Mexico - Rio Sinaloa Irrigation Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No'--281-ME APPRAISAL OF THE RIO SINALOA IRRIGATION PROJECT MEXICO November 14, 1973 Latin America and Caribbean Regional Office This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Equivalents Currency Unit = Mexican Peso (MNx$) 1 Mex$ = US$ 0.08 US$1 = Mex$ i2.5 Mex$ 1 million = US$ 80,000 Measures mm. = millimeter (1 mm = 0.039 inch) m = meter (1 m 3.28 feet) km = kilometer (1 km = 0.62 miles) ha = hectare (1 ha 5 10,000 m2 = 2.47 acres) km2 = square kilometer (1 km2 = 247.1 acres = 100 ha = 0.386 square miles) m3 = cubic meter (1 m3 = 1.31 cubic yards 264.2 US gallons) Mm3 = million m3 (1 Mm3 = 811 acre feet) kg = kilogram (1 kg = 2.2 lb) ton = 1,000 kg = 2,205 lb Abbreviations SRH = Secretaria de Recursos Hidraulicos (Ministry of Water Resources) CRF = Comision del Rio Fuerte (SRH Executive Commission dealing with the Rio Fierte) CAADES = Comfederacion de Asociaciones Agricolas del Estado de Sinaloa (Confederation of Farmer Associations of the State of Sinaloa) DAAC = Departamento de Asuntos Agrarios y Colonizacioan (Department of Agrarian Affairs and Colonization) FONDO = Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicultura (Fund in Central Bank to provide agricultural credit) SAG = Secretaria de Agricultura y Ganaderia (Ministry of Agriculture and Livestock) PLAMEPA = Plan de Mejoramiento Parcelario (SRH group providing intensive extension service) CONASUPO = Compania Nacional de Subsistencias Populares (Government organization guaranteeing prices and purchases of subsistence crops) BANEJIDAL = Banco Nacicnal de Credito Ejidal (official Bank granting credit to ejidatarios only) BANCO AGRICOLA = Banco Nacional de Credito Agricola, S.A. (official Bank granting credit to small private holders and colonists) BANAGRO - Banco Nacional Agropecuario, S.A. IDB = Interamerican Development Bank USAID = United States Agency for International Development Fiacal Year - January 1 - December 31  MEXICO RIO SINALOA IRRIGATION PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ............ ............. i-ii I. INTRODUCTION ..................... 1 II. BACKGROUNT) ........ .............................. 2 General .. ....................................... 2 Agricultural Sector ...... ...................... . 2 Government Policy for Agriculture ........... 3 Agricultural Supporting Services ............. 4 III. THE PROJECT AREA .................... ............ 6 Soils, Topography, and Drainage ................ 6 Climate . ......................................... 6 Population ........ .............................. 6 Transportation, Processing, and Marketing ....... 7 Land Holdings and Tenure ........................ 7 Present Use of Project Lands .................... 8 Present Irrigation Works ........................ 9 IV. THE PROJECT ..................................... 10 Description ..... 10 Water Supply, Requirements, and Utilization ..... 11 Status of Engineering ...... ..................... 12 Cost Estimates ....... . ........................... 12 Financing ....................................... 14 Procurement ..................................... 14 Expenditure Schedule ...... ...................... 15 Disbursements ................................... 15 Advance Contracting ............................. 16 Accounts and Auditing ... ........................ 16 V. ORGANIZATION AND MANAGEMENT ................. .... 17 Administration .................................. 17 Operation and Maintenance .................... ... 17 Agricultural Services ...... ..................... 17 Water and Development Charges ................ ... 18 This report is based on the findings of two appraisal missions. The first, composed of Messrs. J.C. Douglass, J.J. Schul, and A. Anir (IBRD) and A. Cornejo (consultant), visited Mexico in December 1972, and the second, com- posed of Messrs. J.C. Douglass, R.R. Rossi, and A. Amir (IBRD) and H.R. McDonald (consultant), visited Mexico in May 1973.  TABLE OF CONTENTS (Cont'd) Page No. VI. PRODUCTION, MARKETS, PRICES, AND FARMERS' INCOME 19 Production ...................................... 19 Markets and Prices ............... ............... 20 Farmers' Income ....... . ......................... 21 VII. BENEFITS AND JUSTIFICATION . ...................... 24 VIII. RECOMMENDATIONS ....... .......................... 