Third Irrigation Project Mexico

Document of The W orld DanK FOR OFFICIAL USE ONLY Report No. 1 067 PROJECT PERFORMANCE AUDIT REPORT on MEXICO THIRD IRRIGATION PROJECT (tan~n IL'0-M1 7A k 0 1 O7 VLOL%L11 U , 1JI- 1V Operations Evaluation Department This document has e restricted istrbution and may be f by irecipieus only in the perfurmance uf their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PREFACE Loan 450-ME, signed in May 1966, was closed in December 1973. This report presents the results of a performance audit of achievements under the loan, as well as a critical review of its original design and its implementation. The audit was based on information contained in the project's appraisal and supervision reports, in the Project Completion Report prepared in 1974 by the Latin America and Caribbean Regional Office, in other material from Bank files and in the progress reports submitted by the Secretaria de Recursos Hidraulicos (SRH, the Mexican executing agency) and on discussions with Bank staff in Washington and with SRH officers at headquarters in Mexico City and at the project sites in Torreon and San Juan del Rio. The valuable assistance provided by the Government of the United Mexican States in the preparation of this report is gratefully acknowledged. 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.  TABLE OF CONTENTS Page No. Project Performance Audit Summary i-v Attachment: Project Performance Audit Report I. Project Conception 1 A. Background of the Project 1 B. The Project 2 C. Critical Assessment of the Project Conception 4 1. The Conception of the Lagunera Part of the Project 4 2. The Degree of Preparation of the San Juan del Rio Part of the Project 6 3. The Exclusion of Technical Services as a Project Component 8 4. The Overly Optimistic Assumptions about the Time needed for Land Leveling 9 5. The Exclusion of Some Important Project Costs 9 6. The Benefits of the San Juan del Rio Part 9 7. The ex-ante Rates of Return 10 II. Project Implementation 11 A. Physical Execution and Time Delays 11 B. Cost Overruns 14 C. Disbursements 16 D. The Fulfillment of the Supplementary Loan Conditions 16 E. Organization and Management 20 III. Project Impact 20 A. Water Supply 20 B. Agricultural Production 24 C. Employment 33 D. Income Distribution 33 E. Institution Building 34 F. Economic Rates of Return 34 IV. Borrower Performance 34 V. Bank Performance 35 VI. Conclusions 38 Annex Tables 41 Diagrams 46 Maps 51 - 53  PROJECT DATA Amount of Loan US$19.0 million Amount Disbursed US$18.4 million Amount Cancelled US$0.6 million Date of Loan Agreement May 25, 1966 Original Date of Effectiveness September 15, 1966 Actual Date of Effectiveness December 30, 1966 Original Closing Date March 1, 1972 Actual Closing Date December 31, 1973 Completion Report Date April 1, 1974 CURRENCY EQUIVALENTS US$1.00 = Mex $ 12.50 Mex $1.00 - US$0.08  Proiect Performance Audit Summary MEXICO THIRD IRRIGATION PROJECT (Loan 450-ME) Project Conception 1. In May 1966 a US$19 million loan (Loan 450-ME) was made to the Mexican Government to assist in the rehabilitation and expansion of the irrigation systems in two Districts: Region Lagunera and San Juan del Rio. It was the third in a series of seven irrigation loans made to Mexico. 2. The projects comprised the construction of one dam in each District, the improvement of the distribution network, the construction of service roads and houses for the ditch-riders, and land leveling of the whole irrigation acreage. 3. These works were expected to increase the availability of sur- face water and the reliability of its supply. As a result, the irrigated area was going to be increased by 62% in Lagunera and by 85% in San Juan del Rio. Canal lining in Lagunera was expected to reduce seepage recharge to the aquifer and, thus, decrease the area irrigated with groundwater by one third. 4. The Mexican Government committed itself to increase and improve the technical services to farmers in both districts and to make available specific amounts of credit funds to them. Yields would be raised as a result of both the more opportune and dependable water supplies and the increased technical services and credit. 5. The Mexican Government also committed itself to bring under con- trol the excessive pumping of groundwater in the Lagunera basin and to establish adequate water charges so that the water users would fully bear operation and maintenance costs and pay reasonable amounts towards amorti- zation of the project investment costs. 6. In general, the project was well conceived and designed. However, these specific points deserve some comments. a) The Lagunera part of the project failed to recognize the surface and groundwater irrigated areas as sub-systems of a more comprehensive system. Alternative solutions involv- ing the conjunctive development and use of both kinds of water were not analyzed before appraising this project. - ii - Since it covered only the former, the canal lining com- ponent was not adequately defined and appraised; and the area and production increases were overstated; b) although the evidence is admittedly inconclusive, it seems that the San Juan del Rio project was not yet ready when it was submitted to and accepted by the Bank. As a result, the planned costs were doubled and important delays occurred. It is possible that a more thorough preparation would have advised the postponement of the project. c) the increase and improvement of technical services, although considered essential, were not included as a project component, but only as a loan condition to be fulfilled by the Government. Had they been carefully planned and included as a project component, their im- plementation would have been easier and the Bank could have expressed more firmly its concern with the delay in providing adequate technical services at San Juan del Rio. This delay was one of the causes of the late reali- zation of the project benefits and,so, of the low present internal rate of return (IRR) estimate for this part of the project; d) lack of experience of both SRH and the Bank with large- scale land leveling led to over optimism in both the costs and schedule of land leveling; e) the costs of technical services and on-farm investments were not included in the project costs, and some of the project benefits were overstated or expected to arise sooner than possible. Thus, the expected IRRs were over- estimated for both parts. (Revised IRRs taking into account the above factors would have been 8% for Lagunera and 10% in San Juan del Rio instead of the appraisal report figures of 11% and 16% respectively.) No contingency allowance or sensitivity analysis was made for possible yield and price deviations,for the risk of cotton diseases,and for time delays in construction. Project Implementation 7. Delays of up to two years occurred in executing civil works in Lagunera and of almost four years in San Juan del Rio. The total con- struction period in the latter district was more than twice as long as planned. Consequently, the loan closing date had to be put off for almost - iii - two years. By this new closing date, all the civil works involved were completed, but land leveling was not terminated in Lagunera and was abandoned altogether in the San Juan del Rio region. The actual costs were 26% above the project forecast at Lagunera and 92% at San Juan del Rio. The above-mentioned deficiencies in project design and some problems with the contractors are the main causes of these time delays and cost overruns. Project Impact 8. Project works allowed an increase in the amount of surface water available for irrigation in both districts. Contrary to expecta- tions, the volume of groundwater being pumped at Lagunera has not yet decreased, resulting in a more speedy drawdown of the aquifer's water table, which is, in some places, approaching its lower limits. 9. The area irrigated with surface water in Lagunera increased from 45,000ha at appraisal to 84,0)0 and89,000 ha during the last two years. The District authorities intend to restrict the area subject to per- manent irrigation to 80,000ha. This permits the area irrigated by each of the 35,000ejidatarios to double from 1 to 2 ha, while maintaining the area formerly irrigated by the small landowners. 10. The efforts made by SRH have brought about a substantial increase in the water conveyance efficiency and in the on-farm water use efficiency. Taking both concepts together, the amount of water that had to be released from the reservoirs to irrigate each hectare was reduced by 40%. 11. A similar effort is being made in the groundwater irrigated area beyond the project scope. The expected water savings would eventually compensate in full the decrease in the availability of groundwater brought about by canal lining and,in addition, would partially offset the effect of the aquifer depletion. Therefore, the area irrigated with groundwater in Lagunera would be reduced only by some 12,000ha instead of the 40,000ha envisaged at appraisal. 12. The irrigated area remained unchanged until project completion in San Juan del Rio. In 1973/74 some 8,000to 8,500ha were irrigated but this figure dropped to the pre-project level of 5,000ha in 1974/75. The fact that these figures are below the projected 10,000ha is due mainly to the delays in project completion and the lack of opportune technical assistance and enough credit. 13. Expected changes in the cropping and diversification pattern only partially materialized. Some crops (mainly cotton) have shown noticeable yield increases, attributable to: (i) the larger, more dependable - iv - and more opportune water supply to farmers, (ii) the increase in the quantity and quality of the technical services provided to the farmers, and (iii) the increase in the utilization of fertilizers. As a result, the value of production in the last two years has exceeded appraisal forecasts at Lagunera. It is still 20% under what was expected at San Juan del Rio, though the targets may be reached in the near future. 14. The project had some income distribution effects, improving the situation of the poorer farmers more than that of the more wealthy, although no explicit reference was made to this point in the appraisal report. Moreover, additional employment has been created. 15. The Lagunera part of the project was a successful and worth- while effort. Since production increases came about faster than planned, since cotton retained its high share in the cropping pattern and since the expected reduction in the groundwater irrigated area has so far failed to begin to materialize and is now envisaged to be less than anticipated at appraisal, the IRR has been recomputed at 21%, twice the appraisal forecast. 16. On the other hand, investing in San Juan del Rio proved to be unprofitable. Actual implementation period and construction costs doubled appraisal estimates, and project benefits are so far smaller and have materialized later than expected. The inadequate project preparation referred to in paragraph 6.b is to blame for this poor performance. The IRR is figured now at only 5%. The Performance of the Borrower and of the Bank 17. The overall performance of the Borrower was satisfactory. It complied adequately with its bidding, constructing and financing res- ponsibilities and, apart from some minor issues, no organizational or management problems arose during loan implementation. The Borrower, however, did not comply with two loan conditions: (i) no direct actions were taken before project completion to enforce a reduction in the rate of groundwater extraction; and (ii) the water charge condition has been complied with only with respect to Lagunera's operations and maintenance costs; it is yet to be complied with in San Juan del Rio and in respect to the additional amortization charges in both districts. 18. Bank performance was, in general, satisfactory. However, a deeper Bank involvement in project preparation and a more critical Bank role regarding the project design submitted by SRH would have resulted in more profitable activities at both sites and, perhaps, as mentioned above, might have resulted in postponement of the San Juan del Rio part. - v - 19. Bank supervision was satisfactory, though irregularly spaced, but the turnover of supervision staff was undesirably high. 20. The Bank has no information about what is happening after project completion. A Mexican offer to submit continued reporting on Loan 450-ME was dismissed by the Bank for the purely formal reasons that no such obligation existed after the loan was closed. Projects like this, whose benefits begin to materialize mainly after project completion, merit follow- up and reporting arrangements adequate for this purpose.  