Mexico - Second Integrated Rural Development (PIDER II) Project

Report No. 1480a-ME Appraisal of an Integrated Rural Development Project - Pider 11 Mexico May 31, 1977 AgriulIture and Rural Development Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1 Mex$22.5 Mex$l US$0.04 Mex$1 million = US$44,444 WEIGHTS AND MEASURES 1 hectare (ha) = 2.47 acres=10,000 m 1 kilometer (km) 2 0.62 miles 1 square kilom. (km = 0.39 sq. miles = 100 ha 1 kilogram (kg) = 2.20 pounds 1 liter (1) = 0.26 gallons 1,000 kg =1 metric ton= 0.98 long ton GLOSSARY OF ABBREVIATIONS BANRURAL - National Rural Credit Bank BANXICO - Bank of Mexico CAPFCE - Administrative Committee of the Federal Program for Construction of Schools CFE - Federal Commission for Electricity CIDER - Research Center for Rural Development CONAZA - Arid Zones Commission CONAFRUT - National Fruit Development Commission CONASUPO - National Company for Popular Subsistence FIRA(FONDO) - Guarantee Fund for Development of Agriculture, Livestock and Aviculture Hacienda - Ministry of Finance IDB - Inter-American Development Bank INI - National Institute for Indian Affairs INIA - National Institute for Agricultural Research NAFIN - National Financiera Patrimonio - Secretariat of National Patrimony PIDER - Investment Program for Rural Development PRONDAAT - National Program for Extension in Rainfed Areas SAG - the ex-Secretariat of Agriculture SAHOP - Secretariat of Human Settlements and Public Works SARH - Secretariat of Agriculture and Water Resources SOFE - Sub-Department of the Ejidal Development Office SPP - Secretariat of Programming and Budgeting SRH - the ex-Secretariat of Water Resources SRA - Secretariat of Land Reform SSA - Secretariat of Health and Social Assistance FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY MEXICO INTEGRATED RURAL DEVELOPMENT PROJECT - PIDER II Table of Contents Page No. SUMMARY AND CONCLUSIONS ............. ...i - iv I. INTRODUCTION .........1...... e .............................. II. BACKGROUND .....2 A. Development of the Rural Sector. . . 2 B. The PIDER Program 3... . . 3 C. Progress Under PIDER I. . . .. 4 III. THE PROJECT. . . 6 A. General. . 6 B. Brief Description ... 7 C. Detailed Features......... 8 IV. ORGANIZATION AND MANAGEMENT ...... ........................ 18 A. Organizational Levels ............................... 18 B. Evaluation . ......................................... 21 V. PROJECT COSTS AND FINANCES ............................... 22 A. Cost Estimates ....... ............................. 22 B. Financing ........................................... 24 C. Disbursements .... ................................... 24 D. Procurement ......................................... 24 E. Accounts and Auditing ...... ......................... 25 VI. PRODUCTION, MARKETS, FARMER BENEFITS AND FINANCIAL RESUTS ............................................. 25 A. Production, Yields and Marketable Surplus . .......... 25 B. Markets and Prices .................................. 27 C. Producer Income and Benefits ........................ 27 D. Cost Recovery and Fiscal Impact . ..................... 28 E. Ecological and External Effects .................... . 29 VII. ECONOMIC ANALYSIS ........................................ 29 A. Economic and Financial Analysis .... ................. 29 B. Project Risks ....................................... 30 VIII. RECOMMENDATIONS .......................................... 31 This appraisal report is based on the findings of a mission which visited Mexico in July-August 1976, composed of A. Schumacher, D. Lindheim, C. Lindahl, N. Barry, S. Draper, B. Mitchell and R. Skolnick (Bank) and C. Chisholm, E. Cifuentes,L. Jarvis and G. Schramm (consultants). Messrs. Schumacher and Lindheim visited Mexico with J. Austin (consultant) in November 1976. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosd without World Bank authorization,  -2- ANNEXES 1. Development of the Rural Sector 2. Performance under PIDER I 3. Directly Productive Activities a. Development Credit b. Rural Industries c. Irrigation d. Livestock e. Soil and Water Conservation f. Forestry 4.1. Productive Support Activities a. Extension b. Agrarian Reform c. Marketing/Nutrition d. Rural Electrification e. Feeder Roads 5. Social Infrastructure a. Water Supply b. Education c. Self-Help 6. Organization and Management a. The Organization and Management System of PIDER b. The Evaluation System of CIDER 7. Financial Aspects a. Cost Estimates and Investment Phasing b. Disbursement Estimates c. Fiscal Burden and Cost Recovery 8. Economic, Financial and Technical Analysis a. Agricultural Yields and Technical Specifications b. Marketing of Project Output c. Economic and Financial Analysis MAP IBRD 12783 Rural Development Project - PIDER II  MEXICO RURAL DEVELOPMENT PROJECT - PIDER II SUMMARY i. Mexico has requested further Bank support for its ongoing national rural development program (PIDER). PIDER, established in 1973, is one of a number of Mexican efforts to raise incomes and improve living standards of its rural poor. To date about US$471 million has been invested through PIDER in 86 micro-regions 1/, about 1.8% of the total public investment budget dur- ing this period. A further US$700 million is programmed for the 1977-1982 period making the total investment about US$1.2 billion over the full 1973- 1982 period. A considerable number of the approximately 4 million persons who live in these regions have already benefited directly or indirectly from PIDER investments. The Bank PIDER I Project (Loan 1110-ME) provides US$110 million in support of development programs in 30 micro-regions; an IDB loan provides US$40 million in support of a further 15 micro-regions. Disburse- ments from these loans financed the equivalent of about 12% of the PIDER budget in 1975 and 1976. The second Bank loan now proposed would raise the level of external support to the PIDER program to about 25% over the 1977- 1979 period. ii. PIDER was initiated as part of a wider Mexican effort to address the economic imbalances created during the past decades. Mexican agricul- ture achieved a 4% annual rate of growth between 1940-1965 - among the high- est in Latin America. Since 1967, however, the growth rate in agricultural production has slowed markedly to about 1.8 percent per year. Even during the period of rapid growth, the bulk of the rural population was little affected. Most growth came from larger farmers, many with irrigated holdings, among whom agricultural investment and services were largely concentrated. The productive potential of smaller producers especially those farming rainfed plots in more isolated areas, was largely ignored. The PIDER machinery was created to integrate and expand government rural development activities to develop this smaller producer potential. Actions under PIDER now encompass productive infrastructure, credit, inputs, extension, all-weather roads, and marketing facilities, together with education and other amenities, such as safe drinking water supplies. The basis for investment programming is a micro-region plan. Eighty six plans are currently being implemented, a number expected to increase to 100 by the end of 1977. iii. PIDER has been instrumental in securing considerable institutional change. A major accomplishment was the reform of the agriculture extension service that PIDER succeeded in introducing in its micro-regions. This re- form is now being institutionalized as a pilot program for the entire Mexican extension service. Further institutional reforms include: strengthening of the federal level Secretariat in which PIDER operates; decentralization of resource control to the state level; improved inter-agency coordination at 1/ Micro-regions comprise an average of 50,000 persons located in two to seven contiguous rural municipalities within a state. They are selected using criteria that balance poverty levels (per capita incomes averaging below US$100) with potential for income increasing productive activities.  - ii - the local level; the creation of a professional evaluation agency (CIDER); and the increasing participation of local communities in the investment decision-making process. PIDER has also supported various technical inno- vations designed for small farmer use including trickle irrigation systems (with buckets), maize silage storage units, and small stock programs. iv. Despite PIDER's early success, there is scope for improvement. PIDER management and staff are aware of the deficiencies and are taking actions to remedy them. The Bank has established and maintained an effec- tive dialogue on the PIDER program through project preparation of PIDER I and PIDER II and through supervision of PIDER I. The proposed project would strengthen the basis for this dialogue with the new Administration and help introduce a number of further reforms in PIDER. v. The proposed project would help finance programmed investment and associated requirements in some 20 micro-regions additional to those 30 whose development is already supported under PIDER I. The programmed investments, and the development plan for each micro-region, were prepared by PIDER for Bank appraisal. The scope of the proposed project is in line with support provided under PIDER I; however, a rural industry element has been added. For institutional reasons, and poor performance under PIDER I, it is not proposed to support investments in the rural health system under this PIDER II project. The major part (70%) of the project would be channeled into productive investments in livestock, irrigation, rural industries, fruit production, soil and water conservation, and associated farm development credit. Support would also be extended for the development of feeder roads, markets, extension services, electrification, and farmer organization efforts (20%). Investment in social infrastructure (9%) would include construction of primary education facilities and drinking water facilities, and provide materials for self-help projects on a local initiative basis. The Project would also include evaluation and training of project management. vi. The project would be carried out by some 14 federal and state agencies. At the Federal level, PIDER policy is developed and coordinated through the Directorate of Promotion and Regional Operations of the Secretariat of Programming and Budgeting (SPP). This Directorate is supported by a Sub-Directorate for Rural Development (i.e., PIDER) with a staff of some 95 technicians responsible for: reviewing investment plans, management operations, and investment monitoring. At the state level, coordination of the PIDER program is handled by a Coordinating Committee consisting of the state level directors of the participating agencies under the chairmanship of the state governor. Management is the responsibility of the new state level SPP representative who is the technical secretary of the State Committee. The SPP representative is assisted by a technical secretariat of professionals including a state level PIDER Coordinator and resident Coordinators for each of the states' micro-regions who work closely with local elected officials and community leaders. vii. Total costs of the project are estimated at US$255 million equiva- lent, including US$46 million of foreign exchange component. The proposed loan of US$120 million would finance the full foreign exchange costs plus US$74 million in local currency, equivalent to 35% of local currency re- quirements. International competitive bidding would be restricted to single  - iii - contracts over US$250,000. Local competitive bidding, negotiated contracts and force account would be applied for individual works below this amount in accordance with established government procedures which are satisfactory. viii. The project would benefit areas with a total rural population of about 1 million. Beneficiaries targeted for project support have family incomes ranging from US$250 to US$750, placing them in the lower 50% in the rural sector. Under the proposed project, about 46,000 farm families would benefit from directly productive activities. Some 32,000 farmers (190,000 people) would be expected to achieve a near doubling of income over a period of eight years. The incomes of an additional 14,000 farmers benefiting from the 34,000 ha to be irrigated would be expected to triple from present levels at full development. Some 200,000 people would have access to improved rural infrastructure; about 65,000 man-years of temporary employment and 30,000 permanent jobs would be created. Annual production increases resulting from project investment have been estimated as follows: maize (200,000 tons), beans (40,000 tons), beef (25,000 tons), honey (200 tons) and fruit and vegetables (10,000 tons). About half of the increment of maize and bean production would be consumed by the producers, the remainder being marketed for internal consumption in Mexico. Typical village development models in representative micro-regions show financial rates of return on directly productive activities averaging 21%, varying from 11% to 33%. Economic rates of return on productive investments average 24%, and from 13% to 36%. Social infrastructure such as schools and drinking water would improve basic literacy and health levels. Beneficiaries would contribute between 10% and 30% of investment costs for the productive investments in cash, labor or kind, 15% to drinking water supplies, and would meet all operation and maintenance costs. Contributions would be made toward the cost of education facilities. In all, some 39% of total project cost would be recovered from beneficiaries. ix. The project has risks. First, while the estimated micro-region rates of return embody reasonable expectations about outcomes, the caliber of state and local leadership and staff involved under the program bears importantly on these outcomes. This conclusion is based on PIDER I experi- ence where results varied between regions. Second, after only two years of experience since program inception, farmer response to the new technological packages is still not definitive. In some micro-regions under the ongoing program, response has exceeded expectations; in others not. Improved field demonstration, closely tied with strengthened extension efforts, would help improve farmer response rates and would be supported under the project now proposed. These risks are substantially reduced, however, by strong management. Experience to date indicates considerable PIDER management capability to respond to problems and to take appropriate actions. Also, CIDER, the Rural Development Research Center, will continue to undertake a substantial evaluation effort. The Government has shown a high degree of flexibility in the execution of the program.  - iv - x. The expanded PIDER program represents a reinforcement of Mexico's commitment to raise levels of living among a relatively large number of rural poor. Major new efforts towards increasing small farmer productivity have been initiated, with PIDER taking the lead in generating improvements in the key agencies dealing with the rural poor. The Government is expected to continue this commitment to improving conditions of the rural poor through PIDER and other rural development programs.  MEXICO RURAL DEVELOPMENT PROJECT - PIDER II I. INTRODUCTION 1.01 The Government of Mexico continues to give priority to raising the productive capacity of many of its 12 million rural poor (per capita incomes less than US$100) who make up over 50% of the rural, and 20% of the total population. Emphasis is being given to making investments in regions where there are large numbers of small farmers and where sufficient productive potential has been identified for raising farmer incomes. A program to integrate and focus agency activity on specific micro-regions of rural poverty is being implemented. This program, PIDER (Investment Program for Rural Development), was initiated in 1973 and is now in operation in some 86 micro- regions. 1.02 Early in PIDER's development (1973), the Government requested IBRD support to the PIDER program. A loan for US$110 million was approved by the Bank in May 1975 to assist activities in 30 micro-regions (PIDER I). 1/ The Government has now requested a second loan to support activities in an addi- tional 20 micro-regions (PIDER II). With this loan, a total of 65 micro- regions would be receiving external assistance. The Government would continue to provide the major resources required, however, as external support provided by the IBRD and IDB covers only a small proportion of the PIDER program's overall costs. PIDER's 1973-1976 total investment was US$471 million of which external agencies provided US$30 million or 6%. For the 1977-1980 period, with the Project, the external share in the overall PIDER program would rise to about 25%. The IBRD share in the 1973-76 program was 5.7%. For 1977-1980, with the proposed loan, it is projected at 20%. 1.03 Fourteen IBRD projects totalling US$904 million have been pre- viously approved for agricultural and rural development projects; 35% of Bank lending in Mexico. The bulk of these loans have been for the development of irrigation and the provision of agricultural credit. Performance under these projects with two exceptions has been satisfactory. 1/ The Inter-American Development Bank (IDB) is supporting the program in an additional 15 micro-regions.  II. BACKGROUND A. Development of the Rural Sector 2.01 Mexico's efforts to develop its rural areas have featured two major themes in recent decades: growth in agricultural production and con- solidation of land reform efforts begun following the 1910 revolution. In the period from 1940 to 1965, Mexican agricultural production more than tripled, making its growth rate among the highest in Latin America. In addition, more than half of all arable and pasture lands were distributed to previously landless families. Income inequalities widened, however, as the economy was unable to provide employment for the poorer sectors of the rural population, particularly those living in rainfed agricultural areas. Since 1967, the growth rate in agricultural production has slowed markedly to about 1.8% per year despite a continuing increase in internal demand. Mexico has become a major importer of milk powder and dairy stock and, over the last three years, a net importer of basic grains, especially corn. 2.02 In 1973, when the last full survey was undertaken, the average family income in Mexico was estimated at US$2,700. Over 50% of the rural, and 20% of the total population, however, had incomes of less than US$500 per fam- ily. 1/ At least one half of the agricultural labor force is now landless, with many others having rights in ejidos 2/ too small to provide an adequate living. 