1 RETURNI< TrO RESTRICTED

I RETURN TO Report No. PTR-88

IIREPOR-S D'SK| WITHiNift____ t__I '1

~~1IN

This report was prepared for use within the 13ank and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynol be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENr

INTERNATIONAL DEVELOPMENT ASSOCIATION

THE TRANSPORT SECTOR

OF

MEXICO

.in ftour volume s.ei8)

VOLUME I

SUMMARY

May 13; 1971

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

MEXICO

THE TRANSPORT SECTOq

Table of Contents

Page

MAP (IBRD 3146 - Mexico Transportation Network)

FORR.JORD 1

TNTRnODTTlT TOn 2

TPOLTTY AND PLJT.RTING 4

A. Present PT ivng and Coor nation LB. Alternatives to Improve Transport Planning and

Coordina+ion 0C. National Transport Policy 12

II. RAILWAYS 14

A. Background 14D. ±l1t Rta-LLWay £-IUU±teIL 14

C. Policy 15D. Financial AspectsE. Investment Strategy 20Tl - - C, rF.i * r UecoJu,,iendationAs U

II!. ROADS AND ROO) T.RA1NSPORT 22

A. Tne Road System 22B. Highway Administration 23C. Highway Planning 24D. Highuay Design, Construction and Maintenance 26E. Financing of Investment and .ecurrent Expenditures 28F. Road User Charges 30G. Toll Highways and Bridges 34H. Road Transport 36

TV. I.CPEPEX (Petroleum Transport) 39

A. General 39B. Petroleum Transport Facilities 40C. Traffic Trends 42D. Past and Future Investments 44E. Transport Policy and Coordination 46

Table of Contents (Continued)Pane

V. PORTS Ji8

B. Policy and Organization 8C. Port- Facities .An Operations hl

D. Finances 50E. ,-tr T i nd Ir,ves wm,+ Strateg 51

. 1- U UUJ. U I.L . -L O.J4L .L 4J%A.~U~

F. Recommendations 52

VI. CIVIL AVIATION 55

A. Background 55B. Policy and Planning v6

C. ;Eanagement and Operations 59D. Reconmendations 63

aTII. URBA1 TRANSPUN.T 66

PIMEX A

' X 177 <s ~~~~~~~~~~~~~~~~U. S. A

Z-''77' 1 S F7. I9ne _, \ \ ,o~p I- DJ8tE LrR

I=F-lF^ -8< >\,_ w - + S Q J X ' *-I rOR<H RN

a 2 < ts !oX X }> 0 f <9 _ 09Nso ~~~~~~M E X I C C)t > 1 _,>&55= ......... - 4 t 4 / XTRPANSPOR TAT ION NET'WOFRK

_ /a t<e ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~G Ul F C-) F m F x C C)

,~~ ~~~~~~~~~~ ~~~~ ATE.,,f,

-- T0L~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~YC IAN i>[<

_ NdAl:4 30Api 'C"z°"" %; CU.o . -; _ .. \ -a~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ENNSI

cd ig\,'<_<< ( FS O 1\. C0 E U P A 5

MEXICO

THE TRA1?SFORT SECTOR

FOREWORD

i. A mission composed of Bank staff and of consultants recruited bythe Dank visited Mexico during ApriI 1I7u at the request of the Government.From officials at all levels the mission received the fullest cooperationand gained an understanding of the deeper issues in the transpcrt scene.The abili1,y of many of these officials and their serious commitment to thesUbstance of the mission's work was impressive. The major preparatory effortthat had been done before the mission's arrival; the excellent organizationalarrangements whereby groups of Mexican officials worked with the mission'sexperts; and the unstinting efforts which were made by these and other offi-cials to meet the missicnis requests, greatly facilitated the mission's work.I'he venture was a model of Bank and memiber country cooperation in investi-gating an important national issue.

ii. The mission was composed of:

Bank Staff

V. Hogg - Missioil Chief T.P.D.1/G. Beier - Fiscal Economist, Econ. Dept.J. de Gryse - Financial Analyst T.P.D.H. Jones - Financial Analyst T.P.D.M. Karcher - Transport Economist T.P.D.E. Meldau (Miss) - Fiscal Economist Econ. Dept.P. Ruof - Economist Area Dept.F. Sander - Financial Analyst T.P.D,,A. Elizondo (Miss) - Secretary to Mission E.D.I,"

Consultants

R. Bandeen - C.N.R. Officerl/ (Canada)W. Bowra - C.N.R. Officer (Canada)R. Brown - Transport Economist (ECLA) (U.S.A.)J. Cann - C.N.R. Officer (Cana(da)A. Chandler - Financial. Analyst (U.K.1)C. Foster - Econonist (Urban) (U.K.')D. Freebairn - Econoraist (Agriculture) (U.S.A.)S. Hayden - Aviation Expert (U.S.lA.)A. Parra - Petroleum Expert (Venezuela)M. Pennington - Port Expert (U.S.lA.)L. Prado - Highway Expert (Brazil)

iii. The mission's report was completed by October 1970 and discussed withthe Mexican Government at that time. It has not been updated since then anddoes not ref'lect developments which have taken place subsequently.

Note: The time spent in the field by particular individuals ranged betweenone and four weeks.

1/ Transportation Projects Department7/ Economic Development Institute3/ Canadian National Railways

- 2 -

rrn41 n'AS cS}lWr ' 5 'C'^

IlTRODUCTION

-f c; r1U1±Ui ULLZ_Uonmi1 UdXncsso t Js u Lite Ub.ueen ul,e Govenimentof r1exico and the Bakc. From this, the Government has concluded thiat a three-pronged attack ln economic policy- is necessary to acLheve the country's broadeconomic and social objectives. First, measures must be taken to improve thebalance of payments. This, among other things, wiLL involve increasing foreignexchange earnings from exports and services such as tourism. Secondly, thegeneral fiscal or budgetary position must be improved. Among tne ways oIachieving this is to ensure a) that operations in the public sector areefficiently carried out; b) that new investments are sound and well-timed;and c) that the tariff or price policies of public sector revenue earningcnterprises lead to efficient resource allocation, while taking into accountthe need to minimize their demands on the national budget. Thirdly, theprocess of improving economic and social conditions in the still large butpoor rural areas of the country must at least continue and, if possible, beaccelerated.

ii. The Government is fully aware that progress towards these objec-tives will require action over the whole spectrum of the economy. Nevertheless,it considered large opportunities exist and important gains may be possible bya major effort in the transport sector. Accordingly, it invited the Bank toreview the sector with the broad purposes of assessing existing policy andplanning in the sector; the present levels of efficiency in transport opera-tions; and to make recommendations that would help the sector and assist inachieving the wider national economic policy aims.

iii. The following comment some 10 years ago by the Royal Commissionon Transportation in Canada is an approDriate summary, description and warningof the current transport scenie in Mlexico, as found by this mission:

"Uncoordinated public investment, without clear-cut policyobjectives and writhout some unifying research group constantlyassessing the effects of regulation on 1!ational TransportationPolicy and to recommend necessary changes in policy and regu-latrorv legi th onn leaves open the onsslbilitv and Drobabilitvthat changing circumstances w-ill create future misallocationsof rPesurcPs in transportation, and consequently in the wholeeconomy.''17

iv. Among the consequences of that Royal Commission's Report was an;+A>t Thl,r;> A-, "n1oU;^t - +r +Icn 1 A nhi0r+i¶rn nf' +i'nn r+.n+. in

the Canadian economy; the introduction of new and2 par-seeing legislationdeflring vh koVL"ntr;'Js natiaona.1 tran.sort plcg >eceto frQ

, Royal Commission on Transportation (Canada), Vol. II, 1961, p. 163.2/ 14-15-16 Elizo II, Chapter 69, 1967 (see attached hnnex A for preamble).

- 3 -

institutions to improve transport planning and coordination; the giving offreedom to the railways to operate on a fully commercial basis, subject toa bare minimaum of governmental control and supervision; the bringing in ofnew men into the transport planning and operating agencies; and, among otherthings, the undertaking of more research into transportation matters bY -theGovernment itself and the universities, often with governmental funds.

v. Similar changes are now needed in Miexico. This advice, however, isnot new. In three earlier reviews of the transDort sector. the Bank has madeobservations along similar lines.!/ The Government's recognition, however, thaLthe time may now be annronriate for action is ref ected in its request to theBank for the review undertaken by this current mission.

vi. 'The "transport problem" in iMexico, as elsewhere, consists of threei nter-related a.sperl t Fni rt of [v es-'- that c' Vrent trnisprt operations

are carried out as efficiently as possible. Secondly, of undertaking economi-eallyv sown-d --.d well-tiMed in.vestn.ents l..ThiLch areflectL n.atio0n.LL '. e-on-lorm.ic ad.d

social priorities as well as take into account the rapid, world-wride techl-nologic-1 ch-ages tlhat+ are tSW~-ng place in the0 tr-.spor secor d

.. a~- ~ UW'~J.L~ yJ.a'.~. .LJ ~ULL .4 LLj'4 Ou~ 1U.22 * 11~

thirdly, of employing pricing or tariff policies which, while improving thellocation o,f th nti-' -4sources rec 4z 4-L.e ---Ae to_ geeasefw-

for the further development of the sector in the face of the short-run diffi-^~U~ %ties ofL_L incresing kli sain by mPI-o-venmen-ts ir. wheit ta-x SySterl01.

svii The obstacles in the way of subsial progress towavds achieve-ment of these objectives in 1Mexico are not those of limited human skills oraLUIJ±stratu-Lve inucapabilities. A gull alu proper execution, for example, o0the tasks presently and legally laid on the various Iinistries and agenciesin the transport sector could, by itself, produce significant improvements.The fundamental issues are more those of defining and re-directing transportpolicy -- o.f the political process of maKing change in the national as opposedto sectional interests -- and of appointing the right men to carry it out.MVlexico unquestionably has such men. Some are already involved in tne sectorand others could be brought in. If the challenge of clear objectives andpolitical support is gi.ven to both -these groups, success is possible. Itwill not be easy, however.

viii. This report, in four volumes, touches upon and makes reconmmenda-tions about many detailed aspects of t.he railway and highway (Vol. I1); portsand pipelines (Vol. III) and aviation and Mexico City urban transport sectors(Vol. IV). This particular volume attempts to summarize the others and discussthe broader transport policy and planning process in Mexico.

1/ These reviews 'i ds eh in m det A 1 -- most of' - h

is not repeated in this report -- are:

i) Report No, T'H-137a: "An appraisal of the DevelopmentProgra. of 2.A- col, Vol. V, ^rU.eX TIT = Tation,

July 13, 1964;ii) Rueport tIO. tvNI-""'16 "Current Economic PosiVion and Pros-

pects of Mexico", Vol. III, Annex VI - Transport,Oct.ober 26J, 197u6 aIU,

iii) Report No. WH-194a: "Current Economic Position and Pros-*acts ol i4u.JLco". De 1 I -- I4Uie: .IZ6sotor of Mexico", DbcemOer 31, 1969,

I,. POLICY ii< PT .A,_TTTTM

A. Present Planning and Coordination

(i) Introduction

The present organizational arrangements in Mexico whereby transportpolicy .4 -- A -made ar.d exeutd,an t-44r a -4--i carrie out, - ar-e bLoth

confused and complex because of the number of Mlinistries and agencies directlyor ini rectly involved. Some comr,plexity, hoLvever-, is unIavoidable in a countI. the physical size of MIexico with its federal system of government and generally-well developed, techn-ologlcally- modern transport systemn. In additLion, gi-ven

the overall political philosophy of the country it is also necessary to ensurepa ticipation in bothl the decision-making process by the variety of interestsinvolved and the decentralized carrying out of decisions. Provided, however,a) goals in the transport sector are ciearly specified5 b) actions take placewithin the framework of a sound, well-known and fully understood policy; andc) actions are under the supervision of an effective coordinating machinery.there is no basic reason -.hy the sector should not contribute efficiently tothle broader national purpose.

ii. Today in Mexico a wide range of different Ministries and agenciesare responsible for, or involved in:

a) transport policy formulation;

b) transport planning and investment decision making,

c) transport coordination and regulatory activities(e.g. taxation, tariff-setting, licensing, sub-sidization, etc.);

d) transport facilities construction; and,

e) transport services operation.

iii. Three Federal Government Ministries stand out in relation to theseresponsibilities. First, the M7inistry or Secretariat of Communications andTransport (SCT) which has a general responsibility for most of the transport;sector. Secondly, the M-inistry of Public 11orks (s0P) which is mainly engagecLin the construction, improvement and maintenance of federal free highways ardthe construction of toll roads, railway extensions and airports. In the plar.-ning, engineering and financing of State and local government roads (e;:cludingurban) it has formal working arrangements w,xith the entities involved. Thirdly.the "Secretaria de Marina!. or Navu Idnistryv wihich is responsible for mostport development works and aspects of port operations -- though there is asrmall "Free Port Authority" wjhich reports to the Ministrv of Finance.

iv. P'ssuming investment decisions reflected coherent national economicanu transport policies -- wh-ich t>hey do not n- i-um-ierous other parties arealso involved, each with different degrees and types of interest. The invest-mrlent programs of the tihree above lKinistries are submitted to and approved bythe Ministry of the Presidency, particularly its Department of Investments,and by a Joint Presidency/ilnistry of Finance iSub-Jomnmission on InvestmentFinancing". Even though ultimate decisions are made in the Presidency,transport matters are of interest to other It'inistries also. The !N1inistrie;3of Agriculture and 'iydraulic Resources are concerned with rural roads. Theilinistry of Commerce and Industries is involved in developing the transpor-tequipment industry (e.g. trucks, shipbuilding, railway freight cars, etc.).The Ptinistry of F'inance in addition to its concern about the financing of-.nvestment play's the traditional taxing, subsidizing and budgetary controlroles. Other eibinistries (e.g. Fomento, Patrimonia j'!acional) have their owlspecial interests in aspects of investment in or owrnership of transportinfrastructure.

Investment decisions must also take into account the views of such"decentralized organizations" as the National Railw;y,s (INacionales de Mexi co),the Airport and Auxiliary Services Authority (ASA)Al/the Toll Roads andBridges Authority (Caminos y Puentes) and PEIEX (the national oil company),as well as such "state enterprises" as the Pacifico Railway, Aeronaves deIexico (the national airline) among others.

vi. Problems involving transportation and transport coordinationnatters are di-scussed by a variety of permanent Commissions. Importantdecisions are taken directly at the Presidential level. Finally, given thepolitical arrangements in M,exico, the main political party and the workers'syndicates have some influence in, among other things, appointments to keydecision-makirng positions. In sum,i, therefore, the excellent organizationalcharts and legislative texts which e-dst in liexico are only partial guidesto the real process of decision and policy making.

(ii) iniLstr77 of Communications and Transport (SCT)

vii. As its title indicates this Ministry now has two important functions--communications (i.e. postal, telephone. telegraph, radio and TV services) andtransport. It is doub ul whether any one iinister can effectively handle bothactivities any longer.- The time has probablv corme to establish a strong.eparate Ministry of Transport thiat would be capable of formulating andresponsible for implementiing a National Transport Policy.

viii. Throigh a vaJety of De'-artmnents (Ii recci ones - eer the-10--- --- . _ D h

present Ministry has broad responsibility for a) aviation operations andassociated activities (lie-ensing, saffety, radl-io -aids, etc.), though not for

1/ By presidential decree, it was recently allowed to engage in airportconstruction in addition to its airport operation and maintenancefunctions.

2/ This is not to be read as a criticism of past or the present Ministers.On the contrary, they have been some of the ablest and most dedicatedof i.exican citizens.

the construction, maintenance or operations of airports; b) the use of theFederali HhwTJayr Syirst+m t+.h-rouh t.rafic po]n'c i o and the i sue of rou+te licensesto truck and bus route operators; c) the technical supervision of theDiation n_ Ra ay1 s and v- direc - A,- , rato of others -- s rf which arein the process of being absorbed into th:e Ilationol Railways; d) the settingo^ ehia st~ar.darAs Jn toe operation of' rnpr evcs^dtefix-v

'Ji. 11 UC¼Li Lt% 0 'Jf .Ad. U. LI vlAS a J..I -Li C... -it U.iI~4 0iLi 1 V .1- -.'I Wa.

ing of rates for air, lard and sea transport services and all operations (e.g.port cargo han'ing reatn to 4hes- and--4- -- --e --epaauio an rsn

of transport statistics, subject to technical standards laid down by thellinistr-y of Comm,erce and inldustr-y' s Federal Stats stics Departm,ent.

i<. 3y law, the SOT is -Lto ad-vise the Ministr-y of Public um r / oP/on the formulation of programs for the construction of roads, airports, rail-way stations and road tranEport terminals operaling under concessiunr-s U (empha,isadded). Through this advisory function and its direct control over transportprices, the SOT has the legal power to influence significantly the demand fortransport facilities and the resulting investment requirements, including theirtiming and location. There is, in fact, a -Transport Coordination Comiussion'under thie SCT which reports to the Miinister. In practice, however, it is moreof a consultative group concerned Wihl th-e technica1 aspects of inter-miod`lintegration and facilitation issues rather than with the economic policy iss-iesinvolved in tne transport sector.

x. Unfortunately, the SCTIs advisory powers to the SOP are not fullyexercised. One result is that SOP has become alrgc-ly independent planningand construction authority in a number of transport activities, subject onlyto the investment approving powers of the Presidency and the budgetary powersof the Miinistry of Finance. The ;Uavy MIinistry, meanwhile, is outside the orbitof the SOT, other than for its right to express T'opinions1 I on concessionswhich the lIuavy Ministry grants for shipping services and marine schools andfor its approval of charges for some port services. PEP1E-I submits its pro-posed pipeline construction and tanker purchase programs directly to thePresidency while the rates charged for the movement of petroleum products byother transport modes is determined/approved by SCT.

(iii) Assessment of Present Planninf

xi. The present system may be characterized as "planning by negotiatioai"with the Presidency. There is insufficient prior consultation among the threemain Ministries and PETiEX as how best to achieve objectives. Each agency triesto identify the bottlenecks in its own mode in relation lo existing capacitYand, accordingly, may carry out feasibility studies under pre-emptive terms ofreference which do not take into sufficient account the possible impact ontraffic and investment requirements of possible changes in rates and fares bythe SCT. Forecasts of traffic volumes mav be made by each agency independ-ently and with only a partial awiareness of what is being planned in an alter-native or comoetitive mode. Proiects in one transport mode are not assessedin any detailed -say against the alternative of developing another and possiblyoirpe encrnnrnJmic mode. Bv the time many Droiects reach the Presidency for approve].

they may be at an advanced stage of preparation and may have involved sub-

-7-

stantial, but mis-directed efforts and the use of engineering funds. Moregenerally, in the absence of a clearly know.m national transport policy frame-work, it cannot be concluded that projects zre being presented or evaluatedas component nartr of sets of inrterated n'=- or rernionnl transportdevelopment plans. The result is that the Presidency is called upon at alate stage to rPvie-T mny project-s and seek additionl inorm.ation about thermso that it can prepare meaningful programs which match its omri and the Ministryof hinan ce' s estimates of the amonts and sources o funds likely to beavailable. If, under thle present process, the aggregation of projects approcO-adCd up i n some Tran-w +tr .a'iarenin+ p i is, i l measure,n by chance.

The outcome of this annual negotiation process may not result in a 'balanced`

integrated development approach.

xii. These criticisms of the present system should not detract, however2from its many positive and practical aspects nor refLect on the work of thefewi able officials involved at the center of the system. In the absence ofspecific --ecivs A ,v.idelines4to 4-1emise`es ar, to the agencie 4heyLijJL U.Lv _ C-.iLLA U" VLL LUO Ai U 1I1 t3±V ~ IzaU Ut.) U11u CdV1it...LVO U11U.LY

make the best efforts which time, resources and other constraints permit.iYVt; I1 I t- _L t-, , 1itC1-t: _L 1VIU111 1(.I _]11i.1Qg ,[U1 U UIIll o IVIL IllUUlL aD UU ILU _11 _lLi UC VU AbU

to the investment program for the next fiscal year to the detriment of prc--gr'amr-ng over longer time horizons. As a res-ul, muany of the Governmeilt'sbest people are fully occupied in the mechanics of formulating an annualinrvestd1ent budget wlhen some of Uteir sidil and experience could be betteremployed in developing longer term "perspective" programs that might moreacc-r-aely reflect national economic, sociaL and political objectives. 'Ireneed for planning for periods even longer than one Presidential term of offien(6 years) has been recognized at the highest level. It is to be hoped thatefforts will be made, therefore, to develop programs over longer time horizons-

xiii. Some information, of course, is submitted by Mfinistries and agencie:3to the Presidency regarding proposed investment plans over each new Presi-dential term. It appears, however, that these are intended more for financi alresource planning purposes than as program budget and planning instrumentswhereby studies (including engineering) have to be carried out in certain tni2?sequences and staff requirements in numbers and skills are forecast. Equal-:i,a program and budgeting approach is not fully developed which would permit.an assessment of the regional/state/inter-sectoral implications of theseprojections and of the meaning of such investment decisions on future anru<arecurrent budgets.

xiv. The divorce between investment decision making and the analysisof current expenditures of the operating agencies is another weakness in thepresent system. WThile joint working groups which, among others, includerepresentatives of the ianistry of the Presidency and YMnistry of Finance,consider the operating budgets of the agencies from whom capital budgetrequests are also being received, the analysis seems to be piecemeal and mayinvolve different people. The Sub-Commission on Investment Financing, forexample, is said not to study seriously the effects on investment decisionsof changes in either the tariff policy or taxation position of operatingagencies.

-8-

iv. The defect of a lack of adv--an iyrati rvr on some nroj -rePsnt.ei

to the Presidenc:- could be overcome by the establisiment of a pre-investmentst udies.L~ U Ii-Vu u LuLL UJ.iln ul'c ;'4nistry for r.ajor "' '-"'--I pro,ects.

The tasks of tiis unit, wuhich the mission recorarends should be established,UOULUJU iI1LntUUU a) UI±i pfUjJd-.U t, i 01 4J upJl-upl- La te i± Uo rev; 1i'en .JJ o u- 7

b) the initiation and evaluation of consultants' proposals; c) representationon steering conmittees set up to oversee the execution of' studies; and d)coordination to see that the inputs needed for a study are both provided andconsistent. It is envisaged that such a unit could develop standards forstudies, including appropriate methodologies; acquire information and buildup files as to thie performance, etc. of domestic and fuoeign consuuitcunts; an.d,in the process, not only prevent a -oaste of resources on sometimes overlappingor competing studies but also speed up the wThole process of project preparation.It should be stressed, however, that this unit need not be involved in routinefeasibility studies -which properly fall within the sphere of one agency. Itshould, however, know at an early date that these studies are to be carried outand have the right to review their termis of reference. The mission believesthat a properly staffed unit could raise the standards of project preparationstudies throughout much of the public sector.

xvi. It must also be recognized that the advances made within the presentdndministration have not been institutionalized. The division of authiority

between the tinistry of Finance and the Ministry of the Presidency makes under-standing betaieen Ithe two absolutely essential. Thile this has been accomplishedat the technical level within the present Sub-Commission on Investment Financiingthere is no reason to believe, however, that -ith different people on theSub-Commission the system would continue to function so smoothly. At best, thepresent arrangement is .recarious and is heavily dependent on the personalitiesof the particular officials involved.

xvii. The problems of the national and sectoral levels spill over into theproject level. A number of different evaluation methodologies is usedby the different Kinistries and agencies to justify the projects being proposed.l/Tf. for examplef lt iis anticipiated that a q nrt,iculqr oroiect can be financed bya particular international agency the methodology used is most likely to bethat fouznd acc-eptnhle to the financinog agency, Projicts.- to be financed bynational funds are gZiven little, if any, thorough economic evaluation. Since,howTever, gonls are not. etab1i shed at the national level, there is no frameof reference within whhich many projects can be analyzed and prioritiesestablishe. F~or x.nmnple, -without. a national transport policv there is noway whereby disparate benefits, such as time-savings and increased agri-cuilturnl production resuqlting from transport investment_ cnn he -related foralternative projects on even social or income distribution grounds.

xvii. This lack of a national transport policy also means that while a-rell prepare project Lby ore age..cy car. o n ',' o poter.+v'5ly -- po-

tant projects are ignored. For example, while funds have been found for tollrloadUi, s, UU4Ll 11cLj uiL) 1 UUllt ) .UV J1iJJ.UV% UIJ11U ICL-LUJ1 0 p u o IlLs VIS UO v- I- E

is likely that some of the funds used for toll roads may have yielded greaterEcorio-uac retuuris to ulie Rab.LOfl Li. the-y hadL bUeeni. usedl in the port secltor.

