represented by Messrs. Jesus Silva Herzog and Horacio Garcia Aguilar, Banco Nacional Agropecua- rio by Jesus Romero Chavez. 4. The following is a summary of Bank loans to Mexico as of March 31, 1969:  -2- Loan Year Borrower Purpose Amount Undisbur3E; (US$ million) 1949-1965 Loans fully disbursed 521.6 Nil (less cancellations) 136 -ME 1963 Nacional Financiera, S.A. Irrigation 12.5 4.0 D L-14E 1963 Nacional Financiera, S.A. Roads 39.3 2.5 1CCB-ME 1965 Caminos y Puentes Federales de Ingresos and Nacional Financiera, S.A. Toll Transport 32.0 11.2 io0-ME 1966 Nacional Financiera, S.A. Irrigation 19.0 13.3 527 i'H 1968 Nacional Financiera, S.A. Irrigation 25.0 25.0 r?R-.gE 1968 Nacional Financiera, S.A. Roads 27.5 27.5 91I --,IE 1968 Comision Federal de Electricidad and Nacional Financiera, S.A. Power 90.0 52.4 Total (less cancellations) 766.9 Of which has been repaid to Bank and others 151.5 Total now outstanding 615.4 Amount sold 48.9 Of which has been repaid 38.7 10.2 Total now held by Bank 605.2 Total undisbursed 135.9  5. Construction and procurement financed under outstanding loans have generally been proceeding satisfactorily. A small part of the construction in one district financed under the 1963 irrigation loan (336-ME) has been postponed and the Closing Date extended to June 30, 1970, while efforts were being made to improve drainage and cropping patterns and to increase the availability of water. Construction under the 1963 highway loan (354-ME) is now expected to be completed in mid- 1970, three years behind schedule, mainly because of delays caused by unusually heavy rains, limited budgetary allocations and larger volumes of work than had been originally estimated on the basis of preliminary engineering. Construction delays have also occurred under the 1965 toll transport loan (hal-HE) because of increased quantities of earthwoxks and additional structures and because of a delay in the decision as to whether to proceed with one of the roads in the project. 6. A project for another power sector loan is currently being ap- praised. The Government has also expr esed interest in loans for projects in the fields of forest industries and tourism, as well as further projects for roads and irrigation. 7. IFCr s total commitments in Mexico, as of Mlarch 31, 1969, totalled $29.0 million comprising $6.5 million of operational investments and $22.5 million of standby and underwriting commitments, in seven enterprises. IFC holds for its own account $l.4 million in loans and $3.2 million (at cost) in equity. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. Borrower: Nacional Financiera, S.A., a financial agency of the Mexican Government which, under the existing Mexican legislation, has to be the boryower or co-borrower of Bank loans. Guarantor: The United Mexican States Project Agreement: Banco de Mexico, as trustee of the Fonic de Garantia y Fomento para la Agri- cultura, Ganaderia y Avicultura (FONDa). Amount: The equivalent in various currencies of $65 million. Purpose: To provide funds to FUNDD, to be channeled through participating credit institutions, for the implementation of: (a) a countrywide livestock, agricultural and agro-industrial development sub- project (which is essentially a continua- tion and expansion of Loan L0-Ig) and (b) a sub-proj'ect desigaed to de7elnp cattle in the Gulf of hexico arua.  4 - Amortization: 20 years, including a five-year period of grace, through semi-annual instaLl- ments, beginning September 1, 1974 and ending September 1, 1989. Interest Rate: 6-1/2 percent per annum. Commitment Charge: 3/4 of 1 percent. Estimated Economic Rate of Return: Around 30 percent. PART III - THE PROJECT 9. An appraisal report entitled "Livestock and Agricultural Develop- ment Project" (PA-8a) is attach-ed. 10. Agriculture provides employment for half of Mexicols population, and accounts for over 50 percent of the countryts export earnings and about 95 percent of domestic food consumption. Considerable resources are avail- able for the raising of livestock, which represents about 35 percent of the net value of farm output. In the development of crop production, livestock and agro-industries the adoption of new production techniques has been closely associated with the provision of agricultural credit from both public and private credit institutions. There is still substantial un- satisfied demand for agricultural credit, especially on medium and long- term. The FONDO ts resources and organization are playing an important role in helping to cover this gap. 11. The FONDO, a trust fund of the Banco de M4exico, operates as an intermediary between private credit institutions and the predominantly government-owned Banco Nacional Agropecuario system (BNA) on the one hand, and the Banco de Mexico, to whose rediscount facilities it has full access, on the other. Funds from the FONDOts own resources and from borrowings are channeled through the participating credit institutions to farmers. livestock producers and agro-industries. The FONDO administers several lending programs. The Bank's experience with its 1965 loan of $25 million (430-ME) handled entirely through the FONDO has been satisfactory. A special fund was created within the FONDO for the first loan, and the loan was fully disbursed prior to the Closing Date. As of June 30, 1968, it had contributed to the financing of 2,617 individual projects, of which, in value terms, 58 percent was for livestock, 20 percent for general crops, 17 percent for agro-industries and 5 percent for fruit and tree crops. 