3/ 2.03 In the early 1970s, the Government began to reassess its rural growth and development strategies. As a result, government budgets were re-programmed to provide substantial increases in allocations for technical assistance, research, infrastructure and credit toward the rural sector. Producer price incentives were also substantially increased. 1/ Government estimates that a minimum acceptable living standard for rural families requires the equivalent of US$960 per family per year. 2/ The term is derived from the Spanish equivalent of the village common, based on the concept that the land reform returned the usurped village lands to their rightful owners - the farmers, called "ejidatarios". 3/ Government will not resolve the rural employment problems through PIDER or related rural development programs. The potential for the expansion of arable land is limited. Current estimates indicate that Mexico can only increase its land under cultivation from the present 22 million ha. to 30 million ha. (rainfed), and from 4 million ha. to 8 million ha. (irrigated). Over the longer term, off-farm rural or ultimately urban employment is required. The project includes a pilot program for rural industrialization (para. 3.19).  - 3 - 2.04 The major efforts were undertaken by five groups: (i) the Presi- dent's office commissioned task forces to develop policies for achieving self- sufficiency in basic grains and for investments to assist the rural poor. These study groups were later institutionalized as major coordinating entities (COCOSA and PIDER) within the office of the President; (ii) the Secretariat of Public Works (SOP) began implementation of a nation-wide program of labor- intensive feeder road construction in 1971. Five years later some 70,000 miles of roads had been constructed, giving temporary employment to some 190,000 rural persons; (iii) the Secretariat of Hydraulic Resources (SRH) further extended its major program to develop the irrigation potential of substantial numbers of small farmers. SRH developed new criteria and adapted technologies for small scale irrigation; (iv) the Agrarian Reform Department undertook a complete review of legislation affecting ejido farming and reviewed its own procedures affecting the granting of titles. A new Agrarian law was passed in 1971 and a new Secretariat of Agrarian Reform (SRA) was created in 1974; finally, (v) the Bank of Mexico, operating through its agricultural credit agency, FIRA, following a study of credit systems oriented to small farmers, promulgated new regulations to encourage the banking system to intensify its actions with smaller farmers. Other agencies, such as CONASUPO (food marketing) and CFE (Federal Electricity Commission) also reworked their investment and operating criteria to increase their efforts in poorer rural areas. In summary, creative talent in many agencies was released to focus on the problems of rural development. The PIDER Program 2.05 To coordinate and focus these efforts in the most needy areas, a new rural development program was developed. Micro-regions 1/, with a high concentration of the rural poor, were chosen and specific micro-regional plans and investment programs prepared. A goal was set to develop 100 such regions, and a capital expenditure of US$1.2 billion was programmed. By 1977, invest- ment programs were being implemented in 86 micro-regions, and expenditure had amounted to US$471 million; this represents about 1.8% of Mexico's public investment budget during this period. These investments cover a variety of activities, principally directly productive and productive support activities, but also including social infrastructure. In total, some 6,500 communities, representing some 4 million persons, are in regions already benefiting under the program. Over the period 1977-1982 an additional US$700 million of public investment is to be allocated to further develop the microregion program. Some 5 million rural persons are expected to benefit when the program is complete: about 25% of the rural population. 1/ Micro-regions comprise an average of 50,000 poor persons located in two to seven contiguous rural municipalities within a state. They are selected using criteria that balance poverty levels (per capita incomes averaging below US$100) with potential for income increasing productive activities.  - 4 - 2.06 PIDER has been instrumental in bringing about far reaching and much needed institutional change. The implementation capacity of the many agen- cies involved under PIDER was increased and activities were directed towards improvement in the productivity and living conditions of the rural poor. The program is now well known and is viewed as highly successful both at local and federal governmental levels. Its continuation under the new Administration is assured. Applications are pending from municipalities and states for the creation of substantial numbers of additional micro-regions. PIDER, however, has now embarked on a period of consolidation with expansion of micro-region programs to be halted at the 100 micro-region level. As a result of PIDER, for the first time inter-agency coordination is occurring at the local level; both for PIDER and now also for the traditional agency programs. Control of PIDER funds has been decentralized to the state level increasing flexibility in program execution and making the program more responsive to local farmer needs. The success of PIDER decentralization led the new administration in early 1977 to decentralize control over the execution of most public invest- ments. In addition, as a result of initial PIDER experiences, agencies have undergone internal reorganization. For example, the reorganization of the national extension service was initiated in response to PIDER efforts. PIDER has been a vehicle for facilitating the testing and introduction of a variety of new technical packages developed for small farmer applications including: (i) the PRONDAAT 1/ extension system, now underway in 15 micro-regions; (ii) improved farm storage, irrigation, pasture development and soil management techniques in drier areas; and (iii) wider introduction of small stock, especially rabbits, chickens, goats and beekeeping on project farms. C. Progress Under PIDER I 2.07 Assessments of PIDER I performance are interrelated with assess- ments of the performance of the entire PIDER program. With few exceptions, actions taken to improve on PIDER I micro-regions have been applied program- wide. Similarly, improvements in program-wide actions directly affect the PIDER I micro-regions. Moreover, the intent of the PIDER I Project was not only to achieve success in the 30 PIDER I micro-regions; but also to bring about improvements in the program as a whole. 2.08 Since loan signing in May 1975, three Bank supervision missions have reported on project progress. These have deemed progress satisfactory, though various factors external to the Project (elections, budget reduction, devaluation) caused a slowdown in 1976. The perception of PIDER at both community and governmental levels is positive and the program's role in the new Administration is assured with a substantially increased budget from Mex$2 billion in 1976 to Mex$3.3 billion in 1977. 1/ PRONDAAT is a National Program for Development of Agriculture in Rainfed areas.  - 5 - 2.09 Thus far, with project implementation only half completed, over 14,000 ha have been irrigated. Over 100 cattle and smallstock units have been constructed including the establishment of 5,000 ha of improved pasture. Additionally, some 220 beekeeping units have been provided. In the majority of cattle units assisted through the project, additional pasture development and infrastructure are being financed directly through credit - public expendi- tures being limited to an initial pilot area of about 4 ha of pasture per family. Over 1,700 km of feeder road have been constructed; 270 villages electrified; and 260 villages provided with drinking water. Infrastructure investments in many areas have provided considerable temporary rural employment and in some cases have also resulted in substantial wage increases. 2.10 In general, it is too early to assess the full impact of the pro- ject on farmer production and income; only two years of an estimated eight- year period to full development have elapsed. In areas where the reformed extension service (PRONDAAT) is in operation, production and income increases are apparent and generally above appraisal estimates. In areas still served by the traditional extension systems, progress is slower - in many cases the PIDER supported services represent the first contacts small farmers have had with technical assistance. However, these efforts - and the PIDER investments they generate - are creating the basis for the organization of small farmers to enable them to gain a greater share of the value of their production. In a number of instances, farmgate prices and farmer incomes have substan- tially increased following feeder road investments. 