Attachment Project Performance Audit Report MEXICO THIRD IRRIGATION PROJECT (Loan 450-ME) I. PROJECT CONCEPTION A. Background of the Project 1.01 Arid and semi-arid climatic conditions, together with a large amount of mountainous terrain, limit the cultivable land in Mexico to about 30 million ha, 16% of the total land area. Because of these con- ditions, many schemes were developed by the Mexican Government, mainly with its own resources, to bring more land under irrigation. These irri- gation works were responsible for a large part of the sustained increase in agricultural production during the last decades. 1.02 The endeavor to increase the area under irrigation as rapidly as possible led to the construction of some irrigation systems which did not make full use of the potential water resources. Later, the Government con- cluded that the rehabilitation of some of the existing irrigation districts would yield a higher economic return than the construction of new ones. Secretaria de Recursos Hidraulicos (SRH, the Mexican agency responsible for irrigation works) identified and formulated several rehabilitation projects and the Government submitted them to the Bank and other foreign aid agencies (Export-Import Bank and Inter-American Development Bank). Several stages and a prospective timing for their submission to the Bank were prepared, taking into account the degree of progress of the preparation reports on each of them. 1.03 Two of these rehabilitation projects (Region Lagunera and San Juan del Rio) were submitted to the Bank in July 1965 and appraised in August 1965. On May 25, 1966 a US$19 million loan (Loan 450-ME) was made to assist in financing their implementation (US$16.6 million for Lagunera and US$2.4 million for San Juan del Rio). The projects were expected to substantially expand the irrigation area in both districts: (i) providing more water and increasing the reliability of its availability through the construction of additional dams, and the reconstruction, enlargement, and improvement of the distribution systems; and (ii) increasing the on-farm efficiency of water utilization, through land leveling of the entire irrigation area and improve- ment of agricultural services. This was the third of a series of seven loans made by the Bank to Mexico from 1961 to 1975 for irrigation projects and the only one to affect those two districts (see annex 1). - 2 - B. The Project 1.04 The project covered two irrigation districts: (i) Region Lagunera, in North Central Mexico, where 5%670 ha were already irrigated with surface water and about 60,000 ha with groundwater, and (ii) San Juan del Rio, approximately 170 km north of Mexico City, where 5,400 ha were already irrigated with surface water and a further 600 ha with water pumped from underground aquifers or surface streams (see map 1). 1.05 Irrigation had been practiced in both areas for many years. Approximately 20 years prior to the loan date, the Mexican Government, through SRH, built one dam and some canals in each district to provide for better water regulation and to allow for better use of the water supplies. Though reasonably well constructed, some features of these irrigation works were below optimum standards and certain facilities had deteriorated because of inadequate maintenance. 1.06 Most farmers in both districts are "ejidatarios," very small and poor farmers who jointly hold (and sometimes work) the communal land: Number of farms (thousands) Aver. size of farms (ha) Ejidatarios Independent Total Total Irrigated Smallholders Holding area Region Lagunera 35.0 2.8 37.8 3.8 1.3 San Juan del Rio 2.7 0.5 3.3 5.5 2.0 1.07 In Lagunera the project comprised the following works: - the construction of the Francisco Zarco Dam on the Nazas River (reservoir capacity: 300 million m3) to regulate the torrential inflows into the 250 km reach of the river below the existing Lazaro Cardenas Dam; - the abandonment of the existing distribution system and the construction of 1,000 km of new concrete-lined canals; - the construction of 1,300 canal structures; - the construction or rehabilitation of 500 km of maintenance roads; - the construction of 100 houses for ditch-riders; and - land leveling of up to 85,000 ha. - 3 - The cost of this part of the project was estimated at Mex$720 million (US$57.6 million). The area irrigated with surface water would increase by 62%, from 52,670 ha to 85,000 ha (see map 2)1/. 1.08 The project would bring about some negative effects. Water seep- age through the existing canals was assumed to be one-third of the source of ground- water. Therefore, canal lining was expected to eventually reduce the area irri- gated with groundwater by one-third: 20,000 ha out of the 60,000 ha then irrigated with groundwater..2 1.09 In San Juan del Rio the project comprised the construction of: - the Constitucion de 1917 Dam on the Caracol River (reservoir capacity: 45 million m3) to store the flow of that river and the excess inflow to another river, the San Juan River, below the existing San Ildefonso Dam; - a 15-km feeder canal to carry this excess inflow to the Constitucion de 1917 Dam; - 110-km of new canals and the reconditioning of 40 km of existing canals; - 300 canal structures; - 16-km of surface-water drains; - 8 houses for ditch-riders; - new maintenance roads and improvement of the existing ones, with a total of 120 km; and - land leveling for up to 10,000 ha. 1/ Lagunera is made up of three different parts: (i) Rodeo and Nazas, with some 7,500 ha, along the river bed upstream from the Francisco Zarco Dam (called Unit 1 in the appraisal report); (ii) San Jacinto, along the river downstream from this dam but upstream from the deviation dams from which the main canals are born; and (iii) the Lagunera plain, irrigated by these canals (both ii and iii together were called Unit 2 in the appraisal report). The appraisal report consolidated information about the three parts. But the first one was neither by intention wr in fact benefitted by the project. Therefore, only the two last parts (i.e., Unit 2) are considered in this text and in all its tables, with the exception of section I C.I. and Table 1, where both units are taken together to preserve the appraisal report estimates and forecasts. In Unit 2, the area irrigated was expected to increase from 44,100 ha to 77,500 ha. 2/ According to the project estimates, the natural infiltration of rain water through the basin's pervious materials, and of river water through the Nazas and Aguanaval Rivers stream beds,was credited with another third of the groundwater sources, and, as a result of pumping at a higher rate than the recharge, the "mining" of groundwater from the aquifer was credited with the last third. Since this "mining" was depleting the aquifer and the water table depth was progressively increasing, this overdrawing was expected to eventually reduce the area then irrigated with groundwater by another 20,000 ha. The project did not consider the deep percolation from the irrigated land as a source of recharge for the aquifer. The cost of this part of the project was estimated at Mex$98 million (US$7.8 million). It was expected to almost double the area irrigated with surface water from 5,400 to 10,000 ha (see map 3). 1.10 In addition to the hydraulic civil works construction, the Mexican Government committed itself: a) to increase and improve the technical services to farmers in both areas (expand the number of extension agents, establish training pro- grams for them, establish demonstration centers, etc.); b) to make available specific amounts of credit funds for short- and medium-term loans to the farmers through the banks serving the two districts: altogether 2.3 million pesos (US$0.2 million) for medium- and long- term credit, and 116 million pesos (US$9.3 million) yearly for short-term credit; c) to control the annual cropping pattern in both districts in accordance with the available water supplies and to veto any agricultural plan for which sufficient water was not going to be available. Areas planted with cotton, a relatively high water user, were going to be reduced, and these areas were to be replaced by crops with lower water requirements. d) to take the necessary steps, insofar as practicable, to bring under control the excessive pumping of groundwater in the Lagunera basin; e) to carry out water and soil salinity studies at Lagunera; f) to promulgate rules for adequate operation and maintenance of the works constructed under the Loan and, after completion of works, to establish adequate water charges so that the water users should bear operation and maintenance costs fully and pay reasonable amounts towards amortization of the investment in the rehabilitation works. C. Critical Assessment of the Project Conception 1.11 In general, the project was well conceived and prepared. Never- theless, there are seven specific points that deserve some comments: the conception of the Lagunera part; the degree of preparation of the San Juan del Rio part;the exclusion of technical services as a project component; the overly optimistic assumptions about the time needed for land leveling; the exclusion of some important project costs; and the way in which some of the benefits and the internal rates of return were estimated. 1. The conception of the Lagunera part of the project 1.12 This part of the project failed to recognize the surface and groundwater irrigation schemes as sub-systems of a more comprehensive irri- gation system, and the interspersed surface water and groundwater irrigated -5- areas as parts of a single production system. At appraisal 52,670 ha of the Lagunera area were irrigated with surface water in both Units 1 and 21/ interspersed with some 60,000 ha irrigated with groundwater by tubewells..2/ Both kinds of water were intimately related in their origin and in their use. Seepage of sur- face water was an important source of groundwater. Relationships of com- plementarity and substitution could be established between them as they irrigated intermingled areas. Many Lagunera farmers use both kinds of water simultaneously to irrigate different parts of their land, and production, employment, income and other benefits are obtained together, with limited possibility for separate attribution by water source (see diagram 1 and map 2). Therefore, the project should have comprised both categories: surface irrigated area and groundwater irrigated area. 1.13 Alternative solutions involving any increase in the groundwater supply were not considered. The project seems to offer the best design to increase surface water irrigated acreage, but no steps were taken during project preparation and appraisal to identify, analyze and compare all alternative strategies directed at the increase of the Lagunera's whole irrigated acreage. It is possible that a different project, including the development and use of both kinds of water (surface and groundwater) could have brought about more income in most years with a higher security margin. 1.14 Since the appraised project covered only the surface irrigated area, the canal lining component and its partly offsetting effects on sur- face water and groundwater supplies were not adequately defined and appraised; and the increase in the irrigated area and in the production value was overstated. These subjects are analyzed in the following paragraphs (1.15 to 1.17). 1.15 Economic viability was assured only with reference to the project as a whole, but the economic viability of the major components was not analyzed. One of these major components, canal lining, was the most expen- sive one (33% of the total cost of the project; one and one-half times the cost of the dam) and the only one which was going to reduce the availability of groundwater for irrigation. As such, the canal lining component should have born all diseconomies derived from this reduction. On the other hand, in a closed system, such as Lagunera, canal lining was not a water-saving device but actually a device to change the source of water utilized to irrigate one-third of the former groundwater irrigated area (20OO ha out of the former 6Q000 ha) from groundwater to surface water. Therefore, canal lining should have been treated as a separate sub-project, and so appraised, taking into account its own costs and benefits. 1/ See footnote to paragraph 1.07. 2/ Neither at appraisal nor at present is there exact information about the acreage actually irrigated with tubewells. - 6 - 1.16 The project documents stated that the planned works were going to increase the irrigated area by 62%, but the increase possible to obtain was only 11%, because: (i) the pre-project irrigated area was not 52,670 ha but 112,670 ha, considering both the surface water and the groundwater irri- gated components, and (ii) the appraisal report assumed that canal lining would eventually eliminate one-third (20,000 ha out of the 60,000 ha) of the area then irrigated with groundwater (see again para. 1.08 and table 1 and diagram 2). 