Mexico - Tropical Agricultural Development Project

Document of The Woi ld Bank FOR OFF1I(AL USE ONLY Report No. 1864b-ME STAFF APPRAISAL REPORT TROPICAL AGRICULTURAL DEVELOPMENT PROJECT MEXICO April 3, 1978 Projects Department Latin America and the Carribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official dutics. Its contents may not otherwise be disclosed Mitbout World Bank autborizatifn.  CURRENCY EQUIVALENTS US$1 Mex$23.0 Mex$l US$0.04 Mex$1 million = US$43,500 WEIGHTS AND MEASURES Metric System 1 hectare (ha) = 10,000 m2 2.47 acres -1 kilompter (km) 2 0.62 miles 1 square kilometer (km ) = 0.39 sq. miles = 100 ha 1 kilogram (kg) = 2.20 pounds 1 liter (1) - 0.26 gallons 1,000 kg = 1 metric ton = 0.98 long ton ABBREVIATIONS BNCR - National Bank for Rural Credit CIAPY - Center of Agricultural Research of the Yucatan Peninsula CIASE - Center of Agricultural Research of the Southeast CIAT - Tropical Agriculture Research Center CINIM*T - International Center for Improvement of Maize and Wheat CPNH - Naticn IWTater Plan Commission CSAT - College of Tropical Agriculture DGGI - General Directorate of Large Scale Irrigation DGDR - General Directorate of Irrigation Districts DT - Rainfed Districts FIRA - Agriculture Trust Funds of the Bank of Mexico INCA National Institute for Training of Farm,ers INCAFOR - General Directorate of Forestry Research and Training INIA - National Institute for Crop Research INIP - National Institute for Livestock Research PLAMEPA - On-farm Improvement Plan in Irrigation Districts PLANPA - Papaloapan Plan--for Agriculture Extension DPAE - Department of Production and Agriculture Extension (within SARH) PRONDAAT National Program of Agricultural Development in Rainfed Areas SAR - Former Ministry of Agriculture SARH - Ministry of Agriculture and Hidraulic Resources SOFE - Sub-department for Organization and Development of Ejidos within SRA SRA - Ministry of Agrarian Reform SRH - Former Ministry of Hidraulic Resources UNDP - United Nations Development Program GOVERNMENT OF MEXICO FISCAL YEAR January - December  FOR OFFICIAL USE ONLY MEXICO TROPICAL AGRICULTURAL DrIVELOPMENT PROJECT TABLE OF CONTENTS Page No. I. THE AGRICULTURAL SECTOR ............................ 1 A. General . ......................... 1 B. Agriculture in the Tropics ..................... 2 II. INSTITUTIONAL 'LSPECTS OF AGRICULTURAL DEVELOPMENT IN THE TROPICS ................................... 5 III. THE PROJECT ................ ....................... 10 A. Brief Description ....................... 10 B. The Project Area ............................... 11 C. Detailed Features ............................ .14 D. Project Costs ................................ . 19 E. Financing . ...................................... 19 F. Procurement .................................... 20 E. Disbursements ................................ . 21 IV. ORGANIZATION MANAGEMENT AND IMPLEMENTATION ..........22 V. TECHNICAL FEATURES ................................. 29 A. Civil Works .................................... 29 B. Agricultural Production ........................ 30 C. Technical Services ............................. 31 D. Extension ...................................... 36 VI. DEMAND AND MARKETING ASPECTS ......................... 36 VII. FINANCIAL ANALYSIS .................................. 40 VIII. ECONOMIC ANALYSIS ................................. 41 IX. SUMMARY OF AGREEMENTS REACHED ........................ 48 This report is based on the findings of an appraisal mission that visited Mexico in August/September 1977. The mission comprised Messrs. R. Milford, J. Roman, B. Kanchanalak and J. Cordeu (YP), (IJ3RD) and N. Shaw and D. T. Myren (Consultants). 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 (Cont'd) ANNEXES 1. A Background to Agricultural and Livestock Research in the Tropics 2. Supporting Tables and Charts 3. Related Documents and Data in the Project File MAPS IBRD 13209 IBRD 13210  I. THE AGRICULTURAL SECTOR A. General Resource Base 1.01 Mexico has a land area of nearly 200 million ha, about 70 million ha of which is classified as rangeland, around 35 million ha is considered suit- able for cropping, and about 45 million ha is suitable for forestry. The remaining areas are either too dry, too poorly drained or too steep for any form of agriculture. At present, about 17 to 20 millionr ha of the country's 35 million ha of potentially arable land is cropped each year. Mexico has about 5 million ha under irrigation, which accounts for about 60% of the country's annual crop output, and it is estimated that an additional 5 million ha could be dsveloped with water control including drainage and flood control as well as irrigation. Irrigation development has traditionally received highest priority and the largest share of public expenditure in the agricul- tural sector, with very little being invested in improving rainfed agriculture, although the rainfed areas comprise about 75% of the total cropped area of Mexico and represent about 85% of the country's farm enterprises. Development 1.02 Prior to the mid-1960s, Mexico's agricultural sector was a dynamic part of the country's economy growing at a rate of about 5% a year. Then, abruptly, in 1965, the rate plummeted to about 1% a year and has stayed there ever since. The seriousness of this fall is clear particularly when viewed in the perspective of Mexico's rapidly expanding population, which has in- creased at about 3.5% per annum over the past 10 years and stand now at 60 million. 1/ As a result, Mexico has been unable to produce enough food to satisfy local demand and, since about 1970, the country has become increas- ingly dependent upon imported food grains (mainly maize, wheat and beans); feed grains (mainly sorghum); oil seeds; and powdered milk. In an attempt to deal with the situation, Government has placed the highest priority on increasing agricultural output, an emphasis that is warranted also because agriculture is still the most important source of income and employment for Mexico's rural population of about 20 million. Over three mlllion families depend upon agriculture for their livelihood and represent about 40% of the country's labor force. These people comprise three distinct groups of nearly equal size, (i) those who work on land owned by others; (ii) private land holders; and (iii) ejidatarios 2/. About 40% of the rural families 1.0 million private farmers and about 1.2 million landless families. About 40% of the rural families have incomes of less than US$1,800 per year. The rural pro- duction and income distribution is, moreover, skewed, following the pattern of intensity of land use. It is estimated that about 5% of all farms supply 1/ Preliminary data indicate that the rate of population increase may be declining slowly and that the figure for 1977 may be around 3.2%. 2/ Ejidatarios are members of an ejido, which is a form of group land tenure based on usufruct.  about 50% of agricultural market sales, while 80% contribute about 16%. At the current rate of growth, the sector is unable to generate sufficient - and income to prevent an ever-increasing urban migration. Although improving the agricultural sector alone cannot solve all of Mexico's employment/income distribution problems; it can, nevertheless make a major contribution to raising 1lving standards in rural areas and in reducing urban migration. 1.03 As a first step toward coordinating its efforts to increasing agri- cultural output, the newly elected Government merged the Secretariats of Water Resources (SRH) and Agriculture and Livestock (SAG) into one Secretariat of Agriculture and Water Resources (SARH). It also issued a presidential decree creating Rainfed Districts (DT) along lines similar to those which cover existing irrigation districts to provide a mechanism for channeling development support to rainfed agriculture. The chances for bringing about increases in production would be considerably enhanced by technical services, coupled with an efficient use of credit, improved marketing facilities and infrastructure, particularly as applied to a greater part of the country's small individual farmers and ejidatarios who together account for at least 65% to 70% of the country's agricultural land. Much of the Bank's current lending to Mexico for agriculture has been directed to helping this important subsector, mainly through on-going rural development projects and a series of agricultural and livestock credit projects. 1/ 1.04 Besides increasing output from presently cultivated areas, Mexico must also try to bring as much of its potentially arable but unused land into production as quickly as possible. In this regard, it is estimated that, in addition to increasing productivity from existing areas, Mexico needs to cultivate 200,000 ha of new land each year if it is to regain the momentum of pre 1965 years (para K 02). Recent studies by the National Water Plan Commission (CPNH) estimate that Mexico has about 6.3 million ha of unused or underutilized land which could easily be brought into intensive production quickly. Of this, an area of about 3.6 million ha (60%) is located in the tropical lowlands. B. Agricultuire in the Tropics 1.05 The tropical lands of Mexico are located on the Gulf Coast and southeast region of the country (see map IBRD 13209). Within these regions there are some 27.4 million ha of flat lands (46% of all the flat lands in the country) with an annual rainfall ranging from 1,000 to 6,000 mm. About 13.6 million ha are located on predominantly shallow calcarious soils on the Yucatan Peninsula, and the remaining 13.8 million ha on the Gulf Coast and onL the Pacific Coast of Chiapas and Oaxaca. Studies by CPNH have shown that within these areas there are about 8.3 million ha of arable lands with medium to high agricultural potential, of which about 3.6 million ha is virtually unused (para 1.04). Because of the generally high and reliable rainfall, the arable areas identified in the region have considerable potential for intensive production. In many places, cropping intensities greater than 100% are 1/ Loans 1053-ME, 1111-ME, 1462-ME, 430-ME, 610-ME, 747-ME, 910-ME, and 1217-ME.  -3- easible without irrigation while in others only modest supplementary irri- gation systems would be required. The fertile lands are located mainly on the coastal flood plains of the four main Gulf Coast rivers--the Panuco, the Papaloapan, the Coatzacoalcos and the Grijalva-Usumacinta and to a lesser extent on the Pacific Coast of Chiapas and the Yucatan Peninsula. More than 60% is in the hands of ejidatarios or small private farmers, the holdings averaging 8 ha per ejido family and upwards of 20 to 30 ha per small private farmer. Most families are at subsistence levels. 1.06 To date, the main developments in the region have been on the Tropical Gulf Coast where until recently, three river basin commissions were in charge of development: the Papaloapan Commission since 1947, the Grijalva Commission since 1951 and the Panuco Commission since 1959, with the Minister of SARH the president of each of the commissions. In 1977 the Grijalva Commission was dissolved. 1.07 Achievements during the first 30 years of existence of the Papaloapan Commission included main and penetration roads totalling 2,000 km; flood con- trol works; and rural development in the form of agricultural extension, roads, schools, health services, domestic water supplies, malaria control and some colonization schemes. Funds were drastically reduced after 1959, causing a decline in the rate of development, although agricultural production continued to rise because of benefits derived from earlier investments. In 1975, the Commission, with Bank assistance (Loan 1053-ME), initiated a rural development project directed at improving socio-economic conditions of the ejidatarios and small farmers in the basin. Agricultural output of the zone is mainly from 175,000 ha of sugarcane, with low yields however, due to impeded drainage. Maize is grown on about 300,000 ha but yields are low at about 0.7 ton/ha except in those areas that receive technical services and inputs, where yields run to 3 ton/ha. The total cropped area in tne Papaloapan lowlands is about 600,000 ha, but, with most of the remainder of about 2 million ha devoted to extensive animal husbandry, output is only a small fraction of the potential. The commission has also been active in promoting industrial development to take advantage of the power generated by the Miguel Aleman dam and in recent years a paper mill, a sugar plant and numerous canning plants have been established in the basin. 1.08 In the Grijalva-Usumacinta coastal lowlands, the "Plan Chontalpa", a 75,000-ha development based on drainage, was constructed from 1966 to 1971 with Inter-American Development Bank (IDB) assistance but it met with mixed success. Besides drainage and roads, the project included: housing, domestic water supply, electrification, schools and health centers. Despite the drainage improvements, agricultural production was less than expected because of institutional and manpower constraints. In hindsight it appears that the drainage and road systems were constructed too rapidly and the social infrastructure was over-elaborate. For example, the housing provided might better have been of a local, self-help rather than an imported type, ill-suited to the local environment. La Chontalpa has nevertheless demonstrated that drainage is feasible in that part of Mexico and that high-value, high yielding crops can be obtained with proper cultural practices.  4- 1.09 Tn the Panuco coastal plain, hurricanes occur irregularly every few years and cause serious damage from flooding. Because of lower rair1fall, conventional irrigation is needed in Panuco as compared with the other three river systems of the Gulf Coast. In 1974, the Panuco Commission began con- struction of a first-stage irrigation project (area 137,000 ha) with Bank assistance (Loan 969-ME). A considerably larger second-stage project covering 250,000 ha is planned, which would, besides irrigation, deal with a complex flood problem that affects much of the coastal plain, including the port city of Tampico. 1.10 CPNH has identified 2.4 million ha of fertile lands out of the 3.6 million ha of virtually unused lands located in the region (para 1.04) as having greatest potential for medium-term development. Most of these lands, located in the four Gulf Coast river basins (para 1.05) with small areas on the Pacific Coast of Chiapas and the Yucatan Peninsula, are presently unfit for cropping because of poor drainage or susceptibility to flooding and are being used mainly for extensive ranching. With basic drainage infrastructure, roads and in some cases, supplementary irrigation, much of the area could become almost as productive as many of the country's large-scale irrigation areas but at considerably less cost per ha. These humid tropical lands are moreover better suited for crops with high water requirements such as sugar and rice than the irrigated arid areas of the northern and central Pacific regions. Government has given priority to developing its humid tropics and has charged CPNH with responsibility for drawing up a development strategy and prepare specific projects to implement it. The recent discovery of large reserves of oil and gas in the region has given added imDetus to this work. The influx of population to the area has improved local marketing prospects for food crops, new road networks have opend up large areas for development, and health, education and other social services have been improved. Present Land 'U'se in the Humid Tropics 1.11 The main characteristics of the present agro-livestock system in the Mexican humid tropics is extensive land use with low yields and a generally low level of farm management, processing, marketing and agricultural services (extension, research, and to a lesser extent, credit). Livestock production, both from beef and dual-pupose beef/milk operations, is the most widespread activjity in the Panuco, Papaloapan and Grijalva-Usumacinta basins at the present time. About 7 million head, or about 25% of the national herd, are located in the humid tropics, which is one of the most important areas produc- ing beef for Mexico City. Within the 4.7 million ha of the lands of medium to high agricultural potential now being used (para 1.05), both extensive ranching and cropping are carried out, the main crops are: corn (60%), beans (14%), sugar (14%), rice (4%), and cocoa (4%), with small areas in crops such as fruits and vegetables, bananas, rubber, coffee, and pineapples. Although average yields are generally low with maize less than, 1 ton/ha, beans less than 0.3 tons/ha, sugar less than 50 tons/ha and rice less than 1.5 tons/ ha, available information shows that these can be increased considerably given the right technical, infrastructural and managerial inputs. As the region is moreover suitable for intensive animal production (particularly using grass- legume pasture mixtures), a wide range of development packages can be evolved to take account of small ecological and socio-economic aifferences within the zone.  -5- Socio-Economic Problems in the Tropics 1.12 The most important socio-economic problems for agricultural develop- ment in the tropics relate to the lands held under ejido tenure, which consti- tute 60% of the arable or potentially arable lands in the area. Under the law ejido lands are allocated to groups of "ejidatarios", but, each ejidatario is given use rights over a specific parcel within the ejido (around 8 ha in the tropics) so land is generally exploited individually. This system of exploita- tion has created obstacles for converting ejidatarios from their present subsis- tence agriculture to one which is production/profit oriented. More recently, the Government has decided that, in all new ejidos, land will be allocated and worked in A truly collective way with no individual plots allocated to farmers, except for the establishment of small gardens for home consumption. This new system, which permits the ejidos to take advantage of the economies of scale and central administration, has already been introduced in the new ejidos in Panuco and other parts of the country. These have been successful when adequate provision has been made for credit, physical inputs, social anrd management services with an improvement in the socio-economic status of the individual ejidatario families. In such ejidos the general assembly has accepted the responsibility for planning, execution and management of the productive operations of the unit. The assembly under the leadership of its head elected by the ejido is empowered to obtain credit for on-farm development and to allocate work responsibilities to ejidatario members who are paid on the basis of work done. The profits are distributed among all members. How- eve-, to take this approach in the existing ejidos would call for considerable modifications in land use rights and social structure, which would likely take some time. Under the project, collective management would be introduced wherever possible (paras 4.07 and 4.08). II. INSTITUTIONAL ASPECTS OF AGRICULTURAL DEVELOPMENT IN THE TROPICS The National Water Plan Commission 2.01 CPNH, a semi-autonomous commission established in 1976 under the general umbrella of SARH, has been assigned a key role in Mexico's tropical agricultural development program. One of the main proposals of CPNH (drawn up in collaboration with Government, the Bank and UNDP) was that greater emphasis be given to developing agriculture in the humid tropics. CPNH has published 27 reference reports prepared by a group of technical specialists, economists and sociologists, which provided basic data for the formulation of a long-term (1975-2000) agricultural development strategy for the humid tropics. The strategy involves (a) phased area-development programs based on the initial development of pilot project areas (about 4,000 ha each) to determine the infrastructure cum socio-economic packages suitable for developing a larger "area of influence" of 50,000 to 150,000 ha, and (b) the strengthening of the key institutions involved in tropical agricultural development while providing a mechanism for better coordination of their activities. Using its own staff and consultants, the agency has completed feasibility studies for two pilot  6- project areas and is carrying out studies for four others, and, in collaboration with the various entities involved, it has prepared a plan for concurrent improvement of agricultural services in the humid tropics. Initially, these plans envisage improving mainly the extension and research services for the region, with empahsis on the areas of influence of the pilot projects. Extension Organizations 2.02 The SARH Department of Production and Agricultural Extension (DPAE) is the public body responsible for extension in Mexico. Until the 1970's its services were directed mainly to irrigation areas, generally neglecting the large number of low income farmers, particularly those in rainfed areas. In the early 1970s, two positive steps were taken to improve the quality of service for creating: (a) the On-farm Improvement Plan (PLAMEPA), addressed to irrigation districts within SRH; and (b) the National Program of Agricul- tural Development in Rainfed Areas (PRONDAAT) within SAG. PLAMEPA emphasizes better use of water by providing advice on land levelling and other on-farm works, complete technological packages, and demonstrations, through applied research, while PRONDAAT, which is based on the experience derived from the maize cultivation improvement "Plan Puebla", is supported by the Graduate School of the National Agricultural University at Chapingo. In essence, under the PRONDAAT approach, the extension agent is given a broader development role by directly involving him in the organization of small farmer associations, produce marketing, and provision of inputs and credit. The program is supported by intensive field trials designed to produce appropriate technical packages for individual ecological zones. 2.03 Existing services are, however, unable to provide adequate assistance to an estimated 4 million farmers cultivating..over 15 million ha. There are about 5,200 extensionists in SARH and about 2,200 in the agricul- tural credit system (para 2.11)--about one per 550 farmers. In the humid tropics, the ratio is less than one SARH extension worker for 1,000 farmers and the service offered is generally poor. A notable exception (para 2.08) to this is in the Papaloapan basin, where, under the Papaloapan Commission, and financed by Bank Loan 1053-ME, "Plan Papaloapan" (PLANPA) technicians are providing a PRONDAAT-type service to the ejidatarios in the rainfed areas of the basin. PLAMEPA also operates in the Papaloapan basin in the Rio Blanco irrigation district, with coordination between the two achieved through a technical coordinator. Using experience gained in the Papaloapan basin, it should be possible to establish an effective extension service in the humid tropics based on the PLANPA-PLAMEPA system. Research 2.04 Research on crops, livestock and forestry is carried out by semi- autonomous SARH agencies: the National Institute for Crop Research (INIA); the National Institute for Livestock Research (INIP); and the General Directorate for Forestry Research and Training (INCAFOR). Until recently, INIA's work has been directed largely toward irrigated crop development and to the higher rainfall  -7- areas, and its work in collaboration with the Centro Internacione.l para Mejoramiento de Maiz y Trigo (CIMMYT) in wheat and, to a lesser extent, maize breeding, i-s well known internationally (Annex 1). The institute has been allocated more funds in recent years and has been able to expand its research staff and improve the scope and caliber of its work. In 1977, its total budget was about US$20.5 million and its staff included 650 fulltime pro- fessicnals, of which 40 were P,.Ds, 130 MScs, and 480 BS graduates. In August 1977, significant organizational changes were made within INIA that were designed to tie its work more closely with the production needs of the country. It has delegated more responsibility to its regional centers and adopted a multi- disciplinary team approach, with units working on specific commodities or production-oriented problems. While these are important improvements, there is still a need to upgrade the academic standards of staff, strengthen the research effort in rainfed areas, integrate individual research findings into technolog- ical packages for specific ecological regions, and improve interaction with the extension services. Most of INIA's research for the humid tropics is done by the Center of Agriculture Research for the Southeast (CIASE), located in Veracruz, and by the Center of Agricultural Research of the Peninsula (CIAPY), located in Yucatan. However, except for maize, there is a paucity of pro- ductive research data on almost all crops suitable to the area. 2.05 INIP's earlier work was concentrated on genetics, veterinary medicine, and preventive vaccines, but today it is placing greater emphasis on animal production management problems, including pasture management and stocking-rate studies, both of which are crucial for Mexico's livestock industry. Research is currently organized by disciplines; however, following INIA's example, INIP is now changing to a production-research orientation. INIP's staff in 1977 totalled 163 professionals, including eight PhDs, 30 MScs, 90 BSs and 35 BS degree candidates who were scheduled to graduate in 1977. The institute has its headquarters in Mexico City and there are 16 experi- mental centers located through the country, six of them in the tropics. Its budget in 1977 was about US$5.2 million, with about 50% of its resources devoted to aspects of cattle health and productin in the tropics. As with INIA, there is a need to upgrade academic standards of staff and to augment research capability. 2.06 INCAFOR, which forms part of the Forestry Sub-secretariate of SARH, was recently formed from the National Forestry Research Institute which was founded in 1960, with headquarters in Mexico City. Field research is carried out mainly at six experimental stations, two of which are in arid, two in temperate and two in tropical areas, but most of the institute's efforts are concentrated in the temperate pine forest regions. Its total annual budget in 1977 was about US$9 million, of which about US$1.7 million was spent on staff training. Currently, out of a total of 118 professional staff, only three have PhDs and 11 have MScs. The paucity of trained staff is particularly evident in its tropical program in which there are only three staff members with bachelor's degrees located at the two tropical experimental stations. Clearly it would be unwise to consider increasing forest research in the tropics without first providing for more trained end experienced staff.  -8- The Papaloapan Commission 2.07 The Papaloapan Commission, a semi-autonomous institution within SARH, was established in 1947 to promote development of the important Papaloaparn basin. The Vocal Ejecutivo, the offici.al representative of SARH, is responsible for executing policies approved by the Minister of Agriculture and Hydraulic Resources, and the annual appropriation for the Commission appears as a separate appropriation in the SARH budget. As mentioned in paragraph 1.07, the Commission has greatly assisted development of thle basin and was one of the first entities to promote rural development in Mexico. Among its achievements, one of the most important affecting agricultural production, has been the establishment of effective extension services for both raiuifed PLANPA and irrigated PLAMEPA areas, particularly for the smaller land holders and ejidatarios. The Commission has as an objective the ultimate merging of the two services into one unit. The College of Tropical Agriculture (CSAT) 2.08 .ocated at Cardenas in the state of Tabasco, CSAT was established in 1969 as a center for postgraduate training, specializing in tropical agricultural-livestock production, but, in 1973, it enlarged its program to provide undergraduate training. In 1977, the student body consisted of 41 students working towards master's degrees and 418 undergraduates. The college faculty of 80 professionals consists of three PhDs, 20 MScs and 57 BScs. 2.09 CSAT's undergraduate training programs are in line with the needs of Mexico's tropical region and some 30% of the time is devoted to agro-social practices, which permit the students to have direct contact with farmers through studies on all aspects of the farm enterprise. The college has assigned particular importance to providing advanced training to its own staff, by sending members to other institutions (some in other countries) to take advanced courses and by bringing visiting professors, both national and international, to its own campus. However, there is a need to accelerate further the training program if the staff is to cope with the proposed expan- sion in the student body, which is projected to double within five years. Agricultural Lending Institutions 2.10 Mexico has a well structured and experienced agricultural credit system, involving both public and private lending institutions, but the great- est proportion of institutional credit in Mexico is handled by the main public bank, Banco Nacional de Credito Rural (BNCR). BNCR was found in 1975 through the amalgamation of three agricultural public banks to consolidate the lending activities of the predominantly small holder and ejidetario clientele with wnich all of these banks operated. In 1976, more than 90% of its portfolio of Mex$ 25,000 million was for short-term crop loans. Almost all long-term credit is channelled through special developmernt funds within the general administrative framework of the Agricultural Trust Fund of the Bank oF Mexico (FIRA). Commencing in 1965, FIRA has been responsible for administering five Bank agricultural credit loans, totaling US$400 million, and under its control, long- and medium-term lending has been well managed and sub-borrowers have  -9- generally benefited from their investments. A feature of long-term agricul- tural credit operations in Mexico is the level of technical support provided through more than 2,000 technicians employed by FIRA and BNCR and the private banks. FIRA has considerable experience in operating long-term credit in the low income producers subsector. In 1976 it rediscounted US$73 million, or 50% of its total portfolio for the subsector. FIRA staff has also taken the initiative in developing new production packages based on technology developed within as well as without Mexico. It has established 13 demonstration centers throughout the country and promoted these new packages through its on-farm lending operations. Both FIRA and BNCR have three regional headquarters serving the tropics and, together, they have perhaps a longer and wider experience in tropical agro-livestock production at the farm level than any of the other public institutions. 2.11 While credit institutions have an important role to play in speeding up development in Mexico's tropical areas, there is a ne:d for closer coordi- nation between them and the other public institutions involved in the area, particularly with SARH extension and research activities. A closer involve- ment of the extension service with the credit institutions would be especially useful to ensure more comprehensive follow-up supervision of sub-borrowers, thereby enabling them to make the most effective use of their loans. State Governments 2.12 Although the initiative and most of the resources for developing agriculture in Mexico's tropics rest with the Central Government through its various agencies, successful implementation of any program would be difficult without the support of the various State Governments involved. Also, State Government policies are important in determining overall development stragegies, especially those policies concerning highly sensitive land tenure and agrarian reform issues. Central Governemnt planners envisaged that considerable changes in land use rights will be necessary to ensure equitable opportunities for the relatively large undeveloped rural population in the region, but experience has shown that the full support of the State Governments, is important in the iaiplementation of the necessary agrarian reform actions that will bring about these changes. Secretariat of Agrarian Reform (SRA) 2.13 In any development strategy for Mexico's tropical regions, the involvement of SRA is essential since its staff is needed to assist farmers to organize themselves and to clarify land use rights before any on-farm Improvement programs are put into effect. Since most of the plans for devel- oping the region deal mainly with ejidos, most of the field involvement of SRA in these plans would be through SRA's Sub-department for Organization and Development of Ejidos (SOFE). The SOFE staff serve in multi-disciplinary teams that ensure that the ejidatarios are deeply involved in detailed plan- ning of new investments. They also educate and convince ejidatarios of the need to work collectively and to see that all can share benefits equally. SOFE's long-term goal is to transform each ejido's general assembly into a  - 10 - planning body that can implement economic programs (in accordance with the new agrarian reform law) by offering ejidatarios incentive in the form of infra- structure such as roads , drainage and irrigation works and social facilities linked to well identified possibilities for increasing production and on-farm incomes though technically supervised credit and management services. In addition to this, direct effects of enhancing the ejidatarios socio-economic status most programs create employment (on- and off-farm) for members of the ejidatarios' families. III. THE PROJECT A. Brief Description 3.01 The project would be part of a long-range program for intensifying agricultural production in the tropical lowlands of Mexico. It would be carried out over a five-year period and would consist of three major compo- nents: (a) development of six pilot projects of about 4,000 ha each; (b) support for improvement and expansion of the existing agricultural and livestock research in the tropics; (c) strengthening and improving the agri- cultural extension service in the tropics with emphasis in the 660,000 ha area of influence of the pilot projects. Some 3,000 families would be direct beneficiaries of the pilot projects and some 40,000 additional ones would receive assistance from the extension service. SARH would have overall responsibility for project execution with actual execution by several of its departments (para 4.01), SRA and FIRA. A technical committee chaired by CPNH would formulate operational plans which would be carried out by a Project Unit in CPNH. Identification of the project was one of the results of the National Water Plan Studies, carried out between 1972 and 1975, by CNPH with Bank and UNDP assistance. FAO and consultants assisted CPNH to prepare the feasibility studies. B. The Project Area 3.02 The project would be implemented in the tropical lowlands on the Gulf Coast and Southeast regions of Mexico (see map IBRD 13209) comprising the lower Panuco, Papaloapan, Coatzacoalcos and Grijalva-Usumacinta River basins on the Gulf; the Yucatan Peninsula; and the coastal lands on the Pacific Coast of Chiapas and Oaxaca. The project's total area of influence would be about 27.4 million ha (para 1.05) located in the states of Tamaulipas, Veracruz, Oaxaca, Tabasco, Chiapas, Campeche Yucatan and Quintana Roo. The area is served by good surface, air and maritime communications to major cities. The "Circuito del Golfo" road and the Southeast railway run along the shoreline of the Gulf and link the region with the national highway and railway networks. Likewise, the "Troncal del Pacifico" road runs along the Pacific Coast of Chiapas and connects with the Circuito del Golfo road through the Trans Isthmic road, which runs across the Tehuantepec Isthmus. The recently built Ciudad Aleman to Sayula road transects the fertile lands of the Papaloapan  - 11 - oasin and interlinks it with the Grijalva-Usumacinta basin. The Veracruz and Coa.zacoalcos ports handle most of the Mexican goods and oil imports and exporLS. Climate 3.03 The climate is humid and semi-humid tropical. Mean monthly tempera- tures vary from 25 C in December-January to 30 0C in April-May. Annual rainfall in the Gulf increases north-south from 800 mm in the northern part of the Panuco basin to 1,500 mm in the lower Papaloapan basin to 3,000 mm in the Grijalva-Usumacinta basin. In the Panuco and Papaloapan basins, about 85% of the rainfall occurs during June-October compared to 65% in the Grijalva- Usumacinta basin. Supplementary irrigation is therefore needed for dry-season cropping in Panuco and some parts of Papaloapan. Otherwise, except for flood- ing and water-logging, there are no major climatic constraints for pasture and perennial crops. In the smaller Pacific coastal plain, annual rainfall ranges from 1,000 mm to 2,000 mm toward the east; in the western portion, where rain- fall is around 1,200 mm, the full development potential cannot be achieved without supplementary irrigation. Another major climatic constraint is the relatively high wind (40 to 100 km/hr) during the growing season, capable of inflicting frequent damage to crops. In the Yucatan Peninsula, rainfall ranges from 500 mm in the north to 1,300 mm at the Guatemalan border. Topography 3.04 Topography is of two types: (a) rolling foothills with slopes of less than 2.5% and located inland; and (b) the flat lands of the lower deltas where the river channels are shallow and sometimes higher than the swamps behind the natural river levees resulting in frequent flooding at the confluence of the lower tributaries. 