Document of

The World Bank

FOR OFFICIAL USE ONLY

LAJ' 5o-1)16

lepogt No. P-3837-M

RE PDRT AND RECO IMENDTION

OF THE

PRESIDENT OF TEE

IN7ERNATIONAL BANK FOR RECONST1gCTION AND DEVELOPMEIT

TO 'TE

EECUTIVE DIRBCTORS

ON A

PROPOSED LOAN

IN AN AMOUNT EQUIVALEqT TO US$76.3 MILLION

TO

BANCD NAC IONAL PESQlERO Y PORTUARIO, S . A.

WITH THE GUARANrEE OF

UNITED MEXICAN STATES

F CR A LAZARO CARDENAS INDUSTRIAL PORTS PROJECT

May 31, 1984

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Currency Unit - Peso (Nex $)

On May 31, 1984, the exchange rate in the controlled marke- wasUTS$1 M= ex$163.61; the freemarket exchange rate stood at US$1 = Mex$181.73.Both exchange rates are currently sliding at a rate of Nex$0.13 per day again.:the US dollar.

Fiscal Year

January 1 to December 31

ADbreviations

BANPESCA - Banco Nacional Pesquero y Portuario, S.A.National Bank for Fisheries and Port Development

CGPPI - Coordinacion General de Proyectos de Puertos IndustrialesGeneral Coordinating Commission for Industrial Ports Projects

CNCP - Comision Nacional Coordinadora de PuertosNational Port Coordinating Commission

DGCF - Direccion General de Caminos FederalesDirectorate General for Federal Roads

DGGI - Direccion General de Grande IrrigacionDirectorate General for Large-Scale Irrigation Works

DGOM - Direccion General de Obras MaritXmasDirectorate General for Marine 'Works

DGOPD - Direccion General de Operaciones y Desarrollo PortuarioDirectorate General for Port Operations and Development

DGP - Direccion General de PlaneacionDirectorate General for Planning

DGVF - Direccion General de Vias FerreasDirectorate General for Railway Infrastructure

EFF - Extended Fund FacilityESP - Empresa de Servicios Portuarios

Port Service CompanyFERTEIEX - Fertilizantes Mexicanos, S.A.

Mexican Fertilizer PlantFONDEPORT - Fondo Nacional para los Desarrollos Portuarios

National Port Development FundNDP - Plan Nacional de Desarrollo

National Development PlanN de N - Nacionales de Mexico

National Railways CompanyPTT - Productos Mexicanos de Tuberias, S.A.

Tube Product PlantSAHOP - Secretaria de Asentamientos Humanos y Obras Publicas

Secretariat for Humaa Settlements and Public WorksSARH - Secretaria de Agricultura y Recursos Hidraulicos

Secretariat for Agriculture and Hydraulic ResourcesSCT - Secretaria de Comunicaciones y Transportes

Secretariat for Communications and TransportSEDUE - Secretaria de Desarrollo Urbano y Ecologia

Secretariat for Urban Development and EnvironmentCFE - Comision Federal de Electricidad

Federal Electricity CommissionSHCP - Secretaria de Hacienda y Credito Publico

Secretariat of FinanceSICARTSA - Siderurgica Lazaro Cardenas - Las Truchas

Lazaro Cardenas-Las Truchas Steel PlantSPP - Secretaria de Programacion y Presupuesto

Secretariat for Programming and BudgetingTUM - Terminal de Usos Multiples

Multiple Use Terminal

)ifCO FOR OmCAL USE ONLY

LAZARO CARDENAS INDUSTRIAL PORT PROJECT

LOAN AND PROJECT SUMMARY

Borrower: Banco Nacional Pesquero y Portuario, S.A.(BANPESCA).

Project ExecutingAgency; Secretaria de Comunicaciones y Transportes (SCT)

Guarantor: United Mexican States.

Amount: US$76.3 million, including capitalized front-end fee.

Terms: Fifteen years, including three years of grace at thestandard variable interest rate.

ProjectDescription: The proposed project supports the Government's strategy for devel-

opment of the Industrial Ports Program, to achieve a more balanceddistribution of population and economic activity, a more organizedexpansion of the industrial plant, coordinated development of portinfrastructure and services and the overall strengthening and mod-ernization of transport activities. Specifically, the proposedproject would help: (i) ensure efficient operation of existingterminals in the industrial port of Lazaro Cardenas; (ii) streng-then the admfaistration and finances of the industrial port; (iii)improve access to, and increase the utilization of, industrialport installations; (iv) provide effective pollution and floodcontrol in the port area; and (v) maintain a dialogue on remaininginstitutional and related policy issues affecting the performanceof the port subsector. To achieve these objectives, the projectIncludes: (a) construction of roads, rail installations and provi-sion of maritime access to industries, facilities and services;(b) acquisition of general cargo handling equipment; (c) installa-tion of sewerage treatment systems for effluents; (d) provision ofequipment and shops for solid waste management; (e) land prepara-tion and services for small and mediumr-sized industries; (f)provision of flood protection works; and (g) consulting servicesand training.

* Risks: The proposed project faces three risks: (i) institutional, sinceit is the first project under the newly established IndustrialPorts Program; its execution and operation will require coordina-tion among various sectoral Government agencies. The project hasbeen designed to reduce these risks; (ii) prolongation of theeconomic recession could affect projected traffic levels and thepace of industrial investment at the port. Sensitivity analysesindicated that the economic return of the project would not beaffected significantly by foreseeable variations in trafficvolumes, or project costs; and (iii) delays in industrial invest-ment and production could affect the viability of the maritimeaccess component of the project. This component has been tranchedin order to minimize the risk.

This docume hs a restricted distribution and may be used by recipients only in the performanceor ter ofkicia duties Its contents may not otherwie be disclosed without World llank authorization.

Estimated Project Costs

Local Foreign Total-(in US$ million)-

Road, Rail and Maritime Access 11.4 23.7 35.0Equipment 3.2 8.5 11.7Environmental Protection 2.7 3.3 6.0SmalU and Medium Scale Industrial 1.3 1.1 2.4

ParkFlood Protection 8.1 18.9 27.0Technical Assistance and Training 1.1 2.9 4.0

Total Base Cost 11 27.9 58.2 86.1

Physical Contingencies 3.1 5.9 9.0Price Contingencies 5.4 12.0 17.4

Total Project Cost 1/ 36.4 2/ 76.1 112.5

Front-end fee 0.0 0.2 0.2

Total Cost 36.4 76.3 112.7

Filancing Scurces: Local Foreign Total(in US$ million)

Proposed IBRD Loan - 76.3 76.3roverment 3/ 36.4 - 36.4

~4 - 76. i l.T

Estimated Disbursements (in US$ million)Bank Fiscal Year

1985 1986 1987 1988 1989 1990

Annual 5.8 22.5 18.4 16.7 10.5 2.4Cumulative 5.8 28.3 46.7 63.4 73.9 76.3

Rate of Return: The project has an overall economic rate of return of 23percent. The maritime access works would be evaluated andapproved in tranches, and would have a minimum economic rateof return of 12 percent.

Staff Appraisal Report: Report No. 5025-ME, dated Mav 29, 1984.

1/ Totals may not add up due to rounding.2/ Includes local taxes estimated at US$12,100,000.3/ Includes ESP and FONDEPORT internally generated funds.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A

PROPOSED LOAN TO BANCO NACIONAL PESQUERO Y PORTUARIOWITH THE GUARANTEE OF UNITED MEXICAN STATES

FOR A LAZARO CARDENAS INDUSTRIAL PORTS PROJECT

1. *I submit the following report and recommendation on a proposed loanto Banco Nacional Pesquero y Portuario, S. A., (BANPESCA) with the Guarantee ofUnited Mexican States for the equivalent of US$76.3 million to help finance aLazaro Cardenas Industrial Ports Project to be carried out under the leadresponsibility of the Secretariat of Communications and Transport (SCT). Theloan, which includes a capitalized front-end fee of 0.25 percent on the Bankloan, would be repaid over 15 years, including 3 years of grace, at thestandard variable interest rate. Proceeds of the loan, required by ESP andBANPESCA, acting as trustee for FONDEPORT, for carrying out the Parts of theProject assigned to them, would be ow-lent to them under the same terms andconditions as those of the Bank loan. These entities will also bear theforeign exchange risk.

PART I - THE ECONOM!

2. An economic report on Mexico (Mexico: Recent Economic Developmentsand Prospects, No. 4996-ME) was distributed to the Executive Directors onMay 14, 1984. The report's main conclusions are summarized below.

Background

3. After almost three decades of relatively stable and high economicgrowth, Mexico experienced a serious financial and economic crisis in 1976 andan even more serious one six years later, in 1982. When the Bank's previouseconomic report was prepared in 1980 and early 1981, an underlying trendtowards structural economic imbalance was already evident, and the potentialdangers were recognized. However, the issues were not addressed by the out-going Government with the vigor that was required as oil revenues and externalloans had temporarily eliminated foreign exchange constraints to development.

4. Today, Mexico is struggling to emerge from a crisis worse than anyother in its modern history, and faces a seve-e resource constraint. In thisstruggle, the Government cannot afford to delay implementation of correctivepolicies on a broad front. Moreover, the prospects for a resumption of econo-mic growth depend more than ever on favorable international conditions. Thepath leading to Mexico's economic recovery is a narrow one, with limitedoptions and little room for maneuver in domestic policy.

Developments During 1977-1982

5. The stabilization measures initiated in 1977 and the discovery andexploitation of large oil resources in the mid-1970s allowed the Lopez Portillo

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Administration (Jan. 1977 - Dec. 1982) to overcome the serious financial crisisof 1976 and to start working on structural, social and economic problems,including poverty, income and wealth inequality, unemployment, regionalimbalances and relatively slow agricultural growth. In the early years of thatAdministration (1977-1980) GDP grovth was high (8.5 percent a year), 2.5million jobs were created, domestic consumption recovered, and the share ofinvestment and savings in GDP surpassed historical levels.

6. Rapidly rising public expenditures unmatched by revenues led toincreasing public deficits and an overheated economy. Although inflationarypressures mounted, the exchange rate was not adjusted. By mid-1981, theeconomic situation began to mirror the scene prevailing before the 1976financial crisis. The appreciation of the real exchange rate contributed to acurrent account deficit of 5.8 percent of GDP, while the deterioratinginternational oil market conditions caused large revenue shortfalls withrespect to budget expectations. The public sector deficit rose to just under15 percent of GDP. External borrowing was used to finance part of the domesticfiscal deficits and to defend the exchange rate. Mexico's foreign debtincreased rapidly, at a time of high and rising international interest rates.A stabilization program initiated by the Government in mid-1981 was notsufficient to redress the growing fiscal imbalance, the high cost of foreignloans and the increasing private capital flight fueled by the public's anxietyover Mexico's financial troubles.

7. The crisis came to a head in 1982. In February, as capital flightintensified, the Bank of Mexico had to stop supporting the peso, which thenexperienced a 40 percent devaluation in dollar terms. A large wage adjustm.entgranted in March 1982, which tended to undo the effects of the devaluation, andcontinuing slack in the oil market kept the balance of payments under strain.Under the circumstances, the international banking community was unwilling tocommit new funds to Mexico, in the amounts required. These factors led to asecond devaluation of the peso in August 1982, while the acute shortage offoreign exchange forced the Government to suspend the amortization payments ofmost of Mexico's external public debt pending a broader agreement on itsrefinancing. Capital flight continued as private sector confidence was shakenby the nationalization of the banks in September 1982, and the mandatoryconversion of US dollar deposits into pesos. Also put into effect were ageneralized system of exchange controls and strict external trade restrictions.

