I~~~~~~~~~~~~IRETURN T0 |I~E!Y.~ ,.-j RESTRICTED

I E C~~~~~~Wry -WH137oNE WEEK l1

report was prepared for use within the Bank and its affliiated organizotions.| They do not accept responsibility for its accuracy or completeness. The report may

I not be published nor may it be quoted as representing their views.l

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

AN APPRAISAL OF

THE DEThrU'TT Ort-'?PMENT-r DO (n A Mx

OF MEXICO

VOLUME I

July 1l3, I1 964

Department of OperationsWestern Hemisphere

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CURRENCY EQUIVALENTS

U.S. $1 = 12.49 pesos1 peno (Mex$) = T U.. $. 081 million pesos = U.S. $80,000

Gerald Alter ......................... Chief of klission

Loreto Dominguez .................. Chief l:conomist

Mlervyfn Wciner .................. Public InvestmentProgramr Advise.

Subhas Dhar .................. General Eecnomist

Sylvain Plasschaert .................. Public FinanceEc jnoraist

George Darnell ............ . . AgriculturE-l Production;Idviser

Albert Johnson ....................... Agr4cultural iconomist

Vincent og ..................... , Transnortation

i.e orlomhist

Raul Paraud ................ Highway Arlviser

krthur Car:rcicael ......... ....... porVs and arineAdviser

Pa.l oucl.cht . .. aiayla Corisultant

Frederic!- Sander . .R............ ailwayr Consultant

Vaughan Sea: . . ............... Power Consuiltant

Philippe Duvieusart . ....... du.... indnstry Adviser

Duncan S. 3allantine ............ Education Adviser

Charles 1orse ................ .Public HTealth andSanitation Adviser

Alirio Parra ................ .. Petroleum Consultant

John de Beers ... ............. Housing Consultant

Miss Dorothv Nichiporowich ...-....... Misi- on Secretarv-

TABLE OF C ONTENTS

Page No0r

SumumarIy of 'ILi Ln Concduzions ardiu JUcomf,-,InuJtiU i - xi

Chapter 1 - introduction 1

Chapter 2 - Recent Economic Developments 3

Chapter 3 - Diagnosis of Econcmic Conditions 7

Chapter 4 - The Economic Development Plan 10

Growth Targets °

Investment Levels il

Chapter 5 Private Investment: Incentives and -t)Financing

System of Incentives and Climatefor Private Investment 15

Financial Intermediaries and thePrivatu Sector 20

Financing Problems of Major Sectors 24

Agriculture 24

Manufacturing 28

Private Housing 31

The Mexican Government Program 31

The AID Housing Guarantee Program 34

Summary of External Financing forPrivate Sector 36

Chapter 6 - Financing of Public Investment 37

Chapter 7 - The Public Investment Program 49

Introduction 49

Transportation 55

Prage INo.

ULIapter 'I - 111" ruul.c .u±vestr,en,, rrogr'±ii (juontd

The Highway Program 57

The Railway Program 60

The National Railways 61

The Pacific Rai4way 63

The Other Railways 64

Now Railway Construction 65

Financing the Program 65

Ports 67

Civil Aviation 69

Petroleuim and Petrochemicals 70

Introduction 70

Petroleum Invustments 72

Petrochemical Investments 74

Financing the Program 76

Electric Power 79

Investment in Generating Facilities 80

Investment in Distribution Facilities 82

Financing the Program 82

Agriculture 85

Irrigation 86

Agriculture 90

Manufacturing 93

Housing 97

Page No.

Chapter 7 - The Public Investment Program (contd.)

Water, Sewerage & Health 101

Education 109

Chapter 8 - External Financing for Public InvestmentProgram 114

Chapter 9 Balarce of Payments and External!Trrowing Capacitv 121

App endixes

A - Balance of Payments 1 - 10

B Notes on the Mexican Tax System 1 - 16

C - Private Industrial Projects for

Foreign Fir!nr-ing 1- 6

TI .Stistie.a Table 1 - 39

Annexes

1 - Petrolcum and Pctrochemicals7-- -- N I ).__7separate volw.ne/ * _--

II - A ricpltucEr' ---- to -andReatd ork parato vlue) 1 4 h6

III - Electric Power7r=ZZ:,. 1 -_ _

nrT - Transportation 1 - 105 (Part I)(separate volume) 1 - 3 (Part II)

V - Education(separate volume) 1 - 30

VI - Water Supply, Sewerage andPublic Health(separate volume) I - 3

BASIC DATA

Area: 760,000 square miles

Population: Over 38 million in mid-1963L4s 1 population 10)65o

1960: 49%D'Ra- P grc s. - inl.n to% r) rv£tdA bu±t gJ.uw 141; .L7L4U-uu; L L.7

1955-62: 3.1%

Gross National Product (1962): Ps. 177.5 billionReal rate of growth:

Approximately 5% in 1950's.Slightly lower in recent years.

Per capita GNP: US$340 equivalent

Origin of Gross TNational Product (1962): Agriculture: 17%Mining, including petroleum: ,%Manufacturing & Construction: 213%Services: 50%

Gross Fixed Investment (1962): Ps. 23.4 billion = 13,1% of GNP

Government Finance (1963): (millions of pesos)

Federal Revenue 15,3U7Federal FExpenditures 17,062

Deficit ( - ) -1,645Public Investment 12,363

Federal Government 3,747Other Public Sector 8,616

Balance of Payments (1963) (US$ million):

Current Account -103exports 981tourism and border trade 656imports -1,2hOother (net) - 500

Capital Account 272long-term private capital (net) 12long-term official capital (net) 190short-term capital - 40

Net Errors and Omissions - 9Changes in Official Reserves + 10

Money Supply, December 1963 (billions of pesos) 22.9increase bv 121 since Decemhbr 1902

lWholesale Prices (1954 = 100), December 1963 142.2-1 L'.asJ'4 6

since 1961)n__r_____ Foreig___n ____hn____ ________om nDecember v1063 (TTQ .--11 5

External Public Debt Outstanding, June 1963,inlunrirl, iinrljc iisv,,' (USTTC -,ill.) 1A7 I.r7 7

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ '- -' '- -- o-~- j .1, 4 ,V I .

SUTHARY OF MAIN COI,CT,USIONS AND RECOIHENTVTIONS

Scope of Mission's Work

1. At the request of the Mexican Government an IBRD mission appraisedMexico's national development plan for 1962-1964, and later - in thelight of developments in 1962 and 1963 - reviewed the adjustments re-quired to up-date and extend the overall program to cover the period1963-1965. In its appraisal work the Bank mission was particularly con-cerned with the level, sectorial distribution, and financing of publicinvestment and with the svstem of incentives, general climate and avail-ability of finance for the private sector. This report reflects thefindings of the 1963 mission a.nd the rpvip-,,y of earlv 196)! Tt ineorpor-ates the latest infonrmation on the actual progress of investment during1963 and dichp t adjusT,.a in p r for 1°64 an 1965 which

are being considered now by the Mexican authorities.

Economic Tackground

2. The Mexican Government's decision to adopt a three-year economicdevelopr,n,nt plan w.as pr -m.+-e by certain uu ,rr1fvo ble ecn omn n trc-n

SJsVS~L~'jJu~ LS -',ua.-- ~ 1 V'1,ii U,44 a C L-1 ~ k J1L Vi.L IL U Cu

which appeared after 1957 and which became particularly noticeable in1961 and 19620 Thus, the traditionally rapid growth of th ItIexicaneconomy showed some tendency to slow-dow,n; the slower rate of growth wasassociatdu f withLII a decllne ln 'Iexicols external ecarnlig1s ad,LU in

1961 and 1962, with an outflow of capital - stimulated in part by the4 . _ _ n_ -Z -- e -international po Ltcal st Ud atUIl V1 LI reiumiLphrei C. rIVa ue inve stm ent

showed a tendency to lag. The Mexican Government counteracted these.L - z __ __ ~~~~~~~~ben --- -I - --t~trenus by a step-up ir, p-ubl _ ic l bment f inaniced, to a larger exteni

than had been customary in the past, by increasing resort to domesticand external borrowing. In 1963 there were clear indications of an econ-omic recovery. Gross national product expanded 6 percent in real terms,current account exchange earnings increased by nearly 7 percent and thecapital outflow came to a virtual standstill. These developments aitestto the basic flexibility and strength of the economy of Mexico and to thereasonableness of the target growth rate (5 percent to 6 percent) whichthe development plan aims to attain. However, the mission shares theopinion of the Mexican Government that economic planning in Mexico shouldnot be based on the assumption of a continuation of a rapid expansion ofexchange earnings.

Economic Development Strategy

3. It is against this background that the mission has appraised theeconomic development strategy of a revised three year plan, The pastincreases in public investment and a planned further increase for theimmediate future are justified, both in terms of the long-term physicalcapacity requirements of the economy and in terms of the probable short-term pattern. HIowever, the financing plan is being adapted to a changing

- ii -

situation. As the capital outflow comes to an end and the private sectcrresumes its traditional and necessary expansion, partly under the stimulusof Government policies, the public sector, which has been borrowingheavily from financial intermediaries, is planning to reduce its claimon the supply of domestic financial resources.

4. At the same time the Government is prepared to stimulate privateinvestment, particularly by increasing the availability and reducing thecost of financing, and by demonstrating through its own action in manydifficult fields that the private sector continues to have a vital rolein play in carrving forward the countrv's aspirations for economic devel-opment.

5r Even though the number of Government agencies and enterprisesnodiuing groord and orrrmme-reinI serrvices in vpxinro is- rathpr 1 rgej the

private sector accounts for over 90 percent of such output. The planrecognizes the importance of the private sector and the role that itsinvestments must play in the attainment of the country;s economic growthrateQ- Thre -rirrmyieNii fjcr:nl -:lurl rt+.Iia" in-nean+jtr a Tonr +h o "v-TnmN+.nn tnf' +.Hebrates Th~ rar~f11o f ~1 an rI+he,1rotie the promotion of th-private sector, particularly agriculture and industry, seem by and largeto be ,wcI suited too Ma-J'can cnd4+ 4

-r-s. Tihe mi4

-in- wou,hld sugge

however, that tax concessions and the structure of business taxationshouldn

1no be r ;nf inA ore to evAo- 4- l a-1a - ore--- effici

4en 4- 4r.- n rf

economic promotion. Even more important, however, for the immediatefut 4re woUIA be Covernmlent actions Which would cl1earl dAe,.o a th4- 1e

important role that the Government assigns to private investment. Itwoul Iappa ----- 4 g4ve the- 4 ge resonibiites of te ?eia oenWL.LU LJ .IZJkJO.J 14110.0 r'.Vv11 0110; ".1.0.4 0L1J. IiO ' UIlO l OA±0 U'.)VOl AA

ment in regard to economic infrastructure and social investment and therelat0ive lag of recent year-s opva0te ir1VEBSIL4UOI, teLiV uUVCILJenLUt

should adopt a cautious attitude toward the expansion of existing stateentt-,EprL-isesZ aInd the iLn-LUiation- of0 az proces of sal of -hs - -r

which it has been difficult for the Government to establish on a soundbasis. Two specific industries, steel and automobiles, offer theGbvernment an opportunity to adapt its own investment plans to the realrequirements of the market.

Financi.ng rrivate Investment

6. Also very promising as an immediate field for stimulating privateinvestment in high priority sectors would be measures to facilitateprivate financing. Private saving has tended to expand in recent years.Capital flight, however, has absorbed part of these savings; the Govern-ment has been another important outlet for private savings. The Govern-ment financing program now being formulated and discussed in this report.will assure the private sector of an adequate share of resources byreducing Government reliance on private saving. The mission supportsthe Government's plans to increase the availability and reducing thecost of financing for the private sector by resorting to external bcrrow-

- iii -

ing which will be channeled through financial intermediaries to theprivate sector. In the absence of external support, and taking intoaccount the financing pro_ram for the public sector and the need to build

up Mexico's foreign exchange reserves, credit to the private sector couldbe exandedri hy about ten nercent in 196h, and by nine percent in 1965.Under these circumstances the increase of credit for the private sectorwould be below-i the levels of the past. fpw years and would not be ^onduciveto the projected expansion of private investment Ln many key sectors. Inorder to permit an increase in credit to the private sector more in linewith the expansion of recent years, the mission supports the plan toborrow f abroad approxi tely $?0 mnllinn in 1Q965 This external borrow-

ing program should also complement the program recently adopted in Mexicoto reduce nter-tr+ rates. Terest rates in the ra nnge of 12 - 15 percentunder the conditions of mild inflation which prevailed in Mexico urtil1960 represented a bearable burden ir, real te-ms. The price stabilit_ y

that has prevailed for the past three years has in fact raised interestravLes in rela'L eris and reir.forced te other fLorces leading to a retarda-tion of private investment.

7. The mission supports the hiexican Government's plan to channel abouthalf- Of the external financ ilg hllat it seeks for the private sector intoa special program of medium and long-term credit for capital improvementin the agriculture sector. Tne share of total creditb going to agriculturehas dropped sharply since 1959. This factor, added to the reduction inagricultural profits wnich very likely occurred after the L957 drop inexport prices, may have had an unfavorable effect on irvestment and out-put in agriculture. The growth rate of agricultural output dropped tothree percent in the last five years compared with five percent between1950 and 1957. In this situation it would be helpful to expand mediumand long-term credit to agriculture which is in very short supply andcostly. The special program of agricultural credit is being planned atthe lev--l of about 1lex$0.9 billion per year with the external participationin 1965 being about half - i.e. $30 -. $35 mldion. The Bank of Mexico's

"Guarantec Fund" appears to be the most appropriate instrument for channel-ling the credit to farmers with good land and in a position to take fulladvantage of credit with minimum supervision although other institutionsmay also qualify. This program, in contrast to the program for small

farmers already in operation with AID support, would be directed primarilyto the medium-sized farmers; in pioneering fields even the large farmerswith substantial resources of their own should not be excluded. On thebasis of the plans now being prepared by various Governmental agencies,several major areas in which additional credit could be effectively util-ized on such a basis have been identified: a special program of credit inirrigation areas, both new and old, making possible more effective controlof water on the land; a program for financing fruit production, mainly

citrus, apples, mangos and avocados; a credit program to improve pasturesand pasture management in those livestock areas where disease has beeneradicated or prophylatic measures undertaken; a program for encoaraging

- iv -

rehabilitation of eroded lands and prevention of further losses byfinancing in the dry farm areas contour planting, terracing, plantingof special crops and the establishment of trees; the financing of aspecial coffea diversification program worked out by the -Mexican CoffeeInstitute.

8. With respect to manufacturing the Mexican Covernment has recentlyexpanded the scope of operations of the "Fond) de Garantial in the NacionalFinanciera which operates through private credit and investment banks, sothat it will be able to cover more adequately the credit requirements oFmedium-sized enterprises for medium and long-term credit.. The new reg-ulations will allow the Fondo to cover the bulk of Mexican industrialenterprises, excepting the largest companies with a net worth of morethan Ps. 10 million. The mission supports these efforts to assist smrallerenterprises to grow and medium--sized ones to obtain the financing neededto develop their operations, and recommends that the external financingalready obtained from the Inter-American Development Bank should be supp-lemented so that about $15 million a year be made available.

9. Finally, the mission supports tha program developed by the Bank ofMexico to mobilize a somewhat greater share of bank resources and tostimulate private savings through a credit program for private housing.This Drogram is well designed to mobilize resources of -workers and employvers for imeeting urgent housing needs with modest external financial supp-ort. Tt shoulda divert savings from hiaher cost housing and vvt ininimizethe diversion of resources from other high priority uses. A total ofapproyimately t25 million a year might well 'h channeP1d from nhrnn tothis program.

10. In the case of the large industrial enterprises outside the scopeof' th rIVnAn nrla (~~,~! +cvr~ c*AJ+a cn

1-j v li A r nI-VrJrn-of ~ te"ondo de Gaania, xtral __ei+ ^ihe irct-o-wt

Government guarantee have been resorted to in the past. The mission* sual-zes +in addition the ¶J rto be r.ade a-lable tothe private sector via financial intermediaries in 1965, a sin, of aboutd2lr3 .ll-1on a year w-ill be avllbe n ,h formn oP credits for specifi,

private industrial projects to large enterprises.

Financing the Public Sector

11. The Government recognizes that in order to reserve adequate savings4e _4 -6 1 _A - D _A_vA__ A1 l _AAA A 4 AA- -- 4. _- A-A A_ A r

. V-io LAi e p VrVl., ICe ISJL 2t-. r LLAJLi Ui L,i1 L U VU ULJAJ LI.* ULA UUV111UQWk.L '.

ing must be reduced - and in 1963 took effective steps in that direction.Tle Government also recognizes the need to increase publiU sav:Ugs inorder to carry out high priority public investments. Public savings

i.Vd±±U.L~ .J. _J41V LIV~It: ±.1 ±,7ul duV aLUUs . 2 LLLJUL L)e`U - theavailable 'or -vevs'--nt in 196 were about P9 2@ bilo below UIh

level envisaged in the Immediate Acticn Plan; they increased substantiallyin 1963 but, ul-=ess spec'al measures are taken, will show only snfllincreases in 1964 and 1965. However, the Mexican Government is prepared

to take measures toward the end of 1964 which will permit public invesb-ment to be maintained at the level of about Ps. 13.5 billion whilereducing net internal borrowing from Ps. 2.5 billion in 1964 to Ps. 1.5billion in 1965.

12. The measures to be taken during 1964 include tax measures as wellas increases of prices charged by the Government enterprises. Alreadythe sale of subsidized gasoline by Pemex in Mexico City has been suppress-ed. This will yield about Ps. 100 million annually. The Government isnow studying other measures which are designed to increase public savingsby about Ps. 1.2 billion in 1965. Additional resources of Ps. 1.2. bil-lion for 1965 will not be sufficient to carry out the full program ofinvestment recommended by the mission. However, the extent to whichinvestment will fall short of the recommended target is not serious.Public sector savings thus increased would represent approximately 5,7percent of GNP in 1965 as against 4.6 in 1962. Even after deduction ofexternal debt amortization pavments and financial investment outside thepublic sector, public savings available for financing public investmentin 1965 would renresent 60 nercent of nrolented invastment in that vear.The use of internal credit projected for 1965 would increase the domesticcontribution to the financing of niihlin JnvPtRment to 71 nprnent.

1 TIn reviewing the various meanS by which public savings coilri 'hincreased, the Mfexican authorities have a wide variety of alternativesonpr to them- The longrn pos i1bi-iies for in,- eAinci rphblitc viny

in Mexico are substantial, since the present tax burden is relativelylow an.d tax evasion is generally recognized to be im.portant * Substantialincreases in public savings are also possible by raising the price chargedby rejo;r pulcenterpr-ises. A li,st of these latter ItAYYes ofP measuresput together by the mission suggests that about Ps. 1.5 billion a yearcould - A- -rase by inra-g - h prce -of good and serlcs- povueLi%'.AIJ LJy J±...L ULIU 4.L 6VUUU. dtL±U ~ ~ .IV

by public enterprises to levels which are fully justified. If all thesemeasures for increasing the sav-igs of public enterprises were taken,no additional tax measures would be required. Such a course would haveimportant beneficial side effects in stimulating a more econoirac adnuin-istration of the public enterprises concerned. On the other hand, it isIthie overal-l re;vtenue VbJectieV whichUL ia- pUlaramuU1t a the, WM- Y.Ft;W,1 stage

of Mexicots development, and to the extent that resources will not orcanrot be obtained through the additional generation of funds by publicenterprises, it becomes of vital importance to take measures in the taxfield wnich could raise hne total additional resources to tre proposedtarget figure of Ps. 1.0 to 2.0 billion per year.

14. The tax measures suggested by the mission for considerationinclude additional taxes on property income and luxury consumption. Theadjustments suggested in the income tax are in line with the enactmentof the global-type income tax which the Mexican authorities have alreadyadopted as their ultimate objective,

- vi -

15. If the suggested amount of Ps. 1.0 to 2.0 billion in additionalpublic savings were raised, domestic resources, including domestic credit,would finance about 65 percent of tota' public investment over the nexttwo years. With domestic resources making such a contribution it shouldbe possible to raise the remainder from external sources on reasonableterms. Gross external financing recommended by the mission for the publicsector would average about $360 million a year in 196)4 and 1965, comparedwith the $550 million a year in the Plan. On a net basis, externalborrowing for the public sector would average about $150 million a year.

The Public Investment Program

16. The mission, while taking into account the original 1562-64 invest-ment program of the YKexican Government, found it advisable to obtain arevised 1963-65 program from the appropriate authorities. However, due tothe overlap of this period with the first year of the new administrationcoming into office on T)ecemhbr 1. 196.'i. it -as not- nossible for theGovernment to prepare an official overall program that incluided 1965.As an alternative the mission examined the agency nrogramTs and composedfrom them a mission-recommended target-program for the period 1963-1965.,This progra nwas revrised, where possible inJanuary 196) in consul+-ationwith the respective agencies. The final step was than to formulate a"probable"r prog,ram for 196) and a n'pro e" program for 1965 on thebasis of discussions with the agencies concerned and the Ministry ofFi Ynance.

17T- ' oAI -,,11;C Jnvctmn ..ecae ubrsman" l ; _- r cw e ; n sw{{ ntS

.LI -Lf .2 VJ) y..J.I L v v . Lva , C_/__, x -- C0 ULO al V .L . 1,L.¾J e S,y SJ,l

above the 1962 level. The mission's recommended target for 1964-65 isabout Ps. 15* b illon a year; nd- t, - ---- u-less u .-

resources develop to finance further increases, will be of the order ofP.C In bilio a year- ar-`,ng tha' measures are tKnto iAle-^eas

*'s _L_ L.~)ULLL-LJ..±UI yrVar - assUJiULi bAld ldUe d.L udlWi Li U ALiq_C10C

public savings by 1.2 billion in 1965. The 10 percent differencebet -ween the mission's recommended targets and probable pu in irlvestmenTin 1964-1965 should not be a cause for concern. Apart from the marginsoI error inevitable in estimating required investment it seems that asa result of the increase in public investment of recent years, theeconom,,y- enjoys a slight margin of Uhysical capacIty- in most fields ofpublic investment relative to the requirements imposed by an expandingeconomy. Thus while it might be desiraole to increase pubiic invest-ment somewhat more than is now contemplated in 1964 and 1965, the missionwould not challenge the advisability of keeping investment in 1964 and1965 ten percent below the mission's recommended level - particularlyif private investment in high priority sectors is given increasingsupport and encouragement.

18. Taking into account actual investment in 1963, probable invest-ment in 196)4, and projected investment in 1965, the overall program ofinvestment for 1963-1965 calls for very substantial increases over theprevious three year period 1960-19b2 in several sectors, particularly

- vii -

highways, irrigation, housing, education and urban water supply andsewerage. Investment in all other major fields should rise but not somuch in percentage terms. The rise in petroleum investment in thecurrent triennium is only about 5 percent. Nevertheless, petroleum andnetrochemicals will renresent the largest single sector and will absorbabout 17 percent of total investment. The mission attaches a very highpriority to the nrogrnm. Piven its role in sustqining the rrrowth ofsupply of products which are vital for overall economic growth, for thee)pansi nn of Yneort..s nndl for t.he rc.o)nta.inment. of etrolum and1 chePmic.limports. Investment in the electric power sector will complete a largeprogDraTfl, already in the advanced stage, to increase generating capacity.Expenditure levels on high priority distribution facilities will beraised and a program of _onversion of frequencies that- will permit abetter utilization of generating capacity in the near future, and a moreeconom cal n I Mnsn on -of + J,, gn -ig c ity 4i An theJ 1r run, IIvin beI

initiated.

19. Highway investment is projected to increase substantially; it'i go a "lAong -way tow'ardal comLApletJin - -he -on st ru. U4 o n of Uthe ma,or - - ,g

way network and includes the initial stages in the development of a news y stlem of t;o' 4 od for hea-ry_ Ttraffic_4 roues Ine n4196 and%;0± I U.L. I CUCU) IUI bi:;V d). U11C X UuU ; C) * LH1Vt :0LdIitLi U ±L1 1-.71-04 dt.iLL

1965 is expected to reach the mission's recommended target although itis poJs sLle that theiZ inita U LII- of the new toUU LUa U planiLlUU

for the end of 1964 may be delayed. Tn railways only a modest increasein iiLvesUbLent is projected for 1964-1965 even th-ough a somewhat greaterone would be desirable in view of deferred maintenance expenditures andthe need to replace obsolete equipnent and rolling stock. The missionwould recommend that early in 1965 Mexico's new administration shouldcarefully review the mission's recommendations in the railway fieldwith a view to augmenting railway investment further, financed by anincrease in railway tariffs.

20. The irrigation program, which in percentage terms represents tnelargest increase compared with 1960-.62, should contribute substantiallyto realizing the increase in agricultural outnut which is required forthe decade of the sixties. In agriculture outside irrigation, invest-ment levels are not increasing as they should. While investment inthese activities (storage, tick control, extension service, etc.) arenot by themselves quantitatively large, they are part of Governmentalaction programs which are important for the long-term growth of agri-culture and which might permit, in the future, slowing down alternativeexpenditures on irrigation projects. In manufacturing, more substantialpublic investments are contemplated, particularly in 1°64, in completingexpansion programs already underway and in initiating new projects. Inview of the apparent readiness of the Drivate sector to go forward inmost fields where expansion of Government enterprises is being contem-plated, the mission urges that the Mexican Government review with greatercare the investments proposed by State manufacturing enterprises for 196L4and 1965. Even so, Government investment in manufacturing is unlikely toexceed 2 percent of Government investment in 1964 and should not be re-garded by the private sector as a serious deterrent to the continuedgrowth of private manufacturing.

- viii -

21. Investment in housing, education, health, water supply and sewer-age is expected to increase by about 60 percent in the current triennium.Investment in these fields would, however, be less than 20 percent oftotal public investment. The public investment program in housing would.complement the credit program for the private housing sector which themission also recommends. Public investment in education will more thandouble in the 1963-1965 period. While the mission would prefer that theprimary school construction program be curtailed somewhat more inaccordance with the original schedule. and that greater emDhasis beplaced on the construction of secondary school facilities, this very con-siderable increase in educational facilities should represent an imDort-ant step in meeting skilled manpower requirements over the long term.

22. The investment program in urban water supply and sewerage, whilenot bringing about a fiindmentnl change in the present nation l facili-ties picture, would largely resolve Mexico City's huge and criticalwater and sewerage problem and would initiate a process of improvementin the facilities in other parts of the country. Investment in healthfacilities, excluding the anti-malaria progrm, are eected to stabi-lize more or less at the 1963 level. Despite the obvious need for greatlye xFa nwdedd hne lth. sevrviceosy a more ratoa la o the I osrclno

hospitals and clinics is clearly necessary before these programs arestepped uap. On vhe other hands Dh <ai rdcto rg',oeofO VjJU U}J WJ I ~i .UI11_ I £ldIU, Ult' IILCL.LdLC VU±UL.LLUCt UL~I, ULLe '

the most effective programs in the public health field, is not receivingt ireaed finan.cial support that it deserves ln -, -4 ana 1965.

ExLerrnal Finiancing f or Public Sector

23. The financing plan for tne pubiic sector in support oI the invest-ment program described above calls for external credits amounting to$392 million in 1964 and $321 million in 1965. Financing arrangementsfor 1964 can be said to be practically complete since disbursements onexisting external credits will provide $287 million, or almost three-fourths of 1964 external financial requirements. New credits already inthe process of negotiation wll1 provide an additional $40 mntllion. Ybst,if not all, of the remainder is to be covered by the public issue ofexternal bonds. in 1963 Nlexico placed $40 million of such bonds in theNew York Market and plans are well underway to place a second issue ofq)25 million early in 1964.

24. Disbursements on existing credits will provide no more than $153million out of $321 million of external financing required in 1965.The urgency of undertaking financing arrangements to cover the gap isthus evident. As a first step in formulating an external financing pro-gram for 1965, the Dlexican Government in cooperation with the mission,identified those parts of the projected investment program which aresufficiently large and sufficiently well studied to lend themselves toexternal financing. Excluding the parts of the program for which ex-

- ix -

ternal financing is already committed, the following parts of the sectorprogram were found to be suitable for external financing: for electricpower, highways and railways - the whole of the recommended program;for water, sewerage and health - the program for the Mexico City area andthe City of Monterrey; for irrigation, those projects in the large irri-gation programs and the commission programs which are not so far advancedthat only relatively small expenditures remain to be made; for Pemex -the total recommended program 'ess investment in drilling, sales and un--identified miscellaneous items; in the case of Pemex it was assumed that,as in 1964, supplier credits will be arranged to supplement the Frenchcredit. These eligible items for new financing total Ps. 4 billion in1965, approximately 30 percent of the total investment projected for 1965.Disbursement.s on existingr P--t.Prnq1 romm4 tmTnt..g nar attp,cihid tn nroipctn

and programs representing about half of total investments.

25. It was found that if external financing were to be lim.ted to theforeign FxYclwnrwr contepnh of the plOirih1h mpcrgrnmq rhii br lts aricded

to those under existing credits would total about $236 million. Thistotanl ic ern:irizrhlir IPc: +tha:n t.helP mnillion nFrc'ssrF+rn:l bcrrr,-

ing that would be required to satisfy the overall external financing pl.n.

financing approach to the external financing of the program would, by

26. Fortunately. Mexico will probably be ale to secure some generalpurpose financing not tied to the foreign exchange content of the programthlroughn additional. bond issues Q-s;'l.lcarl to those pyla.-nned f~or ~L71496} 11-WevrIit would be unwise for the Miexican Government to count cn the major por-

tion o the p8_2 mlli.4orn gap tuo ble co-veredl byscLodisus rtUJAJIA'dl ~i; ~~O3lILL.J~ULl AJ U~ ~UV~U u Lj~y ULI UULIU -J6t ,Ul- IUU

expect at this time that general purpose borrowing from the official inter-national lend-ng agencies would be available tO make up the difference.An alternative now being corisidered by the Mexican Government is a blendof project and general purpose external fir-ancing for the prograrm. Forall eligible expenditures identified above, with the exception of therailway sector, wnere straight foreign exchange component financing wouidbe sought, the Government would endeavor to obtain 50 percent financingfrom abroad. The application of this rule would add over $55 million toexternal disbursements in 1965 and would largely close the financing gapin tnat year, since less than $30 million would have to be raised bygeneral purpose borrowing.

27. The particular blend of project and general purpose financingdesired by the T'exican Government is, of course, only one of many possiblecombinations; also, it must be recognized that the quantitative projectionsof public savings, exports, imports and international private capital move-ments underlying the overall financing p'an and the external financingrequirements discussed here, are subject to considerable margins of error.What does seem clear, however, is that HIexico has reached a stage in her

economic development in which the external financiniR recuirements exceedby a significant margin the foreign exchange content of siiitable projectsand orograms to which external financing- can be attached. The foreiFnexchange content of eligible projects and programs amounts to perhaps20 nercent of total nublic investment. Even though Mlexicots externalfinancing requirements for the puiblic sector are modest, net foreignfinancin,e h,inr, equal to about 12 nprcent of nnblic investment. grossexternal financing required is equivalent to about 30 percent of totalnpihli' invpqt.mennt and is 50 perc-ent in excess of h fnrpian exchangP_

component of suitable projects.

28, In implementing the external borrowing plan, external commit-ments on a pro ject basis will 1 be particularly Li.nortan+, in the folTlowi.nnfields: railways, highways, electric power, water supply, irrigation,and petroleum. In 1l sectors, but particularly where external financ=ing looms large, the external financ4ng agencies in making project loans

favorablc findings on the composition of investments are valid and-hehe the- 4 .eiP- pro-ec4 makin up,4- - 4e i-nves+.en list are-4 we"--~VLL~ SS~A. US .J<~~ ~ t dJ ~J i U, J JIi LM-L, LAjJ U.±1 .L V U1IIMA U 11M.L CU E;. Vv_

prepared and whether they promise to be high yielding. Th,ey will alsohave an opportunit>y tuo conslUder -VYt'h. Ithle 113X`Lcan Governm,,ent -whlethler, anduto what extent, changes in administration and financial policy are neces-

T -_ _-- _4 1)_ _5t .r >_ -_ n__ _ _ _ __ r, |___ - _! _ __ saryanc ordf r'yeto randz theorfulln benefit rmpoete netet

2 I The program of exterrnal borrow-ing ior both the privaue anln puoi.icsector at the rate of about P'40 million to $450 million (gross) a yearis consistent waitn the nrojected development oI Aexico-s baiance ofpayments for the next few years, and will permit M.exico to increasecapital goods imports in line with the import content of' projected publicand private investment levels. The borrowing program itill also permit amodest increase in M-exico s international reserves which have not beengrowing in line with PIexicots international liquidity requirements andnow represents less than three months4 payments on current account.The increase in reserves will, however, materialize only if Mexico issuccessful in arrangin,g for long-term external borrowing of the magni-tude discussed above and provided that the outflow of capital which bur.-dened the balance of payments in 1962 and 1963 does not resume.

30. The program of external borrowing recommended here is superimposedupon a very large increase in external indebtedness and debt service wh_chhas taken place over the past few years. Debt service has risen fromabout 12 percent of foreign exchange earnings in 1958 to about 17 percentin 1963. 13ecause of the fairly heavy short-term maturities in the exist-ing debt, service on that debt is projected to decline to less than 9 per-cent in 1967. External borrowing on the scale of '1400 million a yearover the next five or six years, if arranged on appropriate terms, wouldrequire service payments representing fifteen to sixteen percent of

- xi -

exchange earnings in 1965 - a ratio wthich would continue at this leveluntil 1970, given the projected current account exchange earnings.These debt navments are within the canae-tv of Mexico to serve withoutundue strain.

31. However, the above projection of debt service is based on theassumption that borrowing over +he nev+ five or six years for the pu-licisector is arranged with maturities of 15 years and borrowing for the

rv;w_+. eor+7P-"rnM _~ In wroe T4 +hc Moo Wnv;rn (,^ra-aoniT.G +.n J*v..'?~z ~.+.r. ...-.. v v Tas T h. v~' ~ tfinance only the equivalent of the foreign exchange content of new pro-

s o- ,--n the basis of long-1er. b but+ w-erte to obtain the rem-n--der of its requirements through loans with a maturity averaging aboutthree years, debt servlce wol ris to a'o t~ 0 pecn f oe

exchange earnings in 1965

32. It Should be noticed that the volume of bcrrowing discussed abovewill be required or'y in case 8ielu.L inte r natlonl cLU rnL. t accou

develops after 1965 according to the conservative projection that hasbeen adopted for p-rposes of' analysis. A more fa-vorable balance of pay-ments development should greatly reduce borrowing requirements. Thelikelihood of this happening is rather strong. l^exIco's economic growti:-has been associated with a rapid expansion and diversification of itsinternationial trade in commodities and services, Tnis development hasbeen facilitated by the increasing diversification of Mexican output andby the ability and interest of Mexican entrepreneurs to seek and exploit.export opportunities. Government policy has, of course, contributed tothis development by providing not only the necessary social and economic.overhead facilities but also by maintaining a climate in which privateinitiative has been able to prosper. These trends should be reinforcedby the development program discussed here. The program contemplated bythe Mexican authorities should make it possible for the Mlexican economygradually to reduce its dependence on officially organized foreigncapital inflows in the period after 1965. This is particularly true ofthe measures to increase the rate of public savings and to promote andstimulate the development of agriculture and manufacturing. Action inthese fields, coupled with the implementation of the public investmentprogram, should establish the basis for a continued high rate of econ-omic growth after 1965 combined with reduced net capital inflows.

C H A P T E R 1

IDTTRODUCTTON

1. At the reques"t nf the M4i-xicn C'rr vrrnnpnt an TIRPD missoinnanpraised Mexico's national development plan for 1962-6h, and later, inthe light oi' develo pmntns. in 16Q2 rPvi-TTrd the pdji7i.rnPnf rqnilired toupdate and extend the overall pro-ram to cover the -eriod 1963-65.This document presents the results of the missions work.

2. The mission was compooed Of srvcra' gencral cconomists, as -ellas specialists in agric lture, industry, transport, petroleum, power,

i- li h ousi1 -ng%, publJ ic heath1 a±d educatl i n It . orlUed in 1I Gxico

for two months early in 1963 and before leaving :'exico in March dis-cussec' stme ofi the principal1 c-nclusions J. U Tith 41hVIe --exican aUtr i Uiti.

A preliminary re;oort -ras presented in August 1963 and three members ofthe ,lsion retu, toLIi~U 'ei- lr~ JIad 2- T__ toJ. l A. revie.- the rer.ort

in detail.

3. In its apT,raisaL iwork the Bar, l.ission T-Jas mainly con.cerned cliththeL growthi' objec-tives that the 1 ieia Goer,el desre to atai and Twith the appropriateness of Mexico's development effort. In particular

Z _. _ l_ D _ Z T>.F T--- I _-4.il1 Ilibb-LUII ±UUU UU' VII-LAIU ii 11 £'d1IU_LI6 1lXlU U- LilVtb ll

e:ffort, especially the public investment pro,-ra.!i, through the use ofdomestic as fell as extcrnal resources.

4. TLis re'port reflects tne Lin'uings 01 tne 1I96U mission to iiexicoand the revi4ew of early 1964. This is n effect a revision of theinterim report submitted to tihe lMiexican Goverrnwnt in Aiugust i963 as abasis for a discussion of economic policies, investment Dlans and financ-ing possibilities. It ircorporates the latest infcrmation on the actualprogress of investment durin_ 1963 and discusses the adfjustments in pro-grams ior 1964 and 1965 h!ich are non; under review- by the Prcxican author-ities.

5. This report consists of two main parts; Part I is a summary ofthe missionis findings on ilexico's development efforts and incorporatesthe results of the January 1964 discussions with the Mexican 2uthorities;Part II comprises a series of annexes on the major fields of public in-vestment. These annexes are based mainly upon the work of the 1963 mis-sion, although sonie data in the original annexes have been corrected onthe basis of information supplied >y the liexican Government in January196h.

_2-

6. The present report must be consicdered primarily as a reviewi ofMexico's deIelopment efff rt as it ras emerglng In 0962 and rl I3 Itsprimary ernnhasis is on the internal and external finaa-cing problems, to-rhih atertion ust be gi.ven by- th exca aut' as byexternal f' .na--cing agencies in 1964 and 1965. This report is only to am 'noUu1 e=tn an. a,tria 4. a J4 foC,..a ,)0lan~ sir;ce the~ orlL V-JSCa r,1

presented b-- the Governmnent covers the period 1962-64, No o2ficial, updatedpublic i,-ves .,,Uent pUl ' 1- v L 4-1 ,,h -ea± ±196'5- 4dU ±_i__i_.. ac.our t1h

changes which have been occuring sin-ce 1962 has been officially adopted.4u;JevtU-, u;JUaUinJ1' Uof L.'LV riVIUU L-raT,1L is a cUnru±iniig prhuJes andu uti

