Mexico - Fourth Road Project

RESTRICTED FILE COPY Report No. P-832 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 The report may not be published nor may it be quoted as representing their views.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 NACIONAL FINANCIERA, S. A. OF MEXICO WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR THE FOURTH ROAD PROJECT June 2, 1970  REPORT AND RECOIvINDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.A. OF MEXICO ITH THE GUARANTEE OF THl UiITED 152;;ICAN STATES FOR THE FOURTH ROAD PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$ 21.8 million to Nacional Financiera, S.A., (Nafin) uith the guar-antee of the United Mexican 'tatas to covor the estimated foraign exchange cost of a road project. PART I - Historical 2. Of the twenty-four Bank loans to M4exico, five totalling $155 million were for highways, of which three were for federal roads (in 1960, 1963 and 1968) and two for toll road transpo-rt (in 1962 and 1965). The proposed project was appraised by a Bank mission in November 1969. Negotiations were held from May 13 - 20, 1970. Negotiators from Nafin were headed by Lic. Pedro Galicia and from the Secretariat of Public Works by Subsecretary Ing. Rodolfo Felix Valdes. 3. The proposed loan would increase the Bank's lending to Mexico to $979 million (net of cancellations). Mexico has received no IDA credits. The following is a summary of Bank loans to Mexico (as of April 30, 1970):  Loan Year Borrower Purpose Amount UndisbvLrsed 1949-1965 Loans fully disbursed (less cancellations) 52216 Ni" 336-11E 1963 Nacional Financiera,S.Ao Irrigation 12.5 2.6 354-ME 1963 Nacional Financiera,S.A. Roads 39.3 0.3 401-ME 1965 Caminos y Puentes Federa- Toll Transport 32.0 5.6 les de Ingresos and Ha- cional Financiera, S,Ao 4504-E 1966 Macional Financiera,S.A. Irrigation 19.0 7.2 527-ME 1968 Nacional Financiera,S.A. Irrigation 25.0 24.6 528-1IE 1968 Nacional Financiera,S.A. Roads 27.5 21,2 544-1-E 1968 Comnision Federal de-- Electricidad and Na- cional Financiera,,S.Ao Power 90.0 11o3 610-ME 1969 Nacional Financiera,S.A. Agriculture 65.0 50.2 659-N4E 1970 Comision Federal de Electricidad and 'Na- cional Financiera,S.A, Power 125.0 125.0 Total (less cancellations) 956.9 Of which has been repaid to Bank and others 183.5 Total now outstanding 773.4 Amount sold 490o Of which has been repaid 42,8 6.2 Total now held by Bank 767.2 Total undisbureed 2 L8 0  - 3 - 4. qSerious delays have occurred in procurement and construction, and disbursements have been slower than was expected,under the following irrigation loans: Loan 336-ME of 1963 - construction in one district had been temporarily postponed while efforts were underway to improve drainage, increase the supply of water and improve the cropping pattern; subsequently, construction has been resumed and the Closing Date extended to June 30, 1971,which should permit complete disbursement of the loan; Loan 450-ME of 1966 - construction of the distribution system w~as delayed in order to concentrate efforts on completion of major storage works; current prospects are that the project may still be completed by the original Closing Date of March 31, 1972; and Loan 527-ME of 1968 - effectiveness was delayed 13 months because of problems in reaching agree- ments with farmers on water charges; progress with the execution of the project is now satisfactory and full disbursement by the original Closing Date of June 30, 1975, is expected. Progress under the following highway loans has been lagging: Loan 354-ME of 1963 - the project suffered from delays in placing contracts and in obtaining local funds, bad weather and the problem of right-of-way acquisition. It is now about 95% complete and will be fully completed this year; Loan 401-i4E of 1965 - work was completed early in 1970 but disbursements are lagging because, after elimination of one of the project roads,the corresponding amounts have been reallocated but, so far, only partly disbursed; Loan 528-ME of 1968 - although delays have occurred in making disbursement applications, con- struction is generally proceeding satisfactorily. 5. A tourism project is expected to be appraised this summer and a project for a forest industries complex is under preparation with assist- ance from the Bank/FAO Cooperative Program. 6. IFC's total commitments to Mexico had reached $30.5 million by April 30, 1970, consisting of $8.0 million of operational investments and $22.5 million standby and underwriting commitments. From these commitments the Corporation still held $5.4 million on that date, con- sisting of $2.9 million in loans and $2.5 million in equity. PART II - Description of the Proposed Loan 7. Borrower: Nacional Financiera, S. A., a financial agency of the Mexican Government which, under Mexican legislation, has to be the borrower or co-borrower of Bank loans. Guarantor: The United Mexican States.  - 4 - Amount: The equivalent in various currencies of $21.8 million. Purpose: To finance the estimated foreign exchange cost of a program for the improvement of about 580 kms and the construction of about 462 kms of federal highways. Amortization: 25 years, including a 5-year period of grace; amortization in semi-annual installments beginning July 1; 1975 to retire the loan by January 1, 1995. Interest Rate: 7 percent per annum. Commitment Charge: 3/4 of 1 percent per annum. Estimated Economic Rate of Return: 18 percent per annum. PART III - The Project 8. The appraisal report entitled "Appraisal of a Fourth Road Project - Mexico" (PTR-h7a) is attached. 9. Since the Bank's first road loan to Mexico, good progress has been made in developing a modern highway system in the country, and the length of the federal system has increased from 21,000 kms in 1960 to 27,000 kms in 1968. At the same time the quality of the roads has been improved and nearly 60 percent of the system is now paved. The project is a continuation of this process. lOo A need exists for further investments in roads and other transport modes to assist in the continuing rapid growth of the country, and there is also an increasing need for a well coordinated overall strategy of transport development. On the request of the Government, a Bank mission visited Mexico last April to study the transport sector of the country. Its report is now being prepared. In addition, a special study is being made of the rate structure of toll roads owned and operated by the Caminos y Puentes Federales de Ingresos y Servicios Conexos (Caminos); a governmental agency. 11. The planning, construction and maintenance of federal roads is a responsibility of the Secretariat of Public Wlorks. This Secretariat has a competent staff and extensive experience in highway construction and maintenance. Expenditure on federal highways over the next seven years is estimated to be the equivalent of about US$700 million.  - 5 - 12. The total cost of the project works, including contingencies, is estimated at the equivalent of about $56.8 million. The proposed loan of US$21.8 million equivalent consists of $18.8 mlllion represent- ing the estimated foreign exchange cost of project works, together with $3 million for interest and other charges on the Bank loan. The balance of the financing for the project would be provided by the Federal Budget. Bank disbursements for project works would be made on a percentage basis. 13. Contracts for the project works would be let on the basis of international bidding except for approximately $5.8 million of contracts, constituting about 10 percent of the total cost of project works, for bridges and miscellaneous works which would be awarded after locally advertised bidding. This follows the pattern of procurement agreed under previous loans. The Government has agreed in the case of six roads to tendering for "packages" of road sections as well as individual road sections, as explained more fully in paragraph 4.15 of the Appraisal Report and paragraph 3 of Schedule 3 of the Guarantee Agreement. This procedure is intended to encourage broader international competitive bid- ding, reduce costs and improve efficiency in construction. 14e The project is justified on the basis of substantial resulting economic benefits, mainly through road user savings arising from the im- provement of riding surfaces and from shorter routes. In the case of one project road, a measurable increase of agricultural output is also expected. The rates of return on the individual roads range from 10 per- cent to 29 percent, with a weighted average of 18 percent. PART IV - Legal Instruments and Authority 15. The draft Loan Agreement between the Bank and the Nacional Financiera, S. A., the draft Guarantee Agreement between the United Mexican States and the Bank, the Report of the Committee provided for in Article IIi, Section (iii) of the Articles of Agreement and the text of a Resolution approving the Loan are being distributed to the Executive Directors sepa- rately. 16. The draft Loan and Guarantee Agreements follow generally the pattern of the agreements for the previous Mexican road projects. 