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DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENTINTERNATIONAL DEVELOPMENT ASSOCIATION
Not For Public Use
Report No. P-130 7-ME
REPORT AND RECOMMENDATION
OF THE
PRESIDENT
TO THE
EXECUTIVE DIRECTORS
ON A
PROPOSED LOAN
TO
SIDERURGICA LAZARO CARDENAS - LAS TRUCHAS, S.A.
AND
NACIONAL FINANCIERA, S.A.
WITH THE GUARANTEE OF
UNITED MEXICAN STATES
FOR A
STEEL PROJECT
August 21, 1973
Latin America and the Caribbean Department
This report was prepared for official use only by the Bank Group. It may not be published, quotedor cited without Bank Group authorization. The Bank Group does not accept responsibility for theaccuracy or completeness of the report.
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CURRENCY EQUIVALENTS
US$1 = Mex$12.5Mex$1 = US$0.08Mex$1 million = US$80,000
INTE&NATIONAL BANK FOR RECONSTRUCTIO; AND DEVELOPMEN
REPORT AND RECOMMEDATION OF THE PRESIDENT TO THE CECUTIVEDIRECTORS ON A PROPOSED LOAN TO SIDERURGICA LAZARO CARDENAS
- LAS TRUCHAS, S.A. AND NACIONAL FINANCIERA., S.A.WITH THE GUARANTEE OF UNITED MEXICAN STATES
FOR A STEEL PROJECT
10 I submit the following report and recommandat±ons on aproposed loan in various currencies equivalent to $70 million jointlyto Siderir:gica La.zaro Cardenas - Las Truchas, S.A. (SICARTSA) andNacional Financiera, S.A. (NAFIh) to assist in finarLcing a new steelplant at Lazaro Cardenas* The loan would be guaranteed by UnitedMexican States and would have a term of 15 years, including five yearsof grace, with interest at 7-1/4 percent per annum, The MexicanGovernment would charge SICAdRSA a gnarantee fee of 1-3/4 percent, perannum on the ou1tstanding amount of the Bank loan, br-nging the cost ofthe loan to SICARTSA to 9 percent per annum, The Inter-AmericanDevelopment Bank (IDB) will participate in the financing of the projectwith a loanx for $514 million and bil&teral financing xill amount rvo about$180 million.,
PART I - THE ECONOMY
2. My report and recommendation dated Mayr 30, 1973 on tihe MexicoCity Water Supply Project (P-1207a-ME), gave recent information on theMexican economy. This is reproduced and updated in Annex I, following thecountry data. The Basic Economic Report (192-KE) of June 27, t973 was thesubject of a Board Seminar on July 26, 1973. The Report concludes thatMexico continues to be creditworthy for substantial amounts of Bank loans.The ratio of debt service payments to receipts from exports of goods andnon-factor services, which was estimated at less than 20 percent in 1972is expected to peak in the late 1970's at near 25 percent and shoulddecline thereafter. During the next few years Mexico's annual gross ex-ternal borrowing requirements are estimated at about $1,400 million, ofwhich, as in the past, about 75 percent is lik-ely to be raised fromprivate sources. The IBRD's share in total annual debt service obligatiornsis expected to remain near 10 percent.
PART II - BANK GROUP OPERATIONS IN MEXICO
3. The Bank Group operations in Mexico were also recently reviewedin the aforementioned Mexico City Water Supply Project report, and an up-dated statement as of July 31, 1973 is presented in Annex TI.
-2-
a0 In lending to Miexico, the Bank tries to assist theGoverrunent irn ach.ieving four major interdependert and complementaryobjectives:
a) to spread the benefits of growth more widely than before;b) to hielp Mexico continue to achieve the re-markable gromath
oL output of the past two decades;c) to help Mexico mobilize exuternal reEources to com=leaent
. GS cuite a-,preciable domestic savings; andd) -to contribute wi t h funds and expertise to the solution of
cri;°cal adjustrient problems that are thenselves a resultof Mexico'3 contrnued growth, such as urban concentration,enviroraerital p,ro&blems etc.
Thne .,ropose. -^oject is designed to meet several of these ai-mswil, promote ecor:oLc g:rowoh bty furthering increasing efficiency in --he
s C;i sec-or: it -ill further the regional decEntralization of industrialproduction afid help oen up a b_ therto neglected and poor region; the-joirt 0f -ofte B.-Lk and of_ the IDB i.s helping SICARTSL,., a recently formed_s: :-any, to borro.w abooat US$1 80 million from bilateral sources on approp-ra'te eeriJ. Fdnall, 3the .roject has served as a catalyst to encourage
Go Gove- n -bc)t Gv Wrove the insti-utional structure 'or planing and- ,~ - ._ _'^e steel sector strategy.
> t IlI TKE STEEL SECTOR
t.aneral
MaeXLcols '-dustrial sector has been the most dynamic elementLn the economioy over tfhe last 25 years. Its average annual rate oZf growthaccelerated to 83o6 percent in real terms during the 1960's, from 7.5 per-cent ir, the preceding decades. With a one-third share of GDP and about2, *zercent oi^ the national labor for-ce, it thereby was a major contributor-GC the high Cal gro-.'4th r7ate of 6.9 percent per year achieved during theIa-st decacO. Constracti_o_ ..;as been another buoyant sector, with an averagearnual grs -,. rate duri.ng the 1960's of over 9 percent. The two sectorstogether hive been the nrimua.y determinants of increasing demand for steel.
Yocz aron; ad steel industry is one of the oldest in Latin.nericaO Lt was ewtabD,ned iTi 1903, with the foundation of 1undidora dercLerro y Asero, S.A. (3%xndidora), an integrated iron and steel plant in.Honterrey. The second major company-, Altos Hornios de Mexico, S.A. (AHMSA),was foundeL' by the Goverrmnent in 194`1 and operates an integrated plant irnhonclova. Over the ,-)ast 30 years the industry has grown rapidly -O aGrinal cr..de steel caia-aac-Ity of about 5.2 million tors, split amongst thevarious co-xoanies as shown below:
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NominalCapacity
Company Q300 tons) Ownership
Altos Hornos de Mexico, S.A. (AHMSA) 2,50C Governmentat Monclova
Fbundidora de Hierro y Acero, S.A. 950 Private, with(Fundidora) at Monterrey Government (inqd
IFC) participation
Hojalata y Laraina, S.A. (HYLSA) with 750 Privateintegrated plants at Monterrey andPuebla
Tubos de Acero de Mexico, S.A. (TAhISA), 280 Privatewith an integrated plant at Veracruzproducing seamless pipes near its mairnconsumer, the oil industry
Six semi-integrated plants, mainly in 670 PrivateMexico City
5,150
Because of technical limitations, the effective capacity of the aboveplants totals only about 4.6 million tons of raw steel per annua.
Steel Demand and Sual
8. Apparent consumption of steel products in Mexico has increasedat an annual average of 8.3 percent over the past decade, reaching anestimated 3.1 million tons in 1972 - equivalent to about h42 million tonsof crude steel. It is projected that the future growth of consumptionwill accelerate to 10.4 percent annually and lead to an estimated productdemand of 6.7 million tons by 1980o This forecast justifies substantialincreases in Mexican production capacity, both for crude steel and forfinished steel products, provided costs are internationally competitive.
9. The consumption of light non-flat products,1/ which are of specificrelevance for the SICARTSA steel project, constitutes roughly 40 percentof the present steel market and grew at an annual rate of about 6.8 per-cent over the last decade to 1.2 million tons in 19720 Fhture demand forthese products is expected to grow at a faster average annual rate of 9percent to 2.8 million tons in 1980, due in part to the projected acceler-ation in Government housing and public works programs. The presenteffective rolling capacity for light non-flat products is estimated at
1/ Wire rods, bars and shapes.
millIon tons, but no more than two-thirds o:' this level has acuallybeen utilized in anj one year due to i.balances in. the various productionunits. Using conservat-ive assumptions with regard to increased crudesteel and rolling capacity utilization for the 2uture, it has been projectedth,at the supply of light non-flat products without SICARTSA would be aboutone million tons short of projected demand in 1980.
10i ex:ico imfqports about 600,000 tUons of' scrao per year for use,rrmarily in the se- 'e-rated steel planits. Imports of rero-llable-- terir' ~-o;nt -vo about 160,000 tons annually and imports of finished
seel products - mainly specialty steel's - have levelled at about 180,000'COi. aXEMiZaIlly in recent': yea-ro Eports of stieel. products have been sporadicad have not exceeded 30C>9,000 tons in any one year. Imports and exportso-' the types of produc"c. SI"-t4C.SA -will produce have been negligible in thep_st and a^e not tX C'cdto ae siginificant in the f'uture.