irnnlicaatons o. thnis rrocess for policy in 1964 and 1965 are explicitlyconsidered in this repj rt. The mis5io haa worked clozely i,ith the Minis-try of Finance anO the various government depart,mEnts, autonomous irstitu-

~~~~~~~~r r . I I 11 . - I - ! I - - 11tions and state enterprises Il i1ts review;o 03 ne investment lanz oI theagencies. ln reviewin- all aspects of Mleznico's develoement effort, in-cl.uding its macro-econom.c irar.ewjcrk, tihe rission has 17orked closely -. itnthe 11inistry of Finance and the Bank oJ' Mexico, particulerly, howrever,with the joint Finance ilinistry-1Banik of ile.xico 'iorling Group.

C Tr FA P T E R 2

REC'',! ECONIUrUIC ATT'7LOPFI.)TS

7. In 1.962 the Mexican i-overnment decided to adont a three-vear eco-nomic development plan kno-.n as "Plan de Accion Inmecliata". This decisionwas Drompted bit certain unfavvorab1 e economic trene.s which rnnde theirappearance in 1057. Siince l957 the rate of growth of GDP in real termshad tended to s'ow doujn- and in four of t.he f'ive vyirs- inc'ucding 1961and 1962, economic growth wT,as in the reighborhood of 4-5 percent per year.In contrast; ,iexicn

1ls Innng-tepnv grouti' over the period 1939 to 1957averaged 6 percent annually, and the foui '7cars following the 195 de-valiuation wpere ye ars of very rapid growth withi growuth, rates over R percentper year. Mlexico's nopulation has been rzrowing over 3 percent per year.This i nard4uio in "r.t> a e'tc to Uecan intl n'entoa

price situat-ion for the rl.ajor com,iodities exported by t 'iexico, a changevihoch between 1 Ot7 a.nd 1960lA reducec:' earnin,s- on cu-Mrent accor t. ,;ag

earnings on currenit account exper.enced a marked :improvement in 1961 and196L2 --hen a ncr: factor entered te U.A UUe.- C Vol.,J.eUI %J± capt.LUA.L

amounting in both years to about '150-pf200 million was leaving the country.Also, the level Of prvdte irvestr,ent had no-> risen in 961' and fUr sev ralyears had tended to represent a declinin. proportion of GDP. Partly tocounter a the u tii I reijds en ± p.-r-va tU-LI ±IVUZ. uRALi I U IU 1rtuy tU .c uUI higl pri-

ority economi .c needs, the Government attempted to increase public invest-rment. Actu.al plbtl.u investnent, 'owv-er, rosU sh'arply onl= in 1960; itremained unchanned i.n 1961 and ro.,e an additional 11-12 percent in 1962

8. In 1963 the rate of economic groimh showved a subst3ntial recoverywi-th GNTP rising by 6 percent in real terms. Thiis return to high rates ofeconomic CroT,th occurred under continuing conditions of monetary and pricestability arid appears to ha-,e been lurgely supported by a f urther expan-suio of publUin ±ivuestfimenu alnd a spurt in exports euai private investment -particularly in buailding, con-tructtion. The international current account,as in 3961 and L962, again Ue..Feloned satisiactorily in i963 cIosing witha smnaller deficit than in 1962; the outflo!j of capital was virtuallyeliminated in 1963. As a result net official gold and foreign exchangereserves rose by nearly ":;70 million,

9. An analyvsis of developments by major economic sectors disclosesthat tne reiative retardation in growth which prevai.led until 1962occurred largely in the service industries, in agriculture, in mining andin the construction industry. i'4anufacturing appears to have continuedits rapid expansion with 6.6 percent during 1957-1962 as against 7.1 per-

- 4 -

cent during 1950-1957. The electric pou-,er industry also imiaintained a highrate of gro-th in these five years. The growth of the petrolewm inOustr;yaccelerated in recent years, averaging 8.7 percent -per year between 1957and 1,62, as contrasted with 6.3 percent per year between 1950 and 195'.The sectors that contributed mcre heavily +,o the economic exnansion of1963 were manufacturing, electric poTier and, as indicated, t'le constructionindustry.

10. rhe real net value of total ar,icultural output (contribution toGDP at constant prices) increased at the avrern-e rate of 5.1 percent be-tween 1950 and 1957 - the growth rate dropping to 3 percent in the follo3ingfive-year period. In 1'63 the level of agricultural output rose only1.2 percent with respect to the previous ;rear. j* slower expansion in theproduction of exportable commodities, influenced by interrnational pricemo-vements after 1956, accounts for the trends above. Production of agri.-cultural export crops (mainly coLton) - i}hich rose at tile rate of 8.5 per-cent during the period before 1957 - expancded at a pace of about 3 percenitthereafter. Domestic crops maintained a fJir'y steady rate of eypansion,averaging- 5 percent to 6 p-rcent per year in botli periods. In the aggre--gate, procuction for domestic use would appear to have c'eveloped since1957, in accordance witli renuire:ients since no undue price rises occurredand imports of foodstuffs and oth.er -gr- ci:1 tural commodities, in any casesmall, experienced a substantial reduction,

11. An important factor favroring aericuLtiira' exninsjion over the past15-20 years has been the opening of ne- lands to crop prodect-ion. `l1houghirrigated areas account fcr the productio,i of al) important part of agri-cultural exportvs. the bulk of the additionel output occurred in non-irri-ated lards made available by optning vir-in lands or co.nversion ofpasturcs. iAricultural y,ields have been increasIn_ slowlyv and L'hese in-creases have been influenced by the irouing importance cf relatively high-yield irrignated a=riculture-

12. Mininlx hias been relativel, stagnant in iexico for mrany v'?ars. ietvalue of mineral production rose approxirnately 3 percent per year bet-ween1950 and 1957 and less than 1 percent since 1957 uYith absolute declinesregistered in 1961 and 1962 (Cf. Table 2). UJnderlyin- these trends isthp bnhnvior o- intprnntinnnl pritnpr uhirch n'r tFhn Tr;1m,n ininrnls _y-

ported by Jiexico has been -unfavorable in recent years, the gradual ex-haustion of onme mines, and 1it.n rise in dHnTestic costs of proouetien

which made investment in mining unattractive. An addi'vional factorY;hiGh r,s ter.ded tro diszourage forrigrn inv-:t.Y,1ni_ -in -.,h indus;rv znd

thus contributed to the relative stlagnation just referred to is the socalled n"icanizationu policF u9nder which- the expans1onJof foreigyn in^-vestments is restricted by the requirement thiat control of the respectiverentpr.rLrlse be' tr+nsfe d toyA +rlc Tv-in "natnals.

-5-

13. Frj-on 1957 to 1962 uie cons-'-.rucn UII .Uinusr-y eUpamueu U udt u dihe a

rate of 4.0 percent per year - in contrast with 8.0 percent during theperiou 195019y. Tni fl±iarge xeiau-ve decline, s.which was concentrated inprivate resi-ential and industrial construction, accounts to a largemeasure ior the trends in private investment mentioned before. somerelative decline in resioential construction may have been part of ahealtny readjustment after the boom conditions prevailing during theearlier inflationary period. ilowever, construction in lHexico City,M4onterrey, and other cities became unduly depressed reflecting perhapsa relative lack of confidence of private investors as well as somescarcity and high cost of const+ruction financing. T'hle improvement ininvestor confidence mainly explains the large expansion in building con-struction which occurred in 1963.

W1. The unfavorable trends in commodity exorta which prevailed duringthe period 1957-1960 were partly compensated in tleir ef'fects on the balanceof payments by the expansion of tourist earnings and by increasing use ofofficial external credits. At the scire tine, imports w;hich had beensteadily rising since 1950 when they amounted to approximately I4600 mil-lion, reached a plateau of about ;1,100 million in 157 and remainedpractically at the same level until 1962. In 1963 tle value of importsexperienced its first substantial rise (9 percent) in seven years (CfoTable 22).~ This rise was to a large extent acccontcu for by greater im-ports by the private sector. These iuorts consisting mainly of' raw rna-terials arid of scme capizal goods reflected the exrarsion in lianufacturingprodluction and private investment.

15. Comiodity ex-Dorts and tourist receints ro,e from .>1l09 million in1960 to `1`,721 mlillion in 1963 or by nearly 22 percent. The commoditieswihich shoied Fmeater expansion include cotton, other manufactures thansugar (i.e. textiles, chernicals ancl othler), anc a group of rriscellaneousexports. F1igh current exchange earnings to-ether with a relatively lowlevel of imports resulted in sorme ieduction in the traditional currentaccount def'icit in 1961 and particularl-y in 1962 and 1963. In spite ofthe capital outi'low thiat occurred in 1961 and 1962, the balancing of theinternrtional accounts recuired relativelyJ small changes ir official goldand foreign exchange reserves. This bias so because, in addition to theimnrovement in tho current account nositionn the utilization of externalof2icial credits was greatly stepped up, reaching a total of about `h00mil 1 ion on a gross basis in both 1962 and 1963 tren thno,h _ ortizqtionpayments also tended to increase, the net infLow of official foreign capitalrose from j12 million in 1958 to M17)L inillion in 1960 declining there-P-terto :2120 million in 1963.

16* The increase in gross officia'l capital inflowzs of recent years wa-saecomnlished througvh some sqn ecial operations (e.gn. 1oans by PrrjdentialInsurance Company in 1960 and 1961) and by resortingr heavily to supplier

crcitz of rahrshort -- drt.Te'.er ebto cottr et

-6-

- is IJW-LI by L.ie Lact u la d scheU"1_U;AU edi ai.11 Fdjacul UVio.L UIIv e ne-Al,ten years represent approximately 80 percent of debt outstanding as ofu - __ -r - rt nz . A -31 -3':L_ __ -I 1 _') __ - I -- _ . __ J. -- _ _. - 1 .~_til t:iiU 0± l ). JUU±U.LLUXLi J JdIUL1Ct Of Pd1lfi.luo ZiUJJU±1U IU.)LLUeU f' oroLthe fact that the inflo:w of long-term foreign private investment -. asmaintained in tlhe pastb three years; a circJ.imstance that points to -urespecial ar.d localized nature oi tle capital flight.

17. The slow growth si domestLc private investment since 1957 tendedto be co-nteracted in its effects on agr-7egate denmand by a rising levelof Government expenditures both on ciirl-ent and capital account. Govern-ment revenues did not rise as fast as expenditures alt.hough they rose inrel_ction to CJ;L. Deficits consist-ently occurred in every year of theperiod. I'hese deficits expanded jgreatly afMter 160, ainountinlg to nearly10 percent of total expenditures in 1962 (Cf. Tables 9-11).

18. In order to finance its def'icits both the Federal GovernLment andthe rest of' the public sector resorted heavily to bank crecit. Throughextension of credit and purcheses of Goveriment secarities, advances uothe public sector by the banking systen averaged 12-13 percent of mcne.-supply in 1962-63 (Cf. 1"ables 5 and 6). -lowevcr, this increasinE resortto bank credit did not result frorm a rer:uct,ion of pubL c savings sincethese remained stable as a proportion of GNP.

19. Ihe alcilit-r of the bar-inUn s'ster,. to extend such a large volume of'credit to the public sector without creating undue inflationary pressures(wholesale prices increased 1 percent in 1961; 1.8 percent in 1962 and.6 percent in 1963) was apparently made po-isibly by a sharp rise in pri-vate savir.gs during the same period. uroSs private savings increasedfrom Ps. 6.8 billion to Ps. 140 billi.on, or from Lh4 percent of' GNP to7.9 percent of GiJP between 1960 and 1962. a neriod during which privateinvestment rose very little (Cf. Tables 1 and 3). During 1901 and 1962,as alreadv nointed out. there wls a1.so a suihst_antial. onu11oT ci of' nrivatecapita1. It seems then that the increase in private savings was suf-ficiently large to offset tlhc ;elmital outfl-ow as well as the increaseduse of bank crecit bi- t'ne nublic sector. In spite ol the capital outflo.r,institution,-l transferable saAhngs (me-!Smrd b: additions to total bank

liabilities of internal origin), rose annually by approxinately 15 percents~ince 1959 -Since 1961 ahont 38 percent of thec redit exPlansion m.ndepossible bY tee rise in domestic bank liabilities was channeled to thepublic sec.tor The use of SUc". credit .as, however, reiuced in 1963(Cf. Table 6). The central bank's nolicy during the period was welladpted +,o prevaiing conitioins 1.ilp it resL-ained the increase in

credit to the private sector as a mean;, to cut dowm capital flight, itrpvrni t+.te anV e ransion Jr: p.- -,P +t ca.,e1 -o1-. tl-,+,-" c, sco so 3rnnt.

act the cepressive effects of the capital fliLht and the trends in pri-vate+ rrodmn

C H A P T E R 3

DIAGNOSIS OF ECON0IHC CONDITIONS

20. The slower rate of Pconnrnic growth of the nast few years hasbeen subject to a variety of interpretations in Mexico. One or themstresss the pffepe. of inrrrnve r1;stion on Pff'-+AvPv ridmanrd anrd

growth by sectors; another emphasizes the obstacles to further importsubstitution such as problems of technolootr and problems representedby the size of the market. A third points to the relatively slowergrowth of the expUort sector since l9U7 and to the proepect thatexchange earnings may not expand in the future as fast as in the past.

_alI 17 f,nrli +4 ^ ~ J n - - - - - 'ki- f,-+-+"1ir in~Y +..nFinally, c,ondi+ions in recent y-ears have feuen-'ly beenatrbj+dothe impact upon Mexico of the international political situation in theU J. e nl,n ,i s p h r4- - Ach is sCad t o h-WV1, osrn f ears of ccnor,n1 aondsocial instability. Such fears are alleced to account for the out-PIlow ofP Cclapit +,'- 104-1 -an -1062 -an for 4h cn>un s,gn ni.Z4JVV 5J. ~C~j.LVCQ... .L&A 4,7S.A. C3L4LA _.7~C C.) 0A.U .ULSJ.I. ULJL1uJ%S.{UULA1 QlrLSLICLV_ ..

private i.nvestment. This relative Lack of confidence by itself', evenabustracting fro,U othlUler LUurel,y ecomILLc facUoLs t1h iiiry Ube aLU ply,

should be regarded as an important element in the interpretation of

officials expressed themselves publicly in a manner designed to assuage| tUV%/ tUV; X UtlU Vl' LtI11 dUUU DEd 3UU JUp LU US1C U I1 jW U | Upa_.uL b d LI *- 1i l r b C

depicting the magnitude of capital outflows are part,icularly unreliableb-ut they strongly suggest a graduai reduction in the levels of suchoutflow in 1962 and their virtual elimination in 1963.

21. The first two interpretations of the slowdown in the rate ofgrowth of the Miexican economy mentioned above suggest that a realbottleneck exists in the industrial sector which, it is implied, isunable to expand rapidly enough because of an insufficiency of' demandfor products of mass consumption and because of the general smallnessof the Mexican market for complex industrial goods. Neither of theseinterpretations finds support in the recent development of industrialoutput whichn, as indicated, has been expanding rapidly. It is truethat there are indications of excess industrial caDacity in somebranches of industry but these seem to reflect particular circumstances.In the case of the textile industry - said to be operating at a fractionof its capacity, the problem seems to reflect the impact on existingantiquated plants of new plants of the most modern design and highproductiviLty. On the other hand, many of the basic industries con-template substantial exoansions in the next few years. A reduction ofdifferentials in income levels which are now very pronounced as betw,een

income recipients and between the various narts of the country - wouldbe desirable as much for economic as for social reasons. In the longrun a wider distribution of the ber±efits of economic progress wouldincrease demand for thos goods and services which the Mexican economyis well adapted to supply. However, there is no evidence of any markedrecent change in the prevailing distribution pattern which mightexplain the slowdown in economic activity. The process of importsubstitution in the industrial field may be encountering more seriousdifficulties, but there is little evidence to confirm this interpret-ation. Certainly the experience gained by Mexican entrepreneurs,aided by foreign know-how and capital in many industrial fields, opensup new possibilities.

22. The reduction in current account exchange earnings which occurredin 1957 - and their slow rise between this year nnd 1960 - must havehad a depressive economic effect which increasing public investment andexoendituires counteracted only in nart- Since 1939. during nearly aquarter of a century exchange earnings in dollars of constant purchasingpower rose Pt 2 rate nf e1coSe to 6 r,rcnt per year (10 percent in

current dollars). Between 1950 and 1956 the expansion of dollarearningsn in real t.srmq .s overor higchevr, i a 7 pc per year,v' wlnhi lh

contrasts with the rate of only 4 percent attained since 1956. Therem.arkalonh rcovery-r"% of qnvnhmr.ge earnirn,sc in 1961 andr 1A962 apanrt f"rom

pointing to the basic strengta and flexibility of the Mexican economy,a-aen-'f y+U did A t7 In-rA +hA7r^1 +;_,DDc +-Q.,4;i 4-.711-As;

J-J U A -. v V. -t. I4 v.. .WA. OA.. JvA--w.A v . '-Jvv-bvUv

by the external sector. This seems to have been mainly due topsychologicall factors suchL as ere reflected ln th . l ight.

Hence the improvement in the 1963 economric situation wihen the importanceu.L ±IVU~ .LCLLULOL INd L'UU U.

23. It :is likely, however, that the expans onary stimulus gi-vell tothe Mexican economy during many years by the extraordinary rise ofcurrent account excnange earnings may be reduced in the -next few years.Although tihe resourcefulness of IDlexican producers and exDorters can bere-liLed upon, anid Goverrumient po-iuc ie s W-LLL U[1UUUJ1AielUJy LULoL.,ue tu favuL

the growth of exchange earnings, lower rates of growth may be anti-cipated for the future. Official projectuions of the balance oL pay-ventsof Mexico which the mission considers reasonable, suggest that currentaccoutb earnings in real terms in I964-65 may be expected to increaseat the average annual rate of 4.6 percent. Although these projectionsindicate tne possibility of faster growth in the country;s exchangeearning caDacity after 1965, the external sector cannot be relied uponto sustain the rate oI growth in the next few years any more than inthe last few years. A rapid rate of growth in the near future willhave to continue to depend more on the expansion of the purely domesticsectors of the economy.

24. Fortunately, Mexico's economy is already well diversified andhas shown considerable strength and flexibility even under unfavorable

- 9 -

external circumstances. Its entrepreneurial groun is numerous andprogressive. The economy has been expanding and entrepreneurs andinvestors continue to have reasonably optimistic expectations aboutthe future. There are areas where import substitution can be accel-erated by annronriate nolicies and there are areas where the growthof exports over the longer term can be stimulated. Both agricultureand indutryv nnpear c-apable of and readv for nper.od of oynransion.There are sectors falling within the sphere of public investment wheremih.tnnti;l inereases in cnnacity are ca11Pe for bh the long-termgrowth requirements of the economy. There are areas of domesticdemand, such as housing, whThich in recent years have been satisfied to avery limited extent because of the scarcity of capital and the highin+rs rates -*n asoiated, -wit+h ca UniitaIP cli ht. T.hus, wait+h appnropriate+.

policies, it should be possible to sustain and to increase the rate ofeorrnom-i grr-thr.h de-spit- the less faoarrwable exort^w prospectso An+

next few years.

25. It cannot be assumned that simply continuing the policies ofthe last fewn -yearsx udsr acconm1,1ish +whis Objective. rV e* a to main-

taining the healthy growth of the private sector while meeting the realneedU Ji JJ. 6 vUW.LL4r PHUDL. .i J lIV -DWIIIGLi -± L c lt uJ LUJU U11.5L U 'J± U VU; ejct.L± .L±UdJ

and monetary policies to changing circumstances. The extensive use ofbank credit by the public sector in 196w-1962 was possible because ofthe special factors affecting the volume of private investment and bya rapid rise in private saviMgs. The reduction in the use of suchcredit which occurred in 1963 already reflects the beginning of aproper readjustment to new circumstances. As the capital outflow comes.to an end and the orivate sector resumes its traditional and necessaryexpansion, the public sector will have to continue reducing its claimon the supply of domestic financial resources, especiallyr bankinglunds, in order to avoid encouraging undesirable inflationary pressures.This in turn calls for readjustment in tax nolicies and in the pricingpolicies of state enterDrises producing goods and services - readjust-ments which the lIexican authorities have already initiated. Finally,the Government should give greater emphasis to measures and policieswhich will encourage private investrment. The Mexican Governmentrecognizes that the private sector, which in recent years has beenlagging in respect to the expansion of investment, continues to have avital role to play in carrying forward the country's aspirations foreconomic development.

C H A Lo T Tb R 1CHAPTTh _? h7~T T,'

r.Y ~.CtA\Tnl,TC. flThVlTTfl2 iEsT PT.ANI

GROv.TH TARGETS

26. The three-year developnent nlan proposed by the lex:i.canGovernment arose tithin the contndx of the Allianne for Progress anan answier to the economic trends and problems described above. ThisPlan set a mrninimm growth tarer?et of' nerc-en for the nprinri 1.960-1965 and cf 6 oercent for the subsequent five.-year period to L970.Ai crn'r.rI-.h rnt.n nC tA nrrontF. nvt -rc>o;n ,r - -.IVn.rt. n ,VArt1lf~+.

during the decade i960-70 is a reaEonable target for >exico and theprogress achieved so far is consistent ^ ththat target It uyouldpermit ner capita product to rise by 2-3 percernt per year. Lvenhi-he raes of econ-.o,ic -ronth are I1 -y -o-v-de that externalmarket conditions tall be more favorable than projected.

27. The grouth targets oi' the "ITnedinte Action Plan" for the nextfe l- years .rere fo n--mlt-ed in -h -4-.tex -P 'I- - - - - - - r- - - - ons

covering the neriod 1960-65-70. These projections rely to a largerextent, tLhan was the c-su in thle pa2S on in.ernal nemand as the dynlu-IUelement to support thc grouth of the va;'ious sectors of the economy.As a result, th1 Plan-s strategy cails ior a "reater import, suDsti-tution effort particularly in netrochemicals, paocr rmanufacture, andthe mechanical industries includin!- the automotive industry.

28. According to the Planis longer-range projections, thc evolutionof the main economic sectors during the oresent decade would be asT OllOT1S:

- 11 -

Pln's Sectornl ProThctnons

(Average Grow^th R>ates)

1961_65 1966-70

Agriculture h.5 5.5

Crops 4.3 5.1

Forestry 6.4 5.5F~ishing 6.9 7

YLLLLLL"4 I- £.U

Petroleum 6.3 7,0Elect-ric Power 10.U 10 .0ianuf acturing 6.9 7.1COnc; ULr-uco O.5 7.2Transportation 5,9 7.2Tr ade L.? 5.9Other activities 6.1 6.6

This pattern of sectoral growth could not be checked in detail butappears to be generally compatible witl the demand patterns which w-Joulcdfollow fromi the projected overall rate of growth. Agricultural outputexpansion of 4.5 percent in 1961-65 should permit a reasonable increasein food and raw rnaterials supply for the domestic market - particularlyin vieui of the lowier growth of exports projected. The sector analysesundertaken by the mission and presented in the annexes seem to confirmthe raDid rates of growth that the Plan projects in the transport,manufacturing and petroleum sectors. The growth of manufacturing, onthe other hand, nav be understated in viewT of its rapid expansion ofrecent years and the important role that this sector is bound to playin the overall economic growth of ilexico. The growth of the serviceindustries is cormpatible with projected commodity output.

IRNJESTI1IENT L,7EIS

29. In order to attain the projected growth rates the plan calledfor very substantial increases in public investment in 1962 and 1963.These higl public investment levels were designed to compensate viaphysical capacity for the low private investment in 1961 and via effect-ive demand for the continued low level of private investment, par-ticularly in 1962. In 196 4j and 1965 the Plan called for a stabiliz-ation of public investment at roughly the 1963 levels with privateinvestment supplying in those years the push necessary to maintain themomentum of economic expansion. In line with the Plan's strategy,

- 12 -

Gross Fixed InvestLnent Accordingto "Immediate Action Plan"

(billion of pesos, 1963 prices)

1960Plan Projections

Estimate 1962 1963 1964 1965

Total Investment 21.0 24.5 27.2 29.9 31.5

Public Sector 9.0 12.4 14.2 14.4 14.5Private Sector 12.0 12.1 13.0 15.5 17.0

public investment authorized by the Secretary of the Presidency wassharply increased in 1961 and in 1963. Actual nublic investment,which had risen very substantially in 1960, increased further after1961 but not to the extent contemnlated in the Plan. Public invest-ment rose by 60 percent in 1960, stabilized in 1961, and in 1962 and196R rons hv =12 nm.rrnt snrn P) nprrent. rAnthrtivrlv IVithori 7edinvestment in 1961-63 has exceeded actual investment by about 10 percent.Thi fferenGe reflects delays in get+ing certinn nprograms uinderwayarising out of administrative and planning problems as well as delays

30.* Takincg asa startinn point actunl puilic i r'v -rmc+rnn+. yT seco+r i n

1962, which totalled Ps. 10.4 billion, the mission undertook todete+rmine the TJol ,,me and t of ;Dublic in-Cs +4C+ +1ha w

ally justified and feasible of implementation in 1963, 1964 and 1965.This task was made possible by the close contacts establ4shed with,and the excellent cooperation extended by, the major public investing

"cLIU L.d es The results of UhiS anaysis apeD r fothe major sectors in the annexes to this report and are summarized in

hp+ 7. 7. * " X r VT iW., carried outU dur.g Lthe cour seUU V 196

suggested that a level of investment very close to that projected inVi1e M1r,meld.La-t IA .LI £lan1 for tUl. periodjju 1ic) wai JUsUtLifLeU.Public investrent at this level of Ps. 14 - 14.5 billion would havebeenL tqulvaULiu w abouu (.7. pr1ceUn 0.L uJlii GNstead of Utie U.LL pIL'UtL1Lactually achieved in 1963.

31. The Immediate Action Plan did not attempt to justify its pro-posed levels of pubiic investment in terms of a completely consistentmacro-economic model, it being virtually impossible to construct sucha model for the Mexican economy at the present time. The mission didnot feel either that it would be justified in attempting rigorously toestablish what level of public investrnent would be consistent with theshorter term growth targets. The somewhat higher investment levelscontemplated in the Igmmediate Action Plan, which appear to be justifiedon the basis of the missions sector-by-sector examination of capacity

- 13 -

reniiirpmrnt for the longer term, may or may not be mnre consistentwith the shorter term growth targets. Since, however, financing covldnot be made available in the form and anount requi-ed to raise publicinvestment to such a level, at least in 1963-6lt, this is a moot question.

Ps. 13.5 billion in 1964 and no action is contemplated by the present.,Av,4 e-+ion oon the fnancial sid c.4Aa would pea-+ the 1v of

public investment to be raised beyond this point in 1965. Thus, publicinvestument, Nmaay we11 'be about P. D- 1,-. bl nbeothe level 1.ojecN1 i.1.k iJUI1J mO. JJ U OUJU U 4O o _L Ld.1.L.~LonJ Uel JW 4U1-~± ~L H I -4U. 144

the Immediate Action Plan.

32. However, it is probable that the somewhat lower levels of publicinvesumentio, coniteii^paUv UuifutI11±c1utu LUL 1-6 J4 adLiu possibl-Jy 7u.965, as Uor,JJ.duU

with the I2mmediate Action Plan, will be at least partially offset bys_o w - _ L _1 - L: n - --- - - - _ _: __ - 1 - - __ _ _ _ I _ M_ - rl,, __ --p o j c t d I

L, ILlgI1t:u jLVU:le e .L pvivauu llVSLLf:BlfU lb. if1 rlail PrOJeCleUpractically no increase in private investment betwreen 1961 and 1962, amroderat,e .iLncrea-se ( . percent) in 19b3 anu a iarger one in .LYOLh Afairly large increase was also projected in 1965 in the long-termn model.

Private Investnent, 1962-65

(billion of 1963 pesos)

1962 1963 196 4 1965

According to Immediate iAction Plan 12.1 13.0 15.5 -

According to Planis Long-term projections 17.GActual Private Investment 13.0

Actual private investment in 1962 exceeded the Plan's projections byabout 5 percent. Estimates are not yet available for 1963 but theincrease very likely exceeded the 7 1/2 percent projected in the Plan.It is the missionts impression, based on discussions held early in 1961>,that further increases in private investment in excess of those con-templated in the Immediate Action Plan are likely to take place in 1964and 1965. The out-flow of slhort-term capital seems to have been large'Lystopped by the end of 1963 and there appear to be good prospects for acontinued expansion of private investmenit.

33. The mission considered the question whether the projected totalinvestment levels are consistent with the long-term growth objectivesstated in the Plan. As noted above, this was done explicitly in thedetailed appraisal for each of the major sectors of public investment.It was not, however, possible to appraise the projections of privateinvestment in the same way since no detailed information is availableon private investment in each of the major economic sectors. It isinteresting to note, hcwever, that Mexico has attained high rates ofeconomic growth with relatively low overall investment levels in thepast. VJhile this may result in part from an understatement in the

- 14 -

level of investment, it seems clear that net incremental capital outputratios, which are in the neighborhood of 1.4 on the basis of the officialstatistics, are, in fact, very low. We can only conclude, given thepaucity of information in this field, that an acceleration in the rate ofeconomic growth will require some, but not a very large increase in therate of investment, Thus, projected investment would rise to nearly16 percent of GNP in 1965, as compared witlh approximately 13 percent in1962.

34. An increase in the rate of investment of this magnitude will notrequire a domestic savings effort very mach in excess of that of recentyears. Rough estimnates suggest that marginal savings ratios in thleneighborhood of 17 to 20 percent mayr be required. A savings ratio atthis level rould appear to be feasible since marginal savings ratios of16 - 17 percent have prevailed since 1958.

35. As to private investment by sectors, the "IIm'.ediate Action Plan"contains only rough orders of magnitude with no qaarititative comparisonswith the recent past. The Plan points out; hot-rever- that investmentin agriculture may be relatively less important than in the past becauseeconomic grnwmth in genernI tpnds to shift emphasis toward manufacftmrinrand also because the incentive towards agricu'tural investment hasdiminished PR a resuilt of the international nri tr for agiculturalexports. Ilanufacturing investment and construction, on the other hand,are avncr.A-c to riOs c,bc+nv4 nily;r the -1 att-r i ca --nuer-nce ofincreasing urbanization and population growth, Investment in transportf 4acil4ities shoul-1d ri se n 41 aab,s,ol,ute ter.as but reppresentn in +erm.s f +tot-lprivate investment a somewoThat lowe-' proportion than in the past.

C H A P T E R 5

PTIVATV TTIv ,TT.M-;1T T:NV\TTVES aIMT FIT\TAN\jTN\TCG

SYSTFEM OF I14CENTIVES A\D CLLMATEVCnP 0TPTWfTrP~ T-IMT~f?JPWMrTP

36. Althou1 -- 1 th,e- nu-,Xber ofP Gover.nient agnce-ad nerri4)'J. M- J ILI U~l Lit LUL ILJUJ _i ZU V V,~L LUIU0 IiIU t L, U~;,Lj. L~ u

producing goods and coimnercial services in Mexico is rather large, thep.r-ivate, siector- account's f0r ove:r 90V -per-cent- ofsc otu.ExetipL±VdIA~~~~~~~~~~~ ~~~ IAJL ~~~~~~~~~t~~~~UUUL19.~~~~~~~~~~ jUL UV~~~~~~~~~~L 7LJ p~~~~~~~~~~~Lut~~~~~~L1t.a Oi tjU~~~~~~~~~~~~~~~~!1 U~~~~~~~ALaj~~~~~~JUA~~~EJL .;~ J'LUJU . UU _

some specific areas (petroleum production and refining, electricity andrdlwaLy trn-wrt)U, wherU; thle uUve(xWinen1 has b-y laW a mVonLopol-y, pLrVateUenterprise occupies the primary position. In quite a few fields stateernterprises s'lare 'Uzle iiilu Ket Wi tlI prlvate indust-y . U1 1etl lle

through agencies such as Nacional Financiera, holds a mirnoritv interestin an enterprise whicn competes with exclusively private enterprises.

37. The llimmediate Action Plan'; recognizes the importance of theprivate sector and the role that its investments must play in the attain-ment of the country's economic growth targets. The Plan states that itis the Government's intent to use more intensively fiscal and otherpolicies for the promotion of the private sector. Incentives -ranted bythe Government to private investment are of two main types: tax con-cessions and protection against imports.

38. In the case of agricultural production for export the Govern-ment, after the 1954 devaluation of the peso which provided an extra-ordinary stimulus to producers, imposed s3ecial export taxes on somemajor commodities such as cotton and coffee. Since 1957 these exporttaxes have been gradually reduced in line with the decline of inter-national prices for these commodities, in order to FLaintain the countrytscompetitive nosition abroad. Export taxes on manufacturing have beeneliminated.

39. Under provisions of the "Law for the Development of New andNecessary Industries" (1955) tax exerotions may be granted under cer-tainconditions to eligible manufacturing industries. These concessionscover import duties and surcharges, stamp taxes and up to 40 percent ofincome tax liability. In the 1959-1961 period, 107 such exemptions weregranted. Besides, the President, acting through the Ministry of Finance,is empowered to grant remission of certain indirect taxes, mainly importand export taxes. The latter group of tax concessions classified as"Taxes compensated with subsidies" amounted to about Ps.800 millionin recent years. It would appear advisable that all tax concessionsshould be carefully reviewed to determine whether they are matched by

- 16 -

an equnivalent "triggering" effect on new investment deeisions. Subsild-ies granted to individual enterprises often outlive the conditionsjus+tifying th.pn Alsr)o tfhprn is increasning rePonnitionr in rPorernibhlPMlexican Government circles that exemption and subsidy benefits to indi--Tri da IA-dustie involvel +he rlsk oLf Ancisions in^onsis+en+ -wri+h, other

aims and tend to delay the initiation of new projects. The missionconcn s wit1h th`i-s view and 1-ci-eS tbat the sope of +"er subsidie

and exemptions should be reduced. In the opinicn of the mission, thesyste.. of 4netvs to be--- full 4-etive shul - genra 'I scope^ -4 - ---

and automatic in application rather than specific to individual enter-ps LIU andsubLj ) UV WidU ad.U1irL.HUr VU U-iLUs UIi. Ull UIIh Uodthie

hand, the tax structure, through appropriate reforms, could be made intoa more efficlent instrumenit of economic promotion than it is ncw.Appendix B on "Notes on the Mexican Tax System" contains an analysis ofpresent business taxation practices and some suggestions regarding possi-ble changes.

40. An effective instrument of industrial promotion used by the iMexi-can Government is protection against imports exerted through tariffbarriers and import licensing. Import duties average about 5 percent onraw materials and 10 - 15 percent on machinery and equipment. These twJocategories of commodities account for approximately 80 percent of imports.Duties on finished consumer goods, in the production of ihich Mexicanindustry has made substantial progress5 averages about 50 percent andthose on non-essential or lu-xury goods aLmost 100 percent. Import lic-ensing is required for about three-fourths of the products imported.Present pro-tective policies appear to be generally sound and there arefew indications that manufacturers, in setting their prices, tend totake excessive advantage of the protection they enjoy. Mexico is devel-oping some exports of manufactures. In general the prices of domestic-ally produced products in the Milexican market are not greatly in excessof prices in international marKets.

41. Specific economic or financial incentives constitute only oneaspect of tne problem of promoting private investment and growth in theprivate sector. Of probably greater importance is the maintenance ofconfidence in the stabillty of the currency and an investment climateunder which private producers may feel assured that their role in thecountry's economic development is recognized in official circles andthat their investments will not be jeopardized by changes in officialpolicies.

42. The Mexican Government has followed for several years policiesdesigned to maintain stability of domestic prices and to protect theexternal value of the peso. Tho capital outflow in 1961-62was not DromDted bv anv justified fears of monetarv devaluation butprobably by psychological and political factors which were in some deg-ree of external origin. Official measures and declarations apnear to

have succeeded to a large extent in stenmin% the outflow. The missionbelieves that restoration of general confidence would be furtherstrengthened by an ine in olrd andl fn-reian echng reserves npart1l

for that reason and mainly because larger official reserves than presently_vailable are ilS-ti.ieP hy s-rutrafil conditions ' ofth Mervan eonomy,

the mission recommends a substantial increase in reserves. (cf. Chapter 9).

43. On a more specific level there are indications that private invest-

with investment plans by the uncertainty regarding Government policiesan-d b y- fears tinat g vel ar e as o J -rvt actiit may be sub ~j e c t to thlecompetition of public or semi-public enterprises enjoying in effectspecial Vdvan ageLLsU.re ±11 n 'iL s cases Uthie -le iA±can Goverr-Jenlt h.as co-pJed wuithi

this problem by defining the area of public activity. For instance, in''iA1' : IJpleUochemical...4.L 1U;:L ty± ,y d aspecliC 'Lis t U1 Ud.iu Liltit"L.Ud.Lj L ±> UU Ut:

produced by Pemex-controlled plants while secondary processes are leftto the private sector. In otIher fields, such as paper manufact<Ure, andeven steel production, the precise role of the private sector is notclear. In general, it seems that given the large responsibilities ofthe Mexican Government with regard to economic infrastructure and tosocial lnvestment and given the relative lag oI recent years m privateinvestment, the desirability of limiting the scope of State enterprisesin manufacturing should be given serious consideration whenever theprivate sector is read,y to increase productive capacity. While it isdifficult to assert categorically that no existing State enterpriseshould expand or that all official enterprises should be sold to thehighest bidder, a cautious attitude toward expansion of existing enter-prises and the initiation of a process o,r sale of those enterpriseswhich it has been difficult for the Government to establish on a soundbasis would foster the expansion of the private sector and conserve thescarce resources available to the Government.

44. Two basic industries provide the Government, at the present time,with an opportunity to adapt rational solutions to situations in whichpublic and private investments vie with each other and also to show thatthe Government assigns, and will continue assigning, to the privatesector an important part in the countr'y's economic development.

45. Hlexico t s steel industry has reached an advanced stage of develop-ment, being now able to meet domestic demand in the main product lines.At the present time this industry is planning substantial investmentsand the possibility of coordinating expansion plans in a sector wherecompanies are few has arisen. To this effect representatives of theGovernment, the steel companies and the Confederation of Chambers ofIndustry have held conversations. The mission considers that coordina-tion of investment plans in the steel industry should be pursued activelv.

- 18 -

46. she claims on the financiD resou-ces of Mexico are such that itis most important to avoid duplication of investment. The claims onCinirverm.nn,n -. aresomnes ni- par-+i^u.la' gvIreatno ar.d +hea pi- ,ncile shouldA

therefore be followed that investments using Government funds orfi.anc bing uaran4--4 by the Govern± Uen 4 slo 'IA be -aref LLy scrut nz

particularly when public and private investments are undertaken toA.uJ_l L.'Vllhe s amr,e dlemr,ndtu. A ULoVUerr11,,ent proVJect soLIulU go, fox-vard in-preference to private investment only when the advantages of doing soare large andIU cleary rl dtUM0nStL lde. UUHnsquUly-f, it is ±oruapu dL1at

investment plans in the steel sector should not be carried forward byany comtpanry independently ofI ne others. hne mission also reounuriendsthat foreign financing be made available wherever necessary to carry outa coordinated plan of investments in the steel industry.

47. Tne automobile industry is now in the earIlr stages of developmentand the Government has decided to reserve the national market to author-ized car manufacturers who establish domestic facilities to producegradually increasing proportions of the finished product. Following aGovernment decree of August 1962 setting the basic conditions of entry,eight car manufacturers who have presented investment programs amountingto Ps. 3.1 billion have been approved. DINA, an enterprise taken overby the Government in payment of credit obligations due by an unsuccess-ful private venture, with productive facilities now largely unused, isscheduled to be one of the producers. In addition, a number of otherlarge projects are going ahead or are under consideration for the manu-facture of component parts. It is generally agreed that the number ofprospective manufacturers - eight - is excessive in view of' the demandfor cars and trucks which is estimated at about 100,000 units in 1965.Under these circumstances the operation of a Government enterprise in afield into which substantial private capital is willing to go underofficially controlled conditions might not be economically justified orfinancially advisable. Although special circumstances may account forthis case, it should be noted as expressed in the Immediate Action Planthat "an important aspect of the Government's industrial policy is toprevent duplication of investment in order to make sure that availableresources are utilized as efficiently as possible and because it is notdesirable that investors enter into irrational forms of competition thatlimit the process of capital formation and result in rising costs andprices."

48. In regard to foreign investment, the so-called "MexicanizationPolicy" under which mining and industrial enterprises are prompted toarrange for transfer of control to Mexican nationals has often beenmisinterpreted and caused confusion among nresent and prosnective invest-ors. In this area an effort should be made to explain more fully theprocedures that foreign investors should follow to comnlv with existinglaws, regulations or policies. Even more important as a means to re-assure investors regarding the fairness of the rnocedures and their

- 19 -

strict application is the public dissemination of information about thevarious arrangements with foieign enterprises as they are rmade.

49. The "T:mmediate Action Plan" states the Government's desire tooffer forei-ni capital opportunities to collaborate in the country:sindustrial development. Ats a matter of policy foreign participation ispreferably to be limited to h9 nercent of the canital of mixed enter-prises "but the Federal C-overnment, under certain conditions, is readyto allow excentions - to he dealt with on a case by ease basis.. Tothis end it is considered to establish a procedure by which NacionalFinanniera and the Tnternational Finan^e corporatnton ma? nact iointAiyto promote the formation of mixed (national and foreign' investmentgroups. The formnation of these groups will be justified when s o1fiCin+.

Yexican capital cannot be obtained to finance those enterprises; in Suchcases it will. bei psble for foreign -apltOal, .rarily.o represen

more than 49 percent of -be total - or even 100 percent - provided thatthe enterprise assumes the obligation to assoc-ate ltse'f -,ith-1ff ,ancapital at a later date until the basic proportions of 49 - 51 percent

ifr. °;nce 4the1 -ssion c.onsiders that4 4the -1vepopsl-a smO* A ;~C liL".O0~ LI L' LUU10 U,LC U ULIL~ J' CO VU j.J1k JjJ '0JV.)C L1CO. Juiil

merits, discussions were held on the subject with the Mexican authori-tlie. i ru.rangementis could UlIIdLe Ud_U m.ada be nus -ua, e g. issu_

of convertible bonds to M4exican investors or "repurchase agreements"b t"e _m.Aj_ X L _ _r:i.:__ t, f0__rLtei.n _h_ _ __ _ _ .X.____ __e - --Ut: Vl'BZL1 3.,Ll JI1=JUI' U Iy 1 UV' Lg1 U.idLUllU3XUX :'IflU L4i1 i r x'lcadi pavIers..I/ Ilo fixed or general formula can be devised, but the problem should betreated on a case by case basis. In each case the proposed formulacould be submitted to the Foreign Mflini.stry which, the mission under-stands, is ready to approve proposals. An official approval Xwould -ivethe company set up under such an arrarngernent the right to oe treated asiI it were under Mexican controi. The mission reconmiends that the Govern-ment makes known to potential investors the possibility of such approvalsin appropriate cases.

- 20 -

FININCIAL INTERTDIARIES AND TIHE PRIVATE SECTOR

51. No i nforymat icn ex-ists in Pv-i -o on the m-nnner in ;.rhic h variousforms of savings contribute to the financing of private investment. Astudy of +hem Url n ("A w.eT.- of the Capital Market ixn IMev,January 31, 1962) estimated that in 1959 approximately seven percentof" privatec in.vestiment- was financed directy fro ab_ road and thro-ghre

investment of profits of foreign enterprises. Insurance companies,thrJ Sough mortgage 'loans an-AAdU dir e ct in, Le st L tA, ULtan.lUd V LAJPUCLt agenciesI ,

through the holding of private fixed interest securities, financed inauout equadL proportions arn adlu LIonal. tWU prcUenLiU priv. a iLestrent.

The purchase of fixed interest securities by the non-financial part ofthe private sector represented roughly- ten1 percen,t of investmUen1t whilethe banking system as such extended financing equivalent to an addition-

' 3 " 1 . _ . - - ' ! L. _ * "- :-_ _ ~ -- _ -al L1 percent. Tne remainder, iLe. approximately two-tnirds oi prlvateinvestment, was probably, accounted by self-financing of the sector byway of reinvestment oI profits. Tne Bank's report poiilted out that inMexico "it is widely agreed that the largest single items of self-financing have been retained earnings, depreciation and new paid-in capi-tal of joint stock companies. No infornation exis.s in Mexico whichwould indicate even the probable magnitude of those important items ofgross investment, but there is reason to assume that industrial enter-prises in iKexico have been reinvesting a large part of their profits.This has been confirmed by a number of leading businessmen and can becorobated by the high cost of borrowiing and the pattern of incomedistribution. Self-financing is also reported to be su)bstantial inagriculture and it is a very significant source of fincncing in the resi-dential construction industry."

52. The following paraa-raphs dea'l mainly with the financing of theprivate sector through finarcial intermediaries and with the question ofthe cost of such financing.

53. Bank financing of the private sector, after adjustments for changesin the purchasing power of the peso, expanded since 1960 at the rate ofapproximately 12 percent per year. Ihis rate of increase does not appearto be unduly low. Over a three-year period (1959-1961) agriculturalproducers received approximately 29 percent of total bank credit ex-tended, while manufacturing and construction received 31 percent and tenpercent respectively of such financing. This proportion appears to beon the average in line with the importance of these major commodity-producing activities. However, the share of credit going to agriculturehas tended to decline sharply since 1959 and this factor, added to thereduction in agricultural profits which very likely occurred after the1957 drop in export prices, may have had an unfavorable effect on invest-ment and output.

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Gredfit. to Privqt,p. to,1°36

AnulPe-rcenta-ge Ch -n gfs %Distribut -Lon

Credit1. 226 1. 1290

To A c-ulture =1. 4e 3e 022

10 n6l U_ l9v8 l9+ 190 91 QA 9- ~

Manufacturing 10.8 15]7 10.1 23.2 31/_ %nA_t, u. lA4L 0b 1 . ') 7 n I i 7 1)0 On

Trade 5.7 15.7 13.3 13J1 17UULL~~~ZL ~ ~ L4.7 )~7. U -L..ULher 44. 39. 9 - 1X'

Sec-urles 17.1 9^13-:1 1-i _L _L 4. 1C

m- r, _ Z I _ _n r n n rz n n 0 'I r%lOatJa '± LIWIU±AUg )L. {tvy U4L4 : ^4 J.L vU LJVV

Source: Bank of Mexico. Credit Analysis Division.

Credit extended to private manu-facturing activities nas expanded at a goodpace but this does not necessarily indicate an adequate supply since itsallocation by size of borro-wer, on the basis of figures for October 1962,shows that a very small number (92 or one percent) of all manufacturingborrowers accounted for about 37 percent of total bank zredit to thesector. This ratio appears to be well in excess of the nossible concen-tration of industrial activities in the hands of large establishmentsand points to credit limitations for those of smail and nedium size.

54. The mission, in collaboration with the Joint Finance Ministry --Bank of Mexico Working Group, has attempted a projection of the possibil-ities of credit expansion through 1965. The results appear in Table 5,wJhere the general procedure followed is explained in footnotes. Hereit is only necessary to point out that the projection assumes that domes-tic liabilities of the banking system will in general expand in the nexttwo years at a somewhat less rapid pace than was the case during 1959-63.During the period ahead private investment is expeited to rise substan-tially; also the movement towards lower interest rates which the monetaryauthorities are fostering should contirue. Both of these factors shouldtend to reduce the importance of institutional transferable savingsrelative to total savings, In 1963 domestic liabilities of the bankingsystem continued to expand at a more rapid rate than projected here.This presumably reflects the virtual elimination of capital outflow inthat year. It would not be prudent to assume a cortirnuation of such arapid growth in domestic liquidity in 1964 and 1965.

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55. The probable increase in total bank liabilities of domesticorigin will be partly absorbed by a higher level of gold and foreignexcchange reserves nlanned by Mexico's monetary authorities - which themission considers desirable (see Chapter 9) - and by a normal increasein the value of huiildin'q eqnipnment and other bank assets. The amountsavailable for credit expansion and other forms of bank investment wouldbe Ps= 5=7 hillinn -nn Ps. 5 3 billion respectively in 1964 and. l965AThe credit to be utilized by the public sector under' the present plansof the Tovern.ment as discussed later in Chapter 6, are esti mated atPs. 2.0 billion and Ps. 15 billion thus leaving approximately Ps. 3.7bil-icn -for +hen pr-iva+e secto. in bothi -io4l.,, and 1.< On. this aitotal credit to the private sector could expand by about ten percent in14a).nd nir- e p-- iIN 1+65 Qn +hough th ern v,4de only

orders of magnitude it is clear that the avaiiability of bank credit forA__ A AA i_4_ A . - _ ._4 - 4. A P . A4 _ _ A- -4 4. .-r -- IA Ql_eViLU fJ _ I-J. X11 /41 iis ttn I')- U d: drl jt V l-AG Ldt-Ly i X1 L7U,7V Vl1

the basis of' internally generated funds alone , wovld be somewhat lowerthan in Wthe last few yYuarz aid out, of line wit,h probal'e requiresmentsgiven the projected expansion of private investment. For this reason,the mLssion supportz the Governmentzs pians to obtain external borrowingwhich will be channelled through financial intermediaries to the privatesector. Since it will take some time for arrangements to be completea,this prograr. which amounts tentatively to some Ps. 900 mill-.on per year (,$70million), could start in 19605 'This volume of external credit, supplemen-ted by an equivalent amount from domestic sources and properly channelledto activities selected for their ability to use it readily and effective-ly, would have economic effects out of proportion to the relativelymodest size of the program. The activities which the mission recommendsto be beneficiaries of this credit program are discussed latea;in this chapter.

56. The recommended external borrowing to expand availability ofcredit for the private sector would also have the effsect of supportingthe Government's policy of low-iering interest rates. HTigh rates of inter-est to the borrower have contributed to limiting the demand for medium-and long-term credit by the private sector, which still relies very heav-ily on short-term borrowing. Thus, business circles in Mexico point outthat effective interest rates have in fact gone up as a result of therelative growth in the volume of higher cost credit extended by privatefinancieras vis-a-vis the credit of traditional banking institutions.Also, (under conditions of mild inflation such as those that prevailedin iIerico until 1960) interest rates in the range of 12 - 15 percentrepresented a bearable burden in real terms and borrowers most likelytook the price factor into account in planning their credit demands.The price stability that has prevailed for the past three years has ineffect tended to raise interest rates in real terms thus displacingmarginal borrowers from the market.

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57. In addition to being high, i.exico's structure of interest ratesls .unh that li+ttle o- no distinntion exists hetween the returns of

short-term lending and of long-term bonds or deposits; both of wh-ichyielda pproxin'.telM ten percent per annln- Thus, NciOnnal Fin-n-niera"Certificates of Participation", formally five year securities yielding

Long-term deposits of similar yield in the various "Financieras" orpr .Sivate3. S.II.SLL 1 ....J -s A aIfls C a high dere on f liruidt.4A

The condition of high liquidity in the case of long-term securitiesor depoJsis is sai to I- necessary si.ince, gi ven t+he equal'.y hnigh rateson short-term loans, b-rrowers of long-term capital w,ould not be readyWI ,r. aL pston to L pay U the p-rJL_LA1 C,lflY apliL%cale_ UV this U,ype of.borrowing. However, one of the unfavorable effects of the presents tr±-ucture of inutresv 1-aut, is IhLau Uith 1low of sav1ngs into effec tiv

long-term lending and equi.ty investment has been discoaraged.

58. The Bank of Nexico, awqare of the undesirable effects of the highcost of. m-soney, recentLy instructed private financial coulipanies o reduceinterest charges on all their lending operations by one percentage point.This measure will soon be reflected in interest on deposits and shouldtend also to influence bank rates. There are also plans to bring aboutincreases in the margins cetween short-and long-term lending. nhemission fully shares the views of the Government regarding the advantagesof inproving the present structure of interest rates and reducing theirlevel and considers that the reco-mended external borrowifng for theprivate sector may help to push the process further.

59. All these measures are being taken in the context of a monetarysystem designed to insure contir±uing adaptation to clhanging economicconditions. The Mexican authorities have had much experience in con-trolling the flow of resources into the bankina system and in regulat-ing the use of such resources. The proposed external borrowing wouldreinforce this system and particularly assist in meeting the creditneeds of the high priority sectors.

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FI11AICING PROBLUE1S OF MAJOR SECTORS

Agriculture

60. The likeiThood that in recent years Mexican agriculture may ravebeen unfavorably affected by a general scarcity of credit has alreadybeen mentioned above. A far more evident problem in this conlectionis that the bulk of agricultural credit extended in Mexico is short-term - to cover annual production needs - and that medium-and long-term credit for capital improvements is in short supply and costly.

61. To supplement the present availability of credit to agriculture,the ilexican Government has obtained from the Agency for InternationalDevelopment of the TJ S.A. (AID) a credit for $20 million which will bechanneled through the "Fondo de Garantia y Fomento para la Agricultura,Ganaderia y Avicultura" to private banks so that these in turn may extendmedium-and long-term credits to small farmers and "'ejidatarios)' Thisloan was conceived in support of a combined social-economic program underthe "Alliance for Progress".

62. The mission confirmed the existence of several areas of agricul-tural activity which, given an adequate supply of medium-term credit,could substantially contribute to increasing outputs for domestic use andfor export. For the effects of this credit to be more proilounced andimmediate it would have to be directed to farmers with good land and ina position to take full advantage of it *with a minimum of supervision.The total amounts of additional mediunw-and long-term credit that theseselected farmers could use may be close to 900 million pesos a year.The mission supports the Plans of the Mexican Government under whichapproxJmately one half of this amount would be obtained through externalcredits matched by an equivalent contribution of internal resources.

63. The mission gave some thought to the most appropriate channelsfor placing the new resources in the hands of creditworthy farmers.An obvious instrument would be the Fondo de Garantia y Fomento para laAgricultura, Ganaderia y Agricultura, administered by the Bark of Mlexico.This Fund operates through comnercial banks mainly by rediscounting loansto farmers. The experience of the Fund has been satisfactory eventhough its resources have been rather limited so far. ALmong the officialban-ks, the Banco Nacional de Credito Agricola offers possibilities becauseof its large network of branches throughout the country and its ex-perience with agricultural credit.

64. The tentative srecial financing program for agriculture amountsto Ps. 875 million per year of which 50 percent or the equivalent oft31 million would be surnorted by external credits. The components ofthe program are as follows:

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Tentative Secial Cred't Prograi for Agriculture, 196b-65

(Hillions of Pesos, ar,rual average)

Program

Irrigation - Newi areas 2251:hRo, 1h Ak e4 '-l; ton A

_~~~ ALiSU rWuUVl VV

LI ru4 t 12 0

livestoc J soeh cobseriat ion 6and machinery 300

Coffee dive-sification 170

375

65. At the present time there are in Mexico about four millionhectares of irrigated land. The productive potential of tnis land isnot being fully realized due, in some neasurL, to ignorance on the parto. the farmers o' the optimun techniques of production, and also becauseof inslufficiency of credit facilities to implement existing knowledge.

66. Effective control of the water on the land is ;iost- important foroptimum yields. This usually necessitates careful leveiing which,depending on the topography, will cost upwards of 500 pesos per hectare.In additiorL to levelling, irrigation ditches and drains are necessary tocontrol water application. In some of thle established irrigationdistricts rehabilitation has beccme necessary due to salinization result-ing mainly from a lack of effective drainage. The rehabilitation ofseven irrip;ation districts has been partially financed by the Bank underloans 275-T'E and 336-1tE. In connection with these loans it is estimatedthat credits of 175 million pesos would have to be extended over a five-year rehabilitation period to enablc the 2and to be restored to full pro-duction, Other districts too require similar expenditures to preventfurther losses of productive capacity. Iledium-termr credit requairementsfor this purpose are estimated to be 60 million pesos annually. Inthe newly developed areas this wore is essential in order that maximumbenefits from the major capital experLditures in dams, main canals anddrains can be achieved, and to prevent deterioration of the land due toerosion, salinization, etc. Credit requirements for these purposes inthese areas are estimated at Ps. 225 million per year.

67. Mexico's potential for fruit production, mainly citrus, apples,mangos and avocados, is large. The prospective export market for thesefruits, particularly oranges, is excellent. The Tiational Co5nission ofFruit Production was established by Presidential Decree of August 16,1961, with the obiective of raising the volume and improvi.ng the quality

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of fruit production as well as promoting industrialization and marketingfaciit +s.c The C--.is-ion -- ----- rf e-s1t1bseV_ a s -r inthe princinal fruit growing areas, ard has a further thirteen in theINl n n ; tr,+ ,r/v

_ks 'rn-. 14'4 ui 1E)'4 -*~1~-

groves of disease resistant varieties recently developed, should enable?I/4. I _ _ .LL. TT C' -J ~ A.L J 4_ ... 4.LtIitlMx co to corupete act lvely _11Ue U0.S. ilma^hke t1. A,ju theU presen, t ,e th_

principal United States groves, located in California, are rapidly beingpurchased for reakl estate while those in l 'orida are scriously diseaseridden and subject to frost dar.age. The U.S. market for Nexico is,;therefore, particularly promising. Tne :fruit juice, tle juice extractfor the soft drink industry and the dried peel for cattle feed also haveexcellent internal commercial prospects. it.andarin oranges, ripeningin the off-season, would be of particular value to the frcsh fruit tradEe.There also seems to be Iiix.ted possibilit 5cs for aoricots, peaclies andother fruito,

69. Aporoxinmatel-r five jeesrs are reqvired at .n estimated cost of10,000 pesos per hectare to cover the establisheant anc the nain-tcnance cost of an orange grove nrior to coianercial bearing. Simxilarcosts per hecteare for apples are estimated to be 6,CO0 oesos, avocado5,500 pesos and mnango hj50C; the r;ajor oart of those outlays occursdur:ng establishmnient. Thc nission fe.ls that 20 million ;,icsos I:Oryear in tno form of medium-term crscit for fruit production, par-ticularly oranges, could be -,rofitably utilized by the farmers andwould evcni allv resulc in substantial foreipm exchan-c earnings.

