Mexico - Apatzingan Irrigation Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-2766-ME REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN. TO NACIONAL FINANCIERA, S. A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR THE APATZINGAN IRRIGATION PROJECT May 9, 1980 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 Since September 1, 1976 the Mexican peso has been floating; it has fluctuated around Mex$ 22.60 to the US dollar since mid-1977. On April 1, 1980, the peso traded at 22.60 per US dollar. FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 2 1 hectare (ha) 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) = 2.2 pounds 1 liter (1) 0.26 gallons 1 metric ton (mt) 1,000 kg = 0.98 long ton ABBREVIATIONS BANRURAL: National Rural Credit Bank (Banco Nacional de Credito Rural) CAEVA: Agricultural Experimental Station for the Apatzingan Valley (Campo Agricola Experimental para el Valle de Apatzingan) COPLAMAR: Commission for Marginal Areas (Comision para las Areas Marginadas) ERR: Economic Rate of Return FIRA: Agricultural Trust Fund of the Bank of Mexico (Fideicomisos Instituidos en el Banco de Mexico en Relacion con la Agricultura) ICB: International Competitive Bidding LCB: Local Competitive Bidding NAFINSA: Nacional Financiera, S.A. PEMEX: Mexican Petroleum Company (Petroleos Mexicanos) PIDER: Integrated Program for Rural Development (Programa Integral para el Desarrollo Rural) PLAMEPA: On-farm Improvement Plan in Irrigation Districts (Plan de Mejoramiento Parcelario) PNDR: Plan for Small Scale Agricultural Infrastructure Development (Programa Nacional de Desarrollo Rural) SARH: Ministry of Agriculture and Water Resources (Secretaria de Agricultura y Recursos Hidraulicos) SHCP: Ministry of Finance (Secretaria de Hacienda y Credito Publico)  MEXICO FOR OFFICIAL USE ONLY APATZINGAN IRRIGATION PROJECT LOAN AND PROJECT SUMMARY Borrower: Nacional Financiera, S.A. Guarantor: United Mexican States Beneficiary: Secretariat of Agriculture and Water Resources (SARH) Amount: US$160 million equivalent Terms: Payable in 17 years, including 4 years of grace, at an interest rate of 8.25 percent per annum. Project Description: The project would promote development of intensive irrigated agriculture on about 110,000 ha in the State of Michoacan, in Irrigation District No. 107, through: (a) construction of the Chilatan dam, on the Tepelcatepec river, in the western part of the valley; (b) rehabilitation of the existing Cupatitzio system in the eastern part of the valley, with a possible back-up for diverting additional water from local streams; (c) construction of distribution and drainage systems, rehabilitation of diversion structures, and irriga- tion canals and drainage works, construction of feeder roads and other infrastructure works to service the irrigation district; (d) land clearing on about 11,500 ha and land leveling of about 74,000 ha of the project area; (e) strengthening of agricultural support services (extension, research and training); and (f) equipment and machinery for operation and mainte- nance of the project facilities. The project would directly benefit 9,806 families compris- ing 8,889 ejidatarios 1/ and 917 private farmers. Of the beneficiaries, 61 percent have holdings of 10 ha or less; 32 percent between 10 and 20 ha each; the remaining 644 holdings, about 7 percent, are larger than 20 ha each. On full development, farm incomes would increase by 60 to 100 percent in the project area. There are no major risks associated with the project because of the Mexican experience with irrigation and dam building. 1/ Ejidatarios are members of an ejido, a form of group land tenure based on usufruct. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Estimated Cost: US$ millions % Foreign Local Foreign Total Exchange I. Civil works and engineering 128.5 82.6 211.1 39 II. On-farm development and agricultural extension 23.3 12.1 35.4 34 III. Equipment for operation and maintenance 0.3 3.3 3.6 92 IV. Indemnities 5.6 - 5.6 - V. Total Baseline Cost 157.7 98.0 255.7 38.3 VI. Contingencies Physical contingencies 22.8 16.0 38.8 41.0 Price contingencies 68.3 46.0 114.3 40.2 TOTAL COST 248.8 160.0 408.8 39.1 Financial Plan: US$ millions % Government 248.8 61.0 Bank 160.0 39.0 TOTAL 408.8 100.0 Estimated Disbursements: Bank FY 1981 1982 1983 1984 1985 1986 1987 ------------- US$ millions ------------- Annual 7 13 24 36 41 29 10 Cumulative 7 20 44 80 121 150 160 Rate of Return: 15.5 percent Staff Appraisal Report: Report No. 2915-ME dated May 2, 1980.