INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND NACIONAL FINANCIERS, S. A.

Size: px

Start display at page:

Download "INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND NACIONAL FINANCIERS, S. A."

Jody McCormick
5 years ago
Views:

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized RESTRICTED UE Wfl Report No. P-418 Fi1 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 The report may not be published nor may it be quoted as representing their views.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 ;AMINOS Y PUENTES FEDERALES DE INGRESOS Y SERVICIOS CONEXOS (CAMINOS) AND NACIONAL FINANCIERS, S. A. OF THE UNITED MEXICAN STATES FOR A TOLL TRANSPORT PROJECT January 21, 1965

2 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOM1ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CAMINOS Y PUENTES FEDERALES DE INGRESOS Y SERVICIOS CO`EXOS hcminos) AE\D NACIONAL FINANCIERA, S.A. HEXICO FOR A TOLL TRANSPORT PROJECT 1. I submit the following report and recommendation on a proposed loan in various currencies equivalent to $32 million to Caminos y Puentes Federales de Ingresos y Servicios Conexos (Caminos) and Nacional Financiera, S.A. to finance the foreign exchange cost of a toll transport project. PART I - HISTORICAL 2. The Bank has made three loans to Mexico for highways. One of them (317-ME for $30.5 million) was made in 1962 for a toll transport project of Caminos, a government agency whose primary functions are financing, operating and maintaining toll roads, toll bridges and ferries. The other two loans (268-ME for $25.0 million in 1960 and 354-ME for $40.0 million in 1963) were to aid in a comprehensive program for improving the Federal (free) highway system. 3. Continuation of the toll road expansion program was recommended in the July 1964 report of a Bank mission appraising the Government's development program ('TH-137a). The report's financial plan also included external loans for this project. In September-October 1964 an appraisal mission visited Hexico to examine the technical, economic and financial aspects of the proposed second toll transport project. Negotiations took place in Washington in January Mr. Patino represented Caminos, Messrs. Felix and Mendizabal the Ministry of Public Works and Messrs. Garcia and Valladares the Nacional Financiera and the Government. 4. The proposed loan would increase the Bank's lending to Mexico to $471 million (net of cancellations and refundings). A summary of Bank loans to Mexico follows: Amount Year No. Berrower Purpose (equivalent in $ million) ME Nacional Financiera & CFE Electric Power Development ME Nacional Financiera & CFE Electric Power Development ME Nacional Financiera & CFE Electric Power Development ME Nacional Financiera & CFE Electric Power Development 34.o

3 -2- Amount Year No. Borrower Purpose (equivalent in $ million) ME Nacional Financiera & CFE Electric Power Development ME Mexlight Electric Power 1958 Development ME Mexlight Electric Power Development ME Bank Consortium & Development of Small 1954 Nacional Financiera Industrial Projects ME Ferrocarril del Pacifico Railway Rehabilitation 61.c ME Nacional Financiera Road Construction ME Nacional Financiera and Improvement 25.0 Road Construction & ME Nacional Financiera Improvement 40.0 Irrigation Improvement ME Nacional Financiera NE Caminos y Puentes Irrigation Improvement 12.5 Federales de Ingresos & Toll Transport Nacional Financiera Facilities 30.5 Total (net of cancellations and refundings) Of which has been repaid Total now outstanding 37 '(.3 Amount sold * 33.3 Of which has been repaid Net amount now held by Bank As of December 31, 1964,1P77.5 million of the above loans had not been disbursed. Construction has generally been proceeding without serious delays. There are no problems in regard to disbursement except for some delays in making applications for reimbursement under Loans 275-NE and 354-ME; however I understand that substantial rpplications will be submitted shortly. 5. In addition to the toll transport project, the Government has expressed an interest in obtaining Bank loans for other Federal highways, electric power, irrigation and farm credit; however, no specific projects in these fields have yet been submitted to the Bank.