12. The project is divided into two parts: (a) a countrywide sub- project which includes annual crops, perennial crops, agro-industries, technical services and livestock development (excluding cattle development in the southeastern sub-project area); (b) the southeastern sub-project, which consists of cattle development in that region of the country. The  total cost of the project over a five-year period is approximately $200 million, including working capital requirements of about $24 million, which would be provided entirely by Mexican sources. The prospective sources of financing for the project would be as follows: producers 20 percent, participating banks 16 percent, FONDO 32 percent and IBRD 32 percent. While the Bank and the FONDO would thus share equally in the overall financing of the project, the Bank loan would not be avail- able to help to finance the working capital component of the project. Accordingly, the Bank would, on the basis of statements of expenditures, reimburse the FONDO for 56 percent of its disbursements to participating credit institutions for medium and long-term loans and the FONDO would cover the remaining 44 percent with its own resources or by borrowing from other sources. 13. The major objective of the project is to increase the total flow of medium and long-term credit into agriculture as a means of rapidly ex- panding output. Returns on investment will vary greatly depending on the type of the enterprise and its location. The overall economic rate of return for the countrywide sub-project is estimated at 28 percent and for the southeastern sub-project at 34 percent, which would give an average return on investment for the project of 31 percent. To induce participat- ing credit institutions to increase their participation in the financing of the project, the FONDO will rediscount loans at rates ranging from 5 Dercent to 7.5 percent, depending on the contribution of the participating institutions and on the size of the loan. The ultimate borrower will pay between 10 and 11 percent and, in addition, a technical service fee of 1 percent, payable to the FONDO, will be charged on the face value of loans for agro-industries, wiich involve more technical preparation than crop production and cattle raising. 14. The Bank loan would cover estimated foreign exchange costs of about $49 million and local costs of about $16 million. This proposed financing of local costs appears reasonable on the basis of the Bankts continuing appraisal of Mexico's development program and Mexico's efforts to mobilize domestic resources, which are summarized in Part V below. 15. As under the previous loan for agricultural credit in Mexico (430-IME) and as is common to most agricultural credit operations, purchase of the equipment financed under the Loan will be made by borrowing producers themselves. They will buy relatively small quantities of widely diversified products, both foreign and domestically,made through local dealers and distributors who are highly competitive. In these circumstances, inter- national competitive bidding is not practicable. In the case of agro- industrial machinery and equipment required for the project, the Govern- ment will insure that the necessary import permits will be issued promptly.  - 6 - PART IV - LEGAL INSTRU=ENTS AND AUTHORITY 16. The draft Loan Agreement between the Bank and Nacional Financiera, S. A., the draft Guarantee Agreement between the United Mexican States and the Bank, the draft Project Agreement between the Bank and Banco de Mexico, S.A., the Report of the Comnittee provided for in Article III, Section 4 (iii) of the Articles of Agreement and a draft Resolution are being distributed to the Executive Directors separately. 