FILE CO-PY Report No. P-315

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized RESTRICTED FILE CO-PY Report No. P-315 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 The report may not be published nor may it be quoted as representing their views.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 RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.-A. IN MEXICO April 17, 1963

2 INTERNATIONAL BAhNK FCR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMENDATIONS OF THE PRE'3IDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA' S.A.,IEXICO 1. I submit the following Report and Recommendations on a proposed Loan in an amount in various currencies equivalent to $12.5 million to Nacional Financiera, S.A. to finance the foreign exchange cost of an irrigation project in Mexico. PART I - HISTORICAL 2. The Mexican Government first asked the Bank in 1959 to consider financing the rehabilitation of irrigation projects in Mexico. As a result of ensuing discussions the Ministry of Hydraulic Resources worked out a program for the completion and rehabilitation of 22 irrigation districts. This program wiras reviewed by the Bank, and on January 16, 1961, the Bank made a loan for $15 million (Loan 275 ME) to help finance the first phase of the program, the rehabilitation of four irrigation distr½4cts in the north-_wsat of Mexico. The proposed loan would be fo. the second phase of the program, namely, the rehabilitation of another chree i:rigation districts in the north-east and north-cenbral parts of the country. 3. Loan negotiations took place in lwashington between Mlarch 25 and 29; Nacionail Financiera was represented by Messrs. Raual M`artinez Ostos, Deput-y Director General, and Manuel S.Valladares, VJashington representative; and the Government by Ing. Luis Zierold Reyes, Director General if Irrigation Districts of the Ministry of Hydraulic Resources. 4. The proposed loan would increase the Bank's lending to Mexico to ';i399.3 million (net of cancellations and refundings).

3 The Bank has made the following loans to Mexico: Amount Year No. Borrower Purpose (equiv. in $ million) ME Nacional Financiera & CFE Electric Power ME Nacional Financiera & CFE Electric Power ME Nacional Financiera & CFE Electric Power ME Nacional Financiera & CFE Electric Power NE Nacional Financiera & CFE Electric Power ME Mexlight Electric Power ME Mexlight Electric Power 11.0 De-velopment ME Bank Consortium & Nacional of 10.0 Financiera Small Industrial Projects ME Ferrocarril del Pacifico Railway Rehab ilitation ME Nacional Financiera Road Construction 25.0 & Improvement ME Nacional Financiera Irrigation Im provement ME Caminos y Puentes Fede- Toll Transport 30.5 rales de Ingresos & Facilities Nacional Financiera Total h06.3 Cancellations and refundings Of which has been repaid 40.7 Total now outstanding Amount sold $23.5 Of whichi has been repaid Net amount now he.d bv Bank 1iF / Includes $170.3 ziillion not yet, disbursed,

4 - 3 - PART II - DESCRIPTION OF THE PROPOSED LOAN 0. Purpose: Borrower: Guarantor: To finance the completion of the construction and of the rehabilitation, of three irrigation districts in north-eastern and north-central Mexico. Nacional Financiera, S.A. The United Mexican States. Amount: The equivalent in various currencies of $12.5 million. Amortization: Interest Rate: Commitment Charge: 32 semi-annual payments from July 1, 1968 to January 1, /2 percent, including commission. 3/4 of 1% per annum. Payment Dates: January 1 and July 1. PAIRT III - LEGAL INSTRUMENTS AND AUTHORITY 7. Attached are a draft Loan Agreement between the Bank and Nacional Financiera, S.A. (No. 1) and a draft Guarantee Agreement between the United Mexican States and the Bank (No. 2). Under Mexican law and practice, Nacional Financiera is the Agency through which the Government borrows ahroad and is therefore the proposed Borrower. However, since the Project is to be carried out not by the Borrower but by the Ministry of Hydraulic Resources, the provisions relating to the execution and the supervision of the Project, as well as the Description of the Project, have been incorporated in the Guarantee Agreement rather than in the Loan Agreement. In Section 5.01 of the Loan Agreement, the Borrower undertakes to make with the Guarantor arrangements satisfactory to the Bank for the transfer of the proceeds of the Loan from the Borrower to the Guarantor. These arrangements are the same as those for the first irrigation rehabilitation loan (275 ME). 8. Other provisions of the Loan and Guarantee Agreements of special interest are:

