Mexico - Seventh Irrigation Project

DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1619-ME REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR BAJO RIO BRAVO/BAJO SAN JUAN IRRIGATION PROJECT April 28, 1975 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 It may not be published, quoted or cited without Bank Group authorization.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 Unit - Peso (Mex$) US$1.00 = Mex$12.50 Mex$1.00 = US$0.08 Mex$l million = US$80,000 Fiscal Year - January I to December 31  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.A. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR BAJO RIO BRAVO/BAJO SAN JUAN IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed loan to Nacional Financiera, S.A., with the guarantee of the United Mexican States, for the equivalent of US$150 million to assist in financing the Bajo Rio Bravo/Bajo San Juan Irrigation Project. The loan would have a term of 25 years, including seven years of grace, with interest at 8-1/2 percent per annum. PART I - THE ECONOMY 2. Some of the major structural features of the Mexican economy - past present and future - were analyzed in "The Economy of Mexico: A Basic Report" (192-ME), distributed to the Executive Directors on June 26, 1973. Short-run trends in 1973-74 were covered in "Mexico: Current Economic Position and Prospects", distributed to the Executive Directors on September 27, 1974. Another updating report on the economy will be prepared by a mission which is scheduled to visit Mexico in July this year. Country data sheets are contained in Annex I. 3. For the three most recent of the six decades since the Revolution of 1910, the Mexican economic system, measured in terms of GDP growth, has been outstandingly successful. Since 1940, the annual average growth rate has exceeded 6 percent. And from the mid-1950s to 1972, Mexico was among the few countries in the developing world to combine sustained and rapid growth with monetary and balance of payments stability. Inflation averaged less than 5 percent a year and the dollar value of the peso was maintained at the level fixed in 1954. 4. Rapid and sustained growth was the product of successful policies affecting the mobilization and use of both private and public sector resources. The role of government in promoting economic growth was expressed on the one hand in the development of strategic infrastructure and major utility industries and on the other in policies which featured price support, import control and agrarian reform measures in the agricultural sector and external protection and the provision of fiscal incentives in the industrial sector. 5. The relative emphasis of public and private investment was, however, reflected in changes in the structure of output and employment and the expansion of manufacturing industry. Agriculture, nevertheless, continued to be the chief source of.employment and in 1970 accounted for 39 percent of the economically active population.  6. In spite of rapid and sustained economic growth over the last two decades, the combination of a high demographic growth rate - about 3.4 percent per year - and, until fairly recently, primarily import substituting industrial policies, have prevented an adequate absorption of the labor force in productive employment. Industrial growth has been quite substantial - about 8 percent annually over the past two decades - but could have been even faster if industrial and trade policies had been primarily focused to exploiting Mexico's unique export opportunities originating in its contiguity to a large industrial market in which labor costs are a multiple of those in Mexico. It was only in the early 'seventies that some major steps were taken to develop manufacturing exports on a large scale - the system of drawbacks on domestic taxes paid on exports and the "border industries"' regime were introduced at that time, and these have been so highly successful as to suggest that a lot more could still be done. As it is, 40 percent of the labor force is estimated in either marginal occupations - relatively unproductive and hence poorly paid - or openly unemployed. 7. The Mexican strategy for development has, in the past, relied on a combination of public action and private profit. The Government has played a highly important role in this process, both as a promoter of key sectors and as a setter of a regulatory and institutional framework within which private and social groups could compete and contend, but which was both firm enough and flexible enough to ensure overall continuity and stability. As a formula for growth, this system has served Mexico well, but it has also led to a sharpening of contrasts in income and wealth between people and among regions. This was not an entirely incidental by-product of the process of growth; the share of the Government in the economy was kept down quite deliberately for many years, and evidently the scope of redistributive policies was limited as long as tax ratios as low as 8 - 10 percent - among the lowest in the world - were maintained. The Government played a crucial role in the development of private commercial agriculture through its irrigation and credit policies and of industry through the provision of infrastructure, education, social legislation and financial policies, but it did not concern itself primarily with the problems of the poorest sections of the population. While the land reform of 1917 - widely spread in the 'thirties - was adhered to, the absence of abundant fiscal resources prevented major programs to improve the economic status of the beneficiaries of the land reform. The present Government, however, came to power on a program of combining past growth policies with much greater efforts in favor of the rural poor, and has launched a number of ambitious initiatives in this direction. Their continuity and viability will depend, inter alia on the Government's continued willingness to mobilize fiscal resources to support these programs. So far the record is impressive: the ratio of public revenues to GNP which in 1970 stood at 11.2 percent, for 1975 is estimated at 15.7 percent.  