1.17 The increase in the net value of production would be only Mex$56.8 million, instead of the planned Mex$120.5 million (53% less than planned), because 20,000 ha out of the 85,000 ha covered by the project were not addi- tional but a substitution for the 20,000 ha to be eliminated by canal lining.-l 2. The degree of preparation of the San Juan del Rio part of the project 1.18 The planned works were considered sufficient to meet all crop require- ments throughout the irrigation period. Moreover, it was expected that additional areas might be irrigated in most years, although these were not taken into account in the benefit projections. However, during the course of construcion the capacity of the storage dam had to be increased from 45 to 75 million m and the location and design of the diversion dam and the alignment of the feeder canal had to be changed. These changes followed: a) a new hydrological study prepared by SRH which indicated that the combined annual flow of the Galindo, "H" and San Juan rivers, would be 43.9 million m3 per year, instead of 35.9 million m3 as previously estimated; b) the discovery that water requirements for irrigation had been underestimated in the original study; c) the discovery during construction that the existing diversion dam was not founded on rock and raising it would be impractical, so a new diversion dam had to be designed and constructed.2I 1/ Another one-third of the then production depending on wells would eventually cease as the available groundwater reservoir is progressively depleted (see footnote to paragraph 1.08). But neither this decrease in production nor the groundwater depletion are related with the project (see Table 1). 2/ When doubts about the geological foundations of the Francisco Zarco Dam in the important Lagunera District were reported, the Bank hired a special geological consultant whose recommendations were made a manda- tory part of the loan agreement. No comment was made by the appraisal mission, however,on the geological foundations of the main and diversion dams in the smaller and less strategic San Juan del Rio District, nor on their hydrological and irrigation studies. - 7 - Table 1 REGION LAGUNERA - THE PLANNED INCREASE IN THE IRRIGATED AREA.a/ Source of Water Groundwater Surface Water Total Area Before After Before After Before After (in thousand hectares) a) Changes in area attri- butable to the project Lands with unchanged status 40.0 40.0 52.7 52.7 92.7 92.7 Lands whose water source was changed by the project- 20.0 - - 20.0 20.0 20.0 Additional irrig. lands - - - 12.3 - 12.3 Total 60.0* 40.0 52.7* 85.0* 112.7 125.0 Percent increase -33% 62% 11% b) Future changes unrelated to the project Further reduction of the area irrigated with groundwater as result of depletion of the aquifer 20.0* - - Total future irrigated area in Lagunera 20.0 85.0 105.0 Percent increase -66% 62% -7% a/ This table was prepared for this audit on the basis of information provided in the appraisal report (those figures with *). Rodeo and Nazas (i.e., Unit 1) were included, in order to preserve the actual appraisal report estimates and forecasts (see footnote to para. 1.07). Neither at appraisal nor at present isthmeexact information about the area irrigated with groundwater. b/ Although equal in area, the additional 20,000 ha to be irrigated with surface water were not the same physical 20,000 ha then irrigated with groundwater that could be expected,to lose that gource of supply. - 8 - Furthermore, and besides the increase in dam size, 24 tubewells had to be drilled later by SRH to meet the water requirements of the district.1/ 1.19 The projected land leveling had to be eliminated after shallow soils were discovered in much of the project area. 1.20 The evidence obtained from the Bank's files and the interviews with Government and Bank staff members is unfortunately inconclusive and does not allow a definited statement to be made. However, while allowing for the advantages of hindsight in assessments of this sort, it seems that the project was not ready when it was submitted to the Bank and that further study should have been conducted before the project was appraised. A more complete preparation would have shortened the execution period and perhaps reduced the cost increase or, conversely, would have advised the postponement of the project on the grounds of its unprofitability at that time. 1.21 On the other hand, it is not unusual that the definitive geologi- cal, hydraulic and agricultural studies for a complex project, usually very expensive, are done after a financing source has been secured. Perhaps projects like this should be financed in two stages: the first covering the completion of the studies and the second supporting the construction. The Bank's policy has been to include some funds for the first purpose in a former loan on the same or a related subject, but it was not done in this particular case, in spite of the fact that these Mexican irrigation loans were understood and treated as a series of similar irrigation rehabilita- tion credits and that two of them were already in operation. 3. The exclusion of technical services as a project component 1.22 The project attributed great importance to the technical services that should be provided to the farmers. They were needed to increase the crop yieldsand the efficiency of the use of irrigation water in Lagunera, and to promote and assist the San Juan del Rio's farmers in their transfer- ring from rainfed to irrigated agricultural production. However, the activities that had to be implemented to provide for these extra and better services were not identified and organized as a project component, and their costs were not quantified. It was only stated as one of the conditions of the loan agreement that the Government would improve them. This 1/ The Bank did not accept these tubewells as a new and additional project component. The full cost of the tubewells was born by the Mexican Government. - 9 - lack of specification prevented a more thorough follow-up by the Bank's supervision missions and delayed the full provision of adequate technical services to the farmers. 4. The overly optimistic assumptions about the time needed for land leveliny 1.23 The lack of experience of SRH and the Bank with large-scale land leveling operations led both of them to overly optimistic assumptions on the time needed to level the then planned 85,000ha at Lagunera. The appraisal report estimated just under five years, from April of the first year of the project (1967) to the end of the fifth year (1971). Later, when submitting the detailed construction schedule, SRH proposed a shorter, two-and-one-half-year period, from January, 1968 to June, 1970. Neither estimate gave adequate consideration to the fact that: (i) the lands could be leveled only in the four-month inter-crop period, instead of during the whole year; (ii) the land to be leveled, in spite of the crop area consoli- dation proposed (and eventually obtained), was not in large continuous blocks but in small scattered plots; (iii) there were not enough large and experienced contractors in the zone and it was difficult to attract outside contractors for such short work periods; and (iv) farmers were somewhat reluctant to level their land fearing that it might destroy or damage soil and minor on-farm irrigation facilities. 5. The exclusion of some important project costs 1.24 Only the civil works and land leveling costs were explicitly treated in the appraisal report as project costs. The costs of technical services (that can be estimated at about Mex$5 million - US$0.4 million - from the information presented in the appraisal report) and of the other on-farm investments (minor irrigation works, increase in the farmers' opera- tional capital needed to deal with irrigation agriculture, etc.) were neither quantified nor included in the project costs. Therefore, the total cost of all the activities that should be developed to reach the project goals, i.e. the total actual "project cost", was underestimated. 6. The benefits of the San Juan del Rio part 1.25 The agricultural production statistics kept by SRH for irrigation districts led to an error in the appraisal estimates of benefits attributable to this part of the project. SRH includes in district figures only the amount of production generated in the area actually irrigated with water supplied under SRH control. Neither the rainfed production nor that obtained from the area irrigated with surface or groundwater not controlled by SRH is reported.l/ With that information in hand, the appraisal mission assumed that the whole increase in irrigated area and production value could be 1/ Unless some controlled district water is allotted to them, as would occur in an emergency or in an extremely dry year. - 10 - additional and, as such, assigned to the project, in spite of the fact that between say 2000 and 5000 hal/ of the additional 5000 ha which were going to be irrigated by the project, were already planted with rainfed maize at that time, yielding about 1300 kgs per hectare. The value of this maize should have been deducted from the reported benefits of the project to com- pensate the additionality attributable to the project, but was not. 7. The ex ante rates of return 1.26 The IRR for Lagunera was estimated at about 11%. This figure falls to something less than 10% if the most favorable estimation of the total project costs2/ is considered, and to 8% if in addition only the production coming from 65p00 ha-l is credited.A/ On the other hand, the year previous to appraisal and used as a base for projections had above average returns, factors that depressed the projected IRR. 1/ It is impossible to know by now: pertinent information was not obtained in the field at that time and it could be difficult, expensive and worthless to try to reconstruct now a series of cropped area and yields through a survey on the people's recollections. 2/ Assuming that the needed amount of credit corresponded to the whole amount of the on-farm investments and that technical services were going to be provided during only five years. On those assumptions (the most favorable ones to the project profitability), the cost of the Lagunera part rises from the appraisal report estimate of Mex$720 million to Mex$850 million (US$57.6 million to 68.0 million), the San Juan del Rio cost from Mex$98.0 million to Mex$111.3 million (US$7.8 million to 8.9 million) and the cost of the whole project from Mex$8.8 million (US$65.4 million) to Mex$961.3 million (US$76.9 million). The last figure is 18% over the appraisal report estimate. 3/ The 8000 ha to be irrigated with the project's surface water minus the 20,000 ha substituting for land previously supplied by groundwater. See again paragraph 1.08, 1.16 (ii) and 1.17, and table 1. 4/ Although less favorable to the project profitability, this procedure seems to be more adequate to represent the actual and planned situation than the appraisal report's procedure. There the "monetary value" of the groundwater formerly available for pumping was computed and then deducted from the overestimated net value of the production referred to in para. 1.16 and 1.17, that is, the production coming from the whole 85,000 ha. - 11 - 1.27 No sensitivity analysis was made on that rate of return to take into account possible variations in yields and prices, 1/ and no allowance was made to account for the risks inherent in a one crop proj- ect, and particularly cotton, which may be affected by devastating diseases. 1.28 In spite of the relatively low rate of return presented in the appraisal calculations, no contingency allowance or sensitivity analysis was made for delays in construction, to which agricultural projects are so often exposed and which actually happened. 1.29 The IRR for San Juan del Rio was estimated at "about 16 percent". The benefit flow used to compute it is not shown in the appraisal report. The only way to reproduce that result is to assume that production would increase steadily from the first cropping season, that is from the second project year, reaching the full development level in the first year after project completion. This schedule, however, is overly optimistic in a project like this, in which the building of a new reservoir is involved and the canal network has to be expanded and improved. If it is assumed that the increase in the production of the annual crops and the establish- ment of the fruit trees and vineyards were going to take place in two steps (50 and 100%) in two years after project completion, and allowing a 5-year period to get the fruit and vine production from the newly established orchards and vineyards, the ex ante IRR falls from 15.5% to 11.6%. If the then existing rainfed maize production (estimated conservatively to have been planted on only 2000 ha, yielding 1300 kgs per hectare) is deducted from the benefit flow, the IRR drops to 10.7%. If the total cost of the project is taken into account2/ the ex ante IRR of San Juan del Rio drops to 10.0%. II. PROJECT IMPLEMENTATION A. Physical Execution and Time Delays 2.01 Substantial time delays (up to two years in Lagunera, between two and four years in San Juan del Rio) occurred during project implementa- tion. The loan . closing date, originally planned for March 1, 1972, had to be postponed for almost two years to December 31, 1973. By this new date, all hydraulic works and one-half of the land leveling operation were completed. Forecasts and actual implementation of individual cate- gories are shown in tables 2 and 3 for both project sites. 