4 - 3 - PART II - DESCRIPTION OF THE PROPOSED LOAN 6. Borrowers: Caminos y Puentes Federales de Ingresos y Servicios Conexos, (Caminos), an agency of the Mexican Government in charge of toll transport facilities in Mexico; and Nacional Financiera, S.A., a financial agency of the Mexican Government wœhich, under the existing Mexican legislation authorizing loans from the Bank, has to be a co-borrower. Guarantor: Amount: Purpose: Amortization: Interest rate: Commitment charge: The United Mexican States. Equivalent of $32.0 million To finance the foreign exchange cost of additional lanes for an existing mixed toll and toll-free route, four new toll roads, three new toll bridges, miscellaneous equipment for operation of toll booths, and accounting equipment. 20 years (including 4 years grace): semi-annual installments from April 1969 through Ppril % per annum. 3/8 of 1% per annum. Paymcnt dates: April 1 and October 1. PART III - APPRAISAL OF TL R OPOSED LOAG The Project 7. A detailed appraisal report (To-460) on the project is att3ched. The project consists of: (a) The widening and improvement (208 km.) of the Mexico City (Federal District limit) - Queretaro road, the main route to the north of the country and to Guadalajara. (b) The construction of four new toll roads: Apaseo-Irapuato (71 km.) and Guadalajara-Zapotlanejo (28 km.), sections of the road between Queretaro and Guadalajara which currently have heavy and growing traffic con estion.

5 - 4 - Oriraba-Cordoba (20 km.) which will relieve existing traffic congestion between the two cities and extend toward Veracruz, the Mexico-Puebla-Orizaba toll road already being financed under Bank Loan 317-ME. Penon-Texcoco (22 km) the first section of the road from Mexico City to the northeast coastal part of the country. (c) (d) The construction of three new toll bridges. The acquisition and installation of mnscellaneous equipment for toll facilities and record and accounting machines. 8. As a result of the project, highway transport costs, particularly in central Nexico, will be reduced. Measurable road user benefits are estimated to yield an economic rate of return of about 15%. Expanding the toll road retwork will also yield additional non-measurable benefits through increased trade in agricultural and industrial commodities and greater geographic specialization of production. Several of the toll roads will also aid the policy of industrial and residential dispersion in the Mexico City metropolitan area, thus reducing urban congestion and the costs of supplying public services and facilities to the area's rapidly growing populftion. The steady improvement of the road network will also indirectly aid in attracting.fcri-rgn tourists, already Yexicols largest single source of foreign exchange. 9. The project will lee carried out without burdening the 3overnment 1 s budget since it will be paid for by users. It w^ill belp to restrain future budgetary outlays by reducing future needs for construction and maintenance of other Federal roads and thus make possible savings in future budgetary outlays for the Federal highway system. The net financial return on the project is expected to average 14hS on the basis of an acceptable traffic forecast. 10. The project is unlikely to aggravate the current financial problems of the Nexican railroads. Railwcly freight traffic is made up predominantly of low value bulk conmodities moving in full carloads over relatively long distances. By contrast highway freight traffic consists generally of goods shipped in small quantities over short distance or goods requiring special service conditions irrespective of length of haul or goods for which time and its associated costs are significant.

6 1. Caminos is a public Federal agency charged with the financing, operation and maintenance of toll transport facilities in Mexico. It is governed by a seven-member Board of Directors, consisting of five Ministers (Public Works, Communications and Transport, Finance, Navy and Patrimonio Nacional) and representatives of the Banco Nacional Hipotecario llrbano y de Obras Publicas (a Government-owned mortgage bank) and of the Mexican Roads Association. It is managed by a Director General appointed by the Board. Tolls are proposed by the Board and must be approved by the Ministry nf Co'municationn end Transp^rt. 12. Nacional Financiera has been a co-borrower in various Bank loans made in the past. 13. Caminos will have the over-all responsibility for the execution of the project. However, the design, planning and construction of the toll, access and service roads and the bridges will be done by the Ministry of Public Works, which, according to the law establishing Caminos, is to be in charge of the construction of new toll road facilities. The Ministry of Public Works is well organized, equipped and staffed to do these tasks. 14. The total funds needed by Caminos to finance its development program amount to about 1.7 billion pesos. Of this amount about 975 million pesos will be required for the project, 575 million pesos are to complete the earlier preject aided under Loan 317-ME and 150 million pesos are for other outlays. 15. The proposed Bank loan equivalent to $32.0 million (hoo million pesos) would cover the foreign exchange cost of the project. Because it is the policy of the Mexican Government to finance the construction of new toll transport facilities without contributions from the Federal budget, the local currency costs are expected to be financed by a 450 million peso line of credit from the Banco Hipotecario, repayable over 10 years (including a four-year period of grace) at an interest rate of 10%. This arrangement for financing local costs is similar to that being followed under the first toll transport project. During the period cash from operations will be largely absorbed by debt service, particularly to Banco Hipotecario, and for working capital requirements. This situation is temporary, however, since after 1971 earnings will continue to increase, working capital needs will be met and service payments on the existing debt to the Banco Hipotecario will decrease. As a result Caminos will be able to finance new investments from its surpluses. 16. On the basis of the present tolls and those scheduled for the new toll facilities, Caminos should be able to earn the necessary funds to

