Mexico - Second Irrigation Rehabilitation Project

RETURN TO REPORTS DESK FILERICOED WIPORTH DESK FlE COp Report No. TO- 344b WITHIN ONE WEEK This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION SECOND IRRIGATION REHABILITATION PROJECT MEXICO April 17, 1963 Department of Technical Operations  N CU) j- I P:1 (I,--! q -.2 E--4 l &j w.,  M EX I C 0 SECOND IRRIGATION REHABILITATION PROJECT TABLE OF CONTENTS Page No. SUMMARY i - ii I. INTRODUCTION 1 II. BACKGROUND INFORMATION 1 III. THE PROJECT AREA 3 A. General 3 B. Climate, Topography and Soils 4 C. Salinity and Drainage 4 D. Floods 5 E. Water Supply for Irrigation 5 F. Land Tenure 6 G. Research and Extension 6 H. Agricultural Credit 7 I. Present Crop Production and Values 7 J. Marketing and Prices 8 IV. THE PROJECT 9 A. General 9 B. Project Works 9 C. Cost Estimates 10 D. Construction Schedule 11 E. Finance 11 F. Organization and Management 12 G. Agricultural Credit for On-Farm Development 14 H. Agricultural Research and Extension Services 14 I. Water Charges and Operational Results 15 V. BENEFITS AND JUSTIFICATION 17 VI. CONCLUSIONS AND RECOMMENDATIONS 18  -2- Page No. ALNEXCS Location Map 1 - Bajo Rio Bravo Irrigation District Principal Physical Data 1 Proposed Rehabilitation Works 4 Construction Schedule 5 Operation & Maintenance after Rehabilitation 6 Estimated Increase in Net Value of Production following Rehabilitation 7 Map 2 - Bajo Rio San Juan Irrigation District Principal Physical Data 1 Proposed Rehabilitation Works 3 Construction Schedule 4 Operation & Maintenance after Rehabilitation 5 Estimated Increase in Net Value of Production following Rehabilitation 6 Map 3 - Ciudad Delicias Irrigation District Principal Physical Data 1 Propo3ed Rehabilitation Works 3 Construction Schedule 4 Operation & Maintenance after Rehabilitation 5 Estimated Increase in Net Value of Production following Rehabilitation 6 Mtap 4 - Present Cost of Production 5 - Irrigation Rehabilitation Project, Stage Two - Estimated Increase in Net Value of Production following Rehabilitation  M E X I C O SECOND IRRIGATION REHABILITATION PROJECT SUMMARY i. The Mexican Government has requested a Bank loan to help finance the second stage of its Irrigation Rehabilitation Program, covering three Irrigation Districts in Northern Mexico. The works proposed, and the pro- cedures to be followed, are essentially the same as those for Stage One of the program for which a loan of US$ 15 million was made by the Bank in January 1961 (Loan 275-ME). ii. Irrigation farming is important in the Mexican economy. The ur- gency of bringing new lands under irrigation has resulted in neglect and a lack of funds for completion and adequate maintenance of older irrigation and drainage works. A program of completion and rehabilitation is now ur- gently needed to reclaim the land already lost or damaged, and to protect the irrigable lands from further deterioration due to the rising water tables and encroaching salinity. iii. The project would consist of the completion and improvement of the irrigation and drainage works, and provision of more adequate services to farmers in the three Irrigation Districts (332,000 hectares). The cost of t&>e public works of the project, which would be carried out over five years, is estimated at Pesos 410 million. An additional private investment in on-farm drainage and improvement, estimated at about Pesos 82 million, woulld also be necessary to take full advantage of the public works. The amount of the proposed Bank loan to meet the foreign exchange cost of the public works would be US$ 12.5 million (Pesos 157 million equivalent), or about 38 percent of the public costs. The balance of the public costs would be met by the Government from regular sources of funds for develop- ment. The private investment would be financed from the farmers' own resources and from credit from governmental banks and other sources. iv. The project would be executed by the Secretaria de Recursos Hi- draulicos (SRH) through its Division of Irrigation Districts. There is a competent staff organization for construction and operation of the project in each of the three Districts. The proposed public works have been soundly planned and the cost estimates are realistic. v. The water users would repay the cost of the proposed works over an average period of 24 years through an annual "rehabilitation quota" (charge) to be established. The annual "water quota" for operation and maintenance would also be increased to cover the full cost of services, including irrigation and drainage extension and proper maintenance in the future.  - ii - via The economic benefits from the project include an increase in annual net farm benefits, estimated at Pesos 124 million. The net farm benefit/investment ratio would be about 16 percent. In addition to this favorable rate of return the investment would also assure sustained pro- duction from the three Irrigation Districts. vii. The project is sound and is suitable for a Bank loan of US$ 12.5 million equivalent for a term of 20 years including a grace period of five years. The borrower would be the Nacional Financiera, S.A., an agency of the Government of Mexico.  M E X I C O SECOND IRRIGATION REHABILITATION PROJECT I. INTRODUCTION 1. The Mexican Government has requested a Bank loan to cover the foreign exchange cost of the second stage of its Irrigation District re- habilitation program. The work proposed and the procedures to be employed would be in most respects similar to those of Stage One of the program, which was the subject of Loan 275-ME (US$ 15 million). Construction under the previous loan is progressing satisfactorily. 2. The second irrigation rehabilitation project is to complete and improve the public works and services in three Irrigation Districts - 332,000 hectares!