1/ The possibility of a 15% decrease in the cotton price was reasonably predicted in the text, but not incorporated in the IRR calculations on the grounds that "if this should occur, the project would still be viable because the future cropping pattern would include a smaller acreage of cotton than is planted now." That dismissal was perhaps too casual, since a 15% decrease in cotton price would have reduced the post-project net value of aggregate production by 17%. 2/ See first footnote to paragraph 1.26. - 12 - Table 2 REGION LAGUNERA - PHYSICAL EXECUTION AND TIME DELAYS Physical Works Completion Date Delay Item Units Planned Actual Planned Actual in Amount Amount a/ b/ Monthsc/ Main Dam (million m3) 300 300 June 69 June 68 Sept.68 3 New Canals (km) 1009 1009 Dec. 71 Mar. 70 Mar. 72 24 Lining of Canals (km) 1009 1009 Dec. 71 June 70 Mar. 72 21 Canal Structures (units) 1300 1269 Dec. 71 June 70 Mar. 72 21 Roads (km) 500 500 Dec. 71 Mar. 70 Mar. 72 24 Houses (units) 100 97 Dec. 70 Jun. 70 Sept.71 15 Land Leveling (ha) 85004/ 430 00e Dec. 71 Jun. 70 --- - a/ Projected in the Appraisal Report. b/ Revised by SRH when submitting the detailed construction schedule. c/ Difference between the actual and the revised planned completion date. d/ Later decreased to 77500 ha. e/ Until August 1975. - 13 - Table 3 SAN JUAN DEL RIO - PHYSICAL EXECUTION AND TIME DELAYS Physical Works Completion Date Delay Item Units Planned Actual Planned Actual in Amount Amount a/ b/ Months- Main Dam (million m3) 45 75 Mar. 69 Dec. 68 Sept.69 9 Diversion Dam (unit) - 1 - Feb. 69 June 70 16 Feeder Canal (km) 15 13.7 n.a. Mar. 69 June 70 15 New Canals (km) 110 112 Mar. 70 Jan. 70 Sept.73 44 Lining of Canals (km) 110 99 Mar. 70 Feb. 70 Dec. 73 46 Reconditioning of Old Canals (km) 40 38 Mar. 70 Feb. 70 Mar. 72 25 Canal Structures (units) 300 340 Mar. 70 Feb. 70 Mar. 72 25 Surface Drains (km) 16 43 Mar. 70 Feb. 70 Mar. 72 25 Roads (km) 120 120 Mar. 70 Feb. 70 Sept.72 31 Houses (units) 8 5 Mar. 69 Feb. 70 Mar. 72 25 Land Leveling (ha) 10000 d/ Mar. 70 Mar. 70 --- - a/ Projected in the Appraisal Report b/ Revised by SRH when submitting the detailed construction schedule. c/ Difference between the actual and the revised planned completion date. d/ Shallow soils prevented land leveling. - 14 - 2.02 In Lagunera, the Francisco Zarco Dam was completed almost on schedule while the other components experienced somewhat longer delays, up to two years. Land leveling suffered substantial delays. The area to be leveled was reduced from the original 85,000 ha to 77,500 ha, but by August 1975, after eight years of work, only 43,000 ha (56% of this area, 51% of the original target) had actually been levelled. This shortfall can be blamed mainly on the overly optimistic assumptions made at appraisal on the time needed to level the project lands (see again para. 1.23). The Mexican Government has assumed the responsibility to complete the remaining levelling operation with normal budgetary allocations extending up to 1977. 2.03 In San Juan del Rio, the planned construction schedule covered three full years, beginning three months after the date of effectiveness of the loan (December 30, 1966), and finishing at the end of the first quarter of the fourth year (1970). The works, which actually began in March 1967, were behind schedule from the beginning. After some delays, all the main civil works were finished by June 1970, but the distribution facilities were not completed until the end of 1973. The principal reasons for this delay were, first, the need to maintain in use many of the canals, on which rehabilitation works were scheduled; second, the need to substi- tute some of the canals considered in the initial outlays of project works and to design new ones; and, third, frequent and sometimes serious problems with the contractors (two of whom declared bankruptcy while working in this district). The total construction period lasted seven years, more than twice the 3.25 years projected (see diagram 3). B. Cost Overruns 2.04 The cost of the items financed under the Loan in Lagunera rose 26% from the original estimate of Mex$708 million eo Mex$888.6 million (US$56.6 million to $71.1 million) -- see table 4. 2.05 This cost increase can be blamed mainly on four items. The new water distribution system and road network costs increased by about 61% over the original estimates (exclusive of contingencies), explaining more than one-half of the total cost increase. Land leveling and engineering and supervision costs were responsible for the other half of the cost increase. Although several modifications and additions had to be made to the storage dam due to unforeseen foundation conditions, a favorable original bid per- mitted the original cost of the dam to be almost maintained. 2.06 Most of the increases in the project works costs were caused by the increase in quantity of works and by the problems referred to above (para. 1.23). Important increases in the unit costs were reported only in land leveling. Most of the increase in the engineering cost was caused by Table 4 Region Lagunera - Actual Expenditures and Projected Amounts (Millions of Mexican Pesos) Revised by Percent Increase as Appraisal Negotiations Absolute of Total Percent of Report January 1967 Actual Increase Increase Projected Figure Francisco Zarco Dam 113.0 99.8 120.4 20.6 7 21 Lined Canals 275.0 221.0) Canal Structures 27.0 21.9) 438.7 166.5 58 61 Roads 36.0 29.3) Houses for Ditch Riders 4.0 2.0 5.5 3.5 1 175 Land Leveling 75.0 75.0 126.0=/ 51.0 18 68 Engineering and Supervision 66.0 66.0 141.6b/ 75.6 26 115 Machinery for Maintenance 5.0 5.0 5.0 - - - Local Steel and Cement - 81.0 51.4 -29.6 10 -37 Sub-total 601.0 601.0 888.6 287.6 100 48 Contingencies 107.0 107.0 - -107.0 Overall Total 708.0 708.0 888.6 180.6 26 a/ Only 76.4 million were actually spent till December 31, 1973 b' Only 126.0 million were actually spent till December 31, 1973 - 16 - the scattered location of the small parcels of land to be leveled and the need to design new canals, canal structures and roads. 2.07 The situation in San Juan del Riowas worse (see Table 5). The changes in the size of the Constitucion del 17 Dam, in the designing and location of the diversion dam, and in the feeder canal alignment (see para. 1.18) caused the project costs to double from Mex$89 million (US$7.1 million) to Mex$184 million (US$14.7 million). C. Disbursements 2.08 Considerable time delays occurred in the rate of disbursement Table 6 shows the schedule of forecast and actual disbursements for the different items included in the Loan's list of goods. 2.09 These delays were caused by two factors: (i) the time delays in project execution, referred to above, and (ii) the long period of time (usually several months) required to process each withdrawal application through Government channels and to eventually submit them to the Bank. Two or three times the Bank had to urge the Government to do all in its power to expedite this process. 2.10 Since land leveling was not completed, US$0.6 million had to be cancelled at the loan closing date. D. The Fulfillment of the Supplementary Loan Conditions 2.11 The fulfillment of the supplementary covenants (see para. 1.10) was only partially satisfactory: a) The supplementary covenants related to the water and soil salinity studies and the issue of rules of operation and maintenance were fully complied with; b) after some delays (considerable delays in San Juan del Rio) increased and improved technical services and the specified amounts of credit funds were eventually provided to farmers; c) SRH effectively controls the cropping patterns through the Comite Directivo (Steering Committee) of both districts so that they match the available water supply; d) the reduction of the cotton area was not achieved, but the Bank accepted it because cotton remains one of the most profitable crops in Lagunera. Table 5 San Juan Del Rio - Actual Expenditures and Projected Amounts (Millions Mexican Pesos) Revised by Percent Increase as Appraisal Negotiations Absolute of Total Percent of Report January 1967 Actual Increase Increase Projected Figure Constitucion 1917 Dam 41.4 41.0 74.2 33.2 30 81 San Jose Diversion Dam - - 9.2 9.2 8 - Feeder Canal from San Jose Dam 4.0 2.5 14.7 12.2 11 490 Distribution System 19.0 15.5 50.3 34.8 32 225 Engineering and Supervision 8.9 8.9 21.5 12.6 12 142 Machinery for Maintenance 1.4 1.4 1.2 - 0.2 0 14 Local Steel and Cement - 5.4 13.0 7.6 7 140 Sub-total 74.7 74.7 184.1 109.4 100 146 Contingencies 14.6 14.6 - - -14.6 Total 89.3 89.3 184.1 94.8 106 Land Leveling (later suppressed) 6.7 6.7 __-__ - 6.7---__- Overall Total 96.0 96.0 184.1 88.1 92 Table 6 SCHEDULE OF DISBURSEMENTS - PROJECTED AND ACTUAL (Accumulated Disbursements as of December 31 of each year, in US$ million) A-1. Civil Works A-2. Civil Works B-1 and 2. Machinery C. Interest and TOTAL Category: in Region Lagunera in San Juan del Rio and Spare Parts other Charges Both Districts Projected Actual Projected Actual Projected Actual Projected Actual Proiected Actual Calendar Years: 1967 3.4/ 0.63 0.58 0.09 0.50 - 0.20 0.08 4.68 0.80 1968 6.80 3.78 1.56 0.57 - - 0.60 0.22 9.46 4.57 1969 9.70 7.58 2.07 1.98 - - 1.20 0.57 13.47 10.13 1970 12.40 10.47 2.13 2.17 - - - 1.20 16.23 13.84 1971 15.20 12.98 - 2.69 - - - 1.20 19.03 16.87 1972 - 13.51 - 2.85 - - - 1.20 - 17.57 1973 - 14.19 - 2.92 - - - 1.20 -18.31b/ 1974 - 14.27E/ - 2.92 - - - 1.20 - 18.39-' Amount Cancelled:d/ - 0.06 - 0.55 - - - - - 0.61 TOTAL 15.20 14.33 2.13 3.47 0.50 - 1.20 1.20 19.03 19.00 a/ Includes 0.30 million dollars from the preliminary year. b/ Closing date: December 31, 1973 c/ Claims honored after closing date. d/ Cancellation effective Srptember 5, 1974. - 19 - 2.12 The issues related to the limitation of groundwater pumping in Lagunera and to water charges deserve additional comments. 2.13 Limitation of Groundwater Pumping.. In Lagunera, drilling of new wells was prohibited; rehabilitation, deepening and improvement of existing wells are under regulation; and the maximum irrigated area permitted to any existing well is fixed. No direct action was taken before project completion (and has not been taken by now -- August 1975) to enforce a re- duction in the volume of water that may be pumped from the existing wells, but water meters have been installed on each of them. These meters are going to make it possible to monitor the exact amount of withdrawals from the aquifer and will eventually be used to regulate them. At the same time, SRH is trying to improve soil and water management techniques in tubewell irrigated areas in order to increase water use efficiency and thereby reduce the amount of water each farmer needs to pump. (see paragraphs 3.05 and 3.06). 2.14 Water Charges. From the beginning, Bank officers gave priority to this issue, because of its intrinsic importance and because it was not satisfactorily handled by the Mexican Government during the first and second irrigation loans. Nevertheless, the rates remained unchanged until the loan closing date, despite continuously rising operation and mainten- nance costs. 2.15 A progressive increase of the charges was scheduled for Lagunera to be implemented after completion of the irrigation works: 1973/74 Mex$30/1000 m3 1/ 1974/75 Mex$45/ " 1975/76 Mex$60/ " This schedule has been implemented as scheduled. The agreement on the charge of Mex$60/1000 m3 for the 1975/76 cropping season was approved in August 1975, and no problem in collecting it is foreseen. This charge is sufficient to fully meet the operation and maintenance costs in 1975/76, as requested by Supplementary Letter No. 6, including the cost of technical assistance to farmers for improving irrigation techniques and the District overhead costs. Because of inflation these costs will increase in the future and this charge will have to be adjusted upwards yearly in proportion to the rate of inflation in order to continue fulfilling this covenant. No arrange- ments for this had been made as of August 1975. 