26 ANNEXES 1. Bank Loans for Agricultural Sector in Mexico 2. Soils and Topography 3. The Ejidal System, Water Law and Land Tenure 4. Project Works 5. Construction Schedule 6. Water Availability, Requirements, ITtilization, and Quality 7. Cost Estimates 8. Equipment and Materials 9. Expenditure Schedule 10. Schedule of Disbursements 11. Operating and Maintenance Costs 12. Agricultural Services 13. Project Projections on Crops, Areas, Yields, Farmgate Prices and Cost of Production 14. Cropping Pattern, Production, Production Costs and Incremental Value of Production 15. Detailed Labor Requirements and Production Costs 16. The Outlook for Cotton 17. Marketing and Prices 18. Farmers Income 19. Economic Evaluation CHARTS 7434 Organization of SRH 7435 Organization Commission of the Rio Fuerte MAP 10307 Rio Sinaloa Irrigation Project  MEXICO RIO SINALOA IRRIGATION PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project for constructing an irrigation system to serve about 100,000 ha on both banks of the Sinaloa River in the State of Sinaloa. The Government has placed emphasis on irrigation as a means of in- creasing agricultural production and to assist in applying agrarian reform programs. About 4.2 million ha are currently irrigated. In the project area, water is the single most important input to insure crop production. ii. The project would involve construction of a dam and reservoir to store surface flows of the Sinaloa River. The surface water supply would be augmented by use of groundwater. A second dam would be built to divert water into the irrigation system that would serve both banks of the river. Drains would be constructed to remove surplus water and the road network would be extended. Lands requiring it would be cleared and all lands would be smoothed or leveled. Equipment would be purchased for operation and maintenance and installation at the dam. An intensive four-year extension service program is included as a part of the project. Construction would take about five years and full agricultural development would be achieved in about the eighth year. iii. The total cost of the proposed project is US$145.6 million, inclu- sive of interest on the Bank loan during the construction period. The pro- posed Bank loan of US$47.0 million would cover the estimated foreign exchange cost (US$46.3 million) (including the estimated interest on the Bank loan during construction (US$6.0 million)), and one-half of the estimated cost of the four-year extension program (US$0.7 million). The remaining costs would be met through Government budgetary allocations. Civil works except for smaller contracts which because of nature or timing, cannot rationally be included in the major contracts, and purchase of equipment would be on the basis of inter- national competitive bidding in order to be eligible for financing under the loan. Contracts for land clearing and leveling, would be awarded to groups of small farmers. Disbursements would be made as 38% of payments to contractors for civil works, land clearing, and leveling, and as 50% of costs incurred by the Government for extension services. Disbursements for equipment purchases made under international bidding procedures would be at 100% cif. Disbursements for interest would be based on actual cost. iv. The Ministry of Water Resources (Secretaria de Recurdos Hidraulicos, (SRH)) would have responsibility for constructing, operating, and maintain- ing the project and for providing extension services. The Ministry of Agri- culture would assist in the technical aspects of the extension service, and  - ii - the Department of Agrarian Affairs would be responsible for choosing and es- tablishing ejidatarios 1! for the project. Normal banking channels would provide the credit requirements. v. The net value of production in the project area would increase from US$3.5 million annually to about US$29.5 millon, as measured in average 1971/72 farmgate financial prices. To achieve this production, approximately 15,500 man-years of employment would be required compared to 3,200 man-years without the project. About 2,300 individuals would be given the opportunity to become new ejidatarios and approximately 10,900 ejidatarios now living on the project would improve their lot. The average net income of the ejidatario would increase about 10 times, and that of the private smallholder about the same. The economic rate of return to the economy would be of the order of 17%. vi. The project is suitable for a Bank loan of US$47 million for a term of 25 years, with a grace period of five years. The borrower would be Nacional Financiera, S.A., the Government agency empowered to contract for external financing. United Mexican States would guarantee the loan and carry the ex- change risk. 1/ Ejidatarios are members of ejidos (communal farms),  MEXICO RIO SINALOA IRRIGATION PROJECT I. INTRODUCTION 1.01 The Government of Mexico has requested a Bank loan of US$47.0 mil- lion to help finance construction of the Sinaloa River irrigation system to serve about 100,000 ha in Sinaloa State. The loan would be made to Nacional Financiera with the Government of United Mexican States as Guarantor. Four previous Bank loans, totaling US$71.5 1/ million, have been made for similar works as well as four loans, totaling US$275.0 million, for agricul- ture credit. Progress on these projects has been generally satisfactory although cost overruns due to particular local conditions have occurred on the last two irrigation projects. An overall performance evaluation is given in Annex 1. 1.02 Secretaria de Recursos Hidraulicos (SRH) initially prepared the project for construction in two phases under separate financing. The first phase involved irrigating 40,000 ha on the left bank using a water supply derived from the uncontrolled flows of the Sinaloa River, supplemented by pumping from groundwater, while works in the second phase included construc- tion of a storage reservoir on the Sinaloa River and development of the right bank area. In December 1972, however, an appraisal mission determined that the two phases should not be separated. First, the river's highly irregular flows would not provide a dependable water supply for the first phase in isolation, and, second, the full project is dependent on complementing the controlled surface supply with groundwater withdrawals. Additional studies were therefore required before the integrated project could be appraised by a second mission. 1.03 This report is based on studies prepared by SRH and by their con- sultants (CIEPS for Bacurato Dam and SITA for analysis of the integrated proj- ect, both of Mexico City) and the findings of the two missions. The first mis- sion was composed of Messrs. J.C. Douglass, J.J. Schul, and A. Amir (IBRD) and A. Cornejo (consultant). The second mission, in May 1973, included Messrs. J.C. Douglass, R.R. Rossi, and A. Amir (IBRD) and H.R. McDonald (consultant). 1/ Loan 275-ME in January 1961 for US$15 million; Loan 336-ME in April 1963 for US$12.5 million; Loan 450-ME in May 1966 for US$19 million; and Loan 527-ME in January 1968 for US$25 million.  - 2 - II. BACKGROUND General 2.01 Since 1960 Mexico's overall economic performance has been impressive, with GDP growing at an average annual rate of 7% and inflation being limited to about 3.5% annually. Despite this, Mexico is faced with the triple prob- lems of a rapidly increasing population, uneven distribution of wealth, and relatively limited agricultural resources in relation to its size. The total population is just over 54 million, of which 21 million (41%) live in the rural areas. With an annual rate of increase of 3.4%, the population is likely to be 100 million by 1990. Income distribution is highly skewed, with the top 10% of the population, in 1969, commanding 51% of disposable income and the bottom 20% only 4%. There is also a marked disparity between urban and rural incomes, for, whereas the average per capita GNP for the country as a whole was US$670 in 1971, in the rural areas, it was less than US$200. Nor is the pattern of land use very favorable. Out of a total area of nearly 200 million ha, only 35 million ha is potential crop land, of which about 16 million are presently cultivated including 4 million under irrigation. It is estimated that about 12 million ha is suitable for irrigation. The Mexican Government has given agricultural development in general, and irrigation development in particular, priority, particularly, as such development is a suitable vehicle for extending agrarian reform. Agricultural Sector 2.02 Although agriculture's direct contribution to GDP dropped from 25% in 1950 to 11% in 1972, it still plays a major role in the Mexican economy. Approximately 39% of the labor force obtains its main income from agriculture and, in 1972, the sector contributed about 50% of export earnings. The target now is to sustain this export level while, at the same time, producing enough food to meet the demand of a rapidly growing domestic market. 2.03 From 1961 through 1965, agricultural production increased at an aver- age rate of 4.7% per year, but from 1966 onwards, it dropped to about 2%. For major staple foods, the poor performance is considered to be largely the result of unfavorable climatic conditions and no permanent shortages are forecasted. For livestock products, fats and oils, and fruits and vegetables, however, production has continuously failed to keep pace with demand. This situation is reflected in the market prices at farmgate, which exceed Government guar- anteed prices, and in consumer prices of these products, which, since 1966, have increased faster than prices in general. Government has recognized the seriousness of the situation and lists the achievement of production increases among its main objectives for the agricultural sector. The main constraints on agricultural development are the limited cultivable area, a shortage of water, and lack of access to technical assistance, long-term credit, and farm inputs for a large number of producers.  - 3- Government Policy for Agriculture 2.04 Production Objective. Mexico is facing two major problems. The first is to keep pace with the growth of demand for agricultural products and the second is to correct maldistribution of income. Since the majority of the population is located in the northern part of the country where rainfall is low, Government has emphasized irrigation as a means of increasing production. Irrigated areas have tripled since 1950 and in 1970 covered 4.2 million ha, producing 40% of the total agricultural production value and 60% of the total crop output. Ilowever, if population continues to grow at its present rate and productivity trends do not improve rapidly, Mexico will face a severe food shortage before the end of the century. Simultaneously, there is a potential water scarcity that could lead to regional water shortages in the late 1970's. 1/ Although increased attention is being given to settlement and rural development projects, sustained efforts to improve land productivity through efficient use of irrigation will be necessary if Mexico is to achieve its agricultural pro- duction goals. 2.05 Distribution Objective. The second big problem facing Mexican agriculture is maldistribution of income (para 2.01). The average net annual family income in Mexico is estimated at US$2,280, but the average net annual family income in rural areas is only about US$860. However, about 40% of the rural families have net annual family incomes of less than US$560. These discrepancies arise mainly from the land tenure system. 2.06 The agricultural population can be subdivided into three groups: landless peasants, ejidatarios, and small landowners. The landless peasants provide most of the seasonal farm labor. Widespread unemployment among the landless has caused massive migration towards the cities. Ejidatarios are members of ejidos, which are groups of farmers. The land remains the property of the ejido and is worked by the ejidatarios individually or collectively. Although the ejidos were institutionalized after the Mexican Revolution and their rights and obligations defined by successive agrarian laws since 1915, their lot has improved very little over the years. Private landowners gener- ally have better access to resources than the ejidatarios, but they often still lack critical inputs such as water, capital, and technical expertise. While private farmers with sufficient land have usually obtained satisfactory incomes, the majority of those with less than 20 ha have not been much better off than the ejidatarios. 2.07 In recognition of the situation, the President of the Republic has pledged to improve the lot of the poorer farmers and the Government has passed two major laws to this effect: the new Federal Agrarian Reform Law and the Federal Water Law. The new Agrarian Reform Law is development oriented. It recognizes the legal status of the ejidos, which makes it possible for ejida- tarios to obtain credit; gives power to the Departamento de Asuntos Agrarios y Colonizacion (DAAC) to carry out land reform; determines the maximum and minimum sizes of farms to be held privately; fixes a ceiling on taxes to be 1/ IBRD is executive agency for a UNDP-financed National Water Plan Study.  -4- paid by ejidatarios; and provides for redistribution of funds from taxes paid by private farmers. Finally, it encourages ejidos to diversify into small- scale industries. The Federal Water Law regulates distribution of water and land in Irrigation Districts in a more equitable way. Under this law, the Government can set up new Irrigation Districts and expropriate, with compensa- tion, all land and irrigation facilities in an area. The law also stipulates the procedure for fixing water charges, requiring that the social and economic situation of individual farmers in each district be taken into consideration. Both these laws provide a good basis for development efforts aimed at helping the less fortunate Mexican farmers. Agricultural Supporting Services 2.08 Secretaria de Recursos Hidraulicos (SRH). In 1947, SRH was estab- lished as a Federal Ministry, directly responsible to the President of the Republic, with wide powers to control and expand exploitation of the country's water resources. Due to Government's emphasis on irrigation, SRH grew rapidly and has now become the main agricultural organization in the country. By 1971/72, it had developed 3.0 million ha under irrigation, or 70% of the country's total irrigated area, the remaining 1.2 million ha being privately developed. Plans are now almost complete which call for new irrigation schemes to be constructed over 800,000 ha and old districts to be rehabili- tated over 450,000 ha by 1976. 2.09 SRIi has, at headquarters level, four main subsecretaries concerned with planning, construction, operation, and administration., but most of its regional activities are undertaken directly by SRH-managed Irrigation Dis- tricts. In five major river basins, however, including that of the Sinaloa River, special executive SRH commissions are responsible for all SRH activi- ties within their areas of jurisdiction and for such other activities as may be assigned by other Ministries of the Government to the Commission. 2.10 The Federal Water Law (para 2.07) requires that each Irrigation District have a Management Committee (Comite Directivo) to advise and coor- dinate operations in the District. This committee is made up of representa- tives of SRH, the Ministry of Agriculture and Livestock, DAAC, the credit institutions and private banks, the National Insurance Agency for Agricul- ture and Livestock, Nacional Financiera (if it so requests), and farmers. One of its important duties is to set the cropping pattern. Private farmers and ejidos submit their individual proposals, which the Committee then com- bines and adjusts to the overall water, technical, credit, and market con- ditions. 2.11 Research and Extension. While little has been done on rainfed crops, research on irrigated crops has achieved considerable success. How- ever, agricultural extension services have been extremely poor. Several Government agencies provide extension services but, except for some irrigation districts they have been spread too thin to have any measurable impact. To compensate for this deficiency, private banks and farm-input suppliers provide their own technical assistance to clients, but their activities have naturally  -5- been concentrated on the most creditworthy farmers, leaving the others without adequate help. In irrigated areas, SRH has set up an organization called Plan de Mejoramiento Parcellario (PLAMEPA) to direct efforts aimed at improving water use on farms that fall below the average efficiency of a particular district. This constitutes an intensive extension effort. Results have been satisfactory, particularly with ejidatarios, because PLAMEPA's assistance is often a condition for obtaining credit from the private banks. The Inter- American Development Bank (IDB) recently granted a US$23 million loan to help finance the first phase of a US$47 million project aimed at extending PLAMEPA's activities over about 1 million ha of ongoing irrigation projects, also financed with IDB assistance. 2.12 Agricultural Credit. Farm credit is provided by both official and private institutions. The Government's Banco Nacional de Credito Ejidal S.A. de C.V. (Banco Ejidal) lends to ejidatarios, the Banco Nacional de Credito Agricola, S.A. (Banco Agricola) concentrates on lending to small-scale farmers, and the Banco Nacional Agropecuario (BANAGRO) lends to any farmer who has tech- nical assistance. About 70% of agricultural lending is by these official in- stitutions and is in the form of short-term credit. Medium- and long-term credit from Government has become significant only in the last few years through the Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicul- tura (FONDO) managed by the Bank of Mexico and has been mostly financed by IBRD, IDB and USAID loans. Until 1972, less than 5% of the most needy farmers had received credit, but Government has since announced its intention to guarantee at least 60% of the amount of the long-term loans made by private financial institutions to groups of ejidatarios or other small farmers. Also, in Bank loan 910-NE, US$25 million has been reserved for lending to low income producers.  - 6 - III. THE PROJECT AREA 3.01 The project area of about 100,000 ha would include lands on both banks of the Sinaloa River below the town of Jaina where the river emerges from the Sierra Madre mountains onto the coastal plain of the Gulf of California in Sinaloa State (see map 10307). About 2,000 ha of the project area lies between Jaina and the new diversion dam at Sinaloa de Leyva. Some 46,000 ha of project lands would be on the left bank of the Sinaloa River below Sinaloa de Leyva between the Sinaloa River and the Arroyo San Rafael and at an eleva- tion of more than 5 m above sea level. The balance of the project area, ap- proximately 52,000 ha, would be on the right bank of the Sinaloa River above the area now irrigated or susceptible to irrigation by pumps from the existing El Fuerte Main Canal. Soils, Topography, and Drainage 3.02 Soils in the area are young alluvial deposits of clay, clay loans, and loams developed from the eroded volcanic rocks of the Sierra Madre moun- tain range. About 70% of the area is covered with a clayish-type soil and the rest with a lighter, sandier type, lying mostly along the stream beds. The soils are fertile, of good depth, generally non-saline, and with good water-holding capacity (see Annex 2). The standards for classification as to suitability for sustained irrigation have been patterned after those suggested by the U.S. Bureau of Reclamation, and over 80% of the land would fall in Class I or II, demonstrating that it is highly suited to irrigation. 3.03 Project lands lie between 5 m and 45 m above sea level and have a general gradient of about 2 to 6 m per km to the sea. The left bank is es- sentially a flat plain, while the right bank area is more undulating in a north-south direction, but no slopes in any direction would exceed about 1%. 3.04 About 800 ha lying at a low elevation in the left bank area are moderately saline, indicating poor local drainage conditions. The balance of the project area, however, has generally satisfactory drainage. Climate 3.05 The climate is tropical semi-arid. Average precipitation isK,40l mm, falling mainly between July and September. Annual temperature averages about 25