/. The Secretaria de Recursos Hidraulicos (SRH) would be responsible for execution of the project. The cost has been estimated at Pesos 410 million. The amount of a Bank loan to provide the foreign ex- change would be about US$ 12.5 million (equivalent to Pesos 157 million). 3. This report contains an appraisal of the project, based on the findings of a field mission which visited Mexico in June 1962, and on documents submitted by the Mexican authorities. The project report com- bines the ni in features and proposals for the three Districts and the Annexes give details of each. II. BACKGROUND INFORMATION 4. Agricultural production represents about 19 percent of Mexicos gross rational product and agricultural products about 52 percent of total exports. The principal crops on an area basis are corn, beans, cotton, wheat and sugar cane. The most important export crops are cotton and coffee. Requirements of almost all the basic foods are now produced do- mestically but there is a pressing need to increase production to meet the growing demand of the rapidly increasing population, to improve the nation- al diet and to increase exports. The annual growth rate of agricultural production is currently assessed at 5.0 percent and that of population at 3.2 percent. 5. Farming is practiced with varying degrees of intensity over 17 million hectares of the country's gross area of 196 million hectares. This represents about 0.5 hectares of cultivated land per inhabitant. Over much of the country the scope is severely limited by natural condi- tions. Flat lands are relatively scarce; rainfall is irregular and the 1/ 319,000 ha. presently irrigated plus 13,000 ha. to be restored.  hydrological resources are often badly located from an agricultural point of view. As a result of this combination of natural factors the total agri- cultural land potential of Mexico has been estimated at only 30 million hectares, or 15 percent of the total area of the country. Against this background, which emphasizes the need for intensification, irrigation farm- ing has been increasing rapidly. 6. The area irrigated is now about 5.0 million hectares. Nost of the recent expansion has been the result of public investment, mainly in large-scale projects. These projects cover some 2.4 million hectares. They are operated by 65 Irrigation Districts or in four areas by Regional Com- missions!i. A recent estimate of the public investment to the end of 1961 in irrigation and flood control work is Pesos 9 billion /* The investment as a whole has been justified. The value of production from the irrigated areas amounts to about 35 percent of the total value of agricultural pro- ductibn. 7. During most of the period of rapid expansion of irrigation the emphasis was on bringing new lands into production. Under this pressure, many projects, though well constructed, were equipped only to minimum oper- ational standards, Inadequate provision was made for drainage. A minimum of structures was included, Some canal systems were not completed and in many cases where lining was desirable, it was not provided. 8. This haste and minimal initial investment, coupled with a reve- nue Dolicy which produced inadequate funds for proper maintenance, has led to serious deterioration in1 many Districts, making a rehabilitation progr-tm a matter of urgency. The most important consequences are wide- sprec: rising water tables and increasing salinity. Substantial areas are already out of production and crop yields on much larger areas are adver- sely affected. The problem is rapidly becoming worse and unless remedial measures are taken future production will be seriously threatened. 9. The situation is recognized by the authorities and the farmers and there is general agreement on the action to be taken. Rehabilitation is being given priority within the irrigation program. SRH has increased water charges substantially to permit more adequate maintenance and farmers have indicated their willingness to repay the cost of the necessary reha- bilitation if long-term financing can be arranged. 1/ Regional Commissions have considerable autonomy but are closely linked with SRH. The Secretary of SRH is the President of all the Commissions and their funds are obtained through the SRH budget. 2/ Unadjusted for changes in the value of the peso.  III. THE PROJECT AREA A. General 10. The project would cover three Irrigation Districts: (in hectares) Irrigation District Gross Area Area Now Irrigated 1. Bajo Rio Bravo 241.,300 205o000 2. Bajo Rio San Juan 79,400 67,000 3. Ciudad Delicias 62,700 47,000 Total 383,1400 319,000 11. The first two Districts adjoin and are situated just south of the Mexican/United States border in northeast Mexico. Ciudad Delicias is some 600 miles west in North Central Mexico (see map). The whole region is semi-arid and irrigation is essential for any reliable agricultural prcduction. The population of the three Districts is about 450,000. The development of irrigation to the present scale in the three Districts has progressed by stages over the past 50 years. It has been at approxi- mately the present level since 1947 in the case of Ciudad Delicias and since 1956 in Bajo Rio Bravo and in Bajo Rio San Juana 12, Though the Districts differ in detail, in broad outline the problems and their proposed solution are similar. In each case, the orig- inal construction was minimal, though the structures included were good. New construction and maintenance have not been sufficient to keep pace with the forces working towards deterioration. The combination of inade- quate facilities and faulty icrigation practices, including the excessive application of water, has led to rising water tables and increasing salinity. This has become increasingly evident in the last three years. There are many examples of land going out of production, and some spec- tacular examples of unproductive land being reclaimed where drainage has been carried out. 13. Basically, each of the Districts is well suited to irrigation farming. If the works are supplemented, the arrears of maintenance made good and irrigation and husbandry practices improved, the current deteri- oration would be halted and the trend reversed, leading to a sustained high level of production. The three Districts are adequately served with means of communication and there are no fundamental obstacles to the development of first class irrigation farming conditions.  - 4 - B. Climate, Topography and Soils 14. The climate is semi-arid, with an average, but poorly distri- buted annual rainfall, ranging from [00 to 700 mm, with the highest con- centration in July-September, Temperatures during the summer are generally high - frequently over 400C (1040F). The winters are normally mild in the two coastal areas but infrequent severe frosts limit the scope of winter cropping. In Ciudad Delicias, due to location and elevation, the winters are more severe. 15. The topography is generally favorable for irrigation. In Rio Bravo and San Juan the lands range from 5 to 60 meters above sea level, and in Delicias from 1,100 to 1,250 meters. Slopes are uniform over most of the land and gradients are suitable for irrigation. 16. All the soils are of alluvial origin and, within the project, mainly range from good to excellent for irrigated agriculture. Their main disadvantage is a high salinity hazard but given proper facilities and management this would be more than offset by high yield potential. C. Salinity and Drainage 17. The high and rising water tables are particularly serious because the sub-soils throughout most of the project areas are highly saline. Both drainage and avoi dance of seepage from canals are key considerations in control of water tables. A network of groundwater observation -Tells was estaulished in 1960 to provide basic data on water table movements for planning corrective measures. The recordings to date have been analyzed, and preliminary groundwater contour maps have been prepared. The situation in 1961 during August/September, when water tables are at their highest, was as set out below. The figures are based on gross areas and the bounda- ries of observation do not coincide precisely with those of the Irrigation Districts. Depth of Bajo Bajo Rio Ciudad W,1ater Table Rio Bravo San Juan Delicias Total (meters) ---- hectares------------------ 0 - 1 68,500 1,300 2,000 71,800 1 - 2 119,500 30,000 20,0OO 169,500 > 2 64,500 38,500 48[,000 151,000 18. The areas already affected by salinity have not been surveyed in detail but maps based on careful field observations have been prepared, showing those areas where land has gone out of production, or where crop growth has been seriously affected. These areas are scattered and in the absence of a systematic survey are difficult to check, but ground and air  -5- inspection confirmed that the areas as mapped gave a conservative reflec- tion of the situation. The areas identified as seriously affected or out of production fall mainly within the zones with water tables at about one meter or less and are shown below. (in hectares) Bajo Bajo Rio Ciudad Rio Bravo San Juan Delicias Total 1. Area seriously affected 16,000 6,300 5,000 27,300 2. Area out of production_ _ 5,000 3,700 11,000 19,700 Total 21,000 10,000 16,000 47.,000 */ Of which estimated to 5,000 1,000 7,000 13,000 be reclaimable 19. In addition to these areas out of production or showing serious crop damage, there are much larger areas where crop damage occurs, but is less evident. There are also extensive marginal areas where farmers, in order to minimize the risk of salinity, have found it necessary to re- strict the application of water at the expense of crop yields. D, Floods 20, The only District with any serious flood hazard is Rio Bravo, where damage may occur from the flooding of the main river or as a result of heavy local rainfall. Damare from the river floods will be eliminated witn the ccaipletion of Amistad Dam by 1968 and after completion of the drainage system schedulled under the project local flooding will be limited to small areas for a maximum of three days. E. Water Supply for Irrigation 21. There is adequate reservoir storage to regulate annual river flows for all Districts, but in the Bajo Rio Bravo District, carryover storage capacity is inadequate. In years of low flow the shortage in Bajo Rio Bravo can be appreciable and the area to be irrigated has to be adjusted accordingly. The lining of canals under the project will improve the situation and the completion of the International Amistad Dam by 1968 will ensure a full supply in four out of five years. (The benefits from Amistad Dam have not been claimed for the rehabilitation project.) 22. In San Juan, the supply position is good, with the probability of a moderate shortage only every seven years.  23. In Delicias, the supply is good with no shortages expected follow- ing the lining of canals. 24. The quality of irrigation water supply in all cases is excellent. F. Land Tenure 25. Under Mexican law, the amount of irrigated land a farmer can own is limited to 100 hectares. Members of the same family, however, frequently jointly operate two or more blocks so that the family operating units may be several hundred hectares in size. There are two main types of occupancy: a) Farmers - who own and farm their land with very little governmental control. Included as "farmers" are colonos who are settled under Government-sponsored schemes and who are subject to various degrees of con- trol until their obligations are partly liquidated. b) Ejidatarios - who have the use-right only of the land they occupy. They are members of "tEjidos"l, which are Government-sponsored group settlements operated under a system of closely controlled co-operative farming. They cannot sell or mortgage their land but their use- rights can be transferred by inheritance within the family. They tend to operate at a low level. 