1/ Water charges were Mex$15/1000 m3 until the 1972/73 cropping season. - 20 - 2.16 Water charges levied at San Juan del Rio have never been raised, though in the last five years they have accounted for less than 30% of the operation and maintenance budget. Studies are being made now (August 1975) on the amount that might be charged to meet that budget fully. The District officers are considering doubling the water charges -- from Mex$25 to 50/1000 m3 -- for the next 1975/76 cropping season but no action had been taken as of August 1975. 2.17 Additional charges to contribute reasonable amounts toward the amortization of the project investments in both the Districts, defined in the Agreement as being not less than Mex$100/ha per year, have not been levied. 2.18 Therefore, the water charge covenant has been complied with only with respect to Lagunera's operation and maintenance charges. It has yet to be complied with in San Juan del Rio and with respect to the additional amortization charges in both districts. E. Organization and Management 2.19 Apart from some minor issues, neither organizational nor manage- ment problems arose during loan implementation. III. PROJECT IMPACT 3.01 Most of the benefits from irrigation projects are realized in the years following project completion. As this one was completed only in 1973, the following "impact analysis" is only tentative. The "actual bene- fits" discussed here are simply a guess of what may happen in the next ten years based on the results of the last two. A. Water Supply 3.02 The project works allowed an increase in surface water utilized for irrigation in Lagunera. About 836 million m3 of water per annum were released from the Lazaro Cardenas Dam in the four years prior to the project. As this dam is 250 km upstream from the irrigation zone and as the canals were unlined, less than 500 million m3 were actually delivered to the farmers. About 1,040 million m3 of water per annum were released from the Francisco Zarco Dam in the last 6 years../ And, as this one is only 50 km upstre from the irrigation zone and as the canals are now lined, 670 million m were delivered to the farmers. Therefore, the project works allowed an increase of 24% in the amount of water released and 36% in the amount of water delivered to the farmers (see table 7). 1/ As this dam is downstream from the former, this amount includes the yield of both. - 21 - Table 7 AMOUNT OF WATER RELEASED IN BOTH DISTRICTS (fn million m-3) Region Laguneraa/ San Juan del Riob/ Cropping Season Water Released from Water Delivered to Farmers Lazaro Francisco Carderas Zarco Dam Dam 1963-64 766.9 n.a. 1964-65 936.4 n.a 1965-66 708.3 24.7 1966-67 934.9 30.6 1967-68 1523.3 26.8 1968-69 1484.5 1705.6 25.5 1969-70 1369.4 1148.6 17.1 1970-71 1097.7 1021.3 23-,6 1971-72 1097.0 1073.9 26.0 1972-73 854.3 758.6 9.8 1973-74 1117.4 1161.9 50.4 1974-75 992.9 1068.6 40.O.SY a/ Source: Gerencia General en la Region Lagunera - Dgo. y Coah Departamento de Estadistica e Hidrometria. b/ Estimated from revenues from water charges, Distrito de Riego San Juan del Rio. c/ Preliminary. - 22 - 3.03 The volume of groundwater being pumped from the aquifer beneath the Lagunera plain has not yet decreased. It is estimated that some 1200 million m3 per annum are still being extracted.-! This result was unex- pected. As stated before (para. 1.08) the appraisal report assumed that canal lining would eventually eliminate one-third of the groundwater sources and, therefore, one-third of the area then irrigated with it. This fact was considered at appraisal and deducted from the project benefits.. ! As this expected "negative effect" has been postponed, the project profitability by now has been higher than expected (see para. 3.14). 3.04 As canal lining is estimated to have reduced the replenishment by 300 million m3 a year, the aquifer has had to provide more water from its own reserves, resulting in a more speedy drawdown of the water table. The natural recharge has been estimated at something between 550 and 700 million m3. Therefore, canal lining can be credited with one-half of the current rate of lowering of the water table, of the total water table drawdown and, thus of the increase in the pumping costs. 3.05 It is probable that the water table will not continue to descend at the same high rate of the past years. First, the dynamic water level is already so deep that in some wells it is approaching the impervious bottom and thus a lesser volume of water can be pumped from each of these wells. Some of them must be closed in the near future. Second, as the dynamic water level goes deeper, the pumping cost goes higher, making it progressively less profitable to pump and use groundwater. Thus, some other wells are going to be closed.T And third, an intense effort is being exerted (and going to be exerted throughout the next decade) by the District authorities to technify the on-farm irrigation methods in the groundwater areas, allowing the well owners to irrigate the same acreage with less water. As the acreage to be irrigated with each well is delimited in the well's operating permit, this implies a reduction in the volume of water that each well owner will pump. 1/ Presently the total amount of water historically and currently pumped out is estimated at 1200 million m3 and the natural recharge at something between 550 and 700 million m3. The water seepage in the unlined canals is still assumed to have been about 300 million m3. As a result of pumping more water than the recharge, the groundwater table is going down by more than one meter per year. 2/ At appraisal, the "monetary value" of the groundwater formerly avail- able for pumping that was going to be eliminated by canal lining was deducted from the value of production to compute the IRR for Lagunera. It was stated before that taking into consideration only the additional production that would be brought about by the project would have been a better approach to appraise the effect of the reduced availability of groundwater (see paras. 1.17 and 1.26). 3/ According to the Mexican law, the owner's right to operate a well lapses if it remains unused during two complete years. - 23 - 3.06 The amount of groundwater that can be saved through each of these factors cannot be determined from the available information. After discussions with the District technicians, it was assumed as probable that within the next decade one-third of the present wells (representing now about one-fourth or one-fifth of the groundwater currently being pumped) are going to st7p their operation and the water usage per hectare can be reduced by 30%.1, If both targets are achieved, the groundwater pumped would be reduced by 40 to 5072 and the area irrigated with groundwater would be reduced only by 20 or 25% (12,000 to 15,000 ha). These figures compare favorably with the appraisal estimate that two-thirds of the area then irrigated with ground- water would eventually have to be abandoned (40,000 ha out of the 60,000 ha; one-half as an effect of caftal lining, the other half, of the aquifer depletion; see para. 1.08 and table 1). Therefore, the water saving that can be achieved in the groundwater irrigated area would increase the project profitability in the future over the appraisal expectations (see para. 3.14). 3.07 Moreover, the actual uninformed and unagreed behavior of the Lagunera farmers proved to make economically more sense than the behavior assumed at appraisal. The appraisal report assumed that the farmers would reduce the groundwater pumping pari passu with the reduction in the aquifer recharge.2/ But they have continued groundwater pumping at the same rate as before, and therefore have increased the rate of lowering of the water table and have brought nearer the date on which the aquifer depletion will be completed. Once the project was defined as restricted to the surface irri- gation water only (see paras. 1.12 and 1.13), the risk of a contingent depletion of the aquifer turned into certainty. As the amount of water available in the aquifer susceptible to be "mined" was almost fixed (see para. 1.08 and diagram 1) the sooner their extracting the better in terms of economic profitability. 1/ For an example of the improvements already achieved in the surface irrigated area, see para. 3.11. 2/ In that case, pumping would equalize natural replenishment at something around 650 million m3 by 1985, with the water level 10 m under its present depth. 3/ It did not explain why the farmers would have done so and did not provide any mechanism to induce such a behavior or, at least, to inform them of the reduction in the groundwater availability. - 24 - 3.08 In San Juan del Rio, about 25 million m3 per annum were delivered to the farmers in the years prior to project implementation and during all the construction period. Only in the cropping season 1973/74, when the distribution system was finished, could this amount be doubled (see again Table 7). B. Agricultural Production 3.09 Expanded agricultural production was obtained through the in- creases in irrigated area and in production per hectare, the latter due to changes in the cropping pattern and to higher yields. 3.10 Increases in Irrigated Area. After a slight decrease in the first ear, the area irri ated with surface water in Lagunera increased from 44,000 a at appraisal to 0,000 ha in 1967/68, remaining at that level until 1972/73,1/ and rose to 84,000 and 89,000 ha during the last two years (see table 8 and diagram 4). The SRH District's authorities intend to restrict the overall project area subject to permanent irrigation to 80,000 ha, an area that can be supplied with adequate water in almost all years. This maximum will permit the area irrigated by each of the 35,000 ejidatarios to double (from 1 to 2 ha each) and will maintain at pre-project levels the area formerly irrigated by the independent smallholders ("pequenos proprietarios") except for those with under two irrigated hectares -- mainly veterans of the Revolution -- whose irrigated land was increased to two hectares: Before After Project Project Ejidatarios 35,000 ha 70,000 ha Pequenos propietarios 9,000 ha 10,000 ha 44,000 ha 80,000 ha The decision to irrigate 89,000 ha in 1974/75 is considered an exception and was adopted in response to the Government's effort to reach self- sufficiency in maize and beans. 1/ With the notable exception of the 1968/69 cropping season, in which, after a rainy year, and having both reservoirs at full capacity, the Government authorized winter cropping (mainly wheat and some barley and oats) and allocated surface water for that purpose. Taking into account both winter and normal cropping seasons, 90,000 ha were irrigated. - 25 - Table 8 REGION LAGUNERA - SURFACE IRRIGATED AREA AND COTTON ACREAGE 1/ (in thousand hectares) Area Cotton as Percent Cropping Irrigated With Cotton of Surface Season Surface Water Area Irrigated Area 1964/5 -2 44.1 43.0 97.5 1965/6 43.3 41.6 96.1 1966/7 46.1 39.9 86.4 1967/8 61.6 43.3 70.3 1968/9 90.2 60.3 66.9 1969/70 57.5 49.3 85.9 1970/1 59.7 50.9 85.2 1971/2 61.6 54.6 88.8 1972/3 57.0 51.0 89.5 1973/4 84.3 73.5 87.3 1974/5 89.1 52.1 58.5 Future years 80.0 Source - Mexico, SRH, Gerencia General en la Region Lagunera, Dgo. y Coah., Departamento de Estadistica e Hidrometria. 1/ Including both the Lagunera plain and the San Jacinto section; ex- cluding Rodeo and Nazas sections,with some 7,500 ha not benefited by the project. 2/ Pre-appraisal year. - 26 - 3.11 The efforts made by the SRH District authorities in Lagunera to improve the water conveyance and to technify the on-farm irrigation methods in the area irrigated with the project's water have been so far successful. In the six cropping seasons since the Francisco Zarco Dan was put into operation in 1968 the conveyance efficiency has been increased from 52% in 1969/70 to 74% in 1974/75 and the amount of water used per hectare has been reduced from almost 11,000 m3 to 9,000 m3. Taking both concepts together, the amount of water that had to be released from the Francisco Zarco Dam to irrigate the Lagunera plain was reduced from 20,000 m3/ha in 1969/70 to 12,000 m3/ha in 1974/75 (see table 9). Table 9 REGION LAGUNERA - WATER CONVEYANCE AND ON-FARM USE EFFICIENCIES (1) (2) (3) (4) (5=3:2) (6=3:4) (7=2:4) Water released On-farm Cropping from Francisco Water delivered Irrigated Conveyance use Total Season Zarco Dam to farmers area efficiency efficiency efficiency (million m3) (million m3) (000 ha) (%) (000 m3/ha) (000 m3/ha) 1969/70 1149 623 57.5 54.2 10.8 20.0 1970/71 1021 592 59.7 57.9 9.9 17.1 1971/72 1074 661 61.6 61.5 10.7 17.4 1972/73 759 522 57.0 68.8 9.2 13.3 1973/74 1162 841 84.3 72.4 10.0 13.8 1974/75 1069 790 89.1 73.9 8.9 12.0 Source: Mexico, SRH, Gerencia General en la Region Lagunera, Dgo. y Coah, Departamento de Estadistica e Hidrometria. 3.12 SRH is trying to improve further the efficiency of water conveyance and on-farm application to guarantee a capability to irrigate the projected 80000 ha with 890 million cubic meters (amount that can be released from the reservoirs with close to a 100% security margin). Any additional water saving is going to be used to satisfy the growing urban and industrial demand. 