70. Si7nificant incr,-ases in 'ivestock output can be aclieved inareas w,here disease lias beon eradicated or 0rophylactic measures haveoben uncertnkcn. Imnrovnd manag:e.nt tnchnicues can bo car-ied outrcadily once a ranch is fenced and divided into paddocl.s. Youngstock caGrn hp 1-ont; separefn to erevrnt hreedin- , t. nn -arly an age,controlled breedinr can be undertakcn to tire c-lvn-' when tile pastureis at its best and to suit the .iarket. Cattle due to be marketed canbe out on the better pastuires orior to sale in order to mur-_rkct them inonptr.im e-onditiojn anr soeah-ieve bet.ter Pi nancial rrtr,' rns=I or- T_

ing ,encin;, provision of haaLdlinS corrals and rater ca-n bc undertaken.Pasti,z e irn"rorvrem. nt by fertilizer applncation oro lanting artificia-pastures uoold be facilitated. Optimum use of improved bieedingsiros can also be achieved. It is estimn.ated t!hat in..iexic Qn.nce67 imllion hectares are devoted to stock raising, the rajority cf-1hich is i- an u-im-2vi-d cond,iti nrm,.ai du1er to% 1 of CiIJ+.±bhle

credit facilities to underta.-e the necessary imnrovoients to make an

annually ii' orovided, would be readily and orofitably absorbed by the14 . trleal, .L4 F WVr

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71. A.any parts of the country lhave already been seriously affcctedby, errosio r~.; nd ant.-_-e'rosio

4n meaure arc, e a~.- m'+n at ' oi ur-ncnnr in,

other areas to prevent ftirther top soil losses. The rchabilitationof theLLJ. -_cUded 1.4ands Lar.d the .rovenViOn. olf .. Ar thCr 10oQsses car. bW(e

achieved by utilizin- several soil conservation teclhniques. In the

of a -reen rianure crop to restore fertility and the establislment oftrLees asa,rdb-S n o^dr I rvi,ntl f.utne loss3es of thenatural wealth of the corntry it is essential that farmers be en-couragxed to adopt these techt,niques. EC'OviOn of suitable credituill facilitate tlhis. It is estimated that a minitum of 65 millionpesos annualy coulid be effectivel-yz utiLized oy crediwtLorthy farrersfor this ourpose.

72. Much of the machinery in use in agricultural opcration is anti-quated and long past itS effective operating lifc. Such equ,ipmientorocludes ooeratin,, efficicncy, l.o7cver, the h.igh intcrel.t rates attihich snort-term credit is available deter most farmers from replacingmuch of' this equipment. Efficiency and production tould be increasedif suitable meditu,-term credit uorc avai.lable to enable replacement ofe-sistin tuorn-out machinery and ourchase of additional ne.i equipment 0The mission feels that a mininum of 35 rillio-r Desos of medium-termcredit annuallyr ould mnaterially assist production efficiency.

73. Under the Intornational Coffee Agreement ,iexico's coffreexports are subiect to quota with possibilities of only a graduallong-term increase. The drop in coffee prices after 1955 calledattention to the desirability of diversifying the output of existingcoffee Dlantations. The :iexican Coffee Institute has a soundlyplanned coffee improvement and diversification progrm,-, zihich issurnmarized belowy.

llwu..bzr of Mectares of Coffee

ImprovedCultivation Cormplete Diversifi-

Year Practices Prunin- 2ieplanting cation Total

1963 20,000 2.0^0 5.000 1J 3,950 2/ 30.950

19614 30,0c0 3,OC0 10,000 7,0U0 5C()Co

1965 30.000 L.coc 15.000 10.750 59.750

Licluz!c3 2,00 ha. rix- Al:tcd in. 1961-622/ Tn(11des (950 ha. nlantedH iTith rubhhr in 1951-2

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The areas planned for diversiffication are schedulled .ainly for rubberand the balance for fruIt, pr-n1ipally oranges nn avrcado nPears,depending on soil and climate suita'uility. Jmports of rvibbr in

e`Ycb in^ 19"1 t+n1 IoA znne fCD +350" tons aluei at+. Ps. 2r) mi11; n.,

7 A+ the yrem.1 1-4 +Uhe Instgic- +i+u+ cs arang.-C cedi..;.t for

participants in the progra:,m througrh the Banco Naconr.al de ComercioJxte. LL %.r e1;, at si:-. ,.ercent in.tercst. V ULLUd, II:Ve Ve,U. are J.LI"L UVU

and to carry out the progran as env-isagAed, sonre 34)0 million pesost'.ol 'bo need'vd in '95and 19t.;., .. ew-tr, crd sreu.da

(~U.LU IJ' IAtUJ -IL; V.Jp C~A LUJ U..LQ1_U V.4'11 k'LLVU±.Lt L'1ZjUidUU cdQ

it takes approximately sever. ycars from plantin- until a rubber true is0.L SWIU [ -L LLI L d_JjJtpping;; .r u.I, orUl-irnru's anauO e,ofee plantaIldoLns

come i'.to production in five and three years respectively.

Iijanuifac tvuri Tig

75. Relative scarcity of financing in the manufact'irinc sector seemscleav in rcgard to ecuity capital in general and long-terr:. credit io-nediur-sizer3 irdustrial enternrises. Shor- and long-terr credit forthe larger entsQrprises ;*-itil tiieir direct access to external financingirstitutions appears to have been and are more adeqr.atc to theindustryi s requirements.

76. Requiremrexnts for equtity capital have increased and the trendshcu].d continue as the m-anufacturing sector expands and progressivelybecomes more capital-intensive. Fecamples ofT capital-intuensivjactivities now in the process of development are afforded by tnechemical, petro-cherilical and automotive industries. kdditionalequity capital needs arise as a rest'lb of the "Mexicanization Program".The relative insufficiency of equ.ity capital has forced enterprisesto increase reliance on borrowed funds while at the same time reducingthe quity basis for borrowing. The lowering of interest rates,already initiated, Aill contribute to in^rease the relative attractive-ness of equity investments versus bonds and short-term in-estments and,therefore, shift funds toward equity investment. The process of

reduction of interest rates should, however, be pushed further and amargin between interest on short-and long-term lending alloryed todevelop. Only thus will investors have a clear choice between (a)short-term low-interest loans, (b) higher return long-term lending. and(X) direct risk investment in productive enterprises with possibilitiesof unusual profits and/or capital appreciation.

77. The institutional set-up for the channeling of funds into equityinvestments should be improved. The volume of common stoc'k trans-actions in the Mexican Stock Exchange is low and the Exchange itself

is operating under rules and methods, the modernization of which hasheen under consideration for some time. The possibility of changes

in these rules could be considered anew together with inprovements of±ihe infornmation nrovided by companies to stockholders and measures toincrease the protection given to minority stockholders.

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78. Every measure to increa se the availability of local equityLfinanc1 I8E1 h,ave, in 4 dtaon toL is drect eff ct, an indi rect

leverage effect by broadening the Hex.can equity basis necessary forob u Ltair.-irg foreign, eqaitty minority participation. and - L U.oth J.ULO" c.uu

foreign) debt-financing.

79. In addition to commercial banks and private "financieras"t,several official inistitutions snake available iiuusutrlal credits. Amlongthese is Nacional Financiera which obtains its resources through theissue of dumestic securities and e_ternal credits. Nacional Financieracredit is, however, directed mainly to e;nterprises in the public sector.

80. Mexican businessmen and entrepreneurs are developing, often inassociation witi foreign partners, a fair num,ber of relatively largeindustrial projects - for new companies or for exoansion of existingones - which are of economiac importance to the development of thecountry. As is normal at the present stage of developinent o. MNexico,these projects are generally in capital irtecsive indiwstries. Inaddition to beneficial direct and inmediate effects, these projects arecreating opportunities for a series of subsidiary industries of a smallersize. The projects to which we refer are of a size that makes itpractical, and sometimes necessary, to have recourse to foreign financing.,both enuity financing and debt financing. The mission rmade in Febriiary1963 a prelininary investigation of some projects of this type which,prima facie, appear to be soundly conceived and likely to contribute tothe indus6rial develoument of the country. Appendix C sets forth alist and brief descriptions of such piojects with inforaation updated toFebruary 1964 where feasible. The projects in this list were discussedwith various Nexicari Government agencies which expressed, in a pre-liminary way, their positive opinion as to the economic value of theseprojects. It is important that the 14exican Government continue tosupport proposals of this kind, particularly in assisting their searchfor foreign financing. The mission recommends thlat foreimn financingbe made available for proposals of this type which lend themselves tointernational firancing.

81. Nacional Financiera under a trust arrangement sunervises the"'Fondo de Garantia y Fomento para la PequeTia y Liediana Industria", whichprovides small and medium companies with short-and medium-term funds,up to five years, at 10 percent interest. The Fondo operates exclusivelythrough private credit institutions including banks and private finarnc-ing companies which assune the full risk. The Fondo, established in1954, has a capital of 120 miillion Desos. contributed by the Government.The Inter-American Development Bank extended in October 1961 a 33.0million loan, now fully disbursed; commitment for an additional _ -0million credit was approved in October 1963.

82. The "Fondo de Garantia" has a good record in the use of itslimited resources and could substantiall:r exoand its operations if morecapital were put at its disposal, now that the range of its operations

- 30 -

has been enlarged. In M11ay 1963 the statutory limits on the size ofit s l-ending t1o indi-r -iduAal enterrise Vwere~ raisL_d.ZU ~LUr,'vkicL Uhat dat

the Fondo extended credits only to enterprises with a net worth of notmore th1an Ps-0.5IL ,-,LVIo andLI -o sL0k,eciled r,Xt-, U.LL-LIVl c,,llunts U ndVL- uer t lienew regulations the Fondo can operate with enterprises having a net

worthoo upto Ps10 roLionand extenJd m,edi-ur,-Lr11 credits ofU~ U p towor .f-up tLo I~ ..LV JRILL..JAL ~Lu ~.LI~J [1U±UI-L)1IU~± U) J A)

Ps.2.0 million and short-term credits of up to Ps.l.0 million with aina_mMlu of Ps.2.7 I llion per enterprise.

83. Thle 'Fondo de Garantial estimates that under the old statutorylimits it could cover slightly more than 50 percent of Mexican industry'.The new limits will allow it to cover the bulk o. Mexican industrialen-terprises - excepting the largest companies with a net worth of morethan Ps.lC0 million. The companies covered by the Fondo Drobablycorrespond to what is often referred to as "The Maci'illan Gap," i.e.,enterorises too large to obtain their financina on a "personal basis"?from a small group of faxaly and friends who provide the equity andguarantee some short-term bank loans, and yet not large enough to callon the domestic capital market or borrow directly abroad. In a sectorlike textiles where there is a great need for roderni7ation and rational-ization of operations, these companies are said to be numerous and theirfinancing requirements to be great. It seems that the Fondo couldprovide a good mechanism to cover the financing problema of this importantgroup of companies.

84. In many respects it can be said that the problems of small com-panies basically result from the fact that they are small. Also,experience indicates tihat medium size or large companies are betteradapted to contribute to econolaic development. Under these circum-stances it seems that every effort should be made to assist smallenterprises to grow and to assist medium size ones to obtain thefinancing needed to develop their operations. For these reasons themrission recoronends that external financing - perhaps ' million ayear - be made available to the Fondo de Garantia for its industrialcredit operations. We recommend that the mechanism of the Fondo -dealing exclusively through private intermediary institutions - andits basic principles of operations, with one exception, be maintained.Writh the expansion of the Fondo to include larger unti loans and largerenterprises it would be apnropriate. in view of the stabilitv of theMexidcan pesos, to ask borrowers to assume the foreign exchange risk.This would appear acceptable under a formula according to which the loansto the medium size companies (net worth between 5 and 10 million) wouldbe made out of funds nrovided. say; half in dollars from externalagencies, and half in pesos from the k1exican Government. Since theamount of the loan wouald be normally larger than in the case o nrrentoperations of the Fondo, the administrative work of the intermediaryinstitutions would presu1m.ably be less andna sli gn+ly reduced margen wou:ldbe acdeptable to them. As the loan would be at medium term (say, no less+.han t.hree~ to~ f'-e yers \.. as+he p~roceswole ¶arrgelA E c i1r ete

- 31 -

in fixed assets, a 50 percent foreign exchange risk should be acceptebleto these -a - which are more sop--;stjcated than the -a l1erThe loans could be made at a rate of nine percent, both on the pesoand on the dollar part, leaving to the interm4edi ay institutions a marg4nof 3 percent or 3.5 percent which would probably be acceptable to them.

Private housing

85. At present, so far as can be determined, the aiount of privateh1ousing financed through bankilng lnstitutions is relatlively sm-'Lall.Perhaps around three-fourths of the estimated two billion pesos a yearinvested in private nousing comes irom non-institutional sources;accumulated savlngs of the homeowner, current savings, spontaneous self-help, and loans from famiiies, friends and money lenders. Unfortunatelythere are no direct statistics on the number of houses built (except inthe Federal District and Mionterray) or on the cost of housing investment.Rough estimates indicate that over the last few years private housinginvestment has not been expanding in real terms. it apparently decl nedin 1962 but recovered in 1963.

86. The institutional arrangements for mobilizing savings and channel-ing funds into private housing are far from adequate. Fhere is nosystem of vigorous, competitive and efficient savings and loan associ-ations such as operate successfully in a number of other countries on amargin or spread of 2 or 3 percentage points between interest paid tothe saver and the rate charged to the borrower. Mortgage banks attractsavings by sale of bonds or "cedulas" at 8 Dercent lending frequentlyat 12 percent to middle and high income families on the basis ofrelatively high initial payments and a maturity of 5 to 10 years. Thesavings departments of commercial banks until recently were prohibitedfrom financing houses; and in any case, the very large differentialbetween the interest paid to savers (4.5 percent) and that which ischarged to borrowers (10 to 12 percent or more) reveals this to be ahigh-cost method of mobilizing savings. The Mexican savings and loanbanks, operating on a contract system, are relatively unimportant.

The M4exican Government Program

87. In the face of the inadequate institutional arrangements forhome financing and an evident large and growing gap between the annualhousing needs and actual construction, the Government of Mexico has pre-pared an outline of a broad program to stimulate savings and channel theminto low-cost housing (mostly $2,400 - L4,400 per dwelling), with theaid of fore:Lgn loans and budget appropriations to provide seed capitalfor the operation. In the first three years this program would investabout 2.2 billion pesos in private housing, compared to about 2.6 billionpesos projected for public construction of housing. Beginning in thethird year, however, the resources invested through the new privatehousing program would exceed those projected for public housing, and

- 32 -

this new program would finance an average of about 41O,X houses a yearduring 1963-70. Thi i would be nearly +w.lc th- avrerage public housingprojected for those years and not much less than the annual average of

1,7 nn,_) ivn; + n-vnao+.nA1 +.r% ho% r-^nc:+.vririe,+r in +h o nri-rrm+n cznr,+,r 'hir m I -- , u be -t tei the -vat secto by all

other means,

88. The prograi -which is still in a preliminary stage and subject torevsin wou ld ..obi-lize funds during '1°634, 4f ro.. four bscsources:

( n¶ 1 )nin rn, A redirect1ion of priv ate , a-vib (ove A~ r.one-a Cmf the(.u J.' 4-I AVJU.. 4 s'±.Jd..... --V .1. ---L4L -- 4UL 4 -.46 -~ -- ~ '*t .5 - '.J I SAJ L)LJJ.. 4)-.,'LJ

\ L J it r tu.LL~ L,LULI ViL Y LVi V ,~ DU V_ 16 \ LVt-l Un -ia-"L 0 UliI,

increment of savings through mortgagc banks and savingsdenar4-m_n4- of comn"Ler _CL-L ba.nksC);U' UJ0.. IIVtLIj~VO U L UVIIlI~ dL UL

(2) Ir.Lcreased priLvatLe sa-vJngs ( froml cash' doirn naym,ents, grouphousing plans, new special housing savings accounts andamulortizatIon pa-y-ue-ruts on mortgage loanis);

(3) Deed capital from abroad (possibly -50 midi±on to beutilized during 1963-65);

(14) Initial capital contribution from 1-exican budgetary funds(250 million pesos).

89. The structure of the program is complex, since it is designedto take advantage of the existing structure of financial institutions andat the same time create new organisms. initially the largest amount o:-local savings available for the plan would come from the mortgage banks,which would channel into low-cost housing 30 percent of the fundsobtained through annual net newi issues of cedulas and mortgage bonds.Their loans for low-cost housing could be for individual mortgages, butmost of the amount would be loaned on a "wholesale" basis to jointplans (planes de conjunto) by which employers and unions would partici-pate in a contributory arrangement for joint financing of workers'houses. The loan money for these joint plans would also come from anew Housing Trust Fund, set up in the Bank of Mexico to receive theproceeds of foreign loans and most of the Mexican Government budgetcontribution.

90. The savings departments of commercial banks would be encouragedby means of more favorable reserve requirement stipulations and by useof new special housing savings accounts, to make loans primarily forindividual houses for workers who do not fit into the joint plans.Depositors in the new special savings accounts would get preferentialtreatment in regard to waiting time to get mortgage financing for houses.

91. The Government has set up two trust funds in the Bank of Mexico,A liousing Trust Fund to lend to the banks for construction of privptehousing mainly through the joint plans. This Fund will receive funidsfrom Goverrnment appropriations in the first two years and will also

- 33 -

distribute funds borrowed over a 5-rear period from abroad. WHith the4. L _0± ---- 4LJL _i-U0U -- -- .. LL.J - VL. AUL1 1U~~ Orecei.u,_pt .of IU motizLat-onVt Wpa-e.ts, w hwill not- be usedA to repay the~

foreign loans, this will become a revolving Lund, which Anay grow withfuture budget appropriations. 11he second fund wirl' be to guaranteethat banks operating under the programn will not lose by delays in re-ceiLVLtg mIrug uratt 4YIeItsL1 U Uue to tIeLr. Rem he bd\anks WiLL_L e UC LiJaLe for

any ultimate losses through defaults, but they will not have to waitlong perlod's IAo get mrtoney ou'u of frozea assess IArougl frlosureprocedures; in effect they will be able to rediscount such assets.Th1is second fund will also subsidize the interest cost to the borrowerup to one percent on certain operations in order to keep interest ratesat reasonable levels.

92. The external loans are to be utilized by the Houising Trust Fundin the Bank of Mqexico, but the Government of Mex-ico would assume therepayment obligativn which has been pLanned on the basis of 2 percentinterest and commission, -with anortization in 30 years with a rising scaleof payments.

93. The program just described will to some extent attract personswho would have built houses in any case. It is impossible to estimateprecisely how much of its effect would be substitutional in this sense.In the attached table a very rough allowance is niade for this tendencyby projecting a decline in houses conventionally financed by privatebanks and in housing financed from "other sources". The terms on iwhichthe housing would be financed have not been fully worked out. It ispossible, however, that the low-income participants in the joint plansmight get loans with a very small down payment, at 8 percent interest andup to 15 years maturity for their houses costing on the average30,000 pesos (;::2,o00). Individual borroTers might have to pay a higherrate cf interest, would makNe a 20 percent down paynent, and would repaytheir loans in 10 to 15 years; higher-income workers in the joint plansmight also have a 10-year amortization period. Any of these financialarrangements would be more favorable than what is now normally available.

94. The mission believes that this program, while ambitious and some-what complex, is well designed to mobilize resources of workers andemployees for meeting urgent housing needs. Additional support forthe program stems from its potential effects on the activities of thebuilding and construction materials industries and as an instrument todivert savings from higher cost housing which the nressure for low-costhousing might otherwise create.

95. In the first three years of the program about 1,350 million pesosof iMexican private savings would be mobilized under full scale onpertionof the program. A rough estimate would be that about half of the mobi-lization of resources would be a diversion or rechannelina of savingsaway from other uses and the balance might be new savings that other-isewould not have lbeen made Ahboit 700 millinon neson of funds beingchanneled through banking institutions would be diverted from other

- 34 -

uses. This represents less than 10 percent of the projected growthof ,v.esti liailt- es of4 banzin - ns 4>i 4 u -- 4 r.s 4-4rt -f 4-- fundsu -04O~.L4L L~~QAM± L~ tD L'..L ~UA L'-L/i . I d.A. t,VL~ J UIit_ t_J UL -.

about 120 million pesos - will be diverted from loans for high-costhosig Dar,pehp _'4- ri on peso -wil __e_ divrte 4rr,-h~~ ~ ~ ~CL V, HVL ISCP -LV JIL--VI t_ 0 W.L.L.J-L. M U~ eI L UE:U ± II ID 41e_

purchase of Government securities; suggesting again the importance ofredluci tnek Ueperuer,ce UA. the pJ'LU.Lr tecor UoL UULi w-ig WLtLro eui

banking system. Wjhile it is difficult to project the uses which wouldsUdvu u¢:LI IIAc.UC 0± Uxif U~ai4 uett USL bLi( (.V IilwlJ.i.U,1 uiiC aUvexbY C1±C(Ub

should not outwyeigh the benefits of the progrum. These benefitsincl-ude: IhIe immeciate stilmulus to saving, the immediate boost toorivate residential housing for the low and middle -Ancome groups and thebenefits tnat wiii accrue over the iong-term from the self-revolvingnature of the program.

96. The mission has considered whethier it is appropriate for iiexicoat this stage of its development to borrow abroad in order to obtain"seed capital" for a housing program of this uype. Mexico's housingneeds are very great and deserve attention. However, there is thedanger that if a program ofq this type is carried out at too high alevel, the diversion of resources from other high priority investmentswill be excessive. The official plans appear to balance properlythese conflicting considerations and deserve external support at a levelof $15 million to '20 million a year in the next few years.

The AID Housing Guarantee Pro;7rai

97. On !Iarch 27, 1963 the first AID guaranty was announced for thefinancing of homes in Mexico by a private firm. The guaranty covered$3.5 million, representing 90 percent of the loan wlich was to beprovided from private sources in the United States to nclp finance1,200 houses in Monterrey. A second guaranty, covering a 20-year loanof 410 million was announced on ilovember 15, 1963. The second proSect,with a total cost of about "13.4 million, will provide housing fornearly 3,000 memrbers of the graphic arts union in Mexico City. Be-sides these operations already announced, approximately .$30 i-llion o'other AID guaranty applications for liexico are now under study.

98. Existing AID guarant-y authority for the entire Latin Americanhousing program (6150 million) and a request for additional guarantyauthority (>'100 million) were exceeded by applications being processedas of Harch 31 1964 (433o million), and it is likely that some of thepending applications for IIexico as well as for other countries will berejected, scaled down, or deferred. Taking into account these factorsand the normal delays in executing such Drojects, it may be estimatedthat actual disbursements on these guaranteed external loans for privatehousing in Mexico will be in the range of ;;,5 million to ,P10 million in1964 and 4LO million to 15 million in 1965. The provision of externalfinance through these guaranties is an interesting experiment but itneeds to be controlled carefully. so that the loan maturities are relat-ively long, interest rates are reasonable, and the aggregate additionalannual burden on Mexico's balance of payments is kept within modest li-its.

Estimated Private Sector Investment in Housingby Major Sources of Financing, 1958-1965

(in millions of pesos)

Actual or estimated Projectedrst 1959 1960 1961-1792 1963 196h i(6-

Total 1/ 1,900 2,020 22iO 2b2h0 2,070 v00 2,600 2, 0

Source of fi£-an -1-

- . 1 , n M A n c ann .O H z ',O I -' IaH.n -. aarrivatse DailKS -l le yV jou 0OU 4_U 4UU eC) u UV

Public agencies 3/ 30 30 70 i50 iOo U60 U70 i.90Budget appropria-tions - - - - 30 60 40

Diversion of fundsof savings depart-ments and mortgagesecurities 4j - _ _ _ _ 130 270 00

"Planes de conjunto"and new savings 5/ - - - - - 90 210 3;00

External loans 6/ - - - - - - 200 300

Other sources 7/1,750 1,680 1,670 1,710 1460 1,340 1,440 1,370

1/ Orders of magnitude, based on rough estimates by the Bank of Mexico ofnumber of houses constructed by private initiative, multiplied by anarbitrary factor of 40,000 pesos per house in 1958; increased accordingto wholesale price index to get figures for 1959-1962; projections for1963-1965 represent the sum of the separate columns on sources offinancing.

2/ Normal financing, mostly of high-income housing on 10-year terms frombancos hipotecarics; converted to a gross basis by adding the netannual increases and amortization (estimated at 12 percent) on previousbalance of loans.

3/ M4ortgage loans by ISSSTE and BNHU figures for 1958 and 1962 are esti-mated in part; these figures and the budget appropriations are includedin "financial investments" of the public sector in Table 2.

LI Allocation of 50 percent of the increments in these forms of savingsto investment in loaw-cost housing.

5/ Savings in six semesters by workers grouns and snecial accounts inSavings Departments of banks, with preference for housing loans;also down-pavments on individual homes and amortization pavments.

6/ Assuming Ps. 100 million in 1964 and Ps. 225 million in 1965 under theI'exican GovernnAnt program nrnd the balnnce uinder the 1ID guaranties.

7/ Residuals, 1958-1962; rough estimates, 1963-1965, on the assumptionthat some home-financing wnll be shifted from these "other" sources tothe more favorable terms under the new- program.

Sources: information from Banco de Mexico and estimates of the IBRDmin aion as of .4ugust 1O6A3

-. 36 -

Summary of External Financing for Private Sector

99. Summarizing, the external borrowing required in 1965 to carry outthe various credit programs reviewed in this chapter amounts to $70million, distributed as follows:

Agricultural Credit Program $31.0 million

Industrial Credit Program $15.0 million

Housing Credit Program $24.0 million

Total $70.0 million

CH APT ER 6

FIN1J'C1CING OF PUBLIC INVESTMENT

100. The "Immediate Action Plan" stated that fiscal funds, resourcesof autonomous agencies and Government enterprises will finance in aboutenual- nronortMons annroxiniatelv 50 prec.nt of ther nronpsed ublic in.vest-ment. The possibilities of raising public resources beyond these amounts7,it'i n thre- tme rp nn rpverl hby the PTn Tuere said to be n1.i ±.' - ThePlan also called for internal credit to be resoi'ted to in sm,iall amounts*-ue1P to t.hez limi+ions of t.he capital ma^et andth d ira it +y' hp f

allaoing the private sector easier access to sources of trancferablec ,riin na t nnnAr1 i to the P'1 - the + &rrcr,.nt- r-'n-l- - ontinue ak,r4in-

to monetary and financial policies des4igned to assure nionetary stability

tq ~~~1G _1 .4 -n ts Q*A _4 T s A - - - P4 A4 -4-4 _ sn z V. VO. t Cl W~~~D UIVIL -1 Jey . %ie ] ;k{w L an he W1

JAV ..* J iiZ UJU. 1A .:I.L VV 1IiIlV , CL 1 4J 5 LX:. lli; LUII.U OL .L%, L . k_UAL, jJ Vjj U UtU

in the ?lan implied exvernal gross borrc7.ing require.,ernts of appro:xiartely91,6OO milliori over the t'i-ree-yea- :eri.od - or over s50O rniilion p.,r eai.,'hese amounts exceed by nearly :2O00 .nillion the gross utilization of ex-ternal crediLs i1n 1960 and 1961 .. nd by about `100 ziaillio; the atilizationof 1962 and 1963. On a net basis, i.e., after deduction of emortizationpaymens, the Plan's eternal requiremients would be about HP3 r.a±ionper year in 1962-64 as against "180 million each in 1960 and 1961. Thefollowing table presents the financing of public inves-tment accordingto the Plan.

- 38 -

Financing_ of! Public Investment Accordinim to Plan

(in billions of nesos

I _n _ Procion±,nsActual a/ 1962 1963 1964 1' 7

Federal Government Contribution 3.3 2.8 3.1 3.4 7.5In-rvest-n Agenc-es 2.9 2 3.1 3.4 3.6Total Official Resources 6.2 5.6 6.2 6.8 1t11

Internal Credit 0.9 0.6 0.7 0.7 1.].r-4- -,~ - 1 r-c,1~-44- 1 on'~ 7 0 4A 0 r01~~ '~~L~~U..LL, 1.7 ~ ~ ~ ~ ~ J.L. ~ I .) '.J7 .)

T1 otual' Finiancin±, = ±Inves.ment 9.0 Lf A4 .Lt4.4 .L4.4 1Lj.D

a/ Differs from missicn's estimates discussed later.b/ Data for 1965 are not part of the "Inmiediate Action Plan" but come from

the longer-range projections underlying Plan.- Data for 1960 are in current pesos; the projections are in pesos of

1962 purchasing power.

102. The cooperation of the %1inistry of Finance permitted the mnisSici tocompile more detailed data on the financing of public investment in _Lexicothan existed at the time the Iamediate Action Plan was asser:bled. Thenew data w,h-ich cover the period 195;9-63 are onily approxi.mate, but evenso, t'iey provide a usefUl factual ',asis for the analysis of public irnvest-ment financIg irn recent years and for the preparation of financingprojections.

103. Perhaps the most striking facts disclosed by the newi data are therelatively large magnitude of prblic savings in Aexico and the increasingresort to internal and external borrowing to finance public investment -

no-Lwithstanding the rise in public savings which occurred after 1959. In.1959 a veryv hieh Droportion of total Dublic investment was financed domes-tically with public savings being the preponderant source of funds forthis nurnose. Public savings rcse snarply in 1960. This was due partlyto the large rise in G.D.P. - 8.2 percent in real terms and 13 percent irmoneyv terms - which occurred in that year. The increase in revenues wasreflected in the accounts of the Federal Govermnent, the Federal Districtanrid the States an nmnininalities andi Tm.w- not. acco.mnanied hy a nrcnnrtiornl

increase in the current expenditures of these Government levels in 1960.The rise in the savinrs of decentralized enterprises was greatly influ-enced by an upward adjustment in the prices of petroleum products sold by

- 39 -

Financinr, of F'=h:blic TnvPstment- 1959-i953

(in billions ofcrr-rent pesos)

1 Q59 19 6 1 61 15 962 1963

Fed-r-.-l G overim en1 t.8 R 3) 03 .9 0Federal District 0.5 0.8 0.8 0.8 0.9St-ates anA 4, T n ,A _ A '3 A O. n 13 A 0 n 3

Uo 9wo aws % s W|HoX x9v 4 V * J J v -)

Social Secaarity Agencies 0.4 0.6 o.6 0.9 1.1Decentralized Ag,encies 1.6 2.7 2.7 3. 3.2

.ToULal PI.ulicU Ocour Qav.Ln47 u.94 7. 8.2 7.

Man:us

Amortization of External Debt 1.9 2.2 2.2 3.2 2.8

Financial Investment and other

capital uscs of resources, net 1.8 2.3 1.4 1.6 1.3D

E,quals: Total Pueblic 3ectorSavings available for investment 2.2 9 3.9 3.4 5_0

Domestic Borrowing, net 0.1 1.7 1.3 2.9 2.0Foreign Borrowing, gross 2.L 4.7 4.3 4.9 5.1Discrepancy between estimates of

resources and investment 1.1 -1.0 -0.2 -0.8 0.3

TOTAL FINANCING - FIXEDINVESTi4FlIT 5.8 9.3 9.3 10o4 12.4

1Wet doniestic borrojing as % oftotal investment 2 18 14 28 16

Net foreign borrowJing as , of totalinvestment 9 27 23 16 19

I4ote: For sources see Tables 5, 8, 21 and 23 in Appendix D.

Pemex .hich accounts for a high proportion of the savings of all decen-tralized enterprises. Public savings did niot rise above the 1960 leveluntil3 1963 -Lhen they reached Ps. 9.1 billion or nearly 15 oercent above

- ho -

1962. H,lost of this increase in 1963 onnirrer1 in the sving. of fthe Feda.eral Government and resulted from the 1961 tax reforms, from improvement,sin tax amini tr3ti n and from a nei n pp7ern-ar pa. o tax which hacbeen introduced to finance an expansion of education expenditures.

104. In 3spite of the substantial rise in the level of public savingswhich oclrf +,.c+t>tee 19U OIOran 1°63~ +,,th pubic- sector resored,,.o e+en=..

sively to doL;estic and external credit in order to finance investment.This 1 was due partly to the trend rr.d, in no A- = -sb- hc ris- i even

faster thani savings - and also to the fact that savings available to fi-.nance investmcnt, fell behaind the nan!s projections. In 1_92 pub-ic s-c-tor resources available for financinJ investment were about Ps. 2.2 bil-.lion belou ' U.hIe lI IL r o jJi JJ ecionsr .-a I-LU soume pi (1Ogzj wasd mdUe Lin 196),

in filling the gap, public savings available for financing inve,tment weres-till Ps. 1.2 bil*lion below tDhe Plan's projectio.s. liAS a result, in orcerto finance an invcstment level of Ps. 12.4 billion (Ps. 1.7 billion belcwthe p1anned target for that yEr, -), tnere was greaLer -use o.L cred-it ulhaIi

was contemplated in the Plan. The form in iihich credit wias utilized wasalso substantially different froin what was contermplated in the Plan. asnoted in Chapter 5, the rapid growth in the domestic liabili-ties of fi-nancial intermediaries permitted the puolic sector to borrow very sub-stantial amounts from financial intermiediaries in 1962 and 1963. at thesame time, the relatively favorable development of Plexico's foreign ex-change receipts on current account ano t,he decline in capital out-flowmade it possible for the countryr to borrowv less abroad than .ias originallycontemplated.

105. Gross external financing in support of the public sector has avera,;edover ,350 million a year in the last four years and has been fairly stntle.Net external financing has been substantiallv lowler at about ',150 millicna year because of the very heavy amortization payments. -.et internalborrowing reached the peak of Ps. 2.9 billion in 1962 and declined byalmost Ps. 1 billion in 1963. The reduction in borrowing frorm domesticsources in 1963 was consistent -Yith tl-e revival of private investment inthat year and reflects the Government's policy of adjusting its oT,m fis-cal and monetary policy to changing economic conditions particularly tothe state of private investment and to the country's balance of paymentsposition.

106. The Government would like to reduce -ven fvrther its dependenceupon domestic borrouine, particularly from t}e bankinLt system, in orderto stimulate private investmaent in 196h and 1965. It appeared on thebasis oi the information available to the mission at the time of its firstvisit to hexico in 1963 that the implementation of the public investmentprograrm at the higher levels contemplated in the Immediate Action Planwould require an increase in public savings in the range of Ps. 1 billionto Ps. 2 billion. The necessary revenue raising measures could not beadopted in 1963 and as a result public investment was at least Ps. 1.5billion belowi the recommended level for that year. Some of the highpriority public investments contemplated by the investinr agencies for1963 were thus delayed.

- 41 -

107 j .11ie ULovermeu UId.The Gov1erV1e r n tht i°U hJUUgLhLU JIrit p cuIitu

are to be carried out without resort to excessive domestic borrowing, itwlll be necesary to take addi io l Ornlmeas-es to iinclrase public sav.ing;J.To assist the Government in formulating a financial plan for 1964-65 thenission ana the Joint F inance Idinistry-Banic of i Jexico working group re-vieiwed again early in 1964 the probable magnitude of resources to beavailable for investment. Governmlent revenues were projected first onthe ass-umption that no additional fiscal measures would be adopted andthat present prices charged by state enterprises selling goods or serviceswould not be changed. This projection assumes, however, a coritinuationcf adc nistrative improvements in tax collections and incorporates prob--able receipts from recent measures, such as: the new payroll tax insti--tuted early in 1963 (which should y-ield about Ps. 700 million in 1964),the newly created tax on the ownership and use of cars, the additional10 percent ad valoremn import tax on non-essentials applied since 1962and the 1951 changes in the income tax law. Government expenditures oncurrent account were projected takinE into account probable increases inwages and salaries of public servants and trends in other major currentitems. It wras assumned that as a matter of financial policy the Govern-ment u.!ould niot permit food subsidies to continue to rise arid, if possible3would reduce them.

108. On the basis of the above assumptions public savings available forinvestment would aimount to about Ps. 5.0 billion in 1963 ard by Ps. 5.6billion in 1964 - i.e. they would be beloT7 the Plan's targets by aboutPs. 1.2 billion (approximately 20 percent) in 1964. The deficiency wouldbe much greater (4s. h.3 or nearly )40 percent) if the estimate for 1965is cornpared with the corresnondinc longer-range projection underlyingthe Irinediate Action rlan. The comparatively modest saving effortiinplicit in the Plan itself. as contrasted with the longer-run savingprojection, is explained in the Plan as the consequence of the "limitedpossibilities of increasing m,iffirc.in-tlr in the hr-rt.-r,in t.he inte.-rna1

financial resources for the public sector." The mission's projections, nri-i -t+ roITve +;l___ unless- addit- ion1 re-v-.-ve-e ing r.eas,-es aretalken. the saving effort contemQplated in the Plan will not be fu-lfilledancd that; ronseniiRntl.v. nublic savingrs will be insnffiri pnt both in thsliL,ht of the short as wqell as the long-range official projections.

109. 1Tfith respect to 1964, the mi-ssion has been informed that the Cov-er.nrren.t is unrable to t+ak+e .ekasiz wh-ichr-) tmeirl yieold a vrc-.-r 1lr -erease

in pa.blic savings in that year. At the same time the Government feels,in vie.wY of' +.he rnrnYniTvmeno-isc already maden in 1063 and) invr.;T MJe ofth igh

priority investments contemplated by the investing agencies for 1964, thatpublic in.vestvment shonuld be raised by about Ps. 1 b11lon. Measurs to

be taken during 1964 are expected to yield about Ps. 400 million inadd-it-ional' puLblic Savings. Dor,-etcbr.igpo, h .^gsse

is projected by the Government at the 1963 level of Ps. 2 billion and inauu -. AL Ullo u1.1t JUVe±I.sJII1tU PjLLdL4z vU ±lvDU I11hVW QilUU-Ue-Ul IU 11 ±UDL- U y

-42 -

1963 and Projections 1.56l?<

(in billions of pesos, 1963 prices)

196J~~~16(Actual) 1964 1965

Public Sector Savings a 9.4 9.9 10.7Juor tization of lxternaL1 u± . uaid

Financial Investment i 4.4 4.3 3.9

Total Public Savings, Available for Invest-ment (according to present legislation) 5.0 5.7 6.8

Domestic Borrowing from Banking System 2.0 2.0 1.5Foreign Borrowing (Gross) / 5.1 4.9 40oForeign Borrowing (Net) (2.0) (2.2) (1.7)Statistical Discrepancy 0.3 * - -Total Resources Available for Investment 12.4 12.6 12.3Total Public Investment 12.4 13.5 1305Financing Gap - 0.9 1.2

To be covered by:Issue of New Treasury Bills 0.5 -Tax and/or Price Increases Effective

in 1964 0.4 o.6Tax and/or Price Increases Effective

in 1965 - 0.6

i See Table 8, Appendix D.b/ For amortization of external debt see A-1i Appendix A.

Financial investment projected to remain at the level of 1963, -viz:Ps. 1.6 billion.

c/ See Appendix A on the "Balance of Payments".

Although the precise source of this statistical discrepancy is notknown, there are indications that 1963 investment has been overstatedin the case of some agencies, particularly Secretariat of HydraulicResources (irrigation) and probablv in the case of the groun of"other" agencies for which detailed information is not available. Ifthis assumntion is correct the estimate of resources available forinvestment would not be in error. For this reason the statisticaldiscrepancv has not been nrsiected forward to 196)l andi 1906

h3 -

am.lntntg t Ps. 500n m.;llionn Thre neT.7 nnpa-r *f.nich can belipoltd Zbanks only in exceptional circumstances is to be placed with non-bank in-ves+ors 4incuding contractors nd suplrliersc T he msin, fee1 +hat it+ .l

unfortunate that the Government is unable to ircrease public savings toagreater extuent- in l964- -4A that4 the- r- ---oermn is 4-n -t ot4~ ~ ChhS~J IS~L U .7JS4 U1II~ U:14 VL uiir c 'J -UIi>1 U ',II " wc

to rely to such an extent on domestic borrowing froDm the banking systeman In shr--erm paper ofl this-4 type. Hoee,i h dr.s ib lit:iesan1L on~ .JorBJi UL.t il L UL.L. LIj jJ kl1UW V U~, -LJ U1it- ..UkIiIV IjJA. L.LCLU-LL.LL..LD

of the banking system continue to rise at the rate recently recorded,Goveri-ir-le. domiestiXc b-orruawJung i ±Y964 atL WIU ith leuu d level may nul be

excessive. External borrowing is projected in 1964 by the Goverinment moreor less at the 1963 levels and is based upon the exoected development ofthe balance of payments. (cf. Chapter 9). C-ross exterrnal borrowing isexpected to decline i 1965.

110. The M4exican Governirent is prepared tc take measur-es toward the encdof 19614 wihich will substantially increase public savings and errnait domes-tic borrowing to be reduced. The measures now contemplated for 196 LL wouldproduce in 1965 a sufficient increase in public savings to permit publicinvestment to be maintained at the level o-A- about Ps. 13.3 billion whilereducing net internal borro-wing from Ps. 2.5 billion in 196L4 to Ps. 1.5billion in 1965. W4hile the financing plan nmust remain flexible, theMIexican Government agrees that the s' ecial circumstances which in recentyears have permitted the public sector to tap extensively the resourcesof the banking system may not cont:inue and it is 'repared to adjust to agradual reduction in the use of bank creeit.

111. The ,neasures to be taken during 1964 fall in the area of taxes anclalso include increases in the :lrices charged by the Government enterprises,Already, the sale of subsidized gasoline by, Pemex in Mexico City has beensuppressed. This will vrield about P . 100 million annually. The Gcvern-*rent is now studying other measures wjhich are designed to increase publicsavings by about Ps. 1.2 billion in 1965. Additicnal resources of Ps. 1.2billion for 1965, while not sufficient to carry out the full program ofinvestment recormended by the mission, would permit an adequate level ofinvestment to be carr-ed out (See Chapter 7). Peblic sector savings thusincreased would represent ap)proximately 5.7 percent of GNP in 1965 asagainst 4.6 percent in 1962. Even after deduction of external debt amor-tization avyments and financial investment outside the .oublic sector,public savings available for financing oublic investment in 1965 would re-nrespnt 60 nercent of nroieotpd investment in that year. The use of in--ternal credit projected for 1965 would increase the domestic contributionto the finaneingr of nuhlic investmeni to 71 nereent- 'hp renm,inder cnoldbe provided from external sources as exDlained in Chapter 8. On thisbasis gross external financing f'or the nublic sector Jousld am-omnt to $321million. As explained in Chapter 9, such a volume of external financing1.Tould be consistent with 1-.exicAo's bal ance of -arm.ent+ - req-ni -. n

- 4h -

" 2. A r e v e Jof UAh Varou meaAr. bI WL"l-I C I .ubl_c VU JiL-

creased shows that the 14exican authorivcies have a wide variety of alter-natives 4 04 ope to thm The ln-I aU posiblile for inrasn p4u'vlJcU. L~V) q VIJF0Li LA theA I. fAO ± L~.IR-1PV O U .L±ULLU..Les 101. J40tP.A~ UU-L±LL

savings in Mexico are substantial, since the present tax burden is rela.-vly lut:jY aidiu Ld1x evasiou Ls zeL.a-.Lly I UU Un ±!1 lpUtltIl .

Taxes at all levels of government are equivalent; to 10.5 percent of GDP,or 13.2 percent, if the sa-Vings of UsUlal sec-urity contributions aId ofautoromous agencies are added. Such a tax burden is lower than that ofmost counbries at a similar stage of development. Another indicatluri uounused taaxable capacity consists of the major degree of evasion,especially in the fields of sales and income taxes. Substantial in-creases in public savings are also possible by raising the prices chargedby .major public enterprises since in some cases these prices are belowreal costs or under the international market value of comparable cominod-ities. Phe mission studied the potential yields of various revenue pro-ducing measures that could be adopted and selected those listed in thetable belowz as deserving special consideration as a means of mobilizingthe additional resources recuired for the Development Plan.

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Estimated Yield of Variouls Mleasures Recoi,,nended forOorns-Acra+-;on Jn Nlobii-in- Aciditi--onal Resce

for the Develo>,me-nt Plan

(annual yield in millions of pesos)

IV&on -Tax Reve nues

Pe-nex 700All 1%iexican Rail.rays 350Electricity Rates and Tax oii

Tlectr:icity Consumption 400Wlater Ra-tes 1b0

suib-Total 1,610

Tax Revenues

Domestically Produced Luxuries andProauction Tax on Semi-Luxuries 500

Income Tax(1) Change in Rate Scliedule of rax:

on Incomes of Profes3ionals 60(2) Increase in Rate of Tax oni Interest

Income from 3-5 to 10 percent 40(3) Increase in Rate on Rents from 5 to

i.0 percent 100(4) Complementary Tax 50(5) Increase Tax on Bearer Dividends

f'rom 20 Lo 25 percent 25"e7xtral Improver-ent in Collection of

Income .and Sales Tax 200Reductiorn in 3absidieb CormDensated with

Taxes anid Exemptions 200Entertainment 'ax 50Increase in Cigzarette Tax _____

Sub-l'otal 1.295

Total 2,905

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113. The tota:L yield of the measures listed is substantially in excessof the preentl cornntemplated adritional sain ncst target of Ps. 1.2 bil-lion for 1965. Pending the completion of the income reforms initiated in19X1 (ee AppeLndix C), the oicln + horln rh cneta

on those measures which T1ould produce rather subs-tantial yields when in-Plemen.rted in t near fulti+w,e, T.- meas e -w li revenue on-i-'

should only be enacted if (i) Lhey contribute to further diversificationof thep 4-x sJstr (ii) rat 4 nrese and -truclw-al-changes are in

line -#ith anticipated major returns.

114. In the judgment of uhe mission, one of the most promising ways forextracting aduitionLal o,-ublic sa-vings, particularly 1i the sh,orti ru',would be to increase the prices of public enterprises in the field ofrailways, petrolelm, electricity and water. Price increases in thesef'ields, which are discussed further in the pertinent sections of Chapter7, would not only increase resources ior financing public investment inenterprises which have very important investment programs underway andare s'!ort of financial reso-urces, but would contribute to establishinga sound financial basis 'or judging ,nanagement performance and efficiencyin operations in several very im)ortant economic fields.

115. In the case of Pemex, the Covern-rent petrolelum monopoly, the missionrecommends that the final step of a *rograir initiated in 1953 to elirinatesubsidies sho-uld now be taken, Pemex still subsidizes three products, alow octane gasoline knoun as 'li"ex-olinall (partially elininated early in1964), kerosene and diesel oil. The elimination of these subsidies wouldincrease savings of the public sector by about Ps. 700 miillion.

116. In the case of the National R1ailways, rates on passenger trafficwhich account for the bulk of the present deficits incurred by the agencydo not even cover current operating' costs. Rates on freight traffic arealso 1Cow^ ancl do not provide for adequat6e charges and a fair return on in-vested capital. The extension of subsidies to users of railway servicescannot be justified on economic a-rounds and the mission recomnends avera,geincreases of' 55 percent in passenger rates and 25 percent in freight rates.These increases would result in additional railway revenues of nearly Ps.350 million per year. Similar considerations apply to C.F.E., the offi-cial electric power agency, and iiexli{ilit, recently acquired by the Cov-ernment. The rate of return on the invested capital of the power sectoras a whole is only 6.75 percent and users, as in the case of petroleumDroducts. are obtaining an uniusti_'ied and unnecessary official subsidy.The electricity tax and electricity rate increases recommended by themission would bring in approximatelv Ps. LOO million a vear in additionalrevenues to the agencies involved. In the case of' water, substantialadditisnal revenules could hp notained by increasing water and sewagecharges in ilexico City, one of the highest per capita income areas of thecou1ntry and one requiring a verv large investrrment ir! the water systemover the next few years.

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117. The adoption of all these measures wJould increase the savings ofpublic enterDrises by about Ps. 1.5 billion per year. If all thesemeasures could be taken, it wTould dispense with the need for legislativeaction to increase taxes and wjould have imnortant. brneficial side( P-ffPerTs

in stimulating economic administration of the public enterprises concerred.

118. However, it is the over-all revenue objective which is paramountat..p nerpesnt qtcp of' 'pl,xco's deeopment; nn to the exent +.t+at. r-c-sources are not or canmot be obtained tnrough the additional generation offmrnd5 by pubnicb1%i ehrissm- it. becme wAy 1-%r ,v'o+nt-+ +to +tke m en,vraes

in the tax field.

119. The tax _ieasures suggested by the mission for consideration arelargely in the field of additional taxes on propery income and luu-y con-suMption which, as explained in Appendix E, are very lightlyv taxed areas.Tncome fol,rpr heed-ed tolc exclude prof" s 'ror,.buiesatvinc,me I.LUn .hiaxe deft,u L Ut±LLL jUL± LI

ities) is either exem-ted or subjected to very low income tax rates.Proper-ty taxes consist o. a) the new-,ily created txli on ownVMership of cars,and b) real estate taxes at the state level. Despite marked imnprovementin enforceii:ent in the 'ederal vi'strict and severai states, tne real valueof property is generally understated. There are few taxes *ith penaltyrates specifically imposed on domestically produced luxuries or semi-luxuries, although they are subject to the general sales tax. Excisetaxes fall on traditlonal item.s such as alcohol and tobacco and on mate-rials sucl as petroleum products erntering largely into industrial pro-duction.

120. Locating a major nart of the required additional tax effort in thefields of property income and lu-ury consumption would not only, reach un-tapped taxable capacity, but wjould also improve the distributional patternof the i4exican tax system. This sy,stem, when viewjed as a whole, appearsas regressive and cannot be credited ':ith correcting the admittedly highlyuneqtual distribution of income and iwjealth in I*lexico. Apart from elementsof progressivity in the income tax, the only other important featuires ofthe tax system which tend to distribute tax burden roughly according tothe ability to pay principle consist of the exemption of necessities fromthe sales tax and the highl duties applied on imported luxuries.

121. The specific measures that could be adopted to tax luxury consump-tion include a special tax of, say, 8 percent on semi-luxuries and 15 per-cent on luxury comanodities. TIhe potential of such tax could be very great(perhaps as much as Ps. 2.0 billion a year). On the assumption of itsbeing applied to a limited range of non-essential commodities, the yieldcan be estimated at Ps. 500 million a year. An increase in present rateson miscellaneous items such as cigarettes and entertainment taxes - wzhichare municipal taxes - could easily produce an ad6itional Ps. 100 milliona year.

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122. In the income tax field, equity and yield considerations convergeto juswti+y adjCA,IS+wnn+ rt 4-to e 4 stinrig leg1isl+ 4rion whi,c-h arev 7; line1 wi-t1 aneventual enactment of a global type income tax. These possible adjust-- -s a ;re- _rr | 1 4 -n4-_ | Sb4r r - ; f4 -l foQ4JI±t>1Ui d.J 'qi \J../ I o ULL? J.&% |. ?u VdJGI VLLLAX O AUi LJ. ?J .AU;. y .LL LJSJiLW .LJ LIGX. UVLI<i tL

3-5 percent to 10 percent; (ii) ra:isin.- the tax on rents from 5 percent(gross, lbefore allowance fLor duepreciLat-ion) to 10 percent and l_U,l rsaLUt',the stipulation whereby the exemption level applies to each dwelling unit,not each building; (iii) raisiln the overall ceiling on the corripleinentar-ytax on total income £rom 30 percent to 40 percent and also including tax--payers who derive income from only one source; (iv) increasing the rateon un-identified bearer shares from its present 20 percent tax to 25 per--cent; (v) equating the rate pattern of taxes on the income OI proieSsionalswith the level of taxes on salaries.

123. Important savings (perhaps Ps. 200 million) could also result froma reduction in the tax exemption presently grantea to industrial enter-prises for promotion purposes, as discussed in Chapter 5, and from the ad-ministrative measures outlined in Appendix B.

124. In framing a package of tax measures the Government should, in theoDinion of the mission, Five preference to the "luxury and sermi-luxury tax"because of its large yield potenLial and the relative ease of implementa-tion. rJith due regard tc exeraptions for bona fide tourists the luxury taxwould represent a step in reducing present disparities in income levelsand w-rould penalize consumption rather than saving.

125. The new Administration to be inaugurated late in 1964 may wish toreviei the progress achieved during 1964 in framing and enacting measuresdesi,ned to increase public savings. If adequate wrovress is to be madein 1965-66 toward reaching longer-term goals, adctitional measures may Iwellhave to be planned to increase public savings above the levels contem-plated for 1965 by the current Administration.

C H A P T E R 7

TWE PU9LIG INTMSTMRNT PR,OGRAM

Introduction

126. M4exico's public investment effort has been increasing in the pastfew years, both in absolute amount and as a percentage of the nationproduct and of total investment (see Table 1). This increase has respon-AA e@ A I-4 hih pril; |..4 4- ss re--Iemnt o- th ecn A -.- _,P A< Y

WUt. Uv'..' QJE,"1' | v;l .i. UJ ± stt.-ZJ s*lLCiUO '..DAC ovsl.it± et'1IJL a it I C J 4-a. 5's pcl LA '-

total investment has taken place in the field of energy. Investment inthe- petr4ole- -sctor whic hasreresentIed a'most1 one~-fourthl of totalIilzii YV l.LLJ.LK'UII1 OvuIAv..J Wl".I l L.la1 .LUjJ ~~LIA~ O..LL.J L d LL '- Ul. U .LL ~ U'. Ua4-

investment, has contributed substantially to overall economic growth andhas converted MitexiOO again to a net exporter of petroleum products.Electric power capacity has kept up well with demand and energy is beingproauced at reasonable costs. Th -e capacit,y of the transp ort system hiasbeen expanding rapidly, particularly in the highway field; it has madean important contribution not only to integrating the domestic economybut has also been a primary factor in the development of Mexico's veryremunerative tourist industry. Tnvestment in irrigation has contributedsubstantially to agricultural expansion and particularly to the growthof agricultural exports. Public investment in the social sector has notbeen large, equivalent to only about 18 percent of total public invest-ment in the last two years. Unsatisfied needs in housing, education,water and sewerage, sanitation and health are no doubt very great. Theeffort in secondary and technical education may well have lagged in viewof the need to expand manpower skills in a rapidly growing economy. TheMexican Government has recognized, however, that advances in these fieldscannot be permitted to go too far ahead of the general expansion of theeconomy and particularly of the finances in the public sector.

127. Recent increases in public investment and the plans which havebeen made and are being made to expand public investment further, gener-ally reflect a proper recognition of the areas in which additional effortsand changing efforts are required in the years ahead. In addition to thesubstantial increase that took place in 1963, present plans of the Mexicanauthorities cal). for a further rise in the rate of public investment in1964-1965. Agency programs tend to be formulated considerably in excessof financial possibilities, and a distinction is therefore necessarybetween the total program resulting from adding up agency-proposed ex-penditures and the adjusted total. The latter involves the judgment ofthe Secretariat of the Presidency and the Ministry of Finance, which takesinto account relative priorities and financial possibilities. The mission,while taking into account the original 1962-1964 program submitted by the

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Mexican Government, found it advisable to seek to obtain a revised 1963-65prograr fron the anproprlrte au+,horities. 1wver. duer to t:nel overlap ofthis periocld-vwith the f:irst year of the new administration coming intooffi eo cn I'cmhpr 1- 19Q64, it I s n,ot, nnonih1 f or the GTv-rnmnPn+, to rpr-

pare ar of'ficial ouerall program that included 1965. The only alternativewzas to examine th+e agencr pograrms and comnnpq frorm th1eom a mlssion-recommended target program for the period 1963-65. These figures werereviLed where possible ir. Jan.uaryr 1964) in consulltation with the ag,enclesthemselves.

128. The final step was then to formulate a "probable" program for 1964'and a "projected" pro-ra, for 1965 on th bas _f discussions wIth, theagencies concerned and the .4inistry of Finance. There are thus tiree setsVf f'-uoes t,U 'o dea- ) 4.. w-1\h ./ ( 1a) tc v age.;ncy (b) U AS ioi;CLUnL4.rVc Io/ nd

targets; and (c) the judgment or "probable" investment progrwms for 1964andu 1965), onth UIe- LbasisO VfL ps.bl UCd,rsol a techni.cal or a ancialnature. The last two sets are sw-marized in the accompanying table byprJincipal et-Us O a hIe ri-LssLons recommenu ed tcarguetU f 196L i7u4-6J5 -LO cauuul;

Ps. 15 billion a year; and the probable program, unless unexpected re-n _ ~~~~4__ __ _. _rc t__.o' Lt_b soutrces develop _ ' It - U Ul-U- - 0W| Ut' U1 tlit U U L

Ps. 13.5 billion a year, assumningy that measures are taken to increasep-ubi±c saviSngs byj Ps. 1.2 billion in l 9650

i29. Tne a-ency programs are described beloiw and in more detail in theannexes. The mission examined agency programs coverin, all but about 10percent of the investments planned Lor l963-G5 and fund these plans tobe by and large well-conceived and justified, although questions arose asto t-he urgency of some programs or te actual ability of some agencies tocarry therm out on schedule. 'ihe mission recommended slight reductions inseveral agency prograws and a sharp cut in the rai13 ay expenditures en-visaged by the agency concerned. In one particular case, agriculture(other than irrigation), thie mission felt that not enough investment wasbeing planned and consequently recommended a higher target.

130. "Probable investmient" in 1964 and "projected investment" in 1965 arebased an discussions held in January 1964 V'i'' the investing agencies andwith the hiinistry of Finance and reflect particularly the financing possi-bilities for these years as viewed by the Iiexican authorities. The 10 per-cent difference in 19614/65 between the mission's recommended targets andthe pUblic sector program that is probable should not be interpreted asirmplying that the actual program is 10 percent less than what is necessaryto fulfill the needs of i;exico's economic development in -the next two years.WNen investment is increasing rapidly 3nd where the system of centralplanning and control of public investment is still far from fulfillingthe require.nents of a complex economy, it is extremely difficult to judgethe administrative capacity of the investing agencies to mount a largerprogram. i4oreover, judgments about the time phasing of capacity require-ments in a rapidl1y growing economy are subject to a considerable margin

PUBLIC INVESTW]NIT EXPENDITURE LFPVELS 1962-63AND PROJCTIONS 1964 -65

(In mil:Lions of pesos)

1964 19651962 19653 Viission's Projected V.ission' Is Projected

(Actual) (Pre:Lim) Recommended In- Recommended In-_ _ _ _ _ _ _ _ _ _ 'R~~~~~~~~~~~~~~~~~~ari-et _ pnqt.rn nt, Trg:t, ye vetmc it

Transportation 1,909 2,340 3,579 2,729' 3 ,318 2,988Riailways 2; 7U9 i771 , k21 . 1,2.00li ghways 9145 1,405 1,599 1,599' 1,633 1,c633Other 112 :186 239 189' 264 1]55

PCtrolebuM and Petrochemica]Ls 1,747 i,646 2,835 2,354 2,234. 2,53471 ectri city 1,750 2,234 2,148 2,148 1,752' 1,752

Agricul.tureb 1,060o770 2,117 1,750 2,331 1 75Irrination g 1, 1,719 1TC' 1,, 6iCOther 171 140 398 150 k8(6 275

Manufacturing 265 534 500 725 350 150Xocial Services 1,977 2 ,228 3,097 2,405 2,857 2,S50

Housing 546 759 1,030 730 850 100Mducation 21 0 1138 440 400 363 LOOHealth, including malaria eradicationi 633 507 597 4k75; 591. 500Urban, leWater S)upply and Seweragle 548 614 1,030 80cC 1.,053 950

Tutal Investment Appraised by mission 8,708 10,752 1L,276 12,111 12,842' 12,C)49Total Inv. not Rppraised byr Mission 1 &059 1, 611 1,447 1,447 1,425 1,Lk25

viz:Investment by Federal District(other than water, sewage mndhealth) 575 661 60c 600Investment by states and municipa-lities not includecd above 3(0 .300 325Investment by other public agencies 794 6550 512 500

TOTAL. F'UBLI:C INVEST'ENM' 10,377 12,363 15,723 13,548 14,267 13,474

_ource: Based on Table 4 Appenidix D.

of error. While the mission's recomrnended target for 1964 and 1')65 tookinto account both thie administrative readiness of the investir.g agenciesto mount larger programs ano the timne phasing of capacity requirements,it was not based on a sufficiently detailed appraisal to rule out over-estimates. eIn any case the extent to --hich the probbable investment fallsshort of the recormmended target is not serious. Partly as a result of tneincrease in pub-Lic investment that has already taken olace over the lastfew years, the economy enjoys a slight margin of physical capacity in mostfields of public investment relative to the requirement- imiiposed by anexpanding economy. Thus, while it might be desirable to increase publicinvestment somewhat more than is notw contemplated in 1964 and 1965, themission is no-t disposed to challenge the advisability of keeping invest-ment in 1964 and 1965ten percent belowJ the mission's recomm:ended target,particularly if^ private invrestment in high priority sectors is given in-creasing support and encouragement 0 In those sectors where there is adiscrepancy between recommerded targets and probable or projected invest.-ment in the next two years, toe reconmended tbargets serve largely asindicators of the Cirection in uhic` iiexicots public; investment mightmove in order to achieve a progrr.. w}ici is closer to an* optimum.