2.11 Despite early PIDER success, there is scope for further improve- ment. The program has given primary attention to establishing new micro-region programs and to implementing investments in these regions. Less attention has been given to the participation of communities in the decision-making process, and less still to the operation and maintenance of investments once construc- tion is finished. Insufficient emphasis has been given to the marketing aspects of the expected production increases resulting from PIDER investments, especially for products other than the traditional corn and bean crops. Credit made available through the banking sector needs to be better integrated with PIDER investment activity. 2.12 PIDER and CIDER staff are aware of the deficiencies and recognize that continued improvements in the organization and training of the extension and agrarian reform staff are needed to achieve full use of PIDER-financed physical investment. Important changes are being made in the operations of both SRA and SAG Extension, the principal groups responsible. Allocations to these agencies are now contingent on PIDER approved annual work programs and projections of expected results. CIDER has also recommended that commit- ments be made by community beneficiaries for the operation of both production and social infrastructure investments prior to construction. CIDER insists that the root cause of poor operation and maintenance is the lack of small farmer participation in the early stages of programming. They also insist on  - 6 - the need for formal participation of FIRA in PIDER programming and execution to ensure the availability of credit for the operation and expansion of productive investments. III. THE PROJECT A. General 3.01 The principal project objective is to reinforce PIDER efforts to raise income, production and employment levels of the rural poor living in 20 selected micro-regions. 1/ The project would also improve social services and facilities for persons living in these regions. 3.02 Under the project, attention would focus on reforms which affect the PIDER program as a whole, including: (i) increasing effectiveness of extension, credit and farmer organization services; (ii) improving the operation and maintenance of existing infrastructure; (iii) strengthening PIDER capability to address specific sectoral issues; and (iv) providing resources for feasibility studies for productive investments and evaluation services. In addition, as compared with the first PIDER project, the pro- posed project would include a larger portion of directly productive invest- ments, a rural industries component would be included, and soil conservation efforts would be strengthened. 3.03 Micro-region Selection Criteria and Programming. For selection and support under the Project, micro-regions are required to be poor, have produc- tive potential, and lack basic infrastructure for exploiting this potential. PIDER uses various threshold levels involving population density, poverty, unemployment, and productive potential in the selection process. Selection of the 20 micro-regions to receive Bank support was based on a number of factors including: the quality of the micro-region investment program (i.e. the nature and composition of the programmed investments); quality of micro- region staffing and organization; the potential for innovative yet replicable programs within and between micro-regions; and the expectation of acceptable economic returns to investments. 1/ PIDER started operations in 17 of these regions during 1975 and 1976. Three are being started in 1977. None have received external financial support to date. All were reprogrammed or programmed in 1976 to qualify for such support.  -7- 3.04 The micro-region plans involve inputs from local and federal tech- nicians and from the local communities. Detailed baseline surveys are under- taken by agency staff involving socio-economic data, technical data and surveys of resources and existing infrastructure. During visits to the village communities, the relevant data are checked and refined. At the same time PIDER objectives and strategies are explained and local priorities established. The investment program is then assessed through analyses of need (income, employment, and basic services) and available resources, both human and natural (e.g. existence of groundwater, soils, etc.). After review, the village programs are aggregated to form the micro-region development program. 3.05 A number of improvements in programming methodology have been made with CIDER assistance during the first PIDER project. CIDER is now training PIDER field teams in a revised programming methodology which gives more local control to determining the annual investment programs. As part of PIDER II, more frequent reprogramming of micro-region plans would be undertaken and additional emphasis given to detailed project feasibility studies. B. Brief Description a. Directly Productive Investments (70%) 3.06 The project would intensify support for infrastructure for livestock units (including smallstock development), small-scale irrigation, soil and water conservation, fruit production, forestry and fisheries development, and rural industries; and through development credit support to on-farm develop- ment, especially relating to livestock, fruit production and irrigation investments. b. Productive Support Investments (20%) 3.07 Investments are included to reinforce improvements in the agrarian reform and extension services (including field demonstration plot develop- ment), marketing, store construction and electrification. The project would also support funds for feasibility studies for further project development. c. Social Infrastructure (9%) 3.08 Improved drinking water supplies, materials for self-help village improvement projects and construction of primary schools would be provided. d. Evaluation (.4%) 3.09 The activities of CIDER would be supported. CIDER would carry out inter alia project-related evaluation, field research, and field staff train- ing.  -8- C. Detailed Features 1. Directly Productive Activities 3.10 Irrigation (16%). Currently, some 50% of Mexico's crop production and between 90-95% of such basic food crops as wheat, soybeans and tomatoes depend on irrigation. About 60% of total public agricultural investment has been allocated to irrigation. 3.11 The project would develop 34,000 ha of irrigated land at an average cost of US$1,400 per ha (see Annex 3c) and would directly benefit some 14,000 families. Construction would be carried out mainly by SARH, using the special- ized OHDR (Rural Development Irrigation Works) Department. The principal activities to be supported include small dam construction, tubewells, pumps, and distribution facilities. In some cases, existing facilities are to be rehabilitated, old gas engines replaced by electric powered pumps following village electrification, and earth canals lined with concrete for improved water efficiency. 3.12 Prior to construction, technical and socio-economic feasibility studies would be carried out for each proposed irrigation project in accord with existing SARH guidelines, which are acceptable. Assurances that these procedures would continue to be followed by SARH would be sought at nego- tiations. 3.13 Under PIDER I, irrigation investment criteria were developed to avoid expensive investments and to ensure an equitable distribution of project benefits. For small irrigation projects up to 25 ha., investment was limited to the peso equivalent of US$4,000 per family with total project costs not to exceed the equivalent of US$32,000 with a minimum of eight family benefici- aries. The average investment cost for irrigation under PIDER I was US$3,600 per family (equivalent to US$1,200 per ha with an average hectarage per family of three hectares). 3.14 Under the project a total cost ceiling of US$32,000 would be con- tinued for small-scale irrigation projects of 25 ha or less - and a US$5,000 equivalent per family limit would be imposed. For all projects a per ha cost ceiling of US$2,500 equivalent would be introduced. Eligibility would be limited to families with pre-project net agricultural incomes not to exceed the equivalent of US$2,500. Assurances were obtained at negotia- tions on these limits. 3.15 Maintenance would be the responsibility of investment beneficiaries who are organized in "irrigation units" and assisted by SARH. Government would generally recover about 10% of the investment cost of irrigation works; and where reasonable based on beneficiary repayment capacity, Government would seek to recover additional amounts of the investment cost: cost of pumps and pipes, for example, would be recovered through credit.  - 9 - 3.16 Farm Development Credit (24%). Increased lending to small farmers has been supported under the Bank's fourth and fifth credit loans. Both public (BANRURAL) and private banks have made loans to small farmers under the criteria established by FIRA, and supported by the Bank. Under the first PIDER loan these same criteria were followed. Credit was provided to the micro-regions supported by the loan; it was not, however, restricted to supporting infrastructure investments made by PIDER. This policy would be continued under the proposed project. While the number of small farmers receiving credit has substantially increased over the last four years (from 20,000 to 80,000), over 75% of Mexico's small farmers are still without access to institutional seasonal or investment credit. 