Mexico - Integrated Rural Development Project

Report No. 527-ME Appraisal of the Integrated Rural FIL F Development Project I Papaloapan Basin Mexico September 23, 1974 Regional Projects Department Latin American and the Caribbean Regional Otfice ; Not for Public Use Document of the International Bank for Recoistruction and Development International Development Association Tis report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authortzation. The Bank Group does not accept respomsibility for the accuracy or compteteness of the report.  CURRENCY EQUIVALENTS US$1 = Mex$12.5 'Mex$1 - us$0.08 Mex$l million US$80,000 WEIGHTS AND MEASURES 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 1 kilogram (kg) = 2.20 pounds 1 liter (1) = 0.26 gallons 1,000 kg = 1 metric ton = 0.98 long ton GLOSSARY OF ABBREVIATIONS BANAGRO - Banco Nacional Agropecuario Banco Agricola - Banco Nacional de Credito Agricola Banco Ejidal - Banco Nacional de Credito Ejidal BANXICO - Banco de Mexico CAPFCE - Comite Administrador del Programa Federal de Construccion de Escuelas CONASUPO - Compania Nacional de Subsistencias Populares CFE - Comision Federal de Electricidad Commission - Papaloapan Commission DAAC - Departamento de Asuntos Agrarios y Colonizacion FONDO - Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicultura INIA - Instituto Nacional de Investigaciones Agricolas INIP - Instituto Nacional de Investigaciones Pecuarias NAFIN - Nacional Financiera PLANPA - Plan Papaloapan PLAMEPA - Plan de Mejoramiento Parcelario SAG - Secretaria de Agricultura y Ganaderia SOP - Secretaria de Obras Publicas SRH - Secretaria de Recursos Hidraulicos SSA - Secretaria de Salubridad y Asistencia PAPALOAPAN COMMSSION FISCAL YEAR January 1 to December 31  MEXICO INTEGRATED RURAL DEVELOPMENT PROJECT I - PAPALOAPAN BASIN TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .. ...........................O. - iii I. INTRODUCTION ........................ I II. BACKGROUND . . .............. 1 A. General .......... ....................... 1 B. Rural Sector ..................... 2 C. Agriculture Supporting Services . . 3 D. Government Policy . . 4 III. INTEGRATED RURAL DEVELOPMENT PROJECT I - PAPALOAPAN BASIN 5 A. Brief Project Description . ..................... 5 B. Detailed Project Features .. 7 C. Cost Estimates .. 10 D. Financing ...................................... 12 E. Procurement .................................... 13 F. Disbursements .. ................................ 13 G. Organization and Management . . ... 14 H. Accounting and Auditing . .16 IV. PRODUCTION, MARKETS AND MARKETING, AND PRODUCER BENEFITS 17 V. ECONOMIC BENEFITS AND JUSTIFICATION .................. 1 i VI. AGREEMENTS REACHED AND RECOMMENDATIONS ................ 19 This appraisal report is based on the findings of a mission, which visited Mexico in November/December 1973, composed of Messrs. M.J. McGarry, F.L. Hotes, R. Rossi, and D.H. van der Sluijs (Bank), and M. Novoa F. (Consultant). Messrs. McGarry, Hotes, and Rossi visited Mexico in February 1974 for a one-week follow-up mission.  :  TABLE OF CONTENTS (Cont'd) ANNEXES 1. The Papaloapan River Basin. Table 1 - Principal Geographic Zones in the Papaloapan Basin. Table 2 - Background Statistics on Upper and Lower Papaloapan Areas. Table 3 - Population Distribution by State in the Papaloapan River Basin. Table 4 - Distribution of Population by Size of Community. 2. Esperanza-Palmar de Bravo Irrigation Area. Table 1 - Cropping Pattern, Yields and Costs of Production - 60 ha Farm Model. Table 2 - Investment Costs - 60 ha Farm Model. Table 3 - Income and Operating Costs - 60 ha Farm Model. Table 4 - Financial Projection for a Typical Group of 10 Families - 60 ha Farm Model. 3. Rio Salado Irrigation District. Table 1 - Cropping Pattern, Yields and Costs of Production - Rehabilitation of 3,600 ha. Table 2 - Investment Costs - Rehabilitation of 3,600 ha. Table 3 - Income and Operating Costs - Rehabilitation of 3,600 ha. Table 4 - Financial Projection for a Typical Family with 3.0 ha. Table 5 - Cropping Pattern, Yields and Cost of Production - 2,500 ha of New Irrigated Land. Table 6 - Investment Cost - 2,500 ha of New Irrigated Land. Table 7 - Income and Operating Costs - 2,500 ha of New Irrigated Land. Table 8 - Financial Projection for a Typical Family with 1.5 ha. 4. Rio Blanco Irrigation District. Table 1 - Cropping Pattern, Yields and Cost of Production - Rehabilitiation of 16,000 ha. Table 2 - Investment Costs - Rehabilitation of 16,000 ha. Table 3 - Income and Operating Costs - Rehabilitation of 16,000 ha. Table 4 - Financial Projection for a Typical Family with 11.4 ha. 5. Technical Services of Plan de Mejoramiento Parcelario (PLAD4EPA) Table 1 - Investment Costs. Table 2 - Operating Costs. 6. Plan Papaloapan for Rainfed Agriculture Table 1 - Cropping Pattern, Yields and Costs of Production - 100,000 ha. Table 2 - Investment Costs - 100,000 ha.  TABLE OF CONTENTS (Cont'd) Table 3 - Income and Operating Costs - 100,000 ha. Table 4 - Financial Projection for Typical F'amily in Upper Basin with 4 ha of Cropped Land. Table 5 - Financial Projection for Typical Family in Lower Basin with 5 ha of Cropped Land. 7. Plan Papaloapan for Rainfed Agriculture - 100,000 ha. Table 1 - Technical Services of Plan Papaloapan (PLANPA) - Investment Costs. Table 2 - Technical Services of Plan PapaloaLpan (PLANPA) - Operating Costs. 