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

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1 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 Bank. It may not be published nor may it be quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CAMINOS Y PUENTES FEDERALES DE INGRESOS (CAMINOS) AND NACIONAL FINANCIERA, S.A. MEXICO June 12, 1962

2 INTIMNATIONAL BANK FOR RECONSTRUCTION AND DEVMLOPNENT REPORT AND RECOI4MENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CAMINIOS Y PUENTES FEDERALES DE INGRESOS (CAM'INOS) AND NACIONAL FINANCIERA, S. A. MEXICO 1. I submit the following report and recommendations on a proposed Loan in various currencies equivalent to $30.5 million to Caminos y Puentes Federales de Ingresos (Caminos) and Nacional Financiera, S.A. to finance the foreign exchange cost of a project for expanding toll transport facilities in Mexico. PART I - HISTOPICAL 2. In October 1961 representatives of Camninos and the Secretariat of Public Works - visited Washington to discuss Bank assistance in financing Caminos' program for expanding toll transport facilities in Mexico. In December 1961 a Bank mission visited Mexico to examine the technical, economic and financial aspects of the program. 3. Loan negotiations took place in Washihgton between May 21 and June 1. Messrs. Martinez Ostos and Valladares represented the Government and Nacional Financiera; Mr. Cervantes del Rio represented Caminos; and Messrs. Espinosa, Felix and Mendizabal represented the Secretariat of Public WHorks. 4. The proposed loan, together with the $130 million loan for power development which is beingprasa-ted to the Executive Directors along with this one, would increase the Bank's lending to Mexico to $386.8 million (net of cancellations and refundings). A table showirg Bank loans made to Mexico and the amounts outstanding, sold to third parties and held by the Bank as of May 31, 1962 is included in the Report on the power project. PART II - DESCRIPTION OF THE PROPOSED LOAN 4. Purpose: To finance Caminost four-year program for the expansion of Mexico's toll transport facilities consisting principally of the construction of 385 km. of express toll highways, 125 km. of access roads, five toll bridges and a ferry-boat.

3 -2- Borrowers: Guarantor: Amount: Amortization: Caminos y Puentes Federales de Ingresos3, 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 which, under the existing Mexican legislation authorizing loans from the Bank, has to be a co-borrower. The United Mexican States. The equivalent in various currencies of $30.5 million. 35 semi-annual instalments from July 1965 to July Interest Rate: 5-3/4%. Commitment Charge: 3/4% per annum. Payment Dates: January 1, and July 1. PART III - LEGAL INSTRUNENTSAND LEGAL AUTHORITY 5. Drafts of a Loan Agreement (No. 1) and Guarantee Agreement (No.2) are attached. The following provisions are of special interest: (a) Loan Axgreement: (i) In Section 5.10 Caminos undertakes to take from time to time steps to cause adjustments in the toll charges on its facilities as shall be necessarj to meet the requirements of Section 3.07 of the Guarantee Agreement (mentioned below). (ii) Section 7.01 provides that, as an additional condition of effectiveness of the Loan Agreement, Caminos will have made arrangements for additional financing of the Project in an amount of not less than 500 million pesos; and shall have made arrangements with the Banco Nacional Hipotecario Urbano y de Obras Publicas, S.A., for the extension, on terms and conditions satisfactory to the Bank, of the life of the Banco's loans and credits to Caminos presently outstanding,

4 - 3- (b) Guarantee Agreement (i) In Section 3.07, the Guarantor covenants that it will grant and maintain, or cause to be granted and maintained, toll charges on Caminos' facilities which will provide Caminos with funds sufficient to cover its operating expenses, including maintenance and taxes, and service payments on debt, and to create a surplus adequate to rneet a reasonable portion of the cost of expansion of its facilities. (ii) Section 3.08 provides that the Guarantor will maintain adequately the access roads and that it will not transfer their control to any entity other than Caminos. 6. Nacional Financiera is authorized by decree of the Mexican Congress of December 19, 1960, to contract the proposed loan and, as the Governmentts representative, to guarantee the loan on behalf of the Government, Caminos is authorized to borrow for the expansion of its facilities. 7. The Report of the Committee provided br in Article III, Section 4(iii) of the Articles of Agreement of the Bank is attached (No. 3). PART IV - APPRAISAL OF 1HE PROPOSED LOAN 8. A detailed appraisal of the Project (T0-315e) is attached (No. 4). The Project 9. The Project consists of: (a) The construction of the following three toll roads: Mexico City-Puebla-Orizaba, 251 kilometers long, which would be a major route to the East, linking the capital to the cities of Puebla and Orizaba, in the direction of Cordoba and Vera Cruz; Mexico City-Venta de Carpio-Tecamac, 32 kilometers long, which would be the first stage of the road from Mexico City to Pachuca in the North; Tijuana-Ensenada, 102 kilometers long, which will be located in the northern part of the Baja California peninsula, terminating at the border with the United States; (b) the construction of four access roads totalling about 125 kilometers, which would serve the toll road system of Caminos;