3 8. The attempts which have been made by the present administration (1970-76) to alleviate the poverty of the countryside and to redress some of the imbalances between rural and urban Mexico have several dimensions. They include a revised Agrarian Reform Law (1971) and a new Federal Water Law (1972), both of which are intended to promote a more equitable distri- bution of basic agricultural resources. These measures have been complemented by changes in the sectoral allocation of available agricultural credit in order to increase the share of low-income farmers and ejidatarios (members of ejidos, which are a form of collective land tenure based on usufruct), the introduction of higher support prices for basic foodcrops and increased government outlays for agricultural research, training and extension services, with particular regard to the needs of peasant farmers. Perhaps the most significant innovation has been a new program for integrated rural develop- ment with which the World Bank has been associated from an early stage. 9. The social and economic needs of the rural sector have not, however, monopolized government attention; those of urban-industrial development have also been stressed in the form of heavy public investment in basic industries - delayed during the 1960s - and an innovative low-income housing program which has been financed with a five percent payroll tax. Productive investment has thus been complemented, in the urban as well as the rural economy, by institutional changes and public expenditures designed to improve the living conditions of the poor. This parallel effort has, however, generated several problems of short-run economic management. 10. In 1971, after monetary and balance of payments pressures had emerged during the previous year, the (then new) Government took stringent action to control demand with the effect that the GDP growth rate fell to 3.4 percent by comparison with a decade average of 7.1 percent in the 1960s. In 1972, renewed expansion was stimulated by public expenditure and the GDP growth rate rose to 7.4 percent. There was another year of rapid growth (7.6 percent) in 1973 - but this time associated with an increase of 21 percent in prices (GDP deflator). Inflation was not the only novelty; private savings, which in the recent past had helped finance sustained growth, increased by only 11 percent, compared with an average rate of 18 percent in 1965-71; the inflow of private capital was replaced by a net outflow, and private investment, particularly in the industrial sectors, slackened, reflecting some uncertainty on the part of the business community. In the public sector, there was a record fiscal deficit - amounting to 5.6 percent of GDP by comparison with an average of 2.7 percent in 1965-71. A major share of the limited volume of real savings was pre-empted to finance part of this deficit while net external borrowing of US$1.2 billion (2.4 percent of GDP) was deployed to finance the rest. These trends were inevitably reflected in the balance of payments where the current account deficit rose to 3.0 percent of GDP (by comparison with an average of 2.0 percent in 1965-71). 11. Noting these trends, the authorities had, by mid-1973, put a restrictive monetary and credit policy into effect and complemented this with what was originally intended to be an austere public finance program  for FY74. Taken together, these measures were expected to restrict demand and to reduce both inflation and the size of the current account deficit. The provisional results for 1974 indicate that whereas the former objective was achieved, the latter was not. Monetary and credit policies were, on the whole, carried out as planned. The rate of increase of prices thus decelerated from April onwards, and a positive differential between Mexican and foreign interest rates was re-established by the end of the year although credit was not allocated as originally intended because the public sector again pre- empted a large part of the available quantity. Higher than planned public expenditures and lower than expected revenues meant,moreover, that the fiscal deficit was larger than foreseen as were the growth rates of aggregate demand and real imports. The deficit in the balance of payments on current account thus amounted to 4.2 percent of GDP rather than the intended 2.8 percent. Net public borrowing rose to US$2.9 billion of which US$1.8 billion was required to finance the fiscal deficit, the remainder being needed for balance of payments purposes including coverage of large capital outflows. 12. The Government's economic program for 1975 incorporates a major effort to mobilize additional public sector resources, the increase in revenues being estimated at more than 3.0 percent of GDP. Monetary and credit policies will continue to be restrictive although, given attractive interest rates, domestic savings are expected to rise. Public expenditures - both capital and current, are expected to increase significantly in real terms and the planned fiscal deficit amounts to 4.3 percent of GDP, three quarters of which will be externally financed. Planned internal public borrowing thus is modest, which means that the private sector will receive a major share of available credit and private investment is likely to increase. The resource gap is expected to decline from 2.1 percent to 1.3 percent of GDP - an improvement which reflects the growth of petroleum exports (projected at about US$450 million for 1975). The current account deficit is estimated at 3.5 percent of GDP. The 1975 program is thus designed to increase public and private investment and public consumption whilst reducing private consumption by means of taxation and a voluntary increase in private savings. From an equity standpoint the recent tax measures are progressive. The 1975 program is thus consistent with the Government's overall economic objectives, and if successfully implemented, should increase the productive capacity of the economy whilst furthering the cause of distributive justice. 13. On December 31, 1973, Mexico's outstanding disbursed public debt of more than one year was US$5.2 billion. Net medium- and long-term public borrowing in 1974 of US$2.2 billion reflects heavy reliance on external as well as internal capital to finance the fiscal deficit and some borrowing - as in 1973 - to offset private capital movements. 