131. Taking into account actua l investirient in 15c63. probable investmentin 19'h and projected investment in 1965, the overall program of invert-ment for 1963/65 cJlls for verv su.bstantial increases over tihe previousthree-year period 1960/62 in severaL sectors, particularly; highways,irrigation. housing, education annd u1 rbn -ater supply and sewerage.Investment in all other major fielc; woculj rise blt not so much in per-cpnt~.Dp terns The ris;p in nptrolrcnimrn invest. :.nh iri tr he mrrrprnt ±.ripnn-iim

is only about 5 percert. Neverthleless petroleum and netrochl?micals willrepresent the large-t single sertor and 7:ill absorb about 17 percent. oftotal investment. The miss-ion attaclies a very hi- gh priority to this o)ro-aranTl gnivTn -1 its -lrole' in +ust ofning therot om p oiimn1 nvu Tcnir+,.

are vital for overall economic growvth, for t,he expansion of exports, andfor the cont-ainment of petrolem anlld chemical mn` orts. The lab in actualinvestment in 1964 is likely to occur primarily in refinery a- xpansion and.petr9Ch micals, T- his zj'il nIt be t,oo scrious in i t±.rz ir mTasuires aretaken by the Government during 1964 to increase th!e prices of netroleumprocuicts~ andr ±Ji z nasisre tlie n-rncri finnnrainl 1,nqf c 3P r rqrTngrn ou±t. thisz

program in the future. Investment in electric power, the second mosti,.mprtant fi'-ld cu-Cnt+rin for almn-o. as :ji,,li i Yvr.v-st+r.,vn+ no ras +nl n.,,lm

will increase almost 25 percent in the current triennium. Investment inthe electric potler sector will c0r,-pjl ete .a 1-arg,e plr grra ", already in the

advanced stage, to increase generating capacity. Expenditure levels onhi; ,-, -; rn+;,y d.4s.ribu,+ An fc-,1 -r4 n t.;11 hbe .- cA red - nn rr--nrn nf nn_

version of frequencies that will pe-rmit a better utilization of generatingcapacc ity in thsl1e n0ar future and a r,ore econo.,,lca]k e-ans Ion ofg encrat-ng

capacity in the long run, will be initiated.

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132. A very large increase in highway investment is projected. It willgo a 'Long -wtry toward' coiim.letiing thIe cUiOJrUU.sLtuctio Uof tIhI mlIJOI- hIJLigLh-way netU-

work and includes the initial stages in the development of a new systemof tollroads ror heavy traIfic routes. Investmett -1 1964 and 1967 isexpected to reach the mission's recommended target, although it is possiblethat the initiation oI the new tollroad program pLannru ior iie eunu vf 194,may be delayed. In railways only a modest increase in investment is pro-jected for 1964/655 even thougn a somewnat greater one wouid be desirablein view of the necessity to make up for deferred maintenance and to re-place obsolete equipment and rolling stock. This would reduce the costof transport and the drain on public finances. However, the increase ininvestment that is likely to take place in the railway sector will De

sufficient to permit a continuation of the very high priority dieseliza-tion program and to provide for some expansion in effective capacity.The mission would recommend that early in 1965 Mexico's new administra-tion should carefully review the mission's recommendations in the railwayfield with a view to augmenting railway investment even further, financedby an increase in railway tariffs.

133. The irrigation program, which in percentage terms represents thelargest increase compared with 1960/62, should contribute substantiallyto realizing the increase in agricultural output which is required for thedecade of the 1960s. Investment in 1964/65 is expected to be about tenpercent below the recommended level. While this is necessary in view offinancial limitations, it may also result from delays which have alreadyappeared in preparing new projects on which construction was to be initiatedin 1964. In agriculture outside of irrigation, investment levels are notincreasing as they should. 4While investments in these activities (storage,tick control, extension service, etc.) are not by themselves quantitative-ly large, they are part of Governmental action programs which are import-ant for the long-term growth of agriculture and which might permit, in thefuture, slowing down alternative expenditures on irrigation projects.In manufacturing. more substantial nublic investments are contemplated,particularly in 196h, in completing expansion programs already underwayand in initiating some new projects. The mission urges that the MexicanGovernment review with greater care the investments proposed by Governmenitmanufacturing enterprises for 1964 and 1965. In view of the apparentreadiness of the private sector to go forward in most fields where expan--sion of Government nnternriseS is heinF contemnlated. the mission feelsthat Government investment in the manufacturing sector might be reducedbelow the level of Ps- 725 million now contemplated for 1964 and that itmight be maintained at even lower levels in subsequent years. Even so,Government investment in manufacturing is unlikely to exceed two npercentof Government investment in 1964 and should not be regarded by the privatesnector as a serious deterrent to the continAued rowt+h of private manufactur-ing.

134. Investment in housing, education, health, water supply and sewerage,4s eected +o 4n-reanse by about An percent in TV_ curnt trienni,,ww

vestmrient in these fields would, howiever, be less than 20 percent ol totalpublic investment. The public investment program in housing will comDle-ment the credit program for the private housing sector recormmended above.In view of the shortage of financial resources in 1964 the mission seesno acceptable alternative to the Government's plans to slow down the con-tinued grojth of public investment in this sector even thou.h the mission'srecommended target is substantially higher than wihat is now envisaged.Public investment in education will more than double in the 1963-65trienniumx. WShile the mission would prefer that the prim-aary school con-struction program be curtailed somewhat more in accordance with theoriginal schledule and that greater emphasis be placed on the constructionof secondary schDol facilities, this very considerable increase in edu-cational facilities should reure3ent an important step in meeting skilledmanpower requirements over the long term. The investrient program inurban water suppDl- and seiTera-e. while not bringin- about a 'undlalnentalchance in the present national facilities pictuere, w-ould largel-, resolveMexico Cit;r?s hure and criticnl wntrr andl sreerage nrnl-,Ip qn9 Tionlnldinitiate a process of improvement in the facilities in other perts ofthe country. Inve3tnent, in health fncilities; excluding the ant -malariaprogram, are expecteo' tc. stabilize riorc or less at the 1963 level. De-spite the 6hvioUS nieed for rat-,t1 e.-manqded helth seiGesj a more : t,ionnIplan for the construction of hospitals and clinics is clearly necessarybefore these pronrams are steppedn uri (Th t,he otePr hland, the arnlariaeradication program, one of the most effective pror,rams in the publicheal-th field, is not receiving- the increased financial support that itdeserves in 1964 and 1965.

135. Total investment not appraised by the mission declinec' sligi-htly from16 to~') +r~ 196. F.ther -- a ,,roecte for.A 1_ CA n d 19 -A ITb-l

the mi:ssion did not have the opportunit) to evaluate the realism of theseprojections in detail, they may well -4 p

the fields not examined b-; the mission. In order for these targets to berealized it ma-y well eu nieesscary for uiu Secretary of the Freesidency andthe iiinistry- of iinance to impose greater rest-raints on some of the in-

_1116irv ^. ;>

TRANSPORTAT T ON

136C Ney-ico has a well-.estaboished rail and road transport netwerk.Foreign private capital had already developed the main lines of the rail-road system by the first World lpar. These lines were subsequently boughtup by the Government. The system has been expanded with the constructionby the Government of the Sonora - Baja California line, the Sureste line,and most recently the extension to the Chihuahua - Pacifico Railroad,0 Butthe basic network is still the old one, most of which is now under theadministration of two semi-autonoinous government corporations -- the Na...tional Railways of Mexico and the Pacific Railroad, These two systems,which together onerate 81 percent of the total presert route-kilometers,accounted for over 90 percent of all freight and passenger traffic in1961. The bulk ol' recent railroad investment has been to rehabilitateand modernize these two systems. The reco:mmended 1963165 railroad in-ve.st.ment nrorarrm oldn ! rontinulp t.his rphnhilit-tion nnd mzol9r1ni zrti7.nprocess. The highway s.rstem, whihch, by contrast, is of more recent date,has been rapidly nvyxandedl and improvedn 3etweenl 9I5-6 2 the highway net-work increased from 25,oOO kms.. to 46R7OO kms By fillin some of thestillI =-rxisnCg Ymajor gapsC in the1 Ima;niY higrhwayn networksbyV ther 11u-"rainopof existing roads that carry heavier traffic vol-umes than originallydesigned for, and by int-oducirJ all=weather se-ondary and tertiaryr

to areas of the country in which economic activity is hampered by the lackof, such~ fa c4-1 t ;es , the -recom.mend- - ed 1936 prgrr, -2S bef -- a cotruaio'~~.L ~ .L ~V J UiiV .L~~II%IIJI IIIr Ji"K-') jfL U6 il VjvaU.LLL Ut:-< d. 'JUL1 -LIJL1CLU-LUVI

of the still unfinished process of hig4hitay development,

13 7 , Both in the immiediate past and in the recommended program forl963-6E, ra.i.lway lIves-Tmens accouUnt for a-Ut hlf of aot l fll p-ublic inves,-ments in transportation, highways for about 40 percent, and ports andai.ports for the small remainder.

l380 In its examination of the transport program, the mission felt thatbefore it could form a judgment as to the appropriateness of the plannedlevels of investment in roads and railways it had to examine first thepresent and future expected roles of each mode. For example, the missionhas tried to assess whether the rapid growth in trucking has made part ofthe rail system or the services provided redundant. It has tried to answersuch prior questions as: "Are truckers able to compete because they arenot paying the full share of the cost of highways?" "What are the reasonsfor the large and growing financial deficits on the railways?" "Are theya consequence of inefficiency or institutional limitations which reflecttransport policy?" "Should the program be designed to run them do'm slowlyif they are high cost carriers rather than modernize and rehabilitate them?""Has the Government's inland transport policy, if any, resulted in a grosSmisallocation of resources or has it provided a satisfactory transportsystem which meets the needs of the economy?" etc,

.J.J7. VVJ L.L L"L V4IA -LJI.ILL I10 U.L. L,jIlt~ UfLIU ±LLIiUL-11UUtLUO1 CLVUdL.LdU±et L4It__ 11LL1_0±ULL

studied the existing and prospective traffic flows in Mexico, the realcosts of transport by road and rail, the structure of transport usercharges, and the appropriateness of the planned rail and road investmentsto rmeet the gurw±UW dr,ad IuyaJUc demand conditions for road and rail tr.-ns-port facilities. The broad conclusion of this part of the mission's study,which is set forth in Annex Tv, is that an investment program for `963-.6considerably larger than the level of expenditures in recent years is well-justified both for railroads and highways.

i40. The mission found that highway traffic has been growing much morerapidly than rail traffic in recent years, thereby reducing the railroad'srelative importance as a transoort medium. However, this divergent rateof growth has represented a gradual shifting to the hig1ways, as highwayfacilities and truck characteristics improved, of those categories offreight w-dich are more economically carried by road. Rail freight hasbeen increasing by 3 percent per annum over the 1950-61 period. The missionsees no reason why it should not continue to increase. In 1961, 99 percentof the freight traffic carried by the railways consisted of full carloa.dlots of bulk agricultural, petroleum and mineral products, principally sugarcane, maize, wheat, gasoline, fuel oil, diesel oil, coal, coke, iron ore,lead, zinc, limestone and gypsum, and bulk industrial products - principallysteel bars, sugar and molasses, cerient and fertilizers - all of wlLich aremore economically moved in large lots by rail. Mluch of this traffic was forlong haul. This hard core of the railways' freight business should remainwith it and, as the economy expands, increase. With greater sneeds and moreefficient hanidling so as to reduce the present higher inventory costs toshippers of shipping now by rail instead of truck, the railroads shouldeven be able to recapture some traffic now going by road. The poor finan-cial condition of the railroads, which reflects a variety of factors dis-cussed below, does not indicate that the railroads are uneconomic freightcarriers. But they are uneconomic passenger carriers, and their tariffpolicies and practices need improvement, and the investment recommendationsof the mission have taken this fact into account.

141. The investment program recommended for the Transport Sector isdescribed in Annex IV and is briefly summarized in the following table.Except for the Airport program which the mission was not able to study,the programs recommended by the mission for each sub-sector representannual expenditure levels substantially above those of recent years. Itappears from the discussions held early in 1964 with the Mexican Govern.-ment that investment in the highwav sector is not likely to reach therecommended levels during the period 1963-65. While a substantial in-crease is oroiected for 196h and 196q in the rnilwjnv sentnr it is uin-likely, given the scarcity of financial resources, that the Governmentwill he ahla to increase its allocation for railway inves+ment up to thelevels recommended by the mission. The Government will face, therefore,the question whe+her it wishes to go nhead full speed on the hig.h-way pro-gram, particularly on the initiation of a new toll highway program in

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1964-65 in view of the sacrifices that this may entail in railways andpossibly in other sectors outside of transportation. The delay in ac-celerating investment in the port sector is attributable as much to ad-r,inistrative lags in preparing proper plans as to the lack of finance.While the gap between the mission's recommendations and the likely in-vestment in the transport sector during the period 1963-65 is of concern,most of the investment included in the recommended program that mill notgo forward consists of cost-reducing investment which, while of high pri-ority, is not essential to the expansion of overall transport capacity,at least in the short-term. Thus, a delay in increasing transport invest-ment should not interfere unduly with the overall expansion of the Niexicaneconomy.

Public Investment in TransportationT(m,1ilion3 of pesos)

1962 1963 1964 1965 1963-65 1963_65(Prelim. (Probable (Pro- 14ission

(Actual) Estim.) Investment) jected) Total Recommen-a b c a+b+e dations

Railways 852 7Lg M)1 1j200 2j890 h,0 j8lHighways 945 1,405 1,599 1,63 4,637 4,637P-orts 82 133 129 100 32 7r70Airports 30 53 60 55 168 222

1 0j3C 9y 79 298 0PJ7 577 T 9T4

The Highway Program

142. i'exico's highway program is a reflection of the thinking of variousGovernme nt bodies. The Ministry of Public -1-rks is responsible for theplanning and construction of all Federal highways, which consist inainlyof inestt a6--- - nd J,.;ernat io---- roads. TI-t is a.s --- osil ------ the X- .- 1IJ. ILAUVI .- UE.U cUJU ±LIJll ULUUId.2L L Vd.U ~ -L U ±L ~L.L,u 1LuoPLE:)LUJ..1 .LUL- Uli1t

planning, construction but not the operation of toll roads. The Statehighway eiprograms are preparedA by- t-h "-' ,_"4-' u4

State. The design standards of their roads and actual work of constructioncarne under theu supevso of4- the Iffiistr of4__- -Public)_ orT.T- ml, °tate

highway programs are submitted annually to the HIinistry of Public Wiorksfor im,.plementation, with th^eir costs being shared V0 pezcent by- tu0e ab-and 50 percent by the Federal Government. Local feeder roads are planned

1- ~ ~ L ¶ T 9 1 ~T--.1 - - - -- _vy a separaue Nlational ± uOFLL1Ujbjiof QIor Local noaad, whose president is bU1eMinister of Public Works. However, these roads are built by the MIinistr;yof Public Workss. The programs for these roads are submitted quarterly tothe Mlinistry of Public Works for approval, with their costs being sharedone-third by the local community, one-tnird by tne State, and one-thirdby the Federal Government. The maintenance of Federal roads is done bythe Federal Government; that of State and local roads, by the States.The operation and maintenance of toll roads is carried out by the separatetoll road authority. Traffic and route regulations, the issuance of per-mits and the determination of rates and fares for highway traffic is theresponsibility of the Mtinistry of Communications and Transport.

143. This apparentl1- divided and overlapping system seems to work smoothly,no doubt because of the overriding authority of the 1i'nistry of Public l.;orkson all matters relating to design standards and specifications; the financialparticipation by the Federal Government in all highway construction; and thepredominance of the Federal programs in the total, State and local roadexpenditures for construction and maintenance accounted for only 10 percentof all highway expenditures during 1960.62. The separation of responsibi-lity for highway operation from that for road construction and maintenanceis not a wholly satisfactory arrangement, and could give rise to problemsin the future. Overall highway programming has been good. In the future,howgever. as the highwav svstem becomes more complete. a problem of excesscapacity in MYexicots combined rail and road facilities could arise, sincethere is no central authoritv which is ePxlicitly resr.onsible for keeningthe whole structure of rail and road transport facilities under continuingrevr; n rirrivini frnm th-is rPeiv,e gidelinpc for fiutmre invetments i,n

both fields. The mission strongly recommends that this function be estab-liIhPrH i-n An MnnVrNn-v'-; .0 Ao nnmti+ n. if- +tIn= (c.rn' r ,-r±nn+. nnAl n%nr-i nnt.1r'l .- lncalvt

vTith other aspects of transport policy formulation.

144. The increasing emphasis that has been given to highlrvay constructionin recent Uyears appea-rs to hlave been welVl JustJ LiedL i4ni ViLew 0f tuhle rapi.d

increases in road traffic that have been taking place with the growth andst.ractural chlange of thie ZF- - -- -eor,-. -h -,iso -nonee -one mai

criticism of past programs, namely, that there has been undue concentrationo.f expendit.LUreU onhI des-gni U sLtandar FedeUr.L'U UUal. roadu to U.iie 11t%.LetLc Vi. Uofth

poorer and more isolated agricultural communities. The mission believesuiiau more might be done to extend the system of Low standard rural roads inorder to reduce transport costs for existing traffic, to facilitate theprovision of public services, and thereby acceierate the development oIregions which are now isolated and economically retarded. The missionaccord-irg'y recommends ruat ways anu means should be found to increase thefinancial contribution of the Federal Government toward the constructionof this type of road, either by reducing the present matching percentageshares required of these governments or through some other arrangements,so that in the future rural roads may be developed more rapidly than inthe past.

145. For 1963-65 the mission endorses - with the qualification affec-ting the new tOll facilitiesf program - the highway program which wassubmitted to it.

1963-65 Highway Investment Program

(millions of pesos)

1963 1964 1965 Total(Actual) -

Construction of Federal roads 341 475 390 1,206

Reconstruction of Federal roads 60 137 226 4h3

Construction of toll transDortfacilities J 352 320 230 :62

Construction of State roads 93 100 110 :303

Construction of local roads 2 80 100 113 293

State roads financed by Federalsubsidies 85 72 80 237

Maintenance 37L 395 L2 1.]193

1,405 1i599 1.633 L,637

;V ILoads33, br.dge)1 It. boa' aL)U d Ucmu±aI.

Financed in equal parts by the Fecderal Government, the State and localgroups. Exclludes the part Locally financed which is not counted aspublic investment.

146. The Federal road program would complete the main highway network5upgrade existing roads that are no longer adequate for present trafficlevels, and open up new areas where the traffic potential warrants. Thetoll road program consists of the completion of toll facilities that areunder construction and the initiation of new ones. They prov.de alterna.-tives to existing free facilities irhere the present traff-ic density andtraffic potential warrants the additional facilities and where the savirgsto the road users can be recouped through tolls at levels which would makethe facilities self-liquidating,

147. The State and local roads program would help to open up new areasto feed traffic to the main roads and to improve local transport facilities.Unlike the Federal and toll roads whose justification was examined in con-siderable detail, the mission wJas not able to look closely into the Stateand local roads program. It considers, however, that the amounts proposedfor these roads represent a realistic minimum to meet traffic and develop-ment needs. In view of the insatiable demand for rural roads, the mission

- so -

recommends that the distribution of the limited funds available for the-eroads be based as far as possible on a realistic assessment of the expectedbenefits, and that design standards be kept to the minimum feasible to max-imize the number of kilometers that can be built for any given sum.

The Railway Program

148. Although there are five small, foreign owned railways irn Mexico, theseven government controlled railways operate 98 percent of the total route-kilometers in the country. The private companies act primarily as servicelines to mining and industrial enterprises. Of the Government railways,two - the National Railway of Mexico and the Pacific Railway - are predom-inant, Together. they control over 80 percent of the total route-kms andcarry ovar 90 percent of the total freight and passenger traffic,

149. Other than for newq line constructions, wihich are initiated by andcbuilt under the sunervision of the Ministry of Public Works. each of thegovernment-owned railways draw up their own investment programs. These areevPntuIl1v reviewed and sanctioned bv the Ministrv of the Presidenev beforebudgetary funds are allocated. Since all the C-overnment railways are in adeficit. onsnitinn thev rplrv on t.ho YPrierqI BudgP(et for inre.tment 'iinds.other than those obtained externally from government, institutional, or pri-vJate bu-sineSS sucs

0 SL J .AJ .'W YLj **~*I~Lh &~f

the ultimate screening process of the Ministry of the Presidency. They. l ±eceu therefore, only the bods a o t oepara e rai;L

roads. The mission reviewed the programs in the light of its conclusionthat there is an econor,,icallv uset-ul and viable role for ralwlvays inMIexico - though not necessarily as now constituted and operated. Takingrinto account tlhe probable gro-wth of rail traffic, the urgenL need for cer-tain rehabilitation works, and the need to invest in new facilities andequipment so as to keep cost levels down and to increase efficiency, themission found, nevertheless, that the investment programs were excessive

I somtue important cases. As shown in the followiIg bsumular-y table, themission's recommended program for all the Government railways, while aboverecent investment levels, is substantially below tha-t envisaged by therailwjays0 Detailed comments on the principal iteins in each railway's pro-gram vjhich are set forth in Annex iV are briefly summarized in the follow-ing paragraphs.

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Public Investment in Railways

(millions of pesos)

1963X16! Program1960-62 Agencies? MissionAnt+1'q Plans ?reTmrpei. i cnq

Major Facilities

Rails and fittings 510 1,308 680Othner tr-ack Ho-7rkS 29 160 I1,019 rl Locomotives 340 571 495Fvre ightI -lu- cars 500 6G L7.)

Passenger cars 21 1..i46 267J.e.Lecor;uhiUII4A.dI UJLons arU.d

signalsi 25 490 275Build.gUI~ cs and term lnls 4"U 825 577

iiiscellaneous 103 588 266

Total, existing lines 2,266 7,1l40 3,796

New construction 300 1485 305

Total 2;566 7,625 4,101Annual Average 855 2,542 1,367

Major _ailways

Niational Railways 15946 5,796 2,926Pacific Railway 212 592 226Others 108 752 574

Total, existing li*nes 2,266 7,1i0 3,796Annual Average 755- 2,360 1,265

151. National Railwav of MvIexico. The bulk of the total 1963-65 railwayinvestment program is that for the National Railway0 Accounting forsome 80 percent of the combined program of all the railways, it envisagesthe completion of the rehabilitation process which has been taking placesince the early 19401s by 1965. It would provide, among other things,for the replacement of 2,933 route-kms of old and underweight rail on themain line tracks together with a substantial length of secondary tracks;the purchase of 89 main line diesel locomotives so as to complete thadieselization of the system; a considerable increase in the freight andpassenger car fleets; and the extension of centralized traffic controlover long lengths of main line sections.

152. The mission concluded that the program envisaged by the NationalRailway was too large and should be severely reduced for reasons ex-plained briefly below, but set out in more detail in Annex IV. Infor-mation obtained by the mission early in 1964 indicates that financiallimitations resulted in a curtailment of investment by the NTational Rail-ways in 1963 slightly below the levels recommended by the mission. Thustotal 1963 investment am,ounted to only Ps. 623 nmllion as against a totalof Ps. 688 million suggested by the mission.

153. Investment in rail-relaying and other associated track-work in1963 represented approximately Ps. 250 million, an amount considerablybelow the plans of the National Railways in this area. This reduction isnot considered undesirable since the execution of the program as plaimedfor 1963-65 would necessitate an increase in the labor force and causean excessive amount of interruption to routine train movements. Themission believes it is inadvisable to make a large but temporary increasein the labor force only to be faced with the problem of trying to reduceit again in 2 or 3 years. It recoimmends, therefore, that the particalarworks should be phased over a longer time period. so that they can becarried out within the capacities of the existing organization and laborforce.

1 4A The desire to uhyv various types of newT and serondhand passengercars in amounts exceeding the ninnber now in service has no juscification,

portation, the mission concluded that a primary cause of present financialI ls i th + oprto i + on^-Y +too mayr passenc s+ erIIea necno.mic

fares and that there is no foreseeable prospect of the losses incurredb-i ng -3lirnnated Jn the near future. W1>.ie th fin-Jcally lgclccurse

weuld be the elimination of all uneconomic passenger services or theraisin - of -- f4are-'s toleel ,tat4- Ul -- a1 e 4he,,- self-spi,ortng, - hele r.L" O LqS I. JC.LUQ UJ JLC Vt,L~ UII U VVUU_LJLL 111ZIur UL±jIIC4 OZ;L± - tAUjJtJ .' U.LL1-,, I1IC; _ UI L

is fully possible or practicable mLrediately. Since alternative busuransportation i s available au a lUver reaL cost Duo th-e econor,- y, to miostof the Dassengers who would be affected by these measures, the missionLcLiflA'b f±idu ar.y JustA ULc at ion for thlle proposal Uo spendu Ps. 1L biLJlJ.1±_'io ojnA

passenger cars during 1963-65 for this railway. It recommended, there-fore,±t~ anlI J4 invetmentiU Vf oInly Ps. CCU 1iLLLUL1 (Ps. 70 ;1LiLL±iLn peLr yer') 50

as to cover the replacement of those cars which are over 35 years of agein order to make tne present services more efficient and safe. For thesane basic reasons the proposed improvements in passenger stations andancillary facilitieo have been cut back to those regarded as essential.Investment in secondhand cars in 1963 represented only Ps. 44 million.Investment in stations and anciilary facilities was similarly cut back.

155. \'Thile the mission feels that there are gcod prospects for an in-crease in freight traffic and for making this branch of the railway'sbusiness viable, it has recommended, nevertheless, that the proposal tospend Ps. 485 million during 1963-65 on new freight cars should be cut

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to Ps. 14'5 million. Since large expenditures have been incurred on newfreight cars over the past six years, a good part of the fleet is new andwill not need replacing for a number of years. 'The mission recommendsthat provision should be made for the replacement of only some 10 percent(1,200 un:its) of the remaining cars during the next three years as partof a longer term steady replacement program geared to an average econorriclife of 30 years for these cars. This recomnendation reflects themission's judgment that replacement needs must be met, but that real in-provements in car handling and turnaround procedures are not only de-sirable but possible and should generate sufficient carrying capacity tohandle the increases in traffic expected through 1965. No investment innew passenger cars apparently was made in 1963.

156. The other main item for which the mission recormmends a signif-icant reduction is in the field of tclecommunications. iNeither presentnor prospective traffic densities appear to warrant a large extension ofthe centralized traffic control system (OTC), which is now in operationonly on the 1Mexico City-Queretaro section of the rnain line. In themission's judgment a modern signalling svsteia would suffice and could beinstalled at about one-half the investment cost for CTC*. The recommerdedproRram. therefore. makes Drovision for such an alternative to CTC. In-vestment in signalling equipment in 1963 represented only Ps. 13 million.

157. Tlhe mission fully endorses the .1an to replace the remaining steamlocomotives by diesPI traction; -i.he ' nonomi bhpnef'its of whi cn have eoenclearly demonstrated by past replacements. Having regard, however, to

way may have under-estimated its locomotive requirements for 1965. Itrecommrends, -th-ueref ore, -that its tractioni -r-qi -sr-nMnn+z hould A hse ke-pt+.

under close and continuing review. Locomotives for a va'-ue of Ps. 188million were acquired n 1963.

L,J. T IhI n!iss)±uio alearneu early n196L th7 U 1Wiat., thei UUVe 1;eU ir.Uten1ds Uto

increase investment in the railway sector in 1964 by as much as Ps. 200mllior.n The diese1,zat,lon pro-rm. which Js consdered by the mto have a high priority is being carried out at the recommended level.ItI was notu possible tuo ob1-4ain deaie iform,atin on the G-overnument's4. U ~~~ ~ U LLhL~~ U ba.) 'J , L d e uJJi LL U u4 in-414 a.4 ma~ uLv.L')1 '. 11 1I~~')Vt 1 UIL 1

intentions with respect to the rest of the program, but it is clear thatL4.Ii~~.11'4J-4 L±ILLdj. JI ±±0-44UJL UI dg ±1 JUU. ~I AJ1fL-U lanciCal _l_U",a-taions will sloav dlow.,n 4the ucuar^-ing, out of wthe expan'ediUz-

program of railway investment recommended by the mission.

159. The Pacific Railway. By contrast .;ith the National Railways,lth e l Us b tatio 1of Wllch lid goe oln UteadUlly forL' a num[bel' U1 ytear

and is still uncompleted, the Pacifico railway has been almost compleie:Lyrehabilitated since 1954. The main line is not in any need for furtherimportant improvement. The program presented, therefore, is largely oneof routine improvements to maintain the system in good operating conditionand produce economies. The mission, however, has recommended two major

cuts in the program. Onc, deleting the purchase of passenger cars beyondreplacement needs that would expand the already uneconomic passenger serv-ice, and the other, postponing the relaying of track on lig;ht trafficdensity branch lines that are mainly used for passenger trains until theeconoric justification has been clearly shown.

160. In view of the fi-nancial stringency facing this railway in 1963,actual investment was below the level recoinended by the mission. It isunlikely to increase in 19616 and 1965 unless substanlially greater re-sources than are now in prospect becomne available.

161. The Other Railwjays. The mission's specific comments on the Coa-huila y Zacatecas road, the Chihuahua al Pacifico road, the Sonora - BajaCalifornia road, the Sureste road and the Yucatan System are set forth inAnnex IV. For the first three of these, the jud-Tlnents are about detailsof the rather routine investment pro-rams for these railroads. For theSureste and the Yucatan Systems, however, special comrment is warranted.

162. The 1963-65 ororrn. nrepn.red *'or the Siirest. railroad is desapnedmerely to mtaintain the line in its present unsatisfactory condition.The line runs throiiph unstahle s-pland, nrdi its 1ir.htwPight. trAck is ideplorable condition, especially -ohere the roadbed is waterlogged, large-1y because of the use of( diesel lcnt. whclloootv iohc are too h.eavy for itaIts track maintenance costs are bhe highesit of any railway in -exico.

163. The missi-on does not feel t1ha,t an investment to keep tlle 'uresteline only in i-s present poor condition is waranted S the linean essential transport link for a part of the country which at present hasno ad .uate substitute, a more coi .L*preVhensiiv.e progrI -f Iabil atincluding works to improve drainage, is needed. ITo plan or estimate ofltel-lc costu of suchAI a prograr,, is available, but the .,ission has .LoLision LL'..Ly

allowed Ps. 200 million for a first stage in the Sureste rehabil-tation.Thi.E' sum is _3_.ore tlln do_l the Ps. 90 -ilo pr,oe - the -,adeJAii±L OUJI1 ;j~ Wul1t L'IId.Ij UULL±t; Ulfz F.. * ;1J IHL_LJ_L±U1I 01LOJU,)U .. V' UI!2_' ±I1UUt

quate program submitted.

164. As f-or the Yucatan System, the mission reccmmends that no furtherin V-estUient 'ue made on the narrow-ga-ue sections on whsiich .f.reight trEaficis very light and train services are mainly for passengers. Since high-way facilities in the area aerved by the narrow-gauge lines are improvirgvthere appears to be no reason to continue the operation or these lines.The remaining standard-gauge lines of the Yucatan System, togetner uiththose of the Sureste, could be incorporated into the N\Iational Railways,thereby improving the service and reducing the operating costs on threselines substantially, if certain legal and financial rearrangements iteremade.

- '5 -

165. New Railway Construction. Except for the proposed shortening ofthe Guadalajara-Saltillo route, which does not appear justifiable eco-nomically, the mission has included in its recommended program the newlines that have been proposed, two of which are short cuts, subject toconfirmation of their justification by final studies. Approval of thefirst section of the Mexico-Iguala line, which shortens and realigns asection of existing track and appears to be well justified on its ownmerits, is not intended to endorse the continuation of the line to Aca-pulco whose justification has yet to be demonstrated. No investment innew construction was made in 1963. Financial limitations make it unlike-ly that. except for the ?4exico-Iguala line - on which a small amounthas been spent on its first sections - any immediate progress will bemade in the new construction program.

166. Financing the Program. The railroad program is large and. how-ever well justified it may be, its implemnentation will require major fi-nancial decisions hv the Mexicnn GovernmRnt The railroads are not nowself-supporting but a charge on the Federal Budget. In view of the need.for the !epyicacn feve-rnrent to finrd addr1it.ionaI financial re tocarry out the overall investrnent program, the mission feels strongly thatuscersYc ofl ra;lwaT.7fly CsY;ndc- ho-ld - -C- - Jlhi C-r Pn +1o 1-rl11

cost of these services and not be subsidized out of general tax revenue3.Therefore, it recofmends freight rate and passenger fare increases tothis end.

167. The mission's analysis of the financial results of the railways'operations shows tuha whLile1 ' 4 they -- 1- - -are allI in -eii fiaca posltions,

the deficits do not arise from basic inefficiencies. The major systemswhi±xci cover tihe buil.k of. thUe net-worku are fuwdamientally so-aiu. Their oper-ating costs are reasonable, particularly in view of the many low trafficdensity line sections that are operated. Staffs are not excessivelylarge - their wages account for about one-half of total expenditures.Productivity of labor per traffic unit, which compares satisiactorilywith that on other railways elsewjhere, has increased by some 50 percentover thle past decade, or slightly faster than the increase in real wages.While the situation on the smaller railways (and the uneconomic branchlines) differ in some respects from these broad conclusions they do notalter the overall interpretation for the network as a whole. Since alarge part of the increase in productivity has been the result of diesel-ization - between 1952-61 the number of steam locomotives decreased from1,251 to i443, while diesel locomotives increased from 182 to 655 units -its continuation should insure further productivity increases for somewhile yet.

168. The deficits are a reflection, among other things, of a patternof real railway prices that have lagged behind real cost increases eventhough productivity and traffic has increased. Passenger fares have been

kept at subsidy levels so that average revenue per passenger kilometerdoes not cover the out-of-pocket empenses of running passenger trains,pDarticularly on the National Railway. Frei-ht rates on particular cate-Egories of goods hnave been kept deliberately low in order to subsidize con-suimers, particular industrial activities and to encourage exports. As aresuilt, other traffic has had to bear charges in excess of their truecosts in an effort to recoup soine oi the losses. in addition, the railwaysare pressed to maintain branch lines in operation which are wholly uneco-nomic, and are also required to carry heavy financial burdens for socia:lservice fringe benefits in excess of those obligatory on other enterprises.

169. So long as it is the apparent policy of the Goverlnment to havethe railroads account for the full cost of these above-average social serv-ice exp-endi-tures as well as show the costs of subsidizing particular groupsin the Mexican commuritvy the mission does not feel that the financial ac-counts of the railroads can ever be in com,plete financial balance. Themissaon fpls t'nnt. t.hR ra-;ilw.vrst fine-Pnr:s .shonlc6 bhr ba1rn3nfd onilv after"normaliza-tiontl; i.e., after adjusting the revenue and expenditure sidescof the ,C- ' rint S as to- re f1 ecrt the flouprrnm Pnf.Is, dciAsi ons tc sub1hs di ze I.

The ad justiients would be identified as nayments l'rom the Government torailwaysto et h slPC>ia co_ts nincuPrre on bena}nnf of' tAhe~ uronns- IPnr-

fited. The mission has prepared such a set cf normalized accounts. Evenaft.- hoievex, , th,-e isson d that -he ralroads' c-counts were still heavily in deficit, and that there is accordingly urgert

-neA to raise r-4

-s and f-ares a-n r-educ cost in order to ba the

operating accounts, quite apart from the need to generate cash for the in-vsti liet prcgama.e_Vr¼> LdSZ 1i IJ jJL VIC± D.1L1c

70 IV ±11aisio ±t a Ll un o!IL±U passnge s i can-

not be entirely eliminated in the immediate future. It recor,Liends, how-ever, th-at they should not be encouraged and, -that a first ste to correctthe passenger deficit which accounts for a large part of the railroads'deficit, average passenger fares shculd be raised on the National iRail-ways by 55 percent to cover just the noesent losses on the running costsof TasexgeV tvral.ns. The missiou would not be uLnd-uly oUUcerned thatraising passenger fares would drive the passenger traffic to the roads inthiose areas whiere bus facic -ies exist or can be readily provided. Tothe extent that this happens, it would result in a more economical use oftransport facilities and national economic resources than at present0

171. Freight rates reflect inadequately the way in which real costsdecline as shipping distances increase. They tend, though without seriouseffect, to distort the allocation of traf'fic between rail and road, byand large, the short haul rates are too low, the rates for medium dist^-ncestoo high, and those for long distances, too low. In the very short haulswhere trucking would normally be more economical than rail, rates tend toattract sorae uneconomic traffic to the railroads. In the medium distancehauls, fron about 200 to 800 kms, rates generally cover costs more than

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adequately; but, as this is the range in which railroads are frequently

rates to be set at levels that may drive traffic to the roads. In thisrange, many rates could be reduced and still cover total costs. For thelong hauls, the revcrse situation applies. Here, the railroads have aclear cost advantage over trucks; yet, in this category oI traific whereafull cost rates should still be attractive to shippers unless specializedservices are provided by the trucks which are not given by rail, ratesare allo-wed to fall below costs, in malny instances even below out-of-pocket runnin- costs. The mission recommends that these defects in thefreight ra-te structure be corrected so as to increase the average levelof rates on the Uiational ?aailways bya 25 percent,

172. These recommended increases in rates would be a first step to-ward earning a reasonable return on the capital invested in the ra lroads.They would eliminate i-nmediately the burden of "normalized" operatingdeficits from the budget, and thereby ease substantially the problems offinancing the investment pr^ogram of the railroads.

Ports

173. Until very recenitly, naritime transport has not been significantin the 1Iexican transport, picture, -ith port investments being rather smalland irregular. There are manry ports along Hexico's 6,300 mile coastline,but, with the exception of Tuipico, which has handled over 5 million tonsof cargo annually, and Vera Cruz, these ports are generally small and Lineed of substantial improvement both in their physical facilities and intheir operation. laritilne transnort shoald increase in importance in thefuture as a result of e-forts by the irexican Government to encouraLe eco-nomic activi-ty in the coastal areas, to develop its major river basins,2nQd to search out. e-nort markets .for it.s growing indusqtries. Thte n-roqrnPct,howrever, does not as yet appear to warrant the establishment of any majornew fac_llties in the very i.medi.-te fulture In the n m.ission's judgm4etthe focus of investinent in Dorts :in the next feiq years should be to makeonod arrears- of maintenance; to nomnle l-e mnfinish!ed Rtru ct.nre; to re-

organize existing facilities, and to expand present facilities where thetraff^icn prospec.ts warrant.

17), The rission feels that tlose parts of the proposed 1963-65 portprogram which are directed to these ends shlould be impiemented as planned.

percent above recent levels. The mission feels, however, that some largepnrojct wC h r.rch, are irc-nlud in the pvroonpnoA .progrr_-n, a-rn er,+ ntJt+if-; P4-i--F9 4~' J~ VV±.v1s L¼ v± X s v at . 1'- VLI 4±,yJ,'~ V '5.Clt a...c t. ,S, ,l v U J tAt LtLJ. .lCt W

at this time, It recoinmends that they should not be countenanced until4the case -"or the.. Js moerevyapaet.Te-ir exc-lusion acco.ts4-

mainly for the large difference betueen the proposed and the reconuendectJ97uJ-6) pU. t .uivestr,'ent p±ogrii.

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Public Investment in Ports

(millions oi pesos)

1963-65 Program1960-62 lMissionActual Agency Pllans Recommendations

25' 1,150 4(0

175. The largest new project proposed is the 580 km. Tuxpan-.latamorosIntra-Coastal Canal in Northeast Mexico. In viewq of the road and ral-wayirnprovements being made in the area, the mission feels that the case ^orbeginning this large project is still "not proven". and recommeilds thatno funds be committed to it until its economic and engineering ieasibilitycan be more closely studied. Such a study, which the mission envisagesbeing carried out by a group of foreign experts, should also examine the!proposal for a port at Ilatamoros and investigate developments on the in-land watenjays over the U.S. border, w;ith which the project would link up.

176. The other major projects which, because of their uncertain stacvs,have been esxcluded from the mission's recoTmended program are the new fa-cilities proposed for Puerto del Pajo Balsas and Manzanillo. The Ilanzani-llo project would add facilities to an existing port to handle iron oreproducts for export. The Puerto del BaJo Balsas project would involvethe construction of a new port originally conceived also to handle oreas part of a large new iron-ore proiect but now being restudied as amirlti-purpose irrigation and port project. The mission feels Lhat theManzanillo projeot shoild gr9 ahead only it' the iron-ore proiect materi2]-izes and tile prospects for this project are vcry uncertain. The studieson the rev:ised Puerto Balsas nroiect have not been completed.

177 Total psrt invem+nent in 1463 was Ps. 133 millionr ofn rThich nbhot.

Ps. 40 million was for the Port of Alvarado - a fishing port on the coastof the Gculf, near Veracruz. This project was not reviewed by the 1963mission. Expenditures in 1963 on projects revieied by the mission weresubstantially +e1T7 l,-rV the level rleomr +b e T+ t m is*n-likely that Government expenditures on the port program will increase irnthle next trrJ years to t+he le vel reonr.r.nded by the misin. Thei ?ricQinr, c

comments on other detailed aspects of the port prograin are set forth inAnnex ITV

su I ad r ' eLI'S W L s VL s LO Ver, ' .L LIW) JIno .o4h VIfUIsinves tJLe ntIL Lp bSu to, th

should be addressed, however, not to the investment program, but to the

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operation of Plexico's ports. Port operations and administration are inneed of urgent niprovement. At p;^esent, the Ministry of Marine, whichis responsible for all port planning, design, construction, dredging anddevelopment, has no direct control over day-to-day operations. Controlover port operations is ver-y fragmented and completely uncoordinated.Plajor construction works are carried out on the basis of uncertain andfluctuating annual budgetary allocations. There are instances of im-portant and useful works being only partially completed because funds ranout and were not renewed. Port operating practices frecquently make forvery inefficient use of existing facilities. The high turnover of en-gineers inhibits long-range planning. TJnder these conditions, smoothport operation and rational planning for inprovements and expansion ofMlexico's ports has been exceedin<-ly difficalt.

179. The -miission feels that the vi,ost urgenrt attention must now be-.into be given to bringing the direction and control of I4exicots ports undeta central authoritv. 1.iitho':t an effective reorgani7ation. there can beno assuranlce that Whe planned improvements will be fully realized orthat an ininroved level of nL).rt operat-ioie anrd maintenance wTil- be achieved.

Civil Aviation

18R0 The mrn-i ssn was not. .be to. e:--amne in any-M d-tal tn rnve-t.-nt.in civil aviation faciliAes proposed for 1963-65. However, since thenrncv-in is not ver large, andr onsnist rirly or nf P-+nlinc: and: inprinr

navigationaL ana meteorological facilities hich are seriously deficientto r-.ee -,h n-elec of ,r-oj-i + 4-+n-al a tf, 4 - + ve -N -1 r.is slojn is

prepared to recommend it.

181. The mjission learned early in 1964 that the Ministry of PublicaVn dee Lo prentri-.g a .o_,IPelIv r ' p I rvmnand developi-nent.

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PFTROLEuNl-l PND PETlRUCHOf1I CALS

182. The Pemex investment program is the largest single category of ir-vestments in the 1963/65 public sector program. The program for Pernexrecomnended by the mission in 19o3 e:,ceeded Ps. 6 billion, equivalent tcalmost 18 percent of the recomm;ended investments for the entire sector.

183. This program consists predominantly of investments in the many tra-ditional activities that Pemex has engaged in since its founding in 1938as a large integrated petroleum operation. It will enable Penrex to con-tinue to improve and expand its facilities for production and distributionof petrole-uim -products; but it also incLudes substantial investments inpetrochemicals, a new field of activity for Peme.x. The 1963 mission ex-amined both the traditional operating investments as well as the petro-chemicals aspects of the Pemex program and recommended that most of theprogram go ahead as scheduled. The report of the 1963 mission (Amnex Iattached) reviews the Pemex Droaram as it stood early in 1963 and con.-cluded that it would be appronriate for Pei,iex to invest about Ps. 6 bil-lion in the period 1963/65. The investments recommerded by the 1963mission, which are summarized in the following table, reflected preliminaryjudements about the merits of the individu2l nroiects in a program sub-mitted by Pemex. IIost of' these juidgments ore sutject to confirmation byfinal pro4lect nnnrqisn1 stuclies. partic':lariv in the case of thc n2tro-chemical program. On the w}.ole, however, a program totalling Ps. 6 bil-linn nr rnnre fer thp r.ri nr,1 1 q,/t .< c-eir1 t.i fi Pf i orerlr to -r e.Pi v.,

Pemex potential for luture growth ancd service to the heiexican economy.The Pemvex pveuro m revised in January 196), also cumvnarired in the f:olLoITi-ing table, is generally consistent with the program as recommended by the1963 mission, except for thc contin,red inclusion of t-,o ne efineres onIM1exico t s lest Coast in the -'emex program.

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PEuiEX: Surmiary Investment Prograns

(in millions of Mexf)

Total1963-

1962 19°.63 196h i96q61 9fiActual Prel.Est. Program Program

PRPCMIRW4A -PRn'PrEln RY rThTPm.Y(Jan. 1S96hY

1. iMajor Projects 813.5 509.9 1,581.5 838.!j ) 929.8

Production facilities 125.8 1.8 61.6 1L.1 77.5IReA in e 185.6 )2-IC 0.4 oRr) c0 O0 7

Transportation 336.4 90.0 357.9 39.9 48-7.8Sales 15.7 6. or) 100.0 286A8Other 11.0 79 4 40s .4 130.8Pect r och Iem i c a"ls lLI7.0 .,q .l rL. c n. 3 ).0 nl.0ff. 31 L~~7 ri 1 j P I.U 4 C I r)U I Ur4')

2. I4inor Projects 95.7 144.0 157.0 170.0 471.0

3. Equ.pment, Apparatusand Materials 98.5 22.4 239.5 2S1.6 745,1

4. Drillilng 'kwelis") 739.4 70/. CS ,5 .> -1Lz.# ,Jyc

Total 1,7147.1 1,6146.5 2,0834.5 2,2314.0 6,714.9

PF.CGEAr'I4 BITC0!LijFNTTD)ED PY T-T jiIISSION (1963)*-

1. Nlajor rrojects 620.0 864.9 772.9 2,257.8

Production facilities 40.5 20.3 8.7 69.5Refineries 93.9 90.3 156.9 341.1Transportation 238.7 124^5 100.0 463.2Sales 58.2 67.3 51.2 176.0Other - - 9.3 9.3Petrochemicals 18£.7 562.5 446.8 1,1.98.0

2. Minor Projects 1144.0 157.0 170.0 471..0

3. Equipment, Apparatusand i14aterials 2214.0 239,5 ___281.6__ 7145.1

4. Drilling (mells) _ 768.5 8566 .5 9)44. 2,569.0

Total 1,756.5 2,118.9 2,169.5 6~,042.9

Ni'ote: Di^ferences due to roundi.ng4

* Arnex I.

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In the past, Pemex's record of operations and expansion in the face of Tanyformidable obstacles has been good. The resource base on which futuregrowth must be basec is adequate. Permex has manaLed to provide reasonablyfor hiexico's rapidly growing petrolelmn needs and its present productioncaoacity and crude oil reserves are satisfactory. However, many improve-ments are needed urgently. Organization and administration must be im-proved to increase efficiency and reduce costs. Procuction, distributionand marketing facilities must be completed and extendea if Thexico's petroleum.product needs are to be met in the future. Increased emphasis must be rivento drilling to naintain and enlarge reserves. In addition, new facilitiesare needed to upgrade Pemex's -product line. But with appropriate invest-ment directed toward these ends, 'emex's p:'ospectvs as a large integratecdpetroleum company appear good.

Petroleum Investments

184. Tile mission feels that the traditional petroleuM operations partSof the Pemex program constitute appropriate investments toward these encs.The recommfiended program includes the wide variety of items needed for theefficient production, refining, transportation and dist.^ibution of oil andgrs nnd their products; iipiment aTnd materiaLs 1'r drillingy wie Is and re-lated field installations; absorption plants to separate licuified petrcleumreS and naT1tu1ra1 gaoline from nat,,ral cas invrstmens in ronfinr'ir- toi

increase the availabili.t- of some products and upgrade others; the con-c:+.-riir,+.1 n r-rf ' )iflk ml on+. +.n -rCminrl7r +t¾' n-rPqn+. rirtr+.' , >t.rnr - f'n-l 4 '-i +1 o

for refined products; and the enlargement of the pipeline capacity in thePe:lex s .cystm Ta,kenr +,-get'+.ner, +the p~roducion+ facl 1 i tie prset n

planned, are well geared to 'emex's requirements and represent an eco-nom.ical and efficient wia¶ O usvn' v,r xiot enrcI, -esoc,m

185. Tlhe M.ission anpro-vcs of tune incregs0-ing erphFasils no-w being given to

more intensive exploration and development drilling. The proportion ofJ Cor at ory we-ll' :I- ich J hav p-- successful has been d lkinin. I.,

fact tlat in 1958/62 onlyr 12 percent of the \-ildcats were successfula'ppCes tG .ni +n +-b - + kn tl3'- -r the bes are +hIav+ di nnCitV - J.S.'_~C- - '- V- -i CL U -Clr ~ ±aVC u,C ~ 14 A -J.-.L l-±. VOid v Ct

increasing number of exploratory wells will be needed to maintain, letalone increase, ,-emex'S crude oil rescrvcs in the #utu¶VYr emex s l+- 1 thasreserves adequate for 20 years at the present rate of production, but pro-duction has be-n increas ng, and exploration has in the past tUree yearsbeen adding bacl- to proved rescrves no more than the volume of crude oilextract-d A,ring +l,; peri--;od. MIe crud oi reeve!rduto --4t1C. ].L d O. LALAr]. l~' U].J~ j)O L U. 11 %- UUO ULLLL J. U_C'0;.L V ZC'Dj'Yj) UUUUUJ±LU1 .LC t. 4±

has thus been declining. Taking into consideration the parallel need formore intensive developrent dr'li since p i pr w has b-een o_-clining - it dropped by 50 percent in the period 1952161 - and that on tneaverage about 10 percent of all wells i7n p-,roduction su out of productlonannually, a more vigorous drilling program appears clearly basic to thepreservatuion of rernex's futuure as a pet,ro"leumii producirng ;company.

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186. The major change recommended by the 1963 mission in the petroleumpart of the Pemex program was in refineries. * hile in full agreement withthe investments underway and planned to f-cilitate and improve the efficiencyof existing refineries and to upgrade their product lines, the missionquestioned the justification of the proposed construction, at a cost ofPs. 800 million, of two refineries on the WTest Coast of esexico at Mazatlanand Rosarito. After further discussions with the 1Nlexican authorities in1964 the mission agrees that new refinery capacity will be necessary by1967, if not before. The shiortage of domestic financial resources willprobably force a retardation in the construction schedule envisaged in theJanuary 1964 Pemex program so that in fact these refineries are unlikelyto come on stream much before they are reouired. Further analyses thathave been ma,de of the Rosarito refinery suggest, moreover, that it willbe a very economic installation permitting very substantial savings oncrude oil and the upgrading of refinery products along the lines requiredby changing market conditions. It should also be nioted that externalcredit has been made available for the Rosarito refinery under the Frenchloan. During 1963 substantially larger sums ,ere spent on refineries thanprojected by the 1963 mission. All of these expenditures were apparentlymade for the completion of existing refinery projects, with the bulk ofexpenditures going to the alkalization and segregation facilities at lIaderoconstruction of which was practically at a standstill in March 1963 whenthe mission visited MIdero.

187. The slow-down durin- 1963 in the Peinex program made necessary bv theshortage of domestic financial resources was reflected in the very smallamounts allocated for transnortatinn; mainly pipelines The Pemex programfor 1964 and 1965 provides for the high priority pipeline projects reviewedin Annex TI Thp miqssin supqnects- however, thant. given the shortango nf ro-sources in 1964, it will be necessary to postpone some part of this program,wit.h a largeor nprop-ortion of t he} +.total imrocz+0rmenpnt talking TIacen' in 1965 t-hanis now contemplated under the Pemex program. Priority shoulo be given tothe compressor stations in the northern gas lines in view of the shortageof capactiy already evident. The scarcity olf financial resources in 1963hns nasn rd 1i t.hp hnqtm-iiot in of absnorpt.ion plants which spnarante lin i1-fied petroleum gases and natural gasoline from natural gas. These highprioritri+y projectsar are also tnnIiAld in the l96+/6 Pemex rgram. Pemex

continues to include in its 1964/65 program the high priority storage plantsnoted in rnnex IT nfortunately the de"lays in ting the storage plants,for which a substantial amount of capital has already been invested, con-thLedin comple n of sm of i t h i e x isti prst rjirts. y is bein given tothe completion of some of the existing projects.

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Petrochemical Investments

188. Pemex's interest in petrochemicals dates from November 1958, whennew regulations to Article 27 of the iviexican Constitution, which reservesthe development of P1exico's basic resources to the State, established nolmsfor the development of a basic petrochemicals industry in hexico. The con-version of natural gas and petroleum products into products which are thebasic raw material for consumer goods-producing industries was reserved tothe State. The first stages of chemical transformation after refining(defined as the basic industries ) became an intuegral part of the petroleumindustry, i.e. Pemex. All other stages oI petrochemical manufacture wereleft open to private industry or to joint venturcs. Pemex has since playedan important role in promoting joint ventures with local private capital.The petrochemical investments in the 1963/65 program are the largest itemisamong the major projects contemplated in the Pemex program. Even if' thepetrochemical investments should go forward on schedule and cont"inue to telarge in 1966 and 1967 it is doubtful that petrochemicals will, even atthe completion of the present program, comprise more than one-tenth ofPemex sales. Though petrochemicals will increase the variety and value ofPemex products and should eventuaLl2r raisc the average net return on Pemex'stotal assets, the future of the Pemex organization would still dependbasically on its integrated petroleum operation.

189. The mission feels particularly strongly that tn-is fact should guidecontinually the day-to-day investment and ecnenditure decisions of thePemex managers. As is brought out below, Pemex has long been chronicallyshort of nash . In thle past the pr_-nrnr-panninf nprOnes has not reflectecthis fundamental fact. Projects have been initiatec without financialnlnsq ton nassu-re t.heir onmp)let.iron_ Tn t.heo fsumming squeneze.n readiily pnost.-r~~~~~~~~~~~~~~. - r- - - - - - - - - - I 1_ponable items such as rnaintenarnce and drilling, and less readily postpon-able items such as bulk plants, have tended to he starved for cashr aS fundswere transferred to the larger projects. Tith large new petrochemicalsproVects now aouhti+ to get 1 nderway rand Ai,vnd-1f ar a of' cash

which are not yet provided for (over 70 percent of the recorninended ex-Tendr1it.in-P.' nVP fpor new projects, t.his pattenrn ounlr! hornbnome -much mornpronounced. If it does, the prospects of Pemexls basic petroleum opera-tions could becoA e compromiese. The missionls favorale judgr:ent aboutthe petrochemicals program is premised on the development of a financialplan that will ensure that the petrochemils progam, aheadif the nlanned private investments to process these prooucts are to berealized, Qan,6 t Ve pctrOl um program, which m.ust gc ahead. Pemexis se rdv ice

as an integrated petroleum company are to grow in line with Yiexico's needs,can both proceed .uith reaonbl prset fc,.leino ce-e

.'A.LQQ CAIJ . UA I. '.C-CLL.L~ jJ JtU' U.n LJJ.V UU1I~J2.tU ±JI qZ_U11J1UO U UL V Wl a J-UU

on. Thve m.ss"ns de4tail-ed coirun,ents 4on th -a relmnso teStchemicals program as it evolved by early in 1963, are set forth in Annex r.

T, pren'ig Utih .LLnL aw,praisa stud in mos instances isfavorable. The mission recommends the postponement of a number of projects

because of timing, and technical and imarket consideration, but it feelsthat on the whole tne program should go ahead, provided that its financingcan be assured. Failur-e to complete the recommended program would detera whole complex of related investments in private facilities that wloulduse the Pe'.nex products and would set back severely the development of thechemicals and plastics industries in Mexico. In general the plants arewell located and near sources of sunply and export terminals. Surfacetransportation, uater, electricity and natural gas supplies are adequate.The plants appear to be well justified in terms of product demand prospectsand in terms of returns on the proposed ixivcstments, thoa.gh particularcare should be given to co-ordinating construction schedules so that thevarious interrelated parts of each complex, including the private industryprograms, can come on stream together. iiany o, the plants are so closelrtied together as stages in a process that they cannot be justified inde-pendently of each other.