8. Experimental Farms Table 1 - Investment Costs. Table 2 - Operating Costs. 9. Feeder Roads Table 1 - Model of Rural Feeder Road - 1 km - Investment and Operating Costs. 10. Potable Water Supply System Table 1 - Model of a Town Water Supply System - 2,800 population - Investment, Revenue amd Operating Costs. Table 2 - Model of a Village Water Supply Systemt - 700 Population - Investment, Revenue and COperating Costs. 11. Sewerage and Sewage Treatment. Table 1 - Model of Town Sewerage and Sewage Treatment Plant - 3,500 Population - Investment, Reverue and Operating Costs. 12. Village Electrification. Table 1 - Model of Town Electrical System - 1,100 Population - Investment, Revenue and Operating Costs. 13. Health Centers Table 1 - Model of a Health Center Type "C" - Investment and Operating Costs. 14. Primary Schools and Workshops Table 1 - Model of a Primary School Classroom - Investment and Operating Costs. 15. Model of a Community Center Table - Investment and Operating Costs 16. Project Monitoring 17. Phasing of Investments  TABLE OF CONTENTS (Cont'd) 18. Estimated Disbursement Schedule of Bank Loan 19. Papaloapan Commission Table 1 - Irrigation, Water Supply and Sewerage Projects Performed by the Papaloapan Commission from 1947 to 1972. Table 2 - Summarized Expenditures Statement. Chart - Organization Chart. 20. Table - Incremental Financial Rates of Return on Selected Project Components. 21. Economic Rate of Return Table 1 - Economic Rate of Return. MAPS Project Area and Banking Network Population.   MEXICO INTEGRATED RURAL DEVELOPMENT PROJECT I - PAPALOAPAN BASIN 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%. From the mid-1950's to 1972, Mexico was among the few countries in the developing world to com- bine a sustained high rate of growth with monetary and balance of payments stability. Maintenance of this growth rate and stability in exchange rates is heavily dependent on rapid growth of export earnings and managment of external debt, which, in turn, hinges on an improved fiscal position. The recent upsurge in inflation to about 20% p.a. is a consequence in part of past failures to take the needed fiscal initiatives. Other problems to be faced are gross maldistribution of income, growing unemployment and under- employment, and the overall social tensions and pressures inevitable in a population growth rate of about 3.4% p.a. ii. Government policy in relation to the rural sector has the triple objectives of rapidly increasing food production for both domestic and export markets, improving income distribution and the availability of public ser- vices to the poor, and creating the maximum number of new jobs consistent with sound overall economic management. In 1970, 39% of the country's labor force was engaged in the agricultural sector. It contributed 11% of GDP, nearly all domestic food requirements, and 50% of commodity exports. Since food production is growing at about 4% p.a., while demand is growing at nearly 5%, elimination of this food deficiency gap by increasing production is the first serious challenge facing Mexican rural areas. The second serious problem is that of maldistribution of income. It is estimated that urban per capita income is about 2.7 times rural per capita income. Of the approxi- mately 3.9 million rural families, it is estimated that about 65% are poor, if one defines poor as anyone with an income below the 40 percentile (US$1,500). Lack of employment opportunities is the third serious problem, as labor absorp- tion possibilities in urban areas are far short of requirements, and, hence, job creation in rural areas is urgent. iii. The proposed loan to help finance the Integrated Rural Development Project I - Papaloapan Basin (Project) would help achieve such objectives. The Project would be executed within the confines of the Papaloapan Basin (46,517 km2 in size). The Project is conceptually a new departure for the Bank in Mexico, and for Mexico itself, and would help finance, in addition to small irrigation works, technical services to rainfed agriculture, market- ing facilities, experimental farms, feeder roads, potable water, sewerage, electricity, primary schools and workshops, medical centers and community centers. Total Project cost would be about US$138.5 million equivalent, including US$18.0 million for on-farm incremental working capital, which part, however, would not be financed under the proposed loan, since it is eligible for financing from Bank Loan 910-ME. The other Project components would be financed from three sources: (a) the Bank loan of US$50.0 million,  - ii - or 41%, would finance all the foreign exchange costs (US$21.2 million, or about 17% of Project cost, excluding on-farm incremental working capital) and 29% of the local currency costs (US$28.8 million, or about 24% of Project cost, excluding incremental working capital); (b) Government would contribute US$60.3 million, or 50%; and (c) beneficiaries would provide US$10.2 million, or 9%. iv. In the construction of water systems based on household connections, the beneficiaries would finance at the outset all investmients within house- holds and the costs of household connections (about 34% of the total costs of these systems), and the rest would be financed from public funds. Such systems would be considered, however, only if, in addition, the