7 - 6 - service the existing and proposed Bank loans and the existing and proposed loans from the Banco Hipotecario. During the construction period the ratio of cash generated from operations to debt service would be about 1.1 to 1. It would rise to 1.5 to 1 by if no further debt were incurred. The ratio would continue to improve thereafter with steadily rising toll revenues and the repayment of loans from Banco Hipotecario. The ratio of net revenue to interest charges would be 2.1 to 1 on the average in , and then rise to 4.7 to 1 by In order to encourage the participation of foreign contractors, it has been agreed, as in the first toll transport project, that road contracts would be awarded on the basis of international competitive bidding and that each construction contract would generally cover work with a value of at least $2.0 million equivalent. Economic Situation 18. A report on "An Appraisal of the Development Program of Mexico" (WH-137a) was distributed to the Executive Directors on July 21, Economic growth in 1964 exceeded the targets of the development plan and the projections in the report. For example, gross national product in constant prices increased about 7% in 1964 according to preliminary indications, in contrast with the plan's target of 5 to 6% annually. This is partly attributable to a rise in public investment outlays within the framework of the Goveihnment t' development prograims; but above. all ' to renewed confidence in the short and long-term prospects of the Mexican economy. This confidence is evidenced by rising private investment, both foreign and domestic, the discontinuance and even repatriation of flight capital and the successful public sale of three issues nf government bonds, totalling $100 million on the New York market in 1963 and Continued rapid economic growth during the Presidential election year of 1964 contrasted sharply with economic hesitancy in previous election years. President Diaz Ordaz, who became President on December 1, 1964,for a 6 -year term, has indicated that the new government will generally follow the policies of the preceding goverrnment, but with increased emphasis on the agricultural sector, which still accounts for 53% of Mexico's total employment and which still has very ample scope for advances in productivity. 20. Foreign exchange earnings from commodity exports have increased appreciably more than projected in the Mission's report (increasing 6% on the basis of data for the first 9 months of the year, compared with 2% in the projection). Tmports have also increased substantially more than had

8 - 7 - been projected (increasing 20% on the basis of nine-months data, while 11% had been projected in the Missionts report.) This resulted partly because of hi_her levels of economic activity and investment and partly because of special factors such as unusually large purchases of cars because of the anticipated price increases resulting from a "Mexicanization measure", whereby resident car manufacturers will henceforth have to comply with a 60/0 local component recuirement. ivlainly as a result of rising imports, Mexico's f'oreign exchange reserves did not continue to rise rapidly in 1964, as had been the case in 1962 and Instead they declined from a peak of '$567 million in February to $500 million in September because of an advance repayment of P`72 million to the U.S. EAport-Import Bank against a balance of payments credit utilized in 1961 and Reserves now are the equivalent of about three months p:yments. 21. Rapidly growing demand during 1964 reflected itself not only in rising imports but also in increasing domestic prices. The wholesale price index increased 6.4%ao between November 1963 and November 1964 after having remained practically stable for several years. The Mexican Government recognizes the importance of price stability fior private domestic savings, foreign capital inflow, and export earnings, three basic elements of ihexicots developmental process. There is every reason to believe the Government will take appropriate measures to preserve stability. 22. Increasing public savin,s is of key importance for assuring necessary financing of the development pro;ram while avoiding pressures on domestic prices and imcorts and borrowing of private savings needed to finance private se_tor -nves'ment, as is emphas.zed in the Mission's report. The outgoing government, under the leadership of Finance Minister Ortiz Mena, had been preparng a program of revence measures which were not, however, initiated prior to the chan-e of government on December 1. The new -overnment, in which he is continuing as Finance Minister, proposed as one of its first legislative measures, a basic reform in the income tax system. A major feature of' the new legislation, already approved by the HeaicDn Congress, is consolidation of income from various sources for tax purposes. The; 'overnment estimates that the new income tax system, in combination with rising incomes and continuing improvement of tax administration, will result in an increase in total income tax yields of about Ps. 1.1 billion in Mexico's external public debt as of June 30, 1964, totalled.pl, 86 1 million, increasing about '>400 million over the total a year previously. The increase was largely in privately placed, medium-term debt. As a result total service on the outstanding debt is about hp400 million in 1965 or 21' of foreign exchange earnings. After heavy maturities during 1965 and 1966, service declines to less than 12% in The rapid growth of Miexicols medium-term debt in recent years and the high debt service ratio for 1965 emphasize the need for Mexico to improve the terms on her further borrowing in order to secure the necessary f'inancing of the development program without serious risks of overburdening her debt service capacity. TJith prudent financial policies and a good investment climate, Mexico has the capacity to sustain a very substantial volume of additional long-term loans. In summary, Mexico has favorable economic prospects and credit worthiness for new loans well in excess of the proposed loan.