1/ Since the mission's visit, SOP has engaged the services of consultants toadvise on prcJect evaluation procedures for highways. The railways havealso engaged consuitant3 to do a number of studies, some of which willpermit iiqprovad proiect evaluation procedures.

xix. ITithout a clear statement of national goals and a transport policy,projects from different sectors cannot be coordinated in space and time. Thepotentia'l impact of carrying out investments simultaneously in feeder roads,irrigation, storage facilities, fertilizers, etc., within a regional agri-cultural development program may be misjudged or lost. Highway planners, forexample, justify feeder road projects in terms of agricultural potential andbenefits that are "estimated" when they should be "programmed". PEMEX mayplan to build a pipeline while the railway may be simultaneously planning 'Lopurchase tank cars for a traffic that may be reduced or no longer exist. Evenin the best of cases, when each project is economically viable, the cumulativeimpact of coordinated execution is not obtained.

xx. Finallv, there is evidence of inadenuate control over the executionof particular projects. Cost over-runs on some transport projects have pre-sented serious Droblems to the HinistrT of Finance. Even the recent threatby the Presidency that contractors' bills which represent spending above oroutside of apporoved es- t.imantesq will nro+. he npaid has not. Vy+. solved the. nroh lr 1,

B Al tprn-4+.i es to Improve Trnn srort Planning and Coordination

* The wlreainaesses noted ahove in the general pl-ning process an.d inproject evaluation and approval procedures are largely outside the scope o.:L

+sreport, Thi oh is focused on ways of im,iprov-ing the 4-- tt +seor.+n-

Apart from the broader role which transport can play in achieving the objec-tives referred too .-in +LlS Introduction, -IeA n -.ed for -- vEIS ien+t in +411 sectoris urgent in view of its burden on current budgetary funds. If the sector canbe Mrade to operate Mrore efficiently; if irnvestVMnts can be better tim.ed and .naemore appropriate to needs; if the operating agencies in the sector can be madeto generalte a greater shaue of A.-.e f Lhy n fo 4e ---- rene-w~~'s ~ ±id~.CZ U4. IL LuUU IA±ey neelu ±U±o inLvestur e4ntin, A ±ene1i_V)J

and expansion, then any funds saved or released could be used to meet otherpressing economic and social needs, s-uch as :Ln. agr-icultur e and education.

x^-ii. The themr,e of this report is that Mexlco needs a national uvwilu.u¼'policy in ordesr that effective transport planning, coordination and operationscan assist in achieving broader objectives. A policy, in and of it self, isnot a panacea, but it is a pre-condition. T*ith a policy decentralized, butucooruinated, planning is possible. Hany flinistries and agencies withlin andoutside the sector will need to be consulted in the formulation of a nation21transport policy. Similarly, many agencies will continue to be involved i:!

preparing programs of transport investment aid in carrying out operations.Just as the nationis educatlon policy should ultimately be the responsibilityof the YMinister of Education, it is nowj desirable in Mdexico that transportpolicy be the ultimate responsibility of one Ianister whose staff would bethe final reviewing authority of all proposed transport programs from a widersectoral view before they are submitted to the Presidency for approval.

xx1ii. The present dispersion of policy making, planning, administration,construction and operations among a host of separate Ministries and agencie,may have served its historical purposes. It is now essential that a machiner:is built whereby a national transport policy can both be formulated and supcr-vised by one Minister. This identification of responsibility is especially

- 10 -

important because under the present system, for example, the Minister ofCormmunications and Transport is but one an'.ong otler 'inisters deeply involved-n transport matters and cannot impose his vie-,.s upon thaem.

xxiv. To make the formulation and implemfientation of a national transportpolicy Dossible, the mission believes two alternatives are available. One isa radical change and the other is to tinker wvith or modify the present systemi.'The first alternative would 'bring all the main entities res onsTble for nlan->dng, construction, administration and operations under the broad responsib~iL-4\7of a single 1inistrvy The m_ission recognizes, however. that dlecisions aS toiwhich functions should be assigned to particular governmental IMinistries arecomplnex pol itic-al/adrini strati-ve issues wh:ich are not c.apable of a 1"nicquesolution. In the field of transport, for example, different nations have foun2raifferent soulutions adequate. In addition, many nations ha.ve fouvrnd that arraga=ments satisfactory at one ti-me period are no longer so at different times. inpractice, decisions are influenced J the re lationship breen fuc+1

balance of power of particular 15inisters and tileir experiences; the priorit.esplaced by the highest authorities on the resolutuion of particur issues; ana 'ali-its that can be placed physically on the tine of one 1'inister.

xxv. In hexico, cormunications, transport and public works were united :none .''P'lStJry of Communicati kons and FLublic L Tor's (SCOP) untlfl 1i95J -/t1.n it wvas

iecided to form two ministries -- the present SCT and SOP. The Ministry ofiNiblic Trks (SOP) Ias made responsiblue for the construction arnd maintenanceof free Federal highways; the construction of toll roads, new railway exten-sions or major route rea1igriIents, airports, and other public work-s includinigbuildings. Since, in practice, most of the work of public buildings fallslithin the particular 'U4nistries they are intended for, SOP has tw ned out to

be primarily a transport sector related agency.

xxvi. Since the 1958 ministerial change, an increasing part of the IMinis-trrof Communications and Transportis (SCT) activities have concerned communicat-nn3.The rapid development of -the na-tion's telecomriunication systems and the growthof television, for example, have absorbed ministerial at-tention more and more.At the same time, the apparent earlier close general relationships betweencommunications and transport (for example, railways and the carrying of mail]'lave become less obvious. There is, of course, a planning "trade-off" betweenthe tw-o in some cases, e.g. improved telephone service can reduce personalvisits involving transport. Today there is muchl-, ore affinity between highw2ayconstruction and the use of highways by trucks; between airport constructicnand international aviation requirements; between railway construction andoperational priorities than communications generally and transport generally.

xxvii. It would appear that the time has nowj come to form a separate IMinistrrof Communications responsible for telecommunications, telephones, television,mail, etc. and to merge the transport functions of the Ministry of Works withthose of the present SCT into a single Ministry of Transport. In the case ofports, the mission recommends below the creation of a "IJational Ports Council"-with the Pinister of the new Ministry of Transport as its President. That is,those functions of the present Mtinistry of the Navy related to commercial portadministration and operation should be split off, and the Ministry allowed toconcentrate on its national defense interests.

- 11 -

xxviii. A fusion of existing transport responsibilities such as suggestedabove would permit one i4inister to be identified as responsible for theformulation and overseeing of the nation's transport policy and for itsexecution. Ulnderstanding betwveen those responsible for transport planningand construction and those charged w,ith the administration and operation oftransport facilities could be increased. This will require that all theentities involved are allowed to participate in the development of policyand made to feel they are forking to common oblectives. The use of reeulatoirymeasures could be better coordinated aith construction by this unification.In addition, somp of th, dcinli i ntion of d.-t.it P,,.thering nnd information svstem4which exists could be eliminated, while improving the end product.

xxix. An institutional change such as that described will not be withoutits p-oblems 1! -erging two impornant iMi ni Ptri i nevi .nahly - means that timewill be required before staff and departm-ents can be made to Iorlc togethern o ,'-n'-vr - r,P ; r.--rl +

4-. ,, P1n h; r t.r- 1 1 v.za,-- _on o+,.rinrc Ac4+ntr, nnDA 1 ooAceninh;Ta-sv4 -,jJt Of iva saingl te'm V Thi T 1 4 . L - ---. t

and good internal communication systems to ensure staff understanding. Uhileduliato cc^ 4b'e elir,lnated it-- -JO 4 d --I( be1 neesr to crat - e--- -4- -entities such as an office to study and supervise tariffs in the communicatio:i3s ector~'rnJ.C-Ii-.Uion blet;!e.%en thuose 1Uj0 uOuctU s Uof cUUMMILLU±Lations arAd t u-ar. Uwihich are related w-ould be somewhat more difficult. In addition, there are

rI L II, 1.-Lerent, in the- protess. Fo U J-mp±t a liuiuser 0f Transport may over Urstress one a:ect of his responsibility, such as highlw;ay construction, to theLL e ofR4. U1I whe 1 rl4 UVIVda.Li spo-ru funcLtion

-± I-1tverunati-ve io uhe institutionaL cnange described, but whichwould operate within the present ministerial structure, would also requirethat the Ti-rster of Communications and Transport be given fuller responsiL-bility for the nation's transport policy. UJnder this alternative, a strong0ectora± rianning Ofiice could be established within the Ministry with itStask being to discuss w-ith other liiinstries and transport agencies thetransport po.icy implications for investment projects. This Office wouldthus exercise a coordinating function and strive to assure that investmentpr-i orities being proposed from others outside of the Ilinistry are consistentwTith actions taken by its own regulatory and administrative entities and thatal± are compatible with the nationis transport policy objectives.

.2"'U'LL ThUs alternative has the advantage that it avoids the political,'administrative problens of modification of the present lYinistries. For itto be effective, however, the Sectoral Planning Office would have to be giverthe specific authority to thoroughly review the investment proposals of otheragencies in tile sector before they are submitted to the Ministry of thePresidency. It would, in effect, do much of the work now being done by thePresidency. The possibility of successful coordination would be increasecL ifsuch agencies, e.g. the IMinistry of Public WJorks were required to prepare andobtain the apiproval of the Sectoral Planning Office for both their annualand longer term investment programs. Precedent for this tvpe of procedureexists in the case of roads now being built in collaboration with State orlocal governments and where the State governments and the Ministry of 1hi G-Works must reach an agreement before the program can proceed.

xxxii. The danger of this proposal, however, is that so long as theM_spor.s-ibili+vy Po r the- f.uct-i -ng of t he tr.--sport --- 4.or -- m--;ns as A-;s=.1. V J. . YL .~ J. ukL~ 4 LUI~_ UJAJLu "Li6 UJ± U4 OIIOjJ%JU± U O'e V L L _ 0.LkL4

persed as it now is among several MIinistries and agencies, a national trans-port~ polic-y ma-y never le fo-P uae ld] ,Ap'>, _len___- A foce 'l.- rListeU p.J±Lx~ ~L.J~I±~~± ~ LUIiIIU_LaUt,U cUIL _UI iJJ~i-LenL'e.. orce± L~UL" IiiIL~LOt1

of Public 1orks or Minister of the Navy is going to be concerned that hisb-udgeta-ry f-unLds are used in a way that represent the Judgerments of u is ownplanning staff. A requirement that his investnent proposals, for example,sho-uld be reviewed by another iiinister belore they are submitted to theIMinistry of the Presidency could appear to him as just red-tape, if nothingmore. Furthermore, this Sector Planning Office of the Mtinistry of Communi-cations and Transport alternative could mean that reviewl takes place at toolate a stage and that some proposed projects have developed a momentum thatis difficult to stop without internal political frictions developing.

xxxiii. Finally, it seems apparent that the increasing demands upon the tim3of a Minister of Communications and Transport arising from continued involve-ment in the communications sector wil' make it difficult for him to formulatea national transportation policy. The requirement that numerous other Min-istries should coordinate with him many of their own activities will absorbstill more of his time. Significant changes in Ilexican transport are likelyto be possible only if a far-reaching reshuffling of authority and functionsis carried out. For this reason, the creation of a strong Ministry of Trans-port and Public lPorks is recommended.

C. National Transport Policy

XXYiv. The priority task of this suggested new Ministry should be to formu-late a National Transport Policy for approval at the highest political level.The problems are not so much those of defining broad objectives (see Annex A)as of more clearly specifying measurable ends and deciding the means toachieve them. This involves more than transport economics.

oxxxv. The possible economic policy objectives are clear:

a) to create an integrated, efficient and safe transportsystem;

b) to ensure a rational allocation of resources in accor-dance with appropriate economic criteria: and,

c) to ensure that the relative tariffs or orices of thevarious transport modes reflect real economic costs,as a result of:

(i) n producing an envi on-nrn.t where +.h inter-

play of co.petition and user choicedeter.n r.es the JamolSint Ln.&S' t*Je of traffic

carried by any particular mode; and,

- 13 -

(ii) providing the means for determining arational basis for the allocation of suchsubsidies as are deemed politicaLlyadvisable and of ensuring that such sub-sidies are clear'y identified as to theamount, purpose and beneficiaries, and-that they are paid directly rather than-through the medium of the transport sector,if at all possible.

xoxvi. The introduction of such an environment in the transport sectorby policy decision wlill necessitate changes in the shape and number of eyist-ing agencies. There is nothing sacred, however, about any organizationalstructure despite the time it has been in effect or the inertial resistanceevoked when change is suggested. Organization is one tool by which men workto achieve cormon objectives, but the consequences of changing technologyand the imperatives of economics should not be side-stepped to preserve soraehistorical or Dre-conceived ideas about the composition and structure of ths

transport seCctor.

xxxvii. Such a transport policy approach implies equal treatment by theGovern7ent nf+ trhe difTprotnn transport modes= Tt n1 reqnuires that a _ub-stantial degree of freedom in decision maki.ng should be allowed to those who,as pvate investors, isoh to risk the ir caann l +.n in rannsor+.nttion (P eg-_

truck operators) or those who, as public officials, are entrusted with theoperatio. of publi cly=oned transport facilities in the public interest. Inthe present circumstances of 1Mexico complete equality and freedom can only begoals towardo.s wh.A4ch prog .ess r,ust CVonVi.u to4 be - Aade -l plicy act. ion s .mhey

are not targets which can be met within one Presidential period of office.The shortage.s of invet- , J SentJI11 fUrLUUs, ba_l.ce%A Vof p,.et nidra4-onLs ar. 4SlO-

for example., of employment policy as well as politically pressing social needs-- 4ll act as. cnt sto somne e-tent.

0.'.'U 0.0 `-J110 I..La0..LIUc U'. )I " J.UJ U.

JLJ'.Vii.L.L aI doUe ri,eaU, hoUweVZ.L, tUIIat tLhe GoJ'-vierr-,ent consioJUslyJ sr.LLVes to.

avoid discrimination or favoritism in the sector; that any obligations it mayir,.pou UiI o in er,trise i11 ;i-e ecUtUV- sh±oul be e'1 miU.nait,eu or- Ud,.eLJ1bLeatelJ ofJ--

set by speci.fically identified compensation3 and that any differences in taxa-tiUn, soac regLlat,ionLs, etc. shotuiLd be gradually e-iinated.

xix.A Thue basic issues now facing the Mexican authorities are w-U etne.they wish to continue moving in the directions suggested and how far thev fee'they can moire at this time. Tne recommendations for the specific modes rmadein the rest of this report may be considered as the desirable steps at thisstage, which will help the sector to achieve the co-uLntLy's broader ecunoULicpolicy goals.

II. RA-IDJAYS

A. Background

i. Substantial developments took place on the iMexican railway systemduring the 1960's. W4hile the lengt'h of the system increased only m-argina'llto 19,900 route-kn, freight traffic increased at an average rate of 5,') p.a.to over h6 mil-lion torns in 1969. Passenger traffic increased more slowly at1.l4% p.a. Total revenues rose from Pesos 1,850 million (MS$1i8 nmillion) toPesos 2,656 million (US$212 million). Steam loconnotives have been phased olitcompletely in favor of diesel operations. Rail lhas been renewed or upgradec --over hal-f the network now has hea:y rail (1100 lbs or more per yau-". Tele-cormunication systems have been improved, as have freight yards and majorstations. The total number of freight cars has increased only 11%, with mostof the increase being in specialized equiprment (e.g. hopper cars, gondolas,refrigerator cars, etc.). Finally, there was only a marginal increase in timlabor force from 70,000 to 72,800. To bring these developments about largeinvestments were miade; for example, in the second half of the period (1965-6C&

investments attributable to the railways themselves averaged Pesos 760 milli-or.'TJS.6o miLllion) p.a. and those by the 111inistry of Public "orks on line exter-sions and major realignments of existing main lines averaged Pesos 177 milli Dr.

IUS11h mIllion) p.a.

ii-L . iHowever, despite growing traffic, rising revenues, greater invest--ments and higher levels of efficiency and productivity -- for which credit isd-ue to management -- the financial position of the ral ray has steadilydeteriorated. In 1969, for example, total support from Government to covertlle deficit in current operations, the servicing of past debts and as a con-tribution to new investment amounted to Pesos 2,289 million (US$183 million).In otner words, about 47tJ of the railway's financial needs in that year werebeing met by the Government. This financial support has been increasing byabout 11i p.a. since the Bank's first major review of the Mexican railways in1963. The Government recognizes that continued support both at this level aUndrate of increase will not only divert resources from urgently required pro-ductive uses elsewhere in the economy but may risk damage to the monetarysystem, as has been experienced elsewhere in Latin America.

B. The Railway Problem

iii. The major problem of the Mlexican railways, therefore, is undoubteciirthe continuing deterioration of their financial situation. Among the diffi-culties which contribute to the general problem in that they all involve afailure to secure maximum revenues are inferior services in certi n sectors o 'inter-city transport, inadequate customer relations and insufficient emphasison marketing on the demand side. On the operating, or cost side; the utiiil-zation of locomotives needs to be improved and freight-car turn-around shouldbe speeded up as well as other economies made.

iv. The chronic and increasing deficits on railwiay operations, itshould be stressed, are not caused by any general inefficiency or excessivecosts, as characterize railways in many developlng countries. Certainly,there is some surplus labor left in the wake of the relatively rapid con--version to t;otal diesel working. The excess, however, is likely to beabsorbed over the next few years as railway traffic increases and a pro-gram of attrition implemented. Social service costs, and particularlymedical and health service costs are high, but not excessively so in thecontext of liatin America. There are a number of branch lines for whichthere is no economic and financial justification. The root of the financialproblem, however, is that rates and fares have been held constant for 11years while costs have steadily increased at a rate that has not been com-pensated by increasing revenue or by economies of operations. Passenger faresare also, in absolute terms, exceptionally lowy. Analysis suggests they donot pay for even one-half of the marLinal cost of nrovidinp the service. Oina "fully allocated cost basis", passenger -train services (which, in term, oftrain-km. renresent hl7; of tnt.a rqilwav e Ffort nnd 1 htc of totn1 revenue)account for over 80O of the total operating deficit. The rail-ways arerequired by I2w tn carry nnil free of chnroe nnd thi s contrihutes to theunprofitabiLity of passenger train operations. The railways' rate-fixinga-rid revenue-e-rn_ng capabil ty is also -affected by a - r-ovre-rn,ent ro

freight receipts which is included in the rate charged and is regressivein its i -Mat as .-el I a as A assome trafflc -wrhi¾ othemie could be more

economically moved by rail to be shipped on other modes.

v. The railways have played a large part in the past economic pro-gress of the count-y by alys having had adequate capaci`t to move the land increasing volumes of traffic at low rates. IThat remains is to put theirfinancial ho-use inl order. As part of that process, they must recognLize tIhatthey are fundamentally a service business organization with competitors andas such the;y -iust 3be cost conscious, go out to sell their ser-vices, satLisfjtheir customers, and expand the range of railway activity to markets hitheL,tountapped Ur- ln w;Iic the railways' share of traffic has been declining. Fratthem to do so, however, a fundamental change in Government policy towards therailiway is necessary. The mission is convinced tnat if Government and railwUaymanagement are determined to face the issues involved there is no reason whythe problems of the railways cannot be solved. It should be recognized,however, that it will not be easy and that it will take time to transformUte attitude of management and staff -- who have been too long preoccupieawith operational problems -- to the realities of having to sell railwaytransportation and to give greater emphasis on quality of service than torailway statistical measurements of operating efficiency.

C. Policy

vi. The mission has recomaended earlier that the Government should.formulate and make known its National Transport Policy. T-his, among otherthings, should define the framework witlhin which the various parts of thetransport system work together towards common national objectives. Itshould also set out goals against wihich progress can be assessed and, in.the case of railways, clearly define their expected role.

