Mexico - Fourth Livestock and Agricultural Development Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 133a-ME APPRAISAL OF FOURTH LIVESTOCK AND AGRICULTURE DEVELOPMENT PROJECT MEXICO May 25, 1973 Regional Projects Department Latin America & Caribbean RegionalOffice This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS US$1 = Mex$12.5 Mex$1 = us$o.08 Mex$1 million = US$80,000 WEIGHTS AND MEASJRES Metric System 1 hectare (ha) = 10,000 m2 = 2.47 acres 1 kilometer (km) = 0.62 miles 1 square kilometer (km2) = 0.39 sq. miles = 100 ha I kilogram (kg) = 2.20 pounds 1 liter (1) = 0.26 gallons 1,000 kg = 1 metric ton = 0.98 long ton ABBREVIATIONS ALPR) - Alliance for Progress BANAGRO - Banco Nacional Agropecuario, S.A. BANCO AGRICOLA - Banco Nacional de Credito Agricola, S.A. BANCO EJIDAL - Banco Nacional de Credito Ejidal, S.A. de C.V. BANXIO) - Banco de Mexico, S.A. GONASJPO - Compania Nacional de Subsistencias Populares DAAC - Departamento de Asuntos Agrarios y Colonizacion FD - Federal District FEGA - Fondo Especial de Asistencia Tecnica y Garantia para Creditos Agropecuarios FONDO - Fondo de Garantia y Fomento para la Agricultura, Ganaderia, y Avicultura IDB - Inter-American Development Bank IMIT - Instituto Mexicano de Investigaciones Tecnologicas INIA - Instituto Nacional de Investigaciones INIP - Instituto Nacional de Investigaciones Pecuarias SAG - Secretaria de Agricultura y Ganaderia SRH - Secretaria de Recursos Hidraulicos USAID - United States Agency for International Development FONDO FISCAL YEAR January 1 - December 31  MEXICO FOURTH LIVESTOCK AND AGRICULTURE DEVFLOPMENT PROJECT TABLE OF CONTENTS MAIN TEXT Page No. SUMMARY AND CONCLUSIONS ........ . . i-iii I, * INTRODUCTION ...... ...... 1 II. BACKGROUNT) ..................... .... .................... 1 A. General... ... . . . . . . . . . . . . . . ......... . . . . . . . . 1 B. Agricultural Sector....... ............ .. .....* *... 2 C. Agriculture Supporting Services . . 4 Markets and Marketing . .. 4 Research and Demonstration ... 4 Extension Services ..... . . .................. 4 D. Agricultural Credit Services ... 5 III. PERFORMANTCE TNDER THE FIRST, SECOND AND THIRD PROJECTS.. 6 A. Introduction .......... 6 B. Lending and Rediscounting Operations ............... 7 C. Project Performance, Financial Condition, and Impact 8 Performance .................. 8 Financial Condition .................. 8 Impact of Lending ................. . 8 IV. THE FOURTH LIVESTOCK AND AGRICULTURE DEVELOPMENT PROJECT. 9 A. Brief Project Description ........................... 9 General Sub-Project ........ ..................... 9 Low-Income Producers Sub-Project ............ .. 10 Cormonents of Lending Program .................. 10 B. Detaied Project Features- .. 11 Project Areas .. ............. * . ................. 11 Farm/Ranch Development . .............. 12 This appraisal report is based on the findings of a mission which visited Mexico in October/November 1972 and was composed of Messrs. C.E. Eugenio, M.J. McCarry, R. Milford, and C. Wolffelt (IBRD), C. Pineau (FAO/IBRD) (Cooperative Program), and L. Peterson and L. Anderson (Consultants).  TABLE OF ONTENTS (Cont'd) Agro-Industries . . 13 Studies, Training and Demonstrations . . 13 C. Cost Estimates ...................................... 13 D. Financing .......................................... * 15 E. Procurement ......................................... 16 F. Disbursements ....................................... 17 G. Organization and Management ......................... 17 Administration . . 17 Lending Policies and Procedures . . 18 H. Accounting and Auditing ............................. 20 V. PRODUCTION, MARKETS AND MARKETING, AND PRODUCER BENEFITS. 20 A. Production .............................. 20 B. Markets and Marketing .............................. 21 C. Producer Benefits .............................. 22 General Sub-Project ..................., 22 Low-Income Producers Sub-Project. . 23 VI. ECONOMIC BENEFITS AND JUSTIFICATIONF.. ..T 24 VII. RECOMMENDATIONS .25 ANNEXES 1. The Agricultural Sector Appendix 1-1 - Agricultural Production Characteristics Appendix 1-2 - Markets and Marketing Appendix 1-3 - Agricultural Education, Research, and Extension 2. Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicultura Appendix 2-1 - Comparative Statement of Income and Expenses of the Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicultura during Fiscal Years 1968 to 1972 Appendix 2-2 - Comparative Statement of Resources and Lia- bilities of the Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicultura as at the end of Fiscal Years 1968 to 1972 Appendix 2-3 - Projected Statement of Income and Expenses of the Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicultura during Fiscal Years 1973 to 1977 Appendix 2-4 - Projected Statement of Resources and Liabili- ties of the Fondo de Garantia y Famento para la Agricultura, Ganaderia y Avicultura as at the end of Fiscal Years 1973 to 1977  TABLE OF CONTENTS (Cont'd) Chart - Organization of the Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicultura Chart - Functions of Units of the Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicultura 3. Banco Nacional de Credito Ejidal, S.A. de C.V. Appendix 3-1 - Statement of Income and Expenses of the Banco Nacional de Credito Ejidal for the Fiscal Years Indicated Appendix 3-2 - Statement of Resources and Liabilities of the Banco Nacional de Credito Ejidal as of End of Fiscal Years Indicated 4. Banco Nacional de Credito Agricola, S.A. Appendix 4-1 - Statement of Income and Expenses of the Banco Nacional de Credito Agricola for the Fiscal Years Indicated Appendix 4-2 - Statement of Resources and Liabilities of the Banco Nacional de Credito Agricola as of end of Fiscal Years Indicated Appendix 4-3 - Statement of Income and Expenses of the Banco Nacional de Credito Agricola and of its Six Wholly-Owned Bancos Regionales for the Year 0| Ended December 31, 1971 Appendix 4-4 - Statement of Resources and Liabilities of Banco Nacional de Credito Agricola and of its Six Wholly- Owned Bancos Regionales as at December 31, 1972 5. Performance under First, Second and Third Projects 6. Summary Estimates of Costs of On-Farm Investments - All Livestock Projects 7. Summary of Cost of Investments - All Annual and Perennial Crop Projects 8. Summary of Costs of Investments - All Agro-Industry Projects 9. Studies, Training, and Demonstrations 10. Projected Statement of Receipts and Disbursements - Fourth Project Operations During the Life of the Proposed Loan Appendix 10-1 - Estimated Schedule of Disbursements 11. The Outlook for Cotton Appendix 11-1 - Recent Trends in World Cotton Production, Utilization and Trade Appendix 11-2 - Recent Trends in World Cotton Prices - C.I.F. Ouotations at Liverpool .  