14. Annex 1, Page 4, shows that 41.3 percent of public external capital contracted in 1968-72 was borrowed from private banks and that international organizations accounted for the next largest share (22.2 percent). The World Bank accounted for 14.7 percent of all commitments. New debt contracted in. 1974, however, was obtained at higher interest rates and on shorter maturities than in the recent past, in the light of a severe contraction in international capital markets.  -5- 15. During 1975 it is expected that net public external borrowing of more than one year will be on the order of US$2.4 billion, which would amount to 3.1 percent of estimated GDP compared with 2.7 percent in 1974. This level of indebtedness is consistent with Mexico's projected future capacity to service the interest and amortization payments, taking account of the expected growth of real exports in the medium term. The behavior of petroleum production and exports is an important element in these projections. The size of Mexico's oil reserves has not yet been determined and published estimates differ widely from the official ones. However, taking account of (i) the proven reserves position as known to us, (ii) the likely avail- .ability of resources for investment, and (iii) the likely supply of invest- ment goods, the outlook for production in 1975-80 appears to be good. After allowing for increases in domestic consumption, the rate of growth of crude output and the export surplus will continue to rise each year. On our present expectations, by 1980, the net export balance of crude and petroleum products should be of the order of US$1,000 million. Mexico's debt service ratio was 24.5 percent in 1973. The estimate for 1974 is 18.0 percent. Assuming that the average terms of future debt improve slightly by comparison with those recently obtained, the debt service ratio is expected to be lower than 25 percent through i980. The Bank's share in public debt outstanding and disbursed at the end of 1973 was approximately 15.3 percent and its share in debt service payments was about 7.7 percent. These shares are not expected to change significantly in the remainder of the decade. 16. Mexico is thus creditworthy for borrowing on conventional terms provided the Government exercises due restraint in monetary, credit and fiscal policies; its recent actions in designing the 1975 economic program suggest it intends to do so. 17. In order to adequately meet its financing needs to assure continued growth with equity in the future, Mexico will have to both strengthen its fiscal effort and supplement that effort with substantial external borrowing. This is what the Government intends to do. Given that the country's diversified industrial structure is capable of supplying a good part of its capital goods requirements, some local cost financing by external agencies is necessary. Bank loans in sectors like power, transport and industry are traditionally tied to the foreign exchange cost of projects. I consider some local currency financing to be justified in other sectors with characteristically low foreign exchange requirements, especially fer high priority and institutionally complex projects like those for agrTcultural development which offer substantial economfic and social benefits and which call for strong institutional support from the Bank.  PART II - BANK GROUP OPERATIONS IN MEXICO 18. With the US$50 million loan for integrated rural development in the Papaloapan Basin signed on October 30, 1974, the Bank has made 38 loans to Mexico for a total of US$1,888 million, net of cancellations. At the end of March 1975, the Bank held US$1,540 million including US$561 million not yet disbursed. Most of these loans have been made for power, industry, transport, water supply,roads and agriculture. The execution of Bank-financed projects has, on the whole, been satisfactory. However, financial performance criteria have not been met under the Fourth Power Sector loan and the matter is being discussed with the Government; remedial actions are expected in the near future. 19. IFC has made 12 investment commitments in Mexico, amounting to US$54.3 million, of which as of March 31, 1975, US$36.3 million had been sold, terminated or cancelled. The balance US$18.0 million held by the Corporation consists of US$15.9 million in loans and US$2.1 million in equity. Annex 11 contains a summary statement of Bank loans and IFC commitments as of March 31, 1975 and notes on the execution of ongoing projects. 20. The main objectives of Bank lending in Mexico are (i) to support policies and programs leading to a wider distribution of the benefits of economic growth; (ii) strengthen policies and programs leading to continued economic growth, both by investing in projects that directly or indirectly make significant contributions to output and employment and by supporting changes that will make institutions function more effectively; (iii) help resolve critical adjustment problems that emerge from Mexico's continued growth; and (iv) transfer sufficient resources to complement Mexico's quite appreciable domestic savings and provide the necessary funds for economic and social investments in a framework of internal and external financial stability. 21. The composition of recent and prospective Bank lending to Mexico follows the evolution of the Government and the Bank's perception of Mexico's development needs both in terms of sectoral mix and in terms of policy emphasis. Thus, the Las Truchas steel mill, for which the Bank made a loan in FY74, is expected not only to further Mexico's industrial growth in an efficient mannier, but also to support the Governnient's program of industrial decentrali- zation. Similarly, the Airports Development Project (FY74) is designed to promote rapid and reliable domestic long-distance passenger transportation and to contribute to the Government's policy of regional integration. The earlier (FY73) Mexico City Water Supply Project also pursues multiple objectives. Responding to the need for expanding urban infrastructure, particularly in low-income areas, it has helped create a specialized institution for efficient management of scarce water resources that cuts across existing functional and administrative boundaries.  