26. The owinership and unit size distribution is: Size of Farmers Units and CoTonos Ejidatarios Total (Hectares) (Per Cent) (Per Cent) (Per Cent) 0 - 10 h4 76 51 10 - 20 39 24 34 Over 20 17 0 15 All Units 61 39 100 G. Research and Extension 27. There are two agricultural research stations within the project area; one near Bajo Rio Bravo and one at Ciudad Delicias. These form part of a national network and must fulfill their part in the national research program. They have not given much attention to w-ork on local problems. This may be in part because they have been able to take advantage of the results of work on nearby United States research stations. Whlilst this may be justified for questions of basic research there is a definite need for applied research on local problems, such as crop varieties and irriga- tion and fertilizer practice for various soil types within the project area.  - 7 - 28. Extension w-Tork on crop pests and spraying techniques are ade- quately provided for by governmental and commercial advisors. Most other aspects of extension are neglected and should be strengthened. H. Agricultural Credit 29. Crop production credit is widely used throughout the area. The sources and approximate proportion of the total are: Government banks (National Agricultural Credit Bank and National Ejidal Credit Bank), 20 percent; private banks, 30 percent; commercial firms and private lenders, 50 percent. 30. The amount of credit extended to qualified borrowers is normally up to a maximum of 70 percent of the estimated cost of production of the particular crop. The period of the loan is for all, or part, of the crop season. The interest rates for loans from the Government banks are usually 10 to 12 percent. The effective rates for the other lenders are upwards from a base of 18 percent to 25 percent. Virtually no medium or long-term credit is available. I. Present Crop Production and Values 31. Details of the cropping and the gross and net value of produc- tion in each District are given in Annexes 1, 2 and 3 and for the project in Annex 5, In terms of area and value cotton dominates all Districts, but in Bajo Rio Byavo and Bajo Rio San Juan there has been some movement away from cotton in favor of corn and sorghum, a trend which appears likely to continue. 32. Over the last five years, the gross value of production has averaged Pesos 2,036 per irrigated hectare. In summary, the project posi- tion is: Bajo Bajo Rio Ciudad Rio Bravo San Juan Delicias Total Value (-- ---in hectares - ------ ) (P/million) Cotton 130,000 25,000 35,000 190,000 451 Corn 70,000 30,000 4,500 loh,5oOA' 115 Sorghum 30,000 15,000 - 45,000 58 Miscellaneous - - 9,500 9,500 25 Total 230,000 70,000 49,000 349,000i/ 649 1/ Includes a total of 30,000 hectares double cropped with corn in the three Districts.  - 8 - 33. Average yields are low: in keeping with conditions and the gener- ally unenlightened standard of farming. Contrasting with the average there are some areas and many individual farmers who are employing advanced methods and obtaining good results. This provides an indication of the potential and underlines the importance of rehabilitation of the works and the provision of services necessary to develop and support good irrigation farming practices. 34. The yield and price estimates are based on well maintained Dis- trict records, extensive local enquiry and observation. The cost of production estimates (Annex 4) have been compiled from the information prepared and used by the banks, contractors and commercial firms in their credit or other business dealings with the farmers. In summary, the posi- tion is: Per Hectare Project Area (Pesos) (Pesos million) Gross value of production 2,036 649 Cost of production 1,349 430 Net value of Droduction 687 219 J. Marketing and Prices 35. Marketing facilities and facilities for storage, milling and ginning are adequate but, in the absence of other sources, dependence on the merchants for credit often puts the producer in a unfavorable posi- tioiiG Practically all the cotton fibre (lint) produced in the area is exported. The seed and other by-products are processed and used mainly in Mexico. The surplus corn and sorghum produced in the area is sent by truck or rail to other parts of Mexico. 36, The farm product prices have been taken at present levels in estiriating the gross and net value of production. The present farm price for seed cotton (Pesos 2,250/ton) corresponds to about 25 US cents per pound as compared with the medium-term outlook for the world price for cotton of similar quality (SM 1-1/16) of about 29 US cents per pound. Government support prices of Pesos 800 per ton for corn and Pesos 560 for sorghum are maintained as a means of stabilizing the Droduction of these crops, which are required for food in Mexico. These prices are not seriously out of line with wTorld prices. 37. The export tax revenue from cotton exports from the area, levied at the current rate of Pesos 106 per bale, has averaged about Pesos 28 million in recent years.  - 9 - IV. THE PROJECT A. General 38. The project is the completion and rehabilitation of the irriga- tion and drainage works and the provision of services to promote better irrigation farming in three irrigation districts covering 332,000 hectares, The main works are the construction of new and reconditioning of existing drains, lining of canals, improvement of structures and other works neces- sary for better water distribution. An irrigation and drainage investiga- tion and extension service would be established. These provisions, together with a limited amount of on-farm drainage and land improvement work would lower the ground water table, prevent farther salinization of land and restore to full production much of the land at present affected. B. Project Works 39. The principal item in the public works is the completion and renovation of the drainage system and the lining of canals in those lengths where seepage is high. Some 1,067 kilometers of new drains would be dug and 899 kilometers of existing main drains would be renovated. This would provide a system of open drains spaced on the average at about one kilo- meter apart, together with intercentor drains. In addition, 467 kilometers of main and secondary canals would be lined and some 330 kilometers of canal extension and rehabilitation carried out. 40. Planning of the drainage system is based on available data on water tables and soil types and wiould be adequate. The depth of drains would vary in keeping with the necessity to maintain grade but would in gerneral be about 3.3 meters. This would provide for 50 cm. depth of silting before cleaning and a further 40 cm. depth of water0 The soils have rroved stable with steep side slopes and slopes of 1 . 