TABLE OF CONTENTS (Cont'd) 12. General Sub-Project Apnendix 12-1 - Financial Rates of Return on Livestock Farm Models Appendix 12-2 - Financial Rates of Return on Crop Farm Models Appendix 12-3 - Financial Rates of Return on Agro-Industry Hlodels Low-Income Producers' Sub-Project Appendix 12-4 - Financial Rates of Return on Livestock Farm Models Appendix 12-5 - Financial Rates of Return on Crop Farm Models Appendix 12-6 - Financial Rates of Return on Agro-Industry Models 13. Economic Rate of Return Appendix 13-1 - Summary Economic Rate of Return Calculations (General Sub-Project) Appendix 13-2 - Summary Economic Rate of Return Calculations (Low,-Income Producers' Sub-Project) MAPS Farming Developnent Areas; Administrative and Field Offices of the FONDO Areas of Concentration for the Low-Income Producers' Sub-Project ADDENDUM 1/ Tables 1 - 24 - Physical and Financial Projections for Livestock Farming and Ranching General Sub-Project Tables 25 - 40 - Physical and Financial Projections for Livestock Farming and Ranching Low-Income Producers Sub-Project Tables 41 - 53 - Physical and Financial Projections for Crop Farming General Sub-Project Tables 54 - 66 - Physical and Financial Projections for Crop Farming Low-Income Producers Sub-Project Tables 67 - 105 - Physical and Financial Projections for Agro-Industries General Sub-Project Tables 106 - 108 - Physical and Financial Projections for Agro-Industries Low-Income Producers Sub-Project 1/ Available upon request from the Agriculture Division, Regional Projects Department, Latin America and the Caribbean Regional Office. .  MEXICO 0 FOURTH LIVESTOCK AND AGRICULTURE DEVELOPMENT PROJECT SUMMARY AND CONCLUSIONS i. Since 1960, Mexico's Gross Domestic Product (GDP) has grown in real terms at an average annual rate of about 7%. Maintenance of this growth rate is heavily dependent on rapid growth of export earnings and management of external debt, which, in turn, hinges on an improved fiscal position. Other problems to be faced are gross maldistribution of income, growing unemploy- ment and underemployment, and placement of new additions to the labor force. ii. Government policy in relation to agriculture has a triple objective of rapidly increasing food production for both domestic and export markets, improving income distribution, and creating a maximum number of new jobs consistent with the first two objectives. Approximately 40% of the country's population is engaged in the agricultural sector. It contributes 10% of GDP, nearly all domestic food requirements, and 50% of commodity exports. Food pro- duction is growing at about 4% per annum but, as demand is growing at about 4.5% increasing agricultural production must have high priority. Maldistribution of income is the second serious problem facing Mexican agriculture, which has a small percentage of relatively large efficient producers, and a large percent- age of subsistance producers. Labor absorption possibilities in the non- agricultural sectors fall short of the expected increase in the labor force, making agriculture's ability to employ larger numbers a matter of great concern. iii. The proposed fourth loan to the Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicultura (FONDO) would support achievement of such objectives. As under the previous three projects, it would, under the General Sub-Project (GSP), finance investments for development of livestock and crops and for establishment of agro-industries, but it would, in addition, provide credit and technical services to low-income producers under the Low-Income Producers' Sub-Project (LIPSP). 1_/ To itensify technical services to farmers and ranchers, particularly under the LIPSP, production-oriented studies, demon- strations, and farmer training would be undertaken. Total Project cost would be about US$272 million equivalent as follows: GSP, US$216 million equivalent; LIPSP, US$52 million equivalent; and studies, training and demonstrations, US$4 million equivalent. The proposed loan of US$110.0 million, or 40% of total Project cost, would finance all the foreign exchange costs (US$84 mil- lion, or about 31% of Project cost) and 14% of the local currency costs (US$26 million, or about 9% of Project cost). 1/ The criterion for separating loan beneficiaries between the GSP and LIPSP would be level of income. 0  iv. As in the previous projects, the FONDO would be responsible for loan implementation. The FONDO was established in 1955 by the Government of Mexico to provide the combination of funds and technical services necessary lo make a significant impact on agriculture and livestock development. Lending was to follow commercial criteria and FONDO was directed to operate through private credit institutions tby refinancing their loans. In 1965, re,,Lonal banks of the Government-owned Banco Nacional Agropecuario system were granted access to the rediscounting facilities of the FONDO. It is now -roposed that Banco Ejidal and Banco Agricola, two public banks, be granted -ccess to the rediscounting facilities of the FONDO to help in execution of the LIPSP. v. In the early years, FONDO concentrated on providing medium- and long- term refinance to small farmers at less than market rates of interest under a program called "ALPRO" (Alliance for Progress). This program is assisted by two loans, totaling US$41.5 million, from the U.S. Agency for International Development (US$20.0 million in 1963 and US$21.5 million in 1966) and by two loans, totaling US$52 million, from the Inter-American Development Bank (US$20 million in 1968 and US$32 million in 1971). vi. In 1965, IBRD made its first loan to the FONDO (Loan 430-ME for US$25 million) to support a project for providing medium- and long-term invest- ment funds to farms and agro-industries. This was followed by a