Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-2286-ME

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO

BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS, S.A.

WITH THE GUARANTEE OF

UNITED MEXICAN STATES

FOR THE

LAZARO CARDENAS CONURBATION DEVELOPMENT PROJECT

April 12, 1978

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorIation.

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CURRENCY UNIT - PESO (Mex$)

The fixed exchange rate of US$1 = Mex$12.50 whichhad prevailed since 1954 was abandoned on September 1, 1976 andthe Mexican peso has been floating since then. In recent weeksthe rate of exchange has fluctuated in the range of Mex$22-23to the US dollar. On March 30, 1978, the peso traded at 22.75per US dollar.

FISCAL YEAR

January 1 to December 31

ABBREVIATIONS AND ACRONYMS

BANOBRAS - National Public Works and Services Bank(Banco Nacional de Obras y Servicios Publicos, S.A.)

CFE - Federal Electricity Commission(Comision Federal de Electricidad)

FLC - Trust Fund Lazaro Cardenas (Fideicomiso Lazaro Cardenas)LCCC - Lazaro Cardenas Conurbation CommissionLCCD Project - Lazaro Cardenas Conurbation Development ProjectSARH - Ministry of Agricultrire and Hydraulic Resources

(Secretaria de Agricultura y Recursos Hidraulicos)SAHOP - Ministry of Human Settlements and Public Works

(Secretaria de Asentamientos Humanos y Obras Publicas)SICARTSA - Steel Mill Lazaro Cardenas - Las Truchas

(Siderurgica Lazaro Cardenas - Las Truchas)

MEXICO FOR OFFICIAL USE ONLY

LAZARO CARDEENAS CONURBATION DEVELOPMENT PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Banco Nacional de Obras y Servicios Publicos, S.A.

Beneficiary: Fideicomiso Lazaro Cardenas.

Amount: US$16.5 million.

Terms: The loan would be repaid over 17 years includingfour years of grace and carry an interest rateof 7.5 percent.

Project Description: (i) Objectives

(a) Support the development of the LazaroCardenas conurbation (see Map IBRDNo. 12488R), one of the fastest growingareas in Mexico, by: strengthening insti-tutional arrangements for urban develop-ment programs, providing low-cost shelterand other urban services to the poorersections of the population, and creatingemployment by assisting small enterprisesthrough credit and technical assistanceprograms.

(b) Help create a replicable institutionalmodel and prepare additional urban projectsin Mexico.

*(ii) The major components are:

(a) Shelter and related physical elements(urban upgrading, sites and services,construction materials loans, trainingcenters, and technical assistance);

(b) A credit line and the construction ofindustrial premises to promote anddiversify economic activities in theregion;

(c) Regional feeder roads and river controlworks; and,

(d) Technical assistance to strengthenthe Fideicomiso (Trust Fund) LazaroCardenas (FLC), and studies to prepareadditional urban development projects forpossible assistance from the Bank.

This document has a restricted distribution and may be used by recipients only in the performanceof their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.

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(iii) Benefits

About 50,000 people are expected to benefitdirectly from the shelter related programs(urban upgrading, sites and services, con-struction materials loans) and the programscarried out in the training centers. Thiscorresponds to about 60 percent of thepopulation projected for the Lazaro CardenasConurbation in 1981, when the project will becompleted. The project is expected to demon-strate the feasibility of providing adequateshelter and urban services to the lowestincome groups, with provision for cost recoveryfrom the beneficiaries. The agencies concernedwith the execution of the project are ade-quately experienced and qualified and FLC'sreorganization will improve coordination andmonitoring. Taking into account FLC's lackof experience in respect of production credits,adequate screening and evaluation procedureshave been adopted to minimize the risk ofuneconomic investments.

Estimated Cost: Local Foreign Total---- In US$ millions----

Urban Upgrading 3.8 1.6 5.4Sites and Services 1.1 0.4 1.5Construction MaterialsLoans 1.5 0.5 2.1

Training Centers 0.2 0.1 0.3Production Credits 2.8 2.2 5.0Industrial Premises 0.5 0.1 0.6River Control 1.7 2.0 3.7Feeder Roads 2.6 1.7 4.3Studies - 4.5 4.5

Technical Assistance - 0.3 0.3

Total BaselineCost 14.1 13.5 27.6

Design and Supervision 1.8 /1 1.9Contingencies 3.7 3.0 6.7

Total 19.6 16.5 36.1

/1 less than US$50,000.

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Financing Plan: Local Foreign Total----In US$ millions----

Bank loan - 16.5 16.5Government 18.0 - 18.0Beneficiaries 1.6 - 1.6

Total 19.6 16.5 36.1

Estimated Disbursements: FY Annual Cumulative-----US$ millions----

79 3.2 3.280 5.7 8.981 4.3 13.282 3.3 16.5

Rate of Return: The economic rate of return on the urban upgrading,sites and services, construction materials loans,training centers, feeder roads, and river controlcomponents, making up about two-thirds of thetotal cost, is estimated at 24 percent. No rateof return was calculated for the other components(production credits, industrial premises, studiesand technical assistance) because the associatedeconomic benefits are difficult to quantify;these components are well justified, however.

Appraisal Report: No. 1904-ME, dated April 4, 1978.

INTERNAT1ONAL IBANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT ANI) RECOMMENDATION OF [HE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOANTO BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS S.A.

WITH THE GUARANTEE OF UNITED MEXICAN STATES FORTHE LAZARO CARDENAS CONURBATION DEVELOPMENT PROJECT

1. I submit the following report and recommendation on a proposed loanto Banco Nacional de Obras y Servicios Publicos, S.A. (BANOBRAS) with theguarantee of United Mexican States for the equivaleait of US$16.5 million tohelp finance the Lazaro Cardenas Conurbation Development Project. The loanwould have a term of 17 years, including 4 years of grace, with interest at7.5 percent per annum. Of the proceeds of the loan, US$0.8 million wouldbe used for construction materials loans with a term of 15 years and interestat 15 percent per annum and US$2.2 million for production credits to artisansand small- and medium-scale enterprises with terms of up to 12 years includingup to one year of grace, and interest at 15 percent per annum.

PART I: THE ECONOMY 1/

2. Some of the major features of the Mexican economy were analyzed in"An Updating Report on the Economy of Mexico" (1110-ME), distributed to theExecutive Directors on March 23, 1976. An economic mission visited Mexicoin April-May 1977 and its report is now in preparation. The discussionwhich follows reflects the preliminary findings of the mission.

Past Performance

3. For most of the three decades preceding the mid-seventies, Mexicowas outstandingly successful in achieving rapid economic growth while main-taining stability in prices and the balance of payments. From 1940 to 1970,average GDP growth exceeded 6 percent per year in real terms, inflationaveraged less than 5 percEnt per year from the mid-1960s to 1972, and thedollar value of the peso, fixed in 1954, was maintained until the September1976 devaluation. The Government's role in this achievement was to carryout direct investments in infrastructure and in key industries such as power,steel and petroleum, while creating a stable regulatory and institutionalframework, as well as goodl profit prospects, to induce private sectorgrowth.

4. This strategy produced rapid growth, but led to a sharpeningof contrasts within the Mexican economy. While land redistribution underthe reform of 1915 was continued, most of the peasants who received landcould not improve their economic status in the absence of basic infra-structure, credit and technical assistance. Rapid population growth madesocial equity even more difficult to achieve. Population growth in Mexico

1/ Part I is substantially unchanged from the President's Report for theTourism Development Project (R78-35 of February 16, 1978).

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accelerated steadily, primarily as a result of reduced death rates, andreached 3.5 percent per year by 1970. Despite economic growth, the highdemographic growth rate made adequate absorption of the labor force inproductive employment difficult. Some 40 percent of the labor force iseither relatively unproductive and poorly paid, or openly unemployed.

5. During the 1970s, Mexico experienced increasing public sectordeficits, inflation, large balance of payments deficits, capital flightand a marked slowdown in the real rate of growth of GDP, which droppedto 2 percent in 1976-- the lowest annual growth rate experienced by Mexicosince the mid-thirties. On September 1, 1976 the authorities abandoned thefixed exchange rate of 12.50 pesos per dollar that had remained unchangedsince 1954 and let the peso float; in recent months it has remained ratherstable at rates fluctuating between 22 and 23 pesos per dollar. Followingthe devaluation, Mexico obtained major support from the IMF. In the lastquarter of 1976, Mexico was able to draw on the Fund for US$480 million.For 1977-79, an Extended Fund Facility accompanied by a comprehensive three-year stabilization program was negotiated, which could provide as much asan additional US$861 million once the increase in Fund quotas becomeseffective. Thus, total IMF support for the Government's program may exceedUS$1.3 billion. The new Government ratified the agreement with the IMFshortly after taking office on December 1, 1976, and to date has compliedwith the program agreed upon with the IMF.

Current Economic Policy

6. The present Government inherited a difficult situation upon takingoffice on December 1, 1976. High inflation, large public sector deficits, in-creasing foreign indebtedness and lack of confidence in economic managementindicated a need for economic stabilization. However, the situation alsocalled for more expansionary policies; economic activity had slowed down, netprivate investment was virtually nil, and the gap between new job creation andgrowth of the labor force was increasing. High world prices for petroleumoffered profitable investment opportunities in the petroleum sector; indeed,increased production for export of these products seemed by far the bestway to meet a large part of Mexico's high debt service requirements in thecoming years.

7. Faced with these conflicting needs and opportunities, the Mexicanauthorities are adopting a mixed strategy aimed at reducing lower-prioritypublic expenditures and increasing public revenues, while proceeding withpetroleum and other high-priority investments. The objectives of the Govern-ment's program include progressive control of inflation together with areturn to high rates of economic growth by the end of 1978. Better manage-ment of public sector expenditures, more rational pricing and cost controlin public sector enterprises, promotion of private savings, limiting wageincreases to justifiable levels, and more effective cooperation with theprivate sector are important parts of the Government's economic strategy.

8. The measures instituted by the new Administration have alreadyproduced good results. Inflation in the twelve months of 1977 slowed to 20.7percent (January-December) as compared to an annual rate of 60 percent inthe last three months of 1976. The deficit in the current account of the

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balance of payments has been reduced, and is estimated preliminarily atUS$2.2 billion for 1977, compared to US$3.5 billon in 1976. Total publicsector financial requirements dropped from 10.3 percent of GDP in 1976 to 7.9

percent in 1977. Mobilization of savings by the banking system is increas-

ing. Perhaps most importanatly, there is a general feeling of increased confi-

dence in the Government's economic policy.

9. The stabilization effort during 1977 was absolutely necessary, but

its price has been the continuation of economic stagnation; for a secondyear in a row GDP grew only by about 2 percent in real terms, implying a

further decline of real per capita income. While control of inflation will

remain as the overriding short-term objective--the Government's announced

target is to reduce inflation to about 12-15 percent during 1978--the 1978

economic program aims at a simultaneous recovery of economic activity,

through a recovery of private and public investment. Increased public sector

savings, further strengthening of the financial system and therefore in-

creased availability of credit to the Drivate sector, and continuation of a

carefully managed wage policy (the annual increase in minimum wages agreed

upon in January 1978 averaged about 14 percent) are the main means the

Government will rely upon to attain the above objectives.