- 16 -

vii. Within this broad policy framework, the Governnent should exerciseits owvnership rights and policy control over the rail-.ays through a Board ofDirectors representing -various key 1iinistries, business and labor. The chiefexecutive officer, appointed by the President of the lRepublic, would be chair-man of the Board and held fully responsible and accountable to the Governme"L3through the Minister of Transport.

viii. Once the railway's role has been prescribed in general terms underthe National Transport Policy and the Board's guidance. its management sholuadthen prepare a "Corporate Plan". This would be a statement in which its gcal>are set out and described more specificallv so that the various activitiescan be brought together for common purposes. It would also permit the rail-way's Board of Directors and the Government itself to see the direction inwhich rail-2ay policies are heading and wihat they imply economically, sociall,rand finnncial v for the nat-onn 7y this menans, some measure of thenr progre sof the railway's proper role in the economy is possible and those givenresponn hiblithi can be held accountable. At present, there is no reol testof success or failure of railway management because no one seems clear as Towhat they are trying to maimiYze or ninimize,

ix. A fvirthPr docenpn+t goverrning all railway activities, and which isthe cornerstone of the Corporate Plan, rmght be termed the "Railway's Phi'o.sophy"- Tt -hold outline the objectives of the ralway; the general directi:rrequired to attain the objectives; and the railway's relationship to theGovernmvernt (e.g. it should rot be so -glated as to restrict its ability 'D

compete freely with otlher modes of transport), to its customers (e.g. itshould supply services at price9 qualy 4 ulk quoantity WLh L .l UaUttra U dt Al

hold customers) and to its competitors (e.g. they should expect aggressivecom.petition in mar whits >>ch wiLll be profitable -to the " It u]dcover all railway activities and should result from discussions with seniorexecutives of the -LLiliVay and `e ov-erru±ientL. The -_ nurrence_ o-I- these p U _s,

and their involvement in the formulation of the document, will ensure thattl A, ei r acDi-L v _L iti es wil-l- be chac^rne'l'ledu t-lowards thle fuP£` ' . the -- Lij Ii

A public presentation of this document could install confidence in the publicUiau 'uale railwa± means serious business and that it intends to serve the natuon.It wTould also act as a berchmark for the railways management to aim.

x. Corporate planning will put new demands on the attitude of railwlj.management to its responsibilities. At present, raliway management is pri-marily operations-oriented. This approach has produced a technically wel'l-constructed and maintained railway with the capacity of handling a greatervolume of traffic. The railwzay, therefore, is in good physical sllape to con-tribute to the growth in the economy. To fulfill the part it has to play inthis growJth, the raillway management must recognize the changing environmentthat today faces most of the i 'orl ds railways applies also in Mexico but theyrmust be given the freedom by Government to respond.

xi. A basic factor then is that railway management must change itsattitudes from operations orientation to a business or marketing orientationsIt wrill have to concentrate on market analysis, systems procedures, financial'.planning, operations and investment planning and economic evaluations. 1Jhileit must be given both the responsibility for the operation of the railway and

- 17 -

substantial freedom within overall governmental economic policies, it muEtbe held accountable for the results.

xii. The radical approach suggested here for future railway policy andmanagement uill require the further development and use of managerial skills,This can be accomplished by (a) bringinig into the railway some senior Meicanswho have gained experience in the required fields (costing. marketing. person-nel, finance, planning, etc.) elsehlrere; (b) using a small group of inter-national advisers for a limited tlme! (G) sending selrtpd rmnnage-ment per,cnne',for training abroad; and (d) creating a stcff college with the highest standa.As.

xiii. A fundamental step in this process of revitalizing the railway is thetGovPrnmnntfs plnn for +he .inif_ieTHnn of all 4exican railways asasingleenterprise. The first stages have already been implemented. Completion isstrongly suported by +he + rnssion.

r uv Thepr i c no cronom,v reason whyr a ralwa 1-rnh-ir A 1; mi + -4 + r +-"nrn

port activities only to railway operations. It is a service industry pro-vi,-'ng "tUr&---port" to Jts customers. It- -- 4-, -P-eor - e il n b,oh the4 ~ 1X--4 ew"J4 U s-' .5. VL - 4 ..J~L~@ U UL13J , UJ~.~JL1 .-' ..L.. UL VJ4 VAL~, A I -

ways' and shippers' interest if the railway could provide all or part of thistLrans-portL 1 scu Vjice lbJy other imeans. AJccordLingJly, 4J-AiU rIl,LVI, I i ULcoidLUts.L-b UIdatcase for permitting the railway to widen the scope of its transport funct½-on.3to becoame, in effect, a tranIsportatin corporation, should be examned.

xv. One regulation -- which inhibits the use of rail transport for somaegoods -- prevents trucks from entering railway (and port) property for d-rectloading and unloading by the trucker's employees. using railway labor maycause added costs and delays and induce seme shippers to send their goods bytruck directly to the destination. The effect of this regulation should baexamined ancd consideration given to its abandonment.

D. Financial Aspects

xvi. It, is paradoxical that in a period of increasing efficiency andl pro-ductivity and of solid traffic growth the financial position of the railwJaysshould have deteriorated to the extent that it might well threaten themonetary system. 1Thnereas costs in real terms have been reduced and revenueshave improved proportionately to the increase in traffic, the combined ef'fectof these two factors has been insufficient to offset rising labor and mater-,alcosts. 14easures to correct the deteriorating financial situation are outl;lined below.

(a) Freight Service

xvii. The railways have contributed to the economic growth of the countr,by carrying a steadily increasing volume of goods at low and, in real terms,steadily relucing cost. In one sense, the principal beneficiaries have becnthe railway staff who have absorbed as wages/salaries all the increase inrevenue frora the greater work and investment by the railway. In anothersense, the principal beneficiaries from the expansion of railway freightactivity have been those producers and consumers of the heavy volumes of

orimarv Droducts and industrialJ raw mMterHqIas that, the rnillwlq monve in hvflk

over long distances and which are goods most suited to rail transport. Exceptfor insiLgnificant adjustment, freight rnates have rTr,n nr nnhnnapl fonr 11years. The avei-age freight revenue per ton-km for all lH1exican railways is 1C.2centaVos (enuiv1entr. t 1_19 U per IT ton-ile). This is one of the lowoestlevels of railw ay rates in any country of the world, being passed only in India(sinr.e the 19(66 Heun1iionI.in) P +ohe ,-inpee) in Korean anri in Bra'il -- 1l of' ;'i

are countries where wage rates and per capita GHP are substantially lower thanin Me co.

.. ii.i G osts developed by the r si n-A; cate +t-h TA--- r f g

rates on most commodities exceed broadly defined long run marginal costs. Forthe 1.ILdL.L IIoLLIV4L,Cy of rates which,II L Uf l tIoet- thUisLO U,-Uj the r1ISiOnU recomrrU,ri.usthey should now be increased. For the rem2inder, a 5, general increase isrecoUruendeuUd now LAo meet 'i'i1e cost of± thei 1Y'7 Labor Law. OuI.UwItUI increjasesshould be made in the future to the extent necessary to compensate for anyerosion in the value of the currency.

(b) Tax on Gross Freight Revenues

:ux. hlatever the original justification for the 12.2rD' tax on freightrates, the advantages of continuing it are unclear. The Government does nottbeneit 1 ' since it hands the proceeds back to the rai_lways as part of thesubsidy to meet current operating losses. The tax cannot be regarded as auser charge" in the traditlonal sense of a payment to Uovernment to reflect

the costs of providing some specific service out of public funds. Since thetax is included in all the railway's tariffs its impact on low value goods,such as agricultural products consumed by the poor, is regressive as comparedwith the effect on higher value, generally higher rated manufactured goods.The railwiay's customers quite rightly regard it as part of the cost to thenof using rail transport and take decisions accordingly. Pemex, for example,took the railway rate in presenting to the mission their estimates of therelative costs of using road or rail for the movement of petroleum products.As an "across-the-board t tax it limits the pricing flexibility of the railTayby raising some rates above levels which would be remunerative but are needeoto be competitive. Some traffic, therefore, which might go by rail is moved,less economically by other modes. The mission recommends that the tax shouw.(be abolished. This does not necessarily mean, however, that all freight rateswould or should be reduced by the amount of the tax. For those goods which. ncxrmove at rates below marginal cost it should be absorbed as part of the increcaesrecommended earlier. On other commodities, the railway should use the fle:i--bility which its abolition will give and adjust freight rates in a manner thal.will increase traffic and revenues.

(c) Passenger Train Services

xx. The chief contributors to the operating deficits of the railways arethe services provided by nassenger trnins; i.e. nassengers and their baggageexpress and mails. A study of the Nacionales costs shows that in 1968 the"znvoi c]hb½ est"1/of operating 'aansenger trains. even when calculated on the

4 e . 4A±- L.'.J 4- 4id-4 -- AI - - -. _-4. 4. _-dJ--L / II 4.VCU U4'AL MA-L~ LIC- _CV V ", I Tt 5n LL A L 11 ArLI I I10w ;4s_

- 21 -

(a) I!ithin the framework of a National Transport Policy,railway management should establish a "CorporatePlan"; conduct its business withthe objective ofmeeting market and service demands; and accept fullresponsibility and accountability for its operatingresults and investment decisions.

(b) A major effort must be made to bring new men withmodern business skills into the railway and also totrain existing senior officials in these techniques.This training may reauire assistance in the form ofadvisers from abroad and sending Mexican staff toforeign railways.

(c) The tax on gross freight revenues should be discon-tinued to increase flexibility in rate making.

(d) Freight rates which fail to cover marginal costssqhouild hb ircr at least to cover these costs.

(e) Freight rates shoulld be raised by a mTninirnx-m onaverage to compensate for the added cost of the 1970Labor Law, and as necessay +kereafter to compensatefor erosion in the valaue of the currency.

(f) Passenger revenue should be equated to at least

ing services; where a service cannot be made to payan," yet r.ust bk-e retair.ed f41or social- reasons, 4theII

Government should reimburse the railways for the loss.

(g) Prior to 1976 the labor force should not be allowed toinc ease arnd shou I d- berduced if pasn,e e e~ d.I1U" J.IVULJU.L Lie ±LLVUU%0L4 _L.L C 1 ± e L.C

are curtailed. An agreement on labor rationalizationand r-e-training sho-uld be negotiated wiwth the syndicates.

(ih) E-: plian snould ue developed wlhucn WUoU ad I ow Wive ra.L±wayto diversify its transportation activities so that itcan play i-ts role in an integrated transport system.

(i) Investment should as far as possible be confined toitems and equipment which give flexibility and canbe easily identified as giving immediate economicreturns.

xxvii. Should these courses of action be adopted and rigorously pursuecl,it IJould be reasonable to expect that by 1976 the railways could move out ofa financial operating deficit position into one of a surplus, and theGcvernment's cash support to the railway could be reduced from the presentllevel of over Pesos 2,000 million annually to about Pesos 650 million, withthe latter beting practically all in repayment of short-term supplier's credit¢qIf the railways could obtain financial aid for investment on less onerous re-payment term's than in the past the financial support needed from Governmentc-.Lad be even further redaced.

- 22 -

III. ROAD AND ROAD TRANSPORT

A. The Road System

i. By contrast with railway network, much of which had been laid doznhbir t1.h 101 tP Rcrr Ii,+inn Maovo on t c ro _systm Jc ofw mcioh reoc+ nt 'c a; n-e-

.7 v __, . -v - o_U - - -. n -- -, -v fI- -_ z -_ -,_.. - __ - I V- tz . .xJ.

less than 1,000 Ian of low standard roads in 1929 it is now about 70,000 kml In

iLL IiSe task.. of. UdeveLopin the n U i&vor. U.. of Cl.r roads fel Von 'he Fe-r;'Government. In 1925, it set up a Comision Nacional de Caminos funded by theproceeds of an earmarked gasoline tax, and made it responsible for the con-struction and maintenance of the primary highwJay network. '1 hile the objsc-ti-ve of providing primary road interconnections among Mexico City, the State^apitals, major ports and border crossings, as well as other important cente3,-of production and consumption has not yet been fully achieved, the developr,'r_.t'fforts made so far have absorbed the bulk of the human and budgetary resov (:.--available for road development in Mexico. Between 1950-60, for example,primary free roads were added to the system at he rate of nearly 1,000 km p-,-'Tear -- from 11,7i4 kin to 21, km5 Im. In the next five years, the yearly ra,edropped to 740 km, and has been about 525 km p.a. subsequently. This isbecause increasing traffic, heavier vehicles and traffic congestion made iti1ecessary to devote a greater proportion of funds to betterment works and tothe provision of alternative high standard expresswiays.

iii. The Federal and State governments share the responsibility fordeveloping the secondary road network which has been growing from about h,2C()Iam in 1940 to 29,000 km in 1969 or at a slightly faster pace than primary rcad1 .sbut with lower construc-tion standards.

iv. The great gap in IIexico's road development until the 1950's was tl.limited attention given to tertiary/feeder and access roads. A quasi-autonomous organization, the Comite AJacional de Caminos Vecinales, wascreated in 1949 to assist in the construction offeeder and access roads.One-third of the cost of such roads is met by the Federal Government, withthe remainder being equally shared by the particular State Government con-cerned and the local interested parties, often in the form of voluntary vhb::;>'owiever, a major effort on the work of providing rural roads begun wVith theiirect intervention by the Mlinistrv for Public 1'orks (SOP) in the 196 0's.loads built under the "tripartite" sharing system then increased from 2,920km in 1960 to ahont, 8920 km iin 1969. Horev ir, ir sane poor States, +heFederal Government financed the full cost of some local roads ('obrasonmpnlmentnrias'). Finally, in 1969, the Federal Government irntiated a

coordinated program to improve rural village life by building short accessroads and proii9;ng iwater supply, ec ty and health facilities. Prior:L t-is given to villages of 500 to 2,500 inhabitants that are located not moretPian 10 km from an existing all-weather road. The program calls for build-ing some 600 km of one-lane, gravel roads annually.

- 23 -

V. One result of the priority properly placed on the development ofprimary roads, is that a high proportion of these roads have been built vopaved standards - the proportion has been around 60% since 1950. I'hile itis possible that some of the existing roads could have been built to gravelrather than 1to paved standards, even at the expense of higher maintenancecosts, traffic volumes over much of the sys-tem are generally sufficientlyhigh to warrant the existing high proportion of paved roads.

vi. The conclusion thus emerges that, as Mlexico has built a fairly.iell developed system of main highways, the emphasis must nowi shift more tothe development of secondary and feeder roads. This conclusion is strengthe.;dby the fact that about 45;' of the population, say, 22 million people, stilllive in wide:ly dispersed and isolated villages and farms, which require bet.t.access to integrate themi into the country's economic life.

3. lighwjay Administration

vii. The responsibility for administering the hi-h-way netwtork and reCIL-latinSz road transport is vested in the Federal and State Governments. TheFederal Government is in charge specifically cf tlhe "vias generales de ccmuf.-cacion" (general communication routes). which in the case of highways aredefined as follows:

(i) highways linldng up foreign highways across thenati nal hbordIPr;

(ii) high,.ays cnOnnec ting tw.Jo or moncre Federal entities(States, territories); and,

(iii) highways constructed either fully or in major part.out of Feder_1 f1mvLnds.

In additUion., since the creation in 1932 of the biparti te cooperation sys-m:

with the Stales and the creation in 1 949 of the tripartite cooperation systemT,Ti th thi q <+. n+Pc nnri I f%r, nl i n+eorn c^+.orl P F, rl n py-ml I,ann>5.!x Tc,1.57

now extends, in varying forms and degrees, over the entire highway networkfrom epres:,ways to intersvtate lhigh¶-Tay.s, to state hni ghways and to feeder andrural access roads.

viii. At the Federal level, the Hiinistry of Public Horks (SOP) and ta-i3.rHLLLs tr-r ofL Coru,-]nic.M CtiLons a-nd -, ansort (SCIT) slh.-ae "whe m,Idain rsoiul,yfor highi-ay matters. SOP builds and maintains Federal highwtays and bridges-I_dl as si st's in thl- constr-uction ard' m.Lintenance of State ank' 'locali roadus .-ndbridges. SCT is co-ncerned ,tith issuing licenses for public road transporters.establishiing taxiffs and policing th-e Federal highwa-s. Although the la g- esSCT the tas' of advising SOP on the formulation of yearly highway constru-czionprograras, SCT has rnot, in fact, been carryilg out thizs function effectively arduSOP has taken over the planning of Federal highways. For the operation ofFederal toll roads and bridges, an autonomous state-owned organization, C2rinosy Puentes Federales de Ingresos (Caminos) was created in 1959 to administer andmaintain existing and new toll facilities built by SOP iath funds of CaminocsThe lack of coordination between SOP, SCT and Caminos creates problems r:hichwill be more full-, discussed later.

- 24 -

ix. At the State level. special highway boards (Juntas Locales deCaminos) were established as early as 1932 and are composed of the Governorof the State. reDresentatives of the State Cha,m,ber of Commerce. road usersand SOP. Annual State highway programs are submitted for technical scrutinyand administrative action to the SOP's Denartrrent of Roads in Coonerationsince 50"; of the construction costs is borne by the Federal Governiment. TKeSOP representatives are genernlyx the only highway engineers on the .Tint_sand, therefore, play an important role in the highw!ay construction and main-t_-nnnPGe o)pernations of t.he States.Q

x. A t the local level, the S0P an d the State Juntas share the task cfplanning and constructing local roads with the private interested parties.Since 1969, SOP is also directly involved in buil ding local roads throughthe rural access road program financed entirely with Federal funds (see

paa 4).

xi. ~ -~.-x Uihay Xm,i.U1 stration in -LIS -o Wven is high.01.Aly. cenVr 13ized,

with SOP exercising powjer down to the level of feeder and access roads.Lu-L`ng the ear-Jy development of "de tr.unk hi1h¶ay 1- r ue.;or a. cenrdi--d.ji2of highway administration was probably justified. The presently required

s>;f ofe.,ihasis tUowards 'LithedvlpetoAeon fadlclrasI1J. U UJ~ u IIj~.~L A U L~ A~U V PLUU1 L UU IL~-UV11U1.iJ,Y dIlU -LUUocLL .LVcldU0

however, requires a greater delegation of power to the States. This tran t t:sof responsibility should go !i pi passu', -with an impruvuenet in highwayplanning, construction and maintenance skills in the States. It will alscrequire a classification of roaas based more on their real economic functano.than administrative division. A thorough analysis of the existing highwaysystem of eiexico would probably lead to the downgrading of some roads nowclassified as Federal since they are of minor significance and the upgradirigof some State roads which perform an economic role far beyond the interestsof a single State. Since this may, however, require legislative action as itwould affect the definition of "tvias generales de comunicaciont (para. vii).it should be carefully studied and pl nned.

C. Highway Planning

xii. As mentioned earlier, SOP has in effect full responsibility forthe planning of Federal highvQays and through its representative on the Sta'.eJuntas and its review of annual State plans it influences the planning ofState as well as local roads. The task, of course, is formidable and, whilleSOP's planning skills have improved considerably, what is missing is anexplicit statement of a national policy tow;ards highnways and objectiveswhich would permit the planning function to be carried ou1t writhin an opera--tional frame of reference. In practice, of course, no scientific formula(other than a purely market test) exists for distributing limited investmen-cfunds among such diverse and competing demands as expressways that mostlysave time (often leisure time) to car travellers, feeder roads that helpstimulate agricultural production and rural access roads that primarilyyield social and administrative benefits to otherAise isolated populations.Although in the final analysis investment allocations are determined by thePresidency, the burden of anticipating such fundamental resource allocationdecisions should not be placed on the SOP's planners. Nevertheless, SOP caa

- 25 -

constructively contribute to the decision-maidng process by evaluating the c7stsand benefits of alternative policies and actively seeking explicit guidance cnthe choices to be made.

xiii. Given the need to integrate the large rural population into thecountry's economic mainstream and, at the same time,to make it attractive tostay on the land in order to stem the tide of urbarization, the planning offeeder and rural access roads must assume high priority. Such planningrequires an integrated approach and inter-disciplinary studies far beyond t!enormal scope of competence of a traditional public works authority. Theref^,Te,the desirability of creating a National Rural Advisory Council - reporting tothe Ministry of the Presidency and acting through inter-ministerial planningcommittees -- for feeder roads and rural access roads should be thoroughlyinvestigated. These committees would comprise representatives of SOP/SCT andsuch Ministries as Agricilture. He1Ith. Educationn Unojend_ etc.j- so thaLt r,f1_potential benefits from investments wfould, in fact, materialize to the fu'.le;.textent through cnnrdiinatedi ac+onn- The work nf these o-nmMittpeq chclm rd hesupported at the State and regional levels by appropriate local organizaticns,Particu1larly imnortnnt woill hbe fAllow-unp studies to assess the benefits Orthe investments and to gain useful insights and experience for future plannir-.

xiv. This segregation of the planning of tertiary or local feeder andr- ral access r-cads, woulld allo 'I- ' Q larnin I--Iton to-- be dlece - l -4 -4-A -1_-

to the main highway network and, through a time-phased program of assistancedi_ gned to l u cpetence in 1highway l a4- 4nn 'A th Sta l-e4- l 4-

the State highway network with the objective of this assistanco program beingto have vh States- "t-4-_- on 4the4rir, owneet" in the future.. Th poenla Mi-_44 'V.I~ ~UdUVO o ud..Lu A UII L.L. L u _1 ±O t L W1 it-, ±LLUU.Lc. IILU PV t,IA_L-L~L~L

there for doing an outstanding job.

xv. Despite some recognized gaps, Mlexico can boast of collecting mor3a.du beer info±iuaton suoub the highway IieUwUri. auu Ls use thal 1110m5o orlhercountries. SOP's Planning Directorate keeps a dynamic road inventory system,which is continuously fed -wi th field infoxiriauion and processed in a compuiue.center. Since 1960, the inventory has data on geometriccharacteristics andsurface conditions of most roads from expressways to trails. In addition,the Planning Directorate conducts a number of traffic surveys each year.

hUese include:

(i) traffic counts taken at scme 50 permanent stationsand 65 toll booths and at about 1,500 non-permanentstations, from which traffic density maps by typeof vehicle (cars, trucks, buses) are established foreach State;

(ii) surveys to measure travel time and speeds on selectedhighways;

(iii) origin and destination surveys which give informationon traffic composition, average hauling distance, occu-pants per vehicle, average pay-load, types of commoditiesand directions of movement.

- 26 -

xvvi. Often, ho-Tzever, +_he suvJsof spe,,ed and oliard des-tJnatlonare unrelated to specific proposed invesUrient projects and, as a result,maxi. mu value is not being derived from t,e resources used. In othcr word_.the amounts of good quality d,ta being collected 4 s not matched by a properutilizat-ion of it in the assessaroent o'L inve_>tment pri or t4es. LIor exam^pl e.~14.-IJ.L 4. .1.3 fl UL± Ti)i0.II1 U J JIVc ULAII -i jJ..1 L A3J.t) L U!

the information on traffic volumes and travel speeds together wTith highwayinv-entory data could serve as a basis for esuaulish,ing speed/flo-vi relati0n-ships under varying road and traffic conditions, and thus replace the roughass-Lum-ptions now being made about congestion costs that would be avoided bythe proposed investments.

xvii. The mission did not have the opportunity to sample any of thefeasibility studies that have reportedly been made for road works includedin the current year program. From a review-f of earlier studies prepared rnair.;1yfor international financial institutionis (including the 3ank), it appears thatmethods of evaluating road user sav-ings not only differ depending on theinstituti oq to wh-ich a project is submitted, but could be suibstantially.mproved.- The mission was informed that some progress is being made towaraiaformulating computer programs for feasibility studies. It strongly recit.rmC!e-.c:that serious efforts be made to improve the qual: ty of the inputs, such asestimates of vehicle operating costs and ta-iie savings, wiith the latter deserv-'ing a particularly hard scrutiny to determine their real economric and socialvalue in a country with large unemployment and uneven income distribution.

xviii. Planning at the State level is in a fairly undeveloped state.Recently SOP has taken the initiative in drawing up for each State a listof possible extensions to the State highway networlc and ranking the projectsaccording to their potential benefits to agriculture, mrining, industry,t,ourism, etc. T'he States have been recluested to comment on SOP's assessment-which is a worthwhile step towards rational highway planLing at the Statelevel. However, much more is required and can be done; SOP should play amore active role as a teacher and setter of standards by disseminating theresults of pertinent studies undertaken and inside and outside of MIexico, bycirculating guidelines for the preparation of studies needed in support ofthe States' annual program.s.