second loan in 1969 (Loan 610-ME for US$65 million) when the first loan was fully disbursed in December 1968, ahead oz schedule, and by a third loan in 1971 (Loan 747-ME for US$75 million) when the second loan was, likewise, disbursed ahead of schedule. vii. In order to fully realize the objectives of development, an IBRD goal was to strengthen FONDO, both as a lending institution and as a technical service organization. During the course of the first three Projects, measures were adopted to accomplish this and FONDO is now a sound and efficient organi- zation. The previous Projects are progressing satisfactorily and loan collec- tions are extremely good. The Third Project, whose closing date is September 1975, is proceeding about 20% behind disbursement projections but loan funds are expected to be fully committed by December 1973. The Fourth Project would continue the program and initiate a development program for low-income pro- ducers. viii. As in the previous Projects, all loans to primary borrowers would be based on FONDO-supervised evaluations as to technical and financial vi- ability; participating banks (official and private), who would generally assume lending risks, would determine borrowers' creditworthiness. The lend- ing and rediscounting terms and conditions would be generally the same as those prescribed under the Third Project -- they have worked successfully. However, because interest rates to sub-borrowers under the GSP would be in- creased from the range of 10% to 11% to the range of 10% to 12%, rediscount rates would also increase. This would help in the continuing effort to strengthen FONDO's financial soundness and, at the same time, help partially  - iii - offset the rate of 4.6% per annum proposed for rediscounts of loans to low- income producers (lending to low-income producers would be at the maximum rate of 7.6% per annum prescribed by the Banco de Mexico for loans to such producers). ix. On the average, under the GSP, farmers and livestock owners would contribute about 15% of their development requirements and agro-industry bor- rowers about 20%; low-income producers would contribute around 5%. The rest would be financed by a loan from a participating bank, which would then be refinanced by FONDO to the extent of 81% (on average) in the case of loans under the GSP and 90% in the case of loans under the LIPSP. x. As in the first three Projects, local trade channels would be gen- erally appropriate for procurement. There are many manufacturers and equip- ment dealers in Mexico, mostly under manufacturing franchise from interna- tional firms. Competition is keen among them and repair facilities and ser- vices are widespread and good. However, in the procurement of machinery and equipment for agro-industries when the cost of machinery and equipment in a single investment exceeded US$100,000 at least five bids from at least three countries would be required. In addition, FONDO would be required to recruit an agro-industries expert to help it, among other things, evaluate these bids. xi. The Fourth Project is expected to provide significant increases in the production of beef, export feeder steers, milk and milk products, and pork. Of a wide range of crops that would be produced, cotton, alfalfa, sorghum, avocados, and grapes are expected to show the most marked increases. No sig- nificant marketing problems are foreseen for the increased output of any of the crop or livestock products. Xii. The estimated rate of return to producers' incremental investments under the GSP would range from 18% to 50% and from 16% to 55% under the LIPSP. The rate of return to the Mexican economy is estimated at around 29%. xiii. With appropriate assurances, the Fourth Project would be suit- able for an IBRD loan of US$110 million for 20 years, including a four-year grace period. The proposed loan would finance, as in the Third Project, 56% of FONDO's refinancing requirements. The borrower would be Nacional Financiera, S.A., the designated Government entity for borrowing from IBRD, and Government would assume the foreign exchange risk.   MEXICO APPRAISAL OF FOURTll LIVESTOCK AND AGRICULTURE PROJECT I. INTRODUCTION 1.01 The Government of Mexico has requested a Bank loan to help finance an agricultural 1/ project to increase food production and processing, both for the domestic and export markets. The proposed loan would be the eighth agricultural development loan to Mexico 2/ and the fourth for agricultural credit. 1.02 Generally, the Bank's experience with agricultural projects in Mexico has been satisfactory. The first two loans for agricultural credit (430-NE for US$25 million and 610-ME for US$65 million) were both disbursed ahead of schedule and the third loan (747-ME for US$75 million), which became effective in September 1971, is expected to be fully committed by December 1973. It is to continue the latter project for supplying long-term agricul- tural credit to the entire agricultural sector that Govermnent has requested this fourth loan, which would, in addition, also provide funds for low-income producers, such as ejidatarios 3/ and other small farmers, who were not covered under previous agricultural credit loans. 0 II. BACKGROUND A. General 2.01 Mexico's overall economic performance since 1960, as judged by growth of the Gross Domestic Product (GDP), has been matched by few developing countries. During that time GDP, in real terms, grew at an average annual rate of about 7.0%, and the average annual rate of inflation was about 3.5%. Prospects for a continued growth rate of 6% to 7%, however, are heavily dependent on the rapid growth of export earnings and on external debt manage- ment, which in turn hinges on an improved fiscal position. The resource gap in 1971 was US$459 million. 1/ Agriculture as used in this report will include livestock as well as crops. 2/ Loan 275-ME in January 1961 for US$15 million; Loan 336-ME in April 1963 for US$12.5 million; Loan 430-ME in 1965 for US$25 million; Loan 450-ME in May 1966 for US$19 million; Loan 527-ME in January 1969 for US$25 mil- lion; Loan 610-ME in 1969 for US$65 million; and 747-MIE in 1971 for US$75 million. 3/ Farmers with usufruct rights to a parcel of Government land.  -2- 2.02 Income distribution is very skewed in Mexico, where the top 10% com- 6 mands 52% of national income and the lowest 20% only 4%. Furthermore, there are great income disparities between urban and rural areas. Average per capita Gross National Product (GNP) in Mexico is US$744 but for rural people it is only one-fourth of this. 2.03 The population of Mexico, at just over 54 million, is increasing at about 3.4% per year and will reach about 100 million by 1990. Of this total, 21 million, or 41%, are rural 1/, and about 13% live in the Federal District (FD). In 1970, the labor force was estimated at 13.0 million workers, of which 5.1 million (39%) were in agriculture, 3.0 million (23%) in industry, 4.1 million (32%) in services, and the remaining 0.7 million (6%) is unallocated. Reliable data on unemployment and underemployment are lacking, but it is be- lieved that these are among the toughest problems facing the Mexican Government and people. B. Agricultural Sector 2.04 The first problem of Mexico's agriculture is its seeming inability to keep pace with the growth of demand for agricultural products (Annex 1). Agriculture's share of GDP has fallen from about 23% in 1950 to approximately 10% in 1972. Nevertheless, the sector still supplies almost all of Mexico's domestic food requirements and about 50% of the country's merchandise export earnings. Because total demand for food is projected to increase at about 4.5% 0 per annum while agriculture is growing at only about 4%, a problem is develop- ing. Because of this, Government recognizes that efforts to raise the growth rate of agriculture must be given priority in Mexico's agricultural development strategy. Tnis is essential, not only to meet growing domestic demand but also to continue agriculture's substantial contribution to export earnings, and thus h-elp ease the balance of payments constraint to growth of GDP (para 2.01). 2.05 With the exception of a few crops like maize, the main constraints to expanding agricultural production are on the supply side and may be sum- marized as follows: (a) the weak technical level of nearly all people involved in agriculture, ranging from farmer to extension and even research workers (paras 2.14 and 2.15); (b) the lack of access to long-term credit by a large segment of producers (para 2.20); and 1/ Defined as people who live in villages of less than 2,500 population.  -3- (c) the faulty production and distribution system for fertilizers and improved seeds (para 2.12). 2.06 Maldistribution of income is the second serious problem facing Mexican agriculture (para 2.02). The average annual family GNP in rural areas is about US$1,000. Of the approximately 3.75 million rural families, about 40%, or 1.53 million, have net annual family incomes of less than US$480. It is further estimated that only about 15% of rural families have net annual family incomes exceeding US$2,000. 1/ 2.07 A growing unemployment and underemployment problem is the third major problem of agriculture (para 2.03). The rural population is expected to continue growing at 1.5% p.a. Given the limited opportunities for absorb- ing new workers in the non-agricultural sectors, increasing attention is being focused on the employment creation potential within agriculture. 2.08 Of Mexico's total land area of 196.7 million ha, approximately 45.8 million ha is unproductive, 43.6 million ha is forest land, 78.0 million ha is range or pasture land, and 29.3 million ha is potential crop land. Only about 14.6 million ha of the latter were harvested in 1972. Mexico also has about 12 million ha that are suitable for irrigated farming but so far only about 4 million ha have actually been irrigated. 2.09 The agricultural population consists of two principal tenure groups: (a) ejidatarios; and (b) small land owners. Since it is estimated that there are about 1.86 million ejido parcels and about 0.96 million privately-owned farms, about 0.93 million rural families are landless. It is estimated that if all the farm land of Mexico were divided among the 3.75 million rural fam- ilies so as to equalize their incomes, then each family would be entitled to about the equivalent in earning power of 4 ha of irrigated land under cereals. 2.10 Of fundamental importance to the growth of modern agriculture in Mexico has been the development, over the past 25 years, of the modern complex of irrigation facilities in northern Mexico, to which IBRD financing has con- tributed. Concurrent with water resource development, and contributing great- ly to the success of irrigated agriculture, research workers were able to develop superior production systems and improved varieties. Moreover, a selec- tive price support program was used to enhance the profitability of certain lines of production. The irrigated areas now produce slightly more than half of the value of crop output and absorb the major share of the commercial fertilizer used. 1/ This is about equivalent to 1,000 times the legal daily minimum wage which is defined by the Mexicans as separating low-income producers from others (para 4.30). .  -4- C. Agriculture Supporting Services ?arkets and Marketing 2.11 Minimum support prices, administered by Compania Nacional de Subsis- tencias Populares (CONASUPO), are offered by the Government for a number of food products, including maize, wheat, sorghum, and vegetable oil seeds, and pros- pects are also favorable for most of the crops not covered (Appendix 1-2). Besides the established good export markets for cotton, sugar, feeder cattle, and beef, the US offers an excellent market for fruits and vegetables. In general, the marketing system in Mexico for agricultural products functions quite efficiently, and adequately serves the interests of producers and coII- sumers. 2.12 The marketing of improved seeds and fertilizers, however, leaves much to be desired, with pricing and availability as the primary problems. Guanos : Fertilizantes, a state body, has a virtual monopoly in the handling of fer- tilizers similar to that of Productora Nacional de Semillas in the ha-ldling of improved seeds. Fortunately, these institutions are beginning to fully ap- preciate the importance of the two inputs to modern agriculture, and initial steps are being taken to find solutions. Research and Demonstration 2. 