Economic Issues and Prospects

10. As Mexico looks ahead, the key problems that its economic policiesmust address would seem to include the following:

(a) Many Mexican families have not participated in the sustained

economic growth of the last several decades. As of 1975,about 4,600,000 Mexican families--45 percent of the total--receive incomes equal to less than one-half the nationalaverage. The members of most of these families work--morethan half of them in agriculture--but they produce little

and receive little. Mexico's labor force is now growing

even more rapidly than in the past--it is expected to growat about 3.6 percent per year over the next decade, which

implies an average annual increase by some 670,000 workers

during 1978-82; during the 1960s the growth rate was 2.7

percent per year. The challenge of providing productive jobs

for both new entrants and existing under-productive workers

is an awesome one.

(b) Crop and livestock production in Mexico, which had grown by6 percent per year during 1945-55 and 4.2 percent per year

during 1955-65, grew at only 2.1 percent per year during

1965-75. This near-stagnation of agricultural productionsignals the end of the strategy in which growth of agricul-tural production came from newly irrigated land, while rain-

fed agriculture was relatively neglected. The continued

expansion of large-scale irrigation, so successful from

1945 into the 1960s, has brought lower and lower returns as

the works became costlier and easily accessible export markets

for high-value crops became more nearly saturated. New

approaches are required now to assure both production growth,and increases in income for Mexico's poor rural families.

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(c) The size and role of the State in the economy has been asubject of much discussion in Mexico in recent years.During 1970-76, private investment slowed down, and virtuallystagnated since 1975. This was, in part, a consequence ofthe pre-emption of credit by the public sector (during thesix-year period, the share of the public sector in theeconomy grew from 15.0 to 21.5 percent), combined with infla-tionary financing and accompanied by what some perceived asan "anti-business" attitude. Public statements by the presentAdministration indicate that it wants to reverse this trend.

(d) The present large foreign debt and sizable public financedeficit are mainly the direct outcomes of past public sectorinability to mobilize adequate financial resources. By theearly 1980s, large increases in export revenues, mainly frompetroleum and related products, should make both the foreigndebt problem and public finances easier to manage. Inthe meantime, however, larger public sector savings arerequired to reduce inflationary pressures and to releasecredit for the private sector.

(e) The rapid growth and heavy concentration of people andproduction in Mexico City, and the scarcity of employmentopportunities and services in rural areas, are importantchallenges which have to be confronted. Both equity andefficiency considerations imply a need for diversion ofsome of Mexico City's future growth to other regions, aswell as the provision of basic public services and enhancedemployment opportunities in selected villages and smalltowns.

11. In the medium term the prospects for resumption of economic growthwith relative price stability are good. Poverty will remain a problem butthe Government is taking steps to address it. The alleviation of the externalconstraint on growth brought about by the expected petroleum earnings (para.14), together with the Government's efforts to increase public sector savingsand to stimulate private investment, could produce economic growth of 7 to 8percent per year in the remaining five years of the present Administration.Resumption of economic growth combined with the intensification of theGovernment's family planning program (on October 28, 1977 President LopezPortillo announced the ambitious goal of reducing the population growth to2.5 percent per year by 1982, then progressively to 1.8 percent by 1988, 1.3percent by 1994, and 1 percent by the year 2000), the new emphasis on rainfedagriculture, and the implementation of specific programs aimed at increasingproductive employment should help to address the structural problems mentionedabove (para. 10).

12. In agriculture, the Government's quick action to defuse tensionscreated by land invasions and expropriations at the end of 1976, and itsdecision to review the legislation concerning land and water use, shouldreduce uncertainty and induce a better use of the available land and waterresources. In addition, the new emphasis on rainfed agriculture--whichhad been relatively neglected in the past--should lead to an increase in the

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production potential of vast areas currently under-exploited and to a reversal

of the past trend towards larger income disparities between the modern and

traditional agricultural subsectors. Development of intensive agriculture in

the tropics and of a nationwide program to construct small irrigation and

drainage works are also new features of the Government's agricultural policy.

These initiatives, together with the more realistic exchange rate and remun-

erative support prices, promise a resumption of growth of production for both

domestic and export markets and increase the possibilities of an improvement

in the living conditions of the rural poor.

13. Industry has potential for considerable growth in many sectors,

including efficient import substitution in chemicals, petrochemicals and

capital goods as well as exports of many different manufactured products.

Increases in tourism export earnings are also expected.

14. Among the benefits of recent public sector investments are the

new possibilities opened to the Mexican economy through the recent discover-

ies of rich petroleum fietlds. The Government has decided to use these large

hydrocarbon resources to help manage Mexico's heavy debt service burden and to

enhance the country's over-all development prospects. To meet this objective,

PEMEX (Petroleos Mexicanos, the State-owned oil monopoly) has launched an

ambitious six-year investment program amounting to US$17.0 billion in 1977

prices (about 25 percent of total public investment). This program would:

(a) almost triple the production of oil and condensates, from 292

million bbl/year in 1976 to 818 million bbl/year in 1982;

(b) more than double the country's primary distillationcapacity, from 270 million bbl/year in 1976 to 577 million

bbl/year in 1982;

(c) substantially increase production of primary petrochemicals

(ammonia, ethylene, benzene, etc.) as well as downstream

products (styrene, vinyl-chloride, polyethylene); and

(d) enable export of natural gas at a rate of 2.0 billion

cubic feet/day by 1982.

Under this program, the value of exports of oil and related products would

increase over ten times, from about US$0.9 billion in 1977 to more than

US$10.0 billion in 1982. If this program were to be carried out on schedule,

and incentives maintained for non-petroleum exports, the balance of payments

on current account would shift from a deficit of US$2.1 billion in 1977 to a

surplus of about US$3.0 billion in 1982.

15. The prospect of rapidly rising petroleum exports, as well as

previously mentioned prospects for increases in tourism earnings, recovery

of agricultural production and exports, and resumption of growth of manu-

factured exports, have greatly strengthened the balance of payments outlook.

Even on the basis of somewhat more conservative projections of petroleum pro-duction and exports than those mentioned above, the current account deficit canbe expected to decline steadily over the next several years and become slightlypositive by 1982, thus reducing Mexico's net external borrowing requirements(Annex I). The debt service ratio has been increasing over the recent past,reaching 46 percent in 1977. It is expected to peak in 1979 at slightly over50 percent and decline sharply thereafter to levels around 30 percent in theearly 1980's. Debt service on Bank loans amounts to about 4 percent of publicdebt service; this ratio is projected to decrease over the next two years andto increase to some extent afterwards. The Bank currently holds about 8percent of Mexico's total medium- and long-term public debt, and this ratio islikely to increase to some extent over the next few years. Mexico remainscreditworthy for borrowing on conventional terms considering the country'sstrong medium- and long-term potential and the comprehensive economic strategywhich the Government has adopted to realize it.

PART II: BANK GROUP OPERATIONS IN MEXICO I/

Bank Operations

16. As of February 28, 1978, Mexico had received 50 loans from the Bankamounting to US$2,624.4 million net of cancellations and terminations; of these,33 loans totalling US$1,486.4 million were fully disbursed. As of February 28,1978, the Bank held US$2,142.2 million of which US$787.2 million had not yet beendisbursed. Some 35 percent of Bank lending has been for agriculture and ruraldevelopment (15 loans for US$923.4 million), 27 percent for power (12 loansfor US$704.8 million) and 21 percent for transportation projects (12 loans forUS$546.7 million); the remaining 17 percent has been for industry (US$205.5million), water supply (US$130 million) and tourism (US$114 million) projects.Mexico is carrying out a stabilization program and because of scarcity ofcounterpart funds, some projects have fallen behind schedule during 1976 and1977. Following review with the Government, a steel loan was terminated(Sec M77-258 of April 5, 1977), the scope of an irrigation project was reducedand US$100 million from the original US$150 million loan were cancelled(R77-305 of December 13, 1977) and the scope of several other projects hasbeen modified. Other projects under implementation and affected by thestabilization program are being reviewed by the Government and further dis-cussions will be held with the Bank shortly. By and large, adequate budgetsupport for the ongoing projects has now been secured. Annex II contains asummary statement of Bank loans as of February 28, 1978 and notes on theexecution of ongoing projects.

IFC Operations

17. As of February 28, 1978, IFC has made 13 investment commitments inMexico, for a total of US$69.5 million, of which US$38.3 million had been sold,repaid or cancelled. The balance held by the Corporation, US$31.2 million,consists of US$26.2 million in loans and US$5.0 million in equity. A summarystatement of IFC investments as of February 28, 1978 is presented in Annex II.

1/ Part II is substantially unchanged from the President's Report for theTourism Development Project (R78-35 of February 16, 1978).

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Bank Strategy

18. The main objectives of Bank lending in Mexico have been to: (i) sup-

port policies and programs leading to a wider distribution of the benefits of

economic growth; (ii) strengthen policies and programs leading to continued

economic growth, by helping to finance projects that are to make directly or

indirectly significant contributions to output, exports, and employment; and

(iii) help resolve critical adjustment problems that Mexico is currently

facing. The Bank is preferentially supporting projects that make relatively

modest demands on budgetary resources and have a strong positive balance of

payments effect, projects of high social priority that help the rural or urban

poor, projects that promote higher levels of employment and those that help

to decentralize economic activity. The proposed Lazaro Cardenas Conurbation

Development Project fulfills several of these criteria (see paras 56 and 57).

19. In view of the difficult structural problems of Mexico's agriculture

and the sector's crucial importance to the country's further development, the

Bank has made agriculture the leading sector for its lending. Consistent with

the overall framework of country and sector objectives, a three-tier approach

has been developed. First, to strengthen infrastructure development and agri-

cultural credit programs so as to meet the demands of a rapidly growing popula-

tion more adequately and to generate the foreign exchange needed for rising

import requirements. Second, to raise the incomes of the rural poor and improve

their standards of living through a combination of directly productive, support

and social infrastructure investments. Third, to strengthen Mexico's institu-

tional capability to use scarce agricultural resources more efficiently. In

support of this strategy, the Bank has made seven loans over the past four

years, totalling US$579 million, for irrigation, rural development and agricul-

ture and livestock credit programs. In FY77, the Executive Directors approved

a US$120 million loan for an Integrated Rural Development Project--PIDER II--

under which some 46,000 poor farm families will benefit from directly produc-

tive activities. This fiscal year, an agricultural and livestock credit

project has been appraisecL and will be submitted to the Executive Directors

in the coming months and an agricultural development project focusing on the

humid tropics is being submitted for consideration on April 25.

20. Bank lending for industry has been aimed at assisting the Government's

efforts to reduce the balance of payments deficit and decentralize industrial

activities away from the major (and increasingly congested) urban areas. Thus,

the Executive Directors approved a US$50 million loan in FY75 to support a

fertilizer project which promotes new poles of development in the resource-rich

southeast region and the north central area. A third Industrial Equipment

Fund project is currently being processed for submission to the Executive

Directors in the coming months and a project to promote small- and medium-

scale enterprises is being submitted for consideration on April 25.

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21. As regards infrastructure, the Bank's operations have been focusedon investments in key areas of the country as well as on institutional reformsand sector policies aiming, inter alia, at suitable pricing mechanisms to helpgenerate additional resources for investment financing: the Airports Develop-ment Project (FY74) was designed to support the Government's policy of regionalintegration; the Third Railway Project (FY76) supported improvements of insti-tutional aspects and financial management of the sector. The Mexico CityWater Supply Project (FY73) has been instrumental in the establishment of aspecialized institution for efficient supply of bulk drinking water in theMexico Valley, and in the pricing of water at levels more closely related tocosts.

