Mexico - Oil impact on regional development : a case study of the state of Tabasco

Report No. 3087-ME Mexico ~~FILEt COPY Oil Impact on Regional Development: A Case Study of the State of Tabasco July 31, 1980 Country Programs Department I Latin America and the Caribbean Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  ACRONYMS CONASUPO : National Marketing Organization COPRODET : State of Tabasco Economic Development Committee CUC : State-Federal Coordination Agreement FIDkIN : Trust Fund for Industrial Cities and Parks IFOGAIN : Trust Fund for Guarantee and Loans for Small and Medium Industries FONEP : Trust Fund for Pre-investment Studies FOVISSTE : Executive Committee for the Housing Fund of Civil Workers INDECO : Community Development Institute INFONAVIT : National Workers' Housing Institute NAFINSA : Nacional Financiera, S.A. PEMEX : Mexican Petroleum Company PIDER : Investment Program for Rural Development PRODERITH : Development Program for the Humid Tropics SAHOP : Secretariat of Human Settlements and Public Works SARH Secretariat of Agriculture and Water Resources SPP Secretariat of Programming and Budgeting CURRENCY UNIT Since September 1, 1976 the Mexican Peso has been floating and fluctuated around Mex $22.60 to the US dollar since mid 1977. US$1.00 = Mex $22.60 Mex$ 1.00 = US$0.442  FOR OFFICIAL USE ONLY MEXICO OIL IMPACT ON REGIONAL DEVELOPMENT: A CASE STUDY OF THE STATE OF TABASCO TABLE OF CONTENTS Page SUMMARY AND CONCLUSIONS ........................ i-x INTRODUCTION ....................................................1 CHAPTER I: TABASCO AT THE THRESHOLD OF THE OIL BOOM. 4 CHAPTER II: TABASCO AND THE OIL BOOM: A MIXED BLESSING? .. . 9 The State and the Oil Boom: Limited Control and Large Responsibilities . . 9 The Positive Side of the Oil Boom: Investment, Employment and State's Revenue. ... 10 The Other Side of the Coin: Urbanization Inflation and Dualism..... 13 Conclusions: Unavoidable Disruption and Inadequate Policy Measures ..16 CHAPTER III: FACING THE OIL CHALLENGE: THE 1978-1982 Development Plan ..17 CHAPTER IV: THE DEVELOPMENT STRATEGY...... 20 Assumptions, Objectives and Critical Choices . .20 Sector Specific Issues... . 25 Urban Settlements, Housing and Urban Infrastructure 25 (a) Urban Settlements: Facing the Reality of Continued Urbanization .25 (b) Housing and Urban Infrastructure: An Increasing Deficit in Low-Cost Housing ....... 26 (c) Institutional Aspects: How to Coordinate Decentralization ................................. 28 (d) Recommendations ........................... 29 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 (Continued) Page Transport .............................. *. ................... 30 Protection of the Environment ................................. 33 Industry , ...... * .................. ......... **............ 35 (a) Overview .. ....................... 35 (b) Implications for the State of Tabasco of the National Industrial and Urban Plans . .37 (c) The Agreement (Convenio) with the Private Sector .. .. . . . .. .0 .. .. .# .*.. .. .. . .. 39 (d) Recommendations . .......... .. .............. 40 A&griculture .......................... 41 Institutional and Organizational Aspects 43 The Required Investment Effort .46 The Employment Picture ......... * ............... . ...... ..*.... 51 ANNEXES Annex I - Environmental Impact of Tabasco Industrial Activities 55 Annex II - The COPRODES .. .................. 70 Annex III - Tabasco: Illustrative Macroeconomic Projections, 1979-1990. . . . ....... 76 STATISTICAL APPENDIX . ......................... 84  This report is based on the findings of an economic mission to the State of Tabasco in March-April 1979. The mission was composed of: Gabriel Sciolli, Chief Jean Benard, Planning Danielle Berthelot, Protection of Environment Marisa Fernandez-Palacios, General Economist Jean Louis Forcina, Transport Robert Milford, Agriculture Delbert T. Myren, Agriculture Mario Rothschild, Urban David Sarfaty (Consultant), Industry Isabelle Wieviorka, Research Assistant The following officials from the Mexican government participated in the mission and contributed to the report: Guillermo Feria, Ministry of Finance Noha el Askalani, Ministry of Programming and Budgeting Francisco Guerra, Ministry of Programming and Budgeting Gustavo Rodriguez Toledo, Ministry of Programming and Budgeting Lenin Rojas, Ministry of Programming and Budgeting   SUMMARY AND CONCLUSIONS Background of the Study 1. Why a regional development study of the State of Tabasco which in terms of population and value added accounts for about 2 percent of Mexico's total? First of all, Tabasco is one of the states in the South-East region of the country which has been more affected by the oil discoveries, hence its significance as a case study of the impact of the oil boom on an economy based on traditional agricultural and livestock activities with a very modest industrial base. Such impact has been perceived as essentially disruptive in terms of price increases, bottlenecks in social and economic infrastructure and deterioration in the quality of the environment. Hence the concern of the Mexican authorities that what is happening at the micro-Tabascan level may be an example, or rather a warning signal, of what might happen at the macro level. At the same time the experience in Tabasco is interesting from the viewpoint of the emphasis by the government on regional development,, decentralization and planning which the government has recently introduced as some of its main orientations. The State of Tabasco has been one of the first, if not the first, to have produced in a very short time a Regional Development Plan. The Oil Boom: A Mixed Blessing? 2. In general terms, the broad issue which the experience of the State of Tabasco raises is the assessment of the net effect of the oil boom on the social and economic structure of the state, especially since the increase in the overall level of economic activity has been accompanied by a number of unsettling effects on prices, on income distribution, on availability of basic infrastructure and social services, and finally on the environment because of the polluting effects of the oil activities. The question is whether the State of Tabasco would have been better off without the oil discoveries. 3. The positive impact of the oil boom on the level of economic activity in Tabasco can be seen through two basic parameters of evaluation, namely investment and employment. Gross investment in the state was Mex$ 2.2 billion in 1973 (1.1 billion by PEMEX), it increased to Mex$ 8.6 billion in 1977 at current prices, or 3.2 billion in constant 1973 prices, equivalent to a real increase of 50 percent which is considerable considering the overall stagnation in 1976-77. Of the total investment in 1977, Mex$ 5.3 billion, or 62 percent, was accounted for by PEMEX. At the same time federal and state investment moved from Mex$ 0.8 billion in 1973 to Mex$ 1.8 billion in 1976. The employ- ment picture has been affected remarkably by the activities of PEMEX which in 1977 employed about 13,000 people (in addition to about 9,000 working for contractors of PEMEX works). In the same year, about 15,000 persons were employed in manufacturing and some 8,500 in non-petroleum related construction. Workers employed by PEMEX in 1973 were of the order of 3,000 and those in manufacturing about 11,000. Even though about half of the workers of PEMEX come from outside Tabasco and a substantial part of the native workers left existing agricultural jobs, the demand for labor originated by PEMEX reduced concealed and open unemployment not to mention the improvement in the average  - 12. - skill per worker and the increase in the average wage which, in the case of PEMEX, is at least double the increase in the average wage in the other sectors. Finally, another positive effect has been the very high increase in state revenue resulting from its share in oil taxes which rose from Mex$ 163 million in 1975 to almost Mex$ 1,300 million in 1978, thus enabling the state to expand its investment expenditure. 4. The other side of the oil boom coin shows an impressive list of disruptive effects which should come as no surprise when one compares the Tabasco experience with that of regions in other countries which have seen similar booms. The main cause of these negative effects has been the steep increase in the population of the urban centers more affected by oil activ- ities, i.e., Cardenas and Centro, in which population has grown in the more recent years at rates well above 10 percent a year. From this population explosion derive most of the problems in terms of scarcity of housing and basic infrastructure, scarcity of food commodities and consequent need for greater imports from outside the state at prices which have been rising as a result also of a very poor distribution system. 5. While the national imperative of oil production could certainly not be adjusted for the benefit of the State of Tabasco, vigorous parallel action of the state and federal authorities could have mitigated the negative by- product of the "imperative". For example, the problem of adequate imports of consumer goods, especially basic foodstuff, could have been alleviated if the CONASUPO intervention had been more efficient. The 1978-1982 Regional Development Plan: Trying to Face the Oil Challenge 6. The problems originated in Tabasco by expansion related to the oil activities as well as the new orientations towards development planning at the state level resulted in the formulation of a regional development plan for Tabasco covering the 1978-1982 period. The plan was produced in Tabasco by the state planning unit with the assistance of experts from the federal government. The first year of the plan, 1978, was considered as an emergency program aimed essentially at satisfying the most urgent needs in terms of basic infra- structure bottlenecks. The Tabasco plan is essentially an investment program and basically does not have the macroeconomic underpinning (at the regional level) that a plan should have. Furthermore there is no clear indication of the extent to which the federal and major portion of the investment program had been "agreed" in broad terms with the federal authorities. In its original formulation the plan was not very clear as to the role which the private sector was supposed to play. This gap was filled early last year as a result of a "frame agreement" between state authorities and a number of private investors which indicated a potential investment program of about Mex$ 8.6 billion between 1979 and 1982. The main comment on the proposed structure of the investment program is that the large emphasis on agriculture (the single largest sector) overestimates the absorptive capacity of both federal and state agencies and shows a tendency towards over-designing works considering the current availability of crop land. One should stress, however, that the plan was prepared under severe time and qualified staff constraints and that the absence of a multi-year public investment program at the national  - iii - level makes difficult the formulation by the states of investment programs implying the commitment of federal funds beyond the next year budget. What is more serious is that the preparation of the projects which are included in the various sector programs has not advanced satisfactorily. 7. The planning effort in Tabasco has taken place within the COPRODET committee for the promotion of economic and social development in the state with representation from all public and private interests, including the federal, state and municipal agencies, as well as representatives of professional and political groups, consumer associations, chamber of commerce, etc. All these representatives convene at a "round" table at the head of which sits the Governor of the state, assisted principally by the technical secretary of the committee who is the federal delegate of the Ministry of Programming and Budgeting (SPP). The COPRODET approach is certainly one of the most genuine and valuable characteristics of the planning effort in Tabasco. However, it implies at the same time a difficult task in terms of reconciling conflicting interests. In any case the participatory approach can only be a first step towards the subsequent phase of implementing the programs as they were defined in the Plan. This implies coordinating the efforts of different federal and state agencies which often share activities in the same sector and it is on this implementation front that the planning effort in Tabasco has to prove its validity. The Development Strategy - Objectives and Critical Choices 8. Implementation of a medium and long-term development strategy for Tabasco depends to a large extent on the actions taken to solve the most urgent problems arising from the inadequate supply of basic commodities in the urban centers, of construction and transport materials and of local skilled manpower. The emergency programs envisaged for the first year of the 1978-1982 Regional Development Plan have met great difficulties in their implementation mostly because of delays in the actual spending of authorized funds. Such difficulties can be attributed to a large extent to inadequate action in providing clear and timely instructions to the government agencies responsible for carrying out the programs. The need for a package of emergency measures aimed at reducing the most acute inflationary bottlenecks is still strong and should be given high priority by state and federal authorities. 9. Improving the standard of living of the people of Tabasco and reducing income disparities are priority goals of the state's authorities. Attaining these goals is dependent on the control of inflationary pressures which may result from the expected continuation of the oil related activities. Within this framework, this study suggests that the objectives of the medium and long-term development strategy for the State of Tabasco -- assuming that the oil related construction activities will continue well into the 1980's -- should be in order of importance: (a) to create employment opportunities in the growing urban centers, outside the oil sector, and to reduce underemploy- ment in the rural areas; (b) to provide adequate physical and social infra- structure for the rapidly growing population of the urban centers as well as for the population in the agricultural areas; (c) to prevent a worsening in the intraregional disparities through excessive centralization of activities in the oil affected areas; and (d) to prevent the deterioration of the environ- ment resulting principally but not exlusively from oil activities.  - iv - 10. While there is general agreement on the objectives listed above there is an active debate, especially within the state, on the post oil boom development strategy, a strategy which is dominated by the public sector, who presents accounts for almost 90 percent of total investment in the state. Some look at the oil activity as to a passing fact and think the state should concentrate on developing the traditional sectors (agriculture, fisheries, livestock and related agroindustries) on which the economy of Tabasco will eventually have to rely. An alternative strategy to attain those objectives is one based on the strengthening of the traditional sectors but at the same time concentrated on capturing the potential benefits of the oil boom by developing the petrochemical and related downstream activities and the small scale industries which can be linked to them. The anticipated construction of a petrochemical plant near Villahermosa would be the starting point of this process. A passive attitude towards the oil boom will not protect the state against its direct disruptive effects and will require practically the same effort in terms of supply of public goods to accommodate the increasing population. I1. The discussion of the development strategy for Tabasco implies a number of issues with national and regional implications. One of them concerns the industrial sector and more precisely the development of downstream petro- chemicals. On the one hand it is necessary to decide at the national level whether and to what extent to continue expanding the sector, while on the other hand, the fact that this sector is already relatively well developed in Veracruz raises the issue of the role reserved to the petrochemical plant to be constructed near Villahermosa. Nor is the development strategy of the agricultural sector indifferent to regional and national considerations. The choice of concentrating or not on tropical crops -- for which Tabasco seems to have a comparative advantage -- should be made in the light of the possibility of obtaining basic foods from other regions without deteriorating the critical situation which now exists in the state as regards both availability of products and their prices. The regional dimensions of the transport sector need little emphasizing. For instance, the choice of Coatzacoalcos as the commercial port of Tabasco with respect to the possible alternative of expanding the project of the port of Dos Bocas and opening it to non-oil uses implies that road communications with Coatzacoalcos will have to be improved both in its Tabasco and Veracruz sections and that bottlenecks such as the bridge on the Coatzacoalcos river will have to be solved. The Required Investment Effort - Macroeconomic and Employment Implications 12. The strategy proposed by this study leads to the formulation of an investment program which, compared with the investment program in the Tabasco Plan, implies a modest (about 3 percent) reduction in the level of total investment but a substantial reduction of investment in agriculture -- reflect- ing the postponement of some of the major works because of absorptive capacity constraints and an equally substantial increase in private investment espec- ially in housing, agriculture and services. A purely illustrative exercise was carried out. The results indicate that the non-oil Regional Gross Product is increasing at about 11.1 percent p.a. in real terms, mainly as a result of the high growth of the industrial sector which started from a very low basis and  v of the construction and services sectors. In terms of regional expenditure the interesting result of these illustrative projections is the levelling off of the non-oil trade deficit, following a steep rise in 1980, a year of high investment level and consequent high level of capital and intermediate goods imports. The employment implications of the proposed strategy are creation of adequate jobs (about 45,000 new jobs between 1979 and 1982) with respect to an expected increase in the labor force of some 50,000 provided the private investment is realized at the indicated level, the participation rate of the active population rate remains unchanged, and the supply of skilled labor is adequate. Should the high job requirement scenario (assuming an increase in the participation rate) materialize, the number of jobs to be created would more than double (107,000) leaving an untractable problem. 1/ Recommendations (a) Curbing Inflation Through Supply Expansion 13. Inflation is likely to be one of the critical issues facing the State of Tabasco in the years to come. In this respect, the proposed develop-, ment strategy raises the issue of the impact of future investment on effective demand and of the potential inflationary pressures which it may originate. Since (a) investment by PEMEX cannot be cut; (b) it is by far the largest component of total investment, and (c) represents a major additional demand of local resources (from housing to roads), the only feasible strategy is to invest in those sectors (housing and related urban infrastructure and transport) which increase the supply of the scarcest goods and services. Any cut of this kind of investment would only make the demand supply gap increasingly larger and the unsettling effects of the oil investment more acute. Investment in agriculture is a more complex case. The comparative advantage of the State of Tabasco lies in the production of export tropical crops rather than of basic consumption commodities which are scarce on the urban markets and call for substantial imports, often at the cost of very high consumer prices due to the "imperfections" of the distribution system. At the same time, investment in agriculture is essential for the long-term development of the state and cannot be put off after the end of the oil construction boom. The solution is to 1/ Equally, if not more, illustrative projections were made for 1990, on the assumption of a continuation of investment by PEMEX, of a reasonable increase in the investment in agriculture and general infrastructure and of an increase in private investment sufficient to absorb the additional work force not absorbed by the other public sectors. The work force projection, assuming a decrease in the growth rate of the population in the state (3.7 percent p.a. as against 2.9 percent at the national level), but allowing for an increase in the participation rate is crucial for this scenario. A decline in the non-oil net trade deficit to the 1979 level was assumed reflecting a conservative strengthening of the productive basis for the state. The results show, with respect to the 1978-1982 period, an increase in regional product at a more moderate but still sustained rate of 8 percent. Finally, a "low oil" scenario is presented to show the implications of a sharp reduction in investment in the oil sector, as a result of which the growth rate of non-oil value added declines to less than 6 percent per annum.  - vi - concentrate the medium run investment on a package of actions (extension services, feeder roads, etc.) which aim at increasing production on existing lands and to postpone new major works at least until after 1982. As to the level of private investment, considerations of employment creation and of general growth strategy for the state call for its expansion as a necessary step towards capturing the potential benefits of the oil boom. One should however avoid excessive concentration in a few urban centers, which would contribute to create inflation poles within the state and also a worsening of the intraregional disparities in terms of employment and overall economic and social growth. 14. Preventing future inflationary pressures in Tabasco cannot depend only on the expansion of supply related investment: a major bottleneck has been in the past the supply of basic consumption commodities in the urban centers. Only a drastic overhaul of the present distribution would solve this problem. Improving the efficiency in the operations of CONASUPO (the public marketing agency) is a priority action but again it may not be sufficient to significantly improve the distribution system. This is an area in which the state's intervention is advisable since it is less a question of available funds and dependence on federal agencies than of organizational and admin- istrative decisions at the state level. Measures should be taken by the state to complement CONASUPO's activities by organizing transportation of basic products from outside the state by making them available at "reasonable" prices, and by setting up "selling centers" at selected spots within cities as well as in the rural centers whose local production of these foodstuff is limited. (b) Increasing Employment Through Vocational Training 15. If inflation, with its disruptive effects on absolute poverty and income distribution, is a major problem facing the state's authorities in Tabasco, unemployment is an equally important issue which will dominate the picture in the coming years. Investment provides only a partial answer to the problem since it has to be matched with an adequately skilled labor supply. If labor force within Tabasco fails to offer the required skills, workers will be called in from out of state and the unemployment level in Tabasco will not decline substantially. From this, the need to set up appropriate vocational training programs in order to increase labor productivity of existing and future labor force and its possibility of employment. Vocational training centers should not be set up exclusively in urban centers but could be located in those rural service centers which the Plan Tabasco considers as one of the main instruments to attenuate the immigration rate into urban centers. Focus on vocational training will require a shift in the allocation of resources within the education budget at the federal and state level. (c) Concentrating on Maintenance and Modernization While Avoiding Overdesigned Major Works 16. The danger of neglecting maintenance and modernization of existing infrastructure in favor of building major and often overdesigned new works is present in Tabasco as in many other regions. The transport and agricultural  - vii - sectors provide good examples. In the transport sector the modernization of the section Cardenas-Villahermosa (part of the Villahermosa-Coatzacoalcos road) is a first priority, as much as the maintenance of the highway system which in the Reforma zone is showing signs of advanced degradation, largely resulting from PEMEX activities. At the same time restraint should be used in expanding the rural road network except when directly linked to development programs in the agricultural sector (e.g., PIDER). Finally the project implying the construction of a new bridge on the Coatzacoalco river should be considered against the alternative solution of building a second bridge in parallel to the existing one. This solution is cheaper (one third) and adequate for the coming 10-15 years. 17. Similar considerations apply to the agricultural sector where for the reasons indicated above, as well as for reasons of absorptive capacity, future programs should contain as little as possible over-designed components, as in the case of the Chontalpa and Balancan programs, and concentrate on extension services, maintenance of existing irrigation schemes and especially on moving towards rainfed agriculture within the framework of the ongoing national project for Rainfed Districts. Realization of the new large works contemplated in the Tabasco Plan can be justified only if substantial portions of the existing cattle grazing land is made available for crop land. This in turn is very much a function of the land tenure system which in its present situation is a constraint to any such shift in land allocation. (d) Limiting Intraregional Disparities 18. The sustained growth rate implied in our illustrative scenarios poses the problem of the worsening of economic and social disparities within the state. The industrial sector well exemplifies this danger since the industrial incentive scheme tends to favor the western municipalities which are already interested by the oil boom in terms of well construction activities and of downstream petrochemical activities, as a result of the petrochemical plant to be constructed in Villahermosa. Serious considerations should be given to extending the incentive scheme to the urban centers in the rural areas, especially Balancan, Tenosique and Emiliano Zapata. 