households involved would be prepared to pay an annual charge sufficient to cover the operation and maintenance costs involved, plus recovery of the public investment funds over 25 years at zero interest rate. In villages desiring9 only water hydrants, they would be required to contribute at the outset at least 20% of the invest- ment cost, and the remainder would be financed from public funds. Such systems would be built, however, only if, in addition the villages would be prepared to pay an annual charge sufficient to cover operation and maintenance costs (public investment funds would not be recovered). A sewerage system would be considered for a village only if the households benefitting would finance at the outset all investments within their households and costs of household connections (about 22% of the total costs of these systems), and the rest would be financed from public funds. In addition, however, the households involved would have to agree to pay an annual charge sufficient to cover operation and maintenance, and re- covery of public investment funds over 25 years at zero interest rate. In the construction of electricity facilities, households benefiitting would finance wiring costs within their households (about 14% of the total cost of these systems) and agree to pay the annual charges fixed according to the tariffs for the sale of electricity applied generally in Mexico. Basied on Project cost esti- mates, these charges are about sufficient .o cover operation and maintenance costs plus the recovery of public investment funds ovier 215 years at zero inter- est rate. No contribution from beneficiaries would be required to finance the investments in experimenta.L farms, feeder roads, marketing facilities, schools and workshops or medical centers and neither would an annual charge be levied. Irrigation facilities would be constructed entirely using public funds but an annual charge, sufficient --o cover operation and maintenance and recovery of public investment funds over the life of the works, would be collected. Selec- tion criteria for roads would be such as to yield at Least a 10% return on incremental investments in roads and the related rainfed agricultural develop- ment. This would be achieved by requiring th t the expenditures on feeder roads be linked to development of rainfed agriculture. Anly other justification for feeder roads would require Bank approval on a case-by--case basis. v. Responsibility for Project plann-ing, execut:Lon and operation would rest with the Papa'Loapan Commission, created in 1947 by Executive Resolution of the President as an agency within the Secretaria deB Recursos Hidraulicos (SRH). It has a good technical staff and experience :Ln doing nearly all of the works envisaged under the Project. It would get the assistance, if -necessary, of other agencies involved such as Secretaria de Obras Publicas  - iii - (SOP) for feeder roads; Comision Federal de Electricidad (CFE) for village electrification; Secretaria de Salubridad y Asistencia (SSA) for health centers; Comite Administrador del Programa Federal de Construccion de Escuelas (CAPFCE) for schools; the parent ministrv of the Commission, SRH, for irriga- tion, water supply, and sewerage; Instituto Nacional de Investigaciones Agri- colas (INIA) for research; Compania Nacional de Subsistencias Populares (CONASUPO) for marketing facilities; and the Fondo de Garantia in matters dealing with credit. vi. Procurement of all contracts exceeding US$80,000 would be by inter- national competitive bidding in accordance with Bank Guidelines. For con- tracts costing less than US$80,000, unit prices approved by SRH would be acceptable, and the Commission would then select the private contractor best qualified to do the job, or use force account, subject, however, to the restriction that the total value of unit-price-based contracts and force account work would not exceed 30% and, furthermore, that force account work would not exceed 10% of total procurement costs. vii. The productive components would directly benefit about 152,000 people of which 124,000 would benefit from the investments in rainfed agri- culture. Beneficiaries of social infrastructure investments include the following: 307,000 rural villagers would have new potable water systems; 42,000 would have new house-connected sewerage systems; 137,000 would have new electrical service to their homes; 324,000 would be given access to medical centers who now lack such access; 59,000 school pupils would have new primary school classroormis or workshop facilities provided; and 106,000 villagers would have community centers built in their villages. viii. Of the investment expenditures, about 36% would be in labor, and these would generate about 30,000 man-years of employment. Furthervore, about 13,000 permanent jobs wouICL be created directly by the Project. ix. The rate of return of the Project to the Mexican economy is estimated at about 26%. Should investment costs be 20% higher, then the rate would drop to 19%. x. During negotiations appropriate assurances were obtained that provide a suitable basis for a Bank loan of UO$50.3 -zalion for 25 years, irscluding a five-year grace period. The borrower would be Nacional Financiera, S.A. and Government would assume tne foreign exchange risk.   