Mexico - Seventh Agricultural Credit Project

Document of i The World Bank v1 t FOR OFFICIAL USE ONLY Report No. 2944-ME STAFF APPRAISAL REPORT SEVENTH AGRICULTURAL CREDIT PROJECT MEXICO May 28, 1980 Regional Projects Department Latin Ametrica and the Caribbean Regional Offices This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1 = Mex$23 Mex$l = US$0.0435 Mex$l million = US$43,500 WEIGHTS AND MEASURES Metric System 2 1 hectare (ha) 2 = 10,000 m = 2.47 acres 1 kilometer (km ) 2 = 0.62 miles 1 square kilometer (km ) = 0.39 sq. miles = 100 ha 1 kilogram (kg) = 2.20 pounds 1 liter (1) 3 = 0.26 gallons 1 cubic meter (m ) = 35 cubic feet 1,000 kg = 1 nietric ton = 0.98 long ton ABBREVIATIONS ACF - Index of Average Cost of Funds to Multi-Purpose Banks ANAGSA - National Crop and Livestock Insurance Agency ANDSA - National Warehouse Agency BANRURAL - National Rural Credit Bank (BNCR) BANXICO - Bank of Mexico CNC - National Smallholders Confederation CNG - National Livestock Producers Federation CONASUPO - National Marketing Corporation DP - Division of Programing FEFA - Special Agricultural Credit Trust Fund FEGA - Technical Assistance and Loan Guarantee Trust Fund FICAR - Trust Funds for Credit in Irrigated Areas FINASA - National Sugar Finance Agency FIRA - Agricultural Trust Funds in the Bank of Mexico (in the loan documents FIRA is referred to as FONDO) FONAFE - National Ejido Development Fund FONDO - Trust Fund for Crop, Livestock and Poultry Credit IDB - Inter-American Development Bank NAFINSA - Nacional Financiera S.A. PIDER - Integrated Program for Rural Development SARH - Ministry of Agriculture and Water Resources SH y CP - Ministry of Finance and Public Credit SPP - Ministry of Programing and Budgeting GOVERNMENT OF MEXICO FISCAL YEAR January - December  FOR OFFICIAL USE ONLY MEXICO SEVENTH AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS Page No. I. THE AGRICULTURAL SECTOR .................................. 1 A. Agriculture in the Economy 1 B. Agroindustries Sector 5.. ...5 C. Fisheries 7... *.....*...... *........ .7 D. Marketing and Prices ............. ............. ..... 8 E. Development Policies and Strategy .................. 8 II. AGRICULTURAL CREDIT .............. .... ....... . ... . 9 III. AGRICULTURAL TRUST FUNDS (FIRA) ......................... 15 IV. PERFORMANCE UNDER PREVIOUS AGRICULTURAL CREDIT PROJECTS . 22 V. THE PROJECT .................. . ... 24 A. Introduction ..* ......... 24 B. Project Objectives.......................... . 24 C. Brief Description .....25 D. Detailed Features . .. . ........ ......... .25 E. Total Investment Program ....33 F. Financing .......... ........... so ....... .... 35 G. Procurement.......... 35 H. Disbursements ...... . ..... 37 VI. PROJECT IMPLEMENTATION ............ .......... .. . ..... 38 A. Planning and Programing 38 B. Operating Regulations and Procedures Manual .41 C. Sublending Policies and Procedures 42 D. Accounts and Auditing ................ 45 VII. PROJECT BENEFITS AND RISKS ........................... ... 46 A. Illustrative Investment Plans ....................... 46 B. Project Benefits .... . ..................... I..... .* . 46 C. Project Cash Flow ... ...... ...9.0 48 * DD. Project Risks ..........................0.4.-.- ...... 49 VIII. SUMMARY OF AGREEMENTS REACHED AND RECOMMENDATION ...... 50 This report is based on the findings of an appraisal mission which visited Mexico during January/February 1980. The mission included N. Sharma, J. Intrator and H. Kim of the Bank, L. Posner, C. Percival, 0. Schulz, G. Kawatea, consultants and Ms. K. Conroy, research assistant. 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 13ank authorization.  - ii - TABLE OF CONTENTS (Continued) Page No. ANNEXES Annex 1. Credits for Agriculture through the Banking System and Sources of Financing .................. . . . . .. . .. . . . .. . . ....... . 51 Annex 2. T.1 Principal Indicators of FIRA's Operations, 1971-1979 ....... 52 T.2 Medium- and Long-Term Loans Rediscounted by FIRA, 1971-1979 53 T.3 FIRA Rediscounts 1973-1979: Projections 1980-1983 ......... 54 T.4 Comparative Statement of FEFA's Assets and Liabilities, 1973-1979 *........ ...... . ................. ...... 55 Annex 3. Project Financing ... ...... . . . . . . . ........................... ...... . 56 Annex 4. FEFA Receipts and Disbursements - Projected Cash Flow . 57 Annex 5. Illustrative Investment Plans ... o ....... ...... ...... 58 T.1 Investment Plan Al - Rainfed Annual Crops Farm (180 ha) Cash Flow Projection ..... ................*.., ...... 64 T.2 Investment Plan A2 - Gravity Irrigated Annual Crops Farm (200 ha) - Cash Flow Projection ........... ......... 65 T.3 Investment Plan Bl - Dairy Production (23 ha) - Cash Flow Projection ............................ 66 T.4 Investment Plan B2 - Beef Production - Cash Flow Projection 67 T.5 Investment Plan Cl - Small Inshore Fishermen Group - Cash Flow Projection ................................................. 68 T.6 Investment Plan C2 - Fruit Packing and Storage Plant - Cash Flow Projection ..................... 69 T.7 Investment Plan C3 - Grain Elevator - Cash Flow Projection 70 Annex 6. Selected Documents and Data Available in Project File 71 MAP IBRD 11789R1 - MEXICO - Seventh Agricultural Credit Project Distribution of FIRA Offices  MEXICO SEVENTH AGRICULTURAL CREDIT PROJECT I. THE AGRICULTURAL SECTOR A. Agriculture in the Economy 1.01 Mexico's agricultural sector accounts for about 10% of the gross domestic product, employs nearly 40% of the total labor force of 17 million, and represents more than 15% of the country's exports. During the last 15 years; however, growth in agriculture has been sluggish and production has not kept pace with domestic demand. Its rate of growth declined from an average of 6% per annum between 1945 and 1955 to 4.4% annually from 1955 to 1965, to less than 2% per annum since 1965. Throughout this period, the country's population has grown at an average annual rate of 3.2%, although more recently it has shown signs of declining to 2.9%. 1.02 This reduced agricultural production, coupled with increasing internal demand, resulted in large food imports and a steady deterioration of the agricultural trade balance, until it recovered in 1976, due to a sharp rise in world coffee prices. Even though Mexico has maintained a positive agricultural trade balance, food imports have increased substantially during the last decade. Since 1970, corn, wheat, sorghum and powdered milk have been the principal food imports, accounting for over 3% of total imports. During this same period, foreign exchange earnings from agricultural exports more than doubled. Due to the more rapid growth in industrial and petroleum export earnings, the share of agricultural commodities decreased from 23% of total exports in 1970 to an estimated 15% in 1978. However, in dollar value, they increased from US$621.2 million in 1970 to US$1,800 million in 1979. Coffee, cotton, shrimp and fresh produce are the primary export items. 1.03 Although the agricultural sector is presently producing below its potential, it could, with an appropriate policy and institutional frame- work and implementation of sound investment projects, become a more important source of employment and foreign exchange earnings. Production Trend 1.04 Crops. Basic crops production (maize, rice, wheat, sugarcane and soybean) has remained somewhat stagnant; total production has varied between 44 and 49 million tons in the last five years. Although basic crops account for 75% of the cultivated area, the area devoted to these crops has declined by 14% between 1970 and 1979. Maize is Mexico's most widely grown crop, accounting for about 8 million ha, or over half the country's cultivated area. Most of it is cultivated in the rainfed areas by small producers. In 1979, imports of maize and wheat were estimated at 4.6 million tons. Bean, an important staple crop, is also grown by almost 80% of the low-income producers. Almost 400,000 tons of beans are presently imported annually. Sugar production increased from 1.8 million tons in 1970 to 2.7 million tons in 1978, but, due to increased domestic demand, exports have declined from about  - 2 - 600,000 tons in 1970 to about 14,500 tons in 1979. Although the country imported about 1 million tons of oilseeds in 1979, domestic production has increased from 1.7 million tons in 1978 to 2.2 million tons in 1979. Fruits and vegetables account for almost 47% of total agricultural commodity exports. Total exports of agricultural products increased from 1.4 million tons in 1975 to 2.6 million tons in 1978. 1.05 Beef. The total cattle population is estimated at about 31 million for 1979, and, since 1970, it has been growing at an annual rate of about 2%. In this same period, the carcass meat output increased by about 4% annually. The increase in productivity has been due partly to improvement in offtake rates and heavier carcass weights. The present level of meat consumption in the country is about 12 kg per capita. 1.06 Beef production in Mexico is prevalent in: (a) the arid and semi- arid northern rangelands; (b) the wet tropics along the Gulf Coast; and (c) the dry tropics along the Pacific Coast. The northern rangelands are used mainly for extensive cattle breeding with European breeds and with stocking rates ranging from 5 to 50 ha per animal unit. Income is derived primarily from the sale of feeder cattle and cull cows. The area has traditionally supplied the US market with feeder cattle (male weaners) and boneless beef. The dry and wet tropic zones produce beef almost exclusively for domestic consumption from Zebu-type breeds. The wet tropics have developed into a major area for cattle fattening and have become a principal source of supply for the Federal District. Presently, there is considerable transfer of one- to two-year-old steers from the dry tropics to the wet tropics for fattening. Stocking rates in the wet tropics are 1 to 3 animal units per ha because of the high initial fertility of the soil, abundant and well distributed rainfall and the high quality of the pastures. 1.07 The volume of annual exports of live cattle and boneless beef to the United States has fluctuated considerably, depending upon the export prices and the export quotas. The latter is regulated by the Government and the National Livestock Producers Federation (CNG) in an effort to ensure adequate beef supplies for the domestic market. Exports of feeder cattle have averaged around 600,000 head annually since 1970 with peaks of nearly one million head in 1972 and 1978 coinciding with high US beef meat prices. The 1979 export quota was fixed at 440,000 head in order to ensure reasonable supplies of beef for the domestic market. Progress is now being made in developing grazing fattening systems to stimulate production. Boneless beef exports which have averaged around 25,000 tons since 1970 were reduced to 10,000 tons in 1979 in order to increase supplies for the domestic market. To accelerate production for the domestic and export markets, the Government is now taking firm measures to increase credit funds for investment purposes, improve the technical assistance delivery system, and improve and expand marketing and processing facilities. 1.08 Milk. In 1979, the national dairy herd was estimated at about 8.5 million. Milk production was about 6.5 million tons, averaging 765 liters per cow. Nearly 70% of total production is from about 2.6 million dairy  - 3 - cows located predominantly in the central plateau temperate zone. About I million Holstein cows, in commercial herds, produce 56% of total milk production. Domestic production provides about 90% of the national consumption, while the balance is imported as milk powder. Annual consumption averages about 100 liters per capita. 1.09 The semi-stabled system of production is practiced mainly in the temperate regions where pasture and crop production is entirely dependent upon seasonal rainfall. Herds are small and mostly family operatecd. This dairy system is characterized by its dependence upon crop residues, particularly corn stover, as a maintenance ration for about half of the year, with year- round supplementation with concentrates. Consequently, daily milk production levels generally range from 6 to 11 liters per cow. Milk production from grazing is confined principally to the tropical region, which is a major beef producing area. Milk output averages around 3 liters per day for a 150-day seasonal lactation. 1.10 Commercial herds of Holstein cows are raised under an intensive system involving housing of cattle and forages grown under irrigation in the arid, semi-arid, and temperate zones. Alfalfa is fed in the spring and summer months and forage oats and corn silage in the winter. High levels of con- centrates are used throughout the year. Daily milk production ranges between 10 and 15 liters per cow but costs of production are high because of high infrastructure investment costs and the high costs of concentrate feeds. Demonstration farms have shown that costs can be lowered by as much as 30% by grazing herds on permanent pastures and this innovation is being slowly adopted but there are still some applied research problems to be resolved. Attempts to promote commercial ejido dairy units of 100- to 1,000-cow herd size during the last 10 years have been only partly successful since generally there is an absence of the managerial skills required for efficient dairy operation. 1.11 Pork. The swine population in 1979 was estimated at over 13 million head and is increasing at an average annual rate of 2%. Hog meat production is at about 650,000 tons from an annual slaughter of almost 8.5 million head. Nearly 70% of the swine population is located in the northeast, central and northern states. Commercial producers usually haLve a herd of more than 80 sows. At current offtake rates, the industry is operating at about 50% of its potential production. 