9 - 8 - Prospects of Fulfillment of Obligations 2h. The project is soundly planned, and the Ministry of Public Works is well qualified to construct the works. Caminos has already demonstrated its ability to operate toll facilities. 25. The arrangements for financing the project assure that adequate funds w.:ll be available to cover costs of construction. Prospective increases in traffic and the undertakirg by Caminos to adjust its rates, if necessar-y should enable Caminos to earn the pesos needed to service the proposed loan as well as its other debts. Under the terms of the Guarantee Agreement, the Government is obligated to Provide additional amounts i-f needed. Mexico should be able to provide without undue strain the necessary foreign exchange to service the proposed loan in addition to its existing external debt. PART IV - LEGAL Iij6TRUBENTS VID AUTHORITY 26. The provisions of the Loan and Guarantee Agreements, which are being distributed to the Txecutive Directors separately, follow closely the standard provisions for Bank loans for road projects and in particular those of the Bank loan for the first toll transport project in Mexico. Provisions of prticular interest are: (a) Loan Agreement (i) As a condition of effectiveness of the Loan Agreement, Caminos will have made satisfactory arrangements for acdditional financing of the project in an amount of not less than L50 million pesos (Section 7.01). (ii) During no additional program for construction of toll +'acilities or substantial additions to the connected services will be undertaken except in accord with a sound financial plan and after the Bank has had a reasonable opportunity to exchange views (Section 5.10 (a)).. (iii) Caminos agrees to take from time to time all necessary or desirable action to obtain adjustments in toll charges on its facilities needed in order to ensure effective use of the facilities and to provide Caminos with funds sufficient to cover (a) its operating expenses, including maintenance and taxes, and service payments on debt, and (b) beginning in 1`)72 to create surpluses adequate to meet a reasonable portion of the cost of further expansion of its facilities (Section 5.10 (b) and (c)).

10 (b) Guarantee Agreement The Guarantor covenants that it will grant the adjustments in toll char-es mentioned.,in (a) (iii) above (Section 3.07)e PART V - COIPLIAi.ICE 'ITH!iRTICLIS OF AGREEMENT 27. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI -.EcKvi_TTMION 28. I recommend that the Executive Directors adopt the following Resolution: RESOLVED: THAT the Bank shall grant a loan to Caminos y Puentes Federales de Ingresos y Servicios Conexos and Nacional Financiera, S.A., to be guaranteed by United Mexican States, in an amount in various currencies equivalent to thirty-two million United States dollars (U.S.$32,000,OO), to mature on and prior to April 1, 1985, to bear interest at the rate of five and one-half per cent (5 1/24h) per r-nnum, and to be upon such other terms and camditi:r as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Second Toll Transport Project) between the Bank and Caminos y Puentes Federales de Ingresos y Servicios Conexos and Nacional Financiera, S.A. and the form of Guarantee Agreement (Second Toll Transport Project) between United Yexican States and the Bank, which have been presented to this meeting. Attachments Washington, D.C. January 21, 1965 George D. Woods President