MEXICO INTEGRATED RURAL DEVELOPMENT PROJECT I - PAPALOAPAN BASIN I. INTRODUCTION 1.01 The Government of Mexico has requested a Bank loan to help finance an integrated rural development project in the Papaloapan Basin (Basin). The proposed loan would be the first loan to Mexico for rural development. To date, the Bank has made 37 loans to Mexico, for a total of US$1,838 million net of cancellations. Most of these loans have been made for power, roads and agriculture. Execution of these projects has generally been satisfactory. The proposed project was prepared by Government with assistance from Bank and the FAO/CP. 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 coun- tries. During that time GDP, in real terms, grew at an average annual rate of about 7.0%. From the mid-1950's to 1972 Mexico was among the few countries in the developing world to combine a sustained high rate of growth with monetary and balance of payments stability. During this period, the annual rate of inflation was less than 5% and the dollar value of the peso was maintained at the level fixed in 1954. 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 management, which in turn hinges on an improved fiscal position. In recent years for instance, the deficit on current account in the balance of payments has increased fairly rapidly, and in the past year inflation has being running at an annual rate of about 20%. 2.02 Income distribution is very skewed in Mexico, where the top 5% commands about 36% of national income and the lowest 40% only about 24%. Furthermore, the share of the lowest 40% has decreased during the 1960s. There are also great income disparities between urban and rural areas. It is estimated that urban per capita income is about 2.7 times rural per capita income. It is further estimated that about 40% of the population have per capita incomes of less than US$259, equivalent to a family income of less than about US$1,500. These may be defined as the poor. 2.03 The population of Mexico (1973), at about 56 million, is increasing at approximately 3.4% per year and will reach about 100 million by 1990. Of this total, 23 million, or 41%, are rural, and about 13% live in the Federal District (FD). In 1970, the labor force was estimated at 13.1 million workers, of which 5.1 million (39%) were in agriculture, 3.0 million (23%) in industry,  -2- and 5.0 million (38%) in services. The net annual additLon to the labor force is presently estimated at about 400,000. Reliable data on unemployment and underemployment are lacking, but there is little doubt tlhat these are among the toughest problems facing Mexico. B. Rural Sector 2.04 Agriculture's share of GDP has fallen from about 23% in 1950 to approximately 11% in 1973. Nevertheless, the sector still supplies almost all of Mexico's domestic food requirements and about 50% of the country's merchandise export earnings. The first problem of Mexico's agriculture is its seeming inability since about 1967 to keep pace with the growth of demand for agricultural products. Because total domestic demand for food is projected to increase at almost 5% per annum while agriculture is presently growing at only about 4%, a problem exists. Because of this, Goverrment recognizes that efforts to raise the growth rate of agriculture must be given priority in Mexico's agricultural development strategy. This is essential, not only to meet growing domestic demand, but also to continue agriculture's substantial contribution to export earnings and thus help ease thLe balance of payments constraint to growth of GDP (para 2.01). The irrigated areas now produce about 60% of the value of crop output, and absorb the major share of the fertilizer used. Crop output in turn accounts for about 70% of total agri- cultural production. 2.05 The main constraints to expanding agricultural production are on the supply side and may be summarized as follows: (a) the weak technical capability of a very high percentage of the people involved in agriculture, particularly rainfed, ranging from farmer to extension and even research workers. There are, of course, some outstanding individuals but the generalization is still valid; (b) the lack of access to credit, especially long-term credit, by a large segment of producers; and (c) the weaknesses in the production and distribution system for fertilizers and improved seeds (para 2.10). 2.06 Maldistribution of income is the second serious problem facing rural areas of Mexico. Of the approximately 3.9 million rural families, it is estimated that about 65% are poor (para 2.02). Furthermore, a Mexican study estimates that the poorest 50% of all workers in agriculture accounted for only about 20% of the total rural income (including off-farm income), while the top 10% accoun-L3d for about 40% of total rural income. 2.07 A growing unemployment and underemployment problem is the third major problem of rural Mexico. The rural population iis expected to continue growing at 1.5% p.a. Given the limited opportunities for absorbing new  -3- workers in the non-rural sectors, increasing attention is being focused on the employment creation potential within rural areas, especially in agri- culture, rural infrastructure and social services. 