13 Most of the crop research has been concentrated in irrigated areas, with little being done in the more extensive rainfed regions. This situation, however, is slowly being corrected (Appendix 1-3). The scope for livestock research in the wet and dry tropical regions, based on experience in other tropical countries (notably northern Australia), looks particularly promising (ADpendix 1-3). In spite of progress to date, the agricultural sector has been poorly serviced by research, and much greater efforts should be made to solve a host of very practical problems needing urgent solution in order to remove serious -i:straints to Increased production. Vxtension Services :.15 Extension services are provided by the federal and state agricultural extension services, the Fondo de Garantia y Fomento para la Agricultura, Gana- 1eria y Avicultura (FONDO), various Government agencies and credit institu- tions, but, in general, they have not been effective in introducing new produc- tion techniques and management methods. An important reason for this has been the large proportion of inexperienced young staff in the services resulting from the high turn-over of professional staff and the lack of transport for field officers. A more fundamental reason was the failure of the research es- tablishment to produce results suitable for implementation at the farm level (para 2.14).  -5- D. Agricultural Credit Services 2.16 Farm credit is provided by both official and private credit institu- tions. The Government's Banco Nacional de Credito Ejidal (Banco Ejidal) lends to ejidatarios, the Banco Nacional de Credito Agricola (Banco Agricola) con- centrates on lending to small-scale farmers, and the banks of the Banco Nacional Agropecuario system (BANAGROs) lend to any farmer for tec4nically- assisted farm projects. Comercial banks and financieras 1/ account for almost all private institutional lending to the agricultural sector, but about 70% of all lending is by official institutions. 2.17 FONDO was established by Government in 1955 as a trust fund in Banco de Mexico (BANXICO) to carry out a program that would provide a combination of financial support and technical service for directed developments in agricul- ture (Annex 2). Under the terms of its trust, FONDO refinances technically evaluated loans of previously authorized participating credit institutions, and supervises project implementation, thus placing lending to agriculture purely on a banking basis. FONDO operations have expanded rapidly. Besides those assisted by IBRD, it is now responsible for projects financially assisted by the U.S. Agency for International Development (USAID) through two loans to- taling US$41.5 million (US$20.0 million in 1963 and US$21.5 million in 1966), and the Inter-American Development Bank (IDB) through two loans totaling US$52 million (US$20 million in 1968 and US$32 million in 1971), as well as for the ones it finances exclusively from its own resources. Under the previous IBRD- supported projects, long-term interest rates charged to sub-borrowers varied from 10% to 11%. Given the low rate of inflation in Mexico (para 2.01), this gave a real interest rate of about 7%. Under the USAID- and IDB-supported pro- jects, the long-term interest rate is now 7.6% but it originally started in 1963 at 5.5% and has increased steadily since. 2.18 Operations of the Banco Ejidal (Annex 3) have been hampered by lack of funds (funds come from Government appropriations and loans from the Banco Nacional de Comercio Exterior) and by serious loan collection problems. As a consequence, 75% to 80% of its loans are for short term and the rest for medium term. Similarly, funds available to the Banco Agricola (Annex 4) have remained at practically the same level over the last 10 years and have limited its operations. Realizing the value of these two banks to any effort to help low-income producers, Government has recently taken steps to improve them: top management has been reorganized, loan accounts are being examined and bad debts written off, accounting and lending routines are being mechanized, and field personnel (technical and promotional) are being trained and more are being hired. These institutions, with their large numbers of branch offices, 1/ Investment banks which have the power to issue bonds and other forms of indebtedness, purchase and hold securities of other enterprises, and grant loans up to 30 years maturity.  - 6 - will continue to play an important role and Government is planning to channel more funds to them through the FONDO and to introduce stricter rules for their use ( para 4.32). 2.19 Farm loans by commercial banks have generally been for short-term while financieras' involvement in the sector has been limited. During the last five or six years, however, with a greater amount of rediscounting and technical assistance facilities available from FONDO, coimercial banks and financieras have shown greater interest in investment lending to agriculture. Evidence of this is the fact that many private banks have been rapidly estab- lishing and expanding agricultural credit departments and hiring significant numbers of agricultural technicians annually. 2.20 The maldistribution of rural income (para 2.06) poses another pro- blem needing solution. Even a vigorous land redistribution program could not by itself solve the rural poverty problem since the size of holdings that would result from equal distribution would be too small to be economically viable (para 2.09). It is for this reason that Government is concentrating on developing "group farming" among the ejidatarios and other small farmers. Group farming, in theory at least, enables the ejidatarios to benefit from economies of scale. Hlowever, because the ejidatarios do not own their land, they lack collateral and, therefore, have been effectively barred from obtain- ing long-term credit from nearly all financial institutions, except the public Banco Ejidal, which, however, has largely concentrated on short-term credit. The result has been that investments to date on ejido land have lagged far behind those made on privately-owned lands. Then, in 1972, Government agreed to guarantee 60% and, in exceptional cases, up to 80% of the long-term loans made by private financial institutions to groups of ejidatarios or other small farmers. With such back-up assured, the Mexican private banking system can now consider starting long-term lending to this large group of farmers. 