19. The urban settlements policy will have an equally important impact on intraregional disparities. The objective is to provide adequate physical and social infrastructure for both the urban and the rural centers. The needs in the urban centers, resulting from the population explosion, are so pressing that they have to be satisfied. At the same time, however, neglecting the rural areas would lead to such a rapid degradation of their economic and social structure that the very attainment of the objectives concerning the urban centers would become much more difficult. The solution of this problem is a concentrated effort in the rural areas, as the one proposed by the Urban Development Plan through the creation of the "rural service centers." (e) Strengthening the Planning and Institutional Framework 20. Two areas which require substantial improvement are the coordination of the activities of the various levels of government operating in Tabasco and its planning mechanism. As to the first aspect, the orientation of the  - viii - current administration towards a more decentralized system of Government would seem to provide the ideal conceptual and institutional basis for strengthening the role of the state level coordinating body, i.e., the COPRODET, in which all federal, state and municipal agencies are represented. A special reference is needed to the relations between the state and PEMEX for which two basic principles should be retained. The first is that the state should receive adequate and timely information on PEMEX's programs which heavily affect the development of the state economy. This implies a much greater "integration" of PEMEX into the planning mechanism at the COPRODET level. The second is the participation of PEMEX in the costs of investment (roads, schools, health facilities) directly or indirectly linked to the oil extraction activity. The recently signed agreement between PEMEX and the state concerning the sharing in the costs of roads construction specifically related to PEMEX is a good example of a satisfactory solution for this type of problem. An important issue related in part to PEMEX's activity but more generally to the insti- tutional aspects is the protection of the environment. First of all, PEMEX is not the only significant source of industrial contamination. Sugar plants play an equally important role. The main problem in this area is to enfo-rce the observance of existing standards on the part of the contaminating indus- tries. The idea of creating a Water Contamination Control District is cer- tainly a good first step, but such an agency will require the full support of state and federal authorities to make the industries comply with the regu- lations. 21. The planning system in Tabasco has to improve under the following main aspects: - Conceptual Framework. The investment program, resulting from a thorough analysis of the ascertained needs for the economic and social growth of the state, must take into account the implications of such a program in terms of private investment and consumption, of public consumption, of the trade deficit, of employment, etc. While it is true that the statistical basis for some of the behavioral variables of the regional economy (consumption structure and pattern, savings) is currently rather weak, the planning officials should avoid the temptation to embark on very time consuming surveys. There are instead critical areas on which further investigation is more urgently needed. An obvious one is the development of downstream petrochemicals in terms of alternative location of the plans, i.e., Villahermosa or Coatzacoalcos, and of specific products. Another is the study of how low income housing can be best adapted to the climatic conditions of the state and utilize as much as possible local resources. Financial Constraint. A realistic view of available financing from all sources (Federal, Credit Institutions, etc.) should be taken when putting together the project composition of the investment program. This constraint should be introduced at a very early stage to avoid the danger of the plan becoming an empty document at the very moment of its publication. Financial planning, however, is not the sole responsibility of the state planners, in Tabasco as in other states. It requires that federal authorities move from the present one-year planning system to a multi-year approach, at least in broad indicative terms.  - ix - - Implementation. It is imperative that project preparation, from feasibility to final design, does not suffer from unreasonable delays. The COPRODET must assume the principal responsibility for this aspect of the planning mechanism by making sure that all interested agencies in a specific project respect the indicated timetable. For the COPRODET to perform this function, it has to be provided with the required skilled manpower and at the same time, existing procedures to allocate federal funds to the state projects must be simplified to avoid that the greater part of COPRODET's energy be devoted to bargaining with the various federal agencies rather than to planning and supervising the execution of programs. Countrywide Implications of the Tabasco Experience 22. Despite the logical limitations of any attempt to generalize the conclusions of the study of an economy such as the Tabascan to a different system, much less open to external factors such as the Mexican, some of the issues raised in this report could indeed apply to the country as a whole. While additional revenues from oil have contributed to dramatically improve the precarious condition of public finances and to light up the difficult prospects of the Mexican future welfare, increased investment and production of oil have also resulted in supply shortages particularly in some sectors such as trans- port and distribution services where the existing bottlenecks have been aggravated. The combined effect of increased aggregated demand and shortages in supply have contributed to maintaining inflation at the two digit level. 23. It is worth mentioning here the main issues that would apply to the country as well as to the state. First of all, there is a clear interest in reducing in Mexico, as in Tabasco, the economic dualism deriving from the expansion of the modern and flourishing oil sector. The pressure of bottle- necks constitutes the second set of problems shared by Tabasco and the country. It is quite clear that fast action is required particularly in the case of transport, urban infrastructure and distribution bottlenecks caused directly and indirectly by increased oil activity. The shortage of skilled labor also endangers any serious attempt to develop non-traditional sectors and the solution of which will request prompt and effective policy action at the national level. 24. There is a general acknowledgement of the presence of these diffi- culties in the Mexican economy. The difficulties inherent to the management of an economy disrupted by the sudden appearance of the oil boom accentuate the indispensability of having means and goals clearly established at the national level so that bottlenecks can be detected and quickly removed and the path to development smoothed.   OIL IMPACT ON REGIONAL DEVELOPMENT: A CASE STUDY OF THE STATE OF TABASCO INTRODUCTION 1. The issue of the regional development problems and prospects of the State of Tabasco was discussed early this year by Bank officials at the federal and state level. The Mexican authorities expressed interest in having the Bank look at the ongoing experience in Tabasco. A mission, which included representatives of the Mexican Ministries of Finance and Planning, visited the state in March-April and its main findings are presented in this report. A preliminary note summarizing the main issues, prospects and recommendations was discussed in Mexico in mid-June. 2. What prompted the Mexican authorities to focus their attention on the State of Tabasco which in terms of population and value added accounts for less than 2 percent of the country's total? First of all, Tabasco is one of the states in the South-East region of the country which has been more affected by the oil discoveries, hence its significance as a case study of the impact of the oil boom on an economy based on traditional agricultural and livestock activities with a very modest industrial basis. Such impact has been perceived by the state authorities, and to a large extent by the population of Tabasco, as essentially disruptive in terms of price increases, bottlenecks in social and economic infrastructure and deterioration in the quality of the environ- ment: From here, the concern of the Mexican authorities that what is happen- ing at the Tabascan micro-level may be an example, or rather a warning signal, of what might happen at the national level once the impact of oil earnings, and of the expectations resulting from them, is felt throughout the economy. 3. At the same time the experience in Tabasco is interesting from the viewpoint of the emphasis on regional development and decentralization which the Government claims as one of its main orientations. It would be wrong to think that the interest of Tabasco's experience lies much more in its oil impact aspect than in its aspects of regional development in action. The nature of the oil derived problems represents a very difficult and significant test for the administrative and institutional structures which are called upon to solve them within a framework of a less centralized decision making process. The coordination effort required by this new framework is equally important in those states where, in absence of oil, the main problem is not one of harness- ing the pace of economic and social activity but rather of increasing its level beyond the poverty threshold. 4. The emphasis on regional development and decentralization is being accompanied in this same period by a renewed drive towards planning, at the sector, at the national and at the state level. Planning is essentially indi- cative, in accordance with the prevailing ideology in the country, and it is aimed at formulating more consistent action programs on the part of the govern- ment, identifying more clearly the respective roles of the private and public sectors. At the national level, the planning exercise is still in process and its apparent slow pace should be understood in the light of the difficulty of the problems to solve, of the various options which have to be reconciled, and  of the impact which basic choices concerning the oil policy are likely to have on the future of the country. At the sector level, various plans, including a National Urban Development Plan, an Industrial Development Plan and an Agricultural Plan have so far been published. At the state level, anyone who has had experience with regional planning in other developing (or developed for that matter) countries is able to realize how difficult it is to "mount" a planning process in conditions of scarcity of adequate staff and, even more important, of reduced exposure to planning itself and little "feelings" for this type of decision-making process. Certainly, the central planning, or programming authorities as in the case of Mexico, can help the states in formulating their plans by providing both specialized staff and procedures, but experienced manpower is scarce even at the center and procedures, no matter how well formulated, require time before they can be meaningfully implemented. 5. The State of Tabasco has been one of the first, if not the first, to have produced in a very short time a Regional Development Plan. As we shall see later on, it would be too easy to point out the weaknesses of this plan, but one should acknowledge that, given the time constraints under which the plan was prepared, the staff available and, above all, the current state of regional development thinking in Mexico, the Tabasco Development Plan was probably as good as it could be. For all these reasons, the choice of Tabasco as a case study in Regional Development is especially justified and can provide very useful suggestions as to how the overall regional development planning should be improved, independently from the existence of exceptional natural resources. 6. It is interesting, at this point, to remember that the present study is not the first exercise of this nature conducted by the Bank. In 1976 a more ambitious report was published, dealing with the problems of the economic development of the Isthmic Region of Mexico, including major physical zones of the States of Tabasco, Chiapas, Oaxaca and Veracruz. 1/ The most significant difference between the two studies is probably not the most apparent one, namely the scope, but rather the general economic conditions of the region, and especially of Tabasco. The situation in the early seventies (the period covered by the report on the Isthmus) was, according to the authors, one of stagnation, of failure to make the most of the natural land resources and was characterized by the "enclave nature of the urban industrial growth which has been associated with the petroleum sector" (page ii). One should add that it was also a situation of much more stable growth for the country as a whole, unlike the one which has developed starting in 1976. This is a significant factor in explaining the much more turbulent situation which the oil boom of the last three years had brought about in Tabasco. In this period, country- wide inflation has been running above or near 20 percent and, if one adds to this the additional inflationary pressures in Tabasco resulting from the oil activities, one can easily see how deep the impact has been on the lower or even middle non-oil related income groups. In addition, one should keep in 1/ The Economic Development of the Isthmic Region of Mexico, Report No. 1080-ME, March 30, 1976.  mind that a large number of problems related to the availability of general infrastructure have been aggravated in these last three years by the rapid increase in population in the urban-oil-linked centers of Tabasco which have experienced growth rates above 10 percent. 7. The reference to the report on the Isthmus brings us to what is an obvious and significant limitation of the current study, a limitation result- ing from the agreement between the Bank and the Mexican authorities that the study should be conducted in the shortest possible time in order to generate a rapid feedback on the various issues and confined to Tabasco which presented the signs of a most acute crisis. In fact, Tabasco is part of a South-East region which, as a whole, is affected by the development of the oil resources, its linkages with the surrounding States of Chiapas and Veracruz are only too clear and its very future, at least in terms of the impact of oil, depends upon decisions which are best understood and assessed in the broader regional context (e.g., the development of the downstream petrochemi- cal activities). This being said, however limited a study of this nature can still cast some light on a number of institutional, organizational and planning aspects; on basic strategies as to the development of the traditional sectors vs. the modern-oil-linked ones; on formulation of an urban development policy as well as of a policy aimed at strengthening the rural infrastructure; on problems of inflation, protection of the environment, etc. 8. There is another aspect on which a study of this type is normally rather weak, i.e., the quality of regional statistics. Again, on the basis of experience in most developing countries, one should not be disturbed by the fact that, with the possible exception of the census years (1970 and 1975 in Mexico), it is very difficult to find at the regional level consistent, or even inconsistent, figures on value added by sector of origin, consumption, exports, imports, prices, wages, etc. The fact that there exists a 1973 input-output table for Tabasco is to be considered most extraordinary. 9. Finally, the macroeconomic projections presented should be considered as very tentative and basically aiming at illustrating problems and strategies rather than at forecasting what is likely to happen. This is due in part to the statistical deficiencies indicated above, but more so to the fact that the annual investment programs of the Federal and State Government cannot be determined much ahead of time and, furthermore, to the fact that the State of Tabasco is such a small entity that it can be significantly affected by relatively marginal changes in the decisions at the center (either by the federal government or by PEMEX), and by equally marginal changes in the decisions of private investors.  -4- CHAPTER I TABASCO AT THE THRESHOLD OF THE OIL BOOM 10. The State of Tabasco is located on the Gulf of Mexico on the South- East of the country. It has a surface of 25,338 km (about 1.3 percent of Mexico's surface). It is divided into 17 municipalities. The capital, Villahermosa, is a fast growing place currently holding about 190,000 inhabi- tants and located in the municipality of Centro. 11. Tabasco is geographically divided into four regions, namely, El Centro, La Chontalpa, Los Rios, and La Sierra. El Centro is characterized by being the administrative and service center for the state and includes Villahermosa, the capital of the state. La Chontalpa is an agricultural region, and also contains some of the important petroleum producing areas. The major center of this region is Cardenas. Los Rios is located on the eastern side of the state and borders on Guatemala. This region is character- ized by agriculture and livestock activities, and its center is Emiliano Zapata. The Sierra region is located south of Villahermosa, and is increas- ingly becoming the center of petroleum and related activities. The center of this area is the city of Macuspana. 12. Tabasco has been traditionally a sparsely populated state holding only a relatively small proportion of the Mexican population (1.6 percent). However, its rate of demographic growth has been consistently higher than that of the country as a whole. Between 1970 and 1977 the average annual increase in Tabasco's population was 4.6 percent, while the Mexican population increased at a yearly average rate of 3.4 percent. Total population in 1979 is estimated to be about 1,150,000 inhabitants. 13. The rate of growth of the population has been clearly associated with oil activity which began in the state in the late 1950s. The most impor- tant increases in population took place in Villahermosa and Cardenas. The annual migration balance with neighboring states, negative before 1960, has been positive in Tabasco since the 1960s, and increased from 0.3 percent of the population in 1970 to about 1.9 percent in 1977. Internal flows of people from rural to urban areas, and particularly to urban centers in oil- related municipalities, have been even more important. 14. Tabasco has a very young population. In 1969 almost 42 percent were under 12 years. Only 25.6 percent were considered economically active popula- tion, and this proportion has decreased to 24 percent in 1978. The sectoral distribution in 1970 was as follows: Table 1: TABASCO - Sectoral Distribution of Active Population Tabasco Mexico (X) (x) Primary Sector 59 37 Industry 13 23 Commerce and Services 21 33 Other 7 7 rce: P 70 PopuWxaLn Census  15. The evolution of the employment structure in recent years indicates that employment in non-primary activities has been growing at an average annual rate of 4.7 percent. Despite the decline in the ratio of active population in the state, active population is growing much faster in Tabasco than in the country as a whole. The net inflow of migrants of working age and the higher participation of women in the labor force associated with growing urbanization are the main reasons explaining the relatively high increase in the labor force that takes place in Tabasco. 16. In 1973 Tabasco was contributing 1.2 percent of the country's GDP while holding 1.6 percent of the Mexican population and accounting for about 37 percent of the national crude oil production. The regional production in 1973 is shown in Table 2. Table 2: TABASCO: Structure of Value Added, 1973 (million Mex$) % Primary Sector 1,636 23 Agriculture 905 12 Livestock 567 8 Forestry 119 2 Fishing 45 1 Industry 3,535 49 Food Industry 564 8 Oil and Derivatives 2,379 33 Other Industries 592 8 Services 1,964 28 TOTAL 7,135 100 Source: Input-Output Table of 1973 prepared by the Central Bank of Mexico. 17. The main agricultural crops are tropical plantation crops, which constitute about 86 percent of the total. Over 90 percent of the national production of cacao originates in Tabasco, and the state contributes also about 30 percent of the Mexican producion of copra, 4 percent of that of sugarcane and 13 percent of that of banana. Fairly modern methods are used in tropical agriculture, yields compare favorable with national levels and through cooperatives owned by producers' unions at the state level the goods reach a fair degree of processing before leaving the state. Food crop produc- tion is oriented towards local market and autoconsumption, the techniques used remain traditional, and in the case of maize and rice yields are below the national level.  - 6- Table 3: TABASCO: Evolution of the Production and Cultivated Area of Main Agricultural Crops, 1973-1978 Yields (mts/ha) Production (mts) Cultivated Area (ha) 1973 1978 1973 1978 1973 1978 Tabasco Mexico Tabasco Cacao 21,500 31,000 40,000 42,000 0.54 n.a. 0.74 Copra 27,300 27,900 25,000 30,000 1.09 1.09 0.93 Sugarcane 1,008,200 1,363,000 13,900 20,800 72.40 65.50 65.5 Banana 98,700 190,400 7,960 8,500 12.40 n.a. 22.4 Corn 71,800 43,800 64,800 42,500 1.11 1.13 1.03 Beans 4,180 8,000 4,900 9,000 0.86 0.54 0.89 Rice 8,600 1,700 6,900 1,100 1.25 3.00 1.54 18. Livestock accounted for 52 percent of the production of the primary sector in 1978. The importance of the subsector is underlined by the fact that Tabasco supplies about 30 percent of the meat consumed in the Federal District. Beef represents about 80 percent of the total value of the produc- tion of the subsector (Table 4). Table 4: TABASCO: Livestock Production, 1977 Volume Value (metric tons) (Million Mex$) Beef 48,100 1,010.1 Pork 7,737 154.7 Lamb 133 5.0 Poultry 2,898 43.5 Total 58,868 1,213.3 19. Outside of oil, the industrial sector is still in an embryonic state. The kind of industries encountered in Tabasco reflect the fundamentally agri- cultural basis of the state's economy. Agroindustries represented almost 80 percent of total industrial production in 1973, and consisted essentially of extraction of vegetable oil (copra), ground coffee and cacao, sugar milling and beef cattle including a slaughter-house and freezing plant. Industrial activity concentrates basically in the municipalities of Centro and Cardenas. A variety of industries supply local and regional demand, among them are construction materials (bricks, concrete blocks, asbestos-cement panels), a milk pasteur- ization plant and facilities for mixing milk-powder, a soft-drink bottling plant, plastic (fiber-glass) pipes tanks, and boats, etc. The seafood industry has reached a certain importance for its supply of oysters and fish. In 1970 barely 6 percent of the state's labor force were engaged in manufacturing  activity as compared with 17 percent for Mlexico as a whole. Extractive indus- tries including petroleum and gas occupied only 268 persons, or 0.15 percent of the labor force, and this compares with 95,212 persons or 0.74 percent nation-wide. Of the 760 industrial establishments in the state in 1971, 244 were located in the capital city of Villahermosa, and of the 4,699 persons employed in manufacture, 1,332 or 28.3 percent were working in the capital city. The establishment of the Industrial City of Villahermosa in 1972 was a significant step, but less than 10 firms had established themselves in the first couple of years of its existence. Since the sharp increase in PEMEX's investments in the area (i.e., since 1976) occupancy of the "Ciudad Industrial" increased to 20 firms, by as many as had been established since its founding, and plans were being implemented for expansion. The range of industries reflected the broadening of entrepreneurial interest which, although it included the expansion of existing agroindustrial activities and of the asbestos-cement plant, also included a polyethylene-film production facility (partly in anticipation of products emanating from the forthcoming petrochemical complex near Villahermosa), oxygen and acetylene production, furniture, blocks, mosaics, clothing, etc. New industries were also located outside of the industrial city. 20. The oil and gas industry has acquired an increasing importance within the state's economy, as reflected in Table 5. In 1976 Tabasco had 27 oil and gas fields in operation and 1,484 wells in production, and these produced 55 percent of the nation's crude oil and gas liquids, and 58 percent of the nation's gas. Table 5: Oil and Gas Productioi in TABASCO, 1972-1976 (million m ) Percentage of Percentage of National National Oil Production Production Gas Production Production 1972 9.6 37.5 8,637 46.2 1973 9.6 37.0 8,946 46.7 1974 10.5 31.3 9,515 45.1 1975 18.2 44.0 11,839 53.1 1976 25.4 55.0 12,416 58.1 Source: PEMEX 21. Commerce and services show the characteristics of traditional sectors with little modernization and high degree of fragmentation and inefficiency. They consist mainly of small family enterprises. Over 60 percent of the commercial establishment are concentrated in the six municipalities where oil activities take place, namely Cardenas, Centro, Huimanguillo, Cunduacan, Camalcalco and Macuspana. There are only 13 small supermarkets, the remainder being small business. The average number of workers per service establishment was only 2.2 people in 1975, of which half are self-employed. There are serious distribution deficiencies that result in very high prices of basic  - 8 - goods, particularly in the rural areas. Although distribution problems are common throughout Mexico, in Tabasco they are aggravated by the fact that only 3 percent of the manufactures commonly consumed are produced in the state, the rest being imported from other regions. 22. According to the 1973 input-output Table, the share of domestic consumption in the regional value added was about 41 percent, while gross investment amounted to about 38 percent and the net external trade balance to 21 percent. Private consumption amounted to about 87 percent of total consump- tion. The structure of investment was as follows: Table 6: TABASCO: Structure of Investment - 1973 (Percent of total investment) Public 69 (PEMEX) (45) (Federal) (20) (State) (4) Private 31 23. Of special interest is the external trade picture of the state which is oriented almost exclusively towards the rest of Mexico and mainly towards its neighboring states. According to the 1973 input-output table, Tabasco's exports amounted to 61 percent of its Gross Regional Product and imports to 40 percent. As a result, the external trade showed a global surplus of almost 1.6 billion pesos, or about 21 percent of its GDP. The trade surplus sectors were oil and gas (2.3 billion), agricultural sector (0.7-billion) and food industries (0.5 billion). All other sectors had trade deficits, particularly manufacturing industries (1.4 billion), transport (0.3 billion) and services (0.1 billion).  - 9 - CHAPTER II TABASCO AND THE OIL BOOM: A MIXED BLESSING? 24. In general terms, the broad issue which the experience of the State of Tabasco raises is the assessment of the net effect of the oil boom on the social and economic structure of the state. While there can be no doubt that oil discoveries and related activities have increased the overall level of economic activity in the state, this growth has been accompanied by a number of unsettling effects, especially on prices--through bottlenecks in the supply of basic commodities and housing; on income distribution, through an increased disparity between those occupied by the oil sector and the rest of the income groups; on availability of basic infrastructure and social services, as a result of the population explosion in the oil affected urban centers; and finally on the environment, because of the polluting effects of the oil activities. The State and the Oil Boom: Limited Control and Large Responsibilities 25. It should not come as a surprise that in the course of the last two years i.e., when the oil activity in Tabasco has picked up dramatically, the state authorities have had a tendency to stress the negative side of the oil boom as exemplified in the above listing. This attitude has resulted naturally in requests for a larger share of federal spending in the state as well as for some form of compensation from PEMEX, the national oil company. The facts are that (a) oil discoveries are by definition an exogenous variable for the State; (b) population explosion in the urban centers and the related great demand on existing resources are beyond its control; (c) the state's own investment expenditure is no more than one fifth of federal expenditure in the state, excluding the investment of PEMEX, which in turn is presently two and a half times the federal expenditure and finally (d) the investment of the private sector, which is a key element in filling the demand supply gap (both in terms of products and jobs), is also largely outside the direct control of the state. Under these circumstances, the transformation of the oil boom into an oil challenge rather than into an oil curse cannot be left in the hands of the state alone: it must be a national, meaning federal and PEMEX, problem in terms of the public decision-making process. 