5 (c) the construction of five toll bridges; (d) maintenance and other equipment for toll facilities, such as.'eckzonic devides for traffic control, signal panels and t'jl gates; and (e) the acquisition and operation of a ferry between Mazatlan iii the State of Sinaloa and La Paz near the southern end of Re Baja California peninsula, and the construction of apr3rupriate terminal facilities. The Borrcwers: 10, Caminos is an autonomous entity in charge cf the develcpment, ci)eration and maintenance of all toll transport facilities in M8.xico. It is governed by a six-member Board of Directors, consis; ng of four Ministers (Public Works, Communications, Finance and Patruimnio Xacional) and representatives of the Banco Nacional Hipotecario y de Obras Publicas (a Government-owned mortgage bank) and of the Mexican Roads Association. It is managed by a director appointed by the Board. Tolls are proposed by the Board and must be approved by the President of Mexico, after consultation with an Advisory Commission on Transportation Tariffs,within the secretariat of Communications. 11. Nacional Financiera has been a co-borrower in various Bank loans made in the past. Execution of the Project 12. Caminos will have the over-all responsibility for the execution of the Project. However, the design, planning and construction of the toll and access roads, the bridges and the terminal facilities will be done by the Secretariat of Public W4orks, which, according to the Law establishing Caminos, is to be in charge of the construction of new toll road facilities. The Secretariat of Public lworks is well-organized, equipped and staffed and is able to discharge these responsibilities efficiently without the assistance of foreign consultants. The design and the construction of the ferry boat will be the direct responsibility of Caminos, which will be assisted by consultants acceptable to the Bank. Financi,ag of the Project 13. The total funds needed by Caminos during the period of construction amount to about 1.2 billion pesos. Of this amount about 875 million will be invested in the Project and the balance will be needed for the servicing of existing and new domestic loans (245 million pesos) and for various smaller expenditures (64 million pesos).

6 14 The proposed Bank loan of $30.5 million (381 million pesos) would cover the foreign exchange cost of the Project. Because it is the policy of the Mexican Governrm-ent to finance the construction of new toll facilities without contributions from the Federal budget, the local currency costs would be financed by a 10-year line of credit from the Banco Hipotecario of 500 million pesos having a grace period of 3 years, and the reinvestment of Caminos' net revenues between 1962 and 1964, which are estimated at 364 million pesos. 15, On the basis of the present tolls and those scheduled for the new toll facilities, Caminos should be able to earn the necessary pesos to service the proposed Bank loan and the existing and proposed loans from the Banco Hipotecario. During the construction period the debt service ratio would be about L5. It would fall to 1.1 in L965 because of a concentration of payments in that year, but would rise to 1.3, l8., 1.8 and 201 in the four following years. It would reach 9 in 1972 if no further debt were incurred. Interest would be covered an average of 2.5 times over the period , and the coverage would never fall below 1.6. Method of Procurement 16. Contracts for the construction of roads, bridges and port terminal facilities wvill be awarded, and the fe.rybboat and the equipment for the toll roads and bridges wil1 be procured on the basis of international competitive bidding. However, an exception will be made for works on roads and bridges valued at a total of about 145 million pesos (equivalent to $11.6 million) for which either contracts have already been let on the basis of domestic bidding or work is to be carried out by the Secretariat of Public Works by force account. 17. An understanding has been reached with the Mexican representatives on the procedures to be followed in intern' tional competitive bidding. In order to encourage the participation of foreign contractors, it has been agreed that the minimum size of each contract would cover work valued at $2 million equivalent except in cases in which the work to be done cannot reasonably be included in a contract of this size. Justification of the Project 18. Reliable studies indicate that new facilities of the type included in the Project are needed for the efficient transportation of passengers and goods. They will stimulate industry, agriculture and trade in the areas served and will more than pay for their cost and maintenance. 190 The two toll roads from Mexico City (to Orizaba and to Venta de Carpio) are needed to facilitate transportation between Mexico City and important regions of central Mexico. They will also permit

7 industrial and residential dispersion in the congested arga around Mlexico City. Est mated direct savings to users would proiuce an economic return on investment of about 20% and 30% respectively. 20. The Tijuana-Ensenada Road will make the West Coast of the peninsula of Baja California more accessible to tourists from the United States and will stimulate tourism in the region. It is Lstimated that tourists usin- this road will spend an addit;ional $20 million a year in Mexico. 21. All of the bridges will facilitate transportation across rivers now inadequately served; the economic return on them is conservatively calculated at between 9 and 15%, not taking into account the increase in traffic which they will induce. 22. The ferry between Mazatlan and La Paz would speed up, and considerably lower the cost of, transportation between the mainland and the lower end of the Baja California peninsula. It will not only increase tourist receipts of the area but will provide an important impetus to the development of Baja California, which is already experiencing substantial growth on the basis of present inadequate means of transport. 23. On the basis of the present and scheduled tolls, the full cost of the investment of the works included in the Project would be repaid at 6% in periods varying from 8 to 20 years, much shorter than their economic life. In addition, there would be further financial advantages to the Government resulting from increased land and property talues which should in turn yield higher revenues from local taxes. Economic Position of Mexico 24. A statement on the economic situation and prospects of Mexico is included in the Report and Recommendations to the ixecutive Directors on the proposed loan to Comision Federal de Electricidad. Prospects of Fulfillment of Obligations 25. The Project is well planned, and the Secretariat of Public Works iz qualified to carry out those parts under its responsibility. Caminos has already demonstrated its ability to manage present toll facilities. It will be assisted by consultants in the design and supervision of construction of the ferry boat. 26. The arrangements for financing the Project assure that adequate funds will be available to cover costs of construction and the Government, under the terms of the Guarantee Agreement, is obligated to provide additional amounts if needed. Prospective increases in traffic and the ability of Caminos to adjust its rates should enable

8 - 7 - Caminos to earn the pesos needed to service the proposed loan as well as its other debts. Mexico should be able to provide without undue strain the necessary foreign exchange to service the proposed loan and the proposed power loan of.130 million, in addition to its existing debt. PART V - COMPLIANCE W4ITH ARTICLES OF AGREEMENT 27. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 28. I recommend that the Bank make a loan to Caminos y Puentes Federales de Ingresos?nd Nacional Financiera, S.A. with the guarantee of the United Mexican States in an amount in various currencies equivalent to $30.5 million for the total term of 20 years with interest (including commission) at 5-3/4% 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). Eugene R. Black President Attachments Washington, D.C. June 12, 1962