1 proposed are satisfactory. 41. Canal lining would consist of non-reinforced concrete 5 to 8 cm. thick, depending on soil and foundation conditions and on the size of the canal. The canal structures proposed are all of a simple character and mostly of standard design. New delivery gates would be a Mexican adapta- tion of the Neyrpic principle for controlled flow gateso The digging would be in easily worked soil, with the exception of a few lengths in wet or flooded ground. Most of the work would be done using dragline excavators. h2. The public works would greatly improve drainage and salinity con- ditions but private on-farm works would also be necessary to take full advantage of the public facilities. The areas which would require various on-farm iorks and other measures to correct soil salinity cannot be deter- mined until further research work has been completed and experience has been gained of the operation of the new drainage system. However, the  - 10 - maximum requirements are estimated as 100,000 hectares of farm drainage, 280,000 hectares of leveling (mainly minor leveling), and 90,000 hectares of leaching or other soil correction measures on highly saline lands. C. Cost Estimates 43. The cost estimates are based on preliminary design. The princi- pal items are shown below. Details are given in Annexes 1, 2 and 3. (pesos million) Bajo Bajo Rio Ciudad Rio Bravo San Juan Delicias Total Public Investment: Construct and renovate drains 86.9 21.7 8.8 117.4 Canal lining and related works 70.9 32.2 3h.6 137.7 Engineering, administration & establishment of the Irrigation & Drainage Extension Service 28.2 10.3 7.7 46.2 Equipment and machinery 14.0 7.8 4.9 26.7 Contingencies, 25 percent 50.0 18.0 1h.0 82.0 Total 250.0 90.0 70.0 41oO0 Pril7ate On-Farm Investment: 140 19.5 2L18 82,3 Total Public & Private Investment 291.0 109.5 91.8 492.3 (Equivalent in US$ million) Public Investment 20.0 7.2 5.6 32.8 Private On-Farm Investment 3*3 1.6 1.7 6.6. Total 23.3 8.8 7.3 39e4 44. Quantities are measured on the basis of surveys and maps using methods which have proved accurate on similar iwork in the past. Unit prices have been carefully established and are constantly kept under re- view. SRH has a great deal of experience in this type of work and the methods employed have a long record of reliability. Provision is also made for field investigation, engineering, design and inspection and to cover rehabilitation administration. In view of the preliminary nature of design, 25 percent has been added for contingencies.  - 11 - 45. The estimates include Pesos 26.73 million for the purchase of new equipment. This would be used initially by the Districts for con- struction and later for maintenance of the works, The estimates also make provision for the establishment of an irrigation and drainage in- vestigation and extension service (para. 60). The estimated public costs average Pesos 1,235 per irrigated hectare and are realistic. 46. The estimate of private investment for on-farm work must be regarded as very tentative. Unit costs have been generously estimated but the areas requiring improvement work are not yet definitely known. However, all indications are that essential on-farm work would not ex- ceed the estimates and would probably be lower. D. Construction Schedule 47. The public works would be completed in five years in the case of Bajo Rio Bravo and in four years in the other two Districts. The work schedule would be: (in kilometers) 1963 1964 1965 1966 1967 Total Drains 50 569 733 440 174 1966 Canal lining and related works 288 201 134 133 41 797 On-farm work would lag behind the public works by one or two yearso E. Finance 480 The loan requested from the Bank is the foreign exchange com- ponent of the public investment in the project. The borrower would be the Nacional Financiera, S.A, The Ministry of Finance -would, through its annual budgets, make available to SRH, the executing agency, the foreign exchange funds, together with the local currency required. The Ministry of Finance would then be reimbursed for the foreign exchange portion of the expenditures out of the proceeds of the loan by Nacional Financieral S.A, SRH would require the Irrigation Districts to recover the invest- ments at 6 percent interest over an average period for the three Districts of 24 years. 49. Foreign Exchange. - Host of the construction equipment required for the project has already been imported and the foreign exchange com- ponent has been taken as the estimated cost of depreciation and spare parts. Detailed studies have been made of the foreign exchange costs for the various categories of work proposed in the project. On the basis of these stucies the foreign exchange component of the proposed public works averages out at 34 percent of the cost of works, or Pesos 130.32 million  _ 12 - ,,us$ 10,4 million equivalent). This estimate excludes the use of the relatively small amount of the new equipment which would have to be im- ported. The CIF cost of new equipment is estimated at Pesos 26.73 million (US$ 2.1 million). The total foreign exchange component to be met by the proposed loan is, therefore, US$ 12,5 million, This represents 38 percent of the public costs of the project. 