26. It would be equally wrong to conclude that there is little which the Tabasco State authorities can do for themselves, in addition to calling for a greater participation of the other levels of government into their development effort. The very claim to autonomy by the lower levels of government has been based historically on the principle that the people living there are best placed to determine what their needs are. This principle puts a heavy responsibility on state (and local) authorities in terms of assessing the nature of their problems as a condition for the formulation of programs, be they financed by their own resources or through transfers from the center. Furthermore, the states bear the responsibility for the use of their own resources for investment which, even if limited, are never negligible and can affect more than marginally some key sectors as housing, health and education.  - 10 - Finally, there is the too often neglected "maintenance" of existing infrastruc- ture: it is a lot easier for the responsible authorities, and not only at the state-local level, to be identified with major new works than with the effi- cient running of the existing ones. The Positive Side of the Oil Boom: Investment, Employment and State's Revenue 27. If we now turn to the impact of the oil boom starting in 1976-77 in terms of increased level of economic activity we can choose two basic parameters of evaluation, namely investment and employment. Gross invest- ment in the state was Mex$ 2.2 billion in 1973, it increased to 8.6 billion in 1977 at current prices, or 3.2 billion in constant 1973 prices, showing a real increase over the period of 50 percent which is substantial considering that 1976 and 1977 were two years of general stagnation. Of the total invest- ment in 1977, 5.3 billion, or 62 percent, was accounted for by PEMEX, 1.5 billion by the federal, state and municipal authorities, and an estimated 1.3 billion by the private sector. The increase for 1978 is even more dramatic since investment by PEMEX increased to more than 12 billion. One should notice (Table 7) that the increase in PEMEX investment did not come about gradually. After it remained at a level of about 1 billion per year in 1973 and 1974, it increased to 2.8 billion in 1975, fell below 1 billion in 1976 and exploded to 5.3 billion in 1977) and to 12 billion in 1978. At the same time federal investment moved erratically from 0.7 billion in 1973, 1.4 billion in 1978, with a peak of 1.6 billion in 1976, while a state investment rose from less than 200 million in 1976 to 1.2 billion in 1978. As to private investment, the impact of the oil boom can be best seen through the high increase in the occupancy of the industrial city of Villahermosa, that between 1977 and the first part of 1978 increased by 20 firms. At the same time, new industries were also located outside the industrial city. Table 7: Public Investment in TABASCO, 1973-1977 (Million Mex$) Year State Federal /1 PEMEX /1 Total 1973 84.4 727.4 1,094.6 1,906.4 1974 n.a. 1,273.3 1,037.9 2,311.2 /2 1975 n.a. 522.8 2,801.1 3,323.9 /2 1976 179.7 1,613.7 421.2 2,214.6 1977 689.2 1,316.9 5,332.5 7,338.6 1978 1,197.8 1,440.9 12,804.4 15,443.1 /1 Authorized expenditure /2 Does not include state investment, which was not available. Source: SPP, Direccion General de Inversiones, and State Department of Finance.  - 11 - 28. The employment picture has been affected essentially by the activi- ties of PEMEX which in 1977 employed about 13,000 people (in addition to about 9,000 working for contractors of PEMEX works). In the same year, about 15,000 persons were employed in manufacturing and some 8,500 in non-petroleum related construction. Since the persons employed by PEMEX in 1973 were of the order of 3,000 and those in manufacturing about 11,000, it follows that between 1973 and 1977, during which period the active population increased from about 195,000 to 220,000 persons, PEMEX alone absorbed about one third of such increase and manufacturing about 15 percent. Even though about half of the workers of PEMEX have come from outside Tabasco, and a substantial part of the native workers left existing agricultural jobs, the demand for labor originated by PEMEX reduced concealed and open unemployment, not to mention the improvement in the average skill per worker and the increase in the average wage which, in the case of PEMEX, is over three times the average wage in the other sectors. 29. Furthermore, most of the additional incomes generated by PEMEX investment and production have been spent in Tabasco and contributed to develop other activities mainly housing construction, transportation and distribution. It is estimated that about 20 percent of the workers directly or indirectly employed by PEMEX come from the northern region of the State of Chiapas (Reforma), a region which commercially depends on Villahermosa. One should finally mention, on the positive side of the oil boom, the externalities represented by those basic infrastructure works, especially roads, which have been constructed to satisfy PEMEX's demand, following an initial period of congestion and of controversies concerning indemnification to private citizens and additional costs for the state budget. 30. Another positive impact of the steep increase in oil production in Tabasco has been the enormous Jump in the state revenues, mainly through the 10 percent state share in the federal tax on oil production but also, although to a lesser extent, as a consequence of additional domestic activity in other sectors. Tables 8 and 9 show the evolution of state revenues in recent years. Total state revenues increased by 241 percent in real terms between 1973 and 1978 (see Table 9). The increase filtered down to the municipalities, whose revenues grew by over 30 percent in real terms in 1978. The share of the oil production tax in total state revenues grew from 1 percent in 1973 to 64 percent in 1978.  - 12 - Table 8: TABASCO: State Revenues, 1973-1978 (Million Mex$) 1973 % 1975 % 1976 % 1977 % 1978 % State Tax 69.1 33 91.0 21 105.1 17 136.8 13 260.2 13 Shares in Federal Taxes 49.8 24 275.2 62 403.3 67 848.8 81 1609.7 81 (Production of oil) (1.6) (1) (162.6) (37) (250.0) (41) (674.3) (64) (1266.1) (64) (Commercial tax) n.a. n.a. (52.1) (12) (66.3) (11) (77.2) (7) (145.2) (7) (Other) (48.2) (23) (60.5) (13) (87.0) (15) (97.3) (10) (198.4) (10) Non-tax Revenues 90.1 43 74.2 17 97.9 16 61.2 6 110 6 Total 209.1 100 440.9 100 606.4 100 1047.0 100 1980.0 100 Source: State Department of Finance. Table 9: TABASCO: Annual Rate of Growthl.1 in State Revenues, 1973-1978 (in percent) 1973-1975 1975-1976 1976-1977 1977-1978 1973-1978 State Taxes -9.3 -5.6 -1.2 61.3 35.6 Shares in Federal Taxes 59.4 19.8 58.7 60.8 387.3 (Production of oil) (6897.2) (25.7) (103.4) (59.2) (2893.5) (Commercial tax) n.a. (4.0.) (-12.2) (59.5) n.a. (Other) (-65.0) (17.6) (-15.7) (72.9) (-39.1) Non-tax Revenues -42.9 7.1 -52.9 52.4 (-56.1) Total 44.0 12.4 30.2 60.4 241.0 1/ Based on 1972 constant prices, using the national GDY deflator.  - 13 - 31. The steep increase of state expenditures during the period can be seen in Table 10. This is mainly the result of the higher demand for public goods and services brought about by oil and urbanization. Given the high demographic growth already taking place in Tabasco since the early 1960's, the state would have faced serious financial problems to satify the growing needs of the population without the additional revenues generated by oil. The improvement in the revenue situation put the state in a position to increase its expenditure, particularly on much needed investment. Table 10: TABASCO: Evolution of State Expenditures and Share in Oil Revenue, 1973-1978 (million in Mex$) 1976-78 1973 1976 1977 1978 % Increase Total Expenditures 209.4 589.5 1181.3 1800.0 205 Current 125.0 399.6 483.5 594.0 48 Capital 84.4 189.9 697.8 1206.0 500 Oil Revenues 1.6 250.0 674.3 1266.1 406 Source: Mission estimates and State Department of Finance. The Other Side of the Coin: Urbanization, Inflation and Dualism 32. The other side of the oil boom coin shows an impressive list of disruptive effects which should come as no surprise when one compares the Tabasco experience with that of regions in other countries which have experi- mented similar phenomena. The first cause of these negative effects relates to population. The main demographic variables that have been affected by the recent oil boom are not so much total population growth but urbanization. In fact, total population of Tabasco grew at about 4.5 percent per year in 1960-1970 and 4.6 percent in 1970-1978. Oil activities started in the state in 1958 and their initial impact on demographic growth was reflected in the fact that from the early 1960's Tabasco became a net recipient of migrants and started growing at a much faster pace than the national average of about 3.3 percent. Growth rates accelerated since 1960 in all municipalities. 33. The rural-urban distribution of the population (as shown in Table 11) has been affected by the oil activities. Urbanization in Tabasco has been accelerating in recent years, when some of the urban centers grew at rates well over 10 percent per year, particularly Cardenas, the second largest city in the state, and Villahermosa, where the problems entailed by urbanization are very serious.  - 14 - Table 11: TABASCO: Annual Rate of Growth of Population in Selected Municipalities and Cities, 1950-1970 * 1950-60 1960-70 1970-78 CENTRAL REGION 3.6 4.5 7.3 Villahermosa 4.5 6.7 10.1 CARDENAS 2.2 10.1 5.9 Cardenas 4.3 13.1 13.8 MACUSPANA 2.9 3.4 2.4 Macuspana 6.3 6.4 8.7 COMALCALCO 3.9 3.6 3.4 Comalcalco 6.0 6.8 4.4 HUIMANGUILLO 4.6 6.2 3.9 Huimanguillo 3.9 4.5 6.9 CENTLA 1.9 2.7 3.1 Frontera 0.1 1.9 5.7 NACAJUCA 2.6 1.7 4.5 Nacajuca 1.7 5.8 17.6 JALPA 3.3 2.9 2.1 Jalpa 5.2 1.5 4.2 TABASCO 3.1 4.5 4.6 Source: Mission estimates and SPP. * Municipalities include rural and urban areas. 34. Besides these larger towns, other smaller centers have experienced even more rapid growth. For example, Nacajuca, a town of 2,500 people in 1950 and just over 3,000 in 1970 almost doubled (5,900 people) by 1978. Ciudad Pemex, a town built expressly to accommodate employees and workers of the sector, has already more than 12,000 people. At the same time, many of the towns that are related to agriculture or to other non-petroleum activities have not grown at the same pace. For example, the country population of Jalapa has only been growing at about 1 percent, of Tacotalpa at about 2.2 percent, and of Paraiso at less than 3 percent. On the average the oil-related municipalities have been growing at an annual rate of about 5.2 percent, while the non-oil municipalities at an average 3.3 percent. 36. Fast growing urbanization has resulted in important gaps in the supply of housing, related infrastructure and urban services in general. The current housing deficit for the state is estimated at 100,000 units  - 15 - (31,000 of which in the urbanized areas). The situation regarding infrastruc- ture has been badly deteriorating in recent years since, in addition to the increase in demand caused by the rapid growth of the urban population, oil- related construction activities absorbed much of the productive capacity of the construction sector in Tabasco, thus precluding any possibility of smooth adjustment of supply to demand. 36. A second negative effect of the recent oil boom, not unrelated to the rapid increase in population and urbanization it entailed, is the creation of inflationary pressures in Tabasco which have resulted in high price levels in an area where they used to be much below the national average. Although there are no official price statistics for the state, it is estimated that during both 1977 and 1978 inflation in Tabasco has been running at rates between one fifth to one third higher than i-n Mexico. This is the combined effect of the sudden pressure on demand added by PEMEX investment activities, both directly and indirectly through the effect of higher wages, rigidities in supply due mainly to the lack of dynamism of the Tabasco economy and the resulting heavy dependence on imports from outside the state that makes it extremely sensitive to deficiencies in the transport facilities and distribu- tion channels which were likely to appear given the suddenness of the boom. Moreover, by its very nature the oil activities resulted in an increase in the demand for non-tradeables, mainly construction but including also services. The main bottleneck in the commerce sector refers to lack of storage facilities and a very bad intrastate distribution of commercial establishments that aggravates the inflationary pressures in the rural areas. This is particu- larly important because it causes an uneven distribution of the consequences of inflation. Food prices also increased but the main beneficiaries were not the farmers but the intermediaries. Wages also grew relatively faster in oil related activities and for skilled labor. 37. The fact that the oil company is not financially constrained and is therefore able to outbid local agents when competing for scarce inputs has only worsened the impact of the oil activity on prices. This is particularly true in the case of skilled workers. Although about half of the workers employed by the oil company come from outside the state, the disruptive effect of its activities on the labor market seem to be quite patent. It is estimated that the increase in the average salary paid by PEMEX in Tabasco between 1976 and 1978 was above 50 percent (as against an increase of 24 percent in the minimum wage). Even allowing for changes in the structure of the employment, the size of the jump provides a clear indication of the potential impact of oil on local wages for skilled labor, and of the pressing need to solve the problem of the lack of adequately trained manpower, a problem already serious at the national level but more obvious in the state. The negative impact of high wages in the oil sector is accentuated by its fuelling effects on inflation on the one hand and by the fact that the shortage of skilled labor has to be borne by non-oil firms with the subsequent adverse effects on the domestic supply. Moreover, any change in the current situation of relatively low wages in Tabasco, frequently quoted as one of the factors linked to the decisions of private firms to locate in the state, might prevent the beneficial side effects that would accompany the oil boom.  - 16 - Conclusions: Unavoidable Disruption and Inadequate Policy Measures 38. Ex post it is only too easy to say that the measures taken to cope with the problems originated by the oil boom were inadequate. The starting point is that PEMEX investment went from less than 1 billion pesos in 1976 to 5 billion in 1977 and to 12 billion in 1978. What economic system, micro or macro, could take such a blow without cracking? If Tabasco were a country, one would be tempted to make the usual remark that investment increased too fast given the possibilities of the country. Anyone can see how odd such a remark would sound when applied to Tabasco. The national imperative of oil production could certainly not be adjusted for the benefit of the micro system of the State of Tabasco, and this is a reality which should lead to the conclusion that only a vigorous parallel action of the same federal authorities who decide on the oil policy could have mitigated the negative byproduct of the "imperative". For example, the problem of adequate supply of consumer goods, especially basic foodstuff, could have been alleviated if the CONASUPO intervention had been more efficient and if the state authorities had been much more effective in preventing excessive profits resulting from speculation by the trade sector in dealing with the local market. Also, greater efforts. could have been made to strengthen the commerce sector and measures could have been taken to correct some specific problems such as the lack of storage faci- lities. But the main conclusion is that the brutal impact of oil discoveries in Tabasco was basically unavoidable. The issue is now what can be done in the future to absorb the shock especially since the basic oil activity is likely to continue at a very sustained level of construction investment for the coming years, not to mention the expected expansion of the related petrochemical activities.  - 17 - CHAPTER III FACING THE OIL CHALLENGE: THE 1978-1982 DEVELOPMENT PLAN 39. The problems originated in Tabasco by the very rapid expansion related to the oil activities as well as the new orientations towards develop- ment planning at the state level resulted in the formulation of a regional development plan for Tabasco covering the 1978-1982 period. The plan was produced in Tabasco by the state planning unit with the assistance of experts from the federal government. The first year of the plan, 1978, was in fact considered as an emergency program, aimed essentially at satisfying the most urgent needs in terms of basic infrastructure bottlenecks. The plan, which had to be prepared in a very short time and with rather limited availability of experienced people, left relatively unspecified, in its original formulation, the role which the private sector was expected to play. During the first half of the current year, this gap has been filled at least from an indicative viewpoint, through the signature of a frame agreement with a number of private investors who have indicated their interest in a number of projects to be carried out in Tabasco over the coming four years. 40. The following considerations on the general characteristics of the Tabasco plan should not be interpreted as a too easy criticism of what has been done for, as already stated in the introduction, given the time and staff constraint and the current state of the "regional planning" art in Mexico, the Tabasco Development Plan was as good as it could be. Further- more, and this is not a secondary factor, the authors of the plan are the first to be aware of its weaknesses and over the last several months have put in a very considerable effort, with the help of the federal authorities, to improve the quality of the plan and to sharpen its focus'. It should also be considered as a very positive fact that the plan has not remained a simple document marking the end of a conceptual effort but has represented the initial step towards programming for development in the state and has been used as a basis to provoke discussions and to obtain the help of all the parties interested in the development of the state. 41. The Tabasco plan is essentially an investment program. The planners in Tabasco could not investigate, basically for lack of adequate information, the impact of the investment program on the main flows of production, consump- tion and external trade with the purpose of checking both the internal consis- tency of the plan and its implied growth effects. These consistency checks, which can show potential significant supply-demand gaps and severe financial disequilibria, are especially important in the case of Tabasco which is now going through a very unbalanced growth path while at the same time some of the major investment decisions affecting the state remain, as already mentioned, outside the control of state authorities. 42. Another weakness, or may be a peculiarity, of the Tabasco Plan is the inadequate spelling out of its financial resources, and sources of financing. In order to understand the process better, one should keep in mind that to a certain extent this is justified by the way investment decisions  - 18 - are made in the federal context in which Tabasco operates. The level of investment expenditure by the federal government in Tabasco is the result of a bargaining process with the state within the overall financial constraint of the federal budget and subject to an agreement on the specific program. When such agreement is reached the authorization to carry out the programs and the allocation of federal funds will ensue automatically. In other words, what is really missing from the Tabasco Plan, at least in its original formulation, is the indication of the extent to which the federal portion of the investment program had been "agreed" in broad terms with the federal authorities. This aspect is even more important if we consider that in Mexico, at the national level, there is really no multi-year public investment program, which makes it very difficult for any lower level territorial unit to formulate investment programs implying the commitment of federal funds beyond the next year budget. It remains true, however, that no clear indication is provided of how the state and municipalities' own investment will be financed, and there is equally no explicit reference to agreement reached with the public financial institutions which are supposed to contribute financing, especially in agriculture. 43. There are also uncertainties built-in in the plan, which are not the result of imperfect planning but rather of the unknown which the activity of the single largest source of investment in the state, PEMEX, represents. One has to accept the fact that the national oil policy is determined on the basis of considerations which do not have as first priority the welfare of Tabasco, or for that matter, of any other oil region. This may be unfortunate for the specific region concerned, but one can only realistically expect that certain decisions are made known to the state as early as possible; one cannot expect that they are made as early as possible because they are of interest to the state. It is obvious that the decisions of PEMEX have an important feed-back on the program, federal and state, in Tabasco in terms of major infrastructure, housing, and also of the basic supply-demand equation which affects the income groups throughout the state. 44. An additional aspect under which the Tabasco plan is rather weak is the current degree of preparation of the projects which is included in the various sector programs. We are not referring here to a plan which simply allocates global amounts to the various sectors: in fact the sector chapters of the plan present an extremely detailed listing of actions to be taken with indication of the amounts involved, and this is already more than one can say of most investment program when they are first formulated. Neither should one be too critical of the fact that when the plan was put together, feasibility studies for at least the first year of implementation were not yet available-- the problem is becoming serious now that we are already well into the first year of the post-emergency plan period--and it is especially important as regards the agricultural sector, which plays such a large role in the total investment program.  - 19 - 45. The problems of implementation indicated above raise the issue of the impact that any major delay in the realization of significant portions of the investment program may have on the implicit development strategy of the plan. By way of example, substantial delays in planned agricultural investment cannot remain without consequences for the rate of urban congestion and will require a much more substantive intervention in this sector. The fact, recognized by everyone, that there is no way to stop immigration into the cities, cannot lead to the conclusions that whatever happens in the agriculture sector has no impact on its pace. 46. The development strategy of the Tabasco Plan, as exposed in terms of the specific amounts allocated to the various sectors, will be discussed in the following section and will constitute the basis for our presentation of the possible alternatives and related policy recommendations. How this strategy has been arrived at, in terms of decision making process, is however one of the most interesting features of the Tabasco planning mechanism and certainly should be considered as a very positive aspect. The planning effort in Tabasco has taken place within the COPRODET, 1/ which is the committee for the promotion of economic and social development in the state with repre- sentation from all public and private interest, including the federal, state and Municipal agencies, as well as representatives of professional and poli- tical groups, consumer associations, chamber of commerce, etc. All these representatives convene at a "round" table at the head of which sits the Governor of the state, assisted principally by the technical secretary of the committee who is the federal delegate of the Ministry of Programming and Budgeting (SPP). This participatory approach to planning has made it possible to listen to the problems and requests of all the interested parties in the state. These issues and requests have then been translated into objectives, priorities and actions required to realize them. 47. The COPRODET approach is certainly one of the most genuine and valuable characteristics of the planning effort in Tabasco. As all efforts based on participation, it is at the same time a difficult one. In the formulation of objectives and priorities the contribution of some interested parties are not always in direct proportion to their weight. For example, PEMEX, for higher oil policy reasons, has not always been able to come forward with the required information on its programs and/or with the required actions to compensate for the somewhat negative secondary effects of its activity. At this stage, and leaving aside the macro-consistency checks mentioned above, actions may have been taken without adequate investigation on the economic efficiency of the decision. Finally, the participatory approach car. only be a first step towards the subsequent phase of actually carrying out the agreed programs: the process at this point may become very difficult and slow since it implies coordinating the efforts of different federal and state agencies which often share activities in the same sector. It is on this implementation front that the planning efforts in Tabasco have to prove its validity. 1/ See for a detailed description of the COPRODET, Annex II.  - 20 - CiAPTER IV THE DEVELOPMENT STRATEGY Assumptions, Objectives and Critical Choices 48. The development strategy for the State of Tabasco depends essen- ially on the assumption concerning the future level of the oil extracting activities. What is really important, however, is not the level of the oil production obtainable from existing reserves which may hopefully continue beyond the year 2000, but rather the level of the construction activities related to the new wells. This clarification is needed because the discussion on the future of Tabasco is often presented in terms of what will happen in the "post oil" era which might be such a distant one to make any serious and realistic planning irrelevant. It is the impact of the construction activities related to oil exploitation which really matters and lends itself to a meaningful debate on the development strategy for Tabasco, which does not rule out the need to look at the problems with a broad vision on the more long-term implications of the development strategy. 49. The existing development plans of PEMEX for the 1979-1982 period are a sufficient base for assuming that the rules of the oil game are pretty much established up to 1982. It is therefore the post-1982 period, let us say until 1990, that might open the issue of some basic alternatives in the level of the oil construction activities. Based on current indica- tions on the future level of oil related activities in Tabasco, the main scenario which we are proposing is one in which the construction activities will continue well into the 1980s, that is for the coming 6-8 years. 