22. To reduce the external deficit on current account, the Governmentis giving emphasis to the tourism sector to increase foreign exchange earn-ings. Promotion of the sector, which requires only limited budget support,will help increase employment opportunities, especially in a number of regionswhere the scarcity of jobs encourages migration to the alteady over-burdenedmetropolitan areas. In support of this policy, a Tourism Development Project,approved earlier this fiscal year, will provide resources for tourism invest-ments needed to tap more fully the country's tourism potential.

23. The Government and the Bank have long recognized the large regionaldisparities in welfare and economic development that exist in Mexico in thecontext of rapid urban growth. The Government has identified high-priorityurban centers, the development of which it wants to encourage and support.Studies are under way to prepare projects designed to provide shelter, urbanservices, and new employment opportunities in these centers, with specialemphasis on the needs of the lower income groups. The proposed LazaroCardenas project would be the first such project.

PART III: URBAN AND REGIONAL DEVELOPMENT IN MEXICO

Trends and Problems

24. In thirty years Mexico has changed from a rural country with onlyweak economic links among its diverse regions, to an urbanized and geograph-ically integrated society. Mexico's population growth has been among the mostrapid in the world, and this growing population has migrated to cities at aneven greater pace. The percentage of the population living in places of 2,500or more inhabitants grew from 35% in 1940 to 59% in 1970.

25. In 1975 there were some 11 million people living in and aroundMexico City, making it the third largest metropolitan area in the world (afterTokyo and New York). Its population has been growing annually at over 5% andU.N. projections based on recent trends show it growing to be the largest cityin the world, with a population of over 30 million people, by the year 2000.In 1975, the Mexico City metropolitan area had 19 percent of the nation'spopulation, and accounted for over 40 percent of the nation's production ofgoods and services.

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o.u. lo slow down the growth of Mexico City by promoting growth inother parts of the country would be beneficial. Mexico is now sufficientlydeveluped for a strategy of selective decentralization to succeed. The nationhas many cities that are reasonably large and growing, where additional workerscould be absorbed in productive activities. The second and third largestcities in the country, Guadalajara and Monterrey, each with population ofover one million, are major industrial and service centers, and have beengrowing even faster than Mexico City. Forty-four other Mexican cities hadover 100,000 inhabitants in 1970; most of these cities have the infrastruc-ture, transport and communications links, labor pool, and other advantagesfor inducing future growth. Measures to increase such growth and to manage

it in an orderly fashion, paying due attention to the needs of low-incomeresidents and immigrants, hLave a double pay-off: the growth of the capitalcan be reduced (at least slightly), while efficiency from the national pointof view is increased.

27. Promoting faster growth in selected medium and smaller cities wouldbe far more than a means to reduce growth in the largest cities. Other impor-tant goals are to provide more productive work in many parts of the country,to bring markets, credit, health and other services nearer to neighboringsmall towns and rural areas (the "hinterlands" of the cities), and thus toimprove the economic and personal welfare of people who now live in placesthat are not close to the major cities of the nation.

28. Mexico has large regional disparities in welfare--as do other largesemi-industrialized countries. Per capita income per month in 1969 rangedfrom Mex$628 in the FederaL District to Mex$109 in Oaxaca--a range of almostsix to one. Access to heaLth care, education, potable water, and other basicneeds also varies dramatically from one region to another. Among the poorestand least-developed regions that have a good resource base and economic develop-ment potential are: (a) parts of the coast of the Gulf of Mexico in the statesof Veracruz and Tabasco, (b) the Isthmus of Tehuantepec, in the same statesand also in Oaxaca and Chiapas, and (c) the Lazaro Cardenas-Zihuatanejo regionof the states of Michoacan and Guerrero. 1/

29. Promoting growth in promising medium-sized urban areas such as thoseon the Gulf Coast, the Isthmus, and the Lazaro Cardenas area serves the dualpurposes of: (a) bringing employment and urban services to less developedregions and guiding growth in these places so as to be orderly and productive,and (b) shifting growth, albeit modestly, to places other than the largestcities.

1/ Recent Bank studies of regional strategy options in Mexico, basedon studies conducted in early 1974, are: Economic Development of theIsthmic Region of Mexico (IBRD 1080-ME), March 30, 1976; Spatial Develop-ment in Mexico (IBRD 1081a-ME), January 31, 1977; and Urban Developmentin Mexico (IBRD 1449-ME), January 31, 1977.

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Spatial Policy

30. Until very recently, Mexico, like most other nations, did not havea well coordinated and explicit spatial policy, but a series of importantmeasures were adopted, including:

(i) Tax reforms established in 1972 that exempt from some leviesindustries located outside the three largest metropolitan areas.However, the objective of attracting new industries to outlyingareas has had a limited success;

(ii) The establishment, since 1971, of industrial parks and newurban complexes;

(iii) Financial programs to assist small- and medium-sized industriesoutside the three largest cities. About one third of alleligible firms have been helped by these programs; and

(iv) The "maquila" 1/ program. Several border cities have grownrapidly because of this program.

31. Within -the last two years, Mexico has moved towards establishing astronger, more coherent and explicit spatial policy. The Law of Human Settle-ments, adopted in June 1976, provides the legal authority for planning andimplementing programs to achieve spatial goals. The stated objectives of thelaw include improved rural-urban integration, more balanced growth amongcities and regions, promotion of growth in medium-sized cities as alternativesto the largest cities, greater citizen participation in solving urban problems,land use control, better provision of urban services, and improvement of thehousing location-job location-commuting situation within cities. The mostimportant objectives that seem to be emerging are:

(i) At the national level, to reduce the growth of Mexico City,and to concentrate resources to develop promising alternativeregions, instead of continuing the past practice of generalizedincentives mentioned in paragraph 30 above.

(ii) At the state level, to establish priorities for allocatinginvestment among cities or regions within each state.

(iii) At the local level, to plan for more orderly urban growthand to implement these plans with public investments andland use controls.

32. At the national level, the new Ministry of Human Settlements andPublic Works (SAHOP) has already completed (January 1978) a National Urban

1/ Assembly of products for export to the United States using at leastin part inputs imported from the United States. US tariffs on suchproducts are levied only on the value added in assembly.

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Development Plan; a Plan to convert a significant part of the objectivesenunciated in the Law of Human Settlements into operational goals. In orderto implement Government policies in this sector, SAHOP is also conductinga series of background and preparatory studies and advising state and municipalgovernments on their own relevant laws and plans. Perhaps the most importantpart of its coordination rosle is to review investment plans of the governmentand public sector agencies for consistency with the National Urban DevelopmentPlan.

33. The Law of Human Settlements provides for new institutions tofacilitate coordination and planning--the conurbation commissions. Anycontiguous urban area that is in more than one state, or that simply consistsof more than one municipality, can be declared a conurbation, by the nationalor state governments, respectively. The commissions for interstate areas arechaired by the Secretary (Minister) of SAHOP, and composed of relevant stategovernors, mayors, and other officials as appropriate. Although the develop-ment plans prepared by these commissions are not binding, they are a powerfulguiding instrument for all federal, state and local authorities. Conurbationzones will be established mainly in cases of large metropolitan areas (MexicoCity was the first), and of smaller areas where either present structure ordesired future growth crosses state boundaries (Lazaro Cardenas and the othertwo conurbation zones established so far, Torreon-Gomez Palacio-Lerdo, andTampico-Ciudad Madero).

34. The Lazaro Cardenas Conurbation Development (LCCD) project is part ofMexico's first attempt to improve urban planning and administration, to promotegrowth in selected priority areas so as to provide jobs and services for lowincome residents, and to reduce migration to the largest cities. The Bank canplay an important role in connection with this ambitious attempt by supportingthis first project. The experience gained in the process would be a valuablecontribution and provide aL basis for the expansion of this scheme into anation-wide program.

PART IV: THE LAZARO CARDENAS CONURBATION DEVELOPMENT PROJECT

ProAect History

35. In the context of its new Law of Human Settlements and the NationalUrban Development Plan (paras. 31 and 32), the Government of Mexico hasrequested a Bank loan to help finance the LCCD Project. The project wasappraised in December 1976, but reappraised in October 1977 to take into accountthe intervening postponement of the second stage of the Las Truchas steel mill,the largest employer in the area, and to review institutional arrangements.Negotiations took place in Washington, D.C. from March 27 to 31. The Mexicannegotiating team was led by Mr. Garcia (BANOBRAS). A Staff Appraisal Report,entitled "Lazaro Cardenas Conurbation Development Project," No. 1904-ME,dated April 4, 1978 is being circulated separately to the Executive Directors.

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Objectives

36. The main objectives of this project are to support Governmentefforts to initiate a process by which shelter and urban services affordableby the low-income groups can be provided in an efficient and replicablemanner; and to promote the development of new regional growth centers. Theinstitutional arrangements for the project would assist in overcoming some ofthe weaknesses of past urban-related programs in Mexico in general, and in theLazaro Cardenas area in particular. These arrangements may provide an effi-cient model for the implementation of additional regional development projectsin other areas of the country and the project includes provision for studiesto prepare additional projects.

The Lazaro Cardenas Region

37. The Lazaro Cardenas region is among the fastest-growing conurbationsin Mexico, with a zone of influence of approximately 12,000 km spread overMichoacan and Guerrero (see Map IBRD No. 12488R), two of the least developedstates in the country. Both states have traditionally been "exporters" ofunskilled emigrants to already overcrowded Mexico City. The urban populationis concentrated in the towns of Lazaro Cardenas and Guacamayas with about29,000 and 17,000 inhabitants respectively. The most important economicfactor in the area is the Las Truchas steel mill, operated by SiderurgicaLazaro Cardenas - Las Truchas, S.A. (SICARTSA), a Government-controlledcorporation. Construction of the plant, which the Bank helped finance underLoan 934-ME, began in 1972 and the plant came into operation in late 1976.Prior to the construction of the mill, the area had a population of some10,000, largely dependent on farming. Construction attracted a large numberof workers and their families from around the country and induced the ex-pansion of many tertiary activities, as well as a few secondary enterprises.The population in the region, now estimated at about 59,000 people, increasedby about 85% between 1971 and 1974 (about 23 percent per year). Since 1974 ithas grown more slowly, at an average of about 18% per year. A major problemin the area has been the lack of coordination among the few and fragmentaryurban programs that were established, particularly affecting the new low-income immigrants that flocked to the area in search of employment and betterliving conditions.

38. The area was relatively isolated before the construction of thesteel mill began but accessibility has been substantially improved: a deepwater port was established; a link to the national railway network and a newhighway leading directly to the Mexico City region will be opened this year.Finally, the road network in the vicinity of the SICARTSA plant is also beingimproved and roadways within the area are being upgraded.

39. The region's many natural advantages are now actively being developed.Chief3among these are: abundant water supply (the Rio Balsas has a flow of350 m /sec); mineral deposits including iron, lead and zinc; and potentiallyrich agricultural land and forests. Power projects which would ensure

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s;.ficient electricity supply for local industries have been completed. Theport is being expanded and aL number of important industries are beginning tobe established in the adjacent industrial area, including a fertilizer plantand petrochemical storage facilities.