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMNENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NACIONAL FINANCIERA, S.A. WITH THE GUARANTEE OF UNITED MEXICAN STATES FOR THE APATZINGAN IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed loan to Nacional Financiera, S.A. with the Guarantee of United Mexican States for the equivalent of US$160 million to help finance the Apatzingan Irrigation Project. The loan would be repaid over 17 years, including 4 years of grace, with interest at 8.25 percent per annum. PART I: THE ECONOMY I/ 2. The Mexican economic situation and major issues of economic policy were analyzed in "Special Study of the Mexican Economy: Major Policy Issues and Prospects" (2307-ME), distributed to the Executive Directors on May 30, 1979. The most recent economic mission visited Mexico in February 1980 and is now preparing its report. Country data sheets are attached as Annex I. Past Performance 3. For the three decades preceding the mid-seventies, Mexico was very successful in achieving rapid economic growth while also maintaining stability in prices and the balance of payments. From 1940 to 1970, GDP growth exceeded 6 percent per year in real terms, inflation averaged less than 5 percent per year from the mid-1960s to 1972, and the dollar value of the peso, fixed in 1954, was maintained until 1976. The Government's economic role in this achievement was to carry out direct investments in infrastructure and in key industries such as power, steel and petroleum, while creating a stable regula- tory and institutional framework, as well as good profit prospects, to induce private sector growth. 4. This strategy produced considerable progress and better living standards for many Mexicans. The absolute income levels of the poorer house- holds rose more or less apace with those of their richer countrymen, but there was little reduction in contrasts within the Mexican economy. While land redistribution has continued, most of the peasants who received land could not significantly improve their economic status as they received only limited benefits from infrastructure, credit and technical assistance. Rapid popula- tion growth which reached a peak of almost 3.5 percent per year by the mid-1970s, made social equity even more difficult to achieve. Even Mexico's sustained economic growth was not sufficient to absorb the rapidly growing labor force in productive employment and by the 1970s some 50 percent of the labor force was either relatively unproductive and poorly paid, or openly unemployed. 1/ This section is substantially unchanged from the President's Report for a Small and Medium-Scale Mining Development Project (Report P-2735-ME of March 6, 1980).  - 2 - 5. During the 1970s Mexico experienced increasing public sector deficits, inflation, large balance of payments deficits, capital flight and a marked slowdown in the real rate of growth of GDP, which dropped to less than 2 percent in 1976--the lowest rate experienced since the mid-thirties. On September 1, 1976 the authorities abandoned the fixed exchange rate of 12.50 pesos per dollar that had remained unchanged since 1954 and let the peso float; since then it has remained rather stable at rates fluctuating around 22.60 pesos per dollar. Following the devaluation, Mexico obtained major support from the IMF. The new Government ratified a three-year extended facility agreement with the Fund shortly after taking office on December 1, 1976, and was generally successful in adhering to it. Recent and Current Situation 6. The present Government inherited a difficult situation. High inflation, large public sector deficits, increasing foreign indebtedness and lack of confidence in economic management indicated a need for economic stabilization. However, the situation also called for more expansionary policies; economic activity had slowed down, net private investment was virtually nil, and the gap between new job creation and growth of the labor force was increasing. Rich new petroleum discoveries and high world prices offered profitable investment opportunities in the petroleum sector; indeed, increased production for export of these products seemed by far the only way to meet a large part of Mexico's high debt service requirements in the coming years. 7. Faced with these conflicting needs and opportunities, the Mexican authorities adopted a mixed strategy aimed at reducing lower-priority public expenditures and increasing public revenues, while proceeding with petroleum and other high-priority investments. The objectives of the Government's program included control of inflation to be followed by a return to high rates of economic growth. Better management of public sector expenditures, tax reform, more rational pricing and cost control in public sector enter- prises, promotion of private savings, limiting wage increases to justifiable levels, and more effective cooperation with the private sector were important parts of the Government's economic strategy. 8. This approach succeeded in bringing inflation down to 18 and 20 percent in 1978 and 1979, respectively, as against an annual rate of almost 30 percent in 1977. The deficit in the current account of the balance of payments peaked at $4.2 billion (or 6 percent of GDP) in 1975 and declined to $1.9 billion (equivalent to 2.5 percent of GDP) in 1977. Favorable oil prospects and increasing capital inflows brought about a rapid increase in imports reflecting both the resolve to reduce protectionism and the growing demand for capital and intermediate goods upon which the expansion of the economy depends. The current account deficit increased to US$2.9 billion (or 3.1 percent of GDP) in 1978 and further to an estimated US$3.8 billion (under 3.5 percent of GDP) in 1979. The public sector deficit also peaked at about 9 percent of GDP in 1975 and declined to about 6 percent in 1979. Mobilization of savings by the banking system has recovered at a strong pace. GDP growth is estimated at about 7 percent in 1978 and 8 percent in 1979 as compared to less than 1 per- cent in 1977.  