50. The development strategy for the State of Tabasco, as in the case of the national strategy formulated by the new Administration, should con- template a "stabilization" stage aimed at reducing the most severe gaps between demand and supply as a condition for tackling the more structural and long-term problems of the state. In fact, the Tabasco Regional Development Plan considered that 1978, the first year, should be an emergency year calling for special programs aimed at satisfying the most urgent needs in terms of inflationary bottlenecks at the infrastructure and basic commodities supply level. The actions contemplated under the emergency program have proved to be very slow mostly because of problems arising in connection with the actual spending of authorized funds. These problems are generally attributed to difficulties in obtaining the cooperation of interested agencies and not because of disagreement on the merit of the programs but rather as a result of inadequate information and instructions. During 1979, supply of basic commodi- ties, of construction and transport materials and of local skilled manpower has fallen behind the continuously increasing demand. Implementation of any medium and long-term development strategy will be put in serious jeopardy by the failure to take effective action aimed at reducing current supply-demand inbalances.  - 21 - 51. The objectives of the development strategy for the State of Tabasco are in order of importance: (a) To create employment opportunities in the growing urban centers, outside the oil sector, and to reduce underemployment in the rural areas; (b) To provide adequate physical and social infrastructure for the rapidly growing population of the urban centers as well as for the population in the agricultural areas; (c) To prevent a worsening in the intraregional disparities through excessive centralization of activities in the oil affected areas; and (d) To prevent the deterioration of the environment resulting principally but not exclusively from oil activities. 52. Control of inflationary pressures--in excess of the national trend-- which may result from the exposed continuation of the oil related activities is also dependent on the actions considered under (b), since shortage of housing has been in Tabasco one of the major sources of inflationary pressures. The other aspect which has a direct bearing on the inflation issue is the supply of basic consumption commodities. Only a drastic overhaul of the present distribution system of these supplies, mostly imported from other states, can solve this problem. The only alternative action would be, as indicated later on in the section on the agricultural sector, a stepping up of the production within the state itself of such commodities at the expenses of a pure economic comparative advantage in tropical crops which Tabasco seems to have. 53. Central to the problem of employment is the qualification of manpower. It would be a serious mistake to assume that job creation through investment will solve the problem. A serious program of vocational training is badly needed to avoid that the increasing labor supply in the urban centers remain excluded from the labor market because of inadequate skills. Increase in labor productivity is essential for a higher employment level since the market for unskilled labor will expand at a much lower rate than the market for skilled labor. 54. The objective regarding provision of adequate physical and social infrastructure for both the urban and the rural centers calls for a critical choice in terms of relative emphasis. On one side, the needs in the urban centers, as a result of the population explosion, are so pressing that they have to be satisfied. At the same time, however, neglecting the rural areas would lead to such rapid degradation of their economic and social struicture that the very attainment of the objectives for the urban centers would become much more difficu'lt. It 's probably true that it is impossible to stop migration from the rural into the urban areas but its pace can be. affected by programs benefitting the rural areas.  - 22 - 55. The objectives underlying the development strategy of Tabasco are basically those established by the Government for the country as a whole. Their attainment, however, is likely to be more difficult in Tabasco than in the rest of the country, especially with respect to decentralization, "dualism" and protection of the environment. The problem of decentralization, which for the country as a whole is put in terms of excessive concentration of activities in Mexico City, Guadalajara and Monterrey, is especially acute in Tabasco where the oil linked urban centers of Villahermosa and Cardenas are growing at a much faster pace than the other urban centers. The possibility for Tabasco to control the location of activities is much less than nationwide for the obvious reason that the location of oil activities is not a decision variable. This aspect is made more acute by the fact that petrochemical industries and the related downstream activities are also likely to cluster around the main oil settlements. The high wage differential between those employed in the oil sector and the others is causing a degree of "dualism" in the economic structure of Tabasco which is probably one of the highest in the countrv and thus the effort required to attenuate its consequences, is much greater than for the country as a whole. Similar considerations apply also to the issue of the environmental protection because of the high concentration of oil and in the future, oil related industries. 56. While there is general agreement on the objectives listed above there is an active debate, especially within the state, on the post oil boom development strategy on the assumption that oil at some point in the future will no longer be there. Some think that one should look at the oil activity as a passing fact and that the state should concentrate on developing the traditional sectors (agriculture, fisheries, livestock and related agroindustries) on which the economy of Tabasco will eventually have to rely. There is an alternative strategy based on the strengthening of tthe traditional sectors but at the same time concentrating on capturing the potential benefits of the oil boom by developing the petrochemical and related downstream activities and the small scale industries which can be linked to them. The anticipated construction of a petrochemical plant near Villahermosa would be the starting point of this process. The greater reliance on the modern sectors while not an easy target to attain, is the only way for bringing the State of Tabasco to an acceptable level of economic and social activity. A passive attitude towards the oil boom will not protect the state against its direct disruptive effects, will require practically the same effort in terms of supply of public goods to accommodate the increasing population, but will cause much more serious problems of employment, income distribution and social stability. 57. A development strategy as the one described above leaves open the issue of the distribution of investment over time, especially if one considers the impact of investment on effective demand and the additional inflationary presures which might derive from it in a context which is already marked by excessive demand with respect to some basic commodities and services. This issue has to be looked upon considering the peculiarity of the investment decision-making process in Tabasco where the future level of investment by PEMEX is not a decision variable for the state authorities, and at the same time, as indicated below, is going to be by far the largest  - 23 - component of total investment in the state. If Tabasco were a country, one would be tempted to recommend, for the sake of a more stable growth, a reduc- tion in the level of total investment, including investment by PEMEX to the extent that it requires the use of domestic scarce resources. Since investment by PEMEX cannot be cut and it represents a major additional demand of local resources (from housing to roads), the only possible strategy is to invest in those sectors which increase the supply of the scarcest goods and services. Any cut of this kind of investment would only make the demand supply gap increasingly larger and the unsettling effects of the oil investment more acute. 58. More specifically, the investment which is required to expand vital supply is public investment in housing and related urban infrastruc- ture, and in transport for certain key existing bottlenecks. Investment in agriculture is a more complex case. The comparative advantage of the State of Tabasco lies in the production of exportable tropical crops rather than of basic consumption commodities which are scarce on the urban markets and call for substantial imports, often at the cost of very high consumer prices due to the "imperfections" of the distribution system. At the same time, however, investment in agriculture is essential for the long-term development of the State and cannot be put off after the end of the oil construction boom i.e., 7-8 years from now. This being said, it remains true that on the basis of past experience in Tabasco, there is a danger of overdesigning some of the major irrigation works as well as of concentrating in general on the construction of new works rather than on a package of actions (extension services, feeder roads, etc.) which might be more effective in increasing production on existing lands. The need, in macroeconomic terms, to avoid an excessive level of investment which is not directly related to increasing supply within the State should force the responsible authorities into a careful examination of the proposed programs in agriculture. This also means that for any given level of invest- ment in agriculture a restructuring in favor of programs aimed at expanding basic consumption commodities in short supply will make that level more compatible with the macroeconomic constraint. 59. As to the level of private investment, a potential candidate for reduction in the name of "stable growth," considerations of employment creation and of general growth strategy for the state make it hard to recommend that as a first step towards capturing the potential benefits of the oil boom one should start by cutting back the private investment effort. The issue here, as discussed later on in the section on industry, is rather one of avoiding excessive concentration in Villahermosa and Cardenas in order to prevent the appearance of "spot" inflationary pressures within the state and also a worsening of the intraregional disparities in terms of employment and overall economic and social growth. 60. A final comment on the wider implications of a development strategy for Tabasco. It was announced in the introduction that one of the limitations of this study was its being confined to the purely administrative dimension of the state as such without any analysis of regional or national implica- tions. This means implicitly that we are assuming that priorities have been bet out which provide the necessary guidance for decision-making at the  - 24 - state level. However, a number of issues with special regional implications should be mentioned here in order to clarify some of the implications of the strategy carried out by the state. By raising this point we are not implying that the local interests should be disregarded, but rather that the interaction between Tabasco and other states is a real one of which maximum advantage should be taken. 61. Regarding the industrial sector, the most relevant point is the development of downstream petrochemicals. Two different interactions are involved here, since on the one hand it is necessary to decide at the national level whether and to what extent to continue expanding the sector, while on the other hand the fact that the petrochemical sector is already relatively well developed in the neighboring State of Veracruz adds inevitably another set of variables that go beyond purely domestic considerations. In the first case the decision will have to be based on international market conditions, internal demand for petrochemicals, analysis of intra- and intersectoral linkages, etc., while the second set of interactions would have to see to questions such as whether to use the petrochemical output of Tabasco as intermediate materials to be further processed in other states (Veracruz) or rather to develop an integrated downstream petrochemical sector that would more fully take advantage of the availability of oil but would also compete with existing or potential activities in the neighboring areas. 62. The development strategy of the agricultural sector is also not indifferent to regional and national considerations. For instance, the choice of concentrating or not on tropical crops should be made in the light of the possibility of obtaining basic foods from other regions without deter- iorating even further the critical situation regarding prices. This is a clear case where the lack of consideration of interregional relationships could lead to either a loss of economic efficiency (if greater self-sufficiency in food production was taken as effective goal at the expense of tropical crops for which Tabasco has a comparative advantage) or to a deterioration of the living conditions, particularly of the poorest group, if the concentration on production of tropical crops led to shortages in the supply of basic foodstuffs. 63. The regional dimensions of the transport sector needs little emphasizing. By way of example we could mention here the use of the Coatzacoalcos port by existing and future industries in Tabasco as particularly relevant for its implications on other subsector elements. The fact that Coatzacoalcos be the commercial port of Tabasco implies a choice, probably correct in our view, with respect to the possible alternative of expanding the project of the port of Dos Bocas and opening it to non-oil uses. The choice in turn requires that road communications with Coatzacoalcos be improved both in its Tabasco and Veracruz sections and that bottlenecks such as the bridge on the Coatzacoalcos river be solved. All these options and actions cannot be handled except by using a clear regional strategy.  - 25 - Sector Specific Issues Urban Settlements, Housing and Urban Infrastructure (a) Urban Settlements: Facing the Reality of Continued Urbanization 64. IT terms of future developments in the structure of urban centers in Tabasco, the State's Secretariat of Human Settlements has prepared a Tabasco Urban Development Plan. The preparation of this plan has followed the general guidelines and objectives spelled out in the National Urban Development Plan, the Tabasco Plan Estatal de Desarrollo, and the State's Law of Urban Development. The plan is essentially a normative framework; it provides a general analysis of the present and expected situation in the urban sector, and proposes a strategy for the distribution of urban population in the state. The various urban development plans prepared for the state are all consistent in their emphasis on promoting the growth of alternative centers to Villahermosa, while continuing to improve the living conditions in this largest city of the state. The alternative centers considered are primarily municipal capitals of areas rich in agricultural potential (some also in fishing and tourism), and which are at the same time the centers of petroleum activities. This approach, as far as the structure of urban settlements is concerned, appears to be basically sound, although it is questionable how successful the plan will be in limiting the growth of Villahermosa. 65. A major objective underlying this strategy is to reduce migration from the rural areas to the capital of the state. It proposes to do so by improving the supply of housing, urban infrastructure and services in a few secondary towns. At the same time, the plan continues to assign high priority to Villahermosa and, to a lesser degree, to Cardenas. It is doubtful whether the state will succeed-in its efforts to reduce migration from the rural to the urban centers to any significant degree. This skepticism is prompted by the absence of an explicit strategy or actions planned to accomplish this shift in urban growth to the other cities and towns of the State. To encourage urban growth in secondary cities and rural services centers it will also be necessary to develop an integrated set of additional programs and actions such as the promotion of employment generation (including small-scale enterprises), establishment of a competitive income and wage structure in the agricultural sector, special fiscal and financial incentives, vocational training programs, 1/ etc. 66. In summary, it is doubtful that the migration issue and the pattern of human settlements, as much as it is derived from migration flows, will be affected much by investments in housing and public works. Public investments will probably continue to be heavily concentrated during the coming years in Villahermosa and in a few additional larger towns. As mentioned, these issues require a more sophisticated and integrated approach, and even then, it is questionable how successful or recommendable such efforts will or should be. 1/ No effective vocational training program exists yet in the State, although some preliminary discussions have been held with the federal "Adiestramiento Rapido de Mano de Obra" program.  - 26 - 67. The activities of PEMEX in Tabasco are crucial in terms of their impact on both the structure of urban settlements and on the housing (includ- ing urban infrastructure) deficit question, and of course, in terms of their direct and indirect financial and economic contributions to the state. In the context of physical works, PEMEX has been mainly engaged in those aspects that directly affect its operations, that is, in the construction of their own installations and of crucial highways. Their contribution to the housing sector and related urban infrastructure has been, according to available information, only marginal. 68. The Tabasco experience suggests that the multiplying effects of the petroleum industry on migration and urban growth, housing and infrastruc- ture needs, wages and prices, etc., is probably much larger than the impact caused directly by the relative small number of people actually employed by this sector. Some preliminary analysis suggests that for every job in the petroleum or related industries, two more jobs are presently generated in other sectors (mainly tertiary), and two more families migrate to the main centers of petroleum activities (including Villahermosa and the other major towns in the state) on the expectation of finding a better job than in the rural areas. 69. The growth of all urban centers has been and is bound to be significantly affected by PEMEX's expansion plans in the coming years. An immediate factor in this context is the proposed creation of a new petro- chemical plant by PEMEX, probably in the vicinity of Luis Gil Perez. This action is likely to influence the pattern and size of urban settle- ments in the state, and by implication, also affect the urban-rural balance. Additional actions of this type, even if extended over longer periods of time, will have similar effects. Lack of reliable information on PEMEX's expansion plans could thus lead to substantial distortions in the state's plan of urban development and inefficiencies of investment in the sector. 70. The provision of more housing and better access to services such as water supply, electric power and health facilities in the rural areas is probably a necessary, but not a sufficient condition for halting migration from these to urban areas, if not coupled with a real lift in the income received by farmers through an increase in agricultural production. The national character of such an approach requires the active participation of other forces, and escapes the limited power of the State of Tabasco and of its "planning" institutions as defined now. Critical would be the participation of federal agencies (e.g., Secretaria de Patrimonio y Fomento Industrial, SAHOP, SARH, etc.), PEMEX, and the private sector, all under one coordinating body to establish a consistent programming, financial and implementing struc- ture. (b) Housing and Urban Infrastructure: An Increasing Deficit in Low-Cost Housing 71. Parallel to the sudden increase in the growth of the key cities and towns in the state, a corresponding increase of the deficit in housing, related infrastructure and urban services has developed. As a result of  - 27 - this rapid growth, the housing deficit in the state is now estimated at a total of over 100,000 units. Only about one third (31,500 units) of this deficit relates to the urban centers, but housing needs in the rural areas are more often solved through self-help, and here, the greatest need is for individual improvement programs and the extension of basic infrastruc- ture. In the city of Villahermosa alone, the present housing deficit has been estimated between 13,000 and 16,000 units, most of it for households that are financially and economically excluded from the available market. Gross estimates indicate that the investment necessary to wipe out this deficit in Villahermosa only would be about Mex$ 4.5 billion excluding the related infrastructure costs. 72. About 42 percent of the mentioned deficit is for families that have no housing of their own and live in provisory or rented quarters; about 30 percent of the deficit is related to existing but old and deterio- rated stock; and about 28 percent of the units are required to reduce serious conditions of overcrowding in the city. Furthermore, and assuming that urban centers will continue to grow at an annual rate of about 8-10 percent, about 7,000 new units will be required every year in the state. As an example, and assuming specific population growth rates of 11 percent and 14 percent for Villahermosa and Cardenas, respectively, new housing requirement in these cities may amount to about 4,000 and 1,000 units annually for the next four to six years. These figures may vary significantly as a function of what the future operations of PEMEX will be, which will also affect the growth pattern of other towns near the petroleum areas. 73. If one discounts the option of mobile home as a real alternative (although it should possibly be considered in some cases), housing is not a "good" that can be "imported" into the region, and shortages in supply, if not resolved quickly, will necessarily lead to higher rents and prices. This is indeed what has happened in Villahermosa and a few other major towns of Tabasco, and the situation does not seem to be improving at the present time. The price of housing and rents in Villahermosa and Cardenas is often 50 percent to 75 percent more expensive than 5omparable accomodation in Mexico City or elsewhere. Monthly rents for a 100 m apartment are about Mex$ 3,500 (about US$150) in Mexico City, while the comparable apartment in Cardenas would rent for about Mex$ 4,500 (US$225), and for Mex$ 6,000 (US$260) in Villahermosa. It is not uncommon for rents for prime houses and apartments to go up by 100 percent from year to year. 74. INDECO and the corresponding State of Tabasco Agency, the Instituto de Vivienda, are the institutions in charge of solving housing and infrastruc- ture problems of the lower income groups. A policy is now evolving to base these programs on a system of sites and services and self-help construction. In Villahermosa alone, the Instituto has received about 6,700 individual requests for such units, and has plans to implement about half of them in 1979. If one assumes that the city will grow at about 11 percent annually for the coming years, and that only 50 percent of the population will require the type of shelter solutions offered by the Instituto, this means (at least) about 2,000 new sites and services units annually for the coming five years, without considering the deficit accumulated so far.  - 28 - 75. In summary, a substantial increase in the provision of low-cost housing and the expansion of city-wide urban infrastructure is required to cope with the existing and the future demand for these services. Although some form of subsidies for the lowest income groups may be justified, public support should initially concentrate on a forceful program to increase the supply and distribution of construction materials and equipment, the provision of serviced urban land, the establishment of a vocational training program, and increasing the accessibility to appropriate credit channels. The direct construction by the state of housing for higher income groups (already beginning a small scale) is probably not going to do much to eliminate the structural rigidities and the overall deficit that exists in the sector. It is certainly not an efficient way (through some form of "trickle-down" effects) to solve the housing needs of the middle and lower income groups, which constitute the vast majority of those seeking a solution to these problems. (c) Institutional Aspects: How To Coordinate Decentralization 76. The responsibility to provide housing urban services and public utilities in the State of Tabasco is divided among a very wide number of agencies. Among these are public, semi-public and private agencies, both federal and state agencies, PEMEX, and a variety of semi-autonomous agencies. 1/ The head of the sector, at the federal level, is the Secretary (Minister) of Human Settlements and Public Works (SAHOP), operating at the state level through its state office, and INDECO, which is the agency in charge of promoting housing for the lower-income groups. Also federal in nature, although not controlled directly by SAHOP, are INFONAVIT, which is the agency responsible for providing housing to wage earners (workers) in general; and FOVISSTE, which is responsible for providing housing to public employees. Controlled by the State of Tabasco ate: (a) the State Secretariat of Human Settlements; (b) the State's version of INDECO, which is called Instituto de Vivienda; and (c) the local (state and municipal) public works committees and water agencies (Juntas de Agua). Housing is also built by PEMEX for some of its employees and workers (besides the construction of a few roads, schools and other public facilities), while the private sector is supposed to cover the remaining gaps. 77. Looking at the future, there are two significant policy questions at stake. The first one is the debate between the supporters and the opponents of the decentralization efforts now being endorsed by the Federal administration. The other concerns the respective role of the federal ministries themselves, and specifically the efforts by the new Ministry of Programming and Budgeting to coordinate the activities of the individual sectorial ministries. The conflicting positions on these matters center around the role of an institutional framework specifically established to solve the issues, namely the COPRODET. 1/ Without considering federal highways, electric networks, schools and many other public facilities which are the responsibility of other agencies.  - 29 - 78. COPRODET has brought together for the first time in Tabasco (and probably for the first time in any state) all the agencies and insti- tutions involved in public works. The institutional achievements of COPRODET are particularly important in connection with issues such as implementation capabilities, cost recovery, and maintenance-operational procedures. Tradi- tionally, most public works in the urban sector have been programmed, financed, and implemented directly or under the control of some federal department of SAHOP. In many cases, the works were carried out by one of these depart- ments and upon their completion, have then been transferred to and become the property of a state or municipal entity. Little continuity was estab- lished in the financing cost recovery stream, and the same was true for maintenance and operational responsibilities. 79. In summary, improvements of the planning process in Tabasco in terms of proper programming can only be accomplished if the state, through COPRODET receives more control and coordination power over individual (federal) sectoral programs. Only then could COPRODET initiate a more appropriate planning process based on real development objectives. This observation surely applies also to other states, where the corresponding COPRODET are even less established. (d) Recommendations 80. COPRODET should examine in more depth the developmental objectives of the state beyond the 1979-1982 period. Only on that basis will it expand its present concern with short-term investment needs to that of defining long-term development objectives. Better and updated information on the future expansion plans of PEMEX is also essential to prevent possible distortions of development efforts in the state. Such information would also provide the state and other public agencies with a sound-basis for the estab- lishment of investment programs to cover some of PEMEX's own requirements. PEMEX, at the same time, should expand significantly its housing and urban services program. 