191o During 1963 pro.ress in executing the petrochemicals progran wassomewhat slower than pro.jected by the mission. The revised 1964/65 pronramprepared by Pemex early in 1964 calls for very rapid acceleration and alevel of total exDenditures in the 2etrochemicals field for the period1963/65 of only slightly less than wias recommended by the mission in l9653

192. The lack of local currency for iinancinp the Penex miajor projectswas evident during 1963 in delavs in corm-letinL i.etrochemical pror citsaiready under construction, as well as in delays in initiating new projects.Onlv the aromaties nroiect in Minatitlan rreeivedi vev-r sbhsta,ntial financi2l=allocations. The revised prograrri now contemplated for 1964/65 is by andlarge consistent with the mission's 1963 reco.mmendations. iiowever- a nevproject providin- for tile expansion of ammonia capacity at Salar.anca hasbeen adderl to 1-h program .0iile the )miss1ionha notr lir3 r a nii-nortf.initirto review this project, the urgency ol increasing fertilizer capacity wasnoted in tl-.e rnmlsin'sQ 19G3 rviT c nt,ai.ned in Anne T Ther hav7 e 31sc

been changes in cost estim.ates, but these changes do not apnear to haveneen so substantial as to redure the projected returns on investment notedin Annex I.

193. As recommended by the mission, Pemex has decided to proceed with themanufacture of s,71thetin rubber,bythe e-mulsion pol,mierizatl of. *n tf.i

and styrene (SER). Arrangements have been concluded with orivute capital,Can3c?.i'n 1a nc.;eic-n, to undcr ake to project oared4uced, -zal Jna

- -C¼ 1a,aS~ ~J a ± U'.JUSXLC- - n vtan& PJt ~SJ s U Ufl 8l 4. L ~U. kV.C C? '0 C AL CZ

join-t venture (one-third share for each party). The plant will be corn-

Pemex funds should be comnitted to projects for which private invcstmentcan bDe encouraged, so tha I PFe.,;ex ma bc- able tuo concenltrate scarce financiatlresources as much as possible on tbe primary activ-ties which up to nowInc' VCG UGII I G vV G. U -L U t L11 -L U b -yu4J U c aUba±LUil- W1u t£lil

the mission noted increasing awareness by Pemex's management of the difficult-,nd sometli-i :.1eslnuperable problems 'M1ici arise t-4ien a uovenimiiiUnL enbcIt-r-Lplsu

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attemapts to establish and operate plants in the chemical and petrochemicalfield. T'he mission hopes that private interests, both national and foreign,with experience in the chemical and petrochemical field -sill also be in-formed of the more flexible attitude which appears to be emerging con-cerning the role of private interests in the development of even "firststage" transformation. U.hile Pemex has succeeded in developing some jointventures, e.g. a polyethylene plant withi ICI, a tetraetihyl load plant withLupont and the SBR plant, some of the projects iwihich were earlier believedto be promising for Joint ventures have not materialized in this form, COnthe other h;ind, the emission is encoura,jed to see that several projects ir..this field are going forwarc( under 100 percent private capital and thatsome of these privcte projects are also receiving financial support underthie line of credit arranged with the French Government. The mijsion isgratified to note that Pemex has decided to postpone construction of thebutadiene facility, as recommended b- the missionz

Financial Prclers 2nd Re-phasing^ of the Irogram

194. As noted in Annex I, Peinex h-s long experienced serious proolems infinancing it;s prog,ram. Feemex h.as equinrlent imported on suppliers' creditlying about unused and projects started but unfinished because of lack offunds. The real cost to Periex and also to the .iexican economy of financinigunder these conditions has been excessively and unnecessarily high,

195. In part, 'Pemex':s chronic cash problems have reflected the fact thataccess to long-term financing has not been available in the past. Thepattern cf financing investments has boen through1, short and medium-termborrowiing (typicailv less than three years) predominantly from abroad,such that Pemex is now saddled with 3 very heavy short-term debt whichcannot be enlarged further because of the disproportionately large amountof cash it already absorbs (12-13 percent of gross revenues in 1960/61 wereneeded to emortize debt).. The Ghase ihnhtt.-n Bank - lnsirrinre (rnun ten-year debt consolidation loan "cr US55C million in 1962 was the iirst loanof this duration ever obtained by Pe.ex. L,on=-berm Iinancing would. byextending the average maturity of n'errex's debts, relieve the cash problemconsiderablv.

196 The external financing nrranged with tlhe French Covernment is animportant step in this direction. It now appears that disbursements underthis credit will be '2rser t'han oAs projected in Annex IT If the 196)J re-vision of the Premex program. were to go foi-warcd at The pace projected inJannuarvy PemeY epnects disbursemerq nts under the 7-'rennh credits to total ovrerS65 million in 1964/65. Pemex also expects to incur aciditional creditsfrom suppliers on a mediim-term basis, asenvisaged ir Annex I, in imonint:

exceeding $550 million in 1964/)/65. `7hile the pattern of external financing,fnr thp Dpmex nror-rnm iq irtnrninc, it. ma stll behrortw1hileto +. Plonre

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somewzhat further the possibility of longer term external financing on apro;,ect bas-s for some part of the petrochemical and refinery pro-ran notincluded under tne French credit.

197 W4hile considerable progress has been mnade in arrangements for theexternaL financing of the petrochemical and refinery program, the veryserious problem of generating domestic financial resources remains0 1e l9is re-arded by Plemex as another year of financial crisis. In recognitionof this internal finoncial problem the Miexican Goverrment did authorize,early in 196h, the i2mnediate withdxcawal of hexolina and subsidized gasolinefrom taxis in the Mexico City market. This is expecterl to yield as much asPs. 100 million which can be applied to financing investment. This measureby itself is lot sufficient, however. On tlhe basis of the program analyzedby the miLsi.on early in 1963, we estimated t'hat additional cash generationof about Ps. 300 million a year -aas required. If the revised Pemex programwere to go forward as scheduled, additional dosiestic resources of aboutPs. 500 million a year would be requirecO in 1964/65, taking into accountrevised prospects for external. finiancing. The iMexican Government, as notiedin chapter 6, does intend to take addit-ional pricing measures which wouldlincrease the Pemex cash surplus. These measures u7ill not, however, betaken early enough in 1964 to generate more than Ps. 200 million in totoin 196[. As noted in Pnrex I, the mission has estimated on the basis ofdata supplied by Pemex that if a Ll subs dies were eliminated by Peraex, asmuch as Ps. 700 million a year in additional revenue could be obtained forthe investment program. This estimate excluded an increase in natural gasprices which -cns recently instituted by Pemex and tlhen suspended in reSponseto protests from industrial users.

198. The :iexican authorities are now considering the re-phasing of theinvce,stment nroarnm in 190)/65 that, will hp required in the light of thedecision to postpone until later in 1964 further financial meFsures. Ouripreliminary discussions in January Q96LJ sug:est th.at Penex invest.ment in1964 rmay halve to be cut from the proposer. level of about Ps. 2.8 millionto n 1 evel orf sli igAtTv norvr Ps 2 - miio li AUon .; tt sch q riit-bqc.k to beapplied mainly to the major projects part of the Pemex program, the petrc-chemmial andq refinery prongrams will av tor hbe r-phased. S-till, evenwith such a cut, expenditures on major projects would rise by over Ps. 5C00million From the 19i6A1 3 rnl levle 1960 .ill- e dlfficult, it should bemanageable. This is, of course, on the assumption that the ilexican Govern-ment proceed.s lanter. in the 4year to -r.nt . m a-th-Irty to lncr-eae produc+

prices and reduce the remaining subsidies. The re-phasing of the 1964 in-vestment proram Ih is required be o f n stringecy whileundesirable, need not lead to serious distortion and imbalances in thein.vestment program. If a severe Stringency zceC to continue into 1S6o5the dislocations in the program would be overwhelming, e.g. the delivery

stantial quantity in 1965 and construction expenditures on projects in-cludel1 I n le cdit e /U Lto-d4!I _LI Ireach-IJ hlg. -vl oin 195. I

local currency is Pnot gener--ted ir greater volume to heip finance con-struction in 1965, serious delays vould result. Thus the mission hopesthat the Mexican Government will iind it possible to authorize Pemex, assoon as possible, to eliminatc the discounts remaining to special groupsand to increase some product prices. If substantial measures are taxenduring 1964, it should be possible for Pemex to further increase itslevel of investment in 1965 to a level of perhaps ls. 2.5 billion, thusrecovering part ol the shortfall in i964. This may well require under-taking virtual_y all of the measures which have been suggested by Pemex,as surmiarized in Ainnex I. On this basis, inzestments in the Pemex programwould be scheduled as follows:

(millions of pesos)1962 1963 _ 1964 _'965 Total

iactual Prel. St+. eI9o37blc Pro7ected T963/

1,7 L7 1,646 2,354 2,3 4 6,534

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ELECIT-IC F0UER

199. Unlike many other countries, 1Mexico has not been plagued withchronic power shortages in its principal conmmunities. The power industryis old and well establishied and has provided rather well for the powier re-quirements of the economy, In the late 1930's, the structure of the in-dustry began to change as the Gcvernment entered what had hitherto beenentirely w-ithin the private sector. In 1937 the Government-owJned Comisi6nFederal de Electricidad (GFE) was created, and by 19•9 it had f.rovn to apoint where it owned and operated close to half the installed electricpower capacity of Piexico. The Government's interest in power was extendedfurther through the purchase in 1960 of lIexlight and Impulsora, the twolargest Drivate power comipanies in Melxlico. and since then most of the re-maining companies still in private hands. As miost of tle companies takenover byv the Governmen-t were absorbed by CFE, the ucwer sector now consistsof four major Government-owned companies: CFE, IE>3A (InJustrial El6ctri-ca de ,-;xico, S.A); Chapala; and liex-nht Of these, rFE nntI r nT dirert-

ly all but Mexlight. The Governiment has thus, as a matter of policy, be--come the owner of practicallythe entire electric po:er sector servingthe public, though there are still some 700 D-;' of captive plants servingprivate industryT and the Governm.ent-owvned petroleum. industry, wYhich re-present about one-fifth of the total installed caoacity in the country.

200. Throughout this period of cnanLe, the industry continucd to expand.However, because of the nature of tUhx. 1 ins tin 1-an c. d r. these

years, the pattern of expansion feLl somewhat out of balance: investment4 -A.,-_lag,-ed -Li d.lstribut-tiorn bat'L was very _L11Uense0 - xadlggneii aai

ty. As a result, there is now exuess generating capacity in some of theUEE systems and at the same timle an urgent need to acceerate the pace of'distribution system improvement and expansion to deliver to customers thelarger quantities of power being -enerated.

*0 ThAe uurr-ubineu 1963-65 V.UUda:! of. UiIe vcX.UULJs df:eni±u± WhiLLLI coIijJUL-

the public power sector, and T1;Iich is surmnarized below, would begin tocorrect this situation. The mission endorses the mnain directions of theprogram and recoirniends only that parts of it be delayed or slovwed forreasons which are discussed in Annex IlI ana sunmarized below.

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Public Investment in Electric Power

(millions of pesos)

1963-651960-62 MissionActual Agency Plans Recommendations

CFE: Facilities underconstruction 4,345 4,668 4,282

Frequency change - 271 24077447a 7739 47,22

=Z*'A 222 656 621

Chapala 75 73 73

Iiexlight 511 1,065 946

TOTAL 5;153 6,733 6,162

Investment i-n Generating Facilities

902. The major power invest-ments dl-ing 1963Ii5 will be made by OFE' tocomplete about 1.4 million kilowatts of new generating capacity now underco-nstruction, at 19 dilfferent loccalities t ugnou- the oWty and the

related transmission lines arid substations to deliver the pover from the:seplants tothe dis- - i+n mncnr nin4 TIn 7iT7 f' +of terecen+ growh in lroad

and the present estimates of its suture Erowth, CFE's progran of expandingplant capacity :.-ighV r.ore appropriatJ±y le 'L y have bleen bt-u4V over a -longerperiod of time. During 1964 and 1965, the 1,500 !ilr of firm capacity I/ i.nthie C.entral System,, wh'i-chomprse abokutU L40 V.Len ofWit; iepoesector, will be about 35 percent in excess of estimated demand. There-sll a±So be cons-iderable fe 4li1 capac -y f1 a few of the silaler

systems. It should however be possible, by deleting some plants in theprogram and by allowing Tor the operation of lags in project executionnormally experienced,to reduce exoenditures as shown in the above table.

The total installed capacity that would be available with the largestsingle generating uInit out of operation,

±o The ± onlyne- start l-n `he -enerat-n- prog;ram is the llalpaso powerplant, which CFE proposes to install at the Raudales dam at ;!alpaso onthle Grijalva River in s-outheast Mlexico, now scheduled ior completiontowiard the end of 1964. The plant would be designed for 720 IN of capac-ity (four 180 !1n1i units) to be installed in 1967 and 1968. The Nialpasoplant w.ould replace other generating plants originally planned for thePuebla - Vera Cruz - .Iinatitl-An system and w-ill sup-sly energy to theCentral an-d 14ichoacan systems after interconnection.

204. The ilalpaso planit would represent a lower cost alternative to theunits which it is scheduled to replace and therefore appears to be welljustified. As thle Lialpaso dam was built -rinmarily to control floodingof the Grijalva River in the lowlands of the Isthmus of -ehaantepec andthereby make possible the eventual developmpnt and settlement of -The entireriver basin (the Chontalpa area), the mission does not feel tlat the costof the dam should be counted as part of the cost of the power plant forpurposes of its justification and has not so counted it. it would havebeen preferable to be able to analyze the power plant and the dan togetheras parts of a multipurpose project. -fcwever, since the dam is now; about80 percent completed, the fact that the rplanning of the Chonitalpa develop-ment is still in too preliminary a stage to male possible an analysis ofthe dam with the power plant should not prejudice the merits of the powerdevelopment itself. Accordingly, on the assu,mDtion that the dam will becom,:leted as scheduled, the mission has included the ilalpaso nower plantin the reconuaended program.

205. The key feature of all futu:re power plamning in lexico, and inparticular For the justiFication of t,he Mqlnalso nlant. is the l3nificaLionof frecquencies in .lexico's :-aajor power systems. All the systems nowvonperat at ;2 fremnenn-v0 of 60 cvrY1 e except t,he Certral vystem qprvinw

-± - - - - - - - - I -- -- -- - - - 7 - - - - - - - - I - --- - I _ - --

the Mexico City area which operates a-t 50 cycles. As the Cen-ral Systemaccou nts for about 40 percent o all energy sales in the country and itsload is jcrowing, the cost to Mexico of not bein.g able to create a fullyintegrated nationa' npow;er svqterm th-t ;4oulr1d enable all generating f2ci l-ities to b,e used to the- maximmn in the most efficient manner would increaserXroC,rrw ~i ve i^ +cip nhepower see1or T,ter to ocrntnp ±.c to devel_pn s ti:wo

separate instead of one interconnected network of generating plants.

206. The problemn of frequency unification has been actively stucdiedby CFE in conjunction with we-- and A-, ---4 consuetants. cd uo-

recommendations of these consultants, the CIFE 1963-65 program now in--c- cla nr,r a- +r,iio tov begi the +mnfic,-4- 4atin a-.arocess 'The. ,.,.issio4 n agreesa

that frequency unification is vital for the more rational future develop-menlt of p 1,er J.IM 'llexILco a.i'u ilas, tUl.ere-Lore, included it iUn thel 11ZLtV11L,U.e"

program. It will maximize the flexibility and thereby the econorny of the_ _ _ S o ~~~~~~n .- -~ 1- - - -- - _I1n n a1_ I -- I_ -

power Eystemr arni wll pelrmita b the Ut,lizatiULUon Uof al theU 1yUro energy

available in an average year Tith a resultant saving inl fael.

_ 82 -

Investmlentb ii- DJistlibion r aciltes

207. During the past several ,ears the major investment in pow.er nasbeen in expanding generating capacity. It is now becoming increasinglyevident that in rnany locations, and particularly in the Centrai (iHiex-light) area, distribution systems are inadequate and system losses areexceeding econo:mcal limits. Increased emphasis is accordingly now beinggiven to bettering and expanding distribution facilities. Some 30 percentof the 1963-65 power program is for investment in distribution systems,compared with lDss than 20 percent during 1960-62.

208. The mission was not able to examine the bases on which the plansfor the Hlexlight system or for the many small distribution systems through-out the country wiere drawn up. houever, in terms of present load fore-casts and systerm losses, its preliminary judgment is that th-e icropcsedrate of increase in expenditure over recent le-vels seem.s rather high: Theagency plans ior 1963-e,5 would about double the 1960-62 level of expendi-ture.

209. To prevent the possibility of overinvestment in distribution fora period, similar to what happened earlier in generating facilities, themission recommends that the entire distribution expansion and bettermentprog;ram of the ,exican power sector be studied. and that until theresults of this re-view are available investment in distribution be kentto the minimum level necessary to rovide connections for new customersand keeD system losses from increasinoa further. This mini.num cannot bedefined precisely, but pending the results of Lhe stuly the mission re-commends that the distribution exnAndi--tures of the T~-'SA anrd v1exlight1963-65 programs be reduced by 25 percent.

Financing the Program

210. Substantial financing will be required to carry out the recoinmendednronrram =

211.* At present, the power sector, though goaer.nment-orned consists of

three finarcially independent entities: CFE, TIESA, and Nlexlight. Thefi;ntr-inl g,ivnAvnota r,f +hI. Qnn+,vy +I-nii t nnnnrle on +n>- i I +i ;+T7 n r'h .1ir

E &X_sa__ ---- SO v_ 5v --- F-- -- -n the a i ,vJ S|t

these groups separately to generate suffficient earnings and cash to helpfinance its in,vestU.m,ent ,ro. and -voi p,,rovide an Aar,einte credit.+orthn'¾V

base for new borrowing to complete the financing of its prograa. Ha;-ever, -4-he-se .,ttie are -o as inepndntfianialyasthi f---)la.V , UlUQ; ~ & 4U 4 UC1O L 1-~. ± LM U

separateness would suggest. For w!ith any given retail rate level, -theearnings and cash p.,ositions of each or the entaties is affected by howbulk power costs are allocated among them, i.e., by the particular bulkpower rates charged by CPE. In vhs LivUr-cJUUiU"U,' the bepdlate fin,an-cial conditions and prospects of these enterprises cannot be consideredwithout reference to the consolidated financial picture of the powersector as a whole.

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212. Ahe missionexuni`ned tvhe Cfinanc:-i 'situatio an prsrct -f the.- .P

power onter^pises ..nd of the powce sector as a whole, and feels that totna1cead equate,y L1iV 0U1 ,U1LU1uUU pJ±06171d1j U111 coJsolida tUdedUU kcarI-ilU'n of

the sector need to be raised and the allocation of these earnings amonCthe en,terprises rniF.ht need to be changed.

213, The present ievel of retail rates a.d taxes on electricity doesnot provide a reasonable re -urn on the capital invested in the electricpower sector and is, therefore, suesicazing power users. Tne amount ofthe subsidy rnay be open to question and should be confirmed by furtherstudy of the asset values on which an econoi.iic rate of return calculationshould most appropriately be based. .iowever, the mission's calc-ulationssuggest t1nat, for the secto; as a whole, t'he present return is abcut6,6 percent -.nd thus is w.ell belor; the 3 to 9 percent level which mightbe considered the minimLum acceptable estimate of the cost oi capital insexico. The rate level is also too low to make DossTble a reasonable

internal F-eaeration o'f funds to finance investi.,ents. At opresent the poi-ersector is able to generate from earnings and the po,er consumption tax,after debt service, less than 15 percent of the fnrnds needed for its in-vestment program.

214. The Governrnent's financial contribution to the nower sector couldbe increased in place of increasing rates oj- taxes on pouer consumptioncThe missicn feels, however, that as long as budgetai.y savings in Ilexicoremain loa;, users of public services should as far as possible pay forthe full cost of these services so as to provide a reasonable return oncapital and to generate from earnings a reasonable proportion of thefinancina reciuired for the investment pErogram.

215. Provisionallv. the mission fecls that a moderate increase now, inrevenues could, with the external borrowing for the -power sector indicatedin chapter 8j reolve the bahsic financig problem of the ncojer se^ctor >inclraise the a-verage return on assets to-Lard a more reasonnbl4 level.1.Jithin such a situation. the inrt-ien'ar short-term financing Droblem re-sulting from the peaking of debt in particular years would be much easierto resslve. As long as no ehanes were to be effected in tlhe retail ratestructure, the form of the increase could equally wel1 be a uniform per-cen+age increase in retail rates or in the power consumption ta4- 'Themission recommends that until a more thorough analysis (an be made ofthe long-term. earnings and cash position of the noer sector, especiallyafter the present period of peak generation investment is completed, andof the asset base for a^A--ra-;-nrg the nrl,ciiuac-y ofr the- prset atelvl

the initial change be made in the power consumption tax rather than inthei rctai_-llrts

oru An er, Tss ve burde.n on Ythle 1 , ,-,4

r,C, +dhtiur hsro ;mais +A a in tNe

put an excessive burden on the distribution companies, A change in the

- 84 -

sel'>ng ric of I'- ------ froar-T. 4v to l'e 'i;ht ;.as intodce ------

in '9654 and should go some way toward solving the problem. Further studyshoulcd be Eiven to this problem to ens-ure that the bulk power chlargesare r,made as equitable as possible.

217, because the various enterprises comprising the pow-yer sector arepeculiarly interdependent in resSpect Doth OI tne ocwer operations andtheir finances, the mission urgently recomnends that a comoetent author-ity be established to deal wiith the vanrious matters raised above -- ire-quency unification, distr-ibution T,rogram study, bulk and retail powerrate study -- which cut across enter9rise lines and affect the powjersector as a whole. Such an authority could ensure that future policydecisions affecting the power sector be made in terms of the needs andprospects of the sector as a whole and not in terms of the particularand perhaps temporary situation of just one of its constituent enter-prises.

AGRICULTU'RE

218, One of the great strengths of t'ne '1exdcan economy, esDecially inthe light of its very rapid rate oi' population growth, has Iain in thefairly balanced development that has taken place over the years in itsagricultural and industrial sectors, even though in the more recent pericdagriculture mayr have been lagging. in expanding domestic agriculture hasbeer able to iiake MeIexico virtually self-sufficient in fcodstuffs as wellas to extend the 1jase for important a-ricaltural exports, and provide agrowing if still limited market for domestic mannfactures. Uver the lonn.term, production of' foodstuffs for intez nal consur.ip:tion, has progressedas much as comnmercial farminig for e-cport. The overall agricultural renoo:dprovides good grounds for expecting that agriculture can conrt.nue to growsa`'isfactorily, given appropriate initiatives from. the public sectoi in theshape of continued investments in expanded irrig,tion Trorks, in improvedtransport facilities, in increased development credits and in mucl intensi-fied research and cxperimentation and extension activities in the manyclimatalogically distinct areas of Ilexico in which agricultural activitiesare carried out.

219. The mnssion examired the various aspects of Nexico's agriculturalplans, and its findings on eachi are sum-arized belou. But before enteringinto the ssecifics of these plans, one -eneral comment should be made. Themission shares the concern that it encourtered among mary -exican official.sto the effect tha. official initiatives iL a-riciiltural development have beenunbalanced and uncoordiinated in Lhe rast. Tilough agricultural developmientis the fruit of many comvlex comolementarv investments -- in civil vorkslike irrigation and drainage, in couipment and machinery, and in improvedknowledge and skills of farmrers -- tie nrimnrv e-iiihasis of agri culturalinvestment i. the past has been in civil wiorks. The full potential bene-fit-s nf >n-r of' thqese works- have still ts' 'o rea3ized hccause fam deve_lop-ment credit, research, experiinentation and extcnsion services have lot beenavailable in adequate amount. (See Annex TI).

220. Tn vie-w of the imnnr-,nce of amrinultume fqor hoth the overalleconomy and thie balance of pa7aments, th-e mission cannot recommend tooct-rronr-Iv t.hnt. -,h-i i-h-l . in jip ic'i nricudltfral develonnpnt Pf fotbe correcLed as rapidly as possible. The recommended investment program,wTh'ich includes nn inr7rs in aricultu.ii,l in7m 4etmnf.t evenn beyon presemnt

official plans, reflects this conclusion. But the imbalance cannot becorrected just y adjusting the omposition of the public in es -nent progrrm.The operating budgets of agricultural a-encies slhould also be increasedto provide ormore adequate, reSeerch and --+extension or.Perhaps rilost

important, procedures for uortnir.uing consultation among agencies working4-1-l - -- ? -'4,-1 e ,-A - -,-4,-..1, n, -b TJT4-4 L...- .in the agiculluua"l feld-~, and -;'art4i-CUlal1y among h lns-iso

.LLI U~i~ ~ '~U.L ~ ~ 4 ~ C~L'. V U i -L -L W'L~ U~ I '~ ~ £C ,

Hydraulic Resources and of ;'griculture and the agricultuural credit institu-tions, snould Ise improved so th l. key emnt of' teofcaj'' develUPr,Ienli

- 86 -

efforts in agrictulture can be rore closely geored at the planning otageand imriemented wJith better balance than heretofore.

Irrigation

221. Some 70,000 hectares of newly irrigated landi will become avail-able annually during 1963-65 as a result of official works now underway.This pace of new irrigation exlpansior. is lower than in the earlier post-war years (113,600 hectares per year during 19A7-52 and 128,000 hectaresper year during :L953-58) but substantially hIgher than in recent years(42, 500hectares per year during 1959-62). W1n,hen to this is added the fruitsof works to complete or rehabilitate annually some 200Q000 hectares inexisting irrigation systems during 1963-65, irri-ation works promise tocontribute proportionately even more to A-lexican agricultural expansionin the next few years than they have done in the past.

222. ThIis large and still increasirg role of' irrigation in 7lexic-nagriculture reflects a long-established consensus in M4exico that scarcityof water being the main problem, irri;3tion is the main roe-d to an expand-ing agriculture, to achieve the food production goals imposed by Mexico'srapid growth of' population and the industrial and export crop productiontargets which the accelerated groTTth of the Mexican economy requires.

223. The mission feels thau the irrigation program has been and is agood one, but that its role in developing hexicots agriculture should beredefined. Great possibilities for increasing the productivity of 1Nexicanagriculture exist but have not been exploited. The mission feels that con-centrated effort to inclrease productivity on the presently irligatedlands could produce large ircreases in oubput, of'ten socner and at a lessercost than through additional irrigation -orks. Good rcsu'ts have already,been achieved in the several Dro-rams irn this directioil whiich haverecently beguni to get underway. h much increased eraphasis Oi w;Jell-conceivedand directed orozrams of farm credit, research and extersion services is.therefore, ur,,ently recommended to improve the balance in t'he azricultura:Ldevelopment effort and to raise the productivity of M;exican agriculture.

22L. Except for a small progr=m of -water cor:trol structures ( pro-grama de bordeo), carried out by the iIinistry of Agriculture to enablesurfare riin-o2f water to he used for I ivestockj for drirking rpurposesand for irrigation wqhEn the water supply is adequate, all public irriga-tion wJorks are~ carried outi+ hr t.he M inistry o~f Hyraul_o Resouroe 4nfol

major programs:

(1) The "Large Irrigation Program", wJhich is to developmajor4 rv * X co-Jtrol struures4,each Lrovi5 forthe irrigation of more than 5,000 hectares of land;

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(2) The "Small Irrigation 1Program", which is to developprojects of less thn,n 5,000 hectares. Currently 200to 300 such projects are being developed each year;

(3) The programs of the reginnal "Commissions"I which areresponsible for the development and operation of the,ater resources as vell as other aspects of t'neir res-pective regions;

(4) The "Irrigation Rehabilitation Program", which is tocomplete and relhabilitabe inadequa'te existing irriga-tion and draLnag:e systems in established irrigationdistricts.

225. Very large increases in the invfestment aspeccs of: these programsare now under way. From a 0.9 billion pesos level ir 162, irrigationinvestments increased to Ps. 1.6 Lillion in i'j63. The agenc- t s planscontemplate further, although smaller, increases in 1964 arnd 1965. HoT-ever, in view of the overall financial situation of the Federal Governmentand delays in oDreparing proJects, it is likely thc,t actulal investment irirrigation in l964 and 1965 may reriain at about the levol of 1963. Vir-tually all of the 1964 expenditures are for works wrlhose construction isalread,r wel:L-advanced. In 1965, the prolortion of expenditures on newstarts is larger and new financing will have to be found for these; how-ever, -ost of the exoenditures plarnnod for 196h and 19`5 are for completingworks already well under Tay.

226. The completion of major irrigation -orks now under construction,on which larre suins hnve alreadv bhsn snrnt- T0o111d hp. in itself a nornellingreason for the Government of Mc:xico to complete its nresent program.Roughly v h:o-thirds of the total expecHdirp r nrncvse_ for the ne:. thrpeyears would !all in this category. HIowTever, the mission has not recom-mendedpr +.he irrlgat,hinn prg-, nn these= Cgrounds.l Then iinrd-,rlvidua prniect

in the nrogoam were reviewed in su-ch detail as the availabiliby of projectre-oert.P and nt.rhnr hnformt.ion npernit:t.ed anrd, !-bhijst. tn rrotfirmati on _hr

more detailed final studies, were found for the most part to be reasonablygood.

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Public Investment in Irrication(millions of pesos)

Actual 1Agency Plans1962 1963 1964-1965

Large Irrigation 378 687 1,24.6Small Irrigation 69 78 191Irrigation Behabilitation 154 225 349Grijalva Commission 244 401 832Fuerte Commission 13 38 98Papaloapan Commission 12 24 70Lerma Plan - - 131Balsas Commission 1 54 391Other Programs 18 123 253

T o t a 1 889 1,630 3,561

227. The bulk of the 1963/65 irrication investnment grogram is for largeirrigation works. 1Hlost of the projects in this category are in advancedstages of construction, but merit completion independently oi' this f_ct.Annex II comments on the principal components of this program.

228. The irrigation and drainage programs of the regional comTissionsrepresent the next largest categorv in tie investment pro gran.. Atnnex IIalso comments on the individual regional programs. Th)e largest of theseprograms, accounting for one-fourth of the total 196h/65 nrogramrL is bythe Gri.jalva Commission. This orogram includes completior of the iaipasoDamrr and the initiation of the first phase in the develonment of the350,000 hectare Grijalva River basin (the Chontalpa area) in the South-east of Mexico whaich is wide!I.y regarded as Ainots prncrinpl remninirngnew f'rontier for settlement and ecolomic development. This is a sparselysettilpd qrea of' impnress-ve nrariculturil notrentAial if thrt- wp. qre,]Pnt1drainage and flood control. The first phase of the Chontalpa developmentis t1ii fnnooo hectare "IE1 Limon"' nroject ±or whirh Interj-,.terican Develop-ment bank financing was obtained in June 1963.

229. Detailed plans for the full Chontalpa development progr2m have notyet been made. The ElLimon project i_ tie "pilot" project for tine region.The mission agrees with the em-iphasis that is being givren to the develop-ment of the Chontalp3 areas and with the concept 1 as a ioproject for the larger area. In view of the absence in this region ofany 'y- J-'-; t J.Ji-1 experimeI,a -4 4ork 4i1- 4J4. proosed o n 'te

89 -

which include crops not previously growm in the area, the organizationalprobleimis of resettlement and new settlement, and the dearth of agriculturaltechnicians needed if the high yields expected from this area are to berealized, the inission was of the opinion that the "pilot" El Limon projectshould have been initiated on a more modest and flexible scale than is nowcontemplated. However, in view oL the decision that has been made to carryout the original larger plan, the mission would emphasize the need forhaving its implementation very closet;' supervised at each phase. This willbe necessary to ensure the success of the project itself, which is a largeland settlement project in its own riFht with many unknowns to be resolved,and also to ensure that the 1- Limon experience will be systematically ex-plored and accumulated to guide subsequent stages of the Chontalpa develop-ment, whose realization will represent a huah commitment of M'iexican resourcesin the years ahead. The mission woulc not reco.-mend going ahead with thelarger Chontalpa development before the lessons to be learned from the StLimon settlement have been identified and their significance evaluated.

230. In size, the third category of the uro,7ram is irrigation rehabilitla-tion. The mission agrees fully -?ith the emphasis that has recently beengiven to the rehabilitation of established irri2ation districts. Becauseof the haste to expand tlhe irrigated area in the past, many works, thouglhwell-designed and constructed, were constructed to minimum standards, andlessential canal linings, permanent structures, drainage networks, weredeferred and maintenance was neglected. The need to complete existingworks and make up arrears of maintenance has now become urgent. The pro-duc-tivitv of sonrne ars haq hIetn serious1y rediuedi hbv the progrPessivedeterioration of the works and tne consecuent deterioration of soils.I'Jithouit. rehTnhlitntion anri completion of the drnino sqytPrms this rde-terioration will continue and some lands go out of production altogether.

231. Of the various irrigation programs, the rehabilitation program isprobablr- t-he most productivre in terms of retur10en on-' imr#=,7i-ir.cmnt, s .the

- r-_-- -- -_d th

most certain to realize the expected benefi-t since the areas involved are!settle oand havep sub-.`qt,nitin+1 on-farmr in-yeqnpnt 1 alresdv made. The mission

therefore feels thAt still further attention to the rehabilitation aspect.of the irrigation progra. is wTarranted. Detailrd projects plans are avail-able only for the rehabilitation program already under -ay. The missionrecoegnizes +t-ha special pr- lm ,--ist in - rig.' on di+r- ct h

irrigated areas, though settled, have to be readjusted to available waterspliesl cand consolidated to _.-prov, e-fi-cienc and reduce oper%atng nr,C,+c

But because the preparation of such projects is unusually complicated and

resources and coordination of their use with available surface water, thisaddiJLti Jonal preparatory work sh"oul be don "Iw to_ avoi 4he _-4 4 sibili-Qy4144dU~.'4~ JJ1d. V1

1JidUJ±, V) l ~L~JLU Ue UUII ~ I.L%UV, 4AJ dYVV±U U1iU VJU0D±U_L_L± IA,

that the reliabilitation program may be forced to pause for an e.-tendedperio nUcel ithe pr UJtu ni I1UGV Und1e Wday dar 1coiletJJdUtU.

- 90 -

232. The small irrigation program, generally in areas where larger projectscannot be developed, was found by the mission to be based on good projectsplanning work which is wjell ahead of t'le developnent work, though co-ordina-tion with tihe "Bordeo"l programa of the iAinistry o Ahgriculture could be im-proved. In all aspects of its irrigation .,orks, the Government intends inthe fuiture to follow the policy of| ch.arging water users for the full costsof the works as well as for the costs of operation and maintenance. Thischange in ncast practi ce has been applied so far only in the irrigationdistricts being rehabilitated. The mission considers that charges forrecovery oi' costs from oeneficiaries of irrig.tion Tiaters supplied byGovernment projects is desirable and encourages rmore effective use of thewater. The mission therefore su-gests that the Governmienti continue itsefforts to 'rring its improved policies for water charges into generalapplication.

233. Althou=h the mission in general egrees with the irrigation programof the Secretariat of Hydraulic Resources it is likely that investment i1964 will be slightly below, the agencvs o.ogoram and tie 1"1,rzher increeseprojected for 1965 may 'be difficult to realize in view of the delays thathave already,r occurred in preparation of ulans and in maaking arrangementsfor external financial assistance,

Agriculture

234. Though irrigation works represent the bulk of Mviexicols public in-vestment exoenditures for acricu'ltire. there are 2 variety of other agri-cultural programs which, though quaiftitatively small coripared with irriga-tion, are iTonrrtant in tFeir reperrtive fields. For convenience thej havebeen grouped together under the heading "agriculture' 0 T'he grouping in-cluldes all aoricul .turnl pro;rams otnner t.Ja.n irrigation for wh-ich publicinvestment expenditures are planned.

235. Thle mnission's coinments about each of the,e various programs for1963-65 are set forth in MAnnvex II. Froadrly, the, endorse the n1 ns o.f tn

various agencies now- wiorking in the Lield uf agr:culture to increase thei:r

0>4 rA-, - ,M"1. OU AL' ~ LOA I 4O.b Lh . iLU4n*~~~

of stor.i.e facilities of the Ulovernment-owned dNational St rage Comoany; tileenl-gFem.ert and acceller3tion of +I^e ".i'iityo .rc'uestpor ebordeo, primarily for water storage facilities to provide for human and11irVe.Stockl cons,m-.ption in arid and smi-arid-A regions; ar;d ehe int4ensifica

tion cf what is now a nominal tick extermination program to cover a wholenew region oF the co-ltry. sThwese ti.u LIee -progrprnis account for Uwo-thi U dLsLUof the total recommended pro-ram. The other smaller programs would, among0 uuI :e, ;. WI±LL1I~03 1IZ:.LJ_ ±II11Ut;iiLJ_Y U1 A1 .1L U1 L dll.) -I1qJL uVVel11t Of ilIUCh. nlU eUsoil and water conservation services to control erosion; accelerate theincrease in artif'u.cial dnelU±,inati±LU o n facilties1U to0 upg±aUd the getU1cUL

- 91 -

quality of 'iexico's large and growing cattle population; accelerate the im-provement of the forestry service; and accelerate the improvement in thegrowing, processing and distribution of the maguey piant and its productsto raise producers' incomes and stabilize the soil in the large and popu-.lous maguey-groming area near iexico City, which has no other source ofincome because nothing else of value will grow there.

237. The "bordeo" program of the Ministry of Agriculture is long-establishedand well-run. However, threre have been cases in the past where projects havebeen poorly co-ordinated with minor irri4ation works of the Ministry ofHydraulic Resources and produced competing demands for water. The expan-sion of this program appears to be justified, but working liaison betweenthe two ministries concerned with water resource development should beinproved.

238. The storage facilities program is being carried out by the NationalStorage Company which -:as established in 1936 as a financially autonomousgovernment entity. The company is run efficiently and at a profit. Theprogram would expand and improve existing warehouse and silo facilitieslocated in more than 250 production and consumption centers throughout thecountry, and build new warehouses, new refrigerated storage facilities, andportable warehouses to reduce post-harvest peak demands for transport. Theplanned increase in storage facilities appears reasonable.

239. Tick control is well-established in iMlexico. Cattle ticks have beaneradicated in over 40 million hectares, mainly in the north. But lnrgeareas of inf-estation still remain. The recommended program would intensifytick eradication in a new area covering 15 sbates. The benefits of the pro-gram, which 1:ould complete the eradication of ticks in the m9jor cattleareas of tlle country, would be impressive. The total program would costPs. 300 million and would prevent losses to the livestock industry fromlosses in weight, reductions in milk supply, and deaths which are estimat-adto aPproximately Ps. 2,000 million a year.

2)40. Taken together, these v&rious pro,rams would raise agricultural in-vestments to Ps. 1.1 billion level Lor 1963-65, as shown in the followinztable.

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Recommended Public Lilvestments in Agriculture, 1963-65kmiiliors of pesos)

fYinistry of AgricuJ tire

Programa de bordeo 150Soil and .rater conservation 90Tick control 240iAiscellaneous programs 100

Other agencies

Patronato de liaguey 80Fruit development program 60Almacenes Nacional de Deposito S.A, (AIMSLA) 360Agrarian Affairs 30iviiscellaneous programs 20

T o t a 1 1,130

This total is someuhat larger than the a,-ricultural investments recorLmendedfor the 1962 -64 Im-;mediate Action PI an, principally because of the muchlarger tick control -proram now bein, proposed. Put both programs coin-cide in their emiphlasis on the need for a sharm increase in this categoryof investments.

2i1i. The mission was not able to study in detail the rese2rch. extensionand other agricultural service programs which do noJG appear in the invest-ment nrogr=.n- However. it W2s ahbLe to nl-serve in tnto f-i elc tlhat they rIonot begin to serve m.ore than a fraction of the _ile:.ican 'ariierz that theyshould serve. The quality of the prof'essional staff and thie facilitiesthat are available are good, but their numbers are grossly inadequate.The mission feels rjqrticuI1_lsr stronnlv th.it the sunnorting services forliexican agriculture shlould be strengthened if farmers are to benefit full-rfrom the various recormnenAeA in-vestment programs. v'ery snstvntial in-creases in agricultural productivity could be realized thereby. To imple-ment this recoqnendation will require ai*s.htstanIta irease in budgetary

allocations for current expenditures in agriculture. The original 1962-6i.nlnn rpnnMrnmArAprI +.Ih=+. +.hp lQ(I'A 'hiiAorp-. n-^ +Jo inp !.,a Aln-rir-iit.ivrpo ho

increased by 65 percent over 1962; the actual 1963 allocation was belowthL,t of 1962.

91i.0 Inom iniravailable no of +]n er.d of 1963Z +Iiatstn,+gicl

tural investmient (other tlhan in irrigation) had been somewhat lower in 1963thlan in 1962 ow ,ing-' rr,~ain to a slow=down i-n storag c cntruction. Tt alsoseems that no substantial increase can be expected in 1964. Thus, theobviorsl berneficial effectsor' the agricult ral investment programs willbe delayed.

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MA MTTT' A TTnT9 ATC

o l of X 1 4A r_ T_=____ -w1 A 5 4 . 4_ _ A n4 _ C 4). l.u; .lutL, u a >.Z ;wv r1.Lcul ;Ais jl±1)uui 7k)C/ J4 ltL lu r

public investment in the manufacturing sector of about Ps. 250 milliona year. The 1963 mission did not obtain a complete updated program,although Nacional Financiera collected for the use of the mission a setof figures or the investment plans of a group of individual public enter--prises in the manufacturing sector for the period 1963/65. Total invest.-ment projected by these enterprises averaged almost Ps. 450 million a yearcompared with the Ps. 250 million contemplated in the Plan. Ihile the1963 mission was not able to make a detailed study of each of the majorenterprises covered by Nacional Financiora, it recommended that programsof the individual enterprises be reviewed carefully with an eyw tocutting the total back to the levels of thu Plan. This recommendationappeared to the mission to be justified in the light of the fcllowingconsiderations:

(1) Some parts of the projects appeared to be unnecessaryin view of the fact that private investors were pre-pared to go ahead in a particular field on an adequatescale.

(2) In other instances tne project did not have a specialeconomic impertance justifying the allocation of publicfunds.

244. The mission recognizes that it is not easy in practice to applythese two criteria in a completely objective manner. 'Thile the M4exicanGovernmient generally accepts the thesis that the public sector shouldundertake investments in critical branches of manufacturing primarilyin instances where the private sector does not appear to be ready to goahead in a timely fashion, it is not easy to obtain information on theprivate sector's plans in the detail required for making careful judg-ments in this field. Moreover. the private sector mav be willing toproceed in certain instances only on the basis of special conditionswhich may annear to he excessive to nublic aiithorities.

29)J1 The (vernrnment has gone nhena in I963 wth investments in the

manufacturing field on a substantially greater scale thanrecormmended bythe mission and appears to he eormnitted in 196I to an even higher 1evel1of investment.

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Manufacturing: Investinent in Government Enterprises,D_e1l;_-n-ry Est-+e - 196 CaIndA as Pl ~Arby Enterprises (Jan.1964) for 1964 & 1965

(in mililions of pesos)

Planned by Enterprise

Prel.Est. Tota:L1963 1964 1965 1963-65

Altos Hornos de Me!xico 75 346 245 666

ZincamexS S.A. 129 30 - 209

Compania Industrial de Atenquique 30 50 58 138

Fabricas ce Papel Tuxtepec - 54 - 54

Industria Nacional Quimico Farmaceutica 10 69 - 79

Ingenic Plan de Ayala 199 - - 199

Other sugar refineries 32 94 20 146

Diasel Nacional (DINA) 10 14 15 39

Operadora Textil - 23 - 23

Ayotla Textil 2 17 5 24

Siderurgica Nacional _ 34 _ 34

Tetraetilo de Plomo 1/ 60 - 60

Miscellaneous 47 5 7 72

Total 534 887 350 1,743

1/ Pemex share in .joint venture with Dupont.

- 95 -

Tt a--ears t-h at investm.ent in nmar.PUfa nuring n 1963-ATckK may hrav exrceeded~r

500 million pesos, with over 300 million pesos having been spent on two

known to the mission in 1963. The first of these projects involves theconstlruct i on of11 a z ic srC0- elter for t-1h1e proucio of 4 ' - V30,000 tons ofrefined zinc. While the mission has rno reason to question that the ex-pelniuL tuJures on tIs11 j.JJect--L -. es 4-JILat4 toJ JUA cost -ve 200 mi'1i14n pesos

may be a high priority investment for the Mexican ezonomy as a whole,iLU -Ls no' clear thIdA,at pLV Uvt ca;ivaUld WdS UII-WL.lJ,g UU rakev Ulth ess3etiU.Lc '

investments in this sector. The largest single project included bothin tIhe 1963FOy program and in nthe Latest revIsion is the expansloun oAltos Hornos de Mexico, the Government-owned steel plant. Over 75 mil-lion pesos were spent in 1963 and aimost 60u miiion pesos additionallyis to be spent in the next two years. The program of Altos Hornos con-templates a general program of improvemnrts5 including an increase insteel capacity from 700,000 tD 1,500,000 tons a yt.ar. The Governmentis fully committed to proceed with this program which in itself wILLinvolve a higher level of investment in the manufacturing sector than wascontemplated by the 1963 mission for the manufacturing sector as a wholc.Here again it se.ms clear that a substantial expansion of crude steeland filmishing capacity is a high priority investment for the IeYicanGovernment. It is not clear that all of the investment contemplated inthe Altos Hornos program is really essential in the idght of what theprivate sector is able and willing to do in steel.

246. A third project examined briefly by the 1963 mission was a pulpand paper project of Fabri^as de Papel Tuxtepece. In this instance theMexican Government decided against proceeding with an expenditure of318 million pesos for new installations using bagasse as raw miaterialbecause of a private project then under consideration, and will onlyexpand some of its present facilities. This private project is apparentlYgoing forward,

247. The .est of the projects included in the revised 1964/65 plans ofthe enterprises consist primarily of the expansion and improvement ofexisting enterprises. Those projects cover a fairly wide field, inclu-ding toxtiles, paper, chemicals, lumber, trucks, sugar refineries andfertilizers. Most of the investments are in existing plants, the ex-pansion of which might be justified in view of the general ecpansion ofdemand in that particular branch. In this sense it cannot be arguedthat the Governmental enterprises in the manufacturing field are likelyto dominate any of these sectors. In most instances private industry iscontinuing to expand and the Governmentts share in the total productionis unlikely to increase. Tn some instannes; sugar refineries for ex-ample, matters of social policy relating to cane growers are involved.The Mexican authorities are uinlikely to apnprove, in full, the programsproposed by the enterprises in all of these various fields. Moreover,some delavs are likely to occur in the exmcuti-on of the programs which

- 96 -

have already been authorized. TJhile the 1964 mission was unable to studytne projects in any detaii, it is safe to assume that exnenditures willnot exceed 725 million pesos in the manufacturing sector in 1964 and thisis probably an absolute maximuam.

248. The mission urges that the Mexdcan Government review with greatercare the investments proposed for 1964 and 1965. First priority shouldbe given to those parts of projects where expansion plans are alreadyunderway and where additional investment in an existing government enter-prise appears to be substantially more economical than an investment innew private projects. Where the private sector is willing to go aheadin new fields the Government should be willing to hold back. In thisconnection the mission was informed that DINA, the Government-otmed com-pany in the automobile field, is proposing to enter into the full scaleproduction of Renault cars and certain types of trucks and buses. Themission, while recognizing that DINA is a going concern whose rehabili-tation or sale became the Government's responsibility, questions whether,given the decision to promote private production of automobiles, it isadvisable for the Government to remain in this field. Similarly, themission questions whether the Government should proceed with the invest-ments proposed for Operadora Textil and Industria Nacional QuimicaFarmaceutica. As to investment in Altos Hornos the mission stronglyrecommends a reappraisal of proposed expansion plans with a view to attain-ing the best possible coordination with planned private investment in thesteel industry.

2h9. Given the apparent wiillingness of the nrivate sector to extendinvestment in manufacturing, including the many new lines of productionwhich the Ilexican Government wants to encom'raveP it should be possihIefor Government investment in the manufacturing sector to be maintainedin 196)4 at the 1963 lmev1 of Ps. 500 million anfi to he rediiced to 350million pesos in 1965.

- 97 -

rOUS ii'iu

250. In recognition of the very large needs for housing in Mexico,public housing activity has increased substantially in the last few years,investment in 1962 having reached over Ps. 500 million. The ImmediateActlon Plan contemplated public investmrent in housing at the level ofabout one billion pesos per year, or approximately seven percent of thepublic investment program for 1962-6L4, compared with the average ofabout two percent durirg 1956-59 and 2.6 percent in 1961.

251. The needs for hou3ing are enormous, both in terms of the unsatis-fied desires of new families beirAg formed each year and in terms ufreplacing existing slums, shacks and decadent unsanitary and overcrowdeddwellings. While there is no readily observable Limit to the amour.t ofuseful and needed housing construction if unlirdt,d resources wera avail.-able, the Mexican Government realizes that there iS a general shortage ofresources and that there are many high priority der,ands on these resourceswhich must be taken into account in deciding on the magnitude of thehousing program. The Mexican Government has made a .Judgment as to theamount of the resources that may be allocated by the public sector forhousing; this judgment is reflected in the Immadiate Action Plan. The1963 mission was disposed to accept this overall figure of about Ps. 1billion por voar with only minor adiustments to put the data in the con-text of the 1963/65 plan and to take into account the current circum-stances of the maior agencies Some reorientation in the progran wassuggested, with greater em,phasis being placed on serving a large nuraberof families at a lower investment cost ner family- Tn additionr themission felt that the interest rates used for determining rents mightwall be increased so as to reduce or eliminnte the subsJih eolemients ofprograms which at best will cover a very limited group in the population.

252. In view of the overall short-fall in financial resources in 1963and 196h and of the actual develnopmnfn off the housing programs, it doesnot appear feasible as of January 1964 to increase housing oxpendituresat the rate co.tem.platI+ in +he TIrmomiate Action Plan or to i.plementthe changes in program orientation suggested by the mission. The follow-ing ta+ble Sa ,n,r -,eaS t-he re,col-Mn,.davo 4-4 of h4 19 -'O63 mis4-on a.d -14-catesthe adjustments that are required in order to arrive at a realistic fore-cast of w,hat 4_ir.-o.m .en, is 1hQLk' el to be i V., ts houslng se^to

-, 98 -

ESTL4ATLD PUBL,IC SECTOR INVLSTPN E i' H OUSG, B'Y AGTi T E', 1958

(In milliorsof pesos)

Actual or Authorized Amounts Ir:1meaJat7 Action Plan Revlsed F:F~.7bLgur3i)3Revised FTges Tq6T47Prel

1958 1959 1,6 11 1062 96 l c162 19 63 1?614 9L63 19614 1965 c st. 19641 19651963

Real Investment 97 121 439 259 522 C 1028 1079 69O 1L090 :l030 850 669 730 7G0

I]'.SS 2 6 65 1231 64 50 271 354 239 200 200 ;200 L43 50ISSST:E l/ l/ 1/ ]/ 67? 714 94 86 80 90 100 1ll 3.00

B.NHOP 1/ '/ 26 82 300C 320 2140 2140 350 250 20 367 350

II 8.14 v 4 2 75; 82 914 176 210 135 140 170 210 30 50

B"eder.al District 3/ 3/ 3/ 3/ 10 120 L140 150 280 280 280 614 150

s4Iinor Agercies 4/ I/ 1/ I/ 1, 1/ 57 141 140 1O i0o LI0 30 5/ 30

1/ Amounts not available.2/ See text; the 1962 actual investment data of' the Secretariat of the kresidencv have been reduced bv 100 million

pesos for "state enterprises" (EBINH pr'ncipally) on t,he understanding that such an ario-ant was carried over for-actual payment in the first days of 1963.

3/ 'Very small,4/ 'Pensiones Militares, National Institute of Mexican Youths Juntas FederaLes de ilejoras Materi.ales; Patrimonio

Indigena Mfeziquital, Ferrocarriles del Pacifico, and Pemex.

5/ 'Pensiones Iiilitares only is included.

Sources: Secretaria de la Presidencia, Eanco de IMexico, data cf individual agencies, and, estimates of the IBRD mission..__~~~~~~~~~~~~~~~~~~~~~~~~~9-

- 99 -.

253. The program of the 1lMSS would have been substant-ially incrasedin the Immediate Action Plan. This program consists primarily of rela-tively high cost renta' housi;ng units combined with rmedical centers andschools. The 1963 mission felt that the IMSS investment in housingshould notl exceeU rs. 100 million per year unl3ss threre is a recrientation of the program towards more investment in low cost houses for salewithout subsidy, mainly to low income families covered by social secur-ity. If the program were modified in this way, we fe3l it would beapproprlate t o incrnase rM2S housing investment to about Ps. 200 milliona year. In fact, fISS has not gone ahead with a greatly expanded pro-gram in the housing field but instead has apparently given priority toinvestments in the health and social service field. Housing investmentin 9063 has continued at the previous level. On the basis of theJanuary 1964 discussions with the Mexican Governiment the mission doesnot expect housirg expenditures by IMSS to exceed Ps. 50 million toPs. 100 million per year in 196L and 1965.

254. The main program of the Banco Nacional Hipotecario is the finan-cing of the Nonoalco project. This is a very large high cost project inMexico City which has a very substantial subsidy element in it by virtueof the fact that land was taksen on at much les3 than its commercial.value and that artificially-low interest rates were used in calculatingrentalsQ The very high investment shown in 1964 for the Banco NacionalHipotecario is for comp'eoting the Nonoalco project. The mission wouldrecommend that new Drojects of this type be given a much lower priority.

255. Instead of high cost apartment dwellings of the Noroalco type,the mission would recommend more e-mphasis on the type of housing programbeing carried out by tne Instituto Nacional de la Vivienda for the lower-middle income group and by the Federal District Government for low-incomegroupse The average cost of the latter houses is less than onae-fourthof the average cost of the units in the Nonoalco project. The FederalDistrict houses are mainly for sale on terms of 10-15 years althoughsome units are for rent; the beneficiaries are working people, with afirst preference being given to low salaried employees of the FederalDistrict. Early in 1963 the mission accepted a very rapid sten-up inthe expenditures by the Federal District on the housing program but dueto technical delays actual expenditurss in 1963 -were substantially belourthe levels projected by the District Government earlier in the year.The Mexican authorities do not expect investment expenditures i-n 196),by the Federal District in the housing sector to exceed Ps. 150 million.This is more or less the level contemplated in the mme-diate Action Plan.

256. The prograI of investment for housing recomTmended by the mnssionin 1963 was to provide a total of 30,000-35,000 housing units annuallyover a threec year periord. This meant more than tripling the number ofdwclling units completed by the public sector in the preceding threeyears but fell consieral short of meeting the estimated anrual

- 100 -

construction sLhortE-f-all. of 70,00 n Ifact,ti rg..dain 1963/64 is unlikely to provide even as much as 30,000-35,000 unitsuo'u uecause proUgrari1 ±I±Vtj,-rItJriLI WL.Ll ue aU a sojIew[IaU lUwer lVe-.l anU

because of the somewhat larger proportion of more expensive unitsincluded Ln the total. However, the ilexican Government, conscious ofthe fact that even an expanded public housing program cannot do thewhole job, has proposed a broad program to finance private housingthrouth the banking system and with the assistance of external loans.Tnese proposals have been included in the recommended program for theprivate sector as described in Chapter 5.

- 101 -

WAT--R, SEE m AGE A11D 1{;ALTK

257. In the fields of water sunnlv. sneinrage and nublic health; thetasks faced by the l'exican authorities are formidable. The present availa-bilitv of thof servirie is ve limiim rlte r Lar e.ffort. nd funris areneeded just to keep pace -Tith the needs of Mexicols expanding population,rartiAriiuTrlv in rrb.pn centers:. in the fie-l-d of iirb2n water sT4pnr .I4exioohzSnct even managed to keep up rith demands. Still larger effort and fundswill be neededt ed ohe eviteind1 Or Wf t.hp facl-titie to 2 parzp-

tibly larger sha.re of the Mexican population than at present.

258. The 1963-65 programs will not bring about a fundamental chanae inthe presen+t nationaql niflhlr h_n1±.h fp,;1i+.ipC T rhc nnorinrl i nshort, the needs are too great, and the financial and human resources andthe availability of co-pleted -lans too limi+ed to effect quick a'd -a - alchange. The=: woulrd mark an imnortant step in this direction, however. Theprogram,s, wicn wr,ou-ld rep-,r---- 4- snarp increasc in cxpend-iturs over recentlevels, would lar7ely resolve Aexico City',Ts large and critical water and

other parts of the countrv. Two-thirds of the expendit-ures would be forjb-an .%ater suHp-.0jn swra; fc-iLl-it i r 41A 41 .s an_ -h rest for me ia 7aiiUl.LJCLI ~CiL~C 'U~JL.L. CL U VLt;t_U 1±LU- LI Ui UIR I U U LU II 1CL ±L;_±

ties, malaria eradication and rural water supnlies,

259. The iIission endorses these nrocrams in most respects. The Mission t sUtUai.LLed cm, mU-LntS1 on U.:e p[U-1C- cts u a ur LuruI frhi AnnIIex Vi ariu bU1r Uu-r-IaizeU

in the paragraphs which follcw-

- 102 -

Public Investmen' in 'Jater Supply and Public Health

(millions of pesos)

1960-62 1963-65

Actual Aveney i4issionPrograms Recommendatiorns

Urban ,Watcr Supplyand. sewer-ape

IJ LLU Ld.. 4~. Lt c I.UJL 4L U UNlatui o nal. lTa er Supp-ly 5 88Federal District Water

O u ppl Pi 530 wL,

:ederal District Seweraae 78-5 785IN-1-± I-rea 'MaLev zuppIY 4u

N-Z-T Area Sewerage - 256Monterrey W'ater and Sewierage 27 146 140

1,330 2,795 2,637

Other ProgramsMedical and1'elfare Facilities l,22.5 1,2CO 1,20OMTalaria Eradication 25l ,, 33 123Rural 1ater Surply 4L7 ± ' 300 bJValley of Mexico -11

1,524 2,134 1.693

TOTAL 2,5• ,909 14932

1/ 1960 estLmated

Urban W.Jater Supnly and Sewerage

26o. Mexico's urban water supnly and sewerage plans fall into threernain groups: (i) the group of related projects for the Mexico City area,which accotint for more than half of the total reconmmended expenditures forwater and sewerage, (ii) the program of the Ministry of Hydraulic Resourcesfor facilities in small urhan centers around th-ie country, and (iii) theMonterrey City pro,ram.

261. There are; unfortunately, no plans for the larger independonturban cente.rs whicqn are not administered by the 1Prinistry of HydraulicResources and so are not included in its National Water Supply Program.