9. The growth outlook for 1980 continues to be favorable and the economy should increase at about 8 percent, but inflation will remain a problem, essentially as a result of investments which are increasing at a rate of more than 15 percent a year in real terms. These investments call for continued increase in imports of capital and intermediate goods and, while foreign exchange will not be a constraint on account of the recent increases in oil prices and the strong creditworthiness of Mexico in international capital markets, the import program will put a severe strain on the existing infrastructure capacity, especially ports and rail transport in which bottle- necks already exist. Additional strain on the transport system is likely to come from the large imports of grains as a result of a bad crop this year. 10. Another threat to the efforts of the Government in reducing inflation below 20 percent may come from the wage area. The recently agreed increase in the minimum wage of about 21 percent, after three consecutive years of decline in real wages, while not automatically reflected in the total wage bill, is likely to establish a floor in union bargaining within the modern sector and contribute to a cost push which might be passed on to consumers. 11. The Government will not have an easy task in maintaining price increases within acceptable limits. The cumulative increase in the consumer price index in 1980, through March 31, of about 9.5 percent, resulting in part from seasonal factors and in part from the newly introduced value-added tax, may adversely affect expectations about inflation. At the same time, the need to expand public investment in the key infrastructure sectors and to maintain in real terms the current programs in the en:rgy sectors, leaves relatively little scope for significant adjustments in tie level of public expenditure. Economic Problems and Prospects 12. Mexico has the institutional and natural resources necessary to attain her ambitious goals of rapid growth and alleviation of poverty. The short-run disequilibria that affected the country during the mid-70s are being brought under control; the new petroleum riches will greatly relax the financial constraints on growth. The proven oil and gas reserves are estimated at about 50 billion barrels. Exploitation of these reserves should allow Mexico to substantially increase production of crude oil and natural gas from the equivalent of about 1.2 million bbl/day in 1976; the stated goal of the Government is to reach a production level of about 2.5 million bbl/day by end of 1980, and more or less maintain it at a level that will enable exports of 1.1 million bbl/day. The challenge is how Mexico can mobilize its resources--not only petroleum but also its human skills, institutions, and experience--to help resolve its long term development problems. The most serious of these relate to poverty, unemployment, stagnation in agriculture, and urban-regional imbalances. 13. Poverty: Mexicans have unevenly participated in the remarkable economic growth of the last several decades. According to preliminary esti- mates for 1977, at least 2.4 million households (22 percent of the total) lived in absolute poverty, while at least 2.8 million (25 percent of the total) had incomes less than one-third the national average. The root causes of this persistent problem are three: rapid population growth, past neglect of rainfed agriculture (where some two-thirds of the poor are principally employed), and slow absorption of labor in high-productivity jobs (mostly in industry).  -4- 14. The Government is acting on all three fronts. A family planning program, started in 1972, has already helped reduce population growth from 3.5 percent per year to an estimated 2.9 percent at the present time. The program is being further strengthened by the present administration, with the ambitious goal of reducing population growth to 2.5 percent per year by 1982 and to 1 percent by the year 2000. New approaches are also taking hold in regard to rainfed agriculture (see para. 17). On the employment front, new tax incentives have reduced the anti-employment bias, and the expected rapid growth of output should also create jobs more rapidly. In spite of this progress, however, the rapid growth of population and of,the labor force made unavoidable by the high percentage of children in today's population, renders the eradication of absolute poverty a goal attainable only several decades from now. 15. Open and hidden unemployment, which are now respectively at 8-9 percent and 40 percent of a labor force which is growing at about 3.7 percent per annum, will remain major problems in the years to come. With the expected GDP growth rate of 8 percent p.a. the economy will be able to absorb the additional labor force, assuming no significant change in the participation rate (now at about 29 percent) and taking into account an increase in labor productivity. In absolute terms the present level of under employment and unemployment are therefore likely to remain. 