3.05 Several existing dams provide partial protection against flooding in the lower deltas. In the Papaloapan basin, the Miguel Aleman dam controls the Tonto River, a main tributary of the Papaloapan, while the Cerro de Oro dam, now under construction, will control the Santo Domingo River, another main tributary of the Papaloapan. Along the Grijalva River, two existing dams (Malpaso and La Angostura), built mainly for power generation, have reduced floods in the lower delta, and two high dams in the planning stage (the Chicogan on the Grijalva River and Istantun on the Tacotalpa River) will further mitigate flood problems in addition to the generation of more power. Adequate flood protection will ultimatel.y require many kilometers of embank- ments in addition to the dams--a matter requiring further study. Besides flood protection surface drainage facilities are needed to remove excess rainfall in the rainy season. All of the pilot projects to be developed under the project would be outside the main flood zones. Agricultural Potential 3.06 Studies carried out by CPNH have revealed that, within the lowlands, there are 8.4 million ha with medium to high agricultural potential (see Map IBRD 13209), of which 44% is virtually unused and the remaining 56% is devoted  - 12 - mainly to extensive cattle ranching. The main constraints for development of intensive agriculture are: (a) frequent flooding and poor drainage on much of the flat, fertile soils; (b) lack of data on many aspects of agricultural production; (c) lack of support services, particularly a well integrated extension service; and (d) generally inefficient farmers' organization and on-farm management. Within this area, CPNH has chosen 2.4 million ha that would be brought into intensive agricultural production over the remaining part of this century (para 1.05). About 2.1 million ha are located in the coastal areas of the Gulf (760,000 ha in the Panuco, 846,000 in the Papalcapan, and 492,000 in the Grijalva-Usumacinta River Basins), with the remaining 300,000 on the Pacific Coast of Chiapas and Oaxaca and the Yucatan Peninsula. Pilot Project Areas 3.07 In its strategy for development of the humid and semi-humid tropics, Government has decided to phase development and test techniques before embarking on large-scale programs. To this end, CPNH had identified 23 pilot project areas, ranging from 2,000 to 6,000 ha as being representative of ecological and social conditions prevailing in surrounding areas, and in whicb development strategies can be tested. Under the proposed project, six pilot projects of about 4,000 ha each would be implemented, of which two, Zapotal and Tesechoacan, have already been chosen and feasibility studies completed, while studies for selection of the remaining four are underway based on the following criteria: (a) the pilot area must be ecologically representative of a surround- ing area sufficiently large to warrant a future development program in which economies of scale can be adopted; (b) the status of the farmers in the pilot area regarding land tenure and income distribution should also be representa- tive of a much larger surrounding area; (c) the areas should possess good potential for intensifying land use and increasing crops agricultural produc- tion; and (d) in some instances, the suitability of the pilot area for crops new to the region would be considered. 3.08 The Zapotal Pilot Project: This pilot project covering 4,500 ha in the Tonala River basin between the Zanapa and the San Fernando Rivers, is adjacent to the Chontalita project in Tabasco state (see Maps IBRD 13209 and 13210) and is representative of 120,000 ha of surrounding lands which is crossed by main highway 180, which links it with Villahermosa (80 km) and the rest of the country. The southeast railways station, La Chontalpa, is 30 km from the area. Some 2,519 inhabitants, or 407 families, presently live in the area, most of whom are ejidatarios or rural workers. In the homogenous surrounding lands, about 12,000 ejidatario families and 3,000 small farmers would eventually benefit in the succeeding stages of development which would follow from the pilot project. 3.09 The area has an elevation of 4 m above sea level and a general ground slope of 0.25% towards the sea, The soils are alluvial, deep, heavy textured and with poor surface drainage. The climate is hot and humid, with an annual rainfall of 2,260 mm and a minimum monthly precipitation of about 125 mm from January to May. The average temperature is 250C, with minimum and maximum temperatures of 220 and 28 C, respectively. The soil and ecological conditions make the area suitable for pasture, coconiut and annual crops. At present,  - 13 - cattle are grazed on about 50% of the land at a carrying capacity ranging from 0.5 AU/ha otn natural grasses to 1.4 on improved pasture. Corn, rice and beans, mainly for home consumption, are grown on 25% of the land, and pro- duction yields are 760, 2,000 and 600 kg/ha, respectively. The remaining 25% is unused. 3.10 Although the entire Zapotal area constitutes one ejido--r.amed for the area--there are organizational problems relating to land use rights within the ejido. Illegal negotiations for land use rights and land lease practices have led to illegal posession of land and conflicts in possession within the ejido. Although no farm holdings are excessively large by Mexican standards, land use per ejidatario is unevenly distributed. Out of the 407 ejidatarios, 40% farm less than 5 ha and account for only 22% of the land, holdings greater than 25 ha occupy 9% and account for 38% of the area, Under the project, the Government would revise ownership rights within the framework of the agrarian reform law to ensure more even distribution of land among ejidatarios (para 4.07). 3.11 The Tesechoacan Pilot Project. The pilot project covers 4,400 ha located in the Papaloapan basin between the Tesechoacan and Obispo Rivers in the jurisdiction of the Papaloapan Commission in Veracruz state (see Maps IBRD 13209, 13210). It is representative of about 140,000 ha of surrounding lands in the basin and is connected with Ciudad Aleman (Papaloapan Commission headquarters), the Veracruz port in the Gulf, and the rest of the country by the paved roads and railways. The population is 3,000 or 435 families, who would become project beneficiaries. Ninety percent are ejidatarios and the other 10% are laborers on private farms. With full development in the future of the 140,000 ha represented by the pilot project some 12,000 ejidatario families and 2,000 small farmers could eventually benefit. 3.12 The area has an elevation of 10 m above sea level and most of it is flat, with slopes of less than 1%, interspersed with small, but slightly high rolling areas. The soils are deep and heavy with poor surface and internal drainage. The area has a semihumid, hot climate. The annual average rainfall is 1,500 mm, with mean monthly minimum precipitations of 30 mm from January to May. The average monthly temperature is 26 0C. Although an earth embank- ment along the left bank of the Tesechoacan River protects the area from flooding, poor surface drainage and runoff from the upper lands cause water- logging in the wet season. 3.13 Soil conditions are suitable for growing a variety of annual crops, fruit trees and pasture. Many farmers are acquainted with modern agricultural techniques and use machinery and fertilizers; however, the risks of losses due to waterlogging in the wet season and water shortages in the dry season have made them reluctant to intensify agricultural practices or to increase areas under cropping. Land use patterns in the ejidos differ from those in the private properties. In the ejidos, 42% of the land is in annual crops, namely, rice, corn and beans, with yields up to 3.0, 2.5, and 1.5 tons/ha, respec- tively; 2% in fruit trees, mainly mango; 30% in pasture lands under a very low grazing intensity; and 20% unused. On private farms, 80% of the land is used for extensive cattle ranching and, in the remaining 20%, there are some mango orchards, scattered areas of annual crops, and fallow.  - 14 - 3.14 Both ejido and private property are found in the pilot project area. Three ejidos occupy 67% of the area, and 19 private holdings, the remaining 33%. In two ejidos, land is exploited in indiviidual holdings, while in the third, the farmers participate in a collective exploitation but hold rights to individual plots. The average land per ejidatario is about 10 ha for the three ejidos. Private farms range in size from 10 to 400 ha; 26% of private farms are larger than 100 ha and account for 65% of the private land. Under the project, some private land would be purchased by the Government and converted into ejidos under the agrarian reform law. 3.15 Four Remaining Pilot Projects. At present, CPNH is conducting studies in nine areas identified as possible locations for the remaining four pilot projects. They are: Tempoal and Tantuan-Sta. Clara in the Panuco basin; Playa Vicente in the Papaloapan basin; Tacotalpa in the Grijalva-Usumacinta basin; Huixtla on the Pacific Coast of Chiapas; Ostuta in the Pacific Coast of Oaxaca; and Ukum Cancabcheck, Tizimin and Chunchintok in the Yucatan Peninsula. The pilot projects selected would be about 4,000 ha each and would represent some 400,000 ha of surrounding lands. Prior to negotiations CPNH presented the Bank with the basic general studies on the above areas in which pilot project areas have been defined based mainly on available socio-economic, ecological, technical and land tenure information. Final selection will be made by the Project Technical Committee (para. 4.01), after which CPNH will proceed with detailed feasibility studies which will be submitted for Bank approval. C. Detailed Features Pilot Projects 3.16 The pilot projects would be used as testing grounds to develop administrative, technical and socio-economic packages for future application in the region. These packages would be aimed at introducing engineering techniques, agricultural, production systems, and farmers' organization systems that, although not new to Mexico, have not been consistently applied in the tropics and, when they have, rarely as one package. 3.17 Implementation of the six pilot projects would bring into agricul- tural production about 23,800 ha and would directly benefit about 3,000 farmers, mainly ejidatarios. In all areas, the project would aim at: (a) improving physical conditions of the areas by constructing drainage works, feeder roads, administrative facilities, and, appropriate works for supplementary irrigation; (b) clarifying land use rights and restructuring of land tenure within the ejidos and, when appropriate, purchasing private land to enlarge the ejidos or incorporation of private farmers into the project within the framework of the agrarian reform and water laws; (c) organizing and training of ejidatarios to induce them to undertake collective-type devel- opment; (d) providing agricultural extension services to develop technical packages and to bring about agricultural development in the areas; (e) estab- lishing agro-industries; (f) providing long-term credit for on-farm develop- ment, fixed investments and livestock; and (g) establishing an operation and maintenance service for the works and purchase of the necessary equipment.  - 15 - Area Development and Infrastructure. Development plans for the two pilot projects--Zapotal and Tesechoacan--have been prepared and evaluated and are describea below, and detailed development plans for the remaining four are being prepared. A condition of disbursement for these four pilot projects would be that the feasibility studies done by CPNH had been approved by the Bank. 3.19 Civil Works. Drainage works would be the main item financed under the civil works program. The design of the works would be such as to remove surface run off from the pilot areas within three days following heavy rain. The project would also include construction of internal roads and adminis- trative buildings. Civil works for the first two pilot projects would include 65 km of main drains, 38 km of secondary and minor drains, 60 km of main and 45 km of minor internal roads, and administrative buildings. Since the Tesechoacan area is subject to flooding from runoff from higher surrounding areas and there is no efficient outlet to evacuate excess water, civil works for this pilot area would also include a local watershed flood control dike, an 8 km outlet drain to the river and improvement of 12 km of the river flood protection embankment parallel to the Tesechoacan River. The watershed flood control dike and the outlet drain would directly benefit 30,000 ha, inclusive of the 4,400 of the pilot project. Supplementary irrigation would also be provided for 2,100 ha including a pumping station on the left bank of the Tsechoacan River, 13 km of main canals, 1] km of secondary canals, control structures and on-farm leveling and ditches to meet the demands for year-round cultivation during the dry season. Under the project, funds would also be made available to purchase operation and maintenance equipment. 3.20 On-Farm Development. Long-term credit would be provided to about 3,000 farmers for on-farm development. Investment would be mainly in: land and pasture development, machinery and equipment, construction, breeding cattle, and planting operations and materials. Long-term credit would be channeled to the farmers through FIRA, BNCR and priv ate banks (para 2.11), which would provide local counterpart funds. Interest rates, repayment terms, and rediscounting arrangements would be 11% to 16% for low income sub- borrowers and 16% to 17% for other subborrowers and would correspond to those applicable under other Bank loans to Mexico for agricultural credit. Short- term operational credit would be made available through BNCR and FIRA (through the private banks) and would not be reimbursable from the loan. The amount of development credit required for the first two pilot projects would be US$6.3 million to be invested in four years, with a further US$12.3 million for the additional four pilot projects. 3.21 Agro industry. In one of the four additional pilot projects, a trial oilpalm plantation of 1,000 to 2,000 ha would be established under collective ejidal management, together with an oilpalm mill that could process seven to 10 fresh fruit bunches (FFB) per hour. Since local experience in growing and processing oilpalm is limited, provision would be made initially for expatriate management services to run the plantation and factory until local personnel were able to take over. Mexico is currently a net importer of vegetable oils, and successful development of oilpalm on the Gulf Coast could go a long way toward meeting local demand (para 6.04). Establishment of the plantation and mill would be financed through agricultural credit rediscounted  16 - plantation and mill would be financed through agricultural credit rediscounted by FIRA. A condition of disbursement for the oil palm plantation and mill would be that the Bank had appraised this component as part of a pilot project. CPNH ha-. yet to finalize the place to locate the mill and plantation in the State of Tabasco. Feasibility studies for presentation to the Bank are ex- pected to be ready by September 1978. Research 3.22 Although the existing information and technological base is adequate, initial momentum in the development of viable agro-livetock programs could not be sustained without a substantial increase in agricultural/livestock research efforts, particularly those of a production-oriented nature. Under the project, these efforts would be strengthened, mainly through increased assistance to INIA and INIP. Some assistance would also be given to INCAFOR to help prepare a viable research program for the tropics and to CSAT to help train its teach- ing staff. The project would thus provide: development costs of new facilities such as land and buildings for four new research stations (US$6.1 million); vehicles and farm equipment to increase field research programs (US$103 million); and scientific equipment, chemicals, library and office equipment to ensure proper support of the production-oriented r --arch program (US$1.9 million); 30 man-years of visiting research specialists and consultants (US$2.1); 88.5 man-years of scholarships (including 34.0 man-years for CSAT) for higher train- ing of staff both at local and overseas institutes (US$1.6 million); contract- ing services for special analysis and servicing equipment (US$0.1 million); improved library services for CSAT (US$0.2 million); and funds to cover opera- tional costs, including incremental salaries for new research and support staff (US$12.7 million), and general operational expenses (US$7.1 million). At negotiations Government presented a plan for closer integration of a number of research programs of INIA, INIP and INCAFOR incorporating elements which had been appraised as individual programs. This proposal respresents an improvement in the organization and management of research and while it was agreed that this should be part of the project, approval for disbursement for the changed portions of the research component of the project would depend upon the results of Bank appraisal to be carried out during an early super- vision mission. 