P.5 .3e , 9 ?lricecl ar,-' . ndstEff ciency
.teel- aLces today in Mexico are coffiparabie to, and in some.-es lower -haa those 'revailing in, ma`or world markets. Trhis, however,
ol,y a :eaent pherson, attiributable to price increases in Japan,.. 'On.sand the X,3-. and exchange rate changes since 1971, com.bined with the;~c-,t- steel orice e'lings in Iexico, fixed by the Government, have not
r.z:z to k,-:e pze iith'! wor:ld trends (the latest change was a 15 percent.. <ae ancrease Lor¢- flat products in 19069, but non-f at ceilings are still
-•n ie-e' eied i-n I956) Actual prices now are at; the ceiling levels, an.d;:\. n prnod,cers p-ofi-s are dITinishing; pressures now exist to have-C e -e ,s raiscd. .The present competitiveness of 4Iexican prices there-
Ise .S mGr:e apparen;r ''at a real. Prior to this recer-s period, market priceseor steel in fexio ac-tually have beern below ce-iling levels, although,e-IerElly h.:igher than world market Drices. Mex:Lcan p-rocuacers have operatecbehi-nd a systen of roCtection through import tariffs and physical licensing,>-ru:ch has anabbled them to remaia financially viable despite some ineff-'ciencies caused by poor plant locations (vis-a-vis raw materials and.._rkets) and outdated technology. The industry today. therefore, iscnaracteri.ed by L;> Laces anong production units and poor economies of5cale, yielding relatively high production costs.
T2 his situaltion hn not been static, however. AXMSA is nowcompleting a product-ion balancing scheme that should improve its efficiency,and simila. steps are under way at 3tndidora, which last year took on-`iopon Ste,i- Corporation of Japan. as an equity anid technical partner.£till. nei;her oe thsse .I Lits offers the opportunity for significanteo,noniWs ,hrougn; eZcpanSiorL, due primarily to locational problems. The_conomic eqpansion potertial of the smaller producers also is seriouslyccn,t-rained
AiI ' o these f'actors havre created a need -'or Mexico's next~a r production increase to be undertaken in a .aew location following>`ferent ;riaciples than were applied in the pE.st. W*With this has come-c parallel need to rethink the steel pricing structure of the country
so as to best utilize, for the benefit of Mexico, whatever efficienciessuch new capacity will introduce. And, finally, improvements in theinstitutional structure for defining and administering national policytowards development of the steel industry have been found necessary.
Steel Sector and Project Objectives
14. Bank participation in the Las Truch-as Project is designed tohelp Mexico meet the above needs. It is a pro;ect structured in accord-ance with sound technical and economic principles, and promises to yieldproduction economies that will make it internationally competitive andencourage improvements in other Mexican plants under competitive con-ditions. Institutionally, the project has served as a vehicle for theGovernment to form a National Iron and Steel Coordinating Commission withthe task of analyzing the structure of the existing Lndustry and recommenc-ing future policies for production, expansion, promotion of technology,and incentives. The Government has undertakenr.
i) to prepare a plan for the coordination of future steelexpansion;
ii) to approve or support further expansion of existing steelplants only when market demand and economic justificationhave been clearly established;
iii) to carry oat reviews of steel prices fro:n time to tize inorder to maintain prices at levels that (a) are reasonablyrelated to Mexican production costs and xorld pr-ice levelsand (b) are such as to allow steel consumers in Mexico toshare in any decline in production costs through redactionsin steel prices.
Furthermore, the project's role in a general economic sense is broadenedby its support for the Government's goal of directing public investmenttowgards under-developed areas of Mexico and away fromL the concentratedwealth and economic activity of the nation's major urban areas.
PART IV - THE PROJECT
15. A report entitled "Appraisal of the Las Truchas Steel Projec-t9S,No. 220-ME of August 10, 1973, is being circulated separately to theExecutive Directors. A summary of the Project is in Annex III.
16. The Las Truchas project was appraised by Bank missions inseveral stages between November 1972 and June 1973, in close cooperationwith the Inter-American Development Bank. Negotiations took place fromAugust 6 to August 10, 1973. SICARTSA was represented by Ing. !.i OriveAlba, Director-General; NAFIN by Lic. P. Galicia Estrada, !Manager; andthe Government of Mexico by Lie Carlos Vidali, Advisor to -the 7ubdirector
of Public Credit I rlis-niy of Finance. Negotiat,ions bOetween- the -DBand the Mexicaon Delegat-cn took place in parallel to the Bank's nego-ti ations. The 1D3 loan s-Uri be for $54 million, The IDB expects topresent it_ !oarn -o the -oard of Execut-ive Directors by the end ofSeT,teboer 1273.
The q2E!par,7
1'', Slk.z>.$'SI in a Xexican corporatior. fcrmed 2rn 1969 Itsauthori' ~ }'_'Je,L a:S c' pri 1,5 1973 was $4C) zdllion equivalnt Thisw- ll be in,reased Vcr 10-6, accordinrg to an agree:d schodule, to a ar±ninnamof $300 milo: ec-c,a u:t to provide a sound ecuity bJase for the compay.fQtez- the -rososea increases have taken place, shares are expeed
to oe held as follows
?eSrcen^-
Feoer-.u isvef-:-fle:Qat of Mexico 510 NaeiL S : * 'C e. 3_L0. (NA.VINSA) 25 0Alto-i Y:Oo_ .0_6 Atei co9 S . (A.MSA) 12.0Feder-aL CZ< e- N- T:ut Rzid -i I .Mrz ! , Q--a (a ~~-zriate industrialist) 0.2
To tal:- 1 00.0
'l6.STGt- 3.s wl'c.t wil be located at t,he mouth of the l-2iverBlsas3 or. -t-he Pacific Coast, at the border between the States of Guerreroan-d Michoacan. T-he area is poor and undevelopec, depending mainly ona,-icultu e. A town some 3; kn away already exiUts and carries the newna:,7e of la u ar darLdenas, after Mexi3o?s ex-President. The plant locationwill_ be some 19 a fron the I5s Triuchas iron ore deposits and adjacent toa rLew deep-sea port. The completion target for the project is mid-1976.
T ecrinical !,Q'e2Y.
.19 -he -o. 'e roject comprises the e.stabl-shment and operationof a new a;eel works wit:; -i JniLitCial capacity of 1 .1 illion tons of crudesteel per arnium and 1 .0 D illion to-as of light ncn-flat finished products.It -vill inaclude faci_ities for YaLi`ng, ore beneficiation and pelletizing,blast fIrnc-ce ironL b.asic ox-ygen steel making, and firished productrollrig. The pla;t has been designed in- a marner tha-: will permit, easyexpansion ;Lad ctversification of production in later _tages to mo;e than5 .illion tons of cucde *teel -ser annum.
Iron Ore
20. The Las Truchas iron ore is located in sev. eral deposits, allin close pC:;mi0 y &nd roughly 19 kca fro-m the plant szte. The primaryores are r_g.: t :c:, wirh haematite iri the upper layers of some of thedenosits. Nieaeb-le resk _ es of' the Las Truchas deposIts are expected to
- 7 -
total over 76 million tons with an average soluble fron (Fe) co.tentof about 51 percent. These reserves will be sufficLent for over 30years of Stage I operation or, alternatively, wrill allow a significantportion of Stage II production to be based on t:his -ron ore. In additionto the proven reserves, it is likely that mineable raserves will amountto more than is known today, bearing in mind that the mining explorationprogram will continue in the Las Truchas area.
Other Inputs
21. Coal will be entirely imported since no suitable coking coalsare available in the vicinity of the project aud transporting Hexico srelativel2y low-quality coals from the distant northern part of the countrywould be uneconomic. Long-term overseas coal sources are being studiedand no supply problems are anticipated. Limest-one, :uanganese ore,bentonite and minor raw materials will be obtained 4rom Mexican sources.Electric energy will be available from the nearby La Villita hydroelectricpower station, and water will come from the adjacentu Balsas River.