Recent Developments

8. The Administration of President de la Madrid, that began its term inDecember 1982, lost no time in taking steps to deal with Mexico's graveeconomic situation. The EFF agreement, approved by the IMF in December 1982,laid the basis for the re-negotiaticn of that part of Mexico's public externaldebt on which amortization payments had been discontinued in August 1982.Commercial banks agreed to restructure some US$19 billion of public sector debtand provide US$5 billion in net new loans for 1983. All obligations fallingdue between August 23, 1982 and December 31, 1984 were restructured over aneight year period, starting from January 1983, with a grace period of fouryears and at an interest rate of 1-7/8 percentage points over LIBOR (or 1-3/4over the New York prime rate). The US$5 billion syndication had a 6-yearmaturity, with a 3-year grace period, at a spread of 2-1/4 over LIBOR (2-1/8over prime). The restructuring exercise included an understanding that the

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international banks would maintain their exposure to the Mexican banks that hadbeen nationalized. At the same time, it provided a mechanism that wouldeliminate 1982 private sector interest arrears and faciiitate payment of therescheduled principal on such debt.

9. A new two-tier exchange rate system was introduced, with a controlledmarket for imports, most proceeds from merchandise exports (except those ofin-bond industries) and debt related transactions, and a free market for allother transactions including those relating to tourism. The controlled ratewas originally set at Mex$95 = US$1, a depreciation of some 35 percent inrelation to the previously prevailing ordinary rate of Mex$70 per US dollar.

* It has been depreciated at a rate of Mex$0.13 per day, and is currently aboutMex$160 per dollar. The free market rate had remained at about Mex$150 perdollar until September 1983, when the authorities decided to let it slide atthe same rate as the controlled rate, and is nov about Mex$175 per dollar. Thedifferential between the two rates, which in December 1982 stood under 60percent, is now down to 11 percent. Although inflation cont-nued to be high(about 80 percent in 1983), the real effective exchange rate in the controlledmarket remains competitive, and nonr-oil exports have risen considerably.

10. Under the IMF Agreement, the Administration committed itself to adrastic reduction of the public sector deficit, from 18.0 percent of GDP in1982 to 8.5 percent in 1983, 5.5 percent in 1984 and 3.5 percent in 1985.Substantial progress was achieved during 1983 in meeting the program objec-tives. The public finances were strengthened considerably and the publicsector deficit in 1983 remained at all times below the ceilings establishedunder the program. The brunt of public expenditure cuts in 1983 was borne bypublic investment. The cuts were made virtually across the board, but theauthorities gave priority to completing projects that were already far advancedand to those that were important for employment, equity, or foreign exchangeearnings. Overall, public investment expenditures are estimated to havedeclined in 19B3 to about 7.4 percent of GDP, from 11.7 in 1982. The fiscalperformance of 1983 was also aided by significant price increases for nearlyall public goods and services, including petroleum products, electricity rates,food, etc. The Government has committed itself to a substantial reduction andeventual elimination of most subsidies, including those provided in the form oflow interest rates.

11. The balance of payments experienced a major turnaround, the currentaccount moving from a deficit of almost US$5 billion in 1982 to a surplus ofUS$5.5 billion in 1983. The strength of the current account and the availa-bility of external finance permitted Mexico to replenish its internationalreserves while paying a large part of the arrears that had accumulated in1982. The net use of foreign financing by the public sector was US$4.2 billionfor the year--below the ceiling of US$5 billion under the stabilization pro-gram. The errors and omissions account of the balance of payments dropped fromUS$11 billion in 1982 to an estimated US$0.4 billion in 1983, largely reflect-ing the decline in unrecorded capital outflows. The swing in the currentaccount was mainly the result of a very sharp contraction of merchandiseimports, to US$7.7 billion representing a decline of about US$7 billion fromtheir 1982 level. The recession, the large devaluation of the peso and thequantitative restrictions all contributed to this. The performance of non-oilexports which had been poor in the earlier part of the year, improved consider-ably in the second half and showed an increase of 10.6 percent in dollar terms

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for the year as a whole. Growth in tourism and in-bond industry was particu-larly strong, and helped in alleviating unemployment. The Government'sstabilization program, together with a moderate incomes policy helped bringdown inflation; it averaged 70 percent (annualized rate) in the last quarter of1983 compared to 125 percent in the first quarter. The flow of savings intothe banking system was in line with the projections of the program, reflectingboth the exchange rate and interest rate policies. The Impact of the severeand sudden adjustment of public expenditures and imports on econci.ic growth bagbeen serious; GDP is estimated to have declined by close to 5 percent in 1983.However, some signs of economic recovery have appeared in recent months: thedemand for credit in the private sector has increased, and employment in themodern sector has risen somewhat.

12. The new Government took steps to regain the confidence of bothdomestic and foreign private investors. These included efforts to deal withthe problems of private external debt, procedures to compensate owners ofnationalized banks, and a more flexible application of the foreign investmentlaw. Negotiations are now being completed with commercial banks and otherprivate creditors for the refinancing of a total of US$11.6 billion of privatesector obligations at stretched out maturities varying between 6 and 12 years,with 3- to 4-year grace periods. Moreover, the Government undertook therestructuring of Mexican private sector obligations guaranteed by officialcredit agencies abroad. The Government recently announced a program totransfer back to private sector ownership most of the 400 private firms thatwere controlled by the commercial banks prior to their nationalization. Thesemeasures and announcements have been beneficial, but much more remains to bedone to restore full confidence of Mexican entrepreneurs and foreigninvestors. The Government fully realizes that this is an issue of the greatestimportance as economic recovery beyond the current stabilization period willdepend critically on the resumption of vigorous private investment.

Short-term Economic Outlook

13. The Administration's stabilization policies will continue in 1984.The authorities expect a gradual resumption of economic growth and a furtherreduction in inflation, while maintaining a strong balance of payments. RealGDP in 1984 is projected to grow by about 1 percent, while inflation isexpected officially to decline to about 40 percent, on a December-to-Decemberbasis, compared to 80 percent the year before although that may turn out to besomewhat optimistic. The increase in economic activity is to be based mainlyon a revival of the private sector and a small increase in public investment.Total employment should continue to rise as the authorities proceed with theimplementation of an emergency program to create and maintain between 700,000and 800,000 additional jobs in 1983-84. Declining domestic inflation (combinedwith the steady slide of both the controlled and the so-called free marketexchange rates - see para. 9) is expected to provide adequate incentives toexport development and efficient import substitution. The Government expectsmerchandise imports to increase to US$14 billion in 1984, partly as a result ofrecent measures reducing the restrictiveness of the import licensing system,and merchandise exports to US$24 billion (from US$22 billion in 1983) with mostof the increase coming from nonr-oil exports. The current account surplus forthe year is expected to be about US$0.7 billion in 1984. For 1984, the growthin public sector debt outstanding and disbursed is to be limited to US$4billion. An important source of external financing for the year will be o

US$3.8 billion syndicated loan from commercial banks. This loan will have a10-year maturity, with a 5-3/4-year grace period, comparing favorably with the1983 US$5 billion loan of 6-year maturity and 3-year grace. Further, thespreads on the new loan are 1-i percent over LIBOR (1-1/8 over prime), downfrom 2-1/4 over LIBOR (2-1/8 over prime) in 1983.

Mediumr-term Prospects

14. The Government's strategy, as outlined in the National DevelopmentPlan(NDP) for 1983-1988, combines special efforts to recover from the presentcrisis with a longer-term perspective on regaining balanced and stable growthto overcome structural problems. The main structural problems facing Mexico inthe years ahead include the very high rate of population growth (2.6 percentestimated for 1983) together with an even higher rate of labor force growth (alittle under 4 percent), slow growth in agriculture, poverty, a highly skewedinterpersonal and interregional income distribution, and an overly oil-dependent economy with a manufacturing sector that has been inward looking fortoo long.

15. The medium-term strategy presented in the NDP focuses on the need forstructural changes in the economy including a greater export orientation of theindustrial system, poverty alleviation through basic needs policies andimprovement in l1bor absorption, decentralization of economic activity,revision of external trade policies and modernization of the commercial struc-ture. The basic elements of policies to address structural problems arementioned in the NDP and it is expected that further details on specific pro-grams and schedules for policy adjustments will be provided in the sectoralplans which are now under preparation.

16. Miexico's medium-term prospects for recovery and stable economicgrowth are good, provided economic management continues to be prudent, privatesector confidence is restored, and the international environment remains favor-able. Adequate domestic policies include inter alia continued efforts toreduce the fiscal deficit, liberalize trade and minimize price distortions.Restoration of private sector confidence is crucial since only a strong anddynamic private sector will be able to raise investment from the presentdepressed levels and to supply the increasing non-oil export surplus requiredfor the resumption of growth. Success in this regard will depend critically onthe quality and the effectiveness of Government's policies. As regards theexternal environment, the commercial banks are expected to maintain theirexposure in Mexico in real terms, and foreign markets to be open to Mexico'snonr-oil exports. Mexico's prospects would benefit from a fall in interestrates in the world financial markets (a one percentage point drop would mean asavings of about US$800 million in overall interest payments) and risingpetroleum prices (a one dollar change in the price of a barrel of oil wouldalter export receipts by $550 million for the year).

17. Under favorable external and domestic conditions, Mexico's economicgrowth could reach 6 percent a year-the historical average for Mexico --towards the late 1980s. This growth would materialize through a sustainedrecovery of the commodity producing sectors. Contrary to the recent experiencewith public expenditure-led growth, Mexico's future economic performance willdepend critically on the recovery of private sector investment.

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External Debt and Creditworthiness

18. Mexico's external public debt increased by about US$4 billion during1983 and is expected to rise by a similar amount this year. With an expectednet new borrowing of some US$3 to US$4 billion a year, the ratio of externaldebt to GDP would decline steadily from 41 percent in 1984 to 33 percent by1990. The debt service ratio (32 percent in 1984 after rescheduling) wouldpeak at about 60 percent in 1987-as amortizations on new borrowing and therescheduled debt fall due-and would decline thereafter to below 40 percent bythe end of the decade. The ratio of public debt outstanding to exports ofgoods and non-factor services would fall from 2.5 in 1984 to 1.5 in 1990.

19. As its debt repayment schedule Implies large gross financing needsduring the 1980s, Mexico will need to count on the continued cooperation of theinternational financial community in refinancing amortization payments andproviding some additional net new borrowing. Such cooperation is alreadyevident from the favorable terms of the US$3.8 billion jumbo loan from the commercial banks for 1984 (see para. 13), reflecting the improvement in Mexico'sexternal position. At the end of 1982, the last year for which a comprehensiveexternal debt report is available at this time, the Bank's share in Mexico'sdebt was 5.3 percent. The Bank share in Mexico's total public external debtservice payments during that year was 3.7 percent. In view of the good mediumand long term potential of its economy and the prospect of continued pursuit ofsound economic policies by the present Administration, Mexico is consideredcreditworthy for IBRD borrowing.

PART II - BANK GROUP OPERATIONS IN MEXICOl/

Bank Operat'ons

20. As of March 31, 1984, Mexico had received 82 loans from the Bankamounting to US$6,486 million, net of cancellations and terminations; of these,53 loans totalling US$2,887 million were fully disbursed. The Bank heldUS$5,335.9 million, of which US$2,327.4 million had not yet been disbursed.Some 42 percent of Bank lending has been for agriculture and rural development,23 percent for industry, 11 percent for power, and 13 percent for transporta-tion; the remaining 11 percent has been for water supply, tourism, urbandevelopment, vocational training and pollution control projects. Annex IIcontains a summary statement of Bank loans as of March 31, 1984.

21. Of the US$6.48 billion total lending, about US$3.2 billion was forestablishing or strengthening institutions for channelling credit to areaswhere credit supply was deficient or nonr-existent, and setting up in the comr-mercial banking system the ability to carry out project-related appraisal ofinvestments in agriculture, industry and tourism. These credit programs havefacilitated lending to low-income farmers and small- and medium-scale indus-trial and tourism enterprises based on productive investment plans, rather thancredit granted on the basis of collateral.

1/ This section is substantially unchanged from the President's Report forthe Second Highway Sector Project (Report No. P-3805-ME). Changes havebeen introduced in para. 27).

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22. The Government arranged adequate budget financing in the years 1978to 1981, which significantly improved project implementation. Government andBank officials met periodically to review project implementation, and greaterattention was focused in Mexico on project monitoring. As a result of thesemeasures, most of the Bank-assisted projects were being implemented satisfacto-rily until mid-1982 and disbursements rose from US$91 million in FY78 to US$448million in FY82. However, the present financial crisis is again causing delaysin the provis'on of counterpart funds, consequently, disbursements in FY83declined to 'S$389 million. A Special Action Program (SAP) was established inearly 1983 to help the Government by alleviating the counterpart funding cons-traints on development projects, and 18 Bank financed projects are receivingsupport under the Program. Partly as a result of the SAP, disbursements duringthe first three months of 1984 improved significantly and, at US$195 million,almost equalled thrice the amount disbursed in the same period of 1983.

IFC Operations

23. As of March 31, 1984, IFC had made investment commitments in 23companies in Mexico, for a total of US$730.4 million, of which US$542.8 millionhad been sold, repaid or cancelled. A summary statement of IFC investments ispresented in Annex II. IFC has been working together with the Bank in prepar-ing proposals to establish a facility for provision of foreign exchangefinancing to private sector companies for the importation of machinery, equip-ment and spare parts required for production of exportable products, forefficient import substitution and for improvements in the utilization of theirexisting productive capacity. IFC approved a US$100 million facility (includ-ing funds mobilized from foreign commercial banks) in 1983, which is providingfinance for fixed investments of a larger size than those assisted under theBank loan for an Export Development Project.

Bank Strategy

24. The main objectives of Bank lending in Mexico in the past eight yearshave been to: (a) support policies and programs leading to a wider distribu-tion of the benefits of economic growth; (b) help finance projects that, di-rectly or indirectly, contribute significantly to output and employment; (c)help reduce Mexico's urban-regional imbalances; and (d) help free bottleneckswhich prevent rapid growth. More recently, however, in response to Mexico'srequirements following the 1982 economic crisis, the Bank, in close cooperationwith the IMF, also supported the Government's stabilization program through as-sistance for export promotion and intensified and broadened economic and sectorwork. As for medium term prospects, the volume and composition of Bank lendingto Mexico would be related to progress in the implementation of policy reformsneeded for structural economic adjustments, through broad policy conditionalityaffecting the entire lending program or important parts of it. Specific policyreforms that would be pursued through a dialogue with the Government, to beconducted in parallel with the processing of lending operations, would coverpriority macro-economic and cross-sectoral issues, such as interest ratepolicy, energy pricing, subsidy reduction and export development.

25. Because of the difficult structural problems of agriculture and thesector's crucial importance for the one-third of the nation's population livingin the rural areas, the Bank has made agriculture the leading sector for itslending. The Bank's agricultural lending program in Mexico has four goals:

first, to help increase productivity of presently cultivated lands in general;second, to give emphasis to improving the productivity of small farmers; third,to complement infrastructure investments with support services, such as extenr-sion, marketing programs and credit; and fourth, to promote employment-generat-ing investments in rural areas. The Bank has made 13 loans in FYs78-83 total-ling US$1,829.4 million for irrigation, rural development and agricultural,agro-industrial and livestock credit programs. A US$175 million loan for arural development project and a US$180 million loan for an irrigation rehabili-tation project were approved by the Executive Directors in FY82, and a US$138.4million loan for San Fernando rainfed agricultural development was approved inearly FY83. A US$1L5 million loan for marketing perishables was approved bythe Executive Directors in April 1983. Projects for rainfed agriculture,regional development and rural credit are in preparation.

26. Bank lending for industry has aimed at: (a) reduction of the balanceof payments deficit; (b) decentralizing industrial activities away from themajor, increasingly congested, urban areas; and (c) promoting greater employ-ment. A steel project which the Bank helped structure and finance is nowoperating in a previously underdeveloped area on the west coast of Mexico, andthe city in which it is located, Lazaro Cardenas, is developing into a newgrowth pole. The timing and location of the proposed project would alsocontribute to the further development of this region. Four loans for indus-trial projects to promote the development of small- and medium-scale industrialenterprises, to finance expansion of small- and medium-scale mining, and tosupport an industrial equipment fund (FONEI) were approved by the ExecutiveDirectors in FYs78-80. A loan for a vocational training project was approvedby the Executive Directors in July 1981; it is assisting a program to increasethe supply of skilled workers and technicians. A US$152.3 million loan fordevelopment of a capital goods industries project and a US$60 million loan forpollution control were approved by the Executive Directors in FY82. A modi-fication in the capital goods project was approved by the Executive Directorsin early 1983 to set up a pilot export development fund to help satisfy theforeign exchange needs of Mexican exporters. A US$350 million loan for anExport Development Project and a US$175 million loan for a Third Small andMedium Scale Industry Development Project were approved by the ExecutiveDirectors in FY83.

27. Bank lending for physical infrastructure has been focused on regionaldevelopment and strengthening of institutions and sector policies. Two highwaysector projects (FY79 and FY84) and the fourth railway project (FY81) supportthese goals. The first and second medium-size cities water supply and sewerageprojects (FYs 76 and 81) reinforce the planning, management and finance of spe-cialized water supply and sewerage institutions at the federal and municipallevels, and contribute to the establishment of tariffs more closely related tocosts; a third project was approved by the Executive Directors on May 17, 1983.

28. The Government has adopted a National Urban Development Plan thatspells out its regional development priorities in operational terms. A projectto assist in the development of the Lazaro Cardenas urban area was approved bythe Executive Directors in FY78, and a second urban project for oil-producingsoutheastern Mexico was approved by the Executive Directors in FYB1. A loanfor the preparation of a deconcentration program for the Mexico City Region wasapproved by the Executive Directors in August 1982.

29. The Economic Development Institute (EDI) is assisting CECADE (Centrode Capacitacion de Desarrollo Economico under the Secretariat of Programmingand Budgeting) in training Government staff in project preparation, Monitoringand evaluation_ EDI assistance is directed at courses on urban and regionaldevelopment, agriculture, rural development and agro-industries. The Bank hasalso assisted the Mexican authorities in training personnel for managing watersupply and industrial credit projects.

30. The Inter-American Development Bank (IDB) is the secoad largestsource of multilateral aid to Mexico. The IDB has made loans to Mexico total-ling US$3,039.3 million as of September 30, 1983. Over 50 percent of the totalhas gone to agricultural and rural development projects, and the balance totransportation, industry, water supply and sewerage, tourism infrastructure,education, municipal development, and pre-investment. The IDB and the Bankhave coordinated their assistance on several projects. Each has made loans forthe national integrated rural development peogram (PIDER), agricultural andlivestock credit, small- and medium-scale industries development, and boteldevelopment projects. The International Fund for Agricultural Development(IFAD) has approved a loan of US$22 million for a rural development project inthe state of Oaxaca which was appraised by the Bank's staff and for which thelank is acting as cooperating institution for administering the loan.

31. Bank-supported power, steel, fertilizer and tourism projects inMexico have been co-financed by several bilateral export credit agencies endcommercial banks. In January 1982, Mexico borrowed US$500 million from com-mercial banks to provide complementary financing for Bank-assisted projectswhere project specific co-financing would have been difficult.

PART III - THE TRANSPORT SECTOR IN MEXICO

A. GENERAL

32. Mexico's difficult topographic conditions as well as the dispersionof its population and economic activities have always made transport a crucialelement of the country's development efforts. The initial emphasis was onrailway infrastructure investments, which led to the laying out of 19,000 kmsof rails by 1910. Transport infrastructure investments then slowed downsubstantially until the mid-193Cs, after which the emphasis shifted to highwayconstruction to provide connections between Mexico City, the state capitals andthe main border crossings and seaports. Requirements for port infrastructureand services increased dramatically in the late 197 0s because of the growth ofthe coastal shipments of crude oil and of dry bulk foreign trade resulting fromthe rapid development of Mexico's petroleum industry lind of the Government'seffort to stimulate and diversify exports. These factors contributed to themomentum of growth over that decade.

33. The accelerated development generated by the oil boom in the late197Cs resulted in unprecedented growth in demand for transport services. Sincetransport had declined as a percentage of public sector investment from 21percent in 1972 to around 9 percent by 1979, serious deficiencies occurred intransport operations and infrastructure affecting national and internationaltrade between 1978 and 1982. The Government responded to the new demand by

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increasing real investments in railways by 173 percent, ports tenfold and high-ways by 86 percent between 1978 and 1981. The budgetary restrictions whichaccompanied the economic crisis in 1982 and 1983, however, resulted in reducingtransport investment to 1979 levels, postponing major investments which werenot near completion and shifting emphasis to maintenance and rehabilitation.The lull in transport demand caused by the recent recession has given theGovernment some leeway, in terms of timing, to reorder its transport prioritiesbut critical investment decisions will have to be made within the next fewyears, in order to serve any economic recovery effectively. Ihe Bank lendingstrategy for the transport sector is designed to provide assistance in meetingthe immediate financial needs of the sector, as well as to help in developingmediumr- and long-term sectoral investment programs and policies.

Transport Network Capacity

34. Mexico has developed an extensive transport network comprising over200,000 km of roads, of which 67,000 km are paved; about 20,000 km of railways;some 33 ports, of which 13 serve international traffic; about 50 airportscapable of handling mediumr and large-size aircraft; and over 20,000 km ofpipelines handling crude oil, refined products and gas.

35. Much of Nexico's nonr-petroleum-related foreign trade is with the US,for which overland routes are used predominantly. However, maritime transportincreased as a percentage of international transport over the last decade, andthis trend is expected to accelerate as Mexican foreign trade diversifies andnew export markets are obtained. In 1982, 101 million tons of internationaltraffic passed through the port system, of which 81 percent was petroleumrelated traffic. Domestic coastal shipping, mainly of petroleum, is alsoimportant. In 1982, some 50 million tons were transported by coastal shipping,of which 78 percent was petroleum-related. Containerized traffic has tripledsince 1979, and it grew from 7 percent to 23 percent of all general cargotraffic between 1979 and 1982.

36. The system's capacity had been generally adequate until the late1970s when general cargo and bulk traffic, particularly grain, increased at afast pace. After 1976, traffic growth took off, with general cargo and drybulk traffic increasing at annual rates of 17 percent and 12 percent respec-tively. These large increases led to capacity problems, and, by the lateseventies, some two million tons of Mexican imports and exports were handled byUS ports with extensive overland movements. In 1982, the port system, feelingthe effects of the recession, experienced a 19 percent decline in non-petroleumtraffic.

Sector Investments

37. During the 1960s and 1976s, substantial amounts were invested intransport, particularly roads, railways and aviation. In the late 1970s, how-ever, transport sector investments declined, but it became evident that thetransport network would be unable to cope with the accelerated growth in traf-fic. To improve capacity, in 1979 the Government launched an industrial portsdevelopment program and a major track improvement plan for the railways. High-way investment expenditures, however, were maintained at constant levels, sothat its share of transport sector investments declined.

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38. With the onset of severe budgetary restrictions, as a result of therecession in 1982, transport investment priorities had to be shifted again.Transport investment levels, not including urban transport, were reduced in1983 in real terms to about US$1 billion (roughly equivalent to the 1979levels), focusing on maintenance, reconstruction of existing infrastructure,completion of high priority ongoing construction works, and deferring theinitiation of new investments. But the transport sector's cuts were lesssevere than those in public investments in general and, therefore, its share inthe total rose from 9 percent in 1979 to 11 percent in 1983.

39. The current Government established a six-year plan for 1983-1988. Aspart of their stated strategy, the 1984 budget does not envisage major newinvestments. During the remainder of the six-year period, however, the Government will have to face the need for additional major investments, in order toprovide adequate transport services required by economic recovery. Theseinvestments may be in areas of rail infrastructure, including completion of theelectrification of the Mexico City-Queretaro line and new li-es betweenGuadalajara and Monterrey. In the highway network, provision of dual carriageways for toll roads may be required. In addition, substantial investments maybe needed for the airport at Mexico City to expand its capacity.

Institutional Framework and Planning

40. The current Administration introduced a far-reaching institutionalreform soon after taking office in December 1982 by incorporating all transportagencies under SCT. Previously, highway and airport development were under thejurisdiction of the former Secretariat for Human Settlement and Public Works(SAHOP). The earlier dispersed institutional arrangement hampered coordinationof planning and investment and limited the scope of the Bank's dialogue onsectoral issues. A new Subsecretariat for Infrastructure in SCT now handlesinfrastructure development for almost all transport, and a Sunsecretariat forOperations has responsibility for operational, regulatory and tariff matters.A Directorate General for Planning, which reports directly to the Secretary, isin charge of overall planning.

41. SCT is presently reorganizing the Directorate General for Planningand the other modal planning offices within the Subsecretariats for Infrastruc-ture and Operations. Once fully implemented, it is expected that planningunits in the various modal directorates will be responsible for identifying andproposing capital investments and will provide the technical details requiredfor the analysis of such investments. The Directorate General for Planningwill have the responsibility for carrying out the economic feasibility analysisand providing a consistent multimodal framework for the preparation of themediur- and long-term investment program. Sectoral planning within SCT iscomplemented by the Secretariat for Programing and Budgeting (SPP), consistingmainly of reviews and approvals of the proposed SCT investment and operatingbudgets. These arrangements have proven effective and are satisfactory. Basedon a review of training requirements for planning in SCT, the Bank is alreadyproviding assistance to enhance SCT's planning capabilities under variousongoing transport loans: Highway (1671-ME), Railways (1924-ME) and PortPreparation (1964-HE) projects). To assure continuity, further assistancewould be provided under the recently approved Highway Sector Project (2428-NE)and the proposed project.

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Fuel Pricing

42. In the late 1970s petroleum products were being priced at the pumpwell below world market prices in Mexico. As domestic inflation surged, thissituation worsened since gasoline and diesel prices were not allowed toincrease above USS0.42 and US$0.18 per gallon, respectively. Gradual priceincreases initiated in December 1981 by the previous Administration had takengreater momentum in December 1982 when the current Administration took office.By April 1984, the price per gallon of extra and regular gasoline was raised toUS$1.30 and US$0.96 respectively, representing real term increases of 84 per-cent and 240 percent. Diesel prices rose to US$0.63 per gallon, which repre-sented a real term increase of 430 percent. Current gasoline prices are nowslightly above the relevant-Caribbear-based--international price, while dieselprices stand at 78 percent.

43. The current Administration in Mexico has demonstrated a strong com-mitment to the gradual elimination of price subsidies. The upward priceadjustments discussed above represent serious action taken to resolve the fuelpricing issue, including a reduction of the price differential between dieseland gasoline. With the present level of prices, no major distortions areapparent in the transport sector. Recent analyses by the Bank also show thatthe impact of relatively low diesel prices on the choice between labor orequipment-intensive construction techniques for rural roads is not signifi-cant. It is the stated policy of the Government to continue adjustments infuel prices in 1984 and beyond, with a view to approaching opportunity costlevels and reducing subsidies. The Bank will continue to monitor progress onthe fuel pricing issue and assist the Government in assessing the implicationsof its pricing policies and the need for further action consistent with thestated policy.

B. THE PORTS SUBSECTOR

Port Administration

44. Responsibility for administration of Mexico's commercial ports laywith the Navy Secretariat until 1977, when responsibility for industrial,commercial and fishing ports was transferred to the Ministry of Communicationsand Transport (SCT). The management of the ports subsector was divided amongtwo Subsecretariats within SCT, dealing with port infrastructure and opera-tions, through (a) the Directorate General for Marine Works (DGOM), responsiblefor port construction and dredging and (b) the Directorate General for PortOperations and Development (DGOPD), which runs overall port operations. Withinthe SCT framework, the National Port Coordinating Commission (CNCP) is responrsible for coordinating port development planning and serves as a vehicle toconsult port users on port development needs. Other institutions or entitiesperforming specialized functions under the SCT jurisdiction include:(a)FONDEPORT, a trust fund placed under BANPESCA, with responsibility for thedevelopment, sale and/or lease of adjacent land to port areas; (b) ESPs, localservice companies in charge of port operations; and (c) BANPESCA, a Govern-ment-owned Bank which finances port development and fisheries operations, andis the Borrower for the proposed project.

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45. A recent attempt by some agencies of the Government to propose theintroduction of local port authorities, did not progress. Instead, under theoverall framework of SCT, the ports are operated by local port service compa-nies (ESPs), jointly owned by the Federal Government, port unions and portusers. SCT has given the ESPs broader responsibilities, to include port equip-ment acquisition and maintenance, cargo storage, and collection of aln porttariffs and dues, complemented with strengthening their administration andoperations vith highly qualified staff in administration, finance, statistics,maintenance, and operational supervision. These new concepts are beingintroduced first at Lazaro Cardenas' ESP, which will serve as a model for thestrengthening of other ESPs. FONDEPORT owns the industrial park lands adjacentto the port areas and is responsible for their administration and commercialdevelopment. It has set up a special department to deal with its new respon-sibility in the development of the industrial ports program. The proposedproject would serve as a vehicle for the Implementation of these keydecisions.

Port Pricing

46. Since the ESPs are operated on a commercial basis, the tariffscharged for their services are, in principle, cost-related and subject tofrequent adjustment. They do, however, require approval by SCT's Directorate-General for Port Administration and the Directorate-General for Tariffs beforethey are officially published and become effective. As a result, there isoften a considerable time lag between the application by an ESP for a tariffchange and its eventual implementation. With the rapid inflation of the lasttwo years, this has meant that cargo-handling tariffs have steadily been fal-ling behind the increasing costs, often eroding profits and reserves of theport operation companies. Ship dues, berthage and wharfage fees paid by shipoperators go directly to SHCP. These are not related to the capital investmentin port infrastructure.

47. The current Administration has stated their intention of rationaliz-ing port pricing with the general objective of eliminating subsidies andpromoting a more efficient use of resources. Pursuant to this objective, theGovernment has set up a special Pricing Commission in SHCP to determine costrecovery principles for infrastructure and for Government-controlled enter-prises. In 1983, the Government raised port dues by levels which resulted inreal increases in revenues of 115 percent between 1982 and 1983. Individualcharges were raised between 24 percent and 2,000 percent in that year. In1984, additional increases are planned for August, ranging between 30 and 40percent, to adjust port dues to reflect price increases caused by inflation.For the Lazaro Cardenas ESP, frequent adjustments in port tariffs have beenmade in 1983 and 1984 to meet price increases. Other actions being taken bythe Government include the revaluation of assets owned by the Government in allcommercial and industrial ports. Under the proposed project, a countrywidestudy of the proper level of port dues, which will serve as a basis forpreparation of an action plan to rationalize port pricing, will be carried outas a positive step in the resolution of this issue (para. 85). Upon completionof the ongoing revaluation of countrywide port assets and of the port duesstudy, a phased but fairly rapid adjustment of port dues is expected to be madein line with the stated Government policy.

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C. THE INDUSTRIAL PORTS PROGRAM

Program Origin and Formulation

48. The historic population trend in Mexico has resulted in heavy demo-graphic and resource concentration in only a few regions in the country; 30percent of the population now lives in three main cities: Mexico, Guadalajaraand Monterrey. These areas also concentrate about 65 percent of industrialproduction on the national level. This has led to serious socio-economicdistortions, especially poverty, income and wealth inequality, unemployment andregional imbalances. These deep-rooted structural problems have persistedthrough the high growth period of the mid-to-late 1970s, the economic crisis of1982 and the subsequent recession. Mexican policy-makers in past and presentadministrations have been concerned that, if the trend toward concentration ofpopulation and economic activity in Mexico City and the central region were tocontinue at the same pace as in the past, the resulting regional distortionswould exacerbate social imbalances, and that the already difficult urban pro-blems in the Mexico City Metropolitan zone, such as an acute water supplyproblem, pollution, traffic and the high cost of urban services, would evenrtually become unmanageable.

49. The Industrial Ports Program was formulated in 1978 by the Office ofthe Presidency as a key element towards achieving a more balanced distributionof population and economic activity, promotion of industrial growth and employ-ment generation. It supports a more organized expansion of the industrialplant, coordinated development of port infrastructure and services and theoverall strengthening and modernization-of transport activities. The objec-tives of the Program fit into the general development strategy of the Govern-ment. This strategy focuses on selective investments in priority regions,activities and needs identified by the National, Urban and Industrial Develop-ment Plans, through coordinated planning of requirements for the ports, theindustrial plant and related support services, complemented with ecologicalprotection measures and human and urban requirements. From the administrativeviewpoint, it is a complex multisectoral program which involves the concertedparticipation of many public sector agencies both in the planning and executionas well as in the management and operating stages of the activities associatedwith it.

50. The areas selected under the Program have physical features whichjustify the concentration of incentives and other Government supports topromote sustained industrial growth. Until the launching of this Program,little advantage had been taken from existing fa'orable physical conditions inthe coastal zones, and ports operated in a commercial capacity, actingprincipally as linkages between maritime and land transport systems. Thechange from commercial to industrial centers is expected to generate its ownincreased transport needs.

Investment Priorities

51. In the port sub-sector, the Government's strategy concentrates, inthe early years of the six-year plan (para. 39), upon rehabilitation andreconstruction of its commercial ports and on the completion of and improvementto the industrial ports of Lazaro Cardenas and Altamira. New capacity isplanned in the medium term at the commercial ports, particularly Manzanillo,

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Salina Cruz, Tampico and Vera Cruz. These investments will have to be studiedcarefully to determine the appropriate timiog for investment in increasedcapacity. To improve planning capabilities and to determine resource require-ments, port investment programs and criteria for economic analysis would bereviewed annually under the project as part of the monitoring process (para.91). The decisions needed for these new investments will depend on the timingand structure of the economic recovery, projected levels of import substitutionand its impact on grain imports and related transport requirements, the evolu-tion of non-traditional exports, and the prospects for industrial and urbandeconcentration.

52. The Industrial Ports Program was given high priority in Mexico'spublic sector investment program. Four industrial ports sites were originallyselected for inclusion: Lazaro Cardenas and Salina Cruz on the Pacific Coastand Altamira and Laguna de Ostion on the Gulf Coast. Between 1979 and 1983, atotal of US$755 million was invested by the Government at these four sites,exclusive of investment in industrial plant. Most of these resources weredirected at Lazaro Cardenas (37 percent of total) and Altamira (34 percent).Investments peaked in 1981 and then fell, in real terms, in line with theurgent need to reduce public sector investment after the 1982 financialcrisis. Until the recession and the need to reassess the proper scope andtiming of the Program, infrastructure at the four sites was constructed at anextremely rapid pace. Industrial development at the industrial ports hasprogressed at a much slower rate than expected when the Program was conceived,partly because of the recession, which has halted new investment throughoutMexico, but also due to overly optimistic projections of demand for industrialland at the port sites. Of the four sites, Lazaro Cardenas is the mostadvanced, requiring limited additional investments to make the port fullyoperational and to provide flood and environmental protection. The LazaroCardenas Industrial Port was developed in the 1970s to serve the steel plantSiderurgica Lazaro Cardenas - Las Truchas (SICARTSA), and subsequentlydeveloped to provide a wharf for FERTIMEX' fertilizer plant. It was to beexpanded to accommodate a grain terminal, a foundry and a steel pipe plant, anoil refinery, chemical plants, and ship construction and repair facilities.Four new industrial plants (besides SICARTSA and FERTIMEX) or specializedterminals are currently under construction there and plans include investmentsby an oil drilling platform manufacturer and in a small and medium scaleindustrial park.

53. The public sector's role centered on the development of infrastruc-ture, including prepared industrial park land with waterfronts and multiple useport facilities, at several industrial ports, to allow industry to take advan-tage of direct access to maritime transport. Private sector initiatives at theindustrial ports were supported by actions taken under the Industrial Develop-ment Plan of 1979. This Plan set out as basic objectives the promotion ofindustrial investment in accordance with regional priorities, creation of jobsto absorb a rapidly growing labor force, increasing real income, and the devel-opment of domestic technology. The public sector's participation under thisPlan concentrated in strategic productive sectors and economic and socialinfrastructure. Under the Plan's industrial investment incentive scheme,industry locating at the industrial ports received tax rebates and specialprices for energy inputs. Concurrently, it was also consistent with the mainthrust of the Urban Development Plan (1978) to discourage migration towardsalready congested urban and industrial areas by promoting relocation of bothpopulation and economic activities and services towards the coastal areas which

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thus receive preferential provision of infrastructt;re and services. The newAdministration has retained these basic objectives.

54. In its recently published National Development Plan (NDP) (May 1983),the new Administration has reaffirmed the priority of the Industrial PortsProgram, not only as a means of promoting decentralization but also as anelement in its efforts to expand exports. The investment strategy beingpursued by the new Administration focuses on completion, at a minimum cost, ofnecessary works at Lazaro Cardenas, and on a full review of the proper pace andscale of other investments under the Program. In addition, more emphasis isbeing placed on the role of these ports within the overall national portssystem, and on the establishment of effective administrative and financialframeworks. While well conceived investments in the Industrial Ports Programcan contribute to overall and regional economic growth, these alone will nothave a major impact on slowing Mexico City's growth. To achieve this, theGovernment must improve its pricing policies in the central region by, interalia, eliminating water and energy subsidies, and enforcing existing environ-mental regulations. The Industrial Ports Program will serve as a positivevehicle for these difficult measures.

Situation in the Lazaro Cardenas Region

55. The Lazaro Cardenas area concentrates abundant water, land, power andmineral resources coupled with an important agricultural potential and welldeveloped transport network. The location of the port on the Pacific Coast isideal for servicing the Mexico City area as well as the Northern region throughcoastal navigation. It is also an appropriate outlet for trade activities withthe Pacific Basin countries.

56. The population of the Lazaro Cardenas region has grown along with thedevelopment of the port. The Municipalities of Lazaro Cardenas and Guacamayas,with estimated 1980 populations of 25,000 and 15,000 respectively, are the twolargest towns in the area. The rest of the region is made up of several smallcommunities and villages in both the States of Michoacan and Guerrero. In1960, the total population of the region was estimated at 6,500 people. By1970, the region's population had grown by 17,000 and reached 60,000 by 1980.This growth of industry and population has generated a number of problems,related to environmental pollution and to the strains on the road system causedby heavy road traffic generated by the port and the industries located in thearea. The rapid growth has also been accompanied by urban management problems,including inadequate facilities and operations of the sewerage and water supplysystems , and poor housing. The Industrial Ports Program contemplates somesimultaneous basic measures and activities, in the educational, labor, health,housing and urban fields to minimize the consequences of rapid industrial andpopulation growths.

57. Environmental degradation, already a problem at Lazaro Cardenas, isexpected to worsen with further industrial development if proper steps are nottaken. The problem of municipal and industrial solid and liquid wastes isbeing addressed under the proposed project. The Government agreed at negotia-tions to take all necessary measures to prevent contamination in the Projectarea (Section 4.11 of the Guarantee Agreement). Furthermore, environmentalconditions at Lazaro Cardenas would be monitored by the Bank under the projectduring semi-annual meetings to review progress in achieving project objectives-nd enforcement of existing regulation.

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58. Solutions for easing future congestion of the urban and regional roadsystem are also needed. Prior to making any major road or bridge investmentsin the area, SCT will analyze alternative road traffic patterns and select themost economic solution to this traffic management problem.

Past Bank Participation and Experience

59. The Bank has been involved in supporting the Government's regionaldecentralization and industrial development. It has been especially active inthe development of the Lazaro Cardenas area through operations to support theSICARTSA steel plant (Loan 934-ME), the FERTIMEX Plant (Loan 1112-ME), urbandevelopment (Loan 1554-ME), the development of the Zihuatanejo-Ixtapa touristresort (Loan 793-ME), and the Zihuatanejo International Airport (Loan1022-NE). Additional projects which support the goals of regional decentral-ization include two medium-size cities water supply and sewerage project, anurban project for oil producing southeastern Mexico and a loan for the prepara-tion of a deconcentration program for Mexico City.

60. The Bank has provided broad support to the development of transportin Mexico. Nine highway loans have been made, the first in 1960 and the ninthin 1984. There have been four railway loans and an airport loan. A Bank loanfor US$20 million (Loan 820-ME) was made in 1972 for a First Ports Project.The main objective of the Bank's participation in the ports project was toassist in the achievement of more efficient operations and in the introductionof a commercial approach to tariffs and services. While substantial operation-al improvements were reached at some ports over the last decade, little wasaccomplished with respect to the rationalization of port tariffs.

61. The Port Development Preparation Project (US$14 million, Loan1964-ME) was approved in 1981 to assist in the preinvestment stages of theIndustrial Port Program through provision of planning and management servicesin program formulation and design, and studies and detailed engineering forsector and individual project components in the ports program. Disbursementshave been slower than expected because of the large budget reductions experi-enced after 1982, which greatly limited the ability of Government entities toutilize loan proceeds. Nevertheless, the studies and advisory services whichhave been completed, or are currently under way, have provided a firm basis forthe preparation of the proposed project.

Role of the Bank and Lending Strategy

62. As the first Bank loan in over 12 years for the physical developmentof Mexico's ports, the proposed project is intended as the start of a series ofoperations in the ports and maritime transport subsector. These operations areto be prepared in the context of Mexico's overall program of port development.

63. The Bank's participation in the Industrial Ports Program fits in wellwith the overall transport sector lending strategy by assisting the Governmentto focus upon difficult investment decisions and by defining, and assisting in,the satisfactory resolution of, issues related to the port subsector. At thesame time, the Bank's role in the Program goes beyond the transport sector,with Bank participation serving as a vehicle for dialogue on the administrativeand financial aspects of the Industrial Ports Program, and on the proper pace,

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scale and composition of Mexican decentralization schemes and related pricingand investment policies. as well as on the difficult issue of euvironmentalcontrol.

PART IV - THE PROJECT

64. The Government of Mexico has requested a Bank Loan of US$76.3 millionto help finance its program of investments at the Lazaro Cardenas IndustrialPort. This project vas identified in 1982 and subsequently prepared by CNCP.A Bank mission appraised the project in October 1983 and a post appraisalmission was made in January 1984. Negotiations were held in Washington on May21-25, 1984. The Mexican Delegation was headed by the Deputy Director ofExternal Financing Operations of BANPESCA, Dr. Antonio Aspra Rodriguez. AStaff Appraisal Report entitled -Lazaro Cardenas Industrial Port Project,"No.5025br-ME, dated May 29, 1984, is being circulated separately to theExecutive Directors. Supplementary project data are included in Annex III.

Project Objectives

65. The proposed project would support the Industrial Ports Developmentstrategy. It would complement major investments made by the Government inLazaro Cardenas to increase the efficiency of the port terminal, to strengthenthe administration and finaices at the industrial port, to create transporteconomies for industries already existing or under construction, to reduce oreliminate environmental hazards associated with the industrial port develop-ment, and to provide protection against flood damage. The project objectivesare as follows: (a) to improve transport facilities for industries throughprovision of access to international maritime commerce and coastal shipping formajor industries; (b) to encourage economic growth in under-developed coastalregions of the country; (c) to increase the country's port capacity and therebyreduce its dependence on foreign ports as it diversifies its internationaltrade patterns; (d) to improve port administration and finances and maintain adialogue on these institutional issues; and, (e) to help establish a properadministrative, operational and financial framework for the industrial port ofLazaro Cardenas.

66. Key areas of intervention through the proposed Bank loan includeintroduction of cost-based tariffs, definition of financial objectives andtargets, implementation of a training program to upgrade management skills ofexisting and new staff and of a comprehensive equipment maintenance programstarting in 1985. In addition, Bank support to the ongoing port developmentprogram aims at the introduction of new approaches to investment analysis andproject definition, and assistance to the institutional and sound financialdevelopment of port entities in general.

Description

67. The proposed project would support the following six components inthe Lazaro Cardenas port area:

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(a) Transport Infrastructure

Land Access

68. Provision of land access to new port terminals and industrial facili-ties through (i) construction of about 7.5 km of highway to connect the multi-ple use terminal (TUK) and fertilizer plant (FERTINEX) with the existing roadsystem, and (ii) installation of about 8.5 km of rail lines, connecting thegrain terminal and steel pipe plant (PHT) with existing rail networks.

Maritime Access (dredging)

69. Extension or deepening of the harbor basin for specific industriesneeding maritime access to connect existing navigation channels with specialpurpose docks to be built by the industrial users.

(b) Port equipment

70. Provision of cargo handling equipment and a harbor tug to Improve theefficiency and capacity of existing container and general cargo berths at theTUM and to assist vess ls inside the harbor during maneuvering, berthing andunberthing operations.

(c) Environmental Protection

71. Correction of environmental problems caused by industrial and munici-pal wastes through (i) provision of a wastewater collection and treatmentsystem at FONDEPORT industrial park; and (ii) of a collection, processing anddisposal system for municipal and industrial solid wastes.

(d) Industrial Infrastructure

72. Provision of cite preparation, road construction and utilities forabout 125 small to medium-sized installations in an area of about 40 ha. Thisarea is part of a 120-ha site designated for such industries within the overallarea under FONDEPORT's jurisdiction in Lazaro Cardenas.

(e) Flood Control

73. Provision of flood protection works to protect the port and theadjacent industrial installations from flood damage against flood flows of upto 7,000 cubic meters per second (cms) through levees and channel rectificationon the left branch of the Balsas river.

(f) Technical Assistance

74. Provision of advisory services for studies, engineering, construc-tion, supervision, training and management of port development activities.

Costs and Financing

75. The total cost of the project is estimated at US$112.7 million, ofwhich US$76.3 million, the amount of the proposed Bank loan, is foreignexchange. These estimates include physical contingencies varying from 10

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percent to 15 percent for civil works and from 0 percent to 15 percent forequipment procurement, and price escalation in both foreign and local costcomponents (denominated in USs) at 3.5 percent for 1984; 8 percent for 1985; 9percent for 1986, 1987 and 1988 and 7.5 percent for 1989.

Project Execution and Administration

76. The proposed project is a multisectoral program, which involves theparticipation of several public sector agencies. In order to deal effectivelywith such a complex task, the Government submitted at negotiations a specificinstitutional framework created for this purpose. The Industrial Port ProgramCommission, which includes high-level representatives of SCT, SARH, SEDUE,FONDEPORT, CNCP and SPP, is the body charged with overall policy making andcoordination for the Industrial Port Program under the lead responsibility ofSCT. Project coordination will be entrusted to a monitoring and coordinationgroup established within the Commission, which would include participants fromeach of the directorates within SCT, SARB and SEDUE involved in the project, aswell as CNCP, SPP and BANPESCA. A Technical Secretariat within CNCP, whichwill report to this group, will be responsible for day to day project monitor-ing, including the preparation of reports regarding project execution andachievement of the project objectives. A project coordinator will be appointedin Lazaro Cardenas to oversee supervision of all project works.

77. SCT would be responsible for execution of the road, rail and maritimeaccess components of the project and for the Lazaro Cardenas road systemstudy. SARH would be responsible for the flood protection measures and SEDUEfor the execution of studies and related civil works and equipment acquisitionfor the solid waste disposal system. FONDEPORT would be responsible for thesewerage component at the industrial park and the small- and mediumr-scaleindustrial park while ESP would be responsible for cargo handling equipment andtug procurement.

78. BANPESCA would be the Borrower for the proposed project aud wouldtransfer project funds between the Bank and the executing agencies as acondition of loan effectiveness, and, to that effect, would enter into agree-ments, under terms and conditions satisfactory to the Bank, with ESP, andFONDEPORT, for onr-lending of project funds (Section 3.01 of the Loan Agree-ment). The agreements with these two entities would be on the same financialterms and conditions as those between the Bank and BANPESCA. The foreignexchange risk will be borne by the two entities, ESP and FONDEPORT.

Financial Framework

79. The three principal participants in the project are the FederalGovernment, through its various sectoral agencies (SCT, SARH, SEDUE) and ESPand FONDEPORT, acting through its trustee, BANPESCA (paras.44-45) under SCTjurisdiction.

Port Operations (ESP)

80. ESP has been handling cargo and ship traffic in the existing portfacilities since about 1975, and is constituted as a commercial .enterprise.

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While it has consistently shown some sort of profit, its expenditures do notreflect the real costs of equipment used since its equipment is depreciated ona historic cost basis. Nor do ESP's expenses include any infrastructure costsat all, since the channels, navigation aids, quays and sheds are used for theport operation by ESP without a concessionary fee. Some of the costs for theseitems are, however, recovered directly by the Government from the port usersthrough vessel and mooring dues and wharfage.

81. In accordance with the Government's stated decision to rationalizeport pricing (para. 47), it is the Government's intention that ESP port tariffscountrywide be adjusted as appropriate to reflect costs, and that they beincreased periodically as required to maintain these levels in real terms. Acost and tariff study will be undertaken for the Lazaro Cardenas ESP, under theproject, in order to determine required adjustments (Section 2.07 of the ESPProject Agreement). Pending completion of this study in September 1985, in1984 the Government has made frequent adjustments to maintain the tariff levelsin real terms. Other actions being taken by the Government to strengthen theLazaro Cardenas ESP are reflected in the ESP action plan confirmed at negotia-tions, which includes: (i) transfer to ESP of all Government-owned equipmentbeing used for the operation of the public wharves in Lazaro Cardenas, as anequity contribution from the Government, by December 31, 1984 (Section 4.06 ofthe Guarantee Agreement); (ii) by June 30, 1985, the Guarantor will allow ESPto collect storage fees and to retain an amount sufficient to cover the costsof operating and maintaining storage facilities on the public wharves (Section4.09 of the Guarantee Agreement); (iii) ESP would produce total revenues to atleast cover its working costs for the fiscal years 1985 and 1986 and by 1987,generate revenues adequate to meet not less than the sum of its total operatingexpenses, and the amount by which debt service requirements exceed theprovision for depreciation (Section 4.03 of the ESP Project Agreement); and,(iv) the Government will take appropriate measures to permit ESP to meet itsfinancial targets (Section 4.06 of the Guarantee Agreement).

Industrial Park Development (FONDEPORT)

82. FONDEPORT has commissioned studies on administration, commercializa-tion and promotion of its industrial parks which will provide, inter alia, thebasis for decisions regarding the type of administrative structure which shouldbe set up to operate the Lazaro Cardenas industrial park. These studies willalso provide an analysis of market demand for the industrial park land whichwill serve for financial and investment planning purposes and for setting ofrents and service charges. While FONDEPORT's financial targets for the LazaroCardenas industrial park cannot be set until the studies are completed,FONDEPORT has stated its financial objectives with regard to the LazaroCardenas industrial perk. The minimum financial objectives will be to setleases and service charges so that internally generated funds cover areasonable proportion of the average annual capital expenditure incurred orexpected to be incurred in Lazaro Cardenas over a five-year period. It is

- 22 -

expected that FONDEFORT will generate sufficient funds for no less than a 20percent average participation in its five-year investment plan. Although thelands for industrial development cost FONDEPORT nothing, it is intended throughthis project that, in the future, FONDEPORT will set its rents so as to achievea reasonable financial return. The leases would reflect their market price,allowing for recovery of investments made in infrastructure, the specialbenefits to be derived from waterfront location or proximity to the port andthe share of the flood control costs which can be attributed to the industrialpark.

83. In keeping with these goals, agreement was reached at negotiations onthe financial objectives of FONDEPORT as follows: (i) that the administration,commercialization and promotion studies already initiated by FONDEPORT, becompleted as a condition of loan effectiveness (Section 6.01 of the Loan Agree-ment); (ii) that FONDEPORT present to the Bank, by December 15, 1984, an actionplan for the implementation of the recommendations of such study and to carryout the agreed Action Plan (Section 2.01(c) of the FONDEPORT Project Agree-ment); and (iii) that the costs of dredging to provide maritime access toindustrial waterfront to industries located in the FONDEPORT industrial park berecovered from the beneficiaries of such works (Section 3.05 of the GuaranteeAgreement).

Port Infrastructure - The Federal Government (SCT)

84. The Federal Government, principally through SCT, has invested someMex$ 16.4 billion (at 1383 prices about US$131 million) in dredging works,construction of the public wharfs, buildings and infrastructure at LazaroCardenas. These investments are recovered, only in part, by port dues andmooring fees levied on vessels, wharfage levied on cargo (also through the shipoperators), excess storage charges and concession fees from industries operat-ing their own wharfs. These dues and fees, which are collected through theSuperintendencia (a field agent of DGOPD), and the Customs authorities in thecase of storage, are uniform among all Mexican ports. Revenues go directly tothe Ministry of Finance and are in no way related to funds for port invest-ments, which come from SCT's annual investment budget.

85. At negotiations, agreement was reached with the Government on aseries of actions to improve the financial picture of the Lazaro Cardenasindustrial port and implement adequate cost recovery arrangements. Thus,(i) a countrywide study of cost-related port dues would be carried out bySeptember 15, 1985. Subsequently, based on the results of this study, theGovernment would present to the Bank, by January 15, 1986, an action plan forthe progressive achievement of such port dues at Lazaro Cardenas, (Section 4.05of the Guarantee Agreement); (ii) the Government will recover from FONDEPORTthat part of the flood control component proportionate to the benefit receivedby FONDEPORT from the works (Section 3.02(c) of the Guarantee Agreement); and(iii) the Superintendencia will keep proforma accounts showing periodic resultswith regard to costs and revenues in Lazaro Cardenas (Section 4.02 of theGuarantee Agreement).

- 23 -

Procurement

86. Civil works and equipment to be financed under the proposed projectwould be subject to ICB in accordance with Bank Guidelines with the exceptionof (a) the civil works for the FONDEPORT sewerage system, to be procured underlocal competitive bidding procedures similar to those used by SCT and which areacceptable to the Bank; (b) the propulsion and navigational components for thetug, which would be procured through limited international tender; and (c)training-related equipment which would be procured under local comparativeshopping procedures. (Schedule 2 to the Guarantee Agreement). Prequalificationof contractors would be required for all works. In evaluating bids for equip-ment procured through ICB, Mexican bidders would be allowed a margin of prefer-ence equivalent to 15 percent of the CIF cost of competing imports, or therelevant prevailing custom duty, whichever is lower. All contracts for civilworks and procurement of goods with a value of more than US$200,000 would besubject to prior review and approval by the Bark. Contracts under US$200,000would be reviewed after the award. In carrying out the project's technicalcooperation components the Government would employ, when appropriate, consul-tants in accordance with Bank Guidelines, with qualifications, experience andterms and conditions in accordance with Bank Guidelines, satisfactory to theBank (Section 3.03 of the Guarantee Agreement).

87. Procurement arrangements for items to be financed under the proposedloan are summarized below:

-US:$ millionsProcurement Method

Project Element ICB LCB Other N.A. Total Cost

Civil Works 86.4 3.8 - - 90.2(57.0) (1.9) (58.9)

Equipment and rails 13.8 1.9 2.2 - 17.9(10.6) (2.2) (12.8)

Consultant Services,Training and Studies - - - 4.4 4.4

(4.4) (4.4)

Total 100.2 5.7 2.2 4.4 112.5(67.6) (1.G ) (2.2) (4.4) (76.1)

Note: Figures in parentheses are the respective amounts financed by theBank loan, exclusive of the front end fee, and include price andphysical contingencies.

Disbursements

88. Bank funds are expected to be disbursed over a sir-year period.Disbursements of the loan would be made against: 66 percent of total expendi-tures of civil works contracts; 100 percent of cost, Insurance and freight for

- 24 -

equipment and rails procured from foreign sources and 100 percent of ex-factorycost for equipment and rails procured from domestic sources; and 100 percent ofthe costs of professional services for technical assistance, and training otherthan recurrent operational training (Schedule 1 of the Loan Agreement).

Retroactive Financing

89. In order to allow for disbursements against the FONDEPORT sewerage workswhich were initiated after appraisal, it was agreed at negotiations that retro-active financiag of up to US$1.5 million would be provided under the project(Schedule 1, 4 (a) of the Loan Agreement).

Accounts and Auditing

90. To help speed up loan disbursements, and as a condition of loaneffectiveness, a Special Account would be set up in the Banco de Mexico, whichwould be operated in accordance with terms and conditions satisfactory to theBank (Section 2.02 (b) and Schedule 3 of the Loan Agreement). Satisfactoryauditing arrangements for the Special Account were agreed during negotiations,including an assurance that the Banco de Mexico would cooperate, as needed, tosatisfy the auditing requirements of the Special Account (Section 4.02 of theLoan Agreement and Section 4.04 of the Guarantee Agreement). Appropriatearrangements for auditing were also agreed for the project accounts maintainedby SCT (Section 4.03 of the Guarantee Agreement) as well as for the auditing byindependent auditors of the accounts and financial statements of ESP andFONDEPORT (Sections 4.02 of the Loan Agreement and 4.02 of the ESP andFONDEPORT Project Agreements).

Project monitoring and semi-annual consultations

91. The Government would prepare periodic reports providing informationon progress in the execution of the project, listing the status of each cor-tract related to Bank-financed components of the project; the status ofdisbursement requests and the schedule of estimated withdrawals of the loanproceeds (Section 3.10 of the Guarantee Agreement). Furthermore, in order tomonitor progress on the accomplishment of the objectives of the overall pro-ject, the Government and the Bank would hold semi-annual meetings (Section 3.07of the Guarantee Agreement). In addition to the ESP, FONDEPORT and Governmentaccounts, CNCP would maintain annual consolidated accounts for all entitiesoperating in the industrial port.

Project Justification

92. The project composition is designed to minimize transport costs(road, rail, cargo handling equipment, maritime access and tug); to protectagainst flooding; to address problems of environmental degradation, and to meetdemand for industrial land for small and medium scale industries. In theassessment of each project component's economic justification, alternativeproject designs were analyzed in order to ensure that the selected projectcomponent was appropriate in terms of scope and timing. The overall economicrate of return for the project is 23 percent.

93. Generally, the direct effect of these transport-related investmentswould be to enable the port to handle at reduced cost the increased and diver-sified traffic volumes expected at the TUM and specialized terminals at the

- 25 -

industrial park which will otherwise have to be transported at higher economiccosts. The road access component has an economic rate of return of 20 percentand the rail access of 19 percent. The investments to provide maritime access(dredging) to industrial users would result in cost savings from avoidance ofroad transport and double handling and reduction of ship waiting times. Thetwo evaluated subprojects have economic rates of return of 18 and 22 percent.

94. The general cargo and container handling equipment to serve forecasttraffic at the TTJM would contribute to faster turnaround resulting in decreasedship waiting and service times. The rate of return for these components are 18and 23 percent, respectively. The benefits from the tug include savings inship moving and unmoving time due to increased tug traction capacity andincreased levels of port safety.

95. The environmental components address problems of environmentaldegradation caused by municipal and industrial wastes. The FONDEPORTindustrial sewer will serve the requirements of projected industrial demand inthe short to medium term. It also represents the first phase of an overallmaster plan at the industrial park to provide for appropriate disposal of wasteas the industrial park develops. The solid waste disposal system is underpreparation through a study which will include feasibility analyses anddesigns, to be submitted to the Bank for review by December 15, 1984. It wasagreed at negotiations that the Guarantor, through SEDUE, and the municipalityof Lazaro Cardenas would enter into effective agreements for construction,operation and cost recovery for the solid waste component (Section 3.02(b) ofthe Guarantee Agreement). Submission of this agreement would be a condition ofdisbursement of this component (Schedule 1, para. 4(d) of the Loan Agreement).

96. Benefits from the flood protection component will result in avoidanceof damage to industrial and port infrastructure and prevention of productionlosses. Agreement was reached at negotiations that the Government wouldregulate upstream reservoirs so as to limit the level of flow in the delta ofthe river (Section 3.13 of the Guarantee Agreement). Confirmation of theeconomic viability of this component through verification of the updated econo-mic analysis of the flood conditions would be a condition of disbursement forthis component (Schedule 1, para. 4(c) of the Loan Agreement). The economicrate of return for this component is 40 percent.

97. The economic rate of return for the small and medium scale industrialpark is 23 percent.

98. The timing of the proposed project is linked to the recent favorableevolution of institutional reorganization and consolidation of transportresponsibilities under one single controlling authority, and the concreteactions already taken by the Government in transport sector pricing and relatedsectors, such as fuel pricing, during 1983 and 1984. The Bank's involvement inthe Industrial Ports Program through the ongoing Port Preparation Loan(1964-ME) and this project has assisted the Government in defining investmentpriorities in the port subsector and improving the overall quality of the portdevelopment program. Finally, the implementation of the targets of the ActionPlans (paras. 81, 83 and 85) would ensure the strengthening of finances at theindustrial port. These developments would not only have an impact in Lazaro

- 26 -

Cardenas but would serve as a model for all the industrial port operationsunder the Program.

Project risks

99. Since it is the first project under the newly established Industrial?orts Program, its execution and operation will require coordination amongvarious different sectoral agencies. The decision to appoint SCT as leadagency and the special institutional organization created for this purposeshould minimize this risk (para. 76). Nevertheless, a greater-thanr-averageBank supervision effort will be required over the life of the project.

100. The main risks which could be associated with this project would beshortfalls in the realization of forecast traffic and delays in completion ofongoing industrial plant construction or projected expansion. The projectsub-components are not directly related to the expected expansions, such asthat of the SICARTSA steel plant and the project viability would not becompromised if such expansion were delayed or cancelled. The componentsrelated primarily to port traffic growth levels (road and rail access and cargohandling equipment) are only moderately sensitive to changes in those levelsbut only major shortfalls in traffic growth will significantly affect thesecomponents' viabilities. Since the traffic forecasts are considered conserva-tive, the risk of such major shortfalls occurring is not great. Since part ofLazaro Cardenas' container traffic is expected to be diverted from Manzanillo(para. 51), a sensitivity test was made to determine the impact on the conr-tainer handling equipment component if this traffic did not materialize. If notraffic were diverted from Manzanillo, the equipment component would still beviable. These components are only moderately sentitive to increases in costs.

101. The dredging to create industrial waterfronts is dependent upon thesuccessful completion and operation of each industry. Requirement for suchwaterfront is dependent upon the type and timing of industrial development atthe port which is in turn linked to the Mexican economic recovery. The risksof premature investment in the dredging to create waterfronts is being furtherminimized by the requirement that each company directly pay for the costs ofsuch dredging. Because of the uncertainties with regard to the demand forindustrial waterfronts, the dredging work to be financed under this projectwould be executed in tranches over a five-year period. The economic analysiswas made for all three stages but initially only stage one is included in thefirst tranche of works being financed by the Bank. Each subsequent stage ofthe work would be agreed between the Borrower and the Bank, on the basis oftechnical, economic and financial feasibility studies conducted in accordancewith terms of reference which have been agreed with the Borrower and which wereconfirmed during negotiations. A condition of disbursement on each subprojectof the dredging program would be satisfactory evidence of the technical,financial and economic feasibility of each subproject (Schedule 1, 4(b) of theLoan Agreement). Each subproject in the dredging program would have a minimumeconomic rate of return of 12 percent and be subject to satisfactory costrecovery arrangements (Section 3.05 of the Guarantee Agreement).

- 27 -

PART V - LEGAL INSTRUMENTS AND AUTHORITY

102. The draft Loan Agreement between the Bank and BANPESCA, the draftGuarantee Agreement between United Mexican States and the Bank, the ProjectAgreements with ESP and BANPESCA, acting as trustee for FONDEPORT and thereport of the Committee provided for in Article III, Section 4 (iii) of theArticles of Agreement are being distributed to the Executive Directorsseparately. Special conditions of effectiveness and other covenants of theproject are listed in Section III of Annex III.

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

PART VI - RECOMMENDATIONS

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

A. W. ClausenPresident

AttachmentsMay 31, 1984

AMN ITABLE 34 Page 1 of 5

-SOCIAL I. .CATO DAT S-MD lREFERE GWIJS (lWlEhE AVERAS I

mmS (MM ECENT ESTIATXE) fb

EAT. ARMECAL & CARLLS ER

A DR SQAND. ml)TOTAL 1972.s 1972.5 u972.sAGROLTURAL IWlJO 976.4 978.3

GM e cOm CM) 370.0 740.0 2250.0 2tl6.2 Z43.6

CKILOEAAS OF COAL E4IIALEIr) 786.0 1U45.0 1686.0 1407.FD 130.a

PoIgATI 0 AM WITL SmtusP=pOPULATnIW.tD-TEAR CnImxSmUs) 37073.0 51176.0 71215.0UBJ% PUPULATIO (Z OF TrAL) 50.8 59.0 67.3 65.9 47.8

POPULATIO PIWJEcriousPOPULATION XS YEAR 2000 (HILL) 115.0STATUIUSAR POPULATIR (MIXLL) 215.0TEAR STATIOCART POP. REACaED 2105

POPULATION DEMSLTIPMR S94 *I. 18.8 25.9 35.2 35.6 82.0rA Sq. E. AGRI. LARD 37.1 52.- 70.9 93.2 157.2

POPLlATIOS ME ST.iXMuE (CZ)0-14 TIS 45.6 4o.5 44.7 40.1 31.9

153-04 I 51.0 50.0 51.6 553 00.965 A3tD ABOVE 3.4 3.5 3.4 4_1 7.2

POPULATIO CROM RATE (C)TOTLU 3.0 3.2 3.0 2.3 1.6115M 4.8 4.7 4.Z 3.7 3.4

CROUE lars RATE t (PM TuKZ) 45.4 43.4 36.0 31.5 Z5.0CUDE DEATi RATE (PEit THOS) 12.2 9.1 7.0 6.1 9.1ocs REPRODlCrI.O RArE 3.3 3.2 2.4 2.0 1.7

FA:ILT PLAIMIIA gSPTO . AUIAL (TOUS) .. 25.1 1145.0USERS a OF MAED 1ES) * - * 38.0

FOOD AN MUERTEIM OF FOOD PROD. PER CAPITA(1969-71-1LOO 97.0 100.0 19.0 113.0 100.4

PER CAPrIT SUPPLY OFCALORIES (C OF UXJEfEMT5) 117.0 11l.9 l12.0 ll.3 129.6PTU3S (GRAMS PER DAT) 69.0 65.0 74.0 67.9 92.3OF Ica AML AM PULSE 29.0 27.0 27.01c 34.1 34.6

CR1. (ACES t-) DEAO_ RATE 10.1 6.5 3.5 5.3 10.4

LIFE PElT. AT BR (YEARS) S7.0 61.3 65.6 64.6 07.ZIXPAFl MORT. (E CPER TOUS) 91.1 73.6 54.4 62.6 71.4

ACCESS TO SAF MR IPOF)OTAL 23.5 49.01d 5S.Old 64.SuRam 65.51Id 61.4/d 77.SRURAL .. Z1.o7 51.i7dT 44.3

ACCESS TO EXCRErk DISPOSAL(2 OF POPULATION)

TOTAL __ 37.01d 3S.Otd 54.6

11RM A. 60.01d 50.0d 69.8 ..

RMRAL 4. .07;- 13.07;T 29.8

POPULATILON PM PSTSICZAI 1830.U 1S10.0 1260.01e 1776.0 1094.8POP. PER XUlSISC PERSON 3650.0 1640.0 1420.0d 1012.2 762.5PMP. PER ROSPITAL -E

TOTAL 590.0 970.0 870.01e 477-0 334.0URBAN 5,0.01f 1170.0 1080.07 667.5 216.0RURAL _. 1370.0 1120.0oe IZ1.t.

AISSIOiS P31 HOSPITAZ BED -. .. .. 27. 20.0

AVERAGE SIZE OF dOUSEMOLDTOTAL 5.4 5.7UORB 5.7 5.7RURAL 5.2 5.S

&VEAGE aO. OF PERSOJS/ROOKTOTAL 2.9 2.5URBAN 2.b 2.2RURAL 3.4 3.2

ACCOSS T ELECT. (2 OF LELIM)SIOTAL .. 5a.9URBAN .- 80.7RURAL .. 27.8

- 29 -ANNEX I

T a L E 34 Page 2 of 5

wEXInO - SOCIAL INDIATeRS DATA SNEETSEXICO REYERECE G2PS (WEISTD AVERAGES) /a

-OST CeDSr RECtTfr ESTDRATE) fbJb RECEST mUDDLE INCOME MMIE rECC!

1960ft b w97o-q ESTfIATEb LAY. AMRICA S CARD EURerE

EDCAION

ADOS TEl) ESTeOLLMET RATIOSPqAARY±: T"TAL '0_0 106.0 120Q0 105_0 102_2

?ALE 82.') 106.0 123.0 106.3 L07.7FVALS: 77.n 102_0 116.0 103_6 97_9

SECOOSART: TOTAL 11.0 22.0 37_0 60_0 56.5-Ar e-14_0 26_0 39.0 38.6 63.4F!4ALF 9.0 17.0 35.0 61.2 48.9

VOCATI.flAL r: OF SECOTmARY) 21.6 26.7 10.4 34.0 22.4

P7PrI-TfACE-R RATIOPSPAEYT 46.0 46.0 39.0 30.7 24.7SECOVDARW 13.0 IG.O 17.0 16.7 22.1

ADELT LITERACY RATE (%) 65._ 74_2 82.7 79.5 69.7

wnitmrrzopPASSRSGER CARSITHOUSA!D PDP 12.9 25.1 46.11c 45.6 52.9RADIO RECEIVERS

1THOCSA5D POP 89.0 273.7 295.4 228.2 165.5

TV RECEtEVRSITHOUSA.D POP 17.5 58.5 108.1 1083 124.2SE S?APER ( DAr t tEAIISTERESrT) CIRCULATIOSPER TqOCSAID PCPLLATEOS 73.3 - 6.54/ 64.1 96.3

CIS%TA i.CcAL ATTEsDAsCEICAPITh 9.8 4.9 4.4 2.9 2.9

LAWR FORCETOTAL LAROR FORCE (TIOCS) It91-n 14722.0 20819.0 _

-,L2ALE (cERCEaS) 15.2 17._ 19.8 Z4.8 34.5%MRICLLTLR E (PERC'ST ) 55.1 5.Z 35.6 31.3 40.7VSDUSTRY (PERCEST) 19.5 22.9 25.8 23.9 23.4

PARTICI'AT;O?1 RATE (PERCVIIT)TOTAL 30.2 28.8 29.2 31.3 62.0IALE 51.1 47.4 46.7 49. 8 55.2

FLDALE 9.2 10.1 11.6 14.8 29.1

EcODG4IC DEPENDESCY RATIO 1.6 1.7 1.6 1.4 0.9

I2CC!! DZSTRTYWN!'ERCEST OF PRIVATE ISCOME(ECEIVED BY

RICHEST 51 OF HOUSEHOLDS .RICHEST 2n OF HOUSEHOLDS 61.1/h 60.7 57.7tcLOVIEST 2(1 OF HOOSEHOLDS 3.4/h 3.3 2.9W -'

LOWEST 40: OF' HOUSErHODS 9s_78h 9.9 9_97_

POVER TAReT 0U0sESTIXATED ABSOLUTE POVERTY INCOMELFVEL CtSS PMR CAPITA)

RBIAl .. .. .. Z89.8 ..

RURAL . - 185184.5

ESTLWATEO REIATIVE POVERTY INCcOMELEVEL tUSS PeR CAPITA)

11HAN 4n 7L0 519.8RURAL - 471.0 372.1 409.0

ESTIMATEO POP. BELOw ASOLLuTEPOVERTY INCOME LEVEL (2)

CRBA! 6 __RURAL _

SOT AVAILABLE'OT APPLICABLE

S0 T E S

Ia The group averages for each Indtcator are populatton-welghted arlthletlc seans. Coverage of countries a_og theIndcators depends on avatlabillity of data and Is not islform.

!b Unless oterwise noted -Data for 1960- refer to any year berwen le59 and 1961: -Data for 1970- between 1969 and1971: and data for n:ost Recent Estinate between 1979 and 1981.

/c 1977: /d Served from w%ter supply and sewerage; /e 1974; If 1962; 4 1976; lb 1963.

lay 1983

- 30 - ANNEX IPage 3-of 5

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ii rt n. st-oos a- ) tO -t sty noes of te. eohe.ti asotry ea (2) R ttRRy n.e sith -. %Mt high. eteeg bat ebe the osoCIy sOe of the

toot 7 --- 11efo to ldtatt U--, the nosgoR of ofiRto the attrtst d.OS. th "la". hltt ofdaa s O- oottooo_ f "". tstt 'hUertod-fOtia aooooe of. Os. blete toeeeo.iio s s or oy Ott rep t S. aelso- of t -iotnte .- 0 toeT se the atop_ A.R

are - .RIU - - R - RRIS -i0 (thoot- sho.i -ootata itoidod 1 h1RCor, ofR1 otortta

RRs lvw. ~ ~ ~ ot. 5tai ittgSyter orC% tis o a9tt hsltl od

fil,URURCRAw U.-. o or tooit sot- eos attrto shot otto-.- etotlatia t r.

b.tc Ro foo osa sooltts otla

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itotooor os..obo -. Is e tttot oeotlat hoa2o- otoothEECUI

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- 31 -

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1970 163 3970 3~~ ~ ~~~~~~93 1gn070-3iq 1920 19390 193

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EdT A1M NOT 3SICES

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-3i Ot ECIiD E9 6 OF UKIC at 1 LL.P1IC DEBT SE0CES ClC 22.20 2.M45 3.33; 29.16 32.RS t MCE11

AEU A IE F iC itEtt OFPU N CUITE S DIIER DF. S 4U LU

a. IT AEREST tS: FUU PRWV 'S 7.40 9.00 11.48 33f91 12.56 0n85Pa mm ti ."1.D. tMet .*.

b. NSE mNImUiTiF oi Lnjnu - 7.90 *.40 7.00 6.00tYEDIISt TOIII,1z

1r- EiE -

a. IIIR B.G. ANtD *. tlS 7 DF IS 9211 s. .10 5.5 5.20PUBIC LLD ANG) D.

b. IIIRD OM SERltlES ttS 7 DF 7.11i 7.29 3.24 5.55 lt,5PA1LIC OMI SERVICE

a/ AUL FIRES ilEEt TD EIBMI 40 UN TOMt FIIUC IEII DtL7 (M.... iC7 SttU E SWitELT DUT [NUMB ttt TttE TDTtL-SDNIICB OK1 ilF REIfII. DRS. ELIZ STAFF BSTINtIESMy Ist 194

-33 - ANNEX II

Page 1 of 2

THE STATUS OF BANK GROUP OPERATIONS IN MEXICO1 /

A. Statement of Bank Loans (as of March 31, 1984)

Loan No. Year Borrower Purpose Amount Less Undis-Cancellations bursed

53 Loans Fully Disbursed 2,887.1

1111-5 1975 NAFINSA Irrigation 50-0 6.61186 1975 BANOBRAS Water Supply 40.0 3.11553-5 1978 NAFINSA Agriculture 56.0 7.11643-5 1979 NAFINSA Small-scale Agri. 60.0 14.71671 1979 BANOBRAS Highways 120.0 24.51686-5 1979 FERTIMEX Industry 80.0 1.7

and NAFINSA1706-5 1979 NAFINSA Irrigation 92.0 58.21712-5 1980 NAFINSA Industry 175.0 47.41820-5 1980 NAFINSA Small and Medium

Scale Mining 40.0 30.01858-5 1980 NAFINSA Irrigation 160.0 151.31881 1981 NAFINSA Small and Medium 100.0 10.9

Scale Industry1891-5 1981 NAFINSA Agricultural Credit 325.0 92.51908 1981 NAFINSA Irrigation 23.0 10.11913 1981 BANOBRAS Water Supply 125.0 92.41929 1981 BANOBRAS Railways 150.0 71.91945 1981 NAFINSA Rainfed Agriculture 280.0 176.21964 1981 BANPESCA Port Development 14.0 11.61990 1981 BANOBRAS Urban Development II 164.0 126.62042 1982 NAFINSA Technical Training 90.0 26.72043 1982 NAFINSA Integrated Rural

Development 175.0 150.92100 1982 NAFINSA Irrigation Rehab II 180.0 177.32142 1982 NAFINSA Capital Goods

Industry 152.3 127.52154 1982 NAFINSA Pollution Control 60.0 56.72191 1983 NAFINSA San Fernando Agri. 138.4 133.72194 1983 BANOBRAS Urban Engineering 9.2 7.62262 1983 NAFINSA Agri. Marketing 115.0 104.02281 1983 BANOBRAS Third Water Supply 100.3 100.02325 1983 NAFINSA Third Small Medium

Industry 175.0 157.12331 1983 BANCOMEXT Export Development 350.0 349.1

TOTAL 6,486.3Of which has been repaid to the Bank 1,150.4Total now outstanding 5,335.9Amount sold 92.3of which has been repaid 92.3 0.0Total now held by Bank2/ 5,335.9Total undisbursed 2,327.4

1/ The status of the projects listed in Part A is described in a separate reporton all Bank/IDA financed projects in execution, which is updated twice yearly andcirculated to the Executive Directors on April 30, and October 31.2/ Prior to exchange adjustments

- 34 -ANNEX IIPage 2 of 2

B. Statement of IFC INVESTMENTS (as of March 31, 1984)

Fiscal US$ MillionYear Obligor Type of Business Loan Equity Total1958/59 Industrias Ferfect

Circle, S.A.1/ Industrial Equipment 0.8 - 0.81958 Bristol de Mexico S.A.1/ A.C. Engine Overhaul 0.5 - 0.51961 Acero Solar, S.A.f/ Twist Drills 0.3 - 0.31962/651 Compania Fundidoria Fierro y

66/68 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.l/ Sodium Sulphate 0.7 - 0.71964/66 Industria del Hierro,

S.A.1/ I/ Construction Equipment - 2.0 2.01970 Minera7de Norte, S.A.11 Iron Ore Mining 1.5 - 1.51971 Celanese Mexicana, S.A.1 / Textiles 12.0 - 12.01972 Promotora de Papel Perio-

dico, S.A. de C.V. 1 / Pulp and Paper 2/ 2/1973/79 Cemento Veracruz, S.A. Cement 15.9 - 15.91974/81 Cancun Aristos Hotel Tourism 1.0 0.3 1.31975/78 Mexinox, S.A. Steel 12.0 3.2 15.21978/81/83 Papeles Ponderosa, S.A. Pulp and Paper 10.7 5.0 15.7

1978 Tereftalatos Mexicanos,S.A. Petrochemicals 19.0 - 1',.0

1979/83 Cementos Tolteca, S.A.3 / Cement 168.0 8.0 176.01979/81 Hotel Camino Real

Ixtapa, S.A. Tourism - 3.1 3.11979 Conductores Monterrey, Electrical Wire

S.A.3 / and Cable 18.0 - 18.01980 Industrias Resistol, S.A.3/Particleboard 25.0 - 25.01980 Vidrio Plan de

Mexico, S.A.3 / Flat Glass 114.9 - 114.91980 Minera Real de Angeles,

S.A. de C.V.3 / Mining 110.0 - 110.01981 Celulosicos Centauro,

S.A.3 / Pulp and Paper 59.5 - 59.51981 Corporacion Agrioindus-

trial, S.A. Agri-Business 11.3 3.0 14.31983 Capital Goods Facility Capital Goods

4/ Financing 100.0 - 100.0

Total Gross Commitments 684.3 46.1 730.4Less Cancellations, Terminations, Repayment 520.6 22.2 542.8

Total Commitments Now Held by IFC 163.i 23.9 187.6

Total Undisbursed (including participants) 135.8 6.9 142.7

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

2/ US$25,000.

I/ Gross Commitment including amounts sold to participants.A US$4.4 million operation with METALSA for auto chassis manufacture ispending signature.

- 35 -ANNEX III

MEXICOLAZARO CARDENAS INDUSTRIAL PORT PROJECT

SUPPLEMENTARY PROJECT DATA SHEET

Section I - Timetable of Key Events

(a) Time taken to prepare project: About 24 months(b) Project prepared by CNCP/SCT(c) First Bank mission to review project: March 1982{d) Departure of appraisal mission: October 1983(e) Negotiations completed: May 1984(f) Planned date of effectiveness: September 1984

Section II - Special Bank Implementation Action

None

Section III - Special Conditions

(a) the Government to complete a study by September 15, 1985 on cost-related port duesand, based on the results of the study, submit to the Bank an action plan by January 15,1986 for progressive achievement of the recommended levels of port dues at LazaroCardenas Industrial Port (para. 85);

(b) Provision of satisfactory evidence of technical, financial and economic feasibilityand adequate cost recovery arrangements for each dredging sub-project would be acondition of loan disbursement for each such sub-project (para. 101);

(c) Government to complete studies and engineering designs for solid waste managementby December 15, 1984. Submission of signed and effective agreements with the munici-pality of Lazaro Cardenas, for construction, operation and cost recovery of the systemwould be a condition of disbursement under this component (para. 95); Government to .akemeasures to prevent contamination in port area (para. 57);

(d) the Government to transfer to ESP equipment needed for its operation; ESP to pre-pare a cost and tariff study by September 15, 1985, and reach revenue levels sufficientto cover working costs in 1985 and 1986 and operating expenses and debt service require-ments by 1987. Government to allow ESP to collect and retain storage fees and theGovernment to take measures to allow ESP to meet its financial objectives (para. 81);

(e) Government to exchange views with Bank on overall project implementation once everysix months during project execution (para. 91);

(f) BANPESCA to set up a Special Account in accordance with agreed procedures, as acondition of loan effectiveness, and to have the Special Account audited by independentauditors; (para. 90);

(g) FONDEPORT to complete administration, commercialization and promotion studies as acondition of loan effectiveness (para. 83). Based on these studies, present to the Bankby December 15, 1984, an action plan with specific administrative, financial and opera-tional proposals for a local FONDEPORT entity, which would provide for cost recovery ofindustrial park investments; and flood protection works benefitting FONDEPORT, to berecovered directly from the beneficiaries (para. 85). Verification of the economicanalysis by updated mathematical model would be a condition of disbursements for theflood control component (para. 96);

(h) BANPESCA to enter into contractual arrangements with ESP, FONDEPORT and Governmentfor transfer of loan funds as a condition of loan effectiveness (para. 78);

(i) The Government to regulate upstream reservoirs so as to limit the level of flow inthe delta of the river (para. 96).

(j) Financial statements of ESP and FONDEPORT to be audited by independent auditors,including respective project accounts (para. 90).

IC~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

II ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~P

31S 9'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~C

A ~~*o..-a

~~~~~~~~~~ jiJji~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~C

IBRD 17797W 00e MARCH 19tJ

M E X I C O

TRANSPORTATION NETWORKAND INDUSTRIAL PORT LOCATIONS

IX~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~3

-,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

-, W !icustna! port

N . Xp~~~~~~~~~~~~~~~Mir comc wf

: b0 ?rincipal cities or to

i > :-. -- - ~~~~~~~~~~~~~~- -- Dide hog -o.Seetd "ugwin,

Railroads4 ~~~~~~~~~~~~~~~~~~~~~~~Rivers

A, Pri-cipal apIvrs

Mot-rt - tati --- bIondes

V.tonana_1 j.4 .

c-

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/ ,.OPaC HONDURAS

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