3.13 It is possible to increase further the irrigated area (perhaps to 90,000 or 100,000 ha) by accepting a lower but still highly secure 95% margin. This might allow SRH to increase the area irrigated by each "ejidatario" to 2.25 ot 2.5 ha instead of the 2 ha originally planned and presently achieved. - 27 - SRH does not like this alternative because it fears the political pressures and social unrest in the years (one out of twenty) in which the irrigated area might have to be reduced. 3.14 Like the volume of pumped groundwater, the acreage irrigated with it has not yet decreased. This means that the expected water source sub- stitution for one-third of this acreage has not yet taken place. Therefore, the new 20,000 ha irrigated with the increased surface water supply that were going to replace those other 20,000 ha formerly and still irrigated with groundwater (see para. 1.08 and table 1) are additional and can be credited for the present as a project benefit (see table 10,b). As the volume of ground- water is going to decrease and the efficiency of its use is going to increase, it can be guessed that the groundwater irrigated area is going to decrease from 60,000 ha to about 48,000 ha by 1985 (see para. 3.06) instead of to 20,000 ha as estimated at appraisal. Consequently, the project can be ultimately credited with a final 24,000 ha increase in the area irrigated with surface water and with the reduction in the cost of the water provided to irrigate other 12,000 ha (see table 10, c). These figures include the area irrigated with groundwater which was going to disappear as the groundwater reservoir was progressively depleted. So, no further reductions in the area irrigated with groundwater can be reasonably expected. 3.15 Progress was less impressive in San Juan del Rio. The irrigated area remained at or slightly above the pre-appraisal level of 5,000 ha till 1973 (see table 11 and diagram 5). In the 1973/74 cropping season, it was possible to irrigate some 8,000 or 8,500 hal/ with the project works. In 1974/75 the figure dropped again to 5,000 ha. 3.16 The area so far irrigated in San Juan del Rio is still under the projected 10,000 ha due to: a) The long delays in finishing the distribution system: 6.5 years instead of the 3 years envisaged at appraisal (see para. 2.03); b) three dry years (1969/70, 1972/73 and 1974/75) within six, limiting the water availability. It may be estimated that were it not for the poor weather, the area irrigated in those years would have been twice as high: perhaps 5,000 ha 1/ These two different figures were provided by different SRH units. The former by SRH Direccion de Estadistica (see column 3 of table 11); the second by the District's Department of Statistics (column 2, from which about 500 ha, irrigated with non-project water sources, have to be deducted). The data problem is referred to again in para. 4.05. - 28 - Table 10 REGION LAGUNERA - TOTAL IRRIGATED AREAaf (in thousand hectares) a) Original plan was presented in Table 1 , page 7 b) At Presentb/ Groundwater Surface Water Total Before Present Before Present Before Present Lands with unchanged status 60.0 60.0 44.1 44.1 104.1 104.1 Lands whose water source was changed - - - - - - Additional irrigated lands - - - 35.9 - 35.9 Total 60.0 60.0 44.1 80.0 104.1 140.0 Percent increase - 82% 35% c) In the Futures Groundwater Surface Water Total Before Future Before Future Before Future Lands with unchanged status 48.0 48.Gd/ 44.1 44.1 92.1 92.1 Lands whose water source was changed 12.0 - - 12.0 12.0 12.0 Additional irrigated lands - - - 23.9 - 23.9 Total 60.0 48.0d/ 44.1 80.0 104.1 128.0 Percent increase -20% 82% 23% a/ Including both the Lagunera plain and San Jacinto; excluding Rodeo and Nazas, with some 7,500 ha not benefitted by the project. (see footnote to para. 1.07). b/ In the "normal future 80,000 ha cropping season." See para. 3.10. c/ By 1985, given the assumptions made in para. 3.06 and 3.10. d/ This area was computed taking into account the effect of canal lining on the groundwater sources, the aquifer depletion and the increase in the on-farm water use efficiency. See paras. 3.05 and 2.06. So, it is net from the effect of the aquifer depletion and should be compared with the figure of 20,000 ha in the section (b) of table 1. - 29 - Table 11 SAN JUAN DEL RIO - IRRIGATED AREAS (in hectares) Cropping Irrigated Areas According To Different Sources: Season 1 2 3 4 District Dept. SRH Direccion de Estadistica. Bank's Super- of Statistics Only Project All Sources vision Missions All sources of water Watersl_/ of Water2_/ 1964/5 5,460 * 4,327 5,093 1965/6 * * 4,699 5,244 1966/7 5,231 5,131 4,993 5,232 1967/8 4,524 4,698 4,788 5,034 1968/9 3,789 5,408 4,617 5,428 1969/70 3,260 4,064 2,578 2,704 1970/1 5,599 5,599 5,493 5,599 1971/2 6,032 6,032 5,693 6,232 1972/3 4,510 4,079 2,972 4,079 1973/4 * 9,059 7,942 8,575 1974/5 * 5,299 * * NOTES: * Information not available 1 / - Water accumulated in and released from the two reservoirs (San Ildefonso and Constitucion de 1917) and conducted through the canals constructed or improved within the frame of the project. 2/ In addition to the former, includes the area irrigated with tubewells built before and during the project construction, but not related with the project (ranging from 106 ha to 1090 ha per year; average 370 ha) and with water pumped from surface rivers or streams (reported in five years, from 17 ha to 516 ha; average 290 ha). - 30 - instead of 2,578; 6 000 ha instead of 2,972, and 10,000 ha instead of 1000, respectively;- c) the delay in providing adequate technical assistance to con- vince the traditional "ejidatarios" -- less used to irrigated agriculture, more conservative and less exposed to technical assistance and commercial cropping than those in Lagunera -- to change from rainfed to irrigated agriculture, to teach them the new techniques they need for such a change and to induce some entrepreneurial capacity (see para. 2.11, b). Such technical assistance has now been made available, but it took much longer than expected for the Mexican Government to establish it at the level agreed upon when the Loan was signed. It would have been highly desirable if the farm assistance program now in operation had been established earlier in the development of the project. This is a point which the Bank insisted upon since the original negotiations, and which was repeated in many of the letters to the Govern- ment that followed the supervision missions; d) the lack of enough credit to transform rainfed agriculture into an irrigated one. Both Bank supervision missions and SRH District officers are of the opinion that delays in lending were more related to lack of sufficient technical assistance to farmers than to a lack of funds. 3.17 By August 1975 the two reservoirs were full and the credit and technical assistance to farmers seemingly adequate. SRH headquarters and district officers hope that in the cropping season 1975/76 they are going to be able to reach the projected 10,000 ha irrigated area and to maintain this figure henceforward. 1/ The 1974/75 cropping season was very special and illustrates some of the problems of the SRH system of area and production statistics. It was a dry year till June and only 5300 ha could be irrigated -- with all the sources of water, the project's and others. Then it rained, and 4000 additional hectares of rainfed maize were established. If in September 1975 the zone gets enough rain, these 4000 ha can complete their vegetative cycle without irrigation. If it does not rain enough, they are going to need one irrigation supplement, which is possible because now the District has water in its reservoirs. In both cases the cultivated area and the production are going to be the same, but in the first case the reported irrigated area is going to be 5300 ha and in the second case, 9300 ha. - 31 - 3.18 Changes in the Cropping Pattern. A more diversified cropping pattern was to be established in both project sites, but diversification has been achieved only on a small scale. 3.19 SRH District authorities have to approve each year the agricultural plan prepared by the Comite Directiva (Steering Committee) of each District. On this basis, the Government committed itself to enforce a reduction by 8% of the area planted with cotton in Lagunera. The released areas would be planted with crops with lower water consumption requirements. In absolute terms, the cotton area diminished in the first two years, but subsequently it increased by 25% over pre-project level, reaching 50-55,000 ha -- a level which, with the notable exception of 1973/74, has been maintained until today (see table 8, diagram 4 and annex 2). As proportion of surface irrigated area, cotton fell from 97.5% at thq pre-project time to 85-90% in most years there- after with three exceptions.17 SRH officers hope to maintain the cropping pattern attained in 1974/75, when about 60% of the surface irrigated area was devoted to cotton, though past experience suggests that a sustained effort has to be made to reach that goal. 3.20 Some high value crops, like tomato, melon, watermelon, grapevine and peppers, not discussed in the appraisal report, have had an important role in diversification. Sorghum, alfalfa and wheat, assumed to be the basis of diversification, have had a much smaller role. 3.21 Year-round water availability would have promoted a greater diversification, mainly through the expansion of permanent crops such as alfalfa, vineyards and fruit trees. By including 7,000 ha of alfalfa in the cropping pattern, the appraisal report implicitly assumed that the project would provide water to the farmer the year round. But SRH only furnishes water in the eight-month-long spring and summer growing season./ Thus, permanent cropsare restricted to those farmers able to irrigate them with groundwater in winter. 1/ (i) 1967/68, the first year the irrigated area was increased; the cotton area did not increase immediately; it increased the following year; (ii) 1968/69 when winter cropping was authorized; and (iii) 1974/75, when a considerable effort was made to increase the area with maize and beans. 2/ SRH decided not to provide water in the four-month-long winter season because: (i) since most of the area is devoted to annual crops, farmers would need a very small amount of water during this season; and (ii) some of the water conveyance losses are proportionate to the volume of water conveyed; other losses are almost constant or "fixed" losses that materialize whenever any water is conveyed. These "fixed" water losses put a very heavy burden on the small amount of water needed in that season. So, providing water on a year-round basis instead of the present 8-month basis would increase water furnished to farmers by a small pro- portion (perhaps no more than 10%), water conveyance losses by almost one-third and the amount of water to be released from the reservoirs perhaps by more than 20%. - 32 - 3.22 In spite of some strong changes from one year to another, there have been only minor changes in the long range crop pattern in San Juan del Rio: a steady increase in the alfalfa area and the initiation of sorghum, tomato, hot peppers and other vegetables as new crops, all of which were adequately considered at appraisal. The acreage they have already reached is still below that projected, but it can be assumed that the actual figures are progressing towards the projected ones. Only 12 hectares of grapevine and none of fruit trees have been so far established; nevertheless, they were 1/ supposed to make an important contribution to the production value increase.- Lack of credit and, mainly, of technical assistance were blamed by SRH officers for this shortcoming (see annex 3). 3.23 Yields. Some crops have shown noticeable yield increases. The most important is cotton, whose yields have been increasing steadily, reaching a 40% increase over the pre-appraisal level (same as proposed at appraisal). This increase was responsible for 24% of the regional gross production value in 1973/74 (a year heavily dependent upon cotton) and for 21% of it in 1974/75 (the year with the smaller proportion of cotton). 3.24 Several causes are responsible for these yield increases: (i) increase in the availability of water which permitted an adequate supply of water to the crops; (ii) increase in the reliability in the operation of the distribution system, which permitted the delivery of water at the precise moment the crops needed it; and (iii) the increase in the quantity and quality of the technical services provided to the cotton growers and the increase in the utilization of fertilizers. Unfortunately, it is almost impossible to ascribe a proportion of the yield increases to each of these factors with the available information. 