Infrastructure
22. SICARTSA will utilize the new port of Lazaro Cardenas which ia
already under construction by the Government5 Tilth a 200-me-ter cuayreserved for SICARTSA traffic - initially imports of equipment and coaland out-ward shipments of about 10 percent of finished products. The portplans have been reviewed by the Bank and are considered technically andeconomically sound. A new city of Lazaro Cardenas is to be constructed bya Governrent trust fund providing residential and commercial facilitiesfor SICARTSA's 4,000-man Stage I work force.
23. Most of SICARTSA's output will be :Juoved inland to the princip;Lmarkets. There are a nunber of transport alte:;rnatives, reqairing varyvilnamounts of invesument for new faciiities or im:rovezaents to existing trans-port systems. After exhaustive studies to detarmine the means of trans-porting the projected steel output at the lowest eccnomic cost, theGovernmernt has opted for a two-stage solution. During the first two yearsof operation, road transport over the existing highway to Nueva Italiaand from there by rail to final destinations i3 considered to be the bestsolution, unless studies still in progress demonstrate that it is preferazleto ship part of the output of Las Truchas by sea to Manzanillo during thisperiod for onward transport by rail. In 1978 a new railway link will becompleted to connect Lazaro Cardenas with the rest of the railway systemat Nueva Italia, and products then will be shipped by rail. The Governmenthas assured the Bank that it will allocate sufficient financial resourcesto carry out the necessary transport infrastructure investments0
Environmental Protection
24. The steps being taken by SICARTSA to minimize the adverseenvironmental effects of the mine and steel works are above average fora project of thds type. Hore general environmental problems areassociated with development of the port, the city, and regional infrastructure.
-U-
A survey of the probiemiis presented was made by & Bank consulting ecolo-gist. Based on h-a recomamenda-tions, the Bank will encourage the Govern-ment to prepare a mLster 1L,nd-use p'an for the coasta. region ol theStates of Guerrero and M4ic`hoacan.
Proj ect Mazagement and Organization
25 ,Responsibility for project executior.. rests with SICARi'SAuander its X tre or-General, and the Company's maagement and organizationare conF _ ^d approc,Priate. The f Lancial and sales _'unctiors need to be-Dgraded, .ioweve * and acceptable plans for doing so !ave been presentedto the Bar..c a.nd Th3. The -British Steel Corporation (BSC) is providingassistance Ln a-a -i&Cci.v&l, financ-ial marketLi-ng anid organizationaj&pecG5 ol. the a .,d at present has about 65 reT.ident speci alists
in -lexicc oZ ceQ at va:c:s levels throughout te.e orranizatilon, in manycases fiL!n, n-anerial azid linctional positio..s., The assistance- willcor,tirnue a;-I the same general level throughout t;1he construction period and:zIo -he .ial n,:god of oper-ations.
o:,o than I .29300 construction worker- are working on the plant
5-LC "I Th3:e; r wo-rk force will iUnrease to aboat 7,000 by -he ends_ 97) ani w I're.k a-; 9,300 in `975. The operstional labor foice at
tne 3teel .,)Int wi," to-sal about 4,O0OO, including head office and sales'ersorzele T rect- en,ployment ef2ects of the p:ropozsed proj ect have beenestimated xsee 4.hpra_sal Report, Amnex 17); while it is difficult tolfore-ast ` .-lemlith precision, they imay turn out to be substantial0
''rai nig of its labor force will be one o' SM-CARTSA's mostLmportant --asks and tUhe stibject is receiving appropri-ate attention by
management. The progr.a- has been discussed with the Bank and is consideredconsistent with the goal of facilitating successiful Es,art-Up and initialoperation of the plant.
Capital Co,.s aieand 1cimG 'Pan
22°le Total -znTnc r equired for the prcject is estimated at theeQuivalent of $6S6.5 mildo:a. including pre-operating expenses, initialworking can,ital, price esc.lation, financial charges during construction,and refinanciLg of early debt maturities and operatirg interest. Takingntco cor±iideratio-G thL£ al civil -works, ereCticnr, so:e equi-_pmentstructures and des-±gn engrieering orders arez expected to be -lacedwith Mexdican suppiiers; airect local currency cc sts wi-ll amount to about$369 million equiva ent an.d direct foreign exchange cv-sts tc about $310million;, or about 46 oercent.
-9-
29. Financing for the project will come from the followingsources:
Source g million
Equity 300.0
Long-Term Debt 378.0IBRD Loan 7000IDB Loan 54 .0Foreign Bilatera41 Credits 178.6Other Loans (1976/77) 75.4
U.K. Grant (O.D.A.) 0.5
Total Financing 678.5
30. The Company's equity requirement during the constructionperiod of $300 million equivalent will be met by the existing share-holders, according to an agreed schedule (para. 17).
31. The proposed Bank loan to SICARTSA of $710.0 million would befor 15 years, including a five-year grace period. In addition to theinterest payable to the Bank of 7-1/4 percent per anaum, the company wouldpay to the Govern.ment a guarantee fee of 1-3/4 perceat per annum on theoutstanding amount, thereby raising the total (cost to 9 percent. The ID"loan would be on similar terms, but at 8 percent annual interest plus asingle payment of three-eighths of one percent as a guarantee fee. BothBanks are recommending five-year grace periods in order to ease SICARTSA? sexpected liquidity problems during the start-up period when production wiLllbe well below capacity (see para. 40 below). This means that the firstrepayment would not fall due until about 2 years after project completion.
32. The proposed Bank loan is intended to fizance some $62 million(c, & f.) costs of equipment, spare parts and building structures acquiredthrough international competitive bidding, and about $8 million of interestduring construction, The Bank loan is expected to be utilized as follows,
$ million % of Loan
Foreign equipment, componentsand spares 33 47
Mexican equipment, spares andstructures 29 42
Interest during Construction 8 11
Total loan: 70 100
If a contract to be 2- lzced byr the Bank is awarded -to a Mexdcan -'irmon the basis o'f mternatioial competitive biddiLzg, disbursement fromthe proposed loan. wc:d cover the full ex-factory cost. The loan isexpected toi be LXxlly disbursed by the end of 1')77.
33. SSfficient parallel credit offers h&.ve been received by thecompany to indicate that bilater^al lunds - to cc-mplete financing for thepoject - .ri.ln no4- be a -rcblem. B:ilateral creclt agl-eements have beenfinaliZed *r ar3 beLng re;otiated w:ith a Astria, 3elgim, UCanada, France,
Gerzaany, Lpr Uni:it t'-e Til.led Kingdom and the United States, The-Le.rmi vary somelflEhat, but ua average provr de "or the credits to cover 90oercent-. of te' Ce L f, rv-e of equipment origialting in the respective;oiUrzries ,Ld 15 p 0ti amoun-it for asscciateCL: Mexican currencye:rzenditurcso ve--,e o uns :';or- thoaese credits are ex-,.ected to be renaymen-tover 15 yearsdrL, in iJg . *.y-ars of graze, at a cost to SIT CfTSA of 7 per-ce-t p_r aia=, The '10 :^cent dow payments fcr bil`.teral orders are
n_;Zerally *bo 'ce ccverea by .ICA2lS'ATSAs equi`-y.
