Mexico - Irrigation and Drainage Sector Project

Docu The Wor FOR OFFICIA ZSAJ 3Y/C-/ RePort No. P-5604-ME MEMORANDUM AND RECOMMENDATION i OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$400 MILLION TO NACIONAL FINANCIERA, S.N.C. WITH THE GUARANTEE OF THE UNITED MEXICAN STATES FOR AN IRRIGATION AND DRAINAGE SECTOR PROJECT OCTOBER 29, 1991 Tbhis document has a restricted distribution and may be ued by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRECY EOUIVALENTS Currency Unit = Mexican Peso (Mex$) US$1 = Mex$3,055 Mex$1 million = US$327 (October 1991) FISCAL YEAR January 1 - December 31 UNITS OF WEIGHTS AND MEASURES I meter (m) = 328 feet (ft) 1 kilometer (knm) = 0.62 mie (mi) hectare (ha) = 10,000 m2 = 2.47 acres 1 square kilometer (ki2) = 038 square miles (mi2) 100 ha 1 metric ton (m ton) = 2,205 pounds ACRONYMS AGSAL I & II - Agriclturl Sector Adjustment Ioans I & n AIOP - Annual lvestmt and Operational Pla CNA - National Water Commission (Comlisl6n Nacdonal del Agua) IDB - Inter-Ameria Development Bank NAFIN - Nacdonal Finandera, S.N.C. (National Financing Company) SPP - Secrearba de Programac6n y Presupuesto (Ministry of Budget and Planni SPS - Sistema de Programal6n y Segulmiento (Planning and Monitoring System)  FOR OMCIAL USE ONLY IRRIGATION AD DRAINAGE SECTOR PROJECT Loan and Pro1ect Summary Borrowert Nacional Financiera, S.N.C. (NAPIN) Guarantor: United Mexican States Executina Asency: Comisi6n Nacional del Agua (CNA) Beneficiariest The program is estizated to benefit some 425,000 farmers, of which about 50 percent have currently an income of less than the minimum wage. Additionally, some 100,000 people will benefit from river control works. Amount: US$400.0 million equivalent Terms: Repayment in 17 years, ircluding five years of grace at standard varia!ole rate. Financina Plan: Local Foreian Total ----- US$ million -- Federal Goverrment 645.0 - 645.0 IBRD - 400.0 400.0 IDB - 200.0 200.0 Total 645.0 600.0 1245.0 a/ a/ Excludes taxes and duties. Economic Rate of Return: Rates of Return for investments included in the proposod project range between 12 percent and 23 percent. The rates of return for large scale on-going projects range from 14 percent to 23 percent; for rehabilitation This document has a restricted distribution and may be ustd by rmspients only in the perfomance| of their offlcial duties. Its contents may not otherwise be di'' tout Wor Bank authoinztion.  - ii - projects the range is from 16 percent to 22 percent. Five small projects with rates of return lover than estimated opportunity cost of capital have been included due to their social impact; these are within the maximum limit of 3 percent of the investment program. Staff Aggraisal Report: Report No. 9779-ME, dated October 29, 1991 Map: 'IBRD No. 23178  MEMORANDUM AND RECOMQENDATION OF THE PRESIDENT OF THE IBUD TO TUE EXECUTIVE DIRECTOXS ON A PROPOSED LOAN TO EACIONAL FIRANCIERA, S.N.C. FOR AN IRRIGATION AND DRAINAGE SECTOR PROJECT The following memorandum and recommendation on a proposed loan to Nacional Financiera, S.N.C. (NAFIN) for US$400.0 million equivalent is submitted fcr approval. The proposed loan, which would be guaranteed by the United Mexican States, would be repayable over 17 years, including five years of grace, at the Bsank's variable interest rate and charges. RABIN would be the Borrower and the National Water Commission (Comision Nacional del Agua, CRA) would be the executing agency. 1. Background. Although irrigated farmland represents only about 30 percent of all land harvested, it accounts for half the value of Mexican agricultural production and provides 60 percent of agricultural exports. Historically, the Government emphasized the expansion of irrigated lands, rather than the improvement of the efficiency of existing irrigation schemes. The strategy had the objectives of expanding the arable land available for resettlement in the arid and sparsely inhabited north and increasing farm incomes. The rapid expansion of irrigated lands came to a virtual halt in the early 19809 as a consequence of the financial crisis in 1982 and the sharp reduction in public investment characterizing subsequent stabilization programs. Public investment and expenditures for irrigation and drainage declined from US$3,600 million in 1981 to US$320 million in 1990. The rate of expansion of irrigated land, which had reached an s;erage oi nearly 150,000 hectares per annum in 1979-1981, declined to a mere 5,000 hectares in 1988. Moreover, the economic crisis resulted in a reduction by over 80 percent in real terms in operation and maintenance expenditures over the last decade. Consequently, about 0.8 million hectares of irrigated land are lying idle, or badly under-utilized, and a further 1.5 million hectares are in need of rehabilitation to restore them to their original level of efficiency. 