5 (a) Lean Agreement (i) The completion of arrangements required under Section 3.09 of the Guarantee Agreement (see b(iii) below) is made a condition of effectiveness. (ii) Section 6.02 provides that a default under any of the provisions of Loan 275 ME would be an event of default under the proposed loan. (b) Guarantee Agreement (i) In Section 3.01(c) the Guarantor gives assurance that the land included in the Project and the water made available therefor are to the maximum extent possible fully, effectively and promptly utilized. (ii) In Section 3.01(e) the Guarantor undertakes that charges iwill be levied on the water users at levels necessary to provide revenues sufficient to cover all operating and maintenance costs and to provide for reasonable reserves for repairs. (iii) Section 3.09 provides that the Guarantor shall make satisfactory provisions for recovering from the water users within the Project area the moneys invested by the Government in the Project. 9. The Report of the Committee provided for in Article III, Section (iii) of the Articles of Agreement of the Bank is attached (Mo. 3). PART IV - APPRAISAL OF THE PROPOSED LOAN 10 The appraisal of the Project (TO-34ha) is attached (No. 4). 11. The expansion of irrigation has been important to Mexico for many years, to help increase agricultural production as quickly as possible in the face of a population growing at the rapid pace of 3.2%o per year. Mexico's difficult geography, irregular rainfall and awkwardly located hydrological resources in relation to irrigable land make the intensification of land use urgent. Only 15% of Mexico's land area, or some 30 million hectares, is potentially arable; this represents less than one hectare per person. More than half of this area, or 17 million hectares, is already under cultivation.

6 As a result of official and private effort, about 5 million hectares or somewhat over one-fourth of the presently cultivated area is now irrigated. Over one-third of the gross value of Mexico's agricultural production, and the bulk of recent increases in agricultural output, originates from this irrigated land. However, in the haste to extend irrigation, the initial investments in many projects, though well laid out, were kept to a minimum. They were also allowed to deteriorate through lack of maintenance. The consequaent inadequate drainage and seepage from unlined canals, together with excessive application of water, have in many irrigation districts led to a rise in the water table and increasing salinity. As a result, crop yields have been declining and some lands have been going out of production. The rehabilitation of existing works has accordingly become urgent. 13. Each of the three districts in the Project to be financed with the proposed loan is well-suited to irrigation farming. irrigation and drainage works in these districts would be completed or rehabilitated where necessary; ground water tables would be lowered, preventing further salting of land and restoring the productivity of affected land in the Project area; and present flood hazards would be considerably reduced. An irrigation and drainage investigation and exzension service would be established by the Government to promote better irrigation farming in the Project area. The Government would make adequate credits available to the farmers for the on-farmn drainage and land improvement that woldd be required to take full advantage of the renovated public facilities. Wgater charges would be raised to a level adequate to cover fully the costs of proper operation and maintenance of the improved works, and rehabilitation charges would be levied to amortize the costs of rehabilitation. 14. The benefits of the proposed rehabilitation would amply justify the cost. As a result of the desalting of lands in the Pro-.ject area and of the efficient operation of the irrigation systems, the annual net value of production of the area, after deducting operation and maintenance costs, would increase by about 124 million pesos ($10 million). This would represent an average annual discounted return of 16% on the public and private investment required for the Project. These estimates are necessarily approximate, but they indicate that the returns from increased production alone would justify the Project. In addition, the Project would safeguard the future production from areas not yet affected by drainage problems and salinity. Execution and Methods of Procurement c15. The Project will be carried out under the supervision of the M4inistry of Hydraulic Resources, which was established in 1947