2.21 It mist be emphasized that the 0.93 million landless families (para 2.09) would he helped only marginally by any agricultural credit project. Nevertheless, where almost all long-term credit previously went to rural fami- lies with net family incomes in excess of ITS$2,000, the changes mentioned above now make it possible to channel development funds to the 1.86 million ejidata- rio families. Agriculture can contribute greatly to improving the living stan- dards of these people as well as other small farmers. III. ?FFXORMANCE UNDER TmE FIRST, SECOND AND TIIRD PPROJECTS A. Introduction 3.01 The first IBRD loan of US$25 million in 1965 (430-NE), the second loan of US$65 million in 1969 (610-ME), and the third loan of US$75 million in 1971 (747-NE) were all intended to help finance medium- and long-term invest- ments (Annex 5). Loans were to be granted by participating banks and then  be refinanced to the extent of 70% to 90% by FONDO. By agreement with IBRD, FONDO would refinance only those loans that had been evaluated by competent technicians and judged to be technically and financially feasible. Loan maturities would conform to the particular repayment capacities of sub-bor- rowers, according to projections of cash receipts and disbursements, and suitable grace periods would be allowed upon FONDO recommendation to the National Banking Commission. B. Lending and Rediscounting Operations 3.02 An important objective was to put operations on an economic basis and to get sub-borrowers to pay interest rates at on-going commercial rates. Thus in the First Project, all sub-borrowers paid a loan interest of 10% per annum regardless of loan size. In the Second and Third Projects, however, larger operators were charged 11% and smaller ones 10%. Rediscount rates were struc- tured to allow participating banks adequate margin to cover risks (which they fully assumed), but, more importantly, to encourage them to participate in the program. The size of the margin was varied, for different rediscount percen- tages, from the First to the Third Project so as to encourage the banks to retain a larger percentage of loans granted for financing from their own funds (para 3.03). Under Loan 747-ME, the margin varies from 5% to 3%. Furthermore, in the First Project, PONDO refina- ced'up to9%X- of any-loan regardless of size, but in the Second Project, 90% of rediscounts were available only for loans of US$40,000 or less, and in the Third Project, 90% financing is restric- ted to loans of less than US$20,000 and then only if made by banks with paid-in capital of US$400,000 or less. 3.03 On average, in the First Project, participating banks rediscounted with FONDO 85% of the value of loans. In the Second and Third Projects, IBRD avd FONDO tried, through changes in the rediscount rate schedule, to entice the participating banks to increase their contribution. The effort was quite successful. By the Third Project, participating banks on average had in- creased their contribution by 33% and are now rediscounting with FONDO about 80% of the value of loans granted to sub-borrowers. 3.04 The following is the distribution of loan funds by enterprise: First Project Second Project Third Project* Livestock ........ 61% 61% 59% Annual Crops ..... 19% 28% 28% Perennial Crops 5% 8% 9% Agro-Industries 15% 3% 4% *As of December 31, 1972.  -8- C. Prolect Performance, Financial Condition, and Impact Performance 3.05 The three IBRD-assisted projects have succeeded in widening the role of the banking system in technically-assisted lending for farm development. In addition to the regional banks of the BANAGRO chain, about 120 private banks have also been participating. The participating banks have increased their technical staff and their contribution to individual sub-loans (para 3.03), and have been availing themselves of credit lines with FONDO at the satisfac- tory usance percentage of approximately 75. Financial Condition 3.06 The special fund created for the IDB and IBRD-appraised projects is in good financial condition. All rediscounts have been collected at maturity, and all claims are against sound financial institutions. Impact of Lending 3.07 A total of 18,043 loans were approved for rediscounting under the First and Second Projects. Of this total, 17,811 loans were made to farms and ranches, and 232 loans were made to agro-industries. 3.08 A sample survey 1/ of 719 farm and ranch sub-borrowers reveals that there was substantial variation between the various types of enterprises and within the different enterprises. The average individual loan size on the sample farm/ranch was US$13,600 but since about 27% received repeat loans, the average borrowing per farm/ranch was US$18,350. Average borrowing per farm/ranch ranged from about US$40,000 for poultry to US$13,700 for beef in- vestments. The contribution of farm/ranch sub-borrowers to total investment averaged 15%. This is in line with IBRD expectations at time of appraisal. 3.09 The breakdown of investment expenditures on the sample farms/ranches was as follo-.'s: land improvement, 19%; irrigation, 5%; machinery and equip- ment purchases, 25%; buildings, 15%; and livestock for breeding purpose, 36%. 3 .10 On the average sample farm/ranch, the gross value of farm production almost doubled between pre-development and calendar year 1971, while net cash operating income per farm increased by 45%. The greatest improvement in net cash operatin. income was on the beef and dairy farms (doubling) and the least on perennial crop farms (8%). 3.11 The sample survey also tried to compare production coefficients be- fore development and in calendar year 1971. For this purpose, a few key co- efficients were selected. On beef farms, the average herd size increased from 1/ Carried out by a consultant, who was hired by FONDO, in accordance with the terms of the Second and Third Project Agreements.  - 9 - 98 cows to 134 cows, but, the weaning percentage did not change significantly. However, stocking rate improved about 10%. In addition, the average annual weight gain in calves was about 8% higher in calendar year 1971 than before development. These improvements in production coefficients are consistent with the FONDO emphasis on improving grazing conditions. However, the failure to raise weaning rates is disappointing. In the case of crops, it was generally found that production coefficients did not change appreciably. 