50. Disbursement for new equipment would be made against import documents. The balance of the proposed loan would be disbursed on a per- centage basis. A term of 20 years for the Bank loan (as under Loan 275-ME) would appear appropriate. The term should include a grace period of five years. 51. Expenditure Schedule, - Local currency cost to be met by the Government would be Pesos 252,95 million. Expenditures of local and foreign currencies would be approximately as follows: (in pesos million) 1963 1964 1965 1966 1967 Total Local currency 19.37 71.13 68.85 63.o5 30.55 252.95 Foreign exchange 9.98 63.371/ 35.47 32.48 15.75 157.05 Total 29.35 134k50 104.32 95.53 46.30 410.00 (equivalent in US$ million) local currency 1.55 5.66 5.55 5.04 2.50 20.30 Foreign exchange 0.80 5.1lO/ 2.80 2.60 1.20 12-50 Total 2.35 10.76 8.35 7.64 3.70 32.80 52. In addition to the finance required for the public works, the organization would have to be developed and ftnds provided for medium- term credit for on-farm improvements (para. 58). The amount would be approximately Pesos 50 million. F. Organization and Management 53. The project would be executed and operated by SRH. This is a separate Ministry, established in 1947, to develop and adiinister the water resources of Mexico. The Secretary of SRH is a member of the 1/ Includes Pesos 26.73 million (US$ 2.1 million) for the purchase of new equipment.  - 13 - Cabinet. A sub-secretary, who is an engineer, is the Senior Official. The responsibilities of the Secretaria are delegated from the Secretary and Sub-secretary via a Senior Administrator on a departmental and divi- sional pattern. 54. Operation in the field is organized through irrigation dis- tricts, of which there are 65 (or in certain regions, not involved in the project, through Commissions, of which there are four). The Depart- ment responsible for irrigation districts is that of the Director-General of Irrigation Districts. Each District has its own technical and adminis- trative staff and a large measure of responsibility for managing its own affairs within the general policies of SRH. The District staff in each case is headed by experienced engineers in the positions of District Manager, Resident Engineer and Operations Engineer. They supervise other qualified staff in the preparation of plans and specifications for new construction and supervise construction, plan water distribution and direct the operation of District-owned equipment. An Office Manager is in charge of departments for accounting, rate collection, disbursements and other office services. The Diotriet funds are ccntrolled by SRH but the financial operations are subject to the approval of the Treasury. Accounts are audited by Government auditors. 55. In each District, there is an Advisory Committee, composed of local representatives of the Mlinistry of Agriculture, Banco Agricola, Banco Ejidal, cotton ginners, farmers and ejidatarios. This Committee assists the District Manager in the plarning and operation of the Dis- trict. 56. SRH is capable of carrying out its responsibilities effectively, The technical staff is well qualifed and experienced and adequate hy- draulics, soil mechanics and material testing laboratories are maintained. The District organizations, as envisaged, would also be capable of an efiective execution and subsequent operation and maintenance of the pro- ject. The principal needs would be enlargement of staff in the lower engineering levels to make the necessary surveys, field plans and inspec- tions and better equipment for maintenance which would be available fol- lowing the completion of the project. SRH intends to meet these needs and in addition would establish standard rules for adequate maintenance. 57. Publicly advertised international bidding would be used in awarding major contracts for the construction work and for the new equip- ment. The major contracts would cover new work representing 70 percent of the total. The balance covers various types of repair and improvement work, which could more appropriately be carried out by SRH's forces or by small local contractors. In order to make possible the participation of foreign as well as national contractors in the execution of the major works, bids would be invited for contracts of a minimum value of Pesos 15 million. Individual qualified contractors would be eligible for awards of contracts for work in the project up to an aggregate value of Pesos 75 million. Under Mexican law, foreign contractors must be registered. This  - 1L4 - is a formality which involves an agreement to operate under the laws of the country and to employ mainly N4exican labor. The procedures for award- ing contracts would be those normally used by SRHF, whereby contracts go to the lowest bidder having proper qualifications as regards experience, equipment and credit. G. Agricultural Credit for On-Farm Development 58. Some of the on-farm improvements would be carried out by the farmers with their own resources, but medium-term credit would be needed for farm development work. Little medium term credit is currently avail- able and interest rates, other than from the Government banks, are very high (para. 30). 