Project Description

(a' Shelter and related urban infrastructure

40. This component includes urban upgrading, sites and services, construc-tion material credits and training centers. The urban upgrading programwould improve about 6,800 p:Lots in Guacamayas, Playa Azul, La Mira and othersmall towns, at a unit cost between about US$800 and US$1,100 equivalent. Inline with the paying capacity of the beneficiaries, the program would providefor two levels of upgrading; namely a fully serviced level in Guacamayas anda reduced level (e.g., simpler sewerage disposal systems) for the smallertowns. The sites and services program will be concentrated in the two largesturban centers, Lazaro Cardenas and Guacamayas (see IBRD Map No. 12489R), whereurbanized land available to low-income groups is scarce and squatter settle-ments are increasing rapidly. Some 1,800 serviced plots will be provided atan average unit cost of about US$1,100 equivalent. In designing the abovementioned shelter related components, special attention was given to the needsand the financial capacities of the lower income segments of the population.About three-fourths of the proposed shelter units will be affordable byhouseholds between the 7th and 22nd percentile in the region's income distri-bution. Practically the whole population will be able to afford the lowestcost units and about 70 percent the most expensive units (the correspondingyearly household incomes are estimated at about US$670 and US$1,350 equivalent,respectively). By contrast, the lowest priced units now available in theLazaro Cardenas region are accessible to only about one-fourth of the popu-lation. In combination with the previous programs, construction materialsloans will be made available to encourage self-help construction on termssuiting the repayment capacity of the lowest income groups (see para. 51). Tocomplement this lending program, four training centers will be opened to?rovide professional training and technical assistance. The centers will alsobe used to implement the proposed credit line for productive activities (seepara. 41 below). In addition, they will house community programs to providevocational training, and to promote improved health and nutrition, generaleducation and cultural programs. The centers will be located so as to bereadily accessible to low-income residents.

(b) Productive Activities

41. This component is composed of two elements. A line of credit willbe made available for artisans and small- and medium-scale enterprises thatare not reached by existing credit programs. The average credit for artisanswould be about US$1,400 equivalent. The project will also finance a numberof workshops and buildings for rentals to credit recipients.

(c) Regional Infrastructure

42. About 200 km of access roads linking 40 neighboring agriculturalvillages to the urban centers of the region would be constructed or upgraded.

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Only one section of the projected roads, between Guacamayas and Lazaro Cardenaswould be paved. The roads would replace existing dirt paths which becomeunpassable during the rainy season. The project also makes provision forriver control works (construction of a large culvert and dredging) on theRio Balsas. The river is the most important single natural factor in theregion and the proposed works are the least cost scheme that would:

(i) provide an adequate water supply for SICARTSA and otherindustries;

(ii) reduce the siltation of the port;

(iii) reduce the erosion along the left branch of the river; and

(iv) provide for the safe disposal of sewerage effluents.

(d) Technical Assistance and Studies

43. The project makes provision for the recruitment of an adequatenumber of qualified and experienced staff to strengthen the Fideicomiso(Trust Fund) Lazaro Cardenas (FLC) and to help carry out the project. Thiswould be in conformity with the implementation responsibility of FLC (seepara. 48 below) and with a plan of action including detailed administrativeand personnel changes, approved by the Government in January.

44. Provision is also made for (i) studies to be carried out by LCCC tocomplete the Development Plan for the area, and (ii) studies to prepareadditional urban development projects in other regions of the country underthe supervision of SAHOP's Project Unit; priority will be given to the pre-paration of additional projects for possible consideration by the Bank. Thetarget urban areas selected by the Government are consistent with the NationalUrban Development Plan (paras. 31 and 32), and the findings of recent Bank studies(para. 28); they are centered around Coatzacoalcos-Villahermosa, Queretaro-Leon, Tampico-Ciudad Madero, Guaymas-Ciudad Obregon, and Manzanillo (see IBRDMap No. 13454). The proposed studies would result in integrated urban develop-ment programs (including the necessary institutional framework) up to 1988.Preliminary terms of reference have already been prepared by SAHOP, reviewedin the Bank and found to be satisfactory. The final terms of reference willbe approved by the Bank (Section 3.03, draft Loan Agreement).

Project Cost and Financing

45. The total cost of the project is estimated at US$36.1 million,including contingencies. The proposed Bank loan would finance the US$16.5million required to cover the foreign exchange costs. The Government contri-bution will amount to US$18 million and the beneficiaries would finance theremaining US$1.6 million. The cost estimates of the various project componentsare detailed in the Loan and Project Summary at the beginning of this Report.

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Execution and Administration

46. FLC will be the major executing agency of the project. It wascreated in 1973 with Nacional Financiera, S.A., the major Mexican public bank,as trustee. The latter's role was subsequently transferred to BANOBRAS, theBorrower. FLC's main responsibility then was to build housing units andrelated urban infrastructure needed by SICARTSA's workers. The GeneralManager of FLC reports directly to the agency's Board (Comite Tecnico),chaired by the Secretary of Human Settlements and Public Works; BANOBRAS, thestate and local governments and other national agencies concerned are alsorepresented in the Comite Tecnico. FLC has now a staff of about 400; abouthalf of the staff is composed of workers engaged in construction activitiesand the rest is made up of professionals, technicians and administrativestaff.

47. The Government has designated FLC as responsible for execution andcoordination of the works and programs under the project as well as for admin-istration, including cost recovery. To carry out these tasks, FLC's adminis-trative structure has been rearranged for increased efficiency and adequatenew staff has been hired. To set up a strengthened financial base, theGovernment is now taking the steps necessary to dispose of arrears of anumber of public agencies, particularly SICARTSA. As a condition of effective-ness, the Government is to take all necessary action to ensure payment ofall debts owed to FLC by SICARTSA (Section 7.01, draft Loan Agreement). Inthe event that this matter shall have been settled before the proposed loan issigned, Section 7.01 would be deleted from the Loan Agreement. FLC has pre-pared selection criteria for the beneficiaries of the urban upgrading, sitesand services and construction materials loan components; these criteriawill be formalized by December 31, 1978 (Section 3.09, draft Loan Agrement).

48. FLC will execute directly all project components except for theregional feeder roads, to be carried out by SAHOP; the river control com-ponent, under the responsibility of the Ministry of Agriculture and HydraulicResources (SARH), and the studies, under the responsibility of SAHOP and LCCC.SARH, SAHOP and LCCC are adequately staffed and their respective experiencewell-suited to implement the project components under their responsibility.

49. The operation and maintenance of the electric and water networkswould be under the responsibility of the Comision Federal de Electricidad (CFE)and the local Junta de Agua Potable (Water Board), respectively, as requiredby Mexican law. The Lazaro Cardenas municipality will be responsible for theoperation and maintenance of the sewerage and storm drainage networks. SAHOPwill maintain the feeder roads and SARH the river control works.

50. Special attention would be paid to monitoring the progress of theproject and evaluating its impact. FLC will be responsible for gathering allfield data and monitoring the implementation of the various components,analyzing the data and work progress, and evaluating the project impact.A complementary monitoring system, which would deal primarily with managementand financial matters related to the implementation of this project, would alsobe established (Section 3.07, draft Loan Agreement). A monitoring unit hasbeen recently established in FLC for these purposes.

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Cost Recovery

51. Under this project, adequate steps will be taken to ensure thatcosts are recovered to the maximum extent feasible. Investments of someUS$15.8 million can be related directly to identifiable beneficiaries, and ofthis, FLC will recover about US$14.6 million (93 percent); FLC will applythese funds towards similar programs in the Lazaro Cardenas region (Section3.02(c)(i), draft Loan Agreement). Specifically: (i) in the case of thesites and services and urban upgrading programs, the costs of land, earthworks,and on site infrastructure (except for access roads) would be recovereddirectly from the beneficiaries. The sale of lots will be on the basis of10 percent down payment and monthly repayments for the balance over 15 years,with interest at 15 percent per annum (Section 3.09 (a), draft Loan Agreement);(ii) construction material loans will be repaid over 15 years and carry aninterest rate of 15 percent (Schedule 5, draft Loan Agreement); (iii) produc-tion credits to artisans and small- and medium-scale enterprises will carryan interest of 15 percent and will be amortized over a period of up to 12years, including a grace period of up to one year; interest charges on creditsto medium- and small-scale enterprises will be reviewed annually by FLC inconsultation with the Bank (Schedule 5, draft Loan Agreement); and (iv) rentscharged for the industrial premises included in the project will cover alloperational and administrative expenses, including adequate maintenance anddepreciation (Section 3.08(c), draft Loan Agreement).

Procurement and Disbursement

52. Civil works for the river control component will be awarded underinternational competitive bidding, except for contracts not exceeding US$250,000equivalent each, which would be let under the Mexican public sector's ordinaryprocurement procedures (subject to an aggregate limit of US$1.25 million),which are considered satisfactory. The rest of the civil works are of minorscope, scattered over several locations and thus unlikely to attract foreigncontractors. Purchases of equipment will also be of limited scope and there-fore contracts will also be awarded under the Government's usual procurementprocedures.

53. With a view to accelerate the implementation of the project, engineer-ing studies for civil works and several studies (para. 44) have already beenstarted. It is proposed that retroactive financing, not exceeding US$350,000,be allowed in respect of expenditures incurred on or after August 1, 1977.The Bank will disburse (i) 45 percent of the cost of civil works; (ii) 40 per-cent of the amount of construction materials loans and productive credits;(iii) 50 percent of local expenditures or 100 percent of foreign expenditureson equipment; and (iv) 100 percent of FLC's promotional expenditures, and ofthe cost of the studies carried out by SAHOP and LCCC.

54. About one third of the 600 ha affected by the LCCD project is nowbeing expropriated. Almost all this land is composed of urban upgradingareas; expenditures in respect of the urban upgrading component will becomeeligible for disbursement on completion of the expropriation procedures(Section 3.06 and paragraph 4(b), Schedule 1, draft Loan Agreement).

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Risks

55. This operation does not present unusual risks. The agencies con-cerned with the execution of the project are experienced and qualj.ied anldFLC's reorganization will improve coordination. Taking into account FLC'slack of experience in respect of production credits, adequate screening andevaluation procedures will be followed to minimize the risk of uneconomicinvestments (Section 2.03, draft Loan Agreement), and adequate steps have beentaken to strengthen FLC.

Project Benefits and Justification

56. The project has been conceived as an integrated approach to theneeds of the urban poor in the Lazaro Cardenas area, by relieving a criticalshortage of low cost shelter and other basic urban services, by adopting designstandards that the lowest income groups can afford, and by providing increasedjob opportunities. This approach and the underlying institutional arrange-ments can be replicated in other priority areas around the country. Theproject, the first of its kind in Mexico should help establish an efficientmodel for future integrated urban programs designed to improve the livingconditions of the urban poor.

57. The project would fill some 75 percent of the low cost shelterneeds of the conurbation through 1981. Based upon a survey of the potentialbeneficiaries and experience with comparable credit programs in Mexico, itis estimated that the production credit component would generate about 1,200additional permanent jobs; the average investment cost per job would be aboutUS$4,200. Another 16,000 mnan/months of construction employment would bedirectly generated by the execution of the LCCD project's physical components.About 50,000 people are expected to benefit directly from the shelter relatedprograms (urban upgrading, sites and services, construction materials loans)and the programs carried out in the training centers. This corresponds toabout 60 percent of the population projected for the Lazaro CardenasConurbation in 1981, when the project wil be completed. The feeder roads willsignificantly help to integrate the agricultural hinterland with the mainurban centers of the Lazaro Cardenas region; newly opened areas for cultivationand grazing will total 30,000 ha and 44,000 ha respectively. An economicanalysis was carried out for the shelter and related urban infrastructure, thefeeder roads, and the river control components. The rates of return arepresented below:

Rate of Return Cost (US$ million)(in percent)

Urban upgrading 22 7.7

Sites and services, constructionmaterial loans and trainingcenters 28 4.9

Feeder roads 22 7.2

River control works 28 5.7

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The overall rate of return of these components, making up about two-thirds($25.4 million) of the project's total cost is estimated at 24 percent. No rateof return was calculated for the other components (production credits, indus-trial premises, studies and technical assistance) because the associated eco-nomic benefits are difficult to quantify; these components are well justified,however.