1.12 The domestic market absorbs all the production, with annual consumption of fresh pork averaging about 10 kg per capita. The high price and shortage of beef has increased consumer demand for pork meat, indicating good prospects for increasing production. Agricultural Development Trend 1.13 From 1945 to 1955, Mexico's agricultural sector experienced rapid growth, with substantial increases both in areas brought under cultivation and in crop yields. Total land under cultivation of the nation's five principal  - 4 - crops (corn, beans, cotton, wheat, and sorghum) increased from 7.2 million ha in 1945 to 9.7 million ha in 1955, representing an annual increase of about 3%. Also during this period, the Government financed the development of large irrigation schemes which brought some of the northwest region's most fertile lands under cultivation. On average, 110,000 ha were brought under irrigation each year. With the introduction of improved technical packages, production yields rose markedly in cotton (5% per annum), wheat (4.5% per annum) and bean (4% per annum), with a less substantial productivity increase in maize (2% per annum). The combined effect of the increase in area and yield resulted in an annual production growth rate of 6%. During the next decade, 1955 to 1965, the growth rate of agricultural production slowed to 4.4% per annum. There were several reasons for this decrease. First, the expansion of lands brought under irrigation decreased to 65,000 ha per year. Second, the annual growth rate of new lands for cultivation of major crops dropped to 1.8% (compared to 3% during the previous decade). Third, although there were major yield increases in certain crops such as wheat (145%) and cotton (40%), their impact on overall production increases was minimal be- cause: (a) most of the new lands brought under cultivation were sown with corn and beans; and (b) the land under cotton cultivation decreased by 120,000 ha. Since 1965, there have been no significant increases in land brought under cultivation; in fact, between 1965 and 1975 there was an actual decline of 3%. It can be discerned from the agricultural growth pattern that for 25 years Mexico relied on the construction of large-scale irrigation schemes, the exten- sion of cultivated lands, and some technological improvements to increase agri- cultural output. 1.14 As manifested in the deteriorating growth rate of production, the Government's overall strategy for agricultural development did not focus on the potential of the total agricultural sector. In the past, the Government's priority was primarily in large-scale irrigation schemes, which have become increasingly expensive, while neglecting the vastly under-exploited potential of the rainfed agricultural lands. About 90% of the Government's financial and technical resources for agriculture have been earmarked for the irrigated districts. In 1976, of the 15 to 20 million ha under cultivation, only 5 million were under irrigation. Although the policy of promoting such irriga- tion schemes in sparsely populated areas was successful in producing 50% of the agricultural production, it left unsolved the basic problems of the 70% of Mexican farmers who cultivate rainfed lands; of these, 50 to 60% are subsis- tence farmers with less than 5 ha. Also, farmers with irrigated lands have always had greater access to credit, modern technology, and inputs. This has resulted in a marked dualism in Mexico's agricultural development. Further, the low productivity of the subsistence farmers has resulted in incomes insufficient to cover basic family needs. This has forced farmers either to abandon agriculture totally and migrate principally to urban areas in search of employment, or to seek part-time employment to supplement their farm earnings. Rural unemployment and underemployment rates remain high, with about two-thirds of agricultural labor earning incomes below the minimum wage. 1.15 The Government's agriculture investment policies have changed notably in recent years, first, by introducing the PIDER program, and, second, by establishing in 1977 within the Ministry of Agriculture and Water Resources  - 5 - (SARH) the Directorate General of Rainfed Districts. Following the irrigation district pattern, 124 rainfed districts were established, covering 70% of the country. The main objective of this new program is to reinforce exten- sion, research, credit and marketing services in these areas. An initial program, covering areas with adequate rainfall, is now being developed with the support of the Bank. Forestry 1.16 Mexico has about 21 million ha in commercial pine stands. In 1978, total wood production was 8.2 million m3, 2.1 million m3 of which was converted to pulp. Between 1977 and 1978, timber production increased 13% but during that same period, pulpwood production stagnated. About 34.8% of wood production was on private property, 28% on ejido land, 8.8% in communities, and 0.6% on federal and 0.1% on state land. The remaining 27.7% was produced through concessions on different land properties. In 1978, the total value of forestry production was US$1,030 million, representing 1.3% of GDP. In 1978 forestry imports, mostly pulp and paper products, were valued at US$258 million while exports reached only US$65 million. At present, Mexico's forestry resources are extremely underutilized. 1.17 FIRA's lending program includes both short- and long-term credit for forestry development. Since 1978, credits have also been channelled through the new Trust Fund for the Development and Assistance of Agroindustry; 60% of its credLits have been for forestry projects. To ensure a rapid development of the sector, Mexico needs increased financing of both short- and long-term credits, complemented with appropriate technical and organizational know-how and training facilities. B. Agroindustries Sector 1.18 Until the 1970s, the Mexican Government's agroindustrial policy focused on import substitution. To promote this policy, the Government provided various incentives, including preferential interest rates, technical assistance programs, guaranteed low prices on the raw materials used by the agroindustries, and established infrastructure. Partly as a result of the Government's efforts, the agroindustrial sector experienced a rapid growth during this period, increasing at an average annual rate of 10%. In 1979, it accounted for 18% of the industrial sector's output, with 27% of the agro- * industrial goods exported (valued at US$320 million). Presently, the agro- industry subsector employs about 740,000 persons, about 4.4% of the total labor force.  -6- Government Strategy and Policies 1.19 Since 1960, there have been four principal trends in the agroin- dustrial subsector's development: a rapid increase in the production of non- food agroindustrial goods; an increase in the subsector's domination by medium- and large-scale enterprises; an increase in foreign investment in the subsector; and an increase in the capital-intensive types of operation in the subsector. To allay the negative impact of these trends, the present administration established a National Commission of Agroindustrial Development in 1979. The commission was given two principal responsibilities: to formulate a National Agroindustrial Development Plan and, subsequently, to coordinate activities of the various public and private institutions involved in its implementation. Its principal objectives are to promote agroindustries which would: (a) increase the production of basic processed agricultural, livestock and forestry goods; (b) emphasize labor-intensive production methods; (c) increase the incomes of ejidatarios, comuneros, and small farmers; (d) establish a solid productive agroindustrial base as an integral part of Mexico's rural development scheme and as a framework for maximum utilization of Mexico's human and natural resources; and (e) increase the production of agroindustrial goods for exports. 1.20 To obtain these objectives, the Government has introduced a series of fiscal incentives for the agroindustrial sector. Additionally, financing for agroindustry investments is available from several trust funds, and FIRA has provided as much as 20% of all agroindustrial credits since 1965. FIRA's Involvement in the Agroindustrial Sector 1.21 FIRA established its agroindustrial program in 1965 and provides three types of financing to the sector: it rediscounts long-term loans for the establishment, expansion or modernization of agroindustries; it redis- counts short-term working capital credits, and it finances part of the cost of the feasibility studies which it conducts for its potential agroindustrial clients. Given FIRA's limited resources for short-term credit financing, most of its working capital subloans are for long-term credit clients. The prin- cipal types of agroindustries financed by FIRA are: cold storage installations for fresh produce, fruit processing plants, grain drying and storage units, feed mills, vegetable dehydrating plants and milk pasteurizing and processing plants. 1.22 In 1979, FIRA discounted US$80.4 million of agroindustrial credits, mainly in the north and northwest regions of the country. This represented 9% of FIRA's entire lending program. Of FIRA's total agroindustrial port- folio, only 3.3% of the subloans have been to low-income producers. In 1980, FIRA plans to increase its lending to agroindustries by 25%. Between 1981 and 1983, FIRA's agroindustrial program is expected to represent 10%, 11%, and 12%, respectively, of FIRA's total annual lending program. Over this period, the program expects to rediscount US$1,437 million of agroindustrial credits. It is estimated that this investment would generate about 98,000 jobs in the subsector.  1.23 l3esides rapid expansion, FIRA has indicated that it plans to diversify its lending program. The principal changes being introduced are promotion of greater participation by the small-scale producer in the agroindustrial sector; financing of small farm implements and agricultural machine service enterprises; financing of ejido-owned forestry industries; financing of fishing enterprises, particularly those owned by small-scale fisherme-; concentration of an increased percentage of its lending in regions designated by the Government as priority zones for industrial development; and increased lending to low-income producers, increasing from its present level of 3.3% of agroindustrial lending to 5%. 1.24 Under the Seventh Agricultural Credit Project, the Bank would support these investments, and funds (US$42 million) would be made avaLilable for greater participation by agricultural producers in agroindustrial activities. C. Fisheries 1.25 Mexico has important fisheries resources, with a fishing zone that covers 2.9 million km2. The fisheries sector provides employnent for 110,000 f-ishermen as well as full or part-time employment in related activities for an additional 700,000 Mexicans. In 1978, 200,000 tons of fish, valued at US$420 million, were caught in Mexican waters; over a third of this was exported. 1.26 The majority of Mexico's fishermen work only the near-shore coastal waters, leaving untouched the vast resources of the more distant coastal waters and of the open sea. Government programs to promote the sector's development have principally worked with the fishing cooperatives. By Mexican law, only cooperatives may exploit the nine high value species: shrimp, lobster, sea tortoise, oysters, shark, abulone, clams, grouper and totoaba. In 1941, the Government established the Bank of Cooperative Develop- ment, which was to meet the credit needs of these fishing cooperatives. Most of the bank's credits were used to purchase the equipment necessary to catch shrimp in the more distant coastal waters. 1.27 Most of Mexico's large-scale fishing activities have been controlled by the parastatal company, Productos Pesqueros Mexicanos S.A. (PPM). PPM was created with the sole aim of improving the distribution and commercialization channels from pier to marketplace. Since 1976, the Government has radically changed its orientation toward this sector. To begin with, it has established the Department of Fisheries at the ministerial level and it is actively pro- moting private sector participation. It has also transformed the Bank of Cooperative Development into the Bank of Fisheries and Port D)evelopment (BANDER) and, in January 1980, allocated to this new bank an equity capital of US$217.4 million to meet the increasing demand for credit from the fisheries sector. 1.28 In view of the scarcity of funds for investment purposes, FIRA is now directing attention to the largely unexploited fisheries sector. Under the proposed project, funds (US$8 million) would be made available to support small cooperatives which are engaged in inshore coastal fishing as well as to promote deep water marine fishing for the domestic market.  - 8 - D. Marketing and Prices 1.29 Marketing arrangements for traditional export crops are better organized than those for crops sold domestically. Commercial farmers engaged in the export subsector generally enter into contractual arrange- ments with processors and exporters, with prices reflecting world market conditions. Marketing constraints are severe in domestic agriculture, with many small producers having access only to limited and localized markets. Additionally, the lack of adequate factor market and distribution systems has somewhat restricted farmers' access to modern inputs. Further, problems occur because of the absence of timely marketing and price information, which has impaired small farmers' ability to make sound decisions. Storage facilities at the farm level are inadequate, and lack of transportation infrastructure in rural areas adversely affects marketing of surplus produce. 