22. In view of the difficult structural problems of Mexico's agri- culture and the sector's crucial importance to the country's further develop- ment, the Bank has substantially expanded and diversified its support for agriculture. Consistent with the overall framework of country and sector objectives, a three-tier approach is being followed. First, Bank support is aimed at expanding and strengthening irrigation and agricultural credit programs so as to meet the demands of a rapidly growing population more adequately and to generate the foreign exchange for rising import requirements. Second, to assist the Government in its efforts to raise the incomes of the rural poor and improve their standard of living through a combination of directly productive, productive support and social infrastructure invest- ment. Third,to strengthen Mexico's institutional capability to use scarce agricultural resources more efficiently. 23. The present project would be one of the most important undertakings of the present administration to bring agricultural production back in line wrth domestic and foreign demand. It would also serve to improve the incomes of a substantial number of poor farmers. The Integrated Rural Development Project I (Papaloapan), and the Integrated Rural Development Project HI (PIDER) being presented to you along with this project, both have their primary focus on improving the living standards of the rural poor through integrated, multi-sectoral development. In addition, we are exploring the possibilities of assisting the Government in its efforts to expand agricultural education and to develop Mexico's lagoon fisheries. Finally, the Bank is helping to strengthen Mexico's resource management, both through the National Water Study which will provide the basis for a rational water development policy and through assistance in formulating and implementing a research and pilot program scheme for the tropical Gulf zones; an operation that, we hope, would lay the foundation for large-scale exploita- tion of tropical agriculture in the future. PART III - THE AGRICULTURAL SECTOR 24. Agriculture has long been a dynamic element of Mexico's economic development. The sector's growth record of more than 5 percent per annum over nearly three decades (1940-1965) is unique among Latin American countries. In that period, it managed to satisfy. the demand of a rapidly growing popula- tion and to transform the country from a net importer to a net exporter of agricultural products. Since the late 1960s, however, growth rates have fallen below the growth of domestic demand. Although prolonged adverse climatic conditions played an important role, structural constraints seem to be the main cause of sluggish production. The growing dependence on yield increases and crop diversification, as against further expansion of the cultivated area, indicates that the past policy of extensive development has largely run its course. Limited idle resources in the traditional agri- cultural areas will make short- and medium-term production growth primarily a function of progress in utilizing more efficiently resources already under exploitation, mainly in existing irrigation districts but also in the temperate rainfed areas. Production growth in the long run will, however, depend increasingly on the large scale development of Mexico's virtually unexploited tropical Gulf coast.  - 8 - 25. Although agriculture contributed only 10 percent to GDP in 1974, the sector is still the largest employer with nearly 4C percent of the labor force. It is also an important foreign exchange earner. Agricultural exports totalled US$1.3 billion in 1974, nearly 40 percent of total commodity exports. However, the net surplus of agricultural trade in 1974 was only half the 1972 level. Coarse grains, notably maize, wheat and soybeans, and milk powder account for most of the imports. The most important export products are cotton and sugar, with 22 percent and 16 percent of total agri- cultural exports, followed by coffee, tomatoes and livestock. While Mexico has diversified its agricultural production, maize and beans remain the subsistence crops for most of the peasants and the basic components of the Mexican diet. Together they account for nearly 70 percent of the rainfed and 10 percent of the irrigated cropland. 26. In relation to its size, Mexico has limited agricultural resources. Mostly because of inadequate rainfall or poor drainage, only 35 million ha are considered potential cropland out of a total area of nearly 200 million ha. However, only 15 million ha, 4 million ha of which are irrigated, are actually cropped. Water supply and control are, therefore, a sine qua ron of agricultural production in most of Mexico's cultivable areas. Public irrigation programs have in fact been a chief source of output growth since implementation on a large scale in the 1940s, and the land under irrigation in 1974 contributed more than 40 percent of total agricultural output. Public irrigation projects have laid the foundation for the development of a modern commercial sector which helped the country earn the foreign exchange needed to industrialize. 27. While until recently agriculture policies were successful in raising production, they did not attend to the pressing problems of rural unemployment, high degrees of income concentration and accelerated rates of rural-urban migration. The rural society is still a composite of striking differences, in spite of the far-reaching Agrarian Reform Legislation of 1917 under which more than half of Mexico's total land area was redistributed. The small class of sophisticated agricultural entrepreneurs contrasts with a large number of peasants in subsistence agriculture with generally small lots in unfavorable ecological conditions. These peasants typically work by traditional methods, barely participate in the market economy, live in primitive social conditions and subsist on a modicum of food production from their farms. According to a recent Bank of Mexico study, only 7 percent of the almost 3 million farms in Mexico are modern, while 53 percent are classified as subsistence units and another 40 percent as traditional, producing only small or no marketable surpluses. 28. More than 20 million people live in Mexico's rural areas. Agri- culture is by far their most important employment and income source. About 4 million families, representing close to 40 percent of Mexico's labor force, depend on agriculture for their livelihood. They comprise three distinct groups: 1.5 million ejidatarios, 1.2 million private farmers and about 1.3 million landless families. The number of landless agricultural workers  - 9 - is increasing rapidly as a consequence of limited farm land in relation to an annual rural population growth of 2 percent. It is estimated that 2 million rural families have incomes of less than US$135 per capita. The income spread, limited employment possibilities and the lack of infra- structure and social services have resulted in massive migration from rural to urban areas. 