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As a group these urban centers could probablv find the funds for bheirsystems, but they lack the t0chnical canacitv to draw up 'he reauisiteexpansion plans and the Miinistry of Hiydrauilic Resources is inadequatelyst;affed to provide trcnnical nssistence to them in addition to prepxarirgplans for its ownll pro7ram. Tnis ga-p in coverage of the present urban waterand sewera7e pro-ram is perhaps its most serious deficiency and renoresentsa potentially serious obstacle to Mexiccts continued orderly in&ustrialand commercial development. The mission wrould recommend strongly that t'heMinistry ol Hydraulic Resources be charged with the responsibility ofassisting these urban communities in preparing detailed studies and designsfor the imnrovement and expansion of their water and sewerage faciliticsand that it be provided with che necessarr fands and staff to do thisproperly.

The M4exico City Area Program

262. i4exico City is Mexico's majoi' urban center and the principal centerof industry and commerce in the country, WITith o-rer 5 million inhabitants,it is also one of the -great metronolitan cen-ters of the world. The need toimprove its water supplyr and sewerage wouldl be urepnt simply because of thesize and imtportance of this urban complex, Bu-t tbe ur,-encer of the needreflects more than this. Mexico Gity is p,rhars the largest city in th!ewor-ld to be sunplied exclusively byv g-round vater. tcr vears it has beendrawing on its ground water supplies more rapidly dhan their rate of normalrecharge. Municinal and private uses of water now numn water o'2t of thesoil iunder the city at a rate of P cubic meters per second, more than threetimes faster than the estimated riormal recharge of 2.5 cubic meters persecond. This overpumpiig has extracted water from the upper clay complexof the soil and caused the soil to consolidnte annd to srettle As a resiut,the entire metrono-iolitan area nes been sinking, The presenv rate of sinki.-,whi ch vari.es TTith the 4enth anc ot.her ohlrrateristios of thpe underIrinn(I ciaylayers, is some?thiirg 'ike 10 cri. per year. Some parts of the FederalDistrict. hJre sPttlei as much aS SiX m.eters over the years.

263. T'rhi si " i -in has 'nad a iov o-f f'.r4lir, cnrl cr

It has made necessarv constant anrl costly repairs to tne cityvs under-roul.dsewape collection system. t.o l+s.street, si and1 its. hui lcn7s endthe construction of extra foundations for new structures, These variouscosts are cturrentl estima+ed to amoont to some 115 I rmillion pos per yeari

It has also made necessary severe restrictions on the use of existing ,ellsand a prohibitio h n onJ thez et+.abls chment of new.T.T STe I a ecans-,e the water

supply is deficient evren with overpumping, new residential and industrialreal +n+ e ate .eeloprAnt ha=nrn .,nA 4t bek sevrelyr restricte-+A T+ Inha raised

the cost of pumping by lowering the water table and has also raised the

tt-n4. The water supl t'UtSc. w i Cn th is UJtj siniangi It -JOUL 1 d

tap new and more distant water fields to enable ti-e city's growqing waterneeds- to bLe satisfledA tW.4o1 v U rtlher resort tou t orU!, I in The Iber.efltsU-

just in terms of eliminating the expenditures covered by settlement wouldprresent, a retu oU r tiS 1a IL eLrcen- t on- the r.on;os-dns t

265. The program to relieve the presentlyr overburdened sewerage systemwould provide similarlyr impressive benefits. The city's present seweragesystem has not prown in pace with the need for ne disc1)ar-e facilities.The present principal discharge facility, the Gran Canal, was originallydesigned for a -ravity drainage of 17.5 cubic meters per second but nowmust carry peak storm loads of up to 100 cubic meters per second. lioreovrer,the ground around it is also sinking and retaining walls must continuallybe raised. 'he resultant load on the canal's sides now approaches thesoil's resistance to shear and poses a real danger of collapse. VWere theCanal to collapse, a large area of do-ntown Mexico City would be flooded bya meter or more of se-wage and storm water. The resultant property damagew!ould be enormous. Expenditures on the retaining walls and on operationand maintenance have been increasing vearl-r because of the increasing comn-plexity of Lt-ie extra ilaintenanice works. The new discharge facilitiesnronosed would replace the CGrnn Canal with 'rrvitv isncharr- via tlnnrels.

266. These nronosed iuater and spiMer __ vnrkn foTr lvTpxir rri tv- are clenrl-jus,ified, and reafry to be imnplemented wJithout delay. 'T'hey could be imiprovedin onp immnnctnnt. rPqnr-rt._ hrmTPvarer At. nrp.2oPn+. t.hr-: r nrrnuvidp nrnlrr for

facilities within the Federal District. The water and sewerage facilitiespnlnnned for the NMZ-T area, - la"ryr, i'¾ 1industr-l comn1pe nri-jent to

the Federal District hut in the State of 'lexico, are nolT n'anned as separate

be reserved for use within the st.ate, and, as sew-age, must bhe kept from

267.. The basic M=Z=T project is a - -on; -the N-Z-T and the Federal District Area should be treated for planningpl Foces as the ,- sigl metropolin mr -it + a-I-k they, ar, wthu-t-- rr - to.

political boundaries. The Federal District has a major water main whlchleads ri,ht u p +A Ile St+ te li and coulA re d i e xtended +o supply th'e

N-Z-'r area. It would be much nlore economical to excend ti-is line ratherthar. create a ne. well fielId for t 1 U ULd-^tionl supHjy -LItia'-LY

envisaged. The sewerage systems could also be economicall,y integrated.Tiie Li4ssilon 1Mitz,'LU IJUI1CtI Ultt the 1'4t- c: arLea l utp ela[tI,Uedu UU

provide for connection with tne Federal District's facilities. T'he estimatedsavings are reflected in the reduced amiounts sho.- for the N-Z-T projectsin the Missionts recormended program. Subject to this change. the Missionen lOoreses the Fede Dera Uis iS trLi ar.dI th eIA UI L)rLelf I I I vJL Ut dLIL t f te weragIct

facilities.

268.. There is anotner group of nronosed works, totalling 181 millionfor I963-65, w--hich includes all water resource proJects withln the Valleyof Mexico but outside the bederal District and the N-Z-T area, to controlflash floods and storm water runoflf, remove se-wage anu utilize it wherefeasible in irrigation, etc. The mission was not able to obtain any studiesfor these projects and has, thereTore, not included them in the recommendedprogram. Information obtained early in 1964 indicates that the FederalDistrict Program wzas carried out during 1963 according to schedule, witn

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expenditures being somewhat higher than projected. The Federal Districtwas prepared, early in 196h, to accelerate expenditures along the linesoutlined in Annex VI but had not yet been authori7ed to proceed vithits program at the accelerated rate, pending a decision as to the avail-ability of financial resources-

National l-later Supply Program

269. Apart from the independent systems, rmostly in the large cities,of which Mexico City and i.onterrey are the cutstanding examplcs, urbanwater supply is principally the responsibility of the Ministry of HydraulicResources. The Ministry operates 624 systems throughout the country. Thetask faced by the ilinistry in improving and extending these systems is alarge one. Over 500 of the water systeas now in service need extensiveimprovement. The majority of these systems are also in need of sewers tcdischarge soiled water. In addition, the unsatisfied demand for watersupply facilities is growinc. Pined water is available only to about one-third of Mexico's urban dwellers, and their numbers are increasing fasterthan it has been possible to add new connections.

270. The proposed programa would imDlement tne 1963-65 part of a 10-yearwater supply program that was drawn up to bring potable water and sewerageby 1971 to 70 percent of the urban population outside the Federal Districtand 50 percent of the rural population living in centers of 500 inhabitantsor more. The olan recognizes that it will not be feasible within this periodto extend sewerage facilities Io a comparable proportion of the populationor to bring either water or seweragre facilities in adequate amount to themajority of the rural ponulation who livc in villages with fewer than 500inhabitants.

271. The m.i cnon fnonrd the MiListry's projec-t planning to be crgiod hutwould make two comments on the prograr. The first, which relates to waterrates and the financi ngof the progrrny is discussed in the section onfinancing below. The second relates to the lMinistry's emnliasis in itsprogram on ostablishing new wnter systems rather t.1nn PrtWnding existingones. The political and human pressure for piped water in communitieswhere none now exists is undoubtedly persistent and strong, and thelinistry's reponse in emphasizing new systems is understandable. However,thbs is the expensive approach to bringi6 ~water facilitie to alr

proportion of the population. As it is usually cheaper to add a givenni-lTaber of connect"ions to an exSting wa4ter sysftM 4han to construc a

new system of equivalent capacity, a given budget could serve many more

ones. The public health hazards of inadequate and contaminated water sup-plies is 'so muchi larger in t1he -largeur -j poulall-onL centers:-L-, whichL are theIL~

very centers requiring extension works, than in the smaller and lessdenselly popuL'-ated centeTs reulin MIew syt..Tersso hrlrU~L~~&V LLL0U~ZLi U~iI J. Z;LJULLL -LU'1 LIUW O L.DU. ID ±LL:: I ±LLO~O-L1" Ulite.l t-.LUL_t

endorses the Ministry's program to bring piped water to stillunservTedl groups wi thlUIU Ua i I dLcat1 aI a LAaU moUre mIhUaUis b givten

- 1o6 -

to dig th-is -by ex n established -- - 4ter--1 sysem tha- is no-} -

case. The mission understands that the Ministry has felt that constitu-4. _n J 'I Z. L : |___ _- _ : A : .nD , - I . - - - .- --JD LUlida± dan1U P b.L-Xa-Ud± jJ LL Id LtXULns AId. ± 4 1iLUXVt:; U ±±.L U uII U DLu .L0 U1, U[pul

proper administrative and financial reforms in the cities now beingser-veu 'uan in new 5y5ruram. zrtn hias prepared a prugrail of revi liLa-tion and expansion of existing systems administered by it, but this pro-gram has not received official support allegedly because of these con-stitutional and political limitations. Until these problems are solved,rNexicos national iater supply program will continue to be unbalancedaIreliminary information on progress made by SRH during 1963 indicatesthat the program was stepped up considerably along the lines envisagedin Annex VI. Expenditures on this program are expected to contirue ata level of about Ps. '00 million a year in 1964 with a further increasein 1965 finances permitting.

Monterrey Water and Sewerage Program

272. Apart from the Federal District, the City of Nionterrey (700,000inhabitants and a major industrial center) has the only independent urbanwater and seworage system with adequate technical planning and design.Only about two-thirds of the population are presently served by the waterand sewerage systems. Where it is available, water service is goode. Butpast investments in the expansion of the water supply have barely kept uFwith dGmand in the served area; the system itself has not been able to beexpanded. The sewerage system is badly overloaded. The improvement andfurther expansion of water and sewerage facilities appears to be essen-tial for the continued industrial growth of Monterrey.

273. The 1963-65 program would provide for a variety of works to en-large the city's present supplv of water and its sewerage system. Itwould also provide for studies for the next phases of water supplyexpansion. As the prolects in sight to increase the supply of waterbeyond 1965 indicate that Monterrc:y faces the almost certain prospect ofsharply rising water costs, the mission would stress the importance ofmlnimizing present water losses and utilizing to the maximum nearbysources of water before more distant and expensive sources are tapped.For the longer term plan, complete studies should be made to indicatethe most economie.l- soluftion to the nrohlem of expnqnding the eitv's watersupplies.

Financing the Programs

27h. The provision of water supply and sewerage services is similar tothe provis ion of electric pow n.er and other utility servinces in that someeffort is usually made to recover from the user all or part of the costnf nrnvid;ing tfhPese servinesz +.to him. In Mexico,ri by - nA large t.he nprilc.s

charged for these services have not covered their costs and, in cases,V '. LJLI.L. V %J. '.S'.A Lfl.L%e, barely covered the ^ost& of justJ opera.ting thesystems IJUS6 tdequateJ ~

- 107 -

w-ater r-ate-s an fa-r to .P-grlmn muchl of fhe sho-rtage and +the pdel

of these services throughout the country. With the many demands forothr fcilt1l-S 4 f-a1 1 -in ,a n t*he ,vihl ir' h-ii,Ac, ++c "Ialfn1m +,v fii-riq f()-other facili+is fall or. thepublic budgets, gefri +a - --forncw water services have been severely limited. There appears to be14++e1 - rio-c+ fo,^" ..w,,-- ou+ the remue.,,ed progrm f

budgetary funds alone. The impcrtance of adequate rates is even moreir. port4ant4 fPor $he wdpndn 'Ltes whose f4i.an ci;al s.9;tu a tio n-d

£Yj L, U1U 1 ~J L41 I U&IIU.1I O OUU10 3 lAj~a ~ 0L ~ V..C

ability to borrow for their water programs depends directly on theadequacy o'L Whe ra'te s te can cha±-I.eU ±dLpraing, agnies- " ad-

mit that water rates are presently too low.

275. For the 624 services administered by the Ministry of HydraulicResources, revenues from wator charges barely cover casih operatiug costs.The connections in these systems are not even all metered. Tb improvethe financial situation of this group of systems wnich it administers,the Ministry is considering having uniform water rates establishedwithin each state, at levels wnich woula provice surpluses ior new watersupply investments within the state. The mission approves of the princi-ple of generating more investment funds for these systems througn moreadequate user charges but does not agree with the form in which this isto be done. water prices should reflect real costs directly, so thatintensive water users can be encouraged by suitable rate differentialsto locate in water cheap rather than high-cost localities. The missionfeels that uniform state-wide rates would conceal differences in thereal cost of supplying water to different localities and could encourageseriously uneconomic location patterrs.

276. The Monterrey water and sewerage system, which was a privatecompany before 19h5, continues to manage its finances efficiently. Itis well run and financially solvent. Its water rates were increased bysome 50 percent early in 1962. Even with the present higher rates, how-ever, the investment expenditures in prospect will require much morefunds than can be generated from earnings, and possibly even more thancould also be borrowed on the basis of present earnings prospects. Themission recommends that the studies to be carried out on the long-terminvestment program include a complete study of the adequacy of thepresent level and structure of rates in the light of the prospectivegrowth in water demand by different categories of water users in the area.

277. The most important water rate problom is in Mexico City. The sys-tem is the largest in the country, and the investments proposed willrequire very large amounts of funds. Though water rates were increasedsubstantially in 1960, the 1962 accounts showed only a small cash sur-plus, and a large earnings deficit. Revenues could be increased throughthe various improvements in operating procedures noted in Annex VI, butno fundamental correction of this situation seems likely without a verylargo increase in rates. A measure of the increase needed is that evena doubling of present revenues would only raise earnings to the eouiva-lent of a nominal four percent return on the present depreciated invest-ment in the system.

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278. Tne finances of the Federal District fortunately provide tempor-arily an ample margin for financing the Mexico City area water and sewer.-age program from budgetary funds and from new borrowing, so that theurgently needed works need not await a complete correction of the presenlrate problem, which might be difficult to effect immediately. But themission would recommend that a full study of the present rate structureand of the demand for water by different categories of water users beinitiated immediately, and that the appropriate amendment to the leveland structure of water rates be effected as soon as possible thereafter.

Other Programs

279. Annex VI sets forth the mission's comments on the programs formedical facilities, rural water supplies, and malaria eradication. Formedical facilities, for which there is no plan beyond the current budgetyear but in which expenditures seum to have been on the whole well-directed by the agencies concerned, the mission recommends that expendi-tures not be raised beyond the 1963 level until coordination betweenthe various agencies is established and planning in the Ministry of Healthand Wdelfare is improved. According tc preliminary estimates for 1963, itappears that investment in medical and welfare facilities by IMSS was atthe 1962 level of about Ps. 300 million a year, although authorizationswere substantially higher. With the actual pace of construction beingdetermined by financial facilities, the Mexican authorities do not expectithe construction of medical facilities by IMSS in 1964 and 1965 to excrmedPs. 300 million annuallv. For rural water sunulius. since the financialand administrative arrangements for the 1963-65 plan do not appear to betoo well-founded and there is a serious question aonut the feasibilitvof raising the pace of investment in this field as sharply as is proposecd,the mission recormends that expenditures be cohntinune at. crrent level suntil the program can be more clearly and appropriately defined. Fortho aai erdcain program,n +.)-.a rlsiozn st.nnr-ronl endrlseszp the. npro-gramn as proposed. It would help complete the malaria eradication cam-paign which w2S initiated in 1956 and was to have been comnplted h 193Qbut which for a variety of factors did not completely eliminate all.malarial n-festation. TT+I +h - pockIe+s - e1 4,,-1-4 ed,+a

already cleared may become infested again, negating all the gains of thef tI -r j -r - -rn

4,r -, vlA al ,-n,A 4 4n ma 4- ---m -- r - -4.- _ 4l +

deO fvelo pment 4and landA cLement in x,gLra ofth country .O,J A,u ULJ. C;.

development and land settlement in large areas of the country.

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EDUCATION

280. Tne Mexican Government has made very substantial advances, despitcthe lack of forward long-term integral plans in educational development,in expanding the country's educational facilities over tne last ten years,particularly at the primary level. The Immediate Action Plan providedfor further advances at the primary level as part of an fl-year primaryeducatiorn program initiated in 1960 and also envisaged a step-up in theconstruction of technical and vocational secondary schools, with someadditional general secondary schools. Very little attention was paidin the Plan to higher education, with the exception of the NationalPolytechnic Institute

281. Since the Plan was prepared agencies operating in the educationfield have revised cost estimates on certain programs, have recommendeda step-up in the pace of activity of certain programs, and in someinstances have adopted completely new prograns not envisaged in thc Plan.The mission has examined the proposals contained in the Plan and therecommendations put forward more recently by thu Ministry of Educationand the Administrative Committee for Federal School Construction. Themission recommends investment expenditures in the educational field atapproximately the level of the Plan, with somewhat greater emphasis oiiinvestment in secondary education and somewhat less on primary education.The prozram recommended bv the mission is about Mex$100 per vear belowthe total resulting from a summation of the figures in the Plan, asmodified bv the latest pronosals submitted by the agencies. as shown inthe following table:

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1963-65 __

Agency MissionProject Plans a/ Reconmendation,s

Primarv Education

1) Rehabilitation of existing primarvschools. 107 105.

2) Restoration of 2L Tnternados dePrimera Ensenanza. 19.5 19,5

3) Pural Drimnnry nlasnroermn andteachers' homes. 253,2 187.2

LI TTrhnn nri.mnrynrclasroc: ]*3: 13UcEil 9 7

Secondary Educatio

1 vr n <2 fi r ni' L _?.oz eannnAov.,_r

education to receive 20,000addltir.al sdentsper year. 10 1.

2) Expansion and rehabilitation ofnommaal schools. . 35

3) New construction - rural and urbannormail-s. SChOlsLS *2

4) Technological Institutes or Technical,Iindustrial QC CommIHrcial. s1chUoo'ls -complete and eauip, 58.5 58.5

5) Special PrograrT 25 TechnicalSecondary Schools per yoar. 262,5 26265

6) Nationai. vlytechnic InstituteTechnical Secondary level. 3, 5,

7) i3 Ruial and U'rban Vocat30onaLTraining Centers per yaar. 288. 37.4

8) Technical Teacher Training Center. 1i5 15.

783.5 548.5

Federal District Program b/ 90.0 90.0

Higher Education

National Poilytechnic institute 112. 112.National University 77.5 77.5

lb9,5$ -189,5

To_al. 75,7 L271a! Based on Plan de Accion Immediata, Program of Oomite Administrador d&1

Programa Faderal de Contruccion de Escuelas, and other informationsupplied by Mexican Government,

b/, Not studied.

282. The rmissionr did not have an noportunity to obtain more up to dateinformation on the plans in the education field on the occasion of itsvisit in January 196X. Surary information on. the progress of exGpendi-tures in this sector during 1963 would suggest, however, that the programof construction for Hr.L school.s awas progressinga a Ia,A,, more rapldrate than was envisaged in the Mexican Government*s own 11-year planand th1at the1 VIsv-uto of secoL)aU--y schols1U_; -was Laggxl."e VU111PUPd witvhi

the mission?s recommended program. The 11-year program provided for theannual construction ofl 2,000 - 3,000 new classrooms in rural areas, aswdll as a substantial number of teacherst homes in order to build about276 rural classrooms by 1971. From the beginning in 1960 tho primaryeducation program in rural areas has been carried on at the upper levelof the annual range of the 2!-year plan, with the result that as of 1963school construction was two years ahead of schedule. The agency programfor 1963-65 - basea on a continuation of a rate of construction of 3,000classrooms a year - if continued, will Icad to an even earlier completionof the goals established in the 11-year progrwii. Thu mission:s reconm-endation for investment in these rural classrooms is to cut back the rateof construc-tion to 2,000 classrooms a year, which is consistent with thegoal of the 11-year program. With respect to urban primary classrooms;the mission would maintair. a construction rate of 1,000 classrooms a yoarin line with the targets of the ll-year program. The remainder of theprimary education p-rogram consists of the improvement and rehabilitationof existing facilities, which merirts a high priority.

283. The mission was greatly impressed with the 11-year plan of primaryeducation. It is well-conceived and its implementation well organiz-djwith the result that it is moving forward smoothly with an appropriatebalance between teacher preparation and school construction. The missionwould like to omphasize, however, that the primary education program iscommitting the country to very substantial increases in current expendi-tures and that in cetting the overall goals for primary education thcprogram must be coordinated with what thu Government fecls it is able todo in increasing taxation. Until tho tax system is changed to assurethe growth of revenue at a rate substantially in excess of nationalincome, it would be imprudent to continue the accelerated schedule ofprimary school construction. i4ioreover, given the limited rcsourcesthat are available for the education sector, it would be wise to attachhigher priority to educational facilities at the secondary level, partic-ularly in vocational and technical fields.

28L. Agency plans in the secondary education field for the neriod 1963-65envisage a very substantial expansion in technical and vocational fields.In contrast with nrimarvr education. where a sten-un in exoansion hasalready taken place, the expansion in the secondary field is only beginn-ing to ace.eerate= yhreover_ the seeond2ry school progra m has not pro-jected forward in terms of a long-term plan, taking into =ccount theroper preparation of' teachers and the e d Thich %Yill result

from the primary program. The mission urgently recommends the accelera-tion of planning~~~' at tle secondS.ay .' lvel.J

- 112

285. -sg of the proposed LsveS+sn e- edtue n h ecna+C~tJ~J* T.. L '-4. IJL J A-I. J.U V~A 511I[.L ..t~J CX CIh4_ ..1±1 Jf.Lt- O_.JA.C L± - J

field, particularly those in technical and vocational education, are of1o; h _ _;VI. 'l-:h _; cs-; __ ; _ - - -. - -.. -5 ., -_n o - .. -A WA + P-h r£L..L911 p 4r 1.I-_ 4i *VY ±Llj~ IIL4.OD4.¼WJL LO jF'O.± U4'~. 4.OC..J .LJ 441.I ~~.L~ V.lh VL L~ .'.-J .. '

of the secondary school curriculua introduced in 1960, which gives toM0ex^ico even in its general secondary education. an appropr- ate balancebetween genoral courses and practical courses. The pJan to expandgenteral seconudar-y ed-ucation to receive 20,000 additional studen ts Peryear is sound, although the mission would recommend the diversion ofsome funds from new construction to exisTing schools in order to proviLemore workshops and laboratories to implement the nfiw curriculum. Theprogram for investment in construction of normal schools would completea program already underway.

286. There are two major new programs propo3ed by the agencies insecondary technical and vocational education. Tile first is a specialprogram for constructing 25 technical secondary schools a year at anannual cost of about Mex$88 million. The second is a program for con-structing 30 rural and urban vocational training centers. The technicalsecondary schools are an essential element of the curricular reform whichwas commernted upon favorably above and should be the main element in thelong-term development of Mexico's secondary education. Together with thEgeneral secondary sch2ols they comprise a flexible system for both termirn-al and continuing education which will allow for a balanced developmenton wall-conceived lines consistent with the country's social and economicdevelopment. The major iimitiLg factor at the moment is teacher availa-bility. The mission has not been able to obtain sufficient data to deter-mine whether staffing of the 75 technical secondary schools proposed isassured, but on the assumption that the staffir.g problem can be solved,accepts the proposed program. The mission does r-commend an increase ofinvestment in the teacher training center begun with assistance fromUNESCO so as to quadruple its capacity.

287. The program for rural and urban vocational training centersoriginally provided for 32 centers a year at an annual cost of Mex$96million. It, is intended to provide short and intensive courses of from16 - ho weaks of a strictly vocational character, and in part was design-ed to absorb the increasing output of primary graduates and capacitatethem rapidly for useful employment' The program was subsequently workedout on a more austere basis but with the target still baing the construct-ion of about 30 centers a year to accommodate 20,000 trainees a year in24 types of rural training and 13 types of industrial training. TheGovernment has approved an immediate program for 1963 of 30 centers ata cost of approximately Mex$19 million. The mission would recommendthat the program be continued more or less at the same level cf con-struction iI 1964 as well and that subsequent construction be decidedupon after an evaluation has been made of the oyperienne in operatingthese schools.

- 113 -

288n In the field of higher education the mission was able - tcollect the plans for the federally sulpported institutions of education,ln part-icu'-ar +he Nat+ionall Polytechnnie. T- s 4 ut aad' 4the Nati4onal

University. The proposed expenditures for the National University andthe Naiona l PoYly+chln-lc InstitutCe, -wlevre recently constuructUed buildingsneed to be equipped, appear to be necessary and normal developmentexpenditures. '"hile these two institutions enroll sxpproxmately- 60 per-cent of the university students in Mexico, a national program of highereducation should -include a decentralization of facilitles away frormi theFederal District and the strengthening of state and regional institutions.

289. The Mexican authorities are faced with understandable pressuresto further increase the intake capacity of the institutions of higherlearning. However, the National University; as well as the InstitutoPolitico and other entities under the Ministry of Education are makingprogress toward solving this problem. Among measures being taken arean addition of one year to the "Preparatoria" (second-stage high school)programs and changes in the curriculum, provision of alternative tech-nical careers, increasing sabsidiDs to state universities to discourageconcentravion i.l the Federal District, improvements in the distributionof professional specialists, expansion of the use of full-time faculties,better utilization of existing facilities and a reduction of the veryhigh rate of drop-outs. However, unless these problems are attacked cna larger scale, construction of new buildings to accommodate expandedenrolments will not be at all fruitful.

C ! A .' T a . 8

EXTERNAL FINAICING OF PUBLIC INVESTIKENT PROGRAM

290. The financing Dlan for the public sector in support of the invest-ment program reviewed in Chapter 6, calls for external finarcing amountinagto Ps. 8.9 billion ($710 million) in 1964/65. External financing for1964 in support of the public sector would amount to $396 million. Asshown in the following table disbursements on existing external creditswill provide $287 million or almost three-fourths of external fi-aancialrequirements in 1964. These estimates take into account the expectedlag in the power program and in the petrochemical and refinery proagrams,two sectors where large undisbursed commitments are available for financingthe 1964 progrram, Very large external disbursements under existing ex-ternal commitments are also expected n '964 for highways, irrigation andmanufacturing. New external credits are in the process of negzotiation forthe railway i)rogram. Sunplier credits are continuing to be arranged tocover that part of the Pemex program not included in the French credit,and medium-term bank credits are being arranged for the power program.

291. On this basis, there are good prospects that about $325 million willbe forthcoming in 196h from dishursements on nxistinir commLtments and frcemdisbursements on external loans in an advanced stage of negotiation. Thetern of some of the ov'edits that have been arranged to cover 196)4 reqnire-ments has been fairly short, particularly in the case of the electric powersector wy.here it has been necessary to obtin about $50 mil11 on in medilm-term credits from abroad in order to cover 1964 requirements. There re-

mo~~~~~~W nsaou -0 lino externalI credlits +-o I- -r,anged for "964.**tAL.h ~..LJ¼itA J - _fI.# Jh.L.L..L 's -'s C" I~u U Id a.. W A. aL 5 ,'. 4- 1 _/J _

According tc) its present plans, the lMexican Government will, during 1964,i.c.c:lss rue lElirvlxr mn aout tfn mil-l of' +.lnlrT bonds. Tihis orrrq +.to bn

feasible in view of the success the Government achieved in July, 1963 wqhen

years, $5 million at four years, $5 mill on at five years and $25 millionat 15 yers The- M-4lcan 0-verrn,ien 4's ;,an I r we' -nerz to -lc -a -- I4 '

second issue for $25 million in the first half of 1964. With continuedgood fLicial-J IUaJ. ,,L, anae.t LLU a thi. iIsJue oIfL$35 .L"ULL r,ad.y V JL be feasible

in the second half of 1964. Such issues will largely close the 1964 ex-ternal financing gap.

Tab'le A

EXTf9RNAL FIINANC;ING l..F E:STIM4TED INVESThiENT IN 1964

(In mnill:ions of specified currency)

Estimated jnLInvrestrr-ent O:n credits to be

Inv196rnenTo-tal On existing negotiated orins196 iPs. P credits under negotiationPs, Dt

Railways 941: 550 44 24 20 Canadian cred.it 1.6 mill., balance inother credits, including $20 millionunder negotiation.

Highwayw :1,599 487 39 39 -

Electric Powler 2,1413 1,:351 1(8 90 18 IBRD $40 mill., supplier crecdits $20mill ~, mediujrr term privat,e bank loan$30 million.

Petroleum andPetrochemicals 2,354, 6 75 54 .54 French credit $30C million; remainder

supplier credlits, unspecified amountstill to be negotiated0

Irrigation -L,600 :325 26 ,26 IBRD and IDB credits.,

>Jater and Sewerage 800 62 5 5 IDB.

Industry 72!5 ,375 3 .30 Eximbank credit to Altos Hornos;supplier credLits to DINA4Other i338:1 238 19 :19 _

TOTAL, 1:3548 4,063 325 287 38

-…~~~~~~~~~~~_ __ __

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292. Whiile an externla1 finanning nlan fnr 1.9% is ,aell advanr-e. a q-,rpatdeal must be done to ar-range external financing during 19`h if externalf'inancin,- requirements arl to hb fl'f-illpri in 19065 As shorwn in Table BTdisbursements on existing credits will provide no mor-e -than l153 millionou1t of the &'321 million renquired for 1965. Q is a first step in formulatingan externa-l rinancing program for 1965 the Mexican Gov3rnment, in cooperaL-tion -xiL.h themission, identified Ihose parts of the Projected irn.es+ ___in 1965 for iihich external financing has not already been corm=itted butt-hich -in eared to be ---fro.riate subjects or n-,., cxcrnal firancing. Tl-;parts of thei sector pro,rams included in this elig-ible list wlere the follow-

that part covered by disburserents on existing external1,U11IWUL UIUj~U! UO.

L) *.'or I Iu g I bIIk)se pat n co uuveried by eUti1ng e eriV-.l

commitments, particularly the p-oposed new tollroad pro-gramr alndU the nuc,;. fedeera-L road progra-.

C) tLe ih)oLe of the 196O raiJLwa,fy program not covered byexternal conunitmenrts now being arranged.

d) For Pemex it is assumied that supplier credits twill bearranged to supplement the French credit, as in 196h.

e) For irrigation eligible projects are defined as thoseprojects in the large irrigation programs and thecommission programs which have not been initiated or onwhich small ex-penditures are expected to be made by 1965.

f) Jor !water and sewerage the large programs for the 1hlexico,ity area and the Hionterrey project were considered eligible.

These eliEgible items for ne-! financing total nearly Ps. h billion in 196',apiroximatelY 30 percent of the total investment urojected for 1965. Din-bursements on existing external cormiitments are attached to projects andprograms representing obout half of total investment. In addition, about,10 percent of total public investment will occur in the sectors not examinedby thie mission. Finally, in the sectors that were examined by the mission,it was agreed jointcly between the mission and the 1h4exican Government that,ior a variety of reasons some projects and programs were not suitablecandidates for external financing in 1965. In some instances the M4exicar.Government f'elt that the availability of external financing for certainsectors would make more difficult the task of central co-ordination of theinvestment program. In other cases the iiexican GovernmOnt felt that ex-ternal financing agencies were not suf"ficiently familiar wiith the investmentactivity concerned to be able to conclude loan contracts early enough to per-mit substantial disbursements in 1965. Finally, there appear to be a largenumber of small projects and programs to which it would be administrativelydifficult to attach external finance.

TatLe B

EXT'RN'AL FINANCII! OF PROJECTED DrIVESTMEMT IN 1965, BY ,AIT1 CATEG(RIES

(In millions of specified currency)_ (1) l I (l! (LJ (S) (6) C?) ~~~~~~~~~~~~~() (° 10 L) 12v

Expo4nd turea Fossible Fijiancing Tca rentExtlena ComtmentsProjezted Estimated Eligible for Foreign Disbursements in 1965 Requiredl

Investment Disbursements External Excbange Foreign Foreignin 1965 on Existing' FilnanciLng Content 50% Basis Exchange 505% Basis Exchange 50% Basis

Credits in 1965 Basis Basis Basis

(9)-3+6 (10)-3+8PFs. Ps. $ Ps. Ps. $ Pis. $ $ $ $ $

Rallwarp 1,200 62 5 1,150 312-- 25 312 25 30 30 25 25

Hil>3LvB 1X633 190 15 400 158 12 200 16 27 31 35 14_11ropo-ed Toll Roads 59- - 1 2 12 5

Possible new Federal Roads 110 - - 110 42 3 55 4 3 4 1L4 18Other Projects 1,233 190 15 _- - - - 15 L5 -

Electric Power 1752 363 29 1,389 350 28 6595 56 57 l35 80 2/ 174 2/Petroletum andl PetrochemicaLs 2,584 700 56 3/ _ _ 56 56

IrrigatiLon 600 436 35 400 2/ 120 10 200 16 45 '1 76 126Water and Sewerage 950 50 4 650) 100 8 325 26 12 30 30 105

'S;.R.H., 300 -, -_ _ - -_ _Federal District 600 -- - 600 90 7 300 24 - 28 100tMonterrey 50 - 5) 10 1 25 2 - - 2 5

5a,nufatct.urin, _350 62 5 - _ _ -5Other Investrent Appraised by Mission 1,980 *- - _ _ _ _ - 6

Investment nct Appraised by Mission 1,425 50 14 - - - -4 -4 -4 4TU1'AL 13,474 1,913 153 3,979 ],040 83 l732 139 236 292 246 474

I7WtiE assumed tht_ external financing in this sector wil be atached to theoreig exc=g_e omponent oof tal lc pendtures provisionestimated at 33% of total.

2/ Covers 1965 and 1966 requirements.3/ Incliudes cLisbur'sements on some supplier credits to be arrangedl.

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293 In T- iein what p4 of "re 4nvest.ie-lt- prgaassdb osure,1~7) -Li. I.t: ¶V ±L t:VY Li i6 VI ld U jJdi U, IJ.L IAi -Li Ult-il L1 PI V~ dHil i UI L UU J IU L. z i~i t 1 ~uteligible for external financing, the mission weighed how such financingmii.ht encourage desirable investim,ent in certain sectors. 1y and large,the Niexican authorities themselves seek to attach external financing townat thne mission considers to be high priority inveAtrnent. There are,however, somqe Darts of the mission's recomi.iended investment, such as theagricultzra 1. program other than irrigation and the malaria ercdicationprogram, which in the judgnent of the mission deserve high priority.These programs are, nevertheless, not being carried out with a speedcornn2ensurate with their import2nce. External financing a2encies mightwell consider Tshether the o'ffer of e_ternal support for some ol theseprograms would facilitate their implemeritation. It should be recognized,however, that the programs concerned involve relatively small expenditure!sand the unavailability of external finance may not be the most importantfactor irpeding such in-rvestment.

294. The second step .,Jas to 6efine a plan for 1965 based on the externalfinancing of just the foreign exchange component of these eligible expendi-tures, This approach wiould conform to the preferences and present normalpractices of national and international financing orencies. As shown inTable 13, disbursements on external credits resulting from this straightimport-component-financing apporoach to new financing, added to disburse-ments under existing credits, would total 2P236 million. This total isconsiderably less than the t321 million of gross external borrowi.ng thiatwouldl be required to satisfy the overall external 1inancing plan. Therlexican Government has concluded that a conventional import-component-financing approach to the external financing of the progr-m woul a, by it-self, not be adequate. kn additional 65 million of disbursements on ex-ternal credits r.ould be needed for 16%5 in order to co:nplete the programas schedulerl.

295. Some part of' these additional external eisbursements may be obtainedby additional bond issues in 1965. Thile it is still too early to judgethe absorbtive cao,acity of `,he marlket for ilexica-n bonu issues, it jould beunm-ise for the Ilexican (;overnynent to count on the majo-r portion of the$5 million to be covreredt by sucl bond issues in 1965. The i4exican Govern-ment proposos to obtain a blend of general purpose borrowirg and projectfinarncinL including some financin- of local currency eo.-enditures.

296. One alternative now being considered br the MIexican Government wouldbe to obtain 50 percent financing from abroad for eligible expendituresidentified above. The excention would be the ra.ilThav septor where straightforeign exchange component financing would be soughlt. The implications ofthis formula are shomn in Colirmn 10 of Tahle B= APnn 1vi ;he 50 nOeiitrule would add over 0;'55 million to external disbursements in 1965 and wouLd1 arely c lose the fin;nningr gap. Lyess .than SAi0 million wouldl have to beraised bvr general purpose borrowing in 1965.

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297. I!ec' ablt to boro in the fiaca makt cold oD course, 1 -.'- ;I . ri'eA_Lu u d U±L ±LUY UU VuIl U"v _lii Ulit_ i±L.iL UL. lau_C Lrlldi rA& -U0 UUU.iU, U- ~ULULbe compromised in the future by adv-erse developments in these markets,regardless of th-e continued creditworthiness and g,ood financial m;anage-ment of the hIexican economy. Under such circumstarces the ikiexican Govern-

/ ~ ~ ~~ ~ ~ ~ ~ ~ ~ ~ ~~~ ~ ~ ~ ~ ~ ~ ~ ~ ~ - --A_ _ -- -- - - - -intent wouV OldI have to seek other ways of blendIng project and general purpoJefinancing. If the h'1exican Government continues to lnake good prog,;ress inimplementing its developinent program and in carrying through on its in-tentions to establish a sounder domestic financial base for the program,external financing agencies might be disposed to link their financing toan even larger extent to the local currency expenditures of projects andprograms. Alternatively, external financin& agencies may even be willingto consider some general purpose financing not tied to specific programsor projects.

298. Howqever, tiaere is little meaning in elaborating on the many combJna-tions of possible alternatives at this time. The t`exican Governlaent iskeenly aware of the margins of error in the quantitative projections ofpublic savings, exports, imports and international private capital move-ments in terms of which the overall financing plan was drawn up and on thebasis of which these external financin- arrangements are being considered.What does seem clear is that Mexico has reached a stage in her econoricdevelopment where, at least for the tinme being, the external financing re-quireri,ents of the public sector exceed, by a significant margin, the for-eign exchange content of suitable projects and Drograms to which external.financing can be attached,

299. At thle present time the foreign exchange content of projects andprograms that lend themselves to foreign financing, i.e. projects whichthe mission found suitable for new financing or projects which are alreadyfinanced abroad, represents approxaimately 25 percent of the value of theseparticular investments. Since about three-quarters of tot3l public invest-ment is suitable for foreign financine the foreign exchange content of theeligible projects and programs amounts to perhaps 20 percent of total pub-lic investment. Even though iAexico's external financing recuirenents forthe public sector are fairly modest, external finance well in excess of20 percent of total public investmnent is called for. Pxternal financingnet of amortization is equiivalent to about 13 percent of total publicinvestment. Given sl'exico's present debt structure amortization paynentsare, however, very high, equivalent to about 18 percent of total publicinves-tment. As a result, gross external financing reDresents about 30percent of total public investment and is 50 percent in excess of theforeign exchanfe component of suitable proiects.

300. Tlmse fi g1res_ derived from the 1965 projections; are fairly renre-sentative of thie situation that is likely to prevail in 1966/67. GTrossexternal financing requirements fcr the public sector are not ePYne^-ted todecline substantia'lly. From a balance of payments point of view, the neteYt,Prnal finnncing requireldl novpr thp nPetS t f'eW years is likelyv fto inrrease

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somewlthat-, as noted De-lowJ, or, perhaps stablz 34 4 the 41- 6 /65 level of 4

~J~V~I U,~4~J~.LVU~U ~.L~VJ, ± P I IIjC U d)LJ4.±L, au U Wit= £17Ui314/~) .1. -VU V1.04

about $250 million a year. From the point of view of Mexico's fiscalacoaiunse, e ;Lerna' financi needed c.i U U Ut; t)tL. U tO UU Uto lLIU su-

stantially. Indications ,ihich tile mission has obtained from some of themajuuJ,, Tl u 2i U-LlIt, ag_;ic I .: pU.L11 , LU a UUIIL.LIILtU I.Lb5e II IpUUbLic iLVU sUme1IUafter 1965. Public savings are also expected to grow, particularly ifthe new adminillstration,1 which takes office at trie end of 196b4, reinforces.during 1965 the measures which are now planned for 1964. At the same timethe cEpacity o_ Aexico's industry to suppiy the goods and services requiredbv i4exico's public investment effort will increase rapidly. On balance,a fairly substantial gap is likely to nersist between the foreign exchan;econtent of the projects slitable for foreign financing and ;lexico's grossexternal financing require.-^ents. T:hus, externaL cofrmitments to be arrangedin 1964 and 1965 on a project basis to finance disbursemients in 1965 andlater years can approprietely cover part of the l.ocal currency expendi-tures of suitable projects included in the program.

301. For the disbursement fiLures rmentioned above to materialize in 1965,credit comi:itments in very substantial amounts T-ould have to be nerfotiatedduring the course of 19614 or early in 1965. In so-ae cases com-aitmentsmight be made annually for each year's programn., bub in most i.nstances itwould be preferable either to see an individusl project through to corple-tion or to the completion of a definable uhase of a longer program whichwould thierefore cover expenditures beyond 1965. If new commitments weredefined to cover 50 percent of projectod expernditures on sui-table projects,thae required new conmitments in 1964 and early 1965 would total $474 mil-lion, as shown in Column 12 Table B.

302. In order for these comnitments to be made on schedule the missionwould point out the urgenc-r of an early final decision by the NexicanGovernment on its 1964/65 external fin-ncing plan and 1the necessity tocompl;te uniinished project studies. 'ithout adequate studies there islittle Drospect for entering into ner otiation for n,w external :Financingcomm-itments for the-=e rojects. To n->-otiate for new commitments on aproject basis is nornally a lengthy process. If this -pDrocesLj were to beextencded unduly because of a failure bl- the investinf agencies to completeno-j unfinished project studies, the financin pl..an, and tlierefore thewhole investment progfrar,a could not materialize even approximately asrecormrnended above. There is alwJays the darger tl at thie Aiexican Govern-ment mav. bec3use of d.layis in arrangineg financing on a ororner basis,feel compelled to accept external financing on inanpro-priate terms oraccept an undesir2ble reduction in the total nrogram. Advance nlanningof external financing is thus essential both for the carrying out of anadeqnuate invest.aent rjrogram and -Lor nrotectinv liexL.co's eapacity toborrow abroad.

C H A P T E R 9

BALANCE OF PAYMjENTS AND EXTERNALflUttf.UVPiU WfUkRI. I I

The Prospects of the Balance of Payments

303. Balance of payments proiections developed jointly by the missionand the Finance Rinistry - Bank of Mexico Working Group suggest thatIlexico's deficits on current account transactions, which in 1962 and1963 averaged approx mately 100 million per year, may increase tobetween $200 million and ';300 million in 1964 and 1965. This changewould mainly be the result of a relatively rapid risc in comnmodityimports combined with a rather slotw growith in earnings from exports andtourism. Largely due to heavy amortization payments on external d½bt,the overall balancing of Mexico's international accounts wfill requirein 1964 and 1965 gross external borrowing for the public and privatesectors in excess of `JOO million a year. Under assumotions that arenot unduly optimistic the volume of required external borrowing wouldsubstantially decline after 1965. However, under a more conservativeprojection of exports - showqn in Annex A, Tables A.1 and A.2, externalborrowing would increase so.newhat above the 1965 levels. This chapterbriefly discusses the elerents underlying the above conclusions andpoints out the effects, in terms of debt servicing burden, of under-taking various programs of external borrowing.

304. The analysis of the specific prospects of the major coieroditiesexported by lexico suggests that on the average exchange earnings fromthis ource will expand in 1964-1965 at the annual rate of approximately3-4% per year. This rate, which has approximately prevailed since1957, contrasts with the more rapid one wihich characterized the expansionof the Nsexican economy over the past decade or two. The rise in com-modity exports which occurred in 1961 and 1962 (9,0 and 12% respectively)can not be considered representative of Mexico's export potential sinceexceptional factors were at play in those years. Thus, in 1961 sugarexports, following the opening of the US market, reached the value of$69 million when a few years before such exports had been rather un-important. In 1962 cotton exports, influenced by large plantings andgood yields together wTith a stable level of domestic onsumption, ex-nanded by nearly 260 million above the 1961 level. Events such as thesecannot be counted upon to sustain export earnings in the future. Takinginto account trends that appear to nrevail nnrw the mission is innlinpr1to accept the official Mexican view that over the next two years thelevel of exports will rise at 2 relatively mioderrte nace (hg) in

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corparison with the experience of the years before 1957. A longer run

minimum at the rate of the past few years - say 4 percent annually.Additio.aJl export earnings of appro-dmately 200 millioni per year by1970 are, however, quite possible if manufactured and miscellaneousexports - projected to expand at the rate of 5 to o percent per year -were to expand at the rate of 10 to 11 per cent, a not unreasonableexpectation considering that between 1956 and i963 these groups oT

exports grew at a rate close to 12% per year. Were this latter pro-jection to materialize, total exports would be expanding betw^!een 1963and 1970 at the compound rate of 6% - a rate which is very much in linewith the long-term trends of Me>d.can exports.

305. Tourlsm and border trade, the other ma,/or sources of currentaccount exchange earnings for Mexico, have been expanding since 1957at the rate of about 8do per year. It has been assumed that theseearnings will grow in the next few Jyears at a slightly slowJer rate,i.e. 7%, an assumption which may also prove to be conservative.

306. Between 1956 and 1962 Mexicot s import level remained practicallystable around the figure of $1,100 iillion per year. This stabilityresulted in some measure from the relatively slow rates of growth whichprevailed over the period and, more importantly, from the expansion anddiversification of the Mexican economy which permitted an accelerationof the process of import substitution. Although industrialization hasbeen a key factor in Mexican development, import substitution was notlimited only to industrial goods but included also foodstuffs and rawmaterials. Thus, over the past seven or eight years 1.4exico has becomeself-sufficient in wheat and corn, saving on this account alone no lessthan k60 million per year. In 1963 the import level for the firsttime since 1956 experienced a substantial increase (9%) reaching a tota:Lof $1,240 million. The mission agrees with the lIexican authoritiesthat the attainment of a target growth rate of 5-6% in the next fewyears will require that imnorts expand by perhaps as much as 5% per year.On tins basis it is estimated that 1970 imports may amount to $1,800million.

307. If current exchange earnings and expenditures develop as projected,the 1962 and 1963 deficits of about S100 million would exDand to p237million in 1964, to $239 million in 1965 and to between 'f275 million andth75 million in 1970. denending on the behavior of the commoditv exportsdiscussed above. The range in the possible current account deficit by1970 clearly indicates the need to intensify exchanae earnino activitiesand to continue fostering conditions under which export trade and tourismmay prosper.

308. the projec-ted de-velopment olf MeYico's c-urrent ac-count underlinesa basic policy issue confronting all developing countries, viz. thati rnnrv. smhub.stit +ii un -nless ahcormrnnid bycrnrelat+iv andl s sf

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efforts to expand earnings on current account, is bound to reach aneventual impasse hrough a variety of import bottlenecks. r uece theneed for industrializing countries to maintain and if possible improvethneir competitive position abroad and to constantly open new marKeTs iortraditional as well as new export products. This requires the adoptionof nolicies that put a premium on increasing the productive efficiency andlowering the costs of existing export activities, the avoidance ofmeasures that may bring undue monetary expansion and price inflation, andthe use of specific inducements and many other forms of assistance toproducers and exporters.

309. ilexico's official policies have traditionally tended to favor theexport sector - a fact which goes a long way toward explaining thesuccess of her development efforts. The projected current accountdeficits referred to above signal the need to further intensify exportpromotion policies in Mexico. The same is true, of course, in regard tothe tourist industry which is also a very importaiat source of exchangeearnings for Mexico. In fact, a special case for the proinotion of thetourist incdustry can be made, since earnings from tourism orovide a meansof compensating fluctuations in earnings frorii commodity exports and alsobecause of the diverse impact of tourist earnings. Tourist earningsbenefit not only those who directly sell personal services to touristsbut indirectly create demand for the products of practically everynational industry and activity from food production to building con-struction.

310. Since the capital outflowis which occurred in 1961 and 1962 cameto a virtual end in 1963, the projection does not conteanlate for theforeseeable future further losses on this account. But given thesusceptibility of the lliexican economy to such movements, economic policywill have to be flexible enough to adjust to actual develonments. Theresumption of capital flight at the levels of 1961-62 would, of course,reflect a state of uncertainty and reduced confidence in the nrivatesectcr such as to endanger the attainment of the Plan's targets. Undersuch circumstances it might be desirable to secure an even lar:zer volumeof external funds for lending to the private sector through credit andinvestment intermediaries than is assumed in the recommended nrogzram.However, the improvement in the situation which already occurred in 1963suggests that such canital f'ight is rather iinlikelv

311. Amortization pnvments of long-term foreign credits and directforeign investment can be projected with reasonable accuracy. Amortiz-ation pavments in 196)h and l965 are largely determind h-r exerrnal rdehtalready contracted. The amortizatior estimate for 1970 is, of course,_nf'1 itenced hy the nroiprted eirternal borrowing and the terms that mayapply to this new borrowing. It was assumed that new borrowing foroff; r;im1 niirXnrczaz vArmilrl nr]o +.1in n-trornerr ho%d An+^r'rl -rw nyir>7^;4 ^-rQ f

official purposes - the veagebeo cd r iods .f15 years, with tx.o years of grace and at the rate of interest of %56 percentDirect foreig. invres+n.ent was projected to increase graually fror.its

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1963 level of 4117 million, reaching a levrel of about W200 million by1970.

312. Discussions wlith the Mexican authorities convinced the missionthat the Mexican authorities are prudent in planning on some increase ininternational reserves over the next few years over and above the levelattained at the end of 1962. Gross foreign exchange reserves as ofDecember, 1962 amounted to about 'P$4c0 million. An increase of $69 millionoccurred in 1963 but even so present reserves are equivalent to less thanthree months' payments on current account. A reserve level of $400 to.$500 million was considered adequate several years ago when Mexico'sforeign exchange payments and level of domestic monetary liabilities weremuch lower. Mexico's international accounts are vulnerable to specul-ative capital movements - particularly in view of the very large increasein money and quasi money over the last few years. Fortunately Mexico'sinternational liquidity position is supported by a line of secondaryreserves in the form of special arrangements with the EXI1I Bank and theUS Treasury, as well as the arrangernents resulting from membership of tieI17. But present levels of foreign exchange reserves cannot be con-sidered totally adequate for M4exico's level of international payments andsecondary reserves are no substitute for adequate working balances. Theutilization of secondary reserves for such purposes may, in fact, haveunfavorable psychological effects and stimulate capital flight. Thusthe target of an increase of about '145 million in international reservesin 1964 and 1965 was considered accentable. A somewhat larger increasewould probably be justified, if full account were taken of the volume ofcurrent international pavments and the danger of canital flight. How-ever, under existing international payments conditions it may be diffi-cult for Mexico to secure the external borrowing nrojected here. hi-lebuilding uD reserves at a higher rate.

313. Given the projections of the various items referred to above, theoverall bnlanc.i ng rof Yipcri 'n I i nfrnational accounts would rerunre exter-nal borrowing of approximately $400 million to "'"450 million in 1964 and1965. By 1970 reniired external borrowing mav hnve declined to lessthan 1S300 million per year, if the more favorable projection of commodityezrnorts materiali zes. External borroiing mary have to remain at ltvelsslightly higher than those of recent years, if exports happen to develop*n lline with the+bj les 'fnvornh1 as A.pion dicse ,pr-s uly h.

figures are intended only to give an idea of orders of magnitude of- ~,rir "-,~A -.v

4- -tV l -%f%fIK.fe 'Tfl- ---- 4--r. ,-~P -, r -1 -C - I--- -- _P

A--Jr1 L U r Ue -exteaJ LJVA b Jr4.LLJ.6. LI,e ,margis of- p i erro become, of.

course, larger as the projection progresses in time.

314. As Annex A and the discussion of Chapter 5 show, the mission re-comflendIs eUe r la ]L bJorro±-.ng 1UOr 4-i piLvate setoLrL& - toU be, uI-1an[1Le±lUU

through financial intermediaries - for a total amount of $82 million inL, _- _ _____ _ __ _/nnZ I . _ .- i^ZjfrS\ T _A 1: |_ _ _ :.- - _ _-:_ __1.Wthe nlt::LU tWNU ytears (196U4 adU 1ULU) in aiuutiLoLL dLrect LoreLgrn credlitsto private enterprises over these two years may aggregate $63 million.On thI Hs basis borro-wtng for the public sector should absorb approximate:Ly$392 million of external resources in 1964 and $321 million in 1965, viz.

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TotalU194 1965 J-96'--'2

(in mnillion US$)

Required borrowing to balance international account 437 421 858Of which:

Borrowing for private sector (through financialintermediaries) 15 70 o5

Direct credits to private enterprises 30 30 60Borrowing for public sector 392 321 713

315. As shown in Chapter 8, official borrowiing at the above levels willonly be possible if external financing can be arranged to cover not onlythe foreign exchange content of new projects in the public investmentprogram but some part of local currency exoenditures as wiell. If itshould prove difficult to arrange for such finarcing, twhat are thealternatives open to Yiexico? If extern.al borro-ting were cut bach by4i100 million a year in 1965, could the orogram be carried out? Wemight first assume that the nublic sector reduces its borrowing abroad andincreases public savings in 1965 by an additional Ps. 1,200 billion ayear. Would an additional increase of public savings of this magnitudeincrease exchange receipts or reduce external payments to a correspondingamount? It is very doubtful that any such result would be produced.

316,. If private expenditures for both consumption and investment werereduced by Ps. 1,200 billion as a result of such measures, it is un-likely that the additional foreig-n exchange generated would be greatlyin excess of $20 million and domestic employment and incomes would notrise at the Drojected rate in the short run unless tax measures had beenemployed wlhlich impinge primarily upon private spending, mainly investment,which has a large foreign exchange content. Tax measures of this typ_wJould be contrary to the longer terr objectives of the development pro-gram. Another nossibilitv would be to combine measures to increasepublic savings with a devaluation of the exchange rate so as to promoteexports and discourage imports. The Hexican authorities are unalter-ably opposed to any such move. Moreover, it is difficult to establisha case for such a reconmendation. While HIexico ts orice level relativeto foreign prices has increased since the last devaluation in 1954, theincrease has not been very great and nrice stability has been establishedin the past three years. In these circumstances it would be unadvisableto alter the present eoxhange rate and to sacrifice the 7'lll advantagesfrom relative price stability which it has not yet been possible tor.eal i -7e.- The anoiunce npol- niv of the MPveic!,qn Government to redue-einterest rates, to establish an adequate differential between short andlong-term rates, and to keuep Vtage inoGe2e in line wtr h product in tyincreases would be vitiated by such actions. iloreover, measures being

taken i + c A eil,+on+; 11 -r imn,rNyv'rvu lTi vTarJ e F

position over the longer term, even though the results will not bereas zed in the nert few years . There is no evidence that eexico spresent exchange rate is not a long-term equilibrium rate.

- 126 -

317. W..ith respect to the use of direct controls as a means of generat-ing the additionial ':lOO million a year in exchange resources,9 'the pros-pects are not favorable. The Mqexican Government, over the last fewyears, has already tightened its quan-titative restrictions. ecoof course, operates under certain limitations in enforcing direct con-trols because of its geographical position. Reducing imnports belowprojected levels by $100C million through applying mnore rigorous res-trictions without seriously affecting the success of the developmentprogram is out of the question.

318. Thus, the mission sees no feasibla alternative to an externalborrowing program of the indicated order of magnitude other than areduction in the investment. orogramn itself. Should this become neces-sary, a real problem would arise because of 'the fact that the foreignexchange content of the public i-nvestment program as such is relativelylow. In order to achieve equilibrium in the balance of payments whilereducing exchange -paVments by $100 million a year, public investmentmight have to be cut by as much as 10 percent., taki-ng into accountboth the direct and indirect imp3act. The consequences of suach areduction h-ave not been appraised, but it is clear that they are not to)be accepted lightlv.

319. The mission has also considered, gaiven the balance of paymentsprospects presented here, wvhether the programn could go forward -on asound basis without raising Ps. 1 billion - Ps. 2 billion a year inadditional public savings and instead borrow,ing abroad an additional

~nuiv~1 n moiint_ Adirlifi ~nnnI hnrrrnmrT nr, qhroqri niill ri voi ri thp-reduction in private spending which the fiscal effort implies. By thesamne tnokn, unless r measures wererr taken to d1ivertr demandnr frnm dretproduced goods to imports, there would be excess demand and prices -wouldrise ti This pzricea rise wounild st.irmulate im-nnr-Li !andl migYht leadto aresumption of the inflationary process wqhich the Mexican authoritieshave brought to _a h,_al .9Ta ~vr-A -rl i n,,in no.ha

relaxing quantitative restrictions or appreciating the exchange rate,rT,-fnIII rl 'h narMoc ,n"I - in r) ^IAMri +j n n'iv n rro i rny-r%v4.c nt eli Qrr-niir' n m vn rBut this would be contrary to the longer term, orogram objectives.

Debt Servicing Capacity

320. The program of external borrowing referred to above is super-.A..LV OUV WL VI; j J .LL r- J.Ll%-~L V A.L1 VAiJLu i LicL L L.J LVUl1_CO atlu~ UU

service which has tak-en place over the past few years. Mlexico'sC" %.Ai.. 'd U \ ',ULLIUL Lail LI U Jc Li / b1.~J .5U y dVU..U~J .LJJ..L_LULVL _LL UL i

past five or six years and debt service has risen from about 12 perce-ntXI * Inr mLl. ni1---

Ui- ULoeignl ex -arige earnings inA -L9? to about ', p~Lerent in 1`764 . ±1I±

debt is rather heavily i-nfluenced by relatively short maturities and coni-sequen'il - diebt b-Urv±LU- WiJL_L UVL±J.Ue rapICI-y ±rQ!n its9 pre~sentJ le-Vej. Luu Lebthan 9 percent of projected current account earnings by 1967. Externalgross borrowjing on the scalle of iP4~00 million a year, given the

- 127 -

amortization schedule on existing debt, would renresent over the nextfiv,e or six years net borrowing of about $200 illion a year. Thisvolume of borrowing could be undertaken by Mexico without exceeding therlative leb lurlen w,L c;uh the country presently supporvs - provided it

were arranged mostly on a long-term basis. For purposes of analysis wehLave assuned that borrowing for private sector projects would have anaverage maturity of five years or less while borroiring for relending to

4.1-~~~~~~~~~~~~~~~~~~the private sec'-or woulUd be f'or a period of ten years. In the case ofthe public sector we have assumed that new borrowing would have maturitiesaveraging 15 years, with a two year period of grace. On these assumptioas,debt service in 1965 would be approximately $285 million. It wouldgradually rise to a maximum of about $400 million by 1970. Such servicewould represent 15 percent to 16 percent of foreign exchange earnings oncurrent account in 1965. If current account exchange earnings expand atthe rate of 4h2 percent - a relatively low rate if judged by historicalstandards - debt service would roughly remain at this level until 1970.It is within the capacity of Miexico to make these debt payments wxithoutundue strain.

321. However, should Mexico seek to borrow at the rate of h400 millionto 'h450 million a year over the next few years without careful manage-ment of the terms on which debts are incurred, debt service could easilyget out of hand. To illustrate: total borrowing requirements of the196h-65 program exceed the foreign exchange content of projects in thecase of the public sector by $200 million to $250 million. If theMIexican Government were to finance only the foreign exchange content onthe basis of long-term borrowing but were to obtain loans with amaturity averaging about three years for financing local currencyexpenditures, debt service would rise by "70 million - $MO million overthe next few years and would be equivalent to almost 20 percent offoreign exchange earnings in 1965. A much higher debt burden would,of course, rapidly arise in case short-term borrowing were to be used tofinance also part of the foreign exchange cost of projects.

322. It should be noticed that the volume of borrowing for 1965-70discussed above will be required only in case I1Iexico's internationalcurrent account develops according to the conservative nroiection thathas been adopted for purposes of analysis. A more favorable balanceof pavments development would nermit a reduction in external horrotuingrequirements - provided the authorities took steps to raise public savings.The likelihood that Mexico will in fact resort to a level of externalborrowing lower than discussed here is rather strong. Mexico's economicgrowth has been associated with a rapid ex'ansion and di-ersificationof its international trade in commodities and services. This develop-ment has been facilitated by +he increasing diversificat+ion of Mexicanoutput and by the ability and interest of ilexican entrepreneurs to seekand evpl . export opport+ni ties. Go+el--ent poli^ h , c

contributed to this development by providing not only the necessarysocial and economic overhead facilities but also by maintainlng a cllmat_

- 128 -

in which private initiative has been able to prosper. These trendsshould be reinforced by uthe development program discussed in this report.The program contemplated by the IMexican authorities and supplemented bythe specific measures recommended in this report, should make it possiblefor the Mexican economy gradually to reduce its dependence on officiallyorganized foreign capital inflows in the period after 1965. This isparticularly true of the measures to increase the rate of public savingsand to promote and stimulate the development of agriculture and manu-facturing. Action in these fields, coupled with the implementationof the public investment program, should establish the basis for a con-tinued high rate of economic growth after 1965 combined with reduced netcapital inflows.

APPEA4DIX A

BALANCE OF PAYMENTS

(See following pages)

Table A.! APPPENDIX Y A

BALANCE OF' PAYTENTS, A.CTUAL 1962 AND 31963 AND PYLOJECT-IONS 19614-65-70

(In rdillionrs of' US dollars)

Actual Proj ectionsProgram P;eriod Long-term

196>O 2 19 ,2 l>3 v 1964 1W965 (1970) * ,

Exports of Goods and Services 1587 1703 :1765 1858 2375Commodity Exports 900 939 9 0 12Production of' Gol.d and Silver 44 50 50 50 55Tourism and Border Trade 585 654 700 749 1050Migrant Workers Remittances 32 35 30 25 25Other Concepts 26 35 30 310 30

Imports of Goods and Services 1.680 1806 ;2002 2147 2850Commodity Imports (registered trade) 13-4 1<>E0 '5 7 8COBorder Trade (unrecorded imports) 244 255 286 309 432Tourism 35 39 46 5.1 98Interest and Dividends Direct Foreign Investment 159 L58 176 190 270Interest Official, Debt 5)4 55 64 80 180Other 49 50 50 70

Current Account, Balance - 93 - 103 *-237 *-289 -h475Short-term Capital and Errors and Omissions - 3 5 - 13 - 38 Amortization of Long-term Foreign Credits - 268 - 236 - 230 - 195 - 210Direct Foreign Investment, 1]28 L17 133 143 203Increase in Official Reserves (net) 17 69 65 80 -Borrowing Programi L;ol 1125 437 421 482

Gross Borrowing for Public Sector (396) (4+08) (392) (321)Gross Borrowing for Privat,e Sector

Borrowing through F'inancial. Intermediaries ( - ) ( - ) ( 15) ( 70)Direct Credit to Enterprises ( 6) ( 17) ( 30) ( 30D)

Source: Actual data, Bank of Mexico. Projectic)ns prepaired by missi.on and Finawice ]linistry - Bank ofMexico WcrkinJ Group.

* Preliminary.uonserv-ative or minimnumn teiLimate. As explained in the noites to tihis table, exchange earnings on

account. of commodity exports and tourism may exceed the figures here projected by as imuch as $200million. In such case required borrowing abroad in 190 wnuld be reduced to less than $300 million.

Table A.L

Page 2

Notes: For assumptions underlying projections oi.' exports, imports,4tour4sm. and producti4on -of go lA anid s-;ilver, see Tab,les A.2, A. and -IAJ LU LL d ~U k9L LJUUA ' AI. ULVLA ~__L 6UL"L <1,1U O-L.L VV , P= ~ .XVL = IL . r ZL._.) CLLIU.

A.4 in this appendix. Assumptions for other items are as follows:

Migrant Workers Remittances: Earnings of Mexicans coming seasonallytu U o t Uted QSat ed aj dg*ctii al -wursArL are proJected to declinUdue to restrictions being imposed on their entry.

Direct Private Foreign Investment, Interest and Dividends: Estimateof Bank of i.exico - i1Jinistry oI Finance Working Giroup. Investmentmaintained in 1964 at average levels of recent years. Some increaseprojected in l965 and thereafter. Interest and dividend trarsfersabroad projected on the assumption of a reinvestnent rate similar tothat of recent years.

Short-term Capital and Errors and Omissions: Assumes virtually nocapital outflow in 1964 and comr,pensation of this item and erirors andomissions in 1965 and thereafter.

Increase in Reserves: Projected in line with officially planned increasein level of gold and foreign exchange reserves in M4exico. See Chapter 9.

Borrowing Program: Borrowing for both private and public sector is shounon a disbursement basis, In the case of borrowinge for the publicsector, the amounts shown are in part expected disburesements on alreadyoutstanding external debt comxnitients \(f. Chapter 8) and in part dis-bursements on new commitments recommended in this report. Borrowingfor private sector distinguishes between credit to private sector to bechanneled through financial intermediaries (discussed in Chapter 5) anddirect external credits to private enterp-rises. The figure of A15 millionof external credit channeled through financial intermediaries, shown for1964, covers expected disbursements on several loans of Inter-AmericanDevelopment Bank and AID signed in 1962 and 1963 for the purposes ofproviding credit for agriculture, industry and low-income housing. Thecomponents of the $67 million shown for 1965 are discussed in Chapter 5.

Amortization of Lone-term Foreigen Credits: Estimated amortization pav-ments on total external public debt, including undisbursed aiounts,appear in Table 24. Annendix D. SchedrlA of amortization pnnvments fordrawings on new commitments for official use have been computed on theassumntion that this new borrowing nill he for repayment in 15 vyersplus two years grace on amortization and interest at the rate of 5.5nprreent, npr nnim fornrowing tflhrougch finnn.i-nl int.Prmnianri4n wasassumed to be for repayment in ten years, no grace period and 5.5 percentinterest. Terms used for borrowing for private projects is five years,no grace period and interest at 6 percent.

Table A.2 APPENDIX A

MAIN iCO4ODITY EXPORTS, 1956, 1960-62 ANID PROJECITIONS 1963-65-70

(In millions of US dollars)

Projections1956 1960 1961. 192 1963 1964 1965 1970

(Est.)

Cottoln 260 158 160 218 177 177 196 233Cof fee 105 72 72 70 73 74 7 6 137Cattle and Fresh Meat 8 43 58 74 70 83 8X7 100Shrim]? andi Fish 25 36 46 46 56 52 55 70Sugar 3 53 69 43 L9 40 39 38Tomatoes 8 26 14 20 24 16 16 16lMinerals

Lead Bars 53 34 37 26 28 26 26 :33Zinc concentrates a.rd bars 43 29 27 28 26 29 29 32Copper concentrates and bars 73 26 19 24 25 24 18 17SulzThur 14 28 29 30 33 31 32 140Fue:L Ci:l 43 12 13 18 17 17 17 21Crude Pietro'leum 9 2 12 14 14 14 15 17Natural Gras - 7 8 7 7 8 8 :Lo

Manufactu:res 55 77 96, 1C6 130 ( 34 39° 500Other Commodities 108 135 1kb. 176 210 ( 3

Total Commodity Exports 807 738 804 910 939 955 10oo 1214

Source: Original data of Direccion General de Estadistica, adjusted by Bank of' Mexico to correct forvaluation errors. Export statistics are published by BaLnk of Mexico with breakdown lis-ting

approximately 60 individual commodities and a group of' "miscellaneous unclassified" commodities. Thistable shows the most important individual commodities (with some additional groupingg) listed by theBank of Mexico, with the remainder lumped under "other" commodities. Bases of projections g:iven infollowing pages.

APPENDIX AIT1nA 0

Page 2

NJ otes on hLx_potJ-J. IJlojections: l.heI Joint± Bang. of± 1-1exico -_ I nistU o

Finance Working Group provided projections which very closely coincideW-LU1.4 1AL1t 1. L J- .,LI-LE UL±1.0 LUcVJALt - WIILLL;11 ±- pL O L ''UJ LD C& . J HIZl JILLL LI

comparability with historical balance of payments statistics publishedb-y thle Bank of it'exico. Assutr,Vions underlyi ng Uthe projection are asfollows:

Cotton - Projected value of exports derived as follows:

Actual Projectionsyo2I 913 16h4 1965 1970

(Est.)

Acreage Harvested (th.Hs.) 825 733 760 800 960Yield (kgs. per Ms.) 617 610 615 630 675Output (thousand ts.) 512 447 467 504 648Domestic Disappearance (th.ts.) 116 130 140 144 165Exports (th. ts.) 396 317 327 o60 483

(th. bales) 1742 1394 1440 1584 2125Average Unit Price (US cents per lb.) 0.25 0.25 O025 0.25 0.22Value of Exports (mllU. US$) 218 174 177 196 233

(Acreages and output for 1962 and 1963 are preliminary estLnatesof the Confederation of Cotton Associations). Projection of acreagesassumes increases of 5 percent per year in 1964 and 1965 and 3.5 percentper year from 1965 to 1970. Yields are projected to increase at about2 percent per year. Domestic disappearance in 1962 was unusually lowprobably due to drawing of stocks. Average unit export prices areprojected to remain at their 1963 level for the next two years declining12 percent by 1970.

Coffee - The projection assumes a gradual (2-3 percent) increasein the volume of exports in line with expected increases in world con-sumption and the maintenance of present price levels until 1965 with aslight increase thereafter.

Cattle and Fresh IMeat - Demand and prices in the United States,the major market for iMIexican cattle and fresh meat exoorts. are expectedto remain firm. The projection assumes a 5 percent annual increase inthe volume of exports until 1965 and 3 percent thereafter. Prices areassumed to remain stable.

Shrimp and Fish - Shrimp exports, which constitute the bulk ofthis conmmnodit.r group; enjoy a strong dem2nd in the Ini ted States= How-ever, supplies in the Gulf of Mexico are tending to exhaustion due tonvm.rfi shimr_ The nrnipctlon asimea stalizat-lon of e-xport. volumesand some improvement (5 percent per year) in export prices.

APPENDIX ATable A.2

Sugar =Project~ed v3lue Of e-x.orts derived as follows:

ActualJ. -Ic.tions

1902 1963 1964 190I 1970

Outpu, raw, sugar _th.ts. . _1 ' 1650 1650 L f _ ,Domesticconsumption (th.ts.) 1246 1300 1350 1400 1600

a ~i,.. .- i. u 4-,. enr ,'irn -Ir'n n ~ r'r -Ir'rYLear-erndl stuCr ok (lt .* U.) 9 9 L;u ±0 150 )U 10 5v

Exports (th.ts.) 350 300 300 325 350Unit export pLr.ice (UC) cets per l b.LU ) 5 6.o 5.5 5 U

Value of Exports (mill. US$) 43 50 40 39 38

(Data for 1962 are from International Sugar Council).

'The above figures reflect the situation as it appeared in 1963. Theoutput projectionis are probably on the conservative side in view ofthe increased interest in sugar production. i4exican su-ar productionhas increased in recent years as the US market for sugar exports ex-panded. The basic US quota for 1Mexican sugar for 1962-6b is 190,000metric tons per year, but additional allocations are made in line withUS requirements. As a result exports to the US market ir. 1961 and1962 absorbed all available exportable surpluses. It can be estimatedthat Mexican exports to the US in the next few years Twill drop somewhatfrom their 1963 level due to increased domestic consumption and needto replenish domestic stocks. US premium prices have risen sharply inrecent months and it is expected that these ne-r price levels will not bemaintained.

Tomatoes - Tomato exports, whose main destination is the USmarket, rose rapidly for several years until 1960. These exports arevolatile due to weather conditions in both Mexico and the US. The USmarket appears to have stabilized so that no further increases inMexican exports may be expected.

Lead - IProduction in i'Iexico has not kept pace wvith the worlddemand fo;- lead which has been growing at about 2 percent a year. Infact, production has been declining and is expected to stabilize aroundthe 1963 level for the next 2-3 years. Exports to the US which accountfor about 50 percent of total are regulated by a fixed quota. Steadilyincreasinc domestic consumption and tihe current low level of the exportprice make higher exports outside the US unlikely. Expectation of somerecovery in prices in the late 1960's may, increase production andexports to some extent.

Zinc - The case of zinc is somewhat similar to that of lead.Production has not increased fast enough to take advantage of thegrowring world demand (3.5 nercent annually?. Like lead; about

APPENDIX A

P o_"e ..,

50 percent of. exportls go t o UIh Ue US ) s L UJ to. eg 'a'tion ICy a UL.Squota. In view of the current low export price and increasing domesticL;ULIOLUIIIP UJ.Vtl1 jLVUULL ULU±LI a l±U ~-AJJV'LIU cdJ.:, ±±kL&tJ_' UU 0 LI U±I.LL - 4t, .IUULIU UA It

1962-63 level and thereafter may increase to some extent due to apossible slight reGovery in, price.

!ctpEer - Current export price is consilered rhgh and expezteduu tLvfall by about 1 0 percent after 1964. Domestic consumption, whichnormally accounts for about 40 percent of production, has remainedfairly stable over the past five years, but is likely to increaseslightly. As a result, the outlook until 1964 seems to be maintenanceof the current level of production and export and som.e reduction there-after4,

Sulphur - Hexico produces sulphur primarily for export. Wlorldprice has generally followed a do-vnward trend as new supplies, includ-ing iMexico's, have been appearing on the market. However, as newcapacity is absorbed world price is expected to stabilize at slightlylower than the current level until 1965. Long-term prospect forsulphur appears quite favorable (4 to 5 percent annuial increase inworld demand).

Crude and Fuel Oil - Export to US, the principal export market,is regulated by quotas. Gentlemen's agreement permits 30,000 oarrelsper day overland exports to the US outside quota system. Additionalquantities occasionally enter the US market as marginal oil throughpurchase of quotas. Projections are based on the assumption that theUS quota arrangements will continue and that no new market will open up.World prices of crude and fuel oils have been weakening in recent yearsand the trend is likely to continue until mid 1960's. Domestic con-sumption in Mexico will have very little effect on exports. Con-sumption of crude oil will continue to increase and could be met byadditional production. Consumption of fuel oil is increasing slowlyand refinery additions will process mnore of the crude oil into highergrade products. Heavy crudes, such as Panuco, have only limitedapplications in Mexico.

Natural Gas - This gas is exported exclusively to the US. Boththe volume of export and price are regulated by contractual obligationswith occasional minor adjustments in quantity. An upward revision ofthe contract by 1970 appears feasible. Additional production in theRevnosa area would be absorbed by the growing dometi4 nimarket.

Marfatures andi othern rnmmri ti PR - TnGllii1 cannned andpreserved foods; textiles - of which henequen and ixtle account forabout 80 percent of All tex+ile exports; chemncal products, basedmainlyr on natural and synthetic hormones; and "other" products amongwhich booksh tiles and glass are of sonme im,nportance. Among nmanufactured

APPENi\DIX ATable A.2

Page 5

e--iles Iheneqiuen exJportus, Uue tuo co petiu--on from otu ULer fibers, canUnotbe expected to expand substantially. Thle group of chemical products(35 perccnu ofi the ttUUal) Iias s1ownl utle fastest --ate of uxpansi slnc

1956. On balance manufactured and other commodities, excluding sugar,are projected to increase at -the rate of 7 percenit per year until l96

and 5.0 percent thereafter. Between 1956 and 1963 exports of manu-factures (excluding sugar) and otGier comimodities expanded as a groupat tne rate of 11.5 percent per year. On the basis of this experiencethe growth here projected Tor tnis group oi commrodities is conservative.A projection at the rate of about 10 percent per fear wqould increaseexchange receipts by nearly ,j;2OO million por year by 1970. Given acontinuation of the factors presently favoring exports t-is does notseem unreasonable.

P'roduction of Gold and ilver - Since gold ancd s.lver are largelyby-products of other mineral production, the 1)rojection, in line with theprospects of the mining industry, assuines only very small annual increases.

Table AJ3 APPENDIX A

COM ODITY LIPORTS, 1.956, 1960-6:3 AND PROJECTION3 1964-65-70

(In millions of IJS dollars)

Projections1956 1960 1,6-i 1962 1963 1964 1965 1970

Consumer CGoodEs 166 2:L2 222 229 280 a/ 286 292 338

Food., non-processed 23 :16 10 13Food processed 2C) 'L8 18 22Non-food, non-durable 30 39 57 42Durable goocds 9 3 140 138 151

Production Goods 86'3 9.74 9716 914 966 1094 1175 1462Raw matebrials and intermediate

products 375 1404 :330 378 4L1 1424 435 527Capital Goods 4914 570 .535 536 556 670 7140 9140

Animal.s, seedsc, etc. ( 11) ( L1) ( 11) ( 12)Construction nnaterials ( 614) ( 68) ( 55) ( 60)Tools and spare parts ( 52) (108) (107) ( 92)Agricultural machinery ( 36) ( 143) ( 40) ( 140)Transport equipment (109) (1:26) (:102) (127)Indust,rial. and commercial

equipment (193) (2:L14) (220) (204)

Miscellaneous Goocds b/t 36

Tot,al Commodity Imports 1072 1186 1139 n1143 1246 1380 1.467 1800

Source: Historical figures, Bank of Mexico. Projection prepared by mission and Bank of Mexico - Finance,Ministry Working Group. Details of bases of projection are given in the following pages.

a/ Further breakdown than shown not availabLe. Estimate based on 9 months' data.b/ AAfter 1956 included with other items,

APPENDIX ATau-Le A.3

Page 2

onsuri-er Goodus: TLh-le sank o± -iexico - ; inance ilinistrry 1.'orking Groupprojected imports of consumer goods on -the assuLmption of a growth rate o:lp percent for the period 1961-65 and o percent for the period 1966-70. Bycorrelating imports of consumer goods anc total consumption in the countryit arrived at an estimated increase in consumer goods biports of 2.1 per.-cent per -year in 1961-65 and 2.9 percent in 1966-70 Historically im.portsof consumer goo6s rose atL the rate of 2 percent during the period 19,G-62and then experienced a sharp increase in 1963. The present projectionadopts the grooth rates com,Duted. by the Bank of rlexico - Ivinistrr of Fi-nance Working Group.

Raw Niaterials and Intermediate Goods: Imports of this category oi'goods have remained a- the level of about ;.'i0O million per annum since 1956.During this period the rate of economic -groith averaged 5.6 percent per year.Since the mission's orojections assume a substantial increase in privateinvestrlenit as well as higher r-tes of growth; than in the recent past, it isfelt, that tlhe margin for imports of raw materials and intermediate goodsmust be increased. Growt'h of the.e imports has been projected at the rateof 3 to 4 percent.

Capital Goods: Import requirements of capital goods were projectedon the basis of the estimated, iruport content of the investment necessaryto bring about an increase of approximately 6 percent in GDP over the nextfew years. It should be noted, however, that tha estiinates of investmentand required capital goods imports are rather rooL-h approximations. Avail-able informa-tion indicates that over the past four years net investment ofabout 7 percent of GDP resulted in an av.rage rate of economic growth ofapproximatelyr 5 percent per ,year. This pattern of extremely favorable(l.b or thereabouts) incremental capital-output ratios seems to have beenfairly typical of :ex.can developm-ent. A gradually rising incrementalcapital-outnut ratio (up to 2.0 in 1970) was used in the projection on theassumotion th'.lat the favorable factors which until nom have ne-mitted Mex-Icorapid rates of g-rowTth witli lowT investnment levels will tend to lose impor--tance as the colntry moves into more canital intensive economic activities.On these bases total gross investment would have to rise from about 12.7 per-cent of GDP in '962 to 15.7 percent in 1965 and 18 percent in 1970. Apartfrom these considerations, recent econoric cdevelopnments clearly indicatethat a rmoderate increase in investment levels sunillement,ed by 2nnronriateecono,nic nolicies should miake the target rate of Eroi.th of 6 percent perann-um easilv attainable. The nroiected investment, levels also seem com-patible with the overall saving possibilities of liexico. For such invest-m,ent to materialize the marginal saving ratio (per carita) should be aTprrc-Y(Jmately 16 percent - that is to say it should be at a level comparable tothat which nrevailed drring the pa:t four nr f-ve years Thli Ptimate ofrequired domestic saving ei'fort is based on the assumption of an increasingvnlume nf net ceni+.l infl oT. t.hrouglh 1 Q70 (projeced.al onf' pamentscurrent account deficit for 1970 is Ps. 5.6 billion). But even if thecurrent acco-nt deficit remnains at the present level (say Ps. 2.8 billion)>the resulting marginal saving ratio (20 percent) wqould still appear to bewell1 T.^?ji"_iinhir inrxilc' osbii-is

Table Ae4 APPENDIX ATOURIST RF,CEIPTS AMID EXPEVDDTTtJPUES, 1957, 1L960-63 A5ND PROJECTIONS 1964-70

(In millions of US dollars)

Projections1958 1959 1960 1961 1962 1963 1964 1965 197D

Receipts 1450 496 521 557 586 655 7C0 749 1050Intericr tourism 134 1142 155 1L64 179 209Border transactions 316 354 366 :393 1406 446

Expenditures 208 245' 2!;0 273 280 304 332 360 530Interior tourism 19 214 29 31 35 39 45 51 98Border transactions 189 221 221 2.42 245 265 287 309 432

Number of Tourists (000)Foreign tourists to

interior 771 813 107 6Mexicans abroad 614 69

Notes: Receipts from tourism and border trad.e have been proJected at; the rate of 7% per year, Thesereceipts increased at the rate of nearly eight percent between 1958 and :L963 (9.14 pe;rcent forinterior tourism and seven percent for border tourism). Further expEansion at these rates is feasible andprojections prepared by the Bank of Mexico - Ministry oaf Finance W.Torking Group point to such conclusionon the basis of estimates of levels of personal income in the United States, average expenditures ontourism and share of Mexico in US tourist expenditures. Tourist expenditures; of Mexicans have beenprojected to rise at the rate of 12-13% per year, i.e. at, a rate slightly higher than the one that

prevailed between 1957 and 1963 (12%). Border transactions, which incluide a high proportion of unrecordedimports, were projected on the basis of the historical relation of these imports to receipts fromn bordertourism.

APPENDIX B

NOiTES ON THE iEX'ICAN TAX SYSTEM

A. Tax Structure and Recent Changes.Federal Goverinenat.

1. In l°62 over one-third of the ilexican Goverinent revenues camefrom income taxes; sales and excise ta.es accounted f'or about 11-12percent eachi, while taxes on fioreign trade represented an adcditional18 percent cf revenues. A variety of other taxes provided the balanceof current revenues. Although income taxes have become increasinglyimportant in recent yTears, the full tax potential at existing rateshas not been reached due to a high degree of evasion.

2. In the past few years varicus measures were taken to strengthentax administration and reduce evasion. These measures include:

a. Centralization and rationalization of auditingoperations through the c.eation in 1959 of theItAditoria 7iscrail ai corns of ni)al ili d nubl icag^nts. bifierent taxes, such as sales 2ndnncomp taxes; car hencefnrth 'oe invf-et!gated

Jointly.

b. The rezi,oval of the traditional "calificacion"syZstem of assessment, whkereby tax liabilitieswere determined on the basis of a give and takene-gorrtian-ting prnor-cess bet-een t'no- trva-p-ye andthe tax official. This system implied the

pesu-., t io n-n c1'' e v3 snf n d rlmstn i bly

induced the taxpayer to act in self-defensebyr concealing parn-t o IMs a-c+1a in^om.n

Besides, th-e figure arrived at in the,a,ificacion"f process .Ja,S bind-i on bot

parties. According to t-e new rules, the. nA,snsn,n - I o ; ,Yn4 4- A> , 'n-1noAAn

CJVernunent's rii cht Ut_ reopenb a case w1here

fraud is suspected, will only be prescribedafter -Cilvre years, anA 4hIe seassessment -4i n1o

be based on more objective yardsticks.

c. A system of regularization ("convenios") where-by the uia±payer can be discarged of uities prior to 1962, if he consents to pay partol uhe evaued uaxesw

APPEIDIX BPage 2

d. The creation, now under way, of the "Federal Register"whereby for each taxpayer all relevant information willbe centralized. This wvould allow the tax authorities,using automatic data processing devices, to crosscheckdata relatinrg to the same or to different taxpayers.

e. Emnlovers are now obliged not only to retain salarytaxes at the source, as previously, but also to com-municate thc identity of the payees to the taxingauthorities.

f, Persons, with more than one source of salary income,must now renort their wagu-es on a consolidated basis.

Fiirthmr mPnqirPe. wh4 c+h the miss-inn rec r:rnrriq toE i.mrrnve t.ax qr1min4tration are the folloiiing:

a. Close cooperation between the various branches ofthe Administration, especially Jith. ;egard to theexchange of relevant information.

bo Auditing shouild not, be limited to taxpayers in theh; rh nca+. hordera+r 1.c , ;C To nr,O nmvc +,,-,"nnTn mra ,U ; f;+

not possible to concluct each year a thorough exami-nation oJf Cadch j ta.Atpayer.s d-clarat,o, -. - a rat iona l-

method of auditing must be devised. "1iormal" ratiosofL pr ofi.t 4to sa'.es- can 'be commoutel 'or vardousbusiness categories, according to their size, loca-Uti., bY tye Uo UjeU0 Ut radUe, LIU T _ a'lo.,s to

concentrate further inquiry on those taxpayers,ubiose ratios arei uoiLns drably b-elo-v uie xrUIx'I,,-

Besides, a system of sampling at random should beinStituted, whereby taxpayers carrying tile samecode element in the "Federal Register" are sortedout for fOther controlm In this way taxpayerscan no longer assume that underdeclaration goes-ur- -he ed i,_

c; Yol'te temlpas1is hollul bI U Liue put on selectLive field

investigation than in the past. The Auditoriaso far seems to have been concerned mainly withoffice auditing.

d. The Federal Government should assist the Statesin improving and maechanizing -their tax system,

APPENDIX BPage 3

3. Income Taxes. Until recently 1KCexicots income tax followed theschedular system with various types of income taxed at different rates.In December 1961 the income tax law was modified through changes inrates and the introduction of a limited new global schedule taxingtotal income independentlv of source. More snecificallv. the mostimportant income tax changes were as follows:

a. Rates in Schedule IV of the income tax pertainingto wrages and] salaries were i;ncreated_ excpt withrespect to thie lowest and hlghest income brackets.

bo Two types of property income were brougnt withinthe income tax base P pents from builiings notused for certain specific business purposes arenow taxed at depreciation and repairs), if they exceed 1,000pesos a mon+h. The tP v is imposed on each uvnitrented, i.e., on each apartment, not on the apart-cmnt- b uilding as a F:hole T Ircome from fixed yield

securities, if exceeding a seven percent interestt_ are A A1s u I_4h ; j 4- c1 4IAVb A 4I -l r_ Fa.1m

two to five percent according to the interest rate,

c. The tax on distributable profits (noo Schedule VII)wadO .UU±otU _11UII i_a rUOIU ) e-u J)tOYUtILU Ull UiLV.±-

dents nayable on bearer shares, unless the payeeid_ent.vL.its hlnWWself.

u. AcoIripLe ntury tax( on tO,a L, info.-e troamlin.aLevUrsouirce applies uoa to indiviOuals iA,hose taxableincome exceeds rs. 180,000 a year. 1he effectiverates extend from 3 to 15 percent. But two legalprovisions restrict considerably the scope of -(,isnew tax. it woes not a:,Ply unless. the taxpayerobtainrs incomes taxable in Two or more schedules;and unless tLe total tax liability requlting- fromboth the schecdular and the new complementary taX,

does not exceed 30 percent of taxable income.

e. A capital gains tax on urban real estate graduatedaccordinLg to tie tixe-iag between acquisition andsale, HTowever, value appreciDti.ons before Janu-ary 1, I9o0 are not taxable.

f'. Prov,.rision for accelerated depreci ation has beenmade.

APPENDIX BPage 4

Thle yield effect of these changes is rather :i-odest - Ps. 250million ifor 1962. This is merely 5.3 pcrcent of 1962 income taxrevenue And less than 2 rJercnnt of total c-urrent revenue.

Resnonsiblr c'overnrzant circ.les hqvpe rublicly stated thleir in-.tention to effectuate a further major tax reform in tlhe not too dis-tant, -it,m'rp- ITen A speec onIarch 1 K 193 ithp TinanGer ( i nisterasscrtea th.-t the 1961-62 tax law modifications did not brin- theprocess of tax reforra to an end. hore specifically, hedisol osedthe Government's intention to substitute for the present s-stem ofschedular taxes on sepa-rate in-co.mes a ta. on total income "person-alized" by such modern features as a progressive rate schedule andpersonal In-j faMilr I 11 -T7. Inc Su. o rno"rn, accring + to c

Iinister, wjould bring about a iiore eq,ui4able tax system.

6. The mission is in agreemrent waith this objective and with ThoCJCI U~~~~V U!i~ j,. ~: K-1 U CUU 'JdA2 0 J' UVt3A* . 1.~ ..- C~J JL -L,L U.LU11 L uc1e

income tax burden does not counterfct tlhe regressive featuxes of in-di;rect taxa"ion. 71 -- - - - in -ost sc,"-4-ula--t,1--e income 4ae,acoc,U. LI v&c u UdLd "JJ1 I C; I - l I i ±N Du J) , U -U1= -UL - U., j. J ±iU -L -Z d'CUJ±

ing to traditional tax theory, property inco,mes are taxed more hleaviilyU F)I1 e3rneel lncor,Ies, theO £0V!2-J~ 11 rv- st i. r a in i nxioo s,

progressive rates exist in most ,chedules although, in crder to ef-lectuate a rati : onal 'L Clistr ibutIiOn VI Utax UUUdLie . cc UJi LIU Lto the

relative "ability to pay" of each taxpa:per, a proCressive rate-sche-Cule slould' be appLIed to total t.rxale income. s tna flOlo0iIngClhart sug-e.sts, an attesiut at discovering any distributional logicin the erratic complex of rates qou]d be futile. lioreover, propertyand businesa: income recipients enjoy r.uch freater evasion oppor-tunities then wage-earners, thus comnpounding the distortions in-herenL in the nominal rate pattern.

7. The !hlexican income tax su.ucers from other deficiencies: thepresent -7-stem has somae aetrimental effects on -nvestment and businessactivities, and it is e::cessively complicated (the system involvEsmore than 4'u different tax declaration forms). i.do-pting a globalsystem -ould mean a great sm,iliflication not only for 'he taxTpayerbut also for the revenue agents.

ME-XICO: AVERAGE TAX RATE IN VARIOUS INCOME TAXSiCHEIDULES60%[ ~ ~~I~-

50%/

CLI 4 C % _ _____________ _ ___ _____________ - -o INDUSTRY - CC)MMERCE

0 / - -_ --

Ld3C) % .... -...0 -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~43C)0/ 0 - - ,.~~~~~~~~~~~~~ .~~~. ~PROFESSIONALS

Lu INTERE 'r / .01........... ,-.. o...........P..........ALLI INTERES T _ o...... .-;----,CL ..........Z / it ." - AGRICULTURE

<1 20()% _-,/ -

_C) 00 DIVIDENIDS t _ , -' - _ DIVIDENDS t

(% -~ ~~~~~~~~~~~~- .--- ,'--- , .--

1()% .--- _ ,---'s,,........... t--

t- t . "'---.. WAGE',

--_; ....-----

. . ....... LOGARITHMIC SCALE

2 :3.5 6 1 C) 20 35 50 100 200 300 500 1,000 2,000 5,000 100,000 50,000 100,000ANNUAL TAXABLEI INCOME IN THOUSANDS OF PE:SOS

* Not applicable to fixed-yield bonds. IBRD - Economic Staff

t Undisclosed bearer shores are subject to 2C 0/0 21h6

APPEMTDIX BPage 5

8. Lest it maintains and even am,alifies pre-existing inequitiesand distortions, a global systert of incorie tax should meet three basicprereouisites. First, all incoa.es should be brought within the taxbasis. This implies for hexico a removal ol the present liritationson taxing nronertv income. Second. each tvne of taxable income shouldbe assessed as accurately as possible. Hence, anti-evasion measuresshomld be stePnnpd iin Tnirdj 'hip 'hisea author-t should-3 have theability to assemble tax informatvion about any person. In this respecttl-e pernanent identi^i ca tion sv.- temn (!IreA .strti fe~ral ") is o~tf~ thegreatest belp. In recent year., thie :ieyican Coverrnent has therefore

taking a major tax reform, T'his anpears to be a wise course of action.

9. The iiexican Governnment shoulcd carefully, but without wuduedelays, plan te, in,tenFted reforT+, o ,-nco,ne -axes It ,u- 1, be harm-ful either to introcuce prematurely an ill-conceived new systemi orto ir,provise a --re iiA` 'kL [J - -,JSJe of baU ted.;.inor ret.JVouc'.les tothe existing system.

10. In addition t;o the income tax cha:apes referred to before, theI'llex-ioan Glovernrnmer.t' has also introducecl recenltlyr chlnges -n other axe;

a. A newLy creat.ed tua x on t, o --nUrS-ip andc use

of cars. In its f-irst trear of an-Dlication(1962 | |) thi ta yelde Ps * _ milin

\, U l. ¢,-') UdY_ Y_it-L.1t:eu rr. 04 lfllL Ol.uL

b. I'!Le auo±±uiuio cu^ the i1L`erieance *a,;. Iife-hwas motivated by the very 1-o - yield of thetax and the fact that, byx niding their assetsrehind bearer shares, wealthy taxpayers evadedthe tax almost completely.

c. Since 1962 an additional import tax of 10 per-cent ad valorem is applied on 1,250 comnlodities,ciasLified as -non essential.- Th'e proceeds oItihis tax are earmsrked for promoting exports ofmanufactured goods.

d. A newq tax on payrolls, earmarked for financingsecondary and higher education, is effectivesince i,iarch 1, 1963. Employers contribute1 percent of salaries paid out to their em-ployees. 'ihe latter, if their wages exceedthe legal minimum wage level, equally con-tribute 1 percent. Professionals pay 1 per-cent of their income taxable for purposes ofSchedule V.

APPENDIX BPag:e 6

11. Some rather uncommon characteristics of the new tam on pavrollsor "education" tax are worth mentioning. The tax resenbles compulsory,socisl security contributions, but the proceeds are not necessarilyused for the benefit of the contributors. As its yield falls shortof tntai PdlAtional Pwnenci`t-ires; the 12qtter will still have to baefinancedJ predominantly out of the general budget. The impact of thenew txn-x fn-lls on lsabr andI bus inesr not ron pronPrty inromez_

12. Sales Taxes * The dexican sale3 tax is o_2 the turnovrer, ri!ulti-point type. The raLe on mos-t cormiodities is 3 percent, of whichln8 percent flowS to tze iedernl Rtra-rnment nnd the +3 mi nf_ to th eStates or the Federal District. Many "necessities" are exemipted andfor other comm.odities thIe rate is h.allred,

13. '.evnue f1rom salecs taxes has -i-cre-sed f,te than DP or than.LJ* t.~V ~±U~ 1 J . u .1 az vu~u, ±a ±t a j' .1~'vzt una±± .JJJI 'JjL U 1X

total tax yield. This is partl1 attributable to favorable socio-econo.,ic factors such. as theC JMnrc.aS-int, d_-grce of.lntzatio a;

urbanization and the adoption of new marketing rmiethods such as super-markets . Collections 41,- )4- --n 1 -_i _-dra _'src have-_ 4ro-. e e thnIILdJ. ~ U ',I _LLJ1~ 11 L1111- I U 1dL ~ ± IL l j:,.L v l looutl U 5 U1

those in the States. Administration of sales taxes also has improved.vasLon 1-i0J e-V-e r i stilIl very siZe * -i-I Li LI t L ~Ilt y L leltU UihaU

only about 30-40 percent of taxable transactions are actually taxed.M<L... £... 4 - 4 - 1- t,I tn- _ ._ ,nKTie nul-liber o'L taxjpayers laui.e to saL`s tax -eached uO,U00 in 190UU

But 60 major enterprises accounted for a7T.os' half the sales taxyield.

1X. Taxes on Foreign TlradeU. Imporv aldct export taxes representedone-third of all current revenue in 1955 and only 18 percent in 1962.has5 oecrease is essentially cue to tie evolution of export taxes.These were originally introduiced in order to tap the iwindfall g,ainsaccruing from devaluations to erporters. unfavorable price develop-ments for primary commodities anci a deliberate policy of ex-ort pro-motion have led the C-overnment to lower rates on an increasing numberof commodities and to grant remission of export ta,es ("subsidiescomuenjated iithn taxes") to enterprises on an indlvlduaL Dasis. Theratio of export tax yield to the value of exported goods has declinedregular)y from its 1955 15.3 percent peak to 6.7 percent in 1902.The structure of export taxes is such that they provide an incentiveto export finished goods, since more finished comnodities are taxedless than unfinished ones. Import tax rates on the other hand haveheen raised in recent years. The average tariff is 5 percent on rawmaterials, 10-15 percent on machinery and investment goods, about50 nercent on mnanuf'actured goods competing iith domestic supplies,and up to 100 percent on luxuries. This demonstrates tlhat importduties are used as a potent protectionist device. In view of t,heheavy capital goods cormponent in total imports, the average valueof import taxes to the total va-lue in 1962 however was 11.2 percentwhereas in 1955 and 1958 it was respectively 8.3 percent and 9 percent.

APPENDIX BPage 7

l. Excise Taxes. Tnyes on domestic production are levied on a serip-eof commodities, such os alcohol, tobacco, electricity production andc.onsnrPntion. petroleimmr assembly of cars. The proceeds of t.-e eiectrirftvtax are channeled to OFE. Formerly i-'=X was subject to several taxes.Snc 19 60 PIThTfrY p-anr, n niIi tfax 1 wh1 rYhi reaches a maximu m. oe 19 neioent+

of its gross revenues. Fiscal accounts for recent years impute theunified tax. tO the various co.pnents. the newly- crae tax on o-Jneship of cars is also catalogued as a production tax, though it is infac+t to be co.nsidered as a +ax on the poSsession of a l sr or so.i--

luxury commodity. Product on taxes have increased at an annual rateo 12 -:5p rc n Si- I lolf Tk AA o4. A_+ - + -;__m1 0-eT; +1, -- ' - - - - - -r - -V s 4 C- * Y jJL.± C.,L,±± U 'a ', As@s 5 /22 v s ! 1_ a0 L ± . UO -1 V ULL: C1 t J

0al hCa

of the country1 s production base, but also, especially in recent years,some rate increases (alcohol, electricity 4d the ne -eic4 tax).

±0. OJUIJ~ ±duther UTuaxes an. YeL', Revenutes., JUiu USome taIxes UUicU nII UthIi

miscellaneous category have e-perienced a steady increase (e.g. stamp4. _ -__ 4 _ 4A - - T .., ml2_ 2zn_ -- 4. _ n_ r>u.aes,. I tA±dAC 0vll IIJ AI IL6 li.dvu Uen&eU UU ±eve± U±i . *like ±iidjul COiQ-

ponents of this category, such as arrears, and most non-tax revenueswere sublJect to considerable year to year fluct-uationsu

It Feuteral. J, Ice ra Distr: c is tue iaos,important political subdivision of Iiexico, with revenues equivalent toabout two-thirds of all other states and municipalities. The iederai.District has traditionally ;enerated a sizeable surplus on currentaccount. Except in 1902, a suuplus iwas even reached in the over-allbudget situation. Savings representcd about CO percent or more oftotal revenuies in most years, except in 1962, when they reacihed only46.1 percent. The presently outstanding debt obligation3 of theFederal District are minimal. Current revenues stem frorn a multi-plicity of sources. The sales tr;x ard a real property tax (0.9f, per-cent on gross cadastral value) made up 45.53 percent of total c-rrentrevenues in 1962. The yield oi the real property tax nas been in-creasing at a compound rate of 16 percent a year since 1935, slightlyfaster 1than Federal District. curent revenues. This is due to cadastralrevaluations as thle 1943 rate sti'l prevails.

18. States and Lunicipalities. Revenues of States and Nrunicipalitiescome from a long list of minor taxes and fees, some participatior intaxes collected by the Federal Government, and only one local tax ofsome importance - the real property tax. Revenues of States andMunicipalities are inelastic partly due to the fact that, as fiscalmara ement, both at the expenditures and revenue side, is highly,cent:^alized at the level of the Federation the tax domainleft to local governments is very limited, Most taxes are specificand do rict have a considerable degree of built-in flexibility. Taxcollections vary greatly from state ts state, not only because ofdifferent levels of economic development, but also because of differ-ences in the quality of tax administration. in one state visited by

APPENDIX BPage 8

the mission tVe imnlementption of modern methods nf tax administrnticraccounted for a large part of the 27 percent increase in current revenueand the 57 percent innerens in t,he vield of t.he sa t-ix- bo,th of whichwere obtained from 1961 to 1962. This suggests that with appropriatepolicies local finances could be improved at least to the point iT.^herethe increment in current expenditures could be covered by, locallymobhilized resorces-.Savings '~-~ gee7t nr bysae and municipalitieshave tended to decline in recent years not only iuhen compared to currentrevenues, but even in absolute terPns.

APPENDIX EPage 9

B. Present System of Business Taxation and Suggested Reforms

19. At present coLmmercial, agricultural and industrial profits aresubject. to twio and, under some conditions, to three taxes:

a. The progressive income tax in Schedules I (commerce) andII (industry). The highest marg-inal rate reaches 39 per-cent and applies to taxable profits over Ps. 2 rillion.The average tax rates reach 20 percent for a taxable in-come of about 320,000 pesos and 30 percent for a taxableprofit around 1,675,000 pesos. The tax applies equallyto unincorporated enterprises, partnerships and corTuorations.For small taxpayers with an annual turnover elow 300,000pesos tax assessment procedures are simplified and tax lia-bilities determined accorcing to a classification oftaxpayers into seven categ.ories. In 1960, 98.1 percent ofall taxpayers in Schedule I, and 95.7 percent in ScheduleII were ".inor" taxnayers. Agricultural profits are taxedat rates which are about half of those applying to cornmer-h iA "nexnc s profits tax"is.lj

h An ttoveqp.cm ~n-nrrfi+ ..q......... t.n -V ;. ri ql Ir P-mTi inrl1 r.n I n.-,~In II

i.e., those obtaining annual gross receipts over 300,OCOI-. Q~ m vri Ac ,A + 1i 1- 4-'- i- + I ~,~~ L~ ~-cr + pvC i + &1l

invested, the latter bein{ defined as the sum of paid-in,-p-±l capital~ ~reserves and surplus earned. lThe rates

are graduated from 5 percent to 25 percent according tothe~ 14J. SJ.L 4 L'fi JJcapital .1 inve.4 LJent~L1L~ I 4 44jJ4 ratlo xcess. ... U prft ax

liabilities however may not exceed 10 percent of taxableincome.

c.L Tle Udst r!iuUtlUUe prLoft UtdA. Th1ls UdX.A ha s JaU.i-,bU

character. Formally levied on the profits of a corpora-tion or partnersh1ip, i-t cannot ue eUquated Viith a supple-mentary tax on corporate or partnership profits. The taxis intended to be borne bJ - the sh-atreholder or partner and,to this effect, 4he entity is entitled to recoup the tax,when pa,ying o-u-t the di-vidend. eitLher is it sIJilar tothe usual tax on dividends, as, even in the event no divi-dends are paid, the enti+ty is subject to tne tax on itstotal profits. The appreciation in the stockholdersequity participation as a result of profit retention isconsidered to justify the inclusion of undistributedprofits in the tax base. A flat rate of 15 percent a-plies(raised to 20 percent on dividends of bearer shares, un-less the taxpayer authorizes identification). Substantialreductions of distributable profits tax liability can be

APPE;JDu± BPage 10

granted if the tawpayer, under certain conditions, appro-priates the profits to a reinvestment reserve. The re-duction can even reach 100 percent for industrial enter-prises.

20. Accordingly, the burden cf direct taxes on business pro,-'its isdeterm.ined by various elenients. Table A exemplifies the total taxburden on enterprises, under different assumptions. It shouLld be re-membered that part of the distributable profits tax can be receupedfrom the shareholders.

21. The present system of business taxation is highly complex, themore so since there are sizeable differences with respect to the de-termination of the taxable base in each of the three taxes. Thiscomplexity is further increased by the effect of possible exemptionsand suosidies.

22. The oresent system also entails some economiically undesirableconsequences, A case could be made tor charging progressive ratesaccording to the absolute size of business profits wJhen dealine .Jithsmall, highly labor-extensive enter,rises. Cenerally speaking, thepresent svstem nrovides an ercoiirac-ernent t.n spli.t-upn n prnciuctlre

L s _ _ . X _ _ X _ , _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~n ------- 1 _

unit into several sraller separately taxed entities. Though the effectof this sy stem on the size of enterprises sro11 d ..ot be exa-gerated,as the tax factor is only one o- various determinants of businessAdec (-: sin s, some cases of _- tax-motvi--ated -sFl+ii-u hae ee Nrrt-ne

to the mission.

23. The advent of a global system of income taxation, the need forsirnl,lrict an d -the a-'visabil ty of shaln the-,-4 4 tax 4 ytmacod

ing to economic development objec-tives, all tend to suppor-t the caseL.~L~ VA Ul~ L UJLU 1 -i- UIItU 'Jl. QC)zil L O~V Q UUI.! U)± L'±tDL1B~.1 ,L.U. . liU

probleiris involved in designinE arn appropriate system of taxing businessprofits are very difficult and intrig-uing. The equit-i reqUiivenents,the likelv effects of alternative schemes of taxation on investmentdecisicns,on the development of a genuine capital market and on thelegal forms of doine business must be considered. These differentaims may be largely conflicting. urethermore, a prouer coordinationof the tax on the corporate entity and of the tax on aividenlds at thestbock-older X s le-vel is not easy to achievew

2h. In devising a new scneme, the present-day institutional andeconomic characteristics and the specific developmental needs of theriexican economy should be guiding principles. Among these iac-orsthe following stand out:

APPENDIX BPage I

a. IMost business units are small-sized. According to 1960tax statistics, 97,7 percent of the total number of tax-payers in Schedules I and II belonged to the category of"msinor taxpayers", i.e., their annual gross receipts °werebelow 300,000 pesos. Only 0.35 percent of all taxpayersin Schedules I and II had gross revenucs over Ps. 5 mil-lion but accounted f'or 89.2 percent of total yield; 72.8percent of these larger enterprises were conducted incorporate form. Thoughi no precise data are available,there can be no doubt that the miiajority of cor-porate enter-prises show low levels of taxable proflts.

b. lJost corporations in Liexico are of the closely-hleld,family-type. There is no widespread ownership of sharesand transfers of shares are not frcquent. In other iwords,interests of managers and shareholders tend to coincide.Hence, taxes levied on the clcsely-held coroDora-tion canbe consid(iered as sz;ihs'Htmt,pq for t_es on the st.ozkholdie-r,7s

dividends as they are levied on the same persons.

c, A penalty on large-sized enterprises is sot beneficial toMleXjrin vet~lnnm ni- speciall in •ir r Tj of' the +br '

imoortance of large-scale r-tailing and of mcore capital-4.1:-U V -LJ ~ Y ~V. &~ A-L.f± L±J 1 ~ J a. P- 4~'11 'Z;~WLI ~ UJ4. U L o~-Avo L 0

is, as historical exoerience has convincingly shownn, most

corporate sector also contributes towards creating a genu---Ine capidl U 'L r-,e U.et

d. Th-e noinal ., ignouring tax evasion asd incentivebenefits) average tax burden on business profits, exceptfor ernterorises in the small prof'it levels, thougLh iarfrom excessive, is comRparatively high with reslpect totaxes on property incornes. This consideration suggeststhat in reshaping the income tax system additional t.axyields should be secured from increased rates on propertytaxes, not from a considerable increase in the tax level onbusinesses. TIhe average tax on businesses should be atabout the present level, or, at the most, slightly higher.The relative shift of tax burdens from the business entityto the business proprietor's level would also be beneficial,as investrment is more likely to materialize when funds arekept within the business entity than when they are appro-priated to individuals.

25. An examination of various technical alternatives leads -themission to believe that the system of business taxation, most suited

APPEND1A BPage 12

for Mexico, could be construed a70n- the following lines:

a. A high prepayment rate on mobile propertyj incorrie is aprerequisite if the revenue and equity requirements of aglobal tax system are to be fulfilled.

b. For the time being the distinction between "major" and"minor" taxpayers should he maintained for unincorporatedbusinesses. To do otherwiise would excessively strain taxadministration.

c. A tax on corpDorate profits shculd be introduced. Itshould apply the same rate irrespective of the level of'profit earned, ice., there should be no progressive rateschedule. One e:xception could be envisa-ed for new cor-porations engaged in productive industrial activities, butexisting incentive Leglslat.ion and the recommended intro-duction of a loss carrv-over would take care of treatinr.enew ventures leniently in their L"irst years of operations.Under a global tax ysvtems with average rates going up to50-55 oercent, there is a definite need to prevent wealthytaxpayers from .v,dl6i nc gh marginal taxes throluph thesetting-up of simall (personal holding) companies. On theother nand, the -3-ith of en+ernrises into larger scaleoperations should not be discouraged.

d. The dis-tributable orofits tax, of course, would disappear,as + -t Adi -,,, ta-x I is I i -n cmponn o+ +h-e c, 1 lo sl

tax structures. The excess profits tax should be abolished.le IcI rum iWIIt UanIcies LJ tW Lh ' i c vL Wd.t w as gAeard

f'rom devaluations and Korea-boom) are no longer prevalent.The squeeze in pr-ofit .largins 'u-r I --gr rec en tyeranth

trend tcwards more capital-intensive ventures would any-'ilOw p,rec±ude any LroauuEiing of -the scope fur ex profsO.

I:i ¢ ,L L UD U W aud o Jo ullU L'VIIC UdLL O 1 VUL UIII=LI D-1±O1 UOtV

f'eatures. Apart from existing special exemptions ands-ubsidies, the 1962 tax reform introduuced thle possibility-of accelerated depreciation. However, this benefit isnot granted automatically Dut is up to a decision bythe Finance Ministry. At the time of the mission'sstay in Mexico no enterprise had availed itself of thisnew measure. Reinvestmnent reserves give rise to taxrelief for purposes of the distributable profits tax.The latter two measures are recomendable featuresof a modern tax system, though it should be stipulatedthat the tax-saving benefit of reinvestment reserves is

APPE"TDIX BPage 13

i'oregone if the reinvrestmient fails to materialize within,say three years. A loss carry-over is now only providedf'or purposes of the distlributable profits tax. Consider-ing its positive effect on risktaking, it should be partof the new system.

26. -iost thorny is thie problem of reconciling the tax on dividendsat the shareholder's level and the tax on business profits. Severalconsiderations should, to the extent possible, be reconciled. First,the investor shou'd not fetch a higher net yield (after taxes) on aloan than on an equity investment of same amount. Second, to considerthe cornorate entity and tie shareholder as econorically distinct, onlyconforms to reality for a minority of larger scale business undertakingsin Hexico. lHence. in setting rates on dividerds at the shareholder'slevel, concurrent taxes at the corporate level must be taken into account.And third, the aim to rmornrvp the inhibiting effects of taxes on thesupply of equity capital sihouldl not be carried so far as to penalizethe fanancy g of restnent through the ploughing b'hmn of bi,jnpqprofits. Reinvestment of rctained earnings is bound to remain themajor source of inrvestIble funcs for many Lears to come

2 '7 '{'hea stm 1.c , rh inh on bk--ncnn tet- -pp",InrCv-ma - -n -il itu re

quiremrents listed above, woul. consist in the apnlication at the cor-poratlue Le v C O'I o lo p-ercer.t tx on retc-incd ear-ng,b -an - 20 eren

CA ACA .LA VCA CA. L 1C. jj1

L4L l II AJA AJA 1 C I 4X,4 tA±AILLAJ I LA C AJOI '01A; LI

rate on distributed earnings at the corporate level. (At the stock-h1-older's leve-Jl, a _30 percent- or- 35 -cercent prpa,e t tax wo ld be~) iZ V0.L, AL J\J O± CAILU Cl .) lj01 UOI ,Uii P.L up pjtdyCell U . kL LU U.LU

applied). These rates only indicate orders of magnitude. The basicidea isUto reduc consut i ±derably t'he rate_ on Ui-_td profits at ti-e

corporate level. The rates to be adopted depend on such factors astlt 1tzVe t eltsj_ lor lthe Einco tx,i the orepyentt r ate VAl D k C l-'holders' dividends, the extent to whi-ch incentives are granted. Ina !closel-yheld!! comany it is uieaning-ul to loos at the total taxliability,I i.e., the taxes applied at the corporate level and thoseon the stockhlolde;- combined. Supposing a stockholder s divicdendprepaym-ent tzx rate of 30 percent, this total tax liability would

- .~~~.4. LA.. ~~~.L ~~~ .~4.t.1vary betwen thUULI ~± 1fe x'eu ofproits ein ui Viy -ulVdl i.ut U14Wt;u1 4u/p1ttI P i s1Wliu k-Lilv UISSI,;iUC 1, t:vil iLI U yW1l-L

held) and 44 percent (at a 100 percent distribution ratio). Thus thesystem outlined contains a built-in incerntive for such compan-ies toretain profits rather than to distribute them. This incentive is com-pounded if, as advocated above, the utilization oI reinvestment re-serves entails some tax benefit. For "openly-held" companies wherethe interests of managers ard stockholders mayr diverge, a higner dis-tribution ratio would tend to shift the tax burden from the corporateXto the stockholder's level. Tie Exchequer would still benefit frcmsuch a shift, but on the corporate level profit retaining would beless att;ractive than profit distributing. This is however not ob-jectionable. On the one hand, such "openly-lheld" companies, being

APPENDIX BPage 14

frequently capital-intensive, are instrumental in broadening the scciefor a market in equity securities. On the other hand, the bias infavor of profit distribution would be largely offset b- the favorabletreatment of reinvestment reserves.

28. Thle scheme of business income taxation cutlined above has otheradvantages. it can easily be administered. Large-scale businesseswiould be encouraged to adopt the corporate form, as otherwise theirnet profit would be liable to the higher brackets of the individualincome tax.

29. Reform of Sales Tax. Attention should howiever not be devotedexclusively to income tax, if tax policy is to be b-rougl.t in line To1ththe aim of rapid economic arowth. In t',:e lon.wer run reform of' thesales tax should be carefully considered, Th's tax is unsatisfactoryin many respects. It is widely evaded, especiallv at the retail salestage. The large num,aber of taxpayers strains the manpow:er resourcesof the tax administration The only crrude clifferenthatinn of the t.-Cburden betTween comvmioditics, and hence between different income levels,consists of the exemption of "tnecesti f and th,e imnositnon at hal .v-drates on other conmodities 9

30, The present multi-point tax could profitably be replaced by as i nle -pon: +.tv +. +.ht I manuacture r fo-y I nr-r Pr s-o; rrC .dJtJ at.

the level of the first sale. This s-stem is relativell easy to masteradlministrative+;rlyr N;r immrv.+e+ Th,n te c r~ or hr.P;r-1 oe +n r';c-.O-d M-@ s; |v|wuLsv_t )wvcwsv_i I-,nvc vvv fli-

criminate between luxuri_s (such as higih quality furniture, furs,movie projlectors, te'evis ion sets), s emi=luxuries (scl aS radiosn

electrical house appliances) and more essential consumer goods. This--ouc -rrs abol- t a-1 Iror eutbedsru Otax bresaln

social classes and would tend to dcivert resources from production oflur%~lesac e.4flLr toZ; Crso-^ essetla F-'UUOO ,N!lLts1 (LUmestiC

production expqnding rapidly, this tax possesses a sizeable yieldpo uentiu±da. 0,maL- pJroUUUcin andIU eta UdL t aUU U-IiL, to Vlhich verI rsimple assessment riethocis are applied at present, could be subjectedto a I11 icense t, ax of fTix.Aeld di,11Lntz IJ

Illustration Showing Taxes on hypothetical Casesof Taxable- Income and Tnvostad Clapital

(expressed in Mexican pesos)

Capital Stock 1,000,000 1,000,000 5,000,000 5,000,000 10,000,000 20,000,000

Balances at beginning of year ofRetained Earnings 150,000 150,000 700,000 700,000 1,LOO,000 2,800,000Capital Reserves~statutory, reinvestment, etc.) 50,000 50,000 300,000 300,000 600,000 1,200,000

Total Invested Capital (base fcrexcess profits tax computation) 1,200,000 6,oo00,000 12,000,0 0 2L,000,000

Annual Taxable Income 300,000 2,000,000 1,000,000 2,000,000 I, 000,000 10,000,000

scale of Schedule II 59,608 623,858 271,108 623,858 1,L03,858 3,743,858

Excess Profits Tax on above TaxableProfit less NormaL Income Tax(Schedule II):At graduated scale 3,039 - None 32,61L L9,61b 205,61LUnder a Provision of the Law effec-

Profits Tax is limited to an over-all rate of 10% of the profit sub-ject thereto - 137,61L None - - -

Distributable Profits Tax-/ (on TaxableProfit after deducting (a) Normal In-come and Excess Profits Taxes and (b)allow-nnes of 5% to statutor- 2n,and 30% to reinvestment reserve- 23 1L2 120,756 71 067 130,99I 2L8,286 589,926

Total Taxes on Income 85,789 882,228 342,175 787,L66 1,701,758 4,539,398

Percentage of above Total to Taxable In-come, of which: 28.60% 44.11% 34.22% 39.37% 2.5Lb .39%

Perce-ntage Of Normall Income Tasv to Tax-able Income 19.87% 31.19% 27.11% 31.20% 35.10i 37.Lb%

Percentage of Excess Profits Tax to Tax-able Income 1.01% 6.88% - 1.63% 1.Ph% 2.06%

Percentage of Distributable Income Taxto Taxable Income 7.71% 6.03% 7.11% 6.55% 6.21% 5.891

'l/ Assaumng rio bexrer shares, ard hence a tax rate of 17P.

2/ The percentage of profits which may be appropriated to a reinvestment reserve is subject to authorization ofthe Income Tax Department. In this example, 30% is used as a hypothetical percentage.

Source: Information Guide for Those Doine Business in Mexico.Price Waterhouse & Co., U.S.A., March 1962. p.4O.

APPLNDIX BPage W

C. Im=rovements in Public Sector Finencial Accounts.