PART V: LEGAL INSTRUMENTS AND AUTHORITY

58. The draft Loan Agreement between the Bank and BANOBRAS, the draftGuarantee Agreement between United Mexican States and the Bank, and the Reportof the Committee provided for in Article III, Section 4(iii), of the Articlesof Agreement are being distributed to the Executive Directors separately.Special conditions of the project are listed in Section III of Annex III. Asa condition of effectiveness, the Government will take all necessary action toensure payment of all debts owed to FLC by SICARTSA (para. 47). An additionalcondition of disbursement in respect of the urban upgrading component would bethat expropriation procedures be suitably completed (para. 54).

59. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

PART VI: RECOMMENDATION

60. I recommend that the Executive Directors approve the proposed loan.

Robert S. McNamaraPresident

by I.P.M. Cargill

Attachment

April 12, 1978

ANNEX IPage 1 of 4 pages

TABLE 3AMEXICO - SOCIAL INDICATORS DATA SHEET

LAND AREA (THOU KM2) ----------------…------------------------------

--------------- MEXICO REFERENCE COUNTRIES (1970)

TOTAL (972.5 MD'1T RECEN'AGRIC. 950.0 1960 1970 ESTIMIATE BRAZIL CHILE SPAIN****

GNP PER CAPITA (US$) 370.0* 690.0* 1090.0*/a 550.0* 820.0* 1580.0*

POPULATION AND VITAL STATISTICS

POPULATION (MID-YR. MILLION) 36.0 50.4 62.0 /a 92.8 9.4 33.6

POPULATION DENSITYPER SQUARE KM. 18.0 26.0 31.0 /a 11,0 12.0 67.0

PER SQ. KM. AGRICULTURAL LAND 36.o 52.0 65.0 T1 49.0 58.0 105.0

VITAL STATISTICSCRUDE BIRTH RATE (/THDU, AV) 46.1 43.8 42.0 38.4 32.9 21.0

CRUDE DEATH RATE (/THOU,AV) 14.0 io.2 8.6 9.9 11.0 8.8

INFANT MORTALITY RATE (/THOU) 74.0 68.5 52.0 110.0 79.0 27.9

LIFE EXPECTANCY AT BIRTH (YRS) 56.3 62.4 64.7 59.4 60.6 70.5

GROSS REPRODUCTION RATE 3.2 3.1 3.0 2.6 2.2 1.4

POPULATION GROWTH RATE (x)

TOTAL 3.1 3.5 3.5 2.9 2.4 1.1

URBAN 4.9 4.6 5.1 5.0 3.5 2.o

URBAN POPULATION (x OF TOTAL) 50.7 58.7 63.3 55.9 76.0 59.1

AGE STRUCTURE (PERCENT) 40 TO 14 YEARS 45.8 46.2 46.3 42.0 39.0 27.8

15 TO 64 YEARS 50.9 50.1 50.3 55.0 56.3 62.565 YEARS AND OVER 3.3 3.7 3.4 3.0 4.7 9.7

AGE DEPENDENCY RATIO 1.0 1.0 1.0 0.8 0.8 0.6

ECONOMIC DEPENDENCY RATIO 1.6 2.0 1.8 /b 1.5 1.6 1.1

FAMILY PLANNING

ACCEPTORS (CUMULATIVE, THOU) .. 55., 3212 250.0 403.5

USERS (x OF MARRiED WOMEN) 1. . 13.1 1.6

EMPLOYMENT

TOTAL LABOR FORCE (THOUSAND) 11300.0 13000.0 16600.0 v 29400.0 2900.0 11900.0LABOR FORCE IN AGRICULTURE (x) 54.0 45.0 41.0 40.4 21.0 25.oUNEMPLOYED (x OF LABOR FORCE) .. .. 6.6/a,c 7.5 4.1 /a 1.1 l.a

INCOME DISTR;BUTION

K OF PRIVATE INCOME RECOD BY-

HIGHEST 5% OF HOUSEHOLDS /7 Ia 27 9 ** 35.0 /a 31.0HIGHEST 20% OF HOUSEHOLDS 5i.8 7Ta 58.3 *X 62.0 7a 55.8LOWEST 20% OF HOUSEHOLDS 3.5 7a 3.4 ** 3.0 7ja 4.8LOWEST 40% OF HOUSEHOLDS 10.3 7-? 10.5 ** 10.0 7T 13.0

DISTRIBUTION OF LAND OWNERSHIP

X OWNED BY TOP 10% OF OWNERS . 37.1 45.0X OWNED BY SMALLEST 10% OWNERS . 0.3 1.5

HEALTH AND NUTRITION

POPULATION PER PHYSICIAN 1800.0 1490.0 1910.0 2210.0 /b 740.0 /bPOPULATION PER NURSING PERSON 2830.0 /b 1862C.L a . 3220.0 /b 5830.0 7TBPOPULATION PER HOSPITAL BED 590.0 7 9E3.0 830.0 /d 260.0 - 270.0 - 220.0

PER CAPITA SUPPLY OF -CALORIES (x OF REQUIREMENTS) 107.0 105.0 117.0 109.0 101.0 107.0PROTEIN (GRAMS PER DAY) 65.0 65.0 66.9 64.0 71.0 81.Q

-OF WHICH ANIMAL AND PULSE 29.0 /d 28.0/b 27.5 39.0 32.0 40.0

DEATH RATE (/THOU) AGES 1-4 12.7 9.8 8.4 /e ,. 3.9 0.9

EDUCATION

ADJUSTED ENROLLMENT RATIOPRIMARY SCHOOL 80.0 104.0 111.0 87.0 107.0 123.0SECONDARY SCHOOL 11.0 22.0 30.0 . 39.0 57.o

YEARS OF SCHOOLING PROVIDED

(FIRST AND SECOND LEVEL) 12.0 12.1 12.0 11.0 12.0 11.0VOCATIONAL ENROLLMENT

(% Or SECONDARY) 24.0 24.0 .. 17.0 33.0 20.0ADULT LITERACY RATE (x) 62.0 /e 76.0 76.0 64.0 90.0 94.0

HOUSING

PERSONS PER ROOM (URBAN) 2.6 2.2 , , 1.0 1.3 /c

OCCUPIED DWELLINGS WITHOUTPIPED WATER (x) 76.0 /f 61.0 /c *- 73.0 IC 40.0 /c,d

ACCESS TO ELECTRICITY -C 0

(x OF ALL DWELLINGS) . s9.0 48.0RURAL DWELLINGS CONNECTED

TO ELECTRICITY (x) , 2B.0 8.0 .

CONSUMPTION

RADIO RECEIVERS (PER THOU POP) 95.0 276.0 301.. 0 60.0 143.0 214.0PASSENGER CARS (PER THOU POP) 14.0 24.0 40.0 25.0 18.0 71.0ELECTRICITY (KWH/YR PER CAP) 313.0 567.0 724.0 491.0 806.0 1634.0

NEWSPRINT (KG/YR PER CAP) 2.8 3.2 36 2 .7 .5.0

SEE NOTES AND DEFINITIONS ON REVERSE

ANNEX IPage 2 of 4 pages

NOTES

[lens otherwise noted, data for 1960 refer to any year between 1959 and 1961, fcr 1970 between 1968 and 1970, and for Most Recent Estimate between

1973 and 1975.

* GNP per capita data are based on the World Bank Atlas methodology (1974-76 basis).

** Income distribution data for 1975 currently beging revised.

*** Spain has been selected as an objective country because its per capitt incose is higher than Mexico', and boc-uno both -ounrrirs have ic counon

the importance of tourism and the influence of nearby richer countries.

MEXICO 1960 /a 1963; /b Includes midwifery and nursing anxilliaries; /c 1962; /d 1961-62; /e Sin years and over; /f Inside

only.

1970 /a Including assistant nurses; /b 1964-66; /- Itside only.

MOST RECENT ESTIMATE: /a 1976; /b Ratio of population under 15 and 65 and over to total labor forco; /c Larger cities only;

Id 1971; /e 1972.

BRA71L 1970 /a Economically active populationu; b Hospital personnel; /n Inside only.

CHILE 1970 /a Gran Sentiago; Lb Personnel in government services only; /c Data refer to households; /d Innide only.

SPAIN 1970 /a Employment office estimate; /b Registered, not a11 practicing in the country.

R10, February 14, 1978

DeflINITIONS OF SOCIAL INDICATORS

L -doAral onrea a e2) Poonlation per nursing per-n - Poplation livided by mober of pracciing

2_t.t - TctoIal,uface area prising lmad are. d inlad water. wle and female graduate nu-brs, "trained or "certified' entrss and

Agric - Moot recast eatiatae of agricultural area -ued temporarily or pares- anaili-ry Per-onnel with training or- pertieno.

meetly for crops, pa-tores, nrket & kitchen Sardne. or to lie fRll. Poetiation per hospital bed - Population divided by otaster of hospital beds

available in public and prioste general and apeciolised hospital and

lNP oer _upita (1S$) - GNP per capita estimates at ourrent market pri-es, r-hebilitation centerai; eolude- nor,itg bones and eeta-lIshe-enrs for

calonlated by as conversion method as world Bank Atlas (1973-75 basis); cus todal and preventve care.

1960; 1970 and 1975 data. Per .. pita srpply of nolories (X of requirements) - CGouputed fras energy

equiv"aent of net Rood suppics available in country per capita per dy;

Population und vital stattstio available sopplie- -omprise dOSestic productin, imports less exports and

Poeplation (mid-year million) As of July first: if not aveilable, average changes in Bth;k net eupplies exclude anial feed, seeds, quantities used

of two end-yearn estiattes; 1h60, 1970 and 1975 dsta. in food processing and losses in distribution; requirements were estimated

by FAG based on physiological needs for sorol -ctivity and healtb con-id-

Popnlation densitv - Per sonat ka - Mid-ye-r population per square kil-ter ering environsmental temperature, body weights, uge and ass distributions of

(100 hectares) of total area. popnlation, and allowing 10% for waste at household level.

Po.tlation density - et asquare ka of unrie land - Coaputed as sbove for Per capita auisly Rf protein (aras Per day) - Protein contet of per capita

agricultural land only. net supply of food par day; Mt supply of food is defined as above; require-

ments for a11 csuntries established by USDA Eionomai Research Services

Vits) ocatlstics provBte for a mimimuna allowance of h0 gras of total protein per day, and

Crude birth rate per thouss.nd average - Asnual live births per tboasand of 20 gvesa of anirl and polse protein, of vhich 10 gras should he animal

mid-year populstion; tan-year arithatic aveageaa nding in 1960 snd 1970, protein; theas standards re lo r than those of 75 gras of total protein

ad five-year averase ending in 1975 for nest recant astimat. snd 03 gras of animal protein s *n average for the vorld, proposed by FAR

Crude death rate ser thousand. aversas - Annual deaths per thousand of mid-year in ths Third Woeld Food Survy.

population; tee-year arithmuetin averages ending in 1960 snd 1970 and five- Per capita protein eunoly frot animal and pulse - Protein *upply of food

year avro-gs ending in 1975 for seat recent sniaste darived Prea animals nd poIses in grans per day.

Isfuot sortulity rate (/thou) Annual deaths of infants under ona yer of age Death rate (/thou) ages 1-4 - Annual desths per thousand to age groap 1-4

per thousand live births. years, to children in this sge group; suggested as an indicator of

Lif, eopert..cy ot birth (yrs) - Average maser of years of life reaining at malnutrition.

bhuth; usually fivs-year averages ending in 1960, 1970 and 1975 for develop-

[Og countries mducation

Gro-t reproduction rate - Average nunber of lion daughters a woman will bear Adlasted enrollment ratio - primary school - Enrollment of a11 ages as per-

It her normal reproductive period if she esperiencsa present sge-specific castage of primary School-age populaotim; includes children ages 6-11 years

fertility rate-; usually fice-year verages ending in 1960, 1970 and 1975 but adjusted for different lengths of primary ed-cation; for countries with

for developing countries, universal educetion, enrollment asy emceed 100I uince sxew pupils are belo.

PFpol1tion growth rate (7) - total - Compound annual growth rates of mid-year or above the official school age.

population for 1950-60, 1960-70 and 1970-75. Adlulcad t nnollsasI t ratlo -aeondary school - Co-npotnd as above; secondary

Population grovth rate (2) - urban - Computed like grath rate of total education requires at lase four years of approved primary tnstruction;

population; different definitlona of urban coes. -uy affect nomparability of providea gassnerl, vocational or te-oher training instructions for pupils

data among countris. of 12 to 17 years of .R.; norrespondance courses are g -nerally enluded.

Urbun population (% of tatnl; - Ratio of urban to total papulation: different Years of schoolisa provided (first and eacond levels) - Total years of

definitions of urban sreas sy affact comparability of data among countries. schooling at setndory level, vocatienal instruction may be partially or

completely esoluded.f

age strurture (percent) - Children (0-14 years), working-age (15-64 yearn), Vocational enrollment (%. of secondary) - Vocational intituions i-nclude

ard -i-ted (65 years sod over) as Par.entaggs of mid-year populatin technical, indutrial or other prograns which operate independentlv or as

ARe dependency ratio - Ratie of population under 15 and 65 snd oer to thoae deparcmnats of secondary in-tituti.nb.

of ages 15 through 64. idlt literacy rate (%) - Literate odults (able to read and write) as per-

oconlo depeodencc ratio - eRa of population under 15 and 65 and over to ce-tage of total adult population aied 15 yearn and ver.

the labor forts in aae group of 15-64 years.Fanilv planoing - aoceptors (,nuolative. thou) - Canalative nunher of acceptors Ho-sing

of birth-control devices under auspices of nationsi faily pla.oing progran Persons per roos (urban) - Average nonbhr of peruons per ma in occupied

niece inception conveotional dwellings in arban-a -. ; dwellings enolude non-parmaneot

F _ily p - er o e - PearentaRgs of married womeun of structures and unoccupied perts

child-beating age (15-44 years) who use birth-oonfrol devices to a11 earried Occupled dwellingas without pined outer 71 - 7tpied con--crion-l dwellings

woten It Bone a- e group. in orbon and rcral areas without inuide or o-toide piped wster facilities

so percentage of a11 occupied dwellisgs.

gaooynent Access to electricity (7 of all d-ellings) - Convectional dwellings with

Tota1 labor ftaco (th.nsand) - Economically acive persons, including aemed electricity in living quarters as percent nf cotul d-ellings in urba- and

force- and une. ployed but excloding housewives, students, et; definitions rural areas

in various countries are not comparable. gral dCsellino coneneted to electricity (/) - tonputed as above far rural

Labor force in agriculture (2) - Agricultural labor force (In faming, forestry, dwellings only.

hu-tilg and fishing) as par-ent.eg of total labor fort.

Uneaployed (7 of labor forte) - Ilecployed are usually defined as parsons wha Cossumption

ore able and willi 'o t trke a job, out of a job on a given day, remained ant Radio receivers (er then pop) - All types of receivers for radio broadoasra

of a job, aod seekig work for a sp-eified minimaus period not enceedine one to general pnblio per thouoand of -opnlution; eocludes -nlican.ed receoiers

week; y vat ha comparable between countries due to different definitiona in countries and in years when cegistratio- of radio -tas 000 in effe-t-

of onomployed and source of dte, e.g., mploymant office statistics, sample data for recant ysars may not be conparable si0ce 0Ct -ouvntries aboliuhed

urveys, cpulsory 4 nomployment insurance, licensing.Pasaseger caro (per that pop) - Passenger tars topota nog-o- ars -retiog

nocae distribution - Per-entage of private inmoe (both in sabh and kind) less than eight persons; eacludes onbulooces, hearses and oilitary

received by richest 57, richest 20X, poorest 20%, and poorest 407 of house- vehIcles

h'lds. Eilectrcitv (kwh/yr per cap) - Annual consumption of Industrial, cot-srci-l,

public and private electricity in kilow-tt houts pet capita, g.e.rally

Distribution of land overahip - Percentages of land owned by Wealthiest 107 based on produr cion dats, without allowance far losses in grids hot llow-

and poorest 107. of land owner, inS fur imp oem and doporre of electricity.

Newsprint (ks/yr per cap) - Per capita aenual cons"mption in kilograms

hiolth *od N,utrition sotinated fra dome-tic production plus net isapurts of newsprint.

Plpulation per pnhsioian - Population divided by number of practicing

phyocoisna qoalifiad fron a medical school at university level.

Page 3 of 4

MEFICO - 000f8IlC DEVOLOP9iR DATA SMET

Actual PEall.laarv Estimates Projected Grqe.th Rates As % of GDY1945- 19A70 1975 1976 1977 1978 1982 . 1966170 1971/73 1976/82 1965 1975 t982

NATI0NAL ACCOUNTS !ometast 1972 Prices,. US Millio-t

Gous D-stic Prodsct 26,472.0 36,952.0 48,680.0 49,683.0 50,570.6 53,938.9 72,275.7 6.9 5,7 5.8 99.6 99.1 97.2Gatos from Te.m of Tr-de 904.0 104.0 424.0 482.6 328.6 418.5 2,075.3 -35.1 32.5 25.5 3.4 0.9 2.8Gross D-eetft Inte 26,576.0 57,056.0 49,104.0 50,165.6 50,899.2 54.357.4 74,351.0 6.9 5.8 6.1 100.0 10000 100.0l porte (tieladilsu 8(70) 2,768.0 3,928.0 5,648.0 5,339.0 4,549.4 5.,69.6 7,118.3 7.3 7.5 3.4 10.4 11.5 9.6Exports (itwrt .p..t.t) 2,624.0 3,152.0 3,960.0 4,470.5 4,761.2 5,223.6 9,057.9 3.7 4.7 12.6 9.9 8.1 12.2R-s-rr Gap 144.0 776.0 2,688.0 86'8.5 - 211.8 45.9 -1,939.6 40.1 16.8 - 0.5 3.4 - 2.6Comption 21,704.0 30,288.0 39,752.0 39,476.4 39,799.0 41,643.5 54,421.4 6.9 5.6 4.6 81.7 80.9 73.2I-ve sr t 5,016.0 7,544.0 11,240.0 11,557.7 10,888.4 12,759.8 17,989.9 8.1 7.9 7.2 18.9 22.5 24.2Cros Doestic SeviaEs 4,872.0 6,768.0 9,352.0 10 689.2 11,100.2 12,713.8 19,929.5 6.6 6.7 11.4 18.3 19.1 26.8Cross Mr,tiecl Savings 4,520.0 6,312.0 8,096.0 9,585.8 9,701.7 11,258.4 18,501.0 6.9 5.6 12.1 17.0 16.9 24.9

TRADE IN G000DS AND NFS forrest Prics. 000 Oilios As 2 of Total

IMPORTS. TOTAL 2,073.2 3,416.9 8.636.7 8,135.1 7,512.2 9,410.9 16,214.0 10.05 7.4 9.4 10.0 100.0 100.0Food 5.9 74.6 443.0 148.2 223.4 220.7 302.3 66.1 42.8 -5.3 0.3 5.1 1.9Petroleo cod Products 26.2 54.2 209.1 291.3 358.0 415.2 - 15.7 40.0 - .3 3.4 -Otl;. Coeds 1,527.5 2,223.4 5,879.7 5,631.7 4,855.3 6,400.0 11,586.1 7.6 20.5 10.2 73.7 68.1 71.4N-e.Feoto- 5orvice- 513.6 1,064.7 2,022.9 2,063.7 2,075.5 2,375.0 4,320.6 15.7 13.7 11.5 24.8 23.4 26.7

EXPORTS. TOTAL 1.964.6 2,745.5 6.081,7 6,811.8 7,862.1 9.328.8 20,634.6 .j§7 17.2 19.1 100.0 100.0 100.0Selected Agricltorel Goods -/ 642.4 711.6 954.2 1,002.8 1,785.6 1,503.5 2,200.2 2.1 6.0 12.7 32.7 15.7 10.7Petrelece cod Peodoots 40.1 38.4 460.1 567.5 835.4 1,687.5 7,000.1 -0.9 64.3 47.5 2.0 7.6 33,9Selected MiOsrals 189.7 244.3 457.6 456.7 509.6 593.4 1,050.1 5.2 13.4 12.6 9.7 7.5 5.1Menofeccur. - 132.5 326.9 1,069.3 1,193.0 1,410.7 1,752,1 4,035.6 19.8 26.8 20.9 6.7 17.6 19.6Othse Goods 153.9 26.6 63.3 46.5 52.4 61.2 117.9 -29.6 18.9 9.3 7.8 1.0 0.6ONess-actor Servico. 806.0 1,397.7 3,077.2 3,345.3 3,268.4 3,731.1 6,228.7 11.6 17.1 10.6 41:0 50.6 30.2

TRADE INDICES Acorea. 1972 - 100

Export Price Icdec 78.0 90.0 172.1 170.8 177.4 194.1 295.5 2.9 13.8 8.0 - - -Impoct Pri-c Imdc 75.0 57.0 153.6 152.4 165.1 178.6 227.8 3.0 12.0 5.6Ter-, of Trode 104.0 103.4 102.0 112.1 107.4 108.7 129.7 - 0.1 1.6 2.1 _ __ __

VALUE ADDED BY SECTOR Contest 1972 Priesu. 0S0 Millie- 0

Pri-ary 5,082.6 6,244.9 6,183.4 6,260.1 6,725.9 7,443.6 9,610.7 4.2 -0.2 6.5 19.2 12.7 13.3Set_od.ry 6,988.6 10,790.0 14,849.8 15,105.6 15,322.9 16,451.3 23,923.2 9.1 6.6 7.1 26.4 30 .5 33.1Tertiary 24,G40.0 19 917.1 27,654.8 28,319.3 28,521.8 30,044.0 38,739.8 6.7 6.8 4.9 54,4 56.8 33.6Totl (GDP) 26.472,0 36,952.0 48,688.0 49,683.0 50,570.6 53,938.9 72,275.7 6.9 5.7 5.8 100.0 100.0 100.0

CONSOLIDATED PUBLIC SECTOR FIN3ANCES Coostost 1972 Prices. 0SS Milli-oo Ac 2 of GDY

C-root Ro-ipts 3,042.0 4,942.6 7,346.3 9,325.2 7,833.1 9,410.3 17,315.4 10.2 8.3 11.0 11.4 15.0 23.3C-rrect EOpePditores 2,329.0 3,156.4 6,222.4 6,902.5 6,643.8 7,416.7 10,652.0 6.3 14.5 6.4 8.8 12.7 14.3Poblic S.vi,eI 713.4 1,786.2 1,124.0 1,332.7 1,209.3 2,060.9 6,663.6 20.1 -809 25.9 2.7 2.3 9.0Restorers for 776.3 1,864.0 1,193.7 1,427.5 1,259.4 2,315,2 6,736.3 19.2 -8.5 24.8 ,.9 2.4 9.1leveroot 1,741.5 0,400.5 4,085,8 4-,845.7 4,425.0 5,606.0 7,880,3 6.6 13.5 7.2 6.6 9. 1.Deficit (set) -965.2 -536.5 -3,292.1 -3,416.2 .3,165.8 -3,290.8 -1,0144.0 -11.1 43.7 -13.5 -3.6 -6.7 -1.5

ALLOCATION Or CON80OLIDATED Au 2 of ToddP00L1C SECTOR EXPFNDITORES 1970 19731 1982

Agtultoltre _ 843.2 3,245.5 _ - _ _ _ _ - 8.8 15.9 -Industrp 5500 3 6,8803 _ - - 36,3 2.4

Tratopert end CencitatitOs - 1,136.9 2,024.6 - - _ _ _ _ 11.8 10.0oG _eosl AdtiSistr-ti.n asd Othert - 1,772.3 4,202.4 - 18 4 20.7Total - 8,637.2 20,332.6 - - - - - 2 - 100,0 100.0 -

Ported A--ccSELECTED INDICATORS 19670 1971i75 1968S 0CEo 2.91 1 2.89 4.99 11.10 13.02 3.23 3.41 -. 90 3.63 5.76Import Elacticity 0.75 * 1.51 - 0.52 - 2.68 -8.28 2.38 1.16 - - 0.31 0.96 -0.64Margi.al Savigo Sati0 -0.16 - 0.24 0.11 1.34 0.50 0.46 0.35 - - 0.19 0.10 0.53

LABOR PgRCE AND OUTPUT PER WORKER - Value Addod ocr bor-er (1972 vricea)ID Milliecs As 7, of Total 1960-1970 2 Of Average

IS75 1963) 1970 Grotth Rotc 1960 1970 1960 1975 Growth Rote

Agrieclt-re 5.4 5.1 50.5 39.2 -0.6 608.8 939,9 34.7 33.0 4.4I'd,utry 2.1 3.0 19,.6 23,1 3.6 2,468.9 4,134.9 140.6 143.0 5.3Sortloot 3.2 4.9 29.9 37.7 4,4 3,222.8 4 044,8 183.6 142.0 2.3Tetol 10.7 13.0 000.0 100.0 2.0 1,755.6 2,847.6 100.0 100.0 5.0

... Not opplituble or aveileble* 1/ nlertdes sugar

ANNEX IPage 4 of 4

BALANCE OF PAYMENTS. EXTEBNAL ASSISTANCE AND DEBT

(US$ million at current prices)

Actual Preliminary Estimates Projections197D 1975 1976 1977 1978 1980 1982

SUMMARY BALANCE OF PAYMENTS

Exports (including NFS) 2,745.4 6,081.5 6,811.8 7,862.1 9,328.8 13,879.9 20,634.6Imports (including NFS) 3,416.9 8,636.6 8,135.1 7,512.2 9,458.7 12,256.1 16,271.5Resource Balais 1 9 - 671.5 -2,555.1 -1,323.4 349.8 - 129.9 1,623.8 4,363.1Interest, net -' - 307.0 -1,266.5 -1,872.0 -2,126.5 -2,350.9 -2,746.6 -2,713.4Direct Investment Income - 267.5 - 657.5 - 636.6 - 739.8 - 856.4 -1,135.8 -1,486.2Workers' Remittances 122.7 174.6. 193.0 207.5 224.1 257.7 295.1Current Transfers, net 55.3 123.4 146.9 157.1 171.6 204.9 245.0Current Account Balance -1,068.0 -4,181.2 -3,491.9 -2,151.7 -2,941.3 -1,795.8 703.8

Private Direct Investment 322.8 748.8 688.0 688.0 777.4 983.9 1,234.2Public Med. and Long Term Debt, net 256.6 3,565.8 4,906.9 3,075.1 2,467.0 - 213.4 -1,588.5

(Disbursements) (821.3) (4,418.6) (6,123.3) (5,551.1) (5,996.2) (4,748.8) (3,355.2)(Repay-ents) (-562.7) (-852.8) (-1,216.4) (-2,476.0) (-3,529.2) (-4,962.2 (-4,943.8)

Other Capital 588.7 31.7 -3,043.0 - 861.4 21.9 1,233.3 - 133.3(Public Short Tenm) (139.6) (842.8) (839.8) - - (-200.0) (-200.0)(Other Capital, me..) (449.1) (-811.1) (3,882.8) (-861.4) (21.9) (1,433.3) (66.7)

Change in Reserves (- - increase) -102.1 -165.1 940.0 - 750.0 -325.1 -207.5 - 373.6

GRANT AND LOAN COMMITMERTS 844.1 4,305.7 6,560.5 5,356.8PUBLIC MED. AND L.T. LOANS

IBRD 146.8 310.0 725.0 187.0 - - -

IDA - - - - - - -

Other Multilateral 112.3 121.8 355.1 280.0 - - -

Governments 81,0 316.8 118.6 250.0 - - -

Suppliers 69,7 116.7 201.9 150.0 - - -

Banks and Financial Institutions 434.4 3,300.1 4,454.8 3,889.8 - - -

Rends - 140.3 707.5 600.0 - - -

DEBT AND DEBT SERVICE EXTERNAL DEBT

Public Debt Outstanding & Disbursed 3,226.9 11,095.9 16,002.9 19,078.0 Outstanding and Disbursed(end of period) on Dec. 31, 1977

Interest on Public Debt - 216.9 - 810.5 -1,069.9 -1,237.0Repayment on Public Debt - 474.7 - 852.8 -1,216.4 -2,476.0 $ Millions PercentOther Debt Service (net) - 224.3 - 193.3 - 325.7 - 367.7Total Debt Service (net) - 915.9 -1,856.6 -2,612.0 -4,080.7 Public M 6 L.T.Burden on Export Earnings ( 2/) Loans

a. Public Debt Service 24.0 26.6 32.6 46.0b. Total Debt Service 31.8 29.7 37.3 50.6 IBRD 1,456.8 7.6c. Total Debt Sergice and IDB 772.7 4.0

Direct Investment Income 44.8 40.2 46.4 59.7 Governments 853.5 4.5Average Terms of Public Debt Suppliers 320.8 1.7

a. Interest as % of prior Bonds 1,821.6 9.6

i year's D.0. and D. 7.4 10.8 9.6 7.7 Other Financialb. Amortization as 7 of prior Institutions 13,852.6 72.6

year's 0.0. and D. 16.3 11.3 11.0 15.5 Total 19,078.0 100.0IBRD Exposure

a. IBRD D.O. & D. as % of 18.0 10.1 7.7 7.6Public D.0. and D.

b. IBRD Debt Service as % ofPublic Debt Service 7.8 7.0 5.8 4.2

IDA Exposure - - - -

- Not applicable or available1/ Includes interest en short-term private and public debt2/ Itcludes worker remittances

ANNEX IIPage 1 of 8

THE STATUS OF BANK GROUP OPERATIONS IN MEXICO

A. STATEMENT OF BANK LOANS (as at February 28, 1978)

US$ MillionLoan Amount less

Number Year Borrower Purpose Cancellations Undisbursed

33 loans fully dis- 1,486.4bursed

793 1972 Nacional Financiera Tourism 22.0 0.6S.A.

909 1973 Nacional Financiera Water Supply 90.0 50.6S.A.

968 1974 Nacional Financiera Roads 90.0 61.1S.A.

969 1974 Nacional Fininciera Irrigation 77.0 17.1S.A.

970 1974 Nacional Financiera Irrigation 47.0 43.6S.A.

1022 1974 Nacional Financiera Airports 25.0 14.5S.A.

1053 1974 Nacional Financiera Integrated RuralS.A. Development 50.0 45.6

1110 1975 Nacional Fin,anciera Integrated RuralS.A. Development 110.0 60.5

1111 1975 Nacional Financiera Irrigation 50.0 50.0S.A.

1112 1975 GUANOMEX & NacionalFinanciera S.A. Industry 50.0 23.4

1186 1975 Banco Nacional deObras y ServiciosPublicos S.A. Water Supply 40.0 38.7

1205 1976 Nacional Financiera Industry 50.0 33.7S.A.

1217 1976 Nacional Financiera Agricultural andS.A. Livestock Credit 125.0 48.1

1232 1976 Ferrocarriles Na-cionales de Mexico& Nacional Finan-ciera S.A. Railways 100.0 87.7

ANNEX IIPage 2 of 8

US$ MillionLoan Amount lessNumber Year Borrower Purpose Cancellations Undisbursed

1420 1977 Nacional Financiera Tourism 42.0 42.0S.A.

1462 1977 Nacional Financiera Integrated RuralS.A. Development 120.0 120.0

1524 1978 Nacional FinancieraS.A. Tourism 50.0 50.0

TOTAL 2,624.4 787.2

Of which has been repaid to the Bank 454.7

Total now outstanding 2,169.7Amount sold 92.3of which has been repaid 64.8 27.5

Total now held by Bank 1/ 2,142.2

Total Undisbursed 787.2

1/ Prior to exchange adjustments.

ANNEX IIPage 3 of 8

B. STATEMENT OF IFC INVESTMENTS (as of February 28, 1978)

Fiscal US$ MillionYear Obligor Type of Business Loan Equity Total

1958/59 Industrias PerfectCircle, S.A. 1/ Industrial Equipment 0.8 -- 0.8

1958 Bristol de Mexico,S.A. 1/ A.C. Engine Overhaul 0.5 0.5

1961 Acero Solar, S.A. 1/ Twist Drills 0.3 -- 0.31962/65/ Compania Fundidora66/68 Fierro y Acero de

Monterrey, S.A. Steel 2.3 21.4 23.71963 Tubos de Acero de

Mexico, S.A. 1/ Steel 0.9 0.1 1.01963 Quimica del Rey,S.A. 1/ Sodium Sulphate 0.7 -- 0.71964/66 Industrial del Hierro,

S.A. Construction Equipment -- 2.0 2.01970 Minera del Norte, S.A. Iron Ore Mining 1.5 -- 1.51971 Celanese Mexicana,S.A. Textiles 12.0 -- 12.01972 Promotora de Papel

Periodico,S.A. deC.V. Pulp and Paper 2/ 2/ 2/

1973 Cemento Veracruz Cement 10.5 -- 10.51974 Cancum Aristos Hotel Tourism 1.0 0.3 1.21975 Mexinox, S.A. Steel 12.0 3.2 15.2

Total Gross Commitments 42.5 27.0 69.5

Less Cancellations, Terminations, Repaymentand Sales 16.3 22.0 38.3

Total Commitments Now Held by IFC 3/ 26.2 5.0 31.2

Total Undisbursed _ _

1/ Investments which have been fully cancelled, terminated, written off,sold, redeemed or repaid.

2/ US$25,000

3/ Prior to exchange adjustments.

ANNEX IIPage 4 of 8

C. PROJECTS IN EXECUTION 1/

Ln. No. 793 Zihuatanejo Tourism Project: $22 Million Loan of January 22,1972; Effectiveness Date: March 30, 1973. Closing Date:December 31, 1978.

All infrastructure works have been completed. The inter-national airport at Zihuatanejo is now being served by 35flights a week from Mexico City. A new bilateral airagreement between Mexico and the US was signed in January1978 that will allow Mexican and US air carriers to serveZihuatanejo directly from 23 US cities. Three hotels with555 rooms will open by May 1978, and an additional 1,500rooms are under construction. The only category of theloan not yet fully disbursed relates to the training compo-nent (about US$500,000). To use these funds, the Mexicanauthorities are preparing a proposal for additional trainingfacilities at La Paz (Baja California).

Ln. No. 909 Mexico City Water Supply Project: $90 million Loan ofJune 18, 1973; Effectiveness Date: April 30, 1974.Closing Date: December 31, 1978.

Project works are well advanced except in the Texcoco Region.Overall, more than half of the project works as originallydefined have been completed, and the works in progress areexpected to be completed by the end of 1978. The Governmenthas proposed that savings in carrying out some components ofthe project be applied to finance new works which wouldserve the objective of increasing bulk water supply to theMexico City metropolitan area. The Government is carryingout a revision of the bulk water rate, on confirmation ofwhich a recommendation on changes in the project descriptionwill be submitted to the Executive Directors.

Ln. No. 968 Seventh Highway Project: $90 Million Loan of March 1, 1974;Effectiveness Date: May 29, 1974. Closing Date: December 31,1978.

About 25 percent of the works have been carried out and aboutUS$25 million have been disbursed. Substantial delays havebeen encountered in the initiation of project works because ofthe shortage of budgetary allocations. Substantial costincreases caused by price escalation were also encountered.Taking this into account, a change in the scope of the project

1/ These notes are designed to inform the Executive Directors regarding theprogress of projects in execution and, in particular, to report anyproblems which are being encountered and the action being taken to remedythem. They should be read in that sense, and with the understanding thatthey do not purport to present a balanced evaluation of strengths andweaknesses in project execution.

ANNEX II

Page 5 of 8

was made in August 1977, from 16 roads (1,975 km) to ten roadsand part of an eleventh road (1,216 km) which, because of costincreases, have the same total cost as the original project.The roads remaining in the project continue to be justified asbenefits have kept pace with costs. Overall progress of projectworks is estimated at about 31 percent and completion is nowexpected for late 1980 or about two and a half years behindschedule.

Ln. No. 969 Rio Panuco Irrigation Project; $77 Million Loan ofMarch 1, 1974; Effectiveness Date: May 29, 1974.Closing Date: December 31, 1980.

Construction is over 60 percent completed and termination ofall works is scheduled for 1980. About 16,000 ha were irrigatedin the previous season; on full development the project willprovide irrigation to 137,000 ha. The technical assistanceprogram and the land settlement program are proceedingsatisfactorily. However, inflation has been greater thanestimated at the time of appraisal, and project costs haverisen to about US$371 million equivalent from the originalestimate of US$212 million. A recent analysis of the projectindicates that the rate of return remains satisfactory, althoughproject costs have risen, due to rapid increases in commodityprices over the same period. A Government's request for asupplementary loan is under consideration.

Ln. No. 970 Rio Sinaloa Irrigation Project: $47 Million Loan ofMarch 1, 1974; Effectiveness Date: May 29, 1974.Closing Date: December 31, 1980.

Construction of major project works remain substantially behindthe original schedule; the pace is, however, accelerating asworks for ithe major storage dam have now begun. About 15percent of project works are completed and water is beingsupplied to 25,000 ha of the 100,000 ha to be served by theproject. Total project costs have risen from US$146 million toUS$341 million because of higher inflation than projected atthe time of appraisal and changes in the volume of physicalworks. The Government's request for a supplementary loan isunder consideration.

ANNEX IIPage 6 of 8

Ln. No. 1022 Airport Development Project: $25 Million Loan ofMay 28, 1974; Effectiveness Date: September 16, 1974.Closing Date: June 30, 1978.

The project originally included the construction of sevenregional airports and the expansion of an existing one atCampeche. Of these, the Guaymas airport works have beenpostponed by the Government because of interim improvementsof the existing airport carried out by the local municipalitywith its own resources. At Campeche, the Government hasdecided to construct a new airport with its own fundsinstead of improving the existing airport. Loan proceedsallocated to Guaymas and Campeche were reallocated in August1977 to complete construction of the six airports retainedin the project. Works in all the six airports are proceedingsatisfactorily.

Ln. No. 1053 Papaloapan Integrated Rural Development Project: $50 MillionLoan of November 15, 1974; Effectiveness Date: January 27.1975. Closing Date: June 30, 1980.

Project implementation is accelerating after delays due toinadequate budget support. A reprogramming of the projectwas begun in 1977 to adjust for these delays. The projectis being given priority attention. Budget levels have beeninadequate but are under review and are likely to be raised.While, as a whole, the project remains behind the originalimplementation schedule, some elements, most notably extensionservices, are ahead of schedule. The project would likelybe completed two years after the original closing date.

Ln. No. 1110 Integrated Rural Development Project (PIPER I): $110 MillionLoan of May 8, 1975; Effectiveness Date: October 29, 1975.Closing Date: December 31, 1982.

Project investments are generally on schedule and managementis taking actions to further strengthen project implementation.Special inter-agency agreements regarding the developmentcredit, agricultural extension, and farmer organization compo-nents are being implemented. The new PIDER management isgiving priority to ensuring the proper operation and mainte-nance of earlier PIDER investments. Emphasis is also beinggiven to improve cost recovery, investment analysis andprogramming, monitoring, and rural industries.

ANNEX IIPage 7 of 8

Ln. No. 1111 Seventh Irr:Lgation Project - Bajo Rio Bravo and Bajo RioSan Juan: $150 Million Loan of May 8, 1975; subse'.uentlyreduced to $50 Million; Effectiveness Date: July 30, 1975;Closing Date: December 31, 1982.

The Government and the Bank have agreed that, in view ofthe size and complexity of the project, its high cost andthe Government's current policy of restraining fiscal expendi-tures, it would be advisable to carry out the project inseveral phases over a longer period of time than the sevenyears originally visualized. As explained in MemorandumR77-305 of December 13, 1977, the loan amount has now beenreduced from $150 million to $50 miliion which would be appliedto the first phase of the project. The first phase works wouldbe implemented over four years. Contracts for priority worksare being placed and studies for the remaining works under thereduced project are in progress. A technical assistancecomponent of the project is under implementation.

Ln. No. 1112 Fertilizer Project: $50 Million Loan of May 22, 1975;Effectiveness Date: July 30, 1975. Closing Date:December 31, 1978.

The devaluation of the peso affected the project cost and itsimplementation schedule. Preliminary estimates indicate acapital cost increase of 36 percent in pesos and a delay of 7to 8 months in implementation. The Bajio Urea Plant will becompleted in June 1978, the Pajaritos Urea Plant in June 1979and the Parathion Plant in May 1978.

Ln. No. 1186 Medium Cities Water Supply and Sewerage Project: $40 millionLoan of January 13, 1976; Effectiveness Date: April 26, 1976.Closing Date: December 31, 1980.

Subloan agreements have been signed with three cities whereconstruction has begun. It is expected that agreements willbe signed by the end of the year with local authorities forfour additional subprojects which would fully commit theloan funds.

Ln. No. 1205 Industrial Equipment Fund (FONEI) Project: $50 Million Loan ofApril 30, 1976; Effectiveness Date: August 30, 1976. ClosingDate: December 31, 1979.

After some delays in committing resources to new projects inlate 1976 and early 1977, demand for financing for industrialprojects has strengthened and FONEI has numerous applicationson hand. As of March 15, 1978, 80 perent of the loan hadbeen committed.

ANNEX IIPage 8 of 8

Ln. No. 1217 Fifth Agricultural and Livestock Credit Project: $125 MillionLoan of March 11, 1976; Effectiveness Date: August 30. 1976.Closing Date: January 1, 1980.

Commitments under this project are running ahead of schedule.Funds for medium-income producers and agro-industries arefully committed. The National Rural Credit Bank has beendeclared eligible for rediscount under this project therebyincreasing the rate of commitment of funds to low-incomeproducers.

Ln. No. 1232 Third Railway Project: $100 Million Loan of April 30, 1976;Effectiveness Date: June 16, 1976. Closing Date: June 30, 1979.

Execution of the project has been generally satisfactory.Orders have been placed for rails, car components, trackand workshop machinery. Following the devaluation in 1976,the budgetary cuts in the stabilization period, and theslackening in traffic growth, the railway has proposedsubstantial rephasing of its investment plan and procurementschedule, details of which are being worked out. The executionperiod of the project will require to be extended by about twoyears. Operational and technical improvements of the railwaycontinue, though they have not yet been reflected in thefinancial performance of the railway on account of inadequatetariff increases.

Ln No. 1420 Baja California Tourism Project: $42 Million Loan ofJuly 5, 1977; Effectiveness DateClosing Date: June 30, 1981.

The establishment of a land trust fund in the project area ofSan Jose del Cabo, a condition of loan effectiveness, isexpected shortly. Implementation of the project has alreadystarted and is on schedule. A project unit in Mexico Cityand adequately staffed field offices have been established.

Ln. No. 1462 Integrated Rural Development Project - PIDER II: $120 millionLoan of July 5, 1977; Effectiveness Date: October 28. 1977;Closing Date: July 31, 1981.

Implementation is on schedule.

Ln. No. 1524 Tourism Development Project: $50 million Loan of March 21, 1978;Effectiveness Date: ; Closing Date:December 31, 1981.

The loan is not yet effective.

ANNEX III

MEXICO

LAZARO CARDENAS CONURBATION DEVELOPMENT PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

I. Timetable of Key Events

(a) Time taken to prepare project: About 12 months

(b) Agencies which lprepared project: FLC and SAHOP

(c) First presentation to the Bank: January 1976

(d) First mission to review project: March 1976

(e) Departure of appraisal mission: October 17, 1977

(f) Completion of negotiations: March 31, 1978

(g) Planned date of effectiveness: June 1978

II. Special Bank Implementation Actions

None.

III. Special Conditions

I. The final terms of reference for the studies will be approved bythe Bank (para. 44).

2. FLC will complete preparation of detailed selection criteriafor the beneficiaries of the urban upgrading, sites andservices and construction materials loans components byDecember 31, 1978 (para. 47).

3. Adequate steps will be taken to recover the cost of componentswith identifiable beneficiaries (sites and services, urban up-grading, construction materials loans, production credits,industrial premises). FLC will apply the recovered funds towardssimilar programs in the Lazaro Cardenas area (para. 51).

4. The expropriation procedures in respect of land affected by theurban upgradirng component will be adequately completed (Conditionof Disbursement, para. 54).

5. The Government. will take all necessary action to ensure paymentof all debts owed to FLC by SICARTSA (Condition of Effectiveness,para. 47).

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