17. The provisions of the Loan, Guarantee and Project Agreements generally conform to the patterns of previous agreements in Mexico, particularly those for the first agricultural credit loan. It is a condition of disbursements for the South-eastern Cattle Development Sub- project that the FONDOIs office in Villahermosa must be set up as a regional office with a suitable organization and technical staff (Section 2.03(i)). PART V - THE ECONOIaT 18. Mexico's economic progress since the 1950's, during which period real GNP increased at an average annual rate of about 6 percent, was analyzed in the Bank's comprehensive report of 1966 (WH-164b) and in subsequent reports (WH-174a and ME-183a). These reports described the impressive aspects of Mexican performance, but also stressed the importance of expanding public sector savings, increasing export earnings and keeping the external debb service within manageable proportions. 19. A Bank mission which has just returned from M4exico reports positively on these major issues. Public sector savings grew by 25 per- cent during 1968 and plans are now being completed for a major change in the system of indirect taxes with the view to raising additional revenues. The balance of payments situation in 1968 wasq reasonably satisfactory and the Government is currently intensifying its efforts to increase agri- cultural and industrial production for export and expand its foreign exchange earnings from tourism. 20. During 1968 Mexico also continued efforts to obtain the external financing needed for her investment program and at the same time hold down the annualservice burden on her external public debt by stretching out maturities in the process of "rolling over" outstanding debt, despite tight international money markets. Service payments during 1969 on the medium and long-term external public debt will be about $544 million and the debt service burden will amount to about 22 percent of foreign exchange earnings. Summary tables of Mexico's external medium and long-term public debt are attached.  - 7 - 21. Mexico is making continuing efforts to expand public savings and export earnings, but even after taking this into account and allowing for the proceeds of foreign bond issues and borrowings from commercial banks abroad, the volume of gross capital inflows is not likely to be sufficient to cover the savings-investmaent gap of the public sector and the overall balance of payments deficit unless the financing extended by international agencies covers some local costs in addition to the foreign exchange costs of eligible projects. This situation exists partly because of the existing high level of debt service and also because of the fact that Mexico has a diversified industrial structure capable of supplying a large portion of its requirements for capital goods. In the existing circumstances in Mlexico Bank financing of a portion of the local costs of high priority projects is justified. 22. In view of a long record of good economic performance and the Government's continuing policies for fiscal and balance of payments manage- ment, I consider Mexico creditwiorthy for further Bank lending. PART VI - COMPLIANCE IWITH ARTICLES OF AGREEMEUT 23. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 24. I recommend that the Executive Directors approve the proposed loan. Robert S. McNiamara President by J. Burke Knapp Attachment liashington, D. C. May 7, 1969  PRELIMINARY Table 3.: MEXICO - ESTIMATED EXTERNAL PUBLIC DEBT OUTSTANDING AS OF DECEMBER 31, 1968 /1 Debt Repayable in Foreign Currency (In thousands of U.S. dollars) Debt Outstanding Source December 31, 1968 (Disbursed and Undisbursed) TOTAL EXTERNAL PUBLIC DEBT 3,006,326 Privately held debt 1 600 301 Publicly issued bonds Suppliers' credits 353,372 Financial institutions and others 911,921 Loans from international organizations 828,060 IBRD 620,299 IDB 207,761 Loans from governments 52h4660 Canada 29,940 Czechoslovakia 216 France 70,357 Germany 12,825 Italy 36,661 Japan 9,936 United States 364,725 Nationalization 53,305 /1 Debt with an original or extended maturity of one year or more. Statistical Services Division Economics Department May 6, 1969  PRELIMINARY Table 2: MEXICO - ESTIMATED FUTURE SERVICE PAYMENTS ON EXTERNAL PUBLIC DEBT OUTSTANDING AS OF DECEMBER 31, 1968 Debt Repayable in Foreign Currency (In thousands of U.S. dollars) DEBT OUTSTANDING (BEGIN.OF PERIOD) PAYMENTS DURING PERIOD INCLUDING AMORTI- YEAR UNDISBURSED ZATION INTEREST TOTAL TOTAL EXTERNAL PUBLIC DEBT 1969 2,733,207 406,759 137,294 544,053 1970 2,326,947 280,637 125,752 406,389 1971 2,046,918 252,782 116,201 368,983 1972 1,794,532 290,081 100,046 390,127 1973 1,504,708 269,448 84,153 353,601 1974 1,235,288 139,621 68,421 208,042 1975 1,095,667 123,887 60,601 184,488 1976 971,781 107,120 53,538 160,658 1977 864,661 99,223 47,343 146,566 1978 765,437 109,180 41,752 150,932 1979 656,257 83,891 35,343 119,234 1980 572,365 103,851 30,679 134,530 1981 468,515 67,815 24,636 92,451 1982 400,700 85,579 20,242 105,821 Note: Includes service on all debt listed in Table 1 prepared on May 6, 1969 with the exception of $273,560,000 for which repayment terms are not available. Statistical Services Division Economics Department May 6, 1969