3.12 The survey of agro-industries involved a sample of 54 firms and in- cluded respondents from 13 different industries. Only 30% of the sample firms were in existence prior to the initial project loan, and some 39% of the sam- ple were cooperative-type undertakings. About 26% of the firms had multiple loans. On average, sub-borrowers contributed 40% of investment cost. Average investment was US$235,000 distributed as follows: land, 3%; buildings, 31%; machinery and equipment, 64%; and other, 2%. The average cost of creating a new job in an agro-industry was US$26,000. The agro-industries surveyed were generally in good financial condition and were making a satisfactory level of profits. IV. THE FOURTH LIVESTOCK AND AGRICULTURE DEVELOPMENT PROJECT A. Brief Project Description 4.01 The Fourth Livestock and Agriculture Development Project (Fourth Project) is a program for long-term investments in livestock and crop produc- tion and in agro-industries. It would consist of two sub-projects: a General Sub-Project (GSP) and a Low-Income Producers Sub-Project (LIPSP). It would also provide funds for studies, special training, and demonstration. 4.02 The objectives of the Project are: (a) to expand food production so as to enable Mexico to con- tinue meeting from local resources nearly all her domes- tic food requirements and also to continue agriculture's substantial contribution to easing the balance of pay- rents constraint to growth of GDP; and (b) to improve the distribution of income by giving long-term credit and complementary technical services to low-income producers. General Sub-Project 4.03 The GSP would continue the countrywide livestock and agriculture development program started in 1965 by FONDO with IBRD assistance. As before, any agricultural activity that was judged to be technically, financially and economically sound would be eligible for financing under the GSP. As under the previous projects, participating private credit institutions and regional BANAGROs would extend loans to producers at commercial rates of interest  - 10 - on the basis of technically and financially evaluated development plans. Plan implementation would be supervised by FONDO technicians or by FONDO- trained and approved technicians. As before, FONDO would refinance the primary loans at varving rates of interest designed to encourage participation of more local funds in the GSP (para 4.31). Low-Income Producers Sub-Project 4.04 The LIPSP would initiate an agriculture development program aimed specially at ejidatarios and other small farmers who meet certain requirements (para 4.30). Loans would be granted by both official 1/ and private credit institutions to: (a) such low-income producers legally formed into associations or groups where each member would be jointly and severally liable for all debts incurred by the "group", and (b) such individual small farmers who were not ejidatarios. Loans would be based on technically and financially evaluated plans, and the same standards observed in previous IBRD-assisted projects would be maintained. Technical assistance would be provided by FONDO technicians or by FONDO-trained and approved technicians. Components of Lending Program 4.05 The main components of the lending program may be summarized as fol- lows: Investment (US$'000) % of Total Estimated No. of Loans Average Lending Year 1 Year 2 Total Per Loan Total /1 Program A. General Sub-Project 1. Livestock a. Beef Ranching 1,809 2,442 4,251 16.0 74,200 28 b. Dairying 596 902 1,498 26.5 42,600 16 c. Other 310 430 740 18.7 15,100 5 Sub-Total 2,715 3,774 6,489 18.7 131,900 49 2. Crops a. Annual 1,400 2,080 3,480 13.3 50,100 19 b. Perennial 320 490 810 15.0 13 200 5 Sub-Total 1,720 2,570 4,290 13.6 63,300 24- 3. Agro-Industries a. Livestock Processing 11 15 26 363.1 10,300 4 b. Crop Processing 14 21 35 257.4 9,900 4 c. Agricultural Inputs 1 2 3 61.3 200 0 Sub-Total 26 38 64 291.1 20,400 8 Total GSP 4,461 6,382 10,843 18.3 215,600 81 71 Total investment figures include a price contingency of about 9%. 1/ BANAGRO's, Banco Ejidal and Banco Agricola (paras 2.16 and 2.18).  Investment (US$'000) % Estimated No. of Loans Average Lending Year 1 Year 2 Total Per Loan Total /1 Program B. Low-Income Producers' Sub-Project 1. Livestock a. Beef Ranching 59 90 149 60.5 10,100 4 b. Dairying 66 99 165 84.3 15,200 5 c. Other 23 35 58 73.2 4,700 2 Sub-Total 148 _24 372 73.1 30,000 11 2. Crops a. Annual 264 459 723 17.6 13,900 5 b. Perennial 218 427 645 6.5 4,600 2 Sub-Total 482 886 1,368 12.4 18,500 7 3. Agro-Industries a. Logging 2 4 6 552.0 3,600 1 TOTAL LIPSP 632 1,114 1,746 27.2 52,100 19 Total Lending Program 5,093 7,496 12,589 19.6 267,700 100 /1 Total investment figures include a price contingency of about 9%. 4.06 Under the GSP, loans would nearly always be made to individuals, so about 11,000 families would be direct beneficiaries of credit. In the LIPSP, however, the 1,746 loans would be made to about 22,600 families for develop- ment as follows: (a) 149 beef ranches by 3,060 families; (b) 165 dairy farms by 3,150 families; (c) 58 other livestock undertaking such as pigs and poultry by about 1,150 families; (d) 723 annual crops farms by 8,676 families; (e) 645 perennial crop farms by 6,450 families; and (f) six agro-industries by about 120 families. Therefore, on average, each LIPSP loan would benefit about 13 families. B. Detailed Project Features Project Areas 4.07 The GSP would be countrywide in scope. The LIPSP would have areas of concentration (Map IBRD 10284R) in some of the poorest regions, such as the states of Oaxaca, Guerrero, Queretaro and Aquascalientes, and all additional staff for this Sub-Project would go to such areas (para 4.26). It is important, however, that FONDO's three regional and 35 field offices lying outside the areas of concentration (Map IBRD 3283R1) participate in the LIPSP to the maximum .  -12- extent possible to gain experience in dealing with low-income producers and to build the liaison with other institutions so vital for an expanded follow- up project. In these areas, no additional strengthening would be envisaged at this time. Farm/Ranch Development 4.08 Since the inputs financed under the GSP and the LIPSP are similiar the two Sub-Projects will be treated as one in the following paragraphs dis- cussing technical features. 4.09 Beef Ranching. In the wet and dry tropical areas of the east, south- east and southwest, development efforts would include the introduction of tropical legumes and the application of fertilizers to increase the productivity and longevity of artificial pastures. In Northern Mexico, efforts would focus on introducing new techniques of management to increase extraction rates signif- icantly. In general, throughout Mexico, investments would be mainly in breeding stock (to increase herd numbers more rapidly); in pasture establishment and land clearing (to provide better quality and more consistent levels of stock nutrition); and in fencing, water facilities, irrigation, and ranch infra- structure (to improve farm management) (Annex 6). 4.10 Dairy Farming. In view of successful dairy farming operations under the previous projects, investments in dairy development are expected to further increase in the central highlands and the irrigated north and to expand sub- stantially in the states oL Guerrero and Oaxaca, especially in areas close to Acapulco. Investments would be mainly for milking cows (to improve the quality of herd and increase numbers more rapidly), pasture establishment (to improve nutrition levels), and in machinery and farm infrastructure (to increase pro- ductivity and reduce the cost of production) (Annex 6). 4.11 Other Livestock. Investments in pig farming as well as in poultry development are expected to be greatest in Central Mexico. Principal invest- ments would be in breeding stock, housing and equipment. Other livestock developmients would include investments in goats, bee keeping, and the raising of fur-producing animals. 4.12 Annual Cro2s. About 50% of investments are expected to be made in irrigated areas, and the rest would be in rainfed areas. In the irrigated areas, the main investment items would be machinery and equipment, on-farm irrigation works, and farm installations, while in rainfed areas land clearing would be a major investment item (Annex 7). 4.13 Perennial S=. About two-thirds of the development in perennial crops are expected to be in rainfed areas and the rest in the irrigated dis- tricts. Major investments would be crop establishment, machinery and equipment, and some on-farm constructions (Annex 7). 0  - 13 - * Agro-Industries 4.14 Under the GSP, about 65% of expected investments (53% of the number of plants) would be related to the livestock sub-sector (slaughterhouses, pork processing, feed mixing, and alfalfa drying plants), while the balance would be for crop processing plants (fruit and vegetable packing- storage and pro- cessing), fertilizer and insecticide mixing, seed drying and storage, and wineries. Under the LIPSP, about six logging and saw mills would be financed. Over 60% of investment cost is expected to be in machinery and related equip- ment (Annex 8). Studies, Training and Demonstrations 4.15 ,mphasis would be given to the provision of technical services to farmers, particularly tihose in the rainfed areas, and to livestock producers, especiall. those in the tropics. Ejidatarios and other low-income producers would receive special attention, not only on technical matters, but on organi- zational and administrative matters as well. Production-oriented studies and demonstrations (adapting and integrating research findings into farming systems, better use of pastures, economical calf-rearing methods, and such) and training would be undertaken. FONDO's fundamental role would be to provide the initia- tive (it is in a good positionl to appreciate problems at farm level) and the funds that would be needed, and, accordingly, as in the Third Project, as- surance was obtained that FONDO would enter into contractual arrangements with Government, state, and private entities to undertalke specific programs on its behalf, and would not, except with IBRD concurrence, perform such ac- tivities itself. Such an arrangement w.ould help develon, expand, and streng- then Mexico's existing agricultural research efforts. Details on cost esti- mates are show-n in Annex 9. 4.16 In support of the on-going effort to strengtlhen its technical ser- vices, FO')O would continue to send its tecbnicians for training in and out- side MIexico. As before, candidates would be selected on the basis of their basic training, experience, actual performance, and potential for growth and accordinz- to FONDO's need for specialized technical capability in particular fields. It is also planned to send selected farmers abroad and within Miexico for training and observation of new farming technology. By adopting new Treth- ods observed, their farms would then become useful demonstrations for FONDO. C. Cost Estimates 4.17 The total cost of the Fourth Project is estimated at US$271.7 million of which US$83.9 million, or 31%, represents foreign exchange requirements. Estimated Project costs, including a price contingency of about 9%, are summarized below: S  - 14 - Total Foreign Total Project Costs Project Exchange Components Local Foreign Total Local Foreign Total Cost Cost --Mex $ millions--- ---US$ millions--- 1. Breeding Stock - 478.8 59.0 537.8 38.3 4.7 43.0 15.9 11 Beef Cattle 2. Breeding Stock - Dairy Cattle 202.7 235.5 438.2 16.2 18.8 35.0 12.9 11 3. Farm Machinery and Equipment 347.8 307.2 655.0 27.8 24.6 52.4 19.3 47 4. Farm Construc- tions 405.1 47.8 452.9 32.4 3.8 36.2 13.3 11 5. Cattle Watering Facilities 54.4 18.3 72.7 4.4 1.5 5.9 2.1 25 6. Pasture/Cror Fstablishment 463.0 128.2 591.2 37.1 10.3 47.4 17.4 22 7. Irrigation Facilities 118.9 64.1 183.0 9.5 5.1 14.6 5.4 35 0 8. Agro-Industries Civil Construc- tion 62.3 6.5 68.8 5.0 0.5 5.5 2.0 9 9. Agro-Industries MIachinery and Equipment 61.4 143.4 204.8 4.9 11.5 16.4 6.0 70 10. Studies Training & Demonstrations 36.8 13.0 49.8 2.9 1.0 3.9 1.5 26 11. Miscellaneous 116.6 26.0 142.6 9.3 2.1 11.4 4.2 18 TOTAL 2347.8 1049.0 3396.8 187.8 83.9 271.7 100.0 31 _~~~~~  - 15 - D. Financing 4.18 Financing would be shared in the following amoulnts and proportions: