Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 3756b-ME

STAFF APPRAISAL REPORT

MEXICO

CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

April 15, 1982

Projects DepartmentLatin America and the Caribbean Regional Office

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

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CURRENCY EQUIVALENTS

Currency Unit = Peso (Mex$)

The Mexican peso is adjusted on a floating basis. The Central Bankwithdrew from the exchange market on February 18, 1982. Immediately prior tothat date, the exchange rate was 26.9 pesos per US dollar. In recent weeks,the peso has traded around 45 pesos per dollar.

GLOSSARY OF ABBREVIATIONS

ACF Index of Average Cost of Funds to Multipurpose BankstBNCE Banco Nacional de Comercio ExteriorCANACINTRA Camara Nacional de la Industria de TransformacionCEDIs Indirect tax rebate certificates provided to exportersCENAPRO Centro Nacional de Productividad (National Productivity Council)CFE Comision Federal de Electricidad (National Electricity Comission)COCOFIN Comite Coordinador y de Evaluacion Financiera del Programa de Desarrollo

a la Industria de Bienes de Capital (Coordinating Committee of theProposed Program)

CONACYT Consejo Nacional de Ciencia y TecnologiaCONALEP Colegio Nacional de Educacion Profesional y TecnicaCONCAMIN Confederacion de Camaras IndustrialesFIDEIN Fideicomiso de Conjuntos, Parques, Ciudades Industriales y

Centros ComercialesFISOMEX Fomento Industrial SOMEXFOGAIN Fondo de Garantia y Fomento a la Industria Mediana y PequenaFOMEX Fondo para el Fomento de las Exportaciones de Productos

ManufacturadosFOMIN Fondo Nacional de Fomento IndustrialFONEI Fondo de Equipamiento IndustrialFONEP Fondo Nacional de Estudios de PreinversionGDP Gross Domestic ProductIMIT Instituto Mexicano de Investigaciones TecnologicasINFOTEC Servicio de Informacion TecnologicaNAFINSA Nacional Financiera, S.A.NIDP National Industrial Development PlanPAI Programa de Apoyo Integral a la Industria Mediana y PequenaPEMEX Petroleos Mexicanos'Program' Capital Goods Industries Development Program which would be

supported by the proposed projectSECOM Secretaria de Comercio (Ministry of Commerce)SEPAFIN Secretaria de Patrimonio Nacional y Fomento Industrial

(Ministry of National Patrimony and Industrial Development)SHCP Secretaria de Hacienda y Credito Publico (Ministry of Finance and

Public Credit)SMI Small and Medium Scale IndustrySOMEX Sociedad Mexicada de Credito IndustrialSPP Secretaria de Programacion y Presupuesto (Ministry of Programming

and Budgeting)STPS. Secretaria de Trabajo y Prevision Social (Ministry of Labor

and Social Security)

FOR OFFICIAL USE ONLY

MEXICO

CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

STAFF APPRAISAL REPORT

TABLE OF CONTENTS

Page No.

I. THE CAPITAL GOODS PRODUCING INDUSTRIES IN MEXICO

A. Background ..................................... 1

Manufacturing Sector Performance ............ .. 1........ Structure of Manufacturing ...... .............. . 2The Capital Goods Industries Sub-sector .................. 3Employment, Productivity, and Intersectoral Linkages ..... 4Development Potential .................................... 4Development Constraints and the Proposed Capital Goods

Industries Development Program ......................... 5

B. Policy Framework. ............. d.... 7

Policy Coordination ....... .................. 7Incentives System ....... .................. 7Protection Policy ....... .................. 9Public Sector Procurement ...... .......................... 11The Overall Balance of Protection and Incentives ......... 11

C. Technical. Structural and Other Factors Affecting SubsectoralDevelopment ........................ ...................... 12

Technology Absorption and Development ..................... 13Excessive Vertical Integration ............................ 15Information Dissemination System .......................... 16Technical Standards ....................................... 17.Engineering Software ...................................... 17Technical Manpower Training ............................... 18

II. THE FINANCIAL SYSTEM AND CAPITAL GOODS INDUSTRIES FINANCING

A. Institutional Structure ................ .. ................. 19

The Banking System ....... .............. ................... 19The Trust Funds ........... ................................. 20The Securities Market ................... .................. 21

B. Credit Availability and Interest Rate Policy .... .......... 21

C. Capital Goods Industries Financing ........................ 23

Availability of Financing ................................. 23Financing of Domestic Sales ............................... 23Complementary External Financing .......................... 24

D. Outlook .......................... ......................... 24

This document has a-restricted distribution and may be used by recipients only in the performance of|their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Page No.

TABLE OF CONTENTS (Continued)

III. MAJOR PARTICIPATING INSTITUTIONS

A. Nacional Financiera, S.A. (NAFINSA) ..................... 25

Project Promotion Department .............. .. ............ 26Credit Department ..................... .................. 28

B. Organizacion SOMEX ...................................... 29

Industry Wing (FISOMEX) ................ .. ............... 30Banking Wing (Banco Mexicano SOMEX) .......... ........... 31

C. Fondo de Equipamiento Industrial (FONEI) .... ............ 32

IV. THE PROJECT AND THE PROPOSED BANK LOAN

A. The Project ............................. 35

Financing of Production ................................ 36Sales Financing .............................. 37Complementary Measures .. 38

B. Project Financing and Implementation .39

Financing Limits, Onlending Terms and Conditions 40Project Cost, Financing Plan and Cofinancing . .40Project Implementation and Program Coordination 43Channeling Arrangements and Spreads to ImplementingAgencies .. 44

Operating Regulations and Project Execution Paper 44Annual Reviews ... 45

C. The Proposed Bank Loan .45

Loan Features .. 45

Disbursement of Bank Funds .. 46Procurement and Auditing. 47Approval Limits .. 47

D. Project Benefits and Risks .47

V. RECOMMENDATIONS .. 49

This report is based on the findings of an appraisal mission which visitedMexico in May/June 1981. The mission comprised Messrs. Challa, Baskind,Voljc, Lopez-Lopez (LCP), Gonzalez (UNIDO/Bank Cooperative Program) andFigueiredo (Consultant) and Ms. Vergara (Consultant).

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TABLE OF CONTENTS (Continued)

ANNEXES

Annex 1 Estimated Quarterly Schedule of Bank Loan DisbursementsAnnex 2 Capital Goods Product Categories as Defined Under the

National Industrial Development PlanAnnex 3 Summary of Principal Fiscal Incentives for Industrial Investment

Under NIDP, 1979Annex 4 Institutional Infrastructure for Technology Development by

IndustriesAnnex 5 Structure of the Mexican Technical Education and Training

System for IndustryAnnex 6 Operating Regulations of the Industrial Equipment Fund (FONEI)Annex 7 Supplementary Tables

T-1: Gross Domestic Product by Sector of Origin, 1965-80T-2: Gross Value of Production and Value Added in Capital Goods

Industries, 1970-1978T-3: Manufacturing Sector and Capital Goods Industries

Subsector, 1960-80T-4: Trends in and Structure of Gross Fixed Investment, 1965-1980T-5: Number of Enterprises in Capital Goods Industries Sub-SectorT-6: Employment in Manufacturing and Capital Goods Industries

Sub-SectorT-7: Value Added and Fixed Assets per Worker in Manufacturing

Industry (1975)T-8: Selected Capital Goods Exports and Imports, 1978-1980T-9: Financial Sector Summary AccountsT-10: Financial Agents' Share in Total Financial Intermediation

in 1980T-11: Resource Mobilization and Credit Availability IndicatorsT-12: Mexico's Largest BanksT-13: Liabilities of the Banking System by InstrumentT-14: Institutional Structure of the Banking SystemT-15: Total Financing by Sector and by Type of BankT-16: Banking System Credit by Sector, 1977-80T-17: Geographical Distribution of Credit and DepositsT-18: Selected Interest Rates in Mexico, USA, and London Interbank

RatesT-19: FOMEX's Financing for Capital Goods IndustriesT-20: Types and Characteristics of NAFINSA's Credit OperationsT-21: NAFINSA's Domestic Currency Interest Rates to Final

Borrowers in Effect Since May 1981T-22: NAFINSA - Total Approvals by SectorT-23: NAFINSA's Approvals of Credits to Capital Goods IndustriesT-24: NAFINSA - Credit Approvals to Capital Goods Industries by

Type of Activity, 1977-80T-25: Banco Mexicano SOMEX--Approvals to Capital Goods IndustriesT-26: Analysis of Characteristics of FONEI's Loan Approvals, 1978-80T-27: Pipeline of Subprojects Presented to FONEI for Financing as

of June 30, 1981

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TABLE OF CONTENTS (Continued)

ANNEXES

Annex 8 Supplementary Charts

C-1: Organization Structure of NAFINSAC-2: Organization Structure of NAFINSA's Credit DepartmentC-3: Organization Structure of Organizacion SOMEXC-4: Organization Structure of FISOMEX's Capital Goods

Industries DepartmentC-5: Organization Structure of Credit Sub-Directorate of

Banco Mexicano SOMEXC-6: Organization Structure of FONEI

Annex 9 Items to be Included in the Proposed InformationDissemination System and Training Program

Annex 10 Selected Documents and Data Available in the Project File

MAP

I. THE CAPITAL GOODS PRODUCING INDUSTRIES IN MEXICO

A. Background

Manufacturing Sector Performance

1.01 Manufacturing industry played a major role in the strong growthperformance of the Mexican economy in the last three decades, when per capitaGDP increased some 3% per annum despite population growth of over 3% perannum. Manufacturing grew at over 8% annually in this period; its share inGDP rose from 17% in 1950 to about 24% in 1980. 1/ Since 1970, the growthrates of overall economic activity, and industrial output in particular, haveexperienced relatively sharp fluctuations. The 7% annual GDP growth rates atthe beginning of the decade dropped to 2% in 1975-77, but rose to 7-8% in1978-1980. Increases in manufacturing production similarly averaged almost 8%in the first four years, dropped to 2% through 1977 but then recovered,reaching some 9% in 1978 and 1979. Partly because of infrastructural andinput constraints, the increment to industrial output in 1980 was only of theorder of 6% (Annex 7, T-1 to T-3).

1.02 The changes in industrial growth momentum experienced during the lastdecade reflected changes in the macro-economic environment as well as in thepolicies adopted by the different Mexican administrations. The difficultiesin the mid-years of the decade resulted from the demand management andexchange rate policies followed earlier. The more recent period of stronggrowth (1977-80) is associated with increasing earnings from oil exports, moreopen trade policies involving reduced reliance on import licensing, andcrawling peg exchange rate regime introduced by the administration which tookoffice at the end of 1976. The emergence of a substantial hydrocarbon resourcebase should help to moderate the balance of payments constraints on futuredevelopment policy.

1.03 Gross fixed capital formation has risen substantially to reach25% of the GDP in 1979 and 1980, compared to 20% in the early 1970's (Annex 7,T-4). Both public and private investment have increased reflecting recoveryfrom the relatively low investment levels earlier in the decade as well asmore optimistic expectations for the future growth of the Mexican economy andof certain key subsectors, particularly petroleum, petrochemicals and electricpower. In the first phase of this boom, a considerable proportion of increaseddemand for machinery and equipment was met from local production, throughbetter utilization of existing capacity. In 1979 and 1980, however, the shareof imports in total supply of equipment rose sharply, as a result of increasesof 40% and 28% respectively in the volume of those purchases, making capitalgoods the largest category of imports (para. 1.08).

1.04 While prospects for rapid economic and industrial growth are goodfor the medium and long-term, the macro-economic policies followed must beconducive to sustained expansion. During 1980 and 1981 overall demand continued

1/ Manufacturing industry under the Mexican definition excludes petroleumrefining activities.

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to rise in the face of resources constraints on output and inflation remainedin the 26-30% range. Although some measures were taken in the course of1981 to restore balance, including an accelerated crawling peg, a reversalof the trend towards liberalization of imports and an attempt to cut backon government expenditures, the fiscal deficit reached 14% of GDP. Moreover,the current account deficit was equal to 9% of GDP in 1981 reflecting bothan unprecedented surge in imports and an unexpected fall in petroleum exports.At the beginning of 1982, there were fears of a further setback in oil exportsand of an acceleration of inflation, resulting in pressures in foreign exchangemarkets. On February 18, 1982, the authorities announced their withdrawalfrom support of the peso which subsequently depreciated vis-a-vis the UScurrency to a current level of around Mex$45 per dollar. The Governmentalso announced a stabilization program including additional budget cuts,liberalization of certain basic imports (including capital goods), andprice controls. 1/

Structure of Manufacturing

1.05 The recent period of growth of manufacturing activity has witnesseda substantial deepening of the sector. At the beginning of the 1960s, thetraditional subsectors producing basic consumer goods (including food,clothing, shoes, pharmaceuticals and toiletries) accounted for almosttwo-thirds of industrial value added. By 1970 that share had dropped toabout 55%, while metal-working and mechanical engineering industries grewrapidly, from a base in 1960 comprised mainly of repair installations andsimple fabrication and assembly into more advanced manufactures, increasingtheir share from 13% in 1960 to 18% in 1970. This trend continued throughthe 1970s, as the share of the basic consumer goods industries in outputdropped further to about 50% and that of the engineering industries roseto 22% by 1979.

Table 1.1: STRUCTURE OF VALUE ADDED IN MANUFACTURING a/

(Percentages)

1960 1970 1979

Food processing, beverages, and tobacco 36.8 26.2 25.3Textiles, clothing, shoes and leather products 18.8 24.9 22.4Paper and wood products (publishing) 8.1 7.5 7.7Basic chemicals, petrochemicals and fertilizers 4.0 4.9 4.7Pharmaceuticals, toiletries, soaps and related 7.2 5.8 4.3products

Non-metallic minerals and base metals 10.3 10.4 12.4Metal products, machinery, and equipment 12.6 18.3 21.7

(of which autos and auto-parts) (2.2) (3.9) (5.7)Miscellaneous 2.2 2.0 1.5

Total 100.0 100.0 100.0

a/ Excluding petroleum refining.

SOURCE: Banco de Mexico (unrevised series)

1/ For an earlier discussion of these matters, see also Mexico: DevelopmentStrategy - Prospects and Problems, Bank Report No. 3605-ME, August 31, 1981.

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The Capital Goods Industries Subsector

1.06 The capital goods industries subsector 1/ has been one of the moredynamic groups within manufacturing. Starting from a relatively low level,output has increased some 9% in real terms annually over the last two decades(Annex 7, T-3). The growth has been particularly pronounced recently (averag-ing annual 11% p.a. over 1977-80). The number of enterprises engaged incapital goods manufacture also increased more rapidly than the average formanufacturing sector as a whole, although suffering large fluctuations (Annex7, T-5). Nevertheless, compared with other relatively large middle and lowincome countries such as Argentina, Brazil, India, and Korea, the Mexicancapital goods industries subsector remains underdeveloped. It represents only11% of total manufacturing sector output in Mexico in recent years, comparedto about 20% for Argentina, and 15% for Brazil. 2/ Total requirements ofcapital goods, on the other hand, grew rapidly over the past three years (at arate exceeding 20% per annum) with an increasing gap between requirements anddomestic production. Over this period, Mexican domestic production of capitalgoods supplied about 50% of domestic demand, compared to 80% in Brazil.

1.07 About one-third of output in the subsector is made up of metalproducts (e.g., pipes, tubes and fabricated structures), particularly forpetroleum distribution and refining and petrochemicals production and steel-rolling-mill equipment (Annex 7, T-2). Non-electrical machinery accounts formore than 30% of the subsector total, and includes a wide variety of agricul-tural as well as industrial machinery and equipment (e.g., tractors, handtools, pumps, compressors and machinery for production of glass, cement,sugar and flour), but production of general purpose metal-working machinerysuch as machine tools, forges and presses has been very limited. Electricaland electronic machinery also represents about 30% of value added in capitalgoods production with the principal product lines among power transmissionand distribution equipment and small and medium sized generating equipment.Transport equipment accounts for the remaining 7% of output. 3/

1/ The definition of the capital goods producing industries raises someconceptual and statistical problems. For the general purposes of thisreport, use is made of the definition given in the industrial incentivedecree of March 5, 1979, and subsequent revisions (the latest is repro-duced as Annex 2). However, the statistical tables appearing in Annex7, T-1 to T-4), are based on the definition provided in the recentlyrevised national accounts data, using a 72-sector model. Due to limita-tions of those data, some consumer goods and intermediate products areincluded among metal products while the bus and truck industries areexcluded from the transportation equipment category.

2/ The problems mentioned in the previous footnote, as well as the differ-ences in national coverage, make it even more difficult to undertakeinternational comparisons of the subsector. The Mexican manufacturingdata exclude, but the Argentine and Brazilian include, petroleum refining;adjusting for this exclusion would further reduce the share of capitalgoods in Mexican industrial output as compared to Argentina and Brazil.

3/ For reasons of data availability mentioned earlier, this figurecovers only the production of ships and railway equipment.

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The fastest growing category over the past two decades has been non-electrical machinery, in particular, equipment for agriculture, petroleumextraction and refining and petrochemical production. Total purchases ofcapital goods in Mexico were valued at about Mex$400 billion (about US$17 bil-lion equivalent) for 1980.

1.08 Capital goods currently represent Mexico's largest import category,accounting for almost one-third of merchandise imports, while capital goodsexports represent less than 10% of the country's total merchandise exports.In 1979 imports of capital goods were about US$3.6 billion (compared to US$195million of exports), and the preliminary estimate for 1980 exceeds US$5billion (Annex 7, T-8). According to trade balance coefficient calculations,metal products and machinery are the main contributors to the foreign tradedeficit in Mexico per unit of final demand.

Employment, Productivity, and Intersectoral Linkages

1.09 Employment in capital goods manufacturing has shown a dynamicgrowth. Between 1960 and 1975, the average annual growth rate of employmentin the capital goods industries (9.7%) was almost double that of manufacturingindustry (5.0%), and by 1975 capital goods industries accounted for about 10%of the employment in the sector, compared to about 5% in 1960 (Annex 7, T-6).The average incremental employment per unit of incremental gross output isestimated to be somewhat higher for capital goods industries than for manufac-turing industries as a whole, while the corresponding capital-output ratioestimate is about the same as that for total manufacturing industry. Compari-son of direct labor and capital coefficients (Annex 7, T-7) indicates that allcapital goods industries except transport equipment are moderately labor-intensive, and can be considered as important sources of future employmentopportunities in Mexico. 1/ Another important feature of capital goodsindustries is their strong forward and backward linkages in the economy, whichhave become even more prominent as a result of Mexico's recent rapid develop-ment. Capital goods industries would thus have substantial impact on thegrowth and employment in other industries.

Development Potential

1.10 The large increases in investment in both public and private sectorsanticipated in the 1979 National Industrial Development Plan indicated highannual rates of growth in domestic demand for capital goods in 1982-1990of 17-19% for electrical and non-electrical machinery and 12-14% for othercapital goods. Using more recent and somewhat more conservative growthprojections, the Ministry of National Patrimony and Industrial Development(SEPAFIN) estimated the total demand for 1981-1990 at Mex$9,000 billion in1980 prices (equivalent to approximately US$375 billion in 1980 prices),reflecting a projected annual growth of approximately 12%. Demand from thepublic sector is expected to account for over 50% of the total demand forcapital goods, the bulk deriving from the state petroleum and electricitycompanies, Petroleos Mexicanos (PEMEX) and Comision Federal de Electricidad

1/ Analysis of a sample of recently implemented capital goods projectsindicates an average fixed investment cost per incremental job of about$29,000 equivalent in 1980 US dollars.

(CFE). In the medium term, the major users of capital goods are expected tobe the petroleum and petrochemical industries, electric power generation,steel making and non-ferrous metal industries, mining and mineral processing,sugar mills, and cement industries. Although the domestic market size inMexico for many of these categories of equipment is large enough to permit anefficient scale of production of the respective capital goods, a large propor-tion of the equipment needs (40-50% in recent years) is currently being metthrough imports (Annex 7, T-4). Given the high capacity utilization ratescurrently prevailing in most industrial subsectors in Mexico, the gap betweenthe domestic supply and domestic demand as regards capital goods, which isalready high in relation to other countries in comparable stages of development,is projected to increase significantly over the coming years.

1.11 The relatively large size of the domestic market, together with therelative labor intensity of most capital goods industries (as compared withconsumer or intermediate products industries of similar size), the prospectsfor continued strong growth of the domestic demand for fixed capital investment,and the low labor cost in Mexico, lend reason to believe that Mexican capitalgoods industries can operate efficiently and compete internationally in manyproduct categories. Field interviews with private industrialists confirmedthat there are many product lines, especially those involving batch productionrather than highly automated continuous production, in which Mexico cancompete effectively in international markets. Several enterprises in themetalworking field, including manufacturers of specialized machinery (e.g.,

equipment for glass making, food processing, and petrochemical industries),are already exporting significant proportions of their production.

Development Constraints and the Proposed Capital Goods Industries DevelopmentProgram

1.12 The development of capital goods industries has, however, laggedconsiderably behind the indicated potential. The subsector has been handi-capped by low productivity, excessive fragmentation, limited specialization,inadequate technology absorption and development, unreliable supply andinadequate quality of parts and components, and high regional concentration.These factors have limited the subsector's potential economic impact andmany capital goods categories in which Mexico possesses longer term comparativeadvantage are not being produced.

1.13 Three principal factors contributed to the above problems. First,in the past the development of capital goods industries took place in theabsence of a unified policy framework. The subsector has been subject tovarying and relatively low (compared to other industries)protection levels through most of the recent period. As a result of lowtariffs combined with an overvalued exchange rate, some 'net' effectiveprotection levels have been estimated to be negative (e.g., in the mid-1970s).Although prior licenses were used as a protection device for several capitalgoods categories, most licenses were in fact granted very liberally, particu-larly to the public sector entities which have been the source of a largeproportion of the incremental capital goods demand. Moreover, until recentlythe public sector entities enjoyed an almost full exoneration of tariffs oncapital goods imports. Also, export incentives provided to the subsector havebeen inadequate through much of the recent period. Second, the development of

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the subsector has been constrained by a number of technical, structural, andinformation deficiencies. Several of the existing symptoms of weakness areattributable to inadequate technology absorption and development, shortages ofqualified technical manpower and skilled workers, deficiencies in standardiza-tion and abilities to provide 'engineering software,' a tendency towards exces-sive vertical integration, insufficient subcontracting, and important deficienciesin sectoral and technical information. These factors have led to inadequateproject preparation, efficiency and productivity shortfalls, and a somewhathaphazard 'programming' of capital goods manufacturing projects by public andprivate sectors in the absence of reliable background information. Third, ascarcity of credit facilities to support domestic production and sales ofcapital goods and a lack of adequate expertise or coordination among thefinancial institutions in helping the preparation and promotion of sophis-ticated capital goods industries projects have weakened the competitiveposition of Mexican firms vis-a-vis foreign suppliers.

1.14 The government clearly considers the capital goods industries tobe a strategic subsector whose development is critical to Mexico's immediateas well as long-term needs. This assessment appears justified in view ofthe large growth potential of the subsector, its substantial linkages with theother sectors of the economy, the employment potential, and perhaps most ofall, its potential contribution to Mexico's long range development through theexpected favorable impact on technology absorption and "technology mastery'" inMexico. The government is mounting a major effort to develop the subsectorwith the participation of the local and foreign private sectors and assistancefrom bilateral and multilateral agencies. To this end, it has initiated acomprehensive program for the development of capital goods industries (here-inafter referred to as 'the Program') to address each of the three sets offactors identified above. The Program is designed to provide: (a) a welldefined and comprehensive policy framework which gives appropriate incentivesand support for the development of an efficient capital goods industriessubsector; (b) several complementary measures to address the technical;structural and information deficiencies; and (c) an institutional framework toensure an adequate mobilization of domestic and external resources, a wellcoordinated financing structure and consistent financing policies.

1.15 In response to the government's request for Bank assistance informulating and implementing the Program along the above lines, Bank missionshave worked closely with the Mexican authorities for the past 3 years.Several of the Program's elements have already been initiated or are about tobe initiated by the government; other elements would be started during theProgram's initial phase. The proposed Bank project, which is presented inChapter IV of this report, is designed to support the first phase of theproposed Program, and would be implemented under the overall coordinationof COCOFIN. The remaining two sections of this chapter explain the stepsbeing taken or proposed to be taken on the policy framework and complementarymeasures (items (a) and (b) referred to above). Chapters II and III providethe details of the Mexican financial system and the principal participatinginstitutions in the proposed project.

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B. Policy Framework

Policy Coordination

1.16 Reflecting the high priority attached by the government to thedevelopment of capital goods producing industries, the National IndustrialDevelopment Plan in March 1979 and numerous associated decrees have provided abroad spectrum of fiscal and other incentives for the subsector. 1/ Withinthe inter-ministerial National Commission for Industrial Development createdto monitor progress under the Plan, the government established in December1980 2/ a Sub-Commission for Capital Goods Industries Development composed ofhigh fevel representatives of the key ministries and agencies concerned withthe Subsector. These are the Secretariat of Patrimony and Industrial Development(SEPAFIN), the Secretariat for Finance and Public Credit (SHCP), the Secretariatof Programming and Budgeting (SPP), the Secretariat of Commerce (SECOM), theSecretariat for Labor and Social Security (STPS), the Secretariat for Agricul-ture and Hydraulic Resources (SARH), Nacional Financiera (NAFINSA), andOrganizacion SOMEX. The Sub-Commission, which is chaired by the Ministerfor Industrial Development, has the responsibility for monitoring progress ofthe subsector and for proposing measures and necessary criteria to stimulateits rapid and efficient development.

1.17 Two other inter-ministerial bodies also play major roles in formula-tion and implementation of policies. A Committee for Coordination and FinancialEvaluation of the Capital Goods Industries Development Program (COCOFIN) wasset up in 1978 under the chairmanship of SHCP and with other representativesfrom Banco de Mexico (the Central Bank), NAFINSA, Banco Nacional de ComercioExterior (BNCE), and Organizacion SOMEX. COCOFIN, which has been reviewingthe general adequacy of financial resources available for the subsector, hasbeen given the role of establishing the operating policies and supervisingimplementation of the comprehensive development program for the sub-sector tobe supported by the proposed Bank loan. In addition, the Tariff Commission,comprising principally SECOM, SEPAFIN and SHCP, which has the responsibilityfor elaborating the government's overall commercial policy, has recently beengiving considerable attention to the details of the import protection systemfor capital goods industries.

Incentives System

1.18 Fiscal incentives for investment in capital goods producing industriesare included in the general incentive decree 3/ issued by the government in

1/ The Plan and the original set of relevant presidential decrees which setout the incentive system established to achieve its objectives have beendiscussed in detail in the Staff Appraisal Reports for the Fourth IndustrialEquipment Fund (FONEI) Project, Report No. 2473-ME dated May 10, 1979,and for the Second Small and Medium Scale Industry Development Project,Report No. 2947a-ME dated May 30, 1980.

2/ This body replaced an inter-ministerial commission which had been set upin 1978.

3/ The main features of the March 1979 decree are summarized in Annex 3.

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March 1979 concurrently with the publication of the National IndustrialDevelopment Plan (NIDP). The system combines the various objectives of NIDP,which include regional decentralization, the promotion of small industry andthe generation of additional employment opportunities, as well as the promotionof priority industries. The development of the capital goods manufacturingsubsector is a key element of the strategy laid out in the NIDP, and thesubsector is among the branches which have been accorded the highest priority(Priority Category 1) in the Plan and the incentives decree. For industriesproducing priority goods, the decree provides for tax credits of 20% ofthe investment costs plus an additional amount proportional to the number ofincremental jobs from the investments creating or expanding productive capacity,except in case of plants located in the industrially congested areas of theFederal District (Zone IIIA) and designated contiguous municipalities in fourstates (Zone IIIB). 1/ Provision of such incentives is subject to the enter-prises meeting certain production, price, exports and other targets to bespecified for each industrial product line (para. 1.20). The qualifyingenterprises receive certificates (CEPROFIs) for the values indicated which canthen be used in payment for most federal taxes. As a further stimulus tothe expansion of domestic output of these items, the decree entitles purchasersof locally produced capital goods from qualified suppliers to a 5% rebate (inthe form of CEPROFIs) on the purchase price. 2/

1.19 A June 1981 decree allows additional fiscal incentives of up to 10%on investment and employment in the case of enterprises which can operate inan "efficient and internationally competitive manner", and are willing tocreate sufficient production capacity to enable significant exports. Thedecree also allows an increase in the rebate for purchasers of domesticallyproduced capital goods from 5% to 15%, if the producing enterprise fullysatisfies the conditions of the development program registered with SEPAFIN.Moreover, subject to certain conditions to be specified in the developmentprograms for individual capital goods categories (e.g., minimum percentages ofdomestic value added--para. 1.20), the decree extends the 15% rebate tolocally produced parts and components purchased by those capital goods produ-cers who subscribe to a development program; this latter measure is designedin part to stimulate subcontracting within the subsector and reverse the trendtowards excessive vertical integration (para. 1.33). With a view to restrictthis latter incentive to cases of genuine subcontracting (i.e., to excludecaptive supplier companies created by a parent company only for legal and taxreasons), the decree authorizes the incentive only for parts and componentproducers who can demonstrate a significant diversification of their salesamong different purchasers.

1.20 In September 1981 the government issued a further decree, entitled'Program for the Development of the Capital Goods Industries', setting out thebasic rationale for giving priority to capital goods industries, and summariz-ing the incentive-protection framework applicable to them as well as the

1/ However, expansions of existing plants in Zone IIIB are eligible toreceive the tax incentives.

2/ In addition, industries creating or expanding facilities in the areasof highest priority (zone IA) are offered a 30% discount on energyprices (natural gas, fuel oil and electric power); a 30% discount onprices of basic petrochemical inputs is also offered for new facilitiesof petrochemicals industries, subject to an export commitment. Thegovernment is considering discontinuing these incentives, however.

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obligations to be fulfilled by enterprises which wish to obtain the benefitsoffered. On the matter of incentives, the new decree is essentially a restate-ment of the provisions discussed above which have appeared in previous decrees.In addition, the decree outlines the nature of the obligations and targets onlevels of production, prices, domestic value added and exports, which would haveto be fulfilled by enterprises in order to be eligible for the fiscal incentives.These objectives, together with the relevant incentives and protection, wouldbe spelled out in the 'development programs' ('programas de fomento') to beauthorized by SEPAFIN to individual product categories. Most importantly, aspart of the strategy to enforce efficiency, the decree provides that eligibleenterprises must commit themselves within their approved investment programsto achieve, in the medium term, domestic price levels which will not be more than15% in excess of the comparable prices prevailing in the domestic markets ofthe countries of origin of the imported technologies. In addition, the obli-gations specified in the development programs are expected to include commitmentsby the individual enterprises to attain at least 50% domestic value added withinfive years, and reasonable export targets to be agreed with the enterprises foreach product category. 1/ In a separate measure to discourage excessive importa-tion of subquality used machinery and equipment and over invoicing of such importsin connection with equity contributions of foreign partners, for purposes ofcomputing the tariff payable, the government requires used machinery andequipment to be valued at least at 70% of the corresponding new price. 2/

Protection Policy

1.21 The September 1981 decree also spells out the general criteria forsetting the levels of import protection for capital goods. The criteria reflectthe government's desire to have a rational protection policy for the subsectorwhich would help it in its "take off" stage, while minimizing the burden ofsuch protection on the rest of industry and fostering efficiency in the mediumterm. Emphasizing the need for selectivity in approach, the decree distinguishesbetween the types of protection offered for three different groups of capitalgoods products: (a) products unlikely to be produced in Mexico on a viablebasis in the medium term, for which no prior license requirements and only'low' import tariffs would apply; (b) product lines being produced in Mexicobut whose production is still at an incipient stage, in which case some infantindustry protection would be provided through 'moderate' levels of importtariffs combined with prior import license requirements applicable for periodsof up to 5 years; and (c) products whose production has reached reasonable

1/ Substantial sanctions are contemplated against capital goods industriesreceiving fiscal incentives if they violate the export, price and otherobligations to which they subscribed under the development programs, withthe possibility of imposing penalties of up to four times the total amountof fiscal incentives granted for these industries.

2/ In case the importer requests partial or full exoneration of this importtariff, a special committee composed of SEPAFIN and SECOM representativeswould evaluate the merits of such a request, after taking into account thefair market value and the adequacy of quality characteristics of theconcerned machinery or equipment.

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levels of maturity, but still need time to achieve the target efficiencylevels, in which case the protection offered would be only through 'adequate'import tariffs. 1/

1.22 Precise definitions of the nominal tariff levels which would beconsidered 'low', 'moderate' and 'adequate' were not provided in the decree.However, in connection with the proposed project, the government has pro-vided the Bank the draft of a more detailed protection and incentives policystatement, spelling out, among other things, the specific tariff rangesproposed and the principles which would govern protection policy for capitalgoods industries. This draft statement indicates that tariff levels wouldbe in the 5-10% range for industries in category (a), 10-25% for thosefalling in category (b) (i.e., infant industries), and 25-40% for those incategory (c) ('mature' industries). It also states that, as an industrymatures the tariff levels would be progressively scaled down (and any priorimport license requirements removed) in order to achieve protection levelswhich are consistent with the 15% maximum price difference goal referred toearlier (para. 1.20). Protection would be applied on a selective basis toproduction of items in which Mexico is likely to achieve international levelsof efficiency (including reasonable export prospects) in the medium run,rather than indiscriminately to encourage the domestic manufacture of alllines of capital goods. Within these guidelines, the Tariff Commissionwould determine the specific nominal tariffs or other protection applicableto each product category (including the required scaling down over time)on a case-by-case basis, as applications are received from individual indus-tries for subscribing to the 'development programs' for the respectivecapital good category. The Mexican officials emphasized that the 15% maximumprice difference criterion for the medium term would be applied strictly bythe ministries concerned in evaluating all projects for capital goods manufac-ture submitted for authorization of fiscal incentives.

1.23 The above principles appear to provide a sound basis for promot-ing industries which are efficient and internationally competitive in thelong run. They have been confirmed during loan negotiations and in aletter from the Mexican authorities to the Bank. However, the specifictariff ranges in the draft policy statement now need to be revised to takeaccount of the recent major changes in the exchange rate (para. 1.04).The government is currently evaluating the necessary changes in tarifflevels. Receipt by the Bank of a satisfactory revised policy statementfor the subsector would be a condition of effectiveness of the proposedloan. Any subsequent change in the policy statement during the project'simplementation period would have to be acceptable to the Bank. It isunderstood that the applicable protection policy would be reviewed andadjusted from time to time to reflect significant future changes in thereal exchange rate, international trade developments, etc.

1.24 The Mexican authorities have taken several measures to provide astimulus for exports, including provision of sales financing (through FOMEX)and risk insurance for exports at interest rates competitive with those

1/ "Mature" industries in this context include capital goods industriesgraduating from the initial infant industry protection, as well asthose that have hitherto been operating inefficiently and need someprotection over a limited period to adjust or rehabilitate themselvesin order to achieve the target efficiency levels.

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charged by export credit agencies in other capital goods exporting countries,

rebates for indirect taxes and import tariffs on inputs (and components),

and additional investment and employment incentives available for industries

operating on an efficient and internationally competitive basis (para.

1.19).

Public Sector Procurement

1.25 A closely related issue is the government policy with regard to

procurement by public sector entities. It is the government's strategy to

use public sector investment programs, particularly those of PEMEX and CFE, 1/

to stimulate the growth of the domestic capital goods industries. At the end

of 1980, the government issued a decree, followed by implementing regulations,

establishing standardized policies and procedures for all procurement by

public sector agencies and enterprises. In relation to capital goods, the

regulations provide that international competitive bidding would be permitted

in those cases when it is demonstrated that equipment of suitable quality is

not manufactured locally in sufficient quantites or is not likely to be avail-

able in a timely manner from local sources. It is also specified that inter-

national bidding would be permitted if the prices prevailing for locally

produced items exceed the margin of domestic preference (15%) or the applicable

tariff, whichever is higher. The external price used in this comparison would

be that prevailing in the domestic market of the country of origin of the

technology. Officials of various affected institutions have indicated their

satisfaction with the procedures being used by SECOM in implementing the above

policies, noting that the regulations are being applied judiciously without

forcing the purchase of inappropriate or expensive locally made items.

The Overall Balance of Protection and Incentives

1.26 The proposed policy framework contains a balance of moderate pro-

tection and incentives. The government believes that a period of infant

industry protection is justifiable for the subsector because of its critical

role in the economy and its special characteristics with a relatively long

learning curve, numerous external economies and the current situation of

intense competition at the international level (often involving 'dumping'

according to Mexican industries and government officials). Recognition has

been given to the need for ensuring a longer-term efficient production path

and the need for selectivity and 'temporality' in providing protection, while

ensuring adequate investor interest. A substantial portion of the initial

costs will not be borne by the consumers, but by the national budget in the

form of the investment, employment and purchase incentives. Mexican capital

1/ As noted earlier, these two institutions together are expected to account

for major portion of the public sector purchases of capital goods.

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goods manufacturers are aware that the government does not intend to providepermanently high levels of protection, and that the long-term viabilityof the investments will depend upon their international competitiveness.Given the experience of other countries which have undertaken programs topromote capital goods development and the conditions affecting their produc-tion, the average level of effective protection implied by the policy frameworkfor the subsector does not appear to be excessive, and measures to avoid anti-export bias appear satisfactory. 1/

C. Technical, Structural and Other Factors Affecting Subsector Development

1.27 Mexican authorities have become increasingly conscious in recentyears of the important contribution that capital goods producing industriescan make to the development of a broader based and better integrated industrialsector. In order to explore the principal technical, marketing and otherissues involved in fostering a deepening of the sector, a working group wasestablished in the early 1970s composed of staff from NAFINSA and a team ofinternational experts from the United Nations Industrial Development Organiza-tion (UNIDO). In 1977, the group published its main report 2/ which examinedthe past performance and possibilities for future growth of the subsector inthe light of the experiences of other industrializing countries in this field,the production characteristics of capital goods, and the relationship withMexico's other manufacturing activities. Subsequently, the joint workinggroup undertook more detailed studies of the supply-demand characteristicsaffecting the main capital goods categories, and feasibility studies toidentify viable projects which could serve as catalytic agents in the sub-sector's development. 3/ Based on the information from the NAFINSA-UNIDO

I/ An inter-ministerial working group is currently undertaking a study oneffective protection for all sectors of the economy, based on directprice comparisons for a relatively large sample of goods. Preliminaryresults using 1979 data indicated that the average level of effectiveprotection for manufacturing activities as a whole was in the 12-15%range, with the two main groups of capital goods, non-electrical andelectrical machinery, in the 17-19% range. The effective rate of pro-tection for the economy as a whole was close to zero, given thenegative protection rates for agriculture and petroleum. The workinggroup is expected in the near future to recalculate the respectiveprotection rate estimates using more recent data (for 1980 and 1981).Possible Bank collaboration in this effort is being discussed in thecontext of the Bank's economic and sector work program.

2/ Una Estrategia Para Desarrollar La Industria de Bienes de Capital(Mexico, 1977).

3/ Some of these studies have also been published as annexes to the mainreport.

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studies, information available from other agencies and representatives of theMexican private sector, and the analysis of the Bank missions, several techni-cal, structural and other factors have been identified as sources of importantconstraining influences in the development of the capital goods manufacturingsubsector in Mexico.

Technology Absorption and Development

1.28 The effectiveness of technology absorption and technology developmentin capital goods manufacturing appears to have been quite varied, dependingupon the nature of technical collaboration between the foreign and domesticpartners, the participation of an aggressive local private sector partner,and the nature of the project itself. While Mexican companies have been ableto absorb reasonably well the technology from their foreign partners, they havebeen less effective in adapting, innovating or developing new technology. Thegovernment's program for subsector development includes measures to correctthis deficiency through strengthening of the institutional infrastructure fortechnology-related assistance, and provision of fiscal incentives fortechnology innovation and adaptation.

1.29 Mexico's institutional infrastructure to support technologicalresearch, development and adaptation activities is reasonably well developed.The main institutions of relevance to capital goods industries are: theConsejo Nacional de Ciencia y Tecnologia (CONACYT), which formulates thenational science and technology policy and operates 12 technological researchand development centers (specialized by subsector) at different locations inMexico 1/; Servicio de Informacion Tecnologica (INFOTEC), a NAFINSA adminis-tered trust fund devoted to providing industry-oriented technological informa-tion, advice and other related services, which enjoys wide contacts and goodreputation with private industry 2/; Instituto Mexicano de InvestigacionesTecnologicas (IMIT), a decentralized public institute which carries out projectfeasibility studies and technological research for industrial enterprises on aconsulting basis; the Instituto de Investigaciones Electricas (IIE) andInstituto Mexicano del Petroleo (IMP), two highly reputed technological insti-tutes specializing in activities related to electric generation/transmission/distribution and petroleum and petrochemicals extraction/processing 3/; andseveral private sector consulting companies (some with foreign affiliations)which can provide a wide range of engineering and other services. Thenature of the activities and capabilities of these institutions are discussedin greater detail in Annex 4.

1.30 While the above institutional infrastructure can provide valuablesupport, past research studies have indicated that the key advances in tech-nology absorption, development and adaptation tend to be mainly a function of

1/ CONACYT is the recipient of a US$50 million loan in 1981 from the Inter-American Development Bank, mainly to help strengthen technologicalresarch and development centers, institutes and departments.

2/ INFOTEC is participating in the first and second small and medium scaleindustries development projects (Loans 1552-ME and 1881-ME approved inFY78 and FY80).

3/ IIE is affilated with CFE and IMP with PEMEX.

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the enterprise's own initiative. Recognizing the need to stimulate suchinitiative by the industrial enterprises, the government issued a decree inNovember 1980 providing of broad range of incentives, including: (i) taxcredit of 20% of the investment costs of fixed assets and exemption ofreinvested profits from corporate income taxes, for institutions devotedexclusively to technological research and development, or technologicalassistance including the elaboration of basic engineering designs, providedthat the facilities are located outside of the highly congested Mexico Cityarea (Zone IIIA); (ii) 25% investment tax credit or exemption of duties onimported equipment for national institutions devoted to scientific and tech-nological development; (iii) tax credit of up to 20% of investments fortechnological research, development and adaptation activities by productiveenterprises (25% in case of small enterprises); and (iv) 10% tax credit onsales of the technology developed by industrial enterprises. In addition,enterprises which purchase services provided by eligible institutions orenterprises will receive tax credits equivalent to 10% of the value of thecontract, 15% if the purchaser is a small enterprise. Finally, since 1976,the government has also permitted accelerated depreciation for tax purposes oncapital equipment used for R&D purposes, and R&D expenditures can be deductedas current business expenses in computing taxable income.

1.31 Government regulations on acquisition of foreign technologiesappear to be reasonable and do not constitute an undue administrative burden.All technology transfer contracts have to be authorized by SEPAFIN's Registryof Technology Transfer which checks for the suitability of royalty paymentsand other conditions of the contract, which frequently helps the entrepreneurto negotiate reasonable levels of payment. Subject to this, technology may beacquired freely from abroad by enterprises in priority sectors (includingcapital goods) but payments purely for trade marks are not permitted. In thecase of capital goods, royalties have generally been in the range of 3-7% ofsales.

1.32 As an additional measure to address the problem of insufficientindustry-sponsored technological research, development and adaptation (RDA),FONEI and CONACYT have initiated programs for financing such activities on arisk-sharing basis. Under the FONEI scheme, costs incurred by industriesfor technology-oriented in-house RDA, as well as industry-sponsored RDA workcontracted to technical consulting firms, are eligible for financing, whereasthe CONACYT scheme contemplates support mainly through work undertaken byone of CONACYT's technological research and development centers at the requestof the respective industry. The schemes of both FONEI and CONACYT involvea significant subsidy element, mainly in the form of financing at low interestrates, and absorption by the respective agency (FONEI or CONACYT) of up to75% of the costs of the research program in the case it does not yield fruitfulresults. 1/ A recent IDB loan to Mexico for technology development includesUS$2.5 million component to support CONACYT's risk sharing program for the

1/ The terms and conditions of financing differ somewhat under the twoprograms. The effective yield on the financing provided by FONEI in thecase of successful projects is of the order of 6-8 percentage pointsbelow the ACF index (that is, currently about 24%); the correspondingyield on CONACYT's financing is considerably lower, but a provision ismade for some possible royalties to CONACYT in case of successful researchprojects.

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full range of industrial activities. The proposed Program would include asmall component to support the technology RDA activities of capital goodsmanufacturing industries through the risk-sharing program of FONEI (para.4.02). Given the innovative nature of the risk-sharing programs, FONEI (andCONACYT) has opted to offer financing conditions that may prove to be somewhatovergenerous in the long run. While this may be essential in the initialstages to generate sufficient industry interest in technology development,financing conditions for the technology financing component would be reviewed,as part of the annual review of the entire Program (para. 4.19), with a viewto identify and make any needed adjustments (e.g., inclusion of additionalconditions providing for royalty payments to FONEI in case of successfulresearch). Other complementary support would also be provided under theproposed Program to help strengthen INFOTEC's technological information andother support services (para. 4.07). Also, financing would be included tohelp provide production-related technical assistance and on-the-job trainingoriented towards improving the efficiency of utilization of existing facilities("X-efficiency") as well as ensuring efficiency in new investments (para.4.02).

Excessive Vertical Integration

1.33 As a result of difficulties in assuring adequate quality and areliable supply of components and other inputs and the previous emphasis inthe incentives decrees only on final products, a high degree of verticalintegration is evident among many Mexican capital goods industries. 1/ Thelack of specialization in component manufacture and the relatively small useof horizontal linkages and subcontracting have led to a fragmented market inthe production of many capital goods components. In an effort to correct thistrend, the government has initiated a system of subcontracting exchanges wheresmall and medium enterprises can register their capabilities and make thatknown to larger enterprises. To date four such exchanges have been set upwith the assistance of the Directorate General of Small and Medium ScaleIndustry (DGSMI) of SEPAFIN, at Guadalajara, Bajio, Puebla-Tlaxcala andVeracruz, and two more at Monterrey and Nuevo Leon are planned. DGSMI hascarried out useful preparatory work and provided guidance in the establishmentof the exchanges, but they are eventually to be taken over and operated by thelocal chambers of industry. While it is too early to judge the effectivenessand impact of these subcontracting exchanges, they represent a worthwhileinitiative. The operation of the exchanges is expected to be closely coordinatedwith the technical assistance and extension activities under the national smalland medium scale industry development program (the PAI program which receivessupport under Loans 1552-ME and 1881-ME). The recent extension of fiscal andother incentives to locally produced parts and components of capital goods(para. 1.19) is expected to provide a further stimulus towards increased useof subcontracting.

1.34 Nevertheless, there remain important obstacles to wider use ofsubcontracting systems particularly those involving smaller enterprises. Themost important of these has been the disparity in technological absorption

1/ Another factor that encouraged high degrees of vertical integrationappears to have been the availability of relatively cheap capital inthe past (before 1977/78) which implied relatively low penalties forunderutilization of equipment capacity.

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between the larger and smaller enterprises. To help overcome this constraint,subcontracting enterprises would be eligible under the Program to receivetechnical assistance loans at concessional interest rates (para. 4.02). Inaddition, to ensure adequate consideration to subcontracting possibilities inindividual subprojects, all subproject evaluations accompanying requests forauthorization of Bank financing would be required under the Program's operatingregulations (para. 4.17) to include an assessment of the subcontractingpossibilities.

Information Dissemination System

1.35 There appears to be an insufficient dissemination of informationregarding the supply-demand characteristics and current installed capacity ofcapital goods industries. Also, relatively little information is available oninvestments under consideration by the public and private sectors affectingthe demand or supply of capital goods. This has been in part due to theprevious lack of programming and projection of capital goods needs by theprincipal public sector purchasers, notably PEMEX and CFE, the reluctance ofsome elements of the private sector to give out relevant information, and lackof an institutional infrastructure to systematize and provide the relevantinformation to industries. The deficiencies in available information increasethe uncertainties associated with investments in capital goods projects andhamper the private sector's ability to plan investments in capital goodsindustries on a rational basis. They also appear to be preventing the optimalgrouping of capital goods products and intermediates in formulating manufactur-ing projects. For example, the appraisal mission noted several instances oflarge plants manufacturing equipment for electric generation and transmission,petroleum refining, petrochemicals production and sugar refining which havethe ability and idle capacity (at least part of the time) for undertakingheavy fabrication, forging, pressing, machining, heat-treatment, etc. Suchcapacity could be used to produce equipment for a wide range of other activities,with suitable programming, minor adjustments and acquisition of the neededknow-how.

1.36 One measure which has recently been taken to improve this situationis the publication by the principal public sector enterprises (particularlyCFE and PEMEX) of their long term investment programs projecting their likelyrequirements of major equipment, say, over a 5-10 year period. Also, as partof the measures taken to standardize public sector procurement procedures, allentities within the public sector are required to submit to SECOM at thebeginning of each year details of their planned expenditures for the year;these are later published by the government. Finally, in order to provide aforum for discussion of the public sector investment programs and procurementinformation, the government has started creating Mixed Commissions ('ComisionesMixtas') comprised of representatives from the private sector capital goodsproducing industries and the major public sector purchasers of those goods(one Commission for each major public sector entity or association). Thus farsuch Mixed Commissions have been established for CFE, PEMEX, SIDERMEX (steel)and the association of nationalized sugar producers; these appear to bereasonably effective and a similar commission may be created in the future forFERTIMEX (fertilizers).

1.37 Two additional initiatives would be taken by COCOFIN in collaborationwith SEPAFIN, as part of the proposed Program, in order to fill the mostcritical information gaps and improve access to information on the capital

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goods 8ubsector, namely, a comprehensive inventory of existing productioncapacities of relevance to the subsector, and implementation of a broad informa-tion dissemination system (paras. 4.07 and 4.08). The above measures wouldfacilitate optimal grouping of products in formulating the investment projects,prevent duplication of projects and redundant productive capacity, provide abetter basis for user industries to consider domestic procurement of capitalgoods, and help entrepreneurs plan capital goods investment projects on arational basis.

Technical Standards

1.38 Difficulties in having commonly accepted engineering standards forboth products and inputs have also contributed to the slow growth in subcon-tracting and, more generally, have adversely affected the development of thesubsector. Common technical standards are needed to ensure interchangeabilityof parts and reliability according to a predetermined level of performance.With growth in world trade, there has been a major effort at establishinginternational standards, or at least reconciling diverse national standards toprovide compatible equivalents. The issue of choosing among different existingstandards becomes particularly important for a developing country such asMexico which depends upon technology derived from different developed countries,and whose products include parts and components used in a wide variety offinal products elaborated in other countries. The related decisions couldaffect the size of the production runs and production costs of capital goodsindustries.

1.39 The Mexican authorities have initiated a comprehensive programto establish a national standards system, and working groups have begun toelaborate norms for various product lines, including some capital goods. Thedegree of acceptance of these standards by the domestic industries has beenlimited, as may be expected at an early stage of developing standards. Mostenterprises including those in the public sector continue to rely on foreign/international standards, apparently because a high proportion of their existingequipment is imported; moreover using internationally accepted standards couldfacilitate exports.

1.40 Given the relatively early stage of capital goods production inMexico, it would be difficult to establish a consistent and streamlined systemof standards quickly. It is likely that the most practical approach may be tofocus on selected product lines considered to be of highest priority forestablishment of national standards, striving to obtain strong participationof producers and consumers in the working groups for these items. For amajority of the products, however, acceptance of an internationally knownstandard may be the best solution, at least in the near term. To address theissue, COCOFIN would periodically review, together with other agencies con-cerned, the progress achieved and required additional measures towards stream-lining and/or developing standards (para. 4.09).

Engineering Software

1.41 Mexico seems to have made little advance thus far in the developmentof "engineering software", that is, putting together designs and engineering ofcomplete plants as opposed to only pieces of hardware. In comparison withother developing countries such as India, Korea and Brazil, the contrast isnotable. This would be a major area where potential for future growth andimprovement lies, and should be emphasized in the future development strategy.

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As the capability to put together complete plants and to manufacture sophis-ticated equipment develops, Mexican companies would also have to build acapability to provide their clients (both domestic and foreign) requiredmaintenance services and technical assistance in the operation of the plantsor equipment. Progress in the development of capacity in this area will bemonitored during the course of the Program, and COCOFIN would provide a forumin which it will be possible to discuss and decide upon possible measures toassist this process of growth (para. 4.09).

Technical Manpower and Training Needs

1.42 Shortage of qualified manpower, particularly technical manpower withthe skills and experience required in capital goods manufacture is becoming aserious constraint. The deficiencies appear most critical at the skilledworker and technician levels, but are also evident at the professional andmanagerial levels. An adequate system of vocational training programs wouldbe essential to address the various technical and structural issues discussedabove. Suitable training programs, 'mini-courses' and seminars are also neededto bolster the capacity of the professional and managerial staff of theindustries as well as the technical staff of the principal financing agenciesunder the proposed Program. Emphasis needs to be put on the treatment of thetechnology transfer process, technology transfer agreements and the design ofcomplex financing packages involving foreign collaborators to formulate'bankable' projects (para. 4.05).

1.43 A large number of public, semi-public and private institutionsprovide technical training at various levels, including the Ministry ofEducation, Ministry of Labor and several autonomous and semi-autonomousagencies. The most important facilities relevant to capital goods industriesare: the CONALEP system of training centers which is designed to offer terminaltraining to skilled workers and lower level technicians 1/; the CECATI systemof centers for training semi-skilled and skilled workers; the CET and CECYTsystems which serve the dual purposes of providing 'terminal' technicaltraining for low to middle level technicians as well as preparing candidatesfor universities and higher level institutes; CENAPRO which has been involvedin training technicians, professionals and middle level management personnel;ARMO, the UN-assisted system of brief but intensive vocational trainingprograms under the auspices of CENAPRO; the system of regional technologicalinstitutes; universities and higher level technological institutes which offerindustry-oriented programs from time to time; and programs custom-designed forthe needs of individual enterprises either in-house or with assistance from

1/ The Bank has approved a US$90 million loan in FY81 to provide support tothe CONALEP system (Loan 2042-ME). In addition to the general uppersecondary level technical training courses in the metalworking fieldwhich are offered by several CONALEP centers, two specialized trainingand applied research programs in the metalworking field expected to beinitiated during 1982/83 at CONALEP's Saltillo and Cuautitlan centersare of particular relevance to capital goods industries. The center atSaltillo which will start operating in 1982 will cover foundry, boilershopwork, mechanical fabrication, installation and maintenance (with capacityto train 500 technicians and 250 workers each year), while the Cuautitlanprogram, expected to be initiated later, will cover metallurgy, foundry,machine tools, fabrication, installation and maintenance (with expectedyearly output of 2,400 technicians and 500 skilled workers).

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consulting companies or independent institutions. 1/ Annex 5 provides aschematic diagram and explanation of the various training sources.

1.44 Mission discussions with industry representatives indicated substan-tial deficiencies in their knowledge of the available training facilities fromthe various sources and the suitability to their own operations. The problemis compounded by the seeming or real overlap between the training functionsamong the different institutions, particularly with respect to the programsfor skilled and semi-skilled workers and technicians. In order to overcomethis deficiency, a comprehensive inventory of all available training coursesrelevant to capital goods industries would be carried out under the directionof COCOFIN, as part of the proposed Program (para. 4.06).

II. THE FINANCIAL SYSTEM AND CAPITAL GOODS INDUSTRIES FINANCING

A. Institutional Structure

The Banking System

2.01 Mexico's banking system comprises Banco de Mexico (the CentralBank), 23 public banks and 64 institutions of private and mixed ownership.In 1980, private and mixed banks accounted for 61% of the banking system'sliabilities, the public banks for 31%, and Banco de Mexico for 8% (Annex 7,T-9). Other financial intermediaries include insurance and guarantee companies,credit unions, deposit banks, and the securities market, which togetheraccount for about one quarter of the total financial intermediation (Annex 7,T-10). Mexico maintains an open financial system vis-a-vis external markets.

2.02 Although the financial system experienced a period of rapid deepeningfrom 1967 to 1972, when the ratio of banking sector's non-monetary liabilitiesto GDP increased from 0.32 to 0.40, the economic uncertainties of the mid-1970sthat ultimately led to the massive peso devaluation in 1976 caused a sig-nificant capital flight; based on a partial survey the ratio is now estimatedat about 0.33 (Annex 7,T-ll). Banco de Mexico has since taken several measuresto reverse this trend, the most important being a liberalization of interestrate ceilings on deposits and offering remuneration on reserve requirementsof banks. Private sector deposits with private and mixed banks as a percentageof GDP, however, increased recently from their 1977 low of 23.2% to 26% in1980; together with a growing share of banking system credit in GDP, thisindicates a reversal, or at least a stemming, of the earlier unfavorable trendin financial intermediation. Although the largest 12 banking groups accountfor over 85% of the assets (Annex 7, T-12), indicating a fair degree ofconcentration, the system appears to be quite competitive, particularly inraising deposits. Administrative expenses of banks are relatively high(exceeding on the average 6% of deposits), mainly due to costs associated withtheir large branch networks. Due to the high liquidity preference of savers,liabilities of the banking system have been skewed towards short-term obliga-tions (Annex 7, T-13).

1/ Since 1978, Mexican firms have been made legally responsible to ensureadequate training facilities for their employees; this regulation isstill only in the initial stage of enforcement.

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2.03 Traditionally, financial institutions in Mexico were specializedas deposit and savings banks, financieras or investment banks, and mortgagebanks. The 1976-77 financial crisis, when the banking system experiencedmassive withdrawals of funds, convinced the Mexican authorities of theurgent need to introduce organizational reforms. In December 1978, a seriesof amendments and additions to the Banking Law were introduced to raise theefficiency and effectiveness of the banking system. The most importantmodifications involved measures to encourage grouping of specialized banks toform the multipurpose banks (multibanks), with a view to increase competitionthrough the increased financing capacity of the smaller banks, lower administra-tive costs of the system through economies of scale, and improved access tothe full range of financial services for clients outside the biggest cities.The capital requirements for banks were also changed, with the requirementsnow being linked to the risk classification of assets instead of liabilities.With a view to counteract a traditional over-emphasis on loan collaterals, the133% minimum collateral was eliminated, and principles were established thatloans should be granted taking into account the economic feasibility of theproject being considered, and that repayment periods should be set on thebasis of a project's expected cash flow. Overall exposure limits per clienthave also been set to avoid excessive concentration of portfolio risks ofindividual banking institutions.

2.04 Mexico's multibanks are now the dominant type of private sectorand 'mixed' financial institutions. 1/ Multibanks can offer a full range offinancial services through their branch offices and provide a fairly broadregional coverage of the country. As of March 31, 1981, there were 64 privateand mixed banks (down from 198 as of September 30, 1977), of which 35 weremultibanks (up from 14 as of September 30, 1977 and 26 at year-end 1978). Themultibanks now account for more than 90% of the assets and 80% of all thebranch offices of private and mixed banks. Despite the fact that the numberof financial institutions was reduced to two-fifths in less than four years(from 220 in 1977 to 87 in 1981), the number of branch offices increased inthe same period from 3,535 in September 1977 to 4,492 in March 1981 (Annex 7,T-14). Among the public sector banks, NAFINSA is by far the most importantone supporting the industrial sector, and fulfills a combination of developmentbanking, commercial banking and industrial promotion activities; it alsoadministers several government trust funds (para. 2.05) and acts as an agentof the government in obtaining external borrowings. The most important'mixed' bank involved in industrial financing is Organizacion SOMEX. Underthe proposed capital goods development program, NAFINSA, Oroanizacion SOMEX,as well as the entire private banking system (through the trust fund mechanismsdescribed below), would participate as financial intermediaries.

The Trust Funds

2.05 In order to channel additional financial resources to sectors itconsiders a priority, the government has set up several trust funds. Thesefunds derive their resources principally from the reserve requirements of thebanking system, although several have also received loans from local andinternational sources, including the Bank. The most important trust fundsproviding financing to the industrial sector are among those managed by theBanco de Mexico and NAFINSA. The principal trust funds administered by

1/ 'Mixed' banks are entities with mixed public and private sector owner-ship which operate essentially as private sector banks.

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Banco de Mexico are FONEI, which finances relatively large export andefficient import substitution projects in the industrial sector, and FOMEX,whose main activity is pre- and post-export financing. The main NAFINSA-administered trust funds supporting industrial activities are FOGAIN (creditto small and medium scale industry), FOMIN (equity and quasi-equity financingto small and medium scale industry), FIDEIN (promotion and development ofindustrial estates) and FONEP (financing of preinvestment and other studies inconnection with project preparation). The trust funds financing creditoperations (FONEI, FOMEX and FOGAIN) operate through the entire banking systemby rediscounting loans made by individual banks.

2.06 During 1979, trust funds administered by Banco de Mexico and NAFINSAchanneled Mex$66,400 million through the banking system, equivalent to about6.5% of total banking sector credit. The amount for 1980 is estimated atMex$88,400 million. The trusts' share in medium- and long-term financing isimportant due to the relatively short maturity of the resources mobilized bythe banking system assets; in 1979, they accounted for 23% of the total medium-and long-term credit to industry and 38% to agriculture. Capital goods produc-ing industries obtained Mex$16,950 or 19% of total trust financing in 1980.

The Securities Market

2.07 Although it has grown rapidly following a series of reforms takenin the mid-1970s, Mexico's securities market is still relatively small and hasnot yet developed into a very important mechanism to finance industrial firms.In 1980, new issues of shares and fixed interest securities accounted for only4.2% of the country's total financing through financial intermediaries.Comparatively few, mostly well-established and large, companies are listed inthe organized securities market (centralized in 1976 into a single securitiesexchange). 1/ Total value of shares traded in the organized market increasedfrom Mex$30,300 million in 1978 to Mex$93,800 million in 1979, but fell toMex$74,900 in 1980; the volume of traded debt securities has been decliningsince 1976, reaching Mex$65,000 million in 1978, Mex$33,000 million in 1979,and Mex$25,700 million in 1980. Recognizing the limitations of the existingsecurities market, the government is providing equity and quasi-equity invest-ments through direct investments undertaken by NAFINSA, FOMIN, and FISOMEX(holding company wing of Organizacion SOMEX). This type of financing has hadan important impact on capital goods industries' equity financing, and wouldbe supported under the proposed project.

B. Credit Availability and Interest Rate Policy

2.08 As the economy recovered from the 1975-76 crisis, the financialsector grew rapidly. Total financing increased 5.1% in real terms in 1978,11.4% in 1979, and 7.7% in 1980. Credit given by private and mixed banksexpanded at an average annual rate of 16.1% in real terms in 1978-80 andaccounted for 38.7% of total financing in 1980, compared to 30.3% in 1977(Annex 7, T-15). Credit to the manufacturing sector, however, has had aless dynamic growth: 5.5% in real terms in 1978, 4.9% in 1979, and 2.1%in 1980. The manufacturing sector accounted for slightly over 20% of totalbanking system credit in 1980, compared with 25-26% in 1977-78, reflectingin part the increase in the relative share of the energy sector (Annex 7,T-16).

1/ Responsibility for control and supervision of the securities exchangerests with the National Securities Commission.

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It appears that the heavy concentration in Mexico City, typical for bothindustrial value added and industrial credit, has decreased significantly.As of December 31, 1980 the Federal District accounted for 47.7% of totalcredit to the manufacturing sector, compared to 57% in 1978 (Annex 7,T-17).Priority zones as designated by the National Industrial Development Planregistered some gains in their respective shares of credit, a trend which isexpected to continue in the future and which would be encouraged under theproposed project.

2.09 Since 1974, financial institutions in Mexico have been adoptingincreasingly a variable interest rate system for term lending operations.By 1977 practically all term loans were made at floating interest rates,using as an index the average cost of deposit funds (ACF) to investmentbanking departments of private and mixed banks. In December 1979, followingthe transformation of the banking system from specialized banks to multipurposeinstitutions (para. 2.04), Banco de Mexico modified the ACF index calculationto base it on the average cost of all term resources (3 days to 2 years) ofthe Mexican (private and mixed) banks, making it broader and a better indicatorof the cost of funds in the market. In line with Mexico's open financialsystem, domestic deposit and lending interest rates can be expected to main-tain an approximate parity with interest rates in international markets andto reflect changes in the domestic inflation rate, although with same lags.The ACF index rose from about 18% in December 1979 to about 34% in March 1982(Annex 7, T-18), reflecting the periodic adjustments of all deposit rateceilings to maintain domestic financial savings and preserve party withforeign markets. During 1980-81, the level of interest rates on loans aswell as term deposits of banks not only exceeded the rate of inflation inMexico (estimated at about 28% for 1981), but also made peso deposits competi-tive with those denominated in foreign currencies. This is reflected in aprogressive decrease in the percentage of foreign currency-denominatedcredits from about 35% in 1977 to 28% by the end of 1980. The margins overthe ACF charged by banks range from less than 2 points for prime clients withreciprocal business, to about 7 points for marginal clients, implying currentlending rates of about 36% to 41%; the average effective lending rate currentlycharged by the private and mixed banks in Mexico City is estimated at 38-39%.

2.10 The widespread application of adjustable interest rates has causeda gradual shift of lending towards medium term loans, although banks are stillconstrained by the high liquidity of their liabilities. As of December 31,1980, private and mixed banks had 46% of their loans at terms exceedingone year, compared to 39% in 1978. Long term loans (say of terms of more than5 years) make up only a small proportion of these, reflecting continueddifficulties in the access of industries to longer term financing which isneeded for large investment projects or investments involving long gestationperiods. This is mainly a result of the concerns of the banks with regard toborrowers' repayment capacity and uncertainties in domestic and internationalinterest rates experienced in recent times. Banco de Mexico is continuingits efforts to improve the term structure of the banking system's liabilities,through several recent measures including elimination of the highly liquidinvestment and mortgage bonds, further liberalization of interest rates oncertificates of deposits of 24-month maturities, offering higher remunerationson the reserve requirements for banks whose proportion of term depositsexceeds that for the banking system as a whole, and elimination of remunera-tions for reserve requirements on checking and savings deposits.

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C. Capital Goods Industries Financing

Availability of Financing

2.11 Because of the long gestation periods involved in implementingcapital goods industry projects and in their achieving the required levelof technology absorption and development, availability of adequate long-termfinancing is particularly important to the development of the capital goodssubsector. Consequently the availability of term funds from the trust fundmechanisms (most importantly FONEI and FOMEX) and from the public and mixedbanks has been a significant factor in facilitating the subsector's development.Funds available from these channels would be supplemented through additionalresources under the proposed Program, including additional term funds forsales financing of capital goods (para. 2.13).

2.12 The government is aware of the difficulties in capital goods financ-ing and is monitoring the available support through COCOFIN (para. 1.17) whosemembership represents several financial institutions (NAFINSA, OrganizacionSOMEX, BNCE, FONEI, FOMEX, FOGAIN and FOMIN). During 1980 these institutionsapproved Mex$28,700 million in credit to capital goods industries, a substantialincrease over Mex$17,700 million in 1979; about 37% of the credit in 1980 wentfor non-electrical machinery, 24% for transport equipment, 21% for electricaland electronic equipment, and 16% for metallic products. Among the aboveinstitutions, FOMEX was the largest source of funds, providing 37% of totalcredit in 1980, followed by BNCE (27%), NAFINSA (22%), FONEI (7%), OrganizacionSOMEX (5%), and FOGAIN (2%). However, as mentioned above, a good deal of thefinancing is in the form of short-term working capital credit, over 80% in thecase of FOMEX and BNCE (1980 data), about 70% in the case of NAFINSA (1977-80average), and some 30% in the case of Organizacion SOMEX (1978-80). FONEI'scredits, on the other hand, are of a longer term nature, with over 90% of thefinancing in the over 4 to 10 years category.

Financing of Domestic Sales

2.13 At present the main source of financing specifically designed tofinance sales of capital goods to local and foreign buyers is FOMEX, whichrediscounts buyer or supplier loans made by Mexican banks (with maturitiesof up to 15 years) for this purpose (Annex 7, T-19). FOMEX's scheme forfinancing domestic sales of capital goods was originally started more than 10years back, but became significant only in recent years when it started beingused to provide short term sales financing to address specific problems relatedto the sales of capital goods to Mexican public enterprises (most notablyPEMEX and CFE). In principle it is available for short, medium, as well aslong term financing of all domestic sales of capital goods (with terms of upto I'1 years), for amounts for up to 85% of the invoice value net of the costof imported inputs. To date the bulk of the sales financing provided underthis scheme (over 80%) has, however, been only short term. Loans to financethe domestic sales are generally denominated in pesos and bear a floatinginterest rate equal to two percentage points above the ACF index (that is,equal to those under FONEI loans--see para. 3.22). In principle FOMEX mayalso rediscount sales financing loans denominated in foreign currencies usinginterest rates competitive with those offered by foreign suppliers in thatparticular currency, although the option of foreign currency denominated loanshas rarely been used in the past in financing local sales. No exact data onthe banking sector sales financing to capital goods producing industries

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exist; estimates indicate, however, that the capital goods subsector's shareof such financing in total manufacturing is about 12%, close to its share ofthe manufacturing value added, but is also almost entirely short term.

2.14 Shortages of sales financing and the perceived inferior competitiveposition of domestic capital goods producers vis-a-vis foreign suppliers withrespect to the terms and conditions of sales financing are frequently cited byMexican industrialists as major factors hindering the growth of the local capitalgoods industry. While shortages in sales financing actually experienced inthe past have not been critical, there is little doubt that the needs for salesfinancing would increase very substantially in the future as the domesticcapital goods industry develops. On the other hand, industrialists are notwell informed about the features of financing available through FOMEX fordomestic sales of capital goods, and banks not fully familiar with the marketsand technical aspects of capital goods tend to be reluctant to provide thefull amount of sales financing which can be rediscounted under FOMEX's scheme.Another potential problem is that capital goods producing industries cannotafford to use up the bulk of their borrowing capacity in arranging salesfinancing. To help address these problems, the proposed project would providegreater facilities to publicize information on available sales financingresources, terms and conditions. Consideration would also be given to theneed for an increasing use of foreign currency denominated loans (to beoffered as an option to the industries) in the financing of local capitalgoods sales to help domestic capital goods producers overcome any competitivedisadvantage. In the longer run, consideration should also be given byCOCOFIN and the concerned government agencies to the possibility of promotingprivate institutions specialized in financing of sales/purchases of capitalgoods, which might more readily accept loan exposure (e.g., as 'acceptancecorporations' willing to assume full collection responsibility and credit risksof the buyers in return for a margin, through 'factoring' of sales), and devel-oping a secondary market for acceptance type instruments for sales financing.

Complementary External Financing

2.15 The larger industrial enterprises of Mexico have had reasonablesuccess in recent years in obtaining short and medium term investment financingin the form of direct loans from foreign private banks, suppliers credits,equity participations by collaborating foreign partners. Based on an analysisof a representative sample of medium size capital goods manufacturing projectswhich have been financed recently, or are being considered for financing,total financing from external sources (excluding IBRD and other multilateralaid agencies) accounted for 10-15% of the total investment costs on theaverage. It is believed that with additional efforts to mobilize complementaryexternal resources this percentage can be increased significantly. The'cofinancing' proposed in connection with the proposed Capital Goods Develop-ment Program would be a step in this direction (para. 4.13).

D. Outlook

2.16 Given the vigorous domestic demand, existing structural imbalancesand possible needs to accelerate the rate of peso devaluation, the inflationarypressures in the economy can be expected to continue in the near future. Onthe other hand, the high level of public sector deficit, part of which is

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financed through the financial system, lends reason to believe that monetaryand credit policies will at best be moderately expansionary. It may reasonablybe expected that interest rate policies will continue to be set taking intoaccount international financial market trends, differences between Mexican andworld inflation rates, and the need for a more adequate term structure ofdomestic savings. Under such circumstances, capital goods producing industries,whose output is expected to grow considerably faster than that of the rest ofthe manufacturing sector in the years to come, may be particularly affected bythe high interest rates and a shortage of funds necessary for new investments,expansion and sales of their products. The proposed project would contributeto strengthening the financing system for capital goods industries togetherwith improvements in other areas such as the policy framework, institutionalstructure and needed technical measures, as described in Chapter IV.

III. MAJOR PARTICIPATING INSTITUTIONS

3.01 The investment financing under the proposed Program would be channeledmainly through three institutions--NAFINSA, Organizacion SOMEX and FONEI(paras. 2.04 and 2.05). Sales financing would be provided mainly throughFOMEX, whose activities have been discussed in para. 2.13. This chapterprovides a brief institutional analysis of NAFINSA, Organizacion SOMEX andFONEI, the main agencies channeling Bank funds under the Program.

A. Nacional Financiera, S.A. (NAFINSA)

3.02 NAFINSA is the government's most important development bank supportingthe industrial sector. Through its own operations together with those of itsaffiliate 'Banco Internacional,' it also acts as a commercial bank, acceptingdeposits and offering a wide range of services, mostly to the industrial sector.It has a large holding company wing through which it holds equity participationsin industrial companies of public and mixed ownership (162 companies including20 majority interests at year-end 1980). NAFINSA also acts as the government'sofficial agent in a variety of financial transactions, the most important ofwhich involve raising external resources in capital markets and throughbilateral and multilateral agencies. As of December 31, 1980, NAFINSA's totalassets stood at about Mex$239 billion (close to US$10 billion equivalent),making it one of the world's largest development banks. NAFINSA has been theBorrower for the majority of Bank loans to Mexico, including all previous Bankloans for the Mexican industrial sector.

3.03 NAFINSA's board of directors (Administrative Council) is composed oftop level government officials. Its chairman is the Minister of Finance andother members include the Ministers of Programming and Budgeting, of IndustrialDevelopment, and of Commerce, the Director General of Banco de Mexico, theChairman of the Confederation of Industrial Chambers (CONCAMIN), and two otherrepresentatives of the private sector. NAFINSA's administrative head is itsDirector General, under whom there are three general sub-directorates, one forindustrial promotion, one for finance and one for trust funds and affiliateindustrial companies. The main departments of NAFINSA which would be directly

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involved in the implementation of the proposed Program are the Project PromotionDepartment of the Industrial Promotion wing and the Credit Department of theFinance wing (see indicative organization chart of NAFINSA in Annex 8, C-1).

3.04 In addition to acting as the Borrower of the proposed Bank loan onbehalf of the government (para. 4.20), NAFINSA would have an important role inthree project-specific aspects. First, using the results of the sectoranalysis which it has been carrying out with UNIDO cooperation (para. 1.27),NAFINSA has been active over the last several years in generating new projectideas, preparing project profiles and carrying out feasibility studies forpotential product lines within the capital goods subsector which can be pro-duced in Mexico on an economically viable basis. In line with its objectiveof identifying and helping to fill major gaps in the subsector, NAFINSA'sproject generation and promotion work tends to focus on relatively new orundeveloped product lines in Mexico which nevertheless have significantpotential, or product lines which require investments too large to be under-taken solely with private sector initiative.NAFINSA would typically be preparedto finance part of the projects promoted through suitable equity investments.The project ideas generated and other background work by NAFINSA could alsoprovide useful inputs to other potential investors in the subsector.Second, NAFINSA's banking wing would also participate under the Program as acredit institution to channel term financing to existing or new capital goodsproducing enterprises for increases in productive capacity. 1/ Third, NAFINSAwould provide the Technical Secretariat of the Coordinating Committee of theproposed Program, to assist in the operational and administrative aspects ofchanneling Bank resources, maintaining the 'Program Account' and other aspectsof Program monitoring (para. 4.15); based on the considerable information andexpertise which it has developed, NAFINSA is also expected to provide importantinputs into the proposed information dissemination system for capital goodsindustries (para. 4.08). This last aspect of NAFINSA's role under the proposedProgram is discussed in the next chapter, while the first two aspects arecovered below.

Project Promotion Department

3.05 The Project Promotion Department undertakes subsectoral studies,identifies project ideas, prepares feasibility studies, and, in the case ofpromising industrial projects, carries out the necessary promotion work toobtain the collaboration of domestic private sector partners and/or foreigninvestors. The department is functionally divided into four divisions, one ofwhich specializes in capital goods industries. The Capital Goods ProjectsDivision has a total professional staff of 25 of which 15 are directly involvedin project identification, preparation and promotion, while the others providetechnical support and administer a newly formed information center. Identifica-tion, preparation and promotion of individual capital goods projects is typicallyhandled by a project team of 2 or 3 professionals with technical, marketing andfinancial skills. Additional technical expertise can be made available by oneof the UNIDO experts collaborating with NAFINSA in studying the subsector(para. 1.27).

1/ In the case of projects promoted by its industrial promotion wing, NAFINSA'spolicy has been to preferably obtain credit from other banking institutions,rather than from its own banking wing.

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3.06 NAFINSA's prefeasibility studies of proposed capital goods manufactur-ing investments cover the technical, market, financing and other relevantaspects. Upon completion of the study for a particular project, NAFINSAinvites offers from potential technology partners. The offers received arecompared with respect to competitiveness of prices, exports and net foreignexchange impact, financial return, technology absorption, etc., and the bestoffer is chosen. There have been very few cases to date in which a localprivate sector enterprise has been chosen at an early stage as a projectpartner and invited to participate jointly with NAFINSA in the prefeasi-bility study and technology selection process. This appears to have beenthe result of a perception within the private sector that NAFINSA is primarilya public sector oriented entity. The lack of a close participation of a localprivate sector partner with prior experience in capital goods manufacture hastended to prolong the gestation period of new projects and weakened NAFINSA'sposition in negotiations with foreign partners.

3.07 Negotiations are then initiated with the chosen partner(s) on thefinancing plan of the project, the relative share contributions of the partners,technology transfer agreements, marketing, procurement procedures, plantlocation, legal status of the enterprise to be formed, etc. If these aresuccessfully completed, the project proposal together with the amount, termsand conditions of NAFINSA's proposed equity participation is submitted for theauthorization of NAFINSA's Director General, and later for ratification byNAFINSA's Project Appraisal Committee which is chaired by the Under-Secretaryof SEPAFIN. Subsequently, steps are taken to constitute a new enterprise (ifapplicable) and formalize the NAFINSA's equity participation.

3.08 Over the last four years, NAFINSA has prepared more than 20 prefeasi-bility studies, covering a wide spectrum of product lines, particularly in theareas of: metal products and metal working (e.g., heavy foundry-forge andfabrication, boilershop and large diameter pipes); process equipment (processpumps, valves and speed reducers); electrical and associated machinery (turbo-generators, hydraulic turbines and minicomputers); agricultural equipment(farm tractors); and other general and special purpose machinery and equipment(mineral crushers, earthmoving equipment, radial drilling machines, largechain saws, etc.). Despite an impressive effort in generating many projectideas and elaborating sectoral and prefeasibility studies, NAFINSA has hadonly a limited success in bringing capital goods manufacturing projects to a'bankable' stage where outside entrepreneurs and financing agents show activeinterest in participation. 1/ A greater entrepreneurial orientation forthe project promotion staff (for example, through orientation/training coursesto help in dealing with technology transfer issues and in designing complex

1/ The most important projects developed to date have been those for heavyforge and foundry facilities (NKS), large pumps (KSB), large diameterpipes (PROMETUSA), and turbogenerators of 1 to 60 MW capacity (TURALMEX).All except one of these are still in the initial stages of implementation.NAFINSA expects to be able to finalize several more capital goods proj-ects in the near future, including those for earthmoving eqipment,hydraulic turbines, textile machinery and valves for process industries.

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financing packages), and a closer involvement of Mexican private sectorpartners from an early stage in project processing should help to address thisshortcoming. This point has been conveyed to NAFINSA and would be addressedin part through the proposed training/orientation courses under the Program(para. 4.05).

Credit Department

3.09 NAFINSA's Credit Department has total professional staff of about95, organizationally divided into the Credit Analysis division, which isresponsible for evaluation of credit requests received, and the Credit Opera-tions division, which carries out formalization, administration and supervisionof approved credit operations. An indicative organization chart is included inAnnex 8, C-2. NAFINSA's internal regulations allow it to make fixed assetsor working capital credits, provided that its participation is no more than50% of the total project costs. Annex 7, T-20 provides a summary of thevarious types of financing operations carried out by NAFINSA. The CreditDepartment can also process endorsements ("avales") to foreign banks orsuppliers. NAFINSA's evaluation of its credit applications covers the financial,economic, technical and marketing aspects of the firms, the financial viabilityof the firm being the single most important consideration. In line with thegovernment's priorities, special attention is paid in credit evaluations tosocio-economic aspects such as decentralization, employment generation andenvironmental impact. NAFINSA's analysis of the above aspects, while generallyof good quality, is typically focussed on the firm as a whole, with littleanalysis of the incremental impact of the investment project. Under theproposed Program, NAFINSA would be required to include in all its financingrequests for credits an incremental analysis and a ERR calculation followingguidelines acceptable to the Bank (standard guidelines for DFCs involving useof border prices and similar to the guidelines being used by FONEI -- para.3.21). All subproject appraisals under the Program would also have toinclude an adequate consideration of subcontracting possibilities, trainingneeds and procurement issues (paras. 1.35 and 4.06). Credit supervision andportfolio control procedures employed by NAFINSA include periodic analysis offinancial statements, routine plant visits and special control steps in caseof arrears or other financial difficulties; these procedures appear satisfac-tory and the arrears in loan portfolio are within acceptable limits. Thefinal authority for deciding on credit proposals rests with NAFINSA's CreditCommittee which is appointed by its board; but the Committee has delegatedapproval authority for the smaller operations to the Director General or hisappointees. 1/

3.10 NAFINSA's onlending rates to final beneficiaries on loans made usingown resources are in 1.75 to 5.5 percentage points above the ACF index (para. 2.09),depending on the economic activity (most importantly, the priority categoryspecified by the government); geographic zone (in accordance with the NationalIndustrial Development Plan), and type of borrower (private, public or mixedenterprise). Annex 7, T-21 shows the interest rates to industry as of mid-1981.

1/ NAFINSA has 19 branch offices throughout the country, which undertakepart of the credit appraisal and supervision responsibilities, particularlyin the case of smaller operations; about 20 additional branches areplanned to be opened over the next 2 years.

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3.11 While the overall amount of credit granted by NAFINSA grew rapidlyin real terms in recent years (Annex 7, T-22), the level of NAFINSA's financingof the capital goods industries has been varying; after a sharp drop in 1978,the credit to the capital goods sector more than doubled in nominal terms in1979 and then fell again in 1980 (to about US$235 million equivalent). Inthe 1977-80 period, more than two-thirds of capital goods financing were short-term operations (Annex 7, T-23). Non-electrical machinery and transportequipment accounted for 35% and 39% respectively of the total numbers of creditoperations for capital goods industries. The amount of financing, however,shows a marked skewness in distribution: nearly 90% of the credit to capitalgoods industries was for manufacturers of heavy transport equipment (i.e.,trucks, buses and tractors) (Annex 7, T-24). The skewness is explained inlarge part by a heavy lending program during 1977-80 to Diesel Nacional, S.A.,which accounted for 56% of total lending to capital goods industries. Theproposed Program is expected to help NAFINSA reverse this trend and developa more diverse set of capital goods industries.

B. Organizacion SOMEX

3.12 Organizacion SOMEX is a vigorous banking conglomerate with 'mixed'ownership 1/ which operates essentially as a private sector bank while strivingto achieve the developmental objectives laid down by the Government. Thebanking wing of the group, Banco Mexicano SOMEX, provides short, medium-and long-term credit to industry. Through its holding company subsidiarycalled Fomento Industrial Somex S.A. (FISOMEX) the group also holds equityparticipations (usually controlling shares) in a diverse set of industries.Over the past 2-3 years FISOMEX has been moving increasingly into investmentsin capital goods manufacturing projects, with emphasis on rationalization ofexisting industries and with the stated aim of aggressively competing in themarket to promote efficiency in the subsector.

3.13 Organizacion SOMEX emerged during the late 1970s through a sequentialmerger of the Sociedad Mexicana de Credito Industrial (SOMEX, an investment bank)with the Financiera Hipotecaria and Banco Mexicano. Its banking wing (BancoMexicano SOMEX), a multipurpose bank, is now the fifth biggest among privateand mixed banking institutions in Mexico. The holding company wing (FISOMEX)was created in 1979 to promote new industrial projects in the private sectorand to control the industrial, real estate and tourism enterprises in whichthe group is a shareholder. In addition to the banking and industrial wings,Organizacion SOMEX also has a corporate services wing in charge of legal,fiduciary, administrative and overseas operations (see organization chart inAnnex 8, C-3). Organization SOMEX's board (Administrative Council) is composedof high level representatives from SHCP, SPP, Banco de Mexico, NAFINSA,

1/ A 'mixed' institution is one with joint state and private sector ownership(generally with the state having a controlling share), but classified asa private sector bank for legal purposes. Organizacion SOMEX is the mostprominent 'mixed' banking institution supporting Mexico's industrialsector. It has about 70% state ownership.

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BANOBRAS (Banco Nacional de Obras Publicas), PEMEX and the private sector.The Council meets once a month to take decisions on financing requests,investment proposals and other policy matters. The Executive President ofOrganizacion SOMEX also chairs the Administrative Council. Each of the threemain wings (banking, industry and services) is headed by an Executive Vice-President.

Industry Wing (FISOMEX)

3.14 FISOMEX is organized into several 'Corporate Directorates' accord-ing to the type of industrial activity of its holdings. FISOMEX has recentlycreated a capital goods industries department within its 'Corporate Directoratefor Development' to supervise its expending acquisitions and holdings ofcapital goods manufacturing enterprises and to prepare and promote new orexpansion projects in this field suitable for further equity participations byFISOMEX. The department is still at an early stage of organization, with lessthan 10 professional staff by mid-1981; a number of additional budgeted slotsare expected to be filled in the near future. The department's indicativeorganization chart is presented in Annex 8, C-4. Investment operations andprojects in the heavy transport equipment area (buses, truck parts, etc.),which would also qualify as capital goods under the proposed definition(Annex 2), are handled by FISOMEX's Corporate Directorate for Automobiles andAuto-parts.

3.15 FISOMEX started its acquisition program in the capital goodsindustries field a few years back. The focus of the acquisition program sofar has been to consolidate and rationalize existing capital goods manufacturingoperations, with a view to later expanding the productive capacity of suchoperations. In selecting projects under its acquisition and expansionprograms, FISOMEX gives particular weight to the market analysis and inter-national and domestic competitiveness. Thus far, FISOMEX has acquired fourfirms involved in manufacture of engineering equipment: Mecanica Falk, whichmanufactures speed reducers and transmission mechanisms; MECAMEX, whichproduces a diversified line of small machine tools; and the Fairbanks-MorseManufacturing Company and its Central-American affiliate, which manufacture avariety of mechanical and electrical equipment including small machine tools(especially lathes and drilling machines), agricultural and municipal pumps,compressors, electrical transformers (monophasic and distribution transformersof capacities in the 37.5-75 KVA) and A.C. motors. These product lines areexpected to be further diversified and expanded over the the coming 2-3 years.In addition, FISOMEX expects to continue and expand its strong involvement inthe manufacture of transportation equipment and parts, including the productionof trolley buses (through holding in Mexicana de Autobuses, S.A.), trucks andtrailers (through holdings in Traksomex, S.A. which has the collaboration ofMack Trucks, Inc. of the United States). FISOMEX also expects to expandits involvement in manufacturing crankshafts for VAM and Chryslerengines as well as a new line of crankshafts for Perkins diesel engines(through MACIMEX); diesel engines with collaboration from General Motors(Somex Diesel Allison); and tractors and other farm equipment (through a newoperation to be established in 1981/82). FISOMEX has recently also starteda new engineering company (Proyecta) with collaboration from Davy-McKeeCorporation to facilitate the group's entry into the engineering software and'product engineering' fields.

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3.16 Final authority to approve equity investments of FISOMEX rests withthe Administrative Council of Organizacion SOMEX. The Council has, however,delegated to the Executive President and his appointee(s) the authority toapprove operations involving amounts below 5% of FISOMEX's capital subject tocertain cumulative limits. As of December 31, 1980, FISOMEX had total equityholdings in subsidiaries and affiliates (including minority equity positions)totalling about US$37.5 million equivalent distributed among nearly 60 companies.The policy of the group is to hold a controlling equity participation in theassociated companies, whenever feasible, in order to be able to activelyaffect the market and production strategy of the companies. Its statedstrategy for future investments in the capital goods area is to focus on:

(i) product lines which are currently fragmented so that aconsolidation and specialization could yield potentialprofits and drive down product prices;

(ii) products in whose production technology absorption is amajor factor, which is considered by FISOMEX to be an areaof its comparative advantage; and

(iii) projects which involve development of capital goods industry'infrastructure' (e.g., heavy fabrication), and product andprocess engineering ('engineering software').

FISOMEX's acquisitions and investments to date appear consistent with thisstrategy, and show good promise for success.

Banking Wing (Banco Mexicano SOMEX)

3.17 The Credit Department of the banking wing is responsible for managingall credit operations. It is headed by a Corporate Director and organizedinto several sub-directorates. The Sub-directorate for Development Credit,which would handle the group's credit operations under the proposed Program,is comprised of five divisions, of which three carry out credit appraisal work(one each for the public sector, private sector and tourism), one handlesthe legal and administrative aspects of approved credits, and one deals withcredit supervision. Currently the Sub-directorate has some 60 professionals,including 18 credit analysts (referred to as 'account managers') (Annex 8,C-5). To the extent feasible, the credit analysts specialize by line ofproductive activity. Organizacion SOMEX's board has delegated the authorityto approve credits smaller than Mex$100 million to a Credit Committee appointedby the board, and in case of smaller amounts, to the President and his executivestaff. The criteria, procedures and quality of credit evaluation and super-vision are essentially similar to those of NAFINSA's Credit Departmentdescribed earlier (para. 3.09). As in the case of NAFINSA, while most creditappraisal staff have the competence to carry out a full project analysisincluding ERR and FRR calculations, this is not always included in the creditappraisal process. Under the proposed Program, Banco Mexicano SOMEX would berequired to include a full analysis of the incremental economic impact ofprojects submitted for Program financing, following guidelines similar tothose applicable for NAFINSA and FONEI (paras. 3.09 and 3.21).

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3.18 Although SOMEX is predominantly an industrial credit institution,the group's involvement in financing capital goods industry investments at asignificant scale is of a more recent origin. Only two such projects totallingMex$248 million were approved in 1978; the number grew to 10 credit operationsin 1980 for a total amount exceeding Mex$1.5 billion. Over the 1978-81period, more than two-fifths of the credit operations, amounting to over 50%of the total credit went for metallic products, followed by non-electricalmachinery which accounted for one-third of the total number of capital goodsindustry operations and one-fourth of the total amount (Annex 7, T-25). Ofthe 18 credits approved in this period, 5 were for new plants, and the remainingfor expansion or diversification of existing capacities, with Banco MexicanoSOMEX's financing representing some 35% of total project cost. About 70% ofthe financing was medium-to-long term credit for fixed assets and permanentworking capital. The group's financing of capital goods industries is expectedto be further extended and diversified under the proposed Program.

C. Fondo de Equipamiento Industrial (FONEI)

3.19 FONEI was established in 1971, following extensive discussions betweenthe Mexican authorities and the Bank, to help improve industrial efficiency, thestructure of industrial financing, and the country's balance of payments position.FONEI was set up as a trust fund of Banco de Mexico, to provide supplementalterm financing through the entire network of Mexican commercial and multi-purpose banks for industrial projects which would have a positive impact on thebalance of payments through higher exports or efficient import substitution.Additional operational objectives were emphasized as FONEI became a more matureinstitution, the most important being to strive towards an efficient allocationof resources through the financial system by inducing banks to make their lendingdecisions increasingly on the basis of comprehensive project appraisal, topromote industrial efficiency by encouraging enterprises to prepare detailedfeasibility studies, and to encourage lending for new high priority activitiessuch as pollution control and technology development. To help achieve theseobjectives, the Bank has made four loans to FONEI totalling US$360 million. 1/A full institutional appraisal of FONEI is available in the Staff AppraisalReport prepared and circulated to the Executive Directors in connection withthe latest FONEI loan (Report No. 2478b-ME of May 10, 1979). The followingis a summary description of the main features and recent developments.

3.20 FONEI's Technical Committee (its highest decision-making body)is composed of high level government officials. Its chairman is the DirectorGeneral of Public Credit of the Ministry of Finance, and other members includerepresentatives of the Ministries of National Patrimony and Industrial Develop-ment, and of Commerce, Banco de Mexico, NAFINSA, IMIT (para. 1.29), and tworepresentatives of the private sector nominated by the chambers of commerceand industry. The Committee meets once a month to decide on all proposalsfor FONEI financing above Mex$15 million. Decisions for credits below thisamount are delegated to FONEI's Director. An organization chart of FONEI isincluded in Annex 8, C-6.

1/ Loans 824-ME of June 1972, 1205-ME of April 1976, 1560-ME of September1978 and 1712-ME of July 1979.

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3.21 The policies and procedures which govern FONEI's operations are setforth in its Operating Regulations (Annex 6), which may be modified by FONEI'sTechnical Committee in consultation with the Bank. They define the types ofprojects that may be financed by FONEI, terms and limits of subloans, interestrates, criteria for project selection, responsibilities of the intermediaries andfinal beneficiaries, and procedures for FONEI's authorization of financing.These Operating Regulations specify that in selecting projects for financing,FONEI should consider, inter alia, the following economic criteria: (i) theproject's foreign exchange generation or savings; (ii) its economic rate ofreturn; (iii) its utilization of labor and its value added; and (iv) industrialdecentralization aspects. The maximum amount of financing FONEI can normallyprovide to a single investment project is Mex$200 million. However, tofacilitate significant participation in relatively large projects consideredof high priority by the government (e.g., capital goods and petrochemicals),FONEI can approve financing in excess of the above amount provided priorauthorization of the Ministry of Finance is obtained. FONEI's subloans havemaximum maturities of 13 years, including up to 3 years of grace. FONEIrecently also initiated a risk-sharing program to provide a special stimulusto technology research, development and adaptation activities of industries,under which it may provide a partial grant and may waive the client's obliga-tion to repay in case the research project becomes a non-success (para. 1.33).

3.22 FONEI requires its resources to be complemented by funds fromclients and financial intermediaries. To ensure adequate capitalization,final borrowers for investment projects are required to finance at least 25%of fixed asset costs of new investment projects and 20% of expansion projects.The intermediaries are required to finance at least 15% of FONEI's financingfor new projects (which in turn is limited to 65% of project cost), and 11% inthe case of expansion projects where FONEI could provide up to 72% of projectcost. In addition, the intermediary is required by FONEI to ensure thatprojects have adequate working capital financing. In practice, FONEI financesabout 40% of project costs on average for investment projects. Onlendinginterest rates on FONEI's loans for investment projects are set on a floatingrate basis (adjustable every six months) at two percentage points above theACF index (para. 2.09), including a spread of two percentage points for theintermediary bank, which assumes the full credit risk. Loans granted forpollution control and technology improvement are eligible for interest rateswhich are 2%-5% lower than its regular rates to help stimulate these activities.

3.23 FONEI's project appraisal and supervision capabilities havedeveloped well over the years. It has been reasonably successful in itsefforts to encourage the intermediary banks to take over the responsibilityfor carrying out full project appraisals before submitting the financingrequests to FONEI and to undertake regular and systematic supervision of theprojects. This was partly achieved by offering additional spreads of 0.25-0.5%to intermediary banks willing to assume project appraisal responsibility, anda further 0.25% if the bank also agrees to undertake full project supervisionfollowing FONEI's guidelines. FONEI is currently considering steps to furtherimprove its project monitoring and supervision procedures.

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3.24 FONEI's lending operations and loan portfolio have grown rapidlyover the past five years (with an almost 10-fold increase in portfoliosince 1976), as a result of vigorous domestic demand as well as the promotionalefforts and expanding contacts of FONEI with private sector industries andbanks. New loan approvals in 1981 were about US$300 million equivalent, forabout 110 projects (compared to about US$200 million equivalent in 1980distributed among 80 projects) (Annex 7, T-26). 1/ Total loan portfolio ofFONEI at year-end 1981 stood at about US$415 million equivalent. The incomepicture and overall financial condition are satisfactory, with a substantialgrowth in the net income from 1979 to 1980 and good prospects for continuedgrowth.

3.25 In recent years, FONEI's financing for industries manufacturingcapital goods and components amounted to 35-40% of its total financing, andcovers all the main capital goods categories (Annex 2). A recent ex-poststudy carried out by FONEI on the basis of information from supervisionreports submitted by participating banks for a sample of subprojects financedby FONEI during 1975-80 indicated that the average fixed investment costper incremental job created by capital goods industries projects was aboutUS$29,000 equivalent in 1980 dollars (which is lower than that estimated atthe time of appraisal of these projects), indicating that these projects arefairly labor intensive. The net foreign exchange earnings of these projectsduring the first five years of their operation has been substantial, amountingto 2-5 times the corresponding fixed investment costs. Annex 7, T-26 showsthat the geographical distribution of projects supported by FONEI has beenbettered over the last two years, with as much as 45% of the financinggoing to the highest priority zone (Zone I). 2/

3.26 FONEI expects continued high demand for its financing for capitalgoods industries projects through the private banking system. Giventhe increased fiscal stimulus and the government's special promotion efforts,the proportion of capital goods manufacturing projects in its operations islikely to be at least maintained. Annex 7, T-27 includes a representativelist of investment projects of capital goods industries received for consid-eration by FONEI.

3.27 A Project Performance Audit Report (PPAR) of the First and SecondIndustrial Equipment Fund (FONEI) Projects (SecM79-535 of June 1979) acknow-ledged that FONEI financed sound investments, whose foreign exchange savingsperformance has been substantial. However, it commented on two importantaspects of FONEI's early operations:

1/ FONEI had 44 budgeted professional slots in its organization structure inmid-1980, representing a significant increase from 19 in early 1979. Somefurther increase in staff may be needed to undertake the contemplatedincreases in its operational activity, including an active promotion ofcapital goods industries, pollution control and technology developmentprojects.

2/ FONEI proposes to open three regional offices at Guadalajara, Monterreyand Mexicali in the near future to further facilitate project promotionin areas outside Mexico City.

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(a) Given FONEI's attractive onlending interest rates, the relativelysmall spreads allowed for FONEI's participating intermediaries,and the prevailing conditions of credit rationing, the interme-diary banks (which assume the full credit risks) tended to allo-cate loans preferentially to their 'prime' borrowers; this ledto a disproportionately high concentration of FONEI's lendingin large and well-established borrowers; and

(b) FONEI made little progress towards achieving its objective,set under the Second Bank loan, of encouraging the participat-ing intermediaries to use project appraisals as a major inputto their lending decisions, rather than lend primarily onthe basis of loan collaterals.

The difficulties noted are in large part due to the fact that FONEI, inthe period covered by the PPAR, was a new institution. Each of these diffi-culties has been addressed in the Third and Fourth projects which have subse-quently been approved by the Bank. FONEI's onlending rates have since beenincreased and are now on a floating basis linked to the ACF index (para. 3.22).Interest rate spreads to participating banks have been increased to reasonablelevels to provide them an incentive to assume greater lending risks in theutilization of FONEI rediscounts and to participate more actively in theappraisal and supervision of investment projects. Recent evidence indicatesthat these measures, together with changes in the banking law, have helped toreduce banks' collateral requirements and to increase appraisal-based lending.FONEI's lending is also becoming increasingly diversified, with a lower propor-tion of the subloans going to the larger clients. FONEI's loan portfolio atyear-end 1981 was distributed among 270 companies, of which 86 companiesborrowed for the first time from FONEI in 1981.

IV. THE PROJECT AND THE PROPOSED BANK LOAN

A. The Project

4.01 The proposed project would form the first phase of the Capital GoodsIndustries Development Program initiated by the government (para. 1.14), whoseobjective is to achieve a balanced and efficient development of the Mexicancapital goods manufacturing subsector and thus help to improve productivity,employment, balance of payments and long range technology development inMexico. To this end, the project would help to correct existing technical,structural and other deficiencies in the subsector and would provide theneeded financial and technical assistance to individual capital goods manufac-turing industries, in the context of a suitable policy framework. The focusof the production and sales financing components of the proposed project,which would cover the first 2-3 year period of the longer range Program, wouldbe the development of medium size capital goods industries, while the proposedcomplementary measures are oriented to help the development of the entiresubsector by providing needed technical assistance, training, information, andother facilities. The specific project elements are described below.

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Financing of Production

4.02 The financing component to support production of capital goods wouldcomprise assistance for medium size capital goods manufacturing projectsthrough:

(a) financing of medium- to long-term production credits for fixedasset financing for eligible projects involving the creationor expansion of productive capacity by capital goods producingindustries;

(b) financing of equity investments by the implementing agenciesin capital goods producing firms in connection with eligibleinvestment projects involving the creation or expansion ofproductive capacity; and

(c) financing through the FONEI system for: (i) specialized tech-nical and technological assistance provided by local or foreignconsultants or institutes to enterprises involved in themanufacture of capital goods, including to enterprises supplyingcomponents or services to Mexican capital goods manufacturerson a subcontracting basis; 1/ and (ii) a risk-sharing scheme tostimulate research, development, and adaptation activities ofcapital goods industries (para. 1.32).

Initially, the program of production credits would be administered by NAFINSA,Banco Mexicano SOMEX and FONEI, while NAFINSA and FISOMEX would be theagencies implementing the equity investments program. Participation of theseagencies would provide a balanced mixture of capital goods development projects,since each of them has a somewhat different role with respect to the promotionof new or expansion projects. NAFINSA's industrial promotion efforts arelikely to have a heavy emphasis on the creation of new enterprises and thedevelopment of new products, typically with some public sector involvement,while virtually all of the capital goods projects financed through the FONEIsystem are likely to be private sector projects, mainly involving expansionof existing production capacity or diversification into more sophisticatedproducts within a product category that is already being produced. Investmentsundertaken by FISOMEX, on the other hand, are likely to focus on new orexpanded productive capacity in the context of rationalizing existing produc-tion structures and consolidating existing production units to enable productspecialization and increased operating efficiency. Other financing agenciesmay also participate in implementing the Program, as may be recommended

1/ Such assistance would be oriented towards achieving imaprovements inareas such as quality control, product design, production processes,production planning, market research, management systems, and relatedon-the-job or other training.

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by the Coordinating Committee of the Program (COCOFIN) and agreed betweenthe Borrower and the Bank. The most likely additional candidates forparticipation appear to be FOMIN and FOGAIN, the NAFINSA-administered trustfunds responsible, respectively, for provision of risk capital and creditfinancing to small and medium scale industry. 1/

Sales Financing

4.03 The support for production of capital goods would be complementedby sales financing to be provided through FOMEX in the form of term creditsto buyers and to suppliers of capital goods on adequate terms and conditions,in order to facilitate domestic sales of such goods. 2/ It would be ensuredthat the terms and conditions of such financing are competitive with those offoreign suppliers, paying due attention to the need for offering the option offoreign currency denominated loans in domestic sales financing (para. 2.14).

Complementary measures

4.04 In order to ensure the success of the Program, a number of comple-mentary measures would need to be implemented to help overcome existingtechnical, structural, and other problems facing the subsector. To initiatethis process, the project would include several specific elements describedbelow, which follow from the sector analysis presented in Chapter I. Bankfinancing would be made available to cover part of the foreign exchange costinvolved in implementing these measures (para. 4.20), and local counterpartresources directly allocated to the Program would be available to meet theremaining costs. The Program's Coordinating Committee, COCOFIN (para. 1.17),would have the overall responsibility to monitor the implementation of thevarious complementary measures, but would seek the close collaboration of theprincipal implementing agencies as well as other concerned agencies (e.g.,with SEPAFIN on information dissemination system, INFOTEC's technologicalinformation service, etc.) and industry associations. The details of imple-mentation and coordination of the complementary measures have been includedin a project execution paper prepared by the authorities in connection withthe proposed Program (para. 4.18).

1/ These two trust funds are implementing agencies of the First and SecondSmall and Medium Scale Industry Development Projects being supported bythe Bank through Loans 1552-ME and 1881-ME. They could provide usefullinks between capital goods manufacturers and SMI enterprises, althoughin the past the actual amount of financing by these trust funds tocapital goods industries has been limited.

2/ The amounts, terms and conditions of FOMEX's existing mechanisms forfinancing exports of Mexican capital goods appear adequate, and wouldbe continued during the Program period, but no specific Program supportappears to be necessary to the export financing operations.

I

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4.05 Training. During implementation of the proposed project, two typesof training programs would be carried out. Firstly, a formal training programwould be undertaken to bolster the capability of the technical staffs of theprincipal implementing agencies for preparing, promoting, and/or evaluatingcapital goods development projects. The training program would focus on theareas of technology assessment, technology absorption possibilities, design oftechnology transfer agreements, and formulation of complex financing packagesinvolving several parties and foreign companies (paras. 1.42). Secondly, moredetailed seminars or 'mini-courses' for specialized technical and financialstaff of industries and the principal financing agencies would be designed onspecific topics relevant to the preparation and review of capital goodsmanufacturing projects. Annex 9 includes an indicative list of the topics tobe covered.

4.06 To improve availability of information on training facilities (para.1.44), and facilitate planning and implementation of human resource developmentprograms by industries, a comprehensive survey of all available trainingcourses relevant to capital goods industries would be carried out. The surveywould cover vocational as well as more advanced technical training and manage-ment orientation courses, from all sources in Mexico, and would includeinformation on the course content, frequency, type of participants, etc. foreach course. The inventory would be made publicly available upon completion.In addition, an analysis of the technical manpower and training needs ofcapital goods industries over the next 5 years, disaggregated by type ofindustry and type and level of technicians/skilled workers, would be under-taken. 1/ Feasibility studies and subproject evaluations submitted by projectsponsors and/or the participating intermediaries in support of financingrequests would be required to include an assessment of the training needsunder the subproject and plans to meet them.

4.07 Technological information and other support services would beexpanded. INFOTEC would be assisted to increase the coverage and level of itsservices to the capital goods subsector, e.g., technological informationservice, assistance in selection of equipment and suppliers, comparativeanalysis of alternative technologies, technological audits, product andprocess selection, and industrial engineering. A 'technology gap and compara-tive advantage' study would be undertaken to evaluate the level of technologyin Mexico in the manufacture of different capital goods product lines and thefeasibility of producing these products in a competitive manner in Mexico.The study would take into account factors such as the technological complexityof the product, rate of technological obsolescence, the 'technology ceiling'(highest technology level attained in the world) and feasibility of attainingthat level in Mexico, the role of economies of scale, structural problems,existing production capacities and markets. This analysis would then be usedto identify the capital goods product lines in which the 'technology gap' canbe most efficiently filled by Mexican enterprises.

1/ This work would draw on, and coordinate closely with, the work of theJoint Committee of the Ministries of Education and Labor on HumanResources Planning, which is currently preparing an aggregate long-range forecast of the human resource needs of capital goods industries.

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4.08 Information Dissemination System. Two elements included in theproposed project would be designed to fill the information gaps identified inChapter I (para. 1.37). First, an inventory of the effective installedcapacities (together with relevant quality specifications) of major Mexicancapital goods and components manufacturers, including installed capacities for'job shop' work and other services relevant to capital goods manufacture,would be carried out to help promote closer linkages between component andfinal capital goods manufacturers, and facilitate better informed procurementdecisions by producer and user industries. Second, a broad informationdissemination system would be established and implemented to consolidate theavailable subsectoral information on current and projected installed capacities,available technologies, domestic and international markets for capital goodsand their components, supply-demand characteristics, etc. Annex 9 includes anindicative list of items and sources of information for the system, whichwould be made available in an appropriate format to all interested producerand user industries. COCOFIN would rely on SEPAFIN for advice in formulatingand implementing the system. 1/ To provide wide dissemination of the informa-tion, full advantage would be taken of the available information channels ofthe chambers of industry, INFOTEC and the financial institutions.

4.09 Other. COCOFIN would create a suitable mechanism to review othertechnical and structural issues affecting the subsector, such as the adequacyof technical standards (para. 1.40) and strengthening of capability to provide'engineering software' (para. 1.41). It would also provide support to FOMEX inpromoting sales financing, reviewing the adequacy of domestic sales financingconditions and terms, and strengthening after-sales service related to bothexports and domestic sales (paras. 2.14 and 4.03).

B. Project Financing and Implementation

Financing Limits, Onlending Terms and Conditions

4.10 The project would focus on the development of medium size capitalgoods industries. Only projects with total investment costs below US$50million equivalent would be financed. Most of the projects are expected toinvolve total investment costs in the US$5-40 million range. To avoid undueconcentration of Bank funds, a maximum limit of US$10 million would beapplicable for total Bank financing for any single subproject. Moreover, Bankfinancing to any given subproject would not exceed 25% of the total investmentcosts involved, which represents a ceiling equivalent to 50% of the estimatedforeign exchange cost of the typical subproject. This limit is expected toresult in the Bank financing of about 30% of the total foreign exchange costinvolved in the investments supported by the Program (para. 4.13). Enterprisesreceiving loans under the Program would be required to provide at least 20% of

1/ Representatives of SEPAFIN expressed to the appraisal mission their keeninterest in collaborating with COCOFIN and the Program in this respect.

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the total investment costs of the subproject financed. In the case of equityinvestments, Bank financing for a single subproject would be limited to onehalf of the total equity contribution by the respective implementing agencyin connection with the subproject, subject to a maximum of $2 million in Bankfinancing per subproject. Moreover, no Bank funds would be available forfinancing loans by implementing agencies to enterprises in which they hold amajority ownership. All subproject financing requests submitted for Bankfinancing would be required to include a full financing plan for the respectiveinvestments supported.

4.11 Subloans to the final beneficiaries for fixed assets financingwould bear floating interest rates adjustable at least once every six monthsto equal the latest monthly ACF Index (para. 2.09) plus 2%. The ACF tends tomove in parallel with inflation, so that these onlending rates can be expectedto lead to positive real interest rates over the life of the loans (para.2.09). 1/ FONEI's subloans for financing technical assistance would bearonlending interest rates of 5 percentage points below the rates on itsregular subloans; financing for technology research, development and adaptationactivities on a risk-sharing basis would be on terms and conditions consistentwith FONEI's operating regulations (paras. 1.32 and 3.21). Maximum subloanamortization periods would be 13 years including up to 3 years of grace.FOMEX is expected to continue to use floating interest rates of ACF plus 2%on its peso-denominated credits for financing domestic sales; domestic salesfinancing credits denominated in foreign currencies would bear an appropriateonlending rate which is competitive with the financial market conditions forloans in the particular currency.

Project Cost, Financing Plan and Cofinancing

4.12 Based on the project pipelines and demand projections of the principalimplementing agencies, and assuming the size and financing limits, termsand conditions outlined in para. 4.10 above, it is estimated that totalresources of the order of US$1,150 million equivalent would be required forthe target capital goods manufacturing projects over the first 2-3 year periodof the Program. This estimate includes about US$885 million equivalent forinvestments in fixed assets and permanent working capital, US$250 million forsales financing and US$12 million for technical assistance financing. Equity

1/ Spreads to intermediary banks under FONEI's loans would be the same ascurrently specified in its operating regulation--viz., 2% plus an addi-tional spread of 0.25-0.75% depending on the loan size and the acceptanceby the intermediary bank of project appraisal and supervision responsibility(paras. 3.22 and 3.23).

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contributions from the local private sector participants in the projects andloans from local private banks using their own resources are together expectedto cover some US$370 million equivalent of the investment and technicalassistance financing needs. A direct allocation to the Program from budgetresources would cover the counterpart resource requirements for implementingthe proposed complementary measures under the Program. About $250 million ofterm financing is expected to be arranged for domestic sales of capital goods,primarily through FOMEX which would contribute US$200 million through redis-counting operations, with the remaining being provided by the intermediarybanks concerned. The remaining resource gap of about US$520 million equivalent,roughly corresponds to the total estimated foreign exchange cost associatedwith the investments supported under the Program; this would be filledby the proposed US$150 million Bank loan and complementary external resourcesraised in connection with the proposed project, as described below. Tables4.1 to 4.3 provide a full breakdown of the total costs among the differentproject components and financing sources.

4.13 The Bank loan would cover about 30% of the foreign exchange contentof Program costs (para. 4.10) leaving substantial amounts of additionalexternal resources, estimated at about US$370 million equivalent, to be raisedfrom complementary sources. Of this, about US$150 million equivalent would beraised by the three principal implementing agencies (NAFINSA, OrganizacionSOMEX and FONEI) in the external markets to provide amounts approximatelymatching those of Bank disbursements; 1/ these resources would be raisedthrough direct financing from foreign private banks, bilateral export creditor other supplier credit mechanisms arranged by the principal implementingagencies. Each institution has had prior experience in borrowing from foreignprivate banks, and some of the necessary funds have been contracted. 2/ Thebalance of foreign exchange needs, estimated to total about US$220 millionequivalent, would be raised in the form of equity contributions by foreignpartners, loans from foreign private banks, and suppliers credits other thanthose arranged through one of the principal participating agencies (e.g., inconnection with financing of required imported working capital). This implies a

1/ In the case of FONEI, external resources raised by FONEI together withthose raised by the principal intermediary bank(s) financing the invest-ment would have to match the resources being provided from the Bankloan.

2/ For example, NAFINSA currently has open 'global' lines of credit fromofficial export credit agencies of 13 European, Asian, and Americancountries, which offer loans denominated in U.S. dollars and other foreigncurrencies at attractive interest rates, with maximum amortization periodsranging between 5 and 12 years. Banco Mexicano SOMEX and some of theprivate banks participating through FONEI also have access to open linesof credit offered by the official export credit agencies; efforts wouldbe made during project implementation to increase such facilities tohelp provide the private sector an easier access and a greater choiceamong foreign supplier credits.

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MEXICO - CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 4.1: Estimated Project Costs and Financing Plan

(Million- US$ equivalent)

Complementary External ResourcewIncluding Bilateral ExportrCredits Local Resources a/ Other External Resources */ TOTAL

Sack & Suppliers Credits Raised Through Local Private Local Fin-ncial Foreign Foeign private BanksSubprogram Financing Principal Implementing Agencies Sector Sponsors Institutions b/ Collaborators & Other Sourcev

Fixed Investment Credits 130.0 130.0 130.0 80.0 470.0

Credits for PermanentWorking Capital 120.0 100.0 220.0

Equity Investments 17.0 17.0 110.0 6.0 c/ 43.0 193.0

Sales Financing 250.0 d/ 250.0

Technical Assistance &Complementary Measures 3.0 4.3 5.0 e/ 12.0

Frontend loon fee 2.3 - - - - 2.3

TOTAL 152.3 147.0 114.0 508.0 43.0 180.0 1 147.3

af Indicative estimates based on prior experience taking account of likely changes

bf Figures include any local currency contributions by the principal implementing agencies as -ell as other intermediary banks.

cf Local currency contributions by NAFINSA and FISOMEX.

d/ Includes US$200.0 million equivalent financed through the FOMZX system and US$50.0 million provided by project sponsor.

e/ T>ue 'n~Tr 5 snfllios Af bsem dr,nAaeaa allocated directly te the Progua far isplasstiag prepesed eeLplsetry ,senree Ad 115$2.5 million oflocal resources to be provided through FONEI for financing technical assistance eubloans and risk sharing program for technology devaelepent--eaTable 4.2 bela..

Table 4.2: Breadown of the Costa & Financing of Technical Assistance & Other Cnpliantary Measures

(Millions us$ equivalent)

Throngs COCOFIN and ProjectXFThoN Technical Assistance Agencies Sponsors Total

(a) Strengthening of training facilities 0.6 0.6

(b) Expanded technological information &other support services (including 1.2 1.2

techonlogy gap study)

(c) Strengthening of informatior disseminationsystem 1.2 1.2

(d) Special surveys(Inventory of taIning courses,disaggregated analys1s of manpower needs 0.5 0.5of industry & special inventory of installedcapacities)

(e) Financing technical assistance to industries 2.5 2.5 5.0(including subcontractors)

(f) Risk-sharing program for technology development 2.0 1.5 3.5

Subtotal Technical Assistance 4 5 - 1420

(Of which Bank financing) 2.0 1.0 3.0

Table 4.3: Estimated Distrution of Bank Funds

Organizacion SOYEX COCOFIN andSubprogram NAFINSA FONEI & Other Program Participants Technical Assistance Agencies Total

Fined Investment Credits 42.5a/ 62.5 25.0 130.0

Equity Investments 1 0 0 a/ 7.0 17.0

Technical Assistance andComplementary Measures 2.0 1.0 3.0

TOTam 52.5 64.5 32.0 1.0 150.0

a/ Includes possible financing of small and medium sized projects by FOMIN and FOGAIN.

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considerable effort by the beneficiary enterprises to raise complementaryexternal resources at the level of individual projects, which appears feasible.As one measure to help this, NAFINSA would encourage an increasingly activeparticipation of the 'coinvestment funds' in providing equity funds to Mexicanprojects involving foreign collaborators. 1/ Specific co-financing packagesincorporating the above elements would have to be arranged on a case-by-casebasis for the individual subprojects, to suit the particular project needs andtiming.

Project Implementation and Program Coordination

4.14 COCOFIN (para. 1.17) would oversee the implementation of the Program.It would establish operating policies and guidelines, review the progressachieved by each of the implementing agencies in achieving Program objectives,ensure that subprojects submitted for financing are consistent with thenational priorities for the subsector's development, and supervise the channel-ing of Program resources. In view of the institutional maturity of theimplementing agencies, the Committee would not involve itself in detailedevaluation and supervision of subprojects, but would delegate those functions,to the respective implementing agency. In addition, COCOFIN would make orrecommend allocations or reallocations of Bank and other Program resourcesamong the implementing agencies, through approval of suitable annual budgets.Within the approved allocations, individual implementing agencies would beable to use Bank funds for financing eligible subproject expenditures (paras.4.21 and 4.23); COCOFIN would review periodically the eligibility of theexpenditures financed with the help of its Technical Secretariat on an ex-postbasis. The arrangements would substantially preserve the autonomy of theindividual implementing agencies in subproject evaluation and supervision andwould not imply unduly cumbersome procedures. Finally, COCOFIN would pay parti-cular attention to ensuring the implementation of the training, informationdissemination, technical assistance and other complementary measures includedas part of the Program (para. 4.04) and would provide a forum for reviewingthe need for other related measures (para. 4.09).

1/ Under the program of 'coinvestment funds' initiated by NAFINSA severalyears back, collaborative agreements are drawn up between NAFINSA anda participating foreign bank, which together contribute resources toform a fund, usually 60% by NAFINSA and other Mexican agencies and 40%by the foreign banks; the proceeds are then used to make minority equityinvestments in suitable projects involving joint ventures between Mexicanindustries and collaborators in the respective foreign country. Whilethe amounts of investments made by the coinvestment funds to-date havebeen small (totalling about US$18 million equivalent over the past fiveyears), NAFINSA believes that it can make increasing use of this instru-ment in the future to play a catalytic role in attracting foreign directinvestments together with required technological collaboration in capitalgoods manufacturing industries.

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4.15 A Technical Secretariat within NAFINSA would assist COCOFIN in itsday-to-day activities. The Technical Secretariat, which would be headed by aSubdirector General of NAFINSA, would be responsible for the operational andadministrative aspects of channeling the Bank resources to the principalimplementing agencies for approved subprojects, collection of respectiverepayments from the agencies, and maintenance of a separate "Program Account"to record major inflows and outflows and an information system to facilitatemonitoring. It would prepare for COCOFIN's review proposals for allocation(or reallocation) of Bank and other Program resources, and would assist inmonitoring the use of assigned budgets.

Channeling Arrangements and Spreads to Implementing Agencies

4.16 Bank funds would be made available through the Program Accountto the principal implementing agencies to finance part of the foreign exchangecontent of the fixed assets loans, equity investments and operations forfinancing technical assistance or risk-sharing programs to help technologydevelopment. Complementary external resources matching the Bank resources inamount would be raised by implementing agencies from commercial sources tocover the remaining part of these financing operations (para. 4.13). Salesfinancing would be channeled directly by FOMEX and its intermediary banks.Bank resources provided under the Program would be repaid by the implementingagencies into the Program Account, together with an interest equal to 4.0percentage points below the onlending interest rate applicable on the respectivesubloans. 1/ The amortization schedule for the repayments by the implementingagencies would be identical to the amortization schedule agreed with the finalborrower in the case of subloans; Bank resources provided to the implementingagencies for making equity investments would be repaid into the ProgramAccount according to a fixed equal principal payment amortization scheduleover 13 years including up to three years of grace.

Operating Regulations and Project Execution Paper

4.17 The arrangements discussed above relating to the Program coordination,channeling and repayment of funds, maximum amounts, terms and conditions offinancing, onlending interest rates, and criteria and responsibilities forsubproject evaluation and supervision (paras. 3.09, 3.17 and 3.21) have beenincorporated in the 'operating regulations' of the Program, which were discussedand agreed upon during loan negotiations. 2/ These operating regulationshave since been formally approved and transmitted to the Bank by the MexicanAuthorities. Any substantial change in the operating regulations duringthe project implementation period would have to be acceptable to the Bank.

1/ The interest rate payable by the implementing agencies on resourcesborrowed for the purpose of making equity investments would be equalto that payable in the case of resources for investment subloans.

2/ The operating regulations specifically require all subproject appraisalsto include an economic rate of return (ERR) calculation.

- 45 -

4.18 To facilitate coordination and a close monitoring of the progressachieved, a 'project execution paper' has been prepared and submitted to theBank by the Mexican authorities. The paper, whose text was agreed upon duringloan negotiations, includes a description of the Program, division of respon-sibilities among the implementing agencies, and a full description and stepsfor implementation of the training, technical assistance and other requiredcomplementary measures. The expected time schedules for implementing thevarious complementary measures have been transmitted to the Bank through aseparate letter of the Borrower acting as the Technical Secretariat of COCOFIN.Any material changes in the project execution paper would have to be acceptableto the Bank.

Annual Reviews

4.19 In view of the complexity of the Program, COCOFIN and the implement-ing agencies would, with Bank participation, carry out at least once everyyear (before December 31 of each year starting in 1983) a full review of theprogress achieved in implementing each of the project elements. The reviewwould cover the adequacy of the policy framework relevant to capital goodsindustries, including any need to revise tariff levels and other elements ofthe protection policy, and progress on the utilization of the financingcomponents and implementation of the complementary measures, with a view toidentify any needed adjustments in the Program's design, financing conditions,project selection criteria, free-limits and implementation procedures.Adjustments mutually agreed among the Bank, the Borrower and COCOFIN as aresult of the review would be incorporated in the project.

C. The Proposed Bank Loan

Loan Features

4.20 The proposed US$152.3 million Bank loan would finance about 13% ofthe total costs involved in implementing the first phase of the Program asoutlined above (about 30% of the foreign exchange costs -- see paragraph4.13), in addition to the capitalized US$2.3 million front-end fee on theloan. The Borrower of the loan would be NAFINSA, acting as the agent of thegovernment. It is expected that the loan would finance 40-60 investmentsubloans, 10-15 equity investments, 20-30 technical assistance financingoperations, and several (say 5-10) individual operations to finance technologyresearch, development and adaptation activites on a risk-sharing basis. Inaddition, funds from the proposed Bank loan would be available to finance theforeign exchange expenditures related to the implementation of the variouscomplementary measures envisaged under the Program (para. 4.04). Salesfinancing would not be provided using resources of the Bank loan, but would besupported through local resources (para. 4.16). The eligibility conditionsand financing limits explained in para. 4.10 would be applicable for Bankfinancing. About 60% of the Bank loan would initially be allocated among theagencies, with US$35 million each for NAFINSA and FONEI, US$10 million forBanco Mexicano SOMEX, US$5 million for FISOMEX and US$2 million for implemen-tation of complementary measures. The Bank would allocate the remaining partof the loan resources, and make appropriate reallocations from time to time,

- 46 -

depending on the progress of the different project components, and takinginto account the recommendations of COCOFIN (para. 4.14). The Government(with NAFINSA acting as its agent), rather than the individual implementingagencies, would assume the responsibility for servicing the Bank loan, includingthe associated foreign exchange risk. Repayments received from the implement-ing agencies into the Program Account (para. 4.16) would be used as seed capitalfor the Program and would have to be relent for purposes similar to those ofthe proposed project. In view of these arrangements, and the relatively longamortization periods expected for subloans, 1/ the proposed Bank loan would berepaid according to an equal principal payment amortization schedule with15 years term including 3 years of grace.

Disbursement of Bank Funds

4.21 Subject to the limits specified in para. 4.10, disbursements underthe proposed Bank loan would be made for up to the following percentages ofcosts of individual items financed by COCOFIN or the principal implementingagencies through fixed investment subloans, technical assistance subloans,equity investments, risk-sharing program for technology development, andproposed complementary measures under the Program:

(a) 100% of foreign expenditures for directly imported equipment,services contracted for implementing the technical assistanceactivities and other complementary measures under the Program;

(b) 70% of total expenditures for imported equipment purchasedoff-the-shelf in Mexico; and

(c) 45% of the ex-factory cost of domestically manufacturedequipment.

Full documentation to evidence the above expenditures would be required forauthorization of Bank disbursements. Only expenditures made no more than 180days prior to the date of receipt by the Bank of the corresponding financingrequests would be eligible for reimbursement under the proposed loan. Theproposed extension of the Bank's normal 90-day limit under DFC projectsrepresents a continuation of the practice under the ongoing loans to FONEI,and would be justified in view of the complex institutional arrangementsinvolving several institutions and a multi-stage review process. Annex 1includes the estimated disbursement schedule for the proposed loan. Theestimated disbursement schedule is based on the average disbursement profilefor IDF projects in LCP during 1970-80, modified in the later years to reflectthe experience on recent FONEI operations, which provides the most directlycomparable subloan disbursement experience.

1/ Typically 7-12 years, reflecting the nature of capital goods manufac-turing projects as well as the need to complement substantial amountsof shorter term co-financing resources.

- 47 -

Procurement and Auditing

4.22 Procurement procedures for goods and services financed under theproposed loan would follow the procedures customary to Bank DFC-type projects,with the principal implementing agencies having the responsibility for ensuringthe competitiveness, in price and quality, of items procured and their suita-bility for the purpose intended. In the case of all individual procurementpackages exceeding US$1.0 million in value, the agencies would require thebeneficiary enterprises to provide specific evidence of adequate internationaltendering, with the participation of at least three international suppliers. 1/Subloan contracts signed by them with the client enterprises or participatingbanks (in case of FONEI) would contain provisions to ensure satisfactoryprocurement procedures along these lines. These provisions would be reflectedin the Program's operating regulations (para. 4.17). The accounts of NAFINSA,FONEI, Banco Mexicano SOMEX and FISOMEX, including those kept for the purposeof the project, and the 'Program Account' (para. 4.15), would be auditedannually by reputable auditors following accounting principles satisfactory tothe Bank.

Approval Limits

4.23 Prior Bank approval would be required for: (i) the first three fixedasset subloans submitted by each implementing agency; (ii) all fixed assetssubloans involving more than US$2.0 million in Bank financing; 2/ (iii) allequity investments requiring Bank financing of more than US$1.0 million;(iv) all equity investments by participating agencies in enterprises in whichthey already hold or are expected to hold a majority ownership; and (v) allsubloans for technical assistance financing or financing of risk-sharingcontracts which involve Bank financing of US$200,000 equivalent or more.These limits are expected to provide for prior Bank review of about one-thirdof the subloans and investments financed, accounting for about 60% of theloan amount.

D. Project Benefits and Risks

4.24 The proposed project is expected to help the efficient developmentof the capital goods manufacturing subsector in Mexico through the financialassistance, policy actions and other complementary measures. Some 50-75 invest-ment projects involving investment costs of about US$885 million equivalent are

1/ For projects involving new technologies or technology transfer agreements,the competitiveness of available alternatives would be assessed takinginto account the price, terms, and conditions of the technology transferpackage, any associated equity participation by the potential technologypartner, the price and quality of the equipment to be procured, and therelated financing arrangements.

2/ This limit is equal to FONEI's free-limit established in 1979 for theongoing Bank project for general industrial financing (Loan 1712-ME).

- 48 -

expected to be supported; in addition 25-35 operations to finance technicalassistance and technology research, development and adaptation would beassisted. Most subprojects are expected to have real economic rates ofreturn (ERR) in the 15-35% range. ERRs would be calculated for all investmentsubprojects to ensure the utilization of loan resources only for efficientprojects. Between 20,000 and 24,000 incremental jobs are expected to begenerated by the investments supported at an average investment cost ofUS$38,000 to 42,000 equivalent per job. In addition, in view of the strongforward and backward linkages of capital goods industries with other parts ofthe economy, substantial indirect employment impact can be expected. Asignificant regional development impact is also expected as a result of theexisting fiscal incentives and other measures to encourage industrial decen-tralization away from the big cities: about 60% of the investment projectssupported can be expected to be located in the highest priority zone identifiedby the National Industrial Development Plan (Zone I), and less than one-tenthof the investments are likely to be in areas in the immediate vicinity ofMexico City. Total foreign exchange earnings or savings of US$2.0-3.0 billionare expected during the first five years of operation of the subprojectssupported; exports generated by the projects are likely to account for atleast US$500-600 million equivalent of this amount. The streamlining andcoordination of the financing structure, policies and complementary technicalsupport, which the proposed Program would help to achieve, would providelong-range benefits by facilitating a rational subsector development. Perhapsthe most important long term gain would be the technology absorption, develop-ment and mastery which is likely to be gained in the process of preparing andimplementing capital goods manufacturing projects and the complementarymeasures under the Program, which could have very substantial effects onfuture Mexican productivity, employment and balance of payments.

4.25 The project involves two kinds of risks. First, at the policylevel, the government could hesitate to make the appropriate adjustments inexchange rate and protection policies in the light of future macro-economicchanges, which would create the risk of encouraging inefficiency in thecapital goods manufacturing subsector. The understandings reached on thisissue and the proposed annual reviews as well as the government's own interestin ensuring efficiency and developing exports, suggest that this risk is notlarge. Moreover, PEMEX and CFE, which account for substantial capital goodspurchases in the country, have expressed their keen interest in maintainingcompetitiveness in their domestic purchases, with prices within the statedmargin of 15% vis-a-vis comparable international purchases. Second, theProgram involves complex institutional and coordination arrangements. Inparticular, the coordination of financing and a satisfactory execution andmonitoring of the complementary measures require effective management andcoordination on the part of COCOFIN, including delegation of the operationaltasks to specialized agencies. The Bank would closely follow developmentsin this regard, paying particular attention to them during the project'sannual reviews. This and the provisions of the project execution paper shouldhelp limit the institutional risk involved. On the whole, the project presentsa moderate degree of risk.

- 49 -

V. RECOMMENDATIONS

5.01 During loan negotiations, agreements and/or understandings werereached:

(i) with the Mexican Government, NAFINSA (in its capacity asthe Borrower) and COCOFIN on:

(a) the loan amount and the project financing plan (para.4.12);

(b) availability of required counterpart resources to pro-vide sales financing in adequate amounts, terms and con-ditions (paras. 4.03 and 2.14), and to implement thevarious complementary measures (para. 4.12);

(c) arrangements for channeling the proceeds of the Bank loanand for repayment of the Bank loan (paras. 4.16 and 4.20);

(d) institutional and coordination arrangements (paras. 4.14and 4.15);

(e) operating regulations of the Program (para. 4.17); and

(f) policy statement on incentives and protection applicableto the capital goods subsector (para 1.23).

(ii) with NAFINSA (in its capacity as the Borrower), COCOFIN and theprincipal implementing agencies (NAFINSA, FONEI and OrganizacionSOMEX) on:

(a) projects eligible for support, financing limits, terms andconditions (para. 4.10);

(b) plans for implementing the technical assistance componentsand other complementary measures (paras. 4.04, 4.08 and4.09), and the text of the project execution paper(para. 4.18);

(c) allocation of the Bank loan resources among the differentimplementing agencies and project components and proceduresfor their review and reallocation (paras. 4.14 and 4.20);

(d) complementary external resources to be raised by theprincipal implementing agencies (para. 4.13);

(e) onlending interest rates (para. 4.11);

(f) annual reviews of the progress in the project's implementa-tion (para. 4.19);

-50-

(g) criteria and procedures for evaluation of subprojects(including ERR calculations) by the implementing agencies(paras. 3.09, 3.17 and 3.21);

(h) procedures for disbursements of the Bank loan (para. 4.21);

(i) free-limits (para. 4.23); and

(j) procurement and auditing arrangements (para. 4.22).

5.02 Receipt by the Bank of a satisfactory revised statement of policyon protection applicable to capital goods industries (para. 1.23) would bea special condition of loan effectiveness.

- 51 - ANNEX I

MEXICO - CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Estimated Quarterly Schedule of Bank Loan Disbursements a/

(US$ million)

IBRD Fiscal Year Disbursements in Cumulativeand Quarter Quarter Disbursements

1982-83

December 31, 1982 2.3 2.3March 31, 1983 4.5 6.8June 30, 1983 6.5 13.3

1983-84

September 30, 1983 10.0 23.3December 31, 1983 12.0 353March 31, 1984 15.0 50.3June 30, 1984 16.0 66.3

1984-'85

September 30, 1984 22.0 88.3December 31, 1984 22.0 110.3March 31, 1985 16.0 126.3June 30, 1985 9.0 135.3

1985-86

September 30, 1985 6.0 141.3December 31, 1985 b/ 4.0 145.3March 31, 1986 3.0O 148.3June 30, 1986 2.0 150.3

1986-87

September 30, 1986 1.01 151.3December 31, 1986 c/ 1.0, 152.3

a/ The estimated disbursement schedule is based on the average disbursementprofile for DFC projects in LCP during 1970-80, modified in the later yearson the-basis of the experience on the most recent FONEI loans to Mexico, whichrepresent the subloan disbursement experience most directly comparable to thatunder the proposed project.

b/ Last date for submission of subprojects for Bank financing.

c/ Closing date.

- 52 -

MEXICO - CAPITAL GOODS INDUSTRIAL DEVELOPMENT CREDIT PROJECT

Capital Goods Product Categories as Defined Under the

National Industrial Development Plan 1/

Industries involved in the manufacture of the following goodsare considered as capital goods industries (included in the industries categorizedas Priority I) under the National Industrial Development Plan. Canital Goodsfall under Section 1.2 of the Plan's classification.

1.2.1 Machinery and Equipment for Production of Food and FoodProducts

1.2.1.1. Machinery and equipment for industrializationof food products

1.2.1.2. Tractors, harvesters and farm machinery.

1.2.1.3. Airplanes for crop dusting

1.2.2 Machinery and Equipment for the Petroleum and Petro-chemicals Industries

1.2.2.1. Machinery and equipment for on-shore andoff-shore exploration and drilling

1.2.2.2. Valves, axles, shafts, couplings and pumps

1.2.2.3. Motors, pumps, compressors, turbo-compressorsand blowers

1.2.2.4. Tubing for drilling, process and support

1.2.2.5. Tubular heaters and heat exchangers

1.2.3. Machinery and Equipment for Electrical Industry

1.2.3.1. Machinery and equipment for generation,

transmission and distribution of high

voltage electricity.

1.2.3.2. Hydraulic turbines, gas turbines and relatedgenerators of electricity.

1.2.3.3. Injection pumps, boilers and large piping.

1.2.3.4. Equipment for measurement and control.

1/ As amended by the decree published on October 7, 1981.

53 ANNEX 2Pag2

1.2.4 Machinery and Equipment for Mining and MetallurgicalIndustry

1.2.4.1. Machinery and equipment for extraction,concentration and benefaction of minerals.

1.2.4.2. Machinery and equipment for coking, peletizationand smelting of ferrous minerals.

1.2.4.3. Machinery and equipment for smelting, refining,molding and lamination of metals.

1.2.4.4. Machinery and equipment for manufacture ofmetallic products involving sheets, wires androds.

1.2.5. Machinery and Equipment for Construction

1.2.5.1. Machinery and equipment for construction industry.

1.2.5.2. Earthmoving and soil conditioning machinery andequipment.

1.2.6. Transport Equipment

1.2.6.1. Tractor-trucks, heavy and semi-heavy trucks andtrolley buses and integrated buses.

1.2.6.2. Boats for non-sport activities and their partsand components.

1.2.6.3. Railway locomotives, railing cars, heavy railwayequipment and installation and their parts andcomponents.

1.2.7. Machinery and Equipment for Diverse Industries

1.2.7.1. Machine tools

1.2.7.2. Carbon and alloy steel tubing

1.2.7.3. Pumps, compressors, valves, couplings andconveyor belts for process industries.

1.2.7.4. Measurement, control and laboratory equipmentfor industrial use

.1.2.7.5. Direct or alternating current motors greater than1 HP and their controls.

1.2.7.6. Machinery and equipment for cement industry.

1.2.7.7. Machinery and equipment for paper and celluloseindustry.

- 54 -ANNEX 2Page 3

1.2.7.8. Foundry, forging and molding of parts formachinery and equipment made of iron, steeland their alloys.

1.2.7.9. Heavy fabrication, machining and welding.

1.2.7.10. Industrial boilers and heat exchangers

1.2.7.11. Machinery and equipment for-textile, garmentand leather industries.

1.2.7.12. Machinery and equipment for plastics and glassindustries.

1.2.7.13. Industrial refrigeration machinery and equipment.

1.2.7.14. Machinery and equipment for materials handling.

1.2.7.15. Machinery and equipment for packaging and bottling.

1.2.7.16. Diesel motors for general use and their components.

1.2.7.17. Machinery for preventing environmental pollution.

1.2.7.18. Machinery and equipment for water wells.

1.2.7.19. Velocity reducers for industrial use.

1.2.7.20. Metal molds, dies and matrices.

1.2.8. Industrial Electronics Equipment and Components

1.2.8.1. Electronic telephone equipment.

1.2.8.2. Industrial and communications electronicequipment and components.

1.2.8.3. Electronic computers and components.

1.2.8.4. Integrated circuits and electronic components ofgeneral use-

1.2.8.5. Manufacture of electronic equipment formeasurement and control.

Vl

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Summary of Principal Fiscal Incentives for Industrial InvestmentOffered Under the 1979 Decrees Issued with NIDP

Priority Sectors All Industrial ActivitiesGeographic Location Other Purchase of Employment Generatedof Investment Small Enterprises b/ Activity Category 1 c/ Activity Category 2 d/ Industries Local Equipment !y Additional Shifts

Zone IPreferential 25% Investment 20% Investment 15% Investment - 5% 20% Additional

20% Employrment 20% Employment - Employment

Zone IIState Priorities 25% Investment 20% Investment 10% Investment - 52 20% Additional>

20% Employment 20% Employment - Employment

Reat of the Country 25% Investment e/ 20% Investment 10% Investment e/ - 5% 20% Additional -n20% Employment 20% Employnent e/ Employment

Zone IIIA. Controlled growth - - 5-B. Consolidated growth 25% Investment e/ 20% Investment e/ 10% Investment e/ - 5% 20% Additional

20% Employment e/ 20% Employment e/ - Employment

a/ Geographic zones are defined in the decree published in Diario Oficial. February 2, 1979. Fiscal credits can be used for the paymentof any federal tax which is not im,lased for a specific use. The percentages shown in the table for investment are applied to the totalvalue of construction and installations and the purchase of new machinery and equipment directly related to the production process; itis granted at the time of undertaking of the expenditure. In the case of employment, the percentage is applied for a period of two yearson the new employment valued at the annual mininmum wage.

b/ Enterprises with fixed assets not exceeding 200 times the annual minimum salary in the Federal District.

c/ includes agroindustries, capital goods producing industries and strategic inputs for the industrial sector (e.g. steel, cement)

d/ Includes non-durable consumer goods, durable consumer goods and intermediate products specified in decree published in Diario Oficial,March 9, 1979.

eI/ pplied only to expansions of productive capacity in the same industrial activity.

Source: Secretaria de Patrimonio y Fosento Industrial, Plan Nacional de Desarrollo Industrial, 1979-1982 (Mexico, 1979) p. 181.

W

- 56 - ANNEX 4Page 1

MEXICO

Institutional Infrastructure for Technology DevelopmentBy Industries

1. Industry in Mexico has now reached a relatively high degreeof sophistication and there exists a substantial pool of importantengineering and technical skills. If Mexican industry is to furtherincrease local value added and compete efficiently in world markets,there is a need to focus increasingly on the technology factor inindustrial development and develop indigenous capabilities fortechnological acquisition, adaptation and innovation. This would helpthe development of new or improved products, more efficient productionmethods, and new processes to use available raw materials. Thecapital goods industries subsector has a key role in this respectbecause capital goods often act as the carriers of technologydevelopment and the capability to design and manufacture them is agood indicator of the degree of technological mastery'. Recognizingthe importance of technology issues, Mexican authorities have createda relatively large institutional infrastructure to supporttechnological development in industry.

2. The Instituto Mexicano de Investigaciones Tecnologicas(IMIT) was one of the pioneer institutions established in the area ofindustrial research and development, having been established in thefifties with the help of the Armour Research Foundation. IMIT ispartly funded by the Mexican Government, through Banco de Mexico, andpartly by revenues from industrial and banking clients for projectpreparation and evaluation. IMIT also conducts technological researchfor enterprises for a fee. The main focus of IMIT's researchactivities has been in the food and processing technologies ratherthan in capital goods subsector per se.

3. More recently, in 1970 the government created the ConsejoNacional de Ciencia y Tecnologia (CONACYT) to formulate and implementnational policies aimed at strengthening the links between researchorganizations and industrial enterprises. Its activities werefocussed initially only on science and the related support to humanresource development. Since 1978, CONACYT has moved increasingly intotechnological development field. CONACYT has been instrumental in thecreation of 12 technological research and development centers to date,and the provision of technical services to medium and small-scaleindustry. In general, the centers which deal with the metalworkingindustry are not as developed as those related to processingindustries. The most relevant to capital goods industries are tworelatively new and small centers: Instituto Mexicano deInvestigaciones en Manufacturas Metal Mecanicas, A.C. (IMEC) locatedin San Luis Potosi, which provides simple designs for equipment andtools and assistance in production engineering to small-scalemetalworking industries in the region (25 professionals); and Centrode Investigacion y Asistencia Tecnologica del Estado de Queretaro,

- 57 - ANNEX 4Page 2

A.C. (CIATEQ), established in 1978 in Queretaro, which is orientedtowards the provision of services to small-scale metalworkingindustries on metal cutting, thermal treatment and forging processes.(15 professionals). CONACYT has been the recipient of a US$50.0million loan approved earlier this year (1981) by the Inter-AmericanDevelopment Bank mainly for strengthening the science and technologyresearch centers, institutes and departments functioning under itsauspices.

4. Although it lies outside CONACYT's institutional system,mention should also be made of the Institute of Electrical Investi-gations (IIE) at Cuernavaca, which has achieved a higher level ofperformance than the aforementioned centers. It has a staff of over400 professionals. While legally an independent institute, it dependsheavily on CFE, which contributes a large share of its budget (38%)and provides the bulk of its work. The Instituto Mexicano delPetroleo (IMP), which is a research institute set up by PEMEX, is awell established research and development institute enjoying worldwidereputation for basic as well as applied research in the petroleum andpetrochemicals field. Part of IMP's research activities are concernedwith the design and development of equipment for petroleum extractionand refining and petrochemicals processing, a field in which IMPscontributions have been significant.

4. The Servicio de Informacion Tecnologica (INFOTEC), aspin-off of CONACYT, is a trust fund administered by NAFINSA, andprovides technical information, technological advice and relatedsupport services to Mexican firms of varying size and industrialsophistication. It was designed after the Danish and Canadiantechnological information services. Since its establishment in 1972,INFOTEC has shown an impressive growth performance and an ability togenerate the interest of private Mexican firms in its services. Atpresent it has about 140 employees, of which approximately one halfare professionals. The services offered include: technologyinformation search, using the resources of its own library andperiodicals subscriptions and through a network of relationships withother information centers, R&D centers and consultants; industrialliaison service under which INFOTEC seeks to identify, through plantvisits, the technological information needs, problems and businessopportunities of the industrial firms; an 'enquiry service to answerspecific technical questions received in written form or by telephone;publication of a technical news bulletin; technical documentacquisition service (e.g., acquisition of copies of patents,standards, etc.); and specialized technical assistance services tocater to specific requests from firms, e.g., for assistance infeasibility or market studies, plant layout, process optimization,analysis of alternative suppliers of technology, etc. Approximatelyone half of INFOTEC's budget needs are covered by fees paid by cliententerprises.l/

1/ INFOTEC has been the most active among the specialized technicalassistance agencies participating in the first and second smalland medium scale industries development projects (Loans 1552-MEand 1881-ME).

- 58 -

5. INFOTEC-s board is comprised of representatives from SPP(Secretariat of Programming and Budget), SEPAFIN, SHCP, Banco deMexico, NAFINSA, Banco Mexicano-SONEX, Banco Internacional and theNational Federation of Chambers of Industry (CONCAMIN). Itsorganization currently includes a separate department concentrating oncapital goods industries (with 15 professionals). INFOTEC expressedstrong interest in expanding its services oriented specificallytowards capital goods industries.

6. Finally, Mexico also has a large number of competentprivate sector consulting companies which can provide a wide range ofengineering, project preparation or other services. Some of theconsulting companies have foreign associations and hence have easyaccess to technological information from foreign services. A few ofthe universities are also initiating programs oriented towardstechnology development and provision of services to industry, e.g., anew center for mechanical design is expected to be established in theengineering faculty of the Universidad Nacional Autonoma de Mexico(UNAM).

-59-. ANNEX 5

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECTStructure of the Mexican Technical Education and Training System for Industry

LEVELS:

LOWER UPPER HIGHERPRIMARY SECONDARY SECONDARY LEVEL ARMO - Adiestramiento Rapido de Mano de Obra--a U.N.

assisted program established in 1966 for briefbut intensive vocational training in severalspecializations (with course durations ranging

UNIVERSITIES from a few months to more than one year) as well

CECYT AND HIGHER as training courses for first line shopl_______ l TECHNOLOGICAL supervisors and trainers; at present it has

] TECHNICAL 1 INSTITUTES normal capacity of 40,000 to 50,000 traineeSECONDARY hours.

CECYT- Centros de Estudios Cientificos y Tecnologicos(Centers for Scientific and Technological

PRIMARY Studies), similar to CET referred to below.

'l ICECATI - Centros de Capacitaci6n para el Trabajo'.1 CECATI (Industrial Training Centers)--for terminal

technical training of smi-skilled and skilledworkers through courses of up to 40 weeks;

CET nrimary school attendance is not a prerequisiteCONALEP CENAPRO for entry into the CECATI systemCERETI

ENAMACTI CET - Centros de Estudios Tecnologicos (Centers forTechnological Studies--which provides terminaltechnical training as well as training in

| ARMO l ITR preparation to university.ARMO CENAPRO- Centro National de Productividad (National

Productivity Center) - offers training programs(including on-the-job training) for shop foremen

cUSTOII and middle level technical and managerial staff;DESIGNED its courses can be designed for individuals orTRG PROGRAMS specifically for an individual enterprise upon

request. I/

CERETI - Centros Regionales de Enseefanza Tecnica (RegionalTechnical Teacher Training Centers).

CONALEP - Colegio Nacional de Educacion Profesional yTecnica (the National System of Professional &Technical Education),a semi-autonomous agency ofthe Ministry of Education, which provides terminalprograms for skilled workers and lower andtechnicians through a national system oftraining centers.

ENAMACTI - Escuela lacional de Maestros de Caoacitaci5n.pare el Trabajo Industrial. (National Schoolfor Industrial Technical Trainers).

ITR - Institutos Tecnologicos Regionales (RegionalTechnological Institutes).

Custom -DesignedPrograms - Training programs undertaken by individual

industrial firms to suit the specific needs oftheir technicians and skilled workers; they aretypically designed and administered with theassistance of a consulting company or atechnical institute (e.g., the MonterreyTechnological Institute has designed trainingprograms for capital goods manufacturing unitsof the Alfa group).

1/ Up to now CENAPRO was located exclusively in Mexico City, but in 1981/82 two centers will beopened in Torreon and Merida, another one is in construction in Irapuato and others are plannedin the states of Tabasco, Baja California and Tamaulipas.

- 60 -ANNEX 6Page 1

OPERATING REGULATIONS OF THE INDUSTRIAL EQUIPMENT FUND

(FONEI)

I. OBJECTIVES

1. Objectives. The objectives of the Industrial Equipment Fund (FONEI)are:

(a) to promote the efficient production of industrial goodsand services;

(b) to ensure that the auxiliary lending institutions andorganizations (financial intermediaries) of the countrytake the viability of investment projects into accountin their lending decisions.

II. GENERAL PROVISIONS

2. Operations. FONEI may undertake the following operations:

(a) to provide funds to the financial intermediaries for loansthat they grant for: (1) the acquisition of fixed assets;(ii) the preparation of preinvestment studies, and (iii) theadaptation, production, integration and development oftechnology;

(b) to carry out financing operations related to those mentionedin (a) above;

(c) to provide guarantees to protect the financial intermediariesagainst the risks of default;

(d) to make grants to enterprises to assist technologicaldevelopment.

3. Currency. The lending operations of FONEI shall be denominated inMexican currency.

4. Credit Limits. The maximum amount of financing granted by FONEI foreach project or program shall be Mex$200 million. The Committee may make largerloans for high-priority projects subject to ratification by the entityestablishing the trust.

- 61 -

5. Maximum loan period. FONEI shall establish the loan period andother conditions of financing according to the nature of each project. Themaximum period shall be thirteen years, including a grace period of not morethan three years.

6. Interest rate. The annual net interest rate used in the variousFONEI programs shall be charged on unpaid balances and based on the averagepercentage cost (CPP) of interest rate charges and if applicable, surcharges,on borrowing operations in Mexican currency by the whole range of privateand mixed banking institutions, including loans by enterprises and individualsterm deposits (except savings accounts), and also, where applicable, bank gonds,based on monthly estimates prepared by the Banco de Mexico. The CPP shall berounded off to the nearest one-tenth of one percent.

The initial rate applied shall be that in effect for the monthimmediately preceding that of the contracting of the loan between the institutionand its borrower and shall be modified every quarter if necessary, even thoughthe amortization payments may be monthly or quarterly, as stipulated in theprececing paragraph.

7. Discount differential. The discount in favor of the intermediaryinstitutions shall in all cases be 2% on unpaid balances. However, FONEI mayincrease this differential in the following casest

(a) up to 0.5% when the intermediaries undertake the appraisalof the projects, if the total assets before the projectinvestment in an existing enterprise, or estimated assetsin a new enterprise, are less than Mex$100 million, and byup to 0.25% when the assets exceed this amount'

(b) by up to 0.25% annually after presentation to FONEI of thesupervision report or reports.

In both cases the intermediaries may carry out these tasks with theirown technical staff or through outside consultants, with FONEI's prior agreementand in accordance with the terms of reference established by it.

8. Guidelines for the intermediaries. The lending institutions actingas financial intermediary in loans made by FONEI shall be subject to thefollowing basic requirements:

(a) in programs where FONEI finances only the acquisition offixed assets, they must ensure that the borrowing enterprisewill have sufficient resources to meet its working capitalneeds;

(b) the costs of appraising and supervising the project shallnot be passed on to the borrower;

(c) except for any subordinate portion of the discount, theintermediary shall be obliged to service its debt punctuallyand in full, regardless of whether it has received paymentfrom its borrower. In addition it shall immediately payto FONEI any sums received as advance repayment of principal.

- 62 -

ANNEX 6Page 3

9. Complementary financing. In the financing of projects supported byFONEI, other lending institutions, equipment suppliers, and in general anyother sources of funds, may participate in addition to the financial intermediary.

10. Borrower's contributions. The contribution of the final borrower shallbe made in the form of increases in capital stock, or through internal generationof funds during the execution phase of the project in the case of establishedenterprises.

11. Commitment charge. FONEI shall charge the financial intermediariesa commitment fee of 1% per annum on the undisbursed balances in accordancewith the disbursement schedule approved by FONEI. The financial intermediariesmay in turn pass this charge on to the final borrowers.

12. Rights of FONEI. The contracts signed by FONEI with the financialintermediaries, and those signed by the latter with the final borrowers, shallstipulate that FONEI is at all times entitled, without prejudice to thoseassisting the intermediaries, to obtain the information it considers necessaryregarding the execution of projects or programs, to inspect and supervise theirimplementation and operation, and to require the final borrowers to submitfinancial statements certified by external auditors.

13. Coordination agreements. FONEI may enter into coordinationagreements with other trust funds or entities in order to assist enterprises,under the terms of its Operating Regulations.

14. Portfolio limit. FONEI shall limit its loans to any one enterpriseto 5% of its total assets.

15. Alternative sources. FONEI shall not make loans for projects orprograms for which adequate alternative sources of financing are available.

III. EQUIPMENT FINANCING PROGRAM

16. Objectives. FONEI may finance:

(a) the equipping of new industrial plants or the expansion,modernization or relocation of existing plants whicheffectively promote national objectives for industrialdevelopment, or whose products have reasonable prospectsof competing in foreign markets;

(b) the equipping, extension or modernization of enterpriseswhose purpose is to provide services that generate orsave foreign exchange efficiently.

'Efficiency" is understood to mean that production costs enable theproducts or services to compete now or in the foreseeable future, in terms ofquality and price, with identical or similar products from overseas.

17. Use of resources. FONEI resources in this program musr be used onlyfor the acquisition of machinery, equipment and installations, their assembly

- 63 -

ANNEX 6Page 4

and conditioning, the construction of premises to contain them, and pre-operating costs.

18. General guidelines. In selecting projects for FONEI financingunder this program, the following factors among others shall be taken intoaccount: the priority of the activity, the generation or saving of foreignexchange, industrial decentralization, regional development, employmentcreation, value added, and the economic and financial rates of return.

19. Credit shares. With a minimum of Mex$4.5 million, FONEI shallfinance the acquisition of fixed assets in the following proportions:

(a) for projects whose purpose is the establishment of newenterprises, up to 65% of fixed assets. The financialintermediary shall provide funds equal to at least 15.4%of the FONEI loan from its own resources and the finalborrower shall contribute at least 25% of the value ofsaid assets;

(b) in the case of projects for expansion, modernization orrelocation of existing plants, FONEI may finance up to72% of the fixed assets under the project. The financialintermediary shall provide funds equal to at least 11.1% ofthe FONEI loan from its own resources, and the finalborrower shall contribute at least 20% of the value ofsaid assets.

(c) within the framework of its participation, FONEI maysubordinate its loan in relation to the financialintermediary in a percentage not exceeding that of thefinal borrower, in cases of high-priority projects forenterprises with total assets not greater than Mex$100million.

20. Interest rate. The net interest rate charged to the final borrowershall be 2% above the CPP referred to in paragraph 6, except for the subordinatedpart of the loan, where it shall be 2.5%.

However, these rates may be reduced by up to 0.25% in the light ofthe costs of the preinvestment studies incurred by the enterprise for thecontracting of external consultants acceptable to FONEI.

IV. POLLUTION CONTROL PROGRAM

21. Purpose of the program. Through this program FONEI may providepreferential loans to enterprises, especially those established in areas of highindustrial or population density, for the acquisition of pollution controlequipment, taking into account as far as possible the views of the competentauthorities.

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ANNEX 6Page 5

22. Amount of assistance. FONEI will finance up to 90% of the costof fixed assets and technical advice. The enterprise must contribute notless than 10% of the investment.

23. Interest rates. The net interest rate charged by the financialintermediaries to the final borrowers shall be the CPP indicated in paragraph 6.

V. TECHNOLOGICAL DEVELOPMENT PROGRAM

24. Purposes of the program. Through this program FONEI intends tosupport research into and the development and adaptation of methods andprocedures for the efficient manufacturing of industrial products, and thedesign, construction and testing of capital goods, including prototypes andpilot plants.

25. Use of funds. The resources in this program will be used for suchpurposes as: purchase of basic data and process engineering, salaries,materials, equipment and services, training costs, etc., all-relating totechnological projects.

26. Forms of assistance. FONEI may give its support in the form ofloans and grants, separately or together, in such a way that the sum of bothdoes not exceed 80% of the enterprise;s annual program costs.

27. Credit shares. FONEI's support may account for up to 80% of theentrepreneur's approved annual budget; the firm must in all cases provide aminimum of 20% of said budget.

28. Interest rate. The net interest rate charged to the final borrowershall be three percentage points less than that indicated in paragraph 6.

29. Loan guarantee. The guarantee for the loans granted by FONEI to thefinancial intermediaries under this program shll not be greater than 90% ofthe amount of each loan, including capital and regular interest.

The financial intermediary or, as the case may be, the entrepreneuror party requesting the guarantee, shall pay to the trustee, in one singlepayment, the equivalent of 0.5% of the principal of the loan on the date onwhich the guarantee contract is signed.

30. Exemption from loan repayment. In the light of the features of eachcase, the Technical Committee may exempt an enterprise from repayment of partof or all of the loan if the results arenot positive, in which case it shalldecide the destination of the remaining assets and rights.

31. Grant limit. FONEI's contribution in the form of a grant shall notexceed 30% of the entrepreneur's approved annual budget, within the allocationapproved annually by the Technical Committee for this section of the program.

32. Criteria for grants. In making any grants, FONEI shall take intoaccount principally the degree of risk involved, the degree of innovation,participation by a Mexican research institute or engineering firm, and therelative size and economic capacity of the enterprise.

- 65 -ANNEX 6Page 6

V. PREINVESTMENT STUDIES

33. Purpose of the program. To assist entrepreneurs in improving thebases for their investment decisions and loan requests, FONEI may grant loansfor carrying out preinvestment studies when these relate to projects that arepotential candidates for financing by the Fund.

34. Credit limits. FONEI's financing can cover up to 80% of the cost ofthe studies. The entrepreneur or promoter must contribute a minimum of 20%of said costs.

35. Consolidation. If the preinvestment study leads to implementationof a specific project, the loan shall be consolidated with that which FONEI maydecide to grant to the project.

36. Loan guarantees. FONEI may provide its guarantee to the financialintermediaries under this program on the terms stated in paragraph 29.

37. Interest rate. The net interest rate charged by the financialintermediaries on loans for preinvestment studies shall be 3% below thatreferred to in paragraph 6.

/s/ Banco de Mexico, S.A.Trustee of the Federal Governmentfor the Industrial Equipment Fund

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 1: Gross Domestic Product by Sector of Origin, 1965, 1970, 1975-80

(in current and constant 1972 prices)

Shares

1965 1970 1975 1976 1977 1978 1979 1980 1965 1970 1975 1979

Values in Current Prices (billion pesos)

Agriculture, Forestry, Fishing 36.4 47.4 99.9 t28.6 176.6 223.5 277.7 na.. 14.4 11.3 10.1 10.0Mining 3.3 5.6 10.7 13.8 21.3 23.4 31.5 n.a. 1.3 1.3 1.1 1.1Petroleum 9.1 13.3 31.3 37.4 64.1 83.1 132.4 n.a. 3.6 3.2 3.2 4.8ttanufacturing 52.5 94.7 227.1 289.8 405.7 513.0 658.7 n.a. 20.8 22.6 23.0 23.8Construction 10.1 21.4 63.3 78.1 99.1 134.6 186.6 n.a. 4.0 5.1 6.4 6.7

Electricity 3.4 6.2 11.2 14.9 23.6 25.4 32.6 n.a. 1.4 1.5 1.1 1.2Commerce 76.3 124.1 288.2 334.5 447.7 573.4 744.4 n.a. 30.3 29.6 29.2 26.9Transport & Communication 7.3 11.1 29.0 36.2 53.0 68.9 87.8 n.a. 2.9 2.6 2.9 3.2Government 13.7 26.0 85.1 118.2 154.2 188.2 245.8 n.a. 5.5 6.2 8.6 8.9Other Services 39.9 68.9 142.4 176.4 229.4 289.5 369.5 n.a. 15.8 16.5 14.4 13.4

Gross Domestic Product 252.0 418.7 988.3 1,228.0 1,674.7 2,122.8 2,767.0 n.e. 100.0 100.0 100.0 100.0Non-Oil GDP 243.0 405.4 957.0 1,190.6 1,610.6 2,039.7 2,634.6 n.a. 96.4 96.8 96.8 95.2

Average Annual Growth Rates

Values in 1972 Prices (billion pesos) 1965-70 1970-75 1975-80 1965-80

Agriculture, Forestry, Fishing 45.6 51.7 56.0 56.6 59.6 62.4 61.9 65.3 2.5 1.6 3T 2.4Mining 4.7 5.6 6.6 6.8 6.9 7.0 7.3 7.8 3.6 3.3 3.4 3.4Petroleum 8.4 13.2 18.9 20.9 24.3 27.8 32.1 37.6 9.5 7.4 14.7 10.5Manufacturing 70.3 106.3 141.4 146.4 151.7 165.3 179.5 189.5 8.6 5.9 6.0 6.8Construction 15.0 23.8 35.5 34.8 34.1 38.6 44.1 49.7 9.7 8.3 7.0 8.3

Electricity 3.2 6.2 9.3 10.0 10.9 11.8 12.8 13.7 14.1 8.4 8.1 10.2Commerce 95.8 134.4 173.2 171.5 173.5 184.3 198.8 212.7 7.0 5.2 4.2 5.5Transport & Communication 8.4 12.3 19.8 20.8 22.1 24.5 26.8 28.7 7.9 10.0 7.7 8,5Government 19.9 28.8 42.4 51.3 52.3 55.6 61.8 66.1 7.7 8.0 9.3 8.3Other Services 60.9 79.5 97.8 99.1 101.5 104.3 109.7 117.4 5.5 4.2 3.7 4.5

Gross Domestic Product 332.3 461.8 605.9 618.2 636.6 681.6 734.9 788.4 6.8 5.6 5.4 5.9Non-Oil GDP 323.9 448.6 587.0 597.3 612.3 653.7 702.8 750.8 6.7 5.5 5.0 5.8

Source: Bank of Mexico and World Bank staff estimates._

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 2: Gross Value of Production and Value Added in Capital Goods Industries, 1970-1978 (Revised Series)

(Million Mex$ in Current Prices and Percentages)

1970 1971 1972 1973 1974 1975 1976 1977 1978

Gross Value of Production (Millions Mex$, curreiLt prices)

Total Manufacturing 274,137.6 300,369.0 339,721.9 417,486.2 566,465.7 666,451.1 811,924.2 1,096,507.4 1,363,023.6

Metal products 8,968.5 7,790.8 9,835.3 11,645.5 16,718.5 20,798.0 25,401.2 32,875.1 43,046.1Non-electrical machinery 5,460.1 5,949.7 6,995.8 9,265.3 12,541.6 16,609.8 20,546.2 27,799.2 37,505.8Electric and electronic machinery 6,740.5 6,697.0 3,355.2 10,326.0 13,937.9 16,487.0 21,485.0 29,064.3 37,000.3Transport equipment (ships & railway) a/ 1,246.8 1,375.5 1,677.6 2,101.7 2,861.0 3,171.3 4,519.3 4,896.0 5,934.3

Sub-total 22,415.9 21,813.0 26,863.9 33,338.5 46,059.0 57,066.1 /1,951.7 94,634.6 123,486.5

Share of capital goods in total manufacturing (%) 8.2 7.3 7.9 8.0 8.1 8.6 8.9 8.6 9.1

Share in sub-sector total (%)

Metal products 40.0 35.7 36.6 34.9 36.3 36.4 35.3 34.7 34.9Non-electric machinery 24.4 27.3 26.0 27.8 27.2 29.1 28.6 29.4 30.4Electric and electronic machinery 30.1 30.7 31.1 31.0 30.3 28.9 29.9 30.7 30.0Transport equipment (ships & railway) a/ 5.6 6.3 6.2 6.3 6.2 5.6 6.3 5.2 4.8

Automotive industries (including buses & trucks) 14,395.4 16,402.0 19,377.0 25,845.7 34,565.3 40,139.0 41,575.3 56,719.2 89,143.9

Value Added (Millions Mex$ in current prices)

Total Manufacturing 105,203.0 118,057.1 134,723.4 164,014.9 215,717.0 256,701.0 316,210.2 440,812.0 550,571.9

Metal products 4,088.0 3,927.6 4,428.8 5,345.9 7,506.7 9,365.5 12,039.3 15,748.8 20,108.9Non-electric machinery 2,716.8 2,926.6 3,475.0 4,754.5 6,333.3 8,253.4 10,498.7 14,023.9 18,975.1Electric and electronic machinery 3,123.9 3,169.8 3,982.9 5,055.4 6,665.8 7,819.3 10,537.6 14,028.0 17,861.6Transport equipment (ships & railway) a/ 684.7 742.2 890.3 1,098.3 1,464.7 1,556.3 2,215.6 2,527.4 3,062.2

Sub-total 10,613.4 10,766.2 12,777.0 16,254.1 21,970.5 26,994.5 35,291.2 46,328.1 60,007.8

Share of capital goods in total manufacturing (%) 10.1 9.1 9.5 9.9 10.2 10.5 11.2 10.5 10.9

Share in sub-sector total (7.)

Metal products 38.5 36.5 34.7 32.9 34.2 34.7 34.1 34.0 33.5Non-electric machinery 25.6 27.2 27.1 29.3 28.8 30.6 29.7 30.3 31.6Electric and electronic machinery 29.4 29.4 31.2 31.1 30.3 29.0 29.9 30.3 29.8Transport equipment (ships & railway) a/ 6.5 6.9 7.0 6.8 6.7 5.8 6.3 5.5 5.9

Automotive industries 4,941.1 5,005.8 6,359.0 8,483.7 11,029.6 11,957.9 11,938.1 18,133.1 30,693.6

a/ Excludes buses and trucks.

Source: Secretaria de Programacion y Presupuesto and Banco de Mexico, Sistema de Cuentas Nacionales de Mexico (Mexico, D.F.),January 1981.

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 3: Manufacturing Sector and Capital Goods Industries Subsector, 1960-80

(Millions of 1970 Mex$)

Average Annual Growth Rates

1960 1970 1975 1976 1977 1978 1979 1980 1960-70 1970-75 1975-79

Total Manufacturing 44,901.0 105,203.0 148,057.7 155,517.2 161,037.3 176,398.3 192,626.9 203,799.3 8,9 7.1 6.8

Metal products 1,574.1 4,088.0 5,105.9 5,296.5 5,114.6 5,572.6 6,280.0 6,845.5 10.0 4.5 5.3

Non-electric-machioe,y 634.3 2,716.8 4,681.9 4,838.3 4,888.6 5,551.7 6,390.0 ) 15,7 11.5 8.1

Electric. & electric machinery 776.5 3,123.9 4,477.9 4,952.1 5,214.1 5,879.3 6,377.7 15,050.9 14.9 7.5 9.2

Transport equipment (ships & railway) a/ 447.8 684.7 957.5 1,'03.9 927.2 972.6 1,078.6 ) 4.3 6.9 3.0

Total capital goods 3,432.7 10,613.4 15,223.3 16,190.8 16,144.5 17,976.2 20,126.3 21,896.4 11.9 7.5 7.21 2.

Index (1970=100) Total manufacturing 42.7 100 140.7 148.7 153.1 167.7 183.1 193.7

Capital goods 32.3 100 143.4 152.6 152.1 169.4 189.6 206.3

a/ Excluding buses and trucks.

Source: 1970-78 based on revised national accounts prepared by Secretaria de Programacion y Prssupuesto and Banco de Mexico, Sistema de Cuentas Nacionales de Mexico, (Mexico, D.F.),January 1981.1960 estimated on the basis of data from previous national accounts; 1979 and 1980 estimated on the basis of partial data trom production indices.

M l

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 4: Trends in and Structure of Gross Fixed Investment1965, 1970, 1972, 1975-80

1965 1970 1972 1975 l179 1977 1978 1979 1980

In Current Mexican Pesos (billions)

Construction 23.0 44.6 54.9 129.0 154.5 198.6 283.8 407.8 583.0Domestically produced capital goods 9.1 19.6 22.8 47.4 57.2 74.2 106.1 149.2 200.0Imported capital goods 10.9 16.2 18.1 41.7 52.7 62.5 81.6 137.1 190.0Other 1.2 1.8 2.1 3.6 3.2 3.8 4.5 4.0 6.6

Total 44.3 82.3 97.8 221.7 267.6 33§.l 476.1 698.1 979.6

Share in GDP in percentages 17.6 19.7 19.1 22.4 21.8 20.2 22.4 25.2 25.6

Composition in percent of totalConstruction 52.0 54.2 56.1 58.2 57.7 58.6 59.6 58.4 59.5Domestically-produced capital goods 20.6 23.8 23.3 21.4 21.4 21.9 22.3 21.4 20.4Imported capital goods 24.7 19.7 18.5 18.8 19.7 18.4 17.1 19.6 19.4other 2.7 2.2 2.1 1.6 1.2 1.1 1.0 0.6 0.7

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

In 1972 Mexican Pesos (billions)

Construction 29.8 47.9 54.9 71.2 69.7 68.3 77.4 88.3 99.7Domestically produced capital goods 10.4 20.3 22.8 32.7 32.2 30.6 37.0 43.4 49.3Imported capital goods 15.3 19.4 18.1 25.5 24.1 16.6 19.2 26.9 34.4Other 1.5 1.9 2.1 2.1 1.7 1.6 1.7 1.3 1.8

Total 57.0 89.5 97.8 131.5 127.7 117.1 135.3 159.9 185.2

Average annual growth rates (1972 prices) a/

Construction - 10.0 7.5 9.2 - 2.1 - 2.0 13.3 14.1 12.8Domestically produced capital goods - 14.3 6.0 12.8 - 1.5 - 4.9 20.7 17.5 13.6Imported capital goods - 5.2 - 3.0 12.3 - 5.5 -31.3 16.0 40.0 27.9Other _ 5.6 3.6 0.3 -18.9 - 3.8 7.3 -27.4 41.8

Total - 9.5 4.9 10.4 - 2.9 - 8.3 15.5 18.2 15.8

a/ 1970 - annual average for period 1965-1970; 1972 - annual aperage for period 1970-1972; 1975 - annual average for period 1972-1975.

Source: Banco de Mexico and Bank staff, see Report No. 3605-ME, Mexico: Development Strategy - Prospects & Problems, August 31, 1981, Statistical Appendix Tables 2.10 - 2.14.

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMFNT PROJECT

Table5: Number of Enterprises of Capital Goods Sub-Sector

1960 1965 1970 1975 Annual Rates of Growth

Number % Number % Number % Number % 1960-65 1965-70 1970-75 1960-75

1. Total Manufacturing Ind. 100,335 124,935 118,997 118,643 4.5 -1.0 -0.1 1.1

2. Total Capital Goods 3,059 100.0 4,680 100.0 3,647 100.0 5,756 100.0 6.5 -4.9 9.6 3.5

-getal Products 622 20.4 862 18.4 871 23.9 1,001 17.4 6.7 0.2 2.8 3.2

- Industrial Machinery 2,141 71.6 3,414 72.9 2,312 63.4 4,162 72.3 6.1 -7.5 12.5 3.3

- Electrical Machinery 99 3.2 221 4.7 275 7.5 426 7.4 17.4 4.5 9.1 10.2

- Transport Equipment 147 4.8 183 3.9 189 5.2 167 2.9 4.5 0.6 -2.4 0.9

3. Share of Capital GoodsEnterprises in TotalManufacturing

Enterprises (X) 3.0 3.7 3.1 4.9

SOURCE: Elaborated from the 1960, 1965, 1970, and 1975 Industrial Census Data.

LCPI2 AOctober 1980 I

MEXICO: CAPITAL COODS INTUSTRT1S T)FVET.OPMENT PROJECT

Table 6: Employment in Manufacturing and Capital Goods Industries Subsector

Annual Rates of Growth1960 % 1965 % 1970 % 1975 % 1960-65 1965-70 1970-75 1960-75

Number Number Number Number

1. Total Manufacturing Ind. 791,440 1,323,274 1,520,817 1,654,381 10.8 2.8 1.7 5.0

2. Total Capital Goods 39,729 100.0 84,642 100.0 112,707 100.0 158,987 100.0 16.3 5.9 7.1 9.7

- Metal Products 14,276 36.0 22,686 26.8 30,616 27.2 32,528 20.5 9.7 6.2 1.2 5.6

- Industrial Machinery 12,731 32.0 35,343 41.8 45,213 40.1 76,375 48.0 22.7 5.0 11.1 12.7

- Electrical Machinery 6,454 16.2 17,213 20.3 21,328 18.9 24,904 15.7 21.7 4.4 3.1 9.4

- Transport Equipment 6,268 15.8 9,400 11.1 15,550 13.8 25,177 15.8 8.7 10.6 10.1 9.7

3. Share of Capital GoodsIndustries in TotalManufacturing IndustriesEmployment (x) 5.0 6.4 7.4 9.6

SOURCE: Elaborated from the 1960, 1965, 1970, and 19745 Industrial Census Data.

LCPI2October 1980

-72- ANNEX

MEXICO- CAPITAL GOODS INDUSTRIES DEVELOPM frl 'FOJECT T-7

Tablo 7: Value Added and Fixed Assets per Worker in Manufacturing Industry in 1975

(Thousands of 1975 Mex$)

Direct LaborValue Fixed CoefficientsAdded Assets (Workers per Direct Capital-Output Coefficientsper per Million 1975 Fixed Working Total

Worker Worker Mex$ Value Capital Capital CapitalAdded)

Food 74.7 72.7 13.4 1.02 0.51 1.53Beverages 177.3 100.4 5.6 0.63 0.27 0.90Tobacco 505.5 97.0 2.0 0.19 0.39 0.58Textiles 84.4 91.3 11.8 1.12 0.60 1.72Wearing Apparel 49.6 14.2 20.2 0.28 0.59 0.87Footwear 54.2 26.8 18.5 0.50 0.46 0.96Wood and Cork Products 50.5 44.2 19.8 0.89 0.34 1.23Wood Furniture 51.3 22.8 19.5 0.45 0.34 0.79Paper Products 142.2 197.7 7.0 1.88 0.56 2.44Printing 92.3 62.5 10.8 0.69 0.29 0.98Chemicals 187.3 194.7 5.3 1.12 0.52 1.64Petrochemicals 211.8 308.2 4.7 1.50 0.43 1.93Rubber Products 125.7 94.6 8.0 0.82 0.32 1.14Non-Metallic Minerals 97.8 148.0 10.2 1.56 0.30 1.86Basic Metal Industries 194.3 254.7 5.1 1.35 0.54 1.89Various Manufacturing 80.8 51.2 12.4 0.67 0.52 1.19

Capital Goods:

Metal Products 87.5 57.4 11.4 0.67 0.46 1.13Industrial Machinery 114.4 60.8 8.7 0.56 0.61 1.17Electrical Machinery 99.6 40.6 10.0 0.43 0.45 0.88Transport Equipment 120.4 107.6 8.3 0.94 0.93 1.87Average Capital Goods 102.3 76.0 9.8 0.78 0.64 1.42

Average Total ManufacturingIndustries 107.7 94.2 9.3 0.93 0.50 1.43

SOURCE: Elaborated from the 1975 Census Data.

LCPI2October 1980

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 8: Selected Capital Goods Exports and Imports, 1978-1980(millions of US$)

Exports Imports

1978 1979 1980 a/ 1978 1979 1980 a/

Total Merchandise Trade 6,063.1 8,798.2 15,307.5 7,713.8 11,985.6 18,572,2

Total Capital Goods 189.6 194.7 243.9 1,980.9 3,577.3 5,118.6

Of whichAgricultural Equipment 8.3 8.9 8.7 146.9 300.4 353.7

Railroad Equipment 29.2 34.8 0.4 21.0 95.0 159.0

Other transport Equipment 45.3 37.5 57.3 248.9 538.7 744.3

Planes and parts 5.0 9.2 9.6 94.5 185.2 268.1

Trucks 28.5 23.6 30.2 49.0 127.1 127.3

Boats and parts 78.1 176.1 208.8

Industrial Equipment 67.7 77.2 110.4 1.150.6 1,999.3 2,938.7

Pumps 2.5 3.8 6.7 108.7 201.9 207.3

Hand-tools 9.6 12.8 15.6 40.0 65.4 98.5

Typewriters 14.3 15.9 21.0

Textile machinery 142.9 225.6 294.6

Rubber industry 40.1 69.6 94.4

Temperature regulating equipment 60.1 73.9 73.4

Metal-working equipment 109.3 201.1 391.9

Data processing equipment 58.5 103.8 192.5

Loading and underloading equipment 54.0 102.2 184.3

Machinery for paper & carbon ind. 29.2 51.4 82.9

Soil perforation equipment 69.2 209.2 254.6

Industrial tractors 89.3 133.2 126.4

Turbines 34.8 71.3 132.8

Presses & crushing equipment 3.4 9.5 7.4

Scientific Equipment 3.5 3.9 8.6 116.1 200.8 257.2

Electric & Electronic Equipment 18.6 14.7 38.1 217.4 328.3 497.9

Generators, transformers & motors 9.9 8.2 17.8 68.4 92.6 114.0

Electronic communications machineryand apparatus 4.8 1.5 4.9 49.0 48.4 59.5

a/ Preliminary estimates.

Source: Banco de Mexico ;

-74- ANNEX 7T-9

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPI{INT PROJECT

Table 9 Finantcial Sector Summary Accounts

(Mex$ billion)

1977 1978 1979 1980

I. BANCO DE MEXICO

A. Total Assets 280.1 366.2 496.6 698.0

1. Foreign Reserves 33.7 45.9 67.3 93.02. Credit (Total) 246.4 320.3 329.3 605.0

- To financial institutions 15.9 14.1 17.3 41.9- To public sector 230.0 305.6 411.1 502.1To private sector 0.5 0.6 0.9 1.0

B. Total Liabilities 280.1 366.2 496.6 698.0

1. Cufrency 88.6 114.8 149.6 199.7

2. Reserves 191.5 251.4 347.0 498.3

II- PUBLIC SECTOR BANKS

A. Total Assets 341.0 317.1 374.5 557.3

1. Net Credit to FinancialInstitutions 4.4 0.9 - 0.7 - 14.0

- Gross Credit 66.0 69.0 84.7 148.7- Liabilities 61.6 68.1 86.4 162.7

2. Credit to Public Sector 220.2 252.6 194.6 329.43. Credit to Private Sector 116.4 143.6 180.6 241.9

B. Total Liabilities 341.0 397.1 374.5 557.3

1. Private Sector 67.5 62.2 83.1 119.12. Net Foreign Liabilities 248.2 255.0 291.4 318.6

3. Capital & Other 45.3 79.9 67.6 119.6

III. PRIVATE AND MIXED BANKS

A. Total Assets 475.0 643.4 895.3 1.280.5

1. Net Credit to FinancialInstitutions 205.8 265.1 365.4 518.1

- Gross Credit 239.6 293.0 401.5 573.4- Liabilities 33.8 27.9 36.1 55.3

2. Credit to Public Sector 12.3 29.5 42.5 56.2

3. Credit to Private Sector 256.9 348.8 487.4 706.2

B. Total Liabilities 475.0 643.4 895.3 1,280.5

1. Private Sector Monetary Assets 389.0 525.4 722.5 995.9

2. Net Foreign Liabilities 34.5 50.9 .72.1 139.1

3. Capital & Other 51.5 67.1 100.7 145.5

SOURCE: Banco de Mexico, Indicadores Economicos.

LCPI2July 1981

-75- ANNEX 7

T-10

MEXICO: CAPITAL GOODS INDUSTRIES DFN7ELnPtKPMT'7KOJECT

Table 1o: Financial Agents' Share in Total_Financial Intermediation in 1980

VolumeAgent (Mex$ billion) % As % of GDP

1/. 41. Banking System - 1,837.8 76.2 48.0

- Private and Mixed Banks 2/ 1,280.5 53.1 33.5- National Banks 557.8 23.1 14.5

2. Insurance and Guarantee Companies -/ 73.5 3.0 1.9- Insurance 69.7 2.9 1.8- Guarantee 2.8 0.1 0.1

3. Auxilary Credit Organizations ±1 17.7 0.7 0.5- Credit Unions 14.9 0.6 0.4- Deposit Houses 2.8 0.1 0.1

4. Securities Market 482.1 20.0 12.6- Variable Return Securities (shares) 74.9 3.1 2.0- Non-government Fixed Return Securities 25.7 1.1 0.6- Treasury Certificates & government 381.5 15.8 10.0

bonds (includes P'etrobonos)

TOTAL 2,411.1 100.0 63.0

1/ Total Assets

2/ Excludes foreign assets and includes interbank operations.

Source: Banco de Mexico, Annual peport and Bank estimates

LCPI2July, 1981

-76- ANNEX 7T-11

MEXICO: CAPITAL GOODS INDUSTRIES DFVF.L(YPM1NT PP RJCT

Table 11: Resource Mobilization and Credit Availability Indicators(As Percentage of GDP)

1977 1978 1979 1980

1. Total banking system liabilities 58.4 57.1 57.5 56.6

2. Non-monetary liabilities of thebanking system 33.9 33.1 33.2 33.1

3. Non-monetary peso liabilitiesof the banking system 1/ 19.2 22.2 22.7 24.2

4. Private sector's deposits 2/ 23.2 24.7 26.1 26.0

5. Total banking system creditoutstanding 31.8 30.8 34.7 34.3

6. Banking system credit to privatesector 17.6 17.6 18.2 17.9

1/ All liabilities in local currency, except checking accounts and other demanddeposits.

2/ In private and mixed banks.

Source: Banco de Mexico, Annual Reports.

LCPI2July 1981.

MEXICO; CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 1: Mexicors Largest Banks(Outstanding Balances as of December 31, 1980)

Assets Demand Deposits Savings Deposits(Mex$ Million) % (Mex$ Million) % (Mex$ Million) %

Bancomer 338,507.5 26.0 67,381.6 23.6 25,063.3 32.0Banco Nacional de Mexico 303,886.5 23.4 62,001.5 21.7 22,998.8 28.7Banca Serfin 124,211.9 9.6 23,084.6 8.1 6,097.9 7.5Multibanco Comermex 119,049.7 9.2 25,956.0 9.1 5,589.9 7.0Banca Somex 88,398.7 6.8 15,071.4 5.3 2,548.6 3.1Banco Internacional 43,342.2 3.3 11,420.0 4.0 779.8 1.0Banco del Atlantico 29,816.8 2.3 8,447.3 3.0 1,087.8 1.4Banpais 27,410.2 2.1 6,953.2 2.4 908.1 1.0Banco BCH 25,947,3 2.0 4,281.1 1.5 531.2 0.6Multibanco Mercantil de Mexico 17,644.1 1.4 3,951.9 1.4 88.1 0.1Banca Confia 15,648.0 1.2 5,033.5 1.8 879.7 1.1Banpacifico 9,912.0 0.8 2,646.3 0.9 497.4 0.5Other 155,627.0 11.9 49,497.6 17.2 12,886.4 16.0

TOTAL 1,299,401.9 100.0 285,726.0 100.0 79,957.0 100.0

SOURCE: Comisitbn Nacional Bancaria y de Seguros, Negocios y Bancos and mission estimates.

LCPI2July 1981

_ ._T

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 13: Liabilities of the Banking System By Instrument

1978 1979 1980!!

LIABILITIES Mex$ billion % Mex$ billion x Mex$ billion x

Monetary 260.3 21.5 346.5 21.8 460.8 21.3

Non-Monetary 931.9 76.9 1,219.5 70.7 1,676.7 77.4

- Savings Instruments 439.7 36.3 603.0 37.9 857.9 39.3

Liquid 141.4 11.7 703.9 12.8 284.8 13.2

Non-Liquid 298.3 24.6 399.1 25.1 567.1 26.2

Up to 1 Year Maturity 86.4 7.1 158.3 10.0 291.5 13.5

1 Year 153.1 12.6 158.2 9.9 182.5 8.4

More Than 1 Year 58.8 4.9 82.6 5.2 93.1 4.3

- Other Liabilities 492.2 40.6 616.5 38.8 824.8 38.1

Public Sector 81.7 6.7 115.2 7.2 188.6 8.7

Private Sector 14.5 1.2 31.0 1.9 48.1 2.2

Foreign Sector 322.6 26.6 383.6 24.1 479.9 22.2

Other 73.4 6.1 86.7 5.6 108.2 5.0

CAPITAL 19.5 1.6 24.3 1.5 28.1 1.3

Liabilities in Domestic Currency 751.4 62.0 999.6 62.9 1,413.2 65.3

Liabilities in Fgreign Currency 460.3 38.0 590.7 37.1 752.4 34.7

Total Liabilities 1,211.7 100.0 1,590.3 100.0 2,165.6 100.0

1/ Preliminary

Source: Banco de Mexico, Annual Reports

LCPI2July 1981

19_,

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 14: Institutional Structure of the Banking System

September 30, 1977 December 31, 1978 MaYrch 31, 1981No. of No. of No. of No. of No. of No. of

Institutions Offices Institutions Offices Institutions Offices

Public Banks 22 694 22 701 23 690

Private and Mixed Banks 198 2,841 132 3,073 64 3,802

- Multipurpose Banks 14 1,245 26 2,324 35 3,602- Deposit Banks 93 1,456 52 667 11 173- Financieras 66 95 43 60 9 13- Mortgage Banks 14 28 3 7 2 6- Other Private Banks 11 17 8 15 6 8 '

TOTAL 220 3,535 154 3,774 87 4,492

1/ Does not include Banco de Mexico, S.A.

Source: Comisi6n Nacional Bancaria y de Seguros.

LCPI2July, 1981.

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 15 : Total Financing by Sector and by Type of Bank 1/

Financing by Institution Amount % Am 1978 1979 8Amount

Banco de Mexico 286.7 100.0 350.9 100.0 481.6 100.0 658.6 100.0To Public Sector 271.7 95.0 331.8 94.6 459.5 95.4 611.4 92.8To Private Sector 2/ 2.9 1.0 3.4 1.0 2.8 0.6 3.5 0.5To Credit Institutions 11.5 4.0 157.0 4.4 19.3 4.0 43.7 6.7

National Banks 334.2 100.0 370.5 100.0 458.9 100.0 605.2 100.0To Public Sector 257.4 77.1 266.7 72.0 322.8 70.3 415.6 68.7To Private Sector 2/ 72.0 21.5 82.6 25.0 123.0 26.8 171.5 28.3To Credit Institutions 4.6 1.4 11.2 3.0 13.1 2.9 18.1 3.0

Private and Mixed Banks 288.1 100.0 401.3 100.0 555.8 100.0 788.5 100.0To Public Sector 25.7 8.9 32.8 8.2 46.5 8.4 52.9 6.7 tTo Private Sector 2/ 242.7 84.2 348.8 86.9 487.4 87.7 706.2 89.6 xTo Credit Institutions 19.7 6.9 19.7 4.9 21.9 3.9 29.4 3.7 0

Total Consolidated Financing 3/ 886.8 100.0 1,095.2 100.0 1,442.0 100.0 1,961.1 100.0To Public Sector 569.2 64.2 650.4 59.4 828.8 57.5 1,079.9 55.1To Private Sector 317.6 35.8 444.8 40.6 613.2 42.5 881.2 44.9

1/ Balances outstanding as of December 31.

2/ Including foreign private sector.

3/ Total by institutions does not equal the consolidated total because in the latter interbank operations are excluded.

Source: Banco de Mexico, Moneda y Banca.

LCPI2July, 1981.

-8 1 -

ANNEX 7T_lt6

MEXICQ: CAPITAL GOODS INDUSTRTFq , nM.TLnvw n' J1""

Table 16; Banking System Credit By Sector,. 1977-80(Outstanding Balances as of December 31)

1977 1978 19791/ 1980Mex$ Million % Mex$ Million % Mex$ Million % Mex$ Million %

1. Primary 69,962 13.1 92,203 14.1 120,705 12.6 192,334 14.7

Agriculture 63,745 12.0 84,857 13.0 110,730 11.5 177,703 13.6Mining 3,286 0.5 3,881 0.6 5,167 0.6 8,320 0.6Other 2,921 0.5 3,472 0.5 4,808 0.5 6,311 0.5

2. Industry 195,204 36.7 255,413 39.1 335,674 34.9 447,323 34.1

Energy: 19,730 3.7 37,566 5.8 70,851 7.4 108,826 8.3- Petroleum 2,842 0.5 11,928 1.9 18,662 1.9 32,530 2.5- Electricity 16,888 3.2 25,639 3.9 52,189 5.4 76,296 5.8

Manufacturing Industry: 136,499 25.6 169,219 25.9 207,908 21.6 268,040 20.4- Manufacturing 92,020 17.3 111,087 17.0 143,873 15.0 177,209 13.5- Non-metallic Minerals 4,009 0.8 5,225 0.8 6,421 0.7 9,455 0.7- Steel and Other

Metallic Products 32,603 6.1 42,733 6.5 43,798 4.5 61,429 4.7- Machinery and Equip-

ment 7,867 1.4 10,174 1.6 13,826 1.4 19,446 1.5Construction 38,975 7.3 48,627 7.4 56,015 5.9 70,457 5.4

3. Housing 18,736 3.5 25,558 3.9 29,889 3.1 35,800 2.7

4. Services 84,295 15.8 103,905 15.9 216,196 22.5 282.765 21.5

Transport 28,771 5.4 32,460 5.0 35,417 3.7 48,075 3.6Communications 96 - 191 - 2,508 0.3 299 -Banking 33,062 6.2 43,531 6.7 68,201 7.1 129,660 9.9Other 22,366 4.2 27,773 4.2 109,570 11.4 104,731 8.0

5. Commerce 68,478 12.9 94,951 14.5 140,867 14.6 210,552 16.1

6. Government 95,884 18.0 81,104 12.4 118,073 12.3 143,683 10.9

TOTAL 532,549 100.0 653.184 }00.0 2fi1.Ai 100.0 1 1PC..

1/ Due to changes in definitions of sectors, introduced in June 1979, the 1979 figures are not consistent withthose of the previous two years, Indicadores Economicos.

SOURCE: Banco de Mexico,

LCPI2July 1981

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 17: Geographical Distribution of Credit and Deposits(Outstanding Balances as of December 31, 1980)

Total Banking Private and Mixed Banks

System Credit National Bank Credit Credit Deposits

State Mex$ Billion % Mex$ Billion % Mex$ Billion % Mex$ Billion %

Distrito Federal 677.1 53.5 386.8 68.3 290.3 41.6 484.1 47.2

Nuevo Leon 77.4 6.1 16.0 2.8 61.4 8.8 66.8 6.5

Jalisco 54.5 4.3 8.7 1.5 45.8 6.6 69.6 6.8

Sinaloa 45.8 3.6 25.0 4.4 20.8 3.0 20.5 2.0

Mexico 42.3 3.3 8.6 1.5 33.7 4.8 10.1 1.0

Sonora 41.5 3.3 16.8 3.0 24.7 3.6 28.7 2.8

Veracruz .39.4 3.1 17.6 3.1 21.7 4.1 38.6 3.8 1

Michoacan 36.1 2.9 24.6 4.3 11.5 1.6 19.1 1.9 m

Coahuila 32.2 2.5 15.3 2.7 16.9 2.4 27.4 2.7

Chihuahua 25.9 2.1 0.9 0.2 25.0 3.6 27.4 2.7

Tamaulipas 25.0 2.0 5.4 1.0 19.6 2.8 2.8 3.2

Guanajuato 23.0 1.8 3.8 0.7 19.2 2.7 2.7 2.5

Other States 144.8 11.5 37.2 6.5 107.7 15.4 15.4 17.0

TOTAL 1,265.0 100.0 566.7 100.0 698.3 100.0 1,026.6 100.0

SOURCE: Banco de Mexico, Annual Report and Indicadores Economicos-

LCPI2July 1981

--4

MEXICO CAPITA7. GOODS INDUSTRIES DEVELOPMENT PROJECT

Tablie18:i Slected Interest Rates in Mezico. USA, and London Interbank Rates

1979 1980 1981

Gross Net Gross Net Gross Net Groas Net Gross Net Gross Net Gross Net Gross Net Gross Net Gross Net

MEXICO

Time Deposits a/1 day a week 12.0 9.5 12.0 9.5 12.9 10.8 15.6 12.3 17.1 13.5 17.6 14.2 16.5 13.9 20.8 17.8 22.8 20.2 22.4 19.91 day a month 13.9 11.0 13.9 11.0 14.6 11.5 18.7 14.8 21.9 17.3 22.0 19.5 19.9 17.3 23.9 21.4 27.1 24.6 26.8 24.3

Certificates of Deposits2 months 14.5 12.0 14.5 12.0 15.4 12.7 18.8 16.2 21.3 18.7 23.3 20.8 21.8 19.3 26.2' 23.7 29.2 26.7 29.0 26.512 months 17.5 15.0 17.5 15.0 17.5 15.0 18.4 15.9 21.3 18.8 24.5 22.2 24.9 22.3 27.5 25.0 32.2 29.7 32.3 29.824 months or more 18.5 16.0 18.5 16.0 18.5 16.0 19.4 16.9 22.4 19.8 26.6 23.5 27.0 23.8 30.0 26.1 33.7 29.9 33.3 30.8

CETES-/ 13.7 14.3 15.3 16.9 19.8 22.1 21.9 26.6 28.6 28.3Average Active Interest RateDo _stic currency 20.6 20.9 21.2 22.6 24.1 27.5 28.4 30.9Foreign currency 25.6 15.9 15,5 19.7 21.9 20.4 17.1 21.5Average cost of funds (ACF) 16.0 16.0 16.2 17.3 18.6 20.2 21.0 23.2 26.1 26.9

USA

Certificates of Deposits-3 months 9.8 9.4 10.4 13.1 14.5 10.9 9.4 15.1 13.9 14.112 months 10.7 9.8 10.1 12.0 13.1 10.2 9.7 13.8 13.7 13.9

LONDON

Eurodollar Deposits

"Call Money" 10.2 10.3 11.0 13.1 14.4 11.9 9.7 16.0 14.6 15.3

3 Months 10.9 10.6 11.6 14.6 16.1 12.7 10.7 16.4 15.4 15.512 months 11.2 10.6 11.2 13.4 15.2 12.0 11.2 14.6 15.1 15.224 months 10.2 9.8 10.2 12.0 13.8 11.5 11.1 13.7 14.6 14.3

Annual Inflation ate (CPi increasesfor 12-month periods ending in thbrespective cuarter) d!/ 18.0 17.8 17.7 19.2 22.6 25.1 28.4 28.9 27.9

a/ Withdrawable on specific days.b/ Mexican Treaury Certificat".c/ US$100.000 Minimum

d/ Computed as ratio of the average CPT index for the thrbePionths coveted by the resystive qu&Wter*.

9'i

-84- ANNEX 7

T- 9

MEXICO - CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 19: FOMEX's Financing for Capital Goods Industries

(Mrex8 million)

1978 1979 1980Amount Amount x Amount %

EXPORTS 1,689.7 77.8 2,220.2 62.2 2,325.6 16.4

Pre-exports 542.8 25.0 1,327.6 36.4 864.1 6.1Sales 1,146.9 52.8 942.6 25.8 1,461.5 10.3

IMPORT SUBSTITUTION 418.2 19.2 1,167.2 32.0 2,879.0 20.3

Sale-Purchase 65.1 3.0 213.4 5.8 8,943.2 63.9PEMEX, CFE Invoice Receipts - - - 7,857.0 55.5Other 65.1 3.0 213.4 5.8 1,086.2 7.7

Total 2,173.0 100.0 3,650.8 100.0 14 147.8 100.0

= L = ~

Source: FOMEX Annual Reports.

LCPI2July 1981

MEXICO: CAPITAL GOODS INWSTRIES DEVELOPMENT PROJECT

Table 20: Types and Characteristics of NAFINSA'S Credit QperatiQnr

aName of the Credit Concept Purpose Subiect of Credit Requirements

Short-term Credits

1. "Descuento" A credit operation providing the tender Working capital Industrial enternrises Establishment of a creditthe ownership of accepted credit titles, financing requirements. (complementary short-term line (revolving or non-originating from sales/purchase of merchandise, financing to ongoing long-term revolving).

operations.)

2. "Quirografario" Short-term credit operation guaranteed IT ediate liquidity Complementary working capital Signoture of a promisoryby the signature of the debtor only, financing to cover un- financing to ongoing operations note and/or an indoree-or with a required collateral, expected expenditures, of well known clients. ment; in case of collateral,

a "provisional credit." a formalization letter spe-cifying that 80X of thecredit recovery will be usedfor c-pital repayment, theremaining 20 for interest

3. "Prendario" A credit operation documented by a Working capital financing. Well known clients from the repymentpromisory note (for which pawn exists). agricultural, industrial and Signature or a promisory

commercial sectors. n.te and/or sn indoreement.

4. "Directo" Short-term credit upto 180 days, Working capital financing. Federal government decentralized Personal guarantee andfrenewable one time, agencies, parastatal enterprises, or real collateral.

federal trust funds, etc. X

5. "Credito en Cuenta Corriente" Working capital financing. Federal government decentralized Personal guarantee or and/agencies, parastatal enterprises, or real collateral.federal trust fund, etc.

Medium- and Long-Term Credits

6. "Habilitacion o Avio" Medium-term operation initiated by Purchase of newumateriala, Industrial sector clients. R19 materials and otheran opening credit contract, specifying intermediate goods, pay- purchased goods serve asthe conditions of approval. ment of wages and salaries, collateral and have to be

etc. insured against possiblerisks.

7. "Simple" Long-term operations; all other See 4 or 5 See 4 or 5- See 4 or 5.characteristics similar to those of"Credito Directo" or "Credito enQuenta Corriente."

8. "Refaccionario" Long-term operations for fixed assets Purchase of land, purchase Industrial sector clients. Lots, construction,financing, accompanied by a contract and installation of machi- buildings, machinery andspecifying its objectives, duration of nery and civil works, output of the productioncredit, goods included in the guarantee, etc. covering of export costs, process serve as a collateral

expansion and adaptation and have to be insured againstof industrial plants, etc. various kinds of possible

risks.

9. "hedocumentacion" The operation of extension of any kind

of medium- and long-term credit.

Source: NAFINSA's Operational Manual.

LCPI2, June 1981.

-86 - ANNEX

MEXICO: CAPITAL GOODS INDUSTRIES DEVF.T.nPMFNT PRn.TFCT T-21

T-21: NAFINSA's Domestic Currency Interest Rates toFinal Borrowers-in Effect Since May 1981

Sector Interest Rate

A. General (Manufar-turing)- Public Sector (Federal Government, ACF plus 2.5Ministries, State Governments, TrustFunds, Decentralized Organisms,Enterprises with majority stateparticipation),

- Enterprises with minority state participation ACF plus 3.0

- Private SectorPriority activity

Zone I ACF plus 3.5Zone II ACF plus 3.5Zone III and rest of the country ACF plus 4.25

Non-priority ActivityZone I ACF plus 4.25Zone II ACF plus 4.75Zone III and rest of the country ACF plus 5.5

B. Mexican Food System (SAM)- Public sector ACF plus 1.75- Enterprises with minority state participation ACF plus 2.25- Private sector ACF plus 3.0

C. Tourism- Public sector ACF plus 2.5- Enterprises with minority state participation ACF plus 3.0- Private sector

Priority "A" ACF plus 3.5Priority "B" ACF plus 4.25

Source: Nacional Financiera, S.A.

LCPI2, June 1981

d9

ANNEX 7-87 - T-22

MEXICQ; CAPITAL GOODS INDUSTRIES DEVELOPMENT PIjE,

Table 22: NAFINSA - Total Credit Approvals by Sector

(Mex$ million)

1978 1979 1980Amount % Amount X Amount %

Infrastructure 7,827 21.5 10,921 18.7 16,498 23.0

Industry 17,720 48.5 46,036 78.8 48,775 67.9- Basic Industries 11,145 30.5 34,176 58.5 33,975 47.3

O Other Manufacturing 6,574 18.0 11,859 20.3 14,800 20.6(Capital Goods 1/ 2,725 7.5 6,083 10.4 5,466 7.6

Other Activities 11,016 30.0 1,454 2.5 6,595 9.1

Total 36,562 100.0 58,411 100.0 71,868 100.0

1/ Numbers in parentheses refer to credit for capital goods industries approvedby NAFINSA's head office.

SOURCE: Nacional Financiera, S.A.

LCPI2July 1981

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 23: NAFINSA's Approvals of Credits to Capital Goods Industries,

by Type of Credit 1/

(Mex$ million

1977 1978 1979 1980 Total 1977-80

No. of No. of No. of No. of No. of

Credits Amount Credits Amount Credits Amount Credits Amount Credits % Amount X

Short-term Credits 2/

1. Directo 6 1,248 14 1,323 10 577 8 1,113 38 35 4,261 23

2. Aval (guarantees) 9 1,264 5 1,200 4 2,714 5 1,834 23 21 7,012 38

3. Descuento - - 2 10 1 400 - - 3 3 410 2

4. Other 8 119 1 65 6 680 3 40 18 16 904 5 1

Sub-total 23 2,631 22 2,598 21 4,371 16 2,987 82 75 12,587 69 x

Medium- and Long-term Credits 2/

5. Habilitacion o Avio (for workiig 1 184 5 108 3 1,692 3 878 12 11 2,862 16

6. Simple capital) 1 20 3 1,218 4 11 1,238 7

7. Refaccionario (for fixed) 4 1.129 4 19 - _ 4 383 12 3 1.531 8

Sub-total 5 1,313 9 127 4 1,712 10 2,479 28 25 5,631 31

TOTAL 28 3.944 31 2.725 25 6,083 26 5,466 110 100 18,218 100

1/ Includes only credits approved by NAPINSA's head office.

2/ See Annex 7, T-20 for definitions of the different types of NAFINSA's credits,

Source: Nacional Financiera, S.A.

LCP12June 1981

=EXICO: CAPITAL GOODS IIDUSTRIES DEVELOP.MENT PROJECT

Table 24: NAFINSA - Credit Approvals to Capital Goods Industriesby Type of AcLivity, 1977-80 I/

(Mex$ million)

1977 1978 1979 1980 1977-80Subsector No. of No. of No. of No. of No. of

Credits Amount Credits Amount Credits Amount Credits Amount Credits % Amount %

Metallic products 2 50 - - 1 70 4 98 7 6.4 218 1.2

Non-electrical machinery 4 118 14 312 11 415 10 451 39 35.4 1,296 7.1

Electrical and electronicequipment 1 25 3 55 4 58 - 3 71 11 10.0 209 1.2

Transport equipment 21 3,751 9 2,325 7 5,500 6 4,746 43 39.1 16,322 89.8

Measurement equipment - - 5 32 2 40 3 57 10 9.1 129 0.7

cOD

Total 28 3,944 31 2,724 25 6,083 26 5,423 110 100.0 18,174 100.0

1/ Includes only credits approved by NAFINSA's head office.

SOURCE: Nacional Financiera, S.A.

LCPI2

July 1981

9!

MEXICO - CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 25: Banco Mexicano SOMEX -- Credit Approvals to Capital Goods Industries

(Mex$ million)

1978 1979 1980 1981 1/ - 1978-81

No. of No. of No. of No. of No. of

Credits Amount Credits Amount Credits Amount Credits Amount Credits % Amount Z

Metallic Products - - 3 343.0 5 951.0 - - 8 44.5 1,294.0 52.7

Non-electrical Machinery 1 113.0 1 45.0 3 230.0 1 200.0 6 33.3 588.0 23.9

Electric and Electric Equipment 1 135.0 - - - - 1 75.0 2 11.1 210.0 8.5

Transport Equipment - - - - 2 365.0 - - 2 11.1 365.0 14.9

TOTAL 2 248.0 4 388.0 10 1,546.0 2 275.0 18 100.0 2,457.0 100.0

1/ Projects approved as of mid-June, 1981.

Source: Banco Mexicano SOMEX and Bank estimates.

LCPI2July 1981.

- 91- ANNEX 7

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 26; Analysis of Chagacteriatics Qf FONE)Ts LQan Approvals197d-80

(a) By Program

1978 1979 1980

I No. of Millions No. of Millions Fa. or' Ilillions -

Projecta o Proiects of pesos I Projects of pesos

General Equipment 55 2 284 2 99.8 57 3 004.5 94.1 66 4 98. 1 98.9

(a) \;ew projects 'I 57T 3T z 3T T7

(b) Expansion 31 908.6 39.1 34 1,911.1 59.8 45 3.334.6 71.7

Pollutiotn control - - - I 100.0 3.1 4 43.3 0.9

Technology'developeent 2 2.0 0.1 5 88.7 2.8 3 4.6 0.1

Preinv.stment studies 4 2.2 0.1 3 0.7 _ 7 2.7 0.1

Total 61 2,288.4 100.0 66 31193.9 100.0 SO 4,648.7 100.0

leorcns troll's 197i, 1980 Anual lports.

(b) By Term1978 1979 1980

No. of Millions No. of Millions No. of millions

Projects of peso. I Projects of pesos 2 Projects of pesos S

Up to 4 years 21 403.4 17.6 10 241.3 7.6 8 128.3 2.8

Over 4 to 7

,ycers 31 1,385.7 60.6 45 3,319.9 72.6 50 2,514.9 54.1

Over 7 to 10 years 6 343.3 15.0 10 538.3 16.8 20 1,815.5 39.0

Here than 10 y.aro I 856.0 6.8 1 94.4 3.0 2 190.0 4.1

Total 61 , 100.0 66 100.0 80 4 100.0

Sowen. POMZU's 1979. 1980 Anual Resports.

(c) By Category197il 19*9 M o 1-

-'Ro. 1. nilsi.one Nu, of Millions No. of X!Aliome

Pro;ects of pesos 7 Pro;ecta of nos I Projects oG 2e so_.

rndustrfal Prlortitfe il. 94 5 1~733.

Prioriy I 23 780.29 31.1 29 0 3.4

- Agroindustry. 3 53.1 'TT3 -4 134.1 4 .2 -I 11.1.2 2.4

Capital gooda 19 711.6 31.1 21 922.8 26.9 24 1,351.2 29.1

Stratesic inputs 1. 16.2 0.7 4 201.5 6.3 9 364.9 7.0

Priority 2 35 1,446.8 63.2 33 1,745.2 54.6 36 2.2S2.4 49.1

- Noo-durablthcon-eoro ... 12 536.0 23.4 5 315.2 9.9 3 19.2 0.4

- Dursbl,h consuo.ergooes 3 29.6 1.3 12 691.4 21.6 11 e01.4 17.2

- ILtero.Oiate goods 20 081.2 38.5 1o 738.6 33.1 22 1,471.8 31.7

Prontiar De,elopLeot 3 60.7 2.7 4 189.7 6.0 5 316.6 6.S

Other Ca teA-niea. - 4 _ 22 4 4.t:

Total 61 2,288.4 10.0 0 6 3,193.9 0.0 4687 1-.o

bSerne POIU'a- 1979, 1980 Annual Reports.

(d) By Zone1979 98

ITo. of Millions No. of lillions

_ _ Pro1ects of oesos 7. Projects of pesos I

Zone 1 21 1,325.4 41.5 35 2 097.4 45.1

A. Industzial Ports . 90.0 2.8 4 424.2 9.1

B. Urban Industrial Centers 19 1,235.4 38.7 31 1,673.2 36.0

Zone IIState Priorities 6 162.1 5.1 13 848.6 18.3

zone Ill 21 8t0),7 25.2 t 499. 1 10.7

A. Areas of Controlled Growth 14 453.3 14.2 3 105.1 2.2

B. Areas of Consolidation 7 351.4 11.0 a 394.0 8.5

Reet of Country 18 9C0.9 78.2 21 1 .203. 25.9

Total 66 1 93.9 , 00.0 80 10 9 .0

SoulCre FON3I's 1979, 1980 Annuel Reports.

-92- ANNEX 7

T-27

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Table 27: Pipeline-of Subprojects Presented to FONEIfor Financing as of June 30, 1981

(Mex$ million)

Fjnterm.

M C. W. a.h.*7Ma. 3 C.a,la C.-P.) Its.6 U.r

7~S.40 MTLC :.1 34.. ^.34-z|1 ,II.a 2_. 1 30 0J 4 .8 40.0 * J 3. ear 0...*-

ZSWJUMZAL. S. .

I0R0. S. *a.4 eal _. . OVA 9 0.3 2S.7 0tt1. S_I lb. -

_nte .pe -

"OM-~L.

433*11. 1. &- ett ... l.....gtl5. 40. 11.3 MA LI 0.A D.4t410 b 1-witbty.3053330 .u -- la eS.4 .- *W111 S

8. 4.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~b

CUM Up Lt s. r30 * 120.0 14.? ".1 _S. A. me C. V. r*t

- *$1~.m *teit *t.el .1..'.., 4..... * a . * MA 3.0 14.0 1____1aU.L lb. tSO btlttyS. e. _ WF a.P UI

4* Siag t Ya a 4_a

HJW4 &C 04234 -.U1 *ri2tt.n vltolac * 00 . I.M. 0 0 I tt.* K C..

6018035 I unI3c4 .L..t,.-I .1 .i.u . _re. _4 * U .5 * ?.8 3 fn

I Is "S. C3. A.. p1d.t &. -I.4. .

Wb. 1g rlU -- I _ ts*sr*r_ f UA 3.3 3i .

C. W.

8eC eil *-3tub. I Na * sWJ 15. 37P 3

LAN CLAM *tf4 35.1 .. _f'wt..

GMSrS?IU 30 4 an , b.7.. f1. . 41 * 1.4 *S LI 4' i tba *

mXuWnIL _,L. S. A. ' -M- *211 I USTb.S. _e, s _ * I .8 *4

S.Ai u0ena 81 _.da _r

SA.

9051818 ]PA" -- I P. E. l.l. 2. * . W. 32

30* 8.A. .01 51.pite1 Ya.4 - 11. *w Ni 8* a 2. 4134. .3

*aina. 8. A. -= VWl A . .31 L.z .1 _e

l u'

-%17-9. 1003

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Chart 1: Organization Structure of NAFINSA

DIRECTOR GENERAL|LIC. JORGE ESP INOSA DE LOS REYES|

SUB-DIRECTOR GENERAL SUB-DIRECTOR FOR SUB-DIRECTOR GENERAL FINANCE

INDUSTRIAL PROOMTION AFFILIATE ENTERPRISES LIC. ALFONSO GARCIA MACIASLIC. CRISTOBAL LARA, BFAUTILL AND TRUST FUNDS r ',

LIC. JORGE TAMAYO, _

PROGRAMMING PROJECT PROMOTION ENTERPRISE CONTROL DEPARTMENT TRANSACTIONS ASCURITIES DEPT.DEPARTMENT DEPARTMENT DEPARTMENT TRUST FUNDS DEPARTMENT DIECTOR:

DIRECTOR : DIRECTOR: DIRECTOR: ADMINISTRATION DIRCTOR; DBEPCTOR: LIC. OLIC. HECTOR LIC. RAMON LIC. BENITO REYTI.CRO IECO:LC GAIARAIGUA HICT0RAES CARLC. TORRESLIC.BINITORILLA DE C. K. FRANCISCO ALCALA DE LEON

ARANGUA MDRALFS CARLOS TORRES l ROMAY , ~~~~~~LA GARZA SUAREZ DAVILA

MEXICO: CAPtTAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Chart 2; Organization Structure of NAFINSA's Credit Department

IDIRECTOR:

S LIC. CARIOS SORILLA|DE IA GARZA

CRKOIT ANALYSIS ~~~~~~~~~~~~~~CREDIT OPERATIONSCDIVISIS CENUAL DtVISION

CHIEF: C. PG FUSTAVO R TUBIOING. GUSTAVO LCKBERA

D A FORMLLIZATION, PUB~~~~~~~~AD ECZTN LICE SECTO SPRIVCEAIT ADMJOIYSATE- MNDPIAT

INORTIOOERTIEF C|s EAN S O B OPERATIONS AND

ANDINC. JULIO SAWC RDIVISION OIF: SUDIS.SUB-DIVISION Sen CHIEFa 2 Seno T

I Senior Analys1t Senior Analyst LIC. .USTAVO5 Analyoto 5 Analysts HERNANDEZ T A

10 Technical T Asats

ALCPI2,ts JupAn1STATAL F9E8AL CDEVELOP9T FUNDS9SAND DRECTRALIZED AND STATE SSClaTARIATS AND MAJORITY STATE- OWNED, PRIVATIIORGANISMS SUB-DIV. SUB-DIVISION M'NED) ENTERPRISES SNTIRPRISUS, B

CHIUEF: CBIUF SUB-DIVISION SPECIAL OPlRTv-IONSORANDO CANO MN. JULIO SAM CHIEF: SUB-DIVISION

2 Senior Technicians* 2 Senior Technicians - .P WONIO BIDL LIC. UXRUCZgA,13 Technical Aust.. 13 Technical Aunts. 2 Senior Tachnician

14 Techn1c&l Assat Z Senior Technicians

LCPI2, June 1981

MEXICO - CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Chart 3: Organization Structure of Organizaci6n SOMEX

BOARD

| Presidentl

Dr. Mario Ramon Beteta

Executive Vice-President Executive Vice-President Executive Vice-Presidentof Banking Wing of Industry Wing of Services Wing

(Banca SOMEX) (FISOMEX)Lic. Luis Chico Pardo Lic. Donaciano Tames

Corporate Staff npnvrtments Legal

(Finance & Administration) TrustAdministrativeInternational

Other Corporate Directorates Corporate Director, Corporate Director,

(Tourism, Chemicals, Consumer AoAutomobiles -& Auto Parts Development -

Durables, Construction, etc.) .

Petrocemicals Capital GGOd

co

-IO-CAPITAL GOODS IMDUSTIIES DVVi,OPTENT PROJECT

Ch-rt 4: Organtoaion Structure of FIS70EX'. Capitl Goods Ind-1 trise DepOrtnnnt

LCRCARDO GONZALEZ

MECHNICA IIMNS O N

| MANIIFAC'TURING 0 119 || EDVIIH CIISO ||N MARIEF ALANNING HICA- RESOURCES DIVISION |

DIVISI MARIO APERDINI CHIEF:~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~UIDIIIc4St-DVSII

CHIEF: VACANT

ING. ALVAREZ CANTU VCNI Coordinzter

| ~~~~2 Assist-to

SIN/ICD PLNNIG | PLANNING SUB-DIV. | T|IIGHNICAL SUB-DIV S RIHN REs -S PULI RELATION

UB RATIONS F -CTS SUB-DIV. ~~~~~~~~~AUDITOR SU--I.O SDB-DIVISIONN

I CoordFltoI 7 Alyt 6 Ansly.t. 2 Analy.t.

2 SpIrloliote 1 Market Speci-list(Inventory &

Control).

LCPI2July 1981

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Chart 5: Organization St7uctore of Credit Sub-Directorate of BEnco Mexicano-SOMEX

SUB -DISECTORCROAECEIT.]

LIC. JAINE RUIZ

IGOVERNETSCO TOURISM SECTOR T | PIAESCO|-|CRDTPERATION | IT ANALYSIS|OWNED ENORTE STAE CHIEF DIR. CESAR CHIEF CHIVISIO SUPERVISION DIVISION

DIVIEF ANOIOLRE JOSE CARMON C'dIEF:

VACANT 5 Accour.t l'.-ager3 lMIL l

4 Account M.angers

SUB-DIVISR SUE-DIVSION CREDT OPERATION CREDIT RECOVERY CEI NLSS CEI (TOA aon ManAgeD AGMINISTRATION c SUB-DVISION SIR-DITVANAUY LD-IVsAccou t M anag rs 5 A count M nagersPU B-DIVsional 13 P rofessionals 8 C redit A nalysts 8 C redit Supervisor s .

LCPI2July, 1981

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Chart 6: Organization Structure of FONEI

Technical Committee

Director

| romot ons |Technical Spca Operations|| Subdirector || Subdirector r Projects | Subdirector

Promoters Regional Chief of Chief of Chief of Chief ofPromoters | | Representatives Appraisal Supervision Operations Accounting

Pro,~ects Financial ortfolio| Appraisal 1 r = t CSupervision Contracts Credit Information & Control| Officers C l ontfiroflc Officers Officer Officer Analysis Officer Officer

Assistant RecordsAdministrator Recrd

World Bank - 20307

- fE'

_ 99 -ANNEX 9

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Indicative Listing of Items to be Included in the Proposed InformationDissemination System and Training Programs

A. Information Dissemination System

The proposed, information dissemination system wouldconsolidate the available subsectoral information on current and projectedinstalled capacities, available technologies, domestic and internationalmarkets for capital Roods and their components, supply-demand characteristics.etc. Possible items and sources of information for the system includethe proposed special survey of installed capacities (para. 4.08); SEPAFIN's registrywhich contains information provided by capital goods producing industries onplanned new investments in connection with applications for authorization offiscal incentives and subscription to a 'development program' (includinginformation on existing and planned capacities, characteristics of thetechnologies, production characteristics and plant locations); demandinformation available from the public sector entities and the 'ComisionesMixtas' (para. 1.36); information available with the chambers of industryon supply and demand characteristics; special sectoral studies such as thosecarried out by COCOFIN (e.g., information from survey of training facilities,para. 4.06), NAFINSA, and INFOTEC (e.g., the 'technology gap' study referredto in para. 4.07); information from the principal financing institutions(NAFINSA, FONEI, FOMEX, FOGAIN, Organizacion SOMEX, etc.) on capital goodsprojects by them. The relevant information from each of the above sourceswould be gathered, validated, systematized and made available in an appropriateformat to all interested producer and user industries.

B. Training Programs

Two types of training programs are expected to be formulated and implemented.Firstly, a formal training program could be undertaken to bolster the capacityof the technical staff of the principal implementing agencies for preparing,promoting; and/or evaluating capital goods development projects. The trainingprogram would focus on the areas of technology assessment, technologyabsorption possibilities, design of technology transfer agreements, andformulation of complex financing packages involving several parties and foreigncompanies (para. 1.42). Secondly, more detailed seminars or 'mini-courses' forspecialized technical and financial staff of industries and financial staffof industries and the principal financing agencies would be designed andoffered on specific topics of relevance to capital goods industries, such as(i) identification of capital goods product categories which match the technicalcapabilities and comparative advantage of Mexico; (ii) factors affectingachievement of good technology absorption and technology mastery; (iii) criteriaand intricacies of evaluating technology transfer/partnership agreements;(iv) importance of ensuring adequate quality control and reliable deliveryschedules in supplying components to capital goods industries and ways tohelp subcontractors achieve them; (v) relevance of standardization and precisionof machine tools in assuring adequate quality of capital goods and their components;(vi) ways to make best use of horizontal linkages and specialization among capitalgoods manufacturing enterprises; and (vii) methods of assessing the economicvalue of used vs. new machinery taking into account the long run implicationsto the production process, cost and quality.

- 100-ANNEX 10

MEXICO: CAPITAL GOODS INDUSTRIES DEVELOPMENT PROJECT

Selected Documents and Data Available in the Project File

A. On the manufacturing sector and financial system

1. Plan Nacional de Desarrollo Industrial (1979-82), issued bythe Secretarla de Patrimonio y Fomento Industrial (SEPAFIN), 1979.

2. Mexico: Una Estrategia para Desarrollar la Industria de Bienes deCapital (9 volumes), NAFINSA-UNIDO Special Project, published byNAFINSA, 1977-80.

3. Indicadores Economicos, Various issues, published monthly by Banco deMexico

4. Informe Anual, 1977-81, Annual Reportsof Banco de Mexico.

5. Informacion Economica, Various issues, published by Banco de Mexico.

6. El Mercado de Valores, Various issues, published by NAFINSA.

7. Mexico: Financial System, Report by F. Veneroso (Consultant),September 1978.

B. On Implementing Agencies

1. Annual Reportsof NAFINSA, 'Banco Mexicano-SOMEX, FONEI and ?OMEX,1978-80.

C. On the Project

1. Capital Goods Information Dissemination System and Capital Goods ProgramTechnological Information System, Elsa Vergara (Consultant), August 1981.

2. Proposed Capital Goods Industries Development Credit Project--Views onSelected Issues - Report including observations on technical issues,training needs and subcontracting, by Oscar Gonzalez, UN,DO--World BankCooperative Programme.

3. Report on World Bank Mission to Mexico, Consuitant's Report on issues oftechnology transfer and technical deficiencies affecting Mexican capitalgoods Industries by Nuno Figueiredo (Consultant), July 31, 1981.

4. Miscellaneous Sectoral Supply-Demand and Structural Issues, Report bySat Goel (Consultant), October 1980.

5. Program Operating Regulations (approved by the Mexican authorities inApril 1982).

6. Project Execution Paper (approved by the Mexican authorities in April 1982).

IBRD 15553-iio too- 99w JANUARY 1981

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