81. COPRODET should make a thorough analysis of the implementation requirements and available capacity in the state to carry out the investment plan it has programmed. It should also identify the measures that need to be taken to ensure proper maintenance, operations, and cost recovery procedures. This analysis should specifically deal with the possible impact (over time) of the programmed investments in the construction sector, and particularly with questions such as to the availability of construction inputs, transport and storage facilities, as well as the estimated effects on labor costs and pricing. 82. One of the most serious bottlenecks in the construction industry in general and in housing in particular, is the scarcity and high prices of construction materials and equipment. It will become increasingly important to improve this situation, and it may even become necessary for the State itself to establish a separate public purchasing and distribution system for such materials and equipment.  - 30 - 83. Of primary importance to the housing sector is also the issue of land availability. Urbanized land in most of the state's urban centers is scarce and very expensive. This is a major constraint on the expansion of the housing stock, and the state should therefore consider the possibility of providing by itself urbanized areas in order to reduce the pressures on this input. In some cases, and where it would support the state's priorities and objectives regarding the structure of human settlements question, these lands could be provided at less than market prices. 84. The most serious and largest part of the housing problem relates to the urban low-income groups. The state's INDECO-Instituto de Vivienda is the best suited organism to deal with this problem and should receive every possible support. Transport 85. Tabasco relies mainly on the road sector for its communications with the outside world: the port sector is practically non-existent and there is only one railway line (300 km) through the state, linking Veracruz and the central network to Merida and the Yucatan peninsula. This line bypasses Villahermosa and Cardenas, the two major towns and has had no significant role to play in the development of Tabasco. As to the aviation sector infrastructure, a new international airport has been opened to replace the existing airport at Villahermosa, which was too close to the city, and presented approach problems, and it should provide adequate facilities until at least the mid 80s. In 1978, some 390,000 passengers arrived in and departed from Villahermosa; traffic is growing at over 15 percent per year. 86. The road network is centered on Villahermosa. The main federal highway runs west to Cardenas and Coatzacoalcos, and is the state's lifeline and at the same time the only one with an advanced degree of congestion, particularly in the section Villahermosa-Cardenas. The other important federal roads have a lesser importance for Tabasco. In a number of selected zones under the PIDER programs, efforts have been made in recent years to expand rural infrastructure with minimum standard roads. PEMEX has also contributed an increasing share of the state's road budget and built on its own the access roads necessary for its drilling and production programs. 87. In recent years, the vehicle park has increased tremendously and the highway infrastructure around Villahermosa has been experiencing increasing levels of congestion, particularly the road to Coatzacoalcos (Table 14). On the section Cardenas-Villahermosa, traffic has reached a level of some 7,500 vehicles/day, including truck traffic of some 4,000/day, and is growing by some 10 percent every year. A number of state and local roads, concentrated in the Reforma area, have not been able to cope with high levels of truck traffic, poor drainage and minimum maintenance. Maintenance on other important federal roads also appears to have been modest in recent years, and certainly below the minimum level required to achieve a satis- factory upkeep of the existing infrastructure.  Table 14: Vehicles Regis-tered in Tabasco Vehicle 1970 1971 1972 1973 1974 1975 1976 1977 Auteinobiles 5,116 4,828 6,112 6,890 6',848 6,964 13,726 13,563 Buses 332 282 358 378 391 1,193 n.a. 2,330 Trucks 4,258 4,373 3,840 4,168 6,844 7,368 10,985 8,565 Source? SPP  - 32 - 88. There is an urgent need to upgrade the road to Coatzacoalcos. The first priority is the modernization of the section Cardenas-Villahermosa. This highway is for practical purposes the only link between Villahermosa and the outside world, and is critical for the development of the Reforma fields. While SAHOP does envisage to go ahead with this work, its proposal calls for completion in 1982 when traffic should be well over 10,000/day. An accelerated construction schedule should be considered to expand the Cardenas-Villahermosa section to 4 lanes by 1981. Additionally, and in the same time frame, the access roads to Reforma from this highway must be reconstructed. Any departure from this schedule will constrain to some extent the development potential of the Cardenas/Villahermosa zone by slowing down the expansion of existing activities and diminishing the relative attractiveness of locating new industries in or around Villahermosa instead of the Coatzacoalcos/Minatitlan area in Veracruz. This would be unfortunate because this area is already experiencing worse "oil boom" induced problems than Tabasco, even though it enjoys more natural advantages such as the existence of port facilities and a railway connection to the central network. 89. As a second priority, maintenance efforts on other important links in the federal and state networks should be stepped up; more consider- ation should be given by the state to the maintenance requirements of highway investments particularly for roads built with the support of other entities, such as PEMEX, the local municipalities or federal agencies. These entities have an incentive to provide resources to build highways providing access to facilities they have the responsibility to build (such as a petrochemical plant). At this writing, however, they do not provide resources to maintain this infrastructure, to the detriment of the very economic development induced by the establishment of the facilities they are building. The advanced degradation of the highways in the Reforma Zone is directly traceable to this and a repetition of this problem should be avoided. 90. This brings up the issue of PEMEX participation in highway investment financing. In the past PEMEX has provided up to one third of the funds needed to build state highways of interest for oil exploration or development programs with an equal share coming from the state and federal highway budgets. It has now been agreed to raise the PEMEX share to one half of the total, with the other half being split equally between the state and federal governments. However, this will not lighten the burden imposed on state finances by investments undertaken for PEMEX's sole benefit, since oil development activities--and the complementary highway infra- structure--are being stepped up substantially. Financing highway invest- ments fully with PEMEX funds when PEMEX is the sole or major beneficiary (as in the case of the access road to Reforma from Villahermosa for instance) would lead to a greater relief of the state's finances and the "internaliza- tion" of development infrastructure costs in PEMEX. 91. Outside of the specific cases in para 96 above, infrastructure expansion should be maintained at the bottom of the priority list. This is especially true for rural roads except in those instances when road building is associated with development programs (e.g. PIDER) leading to productivity improvements and economic, as opposed to social, benefits.  - 33 - Opening too many new areas with poor access to the existing network is a costly proposition compared to the economic benefits one can reasonably expect in return and a prohibitively expensive one if achieved with postponement of critical investments in the Villahermosa-Cardenas area. 92. Finally, a review of the investment priorities in the highway field would not be complete without a mention of the bridge on the Coatzacoalcos river on the road Villahermosa-Coatzacoalcos. Even though the bridge is located in the State of Veracruz, a review of the options for its necessary expansion is called for by the critical role played by reliable communications between Tabasco and the Coatzacoalcos-Minatitlan area. The existing two-lane movable bridge is one of the weak links in the primary highway system of Mexico: it is the only bridge above the Coatzacoalcos river in Veracruz and traffic (now 10,000 vehicles per day) is rapidly approaching maximum capacity. Furthermore, the facility is located upstream of the Coatzacoalcos port but downstream from the Minatitlan oil refinery and is insufficiently protected against collisions by medium size tankers. Traffic delays are already substantial and impressive bottlenecks appear every time the bridge is opened to let tankers through. Traffic will double in another five years because of the continued economic growth in Tabasco and the coming on stream of petrochemical and other plants now being built in the industrial complex across the river from Coatzacoalcos. Thus, in less than five years the existing bridge will definitely be a bottleneck; if the facility is put out of commission because of a tanker collison, huge detours across Oaxaca and Chiapas will be necessary to reach Tabasco by land. SAHOP has studied the possibility of building a new bridge and some 30 km of connecting roads on both sides of the river; the bridge would be in prestressed concrete (because of the high sulphur content in the atmosphere) with a clearance of 35 meters above the water level and a 200 meters span, one of the largest in the world. It is estimated to cost about US$50 million yet its awesome design presents inherent construction risks. Because the new alignment is distant from the existing traffic flows, it is to be expected that a sizeable portion of total traffic will not be diverted from the existing bridge, which reduces considerably the economic merits of SAHOP's proposal. The alternative of building a second bridge parallel to the existing one should cost only one third as much and reduce congestion to an adequate level for the coming 10-15 years; at that point, building a new bridge could be reconsidered, depending on development. The merits of this alternative appear to be such as to justify a more thorough investigation than has been the case up to now. Protection of the Environment I/ 93. The principal sources of industrial contamination in Tabasco are sugar plants and PEMEX. The present state of environmental deterioration in Tabasco is not alarming except for a few limited but critical areas. One of them is the river San Felipe, whose waters are so poor in oxygen that 1/ For a more detailed discussion of this aspect, see Annex I.  - 34 - it will soon endanger Tabasco's main oyster beds located in laguna Machuna where the river San Felipe flows in. Another area is the river Grijalva (or Mezcalapa) which shows alarmingly low levels of oxygen at some points of its course, mainly upstream from Villahermosa. Considering that two thirds of Villahermosa's water supply comes from an intake at the Grijalva river, the situation is rather critical. This situation can only worsen after the planned implantation of sugar and petrochemical industries along the river. A new sugar plant, of a capacity equivalent to the total sugar capacity already installed in Tabasco, is currently under construction in the Municipality of Huimanguillo. It will discharge its waste waters in Grijalva. Tabasco first petrochemical plant to produce monomers (ethene, butene and the like) from gas, will probably be located on the Grijalva river at Luis Gil Perez, some 20 kms upstream from Villahermosa. 94. This is however, the part of Grijalva which has the smallest volume of water since the river forks into one main stream, called Rio Carrizal, and a smaller stream which keeps the name of Grijalva (Mezcalapa) some 80 kms upstream from Villahermosa. Therefore, the exposure of Villahermosa's primary source of water is very high. In this specific case, part of the solution could be to change either the plant site or the river intake. But in general, preventive steps should be taken in view of the intensified activities of PEMEX in the state: development of oil fields and program of secondary recovery. The latter consists in forcing oil out of the reservoir rock by direct displacement with another fluid: the fluid chosen by PEMEX in Tabasco is water. The implementation of water-oil separation processes will then become a first priority; otherwise, water contamination will reach unacceptable proportions. 95. There is a rather fair knowledge available at present both on the level and localization of the pollution created by Tabasco's industrial develop- ment owing to the many studies undertaken by or at the request of govern- mental institutions in charge of environmental protection. Nevertheless, the evaluation of the degree of degradation of the state's natural resources has remained so far highly qualitative. The same holds true for the few references made in these studies to ecological costs (wetlands life), and to economical costs, (most of the oyster and shrimp breeding grounds of Tabasco's coastal lagoons). 96. It is admittedly difficult to line up series of hard figures on the environmental cost of economic activities and even more so to set definite and definitive limits to the degradation of natural resources which can either be tolerated in view of a net economic benefit or be found unacceptable due to the detriment caused to other activities. In any case, natural resources are finite in quantity as well as in capacity for self-regeneration. Conse- quently, their usage calls for some sort of central and organized control. In that respect, the Mexican legislation has not been strikingly successful. The existing legislation on atmospheric pollutants is rather scanty. It has been quite elusive on the issue of petroleum industries' free emissions into the air. This gap is apparently going to be filled by a new legislation presently under preparation in Mexico. Legislation attempts at controlling aqueous pollutants have led so far to rather disconcerting results, probably  - 35 - due to a lack of central enforcement of the law and of concertation between the various institutions in charge of implementing it. 97. Yet, there is a matter of urgency in deciding which steps should be taken to protect Tabasco environment, when it is still time to do it. It has been suggested to the Governor of Tabasco to create a Water Contamina- tion Control District, a semi-public organization regrouping representatives of all major private and public entities of Tabasco, in order to control the common usage and respective degradation of natural resources. It is definitively a good starting point. Such an organization should, however, not be restricted to controlling aqueous effluents, but be extended to the discharge of flue gases as soon as the new Mexican legislation on air quality is issued. To function properly, it also needs quantitative informa- tion on the economic benefits of Tabasco's industrial development in relation to the economic costs of deteriorated natural resources. And more than anything else, it ought to receive full support from the government to be in a position to prevail over local disputes. Whatever the institutional setting will be, an action is to be started soon, otherwise it will barely catch up with the present rate of state and PEMEX planned industrial develop- ments. The resulting effect on the environment will probably be as dramatic as that of the neighboring State of Veracruz if not worse since most of Tabasco petrochemical activities will be implanted inlands and not on the coast like at Coatzacoalcos (Veracruz). In that case, Tabasco's natural resources will not be readily available for the post oil boom era of the state. Industry (a) Overview 98. In addition to the agricultural, fishing and seafood processing activities, a great potential for the industrial development of the State of Tabasco lies in the range of downstream petrochemical activities such as resins, plastics, paints, synthetic fibres, organic chemicals, various polymers, and insecticides. Another areas for growth are the supporting and auxiliary activities related to the production of oil and gas: a steel-forming plant to turn out sheets, profiles, rods, wire, and mesh; various construction materials (a cement plant is already under construc- tion); tools of various kinds (virtually all of which are now being brought in from the outside); sulphuric acid (based on the local avail- ability of sulphur obtained from the gas-sweetening operations) 1/; machinery and equipment and replacement parts (from nuts and bolts and valves to pumps and compressors); plastic molding operations producing articles for use in the home, agriculture, fishing and other marine opera- tions; workshops including soldering, welding, turning, grinding, forging, etc. 99. Much will depend on the scope, composition and destination of the products of the petrochemical complex. Although we have little informa- l/ PEMEX's requirements are seen as rising from 40,000 tons in 1978 to 90,000 tons in 1979 and to 125,000 tons in 1982.  - 36 - tion on the matter (beyond its probable location at Luis Gil Perez), the important thing is to know what feedstocks will be issuing from the Tabasco petrochemical complex and what downstream products will be derived from them. If the decision is that the Tabasco petrochemical complex will be a mere "annex" of the Coatzacoalcos/Pajaritos/Minatitlan complex and that it will be little more than a raw materials supplier, then obviously little can be expected from it. But if the decision is something more than that, then some or much benefit can flow from it. 100. The current indications are that in any case PEMEX's expenditures in Tabasco, will lead to some development of petrochemical activities, in addition to a number of supporting activities. PEMEX's projected total investments for the 1977-1982 sexenio in Tabasco are Mex$ 60,000 million. In the year 1977, Mex$ 4,076 million were expended in the drilling of wells and in the construction of facilities for the extraction and transport of oil and gas in the state. In 1978, the authorized expenditure in the state was about Mex$ 12 billion of which 35 percent was destined for the drilling of wells, 40 percent for processing facilities, 22 percent for the construc- tion of petrochemical installations, and 3 percent for works of service and social utility. By the end of 1978, crude oil production was raised to 1,000,000 bbl/d compared to 754,000 bbl/d at the end of 1977, and natural gas production rose to 1,649 million CFD from 924 million CFD in the same period. This required the construction of collection mains, compressor stations, and gas pipelines for the recovery of liquids in Cactus, La Venta, and not to be overlooked is the fact that the Tabasco leg of the National Gas Trunkline System will have been built. In Dos Bocas, near Paraiso, a service and supply port will be built to support the drilling and production activities in the Gulf of Campeche. Besides transport equipment and storage facilities, the port will have a monoboya or floating deck for loading ships up to 250,000 tons of dead weight for handling the crude oil and other petroleum products to be exported from the plants and installations of Tabasco and Chiapas. In Cardenas, there will be installed a storage terminal with 22 tanks of 500,000 barrels each from which crude oil will be exported from the present port at Pajaritos and from Dos Bocas. For the marketing of future quantities of distilled and petrochemical products in the region, a storage and distribution plant will also be built in Villahermosa (Tables 3, 4, 5 and Annexes 2, 3). 101. Looking further ahead, Tabasco's rich energy base, not only in oil and gas, but also in the production of electrical energy, can be the basis for the location of industries which require relatively large quantities of this form of energy. According to the Federal Commission on Electricity, Tabasco is at the top of the list among the Mexican States in its potential to produce electrical energy. Presently, the hydro-electrical installations at Malpaso and at La Angostura (about 40 kilometers from Villahermosa) have a joint capacity of 2.0 million kw, and it is projected to add another 2.0 million kw at two other sites within a radius of 50 kilometers or so of Villahermosa during this administration, which would bring the state's capacity to almost 20 percent of that of the nation. The commission's long-term projections include the quintupling of the generation of electrical energy from the Grijalva and Usumacinta Rivers watersheds from 5,000 million  - 37 - kwh to 25,000 kwh over the next 20 years. In Mexico, the principal branches of industry in the consumption of electrical energy are: chemicals, textiles, cement, steel, paper and pulp, aluminum refining, and mining- metallurgical. In 1973, these consumed 41 percent of the total in the industrial sector. Hardly any of these industries are located in the state at this time. In coming years, this situation can change as increasing percentages of private and public sector investments are placed outside of the three main metropolitan areas in accordance with the National Urban/ National Industrial Development plans and when the comparative advantages of locating near abundant and advantageously priced energy sources become increasingly evident. 1/ Furthermore, the availability of relatively low-cost electricity and natural gas (source of hydrogen and sulphur) puts the State of Tabasco among the nation's favored locations for an ammonia plant. Indeed, the possibilities for increasing substantially the state's -- and the nation's -- use of fertilizer on its farms open up new vistas for the agricultural sector (see also Annex 11). (b) Implications for the State of Tabasco of the National Industrial and Urban Plans 102. The National Industrial Development Plan (March 1979) names the industrial activities which have priority for the periods 1979-1982 and 1983-1990. The list is subdivided into two groups. In category 1 are agroindustries and the capital goods industries. The highest incentives are reserved for these industries. There is a 20 percent credit on the value of the investment 2/ and a 20 percent credit on the sum of the wages paid out resulting from the additional employment attributable to the new investment. 3/ These incentives apply wherever the investment takes place within the national territory. In Category 2 are selected groups of durable and nondurable consumer goods, intermediate products, and a miscellaneous list. The highest incentive in this category is reserved for those industries which are established in Zone I. These consist of a 15 percent credit on the value of the investment and a 20 percent credit on wages and salaries as explained above. In Zone II, the allowed credits for investment and employment are 10 percent and 20 percent, respectively. In Zone III, no credits are allowed for the subzone of "controlled growth" (the Federal District). For the subzone of "consolidation" (the outskirts of the Federal District), the credits are 20 percent for investment and employment for industries in Category 1, but they are restricted to plant expansions. 1/ According to the Instituto Mexicano del Petroleo, the average annual projected demand for energy for the period 1974-1985 is: hydrocarbons 7.0 percent, electricity 12.1 percent, coal and coke 9.2 percent, averaging out to 7.5 percent for all sources. 2/ The credit may be used on any taxes due to the Federal Government which do not have an assigned use. 3/ The credit is calculated against the annual minimum salary of the economic zone in which the plant is located multiplied by the number of new posts created directly by the investment or by the creation of additional shifts according to the given case. The credit is limited to two successive years.  - 38 - For industries in Category 2, the credits are 10 percent and 20 percent, respectively, limited to cases of plant expansion. 103. The State of Tabasco fares well within the context of the regional and industrial priorities. In respect to regional priority, the western part of the state is favorably situated in that it falls in the category of Zone I-B with incentives only somewhat less than those granted to the four industrial ports. Of the 16 municipios in the state, 7 of them are included in the preferential incentives of Zone I-B, and this includes the State's main cities of Villahermosa, Cardenas, Huimanguillo, and Cunduacan. It also includes the port city of Dos Bocas (now in construction). From the stand- point of industrial priority, it also fares well in that agroindustries fall into Category I. Local industries such as the processing of copra, coffee, cacao, cattle, poultry, rice, sugar, and fruits and vegetables are included. Location and industrial incentives thus reinforce each other. Incentives for small and medium industry, for purchasing capital goods manufactured in the country, and for incremental increases of the work force apply in Tabasco as in other parts of the country. Small industry receives a 25 percent credit on its investment throughout the Federation except for Zone III-A (The Federal District). The purchase of capital goods nationally produced allows a 5 percent credit throughout the republic. And the generation of added shifts in industrial employment allows a 20 percent credit against the added payroll except in the Federal District. 104. Still another benefit for Tabasco is the Federal directive to all ministries to give priority in their planning to the priority regions. Federal public investments authorized for the State of Tabasco, for example, for the year 1979 are Mex$ 3,000 million, well above that of the preceding year. These do not include the expenditures projected for PEMEX which reach about Mex$ 12 billion, double of that of the preceding year. 105. What remains uncertain at this writing are the prospects of the 16 municipios not included in Zone I-B--those which are located mainly in the eastern part of the state, and whose main industry is livestock and agriculture. Presumably, their needs will be taken care of under the agri- culture and rural development programs of Plan Tabasco including the PIDER programs and the credit programs carried in the convenio with the private sector. On the other hand, this may not be enough, and it may be worthwhile to consider the possibility of identifying one, two or more market towns (possibly Balancan-Tenosique or Emiliano Zapata) for agroindustrial development and as subregional supply and service centers. The municipios approved for this role by the state and the federal government would be placed in Zone II, and fiscal incentives would also be available for firms establishing themselves in these areas. 106. In the light of the explicit priorities and targets, and of the accompanying incentives, Tabasco should fare rather well. Tabasco's capabilities already rank high in the nation with respect to products of animal origin (livestock and seafood), and few will question that its potential is two to three times its best recent annual production. The Federal-State-Private Sector CONVENIO contains a number of agroindustrial projects which will become beneficiaries of the incentives accorded to  - 39 - this priority industry. Not to be overlooked is the inclusion of cellulose where stands of timber in the southern and eastern parts of the State of Tabasco can be processed under the incentives program. 