D. Highway Design, Construction and M•aintenance

}ix. SOP's highway design standards, which take into) account presentand expected traffic volumes as well as topographical conditions of the areaserved by the roads, are acceptable. Similarly, the ex-isting legislation fo-the control of vehicle weight and dimensiors is satisfactov. There nareindications, however, -that over-loading is not controlled as vigorously asit should be and may result in excessive damagre to pavements.

xx. Contrasting laith the uindistinguished level and use of economicanalysis in highway planning, highway design w¢ork stands out for its excellent1technicnal qualit ye SOP's Design Directorate uses up-to-da+ve methods and eqW--`ment, including modern air photography equipment and optical equipment for

I / Since the mission' s retun, consultants have been engaged by SOP toassist in this process.

photo interpretation and over 50 different computer programs. The staff usingthese tools are well qualified. Local consultants are employed only to a sina1.extent and then mainly for bridge design iwork.

xxd. The Design Directorate produces studies for some 1,200 km of roadsannually and has the capacity to produce substantially more. In view of thedecline in the rate of construction of Federal highways, the question arisesas to how this excess design capacity can be effectively used. One use,which at the same time improvesthe quality of design of State roads, is toarrange for the State Juntas to use SOP's equipment. For instance, all theair-photo services and the running of computer programs for State roads could.conveniently be carried out by SOP. The States would be responsible for thefield wiork and would pay SOP for the services rendered to them. The DesignDirectorate would, in fact, operate like a consultant on a semi-commercial !Dc'- s.

xxii. Highway construction in Mlexico does not present any particularproblem from the contracting side. The existing construction industry isstrong, well-equipped and well organized and the quality of its work is go^r-erally good. Manv of the problems regarding poor work encountered in the pasthave been overcome, and were due more to begirning work before engineeringwas well advanced nnd to changes in the course of construction rather than tothe inability or inexperience of contractors. Although there are still sonenn1it.inn1 ovPrlvay in cn-.trnae-t JTrf1z r_cnmpntitinn i3 keen nnd h2s cq i conr-iforeign firms from bidding for highTw%ay contracts in Mexico.

xxiii. Highway maintenance is carried out by a separate maintenance organi-za tion in I SOCP for cderc 1 ; --- -by C' n -,nos for toll 1 ro ads _=d bridges, 9 -d

by the State Juntas for state and local roads built under the "tripartita"nicmc 1,n M..; -,- o Ar,, Ar .accessrn ., oA. J trnedA ,c,-_ An + 1 noc a] on.-n _-.45 .4XI tic.,, LtcI.lll V~4C 4. i). .3 WA4 (14.. (1 ". OO 4 A.Q LO V1'... 4. titS '(44 VV VL.4. 44.. VV1C 4.4t .L .,a,tt.iLI

ties served by them.

xxiv. On the whole, the maintenarice of Federal highwiays is good, despitea shortaage of some items of mLI aintenance equipment. SOP"'0s maintenanceDirectorate estimate new equipment needs at Pesos 200 million (US$'25 'il1]ioni;"I"- . UaI UlV u .LUL±Z;U a0±a ; i± sL Lr,1jUs Ul. I w L. | Dl UXJI UL L La ±Lt U L ) IU UUL L

that a good part of the present maintenance equipment is overage and needyrenewal nLd that additions are required to keep up wvith the deman,ds of the

expanding network and increasing traffic.

xxv. Three factors influence maintenance requirements on the Federalnetwork: (i) the low design standards of those roads which were constructe-many years ago but now carry traffic above their design capacity; (ii) thepoor condition of some road sectionas on whi'ch construction begaln beforethe final engineering was available; and (iii) an insufficient enforcementof venicle weight regulations. The effect of these is to reduce the econoix-Clife of pavements and increase heavy maintenance reciuirements, thus depleti.Igthe budgetary allowance for routine maintenance. Rather than the present su._cyof meeting this problem by frequent resurfacing, it may be more economic toestablish and carry out a reconstruction and betterment program for the $-6,CDOIm of sections presently affected, However, the problem of insufficientenforcement of vehicle weight regulations should be examined carefully) tneextent and type of overloading should be established and more effective r.ea.isof control devised. Not counting expenditures on resurfacing, the average

- 28 -

mni ntfnninn e2m enditaire npr krm nf' Fedreral highway (exc1luding drennci tin.n ofequipment and overhead) is about US$1,250 equivalent and should be adequateat current pric-e lIevel-sc

-e.v.ri. The q+ Ji-tas a 1 cif from a'n shortag of' h;= ghway intenn' - - . .- - _ - 1 - ---- _= .J.s _ U *UCJ._-L.flC-.US

equipment. Their needs are even more severe than SOP's, from which theyocWasion~ ~ ~~~~~f). --- boro eq0.n.S *zrg,ml;ec +rLl>so 4Sa-C~.~J1c1.LJ LJJ. 'JW~'A~..jJIL~k U 'iI CLV .Lar' Iid..1LJ..L ILC11,1Zx uAj~~LUL. ~ Jil U) aC~

roads average US$250-325 equivalent per kIn, which is less than adequate andSUJA. LL.Lu U~_ "VII._U OU U

^cvii. The possibUility of eventually gi-ving the U tate Juntas ithe practicblresponsibility for both Federal and State road maintenance operations, wi-th agovervr-u-erinu coniuirbutioin for twie ruderal roads, should be investigated. Thlismay be a means of reducing some of the duplication of equipment, shops andpersonrnel and of improving tahe efficien cy of maintenance operations.

E. Financing of Investment and Recurrent Expenditures

xXvii. Betwvieen 1 965 and 1969 total expenditures on highways in flexicoincreased at an average yearly rate of 6.8K from Pesos 1.68 billion (US$135million) to Pesos 2.36 billion (US"'i89 million) and were financed as follows;

1965 '1966 1967 1968 1 969 1 5(Pesos PdllionT7

Federal Budget 1,167.5 1,075.6 946.3 956.5 945.2 1,0Th.?

Internal Credit 10.7 212.6 388.1 470.9 564.8 61¾,,

Foreign Credits 264.1 185.9 280.6 185.4 238.4 326.1

Cooperation 2/ 227.7 278.7 324.9 411.8 49.0o 515.3

Caminos Revenues 13.1 22.2 41.6 46.8 110.8 11c.b

TOTAL 1,683.1 1,775.o 1,o81.5 2,071.4 2.358.2 2.60oo,1

On average, foreign credits represented about 12', of total resources. Theshare of resources contributed by the States and local communities under t,e"bipartita" and "tripartital systemsincreased from 13.5E¢ in 1965 to 21.25~ in1969, reflecting a shift to-wiards more secondary and local roads.

Xxix. A functional breakdown of these expenditures was not available -tothe mission. and infonmation given to the Bank on previous oeaic ns doen ncr.tally with the above figures.

xxx. In 1969, SOP prepared an investment program for 1970-1976 that con-sti hates a general framewPxork for i-ts future ann.ual programs. It hns ~no 1-,,

officially agreed to by the Federal and State Governments, however. Acco:rxi'.:.gto this program., expendtures in the highway sectnor wol A be as follows:

V/ Provisional2/ Contributiorns by the States and local communities under the l"bipartita"

and "tripartita" systems.

- 29 -

SOP Proposecl -i-1-9way Expenditures ()Y(U-1 y)7--

(Pesos B,illion)

1970 1971-76 Total-'

Federal Hi waysm'

ConstructionŽ' 1.18 7.51 8.69Maintenance 0.45 3.70 4.15I4aintenance Equipment 0.06 0.34 0.40

Sub-total 1.69 11.55 13.24

State and Local Roads_ipartJLta

Construction 0.34 3.99 4.33Haintenance 0.12 1.08 1.20Mlaintenance Equipment 0.03 2.52 2.86

Sub-total 0.83 7.75 8.58

TOTAL/ 2.qO 19.33 21.83

XXXi. Accord± UJ.Iin,,UV to tJis proj-cU113,,,, LVd 1ttl 1y 1WC: eL1Ut L tur±es wou',dUi ln.r;ieas-i)

at about 4.8% annually between 1070-1976 as compared with 8.8H, p.a. in tae19G-199 period. uonsUrUt.;U-ULQ1i UL Vt of d-. LLLgJayd S LVUU.LI leveil off up L,U ly f2

and decrease sharply in 1976, while Federal highwlay maintenance would increareby 7I5o anuriaIy, The share of State and local roads in the total proposcdexpenditures would rise from 32< to 51l,'a indicating a welcome shift towardssuch roads. Lhe question ar-Lses whether sufficient budgetary resources arelikely to be available at the State and local levels, to finance a highwayexpenditure program Utat would more than double in size over six years. Thlemission could not investigate this separate resource problem which is clearlycrucial to the success of the proposed program. If an examination by thieGovernment shows that the States will not have sufficient resources, thepossibility of allocating part of the increase in road user charges recorln-ise-by the mission for these roads should be investigated. Alternatively, theFederal Government might have to increase its share of financing in the"tripartita" and "bipartita" systems out of general budgetary funds.

xxxii. While the proposed program aims in the right direction of puttingstill more emphasis on State and local roads, mucn more detail and informationwould be needed to pronounce either on the absolute size of the program or on

1/ Excluding indirect (overhead) expenses.2/ Including toll roads.3/ Including design and supervision.I/ Figures do not add to totals because of rounding.

- 30 -

the particular items composing it. Through its highway inventory and thevarious traffic surveys, SOP has collected much of the information necessaryto prepare a highway program based on economic priorities. The mission couldnot ascertain, however, to what extent tids information had been used in thepreparation of the above-estimated expenditure program, nor could it closelyexamine the criteria used in ranking the various projects included in theprogram. The mission's general conclusion is that the direction of investLmentexpenditures seems right; should there be constraints on resource allocat_olto highway programs, a reduction in the construction program of Federal and.toll roads is unlikely to cause any severe economic strain in the movement sfgoods and passengers. On a financial or cash basis the total revenues raisedfrom all road users would, on the basis of information in the next section,more than cover the costs of the above 1970-76 program of highway expendit.'lesenvisaged by SOP. As that section shows, however, a substantial portion ofthe "road user charges" raised are not collected by the Government but reta--iedby PEMEX. If this continues then there would be pressure on the budget tofinance such a program.

F. Road User Charges

xxxiii. Vehicle owners in Mexico pay (i) indirect taxes to the FederalGovernment on vehicles, tires and parts manufactured in the country; (ii)taxes and licence fees to the State and Municipal governments; (iii) tollsfees for the use of toll roads and bridges. I,ith the exception of tollrevenues, the proceeds frcm these taxes and fees go into general budgetsand are not earmarked for highway maintenance and development. There is I;omotor fuel tax in the traditional sense found in most countries. However,as explained below, part of the revenue received by Pemex, the national oilcompany, can be regarded as a tax or road user charge.

xxxiv. Pemex pays a 12% turnover tax to the Federal Government on thevalue of all its sales (other th n on netro-chemica1 prodlucts for which therate is 7.8%). The remainder of its net revenue it retains and uses tofinance part of its general investment pror an. To compensate the Statesfor an earlier direct tax on gasoline, diesel fuel and lubricants, a smallpart of the proceeds of the tr-rnover tax is allocat-ed to the States on thebasis of Pemex's sales in the States. The total turnover tax cannot beconstrued as a road u-ser chage since (i) it applies to reven-ues from alDroducts sold by Pemex, including products not used in road transport (e.g.kerosene fertilizers); (ii) it contans elements o ' a corpor-ate pro' It'ax;mnd (iii) it does not reflect the possible cross-subsidization among Pemex'.

rmanv diverse product sales.

xxxv. To deterMine +the 'true tax on sales of motor fuel the mission,with Pemex's cooperation, made estimates of the costs of producing anddistributing gasoline -ad desel fuel to compare these costs -with the re-tail prices of these products. The results, which must be considered onlyes orders of mragnitude, should be conriLrmed by Permex:

- 31 -

US cents per gallon

Gasolinet, Liesei Fuel

Retail Price 26.8 10.3Distributors' Margin 2.5 0.9

Price at Pemex Agency 24.3 9.4Transport and Storage 1.7 1.5Production Cost 12.0 7.5

Net Income to Pemex 10.6 o.'Normal' profit (20% production cost) 2.4 1.5

Surplus (deficit) 8.2 (1.1)Turnover tax (12% to Government) 3.1 1.2

Retained by Pemex 5.1 (0.8)2/

1/ Exeiitli1nz Mtyn1linn-2/ Turnover tax paid minus net income of Pemex fran sales.

xxxvi. The surplus of about Us8.0 cents equivalent per gallon on gasDJin3ealn 'hp nnn5-,! ep n i,nv rl hon srlenrl rs a vf' mahi rod - i f' iit i simprl t+npe

turnover tax is paid on retail prices, means Pemex would transfer aboutUS3.0 cents per gallon to the Federal Treasury anrd retain ahout TU85.O centsper gallon for its o-vm use over and above a 'normal' profit. For dieselfueal t.he sritu%nA ion iscr-i q _n Ai fOerer.t. Tphe, retalpice of' dioesel fulpbarely covers the total cost of production and distribution, and does notmake anny adeate c ft-uton which wo+ud remect the oppor-- t---ii+ cost o fPemex's capital. Thus while gasoline using vehicles contribute to the costJof the road system, diell vehicles wc.h. are 4.-... large ---- trclcs .

buses not only do not pay the economic cost of the damage they do to theroad ovrkAtem+nV,,+ also are bi. ,. - s- A4,e -A she ra, t e ,P of zbo.0 TTClI (en ,s* .-.4 1 -l)'.lj 14).1 0-L4' Wz)_.LJ1E, -V~LA.Ll1.A 0 V AA.4 4 O.1'~4 J.6 0.L4' "v' '4L~.±. '-' )'~)

equivalent per gallon of diesel fuel they consume. In addition, sinceI'l P ~ .1 0. VUL1.V K.J V VC± O..A VJ.L W)VLLU Vl.J.L* .C L U 1...U.LVUOL 1 U ,.

446O..J.LJL_L 0.L-S

had a net revenue (before 'normal' Drofit) of only USO.4 cents per gallon,i i -Op

0"ng t, UV-v .II 1-,LiU pi uto thle su.fJl-usL Et u `-es on other

t^^-vii s. a grou road usersi Uhve been pa±yg mtore e Uach year recr.tly

than the annual outlays for road construction and maintenance:

-32 -

Road User Revenues from: 1965 1966 1967 1968 1969(Pesos llioinl

Sale of Gasoline .4h66 1.576 1.713 1.877 2.032Sale of Diesel Fuel (89) (97) (los) (115) (130)Other Federal Taxes rN6J 479 569 601 656Toll Revenues 159 193 239 302 355State and lna1 tn Ys ),n3 316 EP22 _,__

A 2,36 9r4 1 927329 3,187 3-, 6

HigTiay wRvendituresJ2 I63 14 , 775 1,982 2,071 2,3)?

Si plUS AR68 770 Ro 1 116 1 ,005

1,r il G-asolin and d;se fel prices have 'been Iagl un -c, ange ove~4.- .1.- ".1i L Q'~ Jt. -~U'.L. V~ 1W-V x- l ~I Ldl. V UZ.Ly wl'LdIir,~_U U V J.L

the past decade, while the average quality of fuel has improved. Hence,1th+1 the0 cqcine sn tr+he uchsn _oale ofk the , Peso, +Aue prce ousr† W.- -e --- n- . I.. n ~...

1Ji.-VW% U 4 Vh- .1 VU 4 4U.. 4 SS- U vL- t4. -4.1

have fallen in real terms. Originally, diesel fuel prices were set at a10-T.ST level to .asslist ccon'omirc "developmenIat il1n Tlex4 LJ l4o11- 5r1, L - '44. W .4

costs, i.e. by encouraging dieselization of the railways and the growth ofVT V e truckilng industry. * These aims have been largt'uely met . TheU railways

are fully dleselized. The trucking industry has grown and, despite theforLal regulatory framework, is comLpetiti ve. Tranlsport costs do nolt appe^crto be a general limiting factor on development, as in some countries, thoL)i.there atre somie speciflc iocal exceptions. The dission,s enquiries suggestthat in Mexico truck transport costs range between 3-100 of the total del'VeL edprice of most goods, with the iuel tax element of vehicle operating costs 'Loinsa small proportion (an authoritative examination of this in Mexico by theproposed Ministry of Transport would be an important research project).

.The evidence though tenuous (and also needing investigation byGovernment) suggests that diesel trucks are not paying the econaomic costsof their use of the general highway system, even if vehicle licence feeand toll payments are taken into account. It also appears that, accordinCto Pemex, if desulfurization investments were taken into account, the truaeconomic cost of diesel fuel would be greater than estimated. The low J•:LC.J

of diesel fuel may also be a contributory factor in some goods moving -byhighway w1hich otherwise wiould move more economically by rail, and thusmay have some investment distcrti(nn or m,is-timig effect..

xl. Tne mission recorrnends, therefore, that the price of diesel fuelshould be raised by an amount to eliminate the present subsidy of aboutUS1.0 cents equivalent per gallon and to provide a sufficient contributionto cover the damage caused to the roads by dilesel trucks and buses. Thereis no economic need, however, to tax diesel fuel used by the railway sinceit does not represent a user charge; subsidies should however be eliminated.

i/ Rough estimate.2/ Excludes expenditures on municiTal streets.

- 33 -

Xli. A user charge on trucks using Liquid Petroleum Gases (LPG) shouldalso be imposed. At present this fuel is not taxed and is imported dutyfree by the private sector. Taxing the fuel may be administratively diffi-cult because of the many sales outlets. A user charge, however, could belevied by increasing the annual licence fee on such vehicles. This isdesirable (a) to ensure that LPG trucks pa for their damage to the roads,and (b) tc, discourage the use of this fuel and thereby save foreign excharngc

xlii. The general gasoline tax should be maintained at least at itspresent real level (i.e. its price should increase in line wTith cost increases).The existing effective tax level unquestionably covers the economic costs togovernment of road use by gasoline vehicles and, when added to other usercharges on these vehicles, pays for tlhe overall maintenance and investmentin roads. Gasoline is also used bv smaller truclcs serving local needs inthe rural areas, whereas diesel trucks tend to be larger and operate onlong haul routes. An argument can be made, however, for increasing gasolir.e-taxes in urban areas, particularly Mexico City, on +the grounds that it mayassist in reducing congestion and air pollution in the city center and thusmore effectively reflect the social costs of automobile use. The amount ofsuch an urban surtax i9 limited by the speculative onnortunities of cross-hauling fuel. A small additional tax of about US4.O cents equivalent pergallon for gasoline in Mpxi rity cor l rid probably hp 1ev ed without serict-zrisk of evasion or generating fuel searching journeys.

xliii. in addition to the above recommended adjustments, the missionrecommends that t-he present user charge aystem shoul d be thorough1 r eV Yrri rnrrl

by a joint committee of Mlinistry of the Presidency, Finance, Transport andPeraex re-resent_nivs

xliv. ^.ee broad o'bJectives of +V4is elnqqui~ shI"oulde + providethbasis for (a) a general road user charges policy for Mexico, within theoverS Ial fr.-L.ework of ger.eral fi- scalo uoi cy, ar, 5 b a rat or,al ar.d eq-'ta ab'.allocation for the distribution of the funds raised from vehicle ownerslhipand use to the Federal, State and Municipal governments. Th4is will requireas a first step, a detailed investigation to clarify the facts of the presen-*.clear situation. A consideration of alternative policies, their economracosts and administrative feasibility will then be necessary so that a po].ij,Lrposition can be taken by Governmient.

. n the mIeaL.rWm, e L` !road accourl' wi" conrAinue so Show a sir-plus in that total revenues to Government and Pemex will exceed actual andplanned highway expendt-ures. Tlhe road sector -will still be itaxed ligtlyas compared with many countries, and the continued development of a healthyroad transport ind utur-y ` o-`U, notb -e a-fcUete.

- 34 -

G. Toil Highways and Bridges

xlvi. Tne construction of- tol3 Cacilities absorbed about one-third ofFederal highway expenditure in the 1960's, when toll roads increased from290 km to 1,036 km and the number of toll bridges rose ten-fold from twoto 20. Total investment in toll facilities by the end of 1969 amounted tonearly Pesos 3.0 billion (US$240 million). The Bank participated in thefinancing of 18 of the facilities through two loans totalling US$62.5 mil-lion.

xlvii*. The aim of all post 1910 Revolution Governments ha6 been theintegration of the country by a basic primary road network. This had notbeen fully achieved by the mid 1950's when some existing highway sectionswere becoming increasingly congested. There was an economic case to improvethese roads, often by a parallel new road. The Government considered itinequitable and economically undesirable however, to finance these newconstructions by a general tax increase on vehicle fuels or through thegeneral budget, wlhen some regions still lacked road communications. A newparallel road would offer clear benefits (reduced vehicle operating costs;time savings, lower accident rates and greater ccmtrort) to justify an in-vestment decision. The idea ermerged, therefore, that it would be propcrto recover a part of these benefits (a t"cuotal is levied orny where aparallel free road exists; This concept was easily extended to bridgeswhich may supplement an existing bridge or a ferryv service.

xlviii. The first toll roads were sections of the Mexico City - Acapulcotourism route and were built and oDerated in the early 1950Ts by a commeLcial company with State participation. In 19585 an autonomous Federalagency (Caminos Federales de Ingrescs) was created and took over thecomnany's assets on the grouinds that the objectives were not finnncialgains, but the generation of resources to be reinvested in new publicworks and servi-es. To avoid wasteful dunlicationn SOP was given the taslof planning and building toll roads and bridges, with Caminos being res-ponsible for their adlrd--ri +tration and maintenance. In 1963, the activi ties,of Caminos were expanded to include the oneration of ferries, the rentalof heavyn construction equipment, etc., and its titne ch-nged to the preseni;Caminos y Puentes Federales de Ingresos y Servicios Conexos (Caminos).

xlix. This brief reminder is important to an understanding of CaninosfuInctions and operat-icns as well as to an eval uaton of the res uts beingachieved. Camninos1 primary function is to administer (operate) toll roadsU.- bridges by collecUIAng 4toll ch-arges ai'd m`intaining wl f1acilltes. 's1Jy uii U± U I__L 111L i _ 1~LI dLL±1 ViA.X L £ _'-L± _L ,L f

such, its performance mLust be judged primarily on the basis of efficiencyand econoi,my. In the absence of a detailed study on the operations ofCanmines, the accounuing results may give some insight; unfortunately,Cal:iILnos' accoiunting practices vary over time, so that accounting data maynot be strictly comparable. Nievertheless, it can be said that the costsof toll collection on highwiays are reasonable by international standards,ranging from as little as 3.1% of toIl revenues on the busy Mexico-Queretarzroad to 12.8% on the Cuernavaca-Amacuzac road. There are, however, twonotable exceptions the Tijuana-Ensenada road and the La Pera-Cautla roadwhere collection costs amount to 21.2% and 147.2% of toll revenues. In bothcases, low traffic is a major contributing factor.