3.25 Production value. The gross and net value of production coming from the area irrigated with project water in the last two years at Lagunera have exceeded appraisal forecasts. This is attributable to the larger than planned irrigated area (84,000and 89,000 ha instead of 80,000) and the higher than expected cotton share in the cropping pattern. On average, the last two years' net value of production was Mex$360 million, at constant 1964/65 prices, 186% over the pre-appraisal situation (see annex 2). 3.26 The cropping pattern during the last two years was exceptional insofar as in the first cotton and in the second beans covered an unusually high proportion of the area. Their average may represent the normal cropping pattern in the future years. On the basis of this average and taking a total acreage of 80,000 ha, the average net value of production can be expected to be about 1/ Some 450 ha of vineyards were reported in some supervision mission reports and in the project completion report. Although they are within the District boundaries, they existed before the project and are irrigated with groundwater obtained from their own tubewells. Thus, they do not pertain to the project and should not have been considered. The 12 hectares reported here were just established last year and are an actual part of the project. 2/ Computed at constant appraisal prices. Actual prices have not increased in real terms. - 33 - Mex$330 million per year, or 160% over the pre-appraisal year and 20% above the appraisal projection.!! As the net additional irrigated area brought about by the project is assumed to decrease to about 68,000 ha (see again para. 3.14), by 1985 the net value of production can be expected to be about Mex$280 million, slightly over the appraisal projection. 3.27 The net production value at San Juan del Rio in the 1973/74 cropping season was Mex$20 million, almost three times that at pre-appraisal, but it is still 20% under that expected in the appraisal report. However, this cropping season was the first one after project completion, and it is possible to assume that the actual value of production may reach the appraisal targets within the next five years, when the project area will be fully irrigated and the agricultural production system fully transformed into an irrigated one (see annex 3). C. Employment 3.28 Reduction of unemployment in rural areas was defined as one of the objectives of the Lagunera project. Although no quantitative infor- mation is available, local sources have indicated that labor requirements for cultivation and harvesting have increased. D. Income Distribution 3.29 Although no explicit reference was made on this point in the appraisal report, the project did have a positive impact in the national Income distribution. The areas affected were poor and had few alternative employment opportunities. All of the Bank's irrigation loans to Mexico have benefitted small farmers, but this one involved the smallest ones: Average Size per Farmer before the Project Loan Surface Irrigated Land Total HoldinS 275-ME 13.4 ha 13.4 ha 336-ME 16.3 ha n.a. 450-ME 1.3 ha 3.8 ha 527-ME 14.9 ha n.a. 969-ME 1.7 ha 39.5 ha 970-ME 3.7 ha 8.4 ha 1111-ME 15.1 ha 16.5 hal/ 1/ From information presented in the appraisal report, it is not possible to separate the production that was assumed to come from Unit 1 from that which was going to come from Unit 2, the one affected by the project (see the footnote to paragraph 1.07). Thus, the actual increase is more than shown above (perhaps 30 to 33%). 2/ Within the District boundaries. - 34 - 3.30 Although nothing was said in the appraisal report about how the project's additional waters were going to be divided between the independent smallholders ("pequenos propietarios'l) and "ejidatarios", almost all of them have been allocated to the latter, indeed poorer than the former. In Lagunera this has made it possible to double each ejidatario's surface irrigated area, from one to two hectares. Only those "pequenos propietarios" who had less than two hectares of irrigated land received project water just to reach this level and become equal to the ejidatarios. E. Institution Building 3.31 Since the Mexican Government has a strong and competent institu- tional system to deal with irrigation projects, neither was such an objec- tive set up nor has any significant change taken place as a result of the project. F. Economic Rates of Return 3.32 Taking into account the actual costs and benefits at constant appraisal prices, the actual timing of the project, and the assumptions made in paragraphs 3.02 to 3.25, the following rates of return were com- puted: Ex-ante As presented in As adjusted Mid-term Audit the appraisal report in this PPAi/ Estimate-2/ Estimate a) Region Lagunera 11% 8% 15% 21% b) San Juan del Rio 16% 10% 8% 5% 3.33 The higher audit estimate of IRR for Lagunera compared with both ex-ante estimates is explained by the more rapid than expected growth of production, the permanence of the high cotton share in the cropping pattern and the lack of reduction in the groundwater irrigated area. The shortfall in the IRR for San Juan del Rio was caused chiefly by the doubling of costs, the long delay and the fact that the first project benefits were realized only after project completion (see annexes 4 and 5). IV. BORROWER PERFORMANCE 4.01 The overall performance of the Borrower was satisfactory. The Mexican Government, Nacional Financiera S.A. and Secretaria de Recursos 1/ See again paragraphs 1.26 and 1.29. 2/ A reanalysis of the project's internal rates of return was made by the Bank in June 1971, when it became evident that both parts of the project were suffering significant cost overruns and time delays. - 35 - Hidraulicos complies adequately with their bidding, constructing and financ- ing responsibilities. Contracts, quarterly reports and other material were submitted to the Bank usually on time. 4.02 However, at several stages of project implementation, the Bank had to show concern about the rate of land leveling in Lagunera, the lateness of the expansion of technical services in San Juan del Rio, and the delays in the submission of withdrawal applications. It should be reiterated that the delay in providing adequate technical assistance was one of the reasons for the delay in realizing the project benefits in San Juan del Rio. 4.03 Project preparation, with the reported inadequacies in design (see paras. 1.11 to 1.23), was made completely by SRH. However, both the Mexican Government and the operational departments of the Bank have reported that most of the deficiencies discussed in project preparation relate to procedures utilized a decade ago which have been improved or are no longer in use. 4.04 Eventually, the Borrower complied with almost all the major condi- tions of the loan. It is not yet in full compliance with the provision to impose water charges such that full operation and maintenance costs are met, and a reasonable part of the investment cost is amortized. Water charges are, however, gradually being adjusted to align with the unit cost of operation and maintenance. 4.05 The way in which SRH obtains and keeps its agricultural statistical information was a serious inconvenience both for project design and for ex-post evaluation. The fact that only the crops which were actually irrigated with SRH Districts' waters are registered and reported as "irrigated areas" providing "District production" led to misunderstandings and mistakes about the area irrigated with groundwater at Lagunera and the irrigated and rainfed area at San Juan del Rio. Moreover, some differences were found between the information available at the project sites and at the SRH Headquarters in Mexico City. V. BANK PERFORMANCE 5.01 The Bank performance was, in general, satisfactory. 5.02 The project would have benefitted had the Bank been more involved in project preparation and assumed a more critical role regarding the project design proposed by SRH. It has been mentioned that alternative solutions involving the conjunctive development of surface water and groundwater should have been analyzed in Lagunera before accepting and appraising the more restricted surface-water project to find out and ensure that this project was actually the best available alternative (see paras. 1.12 and 1.13); that further geological, hydraulic and agricultural studies were needed - 36 - before accepting and appraising the San Juan del Rio's project (see para. 1.18, 1.19 and 1.20); that some activities, costs and benefits were not included or adequately computed (see para. 1.22 to 1.29); and that some of the project's cost overruns and time delays can be reasonably blamed on these faults (see para. 2.02 to 2.07). However, no preparation or pre-appraisal mission was ever sent to Mexico and, on receiving the project prepared by SRH, a full appraisal mission was sent there immediately. 5.03 Bank supervision was satisfactory. Nine supervision missions were sent to Mexico at irregular intervals from August 1966 to February 1974, one every 10 months on the average. Seven of them were made up of one agricultural- ist and one or two irrigation engineers. Only two of them included economists (see table 12). 5.04 The turnover of supervision staff was undesirably high. Fourteen persons participated on them: eight persons never made a second visit; no one participated in more than three missions. Four missions were staffed with no one having participated on the previous one (see table 12). The supervision missions covered the hydraulic, engineering and agricultural development issues in reasonable proportions1/ but their continuity on some of the items and problems covered was not adequate; important issues raised in some of the supervision reports were not followed up or answered by subsequent ones. 5.05 The Bank has no information about what has happened after project completion. As project completion was defined by the end of the construction works involved and, thus, of the loan disbursement, the benefits of the project had yet to materialize. Neither was any additional supervision sent by the Bank to appraise what the benefits actually were, nor was any further information requested from the Mexican Government. In fact, a Mexican offer to submit continued reporting on Loan 450-ME was dismissed by the Bank on the grounds that "since the loan was officially closed on December 31, 1973, submittal of further quarterly progress reports will not be necessary. Further, we do not have a foial requirement that a completion report be prepared by the borrower" (April 29, 1974). 5.06 Several supervision missions reported substantial increases in the production value. However, an important part of the reported increase was due to nominal increases in the crop prices; when recomputed at constant prices or at real prices, as used here, rather less impressive figures arise..Z 1/ The typical table of contents of the supervision reports covered physical execution, cost estimates, disbursements, water supply, agricultural development, operation and maintenance, and organization, management and performance of the Borrower. 2/ Agricultural products prices did not increase in real terms during the project's life. - 37 - Table 12 THE SUPERVISION MISSIONS Supervision Missions 1 2 3 4 5 6 7 8 9 a) Dates Aug Nov Feb Aug Mar Mar Jul Feb Feb '66 '66 '68 '68 '70 '71 '72 '73 '74 b) Months elapsed since preceding mission 3 15 6 19 12 16 7 12 c) Staffing 1/ Agriculturalist 1 A A Irr. Engineer 1 I Irr. Engineer 2 I Economist 1 E Agriculturalist 2 A A Economist 2 E Irr. Engineer 3 I Irr. Engineer 4 I I Agriculturalist 3 A A A Irr. Engineer 5 I I I Economist 3 E Agriculturalist 4 A Irr. Engineer 6 I I Agriculturalist 5 A d) Composition Agriculturalists 1 1 1 1 1 1 1 1 1 Irr. Engineers 2 1 1 2 1 1 1 1 Economists 2 1 1/ Classified according to their main field of specialization. - 38 - VI. CONCLUSIONS AND RECOMMENDATIONS 6.01 The Lagunera part of the project was a successful and worthwhile effort. Its IRR, estimated at 11% at appraisal, is set now at 21%. Its effect on the region's development is noticeable. 6.02 This success surpassed the project expectations: production increases came about faster than planned; the farmers maintained the high share of cotton in the cropping pattern; and the expected reduction in the groundwater irrigated area failed to materialize, during the project period, advancing the additionality brought about by the project. 6.03 On the negative side, alternative solutions involving conjunctive development and use of both surface water and groundwater should have been analyzed before appraising and accepting the project limited only to surface water. It is possible that a different project could have been conceived that would have brought about more income in most years with a higher security margin. 