107. While the production of capital goods in what has been a pre- eminently agricultural state may appear to be an exaggerated possibility at the present time, it is not at all to be excluded from consideration; and not least because the estimated demand is high (two and three times that in the agroindustrial sector). To be sure, the advantage is now all with the in- dustries in the three metropolitan centers of Mexico City, Monterrey, and Guadalajara. Nevertheless, the soon-to-be established Tabascan petrochemical complex will undoubtedly look favorably on the factors of proximity and industrial relatedness where local suppliers are concerned. Intermediate goods, including those of petrochemical materials, fall into Category 2. In Zone I, the fiscal credit is 15 percent, the highest in geographical terms. Thus, the Tabascan municipalities so included will enjoy the highest incen- tives applicable to Category 1 and 2 among the industrial products. (c) The Agreement (Convenio) with the Private Sector 108. The Convenio represents a significant effort on the part of the private sector to establish a solid base of projects for the Plan Tabasco. Eighty three projects are listed with an overall value of Mex$ 8,563 million. A number of positive features may be noted. There is a varied representa- tion of projects. Among the agricultural and agroindustrial projects are: credits for increasing the number of subloans to farmers to increase the cattle population and for increasing productivity, 2 coconut processing plants, 5 cacao fermenteries, 3 chicken-processing operations, a slaughter- house and meat-freezing operation. Construction materials include cement, bricks, plaster, and concrete-mixing. Some of the manufacturing products are directly related to serving the oil and gas industry: parts for drilling rigs, steel cables, diesel pumps, industrial gases, and a machine shop and welding operation. Other manufactured products seem to reflect the spreading perception of western Tabasco's increasing importance as an urban/regional service center, such as home and office furniture, paints, shoes, retreading of tires, etc. Also included are 8 hotels to serve the increasing business and tourist traffic and housing for low-income and middle-income families. 109. Other observations are warranted. The largest project is the cement plant (Cementos Apasco) which will have a capacity of 2,200 tons/ day. It will cost Mex$ 2,300 million and will hire 400 persons. This will make possible other secondary industries, a couple of which are already included such as the asbestos-cement plant, 2 rock-crushing plants, and 2 premixed concrete plants. Clearly, the availability of cement in the vicinity will have a favorable bearing on the construction of industrial plants, roads, culverts, bridges, housing in general, and the rest of it. Petrochemical projects in the list are very few, but this is not a matter of surprise in the light of the fact that the Tabasco petrochemical complex has not yet been built. But this clearly will be a matter of closer attention--and promotion--to the extent that the petrochemical complex becomes a reality. We have already noted that several plants have been  - 40 - established in anticipation of the future needs of the petrochemical industry (polyethylene bags, paints, etc.) The credits pledged by the private banks will require some clarification. The purpose of the credit is most praise- worthy--to improve the capacity of the cattle industry--but it is not at all clear what is the source of the funds. To what extent are these credits from Government trust funds, on the one hand, and from private banks' own resources, on the other? 110. From this point on, monitoring the implementation of the Convenio and a continuing process of promotion take on increasing importance. If one subtracts the value of the cement plant (Mex$ 2,300 million) and the agricultural credits (Mex$ 1,450 million), and the sum of the proposed hotels (Mex$ 1,798 million), the remainder is approximately Mex$ 3,000 million or about a third of the total for various agroindustrial and industrial projects. These are mainly small to medium industries, and undoubtedly they will need technical and financial assistance. What is urgently needed is a strengthen- ing of the capacity of the local authorities to assist these firms (and others to come) in the coming months. An immediate task would be the elimination of the confusion that exists with respect to the precise meaning of the new decrees on decentralization and industrial incentives, including entitle- ment to state and municipal benefits when they utilized those of the Federal Government. Meanwhile, it can be said that the Convenio is a good beginning, and hopefully it will serve as a prelude to further additions in the course of time. (d) Recommendations 111. Consideration should be given, in any future updating of the Plan Tabasco, to the possibility of including eastern municipios in Zone II. (Incentives are also offered to industry locating in Zone II, although these are less than those in Zone I.) This would complement the situation in western Tabasco where 7 municipios in Zone I-B provide somewhat higher incentives. It would also provide an opportunity for urban centers in rural areas ("market towns") to attract new plants (including agroindustrial plants which have the highest incentives regardless of location). Among them might be the urban centers of Balancan, Tenosique, and Emiliano Zapata. 112. The future relationship of the industrial port of Coatzacoalcos (Veracruz) and the petrochemical complex to be built at Luis Gil Perez (only a few kilometers from Villahermosa) needs elucidation--from the standpoint of technological complementarily (if any), incentives, and urban/industrial development. In the industrial port area of Coatzacoalcos are the petro- chemical complexes of Pajaritos and La Cangrejera, the refinery at Minatitlan, and a number of downstream plants related to the output of these plants. What sort of downstream plants may be expected from the petrochemical plants in Tabasco? Will the Veracruz and Tabasco complexes be complementary and of mutual benefit or self-contained and mutually exclusive? What will be the probable effect of the higher incentives in Zone I-A as compared to Zone I-B? Are there any implications in this for the urban/industrial growth of Villahermosa and western Tabasco? In light of this, what should be Tabasco's promotional approach?  - 41 - 113. Tabasco's requirements for skilled labor--short term, medium term, and by type of industry--need to be defined. The state should make a rigorous analysis of the problem and establish or secure appropriate vocational training programs that would incorporate the needs not only of the industrial sector but also of other sectors. Many firms, including PEMEX, will undoubtedly use their own training programs, but very likely this will not be sufficient. A tally needs to be taken of the relative contribution of the public and private sectors in meeting specific needs. The efforts should include the requirements in the rural hinterland as well as in the urban areas. 114. Small and medium industry will need technical and financial assistance on a constant and steady basis from the well-known public and private sectors organizations dedicated to this task (NAFINSA, FOGAIN, FIDEIN, FONEP, the local trade associations, and private banks) and from COPRODET, the coordinating body. This assistance cannot be taken for granted. 115. The incentives offered under the National Urban/National Industrial Development Plans should be given the widest publicity. This should include clarification as to the availability of state and local incentives (if any), once the federal incentives are accepted. Agriculture 116. The overall concepts for the short-, medium- and long-term strate- gies as outlined in the agriculture development plan are essentially to: (i) strengthen production support activities for present crop and livestock areas including the completion and conservation of civil works; (ii) promote a combined crop-livestock approach in new areas of development adapted to local ecology and needs for hydraulic infrastructure; (iii) bring into produc- tion presently marginal areas through low cost civil works which can be com- pleted rapidly; (iv) plan for multiple uses in design of hydraulic works, especially flood control combined with power generation; and (v) carry out integrated development by stages which will permit minimizing risks of failure of water control projects and reduce the maturation periods of the projects. 117. The proposed strategy implies to: (a) improve yields on present crop and grazing area, through an inte- grated agro-livestock plan which will be based principally on extension activity; (b) open up new lands to intensive crop production and grazing begin- ning with those which have only minor drainage problems but low yields; nevertheless, infrastructure would include surface drainage, flood control, possibly supplementary irrigation, and road building.. Supplementary irriga- tion needed in certain areas would be provided through the use of low lift pumps located in the drainage system to provide water in brief periods of drought;  - 42 - (c) establish a method for local planning and implementation of agro- livestock development based on expanding and strengthening the Bank-funded Program for Integrated Rural Development of the Humid Tropics. The PRODERITH approach consists of development by stages to reduce the risk of failure and assure the maturation of projects in the shortest possible time through a process of learning and rapid expansion based on experience gained. Thus the pilot projects: (i) would be large enough to include all the components so that they may sbrve as bases for modular expansion; and (ii) would combine from the beginning the infrastructure work and the technological changes which are indispensable for bringing the project area into high level production. This permits a rapid increase in production at the same time that the farmer assimilates the changes necessary into his productive organization; (d) for the intermediate and long-term, initiate planning now for integral development of the water resources based largely on civil works combining the generation of electrical power with flood control. 118. The orientation of the Tabasco crop and livestock plan is to work first with the most productive soils and those crops which are high consumers of water but can be produced without irrigation. In oil crops this would include industrial scale production of perennials such as African oil palm and coconuts. It would call for installing new sugar plantations and mills in phase with projected market demand. In cereals it would mean promoting rice, under irrigation, rainfed and flooded conditions. In cacao, this would require improved technology and new plantings to produce the maximum that can be absorbed by the national market and for export. In livestock, better pastures and production technology would make possible higher yields of meat and milk without expanding acreage. 119. There is great potential for increasing productivity of most per- ennial and annual crops and livestock production based on existing information and experience in the State. This is well recognized by both state and federal experts, all of whom point to improved technical services (both quali- tative and quantitative) as the basic element in any future realization of this potential. Given these services, which also imply organization and education of producers, plus the necessary physical inputs and credit/marketing services, we have little doubt that the State of Tabasco would be able to produce all the basic foodstuffs needed to meet the demands of its rapidly increasing population. However, the comparative advantage that the state has for production of the perennial tropical crops and livestock is such that the returns to the State's producers from these efforts will always over- shadow those from basic crops, for which, except perhaps for rice, the state does not have this comparative advantage. As already mentioned, the issue of the adequate supply of basic foodstuffs in the urban centers of the state has a direct bearing on the choice of the most appropriate strategy. Should the state authorities fail to bring about the organizational changes required to solve this crucial problem (through a major overhaul of the import-cum- distribution system), it will become necessary to increase the scope of basic crops in the agricultural strategy of the state.  - 43 - 120. Given that the basic priorities in the Tabasco Agriculture Plan are sound, we consider that for successful implementation of the plan the follow- ing points need to be taken into account: (a) Individual projects need to be more carefully appraised taking into account all costs (direct and indirect). These costs should be phased over the project life and should be detailed in terms of manpower, infra- structure, credit, inputs and marketing/processing (where appropriate). Further, cost/benefit projections in addition to quantification of social and other benefits must be calculated and priority for project execution allocated mainly on the basis of these analyses. (b) With reference to (a) we consider that the present approach of the Grijalva Commission in its area cum regional agricultural development programs is too strongly biased to "gold plated" infrastructure works many of which may not be necessary or at least suffer from being over-designed and thus too expensive. In our opinion, both the Chontalpa and the Balancan programs have been over-designed with respect to infrastructure, although we acknowledge that the agriculture/livestock development has been satis- factory. The annual investment in agriculture proposed in the Tabasco Plan (US$100 million by 1980, or about US$500 per ha on existing arable land) is excessive for the existing availability of crop land, and the risk of over- investing on non-essential or inefficient infrastructure work is high. However, the conversion of present grazing areas into crop production could allow the efficient absorption planned investment. This would be a reasonable strategy, particularly in some regions like the Huimanguillo area near the border with Chiapas, where extremely valuable potential crop land is used for cattle grazing. (c) Future planning efforts for agriculture/livestock/forestry devel- opment in Tabasco should take full advantage of the new structure provided by SARH through its General Directorate for Rainfed Districts. (d) Although it is a national problem of very difficult political solution, it should be mentioned that the present land tenure system, particu- larly for private land owners, which distinguishes between livestock and crop producing areas is in the mission's opinion a major bottleneck in land utiliza- tion. This applies particularly to those areas designated as being suited for livestock, as the one mentioned in (b). Many of these could be cropped and/or exploited under a mixed farming system. However, livestock producers are not going to be induced to diversify production activities and grow crops commer- cially, under the present system which immediately puts their ownership in jec.pardy of expropriation under the Agrarian Reform Law. Institutional and Organizational Aspects 121. It is not surprising that problems at the institutional and organizational level have been in the recent past cause of inefficiencies which in turn have been magnified by the unbalancing effects of the oil boom. The type of problems referred to here is well exemplified by what has been happening in the area of housing urban services and public utili- ties. The responsibility in this sector is divided among a wide number  - 44 - of public, semipublic and private agencies, both federal and state agencies, including PEMEX and without considering federal highways, electric networks, schools and other facilities which are the responsibility of the agencies. The multitude of agencies involved has led to considerable coordination difficiencies. Furthermore, the responsibility for operating and maintain- ing the investments has also been divided among various federal, state and sometimes municipal institutions. This situation, which is characteristic of the investment process in other sectors, has to be substantially improved, otherwise the strategy outlined in the previous section will not have many chances to be carried out. 122. The solution to these problems implies modifying substantially time honored practices of independent and centralized actions by the many agencies and technical ministries which are functionally responsible for the various sectors and subsectors. The orientation of the present admin- istration towards a more decentralized system of government would seem to provide the ideal conceptual and institutional basis for strengthening the role of the state level coordinating body, i.e., the COPRODET in which the technical federal agencies are very adequately represented while the delegate of the Ministry of Programming and Budgeting, who works closely with the Governor in Tabasco, exerts a very much needed coordinating role. It is clear that the success of the coordinating effort at the state level is very much dependent upon the success of such effort at the national level, where the Ministry of Programming and Budgeting is engaged in the difficult task of not only maintaining the overall level of public expenditure within the nationally established financial ceiling but also of allocating the funds among the various sectors and the different states. The strengthening of the coordination effort at the state level certainly meets the demand of the state authorities. At the same time, it increases substantially their burden and responsibility for an efficient implementation of the various programs. This additional effort should not be underestimated since ineffi- ciencies can come not only from inadequate coordination mechanism but also from coordination "indigestion." 123. The preceding discussion concerned the implementation of programs which have already been agreed upon by the Federal Government. However, as mentioned earlier, the state has direct control only over a fraction of total public investment within the state itself, and in the case of Tabasco, when one considers investment by PEMEX this fraction becomes extremely small. This implies on the part of the state a very substantial bargaining effort with the federal authorities to determine the level of federal funds allo- cated to the state. As in the recent two years, the State of Tabasco is likely to increase its request for funds quite substantially in order to satisfy the increasing demand for public goods resulting from the expected rapid increase in population and economic activity. If one considers that the share of Tabasco in federal public expenditure is currently well below 2 percent, we are here in a situation in which any increase in federal alloca- tions is more likely to depend from the absorptive capacity of the state than from any Tabasco specific ceiling dictated by the availability of funds at the national level. If this interpretation is accepted, the burden of present- ing well thought out programs remains essentially with the state. But this  - 45 - means that the state will be required to make all efforts, through its coor- dinating and programming services, to stimulate the interested ministries and agencies into formulating such programs. There is here a risk for the State of Tabasco, as for any other state, namely that funds are obtained on an appropriation basis but then the level of authorized expenditure may fall short drastically because of the poor preparation stage of the specific projects on which the funds are actually spent. In other words, state authorities should not overestimate the results of their bargaining effort when measured in terms of obtained "programmed allocations" by the federal Government. 124. The federal Government is not the only "partner" which the State of Tabasco has to deal with in its development effort. PEMEX, the oil company, is another and a formidable one in terms of its weight in the social and economic structure of the state, not to mention its contribution to the state budget through the participation of the latter in the oil production tax (e.g., for 1979, the share in the oil tax is equal to almost one half of a total state budget expenditure of 2.5 billion). The relations between the state and PEMEX raise two basic issues. The first, already mentioned, is for the state to receive adequate and timely information on PEMEX's programs which heavily affect the development of the state economy. This is not an area where procedures can be established: It is left essentially to the goodwill--spontaneous or stimulated--of PEMEX but there is no doubt that PEMEX should consider it a duty to keep the state authorities informed, as far in advance as possible, of its planned activities. The second issue is that of compensation by PEMEX, or rather, of participation of PEMEX in the costs of investment (roads, schools, health facilities) which are directly or indirectly linked to the oil extraction activity. Early this year, an agreement was signed between PEMEX and the state concerning the sharing in the costs of roads construction specifically related to PEMEX's heavy transportation activities. It is a good example of a satisfactory solution for similar problems which might arise in the future. A related issue, is that of the protection of the environment against deteriorations provoked by the oil activity. Observance of adequate standards by PEMEX is not easy to obtain and will require quite some doing by both the state and the federal authorities. 125. There is also a significant role to be played by the state, which has institutional implications, namely the reduction of intrastate disparities among the various municipalities considering that the oil boom is affecting a limited number of the existing urban centers while many of the others have a much weaker economic basis. The fact that all municipalities sit around the COPRODET round table is not a guarantee that all demands are met on an equi- table basis especially in view of the very pressing problems which the state must solve in the faster growing centers. Furthermore, it is very likely that the weaker municipalities are also the least equipped to formulate on their own well prepared programs which serve as a basis for fund allocation. The state will have to make an additional effort in providing the less favored municipalities with the required technical asistance and funds to prevent a disruptive degradation of some subregions within the state.  - 46 - 126. There is finally the aspect of the relations between the state and the private sector. This area requires first of all a strengthening of the state agencies responsible for the promotion of private investment. They should not assume an exceedingly bureaucratic approach to their task, as it happens in other countries, providing, in the best of circumstances, some assistance in moving within the intricacies of the incentive and "settle- ment" legislation. Secondly, state authorities should be aware of the fact that private investors are obviously profit oriented and in search of compara- tive advantages in terms of location. A serious assessment of these aspects within a broader regional context is a precondition for a flexible and aggres- sive policy of promotion of private investment. At the same time, as again shown by the experience in other countries, the state authorities will have to resist the temptation, under the "pressure" of private investors, to assume costs, especially in terms of infrastructure requirements, which are out of scale with respect to the effective needs of the private sector. By way of example, one could mention the water supply infrastructure for industrial purposes, where one can often observe large investments which are only partially utilized for a number of years and which were built on the basis of inflated demand forecasts by private investors. The signature of the frame agreement mentioned in para. 115 between the state and a group of private investors for a massive investment effort over the coming four years is certainly a very interesting and promising step, but should not leave the state authorities with the idea that the medium-term future of Tabasco private investment is already granted and that it will not impose a burden on the state finances. The Required Investment Effort 127. The conclusions from the discussion of the broad outline of the appropriate development strategy and of the sector specific issues can be summarized as follows in terms of priority investment decisions: as far as the productive sectors are concerned, the anticipated private investment in industry (some Mex$ 9 billion between 1979 and 1982, Table 15) should be considered a minimum requirement in order to modernize the economy and ensure an adequate increase in the employment level. Investment in tropical agricul- ture should be carefully revised to avoid excess demand on existing resources for capital formation which might remain idle for a number of years. Great emphasis should be put on rainfed agriculture and, more generally, on exten- sion services, as well as on rural development programs. Fisheries should also receive substantial support in view of the potential of the area and the high employment content of the sector and measures should be taken to prevent contamination effects of industrial activities. Tourism should not be neglected but creation of excess capacity should be avoided by not encouraging the construction of too many luxury hotels which might be forced to deal with tour operators at cut-rates. As to the basic infrastructure, a sustained program of low cost housing and related urban infrastructure is required within a policy of urban settlements which does not neglect the rural areas by pushing the service centers approach. In transport the upgrading of the road to Coatzacoalcos with the modernization of the Cardenas-Villahermosa section is a priority intervention; maintenance of existing network is also crucial.  - 47 - 128. How does the investment program put forward in the Plan Tabasco fares with respect to the program outlined above? As mentioned earlier, the original formulation of the investment program under the Plan has been going through a revision process, the first major element of which was the inclusion in the investment program of the investment under frame agreement with the private sector. It should be stressed here once again that the apparent sluggishness of the revision process is to a large extent the result of the slow pace at the federal level, of the formulation of federal investment programs but also of the limited ability, at the state level, to come up with well thought out programs. For discussion purposes it is interesting to comment first on the investment program of the Tabasco's Plan in its original formulation. This will enable us to comment on its adequacy with respect to the accepted goals of the development strategy and to arrive, subsequently, to what we consider a more realistic program based on the economic and social requirements of the state. 129. In the original investment program under the Tabasco Plan, as shown in Table 15 and 16, investment in agriculture and fisheries is the single largest component if we exclude both oil extraction activities and petrochemicals. Irrigation accounts for almost 40 percent of investment in agriculture. If one looks more closely at the investment package for agriculture one finds that another 10 percent has ben allocated to the con- struction of an agricultural college, and about 13 percent to various sup- porting programs for which it is not always clear how much investment and how much current expenditure is involved. Fisheries account for 11 percent of the total. 130. As to the Urban and Housing Sector, more than 40 percent of the funds have been allocated to urban related infrastructure and more than 30 percent to housing. Finally, in Transport and Communications, the largest component (40 percent) is for main highways, followed by feeder roads (33 percent) and rural roads (18 percent). More than 80 percent of private investment is explained by the projects included in the convenio which in turn, as discussed above, include a substantive amount (20 percent) of hotel construction which might be excessive when compared with the real possibilities of this sector in the medium term. 131. A number of considerations call for a revision of the original investment program in the Tabasco Plan. These considerations refer to three main areas, namely, allocation of federal funds, implementation capacity at the state level and development strategy. On the basis of what has been happening since the mission first visited Tabasco, and going back to what was mentioned earlier in this report on the procedures followed in preparing the investment program, it is clear that by and large the federal component of the proposed investment program remains well above what the federal authorities are willing to allocate. It is also clear that any discus- sion on the amount of federal allocations for the outer years is not really possible since federal authorities are in a position to discuss only the next year program and, this too, well into the second half of the current year. Furthermore, the authorization for expenditure during the current years is also subject to mid-year revisions depending upon the overall budgetary policy of  - 48 - Table 15: Plan TABASCO - Investment Program 1979 - 1982 (million Mex$) PUBLIC INVESTMENT 26,710 Agriculture and Fisheries 12,740 Irrigation (4,516) Housing and Urban Infrastructure 5,749 of which Water and Sewerage (2,551) Housing (1,817) Transport and Communications 4,025 of which Red Troncal (1,609) Red Alimentadora (1,322) Red Rural (794) Education and Health 2,118 Others 816 Municipalities 1,500 PEMEX 61,000 of which Petrochemicals (16,000) Private Investment 10,752 Total 98,462 Table 16: Plan TABASCO - Structure of Investment Program (X) 1979 - 1982 Excluding Oil But Including Oil Including Petrochemicals PUBLIC INVESTMENT 27 51 Agriculture 13 24 Housing and Urban Infrastructure 6 11 Transport and Communications 4 8 Education and Health 2 4 Others 2 4 PRIVATE INVESTMENT 11 21 PEMEX 62 - Petrochemicals (16) 28 Total 100 100  - 49 - Table 17: TABASCO: Revised Investment Program (in 1979 million Mex$) 1979 - 1982 1979 1980 1981 1982 1970-82 PUBLIC IN'TSTMENT 4,300 4,750 5,350 5,100 20,213 - AGRICULTURE 1,300 1,500 1,70C 2,000 6,50O Forestry and Fisheries - Housing and. Urban Infr. 970 1,150 1,400 1,700 5,200 - Transport and Ccmm. 1,030 1,100 1,150 1,200 4,481 - Others 1/ 1,000 1,000 1,000 1,000 4,200 P4MEX 12,800 1600o 16, 000 .6,ooo ft,ooo - Petrochemicals 4,000 4,000 4,000 4,000 16,000 PRIVATE _INVS^EQINT 2,700 3,500 3,500 4,500 14,600 - Industry and Toarism 1,200 2,000 2,400 3,000 8,600 Housing 1,000 1,000 1,000 1,000 4,000 Agricultural Trade 500 500 500 500 2,000 TOTAL 19,800 24,250 25,150 26,400 95,740 1/ Includes Education, Health and public infrastructure for Industry, Tourism and Trade.  - 50 - the federal government. A second consideration relates to the implementation capacity for the specific projects included in the program and this is parti- cularly true of the agricultural sector in which the original program for 1979, not to mention the outer years, is still lagging behind schedule for lack of adequate project preparation as well as for lack of agreement with the various federal agencies on the specific nature of some of the programs. 132. Thirdly, as mentioned in the sector discussion, some of the largest investment in irrigation of tropical products areas are probably excessive, even if there were no implementation constraints, because the present land tenure system would not allow an efficient use of the invested capital. In order to test the adequacy of the investment program in agriculture some calculations have been made on the basis of the proposed investment program and taking into account reasonable assumptions on the growth rate of the major crops. These calculations have given ICOR's 1/ of 12 and 8 depending on the time lag adopted, clearly an index of very low or, if one wants to be optimistic, very deferred efficiency. 133. These considerations have led us to propose a somewhat different investment program for the 1979-1982 period which is indicated in Table 18. The figures indicated there should be considered much more an indication of the structure of an acceptable package than for the specific amounts indi- cated since any real attempt to forecast investment in Tabasco would be a shot in the dark. The main differences between the two investment scenarios are not so much in the total level of investment (95.7 billion against the original 98.4) but rather in its composition. While the investment alloca- tions for the basic infrastructure sectors have not changed substantially, public investment in agriculture has been cut by half at the advantage of a 40 percent increase in private investment. The reduction in public investment for agriculture would be in reality less drastic since the original Tabasco Plan probably included a portion of private investment financed by public financial institutions. In our scenario we allow an amount for private investment in this sector. As to private investment, in addition to agriculture, explicit allowance is made for private invest- ment in housing to complement the public effort in urban infrastructure. 134. As a purely illustrative exercise given the weak statistical base at the state level, some medium-term projections of the main macroeconomic aggregates have been made and are presented in Annex III. 1/ ICOR: Incremental capital-output ratio, calculated as the ratio of investment in a given year to the increase in output assumed to arise from that investment.  - 51 - Table 18: Structure of Proposed Investment Program 1979 - 1982 (Excluding Oil but Including Petrochemicals) Public Investment 40.0 Agriculture 13.0 Housing and Urban Infrastructure 10.0 Transport and Communications 9.6 Others 1/ 8.0 Petrochemicals 31.0 Private Investment 29.0 Industry 16.0 Other sectors 13.0 TOTAL 100.0 1/ Including education, health and support investment for the Industrial and Trade sectors. The Employment Picture 135. The discussion of the development strategy for Tabasco would not be complete without a discussion of its implications in terms of the employ- ment problem which is crucial for the social and economic development of the state. A first calculation for the 1979-1982 period assumes that the popula- tion for the state as a whole will increase at the same rate as between 1970 and 1977 (i.e. 4.6 percent). 136. For the six municipalities more affected by the oil (Cardenas, Centro, Comalcalco, Cunduacan, Huimanguillo and Macuspana) the assumed growth rate is that of the 1970-1977 period or of the state, whichever higher. Assuming that the activity rate remains at the 1978 level of 22 percent (a conservative estimate), the number of jobs to be created 1/ between now and 1982 would be 50,000, as shown in Table below: 1/ We are discussing here only the jobs necessary to absorb new additions to the labor force. Existing underemployment (i.e., people engaged in activities of very low productivity reflected in incomes below minimum standards) is not dealt with except to the extent that the primary sector is assumed to have no potential for job creation, all new investments resulting in higher productivity for existing jobs.  - 52 - Table 19: New Jobs Required (Low Variant) (Thousands) A. Municipality Population Population Active Population Assumed 1978 1982 1978 1982 Growth Rate Cardenas 125.6 158.0 27.9 35.1 5.9 Centro 287.2 380.8 63.8 84.5 7.3 Comalcalco 92.1 110.2 20.3 24.3 4.6 Cunduacan 57.7 70.0 12.8 15.5 4.6 Huimanguillo 97.1 116.9 21.6 25.9 4.6 Macuspana 89.3 109.3 19.8 24.3 4.6 Other 348.6 379.0 76.7 83.3 2.1 TABASCO 1,097.6 1,324.2 242.9 292.9 4.6 137. With the same population growth but assuming that the participation rises to the national average of 28 percent in the oil affected municipalities, the number of jobs to be created by 1982 would be 107,000, while it remains at its 1978 level (22.2 percent) in the remainder of the state. Table 20: New Jobs Required (High Variant) Active Population 1978 (Thousands) 1982 B. Cardenas 27.9 44.2 Centro 63.8 106.5 Comalcalco 20.3 30.8 Cunduacan 12.8 19.6 Huimanguillo 21.6 32.7 Macuspana 19.8 30.6 Other 76.7 86.2 TABASCO 242.9 350.6 138. These projections for 1990, assuming a population growth rate for the state of 3.7 percent and a participation rate of 30 percent in the five municipalities and 28 percent in the rest of the state indicate a number of new jobs to be created of about 176,000 between 1982 and 1990 (see Table 21). Table 21: Jobs to be Created (1982-1990) Population Annual Growth Active Population 1982 1990 Rate 1982 1990 Cardenas 158.0 216.2 4.0 44.2 64.9 Centro 380.8 584.4 5.5 106.5 175.3 Comalcalco 110.2 145.1 3.5 30.8 43.5 Cunduacan 70.0 92.2 3.5 19.6 27.7 Huimanguillo 116.9 153.9 3.5 32.7 46.2 Macuspana 109.3 143.9 3.5 30.6 43.2 Other 379.0 447.6 2.1 86.2 125.3 TABASCO 1,324.2 1,765.0 3.76 350.6 526.1  - 53 - 139. An estimate of job creation has been attempted only for 1982. The convenio between the private sector and the Government foresees the creation of about 6,000 jobs, in the secondary sector and some tertiary activities such as tourism. PEMEX activities will generate about 5,000 additional employment positions, while public investment and private activity will generate about 2,000 additional jobs in the construction sector. Existing evidence shows that between 2 or 3 employment positions are created in the state per every new PEMEX job. 1/ If a ratio of 2.5 is applied to the 13,000 jobs mentioned above, we get a total of about 45,000 jobs which can be created in 1979- 1982. This figure assumes that all investment planned in the convenio will actually take place during the period under study. Private investment not included in the convenio is not specifically accounted for, but it is assumed to be reflected in the 2.5 ratio. 140. The current distribution of employment and output by sector indi- cates that agriculture and primary activities have little potential for employment generation. In effect, the primary sector generates only about 24 percent of total value added, while it accounts for almost 50 percent of the employment (compared to 20 and 32 percent respectively for the secondary and tertiary sectors). Agricultural investment is not likely to create additional employment but rather it will increase the productivity of jobs already existing. The considerable potential for development of primary activities in the state cannot be denied but the solution to the employment problems does not lie only with the agricultural and related sectors. The flow of people from rural to urban areas will continue in the immediate future. The efforts planned regarding the increase of cultivated land, implementing improved technologies, rationalizing crop patterns, etc., will contribute to the alleviation of poverty and to increasing the income of those engaged in primary activities. 141. It would seem, from the above discussion, that the contemplated investment program for the 1979-1982 period should be adequate to absorb almost the entirety of the additional work force assuming that the low variant will materialize--the rather conservative assumption concerning the ability of the agricultural sector to create additional employment can be considered a safety valve of this scenario. It is implicit in this scenario which sees employment being generated essentially by private and oil sector investment (with an appropriate multiplier effect) that the ongoing public investment outside agriculture is basically preventing a fall in the existing employment level. It is also clear that should the high variant materialize, and therefore some additional 60,000 jobs be created in order to keep employment at its present level, a doubling of the investment by PEMEX and the private sector would be necessary to absorb it, which is totally unrealistic. 1/ This ratio includes "informal" activities such as street vending and other jobs where self-employment and traditional techniques prevail.  - 54 - 142. If the 176,000 new jobs indicated by the figures in Table 27 are to be created between 1982 and 1990 a significant private and public investment effort will have to be made. Only if the oil activity level indicated in our basic scenario prevails and if it is accompanied by the appropriate public investment in infrastructure will the employment problems of Tabasco remain reasonably under control.  - 55 - ANNEX I Page 1 ENVIRONMENTAL IMPACT OF TABASCO INDUSTRIAL ACTIVITIES I. BACKGROUND The State of Tabasco has a rather sensitive tropical ecological system. 1. Water bodies are numerous, abundant and form an intricate system of highly interconnected rivers, marshes, swamps and lagoons, which certainly increases trisks of dissemination of water contamination. Tabasco hydrological system counts with two main basins which are among the largest of Mexico--the eastern wasin of Coatzacoalco-Tonala, covering 15 percent of the state, or 3,600 km , and the western basin of Grijalva-Usumacinta which includes the two major rivers of Tabasco (Grijalva-Usumacinta), and covers the remaining 2 85 percent of the state or 21,000 km . Most of Tabasco rivers flow from the south, the mountainous part of the state, with high annual precipitations ranging from 3,500 mm to 4,000 mm, to the north where the annual level of precipitation can reach 2,000 mm. Consequently, Tabasco rivers have an important flow. This characteristic, coupled with the mild temperature, an annual average of 280 centigrade, explains the good self-regeneration capacity of the basins. 2. Tabasco presents the most original and compact sequence of ecosystems: tropical forests, savannas, freshwater herbaceous and shrub marshes, mangrove swamps and saltwater lagoons. From south to north, these systems are conti- guous on a fairly small stretch of land between the parallels 170 and 18030, and each one of them has its own balance, which makes the general ecological equilibrium of Tabasco rather delicate and certainly complicates the task of preserving it. 3. Finally, during the winter months, from October to March, Tabasco is frequently exposed to strong winds, "los Nortes," whose normal speed ranges from 80 to 100 km/hour. Since Tabasco can be considered as a flat tropical state, 80 percent of its land being between 0 meters and 200 meters above sea level, winds can dissipate industrial smokes faster but at the same time extend significantly their range of impact. "Los Nortes" come together with heavy rains which can easily bring into solution the most dangerous components of the industrial smokes, like the sulfhydric acids, and fix them into soils under the form of highly corrosive acides, one of them being sulfuric acid. II. STANDARDS 4. Mexican federal regulations have fixed tolerable levels of contamina- tion of water bodies according to their final uses. The 1977 revision of the  - 56 - ANNEX I Page 2 federal law deals with five categories of water bodies: DA - Reserves for drinking water which will be simply disinfected before urban use. DI - Reserves for drinking water which will be the object of a conventional treatment before urban use. DII - Water bodies appropriate for recreation (tourism) and adequate for aquatic life. DIII - Water used in agricultural and industrial activities only. DIV - Water used only by industries at the exception of those processing food. 5. Without going into the details of the regulations pertinent to each class of water bodies, one could summarize the Mexican standards of water quality as outlined in the table below: Table 1: Acceptable Maxima and Minima of Water Quality - Solids which can sediment Less than 1 milligram per liter - Dissolved oxygen More than 4 milligrams per liter - oil and grease Less than 70 milligrams per liter - Floating materials None which could be retained by a 3 mm mesh screen - Temperature 35 centigrade at most - PH 4.5 to 10.0 6. The existing legislation on air quality is rather scanty in that it only regulates the concentration of solids in suspension. This is of a limited interest to Tabasco, which only has a cement plant at present although there are plans for another one in the near future. The larger scale industrial development of Tabasco refers to agro- and petrochemical industries which have an atmospheric impact by far not confined to the sole emission of solids. A proposal of ECO-INGENIERIA, a consulting firm which studied the environmental impacts of Tabasco industries 1/ at the request of the Secretary of Agriculture 1/ "Estudio para la Evaluacion Inicial del Deterioro Ambiental del Estado de Tabasco y Establecimiento de un Programa Continuo de Monitoreo en dicha Entidad" - Enero de 1979.  - 57 - ANNEX I Page 3 and Hydrological Resources (SARH), is to fix the following limits on the concentration of chemicals in the emission of industrial smokes. Table 2: Proposed Atmospheric Standards Components Concentration Time Span (mg/m ) (Hr) - Carbon monoxide 30.000 24 - Sulfur oxides 0.365 24 - Nitrogen oxides 0.200 24 - Hydrocarbons 10.000 24 - Solids in suspension 0.150 24 7. There is no indication yet as to when the above regulations or others on the tolerable levels of chemicals in the air will be accepted. However, once the government agrees on appropriate standards, it will still have to implement some sort of procedures to force the industries to comply to them. This is a critical issue which keeps on being overlooked in the successive revisions of the Mexican environmental law. At present, the responsibility for implementing this law is shared by the Secretary of Health and the Secretary of Agriculture and Hydrological Resources (SARH); so far the duplication of the studies that they or other governmental institutions in charge of the protection of the environment have sponsored is more striking than the coor- dinated results of their joint field activities. In fact, their main task seems to have been the calculation and collection of fines from polluting entities. One must admit, however, that the law itself does not include any sort of measures to deter industries from contaminating or to encourage them to restore the environment. These sorts of measures could very well be fostered by regional governmental agencies like basins agencies, which would certainly be in a better position than the central government to balance the regional needs for economic development with the economic costs of local environmental resources. III. SOURCES 8. The discovery of major oil fields in the State of Tabasco and the neighboring State of Chiapas has given a definite thrust to the local economic activity. Both states account for 75 percent of the natural oil production this year. However, hasty industrial and urban developments have caused some already discernible damages to the environment. They were identified by an IBRD's mission which visited Mexico in July 1978. The mission also looked at the components of urban development relevant to the environment like water supply, sewage disposal, solid waste disposal, drainage and flood control. 1/ 1/ Refer to Mr. Eigen's report, dated August 11, 1978.  - 58 - ANNEX I Page 4 The present report will therefore deal with the direct effect Tabasco indus- trial activities have on the state natural resources. A. Traditional Industrial Activities Description 9. The industrial vocation of Tabasco originated in its traditional agricultural, cattle raising and fishing activities. It was and still is an industry of transformation centered on the manufacturing of food products and beverages. Most of the undertakings are small, except for a few plants either processing sugarcane and cacao or packing meat. For this reason, the Ecoplan, published by SAHOP in October 1978, reckons with 145 plants represented then about 50 percent of Tabasco's industrial investments, half of which being imparted to the sole sugar industry. SAHOP classifies them in four groups: - food industries: 78 plants - sugar industry: 6 plants - construction materials: 47 plants - others: 14 plants 10. The main centers of activities are listed below, in a decreasing order of importance (also, see Map 1): - Villahermosa - Cardenas - Huimanguillo - Tacotalpa - Jalapa - Comacalco - Paraiso - Frontera - Jonuta - Balacan - Tenosique 11. The distribution of activities by centers is best illustrated by Maps 2 and 3. Most transformation centers are located on the main production areas which actually surround an enclave of the State of Chiapas in Tabasco, apart from the fishing and fishcanning centers of Frontera in the north of the state as well as the agricultural centers of Balancan and Tenosique in the east. Nature of Ecological Impacts of the Traditional Industries According to SAHOP, the major environmental problem created by Tabasco traditional industries is water pollution. 12. Food and sugar industries are mainly contributing to decrease the level of oxygen dissolved in rivers or water bodies in the vicinity of their  - 59 - ANNEX I Page 5 sites by discharging effluents rich in organics and solids which generally are not biodegradable. Also, these effluents often have a temperature much higher than that of the receiving bodies. The difference of temperature hinders the natural water regeneration process by inactivating the bacterias which are naturally present in the water bodies and have the capacity of purifying water. 13. It is, however, the sugar industry which has, by far, the worst impact on Tabasco rivers. The reason for it is threefold. First, it owns the largest industrial units, more than one third of today's Tabasco indus- trial investments. Second, it consumes massive amounts of water, which of course multiplies the risk of contamination. Third, its polluting capacity, mainly through the discharge of organics, is high. In addition to the general characteristics mentioned above, sugar plants effluents contain also high quantities of sub-products of bagasse and honey which cannot crystalize, hence cannot be cleared from water by simple sedimentation. They require a more elaborate treatment through coagulation by chemicals or resins prior to sedimentation. 14. To our knowledge, sugar plants, if not other food transformation plants, are equipped to carry out this sort of waste water treatment. The mission visited the installations of one of the largest sugar plants of Tabasco, at Benito Juarez, in the industrial development of Plan Chontalpa (Municipality of Cardenas). But their degree of operating inefficiency is quite alarming, as it will be shown later in the report. It was impossible to establish whether the inefficiency was due to the undersizing of the installations, to their lack of maintenance, or to their being simply by- passed since they constitute a cumbersome and non-productive operation. 15. Among the two last groups of industries listed by SAHOP under con- struction materials and others, the impact quarries have on their environment is only worth mentioning. The rapidly increasing need for construction materials in the state has hastened the pace of quarry exploitation, result- ing in the destruction of the local vegetation and eventually in various degrees of ground erosion which modifies both the stability and fertility of soils to the extent of making any attempt to restore the land doomed to failure. Also, the preparation of the extracted materials ready for construc- tion is generally done near quarries' sites in elementary calcination plants emitting smokes containing high concentrations of solids in suspension and toxic gases like carbon monoxide and sulfur dioxide. Quarries are mainly located in the south (Tacotalpa) and in the east of the State (Tenosique). Both Tacotalpa and Tenosique are rather well developed agricultural areas producing corn, rice, beans and sugarcane. Localization and Evaluation of the Pollution Created by Traditional Industries 16. ECO-INGENIERIA was requested by SAHOP, in the course of 1978, to give an initial estimate of Tabasco level of pollution. The report they pub- lished in January 1979 confirms the high polluting capacity of sugar plants. In fact, some of the state rivers, which collect their industrial effluents, have reached such a low concentration in dissolved oxygen that the aquatic and  - 60 - ANNEX I Page 6 sub-aquatic life is already endangered. If their present degree of degradation deteriorates further the rivers will become soon unsuitable for urban water supply. The existing situation is summarized in the table below. Table 3: Environmental Impacts of Sugar Plants and Food Plants Location of Origin: Sugar Plants Endangered Rivers Potential Economic/Social Costs Santa Rosalia Santana Laguna Machona = fish + oyster beds Benito Juarez Naranjeno Laguna El Carmen = fish + oyster beds Industrial Plan Chontalpa San Felipe Laguna El Carmen = fish + oyster beds Huimanguillo Grijalva (or Mezcalapa) Villahermosa = urban development Dos Patrias - La Union) Tacotalpa Rich agriculture land + Progreso - Santa Rosa ) Villahermosa = urban development 17. Lagoons Machona and El Carmen are linked by another lagoon parallel to the coast, lagoon Pajonal. Water samples of the three lagoons were analyzed by ECO-INGENIERA. Their concentration in dissolved oxygen was rather low, some 5 milligrams per liter, yet above the minimum (4 milligrams per liter), recommended by the Mexican ambiental law. It would therefore not be so alarming if it were not for: (i) The size of the lagoons which is large enough to supposedly allow for a good self-regeneration capacity (water samples were apparently taken in the center of the lagoons). (ii) The state of the three main rivers draining most of the effluents of the industrial site of Plan Chontalpa into the lagoons. 18. The river Santana which flows in lagoon Machona, and rivers San Felipe and Naranjeno which flow in lagoon El Carmen, leave the Plan Chontalpa area with oxygen concentrations ranging from 1 milligram/liter to 0 milligram/ liter. 1/ Also, their regeneration capacity has become extremely low contrary to what is currently stated by the management of the industrial development of Plan Chontalpa. Thus, a few miles upstream the junction between rivers and 1/ The standard methods of measuring dissolved oxygen concentrations do not allow to detect any oxygen in the river Santana between Plan Chontalpa and the village Santuario, 10 kilometers downstream.  - 61 - ANNEX I Page 7 lagoons, measured oxygen concentrations are no higher than 1.5 milligram/liter. As a result, besides lowering the overall oxygen concentration in the lagoons, the flow of insufficiently oxygenated waters is bound to change their normal currents as well as cycles of exchange, modifying then the general ecological balance of the lagoons. The mission, however, was neither able to assess the dynamics of the lagoons' degradation process nor was it in a position to cost the damage in their breeding grounds for commercial fish (shrimp) and shells (oysters), which are directly impaired by the industrial activities of Plan Chontalpa. Both above-mentioned points are of critical importance since the lagoons have an economical as well as ecological significance and any water contamination process, once too far advanced, is rather difficult and costly to reverse. 19. The Tacotalpa and Grijalva rivers are somewhat less polluted although at some points the second one is very poor in oxygen, mainly in that part of its course called Mezcalapa, upstream Villahermosa. Anyway, a worsening of the present degradation of both rivers would rapidly have dramatic economic and social repercussions since Villahermosa, the main urban center of Tabasco, is located at the junction of Grijalva and Tacotalpa and two-thirds of Villahermosa's water supply comes from an intake at the Grijalva river. The Tacotalpa river has proven so far to have a flow abundant enough to drain the industrial effluents of food and sugar plants without registering too drastic a drop in oxygen concentration. It is not foreseen that the planned industrial- ization of Tabasco will further endanger the Tacotalpa river. 