3.17 Under PIDER I, the performance of the credit component was adversely affected by the poor coordination between PIDER and FIRA offices. FIRA was not formally included in the monthly state-level PIDER meetings and felt itself only a marginal participant in the program. PIDER staff saw credit as important but not their responsibility and thus not directly related to the PIDER program. Bank supervision missions brought both groups together on various occasions in attempts to bring about a better mutual understanding between the groups. Considerable progress was eventually made and, as a result of the first PIDER loan, investment agency and bank coordination was begun at the state level. Increasingly, PIDER has been adopting FIRA investment criteria in the programming of on-farm directly productive invest- ments, such as livestock projects. PIDER field staff now find such coordina- tion indispensable for the proper operation of the program and are insisting on the formal participation of the FIRA at the state and local levels to ensure that investments programmed and implemented by PIDER meet FIRA criteria for additional financing. A formal agreement, defining the obligations and responsibilities of each group, has now been signed between PIDER and FIRA which provides inter alia for: (i) mechanisms for formal coordination includ- ing periodic meetings, information exchange, integration of FIRA into the State Committees; (ii) procedures for resolving intergroup disputes regarding investment criteria; and (iii) arrangements for training PIDER staff on FIRA regulations and procedures. Seasonal production credit (currently at 14% interest) would be provided under the project from existing credit lines, but would not be reimbursable from the proposed loan. 3.18 Development credit reimbursable from the proposed loan would be used primarily for livestock and for land leveling and associated investments needed to support new irrigation works. Interest rate and re-discounting arrangements would correspond to those applicable to low-income producers under other Bank loans through BANXICO for agricultural credit. Repayments of principal will range from 3 to 15 years and will include grace periods of I to 3 years with FIRA rediscounting no more than 90% of the original credit amount. Interest and rediscount rates would be as follows:  - 10 - Rediscount Interest Rates to Partici- Rates to pating Banks Beneficiaries Private Public (i) Loans to beneficiaries receiving institutional credit for the first 6.50% 7.50% 9.50% time and whose net annual family income does not exceed 250 times the daily minimum rural wage for the regions where they are located (ii) Loans to other low income procedures in Project micro- 8.00% 9.00% 11.00% regions. During negotiations, assurances were obtained on these arrangements. 3.19 Rural Industries (7%). The project would provide about US$14.0 million in support of the development of rural industries. Because this represents a new component, not available under PIDER I, the funds would be available for projects both in the 20 micro-regions financed under the proposed project and in the 30 micro-regions supported under PIDER I (Annex 3b). About 86% of the amount would be used for financing investment through the banks and through Government agencies. The remaining 14% would finance technical assistance for rural industry development including financing of feasibility studies, specialized agency staff and training. The basic strategy would be to: (i) develop industries for exploitation of natural resources of the micro-region in order to strengthen small-farm and ejido production; and (ii) to finance small-scale village industry to serve local markets and to provide employment at low cost by utilizing intermediate technology. The strategy would support the new Government's policy for the development of rural industries. The project would finance: (a) Development credit for about 50 rural industries located within the micro-regions and owned by ejidatarios and small farmers. Credit granted by official bank or the private banks would be eligible for re-discounting by FIRA at the same terms as estabished under the low-income producers component of the Fifth Agriculture Credit Project to Mexico.  - 11 - (b) Investments in about 300 small scale, labor intensive rural industries (village industries). Such investments would be limited to US$35,000 equivalent per enterprise. Government is preparing a plan, to be submitted to the Bank before June 30, 1978, for village industries specifying agencies and eligibility criteria. (c) Technical assistance to identify, prepare and assist rural industries as well as to train staff of partici- pating agencies or institutions. Technical assistance would comprise: (i) expansion of technical staff and training programs for technical staff in participating agencies;and (ii) financing for preparation of rural industry projects in the micro-regions and for assistance to already established enterprises. 3.20 Livestock Development (8%). The project would support livestock development on some 500 ejidos. Under PIDER I, in 1975 and 1976, some 250 ejidos received livestock investments with an estimated 8,000 persons likely to benefit. The strategy was to provide a small pilot livestock unit (300 ha or about 4 ha per family) with a minimum technical package involving land clearing, an improved pasture, minimum fencing, and a simple dip and corral. All cattle, and any expansion beyond the pilot infrastructure package, had to be financed by development credit. Most projects were organized on a semi-collective basis, enabling many ejido members to benefit from the in- vestment. In many areas the success of the initial PIDER investments stimu- lated an expansion of the pilot units to much larger areas of the ejido, financed solely through medium-term development credit. Beef cattle devel- opment would continue to receive the major share of investment support under the Project: dairying, sheep and goat raising, and pork units would also be continued. 3.21 Under PIDER II a modified approach would be adopted under which FIRA staff would review the viability of sub-projects and provide development credit for the expanded unit from the outset. This approach has the advantages (a) that credit is tied to the project from the beginning, thus serving to increase beneficiary interest and commitment while assuming higher standards of technical appraisal and (b) the scope of the program would be expanded, since in some cases an expanded unit would be viable where a pilot unit would not be. 3.22 Soil and Water Conservation (5%). The project would support the construction of soil and water conservation works using labor intensive  - 12 - methods. The equivalent of US$10.4 million has been budgeted for a three year period for conservation, sufficient to cover some 80,000 ha. 3.23 Under PIDER I, some 24,000 ha were improved at an average per ha cost of US$130, with per ha costs varying from US$110 in Nuevo Leon to US$180 in Oaxaca, depending on slope and erosion severity. This represents some 40% of all soil and water conservation efforts in Mexico equivalent to an annual average of US$3.2 million over the 1974-1976 period (see Annex 3e). Since the economic return from terracing partly eroded hills is much greater than from erosion control on already seriously deteriorated land, the program would concentrate on improving partly eroded slopes with simple contouring and terracing rather than restoring totally eroded slopes. 3.24 To improve the program, assurances were obtained during negotiations that (i) conservation works in Bank supported micro-regions would focus on labor intensive improvement of partly eroded slopes rather than machine restoration of fully eroded hills; and (ii) technical and economic conservation plans would be prepared prior to construction. 3.25 Fruit, Forestry, and Fishery Production (4%). Some US$9.2 million are budgeted for fruit production. As in the livestock development compo- nent, the strategy would be to provide farmers with a small pilot technical package (2 ha per family) which would include land clearing, provision of trees, fertilizer, sprayer and technical assistance from CONAFRUT. 1/ The expectation is that the success of the initial investment would spur the farmer to expand operations which would then be financed by credit. 3.26 The project would provide support to the development of orchard infrastructure and fruit tree planting on some 7,500 ha. Under the Project, CONAFRUT would be responsible for farmer demonstration, nursery development, orchard preparation, plant distribution and technical extension. The types of fruit production supported under the Project vary according to ecological areas, ranging from apples in Nuevo Leon to avocadoes in Oaxaca. 3.27 The project would also support limited investments in beekeeping, forestry, and fishery development. Beekeeping is a labor-intensive activ- ity carried on by small farmers in many parts of Mexico. Under the project, 1/ The National Commission for Fruit Production (CONAFRUT) is an auto- nomous agency operating under SARH charged with developing fruit pro- duction in rural Mexico.  - 13 - hive improvement and expansion, honey gathering equipment, and fencing would be provided. Reforestation and afforestation investments on selected ejidos would also be supported, especially where ejidos have already established small sawmills. In one micro-region, fishery infrastructure in the form of cold storage facilities would be assisted. SARH would be responsible for supervising forestation and maintenance of fishery cold stores. Beekeeping activities would be the responsibility of INI and SARH. 3.28 Feasibility Studies (2%). The project would also include a new component for feasibility studies for micro-region productive investments. Currently, PIDER only supports studies by SARH. There is a need to undertake more complex studies not only for irrigation feasibility work, but for the identification and detailed preparation of productive projects in such areas as livestock, fisheries, and forestry. Under PIDER II, funds would be provided to initiate project feasibility work to be undertaken by either private consultants or government agencies. Individual studies up to US$15,000 would be contracted at the discretion of the state level SPP representative, while studies over US$15,000 would be subject to the approval of the PIDER Director in Mexico City. A total of US$3.6 million is provided - sufficient for an average of 10 studies per micro-region. Assurances on feasibility study cost approval limits were obtained from government during negotiations. 2. Productive Support Activities 3.29 Feeder Roads (7%). The project would continue support to the innovative labor-intensive feeder road program of the Secretariat of Public Works and Human Settlements (SAHOP, ex-SOP). Under the project, the Bank would provide about $15.9 million toward the construction of approximately 2,000 kilometers of all-weather roads. These are estimated to cost about US$8,700/Km with unskilled labor accounting for an average of 60% of con- structisn costs. Equipment is generally used where earth movement exceeds 4,000 m per km. of new feeder road. Roads are constructed to all-weather standards, to an average width of 7 m and with drainage ditches on each side. Rural communities would continue to play the major role in both construction and maintenance (see Annex 4-e). 3.30 SOP directed a nation-wide feeder road program since 1970 and has established an organization for dealing with the construction, maintenance, and evaluation of rural roads. So far, it has supervised the construction of 73,000 kilometers of rural roads which link 7,000 communities and over 6 million people to the national road network. In addition, SOP made road construction and maintenance a focus for community organization. 3.31 The cost of the nation-wide rural road program from 1970 to 1976 has totaled about US$425 million and the average cost per kilometer about US$6,000. Unskilled labor averaged about 60% of the direct construction costs and the program provided seasonal employment for an average of 55,000 workers per year. SAHOP monitors the costs of its program, uses-labor-intensive tech- niques when appropriate, and trains its staff to play an active role in rural development efforts.  - 14 - 3.32 During negotiations, assurances were obtained from Government that adequate arrangements be continued for maintenance, that labor intensive techniques be continued where technically and economically appropriate, and that construction be scheduled to minimize conflict with agricultural tasks. 3.33 Extension Services (5%). Under PIDER I a major effort was made to improve the effectiveness of the extension services operating in PIDER micro-regions. While improvements have increased the effectiveness of the extension service, neither PIDER nor the Bank have been satisfied with exten- sion operations. Through PIDER, the Secretary of Agriculture recognized officially that substantial improvements were required -- something no prior administration has been willing to accept. In a new "operational plan" 1/ finally approved by the Bank in October 1975, the government made a commitment to extend the PRONDAAT 2/ extension system to all Bank supported micro-regions. Progress, however, has been slow in extending the reforms in the extension services. 3.34 In the early months of the new administration, considerable atten- tion was given to re-organizing the extension services. With the consolida- tion of the Secretariat of Water Resources and the Secretariat of Agriculture, all extension services in each Secretariat were brought under a national Director General for Extension. Two major departments were created, one to service the extension needs of farmers in rainfed areas, the second to service the farmers with irrigated lands. This administrative change represents a radical change from the previously fragmented and ill-organized extension services available to Mexican farmers. 3.35 PIDER has funded a major expansion in the rainfed extension service. Some 1400 professionals are now being supported (Annex 4-a) - nearly half of all personal working for the consolidated Department of Rainfed Extension. PIDER management, early in the new Administration, drafted a far-reaching agreement 3/ to initiate improvements in micro-region extension activities. 1/ This Operational Plan was submitted to the Bank in November 1975 as a condition for declaring the PIDER I loan effective. 2/ PRONDAAT is a new system of extension derived from the lessons of the well-known Plan Puebla program. Unlike traditional extension programs in Mexico, PRONDAAT field staff support an intensive program of adaptive research and evaluation designed to produce technical packages for basic grain crops appropriate for the ecological conditions of each micro- region. The new system emphasizes diagnosis, applied research, appli- cation and evaluation of results on the farmers' own plots (see Annex 4-a). This system has already proved successful in a number of pilot micro-regions. 3/ A formal agreement between the SPP (for PIDER) and the SARH was signed at the Under-Secretary level.  - 15 - Under this agreement, PIDER will not finance any extension work in PIDER micro-regions unless extension workers are closely supervised and work to a monthly schedule of training and visits (using essentially similar procedures to those that are working well in Bank projects in India and Turkey). PIDER has appointed a senior professional to supervise the execution of this agree- ment. 3.36 To support PIDER efforts to carry out these changes, assurances were obtained during negotiations that PRONDAAT operations be put into effect in the 20 micro-regions supported under PIDER II no later than December 31, 1980. 3.37 Farmer Organization (3%). Support for the expansion of farmer organization and agrarian reform (SRA) activities in the project areas was provided under PIDER I for: (a) organizational and development assistance; and (b) resolution of land tenure conflicts. PIDER supported the establish- ment of SRA teams to orient communities to development opportunities, to re- organize ejido committees, and to ensure participation in a jointly agreed development program. A close liaison was to be maintained with agency staff, especially extension staff, to ensure farmer awareness of government services and of farmer obligations during the implementation of the micro-region development programs. The resolution of land tenure issues, a prerequisite for the provision of both short-and long-term credit, was also considered an important development activity. 3.38 In most micro-regions, however, the more politically urgent land tenure issues often took precedence over the organizational activities espe- cially in such states as Sinaloa. In December, 1975 there was a reorganiza- tion of SRA which reduced the effectiveness of the ejido development branch of the department. PIDER has now signed an operational agreement with the new head of SRA which spells out the conditions under which PIDER would continue to fund the activities of SRA organizational staff in PIDER micro- regions. This agreement outlines the priority areas of assistance SRA needs to provide PIDER investment recipients, both prior to investment and follow- up, and also specifies procedures that SRA micro-region staff would need to follow. 3.39 Rural Marketing/Nutrition. In recent years CONASUPO has devel- oped an improved capability for expanding and servicing its network of rural stores and warehouses. In rural areas it pursues two basic activi- ties: one involves buying the grain surpluses of small farmers at fixed prices, (generally favorable relative to other market outlets); the other provides a line of basic products to rural consumers, most of whom are poor, at prices about 25% below those charged by the limited private mar- keting network in rural areas. These basic products include essential foods such as corn, beans, sugar, and cooking oil as well as nonfood items  - 16 - such as soap, candles, aspirin, and tissues. While CONASUPO's procurement activities have worked fairly well, its marketing of basic goods in rural areas has suffered from a tendency to stock items suitable for urban con- sumers. Recognizing this, CONASUPO has now organized a basic staple prod- uct line with a better distribution system. Known as the basic staple pro- gram, it includes only corn, beans, cooking oil, rice, and sugar. By 1975, this program involved 5200 distribution points with sales of nearly Mex $500 million (Annex 4-e). 3.40 Under the Project, rural marketing would be developed within the PIDER II regions so that better prices and more and higher quality food would be made available to the rural poor. The project would support CONASUPO activities in purchasing (warehouses) and sales (stores). 3.41 Rural Electrification (3%). The project would bring electricity to some 131,000 rural people living in 300 villages at a total cost of US$7.3 million (Annex 4-d). 30% of the demand is estimated to be associated with directly productive investments, and the rest with improving the living standards of the population. The average cost of village electrification is estimated at US$60 per beneficiary. CFE builds, operates, and maintains electricity generation and distribution facilities throughout Mexico and is implementing a national six-year plan for rural electrification involv- ing connection of villages to the existing grid. This program is now more than 50% completed. During negotiations, assurances were obtained that installation costs would not exceed US$150 per person, and that villagers would pay installation charges and rates for the sale of electricity as are generally applied in Mexico which include the full cost of operation and maintenance. 3. Social Infrastructure 3.42 Village/Eiido-Level Educational Facilities (2%). The Project would improve education opportunities by renovating, constructing and fur- nishing 1,500 primary level classrooms accommodating some 60,000 students. New construction of each classroom would cost about US$4,800 including furniture (Annex 5-b). CAPFCE (the school construction agency) has estab- lished a sound system of rural school siting and construction, choosing low cost building designs and methods, and coordinating closely with the Ministry of Education to ensure staffing arrangements. Siting and con- struction would continue to be closely coordinated with the Ministry of Education to ensure adequate provision of teaching materials and staff. In carrying out the program, CAPFCE requires benefiting ejidos and vil- lages to provide a free site and encourages local contribution of building materials and teacher housing. During negotiations, assurances were obtained that these facilities would be adequately staffed and maintained by the Government.  - 17 - 3.43 Rural Water Supply (5%). The project would provide rural water systems for approximtely 214,000 persons at an average cost of US$45 per person (Annex 5-a). In the past both SSA and SRH provided rural water sys- tems, with SSA concentrating on smaller villages and SRH on larger towns. Both agencies were also responsible for operation and maintenance. In early 1977, the new government re-allocated all rural water supply responsibilities to the Secretariat of Public Works and Human Settlements (SAHOP). Since the Secretariat has successfully carried out the feeder road component, there is the expectation that major improvements in the provision of village water supply systems will also be achieved. During negotiations, assurances were obtained that a minimum contribution of cash, labor or materials of 15% to investment costs during construction be made by villagers, that full payment for operation and maintenance costs be obtained, and finally that there be a limit, except with IBRD approval, on government's share of system costs of US$100 per person benefited. 3.44 Self-Help (2%). PIDER has supported a number of efforts at self- help in its micro-regions. From 1974 to 1976, some 200,000 persons have contributed labor and local materials for the improvement of village streets, plazas, workshops, latrines and homes. The Agencies involved, mainly SSA, SOP and INI, supplied technical assistance, organizational help and materials not locally available. A program ceiling of the equivalent of US$40 per ben- eficiary was established under the first PIDER Project. The self-help pro- gram has proved so popular that program funds have already been exhausted. Two problems of the first phase were: (i) insufficient emphasis on latrine and workshop construction; and (ii) overly strict eligibility criteria which required that villages have basic water, electricity and road transport. Assurances were obtained during negotiations that eligibility criteria would be relaxed to include villages without potable water and electricity, and that a maximum equivalent to US$40 of materials per beneficiary would continue to apply. Health 3.45 Under PIDER I the Bank was reluctant to include financing for health services infrastructure because of weaknesses in the organizational arrangements for rural health services delivery. Financing for such facili- ties was included only after commitments were made by the Mexican Government to seek alternatives to the current provision of rural health services. A verbal commitment was made to establish pilot health programs in three of the thirty PIDER I micro-regions; and a written commitment was made to establish a work group to study and define alternatives for health services provision in PIDER micro-regions. 3.46 Under PIDER I, neither of the commitments was carried out. The programmed infrastructure was constructed generally in accord with expecta- tions. In a few cases mobile health units were established and are working well. In most cases, however, the health posts and centers are not providing appropriate, cost-effective health services.  - 18 - 3.47 As a result, no funds are recommended under PIDER II. Attempts to introduce reforms in the rural health system will, however, continue through the supervision of PIDER I and possibly through the Family Planning Project currently proposed. IV. ORGANIZATION AND MANAGEMENT 4.01 Much of PIDER's early success can be attributed to its innovative organizational approach which stresses both strong coordination of budgetary authority, and monitoring at the top level and active planning and participa- tion at the state and local level. Coordination is critical since 14 agencies 1/ are involved in the program with 2,700 PIDER-paid pro- fessionals working full-time in the execution of the PIDER program throughout the country. Most of these are deployed either at the state or local level. At the local level they are generally employees of the executing agencies, carrying out specific tasks as part of a PIDER micro-region development plan. At the top level, there is a core staff of 95 PIDER employees, within the Secretariat of Programming and Budgeting (SPP). SPP was created under the new administration in December 1976 as successor to the Secretariat of the Presidency. SPP has authority over the public budget and control over in- vestment planning and monitoring. Under the new arrangement, PIDER will now report to the SPP Director of Promotion and Regional Operations instead of to the Director for Public Investment. This should strengthen the operating efficiency of PIDER. 4.02 During 1977, the new administration is moving to create a new structure to execute federal programs at the state level. A senior SPP official is now assigned to each state with full authority over federal spending in his state. As the highest ranking federal civil servant at the state level, he reports directly to the SPP Secretary in Mexico City. In addition to planning federal expenditures, the job entails full authority to reallocate money and to authorize payments at the state level. The creation of this new position should facilitate coordination between PIDER and the normal operating and investment program funded from federal sources. A. Organizational Levels 4.03 PIDER operates at the federal, state and local levels as follows: 1/ Federal institutions participating at the federal and state levels in- clude: Secretariat of Agriculture and Water Resources, Finance, Public Works and Human Settlements, Health, and Agrarian Reform; in addition to the Federal Electric Commission, National Corporation for Basic Marketing, Committee for Administration of the Federal School Construction Program, National Arid Zones Commission, National Indigenous Institute, National Institute for Rural Community Development and Low Cost Housing, and the BANRURAL.  - 19 - Federal Level. PIDER policy is developed and coordinated through the Directorate of Promotion and Regional Operations of the SPP. This Direc- torate is supported by a Sub-Directorate of Rural Development (i.e., PIDER) with a staff of some 95 technicians responsible for: reviewing investment plans, management operations, and investment monitoring. State Level. Coordination of the program is handled by a Coordina- ting Committee consisting of the state level directors of the participating agencies under the chairmanship of the state governor. Actual management is the responsibility of the new state level SPP representative who is the technical secretary of the State Committee. The SPP representative is assisted by a technical secretariat of professionals includng a state level PIDER coordinator and resident Coordinators for each of the states, micro-regions who work closely with local elected officials and community leaders. Village/Ejido Level. Local participation, essential to the imple- mentation of PIDER investments, is achieved through a variety of schemes which depend on the political, social and administrative characteristics of the sector and micro-region. In some cases such programs as feeder roads or small irrigation works have served to launch permanent village committees which then undertake additional PIDER activities. As a rule, SRA field personnel take the lead in organizing communities at the start, involving municipal chiefs, ejido presidents, teachers, or other appropriate persons. These local leaders in turn generate community participation as well as pro- vide an independent information link to the state-level technical secretariat. 4.04 Since the start of PIDER in 1973, major improvements have been made in PIDER organization and management. A PIDER headquarter reorganization was implemented in early 1976 which has led to an improved integration of the planning, programming and supervisory functions. The new organizational structure has two regional Departments, North and South, which combine the former Departments of Studies and Supervision. A major change was the crea- tion of a Special Studies Division through which PIDER will attempt to under- take a much closer review of the criteria used by the 14 PIDER supported executing agencies. An Authorization and Control Department is in charge of budgeting, budget control and monitoring. Under the Deputy Manager (Co- ordinator), special units were established for the IDB and IBRD projects. 4.05 The system described has worked satisfactorily and without undue inter-agency friction. There are, however, areas that require improvement. (i) Functional Staff. The total number of staff in PIDER headquarters has now reached 95, with 40 supervisors in the Regional Departments and 55 Administrative/ managerial staff. An attempt has been made to form inter-disciplinary teams for each of the sub-regions, but the teams comprise mainly civil engineers and economists. PIDER is short of functional expertise in agriculture and rural industries. This would not be serious if PIDER's role could be limited to overall micro-region programming, supervision, and monitoring. However, PIDER experience indicates that such a role is too  - 20 - limited. PIDER involvement in the review of rural develop- ment policies and investment criteria of the line agencies, particularly the weaker ones, is imperative. PIDER's management has recognized this and has now taken action. For the proposed PIDER II project, PIDER would appoint staff for its new Special Studies Division withi sector and project appraisal capability especially in the agricultural and rural industry sectors to undertake this line agency review process when assessing agency investment requests. (ii) Need for Resident PIDER Coordinators in Micro-Regions. There are resident PIDER staff in only 15% of PIDER micro-regions while in the other 85% the coordinator lives in the state capital and periodically visits the regions. Those micro-regions with resident coordinators have better records both in coordination of investments and of operations since the coordinators take the ini- tiative in advising on re-programming, in generating local understanding of the PIDER approach, in super- vising line agency operations, and in insisting on proper operation and maintenance of completed investments. The resident PIDER coordinator has become an effective locally- based "change agent", whereas those who only visit the micro-regions normally only perform monitoring functions. It it is now PIDER policy for all micro-regions to have PIDER appointed resident staff managers. (iii) Staff Training. PIDER management has given insuffic- ient priority to organizing training courses for the three groups of staff employed under the PIDER program: the State PIDER Directors, the State and micro-region PIDER coordinating staff, and the persons paid directly by PIDER in the 14 agencies working full-time in PIDER micro-regions. PIDER recently submitted to the Bank for review a detailed program for multi-tiered training for all PIDER Personnel involved in executing the PIDER program. (iv) Operation and Maintenance. PIDER has not made adequate provision to guarantee proper maintenance of its in- vestments. Once an agency completes a project such as an erosion control work, a domestic water supply installation, or an irrigation work, it turns the in- stallation over to local committees representing program beneficiaries for operation and maintenance. Provision for continuing supervision after investment completion and arrangements with beneficiary groups have been inadequate. During negotiations, assurances were obtained that new investment commitments for individual projects would include written agreements with beneficiaries to provide adequate operation and maintenance arrangements.  - 21 - (v) Reprogramming. PIDER does not have a policy for the re-programming of its four-year micro-region plans. Annual investment authorizations are prepared, but where major changes occur during this process, the implications for the overall micro-region program are not fully assessed. Assurances were obtained during negotiations that the annual investment programs would be agreed upon by the Bank. B. Evaluation 4.06 The evaluation of PIDER luis been carried out by CIDER. With 22 professionals, CIDER's main task is to evaluate the impact of current programs of rural development and to develop policy recsmmendations for future efforts. Its main focus is on PIDER, though CIDER has reviewed other rural develop- ment programs. CIDER's other principal task is to develop rural development training programs for PIDER federal and state level staff. CIDER began this training in late 1976 with six regional review seminars for PIDER field staff. 4.07 CIDER, firanced through the Secretariat of Programming and Budgeting (as is PIDER), has institutional autonomy from PIDER management and freedom in the choice of research topics. The CIDER director reports to the Secretariat of the Programming and Budgeting and to a CIDER board comprising various Sec- retaries. PIDER is not represented on the Board. CIDER also has an advisory council for methodology and research design. 4.08 CIDER does not undertake on-going program monitoring, which is done by PIDER. Instead, CIDER is geared towards the evaluation of specific aspects of the PIDER program. CIDER has placed much emphasis on public administrative and sociological aspects of public investment. During supervision missions, Bank staff have urged CIDER to increase its efforts to assess the agronomic impacts of PIDER investments and services as they affect farmer yields and farmer income. The non-economic evaluations are of great interest, and should be encouraged. CIDER should however strike a better balance in its evaluation program between the economic and non- economic aspects of the program. 4.09 Various deficiencies and problems in PIDER activities were detected in initial CIDER evaluations. Th-e basic cauise was generally attributed to weaknesses in the origiiial village program and programming process. Rather than passively transmit conclusions to PIDER, CIDER has joined PIDER in re- programming a number of micro-regions. CIDER is thus directly introducing recommendations for improving the PIDER programming process. CIDER also concentrates on analyses of structural changes generated by the development program. Two principal issues whiclh are central to CIDER evaluations, but generally neglected in evaluations carried out elsewhere, are analyses of: the effectiveness of institution building under the PIDER investment and  - 22 - organization strategy, and the degree and quality of village participation in the programming and execution of the investment program. This difference is in part accounted for by the philosophy of the rural development program in Mexico, and in part by the Bank's insistence on such issues as part of its new style approach to rural development. During negotiations it was agreed with Government that the effects of the Project on micro-region development, including changes in crop yields and beneficiaries' income, would be evaluated. V. PROJECT COSTS AND FINANCES A. Cost Estimates 5.01 The total cost of the Project is estimated at US$255 million, of which US$44 million, or 18% represents the foreign exchange costs. Cost estimates are based on detailed plans for the proposed 20 micro-regions. These plans were reprogrammed during the first half of calendar year 1976 and cover estimated expenditures over a four-year period. The PIDER II project would support investments made as of mid-1977. As the PIDER II project was appraised before the period of major monetary adjustment in Mexico (September-November 1976), base line project costs were increased by 30% for the estimated inflation between mid-1976 and April 1977. 5.02 To these adjusted base line costs (expressed in dollars) were applied 10% physical contingencies for all items except credit. Further, expected international price contingencies were added at the rate of 10%, 9% and 8% for the three year project expenditure period, April 1977-April 1980. In using these price contingencies, the assumption is that over the project disbursement period the peso/dollar exchange rate would broadly adjust itself to the difference between domestic and international inflation. Indications are that the peso would be allowed to float freely in response to market forces. Details of project costs are shown in Annex 7-a and are summarized below.  - 23 - IEXICO RURAL DEVELOPMENT PROJECT - PIDER II Estimated Project Cost Foreign Unskilled Baseline Local Foreign Total Exchange Labor Cost -------US$ million