6.04 In addition, one of the project components, land leveling, proved to be based on overly optimistic plans and could not be completed. Only one-half of the original target area had been leveled by the loan closing date. 6.05 Furthermore, only the overall profitability of the Lagunera project was calculated. The profitability of its major component, the canal lining, which accounted for roughly one-third of the investment and was the only component with recognized negative effects, was not analyzed. The economic viability of all major components of an irrigation project, as well as that of the project as a whole, should be established at appraisal. 6.06 On the other hand, investing in San Juan del Rio proved to be unprofitable. The rate of return of this part of the project, incorrectly computed at 16% at appraisal (it should have been estimated at 10%), is figured now at only 5%. 6.07 The doubling of the project cost and construction period and the delayed emergence of the project benefits - and only of a part of them - till after project completion, the two factors which explain this poor performance at San Juan del Rio, can be attributed, most likely, to insufficient prepara- tion work. The evidence obtained during the audit, admittedly inconclusive, suggests that additional and more detailed studies should have been conducted before the project was submitted to the Bank and appraised. A more thorough and complete preparation would have shortened the execution period and perhaps reduced the cost overruns. It might also have indicated that the project should have been postponed. 6.08 From the preceding paragraphs, it can be concluded that a deeper Bank involvement in project preparation, and a more critical Bank role regarding the project design submitted by SRH, would have brought about more profitable projects for both sites and, perhaps, postponement of the San Juan del Rio port. The Bank justifiably could have scheduled a pre-appraisal mission. - 39 - 6.09 Another improvement worth emphasizing would have been the detailed planning of technical services - a very important activity that should have been developed in an adequate and timely manner to help achieve project benefits at both sites. Provision of these services was only introduced in general terms as a covenant to be accomplished by the Mexican Government. The experience suggests that it is not enough to set activities essential for project success, such as in this case, only as a rather vague loan condition. They should be carefully planned and listed as a project com- ponent, even if they are identified in the legal documents as a Government responsibility to be completely financed by Government. 6.10 The overall performance of the Borrower was satisfactory. It complied adequately with its bidding, contracting and financing responsibilities and with almost all the major conditions of the Loan. The borrower has not yet fully met one important loan condition, that is, to charge the farmers water rates high enough to meet fully the operation and maintenance costs and to provide some funds toward the amortization of the monies invested in the project. The requirement for such charges is a long-established Bank policy, and the Bank emphasized this point during both negotiations and implementation. The requirement was accepted by the Mexican Government, inasmuch as it had the same policy, but Government has not yet been able to make this point acceptable to the farmers and to enforce the charge. The remedies provided in the Loan Agreement were not exercised by the Bank. 6.11 Bank supervision was significant. However, the turnover of super- vision staff was undesirably high, although how far it would have beeen possible to reduce it, given manpower resources available, has obviously been beyond the scope of this study. 6.12 The Bank does not know what has happened after project completion. Projects like this one, whose benefits begin to materialize just at the loan closing date or thereafter, need some kind of follow-up to allow a more useful analysis of long-term impact. Future loan agreements should perhaps stipulate that such a follow-up be undertaken by the Borrower and supplied to the Bank in order o stay abreast of the post-disbursement implementation phase of a project.- In the case of Mexico, SRH or COCOSA can assume this job. The regional Projects Division will in the near future be preparing a review of the final report of the Plan Nacional Hidraulico, which is a three-year UNDP- assisted project now being terminated for which the Bank is Executing Agency. In this review, the Bank may call to the attention of the Mexican authorities the need to establish a permanent monitoring system to follow-up on the post- construction phase of irrigation projects. 1/ This request would not impose a new condition on the Borrower since Loan Agreements usually require governments to submit reports as long as the Loan Agreement is effective (usually 15 to 30 years). - 40 - ANNEXES ANNEX 1 IRRIGATION LOANS MADE TO MEXICO DATE OF LOAN NUMBER AGREEMENT AMOUNT DISTRICTS INVOLVED (millions US dollar) FIRST 275-ME January 16, 1961 15.0 Culiacan, Fuerte, Mayo, Yaqui SECOND 336-ME April 29, 1963 12.5 Bajo Rio Bravo, Bajo Rio San Juan, Ciudad Delicias THIRD 450-ME May 25, 1966 19.0 Region Lagunera, San Juan del Rio FOURTH 527-ME January 26, 1968 25.0 Rio Colorado FIFTH 969-ME March 1, 1974 77.0 Rio Panuco, First Stage SIXTH 970-ME March 1, 1974 47.0 Rio Sinaloa SEVENTH 1111-ME May 22, 1975 150.0 Bajo Rio Bravo, Bajo Rio San Juan ANNEX 2 - MFXICO REGION LAGUNERA IRRIGATION DISTRICT NO, 17 Crop Production Statistics Showing Comparisons Between Pre-Project, Appraisal Projection and Actual Cropping Seasons Pre-Project (1964/65) 1 Appraisal Projection 1/ Arrvl 1973(74 Croppipg leason Actual 1/ 1974/75 Croppin8 Season Crop Farmgate Area Average Gross Value of Area Average Gross Value of Area Average Gross Value of Area AveraRe Gross Value of Price Planted Yield Production Planted Yield Production Planted Yield Production Planted Yield Production (Mex$/ton) (ha) (ton/ha) (Mex$ million) (ha) (ton/ha) (Me$ million) (ha) (ton/ha) (Mex$ million) (ha) (tontha) (MexS million) Cotton 2,400 43,020 2.0 206.5 45,000 2.8 302.4 73,516 2.8 489.4 52,087 2.8 350.0 Corn 780 - - - - - - 1,013 1.7 1.3 8,734 2.0 13M6 Alfalfa (Green) 100 - - - - - - 1,987 73.9 14.7 2,744 70.0 19.2 Alfalfa (Dry) 425 - - - 7,000 12.0 35.7 - - - - - - Tomatoes 850 - - - - - . 706 20.9 12.6 798 14.5 9.8 Sorghum (Grain) 600 - - - 15,000 3.5 31.5 688 3.2 1.3 3,205 3.0 5.8 Beans 1,400 - - - 5,000 2.0 14.0 1,926 1.5 4.1 19,430 1.5 40.8 Wheat 900 - - - 13,000 2.8 32.8 - - - - - - Grapes 1,200 - - - 390 15.6 7.3 551 15.5 10.2 Melons & Watewmelons 900 - - - - - - 156 24.0 2.7 524 24.0 11.3 Other - 1,104 - 2.8 - - - 3,877 - 42.0 989 - 10.7 Total 44,124 209.3 85,000 416.4 84,259 575.4 89,062 471.4 Cost of Froduction 83.7 145,8 175.0 152.2 Met Value of Production 125.6 270.7 400.4 319.2 Percent Increase as Compared with Pre-Project Data 1160. 219 154% - /Onlo the Lagunera plain and San Jacinto. Unit 1 (Rodeo and Nazas) with 7,500 ha was deducted. Information p1>vided by the Dept. of Statistics and Hydrometrics, Region Lagunera District. 2 /Prom Annex 3 Report No. TO-520c (April 20, 1966). The information provided does not permit to deduce Unit 1. 3/Latest complete data available. Z_/Latest data available, with estimated yields. ANNEX 3 - MEXICO REGION SAN JUAN DEL RIO IRRIGATION DISTRICT NO. 23 CROP PRODUCTION STATISTICS SHOWING COMPARISONS BETWEEN PRE-PROJECT, APPRAISAL PROJECTION AND ACTUAL CROPPING SEASONS Pre-Project (1964-65) Ap)raisal Projection- Actual - 1973/74 Cropping Season2/ Crop Farmgate Pre-Project Average Gross Value of Area kverage Gross Value of Area Average Gross Value of Price Area Planted Yield Production Planted Yield Production Planted Yield Production (Mex$/ton) 2! (ha) (tons/ha) (Mex million) (ha) 'ton/ha) (Mex$ million) ( (ton/ha) (Mex million) A. Irrigated Lentils 1,400 1,000 0.7 0.98 1,500 1.0 2.10 894 0.7 0.81 Wheat 900 2,230 1.8 3.61 2,500 3.0 6.75 587 2.4 1.29 Corn 800 2,000 1.3 2.08 1,800 3.0 4.32 4,702 3.4 12.60 Barley 900 - - - - - - 484 2.1 0.92 Beans 1,600 30 1.2 0.06 200 1.8 0.58 378 1.2 0.73 Alfalfa (Green) 100 100 65.0 0.65 1,000 90.0 7.20 671 80.0 5.37 Fruit trees 1,700 100 6.5 1.11 300 8.0 4.08 78 8.0 1.06 Grapes 1,200 - - - 400 9.0 4.32 12 - - Sorghum 600 - - - 1,700 3.5 3.57 991 6.2 3.59 Tomatoes and Vegetables 800 - - - 52 11.3 0.47 Peppers (hot-dried) 10,000- - - - .0 8.0 3.84 143 0.9 1.29 Ot Irrigated Crops - - 67 - 0.25 Toa Irgae Cos5,460 8.49 10,000 -36.76 9,059 28.38 B. Rainfed Corn 800 20 1.3 2.08 - - C. Total 7,V'>010.57 10,000 36.76 9,059 28.38 Cost of Production 3.70 12.32 8.49 Net Value of Production 6.87 24.44 19.89 Percent Increase as Compared with pre-project data 2482 190% 1/ From Annex 4 Report No. TO-520c (April 20, 19b6). 2/ Latest complete data available. The area included here is the total area irrigated within the District bourdaries, with both project's and non-project's waters. It was not possible to get only the former one but as the total irrigated area is more in line with that expected at appraisal, it was considered to be an interesting information anyway. 3/ Estimated at appraisal. 4/ Estimated now. ANNEX 4 REGION LAGUNERA - ACTUAL AND ENVISAGED COSTS AND BENEFITS (million Mexican pe-os, at appraisal constant prices) Years Costs Benefits Credit & Increase in Diseconomies Reduction in Decrease in Actual 0 & M Tech. Serv. Total Net Value in Pumpage Water Costs 0 & M Costs Total Investment Costs (assumed) Costs of Production from 6 Depth for 12,000 ha for 65,000 ha Benefits 1 1967 102.0 10.0 4.0 116.0 31.6 0 0 0.6 32.2 2 1968 212.0 10,0 4.0 226.0 99.5 - 0.5 0 1.2 100.2 3 1969 206.0 10.0 4.0 220.0 194.6 - 1.5 0 1.8 194.9 4 1970 194.0 10.0 59.0 263.0 107.6 - 2.9 0 2.4 107.1 5 1971 57.4 10.0 59.0 126,4 122.6 - 4.8 0 3.0 120.8 6 1972 38.8 10.0 4.0 52.8 113.8 - 7.2 0 3.3 109.9 7 1973 12.3 10.0 4.0 26.3 126.3 - 9.6 0 3.3 120.0 4 8 1974 16.5 10.0 4.0 30.5 274.8 - 12.0 0 3.3 266.1 9 1975 16.5 10.0 4.0 30.5 193.6 - 15.0 0 3.3 181.9 10 1976 16.5 10.0 4.0 30.5 197.0 - 16.3 2.5 3.3 186.5 11 1977 16.5 10.0 4.0 30.5 190.0 - 17.1 4.8 3.3 181.0 12 1978 0 10.0 4.0 14.0 183.8 - 17.6 6.9 3.3 176.4 13 1979 0 10.0 4.0 14.0 178.4 - 17.8 8.7 3.3 172.6 14 1980 0 10.0 4.0 14.0 173.4 - 17.7 10.3 3.3 169.3 15 1981 0 10.0 4.0 14.0 168.9 - 17.4 11.8 3.3 166,6 16 1982 0 10.0 4.0 14.0 164.8 - 17.2 13.2 3.3 164.1 17 1983 0 10.0 4.0 14.0 161.1 - 16.9 14.4 3.3 161.9 18 1984 0 10.0 4.0 14.0 157.8 - 16.6 15.5 3.3 160.0 19 1985 0 10.0 4.0 14.0 154.9 - 16.3 16.5 3.3 158.4 20-50 1986-2016 0 10.0 0 10.0 154.9 - 16.3 16.5 3.3 158.4 ANNEX 5 SAN JUAN DEL RIO - ACTUAL AND ENVISAGED COSTS AND BENEFITS (million Mexican pesos, at appraisal constant prices) Years Costs BeDofito Credit & Increase in Actual 0 & M Tech. Serv. Total Net Value Investment Costs (assumed) Costs of Production 1 1967 13.30 1.16 0 14.46 0 2 1968 51.00 1.23 0 52.23 0 3 1969 46.00 1.44 0 47.44 0 4 1970 44.40 1.31 0 45.71 0 5 1971 14.00 1.40 0 15.40 0 6 1972 8.40 2.19 0 10.59 0 7 1973 8.10 2.64 5.15 15.89 0 8 1974 0 3.28 5.15 8.43 13.02 9 1975 0 3.00 1.00 4.00 13.93 10 1976 0 3.00 1.00 4.00 14.84 11 1977 0 3.00 1.00 4.00 15.75 12 1978 0 3.00 0 3.00 16.66 13-50 1979-2016 0 3.00 0 3.00 17.57 りIAGR八名も：ThE REGどoH 研に。りEIA らeぶ4&Aつw rプrTE争 る‘ら移ていn片cfハ4『じr 二1 47 T W i,ýj C (Z. %E A 5 e o F -r" kQ..k,% Nr Ir W c* e #k 5 i TA, V i tic, i w ht4,cý,i wT Ari_ý -rm E. i P-g i c A-" IB p 9, ih 1%. Igckiwic.b "N CTu p 'P s CO Åg." vv~j, vv~ IQU&C,,T li 5i35,T%"Tin "Ro,4cý4 -xwc faQacc;r - 48 - E It't - 5 i DAW ANEW ~kts AUID kcto"o% - - P4Au -A C-T l .L 5" - 49 - so~c A M' So l \ 1 \ PlEr ~ ~ oo t o f Urini 5.< AT €* .*'*¢uat - 50 - l0 5 -T \ "/ 11 1 -11 a iw ti/ £u/s "in '7/1 et/q 69e 'w4 ihz BS »/9 'M4b C4ottsma seatei tX 444f% 5.- (Adi.A'TO _4_ uN 549MedDt~r 1(2A' COLORADO - U N I T E D S T A T E S Chihuahua O RIO YQL/I C/UDAD DEL/ClAS RIO YAQU11 RIO MA YO RIO FLERrE A GUNERA FUERTE BAJO R - ® Rio S: IUAINA SAN JUAN 0 BA JO RIO BRAVO RIO CULIACAN Gulf of Mexico BANK-FINANCED PROJECTS AND PROPOSED PROJECT fOF /Jc MEXICAN IRRIGATION REHABILITATION PROGRAM IRRIGATION DISTRICTS SAN JUA N 0DEL RIO STAGE I (Loan 275-ME) STACE II (oan 336-ML) Mracru * V,, .11 ti .- MEXICO STAGE III (Loan 450-ME) STAGE IV (Lan 517-M Klr V, (t.in 4. ME) ( T a V (L- 11'0 -,EJ PAC/FIC OCEAN o 00 200 300 4o 5001. bh., d-l ,CTOJER 19.17 3RD-203by 2R OCTOJER 1957 IqRD~2032RI  MEXICAN IRRiGAT!ON REHABILJTATION PROGRAM STAGE 1i1 IRRIGATION DISTRICT No. 17 LAGUNERA AREA Main canal Projected canal District area Main roads KItOMETERS edmo ) ý.AýZARO CARDENAS 6 DAM LEr jA,C NTO MATAMOROS Rodéo NåzOS SEPTEMBER 1965 IRDa 61aV MEXICAN IRRIGATION REHABILITATION PROGRAM STAGE 1i1 IRRIGATION DISTRICT No.23 SAN JUAN DEL RIO 0 1 2 3 4 5 0 ILOMETERS SAN iLDEFONSO DAM SAN JOSE DAM LOMO DE TORD DAM SAN JUADERI Main canals m.as==Pro]ected feeder canal District area RallSayS _____Main roads SEPTEMBER 1965IBD18