20. The same does not apply to the Grijalva river which will soon become the state river the most exposed to industrial contamination. It first flows across the industrial sites of Huimanguillo and Cardenas, that concentrate mostly in food, fruits and sugarcane transformation activities. The municipal- ity of Huimanguillo, which is an already important sugar producing center in Tabasco, will soon count with another sugar plant of a capacity equivalent to the total sugar production capacity already installed in Tabasco. In fact, some Mex$ 530 million worth of machinery and equipment have already been invested in the new plant. It is rather difficult at present to estimate the toll to be levied on Grijalva waters by the expansion of Huimanguillo sugar activities. It certainly will be a function of the stand taken by Huimanguillo municipality as to the tolerable increase in local pollution, and the reached compromise between the municipality and the National Organization of Sugar Industries to construct the new plant with some kind of waste water treatment equipment. 21. Before reaching Villahermosa, the Grijalva river drains waste waters and spills from the developing oil fields of Reforma and from PEMEX petrochemi- cal plant of Cactus. Although PEMEX is still completing its construction, this plant has already been in operation for a few years, fractioning gas into basic hydrocarbons monomers like metane, etane, propane, butane, and pentane without disposing of its effluents in sewage basins. Reforma and Cactus are both in the State of Chiapas, but must not be located more than 20 kilometers away from Grijalva river's bed.  - 62 - ANNEX I Page 8 22. PEMEX plans on erecting soon, at Luis Gil Perez, the same type of petrochmical plant as in Cactus. Assuming the choice of Luis Gil Perez as a petrochemical site is irrevocable, the municipality of Villahermosa will have at least to change its water intake, presently at the Grijalva river. The reasons for it are numerous. Luis Gil Perez is located some 15 kilometers upstream Villahermosa, on that branch of the Grijalva river which has retained the lower flow after the river has forked into one main stream called Carrizal river and a smaller stream which keeps the name of Grijalva (also called Mezcalapa on some maps). This part of Grijalva already contains very little oxygen, 0.9 milligrams per liter, at the level of Reforma. Further discharges of industrial effluents between Reforma and Villahermosa do not give a chance to the river to regenerate before reaching the state capital, as confirmed by the analysis of water samples taken by ECO-INGENIERA a few kilometers away from Villahermosa. By the time the petrochemical complex is erected at Luis Gil Perez it will be hardly possible to treat its effluents to the extent of eliminating all potential sources of contamination of Villahermosa's main water supply. Also, one should always reckon with accidental oil spills especially in regard to the present operating efficiency of PEMEX. Therefore, the exposure of Villahermosa's primary source of water supply to pollution is very high and ways of protecting it should be devised soon. B. New Industrial Activities - Petroleum and Gas Description 23. The activities of the government-owned petroleum company, PEMEX (Petroleos Mexicanos) in the State of Tabasco dates back to 1958, when the exploration of the coastal lagoons of the Tonala basin (eastern part of Tabasco) and of the Usumacinta basin (western part of Tabasco) was initiated. Since most of the oil was closely associated with gas, PEMEX installed separa- tion units 1/ in La Venta (Tonala basin) and in Ciudad PEMEX (Usumacinta basin). Gas and oil thus separated were then transported by pipelines out of the state. 24. Since then, there has not been any fundamental changes in PEMEX's activities in Tabasco. They remain oriented primarily towards oil exploration and production. Recent discovery of major oil fields have ranked Tabasco among the main sources of oil and gas for the Mexican states. The major oil fields identified by PEMEX at present are listed below. - Zone La Venta (Eastern Tabasco) - Axis Barra de Tupilco - Sitio Grande (Center of Tabasco) 1/ In Tabasco, they are referred to as petrochemical plants although they do not produce basic hydrocarbon monomers. They simply condition gas and oil to be readily used as feedstock by refineries and petrochemical crackers.  - 63 - ANNEX I Page 9 - Axis Nuevos Lirios - Ciudad PEMEX (Wlestern Tabasco) They account for some 50 percent of the Mexican production of oil and gas (see Table 4). The main pipelines stretch east-west, from Ciudad PEMEX to Veracruz refineries and petrochemical plants of Coatzacoalcos via Villahermosa, Cardenas and La Venta. 25. PEMEX drilled some 2,300 oil wells in the sixties and only about 150 in the seventies. The recent discoveries of the Reforma oil fields (enclave of northern Chiapas into Tabasco State) will necessitate the installation of 300 to 500 oil drilling rigs per year. PEMEX's intensive drilling program concerns a diamond-shaped area cornered on west and east by the cities of Cardenas and Villahermos-, and on south and north by Sitio Grande and the to-be-created oil port of Dos Bocas. In this area, PEMEX intends also to intensify its trans- formation activities. A petrochemical plant producing basic monomers (like etane, butane, etc.) from gas is under completion at Cactus, between Sitio Grande and Reforma--in northern Chiapas. A similar plant will soon be erected in Tabasco, near Villahermosa (Luis Gil Perez). Both plants will constitute an important source of basic monomers readily available to private enterprises 1/ eager to undertake on the production of secondary petrochemicals. Therefore, the area, defined earlier, is bound to attract transformation industries of petroleum products unless it is decided by the state authorities not to foster the implantation of secondary petrochemistry on its grounds. 2/ 1/ A Mexican law, existing since 1959, has divided the 'etrochemical industry in two branches of activities. One, called basic petrochemistry and pro- ducing the main hydrocarbon monomers and some intermediates, is exclu- sively controlled by the Government, through its company PEMEX. The other one, called secondary petrochemistry, is open to the private sector, to the extent that the private enterprises venturing in this field of activities have at least 60 percent of their share owned by Mexicans. 2/ As said earlier in the report, the centers of Cardenas, Cunduacan, Comalcalco, Villahermosa and Sitio Grande, situated on the so-called "diamond shaped area," are already active at transforming food products, fruits and sugarcane. It is not yet clear whether traditional and petroleum activities can develop harmoniously on the same grounds, or which activities will prevail upon the others in case of incompatibility.  Table 4: TABASCO: Oil and Gas Daily Production (PEMEX figures) OIL GAS Oil Fields Number of Wells Cubic Meters Barrels (lB142 gal) 100 Cubic Meters Millions Cubic Feet Samaria 33 49,436 310,952 107,528 380 Cunduacan 21 35,392 222,610 56,990 201 .'gave 7 4,708 29,613 51,035 180 Iride 7 7,915 49,785 11,540 42 ^xiacaque 10 11,461 72,089 18,021 64 Platanal 1 118 742 354 1 Paredon 1 402 2,529 1,077 4 Giraldas 2 1,128 7,095 8,657 30 Rio Nuevo 2 1,595 10,033 5,235 18 Total 84 112,155. 705,448 860,617 920 NOTE - NATIONAL PRODUCTION - Crude Oil - 1,383,278 Barrels per day Associated Gas - 1,961 Million cubic feet per day Non Associated Gas - 815 Million cubic feet per day Total Cas Production 2,776 Million cubic feet per day  - 65 - ANNEX I Page 11 Nature of the Ecological Impact of Tabasco Petroleum Industry 26. Since at present PEMEX is only extracting oil and gas from Tabasco undergrounds, its operations could very well have a relatively small impact on its surroundings if only they were to be carried out in an orderly fashion and were also the object of a concerted action with Tabasco authorities. Unavoidable, of course, are the direct and indirect uses of the land for exploration and exploitation: implantation of oil rigs, access roads, oil/gas separation batteries, pipelines, etc. 27. Although PEMEX says to be under Mexico's constant pressure to increase its production, it should be compelled to position its new oil rigs such as to avoid contaminating the aquifer by perforating the protective geological strata, or cau 3ing too disastrous interferences with lakes and marshes systems in Tabasco wetlands which have a high ecological and economi- cal significance. 28. In the meantime, PEMEX could easily avoid some of the direct degrada- tion caused on its operating grounds by the improper construction and use of catchment basins for oil spills and lubrification liquids during drilling, by the hasty laying of oil and gas pipelines proned then to rupture and at last by the inadequate restoration of drilling sites and pipelines routes. 29. Oil spills especially can bear striking, long-lasting effects both on land and fresh water bodies, considering that one cubic meter of oil can form a thin film on an area of 20,000 square kilometers. At the surface of a lake, such a film acts as a porous membrane and slows down considerably the oxygen exchange between air and water; this phenomenon can endanger a lake's aquatic life by lowering its overall oxygen concentration. An oil film has such a long lifetime that it should rather be removed mechanically by "skim- ming," "sponging" or "vacuuming" equipments. PEMEX does handle such equipments in case of important oil spillage during extraction, but the team which is in charge of protecting Tabasco environment is clearly understaffed as well as under-equipped to face the repeated occurrence of spillage, endemic to PEMEX operations. 30. When oil is spilled in rather turbulent waters, it is almost impossi- ble to prevent oil emulsification, and rather difficult then to separate oil from water. With sufficient holding time, the oil can rise to the surface and form a film to be skimmed off eventually. There are also separators which are based on sound hydrodynamic principles like that developed by the American Petroleum Institute. It is, however, a widely accepted fact that the most effective, while least costly, way of separating oil from water is to prevent them coming into contact! Considering PEMEX plans to multiply the number of  - 66 - ANNEX I Page 12 wells to be drilled in Tabasco and to implement a program of second re- covery, 1/ the State should imperatively get governmental support to force PEMEX to observe the Federal regulations on water pollution that otherwise will soon reach unacceptable proportions. 31. Among other future planned activities of PEMEX in Tabasco, petro- chemistry is the one which will have the most pervasive effect on its surround- ings unless its industrial effluents discharge is strictly controlled. The primary pollution problem in petrochemical plants today is sulphur oxides (SO2) emitted by furnaces burning residual fuel oil and by catalytic desulphurisation units. Mexican oil and gas are highly associated with sulphur, yet there is no legislation in Mexico restricting the amount of So2 desulphurisation units can emit. Consequently, it would almost be within PEMEX discretion to install sulphur recovery plants to convert hydrogen sulphides into elemental sulphur and decrease the amount of pollution, rather than burning them into So2 if it were not for the corrosivity of the gas which is detrimental to PEMEX's own installations. 32. Another polluting aspect of petrochemical plants is the small quantities of cyanamides phenols and mercaptans (derivatives of hydrogen sulphides) that are present in the liquid effluents of the catalytic desul- phurization units. Although in small amounts, they clearly endanger fish waters and urban waters, and cause noxious odors. This danger is apparently considerably reduced when the effluent is discharged into an open estuary or in the sea which has a high dilution effect and contains many types of bacteria capable of oxidizing hydrocarbons, an enormous capacity for self-purification. Nevertheless, this capacity is limited as witnessed by the estuary petroleum sites of Coatzacoalcos-Miniatitlan, in Veracruz, where PEMEX's refinery and petrochemical plants caused dramatic levels of pollution. 33. In the inland areas, like at Cactus in Chiapas and possibly at Luis Gil Perez in Tabasco, aqueous effluents will most probably require processes such as sulphide oxidation and biological oxidation. At the time of our visit to Cactus' petrochemical plant, PEMEX was proceeding with the construction of sewage basins, although the plant had already been operating for a few years. We could not find out whether Cactus was going to be equipped with a waste 1/ A time comes in the life of an oil field when the natural pressure of the reservoir has declined to an extent where it is no longer sufficiently large to force the oil out of the pores of the rock into the bottom of the well. This stage can be reached long before the greater part of the oil has been recovered from the reservoir (in some cases, 80 percent of the total quantity originally present in the reservoir can be left behind in the ground). This state of affairs has led to the development of artifi- cial means of forcing oil out of the pore spaces of the reservoir rock, for example, using direct displacement with another fluid. The oil which is forced out is called "second recovery" and the fluid chosen by PEMEX in Tabasco is water.  - 67 - ANNEX I Page 13 water treatment plant, utilizing some sort of oxidation process. In any case, when PEMEX comes to erecting a petrochemical complex near Villahermosa, the handling of SO2 emissions and of the aqueous effluents will obviously be two critical issues which will have to be discussed with Tabasco Environmental Office in order to spare the urban or economic life of the capital of Tabasco any disastrous consequences. Localization and Evaluation of the Pollution Water by Tabasco Petroleum Industry 34. To date, some 5,000 hectares or 25 percent of Tabasco superficies have been directly or indirectly taken over by PEMEX for its exploration and exploitation activities. As said earlier, their main polluting effect has been on water. The concentrations in dissolved oxygen, oil and grease measured by ECO-INGENIERIA on the sides mentioned below are quite unacceptable, con- sidering the limits fixed by the Mexican environmental legislation. Table 5: Sites Polluted by PEMEX Activities Site Polluting Source Laguna el Limon Ciudad PEMEX (Separation Units) Laguna Mecoacan ) Rio Chocozapote ) Rio Cuxcuchapa ) Oil wells in wet lands Arroyo de La Venta Two other sites, namely Rio Puxcatan and Rio Tonala, have already been affected by PEMEX operations but not to the same extent than the other sites. Details of water samples analysis performed by ECO-INGENIERIA are displayed in Table 6. The important oyster beds and fish breeding grounds of Mecoacan Lagoon are. clearly endangered. The situation can only worsen with the construction of PEMEX oil port, at Dos Bocas. C. Costs 35. PEMEX and the National Organization of Sugar Industries have not so far shown the highest concern for environment protection. Hence they should be forced to build (and operate) their newest plants according to federal regulations since it has proven to be less costly to equip plants with all necessary devices to prevent industrial contamination at the time of construc- tion rather than a posteriori. It is nevertheless doubtful that either PEMEX or the National Sugar Organization agrees to do so, regardless of the compara- tive cost of investing in non-productive equipments or of being fined, on the grounds that they are already the main contributors to the economic development of Tabasco.  - 68- ANNEX I Page 14 36. As a matter of fact, there has been too few attempts at quantifying the economic benefits of industrial development in Tabasco and the correspond- ing economic costs of deteriorated natural resources. To my knowledge, the only study, existing on this matter of critical importance, was done in 1974 by the Subsecretary of Plannification of SARH. It was calculated then that the annual costs of industrial and urban centers 1/ waste waters treatment in Tabasco would amount respectively to 12 and 15 million pesos, summing up to 27 million pesos or about 0.4 percent of the total gross value added (including commerce) at the time. The calculation was based on unit costs of water treat- ment which had been developed hy the General Direction of Water Uses and Prevention of Contamination. There were probably straight engineering costs that did not account either for particularities of local situations or for potential contamination between industrial sites and municipalities' waste water collectors. These costs should be updated, and especially should take into account aqueous effluents from oil fields and petroleum industries. 37. The same study suggested that the State of Tabasco could provide for the necessary water treatment plants and prorate both investment and operating costs to the volume and quality of the waste waters discharged by industries and urban centers. The whole set-up was to be supervised by a Water Contamination Control District, a semi-public organization located in Villahermosa. This organization is apparently still in the process of being developed. It would theoretically present the advantage of having on the same board representatives of all the major private and public entities of the state. Board members could thus discuss environmental problems specific to Tabasco and negotiate the relative price of protecting or regenerating the environment, assuming that the benefits and costs of the state industrial development will have been examined by them. 1/ They include small- to medium-size industries implanted on urban areas, hence using urban facilities.  TABLE 6 - TABASCO WATER BODIES AFFECTED BY PEMEX OPERATIONS Quality Measures, in miligrams per liter OD Fats and Oils DQO DBO Type Location Receiving Body MIN AVER MAX MIN AVER MAX MIN AVER MAX MIN AVER MAX PEMEX Cryogenic In Macuspana, Petrochemical Plant by CD. PEMEX El Limon Lagoon 1.0 4.9 8.0 2.82 136.5 628 4 70.87 488 1.0 3.23 8.0 Plant PEIMEX Cryogenic In Macuspana, Petrochemical Plant by CD. PEMEX Puxcatan River 3.0 5.53 7.0 5 74.65 466 4 17.7 40 1.0 1.91 6.0 Plant PEHEX Cryogenic Huimanguillo, Petrochemical Plant Village of La Venta Creek 0 2.92 9.3 1.86 144.5 556.4 8 115.3 332 2.0 6.69 17.0 Plant La Venta Ma;.allanes Oil F-ields Huimanguillo, | La Venta between La Venta & Chicozapote River 0 0.09 1.0 0.43 75.94 185 55 151.8 764 2.0 6.69 17.0 Sanchez Magallanes Samaria Oil Fields In Conduacan, Jalpa and Nacajuca Cuxcuchapa River 0 0.5 1.0 226 276 326 12 26.5 41 2.0 3.75 7.0 l La Venta Cryogenic In Huitmanguillo, Petrochenical Plant Village of Tonala River 1.0 2.92 7.0 2.31 60.4 160 8 48.9 140 1.0 2.73 5.0 Plant La Venta Oil-Field In Paraiso, on the road Chichicapa- Mecoacan Lagoon 0 5.57 10.0 0 101.3 422 97 279 781 1.0 3.82 7 Chiltepec  - 70 - ANNEX II Page 1 THE COPRODES State Development Committees As a means of ensuring the integral nature of national development founded on state and regional development, a presidential decree dated March 11, 1977 ordered the strengthening of the State Development Committees, thereby creating a state-level planning system which ensures greater consis- tency between state development projects and the national needs and objectives. These committees, which are public financially autonomous bodies, advise on and contribute to planning and programming at state and regional level in conjunc- tion with the various sectors of the community. The goal of each of these committees is to promote the balanced growth and orderly development of the particular state, in keeping with its potential and the needs of the various sectors and regions comprising it; each committee also seeks to generate and promote new ideas, programs and projects which reflect the needs of the population and focus on meeting requirements in the spheres of employment, capital formation and economic growth activities. Each committee, chaired by the State Governor, is made up of: a coordinator appointed by the chairman, whom he represents; a technical secretary, appointed ex oficio, who is the state representative of Secretariat of Programming and Budgeting; the highest-ranking officials representing the federal government in the state; officials of the state Government, appointed by the Governor; representatives of the municipal authorities wishing to participate, representatives of the social and private sectors wishing to participate; any federal senators or deputies invited to participate by the chairman. Each committee, which meets at least once a month with its chairman, has the following functions, among others, in the planning sphere: 1. To propose short, medium and long-term plans for the social and economic development of the state; 2. To propose to the federal and state governments the agreements it regards as necessary for the achievement of that development, and to coordinate them so that they lead to the integral development of a region; 3. To stimulate the rational development of state resources; 4. To make proposals to the federal executive branch regarding the administrative and financial measures that will enable it to carry out its activities; 5. To resolve on the establishment of sectoral and regional sub- committees and working groups;  - 71 - ANNEX II Page 2 6. To facilitate and coordinate the execution of works which are the responsibilities of the various federal agencies operating in the state. The functions of the coordinator of each State Development Committee in the planning sphere are the following: 1. To synchronize the formulation and updating of state development plans, channeling all necessary work to the committee; 2. To promote and provide the impetus for participation by the federal agencies, the departments of the state government, the municipal authorities and the social and private sectors in the execution of state programs and projects; 3. To identify the production potential of, and the state's need for, public and private investments; 4. To represent the committee before all official entities and private or public institutions, whether national or international, within the framework set by the chairman of the committee. The functions of the technical secretary of each State Development Committee in the planning sphere are the following: 1. To actively facilitate formulation of the state development plan by providing the technical support needed, and to shephered it through the approval process; 2. To support those tasks connected with the promotion of the projects being carried out within the state through the committee; 3. To facilitate and organize the provision of such advice on aspects of state development as may be needed by the state government; 4. To ensure that the activities of the technical secretariat are carried out in accordance with central procedures and guidelines, and to coordinate them so that they are consistent through the state; 5. To promote and supervise, in conjunction with the coordinator, the execution of such works and the provision of such services as are included in the state's annual public investment program. In the case of the State of Tabasco, "operational machinery" has been set up whereby the various components of the planning and evaluation procedure are made the subject of consultation between all agencies and agents involved in that state's development action.  - 72 - ANNEX II Page 3 The steps which make up this operational process are as follows: 1. All public and private agencies engaged in common pursuits in the same sector are grouped together as functioning in one of the limited number of sectors recognized within the framework of the policy enunciated by the President of the Republic. (Each square appearing on the accompanying chart represents one sector.) 2. The above-mentioned policy recognizes ten sectors, and these sectors form the arena of action of the Tabasco State Development Committee. They are: Production: Agriculture and forestry Industry Tourism Fisheries Oil Support: Commerce, communications and transportation Social: Housing Education, science and technology Health and social security - 3. The sector groups meet regularly on Tuesdays and Thursdays of every month. When the chairman of the Tabasco Committee, COPRODET (in other words, the Governor of the State) and officials from the corresponding department of the central government have attended these meetings, it means that the criteria of all participants can be integrated and unified, so that fundamental and operational decisions may be taken for the particular sector. The chairman of Tabasco State Development Committee extended the range of the committee's normal functions by adding the following: (a) planning, programming and projects of the state government; (b) coordination of municipal planning, programming and projects; (c) coordination in the case of certain actions undertaken by the project and social sectors.  - 73 - ANNEX II Page 4 Explanation of the Accompanying Chart The basic elements are: earlier plans formulated by the state, public demands (public consultation), inventory of works and services, present situation in the State, national goals, state goals. A basic information package was devised which, when employed in conjunction with the methodology and general guidelines provided, enabled each sector, by following the channels laid down, to carry out its planning, programming and project activities. These activities are spread over a whole-year. For example, the early months are occupied in drawing up a plan for the period and in defining and recasting the state's objectives, targets and strategies to fit in with national and state policies (Phase 1). Subsequently, investment programs are drawn up to reflect the resolu- tions of the Tabasco State Development Committee, and negotiation takes place at the various decision-making levels. Once this procedure is completed, investment is programmed to reflect resolutions taken at plenary sessions of the committee (Phase 2). Projects flowing from the programs approved by the committee are prepared and then negotiated at the various decision-making levels (Stage 3). In order to ensure the uniformity of the criteria applied, the Tabasco Committee meets in plenary session after each of the sector actions illustrated in the accompanying chart as Phases 1, 2 and 3, the purpose of this being to scrutinize the overall coherence of the work carried out in each separate sector. Any necessary adjustments are made before the next phase is started. The plans, programming and projects as approved by the committee fall into the following spheres: - Normal (or Direct) Federal Program - Direct State Program - Direct Municipal Program - Private Investment Program - Participation by the Social Sector - PIDER - CUC  - 74 - ANNEX II Page 5 - State-Municipal Agreements (2 types: construction and repair) - Coplamar System Subsequently, the investment estimates for each of these spheres are put through the necessary channels of negotiation at the various levels of authorization. The works and services authorized in each sphere are those that go on to the implementation stage. Finally, monthly evaluations are made of all actions--by sector, agency responsible, program, etc. This process provides information for submission to the plenary and sectoral meetings of the state development committee, which can then rapidly order any corrective measures necessary. The work of evaluation also provides feedback for the entire system.  -75- ANNEX II Page 6 of 6 Rxatin Public vorks Situatia Naciol State las Consult andi Goals Goals L . _ . tation iServrices J tt BASIC INFORMATION PACKAGE --.M.$ETHODOLOGY AND GENERAL S e c t o r s S ec t o r s UPARY-SESSION OF TABASCO PHASE STATE DEVELOPMT COMMITTE 1~etr . . . _......_ . -~~~~~~~~~~~~~~~~~~I 1. 4 Q ~L ANN RINRG - - STTDHS o e C t o r- -c 5 4> 1' - -. 4 PHAE ! PIIARXY SASS10) OF TABASCO H 2S| STATE -DEVELOPID3NT COMIATTEE- 1_ ,21 _I '. 4 E H PR O GRA MMTI N G S e c t o r e c t a r s Fp .14~~~~~~~~~~~~~~~~ C,PLEiARY SESSION OF ABASCO PSflbAYDESELOPMENT ASCTEE | PHASE 1 (4 3 ; 0 3~~~~~~~~~~~~~~~~~[ . 1 ~~~~~~~~P R O J E C T S|- f