2.08 The agricultural population consists of two principal tenure groups, ejidatarios and private farmers. Since it is estimated that there are about 1.5 million ejido 1/ parcels and about 1.2 million privately owned farms, about 1.2 million rural families are landless. It is estimated that if all the farm land of Mexico were divided among the 3.9 million rural families so as to equal- ize their incomes, then each family would be entitled to about the equivalent in earning power of 4 ha of irrigated land under cereals. C. Agriculture Supporting Services 2.09 Minimum support prices, administered by Compania Nacional de Sub- sistencias Populares (CONASUPO), are offered by the Government for a number of food products, including maize, wheat, sorghum, beans and vegetable oilseeds, and prospects are also favorable for most of the crops not covered. In general, the marketing system in Mexico for agricultural products functions quite effi- ciently and adequately serves the interests of producers and consumers. How- ever, some small farmers do not have access to the CONASUPO administered minimum support prices and, consequently, receive much lower prices from middle- men. 2.10. In the marketing of agricultural inputs, Guanos y Fertlizantes, a state body, has a virtual monopoly in the handling of fertilizers similar to that of Productora Nacional de Semillas in the handling of improved seed. The marketing and supply situation, as perceived by farmers, for both these inputs is unsatisfactory, with timeliness of delivery, shortages and prices the main problems. 2.11 Most of the crop research has been concentrated in irrigated areas, with little being done in the more extensive rainfed regions. In spite of progress to date, much greater efforts should be made to solve a host of very practical problems in order to remove seriouis constraints to increased pro- duction. The two major agricultural research institutions in Mexico are the Instituto Nacional de Investigaciones Agricolas (INIA) and the Instituto Na- cional de Investigaciones Pecuarias (INIP). Both are located in the Secretaria de Agricultura y Ganaderia (SAG), but there is little coordination between them. Extension services are provided by the federal and state agricultural extension services, various Government agencies and credit institutions, but, in general, they have not been effective in introducing new production tech- niques and management methods. The failure of the research establishment to provide results suitable for implementation at the farm level is probably the basic reason. 1/ Farmers on ejido parcels are called ejidatarios and have usufruct rights.  -4- 2.12 Farm credit is provided by official andl private credit institutions. The Government's Banco Nacional de Credito Ejidal (Banco Ejidal) system lends to ejidatarios, the Banco Nacional de Credito Agricola (Banco Agricola) system concentrates on lending to s=mall-scale farmers, aLnd the banks of the Banco Nacional Agropecuario system (BANAGROs) lend to any type farmer who is credit- worthy. Commercial banks account for almost all private institutional lending to the agricultural sector, but about 70% of all lending is by official insti- tutions. The Fondo de Garantia y Fomento para la Agricultura, Ganaderia y Avicultura (FONDO) was established by Government in 1955 as a trust fund in Banco de Mexico (BANXICO) to refinance technically evaluated loans of previously authorized participating credit institutions and supervise implementation. It is the executing agency for the Fourth Livestock and Agriculture Development Project, partially financed by the Bank -- Loan 910-ME (US$110.0 million). D. Government Policy 2.13 Mounting social pressure in the countryside and the disappointing production performance in recent years were instrumental in causing the Government to revamp the strategy of agricultural development. The extensive development approach of the past has largely run its course and a more judi- cious selection of policies and actions will be required in the future as the more easily developed water resources in the northern coastal areas have being exploited, the land distribution program has practicaLly come to a close, addi- tion of new cultivated land is becoming increasingly difficult and expensive, intensification of traditional rainfed agriculture has to be geared to farmers far less sophisticated than those in commercial agriculture, and development of river deltas in the southern Gulf regions raises many as yet unanswered questions. 2.14 The present administration is attempting, through legal changes, to strengthen the service and assistance-type agencies and to considerably expand the public budget for rural development, including agriculture, to achieve the objectives of increased agricultural production and imaproved income level and general standard of living of rural people. The new Agrarian Reform Law (1971), a new Water Law (1971), and a revision of instructions concerning the alloca- tion of Bank credit designed to increase the flow of resources to low income farmers and ejidatarios are measures aimed at ach:Leving the above objectives. The main goal of the new Agrarian Law is to transform the ejido into an effi- cient production unit by, inter alia, granting it juridicial status and the right to contract on the same basis as other enterprises. The Department of Agrarian Affairs and Colonization (DAAC), entrusted with the implementation of the Agrarian Reform Law, has been handicapped in the past by staff shortages and lack of expertise. Recently, however, it is makirtg great efforts to improve its performance. The Federal Water Law has combined the dispersed legislation in this field under one heading and also made it more responsive to Mexico's needs. Secretaria de Recursos Hidraulicos (SRH) c:ontinues to be the central and dominating public agency in water use. It is a sound institution.  -5- 2.15 Rural development, excluding agriculture, has not received much more than benign neglect in Mexico over the last decades. The present administra- tion, however, is trying to evolve a strategy for helping rural areas through a mix of investments in productive elements, production supporting items, and social infrastructure. During the remainder of this administration (1970-1976), the rural sector will probably receive more public funds in rela- tive terms than in any previous administration, except that of Cardenas. Agricultural investment varied between 7.6% and 13.6% of total public invest- ment during the last decade, while present plans would raise this figure to about 18% over the period 1973-76. Irrigation continues to dominate public investment in agriculture. III. INTEGRATED RURAL DEVELOPNENT PROJECT I - PAPALOAPAN BASIN A. Brief Project Description 3.01 The Integrated Rural Development Project I - Papalopan Basin (Project) would develop irrigated and rainfed agriculture, experimental farms, feeder roads, and marketing facilities to support the production effort, and social infrastructure (potable water, sewerage, electricity, medical centers, primary schools and workshops, and community centers), in the Basin. It would also include technical services and credit for incremental working capital needs of farmers (and for some on-farm fixed investments) and would be carried out over five years. 3.02 The main objectives of the Project would be to expand food produc- tion, improve the distribution of income by raising the income level of poor families through provision of credit and technical services, and generally improve the quality of life in poor villages by bringing the level of social services available there closer to the national average. 3.03 The main components of the Project may be summarized as follows:  -6- % of Unit Total Base- Cost Units Investment Line Components Unit US$ Served US$1000 Cost Productive 1. Irrigation Systems (a) Esperanza-Palmar de Bravo.... ha 965 2,400 2,316 3 (b) Rio Salado - Rehabilitation.. " 831 3,600 2,992 4 - New Land ........ tt 1,281 2,500 3,203 4 (c) Rio Blanco - Rehabilitation.. " 218 16,,000 3,487 4 (d) Technical Services ....... " 60 24,500 1,459 2 (e) Incremental Working Capital.. " 265 2b,500 6,4 85 8 2. Rainfed Areas (a) Incremental Working Capital.. 40 100,000 4,013 5 (b) Technical Services . ..... 58 100,000 5,759 7 Sub-Total ...... . ,..9 124,500 29,714 37 Productive Support 1. Experimental Farms .............. No. 859,000 3 2,577 3 2. Feeder Roads. ................... km 11)800 1,340 15,783 20 3. Marketing Facilities ........... No. 80,500 12 966 1 Sub-Total . ... 19,326 Social Infrastructure 1. Water Systems . . ..epeople 32 307,000 9,790 12 2. Sewerage .... . . ..... ". 65 42,300 2,750 3 3. Electricity. 43 136,,700 5,830 7 4. Medical Centers . . .......... 17 323,,700 5,500 7 5. Schools and Workshops ..... pupils 102 59,300 6,050 8 6. Community Centers . ..... ....... people 16 105,700 1,650 2 Sub-Total . . 31,570 39 Monitoring.... .... 195 0 Sub-Total all Components 80,805 100 Contingencies 1. Physical 12,121 15 2. Price 45,537 56 Sub-Total .. .....57658 71 Total Project Costs..... 138,463 171  - 7 - 3.04 The productive components would directly benefit about 152,000 people of which 124,000 would benefit from the investments in rainfed agri- culture. Beneficiaries from social infrastructure include the following: 307,000 rural villagers would have new potable water systems; 42,000 would have new house connected sewerage systems; 137,000 would have new electrical service to their homes; 324,000 would be given access to medical centers who now lack such access; 59,000 school pupils would have new primary school classrooms or workshop facilities provided; and 106,000 villagers would have community centers built in their villages. The primary executing agency would be the Papaloapan Commission (Commission) (para 3.25). B. Detailed Project Features Project Area 3.05 The Project would be executed within the confines of the Basin (Maps IBRD 11078 and 11001). The Basin, located southeast of Mexico City, covers an area of 46,517 km2 and drains into the Gulf of Mexico. The Lower Papaloapan Basin (Lower Basin), covers approximately 21,000 km2, or 45% of the Basin, and lies at or below 100 m elevation, on the gently sloping and undulat- ing lands of the coastal plains. The Upper Papaloapan Basin (Upper Basin) covers the remaining 25,517 km2, or 55% of the area, and is comprised primarily of mountains and canyons although it also has some productive valleys. 3.06 The following table gives some statistical comparisons for various key socio-economic parameters between the Basin and all of Mexico. Key Socio-Economic Parameters for the Basin and all of Mexico (Based on 1970 Census Data) Parameter Mexico Basin Total Population ............................. 48,225,000 2,033,000 Rural Population - % 7..................... 41 61 Annual Income per Rural Family US$ . .......... 1,318 740 Total Labor Force ....... ..................... 13,100,000 587,000 Employed in Agriculture - % ..... ............. 39 64 Literacy Rate, % of Population 10 Years or Older ..............................76 62 Houses with Piped Water or Hydrants - % ...... 61 44 Population per Physician ............ 1,852 2,299 Access to Electricity - % of Total Population 60 41 Houses with Sewage Systems - % ..... .......... 42 26 The data show that inhabitants of the Basin have less than average access to education, health services, electricity, sewerage, and piped water. The Basin itself emerges as a predominantly poor, agriculturally dependent region. It has been chosen as the Project area for these reasons, but also because it has potential for agricultural expansion. Most of the poorer farmers are  engaged in crop production and for that reason the Project would concentrate on crops. Livestock are a very important industry in the Basin and many ejidatarios make their living from this activity. Since, however, the credit and technical services provided under the Fourth Livestock Project (Loan 910-ME) are deemed adequate, livestock would receive little attention in this Project. The long term development of the Basin would be mainly based on rainfed agriculture with possibly some supplemental irrigation (Annex 1). Directly Productive Components 3.07 Esperanza-Palmar de Bravo Valleys. Under the Project, about 40 deep wells, each serving about 60 ha farmed by a group of 10 families, would be sunk, lined and equipped with pump and motor. The Cotmnission would own, operate and maintain the pumps and motors and charge the farmers for the service. Complementary canals would also be built and lined and land level- ling would be carried out. On-farm incremental working capital, resulting from the intensification of production, would also form part of the Project. Prefabricated concrete canals, pumps, motors, and labor are the main invest- ment inputs. A new irrigation district would be formed, so that it could be operated under the provisions of the 1971 Federal Water Law. During nego- tiations, assurances were obtained that disbursement to this region (other than for engineering and design) would be conditional on the prior creation of the irrigation district (Annex 2). 3.08 Rio Salado Irrigation District. Under the Project, all the main canals and laterals of the existing 3,600-ha systema in the upper part of the gorge would be lined with concrete. The water saved by this and other improve- ments of the rehabilitation program would be diverted farther down the river and used to irrigate a new area of 2,500 ha. Cement, labor, engineering and supervision would be the main investment inputs. On-farm incremental working capital would also form part of the Project. While an Irrigation District was officially established in the area by Presidential Decree in 1965, it has never operated as such. During negotiations, however, the Bank was informed (later confirmed by letter) that Government will operate the area from now on as an Irrigation District (Annex 3). 3.09 Rio Blanco Irrigation District. The only Project irrigation work proposed for the Lower Basin would be the rehabilitation of the Rio Blanco Irrigation District. The Project would complete all canals, laterals, and distribution systems to enable 16,000 ha to be irrigated every year, instead of the present 7,500 ha. Metering gates would be installed to enable District personnel to control canal flows and farm deliveries. Land levelling and on- farm incremental working capital would be part of the Project. Labor, cement and water metering gates would be the main investment inputs. This District will be very important in generating data on the economics of supplemental irrigation in the Lower Basin (Annex 4). 3.10 Plan de Mejoramiento Parcelario (PLAMEPA). PLAMEPA is an intensive technical service to farmers in irrigated areas. Technicians would train farmers in matters related to water use, land preparation, technical inputs, and proper timing of all operations and would be the link between the farmers and research workers. The main investment inputs would be salaries, materials  -9_ and equipment for extension work (Annex 5). The cost of this service would be partially financed from the proposed loan during the Project construction period of five years (Annex 5). 3.11 Plan Papaloapan for Rainfed Agriculture (APA), Following the lessons and experience of Plan Puebla, an intensive technical service tp farmers cultivating about 100,000 ha of rainfed agriculture would be organi- zed and partially financed from the proposed loan during the Project construc- tion period of five years. The technicians working in teams, would combine advice in technical matters with agricultural credit. PLANPA is already operating in the Basin on a small scale. Incremental working capital would form part of Project costs with the main inputs under this category being labor, improved seed and fertilizer. The main inv'stment inputs to the tech- nical service would be salaries. Because timely delivery of credit, ferti- lizer, and improved seed in the required quantities is crucial to the success of PLANPA, assurances were obtained during negotiations that Government would take all measures necessary to insure that credit, fertilizer, and improved seed would be made available in the Project area in the quantities and at the time required to fully utilize the other resources available. Assurances were also obtained that the Commission would recruit staff under PLANPA so as to at least satisfy a schedule agreed upon with the Bank (Annexes 6 and 7),, Production Support Components 3.12 Experimental Farms. Applied crop research in the Basin promises to be very rewarding and beneficial to farmers there. Research data on varieties of crops, fertilizer response in different ecological zones of the Basin, and many problems inevitably encountered in a development pro- gram, would provide a basis for the long-term planning and development of the Basin. Three experimental farms would be supported under the Project in zones where none now exist, two in the Upper Basin and one in the Lower Basin. The main investment inputs would be salaries and research miaterials. Rainfed agriculture would be the area of concentration (Annex 8). 3.13 Feeder Roads. The feeder road program would be closely integrated with the other Project components but especially with PLANPA tpara 3.28). The main input into feeder road construction would be labor (Annex 9). 3.14 arketing Facilities. Shortage of storage facilities needed for the marketing of agricultural inputs and production is an impediment to expanding production in some parts of the Basin. In the main producing areas such facilities would be constructed under the Project where they are now lacking or deficient. CONASUPO would generally operate such facilities. Social Infrastructure Components 3.15 The general objective under this part of the Project would be to bring the level of social services available within the Basin closer to national averages, and to encourage more people to live in villages where such services may more easily be provided. Since towns with populations larger than 5,000 (29% of Basin population) are fully serviced, the Project would concentrate on those with between 5C0 and 5,000 inhabitants (49% of  - 10 - Basin population). Selection criteria for the social :infrastructure compo- nents are further discussed in paragraphs 3.29 to 3.34. For potable water, the goal would be to provide it to all villages larger than 2,500, to 50% of those with populations between 1,000 and 2,500, and a third of those with populations between 500 and 1,000 that presently lack t:his service. In some of the larger villages and towns, piped water would be provided to those willing and able to cover the costs involved, while the smaller villages would generally rely on water hydrants. This would entail constructing water facilities in about 260 villages. Since the sewerage program is modest, only about 12 towns with between 1,000 and 5,000 people would be serviced. For electricity, the goal would be to provide it to 50% of villages larger than 2,500, to 25% of those with populations between 1,000 and 2,500, and to about 12% of those with population between 500 and 1,000 that: presently lack such service. In total, electricity would be given to about 106 villages or towns. Medical facilities would be built in about 185 villages, thereby providing them to all small towns with between 1,500 and 5,000 people and to about 50% of the villages with populations between 1,000 and 1,500 that presently lack them. The health centers would have three beds for emergency and maternity care and would be manned by a student doctor and nurse. The Project would build about 1,185 workshops or prefabricated classrooms, which would be about sufficient to meet the shortage of classroom space for primary education (first-four grades) in villages and towns of between 500 and 5,000 inhabitants and provide workshops where needed. Most of these classrooms would be additions to existing schools or replace buildings knocked down by the 1973 earthquake in the Upper Basin. Many of the pupils and tradesmen graduating from these schools would have to leave their area in search of work. About 141 community centers would be constructed in villages of between 500 and 1,000 inhabitants where potable water supply by means of water hydrants exists. ThLe community centers would consist of premises for village meetings, washing clothes on slabs, public showers and toilets; an area for sports; and other such amenities. 3.16 The main inputs to these Project componerLts would be labor, cement, reinforcing steel, prefabricated superstructures, aLnd engineering and super- vision (Annexes 10 to 15). Project Monitoring 3.17 A monitoring system would be established to evaluate Project progress (para 3.35). The main input would be labor (Annex 16). C. Cost Estimates 3.18 The total cost of the Project is estimated at US$138.5 million of which US$22.5 million, or 16%, represents foreign exchange requirements, assuming that contracts would be won by local contractors. Costs have been estimated at July 1974 prices, and a physical contingency of 15% and a price contingency of 56% of base-line costs have been added. Inflation from July to the end of 1974 is projected at about 7%; in 1975 at 15%; and thereafter at 12%; and are in line with expectations of price increases in Mexico (Annex 17). Project costs are summarized below:  _ 11 - Base- Foreign Total Froject Costs Line Exchange Components Local loreign Total Local Foreign Total Costs Cost