Gsi C-rniSlEnt *if ;Hexico ilao .lndertEaken tc provide an urnliciteC-Gject aOplpet.o:i r coi overirlrun guarantee, subject to a 60:40 debt/
cw--.Jty res>r:iction ania w- lh. ei ncng on terms saC,stasfactory to the BakL.;-n t- - co->{ re overmert rls cmmittied itse:lf t-o -rovidte t:e,co~~~ ~, .,he Gc~vrnment has conL __ sLTu rOle~e
c.. _. - ancn (eloo v;75 mil-Hlon) tuo co.;:plete STCAR§ZSA 1s.nSi -(~7 ,'X7t1 p t helP C;-ee sais zovre rxt wiT provide workingnaz',T Lv 2in- a . Sent ra.io no lower t'han I . 5 until 90 percentcL~. :. -j--e_ ,"ocu--- o- a .i3 e. c at, city - a reacho;d ove- six consecutive
mc.i e Co mrr a;3 ; e ') that it wiLl pazy -o di viJ dendsutl:K` c pde - -oe,-r _0:50 o- i I ^..ch paymenlt ;<ould
~o.-.er t-he cu-rent r-.- o b.elo-w, I (`D- " that cumulative dividenx,s at aniy-wa .ill be restr-c tc -o one-h_alf of iJts cumulative net income from the
t-.Le of p a`t starap . c) tat it wil.l be rest,ricted from contract !rxn
__&6i-ional debt 'wrbC_ d.' _ raise the debt/equiuy rat_o above 60:40, aadW, 3l tw' additional non-Projec-t expendcitures in f'ixed or
Ca3italu ascetS eacee .t-hi_ eacialen-t o' $15 zinllior- in arny one yearwithou`,t p'-:Gor ab--e . cct, .'itween the Bank and SICAR'SA.,
.. _a jC
__' .Ui.:w';t ae pa:-'s anad building s-tructures to benanRclSiCeecL 3;' r)osei Bak Than dll-7 be acquired through international
.z,,riretit-Jiv,. saoif d,, in accordanre with `the Bank's guidelines. A -wo-:ag diddmr.r prcc eby echnical proposales follo,;'ed by separatae price
opo' salpie) -S 'cc-, *g 7 ;fol l c sim:ilar t;o --ha-, uise-, for the Brazilian stee-lajes (.,ee k-raIsa- `epo-rt, 3rzallIan Steel expansion Program, PI-1 6 a,-az 5, 19?,')c '.':.e Celection of items -or Bank fLnanc_. has been based on
,-,r!e des-re -t.o oGadge S ;.C% SA' s su,p lY b-&e beyDnd t-e nations oZferingJDil aterai ± ; SO aD to a ,n:c«a_ competitioa, ane` -'he procurement,procedures are saes-iZme -teo enable i4exican manufact,-urers to pa.ticipat-eoffectivel- i- ec4-memt sp yi -i meet-ing these ob,ectives, a bidding
p.-*orefer,;rxce yS-;i cm been acdopted i&nich recDognizes t.hat much of;*ocuremen-c, for thie :proje 3lust necessarily corn3rise large packages with
_>. zgl4 e conr!acto'r7 reC;spon sbility - i e., the blast f'u.ace, pellet plant, etc.
Since no Mexican supplier could meet prequalificatior± criteria forsuch overall responsibility, an incentive to use Mexican reso-urces isgiven to non-Mexican bidders by way of a 15 percent margin of preference(or the prevailing import duty in Mexico, if lower than 15 percent) onthe clearly identified Mexican components of non-Mexican bids. For thispurpose, a component is dfined as being of Mexican origin when suppliedby a company incorporated in Mexico and the costs of local materials,labor and services used in its manufacture are aot less than 50 percentof the total value of the component. In those cases where Mexican companaescan prequalify to bid directly, and not simply as sub-suppliers, theirbids are considered entirely Mexican when Mexican value added reaches 50percent. Procurement under the IDB loan will follow similar principles.Bilaterally financed items are being procured under the same generalprinciples of international competitive bidding as those folio-wed for theBank and IDB items, except that credit terms are being taken into con-sideration during bid evaluations.
36. Initial letuters of intent to place orders for items proposedfor Bank finance were issued by SICARTSA in July, and some firm orders wereplaced during August with full adherence to the Bank's Guidelines forProcurement and in full consultation with Bank staff. In view of the needto maintain project schedules, I recommend that the Executive Directorsagree to retroactive financing of up to $3 million to cover the expenditureslikely to be made prior to the signing of the proposed loan.
SICARTSA's Marlket and Prices
37. The proposed project will help Mexico fill Mexico's supply gapin light non-flat steel products expected to reach about one million torsby 1980. The details are shown below:
Projected Demand/Supl Baac-o iht Non-FJat Productus2 ~ ~~~~pl 2Balnc for Li= -
1976-80
Actual (thousands of tons)1972 1976 1977 1978 1979 1980
Projected demand (1) 1,182 1,816 2,022 2,251 2,506 2,791Projected supplywithout SICARTSA 1,182 1,664o0 1,690 1,725 1,775 1,850
SICARTSA supply - 150 500 800 1,000 1/ 1,000 1/Total Supply (2) 1,182 1,790 2,190 2,525 2,775 2,850Excess (deficit) 2/ - (26) 168 274 269 59
(2) - (1)
1/ 100 percent of capacity.2/ The supply position.from 1977 through 1980 may be somewhat overs-tated
because of the underlyirg optimistic assumptions with respect to capacftyexpansion and utilization of the existing plants.u
- 12 -
30e -a,ure aS,e z.ri es in Mexico will depenc upon the resultsof the Government Is ratLon&I'zation of the existing price structare(para. 13) For I _osos of the L'.s Truchas appraisal, it has beenassumed that some increase in price ceilings will be allowed beforeSICARTSA begins proCduct-ior in 1976 and that real prices at that tinewill be oUi,u 2-3 percent above present price levels, On this basis,the average price n. 1973 currency for the assuried SICARTSA product miLxwill be about $185 per tcor delivered Me:ico Cii-y. A2ter 1976, the basicassumption is tit, SICAYTSA's real prices will d1ecrease by about one per-cenr;; p ,_s-: relative to ,costs. This very posoibly will be the Situat0on-ihe company act-ualy will- face over the long run.
39. As nar-ti of th-! apraisal, a world steel price studzy was carr- edGlt by ank consuls' -zv-., with specific re'erenrce iio thre type of rcts2 7C.ARTSA will sel c r-inl` :its first stage. Based on this study.,, it hasoeen conc 2udtcd tihat -te 1.Icelxy real levrel (in 1973 crrency) of delivered._ort nrices f Por S _4CAL?JSkA s prcduct -ix fill be in tihe range of $p1 88-$200
Ier; tozO ..nder these __cirustances, SICARTSA should able to pod-uce,-eel pro fitably thout protection.
- 2~~~~rciai -
_.v0 Thie 2ea cf2T projections for the o:roposed project have beenu e.- _ a conservative monnerS using operat,ing costs escalated at
.r_e: par anz:ala ana steel prices at 2 perceit. The company7s projected.c,-:i,-eru w± ~-;l :pos t,_cn is strong but liqu:cldity xroblein- will; be
e:. zUterei d^nKurig the nir9t 2 years of operation when debt maturiities-;e, n to 1_:& Lce ac('orc f 2 pro&dixction is reac.hed. The risks are not,get,- l._-owGver,, arL W._l se covered adequately by the completion and cost-overim gurszantee excenaiced by the Government (para. 34,
"he balance shreet projections for t.e 197S-86 neriod are:
.e.. .cc-c_Indicat-ors of Financial Position(USn il] ion)
i970 1977 197X8 1979 1982 ;1985
<2crr2en-;; a5;e K- z/'3L. 50 7' 61 8? 9;_7 >-rert T_i c _biic_ 3 s 12 26 43 4I 4?
;Niet fGorkir- GapK-al i/ 22 24 3'' 38 42 46
C-rrent -iatio 2.9 1.9 1 ,9 1c9 109 2.0Quick Ravio 1.6 1.0 1. 1.0 'io
.iong-Term bt/Zzf -ov 56/44 59/41 56/44 48/52 30/70 713/87
:_es Seet 3-rLc-e Covered 0O6 1 4 2 2 ( ... over 2,2 ... )
f r .~clll.nO ~-:lus c ash for investment.
- 13 -
42. Using constant prices, the financial rate of ret-rn on totalcapital is projected at 11 percent. Profitability forecasts show lossesfor the 2 year start-up period, but increasing profits after that. Cumulativenet cash generation through 1985, the tenth year of operations, is pro-jected at $325 million, providing a substantial contribution to new in-vestment and expansion.
43. A sensitivity analysis was run on the basis of the expectedproduction and sales build-up period of 2-1/2 years and another assumingan extended 5-1/2 year build-up period. Variations of these options inturn were run to determine the likely effect of an additional cost/pricesqueeze of one percent per annum, an increase or a reduction in 4he capitalcosts of $60 mil lion, a one-year production start-up delay, and a 15 percentincrease in operation costs. The most detrimental hypothesis - a start-updelay and cost overrun, together with a 5-1/2 year build-up period - reducedthe rate of return to 8 percent.
44, Debt service coverage during the critical years of operation -sshown in para. 41. The lower 1976 and 1977 figures are consistent withSICARTSA's projected needs for additional financing during those years (theoverrun guarantee will still be in effect) From 1978, the company beginsto cover its interest and principal payments obligations, and a healthycoverage of two times or greater is projected.
Economic Justification
45. The Las Truchas Project is judged the best of various alternativesfor the next step in Mexico's steel expansion program. The project'slocation adjacent to its iron ore supply and a deep-water port facilitywill give it raw material advantages unmatched at arn of the locations ofthe existing Mexican producers and is in line wfith the emerging worldwidepattern of placing new steel works at coastal sites. Its proximity to themain steel markets in Mexico will give the project further long-runadvantages over its major competitors.
46. The basic economic rate of return is 12-13 percent for thelikely range of import prices discussed above. This has been calculatedusing the financial cost estimates, with taxes removed, and with economicprice increases for energy, port and transport costs. Using a combinatioriof unlikely unfavorable events, the return could drop as low as 8 percentbut, overall, the probability of an economic rate exceeding 10 percent isvery high.- Regional or secondary effects of the project have not been takeninto account in the analysis, although they may be considerable and shouldcontribute to the Government's objectives of regional development.
PART V - LEGAL INSTRUNENTS AND AUTHCRITY
47. The draft Loan Agreement between the Bank and SiderurgicaLazaro Cardenas - Las Truchas, S.A. and Nacional Financiera, S.A; thedraft Guarantee Agreement between the United Mexican States and theBank; the Report of the Committee provided for in Article III (Section 4,iii) of the Articles o-' Agreement, and a draft Resolution approving theprcpose& I -cn are being distributed to the Executive Direc-tors separately,.The draft agreements conform to the normal pattern fcr loans I'or industrialprojects.
I am sat;isf:ced i.;hat the proposed lozn would comply wit lh theAr ticles cf Agreement o02 .,he BazLnk
Ph?T V1 - PEGCOMNDAOATI0
I recommend that the Executive Directors approve the proposed
Robert S. McNamaraPresident
by S. Aldewereld
'Attachments
Augast 20, 197 3
C ._ s, . , _ - _ V_ ,
AREA POP;UAT;ON 2.ENS ITY
__ 7 v,JV5 h;' iRate of 0ro.th: >._,. (froL J to 172 15.3 per km' cof "ar-ae-
PO? -A7TC; C4A-?A-REP.ETCS p.?-) FvALTH q.1- -47
-Crude 3Brth Rate (per 1 ,rG) 2 Populatfon per ?hysicia : ., 2 (1968)Crude 0eith PFae (pe- 1,0I0): _.2 Population per hospital bed 5:.0 (1966)Infant Y..zrtality (per 1,000 live births) 53.4
6,IS'':1 GlST213yTlO: (1969) 2L/ DIS:R7T'-ON _' t;D C. 3?S -TP ;.- c7 of natioaal in:o-ne, lowest quintile : 4.0 ov-ed by top 16,. O. o.s :,,_,
highest quintile 64.0 % owned by s-eaIest .07. of o-.-ners
ACCESS .0 PIPED -'I 3/ ACC2SS iO EL :C'rYCTTY Fj, -,
z of populatio - urDan . 1 of populatiou - urban
hJT .wtr:ON; (1963) L/ tO'CAT IJN 7 0'2. 2Calorie intake aF J. of requlrements: 122' (average) Adult l_tera:y rate '. : CPer capita proteim intake 35.&5 kr-/daY (average) Primary school enrollment 7.: 70 (&g0S n-If: 9/
10/
G!Y'P PER CAPITA in 1972 LS $67C
CROSS 1 NA7Il7NA.t P?.02.TUr IN 1971 ANX UkL :RATE OF CR35h--H (t, conrtant pricea)
US i Mln. . 2960-65 1965-70 1971
GNP at Market Prices 36-, 0'2 100.0 7.6 6.6 3.8Gross DoM.estic :nvestnent 7, 122 17 9.2 5.8 - 8.1Cross National Saving 6,307 17.6 9.3 4.2 - 4.5Current Account Balance - c05 - 2.2Exports of Goods, N7S 2,924 5.1 4.3 5.0 5.5Imports of Goods, NTS 3,3i.3 9.4 3.5 7.4 - 3.9
OLTPi,., LABOR FORCE AZPROOUC7IT\%Y ': 197.
11/ValuLe Added Labor Fore- V. A. Per Wocker
S SM. 7. 'ln. _ 2 L'S$ _
Agriculture 3,795 11.3 5.1 78.8 76 29.2Industry 11,293 33-7 3.0 23.1 3,733 li6.2Services 18,776 56.1 4.2 32.0 4,417Jnsliocated -_3-^ _11 t Q- i
localiAv.7rage u lj.i iuu.0 Z 5 O
GOVERNK:NT FINANCEGeneral Covernnert Federal Covernrnent
E'enos Mm.) ?. of C!i? (Tesos Mm: .) :. of C1970 1970 lSi;,-72. 1971 1 9_7 1 _-7I
Current Receipts 51,481 12.3 12.1 36,339 8.0 7.9Current Expenditure 1I.77 10; 10. 29/,)27 .i 6.1Current Surplus 6,744 1.6 1.1 6,962 1.5 1.3Capital Expenditures 17,811 4.3 3.1 14,349 3.2 3.5Exteraal Assistance (net) 1,033 0.2 0.4 450 0.1 0.2
/ In terms of estimated cultivable area.i/ Sourcet 1969 S:rvey by M! it4s-ry of Trade and Industry.j/ Sourcet 1970 Census of Pcpulation.
As percertage of mini-um da'Jly requirements established by FAO. Data from Ba of Mxco Surey, 1968.Source: VHO.In terms of total land in fe.rr-s, including range land, etc., in 1960. Sources 1 Census of Agriculture, ,59i.Sources 1970 Census of Population.
/ Source: 197^ Census of PoFulatior..2/ Sourcet Percentage enrolled of corresponding popu1ation in aje group 6 - ii,2.0/ The Per Capita 5P estimate is at 1970 market prI_es. calculated by the same conversion technicua as thnO 197j2
World Bark Atlas.,/ Total labor force; unemployed are allocated to aector of tleir normal occups;ton. 5
1U,sllccatod' conalstsmainly of unamployed workers seeking their first job. Census figurer adjusted to mid-year.
not available . act applicable
KNMZ IPa5r 2
CO'U\rRY DATA - rr
_0,;:FY_. an2 d PRTr- -S I _969 13701 1971 197: I 972(Mjllion o_tsteld1in,g end perind)
(January to September)Ypney and Ouas Money 86,1i G.4 164,572.7 191,286.4 22 ,700.3 213,4c6.3 246,1i9.02aS: ~-ed' t -o ?ubllc F oc.ctor 2.! 2.9 ,'21.3 4 2,310.6 i,1 4 7.2 51,7 .9 0'r.722.0 237 ̂ -Eor.A. C:ed_: to ?riv-ate Sector2 2/ 66,4 f .3 2L,374.5 146,835.2 166,29-.2 2.
(PercentagesE or rdex Numers)
M.onoy =ar 2,iasi Money -.s X o:- GD? L h3.8 4'.6 18 . 1 1-6.36 .-94 4/Gen'1 .- I -e 2nde~ (1.763 = ICS" 3/ ... 1 23.0 12;3.5 134.8 , . 10. 3
A1:|'.rrconte9e chne~ r Ies
':' 3.-.ce ndc:2 2.3 3.9 4.5 4.9 39Bar.: crec'-.y. to tuc%ic Sector Et.6 20.2 7.'4 9.7 13.7 'San<cec to Frivate 3cclor 4. 20.6 1...o -4.6
?SAT,NCE Q7 kY7f.R.rS ?,CHAWDISE .r-POS _ AV C-FAL. 1969-7T, )
iQ l,:97 :1971 iS us <r(Yi1l:l e-s US S 'anufactures , 62 32.9
Cotton 1L6 ,o.4EL:XortCC ^:. ̂ .c,oss, .r S 2 I 7 2.7- 2, 9 2 Li Beef azid Live Cat,'-g L15 8.2.. ,-tr:s. o .. :od F 2S, 2,S';S 3 ,3 Tarnatoes 9i, 6.7
Fc.c aCn ~(de~>ft ) S%iga r 9O. 6.5Cofeee 8s0 6 7
T Itn r'~ nl q -nT'qrcr (net -7 234 59 5 L.2
WsrXe--E n-_Conr~es -/ s D' 2 34- kl. other 26,Ut'er ;'.'t":".- Davnents :net-. 5 - z 7! _4- 9 Total,et Tr7ran.mS 7.6 35 27 EXTERNAL DEBT7, DECEN3ER 31, l97.
½ -nc-. e-:rent Accourt ~ - '< - '3 us S lnDirect ZoK-.gn irvestnent 283 323 29. -Ne:. T ->ror fng .4.0 276 275 Public Debt, incl. guaranteed 4,244
Dtsburscnents 975 359 799 Non-Guaranteed Private Debt ;9A'7r:Loi: .. 'o"0n . .525 r g 3 92L Ictal outstanding & Disbursed 4,-63
748 599 56 '
CaGptt-,1 Gants - - DEBT SERVICE RAT10 for 1971-
Ot'ser Cas.::a' (net) -_ - 12 - 7Othe- ite,- , .
inc-ease n Reserves 43) 4 102 20, Public Debt, incl. gua1rantee! 22.0Non-Guaranteed Private Debt 7/
=,rcss Feees (end ye.:r) 313 820 1,020 Total outstanding & Disbursed3ort Resf-* +s (ee-' year) S54 752 952
OF 0P 7_C-7A.N0E IBRD/IDA LENDING, (latest m=nth) (Million US $)
-h8-j eh -_'971 IBRD IDA
i =S $ c.08 Oatstanding & Dii3bursed 1 023tYndlsbursed 506
3`72 - 1°7 1
Outstanding incl. Undisbursed
.S S -. 00 02.50s-..cc - us $ o . o8
1' Federal Goverement and States only./ Lendind;.to enterprises anr individup2's. No breakdown between public and private not applicable
sec:or Žnterprises.3/ ';DF def'ator.4/ a-i-Sfp: in relation tc Jan-December GDP es,imate.
s-o September.7nclur'½-3 rerittances of agricultural workerc which are treated as transfers.
8/, ~ . -'' Ee-v~c^ to "pcrts of ,oodS, 7.on-factor services and workers remittanoes.
9,f 1 197-
ANMEX IPage 3
THE ECONOMY
(This is a reproduction, with some updating, of paragraphs 2-13of the Presidentts Report P-1207a-XE dated May 30, 1973)
1. During 1960-70 Mexican GNP in real terms grew, on average, at 7.1 per-cent per annum, and in 1972 reached a level of about US$750 per capita. Duringthe decade of the 1960's the share of manufacturing in total output rose front23 to 34 percent while the share of agriculture declined from 16 to 12 percent.Agriculture continues to be the main source of employment although its share inthe labor force, which was 58 percent in 1960, had fallen to 39 percent by 1>70.Labor employed in manufacturing, during the same period, rose from 16 to 23 per-cent of the labor force. Income disparities between social groups fn Mexicohistorically have been great, and continue to be sD, notwithstanding that Mexicois one of the few countries in which a major land reform :- a result of theRevolution of 1910 - has taken place, and in which about one-half of all crop
land is exploited on a communal (ejido) basis.
2. The high rate of population growth (3.4 percent) and the relativescarcity of arable land have contributed to the very rapid growth of the urbanpopulation. Since 1960 it has risen by some 5 percent annually, and in 1970accounted for about 60 percent of tthe total population, the metropolitan regionsof the three largest cities, Mexico City, Monterrey and Guadalajara grew ever
faster than the overall urban population.
3, Unemployment was recorded at around 9 pe:ccent in 1970 while an additional30 percent of the economically active population were employed in activities ofsuch low productivity as to be cornsidered underemployed. Moreover, because ofthe increase in population and its present age structure, the labor force willcontinue to grow very rapidly.
4. President Echeverria, who has held office since the end of 1970, hasstated that his Government is strongly committed to a po-licy of economic growthwith income redistribution, and has expressed particular concern for the problemof rural poverty. In the past two years the Government has initiated severalmeasures designed to improve the earning and living conditions of the rural poor.These include the enactment of a new Agrarian Reform Law (1971), a new Water Law
(1971), instructions to the banking system to channel part of its resources tosmall farmers and ejidatarios, and the appropriation of funds in the nationalbudget for an integrated rural development and works program. The new AgrarianReform Law is directed to strengthening the legal bases oL the ejido, to accel-erating the awards of final land titles and to granting individual small holderssimilar rights to those of ejidatarios. The new Water Law restricts individualland holdings in new irrigation districts to 20 ha.; the excess land is to bedistributed to small farmers and landless families. The small farmers' creditprogram seeks to improve credit institutions and increase amounts to ejidatariosand small farmers. The rural development program, for which the Government ha.appropriated Mex$2.5 billion (US$200 million) in the fiscal 1973 budget, withL theintention of spending about Mex$15 billion in 1973-76, is in the process of bei?gdefined and is meant to help the landless and seasonally unemployed poor as wellas to improve the productive base of small holders and ejidatarios. It is tooearly to evaluate the impact of these policies, but they undoubtedly respond tosome of Mexico's most serious development problems.
7
Between 1960 and 1971 :i.l share of investment in GDP rose from about17 to almost 20 percent. By 1971 some 88 percent of gross domestic investments- 16.4 percent of GDP - were being financed by internal savings. While totalsavings are thus cuite high, public sector savings need to be increased: Publicinvestr.menLs amount to less thari one-third of totail investmc-fit, but public savingsmpake up only about one-fourLh of total savings. It is the unusually great wi' Iilna-
ness of t!-e ?7-'ate sector to save that has ?er-mitted tse Gover,nment to m..aintaintaxes at the low level of 9 percenz or GDP, but a greatar pul-ic savings effortwiil be needed in the rutuwre, as thie new regional developirient: schemnes and ruralinvsstm-enz -:rograrrs wi-i c.o rcauirs tsar additional reso-crces. ThIere -isno cues.ion abou. tnIe ecOr_oy- sapaciLy To generate adlitional revenues iri. thepub_ li sector, noi only t L o_ taxes 'ut also in t-he piblic en-terpr-ises `--severa~ of which crie prices o- services sold have faile' to aeep up with procuc-tion sadi distribu-oi:: cos-s. he scope for adjustmrent is illustrated by thcierecen-t decssicn tc rest'-ucc-re w.-ter prices in the Fc-de::al District in such a wayas co almost couble revenuese
S IT is no-r-mai n i-. xico, thac private investm.ent attitudes are veryc;t_cu ~ during tne -slrst yea- ot- a new Administration, and 1971 was no exception.
S -ash privace >nvesrment, combinred with. a contraction of ,-ublic investmentsn---.< c-c.:-. che r2.e-e_on i-n t-re un:!ted SLates, slowed the GDP growth rate to a mere
. r ece -.-. however, -:ow h re 1--umed an c1972 to 6 - 7 cercent, while price increases- yr 'ch nac causec concern in 19'% - siowed co around 3 percent, i.e. below those
_ co's a princiaL_ tradin-g pa--r-aers.
7, , Between 1960 and 1970 exports of goocds and services rose by arn averageof 9 percent Der annum; merclnarnase exports grew at a 6.3 pe--cent per annum rateane tourist earnings at 15 perce.e-t per annu-im. Export g:-owthi slowed appreciablyin 1971, ,ecause of tnle U.S. recession and because of uncertainties in tne irternational monetary s,tuation. -n 1972, however, expansion res,med; in the 'irstn!.-' --e mtionthris exports of -man-;ufactures -cse Dy about 30 percen- and tota! merchandisee:-^po.cs by about 23 percent.
A rece-n- aarnk mifssion that evaluated Me-xico's policies for promotingm^-amacu-urec exports has founc ._',-er generally effective Recent moves extendingtl-.e scope of tax rcfunds for exporters and the legislation on border industriess_te especially promising. The :oreseeable ra-e of growth of manufacturedexzr-Dts over the n2xt few; years is of t-.e order of 18 percen' per an-num.
While ?u--,ic external borrowing increased aga-n during 1972 wit:ns tepec-up? public investmentr, the Gove-rn-ment's sournd debt ma-agement policiesCG-.:I ned with subsZantial lendi ng- by th-e Wor-ld Bank and the 1DB have kept thematrity and terLms structure of .,uch borrowings within reason,able limits.Private capital inflows have cor,ninued at a hich level. Overall, Mexico's netinr.er-ational rese--ves increased by $190 million during 1972 to $1,200 million.The ratio of payments fo-L debt service to receipts from exports of goods andser-vices, wh!ich in 1972 was an e. i-iated 2v pe!-cent, is expected to peak in the_at.- t seven:ies at near 25 percent a-nd should decline thereafter. During the
y-W year_, M exicoS' annua_ gross external borro-win- requirements aree~ -.-.teCt t aDout USS ,400 i mi lon,n or which, as in th, past, about 75 nercent
liKely co be raised _'rom Private sources. The IBRD's share in total ennual- 'V Ov _ LI :onr as Zxpucced to remain near 10 -,ercent.