59. The Government would undertake to provide sufficient funds for credit to farmers for on-farm development, estimated at Pesos 50 million over five years commencing in 1965. The funds would be made available to farmers on satisfactory terms and conditions through the Banco Nacional de Credito Agricola, the Banco Nacional de Credito Ejidal and the Fondo de Garantia para la Agricultura, Ganaderia y Avicultura1' The Government would also undertake to review these credit arrangements with the Bank from time to time and, if necessary, to make appropriate adjustments. H. Agricultural Research and Extension Services 60. Under the project, SRH would set up an irrigation and drainage extension service, with suitable staff, laboratories and equipment in each Distr'iet. The service would employ about 40 qualified officers, and would be capable of carrying out the necessary investigations, demonstrations and extension on all aspects of land drainage, water management techniques and husbandry aspects of soil/plant/water relationships including the pre- parat-cn of farm development plans. In addition, the Government would undertake that the Ministry of Agriculture would strengthen its research and extension services so that the combined services provided an adequate and comprehensive research and extension service to farmers within the three Districts. Within each Irrigation District, the program of oork wfould be guided by the District Advisory Committee and the combined research and extension program would be co-ordinated by one senior officer responsible to the District Advisory Committee. 1/ The Fondo de Garantia para la Agricultura, Ganaderia y Avicultura is an agency of the Banco de Mexico which advances lines of credit to private Banks for approved programs of agricultural development.  - 15 - I. Water Charges and Operational Results 61, In the past the Government did not fully recover from the beneficiaries the costs of its investments or levy charges sufficient for satisfactory operation and maintenance of irrigation projects. It has now, homever, been clearly established that Irrigation Districts must repay any new investment for rehabilitation and meet operation and maintenance costs in full, 62. In general, there are two types of water charges, or "quotas". One is the "compensation quota", which is an annual charge per hectare for repayment at h percent interest of the proportion of the original investment allocated to farmers, The annual quota is based on the estimated repayment capacity of the farmers and is paid by landowners only; the eji- datarios who have only use-rights to their land are exempt. The other charge is the "water quota!" for the annual cost of District operation and maintenance. The water quota is an annual charge per hectare and must be paid by all occupiers, farmers and ejidatarios in advance of water delivery. 63. In some Districts a third, or "co-operation quota" is collected. Uhere it applies, this represents an annual charge to repay additional investment carried out at the request of, or with the agreement of the beneficiaries. 64. Under the project it is proposed that w,hen the rehabilitation program is completed within an irrigation unit_,I the "comp nsation quota" dould be dis_on i, ued and the outstanding amount still due for payment undo: this system (about Pesos 53.5 million in the three Districts) - but not arrears of payment - would be postponed during the period of payments for rehabilitation. A new payment, a "rehabilitation quota", would be introduced to amortize the investment in the rehabilitation works. The "rehabilitation quota" would be fixed at Pesos 100 per hectare and payable until the investment had been amortized at 6 percent interest. A Presi- dential Decree would establish the rehabilitation quota for each District and would give SRH power to deny water to both farmers and ejidatarios who do not pay the rehabilitation and wiater quotas. The issuance of a Presidental Decree acceptable to the Bank would be a condition of effectiveness of the proposed loan. 1) Rehabilitation Quotas for Repayment of Investment 65. The "rehabilitation quota", set at Pesos 100 per hectare, would begin to operate in each unit the year following completion of the work. Revenues at this level would amount to Pesos 33.2 million per annum when the full project is in operation. This rate of revenue would be sufficient to amortize the new investment at 6 percent in from 22 to 28 years in the three Districts. The average period for the total investment would be 24 years. 1/ An operating area within an Irrigation District.  - 16 - 66. The foregoing represeits the intention of SRH concerning repay- ment of the rehabilitation investments by the Irrigation Districts. The existing obligation of Pesos 53.5 million after 1965l/ due for repayment by 1974 through the presently levied "compensation quota" of Pesos 7.5 million per annum would be postponed, leaving the full Pesos 33.2 million of annual revenues to be applied to the repayment of the Bank loan and the local currency investment of the Government. However, to illustrate the effects of not postponing the "compensation quota" payments but continuing them as now scheduled, the level of revenues of Pesos 33.2 million per annum would be sufficient concurrently to: 1. repay the existing obligation of Pesos 53.5 million in nine years at 4 percent (by 1974); 2. repay the Bank loan in 20 years at 5-1/2 percent (by 1983); and 3. repay the local currency investment of the Govern- ment in the rehabilitation program in about 30 years at 6 percent (by 1994). In addition to rehabilitation quotas other revenues would accrue to the Goverrnment from export taxes on the increased volume of cotton production resulting from the Project. Export taxes on the present volume of pro- duction of cotton amount to about Pesos 28 million annually. 2) Water Quotas for Operation and Maintenance 67, Water quotas have increased from a district average of Pesos 40 per hectare in 1955 to an average of Pesos 85 at the present time. After rehabilitation, the average rate will be Pesos 119 per hectare. At this level the position after 1968 would be: Bajo Bajo Rio Ciudad Unit Rio Bravo San Juan Delicias Project Water quota P/hectare 115,0 125.0 125.0 119.0 Quota revenue P.million 2h.15 8.50 6.75 39.4o Cost of operation P.million 23.15 8.33 6.50 37.98 and maintenance Surplus for reserve P.million 1.00 0.17 o.25 1.42 1/ 1965 has been taken as the average date for commencement of the rehabilitation quotas.  - 17 - 68. Water quotas would provide for all the District overhead and running exoenses, including the irrigation and drainage extension service and operation and maintenance of the works. There would be a modest surplus for reserves which would be retained for the benefit of the Dis- trict in which it was raised. V. BENEFITS AMTD JUSTIFICATION 69. The public investment in the development of the three irriga- tion Districts to date amounts to about Pesos 700 million. Private in- vestment is not known but would not be more than Pesos 400 million, giving an estimated total investment in the region of Pesos 1,100 million. Making a rough adjustment for changes in the value of the peso, the re- placement value of the total investment would be of the order of about Pesos 1,700 million at the present rate of exchange. 70. The gross and net annual value of production for the past five years have averaged Pesos 650 million and Pesos 220 million respectively (see para. 34). This net value of production is equivalent to 19 percent of the historical investment costs, or 13 percent after making allowance for changes in the value of the Pesos. The above calculations are very approximate but suggest that the present level of production is sufficient to justify the original investment. In addition, there have been the social and economic benefits associated with settlement and the conversion of near-desert into productive country. 71. The work now proposed is essential to prevent further deteriora- tion i.7ith progressive loss of production in the future. Due to difficul- ties of measurement, no benefit from this prevention of future loss is claimed in the calculations which follow, though it must be recognized tha-t the prevention of flurther deterioration and the provision of a base for employing modern technology and improved irrigation farming practices repres_~nt significant benefits from the project. The proposed rehabilita- tion project has been evaluated as an increment investment to obtain addi- tional benefits. 72. Annexes 1, 2 and 3 give information on the present and antici- pated future cropping and value of production in each District and these data are summarized for the project in Annex 5. The anticipated changes in cropping and yields have been based on conservative assumptions and should be attainable in a 10-year development period. They require, how- ever, that the opportunity afforded by the wJorks be effectively exploited with the aid of adequate extension and other supporting services. Future prices have been projected at present levels and the future costs of production have been adjusted to take account of the greater inputs re- quired for the higher yields but have not anticipated any rise in unit costs. Increases that may occur could well be absorbed by greater effi- ciency. The position in each District with totals for the project is summarized on the following page. Interest during construction has not been added to construction costs because benefits would accrue progres- sively as the work proceeds.  - 18 - (in pesos million) Bajo Rio Bajo Rio Ciudad Bravo San Juan Delicias Total Investment costs: Public 250.00 90.00 70.00 410,00 Private 41.00 19.55 21.75 82.30 Total 291.00 109.55 91.75 492.30 Increase in gross value of farm production: 294.00 77.00 72.60 443.60 Less increase in: Farm cost of production 209*00 58.oo 41.30 308.30 Operation and main- tenance costs 6.30 2.70 2.20 11.20 Total 215.30 60.70 43.50 319.50 Nlet farm benefits at full development 78.70 16.30 29.10 124.10 73. The gross value of annual production would increase from about Pesos 650 million to Pesos 1093 million, or by about Pesos 4l3 million. This would give a gross farm benefit/investment ratio of about 90 percent, which. is favorable. 74. The estimated net farm benefits or the net value of increased annual production, after payment of the increased farm costs of-production and the increase in operation and maintenance, would be approxiinately Pesos 12) million. Assuming a 10-year development period, and discounting the annual benefits over the lifetime of the project - 60 years - the benefit/investment ratio would be about 16 percent. 75. These estimates are necessarily approximate but they indicate that the returns from the increased crop production alone would justify the project. In addition the project wiould safeguard the future produc- tion from the areas not yet affected by drainage problems and salinity. VI. CQITCLUSIONVS AND RECOMMENDATIONS 76. Irrigation is important in the agricultural economy of Mexico. Mlost of Northern Mexico is semi-arid and irrigation is essential for any reliable agricultural production. In the three Irrigation Districts form- ing the project - though the public works have been well constructed -  - 19 - inadequate provision was made for drainage and canal lining. The combina- tion of inadequate drainage facilities and faulty irrigation practices, particularly the excessive use of water, has led to rising water tables and increased salinity. A program of completion and rehabilitation is urgently needed. 77. The proposed project works have been soundly planned and the cost estimates are realistic. Services would be provided to promote improved irrigation and farming practices. Credit to farmers would be made avail- able for on-farm drainage works, 78. The Secretaria de Recursos Hidraulicos (SRH) is an experienced and competent organization. Its Irrigation Districts could effectively construct the project works in the time proposed and operate them there- after. The water users would pay charges sufficient for adequate opera- tion and maintenance and amortization of the investment over a reasonable period (para. 66). 79. The project is sound and economically justified and is suitable for a Bank loan of US$ 12.5 million. The borrower would be the Nacional Financiera, S,A., an agency of the Government of Mexico and an appropriate term would be 20 years, including five years of grace. April 17, 1963  te R/O) 0 COLORADO * . U N I T E D STATES C/UDAD SA BUENA VENTURA JUAREZ $ Chihuahuoo RI9 \-