16. An Employment Development Plan was published early this year. It calls for a number Jf measures to strengthen the so-called informal sector both in the urban and the rural areas. To increase the productivity of those employed outside the modern sector, and their employment opportunities, a major effort will be required in the area of vocational training. Technical assistance programs are also needed to stimulate more organized and structured forms of activities,.especially in the services sector. While there is no doubt that the authorities are concerned about unemployment and underemploy- ment, and while the institutional structure to carry out some important programs already exist, a concentrated effort will be required to take effec- tive action and make better use of human resources by substantially reducing the level of hidden and open unemployment. 17. In agriculture, crop and livestock production has shown little growth since the mid-1960s. Faced with diminishing returns to expensive new large-scale irrigation works, as well as the continuing low productivity (and income per capita) in the non-irrigated ("rainfed") sector, the present administration has re-organized the parts of the Government that deal with agriculture in order to design and implement a new strategy. This strategy emphasizes production increases through a balanced development program. Greater emphasis is being placed on technical assistance, demonstration, and credit to develop the underutilized rainfed agricultural potential. Programs to rehabilitate existing irrigation serving nearly one million ha are underway. Small-scale irrigation development is being promoted. Construc- tion of new large-scale irrigation units continues at a relatively reduced scale as economically justified projects are now more scarce. The banking system is being encouraged to provide greater support to agricultural production  - 5 - and processing programs. These initiatives should lead to an acceleration of production growth, more equal development opportunities for Mexico's farmers, and an improvement in the living conditions of the rural poor. 18. The main urban-regional problems are two-fold: (a) growing conges- tion, pollution, high-cost services (especially water) and other manage- ment problems that stem from continued rapid growth of Mexico City (already the third most populous metropolitan area in the world) and other areas in the dry, densely populated central plateau, and (b) retarded development, poverty and great difficulty in providing either better jobs or adequate public services for the one-third of all Mexicans who live in towns of less than 2,500 inhabitants. The present Government has taken many positive steps to confront these problems, including an administrative re-organization, elaboration of a comprehensive plan, and introduction of a strong package of incentives to promote growth in a few well-selected growth poles. 19. The expected high growth rate of the economy in the years to come is the country's strongest weapon to reduce poverty and unemployment. Industry will be a leading sector in expanding domestic production and exports. A National Industrial Development Plan was published last year and it reflects the serious effort of the present administration in identifying the long-term prospects of the industrial sector and its implications for the employment picture. Industry has the potential for considerable expansion in many areas, including efficient import substitution in chemicals, petrochemicals and capital goods as well as exports of many different manufactured products. The Mexican Petroleum Company (PEMEX) has already started an ambitious investment program to produce a variety of primary petrochemicals on a large scale for both domestic consumption and exports anid an equally vigorous expansion is expected in investment for the production of secondary petrochemicals. Touirism export earnings are also expected to increase substantially. 20. A National Development Plan is in preparation. This plan would mark the final step in the planning activities which the current administration has undertaken in order to obtain a more structured picture of the economic and social problems facing the country. In the past two years, a National Urban Development Plan and the already mentioned Industrial Development and Employment Plans have appeared; the forthcoming National Development Plan aims at formulating a national development program reconciling the sectoral targets and making them consistent with the general economic and social strategy of the Government and with the availability of domestic and foreign financial resources. 21. Mexico's public and publicly guaranteed debt service ratio has been increasing over the recent past and peaked above 60 percent in 1978-79. This high ratio reflects the low level of exports relative to GNP and the high proportion of Mexican borrowing from commercial banks; the ratio of external public debt to GNP is average for middle-income countries. The public debt service ratio is expected to decline to around 40 percent in the early 1980s, mainly as a result of rapid increases of petroleum exports. Debt service on Bank loans amounted to about 2.8 percent of public debt service in  -6- 1978; this ratio is projected to remain about the same during the early and mid-1980s. The Bank currently holds about 5.5 percent of Mexico's total medium and long-term public debt, and this ratio is not likely to change significantly over the next few years. Mexico is creditworthy for borrowing on conventional terms. PART II - BANK GROUP OPERATIONS IN MEXICO I/ Bank Operations 22. As of March 31, 1980, Mexico had received 62 loans from the Bank amounting to US$3,635.9 million net of cancellations and terminations; of these, 36 loans totalling US$1,710.4 million were fully disbursed. On March 25, 1980, the Executive Directors approved a US$40.0 million loan to assist a Small- and Medium-Scale Mining Project. The Bank presently holds US$3,029.2 million of which US$1,238.0 million have not yet been disbursed. Some 38 percent of Bank lending has been for agriculture and rural development (20 loans for US$1,356.4 million), 20 percent for power (12 loans for US$704.8 million) 19 percent for transportation (13 loans for US$666.7 million), and 17 percent for industry (10 loans for US$687.5 million); the remaining 6 percent has been for water supply (US$130 million), tourism (US$114 million), and urban development (US$16.5 million) projects. Annex II contains a summary statement of Bank loans as of March 31, 1980 and notes on the execution of ongoing projects. IFC Operations 23. As of March 31, 1980, IFC had made investment commitments in 19 companies in Mexico, for a total of US$250.8 million, of which US$168.5 million had been sold, repaid or cancelled. A summary statement of IFC investments as of March 31, 1980, is presented in Annex II. Bank Strategy 24. The main objectives of Bank lending in Mexico have been to: (i) support policies and programs leading to a wider distribution of the benefits of economic growth; (ii) help finance projects that make directly or indirectly, significant contributions to output and employment; and (iii) help resolve critical adjustment problems that Mexico is currently facing. There- fore, the Bank is preferentially supporting projects of high social priority that help the rural or urban poor, projects that promote higher levels of employment and production and those that help to decentralize economic activity. 1/ This section is substantially unchanged from the President's Report for a Small- and Medium-Scale Mining Development Project (Report No. P-2735-ME of March 6, 1980).  - 7 - 25. Because of the difficult structural problems of Mexico's agricul- ture and the sector's crucial importance to the country's further development, the Bank has made agriculture the leading sector for its lending. The Bank's agricultural lending program for Mexico has four goals: first, to increase productivity of presently cultivated lands through selected programs of irri- gation rehabilitation and on-farm improvements; second, to improve the pro- ductivity of small farmers through programs for (a) rural development, (b) rainfed agricultural development, and (c) bringing new areas in the humid tropics under cultivation; third, to complement infrastructure investments with general support services including agricultural extension and marketing programs and provision of medium-term credit; and fourth, to promote employment opportunities in rural areas through programs of agro- and rural-industries. The Bank has made eleven loans in FY74-79 totalling US$1,012 million for irrigation, rural development and agriculture, agro-industries and livestock credit programs. Several projects for water control and irrigation, rainfed agriculture, rural development and support services and agricultural credit are in preparation, one of which (Agriculture Credit VII) is expected to be ready for presentation to the Executive Directors in the coming weeks. 26. Past Bank lending for industry has been aimed at (a) assisting the Government's efforts to reduce the balance of payments deficit, (b) decentralizing industrial activities away from the major and increasingly congested urban areas and (c) promoting greater employment in the sector by supporting medium- and small-scale industry. A steel project which the Bank helped structure and finance is now operating in a previously under- developed area on the west coast of Mexico. The fertilizer sector has been strengthened by two Bank assisted projects which the state-owned fertilizer company (FERTIMEX) is carrying out. Loans for projects to promote the develop- ment of small- and medium-scale industrial enterprises and to support an industrial equipment fund (FONEI) were approved by the Executive Directors in FYs78-79; they offer support to the private sector at a time of rapid expansion. The Executive Directors recently approved a project for the mining sector which up to now has received insufficient resources from the financial system. A small and medium scale industries project has been appraised and will be sub- mitted to the Executive Directors in the coming weeks. A capital goods industry project is under discussion for possible Bank support. 27. As regards infrastructure, the Bank's operations have been focused on investments in key areas of the country as well as on institutional reforms and sector policies aiming, inter alia, at suitable pricing mechanisms to help generate additional resources for investment financing. The airports development project (FY74) was designed to support the Government's policy of regional integration; the third railway project (FY76) supported improve- ments of institutional aspects and financial management of the sector. The Mexico City (FY73) and medium cities (FY76) water supply projects have been instrumental in the establishment of specialized institutions for efficient provision of drinking water and in the pricing of water at levels more closely related to costs. A highway sector project was approved by the Executive Directors in FY79. A medium-size cities water supply project has been appraised and a railways project is currently under discussion for possible Bank support.  28. The Government and the Bank have long recognized the regional economic disparities prevailing in Mexico. In June 1976 the Government adopted the Law of Human Settlements to provide a new institutional frame- work to deal with the pressing problems of over-cor.;-itration of economic activities in the larger metropolitan areas. The Government has recently adopted a National Urban Development Plan that spells out its regional develop- ment priorities in operational terms, and several projects are now being prepared to meet the needs for basic urban services for poor families and to provide key regional infrastructure in selected priority cities. One such project, to assist in the development of the Lazaro Cardenas conurbation area on the West Coast, was approved by the Executive Directors in FY78, and another project for the southeast part of the country has been appraised. 29. The Inter-American Development Bank (IDB) is the second largest source of multilateral aid to Mexico. The IDB has made loans totaling US$2,148 million to December 31, 1979. Over sixty percent of this lending has gone for agricultural and rural development projects, and the balance for transportation, industry, and tourism infrastructure. In 1979, the IDB approved five loans totaling US$251 million for industrial credit, irrigation, human resources, highways and export promotion projects. The IDB and the Bank have worked in parallel on several projects; most recently the IDB and the Bank have each made loans for the National Program for Small-Scale Agricultural Infrastructure, the Program for Integrated Rural Development (PIDER), agricul- tural and livestock credit, small- and medium-scale industries, and hotel development. The International Fund for Agricultural Development (IFAD) is processing a rural development project in the state of Oaxaca which was appraised by the Bank's staff. PART III - THE AGRICULTURAL SECTOR Background 30. Agriculture is the most important source of income for Mexico's rural population of approximately 24 million. It employs about 34 percent of the labor force in the country, despite increasing migration to urban areas. The sector sustains about 4 million families, of which 1.3 million are land- less. The number of landless families is increasing because of the limited availability of farm land. The majority of the primary sector labor force, however, is engaged in activities with very low productivity, with about two-thirds of agricultural labor earning incomes below the minimum wage. 31. Agricultural external trade remains favorable and exports in 1979 amounted to about US$1.78 billion, or 20 percent of the total merchandise exports (almost 35 percent of non-oil exports), while the share of agricultural imports, US$0.83 billion, in total merchandise imports was about 7 percent. However, the combined effect of rapid population growth and the declining growth in agricultural production has resulted in a significant increase in food imports, particularly of corn, wheat, sorghum, and oilseeds.  -9- 32. The Mexican agriculture is marked by wide disparities in resource endowment, technology, productivity and income. As a consequence of the wide range of conditions in the country's two million square kilometers, Mexican agriculture is characterized by sharp contrasts, such as that between the subsistence farms in the Sierras and the technology intensive commercial farms in the western irrigated zones. Comparing the 0.2 million modern farms with the 1.5 million subsistence farms at the other end of the spectrum, income per ha in the former is 2.7 times of the latter, and income per capita about 20 times as high. 33. Since adoption of Government policy to promote irrigation and the creation, in 1946, of the Secretariat of Hydraulic Resources, three different phases can be distinguished in the development of agriculture. During the period 1945-55, crop production grew at a rate of 7.3 percent per annum; most of the rapid increase coming from opening nearly 110,000 ha per annum to intensive irrigated cultivation. The growth of livestock production during the same period averaged 3.7 