10. Mexico has demonstrated over a considerable time that it can absorb,and utilize effectively, appreciable amounts of external capital. At the sametime the external finances have generally been handled in a prudent manner, whiledomestic policies have generated private sector confidence both in the currencyand in the economy. Indications are that these policies will continue as thepublic sector initiates a more ambitious expenditure policy in order to addressMexico's more intractable development problems, especially those of the ruralpoor. If such policies are supported by corresponding action to channel moreresources to the public sector, Mexico will remain creditworthy for substantialexternal borrowing on conventional terms.
ll. In addressing some of the socio-economic problems referred to above,public investments will have to grow in sectors in which the import component ofinvestment is small. Moreover, Mexico has a highly developed industrial sectorand increasingly Mexican products are competing successfully under internationalcompetitive bidding. External lenders, if they are to make a suitabLe contributionto MexicoT s development, and one that is consistent with overall balance of paymentsrequirements, will have to cover part of the local expenditures of the projects towhich they attach their financing.
12. During the first half of 1973 the Mexican economy has been subjected tothe same inflationary strains as most other countries. Imported inflationarypressures were strengthened by a domestically generated increase in money supplywhich has its causes in expanded Government outlays and an increased private ssctordemand. GDP grew at an annual rate of 8 percent in real terms so far this year.The Mexican authorities are somewhat concerned about the danger of overheating ofthe economy and have recently taken a number of monetary measures, including anincrease in the reserve requirements of the banking system, raising the interestrates for bankiing liabilities in order to attract both domestic and foreign savings,and selected increases in lending rates of the banking system. The financialauthorities are also considering the early implementation of a number of measuresin the public finance field which focus on the restructuring of prices of publicenterprises. Beyond this, they have already made considerable progress in improvingtax administration in order to increase tax revenues.
ANINtEX Ii
Page 1
THE STATUS OF 3iiNK GiQUP OPERATIONS IN M3XICO
A. Statement of Bank Loans(as at July 31, 1973)
US$ rillion
Loan Imount (lessNumber Year Borrower Purpo se Cancellcjtions undi sbursed
20 loans fully disbursed 6u4.D __
450 1966 Nacional ?inanciera, S.A. Irridation 19.0 1.2527 1968 Nacional Financiera, S.A. irrigation 25.0 9.-
-2 1968 Nacional Binanciera, S.A. Rtoads 27.5695 1970 Nacional Fina-nciera, S.A. Roads 21.5 it.7
747 1971 Nacional Financiera, S.A. Agriculture 75.0 30.2793 1972 Nacional Financiera, S.A. Tourism 22.0 22.0620 1972 Nacional Financiera, S.A. Ports 20.0 20.0624 1972 Nacional Financiera, S,A. Industry 3 .0 35O0625 1972 Ferrocarriles Nacionales
de Mexico and NacionalFinanciera, S.A. Railways 75.G 72. 3
634 1972 Comision Federal de ¢lec-tricidad and N\acionalRinanciera, S.A. Power 125.0 99.-3
909 1973 Nacional Financiera, S.A. Water Supply 90.0 90g0
910 1973 Nacional Financiera, S.A. Agriculture 110.0) 110.3
IC TAL 1,529.3 505
Of which has been repaid 269.4
Total now outstanding 1,259.9Amount sold: 67.9Of which has been repaid 48.9 19.0
Total now held by Bank (before 1,240.9exchange adjustments)
Total uncdisbursed 505.6 505.c
B. lao IDA Credits have been made to Mexico
A1.NEX IIPage 2
C. ST,. Y i 3F I' .L-ESTIENTS (as at July 31, 973)
Am-ount irn $- rillionYear Obligor Type of Bus-n,ess Loan Equity Total
1958/59 Indastrias Perfaect Circle, Industrial Ecquip- 0.8 - 0)8S.A. 7 ment
1958 Bristol de .ex_cc, S.,A. 1/ A/C Engine cver- 0.5 - G5Haul
1961 Sco ola r S.A. / Twisti Dril 0R. _ 3
1962/6Y Co/ zij a Fundidora iders Steel 22.3 21.4 23.766/'6 y Acero de Mlonterrey, 8.AA
1963 Qui~w za del Rey, *3.A, 1/ Sodum sulphlate 0.8 - 0.8
1 964/66 inrdustria de-, Hier- 9c, S*A. Constructior Equip- - 2.0 2.0
mer.t
I97C Miner-a del .:c; S,2. iron ore iLidng 1.5 - 1.5
Celan3se Miexl cana, l .1- Textiles 12.0 - -2.0
9?' Promcbora ie Pace` .eriodico, PRlp and paper 2/ 2/ 2/SO^. de C.V.
^t973, Cemer;;o Veracruz Cement 105 . - 10 5
Io- al gross comrmitments 29.5 23.6 53,i
mess an_el~ aticors, ter;minations,
re-aynents ana sales 13 .5 21.8 35. 3
To-&a. corriwi,entts now held by IFC 16.0 1.8 17.8
uozial burs-6 10.5
Lo-a_~ ~ ~ ~~~~~ld -1 e rr,-^na G e9-i
'I / l nvestv.miertizS Wnh ch have been fully cancelled, terrdnat&d, written o'f, sold,r<.~ceezed or repaid.
2/ '.)2 5,00 .
MNTNEX IIPage 3
BANK GROUP OPERATIONS IN MEXICO
(The following is a reproduction, updated and shortened, of paragraphs14-18 of the President's Report, P-1207a-ME of May 30, 1973).
1. The Bank has made 32 loans, for a t'otal of US$1,529.3million net of cancellations, of which at the end of July 1973 theBank held US$1240.9 million, including US$505.6 million not yet dis-bursed. Most of these loans have been made for power, roads and agri-culture0 Execution of Bank-financed projects has, on the whole, beensatisfactory. As I have explained to the Executive Directors (R73-23of February 1, 1973) the Government has not found it possible to effectthe needed power tariff increase and orly $35 million of the $125million loan (834-ME) would be drawable unless the CFE adopts adequatemeasures to present an acceptable program for financing itis investmentneeds.
2. *IFC has made ten investment commitments in Mexico amountingto US$53.1 milion, of which. as of July 31, 1973, US$35.3 million hadbeen sold, terminated or cancelled. The US$17,8 million held by theCorporation consists of US$i6.0 million in loans and US$1.8 million inequity. ThIs Annex presents a summary of Bank loans and IFC investmentsas of July 31, 1973, and notes on the execution of ongoing projects.
3. The FY73 lending program consisted of a Mexico City WaterSupply Project and a Livestock and Agriculture Development Project,totalling US$200 million. In the nextW six months or so I hope to oressentto the Executive Directors three projects that are in an advanced stageof preparation. Now in the process of appraisal are two irrigationprojects - on the Sinaloa and Panuco Rivers - end a highways project.In addition, we are holding discussions with the Mexicans or several trans-port, forestry and rural development projects, some of which are expectedto be ready for consideration later in FY74.
4. ... The irrigation projects are designed not only to help providea rapidly growing population with its food, fiber, and foreign exchangerequirements, but also to support the Governmernt's policies on incomeredistribution as expressed in the Land Reform and Water Laws, both of1971. Loans in the transport and power sectors are designed explicitElyto help inprove institutional structures and policies in sectors that play avital role in irdustrial eand agricultural production and ir the generaStionand utilization of public sector resources. The recent Bank-assistedagricultural credit project has a component earmarked for low-incomefarmers and peasants; if this operation is successful it should lay thefoundation for a wider attack on rural poverty in the future. At the sametime, the Government, together with the Bank, is attempting to prepareintegrated rural investment projects in regions in which income levels arelow but where some productive potential can be identified.
IN,E ITPage 4
PROjECTS IN EErCUTION 1/
Loan No.
11T r P =ject $19 millf.on lcan of May 25, 1966;December 31, 1973. The rev,ised P-reoec-, costs
are about 3, percent higher than estimated but the proJectrate of return wi11 not be affected because of hig;her tnanantici-pated returns. The closing date ha3 beer ex-ter,ded byone yrear to Deceiber 1973. In spi.te of dulays in constructionand land levelling, agricultural development has progressedsatisfacuori'ily; net farm incomes have risen by 38 - 45er-cernt, anQ over -two-thirds of farm popula-:Lion benefiting areejidatarios
527 PoruoT mriE t _ oj.co! ::. million l)an 2,ic)68 closi ate: _ june 30 1976 Estimated p,roject cos-QSh.ave rieen by about 36 t (frox-a $95 :-illion to $129r7iuon). -Droject bene,fits will be higher than at appraisal,bDut probably not enough to fully offset -;he cost increasesoC-ivil wo-rs aare about 50 percent conrolete. The original clo-irLg date (ijne 30, 1975) has been e,,Tended by one year toenab-e co.pletio of works and disbu-.rrseme_nts Agriculturedevelo-pment k, keeping pace -with civil works construction.
•28 Rc.a& /rojem0 :j' $2765million lo:a of Jairuary 26 1963;closngedat Seteer 30, 1973. The rroject initiallydelayed by heavy rains was completed in e.arly 1973, Theoriginal closing date of Ma'ch 31, 1972 has been extendedto September 30, 1973 to permit disbursements.
695 Road Pro`ec-v 2-V: E15.8 million loan of .--re 269 1970;zasi-nfC date- Juane 30, 197 . The -oroject is slightly behind
scnenw e, oecauSe of delays in budgetary allocat'ons. Thedelays are e-cxected to be overcome 3hort1y and it is expectedtnat swVo19LtS Will accelerate in 1973.
/ These notes are designec to hrform the Executi-ve D-irectors regardingthe progress oGi projec-ts- in execution and, in part-cular, to report&ay problems wiliCh are being encountered and the action being taken toremedy them. T_ney should be read in thi;s sense, and with the under-standJng that they do nct purport- to pr,esent a balanced evaluation ofstrengths and wea^rnesses in project execu-tion.
ANNEaX IIPage 5
Loan No.
747 Third Livestock and Agriculture Project: $75 million loan ofJune 9, 1971; closing date: September 30, 1 Disburse-ments are somewhat behind earlier projections but commitmentsof sub-loans are proceeding well and the loan funds are expectedto be fully committed by December 1973.
793 Tourism I, Zihutane.jo: $22 million loan o janua 22. 1972;closing date: December 31, 1975. Though the loan becameeffective only on March 31, 1973, the Dhysical performance underthe project is satisfactory.
820 Ports I: 120 million loan of May 17, 1972; _closin date:June 30, 1976. The proJect is going ahead satisfactorily,despite some delays in the preparation of tender doc-umernts 0The operations consultants financed under the loani havecompleted much of their work. An exte:.sion of their contractwill be necessary, however, in order to implement theirrecommendations and to complete tariff studies. Negotiationsare under way between the Government and the firm selected tocarry out the National Ports Development Study.
824 Industries II, FONEI: $35 zillion loan of June 2, 1972; closingdate: June 30, 1976. The loan became effective on October 12,1972. It has taken more time than was originally envisaged tostaff and organize FONEI fully. Two sub-loans have recently beenapproved. Discussions with the Bank ase in progress on how toexpedite execution of the project.
825 Railways II: $75 million loan of June 2, 1972; closing date:December 31, 1975. Implementation of -,he Investment Plan andprocurement financed by the loan are p-ogressing well; a slowstiart has been made on the Plan of Action, and little progresshas yet been made on several required studies. A new managementteam was appointed in May 1973. Operating results to date havebeen much as forecast, with an improved operating ratio. Trans-port planning at the Government level has, however, made littleprogress.
834 Fourth Power Sector Program: $125 million loan of June 23, 1972-closing date: December 31, 1974. The loan became effective onApril 13, 1973. Increase in power tariffs by December 31, 1972was originally a condition of effectiveness of this loan. InDecember 1972 the Government and CFE (the borrowing FederalElectricity Commission) informed the Bank that for reasons ofdomestic economic policy, they would not be able to put the elect-ricity rate increase in effect by December 31. The loan inclueci$35 million for joint financing of further payments due on ordersplaced before December 31, 1971. With the approval of lxecutiveDirectors (R73-23 of February 1, 1973) the Loan Agreemzent wasamended to separate this $35 million from the remainder; this
ANNEX IIPage 6
Loan No.
834 all0owed the Loan Agreement to be malde effective and pernmitted(cont'd) withdrawals of up to $35 million even before CFE had taken the
measures required to improve its financial situation, Theremainder of the loan ($90 million) is to be withdrawable -unless the Bank agrees otherwise - only if CFE adopts adequatemeasures to present an acceptable program for financing itsinvestment needs,
909 Iexico City Water Smpply Project: $90 Million loan of j;ne 18,1973; closing date: December 31, 197?.
910 Fourth Live 3to okrnd A;griculture Pro'e,(t: SD 10 million loan o,June 18, 197Ž, .1osing date: June 30. 1978
ANNEX IIIPage i
MEXICO
LOAN AND PROJECT SUMMARY
Borrower: Siderurgica Lazaro Cardenas - Las Truchas, S.A.(SICARTSA) and Nacional Financiera, S.A. (NAFINSA)
Guarantor. United Mexican States.
Amount: US$70 million equivalent.
Terms: Payable in 15 years, including 5 years of grace, atan interest of 7_1/A percent per ann,um.
ProjectDescription: The Project consists of the construction of facilities
in an iron ore mine and for a fully integrated ironand steel works on Mexico's Pacific Coast, at the borderof the States of Michoacan and Guerrero. In its firststage, to which the Bank loan will apply, the works wiLlhave an annual production capacity of 1.1 million tonssof crude steel equalling 1 million tons of Light non-flat finished steel products. the works are locatednear iron ore reserves sufficient for at least 30 yearsof production at Stage I level. Coal supplies will beimported through an adjacent deep-water port. The newworks will include mining eauipment and a coricentratio.1plant, a concentrate pipeline, a pelletizing plant, acoke oven plant, a blast furnace plant, a basic oxygensteelmaking plant, a continuous casting plant, a rodand bar mill, a bar and light section mill, a power plant,water supply and treatment equipment, an air compressorstation, an oxygen plant, and engineering workshops.
ATN-EX IIIPage 2
EstimatedCost of U32$ Million
Project: Component Foreign Local Total
Plant, Equipment andSpares 164.8 75.9 240.7 37.9
Services 4.6 8.3 12.9 2.0Freight and Insurance 12.2 2.0 17.2 2.7Erection & Commissioning 9.8 53.3 63,1 9.9Civil Works - 79.6 79.6 12.5Structures 8.0 16.8 24.8 3.9Design & Engineering 8.9 83e, 26.9 4.2Physical Contingencies 7, ,8.7 _
Total Ffxed Assets 223.7 275.6 ke99,3 73.S
Pre-operating Excpenses 19.8 50.2 70 0 11.0Initial Working Capital 8.0 20.0 28.0 4h.Price Contingencies 1526 , 8.3 6.o
TOTAL PROJECT COST 267.1 363.5 635.6 100.3
Knanci&L Charges DLringConstruction 31.9 - 31.9 -
Refinancinrg of Early DebtMaturities & OperatingInte-rest 11.0 - 1 1 o-
TOTAL FINANCJN& REQUIRED 310.0 363.5 678.5
Uikely m11ocationof Bank's Loan: f
Compone-rt Mllion Total
Foreign Equl.:ent, Components and 33 7Spares
Mexican Equipment, Spares andStructures 29 42
Interest duzring Construction 8 11
Total Bank Loan. 7C 100
AN1EX 'rILPage 3
Financing AmountPlan: Source (US$ million)
Equity 300.0 44.2
Long-Term Debt 378.0 £.IBRD Loan 70.0 10.3IDB Loan 54.0 8.0Foreign Bilateral Credits 178.6 26,3Other Loans 75.4 110,
U.K.( (O.D.A.) 0oc5 oO.
Total Financing 678.5 1000
EstimatedDisburse-ments: Amount
(US$ million)
1973 3 .419974 44.41975 14.31976 4.61977 3.3
ProcurementArrange-ments: Two-stage bidding process (technical proposals followed by
separate price proposals) according to the Bank's procurementguidelines. Mexican suppliers and clearly identified Mexicarncomponents of foreign bids will receive a 15 percent marginof preference. Bids are considered entirely Mexican whenMexican value added reaches 50 percent.
Consult-ants: British Steel Corporation has been selected as operating and
technical adviser (Bank loan will not cover expenditure onConsultants).
Rate ofReturn: Economic rate of return on total capital will be 12-13 percent.
AppraisalReport: Report No. 220-ME, dated August 10, 1973.
Industrial Projects Department.