11 Table 1: IEXICO - EX?ERr3NAL PUBLIC D,EBT OUTSTilrILNG IT;TCLUDICGT UNDTDIEURSED AS OF JUDE 30, 'ITH i RPCW'['ED RTJ0L - ADDITI OINS JUILY 1 - OCTOBER 31, l964 Debt Repayable in Foreign Currency (In thousands of U.S. dollar equivalents) Debt outstanding Major reported Item,l June 30, 1964 additions enet of including July 1 - undisbursed undisbursed October 31, 1964 TOTAL EXTE`UJAL PUBLIC DEBT 1,533,428 1,861,511 35,050 Publicly-issued bonds 86,o86 86,086 /1 - Privately-nlacod debt 1,005,267 1,072,329 _ Suon-lier's credits 493,05 519,049 Other 511, ,280 IBRD loans 266,573 38,68;1 _ IDB loans 12,559 63,359 9,300 U.S. Governrment loans 10, ,994 25,750 Export-Import Bank 121, ,410 /2 23,750 ATID, ICA, lend-lease 19,529 57,584 2,000 Loans from other governments 14,687 ila,687 - G.rnany 12,135 12,135 - Italy 2,552 2, lqntionalized properties 7,38)4 7,384 - /1 In the absence of data from Mlexico, this figure is assumed. 77 Does not include.90,000,000 authorized by Exoort-Import Bank in July 1961 for which no agreement has been signed to date. Statistics Division IBRD-Econoiric Department January 13, 1965

12 Table 2: HEXICO - EST-TJiWTD COMTb-,CTIJ.AT SERVICE RYTNTS OM Tl.[i L PUDLIC DEBT OUTSTANIDING INCLIFDINT U.7' 0 AS OF JUNE 30, 1964 WITH iajor REPOO.T'D ADDITIONS JULY 1 - OCTOBE'R 31, 1964 /A Debt Repayable in Foreign Currency (In thousands of U.S. dollar equivalents) Page 1 Total Debt Debt outstanding Payments including undisbursed Amorti- Year January 1. zation Interest Total ,8o0,676 /2 356,395 75, , ,738,006 32L,358 77, , ,414, ,793 69, , ,1-2, ,572 59,368 2h8, , ,833 50, , , ,139 42, , , ,058 36, , ,809 30, , ,608 73,549 26,060 99, ,388 63,707 22,011 85, ,717 5h4,797 18,540 73, ,921 44,594 15,417 6o,( ,327 36,341 13,119 49, ,986 34,093 11,129 45, ,893 32,292 9,272 41,564

13 Table 2: IE'ICO - ESTII-VATED CONT1A.CTTTAL S7IlVICT PAY7i~TS OST E:.-I AL PUJBLIC DEBT OUTSTANDING INCLUDITNG -jji r.y' 1 AS or JUTPT 30, 1964 VIITH HAJOR REPORTED ADDITIOUS JULY 1 - OCTOBER 31, 1964 /1 (COI'iT.) Debt Repayable in Foreign Currency (In thousands of U.S. dollar equivalents) Total service payments by category of debt Page 2 Publicly- Privately- U.S. NIationissued placed IBRD IDB Govt. Loans from alized Year bonds debt loans loans loans other govts. properties , ,948 27,559 1, ,277 3,542 1, , ,113 36,331 2,881 31,170 3,262 1, , ,411 39,369 4,379 33,679 3,109 1, , ,491 39,735 8,481 32,316 2, , ,813 41,751 8,702 29,942 2, ,793 91,368 41,637 8,412 26,909 1, ,123 64,386 30,886 8,120 22,332 1,48) ,870 49,360 30,870 7,829 19,542 1, ,619 35,673 30,863 7,209 16, ,413 23,875 30,841 6,936 15, ,779 18,429 29,205 5,962 12,962 - _ ,92)4 9,093 28,262 5,368 11, ,673 1,676 27,329 5,164 9, ,422 1,587 25,747 4,960 7, , ,176 4,732 6, /1 Includes service on all debts listed in Table 1 prepared January 13, 1965 except for the following items for ihich repayment terms are not available: Privately-placed debt a;l4,085,000 U.S. Govt. lend-lease : 6,750, , 000 /2 Amount outstanding for 1964 is os of Jun- 30th; the service p1.syt-nt3 are for the entire year Statistics Division IBRD-Economic Department January 13, 1965

FILE COPY Report. No. P-82 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE

FILE COPY Report. No. P-82 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COPY Report R E ST R ICTE D No. P-82 This report was prepared for use within the