29. The present Government has responded to the need of increasing agricultural production and improving the situation of the rural poor. It has substantially increased the budget allocations for the rural sector in absolute terms and relative to other sectors, and significantly changed other policies. The more important features of its comprehensive and generally well-designed strategy are: (i) promulgation of new legislation aiming at a more rational and equitable resource utilization; (ii) reform and strengthening of the agricultural support services, technical and organizational assistance, credit and marketing in particular; (iii) expansion of irrigation and irrigation rehabilitation investment programs; (iv) creation of the National Water Plan to formulate comprehensive water management policies; (v) implementation of an integrated rural development program; and (vi) institutionalization of coordinating mechanisms among government agencies. PART IV - THE PROJECT 30. The proposed project would be the twelfth Bank operation for agriculture in Mexico. Previous lending in the sector consisted of four loans for agricultural credit, six for irrigation and one for integrated rural development. The project was appraised in two stages. The main mission visited the area in October and a small follow-up mission in December 1974. Negotiations took place from March 27 to 31, 1975. The Mexican negotiating team was led by Mr. German Sandoval, Chief of the Negotiating Section, Nacional Financiera, S.A. A report entitled '"Appraisal of the Bajo Rio Bravo and Bajo San Juan Irrigation Project" (Report No. 715-ME, dated April 16, 1975) is being circulated separately to the Executive Directors. Project Description 31. The proposed project would develop intensive agriculture and livestock operations on 280,000 ha in the irrigation districts of Bajo Rio Bravo and Bajo San Juan, located in the state of Tamaulipas on the right bank of the Rio Bravo (also known as Rio Grande) along the border with the United States. The project would complete the rehabilitation and betterment of the two irrigation districts initiated in 1964 under Bank loan 336-ME. Performance under the previous loan was satisfactory. Actual construction costs, crop yields and net farm income at the end of the project development period approximated i:hose forecast at appraisal. However, the scope of the project was too limited to achieve the water control required for extended diversification into high yielding crops and the application of advanced production techniques.  - lo - 32. The two irrigation districts form a contiguous block but have different sources of water supply. The Bajo San Juan District is supplied from the San Juan River reservoir at Marte R. Gomez, while the Bajo Rio Bravo District utilizes waters of the Rio Bravo from the Falcon and Amistad Reservoirs and the Rio Alamo in accordance with the provisions of the 1944 Treaty between the United States and Mexico (see paras. 35-37). The project works are prinarily designed to allow Mexico to use its share of the international waters more effecti-vely. This would be accomplished by lining the irrigation distribution systems to reduce water losses and leveling project lands to increase efficiency of water use on the farms. The existing drainage system would be enlarged and extended to lower high water tables and salinity content of soils. Other facilities would be provided to bring the districts up to the standard of a modern irrigation system. The intensive incremental technical assistance program included in the project would form an integral part of the national research and extension programs and complement and strengthen ongoing efforts. 33. The construction schedule is designed to minimize interference with ongoing production. Thus, project works would only be executed during the second cropping season on land blocks taken out of cultivation on a rotational basis for lack of water. Initial work would concentrate on lining the main canals. This would be done on existing alignments where canals can be taken out of service for at least a six-month period. Where this is not possible, parallel canals would be constructed, with appropriate connections to the existing system. Individual sections of the main canals will be lined only after completion of infiltration tests and water balance analysis to ensure most economical specifications (Section 3.02 Guarantee Agreement). 34. At present, water supply - through precipitation and irrigation - only meets about 60 percent of crop requirements in the main season. The proposed investment and technical assistance package would double irrigation efficiency from its present level and thus provide for adequate water supply for estimated crop needs in normal years. It is expected that the additional water supply would be used in the main cropping season. The increased production value under the project would, therefore, derive from higher yields and higher value cropping patterns rather than from an increase in cropping intensity. However, some farmers are likely to plant second crops although irrigation water availability for this would not be assured. International Waters Aspect 35. The water supply of the two districts iS regulated by the 1944 Treaty between the United States and Mexico. Under the Treaty, all flows in the catchment area of the Rio Bravo/Rio Grande below El Paso are accounted for and allocated between the two states according to a fixed formula. The proposed project would increase the efficiency of water use on the Mexican side without affecting the allocation of water between the United States and Mexico or the flow regime below the international Anzalduas dam.  - 11 - 36. The international treaty does not preclude either country from constructing additional water control works in the Basin but any ensuing reductions of inflows to the Rio Bravo are charged against the total water share of the respective country. The Mexican Government has, therefore, been asked for an assurance that no development will be undertaken in the Rio Bravo Basin that would deplete the water supply to the project without the specific concurrence of the Bank (Section 3.09 Guarantee Agreement). 