1. Despite tnis apparently satisfactory indication, there are signsof possible declining efficiency: for instance, Caminos' working expense:are increasing at a raster pace than both traffic volumes and toll revenues.VThile traffic (in numbers of vehicles stopping at toll booths) increasedjust less than threefold between 1963 and 1968, working expenses increasedover four times fran Pesos 22 million to Pesos 91 million. One consequencewas that the proportion of working expenses to toll revenues increased from20% to 33%, despite some increases in toll rates. While, by itself, theevidence is not conclusive, it points to an area that should be of concernto Caminos' management and underlines the need for establishing standardsby which to judge Caminos' efficiency. There may be a case, for instance,for closing down to'L booths at night on some roads or bridges, when tollreceipts faiL to compensate the cost of mamning the toll booths.

li. Another area of concern and potential savings may be the mainteiaanceexenditures, which appear excessively lhigh in some instances. Unfortunate&.,Tthe accounting records are not of great help, as they do not clearly differ-ontiate between routine maintenance, periodic resurfacing and capital improve-ments, especially in the 1969 provisional financial statements. Major ex-penditures must be thorouglly reviewed to ensure that the most economical.solution is being adopted.

lii. In addition to its primary function of operating toll facilities,Caninos is to invest. its. not, re nne in npw nuhilic faiclities and in thecreation of public services (e.g. roads or ferry services). However,Ganninos does no-t have the necensary powers tn carry out this fimctionindependently. On the one hand, the Direcclon de Tarifas in SCT is respo;l-.qshle fors fixing +th +ll ra-n+.tq on +he o+.her hand,l .OP i in rh r¢on of'

olanning and constructing Federal highways, including toll roads. Thus, :-ncethe decisions of both ainistries (SCT and SOn) directly irn uence Caminoscapacity of earning net revenues and re-investing them, Caninos' finari-cial perfo-mance in discharging that 1.ction has to be Judged in nthe right.

of SCT's and SOP's decisions, as well as those of other Government branche-.

liii. In 1967, Caminos prepared a new schedule of toll rates based onthe principle that to.l0l rat es o-1A sho 'dbcuf.r. per *ni of Land-rl

for roads of comparable design standards (two-lane, four-lane, etc.) irrec-pective Or -1he -c4-l constctlo 4ost of the rod toll rates -wound a-Es2

iV U V ~L. VAI ~. CX-UaLLJ '-U±iJL0U.LU%UL V&L 1 LAJUDV !J.U ±I 4ll .LJCLA, VUUJ.-L 4. -0 - U..1

increase with the size and weight of vehicles. I-hile the new rate struc-

approved by 3ST in mid-1969, its application has been suspended by theh ighest authorlties for reasons of political opport-unity.

'v. iThe decision to levy tolls is primari-ly a political one and isbased on the assumption that road users are willing to pay something overand above 'normal user charges' for the better service provided by a tollroad. Since car owners in Ilexico tend to represent the upper income crosssection of a Dopulation with great per capita income disparities, andsince tax levels are generally light in Mexico by international standards,such a desicion a priori makes sense on 1iscl grounds. However, it alsocarries economic implications which may either adversely affect or improv-

- 36 -

the use of toll facilities. Recognizing these possibilities the Governmentis abuit to undertake a study to examine the effects of variations of tollcharges on the economc use of toll higlhways and parallel free roads.

lv. SOP's conclusions regarding the need for the construction or im-provement of toll roads have no less an inpact than SCT's on Ca2rnos' finin-cial performance. Costly facilities weigh heavily on Caminosl ability tomeet debt service payments and, if traffic and toll revenues are low inrelation to the cost of the infrastructure, Caminos' financial position marbe jeopardized. To avoid such a si-tuation to develop in the future, thereshould be greater cooperation between Caminos and SOP than seems to existat present: the proposed investment programs handed to the mission by bothorganizations differ significantly. These proposals have not been fullyevaluated for the economic justification or in terms of their impact onCaminos' finances. Since the first tasl- of Caminos is to operate and maintain toll facilities, the main emphasis should be on ensuring that it doesthis efficiently at a minimum cost, rather than on the financial outcome ofadding new facilities. In the final analysis, the economic return on in-vestments rather than the test of finxancial viability should govern invest-mient decisions regarding new toll facilities.

H. Road Transport

lvi. Mexico has experienced a fast growth of its vehicle fleet. whichincreased over fivefold in the last two decades. The increase was strongestin cars which now account for over two-thirds of the totanl fleet:

Cars % Bu ses % Tr-mLks % Total

95c0 173-1 57.2 l8a5 6.1 111.3 36.7 3O2.s1960 483.1 60.2 26.1 3.3 293.4 36.5 &c" 61969 1,112.1 68.o 30.0 1.8 ].94.6 -I 1, 3 7

Annual average gTo.*h rates

1950-60 10.8% 3.>% 10.2% 1eJY1960-69 8.7c 1 .5% 6.o% Ol

The ccnsiuption of gasoline in road transport also rose steadily, althoughat a somewhat slower pace (6.7, between 1960 ard 1969).

lvrii Unfortunately, the existing ir2iiormation on thle utilization ofthe vehicle f-leet is incomplete, scattered and unsystermatic. For instance,a distribution of vehicles by age and capacity- does not exist. IWhnile originand destination surveys provide a sampling of vehicle utilization, they arenot designed for systwmatic treatment and no reliable estimates are avail5rleon the total ton-km or passenger-km in road transport. Litt3bif any cocrdi-nation exists between SOP and SCT for designing and carrying out surveys.

iviii. Legally, if not in practice, public road transport in Mexico isvery strictly regulated. Not only does the Government control the supplyof public road transport services through a system of concessions and per-mits, it also fixes the price to be charged for a particular service. Thelaw empo-wers SCT, inter alia, to issue concessions and to estaLlish and

- 37 -

enforce tariffs. Concessions are granted for specific routes after SCT hasissued a "Declaratoria de NecesidadV; indicating the need for establishinga new service or expanding that on an existing route.

lix. Ehe law, however, is silent regarding guidelines to be appliedby SCT in defining the routes. At nresent; there are as many as 730 truck-ing routes, grouped into 12 major systems which themse'lves overlap to som,leextent. Neither the 730 routes nor even the 12 maior m utes could be usedas units of analysis to relate supply and demand for trucking services.Tn fact, SOT does not know how many trUckls are operating uinder each routeunder a Federal concession and the last "Declaratoria de Ilecesidad datesbnc-k to l9 SRince that +ime, trucis which hve legn1ly- incorporated intothe Federal public road transport service have been issued emergency permit3rather than con-cessions. Per,.i ts are normally given -for services whichbecause of special characteristics cannot be restricted to a specific route,e.g., moving van.s, tow=1truckXs, local pck-up and dell-ery services, etc.Permits are also granted to absorb temporary pealks in transport demand.

lx. TAe increase in demand for public trucking services has beenlargely - b-4y 1- itjdidamph o unperate - under a connst i u 4J 4JU jonal inJ-ct 44 ior

against SCT for having been denied a concession. "fAmparados t " are not res-trLcted to specific routes, nor do he-y have to abide by he tariff regla-tions.

lxi. Statistics regarding the number of concessionaires, permit holdersand _mparad os" are unreliable; broadly speaking, however, there aue some15,000 trucks operating under concessions or permits and 25,000 trucksunder '"juicios de amparo". Both categories, thus, account for less than10% of the total fleet, leaving a large number of private and State-licerlledcarriers about whom little is known. As is clear from the foregoing thereare many unanswered questions regarding trucking in Mexico. Serious analys-iFwould require informatIon on the fleet, its characteristlcs, distributionand utilization.

lxii. The last systematic study of highway trucking rates was made TL-. 1959,with only marginal changes since thlat time. It is probable, however,that current rates are below the legal tariffs. So long as the "amparados'are not subject to control, there is little the govermnent can do to enfujriethe legally--established tariffs which are little more than a point of re,e'-ence in negotiations between trucking companies and their clients.

lxiii. It is difficult to justify the costs to the Government, to ship-pers and truckers, of maintaining the present system of regulation whichneither really controls tariffs nor capacity. The real question, there-fore, is what type of regulation, if any, is required and what measuresshould be taken to modify the present system so that regulation becomesa constructive force in thle transport sector. Only a thorough study cananswer this question.

lxiv. Mexican transport authorities agree that the present regulatorysyse+e mnI,A .-,rA 4-be ch.ged- qnd t;,at C a study s ,r, c.1- A be cavr

4rioA

out under the aegis of SCT. A major part of the study would be devoted togat.huer. ing infoLnaUiun wlch is notorios.LLLLOLy Uefictin the tc g d

try. This information would permit the preparation of a diagnosis of them,Aost important problems affecting the industry and a discussion of policyalternatives open to the Government. The study would then proceed to analyzc

in 4 detai thes --- _ __n -- --- -_- ~ -_ln edetail -l ese Ca_lUUI .Lati as wUe as iue legal aspeuis lIIvolvedU. I. UL'end of this phase, the Government should be asked to fix the policy andUetermine the precise wjay in wnich tne existn g regulatory system snouldbe altered.

IV. PEI1EX (Petroleum Transport)

A. General

i. The importance of the petroleum industry in the Mexican transportseco r canL -be appreCiatDe 'frm D-w f acts- frt - in 1 .. e.t of

crude petroleum and refined products in Mexico was almost 19 billion ton-kin.-as conr-ared 'To a to0ta 0of U21.5 i L'.0L 11U[I-ho U iL L waL.WCY -Le± t

second, investments in transport, storage and distribution facilities byULe state oil company, Petroleos Mexicanos (Pemex), averaged Pesos 616 ntL1-lion (US$50 million) annually in the 1965-69 period or about two-thirds ofthe railways' average investments in both freight arnd passerger facilli tisin the same period. Pemex is the largest single company in Latin Americaand is ranked about number 70 in the world.

iI. Fenex is responsible inter ala for transporting and distributingpetroleum and natural gas products, so as to meet the grow1ing energy requifr-ments of the Mexican economy, to supply rawi material inDuts to the petro-chemical industry and to cover its own needs for fuel. The company's intc;-nal transport policy is to seek a rational transportation system that willmove oil by the most economic mode or combination of modes of transpor-tto itself. For some products, the choice among modes is Ilimited. Forexample, natural gas in the gaseous form can only be transported by pipe-

line, while residual fuel oil cannot be moved by pipeline unless the pipeis heated or the product is made less viscous by the addition of a dilutantsuch as kerosene.

iii. With these limitations in mind, the company gives first priorityto the movement of oil Droducts by pipeline and then by tanker, once certainvolume conditions have been fulfilled. These modes of transport are ownsn'and controlled by Pemex itself and represent a decision to invest fundswhether internally generated or externally financed. For the balance ofits transport needs, approximately 36% in terms of tons originating and241% on the basis of ton kilometers, the cempany must depend on railways indroads although in some cases it may own or lease the vehicle fleet. If apolicy can be distinguished between these two modes, it is one which aimsat encouraging the use of road transport for the movement of distillateproducts. These products, mainly gasoline, kerosene and diesel, are shinpeiover hauls of up to 400 kilometers. On a ton kilometer basis, railway cD5'sare lower, but this consideration is outweighed in the view of Pemex ontotal dlstribution cost grounds by the flexibility, speed and dependabilityof road transport services. The railways, however, are used preferably furresidual fuel oil and for lona-distance hauls of butane and propane gases(LPG).

1/ ExcluEiLg about 830 million cubic feet of gas daily.

- L4o -

Volumes Transported by Mode - 1969

Tons Ton-km % Average Distance.,w) -I -Lll, ) - - (

Tankers-/ 9,200 38.7 7,360 54.2 800Pipelines./ 6,038 25.4 3,019 22.2 500Railway 4,911 20.7 2,160 i5.y 440Road 3,621 15.2 1,050 7.7 290

23,770 100.0 13,589 100.0

1/ Including crude petroleum2/ Excluding crude petroleum

iv. The basic transport problems facing Pemex are those of distanceand widely scattered points of consumption. The producing zones are dis-tant from the area of greatest demand for final products. Broadly speaking,production of both oil and gas is concentrated along the Gulf coast ofMexico, the principal producing zones being Reynosa in the northeast, tnePoza Rica area, including the continental platform in the mid-east region,and the fields extending frormi Agua Dulce to Comalcalco in the south-east.However, drilling has just commenced offshore on the Pacific coast nearSalina Cruz and a discovery in this area would have a major impact on in-vestment decisions in transport facilities across the Isthmus of Tehuantepe^canl, indeed, would alter the pattern of distribution of petroleum products.

v. At the end of 1969, Pemex was operating six refineries lifth atotal distillation capacity of 552,000 barrels daily (b/d) and crackinginstallations to process 152,000 barrels daily. Two of the refineries,those at Poza Rica and Reynosa, are small and their zone of irniluence isnegligible. Of the four major refineries, Niinatitlan (175,000 b/d) andMadero (169,000 b/d) are located near the scarce of production on the GulfCoast. The two remaining refineries, Atzcapotzalco (90,000 b/d) andSalamanca (75.00o b/d) are located inland near the major centers of con-sumption, i.e., MIexico City, Guadalajara, etc.

B. Petroleum Transport Facilities

v.. The location of both production and of the four major refinerieshas determinnr1 ,..^ _ gr^-t. nt.^nt. fh^ pnreen+. nt.t.patrn nf trqn.-nnr'at,itn ai,'.

L O A-- - _ _ __ r- Ar _ _ __ _ __

distribution. Writh the exception of crude shipments by tanker out of Min-atitlan toMaderor all crude moves to the refineries by pipeline. Naturalgas is transported exclusively by pipelines from the major producing fieldswhich are the originating points for the northern and southerr gas systems.Refined products mo've from the four refineries by pipeline, tanker, tankt-.lJ. ±nd -ail L-1.X carAn. toJ the 60J or. )so sales ageci +--EtJ th- e

country. These movements may be either direct or via transshipment pointssuch, as the ports on the- L.T--f coast- or pipelir.e 4er-4 -- -LS =i-4 c- ' Paclficcoast ports for the transshipment of oil products are Salina Cruz for out-wa.rd uargoes and -I'zatlan, Guaymias andU Rosito fUo iL).nw1VdU cargoes.

vii. rE the end of 1.969, excluding the Minatitlan-Salina Cruz liquidammonia npneline e a total of 2,9116 kilomCeters of products lines were inoperation. Total capacity was rated at 151,500 b/d of which 38% iwas beingutilized. Some lines such as he pipeline and the,line to Salina Cruz have been running at 100% capacity. Consequentlyass a result.l- of bottlenecks, ne-w traf4i c has been shCLiCf+g 4to other moldesof transport in recent raonths. The areas of demand which are facing suplyproblems ccmprise Mexico City and t.he norher.-- ac' 3ic Coast. To meet e.x-Vro ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~± ~ I) UL1 ~ X c1 _L.L 1~ ~LJ *I J I

pected increases in demand Pemex proposes to add hl,800 b/d capacity boexisting lines by inst+a"ing additional pumps and to construct some212,000 b/cl of new capacity within the next decade.

viii. The natural gas line network in Mexico cerprise two separatesystems; the Re1ynosa-'nhihuahcua lLne in tlhe north and the Cd. Pemex -Mexico City - Guadalajara line in the south. The total length of the net-work amounts to over 3,82, kiloreters with an operating capacity of over1.1 billion cubic feet per day. Both systems are now operating at over &C5capaci ry. In view of the grow,ing demand for natural gas, the constructionof a parallel line to Mexico City has commenced and is scheduled for coll-pletion by 1972. In addition, the northern system is being strengthenedin capacity by the addition of new compressor stations. The total volurneof gas moved by pipeline has been rising at an annual average rate of 9.6preflecting the growth of energy demand and the substitution of residualfuel oil in the areas served by natural gas lines. The impact of gas oI1other modes of transport has been indirect; it has slowed the growth offuel oil and shifted demand to regjnns not supplied by gas.

ix. Pemex's tanker fleet aggregated a total of about 350,000 dead.-weight tons (dwt) at the end of 1969 and averaged 6.03 years in age. Theperiod 1961,-69 saw almost the complete renewal of the fleet, with thepurchase of 17 new tankers, including specialized ships for ammonia,aromatics and ethylene. Prior to the acquisitions, the fleet had beenallowied to deteriorate and become obsolescent. Total tonnage owned byPemex now represents over 50% of the ships under MIexican flag. The rene'.alof the takcer fleet had several important effects. Repairs and maintenanicecosts were reduced drastically from Pesos 76 rmillion in 1966 to Pesos 19million in 1968. Moreover the fleet commenced to earn foreign exchange onexport freights which amounted to Pesos 25 million in 1968 and Pesos 12million last year. This utilization of Pemex tankers for export shipmen+sis regarded as a utilization of temporary excess capacity.

x. Port conditions do not allow the use of tankers over 20,000 dwtand, indeed, place a severe limitation on the full utilization of the car-rying capacity of the present Pemex fleet. Because of draft limitations,tankers loading at Gulf ports cannot carry more than 110 to 120,000 barrelsas compared with their maximum capacity of approximately 150,000 barrels.On the Pacific Coast there are limitations of a different type on theoptimum use of the tanker fleet. The limiting factor is not port faciliti sbut storage capacity available at the different loading and unloading point.Only Guaymas and Rosarito on the Pacific can accommodate fully loaded tankers.Other ports, in particular Mazatlan,. in terms of their areas of influenee,could well take full cargo shipments if storage were made available.

xi. In addition to pipelines and tankers Pemex makes extensive use ofthe railway ne+wTor aTanda4W c104 the road s t A1, o t 3862rail tank cars with an a-verage ca-pacity of 9,698 gallons. Of the cars

operated~ ~ ~~~ ~-x -an< er rdbynm 1d +-he b 1 ance 1leasedA -from 1Merx-icr.- -andU.S. railroads. A basic problem facing Pemex is whether to tie up its re-soil-rces iin rlw11.ayr t-, cars or -hether to I-ae them. rOnce 44t has 1b-u^4'Y - O4 ~C" V.L. VVL ~ 1 J -L~d- Jt UJ.1III~. ULLA' ,- .u J~ I L "J uv.4ulu

new tank cars, Pemex has limited its flexibility in the use of alternativetransport modes. The national interest d prudent b 4 re-quires that some tank cars be owned in Mexico. In other words, the issue

s not all leasing or all owvnership. the railways, ho-se-ver, are -under-standably reluctant to invest heavily in tank-cars without any guarantee oftrraffic from Pem ex. The misbion cannot recom-u- iend a uinque solution to hulsproblem. It can only arrive out of discussions between the railways andPm1aLs to LU whIa raI'cUlC guarantees and for what period can be gLven DyPemex and the assurances of service and contractual freight rates than canbe given by thMe railways. me mission would reconmend, however, that assome of the older tank cars now owned in Mexico reach retirement age theyshould be renlaced by leased 20,000 gallon cars which wzould offer unitsavings to both the railways and Pemex.

xii. Railway transportation is used by Pemex for LPG and heavy fueloil and, to a lesser extent, for distillate products. Tank trucks, however,carry the greater part of distillate traffic not moved by pipelines andtankers. Pemex does not own any inter-city tank trucks, but enters intocontractual arrangements with private truckers. An analysis of oil productstraffic by rail and road in Mexico suggests that the road fleet is moreefficient in the sense o2 greater flexibility, higher speed and more capa-city per unit per year. The railways experience serious seasonal problemsin some areas when they must give priority to moving agricultural goodsover petroleum products. In addition, since the railways do not have suf-ficient tank-cars and time is required to lease additional cars, use oftrucks is resorted to to meet sudden peak demands. MIoreover, at manypoints, either demand or storage is inadequate to sustain efficient rail-way operations. Under these conditions, the choice of placing more emphasison road traffic for those products which are not captive to the railroadsappears to be reasonable as a short term solution in terms of real costs toPemex vis-a-vis disbursements for railway services.

C. Traffic Trends

xiii. In the past few years. total ener2v demand has been growing at i:

somewhat higher rate than the gross national product. Rising rates ofgrowth in the SdP - and in industrial nrnclititon - are often acrompnniedby sharper upturns in the consumption of energy. In Mexico, GNP increasedby nearly 7% p.a. over the nast five years and enArvA de-mand hy ahout 8.0%p.a. Current estimates are that GNP w^ill grow at 6.0%a p.a. during theperiod 1970-7q. Tho missinn believes that future energr demnd will nn-tinue to increase at a samewhat higher rate, perhaps 6.7% p.a. lwith liquidproducts growing slower and natinal gas faster.

xav. Miucn of tne outiook depends on adstillate proaucts and LPG. Tnedistillates market responds to the demand for fuel to be consumed by allforms of transport. The requirements of the transport sector averaged220,000 b/d in 1969 or the equivalent of an average growth rate of 9% p.a.from 1965. In geographic terms, distillate demand on the Pacific mightincrease to about 78,000 b/d by 1976, far in excess of the present pipe-line capacity to the WAJest Coast. Mexico City requirements are estimatedat 116,000 b/d by 1976, which could not be supplied with existing refineryor pipeline facilities.

xv. Pipelines affect all other modes of transport. During 1969, asearlier indicated, most products lines were operating at between 90% - 100%capacity. It is evident that the products line system is becoming a bottle-neck because of the absence of spare capacity and delays in the constructicnof new lines. These lags in pipeline capacity are now showing up as aboveaverage increases in the use of other modes, notably road and rail. Pet:.o-leuiri traffic on the highways and railways reflected this situation in 196;1.The railways alone registered an increase of 7% in oil movements as com-pared to 1968. The investment strategy, as developed by Pemex to copeawith rising eneray requirements and changing geographical patterns, en-visages that pipeline traffic should increase by over 12% p.a. up to 197O6

Xvi. The future rate of growth of maritime traffic depends on a num.-ber of factors, among them (a) cmnpletion of a Droducts pipeline fromSalamanca rla Guadalajara to a point on the Pacific, probably Mazatlan;(b) an additional line across the Ltsthmus of Tehuantepec- (c) a system ofproducts lines in the Pacific Northwest, either by extending the proposedline to Mazatlan to (fliiacan .and Tns Mocnhi_s or by constructing a numberof small pipelines from Guaymas, Topolobampo and Rosarito; (d) possibilitYof a new oilfield om the Pacinfic; and (e) inorpqsel production fro-m the t;ff-.shore fields opposite Poza Rica.

xvii. In view of the proposed pipeline program, railway traffic ofnetroIum n products shouIld increase at a slower rate thnn overall demand.How much will be transported by the railways, however, wlll depend in pa:ton the rates and type of ser ice the railways are preparedr tn nrrrnide.Alternative modes to the railway for residual fuel oil transport arelimi ted, but no such problem exists for vasolin, keos ne -AiThe question that needs answering is what measures must the railways tak-to offset co.mpet + or. frem +the hig-hways. T'.r sw '. r be c ven H;,a joint exploration by the railways and Pemex wh1ereby the railway can pr>-irrn Taha+nv. -- 4--~n ,+ 4rnhinl +-.r,4 no n-nrwn nn ohi lic a Qfl fl(V.WAL -- JJ-± ~J. ~t . "L .JALLS..C QIW.LJfl '.i C.4.lO MV±CICN - - -.A --- -..

gallon tank cars and Pemex can more accurately indicate its railway tran-port needs, perhaps on a contractu '- ba's-ls.

XVLii * aJIt1 U .11 Witz: vu.; UDlIIlt7 Uli D_ ±±LUV P.ldVULUUiD luiUV ' ii Liy.

has been remarkable. Traffic rose by 14.6,' p.a. in the period 1966-69 toreach 3.6 millio tons. .raflic lLows, however, are less identifiablebecause of data deficiencies. However, approximately 40% of road traffizoriginates at refineries and the balance at pipeulie terminUls an,d imulpor,points on the Pacific coast. The outlook for the future is for continuedstrong growtn with rates of increase below the recent historical trendU 1:

the light of the projected pipeline construction program.

D. Past and Future Inves-tents

xix. Petroleum transport sector investment in M*lexico during the pastfive vears n,olinted to Pesosn 'A1 billion or-vv ap ror+, Kr 15E of to-.nl

Pemex investments in all activities, including new wells. Transport in-vestments in the 1965IQ-6 priyo- wrJ -ere 9-i + as,.1 follow: pipelines

39.3%, tankers 25.l1, storage and distribution facilities, including port-33.6 and rl tA +.l- t+ru i Cks C2

o . D ; -' v g JSA 4- A._ - .; ne I 7. 4. 7 n - - - - - -

. -1 . 6 tJCU4J±A L JU± -LVLL ±7 I . - j >v, i II--A PI *JHU U IA) I IV i ) U

double its capital in,estments in pipelines to reach a total of Pesos 2.17billlion. Pemex now -eo,^ie tha som 4rdct,tplnep-oev4hve-mex no,j

3J 1U±. ,uIlict ouii±u !diUUUUU' ~,P±LJ.LLI- p±u VjtVUUUZ- IidavU U'Z

unduly delayed because of the investment priorities given to other activitdie'su^ aspeto-h-1-cas es atenton howe-ver, seems Lo have been at.au L4('T

in tlhe allocation of available funds between the several modes of transport-,',for example, VU p±1e±±L1 pvUJUUcU L1n LAWe 110'lonwes wIch wJould hielp .o ___1ZL__

mize transportation costs to the region.

Transport Sector Investrments(P~esos i4riiiions

ly65-oy 1971-75

Pipelines 1,211 2,169Tankers 772 8Li6Storage and Distribution 1,035 343Ports n.a. 125Tank trucks 62 64

Total 3,080 3, 57(US$285 million)

xxi. Three major products pipelines have been approved for construc-tion or, are under active consideration, as follows:

Tuxpan - Poza Rica - Mexico CitySalamanca - Guadalajara - Pacific CoastMinatitlan - Salina Cruz

xxii. Tuxpan-Poza Rica - TMexico City. The proposed products pipeliniewould relieve the supply problem in i4exico City by permitting the shipmentof gasoline, kerosene and diesel frcm IIadero and Hinatitlan by sea to Tuxa;)nand then by pipeline to Mexico City. The step is admittedly a temporaryone, designed to covTer increases in local consumption, until the new150,000 b/d refinery for Mexico City is placed on streat in late 1975 or1976, Once the new refinery goes on stream, the pipelirm would be utilizedfor imported LPG (butane and propane).

- 45 -

_a iia S'manca-Guad ala -Paci C-1' Coast. Hcgh prio rty i given hrPemex to a pipeline from Salamianca via Guadalajara and Tepic to a pointon t+he Pacific, probably ne- MazatrWn. 'P- ent-r- DP-1 ; Coast of Mecv-5is dependent on the present trans-isthmus pipeline and Minititlan refineryfflor its supplies of light; pro4ucss. An alteernaive route is f t to bedesirable on security grounds to supplement supplies from Salina Cruz andon economrc grounds to reduce tanker deliver-y costs by elndna ing Mazatlaas a port of call for light products. Within this context, the decisionrepresents a M-inimu^wm cost approach for rmoving addilional quantitLes ofproducts to the Pacific Coast.

xxiv. Minatitlan-Salina Cruz. The Minatitlan-Salina Cruz corridor(250 ki) is of par ticuJ- r importiance to the movement of liglt, heavy andspecialized products from the refinery center at Minatitlan and petro-cherical pilants to the Pacific Coast. The corridor is a communicationslifeline as far as the oil industry is concerned and is the means wherebyPemex:s largest and most complex refinery, M4inatitlan on the east coast,,extends its zone of influence along the entire west coast of Hlexico. Tra:ns-isthmus transport facilitles are varied but are inadequate in the light; ofpresent and future requirements. The pipeline to Salina Cruz is limitedto an optimum 40,000 b/d whereas demand already exceeds a capacity thatcan be increased only under increasing cost conditions.

xxv. To solve the trans-isthmLus transport situation over the mediumterm, and excluding any major discovery of oil on the west coast, Pemexproposes Etn imaginative alternative. It would use the present 10-inchline for fluel oil and construct a new 14-incll pipeline for refined product-.The project involves blending fuel oil with kerosene on a 65 to 35% basisto reduce the viscosity of fuel and permit its movement by pipeline.Separation would take place at tle pipeline terminal by a simple distilla-tion process. The project is in the nature of an innovation since, tothe best of the mission's knowledge, there are no trunk pipelines forfuel oil operating elsewhere.

xxvi, The mission believes that if both the railways and Pemex made aconcerted effort to increase the capacity of railway traffic in the corri-dor from 8i,000 b/d to 12,000 b/d and eventually to 16,000 b/d, or theequivalent to 2,160 tons/day, it would be posslble to delay this fuel oilpipeline project to about 1976. The measures involved would require theleasing of 20,000 gallon tank cars on the part of Pemex and the organi.a-tion of block trains by the railways. Such an arrangement would, notonly give higher capacity but also produce lower unit transport costs.Concurrently, the problem of the rate structure taking into account themarginal costs should be studied by both managements. Additionsl storageand other terminal facilities would be required and involve both Pemexand the railways in some new investments.

xxvii. In addition to the above ninelnine nroAiettR there are a niimber ofprojects some of which, in the judgment of the mission, might also be unde--taken in Pemex's next planning period. These are -rorectS not +ied t- refineries but to shipping ports on the west coast, notably Rosarito,Guavmas anld Topolobnmpo. They could represent a si anifican-.t cost-s rn g

- 46 -

for Pemex in vieiz of the growini remiirements for distillat.es in the- areaIn terms of the costs by alternative modes of transport they would have anavbav k peri od of betp+wen.Pr 18 n n-nrd t- -years. For financial reasonshowever, they were not included in the draft investment budget for theperiod 971-75 Specific econ..m-ic end finn1feasibility studies should be underta-ken to confirm this impression and tor_t_._ nJ +.he1 opt; !m -n- for -1--t-ent

tanker fleet could adequately cover needs through to 1975 if the pipelineand port improvement programs go aiead. The latter, h-owever, are notentirely under the control and direction of Pemex. Tentative plans havebeen mande for -I th purchase ofLSI.A siIx ne-U 2,k'C0 Lton UCUIkersZ overL Wthepro

1970-75 to replace an equivalent number of older ships. In Mexico, 15wr~Cn1 ~4 A 3 4.1 p_ _l s1_ _ -_ _2.n 1 _I | n _ __2 iy i-ULUt00U dL Wilt:A Ubkj.U.L J1.L±C 0. a tocLiILfu Ub1±AI_LkeL 111 UQJ11Ub U i Q

trade. Replacement of the older vessels wrould add about five million tonsper year in effective carrying capacity. It iS recommr-i-nrUled that Ule re-placement of old tankers be stretched out and not acce:Lerated as proposedin the in-vestment, program. The reasons for this is that demand is likelyto rise more slowly; the pipelines projects qill reduce some of the urgenc),;impJrVements U inthe cheuduluuAing anu maintenance procedures oL ute Lleet mIayprove easier than anticipated; and a dredging and port betterment programwill take a shorter timue to be executed than forecastu

E. Transport Policy and Coordination

xXd.xi The problem of the transport of oil products inevitably hasoccupied a great deal of attention within Pemex. It has allocated a signi-ficant proportion of its scarce resources -- approxlmately 15%, of the in-vestment budget in the past five years -- towards renewing and expandingits transport facilities. Marked progress has been made in the planningand administration of operations. More importance is being attached tofuture long-term planning, with a planning period of 10 years being though:-;more suited for the development of petroleum resources than the six-yearPresidential span currently being used.

XXXO Transport operations and planning in Pemex, however, are widelyscattered through different departments. The major groups intervening ininvestment decisions and operations which affect the transport and distri:-bution of petroleum and natural gas are the following:

Crude Pipelines andNatural Gaslines: Primary Production Directorate

Products Pipelines: Industrial Production Directorate

Tankers, Road and Rail: Commercial Directorate

Under this system of responsibility, the first Directorate deals with modesof transport connected directly to producing fields and the second Direc-torate with pipelines connected to the output fmrom refineries. All othermodes of transport: tankers. tank trucks and tarill cars. are handled by theCommercial Directorate which is also responsible for the final stages ofdistribution.

- 47.-

xxxi. No one group, in the institutional sense, has an overall transportview or is charged with the formulation of plans and the coordination oftransport decisions. The possibility of transferring the management ofproducts pipelines and natural gaslines to the Commercial Direc-torate hasbeen discussed within Pemex, but no changes have been decided upon duringthe present Administration. The mission found during its visit that th.erewas no grcmp at the working level familiar with all aspects of the transportfunction. Pemex collects a wealth of statistics on transportation, but theinformation is dispersed throughout the agency and is often not fullyutilized in decision making. For example, Pemex receives all the basicingredients for origin and destination statistics for rail and road ship-ments, but does not process them Transnort Cost accounting systems alsoneed to be improved.

xxxii. In the light of the above discussions, the mission recommen&s that.a permanent trasmnnort nolicy planning comm.ittee shoulld be set up wi thinr Pemexwith the object of:

(a) forecasting medium and long-run energy demand and require-ments for transport services, both on a national Wndregional basis;

(b) centralizing and using the statistical information flowingin.to h+e -cmpay as a resU't of its transpoort activities;

n- JSUL. LI.L± JI..L-JU e U±U . LI. .vCtuIk.. 4 1-L VL i-

(c) recomine.snding 4trar,sport- po.licies- for th o,pry d

(d) coordinating transport decisions, including the planningof long-run investments.

- h8 -

V. PORTS

A. General

i. Seaborne international trade was not a significant factor in thed1velopment. of the Mpyi4ein neConomv in t.he t0 yenrs or SO after t.he 1910R,evolution. Today, although there are 36 ports of varying size and import.-nnfce ilonrt ±..Iih oInm l.OY m o- (iiltf nndr Pnnific G t the -cr!nrnm-r is st1ll

not largely dependent on such trade. In recent years, for exasple, twio-tlhird.c: of' +.th A nroximat.ly (ll;on +,c r r'f' imrn -r+. hanve comnacross the land border with the U.S.A. tmhile to-thirds of the approximately

C ~f- mrrlIl 1 rvp +-i Vc ?~ f ^- rt^ k7 hw n +.iny n- 1 1..ri rnl , i ,e 1 ' it I -e.^,,-Aea.- - - - tors p.a4. -- ' L- tfl--s E -a -- -- hUWV CJ.' t' 4 5. go d

such as sulphur, minerals, grains, cotton, oil and petroleum products (30%5of +1he +o+ '). h ,s a res 't, 4 he 4 cco- --- r less th,, E!N -C -11 ---- $sA4 46-CJ. -S. "VJ CC1L I * Jil - L L )LA-L U, VLC,.J C.1S1.A.) ULU LIJJ _LZ-0 WL~4U4 )S/J

11.J CLL-L JV1IU1ikALv.L

export earnings and 25% of export earning,; from all sources.

ii. In tonnage terms, the ports are more important for domestic coastalUr-aue. 1L Is U.VdLa whcIU-ll ,n 1erIlij yeui iai al.bo UCuLi beeur a L2."U LILL L.IIIUll

tons p.a. -- 95% of vhich is oil or petroleum product movements - accounts-for . 5L)iO U.L Coll port, tonUnages. `:J.e 'Lua-e fu Ul.Os 1±r ad .e 'is bJund up 1i-Lui.the developrment of Pemex, the national oil company, and is discussed in theseparat We chIIapter onL that CUUO![JU1A,y-.

lii. A number of forces are leading the Government to recognize tuatports will have a more important role in the country' s future development.Airong these are continuing popRultimr pres r&'- anc tne need for dispersalfrcm the central plateau; the limited scope for further import substitu-tion and a need to find export outlets for n-enufactured goods; the oppor-tunities of increasing agricultaral exports; the need to expand fishingboth for home ccnsumption and exports; the p,ossibilities of being a landbridge for container traffic between the mica and southwest U.S.A. andJapan and between Europe and East Asia generally. As a result, the Govern--ment is concerned that the ports are efficient and investments in them well-chosen.

iv. Far reaching changes, in the mission's views, are required if theports are to play their role in the Government's broader development ob-jectives. The following paragraphs briefly describe the present scene asa foundation for its rec=mnendations.

B. Policy and Organizaticn

v. At present, responsibility for the dcvelopment and operations ofthe ports (excluding five "Free Ports") rests primarily with the NavyMinistry. There is no clear policy statement, how7ever, as to objectivesin the port sector. Existing generalizations, such as "integrating theports into an efficient national transport systemn1. are insufficient guide;to the Navy ITinister or the Government whereby progress towards the achieve-ment of objectives can be measured, They also avoid a v-ariety of important;issues on which clear policy positions are required fran the Government.Among these are (a) whether a primarily militaryv-oriented and senior-staffed

- 49 -

organizat on is the most ef2icient body to have the responsibility 'orcommercial port development and operations; (o) whether the ports shouldaim at self-financing -- as, in theory, the railways, airlines, airportsand toll roads are supposed to -- or whether they continue as anotherGovernment Department dependent on the vagaries of the Federal Budget - asthey are now; (c) whether the IIinistry of Communications ald Transport isan appropriate authority to determine the charges for many port services --as it does now -- and whether it uses its 'powers effectively to achievenati-onal economic objectives, including a coordinated transport system;(d) whether port investments are to pass the test of economic criteria orvague assessments of "the national interest"; (e) whether operations inthe ports should be under one controlling authority rather than the presentwidespread division of responsibilities (including si-gnificant activitiesbeing in the hands of workers' syndicates). Mo rigorous analysis of thecosts and benefits of such present policies as compared with alternativesseems to have been made

Vin Withirn +the Nyr Ministry there is an organizational stucturewhich could be a basis of port planning. 'it is not effective, hoijever,hecmise (a) it lackls or does not exercise sullficient control to eeZectcoordinated planning with the numerous other agencies interested in portactivities and ooerations ) ( an apparent linited mo+ivation to carrv O+tthe study and planning functions which the law allows -- which, to date,mnay reflect the low poli+; cal prioty gie r T'A- -_ +,eto+hrn +h +.heno-cmercK__ _ ialv v 1>Ed; E J6|vand vzV -- wa as f non-commercial experience of many of the professional staf^' involved; and(c)'1 an alra.nwl i,hJn w -h-lch - econ-i nnnc approach to carmer-i.1port development is given low priority.

C. Port Facilities and Operations

vii. In general, marine installations such as wharves, breakwaters,oll4 ex-LUdn.a1 and.I ot ear i piers are AdUe-uate for uie LIdL,L -W-.h iIdY reasonaby

develop by 1976. Some investments are required in the ports. These are dis-cussedl lielow (pajJl.-a. AV±±j.

vliii * -edgir LJC- i Ces seem cIaracd' by alac'V of LinaLiobetween the Ministry's Department of Dredging, which is responsible forudreding chanels and alongside quays, ancd its Dupartment of Maritime Workswhich, inter alia, is responsible for ccnstructing quays. It also seemsuuat uredging activity is based more on quasi-political decisions in tue4Iinistry than on assessed traffic priority needs.

ix. Routine maintenance activities in the ports seem to be unsystema-tically carried out, and are below the standards Mexico achieves elsewherein the transport sector. This, again, is a reflection of limited funds asa result of (a) the past low priority of ports; (b) the diversion of port-generated revenues to other government uses; and (c) the submission of in-adequately planned and justified maintenance program requests.

x. The cargo-handling position is mixed. Acceptable loacing ratesare obtained for bulk minerals, oil and petroleuml products and grain, wherethis is handled from silos. An excessive niumber of rail wagons, howqever,are used as warehouses in those ports where, lack of silos or storage spacefor other commodities exists. CONASU?OIs 1/responsibilities are, to someextent, being asswued by the railwavs which, at the sarie time, hiave torent freight cars on a "per diem"I basis from U.S. and Canadian railroadsand use foreim exchanie

Yi. Geanernl crA-haMnclin, which ennn ho emc-htad to, increase ifGovernment's export strategy succeeds, is often below efficient standards.Thsii arPti v-i y-,r is in th-e h1n-it-l1 of' wTrkars' -v-nrslYi nor conopnratives iinrltrconcessions granted by the Navy NIinistry. The rates charged are determinedby t-h,e M n-istNryv of'- Cmmnn1 ct-'r-n Tr-n--o-t'-s rarif? Depa.ri±. and -- nr1

to follo-wi the two-year movements in tl-ie national minimcuvi wage, and are un-

syndicates' gangs by representatives of the Government or shipping agentsor eve-n the,C -J--,-Q; t ts thlIem.s elv es. -fecec st -4- -- 4d-- A s -- ar--- e below -what4'~~ ~ V ~~ ~~ ~ ~ ~ V ~~ . J... -L-Ui1, 0 UO.ULIUd4 tA Cl0 04 V -L ~~VV 1

should be possi!,e because of the limited ariount of equipment available tothe s-ndi cates.. It is also affected by a general shrt-age of warehouseswhich leads to transit sheds and other areas within the ports being clutteredwith cargo that prevents easy mrovements. A recent reduction to 1, days ln

the "free time"' allowed to goods has brought some iprovements and a sub-stanti l increase ln reven-ues fr warehousing. 'u,-ther reductions arepossible, but these should be phased and accomrpanied by the provision ofmore w2arehouses so as to give the b-usinEsu cuf,i-ity e-the opportunity toreadjust both their attitudes to the ports and their oin ways of doingbusiness. At he saiie timie, cusitomS proced-uLres neeu a 'ull exwul-aionto facilitate a speed up of goods processing.

D. Finances

xii. Excluding the Free Ports, the liexican ports are not financiallyautonomous nor are their accounts kept on a ccmimercial basis. Port usercharges, i.e. revenues on ships such as tonnage dues, dockage, mooring,wharfage, are regarded as federal taxes and paid to the rUnistry of Finance.The current scale has been in force since 1966, despite the cost increasesthat have takden place since then. The Wavy Ministry's recurrent and capitalexpenditures on the ports are determined as part of the norm-al governmentbudget. There are no Balance Sheets or valuations of net fixed assets inuse for any of the ports. The total volume of investment in the five years1965-69 is unclear. Navy 11inistry figures indicate Pesos 484 million(US$39 million) while Iinistry of the Presidency figures show Pesos 786million (US$63 million). The difference is partly accountable for debtservicing payments by the Federal Government on loans, whereas items arecharged at "cost" by the Hinistry.

1/ Compani[alacional de Subsistencia Popular, wh-ich is responsible armngother things for the distribution of subsidized foodstuffs and theexport of grains.

2/ They finance equiDment purchases out of a 10°' surcharge allowed forthis purpose on some handling charges.

- 51 -

-.V 1 i Tr, 1 O°C nprt" rru (ecnv•irn P receipts- fr^m pilotage steveinr-

-ng and cargo handling -- the proceeds of .rhich accrue to the syndicatesJnvolTed) T wrenre e about+ Pe s 1o m3 I llionr (Tj's:.'2 xnillion) and wenre mnroinn.lyr

less -- Pescos 8 million than total expenses, largely because of the largean,ounts sp-ent on Aedgin == -s -.e ^In w ic a, prob h more proprly i ch-^ge

able to capital dredging. A recasting of the accounts of the ports to aconvsntional comIercial ba sis uas not possible in view of data and otherlimitations. This would require a major enquiry by government, including thepossibJ 'Le use ofj cons,Lutants.

JiLv. A case fU±* lcUeai LLpoLr Lu1sr c:rgow V dUU-U ;UU.L- Lbe made --

they are low both absolutely and relatively to many other ports in the Gulf/aaribbean area; they have only a slight relationship to the cosus lncurred

in providing services; there are numerous and questionable exceptions, includ-(ng services provided for the Government which, at least, huuld bue UreU. uteu

to revenues (e.g. mail is exempt from wharfage -- it is also carried free onthe railways); and costs are increasing. Apart from some selective increasesin warehouse rents, however, where new and improved service is provided, themission recommends a review of the present structure and level.

E. Future Traffic and Investment Stratery

xv. Extrapolation of the past trends -- 10:_; p.a. between 1960-68 -- isan inadequate basis for future port planning and especially because of thepredominant influence of pe-troleum product tonnages. A sound analysis offliture export traffic, port by port and commodity by commodity, based onstudies of domestic production and marketing opportunities has not apparentlybeen done. Nor does a full evaluation of tie implication of PEflvJEX's pipelineand tanker acquisition program for domestic coastal traffic through the portsseem to have been carried out by the Navy 1linistry. As a result, it appearsprobable that those responsible for port development have a less than adequateview of what investments are required and where and when.

xvi. The task of improving forecasts rmust be given priority. Sincesome excess capacity in the port system exists and since operations may beimproved, there is time -while these operational and other improvements a:^ebeing undertaken for the work of traffic forecasting to be properly planned,staffed and undertaken. Therefore, the Governrment should only undertakemajor fixed investments such as new ports or additional piers, wharves orbreakwaters, after full economic and engineering studies have been satisfact-orily carried out.

xvii. As an irrmediate investment strategy, the best approach would seemtf be a) concentrate on handling and associated equipment which, if necessary,could be transferred elsewhere; b) provide more warehouse capacity where there

s now nn obhvi m.- Phcnrt_aes nndl c) iinnirt.akP selective dredgine and nortremodelling works. A broad 5-7 year program covering b) and c) above, to-gether with a description of som.e of the . ork in-n1vr, is ounit.linedc for theseven main ports in the detailed section on Ports (Vol. III). A first

+proxim.-t+ion tot+ 1 Co: iS Pesos 350 m-ilion (TMi!JL millirnm) The timpphasing or foreign ex;change component cannot be determined at this stage.

Nevertheless, together wzith other port associated investments (e.g. dredgingeqsaipment, .av . _ U-. / zids, ec i' LU co )'d ill kJU1 L.Ji U±i o£ a gL&

suitable for foreigi financing support. 'To generate a project of interest toan international ler.inr institution w*ould, of course, req-uire miore detailedwork a special project preparation mission and some initiative by Governmentof a new approach towards port policy an-d problem,1s.

F. 'Lecorr-ienerda-tiulls* * , * IIu uL Ii. ... ..

xvill. Given that export expansion is an important element in nationaleconomic policy) tihat efficiency and economic criteria are to be increasinglydominant issues in the Government's attitude to ports; and that other than forliquid bulk cargo there is surplus capacity for the present pattern of trafficin each port, the following recomnendations should be considered:

(i) A National -Ports Council should be created. The Presidentof this Council. would be the I4inister of the strengthenedi4nistry of Transport, as recormnended elsewhere. The

Council would be composed of senior representatives of thevarious Ti nistries involved in port matters (Pinance,Agriculture, Cormerce and Industrry, Public I1brks, Patrimony,Fomento). Its broad tasks wjhich are set out more fully intlhe detailed report should be to determine port policy, sub-ject to Presideintial approval; to develop, coordinate,approve and supervise programs to achieve the policy objec-tives; to review, budgets of the ports; to approve the selec-tion of advisory cormittees both to the Council itself andto particular ports. A professional Director should beappointed as the Council's chief executive with the staff,authority and clear responsibility for generating invest-ment programs, budgets and controlling all port operations.

(ii) In -the first instance, the ports should be operated as asystem on a commercial basis. Later, st-eps could be takento consider whether particular ports should be financiallyviable in their onM right, including the re-investment offinancial suroluses ancl/or with borro,w=ng nowers- etc= Animportant step in tnis process weould be to limit theCustoms to tLheir hasir. T iitninrin nndr to rn,nfer cnnfrnlover the transit sheds and warehouses to the Genera-l,eanagers in the ports.-nr The (iuncil would also be res-ponsible for revie-wing and recommnending port user chargesto the !Tinistry of Tran.sport. These are no low end corl il rbe increased a-nd generate substantial revenues which wJouldfin cn an investment progam.

(iii)I A .m.o stin eeor sho 4'd be4- 42de to1gth -bsIJCt J~.A~S:

5~.J~ *1au .', u t) O J ..-Li±5 ull:u "_O

available talent -- engineers, economists, financial^alysts, ec4-. Jnto t'he svaff of 4the Ports Co---41 ard into-4

the ports as General Mlanagers and Depaartment Heads. ThlisefforJt xIas-t in,cluU ie dUnl as[ses;,m , L, ULAee UL tt LLngUl 1JtLlg±5fl54

riee ded 'for~ "-e-rW-,,a -. l astr seVedsanI1~UU&~U iU~ 1<U.' eJ3 .UJJ. d±b ±LUJJ %i VOUUU±-t;Z ZLL±U

longslioremen in the ports. It wiLll also require a deter-rnination of the needs Ior foreign specialist staff(including consultants) to advise on port operating methods,to install accounting and management control systems, tocarry out traffic studies and, if necessary, to value portassets.

(iv) rThe extent and timing of urgent dredging work required atVera Cruz, Salina Cruz, Coatzocoalcos, Guaymas, Ilazatlanand Tampico should be deterrnined.

(v) Selective investments should be made at Vera Cruz andTampico, as indicated in Vol. III. Vera Cruz is and mustcontinue to be regarded as the premier east coast pointof entry to i4exico. It is strongly recommended, therefore,that neither money nor energy be invested in developing analternative new general cargo port to it at Tampico. Otherthan for PEIMI's needs, the existing facilities at Tampicocan be extended, altered and modernized to take care ofgeneral and dry bulk cargo needs at the present site forlong into the future. Satisfaction of PEIEM's needs andthe other improvements, however, will require carefulstudies of the hydrological and possible social cost impli-cations involved.

(vi) The construction of ne,w ports should not be contemplatedat this time. eaxcet if a major associated industrial ormining project requiring a special facility is firmly com-mitted and justified; as possihlv for examnp'e;. at TLsTruchas for a steel plant. In such cases, the port andoLher transnort faciities must bpe includedi in te -cononrnicanalysis of the particular investment project.

(vii) Consideration should be given to the establishment of anort eqinmnent leasing authoritv ThMi s aulthn-rily woulcdbuy equipment with the object of leasing it to the cargohnnAnnrlg s indicates; such eqonip.ment is needed for- ef'f-Nin"+operations. In this wiay equipment could be standardized,purchas-ed on a vol-li-..e baSisi ar.d moved fro port to oriV L4 .4 I,s '.% .. .A l V~ ~ - U

demand changed. Leases should provide for appropriatesTnrs - +;.7s+;nn snA m<;n+ALS%fl.or +S AS Z m J4

._ .&a ,_ _ . *.'aJ %..J . .t A4* *zSwU.4'. ~t~4jLV .A O±AU.sA V-_ LILy Camortiz v a5w;9ty ion. d nar.de mobice equipr.en eqhouldben z.tnvst

ment undertaken through the Ports Council and appropriatecharges made for their use. This equipment wol d -ncludeitems such as gantry cranes and heavy lift cranes.

(ix) A minor general equipment program should be formulated.That is, uirefighting 3ieby equipmnent needs upgradingand lighting, telephone and radio services need improvement.

(x) "Jarehouses should to proviled to relieve tie presentcongestion in the transit sheds. Since, however, afull program of installation waill take time, the present15 days of free time for imports should be reduced onlyto 10 days, with penalty demurrage rates on a rising scalefor the next 5 davs and goods then transferred to ware-houses or other storage space at the cargo owner's cost.For exnort,s the samye free time should be n1loued - 15 davs -at a different scale of demurrage rates. If after 25 daAyscargo hnA not hbeen shi nnpre i t. s-houil he 'hP Te t1d bha4ck tn WnrP.-

houses and charged the full w^Jarehouse rent rate.

(xi) The present regulations prohibiting the entry of trucksinto port areas should be removed.

industrial area at Iatamoros (l1exico) and Brownsville(USTA) should be T

ments (including port implications) are required for

Guadalajara/lianzanillo; Coatzacoalcos/3Salina Cruz;

c)Lilu, P.JU ptentL..d ciIu Vt.dr U 1oLVfL. U.L trnsort

needs preliminary investigation.

d) An examination of the "interface" problem -- i.e. thetransfer point of one mode of transport to another.In sone ports it is probable that the cost of movingcargo from the port gates to the shipts side exceedsthat of moving it from inland to the port gate, andvice-versa.

e) A study of the feasibility of using barge systermis toimprove coastal transport since MIe:dc;mn shipyards arecapable of building good barges and tows boats.

- 55 -

VI. CIVIL AVIATICO

A. Background

i. Air transport has become an increasingly important element inMexicots passenger tranqpnnrt systpn-. Between 1960-68, the two trlnkcarriers (Aeronaves de Mexico - the Government-owned national airline -n r nmnnin W;exncnn Ae hviacion - a private comrY wi-t- h some nominalGoverrnent shareholding) increased the number of passenger-km flowr indomnestic an nento.lserv%.ices from 1 .3 b-1lJon to 2.2 b;linFreight ton--kns are still only nominal, but as the detailed report suggeststhey con. become of greater economi^ iportance.

ii. P4ubc sector invest.m.ent .1 aviation (fllght.j equ±L4r.t ai-4Lorl;

etc.) amounted to Pesos 3,172 million (US$254 million) in the period 196!)-

, as fo±lIows:

Aviation Investment(1965-77

(Pesos Mivllion)Total A

Ministry of Communications and Transport(SCT) 165 5.2

hfinistry of Public Works (SOP) 1,727 54.4Airport and Auxiliary Services Authority(ASA) 280 8.8

Aeronaves dt Mexico 976 30.7Radio Aeronautica Nexicana (RAuISA) 24 0.9

Total 3,172 100.0

About two-tLirds of the total investment was in airports by SOP and ASA; 30%by Aeronaves - mainly in aircraft and servicing equipment and facilities;with the remaining 10% being mainly radio, navigational and other aids.

iii. Over 30 airports are under the operating and maintenance juris-diction of' ASA which is an autonomous agency set up for this purpose in 1.965.These include the main international airports at iexico City and Acapulcoand airports at the State capitals. The current national airport plar covers75 airports, many of which would be "feeder" and/or tourist airports.

iv. Aviation is particularl-y significant for tourism. Availablestatistics show that about L5% of tourists entering Mlexico last year arrivedby air. Since these tourists often spend more per capita per visit thantourists arriving by land, their relative signif1i.n,eo i;., +hk o'vonomy veven greater.

1I/- Including 1970 programmed.

- 56 -

*;. Aeronaves and lIexicana share the domestic market with two secondarycarriers and some feeder air lines (alimentadores), in which Aeronaves has ajoint investment with private capital, and with a number of local air-taxiservices. All domestic services are subject to Governmental route alloca-tion (areas, in the case of the smaller lines). On international routesthe two major companies share the market with 25 international carriers(five are U.S.) serving hexicc. Both carriers had slightly over one millionpassengers in 1968, and in each case about 20, of these were carried oninternational routes. In early 1970, Aeronaves served 12 places outsideMiexico and IMexicana five places, with Los Angeles beirng served by both.The principal international market is, of course, the U.S.A. In 1969, thetwo IMexican carriers had increased their share of this growing, lucrativemarket to 30% of the total as compared wJith 2Og in 1966.

B. Policv and Planning

(i) Ge.neral

vi. The Government's aviation policy is correctly based ona recognitionthat civil aviation has great potential in the nation's overall development.Tnt.rnatAiorl,r_11r it. c.an qhowT the Nevicnn f'lag nd gnerate foreign excYhangpas well as facilitate the movements of the growing tourist market. Domes-tiAall T onr t.he trrnl- ronutes': it. ca!n Tvrr)v-iire nqick1' sri regiuire by'htr

businessmen, tourists, Government officials and others who place a highsraluii on tim. TIn rural areas 1+ can pr d -h necess ary feder servicesfor the irnternational and domestic trunk route services as well as assist

171 i P v,4 1 -avi-aton in Js further developed nd tochJ-1i- -l1 more

efficient than in most developing countries. In part, this is due to theiarge spill-over and 1feed-backL eff1ec's o' the U.S. T iation- _ scene, -clud-

ing the proximity of the world's great aircraft manufacturers in Californiaover the h1exican border. In part, it. lis also due to the GovernmRVent1 s liberlpolicy towards interrnational and charter carriers so that tourism may benefit.

viii. Like most Governments, Miexico exercises three main instruments,in additiorn to investment approval, to influence civil aviation development:route concessions; tariff measures; charter privilege gran;ts. Internationalroute concessions are based on the usual prac-tice of bilateral negotiationswith foreign Governments. These involve a fine assessment of Mexican poli-tical and economic advantage (including the financial health of '-lexican_arriers) and are clearly beyond the scope of this report. On domesticroutes, under existing law, onlT one route can be served by one concession-aire (i.e., airline), although recently there have been a few "ad hoc" de-partures from this basic rule. This rule, however, implies that Governmentcan judge better the economics of a route than can the amanagement of air-lines and this is an assumption which is not self-evident. The economicsof allowing open routes on a more flexible equipment and tariff basis shouldwell be studied to determine the economic costs of the present policy.

ix. For international schedule routes the air-fares of both Mexicancarriers are subject to the InternatiorLai Air Transport Association (IATA)under the policies and procedures of which they work. Domestic tariffs areset by the Tariff Department of the SCT.

x. Charter services are approved by the SCT and figure as an elementin bilateral negotiations, especially with the U.S.A. Mexico has recentlyadopted a generally more liberal policy to these services and should continueto do so, as much of the Governmentts tourism deve'Lopment planning is basedon large numbers of tourists arriving by charter flights.

xi. The most critical shortcoming of the hexican aviation scene is tlhelack of a single, well-defined, entity with full authority and responsibilityfor coordinating the activities of the more than 20 Mi'nistries, public, semi-public and private organizations that have an interest in aviation policy andits implementation. The concerns of these agencies can be broadly groupedinto three categories: infrastructure planning and investment approval;flight operations activities; and regulatory aspects.

(i) Infrastructure

a.) Miinistry of Public Works (SOP)b') Airnorts and AnLiLinry ServiGeS (ASA)c) Radio Aeronautica Mexicana, S.A. (RAYSA)d1!V Ministry of the PresidPncy

(ii) iih nr+in

a) Asro .rec de MgvYr., SA. (Aeron.ves

b) Compania Mexicana de Aviacion, S.A. (Mexicana)) Secondr.d and Feeder A 4r Al-n es

d) Foreign Airlinese)O Turists Agencies

cGj £VLL"QU.L. Vi. U.V1iJA11IWiVUCLU.L1i0 CULA ±±dUiLJI-pIJ I \Ljl

a) ) Diepsart ent o i Civil Aviation (Rerorauti(ca)

(ii) Department of Tariffs (Tarifas)

b) Tourist Agencies

xii. The Ministry of the Presidency (Presidencia) has to act as a co-ordinator of the groups most directly invoived or responsible for thefunctioning of the civil aviation sector through its investment approvingrole. Because of limitations on its manpower in terms of numbers andexperience and its many other competing responsibilities, its coordinat-ingeffort is, at best, nominal in that it is more concentrated on investmentdecisions than on operating efficiency or pricing policies and practices asways of im)roving efficiency or investment decisions.

- 58 -

(ii) Infrastructure

xii. The nresent excellent qvsti-m of nirnorts and related commrnioationsand navigational aid networks has been created within the framework of anational Gi v-l aviation progranm (Programa NacionaJ deI eronautica), withinwhich a National Airport Plan was the primary instrument. In 1965, the

Governmer.t,rencn,'izng +lno need for a nnnnAAin n+ri fr'v', + r,c+Ivb Acirnlnn...

ment program, established a National Airport Plan in which 75 airports were;in+iially selected for (developm,ent- Sel-ectlion -vas b-ased onn tAhe follo.0,ingfactors:

(a) the influence of air transport on the socio-economicaci-vLV±uutis iLn peVLcu.iar "weas;

(b) tlhe potenialu role OI aviation inier i lcommunications;

(c) actual statistics on the number of air passengers;

(d) the number amd nature of existing routes and theprospects for establishing new links;

(e) a balanced geographic distributicn of airports; and,

(f) the general economic development possibilities of each region.

xiv. The first stage of the planning was properly designed to concentrateon the country's main airports. By this means all jet-trunk routes wereestablished with a network of efficient feeder services into the trunk routestructure. The airports selected were divided into three categories: longrange (essentially for serving international routes), medium range and shortrange.

xv. As indicated above, implementation of this program has involvedGovernment expenditures of some Pesos 2.0 billion (US$160 million) by SOPand ASA between 1965-70. Roughly, the same amount, Pesos 2.0 million out ofa total for the sector of Pesos 3.4 billion, has been tentatively programmedfor the period 1971-75. The implications of this are discussed later below.Consideration is now being given to the developmert of a rural airport systemto provide access to remote areas pending develoDment of sufficient demandto warrant the construction of roads under the rural road program. This isstill in the conceptual staEe and. therefore. no budeet has been developed.The idea is definitely worthy of further consideration.

(iii) Flight Operations

xvi. Both Aeronaves and hfexicana fly modern turbo-jet aircraft and havethe .basicy'ro,nA sr1.c man~n+nanrsc uni t-rinr ,g l fac;[ities r.e-- ce-ry to

support the operations. Irn general, past trafLic growth rates of both air-

the future, however, increasingly large investments in aircraft and support

facilities will be required if they are to kreep pace with similar grcwthrates in t,he future5 and especially if they are to equip themselves with"next generation" aircraft so as to remain competitive. The feeder airlines(alJ.imentacdores) also operate modern equipment and, in addition to offeringreasonable off-route service, nrovide "on-the-job" training for futureflight crews for the two airlines.

xvii. At the bottom of the air transport system is the regulated airtaxi induStry. The Government is considerinp' f'rthpr modifinations in thissub-sector in an effort to provide more efficient service to a greater num-her of users and at the -smn-n time strengthen t fh' n1n,inl position of tkeoperators. Plodifications contemplated include more area concessions in lieuo,f' rmout.p r-onr-_sssion and s trlr- i r.a" "cam 1 r-n+ir of o',nc o nare s A o +ncrw1 e

stronger commercial entities in the taxi business.

(iv) Regltory

xviii. Primary responsibility for regulation and statutor-y control of allcivil a3 n actiJ.viLties lies -V.Lwi Withe ,CT. ' LLJiU t4 S, tlhe9 upX tulllenI

of Civil Aviation is the general regulatory and licensing agency. It iswell saLltaffed ndiu hUa a stroulg influence on infrastructure planning. Bothair fares and airport user charges (including landing fees, concession rents)are established by SMT's; Tariff Department. It does not, however, appear touse its pricing powers as a coordination or efficiency searching instrument.

C. Management and Operations

xix. Legally, airports are to be designed and constructed by the 0?P,in accordance with general planning ideas established bv SGT. ASA is, witha few major exceptions, responsible for the operation ofW federally-oi-medairports. Recently, however, ASA was specifically authorized by political de-cision to design and construct some airport facilities. Airport assets(newi fields, runways, terminal buildings, etc.) are transferred to ASA ontheir completion by SOP and are taken on to its "books'! at construction cost.Those constructed directly by ASA itself are added to its capital assets inthe same manner. User charges are set to cover ASA's operating costs as awhole (above half of the airports administered by ASA made an operatingprofit in 1969, the rest; incurred losses). It earned a rate of return of6.8% on its average net fixed assets in 1969. The airport facilities aretransferred to ASA "free and clear" as a Government contribution on whichno dividends or interest are to be paid. As a result, it has accumulatedlarge surpluses which have been reinvested in securities. There is noapparent reason why ASA should not pay the Government a reasonable retuirnon the taxpayers' investment in this profitable agency or, as an alterna-tive, why it shoul-d Inot be set free to operate as a "commercial" enterpriseto generate the funds required internally for its airport investment p:rogramwithout drawing on the Government budget. In this way, ASA could play a rolecomparable to that envisaged elsewhere in the report for the railwavs and.ultimately, by the proposed National Ports Council.

- 60 -

xx. PERAMSA (Radio Aeronautina ..exicana; S.A.) is an imnortant aeencvwith primary responsibilities in the operational area of civil aviation,especiaIll its safety aspects Tt. is P nar-uvate co,mpnny but t.rith majorGovernment participation and is responsible for air traffic control, wro-nuticnl meteorological. services1 communications and nnvigationnl aids. The Government's share in RA*iSA will be increased by the value of the two majorcontracts for e1qupment now being nnyriad ou11+. RA.i45h's usr hchoe,q asestablished by SCT's Tariff Department, are based on recovering "out-of-ocket+'1 pra-tln costs a-n in- ----+av n^e c nor+ depc--atno+n The

users, including foreign airlines, are accordingly subsidized. A reviewI t4h ba i of su '-i cha ge IS Arecov vAeA _3 A A3 - 4 _A- 2AAAAv1 - 4- -_ _of tAT 4- A

V' W44. UJ.4 ) F Lu V r OULL UtiOd. .LD | o L-ubAIUI±~±i4V~U D J.UJ_L V LAL VXWV L V4AL±

growing volume of funds that will be needed as technology develops andsafety reJLi.remlenL t inreLe

xxi. Aeronaves de PEexico (Aeronaves) is the Government:s airlinie. Ln1969, it flew 25.5 million km on scheduled services and carried 1.1 millionpassengers. it generally maKes a profit bezfore interest cnarges but, be-cause of its heavy debt burden on, among other things, past equipment pur-chases, it incurs losses after meeting its financial charges. Ihis deficit,which in 1969 amounted to Pesos 48.9 rmiliion (US$4 million) has to be metby the Govermment and Nacional Financiera, S wA, which have accepted shortterm notes from Aeronaves in return for paying its debts to others as theycome due. The result has been a steady increase in the short-term indebted-ness of Aeronaves. The heavy interest charges that must be borne by Aeronavesmake it unlikely that it will become financially profitable unless the debtis "written off". Debt servicing adversely affects the airline's operatingefficiency as needed expenditures to improve maintenan,ce equipment and facili-ties are not made for lack of funds. ho operating subsidies are given toAeronaves.

xxii. Mlost of the feeder airlines are under Aeronaves control, as arethe two secondary lines, Aerocarga, S.A., and Servicios Aereos Especiales, S. A.de C.V. (SAE). Aerocarga is destined to be Mexico's national air freightcarrier, while SAE, which now flies secondary scheduled services withinMexico, is intended to become the principal Mexican charter airline - outsidiethe International Air Transport Association (IATA) of which Aeronaves is amember.

xxiii. Iexicana flew 20.1 million km and carried nearly 1.2 millionpasseneers in 1969. It has earned profits in 1968 ar.d 1969 after incurringoperating losses in 1966 and 1967. It also has a heavy debt burden followingsomee recent lnrge loans for new and larger net aircraft. Tt. has rentlVrejoined IATA which it left some years ago as a means of avoiding sanctionsagainst operational practices which the zmanager,rt wisghed to unldertake. TheiTmanagement now considers that the benefits from IATA membership outweigh theL,i sav^te

YYisro~~~~~~~~~~~~~~~~~~~~~ ~ ~~~~~~~~~~~~~ s., e. .,ao ailns th seconar -y airie 4nd r,os - fth

feeder airlines have a common and strong air crew union (ASPA). MaintenanceB_. 1L - ~)11U ±VL-jI± AU U O L.UII' IU- ±~ ICII~ iIIIliU ± UJ.dul ground ser-v-ices f'or the tLA-0 tiu-nkC Cuar-rivers Cal-e micannei31 by ,r,eso

separate unions and, in general, there is no shar-rig of maintenance or grounidservice facilities or equipment.

- 61 -

xxv. There is no duplication of `nternatioral routes by the tWo truankcarriers and only a limited number cf joJuiwly served domestic city pairs.Domestic fares are based on a fixed "terminalJt charge (50 pesos per passen-ger for jet aircraft) plus a charge per route-km. lihere city pairs arejointly served by Mexicana and Aeronaves this tariff system can produceanomalies :in total fares between the two points, because of varied routestructures imposed by the Government, that do not reflect cost or servicedifferences.

xxvi. Personnel training for the civil aviation sector is generallycarried out by CIAAC (Centro Internacional de Adiestramiento de AviacionCivil) which at present is operated by the Government, although with finan-cial assistance through scholarships arranged by the International CiviL'Aviation Organization (ICAC). The school provides flight training programsfor hexicaiis as well as instruction irn non-flying activities such as air-craft maintenance, communications, air traffic control, etc. for bothMexicans and other Latin Americar. nationals. ICAOC participates only in thenon-flyring side. Discussions have been going on for some time wJi'th theconstructive idea of expandlng t,he school's activities annd establishing itas a true Latin A'-merican civil aviation training center, somewhat along thelines of the reaional school in Beirut operated hy IrA.-O

xxvii.- MfPvipn'c r'iu-il aviatlonr sector to a rlare extent, de.v?elo-iL~- - --. -- --' U, S-t-fl - - E

with a bare minimum of outside technical and operational assistance orahice. General assistan is r fre m ICAO whose Morth Am_er:ca

Regional Office is located in NIexico City; from IATA, whose Regional Repre-sevIntat-ve j c I ^.r...j4-,1',A -,. - TA,.. - ._A fr 4- .,, TT . t'. _,,1 ,..,~sentaiwTe Ls lca_e in Rio de Jar.e ov, cud frr LIhe U.S. Federai Av-at--~ orE-Agency's Technical Assistance office. Foreign consultants are rarely used.

Beeau se of t,>i-~ 1Js J .dpendent effort there is a -Ji±teU- eOpVer-ence about l;hetechnical aund planning lessons gained on similar problems in other areas,and thi.s is reflected in somie of the development work now^ taking place.For example, the facilities for handling departing passengers' baggage (lonot anticipate modern trends which are moving toward containerized haldling;the sizing of terminal buildings areas is not fully related to passengertrfPiC s-tkues anud aircraf4 . movement forecasts, -Ai wL± res-U.Ltant -unba ul1 au i ,edinvestments. Basic design and operating procedures are based on ICAO andAA requi-ramenus buu these, in st-W 'sh only standards and notX JIIU% u~5, temev, saua-LInno

detailed design criteria to be uncritically applied.

xxviii. The following table shows the tentative allotment of public fundsto the civil aviation sector for the period 1971-1975:

- 62 -

CGi1vi hviaI or - P ,sr.r Tnves'tmeint bhir Acpn-v

Fiscal .Sel<-Glenerated naer ral Foreign Tot i-Resources Funds Loans Loans

IM1inistry of Public WAorks 64 - 1,286 - 1,370

Ministry of CommunicationsanCId T.ranspor4t. - - =4

ASA ~ ~ ~~~~ ~ ~ ~ ~~- .3)UC - 2 & L,6,

Aern-e - 12 -L 94 -.C6

U, 0 A 43 - 43

Total 84 ____ 1,286 1,483 3,398

/t Inclrdes provision for either a new airport at Lexico City

and the alternative of improvimn the existir>F airport.

Cf the approximately Pesos 2.0 billion shoin for SOP and ASA as expendituresin infrastructure about Pesos 600 miillion represents asorelimninarv budgetallocation for a new Mexico Cityf Interr.ational Airport at Zuxnpango; Pesos 331Ti11 ion is fnr mTint.PrtarcP anrd general ni-ort iLrnroverments- And Pesos &)07

million for construction or major improvements at 41 airports. Budget provi-sions have also bhen made for land acquisi..ior, studies ~nn di£n and slnpevision of construction while the amounts for maintenan-ce and ipT;rovementappear reasonable for a five-year progran covernlg !n infrastructure systemin a country the size of Yexico, the mission believes the case is not provenand requires careful re-evaluation (see pa-. i).

ix. 2 ~~axenditures Por Aeronaves icueabout Pesos 950 r)li thatULJ Q .SJ 4AQ~ '41L0V 0IJ CJJ.4 v 4. A /,IJ~ -Y.AI Z .L.L- _ V1 0. V

are tentatively allocated for commitment toward the end of the five-yearp--eriLod' to cover possible acqusiio o wd-o44ed je -r0 eo 120j2(4J. J.UU. AJ UL)VUJ. J L U.L 0 iA.A{ILLSL U.LLJn L L V JU.e- UJU L tLLVA U CX.L LI.4 V. q M .L U 40AUDV I.LC-'

million is allotted to purchase an additional DC-9 aircraft to accommodateforecastU UtrafLIc increas. Tih Aeuonaves Mciamt-Eent is qu- ut. pruper.Ly

cautious in its attitude towards the need for wide-bodied jet aircraft in-vestmerit and, apparentuly has provided for such a program orU the contingencygrounds tha-t competitive pressures may require investment. The DC-9 purchase,however, is likely to be a necessity to maintain route capacity. Both itemsare recognized by Aeronaves as needing further analysis to determirie bothjustification and timing before firm commitments are made.

- 63 -

D. necommendabLons

xxx. The Government has recognized the potential of civil aviation forMIlexico's development program. Most of the adnministrative and operationalstructure necessary has been theoretically provided for, and an increasingportion of the transport sector budget is being channelled to aviation.1\Jevertheless, due to the lack of coordination in the initial planning, tneoverlapping of responsibilities in some areas and, still worse, lack ofcommunication between the various agencies, the system is not realizing itsfull potential either in service or efficiency.

xxxi. Substantial increase in efficiency could be obtained within thepresent framework solely by improvements in the present coordination andplanning functions. Efficient coordination cannot be imposed, however, onthe diverse groupirngs which comprise the civil aviation sector in Mexico.Rather, it must depend on the persuasion, guidance and dedication of seniorofficials in all of the agencies involved. Firmer direction, however, couldassist to bring this about. It is recommended, therefore, that a Sub-Minister for Civil Aviation should be established within bhe mission'srecommended new Ministry of Transport. His terms of reference should makehim directly responsible for the formulation and overall execution ofaviation po'Licy, including such functions as tariffs. He shouLd representthe civil aviation sector in all matters directly or indirectly involvingthe sector. In addition. consideration should be given as to whether heshould be a senior member of the Technical Consultative Committee (ComraissionTecnica Consultiva). which itself should be made more active and dominantin the area of inter-sector planning and coordination. He should be the Cha;a-mar of the "Comision de Planeacion de Aeronuertosl" which should be reactivatedand staffed so as to become a positive link in the infrastructure planningfieldi The S_n-hMin-_ier fnr Gvfil Aviatinon should, either person-ally orthrough a senior subordinate, be one of the Governmnent's members on the ]3oardsof the varinous public and private aviation corprinrtirn in which the Glovern-ment is now participating. The Sub-Iinister need not necessarily be an expertin rivil nvintionn- bht sholrd have an uinderstarding onf and ahility to dealwith the braod spectrum of technical, legal, economic and financial mattersthat are invnIvTar in civiril avial.-c H tnfef shq1rl.d noit be larg__ blt

consist of a sm 1l group of highly qualified and experienced aviation orientedpnersonnrel Tho, wTtullld be ca-n-,Wl- o'r -through the- i -e.i :in

the field.

xxiii. Among his taska should be to review the terms of reference for thevarious -omm-s sc4on" G.ovircArnmnt. cies andA fnvernment c o n And make

recommendations for such adjustments as may be necessary to provide fo-radequate cooperation be ween the gro's whilO- at the s..e time, clealydefining the primary responsibility of each. Thereafter, the Sub-Ministersnould, either directly or through -mon:Ltor- g okffcls, ensure that each.group retains adequate authority to enable it to meet its assigned responsi-bilities.

- 64 -

XXYiii. Ui-der the general direction of ths Techrical Consiultative Conmittee,the "Conision de Baneacion de Aeropuertosi should be made responsible for thegeneral planning not only of rewT^ airports and extensions -to e A airnorts,but also for all related investments such as comraunication and navaid in-stallations, airwzays systems -nnro t-ructres This will, no doubt,entail a broadening of the Committee's base to include membership from otheragen.cies in the sector or from those affected by aviation operations suchas Tourism. The Airport Plarning Comniss-ion Is first task should be a generalre-rWr of- +the r exis s i s+pm rd ans so as +r esta-bn4 lJ sh proper priorlt +efor a technically efficient and time-phased further developrmient. This work,4it is- -ugstd --,roal A. 'd be entrulsted to 'I 4-rene 4ors --in4-U -Lo 1, JIVLU~VL.Y '.LWLLLU~ UV uJ i L' -t) Caii 'Aj_± L14u. UOi _U.L. .U.

firm under terms of reference prepared by the Cormmission but agreed by a sub-s uantiaL r,iaJoritLy of the aviation sectLor participar,ItU aU U belneiclJ ieU.U Th

study should cover all regulatory, infrastructure and flight operatiornspuects. It is probabe that the reviewt t wil identLU iy the need for-- more de-

tailed studies in, for example, development of an air cargo industry; revisionof the dorimestic route and fare structure; greater use of cormmon ground faci-lities by the h'exican trunk, operators; consideration of a single flag carrierin the international field and possible establisae.ent of a Latin Americanairlinie, or an, airline group with 1lexican participation, and the expansionof the present Centro interrnaciciiai de Adiestrazniento de Aviacion Civil (CTAAC)to provicle for all phases of civil aviation training not only for Mexico butfor Latin hrmerica.

xxdxiv. In general, a further major capital development prograrmi for thecivil aviation sector should awfait the reccirmendations likely to arise fromthe investigations suggested in the previous paragraph. Certain activities.how,ever, twill benefit frcm a rnore jimmediate handling of four particularproblems:

(a) At present airport master plrnning and design is carried outeither by SOP or ASA almost entirely with their own staff.While the staffsof both agencies are well qualified -tech-nically, they are shor-t on experience in dealing with theoperational complexities of modern airports that have todeal with very large volumes of passenger, aircraft andfreight movements. It is recoyamended, therefore, that amuch greater use be made of qualified international con-sulting organization-s to assist in preparing any masterplans, especially for Piexico's maicr airports, azd indeveloping design criteria, particularly with respect tothe terminal area requirements.

(b) The twio truink arriors Aror.rnaves Lnd iIlexricana. sholmid beencouraged to initiate a joint study on the feasibility ofanhieving greater use of' rmnlTerrial ground facrities suic.has ground handling at airports served by both carriers;,joint overhaul facilities and stores, taking into ancoulntthe different types of aircraft inrvolved; cormon flightkitchen facilits .d jOAillt icouter,+e oh+ oe--rtion+jsr

and reservation facJI it.+,es. The fnll support of Govern-ment should be given to the i.iplermentation of any ensuingrecommendations. The technical and economic implicationsof a single flag carrier on international routes to achieveeconomies should be reviewed as part of this study.Responsibility for final reconmendations in this respect,however, is probably better entrusted to a group representingneither Aeronaves or IPiexicana.

(c) .Aeronaves is burdened with an overwhelm,ing debt structure-that nfffnts tlhe Pff'fi'h vncv of its otherwise cnanahle

management group. It seems obv:ious that some basic:inYest-m irt TnAiri.apren-nnr nrrd qHTni-n.trn'HvP fnnili ities

are being deferred in an effo'rt to make debt service pay-menrts. Less efficiernt operations than +he managementis capable of result because of its understandable reluc-

recognizes the need for new or improved facilities. Asaprelud t o +he j;oint stud, - recom=mended >i()aoe~ jJ.L J. L U' U j4 J .L~ U V uU"IY 4. -"I kw LJ ~J'WV~_

Aeronaves should be recapitalized and placed in a moreequitabUle fiancia.l status to pen11t it to properlyrealize its full potential in a highly competitive field.

(d) 'rhe domestic fare structure is irrational in many respectsand produces some strange anomalies. The airline usermay be faced with the choice of delaying his trip or payingadditional fare to ride the alternate airline. A routeand fare structure study should be initiated at an earlydate to resolve some of the anomalies and to put fares ona cost reflecting basis. Such a study would be a properfield of enquiry under the proposed new Sub-Iinister forCivil Lviation.

xxxv. Mexico's civil aviation sector has, with some minor exceptions, bothithe agenc.es and qualified manpower to implement effectively and efficiertlythe National Aviation Policy. The primary need is a strong coordinator ableto direct and inspire the existing organizations to fulf-ill their terms ofreference in full cooperation with the rest of the sector. If a well quali-fied man can be appointed to the recormmended new post of Sub-N.riister forCivil Aviation., and be given full Governmental support, a much more eff:icientcivil aviation system can be achieved.

- 66 -

VII, UTRBANI TRA,'TSPr)-'T

i= Over much of the world uirbnn traffic congestion has become a sericuedomestic problem of the 20th Century. It is particularly burdensome in thelarge) nniirn- l y gp'rs,.rcT -et+o i 4 ci of developing co 'n+ s. In

absolute terms, these cities cannot easily face the high costs of the traci-tiona' solu of r-Pwna 4- ,rbi c by ri-1 u rb ar.n fre-wayconstruction. Nor, in relative terms, can the Governments easi'ly contemplate4-1,e -'location of large =st s-atisf hdmns 4of sat'1 -o'r ativ'ULa c"_ dJ UUdU U UJ. ±dL U II UU _D. UI±A UVZ111.U.LUO VU± L '3111J 1, ~,UIII}JJ dIL V-LVq,

richer, car owning minority when large groups of the rural population havenone or or'y a b are M_i.ilmlu,li Of the DasLu ±iL1aL1Ldr and soia s^ wui± Ur-vicesusually found in urban areas. The economic returns from many urban transport11 Iuvioeinauls - whv1'iic art-e ofe Ueiti te savings - appear less tan gible and -urgentto decision makers than investmnent in agriculture or industry. Nevertheless,cnational pride is one rionng other iurenti-ves for thern to in-vest heavily intransport in the capital and other major cities.

ii. In Mexico, this general transport problem and resource allocationdilerma is ccz,pounded by the physical environment of Iiexico City. It iiesin a valley surrounded by mountains which make outward expansion expensiveand, in some directions, impossible. Problems of subsidence and the need tostrengthen structures against earth tremors make upward building of the cityand underground construction costly. Finally, because of its location, veryhigh costs are involved in providing the extra water supplies and increasedsewage facilities needed.

iii. Despite the rising costs of providing for a growing population,Mexico City continues to increase in size. Its population has grown at over5-0 p.a. for the past three decades and there is little sign of it slackening.About one-third of the present 9 million people in the i4ietropolitan Area(i.e. in the Federal District (7 million people) and in the immediate suburbslying within the State of Mexico) were born elsewhere in Mexico and havemigrated to the area. Present evidence suggests that even if there was nofurther net immigration to the area, the total population as a result of nat-ural increase trends would rise to about 20 million byr the end of this century.'/

iv. Cutting off migration into the area does not seem administrativelyor politically feasible in present circumstances. In addition, strong economicforces seem likely to maintain a high attraction rate to the area because ofits dominance in the Mexican industrial manufacturing scene. Only two citieDs.Guadalajara and Monterrey look as if they could act as counter-magnets in theshort run. NTevertheless, and although their populations are growing slight:Lvfaster than Mviexico City's, their presently much smaller absolute size (about1 million people) makes it seem unlikely - in the absence of drastic measures -that they will shake the dominance of the Mexico City Mietropolitan Area forsome decades. It is unlikelvy therefore. there will be in eayv or earlvrelocation of capital and human resources. A slo-ing dowm in the rate ofePnnomio gvornwh in Texico City is Pnqn y -a srimi posibility that

1 / There is little sign of a declinrng birth rate and no expi cit policyto bring this about has been announced.

- 67 -

needs to be recognized by the authorities. Ihether this will affect the totalIiexical economy seriously will depend on how far output and productivityincreases elsewhere to compensate it.

vs Thus the most probable prediction is that M4exico City will continueto grow rapidly but, because of traffic congestion and problems of water supply,se-age and subsidence: a) the quality of urban life will fall and b) publicsector expenditures and social costs will rise quickly.

vi. The urban transport problem, therefore, is but one element in thelarger problem of trying to achieve an efficient economic and social function-ing of an urban population of perhaps twice the present size within 25 years.This will need clear answers as to the size of the Metropolitan Area, theshape it should take, the extent of public and private transport and theamounts of above and below ground transport.

vii. A plan for the overall growth of the Metropolitan Area could3 easethe problems. This should be at two levels. At the national level. it isnecessary to consider the national problem and develop a program to make otherlarge cities and tcwrns good substitutes for Iexi eo Citvy so aS to eneouragemigration there. Practically, this means choosing a package which a) gets abalance of cror+th between riainlv Guadnlajara and Mr 1onterrey nnd other townsat a distance from Mexico City; and b) develops areas, e.g., Toluca in theStMae of MeVico on the other sl deof the moulntins, that are near enoughto Mexico City to become parts of a greater Metropolitan complex and thusbeneflt from, annd complem.,ent some of U.-e industril and specialized activitiesthere, At the city level, it means choosing a strategy of expansion for theimmediate j rexico Cityarea wThi.bch fully +es illtO acco-t +he pravate ndpublic sector costs of alternative policies and patterns of development

working on various aspects of the problems. In addition, the administrative11nA M-rvil,41 eor onvrrn hc- AJ 0 v. no 4 r-...-A-n

4P4- a an.-.,vc

"d ci.1 service~ ..ac,iney c be lecisive in ensuring actio.LnJL UJ.e D.o

have been made. Planning at present, however, is fragmented. It must bep. I 'I eA +0og+1vr and br1og-h, rn-ere

4-- +e politic p4--1 o 4-s, -04- J lt can.

jLAL.Av.~4 V'..~ - O.LJ '-'4. ' .'.4 V U .U. ... J UJl jJ±.L UL%,±Cd. jJJ. t'_0 Z) U tALdi, ~.1. L' C

generate rational, financially and economLically costed and politically feasibleI1 U..+ ; 4_ -u + 1, - A 3 - 4-4 __ __ A- __

;U.L'L UL-Lon, LV.J L11XC JV J dU.L C ea .L %J .J L %''4i-bLU±i I11LQeS'.,

ix.A. 1±dL t~ is~ one 4J.L J fdactor ini i±e±ring to achieve the beus

pattern cof growth. The costs and tine involved in travel are importartdeterminwants of net benefis of one a,ler-atiue pattern against another.To test the economics involvTed in the alternatives, experience elsewhereindicates that Land use and transport modelling atudies will be needed in

lMexico on a scale not yet contemplated by the authorities. Ilhat is neededis to develop the traditional models designed for U.s. and EuroDean c:ities,but with much more emphasis on land use, regional anaL sule broad economic plan-ning aspects of the problem. There are many able people in Mexico who couildform teams to do much of the work. They need expert support, hotlever,, frolmoutside both to avoiddupli cating the mistakes made elsei-here but to benefifrom advamced thinking. lianding the work over to foreign consultants is

- 68 -

neither necessary nor desirable in M1exico. E.peri-ence elsewhere in majorurban studies suggests that a total reliance on the use of foreign consultantscan result in a situation where a) it does not leave behind an adequate"memoryy" or learnLing experience; b) there are serious difficulties in adantingthe usual models because of a lack of appreciation of local conditions andsocial motivations7 and c) an adenuate consideration is not. given to nlter-natives because of either a presumption of massive expenditures on freewaysor a nre iudice in favor of mibwunvs. The best, sol util on in Mv exio wonild seem

to be a high level, quasi-Governmental commission that would sub-contractsome or parts of the numerous studies needed to donestic anri foreign firmesand expert individuals.

x. In addition to the above overall strategic questions, there are anmh-qer of in.nyrtant tac-tic-_al ones~ that needl ex--^-at-o-:

(1)~rcf'4mic+ T Te town of ,4 -. 4,v, i to th 4s o he

international airport and entirely within the State oflexico, has grownL fro almost nothing to 600,000 peoplein 10 years. This was cormpletely unforeseen and unplanned.

T}nLe tovr s t+whout Le most. elrntr P tb evcsV'V ~ ~.~ ~ V~~J. V V~ 1~It1U. J.L jUU.L J~b

It is not, holwever, a slum ("barrios") as fournd elsewherein T at -4 - AUJ.4±- . Tt4 VZ LUU -1-4 i1habit.1-its 4 r EU

have a sense of community pride anid self-help. It is anexanlple, however, of -wh.at Ifl'ig be eU.peetedl to be repeatedelsewhere in the area with unplanned gro-,th. The StateGovernment haas liriaginatiVe pl ns to supply services at acost the inhabitants can afford, wv.ith subsidization. BytiLs m111e1as tih is littl .LiKlood tha-T Tthe improvements

proposed will lead to the "richler" poor displacing the'poorer" poor whLTo now live there, and has happened else-

where in the world. How to provide reasonable public ser-vices without a subsidy to very poor people is a worldwidequestion. Accordingly, what is being planned for thistoi-m seems worthy of foreign fin.ncial support not only inits own righ-t but as a case study for the benefit of othernations, particularly in Latin America.

(ii) The new^ MIetro authority in Iiexico City is dycanaic andarnxious to extend its newly constructed system. This makessense, however, only in terms of a plan whidch will look atfreeway construction and rising car ownership. lere againwould seem to be an excellent opportunity for the author-ities to test the effect of a ne- Petro on a city beforeapproving any extensions in Liexico City or newf systems inother towns.

(iii) As in many Latin P ierican countries, the bus system isprivately omned (perheps 3,00 individunls) and apparentlyprofitable. But the vehicles are often dirty, servicesslow and routings tortuous. The system has to adapt to achanged role not only because of the new Metro but because

- 69 -

the city is growing, the inhabitants are travellinglonger distances than found in many other cities. andthere are groups who could pay higher fares .or improvedservices. Among the basic questions that need examina-tion is that of "municipalizing" or aggregating owner-ship into larger groups or comnanies; the effet of thepresent system of controlling entry into the industrynnd keeping its fnres at nn ex-eptionanlly low level.!ithough some imaginative exercises are being done withoutpublic support at the Polyecehnic to~ identify betLter busrouting pattenis, they are in need of additional data andfinancial support to produce e.-ly res-ts. In. the ,-=sion's view a thorough high level policy review should becolAsidleredo ±l,.-; would iUnc]ude -4 economics dr.I d.org-

zation of bus services and of their partial substitutes(tadAiLSI, par`icu.lJarl whe1 "pese ! or-l LiLU f Vuui, uol-±

lective taxi s. This review could possibly form the basisfor a subsequent pre-irlvtUaLtetlU study designed to assessthe need and financing of bus purchase requirements.

(iv) A basic inconsistency that must be reconciled in 1IexicouCity is between tLe current policy of attempting to pro-vide more parking spaces and a belief that some fo.-n ofrestraint is needed over car use to alleviate the socialcosts of congestion, pollution and the financial feed-back effects on the finances of public transport. Theneed for a gasoline surtax has been discussed earlier inpara. xlii., Chapter I!I. The possibility of a "roadpricing" solution is being given increasing attentionoutside Mexico, particularly, for example, in the U.K.The possibilities offered by such a solution should beinvestigated by the f_exican authorities, taking intoaccount the broader national road user charges implications.

(v) Traffic engineering still offers the possibility, at lowcost, of increasing street capacity in Mexico City. Moreand better qualified staff are needed to introduce improvedtechniques. The functions should be separated from theTraffic Police.

xi. In short, there are many facets to the Ilexico City urban transportproblem. There is a need to tackle them in a coordinated, more professionaland scientific way. Substantial investment proposals will be needed coveringthe Metro, beltways, freeways, more housing and new town construction. Thesewould be easier to appraise, and the economic and social costs of alternativeactions identified for decision makers, if the large number and variety ofstudies described in the full report were undertaken. Although, in total,they should take three to five years to complete many could be structured toproduce useful information for decision making at earlier stages.

- 70 -

xii. Finally, in the mission's view a close partnership between the Bankand the different authorities in the Metropolitan Area could be constructiveand fruitful:

(i) there is a need to develop appropriate methodologies forurban studies in develoning countries since much that hasbeen done so far has not been successful;

(ii) a particular aspect, for example, is to improve the returnsfrom i nTrPestlent in freewa-s nnd mass tr.-nqit - 1'iexi coGitywould seem a particularly suitable case since it is complet-ing a new Tflptrn nnfd niiyn,-roiis Tprnnnqq!'s i-- beni no, -made Plse-

where in the developing world;

(iii) the various adnmnistrationls involved are well equipped totackle the issues ser,ously anId, because of the gravity oftheir own- problem, are concerned;

(iv) there are many people in and out of Government who havesrome of the skills &nd ina g-inatioun r ev . anv d th+ere is-

some excellent data so the efforts will not have to start

Al_L v i ± llLLbOOlUl i U;Vli: 1 s Ui1m dU ±1 U1LB r1JU11 dU J u11Wc in bJ~' ' U bUut

studying and tackling the urban problens of MIexico City in a deliberate wTaynot orly co-A 44 i lay the -ouUUdU.LUU for a possibl.y soul,d ±Uei^natioIL con-sulting and advisory business but also maice a major contribution to an under-standing and solutlon of the gro-w-ing uurban probItrns elsewhere.

fl1ThEX A

PREAMBLE uF 14-15-16 iiA m3'H Ii

(CHAPThR 69)

"i'.n Act to Define and Implement a National Transportation Policy for Canada"

It is hereby declared that an economic, efficient and adequatetransportation system making the best use of all available modes of transpor-tation at the lowest total cost is essential to protect the interests of theusers of transportation and to maintain the economic well-being and growth ofCanada, and that these objectives are most likely to be achieved wfhen allmodes of transport are able to compete under conditions ensuring that havingdue regard to national policy and to legal and constitutional requirements:

(a) regulation of all modes of transport rill not be ofsuch a nature as to restrict the ability of any modeof transport to compete freely with any other modesof tran.sort

(b) each mode of trnsnnort. s o far nn nraMcti cabl e hbearsa fair proportion of the real costs of the resources,facilit,ies ind cer,nrces rwovided that. mnories of tr-ns-

port at public expense;

(c) each mode of transport, so far as practicable, receivescom.pensation for the resources, facilities and servncesthat it is required to provide as an imposed public duty;

(d) -.G mode of ta.or,so -a as --ciohe testraffic to or from any point in Canada under tolls andconditions thatv An r.ot consti tute:

any such traffic beyond that disadvantageJU.: .-Z± U ±1 'I JAUc,± -U VtJLUM4-UJ. L -i.luerent- in -1-e -location or vol'a.e ofL .he

traffic, the scale of operation connectedWel-erW±v.,± or- the t1L,Yj Uo4 UaLL.L4e.± or- ser-vice involved, or

(ii) an undue obstacle to the interchange ofconmodities between points in Canada orunreasonable discouragement to the develop-ment of primary or secondary industries orto export trade in or from any region ofCanada or to the movement of commoditiesthrough Canadian ports.