7 - 6 - to develop and administer the water resources of Mexico. The Ministry has a well-qualified and experienced technical staff, both in Mexico City and in its 64 Irrigation Districts, and maintains adequate hydraulics, soil mechanics and materials testing laboratories. Its staff and its equipment are adequate for the execution and supervision of the Project. 16. Substantially all the work for the completion of the construction and the rehabilitation of the irrig:tion systems included in the Project is to be carried out by contractors. Not less than 70 per cent of the civil works contracts would be awarded on the basis of international competitive bidding. The balance would consist of small works for rehabilitation of existing canals and structures over a widely extended area, which are not suitable for submission to competitive bidding and would be carried out by the Ministry directly or by local contractors through negotiated contracts. 17. The proceeds of the proposed loan would be used to reimburse the Borrower for the cost of imported equipment to be used by the Mlinistry of Hydraulic Fesources for the Project, p.us the estimated foreign currencyr component (not including the new imported equipment) of civil works. The latter would be disoursed as a percentage of expenditures for these civil works 0 Financing 18. The total cost of the public investment in the Project is estimated at about i33 million. The proceeds of the Loan would ccver ;he foreign exchange component. The local currency cost, about $20 million equivalent, w-o-uld be financed initially from annual appropriations in the Federal Budget. The Government's investment in the Project would be repaid with interest by the beneficiaries over an average period of 24 years, through a special rehabilitation charge (see Para. 7(b)(iii) above). Economic Position 19. The last Bank report on the Mexican economy (Sedi62-72) which was distributed to the Executive Directors on April 11, 1962, indicated that the economy of Mexico was basically sound, that future prospects were satisfactory, that Mexico has on the whole managed her affairs well and that the margin for external borrowing was

8 - 7 - still substantial. The Bank mission that has just completed its field work appraising the Government's investment program has found that there is no reason for altering this conclusion. Recent economic indicators suggest that the slowdown of economic activity in 1961 referred to in the report and the financial problems resulting from a flight of capital early in that year were temporary. Overall economic expansion during 1962 is estimated at over 4%; the balance of payments also improved markedly, in a context of continuing financial stability. 20. To accelerate the pace of national economic growth, the MHexican Government recently prepared a three-year development program. The Bank's apdraisal of this program, which was carried out at the Governmentts request, should be completed by mid-year. 21. Mexico's external public debt has been increasing recently. During the first eight months of 1962, gross new official borrowing abroad amounted to 'h414 million, compared with $232 million during all of This borrowing was for a variety of purposes, principally electric power, petroleum, highways, and industrial and agricultural development. But at the same time, Mexico has been amortizing debt quite rapidly; durlng 1962, Mexico repaid some $205 million of existing debt. As of June 1962, the external public debt amounted to U9'!;',1,498 million, including some $80 million still undi.sbursed. Total service payments on this debt will amount to $23'7 million in 1963, equivalent to some 13% of 1963 gross foreign exchange earnings which are estimated at -l.7 to ;$1.8 billion. Because of the amount of relatively short-term maturities in the present debt, the service ratio declines rapidly, to 10% by 1965 and 4% by 1970 of the foreign exchange earnings expected in these years. In the light of Mexico's balance of payments structure and prospects, Mexico should be able to meet these debt service obligations without undue strain and also to undertake substantial new borroiwtings. Prospects of Fulfillment of Obligations 22. The Project has been well prepared by the Ministry of Hydraulic Resources, which is also well qu2lified to supervise its execution. The Guarantor has undertaken to give technical and financial assistance to water users and to ensure that charges for water would be raised to a level adequate to amortize with interest the investment in the rehabilitation works and cover the costs of adequately operating and maintaining the works. 23. Mexico should be able to service the proposed Loan in addition to its existing debt.

9 PART V - COVPLIANCE JTTI-TH ARTICLES OF AGREEMENT 24. I am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMIENDATIONS 25. I recommend that the Bank make a Loan to the Nacional Financiera, S.A. with the guarantee of the United Mexican States in an amount in various currencies equivalent to $12.5 million with interest (including commission) at 5-1/2 per cent per annum and on such other terms as are specified in the attached Loan and Guarantee Agreements and that the Executive Directors adopt a Resolution to that effect in the form attached (No.5). George D. Woods President Washington, D.C. April 17, 1963