percent per annum, resulting in a combined growth rate of 6 percent for the sector as a whole. In 1955-65, the expansion of irrigated land declined to about 65,000 ha per year, and agricultural and livestock production sector expanded at a more moderate rate of 4.2 percent per annum. Since 1965, the cropped area has remained constant at about 15 million ha. Agricultural production grew only at a yearly average of 1.4 percent between 1965 and 1978, while livestock production continued to expand at about 4 percent per annum. Along with progressive deceleration in growth of irriga- tion facilities, the share of agriculture in national GDP has declined from 14 percent itl 1965 to just over 9 percent in 1978 (or about 11 percent of the non-oil GDP). Government's Policies and Programs 34. The present administration has perceived the dimensions of the problems of the sector and has stated its commitment to improve the living conditions of the poorer sections of the rural population and to focus on agricultural diversification. Self-sufficiency in grains is still one of its main goals, although its achievement by the end of the current six- year term is now considered somewhat unrealistic. The strategy is based on obtaining higher productivity in existing lands and expanding the cropped area, both irrigated and rainfed. 35. In order to achieve both self-sufficiency and improved living standards, the Government has designed a strategy aimed at making fuller use of water and land resources, giving priority to rehabilitation of those irri- gation districts where infrastructure is inadequate or land is in poor con- dition. The rehabilitation programs have received important support from Government agencies, the Mexican banking community, and participating farmers. New lands are also expected to be brought into production, mostly under rainfed conditions; increasing attention is being given to rainfed agri- culture through the 123 recently established rainfed districts. The Govern- ment has given high priority to integration of technical assistance and extension services with marketing and credit in rainfed areas. The Bank has  - 10 - worked closely with Mexican officials in preparing the recently appraised rainfed agriculture development project in support of the national rainfed district's program. The program is designed to increase farm production and productivity, generate employment, provide technical assistance and improve rural infrastructure. The Government is also taking action to meet the needs of the indigenous population and of the people in marginal areas, expanding significantly the program of the Commission for Marginal Areas (COPLAMAR) to extend infrastructure support and public services (such as health, water, schools, and food distribution) to these groups. 36. Additionally, the strategy for development in the agricultural sector calls for investment in training, applied research, rural infrastructure, irriga- tion, land clearing, access roads, as well as marketing and storage facilities. To reduce income disparities in the rural areas, the Bank has supported an integrated approach along these lines by participating in the Integrated Program for Rural Development (PIDER) and the National Plan for Small Scale Agricultural Infrastructure Development (PNDR). Furthermore, to provide impetus to agricul- tural development, the Government has substantially increased credit resources for production and investment purposes. Also, it has taken measures to strengthen the credit and technical assistance delivery systems as well as to promote participation of private banks. Through its credit program, the Govern- ment is also making resources available for the promotion of agroindustries. 37. In parallel, the Government is bringing new areas under irrigation and improving availability of water and its management in the existing irriga- tion districts. The proposed project would support rehabilitation of an important irrigation system, contribute to increased crop and livestock produc- tion and increase employment opportunities in the area. Experience in Previous Projects 38. In the past six years (FY74-79), the Bank has made 11 rural develop- ment and agricultural loans amounting to US$1,012 million: Irrigation (Panuco, Sinaloa, Fuerte/Sinaloa and Bajo Bravo/Bajo San Juan) - US$291 million; Rural Development (PIDER I and II and Papaloapan Basin) - US$280 million; Credit (V and VI Project) - US$325 million; Area Development (Tropical Agriculture) - US$56 million; and Small-Scale Agricultural Infrastructure Develop- ment - US$60 million. As noted in Annex II, by and large, these projects are progressing satis- factorily. Implementation of the above-mentioned irrigation projects was delayed mainly because of budgetary constraints. Accentuating these  - 11 - delays were large cost increases unforeseen at appraisal done prior to oil price increases of the mid-1970s. The Government and the Bank jointly reviewed these problems and agreed that the projects be financed over a longer period of time. This review led to reformulation of the Bajo Rio Bravo/Bajo Rio San Juan project with cancellation of US$100 million from the origina