17. The financial position of Caminos, the Co-borrower with NAFIN under loans No, 317-ME and 40l-ME,has been very weak. Recently, the Government has taken various steps to deal with the situation and has also agreed in principle to the rescheduling of Caminos' debt to the Banco Na- cional de Obras y Servicios Publicos, S.A., a Government-owned bank. In order to ensure that this action is taken promptly, the Government and the Bank agreed that rescheduling of that debt be a condition of the effectiveness of the proposed loan (Section 7.01 of the Draft Loan Agreement).  - 6 - PART V - The Economy 18. An economic mission visited Mexico during March-April 1970, and is at present preparing its report. Its findings generally confirm those of the report on The Current Economic Position and Prospects of Mexico EWH-194aa), sent to the Executive Directors in December 1969. During 1969 economic growth continued at a vigorous rate (6.4 percent). Domestic pri- ces rose by only about 4 percent and the current account deficit of the balance of payments fell slightly from US$740 million to US$700 million. F'ternal indebtedness is high: latest estimates (still preliminary) show a debt service ratio of about 24 percent in 1969. 19. The Mexican authorities recognize the need to increase both pu- blic savings and exports. Without such action, external debt is likely to grow at a rate wqhich would eventually call Mexico's creditworthiness into question. Although the Government is fully aware of the problem, it is not likely to take the necessary action in 1970, since there will be a change of Administration in December of this year. The Government has, however, taken special measures to avoid excessive public investment in an election year. It is proposed to have policy discussions with the in- coming Administration at an early date in the expectation that, as in the past, the Government of Mexico will demonstrate resolution and flexibility in mobilizing resources for economic development in a framework of social stability and institutional continuity. On the basis of this expectation Mexico can be considered creditworthy for external borrowing on conventional terms. PART VI - Compliance with the Articles of Agreement 20. I am satisfied that the proposed loan would comply with the Articles o' Agreement of the Bank. PART VII - Recommendation 21. I recommend that the Executive Directors approve the proposed loani. Robert S. McNamara President Attachment June 2, 1970  Annex Area 1,973,000 sq. km. Population (1969) 49,0 mil-lion Density per sq. km. 25 Rate of growth p.a. 3.4 1967 1968 1969 GDP, current market prices (Mex.$ billion) 301.6 334.5 3 L Per capita (US$) 528,0 566.0 605nO Real growth (percent) 6.4 7.1 6,4 Percent of current GDP Gross Fixed Investment (including inventory accumulation) 19.9 20.0 20a5 Consumption 82e7 82.7 82o3 Balance of Payments Current Account Deficit 2,5 2.8 204 Gross Savings 19.3 19.3 20o1 Federal Government Revenues 7.5 8.0 8.1 GDP, 1950 constant prices (M>lex.$ billion) 114J3 122.5 13100 Sectorial Origin (percent): Agriculture, Forestry, Fisheries 13.5 12.9 12,3 Mining 1.4 1.4 1,4 Petroleum and Coke ..2,8 2.8 2.5 Manufacturing 21.1 214 21s8 Commerce 30,7 30.8 30,9 Construction 5.2 5.2 523 Power 1,3 1.4 1h4 Transport and Conmunication 3.0 3.0 301 Government Services (including Defense) 5.9 6.C 6,0 Other (mostly services) 15J1 15c1 15cC Money Supoly (Nlex. $ billion) 35.4 40O0 44c3 Change in Percent 8.0 13.0 10,8 Price Movements (Percent) GDP Deflator 4.1 3.5 4.1 Viholesale Price (Mexico Oity) 2.9 1.9 2.6 Cost of Living (Mexico City) 2.5 3.2 1,5 * 1969 Data preliminary.  1967 1968 1969 Public Finances ( Mox. $ billion) Current Revenues 47.8 54.5 60.8 Current Expenditure 37.4 43.1 4810 Current Account Surplus 10,4 lle3 12.8 Non-Recurrent Revenues Ol 0,7 002 Surplus of Non-reporting Agencies 0.8 0,8 0.8 Fixed Investment 16.3 19.7 23z5 Financial Investment 2.5 3e5 304 Overall Deficit 7.5 104 13.1 Balance of Payments (US$ million) Exports of Goods and Services 2,195 2,510 2,785 Imports of Goods and Services 2,807 3,9250 3,486 Current Account Deficit - 612 - 740 - 701 Medium and Long-term Capital Inflow (public) 711 751 860 Medium and Long-term Capital Outflow (Public) 421 515 488 Public Medium and Long-term Capital (Net) 290 236 372 Private Medium and Long-term Capital (Net) 130 227 249 Other Capital (Net) 58 -252 192 Errors and Omissions 174 578 -6h Change in Gross Reserves (increase -) -40 -49 -48 Total Gross Reserves at End of Period 621 701 71t (in months imports) 7T.) (2c2) (2F) Medium and Long-Term External Public Debt (us$ million) Total Cutstanding (end of period) 2,648 3,050 3,400 of which undisbureed 486 613 Annual Debt Service 620 526 642 Debt Service Ratio (percent) 28 22 24 Relationship to MonetarY or Custons Area IMIermber of IAFTA IIF Position (US$ million) Quota 270 270 270 DraiTngs outstanding - - - Exchange Rate Mex. $12.50 = US$1.00 June 2, 1970