1.30 To overcome some of the above problems, the Government established the National Marketing Corporation (CONASUPO) to regulate the price and supply of basic food items. CONASUPO has become the principal purchasing agency for basic grains and is the sole importer of grains and milk products. With about 2,000 buying depots throughout the country, CONASUPO purchases grains and stores and transports them to the major consumption areas. CONASUPO also implements the Government's price support policy of basic food commodities. The Government's price policy is geared to provide basic food to urban dwellers at low prices. However, since 1974, the farmgate prices of basic food crops more than doubled and current farmgate prices for major food items are close to the adjusted international prices (para 6.19). In 1980, CONASUPO has announced a support price increase of 20% for corn and wheat and 30% for beans. Generally, support prices are set prior to the planting season and reflect (a) the cost of food in urban areas; (b) minimum wage rates in urban and rural areas; (c) cost of fertilizer, fuel and electricity; and (d) incen- tives for producers. Milk and beef prices are controlled by the Ministry of Commerce and Industry, and the annual exports of young steers are regulated by the National Livestock Federation. 1.31 The Government is currently undertaking several studies relating to wholesale and retail marketing and delivery systems and has created a marketing trust fund to invest in a marketing project to upgrade rural and urban market- ing centers, primarily for perishable goods. E. Development Policies and Strategy 1.32 The Government gives agriculture a high priority and recognizes that prospects for increased production would depend on how effectively it could rationalize its pertinent policies and agricultural development program to utilize more fully the country's resources. The current administration has undertaken a far-reaching administrative reform that will allow broader and more effective Government action in the sector. The Government is now focusing on a balanced approach and emphasis is given to irrigated as well as rainfed agriculture. The new emphasis on rainfed agriculture should lead to an increase in the productive potential of vast areas currently under- exploited and to a reversal of past trends toward larger income disparities between the modern and traditional subsectors.  1.33 The underlying tenets of the Government's development plan for agriculture are (a) self-sufficiency in basic food production; (b) increased production of export commodities; and (c) improved economic and social conditions of the rural poor. In pursuit of these goals, the Government's investment program focuses on agricultural diversification and includes provision f-r opening and developing new areas; development of new and re- habilitation of existing irrigation and drainage infrastructure; improvement of agriculture under rainfed conditions; promotion of multi-sectoral rural development programs; and channeling of funds through the public and private banking system to producers to stimulate private investment to augment produc- tion. In order to facilitate the above, the Government is improving its national and regional planning and programing and it plans also to invest in agricultural research, extension and marketing. The Government is now consider- ing a new legislation aimed at inducing private investment and promoting orderly development in the agricultural sector. 1.34 The Government's agricultural development strategy has to overcome a number of constraining factors relating to agricultural policies. The present administration is critically reviewing policies concerning land tenure, irrigation water law, interest rates, and support prices, and some attempts are now being made to alleviate problems emanating from the policies. 1.35 The Bank's agricultural lending program supports the Government's overall strategy and focuses on the production, employment and income dis- tribution aspects of the agriculture and rural sector. As of 1979, about 38% of the Bank's lending to Mexico was for agriculture and rural development. The Bank's agricultural lending program for Mexico has four goals: (a) to increase productivity of presently cultivated lands through selected programs of irrigation rehabilitation and on-farm improvements; (b) to improve the productivity of small farmers who receive the benefit of most Bank lending through programs for rural development, rainfed agricultural development, bringing new areas under cultivation, and establishing irrigation and drain- age units; (c) to complement infrastructure investments with general support services, including provision of agricultural extension, marketing programs and medium- and long-term credit; and (d) to promote off-farmi employment opportunities in rural areas through programs of agro- and rural-industries. Additionally, the Bank will continue discussions with Mexican authorities concerning agricultural development policies. II. AGRICULTURAL CREDIT General 2.01 As of December 31, 1979, the total outstanding credit to agriculture was est-imated at about US$4,870 million (Annex 1). Over the last three years, total institutional credit has increased at an average annual rate of about 10% in real terms. The public sector accounts for over 80% of the outstanding funds, t:he Agricultural Trust Funds (FIRA) and the National Rural Credit Bank (BANRURAL), providing 31% and 50%, respectively. At the end of 1980, the total  - 10 - outstanding credit is estimated at about US$6,300 million, an increase of 29% over that in 1979. Also, in 1980, FIRA will rediscount US$1,565 million compared to US$1,160 million in 1979. However, while funds from the public sector have been increasing substantially, the private banks' share (from their own resources) of the outstanding credit has decreased from 28% in 1975 to 19% in 1979. Additionally, funds from private banks are usually channeled to commercial farmers for short-term purposes. About 55% of the funds redis- counted by FIRA is for short-term borrowing and the remaining 45% is for medium- and long-term investment purposes. Between 30% and 35% of FIRA funds have been directed to the low-income producers. Likewise, BANRURAL predomi- nantly provides short-term loans to low-income producers (about 90% of its clients are ejidatarios). 2.02 While no reliable information is available on non-institutional credit sources, a study undertaken by the National Smallholders Confederation (CNC) in 1979 reported that non-institutional credit still remains the principal source of funds for about 70% of the ejidatarios. 2.03 Currently, there is a high demand for credit in agriculture, partly accelerated by the Government's expanded agricultural development program. How- ever, the total funds now available for agricultural lending are inadequate even though there is sufficient institutional capacity and an adequate credit delivery system to channel additional credit resources into the sector. Although no official data exist, various Government sources estimate that less than 30% (1.3 million) of farm families receive institutional credit. In 1980, FIRA approved only 65% or US$1,565 million of the total credit requirements of the participating banks. Shortages of credit funds for medium- and long-term invest- ment purposes are also substantial. Less than 25% of BANRURAL's total lending program of US$1,673 million in 1979 was for medium- and long-term investments. For the period 1980-82, FIRA has estimated the medium- and long-term investments at US$5,666 million; however, this total investment would benefit less than 20% of the farm families. To finance the above investment, FIRA would contribute 60%, and the participating banks and the beneficiaries, 25% and 15%, respectively. FIRA would generate funds from its own resources and receive funds from the Bank of Mexico; however, to meet fully the above financial commitment, FIRA would have to mobilize additional resources from external sources. The Bank's participation under the proposed project would meet part of this financial requirement and ensure successful implementation of FIRA's proposed development program. 2.04 Government policies are focused on increasing funds to finance development investments in agriculture. The Government has also stimulated development of a strong technical capacity in the banking system to ensure that funds are effectively utilized. Private banks are responding to the growth in demand by establishing or expanding agricultural credit depart- ments, and the Government, through the rainfed agricultural districts' program, is expanding the penetration of BANRURAL regional banks to new areas.  - 11 - Public Banks 2.05 National Rural Credit Bank (BANRURAL). BANRURAL was created in 1975 through an amalgamation of three public sector agricultural credit institu- tions: the Banco Nacional de Credito Agricola, the Banco Nacional de Credito Ejidal and the Banco Nacional Agropecuario. BANRURAL was established at the national level, with 12 regional banks under its control, and it currently accounts for 50% of the institutional lending to agriculture. The Federal Government is the majority shareholder in BANRURAL; the remain- ing shartes are held by the Bank of Mexico, the Nacional Financiera, the National Crop and Livestock Insurance Company (ANAGSA), and the National Warehousie Agency (ANDSA). On December 31, 1978, fully paid-up capital and accumulated reserves amounted to US$131 million, not including additional reserves created by BANRURAL to cover overdue and other loans of doubtful recovery. BANRURAL holds the shares of the 12 regional banks, which, from a legal point of view, are independent companies. Additionally, BANRURAL owns the majority share capital in two other banks (Banca Promex S.A. - 55% and Banco Provincial de Sinaloa - 93%). 2.06 BANRURAL has its head office and three branch offices in Mexico City and the 12 regional banks have about 450 branches. The Board of Directors of BANRURAL, chaired by the Secretary of the Ministry of Agriculture and Water Resources, consists of 13 members, eight of whom are nominated by various Government departments. Representatives of the National Conifederation of Smallholders and the National Farmers' Confederation are also members of the Board. At the time of the merger, BANRURAL took over all the staff of the three banks, and the total number of employees now is approximately 23,000. BANRURAIL's lending operations are financed from three main sources: (a) short- term credits from a large number of foreign commercial banks; (b) Government budgetary allocation; and (c) medium- and long-term credits through FIRA rediscouints and the Trust Fund for Credit in Irrigated Areas (FICAR). All foreign borrowings are guaranteed by the Government, and, as of December 31, 1978, amounted to about US$1,300 million. In recent years, the Government allocated about US$680 million annually to BANRURAL. The Government grants include provisions that allow about 25% of the lending operations to be earmarked for social purposes and not be recovered. These grants have enabled BANRURAL to create considerable reserves, amounting to US$1,065 million. About one-third of the annual Government grant covers most of the bank's administrative and general expenses. 2.07 BANRURAL's main operation is short-term lending to organized groups of low-income farmers, ejidos and individual smallholders to finance current agricultural crop and livestock production. Total BANRURAL lending during 1979 was about US$1,673 million (US$1,217 million for short-term production, US$391 million for medium- and long-term financing of investments, and US$65 million for commercialization). Part of BANRURAL's medium- and long-term investment credits are rediscounted by FIRA (US$88 million in 1978 and US$132 million during 1979). BANRURAL's lending program for 1980, as approved by Government, totals US$2,430 million, US$1,913 million for short-term produc- tion credits, about US$478 million for medium- and long-term investment credits and the remaining US$39 million for marketing. In 1980, FIRA plans to rediscount  - 12 - US$174 million of BANRURAL's medium- and long-term loans. While in 1979, BANRURAL's short-term credits for agricultural production reached about 1.1 million beneficiaries and a cultivated area of about 3.8 million ha, its greatly increased lending program for 1980 is expected to reach 1.4 million farmers on 5.0 million ha. In short-term production credits, 93% of bene- ficiaries are ejidatarios and the remainder are smallholders and commercial farmers. Eighty-three percent of BANRURAL's 1980 lending program for invest- ments would benefit ejidatarios and low-income farmers and the rest would help commercial producers. 2.08 BANRURAL management is making serious efforts to overcome weaknesses and deficiencies inherited from its predecessor institutions. Operational procedures for all banks in the system have been unified, thereby increasing coordination and efficiency. Loan recuperation is gradually improving; collections in 1979 were about 80% of loans due (87% recuperation in irrigated farming, and 67% in rainfed areas). Improved reporting procedures on loan recuperation have been introduced to enable management to undertake necessary actions on a timely basis. 2.09 National Sugar Finance Agency (FINASA). FINASA is a Government-owned financial institution and is solely responsible for providing all the short- and medium-term credit needs of the sugar industry (both cane producers and sugar mills), financing production credit, investments and marketing. FINASA also operates the Sugar Trust Fund, which lends and issues guarantees to sugar mills unable to provide normally required collateral. It also manages the Sugar Price Stabilization Funds. FINASA's equity as of December 31, 1978 was US$62 million and its principal source of financing is borrowings from foreign commercial banks. FINASA's outstanding loan port- folio on December 31, 1978 was US$1,242 million. Its total lending during 1979 was US$787 million (US$139 million to sugarcane producers, US$235 million to the sugar industry for current production and investments, and US$413 million for the marketing of sugar). About US$37 million of FINASA's loans to sugarcane producers were rediscounted through FIRA during 1979. 2.10 Cane production is largely undertaken by ejidatarios and private smallholders. Total sugarcane cultivated in 1978 was 483,400 ha (441,360 ha in 1977), of which 313,700 ha was cultivated by 94,500 ejidatarios and 169,700 ha by 20,380 smallholders. All loans to cane producers, such as those to be provided under the proposed project, are channeled through the mills and, to the extent possible, are in kind (seeds, fertilizers, tractor services). Until recently, FINASA had only two technicians authorized by FIRA to evaluate and approve subloans, but FIRA is currently carrying out a special training program to significantly increase that number. 2.11 The National Crop and Livestock Insurance Company (ANAGSA). ANAGSA was founded in 1961 as an autonomous Government agency and since 1976 it has greatly expanded its operations. ANAGSA provides crop insurance mainly for maize, sorghum, cotton, hemp and soya, while insurance for fruit plantations and vegetables is still limited to very small areas. Insurance coverage is limited to the production costs, excluding farm labor cost. Insurance premiums are paid both by producers as well as the Government. Also, ANAGSA provides livestock insurance (currently over one million head) and life insurance for credit beneficiaries.  - 13 - Private Banks 2.12 Until the establishment of the FONDO rediscounting facilities, private commercial banks were hesitant to undertake agricultural term lending because of the short-term nature of the bulk of their resources, problems of collateral. their lack of familiarity with agriculture, and the high risk which is generally associated with farming. This situation has changed considerably during the last decade, mainly because of the increasing support extended by FIRA in terms of funds, training of staff and other support services. Many private banks have been establishing and rapidly expanding their agricultural credit departments and hiring significant numbers of agricultural technicians. FIRA has provided intensive training programs for the banks' technicians and is gradually transferring the authority to evaluate and approve subloans to FIRA-authorized bank technicians. To date, private banks have 460 technicians authorized to approve subloans and some additional 430 technicians in training who will eventually receive FIRA authorization. These technicians are now authorized to approve medium- and long-term subloans up to US$110,000 (Mex$2.5 million) each, and a few who have received special authorization from FIRA may even approve subloans up to US$220,000 (Mex$5.0 million). Subloans exceeding these limits are evaluated in consultation with FIRA staff. 2.13 Lending operations by private banks are concentrated mainly on commercial producers and agroindustries. The Bank of Mexico, in order to encourage bank lending to ejidatarios and low-income producers, has stipu- lated that 0.7% of total deposits of multi-purpose banks and 2% of deposits in commercial banks must be held in the form of agricultural loans to low-income producers. Furthermore, this provision has been strengthened by the additional services provided by the Technical Assistance and Loan Guarantese Trust Fund (FEGA) regarding guarantees and the reilmbursement for technical assistance activities provided by the banks. In spite of these provisions and incentives, private bank operations in the low-income farmer sector are increasing on a very modest scale. 2.14 Commercial banks have been making increased use of FIRA rediscount facilities, with FIRA rediscounts amounting to 56% of the 1979 outstanding loan portfolio as compared to 29% in 1975. About 76 private and mixed commercial banks, banking groups and multi-purpose banks participate in FIRA-lending operations. Total FIRA rediscounts through these banks during 1978 were US$695.7 million (66% short-term and 34% medium-term) and US$982.6 million in 1979 (56% short-term and 44% medium-term). The 1980 rediscount program through the private banks is estimated at US$1,343 million (51% short-term and 49% medium-term rediscounts). 2.15 FIRA generally rediscounts to the participating banks 90% of the amounts of subloans. Only in exceptional cases, such as subloans exceeding US$100,000 or large loans for agroindustries, are banks required to increase their participation in subloan financing to 20% to 30%. In view of the large dlemand for credit and its greatly increasing lending program for the coming years, FIRA intends to substantially increase the banks' share in subloan financing. Under the proposed Seventh Credit Project, the 10% participation would be maintained for lending to low-income producers while for other categories of subloan beneficiaries the banks wouLd be required  - 14 - to increase their participation. FIRA would create a suitable interest rate structure on rediscounts which would include incentives for increased bank financing, thus making it attractive to the private banks. Interest Rate Structure 2.16 To date, the interest rate structure in agriculture has been changing moderately. Nominal interest rates on medium- and long-term credits redis- counted by FIRA to the participating banks range between 11.0 and 13.5% for low-income producers, 16% for other producers, and 17% for agroindustries. These rates are applicable under the Sixth Credit Project as well as all other FIRA rediscounts. Interest rates on short-term credit (which are not included in the Sixth Project) vary from 14% for low-income producers and 16% for other producers to 16 to 17% for agroindustries. BANRURAL interest rates on medium- and long-term credits are equal to those of FIRA; however, rates on short-term subloans vary from 16% for ejidatarios to 18% for other beneficiaries. 2.17 The above rates are negative as inflation is now estimated at between 18 and 20% and below the market rates charged by the commercial banks, which vary between 19.5 and 23%. Net interest rates on term deposits (from 3 to 12 months) for February 1980, averaged 18%. The average cost of funds (ACF) to the financial departments of multi-purpose banks, which is a weighted average of interest rates paid by banks and other financing insti- tutions on bonds, notes, and certificates of deposits, excluding checking and savings accounts, averaged about 16.5% in 1979. The ACF rate is calculated monthly by the Bank of Mexico and averaged 18.8% for the first four months of 1980. Since its inception, the ACF index has been readily accepted by the banks as it adequately reflects the cost of funds, but now they are charging sub-borrowers a spread of about two to five points over the index. The Government has recently revised this index to make it more representative of the cost of funds to Mexico's multi-purpose banks. 2.18 The Government is amenable to bringing about desirable changes in the interest rate structure relating to agriculture, and it is increasingly favoring the adoption of a variable interest rate system linked to the ACF index for term lending operations. The Government's current thinking on the interest rate structure is that: (a) interest rates in agriculture should be compatible with those of other sectors; (b) interest rates structure should be adjusted periodically; (c) interest rates in agriculture should be somewhat lower than the commercial rates (also allowing a small subsidy to low-income producers) in order to maintain a favorable investment climate; and (d) interest rates adopted under FIRA should be used for all other agricultural credit programs such as the Integrated Program for Rural Development (PIDER), the Investment Program for Rainfed Agriculture (PLANAT) and Tropical Agriculture.  - 15 - 2.19 UJnder the proposed project, the interest rate structure would be linked to the ACF level, with provisions for periodic adjustment (para 6.16). Interest rate for the low-income producers would be below ACF, reflecting the Government"s policy of subsidizing this target group, while the rates for the commercial farmers would vary above the ACF level. As the annual rate of inflation iLs expected to decrease to the international levels by 1982, the prevailing rates should be positive in real terms. III. AGRICULTURAL TRUST FUNDS (FIRA) I/ 3.01 In order to stimulate lending to agriculture and induce greater participation of the private banks and financial institutions to finance credit needs of farmers, the Government established FIRA within the Bank of Mexico. FIRA is the common name for a group of three trust funds: (a) the Trust Fund for Crop, Livestock and Poultry Credit (FONDO); (b) the Special Agricultural Credit Trust Fund (FEFA); and (c) the Technical Assistance and Loan Guarantee Trust Fund (FEGA). Detailed financial data on FIRA's operation is given in Annex 2. Trust Fund for Crop, Livestock and Poultry Credit (FONDO) 3.02 The establishment in 1955 of FONDO as a trust fund in the Bank of Mexico was a landmark in the development of agricultural credilt in Mexico. By providing a combination of credit and technical assistance to the public and private banks, the FONDO has contributed significantly to ithe growth of credit and to the improvement of the appraisal and supervision practices. 3.03 The FONDO was created to encourage the private banking systems to participate more actively in financing the credit needs of the agricultural sector. T'he large differential margin between the lending rate to farmers and FONDO"s discount rate to the participating banks has permitted higher rates of return on the private banks' invested capital. The private banks bear the risk of lending and the responsibility for collection, but their risks are greatly reduced by the development of the FONDO's regional offices and staff,, which, in the past, carried out much of the technical analysis of prospective sub-borrowers and subprojects. 3.04 Initiated with Government funds, the FONDO originally restricted its activ:Lties principally to short-term agricultural production credit to finance annual crop production and upkeep of livestock herds. The FONDO's resources were later augmented by loans from USAID and the Inter-American Development Bank (IDB), and it also began to discount longer term subloans for investments. 3.05 Since 1965, when FEFA was established, FONDO has redliscounted only short-term credits for crop, livestock, and agroindustrial prcduction to private banks. During 1979, FONDO rediscounted US$546 million, its recupera- tion of rediscounts from banks was US$481 million, and its total outstanding rediscount portfolio at end-1979 was US$380 million. FONDO operations are 1/ FIRA is referred to as FONDO in the loan documents.  - 16 - financed by its equity, amounting to US$42 million at end-1979 and borrowing from the Bank of Mexico. In 1980, FONDO lending operations will amount to US$860.8 million, an increase of 60% over 1979. Special Agricultural Credit Trust Fund (FEFA) 3.06 The real movement into on-farm development lending occurred only after 1965, when the second trust fund (FEFA) was established within FIRA. This fund was established to channel foreign loans, such as those from the Bank, with corresponding counterpart funds in local currency, supplied by the Bank of Mexico, for medium- and long-term lending to finance investments in agriculture, livestock, and agroindustries. During the first seven years of FEFA's operations, funds channeled through it for agricultural development were on a very modest scale, and only in 1973 did its annual lending program surpass US$50 million. The Bank played an important role in the growth of FEFA. It was the execuLing agency of five Bank credit projects, the on-going Sixth Credit Project and of credit components in other Bank-financed projects, totalling US$664 million. The Fifth Credit Project, executed during 1977/78, and the Sixth Credit Project, which is now nearing completion, helped to trans- form FEFA into the most important lending institution for agricultural develop- ment in Mexico (Annex 2, Table 4). In addition to Bank loans, IDB loans, which are now fully disbursed to FEFA, amount to US$164 million, and, in 1979, FEFA obtained a US$50 million medium-term loan from the Chase Manhattan Bank for agroindustries. 3.07 FEFA rediscounts medium- and long-term loans for agricultural livestock and agroindustries development to both the public and private banks. Total rediscounts during 1979 amounted to US$648 million, its recuperation was US$196 million and its total outstanding rediscount port- folio at end-1979 amounted to US$1,114 million. Government equity in FEFA has been increasing steadily because the principal of external loans from the Bank and IDB is repaid by the Government and the local currency equiva- lent, deposited with the institution at the time of receipt of the external loans, is accumulated in FEFA as additional equity. Total FEFA equity at end-1979 was US$555 million, an increase of 48% over 1978. FEFA's lending program for 1980 is US$704 million, 30% of which FEFA expects to finance through Bank loans, 40% from the recuperation of outstanding rediscounts and the balance from various internal and external sources. Technical Assistance and Loan Guarantee Trust Fund (FEGA) 3.08 FEGA was created in 1973 as a trust fund to defray to participating banks part of the cost of loan evaluation and technical assistance associated with lending operations to ejidatarios and other low-income farmers (up to 3% of the loan amount and, in special cases, up to 6%) and to issue guarantees to private banks for the recovery of loans to these beneficiaries. Since its creation in 1973 and until December 31, 1979, FEGA issued guarantees amounting to US$301 million, while total FEGA payment on account of guarantees (up to 80% of the subloan amount) were US$1 million during 1979 and US$1.2 million in 1978. Technical assistance reimbursement during 1979 totalled US$6.5 million (US$0.8 million to BANRURAL, US$4.0 million to private banks) and US$1.7 million to FIRA to cover part of its costs of training and demonstration centers. All  - 17 - payments Trade by FEGA on account of guarantees and for technical assistance, as well as, FEGA's administrative costs, are paid by the Government. The total amount paiLd to FEGA by the Government since its establishment was US$33 million. FEGA's approved budget for 1980 is US$16.6 million. Reimbursement for technical assistance costs is estimated at US$9.1 million (US$1.3 million for BANRURAL, US$5.2 million for private banks and US$2.6 million for FIRA), and US$2.2 million is provided for the payment of guarantees to private banks. The balance (US$5.3 million) is earmarked for payments of interest on external loans and for FEGA's administrative expenses. Cost of Funds 3.09 The average cost of FONDO-FEFA resources was 4.3% in 1977, 4.5% in 1978, and 5.6% in 1979. The increase in 1979 was due to: (a) the receipt of a US$50 million loan from the Chase-Manhattan Bank which bears commercial interest rates; and (b) the increase in the interest rate from 3% to 6% paid by FIRA to the Bank of Mexico on additional funds withdrawn during 1979. As of March 1, 1980, all Bank of Mexico funds allocated to FIRA bear an interest rate of 8%, and FIRA estimates that for 1980 the average cost of all its resources would be 8.75%. The total funds allocated to FIRA by the Bank of Mexico up to end-1980 would amount to US$1,000 million. Interest on all external credits (except foreign exchange differences) is paid by FIRA on due daLtes, while repayment of principal and all foreign exchange differences are paid by the Government. Overall, FIRA's financial position until end- 1979 was sound due to: (a) the low cost of FIRA's external resources and borrowings from the Bank of Mexico; and (b) adequate differentials between the cost of funds and the rediscount rates paid by the participating banks. By the end of 1979 the accumulated surplus and reserves of FONDO amounted to US$38 million and of FEFA US$46 million. FIRA's financial position is expected to remain sound and the higher rediscount rates which should become effective in mid-1980 would enable FIRA to cover the increased cost of resources. Assistance to Low-income Producers 3.10 FIRA has established a special program to aid low-income producers; almost 30% of FIRA's past lending program was channeled to this group. About 35% of t'he 1980 lending program (US$1,565 million) is earmarked for the low- income producers. Additionally, FIRA has supported the low-income producers through externally financed projects. Under the Fourth Agricultural Credit Project (Loan 910-ME of June 1973), about 20% of that loan was allocated to low-income farmers. This program was expanded under the Fifth Agricultural Credit Project (Loan 1217-ME of March 1976) in which 47% of on-farm lending was allocated to low-income producers and continued in the Sixth Agricultural Credit Project (Loan 1569-MIE), in which 33% of the loan was allocated to this group. FIRA has also been an active participant in Mexico's Integrated Program for Rural Development (PIDER), which would benefit some five million poor families in 100 micro-regions. The Bank has made two loans in support: of PIDER, totalling US$230 million, of which US$57.5 million was allocated to agricultural credit through FIRA for low-income farmers and a third PIDER project is now being appraised. Furthermore, US$11.3 million of the US$56 million loan for the Tropical Agricultural Development (Loan 1553-ME) has been allocated to credit through FIRA, primarily for low-income producers, and the Rainfed Agricultural Development Project, which has been appraised, would include a significant credit component for low--income producers. In addition, six loans (US$164 miLlion) from the IDB have included credit through FIRA for low-income farmers.  - 18 - Recuperation of Rediscounts 3.11 FIRA rediscounts are collected automatically from the participating banks through their accounts with the Bank of Mexico, and FIRA has virtually no overdues. Periodic reports received from the participating private banks on overdue subloans rediscounted by FIRA show that they are below 1% of the total outstanding loan portfolio. On medium- and long-term loans made through BANRURAL and rediscounted by FIRA, mainly to low-income producers and ejida- tarios, overdues are estimated at 10 to 12%. FIRA's Medium-Term Investment Program (1980-82) 3.12 For the period 1980-82, FIRA would base its lending on an overall program equivalent to about US$12,054 million. Lending for short-term and for medium- and long-term investments would amount to 53% and 47%, respectively, of the total investment. FIRA would contribute about 63% of the investment funds, and the remaining balance would be provided by the participating banks (22%) and the beneficiaries (15%). 3.13 The thrust of FIRA's program would be to augment basic food production, increase production of agricultural export commodities, and accelerate and diversify agroindustry production. Almost 80% of the investment program would focus on basic food production. FIRA's program is also designed to reduce regional imbalances in terms of development. Almost 56% of the medium- and long-term investment funds would be directed to the more depressed regions, mainly in the central and southern part of the country. 3.14 FIRA's detailed 1980 investment program has been approved by the Technical Committee, the governing body of FIRA that sets priorities and policies and approves its financing and lending program. About 35% of the overall lending program would focus on low-income producers. 3.15 FIRA's 1980-82 program is reasonable, inasmuch as it reflects the Government's priorities and is in keeping with institutional capabilities, including the participating banks. The proposed project would support almost 20% of the medium- and long-term investments under the 1980-82 program. Organization and Management 3.16 The Bank of Mexico is the trustee of the Government for the three trust funds administered by FIRA. Two technical committees, one for FONDO- FEFA and the other for FEGA, are the governing bodies of the funds. These are composed of 10 members and each is headed by a senior official of the Ministry of Finance. Other members are the Secretary of SARH, representatives of the Bank of Mexico, Banco Nacional de Credito Exterior, ANAGSA, BANRURAL, the Mexican Banker's Association, and two members appointed by farmers' organizations. FIRA is managed by a Director, who is the Fiduciary Delegate, and is assisted by three Sub-Directors (technical services, marketing, and general administration).  - 19 - Since its inception, FIRA has expanded its organization and has decentralized. It now has a central office in Mexico City, nine regional offices, 37 state state off-ices and 90 local offices. The Bank of Mexico, as t-rustee, pro- vides FIIRA with the required staffing, office facilities and administrative services. FIRA's total staff presently numbers 1,263, of which 812 are professional and 451 are administrative. About 35% of FIRA's staff is located at the central office. FIRA is now considering structural changes to strengthen its organizational set-up and to increase decentralization. 3.17 Training and Demonstration. In addition to its lending activities for agricultural production and development, FIRA operates training and demonstration farms engaged in applied agricultural research, production- oriented demonstrations and training activities. These are strategically located in the zones of major present or potential production throughout the country and can be considered as an important complement to the Government's research and extension services. FIRA also continuously maintains training courses for its own and participating banks' agricultural technical staff. Additionally, FIRA complements the participating banks in providing technical assistance to low-income producers, and its technical staff provides some support in preparing, evaluating and supervising the farm development. While FIRA has reasonable training and demonstration programs, additional resources are needed to expand these programs in order to improve technical services to farmers. 3.18 FIRA's Planning and Programing. As FIRA's lending has grown immensely, it has evolved into a large and relatively autonomous agency for agricultural development. In recognition of this, FIRA has set up a Division of Programing (DP), which is responsible for (a) FIRA's annual programing; (b) preparation of proposals for borrowing from international agencies; and 4(c) FIRA's analysis and diagnosis of the agricultural sector. During 1979, DP prepared FIRA's first annual program and its medium-term plan. In late 1979, DP was reorganized to improve its overall effectiveness. 3.19 FIRA's medium-term plan is based on projections from historical trends of the size and composition of the lending program. The projected targets, by and Large, reflect Government policies and past trends toward increases in medium- and long-term subloans, participation of low-income producers, and lending to agroindustries. DP's 1980 lending program provides an estimate of the size and composition of funds to be channeled into agriculture and is based on inputs from the state and regional levels. For the preparation of the 1980 program, DP communicated the Government's national priorities to FIRA's field offices in early October 1979 with DP's projection of the national targets for FIRA's lending but without specifying regional targets. FIRA's state- and agency-level representatives and specialists estimated the funds they could place in sound investments during the coming year, based on consultations with their participating banks, important borrowers, and other Government agencies in the area. Further discussions resulted between DP and the regional agencies before the annual program was finalized. Eventu- ally, the final estimates provide the basis for contractual agreements between FIRA and the participating banks for subloans to be discounted through FIRA. 3.20 Most of the regions carry out their programing and adjustments at the regional residency in consultation with the state residents and special- ists. In the northwest and southeast regional residencies, FIRA is experi- menting with a decentralized structure which locates the specialists at the  - 20 - state residency, leaving the regional residency with only a few coordinators. In all likelihood, the remaining seven regions will follow the same decen- tralization structure in the near future, providing greater roles to the state-level agencies in the planning process. 3.21 The absence of sufficient economists at the state and regional levels hampers the quality of planning; investment programs are largely prepared by technicians. Also, inadequate staff at the central level reduces FIRA's ability to carry out effective studies and analyses. As a result, there has been no detailed analysis on agricultural credit that would provide perspec- tive on the role of credit within the sectoral program. Sector diagnosis is mediocre and restricted to selected data collection. The establishment of the planning and programing function at the division level does not provide DP with sufficient status to ensure access, influence and the ability to attract talented people. 3.22 FIRA is relatively autonomous. Financing for FONDO and FEFA lending activities is supported through funds from the Bank of Mexico, recuperation of previous loans and foreign borrowings. Interest earnings are sufficient to cover the cost of borrowed funds and FIRA's administrative and general expenditures. Only FEGA receives annual Government budgetary allocations to cover the cost of technical assistance and the payment of guarantees. The "trust fund" status of FIRA insulates it from much of the normal political and bureaucratic pressures. FIRA's 1980 annual program was approved by its Technical Committee but the approval process was largely routine due to FIRA's success in placing funds for agriculture. FIRA has been remotely involved in planning for the agricultural sector and has had minimal influence on sector planning despite its vast experience, substantial size and rapid growth in recent years. 3.23 While FIRA is moving in the right direction in planning and programing, there is currently a pressing need to (a) upgrade the status of DP to a Unit for planning and program analysis and hire additional economists at the regional and national level to strengthen FIRA's capabilities to carry out pertinent studies; (b) improve FIRA's analysis and diagnosis of agriculture and credit requirements and analysis of the development effects of FIRA-assisted programs; and (c) improve coordination with other agencies involved in agricul- tural production and development. 3.24 FIRA recognizes the above and places high priority on planning and programing to ensure (a) active and greater participation in agriculture sector planning and coordination, and (b) efficient allocation of its resources to sound investment programs. Consequently, it has agreed to take firm measures under the proposed project, focusing on the above, to revamp its planning and programing mechanism. 3.25 Monitoring and Evaluation. The Monitoring and Evaluation Division of FIRA, known as Division de Evaluacion de Sistemas e Informatica, developed from a professional staff of two in 1976 to one of 55 in February 1980. Although its original objective was limited to economic and financial impact analysis of FIRA's subloans, the division has expanded its scope to include internal systems analysis, and, most recently, selective data collection on agricultural production and credit. In December 1979, the division was reorganized into three offices: the Office of Credit Impact Evaluation, the Office of Internal Systems Analysis and the Office of Information.  - 21 - 3.26 The Office of Credit Impact Evaluation, with a central office staff of 15 and a field staff of 26, remains the principal focus of the division. A series of credit impact methodologies has been developed and tested, and the most recently completed credit impact evaluation attempted to measure subloan impact on farm systems. The study, which was conducted over a one- year period on a 155-subloan sample, illuminated the impact of various investments on production and income, but it did have several shortcomings, principally the extremely small sample taken and improper classification of sample units. 3.27 Based on experience with the above methodology, a new methodology is presently being tested using a sample of 550 subloans. Once the re- sults of this trial are analyzed and the methodology improved accordingly, it will be applied to the rest of the principal farming activ:Lties. The sub-borrowers in the sample will be interviewed monthly over a five-year period. With the financial, technical and socio-economic data collected, FIRA will be able to measure the adequacy of its technical services, the financial success of its lending program, and the socio-economic impact of its present credits. 3.28 Although the Office of Internal Systems Evaluation was not formed until December 1979, the Monitoring and Evaluation Division had been conducting studies in this area since 1977. The studies have focused on the evaluation of (a) the supervision of banks participating in its lending program, (b) efficiency of technical field staff, and (c) assessing by subloan type and by borrower type the extent of recurrent financing. 3.29 The studies carried out by the Monitoring and Evaluation Division have resulted in several significant changes in the institution; for example, a study of the state/regional office structure resulted in the initiation of a pilot project in two regions of Mexico to test means of decentralizing FIRA's decision-making to the state level and an analysis of the monthly state office reporting system has resulted in its replacement with a more concise format, to be submitted by the regional offices on a quarterly basis. This new format can also be stored in the computer. 3.30 The credit impact studies have also resulted in improvements in FIRA's investment programs. For example, realizing the low profitability of small- scale dairy stables, FIRA initiated a series of field research programs to develop a less expensive dairy package based on grazing rather than stable feeding systems. This new system is now being used commercially by 14 ejidos in Tabasco. 3.31 The work of the Monitoring and Evaluation Division is important as it allows FIRA to ascertain the development impact of its len1ding, thereby providing the data necessary for its preparation of sound annual investment programs. However, to reach these goals, the division needs to be strengthened with addlitional staff and facilities. The Seventh Credit would provide funds for such strengthening.  - 22 - IV. PERFORMANCE UNDER PREVIOUS AGRICULTURAL CREDIT PROJECTS 4.01 The Bank has to date financed six credit projects, totaling US$600 million, to support lending for crop and livestock development. The first project (Loan 430-ME, US$25 million, effective October 1, 1965) provided funds for medium- and long-term on-farm investments to medium-sized and commercial farmers in the tropical zone, central plateau and northern Mexico. Subloans financed a variety of activities but largely livestock, annual crops and perennial crops, with a lesser amount for agroindustries. Some 5,500 on-farm subloans were made, 80% of them for less than US$6,700, while 2% were in excess of US$80,000, the latter group accounting for 23% of the amount lent. Livestock activities accounted for 60% of the disbursements; annual crops, 19%; perennial crops, 5%; and agroindustries, 16%. 4.02 The favorable performance of FIRA under the firs. project encouraged the Bank to process a second loan to maintain continuity. The second project (Loan 610-ME, US$65 million, effective September 19, 1969) continued the activities initiated under the first loan and added a cattle development component for southeastern Mexico. In this project, 11,651 subloans were made, averaging US$17,000 each: 85% averaged US$6,400 and only 1% were over US$80,000 and accounted for about 10% of the funds. Livestock activities absorbed 61% of the funds disbursed; annual crops, 28%; perennial crops, 8%; and agroindustries, 3%. 4.03 The third project (Loan 747-ME, US$75 million, effective September 1, 1971) was fully disbursed in April 1974 and closed on September 30, 1975. In this project, 12,326 subloans were made; 81% were for less than US$20,000, averaging US$6,500, while 6% were in excess of US$80,000 and accounted for 29% of the amount disbursed. Of the amounts lent, 58% were for livestock enterprises (four-fifths of these beef ranches), 24% for annual crops, 8% for perennial crops, 7% for agroindustries, and 3% for mixed farming enterprises. 4.04 The first three projects included an appreciable number of modest- sized subloans, and in the third project, an increasing number of ejidos participated. The fourth project (Loan 910-ME, US$110 million, effective October 24, 1973), while continuing to support the activities financed under the previous projects, included a specific component directed to low-income producers, totaling 20% of project subloans. Disbursements under the fourth project were completed by December 31, 1975, one and one-half years ahead of schedule. Overall, 10,881 subloans were made, averaging US$24,260. Of the total number of subloans, 1,910 went to low-income producers, averaging US$19,140. Individual smallholders received 1,118 subloans, and groups (i.e., ejidos, sociedades and grupos solidarios) received 792 loans. There were 23,552 direct beneficiaries and the average subloan per beneficiary in the low-income producers' category was US$1,552. Of the total amount lent under the project, 54% was for livestock enterprises (two-thirds of this for beef ranches), 24% for annual crop farms, 7% for perennial crops, 13% for agroi- ndustries and 2% unclassified.  - 23 - 4.05 The fifth project (Loan 1217-ME, US$125 million, eff'ective August 28, 1976) continued to support FIRA's medium- and long--term lending programs. It was fully disbursed by February 1979, four months ahead of appraisal estimates. In this loan, 40% of the total project investments and 48% of the loan amount was directed to low-income farmers, more than double the amount lent to these farmers under the previous Bank-financed agricultural project. About 6,900 subloans were made to farmers in the low-income categories (i.e., both individual farmers and groups of ejido farmers) and 10,740 subloans were made to medium-income farmers. The average subloan size in the low-income category was US$20,600, and there were 198,450 beneficiaries: 179,000 ejida- tarios arid 19,450 individual small-scale farmers. The total amount lent to these low-income farmers was US$189.7 million and the average subloan size per beneficiary was US$956. Some 16,240 medium-income farmers received subloans: 2,140 ejidatarios and 14,100 individual farmers. The total amount lent to the medium-income farmers was US$177.7 million and the average su'bloan size was US$10,942. Of the total amount lent under the project, 37% was for livestock enterprises (two-thirds of these for beef ranches), 46% for annual crops, 6% for perennial crops, 9% for agroindustries and 2% unclassified. 4.06 The Sixth Agricultural Credit Project continued Bank support of FIRA's long- and medium-term lending program. It was approved June 1978 and became effective in January 1979. Implementation proceeded far ahead of appraisal expectations and, by March 1980, funds were fully committed, with Bank dis- bursements from the loan account amounting to US$130.0 million, or 65% of the total. Total project cost is estimated at US$627 million, 25% of which is destined for low-income farmers; 61% for medium-income and commercial farmers; 10% for agroindustrial development; and 3.5% for technical assistance, training, and demonstration farms. By December 1979, FIRA had rediscounted 11,500 subloans worth US$306.0 million with funds provided by the Sixth Credit. This included 1,240 subloans worth US$36.0 million to low-income producers; 10,000 subloans worth US$250 million to commercial farmers; and 260 subloans worth US$20.0 million for agroindustrial development. On a sectoral basis, 60% of the invest- ments went for crop production, 33% for livestock production, and 7% for agro- industrial development. 4.07 The Bank has completed audit reports on the first four agricultural loans tco FIRA, and a completion report on the fifth loan is IIow being prepared. The Bank: has stressed increased lending to low-income producers, increased emphasis on crop rather than livestock production, and less emphasis on models and more emphasis on sector orientation in loan preparation. Altogether, the agricultural loan series has absorbed US$600 million of Bank funds, making the program one of the largest in the Bank's agricultural portfolio. 4.08 FIRA's performance throughout the 1970s has been impressive. As an institution, it has grown rapidly; trained many high quality technicians for its own as well as private and public bank staffs' and established technical  - 24 - assistance systems and demonstration centers which have benefitted farmers throughout Mexico. Due to the slow start-up of its Monitoring and Evaluation Division, FIRA does not yet have in-depth development impact studies of its lending program. Nevertheless, FIRA's rediscount program has undeniably in- creased private and public bank lending to the agricultural sector, thereby complementing the Mexican Government's programs to increase agricultural production. And, with its increased lending to the country's low-income producers, FIRA has directly addressed the difficult development issue of distribution of the benefits of production increases within the agricultural sector. V. THE PROJECT A. Introduction 5.01 The Government of Mexico has requested Bank assistance in financing the Seventh Agricultural Credit Project to support the Government's overall development programs for agriculture to promote export growth, reduce the country's dependence on imported foodstuff and alleviate poverty and under- employment in the farming sector. The proposed project would be a contin- uation of Bank assistance to FIRA's lending program, which has received financing under six Bank loans, and would help finance a wide range of in- vestments in crops, livestock, fisheries and agroindustry development through- out the country. The thrust of the proposed project would be toward increasing agricultural production and productivity and in institution building. In contrast to the on-going Sixth Credit Project, the proposed project would include an additional category for medium-income producers and would designate about 15% of the total program for their use. Also, under the Sixth Credit Project, only 25% of the total project costs was allocated for low-income producers but under the proposed project 50% would be earmarked for such sub-borrowers. The preparation report for the proposed project was compiled by FIRA staff and submitted to the Bank in January 1980. A list of studies and working papers relating to the project is given in Annex 6. B. Project Objectives 5.02 The objectives of the proposed project would be to: (a) support the Government's agricultural diversification program, including expansion and development of fisheries and agroindustries, and increase low- and medium-income farmer participation; (b) strengthen FIRA's planning and programing capabilities and provide an institutional framework for efficient allocation of financial resources through private and public lending agencies;  - 25 - (c) induce private commercial banks to increase participation in agriculture through FIRA's rediscounting facility and strengthen each agency's subloan evaluation and supervision capabilities and technical services; (d) irtensify training for the technical staff of FIRA as well as for those of participating banks; (e) establish an operating regulations and procedures manual to standardize the participating banks' lending under FIRA; (f) strengthen FIRA's monitoring and evaluation capabilities and data base system; and (g) introduce a more flexible interest rate structure for agricultural financing under FIRA. C. Brief Description 5.03 The proposed loan would support part of FIRA's projected lending pro- gram over a two-and-a-half-year period to cover the foreign exchange costs of FIRA-financed subprojects and institutional improvements (paraL 5.38). Subloans to individual farmers, farmer groups, and cooperatives would be based on tech- nically and economically sound development plans for a wide array of activities, including crops, livestock, fisheries and agroindustries. Given the wide range of types of sub-borrowers and variations in regional conditions and agricultural activities, subloans would vary considerably. F-[RA would focus on development-oriented medium- and long-term investments, placing emphasis on selection of sub-borrowers in terms of development potential and on transfer of appropriate technology to farmers. 5.04 About 63% of the total lending program would be for annual and perennial crops; 32% for livestock; and 5% for agroindustries and fisheries. Further, about 50% of the total program would be directed to low-income producers, 15% to medium-income producers, and 28% to other commercial producers. 5.05 As under the on-going Sixth Credit Project, FIRA would be responsible for projeact execution. Funds would be channeled through some 90 private and public lending agencies, utilizing the existing credit delivery system. Formu- lation, esvaluation and approval, and supervision of investment development plans would be carried out primarily by FIRA-approved participating bank technicians, with logistical support from FIRA staff. D. Detailed Features Crops Lending Program 5.06 Lending for crop production would be for annual as well as perennial crops under rainfed and irrigated conditions.  - 26 - 5.07 Rainfed Annual Crops. Funds would be made available for on-farm investments in the traditional farming systems to increase productivity of basic food crops, mainly maize and beans. Investments would include land clearing and preparation, upgrading of soils, storage facilities, machinery and equipment. Subloan beneficiaries would be primarily ejidatarios or groups of smallholders and medium-income producers with farms mainly in the range of about 50 to 300 ha. Investments on an average farm of 160 ha in semi-arid and temperate areas would amount to about US$21,800, with an average of 16 families per subloan. Likewise, investments on an average farm of 200 ha in the tropic areas are estimated at about US$28,700, with an average of 40 families per subloan. At full development (by year 5), yields of maize and beans are expected to increase from the present levels of 1.7 tons/ha and 0.6 ton/ha to 2.2 tons/ha and 0.9 ton/ha, respectively. Other important annual crops that would be financed in the rainfed tropic areas are rice and soybean. Rice yield would increase from the present level of 2.2 tons/ha to to 2.7 tons/ha in a period of five years, while soybean yield would increase from 0.8 ton/ha to 1.2 tons/ha in a period of four years. 5.08 Gravity-Irrigated Annual Crops. Major focus would be given to the northern region of the country, which includes a large number of medium-income producers and ejidatarios who are in the process of moving into irrigated agriculture. Improvements would allow a significant increase in the area designated for higher value crops and more intensive use of cropland; cropping intensity, on the average would increase to over 125%. Investments on an average farm of 200 ha are estimated at about US$47,800, with an average of 15 families per subloan. Investments would include on-farm irrigation and drainage infrastructure, land levelling, machinery and equipment, farm buildings and storage facilities. Yields of wheat, sorghum, beans and soybeans would increase from the present levels of 3.8 tons/ha, 5.0 tons/ha, 1.2 tons/ha and 2.0 tons/ha to 4.2 tons/ha, 5.8 tons/ha, 1.6 tons/ha, and 2.4 tons/ha, respectively, at full development (year 4). 5.09 Tubewell-Irrigated Annual Crops. This type of farming is predominant in the arid and semi-arid areas of the northwest and subloan beneficiaries would be commercial farmers as well as ejidos or groups of small landowners who participate in small-scale irrigation operations. Beneficiaries would be in areas in which the Government has already financed infrastructure for the development of ground-water resources. SARH is expected to drill 1,000 tube- wells over the next three years in areas of low-income producers. Subloans would cover investments of about US$73,900 per farm of 260 ha, with an average of 14 families, and would finance land improvement and preparation, power installation, well equipment, on-farm irrigation, buildings and agricul- tural machinery. Development investments would emphasize higher value crops such as wheat, sorghum, soybean, safflower and cotton, and would increase the average cropping intensity to 125%. Yields of wheat, sorghum, and soybeans would reach similar levels to those projected for improved production under gravity-irrigated areas. Other crops, such as sesame, safflower and cotton would reach yield levels of 0.9 ton/ha, 1.5 tons/ha, 3.0 tons/ha, respectively, at full development (year 5).  - 27 - 5.10 Irrigated Orchards. In the arid and semi-arid areas, irrigated annual crops are to some extent replaced with orchards because of higher return and lower irrigation water requirements. Grapes and wa,lnuts would be the principal crops. Average investment on a farm of 50 ha for land preparation and planting materials of industrial grapes is estimated at about US$240,900 in eight years, with an average of 10 families participating. Grape yields would begin in the third year with about 5 tons/ha and at ful]L development (year 8) would increase to between 15 and 20 tons/ha. 5.11 The project would also finance the rehabilitation of deciduous fruits such as apples, peaches, pears and olives. About 100,000 ha of these orchards are in production in the north, northwest, and central part of the country. Average rehabilitation investment per farm of 50 ha would be US$114,000 and would include elimination of old trees, replanting, pruning, control of pests and diseases, acquisition of farm machinery, and building of barns and installation of water supply system. Yields are expected to double from 6 tons/ha to 12 tons/ha in about four years. Under a group system, the average r,umber of beneficiaries would be 10 families per subloan. 5.12 Funds would also be provided to finance small-scale operations for the establishment of new orchards of pecans, pistachios, almonds and date palms in the north, northwest and Baja California. The average investment on a farm of 50 ha is estimated at about US$168,200 over a five-year period, with an average of 10 families per subloan. Subloans would finance land improvement and preparation, on-farm irrigation systems, buildings, and machinery and equip- ment. Actditionally, planting materials, agricultural chemicals, fertilizers, and hirect labor associated with the start-up period would also be financed. Farming systems would vary between 20 ha and 80 ha, and, at full development (about 15 years), yields would reach 2 tons/ha for pecans, which would be the principal crop. 5.13 In tropical areas where there is irrigation, the project would also finance lhe establishment of tropical fruits such as maranon, mango, grapefruit, and African palm. The investment for an average farm of 100 ha with 20 beneficiaries participating is estimated at about US$137,600 over a four-year period. Subloans would finance preparation and improvement cf land, and planting materials, agricultural chemicals, and fertilizer associated in the start-up period. 5.14 Rainfed Orchards. Emphasis would be given to the humid tropics where there is a high demand for investment funds among small-scale individual farmers with an average of 1 to 5 ha of farm land to rehabilitate existing plantations of tropical fruit trees (coconut, cocoa, and citrus) in order to increase production to their potential levels. There are about 150,000 ha of coconuts in the states of Tabasco, Guerrero, Colima and Michoacan; 64,000 ha of cocoa in Tabasco and Chiapas; and 215,000 ha of citrus, mainly oranges, in these areas. Subloans would finance the cost of replacing part of the existing plantation; investment items in the initial period would include land improvement and preparation, unproductive tree removal, planting materials, fertilizers, agricultural chemicals, and hired labor.  - 28 - 5.15 Export Crops. Coffee, the principal export crop occupies about 375,000 ha mostly in the high areas of the South Pacific Coast (Chiapas, Oaxaca, and Guerrero) and in the state of Veracruz. Investment would be made available to rehabilitate 17,100 ha of existing plantations to increase production. Subloans would finance the cost to provide better shade trees, replanting materials, elimination of unproductive plants, fertilizer, agri- cultural chemicals, and equipment. Coffee yields are expected to rise from the present level of 1.7 tons/ha to 4.0 tons/ha at full development (year 6). 5.16 There are 450,000 ha of sugarcane in Mexico, with the states of Veracruz and Jalisco the main growing areas. About 300,000 persons are in the sugar industry. Investment funds would be made available to commercial farmers and ejidos to increase the area of sugarcane in rainfed as well as in irrigated areas. It is estimated that, for new plantations in rainfed areas, the in- vestment would be about US$12,800 per ha, and in irrigated areas, about US$14,000 per ha. Subloans would finance farm machinery and equipment and land preparation and improvement. Under project conditions, cane yields would increase from 45 tons/ha to 70 tons/ha in rainfed areas and from 60 tons/ha to 90 tons/ha in irrigated areas. 5.17 Subloans would also be provided for vegetable production. Tomatoes and melons are the principal export crop, and presently, it is estimated that about 140,000 ha are under export vegetable cultivation. Subloans would finance land improvement, on-farm irrigation systems, farm buildings and storage facilities, nurseries and greenhouses, and machinery and equipment. Livestock Lending Program 5.18 Based mainly on previous lending patterns, about 50% of sublending for livestock would be for beef production, 20% for dual-purpose production (meat and milk), 20% for dairy production and 10% for small animals. As there is a wide range of ecological regions and type of borrower, there would be considerable variation in the size of the subloans as well as in the investment packages financed. 5.19 Beef Production. Investment items would include land clearing, estab- lishment and renovation of pastures and fences; improvement of cattle handling facilities, water supplies, and farm buildings; and the purchase of farm machinery and breeding stock. In the northern semi-arid region, output would consist of feeder steers and boneless beef from cull cows. Participating banks would provide short-term credits for fattening more feeder steers through both feedlot and FIRA- developed grazing systems in order to increase the supply of meat to the domestic market. Ranches in the dry tropic Pacific region have limited fattening capacity, and a high proportion of their steers are sold for fattening to the Gulf Coast region, which is being developed as the major source of quality beef for the domestic market. New areas would be developed out of forest land and the carry- ing capacity of existing farms would be increased by sowing improved pasture species. Investment per ranch is estimated at around US$44,000, with an  - 29 - average of 17 beneficiaries per subloan. Farms would range from an average of 4,000 ha in the northern semi-arid region to 125 ha in the humid tropics. It is estimated that the proposed investments at full development would result in. improved carrying capacities, ranging from an increase of around 15% for the northern area to around 40% for the humid tropics, and increases 4in weaning rate from 60% to 65%. 5.20 Dual-Purpose Production. Emphasis would be given to financing more milk production in the Gulf Coast and humid tropic zone lby promoting dual-purpose cattle (Swiss Cebu and Holstein Cebu crossbreds) systems of production. Input costs are low as animals are grazed on tropical grassland without concentrate supplements. The dual-purpose farm is virtually the only means of supplying fluid milk to tropical urban areas. The rapid influx of population and rising incomes in the State of Tabasco have created a serious deficiency in milk supply there. In more remote areas, milk from dual- purpose cows would be used to produce cheese on the farm for sale. Invest- ment items would be similar to those proposed under the beef production program (para 5.19). Investment per ranch is estimated to average about US$36,000, with 10 beneficiaries per ranch. Participating farms would average around 100 ha and it is estimated that at full development there would be increases in carrying capacity of over 30%, improvements in weaning rate from 60 to 65%, and in milk production from 450 to 700 liters per cow. 5.21 Milk Production. The project would give increased emphasis to investment in dairy production. Over 90% of the subloans would be used for increasing the size of existing commercial dairy farms concentrated in the irrigated arid, semi-arid and temperate zones of Mexico. Investments would include alfalfa and/or perennial grass establishment, expansion and improve- ment of existing buildings, water supplies, irrigation, milking and cooling equipment, agricultural machinery and the purchase of in-calf Holstein heifers. Most of the investments would go into the traditional system of milk production in which feed is harvested and fed to confined animals; however, where possible, grazing on perennial pastures would be promoted in order to encourage farmers to gradually adopt FIRA-promoted lower cost methods of milk production. Because many of these farms have a limited area of land on whiich to expand feed production, herd expansion is generally associated with increased reliance on purchased feed. Rearing of heifer calves for herd replacements is now a profitable enterprise and would be promoted, particularly among low-income farmers. Average investment is estimated at around US$45,000 per farm with an average of five beneficiaries per subloan. It is estimated that, at full developmtent, the calving rate would be raised from 70% to 75% and milk produc- tion per cow increased from 3,600 liters to 4,000 liters. 5.22 Other Livestock. Small animals are an important part of the investment program in other livestock. The major investments in this category would con- tinue to be for swine and poultry production, but investments would be made for productiLon of sheep and goat. Investment in swine production would be for both combined and separated breeding and fattening operations, predominantly based on purchased feed. The majority of the subloans are expected to continue to be in the "Bajio" (central plateau) region which has easy access to the grain markets and the main consumption centers. Investment in swine production  - 30 - would average about US$39,000, with four beneficiaries per subloan. The in- vestments would be mainly in buildings for the different classes of livestock, feed storage, water and drainage facilities and purchase of breeding stock. Mainly through an increase in the annual farrowing rate from 1.7 to 1.8 liters per year, the total number of pigs sold per sow per year is estimated to increase from 13 to over 15 by year 2 of development. Agroindustries 5.23 One of the underlying tenets of FIRA's lending program is to increase the participation of small- and medium-scale producers. Under the proposed project, it is expected that about 144 subloans would be extended to small- and medium-scale enterprises. Of the total agroindustries program (US$40 million excluding contingency), about US$4.8 million would be utilized for forestry industries; US$3 million for agricultural implement and service indus- tries; US$6.9 million for slaughterhouses; US$6.3 million for fruit and vegetable packing and processing plants; US$4.8 million for milk pasteurizing plants; US$4.8 million for grain storage facilities; US$4.2 million for feed mills; and US$3.7 million for fishmeal plants. About 60% of total lending would be for moderniza- tion or expansion of existing enterprises, and about 40% would be to establish new industries. FIRA's rediscounts of subloans would be for investment purposes only to cover costs of such capital items as engineering design, site preparation, buildings, storage facilities, utilities installations, machinery and equipment, specialized transport and fishing vessels. 5.24 Slaughterhouses. Lending for slaughterhouses and by-product processing plants would account for about 12% of total funds designated for agroindustries. Funds for investments in slaughterhouses would be directed primarily to producer groups, while subloans for by-product processing facilities (bloodmeal, bonemeal, tallow) would be promoted among existing enterprises. Investment costs would include slaughter and chilling plants and machinery and equipment; total investments for new enterprises would range between US$1.1 million and US$1.9 million and for renovation of existing plants, between US$0.7 million and US$1.2 million. Development of small- and medium-scale specialized meat product plants would be emphasized through marketing and technical assistance. The average investment cost for such enterprises is estimated at US$0.5 million. Beneficiaries per subproject would average between 150 and 200, depending on the size of operation and producer associations. 5.25 Fruit and Vegetable Packing and Processing Plant. In addition to the traditional growing areas, crop gathering centers in areas of newly developing fruit and vegetable production would be emphasized among small- and medium-scale producer groups. Investment costs would range from US$0.35 million for a simple packing shed with grading and selection lines, conveyors, and related utilities and services, to US$0.7 million for a large-scale facility complete with refrigerated storage. These enterprises would be labor-intensive and would require minimal managerial and technical personnel. Each subproject would have about 30 to 50 beneficiaries.  - 31 - 5.26 G_rain Elevators. Currently, there is an acute shortage of grain storage capacity, particularly in the northeast region because of expanding grain production, and FIRA is promoting construction of such facilities among producer groups (200 to 300 producers per group) throughout the country. The high capacity grain elevators require investment of about US$1.0 million for elevators, related construction, drying machinery, equipment ard utilities. Funds would also be available for the establishment of on-farm silo systems among producers and producer groups. 5.27 Feed Mills. FIRA is accelerating its efforts to promote small-scale producer-owned and operated feed mills in strategic locations. There is presently a high demand for feed mill subprojects because of the surging cost of mixed feed for livestock and poultry. Experience indicates that members of producer-owned mills obtain feeds at prices generally 10% beLow the current commercial rates. Investment costs of civil works, utilities, machinery and equipment would amount to about US$0.4 million. 5.28 Milk Pasteurization Plants. FIRA is promoting establishment of small-scale pasteurizing plants in outlying areas which account for a large number of small-scale dairy producers who do not have easy access to proces- sing plants. Establishment of such plants would ensure steady milk supplies in large consuming centers. Investment cost for a turnkey pasteurizing plant would amount to about US$0.35 million, and each subproject would have 40 to 50 producers. 5.29 Sawmills. A large proportion of the rich forest reserves belong to ejidos but a few have successfully exploited their resources. FIRA is providing sawmills and forest products industries among ejidos in cooperation with local governments and PIDER, which are providing infrastructure support. SARH is also providing technical assistance in silviculture practice, while FIRA technicians are providing technical assistance in organizaLtion and management, operations, marketing, and financial and legal aspects. Further, to induce investments in forestry, FEGA would provide loan guarantees as well as reimbursements to banks for technical assistance outlays. Average invest- ments in sawmills would amount to US$1.0 million, with an average participation of 50 to 80 members in each ejido. 5.30 Agricultural Implements and Service Enterprises. There is a great demand in the rural areas for equipment repair and maintenance workshops. There is aLlso a strong market for simple tools and accessories, which are fabricated locally by these shops. About 7% of the agroindustry funding has been earmarked for this subsector which could meet an essential need. A typical subloan of US$0.2 million would finance a shop building; heavy power lines; and metal working machinery such as drills, presses, lathes, and cutting machinery and accessories. Beneficiaries, on average, would number from 5 to 20 per subloan, all of whom would likely be skilled craftsmen.  - 32 - 5.31 Fisheries. Presently, funds from institutional sources for investment in fisheries are scarce. However, under the proposed project, FIRA would have a modest program (US$8 million excluding contingency) to promote fisheries development and meet credit needs. 5.32 An integrated investment program (encompassing small boats or launches with outboard engines, fishing equipment, ice storage facilities, and refrigerated trucks) would be promoted among low-income, in-shore fishermen. This simple low-cost (US$70,000) package would enable small, low-income fisher- men groups (average of 30 families) to increase their incomes through direct sales of fresh fish in major consumption centers. For larger fishermen groups and established cooperatives which supply export markets, funds would be provided for vessels and equipment, fillet plants and freezing and ice plants. A composite investment package consisting of the aforementioned items would amount to about US$0.4 million. Additionally, subloans would be made for in-shore shellfish farms and commercial inland fish farmers to increase production for the domestic market. 5.33 Investment cost for a standardized fishmeal plant would be about US$1.0 million. Items to be financed would be civil works, which would include the plant building and an auxiliary utility warehouse; a small unloading dock; power substation; conveyors; tubes; pumps; and transport vehicles. Beneficiaries of the subproject would average between 20 and 30. Training, Demonstration and Technical Assistance 5.34 Under the proposed project, FIRA's training programs would be expanded to intensify training of its staff, technical staff of participating banks, and farmers. Additionally, the project would make provision for selected FIRA staff to be trained abroad in technical fields. The training would include two-year scholarships for post-graduate degrees where staff expertise re- quires strengthening. FIRA's training program would focus on agricultural finance, farm management, subloan appraisal, low-cost technology and improved farming systems, and technical aspects relating to crop and livestock activi- ties. To facilitate training for farmers, new demonstration centers for crops and livestock would be established in strategic locations, and selected existing centers would be expanded. Under the project, the number of livestock demonstration farms would be increased from 33 to 49 centers, with emphasis on forage production and heifer rearing. Likewise, in agriculture, the number of demonstration farms would increase from 20 to 47. Most of the new centers would focus on improving yields and profitability of basic rainfed crops. The project would also include five training centers, two for tropical dairy production and three for rainfed crop production. Investments would include civil works, land improvement and development, crop and forage establishment, agricultural machinery and equipment, and livestock. Additionally, the project would provide for short-term consultants equivalent to 10 man-months to assist with training.  - 33 - 5.35 Cechnical assistance would continue to be provided to the low- and medium-income farmers by FIRA and the technical staff of the participating banks. Sinice FIRA has significantly increased its lending program for low- income producers, the importance of technical assistance has been heightened. Through FEGA, FIRA would reimburse, as under previous projects, participating banks for p-rt of the cost of providing technical assistance (equivalent to 3X to 6% of outstanding subloan balance) to such farmers. Data Base System and Monitoring 5.36 In order to improve FIRA's data base management system and improve its monitoring capabilities, the project would provide for facilities, equip- ment, additional qualified staff, and consultant services to assist FIRA in these areas. The data base system would be strengthened in order to improve (a) timely availability of quality data to various user groups in FIRA's management, and (b) FIRA's internal control of its lending program. The principal source of input for the data would be from the technical evaluation and disbursement documents prepared in the field. The data base would identify types of sub-borrower by economic activities and regions, and for each subloan there would be information on the investments to be financed, income and operating statement and cash flow situation. Additionally, the disbursement levels under each subloan would be recorded, and the data base would allow identification of repeater subloans. Planning and Programing 5.37 Under the project, FIRA's planning and programing set-up would be strengthened. Provision would be made for additional personnel and consultant services (paras 6.02 to 6.10). E. Total Investment Program 5.38 FIRA has proposed for the project a total investment: program estimated at US$1,179 million, of which about US$325 million, or 28%, represents the foreign exchange component. The proposed investment program represents about 21% of FIRA's overall medium- and long-term investment program, amounting to about US$5.7 billion for the 1980-82 period, which is based on FIRA's past experience, national and regional priorities, FIRA's sectoral development strategy, credit delivery capabilities, and credit absorptive capacity at the farm level. 5.39 Project costs include no allowances for import duties, since the government's policy exempts agricultural equipment and materials from import duties. Base cost estimates are evaluated at mid-1980 prices and incorporate allowances for domestic and international inflation, amounting to about 31% of the total cost. Domestic price escalation is estimated at 18% per annum based on recent inflation rates. The contingency for international inflation, which is estimated at 10.5%, 9.0% and 8.0% per annum for 1980, 1981 and 1982, respectively, has been based on Bank guidelines for international price increases (dated January 7, 1980).  - 34 - 5.40 The consultant costs would amount to US$400,000, with direct cost (salaries, allowance, travel and overhead) estimated at US$10,000 per man-month. Project costs are summarized below: Total Investment Program Total Local Foreign Total Investment Cost FE --------US$ million