3.23 The Assistance to INIA would be provided for research on (a) manage- ment and use of water, with particular emphasis on drainage and the control of the soil/water regime; (b) field and tree-crops rice, beans soybeans and cassava and coconut, oilpalm, spices and rubber (no support would be given for maize, the region's most important food crop, because the existing program is considered adequate); and (c) improved pastures and forage production directed at increasing milk and meat production; (details of these programs are in paras 5.10 to 5.12). In order to give effect to these programs, assistance would be provided to establish four new INIA experiment stations, specifically to cover important ecological areas in the region not covered by the existing 12 stations operating within the administrative control of either CIASE or CIAPY (para 2.04), which are responsible for the coordination of research programs at all research locations within their respective areas of influence (para 5.13). 3.24 The project would also help strengthen the INIP research related to the production of beef, milk, sheep and goats in the tropics. These programs are: (a) production systems based on pasture; (b) arnimal nutrition;  17 - (c) breed improvement; (d) reproductive efficiency; (e) reproductive diseases, and (f) tick-borne diseases (details of these programs are shown in paras 5.15 to 5.20). 3.25 Because INCAFOR research program on tropical forests is small and limited by the availability of experienced staff with suitable post-graduate training (para 2.06), the project would provide scholarships for staff training and for visiting research specialists to advise on the formulation of a program for research in tropical forestry based upon studies on: multiple use of soils; tropical silviculture; and wood technology. 3.26 Regarding CSAT, the Government has provided considerable sums of money in recent years for post-graduate training of Mexican scientists in other countries. To help CSAT upgrade its staff so that more of this training can be provided in Mexico in the future, the project would finance scholarships for CSAT staff to achieve masters and doctorate levels (mainly outside Mexico) and funds would also be provided to build up a scientific library at the college. Extension Services 3.27 Under the proposed project, basic institutional and human resource infrastructure would be provided to achieve the long-term objective of a comprehensive and effective extension service for Tropical Mexico. It would be based on the PRONDAAT approach (para 2.03) and, specifically, would provide for intensive coverage of the pilot project areas (about one extension officer per 30 to 40 families) to be developed under the project and expansion to the broader area of influence of each pilot project, in which coverage would be about one officer per 150 families. Extension services for the Tesechoacan Pilot Project and its area of influence would be provided by PLANPA and financed by the Papaloapan Commission. Excluding that part financed by the Papaloapan Commission, the project would provide for: (a) salaries of five extension teams (US$2.2 million), each to comprise about 17 professionals, 60 field assistants and 21 support staff; (b) purchase and operation of vehicles (US$0.3 million); and (c) materials and equipment (US$0.2 million). 3.28 A Tropical Center for Extension and Training would also be estab- lished and operated by DPAE under the project and provision would be made for (a) land and buildings (US$1.4 million); (b) machinery and equipment (US$2.2 million); and (c) salaries for seven professional and 25 support staff (US$0.7 million). The main objective of the school would be to train extension workers specifically for work in the Mexican tropics and it would be modeled on the PRONDAAT training center in Puebla. D. Project Costs 3.29 Project costs are estimated at US$149.0 million, including a foreign exchange component of US$51.5 million, or 35%. Basic cost of the three major project components, based on mid-1977 prices, is estimated at US$106.7 million,  MEXICO TROPICAL AGRICULTURAL DEVELOPMENT PROJECT Cost SUmary ----------Mex $ 000 --- ----------US$ Million---------- % of %/ Foreign Item Local Foreign Total Local Foreign Total Base Cost Exchange 1. PILOT PROJECTS 1.1 Area Development and Infrastructure Civil Works 287,385 294,952 582,337 12,495 12,824 25,319 24 51 Engineering and Supervision 116,449 - 116,449 5,063 - 5,063 5 - O8d Equipment 4,968 44,781 49,749 216 1,947 2,163 2 90 06M During Construction 17,986 8,372 26,358 782 364 1,146 1 32 Subtotal 1,1 426,788 348,105 774,893 1a],Sq(t 15,135 33,691 32 45 1.2 On-farm Development 255,829 171,120 426,949 11,123 7,440 18,563 17 40 1.3 Agroindustries 17,526 87,469 104,995 762 3,803 4,565 4 83 Subtotal Pilot Projects 700,143 606,694 1,306,837 30,441 26,378 56,819 53 46 2. RESEARCH 2.1 Investment Costs Civil Works and Office Equipment 92,170 12,603 104,773 4,017 548 4 555 4 12 Vehicles, Farm Information and Documentetion Equipment 17,945 17,945 35,890 780 780 1,560 1 50 Scientific Equipment and Chemical Reagents 8,224 26,363 34,587 358 1,146 1,504 1 76 Aircraft - 12,000 12,000 - 522 522 1 100 Land 40,000 - 40,000 1,739 - 1,739 2 0 Subtotal 2.1 156,339 68,911 227,250 6,884 2,996 9,880 9 30 2.2 Technical Services Costs Research Specialists 7,173 40,644 47,817 312 1,767 2,079 2 85 Scholarships - 36,816 36,816 - 1,601 1,601 2 100 Special Analyses & Servicing Equipment 1,736 744 2,480 75 32 107 - 30 Library Services (CSAT) 460 4,140 4,600 20 180 200 - 90 Subtotal 2.2 9,369 82,344 91,713 407 3,580 3,987 4 90 2.3 Operational Costs Incremental Salaries 292,825 - 292,825 12,732 - 12,732 12 - Other Operational Costs 131,580 32,895 164,475 5,721 1,430 7,151 7 20 Subtotal 2.3 424,405 32,895 457,300 18,453 1,430 19,883 19 7 Subtotal Research 592,113 :84,150 776,263 25,744 8,006 33,750 32 24 3. EXTENSION 3.1 Investment Costs Buildings and Office Equipment (training center) 26,245 4,705 30,980 1,141 205 1,346 1 15 Vehicles, fars Information and Documentation Equipment 9,403 10,837 20,240 409 471 880 1 54 Scientific Equipment and Materials 7,875 18,375 26,250 342 799 1,141 1 70 Land 1,000 - 1,000 44 - 44 - - Subtotal 3.1 44,523 33,917 78,840 1,936 1,475 3,411 3 43 3.2 Operational Costs Increment of Salaries of Extensionists, Trainers and Administrative Staff 278,024 - 278,024 12,088 - 12,088 11 0 Operation and Maintenance of EquipmLnc and Vehicles 10,756 4,609 15,365 468 200 668 1 30 Subtotal 3.2 288,780 4,609 293,389 12,556 200 12,756 12 2 Subtotal Extension 333,303 38,526 371,829 14,492 1,675 16,167 15 10 TOTAL BASE COST 1,625,594 829,380 2,454,974 70,678 36,060 106,738 100 34 4. PHYSICAL COtITIlGtErICIES 126,385 107,433 233,818 5,495 4,671 10,166 5. PRICE CONTINGENCIES 21,526 10,752 32,078 TOTAL 97,499 51,483 148,982  - 19 - physical contingencies at US$10.2 million, and price contingencies at US$32.1 million. Out of the total costs, the pilot projects account for 53% (civil works, 32%; on-farm development, 17%; and agroindustries; 4%); the research program, 32%; and the extension program, 15%. 3.30 For the Zapotal and Tacotalpa pilot projects, area and on-farm development costs were estimated on the basis of existing engineering plans and proposed cropping patterns. For the additional pilqt project costs per ha were assumed averaging the costs of the two first pilot projects. The cost of civil works includes a 20% provision for administration, engineering and supervision. Physical contingencies have been estimated at 20% for infra- structure works and 10% for on-farm investments and investment costs for the research and extension components. Price contingencies have been estimated by compounding the following rates for both local and foreign costs: for drainage and irrigation works, 9% in 1978 and 1979 and 8% thereafter; for other investments, 7.5% in 1978 and 1979 and 7% thereafter. These are based on Bank forecasts for international inflation and it has been assumed that the rate of internal inflation would be matched by parallel modifications in the rate of exchange. Project costs are detailed in Annex 2, Tables I to 19 and are summarized below. E. Financing 3.31 Project financing would be shared by the Bank, the Government and the farmers as shown below:  - 20 - Project Financing (US$ Millions) Project Component Government IBRD Total Amount % Amount % 1. Pilot Projects Area development and. Infrastructure 18.5 55.1 15.2 44.9 33.7 On-farm development 11.0 /1 60.0 7.5 40.0 18.5 Agroindustry 0.8 17.0 3.8 83.0 4.6 Sub-total Pilot Projects 30.3 53.3 26.5 46.7 56.8 2. Research Investment costs 5.8 59.6 4.1 40.4 9.9 Technical services 0.1 2.5 3.9 97.5 4.0 Operational costs 19.8 i00.O - - 19.8 Sub-total Research 25.7 76.3 8.0 23.7 33.7 3. Extension Investment costs 1.5 47.1 1.9 52.9 3.4 Operational costs 8.5 67.2 4.3 32.8 12.8 Sub-total Extension 10.0 61.7 6.2 38.3 16.2 Total Base Cost 66.5 62.3 40.7 37.7 106.7 Physical Contingencies 5.5 53.9 4.7 46.1 10.2 Price Contingencies 21.0 67.0 10.6 33.0 32.1 TOTAL 93.0 62.4 56.0 37.6 149.0 /1 Includes US$1.2 million participation of the pilot projects' farmers, 5% of on-farm development investments, and US$1.7 million, or 10% of long- term agriculture credit, provided by participating banks. The proposed Bank loan of US$56.0 million would cover US$51.7 million foreign exchange costs, plus US$4.3 million local costs of the extension component, or 30% of the local cost of that component. The loan would be to Nacional Financiera (NAFINSA), which would channel fuiids to the various participating agencies and institutions responsible for project execution through the Project Unit (para 4.03). The Government wouild finance US$88.9 million the farmers of the pilot projects, US$1.7 million, or 5% of on-farm invest- ments and the participating banks US$2.4 million or 10% of agricultural long- term loans. F. Procurement 3.32 Civil works would total US$30 million with the largest single con- tract about US$2.0 million. Because of the size and location of the several  - 21 - works included in the project, it is expected that construction contracts would not be big enough to attract non-Mexican bidders. Moreover, Mexico has a well-developed and competent construction industry capable of executing the works at competitive international costs. Tractors and equipment for on- farm development would total US$9.0 million and would be purchased directly by the farmers from local suppliers, considering local availability of spare parts and service, a practice applied in the agricultural credit loans to Mexico. Other goods, including operation and maintenance equipment, vehicles, chemical reagents, farm, scientific, office and information and documentation equipment, would total US$8.0 million. These would be purchased by several agencies in small quantities in accordance with implementation requirements. Most of the equipment would be purchased from local suppliers that otherwise offer a wide range of international brands, provide adequate service, and sufficient supplies of spare parts. Thus, procurement procedures would be as follows: Contracts for construction of civil works would be procured following local competitive bidding procedures satisfactory to the Bank. However, to encourage competition and to facilitate Bank supervision, no less than 70% of the civil i.orks and buildings would be constructed under contracts having an estimated value of US$500,000 or more and procured under public competitive bidding advertized in newspapers of national circulation and allowing no less than 30 days between invitation and submission of bid dates. The remaining 30% could be done through contracts awarded without public bidding or by force account. Except for goods for on-farm development financed through agricultural credit, contracts for supply of goods exceeding US$250,000 equivalent would be procured through International Competitive Bidding in accordance with Bank guidelines; when appropriate, bidcing documents should include assurances of adequate local supply of spare parts and service. Contracts for less than that amount could be procured under local procedures. Number and size of tenders for procurement of goods would be agreed upon periodically between the Bank and the executing agencies. G. Disbursements 3.33 The bank would reimburse at the rate of 49% for: (a) pilot project costs for civil works, on-farm credit and agro-industries, exclusive of operation and maintenance expenses during construction and 50% of the engineering and supervision expenses of the civil works (about 10% of the total cost of civil works); (b) research costs for all investments and technical services except land; (c) extension costs for all investment and operational investments except land. Disbursements would be made against normal documentation except for on-farm investments, and works by force account, salaries and operating expenses for Lhe extension service, which would be made against statements of expenditure duly certified by the implementing departments and agencies. 3.34 The estimated schedule of disbursements assuming the date of effective- ness to be July 1978 would be as follows:  - 22 Estimated Schedule of Disbursements of Bank Loan Bank Fiscal Year Cumulative Balance and Semester Amount Disbursed of Loan 1979 Dec. 31, 1978 500 55,500 June 30, 1979 2,120 53,880 1980 Dec. 31, 1979 6,120 49,880 June 30, 1978 11,270 44,730 1981 Dec. 31, 1980 16,420 39,580 June 30, 1981 23,110 32,890 1982 Dec. 31, 1981 30,810 25,190 June 30, 1982 37,180 18,820 1983 Dec. 31, 1982 43,550 12,450 June 30, 1983 /1 49,500 6,500 1984 Dec. 31, 1983 /2 56,000 0,000 /1 Estimated completion date. /2 Estimated closing date. IV. ORGANIZATION, MANAGEMENT AND IMPLEMENTATION Technical Committee 4.01 Overall responsibility for project execution would rest with SARH with actual implementation by the several SARH departments and agencies, SRA and FIRA. SARH's departments and agencies include the General Directorates of Large Scale Irrigation (DGGI) and Irrigation Districts (DGDR); DPAE anci Chapingo Post Graduate School of Agriculture; the research institutes INIA, INIP, INCAFOR, the Papaloapan Commission. Representatives of the implemnenting departments and agencies would form a Technical Committee which would define project strategy and priorities. The Committee would be chaired by the Vocal Ejecutivo of CPNH, which would act as the executing arm of the Committee. CPNH would then be responsible for overall project coordination and supervision.  - 23 Prolect Unit 4.02 A Project Unit has been formed with CPNH from the staff groups who had responsibility for Project preparation. Under the Project this unit would be responsible for day-to-day coordination, supervision, monitoring, and evaluation of the project in accordance with the plans approved by the Technical Committee. In this context, an important flnction would be to draw up in collaboration with the participating SARH department and agencies, annual plans, which, once adopted by the Technical Committee and approved by SARH, w.ould be submitted to the Secretariat of Programming and Budgeting (SPP) for inclusion in the national budget. Each of the participating depart- ments and agencies would be responsible for the day-to-day execution of a specific part of the project, under terms of reference or operating agreements which have been drawn up and agreed to by the agencies concerned. Assurances have been given that the Project Unit, in cooperation with the participating agencies, would furnish the Bank with a completion report prepared in accordance with guidelines which the Bank might reasonably recommend. The project would be implemented over five years according to the schedule shown in IBRD Chart 18620. Pilot Projects 4.03 The state representative of SARH would be responsible for overall direction and coordination of the pilot project activities within his state except for those pilot projects to be executed within the administrative area of the Papaloapan Commission where the Vocal Ejecutivo of the Commission would have this responsibility. Each pilot project would be supported by a small staff and a local technical committee either already in existence or to be established concurrent with the establishment of the pilot projects. The terms of reference of the committee and its responsibilities would be in accordance with Mexico's normal practices for irrigation, drainage and rainfed agricultural districts. The committee would include representatives of the farmers, the state government and the various SARH and non-SARH bodies concerned and it would be chaired by the SARH state respresentatives or his representative except in the Papaloapan basin where the Vocal Ejecutivo or his representative would be chairman. The committee would make observations and recommendations on overall organization and implementation of the pilot project and would review annual budgets before they are submitted to the Project Coordinating Committc- through CPNH. Actual execution of the various components would be carried out by resident offices of SARH departments and other agencies. Overall implementation of the Tesechoacan pilot project and any others that eventually fall within the domain of the Papaloapan Commission, however, would be the responsibility of that Commission, which would undertake execution of those components that in other pilot projects would be executed by the several field offices of the SARH departments. 4.04 Drainage, Irrigation and Other Infrastructure Works. Implementation of the infrastructure component would be the responsibility of DGGI, and the Papaloapan Commission for those pilot projects in the Papalcapan basin. Final designs of the works would be made by DGGI staff or consultants, and construc- tion would be carried out mainly by private contractors, although minor works,  - 24 - could be done under force account. Preparation of bidding documents and procurement would be carried out by DGGI and the Papaloapan Commission. 