2. About 60 percent of irrigated areas is organized in 77 large Irrigation Districts, each serving more than 3,000 hectares. The construction and rehabilitation of hydraulic works in these districts is carried out by the Government and financed by budgetary resources. In most cases the Government is fully responsible for operation and maintenance (O&M) of the irrigation and drainage system in the Irrigation Districts. The remaining irrigation schemes are smaller (from 100 to 3,000 hectares) and organized under 27,000 Irrigation Units in which farmers contribute about 40 percent of investment costs (mostly by labor) and the Government the remaining 60 percent. The Irrigation Units are operated and maintained by farmers through user associations. 3. The Government's current strategy calls for an increase in agricultural production mainly by improving the efficiency in the use of existing irrigated areas and only on an exceptional basis through expansion of such areas. Efficiency will be promoted through rehabilitation, modernization and completion of existing works and through improved irrigation techniques. In line with its National Development Plan for  - 2 - 1988-1994 the Government plans to transfer gradually the responsibility for operation and maintenance (O&M) to water users and increase farmer contributions to O&W expenses and investment costs. Under its new strategy, to be implemented in the proposed project, the Governmeut will apply rigorous economic, social, and environmental criteria to make decisions on the allocation of investment resources and to prevent the degradation of water resources. 4. Ratlionale for Bank Involveegnt. The Bank's Irrigation Sub- Sector Survey of 1982 estimated that production on existing land could be doubled through a combination of increased area and cropping intensity, improved productivity, and diversification toward higher value crops. These findings have been checked and are still valid. The completion of partially constructed irrigation works and the rehabilitation and modernization of existing works a-e essential to achieve such an increase in productionu these would be supported by the proposed operation. 5. However, without an iv-provement in the incentive structure for farmers and without other sectoral changes that have been and will be supported by the Bank, improved irrigation and drainage infrastructure could not ensure production increases. Prior to 1986, Mexico's highly protected economy caused major distortions in internal terms of trade favoring industry. The negative protection for agriculture resulted in producer prices frequently being far below international prices. Industrial protection began to be dismantled with the Bank's Trade Policy loans (1986-1987). The further reduction of discrimination against agriculture that was achieved with the support for the Agricultural Sector Adjustment Loan (AGSAL I); approved in 1988, brought producer prices in line with international prices and helped assure a better return on irrigation investment. The liberalization of trade and prices for agricul- tural commodities and inputs supported by both AGSAL I and AGSAL II (FY91) have also improved the incentive framework for agriculture. Other planned Bank operations which will help support increased agricultural productivity include projects under preparation to help upgrade extension and research services and establish a sound agricultural credit system. The proposed operation, along with other Bank operations in the agricultural sector, has been designed incorporating lessons learned (para. 12) to provide a comprehensive and coherent policy framework, and to create supporting infrastructure, which will encourage private sector investment in agriculture that will lead to increased productivity. 6. Project Objectives. The project would help the Government to: (a) sustain the irrigation and drainage sector through adequate levels of investments selected on the basis of rigorous economic and technical criteria, procured competitively and implemented efficiently; (b) decentralize irrigation funding and management through institutional reforms that would gradually move funding of irrigation and drainage investments from a centrally managed system of Government grants towards a system based on regional and local public utilities which would help to recover costs through user charges and collection instruments, and thus help sustain the investments by the beneficiaries; (