37. In the past, the highly saline drainage waters of the Bajo Rio San Juan District were discharged directly into the Rio Bravo, and American farmers downstream claimed that their crops were damaged during low river flows. In order to resolve this problem, the Mexican Government has now constructed a lined channel to connect the Bajo San Juan to the Bajo Rio Bravo drainage systems. At times of low river flows, drainage water of the Bajo Rio San Juan is pumped through these systems ir,to the Laguna Madre at the Gulf coast and thus kept out of the Rio Bravo. Land Tenure and Income Incidence 38. The provisions of the new Federal Water Law on land expropriation are not applicable in the project area, since it comprises two established irrigation districts. However, as a result of earlier land reforms, only 2.5 percent of the farmers own more than 50 ha each and 12.1 percent more than 20 ha. Of the 18,670 farms in the project area, 7,440 '40 percent) belong to ejidatarios, 7,300 (39 percent) to private farmers and 3,930 (21 percent) to settlers. The average farm size for private farmers is 31.7 ha, for settlers 12.6 ha, an.d for ejidatarios 9.8 ha. 39. Most ejidatarios, settlers and a large number of private farmers are among the poorest 40 percent of the population; their income would increase substantially after full project development. The expected income distribution among project beneficiaries is a corollary to the land tenure pattern and, hence, will be only moderately skewed. 1/ Income Incidence of Project (US$ p.a.) Net Income Type of Farm Total Area Without Project With Project (ha) 10 ha Ejido 72,816 1,670 4,217 13 ha Colono (settler) 49,527 2,300 6,145 22 ha Private Farmer 158,621 3,000 7,570 1/ After taxes and before water charges, including income earned off the farm where appropriate.  - 12 - Markets and Marketing 40. The proposed cropping pattern is consistent with market prospects and the comparative advantage of the project area. Compared to present national production levels, the project would produce significant quantities of milk, cattle, vegetables, cotton, beans and oil seeds. Cotton, feeder cattle and vegetables are also traditional Mexican export commodities. Mexico's medium and long staple quality cotton has a well-established international position and the exportable surplus of the increased output from the project will find easy outlets on the world market. Mexico has recently imposed export quotas on feeder cattle to secure adequate supply for the domestic market. The project will help ease these restrictions and balance the decline of exports from their previous level of nearly one million head. The outlook for feeder cattle exports continues to be good in view of the many American farmers along the border depending on imports from Mexico for their fattening operations, and substantially lower costs of cattle raising in Mexico compared to the southern United States. 41. The project area enjoys an even greater comparative advantage with respect to labor-intensive vegetables such as okra, string beans and squash. While previous limited production had taken place on an incidental basis to fill gaps in the US fresh market supply during times of adverse climatic conditions, major US food chains have of late been relying increasingly on Mexican supplies for food processing. The projected vegetable production under the project for export after full devolopment, equivalent to 15 percent of Mexico's vegetable exports to the US in 1974, is consistent with the expected demand from the United States contractors. Overproduc.ion is unlikely to occur since the cropping area is determined each year by the size of contracts made before the planting season. If actual production were to deviate from the overall projected demand, adjust- ments in the cropping pattern could be made easily without jeopardizing the economic justification of the project because of the versatility of production in the project area. 42. The project area has excellent transport access to the major markets. Presently installed storage and processing capacity would be adequate for most products, but an expansion of the cotton ginning and milk processing capacitv would be required. The private sector is expected to provide for the additional capacity, as well as the packing and transportation facilities that might be required, as it has done in other parts of the country. Management and Organization 43. The Ministry of Hydraulic Resources (SRH), which has a long- established international reputation for the excellence of its technical staff, would be responsible for the project. While its headquarters in Mexico City would prepare the final design and issue the tender documents, field responsibility for construction, operation and maintenance of the p,c-iect would be delegated to the North Tamaulipas Zone Office. To strengthen  - 1 3 - the Zone office, experienced personnel from other offices would be transferred to fill key positions. Agricultural development - annual cropping patterns, water allocation, technical assistance and credit - would be handled by a Management Committee, comprising representatives of SRH, the Ministry of Agriculture, the Ministry of Agrarian Reform, participating banks and farmer representatives. Water Charges 44. The Government's policy objectives in respect of irrigation water charges are to (i) enhance the effective use of irrigation water, (ii) recover fully operation and maintenance costs, and (iii) recover as much as feasible of the investment costs. At present, however, only about half the operation and maintenance costs and virtually no investment costs are recovered through water charges. Further, water charges are levied on an area basis which puts a premium on land and not water as the scarce factor and, consequently, encourages farmers to maximize returns on land rather than water. These practices have to be seen against the historic background of Mexican irriga- tion development; irrigation water from public investment has traditionally been considered a free good to the farmer owning land in the command area of the lrrigation system. 