4.05 Construction of drainage works in the first two pilot projects would begin in late 1978 and would take two years. Construction of irrigation works in Tesechoacan would not start before the project's third year depending on farmers' response to the drainage phase. Final designs of the remaining four pilot projects completed in 1978 and construction would begin in 1979, with completion in two years. 4.06 Agrarian Reform. Two types of agrarian reform actions would be carried out in the pilot projects, namely: (a) clarification of land use rights in the ejidos (para 3.10) and (b) purchase of privately owned land to be converted into ejidos (para 3.14). SARH would establish land tenure resident oLfice in each pilot project to implement these actions. This office would, in accordance with SRA, carry out topographical surveys, study land use rights and ownership titles, negotiate with ejidatarios and private farmers and present to SRA, through SARH, final proposals for admin- istrative and legal actions. No legal problems are foreseen in implementing the proposed land reform actions, but social and political problems are likely to arise. To overcome them, strong support from the State Governments would be necessary and would be ensured through their membership in the pilot project advisory committee (para 4.03). Land reform actions already have started and were reviewed during negotiations. 4.07 Organization of Farmers. Under the project, ejidatarios would be organized to operate and manage their land more effectively. This would generally involve eit'her working with groups of ejidatarios within an ejido as one productive unit or with all of the ejido members as a whole where the management would be on a collective basis. The legal framework within which this would be done is clearly defined under the Agrarian Reform Law, but efforts to encourage closer cooperation between individual ejidatarios have so far met with only limited success. Since conditions in each pilot project and individual ejidos differ, three different approaches are envisaged: (a) in ejidos where individual holdings are predominant, farmers would be encouraged to form groups which would be viable commercial units, the size to approximate those of the crop modules drawn up for the project (para 5.06); (b) in ejidos like Tesechoacan where group farming is already practiced, efforts would be made to strengthen the existing organization, to ensure farmers' participation in management and decision making, and to encourage the incorporation of individual holdings into collectives; and (c) in former privately owned land purchased under the project, collective ejidos would be established with no individual holdings assigned to the ejidatarios. 4.08 Organization of farmers would be a continuing process carried out mainly by the extension service. During the first project year, a spe- cific effort would be made to promote farmers participation and organization, a'ad, to this end, an office responsible for farmers organization would be  - 25 - established in each pilot project. The office would be made up of CPNH staff supported by the Instituto de Capacitacion Agraria (INCA) and assisted by a UNDP/FAO 1/ team of technicians. It would work in close cooperation with the extension service and the agrarian reform office, with its main flinctions being to: (a) inform the farmers about the pilot projects' objectives, technical features, and proposed land tenure and organizational arrangements; (b) promote participation of farmers in the pilot projects' committ3es; (c) assist pilot projects' management in selecting farmers for new ejidos; (d) promote collective-type exploitations; and (e) train the farmers in organizational matters and managerial skills. The office, would work through meetings and workshops, using printed and audio-visual materials. 4.09 ODeration and Maintenance of the Works. Once civil works are completed, the pilot projects would operate as drainage or irrigation districts according to the water law regulations. Operation and maintenance of the districts would then be the responsibility of the DGDR. It is envisaged that the pilot project directors and the advisory committees would become the district's manager and directive committee. 4.10. Cost Recovery of Drainage and Irrigation Works. The 1971 water law requires SARH to carry out socio-ecosnomic studies to determine appropriate charges for the services rendered in irrigation and drainage districts in consultation with SRA and the directive committee of each district. Such charges must take intQ account recovery of part of the investments and the necessary expenses to provide adequate administration, operation and main- tenance services. In the irrigation districts, water charges should take into account volume of water needed, the area irrigated and the crop grown. The law also requires that charges be reviewed periodically to update them on the basis of socio-economic studies. However, there is no consistency in the way charges are determined within the 140 irrigation districts directly ad- ministered by SARH and few charges are related to value of water. Also, regardless of the type of charges, very few are adequate to cover operation and maintenance charges, let alone capital repayment, and, until the end of 1977, no efforts had been made to revise water charges periodically. The Mexican Government has been increasingly aware of the need to address itself to raising water charges, and has set a short-term goal of achieving self- sufficiency for operation and maintenance costs in all districts by 1982. During negotiations, assurances would therefore be obtained that the Govern- ment would: (a) charge and collect fees to cover all the operation and maintenance costs and a reasonable amount of the investments on the basis of the ability of the beneficiaries to pay and the need to maintain an incentive for them to make best use of infrastructure; (b) determine project charges for recuperation of infrastructure costs based upon socio-economic studies, which would be carried out within the next 12 months of completion of the civil works in each pilot project; (c) promptly give the Bank an opportunity to comment on conclusions and recommendations of the socio- economic studies after each is completed; and (d) periodically review such studies with the view to update these charges when appropriate. 1/ Mexico has concluded negotiations for the continuation of an UNDP/FAO assistance program which has been working with CPNH on pilot project feasibility studies,  - 26 - 4.11 All assistance for research under the project would be channeled through the existing national institutions, INIA, INIP, INCAFOR and CSAT (paras 2.05 and 2.09). The new organizational arrangements recenitly made effective through INIA to emphasize production-oriented commodity research programs would be supported under the project. In essence, this approach involves setting up a multidisciplinary research team for each commodity program, to tackle the broad spectrum of research needed to solve the many problems relating to increased production and to integrate findings into existing farming systems or use them as the basis for a new farming system. The teams would be attached to either CIASE in Veracruz or CIAPY In Yucatan. Almost all of them would be located in the region at experimental stations appropriate ot the particular commodity with which they are concerned. Each commodity program would be directed by the head of the appropriate unit within the INIA Division of Technology Development, and a coordinator for each program would be located at CIASE and CIAPY. The programs would be subject to the INIA system of review by regional project committees and by the INIA Division of Applied Research.' This division would also maintain close contact with the extension organization to be established under the project to ensure that research is closely related to the production problems of the region. 4.12 INIP also has adopted this production-oriented approach, set up multidisciplinary teams and established a unit equivalent to the INIA Division of Applied Research to be responsible for reviewing the programs and main- taining close contact with the extension program. The head of the respective units would control the research programs financed under the project, while responsibility for overall direction and coordination would rest with the Subdirector and the Director General. 4.13 A high degree of coordination between the INIA forage program (para 5.10) and the INIP program for production systems based on pasture (para 5.14) would be required to avoid duplication and to ensure a free interchange of information. The Directors General of INIA and INIP have established a small working group, comprising three representatives from both institutions. This group is to meet at least once every three months. 4.14 Arrangements for selection of the visiting research scientists and consultants and for allocation of scholarships for higher training of the staffs of INIA, INIP, INCAFOR and CSAT will be the responsibility of the individual institutions. INIA's and 1NIP's research programs financed under the project, including a breakdown of each program by experiment station location and their proposals for visiting research scientists and scholarships, would be presented to the Bank for comment. INCAFOR and CSAT would also submit their programs for visiting scientists and/or scholarships. Annex 2, Tables 12 to 17 give the proposed financing and phasing for the INIA, INIP, INCAFOR and CSAT programs. Extension 4.15 Execution of the extension component of the project would be the responsibility of DPAE, which would be assisted by PRONDAAT and the Chapingo  - 27 - Post Graduate College. It would be modeled along the lines of the existing PRONDAAT and PLANPA extension services and be linked to agricultural research through the Division of Applied Research in INIA and the equivalent unit in INIP (para 4.12). Detailed proposals for recruiting and training staff for the initial phase of the extension program were discussed at negotiations when assurances were also given that during the execution of the project DPAE would submit its plans regularly for Bank comment. 4.16 Field activities would be carried out by five DPAE resident offices plus PLANPA (para 4.17), each to be responsible for a pilot area with a zone of influence of around 100,000 ha. Each office with a coordinator reporting to DPAE, would be made up of three operational teams, namely: Research (field trials), Extension Techniques (Divulgacion), and Evaluation. Every resident office would have 17 graduates (agronomists, zootechnists, veterinarians and economists) assisted by 17 graduates (agronomists, zootechnists, veterinarians and economists) and 60 professional extensionists, sub professional extension- ists ("peritos"), secretaries, and laborers. Annex 2 Tables 18 and 19 provide details on each office and make up of the various teams. Graduates and "peritos" would receive four months of intensive training before joining the teams. 4.17 Based upon existing technological information, the research teams would develop technological packages of various agricultural activities in the field and test and demonstrate them at farm level. The divulgacion teams would then promote the packages in collaboration with the organization of farmers (para 4.08), taking into account existing office for the socio-economic conditions in the pilot areas, and assist farmers in organization, procurement of credit and inputs, production and marketing. Finally, the evaluation teams would study results and feed their findings back to the research groups and project management. Extension activities in the Tesechoacan pilot project would be carried out by PLANPA as part of the ongoing rural development project. 4.18 The Tropical Center for Extension Training to be established under the project would be modeled after the PRONDAAT National Training Center in Puebla, with its director reporting to DPAE. The Center would serve as the headquarters for extension in Mexico's Tropical Gulf Coast and Southeast and would provide formal training to professional and subprofessional staff from both the extension services and other institutions Involved in development of the region (mainly participating banks). It would also train farmers in on- farm waniagement, accounting and record-keeping and, in collaboration with CSAT would given practical training and demonstrations at its 40 ha site. 4.19 The Center will be located in Tabasco state near CSAT and the proposed INIA experimental station at Huimanguillo (para 5.12). Construction of the Center is expected to begin in 1979 and be finished in about two years. Operations would start in 1980 and in the meantime, extension staff would be trained at the PRONDAAT Center in Puebla. Accounts and Audits 4.20 The participating agencies--SARH, the Papaloapan Commission, FIRA, INIA, INIP, INCAFOR and CSAT--would keep separate accounts for the various  - 28 - project components. CPNH, in turn, would keep a consolidated account for the overall project. All accounts would be audited annually according to Mexican law and following procedures accisptable to the Bank. At negotiations assur- ances would be obtained that: (a) the participating agencies would keep separate accounts as mentioned above; and (b) the Government, through CPNH, would promptly furnish the Bank with an audited report of the project accounts together with the corresponding balance sheet for each year. Monitoring and Evaluation 4.21 The CPNH Project Unit would be responsible for the monitoring and evaluation of all the activities related to the execution of the pilot projects and to the investments and physical development of the research and extension programs. It would also coordinate and supervise the activities of those research and extension agencies who would be responsible for the monitoring and evaluation of their own respective programs under the project. For this purpose, the Project Unit would set up a special monitoring and evaluation group with the assistance of UNDP/FAO. In collaboration with the participating agencies, this group would establish and operate a manage- ment information system for: (a) reporting physical progress of project activities; (b) evaluating the impact of these activities on an on-going basis and; (c) identifying shortcomings in performance in a timely manner. The staff of the Tropical Center for Extension Training would be responsible for monitoring and evaluation of the extension program basing its work on the recent Bank working paper prepared by Cernea and Tipping 1/ in which focus would be upon: (a) visits; (b) recommendations (adoption of); and (c) yields. The activities of this group would also include monitoring and evaluation of those recommendations given to the extension group by the research agencies. Regarding the activities of the research agencies, which includes a number of separate programs, the present INIA and INIP annual internal peer system of review by regional project committees (para 4.11) is adequate to insure the quality, relevance and productivity of ;he work. A periodic external review committee would be developed to interact with the annual internal review committee. 4.22 Semi-annual progress reports from the mpnagement to the bank, would include the findings and recommendations of the special group. In addition, the Bank would receive a copy of the special group's annual report to CPNH management in which it outlined its accomplishments in relation to its tasks for the year be forwarded to the Bank within two months of the close of each fiscal year. A monitorirng and evaluation group within the project unit would be responsible for reporting, monitoring and ongoing evaluation. 1/ A System for Monitoring and Evaluating Agricultural Extension Projects World Bank Staff Working Paper 272, December 1977.  - 29 - V. TECHNICAL FEATURES A. Civil Works Drainage 5.01 Flood peaks, as calculated using the McMath's formula for overland flow for a 10-year storm rainfall, are 20 l/s/ha for Tesechoacan and 30 1/s/ha for Zapotal. The proposed drainage systems would be capable of removing the surface runoff of a 10-year rain in three days. To achieve this, the systems have been designed with a maximum drainage capacity of 8 1/s/ha for Tesechoacan and 8.3 1/s/ha for Zapotal with a drain network density of 10 and 13.3 m/ha, respectively. Minor drains and outlets would be designed during project con- struction and would cost about 20% of the cost of major drains. On-farm drains would be part of on-farm development. Irrigation. 5.02 Water Requirements. Water requirement calculations are presented in Annex 2, Table 7. The supplementary irrigation scheme in the Tesechoacan project covers an area of 2,100 ha which would be devoted to annual crops-- rice, corn and soybeans. Expected irrigated areas and water consumptive use, calculated with the Blaney-Criddle formula, are: Crops Dry Season Wet Season ha mm ha mm Corn 800 445 - - Rice 300 1,079 1,300 1,573 Soybean 400 350 - - 5.03 Effective rainfall is negligible in the dry season and 1,068 mm in the wet season. Overall irrigatioe efficiency3is estimated at 65%. Thus, water requirement would Ve: 11 Mm Sr 7,300 m /ha for an area of 1,500 ha in the dry season and 10 Mm or 7,770 m /ha for an area of 1,300 ha in the wet season. Based upon the rainfall data for the period 1960-1974, peak demand would be 3,000 m /ha/month in March or April every year, and in the period September-November for 11 out of 15 years. 5.04 Pumping Capacity and Riverflow. Pumping station has been designed to take peak capacity assuming an operation period of 15 hours/day, 30 days per month. The Tesechoacan river's lowest flow at the pumping station is about 20 m /sec and water quality is good for irrigation.  - 30 - Roa as 5X05 Roads would be built along the drainage canals 1 m above the surface by using soil from the drainage excavations. They would link the farms with the highway networks and would also serve as operation and maintenance routes. The roads would be of two classes: (a) main roads, which would be built along the main drains with a 5 m gravelled roadway, costing around Mex$ 400,000 per km (US$17,400), inclusive of bridges and culverts; and (b) minor roads, which would be built mainly along the secondary and minor drains with a 3 m gravelled roadway, costing around Mex$ 187,000 per km (US$8,000). B. Agricultural Production 5.06 Modules have been prepared for each of the production activities in the project including dual-purpose livestock, annual crops, mango, sugar, and coconut (Annex 2, Tables 20 to 34). The modules--which reflect expected socio-economic, technical changes, management improvements and the economies of scale needed to optimise farmers' incomes--are illustrative of the expected production levels and the financial viability of each activity within a group- farming operation. Each group-farming operation would include a number of production activities which in aggregate determines the cropping pattern. Thus, rather than determining individual cash flows for each module, a cash flow for the cropping pattern adopted in a particular group-farming operation should be calculated in order to show the effect of the investment-cumr-module mix on individual participating farmers. The cropping patterns proposed for the Zapotal and Tesechoacan pilot projects represent a best current judgement regarding the likely distribution of the various production activities as based on: socio-economic studies relating to present land use and experience of farmers within the pilot projects, soils and micro- topographical information, and proven technology and management systems that have increased productivity. These cropping patterns are shown in Annex 2 Table 3.5 together with estimates of cropping intensities. The cash flows for the group-farming operations in these two pilot projects are shown in Annex 2 Tables 36 and 37. 5.07 The dual-purpose livestock modules of 150 ha was based on FIRA's successful development on ejido C-41 in the Chontalpa drainage development project (near the proposed Zapotal pilot project) and on the INIP experience at Paso del Toro research station near Veracruz. The key elements of both programs are the improved pastures of African Star grass and the legume Leucaena leucocephala and crosses of local Bos indicus cattle adapted to tropical conditions with high milk production Bos taurus breeds (mostly Friesian and Brown Swiss from the temperate regions). Production assumptions at full development are: average carrying capacity, three animal units per ha; average annual milk production, 1,800 litres per head; and total annual sales, 192 head. The annual crop module for rice, maize and soybean assumes an average area of 50 ha, which from experience in the Papaloapan Basin, is the area that optimizes the investment in a tractor, implements and harvester.  - 31 - Yield assumptions are: rainfed rice, 4 tons; irrigated rice, 5 tons; rainfed maize, 3.5 tons; irrigated maize, 4 tons; rainfed soybean, 1.5 tons; irrigated soybean, 2.0 tons per ha (based on the PLANPA/PLAMEPA experience, with ejidos given credit and adequate technical supervision). The mango module of 5 ha is based on experiences in the Papaloapan basin. Yields at full development are estimated at 18 tons/ha. The sugar module is based on plantations of 500 ha, located at Zapotal, near an existing mill; the average yield estimate of 120 tons/ha is based on local experience with well-managed cane grown in the vicinity of the pilot project areas. The coconut module is based on plantations of new planting of 50 ha; hybrid seed would be used throughout, and yields at full development are estimated at 10 tons/ha; the module assumes that 80% of the area would be sown annually to maize from years 1 to 3 and 60% from years 4 to 6, with an average yield of 2.5 tons/ha. C. Research 5.08 Information on production and the current status of research for the specific commodity programs that would be supported under the project are given in Annex 1. The programs cover a wide range of crops and animal production activities, many of which are traditional to the region. Also included however are programs for crops that presently are relatively unknown in the region but which have considerable potential for development in the future based upon experience in countries with similar ecological conditions. By expanding the range of crops available for commercial exploitation, the region's farmers would have greater flexibility in deciding on how to develop their land most effectively and economically. 5.09 Water Use and Management. The program is concerned with research in tropical areas with the objective of achieving optimum control of the soil moisture regime for different crops. It would backstop the various crop research and the extension programs. The program has the following main aspects: (a) studies of major soils to determine the physical and chemical characteristics which influence soil-water relations; (b) studies of the drainage characteristics of major soils in the areas of the pilot projects; (c) tillage systems suitable for soils with poor internal drainage characteristics and for soils in which moisture conservation is important; (d) design of on-farm structures to control the water regime; and (e) water needs of important crops.  - 32 - INIA Research Programs 5.10 Field and Tree Crop. Each of the activities of the program would include: (a) varietal improvements, including suitability for different soil and climatic environments; (b) improving agronomic practices; (c) development of suitable crop rotations; (d) fertilizer requirements, taking into account plant/soil interactions and maintenance of soil fertility; (e) plant protection against diseases and insect pests; (f) product utilization, including processing, quality control and storage; and (g) economics of production and marketing. Specific research activities for individual crops are summarized below: (a) Rice. Large components of the research program are designed to study pathological aspects of rice blast disease and breeding and selecting for resistance. Pathological studies would be made at the various experimental stations, coordinated by a specialist pathologist to be located at Chapingo. Cost of establishing a central pathology laboratory at Chapingo are included in the project. Initial results with resistant varieties obtained from the International Rice Research Institute in the Philippines have been variable, suggesting that it will be necessary to breed new varieties with suitable horizontal resistance for Mexican conditions. In addition, varieties will be needed to cover the range from rainfed area with 1,200 to 1,500 mm rain annually to area with irrigation or with rainfall of 2,000 to 3,000 mm. In this work the experience gained at the International Center for Tropical Agricultural Research (CIAT) in Colombia will be most valuable. (b) Beans and Soybeans. The main requirements with soybeans are (a) to select varieties suited to the humid tropical environment, with particular reference to climatic effects on flowering and production; and (b) to determine planting times that will give maximum production. This program should take full advantage of established varieties and advanced generation germplasm pools at the various inter- national agencies and in other tropical countries (e.g., Northern Australia and Brazil). In the case of beans, an important objective is to collect and catalogue the great range of native beans currently grown by farmers with a view to selecting varieties which combine high yield, disease resistence, good cooking qualities and desirable seed color. For both crops, control of insects, diseases and weeds is also iuportant. (c) Cassava. The major objective for cassava is to develop production systems in which the crop is grown primarily  - 33 - as a source of animal feed. The research program will therefore be closely coordinated with the Forage Program. However, research is needed on varietal selection, agro- nomic practices, crop protection and methods of harvesting and conserving the crop. A large collection of world varieties obtained from CIAT provides a good basis for this work. (d) Oilpalm and Coconut. For both of these crops, research must start from the basis of introducing material from areas elsewhere in the world and studying the general techniques of planting, growing and harvesting the crop. Much of this would be a matter of taking proveni practices from elsewhere and testing them under Mexican conditions. More fundamental research would become necessary only when specific local problems have been identified. Particular attention would be given to the study of production systems in which annual crops or forage would be grown in conjunction with the perennial tree crop. (e) Spices and Rubber. Experiments at "El Palmar" Veracruz have shown that black pepper, cinnamon and cloves will grow well in high rainfall parts of the humid tropics. The research objective is to study these crops in greater detail to determine whether they can be produced econo- mically in Mexico. Rubber is already grown commercially but yields are lower than in major producing countries elsewhere. The overall research objective is to increase production by a combination of better varieties and improved cultural practices and to extend research to examine pro- duction possibilities in Tabasco and Chiapas. 5.11 Forage Crops. The program is designed to enlarge the staff and facilities of the INIA Forage Unit to permit rapid expansion of research in the humid tropical areas of Mexico. The research would be directed to milk and meat with a view to increasing production per hectare and per animal, reducing costs per unit of product as well as the risks associated with traditional production systems. The program has five broad research activities: (a) evaluation of species and varieties of grasses and legumes, including native collections as well as those introduced from other tropical countries; (b) genetic improvements of selected species; (c) seed production, including seed testing; (d) management studies, includiuig fertilizer requirements seeding rates, Rhizobium inoculation, compatibility of mixtures of grasses and legumes, and stocking rates; and  - 34 - (e) productioii 8yste8 in which forages are evaluated in terms of milk or meat production. 5.12 Development of Four New INIA Experimental Stations. The objective is to assist in establishing four new experimental stations specifically con- cerned with research for the area which are to be included in the development phase of the project. Even though there are 12 stations.now operating under the contract CIASE and CIAPY, the CIASE station is the only one in the flat- lands of the humid tropics, and there are none in the areas requiring drainage in Veracruz, Tabasco or Chiapas. The selected sites are at Huimanguillo in the Grijalva-Usumacinta Basin in Tabasco, Huixtla in coastal southern Chiapas, a site in the Papaloapan Basin in southern Veracruz, and at Tempoal in the Panuco Basin in northern Veracruz. While they are under a coordinated research approach, all of these are in the lowland tropics and they sample district ecological regions. The Huimanguillo site is close enough to the site of GSAT near Cardenas to permit continuing collaboration between INIA and CSAT. It is also adjacent to a broad belt of low rolling hills with acid red soils which offer considerable potential for rainfed agriculture. The stations at Huimanguillo and Huixtla would be started in project year 1, and the other two in the second year. 5.13 Technical Services to Strengthen INIA's Research Capability. The project would help IINIA increase its research capability on the selected crops and research programs and activities. This would involve appoinl:ment of new professional staff, plus assistants; employment of short-term research specialists as advisors and training staff outside Mexico; and provision of additional laboratories, farm constructions, scientific equipment, farm equipment, vehicles and two aircraft. Operational costs are estimated on the basis of the standard INIA Research Module, while includes the costs of salaries for a graduate scientist, plus assistant, and of operations and overhead. Details of costs and project phasing are given in Annex 2 Tables 12 to 17. INIP Research Programs 5.14 Pasture Based Production Systems. The main research activities would be studies on: (a) factors which influence the growth, persistence and nutritive value of pasture grasses and legumes, with em- phasis on fertilizers (both major and trace elements), Rhizobium requirements of legumes, stocking rates and grazing management; (b) compatibility of mixtures of grasses and legume and of management effects on proportions of species; and (c) production systems for milk and meat production in which improved pastures are used and supplemented where necessary with other forages, conserved feeds or concentrates; it would also evaluate and utilize production practices arising froni other programs.  - 35 - 5.15 Animal Nutrition. The main research activities would be studies on: (a) levels of essential minerals in feeds and in soils in cattle producing regions leading to an assessment of areas of deliciency or surplus in relation to animal performance; (b) nutritive value of bagasse, henequen and other agricultural by-producLs with a view to their use in milk or meat produc- tion systems; and (c) factors affecting rumen fermentation in cattle receiving fibrous feeds available in Mexico. 5.16 Animal Improvement Program, The main research activities would be: (a) Comparison of crosses between local zebu-type cattle and improved breeds to determine the most suitable type for Mexican tropics; and (b) development of economical commercial breeding systems to achieve the desired cross-bred animals. 5.17 Reproductive Efficiency. The research activities would focus on managerial and physiological factors which influence cattle reproduction. This program includes research on the effects of mating systems and feeding regimes and on hormone systems which could lead to methods for selecting animals of high genetic fertility. 5.18 Reproductive Diseases. The main research activities would be to: (a) study the incidence of reproductive disease in cattle in the Mexican tropics, assess their economic importance and study factors which influence their distribution; (b) develop reliable and rapid methods for diagnosis; and (c) develop and apply effective control measures, including vaccines. 5.19 Tick-borne Diseases. The main research activities would be to: (a) study haemoprotozoal diseases of cattle and the factors which influence their occurrence; (b) develop advanced techniques for the diagnosis of these diseases in cattle and native Launa; (c) study the ecology of the cattle tick and its associated haemoprotozoa;  - 36 - (d) study methods of tick control, both chemical and biological; and (e) improve techniques for disease control, including the produc- tion, distribution, and use of effective vaccine. D. Extension 5.20 Details of the main items to be financed in the project extension component are shown in Annex 2 Tables 18 and 19. The key element of the extension program for each pilot project would be selection of the best technical packages to be promoted. Initially, these would be based on the proposed modules (Annex 2 Tables 20 to 34) and cropping patterns (Annex 2, Table 5) and would include a range of crops (annual and perennial) in addition to dual-purpose livestock activities, In this regard, they would differ from the standard PRONDAAT program, whiLa has, until now, concentrated on maize. VI. DEMAND AND MARKETING ASPECTS Demand 6.01 The demand situation for agricultural production in Mexico is generally favorable, given that over the past 10 years the combined production of the 10 major crops (maize, wheat, beans, sorghum, rice, cotton, soybeans, safflower, sugar and tomatoes) increased by only 1% annually while population increased by 3.5%. Although this dismal picture was offset somewhat by an increase of 31% in the output of livestock products during the same period, current agricultural production is not sufficient to meet present overall demand. Thus, the increases in production expected under the project would be easily absorbed by the domestic market. 6.02 Beef and Milk. Domestic beef prices have increased each year, reflecting a continuing strong internal demand, and the long-term prospects for expansion of the domestic market are bright. Incomes are rising, popu- lation growth continues, and there is a high demand elasticity for beef. Based upon an estimated increase in beef consumption from 10.0 kg to 11.6 kg per capita from 1977 to 1982, the average annual increase in cattle population would need to be about 800,000 head. Annual sales from the first two pilot projects are estimated at about 5,000 head by 1982, or 0.6% of the projected annual increase. 6.03 During the 1970 to 1975 period, total milk consumption increased at a rate of 5.9% annually, while production increased to only 4.8% per annum, the shortfall being supplemented by imports of milk powder. The imports increased from an average of 24,000 tons annually during the 1960s (costing about US$7 million) to about 56,000 tons per annum during the 1970- 75 period (costing about US$27 million per year). This increased importation  - 37 i of milk powder was an important factor in the rise in per capita milk consump- tion from 82 liters in 1970 to 93 liters in 1975. If the same rate of per capita increase in consumption is maintained over the 1977-82 period, imports would increased to about 120,000 tons per year unless the shortfall can be taken up by a sharp increase in local production. Annual milk production from the Zapotal and Tesechoacan pilot projects is estimated at about 7 million liters by 1987. It is expected that, initially, output from the two pilot project areas would be marketed locally as fresh milk or cheese. Presently, demand is strong in the Gulf Coast cities and towns, and prices are often higher there than in Mexico City, which draws its supplies from a well organized, commercialized industry located in the more favorable temperate areas. 6.04 Oil Crops. The demand for vegetable oils is projected to grow at 5.6% per annum during the 1976-82 period. In spite of increased local pro- duction in 1977, Mexico imported 600,000 tons of oil seeds, oil and meal with a value near US$165 million in 1977. About 80% of the production of fats and oils is used for food; while the rest is used for soaps and other industrial purposes. Coconut oil is the main source for industrial use, followed by palm oil, linseed oil and tallow. The annual deficit of about 40,000 tons of copra oil is presently filled by imports. The major sources of edible oil are cottonseed, sesame, peanuts, safflower, soybeans and lard. Because of the relatively easy substitution among edible oils, projections of increased demand for individual crops are generally not meaningful. However, further expansion of oil seed production during the next decade is expected to shift from the irrigated to rainfed areas, including the humid tropics where it is expected that soybean will become increasingly important. In light of the above, prospects for expanding production of vegetable oil, both from annual oil seeds and perennial tree crops, appear bright. Strong domestic demand can thus be expected for the estimated 2,000 tons of copra oil and 800 tons of soybeans which will be produced annually from the Zapotal and Tesechoacan pilot projects. 6.05 Maize. Maize the most important food grain and source of carbhohydrate in the Mexican diet, is grown countrywide. Annual production since 1970 has averaged only 95 on an index of 100 for the period 1967-69, while annual per capita consumption has remained constant at 180 kg; to maintain this level, imports have trended upwards since 1970. Projections of annual import needs during the next five ;y2ar3 range from 0.5 to 2 million tons, depending upon the success anticipated from present efforts to stimulate local production. Both the humid and semi-humid areas of the Gulf Coast are important in these efforts. It is expected that there will be a very strong demand for the maize produced in the Zapotal and Tesochoacan pilot projects, estimated at about 7,500 tons per year. 6.06 Rice. Rice is growing in importance in the Mexican diet, increasing from a per capita consumption of 5 kg in 1960 to 12 kg in 1976. Although production (mainly from the irrigated areas) has increased at 5.4% per annum over the past decade, the projections of present trends indicates that supply will be lagging demand by about 100,000 tons by 1980. The humid Gulf Coast region offers the greatest opportunities to increase output economically and  - 38 - on a large scalse. Strong local demand is expected for the production from the Zapotal and Tesochoacan pilot project areas, estimated at about 10,000 tons per year. 6.07 Sugar. During the past decade, the growth in sugar production has slowed from the 1960-65 rate of 5.8% to only 2.9%. With population growth at about 3.5% p.a., plus a per capita consumption increasing at about 0.4% p.a., Mexico's participation in the export market has dropped from 576,000 tons valued at US$126 million in 1972 to zero in 1976. The building of additional sugar mills is now underway and efforts are being made to improve production practices in order to improve to yields and sucrose content. The research and extension effort of the present project does not have a major focus on sugar, but will be concerned sugar production practices to improve the sugar yields. The Zapotal pilot project includes sugar acreage for the same reason; output will be processed in an existing mill and the annual production of about 6,000 tons of raw sugar will help fill the gap in local demand. Fruit Production 6.08 The humid tropics of Mexico are important suppliers of perennial tree fruits, especially sweet oranges, pineapples, limes, mangoes, bananas, and plantains. Mango prodtuction is mainly for domestic use although there is some canning for export, using modern heat treatment facilities. There is also some grading as extras, firsts and seconds. Most fresh market sales are made in the field and prices fluctuate greatly between seasons and between regions. Although a separate effort in fruit marketing is not included in this project, the extension program on technical assistance for improved marketing, especially in respect to grading, boxing and transportation. Annual production from the 125 ha proposed for the Tesechoacan pilot project would be about 5,000 tons, and the extension service would play an important role in helping producers to obtain the best markets. Present Marketing System 6.09 The marketing of the agricultural output generated under the proposed project would be handled largely through private chc-nnels, with floor prices provided by CONASUPO in the case of basic grains. Government plays a vital role in setting prices for several staples and managing the marketing of inputs and production. The Ministry of Industry and Commerce determines prices to the farmer, the processor and the consumer and CONASUPO administers (a) the farm support price system; (b) state retail distribution outlets for food stuffs; and (c) several major agro-industries. The Guaranteed Price System 6.10 CONASUPO's procurement system includes guaranteed prices, grain storage, and ancillary services. The guaranteed prices are set before the planting period so as to influence the farmers' planting decisions. The price is set as a function of the projected demand, current inventory levels, expected supply price elasticities, farmer costs and risk exposure, and the  - 39 - availability of subsidy funds. Despite inflation, during the late 1960s and early 1970s, CONASUPO kept support prices at a constant level. As a result, the volume of CONASUP's internal purchases of maize droped sharply from 2.1 million tons in 1966/67 to only 770,000 by 1973/74; domestic wheat pur- chases dropped from 1.1 million tons in 1967/68 to 718,000 tons in 1973/74. Meanwhile, demand was rising and CONASUPO was forced to expand its imports of these products. To reverse this trend, support prices were increased sharply after 1972. For example, between 1970 and 1976 corn prices rose 102%, wheat prices 92% and bean prices 185%. Prices were raised again in 1977, which, when combined with the drop in world commodity prices, has placed the 1977 guarantee prices about in line with world prices, exception for maize, whose price is about 30% above the world price. Beef Marketing 6.11 Beef prices are not guaranteed, nor does the Government have a national procurement grid. Rising incomes, high demand elasticity for beef, and rapid population growth can, however, be expected to provide a strong domestic market for additional beef produced under the proposed project. In addition, exports of feeder calves from Northern Mexico, which tend to vary with the difference in beef prices between the United States and Mexico, are expected to average around 600,000 head per year during the 1977-82 period. Exports of boneless beef, based on past market trends and future price pros- pects, including the effects of devaluation, are estimated to continue around 27,000 tons annually for the 1977-82 period. The domestic beef market has been traditionally dominated by a supply of lean animals in the immediate areas of consumption, where they are processed in local slaughterhouses. In recent years, packing plants have begun to market quality meat principally through the direct sale of refrigerated meat to supermarkets. This new marketing channel has been closely associated with the growing supply of finished cattle from the tropics. The Federal District, with about 20% of the population of Mexico, now accounts for about 33% of domestic beef consump- tion. About 30% of this market is supplied with mainly refrigerated beef processed in new slaughterhouses located in the tropical states of Veracruz and Tabasco. Dairy Marketing 6.12 Prices of milk to the farmer, to pasteurizing plants, and to the consumer are theoretically fixed by the Secretariat of Industry and Commerce. Government has increased official milk prices by 40% since 1975 as an incentive to farmers and pasteurizing plants to increase production. Current official regional prices to the producer vary throughout Mexico, from a high of US$0.26 per liter in Morelos and Guerrerro to a low of US$0.18 in Tabasco, Chiapas and Campeche. In the past, Mexican dairy production was restricted, toth by these price controls, especially for first class milk, and by a 20-year Government regulation that first class milk should be pasteurized at the farm level. These factors both resulted in uneconomically sized pasteurization plants. Within the last few years, however, as a result of intensive producer lobbying, price controls have been dropped for first class milk, and centralized dairy processing plants are being permitted.  - 40 - Although the milk and dairy product marketing system is presently geared toward the larger commercial producers, smallholder participation in the system is expanding as cooperative production and marketing system develop. FIRA and other development agencies have stimulated this trend by offering financing as well as technical and marketing assistance programs. VII. FINANCIAL ANALYSIS Producers' Benefits 7.01 The impact of the project in the net 7,800 ha to be developed by drainage/irrigation infrastructure and on-farm credit at Tesechoacn and by drainage and on-farm credit at Zapotal has been analyzed on the basis of the representative modules for dual-purpose livestock (150 ha), sugar (500 ha), coconut (50 ha), mango (50 ha), and the annual crops, maize, rice and soybeans (50 ha modules), presented in Annex 2, Tables 20 to 30. Table 38 Annex 2 gives the financial rates of return for these modules as well as returns for variations of + 10% in production values and operating costs. Returns for all activities are most sensitive to changes in production values, particularly for rice, maize, soybeans and sugar. Under the assumptions used for prices and production indicies, all modules are financially viable. 7.02 Since the ejidos will be operated collectively, financial benefit per family must be considered within the context of the cropping patterns for each pilot project. The present net returns per ha are very low, at about US$55 for Tesechoacan and US$53 for Zapotal. These levels are insuffi- cient to sustain the majority of ejidatario families (about 66% with usufruct rights of 6 to 10 ha per family). Most families reed to supplement their farm incomes with difficult-to-find work off the farm. Even so, the net family income for these ejidatarios is only about US$600 to US$800 per year (excluding the -value of subsistence production). Under the project, these incomes would be increased dramatically. Based on the cropping patterns and according to the cash flows shown in Annex 2., Tables 36 and 37 for an average land holding of 8 ha per family, the estimated net family incomes farm wages) would be about US$775 in year 1; US$1,511, years 2-5; US$2,340, years 6-11; US$3,720, years 12-15; and US$4,060 at full development for the Tesechoacan pilot project and about US$775 for years 1-3; US$890, years 4-7; US$1,450, years 8-9; US$3,320, years 10-14; and US$4,675 at full development for the Zapotal pilot project. 7.03 Project charges in the pilot projects would cover the total amount of operational and maintenance costs, plus recovery of capital investments as appears reasonable in light of the socio-economic studies. Operational and maintenance annual costs are estimated at Mex$ 610/ha (US$26.5) for Zapotal, and Mex$ 715/ha (US$31.1) for drainage and Mex$ 1,300/ha (US$56.5) for irrigation in Tesechoacan (Annex 2, Table 6). Annual capital recovery charges, for civil works inveEtments considering a 50-year repayment period and no interest, are estimated at Mex$ 570/ha (US$24.70) in Zapotal and Mex$ 830/ha  - 41 - (US$3,609) with drainage, and Mex$ 1,150/ha (US$49.83) with irrigation and drainage in Tesechoacan. As shown in the calculations for rent and cost recovery in Annex 2, Table 39, these charges discounted at an 11% rate would lead to a cost recovery index of 22 and 23 for Zapotal and Tesechoacan, respectively, with rent recovery indexes of 40 and 55. In addition to paying for all operation and maintenance costs and part of the investment costs of civil works, beneficiaries would, also repay all on-farm investment costs which would be financed through credit. VIII. ECONOMIC ANALYSIS General 8.01 There are two main components of the proposed project: (a) the pilot projects, with investments in civil works and on farm development for which the financial and economic rate of return can be reasonably estimated, and (b) the research and extension programs, which could yield higher rates of return but are surrounded by a high degree of uncertainty as to the when and by what amount. Consequently, the two analyses are presented separately. Pilot Projects 8.02 Economic Justification and Social Benefits. The immediate benefit arising from the provision of drainage and irrigation infrastructure and credit to the pilot projects would be to permit intensive use of the lands within each pilot project. In turn, this would result in marked increases in productivity per unit of land. The areas would be able to support regular cropping activities on a permanent basis (many for the first time) and live- stock production would be greatly intensifed. The data from the two pilot projects on which feasibility studies have been completed (Tesechoacan and Zapotal) are indicative of the economic benefits for the other pilot projects. Incremental production of milk and meat, maize and mango and production from new crops, rice, soybean, sugar and coconuts, would amount to US$8.6 million at full development of the Tesechoacan and Zapotal pilot projects (using economic prices), or US$850 per ha. The significance of these production values is considerable when viewed in the context of the future development of the larger areas representative of each pilot project. In the case of Tesechoacan and Zapotal, these areas total about 260,000 ha. while the average for each of the four pilot projects still under study is expected to be about 100,000 ha. per pilot project. 8.03 Target Group Beneficiaries. In the project area, the upper limit for poverty level income is US$350 per capita. To obtain this level of income in TeseThoacan and Zapotal, an ejido family should have usufruct right of a minimum )f 5 to 8 ha. The number of target group families with this minimum land use vs about 280 in Tesechoacan and around 300 in Zapotal; and they compose 60% of the total number of families to benefit from the project. Ejido target  - 42 - group families in these two project areas have usufruct right of about 40% of the potentially cultivable land. Under the project, it is estimated that the income of a target group family would increase from US$700 in year 1 (excluding value of subsistence projection at about US$1,000/family) to US$1,500 in years 2 to 5 and US$4,300 at full development in 15 years. An undetermined number of families near the pilot projects would also benefit from the investments in infrastructure such as roads and, drainage. In addition, these families would have more opportunity to supplement their incomes through better employment opportunities, through an increase in seasonal demand for on-farm labor and the operation and maintenance of the pilot project drainage and irrigation infrastructure estimated at about 420 man-years for the six pilot projects. During construction the pilot projects would generate around 100,000 man-days of unskilled labor per year for five years. 8.04 The project would be the first in a series of similar projects in the humid and semi-humid tropics. The total area reclaimable by drainage alone in the region is equal to about 20% of the total area currently under crops in Mexico. Each pilot project would be used to develop the best mix of infrastructural investments and the best technical packages for developing much larger similar areas. The development costs for the pilot projects calculated from the cost data in Annex 2, Table 1 are summarized below: Civil Total/8 ha Works Credit Total Ejidatario /ha /ha /ha Holding --------------------US$-------------------- Zapotal 1,200 1,100 2,300 18,400 Tesechoacan 1,800 /1 900 2,700 21,600 Other Four 1,500 /2 1,000 2,500 20,000 /1 Includes supplementary irrigation works (about US$400/ha). Pilot area drainage costs have been adjusted by US$650/ha to account for surrounding 30,000 ha which would benefit from investment in a watershed flow protection dike and natural drain improvement. /2 Includes allowance for supplementary irrigation in two pilot projects. The total development costs per hectare for the pilot projects compare favorable with those for large scale irrigation development in Mexico which currently vary from about US$3,000 to US$6,000 (including on-farm credit of about US$600 to US$1,000 ha), particularly given that (a) a &onservative approach to the design and costing of civil works has been adopted to minimize risk at the initial development stage; and (b) in later development of larger surrounding areas it will be easier to take advantage of economies of scale. It can be anticipated therefore, that, following development of the pilot areas, the civil works cost involved in expanding into the areas of influence of the pilot projects can be reduced. However, it is unlikely that any reduction could be expected for long-term credit. In the humid tropics,  - 43 - development costs which maximize long-term credit and minimize civil works are the most desirable since all long-term credit would be fully recoverable with interest whereas only a proportion of the civil works investments are likely to be recovered. Also farmers would contribute at least 5% of the on-farm investment either as cash or kind. 8.05 With respect to institutional development, the pilot project program would have a positive impact on a number of institutions involved with agri- cultural development in the region. The extension services financed under the project would use these areas to develop the technical packages applicable to the large areas influence. The pilot project would also serve as a site for testing of research findings at farm level by INIA and INIP and for defining production oriented problems for which further research is needed. In addition, these pilot areas would provide opportunity for those institu- tions involved with credit, agrarian reform and marketing to gain experience which could be used to accelerate development in the region. 8.06 Rates of Return. The economic rates of returns of the two pilot projects over a period of 20 years, using August 1977 prices and wages rates and an exchange rate of Mex$ 23 = US$1 would be about: Rate of +10% Prod. -10% Prod. +10% Oper. -10% Oper. Return Value Value Costs Costs Zapotal 19 22 16 18 20 Tesechoacan 15 17 12 14 15 Zapotal and Tesechoacan 17 20 14 16 18 The sensitivity tests show that there would be little risk involved in the pilot project programs. 8.07 The economic rate of return of the two pilot projects were calcu- lated on the following assumptions and adjustments (Annex 2, Tables 20 and 41), (a) gross value of production - In order to adjust prices to the Bank's projections, corrections were introduced to financial prices of rice, sugarcane and soybeans. (b) unemployment is high in the area. In order to reflect this in the economic analysis, a shadow price was used for labor. A good measure of it was the real salary paid in the region, which is lower than minimum wage. Therefore, Mex$ 50 man/day was used as a shadow wage, while Mex$ 69.7 was used in the financial analysis. These modifications affected the civil works costs and the production costs. (c) as taxes are transfer payments, they were excluded from the economic analysis.  - 44 - Assumption on Justification and Benefits of the Research and Extension Components 8.08 Background Experience on Investments in Research. Two main streams of benefits could be expected from the proposed research and extension effort: (a) impact on crop and livestock production in the seven state area under existing infrastructure, land tenure and socio-economic conditions, and (b) the more intensive impact on the areas of influence of the pilot projects. Neither benefit stream however, can be estimated with precision as agricultural research is an investment in future returns for which the time frame is uncertain. One of the reasons for the low level of investment in research has bee,_ the delay in reaping benefits from such investments. An investment at time "t" will likely not begin to produce a stream of benefits until three years later, and may not become fully productive for another five years or more. Thus, although analyses of specific research programs show returns ranging from 20% to over 90%, the time lage tend to reduce the relative superiority over other development invetments. 8.09 Time lags also tend to be greater for purely scientific research than for more technologically oriented research. However, the Kislev and Evenson 1/ estimation of marginal internal rates of return provides signif- icant insights on this as well as on the comparative returns to research investments in developing versus developed countries. They found rates of return about twice as high for developing as for developed countries, i.e., 60% versus 36% for scientific research and 42% versus 21% for technologically oriented research. This also supports the economic concept that the lower the level of present research effort, the greater the return that might be obtained at the margin from additional research investments. 8.10 An additional highly important return that has usually not been included in the calculations because of the difficulty of measurement is research capital formation, including especially "scholarly capital"--the various mixes of scientific and teclrnical skills--but also the banks of genetic materials, laboratory facilities, experimental fields, and such. 8.11 A key conclusion emerging from the ex-post studies is that countries without significant indigenous research capability are able to realize almost no transfer benefits from research conducted in other countries. Thus, good research capability is a prerequisite, not only for producing new knowledge, but also for transferring, adapting and utilizing knowled.e produced in international centers and in other countries. 8.12 Experience in Investments in Extension. There are relatively few studies of the economic returns for investments in extension. Ideally, such analyses of benefits should take into account: (a) the economic contribution of improved decision-making or information processing skills on the part of the farmer, and (b) the contribution of the information that is supplied by 1/ Kislev Y and Evenson R; Agricultural Research and Productivity; Yale University Press 1975.  - 45 - Assumption on Justification and Benefits of the Research and Extension Components 8.08 Background Experience on Investments in Research. Two main streams of benefits could be expected from the proposed research and extension effort: (a) impact on crop and livestock production in the seven state area under existing infrastructure, land tenure and socio-economic conditions, and (b) the more intensive impact on the areas of influence of the pilot projects. Neither benefit stream however, can be estimated with precision as agricultural research is an investment in future returns for which the time frame is uncertain. .-ie of the reasons for the low level of investment in research has been the delay in reaping benefits from such investments. An investment at 'time "t" will likely not begin to produce a stream of benefits until three years later, and may not become fully productive for another five years or more. Thus, although analyses of specific research programs show returns ranging from 20% to over 90%, the time lage tend to reduce the relative superiority over other development invetments. 8.09 Time lags also tend to be greater for purely scientific research than for more technologically oriented research. However, the Kislev and Evenson 1/ estimation of marginal internal rates of return provides signif- icant insights on this as well as on the comparative returns to research investments in developing versus developed countries. They found rates of return about twice as high for developing as for developed countries, i.e., 60% versus 36% for scientific research and 42% versus 21% for technologically oriented research. This also supports the economic concept that the lower the level of present research effort, the greater the return that might be obtained at the margin from additional research investments. 8.10 An additional highly important return that has usually not been included in the calculations because of the difficulty of measurement is research capital formation, including especially "scholarly capital"--the various mixes of scientific and technical skills--but also the banks of genetic materials, laboratory facilities, experimental fields, and such. 8.11 A key conclusion emerging from the ex-post studies is that countries without significant indigenous research capability are able to realize almost no transfer benefits from research conducted in other countries. Thus, good research capability is a prerequisite, not only for producing new knowledge, but also for transferring, adapting and utilizing knowledge produced in international centers and in other countries. 8.12 Experience in Investments in Extension. There are relatively few studies of the economic returns for investments in extension. Ideally, such analyses of benefits should take into account: (a) the economic contribution of improved decision-making or information processing skills on the part of the farmer, and (b) the contribution of the information that is supplied by 1/ Kislev Y and Evenson R; Agricultural Research and Productivity; Yale University Press 1975.  - 46 - the extension systems. The productivity of extension systems depends heavily on the introduction and rate of uptake of new technology, either directly produced by research systems in a region or transferred from another region. Likewise, the economic value of the allocative skills of the farmer are dependent on the rate of technology introduction. Because of the complexity of these relationships, it is not surprising that few attempts have been made at specific estimates of the economic contribution of extension. 8.13 Because of its conceptual similarity to the proposed project, the most directly relevant previous study is probably that of Mexico's Plan Puebla Project. The Puebla analysis measured only the benefits of the applied information without adding in a value for the improved decision-making or information processing skills of the farmer. However, research and exten- sion were considered parts of a single continuum extending from knowledge production to ultimate dissemination and use. Thus, the costs and returns for research and extension were combined so that the economic analysis would adequately reflect the conceptual approach and avoid an unrealistic separa- tion of returns to research and returns to extension. In this case, the ex-post study, conducted after seven years of operation and using a discount rate of 14%, revealed a benefit/cost ratio varying from 4.03, with a zero opportunity cost assumption for labor, to 2.70, with the conservative assump- tion of no seasonal unemployment and full wage rate. The Proposed Approach 8.14 A combination of factors would appear to have set the stage for viable investment in a combined research and extension program for Mexico's humid tropics. Such factors include: (a) the low level of research/extension investment in the past; (b) the expansion of farm population and of cattle and crop production, which has advanced more rapidly than the investment in research and extension; (c) the development of tourism and the petrochemical industry, which has stimulated road building and provided market access to new areas; (d) the growing interest in new technology on the part of both crop farmers and cattlemen; (e) Mexico's well organized research program at the national level, with a strong interest in expanding work in the humid tropics; (f) the willingness of research and extension planners to integrate efforts around development goals, and identification of several of the key problems and opportunities for production improvement. 8.15 Since both research and extension already have organizational structures at the national level, the proposed investment would go into directly productive research and extension activities in the humid tropics. The research would be directed specifically to increasing the production of the various commodities and to eliminacing constraints to such increases. The range of benefits likely to accrue are proposed in paragraphs 8.20 to 8.23. 8.16 The extension program would initially be based on existing knowledge and would work with research to field test new knowledge and products. Then, as new research began to yield results, these would become elements of growing importance in the extension program.  - 47 - 8.17 In the long term the regionial program in milk and meat production in the tropics could satisfy a large proportion of the nation's growing needs for these products, while still allowing the continuation of feeder calf exports from the north. The technology of most immediate promise is pasture improvement through introduction of legume-grass mixtures and application of existing knowledge on parasite control. Because of the extent of livestock production in the area, a modest 10% average increase in milk and meat pro- duction per hectare and per animal by year 1987 would more than pay for the project costs of livestock research and extension. Even with the variety of soil and drainage problems and the vagaries of adoption patterns, the evidence would indicate that this is a reasonable expectation. 8.18 Likewise, a 10% increase by 1987 in yields of annual crops would more than pay for the additional costs of the crop research and extension program. In crop production, there appear to be excellent prospects for yield increases through improved weed control, fertilization and other cultural practices. In additioni, the research programs would be expected to provide (a) recommendations on a wide range of soil and water management problems which presently act as constraints to crop and livestock production in the region; (b) the technology for expanded rice production, especially the genetic materials, chemical and cultural practices to control rice blast disease, (c) improved cultural and pest control practices for coconut pro- duction, (d) high yielding varieties of beans and soybeans, better adapted to the conditions of the humid tropics; (e) a sound basis for sustained cassava and oilpalm production in the region; and (f) better varieties and improved cultural practices for rubber and spices. 8.19 A noteworthy aspect of the project is that research and extension development would be initiated in year I and not delayed until the pilot projects are completed. Based on the experience from these pilot areas, the Mexican Government expects to make further investments in infrastructure over a period of about two decades in the areas of influence of the pilot projects. When this occurred, the research/eXIension institutional base would be in place and functioning to serve the expansion areas at the next stage of development. 8.23 One of the key innovations of this project is the joint role of research and extension. Both the livestock and agricultural research institutes would be joining with the extension service in a common under- taking for the development of Mexico's humid tropics. Project Risks 8.24 The main risks would be associated with (a) achieving effective coordination between the various participating institutions and departments in project execution; (b) ensuring timely completion of proposed changes in land tenure and farmer organization; (c) effecting the desired changes in land tenure; (d) adopting the technology package at the farm level; (e) failure to take full advantage of supplementary irrigation; (f) failure to provide adequate counterpart financing for the research and extension programs; (g) organizing the extension service and recruiting and training staff in a  - 48 - timely manner. Because of these risks the supervision requirement of the project would be greater than the average Bank coefficient for this activity particularly during the first few years of implementation. Thus, over this period the project would be supervised frequently by Bank staff at intervals of about three to four months. IX. SUMMARY OF AGREEMENTS REACHED 9.01 During negotiations, agreement on the following major points was obtained: (a) No less than 70% of the civil works and buildings would be constructed through contracts with an estimated value of US$500,000 equivalent, or more, and would be procured under public competitive bidding advertised locally. The remaining 30% would be done through contracts awarded without public bidding or by force account (para 3.32). Also, except for goods for on-farm development financed through agricultural credit contracts for supply of goods exceeding US$250,000 equivalent would be procured through international competitive bidding in accordance with Bank guidelines (para. 3.32). (b) The project unirt established in CPNH would furnish the Bank with a completion report prepared in accordance to guidelines which the Bank would reasonably recommend (para, 4.02). (c) INIA and INIP would present details of their research programs including a breakdown of each program by experiment station location and those for visiting research scientists and scholarships for review by the Bank. Similarly, INCAFOR and CSAT would present their respective programs for visiting re3earch scientists and scholarships (para 4.14). (d) DPAE would submit details of the project extension program to the Bank for comment (para. 4.15). (e) SARH, the Papaloapan Commission, FIA, INIA, INIP, INCAFOR and CSAT would keep separate accounts on the investments they would make under the project. CPNH, in turn, would keep separate accounts of the various project components. All accounts would be audited annually according to the Mexican law following procedures acceptable to the Bank, and an audited report together with the corresponding balance sheet, would be submitted promptly to the Bank (para 4.20). (f) Project charges in the pilot projects would cover the total amount of operational and maintenance costs plus recovery of capital investments as appears reasonable in light of socio- economic studies (para. 7.03).  - 49 - 9.02 The following would be a condition of disbursement: a condition of disbursement against investments on the pilot projects still being prepared would be that feasibility studies had been approved by the Bank (para 3.15). This would include details of any proposed oil palm plantation and mill (para 3.21). 9.03 With the above assurances and conditions, the project would be suitable for a Bank loan of US$56 million for 17 years with a four years grace period.  - 50 - ANNEX I Page 1 A BACKGROUND TO AGRICULTURAL AND LIVESTOCK RESEARCH IN THE TROPICS A. Annual and Perennial Crops Water Use and Management 1. INIA has a small unit conducting research into the management and use of water, and has proposed expansion in tropical areas with special attention to the problems of the high rainfall areas. 2. Because of the large investment in drainage infrastructure which is being projected for southern Veracruz and Tabasco, it is crucial to obtain a fuller understanding of the potential effects of various drainage approaches on moisture availability and yields of the major types of annual and perennial crops that are to be grown in the new drainage districts. 3. Experience in the Chontalpa area of Tabasco has already indicated that even in very high rainfall areas there can be drought problems during parts of the growing season and that this is very closely related to the type of drainage system. For this reason the research program will look carefully at production problems both during the heavy rainfall period and during the drier season. This research will be linked closely to the pilot projects to study the effects of various approaches on the production of the main forages, field crops and tree crops. 4. INIA research on soil fertility has taken account of all variables affecting the expression of yield including the measurement of mois