31. As in most other countries. budget procedures in iAexico havetraditionally been devised mainly for purposes of administrative con.-trol and accountability. T'it" thne adcvent of development planning,however, budgeting should also nroduce adequate information on thefinancial asmects of the Plan. The mission believes that without anymajor dif'ficulties, MIexican accounts could be reconstructed so as to

nid Hp essential data. n promising start has heen made throughthe Secretariat of National Patrimony to collect and consolidate fi-nanc-ial ninorTnmatioJn ro-n anoen egencries- Thri e-ffortr. shroid ehp

continued and deepened by giving adecuate attention to economicallyand f.nIicially .meaningful factors, that mnay e hidden behind theassembled data. The Federal "Cuenta Publica," i.e., the "ex post"ancolnts cont.ain a VVI.-i. -P^-+4%JA Or,CA Lrm3'tS r;*0tIl. c

to administrative criteria, An economic and a functional classifica-tircn o budget expend iJ t esA4--I .y are also Ar o ed s rate 3 nv'. r C

UL~L± 'Ut U U U US 'UU dl, U C1AU ~J ± VULUUUUS -JL -U -

the financial aspects of developnment would be greatly fac-ilitated ifa cross-classification of Federal budget e-enditures, i.e., a com-bined economic and functional breakdown were produced; and if therecipi ent15s of govern Ientu transfers b UotUhI' on cr rent a-UdIL capitUd aJ U ac c ountUwere cleerly identified. The latter would allow a consistent distincti-onbetween !'e-'f'7ec-ve transactions"d an' 1 Icompensl1 ed op,eraIions,"± i.e.,those wahereby tax liabilities are converted into subsidies of an equiva--lent armo-unt.

32. At'Ltention may aLso be g±veu to reconstructing the pre,enI- methodof introducing the "Presupuesto," i.e., the "ex ante" budget. 'i'heunderstat,ement of Federal Go-vernment buUrrowing and current receiptsentails as a consequence that the a.mount of i'orthcoming expenditures,especially the investment ou-tlays, are aiso grossly underestimated,To introduce a mo-e realistic "ex ante" budget, and showing its linkswith the planned national development effort, would no doubt contribu-tetowards a better management of financial planning and a clearer publicunderstanding of the financial implications ofi the Plan efforte

APPENDIX C

PRITATE D_lDUSTRIAL PROJECTS FiOR FOREIGN FINANCTEG

1. The mission obtained some Dreliminaryi information on a series ofprivate industrial projects which prima facie appear to be of economicimportance. In some cases it appeared that external financing couldassist to complete financial arrangements for the implementation of theproiects. or to nermit or accelerate the develon;nent of the second stageof the projects in cases where financing of the first stage is alreadyarranged- The f'ollowing list briefly describes t1-e projects wJhich i _m

be suitable for external financing. The basic informnation set forth be-1mT wn e- ohn+i nir3 in PPhr -,inrr 1 IQt' .Thprp onnnre-i n*,n.P +.hi c: hnc- hPPn nn-

dated on the basis of recent information supplied by lZacional Financ'era,.

(a) Industria del Hierro, S.A., Queretaro

Project: manufacture of hieavy construction and industrial,,q,p,.1"j. u .

Cot ULI 64)_ II onLJL-1i bnG invesUCeidU;.d.. sbtAi UrtheL

development contemplated.

Present financing: share capital US$8 million -- debt:

Sponsors and Shareholders: ICA group (public works contrac-tors). Jaciorial Financiera, IiFC and French interests par-ticipate in the financing.

Foreign financing: could permit an earlier development ofsecond stage (expansion and broadening of the productsline). Financing could come in the form of debt or equity.

(b) Astilleros de Veracruz S.A., Vferacruz

Project: Ship reoair and construction -- :5anufacture ofindustrial equipment.

Cost (first stage): US.h4.2 million, -- (second sUage):US$7 million.

Financing (first stage): capital $1 million -- debt13.2 million.

APPENDIX CPage 2

Sponsors and Shareholders: Intercontinental, S.A. -- Tiary-land Dry Dock and Ship Building Co. (Baltimore). Some sharesissued to Mexican investors.

Foreign financing: financing arranged for the first phaseof the project buit room left for additional foreign financingeither in the form of loan (preferably junior debt -- sub-ordinated) or in the form of equity -- common or preferredstock. No financing arranged for the second stage.

(c) Sales y Alcalis, S.A. -- Coatzacoalcos

Project (first stage): plants of sodium carbonate, soda-r.hlorine; cnirlnc soda and of sond ir hi and< fiakes(second stage): X.

Cost (first stage): about US$40 million -- (second stage):about US'18 million

F i n 3" 1nc -n ( fir st S-4e) +,lIta S'TZd.¢ milio == Idebt

7reait from Instituto Mobiliario Italiano): -US$29.6 million.

Shareholders: Petroleos Ilexicanos (37.5 percent), DiamonidAMlk,a-liL- k-. (12. percentu), I3z1.1S 1LntternCtUonlV.CL (Di_ INUra,

(12.5 percent), Petrochlor (7.5 percent), Ing. Jose DomingoJidVJLA1 \ U.UU JPLtSt[;tU),J LLig. 1 U±sJ JU d3U UU ll:IilI±'U \ U.V lJUl

cent) .

Foreign Financing: could assist fixnancing of second stage ofproject; should come, at least partly, in form oI equity orjunior debt. Sponsors also seek additional equity cr loanto refinrance -- at the time -- the first matvuities ot theIMI loan.

(d) iiadera Haya, S.A, -- Sc-nta i;largarita

Project: integrated exploitation of tropical woods. 'fillinclude logging and lumber operations, plywood plant, andsulfite pulp plant (using new,Y process).

Cost: US$14.2 million.

Financing canital: US$12.5 maillion, plus, possiblyr, someequipment suppliers credits.

oponsors and Shareholders: Vancouver Plywood Co., of Canada,Other shareholders might be Nacional Financiera, Banco de

APPENDIX CPage 3

Comercio and other Mexican investors. A foreign firm withexperience in the pulp and paper field would also be invitedto participate in the capital.

Foreign financing: Participation of a foceign pulp andpaper manufacturer. Some sunpliers c.redits. Some additionalfinancing might also be used.

(e) Telefonos de sIexico, S..A. -- Overall expansion :rogram tomeet the pressing needs for +diiorDl phone serv,including 400,000 new phone installations arid 1 million kilo-meters of new cisrcuin t over thoe neXt four ye1a bs u

r o~+ -----,¶oc±nrr -nn.---- - - - - - A 4nv, -10A)-4R. V-

US$200 million, 66 percent for local e.penditures and 32 per-cent in foreign exchlIange.

i,±, e / aIt) I.,U t s p rJ U! .IJ. UU LtU.U UJY _ X a .a LJ U Ul _L C ',AU J . U

bal, S.A.

Pro.ject: installation of a plant with annual capacity of1OOO0 tons of newsprint produced from bagasse.

Cost: uS$36 million.

Proposed financing: capital US$16 million. Suppl-ers credits(tentatively arranged) ITS$20 million.

Sponsors and Shareholders: project promoted by Cia. Indus-trial de San Cristobal, S.A. Nacional Financiera to take asubstantial minority participation. Possibility of otherMexican and foreign investors participating i n capital.

Foreign financing: participation in the share capital beingsought from industrial and financial investors outside Mexico.

Note: Alternative project by NF controlled Fabricas de Papel Tuxtepec,S.A. wsould be postponed if IT technical study of this projectchecks out favorably.

(g) Cementos Sinaloa, S.A., Los 1.ochis

Project: new company to install a 400-tons p.d. cement plan-bin Charay, near Los irochis.

Cost: TJS$4.5 - 5 million.

APPENDIX C

Financing: US$1.6 - 2 illlion share capital; US3`1.6 - 2 milliondebt.

Sponsors and Shareholderst Family Soto, of Mexico, and St.Louis Mining Cc., of San irancisco. T2hese two groups arethe main shareholders of Cementos Portland Nacional, S.A.and Cementos del PacificoJ S.A.

Foreign financing: foreign credit sought to cover -he US$2million of proposed borrowings.

(h) Cement Plant -- Tamnico a-ea.

Proiet. -feasibilitvy .-tuyv for a plant with a dailyv ncnn.itvof 300/400 tons was prepared by "1F. The project is now pro-mot•5-d by a p rivate group.

Cost: USTT$8 _ 6 mir llion_

F1 na n c nf foreigncrI'its of about 'S$3.C million be-ngsought. NF guarantee fcr these credits is being considered.

(i) Iipco -- C-uadalajara

Manufacturer of valves, etc. Substantial exp ansion program.UorelEn L.IdinancIngsotlt

(j) Quinmica Ceneral, SL.A, -- Mexico Cit.y

Project: existing chemical producer starting manufacture ofacetaldehyde derivatives.

Cost: about US$9 million (plus plans for substantial furtherdevelopments).

Finaicing of the Company's own project is largely arranged,but the Corpanyr is seeking financing that would enable it tomake a loan to Pemex to finance construction by Pemex ofthe plant to manufacture acetaldehyde.

Sponsors and Shareholders: The Company is owned essentiallyby thLe Celanese Corporation of America and the Banco Nacio-nel group.

Foreign financing: Sought to as3ure the financing of thePemex plant for the manufacture of raw materials.

APPEIDIX CPage 5

Note: The list above leaves out all projects in the steel industry, inthe automotive industry and, exce,jt for Quirnica General, S.A.,in the petrochemical field,

The major steel producers have large investnient plans for uihichforeign Linancing is needed. iirmncing for these Droects willbe much easier to obtain when a better coordination of the invest-ment nronrnm nf theh maior s.ee comnanies will hp ac-hieued (Seepara.h ), In aduition, there are five projects for the manm-factu.ire of' vanrlous- k-nrd Of' spca steel; h vrj thes-e .oetare s-till. "fluid" and therefore -they have been left out of this

Large aimo_nts of for-ign fir ancing ;,ilh be needed forthe petrochemical industry. See Annex I.

The investment program of prospective car manufacturers has not

Attached is a lis of feasibility studies beiuig car-eu out byNacional F'inanciera and which may be taken over by p;ivate in-duntri-;al ..rouPs..

APPENDIX CFage 6

PEASIBILITY STUDIES UNDER GOOSIDMRATION BY NACIONALFLNANCTERA FOR PROJLCTS TO BE CARRIED OUT BY THE

PUIBLIC SECTOR OR BY THE PRIVATE SECTOR

Nacional Financiera has under ccnsideration various projects forwhich it is making feasibility studies; no conclusions have been reachedyet. Nacional Financiera is willing to pass these feasibility studieson to private groups whicih might be inteiested in carrying out theseprojects. If the conclusions of' Nacional Financiera are favorable and ifno private groups indicate thcir intention to carry ouit the projects, la-cional Financiera intends to carrv them out themselves. Follot,inL aresome of the projects under consideration. If foreign financing agencieswould indinctp a prelim.inary in--erest. in finannnir.-n r&jcs alo' thoselines, they could stimulate interest of private groups in sponsoring andnrni-ot.npg the npri-eCtS

1) Production of Sulfite Pulp~

± UW 4 U A IS aIAALa4.taa.~4.VJ -J.0-3 WJ~JJ U'I) L. VWLA.j Jt:L- ytCIL LU L) UDtL.1

to manufacture paper and chemical derivatives of pul. Preseit

mL.a t;e e-dvesti.ien+,: Isz 40 - 4o Ji..iOIi.

L ait orz Pr d i U-- Uf _ 11 1 - : D . _ x-ng Z ___

*roject to sltart production of ball-bearings oI various sizes(bet-seen 3 millimeters and 2 .neters external d-ameter). Estimatedsaies Ps. 3j million per year. riarket prospects in LAFiu7A beingconsidered.

Estimated investment: at least Ps. 20 million.

3) Plant to 1:aailfacture _endinr;i'Machines

Plant to produce various types of bending machines for steelsheets. Ini-ial ooerations would be on a small. scale with annualsales of about Ps. 12.5 million.

Es timated investment: about Ps. 15 million.

Private groups have indicated a preliininary interest in thisproject,

APPEDNDIX D

ST.T ISTTUA IJ TABLES

OutDut and Investrient

Table 1 - rGross Domestic r roduct and Ilnvest.)enPt,f 1950-632 - Gross 1ionestic Product by Sector of Urigin, 195-0-63n National TD:i-.rSp. nri 1t 1tS Fina rinrn- 1959-62

4 li - D:istribution of" Public lnvestlient 1959-63 by lHajor Agenciesand Types of Projects

floneyf Credit ar. Pnrice

T able 5 = Internal Fi,-an rng fl-,n.,+r - , - Sysem.

1960-63 and Projections ]96l-65

C;rstemr, 158-*63TI ~~~ ~ Tic'-~-63 1~(.A

-7 - 4. T-ce -iI-'. 'I, .L7IL4-J3

P-ublic Sec 'uor ilnaInce

Table o - Public Sector Savi.-ng and Irlvestment 1959-63 and Projectionsof Savings 1964-65

9 - Totai Federal Government Expenditures and their rinancing,1955 and 1958-63

10 - Functional ClassificL!tion of 'Zotal Federal Governnent Eix-penditures, 1955-62

i 11 - Derivation of Federal Govern.rent Savings, 1955 and 195b-6312 -Projection of Current Revenues, Current Expenditures and

Savings of' Federa' Uovernmrent, 1963-6513 - Estim.ted Breakdown of Eederal Governn.ent Transfers,

1955 and 1958-62" 1 - Federal District Sources and Uses of Fiunds, 1958-62 and

Projections 1963-65It 15 - States ard llunicipalities Consolidated State:r.ent of Source's

and Uses of Funds, 1958-62 and Projections 1963-6516 - 15exican Institute of Social Security (fl4SS) Sources and

Uses of Funds, 1958-62 and Projections 1963-65" 17 - Governmrent Employees Social Security Institute (ISSTE)

Sources and Uses of Funds, 1958-62 and Projections 1963-65I 18 - PE1IE,: Sources and Uses of Funds, 1958-62 and Projections

1963-65" 19 - Federal Electricity Comruission (CFE) - Sources and IUses

of Funds, 1959-62 and Projections 1963-65ii 20 - All "4exican Railways, TUses and Sources of Funds, 1959-62

and Projections 1963-6521 - Extra-Sectoral Financial Investiment and Other Oses of

Resources on Capital Account, 1958-62

Trade and Balance of Payments

Table 22 - -umnary Balance oI eayments, i956-63

External Debt

Table 23 - External Public Debt Outstanding Including JndisbursedC3s of JUne 30, 1963 with l4 ajor Reported AdditionsJuly 31, 1963 - JanuarY 31, 1964

Table 24 - Estimated Contractual Service Payments on ExternaliPublic Debt Outstanding Including iJndisbursed as ofJune 30, 1963 with Aajor Reported Additions Jul' 31,1963 - January 31, 1564.

Table 1

GROSM3 LOLST[C ROIDUCT AiJD INVESLiiENf

~~ mnvedsInve5G.N . a/ - - - , , .. 1 -..T rs~fi7ri6 i ~ z: nefmnGurrentP U.G.r. b/ (kexZ; bill. - Current Pub lc as % ofPurret _1960 Prices Prices) Inv. G, oPcPrices 1. -.r'lex; Annual uthor- N(Mex~~e~j rmaIkie"xbi1lel ) bill. Changes Total Priv, ized Pub, bill" _ Pub. Priv.bill-,_I I * bill. c/ I _b/ investA.b/ -_

1950i Lo)6 77n0 5Q9 3.3 296 6.4 _

1951 52.3 83,0 7.8 7.7 4.7 3.0 5.7 910I952 *1 A S P I L I 81 V, 7 'I R -n

1953 58.4 86,5 - 7.5 e.6 2.9 5.0 7.9195I 71.5 93.h- 8.0 9.1 L .h 0 5.6 7.61955 87.3 103.6 10,9 11.9 7.2 4.7 5e4 8.7195 93 00 11' 0 '7 f I 8 R 7 )? 0 L9 R e1957 114 2 119.L 7.7 15.6 9.7 5.9 5,2 8,51958 i27z2 22a 0 68 103 6551 >1959 136.2 129.6 3,1 170hi 10.5 6e9 5,7 h.2 7,7I1960 ini. i ,Lcf 70 0 18e7 11A9 6 0 9. (\ 7'7

_L cL 4o L iL- AJ.C- LI-,±U. .J.L.7UU1

1965 163.8 1h.l 3.5 22.5 11.8 70C7 It3 557 7.2196 27 1529 409 63,i9v2 lo 04 .

1963* 189.2 1615 4 60 13.8 1204 6,6

a/ Bonk of hliexico - il'inistry of Finance vJorking Group,b/ Nacional Financiera, except for 1950 public investiaent W"hic', vas estimoLe(

bv l"iexican VTorking Party-. The method of estimating used by NacionalFinanciera produces fiaures of total investment. Public invest.lent figuresare based on investment authorizations granted by Secretaria de laPresidencia. Priva',e investment is obtained as a residual. For thisreason a cl;enge in the estimate of pub'lic investm-aent also affects thefigriire ofn inriv-t,p invostoent. Privat investimelnt figures in tahle 3 arethe difference between official estimates of to-Gel investnrent and actualpublic investment as estimated by the mission.

c/ Mission's estimates of Pctua1 public investment.

d/ From 1959 on, percentage based on actual public investment; prior to 1959based on authorizptions.

* Preliminary figures.,

Table 2

GROSS DOLdSlIjr P:IODIJGT BY SECTOR OF OMiGIN

(Percentage annual chianges in real ter.s) a/

Weights1950- 1957- 8a P 19o5o 19c6 61 1oA, oo qA

1950 ~~1957 1962 A''/ - '' "-

Total 100.0 6.4 5.0 5.3 3.1 8,1 3.5 5,o 6.0

Agriculture 20,6 5.1 3.0 7.0 -3.0 5.2 2,8 5.2 1.2Crops 1202 6.2 2.2 8.8 -800 5.3 2.6 6.3 0.1

Stock-raising 7.5 3.7 4.2 4.7 3.8 5.1 3.9 3.4 3.0Forestry 0.7 -0.2 0.3 -7.0 12.8 - -10.0 3.7 9.1Fishing 0.2 0.2 9.4 14.8 12.9 11.4 - 8.1 - 7.1

Manufacturing 20.4 7.1 6.6 5>4 9.0 8.3 3.6 6.4 8.2

Ilining 2.5 3.2 0.8 -1.0 3.1 3.9 -4.0 -1.3 3.3

Electric Power 0.9 9.7 8.4 7.6 7.5 9.8 9.5 6.5 10.3

Petroleum 2.7 6.3 8.7 11.7 13.4 5.5 11,4 1.9 5.2

Construction 4.3 8.0 4.0 -3,0 2.2 14.6 1.0 1.1 11.5

Transportation l4.3 7.4 7.8 3.2 3.1 3.7 0.7 -0.2 14.8

Commerce 27.3 5.8 5.0 5.1 2.6 8.8 3.2 5.0 7.0

Public Sector 3.3 4.5 4.7 1.2 3.0 4.9 7.2 6.4 65.0

Other 13.7 8.4 6.0 7.4 1.3 10.9 4.7 5.5 6.14

Source: Bank of Milexico. Latest revised estimates.

a/ W,rith respect to previous year or over indicated period, Based on datain rcnnstant (1960!Q nprices.

Table 3

1IfJ.TIOlqPL INVESTliEi\Tr AIJD ITS FIUANsING, 1959-1962

(In blli--1ons ofL pesos, current prices)

1959 1960 1961 1962

Public Investment 5.7 9.3 9e3 10o 4Private Invest..ent 1.7 91 32 13.0

Total Ir.vesmet 17ines, 2.5 2

Less:Foreign Saving (deficit inbalance of payments oncurrent account) 1.5 3.5 2.2 1.2

Equals IDomestic Financing 15.9 15.2 20.3 22.2

of which:Public Sector Sai ng (5s9) (8.4) (7 5) (8.,"Private Saving and Depreciation

AlloIrnes (100) (6.8) (12.8) (1)4n0)

Institutional Transferable Savings(chlanges in bank liab. of dom.origin) 6.6 5.8 5.6 705

Gross National Product 136.2 154.1 163.8 177.5

For ign Saving as % of total investment 8.6 18.7 9.8 5.].Public Savings as % of public invest-ment lOl.0 90.L 80.6 78.9

Private Savings 2S c of private invest-ment 85.3 72.2 97.0 13h^6

Public Investment as % of G14P 4.2 6o0 5.7 5.9Private Investment as % of GJT 8.6 6.1 8,0 7,4Total Investment as % of GNP 12.8 12.1 13e7 13j3

Public Saving as % of GNP 4.3 5.4 4.6 L.6T) r . (T~T1) 73 I -,I CIIPri-vate SOav-ring as .'a' of GI5JP 7,3 f 4.L1 1,0 709Domestic Saving as % of GINP 11.6 9.8 '2.4 12.5

Institutional Transferable Savingsas , of tot4 l Prvate Sa.vings ,6/o ;i i' v,

Source: l'ables 1, 8 and 22.

Table L

DISTRIBUTION OF PUBLIC INVE'STANEDT 1959-63, BY iIAJOR AGENCIESAN!D TYPE OF PROJECTS

(TrI million of current pesos)

1959 1960 1961 1962 1963(Prelini.)

Federal Government 1690 2765 2656 2h83 37L71. Highways (s.O.P.) 591 b14 63L4 b.2. Irrigation (S.R.H.) 499 602 653 889 16303. Airports (;.O,P.) 15 224 (S.C.T.) 15 315. Ports (3. Aprina) 32 906. Agriculture (S. Agriculture

and other) 171 1407. Education (S.E.P. Politecnico

y Universidad) ( 1828. CAPFCE ( 2509. IUTater and Sewage (S.R.H.) 168 322

10. Public Health (Secr. of Publicnealth and Malaria) 259 200

Federal District 2 53 496 _z 95) 1u021. Housing 10 642. Education n.a. 63. Water and Sewage 380 2924. Miscellaneous 575 661

4.ef Wrur dli ' - - 1 - 4lFd 4F 91,D D1.. Uae andU VI'l dC.j4JCZL±± U.L t ),C UJ'IerL

tnan highway construction b/ 345 392 390 300 300

"lexican Institute of SocialSecuritv (Ii!SS) 139 301 381 359 3L31. Housing 50 -- 3•2. Health 309 300

Mqexican Institute of SocialSecurity for Public Employees(ISSSTE) 21 19 50 132 1181l Housing 67 1112. Health 65 7

PELUEX 1516 2439 2130 1747 1646

Federal Electricity Commission 559 979 1291 175,0 1827

.D- I lways Pon Qr) 786 " L3') '749

1. National RailTways 40' 626

3, Other Railways 65

See footnote at end of table.

Table [ (iont.j

___ __ __ __ __ __ __ __ __ __ __ __ _ Page 2,

1959 1960 1961 1962 (Prelim.)

Other Entities and 'nterprises L63 1075 1150 1789 2610

2. Non-Federal Highwiays n.a. n.a. n.e. 169 173

1. Industrial Electrica PIexicana(Electric Power) , 139 n.a. 121

2. Compania de Luz v Fuerza delCentro eui;rL± ruee v - - n.ade 286u

3, Other Power Enterprises na _.. 28

1. Altos Hornos (Steel) 1i1 38 109 107 752. Zincarrex (Zinc refinery) 1 -293. IngerLio Plan de Ayala (Sugar

Refinery) - - 1994. Industrial de Atenquique

(ianu2acturlng) 3 6 11 305. Ingerio 1Horelos (Sugar) 326. Other (14anufacturing) 40 48 124 141 59

1. Banco Hipotecario (Housing) 29 153 - 300 367

1. Juntas Federales de MejorasNateriales (Public Works) 134 150o 146 104 150

2. Aeronaves de ilexico (Trans-portation) - 86 17 1h5 88

3. Servicios de TransportesElectricos (Urban Trans,) 91 4 145 36

4. Banco de Mexico (Buildingconstruction) 33 3 26 19

5. Programa Nacional Fronterizo(Urban Renevial) - - 65 68

6. Loteria Nacional (Equipmentand building) 124 10 9 9

7. Banco Cooperativo (Equipmentand building) - - 140

8. Puertos Libres Mexicanos (PortImprovement) - - 4 n.a. 3

9. Other 52 a/ 197 3614 525 316

Total Public Investment 5786 9274 9266 10377 12363

Source: Direct information from respective investrment agencies. In some casesthe fi a cre refer r -no. to actaIi nv4 t1mientt bnt tn i nvest.ment auther-vr

izations extended by the Secretariat of the Presidency. In such cases actualinvastam.lent ,m^ry have been different due to 1 ags, to ri cu' e o+ financ .The list of projects and agencies under Federal Governmient is incomplete. Thisfact,4 p'u -h 4 d1, ;f'ferences referreq to 4 bve -xplni - h discrep.ncies betweenthiCUs taleS and ta U11 u

this table and table 8.

Table 4 (Cont.)

Page 3n.a. - Aot ava:lable.

- I4ot part of public sector or the enterprise did not exist.

a/ Estimate.

b/ Highway construction included in 1959, 1960 and 1961e

Table 5

INTE!RNAL FINAINCING CAPACIT'Y OF' THE MEXICAi BAAKINGJ SYTEM 1960-63

(In billions of pesos)

Balances: end of year

19';9 1960 9<5f1962 1963 Projectionst*1959 1960 1961 (1rei62 T-I7 CV1-7

Total Liabilities 38.,2 44h0 49..6 57.1 65.6 73.1 81.0Money' Supply T5iT iTIj9 18rTh 20.3 22.9 a/ 2 .3 d/ 27.7 d/Liabilities (internal) b/ 17.42 21.2 25.1 30I.2 3544 4#0.O e/ 44.4 j/Liabilities (external) - - - - 0.2 1.0Capital and Reserves 5,6 5.9 6,5 6.6 7.3 c/ 7.6 fl 7.9 f/'

Total Assets 33.2 44,h 49.6 57.1 65,6 73.1 81.0Gold, silver and foreign exchange 7;7 -T 5.9 7.0 g/ h.T h/ 7.8 h/Investments (credit aLnd securities)

Public Sector 6.0 7.-7 9.1 1:2.0 14.0 16.O 17.5Private! Sector 214.7 25.,9 29.0 32.8 37.0 40e9 45c5

Other Assets 3.,8 4h.4 5.6 6.2 7.6 c/ 8.4 i/ 9.2 i/

Anmual Changes

Total Liabilities 5,.8 56O 7.5 8.5 7.5 7.9Money Supply Y T 5 1, 2hLiabilities (interna,l) 4 3.9 5.1 54,2 4.6 4Liabilities (external) - - 0.2 0.8Capital and Reserves 0L3 0.6 0.1 0.7 0.3 0.3

Total Assets 5,8 5.6 7.5 8.5 7.5 7.9Gold., silver and foreign exchange -0.7 -0,1 0. 2 0.9 0 d 1l0Investments (credit and securit:ies)Public Sector 1,7 1.3 2.9 2.0 2.0 1.5Private Sector 4,h.2 3.1 3v9 142 3.9 4,6

Other Assets 0.6 1.3 00.5 ll 0.8 0.8

S3e footn,totes at end of table.

Table 5 (Corit.) Page 2

Source: Bank of Mexi,acc.

a/ Currency circulation component is based on definitive December figures. Checking accountswere estimated assuming a ratio with currency in circulation similar to the one that appliedin December 1962.

b/ This group of liabilities was computed by subtracting frcm the consolidated liabilities of thebanking system. (except morney supply items, capital and reserves) the total of liabilities inforeign currency, as follows:

Liabilities other than Liabilitiesmoney supply, capital in foreign Internal

and reserves currency ]Liabilit-ies(a) (b) (a - b)

1959 20. 8 3.6 1'7.2196c0 27.3> 6.1 2-L,21961. 33.1 8.,o 21.11962 36.9 8.,7 30.21963 35 ~4

Internal liabilities a.s of' December 1963 were estimated on the basis of the definitive Septemberfigure projected on the assumption of a continuation of the rate of growth shown by the itemduring the first nine months of th,e yejar.

c/ Estimated on the basis of September data.

d/ Projected assuming that the ratio between money supply and GN1' wi:Ll continue increasing at thesame rate of the past three years. GNP is projected to increcise IS percent per year in realternis.

e/ Domestic liabilities in real terms increased 17 pe5rcent per year between :L99 and 1963. Theprojection assumes an increase of 13 percent in 1c964 and 11 percent in 1965.

f,/ This item is projected to increase at the rate of 4 percent per year as a.'ainst the 5 Dercentannual increase rThich occurred in the past, few years when the banking systein was experiencin-a rapid expansion.

g,/ Based on actual Ban' of Iexico reserves and an estimate of go:Ld and foreig-n exchanlge in the handsof the private banking system. This latter eEstimate assumes no changea in private holdings ofgold anci foreign exehange i.frlth respect. to hol-ings as of Deccombcr 196.

Table 5 (Corit ) Page 3

h/ From balance of payments projections.,

i/ Assurnes a rate of growth of 10 purcent per year.

.1/ Ari -sin out of proposed borrowing program for private sector.

Table 6

DOMESTIC FINANkCING CF THE PUBLIC SECTOR BY THE BAWKIENG SYSTELM[

(In Trillions of pesos)

1.958 1959 1960 1961 11962 1963

Total Gross Public Sector Financing 7,729 9 ,702z 11,,976 13,632 15,8417 18,587

Less: Financing of CEflSA-CONASUPO 1,127 2,28L 2,75h 126 102 -

Financing of Official Banks 414 483 486 299 228 224,CEIMSA credit taken over by Govt. - - - 2,931 2,919 2,821

Equals: Financing of Public Sector, ex-cluding CEETmASA-CONASUPO andOfficial Banks 6,188 6,938 8;,736 13,207 16,517 15,542

.Less: Sales of Bank of Mexico Portfclioof public sector to pu.blic agenciesand enterprises 269 9293 991 1,213 1,61.0 1,508

Equals: Total Finan cding of Flubli-c Sectoras defined 5,919 6,00'? 7,7h5 9,063 11,988 14,034

An;nual Changes - 9( 1,736 1,318 2,925 2,046

Source: Bank of .iexicoONJote: This table shows the adjustments made to gross financing of public sector to arrive at the figures

of Bank credit extended by banking system to public sector, as defined by mission. Credits toCEIMSA-CONASUJPO and to official banks are excluded since they are outside pulblic sector as definedby mission. CEDlBA-CONA'STP outstanding credit balances at the end of 1960 were taken over by theGoverrnment. Hence the increase in credit to Federal Government in 1961 is o,nly .nominal. Excludescredit and securities issued by public enterprises and placed direct:ly w:ith institutions in thebanking, system; since 195;2 it also excludes c;redit extended by p:,ivate banks to CGNASUPO.

Table 7

Base 1954=100

V!holesale Prices - 210 Comin. Uost o0General Consuer Eroduction Living

index Goods Goods (hlex. Cit

1955 113.6 1Lb.2 112.1 116.01956 118.9 120.9 116.0 121,51957 124.0 12696 120.5 128 61958 129M5 13307 123.8 1L3 9 3

1959 131.O 13)4.7 22 6,G i47,C01960 137.5 139.8 134W3 154.21961 138.8 1l41.2 135.6 1i6.81962 141e3 1)45.6 1315.Li 1<8.71°63 142.2 1)45.3 137.7 159,6

A4rinlnalChanges

1q(6 +n f + R.q + 6 + !le1561 + 0.9 + 1.0 + 0.9 + 1.71962 +a18 +31 -- ol + 1.21,963 + 0.6 + 1.7 + 0.6

Source: HanK oi Alexico anid Secretaria de Tndustria y C,p.ercio0

Table 8

P.Tv LI C SEC-TOR S,t JI G . D A,J T) VT.T L S. Ijf 1959= 1 963o A l- P-;ua,J a .J'-'4. T.4SJ\TlZ

OF SAVINGS 1964-1965

(In millions of pesos)

Sa vingsActuals _ Project,ions

1959 1960 1961 1962 1964 1965_ _____________ ___Pei. ___

Federal Governslent 3,128 3,830 2,861 3,202 3,886 4,117 4,288Federbi District 530 754 o42 786 894 1,015 1,194States, illunicipalities

and Territories 231 429 307 276 219 178

IHISS 21I, )15 592 60o 815 880 9ISSSTE 127 151 201 285 325 322 290

Pem.ex 1,509 2,027 2,320 2,320 2,394 2,304 2,4OOCFE 114 119 184 198 257 413 702All i-'1exican Railways - 360 - 178 - 384 -- 472 -- 547 - 539 - 632Other recentralizedEnterDrisus 297 786 5L4 999 1,100 1,2u0 lj300

Total Public Saving 5,86u 8,373 7, L6 8,246 9,376 9,931 i.u56

Investment______ Ac-tuals

__9_79_ 196 1-'9 1962'- 1963 _9

D~~~~~~~~~~~~~~~~~ _-n '__ r, 1) 1-> 7EM /_e'r a : 'C l c G -uvu *IVL-1-1 !iL, 1U7V c LI ~ c .9 LU_)

Federal District 253 496 535)Ub es, I;.uniciLLpal.tIlei

and Territories 345 392 390

PISS 139 301 381ISSSTE 21 19 50

Pemex 1,510 2,139 2,130OFEr -59 979 1,291All 2¢exican Railways 6oO 8013 786Other Decentralized

Enterprises 463 1,075 1,047

Total Public 'rnvestLaent 5,786 9,271) 9,266 10,377 12,363

Source: All data on savin;7s as well as the investment estimates for 1959, 1960 and1961 come from Tables 9, 11, 12 and 14 to 20 in this Annex. As to in-

vestment for 1962 and 1963 the mission '.ias able to obtain detailed estinates on anagency basis. These estimates, which appear in Table 4, have been preferred tothose for the same years shom in Tabl.e 11 andi Ii 4e 20 - hihii were obtained by themi.ssion during its first .isit to r'exico early in 1963e The discrepancies betwieenpdPrnI G%rnmrenL investment obtained bry adding agencar data (T-ble lil and fede,ral

Table 8 (Cont.)

Page 2

investmi.ent according to fiscal data (Table 9) result in part because the agencycoverage in Table 1 is incomplete and also because occasionally some agenciesundertake investment in excess of budgetary appropriations by resorting tocontractors credit, Savings figures for "other decentralized enterprises" arerough estinates computed by subtracting credit extended by the banking systemto those enterpiises fro;n their total estiiiiated invest.nent.

Table 9

TOTAL FEnE7.h-' A .r; r.1 vE 1DITrM.n. A.'L TUT-D L'ThJA CrT;, 195-AN4D 1°58-1963

(In millions of pesos)

Expenditures 6,960 10,092 10l48b J.2,691 13,681 15,186 17,062

Expenditures on CurrentA,ccount 4/ 4^116 6,255 7,415 8,692 10,168 11,597 12,852

Expenditures on CapLtalAccount, 2,81W. 3,837 3,069 3,999 3,513 3,589 4,210

of' which:Direct Fixed Tnvest.,ent (1.817) (2.;11) (1;690) (2,765) (2.65L) (2,?51)(3.186"Transfers on Capital

Aceolant ~~~~~~~~(1 -n27) 1 'A06 (lj37°) (I 1;2i) (8 Q ,9)c (h')''0!),

esolar~1'reso i n 0)09 l,148J 1R_f°l 1, 25,I86 :1 7 n62

Current Revenues b/ 7,506 8,798 9,82, 11,844 12,015 13,567 1L5417

Borrowing - 402 771 573 485 )Internal (net) (- lco\ (978) - (70I1) (2) )1,666 1,619 i

External (- 162) (- 207) (-- 128) (250) ).lis cel-laneous5 u. 2 e -IptU - L"4 523 86 36

a/ Includes the current expenditures listed in Table 11 olus the intrasectoraltransfers on current account shoim in Table 1 3.

-,,ror rmore details see 'Table 11

T'able 10

I,-UKITION\AL Cij}SST ICATIO:-; OF1 T071AL CETMER3AL GO\r1|:i -l;' E.&F-ERDITURLS 5, 1955S 1958-62

(1Tn mi-i-111ions O-f PSS

1955 1958 1959 1960 1961 1962

Total Expenditures 6o_q6 10,092 1o,j8L4 12,691 13,70* 14 9 930*

Transports 1,617 hY3;n 5 2,167 2_477 2,7i1 3,055H2ilrays 494 7e8 779 955 1,190 1,215Roads 673 932 83)4 802 828 13023Ports, i14aritime Jorks 169 226 135 177 155 198Telecomnunications 220 330 357 413 440 )492Airports 34 53 8 2)4 26 23General Services 27 56 54 1V6 102 104

Agriculture 968 1,129 1,126 1,27° 1,332 1,533Irrigation 707 771 b'(4 837 ( 548 750 Agricultural Development 169 237 246 271 28) 331Colonization 31 41 95 59 272 171Others 61 50 111 112 129 L41

Industrial Promotion 871 1,063 1,506 1,569 1,461 1.861J `es SSI ' orm[merc-a. anUIndustrial Enterprises 598 5L!O 485 566 789 753

Other DjeVe.I.pent Epeditulres a/ 273 523 1,021 1,003 672 1,0L

EdUCatiOn 77R 1,295 150o 1 9!46 2,159 I 2,282Primary7 Education 72032 b i,0T1 10 38 1, ,

Egh, -r h d u- 1 ,a-I Al 1i 373 liPi 50" rfv7~~~~ ~~~~~~~ ~~~~~~~ J4L4 .) ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~) L44~~~~~~~~~~~~~~~~~~J )~~~~~~~~~~~~~JLJ. 2~~~~~~~~~~~~~~~~~~~~' )- I 4 ) L4

Secondary and VSocational Education 119 38 102 130 155 L55rChOO-1 lonstrC On 87 11j915 18 ;7

Others 56 162 138 165 171 196

Public Health 291 529 546 625 621 735Ired1Ga1 ServiCeS 23Q 121 T)414 )I-P89 5EZ - KS

Others 61 108 101 136 118 1147

Social RIelfare 262 L25 502 731 892 873Jontributionato Social Security

Schemres 78 227 263 389 453 1452Pensions and other 184 198 239 3b2 439 L21

Militpry Expenditures 52 h 857 _ 857 1,097 1,177 1,289Salaries (including social benefits) 349 626 641 742 784 &86Equipi-Ient 29 45 38 130 153 139Others 1146 186 178 225 2Lo 2644

See footnote at end of table.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~~ ~~Pa g-e 2 _ _ _

11955 1]958 1959 1960 1961 1962

GeneraIl Aio4,n +21 1, 1'T4 1 1 C1 I 1 C' r" 1, '7 V1

Fiscal Administration 255 351 356 bh4 479 524Ex-tera - lltLn 67 82 91 T99 -01 -12un - I

Others L199 816 669 946 969 1,057

Public Debt 226 407 370 578 983 791

* The expenditure data -iven ln this table for 1961 and 1962 differ sligntlyfroml t'LOse s'nown in Tabl 9. Those sf 'eb'e9are b^sed on the mos-t. rpeGnt

revwision of official data.

a/ Includes expenditures for elecuric power for unspecified anount. A iniajorpart of the expenditures in the electricity field consists of tr. nsferson capital account.

Tau-e ''

DERIVATION OF FFDERAL GOV, .TjP SAVTNGS 19q5 AND T)5-1963

(In millions of pesos)

1955 1958 1959 1960 1961 1962 1953 2/

1. Current Revenues 7,506 8,798 9,825 11,844 12,015 13,567 15,417

Taxes Cogmpensated withSubsidies 520 7L0 785 896 624 773 832

Tax on Incomes, of which: 1,985 2,730 3,056 3,628 4,071 4,724 5.,688Taxes on Business

Profits bJ (1,284)(1,679)(1,920) (2,195)(2,437)(2,578) (3,118)Tax on S-Plnries ( 308)( 51.R)( 6_7) ( 757)( 867)(1;225 (Vi..85)Tax on Professionals'

Tn._onme (z 28) 50)( 58) ( 7) ( 105)( 10,l 165)Tax on Property Income cJ ( 365)( L53)( 451) ( 589)( 662)( 762) ( 840)Com.plementva.' Tax on.Total Income - - - - - ( 15) ( 80)

Sales T- h) 878 962 1,102 1,269 1 flo 1,,545

Import Tax 895 1,263 1,553 1,753 1,678 1,688 1,f85E=o-t Tax~~~~~~~~~~~~~~~~~1 d/ C 1,3 941 927 93 91' 86ni). 43 17717~~~~~~~~~ ~~~~~~~~.L4).L 74L4J 7 C. 7)L c .J.L14 U W) II I

Excise Taxes 771 937 1,158 1,314)Oulter Taxes andU 'urret / ) ,49 ' ,4j64. L,23)

Revenues e/ 1,262 1,309 1,384 2,219)LdLucatilon ax - - - - 4(f

2. Current Expenditures,Econo:ic Classific-tion 3,785 5,555 6,697 8,01 9,154 10,365 11,531Wa-vtges an' Salaries-I 71,747 2,'735 3,227 7 3 'nl.e . 31 ',800. 5,4r 50 x

Purchases of Goods and

penditiures 683 711 790 904 864 977 1,160T .-. - ]- - -- -J - L. . ,ij n k4 3 oif ff z o n j Pn fftcr7 s 7 n zA, ,_R7,4 n

Transfers on CurrentAccousn4 f(xt-ra--ectoral

Transfers) 1,100 1,780 2,300 2,658 3,196 3,880 4,161

3. Surolus on Currcnt Account(= 1-2) 3.721 3.243 3.128 3 810 2.861 3,202 3.886

4. Federal GovernLrent Savingsas Percentage of TotalFederal Government CurrentRevenues 49.6% 37.9%7 31.8% 32.3% 23.8/6 23.6% 25.2%

See footnotes at end of table.

Table 11, ("Cont.c)

Page 2

Source: Ministry of Finance.

a/ ?roxr)ioina data.

b/ Inclu:des the Schedules 1 (commerce), II (industry), III (agriculture)and the excess profits tax.

0/ Includes taxes on interest, the "distributable prof-ts tax", the taxon concessions and, since 1962, also the tax on rents,

d/ Contaj-ns taxes on a variety of products; includes since 1962 also the

e/ In this category are lurped together misceilaneous receipots such astaxes on mining and lotteries, stamp t.^xes, non-tax current revenuesand arrears.

Teble 12

PROJECTION OF CURRENT RLVZENUES, C13RREIT EXPENDITURihS AND SAVI\IG3S OF FEDEHAL GOV; NK4ENT, 1963-1965

(In millions of pesos)

Acals 5_ _ roj econs

1962 1963 1964 1965 Assumptions Underlying Projections

Current Revenues 13,459 15,201 16,583 17,963

Taxes Compensated with Subsidies 800 800 800 800 1962 levelTaxes on Incomes, of which: 4M,69L 5,179 5,731 6,222

Taxes on Business Profits (2,637) (2,819) (3,026) (3,181) + 83% a year in Schedule I (commerce); + 5%a year in Schedule II (industry); + 17%a year in Scheduale II1 (agriculture);excess profits tax constant at 1CT millionpesos

Tax on Salaries (1,178) (1,319) (1,530) (1,713) + 12% in 19063; + 16% in 196h; + 12% in1965

Tax on Professional Incomes ( 156) ( 195) ( 244) ( 3C3) + 25% a yearTax on Property Income, ( 708) ( 811) ( 881) ( 970) + 10% a year, with big increase in 1063

oQ tax on renrtsComplementary Tax on Total Income ( i5) ( 5) ( 50) ( 55) big increase in 1963; + 10% in 1964 and

1965Sales Tax 1,474 1,607 1,752 1,910 + 9% a yearirnwort T'ax 1,603 1,683 14762 10853 average tax rate of 10.9%, 10.6% and

10.3% applied to import values in 1963,].64 anid 1965

Export Tax 761 706 7t40 722 average tax rate of 65%, 6.25% and 6%applied to export values in 1963, 1964and 1965

Excise Taxes 1,723 1,930 2,162 2.,421 + 12% a vearO',her Taxes and Current Receipts 2,h01. 2,596 2,8Ch 3,02L4 + 8 yearEducation Tax - 700 932 1,007 Miexican Government estimate for 1963

(10 months); + 11% in 1064; + 8% in 1965

Table 12 (Cont.)

Page 2Actuals Projections

19621 1963 1,964 1965 Assumptions Underlying Projections

Current Expenditures 10,264k 1T4h2 12,352 3y51

'Wages and Salaries 4,853 5,2h1 5,816 6,281 + 8J in 1963 a½ 1965; + 11% in 196"Purchases of Materials", "General

Services", Other Expenditures 886 947 L,009 1,073 puirchase of materials + 5% a year;"general ;services" + 6%.

Interest on Public Debt 875 5954 IL,060 1,150 see footnoteTransfers en Current, Account, In-

cluding Subsidies Compensatedwith Taxes, (total) of' which: (4k,807) (5,445) (6,055) (6,665)

Extra-Sectoral Transfers 3w ,6S0 L,007 4, k7 4L,947 see footnote

SurDlus on Current Account 3,1951 h,052 h1,331 4,512

Federal Government Savings asPercentage of Curr ent Revenues 23.7% 26,,7% 26x0% 25.1%

APPENDIX DTable 12

Page 3

NOTR: This projection was prepared on the basis of information availableearLy in 1963. Information obtained one year later indicates that actualFederal Government savings (Cf. Table 8) were about 4 percent below thelevel projected here. The figures shown in Table c for 1964 and 1965 werederived simply by appltring to actual 1963 Federal Government saving thepercentage increases implicit in this projection - the assumptions of whichare as follows:

In regard to current expenditures the projection assumes that the generalprice level will remain stable. Accordingly, it appears reasonable toassume that some current expenditure items, such as the "purchase of goods',will grow at a somewhat slower rate than in the past, Stabilization of theprice level may also be expected to soften somewhat wage increase claims.Debt interest projections are based on actual uBRD estimates of outstandingdebt.

Projecting transfers on current account and segregating theni into extra.-sectoral and intra-sectoral transferS can onlv be attemnted in a roughway. Policy decisions as to the creation of new decentralized agenciesand the _cnansion of crrreitt onprations through national banks are -imnortntvariables, It did not seem reasonable to extrapolate recent rapid in-creases J-a c-urrent transfers Thp mission's stimat of "trar!fers for'consumption" on the basis of present policy are broadly consistent withrevel onmpnts w.hereby (i)' subs'idies- to flflASUIPO arc no lnrese over

their 1962 level; (ii) losses of the railways, at existing rates, wouldbe at about the level projecte by the rnission; and (iii) other cor.-ponents would move slightly slower than in the past. The estimate oftransfexrs f-or sociallsrTcs which consist Por - large part of contr--;~~~~~ ~~~~~~~ V WtLL' 4 UU L~L U LJAJ a. J.U.L 6- p.Jd V VJ. 'J VI --

butions to social security institutions, is more or less in line withthe_ 4rjce -ces in -h reeit -of -41_ ___- soc4-l sec-4t institutions.4 --wlu 'i d ~, wz-U .LULLLI U11z: UL;, L,J 'J±L -U L C;LL O : . _L. -LLI0U _ Ui U U- U I 1 .

Subsidies compensated with taxes are forecast at their 1962 level.

In projecting current revenue besides historic trends in the 1955-'1062 p--'-, qd If.actors suc.h as tne .like'ly eVvolution o. I-ro1 4-

margins, the effect of a stabilized orice level on tax collections and+he~ ~~ imac of I Jthe _ 1961 .V1 inoe a-A %1changes. ha.ve~ beer taken i;nto account.-+~~- ofU L4L - 7 In4L ALLJtI-U. 111 L~ 4-- Leien 4u j' -- JL1 U')CLA t U.

The estimates embody the effect of what could be tenned t.he "normal"L41L1JJ. tJ V CAIIeLIU J-LI enw.u V I k 1eUILIV U,~. - LI1~: ULIIzi t ~pt.pL± I(LIUA~U ILL ULLU 1£U(.t:LIU Pa:U.

No account is taken of the fact that recent measures provide tools forreduclng tax evasion considerably. VW1ere the analysls could lead toalternative conclusions, the smaller growth rate has generally beenpLreL re UU. rL±4 -LLJLbS UtiO eSUnLate m-iay be sLlgnly on thle conservaU±ve

side and very closely coincide with official estimates.

T'ne income tax figure was arrived at by adding the yield projected foreach of the various schedules of incomes.

APPE.NDIX DmLaU- _ n nx d.J,U ..LC

rage e;

Likely yieldcs of 0 oreigegul trade taxes were arri±ved at by assumirig tmat,both for import taxes (because of a shift in the composition of importtowards a greater percentage oI caDital goods), and export taxes (becauseof a continuation of export oromotion policy), the average tax rate willdecline. The ratios thus obtained were applied to the export and importfigures projected by the mission. The ID'exican Government estimate ofJ. 700 million for 1963 (10 months) education tax was adopted. For1964 and 1965 the same rates of growTth, used for projecting the wagebi- o-f the Federal Government have been adopted,

Iliscellaneous tayx and non-tax current receipts have increased irregularl,.The annual increase for tiie 1955-1962 period was 9,6 percent; and 160 4percent for the 1953-1962 period. The 1962 increase is in part due toarrears' payments, connected with the tax regularization agreements. Themission projects an 8 nercent increase for the years ahead. Wihereasproceeds from mining may flatten out, some tax arrears have still to bepaid and various other items, such as stamp taxes, hllow a rather regularvyield increment 0

One possible source of error in the mission's eStimates steins from thedifficulty of gauging the effect of the reforrm in tax admi-nistration ornthe y7ield of' sales and income taxes. If adequately used, the new con-trol measures could entail an increment in yield appreciably bigger thanthert normal" one projected.

Table 13

ESTIIATED BREA1DGUN OF FEDERAZ GOVERNLENUNT TRAi;SFERS, 1955 LND 1958-1962 c/

(In millions of pesos)

1q I lQq8 1Q I5Q 1Q60 1Ql l 96q2 lI5R

Total Transfers 2,459 3,651 L,398 4,570 5,070 5,950 6,5;06

Transfers on CurrentAccount b/ 14431 2,345 3,019 3,336 4 5,112 5,Lv82

Effective Transfers 911 1,605 2,231T 2,L44U J,7 4,33 ,Transfers Compensatedwith Taxes 520 740 785 896 624 773 o32

o f w h ich:nIntra-Sectoral Transfers 331 565 719 678 1,015* 1,232 1,321*

Effr_ecti--ve T1rar.sP-r ( 231)- ( iO).o (53)(l)Compensated Transfers ( 100) ( 160) ( 185) ( 196)ra=4- c-oral rans fers0- I'In 1,10 1780n 230 2l ,658 3,19 n4, 0 n, 1,l -1 -IJ~~uA . t vj 2_ 1 _L ~J 1 - i IPc U% ,nA,JW. U,~UP A U

Effective Transfers ( 680)(1,200)(1,700)(1,95&)Comapensated Transfers -0 )U/ ( 580 j { 6 (0j0)

Transfers on CapitalAccount - b7CT 1,028 1,306 1,379 1,23L 859 838 1,024

of wihicihIntra-Sectoral Transfers 150 620 650 674Extra-Sectoral Transfers 578 606 729 560

Source: 1Linistry of Finance.

' The estimates may involve a considerable margin of error, especiaily in thefield of transfers on capital account. Partial information on effectivecurrent transfers and on capital transfers was available for 1960 ana 1961.For other years, the breakdown had to be approyimate, For subsidies, com-pensated by taxes, which include a var1ety oI taxes ana oeneficiaries,limited inforimTtion was only available for 1960. For otheir years, the 1960ratio between extre-sectoral Fnd intra-sectoral transiers has been applied.

b/ IdMexican fiscal accounts distinguish between capital and current transfersaccording to whether or not the transfers have as a counterpart the ac-quisition of assets or claims by the Federal Government 8

cj Includes the following items from the Economic Ulassification scheme: "1in-direct investment", "financial investment", "purchase of real estate", and"other capital expenditures",. The two latter items, relatively unimportant,were assumed to be of an extra--sectoral nature.

*t B;'eakdown of transfers in current accour.t in 1961, 1962 and 1963 was es-timated on the assum)tion that extra-sectoral transfers represented 76•of total current account transfers, i.e. the samne proportion as in 195i,-60.

Table 1i

FEDERAL DISTRI,T SOUrtCES A D USES O FU1JNDS, 1958-1962 AND PR)JECTIONPS 1963-1965

(In millions of nesos)

________________ Actual.s____ arjoin~

1958 1959 1960 1961 1962 1963 1964 1965

Total Resources 536 269 557 622 15076

Current Revenues 937 1,021 1,346 1,524 1,704 :1L960 2',253 2,590Cales Tax b/ (268) ( 300) ( 362) ( Lh02) ( 436) ( 403) ( L63) ( 532)Real Estvte Tax (211) ( 254) ( 338) ( 391) ( L21) ( 501) ( 576) ( 662)Others (458) ( 467) ( 646) ( 731) ( 847((1,056) (1,214) (0,396)

Current Expenditures 478 491 592 682 916 1,066 1,236 1,396ITages and Salarie's (257) ( 306) ( 357) ( 386) ( 439) ( 496) ( 56U) ( 63)Others (221) ( 185) ( 235) ( 296) ( 479) ( 570) ( 678) (766)

Surplus on Current Account 459 530 754 842 786 894 1,015 .L,]9)

Other Resources 77 - 261 - 197 - 220 290

Net Borrowing - 11. 1 10 - 10 - 10 c/Net Drawing on CashBalances 11 75 5 35 77 c/

Surplus in EAtra-budgetary Accounts("cuentas ajenas") 77 - 326 - 192 - 245 223

Uses of Resources 536 _269 557 622 1,076

Fixed Investment 451 253 LL96 535 965±D -.U1dIV IL 2 Lc U" e.l ~ VI -11J.ur ch a se of L' 'al Elstate 1 61 8 13Other Uses

Total 536 269 557 622 19076

4 0+ V'c cC ilir,nrty of fl witn a+rt,il su -ev, + V' tr 10 fnvr 19A6 andr

1962 directly from tVe Federal District.

a/ For projections the followinig rates of growth were used: sales tax 12 per-cent; real estate tax and other current revenues: 15 percent; wages andsalaries: 13 percent; other current expenditures: 19 percent.

t * 14 .+ of transfers _60 -ecn of the ,y4-il) to the, Federal GoverrnaQent.

c/ Estimate

Table 15

STATES AND MUNICIPALITIES CONSOLIDATED SATEAJEIET OF SOURCES AND USES0OF FUNDS, 1958-62 AiiD PROJECUTONS io63-6v

1958 1959 1960 1961 1962 1963 196i4 1965

Total Resources _40 376 489 _ eo 503

Current Revenues 1,820 2,023 2,433 2,518 2,707 2,92Lh 3,158 3,L11Current Expenditures 1 5 1,793 2,003 2,211 2,429 2,672 2,939 3,233

S 1 lrIn, 1C 1 on (01-1rent

kt.ccount 285 231 429 307 278 252 219 178

Other Resources 116 147 60 173 225C.a-ital Income - -

Net Borrouing - 36 - 36 80 25L 225Draing on r'as- hDssU '18 tjjt 'JO.&L

Balances (+) 152 183 - 20 - 61 -

TJse o-' Resources LOl 378 )489 480 503

Fixed Investrnent 328 345 392 390 W08Other Capital Expend-

itures 73 33 97 90 95

Source: Ninirs of i

ca! Projection assumTes annual increases of 8 percent for current revenuesend 10 percent for current expendi tures,

Table 16

iAEIIC'A7N INSTITUTE 0i? SOCIAL SECRITTY (InS ,) SOU}CES AIDU JES OF FUS,

191500-62 ltlPD PROilECTICOMS L963-6~5(Tn inl7innQ nrol f' nacz)

A ctu -is____ Pr - ecvti nsY%

1958 1959 1960 1961 1962 1963 1964 1965

Savin-gs 270 2_4L. 455 592 650 815 880 945

Receipts from Contri-butions by Einployers,Employees and Govern-ment 1,066 '1,2)41 1,71i) 2,091 2,500 2,900 3,300 3,700

Receipts from 7inancialInvestment 45 49 58 83 100 115 130 145

Total Curreiit, Lxpend-itures 841 1,046 1,317 1,581 1,950 2,200 2,550 2,900

Uses of Sairngs 270 2i4 4 555 592 650

Fixed Investment 119 13c9 301 381 1458

ment, of which: 17 - 5 38 128 100

Other Uses 132 110 192 83 82

Purchase of Real Estate ( 17) ( 40) ( 30) ( 54) ( 69)Others (such as increasein medicinal supplies) ( 115) ( 70) ( 162) ( 29) ( 23)

Sonr.r' Fln2ncial Statements of l ;nri a-, rn direct informntion obta.ined b mission.Projections are very tentative. Actual growth of resources will dependlargely on policy decisions with resosect to extension of the presentgeogranhical coverage of the social security system for the privatesectoro it has been ass+red that receipts fron statutory contributionswill increase by 400 million a year, rezeipts from financial investmentbyr 15 1-'A 11 - a year, arA cu1rrert4 a e rA-r b 350 I rillinm1

Table 17

GOXTE:MIvE15T E1EIIPLOYEES SOCIAL SECURITY I1J-TITLTLE (ISSSTE) SOURCES ANDmn?vSE ,N rI J. L 5,8-i kN rAUO,-r-Ir,- IUI -6:

(Tn millinn."s of' npsoq)

P._npl Pro,t iction. a/

1958 19j9 1960 1961 1962 1963 1964 1965

Savings 105 127 151 201 285 325 322 290

Social Security Contri-butions by Governmentand Employees a/ 170 227 3UO 457 691 840 932 997

Other Current Recei.pts(i4nvestr.ent 4-come,

rents) 27 14 16 20 25 27 30 33

Current Expenditures 92 114 165 276 431 542 640 740

Uses of Saavings 105 127 151 ,01 285 325 322 290

Fixed Investi,ent 39 21. 19 50 75 70

Fin2ncial Investment 5 119 133 117 I Ui 19)Loans to Aembers, Net

of Thnqv-tents ( 70) ( 70) (129) ('127) (15) (IRQ)i'inancial Investrient (-15) ( L9) ( 4 (-10) (-14) ( 5)

Purchase of Rieal Estate 10 4L 13 7 6 5Othler lUses 1 -16 - 4 27 22 29

Source: ISSSTE.^,/ Proj,ection or 1963 as budgete4 I- TQCIST.'1 r i o fcr " 4 arcl

1965 projected on basis of 4.5 percent annual increase in number ofemployees; of 6.5 percent increase in wages in 1964 and 3.5 percentincrease in 1965. Current expenditures are roughly estimated.

Table 18

PE&M: SOURCES L'HD USES OF FU TS, 1958-1962 ANID PDRJETTIONS 1964-65

(In million of pesos)

_ _ ctuals sProjecti_n

1958 1959 190' 1961 1962 1963 a/ 1964 1965

Gross Cash Receints 4,087 5,019 5,803 6,382 6,622 6,953 7,231 7,520

Cost of Operationsexcluding depre-ciation b/ 2,556 2,602 2,989 3,109 3,366 3,629 3,905 L,i198

Cash Surolus onoperations, in-cluding depre-ciation 1,531 2,417 2,81ih 3,273 3,256 3,324 3,326 3,322

PDa,Y .Ilen t s to w Governr,ment, / E5!i PAP. 17 (7 otff °36 976 - 15"09 -I oo

Net Cash Surulus or±Operations after taxes 877 1,549 2 207 2,320 2,320 2,348 2,317 2,278

Debt Payments 1,145 2,681 b39 795 1,171 850 760 810

Total Available fromOwn Pesources forInvestment ( 268)X(1l32)'ll,88 1,525 1,149 1.498 1,557 l,468

increases in Govern-ment Equity 208 1764 - - - -5

Own Rtesources and In-creases Equity ( 60) 632 1,193 1,525 ,1b9 i,498 I,557 1,4068

BRorroTing l IPl 1 57 n1 1 -n l.Q 1 167 29L, 899 966

Total Resources forinvestmXent 1h40 2,139 2,229 2,58L 2,316 2,022 2,379 2,h34

Decrease in vworkingCapital 186 ( 584) 309 ( 270) ( 304) - - -

Otlier Capital Uses ofFiinrs 91233 89 98 1)ll 378 266 261 2A65

Trtal Investment (esin program) 1,393 1,516 2,439 2,130 1,634 1;756 2,118 2,2169

Souirce: M4EX.

Prelinminary esti.mtcs subject to cliange.

TIncludes fixed chares,e

Table 19

FEDERAL EL.CTIICITY COMiiISSION (C.F.E.) SCURCES AND USES OF FUiqDS,19ovo=k2 A7fThD(YT PFwoTlTIOl\Tc 1963=65

(In millions of pesos)

____~~~ __ __ t- ua Is - P-rojein At

1959 1960 1961 1962 .1963 1964 1l965

Gross Operating Revcenue 425a/ 47la/ 5835a/ 739b/ 1,043 1,373 1,753

Costs of Operation, Ex-cluding Depreciation | 3 3`2- 4ia 51'I 7b6 (00 i,C5i

Tnte'rn21 CaslhGener2tion (saving) 114 119 18L 198 257 L13 702

PI-usGovernrent Contribution h04 033 437 696 648 513 546Electricity Tax (133) (148) ( 170) ( 208) ( 231) ( 25$) ( 284)Contribution by States ( 25) ( 28) ( 28) ( 35) ( 34) ( 37) ( L,4)Capital Contribution byFederal Covernment (246) (257) ( 239) ( 4$53) ( 383) ( 218) ( 218)

Borrowing 2/ 96c/ 178c/ 694c/ 1,560 2,315 766 650

Eouals: Funds Available forCapital Expen- ditr es 61 71I0 ' i 0 Lr.IA o 1- PO

Investment f! 559 979 1,290 2,050 2,113 1,01T 1,111Increase in Working Capital

and Contingencies ) 25 125 61 119Debt Amortization ) ) 379 982 617 668

a/ From IBRD's technical reports.b/ Preliminary EstixTte by CFE.C/ Estimate nrenared by Deoartment of T1echnical Ooerations. IBRL-a! Assumes new Bank loans in the amount of Ps. 1,625 1;dillioi (4130 million)

in 196-67 n. 1 fl l R ndrHitinnnl short-+t.rm rht.

e/ Includes interest on debt as follo-us: 1959 Ps 41.5 million; 1960 Ps. 48.8miilion; 1961 Ps- 59.7 million; 15Q2 Pq 179,I9 - 1ni i n 193Q Ps* 29(A million; 1964 Ps. 288.4 million and 1965 Ps. 297.0 maillion. Data for19Q-1Q61 f'ronm TOD report 327a; 1962 TOT) estimate 1963-65 CFE projectio.n.

±/ includes frequency change Ps. 600 million, 1965-67 and iIalpaso Ps. 700

* ?rojections for 1963-65 as provided by CFEo

Table 20

ALL VTEXICAN RAILWAYS, USES LA-D `OUHiCES OF FUNDS, 1959-1962AND PROJECTIONS 1963-65

(In millions of pesos)

_ctuals Pro_ jrections

1959 1960 1961 1962 1963 1964 1965

CGross (rnrm+t-na R ueni-i 1,52I 1,866 1,795 1,803 1,903 Q1,91 2,018

Cash Outflow on Operations 1,888 2,044 2,179 2,275 2,L50 2,500 2,650

Internal Cash Generation - 360 - 178 - 384 - 472 - 547 - 539 - 632

PlusGovernment Contributiois

Tlo thie Jperating Deficit 412 319 351 560 697 739 882For Debt Pay-ments a/ 300 320 398 133 L13 860 L480For Investment 175 107 - 160?

Taxes, collected from Customers 120 128 154 154 161 165 170

_Dlus L,4 5" 'IT. terna Borro;vn 29 L2 AO 5O 943 r-19 n In.L .L k ~ lul LICL± J-BJV1IVWL4 ± L.7) LL4 ')'J -'i

Funds Available for CapitalREnrAenditures 9401 1j20 1,1791 l335 1 697 1,3f)J 1,302

MinusDebt Service a/ 270 3614 142 477 43 1480 80

EqualsFunds Available for Fixed

Investment 670 756 737 858 1,258 88M 822

Fixed Investm,ient 636 608 786 852

Discrepancy -4 5

Source: Financial Statementsof Railways and mission's estimates. Projectionsare based on assu,idption of maintenance of existing rates.

a/ Debt interest pay-ents are not covered by governnent subsidies tora; I T.Tm rc

Table 21

EXTRA-SE,TORAL FINTIr TCIATL INVES"ifl3-2T ANTM OTXHER tfSE Oi' 0 SOJPCESU,iT Uk P. IC 0U /I , 'I95-62

(Tn ,llions Df pesos)

Federal Government 686 729 560 208 193

Federal District 85 16 61 87 132

States and iiunicipalities 73 33 97 90 95

IEIS 149 105 154 211 182

ISSSTE 66 107 11u2 151 170

Decentralized AgenciesPemnex L7 673 -211 4 682CFE 20* 20* 20- 20* 25RailwaTs 20- 3l1 52 L9 - 6Othcr 80' 90* 100, 110* 150*

Total 1,226 L,807 975 1,380 1,6h3

Source: Tables 13 to 20. Figures r..arked (*) are rough estimates,

Table 22

BLLANCE OF PAYM1N'rS, :1958-196.3

(In mill;ions of dollars')

19513 1959 1960 1961 1962 19634*

I. CURRIDNT ACCOUNT - 2414 -124 - 276 - 179 - 93 - 103(a) Credits I 1,317 1,372 1,'467 1Ti7 1 703

1. Expcrts (f oob,) $ 7$09 723 T8 0 3 50 99 9312 . Prodluction of gold and silver 49 30 48 41 h4 513. Tourism 134 142 155 164 179 2104. BordLer Trade 3165 .354 366 393 407 4465. Migrant workers remittances 365 38 36 34 32 306. Other 21h 30 28 28 26 35

(b) Debl s :1512 1,41L 1,648 1,642 1,680 1 8061. Imports (c.i.f.) ,' 72 17,}O J17 ,1 3 8 T23h2. Tourism 19 24 28 31 35 393. Border Trade (unrecorded imports) 189 221 221 242 2h.4 2654. Income f'rom direct foreiLgn investment 1-2.3 :129 142 1h8 159 1585. Inte!rest on GoverrMnent :Loans 22 25 30 35 54 546. Othexr 31 36 4h 48 !45 50

1I. CAPITAL ACCOUNT 117 151 195 28B 17)4 272(a) Lono-Tera Capital 192 -120 2 6_1 307

1l Direct F'orei gn Investment 100 -1 -3 a/ 119 -17 1232 . Trading in securities -20 3 - 5 - 7 1 _ 63. Official Creditls (net) 125 78 189 185 148 155

(i) (New-r loans) ( 240) ( 223) ( 352) ( 357) ( 4il) ( 386)(ii) (Amortization) (-.115) (-145) (-163) (-172) (-253) (-.231)

4. Net Chlanges in Govt,, External Debt *- 1.3 - 15 - 25 - 11 - 1.5 35(b) Short Term Capital - 7.5 _ 9 75 2 - 87 - 3h

III. ERRORS AND OMISSIONS 2 r9 _7_ _ 1_0 _

IV. CHANGE IN OFi2. CIAL RSEIRVES - 77 + 56 8 - 21 + 17 +1J2

a, Incliudin- disinvestment resulting frora purchase of electric power companies previously owned by f'orei.gnintere sts,

kI Preliminary.

Table 23

EXTERhTAL PUBLIC DEBT OUTSTI.,\TDING INCLUDING U'MDI3BURSED AS OF JUNE 30, 1963 WITTHLSiAAjOlT -tEi-Oh'ED ADDITiONS JUlY 1, 1963 - JANUAhY 31, 1964

(In thous-nds of US d rollar eniiivn1ents)

ITem June 30, 1963 additionsteT- -'w Tr1i-J ng -July 1, 19 6A =

'Indisbursed undisbursed Janurary 19631

TOTAL ET LPrES; PUJLIC DEBT 1J17,,432 1,57,714 i j33

Publicly-lissited bonds 17,005 17,u05 _u jU( I-

PrivatelJ_ -plrned debt _671,0n19 707958q0 )4lI3Suppliers' credits ,;04507 -3 2 9& 2,365Other 260,512 271,232 C9, '7Ci

IBRD loans _1919756 355,546 LO,0 0

Inter-Amnerican Development Bank loans 4,140 3,750 5,000

U.S. Governm.ent loans 252,768 292f089 b,700Expor,bt-Import Bank 2331 )7T7 /2 L.l70IID, ICA, lend-lease 19,084 37,03h

Loans from other goverrniients 4561 6 41,661Canada 25,000 25,000German-y 13,158 13,158Italy 3,503 3,5o3

Nationalized properties 9,083 9,083

/1 Doees not include the following loans which had not been signed at the ti]nethis table was prepared:

Inter-American Developnent Bank loan t' 20,000.,000Ex-ort-Im-ort 3ank loan 1, -nr;nPID loan 20,000,000

~(,'' -v52 °v 0

/2 Does not include E;port-Import :ank loan of ,?90,0060,0( which inay not bedrawjn.

Table 214ESTIiIATIED CONTRACTUAL SERVICE PAnYE]NTS ON EXTER1NAL 'PUBL'IC DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF JUNE 30J, 1963

WITH MAJ;R REPORTED ADDITIONS JULY 1, 1963 - JANUARY 31, 1964 /1

(In thousanlds of U.S. ldollar equivalents)

Debt out- Debt out-staLnding Payents during year standing Payments during year

Year PllsU - Arnorti- In- Year plus u Amorti- In-disbursed atio terest To-tal disbursed zation terest TotalJarua-r 1 zation January 1

Total debt Publicly-issued boncds1963 1, 45(0,4114 /2 218.,54:L 56,505 275,0o46 1963 17,005 /2 1,9940 - 1,94(01964 1,451,332 229R,83:1 65,770 295,601 1964 56,020 2,938 1,14c1 14,42c1.965 1.,222>,0514 179,48:1 58,635 238,116 2,914.2 1,4214 Li,3661.966 1,,043,485 158E,5441 50,.337 205,8878 1966 51,605 7,940 1,356 Q,2961.967 885,675 139,1614 42, 863 :L82,027 1967 44,356 7,938 989 8E,,927I1968 71I73357 117,620 36,032 153,652 1968 37,3014 7,939 621 8,56(1.969 63,'259 112.,279 31,.387 1L43.,666 1969 29,887 3,941 1,31.6 5,2571.970 518;,572 714,529 27,058 :101,587 1970 26,538 3,9943 1,182 5,)125'1.971 1444,822 6:3,19:1 23, 297 86,1488 1971 23,374 3,941 1,0lL6 14,9871972 382),186 5:3,820 19, 892 73,712 1972 19,988 3,9141 91.2 L,85-31973 32 8,827 147,617 16,'978 64;,595 1973 16,508 3,901 776 It,71171974 281,5514 42.,399( 114,480 56,870 1974 12,811 4,8181 6142 5,1453-1975 239,0614 33,099 12,213 45,312 1975 8,000 2,000 5C)6 2,5061976 205;,965 28;,251 10,512 38,767 1976 6,000 2,000 372 2,3721977 177,71) 2'7,286 8,942 36,228 1977 4,000 2,000 236 2,236

Privately-placed debt - Tota:L Privately-placed debt - Suppliersr credits1.963 7__70 172J 317, 52I 1963 435,7T4'T/2--7,-33,T 13,74 86,32(>1964 644,157 17:3,39:3 30,906 ;2045299 19614 399,801 65,667 17,580 83,21471965 470.,7614 106,782 22,6573 129,1455 1965 334,134 53, 980 15,1214 69),1041966 363,982 79,823 17,132 96,955 1966 280,1514 48, 414I 12,571 6]L,0151967 281t,159 6:3,828 13,.361 77,L189 1967 231,710 42,380 10,4479 52,98591968 220),331 5:1,052 10,.334 61,386 1968 189,330 36,936 8,648 4E,5841969 169,27" 60,1514 7,862 68,316 1969 152,3914 55,103 6,9142 62,0451970 109,125' 34,05:L 6,0o43 40,09L4 1970 97,291 30,6'53 5,3814 36,0371971 7%,,0714 25,,89:3 4,:391 30,284 1971 66,638 22,45'5 3,941 26,14361972 4c9,181. 1'3,830 2,8149 22,679 1972 14s,113 16,432 2,608 13,0140

1Q325',35]L 1L3,5146 1,6I714 1,220 1973 27,711 1.1,9c06 1,610 13,5161974 1';,80', 10,706 375 11,581 19741 15,805 10,7C)6 875 11,58-L1975 5;,099 5,'099 175 5,;274 1975 5,099 5,o509 1 75 !5,2714

See footnotes at end c. r' b1e.

ESTIMATE!D CONTRACTUAL SERVICE PA)MENTS ON EXTE NiAL F'UBLI'C DTBT OUTSTANDING INCLUDING1 U.TDTSBU.JRSED AS OF JUNTE 3O, 1963WITH MAJOh iEPCRTED ADDITICONS JULY 1, 1.963 - JANIUARY 31, 19364 /1 (COONT.)

(In thousands of U.S. dollar equivalents) Page 2

Debt oua - Payments during: year Debt 7 out- Payments during yearstandinga standing

'Year plus un- Arorti- In- Year plus un- In-disbursed 1 Ati- terest Total disbursed 'zaton trs TotalJanuary- 1 ztotrstJanuary 1 a~(n -crs

Privately-placed dLebt - Other IBRD loans

1963 271,282 /2 104,241 13 ,066 117,307 1963 3555,546 /2 1LO,760 11,242 22,002.1964 244,356 107,726 13,326, 121,052 1964 390,140 1L2,876 :l8,163 31,039'1965 136,630 52,8102 7,549 60,351 1-965 377,264 -L6,768 :19,824 36 n5921966 83,823 31,379 4,561 35,940 1S66 360,496 :L8,4$2 :19,0.30 37,942:1957 52,449 21,448 2,882 24,330 1967 341,634 1L9,485 :18,229 37,714'1968 31,00l 14,116 1.,686, 15,802 1968 32 2,1149 :24,022 17,326 141,348.1969 16,885 5, 051 920 5,971 1969 29R8,127 25,120 '16,111 41,2311970 11,834 3,398 655 45057 1970 273,007 :17,522 14,921 32,4431971 8,436 3,398 450 3,848 1971 2155,485 :l8,46 13,970 32,4361972 5,038 3,398 241. 3,639 19 72 2:37,0:L9 '19,455 '12,968 32,4231973 1,640 1,640 64 1,704 1973 2:L7,564 20,503 11,913 32,416

19i74 19 7,0 61 :19,950 10,818 30,7681975 177 ,1:L1 20,1109 9,722 29,8311976 157,002 :20,2'70 8,628 28,8981977 136,7:32 19,830 7,49 27,324

Inter-American D-velopment Ban1c loans U.S. Government loans - Total:1963 3 7'0 /2 '- 302' 302 1963 213521964 39,750 - 2.,152 1,152 1964 272,406 36,123 12,231 48,354'1965 39,750 6,23 1,799 2,422 1965 236,283 44,399 10,727 55,126:1966 39,127 1,064 2,201. 3,265 1966" 1 1,884 142,9146 8,742 51,688:1967 38,063 2,9,04 2,416 5,320 1967 1148,938 .38,2657 6,441 44,708:1968 35,159 2,904 21,227 5,131 1968 l:LO,6'71 25,398 4,468 29,866:1969 32,255 2,904 2<,042 4,946 1969 85.,273 :13,855 3,331 17,186:1970 29,351 2,904 1.,854 4,758 197a0 1,418 :10,196 2,653 12,849:1971 26,447 2,900 1,669 4,569 971 6n 1,222 9,156 2,112 11,2681972 23,547 2,570 1,488 4,058 1972 5 2,0D66 7,639 1,663 9,302:1973 20,977 2,572 1,321 3,893 1973 144.427 7.055 1,294 8;3)91i974 18,405 1,856 1.0,16 3,022 1974 :37,472 5,067 979 6,0o46

:1975 ~16,549 1,856 1,047 2,903 197,5 32,305 4,35 763 4)798:1976 14,693 1,8%6 926O 2,782 1976 #2823417029 486 -,7151977 12,837 1,8G6 805% 2,661 1977 '2h4J 41 3,6100 607 ,007

ESTDHATED CCNTRACTUAL SERVICE PAYMEIINTS ON EXTEBIAL F'UBLIC DEBT O)UTSTAl'PiDING .LNCLUDING UNDISBUIRSED AS OF JUNE 30, 1963WITI rWAJOR REPORTED AhD i1TONS J'ULY 1, 1.963 - JANUARY 31, 1964 /1 (CONT.)

(In thousands of' U.S. dollar eouivalents) Page 3

Debt out- Debt out-standing Payments dvring year standilg Payments duri:ng yeardYear plus ur- Amorti- In- Year plus un Amorti- In-udisbursed 2;aticn terest l'otal disburysed 7.ation terest Total

Jnary 1 -January

U.S.Govt, loans - Exnortt-Trrmort, Ban,k U. S. Government loans - Other

.1963 255,005 /2 30,233 1l.,934 42 ,167 1963 30,334 /2 . 418 418'1964 242,072 36,108 11,797 47,905 1964 3(0,334- 15 434 449.1965 205,964 L.4,321 10,279 54 600 1965 30,3 9 78 448 5261966 16-1,643 42.,8g9 8,281. 5.; 090) 1966 30.,24:L 137 461 5981967 118,834 38>059 5,971. 44,030 1967 30(,1014 203 470 678.1968 80,775 25,2122 31,993, 259,115) 1963 2928, 896 276 ;475 751:1969 55;653 1.3,506 2,852 16,358 1969 29,62(0 34L9 479 828:1970 42, 147 9, 7 71 Z.,173 1., 944 1970 29, 2 7:L 425 430 505:1971 32,376 8,653 1,633 1C,26 19i71 2,846 50.3 479 982:1972 23,723 6,727 1.,1189 7,91 6 19712 284,33 912 1474 1,386:1973 16,996 5,73i0 843 6,573 1973 27,431 1,325 ;451 1,776:1974 11,266 3,655 562 4,217 1974 2 6,10$6 :1,412 417 1,8291975 7,611 2,530 3812 124,694 :81,871976 5,081 2,530 244 2,774 19,76 23,189 :1,599 342 1,9411977 2,551 1,901 108 2,009 197 7 2L590 '1,699 299 1,998

Loans from other governments Nationalized properties:1963 1963 , 3 /2 19T 170 o6,B1964 40,536 -- 2,802 ],698 4S50() 1964 8,32:3 1,699 129 1,828:1965 37,734 6,268 2,101. 8,369 1965 6,6214 1,699 87 1,786:1966 315466 6,207 1]781 7,988 1966 4,925 1,699 45 1,744:1967 25,259 5,853 1,423 7,27 6 1967 .3,266' 859 4 8931L968 19,1406 5,526 1,056 6,582 1968 2,337 779 - 779:L969 13,880 5,526 725; 6,25]1 1969 1L,5513 779 - 779:L970 8,354 5,134 405 5C, 539 1970 7 79 779 - 7791971 3,220 2,835 109 2, 944L972 385 385 12 397

ESTIlATED CONTRACTUAL SERVICE PA YYISTTS ON ZITERiAAL PUBLIC DEBT OWTHTANDING INCLUDING UJNDISBURSED AS OF JUNE 30, 1.96311ITH MADJOR REPOTED AIDDTTIONS JUL'Y 1. 1963 - JANUARY 31, 19611 /1 (CONT.)

Page 4

/1 Includes service on al:L debt listed in Table 23 except for the following items for, which repayment terms arenot; available:

Frivatelylp1aced debt $ 551,003U.S. Govt - lend-lease 6,75o,noo

$ 7,300o000

/2 Amount outstanding for 1963 is as of June 3Oth; the service payments are for the entire year 1.963.