45. The new Federal Water Law of 1972 constituted an initiative to redress this situation. However, the relevant provisions of the law on water charges have not yet been applied since the implementing regulations are not yet issued. Assurances have been obtained that the Government would, within seven months after the date of the Guarantee Agreement, issue the regulations as required to establish and collect water charges to recover the cost of public investment in irrigation (Section 4.02 Guarantee Agreement). The regulations are expected to lay down, inter alia, the following principles: i. Compensation charges for investment cost recovery and service charges for maintenance would be levied on a volumetric and service charges for operation on an area basis; ii. Compensation charges would be differentiated according to the value of crops grown; iii. Socio-economic studies would provide the basis for determining the compensation charges. The studies would be updated every two years to allow adjustment of the charges according to changes in the payment capacity of the beneficiaries; iv. Service charges would be adjusted every two years, taking into account the foreseeable cost development to ensure full recovery of operation and maintenance costs.  - 14 - Investment Cost Recovery 46. Estimates of the investment cost recovery can be made with accuracy only after completion of the socio-economic studies. The actual compensation charges will depend on (a) the farmers' net income after meeting all crop production costs, taxes and project operation and maintenance charges, less a minimum living allowance; and (b) an adequate income incentive to utilize land and water resources most effectively. Assurances have been obtained that the Government would carry out the socio-economic studies, in consultation with the Bank, promptly after completion of the works in each irrigation unit of the project and start levying compensation charges within five months after completion of the socio-economic studies (Section 3.10 Guarantee Agreement). The Government has stated its intention to update the socio-economic studies every two years and to recover the investment costs in a period not exceeding 25 years. The actual recovery period would, in this case, be less than 20 years if government revenues through incremental property and production taxes were taken into account. Using a 10 percent discount rate as opportunity cost of capital in Mexico, the investment would yield, in financial terms, a recovery index of 50 percent through directly attributable incremental revenues. Costs and Financing 47. The project costs, including contingencies (US$170 million), are estimated at US$384 million. The major cost components are civil works and technical assistance, which represent 69 percent and 22 percent, respectively, of base line costs. The Bank loan of US$150 million would finance the estimated foreign exchange cost of US$129 million - excluding material and equipment which the Government furnishes to the contractors - and 50 percent of the technical assistance program (US$21 million). The remaining costs would be met through government budgetary allocations. Details of estimated project costs and their financing appear at Annex III. Procurement 48. Contracts for civil works would be let under international competitive bidding and, whenever feasible, be grouped into large packages of at least US$1.6 million each. International competitive bidding would not be required for land leveling which SRH would contract in small jobs with local groups of farmers. This procedure has the advantage of associating the ejidatarios and farmers ultimately benefitting from the project in the execution of these works and, more importantly, providing them with training for adoption of soil conservation practices. International competitive bidding would also not be required for smaller works which,because of their nature and timing, cannot be included in the major contracts. The items exempt from international competitive bidding would account for less than 20 percent of civil works contracts to be financed by the Bank, which has been the limit for awards on local bids and negotiated contracts under  - 15 - previous irrigation loans. Building materials and standard equipment items purchased in bulk orders by SRH under local bidding and furnished to the contractors would not be financed by the Bank loan. Disbursement 49. The Bank would disburse against (i) 45 percent of payment to contractors for civil works let under international competitive bidding, for small civil works contracts procured under standard government procedures, which are satisfactory to the Bank, not exceeding the equivalent of Mex$2 million each, up to an aggregate maximum of Mex$100 million, and for land leveling; and (ii) 50 percent of the cost of technical assistance during the initial period of the project. The loan would be disbursed in seven years, i976-1982. Economic Justification 50. The proposed project represents one of the most important under- takings of the present administration to increase agricultural production. The annual incremental production value from the project area - Mex$1.9 billion (US$152 million) after full development, equivalent to about 4 percent of Mexico's agricultural production in 1973 - will help reduce Mexico's present deficit in foodstuffs and improve the balance of payments, both through export expansion and import substitution. 51. While the thrust of the project is on increased production, it would also help reduce unemployment. Under the project, about 17,000 man- years of new employment would be generated annually, which, together with the income effects and forward linkages to agricultural processing and marketing, would contribute to the revival of the sluggish economy in the lower Rio Bravo Basin with its 500,000 inhabitants. The project would benefit directly more than 100,000 people and generate additional government revenues through taxes of US$4 million yearly. 52. The economic rate of return is estimated at 19 percent. It would not fall below 14 percent even if a combination-of unlikely unfavor- able events were to ensue. Secondary benefits from acceleration of the general economic activity in the region as a result of the project were not quantified and, hence, not included in the economic analysis.  - 16 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 53. The draft Loan Agreement between the Bank and Nacional Financiera, S.A., the draft Guarantee Agreement between United Mexican States and the Bank, the Report of the Committee provided for in Article 111, Section 4(iii) of the Articles of Agreement, and the text of a Resolution approving the proposed loan are being distributed to the Executive Directors separately. 54. 1 am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 55. 1 recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President by J. Burke Knapp Attachments April 28, 1975  Annex I rage 1 of Is poges SOUNY DATA - PGMI 1,972,547 1i*-?fio (eid-1972) Pe r WOof arbab- lend SOCIAL MIC00TO05 Reference Countries M-xi- BorasiCl e pan aN? PER CAPITA US$3 (ATLAS BASIS) /I no7 7So 0 530 /2 80 / 1,210 I PDCMOGHIC Crude br,th rate (per thousand) 1.6 15 Ky38 /b.. 30 2<) Crude death rate (per thousand) 1i 9 / ~ 10 Aoc 3 0 Infant mortality rate (per thousand live births) 76 Id.a- 61 /2 110 79 28 Life sope-te..cy at birth (years) 50 K 65 / 61 /b.c 62 If, 70 Iroow3 eerdutuorte 3.7 3.1 lb, 2.6 22 1. Poe.lattn2growh ret9.2- 3-1.t2 Pepuletice g-oth rete - urban 55 Age et'jniaat (perweot) 0-1 11 (46ab 1239 25 15-6h 52 50 a 53$ 55 63 65 and over I. b oh6 kgo dop_endey ratio A( 0.9 I.O 0.97 0.8 Za 0.6 Ec_uomi drpc-ce-y rdi . 2.0 1.5/3 1.6K 1.0 La lobac popjlati- as peroet of total 51 Lhi 60 Lh 56 /3, 76 /3 (49 /o.k Panily ploonig: Nt. of oooptors cumultlvs (tim-u.) ...250 No. of.u..rs % of arried m )...1.6 TYtaflbur forue (thoosands) 111,300 13,000 29,600C 3,00 170 Perootego opleyed in egriatjire 51 103.00 19 2,? p Per.etago un.eployed .. 7 2L Ky 2 IGCOat DISTRIBUIYfON Peost _fosico lo-a reoai-d by highest 5% 29 Is 36 33 / 30 ~.7 P-rcet of raioa looe . r.co...ued by hlghoet 20% 59 /r.y 6L ..e 62 /n Peroont of rition1 incom r-osi-d by Icanet 20% 1./r.i. L(4 _t, 3 5 P.r,-t of ntiocal inco- coci-d by Ioseet 10% ii 11 /jjt 1lai. 13 ) MiSTIBUTRIOM OF YARD OIOMSOiSIP I ow-ed by top 10 o Iowes .. I ownd by salient 10% of cenre . HEATh dM Mh31ZTLF0N )boaioprphycicil- I,00oo 1,14L 1,950 4 2,010 <(p 750 /k Popolotino Per eurelg p. erso 2,650 Lia 1,570 3,3CC 34 5,320 /2 1,30 / PPopulttun Pee hospital bad 590 4r 930 260 250 220 / Per .epita caoieepply as % of requiremoote 4E5 102 Las fl 109 101 107 hr, oWita protein opply, total (gras per dayy/3 65 /3, 65; 61 71 01 DeOf ehich, arimal and V01It 29 / 20 39 32 o0 /3, Deth rote 1-4, 2... /7 l14 to 3/t, 0.9 C /8 prinary schoo euro-l.et rotie l1ob( /24 130) L4,ni- 1i9 /c ad 83 Adjusted 7! se ondary school onolmctrtio 9 23 27 L34dc, 29 19 Tee., of -Oooltg, presid.d, firet and secod inel 12 12 13 02 12 Vnca.tios... eI olnte I of sac, school enrollment 21 21. K 17 33 20 AdultiLitr-ayrletei 62 /23, 81 . 60/arf 90 It. 9..k!j Adrecpg No. of persons per room (urbac) 2.,6 h7 2.2 /1.0 1.03 ky~ P rost of occpied units ithou"t piped onitr 60i6kj/j 0 ,p, 1 Access to electricity (as of tot. peplation) .59 LL. 7 lc.o 0 L2 Peron-t of dorm) pepulotice oo eo-td to electricity ...1 lan 30 /3b Rdorsi-nre per 1D00 peplatico 95 301 /a61 /n 119 /o 2104,~ Pea.nosge cars pec 1003 ppelatlcen 1( 28 7;29 7p; 19 /-P 95a SIac. i per ousptitoc (kwh p.O. 338 L. 662 7. 5(4( /a 90 1916 I Newsprint ocsuptice p.o. kg per year 2.5. 237 607 NOW-s, Figures refer tither to the letamt periods or t. eccoat of eurirr-satal tmperature, body neighto. -cc the latest year. Itotst perodo refer in priooipla t. dietrihutico by' age aeSsnd o- f causal POPaitiOeo. the year i956-60or 186g6-70; tie intact y'nar in prim- /6 Prtotin twceoArds (reoairsoests) for all n-atriss as estLib cipi t o 1960 and 1970. linhed by 0(56 Ecoonlc R-.oerh Service proride for a n1intu /3 The Per Copita GOP e.istImt is at morOn pri- foraloac of 60 gr-n of tutmi protoin per day, ma 20 gram of ycae othcr than 1960,-clculoted by the s.ns conerIon anIml and puI.. protato, of ecich 10 gane should he animal le-4oqua an tho 1972 World Bank itlac, protein. Theas etondard era n ,,bst 1san than thoon of 75 /3 ,.Lnege nuber of daughtoro per woma of reproductive gras of total protao and 23 grams of anial1 Proteic as an age. averae for the -oed, proposed by FAD in the Third Whrid Food /2 Pbpolmtion growh mum. ar for the deco.des ncdi.g io Su-ey'. 1960 and 1970. n ose, otodts hav euggested that crude doth rates of childre Aiifttio of population under 15 and 65 and ove to pojoam- age I throgh (4 nay' he oad asafirst pyprlaation inds of tionio agai 15-6(4 for age dependenny rtio md to labor malnutri tion. f.oe Of Ugsn 15-6k for onoxeic dependency ratio. /8 Parnetage enrolled Of ou-mepodiog population of euhoci age /2 fla reference etada-da. rpresent plwelol.ginsa .~ as daficed for moth doaty'Y. quiremenia for aoral ao.linlty and hamlth, tekLIug /a 197y1 A5 1965-70< Lx. Esatiteat; /d 1959; /a 1959511; If, 1969-701 a2 1960-72; A4 Localitiee of 2,5CC or sor; A3 Urbmoand subur1ban e-e of ediaeicesimtive er of unini.palitie, and daetrcte; /LPplatmd nenter which her o ifinite, urban oha-aotarlin1 contributed by, nertkin public and munricipal eariose; A2 5 tie. of 10,000 or sore inghabitants; /I Ratio of population under iS and 60 end over to those in age group 1s-59, /a 15-S59 yearn /2 60 yearsa and over; /a Population under 15 end 60 end over; /2 IPllj /j Based an 1.3 percet samsple tabulati-om f c-ne returs, excluading ladiun Jungle population; ar 1963; Aj HOusaba1de; It, 1969; /. 1966; 2 1961; aGvrmeant only; /x Rueber on the register, cot all n6kisgj in the countr7; /2 Hospital pereoungl; 162.5 Gl961l.62; /sk 19173; L%_c Rg1stecd onLly; 2d Gm-. enarollment which includes -nerege. students; unkmowo; /al 15 y'e' and over;g hiDat refer to living quartee; /24 1960462; /2) Data raer. to houaiog unIte; /k Dhi.m rfer to hOumpholda; /g). ItitSat based on mampe taolatin ocf c-anue returne; date refer to dweIlinge; - Inride or outside; an cluding emel-prarenent dwellings; /w. Inside only'. eSPaIn hoe bean seleted as an bjeoti,e r-utry hecaum its per capita iooms Is higher thanMelo and heceuse bath ucuotrira har- coeo the importance of t-urane and the tfluanne of cearty richer countrin.o 33 Apr01 2(4, 1975  099or I MEXI 0, E..-.,, DSyLj.Z- Dt. Sh-L~ ~ ~ ~ ~ ~~ ~~age0 c 1 Art-,2 Jo-. Eat. Poctd1960 1905 1920 1975 1940 - V 155 2529 97g3 15974 797. 7 O., 79: 0 19969 [925 2979 6.99 1 19 1956iA till2 04' 2-Scar .2:. 004354.41939-69 Po-r, ~SE h'63:ac Ac-ro Arc.-! G-oh